- 1. Operations
- 2. Description of the Significant Accounting Policies
- 3. Transition to IFRS
- 4. Business combinations
- 5. Net Sales
- 6. Cost of services rendered
- 7. Finance results
- 8. Expenses by nature
- 9. Cash and cash equivalents
- 10. Trade accounts receivable
- 11. Inventories
- 12. Judicial deposits
- 13. Income taxes and social contribution
- 14. Deferred and recoverable taxes
- 15. Property and Equipment
- 16. Intangible assets
- 17. Trade Accounts Payable
- 18. Accounts Payable – Programming Suppliers
- 19. Financial liabilities
- 20. Copyright Payable – ECAD
- 21. Related parties
- 22. Commitments and provisions
- 23. Shareholders’ equity
- 24. Guarantees
- 25. Earnings per Share
- 26. Financial Instruments
- 27. Measurement and fair value hierarchy
- 28. Insurance
| a) | General Considerations The Company is exposed to market risk arising from its operations, and it uses derivatives to minimize its exposure to such risks. The Company’s revenues are generated in Brazilian reais, while the Company debts, interest charges and accounts payable to suppliers of equipment are denominated in foreign currency. Therefore, the Company’s earnings are sensitive to varying exchange rates, in particular the US dollar. The market values of the Company’s principal financial assets and liabilities were determined using available market information and appropriate valuation methodologies. The use of different market methodologies may affect estimated realization values. Capital is managed using operational strategies aiming at protection, security and liquidity. The control policy involves constantly monitoring rates contracted against current market rates. The Company and its subsidiaries do not make speculative investments in derivatives or other risk assets. The Company has a formal risk management policy. The Financial Committee provides support for the Company’s Board of Directors and consists of one member from each of the main shareholders (Globo and Embratel) and management. It examines issues relating to financial investments, debt and risk management, and refers matters for management approval. Pursuant to internal policy, the Company’s financial earnings must come from cash generated through operations rather than gains on financial markets. The results obtained by the application of internal controls to manage risks were satisfactory for the objectives proposed. |
| b) | Fair Value The fair values and carrying amount of loans payable are shown below: |
| 12/31/2009
 |
12/31/2008
|
01/01/2008
|
||||
|---|---|---|---|---|---|---|
| Book value | Fair Value | Book value | Fair Value | Book value | Fair Value | |
| Debentures – 6th issue | 582,397 | 563,295 | 583,629 | 588,525 | 581,468 | 581,468 |
| Perpetual notes | 263,711 | 265,343 | 351,254 | 259,196 | 262,583 | 271,908 |
| Global Notes 2020 | 611,450 | 627,729 | - | - | - | - |
| Banco Inbursa S.A. | 351,104 | 358,919 | 472,825 | 482,852 | - | - |
| Banco Itaú BBA | 172,704 | 173,543 | 173,370 | 174,099 | 172,642 | 172,642 |
| Finame | 217,438 | 217,438 | 178,738 | 178,738 | 98,877 | 98,777 |
| 2,198,804 | 2,206,267 | 1,759,816 | 1,683,410 | 1,115,570 | 1,124,795 | |
Other assets and liabilities have fair values equal to book value.
The fair value of the Company’s debt has been calculated based on the estimated cost of paying the outstanding obligations at December 31, 2009, which considered the contractual penalties applicable for early payments. Based on management’s estimation, debt agreements with similar characteristics, if issued on December 31, 2009, would have a higher effective interest rate when compared to the Company’s current debt agreements, considering the current market conditions.
| c) | Risks impacting the business of the Company and its subsidiaries Foreign exchange rate risk The Company’s results are susceptible to exchange fluctuations, depending on the effects of exchange rate volatility on liabilities geared to foreign currencies, primarily the US dollar. The Company’s revenues are generated in Brazilian reais while it pays certain suppliers of equipment and programming content in foreign currencies. The Company’s foreign currency exposure on December 31, 2009, is shown below: |
| Debt in US dollars: | |
|---|---|
| Short-term: | |
| Interest on loans and financing | 15,981 |
| Suppliers of equipment | 34,721 |
| Programming Suppliers | 2,944 |
| 53,646 | |
| Long-term: | |
| Loans payable | 1,210,284 |
| Liability exposure | 1,263,930 |
The Company acquired non-speculative derivative financing instruments to hedge its foreign currency exposure. The purpose of these transactions is to minimize the effects of changes in the exchange rate of the US dollar when settling short term transactions. Counterparties to the contracts are the banks: Bradesco, Goldman Sachs, Pactual, HSBC and Santander.
The Company only enters into foreign exchange derivatives in order to protect a portion of accounts payable to suppliers of imported equipment and future obligations for purchases not made yet, which are or will be linked to the US dollar, and payments of interest charges on short-term debt. For the year ended December 31, 2009, the Company had a derivative instrument (foreign exchange) position of R$94,721 relating to 100% of interest charges on loans in foreign currency and commitments to foreign suppliers. Part of total debt in dollars refers to a loan from Banco Inbursa due between 2017 and 2019, and a Perpetual Note, which has no maturity date.
Financial derivatives are summarized below:
| Description |
Reference value (notional)
|
Fair Value
|
Cumulative effect (current period)
|
|||||
|---|---|---|---|---|---|---|---|---|
| 12/31/2009 | 12/31/2008 | 01/01/2008 | 12/31/2009 | 12/31/2008 | 01/01/2008 | (received) |
(paid) |
|
| Swaps contracts | ||||||||
| Asset position | ||||||||
| Foreign currency | 94,721 | 164,524 | 21,255 | 94,328 | 157,993 | 20,382 | - | - |
| Liability position | ||||||||
| 59,897 | 71,044 | 21,255 | 68,556 | 65,446 | 24,009 | - | 9,052 | |
| Rates (PRE) (NDF) | 34,824 | 93,480 | 45,352 | 91,523 | - | - | 10,528 | |
| - | - | - | (19,580) | 1,024 | (3,627) | - | 19,580 | |
The net liability of R$19,580 is recognized in the “unrealized losses on derivatives” account on the balance sheet. During the period ended on December 31, 2009, the Company recognized a loss of R$97,345, which was recorded as part of finance expenses.
The following table shows the sensitivity analysis of the Company’s management and effect of cash operations with financial derivative instruments outstanding as at December 31, 2009:
Scenario – appreciation of Brazilian currency (R$/US$) and higher CDI rate
| Operations | Probable Scenario | Adverse Scenario | Remote Scenario |
|---|---|---|---|
| Dollar vs. CDI | (9,052) | (23,954) | (38,928) |
| NDF | (10,528) | (19,234) | (27,940) |
Scenario – depreciation of Brazilian currency (R$/US$) and lower CDI rate
| Operations | Probable Scenario | Adverse Scenario | Remote Scenario |
|---|---|---|---|
| Dollar vs. CDI | (9,052) | 5,994 | 20,968 |
| NDF | (10,528) | (1,822) | 6,883 |
| American Dollars (US$) vs. CDI On December 31, 2009, the Company has six contracts of this type, whose notional aggregate value is US$34,400 thousand due between February and November 2010, with its positions short in dollars and long in CDI-geared assets, with the aim of converting short-term debt in dollars to CDI-geared debt. The probable scenario assumes an exchange rate of R$1.7412 = US$1, and a CDI rate of 8.55% per year, while the possible adverse scenario would be the Brazilian real appreciating against the dollar by 25% (R$1.3059), and a 25% (10.68%) increase in the CDI, generating a loss of R$23,954. For the remote adverse scenario, in which the Brazilian real appreciates 50% against the dollar (R$0.8706), with the CDI rate also rising 50% (12.82%), the Company would show a loss of R$38,928, in relation to the above mentioned outstanding contracts. The “possible” adverse scenario has the Brazilian real devalued against the dollar by 25% (R$2.1765) and the CDI rate falling 25% (6.41%), generating a gain of R$5,994. For the remote adverse scenario, in which there is a devaluation of the Brazilian real against the dollar of 50% (R$2.6118), with the CDI rate reduced 50% (4.27%), the Company would record a gain of R$20,968, in relation to the above mentioned outstanding contracts. |
|
| 2 – | NDF (Non Deliverable Forward) The Company holds two contracts of this type with a total long position in dollars in the notional value of US$20,000 thousand maturing between January and February 2010. The probable scenario reflects the BMF quotation on December 31, 2009, of R$1.7412 / US$1. The possible adverse scenario would involve appreciation of the Brazilian real against the dollar by 25% (R$1.3059) or the devaluation of the Brazilian real against the dollar of 25% (R$2.1765 / US$1), while the remote adverse scenario would involve the Brazilian real appreciating against the dollar by 50% (R$0.8706 / US$1) or the devaluation of the Brazilian real against the dollar by 50% (R$2.6118 / US$1). In the probable scenario with appreciation of the Brazilian real, the Company would show a loss of R$10,528, if it had settled its contracts on December 31, 2009, while in the adverse scenario the Company would have had a loss of R$19,234. For the remote scenario, the loss would be R$27,940. In the probable scenario of the Brazilian real depreciating, the Company would have a loss of R$10,528, if it had settled its contracts on December 31, 2009, while in the adverse scenario, the Company would have a loss of R$1,822, and in the remote scenario there would be a gain of R$6,883. On December 31, 2009, the Company holds no leveraged derivatives and no limits for determining the results of the US dollar appreciating or depreciating against the Brazilian real. Interest rate risk The Company and subsidiaries’ results are susceptible to fluctuations due to the volatility effects of interest rates on liabilities and assets pegged to floating interest rates, especially CDI and TJLP. The Company’s exposure to fluctuating interest rates as of December 31, 2009, is shown below: |
| Consolidated | |
|---|---|
| Debentures – 6th issue | 582.397 |
| Finame | 217.438 |
| CCB-Banco Itaú S.A. | 172.704 |
| Liability exposure | 972.539 |
| (-) Financial investments denominated in reais | 876.611 |
| Net exposure | (95.928) |
Credit risk The financial instruments which subject the Company to credit risks are mainly represented by cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with a number of financial institutions and does not limit its exposure to one institution in particular, according to a formal policy. The Company also holds units in conservative-profile fixed-income investment funds. The funds’ assets comprise government bonds and first-line private securities with low risk ratings as per the guidelines set by the Company. Management of the centralized fund’s portfolio is provided by Itaú Unibanco Asset Management – Banco de Investimento S.A. Custody and control of the funds are under the responsibility of Banco Itaú, and risk management is performed by Risk Office, a third-party service provider. Management believes the risk of not receiving amounts due from its counterparties is insignificant. The credit risk is concentrated in subscriber accounts receivable and is limited by the large number of subscribers that comprise the client base. The Company’s maximum credit risk exposure is the book value of customer receivables, as described in Note 10. Debt acceleration risk The Company’s loan agreements, financing and debentures include the debt covenants normally applicable to these types of transactions, in relation to its complying with economic and financial indices, cash flow requirements and other. The Company has complied with these covenants and they do not restrict its ability to conduct its business in the normal course of operations. Liquidity risk Liquidity risk is the risk of a shortfall of funds used for payment of debts. The table below shows payments required for financial liabilities on December 31, 2009. The amounts presented below include principal and interest payments calculated using the dollar exchange rate at December 31, 2009 (R$1.7412 / US$1) for the debt denominated in US dollars (Guaranteed Notes and Banco Inbursa). The debentures and bank credit notes (Banco Itaú BBA), which are denominated in Brazilian reais and are subject to interest based on the interbank rate (CDI), were forecasted based on the yield curve for their respective payment dates, in accordance with the indices provided by BM&FBovespa S.A. – Bolsa de Valores, Mercadorias e Futuros (Brazilian Stock Exchange). The Finame loan was estimated based on the long-term interest rate (TJLP) of 6.50% per year for the entire period. |
| Year of Maturity | Finame | Perpetual Notes |
Guaranteed Notes 2020 |
Banco Inbursa |
CCB – Itaú BBA |
Debentures | TOTAL |
|---|---|---|---|---|---|---|---|
| 2011 | 75,851 | 27,610 | 52,227 | 32,247 | 23,069 | 73,093 | 284,097 |
| 2012 | 57,630 | 27,610 | 52,227 | 32,247 | 24,275 | 212,472 | 406,461 |
| 2013 | 29,280 | 27,610 | 52,227 | 32,247 | 24,690 | 194,030 | 360,084 |
| 2014 | 5,055 | 27,610 | 52,227 | 32,247 | 80,934 | 174,705 | 372,778 |
| 2015 | 2,018 | 27,610 | 52,227 | 32,247 | 72,703 | 154,967 | 341,772 |
| 2016 | 1,009 | 27,610 | 52,227 | 32,247 | 60,157 | - | 173,250 |
| 2017-2020 | - | 138,054 | 792,217 | 412,734 | - | - | 1,343,005 |
| Total | 170,843 | 303,714 | 1,105,579 | 606,216 | 285,828 | 809,267 | 3,281,447 |
The table shows only the estimated interest payments for the Perpetual Notes, with principal being excluded as there is no maturity date.
Interest payments for US dollar denominated debt (Guaranteed Notes and Perpetual Notes) include withholding taxes, in accordance with the current law.