Management Proposal 1380 Kb

Transcription

Oi S.A.
NATIONAL CORPORATE TAXPAYER'S REGISTER (CNPJ) NO. 76.535.764/0001-43
STATE REGISTRATION NUMBER (NIRE) 3330029520-8
Publicly-held Company
Management's Proposal for submission for the approval of the General Meeting to be held on March 21, 2013, under the
terms of CVM Instruction 481/09.
To our Shareholders,
The management of Oi S.A. (“Company”) hereby submits to its shareholders its proposal regarding the subject matters
appearing on the Agenda of the General Meeting to be held on March 21, 2013:
(i) Receive the accounts from Management, examine, discuss and vote on the Management's Report and
Financial Statements for the year ended December 31, 2012, accompanied by the reports of the Independent
Auditors and the Fiscal Council
The company's management is proposing that the shareholders examine and approve the management's accounts and the
financial statements for the business year ended December 31, 2012 and, after close consideration, approve said documents
as analyzed by the Board of Directors at its meeting on February 18, 2013. These documents, together with the opinion of
the independent auditors, the standardized financial statements form – DFP – and management's comments regarding the
company's financial position are available on our web site and that of the CVM, as per CVM instruction 481/09.
(ii) Examine, discuss and vote on Management's Proposal for the allocation of the net income for the year ended
December 31, 2012 and for the distribution of dividends
The company's management is proposing the approval of the allocation for the income for the year ended December 31,
2012 pursuant to the documents attached to this proposal.
(iii) Elect the members of the Fiscal Council and their respective alternates
The company's management is proposing the election of the following members of the Fiscal Council and respective
substitutes until the 2014 General Meeting is held:
FULL MEMBERS
Sidnei Nunes
Allan Kardec de Melo Ferreira
Umberto Conti
ALTERNATES
Aparecido Carlos Correia Galdino
Newton Brandão Ferraz Ramos
Carmela Carloni Gaspar
(iv) Establish the annual aggregate compensation amount for the company's Management and the members of
the Fiscal Council
The company's management is proposing the amount of the Compensation for the Management and the Fiscal Council as
follows: annual global amount (i) for the Board of Directors, in the amount of up to R$6.765.293,00; (ii) for the Executive
Board, in the amount of up to R$48.789.371,00; and (iii) for the Fiscal Council, in the amount of up to R$468.641,00.
Rio de Janeiro, February 19, 2013
Board of Directors
EXHIBIT I (ITEM 12.6 TO 12.10 OF THE REFERENCE FORM)
Members appointed for the Fiscal Council ....................................................................................................................................................................... 5
Composition of the statutory committees and the audit, finance and compensation committees ........................................................................................ 7
Resumes of those indicated by the Majority Shareholder for (re)election as member of the company's Fiscal Council .......................................................... 7
Family Relationships ..................................................................................................................................................................................................... 9
Relations of subordination, rendering of services or control between the management and subsidiary companies, parente companies and others ................ 9
EXHIBIT II (ITEM 10 OF THE REFERENCE FORM)
Officers’ comments on the financial/equity conditions ................................................................................................................................................... 11
Operating and financial result ...................................................................................................................................................................................... 59
Significant effects on the financial statements ............................................................................................................................................................. 65
Changes in accounting policies, qualifications and emphasis ........................................................................................................................................ 66
Key accounting policies ............................................................................................................................................................................................... 80
Internal controls ......................................................................................................................................................................................................... 82
Use of funds raised from public offering ....................................................................................................................................................................... 83
Material facts not shown in the financial statements ..................................................................................................................................................... 84
Comments on items not shown in the financial statements ........................................................................................................................................... 84
Business plan ............................................................................................................................................................................................................. 85
Other material facts .................................................................................................................................................................................................... 90
EXHIBIT III (PROPOSAL FOR ALLOCATION OF NET INCOME UNDER EXHIBIT 9-1-II OF CVM INSTRUCTION 481/09)
Proposal for Allocation of Net Income under exhibit 9-1-II CVM of CVM 481/09 ............................................................................................................. 91
EXHIBIT IV (ITEM 13.1 THROUGH 13.16 OF THE REFERENCE FORM)
Compensation policy and practice ............................................................................................................................................................................... 97
Total compensation by entity ................................................................................................................................................................................... 104
Variable compensation ............................................................................................................................................................................................. 106
Share-based compensation ...................................................................................................................................................................................... 108
Interest held by entity ............................................................................................................................................................................................. 112
Share-based compensation ...................................................................................................................................................................................... 112
Outstanding options ................................................................................................................................................................................................ 112
Options exercised and shares delivered .................................................................................................................................................................... 113
Pricing of shares/options .......................................................................................................................................................................................... 113
Pension plan ........................................................................................................................................................................................................... 113
Maximum, minimum and average compensation ....................................................................................................................................................... 113
Compensation/indemnity mechanisms (Contract-based compensation) ....................................................................................................................... 113
Percentage of related parties in compensation ........................................................................................................................................................... 114
Compensation – other duties..................................................................................................................................................................................... 114
Recognized compensation – parente company .......................................................................................................................................................... 114
Other significant information .................................................................................................................................................................................... 115
EXHIBIT I
ITEM 12.6 to 12.10 OF THE REFERENCE FORM
12.6 - Members appointed for the Fiscal Council:
Name
Age
Elective office to be held
Election Date
Sidnei Nunes
53
Full member of the Fiscal Council
INDIVIDUAL
TAXPAYER CARD
NO.
011.355.928-37
Profession
Appointed by the majority
shareholder
General Meeting Until the 2014 General
to be held on
Meeting
March 21, 2013
Date for
taking office
Administrator
Yes
Within the legal
time frame
Name
Age
Election Date
Aparecido Carlos
Correia Galdino
61
Alternate member of the Fiscal Council
INDIVIDUAL
TAXPAYER CARD
NO.
666.708.708-25
Profession
shareholder
to be held on
Meeting
March 21, 2013
Date for
taking office
Business
Administrator
Yes
Within the legal
time frame
Term of Office
Term of Office
Other positions
and functions
held at the issuer
N/A
Other positions
and functions
held at the issuer
N/A
Name
Age
Election Date
Allan Kardec de Melo
Ferreira
66
INDIVIDUAL
TAXPAYER CARD
(CPF)
054.541.586-15
Profession
shareholder
to be held on
Meeting
March 21, 2013
Date for
taking office
Lawyer
Yes
Within the legal
time frame
Name
Age
Election Date
Newton Brandão
Ferraz Ramos
43
INDIVIDUAL
TAXPAYER CARD
NO.
813.975.696-20
Profession
shareholder
to be held on
Meeting
March 21, 2013
Date for
taking office
Accountant
Yes
Within the legal
time frame
Name
Age
Election Date
Umberto Conti
38
INDIVIDUAL
TAXPAYER CARD
NO.
165.706.888-98=
Profession
shareholder
to be held on
Meeting
March 21, 2013
Date for
taking office
CEF employee
Yes
Within the legal
time frame
Term of Office
Term of Office
Term of Office
Other positions
and functions
held at the issuer
N/A
Other positions
and functions
held at the issuer
N/A
Other positions
and functions
held at the issuer
N/A
Name
Age
Election Date
Term of Office
Carmela Carloni
Gaspar
30
INDIVIDUAL
TAXPAYER CARD
NO.
000.454.351-38
Profession
shareholder
to be held on
Meeting
March 21, 2013
Date for
taking office
Economist
Yes
Other positions
and functions
held at the issuer
N/A
Within the legal
time frame
12.7 – Composition of the statutory committee and the audit, finance and compensation committees:
No new members are to be elected to the statutory committee, or to the audit, risk, finance and compensation committees, regardless of whether these
committees or structures are not statutory.
12.8 – Resumes of those indicated by the Majority Shareholder for (re) election as members of the company's Fiscal Council:
Fiscal Council
Sidnei Nunes
Born September 28, 1959, he holds a degree in Business Administration (1982) and Accounting (1984) from Faculdade de Administração Paulo Eiró, and
an MBA in Finance from the University of São Paulo - USP (1998). He worked at Iguatemi Empresa de Shopping Centers S/A from February 1990 to
March 2008, holding the position of Controller from February 1990 to May 1999 and Finance Officer from June 1999 to March 2008. Since April 2008 he
has been working at Jereissati Participações S/A and LF Tel S/A as Managing Director and at La Fonte Telecom S/A as Finance Officer. His main functions
include financial management and controls and accounting and tax management of the companies. He has also been a member of the board of directors
of Iguatemi Empresa de Shopping Centers S/A since November 8, 2006, elected to the office of director on November 8, 2006, and reelected on April 24,
2009 for a 2-year term of office. He has been a member of the board of directors since April 24, 2008 of the companies Jereissati Participações S/A, La
Fonte Telecom S/A, LF Tel S/A and Grande Moinho Cearense S/A; all of them with a 1-year term of office until April 2011. He has been a full member of
the Fiscal Council of Contax Participações S/A since April 2009, a company whose main business is to provide call center services. The director has never
been charged criminally or in any CVM administrative proceeding, nor has he been charged in the judicial or administrative sphere involving debarring or
suspension of his professional or business activities.
Born April 14, 1951, Mr. Galdino obtained a degree in Business Administration in 1978 from Faculdades Integradas Princesa Isabel. His professional
career began in 1971 at the Jereissati Group, where he has participated in the entire process of evolution and growth up to the present. He is Finance
Officer of La Fonte Participações S/A, a company that takes equity interests in other companies, a member of the Fiscal Council of Iguatemi Empresa de
Shopping Centers S/A, a shopping Center management company, the boards of directors of La Fonte TelecomS/A and LF Tel S/A, companies that take
equity interests in other companies, and in Grande Moinho Cearense S/A, a company that mills wheat for the bakery, pasta and cookie industry. He was
a (full) member of the Fiscal Council of Coari Participações S.A. He is a member of the fiscal council of the companies that take equity interests in other
companies, Telemar Participações S.A. and a substitute member of the Fiscal Council of Contax Participações S.A., a company whose main business is to
provide call center services. The director has never been charged criminally or in any CVM administrative proceeding, nor has he been charged in the
judicial or administrative sphere involving debarring or suspension of his professional or business activities.
Allan Kardec de Melo Ferreira
Born November 19, 1946, Mr. Kardec was an internal advisor to Construtora Andrade Gutierrez between 1971 and 1993, where he was in charge,
between 1971 and 1980, of the bidding and contracts areas in Brazil, while from 1980 to 1993 he was head of the international legal department. His
activities include management consultancy services for a variety of companies in the civil, commercial and tax areas, participation in restructuring
procedures (mergers, splits, divestments and asset sales) of the telecommunications companies of the Andrade Gutierrez Group and in several auction
processes held by the Highways Department of Minas Gerais, or DNER-MG, the Belo Horizonte Transport and Transit Company, or BHTRANS, the Ministry
of Communications and ANATEL. He holds a law degree from the Pontifical Catholic University of (1970), in addition to having participated in several
extension courses concerning Foreign Trade, primarily exports of services, at the Fundação Centro de Comércio Exterior, or FUNCEX, the Dom Cabral
Foundation, the Ministry of Foreign Affairs and Andrade Gutierrez. The director has never been charged criminally or in any CVM administrative
proceeding, nor has he been charged in the judicial or administrative sphere involving debarring or suspension of his professional or business activities.
Newton Brandão Ferraz Ramos
Born May 30, 1969, he has been working as the Controller at Andrade Gutierrez Concessões S.A., a holding company for equity interests since July/1998.
Mr. Newton Brandão is currently a full member of the Fiscal Council of Cia. de Saneamento do Paraná - SANEPAR, a Full Member of the Fiscal Council of
Cia. de Concessões Rodoviárias - CCR S/A, a full member of the Fiscal Council of Dominó Holdings and a substitute member of the board of directors of
CEMIG. He graduated in Accounting from the Pontifícia Universidade Católica de Minas Gerais in 1992, and in 1994 obtained a postgraduate degree in
Administration from the FUMEC/MG. In 2000, he obtained an MBA in Finance from Fundação Dom Cabral. The director has never been charged criminally
or in any CVM administrative proceeding, nor has he been charged in the judicial or administrative sphere involving debarring or suspension of his
professional or business activities.
Umberto Conti
Born on September 12, 1974, in São Paulo/SP, he has served as the Coordinator of the New Businesses area of FUNCEF (Federal CEF Employees
Foundation) since October 2010. Brazilian, single, CEF worker. Mr. Conti holds a bachelor’s degree in Data Processing Technology from the Mackenzie
University (1996), a bachelor’s degree in Geography from the University of São Paulo – USP (2004) and a post-graduation degree in Finance from IBMEC
(2009). He began his career at CAIXA Econômica Federal in September 1999, where he stayed until November 2006, having served also as a Special
Advisor to the president of FUNCEF from November 2006 to October 2010. He is a member of the Investment Committees of FIP CRP VII and FIP Terra
Viva.
Carmela Carloni Gaspar
Born on December 19, 1982, in São Paulo/SP. Ms. Gaspar has served as a Full Analyst at FUNCEF (Federal CEF Employees Foundation) since December
2012. Brazilian, married, Economist. She earned a bachelor’s degree in Economics from the University of Brasília in December 2004 and an MBA in
projects from the Getúlio Vargas Foundation in September 2007. She began her career as a Business analyst at Spectrum Latino América / value
Partners (January 2005 to September 2006), having served also as a Junior Analyst at the Pricing Department – Controllership from December 3006 to
March 2008; Senior Analyst at the Pricing and Tariffs Division – Associate Market Planning Department of Brasil Telecom S.A. (current Oi S.A.) from
March 2008 to February 2009; Senior Analyst at the Retail Division – Region II Promotion Department of Brasil Telecom S.A. (current Oi S.A.); Project
Manager at R8 Consultoria Empresarial from December 2009 to June 2012; and as a Product Analyst at BANCOOB – Banco Coopoerativo do Brasil, from
June 2012 to November 2012.
Certificate of No Prior Conviction:
All the above candidates appointed for election to the Fiscal Council warrant for all purposes of the law that during the past five years they have not been
subject to criminally conviction or sentenced in an administrative proceeding before the Brazilian Securities Commission, nor have they been convicted in
the judicial or administrative sphere to the extent that they have been suspended or barred for exercising any professional or business activity.
12.9.
Family Relationships
Not Applicable.
12.10 – Relationships of subordination, rendering of services or control between the management and subsidiary companies, parent
companies and others:
Manager of the issuer
Name
Taxpayer Code
666.708.708-25
Related person
Company
Jereissati Participações S.A.
Corporate Tax
ID
60.543.816/000193
Type of relationship of the
manager with the related
party
Subordination
Position/Role
Financial Officer
Type of related person
Position/Role
Indirect majority
shareholder
Substitute Member of
the Fiscal Council
Manager of the issuer
Name
Sidnei Nunes
Related person
Company
Jereissati Participações S.A.
TAXPAYER CODE Type of relationship of the
manager with the related
party
011.355.928-37
Subordination
Corporate Tax
ID
60.543.816/000193
Position/Role
Managing Director
Type of related person
Position/Role
Indirect majority
shareholder
Full Member of the
Fiscal Council
EXHIBIT II
REFERENCE FORM ITEM 10
(Management’s comments on the Company’s financial condition)
10.1.
Officers’ comments on:
a) general financial and equity conditions
The officers of the Company believe that Oi S.A.'s financial and equity conditions are sufficient to offer a range of integrated communications products,
including landline and mobile services, data transmission services (including broadband), Internet and ISP services, and other services for residential
clients, small, medium and large businesses, and government bodies, and to honor its short- and medium-term obligations.
Oi S.A. currently has sufficient working capital for current requirements and cash holdings, including loans to third parties, sufficient to finance our
activities and cover funding requirements for at least the next 12 (twelve) months. As of December 31, 2012, our loans and short-term debt amounted
to R$ 3,114 million, which was 12.4% of our net revenue of R$ 25,169 million. As of December 31, 2011, our loans and short-term debt amounted to R$
1,144 million or 12.4% of our net revenue of R$ 9,245 million.
b) capital structure and possibility of redemption of shares, indicating: (i) redemption situations, (ii) formula used to calculate amount
redemption value
Subscribed
consists of
per annum
by dividing
and paid in capital stock totaled R$7,308,752,232.06 as of December 31, 2012, and has remained at this amount to date. Share capital
common and preferred shares, the latter not having voting rights but being assured priority for a minimum non-cumulative dividend of 6%
calculated on the amount obtained by dividing share capital by total number of shares, or 3 % per annum calculated on the amount obtained
shareholders' equity by total number of shares, whichever is greater.
There is no statutory provision for redemption of shares, which may take place pursuant to Article 44 of the Law of Corporations.
Our Extraordinary General Meetings held on February 27 and August 10, 2012 approved the issue for bonus purposes of class "B" and "C" redeemable
preferred shares that have the same rights as stipulated in our bylaws/articles for all classes of preferred shares, and preferred shares class "B" that also
have voting rights and priority in capital reimbursement, without premium, while class "C" preferred shares confer on their holders priority to receive
non-cumulative dividend of 3% of shareholders’ equity per share, without voting rights. These class "B" and "C" preferred shares were immediately
redeemed for R$ 2.543282 per share at the general meeting of February 27, 2012 and 0.300168346064 per share at the general meeting of 10.8.2012,
and both meetings waived any need to amend our bylaws/articles to reflect the creation of these shares since they were redeemed immediately at the
meetings.
c) ability to pay in relation to financial commitments
Oi S.A. issues securities on local and international markets to refinance its short-term debt under normal business conditions.
Oi S.A.'s principal cash requirements are as follows:

working capital;

debt repayment;

capital investment for our operations and to expand our network while improving the facilities and technical capability of our networks;

dividends on our shares, including in the form of interest on shareholders’ equity.
Our operations in the Residential, Personal Mobility and Business/Corporate segments provide a high level of cash flow and enable comfortable
management of financial commitments. Oi S.A. expects that the investments made in recent years, plus those that may be made in the future, will
augment its cash flow, gradually strengthen its cash flow and credit metrics and enhance our ability to honor our commitments. Moreover, if deemed
necessary to borrow to meet commitments Oi S.A. believes it currently has the ability to do so.
Additionally, Oi S.A. has revolving credit facilities for R$ 1.0 billion and R$ 1.5 billion, with international bank syndicates, arranged in November 2011 and
December 2012, respectively. These facilities provide a significant liquidity cushion, strengthen our capital structure and credit profile, and enable greater
efficiency for cash management.
Therefore, considering its ability, cash flow and funding, liquidity position and debt profile, Oi S.A. believes it will have no difficulty in honoring its
financial commitments.
d) sources of funding for working capital and investments in non-current assets used
Our primary sources of liquidity have traditionally been the following:

cash flow from operating activities;

long-term loans; and

sales of debt securities in local and international capital markets.
Our main source of funds is cash flow generated by our own operating activities and those of our subsidiaries. Cash flow from these operations was R$
3,858 million in the year ended December 31, 2012; R$ 1,839 million in the year ended December 31, 2011 and R$ 3,416 million in the year ended
December 31, 2010.
Additionally, Oi S.A. generally seeks to fund its investments in property, plant and equipment by borrowing from banks, supplier financing, capital market
transactions and other forms of funding, to enable a flow of investments that ensures its long growth term and greater value creation for its
shareholders.
e) sources of funding for working capital and investments in non-current assets to be used to cover liquidity shortfalls
Sources of financing for working capital and investments in non-current assets that Oi S.A. may use to cover any liquidity shortfalls are the same as
those mentioned in item "d", namely:

cash flow from operating activities;

long-term loans; and

sales of debt securities in local and international capital markets.
f) levels of indebtedness and characteristics of these debts, describing: (i) significant loans and financing agreements, (ii) other longterm relationships with financial institutions, (iii) levels of debt subordination, and (iv) any covenanted restrictions, particularly in
relation to debt limits and new debt, distribution of dividends, sale of assets, issuance of new securities, and sale or transfer of
shareholder control
The executive officers informed that the Company’s consolidated indebtedness was influenced by the group’s corporate reorganization on February 27,
2012, which included the merger of Coari and TNL and the transformation of TMAR into a whole-owned subsidiary of the Company. As a result of the
corporate reorganization, R$21,102 million were assumed by the Company in the consolidated indebtedness.
The Company raises funds in the captal market, obtains bilateral loans and credit lines with the BNDES and Export Credit Agencies to finance its
investment plan, debt refinance and working capital. In 2012, the total amount of fundings, net of costs, was R$7,067 million, whereas the total
consolidated amortization of principal and interest came to R$4,980 million and R$2,382 million, respectively.
As of 31 December 2012, 2011 and 2010 our consolidated debt was R$ 33,346 million, R$ 8,105 million and R$ 4,365 million, respectively. Our level of
our indebtedness significantly affected financial costs as reflected in the income statement. Financial expenses consist chiefly of interest on loans and
other liabilities, monetary and exchange variations, taxes and other financial transactions. In the year ended December 31, 2012, our financial expenses
totaled R$ 4,491 million, of which R$ 2,066 million consisted of interest on loans and debentures to be paid. In the year ended December 31, 2011, our
total financial expenses. were R$ 1,477 million (R$ 1,060 million in the year ended December 31, 2010), of which R$ 448 million (R$ 558 million in the
year ended December 31, 2010) consisted of interest on loans and debentures to be paid. On 31 December 2012, total debt (as defined by
Circular/CVM/SEP/007/2011, for the Reference Form's item 3.7) was R$ 57,965 million (R$ 21,075 million at December 31, 2011 and R$ 15,549 million
at December 31, 2010) and our debt ratio (current plus noncurrent liabilities divided by shareholders' equity) was 2.92 (1.99 at December 31, 2011 and
1.37 at December 31, 2010.)
Interest rates paid by Oi S.A. depend on a number of factors, including rates prevailing in the domestic and international markets and risk relating to Oi
S.A., the sector in which we operate and the Brazilian economy as assessed by potential lenders, potential buyers of debt securities issued by Oi S.A. and
rating agencies analyzing Oi S.A. debt securities.
Standard & Poor's, Moody’s, and Fitch have placed ratings on Oi S.A. and its debt securities. Any downgrade thereof could lead to higher interest
charges and other financial expenses for loans and debt securities issued by us, and could adversely affect our ability to obtain financing on satisfactory
terms or in the amounts we require.
The following tables show the evolution of our debt in loans and financing on the respective dates:
Loans and financing by type
In
millions
Brazilian reais
of
12/31/2012
12/31/2011 12/31/2010
BNDES
6,367
2,230
2,588
Domestic currency
Currency
basket,
including US$
6,367
2,230
2,579
-
-
9
8,221
19,365
6,088
4,131
1,789
1,788
3,186
TIR %
(12/31/2012)
Matures
8.72%
Dec/2012 Dec/2018
1,093
698
651
9.80%
Apr/11
Dec/2012 Jun/13
-
-
10.81%
1,361
545
547
10.05%
1,137
1,136
404
13,277
107
1
104
47
6.35%
Line of credit - ECA
4,124
-
-
6.74%
Senior Notes
9,153
-
-
8.01%
Debentures
Financial institutions
Domestic currency
Bank credit
notes(CCB)
Real estate
receivables (CRI)
Senior Notes
Other
Foreign currency
10.55%
Dec/2012 Jan/2028
Dec/2012 Aug/2022
Dec/2012 Dec/2016
Dec/2012 Dec/2033
Dec/2012 Aug/2020
Dec/2012 Oct/2020
Other
Subtotal
Funding cost incurred
Total
0
33,953
(607)
33,346
1
8,150
(45)
8,105
47
4,379
(14)
4,365
-
Dec/2012 Feb/2014
Debt breakdown by currency
In millions of Brazilian reais
2011
2012
2010
BRL
20,497
8,104
4,309
USD
10,844
1
3
Euro
2,005
-
-
Other
-
-
53
Total
33,346
8,105
4,365
Debt - breakdown by indexer
In millions of Brazilian reais
Fixed Rate
2012
2011
2010
11,431
1,271
163
Interbank rate (CDI)
9,139
4,109
1,091
Lon-term interest rate (TJLP)
5,538
2,122
2,472
Consumer price index (IPCA)
3,377
535
537
Libor
3,794
1
3
Other
67
67
99
Total
33,346
8,105
4,365
(i)
description of main funding transactions, loans and financing
Domestic currency borrowing
Development Banks
Oi S.A. and its subsidiaries borrow from BNDES to finance expansion and improved quality of the landline and mobile network throughout Brazil and
ensure compliance with regulatory obligations.
In December 2012, Oi S.A. and its subsidiaries entered into a financing agreement with BNDES in the amount of R$ 5,417 million for investment
purposes from 2012 through 2014. Of the total line of credit, at the end of this month, the amount disbursed was R$ 2,000 million (R$ 566 million for Oi,
R$ 888 million for TMAR, R$ 412 million for TNL PCS and R$ 133 million for Brt Celular). Transaction costs associated with this issue in the amount of R$
3.4 million are shown amortized in the income statement in accordance with the contractual terms of this issue at the effective rate.
Additionally, Oi S.A. and its subsidiaries signed currently effective agreements with BNDES and other development banks in the North and Northeast of
Brazil in 2006, 2008, 2009 and 2010 in order to fund investment projects for the above-mentioned purposes.
Note that in the year ended December 31, 2012, repayments of principal and interest charges totaled R$ 1,092 million for the parent company and R$
1,857 million for the consolidated total.
Foreign currency borrowing
Senior Notes
In February 2012, Oi S.A. issued "Senior Notes" in the amount of R$ 1,500 million (R$ 2,741 million) to refinancing debt and for corporate purposes in
general. The final maturity is February 2022. In July 2012, Oi S.A. transferred this issue, net of funding costs, to its wholly owned subsidiary Oi Brasil
Holdings Cooperatief through a supplementary "indenture". Transaction costs associated with this issue in the amount of R$ 12 million ($ 6 million) are
amortized in the year's income pursuant to the contractual terms of this issue at the effective rate.
Oi S.A. has other foreign currency "Senior Notes" that were issued on the international capital market through its subsidiary TMAR in 2009 and 2010. As a
result of the corporate reorganization approved on February 27, 2012, these issues were added to the debt of Oi S.A, which replaced TMAR as issuer
company.
The purpose of these borrowings, which totaled R$ 9,152 million on a consolidated basis, was to lengthen the profile of our debt and reduce its cost, and
make investments, and for corporate purposes in general.
Debentures
For more details of debenture issues, see items “18.5” and “18.8” herein.
(ii) other long-term relations with financial institutions
On December 31, 2012, in addition to the long-term relationships with financial institutions shown in item (i) above, we have the following transactions:
Real Estate Receivable Certificates (local acronym CRIs)
In August 2010, Oi S.A. and its TMAR subsidiary paid in capital to transfer ownership of 101 reversible real-estate assets to Copart 5 and 162 reversible
assets to its Copart 4 subsidiary.
Copart 4 and Copart 5 assigned streams of lease agreement receivables to Brazilian Securities Companhia de Securitização (BSCS), which issued the real
estate receivable certificates backed by these lease agreements.
In relation to the real estate receivable certificates (CRIs), the EGM held on October 20, 2010, approved the TMAR subsidiary’s private issue of simple
non-convertible debentures in a single series for a total of R$ 999 million. Additionally, at the EGM held on November 9, 2010, approved Oi S.A.'s private
issue of simple non-convertible debentures in a single series for a total of R$ 470 million. The proceeds were used for the corporate purposes of Oi S.A.
and its TMAR subsidiary.
In June 2012, Copart 4 and Copart 5 pre-redeemed the two series of real estate receivable certificates (CRIs) for R$ 392.5 million.
Copart 5's assets and liabilities are consolidated in the balances of Oi S.A.'s financial statements since the main risks and benefits of this transaction
remain with the parent.
(iii) level of subordination between debts.
Except for debts secured by real-estate property, there is no level of subordination between Oi S.A.'s debts.
(iv) any covenant restrictions in relation to debt limits or new debts, distribution of dividends, sale of assets, issues of new securities, or
sale of corporate control
Oil S.A. is subject to certain financial covenants that limit our ability to incur additional debt. The level of indebtedness and requirements and limitations
under certain of our debt instruments may adversely affect our results from operations and our financial condition. In particular, the terms of some of
these debt instruments restrict our ability, and that of our subsidiaries, for the following:
•
•
•
•
•
incurring additional indebtedness;
providing guarantees;
providing goods as guarantee;
selling or disposing of assets
transacting mergers, acquisitions or restructurings.
Furthermore, some of these financial instruments include clauses that require the Company to maintain certain specific financial indexes, of which the
most restrictive are:
•
Consolidated debt divided byconsolidated EBITDA for the previous 12 months, less than or equal to four at the eand of each quarter up to
maturity;
•
Consolidated EBITDA of the previous 12 months divided by the consolidated financial expenses of the previous 12 months, higher than or equal to
1.75 at the end of each quarter up to maturity; and
•
Consolidated debt divided by consolidated debt plus equity, less than or equal to 0.95 at the end of each quarter up to maturity.
On December 31, 2012, the Company complied with the financial commitments and believes it will be able to comply with these financial commitments in
2013. Moreover, the Company believes that its compliance with these financial commitments shall not negatively affect its capacity to implemente its
financing plans.
g) limits on utilization of financing already arranged:
In relation to the financing agreements in Brazilian currency described in item "10.1 f (i)" above, we have the following limits agreed and utilized:
- Agreement between Oi S.A. and its subsidiaries signed with BNDES in 2012, amounting to R$ 5,418 million: Oi S.A. may borrow up to R$ 1,484 million.
There was a drawdown of R$ 566 million in December 2012 and another R$ 918 million was drawn down for investment purposes as required. Telemar
Norte Leste agreed a limit of R$ 2,431 and had drawn down £ 888 million by December 2012, leaving a remainder available for future drawdowns
totaling R$ 1,543. TNL PCS agreed a limit of R$ 1,143 and made a drawdown of R$ 412 million, and has a remaining limit of £ 731. Brasil Telecom
Celular agreed a facility of up to R$ 359 million and made a drawdown of R$ 133 million in December 2012.
- Credit facility agreed between Telemar Norte Leste and EDC: Telemar Norte Leste has a line of credit signed with Export Development Canada in July
2012 for US$ 200 million. No disbursement has been made at end-2012, so the full amount was available.
- Credit facility agreed between Telemar Norte Leste and EKN: In July 2011 Telemar Norte Leste arranged for a total of US$ 104 million, with
drawdowns of US$ 5 million in July 2011, US$ 8.5 million in November 2011, US$ 35.9 million in July 2012 and US$14 million in November 2012. The
remainder available for use is US$ 36.6 million.
In relation to other domestic-currency borrowings, 100% of amounted arranged has been disbursed.
h) significant changes to each item of financial statements
h.1) Comparison of operating results years ended December 31, 2012 and 2011 (Consolidated)
The following discussion of operating results is based on our consolidated financial statements prepared in accordance with IFRS. The discussion of
results from our business segments is based on financial information submitted for each of our business segments, as shown in the table below.
Our operating result was significantly influenced by the ownership reorganization on February 27, 2012, which included the absorption of Coari and TNL
and TMAR becoming a wholly owned subsidiary of Oi S.A.. Therefore, the 2012 results include the consolidated results of these companies as of February
27, 2012 and the 2011 results include the results from the former BrT.
Additionally, based on our strategic differential of integration and convergence, in 2012 Oi S.A. started to adopted a client-focused approach (residential,
personal and business/corporate mobility), so the discussions of our operating revenues are based on this new approach.
The tables below specify operating results for each of our segments and the reconciliation of these results with the consolidated income statement. Data
by segment has been compiled based on the same information used by senior management of Oi S.A. to allocate resources across business segments
and assess their performance. The performance of these segments is assessed and managed based on information prepared in accordance with IFRS and
reflected in the consolidated financial statements.
Year ended December 31, 2012
Landline and
data
communication
services
Net operating revenues ..................
R$ 18,117
Cost of goods sold and/or
(12,307)
services provided ...........................
Gross profit ................................... 5,810
Selling expenses ............................ (2,948)
General
and
administrative
(2.247)
expenses ....................................
Other
revenues
104
(expenses), net ...........................
Operating income (loss)
before
interest
and
R$ 719
taxes .........................................
Mobile
services
Other
(BRL mn)
Eliminations
Consolidated
R$ 10,983
R$ 1,066
R$ 4,997)
R$ 25,169
(5,909)
(469)
4,719
(13,966)
5,074
(2,078)
597
(450)
(278)
629
11,203
(4,847)
(666)
(166)
10
(3,069)
(111)
133
(88)
38
R$ 2,219
R$ 114
R$ 273
R$ 3,325
Landline and
data
communication
services
Net operating revenues ..................R$ 8,048
(4,087)
Gross profit ................................... 3,960
Selling expenses ............................
General
administrative
and
Mobile
services
Other
(BRL mn)
Eliminations
Consolidated
R$ 2,006
R$ 607
R$ 1,415)
R$ 9,246
(1,309)
(351)
1.161
(4,587)
697
256
(254)
4,659
(992)
(436)
(135)
402
(1,161)
(1,193)
(169)
(101)
19
(1,445)
Landline and
data
communication
services
Mobile
services
expenses ....................................
Other
revenues
(256)
(expenses), net ...........................
before
interest
and
R$ 1,519
taxes .........................................
Other
(BRL mn)
Eliminations
Consolidated
(44)
(20)
(166)
(486)
R$ 48
R$—
R$ 1
R$ 1,567
In the following discussion, references to increases or decreases in any period are made in relation to the corresponding previous period, unless
otherwise indicated by the context.
The table below shows the components of the consolidated income statement, with the percentage change on the same period of the previous year, for
the years ended December 31, 2012 and 2011.
Year ended December 31
Variation
2012
2011
%
(BRL mn except %s)
Net operating revenues ...........................................
Cost of goods sold and/or services provided ..............
Gross profit ...........................................................
Operating revenues (expenses)
Selling expenses .................................................
General and administrative expenses .....................
Other revenues (expenses), net ............................
Operating income (loss) before interest and
R$ 25,169
(13,966)
R$ 9,245
(4,587)
11,203
4,659
(4,847)
(3,069)
38
3,325
(1,161)
(1,445)
(486)
1,567
172.2
204.5
140.5
317.5
112.4
(107.8)
112.2
taxes..................................................................
Financial income ....................................................
Financial expenses .................................................
2,275
(4,491)
1.406
(1,478)
Net financial expenses, ..........................................
(2,216)
(72)
Income before taxes on net income ..........................
Income tax and social contribution ...........................
Net income ............................................................
1,109
(272)
R$ 837
1.495
(490)
R$ 1,006
61.8
203.9
2,977.8
(25.8)
(44.5)
(16.8)
Net operating revenues
Net operating revenues for the year ended December 31, 2012 increased by 172.2% to R$ 25,169 million against R$ 9,245 million in 2011, chiefly due to
consolidating results of TMAR with those of its subsidiaries as of February 27, 2012, this making for: (1) a 125.1% increase in net operating revenues
from our landline and data communication segment (2) a 447.5% increase in net operating revenues from the mobile segment and (3) a 75.7% increase
in net operating revenues from our "other" segment. Net operating revenues from inter-segment sales, which was eliminated on consolidating our
financial statements, increased by 253.1% in the year ended December 31, 2012.
Net operating revenues from landline and data communication segment
Net operating revenues from landline and data communication services increased by 125.1% for the year ended December 31, 2012, chiefly due to
consolidating TMAR results with those of its subsidiaries as of February 27, 2012, and particularly due to consolidating our Region I landline and data
communication revenues.
Net operating revenues from mobile segment
Net operating revenues from mobile services increased by 447.5% for the year ended December 31, 2012, chiefly due to consolidating TMAR results with
those of its subsidiaries as of February 27, 2012, and particularly due to consolidation of our mobile telephony revenues from regions I and III. Sales of
devices also contributed to the increase in net operating revenues from the mobile segment, which reached R$ 579 million as of December 31, 2012
against R$ 11 million in 2011, as a result of resuming sales of mobile devices in 2012 in line with the strategy of focusing on the high value segment.
Net operating revenues from "other" segment
Net operating revenues from the "other segment increased by 75.7% in the year ended December 31, 2012, chiefly due to consolidating TMAR results
with those of its subsidiaries as of February 27, 2012, and particularly due to the consolidation of our revenues from pay-TV in 2012. The effects of this
increase were partially offset by a reduction in revenues from Internet related to advertising and publicity content included in this segment.
The breakdown of net operating revenues by client is discussed below.
2012
Residential ............................................................
Personal mobility ....................................................
Business/Corporate ................................................
Other services........................................................
2011
(BRL mn except %s)
8,941
8,016
7,695
517
25,169
3,764
1,615
3,370
496
9,245
Variation %
137.5
396.3
128.3
4.2
172.2
Net operating revenues from residential clients
Residential client net operating revenues increased by 137.5% to R$ 8,941 million in 2012 from R$ 3,764 million in 2011, chiefly as a result of a 220.2%
increase in residential-client revenue generating units (RGUs), largely due to consolidating TMAR and its subsidiaries as of February 27, 2012, together
with consistent expansion in broadband and significant growth in pay-TV, through initiatives aimed at: (i) diminishing churn by retaining clients
(convergence, repositioning the portfolio and building loyalty), and (ii) leveraging sales of residential products with strong performance in expanding
channels, advertising campaigns and investment to expand broadband. Oi S.A. ended 2012 with 18.3 million residential RGUs comprising 12.5 million
landlines, 5.1 million broadband accesses, and 757,000 pay-TV clients.
Net operating revenues from personal mobility clients
Net operating revenues from personal mobility clients increased by 396.3% to R$ 8,016 million in 2012 from R$ 1,615 million in 2011, mainly due to a
472.3% increase in personal-mobility revenue generating units (RGUs), largely from the consolidation of TMAR and its subsidiaries as of February 27,
2012, and due to the significant increase in volume of gross additions (remodeling offerings and higher capillarity for channels), and reducing churn
(proactive matching of the best plans for clients based on analyzing consumer profiles). Oi S.A. ended 2012 with 46.3 million personal mobility RGUs of
whom 39.8 million were prepaid and 6.5 million postpaid clients.
Net operating revenues from business/corporate clients
Net operating revenues from business/corporate clients increased by 128.3% to R$ 7,695 million in 2012 from R$ 3,370 million in 2011, chiefly as a
result of a 166.8% increase in business/corporate client revenue generating units (RGUs), largely on the consolidation of TMAR and its subsidiaries as of
February 27, 2012, and on continuing the strategy of helping clients leverage their revenues and rationalize their costs by using technology innovatively.
From this point of view, the year's highlight was the launch of "Oi Smart Cloud” and "Oi Gestão”. These launches strengthen our strategy of being
increasingly present throughout the entire chain of telecom and IT services of our corporate clients. Oi S.A. ended 2012 with 9.0 million RGUs including
broadband services, landline and mobile telephony.
Cost of goods sold and/or services provided
Our cost of goods sold and/or services provided increased by 204.5% in the year ended December 31, 2012, to R$ 13,966 million against R$ 4,587
million in 2011, chiefly due to consolidation of TMAR results and its subsidiaries as of February 27, 2012 making for : (1) a 201.1% increase in cost of
goods sold and/or services provided for the landline segment (2) a 351.4% increase in cost of goods sold and/or services provided in the mobile service
segment and (3) a 33.6% increase in cost of goods sold and/or services provided for the "other" segment.
Of this landline segment cost, 22.6% of costs for the year ended December 31, 2012 and 13.4% for the same period of 2011 refer to (1) interconnection
fees paid by the landline segment for using Oi S.A.'s mobile network to complete landline/mobile calls and (2) fees paid by the landline segment for
services using dedicated lines for industrial applications (local acronym EILD). These costs have been eliminated from our consolidated financial
statements.
Of this mobile segment cost, 20.4% of costs for the year ended December 31, 2012 and 23.4% for the same period of 2011 refer to (1) interconnection
fees paid by mobile segment for using our landline network to complete mobile/landline connections and (2) fees paid by the mobile segment for services
using dedicated lines for industrial applications (local acronym EILD). These costs have been eliminated from the consolidated financial statements.
The table below shows components of cost of goods sold and/or services provided and the percentage variation from the corresponding period of the
previous year, for the years ended December 31, 2012 and 2011.
2012
2011
Variation %
(BRL mn except %s)
Interconnection.....................................................
Depreciation and amortization ................................
Network maintenance ............................................
Rental and insurance .............................................
Personal ...............................................................
Cost of devices and accessories ..............................
Concession agreement renewal charges ..................
Other costs of goods and/or services sold ................
R$ 3,915
3,933
2,031
1,293
577
510
121
1,586
R$ 1,711
843
687
504
375
24
49
394
128.8
366.5
195.6
156.5
53.9
2,025.0
146.9
302.5
Total costs of goods and/or services sold .................
R$ 13,966
R$ 4,587
204.5
Cost of goods sold and/or services provided in landline segment
Cost of goods sold and/or services provided for the landline segment increased by 201.1% for the year ended December 31, 2012, chiefly due to:

a 204.0% increase in interconnection costs to R$ 5,574 million in 2012 from R$ 1,834 million in 2011, chiefly due to the impact of consolidating
the results of TMAR and its subsidiaries as of February 27, 2012, which includes traffic in minutes used by our Region I clients when making calls
to clients of other mobile operators, for which we pay VUM interconnection fees ;

a 304.6% increase in depreciation and amortization costs to £ 2,460 million in 2012 against R$ 608 million in 2011, mainly due to consolidating
results of TMAR and its subsidiaries as of February 27, 2012, and the effects of depreciation of capital gains on fixed and intangible assets
recognized on acquisition of control, at the time of BrT, which were incorporated by Oi S.A. in the corporate reorganization on February 27, 2012;

a 191.6% increase in network maintenance costs to R$ 1,829 million in 2012 from R$ 627 million in 2011, chiefly due to the impact of
consolidating results of TMAR and its subsidiaries as of February 27, 2012, especially due to the larger number of landline sites in Region I, and
increased network maintenance costs from continuing our plans to expand, modernize and improve network quality;

a 101.0% increase in lease and insurance costs to R$ 1,314 million in 2012 from R$ 654 million in 2011, chiefly due to the impact of
consolidating results of TMAR and its subsidiaries as of February 27, 2012, and increased costs of sharing infrastructure for dedicated lines for
industrial applications (local acronym EILD), rights of way, and leases on towers continuing our plan to expand and modernize our network;

a 294.9% increase in personnel costs to R$ 407 million in 2012 from R$ 103 million in 2011, chiefly due to the impact of consolidating results of
TMAR and its subsidiaries as of February 27, 2012, increased headcount of firms carrying out network maintenance on continuing our plan to
expand and modernize our network, and collective bargaining agreements renegotiated in late 2011; and

a 176.0% increase in other costs of goods and/or services sold to £ 721 million in 2012 compared to R$ 261 million in 2011, chiefly due to the
impact of consolidating results of TMAR and its subsidiaries as of February 27 2012, which includes higher expenses for electricity and materials
used in our network due to the larger number of sites in Region I, and concession charges at 2% of annual net revenue.
Gross profit from our landline segment increased by 46.7% to R$ 5810 million in the year ended December 31, 2012 from R$ 3,960 million in the same
period of 2011. As a percentage of net operating revenues from this segment, gross profit fell to 32.1% in the year ended December 31, 2012 from
49.2% in the same period of 2011.
Cost of goods sold and/or services provided in mobile phone segment
Cost of goods sold and/or services provided for the mobile segment increased by 351.4% for the year ended December 31, 2012, chiefly due to:

a 326.8% increase in interconnection costs to R$ 2,244 million in 2012 from R$ 525 million in 2011, chiefly due to the impact of consolidating
results of TMAR and its subsidiaries as of February 27, 2012, which includes traffic of minutes used by our Region I and III clients to make
calls to other mobile operators ‘clients, for which we pay VUM interconnection fees, and charges for use of the network for our clients sending
messages to other mobile operators;

a 528.9% increase in depreciation and amortization to £ 1,459 million in 2012 from R$ 232 million in 2011, mainly due to consolidation of
results of TMAR and its subsidiaries as of February 27, 2012, especially the larger number of mobile sites in regions I and III, and the effects
of depreciation of capital gains on fixed and intangible assets recognized on acquisition of control, at the time, from BrT, which were absorbed
by Oi S.A. in the corporate reorganization on February 27, 2012;

a 2,027.7% increase in the cost of equipment and accessories to R$ 507 million in 2012 from R$ 24 million in 2011, chiefly due to the impact
of consolidating results of TMAR from February 27, 2012, and higher sales of devices, chiefly due to Oi S.A. reintroducing its sales of mobile
devices in 2012, in line with its strategy of focusing on the high-value client segment;

a 450.8% increase in network maintenance costs to R$ 326 million in 2012 from R$ 59 million in 2011, chiefly due to the impact of
consolidating the results of TMAR and its subsidiaries as of February 27, 2012, especially the larger number of mobile sites in regions I and
III, and increased network maintenance expenses under our plan to continue expanding, modernizing and improving network quality, and

a 463.2% increase in other costs of goods and/or services sold to £ 755 million in 2012 from R$ 134 million in 2011, chiefly due to the
impact of consolidating results of TMAR and its subsidiaries as of February 27 2012, which includes substantially increased expenses for Fistel
maintenance and activation fees due to the increased number of clients and mobile sites in Regions I and III.
Our mobile segment's gross profit increased by 628.0%, from R$ 5,074 million in the year ended December 31, 2012 from R$ 697 million in the same
period of 2011. As a percentage of this segment's net operating revenues, gross earnings increased to 46.2% in the year ended December 31, 2012 from
"Other" segment
Cost of goods sold and/or services provided for the "other" segment increased by 33.6% in the year ended December 31, 2012, chiefly due to the impact
of consolidating TMAR results and those of its subsidiaries as of February 27, 2012 which includes increasing expensed for content (channels) for pay TV.
The effects of this increase were partially offset by lower personnel costs of our subsidiary that provides the call center service included in this segment.
Gross profit
As a result of the above, consolidated gross profit increased by 140.5% to R$ 11,203 million for the year ended December 31, 2012 from R$ 4,659
million in the same period of 2011. As a percentage of net operating revenues, gross profit decreased to 44.5% in the year ended December 31, 2012
from 50.4% in the same period of 2011.
Operating expenses
Selling expenses
Selling expenses increased by 317.6% for the year ended December 31, 2012, to R$ 4,847 million from £ 1,160 million in 2011, chiefly due to
consolidating results of TMAR and its subsidiaries as of February 27, 2012, making for: (1) a 197.1% increase in sales expenses for landline and data
communication (2) a 376.9% increase in sales expenses for the mobile segment and (3) a 233.8% increase in sales expenses of the "other" segment.
Landline and data communication segment
Selling expenses for landline and data communication increased by 197.1% in the year ended December 31, 2012, chiefly due to:

a 141.3% increase in call-center expenses to R$ 820 million in 2012 from R$ 340 million in 2011, chiefly due to the impact of consolidating
results of TMAR and its subsidiaries as of February 27, 2012, which concentrates expenses paid for call centers connected with related company
Contax that serves our landline clients in Region I (Region II by the wholly owned subsidiary BrT Call Center).

a 456.1% increase in sales commission expenses to R$ 644 million in 2012 from R$ 116 million in 2011, chiefly due to the impact of
consolidating results of TMAR and its subsidiaries as of February 27, 2012, and the increase in commissions paid chiefly for sales of the "Oi Conta
Total" services package and "Oi Velox" internet service ;

a 237.5% increase in personnel expenses to R$ 402 million in 2012 from R$ 119 million in 2011, chiefly due to the impact of consolidating results
of TMAR and its subsidiaries as of February 27, 2012, increased headcount for sales support, and as a result of renegotiated end-2011 collective
bargaining agreements ; and

a 241.5% increase in postage and invoicing expenses to R$ 417 million in 2012 from R$ 122 million in 2011, chiefly due to the impact of
consolidating results of TMAR and its subsidiaries as of February 27, 2012, which includes spending on these services due to the higher number
of clients in Region I.
As a percentage of this segment's net operating revenues, selling expenses increased to 16.3% in the year ended December 31, 2012 from 12.3% in the
same period of 2011.
Mobile segment
Mobile segment selling expenses increased by 376.9% in the year ended December 31, 2012, chiefly due to:

a 330.9% increase in sales commission expenses to R$ 918 million in 2012 from R$ 213 million in 2011, chiefly due to the impact of
consolidating results of TMAR and its subsidiaries as of February 27, 2012, and the increased commissions paid chiefly for the sale of the Oi Conta
Total package of services and sales commissions paid in the post-paid segment, particularly on sales to clients in Regions I, II and III.

a 310.7% increase in the allowance for loan losses to R$ 266 million in 2012 from R$ 65 million in 2011, chiefly due to the impact of
consolidating results of TMAR and its subsidiaries as of February 27 2012, which includes doubtful debt provisions for mobile client overdue bills
in Regions I and III;

an 880.4% increase in call center expenses to R$ 260 million in 2012 from R$ 27 million in 2011, chiefly due to the impact of consolidating
results of TMAR and its subsidiaries as of February 27, 2012, which concentrates expenses paid for call centers with related company Contax that
serves our mobile clients in Regions I and III (Region II is served by the wholly owned subsidiary BrT Call Center) and

a 449.7% increase in advertising and marketing expenses to R$ 328 million in 2012 from R$ 60 million in 2011, chiefly due to the impact of
consolidating results of TMAR and its subsidiaries as of February 27, 2012, and increased expenses for advertising campaigns to support our main
mobile services in Regions I, II and III;
"Other" segment
"other" segment selling expenses increased by 233.7% in the year ended December 31, 2012 chiefly due to the impact of consolidating results of TMAR
and its subsidiaries as of February 27, 2012 which includes increased expenses for content (channels) for pay-TV and commission expenses on sales
related to this service.
As a percentage of net operating revenues of this segment, selling expenses fell to 18.9% in the year ended December 31, 2012 against 21.7% in the
same period of 2011.
General and administrative expenses
General and administrative expenses increased by 112.5% in the year ended December 31, 2012, to R$ 3,069 million from £ 1,445 million in 2011,
chiefly due to consolidating results of TMAR and its subsidiaries as of February 2, 2012 making for: (1) an 88.3% increase in landline and data
communication general and administrative expenses (2) a 294.8% increase in mobile segment general and administrative expenses and (3) a 63.3%
increase in general and administrative expenses for the "other" segment.
Landline and data communications general and administrative expenses increased by 88.3% in the year ended December 31, 2012, chiefly due to:

a 71.0% increase in personnel expenses to R$ 443 million in 2012 from R$ 259 million in 2011, chiefly due to the impact of consolidating results
of TMAR and its subsidiaries as of February 27, 2012 and renegotiated collective bargaining agreements at end-2011;

a 58.5% increase in expenses for outsourced services to R$ 1,192 million in 2012 from R$ 752 million in 2011, chiefly due to the impact of
consolidating results of TMAR and its subsidiaries as of February 27, 2012; and

a 175.1% increase in depreciation and amortization to R$ 435 million in 2012 from R$ 158 million in 2011, chiefly due to the impact of
consolidating results of TMAR and its subsidiaries as of February 27, 2012;
As a percentage of this segment's net operating revenues, general and administrative expenses fell to 12.4% in the year ended December 31, 2012 from
Mobile segment
The mobile services segment's general and administrative expenses increased by 294.8% in the year ended December 31, 2012, chiefly due to:

a 318.6% increase in personnel expenses to R$ 105 million in 2012 from R$ 25 million in 2011 chiefly due to the impact of consolidating results
of TMAR and its subsidiaries as of February 27, 2012 and renegotiated collective bargaining agreements at end-2011; and

a 157.2% increase in expenses for outsourced services to R$ 304 million in 2012 from R$ 118 million in 2011, chiefly due to the impact of
consolidating results of TMAR and its subsidiaries as of February 27, 2012.
As a percentage of net operating revenues of this segment, general and administrative expenses fell to 6.1% in the year ended December 31, 2012 from
"Other" segment
The "other" segment's general and other administrative expenses increased by 63.3% in the year ended December 31, 2012, chiefly due to the impact of
consolidating results of TMAR and its subsidiaries as of February 27, 2012.
Other revenues (expenses), net
Other operating revenues
"Other" operating revenues increased by 256.2% to R$ 1,996 million in 2012 from R$ 560 million in 2011, chiefly due to the impact of consolidating
results of TMAR and its subsidiaries as of February 27, 2012. The main increases related to: (i) a 1718.6% increase in revenue from sale of assets to R$
390 million in 2012 from R$ 21 million in 2011, which includes the sale of towers by mobile phone companies, in line with our strategy of monetizing
non-strategic assets, (ii) a 342.4% increase in revenue from recovery of taxes and expenses recovered to R$ 693 million in 2012 from R$ 157 million in
2011 and (iii) a 230.8% increase in revenues from operational infrastructure leases and others to R$ 398 million in 2012 from R$ 120 million in 2011,
which includes sharing infrastructure with other operators, such as leases of towers and poles, as a result of increased demand for these services from
other operators.
Other operating expenses
Other operating expenses increased by 87.1% to R$ 1,958 million in 2012 from R$ 1,046 million in 2011, chiefly due to the impact of consolidating
results of TMAR and its subsidiaries as of February 27, 2012. The main increases related to: (i) a 1311.3% increase in expenses for employee and
management profit sharing to R$ 387 million in 2012 from R$ 27 million in 2011, (ii) a 189.7% increase in tax expenses to R$ 894 million in 2012 from
R$ 309 million in 2011.
Operating income (loss) before interest and taxes
Due to the above, consolidated operating income before net interest and taxes increased by 112.1% to R$ 3,325 million in the year ended December
31, 2012 from R$ 1,567 million in the same period of 2011. As a percentage of net operating revenues, operating income before net interest and taxes
fell to 13.2% in the year ended December 31, 2012 from 16.9% in the same period of 2011.
The landline and data communication segment's operating income before net interest and taxes fell 52.6% from R$ 719 million in the year ended
December 31, 2012 from R$ 1,519 million in the same period of 2011. As a percentage of net operating revenues, this segment's operating income
before net interest and taxes fell to 4.0% in the year ended December 31, 2012 from 18.9% in the same period of 2011.
Mobile segment
The mobile service segment's operating income before net interest and taxes increased by 4489.1% to R$ 2,220 million in the year ended December 31,
2012 from R$ 48 million in the same period of 2011. As a percentage of net operating revenues, this segment's operating income (loss) before net
interest and taxes increased to 20.2% in the year ended December 31, 2012 from 2.4% in the same period of 2011.
Net financial expenses,
Financial income
Financial income increased by 61.8% to R$ 2,275 million in 2012 from R$ 1,406 million in 2011, chiefly due to the impact of consolidating results of
TMAR and its subsidiaries as of February 27, 2012. The main increases are related to: (i) R$ 650 million from exchange-rate variation on foreign
investments relating chiefly to exchange-rate gains on financial investments on investment in foreign currency of funds from the Senior Notes issues, (ii)
R$ 99 million of dividend income received relating to investment in the related party Portugal Telecom and (iii) a 34.2% increase in income from financial
investments to R$ 514 million in 2012 from R$ 384 million in 2011.
Financial expenses
Financial expenses increased by 203.9% to R$ 4,491 million in 2012 from R$ 1,478 million in 2011, chiefly due to the impact of consolidating results of
TMAR and its subsidiaries as of February 27, 2012, which led to a 491.3% increase in expenses related to loans and financing to R$ 3,201 million in 2012
from R$ 541 million in 2011.
Income tax and social contribution on net profit
The combined nominal rate of income tax and social contribution for the years ended December 31, 2012 and 2011 was 34%. The income tax and social
contribution expense decreased 44.5% to R$ 272 million in 2012 from R$ 490 million in 2011. The effective tax rate was 24.7% in 2012 and 33.0% in
2011. The table below shows a reconciliation of the combined rate of income tax and social contribution with the effective tax rate for each period.
2012
2011
Combined rate of income tax and social contribution ....................
Tax effects on tax incentives ....................................................
Tax effects on interest on shareholders’ equity ............................
Tax effects of permanent (additions) exclusions ..........................
Tax effect of offsetting tax losses and negative base ...................
Tax effect of deferred tax assets not recognized...........................
Tax effect of deferred tax assets ................................................
34.0%
(14.1)
0.4
1.5
-3.7
(0,8)
34.0%
--(1,0)
--0.0
Effective rate ...........................................................................
24.7%
33.0%
The effective tax rate for the year ended December 31, 2012 was 24.7% due largely to the tax incentive relating to operating income recognized in the
earnings of the TNL PCS subsidiary in the context of obtaining eligibility certification (laudo constitutivo) issued by SUDENE that reduced our actual tax
rate by 14.1%.
The actual tax rate for the year ended December 31, 2011 was 33.0% due to the tax effect of non-taxable income and non-deductible expenses, which
reduced the effective tax rate by 1.0%.
Net income
Net income fell 16.8% to R$ 837 million in the year ended December 31, 2012 from R$ 1,006 million in the same period of 2011. As a percentage of net
operating revenues, net income fell 3.3% in the year ended December 31, 2012 from 10.9% in the same period of 2011.
h.2) Comparison of operating results for the years ended December 31, 2011 and 2010 (consolidated)
The following discussion of operating results is based on our consolidated financial statements prepared in accordance with IFRS. The discussion of
results from our business segments is based on financial information submitted for each of our business segments, as shown in the table below.
The tables below specify the operating results of each of our segments and the reconciliation of these results with the consolidated income statement.
These segment data were prepared based on the same information used by our senior management to allocate funds across segments and assess their
performance. The performance of these segments is assessed and managed based on information prepared in accordance with IFRS reflected in the
unaudited interim consolidated financial statements.
Landline and
data
communication
services
Net operating revenues ..................R$ 8,048
(4,087)
Gross profit ................................... 3,960
(992)
General
and
administrative
expenses .................................... (1,193)
Other
revenues
(256)
(expenses), net ...........................
before
interest
and
R$ 1,519
taxes .........................................
Mobile
services
Other
(BRL mn)
Eliminations
Consolidated
R$ 2,006
R$ 607
R$ 1,415)
R$ 9,246
(1,309)
(351)
1,161
(4,587)
697
256
(254)
4,659
(436)
(135)
402
(1.161)
(169)
(101)
19
(1,445)
(44)
(20)
(166)
(486)
R$ 48
R$—
R$ 1
R$ 1,567
Landline
and data
communicat
ion services
Mobile
services
Other
(BRL mn)
Eliminatio
ns
Consolidat
ed
Landline
and data
communicat
ion services
Net operating revenues .................. R$ 8,893
Gross profit ...................................
Mobile
services
Other
(BRL mn)
Eliminatio
ns
Consolidat
ed
R$ 1,937
R$ 629
R$ 1,196)
R$ 10,263
(4,015)
(1,379)
(323)
985
(4,732)
4,878
558
306
(211)
5,531
(859)
(403)
(125)
361
(1,025)
(173)
(163)
66
(1,.539)
(17)
(10)
(213)
(508)
R$ 34)
R$ 9
R$ 4
R$ 2,460
General
and
administrative
(1,270)
expenses ....................................
Other revenues (expenses),
(268)
net ............................................
Operating income (loss) before
R$ 2,481
interest and taxes........................
In the following discussion, references to increases or decreases in any period are made in relation to the corresponding previous period, unless
otherwise indicated by the context.
The table below shows components of the consolidated income statement and their percentage variations on the same period of the previous year, for
the years ended December 31, 2011 and 2010.
Variation
2011
2010
%
(BRL mn except %s)
Cost of goods sold and/or services provided ..............
Gross profit ...........................................................
Operating revenues (expenses)
Selling expenses .................................................
General and administrative expenses .....................
R$ 9,245
(4,587)
R$ 10,263
(4,732)
4,659
5,531
(1,161)
(1,445)
(1,025)
(1,539)
(9.9)
(3.1)
(15.8)
13.2
(6.1)
(486)
(508)
(4.3)
1,567
2,460
(36.3)
Financial expenses .................................................
1,406
(1,478)
979
(1,060)
Net financial expenses, ...........................................
(72)
(80)
(10.4)
Income before taxes on net income ..........................
Income tax and social contribution ...........................
Net profit ..............................................................
1,495
(490)
R$ 1,006
2,379
(408)
R$ 1,971
(37.1)
19.9
(49.0)
Other revenues (expenses), net ............................
Operating income (loss) before interest and
taxes..................................................................
Financial income ....................................................
43.5
39.5
A breakdown of gross operating revenues by category of service before deduction of ICMS and other indirect taxes and discounts and returns is discussed
below.
Gross operating revenues decreased 6.9% in the year ended December 31, 2011, chiefly due to (1) a 7.5% reduction in gross operating revenues from
our landline and data-communication segment (2) a 4.6% reduction in gross operating revenues from the "other" segment, the effects of which were
partially offset by a 7.4% increase in gross operating revenues from our mobile segment. Gross revenue from sales between segments, which was
eliminated in the consolidation of our financial statements, increased by 16.2% in the year ended December 31, 2011.
Net operating revenues decreased 9.9% in the year ended December 31, 2011, chiefly due to (1) a 9.5% reduction in net operating revenues from our
landline and data-communication segment (2) a 3.5% reduction in net operating revenues from the "other" segment, the effects of which were partially
offset by a 3.5% increase in net operating revenues from our mobile segment. Net operating revenues from sales between segments, which were
eliminated in the consolidation of our financial statements, increased by 18.4% in the year ended December 31, 2011.
Net operating revenues from landline and data-communication segment
The following table shows components of gross operating revenues and net operating income from the landline and data-communication segment with
the percentage variation on the same period of the previous year, for the years ended December 31, 2011 and 2010.
2011
Local landline services; ....................................................
2010
Variation %
(BRL mn except %s)
R$ 4,310
R$ 4,735
(9.0)
2011
Landline-mobile call services (VC:-1) .................................
Landline long distance services .........................................
Long distance landline/mobile (VC-2 and VC-3) ..................
Remuneration for use of landline network .........................
Data communication service ............................................
Public telephones ............................................................
Other landline services ....................................................
Total gross operating revenue ...........................
ICMS and other indirect taxes .................................
Discounts and returns ............................................
Net operating revenues .....................................
2010
Variation %
(BRL mn except %s)
1,373
1,392
344
484
5,681
156
638
14,377
(2,877)
(3,452)
R$ 8,048
1,569
1,732
424
501
5,781
194
610
15,546
(3,254)
(3,399)
R$ 8,893
(12.5)
(19.6)
(18.9)
(3.5)
(1.7)
(19.9)
4.7
(7.5)
(11.3)
1.2
(9.5)
Gross operating revenues from the landline segment declined 7.5% in the year ended December 31, 2011, chiefly due to:

a 9.0% decrease in local landline service gross operating revenues;

a 18.9% decrease in long distance landline/mobile gross operating revenues;

a 19.6% decrease in long distance landline/landlinegross operating revenues ;

a 12.5% decrease in local landline/mobile gross operating revenues ;

a 19.9% decrease in gross operating revenues from sales of prepaid cards for public telephones, and

a 1.7% decrease in gross operating revenues from data communications services
Gross operating revenue from local landline services;
Gross operating revenues from local landline services decreased 9.0% for the year ended December 31, 2011, chiefly due to a 6.4% decrease in gross
operating revenues from subscription and a 26.2% decreased in gross operating revenue from metered services.
Gross operating revenues from subscriptions fell mainly due to a 5.2% decrease in the number of lines in service from 7.1 million at December 31, 2010
to 6.8 million at December 31, 2011, which occurred basically due to the general trend in the Brazilian telecommunications sector to replace local
landline services by mobile telephony.
Gross operating revenues from metered services decreased chiefly due to a 29.0% fall in total minutes billed, which is the number of minutes of local
calls in excess of their monthly service plan baseline, mainly because of (1) a decrease in the number of lines in service, (2) our landline clients migrating
from our basic plans to alternative plans that offer more base minutes monthly, and (3) data traffic from local origins migration to mobile devices.
Gross operating revenue from landline/mobile local calls
Gross operating revenues from local landline to mobile services, which are charged the VC-1 rate, decreased 12.5% in the year ended December 31,
2011, chiefly due to a 13.4% decrease in total minutes of local fixed to mobile calls, due to (1) a 5.2% fall in the number of fixed-line clients, (2) data
traffic of local origin migrating to mobile devices, since users benefit from mobile carriers plans and promotions offering bonus minutes for mobile-tomobile services on their networks at lower rates per minute than fixed-to-mobile, and (3) the introduction of our "Oi fixed unlimited" (“Oi Fixo ilimitado”)
plan in the year ended December 31, 2011, which offers more minutes for fixed-to-mobile calls when calling Oi S.A. and TMAR mobile clients than our
other alternative plans.
Gross operating revenue from long-distance landline services;
Oi S.A. posted revenues from long-distance telephony services (1) originated and completed in a landline, (2) originated and completed on a mobile
device, or (3) originated on a mobile device and completed on a landline as revenue from long distance landline telephony services. Gross operating
revenues from long distance landline services decreased 19.6% for the year ended December 31, 2011, chiefly due to a 27.3% fall in the total number of
minutes of long distance calls, particular due to (1) our competitors aggressive discount campaigns that resulted in a decrease in the total number of
minutes of long distance calls (2) the effects of a 5.2% decrease in the number of landline clients, who are more likely to choose our long distance
landline services than clients of other providers of landline services, and (3) the introduction of our “Oi Fixo ilimitado” "Oi landline unlimited" plan in the
year ended December 31, 2011, through which we offer more minutes for long-distance landline-to-landline calls than our other alternative plans and
which led us to a decrease in the number of minutes recorded as long distance landline services.
Gross operating revenue from landline/mobile long-distance calls;
Oi S.A. posted revenues from long distance telephone services originating on a landline and completed in a device such as a cellular telephone as
revenue from long distance landline/mobile services. Gross operating revenues from long distance landline-to-mobile services, which are charged the VC2 or VC-3 rate, decreased 18.9% in the year ended December 31, 2011, chiefly due to an 18.2% decrease in the total number of minutes of landline-tomobile calls charged at the VC-2 or VC-3 tariff rate, particularly as a result of (1 our competitors') aggressive discount campaigns, and (2) the effects of
a 5.2% decrease in the number of landline clients, who are more likely to choose our landline services for long distance long-distance mobile-to-mobile
calls than clients of other providers of landline services.
Gross operating revenue as remuneration for use of landline network
Gross operating revenues from remuneration for the use of landline network decreased 3.5% for the year ended December 31, 2011, mainly due to the
decrease in gross operating revenues from interconnection fees received for completing calls on our landline network that originate from other landline
service providers' networks, chiefly as a result of a 5.2% decrease in the number of landline clients.
Of gross operating revenues from remuneration for the use of landline network, 21.2% in the year ended December 31, 2011 and 23.5% in the year
ended December 31, 2010 were interconnection fees paid by BrT Celular for use of our landline network to complete mobile/landline calls and were
eliminated in the consolidation of our financial statements.
Gross operating revenue from data communication services
Gross operating revenues from data communications services fell 1.7% in the year ended December 31, 2011, chiefly due to a 9.1% decrease in gross
operating revenues from ADSL subscriptions, the effects of which were offset by a 9.4% increase in gross operating revenues from the other data
communication services.
Gross operating revenues from ADSL subscriptions services decreased chiefly due to a 7.8% decrease in our average gross revenue per subscriber due to
aggressive promotions that we launched in the year ended December 31, 2011, in an effort to grow our broadband client base, the effects of which were
partly offset by a 5.3% increase in the average number of ADSL subscriptions to about 2,032,000 in the year ended December 31, 2011 from 1,953,000
in the same period of 2010. On December 31, 2011, our ADSL client base accounted for 29.8% of total landlines in service against 26.8% in 2010.
Gross operating revenues from other data communication services increased chiefly due to a 23.3% increase in gross operating revenues from IP
services, mainly due to increased demand for these services, particularly from public-sector entities, banks and means-of-payment companies.
Of gross operating revenues from data communications services, 16.0% and 8.5% for the years ended December 31, 2011 and 2010, respectively, were
fees paid by Brasil Celular and were eliminated in the consolidation of our financial statements.
Gross operating revenue from prepaid cards for public telephones.
Gross operating revenues from sales of prepaid cards for public telephones decreased 19.9% in the year ended December 31, 2011, chiefly due to a
decrease in the number of public phone credits due to a general trend toward less use of public telephone cards being replaced by mobile phones, as a
result of mobile carriers' promotions for the prepaid segment, including bonus calls and prepaid refills at promotional rates.
Deductions from gross revenue
ICMS and other indirect taxes
ICMS added and other taxes on landline services fell 11.3% in the year ended December 31, 2011, chiefly reflecting (1) altered revenue mix in our
landline and data-communications segment, given lower taxes or lower tax rates charged on some of our services such as interconnection services, and
(2) a fall in gross operating revenues from our landline segment.
Oi S.A. is required to contribute to the Fund for Universalization of Telecommunications Services (FUST) and the Fund for Technological Development of
Brazilian Telecommunications (FUNTTEL). In the case of FUST, the contribution is 1.0% of gross revenue from providing telecommunications services, net
of the following taxes (1) Social Integration Program (PIS), (2) Contribution to Social Security Financing (COFINS) and (3) Tax on Circulation of Goods
and Services (ICMS). The FUNTTEL contribution is 0.5% of gross revenue from providing telecommunications services, net of PIS, COFINS, and ICMS
taxes.
Discounts and returns
Discounts offered on our landline services are generally applied to data communication services, monthly subscription fees and intelligent network
services (such as caller ID, call transfer, and teleconferencing). Discounts on our landline and data communication services increased by 1.2% in the year
ended December 31, 2011, chiefly due to discounts offered on broadband services due to increased competition from other providers and as part of our
efforts to promote migration of our broadband clients to higher bandwidth subscriptions.
As a result of the above-mentioned, net operating revenues from landline and data communication services decreased 9.5%, from R$ 8,048 million in the
year ended December 31, 2011 to R$ 8,893 million in the same period of 2010.
Net operating revenues from mobile segment
The following table shows the components of mobile segment gross and net operating revenues with percentage variations on the same period of the
previous year, for the years ended December 31, 2011 and 2010.
2011
Mobile services .....................................................
Remuneration for use of mobile network .................
2010
Variation %
(BRL mn except %s)
R$ 1,658
1,204
R$ 1,490
1,134
12.2
6.1
2011
Sales of devices and accessories .............................
Total gross operating revenue ...........................
ICMS and other indirect taxes .................................
Discounts and returns ............................................
Net operating revenues .....................................
2010
Variation %
(BRL mn except %s)
16
2,877
(492)
(379)
R$ 2,006
53
2,677
(445)
(295)
R$ 1,937
(70.2)
7.5
10.5
28.6
3.5
Gross operating revenues from our mobile services segment increased by 7.5% for the year ended December 31, 2011, chiefly due to a 12.2% increase
in gross operating revenues from mobile services and a 6.1% increase in gross operating revenues from remuneration for use of our mobile network.
Gross operating revenue from mobile services
Gross operating revenues from mobile services increased by 12.2% in the year ended December 31, 2011, due chiefly to (1) a 5.9% increase in
subscription gross operating revenues and (2) a 21.0% increase in gross operating revenue from minutes billed (calls).
The average number of prepaid mobile clients increased by 11.5% to 7.1 million in the year ended December 31, 2011 from 6.3 million in the same
period of 2010 due to new promotions that include bonus minutes for long distance calls, data-service packages and credits for using SMS services. The
average number of postpaid mobile clients, including clients of our “Oi Controle” plans, increased by 2.4% to 1.05 million in the year ended December
31, 2011 from 1.025 million in the same period of 2010, mainly due to clients migrating from prepaid to postpaid. On December 31, 2011, prepaid
telephony clients accounted for 86.5%, while postpaid ones accounted for 13.5% of our mobile base. Our average monthly net revenue per user
(calculated based on the average revenue for each 12-month period divided by average monthly client base for the same period) decreased 1.9% to R$
21.0 in the year ended December 31, 2011 from R$ 21.4 in the same period of 2010.
Subscription gross operating revenues increased due chiefly to an increase in the postpaid subscriber base and the increased subscription price for clients
who have migrated to plans that offer more baseline minutes.
Gross operating revenue from minutes billed, which is the number of minutes of local calls used by prepaid service clients plus the number of local call
minutes used by postpaid service clients in excess of their monthly plan baseline, increased by 21.0%, due chiefly to (1) a 11.5% increase in the average
number of prepaid mobile clients, and (2) increased sales of prepaid promotional packages that enable clients to make mobile calls within our mobile
networks and send SMS messages to subscribers of any mobile service provider.
Gross operating revenue as remuneration for use of mobile network
Gross operating revenues from remuneration for use of the mobile network increased by 6.1% for the year ended December 31, 2011, chiefly due to a
10.4% increase in the number of mobile clients, which was partly offset by clients of other providers of mobile services benefiting from promotions deals
offered by these providers, which include packages of minute and SMS services for "on-net" traffic.
Of gross operating revenues from remuneration for use of the mobile phone network, 45.2% in the year ended December 31, 2011 and 40.8% in the
same period of 2010 was for interconnection fees paid by Oi S.A. for use of our mobile network to complete landline-to-mobile calls, which were
eliminated from the consolidation of our financial statements.
Deductions from gross revenue
ICMS and other indirect taxes
ICMS and other taxes on our mobile services increased by 10.5% in the year ended December 31, 2011, chiefly reflecting an increase in gross operating
revenues from mobile services.
Discounts and returns
The discounts offered in our mobile services usually include rebates on sales of prepaid phone cards, plus discounts on local landline and long distance
calls and intelligent network services (such as caller identity, call transfer, and teleconferencing). Discounts on our mobile services increased by 28.6% in
the year ended December 31, 2011, chiefly due to our strategy of bigger discounts to maintain and grow market share as price competition increases.
Due to the above mentioned, the mobile services segment net operating revenues increased by 3.5% to R$ 2,006 million in the year ended December
31, 2011 compared from R$ 1,937 million in the same period of 2010.
Cost of goods sold and/or services provided
The cost of goods sold and/or services provided decreased 3.1% in the period ended December 31, 2011, particularly due to a 5.1% decrease in the cost
of goods sold and/or services provided for mobile telephony, which was partially offset by a 1.8% increase in the cost of goods sold and/or services
provided in the landline segment.
Of the costs recorded by landline and data communication segment, 13.4% of the costs for the year ended December 31, 2011, and 4.7% of the costs
for the same period in 2010, refer to interconnection fees paid by the Company for using the mobile network of BrT Celular to operate landline/mobile
calls. These fees were eliminated upon consolidation of our financial statements.
Of the costs recorded by the mobile segment, 21.9% of the costs for the year ended December 31, 2011, and 23.4% of the costs for the same period in
2010, refer to (1) interconnection fees paid by BrT Celular for using the landline network of the Company to operate mobile/landline calls and (2) fees
paid by BrT Celular on EILD services. These fees were eliminated upon consolidation of our financial statements.
The table below shows the breakdown of costs of goods sold and/or services provided, as well as the percentage variation as from the corresponding
period of the previous year , for the years ended December 31, 2011 and 2010.
2011
2010
% Variation
(in millions of Reais, except percentages)
Interconnection.....................................................
Depreciation and amortization ................................
Network maintenance ............................................
Rent and insurance ...............................................
Personnel .............................................................
Cost of handsets and accessories ............................
Fee on renewal of concession agreements ................
Other costs of goods sold and/or services provided ...
R$1,711
843
687
504
375
24
49
394
R$1,982
807
616
471
335
48
57
416
(13.7)
4.4
11.4
7.0
12.0
(50.1)
(13.6)
(5.2)
Total cost of goods sold and/or services provided ......
R$4,587
R$4,732
(3.1)
Cost of goods sold and/or services provided in the landline segment
The cost of goods sold and/or services provided in the landline segment increased by 1.8% in the year ended December 31, 2011, particularly due to:

27.2% increase in rent and insurance, in the amount of R$654 million, in the year ended December 31, 2011, compared with R$514 million in
the same period in 2010, especially due to the increase in rental costs regarding physical spaces, rights of way and tower rentals;

11.7% increase, to R$627 million, in network maintenance costs in 2011 compared with R$562 million in 2010, especially due to the deployment
of the plan for improving network quality.
The effects of such decrease were partially offset by an 8.0% decrease in interconnection costs, to R$1,834 million, in the period ended December 31,
2011, compared to R$1,993 million in the same period in 2010, especially due to the reduction in landline/mobile and long-distance landline traffic.
Gross income from the landline segment dropped by 18.8%, to R$3,960 million in the period ended December 31, 2011 compared to R$4,878 million in
the same period in 2011. As a percentage of net operating revenues from this segment, gross income dropped by 49.2% in the year ended December
31, 2011, compared to 54.9% in the same period in 2010.
Cost of goods sold and/or services provided in the mobile segment
The cost of goods sold and/or services provided in the mobile segment dropped by 5.1% in the year ended December 31, 2011, especially due to (1) an
8.6% decrease in interconnection costs, to R$526 million, in the year ended December 31, 2011 compared to R$575 million in the same period in 2010,
especially in view of the reduction in landline/mobile and long distance landline/landline traffic; (2) a 50.1% decrease , to R$24 million, in the cost of
mobile handsets in the year ended December 31, 2011, compared to R$48 million in the same period in 2010, due to the drop in sales of more expensive
handsets , such as smartphones and (3) a 24.8% decrease, to R$34 million, in costs with third party services in the year ended December 31, 2011,
compared to R$45 million in the same period in 2010, especially as a result of our program for reduction of costs, concentrating the costs of third party
services in less suppliers.
Gross income from the mobile segment dropped by 24.9%, to R$697 million in the period ended December 31, 2011 compared to R$558 million in the
same period in 2010. As a percentage of net operating revenues in this segment, gross income increased by 34.7% in the year ended December 31,
2011, compared to 28.8% in the same period in 2010.
Gross income
In view of the foregoing, consolidated gross income decreased 15.8%, to R$4,659 million in the period ended December 31, 2011, compared to R$5,531
million in the same period in 2010. As a percentage of net operating revenues, gross income decreased by 50.4% in the year ended December 31, 2011,
compared to 53.9% in the same period in 2010.
Operating Expenses
Selling expenses
Selling expenses increased by 13.2% in the year ended December 31, 2011, especially due to the 15.5% increase in selling expenses from the landline
and data communication segment and the 8.2% increase in selling expenses from the mobile segment.
Selling expenses in the landline segment increased by 15.5% in the year ended December 31, 2011, especially due to:

the 17.2% increase in client services expenses, to R$340 million, in the year ended December 31, 2011, compared with R$290 million in the
same period in 2010, especially due to the renegotiation of some collective agreements entered into with our providers of client assistance
services, including the call center, which is included in another segment, as well as expenses relating to service quality campaigns held with the
purpose of supporting our broadband services;

the 54.6% increase, to R$119 million, in personnel expenses in the year ended December 31, 2011, compared with R$77 million in the same
period in 2010, especially due to the increase in the number of employees and the renegotiation of collective agreements in late 2010;

the 24.9% increase , to R$156 million, in expenses with third party services in the year ended December 31, 2011, compared with R$125 million
in the same period in 2010, especially due to the increase in commissions paid regarding sales of "Oi Velox” internet services; and

the R$26 million increase in expenses with materials in the year ended December 31, 2011, compared with R$3 million in the same period in
2010, especially due to the increase in the purchase of modems in view of the beginning of the campaign for free distribution of such devices to
mobile subscribers for the “Oi Velox” plan as from April 2011.
As a percentage of net operating revenues from this segment, selling expenses increased by 12.3% in the year ended December 31, 2011, compared to
9.7% in the same period in 2010.
Mobile segment
Selling expenses in the mobile segment increased by 8.2% in the year ended December 31, 2011, especially due to:

the 60.2% increase , to R$235 million, in expenses from third party services in the year ended December 31, 2011, compared to R$147 million in
the same period in 2010, especially due to (1) the increase in expenses from commissions on sales in the post-paid segment and in expenses
from commissions on sales regarding service packages of “Oi Conta Total”; (2) the increase in expenses relating to bonuses of promotional
minutes offered to pre-paid clients; and

the 36.8% increase, to R$60 million, in advertising and publicity expenses in 2011, compared with R$44 million in 2010, especially as a result of
the increase in expenses with advertising campaigns intended to support our primary mobile services, such as “Oi Vontade” and “Oi Cartão”, and
the our sponsoring of shows and other events, and use of other communication means to increase brand awareness regarding our services;
The effects of such increases were partially offset by (1) a 56.8% decrease, to R$27 million, in call center expenses in the year ended December 31,
2011, compared with R$61 million in the same period of 2010 (2) a 82.1% decrease, to 7 million, in expenses with materials in the year ended
December 31, 2011, compared to R$37 million in the same period of 2010.
As a percentage of net operating revenues from this segment, selling expenses increased by 21.7% in the year ended December 31, 2011, compared to
20.8% in the same period in 2010.
General and administrative expenses
General and administrative expenses decreased 6.1% in the year ended December 31, 2011, especially due to a 6.0% decrease in general and
administrative expenses of the landline segment and a 37.7% decrease in general and administrative expenses of the “other” segment.
General and administrative expenses in the landline and data communication segment decreased by 6.0% in the year ended December 31, 2011,
especially due to:

a 16.8% decrease, to R$351 million, in expenses from third party services in the year ended December 31, 2011, compared to R$422 million in
the same period of 2010, especially due to the drop in mailing and collection expenses due to changes in invoicing and collection procedures,
which included, among other, the suspension of sending of invoices by mail for collection of amounts past due for more than two months; and

a 17.1% decrease, to R$158 million, in depreciation and amortization expenses in the period ended December 31, 2011, compared with R$195
million in the same period in 2010, especially due to the increase in property and equipment for this segment, which was fully depreciated.
The effects from of these reductions were partially offset by (1) a 25.1% increase, to R$259 million, in personnel expenses in the year ended December
31, 2011, compared with R$207 million in the same period in 2010, especially due to the increase in the number of employees and salary adjustments,
as a result of the renegotiation of collective bargaining agreements in late 2010; and (2) an 8.2% increase, to R$218 million, in legal and advisory
expenses in the year ended December 31, 2011, compared with R$202 million in the same period in 2010, especially as a result of the increase in legal
and advisory expenses relating to corporate restructuring.
As a percentage of net operating revenues from this segment, general and administrative expenses increased by 14.8% in the year ended December 31,
Mobile segment
General and administrative expenses in the mobile segment decreased by 2.3% in the year ended December 31, 2011, especially due to:

a 44.5% decresae, to R$39 million, in expenses from third party services in the year ended December 31, 2011, compared with R$70 million in
the same period of 2010, especially due to the program for reduction of costs in this segment; and

a 35.8% decrease, to R$23 million, in depreciation and amortization expenses in the year ended December 31, 2011, compared with R$36
million in the same period of 2010.
As a percentage of net operating revenues from this segment, general and administrative expenses decreased by 8.4% in the year ended December 31,
Other segment
General and administrative expenses of the other segment of the Company decreased 37.7% in the year ended December 31, 2011, especially due to (1)
a 50.1% decrease, to R$33 million, in personnel expenses in the year ended December 31, 2011, compared with R$66 million in the same period in
2010, especially due to the decrease in the number of employees in our Internet business; and (2) a 35.4% decrease, to R$32 million, in third party
services in the year ended December 31, 2011, compared with R$49 million in the same period in 2010, especially due to a reduction in data processing
costs.
Other Operating Revenues, net
Other operating revenues
Other operating revenues increased by 6.9%, to R$560 million, in the year ended December 31, 2011, compared with R$524 million in the same period
of 2010, especially due to (1) recording of R$50 million in dividends in 2011; and (2) a 33.7% increase, to R$120 million, in infrastructure rent in 2011,
compared with R$90 million in 2010, especially due to the increase in the demand for these services by other service providers, as a result of the growth
in our client base. The effects of these factors were partially offset by a 60.3% decrease, to R$21 million, in revenues from sales of property and
equipment in 2011, compared with R$54 million in 2010.
Other operating expenses
Other operating expenses increased by 1.4%, to R$1,046 million, in the year ended December 31, 2011, compared with R$1,032 million in the same
period in 2010, especially due to:
 a 40.9% increase, to R$571 million, in net provisions in the year ended December 31, 2011, compared with R$405 million in the same period of
2010, especially as a result of (1) the reversal of R$140 million in 2010 regarding the provision for tax claims relating to the Value-added Tax
on Goods and Services (ICMS), due to a favorable court decision in the period, and (2) recording of the additional provision of R$26 million in
2011 regarding new labor and civil claims, and changes in estimates for some of these provisions.

a 11.7% increase, to R$309 million, in tax expenses in 2011, compared with R$276 million in 2010, especially as a result of the increase in PIS
and COFINS taxes on other revenues, particularly due to the increase in shareholders’ equity received from our subsidiaries.
The effects of these factors were partially offset by (1) a 72.7% decrease, to R$28 million, in expenses regarding the provision for profit sharing in 2011,
compared with R$103 million in 2010, especially as a result of the decline in the indices used for estimating this provision; and (2) a 74.2% decrease, to
R$28 million, in the write-off of property and equipment, and intangible assets in 2011, compared with R$83 million in 2010.
Operating income (loss) before financial income and taxes
In view of the foregoing, the consolidated operating income before financial income and taxes decreased 36.3%, to R$1,567 million in the period ended
December 31, 2011, compared to R$2,460 million in the same period in 2010. As a percentage of net operating revenues, operating income before
financial income and taxes decreased 17.0% in the year ended December 31, 2011, compared to 24.0% in the same period in 2010.
Operating income before financial income and taxes in the landline segment decreased 38.8%, to R$1,519 million in the period ended December 31,
2011, compared to R$2,481 million in the same period in 2010. As a percentage of net operating revenues, operating income before financial income and
taxes in this segment decreased 18.9% in the year ended December 31, 2011, compared to 27.9% in the same period in 2010.
Mobile segment
Operating income before financial income and taxes in the mobile segment increased by 241%, to R$48 million in the period ended December 31, 2011,
compared to the loss of R$34 million in the same period in 2010. As a percentage of net operating revenues, operating income (loss) before financial
income and taxes in this segment increased by 2.4% in the year ended December 31, 2011, compared to 1.7% in the same period in 2010.
Net financial expenses
Financial revenues
Financial revenues increased by 43.5%, to R$1,046 million, in the year ended December 31, 2011, compared with R$979 million in the same period in
2010, especially due to:

a 359.1% incresae, to R$345 million, in interest rates and monetary variation on other assets in the year ended December 31, 2011, compared
with R$75 million in the same period in 2010, especially due to the positive variation in exchange rates of financial investments in foreign
currency, relating to funds from the issuance of Senior Notes remunerated at 9.75% and maturing in 2016, held before the use of these funds;

a 33.9% increase, to R$384 million, in earnings from financial investments in the year ended December 31, 2011, compared with R$287 million
in the same period in 2010, basically as a result of the increase in the average value of our financial investments.

a 29.7% increase, to R$307 million, in interest rates and positive monetary variation on credits receivable from related parties in the year ended
December 31, 2011, compared with R$236 million in the same period of 2010, especially regarding the interest rates and monetary variation
accumulated on debentures issued by TMAR.
Financial expenses
Financial expenses increased by 39.5%, to R$1,478 million, in the year ended December 31, 2011, compared to R$1,060 million in the same period in
2010, especially due to (1) a 73.9% increase, to R$474 million, in interest rates and monetary variation on other liabilities in the year ended December
31, 2011, compared with R$273 million in the same period in 2010, especially as a result of (A) R$122 million exchange variation loss on financial
investments in foreign currency arising from the issuance of Senior Notes remunerated at 9.75%; and (B) R$42 million in monetary restatement based
on the Selic rate regarding the tax financing program (2) reversal, in 2011, of estimated monetary adjustments of court deposits in the amount of R$199
million.
Income tax and social contribution on net income
The combined nominal rate for income tax and social contribution for the years ended December 31, 2011 and 2010 was 34%. Income tax and social
contribution expenses decreased 19.9%, to R$490 million, in the year ended December 31, 2011, compared to R$408 million in the same period in 2010.
The effective tax rate was 33.0% in the year ended December 31, 2011, and 17.1% in the same period in 2010. The table below shows the reconciliation
of the combined tax rate on income tax and social contribution with the effective rate for each period.
2011
2010
Combined tax rate for income tax and social contribution ..............
Tax effects on interest on shareholders’ equity ............................
Tax effects from permanent exclusions (additions) ......................
Tax effects from the offset of tax losses and negative base ...........
Tax effect from non-recorded deferred tax assets ........................
Tax effect from deferred tax assets ...........................................
34.0%
-(1.0)
--0.0
34.0%
(5.2)
(5.2)
(1.0)
0.2
(5.7)
Effective tax rate .....................................................................
33.0%
17.1%
The effective tax rate for the year ended December 31, 2011 was 33.0% as a result of tax effects of non-taxable income and non-deductible expenses,
which caused a 1.0% reduction in the effective tax.
The effective tax rate in the period ended December 31, 2010 was 17.1%, especially due to: tax effects on interest on shareholders’ equity, which
reduced the effective rate by 5.2%; tax effects of non-taxable income and non-deductible expenses, which reduced the effective rate by 5.2%; tax
effects of the offsetting of tax losses and negative social contribution base, which reduced the effective rate by 1.0%; and tax effects on deferred tax
assets, which reduced the effective rate by 5.7%.
Net income
Net income decreased 49.0%, to R$1,006 million in the period ended December 31, 2011, compared to R$1,971 million in the same period in 2010. As a
percentage of net operating revenues, net income decreased by 10.9% in the year ended December 31, 2011, compared to 19.2% in the same period in
2010.
h.3) Comparison between equity balances as of December 31, 2012 and December 31, 2011 and 2010 (consolidated)
2012
2011
Consolidated, in millions of
reais, except percentages
2012 x
2011 x
2010
2011
2010
(%)
(%)
ASSETS
Current assets
21,145 12,245
8,487
72.7
44.3
Cash and cash equivalents
4,413
6,005
3,217
-26.5
86.7
Financial investments
2,426
1084
832
123.8
30.3
640
7
-
9,042.9
7,019
2,010
2,070
249.2
-2.9
-7.1
Derivative financial
instruments
Accounts Receivable
Inventories
385
13
14
2,861.5
Current taxes recoverable
1,727
353
335
389.0
5.4
Other taxes
1,557
783
417
98.9
87.8
Court deposits
Assets relating to pension
funds
Other assets
Non-current assets
2,068
1,651
1,384
25.3
9
50
-
-82.0
901
289
218
211.8
56,646 19,419
19.3
32.6
18,399
202.8
5.5
-
2,218
1,911
-
16.1
64
13
-
392.3
-
5,277
-
-
4,076
4,982
25.1
-5.6
Other taxes
738
179
173
312.3
3.5
Financial assets available for
sale
906
-
-
-
-
9,723
4,955
4,266
96.2
16.2
Assets relating to pension
funds
101
143
93
-29.4
53.8
Assets held for sale
113
-
-
-
-
Other assets
318
42
39
657.1
7.7
Investments
80
8
5
912.5
60
Property and equipment
24,819
5,794
5,317
328.4
9
Intangible assets
15,359
1,085
1,318
1,315.6
-17.6
77,791 31,664
26,886
152.5
17.8
Credit with related parties
instruments
Deferred taxes recoverable
Court deposits
TOTAL ASSETS
349
LIABILITIES
Current liabilities
17,067
8,619
6,690
98.0
28.8
774
130
172
495.4
-24.4
Suppliers
4,659
1,841
1,636
153.1
12.5
Loans and Financing
3,114
1,144
1044
172.2
9.6
309
26
71
1,088.5
-63.4
Salaries, social charges and
benefits
instruments
Current taxes payable
1,066
179
197
495.5
-9.1
Other taxes
2,248
1445
856
55.6
68.8
626
308
569
103.2
-45.9
1,059
132
184
702.3
-28.3
100
39
35
156.4
11.4
1,569
1,283
1.237
22.3
3.7
104
78
78
33.3
0
1,439
2,014
611
-28.6
229.8
40,897 12,456
8,859
245.6
40.6
109.6
Dividends and interest on
shareholders' equity
Authorizations and
concessions payable
Tax refinancing program
Provisions
Provision for pension funds
Other liabilities
Non-current liabilities
Loans and Financing
30,233
6,962
3,321
334.3
instruments
205
-
-
-
Deferred taxes
234
-
11
-
-100
Other taxes
2,239
503
693
345.1
-27.4
Authorizations and
concessions payable
1,099
544
573
102.0
-5.1
985
407
395
142.0
3
2.4
Provisions
4,851
3,132
3,060
54.9
Provision for pension funds
480
546
575
-12.1
-5
Other liabilities
571
362
231
58.0
56.7
19,827 10,589
11,337
87.2
-6.6
Shareholders' equity
Capital stock
Cost from issuance of shares
Capital reserves
Profit reserves
Treasury shares
7,309
3,731
3,731
95.9
0
-57
-
-
-
-
13,730
4,368
5,870
214.3
-25.6
384
891
1886
-56.9
53.3
-2,104
-150
-150
1,302.7
0
Other comprehensive income
Capital transactions
Additional dividends proposed
Minority interest
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
140
-
-
-
-
4
-
-
-
-
421
1749
-
-75.9
-
-
-
-
-
-
77,791 31,664
26,886
152.5
17.8
The comparison between the equity balances of the Company was significantly influenced by the corporate restructuring of the group, which took place
on February 27, 2012, and included the mergers of Coari and TNL, and the transformation of TMAR into a wholly-owned subsidiary of the Company.
Accordingly, the equity balances for 2012 comprise the consolidated equity balances of said companies as from February 27, 2012, while the equity
balances for 2011 include the equity balances of former BrT (current "Oi S.A." or "Company").
ASSETS
Cash, cash equivalents and financial investments
The cash, cash equivalents and financial investments account amounted to R$6,903 million as of December 31, 2012, down by R$199 million or 2.8%
compared with the same period in 2011. This performance was especially due to cash from operational activities, in the amount of R$3,859 million;
funding net of costs and payment of principal regarding loans, financing and derivatives, in the amount of R$2,087; and cash and cash equivalents
purchased upon the merger and worth R$4,930, which were offset against the following disbursements: (i) payment of dividends and interest on
shareholders’ equity (R$2,405 million), (ii) reimbursement and bonus shares(R$3,164 million), (iii) court deposits net of redemptions (R$1,662 million)
and (iv) acquisition of property and equipment and intangible assets (R$5,330 million). In turn, financial investments in exclusive investment funds
increased by R$1,324 million in 2012 compared with the previous year.
The cash, cash equivalents and financial investments account amounted to R$7,102 million as of December 31, 2011, up by R$3,053 million or 75.4%
compared with the same period in 2010. This performance was especially due to funding transactions (loans and financing) net of costs in the amount of
R$4,587 million for the period, which were offset against the following payments: (i) principal of loans and financing, debentures and derivatives in the
amount of R$1,096 million, and (ii) dividends and interest on shareholders’ equity in the amount of R$462 million.
Derivative financial instruments – Current and Non-current Assets
The financial instruments and derivative account amounted to R$989 million as of December 31, 2012, up by R$982 million against the same period in
2011. This increase was particularly due to the corporate restructuring that took place on February 27, 2012.
Accounts receivable
As of December 31, 2012, accounts receivable totaled R$7,019, up by R$5,009 million or 249.2% against the same period in 2011, due to the increase
by R$3,550 million in services invoiced and R$1,068 million in services to be invoiced, in addition to R$557 million from handsets and accessories sold,
especially due to the consolidation of TMAR and its subsidiaries as from February 27, 2012.
Accounts receivable totaled R$2,010 million as of December 31, 2011, down by R$60 million or 2.9% against the same period in 2010. The principal
reason for this variation was the decrease by R$36 million in service accounts to be invoiced and increase by R$17 million in the provision for doubtful
debts.
Current taxes recoverable
Current taxes recoverable showed a balance of R$1,727 million as of December 31, 2012, an increase of R$1,374 million or 388.7% in relation to the
same period in 2011. This variation is made up of an R$880 million increase in the amount of income tax and social contribution on income recoverable
and a R$494 million increase in withholding income tax and social contribution, which for the most part resulted from the consolidation of TMAR and its
subsidiaries as from February 27, 2012.
The current taxes recoverable account showed a balance of R$353 million as of December 31, 2011, an increase of R$18 million or 5.4% in relation to
the same period in 2010, due largely to the R$35 million increase in the amount of withholding tax, which was partially offset by the R$16 million
reduction in the amount of social contribution and income tax recoverable.
Other taxes - current and non-current assets
The other taxes account showed a balance of R$2,295 million as of December 31, 2012, an increase of R$1,333 million in relation to the same period in
2011, due to the R$1,104 million increase in the amount of ICMS recoverable and the R$112 million increase in the amount of Pis and Cofins
recoverable, largely as a result of the consolidation of TMAR and its subsidiaries as from February 27, 2012.
Deferred taxes recoverable
The deferred taxes recoverable account showed a balance of R$4,076 million on December 31, 2012, a decrease of R$906 million or 18.2% in relation to
the same period in 2011. Basically, this variation is made up of an R$1,292 million increase, of which R$491 million refer to income tax and social
contribution on temporary differences, R$364 million refer to income tax on fiscal losses and R$270 million refer to social contribution on temporary
differences, which, for the most part, resulted from the consolidation of TMAR and its subsidiaries as from February 27, 2012, and of a R$2,198 million
decrease resulting from the reclassification to non-current liabilities of the amounts of deferred income tax and social contribution verified under the form
of tax benefit resulting from the premiums paid on the Company’s acquisition as recorded by the companies that were consolidated as a result of the
Corporate Restructuring that took place over the course of 2009.
The deferred taxes recoverable account showed a balance of R$4,982 million as of December 31, 2011, a decrease of R$294 million or 5.6% in relation
to the same period in 2010, due largely to the reduction in the deferred income tax and social contribution balances, in relation to the fiscal benefit from
the premium incorporated in the Company as a result of the corporate restructuring transactions that took place during 2009.
Court deposits – current and non-current
The court deposits account showed a balance of R$11,791 million as of December 31, 2012, an increase of R$5,185 million or 78.5% in relation to the
same period in 2011. This increase was due to the 261.8%, 91.3% and 55.4% increases in tax-, labor- and civil-related court deposits, which resulted
largely from the consolidation of TMAR and its subsidiaries as from February 27, 2012.
The court deposits account showed a balance of R$6,606 million as of December 31, 2011, an increase of R$956 million or 16.9% in relation to the same
period in 2010. This increase was mainly due to the 17.3% increase in civil-related court deposits in 2011.
Credits with related parties
As a result of the Corporate Restructuring approved on February 27, 2012, the debentures issued by TMAR on February 17, 2009 and March 12, 2011,
the amounts of R$1,200,000 and R$300,000, respectively, subscribed by BrT Celular, were incorporated by the Company. On June 1, 2012, the
debentures originally issued by TMAR and incorporated in the Company were written off against the capital decrease carried out in BrT Celular.
The credits with related parties account showed a balance of R$2,218 million on December 31, 2011, an increase of R$307 million or 16.1% in relation to
the same period in 2010. This variation was due exclusively to the appropriation of the interest on the private debentures issued by TMAR (credits with
related parties).
Financial asset available for sale
The financial asset available for sale account represents TMAR’s stake in the capital stock of Portugal Telecom. As of December 31, 2011 this account
recorded no balance. As of December 31, 2012 the balance on this account was R$906 million as a result of the consolidation of TMAR and its
subsidiaries as from February 27, 2012.
Property and equipment showed a balance of R$24,819 million as of December 31, 2012, which represents a 328.4% increase in relation to December
31, 2011, largely as a result of the consolidation of TMAR and its subsidiaries as from February 27, 2012.
Property and equipment showed a balance of R$5,794 million as of December 31, 2011, an increase of R$477 million or 9.0% in relation to December
31, 2010. The main factors behind this variation were the R$1,317 million additions during the period, which were partially offset by the R$775 million
depreciation charge.
Intangible assets
Intangible assets showed a balance of R$15,359 million as of December 31, 2012, which represents a 1,315.6% increase in relation to the same period
of 2011, largely as a result of the consolidation of TMAR and its subsidiaries as from February 27, 2012.
Intangible assets showed a balance of R$1,085 million as of December 31, 2011, which represents a decrease of R$233 million or 17.7% increase in
relation to the same period in 2010. The main factor behind this reduction was the R$267 million amortization during the period.
LIABILITIES
Suppliers
The suppliers account showed a balance of R$4,659 million as of December 31, 2012, an increase of R$2,818 million or 153.1% in relation to the same
period of 2011. This increase is basically due to the increases in: (i) infrastructure and network materials (R$523 million), (ii) rental of poles and right of
way (R$418 million), (iii) pass-throughs (R$476 million), (iv) services (R$439 million), (v) maintenance of plant (R$350 million) and (vi) handsets and
“sim-cards” (R$228 million).
It should be stressed that the variation in these balances has been influenced by the consolidation of TMAR and its subsidiaries as from February 27,
2012.
The suppliers’ account showed a balance of R$1,841 million as of December 31, 2011, an increase of R$205 million or 12.5% in relation to the same
period of 2010. This increase was influenced by greater investments made in 2011, particularly during the last quarter.
Loans and financing - current
During the fiscal year ended December 31, 2012, the Company’s debt showed a significant increase due to the Corporate Restructuring that took place
on February 27, 2012, which resulted in an increase of R$21,102 million in the amount of consolidated debt. The debts resulting from the Corporate
Restructuring consist among other things of foreign currency denominated “Senior Notes”, as well as both Private and Public Debentures, in addition to
BNDES at Long-Term Interest Rate.
The current loans and financing account showed a balance of R$3,114 million as of December 31, 2012 an increase of R$1.970 million or 172.3% in
relation to the same period of 2011. This increase was mainly caused by the transfer of loans from non-current to current.
The current loans and financing account showed a balance of R$1,144 million as of December 31, 2011, which was an increase of R$100 million or 9.6%
in relation to the same period of 2010. This increase was mainly caused by the transfer of loans from non-current to current.
Loans and financing – non-current
During the fiscal year ended December 31, 2012, the Company’s debt showed a significant increase due to the Corporate Restructuring that took place
on February 27, 2012, which resulted in an increase of R$21,102 million in the amount of consolidated debt. The debts resulting from the Corporate
Restructuring consist among other things of foreign currency denominated “Senior Notes”, as well as both Private and Public Debentures, in addition to
BNDES at the Long-Term Interest Rate.
The loans and financing account showed a balance of R$30,232 million as of December 31, 2012, an increase of R$23.271 million or 334.3% in relation
to the same period of 2011. This increase, in addition to the impact caused by the Corporate Restructuring referred to above, was influenced by: (i)
taking out of finance with the BNDES in the amount of R$5,417 million to support the investments between 2012 and 2014, (ii) the issue of “Senior
Notes” in the amount of R$2,741 million, for the purpose of debt-refinancing, in addition to general corporate purposes.
The non-current loans and financing account showed a balance of R$6,962 million as of December 31, 2011, which was an increase of R$3,641 million or
109.6% in relation to the same period of 2010. This increase was mainly influenced by the issue of “Senior Notes” in September 2011 in the amount of
R$1,100 million, for the purpose of reducing the company’s debt costs, in addition to general corporate purposes including investments and debt
refinancing, as well as the 7th and 8th issues of simple non-convertible unsecured debentures in the total amount of R$3,350 million, issued and
subscribed in August and December 2011, respectively, which was partially offset by the transfer of debts from non-current to current.
Financial derivative instruments – Liabilities – current and non-current
The financial derivatives account showed a balance of R$514 million as of December 31, 2012, which is an increase of R$488 million in relation to the
same period of 2011. This increase was largely due to the Corporate Restructuring that took place on February 27, 2012.
Current taxes payable
The current taxes payable account showed a balance of R$1,066 million as of December 31, 2012, which is an increase of R$887 million in relation to the
same period of 2011. This variation is made up of a R$589 million increase in the amount of income tax payable and a R$298 million increase in the
amount of social contribution payable, which resulted for the most part from the consolidation of TMAR and its subsidiaries as from February 27, 2012.
Other taxes - current and non-current liabilities
The other taxes account showed a balance of R$4,487 million as of December 31, 2012, an increase of R$2,538 million in relation to the same period in
2011, largely due to the R$1,020 million increase in the amount of Pis and Cofins, the R$510 million increase in ICMS, the R$401 million increase in
ICMS agreement number 69/1998 and the R$493 million increase in the amount of Fust/Funttel/Broadcasting fees, largely as a result of the consolidation
of TMAR and its subsidiaries as from February 27, 2012.
Authorizations and concessions payable – current and non-current
The authorizations and concessions payable account showed a balance of R$2,158 million as of December 31, 2012, an increase of R$1,482 million in
relation to the same period of 2011, as a result of the R$1,344 million increase in SMP authorizations and the R$137 million increase in STFC
concessions, mainly as a result of the consolidation of TMAR and its subsidiaries as from February 27, 2012.
Tax refinancing program – current and non-current
The tax refinancing account showed a balance of R$1,085 million as of December 31, 2012, an increase of R$639 million in relation to the same period in
2011, largely due to the consolidation of TMAR and its subsidiaries as from February 27, 2012.
Provisions – current and non-current
The provisions account showed a balance of R$6,420 million as of December 31, 2012, an increase of R$2,005 million or 45.4% in relation to the same
period in 2011, which was caused by the R$999 million, R$541 million and R$465 million increases in civil-, labor- and tax-related contingencies,
respectively, which to a large extent were due to the consolidation of TMAR and its subsidiaries as from February 27, 2012.
The provisions account showed a balance of R$4,415 million as of December 31, 2011, an increase of R$118 million or 2.7% in relation to the same
period in 2010, which was largely caused by the R$101 million increase in labor-related contingencies.
Shareholders’ Equity
The shareholders’ equity account showed a balance of R$19,827 million as of December 31, 2012, an increase of R$9,238 million or 87.2% in relation to
the same period in 2011. This variation was largely due to the R$13,574 million increase in shareholders’ equity which resulted from the Corporate
Restructuring that took place on February 27, 2012 and the R$837 million increase resulting from the net income for the year, as well as, reductions in
shareholders’ equity as a result of: (i) approval of an additional dividend of R$1,749 million proposed for the year 2011, (ii) redemption of R$492 million
worth of bonus shares, (iii) payment of interim dividends in the amount of R$508 million, (iv) payment of right of withdrawal to dissenting shareholders
in the amount of R$2,008, in connection with the Corporate Restructuring that took place on February 27, 2012, and (v) compulsory dividends declared
in the amount of R$417 million.
The shareholders’ equity account showed a balance of R$10,589 million as of December 31, 2011, a decrease of R$748 million or 4.4% in relation to the
same period in 2010. This variation was largely due to the provision of bonus shares to be redeemed (-R$1,502 million), declared dividends (-R$251
million) and net income for the year (R$1,006 million).
10.2.
Officers’ comments regarding:
a) the Company’s result of operations, in particular:
The Company’s Officers present their comments below in relation to the company’s result of operations. In particular they describe the components of
revenue and the factors that have a material effect on the company’s operational results.
i) description of any important components of revenue
The Company’s telecommunication services include:
•
local landline services in Regions I and II, including installation, monthly subscription, measured services, collect calls and supplementary local
services;
•
domestic and international long-distance landline services in Regions I and II and mobile services in Regions I, II and III, with the use of carrier’s
selection codes for long-distance calls, which are represented by the number “14” in the case of the Company and by the number “31” in the case of
TMAR;
•
mobile services, throughout the Brazilian territory, with the use of 2G and 3G technology;
•
data transmission services, which include (1) ADSL services; (2) leasing of exclusive digital and analogical lines to other carriers, ISPs and corporate
clients; (3) IP solutions; and (4) other data transmission services;
•
use of owned network (1) to complete calls initiated by other carriers’ clients (interconnection services); or (2) by carriers that do not possess the
necessary network;
•
pay TV services;
•
traffic transport services;
•
public usage terminals;
•
value-added services that include voice mail, caller ID and directory inquiries, among others;
•
advanced voice services for corporate clients, such as 0800 services (toll-free); and
•
operation of the iG internet portal.
ii) factors that have a material effect on operational results
The Main Factors that Affect the Company’s Financial Condition and Operational Results, according to the Officers’ comments, are as follows:
Growth rate of Brazil’s Gross Domestic Product and of the demand for telecommunications services
Due to being a Brazilian company that essentially carries out all its operations in Brazil, the Company is affected by the country’s economic conditions.
The GDP growth rate in 2012 was 1.0% vis-à-vis 2.7% and 7.4% seen in 2011 and 2010, respectively. While the Companies’ Officers are of the opinion
that Brazil’s GDP growth stimulates the demand for telecommunications services, we also believe that the demand for these services is relatively inelastic
during periods of economic stagnation and that the effect on the Company’s revenues of a slowdown in the economy or even of a recession in Brazil as a
result of the current international economic conditions would not be material. However, a prolonged large-scale deterioration in Brazil’s economic
conditions could have a negative impact on the number of subscribers and on the use of the services provided by the Company and, as a result, on its
operational revenues.
According to the figures provided by ANATEL, the number of landlines in Brazil increased from 42.0 million in 2010 to 43.7 in 2012 (*), while the number
of mobile telephony subscribers in Brazil increased from 203.00 million as of December 31, 2010 to 261.8 million as of December 31, 2012.
(*) Most recent information provided by ANATEL for the landline refers to May 31, 2012.
During the three years ended December 31, 2012, the number of mobile telephony subscribers in Brazil increased at an average rate of 15.0% a year
while the number of landlines in service grew at an average rate of 1.6% a year.
As a carrier with a public concession for landline services and a mobile telephony services carrier, the Company is the main target and main beneficiary
of this trend.
In the year ended December 2012, the number of our mobile telephony subscribers grew at a rate 8.2% a year, rising from a figure of 45.5 million as of
December 31, 2011 to 49.3 million as of December 31, 2012, while the number of landlines in service dropped at an average rate of 1.6% a year, from a
figure of 18.8 million as of December 31, 2011 to 18.5 million as of December 31, 2012.
Demand for Telecommunication Services
Demand for Local Landline Services
The level of landline penetration in Brazil is similar to that of countries with the same per-capita income and, in as occurred in other countries, the
landline client base has remained stable with a downward trend. The demand for the local landline services provided by the Company has stabilized over
the last few years, exhibiting a significant reduction given that the number of clients who have deactivated their landline services exceeded the number
of new activations during this period, with the number of landlines in service dropped by 308 thousand between December 2011 and December 2012.
The Company is attempting to reverse a trend that is widespread in the Brazilian telecommunications sector of replacing local landline services with
mobile telephony by (1) offering value-added services to landline clients, mainly broadband subscription services, and (2) promoting the convergence of
telecommunications services by offering convergent packages of local landline, long-distance and mobile services as well as broadband services. As a
result of these offers, the Company’s Officers expect that the number of landlines in service will remain stable or decrease to a very small degree over
the next few years. In December 2012, 31% of landline clients also subscribed to ADSL services.
According to ANATEL’s regulations and the concession agreements, the Company is considered fit to offer basic landline plans to its residential clients
with 200 minutes use of the landline network to make local calls. Clients with a basic plan pay a monthly amount for the service and when the number of
calls exceeds the plan’s limit, the Company charges an amount for each minute in excess. The Company offers alternative local landline plans which
include a greater limit in terms of minutes and charges a higher monthly amount, but which is lower than the amount that the client would pay if they
had used the excess minutes in relation to a basic plan. The Company registered an increased revenue from subscriptions on account of the fact that
there was an ever-increasing number of clients subscribing to the alternative plans launched in 2006, and which was offset by a corresponding decrease
in the revenue from the use of excess minutes. In December 2012, the subscribers of the alternative landline plans accounted for 82.0% of the
Company’s landlines in service by comparison with the 74.5% figure observed in December 2010. The Company’s Officers believe that the landline plans
are helping to boost local landline revenues, because many of the subscribers of alternative landline plans do not use all the minutes to which they are
entitled.
The substantial increase in the number of mobile telephony users in Brazil has also had a negative impact on the usage of public telephones. As an
operator with a public concession for local landline services in Regions I and II, the Company is subject to ANATEL’s regulations and in accordance with
the concession agreements signed, it is required to comply with certain targets in terms of availability of public telephones throughout the concession
area. However, due to the fact that an ever greater percentage of the population uses mobile phones to make calls when there is no public telephone or
landline within easy reach, the number of public telephones dropped 12.0% over the course of the last three years (2010-2012).
Demand for Mobile Telephony Services
The Company’s Ofrficers believe that the main reason for which its client base for mobile telephony services has grown from 39.3 million as of December
31, 2010 to 49.3 million as of December 31, 2012 was the success of its promotions and marketing campaigns. In addition, the Company’s Officers are
of the opinion that the launch of new services was one of the main factors behind the growth in the number of mobile telephony clients from 45.5 million
in 2011 to 49.3 million in 2012.
The mobile telephony services market is highly competitive in the region in which the Company operates. In the 12 months ended December 2012, the
average cancelation rate in the Company’s mobile telephony segment, which represents the number of subscribers whose service is disconnected in any
given month (churn), whether voluntarily or involuntarily, divided by the number of clients at the start of each month, was 3.8% per month. As a result,
(1) we incur selling expenses with marketing and Sales efforts aimed at retaining the existing mobile telephony clients and attracting new clients, and (2)
the discounts offered on promotional activities lead to expenses in connection with the gross operating revenues of our mobile telephony segment. In
addition to this, the pressure from the competition led us to introduce plans by means of which the monthly and per-minute fees, charged by us were
reduced, thus decreasing the Company’s average revenue per client.
The Company’s Officers expect that the mobile telephony services segment will continue to grow in terms of client base, volume of traffic and revenues
from value-added services. However, due to the market’s saturation, the Company’s Officers believe that the growth of the mobile telephony segment in
the Company’s Region II is occurring at a lower rate than those historically achieved.
Demand for Our Data Transmission Services
The Company’s broadband services client base increased from roughly 4.9 million as of December 31, 2011 to 5.7 million in December 2012.
The Company’s Officers believe that this growth is the result (1) of the Company’s promotions and marketing campaigns, (2) of the growth in the
number of homes with computers, and (3) of a change in consumers’ preferences which has resulted in an increase in the number of the Company’s
landline clients who value data transmission speeds available by means of the broadband services. We expect that the number of landline clients who
subscribe to our broadband services will continue to grow in the short term.
Effects of the expansion of mobile data transmission services
In December 2007, we were given the authorizations and radio frequency licenses necessary for us to start providing 3G technology services. During
2012 we invested heavily in expanding 3G cover, increasing the number of municipalities served from 272 to 692, and population cover from 55% to
64%. With this increase in cover on top of competitive offers, both in mobile internet via mini modem or tablet and in access from post-paid cell phones,
we expanded our base by 39.4% (mini modem/tablet) and 64% (post-paid cell phones) 2012 x 2011 (retail BU values). In addition, the launch of mobile
internet offers for pre-paid customers, in November 2011, made data packages available to all cell phone customers, and this gave us higher revenues
and better penetration of data usage on the part of these customers. In November 2012, we launched an internet service via mini modem or tablet for
pre-paid users, seeking to reach both customers who need high speed internet access, but cannot commit to a fixed monthly payment, and customers
who only use the service occasionally.
The mobile data transmission services, including 2G and 3G services for cell phone and mini modems, gave an increase in our net client base (calculated
as the number of subscribers at the end of a period less the number of subscribers at the beginning of the period) of approximately 492.4 thousand
during 2012.
The cost of these authorizations and radio frequency licenses was R$708 million, which we will pay to ANATEL in installments through 2023. In 2010, the
Company invested R$137 million in the network equipment required to offer these services, and this led to higher depreciation expenses. We use loans
and financing to fund the purchase and installation of our network equipment, including credit from our suppliers.
The 3G radio frequency licenses require the Company to comply with certain service expansion obligations, which need capital investments that will be
made through 2016. If the Company is unable to meet these capital investments out of operating cash flow, it may have to incur additional debt or
increase liabilities for supplier credit: this would raise total indebtedness and increase net financial expenses.
The company also invested R$369 million to acquire a license for delivering LTE mobile network services, and implementation has already begun. The
existing mobile nucleus was updated so as to be able to offer 4G services for the Federations Cup, an event promoted by FIFA.
In order to speed up implementation, this initial phase will be configured with a shared Radio Access Network, with the LTE and Node B access being
shared with another operator.
b) variations in revenues attributable to changes in prices, exchange rates, inflation and volumes and the introduction of new products
and services.
The Officers’ comments are given below on variations in revenues attributable to changes in prices, exchange rates, inflation and volumes and the
introduction of new products and services.
Prices, changes in volumes and introduction of new products and services
The Officers are aware that the Company is under increasing pressure to reduce rates in response to pricing competition. This pricing competition is
usually in the shape of special promotional packages, including subsidies for the purchase of new mobile devices, traffic usage promotions and incentives
for calls within the mobile phone provider’s own network. The competition over service plans and promotions may lead to an increase in marketing
expenses and the cost of obtaining customers for the Company. This could have an adverse effect on our operating results. If the Company is unable to
compete successfully with these packages, it could lose market share, with a negative effect on its operating revenues and profitability.
This competitive climate is significantly affected by certain key trends, of which the following are the most important:

Convergence of technology and services: the convergence of technology and services makes it possible for telecommunications carriers who were
previously limited to a single service, to offer different services in other sectors of the industry, such as the broadband services offered by cable TV
and mobile phone carriers (using 3G technology), and fixed phone services transmitted by mobile phone carriers.

Consolidation: Consolidation has taken hold of the telecommunications sector throughout Latin America, including Brazil. This has led to the
formation of large groups that benefit both from economies of scale and the ability to carry out coordinated action in different segments of the
industry, which gives them competitive advantages in an environment where media and telecommunications services group are also being formed.

Supply of convergent services: telecommunications services carriers have started to offer convergent packages that they were unable to offer
independently.
In response to this competitive pressure, the Company can (1) start offering its services at tariffs below those fixed by ANATEL and (2), from time to
time, offer its services with promotional discounts or free additional services together with the purchase of certain services. The Company’s financial
statements show as discounts and returns the services it offers at rates lower than those fixed in its plans or than those approved by ANATEL, and the
amount of services offered at a discount or gratis.
Inflation
Telecommunications services are broadly regulated by ANATEL. Charges for local and long distance phone services, and for mobile phones, offered by the
Company, and interconnections with its landline network, as well as EILD and SLD services, are regulated by ANATEL. We have to obtain ANATEL’s
approval before offering new landline or mobile phone plans. The tariffs established or approved by ANATEL for the services offered by the Company
serve as a ceiling for the charges we make, but the Company is authorized to offer discounts on the ANATEL rates for phone services. After ANATEL has
determined or approved a tariff, the ceiling amount is adjusted annually according to the inflation rate, measured by the IST (Telecommunications
Services) index. The ceiling figure for local landline plans is adjusted by inflation, measured by the IST, less the value of the productivity gains achieved
by us and by the local landline telephone sector as a whole. From January to December 2012, the telecommunications services index (IST) was 4.9%.
Exchange rate
The Company's operations are mainly restricted to Brazil, and our revenues are not significantly affected by changes in the exchange rate.
c) impact of inflation and of price changes in principal inputs and products, currency rates and interest rates, on the Company’s operating
and financial results.
Officers’ comments on the impact on operating results of inflation and price changes in inputs and products
The Officers of the Company believe that if Brazil is once again faced with a serious inflationary situation, the Company’s costs and expenses will tend to
increase and its operating and liquidity margins to fall. However, inflation has had no material effect on the prices of our principal inputs and products in
recent years, since in the competitive environment where we operate, the service plans and promotions offered by our competitors has led to an increase
in discounts in some of our products and services.
The service plans and promotions offered by our competitors have also resulted in an increase in some marketing expenses and costs of winning new
customers.
Officers’ comments on impact of Exchange Rates and Interest Rates on the financial results
Practically all the costs of services and operating expenses of the Company are incurred in Reais in Brazil. No significant impact on our operations is
therefore expected from changes in exchange rates.
The Company’s consolidated gross debt as of December 31, 2012, was R$33.952 million. The rise in the level of the Company’s indebtedness as a result
of the corporate restructuring process contributed to this increase, and pushed up financial expenses, as the statement of income shows (for more
information see item 10.1 of this Reference Form).
For more information on the impact of inflation, the exchange rate and interest rates on the operating and financial results of the Company, see items
4.1, 5.1 and 5.2 of this Reference Form.
10.3. Officers’s comments on significant effects, past or anticipated, of the events mentioned below on the Company’s financial
statements and results:
a) establishment or disposal of operating segment
No operating segments were established or disposed of during the year ended December 31, 2012, or in the years ended December 31, 2011 and 2010.
b) constitution, acquisition or disposal of shareholding interests
The Officers of the Company give their comments on the material effects on the financial statements:
Corporate Reorganization
At General Meetings held on February 27, 2012, the shareholders of the Oi Companies (Tele Norte Leste Participações S.A. (“TNL”), TMAR, Coari
Participações S.A. (“Coari”) and Oi) approved the Corporate Reorganization involving the simultaneous partial spin-off of TMAR and incorporation of the
portion spun-off by Coari, followed by the incorporation of TMAR shares by Coari and the incorporation of Coari and TNL by the Company, which thus
became the holder of all current shareholdings in the Oi Companies and is now the only one of the Oi Companies with a stock exchange listing, with its
name being changed to Oi S.A. at the General Meetings.
The purpose of the Corporate Reorganization was to simplify the Oi Companies corporate structure and governance once and for all, resulting in value
creation for all the shareholders by the following means, among others:

Simplification of the corporate structure, previously divided into three public companies and seven different classes and types of share, uniting
the shareholder bases of the Oi Companies into a single company with two types of share traded on stock exchanges in Brazil and overseas;

Reduction of operating, administrative and financial costs, after consolidating the management of the Oi Companies, simplifying the capital
structure and improving our capacity to attract investments and access capital markets;

Alignment of the interests of the shareholders of TNL, TMAR and Oi;

Enabling greater liquidity for Oi shares; and

Elimination of the costs of the separate listing of TNL, TMAR and Oi shares and the expenses of the requirement to disclose information on the
three companies to the public separately.
For a more detailed description of the corporate reorganization, see item 3.3 of this Reference Form.
c) unusual events or transactions
There were no unusual events or transactions of significance that might have caused, or might in the future cause, material impacts on the financial
statements.
10.4.
Officers’ comments on:
The Officers of the Company list below significant changes in accounting policies, and indicate the material effects that they may have on the Company:
a. Significant changes in accounting policies
There were no significant changes in accounting policies in the years ended December 31, 2012 or 2011.
In 2008, Law No. 11.638, of December 28, 2007 (“Law 11.638”) and Provisional Measure No. 449, of December 3, 2008, converted into Law No. 11.941
of May 27, 2009, came into effect, amending, revoking and introducing new provisions into Law No. 6.404 of December 15, (the “Corporate Law”). These
amendments were intended, principally, to bring Brazilian corporate legislation up to date and to enable the convergence of the BR GAAP with the
International Financial Reporting Standards (IFRS), as well as allowing new rules and accounting procedures to be issued by the Securities Commission
(“CVM”) in keeping with international accounting standards.
In accordance with the convergence process of the BR GAAP with international accounting standards, the Company’s Consolidated Financial Statements
for the year ended December 31, 2010 were the first such annual statements to conform to the pronouncements, guidelines and interpretations issued
by the Accounting Pronouncements Committee (CPC) and the International Financial Reporting Standards (IFRS) issued by the International Accounting
Standards Board (IASB).
The Individual Financial Statements of the parent company for the year ended December 31, 2010, were also the first such statements to conform to the
CPCs.
The transition date was January 1, 2009, with the result that the Balance Sheets as of December 31, 2010 and 2009 and January 1, 2009, and the
Statements of Income for the years ended December 31, 2010 and 2009, were prepared according to the IFRS and the CPCs.
The adjustments necessary to restate the opening balance sheet as of January 1, 2009, and the balance sheet and statement of income for the year
ended December 31, 2009, are shown in item (b) below.
b. Significant effects of changes in accounting policies
The Officers of the Company confirm that all the necessary adjustments were made for presenting the Consolidated Financial Statements in accordance
with international standards for the year ended December 31, 2010, and for showing the comparative effects for the year ended December 31, 2009.
Thus, since the Company altered its accounting policies retrospectively, the balance sheet as of January 1, 2009, and the financial statements for the
year ended December 31, 2009, shown for purposes of comparison, were adjusted and restated.
The comments of the Officers of the Company on the material adjustments to the balance sheets as of December 31, 2009 and January 1, 2009, and to
the statement of income for 2009, as well as on the reconciliations quantifying the transition effects, are given below.
a) Reclassifications
Court deposits
The Officers of the Company report that, in the preparation of the Financial Statements according to the old BR GAAP, the amounts of court deposits
linked to provisions and taxes for which payment had been suspended were shown with a reduction in liabilities. In accordance with CPC 26 and IAS 1,
these amounts were reclassified to current and non-current assets, since there is no specific requirement under accounting standards for contingencies to
be shown net.
Income tax and deferred tax
The Officers of the Company report that, in accordance with CPC 26 and IAS 1, income tax is shown separately from other taxes. In addition, deferred
tax assets and liabilities must be classified as non-current assets and liabilities, and so the portion previously classified as current, under the old BR
GAAP, was reclassified.
Derivative financial instruments
The Officers of the Company report that, in accordance with CPC 40 and IFRS 7, the book value of derivative financial instruments recognized at fair
value through income should be shown separately in the balance sheet. Derivative financial instruments previously shown under loans and financing were
reclassified and shown separately in the balance sheet, with the portion receivable recognized as an asset.
Minority interests
The Officers of the Company report that, in accordance with CPC 26 and IAS 1, minority assets are shown as an integral part of shareholders’ equity.
Previously these interests were shown between non-current liabilities and shareholders’ equity.
b) Equity accounting
The Officers of the Company report that the reconciliation below shows how the effects of equity accounting on the adjustments resulting from the
adoption of the CPCs and IFRS by subsidiary companies have been recognized.
c) Corporate reorganization
The Officers of the Company report that, according to ICPC 9 and international accounting rules, the “push down” accounting procedure is not permitted
for the recognition of assets in business combinations, when an acquiring company is incorporated into the company acquired (“reverse takeover”); but if
there is evidence of actual economic benefits arising from the incorporation of the assets recognized, as when it is likely that future taxes will be reduced,
only the tax benefits should be recorded in the "Deferred income tax" account, if the conditions for recognition described in CPC 32 (IAS 12) are
observed.
The Officers of the Company report that the reconciliation below shows the effects of derecognizing capital gains on property and equipment recognized
in the incorporations, and the recognition of the tax benefits originating from the capital gains recognized in the acquisition of BrT and recorded in the
books of the companies incorporated.
d) Deferment of expenses on subsidizing handsets and activation charges
The Officers of the Company report that under the old BR GAAP, 14 Brasil Telecom Celular S.A. (“BrT Celular”) deferred the expenses of subsidizing
mobile handsets for the corporate sector post-paid plans, and amortized them over 12 months, which was the “loyalty period” fixed in the agreement
with the customer. In accordance with CPC 4 and IAS 38, these expenses are passed directly to income when incurred.
The reconciliation below shows the effects of subsidy expenses recorded as costs of services provided and goods sold.
Under the old BR GAAP, BrT Celular deferred the expenses of activation fees and ANATEL - FISTEL inspections, and amortized them over a period of 24
months, which was the average period for which customers remained on the books. In accordance with CPC 5 and IAS 38, such expenses are not directly
related to the service agreement and are therefore passed directly to income when incurred.
The reconciliation shows the effects of client activation fee expenses recorded as costs of services provided and goods sold.
BrT Celular has recorded no deferred tax credits, because it is not earning taxable profits that would support their use.
e) Recognition of revenues
Public Telephones (TUPs)
The Officers of the Company report that under the old BR GAAP, TMAR and BrT recognized revenues from sales of TUP cards at the time they were sold,
while the costs were recognized when the cards were used. In accordance with CPC 30 and IAS 18 - Revenues, revenues from the sale of TUP cards have
been measured and recognized on the basis of the estimate of the number of minutes actually used by customers.
f)
Cost of retirement of assets
The Officers of the Company report that the reconciliation below shows the recognition of the costs of dismounting, removing and reinstalling fixed
assets, according to the requirements of ICPC 12 and IFRIC 1.
g) Deferred income tax
The Officers of the Company report that the reconciliation shows the changes in deferred Income and Social Contribution taxes, in accordance with CPC
32 (IAS 12), representing the tax effects of the adjustments necessary to bring the Financial Statements into line with the CPCs and IFRS, when
applicable.
h) Interest on shareholders’ equity and dividends
Mandatory minimum dividend
The Officers of the Company report that under the old BR GAAP, interest on shareholders’ equity and dividends were recognized at the end of the year,
even though the dividends would not be officially declared until the following year. According to the IFRS, dividends are recognized only when a legal
obligation is created. Thus any proposal for payment of a dividend exceeding the mandatory minimum is recognized only when declared.
Management already has prior authorization from the Board of Directors for the payment of interest on shareholders’ equity, which is deductible for tax,
and so this payment is considered to be declared in advance.
Lapsed dividends and interest on shareholders’ equity
The Officers of the Company report that in accordance with the requirements of CPC 38 / IAS 39, in cases where financial liabilities cease to exist, the
effects thereof should be recognized directly in income for the year.
The reconciliation shows the effects of recognizing directly in income for the period the unclaimed dividends and interest on shareholders’ equity,
previously recorded as a deduction from shareholders’ equity.
i)
Effects of the adjustments on the Cash Flow Statement
The Officers of the Company report that the balances of cash and cash equivalents of the Company and of its subsidiaries remained unaltered at the time
of first adoption of the IFRS and CPCs, however the Cash Flow Statement shows changes due to the adjustments affecting certain accounts in the
Company’s financial statements.
j)
Accumulated profits
The Officers of the Company report that, except for the items reclassified, all the above adjustments with effects prior to the transition date were
registered against retained earnings on January 1, 2009, and reclassified as profit reserves.
k) Earnings per share
The Officers of the Company report that, in accordance with IAS 33 / CPC 41, basic and diluted earnings per share are now calculated on the basis of the
weighted average number of shares in circulation during the year. Previously, the calculation was made on the basis of the number of shares in
circulation on the closing date for the year.
The reconciliation belows quantifies the effects of the transition to CPCs and IFRS on the dates indicated:
Reconciliation of shareholders’ equity as of the transition date, January 1, 2009
CONSOLIDATED (in thousands of Reais)
Recogniti
on
of Retirement
revenues
assets (f)
(e)
Deferred Tax Credits
Other taxes
Court deposits and amounts blocked
Other Assets
Investments
Intangible assets
Total Assets
BR
GAAP
Reclassifi
originally
cations
shown
(a)
12/31/2008
(146,924
6,107,462
)
1,478,558
561,867
2,210,090
54,048
935,690
(935,690)
18,919
452,788
678,972
317,059
188,237
11,432,476
908,989
(1,523,772
1,523,772
)
1,987,755
2,224,993
445,006
145,625
3,744
5,902,124
1,632,218
17,539,938
762,065
16,625
Current Liabilities
Loans and Financing
4,759,943
760,627
48,898
Current Assets
Cash and Cash Equivalents
Accounts Receivable
Inventories
Tax credits
Current tax credits
Other taxes
Court deposits and amounts blocked
Other Assets
Non-Current Assets
Suppliers
Tax Payable
Current tax payable
Other taxes
REFIS (tax refinancing) Program
313,735
(89,920)
89,920
1,889,543
717,911
4,434
(717,911)
31,693
777,377
of
Dividends (h)
-
-
-
16,625
14,411
16,625
4,951
In
accordance
Total effect of CPC
with
CPCs
changes
1/1/2009
-
(146,924)
(935,690)
18,919
452,788
317,059
940,025
5,960,538
1,478,558
561,867
2,210,090
54,048
18,919
452,788
996,031
188,237
12,372,501
14,411
-
(1,523,772)
2,009,331
445,006
9,460
793,101
2,009,331
2,669,999
145,625
3,744
5,911,584
1,632,218
18,333,039
18,921
(79,719)
301,835
(89,920)
5,061,778
670,707
89,920
(717,911)
31,693
777,377
-
89,920
1,889,543
31,693
777,377
4,434
9,460
BR
GAAP
Reclassifi
originally
cations
shown
(a)
12/31/2008
Dividends and interest on shareholders’
equity
340,785
Provisions
218,297
Salaries, Social Charges and Benefits
Pension fund provisions
193,394
148,391
Authorizations and concessions payable
Other Liabilities
Non-Current Liabilities
Loans and Financing
Provisions
Deferred Tax payable
Other taxes
REFIS (tax refinancing) Program
160,074
326,487
6,539,043
4,125,351
Authorizations and concessions payable
Other Liabilities
Minority interests
Capital stock
Capital Reserves
Profit reserves
Additional dividend proposed
623,585
214,753
(5,656)
6,240,952
3,470,758
1,338,246
1,431,948
Shareholders’ Equity – Minorities
Total Liabilities
710,380
262,517
Recogniti
on
of Retirement
revenues
assets (f)
(e)
of
Dividends (h)
(79,719)
(79,719)
222,576
261,066
440,873
-
193,394
148,391
67,819
456,460
(132,153)
132,153
297,711
(262,517)
415,610
-
160,074
394,306
6,995,504
3,993,198
132,153
1,008,091
415,610
713
607,400
623,585
214,754
79,719
5,656
34,805
79,719
(39,258)
79,719
6,275,757
3,470,758
1,338,246
1,392,690
79,719
-
(5,656)
793,101
(5,656)
18,333,039
222,576
453,985
(132,153)
132,153
297,711
(262,517)
413,135
48,898
-
18,921
2,475
-
2,475
-
-
713
607,400
17,539,938
5,656
(5,656)
(5,656)
762,065
(32,273)
(6,985)
(32,273)
(6,985)
16,625
14,411
In
accordance
Total effect of CPC
with
CPCs
changes
1/1/2009
Reconciliation of shareholders’ equity as of December 31, 2009
BR
GAAP
originally
Reclassific
shown
ations (a)
12/31/2009
Current Assets
Cash and Cash Equivalents
Accounts Receivable
Inventories
Tax credits
Current tax credits
Other taxes
Court deposits and amounts
blocked
Other Assets
5,607,544
1,717,441
381,951
1,992,141
42,063
1,001,255
543,280
293,224
179,469
960,092
Non-Current Assets
Deferred Tax Credits
Other taxes
Owing by subsidiaries
Court deposits and amounts
blocked
Other Assets
Investments
Intangible assets
16,927,409
5,052,839
2,645,816
(5,052,839)
5,469,651
1,441,950
186,687
5,374
6,993,405
1,572,404
2,229,004
Total Assets
22,534,953
3,189,096
Current Liabilities
Loans and Financing
4,440,041
1,003,352
956,365
(133,389)
Fistel
charge
deferre
d (d)
Corporate
reorganiza
tion (e)
Subsidy
deferred (d)
-
(1,777)
(21,985
)
(1,777)
(21,985)
Recog
nition
of
reven
ues
(e)
Retirem
ent
of Dividen
assets
ds (h)
(f)
-
-
-
(1,001,255)
122,852
461,591
(1,145,728
)
-
(7,554)
590,224
2,573
14,342
2,573
5,154
-
1,674,750
(7,554)
(1,735,952)
9,188
Total effect
CPC changes
In accordance
with
CPC´s
12/31/2009
of
519,518
(1,001,255)
122,852
461,591
6,127,062
1,717,441
381,951
1,992,141
42,063
122,852
461,591
960,092
(23,762)
1,253,316
155,707
1,509,449
(5,052,839)
6,067,602
-
18,436,858
6,067,602
1,674,750
2,229,004
(7,554)
(1,726,764)
-
3,670,954
179,133
5,374
5,266,641
1,572,404
(1,145,728
)
(1,777)
(29,539
)
2,573
14,342
-
2,028,967
24,563,920
-
-
7,570
19,696
-
983,631
(133,389)
5,423,672
869,963
-
BR
GAAP
originally
Reclassific
shown
ations (a)
12/31/2009
Derivative
financial
instruments
Suppliers
Tax Payable
Current tax payable
Other taxes
Dividends and interest on
shareholders’ equity
Provisions
Salaries, Social Charges and
Benefits
Authorizations
and
concessions payable
Other Liabilities
Non-Current Liabilities
Loans and Financing
Derivative
financial
instruments
Provisions
Deferred Tax payable
Other taxes
Authorizations
and
concessions payable
Other Liabilities
Minority interests
Corporate
reorganiza
tion (e)
Subsidy
deferred (d)
Fistel
charge
deferre
d (d)
Recog
nition
of
reven
ues
(e)
Retirem
ent
of Dividen
assets
ds (h)
(f)
133,389
Total effect
CPC changes
In accordance
with
CPC´s
12/31/2009
of
133,389
(703,219)
38,547
793,374
-
133,389
1,554,278
38,547
793,374
29,683
827,663
104,779
1,194,716
-
120,082
104,533
27,266
2,234,600
(64,891)
99,240
381,088
9,234,611
3,572,606
355,051
575,180
64,891
1,953,448
(276,225)
557,891
-
64,891
3,238,767
557,891
355,051
575,180
609,848
260,377
514
11,094,901
(514)
(1,189,264)
609,848
260,377
1,554,278
703,219
(703,219)
38,547
793,374
29,683
104,779
367,053
827,663
120,082
104,533
99,240
353,822
7,000,011
3,637,497
1,285,319
276,225
2,232,217
(64,891)
-
-
-
64,891
1,953,448
(276,225)
555,508
(514)
514
7,570
-
-
(1,145,728 (1,777)
(29,539
(4,99
19,696
2,383
2,383
-
-
(7,737) -
9,905,637
BR
GAAP
originally
Reclassific
shown
ations (a)
12/31/2009
Corporate
reorganiza
tion (e)
Subsidy
deferred (d)
)
Capital stock
Capital Reserves
3,731,059
6,980,315
(1,260,397)
Profit reserves
Shareholders’
Minorities
383,527
114,669
Total Liabilities
Equity
Fistel
charge
deferre
d (d)
)
(1,777)
(29,539)
Recog
nition
of
reven
ues
(e)
7)
Retirem
ent
of Dividen
assets
ds (h)
(f)
(4,997
)
(7,737)
Total effect
CPC changes
In accordance
with
CPC´s
12/31/2009
of
(1,260,397)
3,731,059
5,719,918
70,619
454,146
514
514
2,028,967
24,563,920
–
51422,534,953
3,189,096
(1,145,728
)
(1,777)
(29,539
)
-
-
2,573
14,342
-
Reconciliation of net income for the year ended December 31, 2009
Corporat
BR
GAAP
e
originally
reorgani
shown
zation
12/31/2009
(e)
Net revenues from
Sales
and/or
Services
10,878,562
Cost
of
Services
Provided and of Goods
Sold
(5,905,598)
173,741
Gross Profit
4,972,964
173,741
Operating revenues
(expenses)
(6,243,819)
Earnings from equity
pick-up
Sale of services
(1,417,845)
General
and
administrative
expenses
(1,434,808)
Other
operating
expenses
(3,391,166)
Financial income
(281,349)
Financial revenues
630,247
Financial Expenses
(911,596)
Operating income
(1,552,204)
173,741
Loss before tax
(1,552,204)
173,741
Current
(449,903)
Deferred
861,418
(59,072)
Loss for the year
(1,140,689)
114,669
Net loss attributable to
controlling
shareholders
(1,142,689)
114,669
Net loss attributable to
minority shareholders
2,000
Subsidy
deferre
d (d)
Fistel
charge
deferred
(d)
Recognition
of revenues (e)
Retirement
of assets (f)
Dividend
s (h)
Total effect
CPC changes
-
-
41,328
-
-
41,328
10,919,890
(1,777)
(1,777)
(29,539)
(29,539) 41,328
(1,048)
(1,048)
-
141,377
182,705
(5,764,221)
5,155,669
-
-
-
11,501
11,501
(6,232,318)
-
(1,417,845)
-
(1,434,808)
(3,379,665)
(281,349)
630,247
(911,596)
(1,357,998)
(1,357,998)
(449,903)
788,590
(1,019,311)
(1,021,311)
-
-
11,501
-
(29,539) 41,328
(29,539) 41,328
(1,048)
(1,048)
11,501
11,501
(1,777)
(14,052)
(29,539) 27,276
296
(752)
11,501
11,501
194,206
194,206
(72,828)
121,378
(1,777)
(29,539) 27,276
(752)
11,501
121,378
-
-
(1,777)
(1,777)
-
of In
accordance
with
CPCs 31/12/2009
2,000
c.
Qualifications and emphases in the auditors’ report
Qualifications
The Officers of the Company report that there were no exceptions in the opinion of the independent auditors on the financial statements for the years
ended December 31, 2012, 2011 or 2010.
Emphasis
The Officers of the Company report that the report of independent auditors KPMG on the financial statements for the year ended December 31, 2012,
contains the following paragraphs of special mention and other matters:
Emphases
(1) they mention the fact that the individual financial statements were prepared in accordance with the BR GAAP, noting that, in the case of the
Company, these practices differ from the International Accounting Standards Board – IASB standards (“IFRS”) applicable to separate financial
statements, only in respect of the valuation of investments in subsidiaries by the equity accounting method, which for IFRS purposes should be at cost or
fair value.
(2) they draw attention to the fact that Note 1 to the financial statements, which describes the corporate reorganization that took place on February 27,
2012, resulting in an increase of R$13,574,013 thousand in the shareholders’ equity of the Company, should mention that as from February 28, 2012,
the operations of Telemar Norte Leste S.A. and its subsidiaries were included in the Company’s yearly results and that the financial statements should be
read with this in mind.
Other matters
(1) they mention that the amounts for the year ended December 31, 2011, shown for purposes of comparison, were previously audited by other
independent auditors.
(2) they mention, in relation to the Individual and Consolidated Statements of Value Added ("SVA") for the year ended December 31, 2012, which
Brazilian corporate law requires public companies to present, that these statements appear as supplementary information under the IFRS, which do not
require them to be shown.
The Officers of the Company report that the reports of independent auditors Deloitte Touche Tohmatsu on the financial statements for the years ended
December 31, 2011 and 2010, contain the following paragraphs of special mention:
(1) they mention the fact that the individual financial statements were prepared in accordance with the BR GAAP, noting that, in the case of the
Company, these practices differ from the International Accounting Standards Board – IASB (“IFRS”) standards applicable to separate financial
statements, only in respect of the valuation of investments in subsidiaries by the equity accounting method, which for IFRS purposes should be at cost or
fair value;
(2) they comment on the corporate reorganization, approved by the shareholders of the Company, of Tele Norte Leste Participações S.A. (parent
company of Telemar Norte Leste S.A.), of Telemar Norte Leste S.A. (parent company of Coari Participações S.A.) and of Coari Participações S.A. (parent
company of the Company) at a general meeting held on February 27, 2012, involving the simultaneous partial spin-off of Telemar Norte Leste S.A. and
incorporation of the portion spun-off by Coari, followed by the incorporation of Telemar Norte Leste S.A. shares by Coari Participações S.A. and the
incorporation of Coari Participações S.A. and Telemar Norte Leste S.A. by the Company, which thus became the holder of all current shareholdings in the
Oi Companies, with its name being changed to Oi S.A. (previously called Brasil Telecom S.A.); and
(3) the report of the independent auditors contains a paragraph on other matters, in relation to the Individual and Consolidated Statements of Value
Added ("SVA") for the years ended December 31, 2011 and 2010, which Brazilian corporate law requires public companies to present, noting that these
statements appear as supplementary information under the IFRS, which do not require them to be shown.
10.5. Key accounting policies adopted by the Company (including accounting estimates made by management in important areas of
uncertainty to describe the financial condition and results, that require subjective or complex judgments, such as: provisions,
contingencies, recognition of revenues, tax credits, long-term assets, useful life of non-current assets, pension plans, foreign currency
conversions, environmental recovery costs, impairment testing criteria and financial instruments)
The Officers of the Company report that the Company’s financial statements were prepared in accordance with the International Financial Reporting
Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the BR GAAP, including the pronouncements, guidelines and
interpretations issued by the Accounting Pronouncements Committee (CPC) and approved by the Brazilian Securities Commission.
When preparing the Financial Statements, the Company Management makes use of estimates and assumptions derived from past experience and other
factors, including expectations of future events, which are considered to be reasonable and material. The use of estimates and assumptions often
requires judgments as to uncertain matters, in respect of the operating results and the value of assets and liabilities. The operating results and financial
condition may differ if the past experience and assumptions used in calculating estimates prove to be different from the actual results. The Officers of the
Company believe that the estimates with a significant risk of causing material adjustments to the book balances of assets and liabilities are the following:
Recognition of revenues and accounts receivable
The Company policy for recognizing revenues is significant in that it is an important component of operating income. The determination of prices by
management, the capacity to collect revenues and the rights to be received from certain revenues for the use of the network, are based on judgments
related to the nature of the tariff charged for the services delivered, the pricing of certain products and the power to collect these revenues. If conditions
change to the extent that Management judges that these criteria are no longer applicable in certain transactions, the value of accounts receivable may be
affected. In addition, the Company depends on measurement guidelines to determine revenues, according to the rules determined by ANATEL.
Provision for doubtful debts
The provision for doubtful debts is set up to recognize probable losses on accounts receivable, taking into account the measures implemented to restrict
the supply of services to customers with overdue accounts and to collect amounts owing by defaulting customers.
The Company Management includes government bodies, corporate customers and other telecommunications services providers in its base for calculating
the provision. There are situations where agreements have been reached with certain customers for the payment of overdue accounts, including
agreements allowing customers to pay off defaulted amounts in installments. The amounts that we actually fail to receive for these accounts may be
different from the amount of the provision set up, and additional provisions may be necessary.
Depreciation and amortization of assets with a defined useful life
Items of property and equipment, and intangible assets, with a defined useful life, are depreciated or amortized, respectively, on a straight-line basis
over their useful life. The depreciation and amortization rates for more important assets are shown in the notes to the Company’s financial statements.
The useful lives of certain assets may vary between the landline and mobile segments. The Company carries out an annual review of the useful life of
these assets.
Impairment of long-term assets
The Company reviews and analyzes the possibility of recovering the amounts recorded for property and equipment and intangible assets, in order to
assess whether its assets are impaired, whether as a result of a decision to discontinue activities in respect of such assets or in the case that there is
evidence that future operating revenues will not be sufficient to guarantee their realization.
Assets with a defined useful life are tested for impairment whenever events or changes in circumstances indicate that their book value may not be
recoverable. For assets with an indefinite useful life (goodwill), the Company tests for impairment of goodwill on an annual basis, in accordance with the
current accounting policies.
Recoverable values of assets are determined by comparing their value in use with their sale value. Such calculations demand the use of judgments and
assumptions. The determination of fair value and of discounted future operating cash flows requires the Company to make certain assumptions and
estimates in respect of the projected inward and outward cash flows of future revenues, costs and expenses. These assumptions and estimates may be
influenced by various internal and external factors, such as economic trends, industry and interest rate tendencies, changes in business strategy and
changes in the type of services and products that the Company supplies to the market. The use of different assumptions may have a significant effect on
our Financial Statements.
Provisions
The Company recognizes provisions for losses from proceedings in the labor, tax and civil courts, as well as administrative proceedings. Recognition of
the provision for losses on legal proceedings is based on the assessment of the risk of loss in each case, including the assessment of the available
evidence and recent decisions, and the estimates made are reasonable in the opinion of Management, its legal counsel and external lawyers. It is
possible that the assumptions used for estimating the provision for losses on court proceedings may change, and this would result in changes in future
provisions for these losses.
Derivative financial instruments are recognized at fair value on the basis of estimates of the future cash flows associated with each instrument
contracted. The estimates shown may not necessarily indicate the amounts that could be obtained in the current market. The use of different
assumptions to ascertain fair value may have a material effect on the amounts obtained and do not necessarily indicate the amount of cash that the
Company would receive or pay on settlement of these transactions.
Income tax and social contribution - deferred
The Company recognizes and pays income tax on the basis of operating results calculated according to the Brazilian corporate law, taking into account
the principles of the tax legislation, giving amounts which are significantly different from those calculated for the CPCs and IFRS. In accordance with CPC
32 (IAS 12), the Company recognizes deferred tax assets and liabilities on the basis of differences existing between the book balances and the tax bases
of the assets and liabilities.
The Company regularly reviews deferred tax assets for impairment and sets up a provision for impairment if it is likely that these assets will not be
realized, based on past taxable earnings, when projecting future taxable earnings and the estimated time for reversal of current temporary differences.
Such calculations demand the use of estimates and assumptions. The use of different estimates and assumptions could result in a provision for
impairment of all or of a significant part of the deferred tax assets.
Employee benefits
The actuarial assessment is based on assumptions and estimates in respect of interest rates, return on investments, inflation rates for future years,
mortality indices and projections of employment levels related to the liabilities for retirement benefits. The precision of these assumptions and estimates
will determine the creation of sufficient reserves to cover accumulated pensions and health plans, and the amount to be provided each year for the cost
of retirement benefits. These assumptions and estimates are subject to significant fluctuations due to various internal and external factors, such as
economic trends, social indicators, and our capacity to create new jobs and retain our staff. All the assumptions are reviewed as at each year end. If
these assumption and estimates are incorrect, it may be necessary to revise the provisions for retirement benefits, and this could have a significant effect
on the Company's income.
10.6 Officers’ comments on internal controls adopted to ensure that the financial statements prepared are reliable:
The following are the comments of the Officers of the Company on the internal controls adopted to ensure that the financial statements prepared are
reliable, more specifically, on the degree of effectiveness of such controls, indicating any imperfections and steps taken to correct them, and the
deficiencies of internal controls, and recommendations to improve them, contained in the independent auditors' report.
a) degree of efficiency of these controls, indicating any imperfections and steps taken to correct them
The Officers of the Company report that monitoring of the Company's internal control environment is an annual process, planned with the aim of proving
that our reports are reliable, as well as the preparation of financial statements for public disclosure according to the applicable accounting policies.
The Officers of the Company report that such monitoring is based on the risk and internal control management methodology, according to international
standards such as COSO (Committee of Sponsoring Organizations of the Treadway Commission), ERM (Enterprise Risk Management) and ISO 31000.
In addition, the Officers of the Company wish to clarify that, under their supervision, Management assesses the effectiveness of the Company’s internal
controls over all the support processes for preparing and disclosing financial information, based on criteria established in Internal Control - Integrated
Framework of the Committee of Sponsoring organizations of the Treadway Commission (COSO) and in Control Objectives for Information and Related
Technology (COBIT) of the IT Governance Institute.
Finally, as a result of the assessment described above, the Officers of the Company concluded that, as of December 31, 2011, the Company’s control
environment was effective, giving satisfactory assurances on the preparation and disclosure of financial information.
b) deficiencies of internal controls, and recommendations to improve them, contained in the independent auditors' report
The Officers of the Company wish to clarify that the Company has a systematic process for monitoring and handling the recommendations issued by the
independent auditors. The audit for the year ended December 31, 2012, has not yet been completed, and so no exceptions have been reported.
10.7. Officers’ comments on the use of funds raised in offers of securities to the public:
The Officers of the Company comment below on matters relating to any offers of Company securities to the public, and also stress that no public offer,
other than those described below, has been made in the past three years or in the current year:
a)
how funds raised in the offer were used
A meeting of the Board of Directors held on February 6, 2012, approved the 9th issue of debentures by the Company, being the 7th public issue. These
are ordinary, non-convertible, unsecured debentures, issued for distribution in the local market (in accordance with CVM Instruction No. 400/2003), for
an amount of up to R$2 billion. The CVM approved the registration of the issue on March 14, 2012. The Debentures were issued in two series, with the
first series, amounting to R$400 million, being for five years at a rate of CDI (interbank rate) + 0.94% p.a. and the second series, for R$1.6 billion, being
for eight years, with repayments of 50% in year 7 and 50% in year 8, at the IPCA (broad consumer price index) rate + 6.2% p.a. Both series were
settled on March 23, 2012, and the net proceeds raised by the Company from the Offer will be used in full for working capital, reorganization and the
lengthening of the Company's debt profile.
In February 2011, the Company issued Senior Notes amounting to US$1,500 million, with the objective of reducing the company’s cost of debt, and for
general corporate purposes including investments and debt refinancing. The Notes bear interest at 5.75%, with final maturity in February 2022.
Financial charges are payable half-yearly in February and August, from August 2012 until maturity.
A meeting of the Board of Directors held on February 6, 2012, approved the 8th issue of debentures by the Company, being the 6th public issue. These
are ordinary, non-convertible, unsecured debentures, issued for distribution on a restricted basis in the local market (in accordance with CVM Instruction
No. 476/2009), for an amount of R$2,350 million (unit value R$1 million), in a single series. The notes were issued and subscribed in full on December
28, 2011. The 2,350 debentures mature on December 28, 2018. Interest is paid half-yearly and capital will be repaid in three equal annual installments,
commencing on December 28, 2016. The net funds raised by the Company from the Offer are to be used in full for: (i) working capital; (ii) Company
reorganization and lengthening of the debt profile and (iii) carrying out the Company investment plan (CAPEX).
In September 2011, the Company issued Senior Notes amounting to R$1,100 million, with the objective of reducing the company’s cost of debt, and for
general corporate purposes including investments and debt refinancing. The notes bear interest at 9.75% p.a., with final maturity in September 2016.
Financial charges are payable half-yearly in March and September, from March 2012 until maturity.
A meeting of the Board of Directors held on July 13 and July 28, 2011, approved the 7th issue of debentures by the Company, being the 5th public issue.
These are ordinary, non-convertible, unsecured debentures, issued for distribution on a restricted basis in the local market (in accordance with CVM
Instruction No. 476/2009), for an amount of R$1,000 million (unit value R$10 million), in a single series. The debentures were issued on August 8, 2011
and were subscribed in full on August 10, 2011. The 100 debentures mature on August 8, 2017, with interest payable annually, and payment of capital
in full on the final maturity date. The net proceeds raised by the Company from the Offer are to be used in full for working capital, repayment of debt
maturing in 2011 and the lengthening of the Company's debt profile.
In December 2010, Telemar Norte Leste S.A. issued bonds for an amount of EUR750 million, in order to lengthen its debt profile and reduce borrowing
costs, as well as for general corporate purposes.
A general meeting held on November 9, 2010, approved a private issue by Oi S.A. of ordinary non-convertible debentures, in a single series, for a total of
R$470 million and for subscription within a three-year period. The proceeds will be used for the Company’s corporate purposes.
A general meeting held on October 20, 2010, approved a private issue by Telemar Norte Leste S.A. of ordinary non-convertible debentures, in a single
series, for a total of R$1,000 million and for subscription within a three-year period. The proceeds will be used for the company’s corporate purposes,
including the repayment of short-term debt.
In September 2010,Telemar Norte Leste S.A. issued bonds to a value of US$1,000 million, and subsequently exchanged the Senior Notes issued in April
2009 for Senior Notes issued in addition for a total amount of US$787 million, intended to lengthen the debt profile of the company and reduce its
borrowing costs, as well as for general corporate purposes.
Extraordinary general meetings held on November 30, 2009 and March 9, 2010, approved the public issue, by Telemar Norte Leste S.A., of ordinary,
non-convertible unsecured debentures for an amount of up to R$2,250 million, in order to lengthen its debt profile, using the proceeds to pay off
maturing debt, as indicated in the offer document.
b) whether any material differences occurred between the actual use of the proceeds and the proposals for use shown in the
corresponding offer documents
The proceeds were used for the purposes described in the offer documents.
c) if any differences occurred, give the reasons for such differences
The proceeds were used for the purposes described in the offer documents.
10.8.
Material facts not shown in the Company’s financial statements
a) assets and liabilities held as off-balance sheet items by the Company, such as: i) operating leases, both assets and liabilities; ii)
receivables portfolios disposed of for which the entity maintains risks and responsibilities, including the corresponding liabilities; iii)
futures contracts for the purchase or sale of products or services; iv) contracts for uncompleted construction works; and v) contracts for
future receipts of financing
The Company holds no assets or liabilities other than those shown in the financial statements.
b) other off-balance sheet items
There are no material items other than those shown in the Company’s financial statements.
10.9.
Officers’ comments on each of the items not shown in the financial statements referred to in clause 10.8.
a)
how such items alter or could alter revenues, expenses, operating income, financial expenses or other items in the financial
statements of the issuer
b)
nature and purpose of the transaction
c)
nature and amount of the liabilities assumed and the rights created in favor of the issuer as a result of the transaction
10.10. Officers’ comments on the principal elements of the Company business plan:
i) quantitative and qualitative description of investments in progress and planned;
The Officers of the Company give below a quantitative and qualitative description of investments in progress and planned:
The Officers of the Company report that the consolidated capital budget approved by the Company Board of Directors for the year 2012 amounted to
approximately R$6.5 billion. Of this total, about R$1 billion was earmarked for investments in mobile telephony, approximately R$1.5 billion in data
transmission equipment and R$827 million for investments and voice transmission.
The Officers of the Company believe that investments are essential to meet projected demand and increase operating efficiency. It is also essential that
these effects occur in an organized way, enabling the Company to enjoy sustainable growth, by delivering landline services, including (i) voice and data
services, using equipment installed at widely separated points, (ii) telephone exchanges, (iii) data communication equipment and (iv) a network of access
lines connecting customers to these service points, interconnected by long-distance transmission equipment. The more important projects are described
below, broken down by type:
Data Network
The Officers of the Company report that the data network projects include the following activities:

Acquisition of data communication equipment for Deterministic and IP Networks to support corporate customer services and standardization of
data services;

Expansion of backbone to support 3G and 4G service expansion, as well as new services.

Implementation and improvement of customized solutions, portfolio products and “last mile” access for customers, including opticalization of
access and/or Service Level Agreements (SLAs).
Highlights among the important investments during the period include the expansion of broadband services, with ADSL+ and VDSL technology, as well as
meeting the requirements of the National Broadband Plan (PNBL) project, intended to universalize the supply of broadband in the country.
Voice Network
The Officers of the Company report that the Company’s switched network faces the challenge of evolving in such a way as to offer new value added
services to its customers, mainly using new technology based on the NGN (Next Generation Networks) concept. This necessitates the modernization of its
switched system.
The Company is progressing with its program for removing and replacing small exchanges, and at the same time is investing in the implementation of
the NGN solution, both to meet long-distance traffic demand (both domestic and international) using VoIP, and to offer differentiated services such as IP
Centrex and VoBB (Voice over BroadBand) functions, as well as advancing landline-mobile convergence to a significant extent.
As a direct result of this strategy, the Company is going ahead with the installation of its IMS nucleus, which is the central element of our Triple Play
offer. The IMS nucleus will not only give us control over the VoIP system, but also serve to integrate the access and authentication control for all three
services, with a significant improvement in automation and the delivery of higher speeds for customers.
In this context, the Officers of the Company draw attention to the projects undertaken in accordance with the regulations: Schools connected;
Individual/Group PGMU; and Ruralcel.
Transport Networks
The Officers of the Company report that the expansion of the transport networks is intended to guarantee the outflow capacity needed for the service
expansion plan and adequate capacity for traffic outflow from the existing system. The following projects are of particular note: (i) National, state and
satellite backbone expansion; (ii) Improvement of synchronization network and signaling links; (iii) Improvement of interconnection traffic; (iv)
Protection / routing optimization projects.
The transport network has been prepared to carry 100 Gbps line rates over our DWDM optical systems as well as 100 Gbps interfaces on the IP backbone
routers. An optical switching layer based on OTN technology has been installed, so as to use capacity more efficiently.
Network Management
The Officers of the Company report that the Network Management projects are divided into the following activities:
Expansion of the platform to provide CGR (Network Management Center) management positions, in real time, with basic-cause-related information on all
faults in transmission, infrastructure, integrated and correlated data, with the aim of continually reducing alarms in various management systems and
domains;
Expansion of capacity of management servers to meet the needs of growth of corporate customers, intended to control the efficiency of the proactive
service provided, avoiding revenue evasion and reducing customer dissatisfaction.
Access Network
The Officers of the Company report that investments in the access network are made up as follows:

Guaranteeing that the requirements of new residential units under construction, and of growth in existing residential districts, can be met;

Standardizing installations to avoid fraud and improve quality;

Replacement of TUPs to improve service in remote locations and reduce fraud;

Projects for improvement and redundancy in cables, including construction of redundant fiber optic routes and cables for linear routes or for
closing off rings;

Execution of Preventive Maintenance in service sectors with a high ratio of defects, replacing network elements where useful life is compromised.
A notable project in the access network is the installation of fiber up to customers' residences (FTTH) to support our offer of Triple Play services. GPON,
the optic technology chosen, is intended to support IPTV and videos services, VoIP and high-speed internet up to 200 Mbps.
Mobile Network
The Officers of the Company report that the 3G expansion includes improving cover in areas where the Company already provides 3G services, in
addition to new municipalities throughout region II. The Company plans to install new Radio Base Stations (RBSs), as well as expanding transmitters
(TRXs) to provide better network quality, permitting call congestion indices to be lowered in accordance with the targets defined by the regulatory
authority. In order to meet its obligations with Anatel and to acquire 3G usage rights, the Company plans to install additional RBSs to serve new
municipalities.
Among our important projects, the following are particularly notable: expansion of the HSPA+ function in the access elements, giving increased access
speed in strategic areas; and the introduction of new access technology. In addition, the company has been given a license to provide LTE mobile
network services and has started installing them. The existing mobile nucleus was updated so as to speed up the installation and to be able to offer 4G
services for the Federations Cup, an event promoted by FIFA. This initial phase will be configured with a shared Radio Access Network, with the LTE and
Node B access being shared with another operator.
ii) sources of financing for investments
The Officers of the Company give the sources of finance for investments below:
The Officers of the Company report that the Company and its subsidiaries have always financed capital investments with long-term loans from
development agencies and multilateral banks, and this strategy is expected to be maintained for financing capital investments in the next few years.
The Officers of the Company explain that the Company, Telemar Norte Leste S.A., TNL PCS S.A. and 14 Brasil Telecom Celular S.A. have credit lines for
financing part of their CAPEX needs for the three-year period 2012-2014 arranged with BNDES, for a total amount of up to R$5,418 million. The amount
disbursed in December 2012 was R$2,000 million.
The Company finances investments in the mobile network from its operating cash flow and long-term financing.
iii) material divestments in progress and planned.
The Officers of the Company comment that the Company has not made any capital divestments in the past 3 years, nor are there any currently in
progress.
The Officers of the Company comment below on the acquisition of plant, equipment, patents and other assets that are likely to have a material effect on
the Company’s productive capacity:
b) acquisition of plant, equipment, patents and other assets that are likely to have a material effect on the Company’s productive capacity
The Officers of the Company report that the Company’s capital investments in property and equipment amounted to R$1,297 million in 2011 and
R$6,564 million in 2012. The following table shows investments in expansion and modernization of installations in the periods indicated:
Item
2012
2011
Mobile networks and systems
1,010
96
Data transmission equipment
1,586
443
Voice transmission
827
212
Telecommunications services infrastructure
261
58
IT services
366
60
Backbone
31
25
Network management system equipment
133
13
Underwater cables
152
15
19
12
Internet service equipment
Others
2,180
363
Total capital investments
6,564
1,297
Cash outflows to settle liabilities previously registered
Total capital investments in accordance with cash
flow
(413)
6,564
884
The Officers of the Company report that the Company’s investments in 2010 and 2011 included the following:

To continue the integration process of the Company’s mobile networks (Region II) with the TMAR network (Region I), improving quality and
expanding coverage, the Company invested R$1 billion in 2012 and R$96 million in 2011 into the mobility sector.

Significant investments have gone into the supply of broadband services, both to expand the network and to increase the speeds available to
customers. In addition, the expansion of the data network capacity, serving the corporate segment, accounted for total investments in data
communication of R$1.5 billion in 2012 and R$443 million in 2011.

In the voice segment, the purpose of investments made in 2012 and 2011 was to service new undertakings in the Company’s area of activities
and to modernize the plants, internally and externally, so as to improve the quality and rapidity of our service.

In order to support this growth, the Company invested in telecommunications infrastructure, including transport networks (backbones), IT
infrastructure and network management platforms, a total of R$791 million in 2012 and R$156 million in 2011.
c) new products and services, indicating: i) description of research in progress previously disclosed; ii) total amount spent by the
Company in research for development of new products and services; iii) development projects previously disclosed; iv) total amounts
spent by the company in development of new products and services.
The Officers of the Company list new products and services below, indicating: i) description of research in progress previously disclosed; ii) total amount
spent by the Company in research for development of new products and services; iii) development projects previously disclosed; iv) total amounts spent
by the company in development of new products and services;
Research and development
The telecommunications sector is principally affected by the digital revolution, which began with the popularization of the internet, demanding new
markets and new standards of competition, and requiring companies to pay special attention to technological innovation.
In this context, the Company has throughout recent years been seeking to differentiate itself and remain a leader in the domestic market by means of its
innovative actions and attitudes.
In order to achieve its targets for innovation in 2012, Oi intensified the process of searching for new services and made advances in innovation, research
and development, developing its Innovation Ecosystem through the Inova Program.
The Inova Program is structured on three innovation Workshops. The Incremental Workshop is intended to advance and develop the culture of innovation
in Oi’s daily processes (focus on the short term). The Planned Workshop is aimed at developing projects to create innovative products, services and
processes within Oi (focus on the medium term). The purpose of the Exploratory Workshop is to assess and define a position in the face of new trends,
technologies and business models that can be implemented in the long term.
10.11. Officers’ comments on other factors with a material influence on operating performance, which have not been identified or
commented on in other parts of this section.
The Officers of the Company clarify that there have not been any other factors with a material influence on operating performance, other than those
identified or commented on in other parts of this section.
EXHIBIT III
(PROPOSAL FOR ALLOCATION OF NET INCOME UNDER EXHIBIT 9-1-II OF CVM INSTRUCTION 481/09)
1. Inform net income for the year
The company ascertained net income of R$837,439,831.94.
2. Inform the overall amount and the value per share of the dividends, including interim dividends and interest on shareholders’
equity already declared.
The dividends proposed by Management for the year 2012 totaled R$837,439,831.94, based on net income, plus retained earnings of
R$103,563.49, totaling R$837,543,395.43, with R$0.51 per common share and R$0.51 per preferred share.
3. Inform percentage distribution of net income for the year
The company’s net income, in the amount of R$837,439,831.94, will be fully distributed.
4. Inform the overall amount and the value per share of the dividends distributed based on income from previous years
As resolved at the Extraordinary Shareholders’ Meeting held on August 10, 2012, the Company paid dividends backed by a Profit Reserve
(Investment Reserve) included in the Company’s Financial Statements for 2011 in the amount of R$507,715,614.95 corresponding to R$0.31,
per common and preferred share.
As informed in item 2 above, the Company proposes the distribution of R$103,563.49, with R$0.000063 per common and preferred share,
which was classified in the retained earnings account in 2012, due to the conclusion of the stock option plan in the year.
5. Inform the following, already deducted from interim dividends and interest on shareholders’ equity already declared:
a. The gross amount of dividend and interest on shareholders’ equity, on a segregated basis, per share of each type and
class
R$
COMMON SHARES
262.881.000,64
PREFERRED SHARES
574.662.394,79
Total
837.543.395,43
b. The form and term of payment of dividends and interest on shareholders’ equity
Date of payment: 03/28/2013
Form of Payment: (a) The shareholders entitled to receiving dividends and/or interest on shareholders’ equity that have checking
accounts at Banco do Brasil will receive their payment through credit to such checking current, provided that they express such an
option and that their record data with Banco do Brasil is up to date; (b) The entitled shareholders who own shares under custody of the
Central Securities Depository of BM&FBOVESPA will be credited of the amounts to which they are entitled directly to such company,
which will be liable for passing on the shares to the shareholders through custody agents; and (c) The other entitled shareholders, duly
identified, should request, at the branch of Banco do Brasil with which they have a relationship or of their preference, the issue of a
payment notice for receiving payment at the ATM or through credit to a checking account at any other bank, at the expense of such
shareholders, by submitting the relevant banking information (bank, branch and checking account number).
c.
Any adjustment and accrual of interest on dividends and interest on shareholders’ equity
Dividends are subject to no adjustment.
d. Date of declaration of payment of dividends and interest on shareholders’ equity used to identify the shareholders
entitled to receive such payment
Dividends will be paid based on the shareholder position as of March 21, 2013. Thus, as of March 22, 2013, all shares will be traded on
an ex-dividends basis.
6. In case of a declaration of dividends and interest on shareholders’ equity based on income ascertained in six-month balance
sheets or shorter periods.
a. Inform the amount of dividends or interest on shareholders’ equity already declared:
Not applicable.
b. Inform the date of the respective payments.
Not applicable.
7. Provide a comparison chart indicating the following amounts per share of each type and class:
a. Net income for the year and for the 3 (three) previous years
R$
2012
837.439.831,94
0,51
2011
1.005.731.443,81
0,61
2010
1.971.024.029,29
3,34
(1,142,689,137.86)
(1.94)
2009 (loss)
b.
R$ per share
Dividend and interest on shareholders’ equity distributed for the 3 (three) previous years
COMMON
SHARES
PREFERRED
SHARES
2012
4,07
4,07
2011
0,92
0,92
2010
0
0
2009
0,59
0,59
8. In case of allocation of income to the legal reserve
a. Identify the amount allocated to the legal reserve
The Company is not proposing to allocate a portion of the result to the legal reserve in 2012, as the sum of legal reserve and capital
reserves reached the 30% limit of the capital stock, as defined in Article 193, paragraph 1 of Law 6404/76.
The calculation of the limit is as follows:
Capital reserve
Special merger goodwill
Special merger- net assets
Interest on works in progress
Special inflationary adjustment - Law 8200/91
Donations and grants for investments
Profit reserve
Legal reserve
Capital reserve + Legal reserve
Capital Stock
2012
1,092,638,724.19
11,737,273,769.94
745,756,369.11
31,287,185.88
123,557,822.32
13,730,513,871.44
383,527,038.25
383,527,038.25
14,114,040,909.69
7,308,752,232.06
30%
2,192,625,669.62
Comments on the calculation chart above and respective reserves:
Special Merger Goodwill Reserve and Special Merger Reserve – Net Assets:
Said reserves represent part of the issue price of the shares with no par value that exceeded the amount allocated to the formation of
the capital stock, pursuant to paragraph 1 of Article 182 of Law 6404/76, which originated from the ownership restructuring executed
in 2009 and 2012.
Interest on Works in Progress
Regulatory capital reserve provided for in the ANATEL Resolution 102, of February 24, 1999, which determines the account plan
adopted by the telecommunication companies, comprising interest on works in progress, which represent actual additions from the
company’s assets which were not originated from the profits accrued in the operation.
Special inflationary adjustment - Law 8200/91
Capital reserve provided for in a special legislation, originated from a special inflationary adjustment of the Fixed Assets accounts,
based on an index that reflects the general price variation, pursuant to article 2 of Law 8200/91.
Donations and grants for investments
Law 11638/07 established that donations and grants for investments should no longer be booked as capital reserves. In accordance
with CVM Instruction 469/08, the amount booked under said reserve existing in the beginning of fiscal year 2008 was held until it was
fully used.
b. Detail the form of calculation of the legal reserve
Considering that the sum of the legal and capital reserves exceed 30% of the capital stock, no amounts will be allocated to the legal
reserve.
9. If the company has preferred shares entitled to fixed or minimum dividends
a. Describe how to calculate such fixed or minimum dividends
The preferred shares have priority in the payment of minimum and non-cumulative dividend of 6% (six per cent) per year calculated
on the amount resulting from the division of the capital stock by the total number of Company’s shares or of 3% (three per cent)
calculated on the amount resulting from the division of the net equity book value by the total number of Company's shares, whichever
is greater.
b. Inform if the income for the year is enough to pay the fixed or minimum dividends in full
Yes.
c.
Indicate whether a potentially unpaid portion is cumulative
Not cumulative
d. Indicate the overall amount of fixed and minimum dividends to be paid to each class of preferred shares
Minimum and non-cumulative dividend of preferred shares in the amount of R$416,685,232.66.
e. Indicate the fixed and minimum dividends to be paid to each class of preferred share
Minimum and non-cumulative dividend of preferred shares, per share, in the amount of R$0.37.
10. Regarding the mandatory dividend
a. Describe how it is calculated as per the by-laws
Shareholders are entitled to receive a mandatory minimum dividend of 25% (twenty-five per cent) of the adjusted net income for the
year set as forth in Article 202 of Law 6404/76.
b. Inform if it is being paid in full
Yes.
c.
Inform the amount potentially retained
Not applicable.
11. In case the mandatory dividend is retained due to the company’s financial condition
a. Inform the amount retained
Not applicable.
b. Describe in detail the company’s financial condition, including aspects related to liquidity analysis, working capital and
positive cash flows
Not applicable.
c.
Justify dividend retention
Not applicable.
12. In case of allocation of income to a reserve for contingencies
a. Identify the amount allocated for such a reserve
Not applicable.
b. Identify the loss considered probable and its cause
Not applicable.
c.
Explain why the loss is considered probable
Not applicable.
d. Justify the creation of such a reserve
Not applicable.
13. In case of allocation of income to the unrealized profit reserve
a. Inform the amount allocated to the unrealized profit reserve
Not applicable.
b. Inform the nature of the unrealized profits that originated such a reserve
Not applicable.
14. In case of allocation of income to statutory reserves
a. Describe the articles of the by-laws that establish the reserve
Not applicable.
b. Identify the amount allocated for such a reserve
Not applicable.
c.
Describe how the amount was calculated
Not applicable.
15. In case of retained earnings set forth in the capital budget
a. Indentify the amount retained
Not applicable.
b. Provide a copy of the capital budget
Not applicable.
16. In case of allocation of income to a reserve for tax incentives
a. Inform the amount allocated to such a reserve
Not applicable.
b. Explain the nature of such an allocation
Not applicable.
EXHIBIT IV
ITEM 13.1 THROUGH 13.16 OF THE REFERENCE FORM
13.1. Policy and practice of compensation of the board of directors, statutory executive board, fiscal council, statutory
committees, and the audit, risk, finance and compensation committees, addressing the following matters:
a.
Objectives of the compensation policy and practice
Under Law 6404, of December 15, 1976, as amended (“the Brazilian Corporate Law”) and the Company’s By-laws, it is the duty of the
shareholders, when gathered at a General Shareholders’ Meeting, to fix annually the overall amount for compensation of management
members. However, it is incumbent on the Board of Directors to resolve on how to individually allocate the amount determined between
its members and the executive officers.
Board of Directors, Fiscal Council, statutory committee, audit, risk, financial and compensation committees
The compensation principle and policies apply to the members of the Board of Directors and their respective committees, as well as to the
members of the Fiscal Council.
The governance model of the Company and its subsidiaries provides for a strongly active Board of Directors in line with the interests of
the shareholders in the short, medium and long term, adding value to the company by combining broad expertise, experiences and by
focusing on operations.
The members of the Board of Directors, of the respective committees and of the Fiscal Council reflect the interests of the company’s
shareholders and are renowned experts in their respective fields. As a result of their qualification, they receive a fixed monthly
compensation in line with the best practices of the market.
The fixed compensation for the members of the Board of Directors, their respective committees and the Fiscal Council is determined
based on market surveys conducted with companies of similar size and capital structure, in addition to considering their time of dedication
to the respective management body.
The practice is to pay exclusively fixed compensation for the members of the Board of Directors and of the Fiscal Council. The
compensation for members of the Fiscal Council is fixed by the Shareholders’ Meeting that elects them, in compliance with paragraph 3 of
Article 162 of the Brazilian Corporate Law. We also inform you that there is no compensation for issuer members due to participation in
the committees mentioned in box 12.
Statutory and Non-statutory Executive Board
The Company applies the same compensation principle and strategy to the statutory and non-statutory executive board, which consist of
offering fair compensation to its executive officers when in comparison with the practice existing on the market, considering the scope of
their operations and their seniority, thereby creating a differentiated opportunity for total earnings given the business results in the short
and long term, and considering the individual performance of the executive officers, as a way to guarantee the company's ability to
attract, retain and motivate its executives, aligning their interests to those of the shareholders.
To achieve this goal, the Company adopts an approach segmented by organizational levels, defining a specific strategy for each
compensation line, so as to balance the impact of each compensation element with the market practices and the business goals, thus
guaranteeing competitive total compensation before the market.
Statutory Officers’ compensation comprises a fixed portion (salary/pro-labore fees and benefits) and a variable portion (short and longterm incentives); non-statutory officers are also entitled to fixed compensation (salary and pro-labore fees) and variable compensation,
as described in detail in the section on compensation elements.
b.
Compensation elements
The company’s compensation policy follows the same principle for all its subsidiaries and includes the same elements in all of them.
i. Description of compensation elements and objectives of each one of them
Fixed Compensation
Under the Brazilian Corporate Law and the Company’s By-laws, it is the duty of the shareholders, when gathered at a General
Shareholders’ Meeting, to fix annually the overall amount for compensation of management members. However, it is incumbent on the
Board of Directors to resolve on how to allocate the amount determined between its members and the executive officers.
Salary or pro-labore fees: the purpose is to compensate the position’s scope of operations, as well as the performance of the member.
The Company’s strategy consists of aligning the base salary of the executive officers with the market average to balance fixed costs and
guarantee competitiveness for this portion of the compensation.
The Company uses the Hay methodology to assess the positions as a tool for achieving internal balance, by defining levels that group
together positions of similar level, difficulty and impact, and for establishing accurate parameters for market comparison.
Salary ranges are defined based on market benchmarks with (minimum and maximum) ranges that enable identification of the members’
performance in relation to the market value for their position.
Direct and indirect benefits: the Company adopts a benefit policy that offers its employees medical care, dental care, pharmaceutical
aid, group life insurance, food voucher, private pension plan, etc, which, when added to the fixed and variable compensation make the
compensation package competitive and attractive in the market.
Post Employment Benefits: The Company offers all its employees the opportunity to participate in a private pension plan, which is nonmandatory, to increase the attractiveness of its compensation package.
Other (INSS): Every month the Company pays its mandatory contribution to the National Social Security Institute (the INSS) thus
protecting its employees in terms of future retirement needs, the need for pension due to death, sick leave allowance, accident allowance,
etc.
Variable Compensation
We describe below the variable compensation offered by the Company exclusively to the members of the Executive Board. The
compensation of the Board of Directors and the Fiscal Council comprises exclusively the fixed compensation described above.
Short-term incentives (”Bonus”): the purpose is to offer incentives and bonuses based on the result of the business plan for the year,
as well as to recognize based on meritocracy the individual performances of the executive officers.
In addition to offering recognition and awards, the short-term incentive plan is used to provide clarity of and focus on the key
performance indicators that assure the excellent performance of the business plan.
The Company’s strategy is place the program’s opportunity gain in the third market quartile for results in line with the business plan, with
the possibility of creating an additional opportunity for higher gain due to better business and individual performances by the executive
officers.
The targetaward levels for expected performance, as well as for maximum performance, are defined by organizational level given the
compensation amounts and mix performed on the market.
The plan determines that annually after approving the business plan, the key results, financial and/or operational excellence indicators be
determined, and calculated for purposes of compensation.
Long-term Incentives (“Share-based Compensation ”):
The stock-option plan in effect until 2011 was terminated as provided for in item 11.2 of the Stock-Option Plan regulation (the “Plan”) due
to the corporate restructuring. In this sense all stock options that had been granted and not exercised in the programs prior to 2012 were
cancelled. For further information on the approved corporate restructuring, please refer to note 31 (a) of the Company’s financial
statements.
To encourage a strong engagement of employees and keep them their commitment to assuring achievement of the targets included in the
Company’s Business Plan for 2012-2015, thereby assuring their alignment and continuity in the medium and long-term, the Meeting of
the Company's Board of Directors held on April 25, 2012 approved the Company's Long-Term Bonus Plan. Such Plan comprises the
transfer of preferred shares by the Company to the beneficiaries of the plan, as a result of their compliance with the annual targets
previously set from 2012 to 2015, which targets are in line with the Company's Business Plan for 2012-2015. The transfer of shares will
only occur in 2016 and is subject to the fulfillment of the targets included in the Company’s Business Plan for 2012-2015, if any. The
Company requested approval by the Brazilian Securities Commission (CVM) to transfer the Company’s shares held in treasury, specifically
in relation to the Special Long-Term Bonus Plan, under Article 2 of CVM Instruction 10/80, which approval is still pending.
ii. Proportion of each element to total compensation
The table below shows the proportion of each element to the total compensation of the Company’s management for the periods indicated:
Board of
Directors
(in percentage)
Statutory
Executive
Board
Fiscal
Council
Non-statutory
Executive
Board
2013
(expected compensation)
Fixed compensation
100,00
100,00
58,97
58,97
Variable Compensation - Bonus
0,00
0,00
41,03
41,03
Variable Compensation - I LP
0,00
0,00
0,00
0,00
2012
Fixed compensation
100,00
100,00
100,00
100,00
Variable Compensation – Bonus
0,00
0,00
0,00
0,00
0,00
0,00
0,00
0,00
2011
Fixed compensation
100,00
100,00
43,85
53,00
0,0
0,00
26,41
47,00
0,00
0,00
29,74
0,00
2010
Fixed compensation
100,00
100,00
35,40
39,00
0,00
0,00
19,50
61,00
0,00
0,00
45,10
0,00
Fixed Compensation includes (Salary/Pro-labore fees, direct and indirect benefit, post employment benefit and other benefits (INSS).
iii. Methodology for calculating and adjusting each compensation element
The compensation policy provides for the following calculation methodology:
Fixed Compensation: for Statutory Executive Board and Non-statutory Executive Board, fixed compensation is calculated based on the monthly salary x
13.33 which considers as fixed compensation the 13th salary and 1/3 vacation bonus. For the Board of Directors and the Fiscal Council, it is calculated on the
basis of salary x 12. Fixed compensation can be adjusted according to the result of salary surveys conducted, but hit is not mandatory, not subject to specific
rules or fixed percentages, just aiming to maintain the Company's competitiveness strategy.
We emphasize that under the Brazilian Corporate Law and the Company’s Bylaws, it is the duty of the shareholders, when gathered at a General
Shareholders’ Meeting, to fix annually the overall amount for compensation of management members. However, it is incumbent on the Board of Directors to
resolve on how to allocate the amount determined between its members and the executive officers.
Direct and Indirect Benefits: Considers the entire benefit package, with methodology for calculation and adjustment criteria set as approved in the annual
collective bargaining agreement. For further details on the benefits offered, see box 14.3 (b).
Post Employment Benefit: Every month the company matches the amount paid by the employee to the private pension plan, and also pays in full the
management and insurance fees set forth in the plan. The plan does not foresee any adjustments during its effectiveness.
Other (INSS): The INSS portion is calculated based on the compensation received by the employee. This portion includes other obligations such as SAT
(Insurance against Work Accident), Incra and Sebrae, as set forth by the National Institute for Social Security. There is no rule for internal adjustment, the
only rules and standards complied with are those established by the Government.
Short-term Incentives (“Bonus”): the Bonus portion is calculated based on the variable compensation target (bonus target), which accounts for the
amount paid for results 100% in line with the targets defined for the year. The key performance indicators considered in determining short-term incentives
are the Economic Value Added (“EVA”), revenue, client satisfaction, among other indicators defined annually by the Board of Directors.
Long-term Incentives (“Share-based Compensation ”): In effect for the years prior to 2012, it considered the adjusted fair value of the stock options
for common and preferred shares, calculated using the “Black & Scholes” methodology, on the date the plans were granted, considering the following pricing
parameters:

the exercise price of the option;

the life of the option;

the current price of the corresponding share;

the expected volatility in the share price;

the expected dividends on the shares (if applicable); and

the risk-free interest rate for the life of the option.
iv. Reasons that justify the compensation elements
The fixed and variable compensation elements are determined based on the market benchmarks that enable identification of the seniority of the officers in
relation to the market value of their position.
The Company uses surveys on executive officers’ compensation conducted by independent consulting companies to determine the competitiveness levels of
the different lines of compensation (salaries, benefits, short and long-term incentives).
c.
Key performance indicators considered when determining each compensation element
Short-term Incentive (Bonus)
The key performance indicators considered in determining short–term incentives are the Economic Value Added (“EVA”), revenue, client satisfaction, among
other indicators defined annually by the Board of Directors. The result is determined based on EVA, Net Income, EBITDA, Churn (loss of client base) and
Contact Rate (unwanted calls).
Long-term Incentives (share-based compensation)
The performance indicator for this plan, while in effect, took into account the company's share price in the market, and as such was been directly related to
the Company's appreciation and expansion. The long-term bonus plan, in addition to appreciating the company's share price in the market, also considers
OFCF (Operating Free Cash Flow) and EVA as performance indicators .
There are no linked performance indicators to determine the base salary, benefits and any other compensation element.
d.
How compensation is structured to reflect evolution of performance indicators
Short-term incentives (”Bonus”): the purpose is to offer incentives and bonuses based on the result of the business plan for the year, as well as to
recognize, based on meritocracy, the individual performances of the executives . The ICP (Short-term Incentive Plan is used to provide clarity of and focus on
the KPIs (key performance indicators) that will assure excellent performance of the business plan.
Long-Term Incentive (share-based compensation): the purpose is to encourage the expansion of the Company and meering of the long-term corporate
targets, enabling the executives to participate in the development of the Company, aligning their interests with those of the shareholders. In addition, the ILP
(Long Term Incentive) plan enables the Company to attract and retain top professionals, offering them compensation opportunities resulting from generation
of value to the shareholders.
e.
How the compensation policy or practice aligns with interest of the issuer in the short, medium and long-term
The Company’s compensation policy offers fair compensation to its executives when in comparison with the market, considering the scope of their operations
and their seniority . The differentiated opportunity for total gains is a function of the short, medium and long term business results, and of the individual
executives’ share in the results, as a way to guarantee the company's ability to attract, retain and motivate its executives, aligning their interests to those of
the shareholders.
Accordingly, the variable short-term incentive compensation aligns with the company's short-term interests while the variable long-term incentive
compensation aligns with the company's medium and long-term interests.
f.
Existing compensation guaranteed by subsidiaries or direct or indirect controlling shareholders
Not applicable. There are no compensation portions received by management and by the other persons mentioned in the main section of item 13.1 of this
Reference Form due to holding a position at the issuer that is guaranteed by subsidiaries or by direct or indirect controlling shareholders, except for the
compensation portions not related to holding positions at the issuer, as detailed in box 13.15 herein.
g. Existence of any compensation or benefit linked to the occurrence of certain corporate events, such as the disposal of the issuer’s
shareholding control
Not applicable.
13.2 – Total compensation of the board of directors, statutory board and fiscal council recognized in the income for the last 3 years and
projected for the current year:
Total compensation estimated for the current Year – Annual Amounts
No. of members
Annual fixed compensation
Salary or pro-labore fees
Direct and indirect benefits
Participation in committees
Other
Variable compensation
Bonus
Profit sharing
Participation in meetings
Commissions
Other
Post-employment
Termination of service
Share-based compensation
Total compensation
Note:
Board of directors
17,00
Statutory board
9,00
6.765.292,80
Fiscal council
5,00
10.153.897,00
172.800,00
468.641,40
Total
31,00
17.387.831,20
172.800,00
2.640.013,22
2.640.013,22
9.372.828,00
9.372.828,00
502.720,62
502.720,62
6.765.292,80
22.842.258,84
468.641,40
Data reported in accordance with the compensation policy planned for 2013.
0,00
30.076.193,04
Total compensation paid in the Year as of 12/31/2012 - Annual Amounts
Board of directors
No. of members
Other
Bonus
Profit sharing
Commissions
Other
Post-employment
Share-based compensation
Total compensation
Note:
No. of members
Other
Statutory board
13,50
Fiscal council
8,00
4,25
273.535,23
Total
25,75
3.128.546,15
21.059,11
8.134.078,23
782.001,93
48.303,65
2.082.957,89
2.131.261,54
3.830,94
288.397,58
292.228,52
3.201.739,85
11.287.435,62
273.535,23
Board of directors
Statutory board
Fiscal council
4,58 ,
4,92
4,75
143.420,00
1.104.646,89
215.417,86
297.481,41
207.500,00
11.536.159,60
803.061,03
14.762.710,70
Total
14,25
1.455.566,89
215.417,86
297.481,41
Bonus
Profit sharing
Commissions
Other
Post-employment
Based on shares
Total compensation
Note:
1.015.156,44
1.015.156,44
67.877,40
67.877,40
1.143.000,00
143.420,00
3.843.580,00
1 member of the board of directors waived compensation.
No. of members
Other
Bonus
Profit sharing
Commissions
Other
Post-employment
Based on shares
Total compensation
Note:
Board of directors
Statutory board
Fiscal council
5,00
4,00
4,75
150.000,00
1.143.000,00
4.194.500,00
207.500,00
889.719,23
83.364,72
Total
13,75
85.000,00
1.124.719,23
83.364,72
239.664,46
239.664,46
695.063,61
695.063,61
49.187,98
49.187,98
1.610.000,00
150.000,00
3.567.000,00
2 members of the fiscal council waived compensation.
85.000,00
1.610.000,00
3.802.000,00
See below the details of calculation used for the number of members reported in the tables above:
2013
Month
2012
BD
SB
FC
January
17
9
5
February
17
9
March
17
April
2011
BD
SB
FC
January
6
5
5
5
February
6
5
9
5
March
6
17
9
5
April
May
17
9
5
June
17
9
July
17
August
SB
FC
BD
SB
FC
January
5
4
4
January
5
4
7
5
February
5
5
4
February
5
4
7
5
5
March
5
5
4
March
5
4
7
16
9
4
April
5
5
5
April
5
4
4
May
16
9
4
May
5
5
5
May
5
4
4
5
June
16
9
4
June
5
5
5
June
5
4
4
9
5
July
16
9
4
July
5
5
5
July
5
4
4
17
9
5
August
16
9
4
August
4
5
5
August
5
4
4
September
17
9
5
Septembe
r
16
9
4
Septembe
r
4
5
5
Septembe
r
5
4
4
October
17
9
5
October
16
9
4
October
4
5
5
October
5
4
4
November
17
9
5
November
16
9
4
November
4
5
5
November
5
4
4
December
17
9
5
December
16
9
4
December
4
5
5
December
5
4
17,00
9,00
5,00
Total
13,50
8,00
4,25
Month
2010
BD
Total
Month
Total
4,58
4,92
4,75
Month
Total
5,00
4,00
4
4,75
13.3. Regarding variable compensation of the board of directors, statutory board and fiscal council for the past three years and estimated
for the current year, we inform that:
The tables below indicate the variable compensation estimated for 2013 and for the years ended December 31, 2012, 2011 and 2010:
Number of members
In relation to bonus:
Minimum amount expected
Maximum amount expected
Amount expected if the targets set were
met
Amount actually recognized
In relation to profit sharing
met
Number of members
met
met
Number of members
met
met
Number of members
met
Board of
Directors
17,00
Estimate for 2013
Executive
Board
9,00
Fiscal
Council
-
Total
31,00
-
0,00
18.745.656,00
-
0,00
18.745.656,00
-
9.372.828,00
-
9.372.828,00
-
0,00
-
0,00
-
0,00
0,00
-
0,00
0,00
-
0,00
-
0,00
Fiscal
Council
4,25
Total
25,75
Board of
Directors
13,50
Executive
Board
8,00
-
0,00
17.906.568,00
-
0,00
17.906.568,00
-
8.953.284,00
-
8.953.284,00
-
0,00
-
0,00
-
0,00
0,00
-
0,00
0,00
-
0,00
-
0,00
Fiscal
Council
4,75
Total
14,25
0,00
-
-
0,00
0,00
-
-
-
0,00
-
1.015.156,44
-
1.015.156,44
-
0,00
0,00
-
0,00
0,00
-
0,00
-
0,00
Fiscal
Council
4,75
Total
13,75
0,00
-
-
0,00
0,00
-
-
-
0,00
-
695.063,61
-
695.063,61
-
0,00
0,00
-
0,00
0,00
Board of
Directors
4,58
-
Board of
Directors
5,00
-
Executive
Board
4,92
Executive
Board
4,00
0,00
met
Note:
2 members of the fiscal council waived compensation.
-
0,00
We also inform that, for the years 2011 and 2010, no estimate was made for maximum amounts or in the event that the target set were reached. This is
because these amounts were determined after assessment of the results established for the plan. Members of the Board of Directors and Fiscal Council are
not eligible for variable compensation.
13.4. Regarding the share-based compensation plan of the board of directors and statutory board, effective the fiscal year and estimated
for the current fiscal year, we inform that:
a) General terms and consitions
The Company’s stock option program (“Plan”) effective until 2011 was terminated as provided for in item 11.2 of the Stock Option Plan ("Plan") regulation
due to the corporate restructuring. In this regard, all stock options granted in years prior to 2012 but not yet exercised were canceled.
Aiming at promoting strong engagement at the executive level and to maintain these professionals committed to ensuring the accomplishment of the goals
included in the Company’s Business Plan for the period 2012-2015, thus also ensuring their alignment and retention in the medium and long term, the
meeting of the Company’s Board of Directors held on April 25, 2012 approved the Company’s Long-Term Bonus Program (“ILP”), consisting of the transfer of
preferred shares from the Company to the program’s beneficiaries, as a result of their achievement of previously defined annual targets over the years 2012
to 2015. These targets are aligned with the Company’s Business Plan for the period 2012-2015.
The remuneration plan rewards long-term achievements and is based on the concept that long-term results are attained through the execution of the annual
business plans in a consistent and sustainable fashion.
In accordance with the Notice to the Market disclosed on July 9, 2012, statutory officers approved by the Board of Directors are eligible for the ILP. Members
of the Company’s Board of Directors are not eligible for the ILP.
The respective plan comprises two installments, “A” and “B”, whose indicators and calculation cycles are detailed below:
Installment A
Installment “A” corresponds to the starting amount, equivalent to two (2) pro-rata targets defined for the group the beneficiary is eligible within the
Company’s Executive Bonus Program.
The actual transfer of the installment “A” shares is subject to the achievement of the long-term strategic targets established for the plan and will be carried
out at once at the end of the ILP term, in 2016, if all targets are met.
Installment B
Installment “B” is defined on an annual basis during the 2012-2015 cycle, according to the matching (1-1) of the amount paid by the Executive Bonus
program of the period.
The transfer of the installment “B” shares is subject to the achievement of the long-term strategic targets established for the plan and will be carried out at
once at the end of the ILP term, in 2016, if all targets are met.
The sum of the installments “A” and “B” represents the total amount to be used as reference for the calculation of the maximum number of shares entitled to
each beneficiary if all strategic targets are met.
The transfer of shares will only occur in 2016 and is dependent on the fulfillment of goals linked to the Company’s Business Plan for the period 2012-2015, if
any. The Company requested approval from the Brazilian Securities Commission ( Comissão de Valores Mobiliários – CVM) for the transfer of the Company’s
treasury stock, specifically with regard to the Long-Term Special Bonus Program, in accordance with article 2 of CVM Instruction no. 10/80, which is still
pending.
Strategic Goals
Achieving the strategic goals is indispensable to define the number of shares reserved to be released to the beneficiaries.
By completely achieving both strategic goals, the participant shall receive the total amount of portions “A” and “B”. In the event of achieving only one
strategic goal, the participant shall receive Company shares in amount equivalent to 50% of the total amount of portions “A” and “B”. If the goals are not
achieved, shares shall not be transfered.
Adjustments
Although the shares reserved are not held by the beneficiaries until the achievement of the strategic goals, the plan envisages that shareholders’ gains during
the calculation period (2012-2015) are included in the plan. Accordingly, the amount equivalent to the distribution of profits to shareholders (dividends,
bonuses, interest on equity (“JCP”) or any equivalent payment), shall be converted into shares and reserved for each participant, based on the price of shares
on the approval date of the distribution by the competent authority.
b) Main objectives of the plan
ILP is aimed at promoting strong executive engagement and keep them committed in order to ensure the accomplishments of the goals provided for in the
Company’s Business Plan for 2012-2015, thereby guaranteeing their alignment and presence in the company in the medium to long term.
c) How the plan contributes to these objectives
ILP promotes the achievement of the goals provided for in the Company’s Business Plan for 2012-2015 through the transfer, by 2016, of shares issued by the
Company to the program’s beneficiaries, subject to the achievement of the targets established by the program, which will be duly assessed in the end of the
duration of the Policy. In this light, ILP promotes long-term engagement and commitment of its executives by providing the beneficiaries with a share in the
Company’s growth and the opportunity of being rewarded for creating value to the shareholders.
d) The plan as part of the issuer’s remuneration plan
ILP is part of a set of remuneration, retention and alignment instruments for the Company’s Executives. The plan is classified as a long-term incentive and is
an integral part of the Executives’ variable remuneration, given that the transfer of shares issued by the Company to the beneficiary is subject to the
achievement of the goals established for 2012 to 2015, which will be duly assessed in the end of the duration of the Policy.
e) How the plan aligns the interests of administrators and of the issuer in the short, medium and long terms
ILP is based on the achievement of the goals provided for in the Company’s Business Plan for 2012-2015 through the transfer, by 2016, of shares issued by
the Company to the program’s beneficiaries, subject to the achievement of the targets established by the program. In this light, ILP offers its beneficiaries the
opportunity of being rewarded for creating value to the shareholders by aligning their interests to those of the shareholders.
f) Maximum number of shares to be transferred
The Company estimates approximately 68 million preferred shares, representing 3.77% of the total shares comprising its capital stock, to be transferred to
ILP’s beneficiaries.
However, considering the remuneration structure approved for ILP, which establishes that part of the shares to be transferred must be calculated based on
the average share price of the 30 trading sessions prior to the date of payment of the Executive Bonus for each of the fiscal years 2012, 2013, 2014 and
2015, it is not possible to estimate the precise number of shares that can be transferred to the beneficiaries, even if assuming the achievement of all goals.
g) Maximum number of options to be granted
Not applicable. ILP is not comparable to a stock option program, since there is no actual granting of an option, but a transfer of shares subject to the
achievement of strategic goals previously established for the business plan.
h) Conditions for the acquisition of shares
The shares will be transferred in 2016, subject to the achievement of the goals within the Company’s Business Plan for 2012-2015.
The achievement of the strategic goals is a sine qua non condition for the definition of the number of reserved shares to be distributed to the beneficiaries.
If the two strategic goals are fully reached, the entire installments “A” and “B” will be transferred to the participant. If only one goal is achieved, 50% of the
installments “A” and “B” will be transferred. If no goal is achieved, no shares will be transferred.
For purposes of payment of the installments “A” and “B”, the strategic goals and their respective weights were defined as presented below:
a) The Operating Free Cash Flow (OFCF), with a weight of 50% of the total reserved shares, is the result of the equation: EBITDA (Earnings before
Interest, Taxes, Depreciation and Amortization) of each fiscal year, minus investments (CAPEX) of each fiscal year, plus the revenues from the sale of
assets, provided that approved for this purpose. The objective is to achieve the operating free cash flow target from 2012 to 2015.
b) EVA, with a weight of 50% of the total reserved shares, is an estimate of the Economic Profit excluding all operating expenses, including the capital
cost of the operation. Delta EVA, in turn, is the variation between the EVA for the present year and that of the prior year. The objective is to achieve
the EVA variation from 2012 to 2015.
i) Criteria to establish the acquisition or exercise prices
Installment A: the number of shares reserved for this installment is based on the average OiBR4 price in the period from April 9 to 30, 2012, adjusted to the
dividend paid in May 2012.
Installment B: the number of shares reserved for this installment is based on the average daily closing price of the stock in the thirty (30) trading sessions
prior to the date of payment of the Executive Bonus of each fiscal year. If the earnings (dividends, bonuses, interest on equity (IOE) or any equivalent
payment) are distributed to the shareholders in the thirty (30) trading sessions prior to the date of payment of the Annual Executive Bonus (Installment B),
the share price will be calculated based on the adjusted average daily closing price of the stock (ex-dividends) of the period.
j) Criteria to establish the exercise term
Not applicable. Since the shares to be transferred are issued by the Company, ILP does not establish a term for their exercise. The transfer is subject to the
achievement of the strategic goals and, if applicable, will be carried out in the end of the duration of the policy, in 2016.
l) Restrictions on the share transfer
The transfer of the shares to the beneficiaries of the plan, if applicable, will be carried out only in 2016 and is subject to the achievement, in the period from
2012 to 2015, of the previously established goals, in line with the 2012-2015 Business Plan.
m) Criteria and events that cause the suspension, alteration or cancellation of the plan
Any event that changes or dilutes the Company’s controlling interest as on the date of approval of the Plan may cause its suspension, alteration or
cancellation.
n) Effects the administrator’s departure from the issuer’s bodies on the rights entitled to him/her by the share remuneration plan
The beneficiary shall remain continuously in the full exercise of his/her duties until December 31, 2015.
If the beneficiary resigns from the Company or if his/her employment agreement is terminated by the Company before December 15, 2015, any remaining
balance of shares related to ILP shall not be transferred, even if on a monthly pro rata basis.
13.5. Number of shares held directly or indirectly in Brazil or abroad, and other securities convertible into shares issued by the issuer, its
direct or indirect controlling companies, subsidiaries or companies under common control, by members of the board of directors, statutory
board or fiscal council, grouped by entity, as of the closing of the past year
Not applicable.
13.6. Regarding share-based compensation of the board of directors, statutory board and fiscal council recognized in the income for the
past three fiscal years, and estimated for the current year, we inform:
Not applicable. The program, effective until 2011 for eligible managers, was the stock option program that involved shares belonging to Tele Norte Leste
Participações S.A., former indirect controlling company of the Company, merged into and universally succeeded by the Company on February 27, 2012, to
which the figures on table 13.2 refer and whose details can be found in its Reference Form. We also inform that the stock option program effective until 2011
was terminated as provided for in item 11.2 of the Stock Option Plan ("Plan") regulations due to the corporate restructuring. In this regard, all stock options
granted in years prior to 2012 but not yet exercised were canceled. Additionally, the members of the Board of Directors and Fiscal Council are not eligible for
stock option plans.
Aiming at promoting strong engagement at the executive level and to maintain these professionals committed to ensuring the accomplishment of the goals
included in the Company’s Business Plan for the period 2012-2015, thus also ensuring their alignment and retention in the medium and long term, at the
meeting of the Company’s Board of Directors held on April 25, 2012, the Company’s Long-Term Bonus Program was approved, consisting of the transfer of
preferred shares from the Company to the program’s beneficiaries, as a result of their achievement of previously defined annual targets over the years 2012
to 2015. These targets are aligned with the Company’s Business Plan for the period 2012-2015. The transfer of shares will only occur in 2016 and is
dependent on the fulfillment of goals linked to the Company’s Business Plan for the period 2012-2015, if any. The Company requested approval from the
Brazilian Securities Commission (Comissão de Valores Mobiliários – CVM) for the transfer of the Company’s treasury stock, specifically with regard to the
Long-Term Special Bonus Program, in accordance with article 2 of CVM Instruction no. 10/80, which is still pending.
13.7.
Regarding outstanding options of the board of directors and statutory board at the end of past year, we inform that:
Not applicable. The stock option program effective until 2011 was terminated as provided for in item 11.2 of the Stock Option Plan ("Plan") regulations due
to the corporate restructuring. In this regard, all stock options granted in years prior to 2012 but not yet exercised were canceled. Additionally, the members
of the Board of Directors and Fiscal Council are not eligible for stock option plans.
13.8. Options exercised and shares delivered related to share-based compensation of the board of directors and statutory board, in the
past three years
Participações S.A., former indirect controlling company of the Company, merged into and universally succeeded by the Company on February 27, 2012, to
which the figures on table 13.2 refer and whose details can be found in its Reference Form. Additionally, the members of the Board of Directors and Fiscal
Council are not eligible for stock option plans.
13.9. Brief description of the information needed to understand the data disclosed in items 13.6 to 13.8, including the explanation of the
pricing method for shares and options
Participações S.A., former indirect controlling company of the Company, merged and universally succeeded by the Company on February 27, 2012, to which
the figures on table 13.2 refer and whose details can be found in its Reference Form. We also inform that the stock option program effective until 2011 was
terminated as provided for in item 11.2 of the Stock Option Plan ("Plan") regulations due to the corporate restructuring. In this regard, all stock options
granted in years prior to 2012 but not yet exercised were canceled. Additionally, the members of the Board of Directors and Fiscal Council are not eligible for
stock option plans.
13.10. Regarding pension plans in effect granted to the members of the board of directors and statutory board
The Company sponsors the Fundados/Alternativo, BRTPREV and TCSPREV pension plans. Nevertheless, none of the members of the Board of Directors,
Statutory Board and Fiscal Council participate in these plans and they have been closed to new members since December 31, 2009. The information displayed
in table 13.2 of this Reference Form refer to pension plans sponsored by other companies in the group in accordance with the plans referred to in table 14 of
this Reference Form.
13.11 – Maximum, minimum and average individual compensation of the board of directors, statutory board and fiscal council
Annual Amounts
Statutory board
Board of directors
Fiscal council
12/31/2012
12/31/2012
12/31/2012
No. of members
17,00
9,00
5,00
Highest compensation amount (Reais)
Lowest compensation amount (Reais)
0
0
0
0
0
0
Average compensation amount (Reais)
Note
0
0
0
Effectiveness of this item is suspended in relation to IBEF associates, due to the preliminary
injunction granted by the 2nd Panel of the Superior Court of Justice in the scope of
Precautionary Measure 17350, sole number 0168534-66-2010.3.00.0000 filed by the IBEF.
13.12. Contract-based compensation
There is no compensation whatsoever based on contracts for management in the event of dismissal from office or retirement.
13.13. Regarding the past three years, indicate the percentage of total compensation of each entity recognized in the issuer’s income
referring to the members of the board of directors, statutory board or fiscal council which are parties related to the direct and indirect
controlling shareholders, as defined by the accounting rules addressing this matter
2012
2011
2009
Board of directors
65.60%
0.00%
4.30%%
Statutory board
0.00%
20.00%%
100.00%%
31.37%%
15.38%%
26.10%
Fiscal council
13.14. Regarding the past three years, indicate the amounts recognized in the issuer’s income as compensation to members of the board
of directors, statutory board or fiscal council, grouped by entity, for any reason other than the position they hold, such as commissions and
consulting or advisory services rendered
There was no payment of compensation to members of the Board of Directors, Statutory Board and Fiscal Council for any reason other than the position they
hold.
13.15. Regarding the past three years, indicate the amounts recognized in the income of direct or indirect controlling companies,
companies under common control and controlled by the issuer, as compensation to members of the issuer’s board of directors, statutory
board or fiscal council, grouped by entity, specifying reasons for such amounts being assigned to these individuals
2012
Direct and indirect controlling shareholders
Company’s subsidiaries
Companies under common control
2011
Board of Directors
Statutory Board
Fiscal council
Total
0
0
0
0
43,537
3,110,534
0
3,154,071
0
0
0
0
Board of Directors
Statutory Board
Fiscal council
Total
2,556,125
5,814,068
170,699
8,540,892
0
0
0
0
0
0
26,285
26,285
Board of Directors
Statutory Board
Fiscal council
Total
3,550,999
1,715,929
247,280
5,514,207
0
0
0
0
20,000
0
91,583
111,583
2010
13.16. Other information that may be considered relevant by the issuer
There is no more relevant information on this item “13”.
lag-i/thn/cri-i/mam/ajd/cac/grg/38866.doc
3/4/13

Management Proposal 1380 Kb

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