Unless otherwise specified, data relating to the Brazilian telecommunications industry included in this annual report were obtained from ANATEL.
Our consolidated financial statements as of December 31, 2007 and 2006 and for the two years in the period ended December 31, 2007 and our combined financial statements as of December 31, 2005, and for the three years
in the period ended December 31, 2005, have been prepared in accordance with the accounting practices adopted in Brazil, as prescribed by Brazilian Corporate Law, or the Brazilian GAAP, which differs in certain significant respects from generally
accepted accounting principles in the United States, or U.S. GAAP. Notes 37 and 38 to our financial statements appearing elsewhere in this annual report describes the principal differences between the Brazilian GAAP and U.S. GAAP as they relate to
us, and provides a reconciliation to U.S. GAAP of net loss and shareholders equity. These consolidated financial statements have been audited by Ernst & Young Auditores Independentes S.S. (EY or Ernst Young) for the
year ended December 31, 2007 and by Deloitte Touche Tohmatsu Auditores Independentes (Deloitte) for the years ended December 31, 2006 and 2005.
As described in Note 1 to our financial statements, in February 2006, an extraordinary shareholders meeting approved the merger of Tele Sudeste Celular Participações S.A. (TSD), Tele
Leste Celular Participações S.A. (TLE) and Celular CRT Participações S.A. (CRT) into the Company through exchange of shares and the acquisition of the minority interest in Tele Centro-Oeste Celular
Participações S.A. (TCO) by exchanging shares of the Company for the shares held by minority shareholders of TCO, after which TCO became a wholly-owned subsidiary of the Company (the Merger). See Item
4.Information on the Company Our History and DevelopmentMerger of the Vivo Companies.
Since the Company was under common control with TSD, TLE and CRT for all periods presented after December 2002 and prior to the above restructuring, financial information combining the historical operations of these
entities has been presented for the years ended December 31, 2005, 2004 and 2003. In the combined financial
information, all inter-company transactions have been eliminated. The acquisitions of minority interests in TSD, TLE, CRT and TCO were accounted for in our consolidated financial statements on the date that the respective share exchanges occurred,
in February 2006. However, the Financial Statements have been consolidated as from January 1
st
, 2006 as described in the protocol of Merger. The combined financial statements for the year ended December 31, 2005 have been presented
supplementally for the purposes of this annual report in our consolidated financial statements as of December 31, 2007 and for the three years then ended and are not required for statutory reporting purposes in Brazil.
Certain sections in this annual report, principally in Item 3.D.Key InformationRisk Factors, Item 4.Information on the Company and Item 5.Operating and Financial
Review and Prospects, contain information that is forward-looking, including but not limited to:
Forward looking statements may also be identified by words such as believe, expect, anticipate, project, intend, should, seek,
estimate, future or similar expressions. Forward-looking information involves risks and uncertainties that could significantly affect expected results. The risks and uncertainties include, but are not limited to:
We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise. In light of these risks and uncertainties, the forward-looking information,
events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
These consolidated financial statements have been audited by Ernst & Young Auditores Independentes S.S. (EY or Ernst Young) for the year ended December 31, 2007 and by Deloitte Touche
Tohmatsu Auditores Independentes (Deloitte) for the years ended December 31, 2006 and 2005.
As described in Note 1 to our financial statements, in February 2006, an extraordinary shareholders meeting approved the merger of TSD, TLE and Celular CRT into the Company through exchange of shares and the
acquisition of the minority interest in TCO by exchanging shares of the Company for the shares held by minority shareholders of TCO, after which TCO became a wholly-owned subsidiary of the Company (the Merger). See Item
4.Information on the CompanyMerger of the Vivo Companies.
Since the Company was under common control with TSD, TLE and CRT for all periods presented after December 2002 and prior to the above restructuring, financial information combining the historical operations of these
entities has been presented for the years ended December 31, 2005, 2004 and 2003. In the combined financial information, all inter-company transactions have been eliminated. The acquisitions of minority interests in TSD, TLE, CRT and TCO were
accounted for in our consolidated financial statements on the date that the respective share exchanges occurred, in February 2006. However, the Financial Statements have been consolidated as from January 1, 2006 as described in the protocol of
Merger. The combined financial statements for the year ended December 31, 2005 have been presented supplementally for the purposes of this annual report in our consolidated financial statements as of December 31, 2007 and for the three years then
ended and are not required for statutory reporting purposes in Brazil.
Our consolidated and combined financial statements are prepared in accordance with the Brazilian GAAP, which differs in certain material respects from U.S. GAAP. See notes 37 and 38 to our financial statements for a
summary of (i) the differences between the Brazilian GAAP and U.S. GAAP as they relate to us, (ii) a reconciliation to U.S. GAAP of shareholders equity as of December 31, 2007 and 2006, and (iii) a reconciliation to U.S. GAAP of our net income
or loss for the three years in the period ended December 31, 2007.
The following tables present a summary of our selected financial data at the dates and for each of the periods indicated. You should read the following information together with our financial statements and the notes
thereto included elsewhere in this annual report and with Item 5.Operating and Financial Review and Prospects.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
Consolidated
|
|
Consolidated
|
|
Combined
|
|
Combined
|
|
Combined
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
2004(2)
|
|
2003(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
, except per share data)
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
Brazilian GAAP
|
|
|
|
|
|
|
|
|
|
|
Net operating revenue
|
|
12,492.5
|
|
10,936.7
|
|
11,253.8
|
|
10,929.4
|
|
9,393.5
|
Cost of services and goods sold
|
|
(6,623.3)
|
|
(5,564.2)
|
|
(5,337.3)
|
|
(5,338.1)
|
|
(4,836.1)
|
Gross profit
|
|
5,869.2
|
|
5,372.5
|
|
5,916.5
|
|
5,591.3
|
|
4,557.4
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
(3,532.8)
|
|
(3,751.1)
|
|
(3,614.9)
|
|
(2,740.2)
|
|
(1,968.7)
|
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
Consolidated
|
|
Consolidated
|
|
Combined
|
|
Combined
|
|
Combined
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
2004(2)
|
|
2003(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
, except per share data)
|
General and administrative expenses
|
|
(1,190.0)
|
|
(1,099.7)
|
|
(1,031.4)
|
|
(959.2)
|
|
(924.4)
|
Other net operating expenses
|
|
(499.6)
|
|
(319.5)
|
|
(491.6)
|
|
(222.0)
|
|
(138.7)
|
Operating income before equity in losses of unconsolidated subsidiary and
|
|
|
|
|
|
|
|
|
|
|
net financial expenses
|
|
646.8
|
|
202.2
|
|
778.6
|
|
1,669.9
|
|
1,525.6
|
Net financial expenses
|
|
(468.3)
|
|
(748.0)
|
|
(913.1)
|
|
(1,088.5)
|
|
(1,161.1)
|
Operating income (loss)
|
|
178.5
|
|
(545.8)
|
|
(134.5)
|
|
581.4
|
|
364.5
|
Net non-operating income (expenses)
|
|
(20.8)
|
|
(289.0)
|
|
(96.5)
|
|
(60.9)
|
|
(36.1)
|
Income (loss) before income taxes and minority interests
|
|
157.7
|
|
(834.8)
|
|
(231.0)
|
|
520.5
|
|
328.4
|
Income taxes
|
|
(257.1)
|
|
859.1
|
|
(363.0)
|
|
(438.5)
|
|
(407.8)
|
Minority interests
|
|
|
|
(8.0)
|
|
(173.5)
|
|
(480.9)
|
|
(347.6)
|
Net income (loss)
|
|
(99.4)
|
|
16.3
|
|
(767.5)
|
|
(398.9)
|
|
(427.0)
|
Net income (loss) per share (R$)
|
|
(0.0691)
|
|
0.0113
|
|
(0.6919)
|
|
(0.1765)
|
|
(0.2065)
|
Dividends declared per thousand preferred shares (R$)
|
|
|
|
0.018
|
|
0.037
|
|
0.058
|
|
0.056
|
Dividends declared per thousand common Shares (R$)
|
|
|
|
|
|
0.047
|
|
0.083
|
|
0.079
|
U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
Net operating revenue
|
|
15,922.1
|
|
14,152.3
|
|
14,407.8
|
|
14,856.5
|
|
12,159.0
|
Operating (loss) income
|
|
623.3
|
|
(183.2)
|
|
929.7
|
|
1,368.5
|
|
1,345.5
|
Net financial expenses
|
|
(437.5)
|
|
(666.3)
|
|
(914.7)
|
|
(992.9)
|
|
(138.4)
|
Net non-operating income (expenses)
|
|
(0.3)
|
|
(11.6)
|
|
(14.8)
|
|
(12.0)
|
|
(35.2)
|
Income (loss) before income taxes and minority interests
|
|
185.5
|
|
(861.1)
|
|
0.2
|
|
363.6
|
|
1,171.9
|
Income taxes
|
|
(295.1)
|
|
409.0
|
|
(319.0)
|
|
(386.6)
|
|
(618.7)
|
Minority interest
|
|
|
|
(8.4)
|
|
(175.4)
|
|
(466.0)
|
|
(415.3)
|
Net income (loss)
|
|
(109.6)
|
|
(460.5)
|
|
(494.2)
|
|
(489.0)
|
|
137.9
|
Basic and diluted net income (loss) per share common (R$)
|
|
(0.21)
|
|
(0.99)
|
|
(1.19)
|
|
(1.43)
|
|
0.15
|
Basic and diluted net income (loss) per share preferred (R$)
|
|
|
|
0.02
|
|
0.05
|
|
0.08
|
|
0.15
|
Weighted average common shares outstanding (3)
|
|
524,931,665
|
|
481,267,468
|
|
443,996,716
|
|
371,686,879
|
|
335,446,441
|
Weighted average preferred shares outstanding (3)
|
|
912,691,180
|
|
841,340,834
|
|
637,776,690
|
|
532,574,385
|
|
487,069,335
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
Consolidated
|
|
Consolidated
|
|
Combined
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
Cash Flow Data:
|
|
(in millions of
reais
)
|
Cash flows from operating activities
|
|
3,098.8
|
|
3,100.8
|
|
2,302.2
|
Cash flows from investing activities
|
|
(1,914.3)
|
|
(1,922.4)
|
|
(2,361.2)
|
Cash flows from financing activities
|
|
(395.5)
|
|
(1,458.4)
|
|
(373.1)
|
2
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
Consolidated
|
|
Consolidated
|
|
Combined
|
|
Combined
|
|
Combined
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
2004(2)
|
|
2003(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
, except for per share data)
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
Brazilian GAAP
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
6,301.4
|
|
6,445.5
|
|
6,683.2
|
|
6,477.5
|
|
6,323.1
|
Total assets
|
|
18,091.2
|
|
17,542.1
|
|
19,259.3
|
|
19,803.0
|
|
18,977.0
|
Loans and financing
|
|
4,381.4
|
|
4,500.4
|
|
5,652.8
|
|
5,595.5
|
|
7,124.0
|
Shareholders equity
|
|
8,297.6
|
|
8,371.7
|
|
7,047.5
|
|
5,830.9
|
|
5,967.1
|
Capital Stock
|
|
6,347.8
|
|
6,347.8
|
|
8,232.4
|
|
5,828.9
|
|
5,615.8
|
Number of shares as adjusted to reflect changes in capital
|
|
1,437,623
|
|
1,437,623
|
|
1,109,225
|
|
2,259,465,452
|
|
2,066,942,500
|
U.S. GAAP
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
6,078.9
|
|
6,333.3
|
|
6,536.4
|
|
6,399.5
|
|
6,990.1
|
Total assets
|
|
22,508.4
|
|
18,392.5
|
|
20,367.1
|
|
20,092.6
|
|
19,148.7
|
Total liabilities
|
|
13,484.0
|
|
9,210.4
|
|
11,294.7
|
|
10,799.5
|
|
11,383.2
|
Shareholders equity
|
|
9,024.4
|
|
9,126.2
|
|
7,165.6
|
|
5,685.9
|
|
5,904.8
|
Capital stock
|
|
6,325.6
|
|
6,325.6
|
|
8,232.4
|
|
5,828.9
|
|
5,615.8
|
Number of shares as adjusted to reflect changes in capital
|
|
1,437,623
|
|
1,437,623
|
|
1,109,225
|
|
903,786
|
|
826,777
|
________________________________________
(1)
|
The financial information presented for 2006 and 2007 represents information from Vivos consolidated financial statements in which Vivo has consolidated financial information of TSD, TLE and CRT as from January 1, 2006.
|
|
(2)
|
The financial information presented for the 2005, 2004 and 2003 fiscal years represents the combined financial data for Vivo, TSD, TLE and CRT, since these companies were under common control with Vivo for these periods.
|
|
(3)
|
As a result of the corporate restructuring in January 2000, the Company was obligated to issue shares to the controlling shareholder for the amount of the tax benefit on the amortization of the intangibles related to concession that was transferred
in the Merger. The number of issuable shares, which are determined on the basis of estimates using the Companys share price at the date of the balance sheet, are considered dilutive and are required to be included for the purpose of
calculating diluted earnings per share for the years ended December 31, 2003, 2004, 2005, 2006 and 2007. The potentially diluted shares, consisting solely of the estimate of issuable shares mentioned above, have been excluded from the computation
for all periods presented as their effect would have been anti-dilutive. As described in Note 37 (j) to the Companys financial statements for the year ended December 31, 2007, the Company applies Emerging Issues Task ForceEITF Issues No. 03.6,
Participating Securities and the Two-Class Method under FASB Statement No. 128. Since preferred shareholders have a liquidation preference over common shareholders, net losses are not allocated to preferred shareholders.
Additionally, loss per share and share amounts for all periods retroactively reflect the effect of the reverse stock split described in Note 22 to the Companys financial statements.
|
Exchange Rates
Before March 14, 2005, there were two principal foreign exchange markets in Brazil:
-
the commercial rate exchange market; and
-
the floating rate exchange market.
Most trade and financial foreign-exchange transactions were carried out on the commercial rate exchange market. The floating market rate generally applied to transactions to which the commercial market rate did not
apply. Prior to February 1999, the exchange rate in each market was established independently, resulting in different rates during some periods. Since February 1, 1999, the Central Bank placed the commercial rate exchange market and the floating
rate exchange market under identical operational limits, and financial institutions operating in the commercial market were authorized to unify their positions in the two different markets, which led to a convergence in the pricing and liquidity of
both markets and a reduction in the difference between their respective rates.
With the enactment of Resolution No. 3,265 dated March 4, 2005 by the National Monetary Council both markets were consolidated into one single foreign exchange market, effective as of March 14, 2005. All foreign
exchange transactions are now carried out in this single consolidated market, through institutions authorized to operate in such market.
3
Table of Contents
Foreign exchange rates continue to be freely negotiated, but may be influenced by Central Bank intervention. From March 1995 through January 1999, the Central Bank allowed the gradual devaluation of the
real
against the U.S. dollar. In January 1999, the Central Bank allowed the
real
/U.S. dollar exchange rate to float freely. Since then, the
real
/U.S. dollar exchange rate has been established mainly by the Brazilian interbank market and has
fluctuated considerably. In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to let the
real
float freely or will intervene in the exchange rate market through a currency band system or otherwise, or that the exchange market will not be volatile as a result of political instability or other factors. In light of these factors, we cannot
predict that the
real
will not depreciate or appreciate in value in relation to the U.S. dollar substantially in the future. In addition, exchange rate fluctuations may also affect our financial condition. For more information on these risks,
see Risk FactorsRisks Relating to Brazil.
The following tables set forth the commercial selling rate, expressed in
reais
per U.S. dollar (R$/US$) for the periods indicated, as reported by the Central Bank.
|
|
|
|
|
|
|
|
|
|
|
Exchange Rate of R$ per US$
|
|
|
|
|
|
Low
|
|
High
|
|
Average(1)
|
|
Year-End
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
|
|
|
2003
|
|
2.822
|
|
3.662
|
|
3.071
|
|
2.889
|
2004
|
|
2.654
|
|
3.205
|
|
2.917
|
|
2.654
|
2005
|
|
2.163
|
|
2.762
|
|
2.434
|
|
2.341
|
2006
|
|
2.089
|
|
2.301
|
|
2.168
|
|
2.138
|
2007
|
|
1.733
|
|
2.371
|
|
1.948
|
|
1.771
|
__________________________________
Source: Central Bank of Brazil, PTAX.
(1) Represents the average of the exchange rates (PTAX) on the last day of each month during the relevant period.
|
|
|
|
|
|
|
Exchange Rate of R$ per US$
|
|
|
|
|
|
Low
|
|
High
|
|
|
|
|
|
Month Ended
|
|
|
|
|
October 31, 2007
|
|
1.744
|
|
1.828
|
November 30, 2007
|
|
1.733
|
|
1.850
|
December 31, 2007
|
|
1.762
|
|
1.823
|
January 31, 2008
|
|
1.741
|
|
1.830
|
February 29, 2008
|
|
1.672
|
|
1.768
|
March 2008 (through March 25)
|
|
1.670
|
|
1.742
|
__________________________________
Source: Central Bank of Brazil, PTAX.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
This section is intended to be a summary of more detailed discussions contained elsewhere in this annual report. The risks described below are not the only ones we face. Our business, results of operations or
financial condition could be harmed if any of these risks materialize and, as a result, the trading price of the ADSs could decline.
4
Table of Contents
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions have a direct impact on our business, operations and
the market price of our preferred shares and our ADSs.
In the past, the Brazilian government has intervened in the Brazilian economy and occasionally made drastic changes in policy. The Brazilian governments actions to control inflation and affect other policies have
often involved wage and price controls, currency devaluations, capital controls, and limits on imports, among other things.
Our business, financial condition, results of operations and the market price of our preferred shares and ADSs may be adversely affected by changes in government policies, as well as general economic factors, including:
-
currency fluctuations;
-
exchange control policies;
-
internal economic growth;
-
inflation;
-
price instability;
-
energy policy;
-
interest rates;
-
liquidity of domestic capital and lending markets;
-
tax policies (including reforms currently under discussion in the Brazilian Congress); and
-
other political, diplomatic, social and economic developments in or affecting Brazil.
Uncertainty as to future government policies may contribute to an increase in the volatility of the Brazilian securities markets and securities issued abroad by Brazilian companies. The Brazilian economy grew 5.4% in
2007, 2.9% in 2006 and 2.3% in 2005. Due to the limited economic growth in recent years, it is not certain whether the current economic policy will prevail. We cannot predict Brazils monetary, tax, social security and other policies, nor if
such policies will cause an adverse impact on the economy and to our business and results of operations or the market price of our preferred shares and ADSs.
Tax reforms may affect our prices.
The Brazilian government has proposed tax reforms that are currently being considered by the Brazilian Congress. If we experience a higher tax burden as a result of the tax reform, we may have to pass the cost of that
tax increase to our customers. This increase may have a material negative impact on the dividends paid by our subsidiary to us and on our revenues and operating results.
Political instability may have an adverse impact on the Brazilian economy.
Political crises in Brazil in the past have affected the trust of investors and the public in general, as well as the development of the economy. Political crises may have an adverse impact on the Brazilian economy, our
business, financial condition and results of operations and the market price of our preferred shares and ADSs.
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Inflation and certain government measures to curb inflation may have adverse effects on the Brazilian economy, the Brazilian securities market and/or our business and operations.
Brazil has historically experienced extremely high rates of inflation. Inflation and certain of the Brazilian governments measures taken in the attempt to curb inflation have had significant negative effects on
the Brazilian economy. Since 1994, Brazils inflation rate has been substantially lower than in previous periods. However, inflationary pressures persist, and actions taken in an effort to curb inflation, coupled with public speculation about
possible future governmental actions, have contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market. In 2007, the general price index, or the IGP-DI (the
ndice Geral de Preços
Disponibilidade Interna
), an inflation index developed by the
Fundação Getúlio Vargas
, a private Brazilian foundation, reflected inflation of 7.9%, compared to 3.8% in 2006 and 1.22% in 2005.
Future measures taken by the Brazilian government may have an adverse impact on the Brazilian economy, our business, financial condition and results of operation, or on the market price of our preferred shares and ADSs.
If Brazil experiences significant inflation, we may be unable to increase service rates to our customers in amounts that are sufficient to cover our increasing operating costs, and our business may be adversely affected. In addition, high inflation
generally leads to higher domestic interest rates and, as a result, the cost of servicing our
real
-denominated debt may increase. Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic
capital and lending markets, which could adversely affect our ability to refinance our indebtedness in those markets.
Fluctuations in the value of the
real
against the value of the U.S. dollar may adversely affect our ability to pay U.S. dollar-denominated or U.S. dollar-linked obligations and could lower the
market value of our preferred shares and ADSs.
The Brazilian currency has been devalued frequently over the past four decades. Throughout this period, the Brazilian government has implemented various economic plans and used various exchange rate policies, including
sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. From time to time, there have been
significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies. For example, the
real
depreciated by 22.3% against the U.S. dollar in 2003. In 2004 and 2005, the
real
appreciated
against the U.S. dollar by 8.8% and 11.8%, respectively, and in 2006 and 2007 the
real
appreciated by 8.7% and 10.5% against the U.S. dollar, respectively.
Devaluation of the
real
relative to the U.S. dollar could create additional inflationary pressures in Brazil by generally increasing the price of imported products and requiring recessionary government policies
to curb aggregate demand. The sharp depreciation of the
real
in relation to the U.S. dollar may generate inflation and governmental measures to fight possible inflationary outbreaks, including the increase in interest rates. On the other
hand, appreciation of the
real
against the U.S. dollar may lead to a deterioration of the countrys current account and the balance of payments, as well as dampen export-driven growth. Devaluations of the
real
would reduce the
U.S. dollar value of distributions and dividends on our preferred shares and ADSs and may also reduce the market value of such securities. Any such macroeconomic effects could adversely affect our net operating revenues and our overall financial
performance.
Devaluation of the
real
relative to the U.S. dollar may increase the cost of our indebtedness in foreign currency. It would also reduce the U.S. dollar value of our revenues and distribution of dividends. As of
December 31, 2007, Vivo had R$ 4.4 billion in consolidated total debt, of which approximately 41.9% was denominated in foreign currencies, such as the U.S. dollar, Japanese yen and the UMBNDES (an index of several currencies predominantly influenced
by the U.S. dollar). Significant costs relating to our network infrastructure and wireless device costs are payable or linked to payment by us in U.S. dollars. At the same time, while our foreign currency debt obligations were covered by derivative
contracts as of December 31, 2007, and we may derive income from these and other derivative transactions, all of our operating revenues are generated in
reais
. To the extent that the value of the
real
decreases relative to the U.S.
dollar, Japanese yen and UMBNDES, our debt becomes more expensive to service and it becomes more costly for us to acquire the technology and the goods that are necessary to operate our business. Although we currently hedge our foreign currency debt,
we may decide to change our hedging policy in the future. In
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addition, when the value of the
real
increases relative to the U.S. dollar, Japanese yen and UMBNDES, the decrease in the cost of servicing our debt is offset by our losses on the derivatives associated with it. See Item
3.A.
Key InformationSelected Financial DataExchange Rates for more information on exchange rates.
Fluctuations in interest rates may have an adverse effect on our business and on the market price of our preferred shares and ADSs.
Between October 2002 and February 2003, the Central Bank increased the basic interest rate by 8.5 percentage points, to 26.5% . In June 2003, the Central Bank started again reducing the basic interest rate. As of
December 31, 2007, the basic interest rate is 11.25% . As of December 31, 2007, Vivos total indebtedness was R$4,381.4 million. Approximately 58.1% of such indebtedness is denominated in
reais
and mostly pegged to the CDI
(
Certificado Depositário Interbancário
) rate, a Brazilian interbank rate. All other debt was denominated in foreign currencies and fully covered by derivative contracts so that the final cost of the debt and the associated
derivative is the CDI rate. As a consequence, an increase in the CDI interest rates and inflation indexes would increase the costs of our debt, which could adversely affect the markets perception of the value of our shares.
Brazilian government exchange control policies could adversely affect our ability to make payments on foreign currency-denominated debt.
The purchase and sale of foreign currency in Brazil is subject to governmental control. In the past, the Central Bank has centralized certain payments of principal on external obligations. Many factors could cause the
Brazilian government to institute a more restrictive exchange control policy, including, without limitation, the extent of Brazilian foreign currency reserves, the availability of sufficient foreign exchange, the size of Brazils debt service
burden relative to the economy as a whole and political constraints to which Brazil may be subject. A more restrictive policy could affect the ability of Brazilian debtors (including us) to make payments outside of Brazil to meet foreign
currency-denominated obligations.
Deterioration in economic and market conditions in other countries, especially emerging market countries, may adversely affect the Brazilian economy and our business.
The market for securities issued by Brazilian companies is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin American and emerging market countries.
Although economic conditions are different in each country, the reaction of investors to developments in one country may cause the capital markets in other countries to fluctuate. Developments or conditions in other emerging market countries have at
times significantly affected the availability of credit in the Brazilian economy and resulted in considerable outflows of funds and declines in the amount of foreign currency invested in Brazil. Any adverse economic developments in other emerging
markets may adversely affect investor confidence in securities issued by Brazilian companies, including our preferred shares and ADSs, causing the market price and liquidity of those securities to suffer.
Risks Relating to the Brazilian Telecommunications Industry and Us
Extensive government regulation of the telecommunications industry may limit, in some cases, our flexibility in responding to market conditions, competition and changes in our cost structure.
Our business is subject to extensive government regulation, including any changes that may occur during the period of our authorization to provide telecommunication services. ANATEL, which is the main telecommunications
industry regulator in Brazil, regulates, among other things:
-
industry policies and regulations;
-
licensing;
-
tariffs;
-
competition;
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-
telecommunications resource allocation;
-
service standards;
-
technical standards;
-
interconnection and settlement arrangements; and
-
universal service obligations.
This extensive regulation and the conditions imposed by our authorization to provide telecommunication services may limit our flexibility in responding to market conditions, competition and changes in our cost
structure.
In 2002, ANATEL changed the Personal Mobile Service (
Serviço Móvel Pessoal
), or SMP, regime (first enacted in December 2000), encouraging companies operating under the Mobile Cellular Service
(
Serviço Móvel Celular
), or SMC, regime to migrate to the SMP regime.
Under the SMP regime, we no longer receive payment from our customers for outbound long-distance traffic and instead receive payment for the use of our network in accordance with a network usage payment plan, which
includes outbound long distance calls. However, the interconnection fees that we receive from long-distance operators may not compensate us for the revenues that we would have received from our customers for outbound long-distance traffic
.
Until June 30, 2004, SMP service providers were able to opt to establish a price cap or freely negotiate their interconnection charges. Now, free negotiation is the rule, subject to ANATEL regulations relating to the traffic capacity and
interconnection infrastructure that must be made available to requesting parties. In 2005, ANATEL began permitting free negotiations for mobile interconnection, or VU-M, fees
and by July 2005, local-fixed concessionaires and mobile operators
had reached a provisional agreement with respect to VU-M fees for local calls, or VC-1 (the agreement guaranteed a 4.5% increase in mobile operators fees). ANATEL approved that provisional agreement and in March 2006, approved another
provisional agreement for VU-M fees for long-distance calls, or VC-2, VC-3, and international, among the same operators that had made the VC-1 agreement in July 2005. In July 2007, ANATEL approved a provisional agreement among the fixed line
operators Telefônica, Telemar, Brasil Telecom, CTBC Telecom and Sercomtel and the mobile operators for interconnection fees for VC1, VC2 and VC3 calls that provides for an annual adjustment of 1.97143% to interconnection fees in Region I
(Telemars Region) and an annual adjustment of 2.25356% in Region II (Brasil Telecoms Region) and Region III (Telefônicas Region). In January 2008, ANATEL approved a provisional agreement among the fixed line long distance
operator Embratel and the mobile operators for interconnection fees for VC2 and VC3 calls, considering the period since January 2004, that provides for an annual adjustment of 4.5% as of March 2006 and an annual adjustment of 1.97143% or 2.25356% as
of July 2007. Under Resolutions 438/2006, 480/2007 and 483/2007, the Brazilian Regulatory Authority developed a new model from 2010 onward to determine reference costs for the use of mobile networks RVU-M by SMP providers who have
significant market power. These values will be used in arbitration cases involving VU-Ms value by ANATEL.
Under Resolution 438, the free negotiation of the cost of use of mobile networks VU-M was maintained. However, in the arbitration by ANATEL, while the cost model will not be implemented until 2010, ANATEL
will decide the new value of VU-M by reference to the existing ratio (as of January 1, 2006) between the value of VU-M and the value of VC-1. In addition, under the ANATEL rules, the retail rates charged to customers for local fixed to mobile calls
cannot be less than the sum of the interconnection fees charged on the local fixed and mobile terminations.
Under Resolution 438, ANATEL also eliminated the partial Bill & Keep rule for network usage between SMP networks. The applicable rule is now full billing, where the SMP operator pays the
entire call termination fee of the other mobile network. The rule of the partial Bill & Keep had been maintained by the SMP and SME (trunking) networks. Before full billing, an SMP operator used to pay for the use of
another SMP operators network in the same registration area only if the traffic carried from the first operator to the second exceeded 55% of the total traffic exchanged between them. In that case, only those calls that surpassed the 55% level
were subject to payment for network usage.
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We cannot predict whether the current regulatory regime will remain in place or whether any future regulatory change will have an adverse effect on our results of operations.
If the inflation adjustment index now applied to our prices is changed, the new index may not be adequate.
The Brazilian government currently uses the General Price Index, or the IGP-DI (the
Índice Geral de Preços Disponibilidade Interna
), an inflation index developed by the
Fundação
Getúlio Vargas
, a private Brazilian economic organization, in connection with the prices charged in the wireless telecommunications industry. Starting in 2010, the Brazilian government will begin regulating the telecommunications industry
based on an economic model (FAC, or Fully Allocated Costs) that analyzes companies total costs based on a theoretical companys costs and other factors. In connection with the introduction of this model, the Brazilian
government will use a different inflation adjustment mechanism, the IST index (
Índice de Serviços de Telecomunicações
), starting in 2010. Under Resolution 438/2006, after the economic model is implemented in 2010,
ANATEL will determine the reference cost of using mobile networks (RVU-M) for SMP providers who have significant market power, which will be used in the arbitration case by ANATEL to determine the value of VU-M. The inflation adjustment of the RVU-M
value will use the IST index. In the auctions by SMP of new radio frequency bands, Anatel has been using the IST index for determining the value of the installments to be paid for the licenses. If this new inflation adjustment mechanism, or any
other mechanism chosen by the Brazilian government in the future, does not adequately reflect the true effect of inflation on our prices, our results of operations could be adversely affected.
ANATELs proposal regarding the consolidation of prices could have an adverse effect on our results.
ANATEL has proposed new regulations on interconnection rules, some of which could have an adverse effect on our results. The following regulations on interconnection rules have been promulgated: the new General
Regulation of Interconnection (
Regulamento Geral de Interconexão
Resolution number 410/2005, or RGI); the Regulation of Separation and Allocation of Costs (Resolution number 396/2005); the Regulation of
Industrial Exploration of Dedicated Lines (
Exploração Industrial de Linha Dedicada
Resolution number 402/2005, or EILD); the Regulation of Remuneration of Use of SMP Providers Networks (Resolution
number 438/2006); the Regulation of Fixed and Wireless Number Portability (Resolution number 460/2007, effective March 2009); the new Regulation of SMP (Resolution number 477/2007, effective February 13, 2008); the Regulation of Terms of Separation
and Allocation of Costs (Resolution numbers 480/2007 and 483/2007) and Invitation Document number 002/2007/SPV-ANATEL related to the auction organized in December 2007 of new licenses for the 1900-2100 MHz radio frequency bands (3G licenses),
denominated bands F, G, I and J, which states that, in the maximum allowed period of eighteen months from the publication of the Terms of Authorization, the authorizations resulting from this auction
will be combined with the existing SMP authorizations of the bid winners when pertaining to the same region of the general authorization plan of SMP. VIVO acquired spectrum licenses in band J in regions where the company possesses SMP
licenses. The regulations that may adversely affect our results are (1) the new negotiation rules for VU-M prices by which ANATEL would have a role in determining the reference cost for use of mobile networks (RVU-M) by SMP providers who have
significant market power, which will be used in the arbitration case by ANATEL of the value of VU-M, rather than the current, free-market negotiation of prices, (2) the VU-M price unification among SMP providers of the same economic group having
significant market power, in the same region of the general authorization plan (
Plano Geral de Autorizações
, or PGA) of SMP and (3) the amendments in the regulation of SMP. These regulations could have an adverse effect on our
revenues and our results of operations because (1) ANATEL may allow more favorable prices for economic groups without significant market power and (2) the prices we charge in some regions in which we operate are higher than those in some other
regions, and consolidation of those prices, competitive pressures and other factors could reduce our average prices and thereby reduce our revenues. In the newly-amended regulation of SMP, ANATEL targets areas of vital importance for mobile
business, such as the necessity for retail stores in the cities within an operators coverage areas, increases in the validity periods of prepaid cards, and a limitation on the period of time after which customers may leave service plans.
In Resolution 460/2007 ANATEL published regulations that will implement and develop fixed and wireless number portability in Brazil by March 2009. For SMP, number portability will only be applied for wireless codes of
access of the same registration area. For fixed operators, number portability will only be applied for fixed codes of
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access of the same local area. There can be no assurance that this new regulation will not have adverse effects on the results of our operations.
In September 2007, ANATEL organized auctions for new SMP licenses in the remaining radio frequency bands D and E and in the 1.8 GHz band (band M), and fifteen SMP licenses in the 1.9
GHz band (band L), previously allocated to fixed operators. VIVO acquired thirteen spectrum licenses in band L.
Resolution 454, published by ANATEL in 2006, relates to the new regulation of conditions for the use of radiofrequency bands of 800 MHz, 900 MHz, 1,800 MHz, 1,900 MHz, which was previously allocated for fixed operators
to provide services using WLL technology, and 2,100 MHz, which are allocated for SMP.
In December 2007, ANATEL organized auctions of thirty-six new licenses for the 1900-2100 MHz radio frequency bands (3G licenses), denominated bands F, G, I and J, and VIVO
acquired seven spectrum licenses in band J. The Invitation Document number 002/2007/SPV-ANATEL for this auction states that, in the maximum allowed period of eighteen months from the publication of the Terms of Authorization, the
authorizations resulting from this auction must be combined with the existing SMP authorizations of the bid winners when pertaining to the same region of the general authorization plan of SMP. Moreover, the Invitation Document modifies the rule for
the renewal of radio frequency licenses and includes in the calculation of the operating profits the profits of remuneration for the use of the SMP network together with the profits of the service plans.
We face substantial competition that may reduce our market share and harm our financial performance.
There is substantial competition in the telecommunications industry. We not only compete with companies that provide SMP service and trunking but also with companies that provide fixed-line telecommunications and
Internet access services, due to the trend towards the convergence and substitution of SMP services for these other services.
We expect competition to intensify as a result of the entry of new competitors and the rapid development of new technologies, products and services. Our ability to compete successfully will depend on our marketing
techniques and on our ability to anticipate and respond to various competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and discount
pricing strategies by our competitors. If we do not keep pace with technological advances, or if we fail to respond timely to changes in competitive factors in our industry, we could continue to lose market share and could suffer a decline in our
revenue. Competition from other SMP communications service providers in the regions in which we operate has also affected, and may continue to affect, our financial results by causing, among other things, a decrease in our customer growth rate,
decreases in prices and increases in selling expenses.
These factors have already contributed to a negative effect on our market share and our results of operations and could have a material adverse effect on our business and results of operations in the future. As a result
of competitive pressures, for example, our market share decreased from 38.2% as of December 31, 2006 to 36.7% as of December 31, 2007, and our market share of net additions to our customer base increased from a negative percentage of 8.5% for the
twelve months ended December 31, 2006 to 28.8% for the twelve months ended December 31, 2007. In addition, our net additions of customers increased 689% from the twelve months ended December 31, 2006 to the twelve months ended December 31, 2007.
Recently, there has been consolidation in the Brazilian telecommunications market, and we believe this trend may continue. Consolidation may result in increased competitive pressures within our market. We may be unable
to respond adequately to pricing pressures resulting from consolidation, which would adversely affect our business, financial condition and results of operations.
In September 2004, Brasil Telecom, the fixed-line incumbent in nine states in Brazil and the Federal District (ANATELs Region II), launched GSM operations in those states. Brasil Telecoms authorization area
overlaps ours in Brasilia and in the states of Acre, Goias, Mato Grosso, Mato Grosso do Sul, Rondonia, Tocantins, Paraná, Santa Catarina and Rio Grande do Sul. The entrance of Brasil Telecom into these markets will increase the competition
that Vivo face in some states. Brasil Telecom has announced that its marketing strategy will be the convergence between its fixed and mobile services, and it is the only company in those states that offers both fixed and cellular
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services. The entrance of Brasil Telecom into the cellular markets in these states increase competition for Vivo and have a material adverse effect on our results of operations.
Our results of operations have been negatively affected by a decrease in our customer growth and could also be affected if our rate of customer turnover increases.
Our rate of acquisition of new customers can be negatively affected by market penetration. For example, our net additions of customers decreased 123.5% from the twelve months ended December 31, 2005 to the twelve months
ended December 31, 2006 and increased 689.1% to the twelve months ended December 31, 2007. The decrease in 2006 was due to a decrease in the addition of new prepaid customers to a loss of 517,373 new prepaid customers in the twelve months ended
December 31, 2006, compared to the addition of 2,703,995 new prepaid customers in the comparable period of the prior year. The increase in 2007 was due to an increase in the addition of new prepaid customers to 3,692,360. This variation in the rate
of new additions of customers has negatively affected our results of operations and could continue to do so in the future. In addition, if our rate of customer turnover were to increase significantly, our results of operations and or competitive
position could be adversely affected. Several factors in addition to competitive pressures could influence our rate of acquisition of new customers and our rate of customer turnover, including limited network coverage, lack of sufficient reliability
of our services and economic conditions in Brazil.
The industry in which we conduct our business is subject to rapid technological changes and these changes could have a material adverse effect on our ability to provide competitive services.
The telecommunications industry is subject to rapid and significant technological changes. Our success depends, in part, on our ability to anticipate and adapt in a timely manner to technological changes. We expect that
new products and technologies will emerge and that existing products and technologies will be further developed.
The advent of new products and technologies could have a variety of consequences for us. These new products and technologies may reduce the price of our services by providing lower-cost alternatives, or they may be
superior to, and render obsolete, the products and services we offer and the technologies we use, requiring investment in new technology. The cost of upgrading our products and technology in order to continue to compete effectively could be
significant, and our ability to fund the upgrading may depend on our ability to obtain additional financing.
Certain debt agreements contain financial covenants, and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.
Certain existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios and tests. Failure to meet or satisfy any of these covenants, financial
ratios or financial tests could result in an event of default under these agreements.
Our controlling shareholders have a great deal of influence over our business.
As of December 31, 2007,
PT Móveis SGPS, S.A
. and
Telefónica S.A
., our principal shareholders, owned, directly and indirectly, approximately 89.3% of our common shares and 62.8% of our total
capital. PT Móveis SGPS, S.A. is 100% controlled by
Portugal Telecom
, SGPS, S.A. See Item 7.A.Major Shareholders and Related Party TransactionsMajor Shareholders. Due to their share ownership, our principal
shareholders have the power to control us and our subsidiary, including the power to elect our directors and officers and determine the outcome of any action requiring shareholder approval, including corporate reorganizations and the timing and
payment of our dividends.
The cellular industry, including us, may be harmed by reports suggesting that radio frequency emissions cause health problems and interfere with medical devices.
Media and other reports have suggested that radio frequency emissions from base stations may cause health problems. These concerns could have an adverse effect on the wireless communications industry and, possibly,
expose wireless providers, including us, to litigation. According to the World Health Organization (WHO), there is no evidence in the latest medical research that shows any relationship between radio frequency emissions of base
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stations and health concerns. However, expansion of our network may be affected by perceived risks if we experience problems in finding new sites, which in turn may delay expansion and may affect the quality of our services. On July 2, 2002, ANATEL
published Resolution No. 303 that limits emission and exposure for fields with frequencies between 9 kHz and 300 GHz. In addition, the Brazilian government is developing specific legislation for the deployment of radio frequency transmission
stations that will supersede the existing state and municipal laws. The new laws may create additional transmission regulations which, in turn, could have an adverse effect on our business.
We face risks associated with litigation.
We and our subsidiary are party to a number of lawsuits and other proceedings. An adverse outcome in, or any settlement of, these or other lawsuits could result in significant costs to us. In addition, our senior
management may be required to devote substantial time to these lawsuits, which they could otherwise devote to our business. See Item 8.A.Financial InformationConsolidated Statements and Other Financial InformationLegal
Matters.
We may be required to record impairment charges relating to goodwill and long-lived assets in the future.
For Brazilian GAAP purposes, an impairment is recognized on goodwill if the expected net cash flows generated from the acquired net assets is not sufficient to cover their book value. As of December 31, 2007, the amount
of goodwill of the Company is R$732.3 million.
For U.S. GAAP purposes, we are required to test our goodwill for impairment at least annually. The difference between the book value of a company and its market value may indicate that an impairment exists. This
impairment test is described in Note 37 to our audited consolidated financial statements. Vivo, in particular, has substantial goodwill, including goodwill related to the acquisition of TCO in 2003 with a carrying value of R$579.2 million as of
December 31, 2007. It is possible that we may be required to record impairment charges relating to our goodwill in future periods, and this would have an adverse effect on our results of operations.
In addition, we are required to record impairment charges on long-lived assets, including property, plant and equipment and finite-lived intangible assets (including concessions) if the carrying value of these assets
exceeds the undiscounted cash flows expected from their use of the assets for purposes of U.S. GAAP. This impairment test is also described in Note 37(m) to our audited consolidated financial statements included in this annual report. When we performed our last
impairment test, our evaluation of our ability to recover the carrying value of our long-lived assets was based on projections of future operations that assumed a higher level of revenues and gross margin percentages than we have historically
achieved. We may not be successful in achieving these improvements in our revenues and gross margin percentages due to the competitive environment, changes in technology or other factors. If we are unable to achieve these improvements, we may be
required to record impairment charges related to our long-lived assets in future periods, and this could have an adverse effect on our operations.
Risks Relating to Our Securities
Holders of our preferred shares or ADSs may not receive any dividends.
According to Brazilian Corporate Law and our by-laws, we must generally pay dividends to all shareholders of at least 25% of our annual net income, as determined and adjusted under the Brazilian Corporate Law. These
adjustments to net income for purposes of calculating the basis for dividends include allocations to various reserves that effectively reduce the amount available for the payment of dividends. We were unable to pay minimum dividends for the fiscal
years ended December 31, 2003, 2004, 2005 and 2007 because we had net losses. For the fiscal year ended December 2006, we were able to pay dividends because we had net income, but the amounts paid were insufficient to meet the minimum legal
requirement. In addition, according to Brazilian Corporate Law, we need not pay dividends to our shareholders in any particular fiscal year if our board of directors determines that such distributions would be inadvisable in light of our financial
condition. See Our preferred shares and our ADSs generally do not have voting rights.
Since we are a holding company, our income consists of distributions from our subsidiary in the form of dividends or other advances and payments. We do not generate our own operating revenues, and we are dependent on
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dividends and other advances and payments for our cash flow, including making any dividend payments and making payments on our indebtedness.
Exchange controls and restrictions on remittances abroad may adversely affect holders of our ADSs.
Brazilian law provides that whenever there is a significant imbalance in Brazils balance of payments or a significant possibility that such imbalance will exist, the Brazilian government may impose temporary
restrictions on the remittance to foreign investors of the proceeds of their investment in Brazil (as it did for approximately six months in 1989 and early 1990) and on the conversion of Brazilian currency into foreign currencies. These restrictions
could hinder or prevent the Brazilian custodian of the preferred shares underlying the ADSs or holders who have exchanged the ADSs for the underlying preferred shares from converting dividends, distributions or the proceeds from any sale of such
shares into U.S. dollars and remitting such U.S. dollars abroad. In such an event, the Brazilian custodian for our preferred shares will hold the
reais
that it cannot convert for the account of holders of the ADSs who have not been paid.
Neither the custodian nor the depositary will be required to invest the
reais
or be liable for any interest.
Holders of our ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.
We are organized under the laws of Brazil, and most of our directors and executive officers and our independent public accountants reside or are based in Brazil. Substantially all of our assets and those of these other
persons are located in Brazil. As a result, it may not be possible for holders of the ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these
other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are
met, holders may face greater difficulties in protecting their interests due to actions by us, our directors or executive officers than would shareholders of a U.S. corporation.
Actual or anticipated sales of a substantial number of our ADSs could decrease the market prices of our ADSs.
Sales of a substantial number of our preferred shares could negatively affect the market prices of our preferred shares and ADSs. If, in the future, existing or future holders of preferred shares make substantial sales
of shares, the market price of our preferred shares and, by extension, the ADSs may decrease significantly. As a result, holders of the ADSs may not be able to sell the ADSs at or above the price they paid for them.
The relative volatility and illiquidity of the Brazilian securities markets may adversely affect holders of our ADSs.
Investments in securities, such as the preferred shares or ADSs, of issuers from emerging market countries, including Brazil, involves a higher degree of risk than investments in securities of issuers from more
developed countries.
The Brazilian securities market is substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States. There is also significantly greater concentration in the
Brazilian securities market than in major securities markets in the United States. These features may substantially limit the ability to sell the preferred shares underlying the ADSs at a price and time at which holders wish to do so. The São
Paulo Stock Exchange had a market capitalization of US$1,398.7 billion as of December 31, 2007, and an average monthly trading volume of approximately US$52.2 billion for the first twelve months of 2007.
In comparison, the NYSE had a domestic market capitalization of US$15.7 trillion (excluding funds and non-U.S. companies) as of December 31, 2007. A liquid and active market may never develop for our common shares,
preferred shares or ADSs, and as a result, the ability of holders to sell at the desired price or time may be significantly hindered.
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Holders of our ADSs may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company and our shareholders may have fewer and less
well-defined rights.
Holders of ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our by-laws and Brazilian Corporate Law. Our corporate affairs are governed by our by-laws and the
Brazilian Corporate Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, or elsewhere outside Brazil. Under Brazilian Corporate Law, the rights of a holder of our common shares
or preferred shares to protect its interests with respect to actions by us, our directors or executive officers may be fewer and less well-defined than under the laws of other jurisdictions.
Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other
jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our common
shares, preferred shares or ADSs at a potential disadvantage. In addition, the disclosure required of public companies in Brazil may be less complete or informative than that required of public companies in the United States or in certain other
countries.
Our preferred shares and our ADSs generally do not have voting rights.
In accordance with Brazilian Corporate Law and our by-laws, holders of our preferred shares, and therefore of our ADSs, are not entitled to vote at meetings of our shareholders, except in limited circumstances. In
accordance with Brazilian Corporate Law and our by-laws, holders of preferred shares will have full voting rights in the event that we do not pay minimum dividends to those shareholders for three consecutive fiscal years, and those shareholders will
retain those voting rights until we pay minimum dividends again.
Because we did not pay minimum dividends for the years ended December 31, 2001, 2002, 2003, 2004, 2005, 2006 and 2007, the holders of preferred shares have been able to exercise voting rights since the general
shareholders meeting held in March 2004. However, once we begin to pay minimum dividends, these voting rights will cease. See Holders of our preferred shares or ADSs may not receive any dividends and Item 10.BAdditional
InformationMemorandum and Articles of Association.
Holders of our ADSs may find it difficult to exercise even their limited voting rights at our shareholders meetings.
Holders of our ADSs may exercise the limited voting rights with respect to our preferred shares represented by the ADSs only in accordance with the deposit agreement related to the ADSs. There are practical limitations
upon the ability of ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example, we are required to publish a notice of our shareholders meetings in certain newspapers in
Brazil. To the extent that holders of our preferred shares are entitled to vote at a shareholders meeting, they will be able to exercise their voting rights by attending the meeting in person or voting by proxy. By contrast, holders of the
ADSs will receive notice of a shareholders meeting by mail from the depositary following our notice to the depositary requesting the depositary do so, and so may not receive voting materials in time to instruct the depositary to vote the
preferred shares underlying their ADSs. To exercise their voting rights, ADS holders must instruct the depositary on a timely basis. If voting instructions for all or part of the ADSs are not timely received by the depositary, the depositary will
assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances. In addition, the depositary and its agents are not responsible for failing to
carry out voting instructions of the holders of the ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of the ADSs may not be able to exercise voting rights, and will have no recourse if the preferred shares
underlying their ADSs are not voted as requested.
You might be unable to exercise preemptive rights with respect to our preferred shares unless there is a current registration statement in effect that covers those rights or unless an exemption from registration
applies.
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You will not be able to exercise preemptive rights related to our preferred shares underlying any ADSs you own unless a registration statement under the U.S. Securities Act of 1933, as amended (Securities
Act), is effective with respect to those rights, or unless an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement. Unless we file a registration statement or an
exemption from registration applies, you may receive only the net proceeds from the sale of your preemptive rights by the depositary, or, if the preemptive rights cannot be sold, they will lapse and you will not receive any value for them. For more
information on the exercise of your rights, see Item 10.Additional Information.
An exchange of ADSs for preferred shares risks the loss of certain foreign currency remittance and Brazilian tax advantages.
The ADSs benefit from the certificate of foreign capital registration, which permits The Bank of New York, as depositary, to convert dividends and other distributions with respect to preferred shares into foreign
currency, and to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for preferred shares will then be entitled to rely on the depositarys certificate of foreign capital registration for five business days from the date of
exchange. Thereafter, they will not be able to remit non-Brazilian currency abroad unless they obtain their own certificate of foreign capital registration, or unless they qualify under Resolution 2,689 of the Central Bank of Brazil, dated January
26, 2000 and issued by BACEN, which entitles certain investors to buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration.
If holders of ADSs do not qualify under Resolution 2,689, they will generally be subject to less favorable tax treatment on distributions with respect to our preferred shares. There can be no assurance that the
depositarys certificate of registration or any certificate of foreign capital registration obtained by holders of ADSs will not be affected by future legislative or regulatory changes, or that additional Brazilian law restrictions applicable
to their investment in the ADSs may not be imposed in the future.
Holders of our preferred shares will be subject to, and holders of our ADSs could be subject to, Brazilian income tax on capital gains from sales of preferred shares or ADSs.
Brazilian Law No. 10,833, dated December 29, 2003, provides that gains on the disposition of assets located in Brazil by non-residents of Brazil, whether to other non-residents or to Brazilian residents, will be subject
to Brazilian taxation. The common shares and preferred shares are expected to be treated as assets located in Brazil for purposes of the law, and gains on the disposition of common shares and preferred shares, even by non-residents of Brazil, are
expected to be subject to Brazilian taxation. In addition, the ADSs may be treated as assets located in Brazil for purposes of the law, and therefore gains on the disposition of ADSs by non-residents of Brazil may also be subject to Brazilian
taxation. Although the holders of ADSs outside Brazil may have grounds to assert that Law No. 10,833 does not apply to sales or other dispositions of ADSs, it is not possible to predict whether that understanding will ultimately prevail in the
courts of Brazil, given the general and unclear scope of Law No. 10,833 and the absence of judicial court rulings in respect thereto. See Item 10.E.Additional InformationTaxationBrazilian Tax Considerations.
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ITEM 4. INFORMATION ON THE COMPANY
A. Our History and Development
General
We are incorporated under the laws of the Federative Republic of Brazil under the name Vivo Participações S.A., known as Vivo (and prior to the Merger, under the name
Telesp Celular
Participações S.A.
). We have the legal status of
a sociedade por ações
, or a stock corporation, operating under Brazilian Corporate Law. Our principal executive offices are located at Avenida Doutor Chucri
Zaidan, 860, 04583-110, São Paulo, SP, Brazil. Our telephone number is +55 11 7420-1172, our facsimile number is +55 11 7420-2247, and our website is
www.vivo.com.br
. The information on our website is not part of this Form 20-F. Our
agent for service of process in the United States is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.
According to market share data published by ANATEL, we are a leading provider of cellular telecommunications services in Brazil through our subsidiary Vivo S.A., whose operations were previously provided by our former
subsidiaries
TC
;
GT
;
TCO
; and the subsidiaries of
Celular
CRT
;
TLE
; and
TSD
.
The following chart shows our corporate structure as of December 31, 2007:
Telebrás and the Privatization
Vivo was originally incorporated as
Telesp Celular Participações
as a result of a restructuring of Telebrás in 1998. Before 1972, there were more than 900 telecommunications companies
operating throughout Brazil. Between 1972 and 1975, Telebrás and its operating subsidiaries, known as the predecessor companies and collectively as the
16
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Telebrás System, were created, acquiring almost all of the telecommunications companies in Brazil, and creating a near monopoly over the public telecommunications services in Brazil.
In 1995, the federal government began a comprehensive reform of Brazils telecommunications regulatory system. In July 1997, Brazils national congress adopted the General Telecommunications Law, which
provided for the establishment of a new regulatory framework, the introduction of competition and the privatization of the Telebrás System. In January 1998, in preparation for the restructuring and privatization of the Telebrás System,
the cellular telecommunications operations of the Telebrás System were spun off into separate companies. In May 1998, the Telebrás System was restructured to form, in addition to Telebrás, twelve new holding companies. Virtually
all of the predecessor companies assets and liabilities were transferred to the new holding companies, which we refer to as the new holding companies. TCP was one of the new holding companies. TCP was awarded all of the share capital held by
Telebrás in TC, one of the cellular operating companies that had provided cellular telecommunications service in the state of São Paulo since 1993. The Brazilian governments common shares of Telesps capital stock were
purchased by the Portugal Telecom group.
Global Telecom (currently Vivo S.A.)
Global Telecom (currently Vivo S.A.) is a B Band cellular concessionaire in the states of Paraná and Santa Catarina. GT began commercial operations in December 1998. In February 2001, we acquired an 81.61%
indirect economic interest in GT for R$902 million. On December 27, 2002, we acquired the remaining shares of GT for R$290.3 million.
Brasilcel
Vivo is controlled by Brasilcel N.V., or Brasilcel, with headquarters in the Netherlands, a joint venture between Portugal Telecom and Telefónica. Through the Vivo Companies, this joint venture controls 27.7% of
the total market in Brazil, according to ANATEL, with 33.5 million customers as of December 31, 2007, according to market share data published by ANATEL. Its operations cover an area of approximately 139 million inhabitants, or 73.6% of the
Brazilian population, and approximately 84.0% of its GDP. Portugal Telecom and Telefónica are managing the joint venture on an equal basis.
In December 2002, Portugal Telecom and Telefónica transferred to Brasilcel all of their direct and indirect interests in the following companies (whose operations have been conducted by Vivo S.A. since our
restructuring):
-
TCP
TCP controlled an A Band operator in the state of São Paulo, GT, a B Band operator in the states of Paraná and Santa Catarina and TCO S.A. and its subsidiaries in the states of Acre, Amazonas, Amapá, Goiás,
Mranhão, Mato Grosso, Matto Grosso do Sul, Pará, Rondônia, Roraima and Tocantis and in the Federal District, Brasilia.
-
TLE
TLE, which controlled A Band operations in the states of Bahia and Sergipe, was one of the operating subsidiaries of Telebrás that was spun off as an individual company in July 1998. It received all the capital stock held by Telebrás
in the subsidiaries that provided cellular telecommunication services in the states of Bahia and Sergipe, namely, Telebahia Celular and Telergipe Celular.
TLE was purchased by a consortium formed by Iberdrola Investimentos Sociedade Unipessoal Ltda., an investment company controlled by Iberdrola S.A. and Telefónica Internacional S.A., a subsidiary of Telefónica. On May 17, 1999,
Iberoleste Participações S.A. purchased 3.07% of Telebahias capital stock and 6.54% of Telergipes capital stock in a tender offer. In February 2000, Telefónica and Iberdrola transferred their shares to Iberoleste,
maintaining their same percentage interest in the consortium. On April 5, 2001, Telefónica purchased all the capital stock directly and indirectly held by the Iberdrola Group in TLE.
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-
TSD
TSD, which controlled A Band operators in the states of Rio de Janeiro and Espírito Santo, was one of the operating subsidiaries of Telebrás that was spun off as an individual company in July 1998. TSD received all the capital stock
held by Telebrás in the subsidiaries that provided cellular telecommunication services in the States of Rio de Janeiro and Espírito Santo, namely, Telerj Celular and Telest Celular, respectively.
TSD was purchased by a consortium of Telefónica Internacional S.A., Iberdrola Investimentos Sociedade Unipessoal Ltda., NTT Mobile Communications Network, Inc. and Itochu Corporation. In May 2000, Telefónica acquired 67.51% of
TSDs capital stock through an exchange offer. On April 5, 2001, Telefónica purchased from the Iberdrola group, with the authorization of ANATEL, 7% of the capital stock of Sudestecel Participações S.A., a holding company
that controlled TSD.
-
Celular CRT
Celular CRT controlled an A Band operator in the state of Rio Grande do Sul. Cellular telecommunications services were first offered in the state of Rio Grande do Sul in December 1992 by a business unit of Celular CRTCompanhia Riograndense de
Telecomunicações. The fixed and cellular operations of Celular CRT were split on June 25, 1998, and the cellular operations were spun off as Celular CRT. On May 4, 1999, Celular CRT obtained its registration as a publicly held company
with the CVM for the trading of its shares on the over-the-counter market organized by Sociedade Operadora do Mercado de Ativos SOMA, starting on May 17, 1999. On September 8, 1999, Celular CRT registered with the Extremo Sul Stock Exchange and
BOVESPA, pursuant to the applicable laws. The main shareholder of Celular CRT was the state of Rio Grande do Sul.
In 1996, the state of Rio Grande do Sul sold part of its stake in Celular CRT to Telefónica. In 1998, the remaining stake of the state of Rio Grande do Sul was sold to Telefónica. In 1999, Portugal Telecom subscribed a share capital
increase of Celular CRT.
Acquisition of TCO
On April 25, 2003, TCP acquired 64.03% of the outstanding voting capital stock of TCO from Fixcel S.A. for approximately R$1,505.6 million, corresponding to R$19.48719845 per each lot of 1,000 shares acquired. TCO is an
A Band operator providing cellular telecommunications services in the Federal District of Brazil, as well as in the Brazilian states of Goiás, Mato Grosso do Sul, Mato Grosso, Rondônia, Acre and Tocantins. The agreement also included
the acquisition of TCOs B Band subsidiary NBT, which provides cellular telecommunications service in the Brazilian states of Amapá, Amazonas, Maranhão, Pará and Roraima. On May 25, 2003, in compliance with Brazilian
legislation, we launched a tender offer for the common shares of TCO not owned by us. The acceptance period ended on November 18, 2003. As a result of the shares tendered, we acquired 74.2% of the outstanding available common shares at the price of
R$16.73 per 1,000 common shares. The total purchase price for the new shares amounted to R$538.8 million. At December 31, 2003 we held 90.73% of TCOs ordinary shares, representing a 29.31% interest in TCO, excluding treasury stocks. We also
announced the intention to launch an exchange offer for the remaining shares of TCO through which we would have become TCOs sole shareholder. This would have been followed by a merger of TCO into TCP. After the launch of the exchange offer,
the CVM raised questions on its compliance with Brazilian law. Although TCP and TCO believed, and believe, that the exchange offer complied with applicable law, TCP and TCO decided to terminate the exchange offer in January, 2004. See sections
TCOs Corporate Restructuring and Merger of the Vivo Companies below for more information on developments to TCO since we acquired it.
Introduction of the Vivo Brand
In April 2003, Brasilcel launched the brand name Vivo, under which TCP, TCO, TLE, TSD and Celular CRT operate. The creation of the Vivo brand constituted a consolidation of the commercial models throughout
the entire country into a common commercial strategy and replaced the different brands under which the different companies offered their services in their respective states. The commercial strategy of Vivo is to increase its customer base as
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well as revenues by retaining customers and maintaining their distribution channels. The launching of the Vivo brand was accompanied by loyalty programs and other measures designed to contribute to the success of the commercial strategy. Guided by a
common management team, Vivo designs marketing, promotional and other initiatives common to all companies and then tailors those activities to the particular markets of those companies.
TCOs Corporate Restructuring
On June 30, 2004, the management of TCP and TCO approved the corporate restructuring of TCO and its subsidiaries Telegoiás, Telems, Telemat, Teleacre and Teleron. The reasons for restructuring were: (i) to
improve TCO and its subsidiaries cash flow, which resulted in the transfer of a R$511 million tax benefit from TCP to TCO, generated by the amortization of goodwill in the amount of R$1,503 million, in connection with the acquisition of TCO
and its subsidiaries by TCP in 2003 and (ii) to simplify the corporate structure of TCOs subsidiaries, improve TCOs capitalization and benefit the minority shareholders of TCOs subsidiaries.
VTOVoluntary Public Tender Offer
On October 8, 2004, Telesp Celular Participações concluded its public tender offer (VTO) for up to 84,252,534,000 preferred shares of TCO by TCP. The number of preferred shares tendered in the VTO exceeded the maximum number to be acquired by TCP. Due to a pro-rata allocation, TCP purchased 0.5547 preferred shares for each preferred share
tendered by a TCP holder. After the VTO, on January 7, 2005, the number of TCO shares held by TCP represents 32.76% of the total preferred shares and 50.65% of the total capital stock of TCO. Also under the VTO, Avista Participações
Ltda., a subsidiary of Brasilcel, purchased:
-
common shares of TLE representing 10.0% of TLEs total common shares and preferred shares of TLE representing 29.51% of TLEs total preferred shares;
-
common shares of TSD representing 3.27% of TSDs total common shares and preferred shares of TSD representing 4.89% of TSDs total preferred shares; and
-
common shares of Celular CRT representing 4.48% of Celular CRTs total common shares and preferred shares of Celular CRT representing 23.44% of Celular CRTs total preferred shares.
Rights Offering
On November 8, 2004, TCP announced a capital increase of up to R$2,053,895,871.47, upon private subscription, with an issuance of 410,779,174,294 new shares, of which 143,513,066,618 are common shares and
267,266,107,676 are preferred shares, identical in every aspect to those shares currently existing, at the issuance price of five
reais
(R$5.00) per lot of one thousand shares, for both types of shares.
The capital increase was carried out in three subscription stages, with due regard to preemptive rights, and ended with an auction of the remaining shares held on January 4, 2005, which was confirmed by the Board of
Directors at a meeting held on January 7, 2005. The capital stock was increased to R$6,427,557,341.20, represented by 1,582,563,526,803 shares, of which 552,896,931,154 are common shares and 1,029,666,595,649 are preferred shares. Following the
rights offering, Brasilcel held 94.9% of our common shares, 50.0% of our preferred shares, and 65.7% of our total capital stock.
Brasilcels Share Holding Increases of TLE, TSD, and Celular CRT
In July 2005, Brasilcel and its affiliates acquired additional voting capital stock of TLE, TSD and Celular CRT in respective Share Holding increases. As a result of those transactions, Brasilcel held:
-
68.72% of TLEs common shares, 40.95% of TLEs preferred shares and 50.67% of TLEs total capital stock;
-
92.01% of TSDs common shares, 90.27% of TSDs preferred shares and 91.03% of TSDs total capital stock; and
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-
90.57% of Celular CRTs common shares, 51.47% of Celular CRTs preferred shares and 68.77% of Celular CRTs total capital stock (excluding treasury shares).
Merger of the Vivo Companies
In February 2006, shareholders of the Vivo Companies approved their consolidation with one another through a Brazilian law procedure (the Merger) whereby TCO became a wholly owned subsidiary of TCP pursuant
to a merger of shares (
incorporação de ações
) of TCO and a merger of companies (
incorporação de empresas
) of TLE, TSD and Celular CRT with and into TCP, with TCP as the surviving company.
Holders of common shares, preferred shares or (where applicable) ADSs of TCO, TLE, TSD and Celular CRT received common shares, preferred shares or ADSs, respectively, of TCP upon approval of the Merger by the requisite percentage of the voting
shareholders of TCP, and of TCO, TLE, TSD and Celular CRT, as applicable. Upon the completion of the Merger, TCP was renamed Vivo Participações S.A. and has become the holding company of TCO and GT and of the remaining subsidiaries of
TLE, TSD and Celular CRT.
The boards of directors (
Conselhos de Administração
) of each of the constituent companies to the Merger completed their respective approval processes for the Merger by December 4, 2005, and the
respective shareholders approved the transaction as of February 22, 2006. The reasons for the Merger were to align the interests of the shareholders of TCP, TCO, and TLE, TSD and Celular CRT, which were previously under common control; to improve
the liquidity of the resultant securities; to simplify the shareholding and organizational structure of the Vivo companies and expand its shareholder base; and to take advantage of important synergies among the companies, which were already
operating under the common Vivo brand.
Pursuant to the Merger, Brasilcel and its subsidiaries hold 89.0% of TCPs common shares. Under the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification, the agreements which govern
the Merger, TCP underwent a capital increase in the amount of R$2,631,136,636.01 as a result of the Merger, from R$6,670,152,498.26 to R$9,301,289,134.27. The agreements also provided that Celular CRTs preferred shares held in treasury are
transferred to TCP in connection with the Merger. At the Vivo Shareholders Meeting held on February 22, 2006, TCP reduced its capital in the amount of R$3,147,782,181.54, from R$6,670,152,498.26 to R$3,522,370,316.72, as approved by management
and the shareholders and in accordance with Brazilian Corporate Law, which permits reductions in capital up to the amount of accumulated losses, allowing a more accurate valuation of the company and the possibility for eventual future distributions
of dividends.
TCP subsequently changed its corporate name to Vivo. The total capital of Vivo following the merger was R$6,153,506,952.73 due to an increase in the amount of R$2,631,136,636.01 as a result of the Merger. For more
information on the Merger, see the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification among TCP, TSD, TLE and Celular CRT dated December 4, 2005, which is included as an exhibit to this report.
CVM regulations permit the acquiror of a publicly held company to capitalize the tax benefits arising from the amortization of goodwill generated in the acquisition of that company, so long as preemptive rights are
extended to the other shareholders of the publicly held company in connection with the capital increase. At the time of the Merger, any rights previously held by Vivo, in connection with its existing investment in TCO, or by certain controlling
shareholders, in the case of TSD, TLE and Celular CRT, to capitalize credits of such companies will remain in effect. As a result, at the time of the Merger, Vivo retained its prior rights to capitalize its credits in TCO and such controlling
shareholders acquired the right to use their credits in future capital increases of Vivo.
Capital Increase
On June 08, 2006, the Board of Directors of Vivo Participações approved a capital increase and issued a total of 15,705,528 new common shares at the issue price of R$12.37 in connection with
Brasilcels capitalization of certain tax benefits relating to the goodwill it recorded when it acquired us in December 2002 and with preemptive rights exercised by our shareholders. CVM regulations permit buyers of joint stock companies to
capitalize tax benefits derived from goodwill, provided preemptive rights related to such capital increase are extended to the other shareholders of the joint stock company. The goodwill Brasilcel capitalized included approximately R$193.9 million
in tax benefits for the fiscal year ending on December 31, 2005 and approximately R$0.4. million for previous fiscal years, totaling approximately R$194.3 million.
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The issue price was 100% of the weighted average of the closing prices registered by the São Paulo Stock Exchange in the 15 trading sessions held between April 07, 2006 and May 02, 2006. The preemptive rights
were authorized to be exercised in the period between May 08, 2006 and June 06, 2006.
As a result of this capital increase Brasilcels holdings in us consisted of 89.3% of Vivo common shares, 47.5% of Vivo preferred shares and 62.8% of Vivos total capital.
The tax benefits for the years ended 2006 and 2007 will be capitalized during the year ending 2008 in accordance with the preemptive right for the capital increase provided under Brazilian Corporate Law.
Corporate Restructuring of Our Operating Subsidiaries
On October 31, 2006, our shareholders approved the merger of Telergipe, Telebahia, Telerj, Telest, CRT, TC, TCO, Telegoiás, Telemat, Telems, Teleron, Teleacre and NBT (each an Operating Subsidiary and
collectively, the Operating Subsidiaries) into Vivo S.A. (formerly known as GT) (the Corporate Restructuring). TCO - IP S.A. remained a separate entity, as it is not an SMP operator.
The remaining rights of the former minority shareholders of TCO, Telegoiás, Telemat, Telems, Teleacre and Teleron survived the Corporate Restructuring of the Operating Subsidiaries as of November 1, 2006 and
continue to exist under Vivo S.A.
Due to this Corporate Restructuring, the SMP and SCM services that were offered by the Operating Subsidiaries in their respective areas and regions, along with their clients and users, were transferred to Vivo S.A.
The Corporate Restructuring had no impact on Vivos consolidated financial statements, capital stock or shareholders equity.
The benefits of this restructuring included, among others, increased organizational efficiency, a more effective management and streamlined administrative and commercial functions.
Acquisition of Telpart, Telemig and Tele Norte
.
On August 2, 2007, Vivo signed a stock purchase agreement with Telpart to acquire control of Telemig Participações and Tele Norte Participações and 22.72% and 19.34%, respectively, of their
total capital for an aggregate amount of R$1.2 billion, subject to certain price adjustments. Telpart is the parent company of Telemig and Tele Norte. In addition, pursuant to the agreement, Vivo will acquire from Telpart certain subscription rights
with respect to goodwill reserves for R$87 million. The completion of the transaction is subject to customary closing conditions.
Upon closing of the transaction, in accordance with Brazilian law, Vivo will launch mandatory tender offers for the acquisition of common shares held by non-controlling shareholders at 80% of the price paid for the
controlling stake. The mandatory tender offers will be extended to Telemig Participações; Telemig Celular; Tele Norte Participações, a holding company of Amazônia Celular S.A. (Amazônia Celular),
which is the SMP provider in Area 8 of Region 1 of the Plano Geral de Autorizações of the SMP that covers the northern Brazilian states of Amazonas, Roraima, Amapá, Pará and Maranhão; and Amazônia Celular. In
addition, Vivo intends to launch voluntary tender offers for up to one-third of all classes of preferred shares held by the non-controlling shareholders in the holding and operating companies at a 25% premium to the weighted average price of the
last 30 trading days up to August 1, 2007.
On August 21, 2007, Vivos General Shareholders Meeting approved and ratified the stock purchase agreement mentioned above. On November 9, 2007, ANATEL approved Vivos acquisition of Telemig pursuant to Action
(Ato) No. 68,401, and on March 5, 2008, it approved the acquisition of Tele Norte for subsequent sale to Telemar pursuant to Action (Ato.) No. 1.261/2008. Assuming full acceptance of all offers, Vivo will have acquired a beneficial interest of 58.2%
in Telemig Celular and 54.6% in Amazônia Celular, for an aggregate consideration of approximately R$2.9 billion (including the value of the subscription rights). As Telemig Celular and Amazônia
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Celular operate in the regions of Minas Gerais and Amazonia, respectively, the transaction will therefore allow Vivo to increase its coverage and customer base.
On December 20, 2007, in accordance with the terms of ANATELs Instruction CVM 358 of 01/03/02, Vivo publicly announced that it signed a stock purchase agreement with Telemar, a Brazilian telecommunications company
unrelated to either Telpart or Vivo, for the sale of all of the Tele Norte shares it was acquiring from Telpart under the stock purchase agreement dated August 2, 2007, in order to facilitate its acquisition of the shares of Telemig. Vivo based its
decision to execute the stock purchase agreement of December 20, 2007 with Telemar on the fact that while ANATEL approved the acquisition of the shares of Telemig Participações by means of Act No. 68,401 of November 6, 2007, the
approval of the acquisition of Tele Norte shares had been pending for a longer time period and Vivo believed that ANATEL was more likely to have approved its acquisition of Telemig shares from Telpart if Vivo sold the Tele Norte shares to a third
party. Subsequent to signing this stock purchase agreement, and pursuant to Act No. 1,261 dated March 5, 2008 published in the DOU on March 7, 2008, ANATEL approved the transfer of shares of Tele Norte to Vivo and the subsequent transfer of these
shares to Telemar.
The sale to Telemar was agreed to be in the amount of R$120,009,893.00, subject to the indexation set forth in the stock purchase agreement dated December 20, 2007, which is equivalent to the price Vivo paid for these
same shares under the terms of the stock purchase agreement of August 2, 2007. The sale will be consumated upon, among other conditions, ANATELs approval of the Tele Norte acquisition by Vivo.
Capital Expenditures
The primary focus of our capital expenditure program has been, and continues to be, the improvement of the capacity of the services we currently offer and the provision of new services as well as the development of
information systems.
The following tables set forth our total capital expenditures for the companies and periods indicated:
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
Vivo
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Switching equipment
|
|
417.3
|
|
375.9
|
|
523.0
|
Transmission equipment
|
|
726.9
|
|
844.4
|
|
862.8
|
Information technology
|
|
267.2
|
|
414.8
|
|
407.6
|
Others(3)
|
|
494.3
|
|
468.8
|
|
413.1
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
1.905.7
|
|
2,103.9
|
|
2,206.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
State of São Paulo Areas 1 and 2
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Switching equipment
|
|
133.4
|
|
121.3
|
|
216.2
|
Transmission equipment
|
|
267.1
|
|
304.7
|
|
309.7
|
Information Technology
|
|
238.2
|
|
351.5
|
|
360.4
|
Others(3)
|
|
143.8
|
|
167.4
|
|
120.9
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
782.5
|
|
944.9
|
|
1,007.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
States of Rio de Janeiro and Espírito Santo Area 3
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Switching equipment
|
|
86.4
|
|
65.0
|
|
90.2
|
Transmission equipment
|
|
115.3
|
|
164.1
|
|
112.8
|
Information technology
|
|
5.6
|
|
12.9
|
|
11.6
|
Others(3)
|
|
106.5
|
|
90.3
|
|
82.5
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
313.8
|
|
332.3
|
|
297.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Table of Contents
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
States of Paraná and Santa Catarina Area 5
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Switching equipment
|
|
56.2
|
|
30.5
|
|
25.4
|
Transmission equipment
|
|
89.8
|
|
70.8
|
|
123.2
|
Information Technology
|
|
2.2
|
|
10.6
|
|
6.4
|
Others(3)
|
|
65.6
|
|
45.3
|
|
30.9
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
213.8
|
|
157.2
|
|
185.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
State of Rio Grande do Sul Area 6
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Switching equipment
|
|
69.1
|
|
89.8
|
|
59.7
|
Transmission equipment
|
|
73.8
|
|
43.5
|
|
118.4
|
Information technology
|
|
5.9
|
|
8.0
|
|
4.2
|
Others(3)
|
|
62.3
|
|
64.3
|
|
56.2
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
211.1
|
|
205.6
|
|
238.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
Central Western and Northern regions Areas 7 and 8
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Switching equipment
|
|
46.4
|
|
44.0
|
|
101.6
|
Transmission equipment
|
|
119.3
|
|
149.8
|
|
145.8
|
Information Technology
|
|
8.1
|
|
27.0
|
|
19.4
|
Others(3)
|
|
78.7
|
|
66.5
|
|
86.7
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
252.5
|
|
287.3
|
|
353.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
States of Bahia and Sergipe Area 9
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Switching equipment
|
|
25.8
|
|
25.3
|
|
29.9
|
Transmission equipment
|
|
61.6
|
|
111.5
|
|
52.9
|
Information technology
|
|
7.2
|
|
4.8
|
|
5.6
|
Others(3)
|
|
37.4
|
|
35.0
|
|
35.9
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
132.0
|
|
176.6
|
|
124.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
__________________________________
(1)
|
The financial information presented for 2006 and 2007 represents information from Vivos consolidated financial statements in which Vivo has consolidated TSD, TLE, and CRT as from January 1, 2006.
|
|
(2)
|
The financial information presented for the 2005 fiscal year represents the combined financial data for Vivo, TSD, TLE and CRT, since the companies were under common control with Vivo for these periods.
|
|
(3)
|
Consisting primarily of free handset rentals, network construction, furniture and fixtures, office equipment and store layouts.
|
|
Our capital expenditure estimate for 2008 is approximately R$6.1 billion, which includes investments in network expansion, introduction of products and services that aim at maximizing the use of cellular telephony, as
well as seeking ways to constantly improve the quality of services provided to our customers.
We intend to fund these capital expenditures mostly with cash generated from operations. See Item 5.B.Operating and Financial Review and ProspectsLiquidity and Capital Resources.
23
Table of Contents
B. Business Overview
According to data regarding market share published by ANATEL, we are among the leading providers of cellular telecommunications services in Brazil, with the help of our subsidiary Vivo S.A., the leading cellular
operator in Brazil. Vivo S.A. is a cellular operator in the states of São Paulo, Paraná, Santa Catarina, Acre, Amazonas, Amapá, Distrito Federal, Goiás, Maranhão, Mato Grosso, Mato Grosso do Sul, Pará,
Rondônia, Roraima, Tocantins, Bahia, Sergipe, Rio de Janeiro, Espirito Santo and Rio Grande do Sul.
In Areas 1 and 2, Vivo S.A. uses a frequency range known as A Band that covers 100% of the municipalities in its authorized areas in the state of São Paulo. At December 31, 2007, Vivo S.A. had 12.1 million
cellular lines in service in these areas, which represented a
13.6% increase from December 31, 2006, and a market share of approximately 41.5% in São Paulo.
In Area 3, Vivo S.A. uses the Band A frequency range that covers 100% of the municipalities and 100% of the population in the states of Rio de Janeiro and Espírito Santo. At December 31, 2007, Vivo S.A. had 5.9
million cellular lines in service in this area, which represented a 20.9% net increase from December 31, 2006, and a market share of approximately 39.9% in those states.
In Area 5, Vivo S.A. uses a frequency range known as B Band that covers 60.0% of the municipalities in the states of Paraná and Santa Catarina and 92.5% of the population of Paraná and Santa Catarina. At
December 31, 2007, Vivo S.A. had 2.8 million cellular lines in service in this area, which represented a 9.8% net increase from December 31, 2006, and a market share of approximately 25.8% in those states.
In Area 6, Vivo S.A. uses the Band A frequency range that covers 72.7% of the municipalities and 96.3% of the population in the state of Rio Grande do Sul. At December 31, 2007, Vivo S.A. had 3.6 million cellular lines
in service in this area, which represented a 9.8% net increase from December 31, 2005, and a market share of approximately 43.1% in that state.
In Areas 7 and 8, Vivo S.A. is the leading cellular operator, by number of customers, in its authorization area and uses a frequency range known as A Band that covers 53.3% of the municipalities in the states of Acre,
Distrito Federal, Goiás, Mato Grosso, Mato Grosso do Sul, Rondônia and Tocantins, which covers 90.2% of the population in these states, and also uses a frequency range known as B Band that covers 33.8% of the municipalities in the
states of Amazonas, Amapá, Maranhão, Pará and Roraima, which covers 71.2% of the population of these states. At December 31, 2007, Vivo S.A. had 6.7 million cellular lines in service in these areas, which represented a 13.5% net
increase from December 31, 2006, and a market share of approximately 34.0% in those states.
In Area 9, Vivo S.A. uses the Band A frequency range that covers 50.2% of the municipalities and 82.5% of the population in the States of Bahia and Sergipe. At December 31, 2007, Vivo S.A. had 2.2 million cellular lines
in service in this area, which represented a 34.3% net increase from December 31, 2006, and a market share of approximately 27.4% in those states.
On September 18, 2007, with ANATELs approval, Vivo acquired the Band L lots, except for lot 16 (area of Londrina PR in region 5) and lot 20 (area of Northern Brazil in region 8). Band L comprises lots in frequency
ranges 1895 to 1900 Mhz and 1975 to 1980 Mhz, with 5 + 5 Mhz band width. As a result, Vivo managed to complete its last coverage gap and will soon be operating in the entire Brazilian territory.
On December 20, 2007, with ANATELs approval, Vivo acquired the Band J lots with 10 + 10 Mhz band width, with the exception of the lots in the state of Minas Gerais.
Our Operations
The following tables set forth information about Vivo S.A.s cellular telecommunications base, coverage and related matters at the dates and for the years indicated.
24
Table of Contents
State of São Paulo Areas 1 and 2
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cellular lines in service at year-end (in thousands)
|
|
12,142
|
|
10,684
|
|
10,476
|
Contract customers
|
|
2,125
|
|
1,803
|
|
1,779
|
Prepaid customers
|
|
10,017
|
|
8,881
|
|
8,696
|
Growth in cellular lines in service during year
|
|
13.6%
|
|
2.0%
|
|
13.5%
|
Churn(1)
|
|
25.4%
|
|
28.6%
|
|
18.7%
|
Estimated population of concession areas (in millions)(2)
|
|
41.2
|
|
40.6
|
|
39.7
|
Estimated covered population (in millions)(3)
|
|
41.2
|
|
40.6
|
|
39.7
|
Percentage of population covered(4)
|
|
100%
|
|
100%
|
|
100%
|
Penetration at year-end(5)
|
|
71.0%
|
|
59.6%
|
|
53.0%
|
Percentage of municipalities covered
|
|
100%
|
|
100%
|
|
100%
|
Market share(6)
|
|
41.5%
|
|
44.2%
|
|
49.2%
|
States of Rio de Janeiro and Espírito Santo Area 3
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cellular lines in service at year-end (in thousands)
|
|
5,947
|
|
4,920
|
|
4,740
|
Contract customers
|
|
1,391
|
|
1,343
|
|
1,476
|
Prepaid customers
|
|
4,556
|
|
3,577
|
|
3,264
|
Customer growth during the year
|
|
20.9%
|
|
3.8%
|
|
8.3%
|
Churn(1)
|
|
25.5%
|
|
32.6%
|
|
29.5%
|
Estimated population of Region at year-end (millions)(2)
|
|
19.4
|
|
19.1
|
|
18.8
|
Estimated covered population at year-end (millions)(3)
|
|
19.4
|
|
19.1
|
|
18.8
|
Percentage of population of Region covered at year-end(4)
|
|
100%
|
|
100%
|
|
100%
|
Penetration at year-end(5)
|
|
76.8%
|
|
64.3%
|
|
58.8%
|
Percentage of municipalities covered
|
|
100%
|
|
100%
|
|
100%
|
Market share(6)
|
|
39.9%
|
|
39.9%
|
|
42.6%
|
States of Paraná and Santa Catarina Area 5
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cellular lines in service at year-end (in thousands)
|
|
2,823
|
|
2,570
|
|
2,910
|
Contract customers
|
|
494
|
|
406
|
|
366
|
Prepaid customers
|
|
2,329
|
|
2,164
|
|
2,543
|
Growth in cellular lines in service during year
|
|
9.9%
|
|
(11.7)%
|
|
12.8%
|
Churn(1)
|
|
34.5%
|
|
44.1%
|
|
20.0%
|
Estimated population of concession areas (in millions)(2)
|
|
16.7
|
|
16.5
|
|
16.1
|
Estimated covered population (in millions)(3)
|
|
15.4
|
|
15.2
|
|
14.9
|
Percentage of population covered(4)
|
|
92%
|
|
93%
|
|
92.3%
|
Penetration at year-end(5)
|
|
65.7%
|
|
56.6%
|
|
51.4%
|
Percentage of municipalities covered
|
|
60.0%
|
|
60.0%
|
|
59.0%
|
Market share(6)
|
|
25.8%
|
|
27.6%
|
|
34.5%
|
State of Rio Grande do Sul Area 6
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cellular lines in service at year-end (in thousands)
|
|
3,647
|
|
3,321
|
|
3,387
|
Contract customers
|
|
939
|
|
790
|
|
829
|
25
Table of Contents
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Prepaid customers
|
|
2,709
|
|
2,530
|
|
2,558
|
Growth in cellular lines in service during year
|
|
9.8%
|
|
(2.0)%
|
|
5.3%
|
Churn(1)
|
|
24.1%
|
|
27.5%
|
|
21.7%
|
Estimated population of concession areas (in millions)(2)
|
|
10.7
|
|
10.6
|
|
10.5
|
Estimated covered population (in millions)(3)
|
|
10.4
|
|
10.2
|
|
10.0
|
Percentage of population covered(4)
|
|
96.4%
|
|
96%
|
|
96.0%
|
Penetration at year-end(5)
|
|
78.7%
|
|
71.3%
|
|
65.6%
|
Percentage of municipalities covered
|
|
72.7%
|
|
70.0%
|
|
69.9%
|
Market share(6)
|
|
43.1%
|
|
43.8%
|
|
48.3%
|
Central Western and Northern regions Areas 7 and 8
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cellular lines in service at year-end (in thousands)
|
|
6,713
|
|
5,912
|
|
6,815
|
Contract customers
|
|
899
|
|
836
|
|
970
|
Prepaid customers
|
|
5,814
|
|
5,075
|
|
5,845
|
Growth in cellular lines in service during year
|
|
13.6%
|
|
(13.3)%
|
|
17.1%
|
Churn(1)
|
|
33.2%
|
|
47.3%
|
|
19.2%
|
Estimated population of concession areas (in millions)(2)
|
|
35.3
|
|
34.6
|
|
33.8
|
Estimated covered population (in millions)(3)
|
|
28.7
|
|
28.0
|
|
27.1
|
Percentage of population covered(4)
|
|
81.5%
|
|
81.0%
|
|
80.4%
|
Penetration at year-end(5)
|
|
56.0%
|
|
47.3%
|
|
44.0%
|
Percentage of municipalities covered
|
|
46.4%
|
|
46.0%
|
|
44.7%
|
Market share(6)
|
|
34.0%
|
|
36.1%
|
|
45.5%
|
States of Bahia and Sergipe Area 9
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cellular lines in service at year-end (in thousands)
|
|
2,212
|
|
1,647
|
|
1,477
|
Contract customers
|
|
399
|
|
331
|
|
323
|
Prepaid customers
|
|
1,813
|
|
1,316
|
|
1,154
|
Customer growth during the year
|
|
34.3%
|
|
11.5%
|
|
11.9%
|
Churn(1)
|
|
29.7%
|
|
32.1%
|
|
33.6%
|
Estimated population of region at year-end (million)(2)
|
|
16.2
|
|
16.0
|
|
15.8
|
Estimated covered population at year-end (million)(3)
|
|
13.4%
|
|
12.4%
|
|
11.1%
|
Percentage of population covered at year-end(4)
|
|
82.5%
|
|
78.0%
|
|
70.3%
|
Penetration at year-end(5)
|
|
49.8%
|
|
38.6%
|
|
29.2%
|
Percentage of municipalities covered
|
|
50.2%
|
|
45.0%
|
|
33.1%
|
Estimated market share(6)
|
|
27.4%
|
|
26.6%
|
|
31.8%
|
__________________________________
(1)
|
Churn is the number of customers that leave us during the year, calculated as a percentage of the simple average of customers at the beginning and the end of the year.
|
|
(2)
|
Projections based on estimates of the
Instituto Brasileiro de Geografia e Estatística
(IBGE).
|
|
(3)
|
Number of people within our Region that can access our cellular telecommunications signal.
|
|
(4)
|
Percentage of the population in our Region that can access our cellular telecommunications signal.
|
|
(5)
|
Number of cellular lines in service in our Region, including those of our competitors, divided by the population of our Region.
|
|
(6)
|
Estimate based on all lines in service in our Region at year-end.
|
|
26
Table of Contents
Our Services
We provide cellular telecommunications services using GSM/EDGE, CDMA and TDMA. Our network provides both CDMA digital service and AMPS, an analog service that we have substantially phased out. We provide cellular
telecommunications services in the frequency of 850 MHz using digital technology CDMA/TDMA and analog technology AMPS, which has been substantially phased out. All our services are provided in the frequency of 850 MHz.
We provide voice and ancillary value-added services, including voicemail and voicemail notification, call forwarding, three-way calling, caller identification, short messaging, limitation on the number of used minutes,
cellular chat room, and data service such as wireless application protocol service through which clients can access WAP sites and portals. We offer direct access to the Internet through either PCMCIA cards (Personal Computer Memory Card
International Association, an organization consisting of some 500 companies that has developed standardized small, credit card-sized devices, called PC Cards) designed to connect compatible PDAs (Personal Digital Assistant, a handheld device that
combines computing, telephone/fax, Internet and networking features) and laptops or cellular phones by a cable connection that offers corporate subscribers secure access to their intranet and office resources. We also offer some new services like
Multimedia Message Service and MExE (Mobile Execution Environment), which enables the wireless device to download applications and execute them on the mobile along with a user interface that contains icons on the wireless device to identify the main
services (such as Voice Mail, Downloads and text messaging (SMS)) for easier access to our services.
In 2004, we launched:
Vivo Direto servicethis service allows users to make individual and group calls;
Vivo Encontra (LBS)a group of location based services, including Vivo Localiza, using GPSOne as a location technology, a service that allows users to locate each other;
Vivo Aqui Pertoa city-guide application;
Vivo Agenda (Synchronized Agenda)this service allows users to back up their contact lists and to recover any information lost in case of robbery or loss;
Vivo em Açãoan alternative-reality game that encourages the client to use different ancillary services;
Vivo Avisa makes the client aware of calls missed when their phone is unavailable;
Olho Vivo (video monitoring, launched in March 2004) was the first monitoring application in Brazil. Subscribers can see real-time images of a webcam connected to a PC through their personal mobiles at a rate of 4 frames per second;
TV no Celular (video streaming launched in October 2004) was the first application of streaming video in Brazil. Subscribers can see real-time audio and television images through their personal mobiles.
In 2005, we launched:
Vivo Play 3Ga multimedia service that leverages the 3rd generation CDMA EV-DO network to provide users with downloading and streaming of video content as cartoons, news, soccer, adult content, weather forecasts and sitcoms
exclusively created for mobile phones. The service also offers users the option to download full track music to mobile phones;
Vivo Zap 3Ga wireless broadband Internet access for computers and handhelds using PCMCIA cards or cell phones that achieves a high data transfer rate of up to 2.4 Mbps using the 3rd generation CDMA EV-DO network and gives users an
experience similar to that achieved with wired broadband connections but with the advantage of mobility;
27
Table of Contents
Smart Maila Wireless PIM solution that enables real-time access for corporate e-mail service or personal e-mail accounts through a PDA providing on-line e-mail notifications and calendar or contact synchronization;
World Phoneusing the same wireless device and number, the World Phone allows Vivo subscribers to automatically roam over CDMA/GSM networks in more than 170 countries;
Instant Messengerthe most popular Internet instant messenger application (MSN) available for Vivo wireless device through WAP; and
MMS Interoperabilityinteroperability agreements established with six main mobile operators in Brazil that allows Vivo subscribers to send and receive multimedia messages from other operators subscribers.
In 2006 we launched:
Vivo Localiza Familia a location based service that allows children to be located and monitored by their parents via cellular phones or the internet;
Vivo Localiza Amigos a location based service that enables customers to locate their friends, as well as to be located by their friends, via the relevant address and a map of the region;
Vivo Co-Piloto a location based service that assists the user in moving from one point to another in several Brazilian cities, and that is offered in the form of a Brew application, which is an application development platform
created by Qualcomm for mobile phones;
Vivo Bolão an interactive game that tests the users knowledge of soccer;
Instant Messengerthe most popular Internet instant messenger application (MSN), which is now made available for Vivo wireless devices through SMS;
Vivo ao Vivo new interface for Vivo GSM terminals;
Vivo e Você na Copa exclusive CBF (Brazilian Soccer Confederation) content (including games, tones, wallpapers, videos and a voice portal) during the World Cup;
Vivo Chip - a service menu on GSM SIM Cards;
Vivo Flash a fixed-wireless connection to the internet; and
Vivo Torpedo E-Mail Corporate a service that transforms the cellular phone number into an email address, and enables users to receive every email sent to them as SMS.
Further, Vivo has improved its current product offerings, as follows:
TV no Celular (video streaming) now includes RTP (Radio e Televisão de Portugal) programming;
Vivo Play 3G now includes music content from Warner Music and Universal Music; and
Vivo Portal de
Voz an exclusive reverse auction service with SBT (Sistema Brasileiro de Televisão).
In addition, in 2007 we launched:
Vivo Pós + Speedy first major marketing initiative with Telefonica Brazil offering billed customers and Speedy (ADSL broadband service) customers a one year complimentary offer (free fixed-to-mobile and mobile-to-fixed
calls during weekends) upon the purchase of a loyalty contract;
28
Table of Contents
Positivo Partnership exclusive agreement with the largest computer manufacturer in Brazil, Positivo Informatica, regarding several marketing initiatives to be conducted together with VIVOs Internet Services, including
various commercial bundles, special data plans, customized notebooks and trademarketing initiatives;
Vivo em Ação 4 the fourth edition of the first alternative multi-platform reality game released by us in 2004 where
players can use SMS, voice portal, WAP and other platforms to complete a mission and earn prizes;
Leilão Vivo the first white label multi-interface reverse auction released in Brazil by a mobile operator;
Vivo Play
Dual Delivery an improvement to Vivos music download service allowing the user to download a track on a mobile phone and a computer with a single purchase;
Search and mobile marketing agreements signed with Yahoo;
A new WAP Portal
(presently available only for Vivo employees but soon to be available for all clients);
A new smartphone portal (presently available only for BlackBerry devices but soon to be available for all smartphones);
EU VIVO CINEMA a
Wapsite with information and downloadable contents about movies and the cinema;
Music Phones first-ever launch in Brazil of music phones with embedded content;
BlackBerry launch of BlackBerry®, a popular
email solution for individuals and businesses;
Vivo Avisa roll-out of the service Who Called, which can now be acquired by any Vivo customer; and
A translation center available for tourists during the Pan American
Games in Rio de Janeiro in 2007.
We offer roaming services through agreements with local cellular service providers throughout Brazil and other countries that allow our subscribers to make and receive calls while out of our concession areas. We also
provide reciprocal roaming services for subscribers of such other cellular service providers while they are in our concession areas.
Our Region
Vivo provides mobile telecommunications services on the A and B Band frequencies in 19 Brazilian states in addition to Distrito Federal, which represents the federal district, representing a total of approximately 7.3
million square kilometers, or 85.6% of the Brazilian territory. This area includes more than 135.2 million people, representing 73.6% of Brazils total population of 183.8 million people, and 212 municipalities with a population in excess of
100,000. On September 25, 2007, Vivo acquired a license to operate within 5 states located in the Northeast region (Ceará, Pernambuco, Piauí, Paraíba and Rio Grande do Norte). Combined with the acquisition of Telemig (as
mentioned in Item 4.A. Information on the Company Our History and Development Acquisition of Telpart, Telemig and Tele Norte), this expansion by Vivo into the Northeast region provides it with national coverage.
The following table sets forth population, gross domestic product (GDP), and per capita income statistics for each state in Vivos service regions at the dates and for the years indicated:
29
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
Last Available IBGE Data
|
|
|
|
|
|
|
|
Frequency
|
|
Population
|
|
Percent of Brazils
|
|
GDP (in millions
|
|
Percent of
|
|
Per capita income
|
|
|
Range
|
|
(in thousands)(1)
|
|
population (1)
|
|
of
reais
)(2)
|
|
Brazils GDP(2)
|
|
(in
reais
)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Area
|
|
(Band)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
São Paulo state
|
|
A, L and J
|
|
39,838
|
|
21.7%
|
|
727,052
|
|
33.9%
|
|
17,997
|
Paraná state
|
|
A, L and J
|
|
10,279
|
|
5.6%
|
|
126,621
|
|
5.9%
|
|
12,339
|
Santa Catarina state
|
|
A, L and J
|
|
5,868
|
|
3.2%
|
|
85,295
|
|
4.0%
|
|
14,539
|
Goiás state
|
|
A, L and J
|
|
5,644
|
|
3.1%
|
|
50,536
|
|
2.4%
|
|
8,992
|
Tocantins state
|
|
A, L and J
|
|
1,248
|
|
0.7%
|
|
9,083
|
|
0.4%
|
|
6,957
|
Mato Grosso state
|
|
A, L and J
|
|
2,854
|
|
1.6%
|
|
37,466
|
|
1.7%
|
|
13,365
|
Mato Grosso do Sul state
|
|
A, L and J
|
|
2,265
|
|
1.2%
|
|
21,641
|
|
1.0%
|
|
9,557
|
Rondônia state
|
|
A, L and J
|
|
1,454
|
|
0.8%
|
|
12,902
|
|
0.6%
|
|
8,408
|
Acre state
|
|
A, L and J
|
|
653
|
|
0.4%
|
|
4,481
|
|
0.2%
|
|
6,692
|
Amapá state
|
|
B and J
|
|
585
|
|
0.3%
|
|
4,366
|
|
0.2%
|
|
7,344
|
Amazonas state
|
|
B and J
|
|
3,167
|
|
1.7%
|
|
33,359
|
|
1.6%
|
|
10,320
|
Maranhão state
|
|
B and J
|
|
6,117
|
|
3.3%
|
|
25,325
|
|
1.2%
|
|
4,150
|
Pará state
|
|
B and J
|
|
7,070
|
|
3.8%
|
|
39,150
|
|
1.8%
|
|
5,617
|
Roraima state
|
|
B and J
|
|
394
|
|
0.2%
|
|
3,178
|
|
0.1%
|
|
8,123
|
Federal District
|
|
A, L and J
|
|
2,455
|
|
1.3%
|
|
80,516
|
|
3.7%
|
|
34,510
|
Bahia state
|
|
A, L and J
|
|
14,079
|
|
7.7%
|
|
90,942
|
|
4.2%
|
|
6,583
|
Sergipe state
|
|
A, L and J
|
|
1,938
|
|
1.1%
|
|
13,422
|
|
0.6%
|
|
6,821
|
Rio de Janeiro state
|
|
A, L and J
|
|
15,406
|
|
8.4%
|
|
246,936
|
|
11.5%
|
|
16,052
|
Espírito Santo state
|
|
A, L and J
|
|
3,351
|
|
1.8%
|
|
47,190
|
|
2.2%
|
|
13,846
|
Rio Grande do Sul state
|
|
A, L and J
|
|
10,582
|
|
5.8%
|
|
144,344
|
|
6.7%
|
|
13,310
|
Vivo
|
|
|
|
135,256
|
|
73.6%
|
|
1,803,815
|
|
84.0%
|
|
13,281
|
__________________________________
(1)
|
According to the last D.O.U. publication data (April 1, 2007).
|
(2)
|
According to the most recent IBGE data (2005). Nominal Brazilian GDP was R$2,147,239 million as of December 2005 calculated by IBGE.
|
|
Marketing and Sales
We closely follow the developments in the markets where we operate and constantly launch new promotions and advertising campaigns. A strong customer acquisition policy has been implemented across all of the
companys operators through aggressive mass sales promotions and segmented actions. Efforts to acquire new customers for prepaid and billed services have mostly been made through joint promotions designed to increase intranet traffic and
stimulate the use of data services.
With the premise of keeping a sustainable customer base, the acquisition promotions have also been open to current customers who wished to change their cell phones. We are actively involved in a high-value customer
loyalty program by offering aggressive discounts on cell phones through direct marketing actions.
On December 31, 2007, Vivo possessed 296 sales outlets (91 in São Paulo, 49 in the states of Rio de Janeiro and Espírito Santo, 32 in the state of Rio Grande do Sul, 35 in the states of Paraná and
Santa Catarina, 25 in the states of Bahia and Sergipe, and 64 in the states that make up the midwestern and northern regions of Brazil). It also has an efficient network of 7,962 authorized retail and resales dealerships. Consequently, Vivo has
maintained its market leadership position, with a total of 8,258 points of sale.
Prepaid telephone card recharging was available at 365,798 locations, including our own stores, dealers, lottery shops, physical and online card distributors, and at smaller shops, drugstores, newspaper stands, book
stores, bakeries, gas stations, bars and restaurants. Online recharging is also provided by several banks websites.
Customer Service
30
Table of Contents
In 2007, Vivo implemented a new model of customer support, targeting to increase customer satisfaction at lower cost. The work on this model started in 2006 and was mainly based on the improvement of Vivos call
center and on Vivos service level agreements.
In the first half of 2007, Vivo concluded the merger of its major customer systems, such as billing and front office systems. Currently, Vivo utilizes the same front office system in all operations, thereby reducing
training, control and maintenance costs. The most important project completed in 2007 was the development of a new call center methodology targeting customer satisfaction. Vivos call center customer services representatives now have
differentiated training, career plans and the ability to solve problems in the front line, thus ensuring high levels of customer satisfaction. The result is a 70% reduction in the processes treated at the second level.
Also in 2007, Vivo received 84 millions visits at its website (
www.vivo.com.br
) with 65 million transactions online.
These actions reflected positively at ANATEL. Vivo ended fiscal year 2007 with a 36% reduction in customer complaints at the national agency, scoring the second place in the ranking among the biggest telecommunications
players Vivos best position thus far.
Higher quality, with lower cost
We implemented a strategy to increase the quality of our services while lowering costs. While achieving the best signal quality, surpassing all of our competitors (according to ANATELs scoring system), we also
improved the level of service of our customer care, generating greater customer satisfaction with our call centers and stores. We additionally take steps to reduce billing errors, leading to fewer claims against us. This strategy has been successful
in increasing our satisfaction rating and in lowering costs.
Our Network
Before November 1998, our network used only AMPS analog technology. After privatization, we began to use CDMA and TDMA digital technologies. In 2006, we began to implement a GSM Network. Digitalization offers certain
advantages, such as greater network capacity and additional revenue through the sale of value-added services. We continue to increase network capacity and coverage to improve our quality of service and to meet customer demand.
By December 31, 2007, Vivo S.A.s telecommunications network in the state of São Paulo, which provides both CDMA digital and GSM digital services, covered 100% of the municipalities. Vivo S.A.s network
is connected primarily through a fiber-optic and radio transmission system of our own and leased mainly from Telecomunicações de São Paulo S.A., or Telesp. The network consists of cellular switches, base stations and other
network elements such as voicemail, prepaid service, Short Message Service, Home Location Registers, Signaling Transfer Point, PDSN and gateways. NEC do Brasil S.A., Nortel Networks Northern Telecom do Brasil, Motorola do Brasil Ltda., Lucent
Technologies do Brasil, Ind. e Com. Ltda., Huawei do Brasil Telecomunicações Ltda. and Ericsson Telecomunicações S.A. are Vivo S.A.s main suppliers in the state of São Paulo.
Vivo S.A. began its activities in the states of Parana and Santa Catarina (Vivo PR/SC) in December 1998 and, until 2005, offered services only through CDMA digital technology. As of December 31, 2007, the
telecommunications network in PR/SC that provides both CDMA digital and GSM digital services covered 60.0% of the municipalities, or 92.0% of the population, in its region. The PR/SC network is primarily connected by a fiber-optic and radio
transmission system of its own and as leased mainly from fixed operating companies (Brasil Telecom and Embratel) and CopelCompanhia Paranaense de Energia S.A.. The network consists of cellular switches, base stations and other network
elements, such as voicemail, prepaid service, Home Location Registers, Signaling Transfer Points and gateways. Motorola do Brasil Ltda., Huawei do Brasil Telecomunicações Ltda., Alcatel Telecomunicações S/A. and Ericsson
Telecomunicações S.A. are Vivo S.A.s main suppliers in PR/SC.
As of December 31, 2007, Vivo S.A. in the midwestern and northern regions (CO/N) provided CDMA Digital, GSM digital, TDMA digital and AMPS analog services, which have been substantially phased out, covering
46.4% of the municipalities, or 81.5% of the population in its region. Our network is connected primarily through a fiber-optic
31
Table of Contents
and radio transmission system of our own and leased from incumbent wire line companies. The network consists of cellular switches, base-stations and other network elements such as voicemail, prepaid service, Short Message Service, Home Location
Registers, Signaling Transfer Point and gateways. Nortel Networks Northern Telecom do Brasil, Motorola do Brasil Ltda. (presently Motorola Industrial Ltda. and Motorola Services Ltda.), Huawei do Brasil Telecomunicações Ltda.
and Ericsson Telecomunicações are Vivo S.A.s principal suppliers in CO/N.
As of December 31, 2007, the telecommunications network of Vivo S.A. in Bahia and Sergipe (BA/SE) covered 50.2% of the municipalities, or 82.5% of the population, of its region. Its network provides both
CDMA digital, GSM digital and AMPS analog services, which have been substantially phased out. The network is connected primarily through a fiber-optic and radio transmission system of our own and leased mainly from Tele Norte Leste
Participações S.A., or Telemar. It also includes cellular switches, base stations, and other communication devices such as voicemail, prepaid service, Short Message Service and Home Location Registers. NEC do Brasil S.A., Ericsson
Telecomunicações S.A., Nortel Networks Northern Telecom do Brasil, Motorola Industrial Ltda., Motorola Services Ltda., Huawei do Brasil Telecomunicações Ltda. and Lucent Technologies do Brasil, Ind. e Com. Ltda.
are Vivo S.A.s main suppliers in BA/SE.
As of December 31, 2007, the telecommunications network of Vivo S.A. in the states of Rio de Janeiro and Espirito Santo covered 100% of the municipalities in its area. Its network provides both CDMA digital and GSM
digital services. This network is connected primarily through a fiber-optic and radio transmission system of our own and leased mainly from the incumbent wire line companies. The network consists of cellular switches, base stations and other
communication devices such as voicemail, prepaid service, Short Message Service, Home Location Registers, Signaling Transfer Point, PDSN and gateways. NEC do Brasil S.A., Nortel Networks Northern Telecom do Brasil, Ericsson
Telecomunicações S.A., Huawei do Brasil Telecomunicações Ltda. and Lucent Technologies do Brasil, Ind. e Com. Ltda. are Vivo S.A.s principal suppliers in these states.
As of December 31, 2007, Vivo S.A.s network in the state of Rio Grande do Sul (RS) provides CDMA, GSM digital and TDMA digital and AMPS analog services, which have been substantially phased out,
covering 72.7% of the municipalities, or 96.4% of the population, of this region. The RS network is connected primarily through a fiber-optic and radio transmission system of our own and leased mainly from Brasil Telecom. The network consists of
cellular switches, base stations and other communication devices such as voicemail, prepaid service, Short Message Service, Home Location Registers and gateways. Nortel Networks Northern Telecom do Brasil, Motorola Industrial Ltda., Motorola
Services Ltda., Huawei do Brasil Telecomunicações Ltda., and Ericsson Telecomunicações S.A. are Vivo S.A.s principal suppliers in RS.
Our advanced network management technology ensures global management and supervision of all our network processes and network performance. The network management centers are located in São Paulo and Brasilia. The
network management center of São Paulo monitors the critical network operational parameters of São Paulo, Paraná, Santa Catarina and Rio Grande do Sul. The network management center in Brasília monitors the critical
network operational parameters in CO/N, Rio de Janeiro, Espirito Santo, Bahia and Sergipe. These centers are able to identify abnormalities in both our network and in third parties networks, using failure and signaling monitoring systems. In
addition, quality and service standards are constantly monitored. The network management centers are integrated with maintenance and operations teams that maintain and operate cellular network elements, as well as cellular infrastructure and
transmission, in addition to the radio network elements and computing bases, service platforms and communications backbones.
Our network is prepared to provide continuity of service for our customers in the event of network interruptions. We have developed contingency plans for potential catastrophes in our switching centers, power supply
interruptions and security breaches.
Pursuant to the terms of our authorization to perform our services, we are obligated to meet certain requirements for service quality. See Regulation of the Brazilian Telecommunications
IndustryObligations of Telecommunications Companies.
32
Table of Contents
Sources of Revenue
We generate revenue from:
-
usage charges, which include measured service charges for calls, monthly subscription charges and other similar charges;
-
interconnection charges (or network usage charges), which are amounts we charge other cellular and fixed- line service providers for the use of our network;
-
the sale of wireless devices and accessories; and
-
other charges, including charges for call forwarding, call waiting, text messaging (SMS), call blocking and Data Services, such as WAP, downloads and MMS services, which are charged only when the customers plan does not include these
services.
Our rates are subject to approval by ANATEL. See Regulation of the Brazilian Telecommunications Industry.
The table below sets forth total net operating revenues in our operating subsidiary for the last three years.
Vivo
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Usage and additional charges and monthly subscription charges
|
|
7,863.7
|
|
7,190.9
|
|
7,349.5
|
Sales of wireless devices and accessories
|
|
3,105.7
|
|
2,742.6
|
|
3,051.7
|
Interconnection
|
|
5,109.3
|
|
4,338.1
|
|
4,304.4
|
Other
|
|
1,565.6
|
|
1,183.1
|
|
1,054.8
|
|
|
|
|
|
|
|
Total gross operating revenue
|
|
17,644.3
|
|
15,454.7
|
|
15,760.4
|
|
|
|
|
|
|
|
Value-added and other indirect taxes
|
|
(3,385.9)
|
|
(3,094.1)
|
|
(3,157.7)
|
Sales and services discount and return of goods sold
|
|
(1,765.9)
|
|
(1,423.9)
|
|
(1,348.9)
|
|
|
|
|
|
|
|
Net operating revenues (3)
|
|
12,492.5
|
|
10,936.7
|
|
11,253.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State of São Paulo Areas 1 and 2
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Usage and additional charges and monthly subscription charges
|
|
2,881.5
|
|
2,543.2
|
|
2,523.0
|
Sales of wireless devices and accessories
|
|
1,174.9
|
|
1,029.3
|
|
1,243.7
|
Interconnection
|
|
1,945.1
|
|
1,813.5
|
|
1,841.1
|
Other
|
|
613.2
|
|
427.3
|
|
371.5
|
|
|
|
|
|
|
|
Total gross operating revenue
|
|
6,614.7
|
|
5,813.3
|
|
5,979.3
|
|
|
|
|
|
|
|
Value-added and other indirect taxes
|
|
(1,161.8)
|
|
(1,012.2)
|
|
(1,054.1)
|
Sales and services discount and return of goods sold
|
|
(683.4)
|
|
(560.2)
|
|
(544.2)
|
|
|
|
|
|
|
|
Net operating revenues
|
|
4,769.5
|
|
4,240.9
|
|
4,381.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Table of Contents
States of Rio de Janeiro and Espírito Santo Area 3
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Usage and additional charges and monthly subscription charges
|
|
1,633.2
|
|
1,611.7
|
|
1,531.5
|
Sales of wireless devices and accessories
|
|
654.3
|
|
545.7
|
|
626.4
|
Interconnection charges
|
|
1,016.9
|
|
805.4
|
|
734.3
|
Other
|
|
278.5
|
|
196.4
|
|
148.0
|
|
|
|
|
|
|
|
Total gross operating revenue
|
|
3,582.9
|
|
3,159.2
|
|
3,040.2
|
|
|
|
|
|
|
|
Value-added and other indirect taxes
|
|
(747.5)
|
|
(693.1)
|
|
(667.8)
|
Discounts granted and return of goods
|
|
(362.0)
|
|
(275.6)
|
|
(294.5)
|
|
|
|
|
|
|
|
Net operating revenues
|
|
2,473.4
|
|
2,190.5
|
|
2,077.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States of Paraná and Santa Catarina Area 5
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Usage and additional charges and monthly subscription charges
|
|
485.0
|
|
431.8
|
|
456.7
|
Sales of wireless devices and accessories
|
|
209.6
|
|
210.6
|
|
220.8
|
Interconnection
|
|
371.9
|
|
310.9
|
|
321.5
|
Other
|
|
134.2
|
|
118.3
|
|
105.0
|
|
|
|
|
|
|
|
Total gross operating revenue
|
|
1,200.7
|
|
1,071.6
|
|
1,104.0
|
|
|
|
|
|
|
|
Value-added and other indirect taxes
|
|
(217.1)
|
|
(198.5)
|
|
(207.2)
|
Sales and services discount and return of goods sold
|
|
(106.0)
|
|
(91.9)
|
|
(76.2)
|
|
|
|
|
|
|
|
Net operating revenues
|
|
877.6
|
|
781.2
|
|
820.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State of Rio Grande do Sul Area 6
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Usage and additional charges and monthly subscription charges
|
|
847.6
|
|
819.1
|
|
882.0
|
Sales of wireless devices and accessories
|
|
238.5
|
|
209.1
|
|
246.2
|
Interconnection charges
|
|
481.0
|
|
395.3
|
|
406.3
|
Other
|
|
176.4
|
|
142.0
|
|
143.8
|
|
|
|
|
|
|
|
Total gross operating revenue
|
|
1,743.5
|
|
1,565.5
|
|
1,678.3
|
|
|
|
|
|
|
|
Value-added and other indirect taxes
|
|
(351.6)
|
|
(364.9)
|
|
(387.3)
|
Discounts granted and return of goods
|
|
(121.3)
|
|
(95.9)
|
|
(108.6)
|
|
|
|
|
|
|
|
Net operating revenues
|
|
1,270.6
|
|
1,104.7
|
|
1,182.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central Western and Northern regions Areas 7 and 8
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Usage and additional charges and monthly subscription
|
|
1,554.1
|
|
1,452.2
|
|
1,618.6
|
34
Table of Contents
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
charges
|
|
|
|
|
|
|
Sales of wireless devices and accessories
|
|
606.0
|
|
570.8
|
|
521.0
|
Interconnection
|
|
984.3
|
|
791.9
|
|
797.6
|
Other
|
|
271.6
|
|
232.7
|
|
234.4
|
|
|
|
|
|
|
|
Total gross operating revenue
|
|
3,416.0
|
|
3,047.6
|
|
3,171.6
|
|
|
|
|
|
|
|
Value-added and other indirect taxes
|
|
(701.9)
|
|
(652.7)
|
|
(681.9)
|
Sales and services discount and return of goods sold
|
|
(347.0)
|
|
(303.7)
|
|
(218.3)
|
|
|
|
|
|
|
|
Net operating revenues
|
|
2,367.1
|
|
2,091.2
|
|
2,271.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States of Bahia and Sergipe Area 9
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Usage and additional charges and monthly subscription charges
|
|
462.3
|
|
391.8
|
|
379.0
|
Sales of wireless devices and accessories
|
|
222.4
|
|
177.1
|
|
193.6
|
Interconnection charges
|
|
310.1
|
|
221.1
|
|
203.6
|
Other
|
|
91.7
|
|
66.4
|
|
52.1
|
|
|
|
|
|
|
|
Total gross operating revenue
|
|
1,086.5
|
|
856.4
|
|
828.3
|
|
|
|
|
|
|
|
Value-added and other indirect taxes
|
|
(206.0)
|
|
(172.7)
|
|
(159.4)
|
Discounts granted and return of goods
|
|
(146.2)
|
|
(96.6)
|
|
(107.1)
|
|
|
|
|
|
|
|
Net operating revenues
|
|
734.3
|
|
587.1
|
|
561.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
___________________________________
(1)
|
The financial information presented for 2007 and 2006 represents information from Vivos consolidated financial statements in which Vivo has consolidated TSD, TLE, and CRT as from January 1, 2006.
|
|
(2)
|
The financial information presented for the 2005 fiscal year represents the combined financial data for Vivo, TSD, TLE and CRT, since the companies were under common control with Vivo for these periods.
|
|
(3)
|
Includes the following amounts that have been eliminated upon consolidation and combination of financial statements:
|
|
Vivo Intercompany net operating revenues
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
|
2007(1)
|
|
2006(1)
|
|
2005(2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Net operating revenues
|
|
|
|
(58.9)
|
|
(41.3)
|
__________________________________
(1)
|
The financial information presented for 2007 and 2006 represents information from Vivos consolidated financial statements in which Vivo has consolidated TSD, TLE and CRT as from January 1, 2006.
|
|
(2)
|
The financial information presented for the 2005 fiscal year represents the combined financial data for Vivo, TSD, TLE and CRT, since the companies were under common control with Vivo for these periods.
|
|
35
Table of Contents
Contract Customers
Since October 1994, cellular telecommunications service in Brazil has been offered on a calling party pays basis, under which customers pay only for calls that they originate. In addition, customers pay
roaming charges on calls made or received outside their home registration area.
Customer charges are calculated based on the customers calling plan, the location of the party called, the place from which the call originates and certain other factors, as described below. Our Region is divided
into areas designated for payment purposes, called registration areas, as follows:
-
Areas 1 & 2
9 areas in the state of São Paulo.
-
Areas 7 & 8
18 areas, comprised of 9 areas in Brasilia and the states of Goiás, Mato Grosso do Sul, Mato Grosso, Rondônia, Acre and Tocantins and 9 areas in the states of Amapá, Amazonas, Maranhão,
Pará and Roraima
-
Area 5
9 areas, comprised of 6 areas in the state of Paraná and 3 areas in the state of Santa Catarina.
-
Area 9
6 areas, comprised of 5 areas in the state of Bahia and 1 area in the state of Sergipe.
-
Area 3
5 areas, comprised of 1 area in the metropolitan area of Rio de Janeiro, two areas in upstate Rio de Janeiro and two areas in the state of Espírito Santo.
-
Area 6
4 areas in the state of Rio Grande do Sul.
Interconnection Charges
We earn revenue from any call that originates from another cellular or fixed-line service provider network connecting one of our customers. We charge the service provider from whose network the call originates a network
usage charge for every minute that our network is used in connection with the call. See Business OverviewOperating AgreementsInterconnection Agreements. Tariff increases are subject to ANATELs review and approval.
Bill and Keep
ANATEL adopted partial Bill & Keep rules for interconnection charges in July 2003. The rules provided that an SMP operator paid for the use of another SMP operators network in the same registration
area only if the traffic carried from the first operator to the second exceeded 55% of the total traffic exchanged between them. In that case, only those calls that surpassed the 55% level were subject to payment for network usage. Under Resolution
438 published in 2006, ANATEL eliminated the rule of the partial Bill and Keep. The current rule is full billing, in which the SMP operator pays the entire call termination fee of the other mobile network. The rule of the
partial Bill & Keep was maintained between SMP and SME (trunking) networks.
Roaming Fees
We receive revenue pursuant to roaming agreements with other cellular service providers. When a customer of another cellular service provider makes a call within our area, that service provider pays us for the call at
the applicable rate. Conversely, when one of our customers makes a cellular call outside of our Region, we must pay the charges associated with that call to the cellular service provider in whose Region the call originates. See Operating
AgreementsRoaming Agreements.
Wireless Device Sales
We sell only CDMA dual-mode (800MHz CDMA-1xRTT/AMPS and 800MHz CDMA/AMPS), GSM and tri-mode (800/1900 CDMA and 800MHz AMPs), and dual technology (CDMA and GSM) cellular wireless devices and data devices in CDMA EVDO
technology (PCMCIA, USB and deskmodem) through our own stores and dealers. We have overlayed our TDMA network with a CDMA network and we have stopped selling TDMA handsets. Although we still have some customers using analog service (approximately
0.1% of our total customer base as of December
36
Table of Contents
31, 2007), we have implemented a series of actions, such as providing discounts on digital wireless devices, discounts on monthly fees for digital services, digital wireless device rentals and free wireless devices, to encourage analog and TDMA
customers to transfer to CDMA service. Our current suppliers for wireless devices are Motorola, LG, Samsung, Nokia, Pantech, SonyEricsson, BenQ-Siemens, Aiko and Kyocera.
Operating Agreements
We have agreements with major fixed-line and mobile operators in Brazil in order to lease physical space, real estate, air conditioning, energy, security and cleaning services. We also lease transmission capacity
necessary to complete the construction of our network infrastructure.
Interconnection Agreements
The terms of our interconnection agreements include provisions with respect to the number of connection points and traffic signals. See Regulation of the Brazilian Telecommunications
IndustryObligations of Telecommunications Companies and Regulation of the Brazilian Telecommunications IndustryInterconnection.
We believe that our subsidiary has adequate interconnection agreements with necessary fixed-line operators in order to provide services. We also believe that our subsidiary has all the necessary interconnection
agreements with long-distance carriers.
Roaming Agreements
We are a member of the Brazilian Roaming Association (the Association), a group composed of all companies providing cellular services in Brazil. The Association was created to standardize roaming services in
Brazil and elsewhere. The roaming agreements require us and the other cellular service providers to provide service to roaming customers on the same basis that each member provides to its own customers, and to carry out a monthly reconciliation of
roaming customer usage charges.
We have provided international GSM services through third-party partners using GSM wireless devices in most parts of Europe, Africa, the Americas, Asia and Oceania.
We offer CDMA automatic international roaming
in the United States, Argentina, Uruguay, Chile, Canada, China, Mexico, Venezuela, Puerto Rico, New Zealand, Dominican Republic and South Korea.
Taxes on Telecommunications Services and Wireless Device Sales
The cost of telecommunications services and wireless device sales to customers incorporates a variety of taxes, including:
-
ICMS
(
Imposto sobre Circulação de Mercadorias e Serviços
) is a state tax imposed at varying rates from 7% to 35% on certain revenues from the sale of goods and services, including telecommunications services.
-
COFINS
(
Contribuição para Financiamento da Seguridade Social
) is a federal social contribution tax imposed on the gross operating revenue less discounts and returns. In December 2003, Law No. 10,883 was enacted, making
such contribution noncumulative and increasing the rate from 3.0% to 7.6%, except in connection with telecommunication services where the rate continues to be 3.0%.
-
PIS
(
Programa de Integração Social
) is a federal social contribution levied over the total revenues received by a company and its subsidiaries, with the deductions foreseen by the governing law. On December 2002, Law No.
10637 came into force, making this contribution noncumulative and raising the rate from 0.65% to 1.65%, except for telecommunication services where the rate continues to be 0.65%.
-
FUST
(
Fundo de Universalização dos Serviços de Telecomunicações
) corresponds to 1% of the net revenue generated by the telecommunication services (except over interconnection services), and serves to
provide funds designed to cover the parcel of the cost attributable exclusively to the fulfillment of universal service targets of the telecommunication services that cannot be recovered through the efficient performance of services, per the provisions of sub-item II, of Art. 81, Law No. 9472 dated July 16, 1997 (Lei Geral dos Serviços de Telecomunicações Telecommunication Services General Law).
37
Table of Contents
-
FUNTTEL
(
Fundo para Desenvolvimento Tecnológico das Telecomunicações
) is a federal social contribution which corresponds to 0.5% of the net revenues generated by the telecommunication services (except those for
interconnection services) and serves to stimulate technological development, the qualification of human resources, and job generation and to promote the access of small and medium companies to capital resources, so as to broaden the competitiveness
of the Brazilian telecommunications industry.
-
FISTEL
(
Fundo de Fiscalização das Telecomunicações
) is a federal tax applicable to telecommunications transmission equipment which serves to provide funds to cover the expenses incurred by the Federal
Government in performing inspections of telecommunication services and in developing the means and improving the techniques necessary for carrying out these inspections. This change is divided in two parts:
Taxa de Fiscalização de Funcionamento
and
Taxa de Fiscalização de Instalação
.
Taxa de Fiscalização de
Funcionamento
is based on the total number of clients at the
end of the previous fiscal year.
Taxa de
Fiscalização de Instalação
is based on (i) the net monthly additions (new clients minus disconnected ones) and (ii) the installation of new equipment (base radio
stations) or system changes, as for example, increases in capacity.
Billing
Vivo uses Atlys, a billing solution that combines software and hardware resources, from the supplier company Convergys as the billing system for centralized billed invoicing in the city of São Paulo. The billing
system operates via a batch processing concept using Vivo customers voice and data traffic. This system functions by segregating voice and data traffic on a daily basis, according to which of seven total billing preferences a customer elects.
Each cycle has a specific due date for each of the consumer and corporate segments.
For prepaid services, Vivo uses the Next Generation Intelligence Network (NGIN) platform, a prepaid platform, from the supplier company PTI, which also works in a centralized way in the city of São Paulo.
In order for the NGIN platform to process correctly, the same system for billed invoicing is used. This system separates the module for customer information, called Care, which is a services platform, from the Voice and Data traffic processing
module used, called Core, which is a tariff platform.
During 2006, the RJ/ES and CO/N centralization billing (billed and prepaid) were completed. The BA/SE centralization process was completed in April 1, 2007.
Cobilling
ANATEL has defined the obligations surrounding cobilling service for long distance carriers in the Brazilian market, which has made possible collecting all types of calls and services in the billed in one telephone
account. Similarly, it defined the basic rules for mobile companies prepaid services, making national and international long-distance calls possible within this segment. Mobile companies charge long-distance operators for the services given
for both segments (prepaid and billed). The settlement collection, where the physical and financial data are provided, occurs monthly. Mobile companies only pass to the long-distance carriers the fees collected from the customers billed
segment and debited from the customers prepaid segment. ANATEL authorizes the customer to select whichever cobilling service provider it prefers for its individual calls, whereas neither the mobile company nor the long distance carrier has
discretion in this area.
Value Added Services (VAS)
Entertainment, information and online interactivity services are available to all Vivo customers through agreements with content suppliers. These agreements are based on a revenue-sharing model through the processes of
billed and prepaid categories, with all divergences between these categories being demonstrated to the content suppliers.
38
Table of Contents
Collection
We have a uniform policy dealing with accounts of defaulting billed customers in default according to its segment. If the payment is more than 15 days late, service is partially suspended, and if payment is more than 40
days late, service is fully suspended until payment is made. We offer an installment payment plan for those with past due balances. However, if accounts are not paid after 90 days, the contract is cancelled and reported to credit protection
agencies. After 105 days of default, accounts are directed to independent agencies for collection and the Consumer Protection Service.
All the amounts receivable over 90 days late are considered provisions for doubtful accounts or written-off. The write-offs are in accordance with Brazilian Legislation, which permits a bad debt write-off for late
payments of R$0 to R$5,000 if they are over 180 days late or R$5,001 to R$30,000 if they are over 365 days late. Write-offs of late payments of over R$30,001 that are open for more than 365 days require the commencement of a lawsuit.
Fraud Detection and Prevention
In 2007, Vivo consolidated its efforts to reduce cloning and subscription fraud, the two principal types of fraud. Cloning is a fraud that consists of duplicating the cellular signal of a bona fide customer, enabling the
perpetrator of the fraud to make calls using the customers signal. This occurs when one line (MIN) is programmed into another device (HEXA) and used simultaneously with a customer account, but the charges are posted to the account of the true
owner. We also implemented significant procedures to detect, prevent and reduce subscription fraud. Subscription fraud occurs when a person, typically using false or stolen documents, obtains cellular telecommunications service, and then incurs substantial charges that are billed to a customer who does not exist or who did not request the
service.
Our processes for detecting both cloning fraud and subscription fraud have improved significantly. By December 2007, the number of cloning fraud cases decreased by 96.51% from December 2006, so that December 2007
represented a historically low record for this type of fraud. Between 2006 and 2007, overall fraud decreased by 52.48% .
Competition
We face intense competition in all the areas in which we operate, principally from other cellular service providers and also from fixed-line operators. Many of these competitors are part of a large, national or
multinational group and therefore have access to financing, new technologies and other benefits that are derived from being a part of such a group. Fixed-line operators generally charge much lower tariffs than cellular service providers.
Our principal cellular competitor in the state of São Paulo is Claro. The main fixed-line operator in this area is
Telecomunicações de São Paulo S.A. Telesp
, known as
Telefónica
.
Our principal cellular competitor in the states of Paraná and Santa Catarina is
Tele Celular Sul Participações S.A.
, or
TIM Sul
. The main fixed-line operator in this area is Brasil
Telecom S.A.
Our principal cellular competitors are: Claro, in the region encompassing the states of Mato Grosso do Sul, Mato Grosso, Goiás, Tocantins, Rondônia and Acre and the Federal District, and
TIM,
in the
region encompassing the states of Amazonas, Roraima, Pará, Amapá and Maranhão. The main fixed-line operators in this area are: Brasil Telecom S.A., in the region encompassing the states of Mato Grosso do Sul, Mato Grosso,
Goiás, Tocantins, Rondônia and Acre and the Federal District, and
Telemar Norte Leste S.A. Telemar
, in the region encompassing the states of Amazonas, Roraima, Pará, Amapá and Maranhão. Other
competitors are Oi (Telemar mobile operator) and TIM.
In the Bahia and Sergipe service areas, our principal cellular competitor is Oi (TNL PCS S.A.). Other cellular competitors are TIM (Maxitel S.A.), which also operates in the state of Minas Gerais, and Claro (Stemar
Telecomunicações Ltda.). The principal fixed-line competitor in this area is Telemar Norte Leste S.A.
39
Table of Contents
In the Rio de Janeiro and Espírito Santo service areas, our principal cellular competitor is Claro, which operates in the states of Rio de Janeiro and Espírito Santo. Claro is controlled by a consortium
led by the Telecom Américas Ltd. (controlled by América Móvil S.A. de C.V.). Claro began providing cellular telecommunications services in this Region at the end of 1998. The rights and obligations under Claros license are
substantially identical to our rights and obligations. Although Claro provides only digital service, its customers use TDMA dual mode cellular handsets that can operate on an analog network and GSM handsets. The principal fixed-line operator in this
area is Telemar Norte Leste S.A. Oi is the third competitor and is integrated with Telemar (a fixed-line operator).
In Rio Grande do Sul, our principal cellular competitor is Claro, which operates in several regions in Brazil, including Celular CRTs region. Other cellular competitors are Brasil Telecom S.A. and TIM. The main
fixed-line competitor in this area is Brasil Telecom.
We also compete with certain other wireless telecommunications services in specific segments, such as mobile radio (including digital trunking technology, offered by Nextel), paging and beeper services, which are used
by some operators in our areas as a substitute for cellular telecommunications services. These competing wireless telecommunications services are generally less expensive than mobile telecommunications services.
Satellite-operated services, which provide nationwide coverage, are also available in Brazil. Although these services have the advantage of covering much larger areas than those covered by the cellular
telecommunications services, they are considerably more expensive than the cellular telecommunications services we offer and do not provide competitive coverage inside buildings.
There can be no assurances that the entry of new competitors will not have significant adverse effects on our business, financial condition, or the results of our operations or prospects. Any adverse effects on our
market share, which results from pressures originating from competition, will depend on several factors that cannot be assessed with precision and which are therefore beyond our control. Among such factors are the identity of the competitors, their
strategy and ability to conduct business, market conditions prevailing at the time, rules applicable to the new market participants and to us, as well as the effectiveness of our efforts to prepare for and face competition. There may also be
competitors with higher technical capacity and more resources than we have.
Regulation of the Brazilian Telecommunications Industry
General
Our business, the services we provide, and the prices we charge are subject to regulation under the General Telecommunications Law and various administrative enactments, which regulate the services provided by Brazilian
telecommunications operators.
ANATEL is the agency that regulates telecommunications under the General Telecommunications Law and the July 2001 Regulamento da Agência Nacional de Telecomunicações, known as the ANATEL Decree.
ANATEL is financially and administratively independent of the Brazilian government. However, ANATEL maintains a close relationship with the Ministry of Communications. Any regulation proposed by ANATEL is subject to a period of public comment, which
may include a public hearing. ANATELs actions can be challenged in the Brazilian courts. On November 25, 1998, ANATEL enacted Resolution 73Regulation of Telecommunication Services, which explains in detail the new
comprehensive regulatory framework for the provision of telecommunications services in Brazil established by the General Telecommunications Law.
Concessions and Authorizations
Before January 2000, ANATEL had only authorized two mobile service providers in each of the ten franchise areas under A Band and B Band. A Band and B Band mobile service providers were granted concessions pursuant to
the
Lei Mínima
, or the Minimum Law. Each concession is a specific grant of authority to supply cellular telecommunications services, subject to certain requirements contained in the applicable list of obligations appended to each
concession. If a mobile service provider wishes to offer any telecommunications services other than those authorized by its concession, it may apply to ANATEL for an authorization to offer such other services.
40
Table of Contents
In accordance with the General Telecommunications Law, a concession relates to the provision of telecommunication services under the public regime, as determined by the public administration. A concession may only be
granted upon a prior auction bidding process. As a result, regulatory provisions are included in the relevant concession agreements and the concessionaire is subject to public service principles of continuity, changeability and equal treatment of
customers. In addition, ANATEL is empowered to direct and control the performance of the services, to apply penalties and to declare the expiration of the concession and the return of assets of the concessionaire to the government authority upon
termination of the concession. Another distinctive feature is the right of the concessionaire to maintain certain economic and financial standards. The concession is granted for a fixed period of time and is generally renewable only once.
An authorization is a permission granted by the public administration under the private regime, which may or may not be granted upon a prior auction bidding process, to the extent that the authorized party complies with
the objective and subjective conditions deemed necessary for the rendering of the relevant type of telecommunication service in the private regime. The authorization is granted for an indeterminate period of time. Under an authorization, the
government does not guarantee to the authorized company the economic-financial equilibrium, as is the case under concessions.
SMP Regulation
In November 2000, ANATEL adopted certain regulations for the issuance of new licenses, which are authorizations to provide wireless communication services through SMP, personal mobile service, to compete with the then
existing cellular operators in the various regions of Brazil. These regulations divided Brazil into three main regions covering the same geographic area as the concessions for the fixed-line telecommunication services. ANATEL organized auctions for
three new licenses for each of those regions. The new licenses provided that the new services would be operated in the 1800 MHz radio frequency bands which were denominated as the C Band (which was later transformed into extension bands), the
D Band, E Band and M Band. These new licenses were auctioned by ANATEL and awarded during the first quarter of 2001, at the end of 2002, in September of 2004, in March of 2006 and in September of 2007. In
September 2007, ANATEL organized auctions for fifteen new licenses in the 1900 MHz radio frequency bands which were denominated Band L. VIVO acquired thirteen spectrum licenses in Band L. In December 2007, ANATEL organized
auctions for thirty-six new licenses in the 1900-2100 MHz radio frequency bands (3G licenses) which were denominated Bands F, G, I and J. VIVO acquired seven spectrum licenses in Band J.
Under these new licenses:
-
services are to be provided using the 1800 MHz frequency bands (D Band, E Band and M Band), 1900 MHz frequency bands (L Band) and 1900-2100 MHz frequency bands (F Band, G Band,
I Band and J Band);
-
each operator may optionally provide domestic and international long-distance services in its licensed area;
-
existing cellular service providers as well as new entrants into the Brazilian telecommunications market can bid for D Band, E Band, M Band, L Band, F Band, G Band, I Band and J Band licenses.
-
a cellular operator, or its respective controlling shareholders, may not have geographical overlap between licenses; and
-
current A Band and B Band cellular service providers can apply for an extra frequency range.
Pursuant to the SMP services regulation each of the three main regions is divided into registration areas, or tariff areas.
On February 3, 2003, TCO replaced its SMC Concession Contracts for Personal Mobile Service Agreements (
Termos de Autorização do Serviço Móvel Pessoal
, or SMP) in Regions I (sub-range
of B frequencies) and II (subrange of A frequencies) of the General Granting Plan (
Plano Geral de Outorgas
, or PGO). On December 10, 2002, Telerj Celular, Telest Celular, Telebahia Celular, Telergipe Celular, Celular
CRT, Global Telecom and Telesp Celular
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replaced its SMC Concession Contracts for Personal Mobile Service Agreements, or SMP, in Regions I (sub-range of A frequencies), II (sub-range of A and B frequencies) and III (sub-range of A
frequencies) of the General Granting Plan. On July 27, 2006, ANATEL published Act 59867 authorizing the incorporation of TCO, Teleacre, Telegoiás, Teleron, Telems, Telemat, NBT, Telerj, Telest, Telebahia, Telergipe, Celular CRT and TC by GT,
as well as the transfer of the respective SMP service authorization titles and of the SMP radio-frequency rights-of-use titles. Act 59867 also provides for the automatic termination of the authorizations for Multimedia Communication Services
(
Serviços de Comunicação Multimídia
, or SCM) of TCO, Teleacre, Telegoiás, Teleron, Telems, Telemat, NBT, Telerj, Telest, Telebahia, Telergipe, Celular CRT and TC, upon each of their respective
incorporations.
In order to transfer our services to SMP, we were required to comply with several technical and operational conditions, including, among other things, the adoption of a carrier selection code for long-distance calls
originating from our network. Under the General Telecommunications Law, all mobile telecommunications service providers must provide interconnection upon the request of any other mobile or fixed-line telecommunications service provider. Until June
30, 2004, SMP service providers could opt to establish a price cap or freely negotiate their interconnection charges. The conditions of the network usage fee negotiation are regulated by ANATEL. Thereafter, the terms and conditions of the
interconnection have been freely negotiated between wireless and fixed-line operators, effective as of 2005, subject to compliance with regulations established by ANATEL. ANATEL submitted to public consultation new regulations on interconnection
rules. ANATEL promulgated the following regulations on interconnection rules: the new General Regulation of Interconnection (
Regulamento Geral de Interconexão
Resolution number 410/2005, or RGI); the
Regulation of Separation and Allocation of Costs (Resolution number 396/2005); the Regulation of Industrial Exploration of Dedicated Lines (
Exploração Industrial de Linha Dedicada
Resolution number 402/2005, or
EILD); the Regulation of Remuneration of Use of SMP Providers Networks (Resolution number 438/2006); the Regulation of Fixed and Wireless Number Portability (Resolution number 460/2007, effective March 2009); the new Regulation of SMP
(Resolution number 477/2007, effective February 13, 2008); the Regulation of Terms of Separation and Allocation of Costs (Resolutions numbers 480/2007 and 483/2007), and related Invitation Document number 002/2007/SPV-ANATEL regarding the auction
organized in December 2007 of new licenses for the 1900-2100 MHz radio frequency bands (3G licenses), denominated bands F, G, I and J, which states that, in the maximum allowed period of eighteen
months from the publication of the Terms of Authorization, the authorizations resulting from this auction will be combined with the existing SMP authorizations of the bid winners when pertaining to the same region of the general authorization plan
of SMP. VIVO acquired spectrum licenses in Band J in regions where it possesss SMP licenses.
In 2007, ANATEL published Resolution 477/2007, effective on February 13, 2008, relating to alterations in the regulation of SMP. In the new regulation, ANATEL notes areas of vital importance for mobile business, such as
the necessity for retail stores in the cities within an operators coverage areas, increases in the validity periods of prepaid cards and limits on the period of time after which customers may leave service plans. These new regulations may have
an adverse effect on our revenues and results of operations.
If the parties cannot reach an agreement on the terms of interconnection, including with respect to the interconnection tariff, ANATEL will act as the final arbiter. Because ANATEL considers us to be affiliated with
Telefónica, which already provides wireline long-distance services in the state of São Paulo and was awarded a license to provide these services nationwide, ANATEL will not award a wireline long-distance license to us. Though we and
other mobile operators have requested that ANATEL revise the current SMP regime, there can be no assurance it will do so. Under the SMP regime, we will receive revenues from interconnection fees paid to us by wireline long-distance operators due to
long-distance traffic originating and terminating on our network.
The authorizations consist of two licensesone to provide mobile telecommunications services, and another to use the frequency spectrum for a period of 15 years. The frequency license is renewable for another
15-year period upon the payment of an additional license fee.
The new SMP licenses include the right to provide cellular services for an unlimited period of time but restrict the right to use the spectrum according to the schedules listed in the old licenses (VIVO Rio
Grande do Sul until 2022 (renewed in 2006; renewable only once over a fifteen-year period); VIVO Rio de Janeiro until 2020 (renewed in 2005; renewable only once over a fifteen-year period); VIVO Espírito Santo until 2008; VIVO -
Bahia and VIVO - Sergipe until 2008; VIVO São Paulo until 2008 or 2009 (for the cities of Ribeirão Preto and Guatapará); VIVO -
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Paraná and Santa Catarina until 2013; VIVO Distrito Federal until 2021 (for Brazils Federal District; renewed in 2006; renewable only once over a fifteen-year period); VIVO - Acre, VIVO - Rondônia, VIVO Mato Grosso
and VIVO Mato Grosso do Sul until 2009; VIVO Goiás and Tocantins until 2008; and VIVO Amazonas, Roraima, Amapá, Pará and Maranhão until 2013). Spectrum rights may be renewed only once over a
fifteen-year period.
In September 2007, ANATEL organized auctions of new SMP licenses in the remaining radio frequency bands D and E, in the 1.8 GHz frequency band M, and fifteen licenses in the 1.9 GHz
frequency band L, previously allocated to fixed operators. VIVO acquired thirteen spectrum licenses in band L. The following Terms of Authorization for Band L have been signed: VIVO Rio Grande do Sul until
2022 (renewed in 2006; renewable only once over a fifteen-year period); VIVO Rio Grande do Sul until 2022 (for the cities of the metropolitan area of Pelotas); VIVO Rio de Janeiro until 2020 (renewed in 2005; renewable only once over a
fifteen-year period); VIVO Espírito Santo until 2008; VIVO - Bahia and VIVO - Sergipe until 2008; VIVO São Paulo until 2008 (including the cities of Ribeirão Preto and Guatapará and excluding the cities
where CTBC Telecom operates in the state of São Paulo); VIVO São Paulo until 2022 (including the cities where CTBC Telecom operates in the state of São Paulo); VIVO - Paraná and Santa Catarina until 2013 (excluding
the cities of Londrina and Tamarana); VIVO Distrito Federal until 2021 (for Brazils Federal District; renewed in 2006; renewable only once over a fifteen-year period); VIVO - Acre, VIVO - Rondônia, VIVO Mato Grosso and VIVO
Mato Grosso do Sul (excluding the city of Paranaíba in the state of Mato Grosso do Sul) until 2009; VIVO Goiás (excluding the cities where CTBC Telecom operates in the state of Goiás) and Tocantins until 2008; VIVO
Goiás until 2022 (the cities where CTBC Telecom operates in the state of Goiás); VIVO Mato Grosso do Sul until 2022 (the city of Paranaíba in the state of Mato Grosso do Sul) and VIVO Alagoas, Ceará,
Paraíba, Pernambuco, Piauí and Rio Grande do Norte until 2022. Spectrum rights may be renewed only once over a fifteen-year period.
The authorizations we need for 2008 are currently being renewed by ANATEL.
Obligations of Telecommunications Companies
As a telecommunications service provider, we are subject to regulations concerning quality of service and network expansion, as established in our authorizations and our original concession agreements.
Any breach by the companies of telecommunications legislation or of any obligation set forth in their authorizations may result in a fine of up to R$50 million.
The mobile service authorizations of Vivo involve obligations to meet some quality of service standards such as the systems ability to make and receive calls, call failure rates, the networks capacity to
handle peak periods, failed interconnection of calls and customer complaints. ANATEL published the method for collecting these quality service standards data on April 23, 2003 (ANATEL Resolution No. 335/03).
Interconnection
Under the General Telecommunications Law, telecommunications service providers are classified as providers of either collective or restricted services. All cellular operators, including SMP service providers, are
classified by ANATEL as collective service providers. All providers of collective services are required to provide interconnection upon request to any other collective service provider. The terms and conditions of interconnection are freely
negotiated between parties, subject to price caps and other rules established by ANATEL. Providers must enter into interconnection agreements, regarding, among other things, tariffs, commercial conditions and technical issues, with all requesting
parties on a non-discriminatory basis. If the parties cannot agree upon the terms and conditions of interconnection, ANATEL may determine terms and conditions by arbitration.
Starting in 2005, in order to have a more homogeneous system and to accelerate the negotiations of interconnection contracts, ANATEL required a standard interconnection network from STFC and SMP Operators through an
offer made publicly and equitably.
Interconnection agreements must be approved by ANATEL and may be rejected if they are contrary to the principles of free competition and the applicable regulations.
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Rate Regulation
With respect to our Basic Plan and certain roaming charges incurred in connection with alternative service plans, our authorizations continue to provide for a price cap mechanism to set and adjust rates on an annual
basis. The cap is the value with the rate of inflation deducted from the productivity estimated by ANATEL. The price cap is revised annually to reflect the rate of inflation as measured by the IGP DI. However, mobile operators are able to freely set
the rates for alternative service plans.
The initial price cap agreed to by ANATEL and us in our authorizations had been based on the previously existing or bidding prices, and was adjusted annually on the basis of a formula contained in our authorizations.
The price cap has been revised to reflect the rate of inflation as measured by the IGP DI.
Other telecommunications companies that interconnect with and use our network must pay certain fees, primarily an interconnection fee. The interconnection fee is a flat fee charged per minute of use. The interconnection
fee charged by us and other A and B Band service providers was subject to a price cap stipulated by ANATEL. This price cap was valid until June 30, 2004 and, thereafter, the terms and conditions of the interconnection are freely negotiated among the
operators, effective as of 2005, subject to ANATEL regulations. In 2005, ANATEL began permitting free negotiations for mobile interconnection, or VU-M, fees
and by July 2005, local-fixed concessionaires and mobile operators had reached a
provisional agreement with respect to VU-M fees for local calls, or VC-1 (the agreement guaranteed a 4.5% increase in fees). ANATEL approved that provisional agreement, and in March 2006, approved another provisional agreement for VU-M fees for
long-distance calls, VC-2, VC-3 and international, among the same operators that made the VC-1 agreement. In July 2007, ANATEL approved a provisional agreement among the fixed line operators Telefônica, Telemar, Brasil Telecom, CTBC Telecom
and Sercomtel and the mobile operators for interconection fees for VC1, VC2 and VC3 calls that provides for an annual adjustment of 1.97143% to interconnection fees in Region I (Telemars Region) and an annual adjustment of 2.25356% in Region
II (Brasil Telecoms Region) and Region III (Telefônicas Region). In January 2008, ANATEL approved a provisional agreement among the fixed line long distance operator Embratel and the mobile operators for interconnection fees for
VC2 and VC3 calls, taking into consideration the period since January 2004, that provides for an annual adjustment of 4.5% as of March 2006 and an annual adjustment of 1.97143% or 2.25356% as of July 2007. In 2007, ANATEL developed a new model which
will be in use starting with 2010 to determine values of reference of remuneration for use of mobile networks RVU-M of SMP providers having significant market power, which will be used in the case of arbitration by ANATEL of the value
of VU-M. See SMP Regulation for more information on the status of this agreement.
Internet and Related Services in Brazil
In Brazil, Internet service providers, or ISPs, are deemed to be suppliers of value-added services and not telecommunications service providers. ANATELs Resolution 190 requires cable operators to act as carriers
of third-party Internet service providers. The Brazilian House of Representatives is considering a law that would penalize Internet service providers for knowingly providing services that allow illegal goods or services to be sold on the Internet,
and would impose confidentiality requirements on Internet service providers regarding nonpublic information transmitted or stored on their networks.
C. Organizational Structure
As of December 31, 2007, our voting shares were indirectly controlled by two major shareholders: Portugal Telecom and Telefónica, through Brasilcel N.V., with 89.3% of our voting stock, 47.5% of our preferred
shares and 62.8% of our total capital stock. Portugal Telecom and Telefónica share their participation in Brasilcel in equal percentages after the Merger, controlling 88.8% of our voting stock, 47.5% of our preferred shares and 62.6% of our
total capital stock.
Following the Merger, our subsidiaries are: TC, GT, TCO, Telebahia, Telergipe, Telerj, Telest and Celular CRT (all of these subsidiaries have now been merged into Vivo S.A. See Our History and
DevelopmentCorporate Restructuring of Our Operating Subsidiaries). Substantially all our assets consist of shares in our subsidiary. We rely
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very substantially on dividends from our subsidiary to meet our needs for cash, including cash to pay dividends to our shareholders. See Item 5.B.Operating and Financial Review and ProspectsLiquidity and Capital Resources.
For a more detailed description of our ownership structure and the joint venture between Portugal Telecom and Telefónica, see Our History and Development and Exhibit 8.1.
Acquisition of Telpart, Telemig and Tele Norte
.
On August 2, 2007, Vivo signed a stock purchase agreement with Telpart to acquire control of Telemig Participações and Tele Norte Participações and 22.72% and 19.34%, respectively, of their
total capital for an aggregate amount of R$1.2 billion, subject to certain price adjustments.
On December 20, 2007, Vivo signed a stock purchase agreement with Telemar for the sale of all the shares of Tele Norte that it was acquiring from Telpart under the terms of the stock purchase agreement dated August 2,
2007. This additional stock purchase agreement was signed to facilitate Vivos acquisition of the shares of Telemig from Telpart. See Item 4.A. Information on the company Our History and Development Acquisition of Telpart, Telemig and Tele Norte.
D. Property, Plant and Equipment
Our principal physical property consists of transmission equipment, switching equipment, base stations, and other communication devices, such as voicemail, prepaid service, Short Message Service, Home Location
Registers, Signaling Transfer Point, Packet Data Switching Network and gateways. All switches, cell sites, administrative buildings, administrative facilities, warehouses and stores are insured against damages for operation risks.
As of December 31, 2007, we had 54 cellular switches in São Paulo and other equipment installed in 13 owned spaces, 2 leased spaces and 15 shared spaces. In São Paulo, we lease most of the sites in which
our cellular telecommunications network equipment is installed. The average term of these leases is five years (subject to renewal for additional five-year terms). Our 4,473 base stations and other network equipment are installed in cell sites,
administrative buildings and administrative facilities. In addition, in Sao Paulo we own administrative buildings (approximately 5,126 square meters) and 1 retail store and we lease 4 administrative facilities (approximately 72,006
square meters) 7 administrative areas (approximately 5,004 square meters), 5 kiosks and 83 retail stores.
As of December 31, 2007, Vivo S.A., in the states of Parana and Santa Catarina (PR/SC), had 17 cellular switches and other equipment installed in six owned spaces. In PR/SC, Vivo S.A. leases most of the
sites in which its cellular telecommunications network equipment is installed. The average term of these leases is five years (subject to renewal for additional five-year terms). Its 1,805 base stations and other network equipment were installed in
cell sites, administrative buildings, administrative facilities and warehouses. In addition, Vivo S.A. in PR/SC has one administrative building (approximately 4,582 square meters) and leases two administrative facilities (approximately 6,740 square
meters), warehouse space (approximately 11,000 square meters), and 35 retail stores.
As of December 31, 2007, Vivo S.A. in the midwest region (CO) had 22 cellular switches and other equipment installed in 6 owned spaces, 2 leased spaces and 2 shared spaces. In CO, Vivo S.A. leases most of
the sites in which its cellular telecommunications network equipment is installed. The average term of these leases is five years. Its 2,342 base stations and other network equipments were installed in cell sites, administrative buildings,
administrative facilities and warehouses. Also in this region, Vivo S.A. owns 6 administrative buildings (approximately 30,911 square meters), 2 warehouse spaces (approximately 5,269 square meters), 2 administrative area (approximately 2,090 square
meters) and leases 3 administrative facilities (approximately 2,617 square meters and 47 retail stores.
As of December 31, 2007, Vivo S.A. in the northern region had 20 cellular switches and other equipment installed in 10 owned spaces and one leased space. Vivo S.A. leases in this region most of the sites in which its
cellular telecommunications network equipment is installed. The average term of these leases is five years. Its 795 base stations were installed in cell sites, administrative buildings, administrative facilities and warehouses. In addition, leases 6
administrative facilities (approximately 5,847 square meters), 2 warehouse spaces (approximately 2,151 square meters) and 24 retail stores.
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As of December 31, 2007, Vivo S.A. in the states of Bahia and Sergipe had 8 cellular switches and other equipment installed in 2 owned spaces and 3 shared spaces. Its operating companies lease most of the sites where
their cellular telecommunications network equipment is installed. The average term of these leases is five years. Their 942 base stations were installed in cell sites, administrative buildings, administrative facilities and warehouses. In addition,
they have their own administrative building with warehouse space (approximately 19,455 square meters both) and lease one administrative facility (approximately 872 square meters) and 23 retail stores throughout this region.
As of December 31, 2007, Vivo S.A. in the states of Rio de Janeiro and Espirito Santo had 20 cellular switches and other equipment installed in 4 owned spaces, 1 shared spaces and 1 leased space. Its operating companies
lease most of the sites where their cellular telecommunications network equipment is installed. The average term of these leases is 5 years. Our 2,548 base stations were installed in cell sites, administrative buildings and administrative facilities. In addition, they have their own administrative buildings (approximately 3,122 square meters) and one retail store, and also lease an administrative facility (approximately 28,175 square meters), 2 administrative areas (approximately
24 square meters), 9 kiosks and 45 retail stores throughout this Region.
As of December 31, 2007, Vivo S.A. in the state of Rio Grande do Sul had 19 cellular switches and other equipment installed in 2 owned spaces, 2 leased spaces and 10 shared spaces. Its operating companies lease most of
the sites where their cellular telecommunications network equipment is installed. The average term of these leases is five years. Our 2,690 base stations were installed in cell sites, administrative buildings and administrative facilities. In addition, they have their own administrative building (approximately 1,484 square meters) and also lease an administrative facility (approximately 4,549 square meters), 4 kiosks and 27 retail stores throughout this Region.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion in conjunction with our consolidated financial statements and accompanying notes and other financial information included elsewhere in this annual report, and in conjunction with
the financial information included under Item 3.A.Key InformationSelected Financial Data. As discussed in Presentation of Financial Information, in February 2006, we merged with TSD, TLE and CRT. Under Brazilian
GAAP, the Merger was recorded as from January 1, 2006. Since we were under common control with these entities since 2002, the financial information presented in Item 5 Operating and Financial Review and Prospects combines our
operations with those of TSD, TLE and CRT for periods prior January 1, 2006.
Critical Accounting Policies
In preparing our consolidated financial statements, we have relied on estimates and assumptions derived from historical experience and various other factors that we deemed reasonable and relevant. Critical
accounting policies are those that are important to the portrayal of our financial condition and results and utilize managements most difficult, subjective or complex judgments, estimates and assumptions. The significant accounting
policies that we believe are critical to aid in fully understanding and evaluating our reported financial position and results of operations reported under Brazilian GAAP are described in Note 3 to our consolidated and combined financial statements.
A description of the differences in accounting policies between Brazilian GAAP and U.S. GAAP is included in Notes 37 and 38 to our consolidated and combined financial statements. The application of these critical accounting policies often requires
judgments made by our management regarding the effects of matters that are inherently uncertain on the carrying value of our assets and liabilities and the results of our operations. Our results of operation and financial condition may differ from
those set forth in our consolidated and combined financial statements, if our actual experience differs from managements assumptions and estimates. The following is a discussion of our critical accounting policies, including some of the
variables, assumptions and sensitivities underlying the estimates relating to:
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-
goodwill impairment;
-
revenue recognition;
-
depreciation of property, plant and equipment;
-
impairment and property, plant and equipment;
-
provisions for contingencies;
-
deferred income taxes; and
-
financial instruments.
Goodwill impairment
Under Brazilian GAAP, the amount of goodwill and other intangible asset impairment, if any, is measured based on projected undiscounted future operating cash flows. Under U.S. GAAP, pursuant to SFAS No.
142Goodwill and Other Intangible Assetsgoodwill is no longer amortized and is subject to a yearly impairment test. In performing the yearly impairment test, we identify our reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets. We then determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. If the carrying
amount of a reporting unit exceeds the fair value of the reporting unit, we would be required to perform the second step of the impairment test that involves the determination of the implicit fair value of the reporting unit by performing a
hypothetical purchase accounting calculation. If the implicit value of the goodwill exceeds the book value, an impairment is recognized. In October 2006, we completed restructurings resulting in a change in the Companys management structure
and operating segments. As a result, the Company had one reportable segment, which represented a reporting unit as of December 31, 2007 and 2006.
A determination of the fair value and the undiscounted future operating cash flows of our cellular business requires management to make certain assumptions and estimates with respect to projected cash inflows and
outflows related to future revenues and expenditures and expenses. These assumptions and estimates can be influenced by different external and internal factors, such as economic tendencies, industry trends, and interest rates, changes in our
business strategies and changes in the type of services we offer to the market. The use of different assumptions and estimates could significantly change our financial statements. If assumptions and estimates about the expected future net cash flows
change in the future, we may have to recognize impairment charges on goodwill, which would decrease our results of operations and shareholders equity.
Revenue recognition
Under Brazilian GAAP and U.S. GAAP, we recognize revenues as the services are provided. Sales of wireless devices to dealers are recognized when the respective wireless device is activated by the end user. Prepaid
service revenue is deferred and amortized based on subscriber airtime usage. Under U.S. GAAP, revenue from sales of wireless devices along with the related cost of the wireless devices are deferred and amortized over their estimated useful life. The
excess of the cost over the amount of deferred revenue is recognized on the date of sale. Under U.S. GAAP, pursuant to EITF No. 00-21, Revenue Arrangements with Multiple Deliverables, the subsidiary accounts separately for free minutes
given in connection with the sale of handsets. Therefore, from January 1, 2004, we began to segregate free minutes given in connection with sales of wireless devices and recharges on prepaid phone plans. These minutes are recognized as used based on
their respective estimated fair values.
We consider revenue recognition to be a critical accounting policy, because of the uncertainties caused by different factors such as the complex information technology required, high volume of transactions, fraud and
piracy, accounting regulations, managements determination of collectibility, uncertainties regarding our right to receive certain revenues (mainly revenues for usage of our network) and the estimation of fair value for certain transactions.
Significant changes in these factors could cause us to fail to recognize revenues or to recognize revenues that we may not be able to realize in the future, despite our internal controls and procedures.
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Depreciation and amortization
Depreciation on property, plant and equipment is calculated on a straight-line method over the estimated useful lives of the underlying assets, which consider historical information available to us, as well as known
industry trends. Determination of estimated useful lives of property, plant and equipment involves significant judgment and includes considerations of, among other issues, our expected usage of the asset and technical improvements that might require
us to replace certain assets before the end of their estimated useful lives. A change in the estimate may cause us to accelerate depreciation or may require an impairment of the asset.
Impairment of long-lived assets
Under Brazilian GAAP, an impairment is recognized on long-lived assets such as property, plant and equipment and concession intangibles if the expected net cash flows generated by the respective asset are not sufficient
to cover its book value. Under U.S. GAAP, in accordance with SFAS No. 144, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.
A determination of the fair value of an asset requires management to make certain assumptions and estimates with respect to projected cash inflows and outflows related to future revenues and expenditures and expenses.
These assumptions and estimates can be influenced by different external and internal factors, such as economic tendencies, industry trends, interest rates and changes in the marketplace. A change in the assumptions and estimates that we use could
change our estimate of the expected future net cash flows and lead to the recognition of an impairment charge on our property, plant and equipment or concession intangibles, which would decrease our results of operations and shareholders
equity.
Provisions for contingencies
We are subject to proceedings, lawsuits and other claims related to tax, labor and civil matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential
ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue, based on legal advice. The required reserves may change in the future due to new
developments in each matter or changes in our approach in dealing with these matters, such as a change in settlement strategy. Future possible changes in the recorded reserve amounts would impact our results of operations in the period that such
changes are recorded.
Deferred income taxes
We compute and pay income taxes based on results of operations under Brazilian GAAP. Under U.S. GAAP, we recognize deferred tax assets and liabilities based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. We regularly review the deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that the deferred tax assets will not be realized, based on
historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. When performing such reviews, we are required to make significant estimates and assumptions about future taxable
income. In order to determine future taxable income, we need to estimate future taxable revenues and deductible expenses, which are subject to different external and internal factors such as economic tendencies, industry trends, interest rates,
changes in our business strategies and changes in the type of services we offer to the market. The use of different assumptions and estimates could significantly change our financial statements. A change in assumptions and estimates with respect to
our expected future taxable income could result in the recognition of a valuation allowance on deferred income tax assets, which would decrease our results of operations and shareholders equity. If we operate at a loss or are unable to
generate sufficient future taxable income, if there is a material change in the actual effective tax rates, if the time period within which the underlying temporary differences become taxable or deductible, or there if is any change in our future
projections, we could be required to establish a valuation
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allowance against all or a significant portion of our deferred tax assets resulting in a substantial increase of our effective tax rate and a material adverse impact on our operating results.
Financial instruments
With respect to financial instruments, we must make assumptions as to future foreign currency exchange and interest rates. For a discussion of the possible impact of fluctuations in the foreign currency exchange and
interest rates on our principal financial instruments and positions, see Item 11.Quantitative and Qualitative Disclosures About Market Risk.
A. Operating Results
In February 2006, pursuant to the Merger, TCO became our wholly owned subsidiary and each of TLE, TSD and CRT merged with and into us. Under the Merger, the Vivo Companies consolidated with one another through a
Brazilian law procedure, whereby TCO became a wholly owned subsidiary of Vivo pursuant to a merger of shares (
incorporação de ações
) of TCO and a merger of companies (
incorporação de empresas
)
of TLE, TSD and Celular CRT with and into Vivo, with Vivo as the surviving company. Holders of common shares, preferred shares or (where applicable) ADSs of TCO, TLE, TSD and Celular CRT received common shares, preferred shares or ADSs,
respectively, of Vivo upon approval of the Merger by the requisite percentage of the voting shareholders of Vivo, and of TCO, TLE, TSD and Celular CRT, as applicable. Upon the completion of the Merger, TCP was renamed Vivo
Participações S.A. and has become the holding company of TCO and of the subsidiaries TLE, TSD and Celular CRT.
Pursuant to the Merger, Brasilcel and its subsidiaries hold all of our common shares. Under the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification agreements which govern the Merger, we
underwent a capital increase in the amount of R$2,631,136,636 as a result of the Merger, from R$6,670,152,498 to R$9,301,289,134. The agreements also provided that Celular CRTs preferred shares held in treasury be transferred to TCP in
connection with the Merger.
At a Vivo Shareholders Meeting held on February 22, 2006, Vivo reduced its capital in the amount of R$3,147,782,181, from R$6,670,152,498 to R$3,522,370,316, as approved by management and the shareholders and in accordance with Brazilian Corporate Law, which permits reductions in capital up to the amount of accumulated losses, allowing a more
accurate valuation of the company and the possibility for eventual future distributions of dividends.
The total capital of Vivo is R$6,153,506,952, owing to an increase in the amount of R$2,631,136,636 as a result of the Merger. For more
information on the Merger, see the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification among TCP and TCO, TSD, TLE and Celular CRT dated December 4, 2005, which is included as an exhibit to this report.
Under Brazilian GAAP, the Merger was recorded as from January 1, 2006. Since we were under common control with TSD, TLE and CRT since 2002, the financial information presented in this Item 5Operating and
Financial Review and Prospects combines the results of our operations with those of TSD, TLE and CRT for periods prior to January 1, 2006.
The Extraordinary General Shareholders Meeting held on October 31, 2006 approved the Merger between the fully owned subsidiary GT with Vivos other fully owned subsidiaries, including Telergipe, Telebahia,
Telerj, Telest, Celular CRT, TC and TCO, as well as TCOs subsidiaries, Telegoiás, Telemat, Telems, Teleron, Teleacre, and NBT.
The objective of the corporate restructuring was to simplify the corporate and operational structure by unifying the general business administration of the operations. Operations will now be concentrated in a single
operating company controlled by Vivo, to take full advantage of the synergies between the companies involved, increase Vivo shareholder value and continue the process approved in the Extraordinary General Shareholders Meeting held on February
22, 2006. Upon completion of the corporate restructuring, the name GT was changed to Vivo S.A.
Acquisition of Telpart, Telemig and Tele Norte
.
49
Table of Contents
On August 2, 2007, Vivo signed a stock purchase agreement with Telpart to acquire control of Telemig Participações and Tele Norte Participações and 22.72% and 19.34%, respectively, of their
total capital for an aggregate amount of R$1.2 billion, subject to certain price adjustments.
On December 20, 2007, Vivo signed a stock purchase agreement with Telemar for the sale of all of the shares of Tele Norte that it was acquiring from Telpart under the terms of the stock purchase agreement dated August
2, 2007. This additional stock purchase agreement was signed to facilitate Vivos acquisition of the shares of Telemig from Telpart. See Item 4 Acquisition of Telpart, Telemig and Tele Norte.
Results of Operations for 2007, 2006 and 2005 for Vivo
The following table sets forth certain components of our results for the periods presented.
Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Percent change
|
|
|
|
2007 (1)
|
|
2006 (1)
|
|
2005 (2)
|
|
|
|
|
|
Consolidated
|
|
Consolidated
|
|
Combined
|
|
2007-2006
|
|
2006-2005
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
|
|
|
|
Net operating revenue
|
12,492.5
|
|
10,936.7
|
|
11,253.8
|
|
14.2
|
|
(2.8)
|
Cost of services and goods
|
(6,623.3)
|
|
(5,564.2)
|
|
(5,337.3)
|
|
19.0
|
|
4.3
|
Gross profit
|
5,869.2
|
|
5,372.5
|
|
5,916.5
|
|
9.2
|
|
(9.2)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling
|
(3,532.8)
|
|
(3,751.1)
|
|
(3,614.9)
|
|
(5.8)
|
|
3.8
|
General and administrative
|
(1,190.0)
|
|
(1,099.7)
|
|
(1,031.4)
|
|
8.2
|
|
6.6
|
Other operating expenses, net
|
(499.6)
|
|
(319.5)
|
|
(491.6)
|
|
56.4
|
|
(35.0)
|
Total operating expenses
|
(5,222.4)
|
|
(5,170.3)
|
|
(5,137.9)
|
|
1.0
|
|
0.6
|
Operating income before financial expense, net
|
646.8
|
|
202.2
|
|
778.6
|
|
219.9
|
|
(74.0)
|
Net financial expenses
|
(468.3)
|
|
(748.0)
|
|
(913.1)
|
|
(37.4)
|
|
(18.1)
|
Operating income (loss)
|
178.5
|
|
(545.8)
|
|
(134.5)
|
|
-
|
|
305.8
|
Net non-operating expense
|
(20.8)
|
|
(289.0)
|
|
(96.5)
|
|
(92.8)
|
|
199.5
|
Net income (loss) before income and social contribution taxes and minority interests
|
157.7
|
|
(834.8)
|
|
(231.0)
|
|
-
|
|
261.4
|
Income and social contribution taxes
|
(257.1)
|
|
859.1
|
|
(363.0)
|
|
-
|
|
-
|
Minority interests
|
|
|
(8.0)
|
|
(173.5)
|
|
(100.0)
|
|
(95.4)
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
(99.4)
|
|
16.3
|
|
(767.5)
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________
(1)
|
The financial information presented for 2007 and 2006 represents information from Vivos consolidated financial statements in which Vivo has consolidated TSD, TLE, and CRT as from January 1, 2006.
|
|
(2)
|
The financial information presented for the 2005 fiscal year represents the combined financial data for Vivo, TSD, TLE and CRT, since the companies were under common control with Vivo for these periods.
|
Operating Revenues
Our operating revenues consist of the following:
-
usage charges, which include charges for outgoing calls, monthly subscription charges, roaming and similar service;
-
revenues from the sale of wireless devices and accessories;
-
interconnection charges (or network usage charges), which are amounts we charge other cellular and fixed-line or long-distance service providers for the use of our network; and
-
other charges, including charges for the text messaging services (SMS), WAP, downloads, call forwarding, call waiting, voicemail, and call blocking.
50
Table of Contents
The composition of our operating revenues has been affected by the shift in the composition of customers to prepaid services (which generate usage charges and interconnection charges but do not generate monthly
subscription charges, and which have attracted lower income customers to our services), by our strategic focus on profitability and selective customer growth, and also by the change in the recognition of revenues related to prepaid services.
Vivos net additions (number of new customers less churn) generated a 12.7% increase in the number of contract customers to 6.2 million in 2007, from 5.5 million in 2006. The 2006 figure represented a 3.5% decrease
from 5.7 million in 2005. Similarly, net additions generated a 15.7% increase in the number of prepaid customers to 27.2 million in 2007, from 23.5 million in 2006. The 2006 figure represented a 2.5% decrease from 24.1 million in 2005.
ANATEL authorizes cellular operators to increase tariffs based upon the prior twelve-month periods cumulative inflation, measured by the IGP-DI variation from February to January of each year. Accordingly, changes
in our revenues from year to year include the effects of tariff increases which were approximately 2% in 2007 and 2% in 2006 determined on a weighted average basis.
As of July 6, 2003, cellular telecommunications operators in Brazil were required by the SMP rules to implement long-distance carrier selection codes (
códigos de seleção de prestadora
, or
CSP) used by customers to choose their carrier for domestic long-distance services (VC2 and VC3) and international cellular calls. As a result, Vivo no longer receives direct revenues or incurs costs in connection with VC2 or VC3 or international
calls.
Additionally, in accordance with ANATELs regulations, Bill & Keep rules were adopted for interconnection charges in July 2003. The rules provide that companies under the SMP regime were not
required to pay tariffs for the use of the local network of other SMP providers as long as customers use local service (i.e., make calls in the same registration area) and as long as there is a traffic balance between them. However, if traffic from
the SMP provider that originates the call to the SMP provider that terminates the call represents more than 55% of the total local traffic between the two providers, the SMP provider who originates the higher traffic through the other
providers network must pay to such other provider the local usage tariff for the portion of the traffic that exceeds 55%. On July 14, 2006, ANATEL eliminated the rule of the partial Bill & Keep in the remuneration of network
usage between SMP networks in favor of a full billing method.
The composition of operating revenues by category of service is presented in our consolidated financial statements and discussed below. We do not present operating revenues on a net basis (i.e., after deduction of
taxes) by category of service.
The following table sets forth the components of our net operating revenues for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Percent change
|
|
|
|
|
|
|
|
2007 (1)
|
|
2006 (1)
|
|
2005 (2)
|
|
2007-2006
|
|
2006-2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
|
|
|
|
Usage, additional call and monthly subscription charges
|
|
7,863.7
|
|
7,190.9
|
|
7,349.5
|
|
9.4
|
|
(2.2)
|
Interconnection charges
|
|
5,109.3
|
|
4,338.1
|
|
4,304.4
|
|
17.8
|
|
0.8
|
Sales of wireless devices and accessories
|
|
3,105.7
|
|
2,742.6
|
|
3,051.7
|
|
13.2
|
|
(10.1)
|
Other
|
|
1,565.6
|
|
1,183.1
|
|
1,054.8
|
|
32.3
|
|
12.2
|
Gross operating revenue
|
|
17,644.3
|
|
15,454.7
|
|
15,760.4
|
|
14.2
|
|
(1.9)
|
Value-added and other indirect taxes
|
|
(3,385.9)
|
|
(3,094.1)
|
|
(3,157.7)
|
|
9.4
|
|
(2.0)
|
Discounts granted and return of goods
|
|
(1,765.9)
|
|
(1,423.9)
|
|
(1,348.9)
|
|
24.0
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
Net operating revenues (1)
|
|
12,492.5
|
|
10,936.7
|
|
11,253.8
|
|
14.2
|
|
(2.8)
|
|
|
s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________
(1)
|
The financial information presented for the 2007 and 2006 fiscal year represents information from Vivos consolidated financial statements.
|
|
(2)
|
The financial information presented for the 2005 fiscal year represents the combined financial data for Vivo and TSD, TLE and CRT.
|
51
Table of Contents
Net operating revenues increased by 14.2% to R$12,492.5 million in 2007 and from R$10,936.7 million in 2006, which in turn represented a 2.8% decrease from R$11,253.8 million in 2005. The growth in 2007 reflects
mainly an increase in revenues from interconnection charges, additional call charges and monthly subscription charges, and sales of wireless devices and accessories. The reduction in 2006 reflects mainly a decrease in revenue from sales of wireless
devices and accessories and usage charges, partially offset by an increase in interconnection charges and other revenues.
Usage, additional call and monthly subscription charges.
Revenues from usage charges increased by 9.4% to R$7,863.7 million in 2007, from R$7,190.9 million in 2006, which in turn represented a 2.2% decrease from
R$7,349.5 million in 2005. The growth in usage charges in 2007 was mainly due to an increase of 15.1% in our customer base to 33.5 million. The decrease in usage charges in 2006 was mainly due to a decrease of 2.3% in our customer base to 29.1
million customers in 2006 as compared to 29.8 million customers in 2005.
Interconnection charges.
Revenues from interconnection charges increased by 17.8% to R$5,109.3 million in 2007, from R$4,338.1 million in 2006, which in turn represented a 0.8% increase from R$4,304.4 million in
2005. The increase in interconnection charges in 2007 was principally due to the end of the partial Bill & Keep rule in July 2006. The increase in interconnection charges in 2006 was principally due to the end of the partial
Bill & Keep rule in July 2006, which was partially offset by the reduction of fixed-line to mobile traffic in substitution for mobile-to-mobile traffic. By eliminating the effects of the partial Bill & Keep rule in
2006, interconnection charges decreased 14.3% .
The effect of the partial Bill & Keep system under ANATELs Personal Mobile Service (
Serviço Móvel Pessoal
, or SMP) regime is described in Item
3Key Information.
Sales of wireless devices and accessories
. Revenues from sales of wireless devices and accessories increased by 13.2% to R$3,105.7 million in 2007 and from R$2,742.6 million in 2006, which in turn represented a
10.1% decrease from R$3,051.7 million in 2005. The increase in 2007 was mainly due to the increase in our customer base, described above, which resulted in part from promotional campaigns to acquire new customers and the launch of GSM technology.
The decrease in 2006 was mainly due to a reduction in the ratio of additional clients to our own wireless devices and a decrease in the average selling price due to competition.
Revenues from sales of wireless devices and accessories are reported before commissions and promotional discounts, and include value-added taxes. In general, the purpose of wireless device sales is to encourage growth
in customers and traffic (and not necessarily to generate profits). Accordingly, we subsidize part of the costs of wireless devices. The subsidy strategy resulted in a gross loss (calculated as the difference of net operating revenues from sales
minus the cost of goods sold) for Vivo of R$693.6 million, R$521.8 million and R$783.5 million in 2007, 2006 and 2005, respectively.
Other.
Revenues from other services increased 32.3% to R$1,565.6 million in 2007, and from R$1,183.1 million in 2006, which in turn represented a 12.2% increase from R$1,054.8 million in 2005. The increase was
principally due to an increase in our customer base and an increase in the use of data-related services by our customers, including text message services, or SMS, wireless Internet services and other value-added services. The increase in 2006 was
principally due to an increase in the use of data-related services by our customers, including text message services, or SMS, wireless Internet services and other value-added services. This increase is a consequence of the development of products
and the increased adoption of these services by users, reflecting widespread access and use of the tools, in addition to the increase in the wireless device portfolio.
Value-added and other indirect taxes.
Value-added and other indirect taxes increased 9.4% to R$3,385.9 million from R$3,094.1 million in 2006, which in turn represented a 2.0% decrease from R$3,157.7 million in
2005. The increase was principally due to an increase in gross operating revenue, particularly in revenue from usage charges, interconnection and sales of wireless devices and accessories. The decrease in 2006 was principally due to a decrease in
gross operating revenues, particularly in revenues from the sales of wireless devices and accessories and usage charges. The effective rate of taxes on gross operating revenues varies depending on the composition of our revenues, since the
interconnection charges are not subject to ICMS. Accordingly, value-added taxes and other indirect taxes corresponded to 19.2%, 20.0% and 20.0% of our gross operating revenues in 2007, 2006 and 2005, respectively.
52
Table of Contents
Discounts and return of goods sold
. Discounts and returns increased by 24.0% in 2007 to R$1,765.9 million, from R$1,423.9 million in 2006, which in turn represented a 5.6% increase from R$1,348.9 million in 2005.
Discounts and returns corresponded to 10.0%, 9.2% and 8.6% of our gross operating revenues in 2007, 2006 and 2005, respectively. The increase was principally due to increases in discounts on wireless devices and accessories in response to aggressive
competition from other providers. The increase in 2006 was principally due to increases in discounts on wireless devices and accessories in response to aggressive competition.
Cost of Services and Goods
The following table sets forth the components of our costs of services and goods sold for 2007, 2006, and 2005, as well as the percentage change from the previous year.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Percent change
|
|
|
|
|
|
|
|
2007(1)
|
|
2006 (1)
|
|
2005 (2)
|
|
2007-2006
|
|
2006-2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of
reais)
|
Cost of goods sold
|
|
(2,096.8)
|
|
(1,898.3)
|
|
(2,424.7)
|
|
10.5
|
|
(21.7)
|
Depreciation and amortization
|
|
(1,378.9)
|
|
(1,327.5)
|
|
(1,240.4)
|
|
3.9
|
|
7.0
|
Supplies, outside services other
|
|
(491.6)
|
|
(517.9)
|
|
(399.4)
|
|
(5.1)
|
|
29.7
|
Interconnection charges
|
|
(1,618.2)
|
|
(785.0)
|
|
(242.7)
|
|
106.1
|
|
223.4
|
Rent, insurance, condominium fees, and leased lines
|
|
(436.1)
|
|
(429.3)
|
|
(438.2)
|
|
1.6
|
|
(2.0)
|
Personnel
|
|
(102.9)
|
|
(88.7)
|
|
(98.2)
|
|
16.0
|
|
(9.7)
|
Taxes
|
|
(498.8)
|
|
(517.5)
|
|
(493.7)
|
|
(3.6)
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services and goods
|
|
(6,623.3)
|
|
(5,564.2)
|
|
(5,337.3)
|
|
19.0
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________
(1)
|
The financial information presented for 2007 and 2006 represents information from Vivos consolidated financial statements in which Vivo has consolidated TSD, TLE, and CRT as from January 1, 2006.
|
|
(2)
|
The financial information presented for the 2005 fiscal year represents the combined financial data for Vivo, TSD, TLE and CRT, since the companies were under common control with Vivo for these periods.
|
Cost of services and goods increased by 19.0% in 2007 to R$6,623.3 million, from R$5,564.2 million in 2006, which in turn represented a 4.3% increase from R$5,337.3 million in 2005. The increase in 2007 was principally
due to an increase in interconnection costs resulting from the end of the Bill & Keep rule in July 2006, an increase in the cost of goods sold and the depreciation and amortization costs, partially offset by a reduction in the cost
of third party services. The increase in 2006 was principally due to an increase in interconnection costs resulting from the end of the Bill & Keep rule in July 2006, and an increase in third-party costs and in depreciation and
amortization costs, partially offset by a reduction in the cost of goods sold. Gross margin (gross profit as a percent of net revenues) corresponded to 47.0%, 49.1% and 52.6% in 2007, 2006 and 2005, respectively.
Cost of goods sold.
Cost of wireless devices and accessories increased 10.5% to R$2,096.8 million in 2007, from R$1,898.3 million in 2006, which in turn represented a decrease of 21.7% from R$2,424.7 million in
2005. The increase in 2007 was mainly due to the increase in the proportion of additional customes buying our wireless devices, offset by the sale of GSM equipment at prices lower than the acquisition price of CDMA equipment and lower than the
prices we paid to manufacture the GSM equipment. The decrease in 2006 was mainly due to the decrease in the ratio of additional clients to our own wireless devices, lower costs as a result of negotiations with suppliers and valuation of the
real
against the U.S. dollar.
Depreciation and amortization.
Depreciation and amortization expenses increased 3.9% to R$1,378.9 million in 2007, from R$1,327.5 million in 2006, which in turn represented an increase of 7.0% from R$1,240.4
million in 2005. The increase in 2007 was principally due to investments and completion of projects, in particular the expansion and coverage of our network, the amortization of intangible goods such as software, and a switch to GSM technology. The
increase in 2006 was principally due to investments and completion of projects, in particular the expansion and coverage of our network and the amortization of intangible goods such as software.
Supplies, outside services and other.
Cost of materials and third-party services decreased 5.1% to R$491.6 million in 2007, from R$517.9 million in 2006, which in turn represented an increase of 29.7% from
R$399.4 million in 2005. The decrease in 2007 was principally due to a decrease in
the provision for losses from interconnection
53
Table of Contents
, partially offset by an increase in the third-party services. The increase in 2006 was principally due to an increase in the costs of public services and the cost of the network for
service data.
Interconnection charges
. Interconnection charges increased by 106.1% to R$1,618.2 million in 2007, and from R$785.0 million in 2006, which in turn represented an increase of 223.4% from R$242.7 million in 2005.
The increase in 2007 is due to the end of the Bill & Keep rule in July 2006 and an increase in total call traffic. The increase in 2006 is due to the end of the Bill & Keep rule in July 2006. By eliminating the
effects of Bill & Keep in 2006, interconnection charges decreased 31.6% as a result of the reduction in the mobile-to-fixed tariff, partially offset by an increase in total traffic mainly in mobile-to-mobile traffic.
Rent, insurance, condominium fees, and leased lines.
Rent, insurance, condominium fees, and leased lines expenses increased 1.6% to R$436.1 million in 2007, from R$429.3 million in 2006, which in turn represented
a decrease of 2.0% from R$438.2 million in 2005. The increase in 2007 was principally a result of increases in lease payments for shared space and in the utilization of the circuits. The decrease in 2006 was principally due to a decrease in payment
for the connection through the utilization of the circuits and through renegotiating leases.
Personnel.
Personnel expenses increased 16.0% to R$102.9 million in 2007, from R$88.7 million in 2006, which in turn represented a decrease of 9.7% from R$98.2 million in 2005. The increase in 2007 was
principally due to an increase in salaries under the terms of our collective bargaining agreement, which we renegotiate annually and which takes effect on November 1, and to training program costs. The decrease in 2006 was principally due to a
larger number of employees having been allocated to capital expenditure projects, such as the construction of networks, partially offset by the increase in salaries under the terms of our collective bargaining agreement and the increase in the
number of employees.
Taxes.
Taxes decreased 3.6% to R$498.8 million in 2007, compared to R$517.5 million in 2006, which in turn represented a 4.8% increase from R$493.7 million in 2005. The decrease in 2007 was principally due to the
decrease in FISTEL taxes which are calculated based on the total number of clients at the end of the previous fiscal year. As of July 2006, the Company had an adjustment in its customer base and consequently the amount of FISTEL taxes paid in 2006
was higher than in 2007. Overall, the customer base was larger in 2005 compared to the end of 2006.
Operating Ex
p
enses
The following table sets forth the components of our operating expenses for each of the years ended December 31, 2007, 2006 and 2005, as well as the percentage change from the prior year.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Percent change
|
|
|
|
|
|
|
|
2007 (1)
|
|
2006 (1)
|
|
2005 (2)
|
|
2007-2006
|
|
2006-2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
|
|
|
|
Selling expenses
|
|
(3,532.8)
|
|
(3,751.1)
|
|
(3,614.9)
|
|
(5.8)
|
|
3.8
|
General and administrative expenses
|
|
(1,190.0)
|
|
(1,099.7)
|
|
(1,031.4)
|
|
8.2
|
|
6.6
|
Other net operating expenses
|
|
(499.6)
|
|
(319.5)
|
|
(491.6)
|
|
56.4
|
|
(35.0)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
(5,222.4)
|
|
(5,170.3)
|
|
(5,137.9)
|
|
1.0
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________
(1)
|
The financial information presented for the 2007 and 2006 fiscal year represents information from Vivos consolidated financial statements.
|
|
(2)
|
The financial information presented for the 2005 fiscal year represents the combined financial data for Vivo and TSD, TLE and CRT.
|
Vivos operating expenses increased 1.0% to R$ 5,222.4 million in 2007, from R$5,170.3 million in 2006, which in turn represented an increase of 0.6% from R$5,137.9 million in 2005. The increase in operating
expenses in 2007 was principally due to the increase in other operating expenses, while general and administrative expenses were partially offset by a reduction in selling expenses. The increase in operating expenses in 2006 was principally due to
the increase in general and administrative expenses offset by a reduction in other operating expenses.
54
Table of Contents
Selling expenses.
Selling expenses decreased 5.8% to R$3,532.8 million in 2007, from R$3,751.1 million in 2006, which in turn represented a 3.8% increase from R$3,614.9 million in 2005. The decrease in 2007 was
principally due to a 49.2% decrease of debtors in default that totaled R$365.7 million in 2007, an increase in third-party costs, especially in loyalty program and cost of distribution, and an increase in depreciation and amortization, partially offset by a reduction in
public services. The increase in 2006 was principally due to a 11.4% increase in debtors in default that totaled R$720.5 million in 2006, an increase in third-party costs, especially in customer service, and an increase in depreciation and
amortization, partially offset by a reduction in advertising costs. The increase in debtors in default in 2006, which includes an incremental value, occurred in the second quarter of R$161.5 million, mostly due to a migration of clients to new
systemic platforms that caused delays in billing and collection in the period that followed the implementation of such platforms. Allowance for doubtful accounts were 2.1%, 4.7% and 4.1% of gross revenues for 2007, 2006, and 2005, respectively.
General and administrative expenses.
General and administrative expenses increased by 8.2% in 2007 to R$1,190.0 million, and from R$1,099.7 million in 2006, which in turn represented an increase of 6.6% in 2005
from R$1,031.4 million in 2005. The increase in 2007 was principally due to the increase in third-party costs, especially consulting and general structure, offset partially by a reduction in depreciation and amortization and leasing and insurance
costs. The increase in 2006 was principally due to the increase in depreciation and amortization of expenses beyond the increase in personnel, leasing and insurance costs and housing association fees, offset partially by
a reduction in third-party costs, especially consulting and general structure costs.
Other net operating expenses.
The net amount of other operating expenses increased by 56.4% to R$499.6 million in 2007, from R$319.5 million in 2006, which in turn represented a decrease of 35.0% from R$491.6
million in 2005. The increase in 2007 was principally due to an increase in the provision for contingencies and a reduction in recovered expenses. The decrease in 2006 was principally due to the reversal of provision for PIS and COFINS in the amount
of R$149.1 million, recorded as recovered expenses, and the decrease in goodwill amortization, partially offset by the increase in the provision for contingencies.
Net Financial Expenses
The following table sets forth certain components of our net financial expenses, as well as the percentage change of each component from the previous year, for each of the years ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Percent Change
|
|
|
|
|
|
|
|
2007 (1)
|
|
2006 (1)
|
|
2005 (2)
|
|
2007-2006
|
|
2006-2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
|
|
|
|
Financial income
|
|
185.8
|
|
286.8
|
|
439.7
|
|
(35.2)
|
|
(34.8)
|
Exchange gains and losses
|
|
297.5
|
|
323.0
|
|
466.3
|
|
(7.9)
|
|
(30.7)
|
Gains (Losses) on foreign currency derivative contracts
|
|
(509.4)
|
|
(764.3)
|
|
(1,120.0)
|
|
(33.3)
|
|
(31.8)
|
Financial expenses
|
|
(442.2)
|
|
(593.5)
|
|
(699.1)
|
|
(25.5)
|
|
(15.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(468.3)
|
|
(748.0)
|
|
(913.1)
|
|
(37.4)
|
|
(18.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________
(1)
|
The financial information presented for 2007 and 2006 represents information from Vivos consolidated financial statements in which Vivo has consolidated TSD, TLE, and CRT as from January 1, 2006.
|
|
(2)
|
The financial information presented for the 2005 fiscal year represents the combined financial data for Vivo, TSD, TLE and CRT, since the companies were under common control with Vivo for these periods.
|
Net financial expense reflects, among other things, the net effect of interest income and expense, and the net effect of exchange rate fluctuation affecting our loans, financings and derivative operations. See Note 28
to our financial statements. Our net financial expenses decreased 37.4% to R$468.3 million in 2007, from R$748.0 million in 2006, which in turn represented a decrease of 18.1% from R$913.1 million in 2005. The decrease in 2007 was principally due to
the reduction in net indebtedness, due to a large inflow of operating cash and long term financing with lower interest rates, as well as to the decrease in the interest rates during the period (11.8% in 2007 and 15.0% in 2006).
55
Table of Contents
Vivos net financial expenses decreased between 2005 and 2006 primarily due to the corporate reorganization and financial liabilities restructuring, as well as to the decrease in the interest rates during the
period (19.0% in 2005 and 15.0% in 2006).
As of December 31, 2007, all of our foreign exchange indebtedness (R$1,834.6 million) was covered by long positions under hedging agreements. Under those derivative agreements, our subsidiaries foreign
exchange-denominated obligations are swapped for
real
-denominated obligations bearing interest at rates linked to the
Certificado de Depósito Interfinanceiro
(Interbank Deposit Certificate), or CDI. This resulted in a gain of
R$296.1 million in our foreign currency-denominated debt (a gain of R$335.0 million in 2006 and a gain of R$460.1 million in 2005), which was offset by losses in our currency and interest rate derivatives contracts of R$509.4 million in 2007 (a loss
of R$764.3 million in 2006 and a loss of R$1,120.0 million in 2005).
Net non-operating Expense
The net non-operating expense decreased by 92.8% to R$20.8 million from R$289.0 million in 2006, which in turn represented a 199.5% increase from R$96.5 million in 2005. In 2006, we recorded a provision for loss in
property, plant and equipment in the amount of R$278.0 million as a result of our analysis of the recoverability of assets related to the technologies. The decrease in 2007 reflects the absence of the provision for loss in property, plant and
equipment.
Income and Social Contribution Taxes Income (Expense)
We recorded expense from income and social contribution taxes in the amount of R$257.1 million in 2007, a decrease from an income of R$859.1 million that we recorded in 2006, which in turn represented a decrease from an
expense of R$363.0 million in 2005. This shift from expense to income in 2006 resulted from the Corporate Restructuring process and the effect of tax credits. See Note 30 to our financial statements.
Minority Interest
In 2007, there was no minority interest recorded for Vivo due to the completion of the corporate restructuring process which commenced in October 2006. See Note 1 to our Consolidated Financial Statements for further discussion on this process. The
minority interests decreased by 95.4% to R$8.0 million in 2006, from R$173.5 million in 2005. The minority interest recorded for the year ended December 31, 2006 represents the minority interest in TCO on January 2006. In February 2006, pursuant to
the Merger, TCO became a wholly owned subsidiary of Vivo.
Vivos Segments
As described in Item 4Information of the CompanyOur History and DevelopmentCorporate Restructuring of Our Operating Subsidiaries, during 2007, we completed corporate restructurings to
simplify our corporate legal structure and create a single legal operating company. This resulted in changes to our management structure and operating segments. By the end of the year ended December 31, 2006, we had one operating segment, cellular
telecommunications services. Consequently, no separate segment information has been presented.
B. Liquidity and Capital Resources
Sources of Funds
Vivo generated cash flow from operations of R$3,098.8 million, R$3,100.2 million and R$2,302.2 million in 2007, 2006 and 2005, respectively.
Vivo had net cash used in financing activities of R$395.5 million in 2007. Although Vivo obtained new loans in the aggregate amount of R$2,095.0 million in that period, these were more than offset by loan repayments of
R$1,911.4 million and net settlements on derivatives contracts of R$561.5 million.
56
Table of Contents
Vivo had R$2,397.4 million in long-term loans and financing as of December 31, 2007. Vivos R$1,984.0 million in short-term indebtedness as of December 31, 2007 consisted primarily of funding from financial
institutions. As of December 31, 2007, Vivo had a working capital (current assets minus current liabilities) deficit of R$55.9 million compared to a working capital deficit of R$27.5 million as of December 31, 2006. As of December 31, 2005, Vivo had
a working capital (current assets minus current liabilities) of R$1,326.3 million.
On May 1, 2005, Vivo issued debentures in the aggregate principal amount of R$1.0 billion in two series, both maturing in May 2015. The first series, in the aggregate amount of R$200.0 million, bears interest at 103.3%
of the average daily interbank deposit rate for deposits of one day (DI
Depósitos Interfinanceiros de um dia, extragrupo
), payable semiannually, and is subject to renegotiation of terms (
repactuação
) in May
2009. The second series, in the aggregate amount of R$800.0 million, bears interest of 104.2% of the average daily interbank deposit rate, payable semiannually, and is subject to renegotiation of terms in May 2010. The proceeds of the issuance of
these debentures were used for the repayment of short-term debt.
We believe that our available borrowing capacity, together with funds generated by operations, should provide sufficient liquidity and capital resources to pursue our business strategy for the foreseeable future, with
respect to working capital, capital expenditures and other operating needs.
Uses of Funds
Our principal uses of funds are for capital expenditures, servicing our debt, payment of dividends and interest on shareholders equity from TSD, Celular CRT and TCO, which were merged into Vivo in 2006.
Our capital expenditures (including capitalized interest) amounted to R$1,905.7 million, R$2,103.9 million and R$2,206.5 million in 2007, 2006 and 2005, respectively. Payment of debt and derivative instruments consumed
cash flows of R$2,473.0 million, R$3,602.2 million and R$4,080.5 million in 2007, 2006 and 2005, respectively. Dividends and interest on shareholders equity payments consumed cash flows of R$17.5 million, R$63.2 million and R$184.7 million in
2007, 2006 and 2005, respectively.
Capital Expenditures
The following table sets forth our total capital expenditures for the periods indicated:
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
Vivo
|
|
2007 (1)
|
|
2006 (1)
|
|
2005 (2)
|
|
|
|
|
|
|
|
|
|
(in millions of
reais
)
|
Switching equipment
|
|
417.3
|
|
375.9
|
|
523.0
|
Transmission equipment
|
|
729.6
|
|
844.4
|
|
862.8
|
Information technology
|
|
267.2
|
|
414.8
|
|
407.6
|
Others(3)
|
|
494.3
|
|
468.8
|
|
413.1
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
1,905.7
|
|
2,103.9
|
|
2,206.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________
(1)
|
The financial information presented for 2007 and 2006 represents information from Vivos consolidated financial statements in which Vivo has consolidated TSD, TLE, and CRT as from January 1, 2006.
|
|
(2)
|
The financial information presented for the 2005 fiscal year represents the combined financial data for Vivo, TSD, TLE and CRT, since the companies were under common control with Vivo for these periods.
|
|
(3)
|
Consisting primarily of wireless devices provided to customers for free, network construction, furniture and fixtures, office equipment and store layouts.
|
Our capital expenditures over the past three years related primarily to increasing our network capacity and coverage. The Company continued its projects for improvement and expansion of the capacity of services
rendered, which provided support to increase the CDMA 1XRTT and EVDO network, expansion of transmission routes, system centralization and integration (billing, collection and CRM, among others), development of new services and opening and renovating
points of sale and terminals for the corporate segment.
57
Table of Contents
In the aggregate, R$1,905.7 million were invested during the year ended December 31, 2007, which included investment in the GSM/EDGE network and in the current CDMA/EV-DO network. This amount represented 15.3% of our
net operating revenues.
Our planned capital expenditures for 2008 include investments in network expansion on GSM/EDGE overlay, introduction of new products and services to maximize the use of cellular phones, expansion of our stores and the
continual improvement of the quality of services provided to our customers (the amount will be approved at a general shareholders meeting). We intend to pay these expenditures with funds generated by operations and our available borrowing
capacity.
Payments of Dividends to Shareholders
The holders of preferred shares are entitled to exercise voting rights since the 2005 general shareholders meeting and until we pay the minimum dividends. However, this has no significant impact on our ownership
structure, since our controlling shareholders own more than 50% of our total capital. See Item 8.A.Financial InformationConsolidated Statements and Other Financial InformationDividend Policy and DividendsPayment of
Dividends.
Debt
As of December 31, 2007, Vivos total debt position was as follows:
|
|
|
|
|
Amount Outstanding as of
|
Debt
|
|
December 31, 2007
|
|
|
|
|
|
(in millions of
reais
)
|
Financing from financial institutions
|
|
4,245.5
|
Fixcel (acquisition of TCO)
|
|
10.7
|
Interest
|
|
125.2
|
|
|
|
Total debt
|
|
4,381.4
|
|
|
|
|
|
|
Long-term debt(1)
|
|
2,397.4
|
Short-term debt
|
|
1,984.0
|
|
|
|
________________________________________
(1) Excludes the short-term portion of long-term debt.
As of December 31, 2007, Vivos total debt was R$4.4 billion, of which R$1.8 billion, or 41.9%, was denominated in foreign currencies and therefore exposed to currency fluctuations. Of that amount, R$723.6 million
was denominated in U.S. dollars (US$408.5 million), R$1,061.2 million was denominated in yen (¥66,997.4 million), R$39.8 million was denominated in euro (EUR 15.3 million) and R$10.0 million was denominated in UMBNDES, which comprises a mix of
different currencies. Devaluation of the
real
results in exchange losses on our foreign currency indebtedness. In order to protect against this risk, we have entered into over-the-counter derivatives transactions with international and
domestic financial institutions. In 2007, we incurred financial expense from foreign currency derivative transactions of R$509.4 million against financial income from monetary and foreign exchange variations of R$296.1 million. At December 31, 2007,
we had derivative contracts that covered 96.1% of our foreign currency-denominated debt and other foreign currency liabilities. The unrealized costs (net of unrealized gains on foreign exchange derivatives contracts) at December 31, 2007 were
R$448.4 million.
We are exposed to interest rate risk as a consequence of our floating rate debt. At December 31, 2007, approximately 56.3% of our interest-bearing liabilities bore interest at floating rates and, primarily LIBOR for
U.S. dollar-denominated debt and CDI, IGPM and TJLP for
real
-denominated debt. Accordingly, our financing expenses will increase if market interest rates rise. At December 31, 2007, all of our foreign currency derivatives contracts bore
interest payments linked to the Brazilian CDI rate. Vivo protected against the risk of interest rates increasing (LIBOR) by entering into derivative contracts in the total amount of US$52.5 million and R$1,347.2 million, respectively. The CDI rates
as of December 31, 2007 and 2006 were 11.12% and 13.17%, respectively.
Some of the debt agreements of Vivo contain restrictive covenants. Financial ratios apply to some indebtedness and involve (1) current ratios, (2) capitalization ratios, (3) EBITDA margins, (4) interest coverage ratios
and (5) debt-
58
Table of Contents
to-capital ratios. Vivo S.A. has indebtedness and financing with the National Economic and Social Development Bank (BNDES), which as of December 31, 2007 totaled R$685.2 million. In accordance with contractual obligations, there are several economic
and financial indicators that must be maintained annually. As of December 31, 2007, Vivo met all relevant economic and financial indicators. Vivo S.A. has indebtedness and financing with the Europe Bank of Investments, which as of December 31, 2007
totaled R$270.1 million. On that same day, various economic and financial indicators were met by Vivo S.A.
U.S. GAAP Reconciliation
We prepare our consolidated financial statements in accordance with accounting practices adopted in Brazil, which differ in significant respects from U.S. GAAP. Net losses for 2007, 2006 and 2005 were R$109.6 million,
R$460.5 million and R$494.2 million under U.S. GAAP, compared to net income (losses) of R$(99.4) million, R$16.3 million and R$(767.5) million, respectively, under accounting practices adopted in Brazil. Shareholders equity at December 31,
2007, 2006 and 2005 was R$9,024.9 million, R$9,126.2 million and R$7,165.6 million, respectively, under U.S. GAAP, compared to R$8,297.6 million, R$8,371.7 million and R$7,047.5 million, respectively, under accounting practices adopted in Brazil.
See Notes 37 and 38 to our audited consolidated financial statements for a description of the principal differences between the Brazilian GAAP and U.S. GAAP as they relate to us, and a reconciliation to U.S. GAAP of net
income/loss and total shareholders equity.
New Accounting Pronouncements
In 2006, we adopted several accounting pronouncements effective December 2006 and January 2007 which were reported in our 20-F report filed in 2006 and which are discussed in the F-pages accompanying the present report.
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS 141R). SFAS 141R will significantly change the
accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141R will
change the accounting treatment for certain specific acquisition-related items including: (1) expensing acquisition-related costs as incurred; (2) valuing non-controlling interests at fair value at the acquisition date; and (3) expensing
restructuring costs associated with an acquired business. SFAS 141R also includes a substantial number of new disclosure requirements. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after
January 1, 2009. We expect SFAS 141R will have an impact on our accounting for future business combinations once adopted but the effect is dependent upon the acquisitions that are made in the future.
In September 2006, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 157, Fair Value Measurements. SFAS No. 157 provides a framework for measuring fair value, clarifies the definition
of fair value, and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. We are required to
adopt SFAS No. 157 for our fiscal year beginning January 1, 2008, except as it relates to fair value measurements for nonfinancial assets and nonfinancial liabilities, which, in accordance with FSP 157-2 issued by FASB Staff Position (FSP) in
February 2008, we will adopt in our fiscal year beginning January 1, 2009. We are currently evaluating the effect that the adoption of SFAS No. 157 will have on our results of operations and financial condition, but we do not expect it to have a
material impact.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115. SFAS No. 159 allows measurement at
fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item shall be reported in current earnings at each
subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This
statement is effective for our fiscal year beginning January 1, 2008. We are currently evaluating the
59
Table of Contents
effect, if any, that the adoption of SFAS No. 159 will have on our results of operations and financial condition, but do not expect it to have a material impact.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary (minority interest) is an ownership interest in the consolidated entity that should be reported as
equity in the Consolidated Financial Statements and separate from the parent companys equity. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the
parent and the noncontrolling interest. It also requires disclosure, on the face of the Consolidated Statement of Operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. This statement
will become effective for us on January 1, 2009. We expect SFAS 160 will not have significant impact on our Consolidated Financial Statements. As of December 31, 2007 and 2006, we have no minority interest due to our corporate restructuring as
mentioned in note 1 to our financial statements.
In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF
06-11). EITF 06-11 requires companies to recognize a realized income tax benefit associated with dividends or dividend equivalents paid on nonvested equity-classified employee share-based payment awards that are charged to retained earnings as
an increase to additional paid-in capital. EITF 06-11 is effective for us since January 1, 2008. We do not expect the adoption of EITF 06-11 to have a material impact on our Consolidated Financial Statements.
C. Research and Development
Vivo maintains partnerships with the Universidade Federal do Rio Grande do Sul (UFRGS) and with Pontifica Universidade Católica do Rio Grande do Sul (PUCRS). Such partnerships permit Vivo to have laboratories at
the universities, which conduct research and development of new technologies, and which support and push innovative processes. We also solidified a partnership at the end of 2004 with the Centro de Pesquisas e Desenvolvimento em Campinas
São Paulo (CPqD), to assess and study new technologies. While we have partnerships with various universities which allow us to make improvements in the R&D area, we also rely on the research and development of our third-party suppliers.
D. Trend Information
In 2007, the rate of growth in Brazils cellular market is expected to exceed Brazils economic growth. In addition, we expect continued strong competition from other operators, greater focus on data and
value-added services, targeted growth on average revenue per user, and further enhancements related to customer service. We expect that we will maintain our leadership position in the Brazilian cellular market, focusing on differentiation in the
development of integrated solutions and the application of new technologies. We plan to continue to offer services and products of high quality in order to meet our clients expectations.
E. Off-balance sheet arrangements
As of December 31, 2007, there were no off-balance sheet arrangements. We have no majority-owned subsidiaries that are not included in our consolidated financial statements, nor do we have any interests in, or
relationships with, any special purpose entities that are not reflected in our consolidated financial statements.
F. Tabular disclosure of contractual obligations
The following table represents our contractual obligations and commercial commitments as of December 31, 2007:
60
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
|
|
|
Less than
|
|
1-3
|
|
4-5
|
|
After 5
|
|
|
Total
|
|
1 year
|
|
years
|
|
years
|
|
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of
reais)
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
Long-term debt(1)
|
|
4,075.5
|
|
1,678.1
|
|
819.2
|
|
290.8
|
|
1,287.4
|
Operating leases
|
|
3,343.1
|
|
381.2
|
|
727.3
|
|
679.8
|
|
1,554.8
|
Total contractual cash obligations(2)
|
|
7,418.6
|
|
2,059.3
|
|
1,546.5
|
|
970.6
|
|
2,842.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________
(1)
|
Includes short-term portions of long-term debt.
|
|
(2)
|
Excludes pension fund obligations.
|
In addition, we have a rental commitment with Telecomunicações de São Paulo S.A.Telesp, a related party, in an annual amount of R$113.2 million, including all costs related to the rental of
certain facilities used in providing telecommunications services, such as electrical and air conditioning equipment.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Our company is managed by a Board of Directors and a Board of Executive Officers. Our shareholders elect the members of the Board of Directors. The Board of Directors must have between three and twelve members, each
serving a three-year term. The board currently consists of nine members. The terms of the current members of the board of directors will expire in April 2009. The Board of Directors hold regular quarterly meetings, and the chairman or two board
members may call special meetings.
The following are the current members of our Board of Directors and their respective positions.
|
|
|
|
|
Name
|
|
Position
|
|
Date Elected
|
|
|
|
|
|
Luis Miguel Gilpérez López
|
|
Chairman
|
|
March 22, 2007
|
João Pedro Amadeu Baptista
|
|
Vice Chairman
|
|
May 10, 2006
|
Shakhaf Wine
|
|
Director
|
|
March 26, 2006
|
Félix Pablo Ivorra Cano
|
|
Director
|
|
March 26, 2006
|
Ignacio Aller Malo
|
|
Director
|
|
March 26, 2006
|
Rui Manuel de Medeiros DEspiney Patrício
|
|
Director
|
|
May 10, 2006
|
Luiz Kaufman
|
|
Director
|
|
March 26, 2006
|
José Guimaraes Monforte
|
|
Director
|
|
June 29, 2007
|
António Gonçalves de Oliveira
|
|
Director
|
|
March 26, 2006
|
Set forth below are brief biographical descriptions of our directors.
Luis Miguel Gilpérez López
, born on December 7, 1959, is General Director of the Mobile division of Telefónica International and a member of the Supervisory Board of Brasilcel N.V. He was a
board member of TCP, Celular CRT, TSD, TCO, Teleacre, Telegoiás, NBT, Telemat, Telems, TCO-IP S.A. and Teleron from 2004 to 2005. He began working for the Telefónica group in 1981, having assumed growing responsibilities in areas
including networks, infrastructure, product and services development and marketing. He has a degree in Industrial Engineering and a masters degree in Business Administration.
João Pedro Amadeu Baptista
, born on March 23, 1958, is currently the Vice Chairman of the Supervisory Board of Brasicel N.V.; Vice Chairman of the Board of Directors of Vivo; Chairman of the Supervisory
Board of Portugal Telecom Investimentos Internacionais Consultoria Internacional, S.A.; PT Móveis Serviços de Telecomunicações, SGPS, S.A.; PT Acessos de Internet WI-FI, S.A.; PT Ventures, SGPS, S.A.;
Portugal Telecom Brasil, S.A. and Mobitel; member of the Board of Directors of Universo Online UOL and Unitel, SARL; Chairman of the Manager Board of Directel, since 2006. He is a member of the Audit Committee of Victoria and Albert Museum em
Londres, since 2005. Mr. Baptista was leader of the global team of telecommunications and partner of Booz Allen Hamilton, in the United Kingdon, from 2005 until 2006. Mr. Baptista was global leader for the group of technology, information
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and entertainment industry of Marsh & McLennan Companies Inc., from 2004 until 2005. He was member of Executive Commission and partner of Mercer Management Consulting, from 1997 until 2005; global responsibility for the groups of
technology, information and entertainment, from 2000 until 2005; co-leader for the United Kingdom, from January 2001 until 2005. He holds a degree in Engineering Mechanics, a post-graduate degree in Energy from the Federal Polytechnical Scholl of
Lausanne, Switzerland, and a MBA from Stanford Graduate School of Business, Stanford, CA, EUA.
Shakhaf Wine
, born on June 13, 1969, is the President of Portugal Telecom Brasil S.A, an executive board member of PT Investimentos Internacionais S.G.P.S., a member of the board of directors of Brasilcel N.V.
and a member of the board of directors of Vivo and Universo Online S.A. Previously Mr. Wine was a board member at TCP, TCO, TSD, Celular CRT and Banco1.Net S.A. Before joining Portugal Telecom in April 2003, Mr. Wine was a Director of Investment
Banking and a Relationship Manager for European corporate clients in the Global Telecommunications Group of Merrill Lynch International from 1998 to 2003, based in London. Additionally, he was Senior Associate Director of the Latin American and
Telecommunications groups of Deutsche Morgan Grenfell from 1993 until 1998, also based in London. Previously Mr. Wine was a foreign exchange trader and dealer for the Brazilian Central Bank at Banco Icatu S.A. He holds a degree in Economics from the
Pontificia Universidade Católica do Rio de Janeiro.
Félix Pablo Ivorra Cano
, born on July 1, 1946, was the President of the Board of Directors from February 1999 to September 2005. Mr. Ivorra is currently a member of the Boards of Directors of
Telecomunicações de São Paulo S.A, Brasilcel N.V, Vivo Participações. He was a member of the Board of Directors of TSD, TLE, TCO and Celular CRT until February 2006. He joined the Telefónica Group in July
1972 and served in the areas of Technical Specifications, Network Planning, Commercial Planning and as General Director of Advanced Communications. In 1993, he was appointed General Director of the team that founded Telefónica Servicios
Móviles, where he held several positions including General Commercial Director and General Director of Business Development until January 2006. During 1997 and part of 1998, he was chairman of the board of Telefónica Móviles
group companies Mensatel, S.A. and Radiored, S.A. He has a degree in Telecommunications Engineering from Escola Técnica Superior de EngenhariaETSI in Madrid, and a post-graduate degree in Business Administration from the Instituto
Católico de Administração de EmpresasICADE also in Madrid.
Ignacio Aller Malo
, who was born on December 1, 1945, is a member of the Board of Directors of Telefónia Móviles México, S.A. de C.V., Brasilcel N.V, Vivo Participações, S.A. He
was a member of the Board of Directors of TSD, TLE and Celular CRT until February 2006. Mr. Aller has served as Chief Operating Officer of Telefónica Móviles S.A. since 2003 and has held several positions at Telefónica de
España since 1967.
Rui Manuel de Medeiros DEspiney Patrício
, born on August 17, 1932, is a member of the Board of Directors of Monteiro Aranha S.A., Monteiro Aranha Participações, Klabin S.A., Vivo,
Jerónimo Martins (Portugal) and Espirito Santo International Holding. He was a member of the Board of Directors of Banco Boavista S.A. from 1997 until 2000; member of the Board of Directors of Banco Inter-Atlântico S.A. from 1980 until
1997, member of the Board of Directors of Ericsson do Brasil from 1979 until 1997, Managing Director and Executive Vice-President of Monteiro Aranha S.A. from 1976 until 1992, Representative of the Monteiro Aranha Group in Europe from 1975 until
1976, and worked at Financiadora Volkswagen do Brasil from 1974 until 1975. Mr. Patrício was Minister for Foreign Affairs of Portugal from 1970 until 1974, Under-Secretary of State for Overseas Economic Development of Portugal from 1965 until
1970, Member of the Commission for Overseas Development Plan from 1963 until 1965, Economic Advisor of Sacor (Oil Company) from 1958 until 1964, and between 1958 and 1963 he was Assistant Professor at Lisbon University. Mr. Patrício has a
degree in Law from the University of Lisbon 1955, a post-graduate degree in Political Economics from University of Lisbon 1956 and Business Administration from Fundação Getúlio Vargas (São Paulo)
1975.
Luiz Kaufmann,
born on August 7, 1945, has been a member of the Board of Directors and Audit Committee of Vivo since July 2005. He was a member of the Board of Directors and Audit Committee of TSD, TLE, TCO and
Celular CRT, since July 2005 and until February 2006. Mr. Kaufmann is President and CEO of Medial Saude S/A, a health care company. Mr. Kaufmann is also a member of the Board of Directors of Gol Linhas Aéreas Inteligentes and chairman of its
audit committee. Mr. Kaufmann is a partner at L. Kaufmann Consultores Associados, a boutique investment bank, through which Mr. Kaufmann was in charge of the turn-around and sale of Vésper Brazil from May
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2001 to November 2003 and in the turn-around and sale of Primesys from October 2004 to October 2005. Mr. Kaufmann was partner of GP Investimentos from 1999 to 2001 and a Board member of several companies controlled by GP, CEO of Aracruz Celulose
S.A. and Chairman of the Board of Directors of Tecflor from November 1993 to April 1998. Previously he spent several years as Managing Director of Arthur D. Little in Brazil. Mr. Kaufmann began his career at Serete S.A. Engenharia as project
engineer in 1968, rising to the position of Director of Finance and Control by 1974. Mr. Kaufmann then held various other executive positions prior to those described above. Mr. Kaufmann holds a degree from Universidade Federal do Paraná and
a Master of Sciences in Industrial Engineering from Illinois Institute of Technology.
José Guimarães Monforte,
born on July 6, 1947, is currently a member of the Board of Directors and Audit Committee of Vivo since June of 2007. Mr. Guimarães Monforte is the president of Jano Comércio,
Administração e Participações Ltda. and was the former President of the board of IBGC and Pini Editora S/A, and the Vice President of the board of Klicknet. He was also a member of the board of Natura Cosméticos,
Caramuru Alimentos JHSF Participações S/A and the board of Agrenco of Brazil. In addition, Jose Guimarães Monforte was also the Vice President of ANBID and of the board of the Settlement Department of the Commodity Exchange. He
was also the Coordinator of the Capital Opening Committee of Bovespa and a member of the Listings Commission. Furthermore, he was a member of the Advisory Panel for the OECD on the Efficiency of the Board of Directors, and a member of the Advisory
Board-Americas Cabinet of the Graduate School of Business in Chicago. He also served as an executive in diverse banks and companies, such as BANESPA, Banco Merrill Lynch, Banco Citibank N.A., and was President of VBC Energia S/A. Jose
Guimarães Monforte graduated with a degree in Economics from the University of Católica de Santos.
Antonio Gonçalves de Oliveira
, born on May 4, 1944, is currently a member of the Board of Directors and Audit Committee of Vivo since July 2005, and a member of the Board of Directors of TCP, since March
2001. Mr. Gonçalves de Oliveira was a member of the Boards of Directors and Audit Committees of TSD, TLE, TCO and Celular CRT, since July 2005 and until February 2006. He is a member of the Board of Auditors of COELBA - Companhia de
Eletricidade da Bahia, since April, 2006 at the appointment of
Caixa de Previdência dos Funcionários do Banco do Brasil
, a large Brazilian pension fund and shareholder of COELBA, President of AAMAC - Associação de
Amigos do Museu de Arte Contemporânea da USP, an important participant in the contemporary cultural scene (2004/2006) and member of the council of representatives of FIESP (Federation of Industries of the state of Sao Paulo) (2003/2007). Mr.
Gonçalves de Oliveira is also a member of the Social and Economic Development Council of the Brazilian Government, a board member of the Small and Medium Company Working Group sponsored by the Brazilian Government, the vice president of the
Brazilian Businessmens Association for Market Integration (ADEBIM), a member of the orientation and steering council of Banco do Povo do Estado de São Paulo and President of the decision council of the National Employee Association of
Banco do Brasil (ANABB). From 1991 to 1995, he served as director of the Latin American Sociology Association and from 1993 to 1994 he served as the executive coordinator of the Small and Medium Company National Movement (MONAMPE). He holds a degree
in Social Sciences from the University of São Paulo, Brazil, and a masters degree in Communication Sciences from the same university.
In accordance with the shareholders agreement between Portugal Telecom SGPS, S.A., PT Movéis SGPS, S.A. and Telefónica Móviles S.A., PT Movéis is responsible for the appointment of our
Chief Executive Officer and Telefónica Móviles is responsible for the appointment of our Chief Financial Officer. PT Movéis appointed three and Telefónica Móviles appointed three of the nine members of our Board of
Directors.
Board of Executive Officers
Our by-laws provide for a Board of Executive Officers with six positions, each elected by the Board of Directors for a term of three years. Our Board of Executive Officers currently has six members. In the absence or
temporary inability to perform his duties, the Chief Executive Officer will be replaced by the Executive Vice President of Finance, Planning and Control. In the case of a vacancy in any position on the Board of Executive Officers, the respective
replacement shall be appointed by the Board of Directors; in case of any inability, the Chief Executive Officer shall choose a replacement for that officer among the remaining officers. One officer may be elected for more than one position on the
Board of Executive Officers, but the members of the Board of Executive Officers cannot be elected to the Board of Directors. The Board of Directors may remove executive officers from office at any time.
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Our Board of Executive Officers currently has 6 positions to be occupied by 5 members, since the CEO also occupies the position of Executive Vice President of Marketing and Innovation as of February 11, 2008.
The following are the current executive officers and their respective positions.
|
|
|
|
|
Name
|
|
Position
|
|
Date appointed
|
|
|
|
|
|
Roberto Oliveira de Lima
|
|
Chief Executive Officer
|
|
April 12, 2006
|
|
|
Executive Vice President of Marketing and Innovation
|
|
February 11, 2008
|
Ernesto Gardelliano
|
|
Executive Vice President of Finance, Planning and Control and Investor Relations Officer
|
|
April 12, 2006
|
Paulo Cesar Pereira Teixeira
|
|
Executive Vice President of Operations
|
|
April 12, 2006
|
Eduardo Aspesi
|
|
Executive Vice President of Marketing and Innovation
|
|
October 10, 2006
|
Javier Rodríguez García
|
|
Vice President of Networks
|
|
April 12, 2006
|
Sérgio Assenço Tavares dos Santos
|
|
Vice President of Regulatory Matters
|
|
April 12, 2006
|
Set forth below are brief biographical descriptions of our executive officers.
Roberto Oliveira de Lima
, born on April 1, 1951, is Chief Executive Officer and Executive Vice President of Marketing and Innovation since February 11, 2008 of Vivo, Vivo S.A. and TCO-IP S.A. and formerly of TCO,
Telerj, Telest, Telebahia, Telergipe, Celular CRT, TC, GT, Telegoiás, Telemat, Telems, Teleacre, Teleron and NBT. Mr. Oliveira de Lima has also been a director of Avista Participações Ltda., Tagilo Participações
Ltda., Sudestecel Participações Ltda., TBS Celular Participações Ltda., Ptelecom Brasil S.A., Portelcom Participações S.A. and all affiliates of Brasilcel, since 2005. He was the Chief Executive Officer of
TSD, TLE and Celular CRT until February 2006. Mr. Oliveira de Lima was Chairman of the Board of Directors of Grupo Credicard from 1999 to 2005 and Chief Executive Officer of Banco Credicard S.A. from 2002 to 2005. Before 1999, Mr. Oliveira de Lima
held executive positions at Accor Brasil S.A., Rhodia Rhone Poulec S.A. and Saint Gobain S.A. Mr. Oliveira holds a degree in Administration and an MBA from Fundação Getulio Vargas, Brasil, and a masters degree in finance and
strategic planning from Institute Superieur des Affaires, Jouy en Josas, France. Mr. Oliveira is a Brazilian citizen.
Ernesto Gardelliano
, born on January 15, 1962, is Executive Vice President of Finance, Planning and Control and Investor Relations Officer of Vivo, Vivo S.A. and TCO-IP S.A. and formerly of TCO, Telerj, Telest,
Telebahia, Telergipe, Celular CRT, TC, GT, Telegoiás, Telemat, Telems, Teleacre, Teleron and NBT. Mr. Gardelliano has also been a director of Avista Participações Ltda., Tagilo Participações Ltda., Sudestecel
Participações Ltda., TBS Celular Participações Ltda., Ptelecom Brasil S.A., Portelcom Participações S.A. and all affiliates of Brasilcel. He joined Coopers & Lybrand in Argentina in 1984 where he
developed his career in the Audit Department. During 1990, Mr. Gardelliano was transferred to Italy. In January 1993, he joined Movicom, the first mobile telecom operator in Argentina. The Company was a Joint Venture led by BellSouth and Motorola.
Mr. Gardelliano acted as the Financial Controller until 1997, when he was promoted to Chief Financial Officer. In 2005, and after the sale of the Latin American Assets of BellSouth, he became Regional Director for Argentina, Chile and Uruguay for
Telefónica Móviles and transferred to Brazil to take over responsibilities in the Finance area of the above mentioned Companies, namely Vivo. Mr. Gardelliano is a Certified Public Accountant, a graduate of the University of Buenos
Aires and holds a degree in Upper Management from the Instituto de Altos Estudios at the Universidad Austral.
Paulo Cesar Pereira Teixeira
, born on June 18, 1957, is the Executive Vice President of operations of Vivo since 2003, Vivo S.A. and TCO-IP S.A. and formerly of TCO, Telerj, Telest, Telebahia, Telergipe, Celular
CRT, TC, GT, Telegoiás, Telemat, Telems, Teleacre, Teleron and NBT. Mr. Teixeira is also a director of Avista Participações Ltda., Tagilo Participações Ltda., Sudestecel Participações Ltda., TBS
Celular Participações Ltda., Ptelecom Brasil S.A. and Portelcom Participações S.A. He was the Executive Vice-President of Operations of TSD, TLE and Celular CRT until February 2006. Since 1998 Mr. Teixeira has acted as
Vice-President of Telerj, Telest, Telebahia, Telergipe, Celular CRT and he was member of the Board of Directors of TSD, TLE and Celular CRT from 2001 until 2003. In 1998 he was a Director of Telepar, Telesc and CTMR Celular S.A., companies of
Telecomunicações Brasileiras S.A. Telebrás, and Vice President of Tele Celular Sul S.A. Mr. Teixeira was Director of telecommunications engineering
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of Mato Grosso do Sul S.A. Telems, a company of Telecomunicações Brasileiras S.A. Telebrás, from 1995 through 1998. During 1995, he was a Department Manager of investment management. In 1994 he was an Assistant to the Director
of Engineering. From 1990 until 1994, Mr. Teixeira served as Divisional Manager of coordination and expansion of Telebrás Holdings. Mr. Teixeira was engineer in the areas of service development and investment control of Telebrás
Holding from 1988 through 1990. From 1980 until 1987, Mr. Teixeira performed several different managerial duties at Companhia Riograndense de Telecomunicações S.A.CRT and was also a member of the board of directors from 1985 to
1986. In 1987 and 1988, he held several different positions at Telebrás affiliates. Mr. Teixeira holds an Electrical Engineering degree from the Catholic University of Pelotas, Brazil.
Javier Rodríguez García
, born on December 8, 1955, is Executive Vice President of Technology and Networks Vivo, Vivo S.A. and TCO-IP S.A, since April 2005. He was the Executive Vice President of
Technology and Networks of TSD, TLE and Celular CRT, until February 2006 and of Telerj, Telest, Telebahia, Telergipe, Celular CRT, TC, since May 2003, TCO, Telegoiás, Telemat, Telems, Teleacre, Teleron and NBT, until October 2006. From 1986
until 1988, Mr. García worked at INDELECIndústria Electrónica de Comunicaciones S.A., as the manager responsible for the implementation of an automatic mobile telecommunications project for Telefónica de
España S.A. From 1988 until 1990, he worked at Rede Electrica de España S.A. as the person responsible for the installation and maintenance of radio mobile systems in Spain. From 1990 until 1992, Mr. García served as an
engineering manager at Telcel S.A., where he was responsible for the implementation of automatic mobile telecommunications system for Telefónica de España S.A. in Barcelona, Madrid and Palma de Mallorca. From 1992 until 1996, he was an
engineering manager responsible for the installation and maintenance of systems at Compañia Europea de Radiobusqueda S.A., and from 1996 until 1998, he worked in cellular businesses for Telefónica Group in Spain and Peru, as a network
quality manager and technical area sub-manager, respectively. From 1998 until 2000, Mr. García was the technology manager in the cellular business of Telefónica Group in Brazil and from 2000 until 2003 was the network manager of Telerj
and Telest He holds a degree in Technical Telecommunications Engineering from the Technical University of Madrid, Spain.
Sérgio Assenço Tavares dos Santos,
born on June 3, 1948, is the Vice President of Regulatory Matters of Vivo Participações, Vivo S.A., and TCO-IP S.A. From January 2006 until February
2006, he was a Vice-President of Regulatory Matters and Institutional Relations of TSD, Celular CRT and TLE and from January 2006 until October 2006, Mr. Tavares dos Santos was a Vice-President of Regulatory Matters and Institutional Relations TCO,
Telerj, Telest, Telebahia, Telergipe, Celular CRT, TC, Telegoiás, Telemat, Telems, Teleacre, Teleron, NBT. From October 2004 until December 2005, he was the Regional Director of TCO and subsidiaries, including NBT; from January 2003 until
September 2004, he was the President and Vice-President of TCO and subsidiaries, including NBT; from October 1998 until December 2002, he was the Director of Engineering and Operations of TCO and subsidiaries, including NBT; from February 1998 until
September 1998, he was Executive Vice-President of TCO, Telegoiás Celular, Telemat Celular, Telems Celular, Teleacre Celular and Teleron Celular. He was Director of Engineering and operations of Telecomunicações de
Brasília S.A. Telebrasília S/A, a fixed telecommunications company, between July 1995 and January 1998, and was also Manager of the Business Unit of Advanced Telecommunications of the Operations Department of Telebrasília from
April 1994 until July 1995 and Assessor and Coordinator of Special Projects of the Engineering Department of Telebrasília from September 1993 until March 1994. He held several different positions at Telebrás from July 1990 until August
1993 and also held several different positions at Telebrasília between March 1976 and July 1990. Mr. Assenço holds an Electrical Engineering degree from Brasília University, Brazil. Mr. Assenço is a Brazilian citizen.
Eduardo Aspesi
, born on August 13, 1959, served as the Executive Vice President of Marketing and Innovation of Vivo Participações, Vivo S.A and TCO-IP S.A. from October 10, 2006 to February 11,
2008. He was General Manager of Hispamar Satélites S.A. from 2005 until October 2006. Mr. Aspesi was Retail Superintendent Director of Telemar between 2001 and 2004. From 1999 until 2001, he was General Director of RBS Direct. Mr. Aspesi was
Marketing and New Business Director of Net Sul Comunicações S/A from 1994 until 1999. He worked of Rádio e TV Gaúcha, between 1991 and 1994. From 1985 until 1991, he held several different positions at RBS Group. He was
also Auditor and Department Chief of Companhia Estadual de Energia Elétrica Rio Grande do Sul (CEEE), from 1982 until 1985. He holds a degree in Administration from Pontifícia Universidade Católica de Porto Alegre, RS and
Economics from Federal University of Rio Grande do Sul. Mr. Aspesi holds a post-graduate degree in finance and marketing from the Federal University of Rio Grande do Sul.
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Board of Auditors
Brazilian Corporate Law requires us to have a Board of Auditors (
Conselho Fiscal
) which is composed of three to five members elected at the general shareholders meeting. The Board of Auditors operates
independently from our management and from our external auditors. Its main function is to examine the financial statements of each fiscal year and provide a formal report to our shareholders. Our board of auditors consists of three members and three
alternates and meets quarterly. Our Board of Auditors is elected annually at the annual general shareholders meeting.
The Board of Auditors is responsible for overseeing our management. Its main duties are:
-
to review and provide an opinion on the annual report of our management;
-
to review and approve the proposals of the management bodies to be submitted to the shareholders meeting regarding changes to share capital, issuance of debentures and subscription rights, capital investment plans and budgets, distributions of
dividends, changes in corporate form, consolidations, mergers or split-ups; and
-
to review and approve the financial statements for the fiscal year.
The Board of Auditors holds regular meetings every three months and special meetings when called by the President or by any member of the Board of Auditors.
Listed below are the current members of our Board of Auditors and their respective positions:
|
|
|
|
|
Name
|
|
Position
|
|
Date Appointed
|
|
|
|
|
|
Claudio José Carvalho de Andrade (1)
|
|
Member
|
|
March 15, 2007
|
Paula Bragança França Mansur (2)
|
|
Member
|
|
March 15, 2007
|
Fabiana Faé Vicente Rodrigues (2)
|
|
Member
|
|
March 15, 2007
|
Daniel Vidal de Almeida (1)
|
|
Alternate
|
|
March 15, 2007
|
Norair Ferreira do Carmo (2)
|
|
Alternate
|
|
March 15, 2007
|
João Renato Pierre (2)
|
|
Alternate
|
|
March 15, 2007
|
________________________________________
(1)
|
Appointed by our preferred shareholders.
|
|
(2)
|
Appointed by our controlling shareholder.
|
B. Compensation
For the year ended December 31, 2007, we paid our directors and executive officers, and the directors and executive officers of our subsidiary, as compensation an aggregate amount of R$11.2 million, including bonuses
and profit-sharing plans. This amount includes performance remuneration and profit-sharing arrangements applicable to all employees. Furthermore, the members of our Board of Executive Officers are eligible to participate in the same complimentary
retirement pension plan available to our employees.
C. Board Practices
For more detailed information, see Directors and Senior ManagementBoard of Executive Officers, and Directors and Senior ManagementBoard of Auditors, above, and Item 9.C.
The Offer and Listing Committees.
There are no service contracts between us or our subsidiary and any of our directors providing for benefits upon termination of employment.
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D. Employees
At December 31, 2007, we had 5,600 full-time employees and 13 temporary employees.
The following table sets forth the number of our employees and a breakdown of employees by main category of activity as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Total number of employees (including trainees)
|
|
5,600
|
|
5,896
|
|
6,084
|
Number by category of activity:
|
|
|
|
|
|
|
Technical and operations area
|
|
1,755
|
|
1,865
|
|
1,437
|
Sales and marketing
|
|
2,061
|
|
2,117
|
|
2,347
|
Finance and administrative support
|
|
1,316
|
|
1,330
|
|
1,448
|
Customer service
|
|
468
|
|
584
|
|
852
|
Employees are represented by the
Sindicato dos Trabalhadores em Empresas de Telecomunicações e Operadoras de Mesas Telefônicas no Estado de São Paulo
(SINTETEL). We negotiate new
collective-bargaining agreements every year with the labor unions. The collective-bargaining agreements currently in force include a salary increase of 4.4% and a benefit increase of approximately 5%, effective as of December 31, 2007.
Our management considers the relations between our workforce and us to be satisfactory. We have not experienced any work stoppage that materially affected our operations.
Each of our subsidiaries negotiates a new collective-bargaining agreement every year with each local union. The collective-bargaining agreements now in force expire on October 31, 2008.
At the time of the privatization, employees had the right to maintain their rights and benefits in
Fundação SISTEL de Seguridade Social
, or SISTEL, a multi-employer defined benefit plan that
supplements government-provided retirement benefits. Under the SISTEL plan, we made monthly contributions to SISTEL equal to a percentage of the salary of each employee who was a SISTEL member. Each employee member also made a monthly contribution
to SISTEL on the basis of age and salary. Members of SISTEL qualified for pension benefits when they qualified for the government-provided retirement benefits. SISTEL operates independently from us, and its assets and liabilities are fully
segregated from us. Employees hired since January 1999 are not members of SISTEL.
Before December 1999, the SISTEL plan covered the employees of the former Telebrás System and we were contingently liable for all of the unfunded obligations of the plan. In January 2000, we and the other
companies that formerly belonged to the Telebrás system agreed to divide the existing SISTEL plan into 15 separate plans, resulting in the creation of private plans covering those employees already enrolled in the SISTEL plan. These new
private pension plans are still administered by SISTEL and have retained the same terms and conditions of the SISTEL plan. The division was carried out so as to allocate liability among the companies that formerly belonged to the Telebrás
system according to each companys contributions with respect to its own employees. Joint liability among the SISTEL plan sponsors will continue with respect to retired employees, who will necessarily remain members of the SISTEL plan.
We maintained the plans
TCPPREV
,
TCOPREV
and
VISÃO CELULAR,
new private pension plans for our employees. Unlike SISTELs defined benefits plan, the plans
TCPPREV
and
Visão Celular
call for defined contributions by our operating subsidiaries, as sponsors, and by our employees, as participants.
TCOPREV
is a
variable
contribution plan
.
As of February 2, 2007, the board approved for the management of Vivo to transfer the following plans from Fundação SISTEL de Seguridade Social to the institution Visão Prev Sociedade de
Previdência Complementar (VISÃO PREV): PBS Telesp Celular, TCPPREV, PBS Tele Centro Oeste Celular, TCOPREV, PBS Telesudeste Celular, Visão Telerj Celular, Visão Telest Celular, PBS Teleleste Celular, Visão Telebahia
Celular, Visão Telergipe
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Celular and Visão Celular CRT. These eleven plans were transfered gradually to VISÃO PREV from May 2, 2007 until December 31st, 2007.
The management of the previous PBS-A and PAMA plans remains under the direction of SISTEL. The PBS-A plan is a defined benefit plan dedicated to retired participants until January 31, 2000, and the PAMA plan is a multi-
sponsor health care plan dedicated to the retired participants from PBS plans.
On August 21, 2007, the board approved the new private pension plan VIVOPREV, a defined contribution plan already managed by VISÃO PREV. From March 2008, the participants of the plans PBS Telesp Celular, TCPPREV,
PBS Tele Centro Oeste Celular, TCOPREV, PBS Telesudeste Celular, Visão Telerj Celular, Visão Telest Celular, PBS Teleleste Celular, Visão Telebahia Celular and Visão Telergipe Celular e Visão Celular CRT will have
the possibility to migrate to the new VIVOPREV plan.
As of December 31, 2007, 64.13% of our employees were members of these plans. We continue to have a contingent liability for the unfunded obligations of the plans with respect to all inactive employees of the former
Telebrás system and all post-retirement healthcare benefits for former Telebrás employees and current employees that have not changed to the new plan.
E. Share Ownership
As of December 31, 2007, each of the members of the Board of Directors and the Board of Executive Officers owned, directly or indirectly, less than 0.01% of any class of our shares. We do not offer stock option plans to
any of our directors or employees.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table sets forth the principal holders of common and preferred shares and their respective shares as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Number of common
shares owned
|
|
Percentage of
outstanding
common shares
|
|
Number of preferred
shares owned
|
|
Percentage of
outstanding
preferred shares
|
|
|
|
|
|
Name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brasilcel
|
|
222,877,507
|
|
42.5
|
|
364,350,055
|
|
39.7
|
Sudestecel Partic Ltda (1)
|
|
88,255,178
|
|
16.8
|
|
1,224,498
|
|
0.1
|
TBS Celular Partic Ltda (1)
|
|
68,818,554
|
|
13.1
|
|
1,165,797
|
|
0.1
|
Portelcom Partic. S.A. (1)
|
|
67,349,733
|
|
12.8
|
|
1,843
|
|
(2)
|
Tagilo Partic. Ltda (1)
|
|
12,061,046
|
|
2.3
|
|
22,625,728
|
|
2.5
|
Avista Partic. Ltda (1)
|
|
9,630,458
|
|
1.8
|
|
46,613,811
|
|
5.1
|
All directors and executive officers as a group
|
|
48
|
|
(2)
|
|
1,751
|
|
(2)
|
__________________________________
(1)
|
Subsidiary of Brasilcel.
|
|
|
(2)
|
Less than 1% of aggregate.
|
Any significant change in the percentage ownership held by any major shareholders during the past three years is disclosed in Item 4.A. Information on the CompanyOur History and Development and
Item 4.C.Information on the CompanyOrganizational Structure.
We are not aware of any other shareholder owning more than 5.0% of the common shares.
Brasilcel does not have different voting rights, but as a result of owning more than 50.0% of our common shares, it has the ability to control the election of our Board of Directors and the direction of our future
operations. See also Item 4.A.Information on the CompanyOur History and DevelopmentBrasilcel.
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B. Related Party Transactions
The main transactions with unconsolidated related parties are as follows:
-
Use of network and long-distance (roaming) cellular communication: These transactions involve companies owned by the same controlling group: Telecomunicações de São Paulo S.A. Telesp and subsidiaries. Some of these
transactions were established based on contracts signed by Telebrás with the concessionaire operators during the period prior to privatization, when conditions were regulated by ANATEL. These transactions also include the provision of
customer service to Telecomunicações Móveis Nacionais TMN customers in connection with roaming services in the Companys network. Roaming international services are provided by Telefônica Móviles
Espanã S.A and Telecomunicações Móveis Nacionais TMN.
-
Technical assistance: Refers to the provision of corporate management advisory and business consultancy services by Portugal Telecom, SGPS, S.A., and technical assistance provided by Telefônica S.A., Telefônica International S.A. and TBS
Celular Participações S.A., based on a formula proposed in the contracts that includes the variation of the LAIR (Profit Before Income tax) and the variation of the preferred and ordinary shares and that determines a coefficient to be
applied upon the performance of services. In the case of the operation of the branch office in the Rio Grande Do Sul, the contract foresees only one 1% fixture on the performance of services.
-
Corporate services: These are passed on to the subsidiary at the cost incurred for these services.
-
Call-center services: Provided by Atento Brasil S.A. and Mobitel S.A. Dedic to users of the telecommunications services of the subsidiary, contracted for 12 months and renewable for the same period.
-
Systems development and maintenance services: Provided by Portugal Telecom Inovação Brasil S.A. and Telefônica Pesquisa e Desenvolvimento do Brasil Ltda.
-
Operating logistical services, accounting and financial assistance: Provided by Telefônica Serviços Empresariais do Brasil Ltda.
-
Voice content portal service provider: Provided by Terra Network Brasil S.A.
We have engaged in a number of other transactions with related parties. See Note 34 to our financial statements.
C. Interests of Experts and Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
See Item 3.A.Key InformationSelected Financial Data and Item 18.Financial Statements.
Legal Matters
We are party to several administrative and legal proceedings that, if decided adversely, could have a material adverse effect on our business, financial condition and results of operations. We have recorded provisions
in our financial statements equivalent to the full amount of the estimated losses associated with those claims where the likelihood of an unfavorable outcome is deemed probable by our legal counsel. However, we do not record provisions in those
instances where the likelihood of an unfavorable outcome is deemed possible or remote by our legal counsel. Below is a summary of our material pending administrative and legal proceedings:
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Civil
Consumers rights
We are a party to several law suits brought against us by individual consumers or civil associations representing consumers rights that allege our failing to properly provide our products and services. None of
these lawsuits are individually material. Based on the opinion of our counsel, we believe that probable losses with respect to these claims total approximately R$135.1 million, an amount for which we have made provisions, and that possible losses
with respect to these claims total approximately R$346.1 million.
We are a party to several civil claims and we have made provisions for these claims sufficient to meet probable losses. We believe that probable losses with respect to these civil claims total approximately
R$79.3 million, an increase from R$35.183 million in 2006.
ANATEL
We are also part of several administrative and legal actions brought by Anatel that allege non-compliance with regulatory requirements related to SMP service, in the approximate total amount of R$18.6 million. Based on
the opinion of our counsel, we believe that the likelihood of unfavorable outcomes with respect to these claims are probable.
Breakup of Telebrás
Telebrás, our legal predecessor, was a defendant in a number of administrative and legal proceedings and was subject to various claims and contingencies. Under the terms of the Telebrás breakup, the
liability for any claims arising out of acts committed by Telebrás prior to the effective date of the breakup remains with Telebrás, except for labor and tax claims (for which Telebrás and the companies incorporated as a result
of the breakup are jointly and severally liable by operation of law) and any liability for which specific accounting provisions have been assigned to us or one of the other companies incorporated as a result of the breakup of Telebrás. In
addition, the legality of the breakup of Telebrás had been challenged in numerous legal proceedings; some of which have been dismissed and are still pending. We believe, based on the opinion of outside counsel, that the likelihood of an unfavorable outcome with respect to these claims is remote.
Tax Credits
Vivo and the other new holding companies incorporated in connection with the privatization of the telecommunications companies offset certain tax debts against the premiums paid by their controlling shareholders. A
claim was filed
on December 16, 1999
against all the new holding companies, including Vivo and TCO, seeking relief in the form of the annulment of the administrative acts that recognized these offsets. Although we believe that the
restructuring was implemented in accordance with Brazilian law, we believe, based on the opinion of outside counsel, that the likelihood of an unfavorable outcome with respect to this claim is possible. We would be required to pay all the taxes that
were offset against goodwill. We are unable to determine at this time the extent of any potential liabilities with respect to this claim.
Ownership of Caller ID
Lune Projetos Especiais Telecomunicação Comércio e Ind. Ltda
., a Brazilian company, filed on November 20, 2001
lawsuits against 23 wireless telecommunications operators, including
Telesp Celular Participações and its subsidiaries. The lawsuits allege that those operators violated patent number 9202624-9, related to
Equipamento Controlador de Chamadas Entrantes e do Terminal do Usuário
, or Caller
ID, granted to Lune by the Brazilian Intellectual Property AgencyINPI, on September 30, 1997. Lune calls on the operators to cease to provide Caller ID services and seeks payment from them for the unauthorized use of the Caller ID system in an
amount equivalent to the payment of fees received by such operators for use of the Caller ID system. However, Lunes right to use patent number 9202624-9 was suspended by a federal judge in response to a lawsuit filed against Lune and INPI by
Ericsson Telecomunicações S.A,. TC
and
Telerj Celular
filed identical lawsuits against Lune and INPI and those lawsuits are still pending before the courts. In connection with this proceeding, a third company, Sonintel,
and its two partners
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also brought an
Ação de Oposição
, whereby they reinvoked their rights to a previous patent related to Caller ID, and to which the above mentioned patent (number 9202624-9) was linked. We believe, based on the
opinion of outside counsel that the likelihood of an unfavorable outcome with respect to Lunes claim against us is possible. We are unable to determine at this time the extent of any potential liabilities with respect to this claim.
Validity of Prepaid Plan Minutes
We and our subsidiary, together with other Brazilian wireless telecommunications operators, are defendants in various lawsuits brought by the public prosecutors office and consumer protection associations
challenging the imposition of a deadline for the use of purchased prepaid minutes. The plaintiffs allege that purchased prepaid minutes should not expire after any specified deadline. Conflicting decisions have been issued by the courts reviewing
this matter. Although we believe that our criteria for imposing the deadline is in compliance with ANATELs rules, we believe, based on the opinion of outside counsel, that the likelihood of an unfavorable outcome with respect to this claim is
possible.
Litigation Relating to the Charging of a Monthly Subscription Fee
GT
,
Telegoiás Celular
and
Telems Celular
, together with other mobile telecommunications operators, are defendants in class action suits brought by the federal public prosecutors office
and local agencies for consumers protection, which challenged the charging, by these operators, of monthly subscription tariffs, alleging that there is no legal provision authorizing such a charge. According to the plaintiff, the charging of
monthly subscription tariffs also violates Brazilian Consumer Law.
In October 2007, the Superior Court of Justice (STJ) has taken a position favorable to Brazilian telecommunications operators holding that the charging of a monthly subscription fee is legal.
Based on the opinion of our legal counsel, we believe that the possibility of an unfavorable decision in this lawsuit is remote, given that the charging of monthly subscription tariffs is expressly allowed by Brazilian
telecommunications regulations.
Litigation Relating to Telebrás Loans
In June 15, 1999, TCO filed a lawsuit against
Tele Centro Sul
(one of the holding companies arising from the breakup of
Telebrás
, now
Brasil Telecom Participações S/A
),
Telebrás itself and KPMG (the auditors during the breakup of Telebrás), regarding the distribution of debts and credits of former Telebrás loans, after its breakup.
In response to the lawsuit filed against it,
Brasil Telecom Participações S/A
filed two countersuits in October 1999 against Telebrasília (which has since merged into TCO) and
Telegoiás seeking payment of the Telebrás loans in the amount of R$41.3 million from TCO and R$24.1 million from Telegoías.
The lawsuit filed by TCO against
Brasil Telecom Participações S/A
, Telebrás
and KPMG, was dismissed. In the two other lawsuits, filed by
Brasil Telecom Participações S/A
against TCO and Telegoiás, the court ruled partially in favor of
Brasil Telecom Participações S/A
. In the
Court of Appeals of the Federal District, TCOs and Telegoiás appeal was denied.
Brasil Telecom Participações S/As
appeal was granted. Since the Court of Appeals of the Federal District rendered
unfavorable decisions in these actions, TCO filed an appeal to the Superior Court of Justice and has been awaiting trial since May 2004. On December 17, 2004, the plaintiff in these actions initiated an enforcement proceeding, claiming the amounts
owed to be R$91.5 million from TCO and R$59.3 million from Telegoiás. On August 31, 2005, TCO and Telegoiás filed a motion to stay the enforcement, in which they challenge the amounts sought by the plaintiff and on which the court
never ruled.
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On October 20, 2006, we entered into a settlement agreement with the claimants in this action, whereby we paid R$153 million to be released from all liability in connection with the claim.
Difference in Shares
Various lawsuits were brought by fixed-subscribers against the holding companies created as a result of the breakup of the Telebrás system. Celular CRT is also named in these lawsuits, rendered by the predecessor
company,
Companhia Rio-Grandense de Telecomunicações
, currently
Brasil Telecom S.A
, in the state of Rio Grande do Sul.
Prior to the privatization process, telecommunications network expansion was partially financed by plans under the Ministry of Communications Order 1,361/76, which entitled fixed telephone line subscribers to
receive a certain number of capital stock shares of the respective fixed telephone service provider, based on amounts that these subscribers have paid for their fixed phone line subscriptions.
The plaintiffs claim to have rights regarding contracts entered into by the predecessor telecommunication company for fixed phone line subscriptions. They claim that the amount they paid for their fixed telephone
subscriptions would be convertible to a certain amount of the Companys shares after a 12-month subscription period.
The plaintiffs allege that the procedure by which the shares were subscribed in their names was unlawful, abusive and, during a period of high inflation, did not take into consideration the monetary correction of the
amount they had paid to subscribe their fixed telephone lines.
Although an Appeals Court in Rio Grande do Sul has taken a position favorable to the plaintiffs, no decision of this kind has been issued against Celular CRT. We have raised, among other arguments, that the action
against us is improper on the grounds that liability for any claims arising out of acts committed prior to the effective date of the breakup should remain with the predecessor company. Decisions favoring this argument have been issued, even by the
Supreme Court. A similar argument was adopted in the lawsuits brought against the holding companies created as a result of the breakup of the Telebrás system, because of which the plaintiffs dropped their actions against Vivo and TCO.
Based on the opinion of our counsel, we believe that the likelihood of an unfavorable outcome with respect to these claims is remote.
VU-M
Global Village Telecom (GVT)
, a Brazilian telecommunications operator, filed a lawsuit against ANATEL and wireless telecommunications operators, including Vivo, claiming that the VU-Ms are fixed at an abusive
rate and that these operators employ anticompetitive practices which are causing financial damages to the plaintiff. GVT requested a preliminary injunction in order to reduce the VU-Ms and a determination by a judicially-appointed expert of the
proper value of the VU-Ms on a cost-based model. GVT also seeks compensation from the wireless operators in the amount of the difference between the value currently charged by the wireless operators and the value to be declared at the
final judgment. The preliminary order was initially denied, but after a renewal requested by the plaintiff, a preliminary order was granted to GVT to allow judicial deposits of the difference between R$0.2899, which must be paid to wireless
operators, and the values currently charged. ANATEL and some wireless operators, including Vivo, appealed from the preliminary order to the Federal Court and a final decision is pending. Based on the opinion of our counsel, we believe that the
likelihood of an unfavorable outcome with respect to this claim is possible.
Tax-Related
Application of ICMS
In June 1998, the
Conselho Nacional de Política Fazendária
, or CONFAZ, decided to apply the ICMS tax to certain service revenues, such as activation fees, and to make the application of the tax to
such activation fees retroactive for the five years preceding June 30, 1998. This claim impacts our subsidiary. We believe the application of the ICMS tax to nonbasic telecommunications services such as cellular activation is unlawful because it
would subject to taxation certain services that are not telecommunications services. In addition, we do not believe new taxes
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may be applied retroactively. We believe based on the opinion of outside counsel (including certain judicial precedents) that the likelihood of an unfavorable outcome with respect to this claim is remote. Moreover, we believe that the predecessor
companies would be liable to our subsidiary for any tax liability arising from the retroactive application.
In the states of Distrito Federal, Acre, Mato Grosso do Sul, Mato Grosso, Goiás, Roraima and Amazonas, Vivo S.A. received tax assessments totaling R$67.5 million as of December 31, 2007, in connection with: i) the ICMS tax applied to
occasional or complementary services that do not constitute telecommunications services; ii) the ICMS tax applied to international calls made from Brazil; iii) failure to reverse proportionally an ICMS tax credit on the acquisition of fixed assets
used in providing communications services and/or exempt or untaxed outgoing goods; iv) the ICMS tax applied to non-remunerated provisions of telecommunications services consisting of the donation of credits to be used in the prepaid service plan; v)
failure to include in the ICMS calculation base fines and arrears interest charged to defaulting clients; vi) alleged failure to comply with supplementary obligations; and vii) other taxes relating to the sale of goods.
In the state of Paraná, Vivo S.A. received tax assessments totaling R$4.0 million as of December 31, 2007, compared to R$1.336 million in 2006, in connection with late payment of the ICMS tax.
In the state of Bahia, Vivo S.A. received tax assessments totaling R$43.7 million as of December 31, 2007, in connection with: i) failure to reverse proportionally an ICMS tax credit on the acquisition of fixed assets, electric power and switching
services resulting from the provision of untaxed communications services; ii) failure to reverse ICMS credits relative to handsets provided for rental and free leases; iii) late payment of the ICMS tax in the period from February to
March 1998; iv) application of the ICMS tax on complementary communications services; v) failure to reverse ICMS credit in relation to long distance and call centers; and vi) the ICMS tax applied to sign-up fees.
In the state of Sergipe, Vivo S.A. received tax assessments totaling R$17.5 million as of December 31, 2007, in connection with: i) failure to reverse proportionally an ICMS tax credit on the acquisition of fixed assets, electric power and
switching services resulting from the provision of untaxed communications services; ii) failure to reverse ICMS credits in relation to handsets provided for rental and free leases; iii) application of the ICMS tax on provision of
handsets on consignment; and iv) the ICMS tax applied to complementary communications services.
In the state of Espírito Santo, Vivo S.A. received tax assessments totaling R$6.9 million as of December 31, 2007, in connection with: i) incorrect ICMS credits and ii) failure to write up trade notes.
In the state of Rio de Janeiro, Vivo S.A. received tax assessments totaling R$148.5 million as of December 31, 2007, in connection with: i) application of the ICMS tax to complementary communications services; ii) application of the ICMS tax on
sign-up fees; iii) application of the ICMS tax to calls originating from administrative and test terminals; iv) application of the ICMS tax to services provided to other telecommunications operators for clients not eligible for an exemption; v)
application of the ICMS tax on international calls; vi) failure to reverse proportionally an ICMS tax credit on the acquisition of fixed assets; vii) application of the ICMS tax on the provision of unpaid telecommunications services; and viii)
application of the ICMS tax to electric power.
In the state of Rio Grande do Sul, Vivo S.A. received tax assessments totaling R$25.9 million as of December 31, 2007, in connection with: (i) application of the ICMS tax to international calls; (ii) late payment of the ICMS tax; and (iii)
application of the ICMS tax on electric power.
In the state of São Paulo, Vivo S.A. received tax assessments totaling R$100.0 million as of December 31, 2007, in connection with: (i) incorrect ICMS tax credits and (ii) an incorrect credit received in relation to values posted as
extemporary credits.
Proceedings related to the above-mentioned tax assesments are currently occuring in both the administrative and judicial sphere. According to the opinion of counsel, an unfavorable outcome with respect to our claims is possible.
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Based on the opinion of our external legal counsel, in the state of Espírito Santo, Vivo S.A. recorded a provision of R$2.6 million as of December 31, 2007, to cover potential losses from tax-related actions currently in administrative
court.
Application of COFINS and PIS
(a) Law No. 9718/98
On November 27, 1998, the method for calculating the amount of contribution required under PIS and COFINS was modified by Law No. 9,718, which increased the COFINS contribution rate from 2% to 3% and permitted the
deduction of up to one-third of the amount due under COFINS from the amount due under CSLL. Since our subsidiary had a negative tax calculation basis, they could not benefit from this deduction. In addition, Law No. 9,718 effectively increased the
amounts of COFINS and PIS due from our subsidiary by including financial revenues in the calculation methodology. This claim impacts TCP, TC, TCO and GT.
We believe that this increase is unconstitutional because: (1) Article 195 of the Brazilian Constitution, which was effective when Law No. 9,718 was enacted, provided that the PIS contribution could only be levied on
compensation of employees, revenues and profits; (2) in order to increase the COFINS and PIS contributions, it would be necessary to enact a law requiring a greater quorum than the one required to approve Law No. 9,718; and (3) the law was made
effective before the expiration of the required 90-day waiting period.
We believe based on the opinion of our legal counsel, and in consideration of recent decisions of the Supreme Court of Brazil, that the likelihood of an unfavorable outcome with respect to the calculation methodology is
remote (especially since one of our subsidiaries has already obtained a favorable decision in November 2007) but with respect to the contribution rates is possible. However, we do not believe an unfavorable outcome would have a material adverse
effect on our financial condition and results of operations. As of December 31, 2007, an amount of R$10.0 million was recorded by the Company after it made escrow deposits of R$2.4 million.
(b) PIS and COFINS
In the state of São Paulo, an action was brought against Vivo S.A. (lawsuit No. 19515,000,700/2003-97) claiming that, in January and February of 2000, Vivo had offset COFINS against unwarranted credits received from a deduction that was in
excess of the permitted one-third of the amount due under COFINS in 1999 from the amount due under CSLL. The Company recorded a provision in the amount of R$24.7 million on the accounts as of December 31, 2007 and 2006, after making an escrow
deposit in the same amount.
(c) Passing on of the COFINS and PIS to Customers
Several telecommunications carriers, including us, are defendants in a lawsuit brought by the federal public prosecutors office challenging our policy of passing the COFINS and PIS expenses on to our customers by
incorporating them into our charges. This claim impacts our subsidiary. We are challenging the lawsuit on the grounds that COFINS and PIS are cost components of the services provided to our customers and, as such, should be incorporated into the
price of such services, as is the practice throughout the telecommunications industry. We believe based on the opinion of our outside counsel that the likelihood of an unfavorable outcome with respect to this claim is remote.
(d) Increase in the Calculation Base
In the state of São Paulo, Vivo S.A. received tax assessments (lawsuits No. 19515,000701/2003-28 and No. 19515,000699/2003-97) amounting to R$2.7 million as of December 31, 2007, compared to R$2.526 million in 2006, as a result of the
increase in PIS and COFINS calculation bases. The lawsuits are in administrative court awaiting the decision of the Court of Special Appeal.
(e) Derivative Operations
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In the state of Bahia, Vivo S.A. received a COFINS assessment of R$9.1 million as of December 31, 2007, in connection with losses incurred on derivative operations performed to determine the calculation base for the contribution. The assessment is
awaiting judgment in the second administrative instance.
IRPJ, IRRF and CSLL
In the state of Rio de Janeiro, Vivo S.A. received tax assessments amounting to R$154.5 million as of December 31, 2007, in connection with: i) the use of part of the negative CSLL (federal social contribution on income) calculation base determined
by the Company in 1997, which originated from a partial spin-off; ii) alleged underpayment of IRPJ (income tax) and CSLL due to the fact that the inspectors did not approve the deductibility of certain expenses; iii) alleged underpayment of IRRF
(withholding tax) on overseas remittances; and iv) changes to the IRPJ and CSLL calculation bases resulting from the reduction in the Companys declared tax loss. There are proceedings based on these assessments currently ongoing in the
administrative court.
IRRF, IOF (tax on financing operations) and PIS
In May of 2007, the Company faced tax foreclosures totaling R$22.4 million as of December 31, 2007 in connection with the tax authorities refusal to compensate the negative balance of IRPJ (income tax) for fiscal year 2000. The DRF -
Delegacia da Receita Federal
(Regional Brazilian Internal Revenue Service) - did not approve some expenditures included in the Companys income tax return and cancelled the balance of IRPJ credits used to offset the tax, thus leading to
the accumulation of debt. The decision of the first judicial instance is pending.
IRPJ
Vivo S.A. assumed the tax assessments received by its former subsidiary TLE amounting to R$5.9 million as of December 31, 2007, charged on underpayment in connection with the excess of investments in tax incentives paid to FINOR, FINAN
or FUNRES (tax incentives in Brazil) as calculated during the review of the Companys income tax return. The decision of second judicial instance is pending.
PIS, IRPJ and CSLL
In September of 2007, in the state of Pará, Vivo S.A. filed a lawsuit aiming to eliminate several federal taxes payable by Vivo S.A. on behalf of the merged company Norte Brasil Telecom S.A. These taxes were automatically assessed by the
SIEF system (one of the Brazilian Internal Revenue Service systems) due to information provided in a specific compensation tax return (DCOMP Declaração de Compensação and PER/DCOMP Declaração
de Compensação, which is sent electronically), and were not approved by Secretaria da Receita Federal do Brasil (Brazilian Internal Revenue Service). These taxes totaled R$14.6 million as of December 31, 2007. The lawsuit is pending in
the second judicial instance.
IRPJ and CSLL
In the state of Rio Grande do Sul, Vivo S.A. was subject to a tax assessment for alleged IRPJ and CSLL debts of R$283.9 million as of December 31, 2007, and for the allegedly unwarranted amortization of the goodwill on acquisition of the interests
of Companhia Riograndense de Telecomunicações (CRT) in fiscal years 1997 and 1998. This assessment is pending judgment in the administrative court.
CIDE
We and our subsidiary filed lawsuits challenging the application of CIDE
Contribução de Intervenção no Domínio Econômico
on the remittances of payments owed to
suppliers headquartered outside Brazil in accordance with technology transfer and technological assistance contracts or trademark and software licenses, in accordance with the terms of Law No. 10,168/2002. We believe based on the opinion of outside
counsel that the likelihood of an
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unfavorable outcome with respect to this claim is possible. Vivo S.A. recorded a provision in the amount of R$70.3 million, after it made escrow deposits amounting to R$44.3 in 2007.
FUST
ANATEL, through the Abridgment of Law nº 7, dated December 15, 2005 established that (i) the values paid for telecommunication companies related to interconnection fees and network usage, cannot be excluded from
the tax basis of FUST contributions and (ii) among others, the values received from telecommunication companies, for interconnection usage and for the use of its networks resources, can not be excluded from the tax basis of FUST contributions.
Considering that the second part of the Abridgment of Law is not in accordance with the Law 9.998/2000, all of our former subsidiaries have filed writs of mandamus questioning the legality of this contribution and have
been granted a favorable decision which has suspended our liability for the contribution.
We believe, based on the opinion of counsel, that the likelihood of an unfavorable outcome with respect to this claim is possible. As of December 31, 2007, the amount notified by ANATEL for payment is of R$131.9
million.
FUNTTEL
Vivos subsidiary filed a writ of mandamus directly to the Managing Chairman of the board of FUNTTEL and the Temporary Secretary of the Ministry of Communications in order to enforce its right to calculate and pay
contributions to FUNTTEL, as per the provisions of Law nº 10,052 of November 28, 2000, without including in the calculation amounts received as transfers entitled to interconnection and use of the network integration resources, as expressed in
article 6, paragraph 4 of Decree n. 3,737 of January 30, 2001. The Company obtained a favorable judicial decision related to this issue. As of December 31, 2007, the amount of the contributions involved is R$68.2 million. According to the opinion of
counsel, there exists a possibility of having the writ denied.
FISTEL
Our former subsidiaries,
Telerj
and
TCO
, hold two authorizations to provide telecommunication services granted by the government through SMP Authorization Term n° 013/2002: one to explore the
Serviço Móvel Pessoal
for an indeterminate period of time and the other to use radio frequencies for the remaining period of time of the first license but renewable for fifteen years.
On November 30, 2005, the license for the usage of radiofrequency expired and consequently our former subsidiaries requested an extension. In order to renew the license, ANATEL requested the payment of a TFI
(Installation Inspection Fee), which our former subsidiaries declined to pay on the ground that they had already paid TFI for all fixed and mobiles stations and radiofrequencies.
In December 2007, our subsidiary Rio Grande do Sul also faced the requirement of paying a TFI at the time of renewing its licenses for its mobile stations. VIVO is currently challenging this requirement.
ANATELs position is that the TFI assessment is due in accordance with Act nº 255. Given that ANATELs position does not seem accurate, our former subsidiaries have filed an administrative proceeding in
order to contest any requirement for payment of the charge.
As of December 31, 2007, the amount involved is R$148.9 million (Vivo in Rio de Janeiro) and R$37.1 million (Vivo in Distrito Federal) and R$95.9 million (Vivo in Rio Grande do Sul).
Litigation Related to ISS on use of network
The municipalities of Salvador (in the state of Bahia) and Porto Alegre (in the state of Rio Grande do Sul) filed administrative proceedings against Telebahia Celular and Celular CRT in order to collect amounts
allegedly due as a services tax (ISS). The municipalities claim that the payments received in consideration of the use of our network could be considered compensation under a lease of a movable asset, and that therefore these payments should be
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subject to the application of ISS. Based on the opinion of our legal counsel, we believe that Telebahia Celular and Celular CRT will be successful in its defense in these proceedings and accordingly we have not made any provisions. As of December
31, 2007, the amount involved is R$109.6 million.
In addition, other municipalities throughout the country (in the states of Amazonas, Mato Grosso, Mato Grosso do Sul, Paraná, Rio de Janeiro, Rio Grande do Sul, Roraima, Espírito Santo and São
Paulo) require the payment by VIVO of the ISS services tax for the main purposes of providing telephone complementary services, advertising, licenses and subscriptions. There is no ISS withholding over consulting services. As of December 31, 2007,
the amount involved is R$34.4 million.
Other taxes, rates and contributions
On December 31, 2007, an amount of R$3.3 million was recorded, related to the following assessments issued by tax authorities: (i) ISS on rental services of goods, support activities and additional services; (ii) income taxes on derivative
operations; and (iii) social security contribution (INSS). As of December 31, 2007, a provision of R$ 4.1 million was recorded for various tax lawsuits.
Other Litigation
We are a party to several labor claims for which we have recorded provisions considered sufficient to meet probable losses in these cases. During the year ended December 31, 2007, no significant labor claims classified
as having the potential to incur probable losses were initiated. No significant changes have occurred in the proceedings reported since the last fiscal year. With respect to proceedings in which the possibility of loss is classified as possible, the
amount involved is R$133.0 million.
We are also party to certain legal proceedings arising in the normal course of business. We believe that our provisions are sufficient to cover our estimated losses due to adverse legal decisions. We believe that
adverse decisions arising from these other legal proceedings would not have a material adverse effect on our business, financial condition or results of operations. See note 20 to our companys financial statements included in this report.
Dividend Policy and Dividends
We may pay our shareholders both dividends and interest on shareholders equity which is a form of distribution that is tax deductible in Brazil. We did not pay dividends or interest on Shareholders equity
for the years ended December 31, 2005, 2004 because we recorded a net loss for each of those years. On December 21, 2007, we paid dividends with respect to fiscal year ended December 31, 2006 in the amount of R$16.8 million, which was insufficient
to meet the minimum dividend required by law. For the fiscal year ended December 31, 2007, we were unable to pay minimum dividends, because we had net losses. As a result, holders of Vivos preferred shares now have the same voting rights as
the holders or common shares until we pay minimum dividends.
Each of our preferred shares is entitled to declared dividends, with priority to receive a noncumulative annual dividend, to the extent net profits or reserves are available for distribution, equal to the higher of (i)
6% of the amount obtained by dividing the amount of subscribed capital by the number of our shares and (ii) 3% of the amount obtained by dividing shareholders equity by the number of our outstanding shares. To the extent there are additional
distributable profits, we are also required to distribute to all shareholders an amount equal to 25% of adjusted net income, or the general dividend, determined in accordance with Brazilian Corporate Law, including any realization of the unrealized
net income reserve. Each of our preferred shares is also entitled to receive declared profits on par with common shares, after our common shares have been paid dividends equal to the minimum priority distribution due to our preferred shares, which
is 25% of our net profits for the year.
Under Brazilian Corporate Law, a company is permitted to suspend the payment of the mandatory dividend in respect of its common and preferred shares if:
|
its board of directors, independent auditors and board of auditors report to the shareholders meeting that the distribution would be incompatible with the financial conditions of that company; and
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the shareholders ratify this conclusion at the shareholders meeting. In this case,
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the board of executive officers would forward to the CVM, within five days of the shareholders meeting, an explanation for the suspension of the payment of the mandatory dividends; and
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the amounts which were not distributed are to be recorded as a special reserve, and, if not absorbed by losses in subsequent fiscal years, they must be distributed as dividends as soon as the financial condition of that company permits. Dividends
may be distributed by us out of our retained earnings or accumulated profits in any given fiscal year.
|
Under our by-laws, we may pay dividends out of retained earnings or accumulated profits in any given fiscal year. For the purposes of Brazilian Corporate Law, accumulated profits are defined as net income after the
provision of income tax and social contribution for the relevant fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to warrants, income bonds, employees and managements participation in a
companys profits. Retained earnings are defined as the amount of our net income in prior years that was not paid out as dividends in the year in which it was earned, but rather was retained in accordance with a proposal of the board of
directors duly approved by a shareholders meeting.
At each annual shareholders meeting, the board of directors is required to determine how net profits for the preceding fiscal year are to be allocated. Under Brazilian Corporate Law, we are required to maintain a
statutory reserve, to which we must allocate 5% of our net profits for each fiscal year until the amount of such reserve equals 20% of our paid-in capital. Losses, if any, may be charged against the statutory reserve.
Brazilian Corporate Law also provides for two additional discretionary allocations of net profits that are subject to approval by the shareholders at the annual shareholders meeting:
|
first, a percentage of net profits may be allocated to the contingency reserve for anticipated losses that may be charged to it in future years. Any amount so allocated in a prior year must be either:
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reversed in the fiscal year in which the loss was anticipated if such loss does not in fact occur; or
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written off in the event that the anticipated loss occurs;
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second, if the amount of unrealized revenue exceeds the sum of (i) the statutory reserve and (ii) retained earnings, such excess may be allocated to the unrealized profit reserve at the direction of the board of directors.
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Allocations may not hinder the payment of mandatory dividends. Unrealized revenue reserve is defined under Brazilian Corporate Law as the sum of:
|
the share of equity earnings of affiliated companies, which is not paid as cash dividends; and
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profits as a result of income from operations after the end of the next succeeding fiscal year.
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The amounts available for distribution are determined on the basis of financial statements prepared in accordance with Brazilian GAAP, which differs from other financial statements such as our consolidated financial
statements included in this annual report.
Priority and Amount of Preferred Dividends
Our by-laws provide for a minimum noncumulative dividend of (i) 6% of the amount obtained by dividing the amount of subscribed capital by the number of our shares and (ii) 3% of the amount obtained by dividing
shareholders equity by the number of our outstanding shares, whichever is greater. As a result of such provision, holders of our preferred shares are entitled to receive, in any year, distributions of cash dividends prior to the holders of our
common shares receiving any distribution of cash dividends in such year. In addition, distributions of cash dividends in any year are made:
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first, to the holders of preferred shares up to the amount of the dividend that must be paid to the holders of preferred shares for such year;
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then, to the holders of common shares until the amount distributed in respect of each common share is equal to the preferred dividend; and
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thereafter, distributed equally among holders of preferred and common shares.
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Payment of Dividends
We are required by Brazilian Corporate Law and by our by-laws to hold an annual shareholders meeting by April 30 of each year, at which, among other things, an annual dividend may be declared by a decision of our
shareholders on the recommendation of our board of directors. The payment of annual dividends in any given year is based on the financial statements prepared for the preceding fiscal year ending December 31. Under Brazilian Corporate Law, dividends
are required to be paid within 60 days of the annual shareholders meeting, or on the date determined at a shareholders meeting, but in any case prior to the end of the fiscal year in which such dividend was declared. A shareholder has a
three-year period from the dividend payment date to claim dividends in respect of its shares, after which time unclaimed dividends revert back to us. Because our shares are issued in book-entry form, dividends will be credited to the depositary,
which is responsible for the delivery of the dividends to their respective holders. We are not required to adjust the amount of paid-in capital for inflation. Annual dividends may be paid to shareholders
pro rata
according to the date when
the subscription price is paid to us.
Our preferred shares underlying the ADSs are held in Brazil by a Brazilian custodian, Banco Itaú S.A., as the agent for the depositary, which is the registered owner of our shares.
Payments of cash dividends and distributions, if any, will be made in
reais
to the Custodian on behalf of The Bank of New York, as depositary, which will then convert those proceeds into U.S. dollars and will
cause such U.S. dollars to be delivered to the depositary for distribution to holders of ADRs. In the event that the Custodian is unable to immediately convert the
reais
received as dividends into U.S. dollars, the amount of U.S. dollars
payable to holders of ADRs may be adversely affected by devaluations of the
real
that occur before such dividends are converted and remitted. Dividends in respect of our preferred shares paid to resident and non-resident shareholders,
including holders of ADSs, are not currently subject to Brazilian withholding tax.
B. Significant Changes
There were no significant changes in 2007 other than as already discussed in other sections of this annual report.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
Brazilian private equity and debt are traded on BOVESPA, which is the trading market for our common and preferred shares. Our preferred shares began trading on the Brazilian stock exchanges on September 21, 1998. In the
United States, our preferred shares trade in the form of ADSs that each represent 1 preferred share as of December 31, 2007 and that are issued by The Bank of New York, as depositary pursuant to a Deposit Agreement among Vivo, the depositary and the
registered holders and beneficial owners from time to time of ADSs. The ADSs commenced trading on the New York Stock Exchange on November 16, 1998 under the symbol TCP. After the corporate restructuring, the symbol became
VIV.
The table below sets forth, for the indicated periods, the high and low closing prices of the ADSs on The New York Stock Exchange, in U.S. dollars, and the preferred shares on the São Paulo Stock Exchange, in
reais
:
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New York Stock
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São Paulo Stock
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Exchange US$ per
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Exchange R$ per
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|
ADS
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1 preferred shares
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|
|
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High
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Low
|
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High
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Low
|
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Year ended
|
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|
|
|
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December 31, 2003
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6.55
|
|
2.04
|
|
20.51
|
|
7.84
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December 31, 2004
|
|
8.94
|
|
5.38
|
|
27.39
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|
16.00
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December 31, 2005
|
|
7.52
|
|
3.12
|
|
19.38
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|
7.00
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December 31, 2006
|
|
4.09
|
|
2.28
|
|
8.91
|
|
4.95
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December 31, 2007
|
|
5.98
|
|
3.41
|
|
10.65
|
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7.10
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Year ended December 31, 2006
|
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|
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|
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|
|
|
|
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First quarter
|
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5.51
|
|
3.90
|
|
11.74
|
|
8.66
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Second quarter
|
|
4.58
|
|
2.28
|
|
9.87
|
|
5.13
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Third quarter
|
|
3.28
|
|
2.29
|
|
6.99
|
|
4.95
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Fourth quarter
|
|
4.14
|
|
3.11
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8.74
|
|
6.87
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Year ended December 31, 2007
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|
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|
|
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First quarter
|
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4.25
|
|
3.41
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|
8.84
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|
7.10
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Second quarter
|
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5.17
|
|
3.59
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|
10.00
|
|
7.23
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Third quarter
|
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5.36
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|
3.72
|
|
10.25
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|
7.50
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Fourth quarter
|
|
5.98
|
|
4.63
|
|
10.65
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8.44
|
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Quarter ended
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|
|
|
|
|
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March 31, 2008 (through March 25)
|
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6.78
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|
4.45
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|
11.30
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|
7.80
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Month ended
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October 31, 2007
|
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5.95
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|
4.63
|
|
10.65
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8.44
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November 30, 2007
|
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5.98
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|
4.93
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|
10.64
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9.06
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December 31, 2007
|
|
5.81
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|
4.75
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|
10.44
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8.45
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January 31, 2008
|
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5.87
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4.45
|
|
10.15
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7.80
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February 29, 2008
|
|
6.78
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5.52
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11.30
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9.82
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March 2008 (through March 25)
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6.59
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5.60
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11.08
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9.51
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B. Plan of Distribution
Not applicable.
C. Markets
Trading on the São Paulo Stock Exchange (BOVESPA)
In 2000, the BOVESPA was reorganized through the execution of memoranda of understanding by the Brazilian stock exchanges. Under the memoranda, all securities are now traded only on the BOVESPA, with the exception of
electronically traded public debt securities and privatization auctions, which are traded on the Rio de Janeiro Stock Exchange.
When shareholders trade in common and preferred shares on the BOVESPA, the trade is settled in three business days after the trade date without adjustment of the purchase price for inflation. The seller is ordinarily
required to deliver the shares to the exchange on the second business day following the trade date. Delivery of and payment for shares are made through the facilities of the clearinghouse,
Companhia Brasileira de Liquidação e
Custódia S.A.
, or CBLC.
The BOVESPA is an entity owned by its member brokerage firms. Trading on the BOVESPA is limited to member brokerage firms and a limited number of authorized nonmembers. The BOVESPA has two open outcry
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trading sessions each day from 11:00 a.m. to 1:30 p.m. and from 2:30 p.m. to 5:45 p.m., São Paulo time, except during daylight savings time in the United States. During daylight savings time in the United States, the sessions are from 10:00
a.m. to 1:00 p.m. and from 2:00 p.m. to 4:45 p.m., São Paulo time, to closely mirror the NYSE trading hours. Trading is also conducted between 11:00 a.m. and 6:00 p.m., or between 10:00 a.m. and 5:00 p.m. during daylight savings time in the
United States on an automated system known as the Computer Assisted Trading System (
Sistema de Negociacão Assistida por Computador
) on the BOVESPA and on the National Electronic Trading System (
Sistema Eletrônico de
Negociação Nacional
). This system is a computerized system that links electronically with the seven smaller regional exchanges. The BOVESPA also permits trading from 6:45 p.m. to 7:30 p.m. on an online system connected to
traditional and Internet brokers called the after market. Trading on the after market is subject to regulatory limits on price volatility and on the volume of shares transacted through Internet brokers.
In order to better control volatility, the BOVESPA adopted a circuit breaker system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the indices of the
BOVESPA falls below the limits of 10% or 15%, respectively, in relation to the index registered in the previous trading session.
There are no specialists or market makers for our shares on BOVESPA. Trading in securities listed on the BOVESPA may be effected off the Exchange in certain circumstances, although such trading is very limited.
Settlement of transactions is effected three business days after the trade date without adjustment of the purchase price for inflation. Payment for shares is made through the facilities of a separate clearinghouse,
which maintains accounts for member brokerage firms. The seller is ordinarily required to deliver the shares to the exchange on the second business day following the trade date. The clearinghouse for BOVESPA is
Companhia Brasileira de
Liquidação e Custódia S.A
. CBLC, which is wholly owned by that Exchange.
The BOVESPA is significantly less liquid than the NYSE or other major exchanges in the world. As of December 31, 2007, the aggregate market capitalization of the 404 companies listed on the BOVESPA was equivalent to
approximately R$2,477.6 billion (US$1,398.7 billion). By comparison, as of December 31, 2007, the aggregate market capitalization of the 2,297 companies (including U.S. and non-U.S. companies) listed on the NYSE was approximately US$2.72 billion.
Although all of the outstanding shares of an exchange-listed company may trade on the BOVESPA, in most cases only the preferred shares or fewer than half of the listed common shares are actually available for trading by the public, the remainder
being held by small groups of controlling persons, by government entities or by one principal shareholder, that rarely trade their shares. For this reason, data showing the total market capitalization of BOVESPA tends to overstate the liquidity of
the Brazilian equity securities market. Overall, the Brazilian equity market is relatively small and illiquid compared to major world markets. In 2007, the combined daily trading volumes on BOVESPA averaged approximately US$2,554.8 million. See
Item 3.D. Key InformationRisk FactorsRisks Relating to Our SecuritiesThe relative volatility and illiquidity of the Brazilian securities markets may adversely affect holders of our ADSs.
Regulation of Brazilian Securities Markets The Brazilian securities markets are regulated by the CVM, which has authority over stock exchanges and the securities markets generally, by the
Conselho Monetário Nacional
,
or CMN, the National Monetary Council and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. The Brazilian securities market is governed by
Law No. 6,385, as amended, known as the Brazilian securities law, and by Law No. 6,404, as amended, known as the Brazilian Corporate Law.
Law No. 10,303 of December 31, 2001 amended the Brazilian Corporate Law and the Brazilian securities law. Consequently, some major modifications resulted for the businesses of the publicly traded companies. Among the
changes, Law No. 10,303, along with Executive Order No. 8 and Decree No. 3.995, all dated October 31, 2001, provided that the CVM was to have the scope of its authority and autonomy altered and expanded. The CVM, which is the agency in charge of
regulating the market, now handles some functions that were reserved to the Banco Central, for example, the regulation and organization of the futures and commodities markets. Other modifications include changes in the proportion of common and
preferred shares (these changes apply solely to companies incorporated after the enactment of the new law), new rules for the issuance of debentures and the exercise of the right of withdrawal, enhanced duties and powers for the members of the Board
of Auditors and the Board of Directors, and the ability of publicly traded companies to make publications available over the Internet. Also provided is the pooling
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agreement, the so-called block voting, by which the shareholders agree during a prior meeting on the direction of the votes that will be cast at the general meetings. The purpose of this type of vote is to prevent any possible individual
dissidents or interests from harming corporate interests.
The period established for companies to adapt their by-laws is one year from the publication of the law on November 1, 2001. Our shareholders held a general shareholders meeting on March 27, 2002, and approved the
necessary modifications to our by-laws.
Under the Brazilian Corporate Law, a company is either public, a
companhia aberta
, such as our company, or private, a
companhia fechada
. All public companies are registered with the CVM and are subject to
reporting requirements. A company registered with the CVM may have its securities traded either on BOVESPA or on the Brazilian over-the-counter market. The shares of a public company may also be traded privately, subject to certain limitations. In
order to be listed on BOVESPA a company must apply for registration with the CVM and the stock exchange. Once the stock exchange lists a company and the CVM accepts its registration as a public company, its securities may start to be traded.
Trading of securities on BOVESPA may be suspended at the request of a company in anticipation of a material announcement. Trading may also be suspended on the initiative of BOVESPA or the CVM, among other reasons, due
to a belief that the company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or BOVESPA.
The Brazilian securities law, Brazilian Corporate Law and the regulations issued by the CVM, the CMN and the Central Bank provide, among other things, disclosure requirements and restrictions on insider trading, price
manipulation and protection of minority shareholders. However, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or markets in some other jurisdictions.
Principal Differences Between the Brazilian and U.S. Corporate Governance Practices
The significant differences between our corporate governance practices and the NYSE corporate governance standards are as follows:
Independence of Directors and Independence Tests
The Brazilian Corporate Law and our by-laws require that our directors be elected by our shareholders at a general shareholders meeting. Nine of our directors are appointed by our controlling shareholder, but
three were appointed in accordance with Sarbanes-Oxley.
The Brazilian Corporate Law and CVM establish rules in relation to certain qualification requirements and restrictions, investiture, compensation, duties and responsibilities of the companies executives and
directors. Although we believe these rules provide adequate assurances that our directors are independent, we believe such rules would permit us to have directors that would not otherwise pass the independence tests established by the NYSE.
Executive Sessions
According to the Brazilian Corporate Law, up to one-third of the members of the board of directors can be elected into executive positions. The remaining non-management directors are not expressly empowered to serve as
a check on management and there is no requirement that those directors meet regularly without management.
Notwithstanding, none of our executive officers are members of our board of directors.
Committees
We have an Audit Committee and a Disclosure Committee, but we are not required under applicable Brazilian Corporate Law to have, and accordingly we do not have a Nominating Committee, Corporate Governance Committee or
Compensation Committee. Pursuant to our by-laws our directors are elected by our shareholders at a general shareholders meeting. Compensation for our directors and executive officers is established by our shareholders.
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Audit Committee and Audit Committee Additional Requirements
In April 2003, the SEC stated that the listing of securities of foreign private issuers may be exempt from the audit committee requirements if the issuer meets certain requirements under Rule 10A-3(c)(3) of the
Securities Exchange Act of 1934, as amended (the Exchange Act). Notwithstanding the exemptions provided for pursuant to Rule 10A-3(c)(3), we have an Audit Committee, whose members fully comply with the independence requirements of Rule
10A-3. See Item 6.C. Directors, Senior Management and EmployeesBoard Practices and Item 16.D.Exemptions from the Listing Standards for Audit Committees.
The function of our audit committee is to oversee the:
-
evaluation of accounting and financial data;
-
recruitment, selection and evaluation of third party auditors;
-
evaluation of internal auditing;
-
evaluation of internal control procedures;
-
preparation of Audit Committee Reports that are required to be included in the Companys annual proxy statement, pursuant to SEC rules and regulations;
-
observance of industry best practices with respect to laws and regulations; and
-
assembly, whenever deemed necessary, for meetings of the committee.
It is also the responsibility of the committee to take all actions necessary in connection with delegations by the Companys board of directors pursuant to the committees charter and domestic and
international legal and regulatory requirements.
Disclosure Committee and Disclosure Policy
The Policy for Disclosure of Relevant Act or Fact was set up by the Board of Directors of Vivo in compliance with Article 16 of CVM Instruction no. 358, dated July 17, 2002.
The ultimate responsibility for the disclosure of relevant information, acts or facts is incumbent upon the CEO, the CFO and the Investor Relations Officer, the first two being responsible for authorizing information to
be disclosed, while the Investor Relations Officer is responsible for the communication itself of the relevant information, under the terms of the provisions of the Relevant Act or Fact Policy and CVM Instructions 358/02 and 369/02.
Disclosures are reviewed by the Disclosure Committee in support of the CEO and CFO. The Disclosure Committee is responsible for processing the disclosure of information and relevant Acts and Facts of the Company, and
for ensuring quality disclosure of information, as well as for the implementation of the Disclosure Procedures and Controls.
The Disclosure Committee reports directly to the CEO and to the CFO and is composed of one coordinator and ten members (representing the Investor Relations, Controls, Corporate Communication, Accounting, Financial,
Mergers and Acquisitions, Communication and Publicity and Compliance Officers, as well as the General Secretary and the Legal Officer), and has the duty of evaluating the need to outsource services (such as auditors, legal counsel and other
independent consultants), in order to provide adequate support for the disclosure process.
Shareholder Approval of Equity Compensation Plans
Our shareholders do not have the opportunity to vote on all equity compensation plans. However, any issuance of new shares that exceeds the authorized capital is subject to shareholder confirmation.
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Corporate Governance Guidelines
We have not adopted any corporate governance guidelines in addition to the rules imposed upon us by applicable Brazilian Corporate Law. We believe that the corporate governance guidelines applicable to us under
Brazilian Corporate Law are consistent with the guidelines established by the NYSE. We have adopted and observe (i) the Policy of Disclosure of Material Acts or Facts, which deals with the public disclosure of all relevant information as per
CVMs guidelines; and (ii) the Policy of Negotiation of Equities, which requires management to inform all transactions relating to our securities.
Code of Business Conduct and Ethics
Although the adoption of a code of ethics is not required by Brazilian Corporate Law, Vivo implemented a Code of Ethics and Conduct for all Directors and employees in May, 2005. See Item 16.B.Code of
Ethics.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following summarizes certain material provisions of our by-laws and Brazilian Corporate Law, the main bodies of regulation governing us. Copies of our by-laws have been filed as exhibits to this annual report on
Form 20-F.
Registration
Our amended and restated by-laws were registered with the Public Registry of the state of São Paulo, or JUCESP, No. 120.067/06 -7 on May 08, 2006, under company number (NIRE) 3530015879-2. Article 5 of our bylaws
were amended as a result of the capital increase approved by the general meeting of our shareholders on March 15, 2007, and were registered with the Public Registry of the state of São Paulo, or JUCESP, Nº 94.964/07-5 on March 22,
2007.
Objectives and Purposes
We are a publicly traded company duly registered with the Brazilian securities commission under No. 017710. Article 2 of our by-laws provides that our corporate purpose is to:
-
exercise control of operating companies which provide cellular mobile telecommunications services, personal mobile services and other services in conformity with the concessions, authorizations and permissions that have been granted to us;
-
promote, through our subsidiary or controlled companies, the expansion and implementation of telecommunications services within our concessions, authorizations and permissions;
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promote, carry out and direct the financing of capital from internal or external sources to be used by us or our controlled companies;
-
promote, carry out and encourage study and research activities aimed at the development of the telecommunications sector;
-
perform, through our subsidiary and affiliated companies, specialized technical services related to the telecommunications sector;
-
promote, encourage, carry out and coordinate, through our subsidiary or controlled companies, the development and training of personnel necessary to perform activities in the telecommunications sector;
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carry out and promote the import of goods and services for the operations of our subsidiary and controlled companies;
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execute other activities connected or related to our objective;
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participate in the equity capital of other companies; and
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trade equipment and materials necessary or useful for providing telecommunications services.
Directors
Below is a description of some of the provisions of our by-laws concerning the members of our board of directors:
-
the board of directors has the power to approve investments and acquisition of assets, assume any obligation and execute contracts not included in the budget for an amount exceeding R$300 million, the public issuance of promissory notes, and the
acquisition of our shares for cancellation or deposit with a custodian; and
-
the board of directors has the power to apportion the global remuneration set forth by the shareholders meeting between the directors and the executive officers.
Pursuant to Brazilian Corporate Law, each member of the board of directors must have at least one share of our capital stock to be elected as a Director. There are no provisions in our by-laws with respect to:
-
age limits for retirement of directors; and
-
anti-takeover mechanisms or other procedures designed to delay, defer or prevent changes in our control.
Although there are no provisions in our by-laws with respect to the following, they are regulated by Brazilian Corporate Law and CVM regulations:
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a directors power to vote on proposals in which the Director is materially interested;
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a directors power to vote compensation to him or herself in the absence of an independent quorum;
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borrowing powers exercisable by the directors;
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required shareholding for director qualification; and
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disclosure of share ownership.
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Rights Attaching to Shares
Dividend Rights
See Item 8. Financial InformationConsolidated Statements and Other Financial InformationDividend Policy and Dividends, and Payment of Dividends.
Voting Rights
Each common share entitles the holder to one vote at meetings of shareholders. Our preferred shares do not entitle the holder to vote except as discussed in our by-laws in Articles 9 and 10. Holders of our preferred
shares are each entitled to attend or to address meetings of shareholders and to elect members of our board of directors according to Article 141, fourth paragraph, II, and Article 141, fifth paragraph, of Law No. 6,404/76, as amended by Article 8,
fourth paragraph of Law No. 10,303/01.
One of the members of our board of auditors and his or her alternate are elected by the majority vote of the holders of our preferred shares present at the annual meeting of shareholders at which the members of the
board of auditors are elected.
Brazilian Corporate Law provides that certain non-voting shares, such as our preferred shares, acquire voting rights in the event we fail for three consecutive fiscal years to pay the mandatory minimum dividend to which
such shares are entitled, until such payment is made.
Our preferred shares are entitled to full voting rights in the event that we fail to pay the mandatory minimum dividends to which they are entitled for three consecutive years, and with respect to:
-
the execution of agreements with related parties whose terms and conditions are more burdensome for the Company than terms in the market for similar agreements in all cases subject to the provisions of article 117 of Law 6,404/76; and article 9 of
our by-laws.
-
changes/eliminations of certain rights and obligations as provided for in our by-laws.
Any change in the preference, benefits, conditions of redemption and amortization of our preferred shares, or the creation of a class of shares having priority or preference over our preferred shares, would require the
approval of holders of a majority of our outstanding preferred shares at a special meeting of holders of our preferred shares. Such a meeting would be called by publication of a notice in the state official gazette and two other Brazilian
newspapers, as determined by the shareholders, at least thirty days prior to the meeting, but would not generally require any other form of notice. The execution of agreements with related parties, under terms and conditions more burdensome for the
Company than market terms for agreements of the same nature shall require prior approval by the General Meeting of Shareholders, with due regard, in any case, to the provisions in Article 117 of Law 6,404/76.
In any circumstances in which holders of our preferred shares are entitled to vote, each preferred share will entitle the holder to one vote.
We did not pay dividends or interest on shareholders equity for the years ended December 31, 2005 and 2004 because we recorded a net loss for each of those years. On December 21, 2007, we paid dividends with
respect to fiscal year ended December 31, 2006 in the amount of R$16.8 million which was insufficient to meet the minimum dividend required by Brazilian Corporate Law. For the fiscal year ended December 31, 2007, we were unable to pay minimum
dividends because we had net losses. As a result, holders of Vivos preferred shares now have the same voting rights as the holders of common shares until we pay minimum dividends.
Meeting of Shareholders
According to Brazilian law, shareholders must be previously convoked in order for a general or extraordinary shareholders meeting to be installed. The convocation must be published in the state official gazette
and one or two other newspapers, as determined by the shareholders, at least 15 days prior to the meetings scheduled date. If the first
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meeting is not installed for some reason, the second convocation must be published at least eight days before the second meeting date.
On the first call, meetings may only be installed with a minimum quorum of one-fourth of the holders of voting shares. Extraordinary meetings whose object is the amendment of the by-laws may only be installed on the
first call with a minimum of two-thirds of the voting capital present. In addition, some decisions require the approval of at least one-half of the holders of voting shares (qualified quorum, article 136 of Law 6,404/76). On a second call, the
meetings are installed regardless of quorum.
Preemptive Rights
Each of our shareholders has a general preemptive right to subscribe for shares in any capital increase in proportion to its shareholding. A minimum period of 30 days following the publication of notice of the capital
increase is allowed for the exercise of the right.
In the event of a capital increase, which would maintain or increase the proportion of capital represented by our preferred shares, holders of ADSs, or of our preferred shares, would have preemptive rights to subscribe
only to our newly issued preferred shares. In the event of a capital increase, which would reduce the proportion of capital represented by our preferred shares, holders of ADSs, or of our preferred shares, would have preemptive rights to subscribe
to our preferred shares in proportion to their shareholdings and to our common shares only to the extent necessary to prevent dilution of their interest.
Preemptive rights to purchase shares may not be offered to U.S. holders of our ADSs unless a registration statement under the Securities Act is effective with respect to the shares underlying those rights, or an
exemption from the registration requirements of the Securities Act is available. Consequently, if you are a holder of our ADSs who is a U.S. person or is located in the United States, you may be restricted in your ability to participate in the
exercise of preemptive rights.
Right of Redemption
Brazilian Corporate Law provides for the right of redemption to minority shareholders under certain circumstances.
The right of a dissenting shareholder to seek redemption arises in case our shareholders representing more than 50% of the voting shares, common shares or preferred shares, as applicable, decide to:
-
change the preference of our preferred shares or to create a class of shares having priority or preference over our preferred shares, except if such actions are expressly permitted in the by-laws at the time of their adoption by our
shareholders;
-
change the preference of our preferred shares, any right they carry, their amortization or redemption rights, or to create a class of shares having priority or preference over our preferred shares;
-
reduce the mandatory distribution of dividends;
-
change our corporate purposes;
-
transfer all of our shares to another company in order to make us a wholly owned subsidiary of that company;
-
approve the acquisition of another company, the price of which exceeds certain limits set forth in Brazilian Corporate Law;
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participate in a group of companies if certain liquidity standards are not met according to the Brazilian Corporate Law as amended by Law No. 10,303/01;
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merge or consolidate us with another company if certain liquidity standards are not met according to the Brazilian Corporate Law as amended by Law No. 10,303/01; and
-
cisão
, or split-up, Vivo Participações S.A., according to the Brazilian Corporate Law, as amended by Law No. 10,303/01, in any of the following situations: (i) reduction of minimum dividends; (ii) participation in a group
of companies; or (iii) change of our corporate purposes, except in case the company receiving our assets has a corporate purpose substantially identical to ours.
The right to redemption lapses 30 days after publication of the minutes of the relevant shareholders meeting or, whenever the resolution requires the approval of the holders of our preferred shares by vote taken
in a special meeting of a majority of the holders of our preferred shares affected by the resolution, within 30 days from the publication of the minutes of that special meeting. We would be entitled to reconsider any action giving rise to redemption
rights within 10 days following the expiration of those rights if the redemption of shares of dissenting shareholders would jeopardize our financial stability.
Unless otherwise provided in our by-laws, which is not the case, shares are redeemable at their book value, determined on the basis of the last annual balance sheet approved by the shareholders. If the
shareholders meeting giving rise to redemption rights occurs more than 60 days after the date of the last annual balance sheet, a shareholder may demand that its shares be valued on the basis of a new balance sheet that is as of a date within
60 days of such shareholders meeting.
Form and Transfer
Our shares are maintained in book-entry form with a transfer agent, Banco ABN-AMRO Real S.A., and the transfer of our shares is made in accordance with the applicable provision of Brazilian Corporate Law, which provides
that a transfer of shares is effected by an entry made by the transfer agent on its books, debiting the share account of the seller and crediting the share account of the purchaser against presentation of a written order of the seller or judicial
authorization or order in an appropriate document which remains in the possession of the transfer agent. Our preferred shares underlying our ADSs are registered on the records of BOVESPA in the name of the Bank of New York, as depositary of the
ADSs.
Transfers of shares by a foreign investor are made in the same way and executed by such investors local agent on the investors behalf except that, if the original investment was registered with the Central
Bank of Brazil under the Brazilian foreign investment in capital markets regulations, the foreign investor should also seek amendment, if necessary, through its local agent, of the certificate of registration to reflect the new ownership.
BOVESPA operates a central clearing system. A holder of our shares may choose, at its discretion, to participate in this system. All shares elected to be put into the system will be deposited in custody with the
relevant stock exchange through a Brazilian institution duly authorized to operate by the Central Bank of Brazil and having a clearing account with the relevant stock exchange. The fact that such shares are subject to custody with the relevant stock
exchange will be reflected in our register of shareholders. Each participating shareholder will, in turn, be registered in our register of beneficial shareholders maintained by the relevant stock exchange and will be treated in the same way as
registered shareholders.
Regulation of Foreign Investment and Exchange Controls
There are no restrictions on ownership of our preferred shares by individual or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of our shares into
foreign currency and to remit such amounts abroad is subject to restrictions under foreign investment legislation which generally require, among other things, that the relevant investment be registered with the Central Bank and the CVM.
Foreign investors may register their investment in our shares under Law 4,131 of September 3, 1962 or Resolution 2,689 of January 26, 2000. Registration under Resolution 2,689 affords favorable tax treatment to
non-Brazilian investors who are not residents in a tax haven jurisdiction (
i.e
., countries that do not impose income tax or where the maximum income tax rate is lower than 20%), as defined by Brazilian tax laws.
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Under Resolution 2,689, non-Brazilian investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain
requirements are fulfilled. In accordance with Resolution 2,689, the definition of non-Brazilian investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad.
Under Resolution 2,689, a non-Brazilian investor must:
-
appoint at least one representative in Brazil, with powers to perform actions relating to its investment;
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appoint an authorized custodian in Brazil for its investment;
-
register as a non-Brazilian investor with the CVM; and
-
register its foreign investment with the Central Bank.
Additionally, the investor operating under the provisions of Resolution 2,689 must be registered with the Brazilian internal revenue service (
Receita Federal
) pursuant to the latters Regulatory
Instruction 200. This registration process is undertaken by the investors legal representative in Brazil.
Securities and other financial assets held by non-Brazilian investors pursuant to Resolution 2,689 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank
or the CVM. In addition, securities trading is restricted to transactions carried out in the stock exchanges or through organized over-the-counter markets licensed by the CVM, except for transfers resulting from a corporate reorganization, or
occurring upon the death of an investor by operation of law or will. See TaxationBrazilian Tax Considerations for more information.
Resolution 1,927 of the National Monetary Council provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. Accordingly, the proceeds from the sale of ADSs by holders
of American Depositary Receipts outside Brazil are free of Brazilian foreign investment controls and holders of ADSs who are not resident in a tax haven jurisdiction will be entitled to favorable tax treatment.
The right to convert dividend payments and proceeds from the sale of our shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which
generally requires, among other things, that the relevant investment be registered with the Central Bank. Restrictions on the remittance of foreign capital abroad could hinder or prevent the custodian for the preferred shares represented by ADSs, or
holders who have exchanged ADSs for preferred shares, from converting dividends, distributions or the proceeds from any sale of preferred shares, as the case may be, into U.S. dollars and remitting such U.S. dollars abroad. Delays in, or refusal to,
granting the required government approval for conversions of Brazilian currency payments and remittances abroad could adversely affect holders of ADSs.
We have obtained a certificate of registration in the name of The Bank of New York, the depositary. Pursuant to this certificate, the custodian and the depositary are able to convert dividends and other distributions
with respect to the preferred shares represented by ADSs into foreign currency and to remit the proceeds outside Brazil. If a holder exchanges ADSs for preferred shares, such holder may continue to rely on the depositarys certificate of
capital registration for only five business days after such exchange. After that, such holder must seek to register its investment directly with the Central Bank. Thereafter, unless the holder has registered its investment with the Central Bank,
such holder may not convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such preferred shares. Such holder generally will be subject to less favorable Brazilian tax treatment
than a holder of ADSs.
Before March 14, 2005, there were two principal foreign exchange markets in Brazil, in which notes were freely negotiated but could be strongly influenced by Central Bank intervention:
-
the commercial rate exchange market dedicated principally to trade and financial foreign exchange transactions such as the buying and selling of registered investments by foreign entities, the purchase or sale of shares, or the payment of dividends
or interest with respect to shares; and
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the floating rate exchange market that was generally used for transactions not conducted through the commercial foreign exchange market.
On March 4, 2005, the National Monetary Council enacted Resolution No. 3,265, pursuant to which the commercial rate exchange market and the floating rate exchange market were unified in a sole exchange market, effective
as of March 14, 2005. The new regulation allows, subject to certain procedures and specific regulatory provisions, the purchase and sale of foreign currency and the international transfer of
reais
by a person or legal entity, without
limitation of the amount involved, provided, however, the legality of the transaction.
Under Brazilian law, whenever there is a serious imbalance in Brazils balance of payments or reasons to foresee a serious imbalance, the Brazilian government may impose temporary restriction on the remittance of
foreign currency abroad and on the conversion of Brazilian currency into foreign currencies. Such restrictions may hinder or prevent the custodian or holders who have exchanged ADSs for underlying preferred shares from converting distributions or
the proceeds from any sale of such shares, as the case may be, into U.S. dollars and remitting such U.S. dollars abroad.
C. Material Contracts
On December 11, 2002, after all of the TCP operators had switched over to the SMP system, ANATEL approved our acquisition of the remainder of the capital stock of GT and, on December 27, 2002, we acquired the remaining
portion of those three holding companies. On December 31, 2002, we owned, directly and indirectly, 100% of the voting stock and economic interest of GT.
For a description of such acquisitions, see Item 4.Information on the CompanyOur History and DevelopmentGlobal Telecom (currently Vivo S.A.).
On December 10, 2002, TC entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the area
corresponding to the state of São Paulo, with the exception of the following municipalities: Altinópolis, Aramina, Batatais, Brodowski, Buritizal, Cajurú, Cássia dos Coqueiros, Colômbia, Franca, Guaíra,
Guará, Ipuã, Ituverava, Jardinópolis, Miguelópolis, Morro Agudo, Nuporanga, Orlândia, Ribeirão Corrente, Sales de Oliveira, Sta Cruz da Esperança, Sto Antonio da Alegria and São Joaquim da
Barra. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes TC to provide SMP services until August 5, 2008. It may be renewed for an additional term of fifteen years upon payment of 2% of
TCs net revenues from usage charges in the region described above in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization, TC was required to pay R$9.0
thousand. The authorization is a legal requirement for providing telecommunication services in the region covered thereby.
On December 10, 2002, TC entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the municipalities of
Ribeirão Preto and Guatarapá and the district of Bonfim Paulista. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes TC to provide SMP services until January 20, 2009. It
may be renewed for an additional term of fifteen years upon payment of 2% of TCs net revenues from usage charges in the municipalities mentioned above in the year prior to the year when payment is due, and every two years during the extension
period. In consideration for the authorization, TC was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunication services in the region covered thereby.
On December 10, 2002, GT entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the area
corresponding to the states of Paraná and Santa Catarina. The authorization replaces the concession agreement entered into with ANATEL on April 8, 1998, and authorizes GT to provide SMP services until April 8, 2013. It may be renewed for an
additional term of fifteen years upon payment of 2% of GTs net revenues from usage charges in its region in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the
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authorization, GT was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunication services in the region covered thereby.
On December 10, 2002, Telebahia Celular entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the
state of Bahia. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes Telebahia Celular to provide SMP services until June 29, 2008. It may be renewed for an additional term of fifteen years
upon payment of 2% of Telebahia Celular s net revenues from usage charges in its Region in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization, Telebahia Celular was
required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunication services in the region covered thereby.
On December 10, 2002, Telergipe Celular entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the
state of Sergipe. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes Telebahia Celular to provide SMP services until December 15, 2008. It may be renewed for an additional term of fifteen
years upon payment of 2% of Telergipe Celulars net revenues from usage charges in its region in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization, Telergipe
Celular was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunication services in the region covered thereby.
On December 10, 2002, Telerj Celular entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the state
of Rio de Janeiro. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes Telerj Celular to provide SMP services until November 30, 2005. It may be renewed for an additional term of fifteen
years upon payment of 2% of Telerj Celulars net revenues from usage charges in its region in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization, Telerj
Celular was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunications services in the region covered thereby.
On December 10, 2002, Telest Celular entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the state
of Espíritio Santo. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes Telest Celular to provide SMP services until November 30, 2008. It may be renewed for an additional term of
fifteen years upon payment of 2% of Telest Celulars net revenues from usage charges in its region in the year prior to the year when payment is due, and every two years during the extension period. In consideration for the authorization,
Telest Celular was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunications services in the region covered thereby.
On February 3, 2003, TCO entered into an authorization agreement with ANATEL, acting as a representative of the Brazilian government, which enables it to provide personal cellular services (SMP) in the area
corresponding to the Brazils Federal District. The authorization replaces the concession agreement entered into with ANATEL on November 4, 1997, and authorizes TCO to provide SMP services until July 24, 2006. It may be renewed for an
additional term of fifteen years upon payment of 2% of TCOs net revenues from usage charges in the region described above in the year prior to the year when payment is due, and every two years during the extension period. In consideration for
the authorization, TCO was required to pay R$9.0 thousand. The authorization is a legal requirement for providing telecommunication services in the region covered thereby. TCOs subsidiaries also entered into authorization agreements with
ANATEL under similar terms.
On April 25, 2003, TCP acquired 64.03% of the voting capital stock of TCO for approximately R$1.505 billion, corresponding to R$19.48719845 per each lot of 1,000 shares acquired. TCO is an A Band operator providing
cellular telecommunications services in the Federal District of Brazil, as well as in the Brazilian states of Goiás, Mato Grosso do Sul, Mato Grosso, Rondônia, Acre and Tocantins. The agreement also included the acquisition of
TCOs B Band subsidiary NBT, which provides cellular telecommunications service in the Brazilian states of Amapá, Amazonas, Maranhão, Pará and Roraima.
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In August 2006, we began installing a new network based on GSM/GPRS/EDGE technology, with a core dual 2G/3G and 2G access, which will be superimposed onto the current CDMA network of Vivo, with completion scheduled for
December 31, 2010. Such implementation includes acquiring all the hardware, software and engineering services necessary as well as installation, configuration, integration, testing, activation and temporary operation of the respective elements. The
contracts also include the SW updates and the furnishing of the new features, guarantees, support and management, as well as O&M and integration with the network system management, the interaction capability of the networks to function with
other operators and integrating with the service platforms. The total cost of this new network is R$1,089 million.
On August 2, 2007, Vivo signed a stock purchase agreement with Telpart to acquire control of Telemig Participações and Tele Norte Participações and 22.72% and 19.34%, respectively, of their
total capital for an aggregate amount of R$1.2 billion, subject to certain price adjustments. On December 20, 2007, Vivo signed a stock purchase agreement with Telemar for the sale of all of the shares of Tele Norte that it was acquiring from Telpart under the terms of the stock purchase agreement dated August
2, 2007. This additional stock purchase agreement was signed to facilitate Vivos acquisition of the shares of Telemig from Telpart. See Item 4.A. Information on company Our History and Development Acquisition of Telpart, Telemig and Tele Norte and the August 2, 2007 stock purchase agreement, which is included in this Annual Report as an exhibit.
D. Exchange Controls
There are no restrictions on ownership of preferred shares or common shares by individuals or legal entities domiciled outside of Brazil.
The right to convert dividend or interest on shareholders equity payments and proceeds from the sale of shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under
foreign investment legislation which generally requires, among other things, that the investments have been registered with the Central Bank and the CVM. Such restrictions on the remittance of foreign capital abroad may hinder or prevent the
custodian for our preferred shares represented by our ADSs or the holders of our preferred shares from converting dividends, distributions or the proceeds from any sale of these preferred shares into U.S. dollars and remitting the U.S. dollars
abroad. Holders of our ADSs could be adversely affected by delays in, or refusal to grant any, required government approval to convert Brazilian currency payments on the preferred shares underlying our ADSs and to remit the proceeds abroad.
Resolution No. 1,927 of the National Monetary Council provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. It restates and amends Annex V to Resolution No. 1,289
of the National Monetary Council, known as the Annex V Regulations. The ADS program was approved under the Annex V Regulations by the Central Bank and the CVM prior to the issuance of the ADSs. Accordingly, the proceeds from the sale of ADSs by ADR
holders outside Brazil are free of Brazilian foreign investment controls, and holders of the ADSs are entitled to favorable tax treatment. See TaxationBrazilian Tax Considerations.
Under Resolution 2,689, of the CMN, foreign investors registered with the CVM may buy and sell Brazilian securities, including our preferred shares, on the Brazilian stock exchange. Registration is available to
qualified foreign investors, which principally include foreign financial institutions, legal entities and individuals. Resolution 2,689 also extends favorable tax treatment to registered investors. See TaxationBrazilian Tax
Considerations.
Pursuant to the Resolution 2,689, foreign investors must: (i) appoint at least one representative in Brazil with the ability to perform actions regarding the foreign investment; (ii) complete the appropriate foreign
investor registration form; (iii) obtain registration as a foreign investor with CVM; and (iv) register the foreign investment with the Central Bank.
The securities and other financial assets held by a foreign investor pursuant to Resolution 2,689 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank
or by the CVM or be registered in register, clearing and custody systems authorized by the Central Bank or by the CVM. In addition, the trading of securities is restricted to transactions carried out on the stock exchanges or over-the-counter
markets licensed by the CVM.
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Registered Capital
Amounts invested in our preferred shares by a non-Brazilian holder who qualifies under Resolution 2,689 and obtains registration with the CVM, or by the depositary representing an ADS holder, are eligible for
registration with the Central Bank. This registration which must be done before the first investment on Brazilian stock exchanges (the amount so registered is referred to as registered capital) allows the remittance to and outside Brazil of foreign
currency, converted at the commercial market rate, acquired with the proceeds of distributions on, and amounts realized through, dispositions of our preferred shares. The registered capital per preferred share purchased in the form of an ADS, or
purchased in Brazil and deposited with the depositary in exchange for an ADS, will be equal to its purchase price (stated in U.S. dollars). The registered capital per preferred share withdrawn upon cancellation of an ADS will be the U.S. dollar
equivalent of (i) the average price of a preferred share on the Brazilian stock exchange on which the most preferred shares were traded on the day of withdrawal or (ii) if no preferred shares were traded on that day, the average price on the
Brazilian stock exchange on which the most preferred shares were traded in the fifteen trading sessions immediately preceding such withdrawal. The U.S. dollar equivalent will be determined on the basis of the average market rates quoted by the
Central Bank on these dates.
A non-Brazilian holder of preferred shares may experience delays in effecting Central Bank registration, which may delay remittances abroad. This delay may adversely affect the amount in U.S. dollars, received by the
non-Brazilian holder.
A certificate of registration has been issued in the name of the depositary with respect to the ADSs and is maintained by the custodian on behalf of the depositary. Pursuant to the certificate of registration, the
custodian and the depositary are able to convert dividends and other distributions with respect to the preferred shares represented by our ADSs into foreign currency and remit the proceeds outside Brazil. In the event that a holder of ADSs exchanges
such ADSs for preferred shares, such holder will be entitled to continue to rely on the depositarys certificate of registration for five business days after such exchange, following which such holder must seek to obtain its own certificate of
registration with the Central Bank. Thereafter, any holder of preferred shares may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such preferred shares,
unless the holder is a duly qualified investor under Resolution 2,689 or obtains its own certificate of registration. A holder that obtains a certificate of registration will be subject to less favorable Brazilian tax treatment than a holder of
ADSs. See Item 10.E. Additional Information TaxationBrazilian Tax Considerations.
If the holder does not qualify under Resolution 2,689 by registering with the CVM and the Central Bank and appointing a representative in Brazil, the holder will be subject to less favorable Brazilian tax treatment than
a holder of ADSs. Regardless of qualification under Resolution 2,689, residents in tax havens are subject to less favorable tax treatment than other foreign investors. See Item 10. TaxationBrazilian Tax Considerations.
Under current Brazilian legislation, the Brazilian government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of
Brazils balance of payments. For approximately six months in 1989 and early 1990, the Brazilian government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors, in order to conserve
Brazils foreign currency reserves. These amounts were subsequently released in accordance with federal government directives. There can be no assurance that the Brazilian government will not impose similar restrictions on foreign repatriations
in the future. See Item 3.D. Key InformationRisk FactorsRisks Relating to Brazil.
E. Taxation
The following discussion contains a description of the material Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of preferred shares or ADSs by certain holders. This
summary is based upon the tax laws of Brazil and the United States as in effect on the date of this annual report, which are subject to change, possibly with retroactive effect, and to differing interpretations. You should consult your own tax
advisors as to the Brazilian, U.S. federal or other tax consequences of the acquisition, ownership and disposition of preferred shares or ADSs, including, in particular, the effect of any state, local or non-U.S., non-Brazilian tax laws.
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Although there is presently no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given,
however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of preferred shares or ADSs.
Brazilian Tax Considerations
The following discussion summarizes the material Brazilian tax consequences of the acquisition, ownership and disposition of preferred shares or ADSs by a U.S. holder not deemed to be domiciled in Brazil for Brazilian
tax purposes (a U.S. holder). This discussion does not address all the Brazilian tax considerations that may be applicable to any particular non-Brazilian holder, and each non-Brazilian holder should consult its own tax advisor about the
Brazilian tax consequences of investing in preferred shares or ADSs.
Taxation of Dividends
Dividends paid by us in cash or in kind from profits generated on or after January 1, 1996 (i) to the depositary in respect of preferred shares underlying ADSs or (ii) to a U.S. holder or non-Brazilian holder in respect
of preferred shares will generally not be subject to Brazilian withholding tax. We do not have any undistributed profits generated before January 1, 1996.
Distributions of Interest on Shareholders Equity
Brazilian corporations may make payments to shareholders characterized as interest on shareholders equity capital as an alternative form of making distributions. The rate of interest may not be higher than the
federal governments long-term interest rate, or the TJLP, as determined by the Central Bank from time to time. The total amount distributed as interest on shareholders equity capital may not exceed the greater of (i) 50% of net income
(before taking the distribution and any deductions for income taxes into account) for the year in respect of which the payment is made or (ii) 50% of retained earnings for the year prior to the year in respect of which the payment is made. Payments
of interest on shareholders equity capital are decided by the shareholders on the basis of recommendations of the companys board of directors.
Distributions of interest on shareholders equity capital paid to Brazilian and non-Brazilian holders of preferred shares, including payments to the depositary in respect of preferred shares underlying ADSs, are
deductible by us for Brazilian corporate income tax purposes. These payments to U.S. holders or non-Brazilian holders are subject to Brazilian withholding tax at the rate of 15%. If the recipient of the payment is domiciled in a tax haven
jurisdiction (
i.e.
, a country that does not impose any income tax or that imposes tax at a rate of less than 20%), the rate will be 25%.
No assurance can be given that our board of directors will not recommend that future distributions of profits will be made by means of interest on shareholders equity capital instead of by means of dividends.
Amounts paid as interest on shareholders equity capital (net of applicable withholding tax) may be treated as payments in respect of the dividends we are obligated to distribute to our shareholders in accordance
with our by-laws (
estatutos
) and Brazilian Corporate Law. Distributions of interest on shareholders equity capital in respect of the preferred shares, including distributions to the depositary in respect of preferred shares underlying
ADSs, may be converted into U.S. dollars and remitted outside of Brazil, subject to applicable exchange controls.
Taxation of Gains
Gains realized outside Brazil by a U.S. holder or other non-Brazilian holder on the disposition of property located in Brazil, including preferred shares, to another non-Brazilian holder are subject to Brazilian tax. In
this case, gains would be subject to a 15% withholding tax rate, except if the beneficiary is located in a low-tax jurisdiction, as defined by Brazilian law, in which case the applicable rate would be 25%.
Our understanding is that ADSs do not qualify as property located in Brazil and, therefore, are not subject to Brazilian taxes upon disposition to other non-Brazilian holders. Insofar as this understanding has not been
tested through the administrative or judicial courts, we are unable to evaluate what the final ruling on the matter will be.
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Gains realized by a U.S. holder or other non-Brazilian holder on dispositions of preferred shares in Brazil or in transactions with Brazilian residents may be free of Brazilian tax, or may be taxed at a rate of 25% or
15%, depending on the circumstances.
-
Gains on the disposition of preferred shares obtained upon cancellation of ADSs are not taxed in Brazil if the disposition is made and the proceeds are remitted abroad within five business days after cancellation, unless the investor is a resident
of a jurisdiction that, under Brazilian law, is deemed to be a tax haven.
-
Gains realized on preferred shares through transactions with Brazilian residents or through transactions in Brazil off of the Brazilian stock exchanges are generally subject to be taxed at a rate of 15%.
-
Gains realized on preferred shares through transactions on Brazilian stock exchanges are generally subject to tax at a rate of 15%, unless the investor is entitled to tax-free treatment for the transaction under Resolution 2,689 of the National
Monetary Council Regulations, described immediately below.
Resolution 2,689, which as of March 31, 2000 superseded the Annex IV Regulations that previously provided tax benefits to foreign investors, extends favorable tax treatment to a U.S. holder or non-Brazilian holder of preferred shares who has (i)
appointed a representative in Brazil with power to take action relating to the investment in preferred shares, (ii) registered as a foreign investor with the CVM and (iii) registered its investment in preferred shares with the Central Bank. Under
Resolution 2,689 securities held by foreign investors must be maintained under the custody of, or in deposit accounts with, financial institutions duly authorized by the Central Bank and the CVM. In addition, the trading of securities is restricted
under Resolution 2,689 to transactions on Brazilian stock exchanges or qualified over-the-counter markets. The preferential treatment generally afforded under Resolution 2,689 and afforded to investors in ADSs is not available to residents of tax
havens. All preferred shares underlying ADSs qualify under Resolution 2,689.
There can be no assurance that the current preferential treatment for U.S. holders and other non-Brazilian holders under Resolution 2,689 will be maintained.
Gain on the disposition of preferred shares is measured by the difference between the amount in Brazilian currency realized on the sale or exchange and the acquisition cost of the shares sold, measured in Brazilian currency, without any correction
for inflation. Although the matter is not free from doubt, there are arguments to sustain the position that the acquisition cost of shares registered as an investment with the Central Bank is calculated on the basis of the foreign currency amount
registered with the Central Bank. See Exchange ControlsRegistered Capital.
-
Gains realized by a U.S. holder and other non-Brazilian holder upon the redemption of preferred shares will be treated as gains from the disposition of such preferred shares to a Brazilian resident occurring off of a stock exchange and will
accordingly be subject to be taxed at a rate of 15%. In case the non-Brazilian holder is domiciled in a tax haven jurisdiction, the applicable rate would be 25%.
As of January 1, 2005, the purchase price of preferred shares sold on the Brazilian stock exchange is subject to withholding tax at a rate of 0.005%, except in the case of non-Brazilian holders who invest through
Resolution No. 2,689. This tax may be offset against the 15% income tax due on the gains realized upon the sale of the shares.
Any exercise of preemptive rights relating to the preferred shares or ADSs will not be subject to Brazilian taxation. Gains on the sale or assignment of preemptive rights relating to the preferred shares will be treated
differently for Brazilian tax purposes depending on (i) whether the sale or assignment is made by the depositary or the investor and (ii) whether the transaction takes place on a Brazilian stock exchange. Gains on sales or assignments made by the
depositary on a Brazilian stock exchange are not taxed in Brazil, but gains on other sales or assignments may be subject to tax at rates up to 15%.
The deposit of preferred shares in exchange for the ADSs is not subject to Brazilian income tax if the preferred shares are registered under Resolution 2,689 and the respective holder is not in a tax-haven jurisdiction.
If the preferred shares are not so registered or the holder is in a tax-haven jurisdiction, the deposit of preferred shares in exchange for ADSs may be subject to Brazilian capital gains tax at a rate of 15%.
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The withdrawal of preferred shares in exchange for ADSs is not subject to Brazilian tax. Upon receipt of the underlying preferred shares, a U.S. holder or other non-Brazilian holder entitled to benefits under Resolution
2,689 will be entitled to register the U.S. dollar value of such shares with the Central Bank as described above, under Exchange ControlsRegistered Capital. If a U.S. holder or non-Brazilian holder does not qualify under Resolution
2,689, he will be subject to the less favorable tax treatment described above in respect of exchanges of preferred shares. Brazils tax treaties do not grant relief from taxes on gains realized on sales or exchanges of preferred shares.
1. Beneficiaries Residing or Domiciled in Tax Havens or Low-Tax Jurisdictions
Law No. 9,779, dated as of January 19, 1999, states that, with the exception of limited circumstances, any income derived from operations by a beneficiary that resides or is domiciled in a country considered to be a tax
haven is subject to income tax to be withheld by the source at a rate of 25%. Accordingly, if the distribution of interest attributed to shareholders equity is made to a beneficiary residing or domiciled in a tax haven, the applicable income
tax will be at a rate of 25%, instead of 15%. The increased rate also applies for capital gains paid to residents of low-tax jurisdictions as of February 2004.
In accordance with Law No. 9,959, non-Brazilian holders of ADSs or preferred shares who are residents of tax havens have been excluded from the tax incentives granted to holders of ADSs and investors under Resolution
No. 2,689 since January 1, 2000 and are subject to the same tax treatment applicable to holders who are residents of or domiciled in Brazil.
2. Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of preferred shares or ADSs by a non-Brazilian holder except for gift and inheritance taxes levied
by some states in Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or in the relevant state to individuals or entities who are resident or domiciled within this state in Brazil. There are no
Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of preferred shares or ADSs.
Tax
on Financial Transactions
The IOF is a tax on foreign exchange, securities, credit and insurance transactions. The IOF rate may be changed by an Executive Decree (rather than a law). In addition, the IOF rate is not subject to the ex-post-facto
principle, which provides that laws increasing the rate of or creating new taxes will only come into effect as of the latter of (i) the first day of the year following their publication, or (ii) ninety days after their publication. A statute
increasing the IOF rate will therefore take effect from its publication date.
Regarding foreign exchange transactions, in spite of the maximum rate of IOF being 25%
,
the inflow and outflow of funds are generally subject to IOF at a rate of 0.38%; however, the inflow and outflow of funds
from portfolio investors located outside Brazil are not taxed. The conversion of Brazilian currency into foreign currency for purposes of paying dividends on preferred shares and ADS is currently not taxed.
The IOF tax may be also levied on issuances of bonds or securities, including transactions carried out on Brazilian stock, futures or commodities exchanges. The rate of the IOF tax with respect to many securities
transactions is currently 0 percent, although certain transactions may be subject to specific rates. The minister of finance, however, has the legal authority to increase the rate to a maximum of 1.5% per day of the amount of the taxed
transaction, during the period the investor holds the securities, up to the amount equal to the gain made on the transaction and only from the date of its increase or creation. The acquisition, holding and disposition of preferred shares traded on a
Brazilian exchange is currently not subject to tax.
Temporary Contribution on Financial Transactions (CPMF
Tax)
Until December 31, 2007, any transaction carried out by a holder of securities in Brazil that results in the transfer of
reais
from an account maintained by such holder (or its custodian) with a Brazilian
fnancial institution may be subject to the CPMF tax, at the rate of 0.38% . The funds transferred for the acquisition of shares on a Brazilian stock exchange are exempt from the CPMF tax.
As of January 1, 2008, this tax has been repealed by the Brazilian Congress (Senate).
U.S. Federal Income Tax Considerations
The following are the material U.S. federal income tax consequences to U.S. Holders described herein of owning and disposing of preferred shares or ADSs, but it does not purport to be a comprehensive description of all
of the tax considerations that may be relevant to a particular persons decision to hold such securities. The discussion applies
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only if you hold preferred shares or ADSs as capital assets for tax purposes and it does not describe all of the tax consequences that may be relevant to holders subject to special rules, such as:
-
certain financial institutions;
-
insurance companies;
-
dealers and traders in securities or foreign currencies;
-
persons holding preferred shares or ADSs as part of a hedge, straddle, integrated transaction or similar transaction;
-
persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
-
partnerships or other entities classified as partnerships for U.S. federal income tax purposes;
-
persons liable for the alternative minimum tax;
-
tax-exempt organizations;
-
persons holding preferred shares or ADSs that own or are deemed to own ten percent or more of our voting stock; or
-
persons who acquired our ADSs or shares pursuant to the exercise of any employee stock option or otherwise as compensation.
If an entity that is classified as a partnership for U.S. federal income tax purposes holds preferred shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner
and upon the activities of the partnership. Partnerships holding preferred shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the
preferred shares or ADSs.
This discussion is based on the Internal Revenue Code of 1986, as amended (the Code), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the
date hereof. These laws are subject to change, possibly on a retroactive basis. It is also based in part on representations by the Depositary and assumes that each obligation under the Deposit Agreement and any related agreement will be performed in
accordance with its terms.
You are a U.S. Holder if you are a beneficial owner of preferred shares or ADSs and if you are, for U.S. federal tax purposes:
-
a citizen or individual resident of the United States;
-
a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or
-
an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. U.S. HOLDERS OF PREFERRED SHARES OR ADSs ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISERS WITH RESPECT TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF OWNING OR DISPOSING OF PREFERRED SHARES OR ADSs, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, NON-U.S. AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAWS.
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In general, if you own ADSs, you will be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if you exchange ADSs
for the underlying shares represented by those ADSs.
The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released or intermediaries in the chain of ownership between U.S. Holders and the issuer of the security underlying the ADSs may be taking actions that are inconsistent with
the claiming of foreign tax credits for U.S. Holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the
analysis of the creditability of Brazilian taxes, and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by such parties or intermediaries.
Please consult your tax advisers concerning the U.S. federal, state, local and foreign tax consequences of purchasing, owning and disposing of preferred shares or ADSs in your particular circumstances.
This discussion assumes that the Company is not, and will not become, a passive foreign investment company, as described below.
Taxation of Distributions
Distributions paid on ADSs or preferred shares will generally be treated as dividends to the extent paid out of current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because the Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions will be reported to U.S. holders as dividends. Subject to applicable limitations and the discussion above
regarding concerns expressed by the U.S. Treasury, dividends paid by qualified foreign corporations to certain non-corporate U.S. Holders in taxable years beginning before January 1, 2011, are taxable at a maximum rate of 15%. A foreign corporation
is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the New York Stock Exchange where our ADSs are traded. You should consult your tax
advisers to determine whether the favorable rate will apply to dividends you receive and whether you are subject to any special rules that limit your ability to be taxed at this favorable rate.
Bills have been introduced in both the U.S. House and the U.S. Senate which would, if enacted, deny the favorable tax rates described in the preceding paragraph for dividends paid in respect of certain securities where the issuer of the securities
is allowed a deduction under the tax laws of a foreign country with respect to such dividend. It is unclear how the proposed legislation would apply to securities such as the preferred shares where distributions may be made in the form of interest
on shareholders equity capital. The proposed legislation would apply to dividends received after the date of its enactment. It is not possible to predict whether the proposed legislation will be enacted, either in its present form or any other
form. Non-corporate U.S. Holders should consult their tax advisers with respect to the potential enactment of currently proposed legislation and its application in their particular circumstances.
The amount of a dividend will include any amounts withheld by us in respect of Brazilian taxes on the distribution. The amount of the dividend will be treated as foreign-source dividend income to you and will not be eligible for the
dividends-received deduction generally allowed to U.S. corporations under the Code. Dividends will be included in your income on the date of your, or in the case of ADSs, the Depositarys, receipt of the dividend. The amount of any dividend
income paid in
reais
will be a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of such receipt regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into
U.S. dollars on the date of receipt, you generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. You may have foreign currency gain or loss if the amount of such dividend is not converted into
U.S. dollars on the date of such receipt.
Subject to applicable limitations that may vary depending upon your circumstances and subject to the discussion above regarding concerns expressed by the U.S. Treasury, Brazilian income taxes withheld from dividends on
preferred shares or ADSs will be creditable against your U.S. federal income tax liability. The rules governing foreign tax credits are complex and, therefore, you should consult your tax adviser regarding the availability of
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foreign tax credits in your particular circumstances.
Instead of claiming a credit, you may, at your election, deduct such Brazilian taxes in computing your taxable income, subject to generally applicable limitations under U.S. law. An
election to deduct foreign taxes instead of claiming foreign tax credits must apply to all taxes paid or accrued in the taxable year to foreign countries and possessions of the United States.
Sale and Other Disposition of Preferred Shares or ADSs
For U.S. federal income tax purposes, gain or loss you realize on the sale or other disposition of preferred shares or ADSs will be capital gain or loss, and will be long-term capital gain or loss if you held the
preferred shares or ADSs for more than one year. The amount of your gain or loss will equal the difference between your tax basis in the preferred shares or ADSs disposed of and the amount realized on the disposition, in each case as determined in
U.S. dollars. Such gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. Consequently, if a Brazilian withholding tax is imposed on the sale or disposition of preferred shares or ADSs, and a U.S. Holder does not
receive significant foreign source income from other sources, such U.S. Holder may not be able to derive effective U.S. foreign tax credit benefits in respect of such Brazilian withholding tax. If a Brazilian tax is withheld on the sale or
disposition of preferred shares or ADSs, a U.S. Holders amount realized will include the gross amount of the proceeds of such sale or disposition before deduction of the Brazilian tax. See Item 10.E. Additional Information Taxation Brazilian Tax Considerations Taxation of
Gains for a description of when a disposition may be subject to taxation in Brazil.
Passive Foreign Investment Company Rules
The Company believes that it was not a passive foreign investment company (PFIC) for U.S. federal income tax purposes for its 2007 taxable year. If the Company were a PFIC for any taxable year during which a U.S. Holder held
preferred shares or ADSs, gain recognized by such U.S. Holder on a sale or other disposition (including certain pledges) of the preferred shares or ADSs
would be allocated ratably over the U.S. Holders holding period for the
preferred shares or ADSs. The amounts allocated to the taxable year of the sale or other
disposition and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year
would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for such taxable year, and an interest charge would be imposed on the amount allocated to such taxable year. Similar rules would apply to any
distribution in respect of preferred shares or ADSs in excess of 125% of the average of the annual distributions on preferred shares or ADSs received by a U.S. Holder during the preceding three years or such holders holding period, whichever
is shorter. Certain elections may be available that would result in alternative treatments (such as a mark-to-market treatment) of the preferred shares or ADSs. U.S. Holders should consult their tax advisers to determine whether any such elections
are available and, if so, what the consequences of the alternative treatments would be in those holders' particular circumstances.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and to backup withholding unless
(i) you are a corporation or other exempt recipient or (ii) in the case of backup withholding, you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.
The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the Internal
Revenue Service.
U.S. HOLDERS OF OUR PREFERRED SHARES OR ADSs SHOULD CONSULT THEIR OWN TAX ADVISERS AS TO THE BRAZILIAN, U.S. FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR PREFERRED SHARES OR ADSs BASED UPON THEIR
PARTICULAR CIRCUMSTANCES.
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F. Dividends and Paying Agents
On December 21, 2007, we paid dividends with respect to fiscal year ended December 31, 2006 in the amount of R$16.8 million, which was insufficient to meet the minimum dividend required by Brazilian Corporate Law. For
the fiscal year ended December 31, 2007, we were unable to pay minimum dividends because we had net losses.
G. Statement of Experts
Not applicable.
H. Documents on Display
We are subject to the information requirements of the Exchange Act, except that, as a foreign issuer, we are not subject to the proxy rules or the short swing profit disclosure rules of the Exchange Act. In accordance
with these statutory requirements, we file or furnish reports and other information with the Commission. Reports and other information filed or furnished by us with the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commissions Regional Offices at 233 Broadway, New York, New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may be obtained by mail from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may also inspect these reports and other
information at the offices of the New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which our ADSs are listed.
In addition, the Commission maintains a website that contains information filed electronically, which can be accessed over the Internet at http://www.sec.gov.
We also file financial statements and other periodic reports with the CVM. Copies of our annual report on Form 20-F and documents referred to in this annual report and our by-laws will be available for inspection upon
request at our offices at Avenida Doutor Chucri Zaidan, 860, 04583-110, São Paulo, SP, Brazil.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in both foreign currency exchange rates and interest rates. We are exposed to foreign currency exchange rate risk because certain of our costs (mostly interest on debt, capital
expenditures and the purchase of wireless devices) are all or partially denominated in currencies (primarily the U.S. dollar and the Yen) other than those in which we earn revenues (primarily the
real
). Similarly, we are subject to market
risk resulting from changes in interest rates that may affect the cost of our financing.
We have entered into derivative instruments, such as foreign currency swaps to manage the exchange rate risk. We do not hold or issue derivative or other financial instruments for trading purposes.
Exchange Rate Risk
The principal foreign exchange rate risk faced by us arises from our U.S. dollar, Japanese yen, Euros and UMBNDES-denominated indebtedness. At December 31, 2007, we had US$408.5 million, ¥66,997.4 million and
15.2 million of indebtedness and R$10 million was denominated in UMBNDES. Our revenues are earned almost entirely in
reais
and we have no material U.S. dollar-denominated assets (except for our hedge contracts). At December 31, 2007,
all of our U.S. dollar-denominated indebtedness and other foreign exchange liabilities were covered by long positions of hedging agreements. Under those derivative agreements, our subsidiarys U.S. dollar, Japanese yen and UMBNDES-denominated
obligations are swapped for real-denominated obligations bearing interest at rates linked to the Certificado de Depósito Interfinanceiro (Interbank Deposit Certificate), or CDI. At December 31, 2007, our outstanding hedging positions covered
96% of our foreign currency-denominated financial indebtedness
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and other liabilities. We are following up on market conditions and will eventually unwind the position and/or apply it to other foreign currency-denominated commitments, such as liabilities with suppliers and management fee. At December 31, 2007,
we recorded financial expense from foreign currency derivative transactions of R$509.4 million against financial income from monetary and foreign exchange variations of R$296.1 million.
Our foreign currency-denominated debt produced a gain of R$296.1 million in 2007 a gain of R$335.0 million in 2006 and a gain of R$460.1 million in 2005. This was offset by our derivatives, which produced a loss of
R$509.4 million in 2007, a loss of R$764.3 million in 2006 and a loss of R$1,120.0 million in 2005. The unrealized costs, net of unrealized loss on foreign exchange derivatives contracts was R$448.4 million at December 31, 2007. The unrealized
costs, net of unrealized loss on foreign exchange and interest rates derivatives contracts was R$500.5 million at December 31, 2006. The unrealized gains, net of unrealized costs on foreign exchange derivatives contracts was R$376.7 million at
December 31, 2005.
The potential loss to us over one year that would have resulted from a hypothetical, instantaneous and unfavorable change of 1000 basis points in the foreign exchange applicable to financial assets and liabilities on
December 31, 2007 would be approximately R$199.3 million. On the other hand, our derivative instruments would have a gross gain of R$191.1 million. The net loss would be R$8.2 million.
Exchange rate sensitivity analysis was made by applying a 10% change to the Brazilian Central Bank exchange rate on December 31, 2007 of R$1.771 to U.S.$1.00, which would represent a devaluation of the
real
of
R$0.771. We then assumed that this unfavorable currency shift would be sustained from December 31, 2007 through December 31, 2008. The foreign exchange loss that affects financial expenses was calculated by applying such devaluation to our
indebtedness and foreign exchange purchase commitments, net of derivative instruments.
Interest Rate Risk
We are exposed to interest rate risk as a result of an investment of cash and cash equivalents mainly in short-term real-denominated instruments. At December 31, 2007, this amount totaled R$1,895.1 million.
Additionally, we are exposed to interest rate risk as a consequence of our floating rate debt in U.S. dollars and due to the nature of our derivative agreements, whereby our U.S. dollar, yen and euro-denominated
obligations are swapped into real-denominated obligations bearing interest linked to the CDI.
At December 31, 2007, we had R$4,381.4 million in loans and financing outstanding, of which approximately R$2.1 billion bore interest at fixed rates and approximately R$2.3 billion bore interest at floating rates of
interest (primarily LIBOR, CDI, IGPM, TJLP-based. Loans and financing in foreign currency are mainly denominated in U.S. dollars, yen and euros, and bear interest at fixed rates ranging from 0% to 27.5% per annum, or are subject to variable interest
from 1.25% per annum above LIBOR. On a swapped basis the cost of funding in
reais
is in line with market conditions taking into account the country risk and is equivalent to approximately from 92.8% to 107.6% of CDI. At December 31, 2007 the
CDI rate was 11.12% . We hedged against the risk of interest rates increasing (LIBOR) at the amount of US$52.5 million (face value).
We have financing in local currency with
Banco Nacional de Desenvolvimento Econômico e Social
BNDES subject to a variable interest rate of 3.5% and 4.6% above the TJLP.
The potential loss to us over one year that would have resulted from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate applicable to financial assets and liabilities on
December 31, 2007, would be approximately R$18.3 million. The above sensitivity analysis is based on the assumption of an unfavorable 100 basis points increase in the interest rates applicable to each homogeneous category of financial assets and
liabilities and sustained over a period of one year. A homogeneous category is defined according to the currency in which financial assets and liabilities are denominated, and assumes the same interest rate movement within each homogeneous category,
such as U.S. dollars. As a result, our interest rate risk sensitivity model may overstate the impact of interest rate fluctuations for such financial instruments, as consistently unfavorable movements of all interest rates are unlikely.
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Interest rate sensitivity was calculated by applying a 10% increase to all floating rate-denominated debt, assuming that the different indexes (CDI, TJLP, IGPM, LIBOR and UMBNDES coupons) would all rise by 1.0%
instantaneously on December 31, 2007, and that this unfavorable move would continue for one year.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
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The accompanying notes are an integral part of these consolidated financial statements.