Edgar Filing: TIM PARTICIPACOES SA

Unassociated Document

As filed with the Securities and Exchange Commission on May 14, 2012

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

o	SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 001-14491

TIM PARTICIPAÇÕES S.A.

(Exact name of Registrant as specified in its charter)

TIM HOLDING COMPANY	THE FEDERATIVE REPUBLIC OF BRAZIL
(Translation of Registrant’s name into English)	(Jurisdiction of incorporation or organization)

Avenida das Américas, 3,434 - 7º andar

22640-102 Rio de Janeiro, RJ, Brasil

(Address of principal executive offices)

Claudio Zezza

Chief Financial Officer

TIM Participações S.A.

Avenida das Américas, 3,434 - 7º andar

22640-102 Rio de Janeiro, RJ, Brazil

Tel: 55 21 4009-4000 / Fax: 55 21 4009-3990

czezza@timbrasil.com.br

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Shares, without par value*	New York Stock Exchange
American Depositary Shares, as evidenced by American Depositary Receipts, each representing five Common Shares	New York Stock Exchange
* Not for trading, but only in connection with the listing of American Depositary Shares on the New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

Title of Class	Number of Shares Outstanding
Common Shares, without par value	2,417,632,647

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. xYes o No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. o Yes x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes x No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

o U.S. GAAP

x International Financial Reporting Standards as issued by the International Accounting Standards Board

 Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17 x Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

o Yes x No

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Page

PRESENTATION OF INFORMATION	3
FORWARD LOOKING INFORMATION	4
PART I	6
Item 1. Identity of Directors, Senior Management and Advisers	6
Item 2. Offer Statistics and Expected Timetable	6
Item 3. Key Information	6
Item 4. Information on the Company	26
Item 4A. Unresolved Staff Comments	59
Item 5. Operating and Financial Review and Prospects	59
Item 6. Directors, Senior Management and Employees	86
Item 7. Major Shareholders and Related Party Transactions	95
Item 8. Financial Information	97
Item 9. The Offer and Listing	108
Item 10. Additional Information	112
Item 11. Quantitative and Qualitative Disclosures About Market Risk	127
Item 12. Description of Securities Other than Equity Securities	127
PART II	129
Item 13. Defaults, Dividend Arrearages and Delinquencies	129
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds	129
Item 15. Controls and Procedures	129
Item 16. [Reserved]	130
Item 16A. Audit Committee Financial Expert	130
Item 16B. Code of Ethics	130
Item 16C. Principal Accountant Fees and Services	131
Item 16D. Exemptions from the Listing Standards for Audit Committees	132
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers	132
Item 16F. Change in Registrant’s Certifying Accountant	132
Item 16G. Corporate Governance	132
Item 16H. Mine Safety Disclosure	134
PART III	134
Item 17. Financial Statements	134
Item 18. Financial Statements	134
Item 19. Exhibit Index	134
Technical Glossary	139

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PRESENTATION OF INFORMATION

In this annual report, TIM Participações S.A., a publicly-held company (sociedade anônima) organized under the laws of the Federative Republic of Brazil, is referred to as “TIM,” “TIM Participações,” the “Company” or the “Holding Company.” References to “we,” “us” and “our” are to TIM together with, where the context so requires and as explained more fully below, one or more of TIM Sul S.A. (“TIM Sul”), TIM Nordeste Telecomunicações S.A. (“TIM Nordeste Telecomunicações”), TIM Celular S.A. (“TIM Celular”), Maxitel S.A. (“TIM Maxitel”), Intelig Telecomunicações Ltda. (“Intelig”), TIM Fiber SP Ltda. (“TIM Fiber SP”) and TIM Fiber RJ S.A. (“TIM Fiber RJ” and together with TIB Fiber SP, “TIM Fiber”), each a directly or indirectly wholly-owned operating subsidiary of the Holding Company and a corporation organized under the laws of the Federative Republic of Brazil.

References in this annual report to the “common shares” are to the common shares of TIM. References to the “American Depositary Shares” or “ADSs” are to TIM’s American Depositary Shares, each representing five common shares. The ADSs are evidenced by American Depositary Receipts, or “ADRs,” which are listed on the New York Stock Exchange, or the NYSE, under the symbol “TSU.”

Prior to August 2, 2011 we had common shares and preferred shares listed on the BM&FBOVESPA under the symbols “TCSL3” and “TCSL4,” respectively, and our ADSs each represented ten preferred shares. As part of our migration to the Novo Mercado listing segment of the BM&FBOVESPA, our preferred shares ceased to trade on August 2, 2011. On August 4, 2011, our ADSs representing preferred shares ceased to trade on the NYSE. From August 3, 2011, we only had common shares traded on the Novo Mercado listing segment of BM&FBOVESPA, under the symbol “TIMP3” and as from August 5, 2011, our ADSs representing five common shares instead of ten preferred shares commenced trading on the NYSE.

Market Share Data

Market share information is calculated by us based on information provided by Brazil’s National Telecommunications Agency (Agência Nacional de Telecomunicações, or “Anatel”). Penetration data is calculated by us based on information provided by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística, or “IBGE”).

Presentation of Financial Information

We maintain our books and records in reais. We prepared our consolidated financial statements included in this annual report in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). The selected financial information for the Company included in “Item 3A. Key Information—Selected Financial Data” should be read in conjunction with, and is qualified in its entirety by, the IFRS financial statements of the Company and “Item 5. Operating and Financial Review and Prospects” appearing elsewhere in this annual report.

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying our accounting policies. Those areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4 to our consolidated financial statements.

On December 30, 2009, TIM Participações S.A. acquired Holdco Participações Ltda. (“Holdco”), which held 100% of the ownership of the telecommunications company Intelig, from JVCO Participações Ltda. (“JVCO”) in exchange for a 5.14% participation in TIM Participações’ capital stock. We have included Intelig in our results of operations since November 30, 2009. Because Intelig is included in all 12 months of our 2010 results but only one month of 2009, our results of operations in 2010 are not fully comparable with our results of operations in 2009.

On October 31, 2011 we completed the acquisition of all of AES Elpa S.A.’s equity interests in Eletropaulo Telecomunicações Ltda. and 98.3% of the interest of AES Communications Rio de Janeiro S.A. We have included the results of operations of Eletropaulo Telecomunicações Ltda. and AES Communications Rio de Janeiro S.A. in our consolidated results of operations from November 1, 2011. The inclusion of these companies in our results of operations for the final two months of the year ended December 31, 2011 affects the comparability of our results of

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operations with the year ended December 31, 2010 and will affect the comparability of our results of operations in future periods. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting the Comparability of our Results of Operations—Acquisition of AES Atimus.”

All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “U.S.$” are to United States dollars.

Solely for the convenience of the reader, we have translated some amounts included in “Item 3A. Key Information—Selected Financial Data” and elsewhere in this annual report from reais into U.S. dollars using the commercial selling exchange rate as reported by the Banco Central do Brasil or Central Bank of Brazil (the “Central Bank”) at December 31, 2011 of R$1.8758 to U.S.$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted into U.S. dollars at that or at any other exchange rate. Such translations should not be construed as representations that the real amounts represent or have been or could be converted into U.S. dollars as of that or any other date. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” for information regarding exchange rates for the Brazilian currency.

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.

The “Technical Glossary” at the end of this annual report provides definitions of certain technical terms used in this annual report and in the documents incorporated in this annual report by reference.

FORWARD LOOKING INFORMATION

This annual report contains statements in relation to our plans, forecasts, expectations regarding future events, strategies and projections, which are forward-looking statements and involve risks and uncertainties and are therefore, not guarantees of future results. Forward looking statements speak only as of the date they were made, and we undertake no obligation to update publicly or revise any forward-looking statements after we file this annual report because of new information, future events and other factors. We and our representatives may also make forward-looking statements in press releases and oral statements. Statements that are not statements of historical fact, including statements about the beliefs and expectations of our management, are forward-looking statements. Words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “plan,” “predict,” “project” and “target” and similar words are intended to identify forward-looking statements, which necessarily involve known and unknown risks and uncertainties. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements. These statements appear in a number of places in this annual report, principally in “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects,” and include, but are not limited to, statements regarding our intent, belief or current expectations with respect to:

Brazilian wireless industry conditions, size and trends;

characteristics of competing networks’ products and services;

estimated demand forecasts;

growing our subscriber base and especially our postpaid subscribers;

development of additional sources of revenue;

strategy for marketing and operational expansion;

achieving and maintaining customer satisfaction;

development of higher profit margin activities, attaining higher margins, and controlling customer acquisition and other costs; and

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capital expenditures forecasts, funding needs and financing resources.

Because forward-looking statements are subject to risks and uncertainties, our actual results and performance could differ significantly from those anticipated in such statements and the anticipated events or circumstances might not occur. The risks and uncertainties include, but are not limited to:

government policy and changes in the regulatory environment in Brazil;

an increase in the number of competitors in the telecommunications industry that could affect our market share;

increased competition in our principal markets that could affect the prices we charge for our services;

our ability to strengthen our competitive position in the Brazilian mobile telecommunications market;

our ability to develop and introduce new and innovative technologies that are received favorably by the market, and to provide value-added services to encourage the use of our network;

the introduction of transformative technologies that could cause a significant decrease in revenues for all mobile telephone carriers;

our ability to integrate acquired businesses and implement operational efficiency;

our ability to operate efficiently and to refinance our debt as it comes due, particularly in consideration of uncertainties in credit and capital markets;

our ability to attract and retain qualified personnel;

our ability to integrate companies and assets that we acquire;

the effect of exchange rate fluctuations; and

other factors identified or discussed under “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report.

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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

The selected financial data presented below should be read in conjunction with our consolidated financial statements, including the notes thereto. Our consolidated financial statements included herein as of and for the years ended December 31, 2011, 2010 and 2009 have been audited by PricewaterhouseCoopers Auditores Independentes. The report of PricewaterhouseCoopers Auditores Independentes on the consolidated financial statements appears elsewhere in this annual report.

Our first financial statements prepared in accordance with IFRS were those as of and for the year ended December 31, 2010, which contain comparative amounts related to the year ended December 31, 2009, also prepared under IFRS. These financial statements were filed with the CVM and made publicly available in Brazil.

Until December 31, 2009, our consolidated financial statements were prepared in accordance with Brazilian GAAP. Brazilian GAAP is based on the Brazilian corporate law No. 6,404 of December 15, 1976, as amended, and included the provisions of Law No. 11,638/07 and Law No. 11,941/09; the accounting standards issued by the CFC; the accounting standards issued by the CPC; and the rules and regulations issued by the CVM. After the adoption of CPCs No. 15 to 43, Brazilian GAAP does not differ from IFRS as regards the preparation of consolidated financial statements. The comparative figures with respect to 2009 have been restated to reflect adjustments made as a result of the adoption of IFRS.

Our summary financial data prepared in accordance with IFRS is not comparable with our summary financial data prepared in accordance Brazilian GAAP presented below as of and for the years ended December 31, 2008 and 2007 and in previous annual reports on Form 20-F. The following table presents a summary of our historical consolidated financial and operating data for each of the periods indicated. Solely for the convenience of the reader, real amounts as of and for the year ended December 31, 2011 have been translated into U.S. dollars at the commercial market rate in effect on December 31, 2011 (as reported by the Central Bank of R$1.8758 to U.S.$1.00). See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” for information regarding exchange rates for the Brazilian real. You should read the following information together with our consolidated financial statements and the notes thereto included elsewhere in this annual report and with “Item 5. Operating and Financial Review and Prospects.”

	As of and for the Year Ended December 31,
	2011 U.S.$			2011 R$			2010 R$			2009 R$
	(thousands of reais or U.S. dollars, unless otherwise indicated)
Income Statement Data:
Net operating revenue		9,108,634			17,085,976			14,457,450			13,158,134
Cost of service provided and goods sold		(4,564,150	)		(8,561,433	)		(7,305,767	)		(6,672,369	)
Gross profit		4,544,484			8,524,544			7,151,683			6,485,765
Operating revenue (expenses):
Selling expenses		(2,583,278	)		(4,845,712	)		(4,494,608	)		(4,436,751	)
General and administrative expenses		(513,591	)		(963,394	)		(1,008,694	)		(1,033,438	)
Other revenue (expenses), net		(345,450	)		(647,996	)		(448,247	)		(462,114	)
Operating profit before financial income (expense)		1,102,165			2,067,442			1,200,134			553,462

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	As of and for the Year Ended December 31,
	2011 U.S.$			2011 R$			2010 R$			2009 R$
	(thousands of reais or U.S. dollars, unless otherwise indicated)

Financial income (expenses)		(127,337	)		(238,858	)		(245,457	)		(245,115	)
Income before income tax and social tax contribution		974,829			1,828,584			954,677			308,347
Income tax and social contribution		(291,799	)		(547,356	)		1,257,038			33,026
Net income for the year		683,030			1,281,228			2,211,715			341,373
Net income per share		0.3017			0.5660			0.8955			0.1379
Diluted net income per share		0.3016			0.5657			0.8955			0.1379
Number of shares outstanding:
Common shares (in millions)		2,418			2,418			843			843
Preferred shares (in millions)		0			0			1,632			1,632
Dividends per share		0.0671			0.1259			0.2006			0.1251
Balance Sheet Data:
Property, plant, equipment and intangibles, net		6,609,637			12,398,357			10,399,571			9,741,375
Total assets		12,495,053			23,438,221			19,370,852			16,109,896
Loans and financing		1,951,478			3,660,583			3,234,670			3,549,219
Shareholders’ equity		6,907,313			12,956,737			10,300,809			7,695,618
Capital stock		5,245,639			9,839,770			8,149,096			7,613,610
Cash Flow Data:
Operating Activities:
Net cash provided by operations		2,201,430			4,129,443			3,972,332			3,035,559
Investing Activities
Net cash used in investing activities		(2,289,432	)		(4,294,516	)		(2,544,335	)		(2,544,848	)
Financing Activities:
Net cash provided (used) in financing activities		560,665			1,051,696			(1,464,789	)		390,770
Increase (decrease) in cash and cash equivalents		472,664			886,623			(36,792	)		881,481
Cash and cash equivalents at beginning of year		1,266,783			2,376,232			2,413,024			1,531,543
Cash and cash equivalents at end of year		1,739,447			3,262,855			2,376,232			2,413,024

The following table sets forth financial information as of and for the years ended December 31, 2008 and 2007 and has been prepared in accordance with Brazilian GAAP, which was the basis for the preparation of our consolidated financial statements prior to December 31, 2009. See “Presentation of Financial and Other Information.” Our first financial statements prepared in accordance with IFRS were those as of and for the year ended December 31, 2010, which contain comparative amounts related to the year ended December 31, 2009, also prepared under IFRS. The financial information as of and for the years as of ended December 31, 2008 and 2007 presented below is not comparable to the financing information as of and for the years ended December 31, 2011, 2010 and 2009. Certain information below is presented in accordance with US GAAP.

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	As of and for the Year Ended December 31,
	2008(1) as adjusted			2007(1)(2) as adjusted
	(millions of reais, unless otherwise indicated)
Statement of Operations Data:
Brazilian GAAP
Net operating revenue		13,147.2			12,483.8
Cost of goods and services		(7,063.8	)		(6,731.9	)
Gross profit		6,083.4			5,751.9
Operating expenses:
Selling expenses		(4,098.4	)		(3,890.9	)
General and administrative expenses		(1,127.4	)		(1,032.8	)
Other net operating expense		(366.7	)		(311.6	)
Operating income (loss) before financial income (expenses)		490.9			516.6
Net financial income (expense)		(375.0	)		(281.5	)
Operating income (loss)		115.9			235.1
Net non-operating income (expense)		—			—
Income (loss) before taxes and minority interests		115.9			235.1
Income and social contribution taxes		64.3			(166.8	)
Minority interests		—			—
Net income (loss)		180.2			68.3
Net income (loss per share (reais)		0.08			0.03
Number of shares outstanding:
Common shares (in millions)		798			795
Preferred shares (in millions)		1,545			1,539
Dividends per shares (reais)(3)		0.11			0.14
U.S. GAAP
Net operating revenues		13,150.0			12,536.1
Operating income (expense)		52.1			208.4
Net income (loss)		151.5			68.3
Balance Sheet Data:
Brazilian GAAP
Property, plant, equipment and software, net		6,971.4			7,021.8
Total assets		16,239.5			14,564.0
Loans, financing and debentures		3,497.7			2,097.4
Shareholder’s equity		7,790.5			7,771.8
Capital stock		7,613.6			7,550.5
U.S. GAAP
Property, plant, equipment and software, net		6,781.6			6,916.9
Total assets		16,339.9			14,667.6
Loans and financing		3,497.7			2,113.5
Shareholders’ equity		7,876.6			7,886.6

(1)	Amounts in 2008 and 2007 have been adjusted to reflect the reclassification of “penalties for contract break” to service revenues, previously classified as other operating income.

(2)

For consistency of presentation with 2008, amounts in 2007 been adjusted to reflect: reclassification of intangible assets intended for the Company’s operations to a specific group called “intangible”; accounting of borrowing costs as a reduction of “loans and financing” and amortization of them over the contract period (up to December 31, 2007, these costs were amortized on a straight-line basis, over the duration of the loan); accounting of derivative instruments at fair value; new treatment for lapsed dividends (dividends not claimed by shareholders within the time limit determined by Brazilian law), earlier accounted for in profit and loss, now to

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be accounted for within shareholders’ equity; reclassification of non operating income to other operating income.

(3)

Dividends per share have been computed as the sum of dividends and interest on shareholders’ equity (“juros sabre capital próprio,” according to Brazilian law), an alternative under Brazilian Corporations Law to the distribution of dividends to shareholders. The distribution of dividends and interest on shareholders’ equity, in each year, proceeded according to the terms set forth by our common shareholders, at the relevant annual general meeting. Dividends per share have been determined as the sum of declared dividends and interest on shareholders’ equity, divided by the total number of common shares and preferred shares outstanding as of the common shareholders’ meeting date. See “Item 10E. Additional Information—Taxation—Brazilian Tax Considerations—Distributions of Interest on Capital.”

Brazilian Economic Environment

Our business, prospects, financial condition and results of operations are dependent on general economic conditions in Brazil.

The international financial crisis in 2008 had an adverse impact on the Brazilian economy in 2009. However, economic indicators in Brazil were less affected than in other areas including the United States and Europe, partially due to a combination of the positive effects of previous macro-econonomic policies and a prompt fiscal, monetary and economic response by the Brazilian federal government. During this period, the Special System of Settlement and Custody basic interest rate (Sistema Especial de Liquidação e Custódia or “SELIC” (which is the benchmark interest rate payable to holders of certain securities issued by the Brazilian government)) reached a historically low level of 8.75% per annum.

In 2010, the Brazilian economy continued to recover from the global financial crisis of 2008. The Brazilian economy’s robust domestic market and recent trend of price stability contributed to economic strength in Brazil during the global economic crisis, which has been demonstrated in a pattern of consistent, sustainable economic expansion. In 2010, Brazilian GDP increased by 7.5%, continuing the rapid economic expansion from late 2009 and early 2010, reaching a value of approximately U.S.$2.024 trillion. Following this rapid expansion, the government and the financial markets have begun to express concerns for rising inflation spurred by this strong economic activity.

The official inflation rate in Brazil (Índice de Preços ao Consumidor Amplo, or “IPCA”) ended 2010 at 5.91%, the highest rate since 2004. The figure was above the Central Bank’s target of 4.5%, though within the 2 percentage points margin that is considered acceptable by the government. However, to manage market expectations, the government initiated a process of monetary contraction by increasing the SELIC to 10.75% per annum at the end of 2010, from 8.75% per annum in 2009.

The rate of inflation in Brazil increased during the first half of 2011, causing the government to respond by tightening monetary policy. The official Brazilian inflation rate, the IPCA, was at its highest levels since 2004. Through June 2011, the inflation rate was of 3.87%, equivalent to a twelve-month rate of 6.71%, exceeding the target set by the Central Bank. As a result, the Central Bank has changed interest rates: after reaching 10.75% by the end of 2010, the SELIC rate was revised, positively and negatively, during 2011 and was 11% as of December 31, 2011. The IPCA ended the year with an increase of 6.4%, the highest since 2004. Low unemployment in Brazil and the expansion of the domestic market have contributed to strong domestic spending. Despite government measures to curb consumer spending, it currently shows no signs of cooling and will likely remain at high levels in the foreseeable future.

The Brazilian government remains active in foreign exchange markets in an effort to curb the appreciation of the real. In addition to participating almost daily in the foreign exchange market buying dollars, the government has adopted several measures to contain the appreciation of the real against the dollar, such as an increase of the tax on financial operations (Imposto sobre Operações Financeiras, or “IOF”) and restrictive measures in relation to foreign investment in Brazil. Despite these measures, the U.S. dollar depreciated 5.9% against the real in the first half of 2011. Foreign exchange markets began to shift in the second half of 2011, and the real depreciated 20% against the U.S. dollar in the second half of 2011. Unlike in 2010, when the foreign trade balance showed a reduction in the accumulated surplus, in the first half of 2011 the accumulated surplus increased significantly, with a trade balance of

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R$42.9 billion, compared to R$16.6 billion in 2010 primarily due to purchases of U.S. dollars by the Central Bank, which totaled U.S.$38 billion. In the second half of 2011, the accumulated surplus increased, with a trade balance of U.S.$ 16.8 billion compared to U.S.$12.4 billion in 2010. In 2011 the accumulated surplus increased 47.8% compared to 2010 (from U.S.$20.1 to U.S.$29.8 billion), the biggest increased since 2007 (U.S.$40.0 billion).

The table below sets forth data regarding GDP growth, inflation, interest rates and real/U.S. dollar exchange rates in the periods indicated:

	For the Year Ended December 31,
	2011			2010			2009
GDP growth (1)		2.7	%		7.5	%		(0.2	)%
Inflation (IGP-M) (2)		5.10	%		11.32	%		(1.72	)%
Inflation (IPCA) (3)		6.5	%		5.91	%		4.31	%
DI Rate (4)		10.87	%		10.64	%		8.61	%
TJLP (5)		6.0	%		6.0	%		6.0	%
Appreciation (devaluation) of the real against the U.S. dollar		12.59	%		(4.3	)%		25.4	%
Exchange rate (closing)—R$ per U.S.$1.00		1.8751			1.6654			1.7412
Average exchange rate—R$ per U.S.$1.00 (6)		1.6738			1.7684			1.9935

(1)	Brazilian GDP for 2011, 2010 and 2009 was calculated using the new procedures adopted by the IBGE.

(2)	Inflation (IGP-M) is the general market price index as measured by FGV, and represents data accumulated over the 12 months in each year ended December 31, 2011, 2010 and 2009.

(3)	Inflation (IPCA) is a consumer price index measured by IBGE, and represents data accumulated over the 12 months in each year ended December 31, 2011, 2010 and 2009.

(4)	The DI rate is the average inter-bank deposit rate performed during the day in Brazil (accrued as of the last month of the period, annualized).

(5)	Represents the interest rate applied by BNDES in long-term financings (end of the period).

(6)	Average exchange rate on the last day of each year.

Sources: Banco Nacional de Desenvolvimento Econômico – BNDES, Central Bank, Fundação Getulio Vargas – FGV, and IBGE.

Exchange Rates

We will pay any cash dividends, interest on shareholders’ equity and any other cash distributions with respect to our common shares in reais. Accordingly, exchange rate fluctuations will affect the U.S. dollar amounts received by the holders of ADSs on conversion by the Depositary of dividends and other distributions in Brazilian currency on our common shares represented by ADSs. Fluctuations in the exchange rate between Brazilian currency and the U.S. dollar will affect the U.S. dollar equivalent price of our common shares on the Brazilian stock exchanges. In addition, exchange rate fluctuations may also affect our dollar equivalent results of operations. See “Item 5. Operating and Financial Review and Prospects.”

Since 1999, the Central Bank has allowed the real/U.S. dollar exchange rate to float freely, and, since that time, the real/U.S. dollar exchange rate has fluctuated considerably. The real depreciated against the U.S. dollar by 15.7% in 2001 and 34.3% in 2002. Although the real appreciated by 22.3%, 8.8%, 13.4%, 9.5% and 20.7% against the U.S. dollar in 2003, 2004, 2005, 2006 and 2007, respectively, in 2008, as a result of the international financial and economic crisis, the real depreciated against the U.S. dollar by 24.0%. In 2009 and 2010, the real appreciated against the U.S. dollar by 25.5% and 4.3%, respectively. In 2011, the real depreciated by 4.8% against the U.S. dollar. On December 31, 2011, the period-end real/U.S. dollar exchange rate was R$1.8758 per U.S.$1.00.

In the past, the Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments ranged from a daily to a monthly basis, floating exchange rate systems, exchange controls and dual exchange rate markets. We cannot predict whether the Central Bank or the Brazilian government will continue to let

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the real float freely or intervene in the exchange rate market by returning to a currency band system or otherwise. The real may depreciate or appreciate substantially against the U.S. dollar.

The following table shows the selling rate for U.S. dollars for the periods and dates indicated. The information in the “Average” column represents the annual average of the exchange rates during the periods presented.

	Reais per U.S. dollar
Year	High		Low		Average		Year End
2007		2.1556		1.7325		1.9483		1.7713
2008		2.5004		1.5593		1.8375		2.3370
2009		2.4218		1.7024		1.9935		1.7412
2010		1.8811		1.6554		1.7593		1.6662
2011		1.9016		1.5345		1.6746		1.8758

	Reais per U.S. dollar
Month	High		Low
November 2011		1.8937		1.7270
December 2011		1.8758		1.7830
January, 2012		1.8683		1.7389
February, 2012		1.7376		1.7024
March, 2012		1.8334		1.7152
April, 2012	1.8918		1.8256
May, 2012 (through May 11)	1.9581		1.9149

Source: Central Bank/Bloomberg

On May 11, 2012, the selling rate was R$1.9513 to U.S.$1.00. The real/dollar exchange rate fluctuates and, therefore, the selling rate at May 11, 2012 may not be indicative of future exchange rates.

Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or serious reasons to foresee such imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. For approximately six months in 1989, and early 1990, for example, the Federal Government froze all dividend and capital repatriations that were owed to foreign equity investors. These amounts were subsequently released in accordance with Federal Government directives. There can be no assurance that similar measures will not be taken by the Federal Government in the future.

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 materializes and, as a result, the trading price of our shares and our ADSs could decline.

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Risks Relating to our Business

Our business will be adversely affected if we are unable to successfully implement our strategic objectives. Factors beyond our control may prevent us from successfully implementing our strategy.

Our business strategy is aimed at improving revenues and selective growth, while maintaining financial discipline. To achieve this goal, seek to strengthen our market position by leveraging mobile telephony to increase broadband usage and exploiting opportunities arising from fixed-to-mobile substitution.

Our ability to implement our strategy is influenced by many factors outside of our control, including: