Avenida Chucri Zaidan, 860, 04583-110, São Paulo, SP, Brazil
Email: ri.telefonicabr@telefonica.com.br
(Name, Telephone, Email and/or Facsimile and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Name of each exchange on which registered |
Preferred Shares, without par value | New York Stock Exchange* |
American Depositary Shares (as evidenced by American Depositary Receipts), each representing 1one share of Preferred Stock | New York Stock Exchange |
* | Not for trading purposes, but only in connection with the registration on the New York Stock Exchange of American Depositary Shares representing those Preferred Shares. |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
The number of outstanding shares of each class as of December 31, 20082011 was:
| | Number of Shares Outstanding |
Shares of Common Stock | | 168,609,291381,347,371 |
Shares of Preferred Stock | | 337,232,189742,537,273 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
ox Yes xo No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
o Yes x No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x | Accelerated Filer o | Large Accelerated Filer x Accelerated Filer oNon-accelerated Filer o
|
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP o | International Financial Reporting Standards as issued by the International Accounting Standards Board ox | Other xo |
The financial statements included
If “Other” has been checked in this filing were prepared in accordance withresponse to the accounting practices adopted in Brazil, as prescribed by Brazilian Corporate Law (Brazilian GAAP).
Indicateprevious question, indicate by check mark which financial statement item the registrant has elected to follow.
o Item 17 xo Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
INTRODUCTION
References in this annual report to “Telesp,“Telefônica Brasil,” “we,” “our,” “us”“us,” “our company” and “the company” are to Telecomunicações de São PauloTelefônica Brasil S.A. – TELESP and its consolidated subsidiaries (unless the context otherwise requires). In addition, allAll references in this annual report to:
| · | “ADRs” are to the American Depositary Receipts evidencing our ADSs; |
| · | “ADSs” are to our American Depositary Shares, each representing one share of our non-votingnonvoting preferred shares;stock; |
| · | “ANATEL” are to Agência Nacional de Telecomunicações – ANATEL, the National Telecommunications Agency of Brazil;Brazilian telecommunication regulatory agency; |
| · | “BM&FBOVESPA” are to the BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros;, the São Paulo stock exchange; |
| · | “BNDES” are to Banco Nacional de Desenvolvimento Econômico e Social, the Brazilian Development Bank; |
| · | “Brazil” are to the Federative Republic of Brazil; |
| · | “Brazilian Central Bank”Bank,” “BACEN,” “Central Bank of Brazil” or “Central Bank” are to the Banco Central do Brasil, the Brazilian Central Bank of Brazil;Bank; |
| · | “Brazilian “Brazilian Corporate Law” are to the Lei das Sociedades por Ações, Law No. 6,404 of December 15, 1976, as amended;
|
· | “Brazilian government” are to the federal government of the Federative Republic of Brazil; |
· | “CADE” are to Conselho Administrativo de Defesa Econômica, the Brazilian competition authority; |
· | “Ceterp” are to Centrais Telefônicas de Ribeirão Preto;
|
· | “CDI” are to Certificado de Depósito Interbancário, the Certificate for Interbank Deposits; |
| · | “Ceterp” are to Centrais Telefônicas de Ribeirão Preto; |
| · | “Celular CRT” are to Celular CRT Participações S.A. and its consolidated subsidiary, formerly Vivo subsidiaries before Vivo’s corporate restructuring; |
| · | “CMN” are to the Conselho Monetário Nacional, the Brazilian Monetary Council of Brazil;Council; |
| · | “Commission” or “SEC” are to the U.S. Securities and Exchange Commission; |
| · | “Corporate Law Method” is the accounting practice to be followed in the preparation of our financial statements for regulatory and statutory purposes prescribed by theunder Brazilian Corporate Law and accounting standards issued by the CVM; |
| · | “CTBC Telecom” are to Companhia de Telecomunicações do Brasil Central; |
| · | “CTBC Borda” are to Companhia Brasileira Borda do Campo – CTBC; |
| · | “CVM” are to the Comissão de Valores Mobiliários, the Brazilian Securities Commission of Brazil;Commission; |
| · | “D.O.U.” are to the Diário Oficial da União, the Official Newspaper of the Brazilian Government; |
| · | “Federal District” are to Distrito Federal, the federal district where Brasilia, the capital of Brazil, is located; |
| · | “General Telecommunications Law” are to Lei Geral de Telecomunicações, as amended, the law which regulates the telecommunications industry in Brazil; |
| · | “Global Telecom” or “GT” are to Global Telecom S.A., formerly a Vivo subsidiary before Vivo’s corporate restructuring; |
| · | “IASB” are to International Accounting Standards Board; |
| · | “IBGE” are to Instituto Brasileiro de Geografia e Estatística, the Brazilian Institute of Geography and Statistics; |
| · | “IFRS” are to International Financial Reporting Standards, as issued by the IASB; |
| · | “IOF” are to Imposto sobre Operações de Crédito, Câmbio e Seguros, or tax on credit, exchange and insurance; |
| · | “IPCA” are to Índice Nacional de Preços ao Consumidor Amplo, the consumer price index;index, published by the Instituto Brasileiro de Geografia e Estatística; |
| · | ·“IST” are to Índice Setorial de Telecomunicações, the inflation index of the telecomtelecommunications sector;
|
· | “JPY” are to Japanese Yen; |
· | “Number Portability” are to “Portabilidade NumericaNumérica,” the service mandated by ANATEL that provides customers with the option of keeping the same telephone number when switching telephone service providers; |
| · | “NYSE” are to the New York Stock Exchange; |
| · | “PTAX “Oi” are to Oi S.A., the mobile operator branch of Telemar;
|
| · | “PTAX” or “PTAX rate” are to the weighted average daily buy and sell exchange rates between the real and U.S. dollar that is calculated by the Central Bank; |
| · | “realReal,” “reais” or “R$”R$ are to the Brazilian reaisreal, the official currency of Brazil; |
| · | “Speedy” are to broadband services provided by Telespus through asymmetric digital subscriber lines, or ADSL; |
| · | “TCO” are to Tele Centro Oeste Celular Participações, which includes TCO’s “B” band subsidiary and NBT, formerly Vivo subsidiaries before Vivo’s corporate restructuring; |
| · | “TCP” are to TELESP Celular Participações S.A., Vivo’s predecessor company; |
| · | “TLE” are to Tele Leste Celular Participações S.A. and its consolidated subsidiaries, formerly Vivo subsidiaries before Vivo’s corporate restructuring; |
| · | “TSD” are to Tele Sudeste Celular Participações S.A. and its consolidated subsidiaries, formerly Vivo subsidiaries before Vivo’s corporate restructuring; |
| · | “Telebrás” are to Telecomunicações Brasileiras S.A.–Telebrás; |
| · | “Telemar” are to Telemar Norte Leste S.A. (controlled by Tele Norte Leste Participações S.A.); |
| · | “Telemig” or “Telemig Participações” are to Telemig Celular Participações S.A.; |
| · | “Telemig Celular” are to Telemig Celular S.A.; |
| · | “Telenorte” or “Tele Norte” are to Tele Norte Celular Participações S.A.; |
| · | “TELESP Celular” and “TC” are to TELESP Celular S.A., formerly a Vivo subsidiary before Vivo’s corporate restructuring; |
| · | “Telpart” are to Telpart Participações S.A.; |
| · | “TJLP” are to Taxa de Juros de Longo Prazo, or long termlong-term interest rate; |
| · | “UMBNDES” are to a monetary unit of the BNDES, consisting of a currency basket of BNDES debt obligations in foreign currencies, which are mostly denominated in U.S. dollars; |
| · | “U.S. dollar,” “U.S. dollars” or “US$” are to U.S. dollars, the official currency of the United States; |
| · | “Vivo” are to Vivo S.A., a wholly owned subsidiary of Telefônica Brasil, that conducts cellular operations including SMP (as defined in the “Glossary of Telecommunication Terms”), in the following areas: |
| · | “Areas 1 and 2,” the state of São Paulo (operations previously provided by TELESP Celular S.A.); |
| · | “Area 3,” the states of Rio de Janeiro and Espírito Santo (operations previously provided by Telerj Celular S.A., or Telerj, and Telest Celular S.A., or Telest); |
| · | “Area 4,” the state of Minas Gerais; |
| · | “Area 5,” the states of Paraná and Santa Catarina (operations previously provided by Global Telecom); |
| · | “Area 6,” the state of Rio Grande do Sul (operations previously provided by Celular CRT); |
| · | “Areas 7 and 8,” the central western and northern regions, including the states of Goiás, Tocantins, Mato Grosso, Mato Grosso do Sul, Rondônia, Acre, Amapá, Amazonas, Maranhão, Para and Roraima and in the Federal District (operations previously provided by Telegoias Celular S.A., or Telegoias, Telemat Celular S.A., or Telemat, Telems Celular S.A., or Telems, Teleron Celular S.A., or Teleron, Teleacre Celular S.A., or Teleacre, Norte Brasil Telecom S.A., or NBT and TCO); |
| · | “Area 9,” the states of Bahia and Sergipe (operations previously provided by Telebahia Celular S.A., or Telebahia, and Telergipe Celular S.A., or Telergipe); and |
| · | “Area 10,” the states of Pernambuco, Alagoas, Paraíba, Rio Grande do Norte, Ceará and Piauí. |
| · | “Vivo Participações” are to Vivo Participações S.A. (formerly TELESP Celular Participações S.A.) and its consolidated subsidiaries (unless the context otherwise requires); and |
| · | “US$,” “dollars” or “U.S. dollars”Vivo brand” are to United States dollars.the brand used in Brazil in the operations of Vivo; |
Unless otherwise specified, data relating to the Brazilian telecommunications industry included in this annual report were obtained from ANATEL.
The “Glossary of Telecommunications Terms” that begins on page 110144 provides the definition of certain technical terms used in this annual report.
On October 3, 2011, our Extraordinary General Shareholders’ Meeting approved the merger, into the Company, of Vivo Participações S.A., with its subsequent extinguishment, as well as the modification of our corporate name from Telecomunicações de São Paulo S.A. – TELESP to Telefônica Brasil S.A.
As a result of such modification, the trade codes for our shares were also modified as of October 6, 2011 (inclusive), from TLPP3 (for the common shares) and TLPP4 (for the preferred shares) to VIVT3 and VIVT4, respectively, with the subsequent change of trading name to TELEF BRAZIL. The trade code for the ADRs, VIV, on New York Stock Exchange was not changed.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTSSTATEMENT
TheThis Annual Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 provides a safe harbor for1995. The forward-looking statements. Certain statements included in this annual report, principallyAnnual Report can be identified, in some instances, by the use of words such as “will,” “expect,” “aim,” “hope,” “anticipate,” “intend,” “believe” and similar language or the negative thereof or by the forward-looking nature of discussions of strategy, plans or intentions. These statements appear in a number of places in this Annual Report including, without limitation, certain statements made in “Item 3.D—3. Key Information—D. Risk Factors,” “Item 4—4. Information on the Company” andCompany,” “Item 5—5. Operating and Financial Review and Prospects,” contain information that is forward looking, including, but not limited to:Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk” and include statements regarding our intent, belief or current expectations with respect to, among other things:
| · | statements concerning our operations and prospects; |
| · | the size of the Brazilian telecommunications market; |
| · | estimated demand forecasts; |
| · | our capital expenditure plan; |
| · | our ability to secure and maintain telecommunications infrastructure licenses, rights-of-way and other regulatory approvals; |
| · | our strategic initiatives and plans for business growth; |
| · | our funding needs and financing sources; |
| · | network completion and product development schedules; |
| · | expected characteristics of competing networks, products and services; and |
| · | the outcome of certain legal proceedings; |
| · | regulatory and legal developments; |
| · | quantitative and qualitative disclosures about market risk; |
| · | other statements of management’s expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.facts; and |
Forward-looking statements may also be identified by words such as “believe,” “expect,” “anticipate,” “project,” “intend,” “should,” “seek,” “estimate,” “future” or similar expressions. | · | other factors identified or discussed under “Item 3. Key Information—D. Risk Factors.” |
Forward-looking information involves risks and uncertainties that could significantly affect expected results. The risks and uncertainties include, but are not limited to:
| · | the short history of our operations as an independent, private-sector entity and the ongoing introduction of greater competition to the Brazilian telecommunications sector; |
| · | the cost and availability of financing; |
| · | uncertainties relating to political and economic conditions in Brazil as well as those of other emerging markets; |
| · | inflation, interest rate and exchange rate risks; |
| · | the Brazilian government’s telecommunications policy; |
| · | the Brazilian government’s tax policy; |
| · | the Brazilian government’s political instability; and |
| · | the adverse determination of disputes under litigation. |
We undertake no obligation to publicly update publicly or revise any forward-looking statements becauseas a result of new information, future events or otherwise. In lightBecause of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.
PRESENTATION OF FINANCIAL INFORMATION
We maintain our books and records in reais. We prepared our consolidated financial statements included in this annual report in accordance with IFRS.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying our accounting policies. Those areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3 to our consolidated financial statements.
Our financial statements prepared in accordance with IFRS were those as of and for the years ended December 31, 2011 and December 31, 2010 which were filed with the CVM, the local securities regulator in Brazil and made publicly available. The selected financial information for the Company included in “Item 3. Key Information—A. Selected Financial Data” should be read in conjunction with, and is qualified in its entirety by, the IFRS financial statements of the Company and “Item 5. Operating and Financial Review and Prospects” appearing elsewhere in this annual report.
The consolidated financial statements as of December 31, 20082011 and 20072010 are in compliance with the IFRS, as issued by the International Accounting Standards Board (IASB) and also with the pronouncements, interpretations and guidance issued by Accounting Standards Committee (Comitê de Pronunciamentos Contábeis – “CPC”) in place on December 31, 2011, which include the new pronouncements, interpretations and amendments issued by the IASB and IFRIC (IFRS Interpretations Committee) which entered into force as of January 1, 2011.
Our first adoption of IFRS to consolidated financial statements was for the year ended on December 31, 2010. Our financial statements as of the transition date for applying IFRS as of January 1, 2009 and the comparative period as of and for the yearsyear ended December 31, 2008, 2007 and 20062009 have been prepared in accordance withrestated to reflect adjustments made as a result of the accounting practices adopted in Brazil, as prescribed by Brazilian Corporate Law, or the Brazilian GAAP, which differs in certain significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. Notes 36 and 37 to our financial statements appearing elsewhere in this annual report describe the principal differences between the Brazilian GAAP and U.S. GAAP as they relate to us, and provide a reconciliation to U.S. GAAPadoption of net income and shareholders’ equity.IFRS. These consolidated financial statements have been audited by Ernst & Young Terco Auditores Independentes S.S. (“(“E&Y”&Y” or “Ernst“Ernst & Young”Young”).
As a result of a change in Brazilian corporate law with respect to financial reporting (Law 11,638), certain changes in accounting criteria became effective for fiscal year 2008. A CVM rule allows companies to adopt these changes for fiscal year 2008 only, without making changes to comparative 2007 financial information, with disclosure in the notes to the financial statements explaining such accounting treatment. Based on this CVM rule, we have elected not to restate our 2007 financial statements. Any changes that would have resulted to our financial statements as of and for the year ended December 31, 2007 as a result of applying the new accounting criteria would not be material, and the application of these changes to our financial statements as of and for the year ended 2008 does not have a material effect on the comparability of our 2008 financial statements with our 2007 financial statements. However, some amounts for 2006 and 2007 presented throughout this Form 20-F have been reclassified to conform with the presentation of the 2008 amounts prepared in accordance with the new accounting criteria. Please see Note 3 to our 2008 financial statements for a qualitative and quantitative analysis of the changes resulting from this new accounting criteria.
We have made rounding adjustments to reach some of the figures included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
Vivo Participações S.A. and Vivo S.A. are included in our financial statements for only nine months in 2011, therefore our results of operations in 2010 and 2009 are not fully comparable with our results of operations in 2011.
ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
A. | Selected Financial Data |
Our consolidated financial statements includedare prepared in this annual report on Form 20-Faccordance with IFRS.
We maintain our books and records in reais.
Our consolidated financial statements for the years ended December 31, 2011 and 2010 are prepared in accordance with IFRS. The date for our first adoption of IFRS to our consolidated financial statements was December 31, 2010. As a result the financial information for the year ended December 31, 2009 have been restated from Brazilian GAAP to reflect the first adoption of IFRS.
The selected financial data presented for the periods described below have been preparedshould be read in accordanceconjunction with the Corporate Law Method, which is the same basis of accounting used in our annualconsolidated financial statements, published in Brazil, audited by Ernst & Young Auditores Independentesincluding the notes thereto. Our consolidated financial statements included herein as of and for the fiscal years ended December 31, 2008, 2007, 20062011, 2010 and 2005, and Deloitte Touche Tohmatsu2009 have been audited by Ernst Young Terco Auditores Independentes S.S. The report of Ernst Young Terco Auditores Independentes S.S. on the consolidated financial statements appears elsewhere in this annual report.
On March 25, 2011, the Boards of Directors of Vivo Participações, our former subsidiary, and Telefônica Brasil approved the terms and conditions of the corporate restructuring of both companies, which was approved unanimously by the general meetings of shareholders of the two companies held on April 27, 2011.
The transaction consisted of the unification of the share base of fixed and mobile operators of the Telefônica group in Brazil through the merger of all shares of Vivo Participações into Telefônica Brasil, with Telefônica Brasil as the surviving entity. Telefônica Brasil exchanged each share of Vivo Participações held by shareholders of Vivo Participações for shares of Telefônica Brasil. The exchange of shares of Vivo Participações for shares of Telefônica Brasil was based on the exchange ratio of 1.55 shares of Telefônica Brasil for each share of Vivo Participações. Upon closing of the merger and the share exchange, Vivo S.A. remained our wholly owned direct subsidiary. The Company assessed the fair value of the assets acquired and the liabilities assumed from Vivo Participações S.A. as of March 31, 2011 for purposes of applying the acquisition method to the transaction as a business combination, and we consolidated and included Vivo Participações S.A. in our results of operations as of April 1, 2011.
The Company acquired 100% of shares of Vivo Participações S.A., amounting to R$31,222,630. See Note 1 and Note 4 to our consolidated financial statements. The Company’s consolidated financial statements include Vivo Participações S.A. and Vivo S.A. as of April 1, 2011. Vivo Participações S.A. and Vivo S.A. were included in the Company’s consolidated financial statements through the full consolidation method. Because Vivo Participações S.A. and Vivo S.A. are included in our financial statements for only nine months in 2011, our results of operations in 2010 and 2009 are not fully comparable with our results of operations in 2011.
In addition, Vivo Participações’ Board of Directors meeting held on June 14, 2011 approved a proposal to group the authorizations for the fiscal year ended December 31, 2004. Although we adopted law 11,638 effective asprovision of JanuarySMP services (at the time held by Vivo Participações in the state of Minas Gerais and by Vivo S.A. in the other states of Brazil), bringing together the operations and the Authorization Terms for SMP services at Vivo S.A.
This corporate restructuring took place on October 1, 2008 (see "Presentation2011 by the transfer of Financial Information"), certain previously reported amounts for 2006assets, rights and 2007 presented below have been reclassifiedliabilities related to conform with the presentationoperation of the 2008 amounts preparedSMP services in Minas Gerais from Vivo Participações to Vivo S.A. Upon completion of this transfer, Vivo Participações became a holding company.
In accordance with the new accounting criteria. See Notes 3 and 4provisions of Law No. 6,404/76, a specialized company was engaged to prepare a valuation study for the consolidated financial statements.part of Vivo Participações’ net assets corresponding to SMP operations in the state of Minas Gerais that were transferred to Vivo S.A., as well as for the net equity of Vivo Participações that was absorbed into the Company.
InAccordingly, under the terms of article 226, paragraphs I and II of Law No. 6,404/76, shares held by the Company in Vivo Participações were cancelled. Upon conclusion of the corporate restructuring on October 2005,3, 2011, Vivo Participações was merged into the CVM introduced Deliberation 488, which hadCompany and Vivo S.A. became the principal effect of changing the classification onCompany’s full subsidiary, thus simplifying and rationalizing our balance sheet of provisions to assets from liabilities from 2006 onward. Thus, our financial information as represented on our balance sheet as of December 31, 2005 included in this annual report has been reclassified to make it comparable to the corresponding financial information on our balance sheet as of December 31, 2006, 2007 and 2008.corporate structure.
The following tables present a summary of our selected financial data at the dates and for each of the periods indicated. You should read the following information together with our audited consolidated financial statements and the notes thereto included elsewhere in this annual report and with “Item 5—5. Operating and Financial Review and Prospects.”
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| | (in millions of reais, except for share and per share data) | | | | |
Income Statement Data: | | | | | | | | | | | | | | | | | | | | | | | | |
Brazilian Corporate Law | | | | | | | | | | | | | | | | |
IFRS | | | (in millions of reais, except for share and per share data) | |
Net operating revenue | | | 15,979 | | | | 14,727 | | | | 14,643 | | | | 14,395 | | | | 13,309 | | | | 29,129 | | | | 15,798 | | | | 15,852 | |
Cost of goods and services | | | (8,726 | ) | | | (8,029 | ) | | | (7,781 | ) | | | (7,717 | ) | | | (7,496 | ) | | | (14,728 | ) | | | (8,845 | ) | | | (9,236 | ) |
Gross profit | | | 7,253 | | | | 6,698 | | | | 6,862 | | | | 6,678 | | | | 5,813 | | | | 14,401 | | | | 6,953 | | | | 6,616 | |
Operating expenses, net | | | (3,523 | ) | | | (3,051 | ) | | | (2,607 | ) | | | (2,805 | ) | | | (2,504 | ) | | | (8,603 | ) | | | (3,391 | ) | | | (3,221 | ) |
Equity in earnings (losses) of associates | | | | – | | | | 2.9 | | | | 19.0 | |
Operating income before financial expense, net | | | 3,730 | | | | 3,647 | | | | 4,255 | | | | 3,873 | | | | 3,309 | | | | 5,797 | | | | 3,566 | | | | 3,414 | |
Financial expense, net | | | (228 | ) | | | (307 | ) | | | (331 | ) | | | (460 | ) | | | (404 | ) | | | (140 | ) | | | (121 | ) | | | (189 | ) |
Income before tax and social contribution | | | 3,502 | | | | 3,340 | | | | 3,924 | | | | 3,413 | | | | 2,905 | | | | 5,658 | | | | 3,445 | | | | 3,225 | |
Income tax and social contribution | | | (1,082 | ) | | | (977 | ) | | | (1,108 | ) | | | (871 | ) | | | (724 | ) | | | (1,296 | ) | | | (1,046 | ) | | | (1,021 | ) |
Net Income | | | 2,420 | | | | 2,363 | | | | 2,816 | | | | 2,542 | | | | 2,181 | | | | 4,362 | | | | 2,399 | | | | 2,204 | |
Earnings per share in reais | | | 4.78 | | | | 4.67 | | | | 5.57 | | | | 5.17 | | | | 0.0044 | | |
Attributable to: | | | | | | | | | | | | | |
Controlling shareholders | | | | 4,355 | | | | 2,398– | | | | 2,204 | |
Non-controlling shareholders | | | | 7 | | | | – | | | | – | |
Basic and diluted earnings per share: | | | | | | | | | | | | | |
Common Shares | | | | 4.40 | | | | 4.45 | | | | 4.08 | |
Preferred Shares | | | | 4.84 | | | | 4.89 | | | | 4.49 | |
Cash Dividends per share in reais, net of withholding tax: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Common Shares | | | 4.54 | | | | 5.25 | | | | 5.58 | | | | 6.89 | | | | 5.63 | | | | 4.78 | | | | 3.62 | | | | 2.56 | |
Preferred Shares | | | 4.99 | | | | 5.77 | | | | 6.14 | | | | 7.58 | | | | 6.20 | | | | 5.26 | | | | 3.98 | | | | 2.81 | |
U.S. GAAP | | | | | | | | | | | | | | | | | | | | | |
Net operating revenue | | | 22,017 | | | | 20,472 | | | | 20,293 | | | | 19,870 | | | | 18,330 | | |
Operating income | | | 3,803 | | | | 3,635 | | | | 4,305 | | | | 4,026 | | | | 3,471 | | |
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Balance Sheet Data: | | | | | | | | | |
| | | |
IFRS | | (in millions of reais, except where indicated) | |
Property, plant and equipment, net | | | 17,154 | | | | 10,201 | | | | 9,672 | |
Total assets | | | 65,490 | | | | 19,966 | | | | 20,643 | |
Loans and financing—current portion | | | 988 | | | | 420 | | | | 1,768 | |
Loans and financing—noncurrent portion | | | 3,959 | | | | 1,405 | | | | 1,752 | |
Shareholders’ equity | | | 43,331 | | | | 11,667 | | | | 11,300 | |
Attributable to: | | | | | | | | | | | | |
Controlling shareholders | | | 43,326 | | | | – | | | | – | |
Noncontrolling shareholders | | | 5 | | | | – | | | | – | |
Capital stock | | | 37,798 | | | | 6,575 | | | | 6,575 | |
Number of shares outstanding (in thousands) | | | 1,123,884 | | | | 505,841 | | | | 505,841 | |
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| | | | | | | | | | | | | | | |
| | (in millions of reais, except for share and per share data) | |
Net income | | | 2,500 | | | | 2,370 | | | | 2,930 | | | | 2,638 | | | | 2,184 | |
Net income per share: | | | | | | | | | | | | | | | | | | | | |
Earnings per share—Common shares—basic | | | 4.63 | | | | 4.39 | | | | 5.48 | | | | 5.02 | | | | 4.05 | |
Weighted average number of common shares outstanding—basic | | | 168,609,291 | | | | 168,609,292 | | | | 167,242,724 | | | | 164,734,052 | | | | 165,320,207 | |
Weighted average number of common shares outstanding—diluted | | | 168,638,238 | | | | 168,609,292 | | | | 167,242,724 | | | | 164,734,052 | | | | 165,320,207 | |
Earnings per share—Preferred shares—basic | | | 5.10 | | | | 4.83 | | | | 6.02 | | | | 5.52 | | | | 4.61 | |
Weighted average number of preferred shares outstanding—basic | | | 337,232,189 | | | | 337,232,189 | | | | 334,342,809 | | | | 328,130,540 | | | | 328,272,073 | |
Weighted average number of preferred shares outstanding—diluted | | | 337,276,489 | | | | 337,232,189 | | | | 334,342,809 | | | | 328,130,540 | | | | 328,272,073 | |
Table of Contents
| | | |
| | | | | | | | | | | | | | | |
| | (in millions of reais, except per share data) | |
Balance Sheet Data: | | | | | | | | | | | | | | | |
Brazilian Corporate Law | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 9,869 | | | | 10,260 | | | | 11,651 | | | | 12,358 | | | | 13,369 | |
Total assets | | | 19,992 | | | | 18,950 | | | | 18,146 | | | | 17,760 | | | | 18,752 | |
Loans and financing—current portion | | | 519 | | | | 806 | | | | 1,829 | | | | 247 | | | | 530 | |
Loans and financing—non-current portion | | | 3,217 | | | | 2,503 | | | | 510 | | | | 2,151 | | | | 2,226 | |
Shareholders’ equity | | | 10,046 | | | | 9,905 | | | | 10,610 | | | | 10,204 | | | | 11,399 | |
Capital stock | | | 6,575 | | | | 6,575 | | | | 6,575 | | | | 5,978 | | | | 5,978 | |
Number of shares outstanding (in thousands) (1) | | | 505,841 | | | | 505,841 | | | | 505,841 | | | | 492,030 | | | | 493,592,279 | |
U.S. GAAP | | | | | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 9,909 | | | | 11,280 | | | | 12,018 | | | | 12,726 | | | | 13,700 | |
Total assets | | | 20,878 | | | | 20,203 | | | | 18,825 | | | | 18,140 | | | | 19,159 | |
Loans and financing—current portion | | | 519 | | | | 808 | | | | 1,828 | | | | 256 | | | | 478 | |
Loans and financing—non-current portion | | | 3,221 | | | | 2,503 | | | | 510 | | | | 2,151 | | | | 2,231 | |
Shareholders’ equity | | | 10,624 | | | | 10,478 | | | | 10,823 | | | | 10,265 | | | | 11,422 | |
(1) | On May 11, 2005, the shareholders approved a reverse stock split in the proportion of 1,000 (one thousand) shares to 1 (one) share of the same class. Had the reverse stock split occurred on December 31, 2004, shares outstanding would be 493,592 and earnings per share under Brazilian Corporate Law would have been R$4.40 as of December 31, 2004. |
| | | | |
| | | | | | | | | | | | | | | | |
| | (in millions of reais except when indicated) | | | | |
Cash Flow Data: | | | | | | | | | | | | | | | | | | | | | | | | |
Brazilian Corporate Law | | | | | | | | | | | | | | | | |
IFRS | | | (in millions of reais, except where indicated) | |
Operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash provided by operations | | | 5,130 | | | | 4,778 | | | | 5,007 | | | | 5,538 | | | | 5,606 | | |
Net cash provided by operations | | | | 8,141 | | | | 4,532 | | | | 4,449 | |
Investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (2,075 | ) | | | (2,318 | ) | | | (1,885 | ) | | | (1,667 | ) | | | (1,415 | ) | | | (2,029 | ) | | | (1,659 | ) | | | (2,296 | ) |
Financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash used in financing activities | | | (2,247 | ) | | | (1,740 | ) | | | (3,372 | ) | | | (3,647 | ) | | | (4,167 | ) | |
Net cash used in financing activities | | | | (4,729 | ) | | | (3,594 | ) | | | (1,618 | ) |
Increase (decrease) in cash and cash equivalents | | | 808 | | | | 720 | | | | (250 | ) | | | 224 | | | | 24 | | | | 1,383 | | | | (720 | ) | | | 536 | |
Cash and cash equivalents at beginning of year | | | 933 | | | | 213 | | | | 463 | | | | 239 | | | | 215 | | | | 1,557 | | | | 2,277 | | | | 1,741 | |
Cash and cash equivalents at end of year | | | 1,741 | | | | 933 | | | | 213 | | | | 463 | | | | 239 | | | | 2,940 | | | | 1,557 | | | | 2,277 | |
Exchange Rates
The Brazilian Central Bank allows the real/U.S. dollar exchange rate to float freely. The real/dollar exchange rate has been established mainly by the Brazilian interbank marketfreely and has fluctuated considerably. The Brazilian
Central Bank has intervened occasionally to control unstable movements in the exchange rate.rate volatility. However, the exchange market may continue to be volatile, and the realmay depreciate or appreciate substantially in relation to the U.S. dollar in the future. It is not possible to predict whether thedollar. The Brazilian Central Bank or the Brazilian government will continue to let the real float freely or willmay intervene in the exchange rate market.
The Brazilian government has been introducing significant changes aimed at simplifying the Brazilian foreign exchange market. Prior to March 4, 2005, there were two principal legal foreign exchange markets in Brazil:
· | the commercial rate exchange market; and |
· | the floating rate exchange market. |
On August 4, 2006, the Brazilian National Monetary Council, through Resolution No. 3,389, relaxed the exchange coverage for exports, allowing Brazilian exporters to keep up to 30% of their income generated from exports of goods and/or services outside of Brazil. The remaining 70% of such income continued to be subject to compulsory repatriation to Brazil.
On September 27, 2006, Resolution No. 3,412 absolved existing restrictions on investments in foreign financial and derivative markets by individuals and legal entities. On October 27, 2006, Resolution No. 3,417 increased the liquidation period permitted for exchange transactions from 360 to 750 days.
Since March 17, 2008, Brazilian exporters arehave been allowed to keep 100% of income from exports outside of Brazil. In addition, the foreign exchange mechanism was simplified to provide for the simultaneous purchase and sale of foreign currency through the same financial institution and using the same exchange rate.
In October 2009, the Brazilian government increased the tax rate related to foreign investments in the Brazilian financial and capital markets from 0% to 2%, including investments made pursuant the Brazilian Monetary Council (Conselho Monetário Nacional), or CMN, Resolution No. 2,689, dated January 26, 2000, as amended. The Tax on Financial Transactions (Imposto sobre Operações Financeiras), or IOF tax, applies upon conversion of foreign currency into Brazilian reais related to equity or debt investments by foreign investors in the Brazilian stock exchanges or the over-the-counter, or OTC, market, as well as private investment funds, Brazilian treasury notes and other fixed income securities.
On October 5, 2010, the Brazilian government announced measures to respond to the real appreciation by increasing the IOF tax rate to 4% on foreign exchange transactions related to foreign investments in the financial and capital markets, except for variable income investments traded on the stock exchange, which remained at 2%. However, the increase failed to achieve its intended goal of curbing the appreciation of the Brazilian currency in comparison to the U.S. dollar.
On October 18, 2010, new increases in the IOF tax rate were announced by the Brazilian government, which adopted a 6% tax rate for foreign exchange transactions and for the investments of foreign investors in accordance with the margin requirements for transactions with future instruments on the BM&FBOVESPA. The IOF tax rate remains at zero on exchange transactions for outflow of these funds as well as for proceeds received as a result of initial public offerings. The conversion of Brazilian currency into foreign currency for purposes of paying dividends for ADS programs is not subject to taxation.
On January 6, 2011, the Central Bank of Brazil published Circular 3,520, which imposes a 60% minimum reserve deposit for any financial operations exceeding US$3 billion.
On July 26, 2011, the Brazilian government issued Decree 7,536, increasing the IOF tax rate to 1% on the acquisition, sale and maturity of derivative contracts that result in short positions in relation to the previous day, as a way to reduce short positions in foreign exchange rate.
The following tables set forth the exchange rate (rounded to the nearest tenth of a cent), expressed in reais per U.S. dollar (R$/US$) for the periods indicated, as reported by the Central Bank.
| | Exchange Rate of R$ per US$ | |
| | | | | | | | | | | | |
Year ended December 31, | | | | | | | | | | | | |
2004 | | | 2.654 | | | | 3.205 | | | | 2.917 | | | | 2.654 | |
2005 | | | 2.163 | | | | 2.762 | | | | 2.413 | | | | 2.341 | |
2006 | | | 2.059 | | | | 2.371 | | | | 2.168 | | | | 2.138 | |
2007 | | | 1.732 | | | | 2.156 | | | | 1.929 | | | | 1.771 | |
2008 | | | 1.559 | | | | 2.500 | | | | 1.833 | | | | 2.337 | |
| | Exchange Rate of R$ per US$ | |
| | | | | | | | | | | | |
2007 | | | 1.732 | | | | 2.156 | | | | 1.929 | | | | 1.771 | |
2008 | | | 1.559 | | | | 2.500 | | | | 1.833 | | | | 2.337 | |
2009 | | | 1.741 | | | | 2.378 | | | | 1.990 | | | | 1.741 | |
2010 | | | 1.655 | | | | 1.880 | | | | 1.759 | | | | 1.665 | |
2011 | | | 1.535 | | | | 1.902 | | | | 1.671 | | | | 1.876 | |
Source: Central Bank of Brazil, PTAX.
(1) | Represents the average of the exchange rates (PTAX) on the last day of each month during the relevant period. |
| | Exchange Rate of R$ per US$ | |
| | | | | | |
Month Ended | | | | | | |
October 31, 2008 | | | 1.921 | | | | 2.392 | |
November 30, 2008 | | | 2.121 | | | | 2.428 | |
December 31, 2008 | | | 2.337 | | | | 2.500 | |
January 31, 2009 | | | 2.189 | | | | 2.380 | |
February 28, 2009 | | | 2.244 | | | | 2.392 | |
March 31, 2009 | | | 2.237 | | | | 2.422 | |
April 2009 (through April 9) | | | 2.176 | | | | 2.289 | |
| | Exchange Rate of R$ per US$ | |
| | | | | | | | | | | | |
September 2011 | | | 1.604 | | | | 1.902 | | | | 1.729 | | | | 1.854 | |
October 2011 | | | 1.689 | | | | 1.886 | | | | 1.785 | | | | 1.689 | |
November 2011 | | | 1.727 | | | | 1.894 | | | | 1.781 | | | | 1.811 | |
December 2011 | | | 1.783 | | | | 1.876 | | | | 1.834 | | | | 1.876 | |
January 2012 | | | 1.739 | | | | 1.868 | | | | 1.804 | | | | 1.739 | |
February 2012 | | | 1.702 | | | | 1.738 | | | | 1.720 | | | | 1.709 | |
March 2012 | | | 1.715 | | | | 1.833 | | | | 1.774 | | | | 1.822 | |
April 2012 (through April 19) | | | 1.826 | | | | 1.887 | | | | 1.856 | | | | 1.887 | |
Source: Central Bank of Brazil, PTAX.
(2) | Represents the average of the exchange rates (PTAX) of the lowest and highest rates in the month. |
On April 19, 2012, the exchange rate was R$1.887 to US$1.00. The real/dollar exchange rate fluctuates and, therefore, the exchange rate at April 19, 2012 may not be indicative of future exchange rates.
B. | Capitalization and Indebtedness |
Not applicable.
C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
This section is intended to be a summary of more detailed discussions contained elsewhere in this annual report. The risks described below are not the only ones we face.Additionalrisks that we do not presently consider material, or of which we are not currentlyaware,mayalso affect us. Our business, results of operations or financial condition could be impacted ifanyof these risks materializes and, as a result, the market price of our preferred sharesandour ADSs could be affected.
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This influence, as well as Brazilian political and economic conditions, could adversely affect us and the trading price of our preferred shares and ADSs.
In the past, the Brazilian government has intervened in the Brazilian economy and occasionally made drastic changes in policy and regulations. The Brazilian government’s actions to control inflation and affect other policies have often involved wage and price controls, currency devaluations, capital controls, and limits on imports, among other things. Our business, financial condition, results of operations and the market price of our preferred shares and ADSs may be
adversely affected by changes in government policies, especially those related to our sector, such as changes in telephone fees and competitive conditions, as well as general economic factors, including:
| · | exchange control policies; |
| · | internal economic growth; |
| · | liquidity of domestic capital and lending markets; |
| · | tax policies (including reforms currently under discussion in the Brazilian Congress);policies; and |
| · | other political, diplomatic, social and economic developments in or affecting Brazil. |
Uncertainty over the possibility of the Brazilian government implementing changes in policy or regulation affecting these or other factors in the future may contribute to economic uncertainty in Brazil and heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian companies. In addition, possible political crises may affect the confidence of investors and the public in general, which may result in economic deceleration and affect the trading prices of shares issued by companies listed on the stock exchange, such as us.
Our business may be vulnerable to the current disruptions and volatility in the global financial markets.
The globalinternational economy remains subject to risks and adjustments arising from the international financial crisis. The international financial system has experienced difficultremains susceptible to unfavorable credit and liquidity conditionsconditions. Foreign and disruptions leading to greater volatility. Since the fall of 2008, global financial markets deteriorated sharply and a number of major foreignnational financial institutions, including some of the largest global commercial banks, investment banks, mortgage lenders,
mortgage guarantors and mortgage insurance companies, were experiencingcould continue to experience significant difficulties, including runs on their deposits and inadequate liquidity. Therefore, the prices of financial assets are likely to continue to reflect risk aversion, with increased volatility.
In an attempt to increase liquidity in the financial markets and prevent the failure of the financial system, various governments have intervened on an unprecedented scale, but theremay continue to intervene in their financial systems, and perform tax adjustments. There is no assurance, however, that these measures will successfully alleviate the currentbe successful in stabilizing conditions in international financial crisis.markets.
Despite the extent of the above-mentioned intervention,interventions, global investor confidence remainscould remain low, the global financial markets could remain volatile and access to credit remains relativelycould still be lacking. ContinuedThe continuation or worsening of disruption and volatility in the global financial markets couldmay have a material adverse effect on our ability to access the capital and liquidity on acceptablemarkets under appropriate financial terms, and consequently onconditions, which may adversely affect our operations. Furthermore, an environment of economic downturn couldmay negatively affect the financial stability of our customers, which could result in a general reduction in businessBrazil’s economic activity and athe consequent loss of income for us.
Political instability may have an adverse impact on the Brazilian economy and on our business.
Political crisescrisis in Brazil in the past have affectedcan affect the trust of investors and the public in general, as well as the development of the economy. Political crises may have an adverse impact on the Brazilian economy, our business, financial condition, and results of operations and the market price of our preferred shares and ADSs.
Inflation and government efforts to curb inflation may contribute to economic uncertainty in Brazil, adversely affecting our business and results of operations.
Brazil has historically experienced high rates of inflation. Inflation and certain of the government’s measures taken in the attempt to curb inflation have had significant negative effects on the Brazilian economy. TheIn 2011, inflation measured by the Consumer Prices Index (Índice de Preços ao Consumidor), or IPCA, reached 6.50%, in line with the IPCA, published by the Instituto Brasileiro de Geografia e Estatística, rose 5.9% in 2008, reaching the target fixedupper limit established by the National Monetary Council.Council, but above the central inflation target of 4.50%. In 2012, the Brazilian monetary policy will continue to use the IPCA for establishing the inflation target. The inflation rate was 4.5% in 2007, 3.1% in 2006, 5.7% in 2005target for 2012 is set at 4.50%, similar to 2011. If inflation rises beyond this target, the basic interest rates may rise, directly affecting the cost of our debt and 7.6% in 2004.indirectly reducing the demand for products and services related to telecommunications. In 2012, factors that may adversely affect consumer inflation are, among others, the international commodities prices, the impact of buoyant domestic economic activity on domestic prices and the indexation of prices and tariffs.
Since 2006, telephone fees for fixed-linefixed line services have been indexed to the Indice de Serviços de Telecomunicações (Telecommunications Index of Telecommunication Service, Index or IST), whichIST, reduced by a productivity factor. The IST is a basket of national indexes that reflect ourreflects the industry’s operating costs. As a result, this index serves to reduce the apparent incongruitypotential discrepancies between our industry’s revenuesrevenue and costs, and thus reduce the apparent adverse effects of inflation upon our operations. In contrast, Brazilian monetary policy has been using
The fee rate increase authorized by ANATEL, which references the IPCA as an inflation targeting system. The inflation target for 2009IST, is 4.5%reduced by a factor of productivity and if inflationapplied cumulatively after a period of 12 months. This can cause increases beyond this target, basicin costs and salaries above and below that of our revenue, with adverse impacts on our profitability. Increases in interest rates may rise, causing directhave a material adverse effect on our business.
The Monetary Policy Committee of the Brazilian Central Bank (Comitê de Política Monetária do Banco Central do Brasil), or COPOM, sets the target of the basic interest rate for the Brazilian financial system based on an expectation of convergence between the future inflation rate and the central inflation target. On December 31, 2011, the basic interest rate was 11.0% per year, compared to 10.75% per year on December 31, 2010. Further increases in the basic interest rate may occur throughout 2012 with adverse effects on our business. According to current market consensus, inflation measured by the costIPCA will be higher than the established inflation target of debt and indirect effects on4.50% for 2012. As a result, the demand for telecommunication goods and services.
Our results of operations have been negatively affected by a decreaseCentral Bank may increase the SELIC rate (the Central Bank’s overnight rate) in 2012 to align inflation with the inflation target, which may adversely effect our customer growth and could also be affected if our rate of customer turnover increases.
Our rate of acquisition of new customers can be negatively affected by market penetration. For example, our fixed-line customer base decreased 1.2% from December 31, 2006 to December 31, 2007 and decreased another 2.5% from December 31, 2007 to December 31, 2008. The decrease was mostly due to an increase in competition in the fixed telephony industry from cable and fixed-wireless operators, and an increase in substitution of fixed lines with mobiles. This decrease in customer acquisition has negatively affected our results of operations and could continue to do so in the future. In addition, if our rate of customer turnover were to increase significantly, our results of operations and or competitive position could be adversely affected. Several factors could influence our rate of acquisition of new customers and our rate of customer turnover, including competitive pressures from mobile telecommunication service providers and other fixed-line telecommunications providers, and economic conditions in Brazil.
business.
Fluctuations in the real/U.S. dollar exchange raterates may adversely affect our ability to pay U.S. dollar-denominatedmeet liabilities denominated or U.S. dollar–linked obligationsto foreign currencies or reduce our income in foreign currency, and could lowermay have a material adverse effect on the market value of our preferred shares and ADSs.
The exchange rate between the U.S. dollar and the Brazilian currencyreal has experienced devaluationssignificant fluctuations in recent years. Between 2000 and 2003, the past. The real was devalued 67% against the U.S. dollar by 18.7% inand gained 40% between 2004 and 2010, considering the annual average exchange rates. Between 2001 and 52.3% in 2002. Over the next few years, in contrast,2011, the real began appreciatingappreciated by 29% against the U.S. dollar, increasing 18.2%dollar.
As of December 31, 2011, 19.32% of our R$6.20 billion total financial debt was denominated in U.S. dollars and UMBNDES. As of December 31, 2011, we had currency hedges in place to cover all of our financial foreign currency-denominated bank debt.
Part of the costs relating to our network infrastructure and services provided by outside vendors is payable or linked to payment by us in U.S. dollars. By contrast, our revenue is generated in reais, 8.1%, 11.8%, 8.7%except income derived from hedging transactions, international long-distance interconnection and 17.2%, respectively, in 2003, 2004, 2005, 2006 and 2007. However,services to customers outside of Brazil.
To the extent that the value of the real depreciated againstdecreases relative to the U.S. dollar or euro, our commitments linked to fluctuations in exchange rates or payable in foreign currencies becomes more expensive and in return our accounts receivable denominated in foreign currencies appreciate, which could adversely affect our revenue and expenses. However, 99.9% of the net balance of the transactions denominated in foreign currencies is covered by 31.9%hedge transactions. Since May 2010, the Company began using net balance coverage, which is the coverage for net positions in 2008. foreign exchange exposures generated by invoices issued or received in foreign currencies, substantially reducing the Company’s risk to fluctuations in exchange rates. By periodically receiving invoices for the net balance
coverage and determining the coverage of exposures, the Company’s corporate market risk department monitors its foreign exchange exposure and commitments linked to foreign currencies so as not to achieve a significant amount of exposure.
It should be noted that the IST, the current index applicable to telecommunication fees for fixed-line services, does not adequately reflect the true effect of exchange rate fluctuations as compared to the previously applicable index, the IGP-DI.fluctuations. Thus, since 2006, telecommunication revenues,revenue, when converted to U.S. dollars, dodoes not adequately reflect the true effect of exchange rate fluctuations, so that our results of operations could be adversely affected. See “—“––A. Selected Financial Data — Data––Exchange Rates” for more information on exchange rates.
As of December 31, 2008, 13.7% of our R$3.74 billion total indebtedness was denominated in foreign currencies, primarily in Japanese yen, Euro and U.S. dollars. As of December 31, 2008, we had currency hedges in place to cover virtually all of our foreign currency-denominated bank debt. Part of the costs relating to our network infrastructure is payable or linked to payment by us in U.S. dollars. However, other than income derived from hedging transactions and international long distance interconnection, all of our revenues are generated in reais. To the extent that the value of the real decreases relative to the U.S. dollar, our debt becomes more expensive to service and it becomes more costly for us to acquire technology and goods necessary to operate our business that have their prices linked to exchange rate fluctuations. The additional costs from our debt, however, are offset by revenues from corresponding hedging transactions and the exposure of our capital expenditures is constantly monitored so that it does not reach a material amount. Nevertheless, currency fluctuations are expected to continue to affect our financial income and expenses.
Political, economic and social developments and the perception of risk in other countries, especiallydeveloped and emerging market countries may adversely affect the Brazilian economy, our business, and the market price of Brazilian securities, including our preferred shares and ADSs.
The market for securities issued by Brazilian companies may be influenced, into varying degrees, by economic conditions in both emerging and internationaldeveloped market conditions, especially by those in Latin American and other emerging markets.countries. The reaction of investors to developments in other countries may have an adverse impact on the market value of securities of Brazilian companies. Crises in other emerging countries or the economic policies of other countries in particular those of the United States, may reduce investor demand for securities of Brazilian companies, including our preferred shares. Any of the foregoing developments may adversely affect the market value of our preferred shares and hinder our ability to access the capital markets and finance our operations in the future on acceptable terms and costs, or at all.
Exchange controls and restrictions on remittances abroad may adversely affect holders of our preferred shares and ADSs.
Brazilian law allows that, whenever there is a significant imbalance in Brazil’s balance of payments or a significant possibility that such imbalance will exist, the Brazilian government may impose temporary restrictions on capital outflows. Such restrictions could hinder or prevent the holders of our preferred shares or the depositarycustodian of our shares in Brazil, Banco Itaú Unibanco S.A. (acting as the agent for the ADSsdepositary), from remitting dividends abroad. The Brazilian government imposed restrictions on capital outflows for a six-month period at the end of 1989. If similar restrictions are introduced in the future, they would likely have an adverse effect on the market price of our preferred shares and ADSs.
Increases in interest rates may have a material adverse effect on our business.
The Central Bank’s Monetary Policy Committee (Comitê de Política Monetária do Banco Central – COPOM), establishes the basic interest rate target for the Brazilian financial system by reference to the level of economic growth of the Brazilian economy, the level of inflation and other economic indicators. As of December 31, 2004,
2005, 2006, 2007 and 2008, the basic interest rate was 17.8%, 18.0%, 13.3%, 11.3% and 13.8%, respectively, and as of March 31, 2009, was 11.25%. Increases in interest rates may have a material adverse effect on us.
Risks Relating to the Brazilian Telecommunications Industry and Us
Extensive government regulation of the telecommunications industry and our concession may limit, in some cases, our flexibility in responding to market conditions, competition and changes in our cost structure or impact our fees.
Our business is subject to extensive government regulation.regulation, including any changes that may occur during the period of our authorization to provide telecommunication services. ANATEL, which is the primarymain telecommunications industry regulator in Brazil, is responsible for,regulates, among other things:
| · | industry policies and regulations; |
| · | competition;competition, including, therefore, our ability to grow by acquiring other telecommunications businesses; |
| · | telecommunications resource allocation; |
| · | interconnection and settlement arrangements; and |
| · | supervision of universal service obligations. |
For futher information concerning specificBrazil’s telecommunications regulatory framework is continuously evolving. The interpretation and enforcement of regulations, the assessment of compliance with regulations and the flexibility of regulatory authorities are all marked by uncertainty. We operate under authorization from the Brazilian government, and our ability to retain this authorization is a precondition to our success. However, because of the regulatory framework, we cannot provide assurances that ANATEL will not adversely modify the terms of our authorization. Furthermore, according to the terms of our operating authorizations, we are obligated to meet certain requirements and to maintain minimum quality, coverage and service standards. Failure by us to comply with these requirements may result in the imposition of fines or resolutions issuedother government actions, including the termination of our operating authorizations. Any partial or total revocation of any of our operating authorizations would have a material adverse effect on our business, financial condition, revenues, results of operations and prospects. In recent years, ANATEL has also been reviewing and introducing changes in the applicable regulation, especially regarding the interconnection fees among telecommunications service providers in Brazil. Interconnection fees, which are fees charged by telecommunications service providers to each other to interconnect to each others’ networks, are an important part of our revenue base. To the extent that changes to the rules governing interconnection fees reduce the amount of interconnection fees we are able to collect, our businesses, financial conditions, revenues, results of operations and prospects could be materially adversely affected.
Therefore, our businesses, results of operations, revenues and financial conditions could be negatively affected by the actions of the Brazilian authorities, including, in particular, the following:
| · | the introduction of new or stricter operational and/or service requirements; |
| · | the granting of operating licenses in our areas; |
| · | delays in the granting of, or the failure to grant, approvals for rate increases; and |
| · | antitrust limitations imposed by ANATEL and the CADE. |
Brazilian antitrust regulation is based on Law No. 8,884 of June 11, 1994, which prohibits any practice or transactions aimed at restricting free competition, dominating the relevant market of goods or services, arbitrarily increasing profits, or abusively exercising a dominant market position. The Economic Law Office (Secretaria de Direito Econômico), or SDE, and the Secretariat for Economic Monitoring (Secretaria de Acompanhamento Econômico), or SEAE, also act towards promoting the principle of free, ample and fair competition among all providers, as well as toward correcting the effects of imperfect competition and repressing violations against economic order. We cannot continue to expand our growth through acquisition of other service providers given the antitrust objections of ANATEL referalong with the fact that we currently already render SMP service all over the country. Consolidation of other competitors in the telecommunications market will increase the competitive pressure on us due to section “Item 5.A −Operatingthe increase in their economies of scale and Financial Reviewreduction of operational costs, and Prospects−Operating Results−Regulatorywe may be unable to respond adequately to pricing pressures resulting from consolidation, which would adversely affect our business, financial condition and Competitive Factors.”results of operations.
Our concession may be terminated by the Brazilian government under certain circumstances.
We operate our business under a concession granted by the Brazilian government. According to the terms of the concession, we are obligated to meet certain universal service requirements and to maintain minimum quality and service standards. For example, ANATEL requires that we satisfy certain conditions with respect to, among other things, expansion of our network to provide public pay-phone service for all areaslocations with populations in excess of 100, expansion of our network to provide private individual telephone service for all areaslocations with populations in excess of 300, and, with respect to quality of service, targets for the number of call completions. Our ability to satisfy these terms and conditions, as well as others, may be affected by factors beyond our control. Our failure to comply with the requirements of our concession may result in the imposition of fines up to R$50.0 million or other government actions, including the termination of our concession. Any partial or total revocation of our concession would have a material adverse effect on our financial condition and results of operations. Moreover, the concession
agreements establish that all assets owned by the Company and which are indispensable to the provision of the services described in such agreements are considered reversible assets and are deemed to be part of the concession assets. The assets will be automatically returned to ANATEL upon expiration of the concession agreements, according to the regulation in force at that time. On December 31, 2008,2011, the net book value of reversible assets is estimated at R$6.96.7 billion, which is comprised of switching and transmission equipment and public use terminals, external network equipment, energy equipment and system and operation support equipment.
The expiration date of the original concession agreements was December 31, 2005, but it has since been renewed as of December 22, 2005 for an additional 20-year term. A Public Notice (consulta pública) was publishedThe current concession agreements contain a provision allowing ANATEL to review the concession terms in 2015 and 2020. This provision permits ANATEL to update the renewed concession agreements with respect to network expansion, modernization and quality of service targets in response to changes in technology, competition in the marketplace and domestic and international economic conditions. On December 30, 2010, ANATEL amended the Company’s concession agreements to allow further amendments on May 2, 2011, December 31, 2015 and December 31, 2020. These further amendments may establish new conditions and targets for universal access and quality, taking into consideration the conditions prevailing at the time, including complementary resources.
Important mergers and acquisitions in the market should increase competition in the upcoming years.
In 2011, we faced a strong growth in the Brazilian mobile telecommunication market, considering the number of costumers and revenue, due to new marketing strategies targeted at stimulating clients to use more voice (local and long-distance calls) and data services. In the fixed market, however, we experienced weak growth. Our competitors have also started to bundle services and integrate their fixed and mobile operations to sell complete service pack to their clients and improve operational efficiency.
on March 31, 2009 with
Some of the proposed revisionsmost important telecommunication groups in Brazil experienced a degree of merger and acquisition (M&A) activity in 2011. These have included TIM, a subsidiary of Telecom Italia, and Oi, which acquired a medium-size company that provides Wi-Fi services in public indoor areas, and the largest shareholder of which is Portugal Telecom.
Mergers and acquisitions may change the market dynamic, cause competitive pressure and force small competitors to the concession contracts. ANATEL will accept comments until June 1, 2009,find partners and then it is expected that it will revise the concession contractsmay impact our business, in 2010.terms of operations, financial condition, marketing strategies and offering of products and promotions.
We face substantialincreasing competition from other fixed-line providers that may reduce our market share.telecom service providers.
WeThe cellular industry is growing fast, mainly because of increased competition. Our competitors have experienced,been using aggressive promotions to increase their client base and, expect to continue to experience, market adjustments in which providers take actions in order to compete for clients, especially corporate and premium residential clients. Such actions result in pressure on market prices and shifts in market share.
At the end of 2008, ANATEL approved a change to the General Plan of Grants or Plano Geral de Outorgas, allowing fixed-line providers to hold concession licenses within the same business group in more than one region. This change allowed for the merger between Oi and Brasil Telecom, operators in Regions I and II, respectively, thus redefining the competitive landscape in Brazil.
Number Portability was also introduced in 2008, which we expect will result in significant changes in the competitive dynamic of the Brazilian telecommunications market. Number Portability allows clients within a limited geographic locale to relocate or change their telephone operator without the need to change their telephone number (for either a fixed or mobile line). Number Portability was introduced for certain of our clients in September of 2008 and as of December 31, 2008, approximately 18% of our clients had Number Portability rights. Number Portability rights for all of our clients became effective in March 2009. Though it is difficult to estimate the impact of Number Portability on the Brazilian telecommunications market, we expect, as an operator with significant market share, that we will initially lose more clients (and hence, market share) than we gain as a result, market share (in particular TIM, which reassumed the second position in the mobile market and is challenging our leadership in the prepaid market). New marketing strategies stimulate clients to use more voice (unlimited minutes within the provider’s network, including long-distance calls) and mobile Internet (with the launch of this change.prepaid and daily offers).
AnyThe increase in competition and the related potential loss ofin market share as a result of competition from fixed-line providers could have an adverse effect on our business, financial condition and results of operations.
We face increasing competition from cellular service providers.Our results of operations may be negatively affected by the application of the SMP rules.
Rapid growth ofUnder the SMP regime, our cellular telecommunications industry and intense competition among cellular service providers have resulted in lower pricessubsidiaries receive payments for cellular services. Cellular services are increasingly becoming an alternative to fixed-line services, primarily for residential customers. We expect this to negatively impact the use of their networks in accordance with a network usage payment plan, which includes outbound long-distance calls. Until June 30, 2004, SMP service providers were able to opt to establish a price cap or freely negotiate our interconnection charges. In early 2005, ANATEL began permitting free negotiations for mobile interconnection, or VU-M, fees and by July 2005, local-fixed concessionaires and mobile operators had reached a provisional agreement with respect to VU-M fees for local calls, or VC1 (the agreement guaranteed a 4.5% increase in mobile operators’ fees). ANATEL approved that provisional agreement and, in March 2006, approved another provisional agreement of a 4.5% increase for VU-M fees for long-distance calls, or VC2, VC3, and international calls, among the same operators that had made the VC1 agreement in July 2005. The current rule is the free negotiation of fees, subject to ANATEL regulations. In July 2007, ANATEL approved a provisional agreement among us and the fixed-line operators Telemar, Brasil Telecom,
CTBC Telecom and Sercomtel and the mobile operators for interconnection fees for VC1, VC2 and VC3 calls that provides for an annual adjustment of approximately 1.97% to interconnection fees in Region I (Telemar’s Region) and an annual adjustment of approximately 2.25% in Region II (Brasil Telecom’s Region) and Region III (Telefônica’s Region).
ANATEL also issued Regulation No. 460/2007 regarding Number Portability, implementing and developing fixed telecommunications services and therefore,wireless Number Portability in Brazil effective as of March 2009, with most costs being borne by the operators. For SMP, Number Portability is applied for wireless codes of access of the same registration area. As of December 2011, there were 242.2 million cell phones in Brazil. From the period beginning in September 2008, when Number Portability became effective, until December 31, 2011, 2,240,949 people changed out and 2,248,418 people changed into our subsidiaries as their mobile servicesoperator. For fixed operators, Number Portability is applied for fixed codes of access of the same local area. There can be no assurance that this new regulation will not have material adverse effects on the results of our operations.
We cannot predict whether the current regulatory regime will remain in place or whether any future regulatory change will have an adverse effect on our results of operations. We cannot assure you that the interconnection rates we negotiated will be upheld or that future negotiations will be as favorable as those that were previously set by ANATEL. If the readjustments that we negotiated are stillcancelled or if freely negotiated interconnection fees in the main competitive productfuture are less favorable to us, our business, financial condition, revenues, results of operations and prospects will be adversely affected.
If the inflation adjustment index now applied to our services. Certain fixed-line services operatingprices is changed, the new index may not adequately reflect the true effect of inflation on mobile platforms are already commonour prices, which could adversely affect our results of operations.
The Brazilian government currently uses the General Price Index, or the IGP-DI (the Índice Geral de Preços Disponibilidade Interna), an inflation index developed by the Fundação Getúlio Vargas, a private Brazilian economic organization, in connection with the prices charged in the wireless telecommunications industry. Starting in 2010, the Brazilian government began regulating the telecommunications industry based on an economic model (FAC, or “Fully Allocated Costs”) that analyzes companies’ total costs based on a theoretical company’s costs and other factors. In connection with this model, the Brazilian government used a different inflation adjustment mechanism, the IST index. Under Resolution No. 438/2006, ANATEL will determine the reference cost of using mobile networks (RVU-M) for SMP providers who have significant market wherein a userpower, which will have two numbers, a mobile number and a fixed number, the latter functioning onlybe used in the user’s areaarbitration case by ANATEL to determine the VU-M fee. The inflation adjustment of residencethe RVU-M value uses the IST index. In the auctions by SMP of new radio frequency bands, ANATEL has been using the IST index for determining the value of the installments to be paid for the licenses. If this new inflation adjustment mechanism, or “home zone.” Additionally, with Oi and AEIOU now operatingany other mechanism chosen by the Brazilian government in the statefuture, does not adequately reflect the true effect of São Paulo beginning in the second halfinflation on our prices, our results of 2008, competition in the mobile telecommunications market has intensified, putting further pressure on the fixed-line telecommunications market. Any loss of market share as a result of competition from cellular service providersoperations could be adversely affected.
ANATEL’s new regulation regarding interconnection and network usage fees could have an adverse effect on our business, financial conditionresults.
Since the beginning of 2005, ANATEL published the following new regulations on interconnection and network usage fees of SMP providers, some of which could have an adverse effect on our results: (1) new General Regulation of Interconnection (Regulamento Geral de Interconexão–Resolution No. 410/2005, or RGI); (2) the Regulation of Separation and Allocation of Costs (Resolution No. 396/2005); (3) the Regulation for Network Usage Fees of SMP providers (Regulamento de Remuneração pelo Uso de Redes de Prestadoras do SMP–Resolution No. 438/2006 and Resolutions No. 480/2007, 483/2007, 503/2008 and 549/2010) and the Regulation on the Criteria for Adjustment of Tariffs for Calls from STFC involving SMP or SME No. 576/2011 (Resolution No. 576/2011); (4) the Regulation for Usage of Spectrum in the 800, 900, 1800, 1900 and 2100 MHz bands (Resolution No. 454/2006); (5) the Regulation for Methodology of the Calculation of the WACC (Resolution No. 535/2009); (6) the Invitation Document No. 002/2007/SPV-ANATEL, relating to the auction organized by ANATEL of new 3G licenses, and stating that, in the maximum allowed period of eighteen months from April 30, 2008, the authorizations resulting from this auction must be combined with the existing SMP authorizations given to the bid winners when pertaining to the same region of the general authorization plan of SMP; and (7) the general plan for updating the Brazilian telecommunications regulation (Resolution No. 516/2008, or PGR). The following are some of the changes in the regulation that may adversely affect our results:
| · | In the case of long-distance calls, two SMP providers controlled by the same economic group can receive only one instead of two interconnection charges (VU-M) for calls originated and terminated in their networks ((3) and (6) above). |
| · | New negotiation rules for VU-M fees by which ANATEL will have a role in determining reference prices rather than the current free-market negotiation of prices. The reference prices will apply to SMP providers that have significant market power, which may be the case of Vivo (according to Resolution No. 549/2010, only the groups that include SMP operators with market share in mobile telephony lower than 20% combined in each one of the regions of the General Plan of Authorizations of SMP are considered groups without significant market power in the offer of mobile interconnection, in their respective areas of authorization) ((3) and (7) above (Resolution No. 549/2010 results of Public Consultation No. 5/2010). |
| · | The free negotiation of the VU-M fee is the current rule. The reference price will only be used as a base in case of a conflict resolution related to the VU-M fee agreement. In the near future, ANATEL may issue a new regulation that will consider groups with significant market power those who have, among others: economies of scale and scope, market share within certain parameters and possibly for the providers that have integrated operation on the SMP and STFC. |
| · | Reference prices were cost based commencing in 2008 in compliance with Resolution No. 483/2007. The prices are calculated according to the regulation on Costs Separation and Allocation (Resolution No. 396/2005) ((2) and (3) above). |
| · | VU-M fees must follow the discounts granted to fixed telephony customers for out-of-business hours calls ((3) above). |
| · | When receiving calls from public telephones, VU-M fees will adopt the same fee rules that apply to public telephones ((3) above). |
| · | Creation of VU-M fee unification among SMP providers of the same economic group with significant market power ((3), (6) and (7) above). |
| · | The interconnection payments between SMP operators for traffic in the same registration area may occur independently of the traffic balance between the operators (this regime is referred to as “full billing”) ((1) and (3) above). Before the adoption of the above-mentioned regulation, payments between SMP operators for traffic in the same area only occurred when the traffic balance between any two companies was either less than 45% or in excess of 55% (this regime is referred to as “partial bill and keep”). |
| · | The Invitation Document 002/2007/SPV-ANATEL relates to the auction organized by ANATEL in December 2007 of new licenses (3G licenses) for the 1900-2100 MHz radio frequency bands denominated the “F,” “G,” “I” and “J” bands, and states that, in the maximum allowed period of eighteen months from the publication of the Terms of Authorization on April 30, 2008, the authorizations resulting from this auction will be combined with the existing SMP authorizations given to the bid winners when pertaining to the same region of the general authorization plan of SMP. Vivo and Vivo Participações acquired spectrum licenses for the “J” band in regions where we hold SMP licenses. In addition, the Invitation Document modifies the rule for the renewal of radio frequency licenses and includes in the calculation of operating profits the compensation received for the use of the SMP network together with the profits earned from the service plans. In accordance with this Invitation Document, in January 2010, ANATEL published an act determining the unification of our SMP authorizations in Regions II (states of Paraná, Santa Catarina, Rio Grande do Sul, Goiás, Tocantins Mato Grosso do Sul, Mato Grosso, Rondônia, Acre and the Federal District) and III (state of São Paulo) of the PGA-SMP, with only one SMP authorization for each one of these Regions (Terms of Authorization Nos. 005/2010 and 006/2010, signed in January 2010, for Region II and III, respectively). Moreover, ANATEL also determined that, from November 1, 2009 (eighteen months from April 30, 2008), in each Region of the PGA-SMP, the VU-M fee must be unified for that Region (two SMP providers controlled by the same economic group can receive only one instead of two interconnection charges (VU-M) for calls originated and terminated in their networks), and freely negotiated. Until such date, the mobile operators charged a VU-M fee for authorization of the SMP. In February 2010, ANATEL |
defined the VU-M fee to be paid for Oi (fixed and mobile operators) and for Brasil Telecom (fixed and mobile operators) to Claro, TIM, Vivo and Vivo Participações, for the region of the PGA-SMP, as a result of the unification of the SMP authorizations ((1), (3) and (6) above). In October 2010, the Oi signed an agreement with Vivo recognizing these VU-M fees as a unified region. Even though it paid the amounts defined by ANATEL, Oi had filed for arbitration against Vivo, which became moot after this agreement.
| · | In 2008, ANATEL published the general plan for updating the Brazilian telecommunications regulation (“Plano Geral de Atualização da Regulamentação das Telecomunicações no Brasil”–Resolution No. 516/2008, or “PGR”) ((7) above). |
| · | In November 2010, ANATEL published Resolution No. 550/2010 for the Regulation on Exploration of Personal Mobile Services by means of a Virtual Network, making possible the creation of the “agent” and the Authorization of Mobile Virtual Network ((7) above). Resolution No. 550/2010 resulted from Public Consultation No. 50/2009. In accordance with this regulation approved by ANATEL, Mobile Virtual Network Operators may operate either as agents or as virtual network licensees. An agent represents the personal mobile service provider through the establishment of a representation agreement, which must be ratified by ANATEL. The agent’s activity is not defined as a “telecommunications service,” so this is of significant interest to companies that operate in other sectors such as large retailers, banks and football teams. |
However, the activity of the virtual network licensee does fall within the definition of “telecommunications service” and is thus subject to all applicable rules:
| · | In October 2009, ANATEL published Resolution No. 535/2009 relating to the Methodology of the Calculation of the WACC ((5) above). |
| · | In December 2008, Decree 6523/2008 became effective, relating to the general norms of customer interaction service by telephone, with the objective of improving the quality of services ((7) above). |
| · | In December 2010, ANATEL organized auctions for the 1900-2100 MHz radio frequency band denominated the “H” band, for extension bands and for available frequencies at “A,” “D,” “E,” “M” and TDD bands, according the Invitation Document No. 002/2010/ANATEL. Vivo was awarded 23 licenses (14 spectrum licenses in 1800 MHz bands (“D,” “E,” “M” and extension bands) and nine spectrum licenses in 900 MHz extension bands). In addition, the Invitation Document modifies the rule for the renewal of radio frequency licenses and includes in the calculation of operating profits the remuneration received for the use of the SMP network together with the profits earned from the service plans ((1) (3) (4) and (7) above); Invitation Document No. 002/2010/ANATEL results of Public Consultation No. 51/2009. |
| · | In December 2010, ANATEL published Resolution No. 558/2010 transferring the bands of 451 MHz to 458 MHz and 461 MHz to 468 MHz to the SMP, STFC and SCM. These bands are currently assigned for access to the services of telephony and data in broad band, particularly in rural areas ((7) above); Resolution No. 558/2010 results of Public Consultation No. 24/2009. |
| · | In August 2010, ANATEL published Resolution No. 544/2010 for the Regulation on Conditions of Use of Radio Frequencies in the Band of 2500 MHz to 2690 MHz. This band was assigned to the SMP Services and STFC in addition to SCM services and Pay Television by means of Multichannel Multipoint Distribution Service (MMDS) for which it was assigned previously ((7) above); Resolution No. 544/2010 results of Public Consultation No. 31/2009. |
| · | In February 2010, ANATEL published Resolution No. 537/2010 relating to amending in the regulation of the 3400 MHz to 3600 MHz band, allowing it to apply additionally to mobile services ((7) above). |
| · | In April 2009, ANATEL published Resolution No. 527/2009 relating to the regulation of the Broadband Power Line (BPL), allowing this service to apply to multimedia communication (SCM) ((7) above). |
| · | In June 2010, ANATEL published Public Consultation No. 21/2010 with a proposal of altering the Regulation for Inspection (Resolution No. 441/2006) ((7) above). |
| · | In June 2010, ANATEL published Public Consultation No. 22/2010 with a proposal of altering the Regulation for Sanctions (Resolution No. 344/2003) ((7) above). |
| · | In July of 2010, ANATEL published Public Consultation No. 27/2010 with the revision of the General Plan of Standards of Quality of the SMP (Resolutions 317/2002 and 335/2003) ((7) above). |
| · | In November 2010, ANATEL published Resolution No. 548/2010 for the Regulation for Evaluation of the Efficiency of Use of the Radio Frequency Spectrum ((4) and (7) above). |
| · | In December 2010, ANATEL published Resolution No. 553/2010 to allow the addition of the ninth digit in the numbers of the mobile telephones of area 11, raising the capacity of numeration in the metropolitan region of São Paulo and eliminating the problem of scarcity of numeration in this area ((7) above). |
| · | In December 2010, ANATEL published Public Consultation No. 50/2010 with the Proposal for Revision of the Regulation of Industrial Exploration of Dedicated Lines (Resolution No. 402/2005) ((7) above). |
| · | In August 2011, ANATEL published Public Consultation No. 46/2011, regarding compensation for the STFC, changes in the collection rate in the Local Network Usage (TU-RL) as regards reduced hours, changes in the interconnection regime and alterations in the compensation structure for the Interurban Network Use (TU-RIU). |
Such new regulations could have an adverse effect on our results of operations.operations because: (1) our interconnection charges could drop significantly, thereby reducing our revenues; (2) ANATEL may allow more favorable prices for economic groups without significant market power; (3) the prices we charge in some regions in which we operate are higher than those in certain other regions, and consolidation of those prices, competitive pressures and other factors would reduce our average prices and thereby reduce our revenues; (4) the granting of new licenses may increase competition in our area from other operators, which could adversely affect our market share, thereby reducing our revenues; (5) the inclusion in the calculation of operating profits the remuneration received for the use of the SMP network will increase the cost of renewing licenses; and (6) in ANATEL’s general plan of updating the telecommunications regulation, ANATEL targets several areas of vital importance for the mobile telecommunications business, such as regulation to improve the quality of services that can cause the rise of operational costs, regulation of the virtual mobile operation (MVNO) that can cause an increase in competitive pressure, regulation against significant market power (“Poder de Mercado Significativo–PMS”) arising from VU-M fee unification among SMP providers of the same economic group having significant market power, that can reduce our revenues, and regulation of multimedia communication (SCM), that can cause an increase in competitive pressure.
The industry in which we conduct our business is subject to rapid technological changes that could have a material adverse effect on our ability to provide competitive services.continually changing and evolving technologically.
The telecommunications industry is subject to rapid and significant technological changes. Our future success depends on our ability to anticipate and adapt in a timely manner to technological changes. We expect that new products and technologies will emerge and that existing products and technologies will be further developed.
The advent of new products and technologies could have a variety of consequences. NewThese new products and technologies may reduce the price of our services by providing lower-cost alternatives, or they may also be superior to, and render obsolete, the products and services we offer and the technologies we use, thus requiring investment in new technology.
As an exampleWe are subject to certain risks related to conditions and obligations that could be imposed by ANATEL for the participation in the spectrum auction for LTE services.
In August 2010, ANATEL established a new policy regulating the 2.5 GHz spectrum which requires MMDS (Multichannel Multipoint Distribution Service) companies, including us, to return, until 2013, a significant portion of the alternative technology,spectrum they currently own and to offer cable TV on a primary basis. Through this initiative, ANATEL objects to providing more spectrum availability to mobile operators in December 2007, ANATEL auctioned frequencies for 3G services (third generation cellular telephone services) at premiums of almost 80% over minimum bid prices, for which all current operators as well as other new entrants into the market submitted bids. The 3G networks allow mobile broadband access at speedsBrazil, thus restricting them from increasing service penetration and prices competitive with currently offered fixed broadband services, which
superior data communication.
On January 25, 2012, ANATEL issued Public Consultation No. 4/2012 for the call to bid for the 2.5 Ghz and 450 Mhz spectrum, for which the deadline to present proposals was March 5, 2012. According to ANATEL, the call to bid for those ranges should be published in April 2012 after the approval of ANATEL’s directive council and the auction should be carried out in June 2012. On the draft call to bid proposed by ANATEL, several conditions and obligations were imposed for the acquisition of the 2.5 Ghz spectrum, such as the definition of a “spectrum cap” of 40Mhz for the first lots, which would also apply to the current holders of that spectrum that confirmed intentions to maintain portions of it. In this scenario, companies that already hold 10+10Mhz bands in 2.5 Ghz could only acquire the FDD (frequency division duplex) spectrum up to 40Mhz, which creates different bidding scenarios for current holders of portions of this spectrum and prospective new holders participating in this bid. However, ANATEL also imposed a spectrum cap of 80Mhz for the subsequent bidding rounds in case bidders show no interest in the first lots.
Additionally, the draft call to bid includes other specific conditions, such as the association of the 450Mhz ranges (destined for rural telephony) with the 2.5Ghz range, coverage targets for certain cities and for the 2014 FIFA World Cup, obligations to acquire national infrastructure and technology and, most importantly, rules regarding indemnification of the current MMDS providers, including us, to vacate the 2.5Ghz range to be auctioned by ANATEL, which should be based on criteria such as costs related to customer and equipment migration or investments made. Because such conditions were not entirely defined by ANATEL in the draft call to bid, the indemnification will be negotiated between the current holders of the range and the winning bidder and arbitrated by ANATEL in case of disputes, which could impact the indemnification amounts expected by MMDS providers.
Also, targets established by ANATEL associated with a fast paced implementation of networks could impact (i) the ability to obtain municipal licenses for the construction of new sites at the speed necessary to achieve the coverage targets, (ii) the capacity of suppliers to deliver the equipment necessary for this expansion, with possible impact on their prices, subject to targets to acquire national technology, and (iii) lack of workers to meet the expected implementation pace.
The creation of certain regulatory asymmetries arising from the General Plan of Competition (PGMC) could increase competition.
ANATEL is expected to issue in 2012 new rules relating to the General Plan of Competition (Plano Geral de Metas de Competicao), which is being created to organize a system for controlling the actions of economic agents in the telecommunications sector, imposing, removing or altering obligations of the service providers according to their market share, with a view to increasing competition. ANATEL is expected to issue rules relating, in particular, to the reservation of network capacity for sharing, and to the definition of “significant market power” in the offering of, interconnection services in mobile networks considering the integration between fixed and mobile services as one economic group. ANATEL is expected to also create a new supervising entity to resolve conflicts between companies with and without significant market power and to evaluate and certify the offering of wholesale services.
These new rules under the General Plan of Competition could increase competition in the markets where we operate.
Certain of our debt agreements contain financial covenants, and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.
Certain of our existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios and tests. Failure to meet or satisfy any of these covenants, financial ratios or financial tests could result in an event of default under these agreements.
The telecom industry, including us, may be harmed by reports suggesting that radio frequency emissions cause health problems and interfere with medical devices.
Media and other reports have suggested that radio frequency emissions from base stations may cause health problems. These concerns could have an adverse effect on Speedy’s growththe wireless communications industry and, our results. Currently, all current mobile operatorspossibly, expose wireless providers, including us, to litigation. According to the World Health Organization (WHO), there is no evidence in the Statelatest medical research that shows any relationship between radio frequency emissions of São Paulo (except AEIOU) provide 3G services at prices competitivebase stations and health concerns. However, expansion of our network may be affected by perceived risks if we
experience problems in finding new sites, which in turn may delay expansion and may affect the quality of our services. On July 2, 2002, ANATEL published Resolution No. 303 that limits emission and exposure for fields with thosefrequencies between 9 kHz and 300 GHz. In addition, the Brazilian government developed specific legislation for the deployment of radio frequency transmission stations that supersedes the existing state and municipal laws. In May 2009, the Brazilian government published Law No. 11934/2009 that limits the exposure for fields with frequencies up to 300 GHz. The new law uses the exposition limits determined by the International Commission on Non-Ionizing Radiation Protection (ICNIRP) and recommended by the World Health Organization (WHO).
In May 2011, the specialized body of the fixed technology playersWorld Health Organization for research on cancer (IARC) classified electromagnetic fields of mobile telephony as “possibly carcinogenic,” a classification which also includes products such as coffee and pickled foods. The World Health Organization subsequently indicated, in fact sheet no. 193, published in June 2011, that to date it cannot be confirmed that the market.use of a mobile telephone has adverse effects on health, although it also announced that in 2012 an official assessment of this risk will be conducted, taking into account all scientific evidence available.
We seek to investNew laws may create additional transmission regulations which, in new technology to remain competitive in a rapidly changing market. If we do not make sufficient investments in new technology or if our networks and technologies otherwise become outdated or obsolete, we may not be able to compete effectively against new, alternative technologies, whichturn, could have an adverse affecteffect on our business. Also, health concerns may affect our ability to capture or retain customers, may discourage the use of the mobile telephone and may result in the adoption of new measures by governments or any other regulatory interventions, any of which could materially and adversely affect our business, financial condition and results of operations and financial condition.
We face risks associated with litigation.
We are party to a number of lawsuits and other proceedings. An adverse outcome in, or any settlement of, these or other lawsuits could result in significant costs to us. In addition, our senior management may be required to devote substantial time to these lawsuits, which they could otherwise devote to our business. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Matters.”
We may be required to record impairment charges relating to goodwill and long-lived assets in the future.
For IFRS purposes, we are required to test our goodwill for impairment at least annually. The excess of the book value of a company over its market value may indicate that impairment exists. This impairment test is described in Note 3 to our audited consolidated financial statements. The Company has substantial goodwill with a carrying value of R$10.2 billion as of December 31, 2011. It is possible that we may be required to record impairment charges relating to our goodwill in future periods, and this would have an adverse effect on our results of operations. When we performed our last impairment test, our evaluation of our ability to recover the carrying value of our long-lived assets was based on projections of future operations that assumed a higher level of revenues and gross margin percentages than we have historically achieved as well as on assumptions that marketplace participants will make in valuing similar assets. We may not be successful in achieving these improvements in our revenues and gross margin percentages due to the competitive environment, changes in technology or other factors. If we are unable to achieve these improvements, we may be required to record impairment charges related to our long-lived assets, including goodwill, in future periods, and this could have an adverse effect on our operations.
In addition, we are required to record impairment charges on long-lived assets, including property, plant and equipment and finite-lived intangible assets (including licenses) if the carrying value of these assets exceeds the recoverable amount expected from their use. This impairment test is also described in Note 3 to our audited consolidated financial statements included in this annual report.
Risks Relating to the Preferred Shares and the ADSs
Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.
We are organized under the laws of Brazil, and mostall of our directors and executive officers and our independent public accountants reside or are based in Brazil. Also, seven of our sixteen directors reside or are based in Brazil. Substantially all of our assets and those of these other persons are located in Brazil. As a result, it may not be possible for holders of the ADSs to effect service of process upon us or these other persons within the United States
or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests due to actions by us, our directors or executive officers than would shareholders of a U.S. corporation.
Holders of Ourour Preferred Shares and ADSs generally do not have voting rights.
In accordance with Brazilian Corporate Law and our bylaws, holders of our preferred shares, and therefore of our ADSs, are not entitled to vote at meetings of our shareholders, except in limited circumstances set forth in “Item 10.B—10. Additional Information—B. Memorandum and Articles of Association.”
YouHolders of our Preferred Shares might be unable to exercise preemptive rights with respect to the preferred shares unless there is a current registration statement in effect which covers those rights or unless an exemption from registration applies.
YouHolders of our preferred shares will not be able to exercise the preemptive rights relating to the preferred shares underlying your ADSs unless a registration statement under the U.S. Securities Act of 1933, as amended, or the Securities Act, is effective with respect to the shares underlying those rights, or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement. Unless we file a registration statement or an exemption from registration applies, youholders of our preferred shares may receive only the net proceeds from the sale of yourtheir preemptive rights by the depositary, or if the preemptive rights cannot be sold, they will lapse and you will not receive any value for them. For more information on the exercise of yourthese rights, see “Item 10.B—10. Additional Information—B. Memorandum and Articles of Association—Preemptive Rights.”
An exchange of ADSs for preferred shares risks the loss of certain foreign currency remittance and Brazilian tax advantages.advantages.
The ADSs benefit from the certificate of foreign capital registration, which permits The Bank of New York, as depositary, to convert dividends and other distributions with respect to preferred shares into foreign currency, and to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for preferred shares will then be entitled to rely on the depositary’s certificate of foreign capital registration for five business days from the date of exchange. Thereafter, they will not be able to remit non-Brazilian currency abroad unless they obtain their own certificate of foreign capital registration, or unless they qualify under Resolution No. 2,689 of the Central Bank of Brazil, dated January 26, 2000 and issued by BACEN, which entitles certain investors to buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration.
If holders of ADSs do not qualify under Resolution No. 2,689, they will generally be subject to less favorable tax treatment on distributions with respect to our preferred shares. There can be no assurance that the depositary’s certificate of registration or any certificate of foreign capital registration obtained by holders of ADSs will not be
affected by future legislative or regulatory changes, or that additional Brazilian law restrictions applicable to their investment in the ADSs may not be imposed in the future.
Holders of our preferred shares will be subject to, and holders of our ADSs could be subject to, Brazilian income tax on capital gains from sales of preferred shares or ADSs.
Brazilian Law No. 10,833 provides that gains on the disposition of assets located in Brazil by non-residentsnonresidents of Brazil, whether to other non-residentsnonresidents or to Brazilian residents, will be subject to Brazilian taxation. The common shares and preferred shares are expected to be treated as assets located in Brazil for purposes of the law, and gains on the disposition of common shares and preferred shares, even by non-residentsnonresidents of Brazil, are expected to be subject to Brazilian taxation. In addition,
Based on the fact that the ADSs mayare issued and registered abroad, we believe that gains on the disposition of ADSs made outside of Brazil by nonresidents of Brazil to another non-Brazilian resident would not be treated assubject to Brazilian taxation, since they would not fall within the definition of assets located in Brazil for purposes of the law, and therefore gains on the disposition of ADSs by non-residents of Brazil may also be subject to Brazilian taxation. Although the holders of ADSs outside Brazil may have grounds to assert that Law No. 10,833 does not apply to sales or other dispositions of ADSs, it is not possible to predict whether that understanding will ultimately prevail in the courts of Brazil, given10,833. However, considering the general and unclear scope of Law No. 10,833 and the absence of judicial court rulings in respect thereto.thereto, we cannot be assured that such an interpretation of this law will prevail in the courts of Brazil. If the income tax is deemed to be due, the gains may be subject to income tax in Brazil at a rate of 15.0%
(general taxation) or 25.0% (if the nonresident seller is located in a tax haven, a country which does not impose any income tax, which imposes it at a maximum rate lower than 20.0%, or in which the laws impose restrictions on the disclosure of ownership composition or securities ownership or the identification of the effective beneficiary of income attributed to nonresident holders). See “Item 10. E—Additional Information—E. Taxation—Brazilian Tax Considerations.”
Certain Factors Relating to Our Controlling Shareholder
Our controlling shareholder has strong influence over our business.
Telefónica Internacional S.A., or Telefónica Internacional, our principal shareholder, currently owns directly and indirectly approximately 85.57%91.76% of our voting shares and 87.95%73.81% of our total capital. See “Item 7.A—7. Major Shareholders and Related PartParty Transactions—A. Major Shareholders” and “Item 7.B—7. Major Shareholders and Related Part Transactions —RelatedParty Transactions—B. Related Party Transactions.” As a result of its share ownership, Telefónica Internacional has the power to control us and our subsidiaries, including the power to elect our directors and officers and to determine the outcome of any action requiring shareholder approval, including transactions with related parties, corporate reorganizations and the timing and payment of our dividends. Given this degree of control over our company, circumstances could arise under which the interests of Telefónica Internacional could be deemed to be in conflict with the interests of our other shareholders.
| INFORMATION ON THE COMPANY |
A. | History and Development of the Company |
General
Following the restructuring and privatization of Telebrás, discussed below, we were incorporated on May 22, 1998, as a corporation (sociedade anônima) organized under the laws of the Federative Republic of Brazil. We are incorporated under the name Telefônica Brasil S.A. (and, before our merger with Vivo Participações S.A. on October 3, 2011, under the name Telecomunicações de São Paulo S.A. – TELESP)
We are registered with the CVM as a publicly held company and our stock is traded on BM&FBOVESPA. We are also registered with the SEC in the United States and our ADSs are traded on the New York Stock Exchange, or the NYSE. Our headquarters are located at Rua Martiniano de Carvalho, 851, 21st floor, 01321-001, São Paulo, SP, Brasil. Our telephone number is 55-11-3549-7922.55-11-7420-1172, our facsimile number is 55-11-7420-2247 and our website is www.telefonica.com.br/investidores. The information on our website is not part of this Form 20-F.
As of December 31, 2008,2011, we had 168,609,291381,347,371 outstanding common shares, with no par value per share, and 337,232,189742,537,273 preferred shares, with no par value per share. Our shareholders’ equity was in the amount of R$1043.3 billion as presented under the Brazilian Corporate Law Method.IFRS.
We provide fixed-line telecommunications services in the State of São Paulo under concession agreements granted in 1998 by the Brazilian government in connection with the restructuring and privatization of the Telebrás System, as described below. The concession, which was renewed in December 2005, authorizes us to provide fixed-line telecommunications services in a specific region, which includes all of the State of São Paulo except for a small area (Sector 33), where a previously existing fixed-line service provider, CTBC Telecom, which was not part of the Telebrás System, continues to operate independently.
In addition to the services that we provide under the concession agreements of 1998, we also provide international and interregional long-distance services, as permitted under Act No. 23,395 of March 1, 2002, under which ANATEL also acknowledged the completion of our having accomplished the network expansion and achievement of universal service targets as of September 30, 2001.
We also provide multimedia communication services (“serviços de comunicação multimídia”dia” or “SCM”“SCM”) such as audio, data, voice and other sounds, images, texts and other information. ANATEL granted the SCM license with Act No. 33,791 of February 14, 2003. Telesp possesses one license,2003, which authorized the rendering of the service in all of the State of São Paulo, except for Sectors 31 (our predecessor company’sa small area prior to the reorganization), 32 (the area corresponding to Ceterp prior to our acquisition) and 34 (CTBC Borda’s area prior to the reorganization)(Sector 33).
On March 14, 2007, ANATEL conceded to A.TelecomA. TELECOM S.A., one of our wholly-ownedwholly owned subsidiaries, the license to offer Pay TV services through DTH (“Direct to the Home” -Home,” a special type of service that uses satellites for the direct distribution of television and audio signals for subscribers). We began offering Pay TV services on August 12, 2007.
On October 31, 2007, the board of ANATEL approved, from a regulatory perspective, the association between Grupo Abril and the Company, which involved, among other transactions, the acquisition of all of the operations of Multichannel Multipoint Distribution Service (MMDS), a special license that allows us to offer Pay TV and broadband services through our subsidiary Telefonica Sistemas de Televisão S.A. The transaction continues to be analyzed by ANATEL, solely with respect to antitrust matters, and will be finally reviewed by CADE.
On February 16, 2009, ANATEL extended the authorization until 2024 for the use of the spectrum frequencies associated to the MMDS in the cities of São Paulo, Curitiba, Rio de Janeiro and Porto Alegre.
In 2008, the Company pioneered the launch of internetInternet access through fiber optic cables (“Fiber to the Home” -Home,” FTTH) for non-commercial customers in Jardins, a neighborhood in São Paulo.noncommercial customers. Aside from the offer of an internetInternet connection with high-speed capacities of 830 Mbps and 30100 Mbps, various bundles werehave also been offered, including Wi-Fi, Digital TV, 2,000 minutes of local and intra-state calls, anti-virus protection, call identification, technical assistance and specific call center assistance.
On February 16, 2009, ANATEL extended the authorization until 2024 for the use of the spectrum frequencies associated with the MMDS in the cities of São Paulo, Curitiba, Rio de Janeiro and Porto Alegre.
According to data regarding market share published by ANATEL, we are among the leading providers of cellular telecommunications services in Brazil, with the help of our wholly owned direct subsidiary Vivo, the leading cellular operator in Brazil. Vivo is a cellular operator in the states of Acre, Alagoas, Amapá, Amazonas, Bahia, Ceará, Espírito Santo, Goiás (also encompassing the area of Federal District), Maranhão, Mato Grosso, Mato Grosso do Sul, Pará, Paraíba, Paraná, Pernambuco, Piauí, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Rondônia, Roraima, Santa Catarina, Săo Paulo, Sergipe, Tocantins and Minas Gerais.
As of December 31, 2008,2011, our telephone network included 11.7 million fixed lines10,981 thousand fixed-lines in service, 2.5 million71,554 thousand mobile accesses, 3,631 thousand broadband clients and 0.5 million699 thousand Pay TV clients. Of the access lines in service, approximately 73% were residential, 22% were commercial, 2% were public telephone lines and 3% were for our own use and testing.
Historical Background
The Restructuring and Privatization
After the incorporation of Telecomunicações Brasileiras S.A. - –Telebrás in 1972, Telebrás and its operating subsidiaries collectively,(collectively, the “Telebrás System”) acquired almost all of the telephone companies in Brazil and monopolized the provision of public telecommunications services in virtually all areas of the country.
In May 1998, just prior tobefore its privatization under the General Telecommunications Law, the Telebrás System was restructured to form, in addition to Telebrás, twelve12 new holding companies. Virtually all assets and liabilities of Telebrás were transferred to the new holding companies, or the “new holding companies.”
In July 1998, the federal government privatized the Telebrás System, selling substantially all its shares in the new holding companies, including TelespPar and its shares in TSP and CTBC Borda, to private sector buyers. As a result of a subsequent reorganization of SP Telecomunicações on January 10, 1999, one of its subsidiaries, SPT Participações S.A., or SPT, became the controlling shareholder of TelespPar.
The Reorganization of TelespPar
On November 30, 1999, the shareholders of TelespPar approved a reorganization involving a series of mergers, whereby Telespar became the telecommunications services company operating under our current name, Telefônica Brasil S.A. (formerly Telecomunicações de São Paulo S.A. - Telesp.– TELESP prior to our merger with our direct subsidiary, Vivo Participações).
Ceterp’s Acquisition
On December 20, 1999, we began the acquisition, through a public auction from the municipal government of the City of Ribeirão Preto, in the State of São Paulo, of 51.0% of the voting shares and 36.0% of the total share
capital of Centrais Telefônicas de Ribeirão Preto S.A., or Ceterp. Ceterp provided fixed-line and cellular services in the State of São Paulo, outside the Telebrás System, and had been one of our minor competitors.
On December 27, 2000, Ceterp was merged with and into us.
The Spin-off of Certain Data Transmission Operations
On August 3, 2000, the wholly-ownedwholly owned subsidiary, Telefônica Empresas S.A., was created with the corporate goal of providing Switched Package Network services. On November 24, 2000, the Company completed a capital increase for Telefônica Empresas S.A. in local currency through the valuation of assets related to the Switched Package Network services, including valuation of a transfer of the authorization to provide that service. Onand, on January 30, 2001, the independent Brazilian corporation, Telefônica Data Brasil Holding S.A. (TDBH), was created through a shareholder-approved spin-off of the data transmission operations performed by Telefónica Empresas S.A. This spin-off was part of Telefónica’s global business reorganization to allow managerial and operational consolidation of business lines through separate, but affiliated, global business units and to enhance the strategic and competitive position of the group. At that time and based on the opinion of external consultants, the management of the company understood that it would be in the best interest of the company to segregate the assets and operating activities related to the rendering of the Switched Packaged Network services, transferring all the shares of Telefónica Empresas S.A. to the then newly-created TDBH. After five years, managementA merger of the company and TDBH determined that the segregation of Telefónica Empresas S.A. reached the expected objectives, which were: (i) consolidation of the Multimedia Communications Service (SCM) in the corporate segment, both in terms of technical specialty as well as client portfolio; and (ii) execution of specific investments that allowed a significant growth of Telefónica Empresas S.A.. Nevertheless, the management of the company and TDBH determined that the considerable increase in competition within this market, dominated by companies directly tied to large national and foreign groups, together with the transactional costs involved, provided an opportunity to merge its operations and increase technological expertise and the development of new products. Accordingly, the merger of the companies’ operations was effective in July 2006. See “—The SCM Restructuring.”
Attainment of ANATEL Targets
Telesp’sOur business, services and tariffs have been regulated by ANATEL since June 16, 1997, in accordance with various decrees, decisions, plans and regulatory measures. We became the first operator to achieve ANATEL’s service targets. As a result, ANATEL granted us a license to offer domestic and international long-distance services to our customers. On September 30, 2001, in anticipation of a December 31, 2003 deadline, we achieved the service offering targets set by ANATEL in respect of network expansion and service universalization. This was acknowledged by ANATEL through Act 23,395 of March 1, 2002. Pursuant to our fulfillment of the targets, on April 29, 2002, ANATEL granted us a concession allowing us to offer international and interregional long-distance services outside our concession region of São Paulo to the whole country, thereby enabling us to have a presence throughout Brazil. Accordingly, on May 7, 2002, we began providing international long-distance services and, on July 29, 2002, we began providing interregional long-distance service. See “—B. Business Overview—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies—Network Expansion &and Quality of Service” for information relating to ANATEL’s network expansion and universal service targets.
The Board of Directors of ANATEL, at ANATEL’s meeting held on January 29, 2003, granted Telespus the authorization to use the SCM nationwide. The Company may now offer voice and data services through various points of presence composed of networks and telecommunication circuits.
On July 6, 2003, mobile telephony operators started to implement a long-distance carrier selection (CSP) that enables the client to determine the long-distance carrier for each domestic long-distance call (VP2 and VP3) or international call, in accordance with the SMP (Mobile Personal Service) rules. As a result, the Company, having acknowledgedacknowledgment of the revenuesrevenue from these long distancelong-distance services, started to pay the mobile telephony operators for the use of their networks.
On September 4, 2004, the rules dictated by Resolution No. 373, dated as of June 03,3, 2004, were implemented to carry out the reconfiguration of the local areas for the Switched Fixed Telephony Service (STFC).STFC. As a consequence, all calls previously billed at domestic long distancelong-distance rates (DC level – Áreas Conurbadas) are now billed at lower rates as local calls. In São Paulo, this modification involved 53 municipalities, of which 39 are in Greater São Paulo (Grande São Paulo.Paulo).
IP Network Asset Acquisition
On December 10, 2002, after receiving approval from ANATEL, our Board of Directors approved a proposal to acquire certain assets from Telefónica Data S.A. (formerly T-Empresas), one of the companies of the Telefónica group, including the following services: (i) an Internet service that allows our customers to access our network through remote dial-up connection and (ii) services that allow customers of Internet Service Providers, or ISPs, to have access to broadband Internet. The purpose of this asset acquisition was to capitalize on synergies that would assist in developing our network and provide a quick response to market competitors.
Acquisition and Reorganization of Atrium
On December 30, 2004, we acquired indirect control of Atrium Telecomunicações Ltda. from Launceston Partners CV. Atrium providesprovided various types of telecommunications services in Brazil, including internetInternet and intranet services, telecommunications management services and the sale and rental of telecommunications systems and related equipment. The acquisition was carried out through the purchase of the total share capital of Santo Genovese Participações Ltda., which held 99.99% of the representative share capital of Atrium.
On November 21, 2005, we approved the corporate reorganization of our wholly-ownedwholly owned companies, A. TelecomTELECOM S.A. (formerly Assist Telefónica S.A.), Santo Genovese Participações Ltda., or Santo Genovese and Atrium Telecomunicações Ltda., or Atrium, which was implemented and became effective on March 1, 2006.
The SCM Restructuring
On March 9, 2006, our Board of Directors and the Boards of Directors of TDBH and Telefónica Empresas S.A., a wholly-ownedwholly owned subsidiary of TDBH (“T-Empresas” and together with us and TDBH, the “Companies”), approved the restructuring of the Companies’ serviços de comunicação multimidia (“SCM”), or multimedia communications services, and data transmission activities (the “SCM Restructuring”).
The terms and conditions of the SCM Restructuring are set forth in an agreement executed by the Companies on March 9, 2006. The SCM Restructuring consisted of (i) the merger of TDBH into our company (the “Merger”); and (ii) the spin-off of all T-Empresas’ assets and activities except its SCM assets and activities outside Sectors 31, 32 and 34 of Region III of Annex II of the General Concession Plan (the “Spin-off”) and assets and activities related to the data center.
Following the approval of this restructuring: (i) TDBH was dissolved; (ii) its shareholders received shares of our common or preferred stock, or ADSs, as appropriate; (iii) we succeeded TDBH in all of its rights and obligations; and (iv) T-Empresas became our wholly-ownedwholly owned subsidiary. The transfer to TelespTELESP of the spun-off components of T-Empresas did not result in any increase or decrease in the net equity of Telesp,TELESP, nor in the number of shares that comprise its capital stock.
With respect to TDBH’s Merger into us, certain minority shareholders tried to suspend our General Shareholders Meeting by contesting the appraisal of the share exchange ratio provided by NM Rothschild & Sons (Brasil) Ltda. by obtaining an injunction from the 14th civil chamber of the central forum of the district court of São Paulo. The injunction was lifted on July 28, 2006, and the merger became legally effective. The main action (Ação Ordinária NoNo. . 583.00.2006.156920-5) has not yet been resolved in the lower court.
On January 31, 2008, at the 22nd22nd General Shareholders Meeting of Telefónica Empresas S.A., the only shareholder of which is Telesp,the Company, it was resolved to change the corporate name of Telefónica Empresas S.A. to Telefónica Data S.A.
Association Agreement DTH Interactive
Since August 10, 2006, the Company, its subsidiary A.Telecom S.A. and DTH Interactive Ltda (DTHI), which provides satellite TV, have maintained an association agreement whereby these companies could offer integrated telecommunications services to consumers, including voice, ADSL, and subscription TV, with each company assuming obligations and earnings related its own expertise. This partnership permitted the introduction of the triple play of telephony, broadband and subscription TV into the Brazilian market.
Agreement of Convergence, Purchase and Sale of Operations, Assets, Stock and Other Obligations with the Abril Group
On October 29, 2006, the Company entered into an agreement with Abril Comunicações S.A., TVA Sistema de Televisão S.A., Comercial Cabo TV São Paulo Ltda., TVA Sul Paraná Ltda., and TVA Radioenlaces Ltda. (the “Abril Group”), whereby we combined our telecommunications and broadband services with the broadband and cable services of Tevecap S.A., or TVA, the second largest Brazilian pay TV provider with operations in the states of Paraná, Rio Grande do Sul, São Paulo and Rio de Janeiro. Through this transaction, we broadened our services to meet our users’ increasing demand, combining the Abril Group’s expertise in content and media production and placement with the expertise of the Telefónica Group in the telecommunications segment.
On October 31, 2007, the board of ANATEL concluded the regulatory review of the association between Grupo Abril and the Company, approving the transaction, which involves (i) the acquisition of all of the operations of MMDS (Multichannel Multipoint Distribution Service) and broadband, and (ii) the acquisition of a significant stake, within the limit of the foreseen effective laws and regulations, in the cable television dealers controlled by Grupo Abril within and outside of the State of São Paulo. This decision was published in the Official GazetteD.O.U. of the Federal Executive on November 19, 2007. The transaction continues to be analyzed by Anatel, solely with respect to antitrust matters,Antitrust clearance is still pending from ANATEL and will be finally reviewed by CADE (Conselho Administrativo de Defesa Econômica), the Competition Authority.competition authorities.
The TelespOur stockholders, in the extraordinary general meeting held on November 23, 2007, ratified the entering into of the Agreement, its amendments and annexes, and approved the implementation of the deal and the signature of all documents necessary for its complete formalization.
As a result of this transaction, Navytree Participações S.AS.A. (“Navytree”) became a wholly-ownedwholly owned subsidiary of Telesp,TELESP, and our provision of broadband services became centralized.
On June 10, 2008, at the General Shareholders Meeting of Navytree, the corporate name of Navytree was changed to Telefônica Televisão Participações S.AS.A. (“TTP”).
Recent DevelopmentsCorporate Reorganization involving Ajato
On October 14, 2008, Telefonica Sistema de Televisão S.A. (“TST”) and TTP purchased from Abril Comunicações S.A. all shares of Mundial Voip Telecomunicações Ltda., EPP, which had its corporate name changed to Ajato Telecomunicação Ltda. (“Ajato”). Following the merger of TTP into the Company on November 11, 2008, Ajato’s shares are held by TST and us.
Corporate Reorganization involving DABR and TTP
On October 21, 2008, the Company’sour Board of Directors and the shareholders of Telefônica Televisão Participações S.A. (“TTP”)TTP and Telefônica Data Brasil Participações Ltda. (“DABR”) approved a corporate reorganization that consisted of the merger of TTP and DABR into us.
On November 11, 2008, the merger of TTP and DABR was approved by our Extraordinary Shareholders Meeting. As a result of this restructuring, TTP and DABR were dissolved and we assumed all the rights and obligations of TTP and DABR.
The reorganization allowed the Companyus to increase synergies, reduce managerial risk, simplify the corporate administrative structure and reduce costs, while also providing tax benefits expected to reduce the Company’sTELESP’s income tax and other taxes assessed on revenue and income, thereby improving the Company’sour cash flows. The reorganization and the goodwill amortization were structured so as to avoid any assumption of indebtedness by Telespus and to minimize any negative impact on the future results of the Company.
Corporate Restructuring involving TS Tecnologia
On May 22, 2009, Telefônica Data S.A., our subsidiary, merged with its controlled subsidiary, TS Tecnologia da Informação Ltda., or TS Tecnologia, in accordance with the values recorded on the books and an appraisal report. This merger caused TS Tecnologia to be extinguished, and Telefônica Data S.A. became the successor to all of the assets and liabilities of TS Tecnologia.
Corporate Restructuring involving A.TELECOM S.A.
On December 9, 2009, our Board of Directors approved the submission to a shareholder vote of the corporate reorganization proposal consisting of the partial spin-off of A.TELECOM S.A. (“A.TELECOM”), and the subsequent merger into the Company of the spun-off part of A.TELECOM.
On December 30, 2009, A.TELECOM’s shareholders approved the spin-off of part of A.TELECOM and the subsequent merger of the spun-off part into the Company. On the same date, our shareholders approved the merger of the spun-off part into us.
This corporate restructuring created synergies for us and A.TELECOM providing both of us with better administrative, operating and regulatory efficiencies regarding telecommunication integrated services, thus benefiting both of us and our respective shareholders.
Corporate Restructuring involving Brasilcel
Acquisition of Brasilcel N.V. stocks by Telefónica S.A.
On July 28, 2010 Telefónica S.A. and Portugal Telecom SG SGPS, S.A. entered into an agreement for the acquisition by Telefónica of 50% of Brasilcel N.V’s (Brasilcel) shares owned by Portugal Telecom. As a result, Telefónica indirectly acquired the shares of Vivo Participações held by Portugal Telecom. Prior to this agreement, Brasilcel’s shares were held by Telefónica (50%) and by Portugal Telecom (50%) and, in 2002, it was used for the
joint venture between both shareholders to jointly hold shares and control of Vivo Participações and other mobile phone companies which were later added under Vivo Participações and in Vivo S.A.
On December 21, 2010, Brasilcel was merged into Telefónica, which held direct and indirect stakes in Vivo Participações’s capital stock representing approximately 60%.
Due to the acquisition of control of Vivo Participações and pursuant to the terms provided for in Article 254-A of Law 6,404/76 and the procedures established in article 29 of CVM Instruction 361 applicable to tender offers (OPA) by sale of control, as defined by item III of article 2 of CVM Instruction 361, on February 17, 2011 Telefónica through its subsidiary SP Telecomunicações Ltda (“SPTelecom”) launched a Public Tender Offer for the shares with voting rights of Vivo Participações (ON shares) held by noncontrolling interests. Those shares were acquired at 80% of the value paid by Telefónica to Portugal Telecom SG SGPS S.A., for each common share with voting rights of Vivo Participações S.A. (ON) owned by Brasilcel.
On March 18, 2011, when the OPAs were made, SP Telecom acquired 10,634,722 common shares of Vivo Participações, representing 2.65% of its shares, resulting in the Telefonica group ownership of 62.1% of Vivo Participações.
Introduction of the Vivo Brand
In April 2003, Brasilcel launched in Brazil the brand name “Vivo,” under which TCP, TCO, TLE, TSD and Celular CRT operate. The creation of the Vivo brand constituted a consolidation of the commercial models throughout the entire country into a common commercial strategy and replaced the different brands under which the different companies offered their services in their respective states. The commercial strategy of Vivo is to increase its customer base as well as revenues by retaining customers and maintaining their distribution channels. The launching of the Vivo brand was accompanied by customer loyalty programs and other measures designed to contribute to the success of the commercial strategy. Guided by a common management team, Vivo designs marketing, promotional and other initiatives common to all companies in the Vivo group and then tailors those activities to the particular markets of those companies.
Agreement with Telefónica and Telecom Itália
In October 2007, TELCO S.p.A. (a company in which Telefónica holds a corporate interest of 42.3%) acquired 23.6% of the capital stock of Telecom Itália. Telecom Itália also holds an interest in the capital stock of TIM. However, Telefónica did not acquire any right to directly participate in the operations of TIM as a result of the acquisition of the corporate interest in Telecom Itália by TELCO S.p.A.
As a result, any transaction involving us and TIM is considered an ordinary mobile network business transaction, which is regulated by ANATEL, as provided in the Act 68.276, dated October 31, 2007 and in the Act 3.804, dated July 7, 2009, both issued and published by ANATEL.
Corporate Restructuring involving Vivo Participações S.A.
In July 28, 2010, in accordance with the material fact disclosed to the public by Telefónica S.A., our controlling shareholder, Telefónica S.A. and Portugal Telecom SG SGPS, S.A. (“Portugal Telecom”) executed a purchase agreement for the acquisition by Telefónica S.A. (directly or through any of the companies within its group) of 50% of the capital stock of Brasilcel, N.V. (a company jointly owned by Telefónica and Portugal Telecom, which owns shares representing approximately 60% of the capital stock of the Brazilian company Vivo Participações S.A.).
On December 27, 2010, the Company and Vivo Participações, jointly announced the approval by their respective Boards of Directors of a proposal for corporate restructuring involving the merger of shares of Vivo Participações into the Company, aiming for the consolidation of the shareholding positions of both companies.
Other than the concentration of the shareholding position herein mentioned, the corporate restructuring aimed to simplify the organizational structure of the companies, both of which were publicly held companies and listed on BM&FBOVESPA and with American Depositary Receipts traded in the United States of America. The restructuring allowed their respective shareholders to participate in one unified company with greater liquidity and with shares
traded on Brazilian and foreign stock exchanges. Moreover, the corporate restructuring provided for the rationalization of the cost structure of the two companies and facilitated the integration of businesses and the generation of synergies, thus positively impacting both companies.
The simplified organization chart below demonstrates the corporate structure of the companies before and after the implementation of this restructuring: (i) TTPreorganization.
The corporate structure before the merger of shares is as follows:
Upon completion of this corporate restructuring, Telefónica, S.A. holds the shares of the Brazilian holding companies that currently are held indirectly by Telefónica, S.A., through the holding of Brasilcel, N.V., as a result of a transaction implemented abroad. The merger of shares did not change the composition of the ultimate control of the companies involved.
The corporate structure after the merger is as follows:
The totality of shares of Vivo Participações was dissolved; (ii) itsmerged into the Company, and the holders of the merged shares of Vivo Participações received new shares to which they were cancelledentitled in the Company. In accordance with Brazilian Corporate Law, as well as the bylaws of the two companies, financial advisors and Telesp’s participation in TTP was exchangedspecialized companies were retained for the respective net assets, without anypreparation of studies regarding the transaction and the subsequent preparation of valuation reports of the companies that were used as reference for the determination of the exchange ratio of shares and the increase in capital stock or issuanceresulting from the merger of new shares, as well as for Telesp; (iii) Telesp assumed all rightsthe purposes of article 264 of Law No. 6,404/76 regarding the exchange ratio between the shares.
In addition to the notice of material fact to be published reflecting more details on the terms and obligations of TTP, (iv) administrative costs were reduced, the goodwill in connection with the acquisition of TTP was transferred to Telesp, which can be amortized will result in a tax benefit of R$288 million, based on future yield, and (v) since TTP was a wholly-owned subsidiary of Telesp, the transfer to Telespconditions of the net equitycorporate restructuring that were agreed upon as mentioned above, the meeting notice of TTPthe respective extraordinary shareholders’ meetings of the companies for voting on the restructuring were timely published.
The corporate restructuring was approved by ANATEL on March 24, 2011. Before the corporate restructuring, the Brazilian entities, TBS Celular Participações Ltda., Portelcom Participações S.A. and PTelecom Brasil S.A. (jointly, the “Holdings BR”), were merged into Vivo Participações. The Holdings BR had as its main asset the shares of Vivo Participações and were controlled by Brasilcel, N.V. The merger of Holdings BR did not result in any increase or decrease in the net equity of Telesp norchange in the number and the composition of classes of shares that comprise its capital stock.of Vivo Part, and did not affect the participation of the shareholders of Vivo Participações.
Moreover, followingAcquisition of Vivo Participações by Telefônica Brasil and corporate restructuring
In order to unify the approvalshareholder’s base of the companies in our group, simplify the organizational structure, rationalize costs, integrate businesses and, consequently, generate synergies provided for in the strategy of Telefónica, on December 27, 2010, the Boards of Directors of Vivo Participações and Telefônica Brasil approved the terms and conditions for restructuring, which provided for the merger of 100% of the shares of Vivo Participações into Telefônica Brasil. Following recommendations of the Guiding Opinion No. 35 of CVM, independent special committees were created to negotiate the exchange ratio of shares and determine the other conditions of the Corporate Restructuring proposal in order to submit later its recommendations to the Board of Directors of both companies.
The proposal was submitted to ANATEL’s authorization and approved at a meeting of the Board of this restructuring: (i) DABR was dissolved; (ii) Telesp succeeded DABR in allagency held on March 24, 2011.
On March 25, 2011, the Boards of its rightsDirectors of Vivo Participações and obligations; (iii) Telesp’s capital stockTelefônica Brasil approved the terms and conditions of the corporate restructuring, which were approved unanimously by the general meetings of shareholders of the Companies held by DABR was directly attributed toon April 27, 2011.
Before the controlling shareholdercorporate restructuring commenced, the Holdings (composed of DABR, SP TelecomunicaçõesTBS Celular Participações Ltda., in exchangePortelcom Participações S.A. and Brazil PTelecom S.A.), controlled by Telefónica S.A. and whose main purpose was to hold shares of Vivo Participações, were merged into Vivo Participações as a preliminary phase for the interests it thenfirst stage of restructuring.
The first stage of the transaction consisted of the unification of the share base of fixed and mobile operators of the Telefonica group in Brazil, through the merger of shares of Vivo Participações into Telefônica Brasil. Telefônica Brasil merged Vivo Participações in its entirety, attributing directly to the holders of shares of Vivo Participações the new shares of Telefônica Brasil. The exchange of shares of Vivo Participações for shares of Telefônica Brasil was based on the exchange share ratio of 1.55 shares of Telefônica Brasil for each share of Vivo Participações. This followed the recommendations of the independent special committees.
Due to this merger of shares of Vivo Participações, Telefônica Brasil’s capital was increased by R$31,222,630, reflecting the economic value of the incorporated shares, based on an economic value appraisal of Vivo Participações prepared by Planconsult Consultoria Ltda. (“Planconsult”).
Telefónica’s strategy in the first stage of the corporate restructuring was to maximize the potential of its operations in Brazil. Therefore, Telefônica Brasil became the direct shareholder of Vivo Participações, and indirectly of Vivo S.A. Through the creation of this “umbrella investment structure”, the noncontrolling shareholders of both companies were equally benefited by the added values generated by the combination of the telecommunications business. This is a basic movement in business so as to improve its converging market strategy, including combined mobile and fixed-line offers. This reorganization created the conditions for the beginning of the process to obtain operational and financial synergies.
Additionally, as a consequence of this merger, on July 6, 2011, Vivo Participações filed a statement with the SEC in order to cancel its registration for the program of American Depositary Shares (ADSs), since all its ADSs were converted into ADSs of Telefônica Brasil, plus payment currency in lieu of fractional Telefônica Brasil ADSs, which was approved on July 7, 2011.
The second and third stages of the corporate restructuring, disclosed to the market on June 15, 2011, sought to continue the simplification process of the organizational structure of the Companies, so as: (i) to focus all authorizations for the rendering of SMP (personal mobile service) services (originally held by Vivo Participações and Vivo S.A.), and (ii) simplify the current corporate structure, eliminating the structure of Vivo Participações, which due to the concentration of commitments became a holding company.
In the second stage, held on October 1, 2011, assets, rights and obligations of Vivo Participações related to mobile operations in DABR,Minas Gerais were awarded to Vivo S.A., a subsidiary of Vivo Participações. As a result, Vivo S.A. became the only mobile operator in the group.
After ANATEL’s approval of the third stage of corporate restructuring, on August 16, 2011, Telefônica Brasil absorbed Vivo Participações’s equity, extinguishing Vivo Participações on October 3, 2011, which simplified and rationalized the Company’s cost structures.
SMP Authorizations and Corporate Restructuring
On June 14, 2011, the Board of Directors of Vivo Participações S.A. approved a proposal for the merger of licenses to provide SMP services (then owned by Vivo Participações S.A. in the State of Minas Gerais and Vivo in other Brazilian States). As a result, the operations and authorizations for the provision of SMP services were unified under Vivo On the same date, the proposal for merger of SMP authorizations as well as for simplifying the corporate structure was filed with ANATEL. The form proposed for this simplified corporate structure was the transfer of
businesses, including property, rights and obligations related to provision of SMP services, as well as the authorizations for the provision of SMP in the State of Minas Gerais held by Vivo Participações, to Vivo, which would result in Vivo S.A. being a wholly owned direct subsidiary of the Company and the mobile operator group that owns the SMP authorizations in other Brazilian states. After the transfer, Vivo Participações was to become a holding company and immediately merge with the Company, thus simplifying and rationalizing the cost structure of the companies involve and subsequently extinguish its corporate existence. On August 16, 2011, ANATEL approved the corporate restructuring pursuant to Act. No. 5,703, published in the D.O.U. on August 18, 2011.
On September 12, 2011, in compliance with Brazilian Corporate Law, an independent firm prepared a valuation report of Vivo Participações S.A.’s net assets based on its book value as of August 31, 2011 containing part of Vivo Participações S.A.’s assets relating to the operations of SMP in the State of Minas Gerais that were transferred to Vivo and the assets of Vivo Participações merged into the Company. Vivo Participações’ valuation as of August 31, 2011 was R$10.3 billion.
On September 13, 2011, the Board of Directors of Vivo Participações S.A. approved, ad referendum of the shareholders: (i) the valuation report of Vivo Participações S.A., containing part of the assets corresponding to the SMP operations in the State of Minas Gerais, which led to a capital increase in Vivo in the amount of R$833.0 million, through the subscription of shares retainedof Vivo Participações S.A.; and (ii) the Protocol of Merger and Instrument of Justification of Vivo Participações S.A. into Telecomunicações de São Paulo S.A. – TELESP (“Protocol”) for the merger of Vivo Participações S.A. into the Company, preceded by the transfer of commercial establishments, including the assets, rights and obligations related to provision of SMP, as well as authorizations for the provision of SMP in the State of Minas Gerais held by Vivo Participações S.A.
On October 1, 2011, the Extraordinary General Shareholders Meeting approved the valuation report of Vivo Participações S.A.. The net assets of Vivo Participações in Minas Gerais transferred to Vivo S.A. amounted to R$833.0 million, which were used for the capital increase in Vivo through the subscription of shares by Vivo Participações S.A., paid via the transfer of assets.
On October 3, 2011, the Extraordinary General Meeting of the Company approved the merger of Vivo Participações S.A. into the Company. On the same rightsdate, the Company changed its name from Telecomunicações de São Paulo S.A. – TELESP to Telefônica Brasil S.A., to reflect its nationwide operations.
On October 18, 2011, the Extract of the Authorization Term No. 46/2011/PVCP/SPV-ANATEL was published in the D.O.U. as a result of Act No. 5703 of October, 16 2011, which authorizes the transfer to Vivo of the authorization to render SMP services in the State of Minas Gerais.
Provision of STFC outside the State of São Paulo by Vivo
On August 18, 2011, ANATEL’s Act No. 7012 was published in the D.O.U. authorizing Vivo to provide STFC services for the general public. On October 7, 2011, Vivo began providing fixed services through mobile technology (FWT) outside of the State of São Paulo.
ANATEL granted on August 18, 2011 consent to the Company to transfer to Vivo its authorizations for STFC service in local mode, domestic long-distance and international long-distance in Regions I and II of the General Plan of Grants (outside of São Paulo). On September 8, 2011, the Extract of the Authorization Term was published in the D.O.U. with the transfer of the STFC licenses in Regions I and II to Vivo. As a result, Vivo began to offer STFC across its area, except for the State of São Paulo, using basically the network elements and some radio frequencies that support the provision of SMP.
Plan for the purchase of shares issued by Telesp; (iv) an increasethe Company.
On August 11 and 15, 2011, the Company informed its shareholders and the market in Telesp’sgeneral, respectively, of approval by the Board of Directors, of the acquisition of preferred and common shares issued by the Company for subsequent cancellation, disposal or maintenance in treasury, without capital resulted, withoutreduction, in order to add value for shareholders. For this repurchase, there was use of part of the issuancecapital reserve existing as of June 30, 2011, excepting the reserves mentioned in article 7, letter (a) to (d) of CVM Rule No. 10/80.
The repurchase started on the date of the resolution, and remained effective until October 20, 2011, and acquisitions were on BM&FBOVESPA, at market prices. The Executive Board was responsible for establishing the maximum quantity of shares to be acquired, whether in a sole or a series of transactions, as well as the definition of the parameters to carry out the acquisitions, observing applicable legal limits and the established maximum number of up to 2,700,000 preferred shares and 2,900,000 common shares.
On November 7, 2011, the Company announced approval by the Board of Directors of a new shares; (v) DABR’s net worth – comprising an amount equivalent to DABR’s investment in Telespplan for the purchase of common and an amount corresponding to goodwill resulting frompreferred shares issued by the Company for the same purpose and using the aforementioned reserve.
This new repurchase started on the date of the resolution, remaining effective until November 6, 2012, and acquisitions were made on BM&FBOVESPA, at market prices, observing legal limits and the established maximum number of 2,912,734 common shares and 25,207,477 preferred shares.
By December 31, 2011, the Company acquired 29,000 common shares and 1,292,300 preferred shares (inclusive of the shares received by Telesp – was transferred to Telesp,purchased on August 11, August 15 and the amortization of the goodwill resulted in a fiscal benefit to Telesp, which was accounted for in Telesp’s Goodwill Special Reserve account in net equity, which shall be capitalized to the Company’s controlling shareholder, SP Telecomunicações Participações Ltda., at which time the minority shareholders will be assured the right of first refusal to subscribe said capital increase and any amounts paid by them shall be delivered to the controlling shareholder; and (vi) the capitalization of the portion of the Goodwill Special Reserve in share capital, in the amount corresponding to the fiscal benefit, will be realized at the end of each fiscal year to the extent that this benefit represents an effective decrease in the taxes paid by Telesp.November 7, 2011).
Corporate Structure and Ownership
Our current general corporate and shareholder structure is as follows:
ON: common shares.
PN: preferred shares.
Restructuring Telefônica Brasil’s subsidiaries
On March 15, 2012, our Board of Directors approved, based on Law No. 12.485/11, a corporate restructuring involving the Company’s wholly owned subsidiaries to rationalize the provision of services rendered by these subsidiaries and the concentration of the provision of telecommunication services into a single company.
The restructuring will be implemented by a process of partial division and merger, first involving only the Company’s wholly owned subsidiaries—A. TELECOM, TData, TST, Ajato and Vivo. As a result of the restructuring, Value Added Services (“VAS”) provided by several wholly owned subsidiaries of the Company will be unified under Telefonica Data S.A. and other telecommunications services will be unified under the Company, which, as a final step to the corporate restructuring, will merge these subsidiaries. Following the merger, VAS will be provided by Telefonica Data S.A. and the Company will provide other telecom servicers.
In addition to streamlining the rendering of services, the corporate restructuring (now possible because of legislative changes applicable to STFC providers) aims to simplify the current organizational structure of the Company, as well as assist the integration of business and the generation of synergies arising therefrom.
This corporate restructuring can only be implemented after the consent of ANATEL. As of the date of this annual report, there is no expected date for ANATEL’s consent.
Capital Expenditures
Year ended December 31, 2011
In 2011, we invested in projects that support our current results and prepare the Company for the competitive landscape in the medium-term. A significant proportion of resources was allocated to enable growth associated with the services we provide.
To meet the needs of an increasingly connected society, significant investments were made to support the strong growth of data customers, whether fixed and mobile data services or dedicated high-speed services to the corporate market, as well as the increase in capillarity of our fiber optics network in São Paulo. We are permittedalso invested in the expansion of the national data transmission backbone to determinemeet increasing demand for mobile data traffic nationwide. In 2011, we invested an amount exceeding R$1 billion to support the full range of data services we offer to our owncustomers.
The following table sets forth our capital expenditures for each year in the three-year period ended December 31, 2011.
| | | |
| | | | | | | | | |
| | (in millions of reais) | |
Network | | | 3,381.0 | | | | 2,039.7 | | | | 1,779.8 | |
Technology / Information Systems | | | 612.5 | | | | 266.1 | | | | 262.0 | |
Others(2) | | | 1,408.0 | | | | 135.6 | | | | 179.3 | |
Total capital expenditures | | | 5,401.5 | | | | 2,441.4 | | | | 2,221.1 | |
(1) | The financial information presented for 2011 represents information from Telefônica Brasil’s consolidated financial statements. |
(2) | Consists primarily of free handset rentals, network construction, furniture and fixtures, office equipment and store layouts and a value of R$811.8 million related to the acquisition of licenses. |
We anticipate that our capital expenditures for 2012 will be similar to 2011. We expect to fund these expenditures with funds internally generated from our operations and through debt.
Year ended December 31, 2010
In 2010, we were focused in voice services in order to comply with ANATEL’s targets and to provide quality service for clients. Also, in order to achieve a consolidated position in the broadband market, during 2010 the focus of our capital expenditure budget, subject to compliance with certain obligations to expand service under the concession. With this in mind,were expanding, modernizing and upgrading our ADSL network and improving our systems and processes of customers relations, marketing and sales.
Year ended December 31, 2009
In 2009, we were focused in voice services in order to comply with ANATEL’s targets and to provide quality service for clients. Also, in order to achieve a consolidated position in the broadband and Pay TV market, during 20082009 the focus of our capital expenditure has been, and continues to be,were expanding, modernizing and upgrading our ADSL network, increasing the base of Pay TV and lauching a new FTTx network (Fiber-To-The-Home).
The following table sets forthimproving our capital expenditures for each year in the three-year period ended December 31, 2008.
systems and processes of customers relations, marketing and sales.
| | | |
| | | | | | | | | |
| | (in millions of reais) | |
Switching equipment | | | 61.1 | | | | 54.7 | | | | 31.3 | |
Transmission equipment | | | 226.6 | | | | 264.5 | | | | 122.9 | |
Infrastructure | | | 56.0 | | | | 45.6 | | | | 60.8 | |
External network | | | 433.4 | | | | 356.0 | | | | 382.1 | |
Data transmission | | | 559.8 | | | | 444.7 | | | | 307.2 | |
Line support equipment | | | 471.8 | | | | 380.2 | | | | 297.7 | |
Administration (general) | | | 459.2 | | | | 368.5 | | | | 329.3 | |
Long-distance | | | - | | | | - | | | | 35.2 | |
Other | | | 74.6 | | | | 78.3 | | | | 154.9 | |
Total capital expenditures | | | 2,342.5 | | | | 1,992.5 | | | | 1,721.4 | |
In addition to the consolidation of our broadband market position, the primary focus of our capital expenditure program has been, and continues to be, the expansion, modernization and digitalization of the network in order to comply with ANATEL’s targets and to provide quality service for our clients. See “—Business Overview—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies.”
We anticipate that our capital expenditures for 2009 will be approximately R$2.4 billion. We expect to fund these expenditures with funds internally generated from our operations and through debt.
B. Business Overview
Our Region
The State of São Paulo covers an area of 248,809 square kilometers, representing approximately 2.9% of Brazil’s territory. The population of the State of São Paulo is approximately 40.6 million, representing 21.6% of Brazil’s total population. Based on the most recent data available, the gross domestic product, or GDP, of the State of São Paulo in 2007 was an estimated R$855.02 billion, or approximately US$439 billion, representing approximately 33% of Brazil’s GDP for the year. The State of São Paulo’s annual per capita income during 2007 was an estimated R$20,522, or approximately US$11,537.
The concessions granted by the Brazilian government in 1998 and renewed in 2005, with the effective date starting in January 2006, allow us to provide fixed-line telecommunications services to a region that includes most—approximately 95%—of the State of São Paulo. The portion of the State of São Paulo that is excluded from our concession region represents approximately 1.5% of total lines in service and 2.2% of the population in the state.State. This concession is operated by CTBC Telecom.
Our concession region is Region III, which is comprised ofcomprises 622 municipalities, including the City of São Paulo, with an aggregate population of approximately 40.641.3 million. Of the municipalities in Region III, 7072 have populationsa population in excess of 100,000. The City of São Paulo has a population of approximately 11 million. According to the plan established by the federal government, whereby the government granted licenses to four providers of fixed-line telecommunications services, the State of São Paulo was divided into four sectors, including Sectors 31 (our predecessor company’s area prior tobefore the reorganization), 32 (the area corresponding to Ceterp prior tobefore our acquisition), 33 (corresponding to the portion of the State of São Paulo that we do not service) and 34 (CTBC Borda do Campo area prior tobefore the reorganization). Through transactions that took place in November 1999 and December 2000, CTBC Borda do Campo and Ceterp merged into our company, which now holds Sectors 31, 32 and 34. Sector 33 is held by CTBC Telecom. According to the Presidential Decree regarding the new General Plan of Grants, published in the Diário Oficial da UniãoD.O.U. on November 21, 2008, we were given a period of 18 months for the unification of the three sectors for which we act as a concessionaire (sectors 31, 32 and 34) were unified into a single sector (sector 31).
On May 7, 2002, we began offering international and interregional long distance servicelong-distance services and on July 29, 2002, we started offering international long distanceinterregional service. The conditions for the provision of interregional and international long-distance services outside the concession area contemplate that providers already operating services under a selection code (a two-digit code to be input by the caller as a prefix to the number dialed) shall keep
such code under the new licenses authorizing operation outside the applicable concession area. Accordingly, we continue using the provider selection code “15” that permits our callers to originate calls using our services even though they are outside our concession area. All interregional and international cellular calls, whether in our concession area or that of another provider, dialedneed to dial a carrier selection code using Personal Mobile Service—SMP, through which mobile services users choose the provider for interregional and international long-distance calls, and which requires dialing our code “15” in order to use our services. See “—Services—Network Services.”
ServicesSince our merger with Vivo Participações, we provide mobile telecommunications services in all of the Brazilian states in addition to the Distrito Federal, the Federal district, representing a total of approximately 8.5 million square kilometers and a population of approximately 190.7 million people. Our wholly owned subsidiary Vivo became a national operator when, on September, 2007, it acquired a license of 1.9 GHz (“L” band) to operate within 6 states located in the Northeast region (Alagoas, Ceará, Pernambuco, Piauí, Paraíba and Rio Grande do Norte), combined with the acquisition of Telemig.
According to data regarding market share published by ANATEL, we are among the leading providers of cellular telecommunications services in Brazil, with the help of our subsidiary Vivo, the leading cellular operator in Brazil. Vivo is a cellular operator in the states of Acre, Alagoas, Amapá, Amazonas, Bahia, Ceará, Espírito Santo, Goiás (also encompassing the area of Federal District), Maranhão, Mato Grosso, Mato Grosso do Sul, Pará, Paraíba, Paraná, Pernambuco, Piauí, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Rondônia, Roraima, Santa Catarina, São Paulo, Sergipe, Tocantins and Minas Gerais.
In Areas 1 and 2, Vivo uses a frequency range known as “A,” “L” and “J” band that covers 100% of the municipalities in its authorized areas in the state of São Paulo. On December 31, 2011, Vivo had 19.6 million cellular lines in service in these areas, which represented a 14.0% net increase from December 31, 2010, and a market share of approximately 33.0% in São Paulo.
In Area 3, Vivo uses the band “A,” “L” and “J” frequency range that covers 100% of the municipalities and 100% of the population in the states of Rio de Janeiro and Espírito Santo. On December 31, 2011, Vivo had 10.1 million cellular lines in service in this area, which represented a 17.1% net increase from December 31, 2010, and a market share of approximately 38.8% in those states.
In Area 4, Vivo uses a frequency range known as “A,” “E” and “J” band that covers 71.6% of the municipalities and 92.4% of the population in the state of Minas Gerais. On December 31, 2011, Vivo had 7.9 million cellular lines in service in this area, which represented a 16.0% net increase from December 31, 2010, and a market share of approximately 33.3% in Minas Gerais.
In Area 5, Vivo uses a frequency range known as “B” band that covers 67.2% of the municipalities in the states of Paraná and Santa Catarina and 93.9% of the population of Paraná and Santa Catarina. On December 31, 2011, Vivo had 4.5 million cellular lines in service in this area, which represented a 14.1% net increase from December 31, 2010, and a market share of approximately 21.7% in those states.
In Area 6, Vivo uses the band “A,” “L” and “J” frequency range that covers 82.1% of the municipalities and 97.7% of the population in the state of Rio Grande do Sul. On December 31, 2011, Vivo had 6.0 million cellular lines in service in this area, which represented a 14.0% net increase from December 31, 2010, and a market share of approximately 42.6% in that state.
In Areas 7 and 8, Vivo is the leading cellular operator, by number of customers, in its authorization area and uses a frequency range known as “A,” “B,” “L” and “J” band that covers 60.2% of the municipalities in the states of Acre, Federal District, Goiás, Mato Grosso, Mato Grosso do Sul, Rondônia, Tocantins, Amazonas, Amapá, Maranhão, Pará and Roraima which covers 83.0% of the population in these states. On December 31, 2011, Vivo had 15.4 million cellular lines in service in these areas, which represented a 26.2% net increase from December 31, 2010, and a market share of approximately 34.8% in those states.
In Area 9, Vivo uses the band “A,” “L” and “J” frequency range that covers 63.8% of the municipalities and 87.2% of the population in the States of Bahia and Sergipe. On December 31, 2011, Vivo had 5.5 million cellular lines in service in this area, which represented a 23.3% net increase from December 31, 2010, and a market share of approximately 29.8% in those states.
In Area 10, Vivo uses the band “L” and “J” frequency range that covers 37.6% of the municipalities and 73.2% of the population in the States of Alagoas, Ceará, Pernambuco, Piauí, Paraíba and Rio Grande do Norte. On December 31, 2011, Vivo had 2.5 million cellular lines in service in this area, which represented a 43.0% net increase from December 31, 2010 and a market share of approximately 7.1% in those states.
On September 18, 2007, with ANATEL’s approval, Vivo acquired the band “L” lots, except for lot 16 (area of Londrina, Paraná, in region 5) and lot 20 (area of Northern Brazil in region 8). Band “L” comprises lots in frequency ranges 1895 to 1900 MHz and 1975 to 1980 MHz, with 5 + 5 MHz band width. As a result, Vivo managed to complete its last coverage gap and will soon be operating in the entire Brazilian territory. On December 20, 2007, with ANATEL’s approval, Vivo acquired the band “J” lots with 10 + 10 MHz band width, with the exception of the lots in the state of Minas Gerais then acquired by Telemig Celular and now by Vivo.
On December 14 and 15, 2010, Vivo acquired 23 lots in the SMP remaining band auction. Vivo acquired lots in almost all regions of the country, which allowed it to reach spectrum capacity of 70 Mhz or higher in all regions where it operates (excluding 23 municipalities in the region of Franca, State of São Paulo, where the spectrum is 50 Mhz).
In the auction of frequencies of H Band and other remaining bands by ANATEL in December 14 and 15, 2010, in compliance with the call notice No 002/2010/PVCP/SPV, Vivo was the winner in 23 of the blocks auctioned.
As a result, Vivo improved its capacity of rendering of services throughout the national territory and now operates in the 900 MHz and 1,800 MHz frequencies in a broad way.
The table below lists the 23 blocks in which Vivo had the winning offer:
| | | | | | |
41 | | 1800 | | 10 + 10 | | States of Paraná, Santa Catarina, Rio Grande do Sul, Goiás, Tocantins, Mato Grosso, Mato Grosso do Sul, Rondonia, Acre and the Federal District |
42 | | 1800 | | 10 + 10 | | State of São Paulo |
44 | | 1800 | | 15 + 15 | | Pelotas, Morro Redondo, Capão do Leão and Turuçu municipalities in State of Rio Grande do Sul |
45 | | 1800 | | 15 + 15 | | States of Alagoas, Ceará, Paraiba, Piauí and Rio Grande do Norte |
76 | | 900 | | 2.5 + 2.5 | | State of Rio de Janeiro |
77 | | 900 | | 2.5 + 2.5 | | State of Espírito Santo |
78 | | 900 | | 2.5 + 2.5 | | States of Goiás, Tocantins, Mato Grosso do Sul, Mato Grosso, Rondonia, Acre and the Federal District (3) |
79 | | 900 | | 2.5 + 2.5 | | State of Rio Grande do Sul except Pelotas, Morro Redondo, Capão do Leão and Turuçu municipalities |
80 | | 900 | | 2.5 + 2.5 | | Municipalities of CN 43(2), in the State of Paraná, except Londrina and Tamarana municipalities |
81 | | 900 | | 2.5 + 2.5 | | States of Paraná and Santa Catarina, except CN 43(2) and Londrina and Tamarana municipalities, in the State of Paraná |
82 | | 900 | | 2.5 + 2.5 | | State of Bahia |
83 | | 900 | | 2.5 + 2.5 | | State of Sergipe |
84 | | 900 | | 2.5 + 2.5 | | State of Amazonas, Amapá, Maranhão, Pará and Roraima |
92 | | 1800 | | 2.5 + 2.5 | | State of São Paulo except the São Paulo Metropolitan Area (Grande São Paulo) and nearby area and Sector 33(1) General Plan of Grants in the State of São Paulo |
101 | | 1800 | | 2.5 + 2.5 | | State of Amazonas, Amapá, Maranhão, Pará and Roraima |
105 | | 1800 | | 2.5 + 2.5 | | Paranaíba municipality, in the State of Mato Grosso do Sul |
107 | | 1800 | | 2.5 + 2.5 | | Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás |
115 | | 1800 | | 2.5 + 2.5 | | Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás |
119 | | 1800 | | 10 + 10 | | States of Rio de Janeiro, Espírito Santo, Bahia and Sergipe |
122 | | 1800 | | 10 + 10 | | State of Amazonas, Amapá, Maranhão, Pará and Roraima |
124 | | 1800 | | 10 + 10 | | States of Alagoas, Ceará, Paraíba, Piauí, Pernambuco and Rio Grande do Norte |
128 | | 1800 | | 10 + 10 | | Paranaíba municipality, in the State of Mato Grosso do Sul and Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás |
163 | | 1800 | | 5 + 5 | | Londrina and Tamarana municipalities in the State of Paraná |
(1) | Municipalities: Altinópolis, Aramina, Batatais, Brodowsqui, Buritizal, Cajuru, Cássia dos Coqueiros, Colômbia, Franca, Guaíra, Guará, Ipuã, Ituverava, Jardinópolis, Miguelópolis, Morro Agudo, Nuporanga, Orlândia, Ribeirão Corrente, Sales de Oliveira, Santa Cruz da Esperança, Santo Antônio da Alegria and São Joaquim da Barra, in the State of São Paulo. |
(2) | CN = Municipalities with the National Select Code. |
(3) | Except Paranaíba municipality, in the State of Mato Grosso do Sul, and Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás. |
On April 28, 2011, ANATEL decided, with regard to the auction of the “H” band and remaining bands (Notice of No Bid. 002/2010/PVCP/SPV-ANATEL), to grant lots 41, 42, 44, 45, 76–84, 92, 101, 105, 107, 115, 119, 122, 124, 128 and 163 to Vivo and other operators of the winning lots in that auction. The lots assigned solely to Vivo are specified on the table above.
On May 30, 2011, ANATEL’s decision was published in the D.O.U. and the Authorization Terms were signed by ANATEL. On June 1, 2011, the Extracts of the Authorization Terms were published on the D.O.U. As a result, Vivo increased its spectrum, beginning to operate at frequencies of 900 MHz and 1800 MHz in a comprehensive manner.
The following table sets forth population, gross domestic product (GDP), and per capita income statistics for each state in Vivo’s service regions at the dates and for the years indicated:
| | | | Last available IBGE data from 2009 | |
| | | Population (in thousands)(1) | | | Percent of Brazil’s population(1) | | | GDP (in millions of reais)(2) | | | Percent of Brazil’s GDP(2) | | | Per capita income (in reais)(2) | |
São Paulo State | 850, 900, 1800, 1900 and 2100 | | | 41,252 | | | | 21.63 | % | | | 1,084,353 | | | | 33.47 | % | | | 26,202 | |
Paraná State | 850, 900, 1800, 1900 and 2100 | | | 10,440 | | | | 5.47 | % | | | 189,992 | | | | 5.87 | % | | | 17,780 | |
Santa Catarina State | 850, 900, 1800, 1900 and 2100 | | | 6,250 | | | | 3.28 | % | | | 129,806 | | | | 4.01 | % | | | 21,214 | |
Goiás State | 850, 900, 1800, 1900 and 2100 | | | 6,004 | | | | 3.15 | % | | | 85,615 | | | | 2.64 | % | | | 14.447 | |
Tocantins State | 850, 900, 1800, 1900 and 2100 | | | 1,383 | | | | 0.73 | % | | | 14,571 | | | | 0.45 | % | | | 11,278 | |
Mato Grosso State | 850, 900, 1800, 1900 and 2100 | | | 3,034 | | | | 1.59 | % | | | 57,294 | | | | 1.77 | % | | | 19,085 | |
Mato Grosso do Sul State | 850, 900, 1800, 1900 and 2100 | | | 2,449 | | | | 1.28 | % | | | 36,368 | | | | 1.12 | % | | | 15,410 | |
Rondônia State | 850, 900, 1800, 1900 and 2100 | | | 1,561 | | | | 0.82 | % | | | 20,236 | | | | 0.62 | % | | | 13,455 | |
Acre State | 850, 900, 1800, 1900 and 2100 | | | 733 | | | | 0.38 | % | | | 7,386 | | | | 0.23 | % | | | 10,689 | |
Amapá State | 850, 900, 1800 and 2100 | | | 669 | | | | 0.35 | % | | | 7,404 | | | | 0.23 | % | | | 11,809 | |
Amazonas State | 850, 900, 1800 and 2100 | | | 3,481 | | | | 1.83 | % | | | 49,614 | | | | 1.53 | % | | | 14,622 | |
Maranhão State | 850, 900, 1800 and 2100 | | | 6,570 | | | | 3.44 | % | | | 39,855 | | | | 1.23 | % | | | 6,260 | |
Pará State | 850, 900, 1800 and 2100 | | | 7,588 | | | | 3.98 | % | | | 58,402 | | | | 1.80 | % | | | 7,859 | |
Roraima State | 850, 900, 1800 and 2100 | | | 451 | | | | 0.24 | % | | | 5,593 | | | | 0.17 | % | | | 13,285 | |
Federal District | 850, 900, 1800, 1900 and 2100 | | | 2,563 | | | | 1.34 | % | | | 131,487 | | | | 4.06 | % | | | 50,436 | |
Bahia State | 850, 900, 1800, 1900 and 2100 | | | 14,021 | | | | 7.35 | % | | | 137,075 | | | | 4.23 | % | | | 9,365 | |
Sergipe State | 850, 900, 1800, 1900 and 2100 | | | 2,068 | | | | 1.08 | % | | | 19,767 | | | | 0.61 | % | | | 9,786 | |
Rio de Janeiro State | 850, 900, 1800, 1900 and 2100 | | | 15,994 | | | | 8.39 | % | | | 353,878 | | | | 10.92 | % | | | 22,104 | |
Espírito Santo State | 850, 900, 1800, 1900 and 2100 | | | 3,513 | | | | 1.84 | % | | | 66,763 | | | | 2.06 | % | | | 19,146 | |
Rio Grande do Sul State | 850, 900, 1800, 1900 and 2100 | | | 10,696 | | | | 5.61 | % | | | 215,864 | | | | 6.66 | % | | | 19,779 | |
Alagoas State | 900, 1800, 1900 and 2100 | | | 3,121 | | | | 1.64 | % | | | 21,235 | | | | 0.66 | % | | | 6,728 | |
Ceará State | 900, 1800, 1900 and 2100 | | | 8,448 | | | | 4.43 | % | | | 65,704 | | | | 2.03 | % | | | 7,686 | |
Pernambuco State | 900, 1800, 1900 and 2100 | | | 8,796 | | | | 4.61 | % | | | 78,428 | | | | 2.42 | % | | | 8,902 | |
Piauí State | 900, 1800, 1900 and 2100 | | | 3,119 | | | | 1.64 | % | | | 19,033 | | | | 0.59 | % | | | 6,052 | |
Paraíba State | 900, 1800, 1900 and 2100 | | | 3,767 | | | | 1.97 | % | | | 28,719 | | | | 0.89 | % | | | 7,618 | |
Rio Grande do Norte State | 900, 1800, 1900 and 2100 | | | 3,168 | | | | 1.66 | % | | | 27,905 | | | | 0.86 | % | | | 8,893 | |
Minas Gerais State | 850, 900, 1800 and 2100 | | | 19,595 | | | | 10.27 | % | | | 287,055 | | | | 8.86 | % | | | 14,328 | |
Vivo | | | | 190,733 | | | | 100.00 | % | | | 3,239,402 | | | | 100.00 | % | | | 16,984 | |
(1) | According to the last revision published by IBGE in 2009 (latest data available). |
(2) | According to the most recent IBGE data (2009). Nominal Brazilian GDP was R$3,239,402 million as of December 2009 calculated by IBGE, subject to revision. |
On December 31, 2011, Vivo had 324 sales outlets (85 in the state of São Paulo, 43 in the states of Rio de Janeiro and Espírito Santo, 35 in the state of Rio Grande do Sul, 37 in the states of Paraná and Santa Catarina, 21 in the states of Bahia and Sergipe, 29 in the states of Minas Gerais, seven in the states that make up the northwest regions of Brasil and 44 in the states that make up the Midwestern and 21 northern regions of Brazil). It also has an efficient network of 11,337 authorized retail and resales dealerships. Consequently, Vivo has maintained its market leadership position, with a total of 11,661 points of sale.
Prepaid telephone card recharging was available at more than 600,000 locations, including our own stores, dealers, lottery shops, physical and online card distributors, and at smaller shops, drugstores, newspaper stands, bookstores, bakeries, gas stations, bars and restaurants. Recharging is also provided online by several banks’ websites, by credit card’s machines, by telephone and accredited websites.
Overview
Our services consist of:
| · | localvoice services, including activation, monthly subscription, measured service and public telephones; |
| · | interconnection charges (or network usage charges), which are amounts we charge other cellular and fixed-line service providers for the use of our network; |
| · | intraregional, interregional and international long-distance voice services; |
| · | data services, including(including broadband services) and other data linkmobile value added services; |
| · | Pay TV services through DTH (direct to home), satellite technology and land based wireless technology MMDS (multichannel multipoint distribution service); |
| · | the sale of wireless devices and accessories; |
| · | network services, including interconnection and the leasingrental of facilities, as well as other services. |
In March 2002, ANATEL certified our compliance with the 2003 universal service targets and authorized us in April 2002 to start providing local and intraregional services in certain regions in which we were not operational and interregional and international long-distance services throughout Brazil. See “—Competition” and “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies—Public Regime-Service Restrictions.Companies.”
We provide interconnection services to cellular service providers and other fixed telecommunications companies through the use of our network. In April 1999, we also began to sell handsets and other telephone equipment through A. TelecomTELECOM S.A. (formerly Assist Telefónica S.A.), our wholly-ownedwholly owned subsidiary. Until January 2001, we provided data transmission services, but spun offspun-off our data transmission operations into TDBH. In March 2006, we began the restructuring of our multimedia communications services (serviços de comunicação multimidia) and data transmission activities. See “—A. History and Development of the Company—Historical Background—The SCM Restructuring.”
The monthly and usage fees for our fixed services (local and long-distance) were initially determined in our concession agreements. From March 2007 until July 31, 2007, the billing system was converted to a minute basis and the former measurement based on pulses was discontinued for all customers. Our concession agreements also
set forth criteria for annual fee adjustments. We derive a substantial portion of our revenuesrevenue from services subject to this price adjustment. The method of price adjustment is essentially a price cap. ANATEL annually applies a price index correction that reflects the inflation index of the period and a productivity factor to our local and long-distance fees. Since 2006, the inflation index has been replaced by the IST, which reflects variations in telecommunications companies’ costs and expenses. ANATEL has complied with the fee range set by the concession agreements.
The following table sets forth our operating revenueWe also provide mobile services for voice, internet and value-added services, including voicemail, voice mail translation in a speech-to-text service (“Vivo Torpedo Recado”), caller identification, voice minutes in unlimited bundles to other mobile phones to post-paid customer, ring back tones (“Vivo Som de Chamada”), data services through WAP protocol and 3G (with a pre-paid data plan special to smartphones), and innovative services such as multi-media backup and cloud based services to save the years indicated. Our feesshort messages (“Vivo Torpedo Center”). We also offer direct Internet through data plans for each categorySmartphones, Tablets and other data enabled devices. We developed a new interface—Vivo Services Store (“Loja de Serviços Vivo”) to sell all the services provided by Vivo, from bundles of service are discussed below under “—RatesSMS to content download such as music, video and Taxes.” For a discussion of trends and events affecting our operating revenue, see “Item 5—Operating and Financial Review and Prospects.”games.
| | | |
| | | | | | | | | |
| | (in millions of reais) | |
Local service | | | 8,609 | | | | 9,125 | | | | 9,636 | |
Intraregional service | | | 2,644 | | | | 2,006 | | | | 2,090 | |
Interregional long-distance service | | | 1,165 | | | | 1,215 | | | | 927 | |
International long-distance service | | | 140 | | | | 134 | | | | 153 | |
We offer wireless roaming services through agreements with local mobile service providers throughout Brazil and other countries, allowing our subscribers to make and receive calls while outside of our concession areas. We provide reciprocal roaming rights to the customers of the mobile service providers with which we have such agreements.
| | | |
| | | | | | | | | |
| | (in millions of reais) | |
Data transmission | | | 3,760 | | | | 2,996 | | | | 2,020 | |
Interconnection services | | | 4,372 | | | | 4,064 | | | | 4,245 | |
Network usage services | | | 466 | | | | 405 | | | | 535 | |
Network Access | | | 384 | | | | 319 | | | | 399 | |
TV service | | | 379 | | | | 54 | | | | - | |
Other | | | 1,102 | | | | 866 | | | | 792 | |
Total | | | 23,021 | | | | 21,184 | | | | 20,797 | |
Taxes and discounts | | | (7,042 | ) | | | (6,456 | ) | | | (6,154 | ) |
Net operating revenue. | | | 15,979 | | | | 14,728 | | | | 14,643 | |
Local Service
LocalFixed local service includes activation, monthly subscription, measured service and public telephones. Measured service includes all calls that originate and terminate within the same local area or municipality of our concession region, which we refer to as “local calls.” Excluding the portion of our region that was serviced by Ceterp before ourits acquisition in December 1999, we were the only supplier of local fixed-line and intraregional long-distance telecommunications services in our region until July 1999. At that time, licenses were auctioned to permit a competitor to provide local fixed-line and intraregional long-distance telecommunications services in our region, including the area formerly served by Ceterp. Vésper São Paulo S.A. received authorization and began operations in December 1999. Embratel, Br TelecomGVT, Oi and TelemarTim also provide local services in our concession region.
See “—Competition.”
TelespWe became the first telephone service concessionaire in Brazil to offer fixed local services outside its concession region (the State of São Paulo). In May 2003, we achieved the network expansion and universal service targets established by ANATEL, and began providing fixed local services to six other states in Brazil, including Sergipe, Espírito Santo, Rio Grande do Sul, Paraná, Santa Catarina and certain areas in Rio de Janeiro. In May 2004, we began providing local fixed telephone services in seven other states in Brazil, including those in the capitals of Pará, Roraima, Amapá, Rondônia, Maranhão, Tocantins and Acre. In May 2005, we also began to provide fixed local telephone services in the capitals of the following states: Ceará, Amazonas, Pernambuco, Rio de Janeiro, Bahia, Mato Grosso do Sul and Mato Grosso. Since May 2006, we have also been providing fixed local telephone services in Brasília (Distrito Federal)(Federal District) and Goiânia, the capital of the State of Goiás. We did not have any activations in 2007.Currently, our main markets outside our concession region are Rio de Janeiro, Espírito Santo, Minas Gerais, Bahia, Pernambuco, Ceará, Federal District, Goiás, Rio Grande do Sul, Paraná and Santa Catarina.
Intraregional Long-DistanceIP Network Asset Acquisition
On December 10, 2002, after receiving approval from ANATEL, our Board of Directors approved a proposal to acquire certain assets from Telefónica Data S.A. (formerly T-Empresas), one of the companies of the Telefónica group, including the following services: (i) an Internet service that allows our customers to access our network through remote dial-up connection and (ii) services that allow customers of Internet Service Providers, or ISPs, to have access to broadband Internet. The purpose of this asset acquisition was to capitalize on synergies that would assist in developing our network and provide a quick response to market competitors.
Acquisition and Reorganization of Atrium
On December 30, 2004, we acquired indirect control of Atrium Telecomunicações Ltda. from Launceston Partners CV. Atrium provided various types of telecommunications services in Brazil, including Internet and intranet services, telecommunications management services and the sale and rental of telecommunications systems and related equipment. The acquisition was carried out through the purchase of the total share capital of Santo Genovese Participações Ltda., which held 99.99% of the representative share capital of Atrium.
On November 21, 2005, we approved the corporate reorganization of our wholly owned companies, A. TELECOM S.A. (formerly Assist Telefónica S.A.), Santo Genovese Participações Ltda., or Santo Genovese and Atrium Telecomunicações Ltda., or Atrium, which was implemented and became effective on March 1, 2006.
The SCM Restructuring
On March 9, 2006, our Board of Directors and the Boards of Directors of TDBH and Telefónica Empresas S.A., a wholly owned subsidiary of TDBH (“T-Empresas” and together with us and TDBH, the “Companies”), approved the restructuring of the Companies’ serviços de comunicação multimidia (“SCM”), or multimedia communications services, and data transmission activities (the “SCM Restructuring”).
The terms and conditions of the SCM Restructuring are set forth in an agreement executed by the Companies on March 9, 2006. The SCM Restructuring consisted of (i) the merger of TDBH into our company (the “Merger”); and (ii) the spin-off of all T-Empresas’ assets and activities except its SCM assets and activities outside Sectors 31, 32 and 34 of Region III of Annex II of the General Concession Plan (the “Spin-off”) and assets and activities related to the data center.
Following the approval of this restructuring: (i) TDBH was dissolved; (ii) its shareholders received shares of our common or preferred stock, or ADSs, as appropriate; (iii) we succeeded TDBH in all of its rights and obligations; and (iv) T-Empresas became our wholly owned subsidiary. The transfer to TELESP of the spun-off components of T-Empresas did not result in any increase or decrease in the net equity of TELESP, nor in the number of shares that comprise its capital stock.
With respect to TDBH’s Merger into us, certain minority shareholders tried to suspend our General Shareholders Meeting by contesting the appraisal of the share exchange ratio provided by NM Rothschild & Sons (Brasil) Ltda. by obtaining an injunction from the 14th civil chamber of the central forum of the district court of São Paulo. The injunction was lifted on July 28, 2006, and the merger became legally effective. The main action (Ação Ordinária No. 583.00.2006.156920-5) has not yet been resolved in the lower court.
On January 31, 2008, at the 22nd General Shareholders Meeting of Telefónica Empresas S.A., the only shareholder of which is the Company, it was resolved to change the corporate name of Telefónica Empresas S.A. to Telefónica Data S.A.
Agreement of Convergence, Purchase and Sale of Operations, Assets, Stock and Other Obligations with the Abril Group
On October 29, 2006, the Company entered into an agreement with Abril Comunicações S.A., TVA Sistema de Televisão S.A., Comercial Cabo TV São Paulo Ltda., TVA Sul Paraná Ltda., and TVA Radioenlaces Ltda. (the “Abril Group”), whereby we combined our telecommunications and broadband services with the broadband and cable services of Tevecap S.A., or TVA, the second largest Brazilian pay TV provider with operations in the states of Paraná, Rio Grande do Sul, São Paulo and Rio de Janeiro. Through this transaction, we broadened our services to meet our users’ increasing demand, combining the Abril Group’s expertise in content and media production and placement with the expertise of the Telefónica Group in the telecommunications segment.
On October 31, 2007, the board of ANATEL concluded the regulatory review of the association between Grupo Abril and the Company, approving the transaction, which involves (i) the acquisition of all of the operations of MMDS (Multichannel Multipoint Distribution Service) and broadband, and (ii) the acquisition of a significant stake, within the limit of the foreseen effective laws and regulations, in the cable television dealers controlled by Grupo Abril within and outside of the State of São Paulo. This decision was published in the D.O.U. of the Federal Executive on November 19, 2007. Antitrust clearance is still pending from ANATEL and CADE competition authorities.
Our stockholders, in the extraordinary general meeting held on November 23, 2007, ratified the entering into of the Agreement, its amendments and annexes, and approved the implementation of the deal and the signature of all documents necessary for its complete formalization.
As a result of this transaction, Navytree Participações S.A. (“Navytree”) became a wholly owned subsidiary of TELESP, and our provision of broadband services became centralized.
On June 10, 2008, at the General Shareholders Meeting of Navytree, the corporate name of Navytree was changed to Telefônica Televisão Participações S.A. (“TTP”).
Corporate Reorganization involving Ajato
On October 14, 2008, Telefonica Sistema de Televisão S.A. (“TST”) and TTP purchased from Abril Comunicações S.A. all shares of Mundial Voip Telecomunicações Ltda., EPP, which had its corporate name changed to Ajato Telecomunicação Ltda. (“Ajato”). Following the merger of TTP into the Company on November 11, 2008, Ajato’s shares are held by TST and us.
Corporate Reorganization involving DABR and TTP
On October 21, 2008, our Board of Directors and the shareholders of TTP and Telefônica Data Brasil Participações Ltda. (“DABR”) approved a corporate reorganization that consisted of the merger of TTP and DABR into us.
On November 11, 2008, the merger of TTP and DABR was approved by our Extraordinary Shareholders Meeting. As a result of this restructuring, TTP and DABR were dissolved and we assumed all the rights and obligations of TTP and DABR.
The reorganization allowed us to increase synergies, reduce managerial risk, simplify the corporate administrative structure and reduce costs, while also providing tax benefits expected to reduce TELESP’s income tax and other taxes assessed on revenue and income, thereby improving our cash flows. The reorganization and the goodwill amortization were structured so as to avoid any assumption of indebtedness by us and to minimize any negative impact on the future results of the Company.
Corporate Restructuring involving TS Tecnologia
On May 22, 2009, Telefônica Data S.A., our subsidiary, merged with its controlled subsidiary, TS Tecnologia da Informação Ltda., or TS Tecnologia, in accordance with the values recorded on the books and an appraisal report. This merger caused TS Tecnologia to be extinguished, and Telefônica Data S.A. became the successor to all of the assets and liabilities of TS Tecnologia.
Corporate Restructuring involving A.TELECOM S.A.
On December 9, 2009, our Board of Directors approved the submission to a shareholder vote of the corporate reorganization proposal consisting of the partial spin-off of A.TELECOM S.A. (“A.TELECOM”), and the subsequent merger into the Company of the spun-off part of A.TELECOM.
On December 30, 2009, A.TELECOM’s shareholders approved the spin-off of part of A.TELECOM and the subsequent merger of the spun-off part into the Company. On the same date, our shareholders approved the merger of the spun-off part into us.
This corporate restructuring created synergies for us and A.TELECOM providing both of us with better administrative, operating and regulatory efficiencies regarding telecommunication integrated services, thus benefiting both of us and our respective shareholders.
Corporate Restructuring involving Brasilcel
Acquisition of Brasilcel N.V. stocks by Telefónica S.A.
On July 28, 2010 Telefónica S.A. and Portugal Telecom SG SGPS, S.A. entered into an agreement for the acquisition by Telefónica of 50% of Brasilcel N.V’s (Brasilcel) shares owned by Portugal Telecom. As a result, Telefónica indirectly acquired the shares of Vivo Participações held by Portugal Telecom. Prior to this agreement, Brasilcel’s shares were held by Telefónica (50%) and by Portugal Telecom (50%) and, in 2002, it was used for the
joint venture between both shareholders to jointly hold shares and control of Vivo Participações and other mobile phone companies which were later added under Vivo Participações and in Vivo S.A.
On December 21, 2010, Brasilcel was merged into Telefónica, which held direct and indirect stakes in Vivo Participações’s capital stock representing approximately 60%.
Due to the acquisition of control of Vivo Participações and pursuant to the terms provided for in Article 254-A of Law 6,404/76 and the procedures established in article 29 of CVM Instruction 361 applicable to tender offers (OPA) by sale of control, as defined by item III of article 2 of CVM Instruction 361, on February 17, 2011 Telefónica through its subsidiary SP Telecomunicações Ltda (“SPTelecom”) launched a Public Tender Offer for the shares with voting rights of Vivo Participações (ON shares) held by noncontrolling interests. Those shares were acquired at 80% of the value paid by Telefónica to Portugal Telecom SG SGPS S.A., for each common share with voting rights of Vivo Participações S.A. (ON) owned by Brasilcel.
On March 18, 2011, when the OPAs were made, SP Telecom acquired 10,634,722 common shares of Vivo Participações, representing 2.65% of its shares, resulting in the Telefonica group ownership of 62.1% of Vivo Participações.
Introduction of the Vivo Brand
In April 2003, Brasilcel launched in Brazil the brand name “Vivo,” under which TCP, TCO, TLE, TSD and Celular CRT operate. The creation of the Vivo brand constituted a consolidation of the commercial models throughout the entire country into a common commercial strategy and replaced the different brands under which the different companies offered their services in their respective states. The commercial strategy of Vivo is to increase its customer base as well as revenues by retaining customers and maintaining their distribution channels. The launching of the Vivo brand was accompanied by customer loyalty programs and other measures designed to contribute to the success of the commercial strategy. Guided by a common management team, Vivo designs marketing, promotional and other initiatives common to all companies in the Vivo group and then tailors those activities to the particular markets of those companies.
Agreement with Telefónica and Telecom Itália
In October 2007, TELCO S.p.A. (a company in which Telefónica holds a corporate interest of 42.3%) acquired 23.6% of the capital stock of Telecom Itália. Telecom Itália also holds an interest in the capital stock of TIM. However, Telefónica did not acquire any right to directly participate in the operations of TIM as a result of the acquisition of the corporate interest in Telecom Itália by TELCO S.p.A.
As a result, any transaction involving us and TIM is considered an ordinary mobile network business transaction, which is regulated by ANATEL, as provided in the Act 68.276, dated October 31, 2007 and in the Act 3.804, dated July 7, 2009, both issued and published by ANATEL.
Corporate Restructuring involving Vivo Participações S.A.
In July 28, 2010, in accordance with the material fact disclosed to the public by Telefónica S.A., our controlling shareholder, Telefónica S.A. and Portugal Telecom SG SGPS, S.A. (“Portugal Telecom”) executed a purchase agreement for the acquisition by Telefónica S.A. (directly or through any of the companies within its group) of 50% of the capital stock of Brasilcel, N.V. (a company jointly owned by Telefónica and Portugal Telecom, which owns shares representing approximately 60% of the capital stock of the Brazilian company Vivo Participações S.A.).
On December 27, 2010, the Company and Vivo Participações, jointly announced the approval by their respective Boards of Directors of a proposal for corporate restructuring involving the merger of shares of Vivo Participações into the Company, aiming for the consolidation of the shareholding positions of both companies.
Other than the concentration of the shareholding position herein mentioned, the corporate restructuring aimed to simplify the organizational structure of the companies, both of which were publicly held companies and listed on BM&FBOVESPA and with American Depositary Receipts traded in the United States of America. The restructuring allowed their respective shareholders to participate in one unified company with greater liquidity and with shares
traded on Brazilian and foreign stock exchanges. Moreover, the corporate restructuring provided for the rationalization of the cost structure of the two companies and facilitated the integration of businesses and the generation of synergies, thus positively impacting both companies.
The simplified organization chart below demonstrates the corporate structure of the companies before and after the implementation of this reorganization.
The corporate structure before the merger of shares is as follows:
Upon completion of this corporate restructuring, Telefónica, S.A. holds the shares of the Brazilian holding companies that currently are held indirectly by Telefónica, S.A., through the holding of Brasilcel, N.V., as a result of a transaction implemented abroad. The merger of shares did not change the composition of the ultimate control of the companies involved.
The corporate structure after the merger is as follows:
The totality of shares of Vivo Participações was merged into the Company, and the holders of the merged shares of Vivo Participações received new shares to which they were entitled in the Company. In accordance with Brazilian Corporate Law, as well as the bylaws of the two companies, financial advisors and specialized companies were retained for the preparation of studies regarding the transaction and the subsequent preparation of valuation reports of the companies that were used as reference for the determination of the exchange ratio of shares and the increase in capital stock resulting from the merger of shares, as well as for the purposes of article 264 of Law No. 6,404/76 regarding the exchange ratio between the shares.
In addition to the notice of material fact to be published reflecting more details on the terms and conditions of the corporate restructuring that were agreed upon as mentioned above, the meeting notice of the respective extraordinary shareholders’ meetings of the companies for voting on the restructuring were timely published.
The corporate restructuring was approved by ANATEL on March 24, 2011. Before the corporate restructuring, the Brazilian entities, TBS Celular Participações Ltda., Portelcom Participações S.A. and PTelecom Brasil S.A. (jointly, the “Holdings BR”), were merged into Vivo Participações. The Holdings BR had as its main asset the shares of Vivo Participações and were controlled by Brasilcel, N.V. The merger of Holdings BR did not result in any change in the number and the composition of classes of shares of Vivo Part, and did not affect the participation of the shareholders of Vivo Participações.
Acquisition of Vivo Participações by Telefônica Brasil and corporate restructuring
In order to unify the shareholder’s base of the companies in our group, simplify the organizational structure, rationalize costs, integrate businesses and, consequently, generate synergies provided for in the strategy of Telefónica, on December 27, 2010, the Boards of Directors of Vivo Participações and Telefônica Brasil approved the terms and conditions for restructuring, which provided for the merger of 100% of the shares of Vivo Participações into Telefônica Brasil. Following recommendations of the Guiding Opinion No. 35 of CVM, independent special committees were created to negotiate the exchange ratio of shares and determine the other conditions of the Corporate Restructuring proposal in order to submit later its recommendations to the Board of Directors of both companies.
The proposal was submitted to ANATEL’s authorization and approved at a meeting of the Board of this agency held on March 24, 2011.
On March 25, 2011, the Boards of Directors of Vivo Participações and Telefônica Brasil approved the terms and conditions of the corporate restructuring, which were approved unanimously by the general meetings of shareholders of the Companies held on April 27, 2011.
Before the corporate restructuring commenced, the Holdings (composed of TBS Celular Participações Ltda., Portelcom Participações S.A. and Brazil PTelecom S.A.), controlled by Telefónica S.A. and whose main purpose was to hold shares of Vivo Participações, were merged into Vivo Participações as a preliminary phase for the first stage of restructuring.
The first stage of the transaction consisted of the unification of the share base of fixed and mobile operators of the Telefonica group in Brazil, through the merger of shares of Vivo Participações into Telefônica Brasil. Telefônica Brasil merged Vivo Participações in its entirety, attributing directly to the holders of shares of Vivo Participações the new shares of Telefônica Brasil. The exchange of shares of Vivo Participações for shares of Telefônica Brasil was based on the exchange share ratio of 1.55 shares of Telefônica Brasil for each share of Vivo Participações. This followed the recommendations of the independent special committees.
Due to this merger of shares of Vivo Participações, Telefônica Brasil’s capital was increased by R$31,222,630, reflecting the economic value of the incorporated shares, based on an economic value appraisal of Vivo Participações prepared by Planconsult Consultoria Ltda. (“Planconsult”).
Telefónica’s strategy in the first stage of the corporate restructuring was to maximize the potential of its operations in Brazil. Therefore, Telefônica Brasil became the direct shareholder of Vivo Participações, and indirectly of Vivo S.A. Through the creation of this “umbrella investment structure”, the noncontrolling shareholders of both companies were equally benefited by the added values generated by the combination of the telecommunications business. This is a basic movement in business so as to improve its converging market strategy, including combined mobile and fixed-line offers. This reorganization created the conditions for the beginning of the process to obtain operational and financial synergies.
Additionally, as a consequence of this merger, on July 6, 2011, Vivo Participações filed a statement with the SEC in order to cancel its registration for the program of American Depositary Shares (ADSs), since all its ADSs were converted into ADSs of Telefônica Brasil, plus payment currency in lieu of fractional Telefônica Brasil ADSs, which was approved on July 7, 2011.
The second and third stages of the corporate restructuring, disclosed to the market on June 15, 2011, sought to continue the simplification process of the organizational structure of the Companies, so as: (i) to focus all authorizations for the rendering of SMP (personal mobile service) services (originally held by Vivo Participações and Vivo S.A.), and (ii) simplify the current corporate structure, eliminating the structure of Vivo Participações, which due to the concentration of commitments became a holding company.
In the second stage, held on October 1, 2011, assets, rights and obligations of Vivo Participações related to mobile operations in Minas Gerais were awarded to Vivo S.A., a subsidiary of Vivo Participações. As a result, Vivo S.A. became the only mobile operator in the group.
After ANATEL’s approval of the third stage of corporate restructuring, on August 16, 2011, Telefônica Brasil absorbed Vivo Participações’s equity, extinguishing Vivo Participações on October 3, 2011, which simplified and rationalized the Company’s cost structures.
SMP Authorizations and Corporate Restructuring
On June 14, 2011, the Board of Directors of Vivo Participações S.A. approved a proposal for the merger of licenses to provide SMP services (then owned by Vivo Participações S.A. in the State of Minas Gerais and Vivo in other Brazilian States). As a result, the operations and authorizations for the provision of SMP services were unified under Vivo On the same date, the proposal for merger of SMP authorizations as well as for simplifying the corporate structure was filed with ANATEL. The form proposed for this simplified corporate structure was the transfer of
businesses, including property, rights and obligations related to provision of SMP services, as well as the authorizations for the provision of SMP in the State of Minas Gerais held by Vivo Participações, to Vivo, which would result in Vivo S.A. being a wholly owned direct subsidiary of the Company and the mobile operator group that owns the SMP authorizations in other Brazilian states. After the transfer, Vivo Participações was to become a holding company and immediately merge with the Company, thus simplifying and rationalizing the cost structure of the companies involve and subsequently extinguish its corporate existence. On August 16, 2011, ANATEL approved the corporate restructuring pursuant to Act. No. 5,703, published in the D.O.U. on August 18, 2011.
On September 12, 2011, in compliance with Brazilian Corporate Law, an independent firm prepared a valuation report of Vivo Participações S.A.’s net assets based on its book value as of August 31, 2011 containing part of Vivo Participações S.A.’s assets relating to the operations of SMP in the State of Minas Gerais that were transferred to Vivo and the assets of Vivo Participações merged into the Company. Vivo Participações’ valuation as of August 31, 2011 was R$10.3 billion.
On September 13, 2011, the Board of Directors of Vivo Participações S.A. approved, ad referendum of the shareholders: (i) the valuation report of Vivo Participações S.A., containing part of the assets corresponding to the SMP operations in the State of Minas Gerais, which led to a capital increase in Vivo in the amount of R$833.0 million, through the subscription of shares of Vivo Participações S.A.; and (ii) the Protocol of Merger and Instrument of Justification of Vivo Participações S.A. into Telecomunicações de São Paulo S.A. – TELESP (“Protocol”) for the merger of Vivo Participações S.A. into the Company, preceded by the transfer of commercial establishments, including the assets, rights and obligations related to provision of SMP, as well as authorizations for the provision of SMP in the State of Minas Gerais held by Vivo Participações S.A.
On October 1, 2011, the Extraordinary General Shareholders Meeting approved the valuation report of Vivo Participações S.A.. The net assets of Vivo Participações in Minas Gerais transferred to Vivo S.A. amounted to R$833.0 million, which were used for the capital increase in Vivo through the subscription of shares by Vivo Participações S.A., paid via the transfer of assets.
On October 3, 2011, the Extraordinary General Meeting of the Company approved the merger of Vivo Participações S.A. into the Company. On the same date, the Company changed its name from Telecomunicações de São Paulo S.A. – TELESP to Telefônica Brasil S.A., to reflect its nationwide operations.
On October 18, 2011, the Extract of the Authorization Term No. 46/2011/PVCP/SPV-ANATEL was published in the D.O.U. as a result of Act No. 5703 of October, 16 2011, which authorizes the transfer to Vivo of the authorization to render SMP services in the State of Minas Gerais.
Provision of STFC outside the State of São Paulo by Vivo
On August 18, 2011, ANATEL’s Act No. 7012 was published in the D.O.U. authorizing Vivo to provide STFC services for the general public. On October 7, 2011, Vivo began providing fixed services through mobile technology (FWT) outside of the State of São Paulo.
ANATEL granted on August 18, 2011 consent to the Company to transfer to Vivo its authorizations for STFC service in local mode, domestic long-distance and international long-distance in Regions I and II of the General Plan of Grants (outside of São Paulo). On September 8, 2011, the Extract of the Authorization Term was published in the D.O.U. with the transfer of the STFC licenses in Regions I and II to Vivo. As a result, Vivo began to offer STFC across its area, except for the State of São Paulo, using basically the network elements and some radio frequencies that support the provision of SMP.
Plan for the purchase of shares issued by the Company.
On August 11 and 15, 2011, the Company informed its shareholders and the market in general, respectively, of approval by the Board of Directors, of the acquisition of preferred and common shares issued by the Company for subsequent cancellation, disposal or maintenance in treasury, without capital reduction, in order to add value for shareholders. For this repurchase, there was use of part of the capital reserve existing as of June 30, 2011, excepting the reserves mentioned in article 7, letter (a) to (d) of CVM Rule No. 10/80.
The repurchase started on the date of the resolution, and remained effective until October 20, 2011, and acquisitions were on BM&FBOVESPA, at market prices. The Executive Board was responsible for establishing the maximum quantity of shares to be acquired, whether in a sole or a series of transactions, as well as the definition of the parameters to carry out the acquisitions, observing applicable legal limits and the established maximum number of up to 2,700,000 preferred shares and 2,900,000 common shares.
On November 7, 2011, the Company announced approval by the Board of Directors of a new plan for the purchase of common and preferred shares issued by the Company for the same purpose and using the aforementioned reserve.
This new repurchase started on the date of the resolution, remaining effective until November 6, 2012, and acquisitions were made on BM&FBOVESPA, at market prices, observing legal limits and the established maximum number of 2,912,734 common shares and 25,207,477 preferred shares.
By December 31, 2011, the Company acquired 29,000 common shares and 1,292,300 preferred shares (inclusive of the shares purchased on August 11, August 15 and November 7, 2011).
Corporate Structure and Ownership
Our current general corporate and shareholder structure is as follows:
ON: common shares.
PN: preferred shares.
Restructuring Telefônica Brasil’s subsidiaries
On March 15, 2012, our Board of Directors approved, based on Law No. 12.485/11, a corporate restructuring involving the Company’s wholly owned subsidiaries to rationalize the provision of services rendered by these subsidiaries and the concentration of the provision of telecommunication services into a single company.
The restructuring will be implemented by a process of partial division and merger, first involving only the Company’s wholly owned subsidiaries—A. TELECOM, TData, TST, Ajato and Vivo. As a result of the restructuring, Value Added Services (“VAS”) provided by several wholly owned subsidiaries of the Company will be unified under Telefonica Data S.A. and other telecommunications services will be unified under the Company, which, as a final step to the corporate restructuring, will merge these subsidiaries. Following the merger, VAS will be provided by Telefonica Data S.A. and the Company will provide other telecom servicers.
In addition to streamlining the rendering of services, the corporate restructuring (now possible because of legislative changes applicable to STFC providers) aims to simplify the current organizational structure of the Company, as well as assist the integration of business and the generation of synergies arising therefrom.
This corporate restructuring can only be implemented after the consent of ANATEL. As of the date of this annual report, there is no expected date for ANATEL’s consent.
Capital Expenditures
Year ended December 31, 2011
In 2011, we invested in projects that support our current results and prepare the Company for the competitive landscape in the medium-term. A significant proportion of resources was allocated to enable growth associated with the services we provide.
To meet the needs of an increasingly connected society, significant investments were made to support the strong growth of data customers, whether fixed and mobile data services or dedicated high-speed services to the corporate market, as well as the increase in capillarity of our fiber optics network in São Paulo. We also invested in the expansion of the national data transmission backbone to meet increasing demand for mobile data traffic nationwide. In 2011, we invested an amount exceeding R$1 billion to support the full range of data services we offer to our customers.
The following table sets forth our capital expenditures for each year in the three-year period ended December 31, 2011.
| | | |
| | | | | | | | | |
| | (in millions of reais) | |
Network | | | 3,381.0 | | | | 2,039.7 | | | | 1,779.8 | |
Technology / Information Systems | | | 612.5 | | | | 266.1 | | | | 262.0 | |
Others(2) | | | 1,408.0 | | | | 135.6 | | | | 179.3 | |
Total capital expenditures | | | 5,401.5 | | | | 2,441.4 | | | | 2,221.1 | |
(1) | The financial information presented for 2011 represents information from Telefônica Brasil’s consolidated financial statements. |
(2) | Consists primarily of free handset rentals, network construction, furniture and fixtures, office equipment and store layouts and a value of R$811.8 million related to the acquisition of licenses. |
We anticipate that our capital expenditures for 2012 will be similar to 2011. We expect to fund these expenditures with funds internally generated from our operations and through debt.
Year ended December 31, 2010
In 2010, we were focused in voice services in order to comply with ANATEL’s targets and to provide quality service for clients. Also, in order to achieve a consolidated position in the broadband market, during 2010 the focus of our capital expenditure were expanding, modernizing and upgrading our ADSL network and improving our systems and processes of customers relations, marketing and sales.
Year ended December 31, 2009
In 2009, we were focused in voice services in order to comply with ANATEL’s targets and to provide quality service for clients. Also, in order to achieve a consolidated position in the broadband and Pay TV market, during 2009 the focus of our capital expenditure were expanding, modernizing and upgrading our ADSL network, increasing the base of Pay TV and improving our systems and processes of customers relations, marketing and sales.
The concessions granted by the Brazilian government in 1998 and renewed in 2005, with the effective date starting in January 2006, allow us to provide fixed-line telecommunications services to a region that includes most—approximately 95%—of the State of São Paulo. The portion of the State of São Paulo that is excluded from our concession region represents approximately 1.5% of total lines in service and 2.2% of the population in the State. This concession is operated by CTBC Telecom.
Our concession region is Region III, which comprises 622 municipalities, including the City of São Paulo, with an aggregate population of approximately 41.3 million. Of the municipalities in Region III, 72 have a population in excess of 100,000. The City of São Paulo has a population of approximately 11 million. According to the plan established by the federal government, whereby the government granted licenses to four providers of fixed-line telecommunications services, the State of São Paulo was divided into four sectors, including Sectors 31 (our predecessor company’s area before the reorganization), 32 (the area corresponding to Ceterp before our acquisition), 33 (corresponding to the portion of the State of São Paulo that we do not service) and 34 (CTBC Borda do Campo area before the reorganization). Through transactions that took place in November 1999 and December 2000, CTBC Borda do Campo and Ceterp merged into our company, which now holds Sectors 31, 32 and 34. Sector 33 is held by CTBC Telecom. According to the Presidential Decree regarding the new General Plan of Grants, published in the D.O.U. on November 21, 2008, the three sectors for which we act as a concessionaire (sectors 31, 32 and 34) were unified into a single sector (sector 31).
On May 7, 2002, we began offering international long-distance services and on July 29, 2002, we started offering interregional service. The conditions for the provision of interregional and international long-distance services outside the concession area contemplate that providers already operating services under a selection code (a two-digit code to be input by the caller as a prefix to the number dialed) shall keep such code under the new licenses authorizing operation outside the applicable concession area. Accordingly, we continue using the provider selection code “15” that permits our callers to originate calls using our services even though they are outside our concession area. All interregional and international cellular calls, whether in our concession area or that of another provider, need to dial a carrier selection code using Personal Mobile Service—SMP, through which mobile services users choose the provider for interregional and international long-distance calls, and which requires dialing our code “15” to use our services. See “—Network Services.”
Since our merger with Vivo Participações, we provide mobile telecommunications services in all of the Brazilian states in addition to the Distrito Federal, the Federal district, representing a total of approximately 8.5 million square kilometers and a population of approximately 190.7 million people. Our wholly owned subsidiary Vivo became a national operator when, on September, 2007, it acquired a license of 1.9 GHz (“L” band) to operate within 6 states located in the Northeast region (Alagoas, Ceará, Pernambuco, Piauí, Paraíba and Rio Grande do Norte), combined with the acquisition of Telemig.
According to data regarding market share published by ANATEL, we are among the leading providers of cellular telecommunications services in Brazil, with the help of our subsidiary Vivo, the leading cellular operator in Brazil. Vivo is a cellular operator in the states of Acre, Alagoas, Amapá, Amazonas, Bahia, Ceará, Espírito Santo, Goiás (also encompassing the area of Federal District), Maranhão, Mato Grosso, Mato Grosso do Sul, Pará, Paraíba, Paraná, Pernambuco, Piauí, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Rondônia, Roraima, Santa Catarina, São Paulo, Sergipe, Tocantins and Minas Gerais.
In Areas 1 and 2, Vivo uses a frequency range known as “A,” “L” and “J” band that covers 100% of the municipalities in its authorized areas in the state of São Paulo. On December 31, 2011, Vivo had 19.6 million cellular lines in service in these areas, which represented a 14.0% net increase from December 31, 2010, and a market share of approximately 33.0% in São Paulo.
In Area 3, Vivo uses the band “A,” “L” and “J” frequency range that covers 100% of the municipalities and 100% of the population in the states of Rio de Janeiro and Espírito Santo. On December 31, 2011, Vivo had 10.1 million cellular lines in service in this area, which represented a 17.1% net increase from December 31, 2010, and a market share of approximately 38.8% in those states.
In Area 4, Vivo uses a frequency range known as “A,” “E” and “J” band that covers 71.6% of the municipalities and 92.4% of the population in the state of Minas Gerais. On December 31, 2011, Vivo had 7.9 million cellular lines in service in this area, which represented a 16.0% net increase from December 31, 2010, and a market share of approximately 33.3% in Minas Gerais.
In Area 5, Vivo uses a frequency range known as “B” band that covers 67.2% of the municipalities in the states of Paraná and Santa Catarina and 93.9% of the population of Paraná and Santa Catarina. On December 31, 2011, Vivo had 4.5 million cellular lines in service in this area, which represented a 14.1% net increase from December 31, 2010, and a market share of approximately 21.7% in those states.
In Area 6, Vivo uses the band “A,” “L” and “J” frequency range that covers 82.1% of the municipalities and 97.7% of the population in the state of Rio Grande do Sul. On December 31, 2011, Vivo had 6.0 million cellular lines in service in this area, which represented a 14.0% net increase from December 31, 2010, and a market share of approximately 42.6% in that state.
In Areas 7 and 8, Vivo is the leading cellular operator, by number of customers, in its authorization area and uses a frequency range known as “A,” “B,” “L” and “J” band that covers 60.2% of the municipalities in the states of Acre, Federal District, Goiás, Mato Grosso, Mato Grosso do Sul, Rondônia, Tocantins, Amazonas, Amapá, Maranhão, Pará and Roraima which covers 83.0% of the population in these states. On December 31, 2011, Vivo had 15.4 million cellular lines in service in these areas, which represented a 26.2% net increase from December 31, 2010, and a market share of approximately 34.8% in those states.
In Area 9, Vivo uses the band “A,” “L” and “J” frequency range that covers 63.8% of the municipalities and 87.2% of the population in the States of Bahia and Sergipe. On December 31, 2011, Vivo had 5.5 million cellular lines in service in this area, which represented a 23.3% net increase from December 31, 2010, and a market share of approximately 29.8% in those states.
In Area 10, Vivo uses the band “L” and “J” frequency range that covers 37.6% of the municipalities and 73.2% of the population in the States of Alagoas, Ceará, Pernambuco, Piauí, Paraíba and Rio Grande do Norte. On December 31, 2011, Vivo had 2.5 million cellular lines in service in this area, which represented a 43.0% net increase from December 31, 2010 and a market share of approximately 7.1% in those states.
On September 18, 2007, with ANATEL’s approval, Vivo acquired the band “L” lots, except for lot 16 (area of Londrina, Paraná, in region 5) and lot 20 (area of Northern Brazil in region 8). Band “L” comprises lots in frequency ranges 1895 to 1900 MHz and 1975 to 1980 MHz, with 5 + 5 MHz band width. As a result, Vivo managed to complete its last coverage gap and will soon be operating in the entire Brazilian territory. On December 20, 2007, with ANATEL’s approval, Vivo acquired the band “J” lots with 10 + 10 MHz band width, with the exception of the lots in the state of Minas Gerais then acquired by Telemig Celular and now by Vivo.
On December 14 and 15, 2010, Vivo acquired 23 lots in the SMP remaining band auction. Vivo acquired lots in almost all regions of the country, which allowed it to reach spectrum capacity of 70 Mhz or higher in all regions where it operates (excluding 23 municipalities in the region of Franca, State of São Paulo, where the spectrum is 50 Mhz).
In the auction of frequencies of H Band and other remaining bands by ANATEL in December 14 and 15, 2010, in compliance with the call notice No 002/2010/PVCP/SPV, Vivo was the winner in 23 of the blocks auctioned.
As a result, Vivo improved its capacity of rendering of services throughout the national territory and now operates in the 900 MHz and 1,800 MHz frequencies in a broad way.
The table below lists the 23 blocks in which Vivo had the winning offer:
| | | | | | |
41 | | 1800 | | 10 + 10 | | States of Paraná, Santa Catarina, Rio Grande do Sul, Goiás, Tocantins, Mato Grosso, Mato Grosso do Sul, Rondonia, Acre and the Federal District |
42 | | 1800 | | 10 + 10 | | State of São Paulo |
44 | | 1800 | | 15 + 15 | | Pelotas, Morro Redondo, Capão do Leão and Turuçu municipalities in State of Rio Grande do Sul |
45 | | 1800 | | 15 + 15 | | States of Alagoas, Ceará, Paraiba, Piauí and Rio Grande do Norte |
76 | | 900 | | 2.5 + 2.5 | | State of Rio de Janeiro |
77 | | 900 | | 2.5 + 2.5 | | State of Espírito Santo |
78 | | 900 | | 2.5 + 2.5 | | States of Goiás, Tocantins, Mato Grosso do Sul, Mato Grosso, Rondonia, Acre and the Federal District (3) |
79 | | 900 | | 2.5 + 2.5 | | State of Rio Grande do Sul except Pelotas, Morro Redondo, Capão do Leão and Turuçu municipalities |
80 | | 900 | | 2.5 + 2.5 | | Municipalities of CN 43(2), in the State of Paraná, except Londrina and Tamarana municipalities |
81 | | 900 | | 2.5 + 2.5 | | States of Paraná and Santa Catarina, except CN 43(2) and Londrina and Tamarana municipalities, in the State of Paraná |
82 | | 900 | | 2.5 + 2.5 | | State of Bahia |
83 | | 900 | | 2.5 + 2.5 | | State of Sergipe |
84 | | 900 | | 2.5 + 2.5 | | State of Amazonas, Amapá, Maranhão, Pará and Roraima |
92 | | 1800 | | 2.5 + 2.5 | | State of São Paulo except the São Paulo Metropolitan Area (Grande São Paulo) and nearby area and Sector 33(1) General Plan of Grants in the State of São Paulo |
101 | | 1800 | | 2.5 + 2.5 | | State of Amazonas, Amapá, Maranhão, Pará and Roraima |
105 | | 1800 | | 2.5 + 2.5 | | Paranaíba municipality, in the State of Mato Grosso do Sul |
107 | | 1800 | | 2.5 + 2.5 | | Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás |
115 | | 1800 | | 2.5 + 2.5 | | Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás |
119 | | 1800 | | 10 + 10 | | States of Rio de Janeiro, Espírito Santo, Bahia and Sergipe |
122 | | 1800 | | 10 + 10 | | State of Amazonas, Amapá, Maranhão, Pará and Roraima |
124 | | 1800 | | 10 + 10 | | States of Alagoas, Ceará, Paraíba, Piauí, Pernambuco and Rio Grande do Norte |
128 | | 1800 | | 10 + 10 | | Paranaíba municipality, in the State of Mato Grosso do Sul and Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás |
163 | | 1800 | | 5 + 5 | | Londrina and Tamarana municipalities in the State of Paraná |
(1) | Municipalities: Altinópolis, Aramina, Batatais, Brodowsqui, Buritizal, Cajuru, Cássia dos Coqueiros, Colômbia, Franca, Guaíra, Guará, Ipuã, Ituverava, Jardinópolis, Miguelópolis, Morro Agudo, Nuporanga, Orlândia, Ribeirão Corrente, Sales de Oliveira, Santa Cruz da Esperança, Santo Antônio da Alegria and São Joaquim da Barra, in the State of São Paulo. |
(2) | CN = Municipalities with the National Select Code. |
(3) | Except Paranaíba municipality, in the State of Mato Grosso do Sul, and Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás. |
On April 28, 2011, ANATEL decided, with regard to the auction of the “H” band and remaining bands (Notice of No Bid. 002/2010/PVCP/SPV-ANATEL), to grant lots 41, 42, 44, 45, 76–84, 92, 101, 105, 107, 115, 119, 122, 124, 128 and 163 to Vivo and other operators of the winning lots in that auction. The lots assigned solely to Vivo are specified on the table above.
On May 30, 2011, ANATEL’s decision was published in the D.O.U. and the Authorization Terms were signed by ANATEL. On June 1, 2011, the Extracts of the Authorization Terms were published on the D.O.U. As a result, Vivo increased its spectrum, beginning to operate at frequencies of 900 MHz and 1800 MHz in a comprehensive manner.
The following table sets forth population, gross domestic product (GDP), and per capita income statistics for each state in Vivo’s service regions at the dates and for the years indicated:
| | | | Last available IBGE data from 2009 | |
| | | Population (in thousands)(1) | | | Percent of Brazil’s population(1) | | | GDP (in millions of reais)(2) | | | Percent of Brazil’s GDP(2) | | | Per capita income (in reais)(2) | |
São Paulo State | 850, 900, 1800, 1900 and 2100 | | | 41,252 | | | | 21.63 | % | | | 1,084,353 | | | | 33.47 | % | | | 26,202 | |
Paraná State | 850, 900, 1800, 1900 and 2100 | | | 10,440 | | | | 5.47 | % | | | 189,992 | | | | 5.87 | % | | | 17,780 | |
Santa Catarina State | 850, 900, 1800, 1900 and 2100 | | | 6,250 | | | | 3.28 | % | | | 129,806 | | | | 4.01 | % | | | 21,214 | |
Goiás State | 850, 900, 1800, 1900 and 2100 | | | 6,004 | | | | 3.15 | % | | | 85,615 | | | | 2.64 | % | | | 14.447 | |
Tocantins State | 850, 900, 1800, 1900 and 2100 | | | 1,383 | | | | 0.73 | % | | | 14,571 | | | | 0.45 | % | | | 11,278 | |
Mato Grosso State | 850, 900, 1800, 1900 and 2100 | | | 3,034 | | | | 1.59 | % | | | 57,294 | | | | 1.77 | % | | | 19,085 | |
Mato Grosso do Sul State | 850, 900, 1800, 1900 and 2100 | | | 2,449 | | | | 1.28 | % | | | 36,368 | | | | 1.12 | % | | | 15,410 | |
Rondônia State | 850, 900, 1800, 1900 and 2100 | | | 1,561 | | | | 0.82 | % | | | 20,236 | | | | 0.62 | % | | | 13,455 | |
Acre State | 850, 900, 1800, 1900 and 2100 | | | 733 | | | | 0.38 | % | | | 7,386 | | | | 0.23 | % | | | 10,689 | |
Amapá State | 850, 900, 1800 and 2100 | | | 669 | | | | 0.35 | % | | | 7,404 | | | | 0.23 | % | | | 11,809 | |
Amazonas State | 850, 900, 1800 and 2100 | | | 3,481 | | | | 1.83 | % | | | 49,614 | | | | 1.53 | % | | | 14,622 | |
Maranhão State | 850, 900, 1800 and 2100 | | | 6,570 | | | | 3.44 | % | | | 39,855 | | | | 1.23 | % | | | 6,260 | |
Pará State | 850, 900, 1800 and 2100 | | | 7,588 | | | | 3.98 | % | | | 58,402 | | | | 1.80 | % | | | 7,859 | |
Roraima State | 850, 900, 1800 and 2100 | | | 451 | | | | 0.24 | % | | | 5,593 | | | | 0.17 | % | | | 13,285 | |
Federal District | 850, 900, 1800, 1900 and 2100 | | | 2,563 | | | | 1.34 | % | | | 131,487 | | | | 4.06 | % | | | 50,436 | |
Bahia State | 850, 900, 1800, 1900 and 2100 | | | 14,021 | | | | 7.35 | % | | | 137,075 | | | | 4.23 | % | | | 9,365 | |
Sergipe State | 850, 900, 1800, 1900 and 2100 | | | 2,068 | | | | 1.08 | % | | | 19,767 | | | | 0.61 | % | | | 9,786 | |
Rio de Janeiro State | 850, 900, 1800, 1900 and 2100 | | | 15,994 | | | | 8.39 | % | | | 353,878 | | | | 10.92 | % | | | 22,104 | |
Espírito Santo State | 850, 900, 1800, 1900 and 2100 | | | 3,513 | | | | 1.84 | % | | | 66,763 | | | | 2.06 | % | | | 19,146 | |
Rio Grande do Sul State | 850, 900, 1800, 1900 and 2100 | | | 10,696 | | | | 5.61 | % | | | 215,864 | | | | 6.66 | % | | | 19,779 | |
Alagoas State | 900, 1800, 1900 and 2100 | | | 3,121 | | | | 1.64 | % | | | 21,235 | | | | 0.66 | % | | | 6,728 | |
Ceará State | 900, 1800, 1900 and 2100 | | | 8,448 | | | | 4.43 | % | | | 65,704 | | | | 2.03 | % | | | 7,686 | |
Pernambuco State | 900, 1800, 1900 and 2100 | | | 8,796 | | | | 4.61 | % | | | 78,428 | | | | 2.42 | % | | | 8,902 | |
Piauí State | 900, 1800, 1900 and 2100 | | | 3,119 | | | | 1.64 | % | | | 19,033 | | | | 0.59 | % | | | 6,052 | |
Paraíba State | 900, 1800, 1900 and 2100 | | | 3,767 | | | | 1.97 | % | | | 28,719 | | | | 0.89 | % | | | 7,618 | |
Rio Grande do Norte State | 900, 1800, 1900 and 2100 | | | 3,168 | | | | 1.66 | % | | | 27,905 | | | | 0.86 | % | | | 8,893 | |
Minas Gerais State | 850, 900, 1800 and 2100 | | | 19,595 | | | | 10.27 | % | | | 287,055 | | | | 8.86 | % | | | 14,328 | |
Vivo | | | | 190,733 | | | | 100.00 | % | | | 3,239,402 | | | | 100.00 | % | | | 16,984 | |
(1) | According to the last revision published by IBGE in 2009 (latest data available). |
(2) | According to the most recent IBGE data (2009). Nominal Brazilian GDP was R$3,239,402 million as of December 2009 calculated by IBGE, subject to revision. |
On December 31, 2011, Vivo had 324 sales outlets (85 in the state of São Paulo, 43 in the states of Rio de Janeiro and Espírito Santo, 35 in the state of Rio Grande do Sul, 37 in the states of Paraná and Santa Catarina, 21 in the states of Bahia and Sergipe, 29 in the states of Minas Gerais, seven in the states that make up the northwest regions of Brasil and 44 in the states that make up the Midwestern and 21 northern regions of Brazil). It also has an efficient network of 11,337 authorized retail and resales dealerships. Consequently, Vivo has maintained its market leadership position, with a total of 11,661 points of sale.
Prepaid telephone card recharging was available at more than 600,000 locations, including our own stores, dealers, lottery shops, physical and online card distributors, and at smaller shops, drugstores, newspaper stands, bookstores, bakeries, gas stations, bars and restaurants. Recharging is also provided online by several banks’ websites, by credit card’s machines, by telephone and accredited websites.
Overview
Our services consist of:
| · | voice services, including activation, monthly subscription, measured service and public telephones; |
| · | interconnection charges (or network usage charges), which are amounts we charge other cellular and fixed-line service providers for the use of our network; |
| · | intraregional, interregional and international long-distance voice services; |
| · | data services, (including broadband services) and mobile value added services; |
| · | Pay TV services through DTH (direct to home), satellite technology and land based wireless technology MMDS (multichannel multipoint distribution service); |
| · | the sale of wireless devices and accessories; |
| · | network services, including rental of facilities, as well as other services. |
In March 2002, ANATEL certified our compliance with the 2003 universal service targets and authorized us in April 2002 to start providing local and intraregional services in certain regions in which we were not operational and interregional and international long-distance services throughout Brazil. See “—Competition” and “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies.”
We provide interconnection services to cellular service providers and other fixed telecommunications companies through the use of our network. In April 1999, we also began to sell handsets and other telephone equipment through A. TELECOM S.A. (formerly Assist Telefónica S.A.), our wholly owned subsidiary. Until January 2001, we provided data transmission services, but spun-off our data transmission operations into TDBH. In March 2006, we began the restructuring of our multimedia communications services (serviços de comunicação multimidia) and data transmission activities. See “—A. History and Development of the Company—Historical Background—The SCM Restructuring.”
The monthly and usage fees for our fixed services (local and long-distance) were initially determined in our concession agreements. From March 2007 until July 31, 2007, the billing system was converted to a minute basis and the former measurement based on pulses was discontinued for all customers. Our concession agreements also
set forth criteria for annual fee adjustments. We derive a substantial portion of our revenue from services subject to this price adjustment. The method of price adjustment is essentially a price cap. ANATEL annually applies a price index correction that reflects the inflation index of the period and a productivity factor to our local and long-distance fees. Since 2006, the inflation index has been replaced by the IST, which reflects variations in telecommunications companies’ costs and expenses. ANATEL has complied with the fee range set by the concession agreements.
We also provide mobile services for voice, internet and value-added services, including voicemail, voice mail translation in a speech-to-text service (“Vivo Torpedo Recado”), caller identification, voice minutes in unlimited bundles to other mobile phones to post-paid customer, ring back tones (“Vivo Som de Chamada”), data services through WAP protocol and 3G (with a pre-paid data plan special to smartphones), and innovative services such as multi-media backup and cloud based services to save the short messages (“Vivo Torpedo Center”). We also offer direct Internet through data plans for Smartphones, Tablets and other data enabled devices. We developed a new interface—Vivo Services Store (“Loja de Serviços Vivo”) to sell all the services provided by Vivo, from bundles of SMS to content download such as music, video and games.
We offer wireless roaming services through agreements with local mobile service providers throughout Brazil and other countries, allowing our subscribers to make and receive calls while outside of our concession areas. We provide reciprocal roaming rights to the customers of the mobile service providers with which we have such agreements.
Local Service
Intraregional long-distanceFixed local service consists ofincludes activation, monthly subscription, measured service and public telephones. Measured service includes all calls that originate in one local area or municipality and terminate in anotherwithin the same local area or municipality of our concession region. Weregion, which we refer to as “local calls.” Excluding the portion of our region that was serviced by Ceterp before its acquisition in December 1999, we were the sole provideronly supplier of local fixed-line and intraregional long-distance servicetelecommunications services in our region until July 3, 1999, when the federal government also authorized Embratel and Intelig1999. At that time, licenses were auctioned to permit a competitor to provide local fixed-line and intraregional long-distance services.telecommunications services in our region, including the area formerly served by Ceterp. Vésper São Paulo S.A. received authorization and began operations in December 1999. Embratel, Br TelecomGVT, Oi and TelemarTim also provide local services in our concession region. See “—Competition.”
Interregional and International Long-Distance Service
On March 1, 2002, ANATEL acknowledged thatWe became the first telephone service concessionaire in Brazil to offer fixed local services outside its concession region (the State of São Paulo). In May 2003, we had satisfied itsachieved the network expansion and universal service targets two years priorestablished by ANATEL, and began providing fixed local services to six other states in Brazil, including Sergipe, Espírito Santo, Rio Grande do Sul, Paraná, Santa Catarina and certain areas in Rio de Janeiro. In May 2004, we began providing local fixed telephone services in seven other states in Brazil, including those in the scheduled date. As a result, on April 25, 2002, ANATEL published an order that allowed us to be the first fixed-line telephone companycapitals of Pará, Roraima, Amapá, Rondônia, Maranhão, Tocantins and Acre. In May 2005, we also began to provide the full range of Fixed Telephone Commuted Service (STFC) and granted us a concession to develop interregional long-distance services in Region III and an authorization to developfixed local telephone services in the local, intraregional, interregional and international markets throughout Brazil.
We began operating international long-distance service in May 2002 and interregional long-distance services in July 2002. Interregional long-distance service consistscapitals of state-to-state calls within Brazil. International long-distance service consists of calls between a point in Brazil and a point outside Brazil.
Network Services
Brazil is divided into Regions I (Oi (Telemar)the following states: Ceará, CTBC Telecom and Embratel), II (Oi (Brasil Telecom), CTBC Telecom, Embratel, Sercomtel and GVT), III (Telefónica, CTBC Telecom and Embratel) and IV (Embratel and Intelig) with Oi (Telemar), Oi (Brasil Telecom), CTBC Telecom, Sercomtel, Telefónica and Embratel being the incumbents. In 2005, we expanded our long-distance network in the main Brazilian cities of Regions I and II, to new regions, such as the concession areas of CTBC Telecom in Uberlândia and Sercomtel in Londrina. We have also updated our interconnection agreements that have allowed us to begin local operations in seven capital cities of Brazil—Porto Alegre, Curitiba, Brasília,Amazonas, Pernambuco, Rio de Janeiro, Vitória, Belo HorizonteBahia, Mato Grosso do Sul and Salvador—by meansMato Grosso. Since May 2006, we have also been providing fixed local telephone services in Brasília (Federal District) and Goiânia, the capital of supplying such markets with the necessary infrastructure based on new generation platforms. In 2008, we commenced operations in the cities of Florianópolis, Fortaleza e Recife.
In 2005, we optimized new business opportunities in the State of São Paulo through offering services to other telecommunications companies. The result was a significant increase in the number of providers that useGoiás. Currently, our wholesale services.main markets outside our concession region are Rio de Janeiro, Espírito Santo, Minas Gerais, Bahia, Pernambuco, Ceará, Federal District, Goiás, Rio Grande do Sul, Paraná and Santa Catarina.
One of the most important developments in network services concluded in 2005 was the adjustment of the network topology in the State of São Paulo by regulatory requirements, which consisted of the integration of 92 municipalities in the state, allowing customers to make local calls that had previously been categorized as long-distance calls.
Competition for long-distance service has increased and at the time there were a total of 21 active CSPs (Carrier Selection Code) in the State of São Paulo. A new prepaid attendant service for intercity call forwarding has been implemented, as well as a national satellite service for large scale clients’ support needs, and 20 local and long-distance carrier service agreements have been renegotiated.
In 2007, Telefónica developed network solutions and invested significant funds to adapt its network to ANATEL’s Number Portability requirements. The implementation of Number Portability in the state of São Paulo was effectively initiated in September 2008 and fully implemented in March 2009.
Other Services
Currently, we also provide a variety of other telecommunications services that extend beyond basic telephone service, including interactive banking services, electronic mail and other similar services.
Interconnection
In 2004, ANATEL published proposed amendments to the interconnection rules in general and, specifically, to the interconnection charging rules. In July 2005, ANATEL published new rules regarding interconnection systems that substantially changed the interconnection model. These changes include: (i) an obligation to offer the public all types of interconnection services, in addition to the interconnection between fixed-line service providers and mobile service providers; (ii) an offer of interconnections for Internet Service Providers (ISPs); (iii) the establishment of criteria for the treatment of fraudulent calls; and (iv) the reduction of time in which new interconnection solicitations are answered. These reforms have facilitated market entry for new operators.
We have entered into new interconnection agreements in accordance with the new interconnection rules upon entrance into the market of seven new fixed and specialized mobile service providers. New contracts have been implemented as of March 2006, which allow us to develop additional interconnection relationships and to offer our interconnection customers new telecommunications services in the State of São Paulo.
In 2006, our interconnection contracts were renegotiated to comply with ANATEL’s regulations and our strategy for reducing interconnection costs.
The interconnection public offer (OPI) had been amended following negotiations with providers and changes in the services rendered and regulatory requirements. We have adopted procedures to reduce the time necessary to answer customers’ interconnection requests, as well as to monitor and comply with quality levels set by ANATEL for interconnection services with a current availability level of 99.8%.
We have also completed implementation of the interconnection with mobile service providers in the most intensive traffic areas, assuring the proper billing for such calls and reducing interconnection costs.
In 2007, ANATEL published the new version of the Regulation of Fixed Network Compensation Rates, which primarily modified the rules for interconnection rates and calculation methods. A 20% increase was applied to tariffs of non incumbents in their regions. The difference between the Normal Schedule and the Off Peak Schedule was also implemented. The tariffs in respect of the Off Peak Schedule were reduced by 30%.
With the publication of the regulations concerning ANATEL’s Number Portability requirements between Fixed and Mobile carriers, Telesp, in conjunction with other operators, implemented a systematic solution including several interoperative processes, which allows for the correct forwarding of calls.
In July 2007, a new Mobile Network Interconnection Fee (VUM) Agreement was signed among the fixed, mobile and long-distance companies. According to the regulation, starting in 2002 and revised in 2006, the VUM price is subject to free negotiation between parties and once an agreement is reached it should be homologated by ANATEL to take effect. According to this Agreement, the parties agreed that the basis for the VCs rate adjustment will be the inflation index of the telecom sector (IST) and the productivity factor (FatorX), and that only 68.5% of this adjustment be passed onto the VUM. This agreement is beneficial to Telesp as it slightly increases the margins on fixed to mobile calls. The first agreement was effective in 2005 and extended until 2008.
In 2007, ten new Interconnection contracts and nine new Traffic Transport agreements were signed with both Fixed and Mobile operators.
In 2008, four new Interconnection contracts and eleven local and long-distance Traffic Transport agreements were signed with both fixed and mobile operators.
ANATEL allowed Telefónica to charge a long-distance interconnection fee in a specific scenario of mobile to fixed calls.
I-Telefónica
I-Telefónica is a free Internet access service provider launched in September 2002 by our subsidiary A. Telecom S.A. (formerly Assist Telefónica). The product is available in 645 cities in the State of São Paulo and over 2,000 cities in all of Brazil. The service delivers high quality, stable Internet access that is structured to ensure that our clients do not encounter a busy signal when connecting to the Internet. I-Telefónica permits us to increase the range of our services and better supply our customers by offering an entry-level option to the Internet market. I-Telefónica also represents a strategic tool to protect us against the possible traffic imbalance that may be generated by Internet access service providers that do not use our network. Traffic imbalance (sumidouro) occurs when a certain telecommunications operator has a higher volume of incoming than outgoing traffic (with another operator). When the incoming/outgoing traffic relationship falls outside the 45%-55% range, the operator with higher outgoing traffic must pay to the other the interconnection fees corresponding to the traffic that exceeds the range. Telecommunications operators that house internet service providers tend to have more incoming than outgoing traffic, and thus receive interconnection revenues from other operators. I-Telefónica helps us keep our dial-up traffic on our own network, and thus reduce unfavorable traffic imbalance, thereby lowering our interconnection expenses.
IP Network Asset Acquisition
On December 10, 2002, after receiving approval from ANATEL, our Board of Directors approved a proposal to acquire certain assets from Telefónica Data S.A. (formerly T-Empresas), one of the companies of the Telefónica group, including the following services: (i) an Internet service that allows our customers to access our network through remote dial-up connection and (ii) services that allow customers of Internet Service Providers, or ISPs, to
have access to broadband Internet. The purpose of this asset acquisition was to capitalize on synergies that would assist in developing our network and provide a quick response to market competitors.
Acquisition and Reorganization of Atrium
On December 30, 2004, we acquired indirect control of Atrium Telecomunicações Ltda. from Launceston Partners CV. Atrium provided various types of telecommunications services in Brazil, including Internet and intranet services, telecommunications management services and the sale and rental of telecommunications systems and related equipment. The acquisition was carried out through the purchase of the total share capital of Santo Genovese Participações Ltda., which held 99.99% of the representative share capital of Atrium.
On November 21, 2005, we approved the corporate reorganization of our wholly owned companies, A. TELECOM S.A. (formerly Assist Telefónica S.A.), Santo Genovese Participações Ltda., or Santo Genovese and Atrium Telecomunicações Ltda., or Atrium, which was implemented and became effective on March 1, 2006.
The SCM Restructuring
On March 9, 2006, our Board of Directors and the Boards of Directors of TDBH and Telefónica Empresas S.A., a wholly owned subsidiary of TDBH (“T-Empresas” and together with us and TDBH, the “Companies”), approved the restructuring of the Companies’ serviços de comunicação multimidia (“SCM”), or multimedia communications services, and data transmission activities (the “SCM Restructuring”).
The terms and conditions of the SCM Restructuring are set forth in an agreement executed by the Companies on March 9, 2006. The SCM Restructuring consisted of (i) the merger of TDBH into our company (the “Merger”); and (ii) the spin-off of all T-Empresas’ assets and activities except its SCM assets and activities outside Sectors 31, 32 and 34 of Region III of Annex II of the General Concession Plan (the “Spin-off”) and assets and activities related to the data center.
Following the approval of this restructuring: (i) TDBH was dissolved; (ii) its shareholders received shares of our common or preferred stock, or ADSs, as appropriate; (iii) we succeeded TDBH in all of its rights and obligations; and (iv) T-Empresas became our wholly owned subsidiary. The transfer to TELESP of the spun-off components of T-Empresas did not result in any increase or decrease in the net equity of TELESP, nor in the number of shares that comprise its capital stock.
With respect to TDBH’s Merger into us, certain minority shareholders tried to suspend our General Shareholders Meeting by contesting the appraisal of the share exchange ratio provided by NM Rothschild & Sons (Brasil) Ltda. by obtaining an injunction from the 14th civil chamber of the central forum of the district court of São Paulo. The injunction was lifted on July 28, 2006, and the merger became legally effective. The main action (Ação Ordinária No. 583.00.2006.156920-5) has not yet been resolved in the lower court.
On January 31, 2008, at the 22nd General Shareholders Meeting of Telefónica Empresas S.A., the only shareholder of which is the Company, it was resolved to change the corporate name of Telefónica Empresas S.A. to Telefónica Data S.A.
Agreement of Convergence, Purchase and Sale of Operations, Assets, Stock and Other Obligations with the Abril Group
On October 29, 2006, the Company entered into an agreement with Abril Comunicações S.A., TVA Sistema de Televisão S.A., Comercial Cabo TV São Paulo Ltda., TVA Sul Paraná Ltda., and TVA Radioenlaces Ltda. (the “Abril Group”), whereby we combined our telecommunications and broadband services with the broadband and cable services of Tevecap S.A., or TVA, the second largest Brazilian pay TV provider with operations in the states of Paraná, Rio Grande do Sul, São Paulo and Rio de Janeiro. Through this transaction, we broadened our services to meet our users’ increasing demand, combining the Abril Group’s expertise in content and media production and placement with the expertise of the Telefónica Group in the telecommunications segment.
On October 31, 2007, the board of ANATEL concluded the regulatory review of the association between Grupo Abril and the Company, approving the transaction, which involves (i) the acquisition of all of the operations of MMDS (Multichannel Multipoint Distribution Service) and broadband, and (ii) the acquisition of a significant stake, within the limit of the foreseen effective laws and regulations, in the cable television dealers controlled by Grupo Abril within and outside of the State of São Paulo. This decision was published in the D.O.U. of the Federal Executive on November 19, 2007. Antitrust clearance is still pending from ANATEL and CADE competition authorities.
Our stockholders, in the extraordinary general meeting held on November 23, 2007, ratified the entering into of the Agreement, its amendments and annexes, and approved the implementation of the deal and the signature of all documents necessary for its complete formalization.
As a result of this transaction, Navytree Participações S.A. (“Navytree”) became a wholly owned subsidiary of TELESP, and our provision of broadband services became centralized.
On June 10, 2008, at the General Shareholders Meeting of Navytree, the corporate name of Navytree was changed to Telefônica Televisão Participações S.A. (“TTP”).
Corporate Reorganization involving Ajato
On October 14, 2008, Telefonica Sistema de Televisão S.A. (“TST”) and TTP purchased from Abril Comunicações S.A. all shares of Mundial Voip Telecomunicações Ltda., EPP, which had its corporate name changed to Ajato Telecomunicação Ltda. (“Ajato”). Following the merger of TTP into the Company on November 11, 2008, Ajato’s shares are held by TST and us.
Corporate Reorganization involving DABR and TTP
On October 21, 2008, our Board of Directors and the shareholders of TTP and Telefônica Data Brasil Participações Ltda. (“DABR”) approved a corporate reorganization that consisted of the merger of TTP and DABR into us.
On November 11, 2008, the merger of TTP and DABR was approved by our Extraordinary Shareholders Meeting. As a result of this restructuring, TTP and DABR were dissolved and we assumed all the rights and obligations of TTP and DABR.
The reorganization allowed us to increase synergies, reduce managerial risk, simplify the corporate administrative structure and reduce costs, while also providing tax benefits expected to reduce TELESP’s income tax and other taxes assessed on revenue and income, thereby improving our cash flows. The reorganization and the goodwill amortization were structured so as to avoid any assumption of indebtedness by us and to minimize any negative impact on the future results of the Company.
Corporate Restructuring involving TS Tecnologia
On May 22, 2009, Telefônica Data S.A., our subsidiary, merged with its controlled subsidiary, TS Tecnologia da Informação Ltda., or TS Tecnologia, in accordance with the values recorded on the books and an appraisal report. This merger caused TS Tecnologia to be extinguished, and Telefônica Data S.A. became the successor to all of the assets and liabilities of TS Tecnologia.
Corporate Restructuring involving A.TELECOM S.A.
On December 9, 2009, our Board of Directors approved the submission to a shareholder vote of the corporate reorganization proposal consisting of the partial spin-off of A.TELECOM S.A. (“A.TELECOM”), and the subsequent merger into the Company of the spun-off part of A.TELECOM.
On December 30, 2009, A.TELECOM’s shareholders approved the spin-off of part of A.TELECOM and the subsequent merger of the spun-off part into the Company. On the same date, our shareholders approved the merger of the spun-off part into us.
This corporate restructuring created synergies for us and A.TELECOM providing both of us with better administrative, operating and regulatory efficiencies regarding telecommunication integrated services, thus benefiting both of us and our respective shareholders.
Corporate Restructuring involving Brasilcel
Acquisition of Brasilcel N.V. stocks by Telefónica S.A.
On July 28, 2010 Telefónica S.A. and Portugal Telecom SG SGPS, S.A. entered into an agreement for the acquisition by Telefónica of 50% of Brasilcel N.V’s (Brasilcel) shares owned by Portugal Telecom. As a result, Telefónica indirectly acquired the shares of Vivo Participações held by Portugal Telecom. Prior to this agreement, Brasilcel’s shares were held by Telefónica (50%) and by Portugal Telecom (50%) and, in 2002, it was used for the
joint venture between both shareholders to jointly hold shares and control of Vivo Participações and other mobile phone companies which were later added under Vivo Participações and in Vivo S.A.
On December 21, 2010, Brasilcel was merged into Telefónica, which held direct and indirect stakes in Vivo Participações’s capital stock representing approximately 60%.
Due to the acquisition of control of Vivo Participações and pursuant to the terms provided for in Article 254-A of Law 6,404/76 and the procedures established in article 29 of CVM Instruction 361 applicable to tender offers (OPA) by sale of control, as defined by item III of article 2 of CVM Instruction 361, on February 17, 2011 Telefónica through its subsidiary SP Telecomunicações Ltda (“SPTelecom”) launched a Public Tender Offer for the shares with voting rights of Vivo Participações (ON shares) held by noncontrolling interests. Those shares were acquired at 80% of the value paid by Telefónica to Portugal Telecom SG SGPS S.A., for each common share with voting rights of Vivo Participações S.A. (ON) owned by Brasilcel.
On March 18, 2011, when the OPAs were made, SP Telecom acquired 10,634,722 common shares of Vivo Participações, representing 2.65% of its shares, resulting in the Telefonica group ownership of 62.1% of Vivo Participações.
Introduction of the Vivo Brand
In April 2003, Brasilcel launched in Brazil the brand name “Vivo,” under which TCP, TCO, TLE, TSD and Celular CRT operate. The creation of the Vivo brand constituted a consolidation of the commercial models throughout the entire country into a common commercial strategy and replaced the different brands under which the different companies offered their services in their respective states. The commercial strategy of Vivo is to increase its customer base as well as revenues by retaining customers and maintaining their distribution channels. The launching of the Vivo brand was accompanied by customer loyalty programs and other measures designed to contribute to the success of the commercial strategy. Guided by a common management team, Vivo designs marketing, promotional and other initiatives common to all companies in the Vivo group and then tailors those activities to the particular markets of those companies.
Agreement with Telefónica and Telecom Itália
In October 2007, TELCO S.p.A. (a company in which Telefónica holds a corporate interest of 42.3%) acquired 23.6% of the capital stock of Telecom Itália. Telecom Itália also holds an interest in the capital stock of TIM. However, Telefónica did not acquire any right to directly participate in the operations of TIM as a result of the acquisition of the corporate interest in Telecom Itália by TELCO S.p.A.
As a result, any transaction involving us and TIM is considered an ordinary mobile network business transaction, which is regulated by ANATEL, as provided in the Act 68.276, dated October 31, 2007 and in the Act 3.804, dated July 7, 2009, both issued and published by ANATEL.
Corporate Restructuring involving Vivo Participações S.A.
In July 28, 2010, in accordance with the material fact disclosed to the public by Telefónica S.A., our controlling shareholder, Telefónica S.A. and Portugal Telecom SG SGPS, S.A. (“Portugal Telecom”) executed a purchase agreement for the acquisition by Telefónica S.A. (directly or through any of the companies within its group) of 50% of the capital stock of Brasilcel, N.V. (a company jointly owned by Telefónica and Portugal Telecom, which owns shares representing approximately 60% of the capital stock of the Brazilian company Vivo Participações S.A.).
On December 27, 2010, the Company and Vivo Participações, jointly announced the approval by their respective Boards of Directors of a proposal for corporate restructuring involving the merger of shares of Vivo Participações into the Company, aiming for the consolidation of the shareholding positions of both companies.
Other than the concentration of the shareholding position herein mentioned, the corporate restructuring aimed to simplify the organizational structure of the companies, both of which were publicly held companies and listed on BM&FBOVESPA and with American Depositary Receipts traded in the United States of America. The restructuring allowed their respective shareholders to participate in one unified company with greater liquidity and with shares
traded on Brazilian and foreign stock exchanges. Moreover, the corporate restructuring provided for the rationalization of the cost structure of the two companies and facilitated the integration of businesses and the generation of synergies, thus positively impacting both companies.
The simplified organization chart below demonstrates the corporate structure of the companies before and after the implementation of this reorganization.
The corporate structure before the merger of shares is as follows:
Upon completion of this corporate restructuring, Telefónica, S.A. holds the shares of the Brazilian holding companies that currently are held indirectly by Telefónica, S.A., through the holding of Brasilcel, N.V., as a result of a transaction implemented abroad. The merger of shares did not change the composition of the ultimate control of the companies involved.
The corporate structure after the merger is as follows:
The totality of shares of Vivo Participações was merged into the Company, and the holders of the merged shares of Vivo Participações received new shares to which they were entitled in the Company. In accordance with Brazilian Corporate Law, as well as the bylaws of the two companies, financial advisors and specialized companies were retained for the preparation of studies regarding the transaction and the subsequent preparation of valuation reports of the companies that were used as reference for the determination of the exchange ratio of shares and the increase in capital stock resulting from the merger of shares, as well as for the purposes of article 264 of Law No. 6,404/76 regarding the exchange ratio between the shares.
In addition to the notice of material fact to be published reflecting more details on the terms and conditions of the corporate restructuring that were agreed upon as mentioned above, the meeting notice of the respective extraordinary shareholders’ meetings of the companies for voting on the restructuring were timely published.
The corporate restructuring was approved by ANATEL on March 24, 2011. Before the corporate restructuring, the Brazilian entities, TBS Celular Participações Ltda., Portelcom Participações S.A. and PTelecom Brasil S.A. (jointly, the “Holdings BR”), were merged into Vivo Participações. The Holdings BR had as its main asset the shares of Vivo Participações and were controlled by Brasilcel, N.V. The merger of Holdings BR did not result in any change in the number and the composition of classes of shares of Vivo Part, and did not affect the participation of the shareholders of Vivo Participações.
Acquisition of Vivo Participações by Telefônica Brasil and corporate restructuring
In order to unify the shareholder’s base of the companies in our group, simplify the organizational structure, rationalize costs, integrate businesses and, consequently, generate synergies provided for in the strategy of Telefónica, on December 27, 2010, the Boards of Directors of Vivo Participações and Telefônica Brasil approved the terms and conditions for restructuring, which provided for the merger of 100% of the shares of Vivo Participações into Telefônica Brasil. Following recommendations of the Guiding Opinion No. 35 of CVM, independent special committees were created to negotiate the exchange ratio of shares and determine the other conditions of the Corporate Restructuring proposal in order to submit later its recommendations to the Board of Directors of both companies.
The proposal was submitted to ANATEL’s authorization and approved at a meeting of the Board of this agency held on March 24, 2011.
On March 25, 2011, the Boards of Directors of Vivo Participações and Telefônica Brasil approved the terms and conditions of the corporate restructuring, which were approved unanimously by the general meetings of shareholders of the Companies held on April 27, 2011.
Before the corporate restructuring commenced, the Holdings (composed of TBS Celular Participações Ltda., Portelcom Participações S.A. and Brazil PTelecom S.A.), controlled by Telefónica S.A. and whose main purpose was to hold shares of Vivo Participações, were merged into Vivo Participações as a preliminary phase for the first stage of restructuring.
The first stage of the transaction consisted of the unification of the share base of fixed and mobile operators of the Telefonica group in Brazil, through the merger of shares of Vivo Participações into Telefônica Brasil. Telefônica Brasil merged Vivo Participações in its entirety, attributing directly to the holders of shares of Vivo Participações the new shares of Telefônica Brasil. The exchange of shares of Vivo Participações for shares of Telefônica Brasil was based on the exchange share ratio of 1.55 shares of Telefônica Brasil for each share of Vivo Participações. This followed the recommendations of the independent special committees.
Due to this merger of shares of Vivo Participações, Telefônica Brasil’s capital was increased by R$31,222,630, reflecting the economic value of the incorporated shares, based on an economic value appraisal of Vivo Participações prepared by Planconsult Consultoria Ltda. (“Planconsult”).
Telefónica’s strategy in the first stage of the corporate restructuring was to maximize the potential of its operations in Brazil. Therefore, Telefônica Brasil became the direct shareholder of Vivo Participações, and indirectly of Vivo S.A. Through the creation of this “umbrella investment structure”, the noncontrolling shareholders of both companies were equally benefited by the added values generated by the combination of the telecommunications business. This is a basic movement in business so as to improve its converging market strategy, including combined mobile and fixed-line offers. This reorganization created the conditions for the beginning of the process to obtain operational and financial synergies.
Additionally, as a consequence of this merger, on July 6, 2011, Vivo Participações filed a statement with the SEC in order to cancel its registration for the program of American Depositary Shares (ADSs), since all its ADSs were converted into ADSs of Telefônica Brasil, plus payment currency in lieu of fractional Telefônica Brasil ADSs, which was approved on July 7, 2011.
The second and third stages of the corporate restructuring, disclosed to the market on June 15, 2011, sought to continue the simplification process of the organizational structure of the Companies, so as: (i) to focus all authorizations for the rendering of SMP (personal mobile service) services (originally held by Vivo Participações and Vivo S.A.), and (ii) simplify the current corporate structure, eliminating the structure of Vivo Participações, which due to the concentration of commitments became a holding company.
In the second stage, held on October 1, 2011, assets, rights and obligations of Vivo Participações related to mobile operations in Minas Gerais were awarded to Vivo S.A., a subsidiary of Vivo Participações. As a result, Vivo S.A. became the only mobile operator in the group.
After ANATEL’s approval of the third stage of corporate restructuring, on August 16, 2011, Telefônica Brasil absorbed Vivo Participações’s equity, extinguishing Vivo Participações on October 3, 2011, which simplified and rationalized the Company’s cost structures.
SMP Authorizations and Corporate Restructuring
On June 14, 2011, the Board of Directors of Vivo Participações S.A. approved a proposal for the merger of licenses to provide SMP services (then owned by Vivo Participações S.A. in the State of Minas Gerais and Vivo in other Brazilian States). As a result, the operations and authorizations for the provision of SMP services were unified under Vivo On the same date, the proposal for merger of SMP authorizations as well as for simplifying the corporate structure was filed with ANATEL. The form proposed for this simplified corporate structure was the transfer of
businesses, including property, rights and obligations related to provision of SMP services, as well as the authorizations for the provision of SMP in the State of Minas Gerais held by Vivo Participações, to Vivo, which would result in Vivo S.A. being a wholly owned direct subsidiary of the Company and the mobile operator group that owns the SMP authorizations in other Brazilian states. After the transfer, Vivo Participações was to become a holding company and immediately merge with the Company, thus simplifying and rationalizing the cost structure of the companies involve and subsequently extinguish its corporate existence. On August 16, 2011, ANATEL approved the corporate restructuring pursuant to Act. No. 5,703, published in the D.O.U. on August 18, 2011.
On September 12, 2011, in compliance with Brazilian Corporate Law, an independent firm prepared a valuation report of Vivo Participações S.A.’s net assets based on its book value as of August 31, 2011 containing part of Vivo Participações S.A.’s assets relating to the operations of SMP in the State of Minas Gerais that were transferred to Vivo and the assets of Vivo Participações merged into the Company. Vivo Participações’ valuation as of August 31, 2011 was R$10.3 billion.
On September 13, 2011, the Board of Directors of Vivo Participações S.A. approved, ad referendum of the shareholders: (i) the valuation report of Vivo Participações S.A., containing part of the assets corresponding to the SMP operations in the State of Minas Gerais, which led to a capital increase in Vivo in the amount of R$833.0 million, through the subscription of shares of Vivo Participações S.A.; and (ii) the Protocol of Merger and Instrument of Justification of Vivo Participações S.A. into Telecomunicações de São Paulo S.A. – TELESP (“Protocol”) for the merger of Vivo Participações S.A. into the Company, preceded by the transfer of commercial establishments, including the assets, rights and obligations related to provision of SMP, as well as authorizations for the provision of SMP in the State of Minas Gerais held by Vivo Participações S.A.
On October 1, 2011, the Extraordinary General Shareholders Meeting approved the valuation report of Vivo Participações S.A.. The net assets of Vivo Participações in Minas Gerais transferred to Vivo S.A. amounted to R$833.0 million, which were used for the capital increase in Vivo through the subscription of shares by Vivo Participações S.A., paid via the transfer of assets.
On October 3, 2011, the Extraordinary General Meeting of the Company approved the merger of Vivo Participações S.A. into the Company. On the same date, the Company changed its name from Telecomunicações de São Paulo S.A. – TELESP to Telefônica Brasil S.A., to reflect its nationwide operations.
On October 18, 2011, the Extract of the Authorization Term No. 46/2011/PVCP/SPV-ANATEL was published in the D.O.U. as a result of Act No. 5703 of October, 16 2011, which authorizes the transfer to Vivo of the authorization to render SMP services in the State of Minas Gerais.
Provision of STFC outside the State of São Paulo by Vivo
On August 18, 2011, ANATEL’s Act No. 7012 was published in the D.O.U. authorizing Vivo to provide STFC services for the general public. On October 7, 2011, Vivo began providing fixed services through mobile technology (FWT) outside of the State of São Paulo.
ANATEL granted on August 18, 2011 consent to the Company to transfer to Vivo its authorizations for STFC service in local mode, domestic long-distance and international long-distance in Regions I and II of the General Plan of Grants (outside of São Paulo). On September 8, 2011, the Extract of the Authorization Term was published in the D.O.U. with the transfer of the STFC licenses in Regions I and II to Vivo. As a result, Vivo began to offer STFC across its area, except for the State of São Paulo, using basically the network elements and some radio frequencies that support the provision of SMP.
Plan for the purchase of shares issued by the Company.
On August 11 and 15, 2011, the Company informed its shareholders and the market in general, respectively, of approval by the Board of Directors, of the acquisition of preferred and common shares issued by the Company for subsequent cancellation, disposal or maintenance in treasury, without capital reduction, in order to add value for shareholders. For this repurchase, there was use of part of the capital reserve existing as of June 30, 2011, excepting the reserves mentioned in article 7, letter (a) to (d) of CVM Rule No. 10/80.
The repurchase started on the date of the resolution, and remained effective until October 20, 2011, and acquisitions were on BM&FBOVESPA, at market prices. The Executive Board was responsible for establishing the maximum quantity of shares to be acquired, whether in a sole or a series of transactions, as well as the definition of the parameters to carry out the acquisitions, observing applicable legal limits and the established maximum number of up to 2,700,000 preferred shares and 2,900,000 common shares.
On November 7, 2011, the Company announced approval by the Board of Directors of a new plan for the purchase of common and preferred shares issued by the Company for the same purpose and using the aforementioned reserve.
This new repurchase started on the date of the resolution, remaining effective until November 6, 2012, and acquisitions were made on BM&FBOVESPA, at market prices, observing legal limits and the established maximum number of 2,912,734 common shares and 25,207,477 preferred shares.
By December 31, 2011, the Company acquired 29,000 common shares and 1,292,300 preferred shares (inclusive of the shares purchased on August 11, August 15 and November 7, 2011).
Corporate Structure and Ownership
Our current general corporate and shareholder structure is as follows:
ON: common shares.
PN: preferred shares.
Restructuring Telefônica Brasil’s subsidiaries
On March 15, 2012, our Board of Directors approved, based on Law No. 12.485/11, a corporate restructuring involving the Company’s wholly owned subsidiaries to rationalize the provision of services rendered by these subsidiaries and the concentration of the provision of telecommunication services into a single company.
The restructuring will be implemented by a process of partial division and merger, first involving only the Company’s wholly owned subsidiaries—A. TELECOM, TData, TST, Ajato and Vivo. As a result of the restructuring, Value Added Services (“VAS”) provided by several wholly owned subsidiaries of the Company will be unified under Telefonica Data S.A. and other telecommunications services will be unified under the Company, which, as a final step to the corporate restructuring, will merge these subsidiaries. Following the merger, VAS will be provided by Telefonica Data S.A. and the Company will provide other telecom servicers.
In addition to streamlining the rendering of services, the corporate restructuring (now possible because of legislative changes applicable to STFC providers) aims to simplify the current organizational structure of the Company, as well as assist the integration of business and the generation of synergies arising therefrom.
This corporate restructuring can only be implemented after the consent of ANATEL. As of the date of this annual report, there is no expected date for ANATEL’s consent.
Capital Expenditures
Year ended December 31, 2011
In 2011, we invested in projects that support our current results and prepare the Company for the competitive landscape in the medium-term. A significant proportion of resources was allocated to enable growth associated with the services we provide.
To meet the needs of an increasingly connected society, significant investments were made to support the strong growth of data customers, whether fixed and mobile data services or dedicated high-speed services to the corporate market, as well as the increase in capillarity of our fiber optics network in São Paulo. We also invested in the expansion of the national data transmission backbone to meet increasing demand for mobile data traffic nationwide. In 2011, we invested an amount exceeding R$1 billion to support the full range of data services we offer to our customers.
The following table sets forth our capital expenditures for each year in the three-year period ended December 31, 2011.
| | | |
| | | | | | | | | |
| | (in millions of reais) | |
Network | | | 3,381.0 | | | | 2,039.7 | | | | 1,779.8 | |
Technology / Information Systems | | | 612.5 | | | | 266.1 | | | | 262.0 | |
Others(2) | | | 1,408.0 | | | | 135.6 | | | | 179.3 | |
Total capital expenditures | | | 5,401.5 | | | | 2,441.4 | | | | 2,221.1 | |
(1) | The financial information presented for 2011 represents information from Telefônica Brasil’s consolidated financial statements. |
(2) | Consists primarily of free handset rentals, network construction, furniture and fixtures, office equipment and store layouts and a value of R$811.8 million related to the acquisition of licenses. |
We anticipate that our capital expenditures for 2012 will be similar to 2011. We expect to fund these expenditures with funds internally generated from our operations and through debt.
Year ended December 31, 2010
In 2010, we were focused in voice services in order to comply with ANATEL’s targets and to provide quality service for clients. Also, in order to achieve a consolidated position in the broadband market, during 2010 the focus of our capital expenditure were expanding, modernizing and upgrading our ADSL network and improving our systems and processes of customers relations, marketing and sales.
Year ended December 31, 2009
In 2009, we were focused in voice services in order to comply with ANATEL’s targets and to provide quality service for clients. Also, in order to achieve a consolidated position in the broadband and Pay TV market, during 2009 the focus of our capital expenditure were expanding, modernizing and upgrading our ADSL network, increasing the base of Pay TV and improving our systems and processes of customers relations, marketing and sales.
The concessions granted by the Brazilian government in 1998 and renewed in 2005, with the effective date starting in January 2006, allow us to provide fixed-line telecommunications services to a region that includes most—approximately 95%—of the State of São Paulo. The portion of the State of São Paulo that is excluded from our concession region represents approximately 1.5% of total lines in service and 2.2% of the population in the State. This concession is operated by CTBC Telecom.
Our concession region is Region III, which comprises 622 municipalities, including the City of São Paulo, with an aggregate population of approximately 41.3 million. Of the municipalities in Region III, 72 have a population in excess of 100,000. The City of São Paulo has a population of approximately 11 million. According to the plan established by the federal government, whereby the government granted licenses to four providers of fixed-line telecommunications services, the State of São Paulo was divided into four sectors, including Sectors 31 (our predecessor company’s area before the reorganization), 32 (the area corresponding to Ceterp before our acquisition), 33 (corresponding to the portion of the State of São Paulo that we do not service) and 34 (CTBC Borda do Campo area before the reorganization). Through transactions that took place in November 1999 and December 2000, CTBC Borda do Campo and Ceterp merged into our company, which now holds Sectors 31, 32 and 34. Sector 33 is held by CTBC Telecom. According to the Presidential Decree regarding the new General Plan of Grants, published in the D.O.U. on November 21, 2008, the three sectors for which we act as a concessionaire (sectors 31, 32 and 34) were unified into a single sector (sector 31).
On May 7, 2002, we began offering international long-distance services and on July 29, 2002, we started offering interregional service. The conditions for the provision of interregional and international long-distance services outside the concession area contemplate that providers already operating services under a selection code (a two-digit code to be input by the caller as a prefix to the number dialed) shall keep such code under the new licenses authorizing operation outside the applicable concession area. Accordingly, we continue using the provider selection code “15” that permits our callers to originate calls using our services even though they are outside our concession area. All interregional and international cellular calls, whether in our concession area or that of another provider, need to dial a carrier selection code using Personal Mobile Service—SMP, through which mobile services users choose the provider for interregional and international long-distance calls, and which requires dialing our code “15” to use our services. See “—Network Services.”
Since our merger with Vivo Participações, we provide mobile telecommunications services in all of the Brazilian states in addition to the Distrito Federal, the Federal district, representing a total of approximately 8.5 million square kilometers and a population of approximately 190.7 million people. Our wholly owned subsidiary Vivo became a national operator when, on September, 2007, it acquired a license of 1.9 GHz (“L” band) to operate within 6 states located in the Northeast region (Alagoas, Ceará, Pernambuco, Piauí, Paraíba and Rio Grande do Norte), combined with the acquisition of Telemig.
According to data regarding market share published by ANATEL, we are among the leading providers of cellular telecommunications services in Brazil, with the help of our subsidiary Vivo, the leading cellular operator in Brazil. Vivo is a cellular operator in the states of Acre, Alagoas, Amapá, Amazonas, Bahia, Ceará, Espírito Santo, Goiás (also encompassing the area of Federal District), Maranhão, Mato Grosso, Mato Grosso do Sul, Pará, Paraíba, Paraná, Pernambuco, Piauí, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Rondônia, Roraima, Santa Catarina, São Paulo, Sergipe, Tocantins and Minas Gerais.
In Areas 1 and 2, Vivo uses a frequency range known as “A,” “L” and “J” band that covers 100% of the municipalities in its authorized areas in the state of São Paulo. On December 31, 2011, Vivo had 19.6 million cellular lines in service in these areas, which represented a 14.0% net increase from December 31, 2010, and a market share of approximately 33.0% in São Paulo.
In Area 3, Vivo uses the band “A,” “L” and “J” frequency range that covers 100% of the municipalities and 100% of the population in the states of Rio de Janeiro and Espírito Santo. On December 31, 2011, Vivo had 10.1 million cellular lines in service in this area, which represented a 17.1% net increase from December 31, 2010, and a market share of approximately 38.8% in those states.
In Area 4, Vivo uses a frequency range known as “A,” “E” and “J” band that covers 71.6% of the municipalities and 92.4% of the population in the state of Minas Gerais. On December 31, 2011, Vivo had 7.9 million cellular lines in service in this area, which represented a 16.0% net increase from December 31, 2010, and a market share of approximately 33.3% in Minas Gerais.
In Area 5, Vivo uses a frequency range known as “B” band that covers 67.2% of the municipalities in the states of Paraná and Santa Catarina and 93.9% of the population of Paraná and Santa Catarina. On December 31, 2011, Vivo had 4.5 million cellular lines in service in this area, which represented a 14.1% net increase from December 31, 2010, and a market share of approximately 21.7% in those states.
In Area 6, Vivo uses the band “A,” “L” and “J” frequency range that covers 82.1% of the municipalities and 97.7% of the population in the state of Rio Grande do Sul. On December 31, 2011, Vivo had 6.0 million cellular lines in service in this area, which represented a 14.0% net increase from December 31, 2010, and a market share of approximately 42.6% in that state.
In Areas 7 and 8, Vivo is the leading cellular operator, by number of customers, in its authorization area and uses a frequency range known as “A,” “B,” “L” and “J” band that covers 60.2% of the municipalities in the states of Acre, Federal District, Goiás, Mato Grosso, Mato Grosso do Sul, Rondônia, Tocantins, Amazonas, Amapá, Maranhão, Pará and Roraima which covers 83.0% of the population in these states. On December 31, 2011, Vivo had 15.4 million cellular lines in service in these areas, which represented a 26.2% net increase from December 31, 2010, and a market share of approximately 34.8% in those states.
In Area 9, Vivo uses the band “A,” “L” and “J” frequency range that covers 63.8% of the municipalities and 87.2% of the population in the States of Bahia and Sergipe. On December 31, 2011, Vivo had 5.5 million cellular lines in service in this area, which represented a 23.3% net increase from December 31, 2010, and a market share of approximately 29.8% in those states.
In Area 10, Vivo uses the band “L” and “J” frequency range that covers 37.6% of the municipalities and 73.2% of the population in the States of Alagoas, Ceará, Pernambuco, Piauí, Paraíba and Rio Grande do Norte. On December 31, 2011, Vivo had 2.5 million cellular lines in service in this area, which represented a 43.0% net increase from December 31, 2010 and a market share of approximately 7.1% in those states.
On September 18, 2007, with ANATEL’s approval, Vivo acquired the band “L” lots, except for lot 16 (area of Londrina, Paraná, in region 5) and lot 20 (area of Northern Brazil in region 8). Band “L” comprises lots in frequency ranges 1895 to 1900 MHz and 1975 to 1980 MHz, with 5 + 5 MHz band width. As a result, Vivo managed to complete its last coverage gap and will soon be operating in the entire Brazilian territory. On December 20, 2007, with ANATEL’s approval, Vivo acquired the band “J” lots with 10 + 10 MHz band width, with the exception of the lots in the state of Minas Gerais then acquired by Telemig Celular and now by Vivo.
On December 14 and 15, 2010, Vivo acquired 23 lots in the SMP remaining band auction. Vivo acquired lots in almost all regions of the country, which allowed it to reach spectrum capacity of 70 Mhz or higher in all regions where it operates (excluding 23 municipalities in the region of Franca, State of São Paulo, where the spectrum is 50 Mhz).
In the auction of frequencies of H Band and other remaining bands by ANATEL in December 14 and 15, 2010, in compliance with the call notice No 002/2010/PVCP/SPV, Vivo was the winner in 23 of the blocks auctioned.
As a result, Vivo improved its capacity of rendering of services throughout the national territory and now operates in the 900 MHz and 1,800 MHz frequencies in a broad way.
The table below lists the 23 blocks in which Vivo had the winning offer:
| | | | | | |
41 | | 1800 | | 10 + 10 | | States of Paraná, Santa Catarina, Rio Grande do Sul, Goiás, Tocantins, Mato Grosso, Mato Grosso do Sul, Rondonia, Acre and the Federal District |
42 | | 1800 | | 10 + 10 | | State of São Paulo |
44 | | 1800 | | 15 + 15 | | Pelotas, Morro Redondo, Capão do Leão and Turuçu municipalities in State of Rio Grande do Sul |
45 | | 1800 | | 15 + 15 | | States of Alagoas, Ceará, Paraiba, Piauí and Rio Grande do Norte |
76 | | 900 | | 2.5 + 2.5 | | State of Rio de Janeiro |
77 | | 900 | | 2.5 + 2.5 | | State of Espírito Santo |
78 | | 900 | | 2.5 + 2.5 | | States of Goiás, Tocantins, Mato Grosso do Sul, Mato Grosso, Rondonia, Acre and the Federal District (3) |
79 | | 900 | | 2.5 + 2.5 | | State of Rio Grande do Sul except Pelotas, Morro Redondo, Capão do Leão and Turuçu municipalities |
80 | | 900 | | 2.5 + 2.5 | | Municipalities of CN 43(2), in the State of Paraná, except Londrina and Tamarana municipalities |
81 | | 900 | | 2.5 + 2.5 | | States of Paraná and Santa Catarina, except CN 43(2) and Londrina and Tamarana municipalities, in the State of Paraná |
82 | | 900 | | 2.5 + 2.5 | | State of Bahia |
83 | | 900 | | 2.5 + 2.5 | | State of Sergipe |
84 | | 900 | | 2.5 + 2.5 | | State of Amazonas, Amapá, Maranhão, Pará and Roraima |
92 | | 1800 | | 2.5 + 2.5 | | State of São Paulo except the São Paulo Metropolitan Area (Grande São Paulo) and nearby area and Sector 33(1) General Plan of Grants in the State of São Paulo |
101 | | 1800 | | 2.5 + 2.5 | | State of Amazonas, Amapá, Maranhão, Pará and Roraima |
105 | | 1800 | | 2.5 + 2.5 | | Paranaíba municipality, in the State of Mato Grosso do Sul |
107 | | 1800 | | 2.5 + 2.5 | | Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás |
115 | | 1800 | | 2.5 + 2.5 | | Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás |
119 | | 1800 | | 10 + 10 | | States of Rio de Janeiro, Espírito Santo, Bahia and Sergipe |
122 | | 1800 | | 10 + 10 | | State of Amazonas, Amapá, Maranhão, Pará and Roraima |
124 | | 1800 | | 10 + 10 | | States of Alagoas, Ceará, Paraíba, Piauí, Pernambuco and Rio Grande do Norte |
128 | | 1800 | | 10 + 10 | | Paranaíba municipality, in the State of Mato Grosso do Sul and Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás |
163 | | 1800 | | 5 + 5 | | Londrina and Tamarana municipalities in the State of Paraná |
(1) | Municipalities: Altinópolis, Aramina, Batatais, Brodowsqui, Buritizal, Cajuru, Cássia dos Coqueiros, Colômbia, Franca, Guaíra, Guará, Ipuã, Ituverava, Jardinópolis, Miguelópolis, Morro Agudo, Nuporanga, Orlândia, Ribeirão Corrente, Sales de Oliveira, Santa Cruz da Esperança, Santo Antônio da Alegria and São Joaquim da Barra, in the State of São Paulo. |
(2) | CN = Municipalities with the National Select Code. |
(3) | Except Paranaíba municipality, in the State of Mato Grosso do Sul, and Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão municipalities, in the State of Goiás. |
On April 28, 2011, ANATEL decided, with regard to the auction of the “H” band and remaining bands (Notice of No Bid. 002/2010/PVCP/SPV-ANATEL), to grant lots 41, 42, 44, 45, 76–84, 92, 101, 105, 107, 115, 119, 122, 124, 128 and 163 to Vivo and other operators of the winning lots in that auction. The lots assigned solely to Vivo are specified on the table above.
On May 30, 2011, ANATEL’s decision was published in the D.O.U. and the Authorization Terms were signed by ANATEL. On June 1, 2011, the Extracts of the Authorization Terms were published on the D.O.U. As a result, Vivo increased its spectrum, beginning to operate at frequencies of 900 MHz and 1800 MHz in a comprehensive manner.
The following table sets forth population, gross domestic product (GDP), and per capita income statistics for each state in Vivo’s service regions at the dates and for the years indicated:
| | | | Last available IBGE data from 2009 | |
| | | Population (in thousands)(1) | | | Percent of Brazil’s population(1) | | | GDP (in millions of reais)(2) | | | Percent of Brazil’s GDP(2) | | | Per capita income (in reais)(2) | |
São Paulo State | 850, 900, 1800, 1900 and 2100 | | | 41,252 | | | | 21.63 | % | | | 1,084,353 | | | | 33.47 | % | | | 26,202 | |
Paraná State | 850, 900, 1800, 1900 and 2100 | | | 10,440 | | | | 5.47 | % | | | 189,992 | | | | 5.87 | % | | | 17,780 | |
Santa Catarina State | 850, 900, 1800, 1900 and 2100 | | | 6,250 | | | | 3.28 | % | | | 129,806 | | | | 4.01 | % | | | 21,214 | |
Goiás State | 850, 900, 1800, 1900 and 2100 | | | 6,004 | | | | 3.15 | % | | | 85,615 | | | | 2.64 | % | | | 14.447 | |
Tocantins State | 850, 900, 1800, 1900 and 2100 | | | 1,383 | | | | 0.73 | % | | | 14,571 | | | | 0.45 | % | | | 11,278 | |
Mato Grosso State | 850, 900, 1800, 1900 and 2100 | | | 3,034 | | | | 1.59 | % | | | 57,294 | | | | 1.77 | % | | | 19,085 | |
Mato Grosso do Sul State | 850, 900, 1800, 1900 and 2100 | | | 2,449 | | | | 1.28 | % | | | 36,368 | | | | 1.12 | % | | | 15,410 | |
Rondônia State | 850, 900, 1800, 1900 and 2100 | | | 1,561 | | | | 0.82 | % | | | 20,236 | | | | 0.62 | % | | | 13,455 | |
Acre State | 850, 900, 1800, 1900 and 2100 | | | 733 | | | | 0.38 | % | | | 7,386 | | | | 0.23 | % | | | 10,689 | |
Amapá State | 850, 900, 1800 and 2100 | | | 669 | | | | 0.35 | % | | | 7,404 | | | | 0.23 | % | | | 11,809 | |
Amazonas State | 850, 900, 1800 and 2100 | | | 3,481 | | | | 1.83 | % | | | 49,614 | | | | 1.53 | % | | | 14,622 | |
Maranhão State | 850, 900, 1800 and 2100 | | | 6,570 | | | | 3.44 | % | | | 39,855 | | | | 1.23 | % | | | 6,260 | |
Pará State | 850, 900, 1800 and 2100 | | | 7,588 | | | | 3.98 | % | | | 58,402 | | | | 1.80 | % | | | 7,859 | |
Roraima State | 850, 900, 1800 and 2100 | | | 451 | | | | 0.24 | % | | | 5,593 | | | | 0.17 | % | | | 13,285 | |
Federal District | 850, 900, 1800, 1900 and 2100 | | | 2,563 | | | | 1.34 | % | | | 131,487 | | | | 4.06 | % | | | 50,436 | |
Bahia State | 850, 900, 1800, 1900 and 2100 | | | 14,021 | | | | 7.35 | % | | | 137,075 | | | | 4.23 | % | | | 9,365 | |
Sergipe State | 850, 900, 1800, 1900 and 2100 | | | 2,068 | | | | 1.08 | % | | | 19,767 | | | | 0.61 | % | | | 9,786 | |
Rio de Janeiro State | 850, 900, 1800, 1900 and 2100 | | | 15,994 | | | | 8.39 | % | | | 353,878 | | | | 10.92 | % | | | 22,104 | |
Espírito Santo State | 850, 900, 1800, 1900 and 2100 | | | 3,513 | | | | 1.84 | % | | | 66,763 | | | | 2.06 | % | | | 19,146 | |
Rio Grande do Sul State | 850, 900, 1800, 1900 and 2100 | | | 10,696 | | | | 5.61 | % | | | 215,864 | | | | 6.66 | % | | | 19,779 | |
Alagoas State | 900, 1800, 1900 and 2100 | | | 3,121 | | | | 1.64 | % | | | 21,235 | | | | 0.66 | % | | | 6,728 | |
Ceará State | 900, 1800, 1900 and 2100 | | | 8,448 | | | | 4.43 | % | | | 65,704 | | | | 2.03 | % | | | 7,686 | |
Pernambuco State | 900, 1800, 1900 and 2100 | | | 8,796 | | | | 4.61 | % | | | 78,428 | | | | 2.42 | % | | | 8,902 | |
Piauí State | 900, 1800, 1900 and 2100 | | | 3,119 | | | | 1.64 | % | | | 19,033 | | | | 0.59 | % | | | 6,052 | |
Paraíba State | 900, 1800, 1900 and 2100 | | | 3,767 | | | | 1.97 | % | | | 28,719 | | | | 0.89 | % | | | 7,618 | |
Rio Grande do Norte State | 900, 1800, 1900 and 2100 | | | 3,168 | | | | 1.66 | % | | | 27,905 | | | | 0.86 | % | | | 8,893 | |
Minas Gerais State | 850, 900, 1800 and 2100 | | | 19,595 | | | | 10.27 | % | | | 287,055 | | | | 8.86 | % | | | 14,328 | |
Vivo | | | | 190,733 | | | | 100.00 | % | | | 3,239,402 | | | | 100.00 | % | | | 16,984 | |
(1) | According to the last revision published by IBGE in 2009 (latest data available). |
(2) | According to the most recent IBGE data (2009). Nominal Brazilian GDP was R$3,239,402 million as of December 2009 calculated by IBGE, subject to revision. |
On December 31, 2011, Vivo had 324 sales outlets (85 in the state of São Paulo, 43 in the states of Rio de Janeiro and Espírito Santo, 35 in the state of Rio Grande do Sul, 37 in the states of Paraná and Santa Catarina, 21 in the states of Bahia and Sergipe, 29 in the states of Minas Gerais, seven in the states that make up the northwest regions of Brasil and 44 in the states that make up the Midwestern and 21 northern regions of Brazil). It also has an efficient network of 11,337 authorized retail and resales dealerships. Consequently, Vivo has maintained its market leadership position, with a total of 11,661 points of sale.
Prepaid telephone card recharging was available at more than 600,000 locations, including our own stores, dealers, lottery shops, physical and online card distributors, and at smaller shops, drugstores, newspaper stands, bookstores, bakeries, gas stations, bars and restaurants. Recharging is also provided online by several banks’ websites, by credit card’s machines, by telephone and accredited websites.
Overview
Our services consist of:
| · | voice services, including activation, monthly subscription, measured service and public telephones; |
| · | interconnection charges (or network usage charges), which are amounts we charge other cellular and fixed-line service providers for the use of our network; |
| · | intraregional, interregional and international long-distance voice services; |
| · | data services, (including broadband services) and mobile value added services; |
| · | Pay TV services through DTH (direct to home), satellite technology and land based wireless technology MMDS (multichannel multipoint distribution service); |
| · | the sale of wireless devices and accessories; |
| · | network services, including rental of facilities, as well as other services. |
In March 2002, ANATEL certified our compliance with the 2003 universal service targets and authorized us in April 2002 to start providing local and intraregional services in certain regions in which we were not operational and interregional and international long-distance services throughout Brazil. See “—Competition” and “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies.”
We provide interconnection services to cellular service providers and other fixed telecommunications companies through the use of our network. In April 1999, we also began to sell handsets and other telephone equipment through A. TELECOM S.A. (formerly Assist Telefónica S.A.), our wholly owned subsidiary. Until January 2001, we provided data transmission services, but spun-off our data transmission operations into TDBH. In March 2006, we began the restructuring of our multimedia communications services (serviços de comunicação multimidia) and data transmission activities. See “—A. History and Development of the Company—Historical Background—The SCM Restructuring.”
The monthly and usage fees for our fixed services (local and long-distance) were initially determined in our concession agreements. From March 2007 until July 31, 2007, the billing system was converted to a minute basis and the former measurement based on pulses was discontinued for all customers. Our concession agreements also
set forth criteria for annual fee adjustments. We derive a substantial portion of our revenue from services subject to this price adjustment. The method of price adjustment is essentially a price cap. ANATEL annually applies a price index correction that reflects the inflation index of the period and a productivity factor to our local and long-distance fees. Since 2006, the inflation index has been replaced by the IST, which reflects variations in telecommunications companies’ costs and expenses. ANATEL has complied with the fee range set by the concession agreements.
We also provide mobile services for voice, internet and value-added services, including voicemail, voice mail translation in a speech-to-text service (“Vivo Torpedo Recado”), caller identification, voice minutes in unlimited bundles to other mobile phones to post-paid customer, ring back tones (“Vivo Som de Chamada”), data services through WAP protocol and 3G (with a pre-paid data plan special to smartphones), and innovative services such as multi-media backup and cloud based services to save the short messages (“Vivo Torpedo Center”). We also offer direct Internet through data plans for Smartphones, Tablets and other data enabled devices. We developed a new interface—Vivo Services Store (“Loja de Serviços Vivo”) to sell all the services provided by Vivo, from bundles of SMS to content download such as music, video and games.
We offer wireless roaming services through agreements with local mobile service providers throughout Brazil and other countries, allowing our subscribers to make and receive calls while outside of our concession areas. We provide reciprocal roaming rights to the customers of the mobile service providers with which we have such agreements.
Local Service
Fixed local service includes activation, monthly subscription, measured service and public telephones. Measured service includes all calls that originate and terminate within the same local area or municipality of our concession region, which we refer to as “local calls.” Excluding the portion of our region that was serviced by Ceterp before its acquisition in December 1999, we were the only supplier of local fixed-line and intraregional long-distance telecommunications services in our region until July 1999. At that time, licenses were auctioned to permit a competitor to provide local fixed-line and intraregional long-distance telecommunications services in our region, including the area formerly served by Ceterp. Vésper São Paulo S.A. received authorization and began operations in December 1999. Embratel, GVT, Oi and Tim also provide local services in our concession region. See “—Competition.”
We became the first telephone service concessionaire in Brazil to offer fixed local services outside its concession region (the State of São Paulo). In May 2003, we achieved the network expansion and universal service targets established by ANATEL, and began providing fixed local services to six other states in Brazil, including Sergipe, Espírito Santo, Rio Grande do Sul, Paraná, Santa Catarina and certain areas in Rio de Janeiro. In May 2004, we began providing local fixed telephone services in seven other states in Brazil, including those in the capitals of Pará, Roraima, Amapá, Rondônia, Maranhão, Tocantins and Acre. In May 2005, we also began to provide fixed local telephone services in the capitals of the following states: Ceará, Amazonas, Pernambuco, Rio de Janeiro, Bahia, Mato Grosso do Sul and Mato Grosso. Since May 2006, we have also been providing fixed local telephone services in Brasília (Federal District) and Goiânia, the capital of the State of Goiás. Currently, our main markets outside our concession region are Rio de Janeiro, Espírito Santo, Minas Gerais, Bahia, Pernambuco, Ceará, Federal District, Goiás, Rio Grande do Sul, Paraná and Santa Catarina.
Intraregional Long-Distance Service
Intraregional long-distance services consists of all calls that originate in one local area or municipality and terminate in another local area or municipality of our concession region. We were the sole provider of intraregional long-distance services in our region until July 3, 1999, when the federal government also authorized Embratel and Intelig to provide intraregional long-distance services. Currently, our main competitors in this service are Embratel, Tim, Oi and GVT.
Interregional and International Long-Distance Fixed Service
On March 1, 2002, ANATEL acknowledged that we had satisfied its network expansion and universal service targets two years before the scheduled date. As a result, on April 25, 2002, ANATEL published an order that allowed us to be the first fixed-line telephone company to provide the full range of STFC and granted us a
concession to develop interregional long-distance services in Region III and an authorization to develop services in the local, intraregional, interregional and international markets throughout Brazil.
We began operating international long-distance services in May 2002 and interregional long-distance services in July 2002. Interregional long-distance services consists of state-to-state calls within Brazil. International long-distance services consists of calls between a point in Brazil and a point outside Brazil.
Data Services—Fixed Broadband
The fixed broadband service was launched in 1999 with the Speedy brand, initially with ADSL technology, which uses the same copper pair that is used in the provision of voice services, to provide fast Internet service. Currently, the product portfolio of broadband speeds on ADSL range from 256 Kbps (kilobytes per second) up to 8 Mbps (mega bits per second). In 2011, Telefonica has 100% coverage of the municipalities in its concession area and is the first operator in Brazil to reach this mark. In addition, throughout 2011, Speedy reached the milestone of 3.6 million subscribers.
In 2010, Telefonica began selling the product Popular Broadband (Banda Larga Popular), which is an initiative in the State of São Paulo to deliver affordable broadband for low-income populations. This product has a speed of 1 Mbps.
In 2011, the Company and the Ministry of Communications signed the National Broadband Plan (Plano Nacional de Banda Larga) commitment which defines conditions for the provision of broadband retail and wholesale, as well as the conditions of communication, quality and supervision.
Broadband services provided under the National Broadband Plan can be provided starting with 90 days after it becomes effective. However, the Company voluntarily launched its services under the National Broadband Plan in July 2011 in municipalities where Vivo’s 3G network was already available. On September 28, 2011, the Company began providing fixed broadband services for retail and wholesale customers. The Company also agreed to offer retail broadband for a price of up to R$35.00 to the consumer or a broadband and fixed telephony package for a price of up to R$65.00 to the consumer. Broadband services offered under the National Broadband Plan for retail customers have a minimum speed of 1 Mbps and may have limits on the amount of downloads available. Wholesale services were available in 350 municipalities and can be used by local governments and companies registered under the tax system called “SIMPLES.” Broadband services offered under the National Broadband Plan for wholesale customers are available in multiples of 2 Mbps, limited to 8 Mbps for local governments and 20 Mbps for corporate users.
We also provide fixed broadband services using coaxial cable at speeds ranging from 8 Mbps to 30 Mbps through Ajato (allowing for speeds from 2 Mbps to 16 Mbps) and optical fiber (FTTx). Optical fiber is the most advanced technology currently available and it allows for speeds of up to 100 Mbps.
Pay TV Services
On March 14, 2007, ANATEL has granted A. TELECOM S.A., one of our wholly owned subsidiaries, the license to offer pay TV services via DTH. We began offering pay TV services on August 12, 2007.
On October 31, 2007, ANATEL’s council approved, from a regulatory perspective, the agreement between Grupo Abril and the Company, which involved, among other transactions, the acquisition by the Company of all of Grupo Abril’s Multichannel Multipoint Distribution Service (MMDS) operations (a special license that allows us to offer pay TV through our subsidiary, Telefonica Sistemas de Televisão S.A). The transaction remains under consideration by ANATEL only with respect to antitrust factors, and will ultimately be reviewed by CADE. On December 31, 2011, we reached 699 thousand pay TV users, including both DTH and MMDS technologies. We currently offer DTH to the whole State of São Paulo, and MMDS in the cities of São Paulo, Rio de Janeiro, Curitiba and Porto Alegre.
Network Services
Brazil is divided into four regions in relation to fixed telecommunication services with the following incumbent service providers (which initially received concessions from ANATEL): (i) Region I, that encompasses the North, Northeast and Southeast regions of Brazil, except the State of São Paulo, where concessions are granted to Oi (Telemar) and CTBC Telecom; (ii) Region II, that encompasses the South and Center-West regions of Brazil, where concessions are granted to Oi (Brasil Telecom), CTBC Telecom and Sercomtel; (iii) Region III, that encompasses the State of São Paulo, where concessions are granted to us and CTBC Telecom; and (iv) Region IV, that encompasses the whole country and in which the concession for long-distance calls is granted to Embratel.
In 2005, after meeting the targets imposed in the concession agreement two years before the expected date, Telefonica started to operate long-distance services in every municipality in Brazil. For the operation of local services in Regions I and II, the Company expanded its network to the main Brazilian cities, providing services in these markets with infrastructure based on new-generation platforms.
In 2007, the Company developed solutions and invested significant resources to adapt its network to the requirements of Number Portability determined by ANATEL. Number Portability is a service mandated by ANATEL that provides customers with the option of keeping the same telephone number when switching telephone service providers. The implementation of Number Portability in the State of São Paulo was effectively initiated in September 2008 and fully implemented in March 2009.
By the end of 2011, for local services, we were present in the main cities of Regions I and II, namely: Porto Alegre, Curitiba, Brasília, Rio de Janeiro, Vitória, Belo Horizonte, Salvador, Florianópolis, Fortaleza, Recife, Goiânia and Uberlândia. For the provision of data services, we had networks in fourteen cities in these regions.
We have continuously adapted and expanded our network topology aiming to develop new business opportunities in the State of São Paulo through offering services to other telecommunications companies. The result was a significant increase in the number of providers that use our wholesale services.
Other important adaptations have been implemented in the network topology to meet the regulatory requirements and to integrate several calling areas in the State of São Paulo, thus allowing customers to make local calls that had previously been categorized as long-distance calls. The integration of new cities into local areas is annually determined by ANATEL and we are fully complying with ANATEL’s determinations.
Competition for long-distance services has continuously increased and by the end of 2011 there were a total of 38 different operators available through the Service Provider Selection Code (Código de Seleção de Prestadora—CSP). Satellite services for providing circuits in remote areas for wholesale and large customers have been also implemented.
Other Services
Currently, we provide a variety of other telecommunications services that extend beyond basic telephone service, including extended maintenance, caller identification, voicemail, cell phone blockers, computer support, antivirus software for our Internet service subscribers, and posto informático (a solution with a fixed monthly fee consisting of a computer, broadband access and technical support twenty-four hours, seven days a week), among others.
Interconnection
In July 2005, ANATEL published new rules regarding interconnection systems that substantially changed the interconnection model. These changes include: (i) an obligation to publish on the Internet an interconnection public offer for all types of interconnection services, in addition to the interconnection between fixed-line service providers and mobile service providers; (ii) offers of interconnection for Backbone Internet Providers; (iii) the establishment of criteria for the treatment of fraudulent calls; and (iv) the reduction of time in which new interconnection solicitations are answered. These reforms have facilitated market entry for new operators.
The interconnection public offer (OPI) had been amended following negotiations with providers and changes in the services rendered and regulatory requirements. We have adopted procedures to reduce the time necessary to answer customers’ interconnection requests, as well as to monitor and comply with quality levels set by ANATEL for interconnection services with a current availability level of 99.8%.
In 2006, the Company completed the implementation of the interconnection with mobile service providers in the most intensive traffic areas, assuring the proper billing for such calls and reducing interconnection costs.
In 2007, ANATEL published the new version of the Regulation of Fixed Network Compensation Rates, which primarily modified the rules for interconnection rates and calculation methods. Local and long-distance tariffs that were flat at all times became variable according to the rules for public service tariffs. A 20% increase was applied to tariffs of nonincumbents.
In addition to the necessary adaptations in its network concerning the Number Portability, the Company, in conjunction with other operators, implemented a systematic solution including several interoperable processes which enables the correct forwarding of calls.
According to SMP regulations, the VU-M price is subject to free negotiation between parties and once an agreement is reached it must be homologated by ANATEL to take effect. The agreement currently in effect was executed in 2009.
Starting in November 2009, the licenses of each mobile operator were consolidated by region, resulting in the consolidation of tariffs and in the reduction of interconnection fees for long-distance traffic within its network.
At the end of 2011, Telefonica had 106 local and long-distance interconnection agreements and 87 agreements for provision of local traffic and long-distance.
I-Telefónica
I-Telefónica is a free Internet access service provider launched in September 2002 by our subsidiary A. TELECOM S.A. (formerly Assist Telefónica). The product is available in 622 cities in the State of São Paulo and over 1,500 cities in all of Brazil. The service delivers high-quality, stable Internet access that is structured to ensure that our clients do not encounter a busy signal when connecting to the Internet. I-Telefónica permits us to increase the range of our services and better supply our customers by offering an entry-level option to the Internet market.
I-Telefónica also represents a strategic tool to protect us against the possible traffic imbalance that may be generated by Internet access service providers that do not use our network. Traffic imbalance (sumidouro) occurs when a certain telecommunications operator has a higher volume of incoming than outgoing traffic (with another operator). When the incoming/outgoing traffic relationship falls outside the 45% to 55% range, the operator with higher outgoing traffic must pay to the other the interconnection fees corresponding to the traffic that exceeds the range. Telecommunications operators that house Internet service providers tend to have more incoming than outgoing traffic, and thus receive interconnection revenue from other operators. I-Telefónica helps us keep our dial-up traffic on our own network, and thus reduce unfavorable traffic imbalance, thereby lowering our interconnection expenses.
Authorization to Provide Multimedia Services
On January 29, 2003, ANATEL granted our SCM license nationwide, allowing A. TelecomTELECOM S.A. (formerly Assist Telefónica), our wholly-ownedwholly owned subsidiary, to provide voice and data services through points-of-presence (POPs), which are comprised of private telecommunications networks and circuits. In addition to A. TelecomTELECOM S.A., ANATEL granted SCM licenses to T-Data (formerly T-Empresas) and Emergia.
Authorizations for pay TV via satellite
On March 14, 2007, ANATEL granted A.TelecomA. TELECOM S.A. authorization to provide services of paidpay TV via satellite (Direct to Home – DTH). DTH is one of the special types of subscription TV services that utilize satellites
for the direct distribution of television and audio signals for subscribers. The launching of the commercial transaction occurred on August 12, 2007.
Authorization for Multichannel Multipoint Distribution Service (MMDS)
On October 31, 2007, the board of ANATEL concluded its regulatory review of the associationagreement between Grupo Abril and the Company, approving the transaction from a regulatory perspective, which involved, among other transactions, the acquisition of all of the operations of Multichannel Multipoint Distribution Service (MMDS).MMDS.
This decision was published in the Official Gazette of the Federal ExecutiveD.O.U. on November 19, 2007. The transaction continues to be analyzed by ANATEL, solely with respect to antitrust matters, and will be ultimately also be reviewed by CADE (Conselho Administrativo de Defesa Econômica), the Competition Authority.CADE.
On February 16, 2009, ANATEL extended the authorization until 2024 for the use of the spectrum frequencies associated towith the Multichannel Multipoint Distribution Service (MMDS)MMDS in São Paulo, Curitiba, Rio de Janeiro and Porto Alegre. ANATEL is currently analyzing the price to be paid for the spectrum usage.
The STFC Concession Agreement
As mentioned above, we are a concessionaire ofThe Company is authorized to provide STFC to render local and domestic long-distance call services originated in Region III, which comprises the stateState of São Paulo, in Sectorsexcept for Sector 31, 32 and 34, established in the General Concession Plan (PGO).of Grants.
The current concession agreement, dated December 22, 2005, was renewed on January 1, 2006, and will be valid until December 31, 2025. However,On December 15, 2010, ANATEL released a public consultation proposing the amendment of clause 3.2 of the concession agreement which resulted in the approval of Resolution No. 559 published on December 27, 2010. Resolution No. 559 establishes that the current concession agreement can be reviewed by ANATEL on May 2, 2011, December 31, 2010, 2015, and December 31, 2020. Based on such review,the amended clause 3.2, ANATEL may establish new requirements and targets for universal and high qualityhigh-quality telecommunication services, according to the conditions present at the time of review.
On June 30, 2011, the Company renewed its concession agreement and entered into new contracts for local and long-distance services with ANATEL pursuant to the concession agreement, with new conditions imposed on the Company to change the basis of calculation of the biannual concession costs. The most relevant modifications discussed by ANATEL’s board include: (i) suppression of clause 14.1 which prohibits service providers from controlling cable TV operators within their concession area; (ii) amendment of clause 3.2, which provides for a biennial concession fee, to include interconnection revenue in its calculation basis; (iii) broadening of ANATEL’s supervisory powers; (iv) the possibility of off-setting cost of universalization in the calculation of the concession burden; (v) the inclusion of the AICE tariff adjustment formulas; (v) the possibility of remote monitoring of services; (vi) limiting the price of AICE subscription to 60% of the basic subscription; and (vii) free price determination.
The concession agreement establishes that all assets owned by the Company and which are indispensable to the provision of the services described in such agreement are considered reversible assets and are deemed to be part of the concession assets. These assets will be automatically returned to ANATEL upon expiration of the concession agreement.
Every two years, during the agreement’s new 20-year period, publicly held companies will have to pay a renewal fee which will correspond to 2% of its prior-year SFTCthe revenue resulting from the application of basic service plans and alternative STFC, net of taxes and social contributions. The first payment of this biennial fee occuredoccurred on April 30, 2007, based on 2006 revenue, and the 2006 STFC net revenues.second payment occurred on April 30, 2009, based on 2008 revenue. The next payment is scheduled for April 30, 20092012 based on the 2008 net revenues.2011 revenue. See Note 211 to our Consolidated Financial Statements.
On April 8, 2008, Telespwe signed an additive termamendment to the concession contracts to substitute the obligation to install telecommunications service posts with an obligation to roll out broadband network infrastructure throughout the municipalities serviced by such concessionaires.
ANATEL granted on August 18, 2011 consent to the transfer from the Company to Vivo of the concessions for the provision of local STFC services, domestic long-distance and international long-distance services in Regions I and II of the General Plan of Grants (outside São Paulo). On September 8, 2011, the extract of the authorization term was published on the D.O.U. for the transfer of STFC licenses in Regions I and II to Vivo. As a result, Vivo began to offer the STFC through the GSM technology across its area, except for the State of São Paulo.
In November 2000, ANATEL adopted certain regulations for the issuance of new licenses, which are authorizations to provide wireless communication services through SMP, personal mobile service, to compete with the then existing cellular operators in the various regions of Brazil. These regulations divided Brazil into three main regions covering the same geographic area as the concessions for the fixed-line telecommunication services. ANATEL organized auctions for three new licenses for each of those regions. The new licenses provided that the new services would be operated in the 1800 MHz radio frequency bands which were denominated as the “C” band (which was later transformed into extension bands), the “D” band, “E” band and “M” band. These new licenses were auctioned by ANATEL and awarded during the first quarter of 2001, at the end of 2002, in September 2004, in March 2006, in September 2007, in December 2007 and in December 2010.
Services for Corporate Customer ServicesCustomers
We offer our corporate clients comprehensive telecommunications solutions and IT support designed to address specific needs and requirements of companies operating in a numberall types of different market segments such asindustry (retail, manufacturing, services, financial institutions, and government.government, etc.).
Our clients are assisted by our highly qualified professionals who offer specialized telecommunication and IT support tailored to meetare capable of meeting the specific needs of each company by delivering corporate Internet access,with voice, data, broadband and data solutions,computer services solutions. We work to consistently achieve greater quality and by consistently striving for greater service efficiency to preservein our services and increase our level of competitiveness in ourthe market.
Rates and Taxes
Rates
Overview
We generate revenuesrevenue from (i) activation and monthly subscription charges;charges, (ii) usage charges, which include measured service charges;charges, and (iii) network usage charges and other additional services.
Rates for telecommunications services are subject to comprehensive regulation by ANATEL. See “—Regulation of the Brazilian Telecommunications Industry.” Since the relative stabilization of the Brazilian economy in mid-1994, two major changes in rates for local and long-distance services have occurred: in 1996 to compensate for accumulated effects of inflation and in 1997 to eliminate the cross-subsidy between local and long-distance services.
Concession agreements, which were valid from 1998 until December 31, 2005, and subsequently renewed under a new contract for an additional 20 years until 2025 (all of our relevant concession agreements were renewed), establish a price cap for annual rate adjustments, generally effected in June of each year.
As of January 2006, with the renewal of our concession agreements until December 31, 2025, new readjustment rules for fees became effective. The current contract may be reviewed and modified by ANATEL on December 31, 2010, 2015 and 2020 to set forth new terms that account for conditions existing at the time of that future review.adjustments.
According to the new contract, we readjust charges based on a service basket of fees, as follows:
| · | localLocal services, where rates are established pursuant to a service basket of fees that includes rates for the measured traffic and subscription fees. In the case of a price adjustment, each one of the items within the local fee basket has a different weight and, as long as the total local fee price adjustment does not exceed the rate of increase in the Telecommunication General Price Index, or IST, minus a productivity factor as established in the concession agreements, each individual fee within the basket can exceed the IST variation by up to 5%;. |
| · | installationInstallation of residential and commercial lines and public telephone services, with adjustments limited to the rate of increase in the IST minus a productivity factor as established in the concession agreements; andagreements. |
| · | domesticDomestic long-distance services, with rate adjustments divided into intraregional and interregional long-distance services, which are calculated based on the weighted average of the traffic, and taking into account time and distance. For these categories, each fee may individually exceed the rate of increase in the IST by up to 5%; however, the total adjustments in the basket of fees cannot exceed the rate of increase in the IST minus a productivity factor as established in the concession agreements. See “—Regulation of the Brazilian Telecommunications Industry.” |
Our rates for international services are not subject to regulation and are not required to follow the price cap for annual rate adjustment described above for other services. Therefore, we are free to negotiate our fees for international calls based on the international telecommunications market, where our main competitor is Embratel.
Local Rates
As of March 2007, the billing system for local calls was converted to a per-minute system and the previous pulse system was discontinued. The conversion of pulses to minutes occurred gradually, between the months of March and July of 2007. As of August 1, 2007, all of the customers of the Company had their local calls billed in minutes.
Our revenue from local service consists principally of activation charges, monthly subscription charges, measured traffic charges and public telephone charges. Users of measured traffic, both residential and non-residential, paid for local calls depending on usage, which until July 2007 was measured in pulses and from then on has been measured in minutes. The first minute is accounted for at the moment a call is connected to its destination.
Under current ANATEL regulations, residential customers who paysign up for the basic plan monthly fee receive an allowance of 200 minutes per month.
Our local concession contracts set forth two mandatory plans for local fixed service, and allow for the concession company to design other alternative pricing plans of its own. Customers will have a choice between the two mandatory plans, any other alternative plan or a combination of basic and alternative plans. The main differences between the two main mandatory plans are as follows:
| 1)· | Local Basic Plan: for clients that make mostly short durationshort-duration calls (up to three minutes), during regular hours; and |
| 2)· | Mandatory Alternative Plan (PASOO): for clients that make mostly longer durationlonger-duration calls (above three minutes), during regular hours and/or that use the line for dial-up service to the Internet. |
The following table outlines the basic billing requirements and rates for the local Basic Plan and the Mandatory Alternative Plan:
CHARACTERISTICS OF PLAN | BASIC PLAN | MANDATORY ALTERNATIVE PLAN | | Mandatory Alternative Plan |
Monthly Basic Assignment | | | | |
Allowance (minutes included in the Residential Assignment) | | 200 minutes | | 400 minutes |
Commercial Assignment | | |
Allowance (minutes included in the Commercial Assignment) | | 150 minutes | | 360 minutes |
Local Call Charges | | | | |
Regular Hours | | | | |
Completing the call (minutes deducted from the allotment) | - | – | | 4 minutes |
Completing the call after the terms of the allotment Sector 31 | | – |
Sector 31 | - | R$0.15446 |
Sector 34 | - | R$0.15046 |
Sector 32 | - | R$0.162080.15980 |
Local Minutes - Minutes–charges in excess use of the allotment Sector 31 | | R$0.10224 | | R$0.03994 |
Minimum time billing | | 30 seconds | | – |
Reduced Hours | | | | |
Sector 31 | R$0.10060 | R$0.03859 |
Sector 34 | R$0.10060 | R$0.03760 |
Sector 32 | R$0.10060 | R$0.04050 |
Minimum time billing | 30 seconds | - |
Reduced Hours | | |
Charge per answered call (minutes deducted from allotment) | | 2 minutes | | 4 minutes |
Charge per answered call after the allotted duration Sector 31 | | R$0.20448 |
Sector 31 | R$0.20120 | R$0.15446 |
Sector 34 | R$0.20120 | R$0.15046 |
Sector 32 | R$0.20120 | R$0.162080.15980 |
The fees for Local Basic Plan Service were approved by ANATEL’s Act No. 4,2895,834 of July 21, 2008, of ANATEL.August 24, 2011. The Alternative Plan under Mandatory Service Provisions (Oferta Obrigatória) (PASOO) was approved by Resolution No. 450, on December 7, 2006, being that the readjustment of the tariffs follows the same rule established for the local basic plan.
In addition, Resolution No. 547, published on November 29, 2010, established that the Company’s fees for both the Local Basic Plan and Mandatory Alternative Plan (PASOO) will be unified following the unification of sectors 31, 32 and 34 into one single sector (sector 31), as defined by the Presidential Decree regarding the new General Plan of Grants published in the D.O.U. on November 21, 2008. Before this unification, ANATEL must publish an Act with the calculated fees taking into consideration the methodology in Resolution No. 547. This unification also applies to Basic Plan tariffs of fixed-to-mobile calls and long-distance calls and presumes the preservation of revenue earned on each item of the Basic Plan.
Besides the Basic Service Plans, Telespthe Company may offer alternative plans with any pricing design it chooses. However, ANATEL must be notified of these alternative plans prior to publishingbefore the publication and implementingimplementation of any such plan.
Clause 12.1 of the STFC concession agreement provides that the Local Basic Plan can be readjusted for periods of not less than 12 months taking into consideration the inflation index “IST” reduced by a fraction of the Company’s productivity (named “Fator X,” which is calculated by ANATEL based on Resolution No. 507/08). The Mandatory Alternative Plan (PASOO) follows the same readjustment formula as the Local Basic Plan. Other alternative service plans are readjusted based on the IST.
On July 21, 2008,August 24, 2011, ANATEL’s Act No. 4,2895,834 approved new local tariffs for our areas of concession, to take effecteffective as of JulyDecember 24, 2008.2011. The average readjustment in the local service basket was 3.01%0.66%. The tariffs were applied to customers as demonstrated below:
| · | Residential customers were charged a monthly subscription fee for the provision of service of R$39.97;41.38; |
| · | Commercial clients and non-residentialnonresidential customers (PBX) were charged a monthly subscription fee for the provision of service of R$68.5669.67 in Sector 31, R$66.7467.82 in Sector 34 and R$63.6864.72 in Sector 32; |
| · | Local minute tariffs were charged at R$0.100600.10423 per minute to Sectors 31, 32 and 34;in Sector 31; and |
| · | Activation fees of R$113.81 were charged R$112.44 in Sector 31, R$92.54 in Sector 34 and R$60.05 in Sector 32.31. |
Intraregional and Interregional Long-Distance Rates
Intraregional long-distance serviceservices consists of all calls that originate in one local area or municipality of our concession region and terminate in another local area or municipality of our concession region. All other calls are denominated interregional long-distance calls. Rates for intraregional and interregional long-distance calls are computed on the basis of the time of day, day of the week, duration and distance of the call, and also may vary depending on whether special services, including operator assistance, are used.
On March 1, 2002, ANATEL acknowledged that we had reached its network expansion and universal service targets two years prior to the scheduled date. As a result, on April 25, 2002, ANATEL published an order that allowed us to be the first concessionaire to provide the full range of STFC services and expanded our license to develop services in the local, intraregional, interregional and international markets throughout Brazil.
On April 29, 2002, certain provisions of ANATEL’s order were partially suspended as a result of certain legal proceedings brought by Embratel. The proceedings prevented us, as a concessionaire, from commencing our interregional services that originated in our concession region, Region III, and terminated in other concession areas, namely Region I (Telemar’s concession region) and Region II (Brazil Telecom’s concession region). However, our authorization to provide local and interregional services in Regions I and II, Sector 33 of Region III, and international services in all three regions was not affected. On June 28, 2002, ANATEL dismissed the proceedings and allowed us to begin offering interregional services originating in our concession region.
On July 29, 2002, after we received the concession from ANATEL to provide interregional long-distance services in Region III and authorization to provide interregional long-distance services throughout Brazil, we launched several new options of interregional calling plans relating to consumer “Code 15,” which is the selection code dialed by customers who may choose a long-distance provider with each call and may result in different prices based upon frequency of use and customer calling patterns.
International Long-Distance Rates
On May 7, 2002, we began operating international long-distance services. International long-distance callscall charges are computed on the basis of the time of day, day of the week, duration and destination of the call, and also may vary depending on whether special services are used or not, including operator assistance.
We have developed alternative rate plans for our residential and corporate customers.
Network Usage Charges
We earn revenuesrevenue from any fixed-line or mobile service provider that either originates or terminates a call within our network. We also pay interconnection fees to other service providers when we use their network to place or receive a call. Under the General Telecommunications Law, all fixed-line telecommunications service providers must provide interconnection upon the request of any other fixed-line or mobile telecommunications service provider. The interconnection agreements are freely negotiated among the service providers, subject to a price cap and in compliance with the regulations established by ANATEL, which includes not only the interconnection basic principles covering commercial, technical and legal aspects, but also the traffic capacity and interconnection infrastructure that must be made available to requesting parties. If a service provider offers to any party an interconnection fee below the price cap, it must offer the same fee to any other requesting party on a non-discriminatory basis. If the parties cannot reach an agreement on the terms of interconnection, including the interconnection fee, ANATEL can establish the terms of the interconnection. See “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies.”
In accordance with ANATEL regulations, we must charge interconnection fees to the other telephone service providers based on the following fees:following:
| · | Fee for the use of our local network—Wewe charge long-distance serviceservices providers a network usage charge for every minute used in connection with a call that either originates or terminates within our local network. We charge local service providers a fee for traffic that exceeds 55% of the total local traffic between the two service providers. |
charge local service providers a fee for traffic that exceeds 55% of the total local traffic between the two service providers.
| · | Fee for the use of our long-distance network—Wewe charge the service providers a network usage charge on a per-minute basis only when the interconnection access to our long-distance network is in use. |
| · | Fee for the leaserental of certain transmission facilities used by another service provider in order to place a call. |
Beginning in 2006, with the 20-year renewal of the concession contracts, the rules in respect of local network fees, or TU-RL, were changed. Beginning on January 1, 2008, local network fees were supposed to be calculated based on a long-term cost model (LRIC—Long Run Incremental Costs).
Through Resolution No. 464, published on April 27, 2007, ANATEL postponed the adoption of the LRIC model to April 30, 2009. Nevertheless, ANATEL is still working on the necessary studies to implement this cost model, as this model is part of its General Plan for Updating the Telecommunications Regulations in Brazil, published on November 12, 2008.
On February 8, 2007, ANATEL published Resolution No. 458, thatwhich approved the regulation of payment for interconnection for STFC. Through this regulation, ANATEL established, as the transition rule until the LRIC model becomes effective, that the value TU-RL stays limited to 40% of the local minute value.
In the same way, Resolution No. 458 established that the transition rule for the inter-city network tariff TU-RIU will remain in effect until the LRIC model becomes effective, and further determined that the value of TU-RIU is limited to 30% of the long distancelong-distance minute value of Class 4, which is the class of calls of the longest distance established by ANATEL.
Cellular telecommunications services in Brazil, unlike those in the United States, are offered on a “calling party pays” basis, under which the subscriber pays only for calls that he or she originates. Additionally, a subscriber pays roaming charges on calls originated and terminated outside his or her home registration area. Calls received by a subscriber are paid for by the party that places the call in accordance with a rate based on per-minute charges. For example, a fixed-line service customer pays a rate based on per-minute charges for calls made to a cellular service subscriber. The lowest base rate per minute, or “VC1,” applies to calls made by a subscriber in a registration area to persons in the same registration area. Calls to personsmobiles outside the registration area, but within our concession region,the mobile authorization area, are charged at a higher rate, “VC2.” Calls to personsmobiles outside our concession regionthe mobile authorization area are billed at the highest rate, “VC3.” When a fixed-line service customer calls a mobile subscriber, we charge the fixed-line service customer per-minute charges based on VC1, VC2 or VC3 rates. In turn, we pay the cellular service provider the cellular network usage charge.
Our revenue from network services also includes payments by other telecommunications service providers for the use of part of our network arranged on a contractual basis. Other telecommunications service providers, including providers of trunkingtrucking and paging services, may use our network to connect a central switching office to our network. Some cellular service providers use our network to connect cellular central switching offices to the cellular radio-based stations. We also lease transmission lines, certain infrastructure and other equipment to other providers of telecommunications services.
Data Transmission Rates
We receive revenuesrevenue from charges for data transmission, which includeincludes our broadband service “Speedy,” the rental of dedicated analog and digital lines for privately leased circuits to corporations and others that were provided by TDBH.us and Telefonica Data. See “—A. History and Development of the Company—Historical Background—The Spin-off of Certain Data Transmission Operations” and “—A. History and Development of the Company—Historical Background—The SCM Restructuring.”
Taxes
The cost of telecommunications services to each customer includes a variety of taxes. The principal tax is a state value-added tax, the Imposto sobre Circulação de Mercadorias e Serviços, or “ICMS,” which the Brazilian
states impose at varying rates from 7% to 35% on certain revenues from the provisionsale of telecommunicationsgoods and services, including telecommunication services. The rate in the State of São Paulo is 25% for domestic telecommunications services.
Other taxes on gross operating revenues include two federal taxes, the Contribuição para o Programa de Integração Social or “PIS,” and Contribuição para o Financiamento da Seguridade Social or “COFINS,” imposed on gross operating revenues at a combined rate of 3.65% for telecommunications services and 9.25% for other services. PIS is a tax designed to share business profits with employees through a mandatory national savings program, and is financed by monthly deposits collected as a percentage of gross operating revenues. COFINS is a tax designed to finance special social programs created and administered by the Brazilian government. On February 2, 2004, the combined rate of PIS and COFINS imposed on gross operating revenues generated by services other than telecommunications services increased from 3.65% to 9.25% (on a non-cumulative basis). However, revenues related to, among other things, equity, dividends and fixed asset sales, are not subject to PIS and COFINS, except for revenues relating to hedging transactions and interest on shareholders’ equity (juros sobre o capital próprio).
In addition, the following contributions are imposed on certain telecommunications services revenues:
| · | Federal Social Contributions: Contribuição para o Programa de Integração Social or “PIS,” and Contribuição para o Financiamento da Seguridade Social or “COFINS,” are imposed on gross operating revenue at a combined rate of 3.65% for telecommunications services (consisting of the COFINS amounts of 3.0% and PIS amount of 0.65%) and 9.25% for other services (consisting of the COFINS amounts of 7.6% and PIS amount of 1.65%). PIS is a tax designed to share business profits with employees through a mandatory national savings program, and is financed by monthly deposits collected as a percentage of gross operating revenue. COFINS is a tax designed to finance special social programs created and administered by the Brazilian government. Revenue related, among other things, to investments, dividends and sales of fixed assets are not subject to PIS and COFINS. |
| · | Contribution for the Fund for Universal Access to Telecommunications Services—”FUST”.FUST.” FUST was established in 2000 to provide resources to cover the cost exclusively attributed to fulfilling obligations (including free access to telecommunications services by governmental institutions) of universal access to telecommunications services that cannot be recovered with efficient service exploration or that isare not the responsibility of the concessionaire. ContributionsContribution to FUST by allare due at the tax rate of 1% of gross operating telecommunications services companies began in January 2001, at the rate of 1%revenue (except for interconnection revenue), and it may not be passed on to customers. |
| · | Contribution forto the Fund of Telecommunications Technological Development—”FUNTTEL.” FUNTTEL is a federal social contribution and was established in 2000, in order to stimulate, among others, technological innovation and to enhance human resources development create employment opportunities and promote access by small and medium-sized companies to capital resources, so as to increase the competitiveness of the Brazilian telecommunications industry. ContributionsContribution to FUNTTEL by all telecommunications services companies began in March 2001,is due at the tax rate of 0.5% netof gross operating telecommunications services revenue (except interconnection revenues)revenue), and it may not be passed on to customers. |
We must also pay a contribution to the Fund for Telecommunications Regulation—“ | · | Contribution to the Fund for Telecommunications Regulation—”FISTEL.” FISTEL is a fund supported by a tax applicable to telecommunications operators (the “FISTEL Tax”) and was established in 1966 to provide financial resources to the Brazilian government for the regulation and inspection of the telecommunications sector. The FISTEL Tax consists of two types of fees: (i) an installation inspection fee assessed on telecommunications central offices upon the issuance of their authorization certificates and (ii) an annual operations inspection fee that is based on the number of authorized central offices in operation at the end of the previous calendar year. The amount of the installation inspection fee is a fixed charge, depending upon the kind of equipment installed in the authorized telecommunications station. The operations inspection fee equals 50% of the total amount of the installation inspection fee that would have been paid with respect to existing equipment. FISTEL is a federal tax applicable to telecommunications transmission equipment which serves to provide funds to cover the expenses incurred by the Federal Government in performing inspections of telecommunication services and in developing the means and improving the techniques necessary for carrying out these inspections. The fees owed to FISTEL, known as the FISTEL Taxes, are: (i) an installation inspection fee assessed on telecommunications central offices upon the issuance of their authorization certificates and (ii) an annual operations inspection fee that is based on the number of authorized central offices in operation at the end of the previous calendar year. |
Billing and Collection
We send each customer a monthly bill covering all of the services provided during the prior period. Telephone service providers are required under Brazilian law to offer their customers the choice of at least six different payment dates within the monthly billing cycle.for each month. In our case, customers are divided into twelve47 different groups, and each group receives a bill according to a specific billing date within the monthly billing cycle.
We have a billing and collection system with respect to fixed-line-to-fixed-linelocal, national and fixed-line-to-mobile for local,international long-distance subscriptionvoice, subscriptions, broadband, data, IT services, outsourcing, television and receivablesthird-party services. Payments of the bills are effected under agreements with various banks and other collection agencies (including lottery-playing facilities, drugstores and supermarkets) either by debiting the customer’s checking account, by direct payment to a bank or through the Internet. We aim to avoid losses in the implementation of new processes and the roll-out of new products through the monitoring of billing, collection and recovery controls. The billing process is audited by the Associação Brasileira de Normas Técnicas (Brazilian Association of Technical Standards), or ABNT, under the applicable rules of the Sarbanes Oxley Act. The actions are followed closely by our Revenue Assurance Team, which measures every risk of loss of revenue detected along the billing and collection chain. These risks are managed to minimize revenue losses.
Our subsidiary Vivo uses Atlys, a billing solution that combines software and hardware resources, from the supplier company Convergys as the billing system for centralized billed invoicing in the city of São Paulo. The billing system operates via a batch processing concept using Vivo customers’ voice and data traffic. This system functions by segregating voice and data traffic on a daily basis, according to which of seven total billing preferences a customer elects. Each cycle has a specific due date for each of the consumer and corporate segments.
For prepaid services, Vivo uses the Next Generation Intelligence Network (NGIN) platform, a prepaid platform, from the supplier company PTI, which also works in a centralized way in the city of São Paulo. In order for the NGIN platform to process correctly, the same system for billed invoicing is used. This system separates the module for customer information, called Care, which is a services platform, from the Voice and Data traffic processing module used, called Core, which is a tariff platform.
During 2006, the RJ/ES and CO/N centralization billing (billed and prepaid) were completed. The BA/SE centralization process was completed in April 1, 2007.
In July 2009, Telemig Celular concluded its centralization process to conform its billing practices to Vivo’s prepaid platform (NGIN). The billing system for postpaid customers was centralized in August 2010 when Telemig Celular completed its process to conform all the billing practices.
In November 2011, Vivo began developing a project to optimize its operational processes and reduce the period between the cut and due date of bills. At the end of this project, expected for April 2012, Vivo will reduce its billing cycles to six month cycles.
Co-billing
In accordance with the Brazilian telecommunications regulations, we use a billing method called “co-billing.”“co-billing” to both segments, fixed and mobile. This method allows billing from other phone service providers to be included within our own invoice. Our customers can receive and subsequently pay all of their bills (including the fees for the use of services of another
telephone service provider) by using one invoice. To allow for this method of billing, we provide billing and collection services to other telephonephone service companies and have developed a special system for such bills.companies. We have co-billing agreements (“co-billing in”) with Intelig, Embratel, Telemar/TNL, GVT, CTBC Telecom, IP Corp, Brasil Telecomnational and Convergia, each of which provides fixed-line services, and with TIM, which provides mobile services.international long-distance phone service providers. Similarly, we use the same method of co-billing to bill charges for our services on the invoices of other telephone servicefixed and mobile providers. We use direct billing through the national registry of clients for customers who use our long-distance services through operators that have co-billing agreements of this nature (“co-billing out”)no joint billing agreement with Telemar, CTBC Telecom, Brasil Telecom, Sercomtel, GVT and Embratel, each of which provides fixed-line services, and with Oi, Tim, Sercomtel Celular, CTBC Celular, Brasil Telecom Celular, VIVO and Claro, each of which provides mobile services.us.
Value Added Services (VAS)
Entertainment, information and online interactivity services are available to all Vivo customers through agreements with content suppliers. These agreements are based on a revenue-sharing model through the processes of
billed and prepaid categories, with all divergences between these categories being demonstrated to the content suppliers.
Third-party Services
In fixed as well as mobile billing process is made inclusion third-party services into the bill, collection and transfer. This service is charged to the contractor.
Collection
We have policies dealing with accounts of defaulting customers according to each ANATEL regulations allow usregulation. For mobile service, we apply the SMP regulation and for fixed service we apply the STFC.
For mobile customers, as a general rule, if the payment is late for more than 15, service can be partially suspended. If payment is late for more than 45 days after the partial suspension, the service can be fully suspended until payment is made. We offer an installment payment plan for those clients with past due balances. However, if accounts are not paid after 90 days, the contract can be cancelled and reported to preventcredit protection agencies.
For fixed customer, as a customer from making outgoing calls after a receivable has been outstandinggeneral rule, if the payment is late for more than 30 days—a partial block—or prevent a customer from making outgoing or receiving incoming calls—a total block—afterdays, service can be partially suspended. If payment is late for more than 60 days and to disconnect a customer upon failure to payafter the partial suspension, service can be fully suspended until payment is made. We offer an installment payment plan for those clients with past due balances. However, if accounts are not paid after 90 days. days, the contract can be cancelled and reported to credit protection agencies.
After the cancellation of the contract, for mobile and fixed services, the accounts are directed to independent collection agencies.
The amounts receivable overdue by 105 days, except for accounts receivables from interconnection fees and government and corporate customers, are considered provisions for doubtful accounts. The write-offs are made in accordance with Brazilian regulations, which permits a bad debt write-off for late payments of R$0 to R$5,000 if they are over 180 days late or R$5,001 to R$30,000 if they are over 365 days late. Write-offs of late payments of over R$30,001 that are open for more than 365 days require the commencement of a lawsuit.
During 20082011, the monthly average of partial blockssuspensions, for both mobile and fixed services, was 834,246 telephone2,050,000 lines and the monthly average of total blockssuspensions was 186,934 telephone379,000 lines. On December 31, 2008, 13.7%The provision for doubtful accounts in 2011 was 1.18% of all receivables had been outstanding between 30 and 90 days, and 39.3% of all receivables had been outstanding for more than 90 days. For a discussion of provisions for past due accounts, see “Item 5—Operating and Financial Review and Prospects.”the total gross revenue.
We continue working on improving the system to control the revenue chain. This control is important for continual improvements in our billing and collections processes, as well as for the assurance of the non occurrence of losses in the implementation of new systems and in roll-outs. The actions are followed closely by our Revenue Assurance Team, which measures every risk of loss of revenue detected along the billing and collection chain. These risks are managed to minimize revenue losses.
Network and Facilities
Our network consists of an access layer that connects our clients tothrough our central switchingmetal or optical networks, which are connected to voice and data hubs, and a network transport layer for managing client concentration, which also connects our clients to our central hubs.centers. These central hubscenters are interconnected locally or remotely through transmission equipment connected predominantly with fiber optics and occasionally through a microwave network, which formstogether form a network layer of networkthat enables connectivity between the various central aggregate services that interconnectplatforms as well as interconnection with other operators. Local transmission is provided through fiber-optic and metallic trunk lines. Intraregional long-distance transmission is provided by fiber-optic cable or by a microwave network.carriers. Our network strategy is based on the expansion of the Access Network (fiber optics) to allow greater coverage and broadband (high-speed) services for our customers, as well as to develop a broadbandan integrated multiservice network that is compatible with several types of telecommunications services and multimedia applications.
As a telecommunications servicestelecommunication service provider, we do not manufacture equipment for the construction of our networks and facilities. We buy the equipment from qualified suppliers and through this equipment we mountimplement our networks and facilities through which we supply our services. The following table sets forth selected information about our network in aggregate, at the dates and for the years indicated:aggregate:
| | At and for Year ended December 31, | |
| | | | | | | | | | | | | | | |
Installed access lines (millions) | | | 14.7 | | | | 14.6 | | | | 14.4 | | | | 14.3 | | | | 14.2 | |
Access lines in service (millions) (1) | | | 11.7 | | | | 12.0 | | | | 12.1 | | | | 12.3 | | | | 12.5 | |
Average access lines in service (millions) | | | 11.8 | | | | 12.0 | | | | 12.3 | | | | 12.4 | | | | 12.3 | |
Access lines in service per 100 inhabitants | | | 28.7 | | | | 29.1 | | | | 29.9 | | | | 30.9 | | | | 31.7 | |
Percentage of installed access lines connected to digital switches | | | 100.0 | | | | 100.0 | | | | 100.0 | | | | 100.0 | | | | 98.7 | |
Employees per 1,000 access lines installed | | | 0.6 | | | | 0.5 | | | | 0.6 | | | | 0.5 | | | | 0.5 | |
Number of public telephones (thousands) | | | 250.3 | | | | 250.3 | | | | 250.3 | | | | 331.5 | | | | 331.2 | |
Registered local call pulses (billions) | | | 25.9 | | | | 27.3 | | | | 28.3 | | | | 31.8 | | | | 33.5 | |
Domestic long-distance call billed minutes (billions) | | | 11.8 | | | | 11.9 | | | | 13.0 | | | | 14.1 | | | | 15.9 | |
International call billed minutes (millions) | | | 84.7 | | | | 88.1 | | | | 94.7 | | | | 104.9 | | | | 96.0 | |
Broadband services (ADSL) (millions) | | | 2.5 | | | | 2.0 | | | | 1.6 | | | | 1.2 | | | | - | |
| | At and for the year ended December 31, | |
Wireline access lines | | | | | | | | | | | | | | | |
Installed access lines (millions) | | | 14.7 | | | | 14.6 | | | | 14.5 | | | | 14.7 | | | | 14.6 | |
Access lines in service (millions) (1) | | | 11.0 | | | | 11.3 | | | | 11.3 | | | | 11.7 | | | | 12.0 | |
Average access lines in service (millions) | | | 11.1 | | | | 11.3 | | | | 11.5 | | | | 11.8 | | | | 12.0 | |
Access lines in service per 100 inhabitants | | | 26.5 | | | | 27.5 | | | | 27.1 | | | | 28.7 | | | | 29.1 | |
Percentage of installed access lines connected to digital switches | | | 100.0 | | | | 100.0 | | | | 100.0 | | | | 100.0 | | | | 100.0 | |
| | At and for the year ended December 31, | |
Wireline access lines | | | | | | | | | | | | | | | |
Number of public telephones (thousands) | | | 215.8 | | | | 250.7 | | | | 250.5 | | | | 250.3 | | | | 250.3 | |
Broadband access lines (millions) | | | 3.6 | | | | 3.3 | | | | 2.6 | | | | 2.5 | | | | 2.0 | |
| | | |
Mobile access lines | | | | | | | | | | | | | | | |
Cellular lines in service at year-end (in millions) | | | 71.5 | | | | 60.3 | | | | 51.7 | | | | 44.9 | | | | 37.4 | |
Contract customers (in millions) | | | 16.1 | | | | 12.6 | | | | 9.8 | | | | 8.6 | | | | 7.1 | |
Prepaid customers (in millions) | | | 55.4 | | | | 47.7 | | | | 42.0 | | | | 36.4 | | | | 30.3 | |
Growth in cellular lines in service during year | | | 18.7 | % | | | 16.5 | % | | | 15.1 | % | | | 20.2 | % | | | 11.6 | % |
Churn(2) | | | 34.2 | % | | | 32.0 | % | | | 30.5 | % | | | 31.3 | % | | | 28.8 | % |
Estimated covered population (in millions)(3) | | | 190.7 | | | | 191.5 | | | | 191.5 | | | | 190.4 | | | | 135.3 | |
Penetration at year-end(4) | | | 123.9 | % | | | 104.6 | % | | | 90.5 | % | | | 79.1 | % | | | 63.5 | % |
Market share(5) | | | 29.5 | % | | | 29.7 | % | | | 29.78 | % | | | 29.8 | % | | | 30.9 | % |
(1) | Data includes public telephone lines. |
(2) | Churn is the number of customers that leave us during the year, calculated as a percentage of the simple average |
32(3) | Number of people within our region that can access our cellular telecommunications signal. |
(4) | Number of cellular lines in service in our region, including those of our competitors, divided by the population of our Region. |
(5) | Percentage based on all lines in service in our region at year-end. |
Technology
In order to offer a greater quantity of integrated services, we have incorporated a series of new technologies in our voice and data networks, the most prominent being IP/MPLS Multiservices networks. Innetworks supported by the telephonic segment we have created a networkIP/MPLS platform. Following the evolution of the latest generation that allowsInternet, we are also adding the IP/MPLS to the IPv6 technology, and installing a platform for transportation of multiple media over IP Protocol that supports a diversified portfoliotraffic analysis (DPI – Deep Packet Inspection) to optimize the network evolution and delivery of products and services for clients.services.
Other top technologiesThe IP/MPLS platform allows us to offer Internet connection solutions to residential clients (Speedy) and business clients, and for the later, at speeds that vary from 64 Kbps to 10 Gbps.
This platform is connected to the main Brazilian Internet providers and telecommunication companies through the network of Telefonica International Wholesale Services, or TIWS, which has redundancy connections. In addition to this connectivity, we installed distributed “mirrors” of the main content providers, using innovative resources from the CDN solution (Content Delivery Network). These characteristics provide our clients with high-quality services and short delays in their Internet connections.
Additionally, we have solution centers named DNS (Domain Name System) strategically positioned in the segmentsnetwork which were extended by 25% in 2010 and which guarantee a quick name resolution to our Internet services clients. These centers transform the Internet addresses typed by residential and business clients into IP addresses guaranteeing the correct transmission of access (fiber-optic cables runningdata. There were no extensions in 2011, but we plan a 15% increase in 2012 and another 15% in 2013.
We provide the IP/MPLS network to the client’s home, Wi-Fi), transmittal (Metroethernet)our business clients offering advanced connection solutions to small, medium and service platforms (flexible billing plans, prepaid) are being implemented which will allow Telesp to offer, in the short term,large companies (Virtual Private Networks – VPN). This network has mechanisms of quality assurance for all applications (QoS – Quality of Service) as well as applications for voice, video and data services in an integrated form, encompassing all the segments of the market. This convergentconvergence. We also offer connectivity solutions to business clients through a network will allow for increased offerings for our clientsbased on Frame-Relay, X25, ATM and a reduction in operational costs centralizing information into fewer elements.Metro Ethernet technologies.
In the corporate segment, we offer an IP/MPLS Network that supports the VPN-IP services to access the Internet and a Frame Relay network for service based on this technology. We have a portfolio
In the residential segment, since 1999, we have been heavily investing in offering broadband access through an asymmetric digital subscriber line, or ADSL, technology under the brand “Speedy.” This technology provides high-speed Internet access through regular telephone lines. In 2007, we initiated the implementation of the FTTx network (available through fiber-opticfiber optic cables running to the subscriber’s home),home – GPON technology) with a coverage of 1,042K Home Passed, offering in 2011 a range of different speeds of up to 30 Mbps.10 Mbps, and IPTV high definition service (HDTV). In December 2008,2011, we surpassed the mark of 2,4893.6 million broadband-connectedbroadband clients connected in service.service, 45% of which had speeds equal to or greater than 2Mbps. To reach this number of clients, we constantly search for market differentials such as new integrated services, speed upgrades and servicing of new localities, among others.
We are implementing anoffer the IPTV Platform, aiming in 2009 to offer servicesservice through a partnership with TVA through the FTTx network technology.and the Telefônica Brasil Platform. We made several improvements in the platform, such as the inclusion of Fast Channel Change (FCC) and installing a new version of the software with more interactive navigation, with the aim of providing a better user experience. In 2012, we will continue the improvements started in Telefônica Brasil’s Platform aiming to increase competitiveness in the ITS market. This platform consists of pay TV with video broadcast offered through the use of the IP protocol, whereby the current pay TV channels are accessible.protocol. The offering of such technologically advanced services is only made possible due to our partnership with TVA, a recognized provider of pay TV services. Additional services, such as pay-per-view and “videovideo on demand” (“VOD”)demand (VOD), are also available. New high definition channels (HD) will be included to increase the quality and option for our customers. Furthermore, Telefónica’sTelefônica Brasil’s network contains space for the recording of programs or local recordings in the Set Top Box (“STB”)(STB), and in the future, third-party content providers will be able to offer games, interactive and connectivity services.
We also offer digital television service via satellite (DTH) to the users/subscribers in the State of São Paulo (and in the future, all of Brazil) that receive broadcast/PPV content through a Ku band antenna and standard Set Top Box (with Smart Card)., also available with a Personal Video Record (PVR) service. As of December 31, 2008,2011, we surpassed the mark of 289,000 users/428 thousand subscribers in service. We finished the implementation of the Content Protection system in 2010, aiming to reduce the possibility of undesired access to the distributed content. In 2011, we began offering plans with new channels in high definition (HD)—up to 11 paid channels in HD, offering premium content to our customers and new local channels to increase service penetration in some areas of coverage.
Our development plan contemplates the use of the most advanced technology available, focusing on integration with the Internet and an increase in the number of multimedia transmission services, with an emphasis beyondon ADSL, investments in FTTx (GPON), NGN, DWDM, ROADM and re-transmittalretransmittal technologies of TV over IP protocol (IPTV), satellite (DTH), and satellite (DTH).the continuous evolution of TV services.
Before November 1998, our subsidiary Vivo network used only AMPS analog technology. After privatization, we began to use CDMA digital and TDMA digital technologies. In 2006, we began to implement a GSM Network. In 2007, we began to implement a WCDMA Network. In 2011, we launched the HSPA+ technology, commercially known as 3GPlus, working across our 3G network. This technology was commercially launched in November, 2011 in São Paulo (and its extended metropolitan area with area code 11), allowing customers who have compatible terminals to achieve even higher transmission rates, reaching up to three times the value of traditional 3G’s rate. Digitalization offers certain advantages, such as greater network capacity and additional revenue through the sale of value-added services. We continue to increase network capacity and coverage to improve our quality of service and to meet customer demand.
Our advanced network management technology ensures global management and supervision of all our network processes and network performance. The network management centers are located in São Paulo, Brasilia and Minas Gerais. The network management center of São Paulo monitors the critical network operational parameters of the countrywide transmission backbone, third parties’ networks, IP networks and service platforms. The network management center in Brasília monitors the critical network operational parameters in the Midwestern Region (CO), Rio de Janeiro, Espírito Santo, Rio Grande do Sul and Paraná/Santa Catarina. The network management center in Minas Gerais monitors the critical network operational parameters in the Northeastern region (NE), the Northern region (NO), Bahia, Sergipe, São Paulo and Minas Gerais. These centers are able to identify abnormalities in both our network and in third parties’ networks, using failure and signaling monitoring systems. In addition, quality and service standards are constantly monitored. The network management centers are integrated with maintenance and operations teams that maintain and operate cellular network elements, as well as cellular infrastructure and
transmission, in addition to the radio network elements and computing bases, service platforms and communications backbones.
Currently, 100% of our network is digital.
Competition
In 2011, the competition continued to increase in the market for small/medium enterprises and in the residential market due to an expansion of the coverage area of the main competitors, improvements on their portfolios, and also due to an increase in their commercial activity and offers for both fixed and mobile services, adding downward pressure to prices and pushing for higher discounts.
We currently face strongintense competition in all the corporateareas in which we operate, principally from other cellular service providers and premium residentialalso from fixed-line operators. Many of these competitors are part of a large, national or multinational group and therefore have access to financing, new technologies and other benefits that are derived from being a part of such a group.
The principal cellular competitor in the state of São Paulo is Claro and in the states of Paraná and Santa Catarina is TIM Celular or TIM. The main fixed-line operator in this area is Brasil Telecom S.A. (in 2008, the Brazilian Government published Decree No. 6654/2008 of revision of the fixed-line general concession plan (Plano Geral de Outorgas, or PGO), allowing fixed-line concessionaires to operate in more than one region of the country. This change allowed Telemar Norte Leste S.A. to buy Brasil Telecom.
In the Central, Western and Northern region the principal competitors are: Claro, in the region encompassing the states of Mato Grosso do Sul, Mato Grosso, Goiás, Tocantins, Rondônia and Acre and the Federal District, and TIM, in the region encompassing the states of Amazonas, Roraima, Pará, Amapá and Maranhão. The main fixed-line operators in this area are: Brasil Telecom S.A., in the region encompassing the states of Mato Grosso do Sul, Mato Grosso, Goiás, Tocantins, Rondônia and Acre and the Federal District, and Telemar Norte Leste S.A.—Telemar, in the region encompassing the states of Amazonas, Roraima, Pará, Amapá and Maranhão. Other competitors are Oi (Telemar mobile operator) and TIM.
In the Bahia and Sergipe service areas, the principal cellular competitor is Claro. Other cellular competitors are Oi and TIM Celular or TIM, which also operate in the state of Minas Gerais. The principal fixed-line competitor in this area is Telemar Norte Leste S.A.
In the Ceará, Pernambuco, Paraíba, Alagoas, Rio Grande do Norte and Piauí service areas, the principal cellular competitor is TIM. Other cellular competitors are Oi and Claro. The principal fixed-line competitor in this area is Telemar Norte Leste S.A.
In the Rio de Janeiro and Espírito Santo service areas, the principal cellular competitor is Claro, which operates in the states of Rio de Janeiro and Espírito Santo. Claro is controlled by a consortium led by the Telecom Américas Ltd. (controlled by América Móvil S.A. de C.V.). Claro began providing cellular telecommunications services in this Region at the end of 1998. The principal fixed-line operator in this area is Telemar Norte Leste S.A. Oi is the third competitor and is integrated with Telemar (a fixed-line operator) and TIM is the fourth competitor.
In Rio Grande do Sul, the principal cellular competitor is Claro, which operates in several regions in Brazil, including Vivo-Rio Grande do Sul’s region. Other cellular competitors are Brasil Telecom S.A. and TIM. The main fixed-line competitor in this area is Brasil Telecom.
In Minas Gerais, currently, there are four other wireless service providers operating within the authorization area of Vivo S.A. Our subsidiary Vivo faces competition from the following operators: (a) TIM, the “B” band frequency range operator that launched its services in December, 1998 (TIM is primarily owned by Telecom Italia and operates in the entire State of Minas Gerais using GSM and WCDMA technologies); (b) Oi, the “D” band operator that launched its services in June 2002 (Oi is a subsidiary of Tele Norte Leste Participações S.A. (Telemar) and operates in the entire State of Minas Gerais using GSM and WCDMA technology); (c) Claro, the “E” band operator that launched its services in the fourth quarter of 2005 (Claro is controlled by América Móvil and operates
a GSM and WCDMA technology network); and, (d) CTBC Celular, an “A” band and 3G band operator (CTBC Celular is controlled by CTBC, a fixed-line operator and uses GSM and WCDMA technologies).
Our subsidiary Vivo S.A. also compete with certain other wireless telecommunications services in specific segments, such as mobile radio (including digital trunking technology, offered by Nextel), paging and beeper services, which are used by some operators in respectthe areas of several types ofVivo S.A. as a substitute for cellular telecommunications services. These competing wireless telecommunications services are generally less expensive than mobile telecommunications services. In December 2010, through the corporate segment,auction 002/2010/ANATEL, NEXTEL was awarded 12 SMP licenses (11 spectrum licenses in “H” band (3G band) and 1 spectrum license in “M” band (1800 MHz band)).
Satellite-operated services which provide nationwide coverage, are also available in Brazil. Although these services have the advantage of covering much larger areas than those covered by the cellular telecommunications services, they are considerably more expensive than the cellular telecommunications services we face strong competition in both voice services (localoffer and long-distance) and data transmission, resulting in customer migration and the need for greater discounts to maximize client retention.do not provide competitive coverage inside buildings.
Our main competitors infor the corporate segment are Oi (formerly Telemar)provision of fixed services are: America Móvil / Telmex group (which includes NET, Claro and Embratel), TIM (which includes Intelig Teléfonos de México, S.A. de C.V. (“Telmex”) through Embratel and GVT a “mirror” operator (operators with certain restrictions set forth by ANATEL during the privatization process) in Region II.Tim Fiber) and GVT. Our competitors employ varyingvaried strategies in an effort to gain market share. For example, Embratel has soughtinstance, GVT expanded its operations to expandother major cities in the State of São Paulo, with a strategy based on ultra-broadband services, low price, high-quality customer service, and a new TV product, targeting high-income residential clients and small and medium businesses. NET improved its presence by consolidatingTV portfolio with a new on-demand video product (NOW) and continued its strategy of aggressive broadband prices, offering promotionally 10 Mb for the price of 1 Mb, which increased our churn up to 7% in some regions, against an average of 2.3%. TIM acquired a large portfolio of companies, making direct salesoptical-fiber network from AES (Atimus), and improving customer service. New market entrants Oi and GVT have focused
their emphasis on larger corporate clients. Our market strategy in this sectorconstituted a new company called TIM Fiber, which is based on offering bundled products (voice, broadband and hardware) and on improving our customer service.
In the high-income residential service segment, we compete in fixed voice and long-distance services with Telmex (Embratel) and in broadband and pay TV services with the pay TV provider NET Serviços de Comunicação S.A. For the local voice and high-income segments, we also face increasing competition from cellular telecommunications services, which have lower rates for certain types of calls such as in-network mobile-to-mobile calls. Such competition increases our advertising and marketing costs. In 2008, we continuedexpected to observe the appearance of small VoIP operators, focused on low and middle income corporate clients, whose impact has not been significant at this point, but which can be more significant in the future. We are taking several steps to defend ourselves from increasing competition. In this customer segment we are focused on improving our voice, broadband and pay TV offerings by developing our products toward specifically defined market segments to remain competitive with new products offered by our competitors.
The region in which we have been granted a mobile telephone authorization is divided in two sub-areas, with five mobile service operators, two of which began operating in São Paulo in the second half of 2008. In March, 2007, ANATEL granted Unicel a licensebegin to offer mobile telephone services in São Paulo. Beginning in August 2008, Unicel began offering mobile telephone serviceshigh-speed fixed broadband in the city of São Paulo and other 11 cities nearby, making this market even more competitive. In the segment of low-income customers, we face competition from Embratel in 63 of the municipalities of the state of São Paulo under the brand AEIOU. In September 2007, Oi obtained a SMP authorization from ANATEL through a public bidding process. In November 2008, Oi began offering mobile telephoneTV services and NET in the state of São Paulo. We expect that the entry of AEIOUboth TV and Oi in the mobile telecommunications market in São Paulo will increase downward pressure on the prices for mobile telephone services in the state, contributing to further migration of users from fixed-line to mobile telephone service.broadband services.
With this new scenario in the competitive dynamic in 2008, the five mobile service operators in the state of São Paulo include:
· | Vivo (formerly Telesp Celular), which was the incumbent mobile telephone provider in the State of São Paulo and is now controlled by a joint venture between Portugal Telecom and Telefónica, our controlling shareholder; |
· | Claro, a unified brand name used since the end of 2003 by several cellular operating companies controlled by America Móvil, S.A. de C.V., the leading cellular service provider in Mexico (which was spun off from Telmex in September 2000). America Móvil is controlled by Carso Telecom Group S.A. de C.V., a closely-held holding company incorporated in Mexico that is controlled by Carlos Slim Helú and family. Carso Telecom Group also indirectly controls Embratel through its subsidiary Telmex; and |
· | TIM, controlled by Telecom Italia, which began operations in October 2002. |
· | Oi (formerly Telemar), which was the incumbent fixed-line telephone operator in Region I under the General Plan of Grants and which entered the São Paulo mobile telecommunications market following the acquisition of a 3G license in September 2007; and |
· | AEIOU (formerly Unicel), which obtained a mobile telephone services license in March 2007 to operate in the city of São Paulo and 63 other municipalities in the region and began operating in August 2008, focusing primarily on providing services to a younger demographic, offering lower rates, pre-paid service and distinguishing itself by the absence of physical stores (all sales are made through the Internet). |
In 2008, we saw a slight decline in the number of fixed-line customers, in part as a result of increased competition. In an effort to maintain the attractiveness of fixed-line telecommunications service, we have created product offerings customized to different customer segments. For example, in the low-income, local fixed telecommunications segment, we face less direct competition due to the low profitability of this market. However, we do face more significant competition from prepaid cellular telecommunications providers in this segment. Such services are relatively profitable because of the high fees generated through the interconnection of fixed and cellular networks. To address indirect competition from prepaid cellular telecommunications providers in the low-income
customer segment, we offer low-cost, pre-paid fixed-line service, which we believe helps prevent migration of these customers from fixed-line service to mobile service.
We have also sought to protect our voice services offerings by increasing our offerings of “Minute Packages” and by including bundling offers with Speedy and pay TV. We have enhanced the attractiveness of our voice services by including voice service plans allowing for unlimited fixed-line to fixed-line calling in bundled Duo and Trio packages (packages with a combination of voice, Internet and pay TV services).
In addition to traditional telephone services,At Telefonica, we continue to develop and expand our product offerings, by expanding our offerings in related market sectors, particularly those with greatergreat potential for future growth, such as broadband Internet services, pay TV,pay-TV, and information technology services.
With respect to our broadband Internet offerings, in spite of increased competition in the broadband Internet market, Speedy has maintained its position as a market leader in the State of São Paulo with more than 2.53.5 million customers as of December 31, 2008. In addition2011 and over 9% growth compared with the same date in 2010. Additionally, our broadband service over high-speed optical fiber reached over 50 thousands households, a growth over 300%, contributing to lower churn with a high trend of bundling.
The strategy of low cost long-distance calls initiated by TIM for on-net calls on a “billing per call” basis continued the success already observed in 2010, and led Claro and our subsidiary Vivo to start making similar offers. These low-cost mobile long-distance rates contribute to the voicelosses of fixed-lines of the incumbents. Nevertheless, the total market of fixed-lines grew 2% compared to the previous year, supported by FWT offers in locations not covered by copper networks and data bundling services previously mentioned,by the growth of fixed-lines provided by non-incumbent companies sometimes bundled for free.
Our subsidiary Vivo has also launched a FWT service which offers fixed-phones using the wireless network. With Vivo’s FWT service, we aim to leverage the fixed-phones sales, mainly outside the state of São Paulo, where we have been actively pursuing additionalreduced fixed network capacity. This solution can also reduce the cost of providing this service to enterprises located nationwide, such as banks, which we already have in our portfolio of clients.
We continue with our strategy in the corporate market strategiesas a provider of complete infrastructure solutions for information technology customers, integrating hardware packages, voice, data, Internet and network services. Additionally, we launched the service “OnVideo,” a product that allows the client to maintain this position, including the launch of high speed broadband services (up to 30 Mbps)watch movies directly from a TV with digital video technology on demand. The service “At Home,” which provides home automation (a solution that integrates home electrical devices, thus offering improved convenience, comfort, energy efficiency and security), completed its second year in addition to expanding our offering of 2 Mbps services to the majority of our customer base.2011.
We believe we made substantial advances in the pay TV market in 2008 by expandingcontinue to develop and expand our range of available programming, leading to increased subscription,product offerings, particularly those with over 650 thousand clientsgreat potential for future growth, such as of December 31, 2008.broadband Internet services, pay-TV, and information technology services. Speedy maintained its
position as market leader in the State of São Paulo (outwith more than 3.5 million customers as of approximately 150 million in Brazil). Operators such as the subsidiaries of America Móvil operating under the brand name ClaroDecember 31, 2011 and Embratel, controlled by Carso Telecom Group, launched combination offerings in 2006 involving fixed-line and mobile services. Other integrated groups, such as Oi (formerly Telemar) and Brasil Telecom and its cellular company “BrT GSM,” have also launched offers incorporating the use of fixed telephones and mobile phones, though such offerings have not yet been launched in the São Paulo market despite the pressure of Oi in the mobile market. We are also offering combinations of services for our customers with “Vivo,” one of the mobile companies affiliatedover 9% growth compared with the Telefônica group.
In 2008, we strengthenedsame date in 2010. Additionally, our position in the market asbroadband service over high-speed optical fiber reached over 50 thousands households, a providergrowth over 300%, contributing to lower our churn with a high trend of complete information technology infrastructure solutions customized to individual clients from which we receive monthly rental payments. As part of this new product offering, we provide “work stations” to our large business clients and “information stations” for small and medium business clients, packaging hardware, voice, data, internet, and network servicing solutions in one convenient bundle.
Finally, we believe our relationships with our customers are the foundation upon which our business is built, and in 2008 we made important advancements in improving our customer relations. First, we restructured our traditional sales and customer service channels so our retail stores can serve as an effective channel for customer relations, offering improved service and higher quality as well as a direct source for all of our product offerings. In addition, we restructured our call centers and adapted our internal customer relations procedures with the goal of offering a higher level of customer service at all points of communication with our customers.
Sales, Marketing and Customer Services
Sales
We employ the following different approaches to deliver our solutions to corporate customers:
· | Person-to-person sales: our business management team offers customized sales services to preserve customer loyalty, customized consulting telecommunication and IT services and technical and commercial support; |
· | Telesales: sales through telemarketing call centers employing highly trained sales associates; |
· | Indirect channels: outsourced sales—by certified companies in the telecommunications and data processing segments—to provide an adequately sized network for our products and services; |
· | Internet: “Portal Telefônica,” with on-line information on our products and services specifically targeted toward our corporate clients; |
· | Door-to-Door: in order to approach more Telefónica Negócios corporate clients, in March 2006, we launched door-to-door sales of services by consultants in the State of São Paulo. |
Marketing
We continuously monitor market trends in an effort to develop new products and services that may address future needs and tendencies of our customers.
We have developed packaged products, bundling voice and data services, digital telephone, minutes packages, information systems and improved connectivity in response to a growing demand from our clients. We believe that the trend toward bundled offers will continue to grow, and developing such offers will be important to maintain our competitiveness in the market.
We employ a different approach to marketing whereby we use a mix of human and technological resources (a specialized team and business intelligence tools, respectively), in addition to specific studies that allow us to target each market segment according to the relevant customer’s specific needs.
We believe that the brand strength of Telefónica (the brand under which we offer our services) and its customer service, marketing and communication efforts will produce new business opportunities and attain and preserve customer loyalty.
Customer Services
Our principles of corporate operations state that we must always offer our clients innovative and trustworthy products and services of high quality and at reasonable prices. We continually improve the quality of our products and services through the modernization of our telecommunications platform and its management systems, as well as its operational support management systems, and an organizational structure with as few levels as possible, bringing the company closer to the customers. The following table sets forth information on service quality for the periods indicated.
| | | |
| | | | | | | | | |
Repair requests of traditional telephones (% requests for repairs of traditional lines/lines in service) | | | 1.3 | | | | 1.4 | | | | 1.4 | |
Repair requests of public telephones (% requests for repairs of public lines/lines in service) | | | 5.0 | | | | 6.2 | | | | 6.2 | |
Call completion local rate during the peak night period (% local calls attempted and completed/total local calls attempted) | | | 75.0 | | | | 75.3 | | | | 78.6 | |
Call completion national long-distance rate during the peak night period (% long-distance calls attempted and completed/total long distance calls attempted) | | | 71.1 | | | | 71.1 | | | | 71.6 | |
Billing complaints (complaints per 1,000 bills) | | | 1.8 | | | | 2.6 | | | | 2.6 | |
Under Brazilian telecommunications regulations, our concession and authorization contracts for providing services (fixed commuted, communication and multimedia telephone and pay TV) contain required targets that must be reached with respect to the quality of services that apply to access times for special service codes, response times for requested information for access codes, national and international call completions, repair requests, fulfillment of repair requests, fulfillment of address change requests and the quality of billing documents.
On December 1, 2008, a new law (the “Lei do SAC”) regulating customer service requirements in the telecommunications industry came into effect. Pursuant to meeting the requirements of this new law, we have invested and continue to invest to develop new procedures in addition to hiring and training additional personnel.
In order to improve the quality of our services, we have undertaken several measures to guarantee customer satisfaction, including:
· | Broadening the scope of customer satisfaction surveys conducted each month for each customer segment among residential, small business and corporate (large companies). In addition to customer satisfaction, the surveys evaluates customer loyalty and our corporate image; |
· | Analyses of satisfaction surveys: identification of the critical factors for customers and main points for improvement; |
· | Analysis of the correlation of the results of the satisfaction surveys with the operational indicators of the company; |
· | Implementing new customer research to evaluate client satisfaction, specifically with respect to the level of customer care received, the sales process, product installation and billing. This research helps identify our customers’ key concerns with respect to our operations; |
· | Identification and monitoring of action items: monitoring of action items and projects resulting from the satisfaction surveys and from additional internal data that facilitate identifying the main problems, so that the action items and projects can be effective; |
· | Maintaining an increased emphasis on programs and projects focused on customer satisfaction, oriented toward and prioritized on customer satisfaction survey results together with internal evaluation and evaluation by outside consultants to help focus on action items of primary importance to customers; |
· | Implementation of processes aimed at reducing billing errors and technical problems for fixed-line and broadband service; |
· | Maintenance and review of quality controls and objectives designed from the customer’s perspective, which establish internal service levels among business areas and support areas (network and system facilities); |
· | Increased emphasis by the Executive Committee on product and service quality and on customer satisfaction with weekly meetings attended by our senior officers; |
· | Establishing a committee for approving new products and services based on analysis of product and services functionalities; |
· | Full use of the “Six Sigma” methodology for improving internal processes, intended to increase customer and employee satisfaction levels and revenues, and to decrease our costs; |
· | Internal audits of processes based on regulatory requirements stemming from our concession and authorization contracts, mainly focused on the processes that reflect directly on the quality of services and customer satisfaction; |
· | Maintain the highest level of NBR ISO 9001:2000 certificates attainable in Brazil, with the following objectives: |
· | Management and execution of marketing, installations, operations, billing, customer service and technical support processes for our voice services in respect of the public telephone segment and for our voice, data and Speedy services in respect of the residential, small business and large corporate segments; and |
· | Management and execution of network projects to provide the products and services discussed above. |
· | Certification every four months, by an independent auditor authorized by the National Institute of Metrology, Standardization and Industrial Quality (INMETRO), of our billing process for fixed commuted telephony (STFC) services, including registering calls, setting tariffs and billing; |
· | Annual certification and maintenance, by an independent auditor authorized by the National Institute of Metrology, Standardization and Industrial Quality (INMETRO), of our processes for collecting, calculating, consolidating and sending to ANATEL quality indicators for fixed commuted telephony (STFC) services; and |
· | Internal evaluation of environmental effects of our activities and the products and services that we develop, with the objective of reducing and preventing negative impacts and promoting the creation of telecommunications services that contribute to our society’s sustainable development. See “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies.” |
bundling.
Seasonality
Our business and results of operations are not materially affected by seasonal fluctuations in the consumption of our services.
Regulation of the Brazilian Telecommunications Industry
General
Our business, including the services we provide and the rates we charge, is materially affected by comprehensive regulation under the General Telecommunications Law and various administrative rules thereunder. Our companies that operate under a concession are authorized to provide specified services and have certain obligations, according to the Plano Geral de Metas de Universalização, or General Plan on Universal Service Targets and the Plano Geral de Metas de Qualidade, or General Plan on Quality Targets.
ANATEL is the regulatory agency established by the General Telecommunications Law and the Regulamento da Agência Nacional de Telecomunicações, known as the ANATEL Decree issued in October 1997.Law. ANATEL is administratively and financially independent offrom the Brazilian government. Any proposed regulation by ANATEL is subject to a period of public comment includingand, occasionally, public hearings, and its decisions may be challenged in the Brazilian courts.
Concessions and Authorizations
Concessions are licenses to provide telecommunications services that are granted under the public sector,regime, while authorizations are licenses to provide telecommunications services granted under the private sector.regime.
Companies that provide services under the public sector,regime, known as the concessionary companies, are subject to certain obligations as to quality of service, continuity of service, universality of service, network expansion and modernization.
Companies that provide services under the private sector,regime, known as the authorized companies, are generally not subject to the same requirements regarding continuity or universality of service; however, they aremay be subject to certain network expansion and quality of service obligations set forth in their authorizations.
Companies that operate under the public sectorregime include us, Embratel, Telemar, Brasil Telecom,Oi, CTBC Telecom and Sercomtel. The primary public sectorregime companies provide fixed-line telecommunications services in Brazil that include local, intraregional, interregional and international long-distance services. All other telecommunications service providers, including the other companies authorized to provide fixed-line services in our concession region, operate under the private sector.regime.
Public sectorregime companies, including us, can also offer certain telecommunications services in the private sector,regime, of which the most significant are data transmission services.
Fixed-line Services—Public sector. Regime. Our current concession agreements for the local, intraregional and interregional long-distance services were extended on December 22, 2005, for an additional period of 20 years.
TheOur current concession agreements contain a provision, allowing foramended by ANATEL to review the concession terms in 2010,on June 30, 2011, providing that they may be amended on December 31, 2015, and 2020. This provision permits ANATELDecember 31, 2020 to update the renewed concession agreements with respect to network expansion, modernizationestablish new conditions and new targets for universal access and quality, of service targets in response to changes in technology, competitiontaking into consideration the conditions prevailing at the time, and defining, in the marketplace and domestic and international economic conditions. A Public Notice (consulta pública) was published on March 31, 2009 with the proposed revisions to the concession contracts. ANATEL will accept comments until June 1, 2009. These proposed changes might be put into effect in January 2011.case of universal access targets, complementary resources, as provided by article 81 of Law No. 9,472 of 1997.
Under the renewed concession agreements and during the 20-year renewal period, we will beare required to pay a biennial fee equal to 2% of our annualthe gross revenue of the previous year, net revenueof taxes and social contributions, arising from the provisionrendering of fixed-line public telecommunications servicesbasic service plans and alternative STFC in our concession area for the prior year (excluding taxes and social contributions). See “—Obligations of
Telecommunications Companies—Public sector-Service Restrictions.Companies.” Each of the foregoing regulatory terms and conditions affecting (or potentially affecting) the current concession agreements, as well as current obligations under the existing concession agreements, may impact our business plan and results of operations.
Fixed-line Services—Private sector. Regime. The Brazilian telecommunications regulations provide forregulation delegates to ANATEL the introduction of competition in telecommunications services by requiring ANATELpower to authorize private sectorregime companies to provide local and intraregional long-distance serviceservices in each of the three fixed-line regions and to provide intraregional, interregional and international long-distance services throughout Brazil. ANATEL has already granted authorizations to private sectorregime operators to operate in Region III, our concession region. ANATEL also granted other private sectorregime companies authorizations to operate in other fixed-line regions and authorizations to provide intraregional, interregional and international long-distance services throughout Brazil in competition with Embratel. Several companies have already applied for the authorization, and ANATEL may authorize additional private sectorregime companies to provide intraregional, interregional and international long-distance services. See “—Competition.”
Since 2002 we provide local and interregional services in Regions I and II and Sector 33 of Region III, and international long distancelong-distance services in Regions I, II and III.
Before January 2000, ANATEL had only authorized two mobile service providers in each of the ten franchise areas under “A” band and “B” band. “A” band and “B” band mobile service providers were granted concessions pursuant to the Lei Mínima, or the Minimum Law. Each concession was a specific grant of authority to supply cellular telecommunications services, subject to certain requirements contained in the applicable list of obligations appended to each concession. If a mobile service provider wishes to offer any telecommunications services other than those authorized by its authorized concession, it may apply to ANATEL for an authorization to offer such other services.
In accordance with the General Telecommunications Law, a concession relates to the provision of telecommunication services under the public regime, as determined by the public administration. A concession may only be granted upon a prior auction bidding process. As a result, regulatory provisions are included in the relevant concession agreements and the concessionaire is subject to public service principles of continuity, changeability and equal treatment of customers. In addition, ANATEL is empowered to direct and control the performance of the services, to apply penalties and to declare the expiration of the concession and the return of assets of the concessionaire to the government authority upon termination of the concession. Another distinctive feature is the right of the concessionaire to maintain certain economic and financial standards. The concession is granted for a fixed period of time and is generally renewable only once.
An authorization is a permission granted by the public administration under the private regime, which may or may not be granted upon a prior auction bidding process, to the extent that the authorized party complies with the objective and subjective conditions deemed necessary for the rendering of the relevant type of telecommunication service in the private regime. The authorization is granted for an indeterminate period of time. Under an authorization, the government does not guarantee to the authorized company the economic-financial equilibrium, as is the case under concessions.
SMP Licenses
In November 2000, ANATEL adopted certain regulations for the issuance of new licenses, which are authorizations to provide wireless communication services through SMP, personal mobile service, to compete with the then existing cellular operators in the various regions of Brazil. These regulations divided Brazil into three main regions covering the same geographic area as the concessions for the fixed-line telecommunication services. ANATEL organized auctions for three new licenses for each of those regions. The new licenses provided that the new services would be operated in the 1800 MHz radio frequency bands which were denominated as the “C” band (which was later transformed into extension bands), the “D” band, “E” band and “M” band. These new licenses were auctioned by ANATEL and awarded during the first quarter of 2001, at the end of 2002, in September 2004, in March 2006, in September 2007, in December 2007 and in December 2010. In September 2007, ANATEL organized auctions for 15 new licenses in the 1900 MHz radio frequency bands which were denominated Band “L.” Vivo acquired 13 spectrum licenses in band “L.” In December 2007, ANATEL organized auctions for 36 new licenses in the 1900-2100 MHz radio frequency bands (3G licenses) which were denominated bands “F,” “G,” “I”
and “J.” Vivo acquired seven spectrum licenses in Band “J” and Vivo Participações acquired two spectrum licenses in Band “J.” In December 2010, ANATEL organized auctions for 165 new licenses in the “H” band, extension bands, and available frequencies at “A,” “D,” “E,” “M” and TDD bands. Vivo was awarded 23 licenses (14 spectrum licenses in 1800 MHz bands (“D,” “E,” “M” and extension bands) and 9 spectrum licenses in 900 MHz extension bands).
On December 1, 2011 ANATEL carried out the bidding of frequency blocks (Notice No. 001/2011/PVCP/SPV-ANATEL), divided into 54 lots, in the bands: 800 MHz (Band A in the North), 1800 MHz (subbands extension in Region II, within the states of São Paulo and Espírito Santo, Ceará and Pernambuco) and TDD (national coverage), totaling approximately R$592 million, considered the minimum biding price. This auction offered remaining lots from Notice No. 002/2010/SPV-ANATEL, held in December 2010, in which Vivo was one of the largest winners in the auction by acquiring radio frequency bands 900 MHz and 1,800 MHz.
Of the 54 lots under auction, 15 were sold, totaling revenue of R$237 million to the government, representing a premium of 0.69%.
Our subsidiary Vivo was unable to participate in this auction because it has already reached maximum spectral capacity in most concession areas. As a result, if Vivo had purchased any lot in these areas, it would have exceeded its spectrum cap as established by applicable regulations. Under these new licenses:
| · | services are to be provided using the 1800 MHz frequency bands (“D” band, “E” band and “M” band), 1900 MHz frequency bands (“L” band), 1900–2100 MHz frequency bands (“F” band, “G” band, “H” band, “I” band and “J” band) and extension bands; |
| · | each operator may optionally provide domestic and international long-distance services in its licensed area; |
| · | existing cellular service providers as well as new entrants into the Brazilian telecommunications market can bid for “D” band, “E” band, “M” band, “L” band, “F” band, “G” band, “I” band and “J” band licenses; |
| · | according to the Invitation Document 002/2010/ANATEL, a single SMP operator in one geographic area will only be authorized to have radio frequency bands up to the total maximum limit of 80 MHz or 85 MHz, depending on the circumstances, while observing the following limits for each band: |
I – (12.5 + 12.5) MHz, for the 800 MHz bands;
II – (2.5 + 2.5) MHz, for the 900 MHz bands;
III – (25 + 25) MHz, for the 1800 MHz bands;
IV – (15 + 15) MHz, for the 1900 MHz and 2100 MHz bands;
V – 5 MHz, for the TDD extensions of 1900 MHz band;
| · | as a result, Nextel and other new 3G operators were given preferential status in the “H” band ((10 + 10) MHz) segment of the auction. Vivo, TIM and Claro were eligible to enter bids for the remaining SMP frequencies. Oi acquired the band “H” lot 8 (for the cities in the states of Mato Grosso do Sul and Goiás). CTBC acquired the band “H” lot 5 (for the cities in the state of Minas Gerais) and Nextel acquired the other band “H” lots; and |
| · | a cellular operator, or its respective controlling shareholders, may not have geographical overlap between licenses. |
According to the Invitation Document 002/2010/ANATEL, a single SMP operator in one geographic area will only be authorized to have radio frequency bands until the total maximum limit of 80 MHz or 85 MHz, regardless of the type of frequency band. Pursuant to the SMP services regulation each of the three main regions is divided into registration areas, or tariff areas.
On February 3, 2003, TCO replaced its SMC Concession Contracts for Personal Mobile Service Agreements (Termos de Autorização do Serviço Móvel Pessoal) in Regions I (subrange of “B” frequencies) and II (subrange of “A” frequencies) of the General Plan of Grants. On December 10, 2002, Telerj Celular, Telest Celular, Telebahia Celular, Telergipe Celular, Celular CRT, Global Telecom and TELESP Celular replaced its SMC Concession Contracts for Personal Mobile Service Agreements, or SMP, in Regions I (subrange of “A” frequencies), II (subrange of “A” and “B” frequencies) and III (subrange of “A” frequencies) of the General Granting Plan. On July 27, 2006, ANATEL published Act 59867 authorizing the incorporation of TCO, Teleacre, Telegoiás, Teleron, Telems, Telemat, NBT, Telerj, Telest, Telebahia, Telergipe, Celular CRT and TC by GT, as well as the transfer of the respective SMP service authorization titles and of the SMP radio-frequency rights-of-use titles. Act 59867 also provides for the automatic termination of the authorizations for Multimedia Communication Services (Serviços de Comunicação Multimídia, or SCM) of TCO, Teleacre, Telegoiás, Teleron, Telems, Telemat, NBT, Telerj, Telest, Telebahia, Telergipe, Celular CRT and TC, upon each of their respective incorporations.
In order to transfer our services to SMP, we were required to comply with several technical and operational conditions, including, among other things, the adoption of a carrier selection code for long-distance calls originating from our network.
Our authorizations consist of two licenses—one to provide mobile telecommunications services, and another to use the frequency spectrum for a period of 15 years. The frequency license is renewable for another 15-year period upon the payment of an additional license fee.
Our new SMP licenses include the right to provide cellular services for an unlimited period of time but restrict the right to use the spectrum according to the schedules listed in the old licenses (Vivo-Rio Grande do Sul (“A” band) until 2022 (renewed in 2006); Vivo-Rio de Janeiro (“A” band) until 2020 (renewed in 2005); Vivo-Espírito Santo (“A” band) until 2023 (renewed in 2008); Vivo-Bahia (“A” band) and Vivo-Sergipe (“A” band) until 2023 (renewed in 2008); Vivo-São Paulo (“A” band) until 2023 or 2024, for the cities of Ribeirão Preto and Guatapará (renewed in 2008); Vivo-Paraná/Santa Catarina (“B” band) until 2013; Vivo-Federal District (“A” band) until 2021, (renewed in 2006); Vivo-Acre (“A” band), Vivo-Rondônia (“A” band), Vivo-Mato Grosso (“A” band) and Vivo-Mato Grosso do Sul (“A” band) until 2024 (renewed in 2008); Vivo-Goiás/Tocantins (“A” band) until 2023 (renewed in 2008); Vivo-Amazonas/Roraima/Amapá/Pará/Maranhão (“B” band) until 2013; Vivo (Minas Gerais) (“A” band) until 2023 (renewed in 2007) and Vivo (for the cities where CTBC Telecom operates in the state of Minas Gerais) (“E” band) until 2020). Spectrum rights may be renewed only once over a 15-year period.
In September 2007, ANATEL organized auctions of new SMP licenses in the remaining radio frequency bands “D” and “E,” in the 1.8 GHz frequency band “M,” and fifteen licenses in the 1.9 GHz frequency band “L,” previously allocated to fixed operators. Vivo acquired 13 spectrum licenses in band “L.” The following Terms of Authorization for band “L” have been signed: Vivo-Rio Grande do Sul (“L” band) until 2022 (renewed in 2006) or 2022 for the cities of the metropolitan area of Pelotas; Vivo-Rio de Janeiro (“L” band) until 2020 (renewed in 2005); Vivo-Espírito Santo (“L” band) until 2023 (renewed in 2008); Vivo-Bahia (“L” band) and Vivo-Sergipe (“L” band) until 2023 (renewed in 2008); Vivo-São Paulo (“L” band) until 2023 or 2024, for the cities of Ribeirão Preto and Guatapará (renewed in 2008) or 2022 for the cities where CTBC Telecom operates in the state of São Paulo; Vivo-Paraná (excluding the cities of Londrina and Tamarana)/Santa Catarina (“L” band) until 2013; Vivo-Federal District (“L” band) until 2021, (renewed in 2006); Vivo-Acre (“L” band), Vivo-Rondônia (“L” band), Vivo-Mato Grosso (“L” band) and Vivo-Mato Grosso do Sul (“L” band) until 2024 (renewed in 2008) or 2022 for the city of Paranaíba of Mato Grosso do Sul; Vivo-Goiás/Tocantins (“L” band) until 2023 (renewed in 2008) or 2022 for the cities where CTBC Telecom operates in the state of Goiás and Vivo-Alagoas/Ceará/Paraíba/Piauí/Pernambuco/Rio Grande do Norte (“L” band), until 2022. Spectrum rights may be renewed only once over a 15-year period.
In December 2007, ANATEL organized auctions for 36 new licenses in the 1900-2100 MHz radio frequency bands (3G licenses), denominated as bands F, G, I and J. Vivo was awarded seven spectrum licenses in band “J” and Vivo Participações was awarded two licenses. The following Terms of Authorization for “J” band have been signed: Vivo-Rio Grande do Sul (including the cities of the metropolitan area of Pelotas) (“J” band) until 2023; Vivo-Rio de Janeiro (“J” band) until 2023; Vivo-Espírito Santo (“J” band) until 2023; Vivo-Bahia (“J” band) and Vivo-Sergipe (“J” band) until 2023; Vivo-São Paulo (including the cities of Ribeirão Preto and Guatapará and the cities where CTBC Telecom operates in the state of São Paulo) (“J” band) until 2023; Vivo-Paraná (including the cities of Londrina and Tamarana)/Santa Catarina (“J” band) until 2023; Vivo-Federal District (“J” band) until 2023; Vivo-
Acre (“J” band), Vivo-Rondônia (“J” band), Vivo-Mato Grosso (“J” band) and Vivo-Mato Grosso do Sul (including the city of Paranaíba) (“J” band) until 2023; Vivo-Goiás (including the cities where CTBC Telecom operates in the state of Goiás)/Tocantins (“J” band) until 2023; Vivo-Alagoas/Ceará/Paraíba/Piauí/Pernambuco/Rio Grande do Norte (“J” band), until 2023; Vivo-Amazonas/Roraima/Amapá/Pará/Maranhão (“J” band) until 2023; Vivo (including the cities where CTBC Telecom operates in the state of Minas Gerais) (“J” band) until 2023. Spectrum rights may be renewed only once over a 15-year period.
In December 2010, ANATEL organized auctions for 165 new licenses in the “H” band, extension bands, and available frequencies at “A,” “D,” “E,” “M” and TDD bands. Vivo was awarded 23 licenses (14 spectrum licenses in 1800 MHz bands (“D,” “E,” “M” and extension bands) and 9 spectrum licenses in 900 MHz extension bands):
| · | “M” band (1800 MHz) of the Federal District and the states of Paraná, Santa Catarina, Rio Grande do Sul, Goiás, Tocantins, Mato Grosso do Sul, Mato Grosso, Rondônia and Acre; |
| · | 1800 MHz extension band of the state of São Paulo; |
| · | “D” band (1800 MHz) of the cities of Pelotas, Morro Redondo, Capão do Leão and Turuçu in the state of Rio Grande do Sul; |
| · | “E” band (1800 MHz) of the states of Alagoas, Ceará, Paraíba, Piauí, Pernambuco and Rio Grande do Norte; |
| · | 900 MHz extension band of the state of Rio de Janeiro; |
| · | 900 MHz extension band of the state of Espírito Santo; |
| · | 900 MHz extension band of the states of Goiás, Tocantins, Mato Grosso do Sul, Mato Grosso, Rondônia, Acre and the Federal District, with the exception of the cities of Paranaíba, in the state of Mato Grosso do Sul, and the cities of Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão, in the state of Goiás; |
| · | 900 MHz extension band of the state of Rio Grande do Sul, with the exception of the cities of Pelotas, Morro Redondo, Capão do Leão and Turuçu; |
| · | 900 MHz extension band of the cities of the registration area number 43 of the state of Paraná, with exception of the cities of Londrina and Tamarana; |
| · | 900 MHz extension band of the states of Paraná and Santa Catarina, with exception of the cities of the registration area number 43 of the state of Paraná and the cities of Londrina and Tamarana; |
| · | 900 MHz extension band of the state of Bahia; |
| · | 900 MHz extension band of the state of Sergipe; |
| · | 900 MHz extension band of the states of Amazonas, Amapá, Maranhão, Pará and Roraima; |
| · | 1800 MHz extension band of the state of São Paulo, with exception of the cities of the metropolitan region of São Paulo and the cities where CTBC Telecom operates in the state of São Paulo; |
| · | 1800 MHz extension band of the states of Amazonas, Amapá, Maranhão, Pará and Roraima; |
| · | 1800 MHz extension band of the city of Paranaíba, in the state of Mato Grosso do Sul; |
| · | 1800 MHz extension band of the cities of Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão, in the state of Goiás; |
| · | other 1800 MHz extension band of the cities of Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão, in the state of Goiás; |
| · | 1800 MHz extension band of the states of Rio de Janeiro, Espírito Santo, Bahia and Sergipe; |
| · | 1800 MHz extension band of the states of Amazonas, Amapá, Maranhão, Pará and Roraima; |
| · | 1800 MHz extension band of the states of Alagoas, Ceará, Paraíba, Piauí, Pernambuco and Rio Grande do Norte; |
| · | 1800 MHz extension band of the city of Paranaíba, in the state of Mato Grosso do Sul, and the cities of Buriti Alegre, Cachoeira Dourada, Inaciolândia, Itumbiara, Paranaiguara and São Simão, in the state of Goiás; |
| · | 1800 MHz extension band of the cities of Londrina and Tamarana, in the state of Paraná; and |
| · | 800 MHz (Band A in the North), 1800 MHz (extension subbands in Region II, within the states of São Paulo and Espírito Santo, Ceará and Pernambuco) and TDD (National coverage). |
Obligations of Telecommunications Companies
We and other telecommunications service providers are subject to obligations concerning quality of service, network expansion and modernization. The six public sectorconcession telecommunication companies are also subject to a set of special restrictions regarding the services they may offer, which are listed in the Plano Geral de Outorgas(PGO), or General Plan of Grants, and special obligations regarding network expansion and modernization contained in the General Plan on Universal Service Targets.
In 2008, the presidential decree published with the General Plan of Grants increased the flexibility of telecommunications provider groups as STFC concessionaires by allowing such providers to provide services in up to two General Plan of Grants regions. Prior toBefore this decree, telecommunications provider groups holding STFC concessions could offer STFC services in only one region.region under the public regime.
Any breach by the companies of telecommunications legislation or of any obligation set forth in their authorizations may result in a fine of up to R$50 million.
The mobile service authorizations of our subsidiary Vivo involve obligations to meet quality of service standards the system’s ability to make and receive calls, call failure rates, the network’s capacity to handle peak periods, failed interconnection of calls and customer complaints. ANATEL published the method for collecting these quality service standards data on April 23, 2003 (ANATEL Resolution No. 335/03 and 317/02). In July 2010, ANATEL published Public Consultation No. 27/2010, revising the General Plan of Standards of Quality of the SMP.
To restructure the process of assessing the quality of mobile service, with the inclusion of new processes and measurement of new indicators to check the quality of mobile broadband and the quality perceived by the user, and the modernization of existing indicators, ANATEL issued on October 28, 2011 (published in the D.O.U. on October 31, 2011), Resolution No. 575/2011, which approved the Regulation for the Management of Quality of Provision of Personal Mobile Service (SMP-RGQ).
The new Regulation provides for the assessment of the network connection and their respective data transmission rate, assessing aspects of availability, stability and connection speed for the data network. In addition, the rule established the formation of GIPAQ (Group Deployment Process Quality Measurement), which will be responsible for implementing the processes on the quality indicators for the “Instant Transmission Rate Guarantee “and “Average Transmission Rate Guarantee.”
The methodology and procedures regarding the collection of data connection indicators will be defined by a group composed of providers, ANATEL Aferidora and Quality Authority (EAq), which shall be responsible for implementing these processes and which will be hired by the mobile operators, as a group, starting with February 29, 2012. All costs associated with implementing the new procedures for measuring quality will be borne by the providers of SMP services. The impacts of the regulations are still being evaluated, particularly its financial aspects.
Restrictions on Companies to Provide STFC in the Public Regime
Public sectorregime companies are also subject to certain restrictions on alliances, joint ventures, mergers and acquisitions, including:
| · | a prohibition on holding more than 20% of the voting shares in any other public sectorregime company, unless previously approved by ANATEL, according to the General Telecommunications Law; |
· | a prohibition on public sector companies that provide different services restricting the provision of more than one service at a time;ANATEL’s Resolution No. 101/99; and |
· | various restrictions· | a prohibition on the offering of cable television by concessionarypublic regime companies to provide similar services through related companies. |
Network Expansion &and Quality of Service
We are subject to the General Plan for Universal Service Targets (Plano Geral de Metas para a Universalização) and the General Plan forof Quality Targets (Plano Geral de Metas de Qualidade), each of which respectively requires that we undertake certain network expansion activities with respect to our fixed-line services and meet specified quality of service targets. The timing for network expansion and benchmarks for quality of service are revised by ANATEL from time to time. No subsidies or other supplemental financingsAfter two public consultations, ANATEL and the Federal Government are anticipatedstill discussing the new General Plan for Universal Service Targets to finance our network expansion obligations.be in effect for the period from 2011 to 2015, which became part of the amended concession agreement on June 30, 2011.
The decree altering the General Plan for Universal Service Targets rescinded in 2008 the obligation of telecommunications concessionaires to install telecommunications service centers (providing calling and data access to walk-in customers) and substituted such obligation with an obligation to roll out broadband network infrastructure throughout the municipalities serviced by such concessionaires. According to thisIn compliance with the decree, in 2011, all municipalities in Brazil are expected to have the necessaryhad infrastructure for broadband networking by 2010.networking. This obligation will requiremade us to roll outimplement an additional network infrastructure toin 257 of the 622 municipalities in our concession region, representing approximately 3% of the population in our concession region (though this regulation will require us to expand our network throughout substantially all of our concession region).region.
Moreover, as part of the General Plan for Universal Service Targets, we have, as have other telecommunications concessionaires, committed to provide free internetInternet access to public schools during the term of our concession grant (until 2025). This will require usIn 2011, we started offering plans with new channels in high definition (HD)—up to connect approximately 9,200 schools11 paid channels in HD, offering premium content to our concession region, 80%customers and new local channels to increase penetration of which must be connected by December 31, 2009, with full connectivity by the endservice in some areas of 2010.coverage.
If a public sectorregime company does not fulfill its obligations under the General Plan for Universal Services and the General Plan for Quality Targets, there are various monetary penalties that may be imposed by ANATEL. A company may lose its license if ANATEL considers it incapable of providing basic services under the two General Plans.
InterconnectionGeneral Plan for the Universalization of the Fixed Switched Service (PGMU III)
On June 30, 2011 the Brazilian government published Decree No. 7,512 related to the General Plan for the PGMU III. The PGMU III sets new targets for Telefone de Uso Público (public phones) density in rural and poor areas and goals related to AICE and bidding for the 450 MHz and 2500 MHz spectrum ranges (to, respectively, meet the needs of rural regions and develop fourth generation mobile telephony). Also according to the new PGMU, the backhaul used to meet the commitments of universalization was characterized as a reversible asset.
ANATEL approved other resolutions and consents in 2011:
| · | STFC Local Areas Rules: On February 9, Resolution No. 560/2011 was published approving the STFC Local Area Rules. This regulation establishes guidelines and criteria for setting Local Areas for Fixed STFC for the use of the general public. |
| · | Resolution No. 573/2011: On October 10, ANATEL authorized the free establishment of prices for Long-distance International calls (LDI). The resolution sets out the implementation of the new regime from January 1, 2016 and before that, providers must demonstrate compliance with standards set forth in the resolution. |
| · | Prior Consent for transfer of STFC licenses outside the State of São Paulo for Vivo: ANATEL granted on August 18 prior consent to the transfer from the Company to Vivo of the concessions for the provision of local STFC services, domestic long-distance and international long-distance services in Regions I and II of the General Plan of Grants (outside São Paulo). On September 8, 2011, the extract of the authorization term was published on the D.O.U. for the transfer of STFC licenses in Regions I and II to Vivo. As a result, Vivo began to offer the STFC through the GSM technology across its area, except for the State of São Paulo. |
The following Public Consultations held by ANATEL in 2011 were not adopted as resolutions:
| · | Regulation of the Special Class Individual Access (AICE): Public Consultation No. 11/2011 is related to the proposal for AICE, which regulates the provision of compulsory service plans for low-income families. The consultation seeks to amend Resolution No. 427/2005 by modifying the offer of phones with a monthly fee for about R$9.50 (without tax) for low-income clients registered in the social program “Bolsa Família.” The main purpose of the consultation is the progressive universalization of access to the STFC through individualized specific conditions for use, special rates and methods of payment. |
| · | Standard Calculation for the Transfer Factor X: ANATEL, as provided in the General Telecommunications Law and in specific legislation, proposed through Public Consultation No. 39 the review of the STFC productivity factor, known as Factor X, which acts as a mechanism to encourage greater production efficiency by transferring to the client part of the economic gains resulting from the modernization, expansion or rationalization of services, as well as new alternative revenues to STFC providers. The main proposed changes are: (i) the Factor X calculation method by type of service and company; (ii) the Recomposition Factor (Fator de Recomposição) of the margin applied to local mode considers the net additions of AICE and other plans related to regulatory requirements, and the concept of Economic Value Added (EVA) that considers the cost of capital of the company in calculating the Factor X, and a model based on future projections (forward looking). |
| · | General Plan of Competition (PGMC): another important action of ANATEL to maintain competition in the telecommunications industry, and in line with the framework of the “General Plan for the Update of Telecommunications Regulation in Brazil” (PGR), consisted of publication of a public consultation with the aim of establishing a General Plan of Competition (PGMC). Responses to this consultation were originally accepted until October 8, 2011 and extended until October 23, 2011. The PGMC was proposed by ANATEL to organize a control scheme for the actions of economic agents in the telecommunications industry, imposing, removing or altering obligations on providers, according to their market power, with a view to increasing competition. The consultation highlighted the reservation of network capacity for sharing and provided criteria for determination of significant market power in the provision of interconnection services on mobile networks. |
The consultation also provides sets of regulatory measures applicable to groups with significant market power: structural measures (applicable to all markets) and specific measures (applicable only to specific markets). The consultation also contained provisions for the creation of three entities: the “Representative” (responsible for gathering the groups without SMP and represent them in case of conflict), the “Supervisor” (responsible for resolving conflicts between groups with and without SMP and assess or certify wholesale offers) and the “Comparer” (responsible for receiving and comparing offers retail).
| · | Review of Regulation of Multimedia Communication Service (SCM): A revision of the SCM was discussed by Public Consultation No. 45/2011. The proposal deals with the supply of the SCM and issues related to network neutrality, storage of subscriber data and other obligations for the provision of service. |
Below is a summary of Public Consultations issued by ANATEL in 2011 which have not yet become regulation, but may be later issued by ANATEL:
| · | Public Consultation No. 11: Regulation of the Special Class of Individual Access (AICE), which regulates the provision of compulsory service plan for low-income families. The deadline for submissions was April 30, 2011. |
| · | Public Consultation No. 16: Proposal for a regulation aimed at managing the quality of fixed-line service (RGQ STFC). The deadline for submissions was May 6, 2011. |
| · | Public Consultation No. 23: Proposal for Public Bidding for the Issuance of Authorizations for the Use of Radio in Sub-band segments of 3,400 MHz to 3,600 MHz for the SCM, the STFC for the General Public and SMP. The deadline for submissions was July 27, 2011. |
| · | Public Consultation No. 26: Proposal for the new General Plan of Quality for Subscription Television Services, to be called the Quality Management Regulation for Providers of Subscription Television Services. The deadline for submissions was July 7, 2011. |
| · | Public Consultation No. 31: Regulation of Cable TV Service. The deadline for submissions was July 26, 2011. |
| · | Public Consultation No. 32: Proposal for a term of authorization to operate the cable TV service (current concessions). The deadline for submissions was July 26, 2011. |
| · | Public Consultation No. 33: Proposal for a term of authorization to operate the service Cable TV (new grants). The deadline for submissions was July 26, 2011. |
| · | Public Consultation No. 39: Standard methodology for the calculation of transfer factor “X,” applied tariff adjustments in the STFC. The deadline for submissions was September 2, 2011. |
| · | Public Consultation No. 41: Proposed General Plan of Competition (PGMC). The deadline for submissions was October 23, 2011. |
| · | Public Consultation No. 45: Proposed Amendment to Regulation of the Communication Services and Annexes I and III of the Rules of Price Collection for the Right of Public Telecommunications Services Exploration and Exploitation of the Satellite Rights. The deadline for submissions was September 16, 2011. |
Summary of Public Consultations in 2011
During 2011, ANATEL issued two public consultations directly and indirectly affecting the SMP:
| · | Public Consultation No. 23: Proposal for Bidding for Shipment Authorization for Use of Radio in Sub-band segments of 3,400 MHz to 3,600 MHz for the SCM, the STFC and SMP. This Public Consultation’s period was extended until July 25, 2011. The corresponding rule was not yet published by ANATEL. |
| · | Public Consultation No. 39: Standard methodology for the calculation of transfer factor “X,” applied tariff adjustments in the STFC. This Public Consultation’s period ended February 9, 2011. The corresponding rule was not yet published by ANATEL. |
| · | Public Consultation No. 45: Proposal to Amend the Regulation of Communication Services and Annexes I and III of the Rules of Price Collection of the Right to Public Telecommunications Services Exploration and Exploitation of the Right to Satellite. This Public Consultation’s period ended September 16, 2011. The corresponding rule was not yet published by ANATEL. |
Other Regulatory Issues
On November 21, 2008, the Brazil Government published the 6,654/2008 Decree, dated November 20, 2008, for the revision of the fixed-line General Plan of Grants, allowing fixed-line concessionaires to operate in more than one region of the country. This change allowed Telemar Norte Leste S.A.—Telemar or Oi— to acquire Brasil Telecom.
In compliance2007, ANATEL published Resolution No. 477/2007, effective on February 13, 2008, relating to alterations in the regulation of SMP, which has contributed to an increase in our operating costs. In the new regulation, ANATEL notes areas of vital importance for mobile business, such as the necessity for retail stores in the cities within an operator’s coverage areas, increases in the validity periods of prepaid cards and places limits on the period of time
during which customers may not leave service plans. These new regulations may have an adverse effect on our revenues and results of operations. To minimize the impacts resulting from these regulatory changes, we had already prepared ourselves during the last quarter of 2007, to meet and comply with resolution 458the terms set forth by the new regulation, mainly those related to the customer service which affect procedures and required significant changes to our systems. In 2009, we continued establishing retail stores in the cities within our coverage areas, pursuant to the provisions of Resolution No. 477/2007. In 2009, we also established mediation centers to attend to users with hearing and speech impediments, pursuant to the provisions of Resolution No. 477/2007. Our plans for achieving the goals set by this new regulation was extend to August 13, 2011 and all goals relating to Resolution No. 477/2007 were achieved by the Company and certified by ANATEL. Because ANATEL considers Vivo to be affiliated with Telefônica Brasil, which already provides wire line long-distance services in the state of São Paulo and was awarded a license to provide these services nationwide, ANATEL will not award a wire line long-distance license to Vivo. Though we and other mobile operators have requested that ANATEL revise the current SMP regime, there can be no assurance it will do so.
ANATEL granted on August 18, 2011 prior consent to the Company to transfer to Vivo its authorizations for STFC service in local mode, domestic long-distance and international long-distance in Regions I and II of the General Plan of Grants (outside of São Paulo). On September 8, 2011 the Extract of the Authorization Term was published in the D.O.U. with the transfer of the STFC licenses in Regions I and II to Vivo. As a result, Vivo began to offer the STFC across its area, except for the State of São Paulo, using basically the network elements and some radio frequencies that support the provision of the SMP.
Under the SMP regime, we receive revenues from interconnection fees paid to us by wire line long-distance operators due to long-distance traffic originating and terminating on our network. While Vivo is not obligated to use Telefônica Brasil’s fixed-line network due to the affiliation relationship, it also cannot receive its own fixed-line license in the event of disagreements with Telefônica Brasil since Telefônica Brasil has the fixed nationwide license and an affiliate cannot have the same type of license in the same area. Since Vivo is not permitted to have a fixed license, Vivo is only able to receive interconnection fees from wire line carriers that have traffic originating or terminating on their network but not from wireless carriers using their fixed-line network. Some of our wireless competitors are also unable to earn such a fixed license due to their affiliations. For example, Oi cannot have a fixed license because it is affiliated with Telemar and Claro cannot have a fixed license because it is affiliated with Embratel. Tim has a fixed license because is not affiliated with any fixed operator, but in July 2009, ANATEL published Act No. 3804/2009 determining the conditions to be followed to guarantee total separation between Tim (Telecom Italia) and our subsidiaries.
On March 24, 2011, ANATEL approved the corporate restructuring of Vivo Participações S.A. and Vivo, which are now controlled by the Company and not by Brasilcel. The operation resulted in the final merger of shares of Vivo Participações into the Company. See “Item 4. History and Development of the Company–A. Historical Background–Corporate Restructuring Involving Vivo Participações S.A.”
On August 18, 2011, through Act 5,703/2011, dated August 16, 2011, ANATEL approved the merger of Vivo Participações S.A. into the Company, with the transfer of the SMP authorizations and respective authorizations terms held by Vivo Participações to Vivo, as well as the resignation by Vivo of its SCM authorization.
New Regulations for Restricted Access Services– SeAC
On September 12, 2011, the Brazilian Congress adopted Law 12,485/2011 as a result of Bill 116, which establishes a new legal framework for audiovisual communication with restricted access. This law opens the Pay TV market by enabling telecom operators to offer audiovisual content to subscribers through their networks, creating a new service called Restricted Access Services (Serviço de Acesso Condicionado, or SeAC). The absence of restrictions on foreign capital to be invested in SeAC providers, as well as the elimination of restrictions for the provision of other telecommunications services through STFC, allow us to provide Pay TV services, as well as other telecommunication services previously limited under the General Telecommunications Law.
According to Law 12,485/2011, the SeAC service will replace current cable subscription TV services, subscription TV, MMDS and DTH and will be regulated by ANATEL. As a result of this law, ANATEL introduced
in December 2011 the proposed regulations for Pay TV services through Public Consultation No. 65/2011, including license grants, installation and licensing of stations and mandatory distribution programming channels. The Public Consultation was finalized on February 2, 2012 and resulted in Resolution No. 581, issued by ANATEL on March 28, 2012, as well as the new Authorization Terms of the SeAC (which were subject to Public Consultation No. 5/12 and were available for comments until the first week of February).
Law No. 12,485/2011 also established an annual payment to Condecine (Contribuição para o Desenvolvimento da Indústria Cinematográfica) to be made by providers of telecommunication services and amended Law No. 5,070/1966 by revising the amount due as Inspection Fee (Taxa de Fiscalização de Funcionamento) for telecommunication stations from 45% to 33% of the Instalation Fee (Taxa de Fiscalização de Instalação). The amount due to Condecine is approximately 12% of the Installation Fee for telecommunication services and must be paid yearly by March 31 of each year.
As a result of Law No. 12,485/2011, the National Cinema Agency (Agência Nacional do Cinema, or Ancine) issued one public consultation by the end of 2011 and one public consultation in 2012 to regulate the registration of economic agents before Ancine. Both public consultations remain under Ancine’s review and are expected to be issued in 2012, as they will become the regulatory framework for the SeAC.
Interconnection Regulation
Under the General Telecommunications Law, all mobile telecommunications service providers must provide interconnection upon the request of any other mobile or fixed-line telecommunications service provider. More specifically, telecommunications service providers are classified as providers of either collective or restricted services. All cellular operators, including SMP service providers, are classified by ANATEL as collective service providers. All providers of collective services are required to provide interconnection upon request to any other collective service provider. Since 2005, telecommunications service providers have been permitted to freely negotiate the terms and conditions upon which interconnection will be provided, subject to price caps and other rules established by ANATEL. For example, providers must enter into agreements regarding, among other things, tariffs, commercial conditions and technical issues with all parties on a nondiscriminatory basis and starting in 2005, to have a more homogeneous system and to accelerate the negotiation of interconnection contracts, ANATEL has required a standard interconnection network from STFC and SMP Operators through an offer made publicly and equitably.
If parties to an interconnection agreement cannot agree upon the terms and conditions of interconnection, ANATEL may determine those terms and conditions by arbitration. Interconnection agreements must be approved by ANATEL and may be rejected if they are contrary to the principles of free competition and the applicable regulations. ANATEL has adopted, from time to time, various regulations governing interconnection rules. The following are the material regulations currently applicable to our business:
| · | the new General Regulation of Interconnection (“Regulamento Geral de Interconexão”–Resolution No. 410/2005, or “RGI”); |
| · | the Regulation of Separation and Allocation of Costs (Resolution No. 396/2005); |
| · | the Regulation of Industrial Exploration of Dedicated Lines (“Exploração Industrial de Linha Dedicada”–Resolution No. 402/2005, or “EILD”). In December 2010, ANATEL published Public Consultation No. 50/2010, with the Proposal for Revision of the Resolution No. 402/2005; |
| · | the Regulation of Remuneration of Use of SMP Providers Networks (Resolution No. 438/2006). In November 2010, ANATEL published Resolution No. 549/2010 modifying Resolution No. 438/2006 and providing that the groups that include SMP operators with participation rates lower than 20% in the market of mobile telephony combined in each one of the regions of the General Plan of Authorizations of SMP (PGA-SMP), are considered groups who lack significant market power in the offer of mobile interconnection, in their respective areas of authorization; |
| · | the Regulation of Fixed and Wireless Number Portability (Resolution No. 460/2007, effective March 2009); |
| · | the new Regulation of SMP (Resolution No. 477/2007, effective February 13, 2008); |
| · | the Regulation of Terms of Separation and Allocation of Costs (Resolutions No. 480/2007, 483/2007 and 503/2008); |
| · | the general plan of update of the regulation of the telecommunications in Brazil (“Plano Geral de Atualização da Regulamentação das Telecomunicações do Brasil” – Resolution No. 516/2008, or “PGR”); |
| · | the general norms of customer interaction service by telephone, with the objective of improving the quality of services (Decree No. 6523/2008); |
| · | the Methodology of the Calculation of the WACC (Resolution No. 535/2009); |
| · | amendment of the regulation of the 3400 MHz to 3600 MHz band, allowing it to apply additionally to mobile services (Resolution No. 537/2010); |
| · | the regulation of the Broadband Power Line (BPL), allowing this service to apply to multimedia communication (SCM) (Resolution No. 527/2009); |
| · | related Invitation Document No. 002/2007/SPV-ANATEL regarding the auction organized in December 2007 of new licenses for the 1900-2100 MHz radio frequency bands (3G licenses), denominated bands “F,” “G,” “I” and “J,” which stated that, within a maximum allowed period of eighteen months from the publication of the Terms of Authorization (it occurred on April 30, 2008), the authorizations resulting from this auction would be combined with the existing SMP authorizations of the bid winners when pertaining to the same region of the general authorization plan of SMP. In accordance with this Invitation Document, in January 2010, ANATEL published an act determining the unification of our SMP authorizations in Regions II (states of Paraná, Santa Catarina, Rio Grande do Sul, Goiás, Tocantins, Mato Grosso do Sul, Mato Grosso, Rondônia, Acre and the Federal District) and III (state of São Paulo) of the PGA-SMP, with only one SMP authorization for each of these Regions (Terms of Authorization No. 005/2010 and 006/2010, signed in January 2010, for Region II and III, respectively). Vivo acquired spectrum licenses in band “J” in regions where it possesses SMP licenses. Moreover, the Invitation Document modified the rule for the renewal of radio frequency licenses and requires the inclusion in the calculation of the operating profits both the profits arising from remuneration for the use of the SMP network and the profits of the service plans; |
| · | related Invitation Document No. 002/2010/ANATEL, regarding the auction organized in December 2010 of new licenses for the 1900-2100 MHz radio frequency band denominated the “H” band, for extension bands and for available frequencies at “A,” “D,” “E,” “M” and TDD bands, which modified the rule for the renewal of radio frequency licenses and requires the inclusion in the calculation of the operating profits both the profits arising from remuneration for the use of the SMP network and the profits of the service plans; |
| · | the regulation for the exploration of SMP by means of Virtual Network, which makes possible the creation of the “agent” and the Authorized of Mobile Virtual Network (Resolution No. 550/2010). In accordance with this regulation approved by ANATEL, Mobile Virtual Network Operators may operate either as agents or as virtual network licensees. An agent represents the personal mobile service provider through the establishment of a representation agreement, which must be ratified by ANATEL. The agent’s activity is not defined as a “telecommunications service” so this is of significant interest to companies that operate in other sectors such as large retailers, banks and football teams. However, the activity of the virtual network licensee does fall within the definition of “telecommunications service” and is thus subject to all applicable rules; |
| · | the assignment of the bands of 451 MHz to 458 MHz and 461 MHz to 468 MHz to the Personal Mobile Service, Fixed Switched Telephone Service and to the Multimedia Communication Service, for access to the services of telephony and data in broadband, particularly in rural areas (Resolution No. 558/2010); |
| · | the assignment of the bands of 2500 MHz to 2690 MHz to the Personal Mobile Service and Fixed Switched Telephone beyond Multimedia Communication Service and Pay Television by means of Multichannel Multipoint Distribution Service (MMDS) for which it was previously assigned (Resolution No. 544/2010); |
| · | the regulation for evaluation of the efficiency of use of the radio frequency spectrum (Resolution No. 548/2010); and |
| · | the addition of a ninth digit in the numbers of the mobile telephones of area 11, raising the capacity of numeration in the metropolitan region of São Paulo and eliminating definitively the problem of scarcity of numeration in this area (Resolution No. 553/2010). |
· | with an aim to restructure the process of assessing the quality of mobile service, with the inclusion of new processes and measurement of new indicators to verify the quality of mobile broadband and the quality perceived by the user, and the modernization of existing indicators, ANATEL issued on October 28, 2011 (published in the D.O.U. on October 31, 2011), Resolution No. 575/2011, which approved the Regulation for the Management of Quality of Provision of Personal Mobile Service (SMP-RGQ). The new Regulation innovates by providing assessments of the network connection and their respective data transmission rate, especially aspects of availability, stability and connection speed data network. In addition, the resolution established the formation of “GIPAQ” (Group Deployment Process Quality Measurement), which will be responsible for implementing the processes on the quality indicators for the “Guaranteed Instant Transmission Rate” and “Guaranteed Average Transmission Rate.” The methodology and procedures regarding the collection of indicator data for data connections will be defined by this group, composed of providers, ANATEL and a “Quality Measurement Authority” (EAq), which shall be responsible for implementing these processes and will be hired by the service providers until February 29, 2012. All costs associated with implementing the new procedures for measuring quality will be paid by providers of the SMP and the impacts of the Regulations are still being evaluated, mainly its financial aspect. Also, through the issuance of Resolution No. 574/2011, which approved the Rules of Quality Management (SCM-SCM RGQ) on October 28, 2011 (published in the D.O.U. on October 31, 2011), ANATEL set targets for service quality, as well as updated definitions for indicators and their calculation methods. |
· | the Regulation on criteria for adjustment of tariffs for calls from the STFC involving access the SMP or SME, approved by Resolution No. 576/2011, dated October 28, 2011, establishes criteria for the gradual readjustment of VCs until 2014. With respect to VU-M fees, for the period before the effectiveness of the cost model established by this Resolution, ANATEL defined transition rules if no pact is reached regarding the VU-M fees. A reduction factor (R) to be applied in the formula for readjustment of the calls involving the PSTN access the Personal Mobile Service. |
| · | VCt ≤VCt0 x (1-R-FA) x (ISTt / ISTt0), where R corresponds to the “Reduction Factor” (Fator de Redução) and FA to the “Damping Factor” (Fator de Amortecimento), the percentage of which depends on inflation in the corresponding period. |
The Reduction Factor to be applied in the next readjustment of the VC rate for fixed-mobile calls will follow the schedule below:
| · | for the first readjustment, ANATEL will apply a Reduction Factor of 18%; |
| · | for readjustments to follow, ANATEL will apply a Reduction Factor of 12%; and |
| · | if the cost model has not yet produced results, the third readjustment will be subject to a Reduction Factor of 10%. |
The “Damping Factor” has the following scale: 0 if inflation is less than 10%; 0.01 if inflation is between 10% and 20% and 0.02 if inflation is above 20%.
For the VU-M fees, they remain freely negotiated and in case there is no agreement as a result of the new VC determined according the formula above, any reduction of these fees will be applied to the VU-M fee up to the VU-
M / VC1 ratio to achieve 70%. From this level, the reduction will also be assessed in other components of the VCs, maintaining this ratio.
Also in 2011, ANATEL issued a Public Consultation on the Plano Geral de Metas de Competição (General Plan of Competition), or PGMC, which has not yet been converted into an ANATEL resolution. The purpose of this consultation is to maintain competition in the telecommunications sector, in line with the framework established by the “General Plan for Update of Telecommunications Regulation in Brazil” (PGR). The PGMC was created by ANATEL was proposed by ANATEL to organize a control scheme for the actions of economic agents in the telecommunications industry, imposing, removing or altering obligations on providers, according to their market power, with a view to increasing competition. The consultation highlighted the reservation of network capacity for sharing and provided criteria for determination of significant market power in the provision of interconnection services on mobile networks.
The consultation also provides sets of regulatory measures applicable to groups with significant market power: structural measures (applicable to all markets) and specific measures (applicable only to specific markets). The consultation also contained provisions for the creation of three entities: the “Representative” (responsible for gathering the groups without SMP and represent them in case of conflict), the “Supervisor” (responsible for resolving conflicts between groups with and without SMP and assess or certify wholesale offers) and the “Comparer” (responsible for receiving and comparing offers retail).
Rate Regulation
With respect to our Basic Plan and certain roaming charges incurred in connection with alternative service plans, our authorizations continue to provide for a price cap mechanism to set and adjust rates on an annual basis. The cap is the value with the rate of inflation deducted from the productivity estimated by ANATEL. The price cap is revised annually to reflect the rate of inflation as measured by the IGP DI. However, mobile operators are able to freely set the rates for alternative service plans.
The initial price cap agreed to by ANATEL and us in our authorizations had been based on the previously existing or bidding prices, and was adjusted annually on the basis of a formula contained in our authorizations. The price cap has been revised to reflect the rate of inflation as measured by the IGP DI.
Other telecommunications companies that interconnect with and use our network must pay certain fees, primarily an interconnection fee. The interconnection fee is a flat fee charged per minute of use. Since 2005, ANATEL has permitted free negotiations for mobile interconnection, or VU-M, fees and by July 2005, local-fixed concessionaires and mobile operators had reached a provisional agreement with respect to VU-M fees for local calls, or VC1 (the agreement guaranteed a 4.5% increase in fees). ANATEL approved that provisional agreement, and in March 2006, approved another provisional agreement for VU-M fees for long-distance calls, VC2, VC3 and international, among the same operators that made the VC1 agreement.
In July 2007, new rulesANATEL approved a provisional agreement among the fixed-line operators Telefônica, Telemar, Brasil Telecom, CTBC Telecom and Sercomtel and the mobile operators for interconnection fees for VC1, VC2 and VC3 calls that provides for an annual adjustment of 1.97143% to interconnection fees in Region I (Telemar’s Region) and an annual adjustment of 2.25356% in Region II (Brasil Telecom’s Region) and Region III (Telefônica’s Region).
In January 2008, ANATEL approved a provisional agreement among the fixed-line long-distance operator Embratel and the mobile operators for interconnection fees for VC2 and VC3 calls, taking into consideration the period since January 2004, that provides for an annual adjustment of 4.5% as of March 2006 and an annual adjustment of 1.97143% or 2.25356% as of July 2007.
In July 2008, ANATEL approved a provisional agreement among the fixed-line operators Telefônica, Telemar, Brasil Telecom, CTBC Telecom and Sercomtel and the mobile operators for interconnection fees for VC1, VC2 and VC3 calls that provides for an annual adjustment of 1.89409% to interconnection fees in Region I (Telemar’s Region) and an annual adjustment of 2.06308% in Region II (Brasil Telecom’s Region) and Region III (Telefônica’s Region).
In March 2009, ANATEL approved a provisional agreement among the fixed-line long-distance operator Embratel and the mobile operators for interconnection fees for VC2 and VC3 calls, for the period from 2007 to 2008, that provides for an annual adjustment of 1.89409% in Region I (Telemar’s Region) or 2.06308% in Region II (Brasil Telecom’s Region) and Region III (Telefônica’s Region) as of July 2008.
In September 2009, even though it had a provisional agreement between the fixed-line operators Telefônica, Telemar, Brasil Telecom and Sercomtel and the mobile operators, without CTBC Celular, ANATEL decided not to approve the readjustment of the local (VC1) and long-distance (VC2 and VC3) fixed-to-mobile calls. In February 2010, this readjustment of the VC1, VC2 and VC3, relative to the period from 2008 to 2009, was approved by ANATEL and the provisional agreement of VU-M fee readjustment (68.5% of the approved readjustment of approximately 0.97% for the VC1) could be applied.
In June 2010, ANATEL approved a provisional agreement among the fixed-line long-distance operator Embratel and the mobile operators for interconnection fees for VC2 and VC3 calls, for the period from 2008 to 2009, for the application of the VU-M fee readjustment (68.5% of the approved readjustment of approximately 0.97% for the VC2 and VC3).
By the end of 2011, our subsidiary Vivo entered into an agreement with Oi (Regions I and II) and us (Region III) for the recognition of the VU-M fee paid at the time and agreed to maintain this amount for an additional 24 months, based on the VC1 readjustment pleaded by both these companies to ANATEL. However, these fees were introduced. The interconnectionnot approved by ANATEL due to the publication of ANATEL’s Resolution No. 576/2011, which addresses the criteria for adjustment of fees for calls from fixed-lines involving access to the SMP or SME. On January 25, 2012, ANATEL published Act No. 486, with the new fees for VC1, VC2 and VC3 (with an average reduction of 10.78%) and, on February 22, 2012, ANATEL published Act No. 1,055 with new VU-M fees (with an average reduction of 14%). However, Oi obtained an injunction in Federal Court to have its readjustment request analyzed by ANATEL. This decision is subject to appeal. See “—Interconnection Regulation.”
Also, ANATEL published the Invitation Document No. 002/2007/SPV-ANATEL, which relates to the December 2007 auction of new licenses for the 1900-2100 MHz radio frequency bands (3G licenses). Under this Invitation Document, the authorizations resulting from the auction of will be combined with the existing authorizations belonging to the bid winners when pertaining to the same region of the general authorization plan of SMP (PGA-SMP) in the period of eighteen months from the publication of the Terms of Authorization (which occurred on April 30, 2008).
As a result, ANATEL published in January 2010 an act determining the merger of our SMP authorizations in Regions II (State of Paraná, Santa Catarina, Rio Grande do Sul, Goiás, Tocantins, Mato Grosso do Sul, Mato Grosso, Rondônia, Acre and the Federal District) and III (state of São Paulo) of the PGA-SMP, with an SMP authorization for each one of these Regions (Terms of Authorization No. 005/2010 and 006/2010, signed in January 2010 for Regions II and III, respectively).
Moreover, ANATEL determined that the value of the VU-M fee should be unified for each Region of the PGA-SMP and freely negotiated beginning on November 1, 2009 (eighteen months from April 30, 2008). Until this date, mobile operators charged a VU-M fee for off-peak hours was reducedauthorization of the SMP. In February 2010, ANATEL defined the VU-M fee to be paid for Oi (fixed and mobile operators) and Brasil Telecom (fixed and mobile operators) to Claro, TIM, Vivo and Vivo Participações (the latter being the result of the ANATEL-authorized merger of Telemig Celular S.A. into Vivo Participações S.A. in March 2010), for the region of the PGA-SMP, as a result of the unification of the SMP authorizations.
In 2007, ANATEL developed a new model which will be in use starting with a date yet to be determined by 30%ANATEL to determine values of reference in connection with remuneration for use of mobile networks—RVU-M—of SMP providers having significant market power, which will be used in the case of arbitration by ANATEL of the value of VU-M. ANATEL did not implement this new model in 2010, as provided by Resolution No. 480/2007, and it was indicated thathas not yet defined the new date expected for such implementation. See “—SMP Licenses” for more information on the status of this agreement.
ANATEL launched on August 25, 2011 the “Project Cost Model” (Projeto Modelo de Custos). The project is associated, among other things, with determining fees for the use of the LRIC cost-based modelfixed telephony network and the calculation of reference values of the VU-M fee and EILD (Industrial Use of Dedicated Lines) for determining interconnection fee values will be accepted after 2009.telecommunications service providers.
At launch, ANATEL signed a US$8.22 million agreement with the consortium of Advisia, Analysis Mason and Grant Thornton, which has two years to perform work in support of ANATEL. This consortium won the international bidding process conducted by the International Telecommunication Union (ITU).
The cost model is of great relevance to ANATEL in carrying out public sector policies, as its development will allow access to cost management information of the different business areas and product lines of telecommunications services providers, contributing to the improvement of regulation of the sector as a whole.
Internet and Related Services in Brazil
In Brazil, Internet service providers, or ISPs, are deemed to be suppliers of value-added services and not telecommunications service providers. ANATEL’s Resolution No. 190 requires cable operators to act as carriers of third-party Internet service providers. The Brazilian House of Representatives is considering a law that would penalize Internet service providers for knowingly providing services that allow illegal goods or services to be sold on the Internet, and would impose confidentiality requirements on Internet service providers regarding nonpublic information transmitted or stored on their networks.
Customer Service
In 2011, our subsidiary Vivo managed to consolidate and expand the personalized sales project to all remote consumer relation channels, such as text message, chat, email and web. This practice had been put in place at inbound customer service since 2009, and consists on exclusive offers that are tailored towards each client’s consuming habits and needs. This successful strategy of cross-selling changed Vivo inbound customer service into a powerful sales tool, that generated new business opportunities while capturing opportunities in which the customer initiated contact and respecting their willingness to communicate with Vivo.
Improved services and functionalities made www.meuvivo.com.br website register 6.1 million unique users and 253 million online transactions. Through the “Fale Conosco” service, 1.1 million email-generated solicitations were solved. Driven by the goals of innovation and customer satisfaction, Vivo expanded its text-message-based customer service channel to all customers, achieving more than 4.2 million contacts served all year.
We managed to continue as the top telecommunications company in ANATEL’s ranking of mobile operators in Brazil. By the end of 2011, ANATEL’s ranking demonstrated that Vivo had the best performance among the largest companies operating in Brazil as measured by the IDA (Attendance Performance Index). Vivo also placed as the best among the key competitors in the telecom industry by having the smallest complaint ratio. Those numbers were supported by Vivo’s actions towards quality and expansion of the customer service channels.
Our challenge in 2012 is to capture more synergies with all contact channels (Internet, SMS, Call Center – inbound and outbound, Chat, Email, etc.) through the Genesys platform as well as integrating Telefônica Brasil’s in-land operations, planned to be rebranded to Vivo in 2012. Also, we aim to improve customer experience in every channel to get closer to the customers and their needs, considering all aspects of Brazil’s demography and regional distribution.
Higher quality, with efficiency
We implemented a strategy to increase the quality of our services while lowering costs. While achieving the best signal quality, surpassing all of our competitors (according to ANATEL’s scoring system in 2011), we also took steps designed to improve the level of service of our customer care, generate greater customer satisfaction with our call centers and stores and reduce billing errors, leading to fewer claims against us. This strategy has been successful in increasing our customer satisfaction rating in 2011 and in lowering costs.
Marketing and Sales
Following our merger with Vivo, we are integrating processes and portfolios of fixed and mobile services, in order to offer customers complete solutions in telecommunications. During 2012, we will integrate channels to offer standardized solutions and customer service along with innovation and best practices for the sale of fixed and mobile services.
We bring our solutions to our clients through the following sales channels:
| · | Vivo Own Stores: focused on individual clients and located on strategic points, our own stores provide a highly trained team built up to guarantee the best sales experience for the customer. The main drive of this channel is innovation. As a result, most stores have available self assistance services for value added services and recharges. We also offer special treatment for Premium clients with scheduled appointments via the Internet to assure “no waiting in line.” |
| · | Indirect channels: are divided in two types: resale and retail. The resale channel is composed by certified companies in the telecommunications segments providing our full portfolio and an adequately sized network for our services to attend the geographic dimensions of the market. Our presence is also established in the retail channel especially for prepaid, recharges and data services. |
| · | Recharge channels: are represented by small companies in various market sectors throughout the country. They became the largest channel for prepaid users and provide new means of virtual recharge for customers. |
| · | Telesales: sales through active and passive telemarketing call centers, employing highly trained sales associates, focused on fixed and data services. |
| · | Internet: “Portal Telefônica,” with online information on our products and services specifically targeted toward our corporate clients; we also offer the option of selling services via online chat through highly trained partners and appropriate tools. |
| · | Online Store: currently offers mobile services to clients with home delivery, payment in installments and different prices of handsets. In 2012, we will launch a new online store covering all the services portfolio of fixed and mobile, and offering improvements in navigation, quality purchase, reduction in SLA, etc. supported by a communications marketing strategy. |
| · | Door-to-door sales: aiming to approach corporate and individual clients, we dispose physical channels of assistance, such as door-to-door sales of services by outsourced small companies and own team consultants. Main focus in fixed and data services. |
| · | Person-to-person sales: our business management team offers customized sales services, ensuring high customer loyalty and a strong customer relationship resulting from customized consulting telecommunication and IT services and technical and commercial support. |
Besides the growth of sales volume, the main challenges for the Company in 2012 are the synergy of fixed and mobile services, the increased use of services in the virtual channels and the strengthening of Brazil’s largest accredited network.
Our Network
In 2011, we consolidated even more our network as a robust network, capable of delivering to the customer its expectation. We moved forward with the migration of TDM to NGM core, reaching 26% of fixed traffic, continued the modernization of cores as well as the adaptation of the data centers’ infrastructure.
We launched the FWT, allowing the operation of fixed telephony outside São Paulo, result of the integration between mobile and fixed worlds.
We also expanded our fixed network’s broadband access. Our broadband ADSL’s product portfolio has speeds that vary from 250 kbps to 8 Mbps. The product “Banda Larga Popular,” which is an initiative of the state of São Paulo, provides broadband at affordable prices to low-income population. This product is already used by 600,000 customers and can deliver speeds between 250 kbps and 1 Mbps. Broadband connections through coaxial cables are offered as well as a product called “Ajato” and its speeds may vary from 8 Mbps to 30 Mbps.
We implemented a platform, known as MLD ASSIA, to improve the diagnosis and stability of our customers and, furthermore, increase the index of assertiveness in recommendation to upgrade the speed.
We use the most advanced technology available in broadband optical fiber: the FTTx, allowing our customers to reach speeds up to 100 Mbps. We closed out 2011 with fifty thousand fiber’s customers. However, five thousands of these customers use IPTV—a system through which television services are delivered using the Internet Protocol suite.
In 2011, Speedy peaked at 3.5 million customers and we started marketing new products (16 Mbps and 25 Mbps) with VDSL2 technology.
Before November 1998, our subsidiary Vivo network used only AMPS analog technology. After privatization, we began to use CDMA digital and TDMA digital technologies. In 2006, we began to implement a GSM Network. In 2007, we began to implement a WCDMA Network. In 2011, launched the HSPA+ technology, commercially known as 3GPlus, working across our 3G network. This technology was commercially launched in November, 2011 in São Paulo (and its extended metropolitan area with area code 11), allowing customers who have compatible terminals achieve even higher transmission rates, reaching up to three times the value of traditional 3G’s rate. Digitalization offers certain advantages, such as greater network capacity and additional revenue through the sale of value-added services. We continue to increase network capacity and coverage to improve our quality of service and to meet customer demand.
Our advanced network management technology ensures global management and supervision of all our network processes and network performance. The network management centers are located in São Paulo, Brasilia and Minas Gerais. The network management center of São Paulo monitors the critical network operational parameters of the countrywide transmission backbone, third parties’ networks, IP networks and service platforms. The network management center in Brasília monitors the critical network operational parameters in the Midwestern Region (CO), Rio de Janeiro, Espírito Santo, Rio Grande do Sul and Paraná/Santa Catarina. The network management center in Minas Gerais monitors the critical network operational parameters in the Northeastern region (NE), the Northern region (NO), Bahia, Sergipe, São Paulo and Minas Gerais. These centers are able to identify abnormalities in both our network and in third parties’ networks, using failure and signaling monitoring systems. In addition, quality and service standards are constantly monitored. The network management centers are integrated with maintenance and operations teams that maintain and operate cellular network elements, as well as cellular infrastructure and transmission, in addition to the radio network elements and computing bases, service platforms and communications backbones.
Our network is prepared to provide continuity of service for our customers in the event of network interruptions. We have developed contingency plans for potential catastrophes in our switching centers, power supply interruptions and security breaches.
Pursuant to the terms of our authorization to perform our services, we are obligated to meet certain requirements for service quality. See “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies.”
Contract Customers for Mobile Services
Since October 1994, cellular telecommunications service in Brazil has been offered on a “calling party pays” basis, under which customers pay only for calls that they originate. In addition, customers pay roaming charges on calls made or received outside their home registration area.
Customer charges are calculated based on the customer’s calling plan, the location of the party called, the place from which the call originates and certain other factors, as described below. Our Region is divided into areas designated for payment purposes, called registration areas, as follows:
| · | Areas 1 & 2: 9 areas in the state of São Paulo; |
| · | Area 3: 5 areas, comprising 1 area in the metropolitan area of Rio de Janeiro, two areas in upstate Rio de Janeiro and two areas in the state of Espírito Santo; |
| · | Area 4: 7 areas in the state of Minas Gerais; |
| · | Area 5: 9 areas, comprising 6 areas in the state of Paraná and 3 areas in the state of Santa Catarina; |
| · | Area 6: 4 areas in the state of Rio Grande do Sul; |
| · | Areas 7 & 8: 18 areas, comprising 9 areas in Brasilia and the states of Goiás, Mato Grosso do Sul, Mato Grosso, Rondônia, Acre and Tocantins and 9 areas in the states of Amapá, Amazonas, Maranhão, Pará and Roraima; |
| · | Area 9: 6 areas, comprised of 5 areas in the state of Bahia and 1 area in the state of Sergipe; and |
| · | Area 10: 9 areas in the states of Pernambuco, Alagoas, Paraíba, Rio Grande do Norte, Ceará and Piauí. |
Interconnection Charges
We earn revenue from any call that originates from another cellular or fixed-line service provider network connecting to one of our customers. We charge the service provider from whose network the call originates a network usage charge for every minute that our network is used in connection with the call. See “—Operating Agreements—Interconnection Agreements.” Tariff adjustments are subject to agreement between the operators and then subject to approval by ANATEL.
Bill and Keep
ANATEL adopted partial “Bill & Keep” rules for interconnection charges in July 2003. The rules provided that an SMP operator paid for the use of another SMP operator’s network in the same registration area only if the traffic carried from the first operator to the second exceeded 55% of the total traffic exchanged between them. In that case, only those calls that surpassed the 55% level were subject to payment for network usage. Under Resolution No. 438 published in 2006, ANATEL eliminated the rule of the partial “Bill and Keep.” The current rule is “full billing,” in which the SMP operator pays the entire call termination fee of the other mobile network. The rule of the partial “Bill & Keep” was maintained between SMP and SME (trunking) networks.
Roaming Fees
We receive revenue pursuant to roaming agreements with other cellular service providers. When a customer of another cellular service provider makes a call within our area, that service provider pays us for the call at the applicable rate. Conversely, when one of our customers makes a cellular call outside of our Region, we must pay the charges associated with that call to the cellular service provider in whose Region the call originates. See “—Roaming Agreements.”
Wireless Device Sales
Through our stores and authorized dealers we sell only GSM and WCDMA devices such as handsets, smartphones, broadband USB modems and netbooks that are certified to be compatible with the Vivo network and service. We have special offers on smartphones, USB modems and other data devices for customers of bundled packages. Our current handset suppliers are Motorola, LG, Samsung, Nokia, Sony, Alcatel, ZTE, HTC, Apple, RIM (BlackBerry) and Huawei.
Operating Agreements
We have agreements with major fixed-line and mobile operators in Brazil to lease physical space, real estate, air conditioning, energy, security and cleaning services. We also lease transmission capacity necessary to complete the construction of our network infrastructure.
Interconnection Agreements
The terms of our interconnection agreements include provisions with respect to the number of connection points and traffic signals. See “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies” and “—Regulation of the Brazilian Telecommunications Industry—Interconnection Regulation.”
We believe that our subsidiaries have adequate interconnection agreements with necessary fixed-line operators to provide services. We also believe that our subsidiaries have all the necessary interconnection agreements with long-distance carriers.
Roaming Agreements
We provide international GSM roaming in over 200 destinations worldwide by means of over 500 roaming agreements.
Fraud Detection and Prevention
In 2011, we consolidated efforts to reach our targets for reduction of amounts and financial loss expenses for our operations related with fraud and fraud costs for the fixed operation, which are considered a reduction of revenue.
Compared with the year 2010, we had a 16.1% reduction in the volumes of financial loss for our mobile operation and a 51.5% increase in the cost of fraud for our fixed operation, resulting in an increase of 22.1% in financial revenues, considering our consolidated operations (fixed and mobile).
The main impact of this increase is related to the implementation of various actions to protect the Company from possible litigation. Thus, we focused our analysis in cases classified in our accounts receivable as having evidence of fraud.
During 2011, we continued our work in combating the two main types of fraud, as follows:
| · | Subscription fraud: type of fraud that occurs when the emission of one or more qualifications without the consent of the real “owner” of documents with the main objective of not paying the phone bill. Fraud can occur through subscription data and information from individuals or companies obtained illegally. In our mobile operation, subscription fraud showed a reduction in expenses of 14.9% as compared to the end of 2010. As for cases in our fixed operations, several actions were implemented to protect us from possible increases in litigation, by working on the analysis of cases classified in our accounts receivable with evidence of fraud. With this new guideline, we had a 51.5% increase in fraud costs compared to what was achieved in 2010. |
| · | Identity Fraud: also known as “social engineering,” the term identity fraud characterizes in the mobile operation the use the service provider phone channels (Call Center) with the use of real data from clients for false identification, allowing undue changes to be made in the customer’s line. We had a 78.2% reduction in financial expenses with this type of fraud compared to that achieved in the previous year. |
C. | Organizational Structure |
On December 31, 2008,2011, our voting shares were controlled by twothree major shareholders: SP Telecomunicações Participações Ltda. with 50.71%50.47%, Telefonica S.A. with 25.68% and Telefônica Internacional S/AS.A. with 34.87%15.43%. TelefôTelefónica Internacional is the controlling shareholder of SP Telecomunicações and, consequently, holds directly
and indirectly 85.57%43.33% of our common shares and 89.13%38.68% of our preferred shares. Telefónica Internacional is a wholly-ownedwholly owned subsidiary of Telefônica, S.A. of Spain.
Subsidiaries
A. TelecomTELECOM S.A. (formerly Assist Telefônica) is our wholly-ownedwholly owned subsidiary. A. TelecomTELECOM was incorporatedformed in Brazil on October 29, 1999, and it is engaged primarily in providing telecommunications and data services and internal telephone network maintenance for customers. The principal services are as follows: (i) digital condominium which is a value-added service for commercial buildings, integrated solution for equipments and services for voice transmission, data and images on commercial buildings under a Building Local Exchange Carrier (“BLEC”) model; (ii) installation, maintenance, exchange and extension of new points of internal telephony wire in companies and dwellings under a basic plan of maintenance (BPM); and (iii) provision of free ISP service under the brand name “I-Telefônica.” In addition, on December 30, 2004, we entered into a transaction to acquire indirect control of Atrium Telecomunicações Ltda. The transaction was approved by our shareholders on January 19, 2005. The acquisition was carried out through the purchase of the total share capital of Santo Genovese Participações Ltda., which held 99.99% of the representative share capital of Atrium. On March 1, 2006 then-subsidiary Santo Genovese Participações Ltda., having merged into its subsidiary Atrium Telecomunicações Ltda., was acquired by
A. TelecomTELECOM S.A. and both Santo Genovese Participações Ltda. and Atrium Telecomunicações Ltda. ceased to exist. A. TelecomTELECOM remained a wholly-ownedwholly owned subsidiary of Telesp,TELESP, and began carrying out the activities formerly performed by Atrium. See “—B. Business Overview—Services.Overview.”
From the second half of 2006, A. TelecomTELECOM began providing pay TV services, fully focusing on the development of this new product line. In February 2008, A. TelecomTELECOM became an owned subsidiary of Telefônica Televisão Participações S.A. (TTP), which currently covers all investments in the pay TV business.. In November 2008, TTP was merged into TelespTELESP and A.TelecomA. TELECOM became a wholly owned subsidiary of Telesp.TELESP. See “—A. History and Development of the Company—Historical Background—Corporate Reorganization involving DABR and TTP.”
Telefônica Data S.A.’s business purpose is to render telecommunications services such as the development, implementation and installation of projects related to integrated business solutions and telecommunications consulting, as well as activities related to the rendering of technical assistance and equipment and telecommunications network maintenance services.
Telefônica Empresas, currently (“Telefônica Data”), became a wholly-ownedwholly owned subsidiary of the Company after the corporate reorganization that was carried out in July 2006. See “—A. History and Development of the Company —TheCompany—Historical Background—The SCM Restructuring.” In July 2008, Telefônica Data became a wholly owned subsidiary of TTP. In November 2008, TTP was merged into TelespTELESP and Telefônica Data became a wholly owned subsidiary of Telesp.TELESP. See “—A. History and Development of the Company—Historical Background—Corporate Reorganization involving DABR and TTP.”
Telefônica Sistema de Televisão S.A. (“TST”) is a company that provides pay television services through the Multipoint Multichannel Distribution Services (“MMDS”) modality.
Vivo S.A. is a company that provides mobile services in the states of Acre, Alagoas, Amapá, Amazonas, Bahia, Ceará, Espírito Santo, Goiás (also encompassing the area of Distrito Federal, or the Federal district), Maranhão, Mato Grosso, Mato Grosso do Sul, Pará, Paraíba, Paraná, Pernambuco, Piauí, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Rondônia, Roraima, Santa Catarina, São Paulo, Sergipe, Tocantins and Minas Gerais. See “—A. History and Development of the Company.”
Ajato Telecomunicações Ltda.The corporate purpose of Ajato Telecommunications Ltd is to provide telecommunications and IT services, access to telecommunications network, internet and radio, including telemarketing, image and data services, trade lease, import, export, maintenance and repair for those equipments.
Aliança Atlântica Holding B.V. based in Netherlands, Amsterdam, with a 50% interest owned by Telefonica Brasil, holds cash from the sale of Portugal Telecom’s shares in June 2010 and a small interest in Zon Multimedia, a company of Portugal Telecom Group which provides pay-TV services, internet, distribution of audiovisual content, cinema and telecommunications services.
Companhia AIX de Participações. This company is engaged in the Refibra consortium, as a leader, as well as in both direct and indirect development of activities related to the construction, conclusion and operation of underground fiber optic networks. Currently, Telefônica Brasil holds a 50% interest in this company.
Companhia ACT de Participações is engaged in the Refibra consortium, as a leader, as well as in activities related to providing technical assistance for the preparation of the network conclusion project by providing studies to make it more profitable, as well as to inspect the activities in progress related to the project. Currently, Telefônica Brasil holds a 50% interest in this company.
GTR Participações e Empreendimentos S.A.’S business purpose is to hold equity interest in other companies, which are engaged in providing cable and pay-TV services, telecommunications services in general, the production, purchase, licensing, import and distribution of television programs, either its own or third parties’, spare parts and equipment, management and rendering of telecommunications and pay-TV service platforms.
TVA Sul Paraná S.A.’s business purpose is to provide cable and pay-tv services, telecommunications services in general, produce, purchase, license, import and distribute television programs, either its own or third parties’, spare parts and equipment, manage, update and exploit telecommunications and pay-TV service platforms and publish journals.
Lemontree Participações S.A.’s business purpose is to hold equity interest in other companies, which are engaged in providing cable and pay-TV services, telecommunications services in general, the production, purchase, licensing, import and distribution of television programs, either its own or third parties’, spare parts and equipments, management, updating and exploitation of telecommunications and pay-TV services platforms, and data management and trading.
Comercial Cabo TV São Paulo S.A.’s business purpose is to provide cable and pay-TV services, advisory and consultancy services in telecommunications in general, to produce, purchase, license, import and distribute television programs, either its own or third parties’, spare parts and equipment, manage, update and exploit telecommunications and pay-TV service platforms, and to engage in all types of marketing and advertisement.
Associated Companies
Since June 30, 2000, we have consolidated under the Brazilian Corporate Law Method, and since January 1, 2009, under IFRS, the operations of Aliança Atlântica Holding B.V., an investment company incorporated under the laws of the Netherlands.Netherlands, that had as its main asset a 0.61% interest in the equity capital of Portugal Telecom, which was disposed of in June 2010. As of December 31, 2008,2011, we held a 50% share ownership in Aliança Atlântica Holding B.V. and Telefónica S.A. held the remaining 50%. Aliança Atlântica Holding B.V. is currently in the process of liquidation and, as a result, its remaining assets are being appraised.
Furthermore, since December 31, 2003, we have also consolidated under the Brazilian Corporate Law Method, and since January 1, 2009, under IFRS, our investment under proportional consolidation in Companhia AIX de Participações, or AIX. At December 31, 2008,2011, we held a 50% share ownership in AIX and Telemar Participações S.A. held the remaining 50%. AIX was formed in 2001 to explore, directly and indirectly, activities related to the execution, conclusion and commercial exploitation of underground cables to fiber-optic.fiber optic. See Note 1 to the consolidated financial statements included in this Annual Reportannual report starting at page F-1.F-13. We also consolidate on a pro rata basis, as required under the Brazilian Corporate Law Method and under IFRS, Companhia ACT de Participações, in which we hold a 50% interest.
D. | Property, Plants and Equipment |
Our main physical properties for providing the Company’sfixed services involve the segments of switching (public switching telephone network-PSTN), transmission (optic and wireless systems), data communication (multiplex devices, IP network), infrastructure (Energy systems and air conditioned) and external Network (fiber-optic(fiber optic and metallic cables), which are distributed in many buildings in the State of São Paulo and in the main cities out of the State of São Paulo. Some of these buildings are also used in administrative and commercial areas.
Our properties are located throughout the State of São Paulo. At December 31, 2008,2011, we used 2,0892,178 properties in our operations, 1,4421,419 of which we own, and we have entered into standard leasing agreements to rent the remaining properties. We own a building in the City of São Paulo where the majority of our management activities are conducted.
As of December 31, 2008, property related to construction in progress represented 6.2% of the net book value of our total fixed assets, automatic switching equipment represented 22.9%, transmission and other equipment represented 33.7%, underground and marine cables, poles and towers represented 2.2%, subscriber and public booth equipment represented 4.7%, electronic data process equipment represented 1.1%, buildings and underground equipment represented 26.1%, land represented 2.3%, and other assets represented 0.8% of total fixed assets. As of December 31, 2008, the net book value of our property, plant and equipment was R$9.9 billion.
Pursuant to Brazilian legal procedures, liens have been attached to several properties pending the outcome of various legal proceedings to which we are a party. See “Item 8.A—8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
ITEM 4A. Our principal physical property for mobile services consists of transmission equipment, switching equipment, base stations, and other communication devices, such as voicemail, prepaid service, Short Message Service, Home Location Registers, Signaling Transfer Point, Packet Data Switching Network and gateways. All switches, cell sites, administrative buildings, administrative facilities, warehouses and stores are insured against damages for operation risks.
As of December 31, 2011, our subsidiary Vivo had 202 cellular switches and other equipment installed in 59 owned spaces, nine leased spaces and 24 shared spaces. We lease most of the sites in which our cellular telecommunications network equipment is installed. The average term of these leases is five years (subject to renewal for additional five-year terms) and ten years in the Northeast. Our 28,293 base stations and other network equipment are installed in cell sites, administrative buildings and administrative facilities. In addition, our subsidiary own 14 administrative building and we lease 33 administrative areas, 11 kiosks and 302 retail stores.
On December 31, 2011 the net book value of our property, plant and equipment amounted R$17.2 billion (R$10.2 billion in December 31, 2010).
| UNRESOLVED STAFF COMMENTS |
None.
| OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other information appearing elsewhere in this annual report and in conjunction with the financial information included under “Item 3.A—3. Key Information—A. Selected Financial Data.” Except as otherwise indicated, allWe prepared our consolidated financial informationstatements included in this annual report has been prepared in accordance with the Brazilian Corporate Law and presented in reais. For certain purposes, such as providing reports to our Brazilian shareholders, filing financial statements with the CVM, and determining dividend payments and other distributions and tax liabilities in Brazil, we have prepared and will continue to be required to prepare financial statements in accordance with the Brazilian Corporate Law.IFRS.
Overview
Our results of operations are principally affected by the following key factors.
Brazilian Political and Economic Environment
The Brazilian economy has experienced moderatedifferent rates of growth this decade. According to IBGE, the IBGE (Instituto Brasileiro de Geografia e Estatística) which uses the new methodology of national accounts, Brazil’sBrazilian GDP for 2011 expanded 5.7%2.7% in 2004, 3.2%2011, compared to 7.5% in 2005, 4.0% in 2006, 5.7% in 2007, and 5.1% in 2008.2010.
Consumer prices, as measured by the Consumer Price Index, or the IPCA, published by the IBGE, registered a variation of 5.9%6.5% in 2008.2011. Accordingly, growth in consumer prices was abovehigher than the inflation target established by the Central Bank, of 4.5%, but below the maximum target threshhold of up to 6.6%. In 20062009 and 2007,2010, the variation had beenvariations of 3.1%IPCA were 4.3% and 4.5%5.9%, respectively. Inflation, as measured by the General Price Index, or the IGP-DI, calculated by the Fundação Getúlio Vargas, which includes wholesale, retail and home-building prices, decreased 1.4% and increased 9.1%11.3% in 2008, compared to 7.9% in 20072009 and 3.8% in 2006.2010, respectively. In 2011, the IGP-DI increased 5.0%.
As a result of the decelerationacceleration of increasing inflation and of the economic activity, the Central Bank raisedincreased the basic interest rates beginning inrate during 2011, but began a series of decreases of the rate during the second quarter of 2008, and assemester. As a result, the SelicSELIC rate increased duringto 11.0% by the courseend of 20082011, from 11.25% to 13.75%.10.75% in 2010.
Brazil finished 20082011 with a trade balance surplus of US$24.829.8 billion, compared to US$4020.3 billion in 2007.2010. Exports went upincreased by 23.2%26.8% to US$197.9256.0 billion, whileand imports increased by 43.5%24.5% to US$173.1226.2 billion. Financial inflows into the country increased, significantly, with foreign direct investments of US$45.166.7 billion, compared to US$34.648.5 billion in 2007.2010. Portfolio investments increased by US$25.1 billion in 2011, in comparison to the increase of US$63.0 billion in 2010. The goodpositive performance of external accounts allowed international reserves to increase by US$26.563.4 billion to the record level of US$206.8352.0 billion.
Public finance performed in accordance with the initial target of 4.1% of GDP for primary surplus. Net public debt, as a proportion of GDP, decreased in 2008 to around 36.0% from 42.0% in 2007. In contrast to prior years the depreciation of the national currency in 2008 did not generate greater public debt. This was due, in part, to a higher level of international reserves accumulated by the country that was greater than the public debt, and Brazil’s becoming an international creditor, rather than a debtor. As a result, Brazil’s sovereign debt received investment grade rating from each of Standard & Poor’s and Fitch in March and April, respectively, in 2008.
Despite the favorable ratings, the lack of liquidityimprovement in international credit marketsdomestic economic data, such as inflation, external accounts, and a higher level ofinterest rates, increased risk aversion in the investment communityinternational capital markets led to an increase ina higher country risk in 2008.2011. The JPJ.P. Morgan Emerging Markets
Bond Index Plus (EMBI + Brazil), which tracks total returns for traded external debt instruments in the emerging markets, increased during the second half of 2008 reaching a 479to 233 basis points in December,by the highest level since Septemberend of 2004.2011 from 180 basis points at the end of 2010.
As a result, the real depreciated against the U.S. dollar in 2011 by 31.9% in 2008. During 2007, however, the Brazilian real continued its appreciation path, observed since 2004, as a consequence of a fall in country risk.12.6%. The exchange rate was R$1.77 to US$1.00 as ofon December 31, 2007 compared to2011 was R$2.14 to 1.88/US$1.00, as offrom R$1.67/US$1.00 on December 31, 2006 and R$2.34 to US$1.00 as of December 31, 2005. The appreciation of the real in this context is also related to the devaluation of the U.S. dollar against other currencies.2010.
Our business is directly affected by trends in the globalinternational economy and the Brazilian economy. If the Brazilian economy enters a period of continued recession, then demand for telecommunications services is likely to decline. Similarly, depreciation of the Brazilian real against the U.S. dollar couldmay reduce the purchasing power of Brazilian consumers and, as a consequence, negatively affect the ability of our customers to pay for our telecommunications services.
Impact of Inflation on Our Results of Operations
Prior toBefore 2006, the fees we charged our customers were periodically adjusted by ANATEL based on the inflation rates measured by the General Price Index (IGP-DI).
Starting in 2006, telephone fees were indexed to the IST, which is a basket of national indexes that reflect the telecommunications sector’s operating costs. Such indexing will thus reduce inconsistencies between revenuesrevenue and costs in our industry and therefore reduce the adverse effects of inflation on our business. The IST registered a variation of 6.6% in 2008.for the last 12 months is 4.92% according to the last data published by ANATEL with reference to December 2011.
The table below shows the Brazilian general price inflation (according to the IGP-DI, IPCA and the IPCA)IST) for the years ended December 31, 20042007 through 2008:2011:
| | Inflation Rate (%) as Measured by IGP-DI (1) | | | Inflation Rate (%) as Measured by IPCA (2) | |
December 31, 2008 | | | 9.1 | | | | 5.9 | |
December 31, 2007 | | | 7.9 | | | | 4.5 | |
December 31, 2006 | | | 3.8 | | | | 3.1 | |
December 31, 2005 | | | 1.2 | | | | 5.7 | |
December 31, 2004 | | | 12.1 | | | | 7.6 | |
| | Inflation Rate (%) as Measured by IGP-DI(1) | | | Inflation Rate (%) as Measured by IPCA(2) | | | Inflation Rate (%) as Measured by IST(3) | |
December 31, 2011 | | | 5.0 | | | | 6.5 | | | | 4.9 | |
December 31, 2010 | | | 11.3 | | | | 5.9 | | | | 5.6 | |
December 31, 2009 | | | (1.4 | ) | | | 4.3 | | | | 2.1 | |
December 31, 2008 | | | 9.1 | | | | 5.9 | | | | 6.6 | |
December 31, 2007 | | | 7.9 | | | | 4.5 | | | | 3.2 | |
(2) Source: IPCA, as published by the Instituto Brasileiro de Geografia e Estatística
(1) | Source: IGP-DI, as published by the Fundação Getúlio Vargas. |
(2) | Source: IPCA, as published by the Instituto Brasileiro de Geografia e Estatística. |
(3) | Source: IST, as published by the Agência Nacional de Telecomunicações. |
Regulatory and Competitive Factors
Our business, including the services we provide and the rates we charge, is subject to comprehensive regulation under the General Telecommunications Law. As a result, our business, results of operations and financial conditions could be impacted by the actions of the Brazilian authorities, including:
| · | delays in the granting, or the failure to grant, approvals for rate adjustment; |
| · | the granting of licenses to new competitors in our region; and |
| · | the introduction of new or stricter requirements for our operating concession. |
A series of new regulations became effective in 2008.2011. See “Item 4. Information on the Company—B. Business Overview.” The most important among these regulations were:
· | Resolution 507, which approved the Rule for the Methodology for the calculation· | regulation of the definitive productivity ratio (X Factor), applied to the Tariff Adjustments for STFC. X Factor is a mechanism that is intended to share the savingsquality management of productivity gains by service providers with their customers. |
· | Resolution 516, which approved the General Plan on Updating Telecommunications Regulations in Brazil. This resolution sets forth an agenda with 37 action items to update the regulatory framework of the telecommunications sector. These action items have been broken down as follows: short term (up to two years), medium term (up to five years)SMP and long term (up to ten years). In any event, ANATEL may make periodic revisions to this general plan.SCM; |
· | Decree 6,654, which revoked Decree 2,534· | regulation of April 2, 1998the criteria for readjustment of fees involving STFC calls involving access from the SMP or SME; |
| · | local area regulation of the STFC; and approved the General Plan |
| · | free determination of Grantsrates for Telecommunications Services. The General Plan of Grants sets forth the regions and sectors in which telecommunications concessionaires may operate and other regulations applicable to concessionaires.international long distance (LDI). |
We expect the following issues to become effective as new regulations or to be subject of one or more Public Notices in 2009,2012, with an exact timeline yet to be determined by ANATEL.
· | Proposals for new conditions and goals for quality and universal access to be included in the revision of concession contracts of STFC operators scheduled for 2010; |
· | Proposals for the assignment of the 2.5 GHz bandwidth; |
· | Announcement for bidding of licenses on the 3.5 GHz bandwidth; |
· | Developmentdevelopment of a General Competition Plan that would regulate standards for service providers with significant market power; |
| · | change in the STFC regulation; |
| · | draft regulation on the provision of STFC out of the Basic Fee Area (Área de Tarifação Básica), or ATB; |
| · | proposed revision of the rules of usage remuneration of providers of STFC networks; |
| · | invitation for bids for 3.5 GHz frequencies; |
| · | proposed amendment of the Regulation of Multimedia Communication Services (SCM); |
| · | proposed rules for industrial exploration of dedicated lines – EILD; |
| · | proposed regulations for the Certification of External Telecommunications Networks in regard to power protection; |
| · | review of the General Plan on Quality Targets to the STFC (PGMQ-STFC); |
| · | creation of a General Plan on Quality Targets of Television Subscription Services (PGMQ-TV); |
| · | proposal for regulation the monitoring and control of goods, rights and services linked to existing concessions; |
| · | proposed amendment of the Regulation of Inspection Powers; |
| · | proposal to amend the rules of implementation of administrative sanctions; and |
· | Publication of the Rule with the criteria· | calculation rules for calculating the weighted-average cost of capital (WACC), which was put into Public Notice in 2007 (Consulta Pública 799)productivity factor (Transfer Factor X). |
Number portabilityPortability came into effect in Brazil in September 2008. Number portabilityPortability allows clients within a limited geographic locale to relocate or change their telephone operator without the need to change their telephone number (for either a fixed or mobile line). We have been gradually implementing Number Portability for our clients beginning in September 2008. As of December 31, 2008, approximately 18% of our clients had Number Portability rights. Number Portability rights for all of our clients became effective in March 2009.
In addition to regulatory considerations, our business is affected by competition from other telecommunications providers. We began to face competition in our region in July 1999, and we anticipate that competition will contribute to declining prices for fixed-line telecommunications services and increasing pressure on operating margins. Our future growth and results of operations will depend significantly on a variety of factors, including:
| · | Brazil’s economic growth and its impact on the greater demand for services; |
| · | the costs and availability of financing; and |
| · | the exchange rate between the real and other currencies. |
Result from ANATEL’s Authorization to Provide Interregional and International Long-Distance Services
As we achieved our universal service targets before ANATEL’s deadline, we were authorized by ANATEL to launch long-distance services outside our concession region. We started our international long-distance services on May 7, 2002 and our domestic long-distance services on July 29, 2002. In 2008, our revenues from domestic and international long-distance services amounted to R$3.9 billion as compared to R$3.3 billion in 2007. By the end of 2008, we had estimated market shares of approximately 62% in international service and approximately 68% in interregional long-distance services.
Foreign Exchange and Interest Rate Exposure
We face significant foreign exchange risk due to our foreign currency-denominated indebtedness, andaccounts payable (including our capital expenditures, particularly equipment.equipment) and receivables in foreign currency. A real devaluation may increase theour cost of debt and certain of our capital expenditures.
commitments in a foreign currency. Our revenues arerevenue is earned almost entirely in reais, and we have no material foreign currency-denominated assets, other than derivative instrumentsexcept income from hedging transactions, interconnection of international long-distance services and corporate stakesservices rendered to customers outside Brazil. Equity investments in foreign companies.companies also suffer effects with variations in the exchange rate.
On December 31, 2008, 13.7%2011, 19.32% of our R$3.746.20 billion of financial indebtedness was denominated in foreign currencies (Japanese yen, eurosU.S. dollars and U.S. dollars).UMBNDES. See Note 1518 to the Consolidated Financial Statements. Devaluation of the real causes exchange losses on foreign currency-denominated indebtedness and commitments and exchange gain on foreign currency-denominated assets and corporate stakes in foreign companies.
We use derivative instruments to limit our exposure to exchange rate risk. Since September 1999, we have hedged virtually all of our foreign currency-denominated bank debt;debt using swaps. Since May 2010, the Company began using net balance coverage, which is the coverage for net positions in foreign exchange exposures, or assets (issued invoices) minus liabilities (received invoices) for foreign exchange exposures, substantially reducing the Company’s risk to fluctuations in exchange rates. However, we remain exposed to market risk resulting from changes in local interest rates, (principallyprincipally the CDI – Certificate forof Interbank Deposits (Certificado de Depósito Interbancário), or CDI; CDIwhich is an index based upon the average rate per cost of loans negotiatedoperations transacted among the banks within Brazil).
This exposure to the CDI is present in long derivatives positions and financial investments, which are indexed to percentages of the CDI. Substantially, allmost of our debt is exposed to long term interest rate risk.rates. On December 31, 2008,2011, R$2.103.06 billion of our indebtedness was subject to fixed rates,the variations of the TJLP, which remained stable since July 2009, and the balanceR$1.20 billion was subject to floating rates (CDIthe variation of the U.S. dollar and LIBOR).UMBNDES. However, virtually allthe portion in U.S. dollars of our foreign currency debt is swapped under hedging arrangements for variable-rate real-denominated obligations based on the CDI. As of December 31, 2008, we had swap transactions—CDI against fixed rates which totaled R$1.52 billion to partially hedge against internal interest rate fluctuations. We invest our excess cash and cash equivalents mainly in short-term instruments that earn interest based on the CDI. See
Note 3436 to the Consolidated Financial Statements and “Item 11—11. Quantitative and Qualitative Disclosures about Market Risk.”
Since we have foreign currency derivatives with notional amounts substantially equivalent to our borrowings and invoices issued and received denominated in foreign currency, we do not have material exchange rate exposure with respect to these contracts. However, we could still continue to have exchange rate exposure with respect to our planned capital expenditures, approximately 31%16.7% of which are madeindexed in foreign currencies (mostly U.S. dollars). This is up from 12% in 2007 due in part to the acquisition of newer equipment and technology not available from domestic suppliers. We systematically monitor the amounts and time of exposure to exchange rate fluctuations and may contract for hedging positions, when appropriate, at our discretion.
Discussion of Critical Accounting Estimates and Policies
The preparation of financial statements in accordance with Brazilian Corporate Law included in this annual report in accordance with IFRS involves certain assumptions and estimates which are based upon historical experiencethat affect the amounts presented for revenue, expenses, assets and various other factorsliabilities and disclosures of contingent liabilities in the notes to the financial statements. Therefore, the uncertainty relating to these assumptions and estimates could lead to results that we deemed reasonable and relevant.require a significant adjustment to the accounting value of assets or liabilities affected in future periods. Although we review these estimates and assumptions in the ordinary course of business, the presentation of our financial condition and results of operation often requires our management to make judgments regarding the effects on our financial condition and results of operations of matters that are inherently uncertain. Actual results may differ from those estimated under different variables, assumptions or conditions. Note 3 of our Consolidated Financial Statements includes methods used in the preparation of those financial statements and Note 4 includes a summary of the significant accounting policies. In order toTo provide an understanding of how we form the foregoing judgments and estimates, we have summarized certain critical accounting policies below.
Estimated Useful Lives of Property, Plant and Equipment and Intangible AssetsAccounting for long-lived assets, including goodwill
We estimate the useful lives of property, plant and equipment in order to determine the amount of depreciation and amortization expense to be recorded during any reporting period. The useful lives are estimated at the time the assets are acquired and are based on historical experience with similar assets, as well as taking into account technological changes and public telecommunications service regulations. If technological changes were to occur more rapidly than anticipated, the useful lives assigned to these assets may need to be shortened, resulting in the recognition of increased depreciation and amortization expenses in future periods. Alternatively, these types of technological changes could result in the recognition of an impairment loss to reflect the write-down in value of the assets. We review these types of assets for impairment losses annually, or when events or circumstances indicate that the carrying amount may not be recoverable over the remaining lives of the assets. In assessing impairment
losses, we employ the cash flow method, which takes into account management’s estimates of future operations. See Note 12(a) to the Consolidated Financial Statements.
As of December 31, 2008, we had R$11.7 billion recorded as property,Property, plant and equipment and intangible assets, underother than goodwill, are recorded at acquisition cost. Property, plant and equipment and intangible assets with definite useful lives are depreciated or amortized on a straight-line basis over their estimated useful lives. Intangible assets with indefinite useful lives are not amortized, but are, instead, subject to an impairment test on a yearly basis and whenever there is an indication that such assets may be impaired.
Accounting for long-lived assets and intangible assets involves the Brazilian Corporate Law,use of estimates for determining the fair value at their acquisition dates, particularly for assets acquired in business combinations and for determining the useful lives of the assets over which they are to be depreciated or amortized as well as their residual value. We believe that the estimates we make to determine an asset’s useful life and residual value are “critical accounting for approximately 58.6% ofestimates” because they require our totalmanagement to make estimates about future technological developments and alternative uses for assets.
Revenue RecognitionAn impairment loss exists when the accounting value of an asset or cash-generating unit exceeds its recoverable amount, which is the higher between the fair value less selling costs and Accounts Receivable
Under the Brazilian Corporate Law and U.S. GAAP, revenues from interconnection fees are calculatedvalue in use. The estimated fair value less selling costs is based on the durationinformation available from transactions involving the sale of each call and, as determined by Brazilian law, recognized atsimilar assets or the timemarket price less additional costs regarding the interconnection services are rendered. Under the Brazilian Corporate Law and U.S. GAAP, revenues from public telephones are recognized at the time the prepaid phone carddisposition of such asset. The value in use is used. For the year ended December 31, 2008, we had R$444.9 million recorded as revenues from public telephone services under Brazilian Corporate Law. See Note 23 to our Consolidated Financial Statements. Deferred revenues are determined based on estimatesthe model of outstanding creditsdiscounted cash flow. Cash flows are derived from the budget and do not include activities of prepaid phone cardsreorganization for which the Company has not yet been committed or significant future investments that were sold but have not been used aswill improve the group of assets of the date of each balance sheet. Under the Brazilian Corporate Law, revenues from activation or installation services are recognized upon the activation or installation of servicescash-generating unit subject to the customer. Under U.S. GAAP, revenues from activation and installation services are deferred and amortized overtest. The recoverable amount is sensitive to the estimated expected service period of the customer of 4.79 years.
In light of increasing competitiondiscount rate used in the telecommunications industry, we are increasingly offering bundled productsmethod of discounted cash flow as well as to the projected future cash flow and services to our customers. This practice does not allowthe expected future growth rate used for the exercisepurposes of judgements and estimates in collecting the value of bundled products with respect to the various components of the bundled products in order to recognize revenue under US GAAP.
We consider revenue recognition a critical accounting policy because of uncertainties caused by differentoverestimation. Furthermore, additional factors, such as technological obsolescence, the complex information technology required, the high volumesuspension of transactions, problems related to fraudcertain services and piracy, accounting regulations, management’s determination of our ability to collect fees and uncertainties relating to our right to receive certain revenues (mainly revenues for use of our network). Significantother circumstantial changes in these factors could cause us to fail to recognize revenues or to recognize revenues that we may not be able to realize in the future, despite our internal controls and procedures. We have not identified any significant need to change our recognition policy for U.S. GAAP or the Brazilian Corporate Law.are taken into account.
Allowance for Doubtful AccountsTaxes
In preparing our financial statements, we must estimate our ability to collect payment for our accounts receivable. We constantly monitor our past due accounts receivable. If we become awareThere are uncertainties regarding the interpretation of a specific customer’s inability to meet its financial obligations, we record a specific allowance against amounts due in order to reduce the net recognized receivable tocomplex tax regulations and the amount we reasonably believe will be collected. We also reassess whether we should recognizeand timing of future revenue from such customers when collection is assured. For all other accounts receivable, we recognize allowances for doubtful accounts based on our past write-off experience (i.e., average percentage of receivables historically written off, economic conditions and the length of time the receivables are past due). Our reserves have generally been adequate to cover our actual credit losses. However, because we cannot predict with certainty the future financial stability of our customers, we cannot guarantee that our reserves will continue to be adequate. Actual credit losses may be greater than the allowance we have established, which could have a significant negative impact on our selling expenses. We recognized provisions for doubtful accounts of R$539 million, R$653 million and R$413 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Provision for Contingencies
We are subject to legal and administrative proceedings related to tax, labor and civil matters. We are required to assess the likelihood of any adverse decision or outcome of these matters, as well as the range of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual matter and in consultation with our internal and external legal counsel.taxable income. We record provisions based on reasonable estimates for contingencies only when we believe that it is probable that we will incur loss in connection with the matter in dispute and we are able to reasonably estimate the expected loss. We have recorded no provisions for a number of significant tax disputes with the Brazilianpossible auditing by tax authorities becausefrom the jurisdictions in which we do not believe we are likely to incur losses in
operate. The value of these provisions is based on several factors such as experience from previous tax audits and different interpretations of tax regulations by the taxable entity and the
connection therewith. Our required reserves for contingenciescompetent tax authority in charge. Such differences of interpretation may changearise in a wide variety of subjects, depending on the prevailing conditions in the future based on new developments or changes in our approach to these proceedings (e.g., change in our settlement strategy). Such changes coulddomicile of the Company. As a result, in a negative impact on future results and cash flows.
Future Liability for Our Post-retirement Benefits (Pension Fund and Medical Health Care)
We provide various pension and medical benefits for our employees. We must make assumptions in connection with the provision of such benefits as to interest rates, investment returns, inflation, mortality rate and future employment rate levels in order to quantify our post-retirement liabilities. The accuracy of these assumptions will determine whether or not we have sufficient reserves for accrued pension and medical health care costs.
Deferred Taxes
By recognizing our net deferred tax assets, we imply that we will generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions to realize the benefits of such assets, and will continue operating under the current and future applicable provisional measures. If these estimates and related assumptions change in the future, we may be required to record additionalpay more than our provisions or to be offset against our deferred taxrecover less than the assets recognized.
Pension plan benefits
The cost of pension plans with determined benefits and thus recognize an additional income tax expenseother post-employment medical care benefits and the present value of pension obligations are determined using actuarial valuation methods. The actuarial valuation involves the use of assumptions about discount rates, expected return rates of assets, expected future salary increases, mortality rates, health care costs trend rates and future increases in our financial statements. Management evaluatesretirement benefits and pensions. The obligation of a defined benefit is highly sensitive to changes in these assumptions. All assumptions are reviewed at each year-end. The mortality rate is based on mortality tables available in the reasonablenesscountry. Future increases in wages and retirement benefits and pensions are based on expected future inflation rates for the country and could significantly impact the value of the deferred tax assets and assesses the need for additional valuation allowances at the end of the year. As of December 31, 2008, we did not believe an additional provisionobligations to offset our net deferred tax assets was required beyond those recognized in the financial statements.provide these benefits.
Financial Instruments and Other Financing ActivitiesFair value of financial instruments
In order to manage foreign exchange transactions, we may, from time to time, invest in derivative financial instruments. Under the Corporate Law Method, as of January 1, 2009, foreign currency swap agreements are recorded at fair value. For the year ended December 31, 2008, we recognized net gains of R$153.4 million (net losses of R$153.0 million in 2007) on our derivative transactions, an asset of R$95.8 million and liabilities of R$37.3 million as of December 31, 2008 (liabilities of R$357.2 million as of December 31, 2007) in order to recognize existing temporary gains or losses. The gains or losses on hedge transactions were calculated based onWhen the fair value of financial assets and liabilities presented on the derivatvebalance sheet cannot be obtained in active markets, it is determined using valuation techniques, including the method of discounted cash flow. The data obtained for the use of these methods are based as much on the information prevailing in the market as possible. However, when it is not feasible to obtain such information in the market, a certain assumption level is required to establish the fair value. The assumption includes consideration of the data that was used, such as the liquidity risk, credit risk and volatility. Changes in the assumptions regarding these factors could affect the presented fair value of financial instruments.
Provisions for civil and labor contingencies
We apply SFAS 133, “Accountingrecord provisions for Derivative Instrumentscivil, labor and Hedging Activities,” under U.S. GAAP.tax claims. The accounting required under SFAS 133assessment of the likelihood of loss includes assessing the available evidence, the hierarchy of laws, the available jurisprudence, the most recent court decisions and its materiality in the legal system as well as the evaluation of the case by external counsels. Provisions are reviewed and adjusted to take into account changes in circumstances such as the applicable prescriptive period, results from tax inspections or additional exposure identified based on newly issued court decisions. A significant change in these circumstances or assumptions could result in a corresponding increase or decrease into the amount of our provisions.
Revenue recognition
Customer Loyalty Program
We have a customer loyalty program that allows customers to accumulate points when generating traffic for the use of our mobile services. The accrued points may be exchanged for handsets or services, provided the customer has a minimum stipulated balance of points. The consideration received is broader than the Corporate Law Method, especially with respectallocated to the overall treatment and definitioncost of a derivative, when to record derivatives, classification of derivatives, and when to designate a derivative as a hedge. All derivatives, whetherthe handsets or not related to a hedging transaction, must be recorded on the balance sheetservices redeemed at their fair value. If the derivative is designated as a fair value hedge, the changes in theThe fair value of the derivative andpoints is calculated by dividing the hedged item are recognized in earnings. If the derivative is designateddiscount value granted as a cash flow hedge,result of the customer loyalty program by the amount of points needed to carry out the redemption. The fair value accrued on the balances of generated points is deferred and recognized as income upon redemption of points.
For determining the quantity of points to be recognized, we apply statistical techniques, which take into consideration assumptions such as estimated redemption rates, expiration rates, cancellation of points and other factors. These estimates are subject to variations and uncertainties due to changes in the redemption behavior of the customers.
A change in the assumptions regarding these factors could affect the estimated fair value of the derivative are recorded in other comprehensive income, or OCI, a component of U.S. GAAP shareholders’ equity,points under the customer loyalty program and are recognized in the income statement when the hedged item results in earnings or losses. Portions of changes in the fair value related to ineffective cash flow hedges are recognized in earnings of the period.
On December 31, 2008, we had US$10.9 million, JPY 15.0 billion and EUR 24.8 million of notional value swap contracts designated as fair value hedges of a portion of our foreign currency-denominated bank debt. Under U.S. GAAP, we recognized a gain of R$3.5 million for the period ending December 31, 2008 for such transactions (R$18.0 million for the period ended December 31, 2007).
In applying generally accepted accounting principles in connection with these derivative instruments, management took into consideration interest rates, discount rates, foreign exchange rates, future cash flow, and the effectiveness of hedges. These judgments directlyit could affect the valueapportionment of derivative instruments recorded onrevenue among the balance sheet,elements and, the amount of gains and losses includedas a result, revenues in the calculation of operating income. Should actual interest rates, discount rates, foreign exchange rates, future cash flow and ultimate hedge effectiveness differ from our estimates, the amounts recorded within the period of realization will have to be revised.
years.
Multiple-element arrangements
Bundled offers that combine different elements are assessed to determine whether it is necessary to separate the different identifiable components and apply the corresponding revenue recognition policy to each element. Total package revenue is allocated among the identified elements based on their respective fair values.
Determining fair values for each identified element requires estimates that are complex due to the nature of the business.
A change in estimates of fair values could affect the apportionment of revenue among the elements and, as a result, revenues in future years.
Sources of Revenue
Our revenues are derived primarily fromThe breakdown of our gross operating revenue is presented net of discounts granted. In addition, we categorized our revenue according to the following:following groups:
· | local service charges, which include· | Telephony services |
Includes revenues from fixed and mobile telephony highlighting:
| · | Local: includes the sum of revenues from monthly subscription charges,fees, installation fees, local services, public telephony and fixed-to-mobile revenues (VC1); |
| · | Domestic long-distance: includes the sum of fixed-to-mobile revenues (VC2 and VC3), public long-distance telephony and domestic long-distance; |
| · | International long-distance: includes the sum of revenues from international public telephony and international long-distance; and |
| · | Usage charges: which include measured service charges activation fees, and charges for use of public telephones (including prepaid cards); for calls, to both fixedmonthly fee and mobile numbers, either within or outsideother similar charges; |
| · | Data Transmission and value added services |
| · | Data Transmission: includes the sum of infrastructure rental revenues and data transmission; and |
| · | Charges for call forwarding, call waiting, text messaging (SMS), call blocking and Data Services, such as WAP and ZAP, downloads and MMS services, which are charged only when the customer’s plan excludes these services. |
| · | Interconnection charges (or network usage charges) are amounts we charge other cellular and fixed-line service providers for the use of our network; |
· | intraregional long-distance service charges, which include service charges for calls that originate and terminate within our concession region;· | Pay TV |
· | interregional and international long-distance service charges;· | Includes cable TV services, through satellite, cable or MMDS technology (multichannel multipoint distribution service); |
· | charges for data transmission, which include Speedy· | Sale of goods and management and data transmission to corporate segment since the merger of Telefónica Empresas in July 2006;equipment |
· | network usage charges, which include fees paid by our customers for fixed-mobile calls;· | The sale of wireless devices and accessories; |
· | interconnection fees paid by other telecommunications service providers on a per-call basis for their calls that terminate in our network;· | Other Services |
· | · | Other services include integrated solution services offered to residential and corporate clients, such as Internet access, private network access fees paid by other telecommunications service providers on a contractual basis for the useconnectivity and leasing of parts of our network;computer equipment, and |
· | charges for other services, which include miscellaneous revenues from other services (call waiting, call forwarding, voice and fax mailboxes, speed dialing, and caller ID). |
Our gross operating revenues include value-added and other indirect taxes and discounts to customers in accordance with Brazilian GAAP. The composition of operating revenues by category of service is presented in our Consolidated Financial Statements and discussed below. We have not calculated net operating revenues for each category of revenue. | · | Other telecommunications services such as extended service, detects, voice mail, cellular blocker, among others. |
Results of Operations
The following table sets forth certain components of our net income for each of the years in the three-year period ended December 31, 2008,2011 and December 31, 2010, as well as the percentage change of each component. The Company acquired 100% of shares of Vivo Participações S.A. amounting to R$31,222,630. See Note 1 and Note 4 to our consolidated financial statements. The Company’s consolidated financial statements include Vivo Participações S.A. and Vivo S.A. as of April 1, 2011. Vivo Participações S.A. and Vivo S.A. were included in the Company’s consolidated financial statements through the full consolidation method.
| | | | | | |
| | | | | | | | | | | | 2008 - 2007 | | | | 2007 - 2006 | |
| | (in millions of reais, except percentages) | |
Net operating revenue | | | 15,979 | | | | 14,727 | | | | 14,643 | | | | 8.5 | | | | 0.6 | |
Cost of goods and services | | | (8,726 | ) | | | (8,029 | ) | | | (7,780 | ) | | | 8.7 | | | | 3.2 | |
Gross profit | | | 7,253 | | | | 6,698 | | | | 6,863 | | | | 8.3 | | | | (2.4 | ) |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Selling expense | | | (2,601 | ) | | | (2,462 | ) | | | (1,924 | ) | | | 5.6 | | | | 28.0 | |
General and administrative expense | | | (755 | ) | | | (839 | ) | | | (983 | ) | | | (10.0 | ) | | | 14.6 | |
Other net operating income (expense) | | | (167 | ) | | | 250 | | | | 299 | | | | (167.1 | ) | | | (16.7 | ) |
Operating expenses, net | | | (3,523 | ) | | | (3,051 | ) | | | (2,608 | ) | | | 15.4 | | | | 17.0 | |
Operating income before financial expense, net | | | 3,730 | | | | 3,647 | | | | 4,255 | | | | 2.3 | | | | (14.3 | ) |
Financial expense, net | | | (228 | ) | | | (307 | ) | | | (331 | ) | | | (25.7 | ) | | | (7.3 | ) |
Income before taxes and social contribution | | | 3,502 | | | | 3,340 | | | | 3,924 | | | | 4.9 | | | | (14.9 | ) |
Income tax and social contribution | | | (1,082 | ) | | | (977 | ) | | | (1,108 | ) | | | 10.7 | | | | (11.8 | ) |
Net income | | | 2,420 | | | | 2,363 | | | | 2,816 | | | | (2.4 | ) | | | (16.1 | ) |
Because Vivo Participações S.A. and Vivo S.A. are included in our financial statements for only nine months in 2011, our results of operations in 2010 and 2009 are not fully comparable with our results of operations in 2011. We have also made certain changes to our accounting criteria and elected to apply these changes retroactively to part of our financial statements for the year 2010 to make them comparable to our 2011 financial statements. Implementation of these accounting changes did not create any difference for our results of operations or shareholders’ equity.
| | | | | | |
| | | | | | | | | 2011-2010 | |
| | (in millions of reais) | |
Net operating revenue | | | 29,128.7 | | | | 15,798.2 | | | | 84.4 | % |
Cost of services and goods | | | (14,728.2 | ) | | | (8,844.8 | ) | | | 66.5 | % |
Gross profit | | | 14,400.5 | | | | 6,953.4 | | | | 107.1 | % |
Operating expenses: | | | | | | | | | | | | |
Selling | | | (7,259.7 | ) | | | (2,964.6 | ) | | | 144.9 | % |
General and administrative | | | (1,785.7 | ) | | | (738.8 | ) | | | 141.7 | % |
Other operating revenues, net | | | 442.2 | | | | 312.4 | | | | 41.5 | % |
Total operating expenses, net | | | (8,603.2 | ) | | | (3,391.0 | ) | | | 153.7 | % |
Equity in earnings (losses) of associates | | | – | | | | 2.9 | | | | (100.0 | )% |
Operating income before financial expense, net | | | 5,797.4 | | | | 3,565.3 | | | | 62.6 | % |
Net financial expenses | | | (139.7 | ) | | | (120.7 | ) | | | 15.7 | % |
Net income before income and social contribution taxes | | | 5,657.7 | | | | 3,444.6 | | | | 64.2 | % |
Income and social contribution taxes | | | (1,295.5 | ) | | | (1,045.8 | ) | | | 23.9 | % |
Net income | | | 4,362.2 | | | | 2,398.8 | | | | 81.8 | % |
Net income attributable to: | | | | | | | | | | | | |
Shareholders of company | | | 4,355.3 | | | | 2,398.8 | | | | 81.6 | % |
Noncontrolling interests | | | 6.9 | | | | – | | | | 100.0 | % |
Net income for year | | | 4,362.2 | | | | 2,398.8 | | | | 81.8 | % |
Net Operating Revenue
Net operating revenues increased by 84.4% to R$29,128.7 in 2011 from R$15,798.2 million in 2010. The increase in 2011 reflects the consolidation of R$13,728.1 million of net operating revenues attributable to Vivo and Vivo Participações for the months of April through December 2011. Our net operating revenues excluding Vivo and Vivo Participações decreased by 2.5% to R$15,400.6 million in 2011, from R$15,798.2 million in 2010, primarily due to the reduction in the traffic originated by fixed-line and to the lower fixed-voice customer base, partially offset by the increased international long-distance revenue in comparison to 2010.
Capital Expenditures (Capex)
In 2011, the Company invested R$5,401.5 million, including the consolidation of Vivo and Vivo Participações for the months of April through December 2011, in projects that sustain its current annual results and position the Company for competitive environment in the medium term representing an increase of 121.2% compared to 2010. As a percentage over net operating revenues the ratio was from 15.5% in 2010 to 18.5% in 2011. A significant portion of resources was
allocated to allow growth quality in our services. The investments in quality maintenance and expansion of our client base represented 67% of the total amount invested by us in 2011.
To meet the needs of an increasingly connected society, significant investments were made to support the strong growth of our data users, both fixed and mobile, or dedicated high speed services for our corporate clients. We are building the future of broadband by increasing the expansion of the optical fiber network in São Paulo. We are also investing in the expansion of the backbone for national data transmission to meet the increase in mobile data traffic throughout the country.
Results of Operations for the Year Ended December 31, 20082011 Compared to the Year Ended December 31, 20072010
Net Operating Revenue
NetOur gross operating revenue is presented net of discounts granted.
Our gross operating revenue increased by 8.5% reaching90.5% to R$15.9 billion43,073.1 million in 20082011 from R$14.7 billion22,609.0 million in 2007.2010, impacted by the incorporation of Vivo Participações and Vivo S.A. which we consolidated as of April 1, 2011. Excluding the effect of such acquisition, which totaled R$20,349.8 million, gross operating revenue would be R$22,723.3 million, an increase of 0.5%, or R$114.3 million, compared to 2010. The variations are explained as follows:
| | | | | | |
| | | | | | | | | 2011-2010 | |
| | (in millions of reais) | |
Telephony services | | | 24,331.3 | | | | 15,366.0 | | | | 58.3 | |
Data transmission and value added services | | | 10,929.3 | | | | 5,028.4 | | | | 117.4 | |
Interconnection charges | | | 3,785.0 | | | | 523.8 | | | | 622.6 | |
Pay TV | | | 865.4 | | | | 587.4 | | | | 47.3 | |
Sale of goods and equipment | | | 2,135.2 | | | | 166.5 | | | | 1,182.4 | |
Other services | | | 1,026.9 | | | | 936.9 | | | | 9.6 | |
Gross operating revenue | | | 43,073.1 | | | | 22,609.0 | | | | 90.5 | |
Value-added and other indirect taxes | | | (13,944.4 | ) | | | (6,810.8 | ) | | | 104.7 | |
Net operating revenues | | | 29,128.7 | | | | 15,798.2 | | | | 84.4 | |
Telephony service: Excluding the consolidation effect of Vivo Participações and Vivo in the amount of R$9,237.8 million, there was a decrease of R$272.5 million in the revenue, or 1.8%, explained by the reduction in the traffic originated by fixed-line services and to the lower fixed-voice customer base, that was partially offset by the increased international long-distance revenue in comparison to 2010. Fixed-line accesses in service reduced 2.7% in 2011 to 11.0 million from 11.3 million in 2010, due mainly to fixed to mobile substitution.Data transmition and value added services: Excluding the consolidation effect of Vivo Participações and Vivo in the amount of R$5,421.0 million, the variation in 2011 totaled R$479.9 million, an increase of 9.5% compared to 2010. This growth is explained by a significant increase in net operatingthe customer base for the data access services, mainly due to strong performance in the corporate segment.
Interconnection charges: Excluding the consolidation effect of Vivo Participações and Vivo in the amount of R$3,375.9 million, the variation in 2011 totaled R$409.1 million, which was a decrease of 21.9% in relation to 2010 This variation is mainly related to reduction in incoming traffic, given the concentration in selling efforts by the operators for stimulating the on-net mobile traffic.
Pay TV: Revenue from Pay TV in 2011 totaled R$865.4 million, an increase of 47.3% in the Pay TV’s gross revenue in relation to 2010. This variation is primarily a resultrelated to consolidation of TVA’s pay TV business results from the second quarter of 2011.
Sale of goods and equipment: Excluding the consolidation effect of Vivo Participações and Vivo in the amount of R$1,953.6 million, the variation in 2011 totaled R$181.6 million, an increase of 9.1% compared to 2010. Revenues from sales of wireless devices and accessories are reported before commissions and promotional discounts, and include value-added taxes. In general, the purpose of wireless device sales is to encourage growth in
customers and traffic (and not necessarily to generate profits). Accordingly, we subsidize part of the costs of wireless devices for post-paid customers.
Others services: Excluding the consolidation effect of Vivo Participações and Vivo in the amount of R$31.4 million, the variation in 2011 was R$58.6 million, an increase of 6.3% compared to 2010. This growth is mainly explained by the increased revenues from cable TV servicesthe supply of integrated solutions to the corporate segment.
Cost of Services and data transmission services (Speedy), and from increased revenues in our national long distance services and interconnection services, both of which were motivated by the increase in the number of mobile customers resulting from a higher number of mobile operators. This increase in net operating revenue is also attributed to increases in revenues from such sources as Posto Informático (PDTI), digital network services, and a tariff readjustment that took effect as of July 2008 that increased service charges to our customers by a weighted average of 3.01%. These increases were partially offset by a reduction of revenues from local services, from activation fees and from public telephone services, the latter due to an increase in competition from mobile telephony companies.Goods
The following table sets forth certainthe components of our operating revenuescosts of services and goods sold for 20082011 and 2007,2010, as well as the percentage change of each component.from the previous year.
| | | | | | |
| | | | | | | | | 2008 - 2007 | |
| | (in millions of reais, except percentages) | |
Gross operating revenue: | | | | | | | | | | |
Local services: | | | | | | | | | | |
Monthly subscription charges | | | 5,487 | | | | 5,646 | | | | (2.8 | ) |
Activation fees | | | 114 | | | | 120 | | | | (5.0 | ) |
Measured service charges | | | 2,563 | | | | 2,808 | | | | (8.7 | ) |
Public telephones | | | 445 | | | | 551 | | | | (19.2 | ) |
Total | | | 8,609 | | | | 9,125 | | | | (5.7 | ) |
Long-distance services: | | | | | | | | | | | | |
Intraregional | | | 2,644 | | | | 2,006 | | | | 19.8 | |
Interregional and international | | | 1,305 | | | | 1,349 | | | | (3.3 | ) |
Total | | | 3,949 | | | | 3,355 | | | | 17.7 | |
Data transmission | | | 3,760 | | | | 2,996 | | | | 25.5 | |
Interconnection services | | | 4,372 | | | | 4,064 | | | | 7.6 | |
Network usage services | | | 466 | | | | 405 | | | | 15.1 | |
Network access | | | 384 | | | | 319 | | | | 20.5 | |
TV services | | | 379 | | | | 54 | | | | 594.6 | |
Other services | | | 1,102 | | | | 866 | | | | 27.3 | |
Total gross operating revenue | | | 23,021 | | | | 21,184 | | | | 8.7 | |
Value added and other indirect taxes | | | (5,979 | ) | | | (5,575 | ) | | | 7.2 | |
Discounts | | | (1,063 | ) | | | (881 | ) | | | 20.7 | |
Net operating revenue | | | 15,979 | | | | 14,728 | | | | 8.5 | |
| | | | | | |
| | | | | | | | | 2011-2010 | |
| | (in millions of reais) | |
Cost of goods sold | | | (1,343.1 | ) | | | (155.7 | ) | | | 762.6 | % |
Depreciation and amortization | | | (3,582.6 | ) | | | (1,687.4 | ) | | | 112.3 | % |
Outside services, concession renewal fee and other | | | (2,616.0 | ) | | | (1,963.0 | ) | | | 33.3 | % |
Interconnection charges | | | (4,537.1 | ) | | | (4,176.7 | ) | | | 8.6 | % |
Rent, insurance, condominium fees, and leased lines | | | (910.5 | ) | | | (364.3 | ) | | | 149.9 | % |
Personnel | | | (380.1 | ) | | | (257.4 | ) | | | 47.7 | % |
Taxes | | | (1,358.8 | ) | | | (240.3 | ) | | | 465.5 | % |
Cost of services and goods | | | (14,728.2 | ) | | | (8,844.8 | ) | | | 66.5 | % |
Local ServicesCost of services and goods increased by 66.5% to R$14,728.2 million in 2011 from R$8,844.8 million in 2010. The increase in 2011 reflects the consolidation of R$6,678.6 million of cost of services and goods attributable to Vivo and Vivo Participações for the months of April through December 2011. Our cost of services and goods excluding Vivo and Vivo Participações decreased 9.0% to R$8,049.6 million in 2011 from R$8,844.8 million in 2010. The variations are explained as follows:
RevenuesCost of goods sold: Cost of wireless devices and accessories increased by 762.6% to R$1,343.1 million in 2011, from localR$155.7 million in 2010. The increase in 2011 reflects the consolidation of R$1,178.7 million of cost of goods sold attributable to Vivo and Vivo Participações for the months of April through December 2011. Our cost of goods sold excluding Vivo and Vivo Participações increased 5.6% to R$164.4 million in 2011 from R$155.7 million in 2010 and was mainly due to an increase in expenses related to maintenance of terminals to access the network and acquisition of other related goods, among others.
Depreciation and amortization: Depreciation and amortization expenses increased by 91.7% to R$3,234.6 million in 2011, from R$1,687.4 million in 2010. The increase in 2011 reflects the consolidation of R$1,290.0 million of depreciation and amortization attributable to Vivo and Vivo Participações for the months of April through December 2011. Our depreciation and amortization excluding Vivo and Vivo Participações increased 15.2% to R$1,944.6 million in 2011 from R$1,687.4 million in 2010 mainly due to expenses for higher investments in our network and amortization of licences on acquisition of Vivo.
Outside services, decreased 5.7%concession renewal fee and other: Cost of third-party services increased by 33.3% to R$8.6 billion2,616.0 million in 2008,2011, from R$9.1 billion1,963.0 million in 2007.2010. The decrease wasincrease in 2011 reflects the consolidation of R$527.5 million of outside services and other attributable to Vivo and Vivo Participações for the months of April through December 2011. Our outside services and other excluding Vivo and Vivo Participações increased 6.4% to R$2,088.5 million in 2011 from R$1,963.0 million in 2010 mainly due primarily to lower revenuesnetwork maintenance and purchase of TV content.
Interconnection charges: Interconnection charges increased by 8.6% to R$4,537.1 million in 2011, from subscriptionsR$4,176.7 million in 2010. The increase in 2011 reflects the consolidation of R$240.3 million of interconnection charges attributable to basic residential packages, basic fixed-fixed call traffic plansVivo and basic plan activation fees, as well as lower revenuesVivo Participações for the months of April through December 2011. Our interconnection charges excluding Vivo and Vivo Participações increased 2.9% to R$4,296.8 million in 2011 from VC1, VC2, VC3, Intra, Inter, Local and International traffic. These decreases were partially offset byR$4,176.7 million in 2010 mainly due to an increase in the alternative basic residential plan subscriptions, alternative fixed-fixed calluse of the network for fixed-mobile traffic, plans and prepaid traffic.
among others.
Rent, insurance, condominium fees, and leased lines: Rent, insurance, condominium fees, and leased lines increased by 149.9% to R$910.5 million in 2011, from R$364.3 million in 2010. The increase in 2011 reflects the consolidation of R$488.7 million of rent, insurance, condominium fees, and leased lines attributable to Vivo and Vivo Participações for the months of April through December 2011. Our rent, insurance, condominium fees, and leased lines excluding Vivo and Vivo Participações increased 15.8% to R$421.8 million in 2011 from R$364.3 million in 2010 mainly due to greater expenses with service fees for use of towers and poles and insurance.
Personnel: Personnel expenses increased by 47.7% to R$380.1 million in 2011, from R$257.4 million in 2010. The increase in 2011 reflects the consolidation of R$109.0 million of personnel expenses attributable to Vivo and Vivo Participações for the months of April through December 2011. Our personnel expenses excluding Vivo and Vivo Participações increased 5.3% to R$271.1 million in 2011 from R$257.4 million in 2010 mainly due to the collective agreement in this period under which we provided a salary readjustment in September 2011 of approximately 5%.
Taxes: Taxes increased by 465.5% to R$1,358.8 million in 2011, from R$240.3 million in 2010. The increase in 2011 reflects the consolidation of R$1,070.1 million of taxes attributable to Vivo and Vivo Participações for the months of April through December 2011. Our taxes excluding Vivo and Vivo Participações increased 20.1% to R$288.7 million in 2011 from R$240,3 million in 2010 mainly due to expenses with the FUST and FUNTEL taxes, due to the growth in the number of new subscribers.
Operating Expenses
The following table sets forth the components of our operating expenses for each of the years ended December 31, 2011 and 2010, as well as the percentage change from the prior year.
| | | | | | |
| | | | | | | | | 2011-2010 | |
| | (in millions of reais) | |
Selling expenses | | | (7,259.7 | ) | | | (2,964.6 | ) | | | 144.9 | |
General and administrative expenses | | | (1,785.7 | ) | | | (738.8 | ) | | | 141.7 | |
Other net operating income | | | 442.2 | | | | 312.4 | | | | 41.5 | |
Total | | | (8,603.2 | ) | | | (3,391.0 | ) | | | 153.7 | |
Operating expenses increased by 153.7% to R$8,603.2 million in 2011, from R$3,391.0 million in 2010. The increase in 2011 reflects the consolidation of R$4,492.6 million of operating expenses attributable to Vivo and Vivo Participações for the months of April through December 2011. Our operating expenses excluding Vivo and Vivo Participações increased 21.2% to R$4,110.6 million in 2011 from R$3,391.0 million in 2010 mainly due to an increase in general and administrative expenses.
Selling expenses: Selling expenses increased by 144.9% to R$7,259.7 million in 2011, from R$2,964.6 million in 2010. The increase in 2011 reflects the consolidation of R$3,869.5 million of selling expenses attributable to Vivo and Vivo Participações for the months of April through December 2011. Our selling expenses excluding Vivo and Vivo Participações increased 14.4% to R$3,390.2 million in 2011 from R$2,964.6 million in 2010 mainly due to amortization of trademarks and client portfolio on acquisition of Vivo and an increase in personnel expenses resulting from the consolidation of TVA’s Pay TV business and expenses with third-party services, mainly with use of the brand and publicity and advertising.
General and administrative expenses: General and administrative expenses increased by 141.7% to R$1,785.7 million in 2011, from R$738.8 million in 2010. The increase in 2011 reflects the consolidation of R$1,051.5 million of general and administrative expenses attributable to Vivo and Vivo Participações for the months of April through December 2011. Our general and administrative expenses excluding Vivo and Vivo Participações generally remained stable, decreasing 0.6% to R$734.2 million in 2011 from R$738.8 million in 2010.
Other net operating income: The net amount of other operating income increased by 41.5% to R$442.2 million of other revenues in 2011, from R$312.4 million of other revenues in 2010. The increase in 2011 reflects the consolidation of R$428.4 million of other net operating income attributable to Vivo and Vivo Participações for the months of April through
December 2011. Our other net operating income excluding Vivo and Vivo Participações decreased 95.6% to R$13.8 million in 2011 from R$312.4 million in 2010 mainly due to an increase in amortization and other expenses.
Financial Result
For the year-end period ended on December 31, 2011, net financial expenses reached R$139.7 million, increasing by R$19.0 million or 15.7% when compared to the period ended December 31, 2010, mainly due to higher net debt.
Income and Social Contribution Taxes
We recorded expenses from income and social contribution taxes in the amount of R$1,295.5 million in 2011, an increase of 23.9% from an expense of R$1,045.8 million in 2010. The increase in 2011 was due to higher income before income and social contribution taxes. The effective rate of income tax and social contribution decreased to 22.9% in 2011 compared with 30.4% in 2010, mainly due to higher interest on shareholders’ equity payments made in 2011, which is deductible for income tax purposes.
Results of Operations for the Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
Operating Revenue
Our gross operating revenue is presented net of discounts granted.
Our gross operating revenue in 2010 totaled R$22,609.0 million, registering a decrease of 2.6% in relation to 2009. The components of our gross operating revenue are presented in the following table:
| | | | | Percent Change | |
| | | | | | | | | |
| | (in millions of reais, except percentages) | |
Gross Operating Revenue | | | 22,609.0 | | | | 23,212.5 | | | | (2.6 | ) |
Fixed Telephony | | | 15,366.0 | | | | 16,234.0 | | | | (5.3 | ) |
Local | | | 10,356.8 | | | | 11,129.0 | | | | (6.9 | ) |
Domestic long-distance | | | 4,912.7 | | | | 4,990.9 | | | | (1.6 | ) |
International Long-distance | | | 96.5 | | | | 114.1 | | | | (15.4 | ) |
Data Transmission | | | 5,028.4 | | | | 4,685.4 | | | | 7.3 | |
Interconnection | | | 523.8 | | | | 487.8 | | | | 7.4 | |
Pay TV | | | 587.4 | | | | 600.3 | | | | (2.2 | ) |
Others | | | 1,103.4 | | | | 1,205.0 | | | | (8.4 | ) |
(1) | Gross operating revenue, but net of discounts granted. |
Fixed Telephony
Monthly subscription chargesLocal. Revenues: Revenue from monthly subscriptions decreased 2.8%local services reached R$10,356.8 million in 2010, a decrease of 6.9% in relation to R$5.5 billion11,129.0 million registered in 2008 compared to R$5.6 billion in 2007.2009. The decrease in 2008 was primarilyis due to lower local fixed telephony revenue in 2010, explained by a decrease in VC1 fees and fixed-to-fixed traffic offset by the averageincrease in the monthly fee revenue due to the positive net additions of 39,000 lines in service an increaseregistered in customer use of new alternative plansthe year, in addition to fixed telephony, including our Linha Controle (Line Control) calling plans (offering packages of fixed-to-fixed minutes of calling time for set monthly fees) and our DUO and TRIO bundles, which have a lower subscription fee, and an accounting reclassification of DDR revenues (related to call transfers) in accordance with new requirements established by ANATEL. These effects were partially offset by the tariff readjustment of 3.01% that took effect on July 2008.most alternative plans as of August 2010. Also, the reduction in revenues from local services, despite the increase in fixed lines, is due to fixed to mobile substitution. In addition, the Company increased the offering of alternative service plans with lower costs, which are more suited to the profile of each client and reduce default rates.
Activation feesDomestic long-distance. Revenues: Revenue from monthly activation fees decreased by 5.0%domestic long-distance services in 2010 totaled R$4,912.7 million, an decrease of 1.6% in relation to R$1144,990.9 million in 2008 from R$120 million in 2007.2009. The decrease was mainlyis due to a program we instituted promoting the exemption from activation fees for non-residential customers that acquire two or more business lines asreduction of July 2008. These effects werefixed incoming traffic, partially offset by higher mobile incoming traffic with the tariff readjustment“15” use (indicating our selection code of 3.01% that took effect as of July 2008.
Measured service charges. Revenues from measured service charges decreased 8.7% to R$ 2.6 billion in 2008 from R$2.8 billion in 2007. The decrease in 2008 was due primarily to the sale of DUO and TRIO traffic packages offering unlimited local calling for a flat fee, that resulted in the reduction of traffic revenues despite higher calling traffic. These effects were partially offset by a significant increase in the sale of such DUO and TRIO traffic packages,operator) and by the tariff readjustment of 3.01% that took effect as of July 2008.0.66%, effective from October 8, 2010.
Public telephonesInternational long-distance. Revenues: Revenue from charges for the use of public telephones decreased by 19.2% tointernational long-distance services reached R$44596.5 million in 2008 from2010, a decrease of 15.4% in comparison with R$551114.1 million in 2007. The decrease in 2008 was2009. This change is due to increased competition froma decrease of traffic in the mobile telephony market. This effect was partially offset by the tariff readjustment of 3.01% that took effect as of July 2008.period.
Long-Distance Services
Revenues from long distance services increased by 17.7% to R$3.9 billion in 2008 from R$3.4 billion in 2007, due primarily to an increase in revenues from our mobile SMP (Personal Mobile Service) services using CSP “15” (code of personal services), resulting mainly from the expansion of the mobile telephony market. Revenues from long distance services also increased as a result of the tariff readjustment of 3.01% that took effect as of July 2008.
Data Transmission
Revenues from data transmission services increased 25.5 % to R$3.8 billion in 2008 from R$3.0 billion in 2007. The increase in 2008 was primarily due to an increase in the use of such services by our residential customers due to the offer of the “Speedy” and “Ajato” Internet services, as well as an increase in the use of data transmission services by corporate customers.
Interconnection Services
Revenues from interconnection services increased by 7.6% to R$4.4 billion in 2008 from R$4.1 billion in 2007, due primarily to a significant increase in the number of mobile operators, that positively impacted VC1, VC2 and VC3 traffic, and also due to the tariff readjustment of 3.01% that took effect as of July 2008.
Network Usage Services
Revenues from network usage services increased by 15.1% to R$466 million in 2008 from R$405 million in 2007, due to increased traffic between operators and use of our networks by other operators as a consequence of the growth of the telecommunications market, and also due to the tariff readjustment of 3.01% that took effect as of July 2008.
Network Access
The revenues derived from network access increased 20.5% to R$384 million in 2008 from R$319 million in 2007, due primarily to an increase in revenues from fees in connection with leasing dedicated lines to other carriers (EILD), and by an increase in the volume of data usage by our clients.
TV Services
Revenues from TV services increased 594.6% to R$379.0 million in 2008 from R$54.0 million in 2007, due to the acquisition of Telefônica Sistema de Televisão S.A. in the fourth quarter of 2007.
Other Services
Revenues from other services increased 27.3% to R$1.1 billion in 2008 from R$866 million in 2007. These effects were caused principally by the growth in demand for PDTI (Posto Informático), and by increases in monthly fees for DDR (transfer of calls).
Value Added and Other Indirect Taxes
Value added and other indirect taxes increased 7.2% to R$6 billion in 2008 from R$5.6 billion in 2007, as a result of the increase in operating revenues.
Discounts
Discounts increased 20.7% to R$1.1 billion in 2008 from R$881 million in 2007. The increase was due primarily to discounts granted to IP and TV services, discounts in connection with subscriptions (such as providing two phone lines for the price of only one subscription instead of the customary two), discounts in connection with call services (such as providing lower call rates during certain hours), and discounts related to our Speedy services.
Cost of Goods and Services
Cost of goods and services primarily includes depreciation and amortization expenses, interconnection services, personnel expenses and costs of services provided by third parties. Cost of goods and services increased 8.7% to R$8.7 billion in 2008 compared to R$8.0 billion in 2007, mainly due to increased expenses related to our terminals and network access maintenance, purchase of TV content (such as more channels) from Telefônica Televisão Digital, increased fixed-mobile network expenditures arising from the use of the network, higher wages and compensation expenses as a result of the Organizational Restructuring Program, increased expenses related to the purchase of goods in connection with the Posto Informático product, and a decrease in the estimated useful life for certain of our equipment (modems).
The following table sets forth certain components of our cost of goods and services, as well as the percentage change of each component from the prior year, for 2008 and 2007.
| | | | | | |
| | | | | | | | | 2008 - 2007 | |
| | (in millions of reais, except percentages) | |
Cost of goods and services: | | | | | | | | | | |
Depreciation and amortization | | | 2,391 | | | | 2,348 | | | | 1.8 | |
Outsourced services | | | 1,525 | | | | 1,240 | | | | 23 | |
Interconnection services | | | 3,855 | | | | 3,617 | | | | 6.6 | |
Operational personnel | | | 199 | | | | 225 | | | | (11.6 | ) |
Organizational Restructuring Program | | | 21 | | | | 63 | | | | (66.7 | ) |
Materials | | | 132 | | | | 32 | | | | 312.5 | |
Other costs | | | 603 | | | | 504 | | | | 19.6 | |
Total cost of goods and services | | | 8,726 | | | | 8,029 | | | | 8.7 | |
Depreciation and amortization
Depreciation and amortization expenses increased 1.8% to R$2.4 billion in 2008 from R$2.3 billion in 2007, due primarily to a decrease in the estimated useful life for certain of our equipment as a result of our acquisition of new modems.
Outsourced Services
Expenses relating to services from third parties increased 23% to R$1.5 billion in 2008 from R$1.2 billion in 2007, due primarily to an increase in TV content, along with increased network access and network maintenance expenses.
Interconnection Services
Expenses related to interconnection services increased 6.6% to R$3.8 billion in 2008 from R$3.6 billion in 2007, principally due to an increase in expenses related to fixed-mobile traffic related to the increasing number of calls terminating on other providers' networks.
Operational Personnel
Such costs include expenses relating to salaries, bonuses and other benefits of employees that directly operate and maintain our businesses. Employee expenses decreased 11.6% to R$199 million in 2008 from R$225 million in 2007, mainly due to lower expenses related to wages, pension plan payments and other payroll expenses resulting from the Organizational Restructuring Program carried out in 2007, and lower expenses related to wages paid to mandatory officers due to a reduction of such officers in 2008 to 4 from 15 in 2007. This decrease was partially offset by an increase in bonus payments to senior officers and sales executives, as well as payments of indemnification for termination of employment contracts.
Organizational Restructuring Program
Expenses relating to the Organizational Restructuring Program decreased by 66.7% to R$21 million in 2008 from R$63 million in 2007. This decrease was due to lower expenditure requirements under this program.
Materials
The costs of materials increased 312.5% to R$132 million in 2008 from R$32 million in 2007, mainly due to the application of the new accounting classification criteria under Law 11,638/07 for the calculation of the cost of equipment for the Posto Informático product, which until fiscal 2008 had been recorded as a depreciation expense.
Other Costs
Other costs include costs associated with the lease of certain infrastructure equipment, poles and underground cables used to operate our telephone lines and costs associated with our concession contracts. Other costs increased 19.6% to R$603 million in 2008 from R$504 million in 2007, due primarily to an increase in infrastructure lease expenses for last-mile traffic termination and duct rental.
Operating Expenses, Net
Operating expenses increased 15.5% to R$3.5 billion in 2008 from R$3.1 billion in 2007, mainly due to an increase in expenses for third party services, increases in wage and wage-related payments for our sales associates, higher expenses in connection with technical and administrative services, and and increase in depreciation of fixed assets related to sales.
Selling Expenses
Selling expenses increased 5.6% to R$2.6 billion in 2008 from R$2.5 billion in 2007, mainly due to an increase in wage and wage-related payments for our sales associates, higher expenses in connection with technical and administrative services (especially with the print-on-demand service and with our call center), increases in telesales services, higher costs in connection with the provision of customer service, increases in customer redemption services, and depreciation of fixed assets related to sales.
General and Administrative Expenses
General and administrative expenses decreased by 10.0% to R$755 million in 2008 from R$839 million in 2007, mainly due to lower expenses resulting from the Organizational Restructuring Program in 2007 and lower depreciation expenses for plant and equipment in service. This decrease was partially offset by an increase in expenses for third-party services related to purchases of TV content.
Other Net Operating Income (Expenses)
Other net operating results include a variety of revenues and costs. In 2008, we had total expenses of R$167.0 million compared to an income of R$250.1 million in 2007. The 2007 income recorded was due primarily to the partial reversal of the INSS provision in the amount of R$105.7 million corresponding to the Bresser, Verão and SAT plans due to a favorable court decision, reduction in scrap iron revenues, increased in labor, tax and civil provisions and goodwill amortization.
Financial Expense, Net
We recorded a net financial expense of R$228.0 million in 2008 compared to a net financial expense of R$307 million in 2007. This reduction is mainly due to lower net debt and a decrease in funding costs.
Non-Operating Income, Net
The “non-operating income, net” line item that was reported in our income statement for prior periods no longer exists due to a change in Brazilian law. Upon adoption of Law 11,638/07, components of the non-operating result account were reclassified into other accounts in the income statement and for fiscal year 2008 and beyond (and for prior periods presented in this annual report) will no longer appear as an independent line item.
Income Tax and Social Contribution
Our income tax and social contribution expenses increased by 10.7% to R$1.1 billion in 2008 from R$977 million in 2007. This increase was due primarily to a decrease in tax credits attributable to our subsidiaries A. Telecom and Telefónica Data S/A and decreased tax benefits as a result of a decrease in the value of interest on shareholders’ equity. The increase in income tax and social contributions was also due in part to higher income before taxes and social contributions.
Net Income
As a result of the foregoing factors, net income increased 2.4% to R$2.4 billion in 2008 from R$2.4 billion in 2007.
Results of Operations for the Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
Net Operating Revenue
Net operating revenue increased by 0.6% reaching R$14.7 billion in 2007 from R$14.6 billion in 2006. The increase in net operating revenue is primarily a result of growth in data package communications revenue due to the consolidation of Telefónica Empresas S.A., an increase in revenue from our Speedy broadband services, and growth in national long distance service revenue. This increase was partially offset by a decline in revenue from measured service charges, network usage services, network access, local service, international long distance service and interconnection (fixed-mobile) traffic, and due primarily to the increase in anti-fraud activities, along with an increase in sales tax expenses and an increase in discounts given.
The following table sets forth certain components of our operating revenues for 2007 and 2006, as well as the percentage change of each component.
| | | | | | |
| | | | | | | | | 2007 - 2006 | |
| | (in millions of reais, except percentages) | |
Gross operating revenue: | | | | | | | | | | |
Local services: | | | | | | | | | | |
Monthly subscription charges | | | 5,646 | | | | 5,690 | | | | (0.8 | ) |
Activation fees | | | 120 | | | | 119 | | | | 0.8 | |
Measured service charges | | | 2,808 | | | | 3,243 | | | | (13.4 | ) |
Public telephones | | | 551 | | | | 584 | | | | (5.7 | ) |
Total | | | 9,125 | | | | 9,636 | | | | (5.3 | ) |
Long-distance services: | | | | | | | | | | | | |
Intraregional | | | 2,006 | | | | 2,090 | | | | (4.0 | ) |
Interregional and international | | | 1,349 | | | | 1,080 | | | | 24.9 | |
Total | | | 3,355 | | | | 3,170 | | | | 5.8 | |
Data transmission | | | 2,996 | | | | 2,021 | | | | 48.3 | |
Interconnection services | | | 4,064 | | | | 4,245 | | | | (4.3 | ) |
Network usage services | | | 405 | | | | 535 | | | | (24.3 | ) |
Network access | | | 319 | | | | 399 | | | | (20.1 | ) |
Other services | | | 920 | | | | 791 | | | | 16.2 | |
Total gross operating revenue | | | 21,184 | | | | 20,797 | | | | 1.9 | |
Value added and other indirect taxes | | | (5,575 | ) | | | (5,531 | ) | | | 0.8 | |
Discounts | | | (881 | ) | | | (623 | ) | | | 41.4 | |
Net operating revenue | | | 14,728 | | | | 14,643 | | | | 0.6 | |
Local Services
Revenues from local services decreased 5.3% to R$9.1 billion in 2007, from R$9.6 billion in 2006. The reduction was due primarily to the 2.3% decline in the average lines in service, a migration from pulse to minute causing a decline in consumption, and reduction in revenues from the sale of traffic packets. These declines were partially offset by the 2.2% tariff readjustment that took effect as of July 2007.
Monthly subscription charges. Revenues from monthly subscriptions decreased 0.8% to R$5.6 billion in 2007 compared to R$5.7 billion in 2006. The decrease in 2007 was primarily due to a reduction of 2.3% of the average lines in service and an increase in the basis of alternative plans, which have a lower subscription resulting in a drop in revenue of R$43.3 million; this loss is within the scope of the company’s efforts to improve the client portfolio. These declines were partially offset by the 2.2% tariff readjustment that took effect as of July 2007.
Activation fees. Revenues from monthly activation fees increased by 0.8% to R$120 million in 2007 from R$119 million in 2006. The increase was mainly due to the growth of new alternative plans in fixed telephony partially offset by a reduction in activation fees.
Measured service charges. Revenues from measured service charges decreased 13.4% to R$2.8 billion in 2007 from R$3.2 billion in 2006. The decrease in 2007 was due primarily to the reduction of 2.3% in the average lines in service, a migration from pulses to minutes, and the sale of traffic packages (DUO and TRIO) where there was a drop in the amount per minute for calls, causing a drop in traffic and a reduction in revenue with local TUP calls collected. These effects were partially offset by a tariff readjustment that became effective on October 1, 2007.
Public telephones. Revenues from charges for the use of public telephones decreased by 5.7% to R$551 million in 2007 from R$584 million in 2006. This decrease in 2007 was due to drops in income from sales of telephone cards and local/intraregional traffic. Offsetting this, there was an increase in international traffic.
Long-Distance Services
Revenues from long distance services increased by 5.8% to R$3.4 billion in 2007 from R$3.2 billion in 2006, due primarily to greater fixed-mobile service traffic, due to the increase in the code “15” (code used to select a service provider) participation, based on customer loyalty sales efforts, and the success in the sale of long distance traffic packages, in addition to the tariff readjustment that took effect as of July 2007. This effect was partially offset by a drop in revenue from fixed-fixed traffic and personal mobile service.
Data Transmission
Revenues from dataData transmission services increased 48.3% torevenue reached R$3 billion5,028.4 million in 2007 from R$2 billion in 2006. The increase in 2007 was primarily due to the growth of our Speedy services, dedicated IP and Frame Relay services, in addition to the increase in hosting revenue from internet service providers and other services such as equipment leasing, outsourcing and management, resulting from the migration of services rendered by the subsidiary Telefónica Data S/A.
Interconnection Services
Revenues from interconnection services decreased by 4.3% to R$4.1 billion in 2007 from R$4.2 billion in 2006, due primarily to a decrease in revenue from SMP (Personal Mobile Service) and fixed collect calls and SMP, as a result of greater anti-fraud activities, partially offset by the tariff readjustment that took effect in July 2007,2010, an increase in fixed-mobile traffic revenue and mobile traffic.
Network Usage Services
Revenues from network usage services decreased by 24.3%of 7.3% when compared to R$4054,685.4 million in 2007 from R$535 million in 2006,2009. This growth is justified by a dropincreased hiring and the actions of sales personnel and the Company’s commitment to quality, reflected in revenue from local calling and interurban calls, in addition to a decrease in mobile-fixed termination calls, these effects were caused primarily by the new interconnection rules that took effect as of January 1, 2007, according to which rates for local network usage were limited to 40% of the amount of the public rate per local minute. In contrast, there was an increase in revenue from international network usage rates.
Network Access
The revenues derived from network access decreased 20.1% to R$319 million in 2007 from R$399 million in 2006, due primarily to the drop in revenues from leases of dedicated lines to other carriers (EILD), as well as decrease network transfer revenue. In contrast, there was an increase in revenue from link compensation and equipment leasing for industrial exploration (EILD).
Other Services
Revenues from other services increased 16.2% to R$920 million in 2007 from R$791 million in 2006. These effects were caused by an increase in revenue from TV services, additional services such as: Detect, equipment leasing, Technical consulting and due to an increase in the salecustomer satisfaction index and larger customer base. There were 680,401 net additions of infrastructure equipment. In contrast, there wasbroadband, the largest gain in our history. Additionally, data revenue in the corporate segment increased in 2010.
Interconnection Revenue
Interconnection revenue totaled R$523.8 million in 2010, an increase of 7.4% when compared to R$487.8 million in 2009. This change is due to higher mobile incoming traffic. Additionally, we recorded a declinetariff readjustment for local, domestic long-distance and interconnection services of 0.66%, effective as of October 8, 2010.
Pay TV
Pay TV revenue totaled R$587.4 million in other additional services such as advertising commissions2010, representing a decrease of 2.2% in telephone directories, rentrelation to R$600.3 million in 2009. This decrease is mainly related to the lower average customer base in 2010. However, the trend changed in the last quarter of 2010, with 21,000 net additions of new customers, due to the Company’s repositioning in relation to this product and compensation for circuits andthe significant churn reduction in the installation fees for telecommunications equipment.period.
Value Added and Other Indirect TaxesOthers
Value added and other indirect taxes increased 0.8%Other revenue registered R$1,103.4 million in 2010, a decrease of 8.4% when compared to R$5.6 billion in 20071,205.0 million 2009. This decrease occurred because of lower revenue from R$5.5 billion in 2006, in accordance with the increase in operating revenues.
Discounts
Discounts increased 41.4% to R$881 million in 2007 from R$623 million in 2006. The increase was due primarily to promotional discounts for Speedy and Dedicated IP services.
Cost of Goods and Services
Costresale of goods and value added services, primarily includes depreciation and amortizationbut was partially offset by a revenue increase due to us providing integrated solutions in the corporate segment.
Operating Expenses
Operating expenses interconnection services, personnel expenses and coststotaled R$12,235.9 million in 2010, a decrease of services provided by third parties. Cost of goods and services increased 3.2% to R$8 billion in 20071.8% when compared to R$7.8 billion12,457.4 million in 2006, mainly due to an increase in expenses related to personnel and rent for network transmission.
2009. The following table sets forth certainthe components of our cost of goods and services, as well as the percentage change of each component from the prior year, for 2007 and 2006.operating expenses:
| | | | | | |
| | | | | | | | | 2007 - 2006 | |
| | (in millions of reais, except percentages) | |
Cost of goods and services: | | | | | | | | | | |
Depreciation and amortization | | | 2,348 | | | | 2,351 | | | | (0.1 | ) |
Outsourced services | | | 1,240 | | | | 1,172 | | | | 5.8 | |
Interconnection services | | | 3,617 | | | | 3,554 | | | | 1.8 | |
Operational personnel | | | 225 | | | | 213 | | | | 5.6 | |
Organizational Restructuring Program | | | 63 | | | | 18 | | | | 250.0 | |
Materials | | | 32 | | | | 44 | | | | (27.3 | ) |
Other costs | | | 504 | | | | 429 | | | | 17.5 | |
Total cost of goods and services | | | 8,029 | | | | 7,781 | | | | 3.2 | |
| | | | | Pecent change | |
| | | | | | | | | |
| | (in millions of reais, except percentages) | |
Operating Expenses | | | (12,235.9 | ) | | | (12,457.4 | ) | | | (1.8 | ) |
Interconnection expenses | | | (4,519.0 | ) | | | (4,236.0 | ) | | | 6.7 | |
Personnel expenses | | | (988.6 | ) | | | (793.9 | ) | | | 24.5 | |
Outsourcing expenses | | | (4,096.9 | ) | | | (3,657.9 | ) | | | 12.0 | |
Bad debt provision | | | (386.3 | ) | | | (564.6 | ) | | | (31.6 | ) |
Taxes | | | (342.9 | ) | | | (343.2 | ) | | | (0.1 | ) |
Other operating revenue (expenses) | | | 11.3 | | | | (356.3 | ) | | | (103.2 | ) |
Depreciation and amortization | | | (1,913.5 | ) | | | (2,505.5 | ) | | | (23.6 | ) |
Depreciation and amortizationInterconnection Expenses
Depreciation and amortizationInterconnection expenses decreased 0.1%totaled R$4,519.0 million in 2010, an increase of 6.7% when compared to R$2.3 billion4,236.0 million in 2007 from R$2.4 billion in 2006, due primarily to a reduction in the depreciation of permanent assets and a decrease in our provision for modem obsolescence. This provision2009. Such effect is made in connectionmainly explained by higher expenses with technological advances in the market.
Outsourced Services
Expenses relating to services from third parties increased 5.8% to R$1.24 billion in 2007 from R$1.17 billion in 2006, due primarily to the increase in expenses for private terminal maintenance,total unbundled loops, an increase in support labor costs,mobile incoming traffic with the “15” use (indicating our selection code of operator) and an increaseMobile Network Interconnection Fee (VUM) readjustment of 0.67% in electrical power costs.February, 2010.
Personnel Expenses
Expenses relatingPersonnel expenses reached R$988.6 million in 2010, a growth of 24.5% in relation to interconnection services increased 1.8% to R$3.62 billion793.9 million in 2007 from R$3.55 billion in 2006,2009. This increase is mainly due to a reversal of labor contingencies in the second quarter of 2009 in the amount of R$159 million and to the non-recurring expenses related to personnel reorganization in the amount of R$74.8 million, accounted for in the fourth quarter of 2010.
Outsourcing Expenses
Outsourcing expenses reached R$4,096.9 million in 2010, an increase of 12.0% when compared to R$3,657.9 million in mobile-originating traffic,2009. This increase is related to an increase of commercial expenses, mainly in customer service, as a result of our commitment to quality and customers satisfaction, a higher concentration of advertising campaigns in 2010, and higher expenses with useregard to network maintenance.
Bad Debt Provisions
Bad debt provisions registered R$386.3 million in 2010 from R$564.6 million in 2009, representing a decrease of 31.6%. As a percentage of the “15” code, outgoing traffic expense andnet operating revenue, the ratio decreased from 3.6% in 2009 to 2.5% in 2010. This effect is explained by an improvement in the customer base profile through our strong performance in our commercial debt collection. Our 1.8% bad debt provision percentage on net operating revenue registered in the fourth quarter of 2010 is one of the lowest levels we have ever reached.
Taxes
Taxes reached R$342.9 million in 2010, a decrease of 0.1% when compared to R$343.2 million in 2009. This variation is justified by the tariff readjustment that took effectdecrease in July 2007.taxes due to services provided between us and our subsidiaries. This effect was partially offset by the new interconnection rules that took effectan increase in January 2007, which decreased by 20% the maximum amount of rates applicable to the use of local networks (TU-RL) in comparison to the rates in effect in December 2006.
Operational Personnel
Employee expenses consist of expenses relating to salaries, bonusesFUST and other benefits of employees that directly operate and maintain our services businesses. Employee expenses increased 5.6% to R$225 million in 2007 from R$213 million in 2006, mainly due to the promotion of 20% of employees and salary revisions that occurred in May and November 2007.
Organizational Restructuring Program
Expenses relating to the Organizational Restructuring Program increased by 250% to R$63 million in 2007 from R$18 million in 2006. This increase was due to the Incentive Plan (Plano de Desligamento Incentivado – PDI) approved in 2007.
Materials
The costs of materials decreased 27.3% to R$32 million in 2007 from R$44 million in 2006, mainly due to a decreaseFUNTEL in the costs of productive plant maintenance materials and public telephone cards.period.
Other CostsOperating Revenue (Expenses)
Other costs include costs associated with the lease of certain infrastructure equipment, poles and underground cables used to operate our telephone lines and costs associated with our concession contracts. Other costs increased 17.5% tooperating revenues (expenses) reached R$50411.3 million in 2007 from2010, mainly justified by the sale and assignment of the right of use of non strategic assets during 2010 in the total amount of R$429320.6 million, in 2006, due primarily to an increase in equipment leasing expenses for the last mile, pole leasing expenses, andpartially offset by the cost of goods sold. In contrast, theresold to the corporate segment.
Depreciation and Amortization
Depreciation and amortization reached R$1,913.5 million in 2010 compared to R$2,505.5 million in 2009, a decrease of 23.6% explained by the adoption of new terms for certain categories of assets, which resulted in changes in those assets’ useful life time when compared to those in 2009. Because this was a reductionchange in other federal taxes.accounting estimates, the effects of this change were recorded prospectively from the year of 2010. This movement generated a decrease of R$399.6 million in the depreciation expense in the year.
Operating Expenses, NetEquity in Earnings of Associates
OperatingEquity in earnings of associates in 2010 reached R$2.9 million, compared to R$18.8 million in 2009, representing a decrease of 84.6%. This decrease is explained by the effect of applying equity accounting of the shareholding of Cable TV operators.
Financial Result
For the year-end period ended on December 31, 2010, net financial expenses increased 21.2%reached R$120.7 million, increasing by R$68.1 million or 36.0% when compared to R$3.2 billion in 2007 from R$2.6 billion in 2006,the period ended December 31, 2009, mainly due to lower net debt. In relation to the provision reversal in 2006 for a federal tax contingency (with respectlast quarter of the previous year, the result was increased by R$19.2 or 37.1% due to COFINSthe same effect.
Income and PIS)Social Contribution Taxes
We recorded expenses from income and social contribution taxes in the amount of R$257.6 1,045.8 million and a partial reversal in 20072010, an increase of 2.4% from an INSS provision corresponding to Economic Plans that occurredexpense of R$1,021.0 million in the past (Bresser, Verão and SAT Plan)2009. The increase in 2010 was due to the statute of limitations, which is a five years decrease of R$101 million, and an increase in selling expenses mainly outsourcing of systems production, expenses from salary readjustments and an allowance for doubtful accounts due to a change in commercial policy and major non-payment.
Selling Expenses
Selling expenses increased 19.9% to R$2.3 billion in 2007 from R$1.9 billion in 2006, mainly due to the increase in expenses from outsourcing of systems production, expenses from salary readjustments and an allowance for doubtful accounts due to a change in commercial policy and major non-payment.
General and Administrative Expenses
General and administrative expenses decreased by 14.6% to R$839 million in 2007 from R$983 million in 2006, mainly due to a reduction in security services and in logistics services (such as storage of TV and telecommunications equipment). These effects were partially offset by the salary expenses associated with the Organizational Restructuring Program, salary increases related to the promotion of 20% of our employees, and fines imposed by ANATEL related to co-billing. In 2007, fixed assets and their respective depreciation expenses were reclassified as general and administrative expenses for cost purposes.
Other Net Operating Income
Other net operatinghigher income includes a variety of revenues and costs and totaled R$170.6 million in 2007 compared to R$276 million in 2006, due primarily to the partial reversal by the Company of the INSS provision corresponding to the Bresser, Verão and SAT plans due to a five year decrease totaling R$105.7 million, of which the amount of R$4.6 million was reverted to the financial result for 2007.
Financial Expense, Net
We recognized a net financial expense of R$307 million in 2007 compared to a net financial expense of R$331 million in 2006. The financial result improved due primarily to a drop in the CDI rate, reducing expenses and lower average indebtedness.
Income Tax and Social Contribution
Ourbefore income tax and social contribution expenses decreased by 11.8% to R$977 million in 2007 from R$1.1 billion in 2006. This decrease was due primarily to lower company pre-tax profits, causing a reduction in the taxable basis. Our effective tax rate in 2007 was 29.3% compared to 28.2% in 2006. See Note 30 to the consolidated financial statements.taxes.
Net Income
As a result of the foregoing factors, net income decreased 16.1 % to R$2.4 billion in 2007 from R$2.8 billion in 2006.
B. B. | Liquidity and Capital Resources |
General
We have funded our operations and capital expenditures mainly from operating cash flows and loans obtained from financial institutions. As of December 31, 2008,2011, we had R$1.72.9 billion in cash and cash equivalents. Our principal cash requirements include:
| · | the servicing of our indebtedness,indebtedness; |
| · | capital expenditures,expenditures; and |
| · | the payment of dividends. |
Sources of Funds
Our cash flow from operations was R$5.18.1 billion in 2008,2011 compared to R$4.84.5 billion in 2007 and R$5.0 billion in 2006.2010. The increase in cash flow from operating activities of 7.4%79.6% in 20082011 compared to 20072010 was due primarily to an increase in average revenue per user in 2008 due to growth in sales revenuesthe consolidation of Vivo and shorter customer payment periods. In addition, in 2008 we did not have to pay ANATELVivo Participações as of April 2011. When analyzing Telefônica Brasil excluding Vivo and Vivo Participações (the “Company”), a concession renewal fee, which is only required in uneven years. Our decrease inof cash flow from operating activities of 4.6%23.5% to R$3.4 billion in 2007 compared2011 from R$4.4 billion in 2010 is due to 2006 was due primarily to the payment to ANATEL oflower margins partly offset by a concession renewal feeslight increase in the amount of R$224.8 million.revenues.
Our future cash flow is subject to the rates approved by ANATEL and the impact of competition on our revenues. We expect to continue to experience a reliable and steady source of internal cash flow from operations for the foreseeable future from our base of customers and installed network.
Uses of Funds
Our cash flow used in investing activities was R$2.12.0 billion in 20082011 compared to R$2.31.7 billion in 2007 and R$1.9 billion2010. The increase in 2006. In 2008, we increased our investments in property, plant and equipment, butcash flow used less cash in investing activities of 22.3% in 2008 as2011 compared to 2007,2010 was primarily due to the acquistionconsolidation of NavytreeVivo and Vivo Participações as of April 2011. When analyzing Telefônica Brasil excluding Vivo and Vivo Participações, the investing activities decreased to R$478.8 million in 2007 and offset2011 from R$1.7 billion in part by the sale2010 due mainly to dividends of real estate. The increase in 2007 compared to 2006 was due primarily to the acquisition of Navytree and the increase in investments in the property, plant and equipment of the company, partially offset by the sale of real estate located in the Barra Funda district.R$1.0 billion received from Vivo Participações, before its merger with us.
Our cash flow used in financing activities was R$2.24.7 billion in 20082011 compared to R$1.73.6 billion in 2007 and R$3.4 billion used in 2006.2010. The increase in cash flow used in financing activities of 31.6% in 20082011 compared to 2010 was due primarily to lower dividend payments and lower indebtedness. The decrease in cash flow used in financing activities in 2007 was due primarily to an increase in loans obtained and a decrease in thehigher payment of dividends.dividends by Telefônica Brasil and Vivo Participações, partly offset by the loan obtained from BNDES.
Indebtedness
As of December 31, 2008,2011, our total debt was as follows:
| | | | Annual interest rate payable | | | | Principal amount outstanding (in thousands of reais) |
Loan and Financing BNDES | | R$ | | TJLP + 1.48% to TJLP + 9.0% | | 2019 | | 3,063.2 |
Loan and Financing BNDES | | R$ | | 4.5% to 5.5% | | 2020 | | 155.0 |
Loan and Financing BNDES | | UMBNDES | | 5.97% | | 2019 | | 194.3 |
Loan and Financing BNB | | R$ | | 10.0% | | 2016 | | 438.3 |
Working Capital Loan | | R$ | | 108.90% of the CDI | | 2012 | | 91.6 |
Mediocredito | | US$ | | 1.75% | | 2014 | | 14.0 |
EIB | | US$ | | 4.18% to 4.47% | | 2015 | | 708.0 |
Resolução 4131 | | US$ | | 4.10% | | 2013 | | 282.2 |
Debentures | | R$ | | 106% to 112% of the CDI | | 2013 | | 1,101.1 |
Debentures | | R$ | | IPCA+ 0.5% to IPCA+7.0% | | 2021 | | 155.3 |
Others | | R$ | | | | 2014 | | 0.9 |
| | | | Annual interest rate payable | | | | Principal amount outstanding (in thousands of reais) |
Loan and Financing BNDES | | R$ | | TJLP + 3.73% | | 2015 | | 1,689,521 |
Mediocrédito | | US$ | | 1.75% | | 2014 | | 34,860 |
Debentures | | R$ | | CDI + 0.35% | | 2010 | | 1,500,000 |
Resolution No. 2,770 | | JPY | | 0.5% to 5.78% | | 2009 | | 211,947 |
Resolution No. 2,770 | | EUR | | 5.74% | | 2009 | | 80,562 |
Resolution No. 2,770 | | JPY | | 1.0% | | 2009 | | 48,166 |
Untied loan –JBIC | | JPY | | LIBOR + 1.25% | | 2009 | | 127,979 |
Accrued Interest | | R$/US$/JPY/EUR | | — | | 2009 to 2014 | | 43,159 |
Total debt | | | | | | | | 3,736,194 |
Current | | | | | | | | 518,842 |
Long-term | | | | | | | | 3,217,352 |
| | | | Annual interest rate payable | | | | Principal amount outstanding (in thousands of reais) |
Total debt | | | | | | | | |
Current | | | | | | | | 1,457.0 |
Long term | | | | | | | | 4,746.9 |
Interest and principal payments on our indebtedness as of December 31, 20082011 due in 20092012 and 20102013 total R$518.81,457.0 million and R$1.5 billion,1,798.1 million, respectively.
The agreements that govern the majority of our outstanding loans and financings contain certain standard restrictive covenants, which may provide for the acceleration of the full balance of our obligations in the event of any default. As of December 31, 2008,2011, we were not in default of any of our obligations and therefore none of our liabilities were subject to acceleration.
Capital Expenditures and Payment of Dividends
Our principal capital requirements are for capital expenditures and payments of dividends to shareholders. Additions to property, plant and equipment totaled R$2.3 billion, R$2.05.4 billion and R$1.72.4 billion for the years ended December 31, 2008, 2007,2011 and 2006,2010, respectively. Our capital expenditures for the year 20092012 are expected to be approximately R$2.4 billion.similar to 2011. These expenditures relate primarily to the expansion of our network. We expect tomay seek financing for part of our capital expenditures eitherand cash management assistance from equipment suppliers andthe Brazilian government, agencies,in particular from BNDES, which is the main government financing agent in Brazil, as well as from the local or foreign capital markets or from local and foreign financial institutions. See “Item 4.A—4. Information on the Company—A. History and Development of the Company—Capital Expenditures.”
Pursuant to our bylaws and Brazilian Corporate Law, we are required to distribute a mandatory minimum dividend of 25% of “adjusted net income” (as defined below) in respect of each fiscal year, to the extent earnings are available for distribution. Holders of preferred shares are assured priority in the reimbursement of capital, without a premium, and are entitled to receive cash dividends that are 10% higher than those attributable to common shares.
Adjusted net income, as determined by Brazilian Corporate Law, is an amount equal to our net income adjusted to reflect allocations to or from (i) legal reserve, (ii) statutory reserve and (iii) a contingency reserve for anticipated losses, if any.
We may also make additional distributions to the extent that we have available profits and reserves to distribute. All of the above distributions may be made as dividends or as tax-deductible interest on shareholders’ equity. We paid dividends of R$2.25.4 billion, R$2.61.9 billion and R$3.11.5 billion in 2008, 2007,2011, 2010 and 2006,2009, respectively.
Our management expects to meet 20092012 capital requirements primarily from cash provided from our operations. Net cash provided by operations was R$5.1 billion, R$4.78.1 billion, and R$5.04.5 billion in 2008, 20072011 and 2006,2010, respectively.
According to Brazilian Corporate Law and our by-laws, we must generally pay dividends to all shareholders equal to at least 25% of our annual net income, as determined and adjusted under the Brazilian Corporate Law. These adjustmentsAdjustments to net income for purposes of calculating the basis for dividends include allocations to various reserves that effectively reduce the amount available for the payment of dividends. For the fiscal year ended December 31, 2008,2011, the Board of Directors Meeting held on February, 17, 200915 decided to submit to the
shareholders meeting a proposal to pay dividends in the amount of R$395,110,343.71,1.9 billion, which, together with the interim dividend and interest on own capital payments made in 2008,2011, would be more than sufficient to meet the minimum dividend required by Brazilian law. The proposal to pay dividends was approved by a General Shareholders Meeting held on March 25, 2009.April 11, 2012. See “—Our“Item 3. Key Information—D. Risk Factors—Risks Relating to the Preferred Shares and the ADSs—Holders of our preferred shares and our ADSs generally do not have voting rights.rights” and “Item 10. Additional Information—B. Memorandum and Articles of Association—Voting Rights.”
New Accounting Pronouncement
Recently Adopted Standards
The consolidated financial statements were prepared and are being presented in accordance with the IFRS.
We adopted all the standards, revisions of standards and interpretations issued by IASB, which entered into force as of January 1, 2011 including:
IAS 24 (Revised) Related Party Disclosures
This revised standard introduces the following changes: (i) provides a partial exemption for government related entities, requiring disclosure of balances and transactions between them only if they are individually or collectively significant; and (ii) provides a new revised definition of a “related party.” The adoption of this standard did not impact the Company’s financial situation or results.
Changes to IAS 32 Financial Instruments Presentation
This change is intended to clarify that subscription right issues that allow the acquisition of a fixed number of own equity instruments at a fixed price will be classified as equity, irrespective of currency it is denominated and its exercise price, assuming that the issuance is made to all shareholders of a given class of shares or equity proportionate to the number of securities that they hold. The adoption of these changes did not impact the Company’s financial situation or results.
Improvements to International Financial Reporting Standards (IFRS) (May 2010)
This text introduces a series of improvements to IFRS in force mainly to eliminate inconsistencies and clarify the wording of some of these standards. These improvements did not impact the Company’s financial situation or results.
IFRS 3 Business Combinations
The measurement options available for noncontrolling interest (NCI) were amended. Only components of NCI that constitute a present ownership interest that entitles their holder to a proportionate share of the entity’s net assets in the event of liquidation should be measured at either fair value or at the present ownership instruments’ proportionate share of the acquiree’s identifiable net assets. All other components are to be measured at their acquisition date fair value.
The amendments to IFRS 3 are effective for annual periods beginning on or after July 1, 2011.
IFRIC 19 Extinguishing financial liabilities with equity instruments
This interpretation establishes that: (i) when the conditions of a financial obligation are renegotiated with a lender and such lender agrees to accept equity instruments from that company to settle that financial liability in full or in part the instruments issued will be considered as part of an installment paid to settle the financial liability; (ii) these instruments will be measured at their fair value, except when these cannot be reliably measured, in which case measurement of new instruments should reflect the fair value of the settled financial liability; and (iii) the difference between the book value of the cancelled financial liability and the initial amount of equity instruments issued is recorded in the income for the period. The adoption of criteria introduced by this new interpretation did not have any impact on the Company’s financial situation or results.
Changes to IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
This change is applied in specific situations when an entity has an obligation to make minimum annual contributions in relation to its post-employment defined benefits plans and makes prepayments to cover these requirements. The change allows an entity to treat the economic benefits of such prepayment as an asset. The adoption of these criteria did not have an impact on the Company’s financial situation or results.
Recently Issued Standards
New IFRS standards and interpretations of the IFRIC (IFRS Interpretations Committee of the IASB) have been issued but their application was not mandatory.
Management of the Company and its subsidiaries has analyzed the impacts of these new pronouncements and interpretations and do not expect their adoption to cause a material impact on the yearly information of the Company and its subsidiaries.
Standards and Amendments to Standards | | Application required: fiscal years beginning from |
Amendments to IAS 1 | Presentation of items of other comprehensive income | | July 1, 2012 |
Amendments to IAS 12 | Deferred tax: Recovery of underlying assets | | January 1, 2012 |
IFRS 9 | Financial instruments | | January 1, 2015 |
IFRS 10 | Consolidated Financial Statements | | January 1, 2013 |
IFRS 11 | Joint Arrangements | | January 1, 2013 |
IFRS 12 | Disclosure of Interests in Other Entities | | January 1, 2013 |
IFRS 13 | Fair Value Measurement | | January 1, 2013 |
IAS 19 revised | Employee Benefits | | January 1, 2013 |
IAS 27 revised | Consolidated and Separate Financial Statements | | January 1, 2013 |
IAS 28 revised | Investments in Associates and jointly controlled companies | | January 1, 2013 |
Amendments to IFRS 7 | Disclosure–transfers of financial assets | | July 1, 2011 |
Amendments to IFRS 7 | Disclosure–offsetting of financial assets and financial liabilities | | January 1, 2013 |
Amendments to IAS 32 | Offsetting Financial Assets and Financial Liabilities | | January 1, 2014 |
The Company is currently analyzing the impact of the application of these standards, amendments and interpretations. Based on preliminary analysis to date the Company estimates that their application will not have a significant impact on the consolidated financial statements of the Company. Notwithstanding this, changes introduced by IFRS 9 will affect the presentation of financial assets and transactions with those occurring as of January 1, 2015.
C. Research and Development, Patents and Licenses
Research and Development
We conduct independent research and development on telecommunications services; however, we do not independently develop new telecommunications hardware. We primarily depend on several manufacturers of telecommunications products for the purposes of such development.
In 2005, we entered into a new agreement with the Center for Research and Development or CPQD, so as to assure the life cycle, support and maintenance of the systems implemented by CPQD for Telesp during the term of the Agreement 7000.
The agreement was negotiated for R$11.8 million and, during its term, we had access to telecom software development, technological services of research and development, equipment maintenance, consulting and training.
CPQD has within its portfolio a tool used by Telefónica for management, planning, engineering and maintenance of terminals of the external network. This tool has data related to the wires, fiber optics and usage of the external network, among other things.
Telefónica also uses another product from CPQD which controls terminals and manages the analogical plant.
Our research and development expenses, including our monetary contributions to CPQD, were R$10.5 million for 2004. For 2005, there were no expenses in respect of Research and Development with CPQD. In 2006, we made investments in research and development, in partnership with the CPQD, in the amount of R$10.3 million, to maintain our products and services in line with the new technologies available in the global market. In 2007, we invested R$12.3 million to align our services with the market’s, as well as to update our tools for providing new products and services supplied by Telefónica and in 2008, we invested R$6.6 million in regulatory compliance and network upgrades in preparation for the implementation of Number Portability.
We also invested R$7.0 million to maintain our products and services in line with the new technologies available in the global market. In addition, we invested R$4.6 million in the development of management solutions for a new network (GPON) through CPQD’s tools.
We also entered into a contract in 2004 with Telefônica Research and Development (TPD) to guide our Network Management and Operation group toward an automated system and to focus our performance. We invested R$2.5 million in 2004 in this regard. In 2005, we invested an additional R$2.3 million in TPD to improve its tools. In 2006, we invested R$7.3 million to improve its services and to further optimize its processes.
Continually seeking to improve our services and pursuant to our contract with TPD, in 2007 we invested R$3.4 million to develop the systems responsible for operating and managing our internal network. These systems are responsible for inventory, fault, configuration and fulfillment. In 2008, together with TPD, we invested R$2.6 million in regulatory compliance and network upgrades in preparation for the implementation of Number Portability. We also invested R$1.8 million for development of NGN and WLL. In addition, we invested R$8.4 million for IP networks and R$3.1 in customer management solutions.
On April 26, 2007, FAPESP and Telefónica entered into an agreement whereby Telesp would supply a 4,000-km fiber network connecting 13 universities and 54 laboratories (including six hospitals). The network covers more than 600 researchers and was developed to contemplate open innovation. FAPESP will provide R$12 million over the life of the contract for project notices sent to the market, meeting Telefónica’s technological innovation demands. This network is one of the largest open innovation networks in Latin America, and in 2007 we had 17
proposals of technological innovation presented, seven of them approved with investments from the government, businesses and science and technology institutes in the state of São Paulo.
Telefónica realizes that itBrasil operates in a fast-paced, dynamic and convergent industry, which demands that ourits products and services be continuously revamped in order to keep up with growth expectations. Accordingly, since 2005, Telefónicathe Company created a new Strategic Innovation Unit that aims to develop new products and services to be tested or launched by Telefónicathe Company in the near future.
Also, in order to keep pace with constant innovation, TelefóTelefônica Brasil created a business incubator that helps the organization to easily handle emerging business opportunities of large sizes or risks that otherwise would be difficult to administermanage in the context of current business units. In 2011, R$1.3 million were invested in innovation.
The table below presents the Telefônica Brasil investments in development, update and modernization of systems to support the launch of new products, improve the external plant inventory quality and take advantage of the new rules for technology businesses. Seeking to continually improve and modernize its services, the Company partnered with partners specialized in R&D such as the CPqD and Telefônica Pesquisa e Desenvolvimento (TPD). In 2011, R$44.6 million was invested in development.
| | | | | | | | | |
| | (in millions of reais) | |
Development | | | 44.6 | | | | 12.5 | | | | 11.0 | |
Innovation (business incubator and tests) | | | 1.3 | | | | 6.8 | | | | 4.1 | |
Total | | | 45.9 | | | | 19.3 | | | | 15.1 | |
The partnership between Telefônica Brasil and CPqD allows Telefônica Brasil to keep informed of technical research services, development of new features in current systems, and services in the areas of consulting and training. Telefônica Brasil can benefit from the use of a specific tool that monitors and manages data of cables, optical fiber and the level of use of its external network.
The partnership between Telefônica Brasil and TPD allows the organization to transfer to an automatic model of management of the planning and operation network focused on performance.
Vivo maintains partnerships with the Since 2007, Telefónica has used certain government incentives focused on loweringUniversidade Federal do Rio Grande do Sul (UFRGS). Such partnerships permit Vivo to have laboratories at the universities, which conduct research and development expenses. Act No. 11,196/05 provides such fiscal incentivesof new technologies, and which support and push innovative processes. Vivo also solidified a partnership at the end of 2004 with the Centro de Pesquisas e Desenvolvimento em Campinas—São Paulo (CPqD), to companies that focus on innovation. Under the terms of this Act,assess and acknowledging the importance of R&D in innovationstudy new technologies. Vivo also relies on the overall CAPEX, Telefónica invested R$387 million in 2006 on projects in innovationresearch and R$522 million in 2007, for a totaldevelopment of R$909 million in these two years. This delivered a cash flow gain of R$69.1 million during these two years. In 2008, Telefónica spent about R$268 million on R&D projects with a cash flow gain of R$32.5 million.our third-party suppliers.
Patents and Licenses
Our principal intellectual property assets include:
| · | permission to use the trademark name “Telefônica” and all names derived from “Telefônica”; |
| · | our name “Telecomunicações de São Paulo“Telefônica Brasil S.A. - Telesp””; and |
| · | our commercial brands, “Super 15” for long-distance services and “Speedy” for broadband products, “Telefónica TV Digital” for pay television service, “DUO” for telephone and broadband service and “TRIO” for telephone, broadband and Digital TV service.service, and |
| · | our commercial brands for mobile services rendered by Vivo, such as, “Vivo,” “ Meu Vivo,” “Vivo Empresas,” “Vivo Celular,” among others. |
In 2009,2012, we believe the telecommunications industry will continue to face the challenges presented by the global economic slowdown. We believe that the effects of the slowdown will be felt in the telecommunications industry more gradually and less intensely than in certain other industries that are more depending on international commerce with other countries or regions that are more directly affected by the economic crisis such as, for example, the United States and Eurozone countries. Nevertheless, we do expectexpecting a slowdown infavorable scenario from the Brazilian economy with an expansion concentrated in the middle class. The raise in consumption is going to increase the demand for telecom services, including Voice, Data and anticipate itPay TV, making the competition more aggressive. Companies are integrating mobile and fixed operations to offer complete and integrated services to meet the consumer needs. Data services (mobile and fixed) will affectstill be relevant in the telecommunications market. Moreover, we expect to face pressure in managing our cost structure in connection with equipment imported from abroad due to fluctuations in exchange rates.
From a business and strategy perspective, onenext years, mainly because of the most important factorsgrowth in the development of the telecommunications industry in the future is technological convergence, represented by the integration of networks and services, about which debates have arisen with respect to its technological, as well as legal, regulatory and commercial, aspects.
Observation of more mature markets, such as the European and Asian markets,smartphone penetration and the current evolution of offers ofincreasing demand for data traffic, driven by OTT services, and convergent productsalready present in the Brazilian market shows(Sky Online, Netflix, Net Now). We expect that we will maintain our leadership in the need formobile segment, even with a player challenging our leadership in the development of a more complete portfolio of services, with better integrated operations, especially forpre paid market. For the fixed voice, broadband and pay TV. To this end, we are focused on developing and offering convegent products and integrated offerings, keeping in mind the needs of the “digital home office”. With the offering of Telefónica TV Digital (DTH) and IPTV through a partnership with TVA, whichoperation, we expect to launchgrow in early 2009, we seekthe ultra-broadband and in the Pay TV market. We will strive to meet these market demands. We are seekingmaintain quality, always providing excellent services to diversify and expand our offering of bundled products (DUOs and TRIOs), with a focus on content (such as through the launch interactive high definition TV again through our venture partner TVA), more personalized offerings, video on demand services and development of products such as the “Passarela”, a control hub forclients.
connecting multiple home media and office applications. We are also improving our customer support services with more emphasis on client attention, such as with “Dr. Speedy”, an information systems technical support offering which provides telephonic support, remote service and on-site technical support.
We expect competition in the industry to remain intense during 2009, particularly with the ongoing implementation of Number Portability throughout Brazil. In addition, due to the change in the General Plan of Grants in 2008, which allowed for telecommunications operators in the same corporate group to offer telecommunications services in more than one region, the industry has already undergone a certain degree of consolidation, which we expect may continue in the near future. Specifically, with the merger of Brasil Telecom and Oi, a large new national telecommunications provider has already changed the competitive landscape, with an aggressive market strategy with plans to offer broadband mobile services by way of 3G technology and fixed telephone services in our market concession region. In addition, our competitors are frequently expanding their product portfolios, obtaining new licenses and upgrading the speed of their high-speed broadband offerings. Moreover, mobile telephone operators represent an ever greater source of competition, constantly developing additional alternatives both to fixed-line telephone service and broadband services.
The broadband market will likely continue to show strong growth, as broadband is considered to be the basic platform for developing convergent products and services. We expect to increase the speeds offered and the sophistication of our products, drawing on new business models – as we have already done with our VoIP, e-commerce and triple play – we are endeavoring to be in a leading position in these movements of the market, such as by expanding our offering of broadband services and developing more value-added services (such as wi-fi modems, improved technical support and installation and configuration support) and by expanding our fiber-optic network to reach up to 330 million homes. With respect to competition, reduction in the prices of infrastructure through new technologies should help current fixed operators to expand geographically beyond their concession areas. This increase in competitiveness is already occurring, mainly in the mobile and long-distance markets, and could to be stronger for local fixed services. As an example, two new mobile service operators, Oi and AEIOU entered the market in 2008. Telesp has responded to these movements and is positioning itself to also capture opportunities outside of its concession area without jeopardizing its consolidated leadership position. This expected influx of competition in the voice market, both fixed and mobile, should bring with it the growth of new services and a greater commoditization of services, with increasingly smaller shares of operators’ total revenues coming from voice services. Given this scenario, there has been a change of focus away from the price of services and towards customer service and quality, along with new product offers.
The market for mobile telephony has shown some signs of deceleration and increased competition despite growth in recent years. In the future, we expect that mobile operators will be increasingly likely to seek alternative sources of revenue, and fixed telephony and broadband will be their main targets, which is evident from announcements by mobile service operators of products offerings for mobile broadband services at speeds and prices comparable with broadband service offered through ADSL and pay TV services. Moreover, the result of the auction for licenses for 3G services that had a premium of 80%, with offers from all the current mobile operators and some incoming ones, demonstrates the interest of the mobile operators in convergent services, especially broadband.
Generally, the Brazilian economy has experienced moderate growth over the last few years, but with significant expansion of internal consumption, mostly by the middle class. Given this trend, growth in some markets, such as broadband and TV should increase from the growth in the segment that has greater income, suggesting the need for adequacy in the geographic coverage and mix of products and services by operators to better serve them. Telefônica, observing this trend, has bet on these markets, both in the broadband and pay TV market, aiming to shift our consumption focus from the upper and upper-middle income classes, where penetration is already sufficiently advanced, to its entire subscriber base, through its different technological alternatives and those of its partners.
Despite not expecting an increase in fixed lines in the market, Telesp seeks opportunities with respect to low-income customers, and since 2004, it has successfully initiated operations of services of telephony designed for this segment. Currently, our portfolio includes voice packages for flat fee services (offering unlimited local calling to other fixed-line telephones), packages of minutes (My Minutes), controlled and economic lines (a cheaper package of minutes for local fixed calls and the use of prepaid credits for long-distance and mobile calls). Our competitors also offer distinct plans targeted toward capturing the lower-income market segment, including by offering flexible
billing packages, free calls to other customers of the same service provider or calling packages with significantly reduced prices.
For the local voice market, in August of 2007, we finished a conversion of billing for local services from pulse-based to minute-based for the state of São Paulo. Despite initially expecting losses, given the differences between charges for shorter calls and longer calls associated with the alternative mandatory plan (PASOO), the conversion did not have a significant impact on revenues, as only 5% of the total client base had transferred to this plan in 2008 (PASOO).
In the long-distance market, we expect competition from VoIP (Voice over Internet Protocol—technology for transmitting voice using the internet) will continue to grow. Over the last two years, we experienced the entrance of many VoIP players in the market, but due to Brazil’s low broadband penetration, low quality of services and limited efforts in marketing, VoIP has mildly affected the traditional long-distance market. We believe that over the next few years, VoIP may play a more expansive role, bringing a decrease in prices and traffic volume of traditional long distance.
We are taking several actions to keep up with market trends and to compete by taking advantage of new technologies. We are closely monitoring the evolution of VoIP usage and developing bundled services that include voice, video and broadband, in addition to the development of products related to IPTV. In addition, we are following technological developments and performing tests on wireless access technology for voice, data and video, such as Wi-Max, preparing the company to take advantage of such technology in areas in which our conventional network coverage is currently limited. We are also looking to remain competitive technologically, which will require significant investments for updating our networks, improving the quality of our services and developing new products. We are also working to improve our customer relations by promoting a company-wide effort to emphasize customer service across all segments of our business. To accomplish this, we have identified several action items, including reducing operation failures, improving management third-party operators, and remodeling our call center, all aimed toward improving the customer service experience.
E. E. | Off-balance-Sheet Arrangements |
None.
F. F. | Tabular Disclosure of Contractual Obligations |
Our contractual obligations and commercial commitments as of December 31, 20082011 are as follows:
| | | | | | | | | | | | | | | |
| | (In thousands of reais, as of December 31, 2008) | |
Contractual obligations | | | | | | | | | | | | | | | |
Long-term debt | | | 3,217,352 | | | | – | | | | 2,048,714 | | | | 343,972 | | | | 824,666 | |
Pension and other post retirement benefits | | | 148,768 | | | | 2,884 | | | | 4,996 | | | | 4,119 | | | | 136,769 | |
Other long-term obligations | | | – | | | | – | | | | – | | | | – | | | | – | |
Total contractual cash obligations | | | 3,366,120 | | | | 2,884 | | | | 2,053,710 | | | | 348,091 | | | | 961,435 | |
Commercial commitments | | | | | | | | | | | | | | | | | | | | |
Suppliers | | | 2,314,698 | | | | 2,314,698 | | | | – | | | | – | | | | – | |
Other commercial commitments | | | – | | | | – | | | | – | | | | – | | | | – | |
Total commercial commitments | | | 2,314,698 | | | | 2,314,698 | | | | – | | | | – | | | | – | |
| | | | | | | | | | | | | | | |
| | (In thousands of reais, as of December 31, 2011) | |
Contractual obligations | | | | | | | | | | | | | | | |
Long-term debt (1) | | | 6,203,959 | | | | 1,457,037 | | | | 2,894,298 | | | | 1,189,987 | | | | 662,637 | |
Pension and other post retirement benefits | | | 308,893 | | | | 5,406 | | | | 48,743 | | | | 48,743 | | | | 206,001 | |
Other long-term obligations including leases | | | 8,749,794 | | | | 1,227,224 | | | | 2,495,447 | | | | 2,959,148 | | | | 2,067,975 | |
| | | | | | | | | | | | | | | |
| | (In thousands of reais, as of December 31, 2011) | |
Total contractual cash obligations | | | 15,262,646 | | | | 2,689,667 | | | | 5,438,488 | | | | 4,197,878 | | | | 2,936,613 | |
Commercial commitments | | | | | | | | | | | | | | | | | | | | |
Suppliers | | | 6,081,611 | | | | 6,081,611 | | | | – | | | | – | | | | – | |
Other commercial commitments | | | – | | | | – | | | | – | | | | – | | | | – | |
Total commercial commitments | | | 6,081,611 | | | | 6,081,611 | | | | – | | | | – | | | | – | |
| (1) | Includes interest payments. |
Long-Term Debt - Principal
| | | |
| | (in thousands of reais, as of December 31, 2011) | |
2013 | | | 1,798,058 | |
2014 | | | 1,096,240 | |
2015 | | | 916,949 | |
2016 | | | 273,038 | |
2017 | | | 220,109 | |
2018 and forward | | | 442,528 | |
Total | | | 4,746,922 | |
Long-Term Debt | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| | | |
| | (in thousands of reais, as of December 31, 2008) | |
2010 | | | 1,704,204 | |
2011 | | | 344,510 | |
| | | |
| | (in thousands of reais, as of December 31, 2008) | |
2012 | | | 343,972 | |
2013 | | | 343,420 | |
2014 | | | 481,246 | |
Total | | | 3,217,352 | |
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. | Directors and Senior Management |
We are managed by a Board of Directors (Conselho de Administração) and an Executive Committee (Diretoria)(Diretoria).
Board of Directors
Our Board of Directors is comprised ofcomprises a minimum of five and a maximum of 17 members, all shareholders, serving for a term of three years. The following is a list of the current members of the Board of Directors, their respective positions and dates of their election.
Antonio Carlos Valente da Silva | | Chairman | | March 29, 2007 | April 07, 2010 |
José María Álvarez-Pallete López | Santiago Fernández Valbuena | Vice-Chairman | | March 29, 2007 | November 7, 2011(**) |
Antonio Viana-Baptista | Gonçalves Oliveira | Director | | February 19, 2008 | November 7, 2011(**) |
Enrique Used Aznar | Eduardo Navarro de Carvalho | Director | | March 29, 2007 | November 7, 2011 (**) |
Fernando Abril-Martorell Hernández | | Director | | March 29, 2007 | April 7, 2010 |
Fernando Xavier Ferreira | | Director | | March 29, 2007 | April 7, 2010 |
Francisco Javier de Paz Mancho | | Director | | February 19, 2008 | April 7, 2010 |
Guillermo Fernández Vidal | Iñaki Urdangarin | Director | | March 26, 2008 | April 7, 2010 |
Iñaki Urdangarin | | Director | | March 29, 2007 | |
José Fernando de Almansa Moreno-Barreda | | Director | | March 29, 2007 | April 7, 2010 |
Juan Carlos Ros Brugueras | José Manuel Fernandez Norniella | Director | | March 29, 2007 | May 19, 2010 (*) |
Luis Antonio Malvido | Luciano Carvalho Ventura | Director | | March 26, 2008 | April 7, 2010 |
Luciano Carvalho Ventura | Luis Bastida Ibarguen | Director | | March 29, 2007 | April 7, 2010 |
Luis Bastida Ibarguen | Fernando Furlan | Director | | March 29, 2007 | April 7, 2010 |
Luis Fernando Furlan | | Director | | February 19, 2008 | |
Miguel Àngel Gutiérrez Méndez | | Director | | March 29, 2007 | |
Narcís Serra Serra | | Director | April 7, 2010 |
Paulo César Pereira Teixeira | March 29, 2007Director | November 7, 2011 (**) |
Roberto Oliveira de Lima | Director | November 7, 2011 (**) |
*(*) | The members of the Board of Directors have the mandate until the ordinary general meeting of 2010. | 2013. |
(*) | The Board member José Manuel Fernandez Norniella was appointed by the Board of Directors in May 19, 2010, as provided by Article 150 of Law 6,404/76, replacing Mr. Juan Carlos Ros Brugueras. His election was ratified at the General Shareholders’ Meeting of August 12, 2010. |
(**) | The Board members Santiago Fernández Valbuena, Antonio Gonçalves Oliveira, Eduardo Navarro de Carvalho, Paulo César Pereira Teixeira and Roberto Oliveira de Lima were appointed by the Board of Directors at a meeting dated November 07, 2011, as provided by Article 150 of Law 6,404/76. |
Set forth below are brief biographies of our directors:
Antonio Carlos Valente da Silvais 5659 years old and acts as President of the Board of Directors and serves as Chief Executive Officer. Mr. ValenteHe is an Electrical Engineer, with vast experience in business development and telecommunications regulation. Mr. Valente served asthe Chief Executive Officer of Telefónica del Perú S.A.A, Telefónica MóvilesVivo, A. TELECOM S.A., TelefóTelefônica Móviles Perú Holding S.A.C.Data S.A., TelefóTelefônica Perú Holding S.A.CSistema de Televisão S.A. and of Telefónica Multimedia S.A.C andAJato Telecomunicação Ltda. He is a memberalso President of the Board of Directors.Trustees of Fundação Telefônica, Chief Executive Officer of Instituto Vivo, SP Telecomunicações Participações Ltda., Chairman of the Board of Directors of Telefônica Factoring do Brasil Ltda., member of the Control Committee of Media Networks Brasil Soluções Digitais Ltda., Telefônica Serviços Audiovisuais do Brasil Ltda. and Telefônica Serviços Empresariais do Brasil Ltda. He was the Chief Executive Officer of Vivo Participações S.A. from May 10, 2011 to October 3, 2011 (when it was merged into the Company). Since April 2011, Mr. Valente is the President of the Cámara Oficial Española de Comercio in Brazil. In addition, Mr. Valente iswas the First Vice-PresidentVice President of the Association of Private Enterprises of Public Services (ADEPSEP) and is a Director of the Official Chamber of Commerce of Spain in Perú (COCEP). Prior to his appointment as Chief Executive Officer of Telefónica del Perú, Mr. ValenteHe was responsible for the regulation of the Telefónica Group for Latin America. From 2002-2003, Mr. Valente acted as Vice-President of the National Agency of Telecommunications (ANATEL) of Brazil and presided over the Latin American Telecommunications Regulators Forum (Regulatel) institute, which unites nineteen Latin American countries and the Caribbean. Mr. Valente obtained a postgraduate degree in
Business and Administration, with a specialization in Systems and Business Management including Entrepreneurial Strategy, from MIT/Sloan School of Management. Mr. Valente has taught and published numerous articles regarding regulation and telecommunications in Brazilian and international magazines. Since May 2007, he has been President of “AHCIET – Asociación Iberoamericana de Centros de Investigación y Empresas de Telecomunicaciones.”Telecomunicaciones from 2007 to 2011. Since July 2008, he has been President of “Telebrasil” (Associação Brasileira de Telecomunicações). He is also a Board Member of CPQD (Centro de Pesquisas e Desenvolvimento), a member of the Strategic Comitee of “FIESP” (Federação das Indústrias do Estado de São Paulo) and, the Vice-PresidentVice President of “ABDIB” (Associação Brasileira da Industria de Base).
José Marí, a Álvarez-Pallete López member of the “CDES” (Conselho de Desenvolvimento Econômico e Social da Presidência da Repúblicais 45 years old) and was appointedPresident of “FEBRATEL”(Federação Brasileira de Telecomunicações). Mr. Valente served as Chairman and Chief Executive Officer of Telefónica Internacional in 24 July 2002del Perú S.A.A, Telefónica Móviles S.A., Telefónica Móviles Perú Holding S.A.C., Telefónica Perú Holding S.A.C and Managing Director Latin America, as well as memberof Telefónica Multimedia S.A.C and was president of the Board of Directors. Before his appointment as Chief Executive Officer of Telefónica S.A. in July 2006. He began his career at Arthur Young Auditors in 1987 and joined Benito & Monjardin/Kidder, Peabody & Co. in 1988, where he held positions indel Perú, Mr. Valente was responsible for the research and corporate finance departments. In 1995 he joined Valenciana de Cementos Portland (Cemex) as headregulation of the Investor RelationsTelefónica Group for Latin America. From 2002 to 2003, Mr. Valente acted as Vice President of the National Agency of Telecommunications (ANATEL) of Brazil and Studies department.presided over the Latin American Telecommunications Regulators Forum (Regulatel) institute, which unites nineteen Latin American countries and the Caribbean. Mr. Valente is an Electrical Engineer, with vast experience in business development and telecommunications regulation and obtained a postgraduate degree in Business and Administration, with a specialization in Systems and Business Management including Entrepreneurial Strategy, from MIT/Sloan School of Management. Mr. Valente has taught and published numerous articles regarding regulation and telecommunications in Brazilian and international magazines.
Santiago Fernández Valbuena is 53 years old and acts as Vice-Chairman of the Board of Directors. President of Telefónica Internacional, S.A. In 2010, he acted as Finance, Strategy and Development Officer of the Company. From 2005 to 2010, he was Finance and Corporate Development Officer. He was appointed Financial Manager for CEMEX in Spain in 1996a Board Member of Portugal Telecom and General Manager for Administration and Financial Affairs for CEMEX Group’s interests in Indonesia in 1998, headquartered in Jakarta. He joined Telefónica in February 1999 as CFO of Telefónica Internacional. In SeptemberEndemol Holding (Netherlands). Since 2008, he is President of the same year, he became CFOControl and Audit Committee and Board Member of Telefónica, S.A. In 2000,Ferrovial. From 2006 to 2008, he was awarded CFOa Board Member of the Year in the M&A chapter by CFO Europe Magazine (The Economist Group). He holds a post-graduate course, the International Management Program by the Instituto Panamericano de Alta Dirección de Empresa (IPADE). He also obtained the Advanced Research Certificate from the Accounting, Financial AdministrationGecina. From 1999 to 2007, he was Vice President of Metrovacesa, S.A.
Antonio Gonçalves Oliveira is 67 years old and Economy Department of the Universidad Complutense de Madrid. He is a member of the following Boardsour Board of Directors: Telefónica Datacorp, Telefónica Internacional, Telefónica Móviles EspañDirectors and Control and Audit Committee. Mr. Oliveira was a Telefónica de Argentina, Telecomunicaçoes de São Paulo (Telesp), Compañía de Telecomunicaciones de Chile, Telefónica Internacional Chile, Telefónica Móviles México, Telefónica del Perú, Colombia Telecom, Portugal Telecom y Chairman of Brasilcel, N.V. Supervisory Board. He has been Chairman of Antares, Fonditel, Telfisa and Telefónica North América; Vicechairman of T.Perú; a Membermember of the Board of Directors of Cemex Singapur, Admira Media, Inmobiliaria Telefónica, TPI, Telefónica Móviles, Telefónica de EspañVivo Participações S.A. since March 2001 and Control and Audit Committee since July 2005. Mr. Oliveira was also a Telefónica Holding Argentina, Telefónica Larga Distancia de Puerto Rico, Telefónica O2, China Netcom, Europe and member of the Supervisory Board of Cesky Telecom.Directors of TELESP Celular S.A. and Board of Directors and Control and Audit Committee of Tele Sudeste Celular Participações S.A., Telemig Celular Participações S.A, Telemig Celular S.A., Tele Leste Celular Participações S.A., Tele Centro Oeste Celular Participações S.A. and Celular CRT Participações S.A., until these companies ceased to exist. Mr. Álvarez-PalleteOliveira was the chairman of the Fiscal Council of Bahia’s Electricity Company (Companhia de Eletricidade da Bahia), or COELBA, from April 2006 to April 2008, chairman of the Association of Friends of the
Museum of Contemporary Art of USP (Associação de Amigos do Museu de Arte Contemporânea da USP), or AAMAC, from 2006 to 2010 and a member of the Council of Representatives of the Federation of Industries of São Paulo (Federação das Indústrias do Estado de São Paulo), or FIESP. Mr. Goncalves de Oliveira is a member of the Advisory Board of The Welfare Fund for Employees of Banco do Brasil (Caixa de Previdência dos Funcionários do Banco do Brasil), or PREVI, since 2008 and was a member of the Council of Social and Economic Development of the Brazilian government and the Working Group for Small and Medium Enterprises also sponsored by the Brazilian government. He was leader of ADEBIM (Associação de Empresas Brasileiras para a Integração de Mercados), member of the Steering Committee and Management of the Banco do Povo de Estado de São Paulo and Chairman of the Deliberative Board of the Association of Brazilian Companies for Market Integration (Associação Nacional dos Funcionários do Banco do Brasil), or ANABB, for six years. From 1991 to 1995, Mr. Oliveira served as director of the Latin American Association of Sociology and also in the 1990s, was the executive coordinator of the National Movement of Micro and Small Enterprise (Movimento Nacional da Micro e Pequena Empresa), or MONAMPE. He was a member of the Fiscal Council of Iguatemi Shopping Center S.A. from 2007 to 2008 and Melpaper S.A. from 2009 to 2010. Mr. Gonçalves is currently a member of the Fiscal Council of Klabin S.A. Mr. Gonçalves holds a graduate degree in EconomicsSocial Sciences, a masters degree in Communication Sciences and a post-graduate degree in Sociology of Organizations from the Complutense University of Madrid.São Paulo (Universidade de São Paulo) in Brazil. He also studied Economics atholds a specialist title in Human Resources from Fundação Getulio Vargas in São Paulo. Mr. Oliveira is certified by the Université LibreBrazilian Institute of Corporate Governance (Instituto Brasileiro de Belgique.Governança Corporativa), or IBGC, as a fiscal board and board of directors member.
Antonio Viana-BaptistaEduardo Navarro de Carvalho is 5149 years old and is a member of our Board of Directors. He was the GeneralIs Director of Telefónica de Espanha, member of the Executive CommitteeStrategy and of the Board of Directors of TelefôAlliances in Telefónica, S.A. holding of TelefôHe joined Telefónica Group.in 1999, and since then has been responsible for Strategy and Regulatory Affairs for Telefónica Latino America from 2005 to 2009, and for Telefónica Brazil from 1999 to 2004. Previously, he worked for five years as a Consultant in Mckinsey & Company, focused on Infrastructure and Telecommunications Projects in several countries and also worked as Steel Works Manager in the Group ARBED in Brazil. He is also a member of the Board of Directors of O2 PLC, Telefónica Latinoamérica and Portugal Telecom SGPS. Since arriving at Telefônicagraduate in 1998, he has been involved with many companies in the group. He was the Executive President of Telefónica Móviles, S.A. In the period between December 1998 and July 2002, he was President of Telefônica International and Executive President of Telefónica Latinoamérica. He was Executive Counsel of the BPI (Banco Português de Investimento) during the period from 1991 to 1998. During the period from 1985 to 1991, he was partner of McKinsey & Co. in Madrid and Lisbon. He holds a degree in economics from Universidad Católica Portuguesa in 1981 and also holds an MBA from INSEAD, Fontainebleau, in 1983.
Enrique Used Aznar is 67 years old and serves as a member of the Board of Directors. He also Acts as a member of the Board of Directors of Telefônica International and Telefónica Peru. He is also a member of the Assembléia Directiva of IESE of Madrid, the vice-chairman of the Spanish Association for the Fight Against Cancer (Asociación Española de la Lucha contra el Cancer) and a sponsor of the Scientific Foundation Against Cancer (Fundação Científica contra o Câncer). He has also served as Executive Chairman of Telefónica Internacional S.A., Telefónica Servicios Móviles and Telefónica I+D, as executive vice-chairman of TPI Páginas Amarelas, Telefónica do Chile and Telintar (investor from Argentina), and as member of the Boards of Directors of Telefónica, Telefónica da Argentina, AT&T Network System International and of Ericsson in Spain. He holds a degree in telecommunications engineeringMetallurgical Engineering from the “Universidad de Madrid”, theFederal University of Madrid. He also holds a degree from IESE (Alta Direção de EmpresasMinas Gerais, Brazil.).
Fernando Abril-Martorell Hernándezis 4649 years old and serves on our Board of Directors. He is Deputy CEO and CFO” at Prisa, is a member of the Board of Directors of Companhia de Infraestruturas del Transporte S.A. (CINTRA) and of ENCE (the Spanish pulp producer). From 1987 to 1997, Mr. Abril-Martorell Hernández performed several functions at JP Morgan, in New York, London and Madrid, including treasury department manager and member of the managing committee. Mr. Abril-MartorelAbril-Martorell Hernández joined the Telefónica group in January of 1997, as corporate finance general manager, having represented the group’s interests in the Brazilian telecommunications industry privatization process. From December 1998 to June 2000, he served as chief executive officer and chief financial officer of Telefónica Publicidade e Información (TPI). He was COO and a member of the Board of Directors of the Telefónica Group from August 2000 to September 2003. In 2005, he joined Credit Suisse Group in Spain as Managing Director and Chief Executive Officer. Mr. Abril-Martorell Hernández holds a degree in law and business sciences from ICAI-ICADE (Instituto de Postgrado y Formación Continua), Spain.
Fernando Xavier Ferreirais 6063 years old and acts as a member of our Board of Directors. Mr. Ferreira served as our chief executive officer and of SP Telecomunicações Holding Ltda. He was president of the Supervisory Board of Brasilcel N.V., president of the Boards of Directors of Vivo Participações S/A,S.A., and Fundação Telefónica. He is alsowas a member of the Board of Directors of Telefónica Internacional S.A. Mr. Ferreira has served as president of Telecomunicações Brasileiras S.A. - –Telebrás, executive secretary in the Brazilian Ministry of Communications, chairman of the Board of Directors of Embratel S.A., president of Nortel do Brasil S.A., Brazilian General Director of Itaipu Binacional, president of Telecomunicações do Paraná S.A. - –Telepar and as member of ANATEL’s consulting committee and member of the Board of Directors of Empresa Brasileira de Correios e Telégrafos - - grafos–ECT and Portugal Telecom. He holds a degree in electrical engineering from Faculdade de Engenharia Elétrica da Universidade Católica do Rio de Janeiro, the Electric Engineering Faculty of the Catholic University of Rio de Janeiro, Brazil, which he received in 1971. He attended a business administration course at Western Ontario University, Canada, in 1982.
Francisco Javier de Paz Manchois 5053 years old and serves as a member of our Board of Directors. Currently Mr. Mancho is the Chief Executive Officer of Atento Holding Inversiones y Teleservicios, S.A.U., an advocate of MAZ management registry, is elected to management of Fundación Telefônica, serves asand a member of the Board of Directors of TelefôTelefónica Internacional, isde Argentina, S.A. Since July 2006 he has been a member of the Executive
Committee of the Superior Board of Advisers of Telefônica LATAM, is an executive officer and member of the Board of Directors of Telefônica Argentina S.A. and is the Honored President of PREALSA.Councils. From JulyJune 2004 until December 2007, he was the President of Mercasa. He was Counselor deputy to the President and Director of the Strategic Corporate area of Panrico Donuts Panrico Group (1996-2004)(1996–2004), General Director of the Ministry of Commerce and Tourism (1993-1996)(1993–1996), General Secretary of Unión de Consumidores de España (UCE) (1990-1993). Delegate Counselor of Ciudadano magazine (1990–1993), and General Secretary of Juventudes Socialistas and executive member of PSOE (1984-1993)(1984–1993). Also, he has acted in the following capacities: counsel of Túnel del Cadí (2004-2006) (2004–2006), President of Patronal Pan and Bollería Marca (COE) (2003-2004)(2003–2004), counsel of Mutua de Accidents of Zaragoza (MAZ) (1998-2004)(1998–2004), counsel of Panrico Group (1998-2004)(1998–2004), President of Observatorio de la Distribuicion Comercial del Ministerio de Comercio ey Turismo (1994-1996) (1994–1996), Member of the Social and Economic Council and Permanent Commission (1991-1993(1991–1993 and 1996-2000)1996–2000) and counsel of Tabacalera, S.A. (1993-1996)(1993–1996). Mr. JavierMancho holds degrees in Information and Publicity and Law.
Guillermo Fernández Vidal is 63 years old and serves as a member of the Board of Directors. Mr Vidal began his career as a Systems Technician at NCR. In 1972, he joined ENTEL as a Systems Officer. In 1982, Mr. Vidal was appointed as President of ECOTEL, a position he occupied until 1987. After that, Mr. Vidal joined Telefónica Group, where he occupied several high-level administrative positions. Currently, he is an Advisor of Telefônica and member of the Board of Directors of Telefônica O2 - Chequia. Along his career path, Mr. Vidal was a member of the Boards of Directors of the following companies: ECOTEL, Ibermática, Amper, Telefónica de Peru, Telefônica CTC, TPI, Terra, Telefónica Móviles, Via Digital, Telefônica de España SAL and Telefônica Móviles España. Mr. Vidal holds a degree in law studies from the Executive Management Program of industrial engineering.IESE (Universidad de Navarra).
Iñaki UrdangarinUrdangarín is 4144 years old and serves as a member of our Board of Directors. He has been assigned to Washington, D.C. as Telefónica Internacional USA Chairman, to reinforce the institutional presence of Telefónica in North, Central and South America and to facilitate dialogue between Telefónica and interest groups such as regulators, industry and society, within the United States, Europe and Latin America. He has previously been President of the Commission for Public Affairs for the Board of Telefónica Latin America and he has managed numerous projects connected to corporate social responsibility both in Europe and Latin America. Sustainable development and social integration have been areas of priority in which Mr. Urdangarín has focused his professional activity for Telefónica. In the sector of telecommunications operating in Europe, Latin America and Asia. Mr. Urdangarín is a former world-class professional handball player.graduate in Business Administration from ESADE, where he also gave classes in Business Policy, and has a Master’s degree and diploma in Business Science from Barcelona University. He has also participated in threedone investigation into and published on, sponsorship, corporate social responsibility and regional economic development. He was an elite sportsman, winning two Olympic Games, winning medals in two of them,handball in 1996 and is Spain’s most decorated sportsman. He held2000 and amassing numerous sporting distinctions, as well as earning the important role of Vice-Presidentaffection of the Spanish Olympic Committee. He combined competitions with studies of Business Science. After ending his sporting career, he began advanced management studies in ESADE, one of the most prestigious business schools in the world. Currently, he is a professor of business policy at ESADE. He has also developed a professional career as an advisor
and consultant at La Caixa (a major Spanish financial firm) and Octagon, before he co-founded the Noos Institute, where he was the president until 2006, when he left the Institute. He presidedpublic from all over two international meetings on “Cities and Major Sporting Events” and “Sports and Tourism” and co-authored and edited four books. Currently, he is a member of the Advisory Boards of Telefónica Internacional, Motorpress (Spanish leading news and media group) and other major Spanish companies. His sports, academic and professional experience makes him believe in the power of sports and culture as useful tools for social inclusion. He, together with other relevant sportsmen, international academics and CEOs, developed a foundation to study and promote the use of sports and culture to help those in danger of being socially excluded. He holds a bachelors degree in Administration and Business Management, together with an MBA from ESADE.Europe.
José Fernando de Almansa Moreno-Barreda is 6063 years old.old and is a member of our Board of Directors. He is a member of the Board of Directors of TelefôTelefónica and President of the board’s international affairs committee.Board’s International Affairs Committee. He is also a member of the Board of Directors of TelefôTelefónica de Peru S.A., Telecomunicações de São Paulo S.A., TelefôTelefónica de Argentina S.A., TelefôTelefónica Latinoamérica S.A., Telefónica Moviles México S.A. de CV, Médi Telécom S/A Morocco and BBVA Bancomer Mexico. He is currently a sponsor of the foundations Reina Sofía, Conde de Barcelona, Diputación de San Andrés de los Flamencos - Carlos de Amberes Foundation, Padre Arrupe-Activa, Príncipe de Astúrias, Euroamérica and Fundación Médica Mutua Madrileña. Mr. Almansa joined the Spanish Diplomatic Corps in 1974 and served from 1976 to 1992 as Embassy Secretary of the Spanish Embassy in Brussels, Cultural Counselor of the Spanish Representation to Mexico; Chief Director for Eastern European Affairs and Atlantic Affairs Director in the Spanish Foreign Affairs Ministry; Press and Political Counselor to the Spanish Permanent Representation to the North Atlantic Council in Brussels; Minister-Counsellor of the Spanish Embassy in the Soviet Union; General Director of the National Commission for the 5th Centennial of the Discovery of the Americas and Deputy General Director for Eastern Europe Affairs in the Spanish Foreign Affairs Ministry. In January 1993, Mr. Almansa was appointed Chief of the Royal Household by His Majesty King Juan Carlos I. He held this post until December 2002 and is currently Personal Adviser to His Majesty King Juan Carlos I. Mr. Almansa holds a law degree from the Universidad de Deusto, the University of Deusto, Bilbao, Spain. He is a sponsor, among other affiliations, of the Foundations Reina Sofia, Conde de Barcelona, Diputación de San Andrés de los Flamencos - Carlos de Amberes Foundation, Padre Arrupe–Activa, Principe de Asturias and Euroamérica.
JJuan Carlos Ros Bruguerasosé Manuel Fernandez Norniella is 4766 years old and he is a member of our Board of Directors. InMr. Norniella held executive positions from 1972 to 1981 at Electromecanique, Alfa Laval and Blackstone SW.G. From 1981 to 1985 he was Risk and Provisions Officer and Asea Brown Boveri S.A., from 1985 to 1993 he was Media and Provisions Officer, Real Estate Officer, Turbochargers Officer and Chief Administrative Officer of Asea Brown Boveri S.A. Mr. Noriella was a Board member at RTVE, Argentaria, Enagas, Endesa, Telvent, Campos Chilenos, Iansa, Vice President of Chilectra (Chile) and member of the Advisory Committee of Abengoa and Accenture. He was elected a Congressman for Madrid in 1993, and was also State Secretary of Commence, Tourism and Small and Medium Enterprises, and represented Spain as an Adjunct Officer before the World Bank, International Development Bank and European Development Bank. Between 1998 and 2005, he was appointed Chief Legal OfficerPresident of the superior Council of Commerce Chambers of Spain and member of the International Commerce Chamber. From 1998 to 2000, Mr. Norniella was Executive Vice President of Aldeasa and Executive President of Ebro Puleva from 2000 to 2005. He is currently Honorary President of Ebro Puleva, board member of Mapfre America and Telefônica Brasil S.A. Since May 1998,He was External Counsel to Iberia since 2003 until its merger with BA, being currently an External Counsel to
IAG. Mr. Ros Brugueras has been a General Secretary toNoriella is also Vice President of the Board of DirectorsCaja Madrid, of BFA and General CounselExecutive Board Member of Telefônica InternacionalBankia S.A. and also a director of Telefônica de Argentina S.A. (Argentina), Telefônica Larga Distância de Porto Rico Inc. (Porto Rico), Companhia de Telecomunicações do Chile S.A. (Chile) and Telefônica do Peru S.A. (Peru). He served on our board and that of Companhia Telefônica da Borda do Campo from December 1998 through November 1999, and also on the boards of Companhia Riograndense de Telecomunicações - CRT, Tele Sudeste Celular Participações S/A, Telerj Celular S/A and Telest Celular S/A. From 1985 to 1997, he was a partner in a law firm in Barcelona, and, during such time, he served as Secretary on the Boards of Directors of various Spanish and foreign companies. Mr. Ros holds a law degree from Universidad Central de Barcelona, the Central University of Barcelona, Spain.
Luis Antonio Malvido is 44 years old and is a member of our Board of Directors. After participating in the Empresa Nacional de Teléfonos (ENTel) privatization in 1990 and its later takeover, Mr Malvido accepted a position at Telefónica Group. In 1998, he was appointed Chief Executive Officer (CEO) of Unifón, the mobile telephony company controlled by Telefónica in Argentina, and, in 2004, he moved to Venezuela to serve as President of Telcel, the telecommunications company that Telefónica had just acquired there. Since 2008, he is a member of the Board and General Director of Fixed Telephony of Telesp. Mr. MalvidoNoriella holds a degree in industrialelectrical engineering from Universidad Politecnica de Madrid and has a diploma in Logistics and Risks. He also received the Institutedistinction of TechnologyLa Gran Cruz de Isabel la Catolica (Spain), Knight of Buenos Aires (“ITBA”)the Bernardo O’Giggins Order (Chile), which he earned with honors.the Verdienstkreus mit stern (Germany) and the Order to Civil Merit (Poland).
Luciano Carvalho Ventura is 6164 years old. He is a member of our Board of Directors and is the officer responsible for LCV Governança Corporativa. He serves as a memberamember of the Board of Directors of Y. Takaoka Empreendimentos, of the Jose Alves Group, of the Grupo Itapemirim and of the Lojas Salfer. Since 1980, he has been dedicated to corporate governance consulting and serving as aan indepedent member of corporate boards. He is thea founding member of the Board of Directors of Instituto Brasileiro de Governança Corporativa - IBGC - Brasil.Corporativa–IBGC–Brasil (Brazilian Corporate Governance Institute) and he was a member of its Board of Directors . He iswas a member of the International Corporate Governance Network -– England. He is professor of the course for formation of directors of the Brazilian Corporate Governance Institute and a speaker at various masters courses and seminars. He holds an MBA from Escola de Administração de Empresas de São Paulo—Paulo–Fundação Getúlio Vargas, a post-graduate degree in finance from Escola de Administração de Empresas de São Paulo da Fundação Getúlio Vargas, a degree in business
management from Escola de Administração de Empresas da Universidade Federal de Pernambuco, and a degree in economics from Faculdade de Ciências Econômicas da Universidade Federal de Pernambuco.
Luis Bastida Ibarguen is 6366 years old and is a member of our Board of Directors. Since 2002, he has acted as an independent consultant, author and lecturer on business economics and serves as director for different companies and foundations. During 2000 and 2001, he was Managing-Director of Banco Bilbao Viscaya Argentaria, where he was a member of the Steering Committee and head of the Global Asset Management Division. From 1988 to 2000, he worked forMr. Ibarguen began working at Banco Bilbao Viscaya.Viscaya Argentaria in 1998. In the period from 1994 to 2000, he was Chief Financial Officer (CFO), reporting directly to the Chairman. From 1976 to 1987, he worked at Banco Bilbao, where he had different responsibilities, mainly in areas related with the finance function.to finance. From 1970 to 1976, he worked for General Electric in New York and Spain. At General Eletric,Electric, he was a member of the Finance Management Program and the International Management Program and worked in various capacities in the Finance and Strategic Planning Functions. He holds degrees in Business at the E.S.T.E. University in San Sebastián - n–Spain and holds an MBA from Columbia University in New York.
Luiz Fernando Furlan is 6265 years old and is a member of the Boards of Directors of Telefônica Brasil S.A. (Brasil), Telefónica S.A (Spain), Telefónica Digital (UK), AMIL Participações S.A. (Brasil), BRF–Brasil Foods S.A. (Brasil), AGCO Corporation (USA), as well as a member of the advisory board of Panasonic (Japan), Wal-Mart (USA) and Telefónica Internacional (Spain). Previously, he iswas Co-Chairman of the board of BRF Brasil Foods S.A. from 2009 to 2010, as well as a member of the board of Redecard S.A. from 2007 to 2010. He has held numerous executive positions from 1976 to 2002 at Sadia S.A., a leading producer of frozen foods in Brazil, including Chairman of theits Board of Directors of Sadia S.A. and of the Amazonas Sustainability Foundation, and Director on the Boards of Redecard S.A., Amil Participações S.A., Telecomunicações de São Paulo S.A - Telesp and Telefónica S.A. (Spain), and member of the International Advisory Boards of Panasonic (Japan) and McLarty Associates (USA). From 2003 until 2007, he wasin 2009. He served two terms as Minister of Development, Industry and Foreign Trade of Brazil. Previously, he served on the boards of international corporations as Panamco (Pan American Beverages, Inc. - USA). He also joined the advisory councils of IBM - Latin America, Embraco S.A. (Brasmotor - Brazil), ABN Amro Bank (Brazil), Maersk Group (Denmark) and was President of ABEF (Brazilian Chicken Exporters Association), ABIOVE (Vegetal Oil Industries Association), ABRASCA (Brazilian Association of Public Owned Companies), Co-President of the MEBF (Mercosur-European Union Business Forum), Vice President of FIESP (São Paulo Entrepreneurs Association) and board member of Bovespa (São Paulo State Stock Exchange).Brazil from 2003 to 2007. He holds a degree in Chemical Engineering from FEI (Industrial Engineering Faculty) and in Business Administration from University of Santana -– São Paulo, with extension and specialization courses in Brazil and abroad.
Miguel Àngel Gutiérrez Méndez is 50 years old and is a Board member of Telefónica Internacional, S.A., where he was previously responsible for Institutional and Public Policy for Grupo Telefõnica in Latin America. He is also a Board member of ABERTIS (Barcelona, Spain). He is also a Board and Audit Committe member of Telesp. From March 2002 to October 2004, Mr. Gutiérrez was Chairman of the Board of Directors of Autopistas del Oeste S.A. (a subsidiary of ABERTIS). From February 2002 until July 2003, he was Chairman and CEO of Telefónica Group in Argentina. He was a founding partner of The Rohatyn Group, an asset management company that focused on emerging markets with $2.3 billion under management. He manages their illiquid investments with teams in New York, Hong Kong and Buenos Aires. For a period of 21 years, Mr. Gutiérrez occupied several posts at J.P. Morgan, reaching the position of Managing Director for Global Emerging Markets, covering Latin America, Eastern Europe, Africa and Asia, London and New York emerging market activities from 1995-2001. Mr. Gutiérrez was also President of ADESPA (Association of Companies and Public Utilities of Argentina); Vice-President of the Fundación Cámara Española de Comercio; a Board member of the Cámara Argentina de Comercio; and a Board member of the Institute for Business Development of Argentina - IDEA. He is currently a member of the advisory council of CIPPEC (Center of Implementation of Politics for Equity and Growth), a Board member of Fundación Cruzada Argentina, Vice-President of the Center for Financial Stability "CEF", and a Board member of Universidad Torcuato Di Tella. He holds an MBA from IAE Universidad Austral (Argentina).
Narcís Serra Serra is 6568 years old and serves as a member of our Board of Directors. From 1991 to 1995, he was Vice President of the Government of Spain, and from 1982 to 1991, served as Minister of Defense. From 1979 to 1982, he was the Mayor of Barcelona. Mr. Serra holds a doctorate in economics from the Universidad Autónoma de Barcelona and is President of Caixa d’EstalvisCIDOB Foundation and Barcelona Institute for International Studies (IBEI).
Paulo César Pereira Teixeira is 54 years old and is a member of our Board of Directors and General and Executive Officer of Telefônica Brasil S.A., Vivo S.A., A. TELECOM S.A., Telefônica Data S.A., Telefônica Sistema de Catalunya.Televisão S.A. and AJato Telecomunicação Ltda. He is also a member of the Board of Trustees of Fundação Telefônica. He was Chief Executive Officer of Vivo Participações S.A. from September 13, 2011 to October 3, 2011 (when it was merged into the Company). He began his career in the telecommunications industry in 1985, as a member of CRT’s Directive Council. At Vivo, he was responsible for the Individual and Residential Market business unit, involved in customer relations, mobile marketing, fixed marketing, planning and commercial and regional management. From 2003 to 2011, he was the Executive Vice President of Operations at Vivo. From 1997 to 2003, he acted as Vice President of Operations for Telefônica Celular, Vice President and Enterprise Officer
of the Telebrás System, board member of Tele Sudente, Tele Leste and CRT, president of the Brazilian Roaming Association (ABR) and National Association of Cellular Providers (ACEL). Mr. Teixeira holds an electrical engineering degree from Universidade Católica de Pelotas, Brazil. He attended a New Telecommunications Techniques course at Ecole Nationale Superieure Des Telecommunications, France, in 1992.
Roberto Oliveira de Lima is 60 years old and serves as a member of our Board Of Directors. Mr. Lima is also a member of the Board of Directors of Edenred SARL, based in Paris, France. He was the Chief Executive Officer of Vivo Participações S.A. and Vivo S.A. and Officer of TBS Celular Participações Ltda., Ptelecom Brasil S.A. and Portelcom Participações S.A. until May, 2011, all subsidiaries of Brasilcel N.V.; he was also Chief Executive Officer of Instituto Vivo. Mr. Lima was Executive Vice President of Marketing and Innovation and Vice President of IT and Products and Services Engineering of the following companies: Vivo Participações S.A. and Vivo S.A., Tele Centro Oeste Celular Participações S.A., Telerj, Telest, Telebahia, Telergipe, Celular CRT S.A., TELESP Celular, Global Telecom, Telegoiás, Telemat, Telems, Teleacre, Teleron, NBT and TCO IP S.A. He was also Chief Executive Officer of Tele Sudeste Celular Participações S.A., Tele Leste Celular Participações S.A. and Celular CRT Participações S.A. until 2006 and Telemig Celular Participações S.A. until November, 2009. He was an Officer of Telemig Celular Participações S.A., Avista Participações Ltda., Tagilo Participações Ltda., Sudestecel Participações Ltda. and Vivo Brasil Comunicações Ltda. until November, 2009. He was Chairman of the Board of Directors of Grupo Credicard from 1999 to 2005 and Chief Executive Officer of Banco Credicard S.A. from 2002 to 2005. Mr. Lima also held executive positions at Accor Brasil S.A., Rhodia Rhone Poulec S.A. and Saint Gobain S.A. He holds a degree in business administration and an MBA from Fundação Getúlio Vargas, Brazil. He holds a masters degree in Finance and Strategic Planning from the Institute Superieur des Affaires, Jouy en Josas, France.
Executive Committee
The executive committee consists of at least threefive and no more than fifteen members, who may or may not be our shareholders, all of them appointed by our Board of Directors for a period of three years and who may remain in
office until reappointed or replaced. Any of our executive officers may be removed at any time by a decision of the Board of Directors.
The following are the current members of the executive committee, their respective positions and the date of their appointment.
Antonio Carlos Valente da Silva | | Chief Executive Officer | | December 18, 2006May 19, 2010 |
Gilmar Roberto Pereira Camurra | | Chief Financial Officer and Investor Relations Officer | | March 23, 2004May 19, 2010 |
Luis Antonio Malvido | Paulo César Pereira Teixeira | General Director of Fixed Telephonyand Executive Officer | | May 20, 2008September 13, 2011 |
Gustavo Fleichman | Breno Rodrigo Pacheco de Oliveira | General CounselSecretary and Legal Officer | June 14, 2011 |
Cristiane Barretto Sales | December 10, 2007Comptroller | June 14,2011 |
*The officers Antonio Carlos Valente da Silva and Gilmar Roberto Pereira Camurra were re-elected at the Board of Directors’ Meeting of February 23, 2007 and their mandates were initiated at the ordinary general meeting on March 29, 2007. The General Counsel, Gustavo Fleichman, was elected at the Board of Directors’ Meeting of December 10, 2007 and his mandate was initiated on January 1, 2008. |
Set forth below are brief biographies of our executive officers:
Gilmar Roberto Pereira Camurra is 5356 years old and serves as Chief Financial Officer and Investor Relations Officer (CFO). He has 29 years of working experience in the financial system. He served for a year as member of the executive board of Grupo Paranapanema (tin exporter). Among his experiences in the banking system, he was vice-presidentVice President of Citibank N.A., performing various activities for 18 years with a focus on the international and treasury areas; founding partner of Banco ABC Roma, performing activities relating to treasury, international and controlling areas; and executive officer of BCN-Barclays, performing activities relating to treasury, asset management and corporate finance in the last three years before the transfer to the Telefónica Group and served as foreign exchange director and deputy treasurer for HSBC Bank. He has been Chief Financial Officer of Telefónica Group in Brazil since November 1999.1999 and from Vivo since May 2011. He also serves as member of the decision-making body of Fundação Sistel, President of the decision-making body of Visão Prev Sociedade de Previdência Complementar, and Vice President of the Board of Directors of Telefónica Factoring.Factoring do Brasil Ltda. He is the Financial Officer of Vivo, A. TELECOM S.A., Telefônica Data S.A., Telefônica Sistema de Televisão S.A. and AJato Telecomunicação Ltda. He is also Vice President of SP Telecomunicações Participações Ltda., member of the Board of Directors Telefônica Corretora de Seguros Ltda., member of the Control Committee of Media Networks Brasil Soluções Digitais Ltda., Telefônica Serviços Audiovisuais do Brasil Ltda. and Telefônica Serviços
Empresariais do Brasil Ltda. He was Finance and Investor Relations Officer from May 10, 2011 to October 3, 2011 of Vivo Participações S.A. (until it was merged into the Company). He holds a business administration and accounting science degree with a specialization course in finance from the University of California, Berkeley.
Breno Rodrigo Pereira Teixeira is 36 years old. Mr. Teixeira is Corporate Secretary and Legal Officer of Telefônica Brasil S.A., Vivo, A. TELECOM S.A., Telefônica Data S.A., Telefônica Sistema de Televisão S.A. and AJato Telecomunicação Ltda. He is also a member of the Deliberative Council of Visão Prev Sociedade de Previdência Complementar and Officer of SP Telecomunicações Participações Ltda. and Instituto Vivo. Mr. Teixeira is also Corporate Secretary of the Board of Directors of Telefônica Factoring do Brasil Ltda., member of the Board of Directors of Telefônica Corretora de Seguros Ltda., member of the Control Committee of Media Networks Brasil Soluções Digitais Ltda., Telefônica Serviços Audiovisuais do Brasil Ltda., Telefônica Serviços Empresariais do Brasil Ltda. and Telefônica Engenharia de Segurança do Brasil Ltda. He was Corporate Secretary and Legal Officer from February 3, 2011 to October 3, 2011 of Vivo Participações S.A.(when it was merged into the Company) and of Vivo from April, 2005 to February, 2011. He holds a law degree from Universidade do Vale do Rio dos Sinos – UNISINOS, Brazil.
Gustavo FleichmanCristiane Barretto Sales is 4943 years old and serves as General Secretaryis the Comptroller of TelecomunicaçõesTelefônica Brasil S.A., Vivo, A. TELECOM S.A., Telefônica Data S.A., Telefônica Sistema de SãTelevisão Paulo S.A. - -Telesp since April 2006. From 2005 to 2006, he worked in Bulhões Pedreira Lawyers, a law firm located in Rio de Janeiro. He worked as a Law Director of Tele Norte Leste S/A - Telemar, a telecommunications company located in Brazil, from 2002 to 2004. He wasand AJato Telecomunicação Ltda. She is also Vice President of ShellInstituto Vivo, member of the Board of Directors of Telefônica Factoring do Brasil S/ALtda. and member of the Control Committee of Telefônica Serviços Empresariais do Brasil Ltda. She was Comptroller from 1998May 10, 2011 to 2002. HeOctober 3, 2011 of Vivo Participações S.A. (when it was merged into the Company). Ms. Sales was also Executive Vice President of Finance, Planning and Control and Investor Relations Officer of Vivo Participações S.A. from August 2009 to May 2011). She was also an Officer of Portelcom Participações S.A. and Ptelecom Participações S.A. She was Chief Financial Officer and Investor Relations Officer of Investidores da Telemig Celular Participações S.A. and Chief Financial Officer of Telemig Celular S.A. Ms. Sales was Chief Financial and Administrative Officer of Tele Leste Celular Participações S.A., Telebahia S.A. and Telergipe S.A. from 2000 to 2003, and, since the creation of the Vivo joint venture in 2003, held simultaneously the positions of officer of Budgeting, Management Control, Accounting and Income Guarantee. Previously she was Audit and Consulting Manager at Arthur Andersen S/C, having worked at this company for ten years until July 2000. She holds a degree in Lawbusiness administration and executive training from Bras Cubasthe University Mogi das Cruzes City, and holds a post-graduate degree in management from Brazilian Institute of Capital Markets (“IBMEC”). He also holds a degree in Tax Law from Brazilian Institute of Tax Teaching (“IBET”).Navarra, Barcelona.
For the biographies of Antonio Carlos Valente da Silva and Luis Antonio Malvido,Paulo César Pereira Teixeira, see “—Board of Directors.”
For the year ended December 31, 2008,2011, the aggregate amount of compensation paid to all our Directors and Executive Officers was approximately R$11.227.476 million, of which R$8.714.411 million corresponded to salaries and R$2.56.251 million corresponded to bonuses. We also paid R$1.220 million in connection with the Performance Share Plan – PSP, a long-term incentive plan. See “Item 6.—Directors, Senior Management and Employees—E. Share Ownership” for a discussion of the PSP plan.
For the year ended December 31, 2008,2011, our Directors and Officers did not receive any pension, retirement or similar benefits.
Board of Directors
Our Board of Directors typically meetmeets once every three months and the Chairman may call special meetings. Our Board takes action by majority vote, provided the majority of its members in office are present, with the Chairman having, in addition to his or her regular vote, the deciding vote in the event of a tie. The specific responsibilities of the Chairman include representing the Board in the General Shareholders Meetings, chairing the General Shareholders Meetings, selecting the Secretary from among those present, and calling and chairing meetings of the Board.
Our Board of Directors is responsible, among other things, for:
| · | establishing our general business policies; |
| · | electing and removing the members of our executive committee, and establishing their responsibilities with due regard for legal and statutory provisions; |
| · | supervising our management and examining our corporate records; |
| · | calling General Shareholders Meetings; |
| · | approving the financial statements, management reports, proposals for allocation of the company’s results and the submission of such documents to the General Shareholders Meeting; |
| · | appointing and deposing external auditors; |
| · | determining the distribution of interim dividends; |
| · | determining the payment of interest on equity “ad referendum” of the General Shareholders Meeting; |
| · | authorizing the purchase of our shares to be cancelled or kept in treasury; |
| · | appointing and removing the person responsible for internal auditing; |
| · | approving the budget and annual business plan; |
| · | deliberating on the issuance of new shares andby increasing the corporate capital within the limits authorized by the bylaws; |
| · | approving the issuance of commercial paper and depositary receipts; |
| · | authorizing the sale or pledge of fixed and concession-related assets; |
| · | approving agreements, investments and obligations in an amount greater than R$250 million that have not been approved in the budget; |
| · | approving our jobsemployment and compensation plans, our rulesincentive policies and workforce, as well asprofessional development, regulation and staffing of the Company, and the terms and conditions forof collective laborbargaining agreements to be executed with unions representing our employees’various categories of the Company’s employees and adherence to the policy of,adhesion or disassociation from pension plans;plans, all with respect to employees of the Company; the Board of Directors can, at its own discretion, assign to the Company’s officers limits to deliberate on these matters; |
| · | authorizing the acquisition of interest in other companies on a definitive basis and the encumbrance and disposalcreation of shareholder’s equity;lien on or sale of an equity interest; |
| · | authorizing the offering of ordinary non-convertiblenonconvertible unsecured debentures; |
| · | approving the internal rulesorganizational structure of the Company, defining its organizational structure, detailingCompany; the respective dutiesBoard of Directors can assign to the officers limits to the exercise of such powers, subject to legal and observing the statutory and legalbylaws provisions; |
| · | approving and modifying the internal regulations of the Board of Directors; |
| · | deliberating as to the issuance of warrants; and |
| · | deliberating, by delegation of the General Shareholders Meeting, about the following aspects related to company debentures: (i) opportunity to issue, (ii) time and conditions of expiration, amortization or redemption, (iii) time and conditions of the payment of interest, of the participation in the profits and of the premium of repayment, if any, (iv) method of subscription or placement, and (v) the type of debentures.debentures; |
| · | approving the establishment of technical and advisory committees for advice on matters of interest to them, to elect members of such committees and approve the committees, internal regulations, which shall contain specific rules concerning their organization, functions, powers, and compensation of members; |
| · | authorizing the sale of property, the creation of in rem guarantees and the provision of guarantees on behalf of third parties, and setting limits on the practice of such acts by the officers; |
| · | establishing, as an internal regulation, the limits for the officers to authorize the disposition or encumbrance of permanent assets, including those related to public telecommunications services which are disabled or inoperable; |
| · | approving the Company’s participation in consortia in general, and the terms of such participation; the Board of Directors may delegate such powers to the officers and establish limits, as it seeks to develop activities in line with the Company’s purpose; |
| · | setting the limits for the officers to authorize the practice of reasonable gratuitous acts for the benefit of employees or the community of which the Company is a part of, including the donation of unserviceable assets to the Company; and |
| · | approving the creation and closure of subsidiaries of the Company, in Brazil or abroad. |
The members of our Board of Directors are all shareholders, one of them being elected by the preferred shareholders in a separate voting process and the others being elected by the holders of common shares. The members of the Board of Directors are elected for a period of three years and may be reelected.
Executive Committee
Our Executive Committee is responsible for our day-to-day management and for representing us in our business with third parties. Each of our current Executive Officers has been appointed by our Board of Directors for a three-year term and may remain in office until reappointed or replaced.
Fiscal Board
Brazilian Corporate Law and our bylaws each require that we maintain a statutory Fiscal Board (Conselho Fiscal). Our statutory Fiscal Board, which is a separate and distinct entity from our outside auditors, is primarily charged with certain advisory, reporting, oversight and review functions with respect to the company’s financial statements. Our statutory Fiscal Board is also responsible for rendering opinions on management’s annual report and management proposals, including financial statements, to be submitted at shareholders meetings relating to a change in the company’s capital composition, investment plans, budget, debenture issuances or subscription bonuses, payment of dividends and consolidations, mergers and spin-offs. However, the statutory Fiscal Board, as required by Brazilian Corporate Law and our bylaws, has only an advisory role and does not participate in the management of the company. Indeed, decisions of the statutory Fiscal Board are not binding on the company under Brazilian Corporate Law.
In accordance with Brazilian Corporate Law and our bylaws, the Fiscal Board consists of a minimum of three and a maximum of five active members and an equal number of alternates.
One member of the Fiscal Board and his or her alternate must be elected by holders of preferred shares in a separate voting process. The following are the current members of the Fiscal Board:
Flavio Stamm | | Gilberto Lerio | | March 25, 2009April 11, 2012 |
Cristiane Barretto SalesCremênio Medola Neto | Oswaldo Vieira da Luz | April 11, 2012 |
Stael Prata Silva Filho | Charles Edwards Allen | March 25, 2009 |
Patrícia Maria de Arruda Franco | | Luis André Carpintero Blanco | | March 25, 2009April 11, 2012 |
Committees
Brazilian Corporate Law does not require a corporation to maintain committees responsible for ethics, corporate governance or compensation. Nevertheless, our Board of Directors has created the following committees:
| · | Control and Audit Committee; |
| · | Nominations, Compensation and Corporate Governance Committee; and |
| · | Service Quality and Marketing Committee. |
Control and Audit Committee
Our Control and Audit Committee was created by our Board of Directors in December 2002 and is comprised ofcomprises a minimum of three and a maximum of five directors, who are not members of our executive committee, and who
are appointed by the Board of Directors to serve as members of the Control and Audit Committee for the duration of their respective terms as members of the Board of Directors. The Committee has its own charter, which was approved by the Board of Directors. The Committee provides support to the Board of Directors.
According to its charter, the Control and Audit Committee shall meet four times per year and report its conclusions to the Board of Directors. We anticipate that there will be some similar functions between the Control and Audit Committee and our statutory Fiscal Board (Conselho Fiscal).Board.
The Control and Audit Committee, among other responsibilities that may be required by the Board of Directors, is charged with informing and providing recommendations to the Board of Directors regarding the following:
| · | the appointment, termination and renewal of the independent auditors, as well as the terms and conditions of the contract with the independent auditors; |
| · | the analysis of the company’s accounts, compliance with certain legal requirements and the adoption of generally accepted accounting principles; |
| · | the results of each internal and independent audit and management’s response to the auditor’s recommendations; |
| · | the quality and integrity of the company’s internal control systems; |
| · | the performance of the independent auditors, requesting opinions on the annual reports and that the main audit reports be clear and precise; and |
| · | any communications with the internal auditors about any significant deficiencies in our control systems and identified financial conditions. |
The following are the current members of the Control and Audit Committee:
Luis Bastida Ibarguen | | April 18, 2007May 19, 2010 |
Enrique Used AznarAntonio Gonçalves de Oliveira | | April 18, 2007November 07, 2011 |
Miguel Ángel Gutiérrez MéndezFernando Xavier Ferreira | | April 18, 2007February 15, 2012 |
Nominations, Compensation and Corporate Governance Committee
Our Nominations, Compensation and Corporate Governance Committee was established in November 1998, and was restructured in October 2004, and consists of three to five directors appointed by the Board of Directors to serve for the duration of their respective terms as members of the Board of Directors. The Nominations, Compensation and Corporate Governance Committee, among other responsibilities that may be required by the Board of Directors, is charged with informing and providing recommendations to the Board of Directors regarding the following:
| · | the appointment of executive officers for our company and our subsidiaries; |
| · | the parameters on compensation for our executive officers and administrators; |
| · | the terms and conditions of executive officers, employment agreements; |
| · | the review of the Board’s compensation plan and any amendments; |
| · | the incentive plans related to compensation; |
| · | the compensation policy for directors and executive officers of the company; and |
| · | the annual corporate governance report. |
The following individuals are the current members of the Nominations, Compensation and Corporate Governance Committee:
José Fernando de Almansa Moreno-Barreda | | April 18, 2007May 19, 2010 |
Antonio Carlos Valente da Silva | | April 18, 2007May 19, 2010 |
Iñaki UrdangarinUrdangarín | | FebruaryMay 19, 20082010 |
Juan Carlos Ros BruguerasJosé Manuel Fernandez Norniella | | April 18, 2007May 19, 2010 |
Service Quality and Marketing Committee
The Service Quality and Marketing Committee was created on December 16, 2004 and provides assistance to our Board of Directors. The Committee consists of at least three, and at most five, members of our Board selected periodically. The Committee meets from time to time, depending on the availability of its members and when called by its chair. The Committee is responsible for review and analysis of quality indices measuring our principal services and to ensure that the requisite degree of commercial assistance is furnished to our clients.
Antonio Viana Baptista | | February 19, 2008 |
Fernando Xavier Ferreira | | February 19, 2008 |
Luciano Carvalho Ventura | May 19, 2010 |
Roberto Oliveira de Lima | April 18, 2007November 07, 2011 |
Eduardo Navarro de Carvalho | February 15, 2012 |
As of December 31, 2008,2011, we had 6,05721,542 employees. All of our employees are full-time, and are divided into the following categories: 43.1%25% in our network plant operation, maintenance, expansion and modernization; 44.9%63% in sales and marketing; and 12% in administration, finance and investor relations, human resources, inventory, technology, legal and strategic planning and management control.
We,Before December 1999, the SISTEL (Fundação Sistel de Seguridade Social) plan, a multi-employer defined benefit plan that supplements government-provided retirement benefits, covered the employees of the former Telebrás System and we were contingently liable for all of the unfunded obligations of the plan. In January 2000, we and the other companies that formerly belonged to the Telebrás system agreed to divide the existing SISTEL plan into 15 separate plans, resulting in conjunction with other sponsors (the companies resulting from the breakupcreation of Telebrás), sponsoredprivate plans covering those employees already enrolled in the SISTEL plan. In that moment, these new private pension plans were still administered by SISTEL and have retained the same terms and conditions of the SISTEL plan. The division was carried out so as to allocate liability among the companies that formerly belonged to the Telebrás system according to each company’s contributions with respect to its own employees. Joint liability among the SISTEL plan sponsors will continue with respect to retired employees, who will necessarily remain members of the SISTEL plans, called PBS plan.
At the time of the privatization, employees had the right to maintain their rights and benefits in SISTEL. Under the SISTEL plan, we made monthly contributions to SISTEL equal to a percentage of the salary of each employee who was a SISTEL member. Each employee member also made a monthly contribution to SISTEL on the basis of
age and health caresalary. Pension benefits of members of SISTEL vested by the same time their retirement benefits vested under the government-provided retirement plan. SISTEL operates independently from us, and its assets and liabilities are fully segregated from us.
From 2000, we decided to establish defined contributions plans, and offered this to participants in our PBS defined benefit plan, as well as to employees who did not qualify for retireesparticipation in orderthe PBS plan. Unlike the PBS plan, which is a defined benefits plan, defined contributions plans are financed for contributions by participating employees, as well as by us as sponsor, which are credited to supplement the salariesparticipants’ individual accounts. We are responsible for all management and maintenance expenses of retired employees. Thethese plans, including the risks of death and permanent injury of the participants.
We maintained the following plans: PBS Telesp,TELESP, Visão Telesp,TELESP, Visão Telefônica Empresas, Visão Assist, Visão ATelecom, PBS TELESP Celular, PBS Tele Centro Oeste, PBS Teleleste and PBS Telesudeste, PBS Telemig Celular, TCPPREV, TCOPREV, Visão Celular, CelPrev Telemig Celular and VivoPrev.
Unlike PBS plans, defined benefits (Visão, TCPPREV, Visão Celular and CelPrev Telemig Celular) call for defined contributions by us and our operating subsidiaries, as sponsors, and by our employees, as participants. TCOPREV is a variable contribution plan.
The plans PBS TELESP, Visão TELESP, Visão Telefônica Empresas, Visão Assist and Visão Assist,ATelecom, previously managed by Fundação Sistel de Seguridade Social, or the Sistel,SISTEL, were transferred to another closed social security entity called Visão Prev Sociedade de Previdência Complementar on February 18, 2005. The
On February 2, 2007, after approval of the board of directors of Vivo, the SPC (Secretariat for Pension Funds), an agency of the Ministry of Social Welfare, approved the transfer of the following plans from Fundação SISTEL de Seguridade Social to the institution Visão Prev Sociedade de Previdência Complementar manages the following pension plans: Visão Telesp, Visão Telefônica Empresas, Visão Assist, Visão TGestiona, Visão Atelecom, Visão Terra, Visão TelerjComplementar: PBS TELESP Celular, Visão TelebahiaTCPPREV, PBS Tele Centro Oeste Celular, Visão Telergipe Celular, Visão TelestTCOPREV, PBS Telesudeste Celular, Visão Celular CRT, TCOand PBS Teleleste Celular. These eleven plans were transferred gradually to Visão Prev TCPfrom July 31, 2007 and December 31, 2007.
On December 15, 2010, we filed with PREVIC (National Superintendence of Pension Funds), an agency of the Ministry of Social Welfare that replaced the old SPC, the request to transfer the management plans PBS Telemig and CelPrev Telemig Celular from Fundação SISTEL de Seguridade Social to the institution Visão Prev PBS-Tele Leste Celular, PBS-Tele Sudeste Celular, PBS-TCO, PBS-Telesp Celular, PBS Telesp and Vivo Prev. TheSociedade de Previdência Complementar.
We also sponsor the plans Planos de Assistência Médica aos Aposentados - –PAMA, or the PAMA, and PBS-A–PBS-A - Plano de Benefícios Sistel Assistidos, or the PBS-A, that are still managed by Fundação Sistel de Seguridade Social. Until December 1999, all sponsors of the plans managed by Sistel were jointly and severally liable for all existing benefit plans. After December 1999, a single employer-sponsored pension plan for active employees was created, the PBS Telesp Plan, or PBS plan. See Note 32 to our consolidated financial statements for a more detailed description of the PBS plan.Social. Retired employees (PBS-A) and post-retirement health care benefits, or PAMA, remained as multi-employer benefit plans. The restructuring of the benefit plans took place in January 2000.
Due toOn August 21, 2007, after approval of the withdrawalboard of other active participants in December 1999, we individually sponsoreddirectors of Vivo, the PBSSPC (Secretariat for Pension Funds), approved the new private pension plan which covers 0.54% of our employees. In addition to the PBS plan, the multi-sponsored health care plan, or PAMA, is provided to retired employees and their dependents. Contributions to the PBS plan are determined based on actuarial valuations prepared by independent actuaries, in accordance with standards applicable in Brazil.
In August 2000, we established the Visão plan, offered to participants in our PBS plan, as well as to employees who did not qualify for participation. Unlike the PBS plan, which isVivoPrev, a defined benefitscontribution plan already managed by Visão Prev. From March 1, 2008 to May 31,2008, from July 1, 2009 to September 30, 2009, and from October 1 to December 31, 2011, the Visão plan is financed for contributions by participating employees, as well as by us as sponsor, which are credited to the individual accountsparticipants of the participants. We are responsible for all managementplans PBS TELESP Celular, TCPPREV, PBS Tele Centro Oeste Celular, TCOPREV, PBS Telesudeste Celular, Visão Celular, PBS Teleleste Celular, CelPrev Telemig Celular and maintenance expenses ofPBS Telemig Celular had the
Visão plan, including the risks of death and permanent injury of the participants. The employees participating in the plan were granted the option possibility to migrate to the new VivoPrev plan.
In October 2011, the plans Visão plan, which was also offered to those who did not participate TELESP, Visão Telefônica Empresas, Visão Assist, Visão ATelecom were merged and resulted in the PBSplan VisãoTelefônica.
The Company currently offers the following plans for employees who do not have any pension plan: Visão Telefônica plan and to all newly hired employees.VivoPrev plan. Our contributions to the Visão plan are equal to those of the individual participants, ranging from 2% to 9% of the participant’s salary and to the VivoPrev plan, ranging from 0% to 8% of the participant’s salary, depending on the percentage chosen by the participant. The aggregate costsaverage contribution of the sponsor under the Visão plan equal approximately 6.2%7.28% and Vivo plan 6.1% of the total amount of salaries paid to participating employees. Currently 90.0%48% of our employees are covered under the Visão plan.these plans.
In 2008, we had 3,445 retirees and beneficiaries,
Approximately 18%12% of our employees are union members of the main telecommunications industry labor union, Sindicato dos Trabalhadores em Empresas de Telecomunicações e Operadores de Mesas Telefónicas no Estado de São Paulo, the Labor Union of Employees of Telecommunications Companies and Telecommunications Desk Operatorsrepresentative in the Statetelecommunication industry. These unions have state representation, so we have employees represented by 27 state unions. In turn, 19 of São Paulo, or SINTETEL, which isthese unions are associated with the Federação Nacional dos Trabalhadores em Telecomunicações, the National Federation of Telecommunications Workers or FENATTEL. The collective labor agreement(Fenattel).
Our Collective Bargaining Agreement for these employees was renewed on September 1, 20082011 and will expire on August 31, 2009. 2012.
Our management considers relations with our work force to be satisfactory. We have never experienced a work stoppage that had a material effect on our operations.
None of our directors or executive officers beneficially owns, on an individual basis, more than 1% or more of our common or preferred shares (including ADSs representing preferred shares) or of our total equity share capital.
At the General Shareholders Meeting of Telefónica S.A. (our indirect controlling shareholder), held on June 21, 2006, the application of a long-term incentive planplan—“Performance Share Plan” (PSP)—for executives of Telefónica S.A. and of other entities within the Telefónica Group, which includes TelespTelefônica Brasil S.A. was approved. The plan grants a determined number of shares of Telefónica S.A. to selected participants who fulfill the necessary requirements.
The PSP is divided into five cycles, each of three yearthree-year duration. The eligible executives, who must remain with the Telefónica Group for a minimum period of three years commencing on the date of their eligibility, will have the right to receive stipulated shares based upon their performance in achieving targeted pre-defined results. Shares will be received at the end of each cycle. Each cycle is independent of the others, with the first cycle starting on July 1, 2006 (with distribution of shares of Telefónica S.A. starting on July 1, 2009) and each subsequent cycle commencing on July 1 of each subsequent year, up to and including, the fifth cycle, which commences on July 1, 2010 (with delivery of shares of Telefónica S.A. starting on July 1, 2013).
The first distribution under the PSP took place in July 2009, with 56 executives (including 4 executives appointed pursuant to the bylaws) from Telefônica Brasil given the right to 239,867 shares of Telefónica S.A.
The second distribution under the PSP took place in July 2010, with 57 executives (including 4 executives appointed pursuant to the bylaws) from Telefônica Brasil potentially having the right to 175,534 shares of Telefónica S.A.
The third distribution under the PSP took take place in July 2011, with 51 executives (including two executives appointed pursuant to the bylaws) from Telefônica Brasil potentially having the right to receive 189,763 shares of Telefónica S.A.
The fourth distribution under the PSP will take place in July 2009,2012, with 8144 executives (including 2 executives appointed pursuant to the bylaws) from TelespTelefônica Brasil potentially having the right to 208,709receive 183.753 shares of Telefónica S.A., for which, on December 31, 2008,2011, we have made a provision of R$3.088.3 million.
The second distribution under thefifth provision related to PSP will take place in July 2010,2013, with 8254 executives (including 2 executives appointed pursuant to the bylaws) from TelespTelefônica Brasil potentially having the right to 261,951receive 182.062 shares of Telefónica S.A., for which, on December 31, 2008,2011, we have made a provision of R$2.276.0 million.
At the General Shareholders Meeting of Telefónica S.A. (our indirect controlling shareholder), held on May 18, 2011, a new long-term incentive plan—“Performance and Investment Plan” (PIP)—for executives of Telefónica S.A. and of other entities within the Telefónica Group, which includes Telefônica Brasil S.A. was approved. The plan grants a determined number of shares of Telefónica S.A. to selected participants who fulfill the necessary requirements.
The PIP is divided into three cycles, each of three-year duration. The eligible executives, who must remain with the Telefónica Group for a minimum period of three years commencing on the date of their eligibility, will have the right to receive stipulated shares based upon their performance in achieving targeted pre-defined results. Shares will
be received at the end of each cycle. Each cycle is independent of the others, with the first cycle starting on July 1, 2011 (with distribution of shares of Telefónica S.A. starting on July 1, 2014) and each subsequent cycle commencing on July 1 of each subsequent year, up to and including, the third distribution under the PSPcycle, which commences on July 1, 2013 (with delivery of shares of Telefónica S.A. starting on July 1, 2016).
The first provision related to PIP will take place in July 2011,2014, with 75145 executives (including 5 executives appointed pursuant to the bylaws) from TelespTelefônica Brasil potentially having the right to receive 239,796555,594 shares of Telefónica S.A., for which, on December 31, 2008,2011, we have made a provision of R$0.924.5 million.
The provision to be recognized for each cycle in a five-year period is based on the fair value of shares at granting date. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
In accordance with our bylaws, we have two classes of capital stock authorized and outstanding: common shares (aç(ações ordinárias)rias) and preferred shares (aç(ações preferenciais)preferenciais). Our common shares have full voting rights. Our preferred shares have voting rights only under limited circumstances. At December 31, 2008,2011, Telefónica Internacional owned 34.87%15.43% of our common shares and SP Telecomunicações, a wholly-owned subsidiary of Telefónica International, owned 50.71%50.47% of our common shares. Since Telefónica Internacional owns 100%55.28% of the equity share capital of SP Telecomunicações, it has effective control over 85.57%43.33% of our outstanding common shares. Accordingly, Telefónica Internacional has the ability to control the election of our Board of Directors and to determine the direction of our strategic and corporate policies. Neither Telefónica Internacional, nor SP Telecomunicações, has any special voting rights beyond those ordinarily accompanying the ownership of our common or preferred shares.
The following tables set forth information relating to the ownership of common and preferred shares by SP Telecomunicações, Telefónica Internacional and our officers and directors. We are not aware of any other shareholder that beneficially owns more than 5% of our common shares.
| | Number of common shares owned | | | Percentage of outstanding common shares | | | Number of common shares owned | | | Percentage of outstanding common shares | |
SP Telecomunicações | | 85,603,079 | | | 50.71 | % | | | 192,595,149 | | | | 50.47 | % |
Telefónica S.A. | | | | 97,976,194 | | | | 25.68 | % |
Telefónica Internacional | | 58,859,918 | | | 34.87 | % | | | 58,859,918 | | | | 15.43 | % |
All directors and executive officers as a group | | 20 | | | — | | | | 1,548 | | | | – | |
| | | | | | | | | |
| | Number of preferred shares owned | | | Percentage of outstanding preferred shares | | |
SP Telecomunicações | | 29,042,853 | | | 8.61 | % | |
Telefónica Internacional | | 271,706,997 | | | 80.53 | % | |
All directors and executive officers as a group | | 1 | | | — | | |
| | Number of preferred shares owned | | | Percentage of outstanding preferred shares | |
SP Telecomunicações | | | 29,042,853 | | | | 3.90 | % |
Telefónica S.A. | | | 179,862,845 | | | | 24.17 | % |
Telefónica Internacional | | | 271,707,098 | | | | 36.52 | % |
All directors and executive officers as a group | | | 1 | | | | – | |
Telefónica Internacional is a wholly-ownedwholly owned subsidiary of Telefónica S.A., or Telefónica. Telefónica’s shares are traded on various stock exchanges, including exchanges in Madrid, Barcelona, Bilbao, Valencia, London, Paris, Frankfurt, New York, Lima and Buenos Aires and São Paulo.Aires. Telefónica’s business operations are concentrated in a number of sectors, including fixed and mobile telecommunications services, data communications, pay TV, integrated business solutions, e-commerce, Internet, telephone book publishing and marketing, marketingmarket information and services, media content creation, production, distribution and marketing and call center services.
B. | Related Party Transactions |
Note 3132 to our consolidated financial statements presents, in tabular format, more detailed financial information with respect to transactions and balances with related parties. We provide below a summary description of transactions with related parties.
We entered into a consulting service agreement, known as the Consulting Agreement, with Telefónica Internacional, on May 17, 1999, pursuant to which Telefónica Internacional provides advice regarding our management, operations and business. The expiration of this contract was originally August 3, 2003, but it was automatically extended for a five-year term and renewed for an additional five years in December 2008. Since January 2006, the percentage of net revenuesrevenue applicable to this contract was 0.1%, pursuant to our concession contracts with ANATEL entered into in December 2005. In December 2010, this agreement was terminated and the outstanding amount of R$23.9 million was paid to Telefónica Internacional.
In addition, in July 2010, we registered with the Brazilian Intellectual Property Agency (INPI), and entered into an agreement with Telefónica S.A. for the exploitation of the trademark “Telefónica” by us upon the payment of the equivalent of 1.0% of our net operating revenue, excluding intercompany transactions. The aggregate amount disbursed in 2011 under this agreement was R$145.0 million.
In 1999, we entered into a service agreement with Atento Brasil S.A. (an indirect majority-owned subsidiary of Telefónica S.A.), or Atento, that is automatically extended every three years, for the provision of certain customer services, principally services related to our call center. Transactions under this service agreement with Atento Brasil involved approximately R$5141,041.8 million in 2008 (R$3842011 (compared to R$750 million in 2007)2010).
In April 2001, we entered into a service agreement for the provision of logistics, administrative, accounting and other services with TelefóTelefônica Serviços Empresariais do Brasil Ltda., or TGestiona, an indirect wholly-ownedwholly owned subsidiary of Telefónica. Transactions with TGestiona under this service agreement involved approximately R$7694.6 million in 2008 (R$952011 (compared to R$89 million in 2007)2010).
Some international roaming services are provided by companies in the Telefonica Group.
We also entered into certain agreements for the provision of telecommunications services to several of our affiliates, each under the indirect or joint control of Telefónica, including Vivo, TIWS Brasil Ltda., Terra Networks Brasil S.A, Telefónica Internacional, S.A., Telefônica Pesquisa e DesenvolvimentoSP, Telecomunicações Participações Ltda. and others listed in Note 3132 to our consolidated financial statements. Transactions pursuant to these various service agreements, in the aggregate, involved approximately R$2.11.6 billion in 2008 (R$1.82011 (compared to R$2.0 billion in 2007)2010).
CVM Administrative Proceeding Relating to Agreement with Atento
There was a CVM administrative proceeding arising out of a certain service agreement with an affiliate of Telefónica Group, Atento Brasil S/A (“Atento”). The CVM initiated an administrative proceeding with respect to the execution of the service contract between Telesp and Atento (the “Atento Agreement”). On October 2, 2003, the CVM held that although the terms and conditions of the Atento Agreement were equivalent to those normally applied in agreements of the same nature and that are considered arms-length conditions, the Atento Agreement had not obtained the required approvals. The CVM, therefore, fined four of our former officers each in the amount of R$75,000.00. The company disagreed with the CVM’s administrative resolution and filed an appeal to the Treasury Department’s Appeals Council for the National Finance System (Conselho de Recursos do Sistema Financeiro Nacional), which was denied. The fines were paid and the administrative proceeding was terminated in 2008.
C. | Interests of Experts and Counsel |
Not applicable.
A. | Consolidated Statements and Other Financial Information |
See Note 20 of our Consolidated Financial Statements.
Legal Proceedings
We are party to legal proceedings incidental to the normal course of our business. The main categories of such proceedings include:
| · | administrative and judicial litigation with Instituto Nacional da Seguridade Social, the National Institute of Social Security, or INSS; |
| · | administrative and judicial proceedings relating to tax payments; |
| · | lawsuits brought by employees, former employees and trade unions relating to alleged infringements of labor rights; and |
| · | other civil suits, including litigation arising out of the breakup of Telebrás and events preceding the breakup.suits. |
Our policy with respect to provisioning for contingencies classifies the various legal proceedings to which we are party as “probable,” “possible” and “remote.” In general, 100% of the total claim value for legal proceedings
classified as “probable” areis provisioned. SeniorOur senior management classifies each legal proceeding into one of these three categories (probable, possible and remote) based upon the advice of internal and external counsel and specialized technical advisors in charge of each matter. Due to the level of provisioning and based on its analysis of the individual cases, our management believes that no additional liabilities related to any legal proceedings will have a material effect on our financial condition or results of operations.
We have not described below any proceedings where the chance of loss is characterized by our management and legal advisors as “remote” since management does not believe that such proceedings have or will have a material effect on our financial condition or results of operations.
Provision for Tax Matters
Federal Taxes
On December 31, 2011, the Company had judicial and administrative disputes relating to: (a) FGTS (Additional contributions to the Unemployment Guarantee Fund for Length of Service required by Social Security on the deposits made by employers) (the lawsuit did not result in reduction of the FGTS deposits made by the Company on behalf of employees), (b) nonconformity due to nonapproval of applications for compensation and claims for refunds made by the Company, (c) social security contributions on the alleged lack of retention of 11% over the value of invoices and receipts received from service providers contracted by the transfer of skilled labor, (d) CIDE taxes (Contribution of Intervention in the Economic Domain) levied on the remittance abroad relating to technical and administrative assistance, as well as royalties, (e) Fixed: does not include the costs of interconnection (ITX) and EILD on the basis of calculation of Fust and Mobile: no inclusion of interconnection revenues (ITX) and EILD on the basis of calculation of Fust, (f) contribution to EBC (Enterprise Brazil Communications), created by Law No. 11.652/08, (g) TFI (Taxa de Fiscalização de Instalação) / TFF (Taxa de Fiscalização de Funcionamento) on mobile stations, (h) Withholding income tax on interest on capital, (i) PPNUM - Price Relative to the Public Administration of Numbering Resources established by ANATEL by Resolution No. 451/06, (j) Income / PIS / COFINS of non-approval of applications for compensation / refund made by companies, (k) compensation of FINSOCIAL, (l) lack of retention of social contribution on services, remuneration, salaries and wages of contribution, (m) COFINS - Requirement resulting from the adoption of revenue as the basis of calculation without the financial statement of revenue, (n) increase in the base calculation of PIS (Social Integration Program) and COFINS (Contribution for Financing Social Security), as well as an increase in the COFINS rate, required by Law No. 9.718/98, which were accrued in the amount of R$1,529.1 million.
In the opinion of our management and our legal advisors, the chance of loss in these cases is “probable.”
State Taxes
On December 31, 2011, the Company and its subsidiaries had various tax matters at the state level, both in the administrative and judicial spheres, totaling R$39.0 million based on the opinion of its legal advisors and classified as probable, with full provision of the amounts involved.
Such matters involve: (a) tax credits relating to electric power as well as tax credit with no documentary evidence; (b) non-taxable telecommunication services; (c) disallowance of fiscal incentives for cultural projects and (d) environmental administrative fines.
In the opinion of our management and our legal advisors, the chance of loss in these cases is “probable.”
Municipal Taxes
On December 31, 2011, the Company and its subsidiaries had various tax matters at the municipal level in the judicial sphere, totaling R$4.5 million. Based on the opinion of its legal advisors and classified as probable, with full provision of the amounts involved.
Such matters involve: (a) property tax (IPTU); (b) tax on services (ISS) charged over rental of chattels and certain other accessory activities, as well as over other leases, subleases, rights of passage, shared or nonshared, over railways, roads, gates, cables, ducts and others of the same nature; (c) use of soil; and (d) control and fiscalization tax (TVCF).
In the opinion of our management and our legal advisors, the chance of loss in these cases is “probable.”
Other Provisions
At December 31, 2011, the Company and its subsidiaries recorded other provisions, relating to legal claims, both in the administrative and in the judicial sphere, amounting to R$7.8 million, related to incorrect payment of ISS referring to the effective rendering of services such as lease, sublease, right of way or use right, shared or not, of railway, highway, poles, cables, ducts and conducting wires of any kind.
In the opinion of our management and our legal advisors, the chance of loss in these cases is “probable.”
Tax Proceedings
The following tax proceedings were pending as of December 31, 2011, and, in the opinion of our management and our legal advisors, the chance of loss in these cases is “possible.”
Federal Taxes
On December 31, 2011, the Company and its subsidiaries had various administrative and judicial proceedings at the federal level, which are awaiting trials in various court levels, totaling R$3,185.7 million.
Among the lawsuits, are: (a) expressions of dissatisfaction due to nonapproval of applications for compensation made by the company, (b) fines for distribution of dividends with an alleged existence of federal debt outstanding, (c) social security contributions based on lost wages as a result of the “Summer Plan” and “Bresser Plan,” Workers Accident Insurance (SAT), amounts owed to third parties (INCRA and SEBRAE), meals to employees and retention of 11% (transfer of labor), (d) withholding tax on remittance abroad relating to technical and administrative assistance and the like, as well as “royalties”, (e) PIS taxes levied on roaming, (f) CPMF on operations due to technical cooperation agreement with the Secretary of National Treasury – STN (via SIAFI compensation) and on contracts for symbolic exchange required by the Central Bank, (g) income tax and social deductions from revenue reversals of provisions, (h) disallowance of costs and miscellaneous expenses, (i) COFINS deductions for losses on swap transactions, (j) PIS / COFINS accrual versus cash basis, (k) income tax due because of the excess in the allocation made to FINOR, or FUNRES FINAN, (l) income on operations with derivatives, and (m) compensation tax on net income, and (n) goodwill paid in the acquisition of Celular CRT S/A and the merger of telecommunications operators.
In the opinion of management and its legal advisors, the chances of loss in these processes are “possible”.
State Taxes
On December 31, 2011, the Company and its subsidiaries had various administrative and judicial proceedings at the state level, related to VAT, totaling R$4,172.5 million, which are awaiting trial in various court levels.
The proceedings are related to: (a) equipment and Speedy modem rentals, (b) international calls, (c) tax credit unduly taken on certain fixed assets, (d) reversal of credit for acquisition of fixed assets, (e) ICMS credits, (f) provision of service outside of São Paulo with payment of ICMS to the state of São Paulo, (g) co-billing, (h) tax substitution with “fictitious” tax base (i) use of tax credits from the purchase of electricity, (j) tax credit on certain accessory and supplementary activities and value-added services (Grant 69/98), (k) tax credits relating to appeals and disputes on telecom services not rendered or mistakenly charged (Grant 39/01), (l) sale of goods at prices lower than the acquisition price, (m) deferred recovery of ICMS for interconnection services arising out of tax credits granted by other federal entities, (n) disallowance of tax incentives for cultural projects, (o) transfer of property from and to another establishment; (p) tax credits on communication services used in providing services of the same nature, (q) gift cards to activate prepaid services, and (r) tax resulting from the reversal of credit and lending operation reversal.
In the opinion of management and its legal advisors, the chance of loss is “possible” in these procedures.
Municipal Taxes
On December 31, 2011, the Company and its subsidiaries held various administrative and judicial proceedings at the municipal level, totaling R$471.9 million, which are awaiting trials in various instances.
Among the actions, there is: (a) ISS – through activities, service and additional value added, (b) retention, (c) property tax, (d) Rate of Land Use, (e) various municipal fees, (f) rate of use of the Mobile Network (A-T), leasing of infrastructure, (g) advertising services, (h) services provided by third parties, (i) consulting services in areas of business management provided by Telefónica Internacional (TISA) and (j) ISS levied on the provision of caller ID service and cellular activation.
In the opinion of management and its legal advisors, loss is “possible” in these proceedings.
ANATEL
FUST – Universalization of Telecommunications Service
Writs of Mandamus were filed separately by fixed and mobile operators to recognize the right to, (a) for fixed operators, not include the costs of interconnection (ITX) and EILD on the basis of calculation of FUST and (b) for mobile operators, not to include interconnection revenues (ITX) and EILD in the basis for calculating the FUST as a result of Precedent No. 7, dated December 15, 2005, being in violation of the provisions of paragraph of article 6 of Law No. 9,998/00. These writs of mandamus are awaiting decision on appeal.
On December 31, 2011, the total amount involved was R$1.7 billion.
The Company is also involved in administrative procedures relating to notifications from ANATEL for charging FUST on ITX and EILD and other revenues from providing services that are not telecommunications in the amount of R$1.6 billion.
In the opinion of management and its legal advisors, there are “possible” chances of loss in these procedures.
FUNTTEL – Fund for the Technological Development of Telecommunications
On December 31, 2011, the Company and its subsidiaries were involved in administrative and judicial proceedings related to FUNTELL amounting to R$622.6 million, which are awaiting trial on first and second court levels (administrative and judicial). These lawsuits discuss the collection of contributions to FUNTTEL on other revenues (which are not telecommunications) as well as revenue and expenditure transferred to other operators (interconnection and EILD).
In the opinion of management and its legal advisors, the chance of success in these procedures is “possible”.
FISTEL – Telecommunications Supervision Fund
ANATEL collects an Inspection Fee (TFI) at the time of grant of extensions for the licenses for use of telephone exchanges associated with operation of the switched fixed telephone service (fixed carriers) and extensions of the term of the right to use radio frequency associated with the exploration of personal mobile service (Mobile operators).
The Company believes this charge is improper and is questioning it administratively and judicially. The total amount involved was R$1,504.4 million (full amount deposited in escrow).
In the opinion of management and its legal advisors, there are “possible” chances of loss in these procedures.
PPNUM – Price Relative to the Public Administration of Numbering Resources
Our subsidiary Vivo, in conjunction with other mobile operators in Brazil, filed a lawsuit challenging the collection of PPNUM levied by the ANATEL for the use of numbering resources managed by ANATEL. At the time of collection, Vivo made the deposit in court on the amounts owed. On April 23, 2009, judgment was rendered
Litigation with INSSin favor of the mobile operators and the lawsuit is currently awaiting a decision on appeal. The total amount involved on December 31, 2011 is R$2.0 million.
WeIn the opinion of management and its legal advisors, there are defendants“possible” chances of loss in several lawsuits filed by the INSS, in the federal courts of São Paulo, including:these procedures.
· | Several legal proceedings for the collection of Seguro de Acidente de Trabalho (Workers Accident Insurance Compensation, or SAT) from January 1986 to June 1997 and charges regarding the alleged failure to collect contributions by certain contracted parties in the approximate amount of R$330.8 million. Management has maintained a provision in the total amount of R$98.2 million corresponding to the portion of the total value whose likelihood of loss is probable, having made a deposit in escrow of R$593 thousand in court.
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EBC (Contribution to Development of the Public Broadcasting)
· | Negotiations relating to certain amounts paid under our collective labor agreements, as a result of inflationary adjustments arising out of Planos Bresser and Verão, in the aggregate amount of R$145.7 million. Management has maintained a provision in the total amount of R$2.9 million corresponding to the portion of the total value whose likelihood of loss is probable. |
On May 26, 2009, the Sinditelebrasil–Union of Telephone Companies and Personal Mobile Service and filed a writ of mandamus challenging the new fee to EBC (Brazil Communications Company), created by Law No. 11.652/08. There was no order of injunction, and the operators affiliated with that union obtained judicial authorization for the deposit of the amount in dispute. The case is pending in a first degree court.
· | Notices relating to social security contributions and amounts due to third parties (under INCRA and SEBRAE) over wages paid during the period between January 1999 and December 2000, in the approximate amount of R$62.1 million. Considering that the risk was classified by our internal and external counsel as being of possible loss, no provision was made. |
On December 31, 2011, the total amount involved was R$577 thousands (fully deposited in escrow).
· | Administrative proceeding relating to joint and several liabilities for payment of 1993 welfare contributions. The amount at issue is approximately R$202.8 million. The probability of loss is possible. No provision has been made. In August 2008, we obtained a favorable final order, which cancelled the debt launched against CETERP due to the expiration of the time period afforded to the National Treasury to claim the tax. |
· | Administrative proceedings with respect to fines of approximately R$162 million for the alleged improper distribution of dividends while the company supposedly was indebted to the INSS. Considering that the risk was classified by our internal and external counsel as being of possible loss, no provision was made. |
· | On December 20, 2005, we were notified of a demand, concerning the period from May 1995 to December 1998, for the payment of social security contribution amounts, through revision of the tax base and the imposition of joint liability between the Company and the service providers related to civil construction specifically. Our counsel has deemed the risk of loss at trial to be remote. Of the 17 active claims, in the second half of 2008, we obtained favorable final orders in six cases. The others 11 claims represent an aggregate of R$1.3 billion, many of which we expect to result in a favorable outcome during 2009. |
While we await the outcome of the foregoing lawsuits, depending on the case and the respective procedural situation, we have pledged, for judicial attachment purposes, real property owned by us, and offered bank guarantees and cash deposits, in accordance with Brazilian legal procedures. If we prevail in the foregoing lawsuits, such attachments will be cancelled, guarantees released and deposits returned.
Litigation Relating to FINSOCIAL, COFINS and PASEP
· | Ceterp, which was merged into us on December 27, 2000, is contesting the applicability of certain taxes on telecommunications services based on constitutional grounds. The allegation is that no other tax (except for the ICMS and import and export taxes) can be applied to telecommunications services, including the IRPJ (Imposto de Renda da Pessoa Jurídica, or the corporate income tax), CSL, PASEP and COFINS. The total amount of the claim equals R$83.7 million. Considering that there is a risk, as classified by our internal and external counsel, of this being a probable loss, management has made a provision for the total amount. In October 2008, an unfavorable final decision was issued, whereby the tax immunity claimed by Ceterp (and which would avoid taxation by the PIS, COFINS, CSL and IR) was not recognized. Currently, the Company awaits a decision determining whether the deposits made by the Company (which were made in an escrow account with a relevant court in the amount of the disputed taxes) will be reverted in favor of the federal government. This is an isolated case that is not expected to have a major impact upon us because (i) the
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amounts under dispute are deposited in escrow with the court, and (ii) Telesp, into which Ceterp was merged, pays all taxes levied on its transactions, including PIS, COFINS, CSL and IR.
Litigation Relating to ICMS
We are a named defendant in several ICMS proceedings pertaining to:
· | Cellular Activation Fees. On June 19, 1998, the treasury secretaries of each Brazilian state approved an agreement to interpret Brazilian tax law to expand the application of the ICMS to cover not only telecommunications services, but also other services, including cellular handset activation, which had not been previously subject to this tax. Pursuant to this new interpretation, the ICMS might be applied retroactively with respect to cellular activation fees charged during the five years preceding the tax assessment by the appropriate authority. On February 29, 2000, the treasury secretary of the State of São Paulo issued a tax assessment against us based on our alleged failure to pay the ICMS due in connection with cellular activation fees charged over the preceding five years. The state treasury considers us responsible for this payment based on certain Brazilian tax provisions and because we operated wireless telecommunications services through Telesp Celular until January 1998.
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Based on the Brazilian federal constitution, we are of the opinion that (i) the treasury secretaries acted beyond the scope of their authority; (ii) their interpretation would subject certain services to taxation, that are not considered telecommunications services; and (iii) new taxes may not be applied retroactively. In October 2008, we obtained a favorable final order that cancelled the ICMS collection for registration of cell phones services.
· | International Long-Distance Services. The São Paulo state treasury secretary filed three administrative violation suits in order to collect amounts allegedly due as ICMS tax in connection with international long-distance services, for the periods of November and December of 1996, April of 1998 to December of 1999 and of January of 1997 to March of 1998. The total amount involved is R$452.1 million. Considering that the risk was classified by our internal and external counsel as being of possible loss, no provision was made.
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· | ICMS Tax Credits. Two notices of tax assessments were filed by the tax agency of the State of São Paulo related to ICMS tax credits from the periods from January 1999 to June 2000 and from July 2000 to December 2003 and a wrongful entry of ICMS tax during March 1999. The assessments relate to the reversal of tax credits in respect of taxable equipment purchases for exempted operations and the criteria for determining tax liability in such a situation. The total amount involved is R$127.9 million. Considering that the risk was classified by our internal and external counsel as being of possible loss, no provision was made.
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· | ICMS with Respect to Property Rental (Modem) and Complementary Services. Administrative proceedings were commenced whereby tax authorities claimed that ICMS was assessed for various services, such as complementary services of aggregate value (SVA) and modem rental, which were not subject to the ICMS. The relevant services were aggregated value call services or complementary services, as well as call-waiting, call transferring and modem rentals, among others. The total amount involved in the proceedings is approximately R$445.2 million. Considering that the risk was classified by our internal and external counsel as being of possible loss, no provision was made.
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Litigation Relating to Fust
· | FUST Calculation Basis. On December 15, 2005, ANATEL issued a new ruling which stated its understanding that interconnection expenses should not be excluded from the FUST calculation basis, which ruling constituted a change in ANATEL’s previous policy that had provided for such a possibility. This new ruling has retroactive application to January 2001. Therefore, on January 9, 2006, we, through the Brazilian Association of Fixed Telecommunication Companies (ABRAFIX), entered a petition of writ of mandamus so as to assure the possibility of exclusion of the interconnection expenses from the FUST calculation basis or so as to avoid the retroactive charge of the balances accrued as a result of the adoption required by Súmula No. 7/2005 of ANATEL. The total amount involved is R$332.3 million. Since February 2006, the
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company has made monthly deposits with the court which currently amount to R$148.3 million. A provision has been recognized equivalent only to the court deposits. The suit is at the second judicial stage.
Labor Litigation
We are also a defendant in several legal proceedings filed by former employees and outsourced employees (the latter alleging(alleging joint andor several liability), who claim, among other things, deficient overtime payment, and unequal compensation, retirement wage supplements, and health and security hazard compensation.compensation, free extension of health plan benefits to retirees of Company; and proceedings regarding our outsourcing practices.
The following lawsuitsIn addition, we are pending:
· | A claim by a labor union representing 9,000 of our employees (SINTETEL) relating to an obligation under a collective labor agreement between us and SINTETEL providing for the delivery of certain studies on the productivity of Telebrás. Despite the fact that this was an “obligation to perform” (as opposed to an “obligation to deliver”), SINTETEL demanded the payment of unpaid salary balances in the amount of 4%, since January 1995, which was allegedly due as productivity compensation. The lawsuit was declared groundless at the first two judicial levels, and an interim appeal filed by SINTETEL is pending judgment. We made no provisions for this lawsuit, as an unfavorable outcome is considered remote. Wealso a defendant in a public civil action filed by the Federal Ministry of Labor which concerns our retaining of third-party companies to perform our core business. Although the likelihood of loss in this action is “possible,” no value amount has been attributed to this action because currently we are unable to estimate the amount of the claims involved at this point. |
· | A claim by a labor union representing the employees of CTBC (SINTETEL) relating to an obligation under a collective labor agreement between CTBC (which was merged into our company in November 1999) and SINTETEL providing for the delivery of certain studies on the productivity of Telebrás. Despite the fact that this was an “obligation to perform” (as opposed to an “obligation to deliver”), SINTETEL demanded the payment of unpaid salary balances in the amount of 4%, since January 1995, which was allegedly due as productivity compensation. The lawsuit was declared groundless at the first judicial level; however, the higher regional labor court reversed the lower court’s decision. We appealed the regional labor court’s decision to the Superior Court, which ruled in our favor, reversing the case back to the labor court. SINTETEL has appealed the Superior Court’s decision. The amount in dispute is approximately R$116.9 million. However, SINTETEL’s appeal was not allowed and the lawsuit was dismissed. There were no payments made by Telesp in connection with this claim. |
· | An Annulment Action was brought by Telesp against the federal government of Brazil in order to obtain a judiciary declaration of the unenforceability of notices of infraction from all authorities alleging that Telesp violated the constitution by failing to properly pay overtime for all of its employees through January 1997 by using the wrong base to calculate the overtime. The total value is of approximately R$31 million. We have obtained a temporary injunction suspending the notices. We consider the risk of loss remote, and no provision has been made. |
As of December 31, 2008, the total cost ofamount we will owe in the labor lawsuits filed against us amounted to R$2.9 billion, of which R$489 million was reserved to cover probable losses.event we lose and, as a result, we have not recorded any amounts.
Civil Claims
There are several civil claims against us,us. We have recorded R$664.7 million in provisions for which R$187.7 million has beenthese proceedings where the risks are deemed probable, including the civil proceedings described below and provisioned, including:
· | “0900 Service” Claims. On June 9, 2000, WCR do Brasil Serviços Ltda. proposed enforcement proceedings against the Company, claiming the collection of the alleged difference in amounts calculated by Telesp regarding the use of the “0900 Service” and the amounts transferred to that company. The value of the proceedings is R$76.2 million. On October 1, 2004, the thirteenth Civil Court of the central jurisdiction of São Paulo published its decision, by which the proceeding was deemed valid. On December 14, 2004, an appeal against the decision was filed before the twenty-sixth Panel of Judges of São Paulo. On May 26, 2006, the appeal against the decision was overturned in part (a reduction of R$20 million). A deposit for damages was made, through a surety bond, in the amount of R$59.3 million and appealed to the Superior
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the regulatory and antitrust proceedings that follow:
Court (Third Chamber). Since the risk level was considered as probable, a provision of R$76.2 million was made for the claims.
| · | Expansion Plan - Plan–PEX. We are subjectdefendants in proceedings related to claims questioning the applicabilitypossible right of the rules issued by the Ministry of Telecommunication regarding the Financial Sharing Agreementsindividuals who purchased our shares in connection with our network expansion plan after 1996, (Ordinance 1028).to receive additional shares from us. These claims are in different phases and there have been no finalvarious levels of the court decisions. Nevertheless, sincesystem. The chance of loss in such proceedings is classified on a case-by-case basis according to the risk is considered probable,facts presented in each proceeding. For the proceedings in which the chance of loss was classified as “probable,” we recorded a provision of R$1826.2 million. |
| · | Service Complaints. We and our subsidiaries are defendants in certain civil actions, in various court levels, regarding claims related to our services and our ordinary course of business initiated by individual customers, civil associations on behalf of customers or by the PROCON foundation, as well as by the Federal and State Public Prosecutor’s Offices. We recorded a provision of R$315.1 million for these claims. We are also defendants to civil actions in which the claims.risk of loss is classified as “possible” in the amount of R$920.5 million. |
| · | Consumer Relations Claims. We are defendants in several civil actions initiated by individual customers in which the claims are the same or very similar from to other and, when considered individually, are not material, to which we recorded a provision of R$81.5 million, calculated on the basis of on the statiscal analysis of our historical losses in such proceedings. |
There are several civil claims against us, for which we have not recorded provisions, though which we deem to be notable, including:
| · | Pension Benefit and Health Care Claims.Plan Spin-Off. Sistel Participants Association in São Paulo (ASTEL) filed a claimpublic civil action against the Company, Sistel Foundation and others, regarding alleged irregularitiesclaiming the annulment of the spin-off of the PBS pension benefit plan that occurred in changes made2000 which caused the creation of the specific TELESP–PBS pension benefit plan, and corresponding allocation of resources resulted from the technical superavit and fiscal contingencies existing at that time. The chance of loss is possible based on the opinion of our legal advisors. The amount involved in this public civil action cannot yet be determined until an expert appraisal report is conducted since it includes the spun-off portion of Sistel related to the company’s retirees’ medical assistance plan, or PAMA, and in particular: (i)telecommunication operators from the prohibition of the contribution of payments from PAMA members; (ii) the reinstatement of PAMA members whose subscriptions were suspended due to default; (iii) the revaluation of PAMA’s economics needs; (iv) the restructuring of the contribution base for total and gross payroll for the company’s employees; (v) the inclusion of all hospitals, doctors, clinics and laboratories that used to be associated with Sistel; and (vi) equity accounting distribution review. The process is in the initial proceedings and no decision has been made by the court. The Company’s management, based on its legal counsel opinion, consider this proceeding as a possible risk. We estimate the exposure of the company at R$322.3 million.former “Telebrás System.” |
| · | Community Telephone Plan -PCT.Plan–PCT The Company is. We are subject to civil public action proposals claiming the possible right for indemnity of associates and entities hired for purchasersthe construction of community networks connected to the expansion plans who didnetwork of fixed telephony operators and have not receivereceived shares for their financial investment in the municipalitiesmunicipality of Diadema, São Caetano do Sul, São Bernardo do Campo and Ribeirão Pires,Mogi das Cruzes, involving a total amount of approximately R$344197.8 million. The claims have not been subject to a final ruling. The risk involved is considered remote with respect to these actions. We are also involved in another action with respect toBased on the PCT inopinion of our legal advisors, the city of Mogi das Cruzes, that was ruled against us but for which we are waiting judgment on our appeal. Since we have a favorable precedent the riskchance of loss is possible. The appellate court has ruled in our favor and changed the lower court decision. The plaintiff filed an appeal to the Supreme Court which is awaiting resolution. |
| · | Monthly Subscription Payment.Services Quality Class Action We are party to numerous individual and collective judicial proceedings instituted at various levels and areas. The Public Prosecutor Office of the judiciary challenging our monthly subscription fees. MostState of these proceedingsSão Paulo commenced a class action suit claiming moral and property damages suffered by all consumers of telecommunication services from 2004 to 2009 due to the bad quality of service and failures of the communications system. The Public Prosecutors Office suggested a total award against the Company of R$1 billion. A judgment was rendered on April 20, 2010 imposing the payment of damages to all consumers who proved to be eligible for the award. Alternatively, if clients do not prove themselves eligible in a number compatible with the severity of the damage after a period of one year, the judgment establishes that R$60 million should be deposited in a special fund for protection of diffuse customer interests (Fundo Especial de Defesa de Reparação de Interesses Difusos Lesados). It is not possible to estimate how many consumers may present themselves in this procedure nor the values to be claimed by them. The parties filled an appeal and the effects of the sentence were suspended. Despite the possible degree of risk, no value amount was attributed to this action because currently we are unable to calculate the total amount to be paid by us in the event we lose and, as a result, we have ended favorably for us, including through the Superior Court of Justice (Third Chamber), but we continue to follow these consumer claims closely, as the results could impact the businesses of all Brazilian telecommunications providers. The underlying probability of loss is considered remote.not recorded any provisions.
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| · | InclusionOwnership of PISCaller ID. Lune Projetos Especiais Telecomunicação Comércio e Ind. Ltda., a Brazilian company, filed on November 20, 2001 lawsuits against 23 wireless telecommunications operators, including TELESP Celular Participações and COFINSits subsidiaries. The lawsuits allege that those operators violated patent No. 9202624-9, related to Equipamento Controlador de Chamadas Entrantes e do Terminal do Usuário, or Caller ID, granted to Lune by the Brazilian Intellectual Property Agency–INPI, on September 30, 1997. Lune called on the operators to cease to provide Caller ID services and sought payment from them for the unauthorized use of the Caller ID system in Service Ratesan amount equivalent to the payment of fees received by such operators for use of the Caller ID system. On October 5, 2011, the law suit was judged groundless against the Phone Companies. Vivo will file an appeal due to this decision. This decision is not final, and will be tried
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before the Court and Superior Court of Justice. However, Lune’s right to use patent No. 9202624-9 was suspended by a federal judge in response to a lawsuit filed against Lune and INPI by Ericsson Telecomunicações S.A., TC and Telerj Celular (formerly Vivo subsidiaries before our corporate restructuring) filed identical lawsuits against Lune and INPI and those lawsuits are still pending before the courts. In connection with this proceeding, a third company, Sonintel, and its two partners also brought an Ação de Oposição, whereby they reinvoked their rights to a previous patent related to Caller ID, and to which the above mentioned patent (No. 9202624-9) was linked. We believe, based on the opinion of outside counsel that the likelihood of an unfavorable outcome with respect to Lune’s claim against us is possible. We are unable to determine at this time the extent of any potential liabilities with respect to this claim.
| · | Validity of Prepaid Plan Minutes. We and our subsidiaries, together with other Brazilian wireless telecommunications operators, are defendants in various lawsuits brought by the public prosecutor’s office and consumer protection associations challenging the imposition of a deadline for the use of purchased prepaid minutes. The federal district attorney’s office believesplaintiffs allege that purchased prepaid minutes should not expire after any specified deadline. Conflicting decisions have been issued by the amounts collected by us as COFINS and PIS are being improperly includedcourts reviewing this matter. Although we believe that our criteria for imposing the deadline is in the fixed telecommunications service rates, and therefore has filed a public civil action in order to exclude those amounts from those charged to our customers and to demand that the amounts improperly charged be returned in double. There are other public civil actionscompliance with ANATEL’s rules, we believe, based on the sameopinion of outside counsel, that the likelihood of an unfavorable outcome with respect to this claim is possible. |
| · | VU-M. Global Village Telecom (GVT), a Brazilian telecommunications operator, filed a lawsuit against ANATEL and wireless telecommunications operators, including Vivo and Telemig Celular, claiming that the VU-Ms are fixed at an abusive rate and that these operators employ anticompetitive practices which when addedare causing financial damages to the one described aboveplaintiff. GVT requested a preliminary injunction to reduce the VU-Ms and other collectivea determination by a judicially appointed expert of the proper value of the VU-Ms on a “cost-based model.” GVT also seeks compensation from the wireless operators in the amount of the difference between the value currently charged by the wireless operators and individual lawsuits, amountthe value to seven lawsuits. We have not made any provisions for these lawsuits asbe declared at the final judgment. The preliminary order was initially denied, but after a renewal requested by the plaintiff, a preliminary order was granted to GVT to allow judicial deposits of the difference between R$0.2899, which must be paid to wireless operators, and the values currently charged. ANATEL and some wireless operators, including Vivo, appealed from the preliminary order to the Federal Court and the preliminary order was sustained by the Federal Court. After this last decision, ANATEL and certain wireless operators, including us, appealed to the supreme court and a final decision is still pending. Based on the opinion of our riskcounsel, we believe that the likelihood of lossan unfavorable outcome with respect to this claim is deemed remote.possible. |
Regulatory and Antitrust Litigation
We are a defendant in each of the following administrative proceedings, which have been filed by telecommunications service providers alleging anti-trust practices:ANATEL
· | EILD Cases. Administrative Proceedings for Noncompliance with Regulatory Obligations Brought by ANATEL – PADOs. As of December 31, 20110, the Company was involved in several administrative proceedings brought on grounds of alleged breach of obligation established by federal regulation, involving risk of loss that is classified as probable. The amount involved and the provision recorded for the proceedings involving a risk of loss classified as probable was, in December 31, 2011, R$217.8 million. We are also defendants to such administrative proceedings in which the risk of loss classified as possible is in the amount of R$860.6 million.We have been accused in two different proceedings of anti-trust violations through price discrimination based on claims that we charge our competitors higher fees for dedicated lines (“EILD”) than we charge one of the companies of the Telefónica Group. Both ANATEL and CADE analyzed the allegations in these cases. We have signed two consent decrees (Termos de Cessação de Conduta) with ANATEL pursuant to which we commit to refrain from practicing the actions challenged in the proceedings.
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We made no provisions for this claim becauseOur subsidiary Vivo is also part of several administrative and legal actions brought by ANATEL that allege non compliance with regulatory requirements related to SMP service, in the total amount of approximately R$24 million. Based on the opinion of our counsel, we believe that the agreements will also be fully confirmed by CADE. In July 2006, ANATEL’s Resolution no. 402, which altered rules regarding EILD, became effective. The Resolution also changed the conditionslikelihood of the consent decrees. Telesp is challenging such resolution before ANATEL, on the basis that the consent decrees could be altered by CADE only. The final term of the consent decrees is March 7, 2007, but full expiration of its effects should take place only when declared by CADE. In addition, Telesp has been able to enter into a commercial agreement with most operators regarding this issue, thus closing the related administrative proceedings. Nevertheless, in December 2008, Anatel initiated a procedure against Telesp to investigate regulatory obligationsunfavorable outcomes with respect to formal aspects of the public offering of Telesp’s EILD.these claims is probable. We are ablealso defendants to present consistent arguments to defend our offer and for this reason, we made no provision for this procedure.
such administrative proceedings in which the risk of loss classified as possible in the amount of R$1 million.
In addition to the two antitrust-related claims mentioned above, we are a defendant in the following proceedings:
· | Civil action filed by the federal district attorney’s office of the city of Marília, State of São Paulo, against ANATEL and us questioning the validity of certain clauses of our concession agreements relating to the fee adjustment mechanism, and requesting reimbursement of the balance between the amounts charged by us in 2001 and the amounts we would have charged if we had used the variation of a different price index in the adjustment of our fees. The lower court ruled in favor of the plaintiffs and determined that our fees be adjusted based on variations of the General Price Index (IGP-DI measured by Fundação Getúlio Vargas). An appeal was filed with respect to the lower court’s decision but, as this appeal did not suspend the effects of the lower court’s filing, we appealed again to a higher court to suspend those effects until the first appeal is ruled on which second appeal was granted. The case was sent to the 2nd Federal Court of Brasília for a new judgment and we estimate that a decision will be delivered in the medium term (in approximately two years).
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· | Public civil action brought by the Federal Public Ministry, in Brasilia, Federal District, against Telesp and other operators of STFC services seeking to substitute as the tariff readjustment index the consumer price index (IPCA, published by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística)) for the General Price Index (IGP-DI, published by the Fundação Getúlio Vargas). The action was ruled to be improper and an appeal was filed by the Public Ministry. We are awaiting the results of the appeal. The estimated time period for the end of the action is five years.
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Litigation Arising to the Telebrás Breakup
· | The legality of the breakup of Telebrás was challenged in numerous legal proceedings, some of which remain pending. Our management believes that the final outcome of these proceedings will not have a material adverse effect on our business or financial condition. |
Other Proceedings
See “Item 7.B—Major Shareholders and Related Party Transactions—Related Party Transactions—CVM Administrative Proceeding Relating to Agreement with Atento.”
Dividends and Dividend Distribution Policy
Priority and Amount of Preferred Dividends
The Brazilian Corporate Law generally requires that the bylaws of each Brazilian corporation specify a minimum percentage of the distributable profits comprising dividends and/or interest on shareholders’ equity, or distributable amount, of the corporation for each fiscal year that must be distributed to shareholders as dividends. See “Item 10.B—10. Additional Information—B. Memorandum and Articles of Association.” Moreover, each Brazilian company may issue new preferred shares for public distribution only if one of the following terms applies to the preferred shares: (i) the right to receive dividends equivalent to at least 25% of the net profit for the fiscal year, to be calculated in accordance with Article 202 of the Brazilian Corporate Law as follows: (a) priority in the receipt of dividends corresponding to at least 3% of the book value per share and (b) the right to an equal share of the profits
attributable to the holders of common shares, after the holders of common shares have received a dividend equal to a minimum of 3% of the book value per share; or (ii) the right to receive dividends, at least 10% higher than those paid for each common shares; or (iii) tag-along rights of at least 80% of the price paid in the sale of control to be paid by the controlling shareholder and also including the right to receive dividends at least equal to the dividend paid to common shares.
According to our bylaws, we are required to distribute as dividends of each fiscal year ending on December 31, to the extent amounts are available, an aggregate amount equal to at least 25% of adjusted net income as a
mandatory dividend. The annual dividend distributed to holders of our preferred shares is 10% higher than the dividend distributed to our common shareholders.
Under the Brazilian Corporate Law, a company is allowed to withhold payment of the mandatory dividend in respect of common shares and preferred shares if:
| · | management and the fiscal board of auditors report to the shareholders meeting that the distribution would be incompatible with the financial circumstances of the company; and |
| · | the shareholders ratify this decision at the shareholder’s meeting. In this case: |
| · | management must forward to the CVM within five days of the shareholders meeting an explanation justifying the decision at the shareholders meeting; and |
| · | the profits that were not distributed are to be recorded as a special reserve and, if not absorbed by losses in subsequent fiscal years, are to be paid as dividends as soon as the company’s financial situation permits. |
For the purposes of the Brazilian Corporate Law, net profits are defined as net income after income tax and social contribution for the fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to beneficiary parties’, employees’ and management’s participation in a company’s profits and founders’ shares.
Under Brazilian Corporate Law, and in accordance with our bylaws, adjusted net income is an amount equal to our net income adjusted to reflect allocations to or from (i) legal reserves, (ii) statutory reserves, and (iii) contingency reserves for anticipated losses, if any.
At each annual shareholders meeting, the Board of Directors is required to suggest the allocation of net profits obtained during the preceding fiscal year. Under Brazilian Corporate Law, we are required to maintain a legal reserve, to which 5% of our net profits must be allocated for each fiscal year, until the reserve amounts to 20% of our paid-in capital. Net losses, if any, shall be charged against the accumulated profits, profit reserves and legal reserve, following this order.
Brazilian Corporate Law also provides for an additional allocation of net profits to special accounts, which is also recommended by management and subject to approval by shareholders at the annual shareholders meeting, including the amount of net profits that may be allocated to the contingency reserve for anticipated losses that are deemed probable in future years. Any amount so allocated in a previous year must be either:
| · | reversed in the fiscal year in which the loss was anticipated, if the loss does not in fact occur; or |
| · | written-off in the event thatif the anticipated loss occurs. |
Net profits may also be allocated to the unrealized income reserve in case the total amount of mandatory dividends exceeds the amount of realized income. Such allocation should also be suggested by management and subject to approval by shareholders at the shareholders meeting. For such purpose, realized income is the balance of net profits exceeding the sum of:
| · | the positive net result of equity adjustment; and |
| · | earnings net from transactions or the accounting of assets and liabilities at market value which must be realized after the end of the subsequent fiscal year. |
The amounts available for distribution are determined on the basis of financial statements prepared in accordance with the Brazilian Corporate Law.accounting practices adopted in Brazil.
If the minimum dividend to be paid to the holders of preferred shares is not paid for the period set forth in our bylaws, which in no event shall be longer than three years, the holders of preferred shares will be entitled to full voting rights until such dividend is paid in full.
Payment of Dividends
We are required by law and our bylaws to hold an annual shareholders meeting beforeuntil April 30 of each year at which, among other issues, the allocation of net profits obtained during the preceding fiscal year and the declaration of dividends by decision of common shareholders are decided, acting on the recommendation of the executive officers, as approved by the Board of Directors. The payment of annual dividends is based on the financial statements prepared for each fiscal year ending December 31. Under the Brazilian Corporate Law, dividends are required to be paid within 60 days following the date the dividend is declared to shareholders of record on the declaration date, unless a resolution by the shareholders sets forth another date of payment, which must occur prior tobefore the end of the fiscal year.
A shareholder has a three-year period from the dividend payment date to claim dividends in respect of its shares, after which we have no liability for the payment. Because our shares are issued in book-entry form, dividends with respect to any share are automatically credited to the account holding the share and no action is required on part of the shareholder. We are not required to adjust the amount of paid-in capital for inflation.
If a shareholder is not a resident of Brazil, he or she must register with the Central Bank of Brazil in order to be eligible to receive dividends, sales proceeds or other amounts with respect to his or her shares outside of Brazil. Our preferred shares underlying ADRsADSs are held in Brazil by a Brazilian custodian, Banco Itaú S.A., as the agent for the depositary, which is the registered owner of our shares.
Payments of cash dividends and distributions, if any, will be made in Brazilian currency to the custodian on behalf of the depositary, which will then convert those proceeds into U.S. dollars and will provide for U.S. dollars to be delivered to the depositary for distribution to holders of ADRs. In the event thatADSs. If the custodian is unable to immediately convert the Brazilian currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADRsADSs may be adversely affected by devaluations of the Brazilian currency that occur before dividends are converted and remitted. Dividends in respect of the preferred shares paid to resident and non-residentnon resident shareholders, including holders of ADRs,ADSs, are not currently subject to Brazilian withholding tax.
Additional Payments on Shareholders’ Equity
Law No. 9,249, dated December 26, 1995, as amended, provides for distribution to shareholders of interest on shareholders’ equity, which may be computed against the amount of dividends to be distributed to the shareholders. A company may treat these payments as financial expenses for income tax and social contribution purposes. This interest is limited to the daily pro rata variation of the Taxa de Juros de Longo Prazo, or TJLP, a nominal long-term interest rate determined by the federal government that includes an inflation factor and cannot exceed the greater of:
· | 50% of net income (before deducting income taxes and the interest on shareholders’ equity) for the period in respect of which the payment is made, or |
· | 50% of the sum of retained earnings and profit reserves. |
Any payment of interest in respect ofto preferred shares to shareholders (including the holders of ADSs) is subject to Brazilian withholding tax at a rate of 15%, or 25% in the case of a shareholder domiciled in a tax haven, and these payments may be included, at their net value, as part of any mandatory dividend. Payments to persons who are
exempt from taxation inIf payment of interest on shareholders equity is made for a beneficiary located outside of Brazil, are not subject to withholding tax.the Tax on Exchange Transactions (“IOF”) triggers at a rate of zero. See “Item 10.E—10. Additional Information—E. Taxation—Brazilian Tax Considerations—Distributions of Interest on Capital.”
We declare and pay dividends and/or interest on shareholders’ equity as required by Brazilian Corporate Law and our bylaws. The declaration of annual dividends, including dividends in excess of the mandatory distribution, requires approval by the vote of a majority of the holders of common shares, and depends on many factors. These factors include our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by shareholders. Our shareholders have historically acted on these matters based on recommendations by the Board of Directors. Within the context of tax planning, we may determine in the future that it is to our benefit to distribute interest on shareholders’ equity.
The following table sets forth the dividends or interest on shareholders’ equity paid to holders of our common and preferred shares since 20052007 in reais.reais.
| | Description (Dividends or Interest on Shareholders’ Equity)(1) | | | | | | | | Description (Dividends or Interest on Shareholders’ Equity)(1) | | | | | | |
| | | |
| | | (per share/in R$) | |
2011 | | | Div/Int | | | 4.783035 | | | | 5.261339 | |
2010 | | | Div/Int | | | 3.616248 | | | | 3.977873 | |
2009 | | Div | | 0.732276 | | | 0.805503 | | | Div/Int | | | 2.556431 | | | | 2.812074 | |
2008 | | Div | | 4.539838 | | | 4.993823 | | | Div/Int | | | 4.539838 | | | | 4.993823 | |
2007 | | Div/Int | | 5.247437 | | | 5.772180 | | | Div/Int | | | 5.247437 | | | | 5.772180 | |
2006 | | Div/Int | | 5.581383 | | | 6.139521 | | |
2005 | | Div/Int | | 6.892824 | | | 7.582106 | | |
(1) | Interest on shareholders’ equity is net of withholding taxes. |
Dividends and Interest on Shareholders’ Equity
On March 26, 2008, the General Shareholders Meeting approved the distribution of dividends for the common and preferred shares in the total amount of R$350.9 million, based on retained earnings from the Company’s financial statements as of December 31, 2007. The payment of these dividends was made on June 23, 2008.
On May 20, 2008, the Board of Directors approved a distribution of interim dividends for our common and preferred shares in the total amount of R$485 million based on earnings as of the March 31, 2008 balance sheet. The payment of these dividends was made on June 23, 2008.
On May 20, 2008, the Board of Directors approved a payment of interest on shareholders’ equity for our common and preferred shares in the amounts of R$170 million. The payments were made on June 23, 2008.
On November 24, 2008, the Board of Directors approved a distribution of interim dividends for our common and preferred shares in the total amount of R$1.090 million based on earnings as of the September 30, 2008 balance sheet. The payment of these dividends was made on December 10, 2008.
On December 9, 2008,2009, the Board of Directors approved, subject to the shareholders approval, a payment of interest on shareholders’ equity for our common and preferred shares in the amount of R$353.6174.3 million. The actual payment is expected to be realized in 2009, to be defined by the General Shareholders Meeting.occurred on April 26, 2010.
On March 25, 2009,April 7, 2010, at the General Shareholders Meeting, the shareholders approved the distribution of dividends to the common and preferred shares in the total amount of R$395.11,252 million declared on the basis of the closing balance sheet on December 31, 2008.2009. The Company’s management proposed the payment will occurof the approved dividends would be made in 2009,two installments as follows:
| · | an initial installment of R$800 million, with payment due June 30, 2010. The actual payment occurred on April 26, 2010; and |
| · | the remaining portion of R$451.6 million, with payment due December 21, 2010. The actual payment occurred on December 13, 2010. |
On September 29, 2010, the Board of Directors approved the distribution of interim dividends of R$196.4 million based on earnings accumulated in our existing balance sheet as of June 30, 2010. The actual payment occurred on December 13, 2010.
On September 29, 2010, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders equity for the common and preferred shares totaling R$331.5 million. The actual payment occurred on December 13, 2010.
On December 14, 2010, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders equity for the common and preferred shares totaling R$171.7 million. The Board of Directors has proposed at the annual shareholders meeting that the payment of such interest on shareholders equity should be initiated before December 21, 2011 on a date yetstill to be establisheddetermined by the management of the Company and properly announced to the market and shareholders.
On March 18, 2011, at the General Shareholders Meeting, the shareholders approved the distribution of dividends to the common and preferred shares in the total amount of R$1,694 million declared on the basis of the closing balance sheet on December 31, 2010. The Company’s management proposed the payment of the approved dividends would be made in two installments as follows:
| · | an initial installment of R$1,429 million, which payment occurred on May 20, 2011; and |
| · | the remaining portion of R$264.7 million, which payment occurred on November 3, 2011. |
On September 13, 2011, the Board of Directors approved the distribution of interim dividends of R$382.4 million based on earnings accumulated in our existing balance sheet as of June 30, 2011. The actual payment occurred on November 3, 2011.
On September 13, 2011, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders equity for the common and preferred shares totaling R$1,250 million. The actual payment occurred on November 3, 2011.
On December 12, 2011, the Board of Directors approved, subject to shareholder approval, a payment of interest on shareholders equity for the common and preferred shares totaling R$617.0 million. The Board of Directors has proposed at the annual shareholders meeting that the payment of such interest on shareholders equity should be initiated before the end of 2012 on a date still to be determined by the management.management of the Company and properly announced to the market and shareholders.
Reverse Stock Split
In a special General Shareholders Meeting held on May 11, 2005, our shareholders approved the reverse stock split of all of our shares, under the terms of Article 12 of the Brazilian Corporate Law, at the ratio of 1,000 existing
shares per one share of the same type and class. When the shares began trading on BM&FBOVESPA in unitary form on June 27, 2005, each of our ADRs, which previously represented 1,000 preferred shares, became one preferred share.
Cancellation of Treasury Stock
On March 9, 2006, a special meeting of the shareholders approved the cancellation of 1,562,387 shares of treasury stock, consisting of 1,258,508 common shares and 303,879 preferred shares. These treasury shares had been acquired as a result of a reverse stock split.
None.
A. | Offer and Listing Details |
The trading market for our common and preferred shares is BM&FBOVESPA.
Our preferred shares began trading on BM&FBOVESPA, on September 21, 1998 and are traded on BM&FBOVESPA under the symbol “TLPP4”“VIVT4” (formerly TLPP4).” Our common shares trade under the symbol “TLPP3”“VIVT3” (formerly TLPP3). At December 31, 2008,2011, we had approximately 506.21,125.6 million common and preferred shares held by approximately 1.92.3 million common and preferred shareholders. The following table sets forth the reported high and low closing sale prices for the common and preferred shares on BM&FBOVESPA, for the periods indicated.
| Prices of common shares of the company |
| | | |
| (in reais) |
January 1, 2003 through March 31, 2003 | 24.50 | | 21.90 |
April 1, 2003 through June 30, 2003 | 27.50 | | 22.99 |
July 1, 2003 through September 30, 2003 | 32.40 | | 21.80 |
October 1, 2003 through December 31, 2003 | 37.00 | | 29.20 |
January 1, 2004 through March 31, 2004 | 45.50 | | 35.40 |
April 1, 2004 through June 30, 2004 | 42.70 | | 33.00 |
July 1, 2004 through September 30, 2004 | 42.65 | | 38.40 |
October 1, 2004 through December 31, 2004 | 46.50 | | 36.30 |
January 1, 2005 through March 31, 2005 | 48.90 | | 39.17 |
April 1, 2005 through June 30, 2005 (1) | 40.50 | | 35.70 |
July 1, 2005 through September 30, 2005 | 37.48 | | 32.10 |
October 1, 2005 through December 31, 2005 | 37.49 | | 31.90 |
January 1, 2006 through March 31, 2006 | 43.80 | | 36.17 |
April 1, 2006 through June 30, 2006 | 43.39 | | 36.40 |
July 1, 2006 through September 30, 2006 | 42.69 | | 37.10 |
October 1, 2006 through December 31, 2006 | 47.49 | | 40.50 |
January 1, 2007 through March 31, 2007 | 50.30 | | 43.00 |
April 1, 2007 through June 30, 2007 | 58.99 | | 44.30 |
July 1, 2007 through September 30, 2007 | 66.98 | | 51.80 |
October 1, 2007 through December 31, 2007 | 59.80 | | 44.00 |
January 1, 2008 through March 31, 2008 | 47.00 | | 39.00 |
April 1, 2008 through June 30, 2008 | 41.95 | | 37.80 |
July 1, 2008 through September 30, 2008 | 40.00 | | 35.00 |
October 1, 2008 through October 31, 2008 | 40.44 | | 36.72 |
November 1, 2008 through November 30, 2008 | 39.89 | | 33.86 |
December 1, 2008 through December 31, 2008 | 39.95 | | 33.84 |
| Prices of common shares of the company |
| | | |
| (in reais) |
January 1, 2009 through January 31, 2009 | 37.30 | | 35.47 |
February 1, 2009 through February 28, 2009 | 35.99 | | 34.48 |
March 1, 2009 through March 31, 2009 | 38.64 | | 34.49 |
April 1, 2009 through April 9, 2009 | 39.00 | | 38.39 |
______________
(1) | Before June 27, 2005, our ADRs were traded in the proportion of 1000 per 1. Since that date, ADRs have been traded in the proportion of one to one. |
| Prices of preferred shares of the company |
| | | |
| (in reais) |
January 1, 2003 through March 31, 2003 | 35.69 | | 29.51 |
April 1, 2003 through June 30, 2003 | 34.97 | | 30.61 |
July 1, 2003 through September 30, 2003 | 39.80 | | 28.55 |
October 1, 2003 through December 31, 2003 | 47.00 | | 36.30 |
January 1, 2004 through March 31, 2004 | 55.00 | | 46.00 |
April 1, 2004 through June 30, 2004 | 49.25 | | 38.50 |
July 1, 2004 through September 30, 2004 | 55.00 | | 46.00 |
October 1, 2004 through December 31, 2004 | 51.40 | | 44.89 |
January 1, 2005 through March 31, 2005 | 58.38 | | 43.81 |
April 1, 2005 through June 30, 2005 (2) | 52.95 | | 45.20 |
July 1, 2005 through September 30, 2005 | 49.00 | | 41.91 |
October 1, 2005 through December 31, 2005 | 48.20 | | 41.50 |
January 1, 2006 through March 31, 2006 | 54.00 | | 46.16 |
April 1, 2006 through June 30, 2006 | 53.41 | | 42.41 |
July 1, 2006 through September 30, 2006 | 51.90 | | 43.50 |
October 1, 2006 through December 31, 2006 | 55.00 | | 48.11 |
January 1, 2007 through March 31, 2007 | 56.30 | | 49.40 |
April 1, 2007 through June 30, 2007 | 62.80 | | 50.75 |
July 1, 2007 through September 30, 2007 | 69.50 | | 53.50 |
October 1, 2007 through December 31, 2007 | 63.19 | | 45.20 |
January 1, 2008 through March 31, 2008 | 50.99 | | 41.97 |
April 1, 2008 through June 30, 2008 | 48.84 | | 42.37 |
July 1, 2008 through September 30, 2008 | 48.37 | | 38.69 |
October 1, 2008 through October 31, 2008 | 53.30 | | 43.99 |
November 1, 2008 through November 30, 2008 | 53.00 | | 44.16 |
December 1, 2008 through December 31, 2008 | 52.12 | | 44.94 |
January 1, 2009 through January 31, 2009 | 45.90 | | 40.55 |
February 1, 2009 through February 28, 2009 | 44.24 | | 42.16 |
March 1, 2009 through March 31, 2009 | 48.19 | | 41.16 |
April 1, 2009 through April 9, 2009 | 49.25 | | 47.85 |
(2) | Before June 27, 2005, our ADRs were traded in the proportion of 1000 per 1. Since that date, ADRs have been traded in the proportion of one to one. |
In the United States, the preferred shares trade in the form of ADRs, each representing one preferred share, issued by The Bank of New York, as depositary, pursuant to a Deposit Agreement, among us, the depositary and the registered holders and beneficial owners from time to time of ADRs. The ADRs commenced trading on the NYSE on November 16, 1998 and are traded on NYSE under the symbol “ TSP”“VIV” (formerly TSP). The following table sets forth the reported high and low closing sales prices for ADRs on the NYSE for the periods indicated.
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | (in US$ per ADS) | | | (in reais per preferred share) | | | (in reais per common share) | |
Year ended | | | | | | | | | | | | | | | | | | |
December 31, 2007 | | | 28.85 | | | | 25.45 | | | | 50.98 | | | | 45.20 | | | | 47.40 | | | | 44.00 | |
December 31, 2008 | | | 21.72 | | | | 18.62 | | | | 52.12 | | | | 44.94 | | | | 39.95 | | | | 33.84 | |
December 31, 2009 | | | 25.53 | | | | 23.74 | | | | 43.54 | | | | 42.12 | | | | 39.29 | | | | 36.00 | |
December 31, 2010 | | | 24.53 | | | | 22.70 | | | | 42.03 | | | | 38.60 | | | | 39.30 | | | | 36.22 | |
December 31, 2011 | | | 28.33 | | | | 25.74 | | | | 52.97 | | | | 47.47 | | | | 48.00 | | | | 43.50 | |
Year ended December 31, 2010 | | | | | | | | | | | | | | | | | | | | | | | | |
First quarter | | | 25.42 | | | | 21.02 | | | | 43.29 | | | | 37.84 | | | | 37.78 | | | | 32.57 | |
Second quarter | | | 22.18 | | | | 18.01 | | | | 39.37 | | | | 33.08 | | | | 33.59 | | | | 29.00 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | (in US$ per ADS) | | | (in reais per preferred share) | | | (in reais per common share) | |
| | | | | | | | | | | | | | | | | | |
Third quarter | | | 24.58 | | | | 20.84 | | | | 41.80 | | | | 36.12 | | | | 39.00 | | | | 33.20 | |
Fourth quarter | | | 25.35 | | | | 22.70 | | | | 41.98 | | | | 38.60 | | | | 39.50 | | | | 36.22 | |
Year ended December 31, 2011 | | | | | | | | | | | | | | | | | | | | | | | | |
First quarter | | | 25.34 | | | | 23.07 | | | | 42.60 | | | | 37.80 | | | | 42.30 | | | | 36.24 | |
Second quarter | | | 30.40 | | | | 25.00 | | | | 46.99 | | | | 39.48 | | | | 43.90 | | | | 37.02 | |
Third quarter | | | 31.77 | | | | 25.84 | | | | 52.50 | | | | 43.06 | | | | 46.88 | | | | 37.30 | |
Fourth quarter | | | 29.34 | | | | 25.39 | | | | 52.97 | | | | 46.55 | | | | 48.00 | | | | 40.50 | |
Month ended | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2011 | | | 30.50 | | | | 25.84 | | | | 52.50 | | | | 48.00 | | | | 46.88 | | | | 42.00 | |
October 31, 2011 | | | 29.34 | | | | 25.39 | | | | 50.80 | | | | 46.55 | | | | 46.49 | | | | 40.50 | |
November 30, 2011 | | | 28.25 | | | | 25.66 | | | | 49.70 | | | | 47.35 | | | | 45.99 | | | | 44.10 | |
December 31, 2011 | | | 28.33 | | | | 25.74 | | | | 52.97 | | | | 47.47 | | | | 48.00 | | | | 43.50 | |
January 31, 2012 | | | 29.65 | | | | 27.02 | | | | 52.30 | | | | 48.35 | | | | 47.46 | | | | 43.35 | |
February 29, 2012 | | | 30.27 | | | | 27.42 | | | | 51.77 | | | | 47.50 | | | | 47.45 | | | | 42.77 | |
March 31, 2012 | | | 31.02 | | | | 29.22 | | | | 56.59 | | | | 50.81 | | | | 50.98 | | | | 46.36 | |
April 2012 (through April 17) | | | 31.22 | | | | 28.84 | | | | 56.92 | | | | 53.25 | | | | 51.69 | | | | 48.89 | |
| |
| | | |
January 1, 2003 through March 31, 2003 | 10.49 | | 8.16 |
April 1, 2003 through June 30, 2003 | 11.94 | | 9.55 |
July 1, 2003 through September 30, 2003 | 13.68 | | 9.35 |
October 1, 2003 through December 31, 2003 | 16.47 | | 12.65 |
January 1, 2004 through March 31, 2004 | 19.25 | | 15.75 |
April 1, 2004 through June 30, 2004 | 17.18 | | 12.45 |
July 1, 2004 through September 30, 2004 | 18.78 | | 15.20 |
October 1, 2004 through December 31, 2004 | 19.43 | | 15.60 |
January 1, 2005 through March 31, 2005 | 21.97 | | 16.16 |
April 1, 2005 through June 30, 2005 (3) | 20.43 | | 18.38 |
July 1, 2005 through September 30, 2005 | 20.80 | | 17.54 |
October 1, 2005 through December 31, 2005 | 21.74 | | 18.34 |
January 1, 2006 through March 31, 2006 | 25.50 | | 20.58 |
April 1, 2006 through June 30, 2006 | 25.14 | | 18.84 |
July 1, 2006 through September 30, 2006 | 24.22 | | 19.95 |
October 1, 2006 through December 31, 2006 | 25.50 | | 22.27 |
January 1, 2007 through March 31, 2007 | 27.14 | | 23.62 |
April 1, 2007 through June 30, 2007 | 32.99 | | 25.30 |
July 1, 2007 through September 30, 2007 | 37.15 | | 26.71 |
October 1, 2007 through December 31, 2007 | 35.16 | | 25.45 |
January 1, 2008 through March 31, 2008 | 29.83 | | 24.08 |
April 1, 2008 through June 30, 2008 | 29.52 | | 25.17 |
July 1, 2008 through September 30, 2008 | 30.42 | | 20.65 |
October 1, 2008 through October 31, 2008 | 26.09 | | 19.18 |
November 1, 2008 through November 30, 2008 | 23.86 | | 19.74 |
December 1, 2008 through December 31, 2008 | 21.72 | | 18.62 |
January 1, 2009 through January 31, 2009 | 20.06 | | 17.12 |
February 1, 2009 through February 28, 2009 | 19.29 | | 18.27 |
March 1, 2009 through March 31, 2009 | 21.30 | | 17.27 |
April 1, 2009 through April 9, 2009 | 22.43 | | 21.28 |
(3)B. | Before June 27, 2005, our ADRs were traded in the proportion of 1000 per 1. Since that date, ADRs have been traded in the proportion of one-to-one. |
B. Plan of Distribution
Not applicable.
Trading on the BM&FBOVESPA
In 2000, Bolsa de Valores de São Paulo S.A. was reorganized through the execution of memoranda of understanding by theThe Brazilian stock exchangesSecurities, Commodities and assumed all shares traded in Brazil. In 2008, Bolsa de Valores de São Paulo S.A. was subject to a corporate reorganization, by which, among other things, the shares issued by it were transferred to BOVESPA Holding S.A. and its corporate name was changed to Bolsa de Valores de São Paulo S.A. – BVSP. After that, the operations of BOVESPA Holding S.A. and Bolsa de Mercadorias e Futuros – BM&F S.A. were integrated, resulting in the creation of BMFutures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros), or BM&FBOVESPA. In late&FBOVESPA, is a Brazilian publicly traded company formed in 2008 Bolsathrough the integration between the São Paulo Stock Exchange (Bolsa de Valores de São Paulo – BVSPPaulo) and the Brazilian Mercantile and Futures Exchange (Companhia BrasileiraBolsa de Liquidação e CustódiaMercadorias & Futuros were merged into). BM&FBOVESPA which currently concentrates all trading activitiesis one of sharesthe largest exchanges in the world in market capitalization, the second in the Americas and commoditiesthe leader in Brazil.Latin America.
Trading on the exchange is conducted by authorized members. Trading sessions take place every business day, from 10:00 a.m. to 5:00 p.m. or from 11:00 a.m. to 6:00 p.m. during daylight savings time in the U.S., on an electronic trading system called Megabolsa. Trading is also conducted between 5:45 p.m. and 7:00 p.m., or between 6:45 p.m. and 8:00 p.m. during daylight savings time in Brazil, in an after-market system connected to both traditional brokerage firms and brokerage firms operating on the Internet. This after-market trading is subject to regulatory limits on price volatility of securities traded by investors operating on the Internet.
In order toTo better control the excess of volatility in market conditions, BM&FBOVESPA has adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the indices of these stock exchanges fall below the limits of 10% and 15%, respectively, relative to the index registered inof the previous trading session.
When investors trade shares onday. In the BM&FBOVESPA,event the trade is settledstock exchange index falls by 20% in three business days after the trade date, without adjustmentscomparison to the purchase price. The seller is ordinarily required to deliverprevious trading day, BM&FBOVESPA may determine the shares to the exchange on the third business day following the trade date. Deliverysuspension of and paymenttrading sessions for shares are made through the facilities of an independent clearing house, the BM&FBOVESPA,a certain period which handles the multilateral settlement of both financial obligations and transactions involving securities. According to the regulations of the BM&FBOVESPA, financial settlement is carried out through the system of transfer of funds of the Central Bank and the transactions involving the sale and purchase of shares are settled through the BM&FBOVESPA custody system. All deliveries against final payment are irrevocable.will be at its sole discretion.
At December 31, 2008,2011, the aggregate market capitalization of the 392373 companies listed on BM&FBOVESPA was approximately US$5881,223 billion. Although all the outstanding shares of an exchange-listed company may trade on a Brazilian stock exchange, in most cases, less than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling entities or persons that rarely trade their shares. For this reason, data showing the total market capitalization of Brazilian stock exchanges tends to overstate the liquidity of the Brazilian equity securities market.
Regulation of Brazilian Securities Markets
The Brazilian securities market is regulated by the CVM, as provided for by the Brazilian Securities Exchange Act and Corporate Law. The National Monetary Council is responsible for supervising the CVM’s activities, granting licenses to brokerage firms to govern their incorporation and operation, and regulating foreign investment and exchange transactions, as provided for by the Brazilian Securities Exchange Act and Law No. 4595 of December 31, 1964. These laws and regulations provide for, among other things, disclosure requirements, criminal sanctions for insider trading and price manipulation, protection of minority shareholders, the procedures for licensing and supervising brokerage firms and the governance of Brazilian stock exchanges.
Under Brazilian Corporate Law, a company is either publicly held and listed, a companhia aberta, or privately held and unlisted, a companhia fechada. All listed companies are registered with the CVM and are subject to reporting requirements to periodically disclose information and material facts. A company registered with the CVM may trade its securities either on the Brazilian exchange markets, including the BM&FBOVESPA, or in the Brazilian over-the-counter market. Shares of companies listed on BM&FBOVESPA may not simultaneously trade on the Brazilian over-the-counter market. The over-the-counter market consists of direct trades between persons in which a financial institution registered with the CVM serves as an intermediary. No special application, other than registration with the CVM (and, in case of organized over-the-counter markets, in the applicable one), is necessary for securities of a public company to be traded in this market. To be listed on the BM&FBOVESPA, a company must apply for registration with the BM&FBOVESPA and the CVM.
Trading in securities on the BM&FBOVESPA may be suspended under a request from a company in anticipation of a material announcement. Trading in the securities of a particular company may also be suspended under the initiative of BM&FBOVESPA or the CVM, among other reasons, due to the belief that the company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or the BM&FBOVESPA.
Brazilian securities law, the Brazilian Corporate Law and the regulations issued by CVM, CMN and the Central Bank provide, among other things, disclosure requirements and restrictions on insider trading, price manipulation and protection of minority shareholders.
Corporate Governance Practices
We are a sociedade anônima, a corporation incorporated under the laws of Brazil, and are subject to the corporate governance provisions of the Brazilian Corporate Law. We comply with the regulatory requirements of the Brazilian Corporate Law regarding the independence of our Board of Directors, the establishment and composition of certain board committees and the adoption and disclosure of corporate governance guidelines.
We comply with several requirements of Brazilian and international laws in order to promote strong corporate governance, reduce investor uncertainties and enhance disclosure of material and other information.
With the approval of our Board of Directors and/or Officers, we implemented several measures over the last few years designed to improve our transparency and disclosure practices. We believe these measures will benefit our shareholders, and current and future investors as well as the marketplace in general. Among the measures we have implemented, we have:
| · | created a disclosure policy for material facts and corporate actions; |
| · | created a policy for internal controls related to financial information; |
| · | created a Service Quality and Marketing committee; |
| · | created a Control and Audit committee; |
| · | created a Nominations, Compensation and Corporate Governance committee; |
| · | developed and published a company Corporate Governance Report (Informe de Governança Corporativa) with information regarding the corporate governance principles we follow, our shareholder structure and characteristics, the composition and competence of administrative entities, the obligations and responsibilities of administrators and equity interests held by corporate officers and administrators; |
| · | created a policy to denounce fraud within the Company (Canal de Denúncias); |
| · | created a policy for prior approval of contracting audit services; |
| · | created an internal rule of conduct relating to the securities market; |
| · | created an Ethics Code in respect of handling financial information; and |
| · | created a policy regarding communication of information to the securities market. |
As determined by the Brazilian Corporate Law, the aggregate annual compensation of senior management is approved by our shareholders at an annual shareholders meeting. The Nominations, Compensation and Corporate Governance Committee provides information and recommendations to the Board of Directors regarding the criterion for compensation.
Our internal rules relating to insider trading are determined in our internal rules and the corporate laws. Senior management and members of our Board of Directors and any other employee exposed to sensitive information are
subject to the restrictions imposed by such charter. In addition to the prohibition on trading of our shares by such individuals when in possession of insider information, the charter establishes blackout trading periods for those periods when insider information is available. As an example, the month before the formulation and approval of our annual financial statements by our Board of Directors is considered a blackout period under the charter. In addition, the charter sets forth instructions for dealing with conflicts of interest and mandates disclosure of any such situation.
Code of Business Conduct and Ethics
Although adoption of a code of ethics is not required by Brazilian Corporate Law, we implemented a code of ethics regulating the conduct of our managers in connection with the registration and control of financial and accounting information and their access to privileged and non-publicnonpublic information and data in order to comply with the requirements of the Sarbanes-Oxley Act and NYSE rules. See “Item 16B.—Code of Ethics.”
In addition to complying with the rules of corporate governance applicable to us under Brazilian law, we intend to gradually comply with substantially all of the new rules established by the NYSE and the SEC applicable to domestic U.S. companies.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
B. | Memorandum and Articles of Association |
Set forth below is certain information relating to our capital stock and a summary of certain significant provisions of our bylaws and the Brazilian Corporate Law.
General
We are registered with the Junta Comercial de São Paulo, the Board of Trade of São Paulo, or JUCESP, under no.No. 35.3.001588-14. According to Section 2 of our bylaws, our main corporate purpose is to provide telecommunications services and to develop those activities necessary or useful for the performance of these services, in accordance with the concessions, authorizations and permits granted to us.
There are no provisions in our bylaws with respect to:
| · | an officer’s power to vote on proposals in which the officer has a personal interest; |
| · | an officer’s power to vote on his own compensation, even in the absence of an independent quorum; |
| · | age limits for retirement of officers; |
| · | required shareholding to qualify as a manager (officer); or |
| · | anti-takeover mechanisms or other procedures designed to delay, defer or prevent changes in our control. |
Brazilian Corporate Law forbids a director to interfere in any business of the company when there is any conflicting interest between him and the Company.
Brazilian Corporate Law no longer requires ownership of shares in order for a person to qualify as a member of the Board of Directors (conselho de administração) of a corporation (sociedade por ações)., however our bylaws require that our directors own shares of the Company.
Issuance of commercial paper and incurrence of certain debt shall be preceded by approval from our Board of Directors, according to the provisions set forth in section 17 of our bylaws.
Our capital stock is comprised ofcomprises preferred shares and common shares, all without par value. At December 31, 2008,2011, there were 337,232,189261,924,477 outstanding preferred shares and 168,609,29131,916,110 outstanding common shares. Our share capital may be increased by resolution of the Board of Directors, up to the limit authorized by our bylaws. Any increase above the authorized capital must be approved by a general shareholders meeting.
The preferred shares are non-voting,nonvoting, except under limited circumstances. They are given priority in the reimbursement of capital, without premium, and are entitled to receive a dividend 10% higher than that attributable to common shares.
Pursuant to Law No. 10,303/01, the following changes were introduced to the Brazilian Corporate Law:
| · | preferred shares representing 10% of our total number of outstanding shares would be entitled to appoint a representative to our Board of Directors; |
| · | disputes among our shareholders would be subject to arbitration, if provided for in our bylaws; |
| · | a tender offer at a purchase price equal to fair value for all outstanding shares would be required upon a delisting or a substantial reduction in liquidity of our shares as a result of purchases by the controlling shareholders; |
| · | any sale of control would require the shareholders to tender for the minority shareholders’ common shares and, if provided for in our charter, for the minority shareholders’ preferred shares, at a purchase price at least equal to 80% of the price per share with voting rights paid to the controlling shareholder; |
| · | shareholders would be entitled to withdraw from us upon a spin-off only if it entailed a change in the corporate purpose, a reduction in mandatory dividends or the participation in a centralized group of companies; |
| · | the controlling shareholders, the shareholders that elect members to our Board of Directors and Fiscal Board, the members of our Board of Directors and Fiscal Board and our Executive Officers would be required to disclose any purchase or sale of our shares to the CVM and BM&FBOVESPA; and |
| · | we would be permitted to satisfy our information disclosure requirements through the Internet. |
Voting Rights
Each common share entitles the holder to one vote at general shareholders meetings. Preferred shares do not entitle the holder to vote at shareholders meetings, except under specific circumstances and with respect to certain matters, as specified below. Holders of preferred shares are only entitled to attend and to discuss, but not to vote on, the issues discussed at our general shareholders meetings.
The appointment of one member of our statutory Fiscal Board, including the alternate member, takes place at the annual ordinary general shareholders meeting, upon separate vote of the holders of preferred shares, for the position available at the Fiscal Board. The election of a member of the Board of Directors by preferred shareholders also occurs on a separate vote, with no participation of the controlling shareholder.
Brazilian Corporate Law provides that certain non-votingnonvoting shares, such as our preferred shares, shall be entitled to voting rights in the event a corporation fails for three consecutive fiscal years to pay any fixed or minimum
dividends to which non-votingnonvoting shares are entitled. In this case, the voting rights of these shares shall extend until the date on which the payment of the accrued and unpaid dividend is made.
Preferred shares are entitled to full voting rights with respect to:
| · | the election of one member to the Board of Directors and Fiscal Board in a straight vote; |
| · | bylaw modifications that seek to limit preferred shareholders’ voting rights in respect of selecting new Board members in a straight vote; |
| · | any agreements for the rendering of management services (including technical assistance services) between us and any foreign affiliate of our controlling shareholder; |
| · | resolutions amending certain provisions of our bylaws; and |
| · | any resolution submitted to the general shareholders meeting during our liquidation process. |
Any change in the preference, benefits, conditions of redemption and amortization of preferred shares or the creation of a more favored class would require approval or ratification by holders of a majority of the preferred shares at a special meeting of the preferred shareholders. This meeting would be called by publication of a notice in two Brazilian newspapers during three days, at least 30 days prior tobefore the meeting; however, it would not generally require any other form of notice.
In any circumstances in which holders of preferred shares are entitled to vote, each preferred share will entitle the holder to one vote.
Preemptive Rights
Each shareholder has a general preemptive right to subscribe for shares of the same class in any capital increase, in an amount sufficient to keep the same proportional participation of each shareholder in the total capital of the corporation. A minimum period of 30 days following the publication of the capital increase notice shall be observed by the corporation for the exercise of the preemptive right by the shareholder. The right of participation in capital increases is assignable under Brazilian Corporate Law. However, the bylaws of a publicly held company that allows
capital increases may provide for the issuance, without granting any preemptive rights to prior shareholders, of stocks, debentures convertible into stocks, or subscription bonuses, the placement of which shall be made:
| · | upon sale on a stock exchange or public subscription; |
| · | through an exchange of shares in a public offering, with the purpose of acquiring control of another company; or |
| · | for the use of certain tax incentives. |
In the event of a capital increase, which would maintain or increase the proportion of capital represented by preferred shares, holders of ADSs, or of preferred shares, would have preemptive rights to subscribe only to our newly issued preferred shares. In the event of a capital increase, which would reduce the proportion of capital represented by preferred shares, holders of ADSs, or of preferred shares, would have preemptive rights to subscribe to our new preferred shares, in proportion to their shareholdings and to our new common shares only to the extent necessary to prevent dilution of their interest.
Redemption and Right of Withdrawal
According to the Brazilian Corporate Law, dissenting shareholders in a shareholders meeting shall have a right of redemption, with reimbursement of the value of their shares, in case the following matters are approved:
(i) | (i) creation of a new class of preferred shares or an increase in preferred shares of an existing class, without maintaining the proportion with the remaining classes; |
(ii) change in the preferences, advantages and conditions of redemption or amortization of one or more classes of preferred shares, or the creation of a class with more favorable rights or preferences;
(ii) | change in the preferences, advantages and conditions of redemption or amortization of one or more classes of preferred shares, or the creation of a class with more favorable rights or preferences; |
(iii) reduction of the mandatory dividend;
(iii) | reduction of the mandatory dividend; |
(iv) merger into another company or consolidation with another company;
(iv) | merger into another company or consolidation with another company; |
(v) participation in a group of companies;
(v) | participation in a group of companies; |
(vi) change in the purpose of the corporation; and
(vi) | change in the purpose of the corporation; and |
(vii) | (vii) split-up of the corporation. |
It is important to point out that (a) in items (i) and (ii), only the holders of shares of the affected type or class will be entitled to redemption; (b) in items (iv) and (v), the holders of shares of a type or class with liquidity and dispersion in the market will not have the right; and (c) in item (vii), the dissenting shareholders shall only have a right of redemption if the split-up implies a change in the corporate purpose, a reduction of the compulsory dividend or participation in a group of companies.
Reimbursement must be required by the dissenting shareholders within 30 days after the publication of the minutes of the general shareholders meeting or special meeting, as the case may be. Within 10 days after the expiration of the period, management is authorized to call a general shareholders meeting to ratify or reconsider the decision, if management understands that the payment of reimbursement to the dissenting shareholders who have exercised their redemption right may jeopardize the financial stability of the company. A shareholder who fails to exercise the right within the assigned term shall no longer be entitled to redemption.
According to the Brazilian Corporate Law, the amount to be reimbursed may only be lower than the share net value ascertained in the last balance sheet approved by the general shareholders meeting if this amount is based on the economic value of the corporation, to be duly appraised. If the decision of the general shareholders meeting takes place more than 60 days after the issuance of the last approved balance sheet, the shareholder shall be entitled to demand, together with the reimbursement, the preparation of a special balance sheet that complies with the time frame previously described.
WeOn December 10, 2002, Telesp Celular S.A. entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the municipalities of Ribeirão Preto and Guatarapá and the district of Bonfim Paulista. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes Telesp Celular S.A. to provide SMP services until January 20, 2009. It was renewed in 2008 for an additional term of fifteen years upon payment of 2% of Telesp Celular S.A.’s net revenues from usage charges in the municipalities mentioned above in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization, Telesp Celular S.A. was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunication services in the region covered thereby. After Vivo’s corporate restructuring, this contract was assumed by Vivo.
On December 10, 2002, GT entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the area corresponding to the states of Paraná and Santa Catarina. The authorization replaces the concession agreement entered into with ANATEL on April 8, 1998, and authorizes GT to provide SMP services until April 8, 2013. It may be renewed for an additional term of fifteen years upon payment of 2% of GT’s net revenues from usage charges in its region in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization, GT was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunication services in the region covered thereby. After Vivo’s corporate restructuring, this contract was assumed by Vivo.
On December 10, 2002, Telebahia Celular entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the state of Bahia. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes Telebahia Celular to provide SMP services until June 29, 2008. It was renewed in 2008 for an additional term of fifteen years upon payment of 2% of Telebahia Celular s net revenues from usage charges in its Region in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization, Telebahia Celular was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunication services in the region covered thereby. After Vivo’s corporate restructuring, this contract was assumed by Vivo.
On December 10, 2002, Telergipe Celular entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the state of Sergipe. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes Telebahia Celular to provide SMP services until December 15, 2008. It was renewed in 2008 for an additional term of fifteen years upon payment of 2% of Telergipe Celular’s net revenues from usage charges in its region in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization, Telergipe Celular was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunication services in the region covered thereby. After Vivo’s corporate restructuring, this contract was assumed by Vivo.
On December 10, 2002, Telerj Celular entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the state of Rio de Janeiro. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes Telerj Celular to provide SMP services until November 30, 2005. It was renewed in 2008 for an additional term of fifteen years upon payment of 2% of Telerj Celular’s net revenues from usage charges in its region in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization, Telerj Celular was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunications services in the region covered thereby. After Vivo’s corporate restructuring, this contract was assumed by Vivo.
On December 10, 2002, Telest Celular entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the state of Espíritio Santo. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes Telest Celular to provide SMP services until November 30, 2008. It was renewed in 2008 for an additional term of fifteen years upon payment of 2% of Telest Celular’s net revenues from usage charges in its region in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization, Telest Celular was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunications services in the region covered thereby. After Vivo’s corporate restructuring, this contract was assumed by Vivo.
On February 3, 2003, TCO entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the area corresponding to the Brazil’s Federal District. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes TCO to provide SMP services until July 24, 2006. It was renewed in 2006 for an additional term of fifteen years upon payment of 2% of TCO’s net revenues from usage charges in the region described above in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization, TCO was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunication services in the region covered thereby. TCO’s subsidiaries also entered into authorization agreements with ANATEL under similar terms. After Vivo’s corporate restructuring, this contract was assumed by Vivo.
Since June 30, 2011, we have renewed our concession agreement with ANATEL and consolidated our six existing material contractscontacts related to the concession of public telecommunications service granted by ANATEL into two new contracts (each filed as an Exhibit to this Annual Report). One of these contracts authorizes the Company to provide local telephone services (Sectors 31) and the other contract authorizes the Company to provide long-distance telephone services (Sector 31). These contracts were renewed on December 22, 2005 andwill expire on December 31, 2025. Three
Our Multimedia Communication Service Authorization Term is also a material contract. Based on this Authorization Term, the Company is allowed to provide broadband services in the State of the contracts relate to local telephone services (Sectors 31, 32São Paulo. The Term was signed on April 17, 2003 for an undetermined period of time and 34) and the others relate to long-distance services (Sectors 31, 32 and 34).is still currently in effect.
On March 9, 2006, our Board of DirectorsOctober 14, 2011 a credit facility totaling R$3.0 billion was obtained from BNDES. These funds will be invested in the expansion and the Boards of Directors of TDBH and Telefónica Empresas S.A., a wholly-owned subsidiary of TDBH, approved the restructuringimprovement of the Companies’ SCM activities.current network, implementation of infrastructure necessary for new technology, in the period from 2011 to 2013, as well as in the construction of a data center in Tamboré (State of São Paulo) and in social projects. The termsagreement has a term of eight years and conditionshas a grace period which expires on July 15, 2014, until when only interest will be paid, on a three-month basis. After this period, interest and amortization of the SCM Restructuring are set forthprincipal will be paid in an agreement executed by the Companies on March 9, 2006.60 consecutive monthly installments.
There are no restrictions on ownership of preferred shares or common shares by individuals or legal entities domiciled outside of Brazil.
The right to convert dividend or interest payments and proceeds from the sale of shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investments have been registered with the Central Bank and the CVM. The restrictions on the remittance of foreign capital abroad may hinder or prevent the custodian for the preferred shares represented by ADSs or holders of preferred shares from converting dividends, distributions or the proceeds from any sale of these preferred shares into U.S. dollars and remitting the U.S. dollars abroad. Holders of
ADSs could be adversely affected by delays in, or refusal to grant any, required government approval to convert Brazilian currency payments on the preferred shares underlying the ADSs and to remit the proceeds abroad.
Resolution No. 1,927 of the CMN provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. It restates and amends Annex V to Resolution No. 1,289 of the National Monetary Council, known as the Annex V Regulations. The ADS program was approved under the Annex V Regulations by the Central Bank and the CVM prior tobefore the issuance of the ADSs. Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil are free of Brazilian foreign investment controls, and holders of the ADSs aremay be entitled to favorable tax treatment. See “—E. Taxation—Brazilian Tax Considerations.”
Under Resolution No. 2,689 of the CMN, foreign investors registered with the CVM may buy and sell Brazilian securities, including the preferred shares, on Brazilian stock exchanges without obtaining separate certificates of registration for each transaction. Registration is available to qualified foreign investors, which principally include foreign financial institutions, insurance companies, pension and investment funds, charitable foreign institutions and other institutions that meet certain minimum capital and other requirements. Resolution No. 2,689 also extends favorable tax treatment to registered investors. See “—E. Taxation—Brazilian Tax Considerations.”
Pursuant to Resolution No. 2,689 foreign investors must (i) appoint at least one representative in Brazil with the ability to perform actions regarding the foreign investment; (ii) complete the appropriate foreign investor registration form; (iii) obtain registration as a foreign investor with the CVM; and (iv) register the foreign investment with the Central Bank.
The securities and other financial assets held by a foreign investor pursuant to Resolution No. 2,689 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or by the CVM or be registered in register, clearing and custody systems authorized by the Central Bank or by the CVM. In addition, the trading of securities is restricted to transactions carried out on the stock exchanges or over-the-counter markets licensed by the CVM.
Registered Capital
Amounts invested in preferred shares by a non-Brazilian holder who qualifies under Resolution No. 2,689 and obtains registration with the CVM, or by the depositary representing an ADS holder, are eligible for registration with the Central Bank. Such registration (the amount so registered is referred to as registered capital) allows the remittance outside Brazil of foreign currency, converted at the commercial market rate, acquired with the proceeds of distributions on, and amounts realized through, dispositions of such preferred shares. The registered capital per preferred share purchased in the form of an ADS, or purchased in Brazil and deposited with the depositary in exchange for an ADS, will be equal to its purchase price (stated in U.S. dollars). The registered capital per preferred share withdrawn upon cancellation of an ADS will be the U.S. dollar equivalent of (i) the average price of a preferred share on the Brazilian stock exchange on which the most preferred shares were traded on the day of withdrawal or (ii) if no preferred shares were traded on that day, the average price on the Brazilian stock exchange on which the most preferred shares were traded in the 15 trading sessions immediately preceding such withdrawal. The U.S. dollar equivalent will be determined on the basis of the average commercial market rates quoted by the Central Bank on such date or dates.
An electronic registration has been issued in the name of the depositary with respect to the ADSs and is maintained by the custodian on behalf of the depositary. Pursuant to the registration, the custodian and the depositary are able to convert dividends and other distributions with respect to the preferred shares represented by ADSs into foreign currency and remit the proceeds outside Brazil. In the event thatIf a holder of ADSs exchanges such ADSs for preferred shares, such holder will be entitled to continue to rely on the depositary’s registration for five business days after such exchange, following which such holder must seek to obtain its own electronic registration with the Central Bank. Thereafter, any holder of preferred shares may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such preferred shares, unless such holder is a duly qualified investor under Resolution No. 2,689 and obtains its own electronic registration.
If the holder does not qualify under Resolution No. 2,689 by registering with the CVM and the Central Bank and appoints a representative in Brazil to act directly in the Brazilian market to acquire preferred shares, the holder will be subject to a less favorable Brazilian tax treatment than a holder of ADSs. Regardless of registration under Resolution No. 2,689, residents of tax havens are subject to less favorable tax treatment than other foreign investors. See “—E. Taxation—Brazilian Tax Considerations.”
Under current Brazilian legislation, the federal government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. For approximately six months in 1989 and early 1990, the federal government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors, in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with federal government directives. There can be no assurance that the federal government will not impose similar restrictions on foreign repatriations in the future.
The following discussion contains a description of the material Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of preferred shares or ADSs by certain holders. This summary is based upon the tax laws of Brazil and the United States as of the date of this annual report, which are subject to change, possibly with retroactive effect, and to differing interpretations. You should consult your own tax advisors as to the Brazilian, U.S. federal or other tax consequences of the acquisition, ownership and disposition of preferred shares or ADSs, including, in particular, the effect of any state, local or non-U.S., non-Brazilian tax laws.
Although there is presently no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of preferred shares or ADSs.
Brazilian Tax Considerations
The following discussion summarizes the material Brazilian tax consequences of the acquisition, ownership and disposition of preferred shares or ADSs by a U.S. holder not deemed to be domiciled in Brazil for Brazilian tax
purposes (a “U.S. holder”). This discussion does not address all the Brazilian tax considerations that may be applicable to any particular non-Brazilian holder, and each non-Brazilian holder should consult its own tax advisor about the Brazilian tax consequences of investing in preferred shares or ADSs.
Taxation of Dividends
Dividends paid by us in cash or in kind from profits generated on or after January 1, 1996 (i) to the depositary in respect of preferred shares underlying ADSs or (ii) to a U.S. holder or other non-Brazilian holder in respect of preferred shares will generally not be subject to Brazilian withholding tax. We do not have any undistributed profits generated before January 1, 1996. If payment of dividends is made to a beneficiary located outside of Brazil, the Tax on Exchange Transactions applies at a rate of zero.
Distributions of Interest on Capital
Brazilian corporations may make payments to shareholders characterized as interest on capital as an alternative form of making dividend distributions. Amounts paid as interest on capital (net of applicable withholding tax)tax, as described below) may be treated as payments with respect to the dividends we are obligated to distribute to our shareholders in accordance with our bylaws (estatuto social) and Brazilian Corporate Law. The rate of interest may not be higher than the federal government’s long term interest rate, or the TJLP, as determined by the Central Bank from time to time (6.5%(6% per annum for the six month period beginning January 2007)2010/2011). The total amount distributed as interest on capital may not exceed the greater of (i) 50% of net income (before taking the distribution and any deductions for income taxes into account) for the year with respect to which the payment is made and (ii) 50% of retained earnings for the year prior tobefore the year with respect to which the payment is made. Payments of interest on capital are decided by the shareholders on the basis of recommendations of the company’s Board of Directors. See “Item 8.A8. Financial Information – Information—A. Consolidated Statements and Other Financial Information—Dividends and Dividend Distribution Policy – Policy—Additional Payments on ShareholderShareholders’ Equity.”
Distributions of interest on capital paid to Brazilian and non-Brazilian holders of preferred shares, including payments to the depositary in respect of preferred shares underlying ADSs, are deductible by us for Brazilian corporate income tax purposes. These payments to U.S. holders or other non-Brazilian holders are subject to Brazilian withholding tax at the rate of 15%. If the recipient of the payment is domiciled in a tax haven jurisdiction, (i.e., a country that does not impose any income tax or that imposes tax at a rate of less than 20%), the rate will be 25%.
If payment of interest on capital is made for a beneficiary located outside of Brazil, the IOF applies at a rate of zero.
Distributions of interest on capital with respect to the preferred shares, including distributions to the depositary with respect to the preferred shares underlying the ADSs, may be converted into U.S. dollars and remitted outside of Brazil, subject to applicable exchange controls.
No assurance can be given that our Board of Directors will not recommend that future distributions of profits will be made by means of interest on capital instead of by means of dividends.
Taxation of Gains
Gains realized outside Brazil by a U.S. holder or other non-Brazilian holder on the disposition of property located in Brazil, including preferred shares, to another non-Brazilian holder are subject to Brazilian tax. In this case, gains would be subject to a 15% withholding tax rate, except if the beneficiary is located in a low-tax jurisdiction, as defined by Brazilian law, in which case the applicable rate would be 25%.
Our understanding is that ADSs do not qualify as property located in Brazil and, therefore, are not subject to Brazilian taxes upon disposition to other non-Brazilian holders. Insofar as this understanding has not been tested through the administrative or judicial courts, however, we are unable to evaluate what the final ruling on the matter will be. If Brazilian tax authorities consider that the ADSs are assets located in Brazil, gains may be subject to income tax in Brazil.
Gains realized by a U.S. holderholders or other non-Brazilian holders on dispositions of preferred shares in Brazil or in transactions with Brazilian residents may be free offrom Brazilian tax, taxed at a rate of 25% or taxed at a rate of 15%, depending on the circumstances:
| · | Gains on the disposition of preferred shares obtained upon cancellation of ADSs are not taxed in Brazil if the disposition is made and the proceeds are remitted abroad within five business days afterof cancellation, unless the investor is a resident of a jurisdiction that, under Brazilian law, is deemed to be a tax haven. |
| · | Gains realized on the disposition of preferred shares through transactions with Brazilian residents or through transactions in Brazil off of the Brazilian stock exchanges are generally subject to tax at a rate of 15%., or 25% in the case of a non-Brazilian holder residing in a tax haven jurisdiction. |
| · | Gains realized on preferred shares through transactions on Brazilian stock exchanges (including the organized over-the-counter market) are generally subject to tax at a rate of 15%, as of January 2005, unless the investor is entitled to tax-free treatment for the transaction under Resolution No. 2,689 of the National Monetary Council Regulations, as described immediately below. Non-Brazilian holders residing in a tax haven jurisdiction may be subject to tax at a rate of up to 25%. |
Resolution No. 2,689 which as of March 31, 2000 superseded the Annex IV Regulations that previously provided tax benefits to foreign investors, extends favorable tax treatment to a U.S. holder or other non-Brazilian holder of preferred shares who has (i) appointed a representative in Brazil with power to take action relating to the investment in preferred shares, (ii) registered as a foreign investor with the CVM and (iii) registered its investment in preferred shares with the Central Bank. Under Resolution No. 2,689, securities held by foreign investors must be maintained under the custody of, or in deposit accounts with, financial institutions duly authorized by the Central Bank and the CVM. In addition, the trading of securities is restricted under Resolution No. 2,689 to transactions on Brazilian stock exchanges or qualified over-the-counter markets. The preferential treatment generally afforded under Resolution No. 2,689 to investors in ADSs is not available to residents of tax havens. All preferred shares underlying ADSs qualify under Resolution No. 2,689.
There can be no assurance that the current preferential treatment for U.S. holders and other non-Brazilian holders under Resolution No. 2,689 will be maintained.
Gain on the disposition of preferred shares is measured by the difference between the amount in Brazilian currency realized on the sale or exchange and the acquisition cost of the shares sold, measured in Brazilian currency, without any correction for inflation. Although the matter is not free from doubt, there are arguments to sustain the position that the acquisition cost of shares registered as an investment with the Central Bank is calculated on the basis of the foreign currency amount registered with the Central Bank. See “—D. Exchange Controls—Registered Capital.”
Gains realized by a U.S. holder or other non-Brazilian holder upon the redemption of preferred shares will be treated as gains from the disposition of such preferred shares to a Brazilian resident occurring off of a stock exchange and will accordingly be subject to tax at a rate of 15%. In case, unless the non-Brazilian holder is domiciled in a tax haven jurisdiction, in which case the applicable rate would be 25%.
As of January 1, 2005, the purchase price of preferred shares sold on the Brazilian stock exchange and on the Brazilian non-organized over-the-counter market is subject to withholding tax at a rate of 0.005%, except in the case of non-Brazilian holders that invest throughentitled to tax-free treatment for the transaction under Resolution No. 2,689. This tax may be offset against the 15% income tax due on the gains realized upon the sale of the shares.
Any exercise of preemptive rights relating to the preferred shares or ADSs will not be subject to Brazilian taxation. Gains on the sale or assignment of preemptive rights relating to the preferred shares will be treated differently for Brazilian tax purposes depending on (i) whether the sale or assignment is made by the depositary or the investor and (ii) whether the transaction takes place on a Brazilian stock exchange. Gains on sales or assignments made by the depositary on a Brazilian stock exchange are not taxed in Brazil, but gains on other sales or assignments may be subject to tax at rates up to 15%., or 25% in the case of residents of tax haven jurisdictions.
The deposit of preferred shares in exchange for the ADSs is not subject to Brazilian income tax if the preferred shares are registered under Resolution No. 2,689 and the respective holder is not in a tax haven jurisdiction. If the
preferred shares are not so registered or the holder is in a tax haven jurisdiction, the deposit of preferred shares in exchange for ADSs may be subject to Brazilian capital gains tax at a rate of 15%.
The withdrawal of preferred shares in exchange for ADSs is not subject to Brazilian tax. On receipt of the underlying preferred shares, a U.S. holder or non-Brazilian holder entitled to benefits under Resolution No. 2,689 will be entitled to register the U.S. dollar value of such shares with the Central Bank as described above, under “—D. Exchange Controls—Registered Capital.” If a U.S. holder or other non-Brazilian holder does not qualify under Resolution No. 2,689, such person will be subject to the less favorable tax treatment described above in respect of exchanges of preferred shares. Brazil’s tax treaties do not grant relief from taxes on gains realized on sales or exchanges of preferred shares.
Beneficiaries Residing or Domiciled in Tax Havens or Low-Tax Jurisdictions
Law No. 9,779, dated as of January 19, 1999, states that, with the exception ofWith limited circumstances,exceptions, any income derived from operations by a beneficiary that resides or is domiciled in a country considered to be a tax haven is subject to income tax to be withheld by the source at a rate of 25%. Accordingly, if the distribution of interest attributed to shareholders’ equity is made to a beneficiary residing or domiciled in a tax haven, the applicable income tax will be at a rate of 25% instead of 15%. The increased rate also applies for capital gains paid to residents of low-tax jurisdictions as of February 2004.jurisdictions.
In accordance with Law No. 9,959, non-Brazilian holders of ADSs or preferred shares who are residents of tax havens have been excluded from the tax incentives granted to holders of ADSs and investors under Resolution No. 2,689 since January 1, 2000 and are subject to the same tax treatment applicable to holders that are residents of or domiciled in Brazil.
Tax on Financial Transactions (IOF Tax)
IOF, or “IOF/Exchange Tax,” is a tax on the conversion of reais into foreign currency and on the conversion of foreign currency into reais. As a general rule, the inflow of funds related to investments carried out on the Brazilian financial and capital markets by a non-Brazilian holder that has registered its investment in Brazil with the Central Bank is subject to the IOF/Exchange Tax at a rate of 6.0%. However, if the inflow is related to an investment in the stock exchange or in over-the-counter markets, IOF/Exchange will trigger at the rate of 0%. Foreign exchange transactions related to outflows of funds in connection with investments carried out on the Brazilian financial and capital markets are subject to the IOF/Exchange Tax at a rate of zero, which also applies to payments of dividends and interest on shareholders’ equity. With the exception of these transactions, the rate applicable to most foreign exchange transactions is 0.38%. Other rates may apply to particular transactions and the Brazilian government may increase the rate at any time by up to 25.0% on the future foreign exchange transaction amount.
An “IOF/Bonds Tax” is due on transactions involving bonds and securities, including those carried out on a Brazilian stock exchange. The rate of the IOF/Bonds Tax applicable to the transfer of shares with the sole purpose of enabling the issuance of ADSs is currently 1.5%. The Brazilian government may increase the rate of the IOF/Bonds Tax at any time by up to 1.5% per day of the transaction amount, but only in respect of future transactions.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of preferred shares or ADSs by a non-Brazilian holder except for gift and inheritance taxes levied by some states in Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or in the relevant state to individuals or entities that are resident or domiciled within this state in Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of preferred shares or ADSs.
Tax on Financial Transactions (IOF Tax)
The IOF is a tax on foreign exchange, securities, credit and insurance transactions. The IOF rate may be changed by an Executive Decree (rather than a law). In addition, the IOF rate is not subject to the ex-post-facto principle, which provides that laws increasing the rate of or creating new taxes will only come into effect as of the latter of (i) the first day of the year following their publication, or (ii) ninety days after their publication. A statute increasing the IOF rate will therefore take effect from its publication date.
Regarding foreign exchange transactions, in spite of the maximum rate of IOF being 25%, the inflow and outflow of funds are generally subject to the IOF tax at a rate of 0.38%; however, the inflow and outflow of funds from portfolio investors located outside Brazil are not taxed. The conversion of Brazilian currency into foreign currency for purposes of paying dividends on preferred shares and ADS is currently not taxed.
The IOF tax may be also levied on issuances of bonds or securities, including transactions carried out on Brazilian stock, futures or commodities exchanges. The rate of the IOF tax with respect to many securities transactions is currently 0% percent, although certain transactions may be subject to specific rates. The minister of finance, however, has the legal authority to increase the rate to a maximum of 1.5% per day of the amount of the taxed transaction, during the period the investor holds the securities, up to the amount equal to the gain made on the transaction and only from the date of its increase or creation. The acquisition, holding and disposition of preferred shares traded on a Brazilian exchange is currently not subject to tax.
Temporary Contribution on Financial Transactions (CPMF Tax)
Until December 31, 2007, any transaction carried out by a holder of securities in Brazil that results in the transfer of reais from an account maintained by such holder (or its custodian) with a Brazilian financial institution may be subject to the CPMF tax, at the rate of 0.38%. The funds transferred for the acquisition of shares on a Brazilian stock exchange are exempt from the CPMF tax.
As of January 1, 2008, this tax has been repealed by the Brazilian Congress (Senate).
U.S. Federal Income Tax Considerations
The following are the material U.S. federal income tax consequences to U.S. Holders described herein of owning and disposing of preferred shares or ADSs, but this is not a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to hold such securities. The discussion applies only to U.S. Holders that hold preferred shares or ADSs as capital assets for U.S. federal income tax purposes and it does not describe all of the tax consequences that may be relevant to holders subject to special rules, such as:
| · | certain financial institutions; |
| · | dealers or traders in securities who use a mark-to-market method of tax accounting; |
| · | persons holding preferred shares or ADSs as part of a hedge, “straddle,” integrated transaction or similar transaction; |
| · | persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar; |
| · | entities classified as partnerships for U.S. federal income tax purposes; |
| · | persons liable for the alternative minimum tax; |
| · | tax-exempt organizations; |
| · | persons that own or are deemed to own ten percent10% or more of our voting stock; or |
| · | persons who acquired our ADSs or preferred shares pursuant to the exercise of any employee stock option or otherwise as compensation; or |
| · | persons holding preferred shares or ADSs in connection with a trade or business conducted outside of the United States. |
If an entity that is classified as a partnership for U.S. federal income tax purposes holds preferred shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Partnerships holding preferred shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the preferred shares or ADSs.
This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis. It is also based in part on representations by the Depositarydepositary and assumes that each obligation under the Deposit Agreement and any related agreement will be performed in accordance with its terms.
You are a “U.S. Holder” if, for U.S. federal income tax purposes, you are a beneficial owner of preferred shares or ADSs and if you are for U.S. federal tax purposes:are:
| · | a citizen or resident of the United States; |
| · | a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; or |
| · | an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source. |
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. U.S. HOLDERS OF PREFERRED SHARES OR ADSs ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISERS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING OR DISPOSING OF PREFERRED SHARES OR ADSs, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, NON-U.S. AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAWS.
In general, if you own ADSs, you will be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.
The U.S. Treasury has expressed concerns that parties to whom American depository shares are released before shares are delivered to the depositary (“pre-release”) or intermediaries in the chain of ownership between holders and the issuer of the security underlying the American depository shares may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. holders of American depository shares. Such actions would also be
inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporatenoncorporate holders. Accordingly, the creditability of Brazilian taxes, and the availability of the reduced tax rate for dividends received by certain non-corporatenoncorporate holders, each described below, could be affected by actions taken by such parties or intermediaries.
Please consult your tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of preferred shares or ADSs in your particular circumstances.
This discussion assumes that we are not, and will not become, a passive foreign investment company, as described below.
Taxation of Distributions
Distributions paid on ADSs or preferred shares will generally be treated as dividends to the extent paid out of current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. Holders as dividends. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, dividends paid by qualified foreign corporations to certain non-corporatenoncorporate U.S. holdersHolders in taxable years beginning before January 1, 2011,2013 are taxable at a maximum rate of 15%. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the New York Stock Exchange where our ADSs are traded. You should consult your tax advisers regarding the availability of the reduced tax rate on dividends in your particular circumstances.
The amount of a dividend will include any amounts withheld by us in respect of Brazilian taxes. The amount of the dividend will be treated as foreign-source dividend income to you and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code. Dividends will be included in your income on the date of your, or in the case of ADSs, the Depositary’s,depositary’s, receipt of the dividend. The amount of any dividend income paid in reais will be a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of such receipt regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you should not be required to recognize foreign currency gain or loss in respect of the dividend income. You may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.
Subject to applicable limitations that may vary depending upon your circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, Brazilian income taxes withheld from dividends on preferred shares or ADSs will be creditable against your U.S. federal income tax liability. The rules governing foreign tax credits are complex and, therefore, you should consult your tax adviser regarding the availability of foreign tax credits in your particular circumstances.Instead of claiming a credit, you may, at your election, deduct such Brazilian taxes in computing your taxable income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States.
Sale, Redemption or Other Disposition of Preferred Shares or ADSs
For U.S. federal income tax purposes, gain or loss you realize on the sale, redemption or other disposition of preferred shares or ADSs will generally be capital gain or loss, and will generally be long-term capital gain or loss if you held the preferred shares or ADSs for more than one year. The amount of your gain or loss will equal the difference between your tax basis in the preferred shares or ADSs disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. If a Brazilian tax on gains is withheld on the sale or disposition of preferred shares or ADSs, a U.S. Holder’s amount realized will include the gross amount of the proceeds of such sale or disposition before deduction of the Brazilian tax. See “—Brazilian Tax Considerations—Taxation of Gains” for a description of when a disposition may be subject to taxation by Brazil. Such gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. U.S. Holders should consult their tax advisors as to whether the Brazilian tax on gains may be creditable against the holder’s U.S. federal income tax on foreign-source income from other sources. In lieu of claiming a foreign tax credit, U.S. Holders may make an election to deduct foreign taxes, including the Brazilian tax, in computing their taxable income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States.
Other Brazilian Taxes
You should note that any Brazilian IOF Tax (as discussed above under “—Brazilian Tax Considerations”) maywill not be treated as a creditable foreign tax for U.S. federal income tax purposes, although you may be entitled to deduct such taxes,tax, subject to applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits applies to all taxes paid or accrued in the taxable year to foreign countries and
possessions of the United States. You should consult your tax advisers regarding the U.S. federal income tax consequences of thesethe payment of Brazilian taxes.IOF Tax, including whether you may claim a deduction for such tax or should instead include the amount of tax paid in your initial basis in the preferred shares or ADSs.
Passive Foreign Investment Company Rules
We believe that we were not a “passive foreign investment company” (“PFIC”) for U.S. federal income tax purposes for our 20082011 taxable year. However, because PFIC status depends on the composition of a company’s income and assets and the market value of its assets from time to time, there can be no assurance that we will not be a PFIC for any taxable year. If we were a PFIC for any taxable year during which a U.S. Holder held preferred shares or ADSs, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of the preferred shares or ADSs would be allocated ratably over the U.S. Holder’s holding period for the preferred shares or ADSs. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for such taxable year, and an interest charge would be imposed on the amount allocated to such taxable year. Further, to the extent that any distribution received by a U.S. Holder on its preferred shares or ADSs exceeds 125% of the average of the annual distributions on preferred shares or ADSs received by a U.S. Holder during the preceding three years or such holder’s holding period, whichever is shorter, that distribution would be subject to taxation in the same manner as gain, described immediately above. Certain elections may be available that would result in alternative treatments (such as mark-to-market treatment) of the preferred shares or ADSs. U.S. Holders should consult their tax advisers to determine whether any of these elections would be available and, if so, what the consequences of the alternative treatments would be in those holders’ particular circumstances.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless (i) you are a corporation or otheran exempt recipient or (ii) in the case of backup withholding, you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.
The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the Internal Revenue Service.
Certain U.S. Holders who are individuals may be required to report information relating to their ownership of securities of a non-U.S. person, subject to certain exceptions (including an exception for securities held in certain accounts maintained by U.S. financial institutions). U.S. Holders are urged to consult their tax advisers regarding the effect, if any, of these rules on their ownership and disposition of preferred shares or ADSs.
U.S. HOLDERS OF OUR PREFERRED SHARES OR ADSs SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE BRAZILIAN, U.S. FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR PREFERRED SHARES OR ADSs BASED UPON THEIR PARTICULAR CIRCUMSTANCES.
F. | Dividends and Paying Agents |
Not applicable.
Not applicable.
We are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by us with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth100 F Street N.W.,NE, Washington, D.C. 20549, and at the Commission’s Regional Offices at 233 Broadway, New York, New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.20549. Copies of such material may be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth100 F Street N.W.,NE, Washington, D.C. 20549, at prescribed rates. You may also inspect these reports and other information at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which our ADSs are listed.
In addition, the Commission maintains a website that contains information filed electronically, which can be accessed over the Internet at http://www.sec.gov.www.sec.gov.
We also file financial statements and other periodic reports with the CVM. Copies of our annual report on Form 20-F and documents referred to in this annual report and our bylaws will be available for inspection upon request at our offices at Rua Martiniano de Carvalho, 851 - 21° Andar, 01321-001, São Paulo, SP, Brasil.
I. | Subsidiary Information |
Not applicable.
ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to several market risks as a result of our commercial operations, debts obtained to finance our activities and debt-related financial derivative instruments, including exchange rate risk, interest rate risk, debt acceleration risk and credit risk. To help us manage our risks, we conduct a valuation of our financial assets and liabilities in relation to market values based on available information and appropriate valuation methodologies. However, the interpretation of market information, as well as the selection of methodologies, requires considerable judgment and reasonable estimates in order to produce adequate realization values. As a result, our valuation estimates do not necessarily indicate the amounts which mightwill be realized in the current market. The use of different market approaches and/or methodologies for the estimates may have a significant effect on the estimated realization values.
We have also obtainedenter into derivative instruments to help manage the risks to which we are exposed in accordance with our risk management policy. All of our derivative instruments are intended to providing hedgesprovide coverage against the risk of variation in foreign exchange, and external and internal interest rates arising from financial debts, in line with our risk management policy. As such,therefore, any changes in risk factors generate an opposite effect on the hedged end.item. We do not hold derivative instruments for speculative purposes and all financial debt in foreign exchange are hedged.purposes.
To further help us manageassist our risks,risk management, we conduct fair value analyses of our derivative financials instruments, as well as sensitivity analyses of our risk variables and our net risk exposure.exposure risk. For a discussionmore details of the results of our valuation analysis, risk management strategy,strategies, and sensitivity analysis of our derivative financial instruments, please see Note 3436 to our 20082011 consolidated financial statements.
| DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not applicable.The depositary, The Bank of New York Mellon, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs or from intermediaries acting for them. The depositary also collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deductions from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
Persons depositing or withdrawing shares must pay: | | |
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | | · Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property · Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates |
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs | | · Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS registered holders |
Registration or transfer fees | | · Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares |
Expenses of the depositary | | · Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement) · Converting foreign currency to U.S. dollars |
Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes | | · As necessary |
Any charges incurred by the depositary or its agents for servicing the deposited securities | | · As necessary |
During 2011, we received from the depositary US$5,385,073.38 for continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.
The Bank of New York Mellon has agreed to reimburse us for expenses it incurs that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse us for its continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse us annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to us based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of fees the depositary collects from investors.
ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
As of December 31, 2008,2011, we were not in default under any of our obligations and there were no dividend arrearages or delinquencies.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
Law 10,303 of October 31, 2001 amended the provisions of the Brazilian Corporate Law relating to the rights of preferred shareholders. In order toTo comply with such modifications, at the extraordinary shareholders meeting held on 12/30/2002, an amendment to our bylaws was approved granting the preferred shareholders the right to receive dividends 10% higher than the dividends paid to common shareholders.
Disclosure Controls and Procedures
Our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures. These controls and procedures were designed to ensure that information relating to us required to be disclosed in the reports that we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of December 31, 2008.2011. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were adequate and effective and were designed to ensure that material information relating to us and our consolidated subsidiaries would beare made known to them by others within those entities to allow timely decisions regardingrelating to the required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). The TelespTelefônica Brasil’s internal control system was designed to provide reasonable assurance as to the integrity and reliability of the published financial statements. All internal control systems, no matter how well designed, may have inherent limitations and can provide reasonable assurance that the objectives of the control system are met.
Management evaluated the effectiveness of internal control over financial reporting under the supervision of our Chief Executive Officer, or CEO and Chief Financial Officer (our Vice-President of Finance), or CFO as of December 31, 2008. Management evaluated the effectiveness of our internal control over financial reporting2011 based on the criteria set out in the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework. Telesp managementframework and concluded that, as of December 31, 2008,2011, our internal control over financial reporting was adequate and effective, based on those criteria.effective.
Our independent registered public accounting firm, Ernst & Young Terco, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2008.2011. The report on the audit of our internal control over financial reporting is included herewith.
Attestation Report of the Registered Public Accounting Firm
Ernst & Young Terco, the independent registered public accounting firm that has audited our consolidated financial statements, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2008.2011. This attestation report appears on page F-3.
Changes in Internal Control over Financial Reporting
Our internal audit department periodically evaluates our internal controls for the main cycles, documenting by flow charts the processes used in each cycle, identifying opportunities and suggesting improvements for the existing control mechanisms. There was no change in our internal control over financial reporting that occurred during the
period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
Our Control and Audit Committee is comprised of a minimum of three and a maximum of five non-executivenonexecutive directors. See “Item 6.C—6. Directors, Senior Management and Employees—C. Board Practices—Committees—Control and Audit Committee.” Our Board of Directors has designated Luis Bastida Ibarguen, an independent member of our Board of Directors under Brazilian rules and a member of our Control and Audit Committee, as the company’s “audit committee financial expert,” as such term is defined by the SEC. We anticipate that there will be some similar functions between the Control and Audit Committee and our statutory Fiscal Board (Conselho Fiscal), the latter of which meets the requirements of the general exemption from the listing standards for audit committees set forth in Exchange Act Rule 10A-3(c)(3). See “Item 16D—16D. Exemptions from the Listing Standards for Audit Committees.Committees Procedures.”
Our Control and Audit Committee and our Board of Directors had approved a code of ethics (Normativa de Conduta para Financeiros da TelespTelefônica Brasil S.A. S/A)). The code of ethics regulates the conduct of our managers in connection with the registration and control of financial and accounting information and their access to privileged and non-publicnonpublic information and data, in order to comply with the requirements of the Sarbanes-Oxley Act and NYSE rules. Our code of ethics follows the code of our parent company, Telefónica S.A. The code of ethics applies to our ChiefCEO, CFO and Investor Relations Officer, General and Executive Officer, Chief FinancialGeneral Secretary and Legal Officer Chief Operating Officer (whom we refer to as our General Executive Officer),and Comptroller, our Officers and corresponding foregoing positions at our subsidiaries, as well as to our executives in the areas for financial, management and internal controls. The code applies generally to all those with responsibilities similar to those listed above.
Following our ongoing commitment to transparency to markets and to supervisory authorities, as well as the adoption of high ethical standards in business, and based on the guidelines set forth by Telefónica S.A.’s code of ethics, our code of ethics provides for values, such as:
· | Transparency;· | transparency; |
· | Honesty· | honesty and integrity; |
· | Compliance· | compliance with laws and regulations, including, but not limited to, the securities markets rules and regulations and the rules and regulations related to insider trading and market manipulation; |
· | Protection· | protection of confidential information and property, except when disclosure thereof is authorized or legally required; and |
· | Reporting· | reporting of suspected illegal or unethical behavior. |
Our code of ethics is included in this Annual Report as an exhibit.
ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
E&YErnst & Young Terco acted as our independent auditor for the fiscal years ended December 31, 20082011, December 31, 2010 and December 31, 2007.2009. The chart below sets forth the total amount billed to us by E&YErnst & Young Terco for services performed in the years 20082011, 2010 and 2007,2009, and breaks down these amounts by category of service:
| | | | | | | | | |
| | (in thousands of reais) | |
Audit Fees | | | 7,002 | | | | 4,474 | | | | 4,591 | |
| | | | | | | |
| | (in thousands of reais) | | |
| | | | | | | |
Audit Fees | | 3,428 | | | 3,000 | | |
Audit-Related Fees | | 982 | | | 294 | | | | 1,305 | | | | 755 | | | | – | |
Tax Fees | | 16 | | | 15 | | | | 58 | | | | 17 | | | | 17 | |
All Other Services | | - | | | - | | | | – | | | | – | | | | – | |
Total | | 4,426 | | | 3,309 | | | | 8,365 | | | | 5,246 | | | | 4,608 | |
For the years ended December 31, 20082011, December 31, 2010 and December 31, 2007,2009, we paid our auditors, E&Y,Ernst & Young Terco for auditing services rendered in the total amount of R$4,4268,365 thousand, R$5,246 thousand and R$3,3094,608 thousand, respectively.
Audit Fees
Audit fees are fees billed for the audit of our annual consolidated financial statements prepared for purposes of filings with the CVM and the SEC and for the reviews of our quarterly financial statements submitted on Form 6-K and to the audit with respect to processes required by Sarbanes-Oxley, with the purpose of certifying the effectiveness over our internal controls.
Audit-Related Fees
Refers to analytic accountingthe auditing services and review with respect to our compliance with the rules promulgatedtargets established by ANATEL.
Tax Fees
Refers to accounting services with respect to the preparation ofservices related to tax returns.compliance procedures.
All Other Fees
Not applicable.
Pre-Approval Policies and Procedures
Our Control and Audit committee evaluates the results of all audit and audit-related services provided by our auditors. Our Control and Audit committee has the authority to approve services to be provided by our auditors that are not specifically included within the scope of the audit. Our Board of Directors, with advice from the Control and Audit Committee, is responsible for authorizing the audit services provided by E&Y,Ernst & Young Terco, the present auditor of the Company. Non-auditNonaudit services are required to be pre-approved by the Control and Audit Committee pursuant to the policy for pre-approval of non-auditnonaudit services.
ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES PROCEDURES |
Brazilian Corporate Law requires that we have a statutory Fiscal Board (Conselho Fiscal). Our statutory Fiscal Board meets the requirements of the general exemption set forth in Exchange Act Rule 10A-3(c)(3). See “Item 6.C—6. Directors, Senior Management and Employees—C. Board Practices—Fiscal Board.” Our statutory Fiscal Board is primarily charged with certain advisory, oversight and review functions with respect to the company’s financial statements; however, the statutory Fiscal Board, as required by Brazilian Corporate Law, has only an advisory role and does not participate in the management of the company. Indeed, decisions of the statutory Fiscal Board are not binding on the company under Brazilian Corporate Law. Our Board of Directors, under Brazilian Corporate Law, is the only entity with the legal capacity to appoint and retain any independent registered public accounting firm, and decide the budget appropriation with respect to such auditors.
Since Brazilian Corporate Law does not specifically grant our statutory Fiscal Board the power to establish receipt, retention and complaint procedures regarding accounting, internal control and audit matters, or create policies for the confidential, anonymous treatment of employee concerns regarding accounting or auditing matters,
we have established a Control and Audit Committee as a best corporate governance practice to address these various
issues. See “Item 6.C—6. Directors, Senior Management and Employees—C. Board Practices—Committees—Control and Audit Committee.”
We do not believe that our use of a fiscal board in accordance with Brazilian Corporate Law in combination with our Control and Audit Committee, as opposed to the provisions set forth in Exchange Act Rule 10A-3(b), materially adversely affects the ability of the conselho fiscalConselho Fiscal to act independently, satisfy the other applicable requirements of Exchange Act Rule 10A-3 or to fulfill its fiduciary and other obligations under Brazilian law.
ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
None.
ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not applicable.
Principal Differences Between U.S. and Brazilian Corporate Governance Practices
On November 4, 2003, the SEC approved new corporate governance rules established by the NYSE. Pursuant to these rules, foreign private issuers that are listed on the NYSE, such as our company, must disclose any significant ways in which its corporate governance practices differ from those followed by U.S. companies under the listing rules of the NYSE.
The significant differences between our corporate governance practices and the NYSE corporate governance standards are as follows:
Independence of Directors and Independence Tests
The Brazilian Corporate Law and our bylaws require that our directors be elected by our shareholders at a general shareholders meeting. SixteenFifteen of our directors were appointed by our common shareholders, and one director iswas appointed by representatives of our minority preferred shareholders. TwelveEleven of our directors are independent in accordance with rules generally accepted in Brazil.
Both the Brazilian Corporate Law and CVM establish rules in relation to certain qualification requirements and restrictions, investiture, compensation, duties and responsibilities of companies’ executives and directors. We believe these rules provide adequate assurances that our directors are independent and such rules would permit us to have directors that would not otherwise pass the independence tests established by the NYSE.
Executive Sessions
According to the Brazilian Corporate Law, up to one-third of the members of the Board of Directors can be elected to executive positions. The remaining non-managementnonmanagement directors are not expressly empowered to serve as a check on management, and there is no requirement that those directors meet regularly without management. Notwithstanding, our Board of Directors consists of 15 non-managementfourteen nonmanagement directors, 12eleven of whom are independent directors in accordance with rules generally accepted in Brazil, and as such, we believe we are in compliance with this standard.
Control and Audit Committee/Additional Requirements
Brazilian Corporate Law and our bylaws each require that we have a statutory Fiscal Board (Conselho Fiscal). See “Item 6.C—6. Directors, Senior Management and Employees—C. Board Practices—Fiscal Board.” Our statutory Fiscal Board meets the requirements of the general exemption from the listing standards for audit committees set forth in Exchange Act Rule 10A-3(c)(3). See “Item 16D.—Exemptions from the Listing Standards for Audit
Committees. Committees Procedures.” Our statutory Fiscal Board is primarily charged with certain advisory, oversight and review functions with respect to the company’s financial statements. However, the statutory Fiscal Board, as
required by Brazilian Corporate Law, has only an advisory role and does not participate in the management of the company. Indeed, decisions of the statutory Fiscal Board are not binding on the company under Brazilian Corporate Law. See “Item 6.C—6. Directors, Senior Management and Employees—C. Board Practices—Fiscal Board.”
In addition to our statutory Fiscal Board, we have established a Control and Audit committee as a best corporate governance practice in order to comply with the requirements of the Sarbanes-Oxley Act as described in Item 6C of this annual report. We anticipate that there will be some similar functions between the Control and Audit Committee and our statutorystatutor Fiscal Board.
Not applicable.
PART III
We have responded to Item 18 in lieu of responding to this Item.
Reference is made to pages F-1 through F-94.F-117.
ITEM 19. EXHIBITS
1.1 | | Bylaws of Telecomunicações de São PauloTelefônica Brasil S.A. – Telesp,, as amended (unofficial English translation) |
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2(a) | | Deposit Agreement dated as of July 27, 1998October 12, 2011, among Telesp ParticipaçõesTelefônica Brasil S.A., The Bank of New York, as Depositary, and Owners and Beneficial Owners of American Depositary Receipts issued thereunder thereunder.(1) |
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4(a) | .1 | Contract and Justification of the Merger of Telefónica Data Brasil Holding S.A. into Telecomunicações De São Paulo S.A. – TelespTELESP and Partial Spin-Off of Telefónica Empresas S.A. dated March 9, 2006 2006.(2) |
4(a).2 | | Credit facility with BNDES dated October 14, 2011 (unofficial English translation). |
4(b)1 | .1 | Grant Contract for Fixed Commuted Telephone Service in Local Modality (Sector 31) between Agência Nacional De Telecomunicações and Telecomunicações De São Paulo S.A. – TelespTELESP dated December 22, 2005June 30, 2011 (unofficial English translation) (3) |
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4(b)2 | | Grant Contract for Fixed Commuted Telephone Service in Local Modality (Sector 32) between Agência Nacional De Telecomunicações and Telecomunicações De São Paulo S.A. – Telesp dated December 22, 2005 (unofficial English translation) (3) |
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4(b)3 | | Grant Contract for Fixed Commuted Telephone Service in Local Modality (Sector 34) between Agência Nacional De Telecomunicações and Telecomunicações De São Paulo S.A. – Telesp dated December 22, 2005 (unofficial English translation) (3) |
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4(b)4 | .2 | Grant Contract for Fixed Commuted Telephone Service in Long-Distance Modality (Sector 31) between Agência Nacional De Telecomunicações and Telecomunicações De São Paulo S.A. – TelespTELESP dated December 22, 2005June 30, 2011 (unofficial English translation) (3) |
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4(b)5 | | Grant Contract for Fixed Commuted Telephone Service in Long-Distance Modality (Sector 32) between Agência Nacional De Telecomunicações and Telecomunicações De São Paulo S.A. – Telesp dated December 22, 2005 (unofficial English translation) (3) |
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4(b)6 | | Grant Contract for Fixed Commuted Telephone Service in Long-Distance Modality (Sector 34) between Agência Nacional De Telecomunicações and Telecomunicações De São Paulo S.A. – Telesp dated December 22, 2005 (unofficial English translation) (3) |
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4(b)7 | .3 | Certificate of Authorization to Provide Multimedia Communication Service, for the Collective Interest, by and between “Agência Nacional de Telecomunicações - ANATEL” and “Telecomunicações de São Paulo S.A. – Telesp”TELESP” (unofficial English translation)(4).(3) |
4(b).4 | Authorization Term of the Personal Mobile Service entered by ANATEL and Telesp Celular Participações S.A. (unofficial English translation). |
4(b).5 | Authorization Term of the Personal Mobile Service entered by ANATEL and Global Telecom S.A. (unofficial English translation). |
4(b).6 | Authorization Term of the Personal Mobile Service entered by ANATEL and Tele Centro Oeste Celular Participações S.A. (unofficial English translation). |
4(b).7 | Authorization Term of the Personal Mobile Service entered by ANATEL and Telebahia Celular S.A.(unofficial English translation). |
4(b).8 | Authorization Term of the Personal Mobile Service entered by ANATEL and Telergipe Celular S.A. (unofficial English translation). |
4(b).9 | Authorization Term of the Personal Mobile Service entered by ANATEL and Telerj Celular S.A. (unofficial English translation). |
4(b).10 | Authorization Term of the Personal Mobile Service entered by ANATEL and Telest Celular S.A. (unofficial English translation). |
8.1 | | List of Subsidiaries |
| | Subsidiaries. |
11.1 | | Code of Ethics of Telecomunicações de São PauloTelefônica Brasil S.A. – Telesp (3) |
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12.1 | | Section 302 Certification of the Chief Executive OfficerOfficer. |
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12.2 | | Section 302 Certification of the Chief Financial OfficerOfficer. |
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13.1 | | Section 906 Certification of the Chief Executive Officer |
| | Officer. |
13.2 | | Section 906 Certification of the Chief Financial OfficerOfficer. |
(1) | Incorporated by reference to our Registration Statement of American Depositary Receipt shares on Form F-6EFF-6POS (No. 333-146901) filed with the Commission on October 24, 2007.July 30, 2010. |
(2) | Incorporated by reference to our form CB filed with the Commission on March 14, 2006. |
(3) | Incorporated by reference to our annual report on Form 20-F (No. 001-14475) filed with the Commission on April 12, 2006. |
(4)(3) | Incorporated by reference to our annual report on Form 20-F (No. 001-14475) filed with the Commission on April 16, 2007. |
The following explanations are not intended as technical definitions, but rather to assist the reader in understanding certain terms as used in this Annual Report.
1xRTT: 1x Radio Transmission Technology, the CDMA 2000 1x technology, which, pursuant to the ITU (International Telecommunication Union) and in accordance with the IMT-2000 rules, is the 3G (third generation) technology.
AICE: Acesso Individual Classe Especial is a mandatory plan offered by the telecommunication providers to low-income customers. Includes different pricing schemes for the Basic Plan (Plano Básico) and the Mandatory Offer Alterative Plan (Plano Alternativo de Oferta Obrigatória).
AMPS: Advanced Mobile Phone System, a radio interface technology for cellular networks based on spectral spreading of the radio signal and channel division in the frequency domain.
ADSL: Asymmetric digital subscriber line. ADSL technology allows more data to be sent over existing copper telephone lines.
Analog: A mode of transmission or switching that is not digital, e.g., the representation of voice, video or other modulated electrical audio signals which are not in digital form.
BLEC: Building local exchange carrier. A BLEC is a service provider that delivers telecommunication services within a specific building. BLECs aggregate traffic at the particular site and employ a single broadband connection for local access.
CDMA: Code Division Multiple Access, an aerial interface technology for cellular networks based on spectral spreading of the radio signal and channel division in the code domain.
CDMA 2000 1xEV-DO: 3G (third generation) access technology with data transmission speed of up to 2.4 megabytes per second.
Cellular service: A cellular telecommunications service provided by means of a network of interconnected low-powered base stations, each of which covers one small geographic cell within the total cellular telecommunications system service area.
CSP:CSP: long-distance carrier selection.
Digital: A mode of representing a physical variable such as speech using digits 0 and 1 only. The digits are transmitted in binary form as a series of pulses. Digital networks allow for higher capacity and higher flexibility through the use of computer-related technology for the transmission and manipulation of telephone calls. Digital systems offer lower noise interference and can incorporate encryption as a protection from external interference.
DTH:DTH: A special type of service that uses satellites for the direct distribution of television and audio signs for subscribers.
FATOR X: a measureX: A measurement of companythe company’s productivity, calculated by ANATEL, which is discounted by the inflation rate and is used for the calculation of the annual rate adjustment applicable to telecommunications companies.
FTTH:FTTH: Internet access through Fiber Optic (“Fiber to the Home”).
FWT: Fixed-phones using the wireless network (“Fixed Wireless Telephone”).
GSM: Global System for Mobile Communications, a service rendered by concession from ANATEL for a specific frequency range.
Internet: A collection of interconnected networks spanning the entire world, including university, corporate, government and research networks from around the globe. These networks all use the IP (Internet Protocol) communications protocol.
IP (Internet protocol): An interconnection protocol for sub-networks, in particular for those with different physical characteristics used by the Internet.
IPTV:IPTV: Pay TV with video broadcast offered through the use of the IP protocol.
MMDS:MMDS: (Multichannel Multipoint Distribution Service ):Service): It’s a wireless telecommunications technology, used for general-purpose broadband networking or, more commonly, as an alternative method of cable television programming reception.
Net additions: total number of new customers acquired in any period minus the reduction in the number of customers.
Network: An interconnected collection of elements. In a telephone network, these consist of switches connected to each other and to customer equipment. The transmission equipment may be based on fiber-opticfiber optic or metallic cable or point-to-point radio connections.
Network usage charge: Amount paid per minute charged by network operators for the use of their network by other network operators.
PBX (Private Branch Exchange): Telephone switchboard for private use, but linked to a telephone network.
PGA-SMP: SCMPlano Geral de Autorizações do Serviço Móvel Pessoal: multimedia communication services,, or (“serviços de comunicação multimídia”).General Plan of Authorizations for the Personal Mobile Services.
PGO: SMPPlano Geral de Outorgas:, or General Plan of Grants.
PUC: Prestação Utilidade Comodidade, which are convenience services offered to fixed-line customers, such as caller ID, voicemail, call forwarding, etc.
SCM: Serviço de Comunicação Multimídia or multimedia communication services.
SMP: Serviço Móvel Pessoal or Personal Mobile Service, or, (Serviço Móvel Pessoal).a service rendered pursuant to an authorization granted by ANATEL to provide mobile service in a specific frequency range.
SMS: text messaging services for wireless devices, which allow customers to send and receive alphanumerical messages.
STFC: STFC (ServiçServiço Telefônico Fixo Comutado):Comutado Transmission, or the transmission of voice and other signals between determined fixed points.
Switch: Devices used to set up and route telephone calls either to the number called or to the next switch along the path. They may also record information for billing and control purposes.
TDMA: Time Division Multiple Access, a radio interface technology for cellular networks based on spectral spreading of the radio signal and channel division in the time domain.
Universal service: The obligation to supply basic service to all users throughout a national territory at reasonable prices.
VOIP:VOIP: Voice over Internet Protocol, is a technology for transmitting voice using the internet.Internet.
VOD:VOD: Video on demand systems allow users to select and watch/listen to video or audio content on demand.
VU-M: Valor de Remuneração de Uso de Rede do Serviço Móvel Pessoal, or Compensation Value for Network Use of Personal Mobile Service.
WAP: Wireless Application Protocol, an open and standardized protocol started in 1997, which allows access to Internet servers through specific equipment, a WAP Gateway at the carrier, and WAP browsers in customers’ wireless devices.
WCDMA: Wide-Band Code-Division Multiple Access, a technology for wideband digital radio communications of Internet, multimedia, video and other bandwidth-demanding applications.
Wireless devices: wireless appliances that we sell, including cellular handsets, wireless handheld devices and wireless broadband cards.
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
TELECOMUNICAÇÕES DE SÃO PAULOTELEFÔNICA BRASIL S.A.—TELESP | |
| |
By: | /s/ Antonio Carlos Valente da Silva | |
| Name: | Antonio Carlos Valente da Silva | |
| Title: | Chief Executive Officer | |
| |
By: | /s/ Gilmar Roberto Pereira Camurra | |
| Name: | Gilmar Roberto Pereira Camurra | |
| Title: | Chief Financial Officer and Investor Relations Officer | |
Date: April 13, 200920, 2012
Telefônica Brasil S.A.
(formerly Telecomunicações de São Paulo S.A. – Telesp)
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
Consolidated Financial statements
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED
DECEMBERAs of and for the years ended December 31, 2008, 2007 AND 2006
2011, 2010 and 2009
CONTENTS
Contents
| F-2 F-3 |
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| F-4 F-5 |
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| F-6 |
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| F-6 F-7 |
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| F-7, F-8 |
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| F-9, F-10 |
Consolidated Statements of Added Value | F-11 |
| F-12 |
The Board of Directors and Shareholders of Telecomunicações de São PauloTelefônica Brasil S.A. – TELESP
We have audited the accompanying consolidated balance sheetsheets of Telefônica Brasil S.A. (formerly Telecomunicações de São Paulo S.A. – TELESPS.A.- Telesp) and subsidiaries as of December 31, 20082011 and 2007,2010, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows and value added for each of the three years in the period ended December 31, 2008.2011. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Telecomunicações de São PauloTelefônica Brasil S.A. – TELESP and subsidiaries at December 31, 20082011 and 2007,2010, and the consolidated results of their operations changes in their financial position,and their cash flows and their value added for each of the three years in the period ended December 31, 20082011, in conformity with accounting practices adopted in Brazil, which differ in certain respects from accounting principles generally accepted inInternational Financial Reporting Standards as issued by the United States of America. Information related to the nature and effect of such differences is presented in Notes 36, 37 and 38 to the consolidated financial statements.
As mentioned in Note 3, the accounting practices adopted in Brazil were subject to changes effective January 1, 2008. The financial statements for the years ended December 31, 2007 and 2006, presented in conjunction with the 2008 financial statements, were prepared in accordance with the accounting practices effective in Brazil through December 31, 2007 and, as allowed by CPC (Accounting Practices Committee) Technical Pronouncement No. 13 – First Time Adoption of Law No. 11,638/07 and Provisional Executive Act No. 449/08, do not include any adjustments for purposes of comparison between the year ended December 31, 2008 and previous years.International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Telecomunicações de São PauloTelefônica Brasil S.A. – TELESP’s's internal control over financial reporting as of December 31, 2008,2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 16, 2009, except for internal control over financial reporting related to Notes 36, 37 and 38 to the 2008 consolidated financial statements of Telecomunicações de São Paulo S.A. – TELESP and subsidiaries, as to which the date is March 31, 2009,14, 2012 expressed an unqualified opinion thereon.
São Paulo, February 16, 2009,
except for Notes 36, 37 and 38, as to which the date is March 31, 2009.
14, 2012
ERNST & YOUNG TERCO
Auditores Independentes S.S.
CRC-2-SP-015199/O-6
Alexandre Hoeppers
Partner
/s/ Luiz Carlos Marques
Luiz Carlos Marques
Partner
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Telefônica Brasil S.A.
We have audited Telefônica Brasil S.A.’s (formerly Telecomunicações de São Paulo S.A. – TELESP
We have audited Telecomunicações de São Paulo S.A. – TELESP’sS.A.- Telesp) internal control over financial reporting as of December 31, 2008,2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Telecomunicações de São PauloTelefônica Brasil S.A. – TELESP’s’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s annual report on internal control over financial reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Telecomunicações de São PauloTelefônica Brasil S.A. – TELESP maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Telecomunicações de São PauloTelefônica Brasil S.A. – TELESPand subsidiaries as of December 31, 20082011 and 2007,2010, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows and value added for each of the three years in the period ended December 31, 20082011 and our report dated February 16, 2009, except for Notes 36, 37 and 38, as to which the date is March 31, 2009,14, 2012 expressed an unqualified opinion thereon.
São Paulo, February 16, 2009, except
for internal control over financial reporting related to Notes 36, 37 and 38 to the 2008 consolidated financial statements, as to which the date is March 31, 2009.
14, 2012
ERNST & YOUNG TERCO
Auditores Independentes S.S.
CRC-2-SP-015199/O-6
Alexandre Hoeppers
Partner
/s/ Luiz Carlos Marques
Luiz Carlos Marques
Partner
Telefônica Brasil S.A.
(formerly Telecomunicações de São Paulo S.A. – Telesp)
December 31, 2011 and 2010
(In thousands of reais)
| | | | | As of December 31, | |
Assets | | | | | 2011 | | | 2010 | |
Current assets | | Note | | | | 11,810,118 | | | | 5,147,449 | |
Cash and cash equivalents | | 5 and 36 | | | | 2,940,342 | | | | 1,556,715 | |
Trade accounts receivable, net | | | 6 | | | | 5,105,860 | | | | 2,546,225 | |
Inventories | | | 7 | | | | 471,721 | | | | 77,499 | |
Recoverable taxes | | | 8.1 | | | | 2,495,066 | | | | 659,357 | |
Escrow deposits | | | 9 | | | | 116,421 | | | | - | |
Derivatives | | | 36 | | | | 1,840 | | | | 166 | |
Prepaid expenses | | | 10 | | | | 255,056 | | | | 41,372 | |
Other | | | 11 | | | | 423,812 | | | | 266,115 | |
Noncurrent assets | | | | | | | 53,679,855 | | | | 14,818,845 | |
Long-term portion of investments pledged as collateral | | | | | | | 99,114 | | | | - | |
Trade accounts receivable, net | | | 6 | | | | 84,855 | | | | 67,343 | |
Recoverable taxes | | | 8.1 | | | | 1,014,959 | | | | 326,677 | |
Deferred taxes | | | 8.2 | | | | 1,428,878 | | | | 503,679 | |
Escrow deposits | | | 9 | | | | 3,400,244 | | | | 1,710,683 | |
Derivatives | | | 36 | | | | 225,935 | | | | - | |
Prepaid expenses | | | 10 | | | | 32,138 | | | | 24,647 | |
Other | | | 11 | | | | 148,293 | | | | 153,808 | |
Investments | | | 12 | | | | 37,835 | | | | 100,837 | |
Property, plant and equipment, net | | | 13 | | | | 17,153,920 | | | | 10,200,697 | |
Intangible assets, net | | | 14 | | | | 30,053,684 | | | | 1,730,474 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Assets | | | | | | | 65,489,973 | | | | 19,966,294 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
| | | | | As of December 31, | |
Liabilities and Shareholders’ Equity | | | | | 2011 | | | 2010 | |
Current Liabilities | | | | | | 12,740,263 | | | | 5,615,310 | |
| | Note | | | | | | | | | |
Payroll and related accruals | | | 15 | | | | 495,624 | | | | 307,245 | |
Trade accounts payable | | | 16 | | | | 6,081,611 | | | | 2,832,157 | |
Taxes payable | | | 17 | | | | 1,691,991 | | | | 754,993 | |
Loans and financing | | | 18.1 | | | | 988,413 | | | | 420,412 | |
Debentures | | | 18.2 | | | | 468,624 | | | | - | |
Dividends and interest on shareholders’ equity payable | | | 19 | | | | 972,986 | | | | 450,897 | |
Provisions | | | 20 | | | | 416,313 | | | | 240,213 | |
Derivatives | | | 36 | | | | 51,162 | | | | 9,502 | |
Deferred revenue | | | 21 | | | | 761,268 | | | | 103,339 | |
Share fractions | | | | | | | 389,953 | | | | 112,594 | |
Other | | | 22 | | | | 422,318 | | | | 383,958 | |
Noncurrent Liabilities | | | | | | | 9,418,925 | | | | 2,683,870 | |
Taxes payable | | | 17 | | | | 459,358 | | | | 38,707 | |
Deferred taxes | | | 8.2 | | | | 788,954 | | | | - | |
Loans and financing | | | 18.1 | | | | 3,959,115 | | | | 1,405,314 | |
Debentures | | | 18.2 | | | | 787,807 | | | | - | |
Provisions | | | 20 | | | | 3,120,798 | | | | 1,118,698 | |
Derivatives | | | 36 | | | | 78,369 | | | | 18,542 | |
Deferred revenue | | | 21 | | | | 156,266 | | | | 38,400 | |
Other | | | 22 | | | | 68,258 | | | | 64,209 | |
Shareholders’ equity | | | 23 | | | | 43,330,785 | | | | 11,667,114 | |
Capital | | | | | | | 37,798,110 | | | | 6,575,480 | |
Capital reserves | | | | | | | 2,719,665 | | | | 2,733,562 | |
Legal reserve | | | | | | | 877,322 | | | | 659,556 | |
Non-controlling interest acquisition premium | | | | | | | (29,929 | ) | | | - | |
Other comprehensive Income | | | | | | | 7,520 | | | | 4,417 | |
Additional proposed dividends | | | | | | | 1,953,029 | | | | 1,694,099 | |
Non-controlling shareholders | | | | | | | 5,068 | | | | - | |
Total Liabilities | | | | | | | 65,489,973 | | | | 19,966,294 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Telefônica Brasil S.A.
TELECOMUNICAÇÕES DE SÃO PAULO(formerly Telecomunicações de São Paulo S.A. - TELESP
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND 2007– Telesp)
For the years ended December 31, 2011, 2010 and 2009
(In thousands of Reais)reais, except earnings per share data)
| | | December 31, |
| Note | | 2008 | | 2007 |
Assets | | | | | |
Current assets | | | 6,459,830 | | 5,227,685 |
Cash and cash equivalents | 5 and 34 | | 1,741,006 | | 933,275 |
Trade accounts receivable, net | 6 | | 3,152,831 | | 2,832,050 |
Deferred and recoverable taxes | 7 | | 1,032,516 | | 1,117,982 |
Inventories | 8 | | 164,410 | | 125,004 |
Derivatives | 34 | | 95,747 | | 25,423 |
Other | 9 | | 273,320 | | 193,951 |
| | | | | |
| | | | | |
Noncurrent assets | | | 13,532,179 | | 13,722,960 |
| | | | | |
Trade accounts receivable, net | 6 | | 61,563 | | - |
Deferred and recoverable taxes | 7 | | 579,807 | | 539,371 |
Escrow deposits | 10 | | 711,300 | | 534,914 |
Other | 9 | | 156,312 | | 152,212 |
| | | | | |
Investments | 11 | | 301,830 | | 177,557 |
| | | | | |
Property, plant and equipment, net | 12 | | 9,868,933 | | 10,260,126 |
| | | | | |
Intangible assets, net | 13 | | 1,852,434 | | 2,050,320 |
| | | | | |
Deferred charges | 14 | | - | | 8,460 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Total assets | | | 19,992,009 | | 18,950,645 |
| | Note | | | 2011 | | | 2010 | | | 2009 | |
Net operating revenue | | | 24 | | | | 29,128,740 | | | | 15,798,251 | | | | 15,852,533 | |
Cost of goods and services | | | 25 | | | | (14,728,171 | ) | | | (8,844,805 | ) | | | (9,236,386 | ) |
Gross profit | | | | | | | 14,400,569 | | | | 6,953,446 | | | | 6,616,147 | |
Operating (expenses) income | | | | | | | (8,603,203 | ) | | | (3,388,110 | ) | | | (3,202,254 | ) |
Selling | | | 26 | | | | (7,259,703 | ) | | | (2,964,632 | ) | | | (2,528,485 | ) |
General and administrative | | | 27 | | | | (1,785,658 | ) | | | (738,846 | ) | | | (805,353 | ) |
Equity in earnings (losses) of associates | | | 12 | | | | - | | | | 2,889 | | | | 18,787 | |
Other operating income, net | | | 28 | | | | 442,158 | | | | 312,479 | | | | 112,797 | |
| | | | | | | | | | | | | | | | |
Operating income before financial expenses, net | | | | | | | 5,797,366 | | | | 3,565,336 | | | | 3,413,893 | |
Financial expense, net | | | 29 | | | | (139,692 | ) | | | (120,738 | ) | | | (188,792 | ) |
| | | | | | | | | | | | | | | | |
Income before income tax and social contribution | | | | | | | 5,657,674 | | | | 3,444,598 | | | | (3,225,101 | ) |
Income tax and social contribution | | | 30 | | | | (1,295,475 | ) | | | (1,045,762 | ) | | | (1,021,012 | ) |
Net income for the year | | | | | | | 4,362,199 | | | | 2,398,836 | | | | 2,204,089 | |
| | | | | | | | | | | | | | | | |
Attributed to: | | | | | | | | | | | | | | | | |
Interest of non-controlling shareholders | | | | | | | 6,881 | | | | - | | | | - | |
Equity holders of the parent company | | | | | | | 4,355,318 | | | | 2,398,836 | | | | 2,204,089 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic and diluted earnings per share – common | | | | | | | 4.40 | | | | 4.45 | | | | 4.08 | |
Basic and diluted earnings per share – preferred | | | | | | | 4.84 | | | | 4.89 | | | | 4.49 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Telefônica Brasil S.A.
(formerly Telecomunicações de São Paulo S.A. – Telesp)
For the years ended December 31, 2011, 2010 and 2009
(In thousands of reais)
| | 2011 | | | 2010 | | | 2009 | |
Net income for the year | | | 4,362,199 | | | | 2,398,836 | | | | 2,204,089 | |
Gains (Losses) on available for sale securities | | | (5,170 | ) | | | (117,609 | ) | | | 22,251 | |
Taxes on earnings (losses) on available for sale securities | | | 1,758 | | | | 39,987 | | | | (7,565 | ) |
Unrealized actuarial gains (losses) and effect of the limitation of surplus plan assets | | | (62,581 | ) | | | (60,585 | ) | | | 25,526 | |
| | | | | | | | | | | | |
Taxes on unrealized actuarial gains (losses) and effect of the limitation of surplus plan assets | | | 19,584 | | | | 18,522 | | | | (6,830 | ) |
Gains (losses) on cash flow hedge | | | 3,022 | | | | - | | | | - | |
Taxes on gains (losses) on cash flow hedge | | | (1,027 | ) | | | - | | | | - | |
Cumulative translation adjustments of foreign currency transactions | | | 4,520 | | | | (6,778 | ) | | | (2,963 | ) |
| | | | | | | | | | | | |
Net gains (losses) recognized in equity | | | (39,894 | ) | | | (126,463 | ) | | | 30,419 | |
| | | | | | | | | | | | |
Comprehensive income for the year | | | 4,322,305 | | | | 2,272,373 | | | | 2,234,508 | |
| | | | | | | | | | | | |
Attributable to: | | | | | | | | | | | | |
Interest of non-controlling shareholders | | | 6,881 | | | | - | | | | - | |
Equity holders of the parent company | | | 4,315,424 | | | | 2,272,373 | | | | 2,234,508 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
TELECOMUNICAÇÕES DE SÃO PAULOTelefônica Brasil S.A. - TELESP
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2008 AND 2007(formerly Telecomunicações de São Paulo S.A. – Telesp)
For the years ended December 31, 2011, 2010 and 2009
(In thousands of Reais)reais)
| | | December 31, |
| Note | | 2008 | | 2007 |
Liabilities and shareholders’ equity | | | | | |
Current liabilities | | | 5,846,874 | | 5,697,223 |
Loans and financing | 15 and 34 | | 502,503 | | 793,783 |
Debentures | 16 and 34 | | 16,339 | | 12,357 |
Trade accounts payable | | | 2,314,698 | | 1,846,232 |
Taxes payable | 17 | | 926,437 | | 908,260 |
Dividends and interest payable to shareholders | 18 | | 1,153,670 | | 996,997 |
Payroll and related accruals | 19 | | 174,672 | | 264,841 |
Reserve for contingencies | 20 | | 128,488 | | 115,884 |
Financial instruments | 34 | | 15,200 | | 279,312 |
Other liabilities | 21 | | 614,867 | | 479,557 |
| | | | | |
| | | | | |
Noncurrent liabilities | | | 4,099,443 | | 3,348,180 |
| | | | | |
Loans and financing | 15 and 34 | | 1,717,352 | | 1,003,029 |
Debentures | 16 and 34 | | 1,500,000 | | 1,500,000 |
Taxes payable | 17 | | 47,401 | | 38,601 |
Reserve for contingencies | 20 | | 570,778 | | 525,393 |
Reserve for post-retirement benefit plans | 32 | | 148,770 | | 95,426 |
Financial instruments | 34 | | 22,148 | | 103,885 |
Other liabilities | 21 | | 92,994 | | 81,846 |
| | | | | |
| | | | | |
Shareholders’ equity | 22 | | 10,045,692 | | 9,905,242 |
Capital | | | 6,575,480 | | 6,575,198 |
Special goodwill reserve | | | 63,074 | | - |
Capital reserves | | | 2,670,488 | | 2,670,488 |
Income reserve | | | 659,556 | | 659,556 |
Adjustments for equity valuation | | | 76,232 | | - |
Cumulative translation adjustments | | | 862 | | - |
| | | | | |
Total liabilities and shareholders’ equity | | | 19,992,009 | | 18,950,645 |
| | Capital | | | Premium paid on acquisition of non-controlling interest | | | Special Goodwill reserve | | | Capital reserves | | | Treasury shares | | | Legal Reserve | | | Retained Earnings | | | Additional proposed dividend | | | Unrealized gains on available for sale securities, net of tax | | | Cash flow hedge | | | Cumulative translation adjustments | | | Shareholders’ equity of company | | | Participation of non-controlling shareholders | | | Total shareholders' equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances on December 31, 2008 | | | 6,575,480 | | | | - | | | | 63,074 | | | | 2,688,207 | | | | (17,719 | ) | | | 659,556 | | | | (58,571 | ) | | | 395,109 | | | | 76,232 | | | | - | | | | 862 | | | | 11,300,302 | | | | - | | | | 10,382,230 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unclaimed dividends and interest on shareholders’ equity, net of taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | 153,673 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 153,673 | |
Net income for the year | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,204,089 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,204,089 | |
Other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 18,696 | | | | | | | | 14,686 | | | | | | | | (2,963 | ) | | | | | | | | | | | 30,419 | |
Appropriations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | (470,000 | ) | | | (395,109 | ) | | | | | | | | | | | | | | | | | | | | | | | (865,109 | ) |
Interest on shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | (514,250 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | (514,250 | ) |
Withholding tax on interest on shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | (90,750 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | (90,750 | ) |
Additional proposed dividend | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,251,646 | ) | | | 1,251,646 | | | | | | | | | | | | | | | | | | | | | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances as of December 31, 2009 | | | 6,575,480 | | | | - | | | | 63,074 | | | | 2,688,207 | | | | (17,719 | ) | | | 659,556 | | | | (8,759 | ) | | | 1,251,646 | | | | 90,918 | | | | - | | | | (2,101 | ) | | | 11,300,302 | | | | - | | | | 11,300,302 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unclaimed dividends and interest on shareholders’ equity, net of taxes | | | - | | | | | | | | - | | | | - | | | | - | | | | - | | | | 134,440 | | | | - | | | | - | | | | - | | | | - | | | | 134,440 | | | | - | | | | 134,440 | |
Net income for the year | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,398,836 | | | | - | | | | - | | | | - | | | | - | | | | 2,398,836 | | | | - | | | | 2,398,836 | |
Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (42,063 | ) | | | - | | | | (77,622 | ) | | | - | | | | (6,778 | ) | | | (126,463 | ) | | | - | | | | (126,463 | ) |
Appropriations: | | | | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends | | | - | | | | | | | | - | | | | - | | | | - | | | | - | | | | (196,355 | ) | | | (1,251,646 | ) | | | - | | | | - | | | | - | | | | (1,448,001 | ) | | | - | | | | (1,448,001 | ) |
Interest on shareholders’ equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (503,200 | ) | | | - | | | | - | | | | - | | | | - | | | | (503,200 | ) | | | - | | | | (503,200 | ) |
Withholding tax on interest on shareholders’ equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (88,800 | ) | | | - | | | | - | | | | - | | | | - | | | | (88,800 | ) | | | - | | | | (88,800 | ) |
Additional proposed dividend | | | | | | | - | | | | | | | | | | | | | | | | | | | | (1,694,099 | ) | | | 1,694,099 | | | | - | | | | - | | | | | | | | - | | | | | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances as of December 31, 2010 | | | 6,575,480 | | | | | | | | 63,074 | | | | 2,688,207 | | | | (17,719 | ) | | | 659,556 | | | | - | | | | 1,694,099 | | | | 13,296 | | | | - | | | | (8,879 | ) | | | 11,667,114 | | | | - | | | | 11,667,114 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unclaimed dividends and interest on shareholders’ equity, net of taxes | | | - | | | | | | | | - | | | | - | | | | - | | | | - | | | | 107,874 | | | | - | | | | - | | | | - | | | | - | | | | 107,874 | | | | - | | | | 107,874 | |
Capital increase due to the acquisition of Vivo Part. on 04/27/2011 | | | 31,222,630 | | | | - | | | | - | | | | 47,723 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 31,270,353 | | | | - | | | | 31,270,353 | |
Withdrawal rights paid to shareholders due to the acquisition of Vivo Part. | | | - | | | | - | | | | - | | | | - | | | | (3 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3 | ) | | | - | | | | (3 | ) |
Repurchase of shares | | | - | | | | - | | | | - | | | | - | | | | (61,617 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (61,617 | ) | | | - | | | | (61,617 | ) |
Acquisition of non-controlling shareholders | | | - | | | | (29,929 | ) | | | - | | | | | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (29,929 | ) | | | (1,813 | ) | | | (31,742 | ) |
Net income for the year | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,355,318 | | | | - | | | | - | | | | - | | | | - | | | | 4,355,318 | | | | 6,881 | | | | 4,362,199 | |
Other comprehensive income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (42,997 | ) | | | | | | | (3,412 | ) | | | 1,995 | | | | 4,520 | | | | (39,894 | ) | | | - | | | | (39,894 | ) |
Appropriations | | | | | | | - | | | | | | | | | | | | | | | | | | | | | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Dividends | | | - | | | | | | | | - | | | | - | | | | - | | | | - | | | | (382,400 | ) | | | (1,694,099 | ) | | | - | | | | - | | | | - | | | | (2,076,499 | ) | | | - | | | | (2,076,499 | ) |
Interest on shareholders’equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,586,950 | ) | | | - | | | | - | | | | - | | | | - | | | | (1,586,950 | ) | | | - | | | | (1,586,950 | ) |
Withholding tax on interest on shareholders’equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (280,050 | ) | | | - | | | | - | | | | - | | | | - | | | | (280,050 | ) | | | - | | | | (280,050 | ) |
Legal Reserve | | | - | | | | - | | | | - | | | | - | | | | - | | | | 217,766 | | | | (217,766 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Additional proposed dividend | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,953,029 | ) | | | 1,953,029 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances as of December 31, 2011 | | | 37,798,110 | | | | (29,929 | ) | | | 63,074 | | | | 2,735,930 | | | | (79,339 | ) | | | 877,322 | | | | - | | | | 1,953,029 | | | | 9,884 | | | | 1,995 | | | | (4,359 | ) | | | 43,325,717 | | | | 5,068 | | | | 43,330,785 | |
Outstanding shares (thousand) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,123,885 | |
Book value per share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 38.55 | |
The accompanying notes are an integral part of these consolidated financial statements.Consolidated Financial Statements.
TELECOMUNICAÇÕES DE SÃO PAULOTelefônica Brasil S.A. - TELESP
CONSOLIDATED STATEMENTS OF INCOME(formerly Telecomunicações de São Paulo S.A. – Telesp)
For the years ended December 31, 2008, 2007 AND 20062011, 2010 and 2009
(In thousands of Reais - except earnings per share data)reais)
| | 2011 | | | 2010 | | | 2009 | |
Cash flows from operations | | | | | | | | | |
Income before income tax and social contribution | | | 5,657,674 | | | | 3,444,598 | | | | 3,225,101 | |
Items that do not affect cash | | | | | | | | | | | | |
Expenses (revenues) not affecting cash | | | 5,326,120 | | | | 2,270,478 | | | | 3,215,771 | |
Depreciation and amortization | | | 4,585,994 | | | | 1,913,494 | | | | 2,505,475 | |
Exchange variations from loans | | | 89,549 | | | | (638 | ) | | | (49,847 | ) |
Monetary variations | | | (30,323 | ) | | | 34,580 | | | | 33,245 | |
(Gain)/ Loss from equity in earnings of associates | | | - | | | | (2,889 | ) | | | (18,788 | ) |
Gain on permanent asset disposals | | | (482,115 | ) | | | (317,486 | ) | | | 14,374 | |
Allowance for doubtful accounts | | | 506,581 | | | | 386,340 | | | | 564,580 | |
Pension and other post-retirement benefits plans | | | (1,163 | ) | | | 4,504 | | | | 6,433 | |
Tax, civil and labor provisions | | | 255,420 | | | | 25,578 | | | | (146,052 | ) |
Interest expense | | | 416,426 | | | | 240,367 | | | | 317,008 | |
Provision for dismantling costs | | | (33,138 | ) | | | 4,332 | | | | 714 | |
Provision for loyalty program | | | 9,861 | | | | - | | | | - | |
Others | | | 9,028 | | | | (17,704 | ) | | | (11,371 | ) |
(Increase) decrease in operating assets | | | (488,210 | ) | | | (208,514 | ) | | | (771,024 | ) |
Trade accounts receivable, net | | | (933,558 | ) | | | 87,501 | | | | (395,235 | ) |
Inventories | | | (55,669 | ) | | | 70,937 | | | | (2,939 | ) |
Other current assets | | | 601,573 | | | | (61,161 | ) | | | (185,918 | ) |
Other noncurrent assets | | | (100,556 | ) | | | (305,791 | ) | | | (186,932 | ) |
| | | | | | | | | | | | |
Increase (decrease) in operating liabilities | | | (2,354,209 | ) | | | (974,304 | ) | | | (1,220,375 | ) |
Payroll and related accruals | | | (56,908 | ) | | | 166,994 | | | | (9,584 | ) |
Accounts payable and accrued expenses | | | 85,694 | | | | (26,355 | ) | | | 177,103 | |
Taxes other than income taxes | | | 130,058 | | | | (8,043 | ) | | | (110,144 | ) |
Other current liabilities | | | (521,056 | ) | | | 43,621 | | | | (272,808 | ) |
Other noncurrent liabilities | | | (97,655 | ) | | | (3,031 | ) | | | 88,003 | |
Interest paid | | | (496,103 | ) | | | (265,792 | ) | | | (328,370 | ) |
Income and social contribution taxes paid | | | (1,398,239 | ) | | | (881,698 | ) | | | (764,575 | ) |
| | | | | | | | | | | | |
Cash provided by operations | | | 8,141,375 | | | | 4,532,258 | | | | 4,449,473 | |
| | | Years ended December 31, |
| Note | | 2008 | | 2007 | | 2006 |
Gross operating revenue | 23 | | 23,020,780 | | 21,183,809 | | 20,796,763 |
| | | | | | | |
Deductions from gross revenue | 23 | | (7,041,795) | | (6,456,247) | | (6,153,742) |
| | | | | | | |
Net operating revenue | 23 | | 15,978,985 | | 14,727,562 | | 14,643,021 |
| | | | | | | |
Cost of goods and services | 24 | | (8,726,408) | | (8,029,203) | | (7,780,510) |
| | | | | | | |
Gross profit | | | 7,252,577 | | 6,698,359 | | 6,862,511 |
| | | | | | | |
Operating expenses | | | (3,523,027) | | (3,050,981) | | (2,607,198) |
Selling | 25 | | (2,600,556) | | (2,462,457) | | (1,924,439) |
General and administrative | 26 | | (755,522) | | (838,613) | | (982,623) |
Equity method in subsidiaries | 11 | | 8,262 | | (2,145) | | 1,034 |
Permanent asset disposal, net | 27 | | (50,555) | | 81,653 | | 5,787 |
Other operating income expenses, net | 28 | | (124,656) | | 170,581 | | 269,420 |
| | | | | | | |
| | | | | | | |
Operating income before financial expenses, net | | | 3,729,550 | | 3,647,378 | | 4,255,313 |
| | | | | | | |
Financial income | 29 | | 932,554 | | 503,453 | | 538,108 |
Financial expense | 29 | | (1,160,440) | | (810,385) | | (869,163) |
| | | | | | | |
Financial expenses, net | | | (227,886) | | (306,932) | | (331,055) |
| | | | | | | |
Income before income tax and social contribution | | | 3,501,664 | | 3,340,446 | | 3,924,258 |
| | | | | | | |
Income tax and social contribution | 30 | | (1,081,693) | | (977,486) | | (1,108,107) |
| | | | | | | |
Net income for the year | | | 2,419,971 | | 2,362,960 | | 2,816,151 |
| | | | | | | |
Number of shares outstanding at the balance sheet date – in thousands | | | 505,841 | | 505,841 | | 505,841 |
| | | | | | | |
Earnings per share - R$ | | | 4.7840 | | 4.6718 | | 5.5673 |
Telefônica Brasil S.A.
(formerly Telecomunicações de São Paulo S.A. – Telesp)
Consolidated Statements of cash flows (Continued)
For the years ended December 31, 2011, 2010 and 2009
(In thousands of reais)
| | 2011 | | | 2010 | | | 2009 | |
| | | | | | | | | |
Cash flows generated from (used in) investing activities | | | | | | | | | |
Capital increase in subsidiaries and associates | | | - | | | | (3,557 | ) | | | - | |
Acquisition of fixed and intangible assets, net of grants | | | (4,653,708 | ) | | | (2,126,465 | ) | | | (2,324,141 | ) |
Cash from sales of fixed assets | | | 610,880 | | | | 292,858 | | | | 28,240 | |
Cash from sales of investment | | | - | | | | 178,453 | | | | - | |
Cash and cash equivalents from consolidation of companies | | | 31,095 | | | | - | | | | - | |
Cash and cash equivalents from business combination | | | 1,982,898 | | | | - | | | | - | |
| | | | | | | | | | | | |
Cash used in investing activities | | | (2,028,835 | ) | | | (1,658,711 | ) | | | (2,295,901 | ) |
| | | | | | | | | | | | |
Cash flows generated from (used in) financing activities | | | | | | | | | | | | |
Loans paid | | | (1,426,334 | ) | | | (1,742,818 | ) | | | (432,924 | ) |
New loans obtained | | | 2,123,727 | | | | 74,275 | | | | 272,600 | |
Net payment on derivatives contracts | | | 56,765 | | | | (5,399 | ) | | | 31,467 | |
Dividends and interest on shareholders’ equity paid | | | (5,387,601 | ) | | | (1,919,906 | ) | | | (1,488,705 | ) |
Acquisition of non-controlling interest | | | (33,850 | ) | | | - | | | | - | |
Repurchase of shares | | | (61,620 | ) | | | - | | | | - | |
Cash used in financing activities | | | (4,728,913 | ) | | | (3,593,848 | ) | | | (1,617,562 | ) |
| | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | | 1,383,627 | | | | (720,301 | ) | | | 536,010 | |
| | | | | | | | | | | | |
Cash and cash equivalents at beginning of year | | | 1,556,715 | | | | 2,277,016 | | | | 1,741,006 | |
Cash and cash equivalents at end of year | | | 2,940,342 | | | | 1,556,715 | | | | 2,277,016 | |
| | | | | | | | | | | | |
Changes in cash during the year | | | 1,383,627 | | | | (720,301 | ) | | | 536,010 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands of Reais)
| | | | | Capital reserves | | | Income reserves | | | | | | | | | | | | | |
| | Capital | | | Special goodwill reserve | | | Share premium | | | Treasury shares | | | Donations and subsidies for investments | | | Tax incentives | | | Legal reserve | | | Unrealized gains on available- for-sale securities | | | Cumulative translation adjustments | | | Retained earnings | | | Total shareholders’ equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances on December 31, 2005 | | | 5,978,074 | | | | - | | | | 2,737,087 | | | | - | | | | 8,590 | | | | (58,704 | ) | | | 659,556 | | | | - | | | | - | | | | 879,604 | | | | 10,204,207 | |
Merged capital – TDBH | | | 597,124 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 597,124 | |
Merged losses - TDBH | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (41,476 | ) | | | (41,476 | ) |
Donations and subsidies for investments | | | - | | | | - | | | | - | | | | - | | | | 475 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 475 | |
Treasury shares cancellation | | | - | | | | - | | | | (58,892 | ) | | | - | | | | - | | | | 58,892 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Recess right to the shareholders due to TDBH’s merger – treasury shares | | | - | | | | - | | | | - | | | | (17,719 | ) | | | - | | | | | | | | - | | | | - | | | | - | | | | - | | | | (17,719 | ) |
Unclaimed dividends | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 180,956 | | �� | | 180,956 | |
Net income for the year | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,816,151 | | | | 2,816,151 | |
Appropriations | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | |
Dividends | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,349,604 | ) | | | (2,349,604 | ) |
Interest on shareholders equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (663,000 | ) | | | (663,000 | ) |
Withholding tax on interest on shareholders’ equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (117,000 | ) | | | (117,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances on December 31, 2006 | | | 6,575,198 | | | | - | | | | 2,678,195 | | | | (17,719 | ) | | | 9,065 | | | | 188 | | | | 659,556 | | | | - | | | | - | | | | 705,631 | | | | 10,610,114 | |
Donations and subsidies for investments | | | - | | | | - | | | | - | | | | - | | | | 759 | | | | - | | | | - | | | | - | | | | - | | | | | | | | 759 | |
Unclaimed dividends and interest on shareholders’ equity, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 209,769 | | | | 209,769 | |
Net income for the year | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,363,169 | | | | 2,363,169 | |
Appropriations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,636,569 | ) | | | (2,636,569 | ) |
Interest on shareholders’ equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (545,700 | ) | | | (545,700 | ) |
Withholding tax on interest on shareholders’ equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (96,300 | ) | | | (96,300 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances on December 31, 2007 | | | 6,575,198 | | | | - | | | | 2,678,195 | | | | (17,719 | ) | | | 9,824 | | | | 188 | | | | 659,556 | | | | - | | | | - | | | | - | | | | 9,905,242 | |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands of Reais)
Merger of DABR – 11/30/2008 | | | 282 | | | | 63,074 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 41 | | | | 63,397 | |
Unclaimed dividends and interest on shareholders’ equity, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 163,392 | | | | 163,392 | |
Adoption of Law No. 11,638, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,705 | | | | 2,705 | |
Unrealized gains on available-for-sale securities, net of taxes | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 76,232 | | | | - | | | | - | | | | 76,232 | |
Cumulative translation adjustments | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 862 | | | | - | | | | 862 | |
Net income for the year | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,419,971 | | | | 2,419,971 | |
Appropriations: | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | | |
Dividends | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,970,109 | ) | | | (1,970,109 | ) |
Interest on shareholders’ equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (523,600 | ) | | | (523,600 | ) |
Withholding tax on interest on shareholders’ equity | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (92,400 | ) | | | (92,400 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances on December 31, 2008 | | | 6,575,480 | | | | 63,074 | | | | 2,678,195 | | | | (17,719 | ) | | | 9,824 | | | | 188 | | | | 659,556 | | | | 76,232 | | | | 862 | | | | - | | | | 10,045,692 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands of Reais)
| | | | | Consolidated |
| | | | | 2008 | 2007 | 2006 |
Cash flows from operations | | | |
| Net income for the year | 2,419,971 | 2,362,960 | 2,816,151 |
| | | | | | | |
| Expenses (revenues) not affecting cash | 3,630,372 | 3,210,254 | 3,058,776 |
| | Depreciation and amortization | 2,657,903 | 2,634,384 | 2,641,554 |
| | Monetary and exchange variations | 209,574 | (85,432) | (70,531) |
| | (Gain) Loss from equity holding in subsidiaries | (8,262) | 2,145 | (1,034) |
| | (Gain) Loss on permanent asset disposals | 50,555 | (83,956) | 5,787 |
| | Amortization of goodwill | 117,724 | 64,738 | 34,482 |
| | Provision for doubtful accounts | 538,625 | 652,692 | 412,997 |
| | Pension and other post-retirement benefits plans, net of funding | 53,344 | 20,403 | 30,059 |
| | Other | 10,909 | 5,280 | 5,462 |
| | | | | | | |
Increase (decrease) in operating assets | (1,117,253) | (614,033) | (1,154,715) |
| Trade accounts receivable | (830,435) | (206,524) | (826,158) |
| Other current assets | (60,544) | (268,263) | (161,656) |
| Other noncurrent assets | (226,274) | (139,246) | (166,901) |
| | | | | | | |
Increase (decrease) in operating liabilities | 196,790 | (181,396) | 286,904 |
| Payroll and related accruals | (104,228) | 62,608 | 17,619 |
| Accounts payable and accrued expenses | 263,970 | 247,862 | 89,366 |
| Taxes other than income taxes | 30,907 | (38,206) | 85,323 |
| Other current liabilities | 126,453 | (442,202) | 149,809 |
| Accrued interest | (9,490) | 20,386 | (4,292) |
| Income and social contribution taxes | (56,061) | (17,301) | 51,679 |
| Reserve for contingencies | 57,989 | (36,102) | (98,748) |
| Other noncurrent liabilities | (112,750) | 21,559 | (3,852) |
| | | | | | | |
| Cash provided by operations | 5,129,880 | 4,777,785 | 5,007,116 |
| | | | | | | |
Cash flows generated from (used in) investing activities | | | |
| Acquisition of subsidiary, net of cash acquired | - | (426,353) | - |
| Advance for future share acquisition | - | - | (200,000) |
| Acquisition of fixed and intangible assets, net of donations | (2,102,438) | (2,038,979) | (1,720,886) |
| Cash from sales of fixed assets and investment | 27,364 | 147,693 | 16,783 |
| Cash received on merger | 435 | - | 18,584 |
| | | | | | | |
| Cash used in investing activities | (2,074,639) | (2,317,639) | (1,885,519) |
| | | | | | | |
Cash flows generated from (used in) financing activities | | | |
| Loans repaid | (1,041,391) | (1,634,845) | (1,382,621) |
| New loans obtained | 1,274,364 | 2,635,813 | 1,254,379 |
| Cash received on derivatives contracts | 67,272 | 75,951 | 70,559 |
| Cash paid on derivatives contracts | (329,941) | (188,100) | (214,833) |
| Treasury Shares – Purchase | - | - | (17,719) |
| Dividends and interest on shareholders’ equity paid | (2,217,814) | (2,628,726) | (3,081,782) |
| | | | | | | |
| Cash used in financing activities | (2,247,510) | (1,739,907) | (3,372,017) |
| | | | | | | |
(Increase) decrease cash and cash equivalents | 807,731 | 720,239 | (250,420) |
| | | |
Cash and cash equivalents at beginning of year | 933,275 | 213,036 | 463,456 |
Cash and cash equivalents at end of year | 1,741,006 | 933,275 | 213,036 |
| | | | | | | |
Changes in cash during the year | 807,731 | 720,239 | (250,420) |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands of Reais)
Supplemental cash flow information
| | 2008 | | 2007 | | 2006 |
Income tax and social contribution paid | | 976,932 | | 1,075,643 | | 1,049,944 |
Interest paid | | 264,041 | | 181,115 | | 245,144 |
Details of acquisition of Navytree | | | | | | |
Current assets, excluding cash acquired | | - | | 31,906 | | - |
Permanent assets | | - | | 201,858 | | - |
Current liabilities | | - | | (180,023) | | - |
Noncurrent liabilities | | - | | (2,739) | | - |
| | | | | | |
Net assets on date of acquisition, net of cash acquired | | - | | 51,002 | | - |
Investment in Navytree | | - | | (53,544) | | - |
| | | | | | |
Cash acquired | | - | | 2,542 | | - |
| | | | | | |
Net assets on date of acquisition, net of cash acquired | | - | | 51,002 | | - |
Goodwill recorded at acquisition date | | - | | 860,203 | | - |
Cash paid in advance in 2006 | | - | | (200,000) | | - |
Liabilities assumed | | - | | (293,790) | | - |
| | | | | | |
Net cash paid for acquisition of Navytree | | - | | 417,415 | | - |
| | | | | | |
Noncash transactions: | | | | | | |
Donations and subsidies for investments | | 315 | | 968 | | 475 |
Accounts payable for property, plant and equipment | | 240,072 | | 46,434 | | - |
The accompanying notes are an integral part of these Consolidated Financial Statements.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
STATEMENTS OF ADDED VALUE
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
(In thousands of Reais)
| | December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | |
Revenues | | | 22,016,525 | | | | 20,539,986 | | | | 20,648,186 | |
Sale of goods products and services | | | 21,957,551 | | | | 20,303,064 | | | | 20,173,887 | |
Other income | | | 597,588 | | | | 889,614 | | | | 887,296 | |
Allowance for doubtful accounts | | | (538,625 | ) | | | (652,692 | ) | | | (412,997 | ) |
| | | | | | | | | | | | |
Input products acquired from third parties | | | (8,204,473 | ) | | | (6,838,670 | ) | | | (6,571,169 | ) |
Cost of goods | | | (5,550,391 | ) | | | (4,910,840 | ) | | | (4,773,355 | ) |
Materials, energy, services of third parties and other | | | (2,462,078 | ) | | | (1,727,707 | ) | | | (1,651,757 | ) |
Loss/Recovery of assets | | | (77,925 | ) | | | (66,040 | ) | | | (23,721 | ) |
Other | | | (114,079 | ) | | | (134,083 | ) | | | (122,335 | ) |
| | | | | | | | | | | | |
Gross added value | | | 13,812,052 | | | | 13,701,316 | | | | 14,077,017 | |
| | | | | | | | | | | | |
Retentions | | | (2,775,627 | ) | | | (2,699,122 | ) | | | (2,676,035 | ) |
Depreciation and amortization | | | (2,775,627 | ) | | | (2,699,122 | ) | | | (2,676,035 | ) |
| | | | | | | | | | | | |
Net added value produced | | | 11,036,425 | | | | 11,002,194 | | | | 11,400,982 | |
| | | | | | | | | | | | |
Added value received upon transfer | | | 940,816 | | | | 501,308 | | | | 539,142 | |
(Gain) loss from equity holding of subsidiaries | | | 8,262 | | | | (2,145 | ) | | | 1,034 | |
Financial income | | | 932,554 | | | | 503,453 | | | | 538,108 | |
| | | | | | | | | | | | |
Total added value to be distributed | | | 11,977,241 | | | | 11,503,502 | | | | 11,940,124 | |
| | | | | | | | | | | | |
Distribution of added value | | | (11,977,241 | ) | | | (11,503,502 | ) | | | (11,940,124 | ) |
| | | | | | | | | | | | |
Payroll and related charges | | | (629,360 | ) | | | (767,999 | ) | | | (658,359 | ) |
Salary | | | (456,348 | ) | | | (451,923 | ) | | | (397,447 | ) |
Benefits | | | (95,194 | ) | | | (110,578 | ) | | | (110,114 | ) |
Payroll tax | | | (40,896 | ) | | | (39,940 | ) | | | (39,907 | ) |
Other | | | (36,922 | ) | | | (165,558 | ) | | | (110,891 | ) |
Taxes, fees and contributions | | | (7,128,655 | ) | | | (7,185,213 | ) | | (7,270,036 | ) |
Federal tax | | | (2,454,034 | ) | | | (2,373,556 | ) | | | (2,512,528 | ) |
State tax | | | (4,576,328 | ) | | | (4,724,120 | ) | | | (4,695,873 | ) |
Municipal tax | | | (98,293 | ) | | | (87,537 | ) | | | (61,635 | ) |
Interest on third parties capital | | | (1,636,959 | ) | | | (1,104,058 | ) | | | (1,081,525 | ) |
Interest | | | (418,664 | ) | | | (335,382 | ) | | | (374,374 | ) |
Rent and leasing operations | | | (481,238 | ) | | | (384,568 | ) | | | (297,456 | ) |
Other | | | (737,057 | ) | | | (384,108 | ) | | | (409,695 | ) |
Dividends and interest on shareholders’ equity | | | (2,419,971 | ) | | | (2,362,960 | ) | | | (2,110,520 | ) |
Interest on shareholders’ equity | | | (616,000 | ) | | | (642,000 | ) | | | (780,000 | ) |
Dividends | | | (1,803,971 | ) | | | (1,720,960 | ) | | | (1,330,520 | ) |
Other | | | (162,296 | ) | | | (83,272 | ) | | | (114,053 | ) |
Reserve for contingencies | | | (162,296 | ) | | | (83,272 | ) | | | (114,053 | ) |
Retained earnings | | | - | | | | - | | | | (705,631 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESPDecember 31, 2011, 2010 and 2009
(In thousands of reais)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
1. Operations and Background
1. | Operations and background |
| a) | Controlling shareholders |
Telefônica Brasil S.A. (formerly Telecomunicações de São Paulo S.A. - Telesp (hereinafter “Telesp”– Telesp), hereinafter “Telefônica Brasil” or “Company”), is headquartedheadquartered at Rua Martiniano de Carvalho, 851, in the capital of the Statestate of São Paulo. TelespPaulo, Brazil. Telefônica Brasil belongs to the TelefónicaTelefonica Group, the telecommunications industry leader in Spain andwhich is also present in several European and Latin American countries. The Company is controlled by Telefónica S.A., which as of December 31, 2008, holds a2011, held total direct and indirect interest of 87.95%73.81% of which 85.57%91.76% are common shares and 89.13%64.60% are preferred shares.shares (87.95% in December 31, 2010, of which 85.57% were common shares and 89.13% were preferred shares).
The Company’sCompany and its subsidiaries’ basic business purpose is the rendering of fixed wire telephone services in the state of São Paulo and mobile telephone services nationwide under Fixed Switch Telephone Service Concession Agreement - STFC and authorizations, respectively granted by the National Communications Agency (ANATEL), which is in charge of regulating the telecommunications sector in Brazil under the Law n°9,472 of July 16, 1997 – General Law of Telecommunications modified by Law n° 9,986 of July 18, 2000 (Note 1.c)1.b.1 and 1.b.2.). The Company and its subsidiaries have also has authorizations from ANATEL directly or through its subsidiaries, to provide other telecommunications services, such as data communication to the business market, and broadband Internetinternet services under(under the Speedy and Ajato brandbrands), mobile telephone services (SMP, through Vivo) and since the second half of 2007, Paypay TV services (i) by satellite all over the country (Telefônica(Telefonica TV Digital) and (ii) using MMDS(MMDS) Multichannel Multipoint Distribution Service technology in the cities of São Paulo, Rio de Janeiro, Curitiba and Porto Alegre. The authorizations for use of 2.5GHz frequency associated with pay TV service by MMDS technology were extended in February 16, 2009 and await a decision from ANATEL regarding the payment conditions for renewal.
The Company is registered with the Brazilian Securities and Exchange Commission (CVM) as a publicly held companypublicly-held Company - category A (issuers authorized to negotiate any securities) and its shares are traded on the São Paulo Stock Exchange (BOVESPA)(BM&FBovespa). The Company is also registered with the USU.S. Securities and Exchange Commission (SEC) and its American DepositoryDepositary Shares (ADSs -(ADSs) – level II)II, listed only as preferred shares, are traded on the New York Stock Exchange (NYSE).
| c)b.1. | The STFCFixed Switch Telephone Service Concession Agreement (STFC) |
The Company is athe concessionaire of the fixed switch telephone serviceFixed Switched Telephone Service (STFC) to render fixed telephony services in the local network and domestic long-distancenational long distance calls originated in Regionsector 31 of region 3, which comprises the State of São Paulo in Sectors 31, 32 and 34,(except the municipalities that form the sector 33), established in the General Concession Plan (PGO)(PGO/2008).
The Currentcurrent Concession Agreement’s renewal,Agreement dated December 22, 2005,June 30, 2011, in forceplace since JanuaryJuly 1, 2006,2011 awarded as an onerous title, will be valid until December 31, 2025. However, the agreement can be reviewed on December 31, 2010, 2015 and December 31, 2020. Such condition allows ANATEL to set up new requirements and goals for universalization and high quality of telecommunication services, according to the conditions in forceplace at that moment.
The Concession Agreement establishes that all assets owned by the Company and which are indispensable to the provision of the services described on such agreement are considered reversible assets and are deemed to be part of the concession assets. These assets will be automatically returned to ANATEL upon expiration of the concession agreement, according to the regulation in force at that moment. On December 31, 2008,2011, the net book valuecarrying amount of reversible assets is estimated at R$6,929,5326,698,899 (R$7,187,898 in 2007)6,818,075 as of December 31, 2010), comprised of switching and transmission equipment and public use terminals, external network equipment, energy equipment and system and operation support equipment.
EveryIn accordance with the Concession Agreement, every two years, during the agreement’s new 20-year period, public regime companies will have to pay a renewal fee which thatwill correspond to 2% of its prior-year SFTC revenue, net of taxes and social contributions. Exceptionally,In April of 2011, the firstCompany made a payment offor this biannual fee happened on April 30, 2007 by valueconcept of R$224,760,186,852, based on the 20062010 STFC net revenues. The next payment is scheduled for April 30 of 2009 based on the 2008 net revenues (note 21).
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| d)b.2. | The telecommunicationsCommitments and relatives frequencies for mobile services subsidiaries and associated companies |
The authorizations granted by ANATEL may be renewed just once, for a 15-year period. Biannually, after the first renewal, a payment of rates equivalent to 2% (two percent) of the company’s revenue for the preceding year, net of taxes and mandatory social contributions related to the application of the Basic and Alternative Plans of Service.
The subsidiary Vivo S.A. is engaged in cellular mobile telephone services (Personal Mobile Service – SMP), including the activities necessary or useful for the performance of said services, in conformity with the authorities granted to it.
In the auctions held by ANATEL on December 14 and 15, 2010, Vivo S.A. was the winner in 23 lots offered for sale the remaining sub-ranges of 900 MHz and 1800 MHz frequencies, in accordance with the Invitation to Bid n°002/2010/PVCP/SPV-ANATEL.
On April 28, 2011, in its 604th meeting held, ANATEL’s Board of Directors, decided in relation to the bidding instructions for H Band surplus (Bidding Instruction No. 002/2010/PVCP/SPV-Anatel) approved Lots 41, 42, 44, 45, 76 to 84, 92, 101, 105, 107, 115, 119, 122, 124, 128 and 163 for Vivo S.A. and other bid-winning operators for lots of that auction.
On May 30, 2011, the decision was published in the Official Gazette (DOU) and the authorization terms were signed with ANATEL. Accordingly, with the ratification of the aforementioned lots, Vivo S.A. increased its overall spectrum and began to operate in the 900 Mhz and 1.800 Mhz frequencies.
On the date of the signature of the Authorization Terms, R$81,175 was paid relating to 10% of the total value and the remaining 90% was paid on December 2011.
The amount of R$811,754, relating to a total of 23 lots, was adjusted in accordance with the remaining license period and recorded as an intangible asset.
On August 18, 2011, Act No. 7012 was published in the Official Gazette (DOU), which authorized Vivo S.A. to provide Switched Fixed Telephone Services (STFC) to the general public. Vivo S.A. is operating under this authorization nationwide, except in the State of São Paulo, where the company operates.
Vivo S.A. is engaged in providing the Personal Mobile Service (SMP), including activities necessary or useful for the execution of these services, in accordance with the authorizations granted, as follows:
Vivo S. A.:
Wholly-owned subsidiary of the Company, Vivo S.A. is engaged in providing SMP services, including activities necessary or useful for the execution of these services, in accordance with the authorizations granted.
Telecom S.A. is a wholly-owned subsidiary of the Company, engaged in the following services:
A. Telecom S.A. is a closely held, wholly-owned subsidiary of by the Company. It is engaged primarily in providing telecommunication and data services and customer internal telephony network maintenance. The principal services are as follows:
(i) | Digital Condominium: integrated solution equipment and services for voice transmission, data and images on commercial buildings; |
(ii) | Installation,Maintenance of customer internal telephony network, i.e. installation, maintenance, exchange and extension of new points of internal telephony wire in companies and houses; |
(iii) | Basic plan of maintenance (“PMB”), plan of prevention maintenance of aggregated service; |
(iv) (ii) | iTelefônica, provider of free Internetinternet access; |
(v) | (iii) | Speedy Wi-Fi, broadband service for wireless Internetinternet access; |
(vi) | “Doctor Speed” and “Speed Segurança”, firewall softwares to detect and remove the virus; |
(vii) (iv) | Speedy Corp, broadband provider developed specially toespecially for the corporate market; |
(viii) | (v) | Integrated IT solution named “Posto Informático” allowing access to Internet, connection of private networks and rentrental of IT equipment;equipment. Since August 2010 the service of internet access has been provided by Telefônica Brasil; |
(ix) | (vi) | Product At-home solutions, home automation that is among the consulting services and development of automation design and installation and configuration of the solution; |
| (vii) | Satellite TV services (Direct to Home – DTH) throughout country.the country and by optical fiber – IPTV (Internal Protocol Television). The DTH is a special type of subscription TV service, which uses satellites for direct distribution of TV and audio signals to subscribers. |
Telefônica Sistema de Televisão S.A. (formerly Lightree Sistema de Televisão S.A.):
The corporate purpose of Telefônica Sistema de Televisão S.A. (“TST”) is to provide pay-TV services in the form of Multichannel Multipoint Distribution Service (MMDS), as well as telecommunication and Internet-basedinternet-based services.
Ajato Telecomunicações Ltda.
The corporate purpose of Ajato Telecommunications Ltd is to provide telecommunications and IT services, access to telecommunications network, internet and radio, including telemarketing, image and data services, trade lease, import, export, maintenance and repair for those equipments.
Telefônica Data S.A. (formerly Telefônica Empresas S.A.):
The corporate purpose of Telefônica Data S.A. is to provide and operate telecommunications services, as well as to prepare, implement and deploy projects involving integrated corporate solutions, telecommunication advisory services, technical assistance services, sale, lease and maintenance of telecommunication equipment and networks.
| Aliança Atlântica Holding B.V.: |
This is
Aliança company formed under the laws of theAtlântica Holding B.V.
Company based in Netherlands, in Amsterdam, whose main asset is the participation of 0.61% in Portugal Telecom. As of December 31, 2008, the Company holdswith a 50% interest owned by Telefonica Brasil, holds cash from the sale of Portugal Telecom’s shares in AliançJune 2010 and a Atlânticasmall interest in Zon Multimedia, a company of Portugal Telecom Group which provides pay-TV services, internet, distribution of audiovisual content, cinema and Telefónica S.A. holds the remaining 50%.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
telecommunications services.
Companhia AIX de Participações
This company is engaged in the Refibra consortium, as a leader, as well as in both direct and indirect development of activities related to the construction, conclusion and operation of underground fiber optic networks. Currently, TelespTelefônica Brasil holds a 50% interest in this company.
| Companhia ACT de Participações |
Companhia ACT is engaged in the Refibra consortium, as a leader, as well as in activities related to providing technical assistance for the preparation of Rede Refibrathe network conclusion project by providing studies to make it more profitable, as well as to inspect the activities in progress related to the project. Currently, TelespTelefônica Brasil holds a 50% interest in this company.
2. Corporate Events
a. | Acquisition of Telefônica Televisão Participações S.A. (formerly Navytree Participações S.A) |
On October 31, 2007, ANATEL concluded the regulatory analysis of the association between Abril Group and the Company signed on October 29, 2006, and approved such transaction..
Accordingly, the Company acquired 100% of the capital of Telefonica TelevisãoGTR Participações S.A. (TTP), a company that owns interests in companies providing subscription TV services. Telefonica Televisão holds the following ownership interests:
| Ownership Interests |
| ON | | PN |
| | | |
Telefônica Sistemas de Televisão S.A. | 100.00% | | 100.00% |
Comercial Cabo TV São Paulo S.A. | 19.90% | | 100.00% |
Lemontree Participações S.A. | - | | 100.00% |
TVA Sul Paraná S.A. | 49.00% | | 100.00% |
GTR-T Participações e Empr.S.A. | - | | 100.00% |
| | | |
On February 29, 2008, the Company paid a capital increase in Telefônica Televisão with shares held in A.Telecom. With this operation, A.Telecom became a wholly-owned subsidiary of TTP.
On July 25, 2008 the Company paid a capital increase in Telefonica Televisão with shares held in Telefonica Data S.A. With this operation, T.Data became a wholly-owned subsidiary of TTP.
| b. Merger of Telefônica Data Brasil Participações Ltda. and Telefônica Televisão Participaçõese Empreendimentos S.A.:
|
Pursuant to the Press Release published on October 21, 2008, the Company’s Board of Directors approved, on that date, the proposed corporate reorganization involving the Company, Telefônica Data do Brasil Participações Ltda. (“DABR”) and Telefônica Televisão Participações S.A. (“TTP”), as approved at the General Shareholders’ Meeting held by Telesp on November 11, 2008.
The transaction includedbusiness purpose of GTR Participações e Empreendimentos S.A. is to hold equity interest in other companies, which are engaged in providing cable and pay-TV services, telecommunications services in general, the following steps:production, purchase, licensing, import and distribution of television programs, either its own or third parties’, spare parts and equipment, management and rendering of telecommunications and pay-TV service platforms.
1st Step: DABR was merged into Telesp,TVA Sul Paraná S.A.:
The business purpose of TVA Sul Paraná S.A. is to provide cable and as a result, the companypay-tv services, telecommunications services in general, produce, purchase, license, import and distribute television programs, either its shares ceased to exist. Telesp shares then owned by DABR were directly assigned to controlling shareholder of SP Telecomunicaçõesown or third parties’, spare parts and equipment, manage, update and exploit telecommunications and pay-TV service platforms and publish journals.
Lemontree Participações Ltda. upon merger, withS.A.:
The business purpose of Lemontree S.A. is to hold equity interest in other companies, which are engaged in providing cable and pay-TV services, telecommunications services in general, the rights applicableproduction, purchase, licensing, import and distribution of television programs, either its own or third parties’, spare parts and equipments, management, updating and exploitation of telecommunications and pay-TV services platforms, and data management and trading.
Comercial Cabo TV São Paulo S.A.:
The business purpose of Comercial Cabo TV São Paulo S.A. is to outstanding shares issued by Telesp remaining unchanged. DABR’s net equity included goodwill from Telesp shares,provide cable and pay-TV services, advisory and consultancy services in telecommunications in general, to produce, purchase, license, import and distribute television programs, either its own or third parties’, spare parts and equipment, manage, update and exploit telecommunications and pay-TV service platforms, and to engage in all types of marketing and advertisement.
The table below shows the amountlist of R$185,511, which wasdirect and indirect wholly-owned subsidiaries of the Company as well as the percentage ownership shareholdings:
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
recorded at the acquisition date based on future profits. In accordance with Law No. 9532/1997, amortization of goodwill will provide Telesp with a tax benefit of R$63,074 to be capitalized by the controlling shareholder upon realization, pursuant to CVM Instruction No. 319/1999. Other shareholders have preemptive rights in the subscription of capital increases.
The following table shows DABR’s merged equity:
| DABR |
| |
Assets | |
Current assets | 1,021 |
Permanent assets | |
Investments | 63,074 |
Goodwill | 185,511 |
Provision for safeguarding shareholders’ rights | (122,437) |
Fixed assets | 44 |
| |
Liabilities | |
Current liabilities | (742) |
| |
Net equity | 63,397 |
| |
Capital increase | 282 |
Capital reserve | 63,074 |
Retained earnings (*) | 41 |
| |
Net equity | 63,397 |
(*) change in equity from the date of the appraisal report to the date of the merger.
2nd Step: TTP was merged into Telesp, and, as a result, the company and its shares ceased to exist. Goodwill generated by the acquisition of this company in 2007 was recorded based on expected future profits, in the amount of R$848,307, and will provide Telesp with a tax benefit of R$288,424.
The following table shows TTP’s merged equity:
| TTP |
| |
Assets | |
Current assets | 1,744 |
Permanent assets | |
Investments | 1,108,872 |
| |
Liabilities | |
Current liabilities | (3) |
| |
Net equity (*) | 1,110,613 |
(*) Net equity in the amount of R$1,110,613 represented the Company’s investment in TTP on the merger date.
For merger purposes, the net equities of TTP and DABR were measured at book value on September 30, 2008 and October 17, 2008, respectively, by an independent appraiser whose appointment was ratified at the General Shareholders’ Meeting held by Telesp on November 11, 2008. The merged companies had no unrecorded contingent liabilities that would have been assumed by Telesp as a result of this transaction. The transaction is not subject to approval by Brazilian or foreign regulatory entities or antitrust agencies. No withdrawal rights were exercised since the subsidiaries had no minority shareholders.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Telesp management believes that this corporate reorganization meets the Company’s and its shareholders’ interests, and will allow increased synergies, optimized managerial risks and simplify administrative and corporate structures, reducing costs as well as generating tax benefits opportunities and cash flow improvement for the Company and its shareholders.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESPSubsidiaries | Dec/2011 | Dec/2010 |
Vivo S.A. (1) | 100% | - |
Telefônica Data S.A. | 100% | 100% |
A.Telecom S.A. | 100% | 100% |
Telefônica Sistema de Televisão S.A. | 100% | 100% |
Ajato Telecomunicações Ltda. | 100% | 100% |
GTR Participações e Empreend. S.A. (2) | 66.67% | 66.67% |
TVA Sul Paraná S.A. (2) | 91.50% | 91.50% |
Lemontree Participações S.A. (2) | 83.00% | 66.67% |
Comercial Cabo TV São Paulo S.A. (2) | 93.19% | 86.65% |
Aliança Atlântica Holding B.V.(3) | 50% | 50% |
Companhia AIX de Participações (3) | 50% | 50% |
Companhia ACT de Participações (3) | 50% | 50% |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(1) fully consolidated as from April 2011 (Notes 1.e and 4).
For(2) fully consolidated as from January 2011.
(3) jointly controlled.
| d) | Share Trading in Stock Exchanges |
| d.1. | Shares traded in the São Paulo Stock Exchange (BM&FBovespa) |
On September 21, 1998, the years ended December 31, 2008, 2007Company started trading its shares in the São Paulo Stock Exchange (BM&FBovespa), under tickers TLPP3 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
3. Base of Presentation of the Financial StatementsTLPP4, for common and preferred shares.
The accompanying individualExtraordinary Shareholders’ Meetings of Vivo Participações S.A. (Vivo Part.) and Telesp held on October 3, 2011, approved the merger of Vivo Part. into Telesp, which, on the same date, changed its corporate name to Telefônica Brasil S.A. On October 6, 2011, the Company changed its ticker codes to VIVT3 and VIVT4 for common and preferred shares, respectively, and the stock exchange code for Telefônica Brasil (see note 4).
| d.2. | Shares traded in the New York Stock Exchange (NYSE) |
On November 16, 1998, the Company started the ADR trading process in the New York Stock Exchange (NYSE), which currently have the following characteristics:
| · | Type of share: preferred. |
| · | Each ADR represents 1 (one) preferred share. |
| · | The shares are traded in the form of ADRs through code “VIV” on the New York Stock Exchange. |
| · | Foreign depositary bank: The Bank of New York. |
| · | Custodian bank in Brazil: Banco Itaú S.A. |
| e) | Corporate events in 2011 |
Merger of shares of Vivo Participações S.A. into Telefônica Brasil
In a meeting held on March 24, 2011, ANATEL gave prior consent to the Corporate restructuring operation involving the Company and Vivo Participações S.A., with Act No. 1,970, dated April 1, 2011, published in the Official Gazette on April 11, 2011.
The Company’s Extraordinary Shareholders’ Meeting held on April 27, 2011, unanimously approved the
Protocol of Merger and Instrument of Justification agreed between the Company and Vivo Part., with each share of Vivo Part. exchanged for 1.55 shares of the Company. The Company’s common and preferred shareholders and Vivo Part.’s common shareholders had until May 30, 2011 to exercise their right to withdrawal. Shareholders that could evidence shareholding on December 27, 2010, the date of publication of the Notices of Material Fact relating to the transaction, and opted for the right to withdraw were refunded for the shares they had of the respective companies. Amounts refunded to the Company’s common and preferred shareholders and to Vivo Part.’s common shareholders were R$23.06 and R$25.30 per share, respectively, calculated based on the net worth value of the shares, as stated in the balance sheet of each of the companies, dated as of December 31, 2010.
Corporate restructuring – Grouping of SMP Authorizations and Simplification of Corporate Structure
Vivo Part. Board of Director’s Meeting held on June 14, 2011 approved a proposal to group the authorizations for the provision of SMP services (by the time held by Vivo Part. in the state of Minas Gerais and by Vivo S.A. in the other states of Brazil), bringing together the operations and the Authorization Terms for SMP services at Vivo S.A.
The means proposed in making this corporate restructuring viable were the transfer, on October 1, 2011, of assets, rights and liabilities related to the operation of SMP services in Minas Gerais from Vivo Part. to Vivo S.A. (mobile operator of the group that had SMP authorizations for the other states in Brazil). When this grouping was completed, Vivo Part became a holding company.
In accordance with the provisions of Law No. 6,404/76, a specialized company was engaged to prepare a valuation study for the part of Vivo Part.’s net assets corresponding to SMP operations in the state of Minas Gerais that was transferred to Vivo S.A.’s equity, as well as for the net equity of Vivo Part. that was incorporated into the Company.
Due to the fact that Vivo Part. was a whole owned subsidiary of the Company, since April 27, 2011, whose net equity already included the investment of the shares in Vivo S.A., the merger: i) did not result in a capital increase for the Company; ii) there was no exchange of shares held by Vivo Part.’s non-controlling shareholders for Company’s shares; and iii) there was no need to prepare a net equity valuation report to market price for the calculation of the exchange share ratio, as there were not any exist non-controlling shareholders to be protected.
Accordingly, under the terms of article 226, paragraphs I and II of Law No. 6,404/76, shares held by the Company in the net equity value of Vivo Part. were cancelled. On conclusion of the corporate restructuring, Vivo Part. was incorporated by the Company on October 3, 2011 and Vivo S.A. became its full subsidiary, simplifying and rationalizing the cost structure of the companies involved.
| f) | Agreement between Telefónica S.A. and Telecom Italia (Act No. 3,804 as of July 07, 2009 and Act No. 68,276 as of October 31, 2007, both from ANATEL’s Board |
In October 2007, TELCO S.p.A. (in which Telefónica S.A holds an interest of 42.3%), completed the acquisition of 23.6% of Telecom Itália. Telefónica S.A. has the control of the Company, which also has the control of Vivo S.A. Telecom Italia holds an interest in TIM Participações S.A (“TIM”), which is a mobile telephone operator in Brazil. However, the Company does not have any direct involvement in the operations of TIM. Additionally, any transactions between the Company, its subsidiaries and TIM are transactions made in the regular course of business, which are regulated by ANATEL.
2. | Basis of presentation of the consolidated financial statements |
The consolidated financial statements as of December 31, 20082011 and 2007 were prepared2010 are presented by the Company in accordance whichwith the International Financial Reporting Standards (IFRS) issued by IASB and in accordance with the accounting practices adopted in Brazil, which are based on accounting practices issued from Braziliancomprise the provisions of corporate law and accounting standards and procedures established by the Brazilian Securities Commission (CVM).
On January 1, 2008, Law No. 11638, of December 28, 2007, substantially amends Chapter XV of Law No. 6404 (Corporation Law), which addresses the financial statements. On December 3, 2008, Provisional Executive (MP) No. 449 was published and produced some adjustmentslegislation set forth in Law No. 64046,404/76, as amended by Law no. 11,638/07 and by Law No. 11638.
As permitted by CVM Resolution No. 565, which approved Technical Pronouncement No. 13, issued by the Brazilian Accounting Pronouncements Committee (CPC), the Company opted for the first-time adoption of Law No. 11638 and of MP No. 449/08 in its financial statements for the year ended December 31, 2008. Accordingly, there were changes in the accounting practices as compared to the year ended December 31, 2007.
Changes in accounting practices taken into consideration when preparing or presenting the financial statements for the year ended December 31, 2008no. 11,941/09, and the initial balance sheet for December 31, 2008 were measured and recorded by the Company based on the following accounting pronouncements issued by the Brazilian Accounting Pronouncements CommitteeBoard (CPC) and approved by the Brazilian Securities Commission (CVM):CVM.
· | Conceptual Framework for Preparation and Presentation of the Financial Statements, as approved by CVM Resolution No. 539; |
· | CPC 01 Impairment of Assets; |
· | CPC 02 Effects on Changes in Exchange Rates and Financial Statement Conversions; |
· | CPC 03 Cash Flows Statements;
|
· | CPC 04 Intangible Assets; |
· | CPC 05 Related Party Disclosures;
|
· | CPC 09 Statement of Value Added;
|
· | CPC 12 Present Value Adjustment;
|
· | CPC 13 First-time adoption of Law No. 11638/07 and Provisional Executive Act No. 449/08;
|
· | CPC 14 Financial Instruments: Recognition, Measurement and Disclosure.
|
Approval of the issuance of these financial statements occurred in the Board of Directors meeting held on February 15, 2012.
The initialFor comparative purposes, the accompanying financial statements for 2011 include the consolidated balance sheet assheets at of December 31, 2007 (transition date) was prepared considering the required exceptions and some of the elective exemptions permitted by CPC Technical Pronouncement No. 13, with only the exempted classification of financial instruments being relevant. Although CPC Technical Pronouncement No. 14 requires the financial instruments to be classified upon initial recognition, for the purpose of first-time adoption, CPC Technical Pronouncement No. 13 allows classification on the transition date, which was the option elected by the Company.
Pursuant to the requirements for the first-time adoption of the new accounting practices, the Company presents below, for fiscal year 2008, a brief description2010 and the amounts impacting shareholders’consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in shareholder’s equity and net income, from the Company and consolidated as these relate to the changes introduced by Law No. 11638/08 and by Provisional Executive No. 449/08.
a. Capital Lease: CPC Technical Pronouncement No. 06
Assets under lease agreements are classified either as finance leases or operating leases. Under a finance lease, a lessor transfers substantially all the risks and rewards incident to ownership to the lessee. All other leases are classified as operating leases.
In the capacitystatement of lessor, the Company executed lease agreements for IT equipment (Posto Informático) that meet the criteria of finance leases. On the date the equipment is installed, revenue is recognized for the
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
present value of lease payments and matched with accounts receivable. Investments made in the acquisition of equipment are recorded as “Inventories” and recognized as lease costs upon installation. The difference between gross and net investment value is recognized as unrealized financial incomecash flows, and the related financial income are posted to each period over the lease term reflecting a periodic interest rate on the outstanding liability balance. This transaction is accounted for as a multiple element arrangement whereby revenues are allocated to the lease and non-lease deliverables included in the bundled arrangement based upon the estimated relative fair values of each element. The revenues from access to Internet and connection of private networks are recognized on a monthly basis as communication services over the term of lease contract, and the revenue from sale-types lease of IT equipment is recognized when the equipment is installed at the customer premises and risks and benefits of ownership have been transferred.
b. Financial Instruments: CPC Technical Pronouncement No. 14 and CVM Instruction No. 475
Financial assets and liabilities should be initially classified and measured based on the following categories:
Financial assets | Valuation method |
Financial assets at fair value through profit or loss | Fair value |
Investments held to maturity | Amortized cost |
Loans and receivables | Amortized cost |
Available for sale | Fair value |
| |
Financial liabilities | |
Financial liabilities at fair value through profit or loss | Fair value |
Financial liabilities not at fair value | Amortized cost |
Financial assets and liabilities recognized on the balance sheet for December 31, 2008 are shown by category in Note 34.
Financial assets and liabilities should be initially measured at fair value. The fair value of financial assets and liabilities is determined based on (i) the price quoted in an active market or, if an active market does not exist, (ii) valuation techniques that allow estimating fair value on the transaction date, considering arm’s -length transactions between knowledgeable and willing parties.
Financial assets and liabilities are subsequently measured at fair value or amortized cost. Amortized cost corresponds to (i) the initial carrying amount of financial assets or liabilities (ii) less amortizations of principal and (iii) more or less interest accrued under the effective interest method.
The effects of subsequent measurement of financial assets and liabilities are directly posted to the net income for the year as financial income or expenses, except for financial assets available for sale, whose subsequent measurement is reflected under shareholders’ equity as adjustments for equity valuation (Note 11).
Derivative financial instruments are classified as financial assets or liabilities at fair value through profit and loss, except where they meet the criteria for hedge instruments.
Derivatives aimed at protecting specific market risks (foreign currency and interest rate risks) and considered to be effective are classified as fair value hedges. In this category, both the derivative and the hedged item are adjusted to fair value at each balance sheet date.
c. Present Value Adjustment: CPC Technical Pronouncement No. 12
Some long-term assets and liabilities must be initially measured at the discounted present value. The Company adopted this concept for ICMS assets generated by the acquisition of fixed assets, to be realized over 48 months.
d. Cumulative Translation Adjustments: CPC Technical Pronouncement No. 02
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Foreign exchange gains and losses arising from the translation into reais of foreign investments accounted for under the equity method of accounting using a different functional currency must be recorded under the parent company’s shareholders’ equity as Cumulative Translation Adjustments. The Company has investments in Aliança Atlântica (jointly-owned subsidiary) headquartered in the Netherlands.
The effects of the first-time adoption of Law No. 11638/07 and Provisional Executive Act No. 449/08 on net income and shareholders’ equity for 2008 are shown below:
| | | | |
| | Net income | | Company/Consolidated |
Effects of first-time adoption | | Consolidated | | Shareholders’ equity |
| | | | |
| | | | |
Balances before adoption of Law No. 11638/07 | | 2,463,610 | | 9,966,181 |
| | | | |
Lease (lessor and lessee) (Note 3.a) | | (33,981) | | 11,233 |
Adjustments for equity valuation (Note 3.b) | | - | | 115,504 |
Financial instruments (Note 3.b) | | (11,236) | | 19,092 |
Discount to present value of long-term assets (Note 3.c) | | (2,946) | | (31,997) |
Cumulative translation adjustments (Note 3.d) | | - | | 1,306 |
Additions to property, plant and equipment | | 304 | | (289) |
Equity method | | - | | - |
Other | | - | | (10) |
Deferred taxes | | 4,220 | | (35,328) |
| | | | |
Effects of Law No. 11638/07 | | (43,639) | | 79,511 |
| | | | |
| | | | |
| | | | |
Balances per 12/31/2008 financial statements | | 2,419,971 | | 10,045,692 |
Additionally, due to the elimination of the non-operating income/expenses account by Provisional Executive No. 449/08, the Company reclassified R$8,376 and R$131,596 reported in the financial statementsnotes thereto for the years ended December 31, 20082010 and 2007, respectively, to other operating income/expenses accounts and net proceeds from the sale of fixed assets and investment, and disclosed the matter in a footnote.
The approval of the financial statements conclusion occurred in an Executive Committee Meeting on February 12, 2009.
AssetsThe Company states that the consolidated financial statements are in compliance with International Financial Reporting Standards (IFRS) issued by the IASB and liabilitiesalso with the pronouncements, interpretations and guidance issued by CPC in place on December 31, 2011, which include the new pronouncements, interpretations and amendments for the following standards, amendments and interpretations issued by the IASB (International Accounting Standards Board) and IFRIC (International Financial Reporting Interpretations Committee) which entered into force as of January 1, 2011:
IAS 24 (Revised) Related Party Disclosures
This revised standard introduces the following changes: (i) provides a partial exemption for government related entities, requiring disclosure of balances and transactions between them only if they are classified as “current” when their realizationindividually or liquidation will probably occur incollectively significant; and (ii) provides a new revised definition of a “related party”. The adoption of this standard did not impact the next twelve months. Otherwise, theyCompany’s financial situation or results.
Changes to IAS 32 Financial Instruments Presentation
This change is intended to clarify that subscription right issues that allow the acquisition of a fixed number of own equity instruments at a fixed price will be classified as non-current assetsequity, irrespective of currency it is denominated and liabilities.its exercise price, assuming that the issuance is made to all shareholders of a given class of shares or equity proportionate to the number of securities that they hold. The adoption of these changes did not impact the Company’s financial situation or results.
Accounting estimates are considered for the financial statements preparation process. Such estimates are based on objective and subjective factors accordingImprovements to management’s judgment for the appropriate amounts to be recorded in the financial statements.International Financial Reporting Standards (IFRS) (May 2010)
Transactions which involve estimates mentioned above may resultThis text introduces a series of improvements to IFRS in different amounts when realized in subsequent periods dueforce mainly to inaccurate results regardingeliminate inconsistencies and clarify the estimation process. The Company revises its estimates and assumptions periodically.wording of some of these standards. These improvements did not impact the Company’s financial situation or results.
IFRS 3 Business Combinations
The consolidated financial statements include the accounts and transactionsmeasurement options available for non-controlling interest (NCI) were amended. Only components of NCI that constitute a present ownership interest that entitles their holder to a proportionate share of the following directly and indirectly wholly-owned subsidiaries and jointly - -controlled affiliates whichentity’s net assets in the event of liquidation should be measured at either fair value or at the present ownership instruments’ proportionate share of the acquiree’s identifiable net assets. All other components are proportionally consolidated:to be measured at their acquisition date fair value.
The amendments to IFRS 3 are effective for annual periods beginning on or after 1 July 1, 2011.
IFRIC 19 Extinguishing financial liabilities with equity instruments
This interpretation establishes that: (i) when the conditions of a financial obligation are renegotiated with a lender and such lender agrees to accept equity instruments from that company in order to settle that financial liability in full or in part the instruments issued will be considered as part of an installment paid to settle the financial liability; (ii) these instruments will be measured at their fair value, except when these cannot be reliably measured, in which case measurement of new instruments should reflect the fair value of the settled financial liability; and (iii) the difference between the book value of the cancelled financial liability and the initial amount of equity instruments issued is recorded in the income for the period. The adoption of criteria introduced by this new interpretation did not have any impact on the Company’s financial situation or results.
Changes to IFRIC 14 Prepayments of a Minimum Funding Requirement
This change is applied in specific situations when an entity has an obligation to make minimum annual contributions in relation to its post-employment defined benefits plans and makes prepayments to cover these requirements. The change allows an entity to treat the economic benefits of such prepayment as an asset. The adoption of these criteria did not have an impact on the Company’s financial situation or results.
New IFRS and Interpretations of the IFRS Interpretations Committee (IFRIC) not yet effective at December 31, 2011.
At the date of these financial statements the following IFRS, amendments and interpretations of the IFRIC have been issued but their application was not mandatory:
Standards and Amendments to Standards | Application required: fiscal years beginning: |
Amendments to IAS 1 | Presentation of items of other comprehensive income | July 1, 2012 |
Amendments to IAS 12 | Deferred tax: Recovery of underlying assets | January 1, 2012 |
IFRS 9 | Financial instruments | January 1, 2015 |
IFRS 10 | Consolidated Financial Statements | January 1, 2013 |
IFRS 11 | Joint Arrangements | January 1, 2013 |
IFRS 12 | Disclosure of Interests in Other Entities | January 1, 2013 |
IFRS 13 | Fair Value Measurement | January 1, 2013 |
IAS 19 revised | Employee Benefits | January 1, 2013 |
IAS 27 revised | Consolidated and Separate Financial Statements | January 1, 2013 |
IAS 28 revised | Investments in Associates and jointly controlled companies | January 1, 2013 |
Amendments to IFRS 7 | Disclosure – transfers of financial assets | July 1 , 2011 |
Amendments to IFRS 7 | Disclosure – offsetting of financial assets and financial liabilities | January 1, 2013 |
Amendments to IAS 32 | Offsetting Financial Assets and Financial Liabilities | January 1, 2014 |
The Company is currently analyzing the impact of the application of these standards, amendments and interpretations. Based on preliminary analysis made up to the present date the Company estimates that their application will not have a significant impact on the consolidated financial statements on first time adoption. Notwithstanding, changes introduced by IFRS 9 will affect the presentation of financial assets and transactions with those occurring as of January 1, 2015.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESPF-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
Subsidiaries | 2008 | | 2007 |
| | | |
A.Telecom S.A. | 100% | | 100% |
Telefonica Data S.A. | 100% | | 100% |
Aliança Atlântica Holding B.V. | 50% | | 50% |
Companhia AIX de Participações | 50% | | 50% |
Companhia ACT de Participações | 50% | | 50% |
Telefônica Televisão Participações S.A. | - | | 100% |
Telefônica Sistemas de Televisão S.A. | 100% | | 100% |
Due to the acquisition of Telefônica Televisão Participações (note 2.a), the Company’s consolidate results for the year ended December 31, 2007 include the consolidated results of TTP from October to December 2007. | 2.1 | Basis of consolidation and main changes in the consolidation environment |
In consolidation, all assets, liabilities, revenuesrevenue and expenses resulting from intercompany transactions and equity holdings amongholding between the Company and its subsidiaries were eliminated.
The main events and changes in the consolidation environment that, due to their significance, should be considered for analysis of the consolidated companies have been eliminated .financial statements for the fiscal year ended December 31, 2011, are presented as follows:
| a) | Acquisition of Vivo Participações S.A. by the Company |
As mentioned in Note 4, the Company incorporated 100% of shares of Vivo Participações S.A. amounting to R$31,222,630 (Note 1.”e” and 4). The Company’s consolidated financial statements asinclude Vivo Part. (incorporated by the Company on October 3, 2011) and Vivo S.A. results from April 1, 2011. Vivo Participações S.A. and Vivo S.A. were included in the Company’s consolidated financial statements through the full consolidation method.
| b) | Consolidation of TVA companies |
As from January 1, 2011, the Company started to include the companies GTR Participações e Empreendimentos S.A., TVA Sul Paraná S.A., Lemontree Participações S.A. and Comercial Cabo TV São Paulo S.A. in its consolidated financial statements by applying the full consolidation method. Up to the prior year these companies were included in the Company’s consolidated financial statements through the equity method. The effect of December 31, 2007, certain accounts were reclassified to allow adequacy and consistency thereof with the current period. However, the amountsconsolidation of these reclassifications arecompanies is immaterial in relation to the Company’s consolidated financial statements.
4. | Summaryc) | Acquisition of Principal Accounting PracticesLemontree Participações S.A. shares |
On September 29, 2011, the Company purchased 68,533,233 common shares representing 49% of the referred class of shares in Lemontree Participações S.A., which is the holder of 80.1% of the common shares of Comercial Cabo TV São Paulo S.A., a company engaged in cable TV services in the State of São Paulo. As a consequence, the Company currently has an interest of 83% in Lemontree Partipações S.A. and 93.19% in Comercial Cabo TV São Paulo S.A. This transaction was considered as a non-controlling shareholders’ acquisition for the purpose of disclosure and measurement in these financial statements.
a.3. | Cash and cash equivalents: include cash, positive current account balances, and investments redeemable 90 days from the original maturities basically comprising CDBs (Bank Deposit Certificates) indexed to CDI (Interbank Deposit Certificate) with quick liquidity and unlikely change in market value.Summary of principal accounting practices |
b. | a) | Trade accounts receivable, net:net: are stated at the rendered service value according to the contracted conditions adjusted by the estimated amount of eventual losses. This caption also includes accounts receivable from services rendered but not yet billed at the balance sheet date.date, as well as the accounts receivable related to the sales of handsets, simcards and accessories. Allowance for doubtful account is recorded in order to cover eventual losses and mainly considers the average default rate. This item, in the consolidated financial statements, includes finance lease receivables (lessor) as mentioned in Note 3.a.expected losses. |
c. | Foreign currency transactions: transactions in foreign currencies are recorded at the prevailing exchange rate at the date of the transaction. Foreign currency denominated assets and liabilities are remeasured using the exchange rate at the balance sheet date. Exchange differences resulting from foreign currency transactions were recognized in financial income and financial expenses. |
d. | Inventories:b) | Inventories: are stated at average acquisition cost, net of allowance for reduction to net realizable value. This corresponds to items for use, maintenance or resale, and the latter includes equipment for finance lease operations (Note 3.a)resale. |
e. | Investments: whollyc) | Prepaid expenses: are measured at the amounts effectively disbursed related to services paid for but not yet incurred. The prepaid expenses are recognized in the income statement when the related services and jointly-ownedthe economic benefits are obtained. |
| d) | Investments: Equity interests in subsidiaries and jointly controlled companies are accounted for understated by the equity method. Other corporate investments are considered to be available-for-salemethod in the individual financial assets valued at market value based on the latest stock exchange rate for the year (Note 3.b). Onstatements. In the consolidated financial statements, all the investments accounted for an equity method are consolidated. The subsidiaries are consolidated as of December 31, of each period.in |
subsidiaries are fully consolidated and investments in jointly controlled subsidiaries are consolidated proportionally.
In consolidation, all assets, liabilities, revenues and expenses resulting from intercompany transactions and equity holdings between the Company and its subsidiaries were eliminated.
The exchange rate variation on the shareholders’ equity of the jointly controlled Aliança Atlântica is recognized in the shareholders’ equity as cumulative translation adjustments.
f. | e) | Property, plant and equipment: thisequipment: This item is measured at acquisition and/or construction cost, less accumulated depreciation and any impairment losses, if applicable. Such cost includes the borrowing costs for long-term construction projects if the recognition criteria are met. Asset costs are capitalized until the asset becomes operational. |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Costs incurred after the asset becomes operational are immediately expensed, under the accrual method of accounting. Expenses that represent asset improvement (expanded installed capacity or useful life) are capitalized.
The estimated costs to be incurred in the dismantling of towers and equipment in rented real property are capitalized with a corresponding provision for dismantling of fixed assets and are depreciated over the useful life of the equipment, which does not exceed the lease term.
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefit is expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement when the asset is derecognized.
Depreciation is calculated under the straight-line method based on the estimated useful lives of the assets, which is based on technical studies that are regularly reviewed (see Note 13 – Property, plant and as determined by the Public Telecommunications Service regulations. The main depreciation rates are shown in Note 12.equipment, net).
g. | f) | Intangible assets: theseassets (including goodwill): These are stated at acquisition and/or construction cost, less accumulated depreciationamortization and any impairment losses, if applicable. |
Intangible assets also includes software rights of use acquired from third parties, authorization licenses obtained from ANATEL, customer lists, brands, premium amounts referring to own stores (which are being amortized over the term of the agreements) and other intangible assets.
The useful life of intangible assets is assessed as either finite or indefinite.
Intangible assets with finite lives are amortized onunder the straight-line basismethod over their estimatedthe useful life.economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for intangible assets with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or in the expected pattern of consumption of future economic benefits embodied in these assets are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually or when there is an indication that theirthe carrying amount of the assets may not be recovered.recoverable. The assessment of indefinite useful life is reviewed annually to determine whether indefinite life continues to be supportable. Otherwise, the change in the useful life from indefinite to finite is made on a prospective basis.
Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset. Gains and losses are recognized in the income statement when the asset is derecognized.
Goodwill arising from the acquisition of investments and recordedare based on future profits will beand are treated as intangible assets with indefinite useful lives. Until December 31, 2008, amortization
| g) | Leases: Agreements providing for use of specific assets and the right to use an asset are subject to analysis so as to identify the accounting treatment applicable to lease arrangements. Agreements in which the lessor substantially transfers the underlying risks and benefits to the lessee are classified as finance leases. |
The Company has agreements classified as finance leases from both the lessor’s and lessee’s standpoint. As a lessor, subsidiary A.Telecom has equipment lease agreements (Posto Informático), for which it recognizes revenue on the installation date at the present value of goodwill wasthe agreement installments, matched against Accounts Receivable. As a lessee in agreements classified as finance lease, the Company records a fixed asset item, classified according to its nature, at the beginning of the lease term, at the present value of the agreement minimum mandatory installments matched against Other Liabilities. The difference between the nominal value of the installments and the accounts receivable/payable recorded is recognized as financial income/expense under the effective interest rate method based on results estimated for 10-year periods; goodwill will no longer be amortized starting January 1, 2009, being thus subjected to annual impairment testing (Note h).the contract term.
Agreements in which the lessor retains a substantial part of risks and benefits are deemed as operating lease, and their effects are recognized in the income statement for the year throughout the contractual term.
h. | h) | Asset recoverability test: Management conducts annual reviews ofanalysis: In compliance with IAS 36, the Company and its subsidiaries review the net book value of its assets, when circumstances indicate it is necessary, in order to evaluateassess if there are events or changes in the economic, operating or technological circumstances thatwhich may indicate asset impairment or loss in its carrying amount. In cases where |
If such evidence is identified and the net book value exceeds the recoverable amount, an impairment provision is recorded, adjusting the net book value to the recoverable amount.
The recoverable amount is defined as the higher of the value in use and the fair value less cost to sell.
In estimating the value in use of an asset, the estimated future cash flows are discounted to their present value using a pre-tax cost of capital - "CAPM - Capital Asset Pricing Model" discount rate, which reflects the weighted average cost of capital and the specific risks of the asset.
The fair value less cost to sell is determined, whenever possible, on firm sale agreement in a transaction on an arm’s length basis, between knowledgeable and willing parties, adjusted by expenses attributable to the sale of the asset, or, when no firm sale agreement exists, based on the market price of an active market, or on the price of the most recent transaction with similar assets.
Losses from continuous operations, including inventory write-off, are recognized in the income statement in expense accounts compatible with asset purpose.
For assets, excluding goodwill, an analysis is performed on the closing date of each fiscal year, to identify if there is an indication that the impairment previously recognized may no longer exist or may have decreased.
An impairment loss previously recorded is reversed only if there is a change in the assumptions used to determine the asset recoverable value as from the time of recognition of the last impairment.
The reversal is limited so that the asset book value does not exceed its recoverable value, nor exceeds the book value that would have been determined, net of depreciation, if no impairment had been recognized for the asset in prior years. This reversal is recognized in the income statement.
The following criteria are applied to assess the impairment of specific assets:
Goodwill is tested for impairment annually and when circumstances indicate that the carrying amount may be impaired.
When the recoverable amount is lower than its book value, impairment is recognized. Goodwill impairment cannot be reversed in future fiscal years.
Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level, as appropriate, and when circumstances indicate that the carrying amount may be impaired.
The main assumptions used to estimate the value in use are:
| · | Revenue: The revenues are estimated considering the net book value exceedsgrowth of the realizable valuecustomer base, the evolution of the market income vis-à-vis the GDP – Gross Domestic Product and an impairment provision is recognized to adjust the asset’s net book value toCompany and its realizable value.subsidiary’s share in this market; |
i. | Income tax· | Operating costs and social contribution: corporate income taxexpenses: The variable costs and social contribution are accounted for onexpenses were estimated according to the accrual basisdynamic of the customer base, and are presented netthe fixed costs and expenses were projected in line with the historical performance of prepaid taxes, paid during the year. Deferred tax assetsCompany and liabilities attributable to temporary differencesits subsidiaries, as well as with the historical growth of the revenue; and tax loss carry-forwards are recognized as deferred tax assets and liabilities, if applicable, on the assumption of future realization within the parameters established by CVM Deliberation 273/1998 and CVM Instruction No. 371/2002. |
j. | Reserves: recognized for those cases in which an unfavorable outcome is considered probable at· | Capex: Capital expenditures are estimated based on the balance sheet date. This reserve is presented nettechnological infrastructure required to make feasible the offering of the corresponding escrow deposits and classified as labor, civil or tax contingency (Note 20).services. |
The key assumptions are based on the historical performance of the Company and its subsidiaries and on reasonable macroeconomic assumptions based on market financial projections, documented and approved by Company’s Management.
The impairment tests of the Company and its subsidiaries fixed and intangible assets did not result in the recognition of losses for the years ended December 31, 2011 and 2010, since their estimated market value exceeded their net book value on the assessment date.
k. | i) | Business combinations and goodwill |
Business combinations are accounted for using the acquisition method. The acquisition cost is measured at the fair value of assets, equity instruments and liabilities incurred or assumed at the acquisition date. Identifiable assets acquired and liabilities and contingencies assumed in a business combination are initially measured at fair value on the acquisition date, regardless of the non-controlling shareholders’ interest (See Note 4).
Initially, goodwill represents the excess of the cost of acquisition over the net fair value of the acquired assets, assumed liabilities and identifiable contingent liabilities from an acquired company, on the respective acquisition date. If the acquisition cost is lower than the fair value of the acquired company's net assets, the difference is recognized directly in the income statement.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to the cash-generating unit that is expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to each unit.
When goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained.
| j) | Financial instruments, cash and cash equivalents |
Initial recognition and subsequent measurement
| (i) | Cash and cash equivalent |
Includes cash, credit balances in bank accounts and investments redeemable within 90 days of the date of acquisition with immediate liquidity and with insignificant change in market value.
Initial recognition and measurement
Financial assets are classified as financial assets at fair value through profit or loss, loans and receivables, investments held to maturity, available for sale financial assets or as derivatives, designated as hedging instruments in an effective hedge as appropriate. The Company determines the classification of its financial assets upon their initial recognition, when they become part of the contractual provisions of the instrument.
Financial assets are initially recognized at fair value plus, in the case of investments not classified as at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset.
Sales and purchases of financial assets that require delivery of goods within a time frame established by regulation or market convention (regular way trades) are recognized on the transaction date, i.e. the date that the Company commits to buy or sell the asset.
The Company's financial assets include cash and cash equivalents, trade accounts receivable and other receivables quoted and unquoted financial instruments and derivative financial instruments.
Subsequent measurement
Subsequent measurement of financial assets depends on their classification as follows:
Financial assets at fair value through profit or loss
This category includes derivative financial instruments entered into by the Company that do not meet the hedge accounting criteria as defined by the corresponding standard. Financial assets at fair value through profit or loss are presented in the balance sheet at fair value, with corresponding gains or losses recognized in the income statement.
Receivables
Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such assets are carried at amortized cost using the effective interest rate method, less impairment, if and when applicable. Amortized cost is calculated by taking into account any discount or premium in the acquisition and fees or other costs incurred. Amortization under the effective interest method is included in financial income in the income statement. The losses arising from impairment are recognized as financial expense in the income statement, if and when applicable.
Held-to-maturity investments
Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Company has the positive intention and financial capacity to hold them to maturity. After initial measurement, held-to-maturity investments are measured at amortized cost using the effective interest rate method, less impairment. Amortized cost is calculated taking into consideration any discount or premium on acquisition and fees or costs incurred. Amortization of effective interest rate is included in financial income in the income statement. Impairment losses are recognized as financial costs in the income statement. The Company did not have any held-to-maturity investments during the years ended December 31, 2011 and 2010.
Available for sale financial assets
Available for sale financial assets are those non-derivative financial assets that are not classified as (a) loans and receivables, (b) held to maturity investments or (c) financial assets at fair value through profit or loss. These financial assets include equity instruments.
After initial measurement, available for sale financial assets are measured at fair value with unrealized gains or losses recognized directly in the available for sale reserve within the group of other comprehensive income until the investment is derecognized, excepted situation of impairment losses.
When the investment is derecognized or when impairment is detected, the cumulative gains or losses previously recognized in other comprehensive income should be recognized in the income statement.
The fair value of available for sale financial assets in foreign currency is measured and translated into foreign currency using the spot exchange rate prevailing at the date of the financial statements. The changes in fair value attributable to translation differences are recognized directly in equity.
Derecognition
A financial asset (or, where appropriate, a part of a financial asset or part of a group of similar financial assets) is derecognized when:
The rights to receive cash flows from the asset have expired;
The Company transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the cash flows received in full, without significant delay to a third party under a pass-through agreement, and (a) the Company has transferred substantially all risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all risks and rewards related to the asset, but has transferred control of the asset.
When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through agreement and has neither transferred nor retained substantially all risks and rewards related to the asset, the asset is recognized to the extent of the Company's continuing involvement in the asset.
In this case, the Company also recognizes an associated liability. The transferred asset and associated liability are measured on a basis that reflects the rights and obligations that the Company has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at original book value of the asset or the maximum amount of consideration that may be required of the Company, whichever is lower.
| (iii) | Impairment of financial assets |
The Company assesses at each reporting date whether there is any evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is considered to be impaired if and only if, there is evidence of impairment as a result of one or more events that have happened after the initial recognition of the asset (an incurred “loss event”) and a loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reasonably estimated.
Financial assets carried at amortized cost
In relation to the financial assets carried at amortized cost, the Company first assesses individually if there is evidence for impairment for each financial asset that is individually significant, or collectively for financial assets that are not individually significant. If the Company concludes that there is no evidence of impairment for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a joint assessment for impairment.
When there is evidence of the occurrence of impairment, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future expected credit losses not yet incurred).
The carrying amount of the asset is reduced through the use of an allowance account, and the impairment amount is recognized in the income statement. Interest revenue continues to be accrued on the reduced carrying amount based on the original effective interest rate for the asset. The loans, together with the associated allowance are written off when there is no realistic prospect of their future recovery and all guarantees have been realized or transferred to the Company. If in a subsequent year the estimated impairment amount increases or decreases due to an event occurring after the recognition of impairment, previously recognized impairment is increased or reduced by adjusting the allowance account. In the event of any future recovery of a written off amount, the recovery is recognized in the income statement.
Available for sale financial investments
For financial instruments classified as available for sale, the Company analyzes whether there is any evidence that the investment is recoverable at each balance sheet date.
For investments in equity instruments classified as available for sale, evidence includes a significant and prolonged decline in the fair value of investments below their cost.
When there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and current fair value, less any impairment loss that has been previously recognized in income, is reclassified from shareholders’ equity to the income statement.
Increases in fair value after the recognition of impairment are recognized directly in comprehensive income.
| (iv) | Financial liabilities |
Initial recognition and measurement
Financial liabilities are classified as financial liabilities at fair value through profit or loss, loans and financing or as derivatives classified as hedge instruments, as appropriate. The Company determines the classification of its financial liabilities upon their initial recognition.
Financial liabilities are initially recognized at fair value and, in the case of loans and financing, are increased by the cost directly related to the transaction.
The Company's financial liabilities include accounts payable to suppliers, loans and financing and derivative financial instruments.
Subsequent measurement
Measurement of financial liabilities depends on their classification, which may be as follows:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities designated at initial recognition at fair value through profit or loss. This category also includes derivative financial instruments entered into by the Company that do not meet the criteria for hedge accounting as defined by the corresponding standard.
The Company has not designated any financial liability upon initial recognition at fair value through profit or loss.
Loans and financing
After initial recognition, loans and financing subject to interest are subsequently measured at amortized cost, using the effective interest rate method. Gains and losses are recognized in the income statement when the liabilities are derecognized as well as during the amortization process using the effective interest rate method.
Derecognition
A financial liability is derecognized when the obligation is discharged, cancelled or expires.
When an existing financial liability is replaced by another from the same lender with substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in corresponding carrying amounts is recognized in the income statement.
| (v) | Offsetting of Financial instruments |
Financial assets and liabilities are presented net in the balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and if there is an intention of offsetting or realizing the asset and settling the liability simultaneously.
| (vi) | Fair value of financial instruments |
The fair value of financial instruments actively traded in organized financial markets is determined based on quoted-market prices at the close of business on the balance sheet date, without deduction of transaction costs.
The fair value of financial instruments for which there is no active market is determined using valuation techniques. Techniques may include using recent market transactions (on an arm’s length basis); reference to the current fair value of a similar instrument, such as discounted cash flow analysis or other valuation models.
| k) | Derivative financial instruments and hedge accounting: |
Initial recognition and subsequent measurement
The Company and its subsidiaries use derivative financial instruments such as currency swaps to provide protection against the risk of changes in exchange rates.
Derivative financial instruments designated as hedge transactions are initially recognized at fair value on the date on which the derivative contract is signed and subsequently are remeasured at fair value.
Derivatives are carried as financial assets when the instrument's fair value is positive and as financial liabilities when the fair value is negative.
Any gains or losses arising from changes in the fair value of derivatives during the year are recorded directly in income, except for the effective portion of cash flow hedges, which is recognized in other comprehensive income.
For the purposes of hedge accounting, the Company's contracts were classified as fair value hedges to provide protection against exposure to changes in the fair value of an identified part of certain liabilities that are attributable to a particular risk (exchange variation) and can affect net income.
At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the Company wishes to apply hedge accounting, as well as the objective and risk management strategy for undertaking the hedge. The documentation includes identification of the hedge instrument, the item or transaction being hedged, the nature of the risk being hedged, the nature of the risks excluded from the hedge, the prospective statement of the effectiveness of the hedge relationship and the way in which the Company will assess the effectiveness of the hedge instrument for the purpose of offsetting the exposure to changes in fair value of the hedged item.
Such hedges are expected to be effective in offsetting changes in fair value and are being continually assessed to determine whether they were actually highly effective over all the financial reporting periods for which they were designated.
Cash flow hedges which meet the criteria for their accounting are recorded as follows: the effective portion of the gain or loss on the hedging instrument is recognized directly in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the income statement.
Fair value hedges which meet the criteria for their accounting are recorded as follows: the gain or loss resulting from changes in fair value of a hedge instrument shall be recognized in income. The gain or loss resulting from the hedged item attributable to the hedged risk should adjust the recorded amount of the hedged item to be recognized in income. The changes in fair value of the hedge instrument and changes in fair value of the hedged item attributable to the hedged risk are recognized in the line of the income statement related to the hedged item.
Current versus non-current classification
Derivative instruments that are not designated and effective hedging instruments are classified as current or non-current or segregated into current or non-current portions based on an evaluation of the contracted cash flows.
When the Company maintains a derivative as an economic hedge (and does not apply hedge accounting) for a period exceeding 12 months after the balance sheet date, the derivative is classified as non-current (or segregated into current or non-current portions), consistently with the classification of the corresponding item.
Derivative instruments that are designated as, and are effective hedging instruments are classified consistently with the classification of the corresponding hedged item.
The derivative instrument is segregated into current or non-current portions only when a reliable allocation can be made.
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily needs more than 18 months to get ready for its intended use or sale are capitalized as part of the cost of the respective assets.
All other borrowing costs are expensed when occurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.
| m) | Interest on shareholders’ equity |
According to the Brazilian legislation, companies are allowed to pay interests on shareholders’ equity, which are similar to the payment of dividends, but are deductible for purposes of ascertainment of income tax. In compliance with the Brazilian tax laws, the Company booked in its accounting records a reserve for the amount owed in consideration of the financial expenses caption for the year’s results and, for disclosures purposes, reversed such expenses, recording a debit direct to shareholders’ equity, resulting in the same accounting treatment of dividends. The distribution of interest on shareholders’ equity to the shareholders is subject to withholding income tax at 15%.
Provisions are recognized when the Company or its subsidiaries have a present obligation as a result of a past event, where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The provisions are restated up to the balance sheet date at the probable loss amount.
Provisions for claims are presented by the gross amount, without considering the respective escrow deposits and are classified as civil, labor, tax and regulatory. Escrow deposits are classified as assets, since the presentation of provisions net of escrow deposits are not met.
| n.2) | Provision for judicial, civil, labor, tax and regulatory claims |
The Company and its subsidiaries are parties to lawsuits that generate administrative and judicial contingencies related to labor, tax, civil and regulatory claims, and accounting provisions have been
booked with respect to such lawsuits whose likelihood of loss was deemed as probable. The provisions for judicial and administrative claims are determined based on the opinion of the Company's and its subsidiaries’ Management and legal counsel.
| n.3) | Provision for dismantling of assets |
This refers to the costs to be incurred in connection with the possible need for giving back to their owners the “sites” (locations for installation of radio bases of the Company or its subsidiaries) in the same conditions as they were found at the time of the execution of the initial lease agreement.
| n.4) | Contingent liabilities recognized in a business combination |
A contingent liability recognized in a business combination is initially measured at its fair value.
Subsequently, it is measured at the higher of:
| - | the amount that would be recognized in accordance with the general requirements for provisions above; or |
| - | the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with the requirements for revenue recognition. |
| o) | Post-retirement benefit plans |
The Company and its subsidiaries sponsor pension plans for individual employees and retirees as well as multi-sponsored health care plans for former employees. Actuarial liabilities relating to defined-benefit plans were calculated using the projected unit credit method. Actuarial gains and losses are immediately recognized in other comprehensive income.
For plans with defined contribution features, the obligation is limited to the payment of contributions, which are recognized in income on the accrual basis.
The defined benefit asset or liability to be recognized in the financial statements comprises the present value of the defined benefit obligation, less cost of past services not yet recognized and less the fair value of plan assets that will be used to settle the obligations. Plan assets are assets held by a closed pension fund. Plan assets are not available to creditors of the Company nor can they be paid directly to the Company. The fair value is based on market price information and in the case of quoted securities, it is the published purchase price. The value of any defined benefit asset recognized is limited to the sum of any past service cost not yet recognized and the present value of any economic benefit available in the form of reductions in future contributions to the plan.
The Company and its subsidiaries have liabilities stemming from employment contracts with its employees, and recognize these provisions during the year. Provisions are recorded to recognize the expense relating to profit sharing. These provisions are calculated based on qualitative and quantitative goals defined by management and recorded in specific accounts in accordance with Cost of services, Sales expenses and General and administrative expenses groups of accounts.
| q) | Share-based payment transactions |
The Company measures the cost of transactions settled with shares issued by the parent Company, Telefónica S.A., and granted to officers and employees based on the fair value of equity instruments at the grant date, using the binomial option pricing model. This fair value is expensed over the period until the vesting date
with recognition of a corresponding liability.
| r) | Other assets and liabilities |
An asset is recognized in the balance sheet when it is more likely than not that its future economic benefits will be generated on behalf of the Company and its subsidiaries and its cost or value can be reliably measured.
A liability is recognized in the balance sheet when the Company and its subsidiaries have a legal or constructive obligation arising from past events, being probable that an outflow of resources will be required to settle the obligation.
Assets and liabilities are classified as current when their realization or settlement is likely to occur within the next twelve months. Otherwise, they are considered to be noncurrent.
| s) | Governmental grant and assistance |
Governmental grants are recognized where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognized as income over the period necessary to match the grant on a systematic basis in connection with the costs that it is intended to compensate. When the grant relates to an asset, it is recognized as deferred income and released to income in equal amounts over the expected useful life of the related asset. When loans or similar assistance are provided by governments or related institutions with an interest rate below the current applicable market rate, the effect of this favorable interest rate is considered as additional government grant.
Under the Brazilian tax rules (Provisionary Measure No. 2199-14, of August 24, 2001, subsequently amended by Law No. 11,196, of November 21, 2005), legal entities with title of projects located in areas under the jurisdictions of the Amazon Development Authority (“SUDAM”) and of the Northeast Development Authority (“SUDENE”), whose businesses fall into an economic sector that is considered a priority under an act issued by the Executive Branch, may request an income tax abatement as provided for in these regulations.
By incorporating Vivo Part., the Company acquired a tax benefit consisting of a 75% corporate tax reduction, based on net income earned from exploiting areas in northern Minas Gerais and the Jequitinhonha valley. This benefit has been granted up to and including 2013.
Vivo S.A. also has been granted a tax benefit consisting of a 75% corporate tax reduction, based on income earned from exploiting areas in the states of Acre, Amapá, Amazonas, Maranhão, Mato Grosso, Pará, Rondônia and Roraima. This benefit has been granted up to and including 2013.
A portion of net income for which a tax benefit has been granted was excluded from the calculation of dividends and may be used only for capital increase and compensation of losses.
In January 2010, a financing line with the Brazilian Development Bank (BNDES) was approved through the Investment Maintenance Program (BNDES-PSI). The funds, which are being used to acquire Brazilian equipment for improvement of network capacity, have been previously recorded under BNDES Finame (Government Agency for Machinery and Equipment Financing) and released as investments were made.
As this financing has an interest rate lower than market interest rates, this transaction falls within the scope of IAS 20. The loans have been recognized at inception at their fair values assuming market rates with a corresponding adjustment to deferred revenue.
| t) | Adjustment to present value of assets and liabilities |
The long-term and short-term financial assets and liabilities are adjusted to their present value. The adjustment to present value is calculated taking into account the contractual cash flows and the explicit interest rate, and in certain cases, implicit interest rate, of the respective assets and liabilities.Therefore, interests embedded in the revenues, expenses and costs associated with such assets and liabilities are deducted with the purpose of recognizing them in accordance with the accrual method. Subsequently, such interests are reallocated to the lines of financial expenses and financial income for the year by using the actual interest rate method in relation to the contractual cash flows. The implicit interest rates applied were determined based on facts and circumstances, and are deemed to be accounting estimates. Based on the analysis performed and on its best estimate, the Company concluded that the adjustment to present value of the current assets and liabilities is irrelevant to the financial statements taken as a whole and, therefore, did not record any adjustment.
The Company used WACC (Weighted Average Cost of Capital) and CDI rates (Interbank deposit certificate) to calculate present value adjustments, depending on the type of asset and liability to be adjusted.
Own equity instruments that are acquired (treasury shares) are recognized at cost and deducted from equity. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of Company’s own equity instruments.
| v) | Revenue recognition: revenues related to Telecommunications services rendered are recorded on the accrual basis. Revenue unbilledrecognition |
Revenues substantially correspond to consideration amounts received or receivable for the sale of goods or services in the Company’s and its subsidiaries normal course of business.
Revenues are recognized when they can be reliably measured and future economic benefits are likely to flow to the Company, the costs incurred in the transaction can be measured, the significant risks and rewards of ownership were substantially transferred to the buyer and specific criteria were met for each of the Company’s activities.
The Company’s revenues consist primarily of voice and data telecommunication services, additional services that are offered to customers through traffic packages with fixed price (monthly) or according to customer’s traffic utilization and sale of goods.
Revenues related to telecommunications services rendered are recorded on the accrual basis based on the contractual terms. Tariff rates for local and long-distance calls are determined by the measurement process pursuant to legislation currently in effect. Services charged at monthly fixed rates are calculated and recorded on linear bases. Unbilled revenue from the date of the last billing until the date of the balance sheet is recognized in the month the service is rendered.
Revenue from the sales of cards for public phonestelephones is deferred and recognized based the estimate use in income as the cards are utilized based on consumption estimates.
Prepaid cell phone recharge credit revenues, as well as respective taxes due thereon, are deferred and recognized in the income statement when services are actually rendered.
Income from equipment under lease agreements classified as finance leases is recognized upon equipment installation, when the risk is actually transferred. Income is recognized for the present value of future minimum lease payments (Note 3.a)payments.
Revenues from sales and services are subject to the following taxes and contribution taxes: State VAT -
ICMS, Social Contribution Taxes on Gross Revenue for Social Integration Program - PIS, Social Security Financing - COFINS and Service Tax– ISS.
Recognition of Revenues and Costs of Goods Sold
Revenues and costs of goods sold (handsets, simcards and accessories) are recorded when risks and benefits of goods are transferred to the buyers. Sales in own stores are recognized when goods are sold to consumers. Revenues and costs of goods sold via dealers are recorded upon activation of the handset, but, in any case, no later than 90 days after the sale date.
Customer Loyalty Program
The subsidiary Vivo S.A. has a customer loyalty program that allows customers to accumulate points when generating traffic for the use of services provided by its subsidiaries. The accrued points may be exchanged for handsets or services, provided the customer has a minimum stipulated balance of points. The consideration received is allocated to the cost of the handsets or services redeemed at their fair value. The fair value of the points is calculated by dividing the discount value granted as a result of the customer loyalty program by the amount of points needed to carry out the redemption. The fair value accrued balance of generated points is deferred and recognized as income upon redemption of points.
Promotional campaign and enrolment fee
Enrolment fees paid by customers to allow them to participate in the promotional campaigns of the Company are deferred and recorded in profit or loss for the period during which the referred campaign lasts.
Multiple-element arrangements
Bundled offers that combine different elements are assessed to determine whether it is necessary to separate the different identifiable components and apply the corresponding revenue recognition policy to each element. Total package revenue is allocated among the identified elements based on their respective fair values.
Determining fair values for each identified element requires estimates that are complex due to the nature of the business.
A change in estimates of fair values could affect the apportionment of revenue among the elements and, as a result, revenues in future years.
| w) | Foreign-currency-denominated balances and transactions |
The Company’s functional currency is the Brazilian real (R$). Foreign currency transactions are recorded at the prevailing exchange rate at date of the transaction. Foreign currency denominated assets and liabilities are measured using the exchange rate at the balance sheet date. Exchange differences resulting from foreign currency transactions were recognized in financial income and financial expenses.
On December 31, 2011 the exchange rates were: US$1.00 = R$1.8758, JPY1.00 = R$0.02431, €1.00 = R$2.4270.
| x) | Taxes and contributions |
We list below the acronyms of the taxes and contributions described in these financial statements:
l. | · | CIDE – Contribution for Intervention in the Economic Domain – federal tax; |
| · | COFINS – Contribution for Social Security Financing - federal tax; |
| · | CSLL – Social Contribution on Net Income – federal tax; |
| · | FISTEL –Telecommunications Inspection Fund; |
| · | FUNTTEL – Fund for Telecommunications Technological Development; |
| · | FUST – Telecommunications Universal Service Fund; |
| · | ICMS – Tax on the Circulation of Goods and on Services – state tax; |
| · | IOF – Tax on Financial Transactions – federal tax; |
| · | IRPJ – Corporate Income Tax – federal tax; |
| · | IRRF – Withholding Income Tax – federal tax; |
| · | ISS – Tax on Services – municipal tax; |
| · | PIS – Social Integration Program – federal tax; |
| · | TFF – Operation Inspection Fee; and |
| · | TFI – Installation and Inspection Fee. |
Income tax and social contribution expenses include the effects of current and deferred taxes.
Current income tax and social contribution
The carrying amount of current income tax assets and liabilities for the last fiscal year and two prior years represent the amount expected to be recovered from or paid to tax authorities. The tax rates and tax legislation used to calculate the amounts are those enacted or substantially enacted at the balance sheet date. In the balance sheet the current income taxes are stated net of the amounts paid during the year.
Deferred taxes
Deferred tax assets and liabilities are obtained using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes.
At the balance sheet date, deferred tax assets are recognized to the extent that their future realization is assessed as more likely than not based on the future taxable income.
The deferred tax assets and liabilities are not discounted to present value and are classified in the balance sheet as noncurrent, regardless of the expected realization. The tax effects of items recorded directly in shareholders’ equity are recognized in equity.
Deferred tax assets and liabilities are offset if there is a legal or contractual right to set off tax asset against income tax liability and the deferred taxes relate to the same taxable entity and the same taxation authority.
Sales taxes
Revenues from the rendering of services are subject to ICMS or ISS at the rates in effect at each state and to cumulative regime of PIS and COFINS, for revenues earned from telecommunication services, at 0.65% and 3.00%, respectively. Other revenues earned by the Company, including revenues relating to sale of goods, under the non-cumulative regime, are taxed at 1.65% and 7.60% for PIS and COFINS, respectively, and for ICMS at the rates in effect at each state.
Prepaid amounts or amounts to be offset are recorded as current or non-current assets, according to the expected realization thereof.
| y) | Concession agreement’s renewal fee: it is a fee which will be paid every two years, during the 20-year period that the concession agreement is in force, equivalent to 2% of its prior-year SFTC revenue, according to the contract. Expenses are proportionally recognized during the corresponding 24 months (Note 21).fees |
It is a fee which will be paid each odd years during the term the concession agreement is in force, equivalent to 2% of its prior-year SFTC net revenue, according to the contract. The corresponding expense is recognized proportionally over each biennium concerned (Note 22).
The preparation of the financial statements requires management to make judgments and estimates and adopt assumptions that affect the reported amounts of revenue, expenses, assets and liabilities and the disclosure of contingent liabilities at balance sheet date.
However, uncertainty relating to these assumptions and estimates could result in outcomes that would require significant adjustment to the carrying value of the asset or liability affected in future periods.
The main assumptions concerning the future and other important sources of estimation uncertainty at the balance sheet date, which have a significant risk of causing a significant adjustment in the carrying value of assets and liabilities, are discussed below:
Impairment of non-financial assets
An impairment exists when the carrying value of an asset or cash-generating unit exceeds its recoverable value, which is the higher of its fair value less selling costs and its value in use. The calculation of fair value less selling costs is based on information available from binding sales transactions of similar assets or observable market prices less additional costs for disposing of the asset. The calculation of value in use is based on the discounted cash flow method. The recoverable value is sensitive to the discount rate used in the discounted cash flow method, as well as the expected future cash inflows and the growth rate used for extrapolation purposes.
Taxes
There are uncertainties regarding the interpretation of complex tax regulations and the amount and timing of future taxable income. The Company records provisions, based on reasonable estimates, for possible consequences of audits by tax authorities of the jurisdictions in which it operates. The amount of these provisions is based on several factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the tax authority in charge. Such differences of interpretation may arise in a wide variety of subjects, depending on the conditions prevailing in the jurisdiction in which the Company operates.
Post-employment benefits
The cost of defined benefits pension plans and other post-employment health care benefits and the present value of pension obligations are determined using actuarial valuation methods. An actuarial valuation involves the use of assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future increases in pension benefits. The defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed periodically.
The mortality rate is based on mortality tables available in Brazil. Future increases in wages and pension benefits are based on expected future inflation rates for Brazil.
For further details of the assumptions used, see note 35.
Fair value of financial instruments
When the fair value of financial assets and liabilities presented in the balance sheet cannot be obtained in active markets, it is determined using valuation techniques including the discounted cash flow method. The input for these methods is taken from observable markets when possible. However, when this is not possible, a certain level of judgment is required in establishing fair values. This judgment includes consideration of data used, liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the fair value of financial instruments.
Provisions for judicial, tax, civil and labor claims
The Company recognizes a provision for civil, labor and tax claims. The assessment of probability of loss includes evaluation of available evidence, the hierarchy of laws, available case law, most recent court decisions and their relevance in the legal system, as well as the evaluation of outside counsel. Provisions are reviewed and adjusted to take into account changes in circumstances, such as applicable statutes of limitation, conclusions of tax audits or additional exposures identified based on new issues or judicial rulings.
Fixed and intangible assets, including goodwill
The accounting treatment of investments in property, plant and equipment and intangible assets entails the use of estimates to determine the useful life for depreciation and amortization purposes and to assess fair value at their acquisition dates, particularly for assets acquired in business combinations.
Determining useful life requires making estimates in connection with future technological developments and alternative uses for assets. There is a significant element of judgment involved in making technological development assumptions, since the timing and scope of future technological changes are difficult to predict.
When an item of property, plant and equipment or an intangible asset is considered to be impaired, the impairment loss is recognized in the income statement for the period. The decision to recognize an impairment loss involves estimates of the timing and amount of the impairment, as well as an analysis of the reasons for the potential loss. Furthermore, additional factors, such as technological obsolescence, the suspension of certain services and other circumstantial changes are taken into account.
The Company evaluates periodically its cash-generating unit’s performance to identify potential goodwill impairments. Determining the recoverable amount of the cash-generating unit to which goodwill is allocated also entails the use of assumptions and estimates and requires a significant element of judgment.
| aa) | Non-controlling shareholders interests |
Non-controlling shareholders interests representing the portion of income or loss and of net equity of subsidiaries that are not held by the Company, which are stated in the consolidated balance sheet under the net equity caption.
| bb) | Financial income (expense), net: represents interest, monetary and expenses |
Financial income and expenses represent interest, monetary and exchange variations arising from financial investments, derivatives, loans, financings and debenture transactions; net present value adjustments of transactions that generate monetary assets and liabilities; and other financial transactions. They are recognized on accrual basis when earned or incurred by the Company and its subsidiaries.
| cc) | Statements of cash flows |
The statements of cash flows were prepared using the indirect method and reflect changes in cash over the stated years. The terms used in the statements of cash flows are as follows:
| · | Operating activities: refer to the main transactions performed by the Company activities other than investment and financing; |
| · | Investing activities: refer to additions and dispositions of noncurrent assets and other investments debentures, loansnot included in cash and financing obtainedcash equivalents; |
| · | Financing activities: refer to activities resulting in changes in equity and granted,loans. |
An operating segment is defined as a component of an entity for which discrete financial information is available, and which is reviewed regularly by the entity's chief operating decision maker to make decisions about resources to be allocated to an individual segment and to assess its performance. Since all decisions by management are made based on consolidated reports, the Company’s operation is to provide its customers with quality telecommunication services, and that all decisions on strategic, financial, procuring, investment and resource application planning are made on a consolidated basis, the management concluded that the Company and its subsidiaries operate in a single operating segment, which is the rendering of telecommunications services.
4. | Acquisition of Vivo Participações S.A. (Vivo Part.) |
Fiscal year 2011
Background: Acquisition of Brasilcel N.V. stocks by Telefónica S.A.
As disclosed through material fact notices dated July 28, 2010 and September 27, 2010, on July 28, 2010 Telefónica S.A., a corporation with head office in Madrid, Spain (Telefónica) and Portugal Telecom SG SGPS, S.A., a corporation with head office in Lisbon, Portugal (Portugal Telecom) signed an agreement for the acquisition by Telefonica of 50% of Brasilcel N.V’s (Brasilcel) shares, owned by Portugal Telecom. Therefore, the transaction resulted in the indirect acquisition of shares of Vivo Participações. Brasilcel, a company headquartered in the Netherlands, was held prior to the acquisition by Telefónica (50%) and by Portugal Telecom (50%) and, in 2002, it was used as a means to form a joint venture between both shareholders so as to hold the shares and control of the holdings jointly, as well as the mobile phone companies which were later added, respectively, in Vivo Part. (former Telesp Celular Participações S.A.) and in Vivo S.A, as a full subsidiary of the Company.
On December 21, 2010, Brasilcel was merged into Telefónica, which held direct and indirect stakes in Vivo Part.’s capital stock, with a share of approximately 60%.
Due to the acquisition of control of Vivo Part. and pursuant to the terms provided for in Article 254-A of Law 6,404/76 and the procedures established in article 29 of CVM Instruction 361, applicable to Tender Offers (OPA) by sale of control, as defined by item III of article 2 of CVM Instruction 361, on February 17, 2011 Telefónica through its subsidiary SP Telecomunicações Ltda (“SPTelecom”) launched a Public Tender Offer for the shares with voting rights of Vivo Part. (ON shares) held by non-controlling interests. Those shares were priced at 80% of the value paid by Telefónica to Portugal Telecom SG SGPS S.A., for each common share with voting rights of Vivo Part. S.A. (ON shares) owned by Brasilcel.
On March 18, 2011, the date of Tender Offers (OPA), SP Telecom acquired 10,634,722 common shares of Vivo Part., representing 2.65% of that company’s capital, resulting the Telefonica Group owning 62.1% of Vivo Part.
Acquisition of Vivo Part. by Telefônica Brasil and corporate restructuring
In order to unify the shareholder’s base of the companies, simplify the organizational structure, rationalize costs, integrate businesses and, consequently, generate synergies provided for in the strategy of Telefónica, on December 27, 2010, the Boards of Directors of Vivo Part. and Telefônica Brasil approved the terms and conditions for restructuring, which provided for the merger of 100% of the shares of Vivo Part. into Telefônica Brasil. Following recommendations of the Guiding Opinion No. 35 of CVM, independent special committees were created to negotiate the exchange ratio of shares and conclude about the other conditions of the Corporate Restructuring proposal in order to submit later its recommendations to the Board of Directors of both companies.
The proposal was submitted for ANATEL’s authorization and approved at a meeting of the Board of this agency held on March 24, 2011.
On March 25, 2011, the Boards of Directors of Vivo Part. and Telefônica Brasil approved the terms and conditions of the Corporate Restructuring, which were approved unanimously by the general meetings of shareholders of the Companies held on April 27, 2011.
The Holdings (TBS Celular Participações Ltda. Portelcom Participações S.A., Brazil PTelecom S.A.), controlled by Telefónica S.A. and whose main purpose was to hold shares of Vivo Part. were merged into Vivo Part as a preliminary phase for the first stage of restructuring.
The first stage of the transaction consisted of the unification of the share base of fixed and mobile operators of the Telefonica Group in Brazil, through the merger of shares of Vivo Part. into Telefônica Brasil. Telefônica Brasil merged all shares of Vivo Part., attributing it directly to the holders of shares of Vivo Part. incorporated, the new shares of Telefônica Brasil. The exchange of shares of Vivo Part. for shares of Telefônica Brasil was based on the exchange share ratio of 1.55 shares of Telefônica Brasil for each share of Vivo Part. This followed the recommendations of the independent special committees.
Due to the merger of shares of Vivo Part., Telefônica Brasil’s capital was increased by R$31,222,630, considering the economic value of the incorporated shares, based on an Economic Value Appraisal of Vivo Part. prepared by Planconsult Consultoria Ltda. ("Planconsult") in accordance with the provisions of article 252, paragraph 1 and article 8.
Telefónica’s strategy in the first stage of the corporate restructuring was to maximize the potential of its operations in Brazil. Therefore, Telefônica Brasil became the direct shareholder of Vivo Part, and indirectly of Vivo S.A. Through the creation of this 'umbrella investment structure', the non-controlling shareholders of both companies will be equally benefited by the added values generated by the combination of the telecommunications business. This is a basic movement in business so as to improve its converging market strategy, including combined mobile and fixed line offers, etc. This reorganization created the conditions for the beginning of the process to obtain operational and financial synergies.
Additionally, as a consequence of this merger, on July 6, 2011, Vivo Part. filed a statement with the Securities and Exchange Commission ("SEC") in order to cancel its registration for the program of American Depositary Shares ("ADSs"), since all its ADSs were converted into ADSs of Telefônica Brasil, plus payment currency in lieu of fractional Telefônica Brasil ADSs, which was approved on July 7, 2011.
The second and third stages of the corporate restructuring, disclosed to the market on June 15, 2011, seek to continue the simplification process of the organizational structure of the Companies, so as: (i) to focus all authorizations for the rendering of SMP (personal mobile service) services (originally held by Vivo Part and Vivo S.A.), and (ii) simplify the current corporate structure, eliminating the structure of Vivo Part., which due to the referred concentration of commitments became a holding company.
In the second stage, held on October 1, 2011 assets, rights and obligations of Vivo Part. related to mobile operations in Minas Gerais were awarded to Vivo S.A., a subsidiary of Vivo Part. As a result, Vivo S.A. became the only mobile operator in the group.
As there was no reason to maintain Vivo Part. as the holding of Vivo S.A. and after ANATEL’s approval of the third stage of corporate restructuring, on August 16, 2011, Telefonica Brasil merged Vivo Part.’s equity, extinguishing Vivo Part. on October 3, 2011, which simplified and rationalized the companies’ cost structures.
Accounting for Acquisition of Vivo Part. by Telefônica Brasil
Considering that accounting for business combinations between entities under common control has still not been specifically specified IFRS, a company must apply the hierarchy provided for in paragraphs 10-12 of IAS 8 – "Accounting Policies, Changes in Accounting Estimates and Errors" to choose the accounting practice to be adopted.
Therefore, in the absence of an IFRS regulation which treats similar or related matters, and in the lack of guidance in the Conceptual Structure for the Elaboration and Presentation of Financial Statements, management can also consider the most recent technical positions taken on by other accounting regulatory bodies which use a similar conceptual structure to that of IFRS to develop accounting pronouncements, or even, other generally accepted accounting literature and practices, so long as they do not conflict with the sources listed in item 11 of IAS 8.
Therefore, an entity can choose to account for a business combination between entities under common control using either the acquisition method in accordance with IFRS 3(R) or by the pooling of interest method, with guidance provided by other accounting regulatory bodies with a similar structure to IFRSs.
Since the acquisition method results in the revaluation of net assets of one or more entities involved and / or the generation of goodwill, it is necessary that economic substance exists from the perspective of the acquiring entity for this method to be applied, as is the case of this business combination.
Therefore, it is necessary that all the facts and circumstances from the perspective of the acquiring entity should be carefully analyzed, before it is concluded that a transaction has economic substance. If there was no economic substance, the pooling of interests method would be the only method that may be applied to that transaction.
Management understands that this transaction has economic substance having considered the following factors in its evaluation and documentation:
| a) | Objectives of the transaction: The acquisition of control of Vivo Part. by Telefónica had as its main objective the integration of fixed and mobile telecommunications services in Brazil as the resultstelecommunication segment is already moving in this direction. Therefore, Telefónica must necessarily integrate its fixed and mobile operations in Brazil, so as to operate more efficiently and with the possibility of derivative operations (hedges)competing with the other companies in the telecom segment. |
The merger of Vivo Part.’s shares into Telefônica Brasil represents the first step towards the integration of the businesses and immediately generates gains due to the rationalization of structures and synergies, as well as avoids risks of claims by the shareholders of both companies, especially at this moment, in which some activities could be focused in one or in the other company. In addition, the shareholders of both companies will benefit from the higher liquidity of the shares in the stock exchange.
| b) | Involvement of third parties in the transaction, such as non-controlling shareholders: Vivo Part. had a significant number of non-controlling shareholders, representing 40.4% of its capital stock, which voted and approved the merger of shares in Telefônica Brasil, with abstention of only one shareholder who held 103 shares, which is not significant considering the Company’s capital. Telefônica Brasil, which had around 12% of non-controlling shareholders, had its operation approved by unanimous votes of the present shareholders. |
| c) | If the transaction was conducted or not at fair value: The exchange ratio of shares was determined based on the recommendations of independent special committees and in their economic values, based on the discounted cash flow method, calculated by the financial advisors of Vivo Part.’s committee, Signatura Lazard Financial Advisory Services Ltda. ("Signatura Lazard"), and Telefônica Brasil’s committee, Banco Santander S.A. ("Santander"). |
TELECOMUNICAÇÕES DE SÃO PAULO
According to item 4.2 of the Merger Protocol the shareholders of Vivo Part. received in exchange for the shares they owned, new shares issued by the Telefônica Brasil, by the same type as those held by Vivo Part’s shareholders. The exchange of shares was approved as follows: For each common and preferred share of Vivo Part., 1.55 new shares of the same type were issued by Telefônica Brasil. Therefore, Telefônica Brasil issued 619,364,658 shares (212,767,241 common shares and 406,597,417 preferred shares) as payment for the 100% of the shareholdings of Vivo Participação S.A. - TELESPThe value of the issued shares in the total amount of R$31,222,630 was calculated based on the economic value of Vivo Part.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSThe Company adopted fair value based on economical value report due to the fact that it is a transaction between two companies under common control, which value per share approximated the value paid by SP Telecom in March 2011 pursuant to the OPA (Public Tender Offer) that resulted in the acquisition of 2.65% of Vivo Part.’s capital held by non-controlling shareholders. As previously mentioned, this value substantially reflects the price paid by Telefónica in the acquisition of control of Vivo Part. from Portugal Telecom, with the differences pointed out mainly due to the premium paid by Telefonica in the acquisition of control and also due to the natural evolution of business between the consideration date by the parent company (September 2010) and the consideration date used by Telefônica Brasil (March 2011).
For
| d) | Existing activities in the companies involved in the transaction: The exchange of shares between Vivo Part. (mobile operator) and Telefônica Brasil (fixed line operator) is part of the strategy of integrating both activities, considering that the acquirer (Telefônica Brasil) did not have mobile operations. Telecom companies in Brazil are working towards obtaining integrated business so as to maintain competitiveness. Therefore, the activities of Vivo Part. and Telefônica Brasil are complementary in the current telecom business scenario and must be managed jointly for their development. |
| e) | If the transaction conducts entities jointly to a ‘reporting entity’ which did not exist previously: The group’s strategy is to integrate its fixed line and mobile services in one 'reporting entity' which did not previously exist, aiming at sharing the synergy gains in the telecom segment in Brazil between shareholders. |
| f) | The transaction altered the control of Vivo Part.: As a consequence of the exchange of shares process and in order to have only one reporting entity, Vivo Part. became a full subsidiary of Telefônica Brasil and was merged in the final stage of the corporate restructuring. |
Therefore, we concluded that the years ended December 31, 2008, 2007merger of Vivo's shares into Telefônica Brasil has economic substance, and 2006therefore, the acquisition method of accounting should be used, as provided for in IFRS 3 (R).
(Amounts expressed
As provided below, the Company has also evaluated the transaction in thousandsorder to properly determine the acquirer. In addition, if in a business combination IAS 27 is applied and it is not possible to indicate clearly which of Reaisthe combined entities is the acquirer, additional guidance in IFRS 3 (R) includes various other factors which must be considered in the determination of which entity is the acquirer.
In a business combination which takes place mainly through an exchange of shares, usually the acquirer is the entity that issues its shares to exchange with the acquired interest. However, in some business combinations, known as reverse acquisitions, the entity which issues the shares can not be considered the acquired entity.
In the identification of the acquirer in a business combination which takes place upon the exchange of shares, IFRS 3 (R), unless otherwise indicated)paragraphs B13 to B18, require that other relevant factors be considered, including the following:
| a) | In a business combination based on exchange of shares, the acquirer is normally the entity which issues the equity instruments: Telefônica Brasil issued the shares in exchange of shares owned by Vivo Part.’s shareholders, turning Vivo Part. a fully-owned subsidiary of Telefônica Brasil. Additionally, the final stage of such corporate restructuring was to merge Vivo Part. into Telefônica Brasil, and therefore Vivo Part. will no longer exist. Telefônica Brasil issued shares held by it in exchange for interest in Vivo Part., increasing its capital stock by R$31,222,630. |
Declared interest | b) | The composition of the Senior Management of the combined entity. The acquirer is normally the company whose former Senior Management is prevailing in the combined entity: The CEO and CFO of Telefônica Brasil, among other key–functions, remained in these positions until the merger of shares. The equivalent positions in Vivo Part. were extinguished. |
| c) | The composition of Board of Directors (or equivalent body) of the combined entity. Usually the acquirer is the entity whose shareholders have the ability to elect, appoint or remove most members of the board of directors of the combined entity: The Board of Directors of Telefônica Brasil remains and the Board of Vivo Part. no longer exists after the merger by Telefônica Brasil. |
| d) | Additionally, the guidance to identify the acquirer also considers that it is normally the entity whose relative size (measured, for instance, in assets, revenues and profit) is significantly larger than the acquired entity: Both companies have similar sizes, which, however must not be a determining fact to be considered in the identification of the acquirer. The most important fact to be considered is actually the essence of this acquisition, which is the acquisition of Vivo Part. from Portugal Telecom by Telefónica in Spain. As a result, shares were exchanged upon this restructuring process so Telefônica Brasil and Vivo Part. could have their businesses integrated, generating the synergies expected by the management and by the market. Therefore, independent of the size of the companies, it is important to consider the essence of the transaction which is the acquisition of Vivo Part by Telefônica Brasil to make the previously mentioned synergies possible. |
Based on shareholders’ equitythe afore mentioned factors, Management concluded that Telefonica Brasil is includedthe acquirer on this transaction.
The fair value of the identifiable assets acquired and liabilities assumed of Vivo Part. were measured and recognized at acquisition date.
These values were determined upon various measurement methods of evaluation for each type of asset and/or liability based on the best available information. The advice of experts has also been considered in addition to the various other considerations made in determining these accounts; however for disclosure purposes,fair values.
The methods and assumptions used to measure these fair values were as follows:
Licenses
The fair value of the amount declaredlicenses has been determined through the use of Multi-period Excess Earnings Method (MEEM), which is based on a calculation of discounted cash flows of the estimated future economic benefits attributable to the licenses, net of the elimination of charges related to contributing assets involved in the generation of such cash flows and excluding the cash flows attributable to the customer base.
This method assumes that intangible assets rarely generate income on their own. Thus, cash flows attributable to the licenses are those remaining after the return on investment of all of the contributing assets required to generate the projected cash flows. The allocated fair value of the licenses on the acquisition date was R$12,876,000, which is being amortized over a 27.75 year period for accounting purposes.
Customer base
The customer base has been measured using the MEEM, which is based on a discounted cash flow analysis of the estimated future economic benefits attributable to the customer base, net of the elimination of charges involved in its generation. An analysis of the average length of customer relationships, using the retirement rate method, was reversedperformed in order to retained earningsestimate the remaining useful life of the customer base.
The objective of the analysis of useful lives is to estimate a survival curve that predicts future customer churn of our current client base. The so-called "Iowa Curves" were considered to approximate the survival curve of customers. The allocated fair value of the licenses on the date of the acquisition was R$2,042,000, which is being amortized over a 8.5 year period for accounting purposes.
Trademark
The fair value of the trademark was calculated using the "relief-from-royalty" method. This method establishes that an asset’s value is calculated by capitalizing the royalties saved by holding the intellectual property. In other words the trademark owner generates a gain in equity.holding the intangible asset rather than paying royalties for its use. The royalties saving was calculated by applying a market royalty rate (expressed as a percentage of revenues) to future revenues expected to be generated from the sale of products and services associated with the intangible asset. A market royalty rate is the rate, normally expressed as a percentage of net revenues, that a knowledgeable, interested owner would charge a knowledgeable, interested user for the use of an asset in an arm’s length transaction. The allocated fair value of the licenses on the date of the acquisition was R$1,642,000, which is being amortized over a 19.5 year period for accounting purposes.
The provisional fair values, goodwill and cost of the identifiable assets acquired and liabilities assumed in this transaction at acquisition dates were the following:
n.In R$ thousands | PensionVivo Participações S.A. |
(provisional data) |
| Fair value |
Current assets | 7,244,124 |
| |
Non-current assets | 28,134,683 |
Deferred tax asset, net(2) | 417,883 |
Other non-current assets | 2,385,177 |
Property, plant and other post-retirement benefit:equipment | 6,198,358 |
Intangible assets (1) | 19,133,265 |
| |
Current liabilities | (7,964,209) |
Non-current liabilities | (5,352,456) |
Other non-current liabilities (3) | (5,352,456) |
Net asset amount | 22,062,142 |
Cost of shareholdings | 31,222,630 |
Goodwill of the Company sponsors individual and multiemployer post-retirement and health assistance plans for its employees. Actuarial liabilities, with characteristics of defined benefit, were calculated using the projected unit credit method, as provided for by CVM Deliberation No. 371/2000. Other considerations related to such plans are described in Note 32.transaction | 9,160,488 |
o. | Financial instruments: are measured at(1) | Includes the allocation of fair value or amortized cost inattributed to licenses (R$12,876,000), trademark (R$1,642,000) and customer base (R$2,042,000). The Company does not consider trademark and customer base as deductible items for tax purposes. |
| (2) | Includes the December 31, 2008 financial statements, as described in Note 3.b. For the year ended December 31, 2007, loansrecognition of deferred income tax over (1) and financing and derivative instruments are shown at contractually agreed rates.(3). |
| (3) | Includes allocation of fair value attributed to contingent liabilities of R$283,000. |
At the date of issuance of these consolidated financial statements, the Company was concluding the process of determining the fair value of the identifiable assets acquired and liabilities assumed from Vivo Part. and, accordingly, new information obtained about facts and circumstances existing at the acquisition date, may result in some adjustments to the provisional allocation of intangibles and goodwill. The conclusion of this process is expected to be carried out within a maximum of twelve months from the date of acquisition.
The fair value of accounts receivables for products sold and services rendered totals R$2,809,561. The gross amount is R$3,027,732. Over the gross amount of accounts receivables for products sold and services rendered, an allowance for doubtful accounts of R$218,171 was recorded, for which settlement is expected in the net value of this provision.
According to IFRS 3 (R) - Business Combination, the acquirer must recognize, on the date of acquisition, contingent liabilities assumed on a business combination even if it is not likely that the outflow of resources to settle the liability are necessary, as long as a present obligation arising from past events exists and its fair value can be reliably measured. In compliance with the criteria above, in this acquisition, a contingent liability at fair value of R$283,000 was recognized, based on the possible cash outflow estimated for its settlement on the acquisition date (see note 20).
p.Analysis of cash flow on acquisition | Earnings per share: it is calculated based on | R$ thousand |
Transaction costs (included in cash flows from operating activities) | | (9,066) |
Cash and cash equivalents of the company acquired (included in cash flows from investing activities) | | 1,982,898 |
Net Income forof cash outflow and cash equivalents from the year and the total number of shares outstanding at the balance sheet date. The difference between the Company’s and the consolidated net income for the year ended December 31, 2007, in the amount of R$209, refers to donations directly recorded as capital reserves at subsidiary A. Telecom S.A., accounted for under the equity method by the Company (Note 11).acquisition | | 1,973,832 |
5. Cash and Cash EquivalentsThe transaction costs incurred to date in the amount of R$9,066 were recorded in the income statement as other operating expenses.
| | Consolidated |
| | 2008 | | 2007 |
| | | | |
Bank accounts | | 31,993 | | 584,627 |
Short-term investments | | 1,709,013 | | 348,648 |
| | | | |
Total | | 1,741,006 | | 933,275 |
From the acquisition date and up to the date of issuance of these financial statements (December 31, 2011), Vivo Part. (until September 2011) and Vivo S.A. have contributed R$16,125,386 of the net operating revenue and R$2,615,068 of the net income of the consolidated company.
For information purposes only, we presented below an unaudited pro forma combined income statement between the Company and the acquired company, Vivo Part., should the acquisition have taken place on January 1, 2011, without considering retroactively as of this date the accounting effects of the purchase price allocations (PPA). This statement does not intend to represent the real results of the operations of the Company should the restructuring have taken place on the specified date, nor should it be used to project results of the Company’s operations on any date or future period.
For the fiscal year ended December 31, 2011 (unaudited)
| | Telefônica Brasil Consolidated for the fiscal year ended December 31, 2011 | | | Vivo Consolidated for the three months period ended March 31, 2011 | | | Elimination (b) | | | Telefônica Brasil | |
Net operating revenue | | | 29,128,740 | | | | 4,812,330 | | | | (802,456 | ) | | | 33,138,614 | |
Costs of goods and services (a) | | | (14,728,171 | ) | | | (2,217,733 | ) | | | 773,395 | | | | (16,172,509 | ) |
Gross profit | | | 14,400,569 | | | | 2,594,597 | | | | (29,061 | ) | | | 16,966,105 | |
Operating (expenses) income | | | (8,603,203 | ) | | | (1,489,121 | ) | | | 29,061 | | | | (10,063,263 | ) |
Selling (a) | | | (7,259,703 | ) | | | (1,180,178 | ) | | | 36,545 | | | | (8,403,336 | ) |
General and administrative (a) | | | (1,785,658 | ) | | | (310,416 | ) | | | - | | | | (2,096,074 | ) |
Other operating income (expenses), net | | | 442,158 | | | | 1,473 | | | | (7,484 | ) | | | 436,147 | |
Operating income before financial expense, net | | | 5,797,366 | | | | 1,105,476 | | | | - | | | | 6,902,842 | |
Financial expense, net | | | (139,692 | ) | | | (39,794 | ) | | | - | | | | (179,486 | ) |
Income before income tax and social contribution | | | 5,657,674 | | | | 1,065,682 | | | | - | | | | 6,723,356 | |
Income tax and social contribution | | | (1,295,475 | ) | | | (355,476 | ) | | | - | | | | (1,650,951 | ) |
Net income for the period (c) | | | 4,362,199 | | | | 710,206 | | | | - | | | | 5,072,405 | |
Attributed to equity holders of the parent company | | | 4,355,318 | | | | - | | | | - | | | | 5,065,524 | |
Attributed to participation of non-controlling shareholders | | | 6,881 | | | | - | | | | - | | | | 6,881 | |
(a) | Includes depreciation and amortization expenses amounting to R$5,131,853. |
(b) | Includes mainly revenues and interconnection costs. |
(c) | Net income would be R$4,940,938 in 2011, should the effects of the amortization of intangible assets of the first 3 months of 2011 (R$199,193), net of deferred income taxes amounting to R$67,726, have been included. |
5. | Cash and cash equivalents |
| | 2011 | | | 2010 | |
| | | | | | |
Bank accounts | | | 77,404 | | | | 8,930 | |
Short-term investments | | | 2,862,938 | | | | 1,547,785 | |
Total | | | 2,940,342 | | | | 1,556,715 | |
Short-term investments are basically CDB (Bank Deposits Certificate) and, indexed under CDI (Certificate for Inter-bank Deposits)(Inter-bank Deposits Certificate) rate variation, which are readily liquid and maintained with reputable financial institutions.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
6. Trade Accounts Receivable, Net6. | Trade accounts receivable, net |
| | Consolidated |
| | 2008 | | 2007 |
Billed amounts | | 2,608,012 | | 2,212,396 |
Accrued unbilled amounts | | 1,374,080 | | 1,353,244 |
Gross accounts receivable | | 3,982,092 | | 3,565,640 |
| | | | |
Allowance for doubtful accounts | | (767,698) | | (733,590) |
| | | | |
Total | | 3,214,394 | | 2,832,050 |
| | | | |
Current | | 2,248,736 | | 2,115,867 |
Past-due – 1 to 30 days | | 530,238 | | 500,048 |
Past-due – 31 to 60 days | | 195,213 | | 146,483 |
Past-due – 61 to 90 days | | 113,101 | | 70,224 |
Past-due – 91 to 120 days | | 110,720 | | 67,199 |
Past-due – more than 120 days | | 784,084 | | 665,819 |
Total | | 3,982,092 | | 3,565,640 |
| | | | |
Current | | 3,152,831 | | 2,832,050 |
Noncurrent | | 61,563 | | - |
Changes in the allowance for doubtful accounts were as follows:
| 2008 | | 2007 | | 2006 |
Beginning balance | 733,590 | | 560,878 | | 574,453 |
Provision charged to selling expense (Note 25) | 538,625 | | 652,692 | | 412,997 |
Write-offs | (504,517) | | (479,980) | | (426,572) |
Ending balance | 767,698 | | 733,590 | | 560,878 |
| | 2011 | | | 2010 | |
| | | | | | |
Billed amounts | | | 3,461,465 | | | | 1,854,151 | |
Interconnection receivable | | | 1,855,801 | | | | 188,609 | |
Accrued unbilled amounts | | | 930,178 | | | | 1,336,441 | |
Gross accounts receivable | | | 6,247,444 | | | | 3,379,201 | |
| | | | | | | | |
Allowance for doubtful accounts | | | (1,056,729 | ) | | | (765,633 | ) |
Total | | | 5,190,715 | | | | 2,613,568 | |
| | | | | | | | |
Current | | | 4,103,377 | | | | 2,008,325 | |
Past-due – 1 to 30 days | | | 631,923 | | | | 394,371 | |
Past-due – 31 to 60 days | | | 204,775 | | | | 95,206 | |
Past-due – 61 to 90 days | | | 115,125 | | | | 41,096 | |
Past-due – 91 to 120 days | | | 49,815 | | | | 19,088 | |
Past-due – more than 120 days | | | 85,700 | | | | 55,482 | |
Total | | | 5,190,715 | | | | 2,613,568 | |
| | | | | | | | |
Current | | | 5,105,860 | | | | 2,546,225 | |
Non-current | | | 84,855 | | | | 67,343 | |
Changes in Allowance for doubtful accounts
| | 2011 | | | 2010 | |
| | | | | | |
Opening balance | | | (765,633 | ) | | | (833,639 | ) |
Provision charged to selling expenses (Note 26) | | | (506,581 | ) | | | (386,340 | ) |
Business combination | | | (218,171 | ) | | | - | |
Consolidation of TVA | | | (3,659 | ) | | | - | |
Write-offs | | | 437,315 | | | | 454,346 | |
Ending balance | | | (1,056,729 | ) | | | (765,633 | ) |
Subsidiary A.Telecom offers “Posto Informático”, a product that consists inof the lease of IT equipment to small-small and medium-sized companies for fixed installments received over the agreed term. Considering the related contractual conditions, the Company classified this product as a “Finance Lease” in itsthe financial statements as of December 31, 2008 financial statements (Note 3.a)2011 and 2010 (note 3.g).
The Consolidatedconsolidated accounts receivable as of December 31, 2008 reflects2011 and 2010 reflect the following effects:
| 2008 |
| |
Present value of minimum payments receivable | 139,214 |
Unrealized financial income | 20,154 |
Gross investment in finance lease receivables at year-end | 159,368 |
| |
Allowance for doubtful accounts | (26,159) |
| |
Financial leases receivable, net | 133,209 |
| |
Current amount | 77,651 |
Noncurrent amount | 61,563 |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP | | 2011 | | | 2010 | |
Present value of minimum payments receivable | | | 261,933 | | | | 112,352 | |
Unrealized financial income | | | 8,941 | | | | 23,213 | |
Gross investment in finance lease receivables | | | 270,874 | | | | 135,565 | |
Allowance for doubtful accounts | | | (69,375 | ) | | | (18,102 | ) |
Financial Leases receivable, net | | | 201,499 | | | | 117,463 | |
Current | | | 177,078 | | | | 45,009 | |
Non-current | | | 84,855 | | | | 67,343 | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Aging list of financial leases receivable:
Year | | Gross investment | | Present value | | Gross Investment | | | Present Value | |
| | | | | |
Falling due within one year | | 77,651 | | 77,651 | | | 177,078 | | | | 177,078 | |
Falling due within five years | | 81,717 | | 61,563 | | | 93,796 | | | | 84,855 | |
| | | | | |
Total | | 159,368 | | 139,214 | | | 270,874 | | | | 261,933 | |
There are neither unsecured residual values that produce benefits to the lessor nor contingent payments recognized as revenues during the year.
| | 2011 | | | 2010 | |
| | | | | | |
Consumption materials | | | 94,547 | | | | 100,579 | |
Resale items (*) | | | 435,032 | | | | 66,564 | |
Other inventories | | | 6,468 | | | | 10,052 | |
Allowance for reduction to net recoverable value and obsolescence | | | (64,326 | ) | | | (99,696 | ) |
Total current | | | 471,721 | | | | 77,499 | |
| | | | | | | | |
(*) Includes, among others, cell phones and IT equipments. | | | | | | | | |
7. Deferred
Below, we present the changes in the allowance for reduction to net recoverable value and Recoverable Taxesobsolescence:
| | Consolidated |
| | 2008 | | 2007 |
Withholding taxes | | 77,371 | | 47,657 |
Recoverable income tax and social contribution | | 36,754 | | 150,991 |
| | | | |
Deferred taxes | | 1,027,879 | | 996,348 |
Tax loss carryforwards – Income tax | | 3,305 | | 5,996 |
Tax loss carryforwards – Social contribution tax | | 1,787 | | 1,949 |
Reserve for contingencies | | 340,850 | | 302,377 |
Post-retirement benefit plans | | 50,581 | | 32,445 |
Allowance for doubtful accounts | | 94,691 | | 95,783 |
Allowance for reduction of inventory to recoverable value | | 28,909 | | 29,943 |
Merger tax credit (7.2) | | 132,515 | | 100,504 |
Income tax and Social contribution on other temporary differences | | 375,241 | | 427,351 |
| | | | |
ICMS (state VAT) (*) | | 456,192 | | 449,759 |
Other | | 14,127 | | 12,598 |
| | | | |
Total | | 1,612,323 | | 1,657,353 |
| | | | |
Current | | 1,032,516 | | 1,117,982 |
Noncurrent | | 579,807 | | 539,371 |
| | 2011 | | | 2010 | |
Opening balance | | | (99,696 | ) | | | (75,928 | ) |
Additions | | | (37,462 | ) | | | (31,568 | ) |
Write-offs | | | 95,149 | | | | 7,800 | |
Business combination | | | (18,852 | ) | | | - | |
Consolidation of TVA | | | (3,465 | ) | | | - | |
Ending balance | | | (64,326 | ) | | | (99,696 | ) |
The reduction in the balance of resale items is explained due to the disposal process made through auctions and reuse in the Company’s plant.
8. | Deferred and recoverable taxes |
(*) Refers to credits on the acquisition of property, plant and equipment items, available for offset against VAT obligations in 48 months.
| | 2011 | | | 2010 | |
| | | | | | |
Withholding taxes | | | 152,919 | | | | 91,185 | |
Recoverable income tax and social contribution | | | 1,143,988 | | | | 27,088 | |
ICMS (state VAT) (*) | | | 1,665,896 | | | | 534,323 | |
ICMS (state VAT)-Convênio 39/Portaria CAT 06 | | | 307,832 | | | | 313,177 | |
PIS and COFINS | | | 210,950 | | | | 17,726 | |
Other | | | 28,440 | | | | 2,535 | |
Total | | | 3,510,025 | | | | 986,034 | |
Current | | | 2,495,066 | | | | 659,357 | |
Non-current | | | 1,014,959 | | | | 326,677 | |
7.1. | (*) | The amount recorded as of December 31, 2011 refers mainly to credits on the acquisition of property, plant and equipment items, available for offset against VAT obligations in 48 months. |
| 8.2 | Deferred income and social contribution taxes |
The Company and its subsidiaries recognized deferred income and social contribution tax assets considering the existence of taxable income in the last five fiscal years and the expected generation of future taxable profit discounted to present value based on a technical feasibility study, approved by the Board of Directors on December 19, 2008, as provided for in CVM Instruction No. 371/2002.12, 2011.
Company estimates the realization of the deferred taxes as of December 31, 2008 as follows: | | 2011 | | | 2010 | |
Deferred Assets | | | | | | |
Tax loss carry-forwards – Income tax and social contribution (a) | | | 348,576 | | | | 2,325 | |
| | | | | | | | |
Provisions for tax, labor and civil claims | | | 736,312 | | | | 302,607 | |
Post-retirement benefit plans | | | 98,833 | | | | 74,460 | |
| | | | | | | | |
Allowance for doubtful accounts | | | 178,433 | | | | 100,194 | |
Fust Provision | | | 151,985 | | | | 73,251 | |
Allowance for obsolescence of modems and others | | | 8,745 | | | | 18,713 | |
Employee Profit sharing | | | 82,564 | | | | 38,730 | |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESPAccelerated depreciation | | | 433,512 | | | | 46,318 | |
Allowance for reduction of inventory to recoverable value | | | 17,542 | | | | 31,593 | |
Provision for loyalty program | | | 23,399 | | | | - | |
Derivatives | | | 69,387 | | | | 33,188 | |
Merged tax credits – DABR (b) | | | 46,962 | | | | 34,691 | |
| | | | | | | | |
Provisions | | | 354,916 | | | | 129,798 | |
Income tax and social contribution on other temporary differences | | | 308,462 | | | | 128,144 | |
| | | 2,859,628 | | | | 1,014,012 | |
Deferred liabilities | | | | | | | | |
Technological innovation Law | | | (333,156 | ) | | | (238,957 | ) |
Exchange rate variation | | | (14,742 | ) | | | (25,811 | ) |
Merged tax credits (b) | | | (207,668 | ) | | | (136,015 | ) |
| | | | | | | | |
Client portfolio | | | (630,896 | ) | | | - | |
Trademarks and patents | | | (536,808 | ) | | | - | |
License | | | (79,976 | ) | | | - | |
| | | | | | | | |
Effect of goodwill generated by the merger of Telemig and Telemig Participações into TCO IP S.A. | | | (258,695 | ) | | | | |
Effect of goodwill generated on the acquisition of Vivo Part. | | | (53,374 | ) | | | - | |
Income tax and Social contribution on other temporary differences | | | (104,389 | ) | | | (109,550 | ) |
| | | (2,219,704 | ) | | | (510,333 | ) |
Total non-current asset (liability), net | | | 639,924 | | | | 503,679 | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Year | | Consolidated |
| | |
2009 | | 502,119 |
2010 | | 215,097 |
2011 | | 135,675 |
2012 | | 101,904 |
Thereafter | | 73,084 |
| | |
Total | | 1,027,879 |
The recoverable amounts above are based on projections subject to changes in the future.
Tax losses and temporary differences in the respective amounts of R$62,512 and R$35,379 were not recognized by the subsidiaries at December 31, 2008 in view of the unlikely generation of future taxable profits.
7.2. Merger Tax Credits
In October 2008, the merger of DABR into the Company through a corporate reorganization process mentioned in Note 2.b resulted in the recognition of merged tax credits arising from goodwill recorded by DABR in connection with the investment made in Telesp in 2006.
Additionally, the Company has tax credits arising from corporate reorganization processes following corporate investments acquired in prior years, as shown in the table below.
The Company’s accounting records for corporate and fiscal purposes include specific (merged) goodwill and reserve accounts, and the related amortization, reversal of provision and tax credit realization are as follows:
| | 2008 | | 2007 |
Consolidated | | DABR | | Spanish/ Figueira | | Spanish/ Figueira |
| | | | | | |
Balance sheet | | | | | | |
| | | | | | |
Goodwill, net of accumulated amortization | | 176,236 | | 213,514 | | 295,600 |
Provision for safeguarding shareholders’ rights, net of reversals | | (116,316) | | (140,919) | | (195,096) |
Net amount – tax credit | | 59,920 | | 72,595 | | 100,504 |
| | | | | | |
Statement of income | | | | | | |
| | | | | | |
Goodwill amortization for the year | | (9,276) | | (82,086) | | (82,086) |
Reversal of provision for safeguarding shareholders’ rights for the year | | 6,122 | | 54,177 | | 54,177 |
Tax credit for the year | | 3,154 | | 27,909 | | 27,909 |
Effect on net income for the year | | - | | - | | - |
For calculation of the tax credits resulting from acquisition, income and social contribution tax rates are 25% and 9%, respectively.
As shown above, goodwill amortization, net of provision reversal and of the corresponding tax credit, had no impact on P&L.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
| a) | Tax loss carryforward and negative tax base: These represent the amount recorded by the Company’s subsidiaries which, pursuant to the Brazilian legislation, may be offset up to the limit of 30% of the taxable income computed in the coming fiscal years and subject to no statute of limitations. The subsidiaries Telefônica Data S.A. and Telefônica Sistema de Televisão S.A. did not record the potential deferred income and social contribution taxes credit that would arise from the use of the tax loss carryforwards and negative tax bases in the amount of R$54,139 at December 31, 2011, given the uncertainty, at this time, as to these subsidiaries ability to generate sufficient future taxable results to ensure the realization of these deferred taxes. |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ForBelow we present tax credit amounts from tax loss carryforwards recognized and not recorded by the years endedCompany’s subsidiaries. As of December 31, 2008, 2007 and 20062011, there was no significant change in the Company’s business or those of its subsidiaries that would indicate the need for a provision for the aforementioned tax credits.
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| | Income Tax | | | Social Contribution | | | Total | |
| | | | | | | | | |
Tax-loss carry-forward and negative base at 12/31/2011 | | | 1,195,277 | | | | 1,154,399 | | | | 2,349,677 | |
Tax credit (25% + 9%) | | | 298,819 | | | | 103,896 | | | | 402,715 | |
Tax credit recognized | | | 259,011 | | | | 89,565 | | | | 348,576 | |
Tax credit not recognized | | | 39,808 | | | | 14,331 | | | | 54,139 | |
| | Income Tax | | | Social Contribution | | | Total | |
| | | | | | | | | |
Tax-loss carry-forward and negative base at 12/31/2010 | | | 130,435 | | | | 130,435 | | | | 260,870 | |
Tax credit (25% + 9%) | | | 32,609 | | | | 11,739 | | | | 44,348 | |
Tax credit recognized | | | 1,710 | | | | 615 | | | | 2,325 | |
Tax credit not recognized | | | 30,899 | | | | 11,124 | | | | 42,023 | |
For presentation purposes, the net amount
The tax benefit generated by the amortization of DABR goodwill will be reversed to the Company’s controlling shareholder, SP Telecomunicações Holding Ltda., through a capital increase with the issuance of the Company’s shares. Other shareholders will be entitled to preemptive rights in the subscription of capital increases that may occur.
8. Inventories
| | Consolidated |
| | 2008 | | 2007 |
Consumption materials | | 129,600 | | 115,217 |
Resale items (*) | | 106,734 | | 87,786 |
Public telephone cards | | 13,461 | | 13,447 |
Scraps | | 161 | | 222 |
Allowance for reduction to net recoverable value and obsolescence | | (85,546) | | (91,668) |
Total current | | 164,410 | | 125,004 |
(*) Includes the inventory of IT equipment (note 4.d)
The allowance for reduction to recoverable value and obsolescence takes into account timely analyses carried out by the Company.
Changes in the allowance for reduction to market value and obsolescence of inventories were as follows:
| Consolidated | |
| 2008 | | 2007 | | 2006 |
Beginning balance | 91,668 | | 99,927 | | 113,971 |
Provision charged to other operating income (expenses), net (Note 28) | 3,743 | | 5,700 | | 4,569 |
Write-offs | (9,865) | | (13,959) | | (18,613) |
Ending balance | 85,546 | | 91,668 | | 99,927 |
9. Other Assets
| | Consolidated |
| | 2008 | | 2007 |
Advances to employees | | 8,207 | | 7,313 |
Advances to suppliers | | 33,567 | | 20,852 |
Prepaid expenses | | 66,699 | | 81,710 |
Receivables from Barramar S.A. (a) | | 62,526 | | 60,116 |
Related party receivables (Note 31) (b) | | 153,285 | | 100,731 |
Amounts linked to National Treasury securities | | 11,289 | | 10,495 |
Other assets | | 94,059 | | 64,946 |
| | | | |
Total | | 429,632 | | 346,163 |
| | | | |
Current | | 273,320 | | 193,951 |
Noncurrent | | 156,312 | | 152,212 |
(a) Refers to receivables from Barramar S.A. recorded by the Company net of allowance for losses.Contents
(b) Includes to current and noncurrent amounts.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP | b) | Merged tax credit: Relates to tax benefits arising from corporate reorganizations represented by goodwill amounts based on future expected profitability to be used in compliance with the limits established by tax legislation. |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007Changes in deferred income and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
10. Escrow Depositssocial contribution tax assets and liabilities:
| | Consolidated |
| | 2008 | | 2007 |
| | | | |
Civil litigation | | 246,500 | | 161,287 |
Tax litigation | | 254,571 | | 246,863 |
Labor claims | | 165,306 | | 76,068 |
Freeze of assets by court order | | 44,923 | | 50,696 |
| | | | |
Total noncurrent | | 711,300 | | 534,914 |
The amounts presented above refer to escrow deposits for those cases in which an unfavorable outcome is considered possible or remote.
Those deposits related to provisions are presented in Note 20.Deferred Tax Assets | | December 31, 2010 | | | Additions | | | Write-offs/realization | | | Business Combination | | | December 31, 2011 | |
| | | | | | | | | | | | | | | |
Tax losses | | | 2,325 | | | | - | | | | (393,067 | ) | | | 739,318 | | | | 348,576 | |
Other deferred assets | | | 1,011,687 | | | | 252,826 | | | | (108,222 | ) | | | 1,354,761 | | | | 2,511,052 | |
Total | | | 1,014,012 | | | | 252,826 | | | | (501,289 | ) | | | 2,094,079 | | | | 2,859,628 | |
11. InvestmentsDeferred Tax Assets | | December 31, 2009 | | | Additions | | | Write-offs | | | December 31, 2010 | |
Tax losses | | | 1,716 | | | | 609 | | | | - | | | | 2,325 | |
Other deferred assets | | | 926,990 | | | | 111,175 | | | | (26,478 | ) | | | 1,011,687 | |
Total | | | 928,706 | | | | 111,784 | | | | (26,478 | ) | | | 1,014,012 | |
| | Consolidated |
| | 2008 | | 2007 |
| | | | |
Investments in associates | | 36,313 | | 28,051 |
GTR Participações e Empreendimentos S.A. | | 1,476 | | 2,047 |
Lemontree Participações S.A. | | 9,608 | | 6,130 |
Comercial Cabo TV São Paulo S.A. | | 21,215 | | 13,345 |
TVA Sul Paraná S.A. | | 4,014 | | 6,529 |
| | | | |
Other Investments (*) | | 265,517 | | 149,506 |
Portugal Telecom | | 210,431 | | 126,509 |
Portugal Multimédia | | 19,531 | | 8,759 |
Other investments | | 35,555 | | 14,238 |
| | | | |
Total | | 301,830 | | 177,557 |
(*) In 2008, other investments are measured at market value, as mentioned in Note 4.e, and in 2007 these are stated at cost.Deferred Tax Liabilities | | December 31, 2010 | | | Additions | | | Write-offs | | | Business Combination | | | Other comprehensive income | | | December 31, 2011 | |
| | | | | | | | | | | | | | | | | | |
Deferred liabilities | | | 510,333 | | | | 274,332 | | | | (155,452 | ) | | | 1,611,833 | | | | (21,342 | ) | | | 2,219,704 | |
Total | | | 510,333 | | | | 274,332 | | | | (155,452 | ) | | | 1,611,833 | | | | (21,342 | ) | | | 2,219,704 | |
The main accounting information of subsidiaries and jointly-controlled subsidiaries at
Deferred Tax Liabilities | | December 31, 2009 | | | Additions | | | Write-offs/realization | | | Other comprehensive income | | | December 31, 2010 | |
| | | | | | | | | | | | | | | |
Deferred liabilities | | | 364,642 | | | | 207,869 | | | | (3,669 | ) | | | (58,509 | ) | | | 510,333 | |
Total | | | 364,642 | | | | 207,869 | | | | (3,669 | ) | | | (58,509 | ) | | | 510,333 | |
At December 31, 2008 and 2007 was2011, the Company projects deferred tax (liabilities) assets to be realized as follows:
| | 2008 | | 2007 |
| | Paid-in capital | | Capital reserves | | Retained earnings (accumulated losses) | | Net equity | | Paid-in capital | | Capital reserves | | Retained earnings (accumulated losses) | | Net equity |
| | | | | | | | | | | | | | | | |
Aliança Atlântica | | 130,095 | | (17,259) | | 15,450 | | 128,286 | | 104,343 | | - | | 10,125 | | 114,468 |
A. Telecom | | 589,969 | | 1,197 | | 19,603 | | 610,769 | | 414,969 | | 209 | | 16,838 | | 432,016 |
Companhia AIX | | 460,929 | | - | | (343,138) | | 117,791 | | 460,929 | | - | | (348,815) | | 112,114 |
Companhia ACT | | 1 | | - | | 31 | | 32 | | 1 | | - | | 45 | | 46 |
Telefônica Data | | 460,025 | | 1,139 | | (254,719) | | 206,445 | | 210,025 | | 1,137 | | (198,211) | | 12,951 |
TTP | | - | | - | | - | | - | | 82,544 | | - | | (5,489) | | 77,055 |
TST | | 255,847 | | - | | (86,602) | | 169,245 | | - | | - | | - | | - |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESPYear | | | |
| | | |
2012 | | | 1,337,875 | |
2013 | | | 93,927 | |
2014 | | | 1,758 | |
2015 | | | (31,700 | ) |
2016 | | | (35,603 | ) |
From 2017 | | | (726,333 | ) |
Total | | | 639,924 | |
| | | | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ForThese recoverable amounts are based on projections that may change in the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Shares – thousand | | 2008 | | 2007 |
Quantity of shares | | Subscribed and paid-in shares | | Company shares | | % ownership interest | | Subscribed and paid-in shares | | Company shares | | % ownership interest |
| | | | | | | | | | | | |
Aliança Atlântica | | 88 | | 44 | | 50% | | 88 | | 44 | | 50% |
A. Telecom | | 947,258 | | 947,258 | | 100% | | 673,820 | | 673,820 | | 100% |
Companhia AIX | | 298,562 | | 149,281 | | 50% | | 298,562 | | 149,281 | | 50% |
Companhia ACT | | 1 | | 0,5 | | 50% | | 1 | | 0,5 | | 50% |
Telefonica Data | | 473,372 | | 473,372 | | 100% | | 215,640 | | 215,640 | | 100% |
TTP | | - | | - | | - | | 84,544 | | 84,544 | | 100% |
TST | | 107,923 | | 107,923 | | 100% | | - | | - | | - |
Investments in affiliates accounted for under the equity method derive from TTP, which was merged by the Company, as mentioned in Note 2.b. Significant information on these affiliate companies, are as follows:
| | | | Quantity of shares (thousand) | | | | |
| | | | Total shares | | Company shares | | % ownership interest |
Affiliates | | Net equity | | Ordinary | | Preferred | | Total | | Ordinary | | Preffered | | Total | | Total | | Voting shares |
| | | | | | | | | | | | | | | | | | |
GTR Participações e Empreendimentos S.A | | 2,214 | | 878 | | 1,757 | | 2,635 | | - | | 1,757 | | 1,757 | | 66.7% | | 0.0% |
Lemontree Participações S.A. | | 14,412 | | 124,839 | | 249,682 | | 374,521 | | - | | 249,682 | | 249,682 | | 66.7% | | 0.0% |
Comercial Cabo TV São Paulo S.A. | | 35,387 | | 12,282 | | 12,282 | | 24,564 | | 2,444 | | 12,282 | | 14,726 | | 59.9% | | 19.9% |
TVA Sul Paraná S.A. | | 5,388 | | 13,656 | | 13,656 | | 27,312 | | 6,691 | | 13,656 | | 20,347 | | 74.5% | | 49.0% |
The Company equity method in subsidiaries is as follows:
| | Consolidated |
| | 2008 | | 2007 |
| | | | |
Aliança Atlântica (a) | | - | | (4,161) |
GTR Participações e Empreendimentos S.A | | (571) | | 78 |
Lemontree Participações S.A. | | 3,479 | | 495 |
Comercial Cabo TV São Paulo S.A. | | 7,869 | | 1,152 |
TVA Sul Paraná S.A. | | (2,515) | | 291 |
| | | | |
| | 8,262 | | (2,145) |
(a) The net income posted by Aliança Atlântica in 2007 refers to equity method on foreign exchange fluctuation of net equity for that year. In 2008 the foreign exchange fluctuation is recorded as Cumulative Translation Adjustment under Net Equity (Note 3.d).
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
12. Property, Plant and Equipment, Net
a. Composition:
| Consolidated |
| | | 2008 | | 2007 |
| Annual depreciation rate% | | Cost | | Accumulated depreciation | | Net book value | | Cost | | Accumulated depreciation | | Net book value |
| | | | | | | | | | | | | |
Property, plant and equipment | | | 42,876,998 | | (33,604,274) | | 9,272,724 | | 41,417,128 | | (31,516,613) | | 9,900,515 |
Switching and transmission equipment | 12.50 | | 17,529,850 | | (15,268,465) | | 2,261,385 | | 16,968,629 | | (14,402,569) | | 2,566,060 |
Transmission equipment, overhead, underground and building cables, teleprinters, PABX, energy equipment and furniture | 10.00 | | 12,690,391 | | (10,121,251) | | 2,569,140 | | 12,340,271 | | (9,598,798) | | 2,741,473 |
Transmission equipment - modems | 66.67 | | 1,381,539 | | (973,066) | | 408,473 | | 1,264,062 | | (844,834) | | 419,228 |
Underground and undersea cables, poles and towers | 5.00 to 6.67 | | 634,323 | | (411,669) | | 222,654 | | 630,139 | | (380,619) | | 249,520 |
Subscriber, public and booth equipment | 12.50 | | 2,245,185 | | (1,780,556) | | 464,629 | | 2,166,427 | | (1,601,088) | | 565,339 |
IT equipment | 20.00 | | 651,826 | | (547,170) | | 104,656 | | 677,165 | | (526,313) | | 150,852 |
Buildings and underground cables | 4.00 | | 6,596,896 | | (4,015,696) | | 2,581,200 | | 6,535,806 | | (3,801,899) | | 2,733,907 |
TV equipment | 8.00 to 33.33 | | 712,437 | | (354,922) | | 357,515 | | 412,402 | | (242,198) | | 170,204 |
Vehicles | 20.00 | | 53,568 | | (38,572) | | 14,996 | | 60,801 | | (40,209) | | 20,592 |
Land | - | | 228,117 | | - | | 228,117 | | 228,455 | | - | | 228,455 |
Other | 4.00 to 20.00 | | 152,866 | | (92,907) | | 59,959 | | 132,971 | | (78,086) | | 54,885 |
| | | | | | | | | | | | | |
Provision for losses | - | | (11,807) | | - | | (11,807) | | (5,706) | | - | | (5,706) |
| | | | | | | | | | | | | |
Property, plant and equipment in progress | - | | 608,016 | | - | | 608,016 | | 365,317 | | - | | 365,317 |
| | | | | | | | | | | | | |
Total | | | 43,473,207 | | (33,604,274) | | 9,868,933 | | 41,776,739 | | (31,516,613) | | 10,260,126 |
Average annual depreciation rates - % | | | 10.64 | | | | | | 10.23 | | | | |
Assets fully depreciated | | 21,204,279 | | | | | | 18,413,172 | | | | |
b. Rentals
The Company rents equipment, buildings and facilities through agreements that expire at different dates. The monthly rental payments are of an equal amount for the period of the contract, annually restated. Total annual rent expense under these agreements was as follows:
| | 2008 | | 2007 | | 2006 |
Rent expense | | 453,332 | | 357,635 | | 259,017 |
future.
Rental commitments related primarily to facilities where the future minimum rental payments under leases with remaining noncancellable terms in excess of one year are:
Year ended December 31, | |
2009 | 24,720 |
2010 | 10,558 |
2011 | 800 |
| |
Total minimum payments | 36,078 |
c. Guarantees
The Company has property items pledged as guarantees in connection with certain legal proceedings as of December 31, 2008. The aggregate amount of claims involved is R$133,562 (R$128,654 in 2007).
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
13. Intangible Assets, Net
| Consolidated |
| | | 2008 | | 2007 |
| Annual depreciation rate % | | Cost | | Accumulated depreciation | | Net book value | | Cost | | Accumulated depreciation | | Net book value |
Software | 20.00 | | 2,520,983 | | (1,732,047) | | 788,936 | | 2,280,556 | | (1,443,857) | | 836,699 |
Customer Portfolio (a) | 10.00 | | 72,561 | | (43,537) | | 29,024 | | 72,561 | | (36,281) | | 36,280 |
Other | 10.00 to 20.00 | | 195,443 | | (154,605) | | 40,838 | | 169,475 | | (123,975) | | 45,500 |
Ajato Telecomunicações Ltda. | | | 149 | | - | | 149 | | - | | - | | - |
TS Tecnologia da Informação Ltda. | | | 945 | | - | | 945 | | 945 | | - | | 945 |
Spanish and Figueira goodwill (merged from TDBH) (b) | | | 301,276 | | (161,319) | | 139,957 | | 301,276 | | (107,143) | | 194,133 |
Santo Genovese Participações Ltda. (c) | | | 119,820 | | (47,928) | | 71,892 | | 119,820 | | (35,945) | | 83,875 |
Telefonica Televisão Participações S.A. (d) | | | 848,308 | | (67,615) | | 780,693 | | 860,203 | | (7,315) | | 852,888 |
| | | | | | | | | | | | | |
Total | | | 4,059,485 | | (2,207,051) | | 1,852,434 | | 3,804,836 | | (1,754,516) | | 2,050,320 |
Average annual depreciation rates % | | | 19.97 | | | | | | 19.81 | | | | |
Assets fully depreciated | | | 1,114,804 | | | | | | 676,059 | | | | |
(a) Acquisition of IP network customer portfolio from Telefônica Data in December 2002. This was stated as Deferred Charges until 2007.
(b) Goodwill on the spin-off of Figueira, which was merged into the Company following the merger of Telefônica Data Brasil Holding S.A. (TDBH) in 2006.
(c) Goodwill on the acquisition of control over Santo Genovese Participações Ltda. (controlling shareholder of Atrium Telecomunicações Ltda.), on December 24, 2004, has been amortized on the straight-line basis over 10 years, based on expected future profits.
(d) Goodwill on the acquisition of TTP (see Note 2.b) is based on expected future profits and is made up of total acquisition cost, R$913,747, less the book value of the investment at the time, R$53,544. In 2008, a price adjustment of R$11,895 brought goodwill down to R$848,308
The Company and its subsidiaries have escrow deposits and assets frozen by court order in connection with civil, labor and tax lawsuits, as follows:
| | Nature | |
| | Labor claims | | | Tax litigation | | | Civil litigation | | | Freeze of assets by court order | | | Total | |
| | | | | | | | | | | | | | | |
Non-current as of 12/31/2010 | | | 555,322 | | | | 546,387 | | | | 528,887 | | | | 80,087 | | | | 1,710,683 | |
| | | | | | | | | | | | | | | | | | | | |
Business combination | | | 54,939 | | | | 1,146,771 | | | | 77,336 | | | | 58,113 | | | | 1,337,159 | |
Consolidation of TVA | | | 2,488 | | | | 24,128 | | | | 6,542 | | | | 1,743 | | | | 34,901 | |
Additions | | | 139,123 | | | | 72,745 | | | | 141,146 | | | | 314,373 | | | | 667,387 | |
Write-offs / reversal | | | (42,796 | ) | | | (5,605 | ) | | | (76,361 | ) | | | (340,605 | ) | | | (465,367 | ) |
Monetary restatement | | | 39,847 | | | | 133,211 | | | | 39,177 | | | | - | | | | 212,235 | |
Transfers | | | 40,782 | | | | 1,166 | | | | (1,442 | ) | | | (40,506 | ) | | | - | |
Merger of Ptelecom | | | - | | | | 19,667 | | | | - | | | | - | | | | 19,667 | |
| | | | | | | | | | | | | | | | | | | | |
Non-current as of 12/31/2011 | | | 789,705 | | | | 1,938,470 | | | | 715,285 | | | | 73,205 | | | | 3,516,665 | |
| | | | | | | | | | | | | | | | | | | | |
Current | | | 18,501 | | | | 15,207 | | | | 61,687 | | | | 21,026 | | | | 116,421 | |
Non-current | | | 771,204 | | | | 1,923,263 | | | | 653,598 | | | | 52,179 | | | | 3,400,244 | |
| | Nature | |
| | Labor claims | | | Tax litigation | | | Civil litigation | | | Freeze of assets by court order | | | Total | |
| | | | | | | | | | | | | | | |
Non-current as of 12/31/2009 | | | 436,153 | | | | 481,664 | | | | 377,301 | | | | 40,222 | | | | 1,335,340 | |
| | | | | | | | | | | | | | | | | | | | |
Additions | | | 104,480 | | | | 33,840 | | | | 117,414 | | | | 75,441 | | | | 331,175 | |
Write-offs / reversal | | | (11,980 | ) | | | - | | | | (17,839 | ) | | | - | | | | (29,819 | ) |
Monetary restatement | | | 14,355 | | | | 30,920 | | | | 28,712 | | | | - | | | | 73,987 | |
Transfers | | | 12,314 | | | | (37 | ) | | | 23,299 | | | | (35,576 | ) | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Non-current as of 12/31/2010 | | | 555,322 | | | | 546,387 | | | | 528,887 | | | | 80,087 | | | | 1,710,683 | |
See note 20, Provisions for further details of the matters that gave rise to these deposits.
On December 31, 2011, the Company and its subsidiaries had several judicial tax deposits totaling R$1,938,470.
A brief description of the main consolidated judicial tax deposits is as follows:
PIS and COFINS
The subsidiary Vivo is party to judicial claims involving the following matters: i)
a claim arising from tax debits offsetting with credits derived from overpayments not recognized by the tax authorities; ii) tax debt derived from underpayment due to divergence in the ancillary statements (DCTFs); and iii) disputes referring to changes in rates and an increase in the taxable bases introduced by Law No. 9718/98.
As of December 31, 2011, the balance of escrow deposits amounted to R$68,532. The amounts provisioned
related to such escrow deposits are disclosed in note 20.
CIDE
The Company and subsidiaries are involved in administrative and judicial disputes for the exemption of the CIDE levied on offshore remittances of resources derived from agreements for the transfer of technology, brand and software licensing, etc.
As of December 31, 2011, the balance of escrow deposits amounted to R$123,228. The amounts provisioned related to such escrow deposits are in note 20.
FISTEL
Due to extensions of licenses terms for utilization of telephony switches associated with the performance of commuted fixed telephony services (fixed operators) and extensions for the use of radio frequencies associated with the performance of personal mobile services (mobile operators), ANATEL collected TFI on the extension of the licenses granted and on the radio base stations, mobile stations and radio links.
Such tax collection was due to ANATEL´s belief that the extension was a TFI taxable event. The Company and its subsidiaries have separately contest this tax at the administrative and judicial level in the belief that this collection is improper.
As of December 31, 2011, the amount deposited totaled R$767,530. There are amounts provisioned of R$733,038 related to such escrows deposits which are disclosed in note 20.
IRRF
The Company and its subsidiaries filed writs of mandamus claiming its right not to have IRRF (Withholding Income Tax) incidence over: (a) remittances to other countries for outcoming traffic (fixed operators); (b) interest on shareholder’s equity paid (mobile operators).
As of December 31, 2011, the balance of court deposits amounted to R$53,760. There are amounts provisioned of R$24,753 related to such escrow deposits which are disclosed in note 20.
In addition to those discussions, the Company and its subsidiaries are parties to other judicial claims involving the following matters: (a) IRRF levied on rent and royalties income, salary, and fixed-rate financial investments; (b) debts referring to the offsetting of IRPJ and CSLL overpayments not recognized by the Federal tax authorities, and debt referring to fines derived from the untimely payment of IRRF.
As of December 31, 2011, the balance of escrow deposits amounted to R$7,709. The amounts provisioned related to such escrow deposits are disclosed in note 20.
IRPJ
The Company and its subsidiaries were party to judicial claims involving the following matters: (a) claims arising from tax debits offsetting with credits derived from overpayments not recognized by the Federal tax authorities; and (b) requirement of IRPJ estimates and lack of payment – debts in the integrated system of economic-fiscal information (SIEF).
As of December 31, 2011, the balance of escrow deposits amounted to R$23,866. There are amounts provisioned of R$1,249 related to such escrow deposits which are disclosed in note 20.
EBC (Empresa Brasil de Comunicação) Contribution
Sinditelebrasil (Union of Telephony and Cellular and Personal Mobile Service Companies) filed a writ of mandamus challenging the Contribution for Development of the Public Radio Broadcasting payable to EBC (Empresa Brasil de Comunicação), created by Law No. 11,652/2008. The Company and its subsidiaries, as members of the union, made escrow deposits referring to that contribution.
As of December 31, 2011 the amounts deposited totaled R$254,328. The amounts provisioned related to such escrow deposits are disclosed in note 20.
Social Security, Work Accident Insurance (SAT) and Funds to Third Parties (INSS)
The Company filed a writ of mandamus in order to nullify the entry stemming from collection of Social Security, Work Accident Insurance (SAT) and third party funds on payment of "Indenização Compensatória por Supressão de Benefícios" due to the suspension of collective bargaining agreements of 1996/1997 and 1998/1999.
On December 31, 2011, the balance of escrow deposits totaled R$75,278.
Guarantee fund for years of service (FGTS)
The Company filed a writ of mandamus in order to declare its right not to pay surtax of 0.5% and 10% for FGTS – (Fundo de Garantia por Tempo de Serviço) established by Supplementary Law No. 110/2001 levied on deposits made by employers (the proceedings did not result in any reduction of part of the deposits for FGTS made by the Company on behalf of its employees).
As of December 31, 2011, the value deposited totaled R$62,154. The amounts provisioned related to these escrow deposits are disclosed in note 20.
Tax on Net Income (ILL)
The Company filed a writ of mandamus in order to declare its right to offset overpayments of Tax on Net Income with overdue installments of IRPJ.
As of December 31, 2011, the total value deposited amounted to R$46,770.
Universalization of telecommunications services fund (FUST)
The Company and its subsidiaries filed a writ of mandamus in order to declare its right to: (a) Fixed operations: non-inclusion of interconnection expenses (ITX) and EILD in the FUST tax base and (b) Mobile operations: non-inclusion of interconnection revenue (ITX) and EILD in the FUST tax base, in accordance with the provision Súmula nº 7, dated December 15, 2005, as it does not comply with the provisions contained in sole paragraph of article 6 of Law No. 9,998, dated August 17, 2000.
As of December 31, 2011, the amount deposited totaled R$299,545. The amounts provisioned related to these escrow deposits are disclosed in note 20.
Provisional Contribution Tax on Financial Transactions (CPMF)
Due to merger of PTelecom Brasil S.A into the subsidiary Vivo Part., which was later merged into the Company, the escrow deposit balance, related to the writ of mandamus filed by PTelecom Brasil S.A, aiming to reject the requirement for CPMF on symbolic and simultaneous foreign-exchange contracts, required by the Brazilian Central Bank for the conversion of external loan into investment, was incorporated by the Company.
As of December 31, 2011, the amount deposited totaled R$20,220. The amounts provisioned related to these escrow deposits are disclosed in note 20.
State VAT (ICMS)
The Company and its subsidiaries are involved in judicial discussions comprising the following issues: (a) ICMS declared and not paid; (b) ICMS not levied on communication in default; (c) subject to the payment of fine for late tax payment, paid spontaneously; (d) ICMS supposedly levied on access, activation, habilitation, availability and use of services, as well as those related to supplementary services and additional facilities; (e) right to credit from the acquisition of goods designated to fixed assets and electricity; and (f) activation of cards for pre-paid services.
As of December 31, 2011, the amount deposited totaled R$29,974. There are amounts provisioned of R$29,941 related to these judicial deposits which are disclosed in note 20.
Other taxes and contributions
The Company and its subsidiaries had judicial discussions that comprise the following issues: (a) service tax (ISS) over non-core services; (b) municipal real estate tax (IPTU) not subject to exemption ; (c) municipal inspection, operation and publicity taxes; (d) differential rate SAT (1% to 3% - Work Accident Insurance); (e) use of soil rate; (f) pension contributions regarding the supposed lack of retention of 11% of the value of various bills, invoices and receipts for supplier contracted; (g) public price for Numbering Resources Management (PPNUM) by ANATEL.
As of December 31, 2011, the amount deposited totaled R$105,576.
| | 2011 | | | 2010 | |
Advertising and publicity | | | 171,566 | | | | 817 | |
Rents | | | 20,992 | | | | 4,901 | |
Insurance | | | 10,289 | | | | 8,714 | |
Software maintenance | | | 14,503 | | | | 14,889 | |
Financial charges | | | 3,426 | | | | - | |
Other assets | | | 34,280 | | | | 12,051 | |
Total current | | | 255,056 | | | | 41,372 | |
| | | | | | | | |
Advertising and publicity | | | 835 | | | | - | |
Rents | | | 11,912 | | | | 9,226 | |
Insurance | | | 1,695 | | | | 4,511 | |
Financial charges | | | 5,317 | | | | - | |
Other assets | | | 12,379 | | | | 10,910 | |
Total non-current | | | 32,138 | | | | 24,647 | |
| | 2011 | | | 2010 | |
Advances | | | 62,123 | | | | 53,704 | |
Related parties receivables (Note 32) | | | 40,285 | | | | 95,452 | |
Subsidy on the sale of handsets | | | 53,408 | | | | - | |
Suppliers receivables | | | 184,748 | | | | 59,769 | |
Other assets | | | 83,248 | | | | 57,190 | |
Total current | | | 423,812 | | | | 266,115 | |
Receivables from Barramar S.A. (a) | | | 52,248 | | | | 56,700 | |
Amounts linked to National Treasury securities | | | 13,819 | | | | 12,884 | |
Pension assets surplus (note 35) | | | 31,210 | | | | 27,171 | |
Related parties receivables (Note 32) | | | 20,214 | | | | 16,943 | |
Other assets | | | 30,802 | | | | 40,110 | |
Total non-current | | | 148,293 | | | | 153,808 | |
| (a) | Refers to receivables from Barramar S.A., registered in intangible assets - Companhia AIX de Participações, net of allowance for losses. |
| | 2010 | | | Additions | | | Result of Equity Method | | | Dividends received | | | Other Comprehensive Income | | | Consolidation of TVA | | | 2011 | |
| | | | | | | | | | | | | | | | | | | | | |
Investments in subsidiaries | | | 57,990 | | | | - | | | | - | | | | - | | | | - | | | | (57,990 | ) | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
GTR Participações e Empreendimentos S.A (b) | | | 2,055 | | | | - | | | | - | | | | - | | | | - | | | | (2,055 | ) | | | - | |
Lemontree Participações S.A. (b) | | | 17,047 | | | | - | | | | - | | | | - | | | | - | | | | (17,047 | ) | | | - | |
Comercial Cabo TV São Paulo S.A. (b) | | | 32,392 | | | | - | | | | - | | | | - | | | | - | | | | (32,392 | ) | | | - | |
TVA Sul Paraná S.A. (b) | | | 6,496 | | | | - | | | | - | | | | - | | | | - | | | | (6,496 | ) | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other investments (*) (a) | | | 42,847 | | | | - | | | | - | | | | - | | | | (5,012 | ) | | | - | | | | 37,835 | |
Zon Multimédia – direct interest | | | 9,036 | | | | - | | | | - | | | | - | | | | (2,299 | ) | | | - | | | | 6,737 | |
Zon Multimédia – indirect interest | | | 3,189 | | | | - | | | | - | | | | - | | | | (810 | ) | | | - | | | | 2,379 | |
Other investiments | | | 30,622 | | | | - | | | | - | | | | - | | | | (1,903 | ) | | | - | | | | 28,719 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total consolidated investments | | | 100,837 | | | | - | | | | - | | | | - | | | | (5,012 | ) | | | (57,990 | ) | | | 37,835 | |
| (a) | Other investments are measured at fair value. |
| (b) | Consolidated from January 1, 2011 as mentioned in Note 3.d. |
| | 2009 | | | Result of equity method | | | Future capital contribution | | | Dividends received | | | Other comprehensive income | | | Write-off (residual value) | | | 2010 | |
| | | | | | | | | | | | | | | | | | | | | |
Associates (I) (II) | | | 55,101 | | | | 2,889 | | | | 3,557 | | | | (3,557 | ) | | | - | | | | - | | | | 57,990 | |
GTR Participações e Empreendimentos S.A | | | 2,121 | | | | (66 | ) | | | 60 | | | | (60 | ) | | | - | | | | - | | | | 2,055 | |
Lemontree Participações S.A. | | | 14,292 | | | | 2,755 | | | | 1,029 | | | | (1,029 | ) | | | - | | | | - | | | | 17,047 | |
Comercial Cabo TV São Paulo S.A. | | | 31,844 | | | | 548 | | | | 2,336 | | | | (2,336 | ) | | | - | | | | - | | | | 32,392 | |
TVA Sul Paraná S.A. | | | 6,844 | | | | (348 | ) | | | 132 | | | | (132 | ) | | | - | | | | - | | | | 6,496 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other investments (*) (I) (II) | | | 285,198 | | | | - | | | | - | | | | - | | | | (124,353 | ) | | | (117,998 | ) | | | 42,847 | |
Portugal Telecom – direct interest | | | 170,777 | | | | - | | | | - | | | | - | | | | (95,415 | ) | | | (75,362 | ) | | | - | |
Zon Multimédia – direct interest | | | 13,049 | | | | - | | | | - | | | | - | | | | (4,013 | ) | | | - | | | | 9,036 | |
Portugal Telecom – indirect interest | | | 56,925 | | | | - | | | | - | | | | - | | | | (14,289 | ) | | | (42,636 | ) | | | - | |
Zon Multimédia – indirect interest | | | 4,605 | | | | - | | | | - | | | | - | | | | (1,416 | ) | | | - | | | | 3,189 | |
Other investments | | | 39,842 | | | | - | | | | - | | | | - | | | | (9,220 | ) | | | - | | | | 30,622 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total consolidated investments (II) | | | 340,299 | | | | 2,889 | | | | 3,557 | | | | (3,557 | ) | | | (124,353 | ) | | | (117,998 | ) | | | 100,837 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(*) Other investments are measured at fair value.
The Company sold the consolidated interest held in Portugal Telecom on June 21, 2010, which generated the following effects:
| | 2008Consolidated | |
| | | |
Balance in 2007Sale amount | | 2,050,320 |
| | 205,149 | |
Software acquisitionsAcquisition cost | | 266,395 |
Goodwill acquisitions – Ajato | | 149 |
Price adjustment of TTP | | (11,895) |
Amortization | | (452,535) |
| | (117,998 | ) |
Balance in 2008Net gain from the sale | | 1,852,434 | 87,151 | |
Jointly-owned companies consolidated on a proportional basis
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007The Group has ownership interest of 50% in Aliança Atlântica Holding B.V., Companhia AIX de Participações and 2006
(Amounts expressed in thousandsCompanhia ACT de Participações, which are consolidated on a proportional basis. The business purpose ofReais, unless otherwise indicated)
F-57
In accordance with MP 449/08, deferred charges cease to exist with all the items being valued and reclassified as Intangible Assets. Deferred expenses
15. Loans and Financing
Consolidated | | Balance in 2008 (*) |
| | Currency | | Annual interest rate | | Maturity | | Current | | Long-term | | Total |
| | | | | | | | | | | | |
Loans and financing - BNDES | | URTJLP | | TJLP+3.73% | | Until 2015 | | 19,283 | | 1,689,521 | | 1,708,804 |
Mediocredito | | US$ | | 1.75% | | 2014 | | 7,594 | | 27,831 | | 35,425 |
Untied Loan – JBIC | | JPY | | Libor + 1.25% | | 2009 | | 129,173 | | - | | 129,173 |
Resolution 2770 | | JPY | | 0.50% to 5.78% | | 2009 | | 213,339 | | - | | 213,339 |
Resolution 2770 | | EUR | | 5.74% | | 2009 | | 84,799 | | - | | 84,799 |
| | | | | | | | | | | | |
Total parent Company | | | | | | | | 454,188 | | 1,717,352 | | 2,171,540 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Resolution 2770 | | JPY | | 1.00% | | 2009 | | 48,315 | | - | | 48,315 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Total Consolidated | | | | | | | | 502,503 | | 1,717,352 | | 2,219,855 |
(*) Amounts presented at fair value, when applicable, as mentionedeach company is detailed in Note 4.o.
Consolidated | | Balance in 2007 |
| | Currency | | Annual interest rate | | Maturity | | Current | | Long-term | | Total |
| | | | | | | | | | | | |
Loans and financing - BNDES | | URTJLP | | TJLP+3.73% | | Until 2015 | | 9,031 | | 800,314 | | 809,345 |
Mediocredito | | US$ | | 1.75% | | 2014 | | 5,576 | | 29,302 | | 34,878 |
Resolution 2770 | | US$ | | 1.00% to 4.8% | | 2008 | | 260,275 | | - | | 260,275 |
Resolution 2770 | | JPY | | 0.80% to 8.00% | | 2008 | | 386,091 | | - | | 386,091 |
Resolution 2770 | | JPY | | 0.50% to 5.78% | | 2008 | | - | | 92,845 | | 92,845 |
Resolution 2770 | | EUR | | 5.15% | | 2008 | | 10,569 | | - | | 10,569 |
Untied Loan – JBIC | | JPY | | Libor + 1.25% | | Until 2009 | | 80,044 | | 78,568 | | 158,612 |
| | | | | | | | | | | | |
Total parent Company | | | | | | | | 751,586 | | 1,001,029 | | 1,752,615 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Finame | | URTJLP | | TJLP+8% | | 2008 | | 2,400 | | - | | 2,400 |
Compror | | R$ | | CDI + 1% | | 2008 | | 23,244 | | - | | 23,244 |
Working Capital Loan | | R$ | | CDI + 2% to 2.5% | | UNtil 2009 | | 16,553 | | 2,000 | | 18,553 |
| | | | | | | | | | | | |
Total Consolidated | | | | | | | | 793,783 | | 1,003,029 | | 1,796,812 |
1.c).
The loan from Japan Bank for International Cooperation - JBIC includes restrictive covenantsamounts of assets, liabilities, revenues and expenses related to Telefônica Brasil’s interest in entities consolidated proportionally at December 31, 2011, 2010 and 2009 included in the maintenance of certainconsolidated financial indices, which to date have been met.statements are set out below:
Loans and financing with Mediocrédito are guaranteed by the Federal Government. | | 2011 | | | 2010 | |
| | Cia ACT | | | Cia AIX | | | Aliança Atlântica | | | Cia ACT | | | Cia AIX | | | Aliança Atlântica | |
| | | | | | | | | | | | | | | | | | |
Current assets | | | 4 | | | | 3,501 | | | | 49,655 | | | | 7 | | | | 4,820 | | | | 57,456 | |
Noncurrent assets | | | - | | | | 65,461 | | | | 2,378 | | | | - | | | | 72,146 | | | | 3,189 | |
Current liabilities | | | 1 | | | | 2,338 | | | | 9 | | | | 1 | | | | 5,727 | | | | 397 | |
Noncurrent liabilities | | | - | | | | 1,849 | | | | - | | | | - | | | | 2,339 | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Shareholders’ Equity | | | 3 | | | | 64,775 | | | | 52,024 | | | | 6 | | | | 68,900 | | | | 60,248 | |
The loan obtained from BNDES is secured by SP Telecomunicações Participações Ltda. | | 2011 | | | 2010 | | | 2009 | |
| | Cia ACT | | | Cia AIX | | | Aliança Atlântica | | | Cia ACT | | | Cia AIX | | | Aliança Atlântica | | | Cia ACT | | | Cia AIX | | | Aliança Atlântica | |
Revenues | | | 25 | | | | 27,491 | | | | 1,139 | | | | 27 | | | | 31,254 | | | | 13,200 | | | | 30 | | | | 30,144 | | | | 3,994 | |
Expenses | | | (28 | ) | | | (24,240 | ) | | | (82 | ) | | | (24 | ) | | | (21,985 | ) | | | (99 | ) | | | (27 | ) | | | (12,207 | ) | | | (185 | ) |
Net income for the year | | | (3 | ) | | | 3,251 | | | | 1,057 | | | | 3 | | | | 9,269 | | | | 13,101 | | | | 3 | | | | 17,937 | | | | 3,809 | |
| | Annual depreciation rate % | | | Net book value as of 12/31/2010 | | | Additions | | | Disposals, net | | | Transfers, net (b) | | | Depreciation | | | Business combination | | | Consolidation of TVA | | | Net book value as of 12/31/2011 | |
Switching equipment | | 10.00 | | | | 1,234,081 | | | | 60,166 | | | | (5,087 | ) | | | 390,972 | | | | (346,804 | ) | | | 617,757 | | | | - | | | | 1,951,085 | |
Transmission equipment | | 5.00 to 10.00 | | | | 3,709,166 | | | | 377,411 | | | | (49,123 | ) | | | 1,106,119 | | | | (847,229 | ) | | | 2,441,209 | | | | 25,282 | | | | 6,762,835 | |
Terminal equipment and modems | | 10.00 to 66.67 | | | | 1,274,037 | | | | 991,417 | | | | (4,819 | ) | | | 1,081 | | | | (1,002,764 | ) | | | 258,714 | | | | 29,387 | | | | 1,547,053 | |
Infrastructure | | 4.00 to 12.50 | | | | 2,811,505 | | | | 228,124 | | | | (61,059 | ) | | | 492,876 | | | | (703,375 | ) | | | 1,851,056 | | | | 845 | | | | 4,619,972 | |
TV equipment and materials | | 8.00 to 20.00 | | | | 187,343 | | | | 125,865 | | | | - | | | | (53,488 | ) | | | (109,607 | ) | | | - | | | | 29,056 | | | | 179,169 | |
Other | | 10.00 to 20.00 | | | | 218,469 | | | | 160,948 | | | | (4,879 | ) | | | 48,747 | | | | (193,108 | ) | | | 556,973 | | | | 1,232 | | | | 788,382 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Provision for losses (a) | | | | | | | (41,373 | ) | | | - | | | | 8,985 | | | | 8,953 | | | | - | | | | - | | | | - | | | | (23,435 | ) |
Property, plant and equipment in progress | | | | | | | 807,469 | | | | 2,068,327 | | | | (12,609 | ) | | | (2,009,147 | ) | | | - | | | | 472,649 | | | | 2,170 | | | | 1,328,859 | |
Total | | | | | | | 10,200,697 | | | | 4,012,258 | | | | (128,591 | ) | | | (13,887 | ) | | | (3,202,887 | ) | | | 6,198,358 | | | | 87,972 | | | | 17,153,920 | |
13. | Property, plant and equipment, net |
| | Annual depreciation rate % | | | Net book value as of 12/31/2009 | | | Additions | | | Disposals, net | | | Transfers, net (b) | | | Depreciation | | | Net book value as of 12/31/2010 | |
Switching equipment | | 10.00 | | | | 1,038,595 | | | | 115,444 | | | | 91 | | | | 295,996 | | | | (216,045 | ) | | | 1,234,081 | |
Transmission equipment | | 5.00 to 10.00 | | | | 3,354,458 | | | | 339,740 | | | | (4,188 | ) | | | 391,947 | | | | (372,791 | ) | | | 3,709,166 | |
Terminal equipment and modems | | 10.00 to 66.67 | | | | 1,183,554 | | | | 575,672 | | | | (4,121 | ) | | | 79,378 | | | | (560,446 | ) | | | 1,274,037 | |
Infrastructure | | 4.00 to 12.50 | | | | 2,990,801 | | | | 71,235 | | | | (40,405 | ) | | | 96,139 | | | | (306,265 | ) | | | 2,811,505 | |
TV equipment and materials | | 8.00 to 20.00 | | | | 327,898 | | | | 17,066 | | | | (261 | ) | | | (82,586 | ) | | | (74,774 | ) | | | 187,343 | |
Other | | 10.00 to 20.00 | | | | 225,996 | | | | 64,325 | | | | (1,299 | ) | | | 5,729 | | | | (76,282 | ) | | | 218,469 | |
Provision for losses (a) | | | | | | | (15,985 | ) | | | 7 | | | | - | | | | (25,395 | ) | | | - | | | | (41,373 | ) |
Property, plant and equipment in progress | | | | | | | 566,820 | | | | 1,013,334 | | | | (12,170 | ) | | | (760,515 | ) | | | - | | | | 807,469 | |
Total | | | | | | | 9,672,137 | | | | 2,196,823 | | | | (62,353 | ) | | | 693 | | | | (1,606,603 | ) | | | 10,200,697 | |
(a) | The Company and its subsidiaries recognized a provision for possible obsolescence of materials used for assets maintenance based on historical and expected future use. |
(b) | See transfers made on Intangible assets. |
Below is the breakdown of cost and accumulated depreciation as of December 31, 2011 and 2010:
2011 | | Cost | | | Accumulated depreciation | | | Net book value | |
| | | | | | | | | |
Switching equipment | | | 15,084,380 | | | | (13,133,295 | ) | | | 1,951,085 | |
Transmission equipment | | | 30,051,932 | | | | (23,289,097 | ) | | | 6,762,835 | |
Terminal equipment and modems | | | 8,830,900 | | | | (7,283,847 | ) | | | 1,547,053 | |
Infrastructure | | | 13,124,946 | | | | (8,504,974 | ) | | | 4,619,972 | |
TV materials and equipment | | | 907,865 | | | | (728,696 | ) | | | 179,169 | |
Other | | | 3,546,825 | | | | (2,758,443 | ) | | | 788,382 | |
| | | | | | | | | | | | |
Provision for losses | | | (23,435 | ) | | | - | | | | (23,435 | ) |
| | | | | | | | | | | | |
Property, plant and equipment in progress | | | 1,328,859 | | | | - | | | | 1,328,859 | |
Total | | | 72,852,272 | | | | (55,698,352 | ) | | | 17,153,920 | |
2010 | | Cost | | | Accumulated depreciation | | | Net book value | |
| | | | | | | | | |
Switching equipment | | | 11,795,681 | | | | (10,561,600 | ) | | | 1,234,081 | |
Transmission equipment | | | 19,122,768 | | | | (15,413,602 | ) | | | 3,709,166 | |
Terminal equipment and modems | | | 4,777,349 | | | | (3,503,312 | ) | | | 1,274,037 | |
Infrastructure | | | 8,477,774 | | | | (5,666,269 | ) | | | 2,811,505 | |
TV materials and equipment | | | 614,921 | | | | (427,578 | ) | | | 187,343 | |
Other | | | 1,429,962 | | | | (1,211,493 | ) | | | 218,469 | |
| | | | | | | | | | | | |
Provision for losses | | | (41,373 | ) | | | - | | | | (41,373 | ) |
| | | | | | | | | | | | |
Property, plant and equipment in progress | | | 807,469 | | | | - | | | | 807,469 | |
Total | | | 46,984,551 | | | | (36,783,854 | ) | | | 10,200,697 | |
14. | Intangible assets, net |
| | 2011 | | | 2010 | |
Goodwill | | | 10,225,280 | | | | 1,064,792 | |
Other intangibles assets | | | 19,828,404 | | | | 665,682 | |
Total | | | 30,053,684 | | | | 1,730,474 | |
Following is the opening of goodwill on these dates:
Goodwill | | 2010 | | | Business Combination | | | 2011 | |
| | | | | | | | | |
Ajato Telecomunicações Ltda. | | | 149 | | | | - | | | | 149 | |
Goodwill Spanish and Figueira (merged in TDBH) (a) | | | 212,058 | | | | - | | | | 212,058 | |
Santo Genovese Participações Ltda. (b) | | | 71,892 | | | | - | | | | 71,892 | |
Telefônica Televisão Participações S.A. (c) | | | 780,693 | | | | - | | | | 780,693 | |
Vivo Participações S.A. (d) | | | - | | | | 7,169,577 | | | | 7,169,577 | |
Telemig Celular S.A. | | | - | | | | 133,896 | | | | 133,896 | |
Telemig Celular Participações S.A. | | | - | | | | 1,485,172 | | | | 1,485,172 | |
Global Telecom S.A. | | | - | | | | 204,762 | | | | 204,762 | |
Tele Centro Oeste Celular Participações S. A. | | | - | | | | 150,930 | | | | 150,930 | |
Ceterp Celular S. A. | | | - | | | | 16,151 | | | | 16,151 | |
Total | | | 1,064,792 | | | | 9,160,488 | | | | 10,225,280 | |
| (a) | Goodwill arising from the spin-off of Figueira, which was merged into the Company as a result of the merger of Telefônica Data Brasil Holding S.A. (TDBH) in 2006. |
| (b) | Goodwill arising from the acquisition of control over Santo Genovese Participações Ltda. (controlling shareholder of Atrium Telecomunicações Ltda.) in 2004. |
| (c) | Goodwill arising from the acquisition of TTP (formerly Navytree), incorporated in 2008 which is based on a future profitability analysis. |
| (d) | Goodwill arising from the acquisition of Vivo Part. in April 2011. |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP | | Annual depreciation rate % | | | Net book value as of 12/31/2010 | | | Additions | | | Disposals, net | | | Transfers, net | | | Depreciation | | | Business combination | | | Consolidation of TVA | | | Net book value as of 12/31/2011 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Software | | 20.00 to 33.33 | | | | 638,975 | | | | 380,942 | | | | (64 | ) | | | 161,984 | | | | (632,725 | ) | | | 1,312,044 | | | | - | | | | 1,861,156 | |
Customer Portfolio (Network IP) | | 9.00 to 15.00 | | | | 14,512 | | | | - | | | | - | | | | - | | | | (193,681 | ) | | | 2,042,000 | | | | - | | | | 1,862,831 | |
Trademarks and patents | | 5.00 | | | | - | | | | - | | | | - | | | | - | | | | (63,154 | ) | | | 1,642,000 | | | | - | | | | 1,578,846 | |
License | | 3.60 to 20.00 | | | | - | | | | 811,754 | | | | - | | | | - | | | | (483,743 | ) | | | 14,031,970 | | | | - | | | | 14,359,981 | |
Goodwill | | According to contractual terms | | | | - | | | | 2,976 | | | | - | | | | - | | | | (1,962 | ) | | | 6,670 | | | | - | | | | 7,684 | |
Other | | 10.00 to 20.00 | | | | 12,195 | | | | 10,436 | | | | (314 | ) | | | (1,263 | ) | | | (7,842 | ) | | | 1,487 | | | | 9,768 | | | | 24,467 | |
Software in progress | | | | | | | - | | | | 183,179 | | | | - | | | | (146,834 | ) | | | - | | | | 97,094 | | | | - | | | | 133,439 | |
Total | | | | | | | 665,682 | | | | 1,389,287 | | | | (378 | ) | | | 13,887 | | | | (1,383,107 | ) | | | 19,133,265 | | | | 9,768 | | | | 19,828,404 | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | | Annual depreciation rate % | | | Net book value as of 12/31/2009 | | | Additions | | | Disposals, net | | | Transfers, net | | | Depreciation | | | Net book value as of 12/31/2010 | |
Software | | 20.00 | | | | 682,776 | | | | 239,986 | | | | - | | | | (159 | ) | | | (283,628 | ) | | | 638,975 | |
Customer Portfolio (Network IP) | | 10.00 | | | | 21,768 | | | | - | | | | - | | | | - | | | | (7,256 | ) | | | 14,512 | |
Other | | 10.00 to 20.00 | | | | 24,132 | | | | 4,604 | | | | - | | | | (534 | ) | | | (16,007 | ) | | | 12,195 | |
Total | | | | | | | 728,676 | | | | 244,590 | | | | - | | | | (693 | ) | | | (306,891 | ) | | | 665,682 | |
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Consolidated long-term debt maturitiesF-62
2011 | | Cost | | | Accumulated depreciation | | | Net book value | |
| | | | | | | | | |
Software | | | 8,744,914 | | | | (6,883,758 | ) | | | 1,861,156 | |
Customer Portfolio (Network IP) | | | 2,114,561 | | | | (251,730 | ) | | | 1,862,831 | |
Trademarks and patents | | | 1,643,511 | | | | (64,665 | ) | | | 1,578,846 | |
License | | | 15,937,373 | | | | (1,577,392 | ) | | | 14,359,981 | |
Goodwill | | | 38,800 | | | | (31,116 | ) | | | 7,684 | |
Other | | | 683,021 | | | | (658,554 | ) | | | 24,467 | |
Software in progress | | | 133,439 | | | | - | | | | 133,439 | |
Total | | | 29,295,619 | | | | (9,467,215 | ) | | | 19,828,404 | |
2010 | | Cost | | | Accumulated depreciation | | | Net book value | |
| | | | | | | | | |
Software | | | 2,953,275 | | | | (2,314,300 | ) | | | 638,975 | |
Customer Portfolio (Network IP) | | | 72,561 | | | | (58,049 | ) | | | 14,512 | |
Other | | | 201,621 | | | | (189,426 | ) | | | 12,195 | |
Total | | | 3,227,457 | | | | (2,561,775 | ) | | | 665,682 | |
15. | Payroll and related accruals |
| | Amounts |
| | |
2010 | | 204,204 |
2011 | | 344,510 |
2012 | | 343,972 |
2013 | | 343,420 |
Thereafter | | 481,246 |
| | |
Total | | 1,717,352 |
| | 2011 | | | 2010 | |
| | | | | | |
Salaries and fees | | | 40,651 | | | | 25,583 | |
Payroll charges | | | 223,359 | | | | 101,021 | |
Employee profit sharing | | | 214,983 | | | | 105,841 | |
Other indemnities | | | 16,631 | | | | 74,800 | |
Total | | | 495,624 | | | | 307,245 | |
16. | DebenturesTrade accounts payable |
| | Consolidated | | Balance in 2008 | | 2011 | | | 2010 | |
| | Currency | | Annual interest rate | | Maturity | | Current | | Long-term | | Total | | | | | | |
| | | | | | | | | | | | | |
Debentures | | R$ | | CDI rate + 0.35% | | Until 2010 | | 16,339 | | 1,500,000 | | 1,516,339 | |
| | | | | | | | | | | | | |
Various suppliers | | | | 5,384,243 | | | | 2,270,444 | |
Values to pass | | | | 146,437 | | | | 51,485 | |
Interconnection | | | | 521,901 | | | | 510,228 | |
Technical assistance | | | | 29,030 | | | | - | |
Total | | | | | | | | 16,339 | | 1,500,000 | | 1,516,339 | | | 6,081,611 | | | | 2,832,157 | |
| | Consolidated | | Balance in 2007 |
| | Currency | | Annual interest rate | | Maturity | | Current | | Long-term | | Total |
| | | | | | | | | | | | |
Debentures | | R$ | | CDI rate + 0.35% | | Until 2010 | | 12,357 | | 1,500,000 | | 1,512,357 |
| | | | | | | | | | | | |
Total | | | | | | | | 12,357 | | 1,500,000 | | 1,512,357 |
Debenture conditions were renegotiated on September 1, 2007, date of end of the first Remuneration period and beginning of the second Remuneration period. This period ends on the debentures maturity date; namely September 1, 2010. Debentures are entitled to interest yield, payable on a quarterly basis. At December 31, 2008 CDI was 12.32%.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| | Consolidated |
| | 2008 | | 2007 |
Taxes on income (a) | | | | |
Income tax | | - | | 2,587 |
Social contribution tax | | - | | 694 |
| | | | |
Deferred taxes | | | | |
Income tax | | 118,132 | | 114,636 |
Social contribution tax | | 12,431 | | 27,074 |
| | | | |
Indirect taxes | | | | |
ICMS (state VAT) | | 683,447 | | 667,961 |
PIS and COFINS (taxes on revenue) | | 102,023 | | 76,838 |
Legal Liabilities (b) | | 26,674 | | 23,310 |
Other (c) | | 31,131 | | 33,761 |
| | | | |
Total | | 973,838 | | 946,861 |
| | | | |
Current | | 926,437 | | 908,260 |
Noncurrent | | 47,401 | | 38,601 |
| | 2011 | | | 2010 | |
Direct taxes | | | | | | |
Income tax and social contribution (a) | | | 129,610 | | | | 1,329 | |
| | | | | | | | |
Indirect taxes | | | 2,021,739 | | | | 792,371 | |
ICMS (state VAT) (b) | | | 1,610,598 | | | | 635,358 | |
PIS and COFINS (taxes on revenue) (c) | | | 319,981 | | | | 120,430 | |
Fust and Funtel (d) | | | 39,879 | | | | 20,661 | |
CIDE | | | 3,359 | | | | 7,301 | |
Others | | | 47,922 | | | | 8,621 | |
Total | | | 2,151,349 | | | | 793,700 | |
| | | | | | | | |
Current | | | 1,691,991 | | | | 754,993 | |
Non-current | | | 459,358 | | | | 38,707 | |
| (a) | Income and social contribution taxes payable are presented net of payments on an estimated basis (Note 7)basis. |
| (b) | The non-current portion includes an amount of R$380,271 at December 31, 2011, which refers to ICMS – Programa Paraná Mais Emprego, resulting from an agreement with the Paraná State Government involving the deferral of ICMS tax payment. This agreement indicates that the ICMS becomes due in the 49th month following the month in which ICMS tax is calculated. This amount is adjusted to the variation of the Annual Indexation Factor (FCA). |
| (c) | Includes the amounts for which the Company received a tax infraction notice for having carried out the COFINS compensation, in January and February 2000, with credits arising from the overpayment of 1/3 of the COFINS paid in 1999, after compensation with CSLL. The litigation awaits special administrative judgment. The Management had recorded the amount of R$47,541 at December 31, 2011, and had an escrow deposit for the same amount. Due to the Tax Recovery Program - REFIS (Law no. 11,941/09), the company requested the waiver of suits and the conversion in income of amounts payable with the resulting raising of the surplus amount. |
| (d) | The amounts related to Fust and Funtel in connection with proceedings held with ANATEL were reclassified to Provisions (see note 20.2). |
18. | Loans, Financing and Debentures |
| Currency | | Annual interest rate | | Maturity | | 2011 (*) | | 2010 (*) |
| | | | | | | | | |
Loans and financing - BNDES (a) | URTJLP | | TJLP+3.73% | | Until 2015 | | 1,327,147 | | 1,715,580 |
Loans and financing - BNDES (a) | URTJLP | | TJLP+1.73% | | Until 2015 | | 71,821 | | 92,842 |
Loans and financing - BNDES | BRL | | 5.50% | | Until 2021 | | 1,912 | | - |
Loans and financing – Mediocrédito | US$ | | 1.75% | | Until 2014 | | 14,027 | | 17,304 |
Loan – working capital | BRL | | 108.90% of CDI | | Until 2012 | | 91,570 | | - |
Loan – Resolution 4131 | US$ | | 4.10% | | Until 2013 | | 282,205 | | - |
Loans and financing - BNDES (b) | URTJLP | | TJLP+1.48% to 4.30% | | Until 2019 | | 1,659,858 | | - |
Loans and financing - BNDES | UMBND | | 5.97% | | Until 2019 | | 194,276 | | - |
Loans and financing - BNDES (c) | R$ | | 4.50% to 5.50% | | Until 2020 | | 135,471 | | - |
Loans - European Bank of Investments – BEI | US$ | | 4.18% to 4.47% | | Until 2015 | | 707,975 | | - |
Loans and financing - Banco do Nordeste do Brasil – BNB | R$ | | 10.00% | | Until 2016 | | 438,279 | | - |
BBVA Comission | - | | 0.43% | | Until 2015 | | 221 | | - |
Loans and financing – BNDES (d) | URTJLP | | TJLP+5.70% | | Until 2016 | | 2,071 | | - |
Loans and financing – BNDES (d) | URTJLP | | TJLP+9.00% | | Until 2016 | | 2,341 | | - |
Loans and financing - BNDES PSI (c) | R$ | | 5.50% | | Until 2016 | | 17,628 | | - |
Loans and financing - Leasing | R$ | | 14.70% | | 2013 | | 726 | | - |
Total consolidated | | | | | | | 4,947,528 | | 1,825,726 |
Current | | | | | | | 988,413 | | 420,412 |
Non-Current | | | | | | | 3,959,115 | | 1,405,314 |
(*) Amounts presented at fair value, when applicable.
National Development Bank – BNDES
| a) | In October 2007, a credit facility for the Company was approved to finance investments in services and products produced domestically. All of these resources have been drawn and their investments are proven and accepted by BNDES. |
| b) | In August 2007 Vivo S.A. entered into a credit facility with BNDES in the amount of R$1,530,459. The funds borrowed were used to finance investment projects in order to expand coverage and increase network capacity throughout the country. Vivo S.A. received the funding gradually and there was no remaining amount available under this credit facility on December 31, 2011. This agreement has a term of seven years, with repayment of principal in 60 consecutive monthly installments commencing September 15, 2009, after a grace period of two years. |
On October 14, 2011 a credit facility totaling R$3,031,110 was obtained from BNDES. These funds will be invested in the expansion and improvement of the current network, implementation of infrastructure necessary for new technology, in the period from 2011 to 2013, as well as in the construction of a data center in Tamboré (State of São Paulo) and in social projects.
The agreement has a term of eight years and has grace period which expires on July 15, 2014, until when only interest will be paid, on a three-month basis. After this period, interest and amortization of the principal will be paid in 60 consecutive monthly installments.
Since the interest rates applied to two of the five sub-credit lines which constitute this financing agreement are lower than those prevailing in the market (TJLP and TJLP + 1,48%), this transaction falls under the scope of IAS 20. As such, using the effective interest rate method set forth in IAS 39/CPC 38, considerations made are as follows: comparison between i) the total amount of debt calculated based on contractual rates; and ii) the total amount of debt calculated based on market rates (fair value). The government grant from BNDES, adjusted to present value and deferred according to the useful life of the financial asset, was R$21,418 at December 31, 2011.
At December 31, 2011 R$1,004,177 had been released.
| c) | On January 2010, a financing line with the BNDES in the amount up to R$319.927 was approved through the Investment Maintenance Program (BNDES-PSI). The funds borrowed are being used to improve the network capacity through the acquisition of domestic equipment under previously signed equipment financing with BNDES (Finame), and released as investments are made. Until December 31, 2011 R$184,489 were granted (R$171,673 until December 31, 2010). |
Since the interest rate on this credit line is lower than the rates prevailing in the market (4.5% to 5.5% pre-fixed), this transaction falls into IAS 20. Accordingly, using the effective interest method set forth in IAS 39, considerations made are as follows: comparison between i) the total amount of debt calculated based on contractual rates; and ii) the total amount of debt calculated based on market rates (fair value). The government grant from BNDES, adjusted to present value and deferred according to the useful life of the financed equipment, resulted in the amount of R$29,007 until December 31, 2011.
With the merger process mentioned in note 1.e, Vivo S.A. answers for the loan agreements which belonged to the former Vivo Part. (R$24,848 at December 31, 2011 and R$12,917 at December 31, 2010).
| d) | In November 2010 and March 2011 BNDES approved credit facilities for Comercial Cabo TV São Paulo S.A. in the amount of R$40,163. Until December 31, 2011 R$24,237 were released. This operation also falls under the scope of IAS 20, due to the fact that interest rates are lower than market rates (5.5% pa pre-fixed), and the subsidy granted by BNDES, adjusted to present value, resulted in the amount of R$2,401 as of December 31, 2011. |
Médiocrédito
Loan agreed in 1993 between Telecomunicações Brasileiras SA – Telebrás and Instituto Centrale per il Credito a Médio Termine – Mediocredito Centrale in the amount of US$45,546, in order to build a rural telephony via satellite network in the State of Mato Grosso. This loan is paid semiannually and matures in 2014. There is a derivative contracted to hedge the exchange rate currency risks related to such debt and, given it is assessed as an effective hedge, the hedge accounting methodology has been adopted. Therefore, at December 31, 2011, the derivative associated to this instrument was recognized at its fair value as of such date.
European Investment Bank – EIB
Vivo S.A. signed an agreement with EIB for a credit facility in the amount of €250 million (equivalent to US$365 million). The funding was received in two portions: the first on December 19, 2007 and the second on February 28, 2008. The agreement has a term of seven years, with repayment of principal in two installments falling on December 19, 2014 and March 2, 2015. Interest on this financing is paid semiannually according to the date of credit release. This financing is secured with a swap agreement that converts the foreign exchange risk into a percentage of CDI (interbank deposit rate) variation.
Banco do Nordeste – BNB
On January 29, 2007, Vivo S.A. entered into a credit facility with BNB in the amount of R$247,240. The funds borrowed were used to expand coverage and increase mobile network capacity in the Northeastern region of Brazil. The agreement has a term of ten years, with repayment of principal in 96 installments after a grace period of 2 years.
On January 30, 2008, Vivo S.A. entered into a credit facility with BNB in the amount of R$389,000. The funds borrowed were used to expand coverage and increase mobile network capacity in the Northeastern region of Brazil. The agreement has a term of ten years, with repayment of principal in 96 installments after a grace period of 2 years.
| (b)Currency | Legal obligations account records tax liabilities, net | Annual interest rate | | Maturity | | 2011 |
Debentures (2nd issuance) – Series 2 | R$ | | 106.00% of judicial deposits, which are being questioned in court.CDI | | Until 2012 | | 346,470 |
Debentures (4th issuance) – Series 1 and 2 | R$ | | 108.00% to 112.00% of CDI | | Until 2013 | | 756,617 |
Debentures (4th issuance) – Series 3 | R$ | | IPCA+7.00% | | Until 2014 | | 87,390 |
Debentures (1st issuance) – Telemig | R$ | | IPCA+0.50% | | Until 2021 | | 67,935 |
Issuance costs | R$ | | | | | | (1,981) |
Total | | | | | | | 1,256,431 |
| | | | | | | |
Current | | | | | | | 468,624 |
Non-current | | | | | | | 787,807 |
Capital raised by Vivo Participações S.A.
2nd Issuance
In connection with the First Securities Distribution Program in the amount of R$2 billion announced on August 20, 2004, the subsidiary Vivo Part. issued debentures related to the 2nd issuance of the Company, in the amount of R$1 billion, on May 01, 2005, with a term of ten years, starting from the issuance date on May 01, 2005.
Debentures were issued in two series: R$200 million in the first series and R$800 million in the second series with a final maturity on May 4, 2015. The first series was early redeemed on January 31, 2011, and the second series pay interest semiannually, after rescheduling, at a rate of 106.0% (second series) of accumulated daily averages rates of interbank deposits (DI) calculated and published by CETIP S.A. (Clearing House for the Custody and Financial Settlement of Securities).
On July 29, 2011, the General Debenture - holder Meeting resolved on the approval of transfer of debentures of the 2nd Public Distribution issued by Vivo Participações S.A. for Telefônica Brasil without changing the top terms and conditions, and the correspondent amendment of the deed in order to reflect the change in the issuer’s ownership.
1st Series
On January 31, 2011 there was an advanced and full redemption of the 1st series of the second issuance of Vivo Participações, totaling 20,000 book-entry, non-convertible, unsecured debentures, with par value of R$10 (ten thousand reais), totaling R$200 million, which characteristics were approved at the Company’s Board of Directors held on April 25, 2005 and May 13, 2005 and the first rescheduling on March 30, 2009.
The redemption was made at unit nominal value of debentures, on the issue date, plus: (i) the due remuneration up to the payment date of redeemed debentures and the (ii) percentage award calculated over the unit nominal value of debentures (“award”), equivalent to R$4.41 (four reais and forty-one cents), by debenture, in accordance with clause 4.13 of the private instrument of deed of the 2nd issue of non-convertible shares.
2nd Series
At the meetings held on April 25, 2005 and May 13, 2005, the Board of Directors of Vivo Part. approved the characteristics of the 2nd series of the 2nd issuance of debentures of the Company.
The 2nd series debentures of the 2nd issuance of the company were rescheduled on May 3, 2010, according to the conditions approved at the Board of Directors’ meeting held on May 29, 2010. The total rescheduled amount was R$340,230 and the company redeemed and cancelled debentures of dissenting debenture holders in the amount of R$459,770. The new interest accrual period is 24 months from May 1, 2010, during which time the interest accrual conditions established herein shall remain unchanged. During this second interest accrual period (until May 1, 2012), the Company’s debentures shall carry an interest rate of 106.0% of the average rate of one-day interbank deposit (DI), calculated according to the formula stated in clause 4.9 of the "2nd Issuance Indenture". The interest payments of the debentures are made in two installments, the first one on November 1, 2011 and the second one on May 2, 2012.
4th Issuance
On September 04, 2009, the Board of Directors of Vivo Part. approved the 4th public issuance, by the company, of simple, unsecured debentures not convertible into stock, all of them registered and of book-entry type, issued in up to three series, with term of 10 years.
The total amount of the issuance was R$810 million, of which the basic offering corresponds to R$600 million, added by R$210 million due to the full exercise of the additional debentures option.
A total of eight hundred and ten thousand (810,000) debentures were issued in three (3) series, there being 98,000 debentures in the 1st series, 640,000 in the 2nd series and 72,000 in the 3rd series. The amount of debentures allocated to each of the series was decided in mutual agreement between the company and the Leader Arranger of the Offering, after the conclusion of the Bookbuilding procedure.
The remuneration for the 1st series is 108.00% of CDI, for the 2nd series is 112.00% of CDI and to the 3rd series, coupon of 7.00% per year (on face value updated by the Extended Consumer Price Index - IPCA variation). These debentures accrue interest payable on a semiannual basis in the 1st and 2nd series and annual basis in the 3rd series.
Rescheduling of each series is provided for as follows: 1st series, on October 15, 2012, 2nd series, on October 15, 2013, and 3rd series, on October 15, 2014.
The proceeds raised as from the issue of the offering were used for full payment of the debt relating to the 6th issue of commercial promissory notes of the company and to supplement of the working capital of the company.
The transaction costs in connection with this issuance in the amount of R$1,981 at December 31, 2011 were appropriated to a liabilities reduction account as deferred cost and are recorded as financial expenses (note 29), pursuant to the contractual terms of this issue. The actual rate of this issue, considering the transaction costs, is 112.13% of the CDI.
The General Debenture-holder Meeting held on July 29, 2011 resolved on the transfer approval of the 4th Public Distribution of debentures issued by Vivo Participações S.A. to Telefônica Brasil without changes of terms and conditions, and of the correspondent amendment of the Deed in order to reflect the change in the issuer’s ownership.
Funding by Telemig (company incorporated by Vivo Part. at June 1, 2010).
1st Issuance
In compliance with the Contract for Provision of SMP Services, in conformity with the Public Selection No 001/07, the State of Minas Gerais, acting through the State Department for Economic Development, has undertaken to subscribe debentures issued by Telemig (company merged at June 1, 2010), within the scope of the “Minas Comunica” Program, using proceeds from the Fund for Universalization of Access to Telecommunications Services (Fundo de Universalização do Acesso a Serviços de Telecomunicações) – FUNDOMIC. Under the terms of this Program, Telemig Celular would make the SMP service available to 134 locations in the areas recorded as 34, 35 and 38.
Also according to the program, 5,550 simple, unsecured, nonconvertible, registered, book-entry type debentures would be issued, without stock certificates being issued, in up to five series.
In consideration for the certification by the State Department of Economic Development of the service to be provided to 15 locations, 621 debentures were issued in the 1st series of the 1st issuance, amounting to R$6,210 in December 2007. In March 2008, for the service at 42 locations, 1,739 debentures were issued in the 2nd series of the 1st issuance, valued at R$17,390. At December 31, 2008, for the service at 77 locations, 3,190 debentures were issued in the 3rd series of the 1st issuance, valued at R$31,900 thus completing the program for providing service to 134 locations inside the state of Minas Gerais.
The maturities of the long-term portion of loans, financing and debentures as of December 31, 2011, are as follows:
Year | | | |
| | | |
2013 | | | 1,798,058 | |
2014 | | | 1,096,240 | |
2015 | | | 916,949 | |
2016 | | | 273,038 | |
2017 | | | 220,109 | |
From 2018 | | | 442,528 | |
Total | | | 4,746,922 | |
Vivo S.A. and Telefônica Brasil have loan and financing agreements obtained from BNDES whose balance at December 31, 2011 was R$3,253,102 (R$1,143,541 (Vivo) and R$1,808,422 (Telefônica Brasil) at December 31, 2010). As provided in these agreements, there are economic and financial covenants which should be calculated annually and semi-annually. At referred to date, all economic and financial covenants included in the two agreements currently in force were achieved.
At December 31, 2011, guarantees were granted for part of loans and financing of the Company and its subsidiary Vivo S.A., according to the table below:
Banks | | Amount of loan/financing | | Guarantees |
BNDES | | R$1,659,858 (URTJLP) R$194,276 (UMBND) R$135,471 (PSI Contract) | | The item “Other” includes· Contract (2007) R$139,511823,562: Guarantee in receivables referring to 15% of FUST payable asthe higher between the debt balance or 4 (four) times the highest installment.
· Contract (PSI) R$135,471: Sale of December 31, 2008 financed assets.( · Contract (2011) R$113,275 as 1,030,572: Guarantee in receivables referring to 15% of December 31, 2007the higher between the debt balance or 4 (four) times the highest installment.) , net· Telefônica Brasil is the intervening guarantor
|
European Bank of judicial depositsInvestment – BEI | | R$707,975 | | · Commercial risk guaranteed by Banco BBVA Espanha. |
BNB | | R$438,279 | | · Bank guarantee granted by Banco Bradesco S.A. in an amount equivalent to 100% of R$126,832 (R$97,567 as the debit balance of December 31, 2007the financing obtained.). · Establishing a liquidity fund comprised of short-term investments at an amount equivalent to 3 (three) amortization installments by reference to the average post-grace period installment. Investments amount: R$55,679. · Telefônica Brasil is the intervening guarantor. |
18.19. | Dividends and Interest Payable to Shareholdersinterest on shareholders’ equity payable |
| Consolidated |
| 2008 | | 2007 |
| | | |
Interest on shareholders’ equity | 437,720 | | 274,976 |
Telefónica Internacional S.A. | 234,441 | | 118,912 |
SP Telecomunicações Holding Ltda. | 77,036 | | 36,371 |
Telefônica Data do Brasil Ltda. | - | | 2,702 |
Minority shareholders | 126,243 | | 116,991 |
| | | |
Dividends - Minority shareholders | 320,841 | | 371,083 |
Dividends subject to shareholders’ approval (note22.e) | 395,109 | | 350,938 |
| | | |
Total | 1,153,670 | | 996,997 |
MostBelow, we present balances of the dividends and interest on shareholders’ equity payable:
| | 2011 | | | 2010 | |
| | | | | | |
Telefónica International S.A. | | | 156,589 | | | | 113,839 | |
SP Telecomunicações Participações Ltda. | | | 126,283 | | | | 37,407 | |
Telefónica S.A. | | | 129,489 | | | | - | |
Compañia de Telecomunicaciones de Chile S.A. | | | 310 | | | | - | |
Minority shareholders | | | 560,315 | | | | 299,651 | |
Total | | | 972,986 | | | | 450,897 | |
Interest on shareholders’ equity and total dividends payable to minority shareholders refer to availableunpaid declared amounts declared, butand to amounts not yet claimed.claimed yet.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
19. | Payroll and Related Charges |
| | Consolidated |
| | 2008 | | 2007 |
| | | | |
Salaries and fees | | 19,723 | | 22,929 |
Payroll charges | | 79,641 | | 89,127 |
Accrued benefits | | 5,087 | | 7,704 |
Employee profit sharing | | 68,835 | | 70,590 |
Organizational Restructuring Program (a) | | 1,386 | | 74,491 |
| | | | |
Total | | 174,672 | | 264,841 |
(a) Refers to incentive plans ("Plano de Desligamento Incentivado") on outsourcing of activities, which changes were as follows:
| 2008 | | 2007 | | 2006 |
Beginning balance | 74,491 | | - | | - |
Accruals (i) | 37,466 | | 153,938 | | 76,403 |
Payments | (110,571) | | (79,447) | | (76,403) |
Ending balance | 1,386 | | 74,491 | | - |
(i) See Notes 24, 25 and 26 at "Organizational Restructuring Program" caption.
20. | Reserves, NetProvisions |
The composition of provision balances at December 31, 2011 and 2010 are as follows:
| | 2011 | | | 2010 | |
Provisions for claims and litigations | | | | | | |
Labor | | | 526,210 | | | | 366,391 | |
Tax | | | 1,580,448 | | | | 310,649 | |
Civil and regulatory | | | 664,703 | | | | 446,159 | |
Subtotal | | | 2,771,361 | | | | 1,123,199 | |
Provision for post-employed benefits (note 35) | | | 308,893 | | | | 219,000 | |
Contingent liabilities (a) | | | 256,044 | | | | - | |
Provision for dismantling | | | 200,813 | | | | 16,712 | |
Total | | | 3,537,111 | | | | 1,358,911 | |
Current | | | 416,313 | | | | 240,213 | |
Non-current | | | 3,120,798 | | | | 1,118,698 | |
(a) Related to the goodwill allocation made in connection with the acquisition of Vivo Participações S.A. (see note 4).
The Company, as an entity and also as the successor to the merged companies, and its subsidiaries are involved in labor, tax and civil lawsuits filed with different courts. The Company’s management of the Company and its subsidiaries, based on the opinion of its legal counsel, recognized reservesprovisions for those cases in which an unfavorable outcome is considered probable. The table below shows the breakdown of reservesprovisions by nature and activities during 2008:the fiscal year ended on December 31, 2011:
| | Nature | | | | |
| | Labor | | | Tax | | | Civil | | | Total | |
| | | | | | | | | | | | |
Balance as of 12/31/2009 | | | 404,106 | | | | 262,527 | | | | 443,810 | | | | 1,110,443 | |
Additions | | | 15,772 | | | | 26,929 | | | | 60,799 | | | | 103,500 | |
Payments - reversal | | | (69,684 | ) | | | (276 | ) | | | (129,351 | ) | | | (199,311 | ) |
Monetary restatement | | | 16,197 | | | | 21,469 | | | | 70,901 | | | | 108,567 | |
Balances as of 12/31/2010 | | | 366,391 | | | | 310,649 | | | | 446,159 | | | | 1,123,199 | |
| | | | | | | | | | | | | | | | |
Business combination | | | 93,739 | | | | 1,110,515 | | | | 162,266 | | | | 1,366,520 | |
Consolidation of TVA | | | 646 | | | | - | | | | 10,291 | | | | 10,937 | |
Additions | | | 112,300 | | | | 66,569 | | | | 172,518 | | | | 351,387 | |
Payments | | | (26,696 | ) | | | (11,143 | ) | | | (117,734 | ) | | | (155,573 | ) |
Reversal | | | (32,088 | ) | | | (6,760 | ) | | | (57,144 | ) | | | (95,992 | ) |
Monetary restatement | | | 11,918 | | | | 110,618 | | | | 48,347 | | | | 170,883 | |
Balance as of 12/31/2011 | | | 526,210 | | | | 1,580,448 | | | | 664,703 | | | | 2,771,361 | |
Current | | | 74,430 | | | | 23,302 | | | | 318,581 | | | | 416,313 | |
Non-current | | | 451,780 | | | | 1,557,146 | | | | 346,122 | | | | 2,355,048 | |
Consolidated | | Nature | | Total |
| Labor | | Tax | | Civil | |
| | | | | | | | |
Balances as of 12/31/2007 | | 456,188 | | 232,152 | | 123,894 | | 812,234 |
| | | | | | | | |
Additions | | 39,800 | | 7,738 | | 151,075 | | 198,613 |
Transfers | | - | | (50,313) | | 50,313 | | - |
Write-offs | | (84,353) | | (25,571) | | (89,701) | | (199,625) |
Monetary restatement | | 85,497 | | 3,950 | | 19,852 | | 109,299 |
Balances as of 12/31/2008 | | 497,132 | | 167,956 | | 255,433 | | 920,521 |
| | | | | | | | |
Escrow deposits | | (133,554) | | (59,431) | | (28,270) | | (221,255) |
| | | | | | | | |
Net balances as of 12/31/2008 | | 363,578 | | 108,525 | | 227,163 | | 699,266 |
| | | | | | | | |
Current | | 50,577 | | - | | 77,911 | | 128,488 |
Noncurrent | | 313,001 | | 108,525 | | 149,252 | | 570,778 |
| 20.1 | Labor contingencies and provisions |
| | Amount involved | |
Risk | | 2011 | | | 2010 | |
Probable | | | 526,210 | | | | 366,391 | |
Possible | | | 404,262 | | | | 155,107 | |
Provisions and labor contingencies refer to labor claims filed by former’s employees and employees at outsourced companies (the later alleging joint or subsidiary liability) claiming for, among others, overtime, wage equivalence, post-retirement salary supplements, job hazard premium, additional for unhealthy work conditions and claims related to outsourcing services.
The Company is also a defendant in labor claims filed by retired former employees regarding the Medical Care Plan for Retired Employees (PAMA), which require, among other issues, the annulment of the change occurred in such plan. The claims await the decision by the Regional Labor Court of São Paulo. Based on the opinion of its legal advisors and the current jurisdictional benefits, Company management considers this claim as a possible risk. No amount has been assigned for these claims, since in the case of loss, estimating the corresponding amount payable by the Company is not practicable at this time.
Additionally, the Company is part to public civil actions filed by the Department of Labor, in respect of the decision to restrain the Company to continue hiring outsourced companies to carry out the Company’s main activities. No amounts were assigned to the possible likelihood of an unfavorable outcome related to these public civil actions in the table above, since in these phases, in the event of loss, it is not possible to estimate the monetary loss for the Company.
| 20.2 | Tax contingencies and provisions |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
| | Amount involved | |
Risk | | 2011 | | | 2010 | |
Probable | | | 1,580,448 | | | | 310,649 | |
Possible | | | 11,679,158 | | | | 4,102,806 | |
Tax provisions
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFederal Taxes
For the years ended
On December 31, 2008, 20072011, the Company held tax matters in the administrative and 2006
(Amounts expressedjudicial spheres, in thousandsconnection with (a) Unemployment Compensation Fund (FGTS) required by INSS on deposits made by employers (the discussion does not result in the reduction of part of FGTS deposits made by the Company on behalf of employees); (b) claims resulting from the non-ratification of compensation and refund requests, formulated by the Company; (c) social contributions regarding alleged lack of payment of 11% over the value of several contractor’s invoices and receipts for transfer of labor; (d) CIDE levied on the remittance of funds abroad relating to technical services, administrative assistance and to services of similar nature, as well as royalties; (e) Fixed operations: non-inclusion of Interconnection Expenses (ITX) and EILD in the FUST tax base and Mobile operations: non-inclusion of revenues from ITX and EILD in the FUST tax base; (f) contribution to EBC (ReaisEmpresa Brasil de Comunicação), unless otherwise indicated)
20.1. | Labor contingencies and reserves |
| | Amount involved |
Risk - Consolidated | | 2008 | | 2007 |
| | | | |
Probable | | 497,132 | | 456,188 |
Possible | | 66,608 | | - |
| | | | |
Total | | 563,740 | | 456,188 |
These contingencies involve several lawsuits, mainly relatedcreated by Law No. 11652/08; (g) TFI/TFF on mobile stations; (e) IRRF on Interest on Shareholders Equity; (h) IRRF on Interest on Shareholders Equity; (i) Public Price for Numbering Resources Management (PPNUM) by ANATEL instituted by Resolution No. 451/06; (j) IRPJ/PIS/COFINS resulting from the non-ratification of the Companies’ offset and refund requests; (k) Social Investment Fund (Finsocial) offset amounts; (l) lack of withholding social contribution levied on services rendered, remuneration, salaries and other salary bases; (m) COFINS – Requirement resulting from non-inclusion of financial income into the tax base; (n) additional charges to wage differences, wage equivalence, overtime, employment relationship with employees of outsourced companiesthe PIS and job hazard premium, among others.
The Company made escrow depositsCOFINS tax base, as well as additional charges to COFINS required by Law No. 9718/98, which were provisioned in the amount of R$133,554 for the reserves mentioned above.1,529,104.
20.2. Tax contingencies and reservesState taxes
| | Amount involved |
Risk - Consolidated | | 2008 | | 2007 |
| | | | |
Probable | | 167,956 | | 232,152 |
Possible | | 2,864,127 | | 2,706,417 |
| | | | |
Total | | 3,032,083 | | 2,938,569 |
On December 31, 2011, the Company and its subsidiaries had administrative and judicial proceedings in progress, in the amount of R$39,023, that according to the opinion of legal advisors, are classified as a probable loss, with full provision recorded.
The principalaforesaid proceedings comprise: (a) credits with electric power and credits without documentation; (b) non-taxed telecommunication services; (c) disallowance of tax contingencies , are as follows:incentives for cultural projects; and (d) administrative fine environment related.
Municipal taxes
· | Claims by the National Institute of Social Security (INSS) referring to: |
On December 31, 2011, the Company and its subsidiaries kept several tax claims within the municipal scope, both in the administrative and in the judicial sphere amounting to R$4,531 which, based on the opinion of its legal advisors, are classified as a probable loss, with full provision of the amounts thereof. The aforesaid claims comprise: (a) IPTU, (b) ISS levied on chattel lease services and secondary and complementary activities, (c) Soil use and (d) TVCF and (e) Incorrect payment of ISS referring to the effective rendering of services such as lease, sublease, right of way or use right, shared or not, of railway, highway, poles, cables, ducts and conducting wires of any kind.
Other provisions
At December 31, 2011, the Company and its subsidiaries recorded other provisions, relating to legal claims, both in the administrative and in the judicial sphere, amounting to R$7,790, related to incorrect payment of ISS referring to the effective rendering of services such as lease, sublease, right of way or use right, shared or not, of railway, highway, poles, cables, ducts and conducting wires of any kind.
Possible contingencies
Federal Taxes
On December 31, 2011, the Company and its subsidiaries held various administrative and judicial proceedings within the federal scope, which are awaiting trials in various instances, totaling R$3,185,747.
Among these proceedings, stand out:
a) Several legal proceedings(a) Non-compliance manifestations due to the ratification of compensation requests made by the Company ; (b) fine for the collectiondistribution of Seguro de Acidente de Trabalho (Workers Accident Insurance Compensation, or SAT) and joint liability fordividends with the allegedly existence of unpaid debts with the federal government; (c) social security contributions alleged notcontribution (INSS) on compensation payment for salary devaluation arising from inflationary losses derived from “Plano Verão” (Summer Plan) and “Plano Bresser” (Bresser Plan), SAT (Work Accident Insurance), Social Security and payables to have been paid by its subcontractorsthird parties (INCRA and SEBRAE), supply of approximately R$330,850. In viewmeals to employees, 11% retention (labor assignment); (d) IRRF on the funds remittance abroad related to technical services and to administrative support and other, as well as royalties; (e) PIS levied on roaming; (f) CPMF levied on operations resulting from the technical operation agreement with the National Treasury Department – STN - (offsetting through Integrated System of a decision handed downFederal Government Financial Administration - SIAFI) and on symbolic foreign-exchange contracts required by the Federal Supreme Court recognizingBrazilian Central Bank; (g) IRPJ and CSLL related to deductions on revenues generated due to the statute barring periodreversal of five years, the Company’s management decided to reverse in 2008 the provision recognized for the amounts covered by the barring period. A provisionprovisions; (h) disallowance of R$ 98,285 for part of the total amount was maintained.
b) Discussion relating to certain amounts paid under the Company’s collective labor agreements,costs and sundry expenses; (i) COFINS loss deductions with swap operations; (j) PIS / COFINS accrual basis versus cash basis; (k) IRPJ due as a result of inflationary adjustments arising outexceeding allocation to Northeast Investment Fund (FINOR), Amazon Region Investment Fund (FINAM) or Economic Recovery Fund of Planos Bresserthe State of Espírito Santo (FUNRES); (l) IRPJ on derivative operations; (m) offsetting of tax over net income-ILL; (n) IRPJ and Verão CSLL related to fiscal years 2006 and 2007, questioning the disallowance of expenses related to the goodwill paid in the acquisition of Celular CRT S/A and the merger of telecommunications operators into Vivo S.A., which occurred in October 2006.
According to the Management and its legal advisors’ opinion, the chances of losses in these processes are possible.
State Taxes
As of December 31, 2011, the Company and its subsidiaries held several administrative and judicial proceedings at the state level, related to ICMS (VAT), in the amount of approximately R$145,751 In view of a decision handed down by the Federal Supreme Court recognizing the statute barring period of five years, the Company’s management decided to reverse the provision recognized4,172,479, which are still awaiting for the amounts covered by the barring period. Ajudgment at several court levels.
Among these proceedings, stand out:
(a) provision of R$ 2,915facility services and rental of Speedy modem; (b) international long-distance calls (DDI); (c) unduly credit related the acquisition of items designated to fixed assets; (d) lack of proportionate credit reversal related to the acquisition of fixed assets; (e) previously unused ICMS tax credits; (f) service provision outside São Paulo state and ICMS paid to São Paulo State and; (g) Co-billing, (h) tax substitution with a fictitious tax base (tax guideline); (i) use of credits related to the acquisition of energy; (j) secondary activities, value added and supplementary services (Agreement
69/98); (k) tax credits related to challenges over telecommunications services not rendered or mistakenly charged (Agreement 39/01); (l) shipments of products with prices lower than acquisition prices (unconditional discounts); (m) deferred charge of ICMS-interconnection (DETRAF – Traffic and Service Provision Document); (n) credits derived from tax benefits granted by other state agencies; (o) disallowance of tax incentives related to cultural projects; (p) transfers of assets among owned establishments; (q) communication service tax credits used in provision of services of the same nature; (r) card donation for partprepaid service activation; and (s) reversal of credit derived from return and loan for use operation.
According to the Management and its legal advisors’ opinion, the chances of losses in these processes are possible.
Municipal taxes
As of December 31, 2011, the Company and its subsidiaries had several administrative and judicial proceedings within the municipal scope, comprising the total amount was maintained.of R$471,876, which are awaiting trials in the several court instances.
Among these proceedings, stand out:
(a) ISS – secondary activities, value added and supplementary services; (b) retention; (c) IPTU; (d) Charge for Soil Use; (e) several municipal charges; (f) rate for Use of the Mobile Network (T-UM), infrastructure lease; (g) advertising services; (h) services rendered by third parties; (i) business management consulting services provided by Telefônica Internacional (TISA); (j) ISS tax levied on caller ID services and on cell phone activation.
According to the Management and its legal advisors’ opinion, the chances of losses in these processes are possible.
ANATEL
Universalization Fund of Telecommunication Services (FUST)
Writs of Mandamus filed separately by the fixed and mobile operators to recognize the right to: Fixed: non-inclusion of interconnection (ITX) and Industrial Exploration of Dedicated Line (EILD) expenses in the FUST tax basis and mobile: non-inclusion of interconnection (ITX) and Industrial Exploration of Dedicated Line (EILD) expenses in the FUST tax base, pursuant to Precedent No. 7, of December 15, 2005, for being in disagreement with provisions set forth in the sole paragraph of art. 6 of Law No. 9,998/00, which are awaiting trials in the second lower court.
On December 31, 2011, the amount involved totaled R$1,719,531. There are also, on the administrative level, various Release Notifications drawn up by ANATEL for the FUST collection on ITX and EILD and other amounts resulting from the provision of services not included in the telecommunication services at the amount of R$1,608,915.
According to the Management and its legal advisors’ opinion, the chances of success in these processes are possible.
FUNTTEL – Telecommunications Technological Development
On December 31, 2011, the Company and its subsidiaries held administrative and judicial proceedings, totaling R$622,606, which are awaiting trial for 1st administrative level and 2nd judicial level.
c) Notification demanding social securitySuch proceedings concern the collection of contributions SATto FUNTTEL on other revenues (not related to telecom services), as well as on income and amountsexpenses transferred to other operators (interconnection and EILD).
According to the Management and its legal advisors’ opinion, the chances of success in these processes are possible.
Telecommunication Inspection Fund (FISTEL)
Due to the extension of the effective term of licenses for third parties (National Institute for Agrarian Reformusing telephony switches related to the exploitation of STFC (fixed line operators) and Colonization (INCRA)the extension of the effectiveness of right to use radiofrequency associated with the operation of personal mobile service (Mobile Operators), ANATEL performs the collection of the Installation Inspection Charge (TFI).
This collection derives from the understanding of ANATEL that the extension would represent a taxable event of TFI. Based on the understanding it corresponds to an unduly collection, the Company and its subsidiaries separately challenged the aforesaid tax in the administrative and judicial levels. The total amount involved R$1,504,365.
According to the Management and its legal advisors’ opinion, the chances of losses in these processes are possible.
PPNUM – Public Price of Numbering Resources Management
Vivo, along with other Brazilian Mini and Small Business Support Agency (SEBRAE))mobile operators, are challenging in court the rate charged by ANATEL for the paymentuse by the operators of various salarythe Numbering Resources managed by the agency. At the time of collections by ANATEL, Vivo made an escrow deposit of the amounts forowed. On April 23, 2009, the period from January 1999 to December 2000,operators received a favorable judgment and the lawsuit is presently in the amount of approximately of R$62,137. These lawsuits are in the 1st lower court andprogress at the last administrative level, respectively. No provisionFederal Regional Court. The amount involved as of December 31, 2011 was made forR$1,977.
According to the balance, for whichManagement and its legal advisors’ opinion, the likelihoodchances of loss is deemedlosses in these processes are possible.
EBC (Contribution to Public Broadcasting Investment)
d) Notification demanding social security contributionsOn May 26, 2009, Sinditelebrasil - Trade Union for joint liability in 1993, inTelephony and Mobile and Personal Service Companies, filed a Writ of Mandamus challenging the new contribution to the EBC (Empresa Brasil de Comunicação), created by Law No. 11,652/08. No preliminary Order was issued, and the companies affiliated to said trade union, obtained legal authorization to make an escrow deposit of the amount of approximately R$202,836, considered as a possible risk until December 2008, when the Company obtained a favorable decision on this suit, which was then closed.under discussion.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years endedAt December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
e) Legal proceedings imposed fines amounting to R$161,982 for distribution of dividends when the Company was allegedly in debt to INSS. No provision was made for the balance, for which the likelihood of loss is deemed possible. This matter is at the 2nd administrative level.
· | Claims by the Finance Secretary of the State of São Paulo referring to: |
f) Assessments on 2001, related to ICMS (State VAT) allegedly due on international long-distance calls for the period from November, 1996 to December, 1999 amounting to R$452,139. One suit is at the last administrative stage and two suits are the first judicial stage. Considering the risk of a possible loss, no provisions were recognized.
g) Infraction notice related to the use of credits in the period from January to April 2002, in2011, the amount of R$34,001, for which the risk is considered possible. The claim is at the 2nd administrative level. Considering the risk level, no provision was made.
h) Infraction notice related to the nonreversal of ICMS credits in proportion to sales and exempt and nontaxed services in the period from January 1999 to June 2000 and from July 2000 to December 2003, in addition to an ICMS credit unduly used in March 1999. The total amount involved istotaled R$127,900. The risk is considered possible by legal counsel. The claims are at the 2nd and first administrative level, respectively. Considering the risk level, no provision was made.577, with a full deposit.
| i) Infraction notice issued by the São Paulo State Tax Department related to nonpayment of ICMS, from January 2001 to December 2005, on amounts received for equipment lease (modem), totaling R$158,587. The suit is at the second administrative level. Considering the risk of a possible loss, no20.3 | Civil contingencies and provisions were recognized. |
j) Infraction notices related to nonpayment of ICMS in the period from August 2004 to December 2005, for noninclusion of revenues from rendering of several supplemental services and value added, in the amount of R$286,673, upon determination of the tax basis. Related risk is assessed as possible by legal counsel. The claim is at the 2nd administrative level. Considering the risk level, no provision was made. | | Amount involved | |
Risk | | 2011 | | | 2010 | |
Probable | | | 664,703 | | | | 446,159 | |
Possible | | | 1,978,973 | | | | 808,006 | |
Civil provisions
k) Infraction notice drawn up by the São Paulo State Finance Office on June 14, 2007, referring to co-billing operations from May to December 2004, due to: (i) non -presentation of the totality of the files provided for in Administrative Ruling CAT No. 49/03; (ii) untimely compliance with notices referring to filing of electronic files; (iii) lack of or irregular recording on the Shipment records; and (iv) unpaid of tax concerning to a portion of the communication services rendered. The amount involved in is R$8,324, already considering payment of the notice item one in the terms of Law No. 6374/89 and of Decree No. 51960/07 (PPI), related to nonpayment of taxes. Part of the infractions results from the notfiled information by other operating companies. The likelihood of loss is assessed as possible. The claim is at the 1st level. Considering the risk involved, the Company did not record a provision.
· | Litigation at the Federal and Municipal Levels: |
l) FINSOCIAL, currently COFINS, was a tax on gross operating revenues, originally established at a rate of 0.5% and gradually and subsequently raised to 2.0%. Such rate increases were judicially challenged with success by several companies, which led to the creation of taxable credits, caused by higher payments, which were offset by CTBC (company merged into the Company in November 1999) against current payments of related taxes, the COFINS. Claiming that those offsets made by CTBC were improper, the Federal Government made an assessment in the amount of R$19,837. In October 2008, the Company obtained a final favorable decision on one of the suits, totaling R$14,799. The other suits, in the amount of R$5,038, are still on trial and await a decision by the second and last administrative stage. A provision of R$ 5,038 for the total amount was maintained.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
m) The City of São Paulo assessed the Company, alleging differences in the payment of the municipal tax on services (ISS), by the imputation of fines of 20% for amounts not paid by the Company, in the amount of R$29,567. The claim is at the 2nd court level. The risk is considered possible. Considering the risk level, no provision was made.
n) On December 15, 2005, ANATEL edited Abridgment nº 01 (subsequently changed to Abridgment nº 07), where it confirmed its opinion not to exclude interconnection expenses from FUST basis, modifying its previous position. The Abridgment has retroactive application, since January, 2001. Thus, through ABRAFIX – Brazilian Fixed Telecommunication Companies Association, on January 9, 2006, the Company petitioned a Security Mandate in order to assure the possibility of excluding interconnection expenses from FUST basis and/or not to be subject to the retrospective payment of differences identified as a result of adopting the noncumulative system by operation of Anatel Abridgement No. 7/2005. The total amount involved is R$332,344. Out of this amount, R$184,050 refers to differences identified as a result of adopting the noncumulative system during the retrospective period (2001 to 2005) and R$148,294 refers to differences identified for the period 2006 to date, which is being deposited with the court on a monthly basis. A provision has been recognized equivalent to only for the court deposits. The suit is at the second judicial stage.
o) Litigation Relating to FINSOCIAL, COFINS and PASEP - Ceterp, which was merged into the Company on November 30, 2000, is contesting the applicability of certain taxes on telecommunications services based on constitutional grounds. The allegation is that no other tax (except for the ICMS and import and export taxes) can be applied to telecommunications services, including the IRPJ (Imposto de Renda da Pessoa Jurídica, or the corporate income tax), CSL, PASEP and COFINS. The total amount of the claim equals R$ 83.7 million. Considering that there was a risk, as classified by internal and external counsel, of this being a probable loss, management made a provision for the total amount. In October 2008, an unfavorable final decision was issued, whereby the tax immunity claimed by Ceterp (and which would avoid taxation by the PIS, COFINS and income taxes) was not recognized. Currently, the Company awaits a decision determining whether the deposits made by the Company (which were made in an escrow account with a relevant court in the amount of the disputed taxes) will be reverted in favor of the federal government. This is an isolated case that is not expected to have a major impact upon the Company because (i) the amounts under dispute are deposited in escrow with the court, and (ii) Telesp, into which Ceterp was merged, pays all taxes levied on its transactions, including PIS, COFINS and income taxes.
There are other contingencies that have also been accrued, for which the involved amount is R$61,718; which the risk is considered probable by management.
Main claims
20.3 | Civil contingencies and reserves |
| | Amount involved |
Risk - Consolidated | | 2008 | | 2007 |
| | | | |
Probable | | 255,433 | | 123,894 |
Possible | | 452,616 | | 904,286 |
| | | | |
Total | | 708,049 | | 1,028,180 |
The principal civil contingencies , are as follows:
- | Community Telephone Plan - PCT. These contingencies are related to civil contingencies in that the Company is involved in public class action lawsuits related to the Community Telephone Plan (PCT), claiming the possible right for indemnity for purchasers of the expansion plans who did not receive shares for their financial investment, in the municipalities of Diadema, São Caetano do Sul, São Bernardo do Campo and Ribeirão Pires involving a total amount of approximately R$343,974. Since June, 2008 the |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| risks involved are considered remote by the lawyers responsible for this case. The claim is in the 2nd court. |
- | There is a collective claim by ASTEL – Sistel Participants Association in São Paulo State, against the Company. Suit brought by members of the Sistel Association in the State of São Paulo questioning the changes in the health care plan for the Company’s retirees (PAMA). The suit is at the initial stage and there has been no judgment of dismissal. The Company’s management, based on its legal counsel opinion, considers this proceeding as possible risk, with an estimated amount of R$322,325. According to the risk, no provision was recorded. |
- | Enforcement proceedings brought by WCR against Telesp. On June 9, 2000, WCR do Brasil Serviços Ltda. proposed enforcement proceedings following ordinary procedural steps against the Company, claiming the collection of the alleged difference between the amounts calculated by Telesp regarding the use of the “0900 Service” and the amounts transferred to that company. The duly updated proceeding amount is R$76,234. On October 1, 2004 the decision handed down by the 13th Civil Court of the central jurisdiction of São Paulo was published, by which the proceeding was deemed valid. On December 14, 2004, an appeal against the decision was filed, which was distributed to the 26th Panel of Judges of São Paulo. On May 26, 2006, the appeal against the decision was judged partially valid, and the content was maintained. The process is in a higher court. Since the risk level was considered as probable, provision was made. |
-a) | Suits for additional shares. These refer to suits involving the Company and addressing the right to receive additional shares calculated pursuant to the regulation issued by the Telecommunications Ministry with regard to network expansion plans after 1996. These suits are at various stages: first stage, Supreme Court and Federal Superior Court of Appeals.Appeals, Considering the risk of a probable loss, a provision was recorded in the amount of R$18,039 was made.26,182. |
- | As of December 31, 2008, theb) | The Company has a provision of R$64,835 for fines relatingand its subsidiaries are defendants in several civil claims, at several levels, related to several Administrative Proceedingsservice rendering. Such claims have been filed by ANATEL against Telesp, consideredindividual consumers, civil associations representing consumer rights or by the legal advisorsBureau of Consumer Protection (PROCON), as a probable riskwell as by the Federal and State Public Ministry. They are also defendants in other claims of loss.several types, related to the normal course of business. Total provision recorded for such issues amounts to R$315,169 (consolidated). |
Massive Claims
Consumption relationship
- | Contingencies, especially assessed as possible risks, involve matters relatingc) | The Company is also involved in several lawsuits filed by individual consumers, with similar characteristics, which individually are not considered to several legal suits, mainly: unacknowledged title to telephone lines, indemnitybe material. A provision in the amount of R$81,539 was recorded, based on statistical analysis of the average historical losses for material and personal damages, among others, for approximately R$130,291.such claims. |
21. Other Liabilities
| Consolidated |
| 2008 | | 2007 |
| | | |
Consignments on behalf of third parties | 198,050 | | 162,041 |
Amounts charged to users | 70,884 | | 70,615 |
Whitholdings | 126,092 | | 89,723 |
Other | 1,074 | | 1,703 |
| | | |
Liabilities to related parties (Note 31) | 81,072 | | 44,920 |
Advances from customers | 69,906 | | 71,675 |
Amounts to be refunded to subscribers | 48,593 | | 49,817 |
Concession renewal fee (Note 1.c) | 102,863 | | - |
Accounts payable – sale of share fractions (a) | 113,377 | | 114,315 |
Accounts payable for the acquisition of Telefônica Televisão Participações S.A. (b) | - | | 23,790 |
Negative goodwill AIX | - | | 8,735 |
Other | 94,000 | | 86,110 |
| | | |
Total | 707,861 | | 561,403 |
| | | |
Current | 614,867 | | 479,557 |
Noncurrent | 92,994 | | 81,846 |
ANATEL
(a) | Amounts resulting fromd) | At December 31, 2011, the auctionCompany and its subsidiaries were involved in several administrative proceedings against ANATEL, which were filed based on alleged non-compliance with the obligations established in industry regulations, as well as in legal claims discussing sanctions by ANATEL at administrative level, whose likelihood of share fractions afteran unfavorable outcome was assessed as probable, and a provision was recorded in the reverse spin-off process in 2005, and TDBH acquisition process in 2006.amount of R$241,813. |
Possible contingencies
Main contingencies
(b) | The amounta) | Community Telephone Plan – PCT. Refers to be paid on December 31, 2007a Public Civil Action to which the Company is party related to the Grupo AbrilPCT, a plan that claims the possible indemnity rights to purchasers of telephone line expansion plans who did not receive shares for the TTP acquisition correspond to R$293,790, of which R$270,000 were retained intheir financial applicationinvestment in the namemunicipality of Mogi das Cruzes. The total amount involved is approximately R$197,863. Legal counsel assessed chances of loss as possible; São Paulo Court of Justice (TJSP) has amended the Company.decision, judging the action as inadmissible. The presentationtelephony association of Mogi das Cruzes (plaintiff) filed a special appeal to alter this judgment, which is by net value.currently awaiting a decision. |
| b) | Class actions filed by SISTEL Participants Association in the State of São Paulo, in which participants question the changes made to the health care plan for retired employees (PAMA), claiming the re-establishment of previous ´status quo’. The claim is still in process as there is no judicial decision in any instance. The risk of loss attributed to this lawsuit by the Company’s legal counsels is possible. The amount is inestimable and the requests illiquid due to its unenforceability, since they involve the return of the conditions regarding the former plan. |
| c) | Public civil actions filed by the i) ASTEL-SISTEL Members Association in the State of Sao Paulo and by ii) FENAPAS - National Federation of Associations of Pensioners, Pensioners and Pension Funds Participants in the Telecommunication Sector, both against SISTEL, the Company and other operators, aiming the annulment of PBS pension plan split, claiming “the dismantling of SISTEL Foundation pension system, which originated several specific plans PBS-mirrors, and corresponding allocation of resources deriving from technical surplus and tax contingencies existing at the time of the split. The risk attributed to this lawsuit by the Company’s legal counsels is possible. The amount is inestimable and the requests illiquid due to its unenforceability, since it involves the assets spun-off from SISTEL referring to the telecommunication operators of the former Telebrás System. |
| d) | The Public Prosecutor Office of the State of São Paulo commenced a class action claiming moral and property damages suffered by all consumers of telecommunications services from 2004 to 2009 due to the bad quality of services and failures of the communications system. The public Prosecutor Office suggested that the indemnification to be paid should be R$1 billion. The decision handed down on April 20, 2010 imposes the payment of indemnification for damages caused to all consumers who have filed a suit for such damages. Conversely, in the event that the number of consumers claiming should the award is not in line with the gravity of their damages, after the lapsing of one year, the judge determined that the amount of R$60 million should be deposited in the Special Expenses Fund to Recover Natural Rights Damages (Fundo Especial de Despesa de Reparação de Interesses Difusos Lesados). It is not possible to estimate the number of consumers who will individually file suits nor the amounts claimed thereby. The Company filed an appeal on the merits of the case. The judgment effects are in abeyance. No amount has been assigned to the possible likelihood of an unfavorable outcome in connection with this action, since in the case of loss, estimating the corresponding amount payable by the Company is not practicable at this time. Likewise, establishing a provision for contingency equivalent to the amount sought is not possible. |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
22. | Shareholders’ Equitye) | The Company and its subsidiaries are involved in other civil claims, at several levels, related to service rendering. Such claims have been filed by individual consumers, civil associations representing consumer rights or by the Bureau of Consumer Protection (PROCON), as well as by the Federal and State Public Ministry. They are also involved in other claims of several types, related to the normal course of business. Total contingency amounts to R$920,509, whose likelihood of an unfavorable outcome has been assessed by their legal advisors as possible. |
| a.f) | Ownership of Caller ID. Lune Projetos Especiais Telecomunicação Comércio e Ind. Ltda., a Brazilian company, filed on November 20, 2001 lawsuits against 23 wireless telecommunications operators, including TELESP Celular Participações and its subsidiaries. The lawsuits allege that those operators violated patent No. 9202624-9, related to Equipamento Controlador de Chamadas Entrantes e do Terminal do Usuário, or Caller ID, granted to Lune by the Brazilian Intellectual Property Agency–INPI, on September 30, 1997. Lune called on the operators to cease to provide Caller ID services and sought payment from them for the unauthorized use of the Caller ID system in an amount equivalent to the payment of fees received by such operators for use of the Caller ID system. On October 5, 2011, the law suit was judged groundless against the Phone Companies. Vivo will file an appeal due to this decision. This decision is not final, and will be tried before the Court and Superior Court of Justice. However, Lune’s right to use patent No. 9202624-9 was suspended by a federal judge in response to a lawsuit filed against Lune and INPI by Ericsson Telecomunicações S.A., TC and Telerj Celular (formerly Vivo subsidiaries before our corporate restructuring) filed identical lawsuits against Lune and INPI and those lawsuits are still pending before the courts. In connection with this proceeding, a third company, Sonintel, and its two partners also brought an Ação de Oposição, whereby they reinvoked their rights to a previous patent related to Caller ID, and to which the above mentioned patent (No. 9202624-9) was linked. The Company believes that based on the opinion of outside counsel that the likelihood of an unfavorable outcome with respect to Lune’s claim against it is possible and is unable to determine at this time the extent of any potential liabilities with respect to this claim. |
ANATEL
| g) | At December 31, 2011, the Company and its subsidiaries are involved in administrative proceedings filed based on alleged non-compliance with the obligations established in industry regulations, as well as legal claims which discuss the sanctions by ANATEL at administrative level, rating the risk of loss as possible for R$860,601. We point out an increase in the amount assessed as possible risk of the company due to the revaluation of proceedings completed in March, in light of the significant change in methodologies for application of sanctions by ANATEL to sanction the utility companies. |
Regulatory proceedings:
| a) | Administrative proceedings discussing payment of 2% charge on revenue from interconnection services due to the extension of right of use of SMP related radio frequencies: Under clause 1.7 of the Authorization Terms that grant right of use of SMP related radio frequencies, the extension of right of use of such frequencies entails payment every two years, during the extension period (15 years), of a 2% charge calculated on net revenue from the basic and alternative service plans of the service company, determined in the year before that of payment. However, ANATEL determined that the 2% charge should be calculated on revenue from service plans as well as revenue from interconnection services, which is not provided for by clause 1.7 of the referred to Authorization Terms. |
For considering, based on the provisions of the Authorization Terms, that revenue from interconnection services should not be included in the calculation of the 2% charge for radiofrequency use right extension, Vivo filed administrative proceedings contesting these charges, based on ANATEL’s position.
According to its legal advisors’ opinion, chances of success in these processes are possible.
| b) | Administrative Proceeding No. 08012.008501/2007-91 |
It is a proceeding filed in the Brazilian System Defending Competition (“SBDC”) by Global Village Telecom Ltda (“GVT”), Intelig Telecomunicações Ltda, (“Intelig”), Transit do Brasil Ltda, and Easytone Telecomunicações Ltda, on August 6, 2007 against Claro S.A. (“Claro”), Tim Brasil Serviços e Telecomunicações S.A. (“TIM”), TNL SCS S.A. (“Oi”) and Vivo, for supposed trust and price squeeze practices, with the objective of increasing VU-M tariff, thus increasing the costs of competitors. Due to the proceeding filed on August 21, 2008, the Economic Right Department (“SDE”) started an administrative proceeding against the defendants in order to evaluate whether the practices adopted would fit into (i) items I, III and IV, article 20 and items V, article 21 and (ii) items I, III and IV, article 20 and items I and V, all of Law No. 8,884/94, to wit trust and price squeeze.
On March 25, 2010, SDE issued a Technical Note which: (i) dismissed the accusation of trust against all the defendants, recommending filing of such accusation, (ii) suggested excluding Oi from the group of defendants in the investigation of price squeeze for considering that its economic group would be responsible for paying VU-M and for not existing evidence of recurrent practices of prices below VU-M; (iii) recommended condemning Vivo, TIM and Claro, based on article 20, items I, III and IV, and article 21, item V, all of Law No. 8,884/94, for the increase in costs of competitors (price squeeze).
The proceeding is pending judgment by the Administrative Council for Economic Defense “CADE” and awaits for the issuance of an opinion by its prosecution unit.
The Company’s legal advisors consider that Administrative Proceeding No. 08012.008501/2007-91 involves possible unfavorable outcome, therefore no related provision has been set up. If CADE hands down a proceeding against defendants only for price squeeze, fines imposed for similar cases have ranged from 1% to 2% of annual gross billing. However, in the remote case that CADE accepts the hypothesis of trust, initially dismissed by SDE, fines have ranged from 20% to 30% of the defendant’s gross billing for the year before that in which the proceeding was filed (in the case of Vivo: 2007), excluding taxes.
At December 31, 2011, the Company and its subsidiaries granted guarantees for tax, civil and labor proceedings, as under:
| | Property and equipment | | | Escrow deposits | | | Letter bond | |
Civil, labor and tax | | | 70,317 | | | | 3,443,460 | | | | 1,494,011 | |
Total | | | 70,317 | | | | 3,443,460 | | | | 1,494,011 | |
| | 2011 | | | 2010 | |
Activation revenue | | | 67,672 | | | | 72,671 | |
Payphone cards | | | 15,783 | | | | 20,847 | |
Services and goods (a) | | | 583,751 | | | | - | |
Government grants (c) | | | 8,322 | | | | - | |
Loyalty program (d) | | | 68,821 | | | | - | |
Other | | | 16,919 | | | | 9,821 | |
Total current | | | 761,268 | | | | 103,339 | |
| | | | | | | | |
Activation revenue | | | 30,792 | | | | 28,383 | |
Services and goods (a) | | | 48,095 | | | | - | |
Equipment donations (b) | | | 22,638 | | | | - | |
Government grants (c) | | | 44,880 | | | | - | |
Other | | | 9,861 | | | | 10,017 | |
Total non-current | | | 156,266 | | | | 38,400 | |
| a) | Refers to the balances of agreements of prepaid services revenue and multi-element operations, which are recognized income to the extent that services are provided to clients. |
| b) | Refers to the balances of network equipment donations from suppliers, which are amortized by the useful life of this equipment. |
| c) | Refers to government grant obtained by subsidiary Vivo S.A. deriving from funds raised with BNDES in a specific credit line (PSI Program), used in the acquisition of domestic equipment and registered at BNDES (Finame) and applied in projects to expand the network capacity, which have been amortized by the useful life of equipment. |
| d) | Refers to the fidelity points program that the wholly-owned subsidiary Vivo S.A. maintains, which allows customers to accumulate points when paying their bills referring to use of services offered by such subsidiaries. The accumulated points may be exchange for telephone sets or services, conditional upon obtaining a minimum balance of points by customer. The consideration received is allocated to the cost of sets or services at fair value. The fair value of points is determined dividing the amount of discount granted by the number of points necessary for the redemption based on the points program. The fair value of the accumulated balance of points generated is deferred and recognized as revenue upon redemption of points. |
| | 2011 | | | 2010 | |
| | | | | | |
Consignments on behalf of third parties | | | 252,807 | | | | 88,238 | |
Amounts to be refunded to subscribers | | | 59,265 | | | | 54,666 | |
Concession renewal fee (note 1.b.1) | | | - | | | | 102,568 | |
Finance Lease (a) | | | 11,669 | | | | 11,507 | |
Liabilities to related parties (note 32) | | | 66,490 | | | | 120,981 | |
Other | | | 32,087 | | | | 5,998 | |
Current | | | 422,318 | | | | 383,958 | |
| | | | | | | | |
Finance Lease (a) | | | 9,398 | | | | 23,346 | |
Liabilities to related parties (note 32) | | | 4,976 | | | | 10,738 | |
Other | | | 53,884 | | | | 30,125 | |
Non current | | | 68,258 | | | | 64,209 | |
| (a) | The Company has finance lease contracts for the use of IT equipment. |
| | 2011 | | | 2010 | |
| | | | | | |
Future payments of the gross finance lease | | | 23,920 | | | | 42,194 | |
Unrealized financial expense | | | (2,853 | ) | | | (7,341 | ) |
Present value of minimum payments due | | | 21,067 | | | | 34,853 | |
| | | | | | | | |
Current | | | 11,669 | | | | 11,507 | |
Noncurrent | | | 9,398 | | | | 23,346 | |
Maturity schedule: | | | | | | |
Year | | Gross investment | | | Present value | |
| | | | | | |
Maturing within one year | | | 11,669 | | | | 11,669 | |
Maturing more than one year but within five years | | | 12,251 | | | | 9,398 | |
Total | | | 23,920 | | | | 21,067 | |
There are neither unsecured residual values that produce benefits to the lessor nor contingent payments recognized as revenues during the year.
Commitments and guarantees
Rentals
The Company rents equipment and facilities and along with the subsidiary Vivo have undertaken commitments with lessors of several stores and sites where the radio-base stations (ERB’s) are located through several operating agreements maturing on different dates.
Rental commitments mainly refer to facilities where future minimum payments under leases with remaining non-cancellable terms in excess of one year and are as follows:
Year | | Value | |
| | | |
Up to one year | | | 1,227,224 | |
One to five years | | | 5,454,595 | |
More than five years | | | 2,067,975 | |
Total | | | 8,749,794 | |
Paid inPaid-in capital is of R$6,575,480 at December 31, 2008 (R$6,575,198 as of December 31, 2007)2011 amounts to R$37,798,110 (R$6,575,480 in December 31, 2010). Subscribed and paid inpaid-in capital is represented by shares without par value, as follows:
| 2008 | | 2007 | |
| | | | | 2011 | | | 2010 | |
Total Capital in shares | | | | | | | | | |
Common shares | 168,819,870 | | 168,819,870 | | | 381,587,111 | | | | 168,819,870 | |
Preferred shares | 337,417,402 | | 337,417,402 | | | 744,014,819 | | | | 337,417,402 | |
Total | 506,237,272 | | 506,237,272 | | | 1,125,601,930 | | | | 506,237,272 | |
| | | | | | | | | | | |
Treasury shares | | | | | | | | | | | |
Common shares | (210,578) | | (210,578) | | | (239,740 | ) | | | (210,579 | ) |
Preferred shares | (185,213) | | (185,213) | | | (1,477,546 | ) | | | (185,213 | ) |
Total | (395,791) | | (395,791) | | | (1,717,286 | ) | | | (395,792 | ) |
| | | | | | | | | | | |
Outstanding shares | | | | | | | | | | | |
Common shares | 168,609,292 | | 168,609,292 | | | 381,347,371 | | | | 168,609,291 | |
Preferred shares | 337,232,189 | | 337,232,189 | | | 742,537,273 | | | | 337,232,189 | |
Total | 505,841,481 | | 505,841,481 | | | 1,123,884,644 | | | | 505,841,480 | |
| | | | | | | | | | | |
Book value per outstanding share in R$ | 19.86 | | 19.58 | | | 38.55 | | | | 23.06 | |
TheAccording to its by-laws, the Company is authorized to increase its capital up to the limit of 700,000,000 (seven1,350,000,000 (one billion three hundred and fifty million) shares, common or preferred. The capital increase and consequent issue of new shares are to be approved by the Board of Directors, with observance of the authorized capital limit.
However, Brazilian Corporation Law – Law No. 6,404/76; article 166; IV establishes that capital may be increased through a general shareholders’ meeting resolution held to decide about charter amendment, if statutory share capital limit has been reached.
Capital increases do not necessarily have to observe the proportion between the numbers of shares of each type. However, the number of preferred shares, nonvoting or with restricted voting, must not exceed 2/3 of the total shares issued.
Preferred shares are nonvoting, but have priority in the reimbursement of capital, without premium, and are entitled to dividends 10% higher than those paid on common shares, as per article 7 of the Company’s bylaws and clause II, paragraph 1, article 17, of Law No. 6,404/76.
In April 2011, there was a capital increase of R$31,222,630 resulting from merger of 100% of shares of Vivo Part. into the Company, approved by the general shareholders’ meeting of April 27, 2011 (see Note 4) corresponding to 619,364,658 (six hundred and nineteen million, three hundred and sixty-four thousand and six hundred and fifty-eight) shares of which 212,767,241 (two hundred and twelve million, seven hundred an sixty-seven thousand, two hundred and forty-one) are common shares and 406,597,417 (four hundred and six million, five hundred and ninety-seven thousand, four hundred and seventeen) are preferred shares.
Share premiumPremium
This reserve represents the amount exceeding book value of the shares arising from the issuance or capitalization on the date of issue.
Special Goodwill ReserveOther Capital Reserves
This reserve was booked as a resultDue to the merger of the Corporate Reorganization processes,holdings TBS Celular Participações Ltda, Portelcom Participações S.A. and PTelecom Brasil S.A. into Vivo Part. (note 1.e) the Company registered the amount of R$47,723 on this caption, which can be used as a counter-entry to the net assets transferred, and represents the future tax benefit to be earned by amortization of the premium transferred. The portion of special premium reserve corresponding to the benefit may be, at the end of each fiscal year, capitalized to the benefit of the controlling shareholder upon the issue of new shares. The increase of capital is subject to the preemptive rights of the noncontrolling shareholders, proportionally to their respective interests, by kind and class, at the time of the issue, and the amounts paid upon the exercise of this right shall be directly delivered to the controlling shareholder, in accordance with the provisions in CVM Instruction no. 319/99.increase.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Donations and subsidies for investment
These represent amounts in assets donated by subscribers for the expansion of the telecommunications services plant until 2007. After 2008, these donations will be classified as deferred revenues under liabilities and subsequently recognized in income over the term of the arrangement with the customer.
These correspond to the Company’s treasury stockshares which resulted from the merger with TDBH that occurred in 2006, partand with Vivo Part. ended on May 2011, besides the buyback program of common and extraordinary shares, which refer to exercisetook place from August 11, 2011, in the amount of withdrawing rights and the remaining to the share auctions carried out by the Company. TheR$61,617, which had an average cost of acquisition was R$44,77.43.50 for common shares and R$46.70 for preferred shares, corresponding to 29,000 common shares and 1,292,300 preferred shares. At December 31, 2008,2011, the market value of treasury stockshares was R$16,258 (R$18,16488,142.
Buyback Common and Extraordinary Share Program Telefônica Brasil S.A.
On November 7, 2011, the Company informed its shareholders and the market that the members of the Company’s Board of Directors approved the acquisition of common and extraordinary shares issued by the company, without capital reduction, for subsequent cancellation, disposal or maintenance in treasury for the purpose of increasing shareholder value. The repurchase will be made through the use of part of the existing capital reserve as of June 30, 2011, except for the reserves referred in Article 7 subsection (a) to (d) of CVM Instruction Nr. 10/80.
This repurchase will begin from the deliberation date of the Board of Directors, remaining in force until November 6, 2012, being the acquisitions carried out in BM&FBOVESPA at December 31, 2007).market prices and is responsibility of Management to decide the moment and quantity of shares to be acquired, whether in a single operation, whether in a series of operations, as well as to define the parameters for carrying out the repurchase, within legal limits, until a maximum of 2,912,734 common shares and 25,207,477 preferred shares.
| c.d) | IncomeRevenue reserves |
Legal reserve
Brazilian corporations are required to appropriateThe legal reserve is set up by allocation of 5% of annualthe net incomeprofit for the year, up to a legal reserve until that reserve equalsthe limit of 20% of the paid-up sharecapital stock. Legal reserve may only be used to increase capital or 30% of nominal paid-up share capital plus capital reserves; thereafter, appropriations to this reserve are not compulsory. This reserve can be used only to increase share capital or offset accumulated losses. The Company did not appropriate legal reserve in 2008 and in 2007 since capital reserves plus legal reserve would exceed 30% of share capital (Law 6,404/76, Article 193).
| d.e) | Special goodwillGoodwill reserve |
This represents the tax benefit generated by the merger of DABR (Note 2.b) which will be capitalized on an annual basis on behalf of the controlling shareholder as the tax credit becomes realized, according to CVM Instruction No. 319/99.
e. Dividends
According
| f) | Dividends – Remaining balance – retained earnings as of December 31, 2010 |
On March 18, 2011, the Ordinary General Shareholders’ Meeting approved the allocation of additional proposed dividends referring to its by-laws, the Company is requiredremaining profit balance of 2010 and expired dividends and interest on shareholders’ equity of 2010, in the amount of R$1,694,099, provided for in the profit allocation proposal to paycommon and preferred shareholders included in the Company’s records by the end of March 18, 2011.
As of May 20, 2011, a payment of the first installment was made in the amount of R$1,429,300. The payment of the remaining installment in the amount of R$264,799 began on November 3, 2011.
| g) | Interim dividends – fiscal year 2011 |
On September 13, 2011, the Board of Directors approved the payment of interim dividends in respectthe amount of eachR$382,400, based on profit recorded in the balance sheet as of June 30, 2011, to holders of common and preferred shares included in the Company’s records by the end of September 30, 2011. Payment of such interim dividends began on November 3, 2011.
| h) | Interest on shareholders’ equity – fiscal year 2011 |
In September 13, 2011, the Board of Directors approved the credit of interest on shareholders’ equity for the fiscal year ending2011, in the amount of R$1,250,000, subject to 15% withholding income tax, resulting in the net amount of R$1,062,500 to holders of common and preferred shares included in the Company’s records by the end of September 30, 2011. Payment of interest on shareholders’ equity began on November 3, 2011.
On December 31,12, 2011, the Board of a minimumDirectors approved the credit of 25%interest on shareholders’ equity for the fiscal year 2011, in the amount of adjustedR$617,000, subject to 15% withholding income tax, resulting in the net income, provided earnings are available for distribution.amount of R$524,450 to the holders of common and preferred shares included in the Company’s records by the end of December 29, 2011. Payment of such interest will start until the end of 2012, and the date will be established and communicated by the Company’s Executive Board.
Dividends are calculated in accordance with the Company’s by-laws and with the Brazilian Corporation Law. The Company presents the calculation of dividends and interest on shareholders’shareholder’s equity deliberated for 20082011 and 20072010 as follows:
Minimum mandatory dividends calculated based on adjusted net income | | 2011 | | | 2010 | |
Net Income for the year | | | 4,355,318 | | | | 2,398,836 | |
Appropriation to legal reserve | | | (217,766 | ) | | | - | |
Adjusted net income for the year | | | 4,137,552 | | | | 2,398,836 | |
| | | | | | | | |
Minimum mandatory dividends - 25% of adjusted net income | | | 1,034,388 | | | | 599,709 | |
Dividends and interest on shareholders’ equity distributed: | | | | | | | | |
Interest on Shareholders’ Equity (Gross) | | | 1,867,000 | | | | 592,000 | |
Interim Dividends | | | 382,400 | | | | 196,355 | |
Profit available for distribution | | | 1,888,152 | | | | 1,610,481 | |
| | | | | | | | |
(+) Interest on Shareholders’ Equity / Prescribed Dividends | | | 107,874 | | | | 134,440 | |
(-) Actuarial (Gains) / losses recognized and effect of the limitation of the surplus plan assets, net of tax | | | (42,997 | ) | | | (42,063 | ) |
(-) Total effects of IFRS on 2009 equity | | | - | | | | (8,759 | ) |
Additional proposed dividend | | | 1,953,029 | | | | 1,694,099 | |
Minimum mandatory dividends calculated based on adjusted net income | | 2008 | | 2007 |
| | | | |
Net income for the year | | 2,419,971 | | 2,363,169 |
Allocation to legal reserve | | - | | - |
| | | | |
Adjusted net income for the year | | 2,419,971 | | 2,363,169 |
| | | | |
Minimum mandatory dividends – 25% of adjusted net income | | 604,993 | | 590,792 |
| | | | |
Retained earnings | | | | |
Retained earnings from prior years | | - | | 705,631 |
Adjusted net income for the year | | 2,419,971 | | 2,363,169 |
Interest on shareholders’ equity / Prescribed Dividends | | 163,392 | | 209,770 |
Merger of DABR | | 41 | | - |
Adjustments of Law No. 11638/07 | | 2,705 | | - |
| | | | |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Profit available for distribution | | 2,586,109 | | 3,278,570 |
| | | | |
Interest on shareholders’ equity (gross) | | 616,000 | | 642,000 |
Interim dividends | | 1,575,000 | | 2,285,632 |
| | | | |
Balance of profit available for distribution | | 395,109 | | 350,938 |
| | | | |
Proposed Dividends | | 395,109 | | 350,938 |
| | | | |
Retained earnings at year-end | | - | | - |
| | 2011 | | | 2010 | |
Amounts in R$ per share (a) | | Gross | | | Net | | | Gross | | | Net | |
| | | | | | | | | | | | |
Interest on shareholders’ equity - common | | | 1.557913 | | | | 1.324226 | | | | 1.097180 | | | | 0.932603 | |
Interest on shareholders’ equity - preferred | | | 1.713705 | | | | 1.456649 | | | | 1.206898 | | | | 1.025863 | |
| | 2008 | | 2007 |
Amounts in R$ per share (a) | | Gross | | Net | | Gross | | Net |
| | | | | | | | |
Interest on shareholders’ equity - common | | 1.141661 | | 0.970411 | | 1.189848 | | 1.011370 |
Interest on shareholders’ equity – preferred | | 1.255827 | | 1.067453 | | 1.308832 | | 1.112507 |
| | 2011 | |
Amounts in R$ per share (a) | | Common | | | Preferred | |
| | | | | | |
Interim dividends declared in March 2011 | | | 3.139752 | | | | 3.453727 | |
Interim dividends declared in September 2011 | | | 0.319058 | | | | 0.350964 | |
Interest on shareholders’ equity - net of withholding tax | | | 0.886505 | | | | 0.975156 | |
Interest on shareholders’ equity - net of withholding tax | | | 0.437720 | | | | 0.481492 | |
| | | | | | | | |
| | | 4.783035 | | | | 5.261339 | |
| | 2008 |
Amounts in R$ per share (a) | | Common | | Preferred |
| | | | |
Interest on shareholders’ equity – net of income tax | | 0.315068 | | 0.346575 |
Interim dividends declared in March 2008 | | 0.650409 | | 0.715450 |
Interim dividends declared in May 2008 | | 0.898872 | | 0.988760 |
Interim dividends declared in November 2008 | | 2.020146 | | 2.222161 |
Interest on shareholders’ equity – net of income tax | | 0.655343 | | 0.720877 |
| | | | |
| | 4.539838 | | 4.993823 |
| | 2010 | |
Amounts in R$ per share (a) | | Common | | | Preferred | |
| | | | | | |
Interim dividends declared in April 2010 | | | 2.319731 | | | | 2.551704 | |
Interim dividends declared in September 2010 | | | 0.363913 | | | | 0.400305 | |
Interest on equity - net income tax | | | 0.614384 | | | | 0.675822 | |
Interest on equity - net income tax | | | 0.318219 | | | | 0.350041 | |
| | | | | | | | |
| | | 3.616247 | | | | 3.977872 | |
| | 2007 |
Amounts in R$ per share (a) | | Common | | Preferred |
| | | | |
Interest on shareholders’ equity – net of income tax | | 1.011370 | | 1.112507 |
Interim dividends declared in March 2007 | | 1.307779 | | 1.438557 |
Interim dividends declared in November 2007 | | 2.928286 | | 3.221115 |
| | | | |
| | 5.247435 | | 5.772179 |
(a) Do not include the amount of dividends to be declared. | (a) | Do not include the amount of proposed dividends. |
The balance of retained earnings as ofunallocated net income for the year at December 31, 2008,2011, in the amount of R$395,109 (R$350,938 at December 31, 2007)1,888,152, plus dividends and interest on shareholder’s equity prescribed in 2011 in the amount of R$107,874 and minus other comprehensive income in the amount of R$(42,997), wastotaling R$1,953,029, were classified as additional proposed dividends payable in accordance with management’sshareholders’ equity, according to Management’s proposal for allocationdistribution of net income for the year, subject to be submitted for approval byof the General Ordinary General Shareholders’ Meeting, andMeeting.
Management’s proposed dividend payment to payment by the end of fiscal year 2009.be approved:
Total proposed for approval | f. | | | 1,953,029 | | |
Value per share | | Common | | | Preferred 1 | |
Total proposed for approval – amount per share | | | 1.630092 | | | | 1.793102 | |
1 10% higher than the amount attributed to each common share, according to article 7 of Company’s Bylaws.
| i) | Interest on shareholders’ equity |
As proposalproposed by Management, in 20082011 and 20072010 interest on shareholders’ equity waswere credited to shareholders in accordance with articleArticle 9 of Law No. 9,249/95, net of withholding income tax, as follows:
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| 2008 | | 2007 | | 2011 | | | 2010 | |
| | | | | | | | | |
Gross interest on shareholders’ equity | 616,000 | | 642,000 | | | 1,867,000 | | | | 592,000 | |
Common shares | 192,495 | | 200,619 | | | 594,113 | | | | 184,995 | |
Preferred shares | 423,505 | | 441,381 | | | 1,272,887 | | | | 407,005 | |
| | | | | | | | | | | |
Withholding income tax | (92,400) | | (96,300) | | | (280,050 | ) | | | (88,800 | ) |
| | | | | | | | | | | |
Net interest on shareholders’ equity included in dividends | 523,600 | | 545,700 | |
Interest on shareholders’ equity, net of withholding tax | | | | 1,586,950 | | | | 503,200 | |
Tax-exempt shareholders receivedreceive interest on shareholders’ equity in full, not subject to withholding tax.
g. Payment of dividends and interest on shareholders’ equity
On March 26, 2008, the Ordinary Shareholders’ Meeting approved a dividend distribution in the amount of R$350,938 as defined in the allocation of net income for 2007 proposed by management. These dividends were credited to holders of common and preferred shares included in the Company’s records by the end of March 26, 2008, and have been paid as of June 23, 2008.
On May 20, 2008, the Board of Directors approved the payment of interim dividends in the amount of R$485,000 based on the financial statements for March 31, 2008, and interest on shareholders’ equity for fiscal year 2008 in the amount of R$200,000, or R$170,000 net of withholding taxes, to holders of common and preferred shares included in the Company’s records by the end of May 20, 2008. These dividends have been paid as of June 23, 2008.
On November 24, 2008, the Board of Directors approved the distribution of interim dividends in the amount of R$1,090,000, based on retained earnings shown on the balance sheet as of September 30, 2008, to holders of common and preferred shares included in the Company’s records by the end of November 24, 2008. These dividends have been paid as of December 10, 2008.
On December 9, 2008, the Board of Directors approved the credit of interest on shareholders’ equity for fiscal year 2008 in the amount of R$416,000, or R$353,600 net of withholding taxes, to holders of common and preferred shares included in the Company’s records by the end of December 30, 2008. The payment will be made in 2009 on a date to be decided at the Ordinary Shareholders’ Meeting.
Dividends and interest on shareholders’ equity are barred by the statute of limitationslimitation after three years, as from the date of beginning of payment thereof, if not claimed by shareholders, according to articleArticle 287, clause II, item a. of Law No. 6,404 dated December 15, 1976. Accordingly, any such unclaimed dividend is credit to retained earnings.
24. | Net operating revenue |
| | 2011 | | | 2010 | | | 2009 | |
| | | | | | | | | |
Telephony services | | | 24,331,263 | | | | 15,366,014 | | | | 16,234,008 | |
Network usage | | | 3,785,017 | | | | 523,787 | | | | 487,803 | |
Data Transmission and value added services | | | 10,929,344 | | | | 5,028,441 | | | | 4,685,432 | |
Pay TV | | | 865,376 | | | | 587,374 | | | | 600,270 | |
Sale of goods and equipment | | | 2,135,165 | | | | 166,464 | | | | 207,860 | |
Other services | | | 1,026,986 | | | | 936,970 | | | | 997,147 | |
| | | | | | | | | | | | |
Gross operating revenue | | | 43,073,151 | | | | 22,609,050 | | | | 23,212,520 | |
| | | | | | | | | | | | |
ICMS | | | (8,800,749 | ) | | | (4,702,669 | ) | | | 4,808,841 | |
PIS and COFINS | | | (1,780,503 | ) | | | (864,994 | ) | | | 927,637 | |
ISS | | | (45,576 | ) | | | (39,441 | ) | | | 41,930 | |
Deductions | | | (3,317,583 | ) | | | (1,203,695 | ) | | | 1,581,579 | |
Net operating revenue | | | 29,128,740 | | | | 15,798,251 | | | | 15,852,533 | |
i. Adjustment for Equity Valuation and Cumulative Translation Adjustment
Adjustment for Equity Valuation
This represents net gains and losses from changes in the fair value of financial assets net of tax, classified as available-for-sale (Notes 4 and 11).
Cumulative Translation Adjustment
This represents foreign exchange fluctuations derived from the translation of net equity of foreign investments.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Adjustment for Equity Valuation25. | |
| |
Portugal Telecom | 55,389 |
Zon Multimédia | 6,775 |
Other investments | 14,068 |
Total, netCosts of income tax of R$ 39,272 | 76,232 |
| |
Cumulative Translation Adjustment | |
Aliança Atlântica | 862 |
Total | 862goods and services |
| Consolidated |
| 2008 | | 2007 | | 2006 |
| | | | | |
Monthly subscription charges | 5,486,797 | | 5,646,362 | | 5,689,614 |
Activation fees | 114,283 | | 119,629 | | 119,349 |
Local service | 2,562,869 | | 2,808,251 | | 3,242,825 |
| | | | | |
LDN – Domestic long-distance | 3,808,790 | | 3,220,787 | | 3,017,396 |
LDI – International long-distance | 140,389 | | 133,870 | | 152,656 |
Interconnection services | 4,372,033 | | 4,063,688 | | 4,244,507 |
Network usage services | 465,788 | | 405,278 | | 534,825 |
Public telephones | 444,910 | | 551,059 | | 583,807 |
Data transmission | 3,759,457 | | 2,995,718 | | 2,020,445 |
Network access | 384,344 | | 318,609 | | 398,868 |
TV Service | 379,019 | | 54,564 | | - |
Other (a) | 1,102,101 | | 865,994 | | 792,471 |
| | | | | |
Gross operating revenue | 23,020,780 | | 21,183,809 | | 20,796,763 |
| | | | | |
Taxes on gross revenue | (5,978,565) | | (5,575,502) | | (5,530,866) |
ICMS (State VAT) | (5,017,815) | | (4,721,551) | | (4,698,108) |
PIS and COFINS (taxes on Revenue) | (917,546) | | (811,549) | | (795,426) |
ISS (Municipal service tax) | (43,204) | | (42,402) | | (37,332) |
| | | | | |
Discounts | (1,063,230) | | (880,745) | | (622,876) |
| | | | | |
Net operating revenue | 15,978,985 | | 14,727,562 | | 14,643,021 |
(a) The group of accounts “Other”, under Gross operating revenues, includes revenue from finance lease of customer premises equipments, as described in Note 4.k
Tariff adjustments affecting recorded revenue
Effective as of July 24, 2008, tariff adjustment was approved by ANATEL for wireline to wireline services . Tariff increased by 3.01% for Local and National Long Distance (LDN) services. Local network tariffs (TU-RL) also increased by 3.01% as of July 24, 2008.
Tariff adjustment of 3.01% for wireline to mobile services (VC1, VC2 and VC3), were also adjusted 3.01% effective as of July 24, 2008.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Tariff adjustment of 2.21% for Basic Plans (Local and LDN) was effective as of July 20, 2007. Local network tariffs (TU-RL) also increased by 2.21% as of July 20, 2008.
Tariff adjustment of 3.29% for wireline to mobile services (VC1, VC2 and VC3) was effective as of July 20, 2007.
24. | Cost of Goods and Services |
| | Consolidated |
| | 2008 | | 2007 | | 2006 |
| | | | | | |
Depreciation and amortization | | (2,390,633) | | (2,347,943) | | (2,351,376) |
Personnel | | (198,990) | | (224,578) | | (213,009) |
Organizational Restructuring Program | | (21,403) | | (63,238) | | (18,362) |
Materials | | (132,023) | | (31,651) | | (42,841) |
Network interconnection | | (3,855,345) | | (3,617,118) | | (3,554,364) |
Outsourced services | | (1,525,450) | | (1,240,328) | | (1,171,748) |
Other | | (602,564) | | (504,347) | | (428,810) |
| | | | | | |
Total | | (8,726,408) | | (8,029,203) | | (7,780,510) |
| | Consolidated | |
| | 2008 | | 2007 | | 2006 | | 2011 | | | 2010 | | | 2009 | |
| | | | | | | | | | | | | | | |
Depreciation and amortization | | (168,875) | | (174,560) | | (14,628) | | | (3,582,633 | ) | | | (1,687,449 | ) | | | (2,255,338 | ) |
Personnel | | (368,611) | | (341,006) | | (296,182) | | | (380,067 | ) | | | (257,385 | ) | | | (210,473 | ) |
Organizational Restructuring Program | | (7,526) | | (9,123) | | (3,653) | |
Materials | | (61,944) | | (89,362) | | (92,269) | |
Outsourced services | | (1,374,596) | | (1,154,183) | | (1,055,174) | |
Allowance for doubtful accounts | | (538,625) | | (652,692) | | (412,997) | |
Means of connections | | | | (536,495 | ) | | | (342,257 | ) | | | (302,970 | ) |
Interconnection | | | | (4,537,124 | ) | | | (4,176,714 | ) | | | (3,933,125 | ) |
Outside services | | | | (2,463,516 | ) | | | (1,841,072 | ) | | | (1,853,136 | ) |
Rental / insurance / condominium | | | | (374,008 | ) | | | (22,046 | ) | | | (40,996 | ) |
Taxes | | | | (1,358,835 | ) | | | (240,346 | ) | | | (343,191 | ) |
Concession fee (note 1.b.1) | | | | (84,284 | ) | | | (102,568 | ) | | | - | |
Other | | (80,379) | | (41,531) | | (49,536) | | | (68,098 | ) | | | (19,318 | ) | | | (13,649 | ) |
| | | | | | | |
Total of service costs | | | | (13,385,060 | ) | | | (8,689,155 | ) | | | (8,952,878 | ) |
Costs of goods | | | | (1,343,111 | ) | | | (155,650 | ) | | | (283,508 | ) |
Total | | (2,600,556) | | (2,462,457) | | (1,924,439) | | | (14,728,171 | ) | | | (8,844,805 | ) | | | (9,236,386 | ) |
26. | General and Administrative ExpensesSelling expenses |
| | Consolidated |
| | 2008 | | 2007 | | 2006 |
| | | | | | |
Depreciation and amortization | | (98,395) | | (111,881) | | (275,550) |
Personnel | | (143,774) | | (167,731) | | (171,856) |
Organizational Restructuring Program | | (8,537) | | (81,577) | | (54,388) |
Materials | | (8,776) | | (15,112) | | (13,465) |
Outsourced services | | (430,826) | | (402,791) | | (444,227) |
Other | | (65,214) | | (59,521) | | (23,137) |
| | | | | | |
Total | | (755,522) | | (838,613) | | (982,623) |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP | | 2011 | | | 2010 | | | 2009 | |
| | | | | | | | | |
Depreciation and amortization | | | (684,891 | ) | | | (123,043 | ) | | | (143,091 | ) |
Personnel | | | (1,049,978 | ) | | | (443,386 | ) | | | (395,606 | ) |
Outside services | | | (3,853,450 | ) | | | (1,730,908 | ) | | | (1,204,566 | ) |
Allowance for doubtful accounts | | | (506,581 | ) | | | (386,340 | ) | | | (564,580 | ) |
Rental / insurance / condominium | | | (79,239 | ) | | | (9,434 | ) | | | (13,451 | ) |
Publicity | | | (735,622 | ) | | | (224,796 | ) | | | (183,377 | ) |
Others | | | (251,597 | ) | | | - | | | | - | |
Donation and sponsorships | | | (98,345 | ) | | | (46,725 | ) | | | (23,814 | ) |
Total | | | (7,259,703 | ) | | | (2,964,632 | ) | | | (2,528,485 | ) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
27. | Permanent asset disposal,General and administrative expenses |
| | 2011 | | | 2010 | | | 2009 | |
| | | | | | | | | |
Depreciation and amortization | | | (318,470 | ) | | | (103,002 | ) | | | (107,046 | ) |
Personnel | | | (557,355 | ) | | | (287,866 | ) | | | (187,797 | ) |
Outside services | | | (693,260 | ) | | | (300,101 | ) | | | (416,802 | ) |
Rental / insurance / condominium | | | (105,985 | ) | | | (32,922 | ) | | | (34,506 | ) |
Others | | | (110,588 | ) | | | (14,955 | ) | | | (59,202 | ) |
Total | | | (1,785,658 | ) | | | (738,846 | ) | | | (805,353 | ) |
28. | Other operating income (expenses), net |
| | Consolidated |
| | 2008 | | 2007 | | 2006 |
Proceeds from sale of property, plant and equipment and investments | | 27,370 | | 147,693 | | - |
Cost of sale of property, plant and equipment and Investments | | (77,925) | | (66,040) | | (5,787) |
| | | | | | |
Total | | (50,555) | | 81,653 | | (5,787) |
| | 2011 | | | 2010 | | | 2009 | |
| | | | | | | | | |
Fines and expenses recovered | | | 366,124 | | | | 195,066 | | | | 274,277 | |
Donation and sponsorships | | | (8,612 | ) | | | (19,117 | ) | | | (14,684 | ) |
Provision for civil, labor and tax contingencies, net | | | (367,554 | ) | | | (116,996 | ) | | | (42,487 | ) |
Profit on disposal of assets (a) | | | 482,115 | | | | 230,335 | | | | (14,374 | ) |
Profit on sales of investments | | | - | | | | 87,151 | | | | - | |
Administrative technical services | | | 32,652 | | | | 36,537 | | | | 36,417 | |
Other expenses | | | (62,567 | ) | | | (100,497 | ) | | | (126,352 | ) |
Total | | | 442,158 | | | | 312,479 | | | | 112,797 | |
| | | | | | | | | | | | |
Other operating income | | | 1,229,862 | | | | 796,285 | | | | 573,792 | |
Other operating expenses | | | (787,704 | ) | | | (483,806 | ) | | | (460,995 | ) |
Total | | | 442,158 | | | | 312,479 | | | | 112,797 | |
Gains on permanent assets disposals in 2007 mainly refers to sale of real property located in the Barra Funda district for R$134,555, with residual value of R$46,044.
28. | (a) | In 2011, subsidiary Vivo S.A. carried out the disposal of 1,358 of non-strategic towers, transferring their management and maintenance to a third-party company specialized in providing these services for the amount of R$476,038 (R$419,527 net of book value). In the fourth quarter of 2010, Telefônica Brasil assigned the right to commercially explore spaces existing in approximately 1,085 transmission towers it owns, and transferred the activity of managing and maintaining the telecommunication tower to a third-party company that specializes in providing such services for the amount of R$233,421 (net amount of the monthly rent of land deferred). Considering that significant risks and benefits were transferred, for purposes of the conditions of the concession, such operation was assessed under IAS 17 – Leases perspective, and classified as a financial lease. Net effect on 2010 income statement is recorded as “Other Operating Income (Expenses), Net”. |
| Consolidated |
| 2008 | | 2007 | | 2006 |
Income | 578,966 | | 750,656 | | 839,924 |
Technical and administrative services | 44,118 | | 47,057 | | 50,371 |
Income from supplies | 20,880 | | 72,838 | | 43,319 |
Dividends | 30,473 | | 21,826 | | 14,033 |
Fines on telecommunication services | 174,774 | | 133,625 | | 116,236 |
Recovered expenses | 52,238 | | 117,645 | | 166,529 |
Reversal of provision for contingencies (*) | 106,894 | | 209,227 | | 336,343 |
Rent of infrastructure | 45,894 | | 37,857 | | 53,129 |
Amortization of negative goodwill – AIX | 8,735 | | 8,735 | | - |
Unidentified billing | 49,519 | | 39,424 | | - |
Other income | 45,441 | | 62,422 | | 59,964 |
| | | | | |
Expenses | (703,622) | | (580,075) | | (570,504) |
Allowance for reduction to recoverable value of Inventories | (3,743) | | (5,700) | | (4,569) |
Amortization of goodwill | (126,459) | | (73,473) | | (34,482) |
Donations and sponsorships | (36,520) | | (39,504) | | (13,526) |
Taxes other than income taxes | (310,985) | | (274,090) | | (251,760) |
Provision for contingencies | (162,814) | | (94,657) | | (141,716) |
Pension and other post-retirement benefits | (20,064) | | (23,033) | | (30,059) |
Other | (43,037) | | (69,618) | | (94,392) |
| | | | | |
Total | (124,656) | | 170,581 | | 269,420 |
(*) | In 2007, the Company partially reversed the provision of INSS, which refers to “Plano Bresser”, “Verão” and “SAT” (see note 20.2a and 20.2.b) due the statute barring period of five years instead in an amount of R$ 105,682, of which R$4,648 was reversed in the financial results of 2007. |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
29. | Financial Income (Expense)expenses, net |
| Consolidated | |
| 2008 | | 2007 | | 2006 | |
| | | | | | | 2011 | | | 2010 | | | 2009 | |
Financial income | 932,554 | | 503,453 | | 538,108 | | | 1,103,359 | | | | 344,354 | | | | 455,888 | |
Income from short-term investments | 161,927 | | 80,988 | | 127,860 | | | 337,179 | | | | 181,717 | | | | 172,164 | |
Gains on derivative transactions | 588,919 | | 218,733 | | 225,162 | | | 251,758 | | | | 18,567 | | | | 65,877 | |
Interest receivable | 53,341 | | 50,508 | | 44,441 | | | 131,521 | | | | 33,834 | | | | 45,545 | |
Monetary/exchange variations Receivable | 122,856 | | 148,447 | | 133,421 | |
Monetary/exchange variations receivable | | | | 267,665 | | | | 86,950 | | | | 147,471 | |
Other financial income | 5,511 | | 4,777 | | 7,224 | | | 115,236 | | | | 23,286 | | | | 24,831 | |
| | | | | | | | | | | | | | | | | |
Financial expenses | (1,160,440) | | (810,385) | | (869,163) | | | (1,243,051 | ) | | | (465,092 | ) | | | (644,680 | ) |
Interest payable | (419,190) | | (336,997) | | (376,429) | | | (484,663 | ) | | | (355,971 | ) | | | (421,599 | ) |
Losses on derivative transactions | (435,472) | | (371,750) | | (391,499) | | | (140,725 | ) | | | (20,746 | ) | | | (123,912 | ) |
Expenses on financial transactions | (69,090) | | (99,731) | | (87,011) | |
Monetary/exchange variations Payable | (236,688) | | (1,907) | | (14,224) | |
| | | | | | |
Finance Expenses, net | (227,886) | | (306,932) | | (331,055) | |
Monetary/exchange variations payable | | | | (308,966 | ) | | | (14,499 | ) | | | (35,640 | ) |
Others financial expenses | | | | (308,697 | ) | | | (73,876 | ) | | | (63,529 | ) |
Net | | | | (139,692 | ) | | | (120,738 | ) | | | (188,792 | ) |
In 2008 includes the financial results
30. | Income Tax and Social Contributionsocial contribution taxes |
The Company recognizesand its subsidiaries recognize income tax and social contribution monthly on the accrual basis and payspay the taxes on an estimated basis, in accordance with the trial balance for suspension or reduction. The taxes calculated on income until the month of the financial statements are recorded in liabilities or assets, as applicable.
Reconciliation of reported income tax expense and combined statutory tax rates
Reconciliation of the reported tax charges and the amounts calculated by applying 34% (income tax of 25% and social contribution tax of 9%) in 2008December of 2011, 2010 and 20072009 is shown in the table below:
| Consolidated |
| 2008 | | 2007 | | 2006 |
| | | | | |
Income before taxes | 3,501,664 | | 3,340,446 | | 3,924,258 |
| | | | | |
Income tax and Social contribution taxes | | | | | |
Income tax and Social contribution tax expense | (981,126) | | (917,471) | | (1,334,247) |
Permanent differences | | | | | |
Equity method | 2,809 | | (729) | | 352 |
Unclaimed interest on shareholders’ equity | (8,919) | | (31,310) | | (9,604) |
Valuation allowance on subsidiaries’ tax losses carryforwards | (39,020) | | - | | - |
Valuation allowance on subsidiaries’ temporary differences | (35,379) | | - | | - |
Nondeductible expenses, gifts, incentives and dividends received | (43,961) | | (59,397) | | (37,302) |
| | | | | |
Permanent exclusions | | | | | |
Interest on shareholders’ equity | 209,440 | | 218,280 | | 265,200 |
Incentives (cultural, food and transportation) | 23,903 | | 31,421 | | 7,494 |
| | | | | |
Total (income tax + social contribution tax) | (1,081,693) | | (977,486) | | (1,108,107) |
Effective rate | 30.9% | | 29.3% | | 28.2% |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP | | 2011 | | | 2010 | | | 2009 | |
| | | | | | | | | |
Income before taxes | | | 5,650,794 | | | | 3,444,598 | | | | 3,225,101 | |
Income and social contribution taxes | | | | | | | | | | | | |
Income and social contribution taxes expenses – at 34% rate | | | (1,921,270 | ) | | | (1,171,163 | ) | | | (1,096,534 | ) |
Permanent differences | | | | | | | | | | | | |
Equity pickup | | | - | | | | 982 | | | | 6,387 | |
Interest expense on shareholder’s equity | | | 634,780 | | | | 201,280 | | | | 205,700 | |
Prescribed dividends | | | (5,613 | ) | | | (7,483 | ) | | | (14,407 | ) |
Unrecognized deferred tax assets of subsidiaries | | | (55,671 | ) | | | (60,726 | ) | | | (109,670 | ) |
Non-deductible expenses, gifts, incentives and dividends received | | | (47,576 | ) | | | (24,532 | ) | | | (23,237 | ) |
Other additions (exclusions) | | | 96,405 | | | | - | | | | - | |
Other items | | | | | | | | | | | | |
Incentives (cultural, food and transportation) | | | (3,470 | ) | | | 15,880 | | | | 10,749 | |
Total general (IRPJ + CSLL) | | | (1,295,475 | ) | | | (1,045,762 | ) | | | (1,021,012 | ) |
| | | | | | | | | | | | |
Effective rate | | | 22.9 | % | | | 30.4 | % | | | 31.7 | % |
Current income and social contribution taxes | | | 928,132 | | | | 926,868 | | | | 745,257 | |
Deferred income and social contribution taxes | | | 367,343 | | | | 118,894 | | | | 275,755 | |
| | | | | | | | | | | | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
The components of deferred income and social contribution tax assets and liabilities on temporary differences are shown in Notes 7 and 17 respectively.
Total current income and social contribution taxes consolidated payable at December 31, 2008 amounts to R$1,071,609 (R$924,196 as of December 31, 2007).note 8.2.
Basic and diluted earnings per share were calculated by dividing income attributed to the Company’s shareholders by the weighted average of the number of outstanding common and preferred shares for the year. No transactions were carried out that could have potential shares issued through the date of issuance of the consolidated financial statements; therefore, there are no adjustments of diluting effects inherent to the potential issue of shares.
The table below shows, the calculation of earnings per share as of December 31, 2011, 2010 and 2009:
| | 2011 | | | 2010 | | | 2009 | |
Net income attributable to the shareholders: | | | 4,355,318 | | | | 2,398,836 | | | | 2,204,089 | |
Common shares | | | 1,381,068 | | | | 749,615 | | | | 688,759 | |
Preferred shares | | | 2,974,250 | | | | 1,649,221 | | | | 1,515,330 | |
Numbers of shares: | | | 928,005 | | | | 505,841 | | | | 505,841 | |
Weighted average common shares outstanding during the year | | | 313,748 | | | | 168,609 | | | | 168,609 | |
Weighted average preferred shares outstanding during the year | | | 614,257 | | | | 337,232 | | | | 337,232 | |
Basic and diluted earnings per share: | | | | | | | | | | | | |
Common shares | | | 4.40 | | | | 4.45 | | | | 4.08 | |
Preferred shares | | | 4.84 | | | | 4.89 | | | | 4.49 | |
32. | Transactions with Related Partiesrelated parties |
The principalmain balances with related parties are as follows:follows bellow:
Consolidated | | Atento Brasil S.A. | | VIVO | | Tiws Brasil Ltda. | | Telefônica S.A. | | Cia Telecomun. de Chile Transm. Regionales S.A. | | Telefónica | | Telefónica de España S.A. | | Terra Networks Brasil S.A. |
| | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | |
Current assets | | 24,803 | | 255,656 | | 2,564 | | 1,987 | | 16,544 | | 3,477 | | 3,248 | | 24,690 |
Trade accounts receivable | | 23,346 | | 252,524 | | 2,364 | | - | | 498 | | 3,477 | | 3,248 | | 24,398 |
Other assets | | 1,457 | | 3,132 | | 200 | | 1,987 | | 16,046 | | - | | - | | 292 |
| | | | | | | | | | | | | | | | |
Noncurrent assets | | - | | 1,109 | | 1,507 | | 16 | | 887 | | - | | - | | 1,826 |
Other assets | | - | | 1,109 | | 1,507 | | 16 | | 887 | | - | | - | | 1,826 |
| | | | | | | | | | | | | | | | |
Total Assets | | 24,803 | | 256,765 | | 4,071 | | 2,003 | | 17,431 | | 3,477 | | 3,248 | | 26,516 |
| | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | |
Current liabilities | | 52,820 | | 239,529 | | 64,025 | | 2,317 | | 152 | | 379 | | 970 | | 5,110 |
Trade accounts payable | | 47,144 | | 239,528 | | 63,979 | | - | | 152 | | 379 | | 970 | | 5,091 |
Interest on shareholders’ equity | | - | | - | | - | | - | | - | | - | | - | | - |
Other Liabilities | | 5,676 | | 1 | | 46 | | 2,317 | | - | | - | | - | | 19 |
| | | | | | | | | | | | | | | | |
Noncurrent liabilities | | - | | 55 | | 23,917 | | - | | - | | - | | - | | 1 |
Other Liabilities | | - | | 55 | | 23,917 | | - | | - | | - | | - | | 1 |
| | | | | | | | | | | | | | | | |
Total Liabilities | | 52,820 | | 239,584 | | 87,942 | | 2,317 | | 152 | | 379 | | 970 | | 5,111 |
| | | | | | | | | | | | | | | | |
STATEMENT OF INCOME | | | | | | | | | | | | | | | | |
Revenue | | 38,871 | | 257,398 | | 4,187 | | - | | 1,279 | | 5,641 | | 5,710 | | 61,027 |
Telecommunications services | | 36,834 | | 257,398 | | 3,661 | | - | | 1,279 | | 5,641 | | 5,710 | | 60,935 |
Financial income | | - | | - | | - | | - | | - | | - | | - | | - |
Other operating income | | 2,037 | | - | | 526 | | - | | - | | - | | - | | 92 |
| | | | | | | | | | | | | | | | |
Costs and expenses | | (514,045) | | (1,957,421) | | (57,737) | | (2,122) | | (541) | | (1,256) | | (3,051) | | (16,663) |
Cost of services provided | | (85,399) | | (1,954,648) | | (56,725) | | (2,122) | | (541) | | (1,256) | | (3,051) | | (15,907) |
Selling | | (418,021) | | (2,080) | | - | | - | | - | | - | | - | | (710) |
General and administrative | | (10,034) | | (693) | | - | | - | | - | | - | | - | | - |
Other operating expense | | (591) | | - | | (1,012) | | - | | - | | - | | - | | (46) |
| | | | | 12/31/2011 | |
Company | | Nature of the transaction | | | Current assets | | | Non-current assets | | | Current liabilities | | | Non-current liabilities | | | Revenues | | | Costs and expenses | |
Atento Brasil S.A. | | a) / c) / e) / f) | | | | 14,720 | | | | - | | | | 186,692 | | | | 338 | | | | 51,148 | | | | 1,041,829 | |
SP Telecomunicações Participações Ltda. | | d) / f) | | | | 4 | | | | - | | | | 126,283 | | | | - | | | | 4 | | | | 357,805 | |
Telefonica de Espana S.A. | | a) / e) | | | | 5,320 | | | | - | | | | 3,997 | | | | - | | | | 6,266 | | | | 5,643 | |
Telefónica del Peru | | b) | | | | 10,663 | | | | - | | | | 61 | | | | 700 | | | | 3,788 | | | | - | |
Telefónica Internacional S.A. | | b) / d) / f) | | | | 221 | | | | 17,022 | | | | 201,856 | | | | - | | | | 1 | | | | 603,066 | |
Telefónica International Wholesale Services Brasil Ltda. | | a) / c) / f) | | | | 2,131 | | | | 22 | | | | 29,080 | | | | 505 | | | | 5,741 | | | | 88,642 | |
Telefónica International Wholesale Services Espanha | | a) / e) / f) | | | | 6,057 | | | | - | | | | 3,402 | | | | - | | | | 11,918 | | | | 14,625 | |
Telefónica Móviles Espanha S.A. | | a) / c) / e) / f) | | | | 5,424 | | | | - | | | | 5,984 | | | | - | | | | 9,190 | | | | 7,985 | |
Telefónica S.A. | | d) / f) | | | | 482 | | | | 1,591 | | | | 172,229 | | | | - | | | | - | | | | 578,363 | |
Telefônica Serviços Empresariais do Brasil Ltda. | | b) / c) / e) / f) | | | | 16,690 | | | | 932 | | | | 10,715 | | | | 2,976 | | | | 6,553 | | | | 94,644 | |
Telefónica Transportes e Logistica Ltda. | | c) / f) | | | | 163 | | | | - | | | | 36,610 | | | | 144 | | | | 67 | | | | 80,887 | |
Terra Networks S.A. | | a) / b) / e) | | | | 9,505 | | | | 16 | | | | 1,100 | | | | - | | | | 8,461 | | | | 5,604 | |
Others | | a) / c) / e) / f) | | | | 26,805 | | | | 631 | | | | 32,206 | | | | 313 | | | | 15,263 | | | | 38,377 | |
Total | | | | | | 98,185 | | | | 20,214 | | | | 810,215 | | | | 4,976 | | | | 118,400 | | | | 2,917,470 | |
| | | | | 12/31/2010 | |
Company | | Nature of the transaction | | | Current assets | | | Non-current assets | | | Current liabilities | | | Non-current liabilities | | | Revenues | | | Costs and expenses | |
Atento Brasil S.A. | | a) / c)/ e) / f) | | | | 8,250 | | | | - | | | | 104,330 | | | | 338 | | | | 30,356 | | | | 704,683 | |
Telefónica International Wholesale Services Brasil Ltda. | | a) / c) / f) | | | | 1,752 | | | | 134 | | | | 24,072 | | | | 259 | | | | 3,837 | | | | 80,560 | |
Grupo Vivo | | | | | | 312,910 | | | | 427 | | | | 343,365 | | | | - | | | | 419,445 | | | | 1,816,903 | |
Telefônica Serviços Empresariais do Brasil Ltda. | | b) / c) / e) / f) | | | | 13,167 | | | | 1,943 | | | | 20,200 | | | | 2,324 | | | | 2,261 | | | | 89,118 | |
Telefónica S.A. | | d) / f) | | | | 51 | | | | 92 | | | | 35,543 | | | | - | | | | 1,553 | | | | 89,365 | |
Others | | a) / c) / e) / f) | | | | 103,537 | | | | 14,347 | | | | 182,020 | | | | 7,817 | | | | 49,332 | | | | 51,922 | |
Total | | | | | | 439,667 | | | | 16,943 | | | | 709,530 | | | | 10,738 | | | | 506,784 | | | | 2,832,551 | |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Consolidated | | Telefônica Serviços Empresariais do Brasil Ltda. | | Telefónica Internacional S.A. | | SP Telecom | | Colômbia Telecomuni cações (Telecon) | | Telefônica Pesquisa e Desenv. Ltda. | | Other | | Total 2008 | | 2007 | |
| | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | |
Current assets | | 11,971 | | 62,853 | | | | 19,058 | | 100 | | 21,386 | | 448,337 | | 291,439 | |
Trade accounts receivable | | 1,315 | | - | | - | | - | | - | | 6,745 | | 317,915 | | 216,541 | |
Other assets | | 10,656 | | 62,853 | | - | | 19,058 | | 100 | | 14,641 | | 130,422 | | 74,898 | |
| | | | | | | | | | | | | | | | | |
Noncurrent assets | | 1,135 | | 14,767 | | - | | 466 | | 87 | | 1,063 | | 22,863 | | 25,833 | |
Other assets | | 1,135 | | 14,767 | | - | | 466 | | 87 | | 1,063 | | 22,863 | | 25,833 | |
| | | | | | | | | | | | | | | | | |
Total Assets | | 13,106 | | 77,620 | | - | | 19,524 | | 187 | | 22,449 | | 471,200 | | 317,272 | |
| | | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | | |
Current liabilities | | 14,949 | | 268,627 | | 77,036 | | 776 | | 20,282 | | 19,205 | | 766,177 | | 502,248 | |
Trade accounts payable | | 14,665 | | - | | - | | 776 | | 20,205 | | 12,614 | | 405,503 | | 308,539 | |
Interest on shareholders’ equity | | - | | 234,441 | | 77,036 | | - | | - | | - | | 311,477 | | 155,282 | |
Other Liabilities | | 284 | | 34,186 | | - | | - | | 77 | | 6,591 | | 49,197 | | 38,427 | |
| | | | | | | | | | | | | | | | | |
Noncurrent liabilities | | 2,164 | | - | | - | | 1,382 | | 3 | | 4,353 | | 31,875 | | 6,493 | |
Intercompany payables | | 2,164 | | - | | - | | 1,382 | | 3 | | 4,353 | | 31,875 | | 6,493 | |
| | | | | | | | | | | | | | | | | |
Total Liabilities | | 17,113 | | 268,627 | | 77,036 | | 2,158 | | 20,285 | | 23,558 | | 798,052 | | 508,741 | |
| | | | | | | | | | | | | | | | | |
STATEMENT OF INCOME | | | | | | | | | | | | | | | | | |
Revenue | | 3,915 | | 2,799 | | - | | 91 | | 87 | | 3,539 | | 384,544 | | 323,726 | |
Telecommunications services | | 2,264 | | - | | - | | - | | - | | 1,400 | | 375,122 | | 314,599 | |
Financial income | | - | | 2,799 | | - | | 91 | | - | | 2,139 | | 5,029 | | 6,812 | |
Other operating income | | 1,651 | | - | | - | | - | | 87 | | - | | 4,393 | | 2,315 | |
| | | | | | | | | | | | | | | | | |
Costs and expenses | | (75,985) | | (11,493) | | (5,895) | | - | | (11,629) | | (40,167) | | (2,698,005) | | (2,319,307) | |
Cost of services provided | | (75,985) | | - | | - | | - | | (3,132) | | (40,167) | | (2,238,933) | | (1,848,568) | |
Selling | | - | | - | | - | | - | | (7,732) | | - | | (428,543) | | (338,379) | |
General and administrative | | - | | (11,493) | | - | | - | | (765) | | - | | (22,985) | | (129,592) | |
Other operating expense | | - | | - | | (5,895) | | - | | - | | - | | (7,544) | | (2,768) | |
Transactions with related parties were carried out at arm’s length.
a) Trade accounts receivable include receivables for telecommunications services. principally Vivo S.A., Atentotelecommunication services including Terra Networks Brasil S.A., Terra NetworksTelefonica de Espanha S.A., Telefonica International Wholesale Services Espanha, Atento Brasil S.A. and Telefónica de España S.A.,Moviles Espana S.A particularly for fixed and mobile long-distance servicescalls, communication through local mobile, interconnection and TiwsTelefonica Internacional Wholesale Services Brasil Ltda,Ltda., due to the contract of rendering services of rights of use of undersea fiber optic.optic, and other group companies.
b) Other intercompany receivables in currentCurrent Assets and noncurrent assets compriseNon-current Assets include mainly credits fromwith Telefónica Internacional S.A., Telefonica del Peru, Terra Networks Brasil S.A., Telefônica Serviços Empresariais do Brasil Ltda., Telefônica Del Peru and other group companies, corresponding to services rendered, advisory fees, expenses with salaries and other expenses paid by the Company to be refunded by the relatedcorresponding companies.
c) Trade accounts payable include services provided primarilyrendered, particularly by Atento Brasil S.A., Vivo S.A., TIWS for call center management services, tele-services centers and sales promoters; Telefônica Internacional Wholesale Services Brasil Terra Networks Brasil S.A., Telefônica Pesquisa e Desenvolvimento do Brasil Ltda.,Ltda, for provision of transmission infrastructure to various international data circuits and for international long-distance services provided principallyroaming by Telefónica de EspañaTelefonica Moviles Espana S.A. We also highlight the rendering of administrative management services in the accounting, finance, human resources, equity, and IT functions payable to Telefônica Serviços Empresariais do Brasil Ltda., Telefônica Transportes e Logística Ltda. and other group companies.
d) Other intercompany payables in Current and Non-current Liabilities mainly include payables for technical support and management services and dividends and interest on shareholder’s equity to Telefónica Internacional S.A., SP Telecomunicações Participações Ltda and Telefónica S.A.
e) Revenues are mainly related to billing speedy services and interregional long-distance services with Terra Networks Brasil S.A., Atento Brasil S.A. and Telefônica Serviços Empresariais do Brasil Ltda. and to network infrastructure leased to Atento Brasil S.A. and services from calls mainly for long distance calls with Telefonica de Espanha S.A. Telefónica Internacional Wholesale Services Espanha, Telefónica Moviles Espana S.A. and other group companies.
f) The balance of costs and expenses mainly refers to international roaming call service provided by Telefónica Moviles Espana S.A., center management services rendered by Atento Brasil S.A., international transmission infrastructure for various data circuits provided by Telefonica Internacional Wholesale Services Brasil Ltda. and Telefónica Internacional Wholesale Services Espanha, management expenses, technical assistance and interest on shareholders’ equity to Telefónica Internacional S.A., SP Telecomunicações Participações Ltda. and Telefónica S.A. and administrative management services regarding the accounting, financial, human resources property, logistics and IT areas payable to Telefônica Serviços Empresariais do Brasil Ltda.,Telefônica Transportes e Logística Ltda. and other group companies.
Other intercompany payables in current and noncurrent liabilities are comprised mainly of management and technical services payable to Telefónica Internacional S.A., software development and maintenance services payable to Telefônica Pesquisa e Desenvolvimento do Brasil Ltda., and reimbursements payable to Telefônica Serviços Empresariais do Brasil Ltda.
Revenue from telecommunications services comprises mainly billings to Vivo S.A., Terra Networks Brasil S.A. and Atento Brasil S.A.
Other operating revenues are basically from network infrastructure leased to Vivo S.A. and Atento Brasil S.A.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESPMembers of the Board of Directors and Executive Committee
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Cost of services provided refers mainly to interconnection and traffic services (mobile terminal) expenses, provided by Vivo S.A. and subsidiaries, call center management services provided by Atento Brasil S.A.Antonio Carlos Valente da Silva | President of Board of Directors and Chief Executive Officer |
Santiago Fernández Valbuena | Vice-President of Board of Directors |
Paulo César Pereira Teixeira | General and Executive Director |
Gilmar Roberto Pereira Camurra | Chief Financial Officer and Investor Relations Officer |
Breno Rodrigo Pacheco de Oliveira | General Secretary and Executive Legal Officer |
Cristiane Barretto Sales | Controller |
Antonio Gonçalves Oliveira | Member of the Board of Directors |
Fernando Abril-Martorell Hernandez | Member of the Board of Directors |
Fernando Xavier Ferreira | Member of the Board of Directors |
Francisco Javier de Paz Mancho | Member of the Board of Directors |
Eduardo Navarro de Carvalho | Member of the Board of Directors |
Iñaki Urdangarin | Member of the Board of Directors |
José Fernando de Almansa Moreno-Barreda | Member of the Board of Directors |
Luciano Carvalho Ventura | Member of the Board of Directors |
José Manuel Fernandez Norniella | Member of the Board of Directors |
Luis Javier Bastida Ibarguen | Member of the Board of Directors |
Luiz Fernando Furlan | Member of the Board of Directors |
Paulo César Pereira Teixeira | Member of the Board of Directors |
Roberto de Oliveira Lima | Member of the Board of Directors |
Narcís Serra Serra | Member of the Board of Directors |
Selling expenses refer mainly to marketing services by Atento Brasil S.A. and commissions paid to cellular telephone operators with Vivo S.A.Board of Director’s Compensation
General and administrative expenses refer to administrative management services provided by Telefônica Serviços Empresariais do Brasil Ltda., and management and technical services payable to Telefónica Internacional S.A.
CompensationThe amount paid by the Company to its Management and Statutory Officersthe Board of Directors in 2011 was approximately R$11,24827,476 (R$20,90012,904 in 2007)2010). Of this amount,these amounts, R$8,73714,411 (R$14,2009,380 in 2007) refers2010) corresponds to salaries and fringe benefits, and R$2,5116,251 (R$6,7003,524 in 2007)2010) to bonuses.
32. | Reserve for Post-Retirement Benefit Plans |
Telesp individually sponsors Telefônica Brasil also paid nearly R$1,220 (R$2,533 in 2010) in connection with Performance Share Plan – PSP, a defined benefit retirement plan (PBS Telesp Plan), administered by Visão Prev, which covers approximately 0.54% of the Company’s employees. In addition to the supplemental pension benefit, a multiemployer plan (PBS-A) and health care plan (PAMA) are provided to retired employees and their dependents (administered by Fundação Sistel), at shared costs. Contributions to the PBS Telesp Plan are determined based on actuarial valuations prepared by independent actuaries, in accordance with the rules in force in Brazil. The funding procedure is the capitalization method and the sponsor’s contribution is 10.52% of payroll of employees covered by the plan, of which 9.02% is allocated to fund the PBS Telesp Plan and 1.5% to the PAMA Plan.long-term incentive plan.
For other Telesp employees, there is an individual defined contribution plan - Visão Telesp Benefit Plan. The Visão Telesp Plan is funded by contributions made by the participants (employees) and by the sponsor which are credited to participants’ individual accounts. Telesp is responsible for bearing all plans administrative and maintenance expenses, including participant’s death and disability risks. The Company’s contributions to the Visão Telesp Plan are equal to those of the employees, varying from 2% to 9% of the contribution salary, based on the percentage chosen by the participant.
Additionally, the Company supplements the retirement benefits of certain employees of the former CTB - Companhia Telefônica Brasileira.
During 2008, the Company made contributions to the PBS Telesp Plan in the amount of R$28 (R$47 in 2007) and to Plano Visão Telesp in the amount of R$20,297 (R$26,457 in 2007).
A. Telecom sponsors two private pension plans for defined contribution; namely, one similar to that of Telesp, denominated Visão Assist Benefits Plan, which is granted to approximately 30% of its employees and another, denominated Visão A. Telecom Benefits Plan, whose basic and additional contributions by sponsor correspond to 30% of basic and additional contribution by participants. The contributions of A. Telecom to these plans totaled R$313 (R$637 in 2007).
Telefonica Data S.A. individually sponsors a defined contribution plan similar to that of the Company, the Visão Telefônica Empresas Benefit Plan. Total contributions to this plan amounted to R$646 (R$881 in 2007).
The actuarial valuation of the plans was made in December 2008 and 2007 based on the record of plan members as of August 2008 and 2007, respectively, and the financial information as of October 31, 2008 was updated to December 31, 2008 and August 2007, respectively, and the projected unit credit method was adopted. Actuarial gains or losses for each year were immediately recognized in each of the periods. The plans assets relate to December 31, 2008 and December, 31 2007. For multiemployer plans (PAMA and PSB-A),
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For thefiscal years ended December 31, 2008, 20072011 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
apportionment of the plan assets was made based on the sponsoring entity’s actuarial liabilities in relation to the plans’ total actuarial liabilities.
Actuarial liabilities recorded by the Company as of December 31, 20082010, our Directors and 2007 are as follows:
Plan | | 2008 | | 2007 |
| | | | |
CTB | | 26,482 | | 20,790 |
PAMA | | 122,288 | | 74,636 |
| | | | |
Total Consolidated | | 148,770 | | 95,426 |
a. Reconciliation of assets and liabilities
| | 2008 |
| | PBS/Visão Telesp/CTB | | PAMA (i) | | PBS-A (i) | | PBS | | Visão Telesp / Assist/ TEmpresas |
| | | | | | | | | | |
Total actuarial liabilities | | 26,482 | | 190,541 | | 1,068,380 | | 91,583 | | 28,875 |
Fair value of assets | | - | | 68,253 | | 1,463,441 | | 92,168 | | 93,273 |
Liabilities (assets), net | | 26,482 | | 122,288 | | (395,061) | | (585) | | (64,398) |
| | | | | | | | | | |
Unrecorded surpluses (ii) | | - | | - | | 395,061 | | 585 | | 64,398 |
Recorded balance | | 26,482 | | 122,288 | | - | | - | | - |
| | 2007 |
| | PBS/Visão Telesp/CTB | | PAMA (i) | | PBS-A (i) | | PBS | | Visão Telesp / Assist/ TEmpresas |
| | | | | | | | | | |
Total actuarial liabilities | | 20,790 | | 137,634 | | 905,636 | | 76,802 | | 22,561 |
Fair value of assets | | - | | 62,998 | | 1,468,827 | | 99,133 | | 70,247 |
Liabilities (assets), net | | 20,790 | | 74,636 | | (563,191) | | (22,331) | | (47,686) |
| | | | | | | | | | |
Unrecorded surpluses (ii) | | - | | - | | 563,191 | | 22,331 | | 47,686 |
Recorded balance | | 20,790 | | 74,636 | | - | | - | | - |
(i) | Refers to the proportional share of Telesp in the assets and liabilities of the PAMA and PBS-A multiemployerOfficers did not receive any retirement pension or other similar plans. |
(ii) | Surplus was not recorded by the sponsors as assets in view of limitations imposed by accounting standards (CVM Resolution No. 371) and by Resolution No. 26 of the Private Pension Management Council
|
b. Total expenses recognized in income
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| | 2008 |
| | CTB | | PAMA (i) | | PBS-A (i) (ii) | | PBS | | Visão Telesp/Assist/ TEmpresas |
| | | | | | | | | | |
Current service cost | | - | | 187 | | - | | 124 | | 2,846 |
Interest cost | | 2,073 | | 14,532 | | 93,587 | | 7,926 | | 2,258 |
Expected return on plan assets | | - | | (5,794) | | (156,392) | | (10,701) | | (7,688) |
Employee contributions | | - | | - | | - | | (34) | | (161) |
| | 2,073 | | 8,925 | | (62,805) | | (2,685) | | (2,745) |
| | 2007 |
| | CTB | | PAMA (i) | | PBS-A (i) (ii) | | PBS | | Visão Telesp/Assist/ TEmpresas |
| | | | | | | | | | |
Current service cost | | - | | - | | - | | 93 | | 3,590 |
Interest cost | | 2,229 | | 11,159 | | 86,729 | | 6,818 | | 2,568 |
Expected return on plan assets | | - | | (6,087) | | (167,404) | | (9,374) | | (6,598) |
Employee contributions | | - | | - | | - | | (63) | | (149) |
| | 2,229 | | 5,072 | | (80,675) | | (2,526) | | (589) |
c. Change in net actuarial liabilities (assets)
| | CTB | | PAMA | | PBS-A | | PBS | | Visão Telesp/ Assist/ TEmpresas |
| | | | | | | | | | |
Liabilities recorded in the balance sheet on December 31, 2006 | | 23,326 | | 51,604 | | - | | - | | - |
Expenses in 2007 | | 2,229 | | 5,072 | | (80,675) | | (2,526) | | (589) |
Contribution of the Companies in 2007 | | (3,378) | | (5) | | - | | (37) | | (2,195) |
(Gain)/Loss generated in the period | | (1,387) | | 17,965 | | (59,580) | | (6,008) | | (15,131) |
Overfunding not recorded in the balance sheet | | - | | - | | 140,255 | | 8,571 | | 17,915 |
Liabilities recorded in the balance sheet on December 31, 2007 | | 20,790 | | 74,636 | | - | | - | | - |
| | | | | | | | | | |
Expenses in 2008 | | 2,073 | | 8,925 | | (62,805) | | (2,685) | | (2,745) |
Contribution of the Companies in 2008 | | (3,323) | | (5) | | - | | (328) | | (2,200) |
(Gain)/Loss generated in the period | | 6,942 | | 38,732 | | 230,936 | | 24,759 | | (11,767) |
Overfunding not recorded in the balance sheet | | - | | - | | (168,131) | | (21,746) | | 16,712 |
Liabilities recorded in the balance sheet in 31/12/2008 | | 26,482 | | 122,288 | | - | | - | | - |
d. Change in actuarial liabilities
| CTB | | PAMA | | PBS-A | | PBS | | Visão Telesp/ Assist/ TEmpresas |
| | | | | | | | | |
Actuarial liabilities – 12/31/2006 | 23,326 | | 111,135 | | 882,270 | | 69,317 | | 26,938 |
Cost of current service | - | | - | | - | | 93 | | 3,590 |
Interest in actuarial liabilities | 2,229 | | 11,159 | | 86,729 | | 6,818 | | 2,568 |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| | CTB | | PAMA | | PBS-A | | PBS | | Visão Telesp/ Assist/ TEmpresas |
Benefits paid during the year | | (3,378) | | (6,919) | | (73,066) | | (5,353) | | (1,444) |
Actuarial (gains)/losses in the year | | (1,387) | | 22,259 | | 9,703 | | 5,927 | | (9,091) |
| | | | | | | | | | |
Actuarial liabilities 12/31/2007 | | 20,790 | | 137,634 | | 905,636 | | 76,802 | | 22,561 |
| | | | | | | | | | |
Cost of current service | | - | | 187 | | - | | 124 | | 2,846 |
Interest in actuarial liabilities | | 2,073 | | 14,532 | | 93,587 | | 7,926 | | 2,258 |
Benefits paid during the year | | (3,323) | | (7,426) | | (83,746) | | (6,025) | | (764) |
Actuarial (gains)/losses in the year | | 6,942 | | 45,614 | | 152,903 | | 12,756 | | 1,974 |
| | | | | | | | | | |
Actuarial liabilities 12/31/2008 | | 26,482 | | 190,541 | | 1,068,380 | | 91,583 | | 28,875 |
e. Change in plan assets
| | CTB | | PAMA | | PBS-A | | Visão Assist | | Visão Telesp/ Assist/ TEmpresas |
Fair value of plan assets at 12/31/2006 | | - | | 59,531 | | 1,305,207 | | 83,077 | | 56,709 |
Benefits paid in the year | | (3,378) | | (6,919) | | (73,066) | | (5,353) | | (1,444) |
Sponsor’s contributions in the year | | 3,378 | | 5 | | 257 | | 67 | | 2,217 |
Return on plan assets in the year | | - | | 6,087 | | 167,404 | | 9,374 | | 6,598 |
Gains/(losses) on assets | | - | | 4,294 | | 69,025 | | 11,967 | | 6,168 |
| | | | | | | | | | |
Fair value of plan assets at 12/31/2007 | | - | | 62,998 | | 1,468,827 | | 99,132 | | 70,248 |
| | | | | | | | | | |
Benefits paid in the year | | (3,323) | | (7,426) | | (83,746) | | (6,025) | | (764) |
Sponsor’s contributions in the year | | 3,323 | | 5 | | - | | 340 | | 2,406 |
Return on plan assets in the year | | - | | 5,794 | | 156,393 | | 10,701 | | 7,689 |
Gains/(losses) on assets | | - | | 6,882 | | (78,033) | | (11,980) | | 13,694 |
| | | | | | | | | | |
Fair value of plan assets at 12/31/2008 | | - | | 68,253 | | 1,463,441 | | 92,168 | | 93,273 |
f. Expenses estimated for 2009
| | CTB | | PAMA | | PBS-A | | PBS | | Visão Telesp/Assist/ TEmpresas |
Cost of current service | | - | | 157 | | - | | 156 | | 3,752 |
Interest cost | | 2,503 | | 18,973 | | 104,319 | | 8,935 | | 2,736 |
Expected return on assets | | - | | (7,064) | | (169,599) | | (9,976) | | (10,381) |
Employee contributions | | - | | - | | - | | (21) | | (384) |
Total expenses (reversals) for 2008 | | 2,503 | | 12,066 | | (65,280) | | (906) | | (4,277) |
g. Actuarial assumptions
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| | 2008 |
| | PBS/Visão Telesp/Visão Assist/ Visão TEmpresas/ CTB | | PAMA | | PBS-A |
| | | | | | |
Rate used for present value discount of actuarial liabilities | | 10.14% p.a | | 10.14% p.a | | 10.14% p.a |
Expected return rate on plan assets | | 11.15% p.a for all plans | | 10.88% p.a | | 11.91% p.a |
Future salary increase rate | | PBS: 6.44% p.a Visão: 7.10% p.a | | Not applicable | | Not applicable |
Long-term inflation rate | | 4.90% p.a | | 4.90% p.a | | 4.90% p.a |
Medical cost increase rate | | Not applicable | | 8.04% | | Not applicable |
Increase in use of medical services for each additional year of age | | Not applicable | | 4.00% p.a | | Not applicable |
Benefit growth rate | | 4.90% p.a | | Not applicable | | 4.90% p.a |
Capacity factor – salaries | | 98.00% | | - | | - |
Capacity factor – benefits | | 98.00% | | - | | - |
Mortality table | | AT-83 segregated by sex | | AT-83 segregated by sex | | AT-83 segregated by sex |
Disability mortality table | | IAPB-57 | | IAPB-57 | | IAPB-57 |
Disability table | | Mercer Disability | | Mercer Disability | | Not applicable |
Turnover table | | 0.15 / (time of service+ 1).starting at 50 years old | | - | | - |
Expected age established for the use of medical services | | - | | 5% to reach 52 years and 10 of participation, 3% for each subsequent year, 100% in eligibility for normal retirement | | - |
Retirement age | | First age of one of the benefits | | Not applicable | | Not applicable |
% of active married participants on retirement date | | 95% | | Not applicable | | Not applicable |
Age difference between participants and spouses | | Wives are 4 years younger than the husband | | Not applicable | | Not applicable |
Number of assisted participants/beneficiaries CTB | | - | | 3.445 | | 5.254 |
Number of active participants of PBS-Telesp | | 36 | | - | | - |
Number of retired participants of PBS-Telesp | | 337 | | - | | - |
Number of dependent groups of retirees of PBS-Telesp | | 30 | | - | | - |
Number of active participants of Visão Telesp plan (including self-sponsored) | | 5.467 | | - | | - |
Number of active participants of Visão Assist plan | | 37 | | - | | - |
Number of active participants of Visão Telefonica Empresas plan | | 192 | | - | | - |
| | 2007 |
| | PBS/Visão Telesp/Visão Assist/ Visão TEmpresas/ CTB | | PAMA | | PBS-A |
| | | | | | |
Rate used for present value discount of actuarial liabilities | | 10.77% p.a. | | 10.77% p.a. | | 10.77% p.a. |
Expected return rate on plan assets | | 10.99% p.a for plans managed by Visão Telesp, 10.98% for plans managed by Visão TEmpresas, 11.00% for plans managed by Visão Assist, 11.15% p.a for plans managed by PBS-Telesp. | | 9.61% p.a. | | 10.92% p.a. |
Future salary increase rate | | 6.59% p.a | | Not applicable | | Not applicable |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Long-term inflation rate | | 4.50% p.a | | 4.50% p.a | | 4.50% p.a |
Medical cost increase rate | | Not applicable | | 7.64% p.a | | Not applicable |
Increase in use of medical services for each additional year of age | | Not applicable | | 4.00% p.a | | Not applicable |
Benefit growth rate | | 4.50% p.a | | Not applicable | | 4.50% p.a |
Capacity factor – salaries | | 98.00% | | - | | - |
Capacity factor – benefits | | 98.00% | | - | | - |
Mortality table | | AT-83 segregated by sex | | AT-83 segregated by sex | | AT-83 segregated by sex |
Disability mortality table | | IAPB-57 | | IAPB-57 | | IAPB-57 |
Disability table | | Mercer Disability | | Mercer Disability | | Not applicable |
Turnover table | | 0.15 / (time of service+ 1), starting at 50 years old | | - | | - |
Retirement age | | First age of the benefits | | Not applicable | | Not applicable |
% of active married participants on retirement date | | 95% | | Not applicable | | Not applicable |
Age difference between participants and spouses | | Wives are 4 years younger than the husband | | Not applicable | | Not applicable |
Number of assisted participants/beneficiaries CTB plan | | - | | 3.401 | | 5.285 |
Number of active participants of PBS-Telesp | | 39 | | - | | - |
Number of retired participants of PBS-Telesp / CTB plan | | 334 | | - | | - |
Number of dependent groups of retirees of PBS-Telesp / CTB Plan | | 31 | | - | | - |
Number of active participants of Visão Telesp plan (including self-sponsored) | | 6.357 | | - | | - |
Number of active participants of Visão Assist plan | | 96 | | - | | - |
Number of active participants of Visão Telefonica Empresas plan | | 211 | | - | | - |
The Company and its subsidiaries’ polices as well as those of the Telefónica Group include the maintenance of insurance coverage for all assets and liabilities involving significant amounts and high risks based on management’s judgment and following Telefónica S.A.’s corporate program guidelines. In this context Telecomunicações de São Paulo S.A. – Telesp complies withThe assumptions adopted, given their nature, are not in the Brazilian legislation for contracting insurance coverage.scope of an audit of financial statements, and therefore, were not audited by our independent auditors.
The major insurances contractedmain assets, liabilities or interests covered by the Companyinsurance and their respective amounts are shown below:as follows:
Type | | Insurance coverage |
| | |
Operational risks (with loss of profits) | | US$10,788,108 thousand R$1,659,430 |
Optional civil responsibility - vehiclesgeneral | | R$1,00031,740 |
ANATEL guarantee insurance | | R$10,463.8024,655 |
34. | Financial InstrumentsStock options |
In 2011 and 2010, the Company’s parent, Telefónica S.A., had in force various share-based remuneration plans based on its share price quote, which were also offered to managing officers and employees of subsidiaries, including Telefônica Brasil and its subsidiaries.
The fair value of shares is measured at grant date, using the binomial option pricing model, which takes into consideration the terms and conditions upon which these instruments were granted.
The Company reimburses to Telefónica S.A. the fair value of the benefits delivered to directors and employees at the grant date.
Detailed information on the major plans in effect as of December 31, 2011 and 2010 is as follows:
| a) | “Performance Share Plan” or “PSP”: |
The table below showsGeneral Shareholders’ Meeting of Telefónica S.A. held on June 21, 2006 approved a breakdownlong-term incentive plan to be granted to executives of financial assetsTelefónica S.A. and liabilitiessubsidiaries, which consists of granting selected participants, upon compliance with the necessary requirements, a certain number of Telefónica S.A. shares, as variable remuneration.
The term of effectiveness initially established for the Plan is seven years, divided into five three-year-long cycles, each of them beginning on July 1 (“Beginning Date”) and ending on June 30 of the third year following the Beginning Date (“End Date”). At the beginning of each cycle, the number of shares to be granted to the Plan beneficiaries will be determined, based on their performance in achieving targeted pre-defined results. This grant will occur, as applicable, after the End Date of each cycle. Each cycle is independent of the others, with the first cycle starting on July 1, 2006 (shares were granted on July 1, 2009), and the fifth cycle on July 1, 2010 (shares to be granted, if applicable, as from July 1, 2013).
Conditions for the granting of shares are:
| - | The beneficiary must continue to work for the Company throughout the three years of each cycle, subject to certain special conditions relating to departures from the Company. |
| - | The actual number of shares to be granted at the end of each cycle will depend on the level of success achieved and the maximum number of shares granted to each executive. Success levels are based on the comparison between the evolution of the shareholder’s remuneration taking into consideration share price quote and dividends (“Total Shareholder Return” - TSR) of Telefónica shares, and the evolution of TSRs corresponding to a group of companies quoted in the telecommunications segment, which constitutes the Comparison Group. At the beginning of each cycle, each employee participating in the plan is granted a maximum number of shares, and the actual number of shares to be granted at the end of the cycle is calculated by multiplying this maximum number for the success level achieved at that date. This will be 100%, should the evolution of Telefónica TSR be equal to or above the third quartile of the Comparison Group, and 30% should this evolution be equal to average. In case the evolution is between these amounts, a linear interpolation will be calculated and, in case it is below average, no shares will be granted. |
At June 30, 2010 and 2011 the second and third cycles of this incentive plan ended and the maximum number of shares granted to the executives of Telefônica Brasil and its subsidiaries was as follows:
Cycle | | Nº of shares | | Unit value in euros | | Date of completion |
2nd cycle July 1, 2007 | | 175,534 | | 7.70 | | June 30, 2010 |
3rd cycle July 1, 2008 | | 186,186 | | 8.39 | | June 30, 2011 |
After the second and third cycles of the Plan, ended in July 2010 and 2011, 175,534 and 189,763 shares were granted to the eligible executives of Telefônica Brasil and subsidiaries, respectively, participating in these cycles.
The maximum number of shares to be granted in each of the 2 outstanding cycles at December 31, 2008. 2011 is as follows:
Cycle | | Nº of shares | | Unit value in euros | | Date of completion |
4th cycle July 1, 2009 | | 245,240 | | 8.41 | | June 30, 2012 |
5th cycle July, 1, 2010 | | 260,611 | | 9.08 | | June 30, 2013 |
| b) | “Performance & Investment Plan” or “PIP” |
The effectsGeneral Shareholders’ Meeting of Telefónica, S.A. held on May 18, 2011 approved a long-term plan, whose objective is to praise commitment, outstanding performance and the high potential of its Global Officers by granting them Telefónica S.A. shares.
Participants do not need to pay for the shares initially granted, and will be able to increase the number of shares they are granted at the end of the first-time adoptionPlan, should they elect to make a joint investment in their PIP. This joint–investment requires the participant to purchase and hold until the end of CPC Technical Pronouncement No. 14 are described in Note 3.b.the cycle a number equivalent to 25% of the shares initially granted by Telefónica S.A. Over this participant investment the Telefónica S.A. will increase the initial shares by 25%.
| Consolidated |
Financial assets | Measured at fair value through profit or loss | | Available for sale | | Amortized cost | | Hedge | | Total Book Value | | Total Fair Value |
Current assets | | | | | | | | | | | |
Cash and cash equivalents (Note 5) | 31,993 | | - | | - | | - | | 31,993 | | 31,993 |
Short-term investments (Note 5) | 1,709,013 | | - | | - | | - | | 1,709,013 | | 1,709,013 |
Derivatives | 7 | | - | | - | | 95,740 | | 95,747 | | 95,747 |
The term of effectiveness initially established for the Plan is three years. The cycle began on July 1, 2011 and will end on June 30, 2014. The number of shares was informed at the beginning of the cycle and after a period of 3 years from the grant date the shares will be transferred to the participant if the objective is achieved.
Conditions for the granting of shares are:
| - | having an active work relation in the Telefónica Group at cycle consolidation date; |
| - | that Telefónica achieves results that represent compliance with the objectives established for the plan: success level is based on comparison of the evolution of the shareholder’s remuneration, obtained through the (“Total Shareholder Return” - TSR), in relation to the evolution of the TSRs of the companies belonging to the pre-defined Comparison Group. |
| - | 100% shares will be granted if the TSR of Telefónica S.A is above the TSR of the Companies that represent 75% of the stock exchange capitalization of the Comparison Group. |
| - | 30% shares will be granted if the TSR of Telefónica S.A. is on the same level or above the TSR of the Companies that represent 50% of the stock exchange capitalization of the Comparison Group. |
| - | determined by linear interpolation if the TSR of Telefónica S.A is between 50% and 75% of the stock exchange capitalization of the Comparison Group. |
| - | will not be granted if the TSR of Telefónica S.A is below the TSR of the Companies that represent 50% of the stock exchange capitalization of the Comparison Group. |
The maximum number of shares granted in this first outstanding cycle at December 31, 2011 is as follows:
Cycle | | Nº of shares | | Unit value in euros | | Date of completion |
1st cycle July 1 2011 | | 570,493 | | 8.28 | | June 30, 2014 |
| c) | Global Employee Share Plan” or “GESP”. |
The General Shareholders’ Meeting of Telefónica, S.A. held on June 23, 2009, approved a share incentive purchase plan for all the employees of the Telefónica Group around the whole world, including employees of Telefônica Brasil and its subsidiaries. Under this plan, participants are offered the possibility of acquiring Telefónica, S.A. shares, with this company assuming the obligation of giving commits to participants a certain number of its shares, whenever certain requisites are met, free of charge.
The term of effectiveness initially established for the Plan is two years. Employees subscribed to the Plan were able to purchase Telefónica S.A. shares through monthly payments of up to 100 euros (or equivalent amount in local currency), up to a maximum of 1,200 euros over a period of twelve months (acquisition period). The delivery of shares will occur, as applicable, after the vesting period, as from September 1, 2012, and the conditions to be met are as follows:
| - | The beneficiary must continue to work for the Company throughout the two years of effectiveness of the plan (vesting period), subject to certain special conditions relating to departures from the Company. |
| - | The actual number of shares to be granted at the end of the vesting period will depend on the number of shares purchased and maintained by the employees. As such, the employees participating in the Plan who remain in the Group and, who maintained the purchased shares for an additional period of other twelve months after the purchase period, will be entitled to receive one share free-of-charge for each share which they acquired and maintained at the end of the vesting period. |
The purchase period began in August 2010 and at December 31, 2011, the number of employees of Telefônica Brasil and its subsidiaries participating in the Plan totals 1,137.
Telefônica Brasil and its subsidiaries registered the following expenses with personnel referring to the afore-mentioned share-based compensation plans in the fiscal years ended December 31, 2011, 2010 and 2009:
Plans | | 2011 | | | 2010 | | | 2009 | |
PSP | | R$ | 10,101 | | | R$ | 9,516 | | | R$ | 6,422 | |
PIP | | R$ | 4,509 | | | | - | | | | - | |
GESP | | R$ | 2,298 | | | R$ | 840 | | | | - | |
Total | | R$ | 16,908 | | | R$ | 10,356 | | | R$ | 6,422 | |
35. | Post-retirement benefit plans |
The plans sponsored by the Company and the related benefits types are as follows:
Plan | | Type (1) | | Entity | | Sponsor |
PBS-A | | BD | | Sistel | | Telefônica Brasil S.A. and Vivo S.A. in conjunction with the other companies resulting from the breakup of Telebras. |
PAMA/PCE | | Health care plan | | Sistel | | Telefônica Brasil S.A. and Vivo S.A. in conjunction with the other companies resulting from the breakup of Telebras. |
CTB | | BD | | Telefónica Brasil S.A. | | Telefônica Brasil S.A. |
PBS | | BD/Hybrid | | VisãoPrev | | Telefônica Brasil S.A. and Vivo S.A. |
VISÃO | | CD/Hybrid | | VisãoPrev | | A. Telecom S.A., Telefônica Data S.A., Telefônica Brasil S.A., Vivo S.A. and VisãoPrev Companhia de Previdência Complementar |
PREV | | Hybrid | | VisãoPrev (2) | | Vivo S.A. |
(1) BD = Defined Benefit Plan; |
CD = Defined Contribution Plan; |
Hybrid = Plan that offers both DB and DC-type benefits. (2) Except CELPREV plan, managed by Sistel. The Company and its subsidiaries, along with other companies from Telebrás System, sponsor pension plans and post employment medical benefits, as follows: i) PBS-A; ii) PAMA; iii) CTB ; iv) PBS-Telefônica, PBS-Telesp Celular, PBS-TCO, PBS Tele Sudeste Celular and PBS Tele Leste Celular; v) Plano TCP Prev, TCO Prev e CelPrev; and vi) Plano de Benefícios Visão Telefônica e Visão Celular – Celular CRT, Telerj Celular, Telest Celular, Telebahia Celular and Telergipe Celular. |
The Company and its subsidiaries sponsor, individually, a defined benefit retirement plan (PBS Plan), administered by Visão Prev, which covers approximately 0.46% of the Company’s employees. In addition, a multiemployer plan (PBS-A) and health care plan (PAMA) are provided by the Company and its subsidiaries to retired employees and their dependents (administered by Fundação Sistel, with constituted fund and participants contributions), at shared costs. Contributions to the PBS Plans are determined based on actuarial valuations prepared by independent actuaries, in accordance with the rules in force in Brazil. The funding procedure is the capitalization method and the sponsor’s contribution is a fixed percentage of payroll of employees covered by the plan, as described below:
Plan | | % |
PBS Telesp | | 13.96 |
PBS Telesp Celular | | 10.78 |
PBS Tele Sudeste Celular | | 16.67 |
PBS Telemig Celular | | 10.36 |
PAMA | | 1.50 |
For other employees of the Company and its subsidiaries, there are two defined contribution plans - Visão Telesp Benefit Plan and Vivo Prev Plan, both of them being administrated by Visão Prev complementary providence company. The others plans are funded by contributions made by the participants (employees) and
TELECOMUNICAÇÕES DE SÃO PAULOby the sponsors which are credited to participants’ individual accounts. Telefônica Brasil and its subsidiaries are responsible for bearing all administrative plans and maintenance expenses, including participant’s death and disability risks. The contributions to those plans are equal to those of the employees, varying from 2% to 9% of the contribution salary for those participants from Telefônica Brasil and from 0% to 8% of the contribution salary for those participants from Vivo S.A. - TELESPbased on the percentage chosen by the participant.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSAdditionally, the Company supplements the retirement benefits of certain employees of the former CTB - Companhia Telefônica Brasileira.
For
In 2011, the years endedCompany and its subsidiaries made contributions to the PBS Plans in the amount of R$18 (R$17 in 2010), to Planos Visão in the amount of R$28,743 (R$25,574 in 2010) and to the Planos Prev in the amount of R$23,073.
Subsidiary Vivo S.A. also sponsors CelPrev. Participants may make three types of contributions to the plan, being: (a) basic contribution: percentage varies from 0% to 2% of participation wage; (b) additional contribution: percentage varies from 0% to 6% of the portion of the participation wage that is higher than 10 Units of Standard Reference of the Plan; and (c) voluntary contribution: percentage chosen freely by the participant and applied on participation wage. The sponsor may make four types of contribution, being: (a) basic contribution: contribution equal to the participant’s basic contribution, less contribution for financing the sickness allowance benefit and contribution for financing administrative expenses; (b) additional contribution: equal to the participant’s additional contribution, less the administrative expense; (c) occasional contribution: made voluntarily and whose frequency is determined by the sponsor; and (d) special contribution: contribution exclusively destined to the sponsor’s employees who do not belong to the PBS and who joined within 90 days of CelPrev’s beginning date.
The actuarial valuation of the plans was made in December 2011 and 2010, based on the records of plan members at August 31 and September 30, 2011 for the plans administered by VisãoPrev and Sistel, respectively, both projected to December 31, 2008, 20072011, and 2006based on the records of plan members at July 31 and August 31, 2010 for the plans administered by VisãoPrev and Sistel, respectively, both projected for December 31, 2010, adopting the projected unit credit method. Actuarial gains and losses for each year were immediately recognized in other comprehensive income. The plans’ assets related to December 31, 2011 and 2010, respectively, and for other multi-employer plans (PAMA and PBS-A), the plans’ assets were allocated on the Company’s actuarial liability to the plans’ total actuarial liability.
(Amounts expressed
Actuarial liabilities referring to the plans mentioned above are recorded in thousands“Provisions” caption (note 20).
Actuarial liabilities recorded by the Company as of December 31, 2011 and 2010 are as follows:
Plan | | 2011 | | | 2010 | |
| | | | | | |
CTB | | | 34,615 | | | | 20,818 | |
PAMA | | | 273,373 | | | | 198,182 | |
PBS | | | 905 | | | | - | |
Total - consolidated | | | 308,893 | | | | 219,000 | |
| | | | | | | | | | | |
Noncurrent assets | | | | | | | | | | | |
Interests in other companies | - | | 265,378 | | - | | - | | 265,378 | | 265,378 |
Amounts linked to the National Treasury | - | | - | | 11,289 | | - | | 11,289 | | 11,289 |
Derivatives | 6 | | - | | - | | - | | 6 | | 6 |
| | | | | | | | | | | |
Total financial assets | 1,741,019 | | 265,378 | | 11,289 | | 95,740 | | 2,113,426 | | 2,113,426 |
| Consolidated |
Financial liabilities | Measured at fair value through profit or loss | | Amortized cost | | Hedge | | Total Book Value | | Total Fair Value |
Current liabilities | | | | | | | | | |
Loans, financing (Note 15) | - | | 502,503 | | - | | 502,503 | | 502,503 |
Debentures (Note 16) | - | | 16,339 | | - | | 16,339 | | 16,339 |
Derivatives | 462 | | - | | 14,738 | | 15,200 | | 15,200 |
| | | | | | | | | |
Noncurrent liabilities | | | | | | | | | |
Loans and financing (Note 15) | - | | 1,717,352 | | - | | 1,717,352 | | 1,717,352 |
Debentures (Note 16) | - | | 1,500,000 | | - | | 1,500,000 | | 1,500,000 |
Derivatives | 230 | | - | | 21,918 | | 22,148 | | 22,148 |
| | | | | | | | | |
Total financial liabilities | 692 | | 3,736,194 | | 36,656 | | 3,773,542 | | 3,773,542 |
| a) | Reconciliation of assets and liabilities |
| | 2011 |
| | PBS-A (i) | | | CTB | | | PAMA (i) | | | PBS | | | Visão | | | PREV | | | Total |
| | | | | | | | | | | | | | | | | | | | |
Total actuarial liabilities | | | 1,214,453 | | | | 34,615 | | | | 366,660 | | | | 242,227 | | | | 33,986 | | | | 46,251 | | | | 1,938,192 | |
Fair value of assets | | | 1,882,195 | | | | - | | | | 93,287 | | | | 294,602 | | | | 108,793 | | | | 73,689 | | | | 2,452,566 | |
Liabilities (assets), net | | | (667,742 | ) | | | 34,615 | | | | 273,373 | | | | (52,375 | ) | | | (74,807 | ) | | | (27,438 | ) | | | (514,374 | ) |
Assets limitation | | | 667,742 | | | | - | | | | - | | | | 53,195 | | | | 44,375 | | | | 26,745 | | | | 792,057 | |
Net liability recognized in the balance sheet | | | - | | | | 34,615 | | | | 273,373 | | | | 905 | | | | - | | | | - | | | | 308,893 | |
Net asset recognized in the balance sheet | | | - | | | | - | | | | - | | | | (85 | ) | | | (30,432 | ) | | | (693 | ) | | | (31,210 | ) |
| | 2010 |
| | PBS-A (i) | | | CTB | | | PAMA (i) | | | PBS | | | Visão | | | Total | |
| | | | | | | | | | | | | | | | | | |
Total actuarial liabilities | | | 1,138,330 | | | | 20,818 | | | | 272,141 | | | | 94,177 | | | | 31,914 | | | | 1,557,380 | |
Fair value of assets | | | 1,717,746 | | | | - | | | | 73,959 | | | | 111,613 | | | | 121,377 | | | | 2,024,695 | |
Liabilities (assets), net | | | (579,416 | ) | | | 20,818 | | | | 198,182 | | | | (17,436 | ) | | | (89,463 | ) | | | (467,315 | ) |
Assets limitation | | | 579,416 | | | | - | | | | - | | | | 17,436 | | | | 62,292 | | | | 659,144 | |
Net liability recognized in the balance | | | - | | | | 20,818 | | | | 198,182 | | | | - | | | | - | | | | 219,000 | |
Net asset recognized in the balance | | | - | | | | - | | | | - | | | | - | | | | (27,171 | ) | | | (27,171 | ) |
| i) | Refers to the proportional share of the Company and its subsidiaries in the assets and liabilities of the PAMA and PBS-A multiemployer plans. |
| b) | Total expenses recognized in the income statement |
| | 2011 | |
| | CTB | | | PAMA | | | PBS | | | Visão | | | PREV | | | Total | |
Current service cost | | | - | | | | 252 | | | | 821 | | | | 3,971 | | | | 2,482 | | | | 7,526 | |
Interest cost | | | 1,978 | | | | 29,173 | | | | 17,838 | | | | 3,062 | | | | 3,487 | | | | 55,538 | |
Expected return on plan assets | | | - | | | | (8,163 | ) | | | (25,654 | ) | | | (6,940 | ) | | | (5,795 | ) | | | (46,552 | ) |
| | | 1,978 | | | | 21,262 | | | | (6,995 | ) | | | 93 | | | | 174 | | | | 16,512 | |
| | 2010 | |
| | CTB | | | PAMA | | | PBS | | | Visão | | | Total | |
| | | | | | | | | | | | | | | |
Current service cost | | | - | | | | 159 | | | | 78 | | | | 3,663 | | | | 3,900 | |
Interest cost | | | 2,148 | | | | 23,038 | | | | 8,803 | | | | 2,865 | | | | 36,854 | |
Expected return on plan assets | | | - | | | | (6,489 | ) | | | (11,334 | ) | | | (11,970 | ) | | | (29,793 | ) |
| | | 2,148 | | | | 16,708 | | | | (2,453 | ) | | | (5,442 | ) | | | 10,961 | |
| | 2009 | |
| | CTB | | | PAMA | | | PBS | | | Visão | | | Total | |
| | | | | | | | | | | | | | | |
Current service cost | | | - | | | | 157 | | | | 135 | | | | 3,368 | | | | 3,660 | |
Interest cost | | | 2,503 | | | | 18,973 | | | | 8,935 | | | | 2,736 | | | | 33,147 | |
Expected return on plan assets | | | - | | | | (7,064 | ) | | | (9,976 | ) | | | (10,381 | ) | | | (27,421 | ) |
| | | 2,503 | | | | 12,066 | | | | (906 | ) | | | (4,277 | ) | | | 9,386 | |
| c) | Amounts recognized in other comprehensive income |
| | 2011 | |
| | CTB | | | PAMA | | | PBS | | | Visão | | | PREV | | | Total | |
Actuarial (gains) losses recognized immediately | | | 15,398 | | | | 36,581 | | | | 22,643 | | | | 30,628 | | | | (6,552 | ) | | | 98,698 | |
Limitation effect | | | - | | | | - | | | | 35,760 | | | | (17,918 | ) | | | 26,746 | | | | 44,588 | |
Total cost recognized in other comprehensive income | | | 15,398 | | | | 36,581 | | | | 58,403 | | | | 12,710 | | | | 20,194 | | | | 143,286 | |
| | 2010 | |
| | CTB | | | PAMA | | | PBS | | | Visão | | | Total | |
| | | | | | | | | | | | | | | |
Actuarial (gains) losses recognized immediately | | | (1,809 | ) | | | 13,069 | | | | (7 | ) | | | (1,138 | ) | | | 10,115 | |
Limitation effect | | | - | | | | - | | | | 2,472 | | | | 47,998 | | | | 50,470 | |
Total cost recognized in other comprehensive income | | | (1,809 | ) | | | 13,069 | | | | 2,465 | | | | 46,860 | | | | 60,585 | |
| | 2009 | |
| | CTB | | | PAMA | | | PBS | | | Visão | | | Total | |
| | | | | | | | | | | | | | | |
Actuarial (gains) losses recognized immediately | | | (2,344 | ) | | | 34,080 | | | | (13,453 | ) | | | (8,066 | ) | | | 10,217 | |
Limitation effect | | | - | | | | - | | | | 14,379 | | | | (47,168 | ) | | | (32,789 | ) |
Total cost recognized in other comprehensive income | | | (2,344 | ) | | | 34,080 | | | | 926 | | | | (55,234 | ) | | | (22,572 | ) |
| d) | Changes in net actuarial (assets) liabilities |
| | PBS-A | | | CTB | | | PAMA | | | PBS | | | Visão | | | PREV | | | Total | |
| | | | | | | | | | | | | | | | | | | | | |
Plan liabilities (assets) as of 01/01/2010 | | | - | | | | 23,508 | | | | 168,419 | | | | - | | | | (65,185 | ) | | | - | | | | 126,742 | |
Expenses in 2010 | | | - | | | | 2,148 | | | | 16,708 | | | | (2,453 | ) | | | (5,442 | ) | | | - | | | | 10,961 | |
Contributions of the companies to plans in 2010 | | | - | | | | (3,029 | ) | | | (14 | ) | | | (12 | ) | | | (3,404 | ) | | | - | | | | (6,459 | ) |
Amounts recognized in other comprehensive income | | | - | | | | (1,809 | ) | | | 13,069 | | | | 2,465 | | | | 46,860 | | | | - | | | | 60,585 | |
Liabilities (assets) as of 12/31/2010 | | | - | | | | 20,818 | | | | 198,182 | | | | - | | | | (27,171 | ) | | | - | | | | 191,829 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Business combination | | | (17,809 | ) | | | - | | | | 17,431 | | | | (50,294 | ) | | | (11,048 | ) | | | (19,961 | ) | | | (81,681 | ) |
Expenses in 2011 | | | (92,030 | ) | | | 1,978 | | | | 21,262 | | | | (6,995 | ) | | | 93 | | | | 174 | | | | (75,518 | ) |
Contributions of the companies to plans in 2011 | | | - | | | | (3,579 | ) | | | (83 | ) | | | (294 | ) | | | (5,016 | ) | | | (1,100 | ) | | | (10,072 | ) |
Amounts recognized in other comprehensive income | | | 109,839 | | | | 15,398 | | | | 36,581 | | | | 58,403 | | | | 12,710 | | | | 20,194 | | | | 253,125 | |
Liabilities (assets) as of 12/31/2011 | | | - | | | | 34,615 | | | | 273,373 | | | | 820 | | | | (30,432 | ) | | | (693 | ) | | | 277,683 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Actuarial asset recognized in the balance sheet | | | - | | | | - | | | | - | | | | (85 | ) | | | (30,432 | ) | | | (693 | ) | | | (31,210 | ) |
Actuarial liability recognized in the balance sheet | | | - | | | | 34,615 | | | | 273,373 | | | | 905 | | | | - | | | | - | | | | 308,893 | |
| e) | Changes in actuarial liabilities |
| | PBS-A | | | CTB | | | PAMA | | | PBS | | | Visão | | | PREV | | | Total | |
| | | | | | | | | | | | | | | | | | | | | |
Actuarial liabilities as of January 1, 2010 | | | 1,082,459 | | | | 23,508 | | | | 238,767 | | | | 93,098 | | | | 31,348 | | | | - | | | | 1,469,180 | |
Cost of current service | | | - | | | | - | | | | 159 | | | | 78 | | | | 3,663 | | | | - | | | | 3,900 | |
Interest on actuarial liabilities | | | 102,289 | | | | 2,148 | | | | 23,038 | | | | 8,803 | | | | 2,865 | | | | - | | | | 139,143 | |
Benefits paid in the year | | | - | | | | (3,029 | ) | | | (9,916 | ) | | | (6,665 | ) | | | (585 | ) | | | - | | | | (20,195 | ) |
Contributions of participants in the year | | | (93,289 | ) | | | - | | | | - | | | | 1 | | | | 302 | | | | - | | | | (92,986 | ) |
Actuarial (gains) losses in the year | | | 46,871 | | | | (1,809 | ) | | | 20,092 | | | | (1,138 | ) | | | (5,678 | ) | | | - | | | | 58,338 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Actuarial liabilities as of December 31, 2010 | | | 1,138,330 | | | | 20,818 | | | | 272,140 | | | | 94,177 | | | | 31,915 | | | | - | | | | 1,557,380 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Business combination | | | 35,091 | | | | - | | | | 23,936 | | | | 117,481 | | | | 161 | | | | 49,656 | | | | 226,325 | |
Cost of current service | | | - | | | | - | | | | 251 | | | | 821 | | | | 3,970 | | | | 2,482 | | | | 7,524 | |
Interest on actuarial liabilities | | | 114,725 | | | | 1,978 | | | | 29,173 | | | | 17,838 | | | | 3,062 | | | | 3,487 | | | | 170,263 | |
Benefits paid in the year | | | (97,917 | ) | | | (3,579 | ) | | | (13,390 | ) | | | (13,385 | ) | | | (5,900 | ) | | | (1,113 | ) | | | (135,284 | ) |
Contributions of participants in the year | | | | | | | - | | | | - | | | | 345 | | | | - | | | | - | | | | 345 | |
Actuarial (gains) losses in the year | | | 24,224 | | | | 15,398 | | | | 54,550 | | | | 24,950 | | | | 778 | | | | (8,261 | ) | | | 111,639 | |
Actuarial liabilities as of December 31, 2011 | | | 1,214,453 | | | | 34,615 | | | | 366,660 | | | | 242,227 | | | | 33,986 | | | | 46,251 | | | | 1,938,192 | |
| f) | Changes in plan assets |
| | PBS-A | | | CTB | | | PAMA | | | PBS | | | Visão | | | PREV | | | Total | |
Fair value of plan assets as of January 1, 2010 | | | 1,479,620 | | | | - | | | | 70,348 | | | | 108,062 | | | | 110,828 | | | | - | | | | 1,768,858 | |
Benefits paid in the year | | | (93,290 | ) | | | (3,029 | ) | | | (9,916 | ) | | | (6,665 | ) | | | (585 | ) | | | - | | | | (113,485 | ) |
Total contributions in the year | | | - | | | | 3,029 | | | | 14 | | | | 12 | | | | 3,704 | | | | - | | | | 6,759 | |
Expected return on plan assets in the year | | | 141,762 | | | | - | | | | 6,490 | | | | 11,334 | | | | 11,970 | | | | - | | | | 171,556 | |
Gains / (losses) on assets | | | 189,654 | | | | | | | | 7,023 | | | | (1,131 | ) | | | (4,539 | ) | | | - | | | | 191,007 | |
Fair value of plan assets as of December 31, 2010 | | | 1,717,746 | | | | - | | | | 73,959 | | | | 111,612 | | | | 121,378 | | | | - | | | | 2,024,695 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Business combination | | | 52,900 | | | | - | | | | 6,505 | | | | 167,775 | | | | 11,209 | | | | 69,617 | | | | 308,006 | |
Benefits paid in the year | | | (97,917 | ) | | | (3,579 | ) | | | (13,390 | ) | | | (13,385 | ) | | | (5,900 | ) | | | (1,113 | ) | | | (135,284 | ) |
Total contributions in the year | | | - | | | | 3,579 | | | | 81 | | | | 640 | | | | 5,017 | | | | 1,099 | | | | 10,416 | |
Expected return on plan assets in the year | | | 206,757 | | | | - | | | | 8,163 | | | | 25,654 | | | | 6,940 | | | | 5,795 | | | | 253,309 | |
Gains / (losses) on assets | | | 2,709 | | | | - | | | | 17,969 | | | | 2,306 | | | | (29,851 | ) | | | (1,709 | ) | | | (8,576 | ) |
Fair value of plan assets as of December 31, 2011 | | | 1,882,195 | | | | - | | | | 93,287 | | | | 294,602 | | | | 108,793 | | | | 73,689 | | | | 2,452,566 | |
| g) | Expenses estimated for 2012 |
| | CTB | | | PAMA | | | PBS | | | Visão | | | PREV | | | Total | |
| | | | | | | | | | | | | | | | | | |
Cost of current service | | | - | | | | 165 | | | | 853 | | | | 4,596 | | | | 3,872 | | | | 9,486 | |
Interest cost | | | 3,164 | | | | 35,026 | | | | 22,780 | | | | 3,083 | | | | 4,260 | | | | 68,313 | |
Expected return on plan assets | | | - | | | | (10,847 | ) | | | (35,943 | ) | | | (13,392 | ) | | | (9,001 | ) | | | (69,183 | ) |
Total expenses (reversions) for 2012 | | | 3,164 | | | | 24,344 | | | | (12,310 | ) | | | (5,713 | ) | | | (869 | ) | | | 8,616 | |
2011 | | Expected return rate on plan assets | | Future salary growth rate | | Medical care cost growth rate | | Annual nominal index of private pension benefit restatement | | Increase in medical services use according to age | | Expected age to qualify for the use of medical services | | Expected retirement age |
| | | | | | | | | | | | | | |
PBS/Visão | | 11.60% | | PBS: 6.54% Visão: 7.20% | | N/A | | 4.5% | | N/A | | N/A | | Eligibility for regular retirement |
| | | | | | | | | | | | | | |
PBS Telemig | | 12.08% | | N/A | | N/A | | 4.5% | | N/A | | N/A | | Eligibility for regular retirement |
| | | | | | | | | | | | | | |
Celprev/PREV | | Celprev: 11.10% PREV: 11.60% | | Celprev: 7.19% PREV: 7.20% | | N/A | | 4.5% | | N/A | | N/A | | Eligibility for regular retirement Eligibility for regular retirement |
| | | | | | | | | | | | | | |
CTB | | N/A | | N/A | | N/A | | 4.5% | | N/A | | N/A | | N/A |
| | | | | | | | | | | | | | |
PAMA | | 11.07% | | N/A | | 7.64% | | N/A | | 4.00% | | 5% upon reaching 52 years old and 10 years participating; 3% for each subsequent year; 100% in eligibility for regular retirement | | N/A |
| | | | | | | | | | | | | | |
PBS-A | | 12.08% | | N/A | | N/A | | 4.5% | | N/A | | N/A | | N/A |
Note: These are all nominal rates, except for medical services claim frequencies.
In addition to the above-mentioned assumptions, other assumptions common to all plans were adopted, as follows:
| · | Actuarial liability discount-to-present-value rate: 9.73%; |
| · | Capacity factor for salaries and benefits: 98%; |
| · | Turnover: 0.15 (years of service +1), zero from age 50; |
| · | Disability entry table: Mercer Disability; |
| · | Actuarial Table: AT2000 segregated by sex; and |
| · | Disability mortality table: IAPB-57. |
2010 | | Expected return rate on plan assets | | Future salary growth rate | | Medical care cost growth rate | | Annual nominal index of private pension benefit restatement | | Increase in medical services use according to age | | Expected age to qualify for the use of medical services | | Expected retirement age |
| | | | | | | | | | | | | | |
PBS/Visão | | 11.60% | | PBS: 6.54% Visão: 7.20% | | N/A | | 5.00% | | N/A | | N/A | | First age entitled to one of the benefits |
| | | | | | | | | | | | | | |
CTB | | N/A | | N/A | | N/A | | 5.00% | | N/A | | N/A | | First date on which it becomes eligible for Social Security benefit |
| | | | | | | | | | | | | | |
PAMA | | 11.07% | | N/A | | 8.15% | | N/A | | 4.00% | | 5% upon reaching 52 years old and 10 years participating; 3% for each subsequent year; 100% in eligibility for regular retirement | | N/A |
| | | | | | | | | | | | | | |
PBS-A | | 12.08% | | N/A | | N/A | | 5.00% | | N/A | | N/A | | N/A |
Note: These are all nominal rates, except for medical services claim frequencies.
In addition to the above-mentioned assumptions, other assumptions common to all plans were adopted, as follows:
| · | Actuarial liability discount-to-present-value rate: 10.25%; |
| · | Capacity factor for salaries and benefits: 98%; |
| · | Turnover: 0.15 (years of service +1), zero from age 50; |
| · | Disability entry table: Mercer Disability; |
| · | Actuarial Table: AT2000 segregated by sex; and |
| · | Disability mortality table: IAPB-57. |
| i) | Expected long-term investment return |
| | 2011 | | | 2010 | |
Percentage of allocation of plan assets | | | | | | |
Capital instruments | | | 5.87 | % | | | 14.28 | % |
Debt instruments | | | 92.87 | % | | | 85.09 | % |
Other | | | 1.26 | % | | | 0.63 | % |
| | | 100.00 | % | | | 100.00 | % |
| | | | | | | | |
Expected return from plan assets | | | | | | | | |
Capital instruments | | | 16.36 | % | | | 15.61 | % |
Debt instruments | | | 12.46 | % | | | 10.82 | % |
Other | | | 11.67 | % | | | 10.25 | % |
Total | | | 13.06 | % | | | 11.50 | % |
Expected long-term investment return rates related to the plans assessed were selected by the Company, being determined based on expected long-term profitability, considering long-term projections provided by Tendências Consultoria and ANBIMA data, among others, as follows:
| · | Variable income assets: historic risk premium estimated by the actuarial advisor; |
| · | Fixed income securities: weighted average rate based on National Treasury Bills (LTN) available and National Treasury Notes – F Series (NTN-F) market portfolio; |
| · | Assets linked to inflation: weighted average rate based on NTN-B and NTN-C portfolio available in the market; |
| · | Foreign exchange securities: average SELIC rate weighted by the foreign exchange variation rate projected for the following ten years; |
| · | Fixed income assets: average internal nominal interest rate variation, projected for the following 10 years; |
| · | Loans to participants: the higher rate between CDI and the plan actuarial goal is considered; |
| · | Properties: the plan actuarial goal used was that of its administrator. |
| j) | History of assets and obligations observed |
| | 2011 | | | 2010 | | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | | | |
Liabilities present value | | | 723,739 | | | | 419,050 | | | | 386,722 | | | | 337,480 | | | | 257,787 | |
Fair value of assets | | | 570,371 | | | | 306,949 | | | | 289,239 | | | | 253,695 | | | | 232,378 | |
Deficit | | | 153,368 | | | | 112,101 | | | | 97,483 | | | | 83,785 | | | | 25,409 | |
Adjustment for liabilities experience (%) | | | 12.08 | % | | | 1.29 | % | | | 7.77 | % | | | 11.83 | % | | | 6.87 | % |
Adjustment for liabilities experience (amounts) | | | 87,413 | | | | 5,397 | | | | 30,043 | | | | 39,929 | | | | 17,709 | |
Adjustment for assets experience (%) | | | (1.98 | %) | | | (0.44 | %) | | | (6.85 | %) | | | (3.39 | %) | | | (9.65 | %) |
Adjustment for assets experience (amounts) | | | (11,284 | ) | | | (1,352 | ) | | | (19,826 | ) | | | (8,598 | ) | | | (22,428 | ) |
| k) | Estimates of benefits payable within the following years |
| | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 thereof | |
| | | | | | | | | | | | | | | | | | |
Defined pension plan | | | 142,033 | | | | 148,084 | | | | 154,407 | | | | 160,707 | | | | 167,679 | | | | 8,041,003 | |
| l) | Significant considerations on PAMA Plan |
The effect of a one percent increase and the effect of one percent decrease in medical cost trend rates are as follows:
| a) | +1% in nominal growth rate of medical costs |
Effect on current service cost and on interest on actuarial liabilities | 5,639 |
Effect on liabilities present value | 57,677 |
| |
| b) | -1% in nominal growth rate of medical costs |
Effect on current service cost and on interest on actuarial liabilities | (4,653) |
Effect on liabilities present value | (47,581) |
The Company and its subsidiaries made a valuation of their financial assets and liabilities in relation to market values based on available information and appropriate valuation methodologies. However, the interpretation of market information, as well as the selection of methodologies, requires considerable judgment and reasonable estimates in order to produce adequate realizable values. As a result, the estimates presented do not necessarily indicate the amounts which mightmay be realized in the current market. The use of different market approaches and/or methodologies for the estimates may have a significant effect on the estimated realizable values.
The table below shows a breakdown of financial assets and liabilities as of December 31, 2011.
| | Fair value | | | Amortized cost | | | | | | | | | | | | | |
| | Measured at fair value through profit or loss | | | Hedge | | | Available for sale | | | Loans and receivables | | | Investments held to maturity | | | Level 1. Market price | | | Level 2. Estimated based on other market data | | | Total book value | | | Total fair value | |
Financial assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents (note 5) | | | - | | | | | | | - | | | | 2,940,342 | | | | - | | | | - | | | | - | | | | 2,940,342 | | | | 2,940,342 | |
Derivatives | | | 730 | | | | 1,110 | | | | - | | | | - | | | | - | | | | - | | | | 1,840 | | | | 1,840 | | | | 1,840 | |
Noncurrent assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interests in other companies | | | - | | | | - | | | | 37,696 | | | | - | | | | - | | | | 37,696 | | | | - | | | | 37,696 | | | | 37,696 | |
Derivatives | | | - | | | | 225,935 | | | | - | | | | - | | | | - | | | | - | | | | 225,935 | | | | 225,935 | | | | 225,935 | |
Amounts linked to the National Treasury Securities (note 11) | | | - | | | | - | | | | - | | | | - | | | | 13,819 | | | | - | | | | - | | | | 13,819 | | | | 13,819 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total financial assets | | | 730 | | | | 227,045 | | | | 37,696 | | | | 2,940,342 | | | | 13,819 | | | | 37,696 | | | | 227,775 | | | | 3,219,632 | | | | 3,219,632 | |
| | Measured at fair value through profit or loss | | | Amortized cost | | | Hedge | | | Level 1. Market price | | | Level 2. Estimated based on other market data | | | Total book value | | | Total fair value | |
Financial liabilities | | | | | | | | | | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | | | | | | | | | | |
Loans and financing (note 18) | | | 34,802 | | | | 953,611 | | | | - | | | | - | | | | 34,802 | | | | 988,413 | | | | 988,413 | |
Debentures | | | 5,537 | | | | 463,087 | | | | - | | | | - | | | | 5,537 | | | | 468,624 | | | | 468,624 | |
Derivatives | | | 1,327 | | | | - | | | | 49,835 | | | | | | | | 51,162 | | | | 51,162 | | | | 51,162 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noncurrent liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans and financing (note 18) | | | 969,977 | | | | 2,989,138 | | | | - | | | | - | | | | 969,977 | | | | 3,959,115 | | | | 3,959,115 | |
Debentures | | | 81,853 | | | | 705,954 | | | | - | | | | - | | | | 81,853 | | | | 787,807 | | | | 787,807 | |
Derivatives | | | - | | | | - | | | | 78,369 | | | | - | | | | 78,369 | | | | 78,369 | | | | 78,369 | |
Total financial liabilities | | | 1,093,496 | | | | 5,111,790 | | | | 128,204 | | | | - | | | | 1,221,700 | | | | 6,333,490 | | | | 6,333,490 | |
Interests in other companies
The Company has direct and indirect interests in other companies resulting from the privatization process. These investments, measured at market value, consider the latest quotation available at December 31, 2011 and 2010.
The table below shows the composition of investments in other companies at market value as of December 200831, 2011 and 2007.2010:
| | % of Interest | | | 2011 | | | 2010 | |
| | | | | | | | | |
Zon Multimédia | | | 0.52 | | | | 9,116 | | | | 12,226 | |
Other investments | | | | | | | 28,580 | | | | 30,483 | |
Total | | | | | | | 37,696 | | | | 42,709 | |
Fair value hierarchy
The Company and its subsidiaries use the following hierarchy in order to calculate and disclosure the fair value of financial instruments through the valuation technique:
Level 1: Quoted prices (without adjustments) on the active markets for identical assets and liabilities;
Level 2: Other techniques to which all data with material effect on the fair value recorded are directly or indirectly observable;
Level 3: Techniques using data with relevant effect on the fair value recorded which are not based on data that can be observed on the market.
In 2011, no transfers of assessments of fair value between level 1 and level 2 nor level 3 and level 2 were made. The Company and its subsidiaries do not have financial instruments with fair value level 3 assessments.
As authorized by IFRS 1, the Company and its subsidiaries did not disclose comparative information on hierarchy of fair value and liquidity disclosures.
Capital management
The purpose of the Company and its subsidiaries’ capital management is to ensure that a solid credit rating is sustained before the institutions, as well as an optimum capital relationship, in order to support the Company’s businesses and maximize the value to its shareholders.
The Company and its subsidiaries manage their capital structure by making adjustments and fitting into current economy conditions. For this purpose, the Company and its subsidiaries may pay dividends, raise new loans, issue promissory notes and contract derivative operations. For the year ended December 31, 2011, there were no changes in the Company’s objectives, policies or capital structure processes.
The Company and its subsidiaries include in its net debt structure: loans, financing, derivative operations, less cash and cash equivalents.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| | Consolidated |
| % Partic. | 2008 | | 2007 (*) |
| | | | |
Portugal Telecom | 1.21 | 210,431 | | 248,299 |
Zon Multimédia | 0.52 | 19,531 | | 40,324 |
Other Investments | | 35,416 | | 44,535 |
| | | | |
Total | | 265,378 | | 333,158 |
(*) In 2007 the values of investments for the financial statements are registered at the acquisition cost and above is presented at fair value.
Risk Management Policymanagement policy
The Company is exposed to several market risks as a result of its commercial operations, debts obtained to finance its activities and debt-related financial instruments.
The principal market risk factors that affect the Company’s business of the Company and its subsidiaries are detailed below:
This risk arises from the possibility that the Company may incur losses due to exchange rate fluctuations, which would increase the balancesfinancial expenses of loans financing and purchase commitments denominated in foreign currency and the related financial expenses. In order to minimize the risk of financial liabilities in foreign currency, the Company enters into hedge contracts (swaps) with financial institutions.currency.
The Company’s indebtedness and the result of loan financing and purchase commitment liabilities denominated in foreign currency are significantly affected by the foreign exchange rate risk. As ofAt December 31, 2008, 13.68% (28.50% on2011, 19.32% (0.95% at December 31, 2007)2010) of the financial debt was denominated in foreign currency (U.S.(US dollar and yen);UMBNDES).
The Company has entered into derivative transactions (exchange rate hedge) with financial institutions to protect itself against exchange rate variation on its gross debt in foreign currency (R$1,004,207 at December 31, 2011 and R$17,304 at December 31, 2010).
In view of this, at December 31, 2011 and 2010 the entirely of the debt was covered by asset positions on currency hedge transactions (swaps(swap for CDI).
b. InterestThere is also the exchange rate risk related to non-financial assets and liabilities in foreign currency, which can lead to a lower amount receivable or higher amount payable, depending on exchange rate variation in the period.
As from May 2010, hedge operations were contracted to minimize the exchange rate risk related to these non-financial assets and liabilities in foreign currency. This balance is subject to daily changes due to business dynamics, however, the Company aims to cover the net balance of these rights and obligations (US$13,917 and €17,818 payable at December 31, 2011) to minimize the related foreign exchange risk.
| b) | Interest rate and inflation risk |
This risk arises from the possibility thatof the Company and its subsidiaries incurring losses to of an unfavorable change in internal interest rates, which may incur losses due to internalnegatively affect financial expenses connected with part of debentures link with CDI and external interestliability positions (exchange rate fluctuations affecting the Company’s results (debentureshedge and JBIC) and the short positions of derivativesIPCA) contracted at floating interest rates to cover the risks of foreign currency-denominated debts.(CDI).
The debt to thetaken out from BNDES bank is indexed toby the TJLP (Long-Term(Long Term Interest Rate determined on a quarterly basisset by the National Monetary Council), which has been stablewas kept at 6.0% per annum since July 2007 (6.25% per annum).2009.
In orderThe risk of inflation arises from the debentures of Telemig (merged into Vivo Part. on June 1, 2010), indexed by the IPCA, which may adversely affect our financial expenses in the event of an unfavorable change in this index.
To reduce its exposition to minimize its exposure to the local variable interest rate (CDI),CDI, the Company investsand its excesssubsidiaries invest cash amounting tosurplus of R$1,709,0132,862,938 (R$348,6481,547,785 at December 31, 2007)2010), substantiallymainly in short-term financial investments (Bank Deposit Certificates) based on the CDI rate variation. The book valuesvalue of these instruments approximateapproximates market, values, since they may be redeemed in theare redeemable within a short term.
As of December 31, 20082011, the Company also contracted CDI + 0.35% of CDI percentage swap with identical flows of those of debentures (note 16).
c. Debt acceleration risk
As of December 31, 2008, the Company’s loan and its subsidiary Vivo had financing agreements containin force, containing restrictive clauses (covenants), typically applicable to such agreements, relating to cash generation, debt ratios and other restrictions. TheThese covenants – which should be calculated semi-annually and annually could otherwise demand payment of liabilities at an earlier time – have been fully performed by the Company has complied with these restrictive clauses in full, and such covenants do not restrict its ability to conduct its ordinary course of business.subsidiary Vivo, and all economic and financial indexes contractually provided have been achieved.
d. CreditThe 1st and 4th issuance of debentures of Vivo Part., taken by the Company on August 19 and September 28, 2011, respectively, have economic and financial indexes that must be determined quarterly, as well as covenants in connection with judicial and out-of-court applications for company economic recovery, liquidation, dissolution, insolvency, voluntary bankruptcy application or adjudication of bankruptcy, payment failure and failure to comply with non-fiduciary obligations. At said date, all financial and economic indices were attained and all these covenants were met including the approval of the transfer by the majority of the debentures holders.
Liquidity risk derives from the possibility that the Company and its subsidiary do not have sufficient resources to meet their commitments according to the different currencies and terms of execution/settlement of their rights and obligations.
The Company and its subsidiary structure the maturity dates of the non-derivative financial agreements, as shown in note 18, and their respective derivatives as shown in the payments schedule disclosed in the referred note, in such manner as not to affect its liquidity.
The control of the Company’s and its subsidiary’s liquidity and cash flow is monitored daily by Management, in such way as to ensure that the operating cash generation and the available lines of credit, as necessary, are sufficient to meet its schedule of commitments, not generating liquidity risks.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
This risk arises from the possibility that the Company and its subsidiaries may incur losses due to the difficulty in receiving amounts billed to its customers. customers and sales of handsets and pre-activated pre-paid cards to the distributor’s network.
The credit risk on accounts receivable is dispersed.dispersed and minimized by a strict control of the customer base. The Company and its subsidiaries constantly monitorsmonitor the level of accounts receivable of post-paid plans and limitslimit the risk of past-due accounts, interrupting access to telephone lines in casefor past due bills. In the mobile services the customer does not paybase is predominantly, a prepaid system, which requires the related bills in 30 days.prior charging and consequently entails no credit risk. Exceptions are made for telecommunication services that must be maintained for security or national defense reasons.
The credit risk in the sale of handsets and “pre-activated” prepaid cards is managed under a conservative credit policy, by means of modern management methods, including the application of “credit scoring” techniques, analysis of financial statements and information, and consultation to commercial data bases, in addition to request of guarantees.
As of December 31, 2008,2011, the Company’s customer portfolio had no subscribers whose receivables were individually higher than 1% of the total accounts receivable from services.
The Company isand its subsidiaries are also subject to credit risk related to temporary casharising from short-term investments, letters of guarantee received as collateral in connection with certain operations and receivables from swap transactions. The Company reduces thiscontrols the credit limit granted to all counterparties and diversifies such exposure by dispersing it among first linetop-rated financial institutions.institutions, according to credit policy of financial counter-parties in force.
and Risk Management Policy
All of the Company’s and its subsidiaries’ derivative instruments have the objective of providing a hedge against the risk of variation in foreign exchange and external and internal interest rates arising from financial debts, accordingassets and liabilities in foreign currency and against inflation risk from its debenture indexed to the Company’s risk management policy.IPCA (inflation rate) with shorter term. As such, any changes in risk factors generate an opposite effect on the hedged end. There are no derivative instruments for speculative purposes and liabilities in foreign exchange are hedged.
The Company hasand its subsidiaries have internal controls over its derivative instruments, which, according to management, are adequate to control the risks associated with each market strategy. The Company’s results derived from its derivative financial instruments indicate that the risks have been adequately managed.
The Company and its subsidiaries determine the effectiveness of the derivative instruments entered into to hedge its financial liabilities upon origination and on an ongoing basis (quarterly). As of December 31, 2011, the derivative instruments taken were effective for the debts for which they are intended to provide coverage. Provided these derivatives contracts qualify as hedge accounting, the debt hedge may also be adjusted at fair value as per the rules applicable to fair value hedge. According to cash flow hedge accounting, the effective portion of fair value variations of derivatives designated for these hedges is recognized directly in equity. At December 31, 2011, subsidiary Vivo S.A. had an foreign exchange swap of US$102,573 designated as cash flow hedge, whose fair value accumulated variation, recognized in equity, was R$3,022.
The Company and its subsidiaries entered into swap contracts in foreign currency at different exchange rates hedging their assets and liabilities in foreign currency.
At October 15, 2009, a swap was contracted by Vivo Part., which was indexed to the IPCA (as for assets), and to the CDI (as for liabilities), in order to cover the exposure of the cash flows of the 3rd series of 4th issuance of debentures to the variation of the IPCA rate. Upon being contracted, this swap was recognized as a fair value hedge.
At December 31, 2011, the Company and its subsidiaries had not had any embedded derivatives agreements.
Fair value of derivative financial instruments
The discounted cash flow method was used to determine the marketfair value of loans, financing, debenturesfinance liabilities (when applicable) and derivative instruments (currency and interest rate swap) considering expected settlement of liabilities or realization of assets and liabilities at the market rates prevailing at balance sheet date.
Fair values are calculated by projecting future operating flows, using BM&F Bovespa&FBovespa curves, and discounting to present value through market DI rates for swaps, as informed by BM&F Bovespa.&FBovespa.
The market values of currency coupon swaps vs. CDIexchange rate derivatives were obtained through market currency rates in force at the balance sheet date and projected market rates were obtained from currency coupon curves. The coupon for positions indexed to foreign currencies was determined using the 360-calendar-day straight-line convention; the coupon for positions indexed to CDI was determined using the 252-workday exponential convention.
The consolidated derivative financial instruments shown below are registered with CETIP.
All of them are classified as swaps and do not require margin deposits.
| | | | Notional value | | | Fair value | | | Accumulated effect in 2011 | |
Description | | Index | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Amount receivable | | | Amount payable | |
| | | | | | | | | | | | | | | | | | | | |
Swap Contracts | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | |
Foreign currency (a) | | | | | 1,106,438 | | | | 19,608 | | | | 1,248,514 | | | | 17,306 | | | | 212,262 | | | | - | |
BES | | USD | | | - | | | | 3,155 | | | | - | | | | 2,654 | | | | - | | | | - | |
Citibank | | USD | | | 187,845 | | | | - | | | | 199,872 | | | | - | | | | 32,219 | | | | - | |
Votorantim | | USD | | | 13,434 | | | | 16,453 | | | | 14,028 | | | | 14,652 | | | | | | | | - | |
Banco do Brasil | | USD | | | 258,900 | | | | - | | | | 282,205 | | | | - | | | | 19,629 | | | | - | |
Bradesco | | USD | | | 196,728 | | | | - | | | | 231,391 | | | | - | | | | 43,137 | | | | - | |
Itaú | | USD | | | 6,324 | | | | - | | | | 6,371 | | | | - | | | | 57 | | | | - | |
JP Morgan | | USD | | | 443,207 | | | | - | | | | 514,647 | | | | - | | | | 117,220 | | | | - | |
Foreign currency (b) | | | | | 44,098 | | | | - | | | | 43,059 | | | | - | | | | - | | | | - | |
Bradesco | | EUR | | | 13,828 | | | | - | | | | 13,773 | | | | - | | | | - | | | | - | |
Itaú | | EUR | | | 30,270 | | | | - | | | | 29,286 | | | | - | | | | - | | | | - | |
Inflation rates | | | | | 72,000 | | | | - | | | | 87,390 | | | | - | | | | 15,513 | | | | - | |
Bradesco | | IPCA | | | 72,000 | | | | - | | | | 87,390 | | | | - | | | | 15,513 | | | | - | |
Variable rate (a) | | | | | 4,644 | | | | 86,954 | | | | 4,638 | | | | 86,537 | | | | - | | | | - | |
Bradesco | | CDI | | | 896 | | | | - | | | | 899 | | | | - | | | | - | | | | - | |
Banco do Brasil | | CDI | | | - | | | | 51,025 | | | | - | | | | 50,647 | | | | - | | | | - | |
Citibank | | CDI | | | - | | | | 22,047 | | | | - | | | | 22,048 | | | | - | | | | - | |
Citibank | | CDI | | | - | | | | 10,012 | | | | - | | | | 9,980 | | | | - | | | | - | |
HSBC | | CDI | | | | | | | 3,870 | | | | - | | | | 3,862 | | | | - | | | | - | |
Itaú | | CDI | | | 3,748 | | | | - | | | | 3,739 | | | | - | | | | - | | | | - | |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP | | | | Notional value | | | Fair value | | | Accumulated effect in 2010 | |
Description | | Index | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Amount receivable | | | Amount payable | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
Variable rate (a) | | | | | (1,150,536 | ) | | | (19,608 | ) | | | (1,204,745 | ) | | | (44,654 | ) | | | - | | | | (125,435 | ) |
BES | | CDI | | | - | | | | (3,155 | ) | | | - | | | | (7,185 | ) | | | - | | | | - | |
Citibank | | CDI | | | (187,845 | ) | | | - | | | | (186,324 | ) | | | - | | | | - | | | | (18,672 | ) |
Votorantim | | CDI | | | (13,434 | ) | | | (16,453 | ) | | | (34,139 | ) | | | (37,469 | ) | | | - | | | | (20,111 | ) |
Banco do Brasil | | CDI | | | (258,900 | ) | | | - | | | | (262,576 | ) | | | - | | | | - | | | | - | |
Bradesco | | CDI | | | (210,556 | ) | | | - | | | | (230,901 | ) | | | - | | | | - | | | | (28,874 | ) |
Itaú | | CDI | | | (36,594 | ) | | | - | | | | (36,753 | ) | | | - | | | | - | | | | (1,153 | ) |
JP Morgan | | CDI | | | (443,207 | ) | | | - | | | | (454,052 | ) | | | - | | | | - | | | | (56,625 | ) |
Variable rate (b) | | | | | (72,000 | ) | | | - | | | | (75,926 | ) | | | - | | | | - | | | | (4,049 | ) |
Bradesco | | IPCA | | | (72,000 | ) | | | - | | | | (75,926 | ) | | | - | | | | - | | | | (4,049 | ) |
Foreign currency (c) | | | | | (4,644 | ) | | | (3,870 | ) | | | (4,685 | ) | | | (3,876 | ) | | | - | | | | (47 | ) |
HSBC | | USD | | | - | | | | (3,870 | ) | | | - | | | | (3,876 | ) | | | - | | | | - | |
Bradesco | | USD | | | (896 | ) | | | - | | | | (937 | ) | | | - | | | | - | | | | (38 | ) |
Itau | | USD | | | (3,748 | ) | | | - | | | | (3,748 | ) | | | - | | | | - | | | | (9 | ) |
Foreign currency (d) | | | | | - | | | | (83,084 | ) | | | - | | | | (83,192 | ) | | | - | | | | - | |
Bradesco | | EUR | | | - | | | | (51,025 | ) | | | - | | | | (51,125 | ) | | | - | | | | - | |
Citibank | | EUR | | | - | | | | (22,047 | ) | | | - | | | | (22,253 | ) | | | - | | | | - | |
Citibank | | EUR | | | - | | | | (10,012 | ) | | | - | | | | (9,814 | ) | | | - | | | | - | |
Total recognized | | | | | | | | | | | | | | | | | | | 227,775 | | | | (129,531 | ) |
Amounts receivable | | | | | | | | | | | | | | | | | | | | | 98,244 | | | | | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| | | | Notional Value | | Fair value | | Accumulated effect 2008 |
Description | | Index | | 2008 | | 2007 | | 2008 | | 2007 | | Amount receivable / (received) (*) | | Amount payable / (paid) (*) |
| | | | | | | | | | | | | | |
Swap Contracts | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | |
Foreign Currency (a) | | | | 407.945 | | 1.161.320 | | 511.059 | | 947.351 | | 95.740 | | |
ABN AMRO | | USD | | - | | 329.754 | | - | | 253.811 | | - | | - |
Banco do Brasil | | EUR | | 65.000 | | 10.480 | | 84.799 | | 10.579 | | 12.318 | | - |
Banco do Brasil | | JPY | | 105.699 | | 130.500 | | 171.878 | | 137.059 | | 57.349 | | - |
Banco do Brasil | | USD | | - | | 5.625 | | - | | 4.814 | | - | | - |
BES | | USD | | 6.967 | | 6.967 | | 7.219 | | 5.234 | | - | | - |
Bradesco | | JPY | | - | | 216.214 | | - | | 216.063 | | - | | - |
Citibank | | JPY | | 147.351 | | 294.702 | | 129.172 | | 159.517 | | - | | - |
Itaú BBA | | USD | | - | | 9.451 | | - | | 9.469 | | - | | - |
Santander | | JPY | | 56.092 | | 126.904 | | 89.776 | | 126.910 | | 26.073 | | - |
Votorantim | | USD | | 26.836 | | 30.723 | | 28.215 | | 23.895 | | - | | - |
| | | | | | | | | | | | | | |
Variable rates (CDI) (b) | | | | 1.500.000 | | 2.310.032 | | 1.524.371 | | 2.419.450 | | 13 | | - |
Banco do Brasil | | CDI + fixed rate | | 500.000 | | 500.000 | | 508.124 | | 508.179 | | 13 | | - |
HSBC | | CDI + fixed rate | | 400.000 | | 400.000 | | 406.499 | | 406.543 | | - | | - |
Citibank | | CDI + fixed rate | | 400.000 | | 400.000 | | 406.499 | | 406.543 | | - | | - |
Votorantim | | CDI + fixed rate | | 200.000 | | 200.000 | | 203.249 | | 203.271 | | - | | - |
Unibanco | | CDI | | - | | 182.000 | | - | | 194.792 | | - | | - |
Santander | | CDI | | - | | 195.228 | | - | | 218.875 | | - | | - |
Banco do Brasil | | CDI | | - | | 204.735 | | - | | 228.830 | | - | | - |
Merrill Lynch | | CDI | | - | | 44.502 | | - | | 49.739 | | - | | - |
Bradesco | | CDI | | - | | 183.567 | | - | | 202.678 | | - | | - |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | |
Variable rates (CDI) | | | | (407.945) | | (1.161.320) | | (451.976) | | (1.262.319) | | - | | (36.656) |
ABN AMRO | | CDI | | - | | (329.754) | | - | | (468.456) | | - | | - |
Banco do Brasil | | CDI | | (65.000) | | (10.480) | | (72.482) | | (10.524) | | - | | - |
Banco do Brasil | | CDI | | (105.699) | | (130.500) | | (114.529) | | (136.446) | | - | | - |
Banco do Brasil | | CDI | | - | | (5.625) | | - | | (6.775) | | - | | - |
BES | | CDI | | (6.967) | | (6.967) | | (13.155) | | (11.707) | | - | | (5.937) |
Bradesco | | CDI | | - | | (216.214) | | - | | (216.744) | | - | | - |
Citibank | | CDI | | (147.351) | | (294.702) | | (137.435) | | (221.534) | | - | | (8.262) |
Itaú BBA | | CDI | | - | | (9.451) | | - | | (9.455) | | - | | - |
Santander | | CDI | | (56.092) | | (126.904) | | (63.702) | | (129.053) | | - | | - |
Votorantim | | CDI | | (26.836) | | (30.723) | | (50.673) | | (51.625) | | - | | (22.457) |
| | | | | | | | | | | | | | |
Variable rates (CDI) | | | | (1.500.000) | | (1.500.000) | | (1.525.050) | | (1.526.175) | | - | | (692) |
Banco do Brasil | | CDI | | (500.000) | | (500.000) | | (508.312) | | (508.667) | | - | | (202) |
HSBC | | CDI | | (400.000) | | (400.000) | | (406.690) | | (406.995) | | - | | (191) |
Citibank | | CDI | | (400.000) | | (400.000) | | (406.712) | | (407.030) | | - | | (213) |
Votorantim | | CDI | | (200.000) | | (200.000) | | (203.336) | | (203.483) | | - | | (86) |
| | | | | | | | | | | | | | |
Fixed rates | | | | - | | (810.032) | | - | | (897.141) | | - | | - |
Santander | | Fixed rate | | - | | (195.228) | | - | | (219.742) | | - | | - |
Banco do Brasil | | Fixed rate | | - | | (204.735) | | - | | (229.904) | | - | | - |
Merrill Lynch | | Fixed rate | | - | | (44.502) | | - | | (49.979) | | - | | - |
Bradesco | | Fixed rate | | - | | (183.567) | | - | | (202.563) | | - | | - |
Unibanco | | Fixed rate | | - | | (182.000) | | - | | (194.953) | | | | |
| | | | | | | | | | | | | | |
Total registered | | | | | | | | | | 95.753 | | (37.348) |
| a) | Swaps of foreign currency (USD) x CDI (R$1,217,652) – swap operations in American dollars and basket of currencies used by BNDES (with several maturities until 2019, with the objective of hedging foreign exchange variation for loans and UMBNDES (debt fair value of R$1,198,483). |
(*) The operations were entered into considering market rates indexed to the CDI (short position), from 100% to 105% of CDI, while the long position is based on the same rates applicable to obligations. | b) | Swap of foreign currency (Euro and Dollar) and (CDI x EUR) (R$69,237 - swap contracts entered into with maturities until February 28, 2012 with the objective of hedging foreign exchange variation for amounts payable in Euro and Dollar (book value of R$26,106 in dollars and R$43,246 in Euro). |
a) Swaps of foreign currency x CDI (asset position on derivative fair value of the R$511,059) – swap operations with several maturities until 2014, with the objective of hedging foreign exchange and interest rate changes in loan operations in foreign currency with these characteristics (debt fair value of R$ 511,050) | c) | Swap IPCA x CDI percentage (R$87,390) – swap transactions contracted with maturities dates until 2014 with the purpose of protecting the cash flow identical to the debentures (4th issuance – 3rd series) indexed to the IPCA (market value R$87,390). |
b) Swap CDI + 0.35% x CDI percentage swap (asset position on derivative fair value of R$1,524,371) – contracted swap operations maturing until 2010 with identical flow as that of debentures (Note 16), to cover the risk of fixed spread (0.35%) (fair value of debentures, excluding premium of R$1,524,371).
The aging listexpected maturities of swap contracts as of December 31, 2008 is2011 are as followsfollows:
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Swap Contracts | | Maturity | | | |
Swap contracts | | | | | | | |
| | | Maturity | | | Amount payable/ receivable at 12/31/2011 | |
| | 2009 | | 2010 | | 2011 | | 2012 and Beyond | | Amount payable/ receivable 31/12/2008 | | 2012 | | | 2013 | | | 2014 | | | 2015 thereafter | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign Currency x CDI | | 81,001 | | (5,636) | | (5,052) | | (11,230) | | 59,082 | | | (47,139 | ) | | | (22,330 | ) | | | 2,259 | | | | 154,037 | | | | 86,827 | |
VOTORANTIM | | | | (8,642 | ) | | | (7,876 | ) | | | (3,593 | ) | | | - | | | | (20,111 | ) |
BRADESCO | | | | (8,101 | ) | | | (8,663 | ) | | | (5,790 | ) | | | 36,817 | | | | 14,263 | |
JP MORGAN | | | | (21,499 | ) | | | (17,849 | ) | | | (17,277 | ) | | | 117,220 | | | | 60,595 | |
BANCO DO BRASIL | | 69,666 | | - | | - | | - | | 69,666 | | | - | | | | 19,629 | | | | - | | | | - | | | | 19,629 | |
BES | | (3,347) | | 0 | | (2,590) | | - | | (5,937) | |
CITIBANK | | (8,262) | | - | | - | | - | | (8,262) | | | (7,801 | ) | | | (7,571 | ) | | | 28,919 | | | | - | | | | 13,547 | |
SANTANDER | | 26,073 | | 0 | | - | | - | | 26,073 | |
VOTORANTIM | | (3,129) | | (5,636) | | (2,462) | | (11,230) | | (22,458) | |
| | | | | | | | | | | |
CDI+Spread x CDI | | (455) | | (224) | | - | | - | | (679) | |
BANCO DO BRASIL | | (129) | | (60) | | - | | - | | (189) | |
HSBC | | (127) | | (64) | | - | | - | | (191) | |
CITIBANK | | (141) | | (72) | | - | | - | | (213) | |
VOTORANTIM | | (58) | | (28) | | - | | - | | (86) | |
ITAÚ | | | | (1,096 | ) | | | - | | | | - | | | | - | | | | (1,096 | ) |
CDI X Foreign Currency | | | | (47 | ) | | | - | | | | - | | | | - | | | | (47 | ) |
BRADESCO | | | | (38 | ) | | | - | | | | - | | | | - | | | | (38 | ) |
ITAÚ | | | | (9 | ) | | | - | | | | - | | | | - | | | | (9 | ) |
IPCA x CDI | | | | (2,136 | ) | | | (1,913 | ) | | | 15,513 | | | | - | | | | 11,464 | |
ITAÚ | | | | (2,136 | ) | | | (1,913 | ) | | | 15,513 | | | | - | | | | 11,464 | |
For reporting purposes,the purpose of preparing the financial statements, the Company and its subsidiaries adopted the hedge accounting method for all of its derivatives.foreign currency X CDI, CDI x foreign currency, and IPCA x CDI swap operations providing financial debt hedge. Under this methodology, both the derivative and the hedged itemrisk covered are measuredstated at fair value. Only the derivative associated with the debentures was not considered pursuant to this methodology.
For the fiscal year ended December 31, 2008,2011, derivative operations generated a net consolidated gainloss of R$153,448 (Note 29). At111,033 (loss of R$2,179 as of December 31, 2008, 100.00%2010 and loss of the Company’s foreign currency denominated debt was covered by asset positions on currency hedge transactions (swaps for CDI)R$58,035 as of December 31, 2009), which generated a net consolidated gain of R$152,671. The Company also has operations involving swap – CDI + spread vs. %CDI, in the principal amount of R$1,500,000,according to cover fixed debentures spread, which generated gains of R$28. Swap operations – CDI vs. pre, in the principal amount of R$50,000, settled in 2008, generated a net consolidated gain of R$749 during the year.note 29.
At December 31, 2008,2011, the balance ofCompany and its subsidiaries registered R$95,753 is recorded227,775 as assets and R$37,348129,531 as liabilities recognizingin order to recognize the derivatives position of derivatives as ofin that date.
Gains and losses for the year ended December 31, 2008, grouped by contracts, were posted to profit and loss accounts (Note 29), as required by CVM Instruction No. 475/08.
Sensitivity Analysisanalysis of the Company’s Risk Variablesrisk variables
CVM InstructionDeliberation 604/09 requires listed companies to disclose, in addition to the provisions of item 59 of CPC Technical Pronouncement No 14IFRS 7 - Financial Instruments: Recognition, Measurement and Disclosure, a table showing the sensitivity analysis of each type of market risk inherent in financial instruments considered relevant by management and to which the companyCompany is exposed at the closing date of each reporting period, including all operations involving derivative financial instruments.
In compliance with the foregoing, all the operations involving derivative financial instruments were evaluated considering a probable scenario and two scenarios that may adversely impact the Company.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
UnderThe assumption taken into consideration under the probable scenario was to keep, the projected realizationmaturity date of derivative financial instruments consideredeach transaction, what has been signaled by the futuremarket through BM&FBovespa market curves (currency(currencies and interest) of BM&F Bovespa upon maturity of each operation. In this context,interest rates). Accordingly, the probable scenario does not produce impactsprovide for any impact on the fair value of the derivative financial instruments reported in the financial statements. The two unfavorablementioned above. For scenarios consideredII and III, risk variables contemplated 25% and 50% decreases,deterioration, respectively, forpursuant to the risk variables upon maturity of the financial instruments.applicable CVM instruction.
Considering that the Company has derivative instruments only to cover its financial debt,assets and liabilities in foreign currency, the changes in scenarios are offset by changes in the related hedged items, thus indicating that the effects are practically null. For these operations, the Company reported the fair value of the hedged item (debt) and of the hedge derivative financial instrument on separate rows in the sensitivity analysis table in order to provide information on the Company’s net exposure for each of the three mentioned scenarios, as shown below:
Sensitivity Analysis – Net Exposure
Operation | | Risk | | Probable | | 25% Decrease | | 50% Decrease |
| | | | | | | | |
Hedge (long position) | | Derivatives (risk of USD decrease) | | 35,434 | | 45,773 | | 56,826 |
USD-denominated debt | | Debts (risk of USD increase) | | (35,425) | | (45,765) | | (56,819) |
| | Net Exposure | | 9 | | 8 | | 7 |
| | | | | | | | |
Hedge (long position) | | Derivatives (risk of JPY decrease) | | 390,826 | | 489,295 | | 588,078 |
JPY-denominated debt | | Debts (risk of JPY increase) | | (390,826) | | (489,295) | | (588,077) |
| | Net Exposure | | - | | - | | - |
| | | | | | | | |
Hedge (long position) | | Derivatives (risk of IGP-M decrease) | | 84,799 | | 106,073 | | 127,376 |
EUR-denominated debt | | Debts (risk of IGP-M increase) | | (84,799) | | (106,073) | | (127,376) |
| | Net Exposure | | - | | - | | - |
| | | | | | | | |
Hedge (Long position) | | Derivatives (risk of CDI decrease) | | 1,524,371 | | 1,586,066 | | 1,646,533 |
Debentures (CDI) | | Debentures (risk of CDI increase) | | (1,524,371) | | (1,586,066) | | (1,646,533) |
| | Net Exposure | | - | | - | | - |
| | | | | | | | |
Hedge (Short position CDI) | | Derivatives (risk of CDI increase) | | (1,977,027) | | (1,981,004) | | (1,982,792) |
| | Net Exposure | | (1,977,027) | | (1,981,004) | | (1,982,792) |
| | | | | | | | |
Effect on changes in fair value | | | - | | (3,977) | | (5,767) |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESPSensitivity analysis – Net exposure
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Operation | | Risk | | Probable | | | 25% decrease | | | 50% decrease | |
| | | | | | | | | | | |
Hedge (Assets) | | Derivatives (Risk of USD decrease) | | | 1,004,209 | | | | 1,280,687 | | | | 1,568,402 | |
USD-denominated debt | | Debts (Risk of USD increase) | | | (1,004,428 | ) | | | (1,280,962 | ) | | | (1,568,732 | ) |
| | Net exposure | | | (219 | ) | | | (275 | ) | | | (330 | ) |
| | | | | | | | | | | | | | |
Hedge (Liabilities) | | Derivatives (Risk of EUR decrease) | | | 43,059 | | | | 53,870 | | | | 64,676 | |
Accounts payable in EUR | | Asset (Risk of EUR increase) | | | (42,841 | ) | | | (53,551 | ) | | | (64,261 | ) |
| | Net exposure | | | 218 | | | | 319 | | | | 415 | |
| | | | | | | | | | | | | | |
Hedge (Assets) | | Derivatives (Risk of USD decrease) | | | 30,863 | | | | 32,745 | | | | 39,326 | |
Accounts payable in USD | | Asset (Risk of USD increase) | | | (30,790 | ) | | | (32,631 | ) | | | (39,157 | ) |
| | Net exposure | | | 73 | | | | 114 | | | | 169 | |
| | | | | | | | | | | | | | |
Hedge (Assets) | | Derivatives (Risk of USD decrease) | | | 213,443 | | | | 278,135 | | | | 348,222 | |
UMBNDES-denominated debt | | Debts (Risk of UMBNDES increase) | | | (213,769 | ) | | | (278,066 | ) | | | (348,194 | ) |
| | Net exposure | | | (326 | ) | | | 69 | | | | 28 | |
| | | | | | | | | | | | | | |
Hedge (Assets) | | Derivatives (Risk of IPCA decrease) | | | 87,390 | | | | 90,181 | | | | 94,951 | |
IPCA-denominated debt | | Debts (Risk of IPCA increase) | | | (87,390 | ) | | | (90,181 | ) | | | (94,951 | ) |
| | Net exposure | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | |
| | Net exposure | | | (1,289,269 | ) | | | (1,388,752 | ) | | | (1,467,465 | ) |
| | | | | | | | | | | | | | |
Total net exposure in each scenario | | | (1,289,523 | ) | | | (1,388,525 | ) | | | (1,467,183 | ) |
| | | | | | | | | | | | |
Effect on changes in fair value, net | | | - | | | | (99,002 | ) | | | (177,660 | ) |
Assumptions for analysis of sensitivity
Risk Variable | | Scenario I | | Scenario II | | Scenario III | |
Risk variable | | | Probable | | | 25% decrease | | | 50% decrease | |
USD | | 2.337 | | 2.921 | | 3.506 | | | 1.8758 | | | | 2.3180 | | | | 2.7816 | |
JPY | | 0.0258 | | 0.032 | | 0.039 | |
EUR | | 3.2524 | | 4.066 | | 4.879 | | | 2.4271 | | | | 3.1300 | | | | 3.7560 | |
UMBNDES | | | | 0.0369 | | | | 0.0462 | | | | 0.0554 | |
CDI | | 13.62% | | 17.03% | | 20.43% | | | 10.87% | | | | 13.59% | | | | 16.31% | |
TheTo determine the net exposure in CDI shown inof the sensitivitysensibility analysis, does not reflect the Company’s total exposure to the internal interest rate, considering that, as previously mentioned, the Company uses short-term investments based on the CDI rate variation as a partial “natural hedge” (R$1,709,013 at December 31, 2008).
In order to derive the net exposure, all derivatives were considered at market value and only (hedged elements) classified under the accounting method were also considered at fair value, as well as their associated debts (hedged items).value.
While theThe fair values shown in the table above are based on the status of the portfolio as of December 31, 2008, they do2011, not reflectreflecting an estimated realization in view of the market dynamics, always monitored by the Company. The use of different assumptions may significantly impact estimates.
35. | Additional Information |
On October 27, 2006, was published in São Paulo’s Official Municipal Gazette, decree nº 47,817 regulating the Law nº 14,023/05, which provides’ for the burial of all aerial cabling in the city of São Paulo, requiring public service concessionaries in the city to comply with the law. The Company is analyzing the effects of this regulation to study its impacts.
36. | Summary of the differences between Brazilian GAAP (“Brazilian GAAP”) and Accounting Principles Generally Accepted in United States of America (“U.S. GAAP”) |
The Company's accounting policies follow accounting practices adopted in Brazil (“Brazilian GAAP), which are based on the Brazilian Corporate Law (Law No. 6,404/76, as amended) and accounting standards and procedures established by the Brazilian Securities Commission (CVM). A summary of the Company’s principal current accounting policies that differ significantly from U.S. GAAP is set forth below.
a. | Change in basis of presentation |
As mentioned in Note 3, the financial statements of the Company, subsidiaries and associates have been prepared based on the accounting practices adopted in Brazil, as well as on the rules issued by the Brazilian Securities and Exchange Commission (CVM), with due regard to the accounting standards set forth in the corporation law (Law No. 6,404/76), which include the new provisions introduced, amended and revoked by Law No. 11,638 and by Provisional Executive Act No. 449 as from January 1, 2008 as permitted by paragraph 10 under CVM Resolution No. 565, which approved accounting statement CPC 13 – Initial Adoption of Law No. 11,638/07 and of Provisional Executive Act No. 449/08.; therefore, their financial statements for 2006, 2007 and 2008 have not been presented in conformity with the same accounting practices and, thus, are not comparable.
The impact of the adoption of the new accounting standard provisions in the net income and the shareholders’ equity under Brazilian GAAP for the year ended on December 31, 2008 are discussed in more details in Note 3.
For the year ended on December 31, 2008, the reconciliation of net income and shareholders’equity under Brazilian GAAP to U.S. GAAP reflects the new accounting provisions by the initial adoption of Law No.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
11,638/07. For the years ended on December 31, 2007 and 2006 the financial data is stated at historical information.
b. | Monetary Restatement of 1996 and 1997 |
The Company changed the basis of presentation of its financial statements from the Constant Currency Method to Brazilian GAAP in 2003. Under Brazilian GAAP, the effects of monetary restatement are recorded until December 31, 1995. Since Brazil was still considered a highly inflationary economy until 1997, the U.S. GAAP reconciliation herein presented includes an adjustment to record monetary restatement up to December 31, 1997. The amortization of the asset appreciation, which was originated from such monetary restatement has been recognized in the reconciliation to U.S. GAAP. The loss related to monetary restatement on disposal of such assets is classified for U.S. GAAP purposes as a component of other operating expenses.
c. | Different criteria for capitalizing and depreciating capitalized interest |
Until December 31, 1998, under Brazilian GAAP, as applied to companies in the telecommunications industry, interest attributable to construction-in-progress was computed at the rate of 12% per annum of the balance of construction-in-progress and that part which related to interest on third party loans was credited to interest expense based on actual interest costs with the balance relating to its own capital being credited to capital reserves. Since January 31, 1999, as permitted under Brazilian GAAP, the Company did not capitalize interest attributable to construction-in-progress under Brazilian GAAP.
Under U.S. GAAP, in accordance with the provisions of SFAS 34, interest incurred on borrowings is capitalized to the extent that borrowings do not exceed construction-in-progress. The credit is a reduction of interest expense. Under U.S. GAAP, capitalized interest is added to the individual assets and is depreciated over their useful lives. Under U.S. GAAP, the amount of interest capitalized excludes the monetary gain associated with the borrowings and the foreign exchange gains and losses on foreign currency borrowings. The U.S. GAAP differences between the accumulated capitalized interest on disposals and the accumulated depreciation on disposals relate to the differences between capitalized interest and related accumulated depreciation under Brazilian GAAP and U.S. GAAP, which is included in the net book value of disposed property, plant and equipment.
The effects of these different criteria for capitalizing and depreciating capitalized interest are presented below:
| | 2008 | | 2007 | | 2006 |
Capitalized interest difference | | | | | | |
U.S. GAAP capitalized interest: | | | | | | |
Interest which would have been capitalized and credited to income under U.S. GAAP (interest incurred on loans from the Company's parent and from third parties, except in years where total loans exceeded total Construction in progress, when capitalized interest is reduced proportionately) | | 53,940 | | 34,475 | | 35,151 |
Capitalized interest on disposals | | (16,971) | | (10,097) | | (11,426) |
| | 36,969 | | 24,378 | | 23,725 |
Less Brazilian GAAP capitalized interest: | | | | | | |
Capitalized interest on disposals | | 16,737 | | 10,091 | | 11,577 |
| | | | | | |
U.S. GAAP difference | | 53,706 | | 34,469 | | 35,302 |
| | | | | | |
Depreciation of capitalized interest difference | | | | | | |
Depreciation under Brazilian GAAP | | - | | - | | 134,785 |
Capitalized interest on disposals | | (16,737) | | (10,091) | | (8,966) |
| | (16,737) | | (10,091) | | 125,819 |
| | | | | | |
Less: Depreciation under U.S. GAAP | | (167,050) | | (173,888) | | (182,779) |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
U.S. GAAP difference in accumulated depreciation on disposals | | 13,389 | | 6,240 | | 8,849 |
| | (153,661) | | (167,648) | | (173,930) |
| | | | | | |
U.S. GAAP difference | | (170,398) | | (177,739) | | (48,111) |
d. | Pension and other post-retirement benefits |
The Company participates in two multiemployer benefit plans (PBS-A and PAMA) for its retired employees that are operated and administered by SISTEL and provide for the costs of pension and other post-retirement benefits (health-care benefits) based on a fixed percentage of remuneration, as recommended annually by independent actuaries. For purposes of U.S. GAAP, the Company is only required to expense its annual contributions due to multiemployer plans. The Company also sponsors a single-employer defined pension benefit plan (PBS) and together with it is subsidiaries sponsor single-employer defined contribution pension plans (Visão). Under Visão Plans, besides the contributions to the plans, the Company and its subsidiaries are responsible for funding the risks of death and disability of participants. The provisions of SFAS No. 87, “Employers’ Accounting for Pensions”, were applied for the multiemployer plan and the single employer plans were applied with effect from January 1, 1992, because it was not feasible to apply them from the effective date specified in the standard.
Under Brazilian GAAP, if there is sufficient information available, multiemployer defined benefit pension plans and other postretirement benefits should be accounted as if they were single employer plans. As such, under Brazilian GAAP the Company recognized actuarial liabilities corresponding to its share in multiemployer plans, while under U.S. GAAP, the Company recognizes only contributions due to the plan each year.
Under Brazilian GAAP actuarial gains and losses are recognized immediately in income. Under U.S. GAAP, the Company uses the corridor approach allowed under FAS 87.
A summary of the difference between Brazilian GAAP and U.S. GAAP in accrued pension and other post-retirement plans liabilities is as follows:
| 2008 | | 2007 |
| U.S. GAAP | | Brazilian GAAP | | Accumulated Difference | | U.S. GAAP | | Brazilian GAAP | | Accumulated Difference |
Active employees defined pension – PBS, Visão CTB | (38,502) | | 26,482 | | (64,984) | | (49,227) | | 20,790 | | (70,017) |
Multiemployer health care plan – PAMA | - | | 122,288 | | (122,288) | | - | | 74,636 | | (74,636) |
Accrued pension (postretirement benefit) | (38,502) | | 148,770 | | (187,272) | | (49,227) | | 95,426 | | (144,653) |
Under Brazilian GAAP, net earnings per share is calculated based on the number of shares outstanding at the balance sheet date.
Under U.S. GAAP the Company applies the Financial Accounting Standards Board - FASB issued SFAS No. 128, “Earnings per Share”, which required calculation based on the weighted average number of share outstanding over the year.
Since the preferred and common shareholders have different dividend, voting and liquidation rights, basic and diluted earnings per share have been calculated using the “two-class” method. The “two-class” method is an earning allocation formula that determines earnings per share for preferred and common
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
stock according to the dividends to be paid as required by the Company’s bylaws and participation rights in undistributed earnings.
Basic earnings per common share is computed by reducing net income by distributable and undistributable net income available to preferred shareholders and dividing net income available to common shareholders by the number of common shares outstanding. Since preferred shareholders have a liquidation preference over common shareholders, net losses are not allocated to preferred shareholders. Net income available to preferred shareholders is the sum of the preferred stock dividends and the preferred shareholders’ portion of undistributed net income. Undistributed net income is computed by deducting total dividends (the sum of preferred and common stock dividends) from net income. Undistributed net income is shared equally by the preferred and common shareholders on a “pro rata” basis. As of December 31, 2008, the Company had a contingent obligation to issue shares to the controlling shareholder for the amount of the tax benefit realized relating to the merger of Telefônica Data do Brasil Participações Ltda on November 11, 2008 (See Note 2b) amounted R$3,154 under Brazilian Corporate Law (equivalent to 28,947 Common Shares and 44,300 Preferred Shares).
The Company's preferred shares are nonvoting except under certain limited circumstances and are entitled to receive dividends that are 10% higher than those attributed to common shares since 2002. For 2008, the Company paid dividends of R$5.182198 per preferred share (R$4.711088 per common share) (See Note 22.e.).
The computation of basic and diluted earnings per share is as follows:
| | | | | |
| | | | | | | | | | | |
Basic numerator | | | | | | | | | | | |
Actual dividends declared | 794,334 | | 1,747,604 | | 914,859 | | 2,012,773 | | 978,193 | | 2,151,411 |
Allocated undistributed Earnings | (13,069) | | (28,752) | | (174,233) | | (383,328) | | (62,318) | | (137,041) |
Allocated U.S. GAAP net income available for common and preferred shareholders | 781,265 | | 1,718,852 | | 740,626 | | 1,629,445 | | 915,875 | | 2,014,370 |
Basic denominator | | | | | | | | | | | |
Weighted-average shares outstanding | 168,609,292 | | 337,232,189 | | 168,609,292 | | 337,232,189 | | 167,242,724 | | 334,342,809 |
Basic earnings per share | 4.63 | | 5.10 | | 4.39 | | 4.83 | | 5.48 | | 6.02 |
| | | | | | | | | | | |
Diluted Numerator | | | | | | | | | | | |
Actual dividends declared | 794,334 | | 1,747,604 | | 914,859 | | 2,012,773 | | 978,193 | | 2,151,411 |
Allocated undistributed Earnings | (13,069) | | (28,752) | | (174,233) | | (383,328) | | (62,318) | | (137,041) |
Allocated U.S. GAAP net income available for common and preferred shareholders | 781,265 | | 1,718,852 | | 740,626 | | 1,629,445 | | 915,875 | | 2,014,370 |
Basic denominator | | | | | | | | | | | |
| | | | | | | | | | | |
Weighted-average shares outstanding | 168,638,238 | | 337,276,489 | | 168,609,292 | | 337,232,189 | | 167,242,724 | | 334,342,809 |
Diluted earnings per share | 4.63 | | 5.10 | | 4.39 | | 4.83 | | 5.48 | | 6.02 |
f. | Disclosure requirements |
U.S. GAAP disclosure requirements differ from those required by Brazilian GAAP. However, in these consolidated financial statements, the level of disclosure has been expanded to comply with U.S. GAAP.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
The Company records deferred income taxes for temporary differences between the tax and reporting basis of assets and liabilities. Under Brazilian GAAP, the methods of recording of deferred taxes are substantially in accordance with SFAS 109, “Accounting for Income Taxes”.
Under Brazilian GAAP, deferred taxes are presented gross, whereas US GAAP requires deferred tax items to be presented net for each company in the consolidated financial statements and for each tax jurisdiction.
Under Brazilian GAAP, the effects of the increase in tax rate from 33% to 34% on the merger tax credit are credited to income each year as the benefit is realized. Under U.S. GAAP, this benefit would be credited to shareholders’ equity. Immediately with the effect of any assessment of the related deferred tax asset for recoverability. The effect of any valuation allowance if required is also recognized in equity in the same year. Otherwise, any change in judgment in subsequent period is recognized through income.
The Company recognizes deferred taxes and U.S. GAAP adjustments separately in the reconciliations.
Effective January 1, 2007, the Company and its subsidiaries adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. The Interpretation prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken within an income tax return. For each tax position, the enterprise must determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is then measured to determine the amount of benefit to recognize within the financial statements. No benefits may be recognized for tax positions that do not meet the more likely than not threshold. The benefit to be recognized is the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement.
As a result of implementing Interpretation 48, the Company has no uncertain tax positions for which it has recorded unrecognized income tax benefits; accordingly, there was no impact on the Company’s results of operations from the adoption of this interpretation. In addition, as of the date of the adoption of FIN 48, the Company did not have any accrued interest and penalties related to unrecognized tax benefits. The Company and its subsidiaries will recognize interest and penalties related to unrecognized tax benefits in financial expense and other operating expense, respectively.
The Company and its subsidiaries file, separately, income tax returns in the Brazilian federal jurisdiction and are generally no longer subject to federal income tax examinations by tax authorities for years before 2003. As a large taxpayer, the Company is under continuous examination by the Brazilian federal tax authorities.
Management does not believe there will be any material changes related to uncertain tax positions over the next 12 months.
h. | Financial income (expense) |
Brazilian GAAP requires financial income (expense) to be shown as part of operating income. Under U.S. GAAP, financial income (expense) would be shown after operating income.
Brazilian GAAP had a category of assets entitled “permanent assets”. This was the collective name for all assets on which indexation adjustments were calculated until December 31, 1995 in the corporate
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
and tax accounts of Brazilian companies. As from January 1, 2008, Law No.11,638/07 became effective and the assets in this classification would be non-current assets, similar to U.S. GAAP. For the years ended on December 31, 2007 and 2006, the Company classified these assets in its financial statements to non-current assets for better comparability.
Gains or losses on the disposal of permanent assets were recorded under Brazilian GAAP as nonoperating income (expense), net until January 1, 2008. As from this date, with the adoption of Law No.11,638, as described in Note 3, gains and losses on disposals of property, plant and equipment were classified as other operating income (expense) for the year 2008 similar to U.S. GAAP., For the years ended on December 31, 2007 and 2006, the Company also classified their to other operating income (expense) to better comparability.
Under Brazilian GAAP, the amounts of the escrow deposits linked to the reserve for contingencies and taxes payable are shown as deductions from the recorded liabilities. As shown in notes 17 and 20 escrow deposits amounting to R$431,228 and R$346,761 of December 31, 2008 and 2007, respectively, are linked to such reserves. Under U.S. GAAP they would be presented separately in current or noncurrent assets instead of contraprovision.
Also, under Brazilian GAAP, the amounts to be paid to Abril Group for the acquisition of Navytree correspond to R$293,790 as of December 31, 2007, of which R$270,000 is retained in financial application in name of the Company and the presentation is by net value (see Note 21). Under U.S. GAAP, it would be presented separately in current assets instead of contraprovision.
k. | Funds for capitalization |
Expansion plan contributions
Expansion plan contributions were the means by which Telesp historically financed the growth of its telecommunications network. The contributions were made by companies or individuals to be connected to the national telephone network. Under Brazilian GAAP, expansion plan contributions received are included in the consolidated balance sheet below equity until proposed subscribers have paid for their telephone connection in full and a general meeting of shareholders approves the capital increases. Until December 31, 1995 expansion plan contributions were indexed from the month received to the date of the next audited balance sheet and transferred to equity when capital stock was issued to the subscriber, at a value per share equal to the book value per share shown in the latest audited balance sheet. From January 1, 1996 indexation was no longer applied and, for contracts signed as from that date, Telesp was allowed the option of using a value per share equal to the market value, when this is higher than the book value. For U.S. GAAP purposes, a portion of the expansion plan contributions would be allocated to shareholders’ equity based on the market value of the shares to be issued to subscribers. The remainder of the expansion plan contributions would be classified as a deferred credit and amortized to reduce depreciation expense from the time the related construction-in-progress was completed.
The Company’s expansion plan contribution program has been terminated, with no contracts being signed after June 30, 1997. Contributions continued to be received through 1999 and the last capital increase occurred in 2000. Since December 31, 2000 there have been no remaining balances of expansion plan contributions to be capitalized.
Donations and subsidies for investments
Under Brazilian GAAP, until January 1st, 2008, date of the first adoption by the Company of Law No. 11,638, equipment received free of charge (donations) were recorded at fair value, with a corresponding credit to capital reserve, which was amortized into result of operations based on realization of the corresponding asset. As from that date, donations were recorded at fair value, with a corresponding credit to deferred revenue, which is amortized into result of operations based on realization of the corresponding asset and the remaining balance existing on December 31, 2007 was kept in capital
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
reserve, until its complete realization. For U.S. GAAP purposes, the credit to capital reserves would be classified as a reduction of the related asset and amortized to reduce depreciation expense.
l. | Loans, Financing and Debentures |
Under Brazilian GAAP, accrued interest is presented together with the related debt (loans, financing, or debentures). Under US GAAP, accrued interests amounting to R$43,159 and R$54,314, on December 2008 and 2007, respectively, would be classified together with other accruals.
m. | Valuation of Long-Lived Assets and Goodwill |
Under Brazilian GAAP, as from January 1, 2008, with the first adoption of Law No. 11,638, under CPC 01 Impairment on Long-lived Assets, an impairment is recognized on long-lived assets, such as property, plant and equipment and intangible assets, if the expected discounted operating cash flows generated by the respective asset is not sufficient to cover its book value (see Note 4.h.). Under U.S. GAAP, the Company and evaluates long-lived assets for impairment using the criteria set forth in SFAS No. 144, “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of”. In accordance with this Standard, the Company periodically evaluates the carrying value of long-lived assets to be held and used, when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from such assets is separately identifiable and is less than their carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the assets.
Under Brazilian GAAP, the amount of goodwill impairment, if any, was measured based on projected undiscounted future operating cash flows until January 1, 2008, date of the first adoption of Law No. 11,638/07. As from this date, under CPC 01 Impairment on Long-Lived Assets, the Company identifies its cash generating unit and determines the carrying value of each cash generating unit by assigning the assets and liabilities, including the existing goodwill and intangible assets. The Company then determines the fair value of each cash generating unit by expected discounted operating cash flows generated by the cash generating unit. If the carrying amount of a cash generating unit exceeds its fair value, an impairment loss is recognized first to goodwill until it is reduced to zero and then proportionally to other long-lived assets.
Under U.S. GAAP, pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill is subject to a yearly impairment test. In performing the yearly impairment test, the Company identifies its cahs generating unit and determines the carrying value of each cash generating unit by assigning the assets and liabilities, including the existing goodwill and intangible assets. The Company then determines the fair value of each cash generating unit and compares it to the carrying amount of the cash generating unit. If the carrying amount of a cash generating unit exceeds the fair value of the cash generating unit, a second step of the impairment test is performed which involves the determination of the implicit fair value of the cash generating unit by performing a hypothetical purchase price allocation. If the implicit value of the goodwill exceeds the book value, an impairment is recognized.
On December 31, 2008, the Company performed an impairment test for Long-Lived assets and goodwill under Brazilian GAAP and U.S. GAAP and determined that the recognition of an impairment loss was not required, since the present value of future cash flows was higher than the carrying amount of those assets. In 2007, under U.S. GAAP, the Company recognized an impairment loss for goodwill related to Figueira in amount of R$32,625.
The changes in the carrying amount of goodwill under U.S. GAAP as of December 31, 2008 and 2007:
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| Consolidated |
| 2008 | | 2007 |
| | | |
Balance at January 1 | 844,689 | | 411,377 |
Additions | 39,751 | | 465,937 |
Impairments | - | | (32,625) |
Balance at December 31 | 884,440 | | 844,689 |
n. | Recognition of gains from disputed taxes |
The Finsocial (tax on sales), currently COFINS, was a tax calculated on operating gross revenue at a rate of 0.5%, that had been increased to 2.0%. The rate increase has been disputed in court and CTBC (merged into the Company) has offset the amounts related to the increase in rates against COFINS (tax on sales). Under U.S. GAAP, this amount was considered a gain contingency in accordance with FASB Statement 5, which would not be recognized until receipt of the benefit were to be considered full and final. In 2006, the Company recognized it as a liability for Brazilian GAAP purposes, which eliminated the GAAP difference.
o. | Research and development costs |
Under Brazilian GAAP companies are allowed to capitalize research and development costs. Since 2005, no more research and development costs have been capitalized and the amortization for the year ended December 31, 2008, 2007 and 2006, was R$3,262,, R$4,982 and R$8,495, respectively. The capitalized research and development costs , comprised mainly of contributions to the Centro de Pesquisa e Desenvolvimento da Telebrás (Research and Development Center of Telebrás). Under U.S. GAAP these costs would be expensed as incurred in accordance with SFAS 2, Accounting for Research and Development Costs.
Under Brazilian GAAP, revenues from activation fees are recognized upon activation of a customer’s services. Under U.S. GAAP, revenues from activation fees are deferred and amortized over the estimated expected service period of the customer. Incremental direct costs associated with such activations services are deferred and amortized over the same period. As of December 31, 2008 and 2007, the total balance of deferred activation fees revenues, net of sales taxes and associated costs amounts to R$378,471 and R$347,588, respectively, and the accumulated amortization amounts to R$330,027 and R$303,294, respectively.
The interconnection fee paid by the Company to other telecommunication operators related to the use of prepaid telephone cards outside its region is registered as a reduction of the public telephones revenues. According to U.S. GAAP, such payment would be classified as a cost of service. Thus, such difference of accounting principle affects neither the net income nor the shareholders’ equity under U.S. GAAP.
q. | Value-added and other sales taxes |
Under Brazilian GAAP, value-added and other sales taxes are deducted from gross operating revenue to arrive at net operating revenue. Under U.S. GAAP, certain of these taxes could be recorded as cost of services. Accordingly, this difference in accounting principle has no impact on net income (loss) or upon shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both revenues and cost of services by R$5,978,565, R$5,575,502 and R$5,530,866 for 2008, 2007 and 2006, respectively.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
r.1. Merger of Telefónica Data Brasil Participações Ltda (“DABR”) and Telefônica Televisão Participações S.A. (“TTP”, formerly Navytree) into the Company
As shown in Note 2b), on November 30, Telefônica Data Brasil Participações was merged into the Company. As both companies Telesp and DABR were under common control and as DABR was a wholly-owned of the controlling shareholders, such transaction was accounted for under both Brazilian GAAP and U.S. GAAP (EITF 94-10) by the book value of net assets contributed by controlling shareholders in the amount of R$63,397, as follows.:
Captions of shareholders’ equity: | Brazilian GAAP |
Capital | 282 |
Special premium reserve (i) | 63,074 |
Retained earnings (ii) | 41 |
Total | 63,397 |
| (i) | Represents the future tax benefit to be earned by amortization of the premium transferred. The portion of special premium reserve corresponding to the benefit may be, at the end of each fiscal year, capitalized to the benefit of the controlling shareholder upon the issue of new shares (see Note 2b). |
| (ii) | Under U.S. GAAP this capital contribution was reclassified from retained earnings to capital reserves. |
The merger of Telefônica Televisão Participações S.A., a wholly-owned subsidiary, into the Company was accounted by the book value of nets assets merged under both Brazilian GAAP and U.S. GAAP. Consequently, this transaction had no impact on consolidated shareholders’ equity, under Brazilian GAAP and U.S. GAAP.
r.2. Purchase accounting for the acquisition of Telefônica Televisão Participações S.A. (formerly Navytree Participações Ltda)
On October 1, 2007, the Company acquired control of Navytree Participações Ltda. (“Navytree”), which has as wholly-owned subsidiary Lightree Sistemas de Televisão Ltda (“Lightree”) and as affiliates Comercial Cabo TV São Paulo (“Cabo SP”) through Lemontree Participações (“Lemontree”) and TVA Sul Paraná S.A. (“TVA Sul”) through GTR-T Participações e Empreendimentos S.A.(“GTR”) (see Note 2) , The purchase price paid was R$897,170, with an additional cost acquisition of R$4,682, totaling the amount of R$901,852.
The Company recognized goodwill in the amount of R$848,308. Such goodwill has been amortized under Brazilian GAAP and has been reversed for U.S. GAAP purposes. This transaction was accounted for using the purchase method in accordance with SFAS 141, with the purchase price being allocated to the assets acquired and liabilities assumed based on the respective fair value. For U.S. GAAP purposes, the purchase price of such acquisition was allocated as follows:
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| | 2007 Acquisition |
Amounts of the historical net assets of Navytree Participações under U.S. GAAP (I) | | 51,733
|
Fair Value adjustments: | | |
Property, plant and equipment (a) | | (11,312) |
Intangible assets: | | |
Customer portfolio (b) | | 68,723 |
License (c) | | 312,654 |
Deferred Income Tax | | (125,822) |
Goodwill (d) | | 505,688 |
Subtotal (II) | | 749,931 |
| | |
Investment in associates under equity method (e) (III) | | 100,188 |
| | |
Purchase Price, including direct costs of R$4,682.(I+II+III) | | 901,852 |
a. | Amortized over 1.95 years, representing the weighted-average of remaining useful lives of the relating assets. |
b. | Amortized over 5.87 years, representing the average customer life. |
c. | MMDS technology license with indefinite useful life, but subject to annual impairment test. |
d. | Under U.S. GAAP goodwill is not amortized but subject to annual impairment test. Under Brazilian GAAP we recorded goodwill of R$848,308, which is amortized based on future profitability. |
e. | Acquisition of shareholdings in associates TV Cabo São Paulo S.A. and TVA Sul Paraná S.A. The summary of related financial information is as follows: |
Balance Sheet | TV Cabo São Paulo S.A. | | TVA Sul Paraná S.A. |
| 2007 | | 2007 |
Assets | | | |
Current assets | 45,593 | | 7,671 |
Noncurrent assets | - | | 21,295 |
Permanent Asset | 97,577 | | 10,799 |
| | | |
Total assets | 143,170 | | 39,765 |
| | | |
Liabilities | | | |
Current liabilities | 61,736 | | 7,867 |
Long-term liabilities | 51,337 | | 22,018 |
Deferred income | 7,836 | | 1,117 |
Total liabilities | 120,909 | | 31,002 |
Income Statement | TV Cabo São Paulo S.A. | | TVA Sul Paraná S.A. |
| For three months period ended on December 31, 2007 | | For three months period ended on December 31, 2007 |
| | | |
Net operating revenue | 48,196 | | 30,505 |
Operating income | 7,024 | | 2,623 |
Net income (loss) | (2,304) | | 1,669 |
Following are the components of the U.S. GAAP adjustment in shareholders’ equity related to such acquisitions as of December 31, 2008 and 2007:
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| 2008 | | 2007 |
| | | |
Purchase accounting on acquisition of Navytree Participações: | | | |
Reversal of goodwill recorded under Brazilian GAAP | (780,693) | | (852,888) |
Property, plant and equipment fair value adjustment | (11,312) | | (11,312) |
Depreciation of fair value of property, plant and equipment adjustment | 7,938 | | (101) |
Customer portfolio intangible asset recorded in U.S. GAAP | 68,723 | | 88,404 |
Amortization of customer portfolio | (14,640) | | (3,736) |
Intangible related to license recorded in U.S. GAAP | 312,654 | | 348,005 |
Goodwill recorded under U.S. GAAP | 505,688 | | 465,937 |
Fair value adjustment to investment in associates under equity method | 91,918 | | 113,265 |
Deferred income tax | (125,822) | | (144,533) |
Total of the U.S. GAAP adjustments related to acquisition of Navytree Participações | 54,454 | | 3,011 |
r.3. Purchase accounting for the merger of Telefônica Data Brasil Holding S.A. (TDBH)
Under Brazilian GAAP, the exchange of all shares issued by the Company to effect a merger with TDBH on April, 28 2006, was recorded based on the book value of the net assets of TDBH, and the purchase price was considered to be the book value of the shares issued. Under U.S. GAAP, the purchase price would be the market value of the shares issued by the Company. As Telesp and TDBH were under common control, only the part of noncontrolling equity interests acquired would be recorded at the fair value of the net assets. The difference between the fair value for the minority interest shares and the book value in U.S. GAAP was R$9,264, which R$5,238 (net of tax) was allocated to surplus value on fixed assets and the remaining balance of recognized as goodwill. The depreciation of the surplus value on fixed assets is based on the average of depreciation rate for TDBH’s assets.
r.4. Reversal of goodwill amortization under Brazilian GAAP
As a result of the corporate restructuring of July 28, 2006, the Company merged goodwill generated from the acquisition of investment at Figueira Administração e Participações S.A., which held telecommunications network operating assets of Banco Itaú S.A. that occurred in 2001.
Under Brazilian GAAP, this goodwill has been amortized over a period of five years. Under U.S. GAAP, the positive difference between the amount paid and the fair value of the assets acquired and liabilities assumed shall be allocated for items which had not been recognized in the balance sheet of the acquired company, as long as meeting all the requirements for recognition. In case of remaining positive difference, it shall be allocated to goodwill and not amortized. In the Figueira acquisition, R$205,754 was allocated to intangible assets – Customer Portfolio, which has been amortized in 10 years, and the difference was recognized as goodwill, which cannot be amortized for US GAAP purposes.
r.5. Merged goodwill – Katalyx and Adquira (TDBH)
As a result of the corporate restructuring of July 28, 2006, the Company merged goodwill generated from Katalyx Transportation do Brasil Ltda. and Adquira do Brasil Ltda.’s restructuring, which occurred in 2005. Both companies were controlled by the same TDBH’s group. According to U.S. GAAP, there is no goodwill generation on business combination which involves companies under common control. In this situation, business combination must be stated at book value of the company acquired or merged.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
r.6. Business Combination – Santo Genovese
On December 24, 2004, the Company acquired control of Santo Genovese Participações Ltda., a closely held company, and owner of 99.99% of the representative share capital of Atrium Telecomunicações Ltda. The purchase price paid was R$113,440, with an additional cost acquisition of R$2,435, totaling the amount of R$115,875. The consolidated assets and liabilities of Santo Genovese as of December 31, 2004 amounted, respectively to R$34,137 and R$38,082. Santo Genovese’s net operating revenue and net loss for the year ended December 31, 2004 amounted to R$21,663 and R$(1,259), respectively.
The Company initially recognized goodwill in the amount of R$119,820 and classified thegoodwill under other assets in the Balance Sheet for the year ended December 31, 2004. Such goodwill has been amortized under Brazilian GAAP and has been reversed for U.S. GAAP purposes. This transaction was accounted for using the purchase method in accordance with SFAS 141, with the purchase price being allocated to the assets acquired and liabilities assumed based on the respective fair value. Under U.S. GAAP, the allocated fair value related to intangible assets (Customer Portfolio) has being amortized over ten years. For U.S. GAAP purposes, the purchase price of such acquisition was allocated as follows:
| | 2004 Acquisition |
Amounts of the historical net assets of Santo Genovese under U.S. GAAP | | (3,945) |
Fair Value adjustments: | | |
Intangible assets – customer portfolio. | | 55,500 |
Debt | | (5,275) |
Goodwill. | | 86,671 |
Deferred Income Tax | | (17,076) |
Purchase Price. | | 115,875 |
r.7. Reversal of AIX negative goodwill
Under Brazilian GAAP, negative goodwill from the acquisition of Aix de Participações was amortized over two years as from January 1, 2007. Under U.S. GAAP, since the Aix de Participações shareholders’equity at the date of acquisition was equal to purchase price, no negative goodwill was generated.
r.8. Purchase accounting for the exchange of the Company´s shares for minority interest shares in former subsidiaries Telesp and CTBC
Under Brazilian GAAP, the exchange of all shares issued by the Company for minority interests in Telesp and CTBC was recorded based on the book value of the net assets of Telesp and CTBC, and the purchase price was considered to be the book value of the shares issued. Under U.S. GAAP, the purchase price would be the market value of the shares issued by the Company, and the minority interests acquired would be recorded at the fair value of the net assets. The purchase price of the Telesp and CTBC was R$665,692, lower than the net assets acquired. Under U.S. GAAP this difference reduces the fixed assets. The depreciation expense related to those fixed assets is adjusted in the reconciliation of net income under U.S. GAAP.
r.9. Sale of Ceterp Celular
Under Brazilian GAAP, when Ceterp was purchased it was recorded at the book value of the net assets of Ceterp, and no distinction was made for Ceterp Celular, the cellular phone business of Ceterp. At the time of the purchase of Ceterp, the Company was obligated to dispose of the cellular business
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
within six months under the regulatory rules in Brazil. Under U.S. GAAP, EITF 87-11, “Allocation of Purchase Price to Assets to be Sold”, when a subsidiary acquired in a purchase is intended to be sold within one year of the purchase date, that subsidiary should be recorded at its non-discounted net realizable value. Therefore, under U.S. GAAP, there would be no gain recognized on the sale of Ceterp Celular. The net income under U.S. GAAP has been adjusted to reflect the reversal of the gain of R$84,264, and the effect on the amortization of concession and depreciation of fixed assets.
s. | Derivative instruments |
As mentioned in Note 34, the Company contracted foreign currency swap contracts for short and long-term agreements at various exchange rates, in the notional amount of R$494.2 million (US$ 10.9 million, JPY15,042.3 million and EUR 24.8 million) and R$904 million (US$146.4 million, JPY40,029.5 million and EUR4 million) at December 31, 2008 and 2007, respectively. The Company also contracts swaps CDI + 0.35% for the percentage of CDI in the amount of R$1,500 million, flows similar to the debentures issued by company with maturity in 2010. Under Brazilian GAAP, until December 31, 2007, swap contracts were recorded at the notional amount multiplied by the terms of the contract as if they had been settled at the balance sheet date. As from January 1 2008, under Brazilian GAAP, all derivative instruments are recorded in the balance sheet at fair value (see Note 3b).
Under U.S. GAAP, the Company applies SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which was subsequently amended by SFAS Nos. 137 and 138. SFAS No. 133 must be applied to all derivative instruments and certain derivative instruments embedded in hybrid instruments and it requires that such instruments be recorded in the balance sheet either as an asset or liability measured at its fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met.
If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives that are considered to be effective, as defined, will either offset the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or will be recorded in other comprehensive income until the hedged item is recorded in earnings. Any portion of a change in a derivative’s fair value that is considered to be ineffective, as defined, must be immediately recorded in earnings. Any portion of a change in a derivative’s fair value that the Company has elected to exclude from its measurement of effectiveness, such as the change in time value of option contracts, will also be recorded in earnings.
Beginning in January 2003, the Company began designating a portion of new derivative contracts as fair value hedges of its foreign currency denominated debt. The Company had R$468.8 million (JPY 15,042.3 million and EUR 24.8 million) as of December 31, 2008 and R$875.7 million (US$130.5 million, JPY 40,029.5 million and EUR4 million) as of December 31, 2007, of notional value cross currency swap contracts with a fair value of R$475.6 million for 2008 (R$912.4 million for 2007) designated as fair value hedges of a portion of the Company´s foreign currency denominated debt. The Company is hedging the related foreign currency (US dollar, Japanese yen and Euro) and interest rate risk associated with such indebtedness. The Company calculates the effectiveness of these hedges both at inception and on an ongoing basis (i.e., at least quarterly). Since these derivative contracts qualify for hedge accounting under U.S. GAAP, the gain or loss on the hedged item attributable to the hedged risk adjusts the carrying amount of the hedged item and is recognized in earnings. At December 31, 2008 and 2007, the value of the Company’s debt subject to these accounting hedges is lower by R$2.5 million and higher by R$2.1 million, respectively, representing the related mark-to-market adjustment, which was recorded in the statement of operations as part of financial income/expense. For the year ended December 31, 2008, no ineffectiveness was included in earnings. Ineffectiveness of R$(1.9 million) for the year ended December 31, 2007, was included in earnings. The U.S. GAAP adjustment reflects differences in the designation of some derivative contracts as fair value hedge under Brazilian GAAP and U.S. GAAP.
The Company’s remaining derivative contracts at December 31, 2008 have not been designated as accounting hedges. Such derivatives were also recorded at fair value in the consolidated balance sheets at
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
December 31, 2008. The U.S. GAAP adjustment also includes expenses of R$0.08 million in 2008 (income of R$1.25 million in 2007 and R$0.82 million in 2006, respectively) related to the difference between the recorded value of these derivative instruments under Brazilian GAAP and U.S. GAAP.
For the years ended December 31, 2008 and 2007, the Company decided not to contract hedges to nonfinancial liabilities denominated in foreign currencies. The Company, however, is still monitoring the results of such nonfinancial liabilities and may contract new hedges in the future if such nonfinancial exposure becomes relevant or if the Company so decides for any other reason.
Pre-operating expenses recorded as deferred charges for Brazilian GAAP have been expensed for U.S. GAAP purposes. The effects of deferred assets amortization on net income for the years ended on December 31, 2008, 2007 and 2006 are R$8,450, R$5,978 and R$13,425, respectively.
Under Brazilian GAAP, equity investments in joint ventures are consolidated proportionally, according to the Company’s interest in each joint venture. Under U.S. GAAP, investments in joint ventures would not be consolidated, but rather recorded under the equity method of accounting. For U.S. GAAP, the Company’s investment on the net equity and the equity in net income or loss would be recorded as a singleline item. The investments in Companhia ACT de Participações, Aliança Atlântica and Companhia AIX de Participações had the following impact on the consolidated financial statements for Brazilian GAAP:
Balance Sheet | ACT | | AIX | | Aliança Atlântica |
| 2008 | | 2007 | | 2008 | | 2007 | | 2008 | | 2007 |
Assets | | | | | | | | | | | |
Current assets | 16 | | 14 | | 5,233 | | 6,284 | | 6,470 | | 4,042 |
Noncurrent assets | - | | - | | 67,092 | | 61,056 | | - | | - |
Permanent Asset | - | | 10 | | 15,650 | | 25,793 | | 57,703 | | 53,202 |
| | | | | | | | | | | |
Total assets | 16 | | 24 | | 87,975 | | 93,133 | | 64,173 | | 57,244 |
| | | | | | | | | | | |
Liabilities | | | | | | | | | | | |
Current liabilities | - | | 2 | | 2,228 | | 9,601 | | 30 | | 9 |
Long-term liabilities | - | | - | | 29,080 | | 17,236 | | - | | - |
Deferred income | - | | - | | - | | - | | - | | - |
Total liabilities | - | | 2 | | 31,308 | | 26,837 | | 30 | | 9 |
Income Statement | ACT | | AIX | | Aliança Atlântica |
| 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 | | 2008 | | 2007 | | 2006 |
| | | | | | | | | | | | | | | | | |
Net operating revenue | 26 | | 26 | | 25 | | 12,340 | | 9,996 | | 11,471 | | - | | - | | - |
Cost of goods and services | - | | - | | - | | (14,670) | | (15,927) | | (15,966) | | - | | - | | - |
Operating expenses | (23) | | (28) | | (26) | | (1,923) | | (7,446) | | (2,140) | | 4,964 | | 4,964 | | (68) |
Financial expense, net | - | | - | | - | | (4,512) | | (4,656) | | (4,726) | | 160 | | 160 | | 25 |
Other revenues (expenses) | - | | - | | - | | (421) | | - | | - | | (13,929) | | 4,161 | | 1,973 |
Income Tax and Social Contribution | - | | - | | - | | (1,217) | | (1,151) | | (1,837) | | - | | - | | - |
Net income | 3 | | (2) | | (1) | | (10,402) | | (19,184) | | (13,198) | | (8,805) | | 9,285 | | 1,930 |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
The Company has analyzed its participation over Cabo SP, Lemontree, TVA Sul and GTR-T and the transaction was considered not material under the scope of FIN46 as of December 31, 2008 and that those entities are under legal control of Abril Group.
SFAS 130 “Reporting Comprehensive Income” establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The objective of the statement is to report all changes in shareholders’ equity that result from transactions and other economic events of the period other than transactions with owners (“comprehensive income”). Comprehensive income is the total net income and other nonowner equity transactions that result in changes in net equity.
For Brazilian GAAP purposes, under CPC Technical Pronouncement No. 02, as mentioned in Note 3.d., translation adjustments electing to foreign subsidiary is recognized in equity as from January 1, 2008. Under U.S. GAAP, translation adjustment is recognized in equity. The income effect was reversed for Brazilian GAAP for the years ended on December 31, 2007 and 2006.
For the years ended December 31, 2008, 2007 and 2006, the components of comprehensive income include foreign currency translation adjustments related to the investments that have functional currency other than Brazilian Reais, application since 2006 of SFAS158 - adjustment related to unrecognized gain or loss and net transition obligation, additional minimum liability calculated in accordance with SFAS 87 through 2006, and fair value of available for sale equity securities in Portugal Telecom, and other investments which are recorded at fair value for U.S.GAAP purposes in accordance with SFAS 115. The following represents the statement of comprehensive income prepared under U.S. GAAP:
Statement of Comprehensive Income | 2008 | | 2007 | | 2006 |
| | | | | |
Net Income per U.S. GAAP | 2,500,117 | | 2,370,071 | | 2,930,245 |
| | | | | |
Other Comprehensive Income: | | | | | |
Foreign currency translation adjustments – Aliança Atlântica | 862 | | (4,161) | | 1,061 |
Pension Plan – SFAS158, net of tax | (14,820) | | 14,166 | | 27,373 |
Minimum liability – SFAS87, net of tax | - | | - | | 8,614 |
Fair value of available for sale equity securities – SFAS 115, net of tax | (24,982) | | (7,781) | | 28,011 |
Total | (38,940) | | 2,224 | | 65,059 |
| | | | | |
Comprehensive income | 2,461,177 | | 2,372,295 | | 2,995,304 |
w. | Acquisition of the IP network and I-Telefônica |
On December 2002, the Company acquired the assets and customer portfolio for the “IP Comutado” and “Speedy Link” services of Telefônica Empresas S.A (See Note 13). In 2003, the Company’s subsidiary, A. Telecom S.A. entered into an agreement with an affiliate, Terra Networks Brasil S.A., for the purchase of certain software used to provide free access service to Internet, called I-Telefônica. Under Brazilian GAAP these transactions were recorded at fair market value of the net assets acquired. Under U.S. GAAP, transfers and exchange of nonmonetary assets between entities under common control should be recorded at historical cost. Thus, for U.S. GAAP purposes the difference between fair market value and historical cost of assets has been recorded directly to shareholders´ equity as capital distributed. Subsequent period adjustments reverse the amortization of the fair value recognized under Brazilian GAAP.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Atrium Telecomunicações Ltda. (merged into subsidiary A.Telecom) has leased certain computer hardware and switching equipment under a noncancelable lease. Under Brazilian GAAP, all leases are considered to be operating leases, with lease expense recorded when paid until January 1, 2008. As from this date, with the first adoption of Law No.11,638/07, in conformity with CPC 06 – Leases, approved by CVM Resolution No. 554, dated November 12, 2008, this lease is considered a capital lease. Therefore, for Brazilian GAAP and U.S. GAAP, the Company is required to record the asset at the present value of the minimum lease payments with a corresponding debt obligation. Depreciation is recorded over the estimated useful life of the asset. Interest expense is recognized over the life of the lease and payments under the lease are amortized to principal and interest under the effective interest method.
For the years ended on December 31, 2007 and 2006, the reconciliation of net income and for the year ended on December 31, 2007, the reconciliation of shareholders’ equity from Brazilian GAAP to U.S. GAAP reflect the recorded adjustments to capital lease under U.S. GAAP, since under Brazilian GAAP all leases were considered to be operating leases.
y. | Sale-type lease – “Posto Informático” |
In 2007, A.Telecom, subsidiary of the Company began to commercialize an integrated IT solution named “Posto Informático” allowing access to Internet, connection of private networks and rental of IT equipment to its customers. Under Brazilian GAAP, until January 1, 2008, date of the first adoption of Law No. 11,638/07 revenue from the provision of this service is recognized in income on a monthly basis as rental services over the term of contract. As from this date, under CPC Technical Pronouncement No. 6, as mentioned in Note 3.a., in the capacity of lessor, the Company executed lease agreements for IT equipment (Posto Informático) that meet the criteria of finance leases. On the date the equipment is installed, income is recognized for the present value of lease payments and matched with accounts receivable. Investments made in the acquisition of equipment are recorded as “Inventories” and recognized as lease costs upon installation. The difference between gross and net investment value is recognized as unrealized financial income and the related financial expenses are posted to each period over the lease term reflecting a periodic interest rate on the outstanding liability balance.
Under U.S. GAAP, this transaction is accounted for as a multiple element arrangement whereby revenues are allocated to the lease and non-lease deliverables included in the bundled arrangement based upon the estimated relative fair values of each element. The revenues from access to Internet and connection of private networks are recognized on a monthly basis as communication services over the term of lease contract, and the revenue from sale-types lease of IT equipment is recognized when the equipment is installed at the customer premises and risks and benefits of ownership have been transferred.
z. | Payment of dividends and interest on capital |
In accordance with the Company’s Bylaws, the Board of Directors can approve the distribution of interim dividends and interest on share capital throughout the course of the year. Under both Brazilian GAAP and U.S. GAAP, these payments are recognized when they are formally declared by the Board. However, in accordance with Brazilian GAAP, the Company’s financial statements are required to reflect as a liability, dividends that exceed mandatory dividends when they are proposed by management. This differs from U.S. GAAP in that under U.S. GAAP, these payments would be recognized only after they are formally approved at the Annual Shareholders’ Meeting that occurs the following year. Thus, under U.S. GAAP, on December 31, 2008 and 2007, dividends of R$395,109 and R$350,938 would be reclassified from liabilities to shareholders’ equity (see Note 18).
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
aa. | Present value discount on noncurrent recoverable VAT (or ICMS) |
Under Brazilian GAAP, as from January 1 2008, noncurrent indirect taxes recoverable (VAT or ICMS) are discounted at present value. Under U.S. GAAP, according to APB 21, such assets are not subject to discounting.
Net income reconciliation of the difference between U.S. GAAP and Brazilian GAAP
| | 2008 | | 2007 | | 2006 |
Consolidated net income as reported under Brazilian GAAP | | 2,419,971 | | 2,362,960 | | 2,816,151 |
Add (deduct): | | | | | | |
Different criteria for: | | | | | | |
b) Amortization of monetary restatement of 1996 and 1997 | | (37,127) | | (38,951) | | (36,722) |
c) Capitalized interest | | 53,706 | | 34,469 | | 35,302 |
c) Depreciation of capitalized interest | | (170,398) | | (177,739) | | (48,111) |
Contributions to plant expansion: | | | | | | |
k) Amortization and realization of deferred credit and amortization of donations | | 32,837 | | 32,486 | | 30,882 |
d) Pension and other postretirement benefits – See Note 37.e) | | 65,071 | | 28,054 | | 37,109 |
r.8) Decrease in depreciation expense due to reduction of fixed assets for fair value in excess of purchase price on merger of Telesp and CTBC | | 45,031 | | 45,284 | | 45,069 |
r.6) Santo Genovese acquisition | | | | | | |
Write-off of the fair market value of liabilities | | | | - | | - |
Amortization of customer portfolio | | (5,550) | | (5,550) | | (5,550) |
Reversal of goodwill amortization under Brazilian GAAP | | 11,982 | | 11,982 | | 11,982 |
x) Leasing Santo Genovese | | 764 | | (17) | | (316) |
y) Sale-type lease – “Posto Informático” | | - | | 11,294 | | - |
r.9) Merger of Ceterp | | | | | | |
Depreciation of the fair market value of assets | | 2,761 | | 2,777 | | 2,763 |
Amortization of concession | | - | | - | | - |
o) Deferred research expenses | | 3,262 | | 4,982 | | 8,495 |
t) Pre-operating expenses included in deferred assets | | 8,450 | | 5,978 | | 13,425 |
r.7) Reversal of negative goodwill amortization – AIX | | (8,735) | | (8,735) | | - |
s) SFAS 133 adjustments – Derivative instruments | | (2,754) | | (18,273) | | (16,348) |
s) Derivative on purchase commitments | | 4,547 | | 4,383 | | 4,399 |
p) Deferred revenues from activation fees, net | | (4,149) | | 18,086 | | 28,398 |
w) Amortization of IP Network | | 7,257 | | 7,255 | | 7,182 |
w) Amortization of I-Telefonica | | 7,018 | | 14,162 | | 14,162 |
Other | | - | | - | | 1,043 |
n) Reversal of Cofins | | - | | - | | 17,500 |
r.4) Reversal of goodwill amortization recognized under Brazilian GAAP - TDBH | | 82,087 | | 87,355 | | 34,202 |
m) Impairment loss of goodwill Figueira unit | | - | | (32,625) | | - |
r.4) Intangible asset amortization | | (20,575) | | (20,577) | | (8,573) |
r.3) Surplus value depreciation – TDBH’s minority allocation | | (613) | | (5,170) | | (2,154) |
r.2) Navytree-Consolidation adjustments and reversal of goodwill amortization | | 51,443 | | 3,011 | | - |
k)Donations and subsidies for investment - TDBH | | 20 | | 228 | | 95 |
aa) Reversal of present value discount on noncurrent recoverable VAT | | 2,946 | | - | | - |
g) Deferred tax on above adjustments | | (49,135) | | (1,199) | | (59,079) |
v) Foreign currency translation adjustment – Aliança Atlântica | | - | | 4,161 | | (1,061) |
| | | | | | |
U.S. GAAP net income | | 2,500,117 | | 2,370,071 | | 2,930,245 |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Net income per share in accordance with U.S. GAAP | | 2008 | | 2007 | | 2006 |
Common shares | | | | | | |
Basic and diluted earnings per share | | 4.63 | | 4.39 | | 5.48 |
Weighted average common shares – basic | | 168,609,291 | | 168,609,292 | | 167,242,724 |
Weighted average common shares – diluted | | 168,638,238 | | 168,609,292 | | 167,242,724 |
Preferred shares | | | | | | |
Basic and diluted earnings per share | | 5.10 | | 4.83 | | 6.02 |
Weighted average preferred shares – basic | | 337,232,189 | | 337,232,189 | | 334,342,809 |
Weighted average preferred shares - diluted | | 337,276,489 | | 337,232,189 | | 334,342,809 |
Shareholders' equity reconciliation of the difference between U.S. GAAP and Brazilian GAAP
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| | 2008 | | 2007 |
Total shareholders' equity as reported under Brazilian GAAP | | 10,045,692 | | 9,905,242 |
Add (deduct): | | | | |
Different criteria for: | | | | |
b) Monetary restatement of 1996 and 1997 | | 46,514 | | 83,642 |
c) Capitalized interest | | 102,704 | | 48,998 |
c) Depreciation of capitalized interest | | (76,525) | | 93,873 |
z) Reversal of proposed dividends | | 395,109 | | 350,938 |
k) Contributions to plant expansion: | | | | |
Subscribed capital stock | | 215 | | 215 |
Deferred credit | | | | |
Expansion plan contributions | | (232,946) | | (234,468) |
Donations and subsidies for investments | | (167,511) | | (168,288) |
Amortization of deferred credit | | | | |
Expansion plan contributions | | 224,585 | | 206,817 |
Donations and subsidies for investments | | 145,494 | | 132,726 |
d) Pension and other postretirement benefits | | 146,788 | | 81,717 |
r.8) Merger of Telesp and CTBC: | | | | |
Fair market value of assets | | (665,692) | | (665,692) |
Accumulated depreciation related to fair market value of assets | | 645,026 | | 599,995 |
r.6) Santo Genovese acquisition | | | | |
Write-Off of the fair market value of liabilities | | 5,275 | | 5,275 |
Amortization of customer portfolio. | | (22,200) | | (16,650) |
Reversal of goodwill amortization under Brazilian GAAP | | 47,928 | | 35,946 |
x) Leasing Santo Genovese | | - | | (824) |
y) Sale-type lease – “Posto Informático” | | - | | 11,294 |
r.9) Merger of Ceterp: | | | | |
Fair market value of assets | | (25,949) | | (25,949) |
Depreciation of the fair market value of assets | | 22,112 | | 19,351 |
Concession | | (58,315) | | (58,315) |
Amortization of concession | | 58,315 | | 58,315 |
r.3) Merger of TDBH’s minority interest – purchase accounting: | | | | |
Fair market value of assets allocation, | | 7,937 | | 7,937 |
Deferred income tax on fair market value of assets allocation | | (2,699) | | (2,699) |
Depreciation of the fair market value of assets allocation | | (7,937) | | (7,324) |
Goodwill allocation | | 4,026 | | 4,026 |
r.2) Navytree – Consolidation adjustments and reversal of goodwill amortization | | 54,454 | | 3,011 |
o) Deferred research expenses | | (1,043) | | (4,305) |
t) Pre-operating expenses included in deferred charges | | - | | (8,460) |
a.a) Reversal of present value discount on noncurrent recoverable VAT | | 34,943 | | - |
r.7) Reversal of negative goodwill amortization – AIX | | - | | 8,735 |
s) SFAS 133 adjustments – Derivative instruments | | (3,512) | | 18,334 |
s) Derivative on purchase commitments | | (24,471) | | (29,018) |
p) Deferred revenues from activation fees, net | | (48,444) | | (44,295) |
w) Capital distributed – IP Network and I-Telefonica | | | | |
Cost | | (143,372) | | (143,627) |
Amortization | | 114,348 | | 100,328 |
r.4) Reversal of goodwill amortization recognized under Brazilian GAAP-TDBH | | 244,423 | | 162,336 |
m) Impairment loss of goodwill Figueira unit | | (32,625) | | (32,625) |
r.4) Intangible asset amortization | | (144,027) | | (123,452) |
k) Donations and subsidies for investment – TDBH | | - | | (20) |
g) Deferred tax effects on above adjustments | | (90,149) | | (36,628) |
v) OCI – Pension Plan SFAS158, net of taxes | | 26,718 | | 41,538 |
v) OCI – fair value of available for sale equity securities SFAS115, net of taxes | | - | | 101,214 |
r.5) Merged goodwill – Katalyx and Adquira (TDBH) | | (1,440) | | (1,440) |
U.S. GAAP shareholders' equity | | 10,623,749 | | 10,477,724 |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Consolidated statements of changes in shareholders' equity in accordance with U.S. GAAP
| | Shareholders’ equity |
Balances at December 31, 2005 | | 10,264,795 |
| | |
Merger of Capital - TDBH | | 597,124 |
Merger of Losses - TDBH | | (76,917) |
Recess right to the shareholders due to merger of TDBH – treasury shares | | (17,719) |
Unclaimed dividends | | 180,956 |
Net income for the year | | 2,930,245 |
Dividends and interest on shareholders' equity | | (3,129,604) |
Merger of TDBH’s minority interest | | 9,264 |
Reversal of Pension Plan accumulated effect - TDBH | | 88 |
OCI - Minimum liability – SFAS87, net of tax | | 8,614 |
OCI – Pension Plan – SFAS158, net of tax | | 27,373 |
OCI – Foreign currency translation adjustment – Aliança Atlântica | | 1,061 |
OCI – Fair value of available for sale equity securities – SFAS115, net of tax | | 28,011 |
Balances at December 31, 2006 | | 10,823,291 |
| | |
Unclaimed dividends | | 209,769 |
Net income for the year | | 2,370,071 |
Dividends and interest on shareholders' equity | | (2,927,631) |
OCI – Pension Plan – SFAS158, net of tax | | 14,166 |
OCI – Foreign currency translation adjustment – Aliança Atlântica | | (4,161) |
OCI – Fair value of available for sale equity securities – SFAS115, net of tax | | (7,781) |
Balances at December 31, 2007 | | 10,477,724 |
| | |
Merger of DABR in 2008,11,30 | | 63,394 |
Net income for the year
| | 2,500,117 |
Dividends and interest on shareholders' equity | | (1,925,938) |
Interest on shareholders’ equity | | (523,600) |
Withholding income tax on interest on shareholders’ effects | | (92,400) |
Unclaimed- dividends, net | | 163,392 |
OCI – Pension Plan – SFAS158, net of tax | | (14,820) |
OCI – Foreign currency translation adjustment – Aliança Atlântica | | 862 |
OCI – Fair value of available for sale equity securities – SFAS115, net of tax | | (24,982) |
Balances at December 31, 2008 | | 10,623,749 |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Disclosure of Accumulated Other Comprehensive Income Balance
| Foreign Currency Translation | | Unrealized Gain on Securities, net of tax | | Pension Plan - SFAS 158 adjustment, net of tax | | Accumulated Other Comprehensive Income |
Balance at December 31, 2006 | 14,510 | | 108,994 | | 27,373 | | 150,877 |
Current period change | (6,305) | | (11,788) | | 21,464 | | 3,371 |
Income tax on current period change | 2,144 | | 4,008 | | (7,298) | | (1,146) |
Balance at December 31, 2007 | 10,349 | | 101,214 | | 41,539 | | 153,102 |
Current period change | 1,306 | | (37,852) | | (22,455) | | (59,001) |
Income tax on current period change | (444) | | 12,870 | | 7,635 | | 20,061 |
Balance at December 31, 2008 | 11,211 | | 76,232 | | 26,719 | | 114,162 |
37. | Additional disclosures required by U.S. GAAP |
a. | Reconciliation of operating income under Brazilian GAAP to operating income under U.S. GAAP |
| | | | | |
Brazilian GAAP operating income | 3,501,664 | | 3,340,446 | | 3,924,258 |
Reversal of financial expense, net | 227,886 | | 306,932 | | 331,055 |
Reversal of federal contingency – PIS and COFINS | - | | - | | (106,633) |
Reversal of OCI – Foreign currency translation adjustment | - | | 4,161 | | (1,061) |
| | | | | |
U.S. GAAP adjustments- | | | | | |
Amortization of monetary restatement of 1996 and 1997 | (37,127) | | (38,951) | | (36,722) |
Depreciation of capitalized interest | (170,398) | | (177,739) | | (48,111) |
Contribution to plant expansion – amortization of deferred credit and donations | 32,837 | | 32,486 | | 30,882 |
Pension and other post-retirement benefits | 65,071 | | 28,054 | | 37,109 |
Sale-type lease – “Posto Informático” | - | | 9,046 | | - |
Decrease in depreciation expense due to reduction of fixed assets for fair value in excess of purchase price on merger of Telesp and CTBC | 45,031 | | 45,284 | | 45,069 |
Merger of Ceterp | | | | | |
Depreciation of the fair market value of assets | 2,761 | | 2,777 | | 2,763 |
Amortization of concession | - | | - | | - |
Reversal of Cofins | - | | - | | 17,500 |
Deferred research expenses | 3,262 | | 4,982 | | 8,495 |
Pre-operating expenses included in deferred assets | 8,450 | | 5,978 | | 13,425 |
Reversal of negative goodwill amortization – AIX | (8,735) | | (8,735) | | - |
Deferred revenue on activation fees, net | (4,149) | | 18,086 | | 28,398 |
Amortization of IP network | 7,257 | | 7,255 | | 7,182 |
Amortization of Itelefonica | 7,018 | | 14,162 | | 14,162 |
Amortization of Santo Genovese’s customer portfolio | (5,550) | | (5,550) | | (5,550) |
Reversal of goodwill amortization under Brazilian GAAP – Santo Genovese. | 11,982 | | 11,982 | | 11,982 |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Amortization of derivatives on purchase commitments | 4,547 | | 4,383 | | 4,399 |
Leasing Santo Genovese | 30 | | 296 | | 196 |
Reversal of goodwill amortization under Brazilian GAAP – TDBH | 82,087 | | 87,355 | | 34,202 |
Impairment loss of goodwill - Figueira unit | - | | (32,625) | | - |
Customer portfolio amortization - ITAÚ | (20,575) | | (20,577) | | (8,573) |
Surplus value depreciation – TDBH’s minority interest allocation | (613) | | (5,170) | | (2,154) |
Navytree – Consolidation adjustments and reversal of goodwill amortization | 51,443 | | 3,011 | | - |
Amortization of donations - TDBH | 20 | | 228 | | 95 |
AIX de Participações adjustments – proportional consolidation | 4,253 | | 13,377 | | 6,635 |
ACT de Participações adjustments – proportional consolidation | (3) | | 2 | | 1 |
Aliança Atlântica adjustments – proportional consolidation | (4,964) | | (4,964) | | 68 |
Other | - | | (10,519) | | (4,521) |
| | | | | |
U.S. GAAP operating income | 3,803,485 | | 3,635,453 | | 4,304,551 |
b. | Reconciliation of net revenues and costs under Brazilian GAAP to net revenues and costs under U.S. GAAP |
1) Net operating revenue
Net operating revenue under Brazilian GAAP differs from U.S. GAAP on the recognition of revenues from activation fees and value added and other sales taxes, as presented below:
| 2008 | | 2007 | | 2006 |
Net revenue under Brazilian GAAP | 15,978,985 | | 14,727,562 | | 14,643,021 |
Reclassification to cost of services | | | | | |
Value added and other sales taxes | 5,978,565 | | 5,575,502 | | 5,530,866 |
Reclassification of costs of public telephones | 76,223 | | 108,996 | | 101,785 |
U.S. GAAP adjustments- | | | | | |
Recognition of deferred revenue on activation fees, net | (4,149) | | 18,086 | | 28,398 |
AIX de Participações adjustments – proportional consolidation | (12,340) | | (9,996) | | (11,471) |
ACT de Participações adjustments – proportional consolidation | (26) | | (26) | | (26) |
Revenue recognition - “Posto Informático” | - | | 51,845 | | - |
Net revenue under U.S. GAAP | 22,017,258 | | 20,471,969 | | 20,292,573 |
2) Cost of services
| | | | | |
Brazilian GAAP cost of services | (8,726,408) | | (8,022,760) | | (7,780,510) |
Reclassification from net revenues | | | | | |
Value added and other taxes sales taxes | (5,978,565) | | (5,575,502) | | (5,530,866) |
Reclassification of costs of public telephones | (76,223) | | (108,996) | | (101,785) |
U.S. GAAP adjustments- | | | | | |
Amortization of monetary restatement of 1996 and 1997 | (37,127) | | (38,951) | | (36,722) |
Depreciation of capitalized interest | (170,398) | | (177,739) | | (48,111) |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Contribution to plant expansion – amortization of deferred credit | 32,837 | | 32,486 | | 30,882 |
Decrease in depreciation expense due to reduction of fixed assets for fair value in excess of purchase price on merger of Telesp and CTBC | 45,031 | | 45,284 | | 45,069 |
Merger of Ceterp – depreciation of fair market value of assets and concession | 2,761 | | 2,777 | | 2,763 |
Amortization of IP network | 7,257 | | 7,255 | | 7,182 |
Amortization of Itelefonica | 7,018 | | 14,162 | | 14,162 |
Sale-type lease – “Posto Informático” | - | | (42,799) | | - |
Amortization of Santo Genovese’s customer portfolio | (5,550) | | (5,550) | | (5,550) |
Amortization of derivatives on purchase commitments | 4,547 | | 4,383 | | 4,399 |
Leasing Santo Genovese | 30 | | 296 | | 196 |
Customer portfolio amortization – ITAÚ | (20,575) | | (20,577) | | (8,573) |
Surplus value depreciation – TDBH’s minority interest allocation | (613) | | (5,170) | | (2,154) |
Amortization of donations – TDBH | 20 | | 228 | | 95 |
AIX de Participações adjustments – proportional consolidation | 14,670 | | 15,927 | | 15,966 |
Allowance for reduction to recoverable value of inventories | (3,743) | | (5,700) | | (4,569) |
Other | - | | - | | 1,043 |
U.S. GAAP cost of services | (14,905,031) | | (13,880,946) | | (13,397,083) |
U.S. GAAP gross profit | 7,112,227 | | 6,591,023 | | 6,895,490 |
c. | Total assets and property, plant and equipment under U.S. GAAP |
| | | | | |
Total assets | | | | | |
| | | | | |
Property, plant and equipment | 46,622,801 | | 47,307,200 | | 45,028,189 |
Accumulated depreciation | | | | | |
Net property, plant and equipment | | | | | |
Following is a summary of the Company’s intangible assets subject to amortization:
| |
| | | | | | | | | |
Gross | 1,536 | | 2,520,983 | | 312,654 | | 329,977 | | 1,464,405 |
Accumulated amortization | (1,515) | | (1,732,047) | | - | | (180,868) | | (429,952) |
Net | 20 | | 788,936 | | 312,654 | | 149,109 | | 1,034,453 |
Amortization expense | 4 | | 310,642 | | - | | 36,999 | | 29,115 |
Amortization period | 10 years | | 5 years | | - | | 10 years | | 5 to 10 years |
| |
| | | | | | | | | |
Gross | 1,536 | | 2,237,523 | | 348,005 | | 349,658 | | 169,448 |
Accumulated amortization | (1,511) | | (1,421,405) | | - | | (143,868) | | (123,975) |
Net | 25 | | 816,118 | | 348,005 | | 205,790 | | 45,473 |
Amortization expense | - | | 337,353 | | - | | 29,893 | | 15,648 |
Amortization period | 10 years | | 5 years | | Indefinite | | 10 years | | 5 years |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
The estimated aggregate amortization expense for the next five years is as follows:
| | Amount |
2008 | | 335,599 |
2009 | | 274,589 |
2010 | | 190,694 |
2011 | | 123,244 |
2012 | | 69,903 |
e. | Fair Value Measurements (SFAS 157) |
We adopted SFAS 157 on January 1, 2008, which provides a definition of fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. The standard applies when GAAP requires or allows assets or liabilities to be measured at fair value; therefore, it does not expand the use of fair value in any new circumstance.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, SFAS 157 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.
SFAS 157 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a description of the three hierarchy levels:
Level 1 - Inputs are quoted prices in active markets for identical asset or liabilities as of the measurement date. Additionally, the entity must have the ability to access the active market, and the quoted prices cannot be adjusted by the entity.
Level 2 - Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
In accordance with SFAS 157, we measure our cash equivalents, marketable securities, foreign currency and interest rate derivative swap contracts at fair value. Our cash equivalents and marketable securities is classified within Level 1, because it is valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Our foreign currency, interest rate derivative swap contracts and financing and loans assigned as fair value hedge are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
The following table summarizes our financial assets and liabilities recorded at fair value as of December 31, 2008:
| Description | | December 31, 2008 | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
| Assets | | | | | | | | |
Cash Equivalents | | | | | | | | |
| Short-term investments | | 1,709,013 | | 1,709,013 | | - | | - |
Marketable Securities | | | | | | | | |
| Portugal Telecom | | 210,431 | | 210,431 | | - | | - |
| Zon Multimédia | | 19,531 | | 19,531 | | - | | - |
| Other Investments | | 35,416 | | 35,416 | | - | | - |
Foreign currency derivative contracts | | | | | | | | |
| Cross-currency interest rate swap agreements | | 511,059 | | - | | 511,059 | | - |
| Interest rate prefixed swap agreements | | 1,524,371 | | - | | 1,524,371 | | - |
| Total Assets | | 4,009,821 | | 1,974,391 | | 2,035,430 | | - |
Liabilities | | | | | | | | |
Loans and financing under fair value hedge | | 475,625 | | - | | 475,625 | | - |
Foreign currency derivative contracts | | | | | | | | |
| Cross-currency interest rate swap agreements | | 451,976 | | - | | 451,976 | | - |
| Interest rate prefixed swap agreements | | 1,525,050 | | - | | 1,525,050 | | - |
| Total Liabilities | | 2,452,651 | | - | | 2,452,651 | | - |
The valuation method used for the calculation of fair value of loans, financing and derivative instruments (foreign currency and interest rate derivative swap contracts) was the discounted cash flow considering the expected settlements and realization of such financial assets and liabilities at the market rates prevailing at balance sheet date. For derivative instruments the method used for the calculation of fair value is presented in more details in Note 34.
In order to minimize its exposure to the local variable interest rate (CDI), the Company invests its excess cash, amounting to R$1,709,013, substantially in short-term investments (Bank Deposit Certificates) based on the CDI rate variation. The book values of these instruments approximate market values, since they may be redeemed in the short term.
For the year ended on December 31, 2008, short-term investments generated a gain of R$ 161,927, which was included as financial expense, net in our results of operations.
Also, during the year ended on December 31, 2008, our foreign currency derivative contracts generated a gain of R$59,082 and interest rate derivative swap contracts (CDI x prefixed) a loss of R$679, which have been included as financial expense, net in our results of operations.
f. | Pension and post-retirement benefits |
A summary of the liability as of December 31, 2008 and 2007 for the Company’s active employees defined benefit pension plan (PBS/Visão/CTB/Visão Assist) is as follows:
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
PBS/Visão Telesp/CTB/Visão Assist/Visão T.Empresas | | 2008 | | 2007 |
Funded status: | | | | |
Accumulated benefit obligation: | | | | |
Vested | | 116,060 | | 96,070 |
Nonvested | | 21,288 | | 17,152 |
Total | | 137,348 | | 113,222 |
Projected benefit obligation | | 146,939 | | 120,153 |
Fair value of plan assets | | (185,441) | | (169,380) |
Excess of projected obligation (assets) | | (38,502) | | (49,227) |
Accrued pension cost (Asset) | | (38,502) | | (49,227) |
Change in benefit obligation and items not yet recognized as a component of net periodic pension cost
| | PBO | | Unrec.G/(L) | | Unrec.NTO |
Balance at December 31, 2006 | | 119,581 | | 44,026 | | (2,552) |
| | | | | | |
Service cost | | 3,683 | | - | | - |
Interest cost | | 11,615 | | - | | - |
Amortization | | - | | (2,137) | | 815 |
Benefit payments and expenses | | (9,915) | | (158) | | - |
Actuarial (gain)/loss | | (4,811) | | 4,811 | | - |
Asset experience | | - | | 18,133 | | - |
Business combination – inclusion of T.Empresas | | - | | - | | - |
Balance at December 31, 2007 | | 120,153 | | 64,675 | | (1,737) |
Service cost | | 2,972 | | - | | - |
Interest cost | | 12,257 | | - | | - |
Amortization | | - | | (3,333) | | 815 |
Benefit payments and expenses | | (10,112) | | 21 | | - |
Actuarial (gain)/loss | | 21,669 | | (21,669) | | - |
Asset experience | | - | | 1,712 | | - |
Business combination – inclusion of T.Empresas | | - | | - | | - |
Balance at December 31, 2008 | | 146,939 | | 41,406 | | (922) |
Disclosure of net periodic pension cost
| | 2008 | | 2007 | | 2006 |
Service cost (net of employee contributions) | | 2,776 | | 3,472 | | 2,960 |
Interest cost on PBO | | 12,257 | | 11,615 | | 11,872 |
Expected return on assets | | (18,391) | | (15,973) | | (15,705) |
Amortization of initial transition obligation | | 815 | | 815 | | 815 |
Amortization of (gains) losses | | (3,333) | | (2,137) | | (1,152) |
Net periodic pension cost | | (5,876) | | (2,208) | | (1,210) |
Change in accrued pension cost
| | 2008 | | 2007 |
Accrued pension cost at beginning of year | | (49,228) | | (20,207) |
Net periodic pension cost | | (5,876) | | (2,208) |
Employer contributions | | (5,852) | | (5,350) |
Business combination – inclusion of T.Empresas | | - | | - |
Other Comprehensive Income – SFAS158 adjustments | | 22,454 | | (21,463) |
Accrued pension cost at end of year | | (38,502) | | (49,228) |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| | 2008 | | 2007 |
Plan assets at beginning of year | | 169,381 | | 139,788 |
Actual contribution | | 6,069 | | 5,403 |
Actual distributions and expenses | | (10,112) | | (9,916) |
Actual return on plan assets | | 20,103 | | 34,106 |
Assets acquired in a business combination | | - | | - |
Plan assets at end of year | | 185,441 | | 169,381 |
Estimated future benefit payments
| | PBS/Visão | | CTB | | PBS-A | | PAMA |
2009 | | 10,975 | | 3,676 | | 386,430 | | 55,232 |
2010 | | 11,332 | | 3,557 | | 400,628 | | 61,062 |
2011 | | 11,787 | | 3,428 | | 415,012 | | 67,473 |
2012 | | 12,246 | | 3,291 | | 429,598 | | 74,453 |
2013 | | 12,724 | | 3,149 | | 444,351 | | 82,064 |
Years 2014-2018 | | 70,582 | | 13,570 | | 2,441,671 | | 547,741 |
The actuarial assumptions used in 2008 and 2007 are mentioned in Note 32.
Asset allocation
The asset allocation for the Company’s defined benefit pension plan (PBS - Telesp) at the end of 2008 and 2007, and the target allocation for 2009, by asset category, are as follows:
| Target Allocation for | | Percentage of Plan Assets at Year End |
Asset category | 2009 | | 2008 | | 2007 |
Equity securities | 19.0% | | 22.0% | | 22.0% |
Loans | 1.0% | | 0.1% | | 0.1% |
Fixed income | 80.0% | | 77.9% | | 77.9% |
Total | 100.0% | | 100% | | 100% |
The allocation of pension plan assets in Brazil is regulated by the Brazilian federal government. The primary allocation of a pension plan's portfolio assets is to fixed-income securities. The plan may also allocate up to 50% of its assets variable-rate securities and up to 5% of its assets loans to participants. The company's pension plan managers seek to maximize return on the plan's assets while balancing potential risks in order to guarantee the payment of benefits to the plans' participants and to reduce future costs. Based on the foregoing investment considerations, the Company's pension plan managers intend to invest, through 2008, portfolio assets as follows: 80% in fixed-rate securities in order to protect the plans from volatility in the Brazilian equity markets and limit investments in such markets to 19.0% of the plans' total investments.
The asset mix is the same for both plans (PBS and Visão) and composed of fixed-income, equities and loans.
The plan’s asset return is the average after-tax return of each asset category weighted by target allocations. Asset categories returns are based on long term macroeconomic scenarios.
A summary of the Sistel pension plan as of December 31, 2008 and 2007 for the multiemployer portion (inactive employees pension plan) – PBS-A, is as follows:
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Pension benefit plan– PBS-A | | | | |
| | 2008 | | 2007 |
Funded status: | | | | |
Accumulated benefit obligation | | | | |
Vested. . | | 4,977,285 | | 4,225,533 |
Projected benefit obligation. . | | 4,977,285 | | 4,225,533 |
Fair value of plan assets. . | | (6,828,191) | | (6,853,284) |
Plan assets in excess of obligations | | (1,850,906) | | (2,627,751) |
A summary of the post-retirement benefits plan (health care plan – PAMA) is as follows:
Health Care Plan – PAMA | | | | |
| | 2008 | | 2007 |
Funded Status: | | | | |
Accumulated post-retirement benefit obligation: | | | | |
Active participants | | 37,110 | | 33,710 |
Fully eligible active plan participants | | 9,098 | | 7,823 |
Inactive participants | | 1,506,410 | | 1,185,019 |
| | 1,552,618 | | 1,226,552 |
Fair value of plan assets | | (554,595) | | (561,415) |
Obligations in excess of plan assets | | 998,023 | | 665,137 |
In 2008, the Company made contributions to the PAMA in the amount of R$5 (R$5 in 2007 and R$32 in 2006). PBS-A is a noncontributory plan.
g. | Concentrations of risk |
The credit risk on accounts receivable is dispersed. The Company constantly monitors the level of accounts receivable and limits the risk of past-due accounts, interrupting access to telephone lines in case the customer does not pay the related bills within 30 days. Exceptions are made for telecommunications services that must be maintained for security or national defense reasons.
For conducting its business, the Company is fully dependent upon the fixed-line telecommunications concession as granted by the Federal Government. The Concession Agreement expired on December 31, 2005, and was renewed, on December 22, 2005, for more 20 years. However, the agreement can be changed on December 31, 2010, 2015 and 2020. Such condition allows ANATEL to set up new conditions and new goals for universalization and quality of telecommunication services, according to the conditions in force by that moment. Every two years, during a 20 years period, public regime companies will have to pay a renewal charge which will correspond to 2% of its prior-year SFTC revenue, net of taxes and social contributions.
Approximately 25% of the Company’s employees are members of the main telecommunications industry labor union, Sindicato dos Trabalhadores em Empresas de Telecomunicações e Operadores de Mesas Telefônicas no Estado de São Paulo, the Labor Union of Employees of Telecommunications Companies and Telecommunications Desk Operators in the State of São Paulo, or SINTETEL, which is associated with the Federação Nacional dos Trabalhadores em Telecomunicações, the National Federation of Telecommunications Workers or FENATTEL. The collective labor agreement was renewed on September 1, 2007 and will expire on August 31, 2008. The Company’s management considers relations with its workforce to be satisfactory. The Company has never experienced a work stoppage that had a material effect on its operations.
There is no concentration of available sources of labor, services, concessions or rights, other than those mentioned above, that could, if suddenly eliminated, severely impact the Company's operations.
Under Brazilian GAAP, deferred taxes are classified as current or noncurrent based upon the expected
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
period of reversal. Under U.S.GAAP, deferred taxes are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. A deferred tax liability or asset that is not related to an asset or liability for financial reporting, including deferred tax assets related to carryforwards, are classified according to the expected reversal date of the temporary difference. The classification of our deferred tax assets and liabilities under U.S. GAAP is as follows as of December 31, 2008 and 2007. Current deferred tax asset of R$521,879 and R$589,286, respectively, current deferred tax liability of R$154,787 and R$202,397, respectively, noncurrent deferred tax asset of R$595,898 and R$473,135, respectively, and noncurrent deferred tax liability of R$267,094 and R$294,621, respectively.
Additionally, under Brazilian GAAP, Telefônica Data S.A and A.Telecom (subsidiaries of the Company) did not recognize deferred income tax and social contribution assets of R$62,512 and R$ 35,379 for the year ended on December 31, 2008, respectively and Telefônica Data S.A. did not recognize deferred income tax and social contribution assets of R$42.4 million for the year ended on December 31, 2007, as mentioned in Note 7.1., due to the uncertainties involving their realization. Under U.S. GAAP Telefônica Data S.A. and A.Telecom recorded those amounts, and as a result of the uncertainty involving their realization, a full valuation allowance in the same amount was also recorded in 2008 and 2007.
i. | New accounting pronouncements |
Recently Adopted Standards
· | In December 2008, the FASB issued FSP FIN 46(R)-8, “Disclosures about Variable Interest Entities” (FSP FIN 46(R)-8). FSP FIN 46(R)-8 requires enhanced disclosures about a company’s involvement in VIEs. The enhanced disclosures required by this FSP are intended to provide users of financial statements with an greater understanding of: (i) the significant judgments and assumptions made by a company in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE; (ii) the nature of restrictions on a consolidated VIEs assets reported by a company in its statement of financial position, including the carrying amounts of such assets; (iii) the nature of, and changes in, the risks associated with a company’s involvement with a VIE; (iv) how a company’s involvement with a VIE affects the company’s financial position, financial performance, and cash flows. This FSP was effective for the year ended December 31, 2008 and had no impact on the Consolidated Financial Statements. |
· | In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. This statement was effective for the year ended December 31, 2008 .
|
· | In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, a standard that provides companies with an option to report selected financial assets and liabilities at fair value. The Standard requires companies to provide additional information that shows the effect of the Company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the Company has chosen to use fair value on the face of the balance sheet. The new Statement does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, “Fair Value Measurements”, and No. 107, “Disclosures about Fair Value of Financial Instruments”. This statement was effective for the year ended December 31, 2008 and had no impact on the Consolidated Financial Statements as management did not elect the fair value option for any other financial instruments or certain other assets and liabilities.
|
· | In September 2006, the FASB issued SFAS 158, which requires companies to (i) fully recognize, |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| as an asset or liability, the overfunded or underfunded status of defined benefit pension and other postretirement benefit plans; (ii) recognize changes in the funded status through other comprehensive income in the year in which the changes occur; (iii) measure the funded status of defined benefit pension and other postretirement benefit plans as of the date of the company’s fiscal year end; and (iv) provide enhanced disclosures. The provisions of SFAS 158 were effective for the year ended December 31, 2006, except for the requirement to measure the funded status of retirement benefit plans on Company’s fiscal year end, which was effective for the year ended December 31, 2008. Since the Company’s measurement date was already December of each year, this change had no impact on its Consolidated Financial Statements.
|
· | In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurement. SFAS No. 157 does not require any new fair value measurements. This statement is initially effective for financial statements issued for fiscal years beginning after November 15, 2007 (calendar year 2008), and is to be applied prospectively as of the beginning of the year in which it is initially applied. For all nonrecurring fair value measurements of nonfinancial assets and liabilities, the statement is effective for fiscal years beginning after November 15, 2008 (calendar year 2009). Since the Company has not changed its current practice, this change had no impact on its Consolidated Financial Statements. See Note 21 on Financial Instruments. |
· | In October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective for the Company on December 31, 2008 for all financial assets and liabilities recognized or disclosed at fair value in the Consolidated Financial Statements on a recurring basis (at least annually). The adoption of FSP FAS 157-3 had no impact on the Consolidated Financial Statements. |
Recently Issued Standards
· | In December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” (FSP FAS 132(R)-1). FSP FAS 132(R)-1 amends SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plans. This guidance is intended to ensure that an employer meets the objectives of the disclosures about plan assets in an employer’s defined benefit pension or other postretirement plan to provide users of financial statements with an understanding of the following: how investment allocation decisions are made; the major categories of plan assets; the inputs and valuation techniques used to measure the fair value of plan assets; the effect of fair value measurements using significant unobservable inputs on changes in plan assets; and significant concentrations of risk within plan assets. FSP FAS 132(R)-1 is effective for the year ending December 31, 2009. As FSP FAS 132(R)-1 only requires enhanced disclosures, management anticipates that the adoption of FSP FAS 132(R)-1 will not have an impact on the Consolidated Financial Statements. |
· | In November 2008, the FASB ratified Emerging Issues Task Force ("EITF") Issue No. 08-6, "Equity Method Investment Accounting Considerations" ("EITF 08-6"). EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
37. | early adoption prohibited. The Company is in the process of evaluating the impact, if any, of EITF 08-6 on its consolidated financial statements. |
· | In November 2008, the FASB ratified EITF Issue No. 08-7, "Accounting for Defensive Intangible Assets" ("EITF 08-7"). EITF 08-7 clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. EITF 08-7 requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting which should be amortized to expense over the period the asset diminishes in value. EITF 08-7 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The company is in the process of evaluating the impact, if any, of EITF 08-7 on its consolidated financial statements.Subsequent events |
· | In April 2008, the FASB issued FAS No. 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). FAS 142-3 amends the factors to be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. This FSP is effective prospectively for intangible assets acquired or renewed after January 1, 2009.. The Company does not expect FSP 142-3 to have a material impact on its accounting for future acquisitions of intangible assets. |
· | In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – An Amendment of SFAS No. 133” (SFAS 161). SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (i) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (ii) the disclosure of derivative features that are credit risk-related; and (iii) cross-referencing within footnote disclosures to enable financial statement users to locate important information about derivative instruments. As SFAS 161 only requires enhanced disclosures, management anticipates that the adoption of SFAS 161 will not have an impact on the Consolidated Financial Statements. |
Ratification of new rates – fixed-mobile calls (VC1)
· | In February 2008, the FASB issued FSP No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13,” which states that SFAS No. 13, “Accounting for Leases,” (SFAS 13) and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13 are excluded from the provisions of SFAS 157, except for assets and liabilities related to leases assumed in a business combination that are required to be measured at fair value under SFAS No. 141, “Business Combinations,” (SFAS 141) or SFAS No. 141 (revised 2007), “Business Combinations,” (SFAS 141(R))ANATEL, pursuant to Resolution nº 576/2011, approved the Act published in the Official Gazette on January 25, 2012, resulting in a net decrease of 10.78%, as of February 24, 2012, in fixed-mobile call rates (VC) applied to SMP (personal mobile service) and SME (specialized mobile service). The Company will apply FSP No. FAS 157-1 to full leasing transactions. |
· | Also in February 2008, the FASB issued FAS 157-2, which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually)SMP exploitation authorization
On January 16, 2012, through Act No. 284, ANATEL approved the unification of the authorizations granted to Vivo S.A. for the operation of the SMP in the areas of provision corresponding to Region I of the General Plan Authorization of Personal Mobile Service (PGA/SMP). FSP 157-2 partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. The adoption of SFAS 157 for all nonfinancial assets and nonfinancial liabilities is effective beginning January 1, 2009. The Company is still in the process of evaluating the impact |
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
| that SFAS 157 will have on its nonfinancial assets and liabilities not valued on a recurring basis (at least annually). |
· | In December 2007, the FASB also issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB 51.” This statement clarifies that a non-controlling (minority) interest in a Operating Subsidiary is an ownership interest in the entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and non-controlling interest, with disclosure on the face of the consolidated income statement of the amounts attributed to the parent and to the non-controlling interest. This statement will be effective prospectively for fiscal years beginning after December 15, 2008 (calendar year 2009), with presentation and disclosure requirements applied retrospectively to comparative financial statements. The Company is currently evaluating the provisions of this statement.
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· | In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R), “Business Combinations.” Statement 141(R) establishes principles and requirements for how an acquiring entity in a business combination recognizes and measures the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. This statement will be effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (calendar year 2009). The impact of the adoption of SFAS 141R on the Company’s consolidated financial position, results of operations will largely be dependent on the size and nature of the business combinations completed after the adoption of this statement.
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38. Subsequent events
On March 25, 2009, the General Shareholders’ Meeting approved the distribution of additional dividends in the amount of R$395.1 million, based on retained earnings as of the annual financial statements of December 31, 2008 and unclaimed dividends and interest on shareholders’ equity of the same year. The shareholders individually registered as such at the end of the day, on March 25, 2009 would be able to receive those dividends with payments starting before the end of 2009 fiscal year at Management’s discretion.
Per share amounts of additional dividends are presented as follows:
| Common | Preferred (*) |
Amount per share: R$ | 0.732276119092 | 0.805503731002 |
| (*) 10% higher than the dividend granted to each common share, in accordance with article 7 of the Company’s bylaws |
At the same date, on March 25, 2009, Management decided that those interest on shareholders’ equity approved by the Board of Directors on December 09, 2008, in the gross amount of R$416 million (R$353.6 million, including withholding income tax) would also have the starting payment date before the end of 2009 fiscal year.
Per share amounts of interest on shareholders’ equity approved on December 9, 2008 and pending payment are as follows:
TELECOMUNICAÇÕES DE SÃO PAULO S.A. - TELESP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2008, 2007 and 2006
(Amounts expressed in thousands of Reais, unless otherwise indicated)
Amount per share: R$ | Immune or Exempt Legal Entities (gross value) | Income Tax Withhold (15%) | Taxed Legal Entities and Individuals (net value) |
Common shares | 0.770991877059 | 0.115648781558 | 0.655343095501 |
Preferred shares (*) | 0.848091064765 | 0.127213659714 | 0.720877405051 |
(*) | 10% higher than the dividend granted to each common share, in accordance with article 7 of the Company’s bylaws |
* * * * * * * * * * *