As filed with the Securities and Exchange Commission on June 27, 2011 
 UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2010 Commission file number: 000-51490 CONTAX PARTICIPAÇÕES S.A. (Exact Name of Registrant as specified in its charter) Contax Holding Company

   The Federative Republic of Brazil(Translation of Registrant’s name into English)

   (Jurisdiction of incorporation or organization)
 ________________ Rua do Passeio 56, 16o andar (parte) 20021-290 Rio de Janeiro – RJ – Brazil (Address of principal executive offices)  Marco Norci Schroeder, Tel: +55 21 3131-0010, ri@contax.com.br, Rua do Passeio 56, 16o andar CEP: 20021-290, Rio de Janeiro – RJ – Brazil (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: None Securities registered or to be registered pursuant to Section 12(g) of the Act: Title of Each Class

   Name of Each Exchange on Which RegisteredPreferred Shares, without par value (“preferred shares”)

   BM&FBovespaCommon Shares, without par value (“common shares”)

   BM&FBovespa
 Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None ________________ The number of outstanding shares of each of the Issuer’s classes of capital, common or preferred stock, as of the close of the period covered by the annual report was: 36,681,000 preferred shares 23,089,600 common shares  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes£NoR 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.  Yes£NoR 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.  YesRNo£    1 700012274.17


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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 theExchange Act.  (Check one):  Large accelerated filer£Accelerated filerRNon-accelerated filer£ Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP£

   International Financial Reporting Standards as issued by the International Accounting Standards BoardR

   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.  Item 17£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). Yes£NoR   (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)  Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes£No£  2 700012274.17


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TABLE OF CONTENTS  PagePRESENTATION OF INFORMATION

   

   1FORWARD-LOOKING INFORMATION

   

   3PART I

   

   

   3Item 1.

   Identity of Directors, Senior Management and Advisers

   

   3Item 2.

   Offer Statistics and Expected Timetable

   

   3Item 3.

   Key Information

   

   4Item 4.

   Information on the Company

   

   21Item 4A.

   Unresolved Staff Comments

   

   42Item 5.

   Operating and Financial Review and Prospects

   

   43Item 6.

   Directors, Senior Management and Employees

   

   54Item 7.

   Major Shareholders and Related Party Transactions

   

   64Item 8.

   Financial Information

   

   68Item 9.

   The Offer and Listing

   

   71Item 10.

   Additional Information

   

   75Item 11.

   Quantitative and Qualitative Disclosures About Market Risk

   

   94Item 12.

   Description of Securities Other than Equity Securities

   

   95PART II

   

   

   96Item 13.

   Defaults, Dividend Arrearages and Delinquencies

   

   96Item 14.

   Material Modifications to the Rights of Security Holders and Use of Proceeds

   96Item 15.

   Controls and Procedures

   

   96Item 16A.

   Audit Committee Financial Expert

   

   97Item 16B.

   Code of Ethics

   

   97Item 16C.

   Principal Accountant Fees and Services

   

   98Item 16D.

   Exemptions from the Listing Standards for Audit Committees

   

   98Item 16E.

   Purchases of Equity Securities by the Issuer and Affiliated Purchasers

   98Item 16F.

   Change in Registrant’s Certifying Accountant

   

   99Item 16G.

   Corporate Governance

   

   100PART III

   

   

   100Item 17.

   Financial Statements

   

   100Item 18.

   Financial Statements

   

   100Item 19.

   Exhibits

   

   100 .100   i 700012274.17


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Table of Contents
 PRESENTATION OF INFORMATION Contax Participações S.A. is a corporation (sociedade por ações) incorporated under Brazilian corporate law.  We operate pursuant to our by-laws, other legislation and regulations in Brazil and, where applicable, local legislation.  Our principal executive office is located at Rua do Passeio, 56, 16o andar (parte), 20021-290 Rio de Janeiro, RJ, Brazil, and the telephone number at that office is +55 21 3131-0010. In this annual report on Form 20-F, except where the context otherwise requires, the “Company”, “we”, “us”, “our” and “Contax” refer to Contax Participações S.A., its direct subsidiaries, Contax S.A. and AbilityComunicaçãoIntegrada Ltda.(“Ability”), Contax S.A.’s branch in Argentina,Contax Sucursal Empresa Extranjera (“Contax Argentina”), and its indirect subsidiary,Todo Soluções em Tecnologia S.A. (“Todo”).In addition, following our acquisition of Stratton Spain S.L., Allus Spain S.L., Stratton Argentina S.A., Stratton Peru S.A. and Multienlace S.A. (collectively, the “Allus Group” or “Allus”) in May 2011, except where the context otherwise requires, such terms also include the Allus Group.  References to Contax Holding refer only to Contax Participações S.A. and do not include Contax S.A., Ability, Todo, Contax Argentina or the Allus Group.  References to Contax S.A. refer only to Contax S.A. and do not include Contax Holding.  References to the Company’s businesses and operations are references to the businesses and operations of its direct and indirect subsidiaries or branches Contax S.A., Ability,Todo, Contax Argentina and the Allus Group. Our previous majority shareholder, Telemar Participações S.A., is referred to as Telemar Participações.  On April 25, 2008, negotiations relating to the restructuring of the ownership structure of Telemar Participações were concluded.  One of the results was the approval of the partial spin-off of Telemar Participações, with the transfer of its shareholders’ equity related to the shares issued by Contax to a new company created especially for this purpose denominated CTX Participações S.A., or CTX Participações. Our two main clients are Telemar Norte Leste S.A., or Tmar, and its subsidiary, TNL PCS S.A., both of which are indirectly under common control with us and are jointly referred to as Oi.  “Oi”is the commercial name used by the Telemar group for fixed-line terminals, long-distance services, mobile services, as well as broadband and corporate voice and data service operations.  The parent company of Tmar isTele Norte Leste Participações S.A., or TNL, which was our majority shareholder before our spin-off to the shareholders of TNL.  See “Item 4. Information on the Company — History and Organizational Structure.” References to “U.S. dollars”, “U.S.$”, “USD” or “$” are to the lawful currency of the United States, and references to “real”, “reais” or “R$” are to the lawful currency of Brazil.  Any discrepancies in tables between totals and sums of the amounts listed are due to rounding. This annual report is presented inreais.  On December 31, 2010, the commercial rate forreaiswas R$1.661to U.S.$1.00.  For the convenience of the reader, somerealamounts presented throughout this annual report have been translated into U.S.$ at that rate.  The U.S. dollar equivalent information is provided solely for the convenience of the reader and should not be construed as implying that the amounts inreaisrepresent, or could have been converted into, U.S. dollars at such rate or at any other rate. References in this annual report to “preferred shares” and “common shares” are to the preferred shares and common shares, respectively, of Contax Holding, which are collectively referred to as the “shares”.  References to “American Depositary Shares” or “ADSs” are to American Depositary Shares, each representing one-fifth of a preferred share.  The ADSs are evidenced by American Depositary Receipts, or ADRs. References to “Consolidated Financial Statements” are to the consolidated financial statements of Contax as of December 31, 2010 and 2009 and for the three years in the period ended December 31, 2010.   1 700012274.17


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Table of Contents
 Our consolidated financial statements included in this annual report have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and we file reports and other information with the SEC.  However, as a foreign private issuer, we are exempt from the proxy rules of Section 14 and the short-swing profit rules of Section 16 under the Exchange Act. Certain terms are defined the first time they are used in this annual report.   2 700012274.17


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Table of Contents
 FORWARD-LOOKING INFORMATION This annual report contains forward-looking statements.  Statements that are not statements of historical fact, including statements about our management’s beliefs and expectations, are forward-looking statements.  All forward-looking statements involve risks and uncertainties.  Many of the forward-looking statements contained in this annual report are identified by the use of forward-looking words such as “anticipate”, “forecast”, “believe”, “could”, “expect”, “should”, “plan”, “estimate”, “intend”, “predict”, “target” and “potential”, among others.  These statements appear in a number of places in this annual report and include statements regarding our intent, belief or current expectations with respect to, among other things: ·the growth in the Brazilian outsourcing contact center sector; and ·the performance of the Brazilian economy in general. Accordingly, our actual results of operations may be different from our current expectations, and the reader should not place undue reliance on these forward-looking statements.  Forward-looking statements speak only as of the date they are made.  Factors that might affect such forward-looking statements include, among other things: ·our future operating performance; ·our ability to integrate successfully recently acquired companies; ·the demand for our services; ·competitive factors in the sector in which we compete; ·changes in the regulatory framework for our clients in the telecommunications, utilities, services and financial sectors in Brazil; ·changes in labor law and tax requirements; ·economic, business and political conditions in Brazil and in the international markets, including governmental changes and restrictions on the ability to transfer capital across borders; and ·the impact of fluctuations in the price of our shares. PART I Item 1.         Identity of Directors, Senior Management and Advisers Not applicable. Item 2.         Offer Statistics and Expected Timetable Not applicable.   3 700012274.17


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Table of Contents
 Item 3.         Key Information Selected Financial Data The selected financial data for the years ended December 31, 2010, 2009, 2008 and 2007 which is presented in the tables below is derived from our consolidated financial statements prepared in accordance with IFRS. Prior to 2008, we prepared our consolidated  financial statements in accordance with U.S.GAAP. You should read this information together with such financial statements, including the notes thereto, and “Item 5. Operating and Financial Review and Prospects”.  Our complete consolidated financial statements as of December 31, 2010 and 2009 and for the years ended December 31, 2010, 2009 and 2008 are presented in Item 18 of this annual report, together with the audit reports of Deloitte Touche Tohmatsu Auditores Independentes and PricewaterhouseCoopers Auditores Independentes, our current and former (respectively) independent registered public accounting firms.  IFRS DATA

   Year ended December 31,2010

   2009

   2008

   2007(in thousands ofreais, except per share data)Statement of Operations DataRevenue (1)

   2,397,996

   2,161,016

   1,774,728

   1,365,815Cost of services

   (2,026,392)

   (1,760,164)

   (1,507,603)

   (1,174,106)Gross profit

   371,604

   400,855

   267,125

   191,709Operating expenses

   (196,565)

   (179,734)

   (138,448)

   (105,880)Profit before tax

   175,039

   205,721

   128,677

   85,829Net income and comprehensive income for the year

   108,498

   131,691

   82,826

   57,742Earnings per Share (inreais)Net income

   Common shares – Basic (2)

   1.82

   2.23

   1.39

   0.92Common shares – Diluted (2) (3)

   1.80

   2.19

   1.39

   0.88Preferred shares – Basic and Diluted (2)

   1.83

   2.23

   1.31

   0.85Weighted average common shares outstanding – Basic (2)

   22,756,504

   22,424,793

   22,569,675

   22,989,259Weighted average common shares outstanding – Diluted (2) (3)

   23,045,556

   22,762,305

   22,569,675

   24,021,293Weighted average preferred shares outstanding – Basic and Diluted (2)

   36,681,000

   36,681,000

   39,114,166

   42,817,744Balance Sheet DataProperty and equipment, net

   405,873

   352,473

   307,700

   274,559Cash and cash equivalents

   387,803

   357,853

   355,928

   240,310Total assets

   1,378,557

   1,071,673

   954,435

   737,600Current liabilities

   504,476

   453,882

   353,713

   265,270Long-term liabilities

   453,110

   214,285

   279,666

   175,325Shareholders’ equity

   420,971

   403,506

   321,056

   297,005Total liabilities and shareholders’ equity.

   1,378,557

   1,071,673

   954,435

   737,660Cash Flow DataOperating activities

   220,404

   278,767

   254,776

   203,176Financing activities

   69,657

   (74,910)

   46,192

   (51,344)Investing activities

   (260,111)

   (201,951)

   (185,350)

   (142,821)
 _________________________ (1)   Revenue is presented on a consolidated basis, net of sales taxes, returns, allowances and discounts. (2)   On October 17, 2007, we effected a reverse stock split at the ratio of one shave for every 20 shaves of the same type, thereby decreasing the number of common shares from 116,495,445 to 5,824,772 and the number of preferred shaves from 200,638,288 to 10,031,914.  On January 15, 2010, we effected a reverse stock split at a ratio of one share for 50 shares of the same type, thereby decreasing the number of common shares from 5,772,435 to 115,448 and the number of preferred shares from 9,170,250 to 183,405.  Simultaneously with the January 2010 reverse stock split, we effected a stock split at a ratio of 200 shares for one share of the same type, thereby increasing the number of common shares to 23,089,600 and the number of preferred shares to 36,681,000.  Information relating to the number of shares and earnings per share amounts has been adjusted retroactively to reflect the foregoing stock splits. (3)   The effects of stock options issued under the Company’s stock option plan were taken into consideration in the calculation of earnings per share for the year ended December 31, 2009 and 2010, as they would have a dilutive effect.   4 700012274.17


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Table of Contents Exchange Rates
 We will pay any cash dividends or interest on capital and make any other cash distributions with respect to our shares inreais.  Accordingly, exchange rate fluctuations will affect the U.S. dollar amounts received or to be received by the holders of ADSs on conversion by The Bank of New York, as depositary, or the Depositary, of dividends and distributions inreaison the preferred shares represented by the ADSs.  Fluctuations in the exchange rate between therealand the U.S. dollar will also affect the U.S. dollar equivalent of the price of the preferred shares on the Brazilian stock exchanges.  Foreign currencies may only be purchased through a Brazilian bank authorized to operate in these markets. Until March 4, 2005, there were two legal foreign exchange markets in Brazil, the commercial rate exchange market, or the Commercial Market, and the floating rate exchange market, or the Floating Market.  The Commercial Market was reserved primarily for foreign trade transactions and transactions that generally required prior approval from Brazilian monetary authorities, such as the purchase and sale of registered investments by foreign persons and related remittances of funds abroad (including the payment of principal of and interest on loans, notes, bonds and other debt instruments denominated in foreign currencies and duly registered with the Brazilian Central Bank (Banco Central do Brasil), or Central Bank).  The Floating Market rate generally applied to specific transactions for which approval by the Central Bank was not required.  Both the Commercial Market rate and the Floating Market rate were reported by the Central Bank on a daily basis. On March 4, 2005, the Central Bank issued Resolution no. 3,265 and introduced several changes in the Brazilian foreign exchange regulation, including: (i) the unification of the foreign exchange markets into a single exchange market; (ii) the easing of several rules for the acquisition of foreign currency by Brazilian residents; and (iii) the extension of the term for converting foreign currency derived from Brazilian exports.  On March 8, 2006, the Brazilian government issued Provisional Measure no. 315, enacted on August 24, 2006, or PM 315, which has been approved by Law no. 11,371, enacted on November 28, 2006.  Together with the underlying regulations issued by the National Monetary Council (Conselho MonetárioNacional), or CMN, Law no. 11,371 made the currency exchange rules more flexible, making it possible to maintain export revenues (from merchandise or services) abroad in the exporter’s account or in a Brazilian bank authorized to operate in the exchange market. On March 18, 2008, the Central Bank issued Circular no. 3,379, allowing Brazilian exporters of goods and services to maintain offshore the totality of their revenues obtained from exports.  Furthermore, PM 315, approved by Law no. 11,371, permits registration with the Central Bank, in local currency, of the foreign capital invested in legal entities located in Brazil which had not been previously registered and was not eligible for another form of registration by the Central Bank (so-called “contaminated capital”).   5 700012274.17


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Table of Contents
 The following table sets forth the commercial seling rates published by the Central Bank (expressed inreaisper U.S. dollar) for the periods indicated. Year ended December 31,

   Period-end

   Average for period(1)

   High

   Low2006

   2.138

   2.176

   2.371

   2.0592007

   1.771

   1.948

   2.156

   1.7322008

   2.316

   1.837

   2.515

   1.5612009

   1.746

   1.999

   2.448

   1.6992010

   1.661

   1.759

   1.881

   1.655Month

   

   

   High

   LowDecember 2010

   

   

   1.712

   1.674January 2011

   

   

   1.691

   1.651February 2011

   

   

   1.678

   1.661March 2011

   

   

   1.676

   1.629April 2011

   

   

   1.619

   1.565May 2011

   

   

   1.634

   1.575
 __________________________ (1)   Represents the average of the exchange rates on the last day of each month during the relevant period. Source: Central Bank On December 31, 2010, the commercial selling rate was R$1.661 to U.S.$1.00.  On May 31, 2011, the commercial selling rate was R$1.580 to U.S.$1.00. Risk Factors The following factors should be carefully considered in addition to the other information presented in this annual report. Risks Relating to Our Business A large portion of our revenues originates from a limited number of clients,and the loss of one or more of these clients could significantly impact our results of operations and financial condition. We strategically focus our marketing efforts on developing long-term relationships with large companies in targeted sectors.  As a result, we rely on a limited number of significant clients for a large percentage of our revenues.  Our contracts with our two largest clients in 2010, Oi and Banco Itaú Unibanco S.A., accounted for 48.9% and 14.2%, respectively, of our revenues for the year ended December 31, 2010.  The current terms of our agreements with Oi (indirectly under common control with us) end in November 2014 and November 2016, each with an automatic renewal for a further 5 to 6-year period from such end dates.  Our agreement with Itaú, our second largest client in 2010, ends in December 2012. We have observed in recent years a trend towards corporate consolidation and change of control of companies in our targeted sectors, such as financial services, telecommunications, utilities and internet.  Such events may cause the termination of existing contracts and the loss of the revenues associated with such contracts.  The loss of any key client or the failure to retain a significant amount of business with our key clients would have a negative impact on our results of operations and financial condition. Changes to our service agreements with Oi could significantly impact our results of operations and financial condition. On December 10, 2010, we and Oi entered into a memorandum of understanding which substantially modified the pricing model by which our customer services product is charged to Oi. Chargesare now based on Oi’s total customer base at any given time, rather than on the frequency and length of calls made by such customers. Increases in the frequency and length of calls made by Oi’s customers may increase our operating costs and, therefore, adversely affect our results of operations. Frequency and length of calls may increase due to facts and circumstances beyond our control, such as the disruption of services rendered by Oi. For more information, see “Item 7.  Major Shareholders and Related Party Transactions — Related Party Transactions — Oi/Contax Contracts.”   6 700012274.17


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Table of Contents If the trend towards outsourcing of contact center services were reversed, the growth rate of our business could be reduced.
 The outsourced contact center industry has expanded considerably in the past several years as a result of a trend towards outsourcing of contact center services.  One of the premises upon which the growth of our business and operations is based is that this outsourcing trend will continue.  However, external factors, such as increases in taxes on revenues that could significantly impact the cost of services rendered by contact center companies, could cause our current and prospective clients to maintain or return to the use of their in-house functions and thus reduce the trend towards outsourcing of contact center services.  As the Brazilian government has historically increased taxes on revenues or on income, we may see ourselves forced to adjust our pricing in order to maintain our profit margins, which could unfavorably impact the decision of our clients to retain us. Additionally, our clients may be subject to restrictions on their ability to outsource contact center services to the extent labor courts hold that such services are part of their core business. Although recently the TST (Brazilian Federal Superior Labor Court) ruled that a wireless telecommunications operator was able to outsource call center services, holding that such services are not part of its “core business”, in a similar case, the TST (Brazilian Federal Superior Labor Court) ruled against the ability of CELG (Centrais Elétricas de Goiás), a state electricity provider, to outsource certain other services that were considered to be its core business.  Such decisions might have an impact on the way lower courts understand what type of services are considered core services and therefore may not be outsourced under Brazilian labor laws. If Brazilian court rulings narrow the scope of the services we are allowed to render, we could lose a part of our revenues as our current and prospective clients become restricted from outsourcing certain services of their contact center operations. Moreover, if the government adopts laws that restrict or dictate costly specifications regarding contact center operations and procedures, it could affect current and future clients’ decisions to outsource certain activities, since such laws could unfavorably impact our profit margins and cause us to adjust the pricing of our contracts. Increases in the use of automated customer services could reduce the demand for our services. A major part of our services is provided by our contact center attendants.  Services provided by live attendants face increasing competition from automated channels which allow our clients’ customers to directly access self-service assistance systems (e.g., internet sites and automated phone services, such as voice recognition and Interactive Voice Response, a device that automates retrieval and processing of information by phone using touch tone signaling or voice recognition so as to access information residing on a server and reply with a pre-recorded response, such as in “bank-by-phone” transactions).  These automated channels may reduce the need for personal contact with contact center attendants.  As automated services become more technically viable and more widely used, the demand for our services could be reduced. Our ability to recruit, motivate and retain qualified management and operators could affect the quality of our services, which could impact our ability to attract new clients and retain existing ones. Since our business is labor intensive, our ability to attract and retain personnel is key to our continued success.  We place significant importance on our ability to recruit, train and retain qualified personnel.  We employed 86,357 employees as of December 31, 2010.  On average, in 2010, we experienced a monthly turnover of approximately 5.7% of our personnel, requiring us to continuously recruit and train replacement personnel as a result of a changing and expanding workforce.  In addition,demand for qualified technical professionals familiar with certain technologies may exceed supply, as new and additional skills are required to keep pace with evolving technology.  In the event that we are unable to recruit, motivate and retain qualified personnel, the quality of our services could be affected, which could reduce our profit margins and impact our ability to attract new clients and retain existing ones.  Additionally, we may experience an increase in personnel costs as a result of (i) a decrease in the productivity of our employees resulting from the loss of qualified, experienced personnel and (ii) an increase in recruiting and training costs related to higher employee turnover and absenteeism.   7 700012274.17


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Table of Contents Our inability to pass through cost increases could seriously harm our profit margins.
 In Brazil, it is common for agreements to be renegotiated annually so that their prices are readjusted to account for inflationary variations in costs.  Labor collective bargaining agreements in the contact center industry are also renegotiated on an annual basis to adjust for inflationary pressures, which results in an increase in our personnel costs.  Hence, to protect against increases in costs of, among other things, telecommunications, energy, facilities leases and especially personnel, most of our contact center services contracts also have annual rate adjustment clauses that provide for price increases in an effort to cover such cost escalations.  Nevertheless, we may decide not to exercise the right to adjust our prices fully in view of competitive conditions or other client relationship issues.  In this case, we will not be able to pass through all of our cost increases.  In the past, for example, we have had to adjust some of our client prices at rates below their respective inflationary adjustment indexes.  If any of our costs increase and we are not able to negotiate a commensurate rate adjustment with our clients, our profit margins would be adversely affected. Our operating results may be harmed if we are unable to maximize our contact center capacity utilization. Our profitability depends largely on how effectively we utilize our contact center capacity.  In order to create the additional capacity necessary to accommodate new or expanded outsourcing contracts, as well as to face significantly higher utilization during peak periods, we must consider opening new facilities or expanding current ones.  The opening or expansion of a contact center may result, at least in the short term, in idle capacity.  If we lose one or more significant clients, if the volume of calls from our clients’ customers declines or if a significant contract is not implemented in the anticipated time frame, our capacity utilization will be affected. In addition, our profitability is significantly influenced by our ability to forecast accurately incoming calls.  An excess of operators, based on an overestimated forecast, may reduce our profitability due to unused capacity.  In contrast, if there are more incoming calls than forecast, we may not be able to handle the call volume, and we may lose revenues or fail to meet performance requirements under our contracts.  The failure to meet such requirements could subject us to penalties and indemnities under certain clauses of our contracts. Despite our ongoing efforts to maximize capacity utilization, we are subject to periods of idle capacity.  This may occur mainly in connection with the commencement of new operations or the termination of an existing contract.  There can be no assurance that we will be able to achieve or maintain optimal utilization of our contact center capacity. If our clients are not successful, the amount of business they outsource may be diminished and could result in lower revenues for us. Our revenues are dependent on the success of our clients.  If our clients are not successful, the amount of business they outsource may be reduced.  Furthermore, due to the inbound nature of most of our services (e.g., customer service), the amount of revenue generated from any particular service contract is dependent upon consumers’ interest in, and use of, our clients’ products and services.  If our clients are not successful or their customers reduce their use of our contact center services, our revenues and the expansion of our business would be adversely affected.   8 700012274.17


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Table of Contents
 General economic and market conditions may adversely affect our financial condition, cash flow and results of operations. Our results of operations are affected directly by the level of business activity of our clients, which in turn are affected by the level of economic activity in the industries and markets that they serve.  The recent worldwide economic slowdown may cause reductions in technology and discretionary spending by our clients, which may result in reductions in the growth of new business activity as well as reductions in existing business activity.  If our clients enter bankruptcy or liquidate their operations, our revenues could be adversely affected.  In addition, the current uncertainty concerning global financial markets may have a material adverse effect on us, including our ability and the ability of our clients to raise the necessary capital to fund business operations. The failure to keep our technology up-to-date may prevent us from remaining competitive. Our business is dependent on our servers, desktops, telecommunications and network equipment, software applications and IT processes and procedures.  The failure to maintain our technological capabilities or to respond effectively to technological changes could adversely affect our competitiveness.  Our continued growth and future profitability depends, among other factors, on the introduction of new services that effectively leverage and respond to technological developments.  There can be no assurance that: (i) our IT and telecommunications systems will be adequate to meet our clients’ future needs; (ii) we will be able to incorporate new technology to enhance and develop our existing services; and (iii) technologies or services developed by our competitors will not render our services uncompetitive or obsolete. Interruption of our contact center services due to unforeseen events could have a material adverse effect on our financial condition and results of operations. Our ability to provide contact center services is dependent upon our ability to protect our facilities and operations against damage that may be caused by fire, natural disasters, power and telecommunications failures, computer viruses, labor strikes, acts of sabotage or terror and other unforeseen events.  We currently have backup systems for our most critical power and data storage and business interruption insurance to offset, in part, certain losses we may incur if our facilities or operations are adversely affected by events outside our control.  Despite the implementation of these systems and contingency plans, as well as network security measures, we may still experience interruption at one or more of our facilities, and we may be unable to provide the services we are contractually obligated to deliver. As a result of any such interruption:  (i) our revenues could be reduced as a result of reduced activity, as most of our contractual compensation is calculated based on speaking time or number of available workstations; (ii) we may be required to pay non-compensatory contractual penalties, since we may be unable to meet certain agreed-upon quality targets (service level agreements) as a result of such interruption; (iii) we may be required to pay indemnities to our clients for lost profits and damages, if we breach our obligations or are unable to deliver our services; and (iv) if we continue to fail to meet our obligations, our clients may be entitled to terminate their contracts with us.  Depending on the amount of penalties and indemnifications we may have to pay as a result of the interruption of our services, our financial condition and results of operations could be adversely affected. Breaches of our contact center service contracts could expose us to significant monetary penalties. We are exposed to different types of contractual penalties as a result of material breaches of our contractual service obligations.  A fair number of our contracts contain provisions setting penalties for breaches at different degrees, determined based on formulas that take into consideration:  (i) the nature and extent of the breach; (ii) the amount of revenues raised or due under the relevant contract in a given year; or (iii) the point in time during the life of the contract in which the breach occurs.  We also have entered into contracts that require us to indemnify our clients for their losses resulting from breach of our obligations under such agreements.  As a general matter, we are unable to quantify our potential exposure under theseprovisions, as the penalty amounts are based on future variables relating to the nature of the breach, the amount of revenues actually earned or the amount of time during which the contract has been outstanding. Our exposure to discretionary early termination by Oi, our largest client in 2010, in connection with breaches of our contact center service agreement is equivalent to the revenue we obtain pursuant to such agreement during the three months prior to the date Oi sends us a notice of termination of the agreement.  Our exposure to penalties related to damages caused by the termination of our agreement with Oi as a result of our contractual breach shall be limited to 5.0% of our annual revenue pursuant to such agreement.  Based upon the amount of revenue generated in 2010 pursuant to such agreement, the early termination penalty would have been approximately R$279.6 million (U.S.$168.3 million), while our exposure to penalties related to damages for the year could have been up to approximately R$55.9 million (U.S.$33.7 million).  9 700012274.17


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 As a result, our exposure for breach under these contracts, though currently indeterminable, may have a significant negative impact on our results of operations. We may be unable to achieve the same performance levels we have been experiencing with our performance-based compensation contracts. We derived approximately 30% of our net revenues in 2010 from operations with performance-based compensation, consisting mostly of telemarketing and debt collection services.  These services depend not only on our success in selling a product, locating a debtor or negotiating a debt settlement, but also on other factors that are beyond our control.  For telemarketing activities, for example, our compensation is measured according to the amount of our clients’ products that we are able to sell in a given period of time or on a sales target which we are required to meet.  Consequently, our performance-based compensation for telemarketing can be affected by, among other things, the attractiveness of the products and services we will be selling for our clients.  In addition, prevailing macroeconomic conditions in Brazil, such as GDP growth, unemployment and availability of disposable income, also affect our performance-based compensation more acutely than they affect enterprises that rely solely on fixed-based compensation, since such macroeconomic conditions directly affect consumer spending and default rates.  Consequently, there can be no assurance that we will be able to maintain in the future the same level of our past performance or that we will not incur losses under our performance-based compensation contracts. We may be responsible for labor liabilities, which could have an adverse effect on our profitability. We were involved in 8,796 labor claims as of December 31, 2010.  Although the total amount of all labor claims filed against us was approximately R$587,614 thousand (U.S.$353,771 thousand) as of December 31, 2010, as of that date we had only recorded provisions of approximately R$57,500 thousand (U.S.$34,618 thousand), based upon our historical losses in similar lawsuits.  We are also subject to potential administrative proceedings brought by the Brazilian Labor Department. If all of the labor claims filed against us or a greater portion of such claims than we have provisioned for are resolved against us, our profitability would be adversely affected.  There can be no assurance that additional labor claims and proceedings will not be brought against us in the future, or if they are, that an adverse ruling regarding such claims and proceedings would not have a negative impact on the cost of services rendered by us, or result in the imposition of penalties or other negative consequences. Our business is highly competitive, and our failure to effectively compete could result in the loss of clients or decreased profitability. We face significant competition and believe that this competition will intensify.  There are numerous providers of our services, including other contact center service companies, niche players, consulting companies and many small companies that offer low-end services (primarily outbound services).  Aside from those competitors, our clients and potential clients may also decide to utilize in-house personnel to perform contact center services they currently outsource, or maintain their in-house customer service andproduct support activities.  We also face competition from automated customer services, through the use of internet, interactive voice response, voice recognition and other technologies.   10 700012274.17


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 Our competitors’ services and pricing practices, as well as the timing and circumstances of the entry of additional competitors into our market, may harm our business.  The trend towards international expansion by foreign competitors and continuous technological changes may lead new competitors to enter our market and may increase pricing pressures.  Our failure to compete successfully could result in loss of clients and specific service contracts or could result in decreased profitability. CTX Participações holds the majority of our voting shares, and there may be circumstances in which its interests differ from or conflict with the interests of our other shareholders. We are controlled by CTX Participações, which spun-off from Telemar Participações in April 2008 and as of May 31, 2011, had voting rights over 69.3% of our voting shares.  As our controlling shareholder, CTX Participações is entitled to appoint the majority of the members of our board of directors and has the power to, among other things, modify our business plan, determine the date of dividend payments, approve corporate restructurings and sell our material assets.  We cannot assure that our controlling shareholder will not take actions that might differ from or conflict with the interests of our other shareholders. We may be liable for fraudulent activities or misappropriation of our clients’ information by our employees or third parties. Our contact center business puts us in possession of sensitive client information.  Despite our internal controls and our efforts to protect our clients’ information, we may be held liable for fraudulent activities by our employees or by third parties.  For example, unauthorized persons may be able to breach our physical or network security systems.  Meanwhile, authorized employees may misuse their authorization rights or the information to which they have access.  Our failure to prevent these occurrences could:  (i) damage our reputation with our clients and the market; (ii) allow our clients to terminate their contracts with us; (iii) expose us to potential liability; and (iv) subject us to the previously discussed contractual penalties and indemnities, all of which may substantially harm our business and results of operations. We may not be able to integrate successfully, or may experience difficulties in integrating, new or future acquisitions and therefore may fail to achieve the anticipated cost benefits and operational synergies that we had anticipated. We recently acquired Ability and the Allus Group, and our potential business combination with Mobitel S.A. (“Dedic”), including its subsidiary GPTI Tecnologia da Informação S.A.(“GPTI”), is currently subject to approval by our shareholders and Dedic’s shareholders, respectively.  In the future, we may acquire other businesses and seek to integrate them into our operations. We cannot assure you that any acquisition or business combination that we complete will result in long-term benefits to the Company. Risks and challenges include the following: ·difficulties in combining previously separate businesses into a single enterprise and difficulties related to assimilating the products or services of an acquired business; ·substantial diversion of management’s attention from day-to-day business when evaluating and negotiating such transactions and then integrating an acquired business; ·difficulties or delays in implementing key information systems, operating procedures and financial controls due to the incompatibility of existing systems or otherwise; ·additional restrictions, conditions or limitations, if any, imposed by governmental authorities;   11 700012274.17


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 ·failure to achieve anticipated benefits such as cost savings and revenue enhancements; ·discovery of liabilities assumed from the acquired business or of assets acquired that are not realizable; and ·discovery, after completion of the acquisition, of contingencies related to taxes, labor, environmental regulation or other matters.  The Brazilian antitrust authorities could impose costly or restrictive conditions on the approval of our business combination with Dedic, which could adversely affect our business and results of operations. Our business combination has been submitted to CADE, the Brazilian antitrust authority, in accordance with Brazilian law, and the transaction is subject to the final approval of CADE. However, Brazilian law permits us to consummate this transaction prior to receiving this final approval, unless CADE issues a writ of prevention blocking a transaction or requires the parties to enter into an agreement permitting the effects of the transaction to be reversed which, by its terms, delays the consummation of the transaction. The antitrust authorities will determine whether this transaction negatively impacts competitive conditions in the markets in which we compete or adversely affect consumers in these markets. If the Brazilian antitrust authorities do not approve our business combination or if such authorities take any action to impose conditions or performance commitments on us as part of the approval process for our business combination, it could materially and adversely affect our business and results of operations and prevent our company from achieving the anticipated benefits of our business combination. The Argentine antitrust authorities could impose costly or restrictive conditions on the approval of acquisition of Stratton Argentina S.A., the Argentine member of the Allus Group, which could adversely affect our business and results of operations.  Our acquisition of the Allus Group has been submitted to the Argentine antitrust authority, in accordance with Argentine law, and the transaction is subject to the final approval of such antitrust authority. However, Argentine law permits us to consummate this transaction prior to receiving this final approval. The Argentine antitrust authorities will determine whether this transaction negatively impacts competitive conditions in the markets in which we compete or adversely affects consumers in these markets. If the Argentine antitrust authorities do not approve our business combination or if such authorities take any action to impose conditions or performance commitments on us as part of the approval process for our business combination, it could adversely affect our business and results of operations and prevent our company from achieving the anticipated benefits of such acquisition.  We are subject to risks from potential fluctuations in exchange rates between therealand the currencies of the other countries in which we operate. With the acquisition of the Allus Group and the establishment of Contax Argentina, we have acquired significant operations in Argentina, Peru and Colombia. Additionally, in line with our growth strategy, we may continue to invest and acquire companies located in other Latin American countries.  As a result, we are and may become increasingly subject to international currency risks from the potential fluctuations in exchange rates between therealand the currencies of those other countries. A significant depreciation in the value of the currency of one or more countries where we have significant operations may materially affect our results of operations.   12 700012274.17


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 Our international activities are subject to special risks. As stated above, with the acquisition of the Allus Group and the establishment of Contax Argentina, we have acquired significant operations in Argentina, Peru and Colombia. Additionally, in line with our growth strategy, we may continue to invest and acquire companies located in other Latin American countries. As a result, our results of operations will be subject to economic conditions in those markets. In addition, our international operations are subject to the risks of doing business abroad, such as revisions in tax treaties or other laws and regulations, including those governing the taxation of the company’s international revenues, restrictions on the transfer of funds, and, in certain countries, uncertainty over property rights and political instability. We cannot predict the likelihood that any of these developments may occur. Moreover, our operations may be subject to risks that may limit our ability to effectively establish, staff and manage our operations outside Brazil, including differing employment practices and labor issues, local business and cultural factors that differ from our usual standards and practices, regulatory requirements and prohibitions that differ between jurisdictions. We may face risks associated with investing in unfamiliar markets. We have acquired and may continue to acquire companies in different segments and international markets that are new to us. When we acquire such companies, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and procedures. Risks Relating to Brazil The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy.  This involvement, as well as Brazilian political and economic conditions, could adversely impact our business, financial condition, results of operations and the market price of our shares and ADSs. The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes drastic changes in policy and regulations.  The Brazilian government’s actions to control inflation and implement macroeconomic 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 shares and ADSs may be adversely affected by changes in policies or regulations, or by other factors such as: ·devaluations and other currency fluctuations; ·inflation rates; ·interest rates; ·liquidity of domestic capital and lending markets; ·energy shortages; ·exchange controls and restrictions on remittances abroad (such as those that were briefly imposed in 1989 and early 1990); ·monetary policy; ·tax policy; and   13 700012274.17


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 ·other political, diplomatic, social and economic developments in or affecting Brazil. In addition, the President of Brazil has considerable power to determine governmental policies and actions that relate to the Brazilian economy and that could consequently affect our business, financial condition and results of operations. The term of Brazil’s former President, Luiz Inácio Lula da Silva, expired in January 2011, and his elected successor, Dilma Rousseff, assumed office on January 1, 2011.  We cannot predict what policies may be implemented by President Rousseff and by the Brazilian federal or state governments and whether these policies will negatively affect our Company or our business and financial performance. Uncertainty over whether possible changes in policies or rules affecting these or other factors may contribute to economic uncertainties in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian issuers.  These uncertainties could adversely affect our activities.  Historically, members of the executive and legislative branches of the Brazilian government, as well as other related persons, have been investigated on the grounds of alleged illicit or unethical behavior.  It is not possible to predict the outcome of such investigations and whether the outcome will adversely affect the Brazilian economy.  As a consequence of their impact on the Brazilian economy, these uncertainties and allegations of unethical or illegal conduct may have a material adverse effect on us and may also adversely affect the market price of our common shares and ADSs. Inflation and certain government measures to curb inflation may have adverse effects on the Brazilian economy, the Brazilian securities market, our business and operations and the market price of the shares. Brazil has historically experienced extremely high rates of inflation.  Inflation and some of the Brazilian government’s measures taken in an attempt to curb inflation have in the past had significant negative effects on the Brazilian economy.  While inflation has been kept largely under control since the introduction of therealin 1994, inflationary pressures persist.  Actions taken in an effort to curb inflation, coupled with speculation about possible future governmental actions, have contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities market.  According to theÍndice Geral de Preços Mercado, or IGP-M, a general price inflation index published byFundação Getúlio Vargas, or FGV, the Brazilian general price inflation rates were 9.8%, (1.7)% and 11.3% in 2008, 2009 and 2010, respectively.  According to theÍndice Geral de Preços - Disponibilidade Interna, or IGP-DI, another general price inflation index published by FGV, the Brazilian general price inflation rates were 9.1%, (1.4)% and 11.3% in 2008, 2009 and 2010, respectively.  According to theÍndice Nacional de Preços ao ConsumidorAmpliado, or IPCA, published by theInstituto Brasileiro de Geografia eEstatística, or IBGE, the Brazilian consumer price inflation rates were 5.9%, 4.3% and 5.9% in 2008, 2009 and 2010, respectively.  In the first quarter of 2011, inflation measured by the IGP-M, IGP-DI and IPCA, was approximately 2.4%, 2.6% and 2.4%, respectively, or 10.1%, 10.7% and 10.1% on an annualized basis, respectively. Brazil may experience high levels of inflation in the future.  Inflationary pressures may lead to further government intervention in the economy, including the introduction of government policies that could adversely affect the economy overall and our business in particular, such as increasing interest rates. Fluctuations in interest rates could increase the cost of servicing our debt and negatively affect our overall financial performance. Our financial expenses are affected by changes in the interest rates that apply to our floating rate debt. At December 31, 2010, we had, among other debt obligations, R$308.1 million of loans and financing that were subject to the TJLP (the Brazilian long-term interest rate). The TJLP includes an inflation factor and is determined quarterly by the National Monetary Council. In particular, the TJLP has fluctuated significantly in the past in response to the expansion or contraction of the Brazilian economy, inflation, Brazilian government policies and other factors. A significant increase in the TJLP could adversely affect our financial expenses and negatively affect our overall financial performance.   14 700012274.17


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 Changes in Brazilian labor law may negatively affect us. Brazilian companies are subject not only to the Federal Constitution and ordinary legislation concerning labor relations (mainly theConsolidação dasLeis do Trabalho, or CLT), but also to collective bargaining agreements between employers’ associations and employee unions or between individual employers and employee unions, in addition to administrative orders, technical notes and instructions issued by the Brazilian Labor Department.  In addition, the tendency of Brazilian labor laws and regulators to protect employees from dismissal has created barriers to changing already burdensome labor regulations.  Furthermore, due to the volume of cases and insufficient personnel, the labor courts are typically slow in deciding the labor claims and disputes that are submitted to them for resolution.  For a discussion on a recent court ruling that restricts outsourcing of certain contact center activities, see “— Risks Relating to Our Business — If the trend toward outsourcing of contact center services were reversed, the growth rate of our business could be reduced”. The Brazilian Labor Department continuously issues and revises current labor regulations regarding specific practices in different business sectors.  In April 2007, the Brazilian Labor Department published a technical note setting forth new guidelines concerning labor practices and regulations regarding contact center activities.  These rules include, among other things, employees’ directives regarding work environment, working hours and breaks, ergonomic equipment design standards and guidance on labor related diseases (Exhibit II to Regulation no. 17 (Anexo II da Norma Regulamentadora no 17)), approved by Rule no. 9, issued by the Brazilian Labor Department as of March 30, 2007 (Portaria no 09).  Labor inspectors have been paying greater attention to these factors and, as a result, have been requiring strict compliance by companies with workplace health and safety rules.  Enforcement of these new regulations may lead to increased costs, which we may not be able to pass through to our clients or, in some cases, administrative fines, which would adversely affect our results of operations and financial condition.  In addition, the Brazilian Legislative Branch has submitted several bills concerning the reduction of working hours, the restriction of outsourcing and increasing breaks of telemarketing operators. Changes in the Brazilian telemarketing regulatory framework may directly affect us. On July 31, 2008, the Brazilian Federal Government enacted Decree no. 6,523/2008 (Decreto no 6.523/2008), which became effective on December 1, 2008 and imposes upon service providers regulated by Federal Agencies (i.e., telephone, electric energy, cable television, credit card, and airline companies) obligations regarding the “Call Centers Law” (Lei dos Call Centers), which mandates compliance with certain service standards for Customer Assistance Services (SAC - Serviço de Atendimento ao Consumidor).  See “Item 4: Industry Overview — Regulatory Developments regarding Telemarketing Services”.These laws are applied to a large variety of our clients that have sought services complying with such new rules.  While this set of rules may increase demand for our services, it will also increase the operating costs of our clients.  Additionally, such law provides for substantial non-compliance penalties (ranging from R$200 thousand to R$3,000 thousand per event) that could be assessed upon our clients.  Although we are bound only to the service level agreements contained in our service agreements, our clients might try to transfer any cost associated with such penalties to us. Regulatory proposals, such as the creation of a “do not call list”, could restrict our contact center services. A series of bills have been presented to Brazil’s House of Representative and the Senate and to local legislative branches of certain Brazilian states and municipalities proposing to regulate several aspects of the outbound telemarketing services we provide, such as: the creation of a national “do not call list” and the imposition of fines in connection with each call made in breach of such restriction.  If these bills are passed, our ability to make outbound calls may be significantly restricted, which would adversely impact our revenues and growth opportunities.  “See Item 4: Information on the Company — Industry Overview — Regulatory Developments regarding Telemarketing Services”. In addition, a number of Brazilian states, such as the states of Amazonas and Rio de Janeiro, are currently debating certain proposed statutes that, if passed, will prevent us from contacting customers thatare registered in public databases commonly refered to as the Register for Telemarketing Phone Call Blocking (Cadastro para Bloqueio do Recebimento de Ligações de Telemarketing).  Other Brazilian states, such as Alagoas, Pernambuco, Maranhão, Paraíba, Paraná, Rio Grande do Sul, Espírito Santo, São Paulo and Mato Grosso do Sul, have already passed similar statutes, which restrict our ability to make outbound calls, thereby limiting our revenue and growth opportunities.   15 700012274.17


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Table of Contents Changes in tax laws may increase our tax burden and, as a result, adversely affect our profitability.
 The Brazilian government regularly implements changes to tax regimes that may increase our and our clients’ tax burdens.  These changes include modifications in the rate of assessments and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes.  Increases in our overall tax burden could negatively affect our overall financial performance and profitability. Exchange rate instability may adversely affect our financial condition. 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 (such as daily adjustments), 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.  Based on thereal/U.S. dollar exchange rate, therealdepreciated against the U.S. dollar by 30.8% in 2008.  In 2009, therealappreciated against the U.S. dollar by 24.6% based on thereal/U.S. dollar commercial rate of R$1.746 to U.S.$1.00, as of the close of business on December 31, 2009.  In 2010, therealappreciated against the U.S. dollar by 4.9% based on thereal/U.S. dollar commercial rate of R$1.661 to U.S.$1.00, as at the close of business on December 31, 2010.  On May 31, 2011, the commercial rate was R$1.580 to U.S.$1.00.  Depreciation of therealrelative 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, including tighter monetary policy.  Depreciation of therealrelative to the U.S. dollar would also reduce the U.S. dollar value of distributions and dividends on the ADSs and the U.S. dollar equivalent of the market price of our shares and, as a result, the ADSs.  On the other hand, appreciation of therealagainst the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments, as well as to a dampening of export-driven growth. We may be unable to convertreaisinto U.S. dollars to make dividend distributions to our ADS holders. In the past, Brazil’s economy has experienced balance of payment deficits and shortages in foreign exchange reserves, and the government has responded by restricting the ability of persons or entities, Brazilian or foreign, to convertreaisinto any foreign currency.  The government may institute a restrictive exchange control policy in the future.  Any restrictive exchange control policy could prevent or restrict our access to U.S. dollars to meet our dividend payment obligations. Economic and market conditions in other emerging market countries may adversely affect the Brazilian economy and, therefore, the market value of our common shares, preferred shares and ADSs and our ability to access the capital markets. 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 economies.  Although economic conditions are different in each country, the reaction of investors to developments in one emerging market 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, as well as limited access to international capital markets, which may adversely affect our ability to borrow funds at an acceptable interest rate or to raise equity capital when and if there should be a need for us to do so.  Such developments have included thedevaluation of the Mexican peso in December 1994, the Asian economic crisis of 1997, the Russian currency crisis of 1998 and the 2001 economic and political crisis in Argentina.  The continuing political crisis in Venezuela and the socialist-oriented government of Bolivia may also influence investors’ perceptions of risk in Latin America.  The volatility in market prices for Brazilian securities has varied from time to time as a result of such crises.   16 700012274.17


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Table of Contents Risks Relating to the ADSs and the Preferred Shares
 You may not be able to sell the ADSs or preferred shares at the price or time you desire because an active or liquid market for the ADSs or the preferred shares will not likely develop. There has not been a liquid public market for either our ADSs or our preferred shares.  Our preferred shares are listed on the BM&FBovespa (the stock exchange of the State of São Paulo, Brazil, the main Brazilian stock exchange), but the ADSs are not listed, and we do not intend to list the ADSs in any organized market or stock exchange.  As a result, active trading in the ADSs will not likely develop.  Similarly, active trading in the preferred shares in the United States will not likely develop.  Active, liquid trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors. Moreover, since 2005, when our ADS program was first implemented, we have experienced a substantial reduction in the number of our outstanding ADSs.  As of December 31, 2005, ADSs represented 13.8% of our total capital stock, whereas the percentage of our capital stock represented by ADSs has decreased to 1.5%, as of May 31, 2011.  We can terminate the Deposit Agreement without the consent of holders of ADSs. We can cause the Depositary to terminate the Deposit Agreement at any time by giving the ADS holders at least 30 days’ prior notice.  After termination, the Depositary’s only responsibility will be (i) to deliver deposited securities to ADS holders who surrender their ADSs, and (ii) to hold or sell distributions received on deposited securities.  As soon as practicable after the expiration of one year from the termination date, the Depositary will sell the deposited securities which remain and hold the net proceeds of such sales, without liability for interest, in trust for the ADS holders who have not yet surrendered their ADSs.  After making those sales, the Depositary shall have no obligations except to account for such proceeds and other cash.  The Depositary will not be required to invest such proceeds or pay interest thereon. The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the preferred shares underlying the ADSs at the price and time you desire. Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature.  The Brazilian securities market is substantially smaller, less liquid and more concentrated than major securities markets in the United States.  As a result, the price for the preferred shares may be subject to substantial volatility, and it may be difficult to find a buyer or a seller at certain times.  Accordingly, although you are entitled to withdraw the preferred shares underlying the ADSs from the deposit facility at any time, your ability to sell the preferred shares underlying the ADSs at a price and time of your choosing may be substantially limited.  There is also significantly greater concentration in the Brazilian securities market than in the United States.  As of December 31, 2010, the aggregate market capitalization of the 10 largest companies listed on the BM&FBovespa was approximately U.S.$853 billion, representing almost 55.3% of the aggregate market capitalization of that market.  The top 10 stocks in terms of trading volume accounted for approximately 44.8% and 43.4% of all shares traded on the BM&FBovespa in 2009 and 2010, respectively.   17 700012274.17


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 Holders of preferred shares and ADSs have limited voting rights. Of our two classes of capital shares outstanding, only our common shares have full voting rights.  Except in certain limited circumstances, our preferred shares will be entitled to full voting rights only in the event that we fail to pay the minimum dividends for a period of three consecutive years.  As a result of these limited voting rights and the fact that CTX Participações had, as of May 31, 2011, voting rights over 69.3% of our voting shares, holders of our preferred shares and, therefore, of our ADSs, generally will not be able to influence any corporate decision requiring a shareholder vote, including the declaration of dividends. Holders of ADSs are not entitled to attend shareholders’ meetings and may only vote through the Depositary. Under Brazilian law, only shareholders registered as such in our corporate books may attend shareholders’ meetings.  All preferred shares underlying the ADSs are registered in the name of the Depositary.  A holder of ADSs, accordingly, is not entitled to attend shareholders’ meetings.  A holder of ADSs is entitled to instruct the Depositary as to how to vote the preferred shares represented by ADSs, in accordance with procedures provided for in the Deposit Agreement, but a holder of ADSs will not be able to vote the underlying preferred shares directly at a shareholders’ meeting or to appoint a proxy to do so. Holders of ADSs may have fewer and less well-defined shareholders’ rights than shareholders of U.S. public companies. Our corporate affairs are governed by our by-laws and Brazilian corporate law, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States.  Under Brazilian corporate law, the holders of our preferred shares and our ADSs may have fewer and less well-defined rights to protect their interests relative to actions taken by our Board of Directors or the holders of our common shares than under the laws of other jurisdictions outside Brazil. When compared to Delaware corporation law, Brazilian corporate law and practice have less detailed and well-established rules and fewer judicial precedents relating to protections afforded to non-controlling security holders and the review of management decisions involving duty of care and duty of loyalty standards in the context of corporate restructurings, transactions with related parties and sale-of-business transactions.  In addition, shareholders in Brazilian companies must hold at least 5.0% of the outstanding share capital of a corporation in order to have standing to bring a shareholder derivative suit, and shareholders in Brazilian companies ordinarily do not have standing to bring class action suits. Although Brazilian law imposes restrictions on insider trading and price manipulation, the Brazilian securities markets may not be as highly regulated and supervised as the U.S. securities markets or markets in other jurisdictions.  In addition, rules and policies against self-dealing and regarding the preservation of shareholder interests may be less well-defined and enforced in Brazil than in the United States, potentially causing disadvantages to holders of the preferred shares and/or ADSs.  Corporate disclosures may be less complete or informative than that ordinarily expected of a U.S. public company. Holders of ADSs or preferred shares may not receive any dividends. According to Brazilian corporate law and our by-laws, we must pay dividends to our shareholders totaling at least 25.0% of our annual net income, as determined and adjusted under Brazilian GAAP, except that we may use current net income (as per Brazilian corporate law): (i) to offset accumulated losses; (ii) to constitute a reserve for unrealized profits; (iii) to constitute a reserve for contingencies (if such contingencies are not already provisioned for); and (iv) to constitute a legal reserve (up to 5.0% of current net income, limited to 20.0% of the share capital).  In extreme circumstances, we may not pay dividends to our shareholders in a particular fiscal year if, at a shareholders’ meeting, our Board of Directors advises our shareholders that such distributions would not be advisable in view of our financial condition.   18 700012274.17


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 Exchange controls and restrictions on remittances abroad may adversely affect holders of ADSs. Brazilian law provides that whenever there is a significant imbalance in Brazil’s balance of payments or a significant possibility that such imbalance will exist, the Brazilian government may impose temporary restrictions on 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 custodianof our shares underlying the ADSs or holderswho have exchanged the ADSs for our underlying shares fromconverting 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 shares will hold thereaisthat 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 thereaisor be liable for any interest. Dividends paid by us will not be eligible for the favorable rate of U.S. federal income taxation applicable to certain “qualified dividend income.” Dividends received before January 1, 2013 by non-corporate U.S. shareholders on shares of certain foreign corporations will be subject to U.S. federal income tax at lower rates than other types of ordinary income if certain conditions are met.  However, because our preferred shares and ADSs are not listed, and we do not intend to list the preferred shares or ADSs, on an established securities market in the United States and there is no income tax treaty between Brazil and the United States, we currently do not expect that those conditions will be met with respect to our preferred shares or ADSs.  As a result, distributions on the preferred shares or ADSs paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, generally will be taxable as ordinary income to U.S. shareholders and will not be eligible for a reduced rate of taxation.  See “Taxation — Certain Material United States Federal Income Tax Considerations — U.S. Holders — Receipt of Distributions.” We may be, or may become, a passive foreign investment company (“PFIC”), which could result in adverse U.S. federal income tax consequences for U.S. investors. Based on current estimates of our gross income, gross assets and the nature of our business, we do not believe that we are, and we do not expect the preferred shares to be considered shares of, a PFIC for U.S. federal income tax purposes for our current taxable year (although the determination cannot be made until the end of such taxable year), and we do not expect to be a classified as a PFIC for the foreseeable future.  There can be no assurances in this regard, however, because the application of the relevant rules is complex and involves some uncertainty.  In particular, the PFIC determination is made annually and is based on the portion of our assets (including goodwill) and income, applying certain look through rules, that is characterized as passive under the PFIC rules.  Moreover, our business plans may change, which may affect the PFIC determination in future years.  Accordingly, it is possible that we may be, or may become, a PFIC for any taxable year.  If we were treated as a PFIC for any taxable year during which a U.S. investor held preferred shares or ADSs, certain adverse U.S. federal income tax consequences could apply to the U.S. investor. See “Taxation — Certain Material United States Federal Income Tax Considerations — Passive Foreign Investment Company Rules.” If you surrender your ADSs and withdraw preferred shares, you risk losing the ability to remit foreign currency abroad and certain Brazilian tax advantages. As an ADS holder, you benefit from the electronic certificate of foreign capital registration obtained by the custodian for our preferred shares underlying the ADSs in Brazil, which permits the custodian to convert dividends and other distributions with respect to the preferred shares into foreign currency and remit the proceeds abroad.  If you surrender your ADSs and withdraw preferred shares, you will be entitled to continue to rely on the custodian’s electronic certificate of foreign capital registration for only five business days from the date of withdrawal.  Thereafter, upon the disposition of or distributions relating to such preferred shares, you will not be able to remit foreign currency abroad unless you obtain your own electronic certificate of foreign capital registration or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on Brazilian stockexchanges without obtaining separate electronic certificates of foreign capital registration.  If you do not qualify under the foreign investment regulations, you will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, such preferred shares. If you attempt to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our shares or the return of your capital in a timely manner.  The Depositary’s electronic certificate of foreign capital registration may also be adversely affected by future regulatory changes.  19 700012274.17


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 Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to the disposition of the ADSs or preferred shares. According to Law no. 10,833, enacted on December 29, 2003, the disposition or sale of assets located in Brazil by a non-resident to either a Brazilian resident or non-resident is subject to taxation in Brazil, regardless of the domicile of the purchaser or whether the disposition occurs outside Brazil.  If the disposition or sale of assets located in Brazil is interpreted to include a disposition or sale of our ADSs, this provision could result in the imposition of income tax on the gains from such a sale or disposition of our ADSs by a non-resident of Brazil to another non-resident of Brazil.  However, considering the general and unclear scope of Law no. 10,833 and the absence of jurisprudence in respect thereof, we are unable to predict whether an interpretation applying such tax laws to dispositions of the ADSs solely between non-residents could ultimately prevail in Brazilian courts. Holders of ADSs may be unable to exercise preemptive rights with respect to our shares. Under Brazilian law, if we issue new shares for cash as part of a capital increase, we generally must grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage.  Rights to purchase shares in these circumstances are known as preemptive rights.  We may not be able to offer our preferred shares to U.S. holders of ADSs pursuant to preemptive rights granted to holders of our shares in connection with any future issuance of our preferred shares unless a registration statement under the Securities Act of 1933, as amended, or the Securities Act, is effective with respect to such preferred shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available.  We are not obligated to file a registration statement relating to preemptive rights with respect to our preferred shares, and we cannot assure you that we will file any such registration statement.  If such a registration statement is not filed and an exemption from registration does not exist, The Bank of New York, as Depositary, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of such sale.  However, these preemptive rights will expire if the Depositary does not sell them, and U.S. holders of ADSs will not realize any value from the granting of such preemptive rights. Holders of ADSs may face difficulties in serving process on or enforcing judgments against us and other persons. Contax Holding and Contax S.A. are corporations organized under the laws of Brazil, and all the members of our Board of Directors and all of our executive officers and our independent public accountants reside or are based in Brazil.  All of our assets and those of these other persons are located in Brazil.  As a result, it may not be possible for you 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, you may face greater difficulties in protecting your interests in the case of actions by us or our Board of Directors or executive officers than would shareholders of a U.S. company. Although, subject to certain conditions, investors generally would be permitted to bring an original action in Brazilian courts under the U.S. federal securities laws, pursuing such an action in a Brazilian court could prove difficult given the relative inexperience of such courts in these matters.   20 700012274.17


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 Item 4.         Information on the Company History and Organizational Structure Contax Participações S.A. was incorporated in Brazil on July 31, 2000 as a corporation, orsociedade por ações, under the name Caroaci Participações S.A.  Its primary functions were those of a typical holding company.Contax Holding’s registered address is: Rua do Passeio 48 a 56 (parte), 20021-290, Rio de Janeiro, RJ, Brazil.Its telephone number is +55 21 3131-0010. Contax Holding is the sole parent company of Contax S.A., a corporation incorporated in Brazil on April 3, 2000 as asociedade por açõesunder the name Contax S.A. (subsequently renamed TNL Contax S.A. and since December 2009 again renamed Contax S.A.).  Contax S.A. is the operational subsidiary of Contax Holding that conducts contact center service activities in Brazil. On December 29, 2004, the shareholders of TNL approved a proposal from its Board of Directors to spin off Contax Holding to TNL’s shareholders for two primary reasons: (i) to realize the full value of the company as a separate entity; and (ii) to allow the management of TNL to focus on its telecommunications operations.  The spin-off was consummated in August 2005 with the delivery of Contax Holding shares to the shareholders of TNL. In October 2008, we invested in our new subsidiary Todo.  The launch of operations in the information technology services outsourcing segment through this subsidiary was aimed at expanding our service portfolio and entering new markets, without losing focus on our main business, the contact center (voice process outsourcing) services conducted through Contax S.A. Contax S.A. owns 80.0% of the voting and total capital of Todo, with the remaining shares of Todo’s capital held indirectly by executive officers of Todo.  A shareholders’ agreement and other documents were signed between the parties regulating matters such as a non-compete agreement between Todo and Contax S.A. and restrictions on the remaining shareholders regarding the sale of shares.  Todo is managed independently from Contax S.A., with different executive directors and with its headquarters located in São Paulo.  Todo did not conduct any significant activities during 2008, and, in 2009, its strategic focus was on supplying IT and infrastructure solutions to Contax S.A.  In 2010, it has sought to expand its services to existing clients of Contax S.A. In September 2010, we acquired Ability, a company active in the trade marketing sector, including marketing, sales promotions, merchandising and market research. The purpose of our acquisition of Ability is to expand our service offering to include specialized point-of-sale services, in accordance with our strategy of becoming a corporate services company in Brazil specializing in the entire relationship chain between companies and their customers through multiple contact channels. Also, in September 2010, Contax established Contax Argentina, as a first step in our strategy to expand internationally in other Latin American countries. In April 2011, we announced the acquisition of the Allus Group, which is one of the main contact center service providers in Latin America, with 22 units in Argentina, Colombia and Peru, as well as commercial activities in the United States and Spain. The acquisition was consummated in May 2011. Telemar Participações S.A. Restructuring Process On April 25, 2008, the restructuring of the ownership structure of Telemar Participações (Contax’s previous controlling shareholder) was concluded.  On that date, an Extraordinary Shareholders’ Meeting of Telemar Participações approved the transfer of Contax Holding shares held by Telemar Participações to CTX Participações, a new company created for this purpose.   21 700012274.17


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 The restructuring was effected to separate Telemar Participações’ interests into two different companies to operate in the contact center and telecommunications industries, respectively.  Although Telemar Participações and CTX Participações have substantially the same shareholders, they are two different investment groups with different investment strategies. The charts below show the capital structure before and after the restructuring of our controlling group: Before the restructuring: ******    22 700012274.17


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 Immediately after the restructuring:  CTX Participações S.A. Restructuring Process As a result of the consummation of certain transactions pursuant to a Share Purchase and Sale Agreements dated January 25, 2011, among (i) AG Telecom Participações S.A. (“AG Telecom”), Caixa de Previdência dos Funcionários do Banco do Brasil - PREVI (“PREVI”), Fundação Petrobras de Seguridade Social – PETROS (“PETROS”) and Fundação dos Economiários Federais – FUNCEF (“FUNCEF”); (ii) LF Tel S.A. (“L.F. Tel”), PREVI, PETROS and FUNCEF; (iii) Portugal Telecom Brasil S.A. (“Portugal Telecom”) and BNDES Participações S.A. – BNDESPAR (“BNDESPAR”); and (iv) Portugal Telecom, PREVI, PETROS and FUNCEF, AG Telecom and LF Tel each acquired 431,999,634 CTX common shares held by PREVI, PETROS and FUNCEF, and Portugal Telecom acquired 463,234,643 CTX common shares held by BNDESPAR and 37,884,932 CTX common shares held by PREVI, PETROS and FUNCEF, as a result of which BNDESPAR, PREVI, PETROS and FUNCEF ceased to be shareholders of CTX Participações. Following the acquisitions, CTX Participaçoes’ share capital was divided as follows: Shareholder

   Shares

   Total %AG Telecom Participações S.A...........................................

   784,730,224

   25.39%Luxemburgo Participações S.A..........................................

   352,730,590

   11.41%LF Tel S.A...............................................................................

   1,137,460,814

   36.80%Portugal Telecom Brasil S.A................................................

   501,119,575

   16.21%Fundação Atlântico de Seguridade Social........................

   314,569,805

   10.18%Total........................................................................................

   3,090,611,008

   100.00%
 Share Buyback During 2006 and 2007, we implemented three different buyback programs, which resulted in the repurchase of 719,000 common shares and 2,705,000 preferred shares.  Of these totals, 544,000 common shares and all of the 2,705,000 preferred shares were cancelled, with the remaining 175,000 common shares held in treasury without reducing our capital stock.   23 700012274.17


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 In September 2008, we approved a fourth buyback program of approximately R$40 million.  By the end of September, we had completed implementing the program and repurchased 52,337 common and 861,664 preferred shares.  All of these shares were canceled in January 2009, resulting in capital stock of 14,942,685 shares, comprised of 5,772,435 common and 9,170,250 preferred shares. We paid an aggregate of R$201 million in connection with these buyback programs, of which R$41 million was used in 2006, R$120 million in 2007 and R$40 million in 2008. At a Board of Directors’ meeting held on October 27, 2009, our shareholders approved a fifth share buyback program for the acquisition of a maximum of 699,800 of our common shares and 1,945,000 of our preferred shares, representing less than 10% of our outstanding common and preferred shares.  On October 28, 2010, we announced to the market that the Company, during the term of the program, disbursed R$20.9 million for the acquisition of 699,996 common shares, equivalent to 9.88% of our outstanding common shares and 3.03% of our total common shares, to be kept in treasury, thereby concluding the program. Stock Option Plan At the General Shareholder’s Meeting held on April 16, 2007, our stock option plan was approved.  The purpose of the plan, established pursuant to article 168, paragraph 3, of Law no. 6,404/76, is to enable us to attract executives, as well as to retain and ensure a closer alignment between the interests of our management and the interests of our shareholders. On September 4, 2009, we approved changes to our 2007 stock option program (a) to adjust the number of options granted to the beneficiaries of the 2007 program due to the reverse stock split at the ratio of one (1) share for every twenty (20) shares (see “ — Reverse Stock Split and Stock Split” below); (b) to adjust the option exercise price from R$51.20 to R$45.00; (c) to change the option exercise price inflation adjustment index from IGP-M to IPCA; and (d) to discontinue the obligation of beneficiaries to exercise options with funds from their annual bonuses. On August 31, 2010, a new stock option program was approved by the committee created to manage our stock options plan, pursuant to which stock options representing 3.1% of our pre-existing outstanding capital stock (equivalent to 2,244,611 common shares) were issued. Reverse Stock Split and Stock Split On October 17, 2007, our shareholders approved the reverse stock split of all shares representing our capital stock at the ratio of one (1) share for every twenty (20) shares of the same type.  The plan was approved in consideration of the large number of small shareholders who did not actively trade in our shares.  With the spin-off from TNL, we inherited several million “inactive” shareholders and in an effort to reduce unnecessary administrative and operating costs and to provide a low cost form of liquidity for these small shareholders, we decided to effect a reverse stock split.  The reverse stock split was effected on November 19, 2007.  Since ADS are mainly concentrated in the hands of institutional investors in large quantities, no reverse stock split took place in relation to the ADSs, so that each ADS subsequently represented one-twentieth of a preferred share. After approval of the reverse stock split, our shareholders were given one (1) month to either acquire new stock in order to hold at least one share according to the new ratio or to sell their shares free of transaction costs.  After the stipulated period, there were still shareholders left with fractions of shares.  On August 13, 2008, the share fractions were grouped and auctioned, and the proceeds were made available to their former holders. On November 13, 2009, our shareholders approved (i) a reverse stock split of all shares representing our capital stock at the ratio of one (1) share for every fifty (50) shares of the same type and (ii) a simultaneous stock split of all shares representing our capital stock at the ratio of two hundred (200)shares for one (1) share of the same type.  The concurrent reverse stock split and stock split was intended to (a) adjust our shareholder base and decrease administrative costs both for us and our shareholders; (b) improve the efficiency of our records, controls and reporting systems; (c) diminish the possibilities of errors and improve services to our shareholders; and (d) improve the market price and liquidity of our shares. After our shareholders approved the reverse stock split and simultaneous stock split, our shareholders were given until January 15, 2010 to adjust their share positions.  The reverse stock split and simultaneous stock split were effected on January 15, 2010, and, after that date, our shares have been trading exclusively in the proportions resulting from the reverse stock split and simultaneous stock split.  As a result of these stock splits, as of the date of this annual report, our capital stock consists of 59,770,600 shares, of which 23,089,600 are common and 36,681,000 are preferred shares.  After the stock splits, some shareholders were owners of fractions of shares.  These share fractions were grouped and auctioned on BM&FBovespa on May 17 and May 24, 2010, and the proceeds were used to pay the original shareholders.  24 700012274.17


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 As a result of the reverse stock split and simultaneous stock split effected on January 15, 2010, each ADS represents one-fifth of a preferred share. Acquisition of Ability On September 1, 2010, we acquired all of the shares of Ability for a purchase price that could reach a total of R$82.5 million, depending on future growth and profitability measures. The purchase price consisted of: (i) R$26.4 million paid in cash; and (ii) an additional amount payable annually through an earn-out agreement based on EBITDA in the three years following the acquisition, up to a maximum of R$56.1 million. Ability is active in the trade marketing sector, including marketing, sales promotions, merchandising and market research. The purpose of our acquisition of Ability is to expand our service offering to include specialized point-of-sale services, in accordance with our strategy of becoming a corporate services company in Brazil specializing in the entire relationship chain between companies and their customers through multiple contact channels. Potential Business Combination with Dedic On January 25, 2011,  we and our controlling shareholder, CTX Participações, agreed with Dedic, a subsidiary of Portugal Telecom SGPS, S.A., to propose to our respective shareholders the integration of our activities by means of a stock merger transaction under Brazilian law (incorporação de ações) between Contax Participações S.A. and Dedic.  In connection with the proposed transaction, Dedic would become our wholly owned subsidiary, and we would increase our capital through the issuance of new ordinary and preferred shares to be received by the current shareholders of Dedic.  On March 30, 2011, our shareholders approved an amendment to our by-laws which created a special independent committee, composed of independent members, with the purpose of analyzing the economic conditions of such stock merger.  The transaction remains subject to approval by the shareholders of Contax and Dedic.. The potential business combination with Dedic is also subject to, among other things, the approval of the Brazilian antitrust authorities. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Business — The Brazilian antitrust authorities could impose costly or restrictive conditions on the approval of our business combination with Dedic, which could adversely affect our business and results of operations”. Constituted at the end of 2002, Dedic is one of Brazil’s largest contact center companies and a member of the Portugal Telecom group. In February 2010, Dedic acquired GPTI, a company that provides technology and information systems companies. According to information made publicly available by Portugal Telecom, Dedic’s operating revenues were R$479 million in 2010 and GPTI’s operating revenues were R$133 million from March 1, 2010 to December 31, 2010. Our proposed business combination with Dedic is consistent with our strategy to strengthen our market position and to expand our portfolio of services we offer to customers.   25 700012274.17


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 According to the stock merger proposal currently under evaluation by the special independent committee, if this business combination is consummated, the former shareholders of Dedic will hold approximately 8.3% of our outstanding shares, thereby diluting the ownership percentage of our existing shareholders. Notwithstanding, the special independent committee has the authority to recommend the approval of the stock merger proposal on different terms. Acquisition of the Allus Group On April 5, 2011, we entered into a stock purchase agreement to acquire all the then-outstanding shares issued by the Allus Group. The Allus Group was indirectly controlled by Eton Park, a global multi-disciplinary investment organization. The Allus Group is a contact center service provider with operations in Latin America, having 22 units in Argentina, Colombia and Peru, as well as commercial activities in the United States and Spain.  The acquisition of the Allus Group represents a further development of our internationalization strategy focused on Latin America. The transaction was approved on April 25, 2011 by the shareholders of Contax. The acquisition price to be paid for the Allus Group will range between R$307 million and R$332 million (based on the U.S. dollar torealexchange rate prevailing on the date the transaction was announced), depending on the future EBITDA performance of the Allus Group. In May, 2011, we consummated the acquisition of the Allus Group. In 2010, the Allus Group’s net revenue was US$174 million. At the end of 2010, the Allus Group had 13.1 thousand employees and 8.5 thousand workstations. The chart below shows our corporate structure after the acquisition of the Allus Group:    26 700012274.17


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 Overview Contax is one of the largest corporate service companies in Brazil and a leader in the contact center and debt collection industry and enjoys a rapidly growing portfolio of clients and services. Contax is fast becoming the only business process outsourcing (BPO) company with broad expertise in customer relationship management (CRM).  By providing customized consulting services that differentiate us from our competitors, Contax is an integral part of our clients’ ecosystem and delivery chain and helps them make the most of their business. Contax began operations at the end of 2000 in response to opportunities in the Brazilian contact center outsourcing market.  Contax initially provided outsourced services previously rendered by Oi in order to increase the quality of Oi’s in-house contact center activities.  In addition, Contax provided integrated services with Oi to their large corporate customers. We have experienced overall growth of our businesses since inception, and with the creation of Todo, the acquisitions of Ability and the Allus Group and the potential business combination with Dedic, we are expanding our services in accordance with our strategy of becoming a corporate services company in Latin America, specialized in the entire relationship chain between our clients and their customers through the multiple contact channels. During 2010, we increased our client base in comparison to the previous year, from 71 clients as of December 31, 2009 to 82 as of December 31, 2010.  Our business strategy is focused on developing long-term relationships with large companies in targeted sectors.  We offer a variety of channels of communication to interact with customers, including voice, Internet, e-mail, mail, fax services and sales and marketing promotion at points of sale.  As of December 31, 2010, we had 86,357 employees (78,200 as of December 31, 2009) and operated 38,680 workstations (34,820 as of December 31, 2009) located throughout 34 contact centers (30 as of December 31, 2009) in Brazil. Our services are designed to enhance the quality of customer interaction at all stages of the customer lifecycle, from identifying and acquiring new customers through providing information and customer services, rendering technical support, customer retention and debt collection. Industry Overview The scope of customer interaction by contact centers generally has expanded from single purpose (generally, basic support or marketing) to integrated service offerings (combining services such as customer service, telemarketing, technical support, customer retention and debt collection) through various communication channels.  As a consequence, the outsourced contact center sector has evolved from primarily single-facility, low technology environments to large, full-service organizations with multi-channel, large-volume contact centers that use sophisticated technology platforms to support such activities. Companies traditionally relied on in-house personnel and infrastructure to perform sales, direct marketing and customer service.  However, driven by increasing competition and higher customer sophistication, in the 1990s companies began to outsource their contact center activities in order to focus on their core businesses and to reduce costs.  Because such activities face significant fluctuations in demand, many companies have found that it is not cost-effective to maintain excess capacity, particularly during peak traffic periods.  Moreover, many companies have recognized that they were not appropriately equipped to conduct contact center activities and could not keep pace with the rapid changes in technology. Outsourced contact center providers are able to render services at a lower overall cost as a result of their ability to amortize fixed costs over a large number of customers, resulting in economies of scale in operations and technology.  For example, by turning to an outsourced services provider, a company can obtain access to sophisticated technology platforms, such as call management software, interactive voice response systems, predictive dialers (devices used to automate the method of making outbound calls anddirect them to an operator when a live person answers, thereby screening out answering machines, busy signals or other operator intercepts) and automatic call distributors, without the cash outlay or maintenance costs that would be required to implement these features in-house.  Because of their expertise and experience, outsourced contact center providers are also able to achieve higher quality and productivity, allowing their clients to focus on their core businesses while retaining and enhancing customer relationships. Today, companies face the challenge of delivering consistent levels of customer service, regardless of the channel of communications utilized or their customers’ location.  This trend has been fueled by the continued growth in Internet, short message service (SMS) and e-mail use, and the increasingly remote nature of customer interactions.  Moreover, companies are increasingly focused on better, differentiated customer services and on increasing the value of their customer relationships through the cross-selling of additional products or services.  By working in partnership with an outsourced services provider, a company can focus on its strategy for acquisition, retention and growth of its customer base without being overburdened with the complexities of day-to-day customer relationship operations.  27 700012274.17


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 Contact center activities are becoming central to the way companies choose to enhance customer loyalty and retention.  According to IDC, a market intelligence and consulting company specializing in the IT and telecommunication industries, the outsourced contact center market worldwide had gross revenues of approximately U.S.$54.6 billion in 2010, with the Brazilian market contributing an estimated R$8.6 billion (U.S.$5.2 billion).  The two biggest companies in the Brazilian contact center market (Contax and Atento) together had gross revenues of approximately R$3.6 billion (U.S.$2.2 billion) in 2008, R$4.0 billion (U.S.$2.4 billion) in 2009 and R$4.6 billion (U.S.$2.8 billion) in 2010. Factors that influence companies worldwide to outsource their contact center needs and other customer relationship management services include the following: ·Increasing importance for companies to retain and enhance customer relationships; ·Increasing need for companies to focus on core competencies rather than non-revenue producing activities; ·Rapid changes in technology requiring personnel with specialized technical expertise and continued investment in new contact center equipment and services; ·Increasing need to integrate and manage complex systems incorporating a variety of hardware and software systems spanning a number of technology generations; and ·Extensive and ongoing training requirements. Brazilian contact center service providers have enjoyed significant growth over the past several years.  Several factors have contributed to this growth: ·Increase in telephony penetration.Prior to Brazil’s privatization of state-owned telecommunications companies in 1998, telephony penetration in Brazil was very low, limiting the use of contact centers as an effective way to deliver customer service on a broad basis.  Today, a larger portion of the Brazilian population can access customer services in general through different communication channels, including both mobile and fixed-line terminals.  According to the Brazilian telecommunications regulatory agency (Agência Nacional deTelecomunicações Anatel), total wireline and wireless penetration grew from 42.8 million in 1999 to 202.7 million in December 2010, exceeding one cell phone per capita. ·Expansion of contact center-intensive service sectors due to economicstabilization and privatization.In the mid-1990s, Brazil implemented successful economic reforms which created a stable macro-economic environment, spurring the growth of financial services and, consequently,the consumer base of these companies.  Brazil concurrently privatized large state-owned service providers in the telecommunications, electric, water and gas sectors, which brought about large investments and a rapid growth in customers. ·Pressure to reduce costs.Pricing pressures from competition and shareholder demands for higher returns have forced Brazilian companies to streamline personnel, through restructuring and outsourcing, and to make other cost reductions, including reducing face-to-face customer services.  28 700012274.17


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 According to the most recent data available from IDC, the total number of outsourced workstations in Brazil grew from 148,000 at December 31, 2008 to 153,800 at December 31, 2009, and based on preliminary estimates, 174,300 at December 31, 2010, which represents growth of approximately 10.0% in 2009 and 13.3% in 2010.  We believe that this increase in outsourced contact center workstations is an indication of substantial growth opportunities for contact center services providers in the next few years. As part of our efforts to improve the services we provide to our clients, we launched, in November 2007, a project to voluntarily join the Seal of Ethics of PROBARE, the Brazilian Program for Self-Regulation of the Client Relations Market.  PROBARE is an initiative by three entities active in the client, consumer and company relations market in Brazil: the Brazilian Association of Direct Marketing (ABEMD -Associação Brasileira de Marketing Direto); the Brazilian Association of Client Relations (ABRAREC -Associação Brasileira das Relações Empresa Cliente); and the Brazilian Association of TeleServices (ABT -Associação Brasileira de Telesserviços).  These entities identified the need for definition of standards of self-regulation in the client, consumer and company relations sector in order to improve services provided.  In order to attain this status, we underwent a rigorous auditing program pursuant to which we had to meet strict requirements.  Our Antártica (São Paulo), Comércio (Salvador) and Mauá (Rio de Janeiro) sites have been officially certified, and we are working to fulfill the same requirements at other operational sites. Regulatory Developments regarding Telemarketing Services On July 31, 2008, the Brazilian Federal Government enacted Decree No. 6,523/2008 (Decreto no 6.523/2008), which became effective on December 1, 2008 and is imposed upon services providers regulated by Federal agencies (i.e., telephone, electric energy, cable television, credit card, and airline companies).  These rules, which are also referred to as the “Call Centers Law” (Lei dos Call Centers), mandate that the Customer Assistance Service (SAC - Serviço de Atendimento ao Consumidor) of such services providers shall comply with the following: (i) all telephone calls must be free of charges and may not result in any financial burden to consumers; (ii) consumers must have the option in the first menu — and in all subsequent menus — to contact directly an operator; (iii) telephone calls will not be terminated until the request is completed; (iv) access to an operator shall not be conditioned to providing any consumer’s data; (v) consumers must have access to an operator within a time limit ranging from forty-five (45) seconds to ninety (90) seconds, depending on the business of the service provider, as mandated by Ordinance No. 2,014/2008 from the Ministry of Justice (Portaria no 2.014/2008); (vi) misdirected telephone calls must be reassigned to the proper operator within sixty (60) seconds; (vii) unless authorized by a caller, no marketing nor advertising, such as recorded announcements, is permitted while a caller is on hold; (viii) all claims, requests, demands and complaints must receive a protocol number to permit the consumers to track their information; and (ix) all telephone calls must be recorded and retained for a period of ninety (90) days and must be provided to consumer upon request within ten (10) days, pursuant Ordinance No. 49/2009 of the Secretariat of Economic Law of the Ministry of Justice (Portaria no 49/2009). A series of bills are currently being discussed by Brazil’s House of Representatives and Senate and also by local legislative branches of certain Brazilian states and municipalities, which propose to regulate several aspects of the outbound telemarketing services we provide, such as the creation of a national “do not call list” and the imposition of fines in connection with each call made in breach of such restriction.  With respect to the Federal proposals, the proposals are currently being discussed by the Commision of Science and Technology, Communication and Information Technology (Comissão de Ciência e Tecnologia, Comunicação e Informática) in the House of Representatives and must be approvedby three different commissions and submitted subsequently to the Senate for a final vote.  The President of Brazil must then grant or deny final approval.   29 700012274.17


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 In 2009, the States of Alagoas, Pernambuco, Maranhão, Paraíba, Paraná, Rio Grande do Sul, Espírito Santo, São Paulo and Mato Grosso do Sul enacted new laws which created local registers for telemarketing phone call blocking.  Under these laws, telemarketing companies are prevented from contacting customers in these states that are registered in the public database.  These laws restrict our ability to make outbound calls to these states, which limits our revenue and growth opportunities.A number of other Brazilian states, such as the states of Amazonas and Rio de Janeiro, are currently debating certain proposed state statutes that, if passed, will similarly prevent us from contacting customers that are registered in public databases, commonly refered to as the Register for Telemarketing Call Blocking (Cadastro para o Bloqueio do Recebimento de Ligações de Telemarketing). Our Strategy Contax’s business model is built on the expertise acquired through highly complex operations and a high volume of transactions, allowing us to render customized services.  We seek to address the specific needs of each client and to offer products that solve problems in a continuing and pro-active manner.  We aim to serve as an essential link between our clients and their customers, adding value through our services.  We believe that the more we participate in and understand our clients’ business, the more we can enhance the quality of the services we offer. In 2005, in order to improve the link between our clients and their customers, we established a business strategy focused on (i) the improvement and differentiation from other service providers of our four main services: customer service; telemarketing; customer retention; and debt collection; and (ii) excellence in support areas and operational processes. We aim to establish long-term relationships with our clients by seeking to deliver continuing and sustainable results.  We also seek to introduce new services for existing clients.  In 2010, the growth in revenues from pre-existing clients accounted for 61.2% of the growth in net revenues. At the end of 2008, in an effort to increase the diversification of our service offerings, we created a new subsidiary, Todo, which is focused on information technology services outsourcing.  The experience acquired in-house by our IT department in providing contact center solutions was incorporated into a new business that initially targeted in-house contact centers.  Currently, in addition to providing IT solutions for our business, Todo seeks to develop new IT solutions for other clients as well. Furthermore, in 2010, we diversified our strategic initiatives through our acquisition of Ability, which supplies outsourced sales personnel to provide in-store sales and marketing services to our clients. Additionally, on January 25, 2011, we we agreed to integrate our activities with Dedic in connection with the development of our strategy to strengthen our market position and to expand the portfolio of services we offer to clients. See “Item 4. Information of the Company —Potential Business Combination with Dedic”. Moreover, in May, 2011, we consummated the acquisition of the Allus Group, as a part of the development of our internationalization strategy focused on Latin America. See “Item 4. Information of the Company — Acquisition of Allus Group”. We also seek to diversify our services offering by rendering administrative services that are part of customer relationship management solutions. Considering our strategies, our approach to refining our principal product offerings is focused on: Customer Service:We believe that one of the reasons many clients are resistant to outsourcing their customer service function is fear of lowering quality and thus jeopardizing the relationships they have with their customers.  We seek to address these concerns by enhancing the customer service model currently in use in the market, implementing actions designed to make each contact with a customer moreprofitable, consistently improving the quality of services and increasing efficiency.  We seek to expand our client base by providing high quality and personalized service consistent with our clients’ expectations.   30 700012274.17


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 Debt Collection:We see potential for growth in the debt collection market.  Each industry segment and each client has different requests concerning the way a collection should be processed.  We believe the successful model used with some of our clients can be successfully implemented in other operations, depending on the needs of other clients.  By developing pilot tests to try new methods of debt collection, integrating management information systems with clients’ needs, providing debt collection operators with proper training, as well as implementing customized forms of variable earnings, we believe that we will be able to continue to grow our client base. Telemarketing:Our telemarketing services are focused on providing efficient solutions for attracting new customers (whether through active, receptive or blended approaches) and improving returns from our clients’ existing portfolio of customers, always focusing on the specific characteristics of each customer and our clients’ target market. Customer Retention:Our customer retention services seek both to persuade the end consumer not to cancel a service and to observe consumer behavior, adopting preventive measures to avoid cancellation requests and mapping and developing new customer retention offers. Trade Marketing:Our acquisition of Ability is part of our new strategy to expand our services in our clients’ customer relationship chain through multiple contact channels. Ability is one of the leading companies in the Brazilian trade marketing sector, specializing in developing relations between companies and their sales channels by understanding their needs at points of sale (generally in stores).  As of December 2010, Ability’s client portfolio included large companies from various sectors such as technology, consumer goods, food and telecommunications. As part of Contax, we expect to increase Ability’s addressable market, as well as to provide its services to our customers, especially those in the financial sector where Ability has limited historical penetration. IT services:We believe that infrastrucuture and technology are important elements in providing superior services and attracting new clients. We seek to maintain a competitive advantage and to distinguish our services by utilizing advanced IT systems and by maintaining strong partnerships with leading technology providers. With this objective, Todo was created to become a supplier of technological services designed according to the specific needs of the CRM market requirements. Todo’s first customer, when it commenced operations in April 2009, was Contax, which outsourced its entire IT area to Todo. The service portfolio of Todo allows the complete outsourcing of its clients’ IT environment. The company has a staff trained on the complex voice platform, URA, an integrated recording solution (which stores voice files containing the client’s and call profile data) and the intelligent dialer management. It also offers solutions for information and timecard access management, which enhances control of person and provides integrated information to HR systems. The company also relies on solutions for management reports, voice network projects and IT environment optimization. The development of our support areas and operational model include the following principal elements: Commercial model:We have recently added specialized members to our sales force and created a product management marketing function in order to expand our range of clients and services.  We are developing new product offerings that focus on specific segments of our clients’ businesses and are continually identifying clients that are not currently “key accounts” to whom we seek to provide a broader range of contact center services. Human resources:We believe our employees are the key to our success.  We focus on attracting and retaining new employees, monitoring their performance and using diverse training methods to meet each client’s needs.  By developing a structured career plan and providing various performance initiatives, we seek to achieve employee excellence and instill our company’s values in our workforce.   31 700012274.17


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 Operational model:By providing our clients with services during the entire customer lifecycle and developing a compelling value proposition in our main product categories, we believe we can continue to enhance our operational model. Competition The outsourced contact center sector in Brazil is competitive and fragmented.  There are a few large contact center companies in Brazil, but we also compete with a variety of companies, including niche providers, consulting companies, trade marketing companies, IT providers and numerous small companies that offer low value-added services (primarily outbound telemarketing services).  In addition, we compete with in-house contact centers, which continue to represent the largest segment of contact center activities.  Moreover, some of our outbound services also compete with other forms of direct marketing, such as mail and e-mail messages, and with traditional media, such as television and radio. We believe offshore outsourcing provided from Brazil, where the contact center provider is not located in the same country as its customers, is neither a threat nor a significant opportunity for us as of the date of this annual report.  Because Brazil is a low-cost country and the national language is Portuguese, it is unlikely that contact center service providers in other countries, usually referred to as “offshore” facilities, could provide Portuguese-speaking customer service at a lower cost than providers in Brazil.  Although Brazil has competitive labor costs when compared to those of other countries and a large qualified workforce, we do not believe that significant opportunities to provide services for other countries currently exist.  We monitor these opportunities on a regular basis. We also face competition from automated customer services, through the use of Internet, Interactive Voice Response, voice recognition and other technologies.  We provide automated customer services as a part of our contact services and continue to develop our technology in this area. As a result of intense competition, contact center services are frequently subject to pricing pressures.  Competition for contracts for many of our services takes the form of competitive bidding on proposals, which take into account quality, technical and cost factors. Since 2005, we have been the leading contact center service provider in terms of revenues (based on information in the most recent financial statements published by Brazilian contact center companies).  Our major competitors in Brazil are: ·Atento.  Atento is a part of the Spanish telecommunications group, Telefónica, which in Brazil controls a large fixed-line operator (Telesp), an Internet provider (Terra) and, together with Portugal Telecom, Brazil’s leading mobile operator (Vivo).  Atento has operated in the Brazilian market since 1999.  After acquiring several companies in the sector, Atento became one of the largest contact center services providers in Brazil.  Two of Atento’s major clients are Telefónica and Banco Itaú Unibanco. ·Tivit.  In 2007, with the acquisitions of Softway and Telefutura, Tivit became one of the three largest contact center providers in Brazil. Tivit was initially controlled by Tivit Tecnologia (35%), Patria Group (7%), Luiz Roberto Novaes Mattar and Eraldo Dante de Paola (14.31%), but in 2010, funds managed by Apax Partners entered into an agreement to acquire 100% of the shares of Tivit. ·Dedic.Dedic is one of Brazil’s largest contact center companies, and it is currently controlled by the Portugal Telecom Group. In February 2010, Dedic acquired GPTI, one of the country’s leading technology and information systems companies.  Two of Dedic’s major clients are Telefônica and Banco Itaú Unibanco. On January 25, 2011, we announced that we and our controlling shareholder, CTX Participações, have agreed with Dedic to propose to our respective shareholders the integration of our activities.  See “Item 4. Information of the Company — Potential Business Combination with Dedic”.   32 700012274.17


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 ·CSU.  CSU is controlled by Gstaad Investment Holding Company and River Charles.  CSU was created in 1992 and is comprised of four units: (i) CSU CardSystem, which is currently the largest Brazilian independent automated billing processing company; (ii) CSU TeleSystem; (iii) CSU Credit&Risk; and (iv) CSU MarketSystem.  CSU is present in São Paulo, Rio de Janeiro, Pernambuco and Paraná, and two of its major clients are Globo Cabo (NET) and Banco do Brasil. ·Teleperformance.  Teleperformance is a French company that operates in approximately 45 countries.  In 2004, Teleperformance expanded its Brazilian operations by merging with Companhia Brasileira de Contact Center, after which Teleperformance became one of the largest contact center service providers in Brazil.  Two of Teleperformance’s major clients are UOL (one of the largest Brazilian Internet providers) and Sky/Direct (a pay-TV provider). Other major global competitors are: ·Convergys.Convergys has approximately 70,000 employees at 67 customer contact centers and other facilities in the United States, Canada, Latin America, Europe, the Middle East and Asia. Its global headquarters is in Cincinnati, Ohio. ·Teletech.Teletech is a global business process outsourcing company that provides customer management, transaction-based processing, database marketing services, professional sales and e-Commerce services. Founded in 1982, TeleTech currently operates in Argentina, Australia, Brazil, Canada, China, Costa Rica, Germany, Hong Kong, Malaysia, Mexico, New Zealand, Philippines, South Africa, Spain, Northern Ireland, Great Britain and the United States. ·Sitel.Sitel is a U.S. company, headquartered in Nashville, Tennessee. It maintains over 140 call centers in 27 countries. Our Business We offer a variety of integrated customer-interactive products and services covering all stages of the customer lifecycle through multiple communications channels.  Each of our main service offerings (customer service, telemarketing, technical support, client retention, debt collection, IT services and trade marketing) seeks to add value to our clients’ customer relationship management (CRM) strategies, while anticipating their needs.  We believe we operate in a flexible environment that can accommodate dynamic shifts in volume, workload and staffing requirements.  We seek to build upon and strengthen end-customer relationships on behalf of our clients.  Our operators are highly trained in the applicable products and services they are supporting and, as a result, they can act as a seamless extension of our clients’ efforts to acquire and service their end-customers. Our business approach is geared toward creating unique products and services that are developed jointly with our clients, leveraging our experience and best practices for each new client we serve.  Building on these tailored products and services, we have developed particular strengths (e.g., customer retention and debt collection) that we can leverage by servicing other clients across diverse sectors. The main services rendered by us are the following: ·Customer Service.  Our customer service solutions focus on providing high quality customer service and on understanding the reasons why customers initiate contacts, which are followed by specific recommendations for improving services offered by our clients.  Contax also develops cross-selling and up-selling strategies associated with customer service efforts and identifies opportunities for automation.  Our customer service solutions are segmented into interactive voice response (IVR), personal services (B2C and B2B), technical support, field support and back-office.   33 700012274.17


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 ·Telemarketing.  Our telemarketing service is focused on providing efficient solutions for attracting new customers (whether through active, receptive or blended approaches) and improving returns from the existing portfolio of customers, always focusing on the specific characteristics of each customer and our client’s target market.  We seek to achieve these goals through (i) efficient contact, through predictive dialers (which are computerized systems that automatically dial batches of telephone numbers) and enhancement of contact lists, and (ii) the quality of the telemarketing personnel, achieved through recruiting focused on the appropriate profile of potential employees, regular training and motivation. ·Debt Collection.  We design debt collection strategies together with our clients to maximize              results, while emphasizing customer retention.  We participate from the early stages of developing our clients’ debt collection strategy through the actual execution of the strategy, using database        filters (systems that prioritize contacts and determine the type of service each customer will          receive), predictive dialers and other automated contact tools, such as voice mail and text               messages typically sent to wireless handheld devices, in order to maximize the likelihood of                customer contact and behavior models that enable us to categorize customers’ risk and identify the       most efficient techniques for interacting with customers.  In order to enhance our performance, we       launch pilot programs to test the statistical efficiency of specific tools and strategies. ·Technical Support.  We provide comprehensive technical product support for our clients’ customers.  For example, we handle troubleshooting calls of consumer products, respond to software and hardwareproblems, provide support for ISPs’ dial-up and broadband customers, and manage corporate IT help desks.For such services, we employ qualified personnel with specialized technical training in dedicated teams. ·Customer Retention.  We provide our clients with customer retention services, whether by persuading their end-customers not to cancel a service or by observing customer behavior and taking preventive measures to avoid cancellation requests.  We collaborate with our clients by mapping final customers’ opinions in an effort to ensure the adoption of adequate strategies for reversing intentions to cancel services. ·Trade Marketing.With 12 years of operations in the trade marketing sector, Ability, which we acquired in 2010, is one of the largest trade marketing companies in Brazil. Its specialty is to plan, guide, create, deploy, operate and monitor all phases of a sales initiative at the point of sale or a distribution channel, with the objective of enabling strategies and expected sales results of its clients.  Our acquisition of Ability expands operations in our clients’ relationship chain through multiple contact channels. In becoming part of Contax, Ability is able to increase its addressable market, as it will also provide its services to our customers. ·IT Services.With the objective of exploring new business opportunities and developing new products, in April 2009, we initiated Todo’s operations. Todo is a center for integration and operation of technology services, focused on complete solutions for CRM market requirements. Todo offers partial or complete outsourcing of the technological environment for customer service, telemarketing and debt collection centers. It also offers solutions for information and timecard access management, which enhances control of personnel and provides integrated information to human resources systems. Todo also provides solutions for management reports, voice network projects and IT environment optimization. We also offer other services such as dispatch, back-office support and surveys, among others.  Furthermore, we continuously work with our clients to develop new products and service offerings.   34 700012274.17


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 The percentages of revenues derived from each of the services listed above were as follows for the periods indicated: Year ended December 31,Services

   2010

   2009

   2008Customer Service

   58.6%

   58.8%

   54.0%Telemarketing

   13.4%

   14.1%

   15.7%Debt Collection

   13.1%

   15.3%

   15.0%Technical Support

   2.9%

   2.3%

   1.9%Customer Retention

   6.3%

   4.2%

   5.0%Other(1)

   5.7%

   5.3%

   8.4%Total

   100.0%

   100.0%

   100.0%
 (1) Other includes trade marketing, IT services and International Services. On a monthly basis, we handle approximately 180 million customer contacts over the telephone at our 34 contact center sites. Our technology infrastructure provides for the effective distribution of calls to one or more of our sites. Markets and Clients We provide contact center services primarily across the following sectors: ·Telecommunications.  This sector includes wireless and fixed-line telecommunications, pay TV and internet. We provide a full range of contact center services to Oi, our largest client.  Oi’s operations include fixed-line terminals, long-distance services, mobile services, as well as broadband and corporate voice and data services.  In addition to traditional customer related services, we deliver extensive customer retention and debt collection services for Oi’s retail and corporate customers.  We also provide services to Net, the largest cable TV operator in Brazil; TIM and Intelig, companies owned by Telecom Italia; Embratel, which is owned by Telmex; and other important Brazilian companies. ·Financial Services.Currrently, the six largest banks in Brazil are our clients.  We provide a broad range of services to the credit card, retail bank and insurance segments, as well as to consumer credit companies.  This sector continues to grow in importance for us since many financial institutions have in-house operations that fit into our strategy of focusing on clients with high volume and highly complex services.  In addition, new financial products and service offerings have expanded our opportunities in this sector. ·Insurance.Our clients include some of the main Brazilian participants in the insurance market. We provide diversified contact center services to several types of insurance companies, such as auto, health, life and property insurance providers, among others.  35 700012274.17


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 ·Other sectors.Other key sectors include travel, transportation, utilities, health care, government, retail and manufacturing. The percentages of revenues of each sector are set forth below for the periods indicated: Year ended December 31,Sector

   2010

   2009(2)

   2008(2)Telecommunications (1)

   56.4%

   57.3%

   51.4%Financial Services

   35.9%

   36.9%

   33.7%Insurance

   2.3%

   2.1%

   1.8%Other (1)

   5.4%

   3.7%

   13.1%Total

   100.0%

   100.0%

   100.0%
 ____________________(1)Reflects the reclassification of a significant client from “Other” in 2007 and 2008 to “Telecommunications” in 2009. Revenues from such client amounted to R$143.2 million for the year ended December 31, 2009 (representing approximately 6.6% of our total revenue for such period) and R$136.4 million for the year ended December 31, 2008 (representing approximately 7.7% of our total revenue for such period). (2)The years of 2009 and 2008 reflect the reclassification of the table above when compared to the Form 20-F of 2009. “Internet” now is allocated in “Telecommunications” and “Utilities” are now allocated in “Other”. “Insurance”, which is now detailed in the table, was previously in “Other”.  Client Contracts Most of our relevant contact center services agreements range from one to six-year terms and allow clients to terminate services after an initial lock-in period, which varies from six to 60 months.  Most of these contracts establish penalties calculated as a percentage of the estimated value due for the remaining term of the agreement.  We have historically established long-term relationships with our clients based on the renewal of our contracts and expansion of the services we provide. The business model with respect to our contracts has evolved over the last few years.  In the past, most of our contracts were based on rental of capacity, where the client defined the number of workstations to be employed for a fixed price.  Most of our inbound service contracts are currently structured as follows: (i) per customer in our client’s customer base, whereby the client pays a fixed amount per each of its customers, independent of the frequency and the length of calls; (ii) based on speaking time, whereby the client pays for each minute of conversation between our operators and customers; or (iii) per call, whereby the client pays for each call answered by our operators. Other services are mostly priced on a pay-for-performance basis, whereby we either receive a combination of a fixed-rate fee plus a success fee or payments that are wholly performance-based.  Typically, performance-based compensation is used in debt collection and telemarketing services. Our services can be rendered on a fully-outsourced or partially-outsourced basis.  Partially-outsourced services may include providing our contact center infrastructure when clients desire to use their own employees or providing our human resources when clients have already invested in their own facilities. Nearly all of our contracts include service level agreements (SLAs) that define performance requirements and minimum quality thresholds.  Service Level Agreements are agreements between service providers and their customers that define, among other things, the services provided, the metrics associated with these services, acceptable and unacceptable service levels (e.g., speed-of-answer goals), liabilities on the part of the service provider and the customer in the case of non-performance, and actions to be taken in specific performance.  The most common service level agreement provision on inbound services is related to the time a customer should wait to be serviced.  This is typically measured as the minimum percentage of phone calls that should be answered in a maximum time frame (e.g., an “80/20” service level agreement provision requires that at least 80.0% of the calls will be answered in no longer than 20 seconds).  With the increased complexity of outsourced services, more service level agreement provisions are required by clients, such as service interruption and even operator turnover.  If we do not meet a service level agreement provision, we may be liable for penalties or a price reduction of our services. Our clients are entitled to receive penalties and indemnification from us when they face operational problems or damages resulting from an act of imprudence, negligence, gross negligence or willful misconduct by us in connection with the delivery of our services.  These penalties, and consequently the respective amounts due thereunder, vary depending on the type and level of each failure.  Hence, wecannot quantify an amount for these penalties in advance, since it is only possible to determine the nature and extent of those failures when a specific event occurs.  Regarding our indemnification obligations, we have other contracts pursuant to which we may be required to pay the total amount of the damages incurred by a client, as calculated by the client, an arbitrator or a judge in a legal proceeding.  As a result, we are unable to estimate the amount of these potential indemnification obligations, since such amount would be directly related to the nature and extent of the damages incurred by our clients and caused by us, our directors, officers, employees or subcontractors.  Our exposure in any of these circumstances could be significant.  36 700012274.17


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 Result Variance and Seasonality We experience variations in our results of operations primarily due to the timing of our clients’ customer relationship management initiatives, such as customer acquisition and sales campaigns.  For example, we experience higher activity in December, which is typically a month of higher volume of promotional activities and sales for our clients, while the beginning quarter of the year tends to be slower in volume of business due to it being a period of holidays and less working days. Our periodic results may also be impacted by the start of significant operations under a new contract or the termination of an existing one.  The start of a contract may adversely affect our results, since we incur start-up costs that are recovered throughout the course of the contract, such as hiring and training personnel and IT implementation.  The termination of our existing contracts may also adversely impact our results, as we would incur increases in costs relating to the severance of our employees and the reallocation of our assets, as well as suffer lower utilization rates of our facilities. Another relevant factor that may impact our results is the practice of annual rate adjustments, usually related to past inflation.  This practice is very common in Brazil, and some of our contracts allow for rate adjustments on an annual basis while some of our costs (e.g., telecommunications and leased facilities) have periodic rate adjustments according to past inflation.  If any significant client contract has its rate adjusted, our monthly results may be positively impacted in relation to the previous month.  We are currently in negotiations with the labor union, and any increase in our employees’ wages or benefits that may result from the conclusion of these negotiations may have an impact on our business until the contractual rate adjustments with our clients become effective. Our annual labor union negotiation typically results in compensation increases, which could take the form of a percentage salary increase and/or one-time payment.  In the event of the latter, our cash flow in a given period would be more acutely affected. Human Resource Management At December 31, 2010, our headcount totaled 86,357 thousand employees.  We believe human resources are the key to the success of our business.  Accordingly, we continuously refine our approach to hiring, training and managing qualified personnel at all levels of our organization, which we believe to be one of our core strengths.  We offer classroom, online and on-the-job training programs for our employees, ranging from training regarding information about our clients and the products and services they offer to techniques relating to telephone-based sales and customer service.  Once hired, each new operator receives on-site training, the duration of which depends upon the complexity of the services to be provided. In an effort to guarantee productivity and quality of our employee’s performance, we have developed specific training programs related to customer service, telemarketing and debt collection techniques.  We also have specific training programs for activities with performance-based compensation services. We also focus on employee retention.  This effort is important since initial training, particularly for inexperienced and young recruits, is costly and time consuming.  Moreover, better-qualified and more experienced operators generally achieve higher productivity levels and greater revenue per workstation.  37 700012274.17


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 We have an aggressive internal employee promotion program.  Our systems and tools allow us to track each operator’s performance using predefined indicators, such as punctuality, absence and productivity.  These systems allow us to reward our best employees and provide specific training for underachievers, seeking to achieve greater productivity and reduce total human resources costs.  We have variable compensation programs for activities that are linked to the achievement of performance-based goals. Facilities Our principal executive office, known as Passeio, is located in Rio de Janeiro, Brazil.  This facility currently serves as the headquarters for senior management and the financial, information technology, human resources and administrative departments.  Passeio also houses contact center operations, with 1,747 workstations.  At December 31, 2010, we had in operation a total of 34contact centers in nine different Brazilian states and the Federal District. We believe our existing facilities are adequate to meet current requirements and to accommodate minor expansions.  Instead of maintaining extra capacity for future demands, we have opted for a strategy of high capacity utilization.  In order to meet aggressive implementation requirements of new clients, we have developed a group of suppliers with standardized products and services, capable of quickly responding to our need for additional workstations or facility expansion. We seek new locations where there are favorable workforce demographics, ample telecommunication and electricity services and easy access to transportation for employees.  We also perform a cost-benefit analysis of every potential location in light of rental costs, setup/retrofit costs, local tax incentives, safety features, and the cost of future expansion.  This has helped us to achieve competitive advantages in connection with the location of our facilities: (i) our operations are geographically spread out, covering a substantial part of the main economic areas of Brazil; and (ii) we have significant operations in places like the Northeast of Brazil which allow us to render services at generally lower costs, mainly as a result of local tax incentives and high performance of our personnel at lower labor costs.  38 700012274.17


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 The following table sets forth additional information concerning our facilities at December 31, 2010:  Sites

   State

   # Work Stations

   # Employees

   Sq. Meters

   ExpirationPasseio I - (3rd to 12th floors) and 48/56 (13th to 16th floors)

   RJ

   1,747

   3,994

   24,044

   Nov. 10, 2010(1)Passeio I Complement - 56 (8th to 12th floors)

   Apr. 30, 2012(1)Passeio II - 56 (4th to 7th floors)

   June 30, 2010(1)Mackenzie

   RJ

   1,278

   3,095

   10,077

   Dec. 31, 2014Mauá

   RJ

   1,674

   3,460

   9,702

   Feb. 28, 2013Niterói

   RJ

   1,553

   4,124

   13,624

   Dec. 31, 2014Riachuelo/Inválidos

   RJ

   342

   827

   2,335

   Jan. 14, 2013São Cristóvão

   RJ

   553

   11

   5,600

   —Beneditinos

   RJ

   540

   1,117

   1,330

   Mar. 31, 2013Engenho de Dentro

   RJ

   237

   290

   3,368

   Nov. 30, 2012Rio Comprido

   RJ

   114

   350

   6,479

   Oct. 31, 2013Alameda Santos

   SP

   Support Area

   —

   1,110

   Mar. 25, 2012Alegria

   SP

   2,525

   5,333

   19,000

   Nov. 20, 2017Antártica

   SP

   2,859

   6,686

   21,621

   June 13, 2014Augusta

   SP

   465

   1

   3,497

   May 31, 2011Inhaúma

   SP

   683

   9

   3,350

   June 30, 2016Lapa

   SP

   1,318

   3,311

   17,375

   Mar. 31, 2012Oliveira Coutinho

   SP

   967

   5

   3,419

   Sept. 30, 2013Paulista/Conj. Nacional

   SP

   1,930

   3,189

   14,711

   Nov. 30, 2015Rubens Meireles

   SP

   Support Area

   —

   2,752

   July 2, 2011(1)CTC Dom Pedro

   SP

   Support Area

   —

   Not Available

   Apr. 14, 2015Contomo

   MG

   1,714

   4,497

   7,290

   Oct. 31, 2015Prado I

   MG

   1,969

   4,566

   11,998

   Dec. 31, 2014Sarzedo

   MG

   Dec. 31, 2014Prado III

   MG

   July 31, 2014Prado II (Ituiutaba)

   MG

   816

   1,962

   Apr. 31, 2019Prado II (IJ 7)

   MG

   May 10, 2012CTC Tamoios

   MG

   Support Area

   -

   Not Available

   Aug. 31, 2012Comércio

   BA

   2,549

   5,937

   11,000

   Mar. 30, 2014Fonte Nova

   BA

   1,522

   3,636

   10,296

   Dec. 31, 2014CTC Miguel Calmon (2nd floor)

   BA

   Support Area

   —

   Not Available

   Apr. 21, 2014CTC Miguel Calmon (3rd floor)

   BA

   Jul. 31, 2015Cabula

   BA

   —

   —

   6,637

   Aug. 31, 2011(3)CTC Casa de Barra

   BA

   Support Area

   —

   Not Available

   Oct. 1, 2013Fortaleza

   CE

   2,656

   6,356

   19,259

   Dec. 31, 2015Nascente

   CE

   448

   1,071

   2,248

   Dec. 31, 2013Aurora

   PE

   501

   1,403

   8,584

   Oct. 1, 2012Conquista

   PE

   562

   2,017

   9,256

   Aug. 2, 2016Príncipe

   PE

   447

   1,603

   3,805

   Dec. 31, 2014Santo Amaro - 3B - Tower II

   PE

   4,539

   7,774

   20,672

   Apr. 27, 2016Santo Amaro - 3B - Tower I

   PE

   20,632

   Feb. 28, 2017CTC Pernambuco

   PE

   Support Area

   —

   Not Available

   Sept. 4, 2010(3)Navegantes

   RS

   1,874

   5,514

   12,103

   Oct. 31, 2015Brasilia

   DF

   298

   586

   4,045

   Dec. 31, 2010(3)Araujo Porto Alegre(2)

   RJ

   —

   185

   Not Available

   Oct. 31, 2015Alameda Santos(2)

   SP

   —

   193

   3,261

   Mar. 15, 2014Florianópolis(2)

   SC

   —

   113

   695

   July 1, 2012Contax(2)

   BRAZIL

   —

   815

   —

   —Ability

   BRAZIL

   —

   2,327

   —

   —Total

   

   —

   86,357

   315,175
 __________________________ (1)           Term has expired. The Company is seeking renewal in the local courts as permitted under Brazilian law. (2)           TODO locations. (3)           Renewal under negotiation. Information Technology Our growth and business success, among other factors, depends on highly effective technology, and therefore our new Technologies Department, has focused on:  39 700012274.17


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 ·Research of new technologies and benchmarks to facilitate the growth of our business; ·Identification of potential suppliers or technologies adhering to our strategy; ·Evaluation of infrastructure solutions and products, in order to reduce operational costs and enhance business effectiveness; and ·Increasing efficiency and improving the performance of IT processes. In 2010, we made significant investments in telecommunications and IT infrastructure in an effort to meet our and our clients’ requirements.  We believe that we must continue to invest in the development of new and innovative systems on a timely basis in order to maintain our competitiveness. We use industry-standard software and hardware from IBM, Lenovo, Microsoft, Oracle and Cisco, EMC, Avaya, Nortel, SAP, Novell, Genesys, Dell, Altitude, Intervoice, Nice, CA, Symantec and others for operations and administrative functions, in addition to our own internally developed software and applications.  For the purposes of interacting with our clients’ databases, we have implemented highly customized services.  In connection with some services, we also utilize systems and software developed by our clients. We have developed the internal capability to design software services applicable to our business requirements.  Our in-house software development team was comprised of approximately 90 systems programmers and analysts as of December 2010.  We have successfully developed in-house systems that have resulted in a competitive advantage by allowing us to tailor our services as well as control and reduce our operational costs, particularly those related to employee productivity.  See “— Our Strategy”. We utilize sophisticated technology for our business, from our telephony platforms (Avaya and Nortel) to our workstations, computer equipment (Dell, IBM, Lenovo and others) and professional recorders, as well as productivity tools, such as predictive dialers, Interactive Voice Response Units, automated call distributors andworkforce management software.  Our customer service professionals have the tools to initiate and efficiently handlemillions of service interactions on a daily basis.  Our telephony infrastructure, partnered with Oi’s as well as other carriers’ data and telephony networks, provide several options when routing voice and data contacts throughout our different sites.  These platforms support such features as voice over IP, or VoIP, best services routing, skills-based routing and schedule adherence. Capital Expenditures The following table sets forth our capital expenditures for the periods indicated: Year ended December 31,2010

   2009

   2008(in millions ofreais)Telecommunications and IT systems

   62.4

   68.8

   110.5Leasehold improvements

   40.6

   60.4

   31.3Furniture and fixtures

   18.7

   12.0

   16.5Other

   39.7

   18.0

   9.6Total capital expenditures

   161.4

   159.2

   167.9
 Our capital expenditure is primarily linked to our rate of growth, with a portion (approximately 20.0%) being applied towards general upgrades and quality improvements of our existing systems.   40 700012274.17


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 Sales and Marketing Our commercial team seeks to broadly address gaps in any step of our clients’ customer relationship value chain. We have sales professionals focused on each of the most significant market segments, who work together with our product development and our technical solution teams in an effort to provide the best service offerings, customized for our clients. We mostly provide services to large Brazilian conglomerates, but we also provide services to any client who seeks a distinguished customer relationship process. Our direct corporate sales force has a team of approximately 50 people, who are responsible for supporting the key account managers in designing our customized solutions and our technical and commercial proposals. Since 2006, we have adopted a strategy known as “WE MAKE CUSTOMERS FOR LIFE”, which illustrates our commitment to, and alignment with, our clients’ long-term satisfaction.  This strategy encourages us to organize and present ourselves as a strategic partner, focused on our clients’ final customers, thus creating an interdependent relationship with our clients.  We intend to be a relationship company rather than a simple service company. Insurance Our assets and liabilities of material value and high risk are currently covered by insurance policies maintained by Contax Holding and Contax S.A., which provide coverage for material damage and loss of revenue arising from such damage.  Contax Holding’s insurance policy is valid until January 2012, and Contax S.A.’s insurance policies are valid until June 2011. We believe the applicable coverage amounts will be adequate for the nature and risks of our activities and sufficient to ensure the protection of our net worth and operational continuity.  All policies are renewable upon expiration. Our insurance policies comprise the following coverage, measured by the risks and nature of our assets: Coverage Type

   Amount Covered in 2011

   Amount Covered in 2010Property damage

   R$109,370 thousand

   R$97,000 thousandBusiness interruption

   R$64,677 thousand

   R$47,556 thousandGeneral liability

   R$10,000 thousand

   R$10,000 thousandDirectors and Officers’ liability

   U.S.$120,000 thousand

   U.S.$100,000 thousand
 Intellectual Property Trademarks Contax On December 30, 2008, Tele Norte Leste Participações S.A. transferred to us at no cost 18 trademark applications/registrations containing the word “Contax” filed before the Brazilian PTO (Instituto Nacional de Propriedade Industrial), of which 16 trademarks registrations have already been granted and two are still pending. As of the date of this annual report, the record of this assignment and the respective publication by the Brazilian PTO was already approved with respect to 14 trademarks, while four are still pending. On September 9, 2010, the Company filed six trademark applications with the Brazilian PTO. Each of these trademarks is pending registration. On October 10, 2010, the Company filed twelve trademark applications with the Argentinean PTO (Instituto Nacional de la Propriedad Industrial – República Argentina). Each of these trademarks is pending registration.  41 700012274.17


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 Todo On November 18, 2008, Todo filed two trademark applications with the Brazilian PTO.  On March 20, 2009, Todo filed eight trademark applications, which have not yet been published for the knowledge of third parties. All of Todo’s trademarks are pending registration, and two are being contested by third parties. Ability On November 18, 2008, Ability Full Service Marketing Ltda. transferred to Ability Comunicação Integrada Ltda. the rights, ownership and interests in three trademarks containing the term “ABILITY” that were registered at the Brazilian PTO. The recording of the transfer of such trademarks has been granted. In addition to the registrations of the above-mentioned trademarks, Ability Comunicação Integrada Ltda. currently has seven trademarks registered at the Brazilian PTO, in addition to 32 requests filed that have been stayed or contested, which are awaiting a final decision from the Brazilian PTO. From July 2009 to June 2010, Ability filed for the registration of another 24 trademarks at the Brazilian PTO. These requests are currently pending analysis by the Brazilian PTO. Ability Comunicação Integrada Ltda. is filing for the registration of two of its trademarks before the competent authorities in Argentina, Colombia, Chile and Mexico. These trademarks were filed in Colombia on April 3, 2009 and in Chile on August 14, 2009. In Argentina, two trademarks requests were filed on December 29, 2009 and May 4, 2010, respectively. In all countries, the trademark requests are being analyzed by the applicable authorities. In Mexico, Ability has one trademark registration granted and two pending registration requests, which were filed on April 27, 2010 and are being analyzed by the Mexican PTO (Instituto Mexicano de la Propriedad Industrial). Domain Names There are currently seven domain names registered with the “Contax” name at the Center of Information and Coordination of Dot BR- NIC.BR (Núcleo de Informação e Coordenação do Ponto BR - NIC.br), the Brazilian institution responsible for registering domain names.  There are four domains (including www.contax-net.com.br and www.contaxt.com.br) registered under the name of Contax Holding (Contax Participações S.A.), one (www.contax.com.br) registered under the name of Contax S.A., and two (www.contax.net.br and www.contaxt.net.br) registered under the name of Telemar Norte Leste S.A. There is currently one domain name registered in name of the Company (www.contaxargentina.com.ar) at the Network Information Center Argentina- NIC.ARG. There are currently two domain name registered in name of Todo (www.todobpo.com.br and www.todo.com.br) and one domain name registered in the name of Ability (www.abilitytrademarketing.com.br) at the Center of Information and Coordination of Dot BR - NIC.BR (Núcleode Informação e Coordenação do Ponto BR - NIC.br). Item 4A.      Unresolved Staff Comments Not applicable.   42 700012274.17


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 Item 5.         Operating and Financial Review and Prospects The following discussion and analysis of our results of operations, financial condition and liquidity should be read in conjunction with our Consolidated Financial Statements and the related notes included elsewhere in this annual report. Executive Overview We provide business process outsourcing services related to customer relationship management, such as customer service, telemarketing, technical support, customer retention, debt collection, IT services and trade marketing.  We were the largest contact center services provider in Brazil in terms of net revenues in 2010 (R$2,398 thousand), based on information available in the most recent financial statements published by Brazilian contact center companies. Our services vary based on the nature of the contact interaction (i.e., whether the contact is inbound or outbound) and are generally rendered from our 38,680 workstations (as of December 31, 2010) through various communication channels, such as by telephone, web, mail, e-mail and through sales and marketing representatives at our clients’ points of sale.  Our revenues are calculated based on a number of indicators, including the number of workstations, speaking time and performance targets, which vary in accordance with the type of service and contractual arrangements we have with our clients. Our results of operations are significantly impacted by the following factors, among others: ·our dependence on Oi, a related party; ·the acquisition or loss of a major client; ·fluctuations in demand for our services; ·our ability to pass through to our clients increases in costs; ·our ability to efficiently manage our workforce productivity; ·our ability to integrate successfully recent or future acquisitions or the risk that such integration may be more difficult, time consuming or costly than expected; and ·success or failure with respect to our performance-based services. Dependence on Oi Oi, a related party, accounts for a substantial portion of our net revenues (48.9% (R$1,173.5 million) for the year ended December 31, 2010). Our relationship with Oi is currently comprised of several distinct and independent services, such as customer services for Oi’s fixed-line business, outbound telemarketing to attract additional mobile customers, customer service for prepaid and postpaid mobile users, technical support for broadband subscribers and debt collection services. Our current agreements with Oi expire in November 2014 or November 2016, as the case may be, each with an automatic renewal for a further five to six-year period from the applicable expiration date. On December 10, 2010, we and Oi entered into a memorandum of understanding, which modified the manner that debt collection and customer services are charged to Oi.  The new pricing model could improve our results of operations to the extent we are able to decrease the operating costs necessary to serve Oi’s customer base by reducing the frequency and the length of calls. However, increases in the frequency and length of calls made by Oi’s customers may increase our operating costs and, therefore,decrease our results of operations. The memorandum of understanding foresees the possibility of reviewing the prices charged to Oi in the event that the frequency of calls made by Oi’s customers should vary substantially from the assumptions made under the new pricing model.  43 700012274.17


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 As a result of our dependence on Oi for a majority of our revenues, any adverse change in Oi’s business could reduce Oi’s demand for our services and consequently have an adverse effect on our business, financial condition and results of operations. In addition, as a result of this dependence, we are indirectly affected by trends in the highly competitive Brazilian telecommunications industry. For example, in recent years, we have observed a trend towards corporate consolidation and change of control of companies in the telecommunications sector. We cannot assure that Oi will continue to use our services or that it will not reduce its use of our services.  The loss of all or part of our business from Oi would have a material adverse effect on our business, financial condition and results of operations. Acquisition or Loss of a Major Client The acquisition or loss of a major client may have a significant effect on our results of operations.  Beginning operations under a new contract may adversely impact our results of operations, since we incur start-up costs that are recovered throughout the course of the contract, such as hiring and training personnel and IT implementation.  The termination of our existing contracts may also adversely affect our results of operations, as we would incur costs to terminate employees and re-allocate assets, as well as suffer lower utilization rates of our facilities. Fluctuations in Demand for Our Services The increase and decrease of demand for our services by our major clients has a significant impact on our results of operations, particularly as such fluctuations affect capacity utilization rates.  The growth of our clients’ customer bases can increase the overall need for contact center services, such as customer service, telemarketing, debt collection and customer retention.  If our clients’ customer bases erode or other events occur, such as increased automated customer service or a decrease in call volume and/or speaking time, a decrease in our revenues could result. Our Ability to Integrate Successfully Recent or Future Acquisitions Our ability to successfully manage and integrate key acquisitions, such as the acquisition of Ability and the Allus Group and the potential business combination with Dedic, is a significant factor affecting our results of operations. The integration of acquisitions involves risks and challenges that could, among other things, increase operating costs. See “Item 3 Key Information — Risk Factors — Risks Relating to Our Business — We may not be able to integrate successfully, or may experience difficulties in integrating, new or future acquisitions and therefore may fail to achieve the anticipated cost benefits and operational synergies that we had anticipated”. A failure to integrate successfully recent or future acquisitions and to deliver the cost benefits and growth synergies expected from such acquisitions could adversely affect our results of operations and financial condition. Our Ability to Adjust Rates Charged for Our Services Our ability to obtain rate adjustments to compensate for increased costs is a significant factor affecting our results of operations.  Our business is very labor intensive, and personnel costs are among the key factors impacting our costs.  These costs include wages, costs of employee benefits, payroll taxes and social security contributions.  For 2010, personnel costs accounted for 75.8% of our total costs, while the remaining 24.2% represented costs associated with third-party services, depreciation, amortization, rent and insurance. Our annual collective labor negotiations involve the discussion of compensation and benefits.  To protect against cost increases related to telecommunications, energy and our leased facilities as well as the impact of inflation, most of our contracts have annual rate adjustment clauses that allow for price increasesto cover any such cost escalation.  We may decide not to exercise the right to adjust prices fully in view of competitive conditions and/or other client relationship issues.  44 700012274.17


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 Our Ability to Efficiently Manage Our Workforce Productivity Our profitability depends largely on the productivity of our workforce.  Workforce productivity involves both traffic planning, which consists of designing facilities and resources to meet user requirements, and corresponding workforce management. Efficient traffic planning is key to the profitability of our services, by bringing the number of operators as close as possible to the levels required to deal with incoming call volume.  An excess number of operators, based on an overestimated forecast, may cause our profitability to decrease due to idle capacity.  In contrast, if there are more incoming calls than originally forecasted, we may not have enough operators to deal with the additional call volume, and we may be subject to service level agreement penalties. Workforce management involves team scheduling that requires the use of sophisticated planning tools to determine the number of employees scheduled during each shift for each type of service, according to our forecast of call volume and speaking time per call, as well as complying with all labor regulations related to our services.  We employ advanced planning and control software packages and have developed several systems that contribute to increased employee productivity.  These systems include proprietary software that links payroll to employee login time and a company-wide intranet that measures individual and team performance indicators.  A significant deviation in these performance indicators could have a material impact on our results of operations. Success or Failure with Respect to Our Performance-Based Services Approximately 30% of our revenues in 2010 were derived from operations with performance-based revenues, which involve telemarketing and debt collection services.  Performance targets include successful sales and collection percentages on bad debt, among other performance indicators.  For example, if we are able to collect more money in a given month, our revenue for such debt collection services can be significantly higher.  Our success or failure with respect to such performance-based services can significantly impact our results of operations in any given period. Key Events in 2010 Volume of Operations During 2010, our volume of operations increased.  In addition to contracts with new clients, this growth resulted from the expansion of services provided to our existing clients (especially in the telecommunications and financial sectors).  This growth in new services required an increase of 11.1% in workstations, from 34,820 workstations at December 31, 2009 to 38,680 workstations at December 31, 2010.  Our headcount also increased 10.5%, from 78,200 employees at December 31, 2009 to 86,357 employees at December 31, 2010. The increase in the volume of our activities and also our ability to readjust pricing under contracts with clients to reflect cost increases contributed to an increase of 11.0% in revenues to R$2,398.0 thousand in 2010 from R$2,161.0 thousand in 2009 (an increase of R$237.0 thousand). In 2010, our revenue growth resulted mainly from the increase in revenues from our existing clients, which represented approximately 61.2% of the total revenue increase.  Customer service continued to account for the largest portion of revenue, representing 58.6% of the total in 2010.  Telemarketing and customer retention collectively accounted for 19.7% and debt collection accounted for 13.1% of revenue in 2010.   45 700012274.17


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 Acquisition of Ability On September 1, 2010, we acquired all of the shares of Ability for a purchase price that could reach a total of R$82.5 million, depending on future growth and profitability measures. See “Item 4. Information of the Company — Acquisition of Ability”. We consolidate Ability in our consolidated financial statements since September 1, 2010. Recent Developments Acquisition of the Allus Group and Potential Business Combination with Dedic On January 25, 2011, we agreed with Dedic to propose to our respective shareholders the integration of our activities with a view to strengthening our market position. See “Item 4. Information of the Company — Potential Business Combination with Dedic”. As a result, we expect this business combination to impact our future results of operations. Further, in May 2011, we consummated the acquisition of the Allus Group, which is one of the main contact center service providers in Latin America, with 22 units in Argentina, Colombia and Peru, as well as commercial activities in the United States and Spain. See “Item 4. Information of the Company — Acquisition of the Allus Group”.  Accordingly, our results of operations following these transactions will not be directly comparable to our results of operations for the financial periods discussed herein. Critical Accounting Policies and Estimates 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 of operations and require management’s most difficult, subjective or complex judgments, estimates and assumptions. The application of these critical accounting policies often requires judgments made by management regarding the effects of matters that are inherently uncertain.  Our estimates, including but not limited to the provisions for accounts receivable and contingent liabilities, may differ from the actual value of such assets or liabilities.  The following is a discussion of our critical accounting policies, including some of the variables, assumptions and sensitivities underlying the estimates relating to: ·revenue recognition; ·impairment of goodwill; ·depreciation of property and equipment; ·contingent consideration measured at fair value; ·payroll and related accruals; ·provisions for contingencies; ·deferred and recoverable income tax and social contribution; and ·share-based payments. Revenue Recognition We recognize revenues on an accrual basis at the time services are rendered, except with respect to some of our performance-based services, which we recognize upon their measurement and acceptance byour client.  Most service contract revenues are calculated based on indicators such as quantity of workstations and speaking time and on performance targets.  Revenues are calculated based on information available in our IT systems that relate to the volume of data services rendered to each client.  Revenues related to our performance-based services are calculated based on data available in our and our clients’ IT systems.  In addition, we usually allocate operation managers to review, reconcile and discuss such indicators with clients.  Some revenue adjustments are recorded after discussions with such clients.  46 700012274.17


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 Impairment of Goodwill To determine if goodwill is impaired, it is necessary to estimate the value in use of the cash-generating unit goodwill was allocated to. The calculation of the value in use requires that we estimate the future cash flow expected to be derived from the cash-generating unit, and the appropriate discount rate for the present value to be calculated. Depreciation of Property and Equipment We depreciate property and equipment using the straight-line method at rates we judge compatible with the useful lives of the underlying assets.  In 2007, the useful lives of IT equipment and Furniture and fixtures were reviewed due to the reduction of the estimated economic useful life of assets acquired before December 31, 2006.  The evaluation and determination of the new economic useful life of these assets was performed in accordance with the rules of A.B.N.T – Brazilian Association of Technical Rules by a specialized consultant qualified for this activity.  Given the complex nature of our telecommunications and IT systems, the estimates of useful lives require considerable judgment and are inherently uncertain, due to rapidly changing technology and practices in our business sector, which could cause early obsolescence of such systems. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Contingent Consideration Measured at Fair Value Contingent consideration in a business combination is measured at fair value on the date of acquisition as part of the business combination. If the contingent consideration is classified as a derivative, and, therefore, a financial liability is recognized, it must be subsequently remeasured at fair value on the balance sheet date. The fair value is based on the discounted cash flow. The main assumptions take into account the probability of meeting each goal and the discount factor. Payroll and Related Accruals Payroll and related accruals are the most significant costs of our operations and are calculated and recorded on an accrual basis by our payroll system.  Payroll and related accruals include wages and salaries, paid vacation, Christmas bonus (décimo terceiro salário,or thirteenth salary), social security charges, executive profit sharing plan and employees’ payroll tax withholdings, most of which are defined by Brazilian labor law. For paid vacation provisions, each employee is entitled to a 30-day calendar paid annual vacation, corresponding to 133.3% of a monthly salary.  We record a monthly provision for paid vacations, until such benefit is paid (when employees effectively take their vacations).  For the thirteenth salary payment provision, we record a monthly provision equal to 1/12 of each employee’s monthly salary until such benefit is paid.  Fringe benefits, such as paid transportation and meal vouchers, are recognized as expenses on a monthly basis when provided to employees. Management’s executive profit sharing plan is performance-based, based on the achievement of several of our financial and quality targets, as well as individual employees’ targets, determined on an annual basis.  This provision is recorded on a monthly basis and is recalculated at year-end based on our best estimate of targets attained, as set in the annual budget process, but the actual total amount is only final after being reviewed and approved by our Board of Directors.   47 700012274.17


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 Provisions for Contingencies The preparation of our consolidated financial statements requires us to make estimates and assumptions regarding contingencies that affect our overall financial condition or relate to the changes in the actual value of liabilities at the date of the consolidated financial statements and accounting for the expenses arising during the reported period.  Such contingencies include those related to the legal proceedings discussed in Note 4.6 to our Consolidated Financial Statements. Provisions for contingencies are recognized for the amounts of probable losses, as determined by our management based on legal advice from in-house and external legal counsels regarding the outstanding contingent matters.  We continuously evaluate the provisions for contingencies based on changes in relevant facts, circumstances and events, such as judicial decisions, that may impact our estimates, which in turn could have a material impact on our results of operations and shareholders’ equity.  While management believes that the current provisions for contingencies are adequate, there can be no assurance that these factors will not change in the future. Deferred and Recoverable Income Tax and Social Contribution We record deferred tax assets arising from temporary differences between the accounting bases of assets and liabilities and their tax bases. Deferred tax assets are recognized only to the extent we expect to generate sufficient future taxable profit, based on projections and forecasts prepared by our management.  These projections and forecasts include several assumptions related to our performance, exchange rates, service volumes, tax rates and other factors that could differ from current estimates. There is no time limit for the use of tax loss carryforwards according to current Brazilian tax regulations.  However, accumulated tax losses may only offset up to 30.0% of the annual taxable profit. Share-based Payments We measure the cost of equity-settled transactions with employees and management by reference to the fair value of the equivalent equity instrument at the date at which such transactions were effected. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the options granted. These estimates also require determining inputs to the valuation model, including the expected life of the stock option, volatility, dividend yield and certain assumptions. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 29 to our Consolidated Financial Statements. Results of Operations Results of Operations for the Year Ended December 31, 2010 compared with the year ended December 31, 2009  Year ended December 31,

   Period over period change

   Period over period percentage change

   Results as a percentage of revenue for the year ended December 31,2010

   2009

   Favorable (unfavorable)

   Favorable (unfavorable)

   2010

   2009(in thousands ofreais, except percentages)Revenue(1)

   2,397,966

   2,161,019

   236,977

   11%

   100%

   100%Cost of services

   (2,026,392)

   (1,760,164)

   (266,228)

   15%

   (85)%

   (81)%Gross profit

   371,604

   400,855

   (29,251)

   (7)%

   15%

   19%Finance Income

   33,213

   24,531

   8,682

   35%

   1%

   1%Selling, general and administrative expenses

   (172,125)

   (166,303)

   (5,822)

   4%

   (7)%

   (8)%Finance costs

   (30,681)

   (39,922)

   9,242

   (23)%

   (1)%

   (2)%
  48 700012274.17


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Table of Contents Year ended December 31,

   Period over period change

   Period over period percentage change

   Results as a percentage of revenue for the year ended December 31,2010

   2009

   Favorable (unfavorable)

   Favorable (unfavorable)

   2010

   2009(in thousands ofreais, except percentages)Other operating expenses, net

   (24,224)

   (13,440)

   (11,000)

   82%

   (1)%

   (1)%Profit before tax

   177,571

   205,721

   (28,150)

   (14)%

   7%

   10%Income tax and social contribution

   (68,518)

   (74,664)

   6,146

   (8)%

   (3)%

   (4%)Minority interest

   (555)

   634

   (1,189)

   (188)%

   0%

   0%Net income

   108,498

   131,691

   (23,193)

   (18)%

   5%

   6%
 __________________________ (1)       Revenue is presented on a consolidated basis, net of sales taxes, returns, allowances and discounts. Revenue In 2010, revenue increased by R$236,977 thousand compared to 2009, representing an increase of 11.0%, from R$2,161,019 thousand in 2009 to R$2,397,996 thousand in 2010.  This growth was achieved through: (i) the increase in the volume of operations with our existing clients (R$145.0 million); (ii) contractual adjustments to reflect increased costs of services rendered (R$58.9 million); (iii) revenues from trade marketing services provided by Ability (R$33.5 million); and (iv) new business in several segments, including health care, government, financial and services (R$18.7 million). This increase was partially offset by the non-recurrence of certain specific revenues of 2009 (R$19.1 million). Customer service continued to account for the largest portion of revenue, representing 58.6% of revenue in 2010.  Telemarketing and debt collection accounted for 13.4% and 13.1%, respectively, of revenue in 2010.  Customer retention and other services accounted for 6.3% and 5.7%, respectively, of revenue in 2010, while technical support represented 2.9%. In 2010, Contax recorded strong revenue growth in certain of its services, with an increase of 66.7% in customer retention, 40.2% in technical support and 19.0% in other services. The performance of the customer service business was in line with 2009. The principal growth was in customer retention activities, basically reflecting the increase in active telemarketing operations designed to attract new clients. Cost of Services Total cost of services increased by R$266,228 thousand in 2010, representing an increase of 15.1% from R$1,760,164 thousand in 2009 to R$2,026,392 thousand in 2010.  Of the total costs of services in 2010, 75.8% related to personnel expenses (74.9% in 2009), mainly payroll, social security charges, benefits and training, among others.  The remaining 24.2% (25.1% in 2009) related to expenditures in connection with third-party services, including maintenance of equipment, rental of properties and data circuits, expenditures related to facilities, general expenses and depreciation.  The cost variation in 2010, when compared to 2009, occurred mainly due to the growth of services rendered upon demand by our clients, since approximately 92.7% of the costs are variable and therefore directly related to the growth of business volume. Personnel expenses in 2010 were mainly affected by (i) increases in salaries and benefits (R$95.0 million); (ii) an increase of 10.5% in headcount (R$80.8 million); (iii) an increase in costs related to training, terminations and hiring for new operations and an increase in employee turnover and absenteeism in certain operations (R$28.0 million), especially in São Paulo in view of the strong labor market; and (iv) personnel costs related to Ability, which we consolidate as from September 1, 2010 (R$16.4 million). Costs related to third-party services increased 11.2% in 2010 (R$27.1 million), reflecting mainly the increase in costs of infrastructure and facilities-related services (electricity, security, cleaning and


building maintenance) and expenses related to telecommunications, corporate sponsorships and charitable donations.  49 700012274.17


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 In 2010, depreciation increased by R$112,029 thousand, or 13.4%. The increase reflects investments made during 2010 and 2009 to support the growth of our business. Finance Income In 2010, finance income increased by 35.4% as compared to 2009, corresponding to a R$8,682 thousand increase to R$33,213 thousand in 2010 from R$24,531 thousand in 2009.  The increase was due to the higher interest income earned on financial investments, given the higher volume of these investments, and the retroactive one-off credit adjustment related to the monetary correction of deposits in court. Selling, General and Administrative Expenses In 2010, selling, general and administrative expenses increased by 3.5% as compared to 2009, corresponding to a R$5,822 thousand increase to R$172,125 thousand in 2010 from R$166,303 thousand in 2009, essentially due to (i) an increase in personnel expenses related to the expansion of our management team (R$16.9 million); and (ii) an increase in rental and facilities expenses due to the expansion of facilities and business support areas and support expenses for new businesses (trade marketing and our operations in Argentina) (R$3.5 million). These increases were partially offset by (i) a decrease in expenses related to changes to our stock option plan (R$7.3 million); and (ii) a decrease in depreciation and amortization (R$7.5 million). Finance Costs In 2010, finance costs totaled R$30,681 thousand as compared to R$39,992 thousand in 2009.  The R$9,241 thousand decrease was mainly due to the lower interest on leasing operations due to the amortization of the amounts outstanding under certain leasing contracts. Other Net Operating Expenses Other net operating expenses increased by R$11,000 thousand to R$24,440 thousand in 2010 from R$13,440 thousand in 2009.  The increase was primarily due to the higher amount provisioned for labor contingencies due to the following factors: (i) non-recurrence of the reversal of provisions in 2009 involving provisioned amounts above the historical average of the effective losses; (ii) the higher number of lawsuits as a result of our larger workforce; and (iii) the higher average amount provisioned for certain types of lawsuits. Income Tax and Social Contribution In 2010, income tax and social contribution totaled R$68,518 thousand, and our effective tax rate was generally in line with the amounts determined under prevailing laws. The decrease over income tax and social contribution of R$74,664 thousand in 2009 reflects the decrease in taxable income in 2010. Net Income As a result of the foregoing, we recorded net income of R$108,498 thousand in 2010, a decrease of R$23,193 thousand, or 17.6%, compared to 2009.   50 700012274.17


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 Results of Operations for the Year Ended December 31, 2009 compared with the year ended December 31, 2008 Year ended December 31,

   Period over period change

   Period over period percentage change

   Results as a percentage of revenue for the year ended December 31,2009

   2008

   Favorable (unfavorable)

   Favorable (unfavorable)

   2009

   2008(in thousands ofreais, except percentages)Revenue(1)

   2,161,019

   1,774,728

   386,291

   22%

   100%

   100%Cost of services

   (1,760,164)

   (1,507,603)

   (252,561)

   17%

   (81)%

   (85)%Gross profit

   400,855

   267,125

   133,730

   50%

   19%

   15%Finance Income

   24,531

   32,547

   (8,016)

   (25)%

   1%

   2%Selling, general and administrative expenses

   (166,303)

   (119,772)

   (46,531)

   39%

   (8)%

   (7)%Finance costs

   (39,922)

   (32,597)

   (7,325)

   23%

   (2)%

   (2)%Other operating expenses, net

   (13,440)

   (18,626)

   5,186

   (28)%

   (1)%

   (1)%Profit before tax

   205,721

   128,677

   77,043

   60%

   10%

   7%Income tax and social contribution

   (74,664)

   (45,848)

   (31,716)

   63%

   (4%)

   (3)%Minority interest

   634

   (3)

   637

   —

   0%

   0%Net income

   131,691

   82,826

   48,865

   59%

   6%

   5%
 __________________________ (1)       Revenue is presented on a consolidated basis, net of sales taxes, returns, allowances and discounts. Revenue In 2009, revenue increased by R$386,291 thousand compared to 2008, representing an increase of 21.8%, from R$1,774,728 thousand in 2008 to R$2,161,019 thousand in 2009.  This growth was achieved through: (i) the increase in the volume of operations with our existing clients (R$240.2 million); (ii) contractual adjustments to reflect increased costs of services rendered (R$92.6 million); (iii) new business in several segments, including retail, financial and services (R$34.4 million); and (iv) revenue from the adjustment of the scope of our services already rendered under a client contract (R$19.1 million). Customer service continued to account for the largest portion of revenue, representing 58.8% of revenue in 2009.  Telemarketing and debt collection accounted for 14.1% and 15.3%, respectively, of revenue in 2009.  Customer retention and other services accounted for 4.2% and 5.3%, respectively, of revenue in 2009, while technical support represented 2.3%. In 2009, Contax recorded strong revenue growth in all of its services, with an increase of 30.3% in customer service, 20.8% in debt collection and 2.5% in telemarketing.  The performance of the customer service offering was mainly a result of an increase in client activities in the telecommunications, financial and pay-TV industries.  The governmental decree that regulates customer assistance services became effective on December 1, 2008, contributing to increasing client demand in 2009 for services that comply with the new rules.  The growth in telemarketing and customer retention activities basically reflects the increase in active telemarketing operations designed to attract new clients.  The growth of the debt collection segment was mainly attributable to the expansion of collection portfolios in the telecommunications and financial industries, which contributed to the increase in revenue. Cost of Services Total cost of services increased by R$252,561 thousand in 2009, representing an increase of 16.8% from R$1,507,603 thousand in 2008 to R$1,760,164 thousand in 2009.  Of the total costs of services in 2009, 74.9% related to personnel expenses (73.6% in 2008), mainly payroll, social security charges, benefits and training, among others.  The remaining 25.1% (26.4% in 2008) related to expenditures in connection with third-party services, including maintenance of equipment, rental of properties and data circuits, expenditures related to facilities, general expenses and depreciation.  The cost variation in 2009, when compared to 2008, occurred mainly due to the growth of services rendered upon demand by our


clients, since approximately 90% of the costs are variable and therefore directly related to the growth of business volume.  51 700012274.17


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 Personnel expenses in 2009 were mainly affected by an increase of 5.0% in headcount (from 74,499 employees at December 31, 2008 to 78,200 employees at December 31, 2009) and by an increase of R$65.1 million due to salary increases provided for in collective bargaining agreements. Costs related to third-party services increased 16.2% in 2009, reflecting mainly the increase in costs of infrastructure and facilities-related services (electricity, security, cleaning, telecommunications and building maintenance) incurred in connection with the expansion of our operations and facilities. In 2009, depreciation decreased by R$6.5 million, or 6.2%.  The decrease in 2009 reflects a one-time adjustment decreasing the useful lives of certain leased IT equipment and furniture in 2008.  In 2009, no such adjustment was made. Finance Income In 2009, finance incomedecreased by 24.6%as compared to 2008, corresponding to a R$8,016 thousanddecreaseto R$24,531 thousand in 2009 from R$32,547 thousand in 2008.  Thedecrease was due to lower amounts of financial investments and lower interest rates in comparison to 2008. Selling, General and Administrative Expenses In 2009, selling, general and administrative expenses increased by 38.9% as compared to 2008, corresponding to a R$46,531 thousand increase to R$166,303 thousand in 2009 from R$119,772 thousand in 2008, essentially due to (i) a R$20.1 million increase in personnel expenses, related to the expansion of our management team; (ii) a R$6.5 million increase in rental and facilities expenses due to the expansion of facilities and business support areas; (iii) R$10 million of  expenses related to our stock option plan; and (iv) R$5 million of expenses related to consulting services for the strategic evaluation and restructuring of the product development area, as well as other specialized business support services. Finance Costs In 2009, finance costs totaled R$39,922 thousand as compared to R$32,597 thousand in 2008.  The R$7,325 thousand increase was mainly due to the increase in outstanding indebtedness under financing from BNDES. Other Net Operating Expenses Other net operating expenses decreased by R$5,186 thousand to R$13,440 thousand in 2009 from R$18,626 thousand in 2008.  The decrease was primarily due to (i) a reversal of provisions for labor contingencies, pursuant to which previously provisioned amounts were decreased to reflect historical averages of amounts paid per claim, and (ii) a reduction in costs relating to labor related litigation. Income Tax and Social Contribution In 2009, income tax and social contribution totaled R$74,664 thousand, and our effective tax rate was generally in line with the amounts determined under prevailing laws.  The increase over income tax and social contribution of R$45,848 thousand in 2008 reflects the increase in taxable income in 2009. Net Income  As a result of the foregoing, we recorded net income of R$131,691 thousand in 2009, an increase of R$48,865 thousand, or 59.0%, compared to 2008.  52 700012274.17


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 Liquidity and Capital Resources  Cash and cash equivalents as of December 31, 2010, 2009 and 2008 were equal to R$387,803 thousand, R$357,853 thousand and R$355,928 thousand, respectively.  Following is a summary of the principal changes in cash flows during the past three years.  Cash Flow from Operating Activities  Net cash flows from operating activities decreased R$58,382 thousand, representing a decrease of 20.9%, from R$278,456 thousand in 2009 to R$220,404 thousand in 2010.  This decrease can be principally explained by (i) the decrease in net income for the year of R$23,193 thousand, as compared to 2009 and (ii) the increase in working capital requirements, mainly due to an increase in accounts receivable, taxes payable and other liabilities in the amount of R$45,132 thousand, partially offset by the increase of R$19,039 thousand in provisions related to labor and other claims.  Net cash flows from operating activities increased R$24,010 thousand, representing an increase of 9.4%, from R$254,773 thousand in 2008 to R$278,786 thousand in 2009.  This increase can be principally explained by the increase in net income for the year of R$48,865 thousand, as compared to 2008, which was partially offset by (i) a R$22,491 thousand increase in working capital requirements, mainly due to an increase in accounts receivable and a decrease in payroll related accruals and (ii) a R$14,527 thousand increase in payments and a reduction in provisions related to labor and other claims.  Cash Flows from (used in) Investing Activities Net cash flows used in investing activities increased R$58,160 thousand, representing a 28.8% increase, from R$201,951 thousand in 2009 to R$260,111 thousand in 2010.  This increase relates mainly to the acquisition of Ability, the increase in long-term financial investment and the increase in judicial deposits. Net cash flows used in investing activities increased R$16,601 thousand, representing a 9.0% increase, from R$185,350 thousand in 2008 to R$201,951 thousand in 2009.  This increase relates mainly to a long-term financial investment made in 2009, which was partially offset by lower investments in property, equipment and intangible assets in 2009. Cash Flows from (used in) Financing Activities Net cash flows used in financing activities was R$74.910 thousand in 2009, compared to net cash from financing activities of R$69,657 thousand in 2010.  This change is mainly due to the net inflow of R$178.7 million related to the disbursement of the loans received from BNDES and BNB, which were partially offset by the payment of R$89.5 thousand in dividends. Net cash flows from financing activities was R$46,192 thousand in 2008 compared to net cash used in financing activities of R$74.910 thousand in 2009.  This change is mainly due to the fact that we had no new financings in 2009 compared to R$117.2 million of proceeds received pursuant to BNDES financings in 2008. As long as we continue to experience a natural growth of our business and results of operations, we believe that our current cash and cash equivalents and cash flows from operations will be adequate to meet anticipated working capital needs, continued expansion objectives and anticipated levels of capital expenditures for the foreseeable future.  At the same time, we continue to seek attractive sources of financing to support future growth opportunities. Management believes that the resources available to us are sufficient for our present requirements and will be sufficient to meet our anticipated requirements for capital expenditures and other cash requirements for the 2011 fiscal year.   53 700012274.17


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 Contractual Obligations The table below shows our contractual obligations at December 31, 2010: Payments due by periodContractual obligations

   Total

   Less than1 year

   1-3 years

   3-5 years

   More than5 years(in thousands ofreais)Capital lease

   4,277

   4,277

   —

   —

   —Operating lease (facilities)(1)

   240,741

   72,058

   97,505

   54,854

   16,324Financings (BNDES)(2)

   331,664

   64,670

   167,505

   72,335

   27,134Financing (BNB)(2)

   51,203

   203

   29,750

   21,250

   —Total

   627,885

   141,208

   294,760

   148,459

   43,458
 __________________________ (1)   Most of our facilities’ lease agreements can be terminated before their expiration, with one to six months’ prior notice, subject to a penalty equivalent to three times the monthly rent. (2)   Includes estimated interest payments. Off-Balance Sheet Arrangements  As of December 31, 2010, we did not have any off-balance sheet liabilities. Item 6.         Directors, Senior Management and Employees We are managed by a Board of Directors (Conselho de Administração) and a Board of Executive Officers (Diretoria).  According to our by-laws, members of the Board of Directors are appointed by our shareholders, which in turn, nominate the Executive Officers. Board of Directors The Board of Directors is currently composed of 10 regular members and 10 alternates, each serving a three-year term.  The Board of Directors holds regular meetings once every three months, and additional special meetings may be called by any member of the Board of Directors at any time. With regard to the appointment of Directors, Brazilian corporate law and CVM regulations provide the following: (i)            holders of preferred shares representing at least 10.0% of the total capital stock of a company may appoint one member to the Board of Directors and the corresponding alternate member; (ii)           holders of common shares representing at least 15.0% of the total common shares with voting rights may appoint one member to the Board of Directors and the corresponding alternate member; and (iii)          if items (i) and (ii) above do not occur, holders of common shares and holders of preferred shares representing together more than 10.0% of the total capital of a company may jointly appoint one member to the Board of Directors and the corresponding alternate member. These rights may only be exercised by shareholders who can prove continuous share ownership during the three months prior to a shareholders’ meeting.  54 700012274.17


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 Brazilian corporate law determines that shareholders holding more than 5.0% of common shares are entitled to exercise cumulative voting rights (voto múltiplo) so as to increase their chances of electing at least one member to the Board of Directors.  Under the cumulative voting process, each voting share is entitled to a number of votes equal to the number of Board of Directors seats being filled at the relevant shareholders’ meeting, which votes can be cast for one or more candidates.  As a result of cumulative voting, controlling shareholders may be prevented from controlling all seats of the Board of Directors, while minority shareholders may be allowed to appoint at least one member of that body.  Common shareholders participating in the cumulative voting process will not be counted for the purposes of appointing Board members in the circumstances described in (ii) and (iii) of the preceding paragraph. None of our Directors have service contracts with Contax Holding or with Contax S.A. providing for benefits upon termination of their employment.  The members of our Board of Directors were appointed at the Annual Shareholders’ Meeting held on April 25, 2011, and will serve until our Annual Shareholders’ Meeting in 2012. The following are the current members of our Board of Directors and their respective positions: Name

   PositionFernando Antônio Pimentel de Melo

   ChairmanCristiano Yazbek Pereira

   DirectorFernando Magalhães Portella

   DirectorPedro Jereissati

   DirectorRenato Torres de Faria

   DirectorPaulo Roberto Reckziegel Guedes

   DirectorArmando Galhardo Nunes Guerra Junior

   DirectorShakhaf Wine

   DirectorZeinal Abedin Mahomed Bava

   DirectorManuel Jeremias Leites Caldas

   Director
 The following are brief biographies of the members of our Board of Directors: Fernando Antônio Pimentel de Melo.Born August 29, 1953, he holds a degree in law from the Universidade Federal de Pernambuco.  He has been the CEO of the Fundação Atlântico de Seguridade Social since March 2005 and also an active member of the Board of Directors of CTX Participações S.A. since April 2008 and of the Board of Directors of Contax Participações S.A. since June 2008.  He was an alternate member of the Board of Directors of Telemar Participações S.A. from April 2006 to April 2009.  He also acted as the CEO of the Fundação Telebrás de Seguridade Social (SISTEL) from 2000 to 2004, and as its Pension Officer from 1991 to 2000.  Prior to this, he acted as the CEO of ABRAPP from 2001 to 2007.  He was originally appointed as Chairman of our Board of Directors in May 2009. Cristiano Yazbek Pereira. Born September 16, 1975, he holds a degree in mechanical engineering from the Escola Politécnica da Universidade de São Paulo, an Executive MBA from BSP and extensive management courses from the Rotman School of Management (University of Toronto) and ESADE (Barcelona). He is an active member of the Board of Directors of Contax Participações S.A. and has been the Corporate Strategy Manager of LFTel since July 2009. He also acted as Superintendent of Telefônica in the fields of Strategy, Regulation and Commercial SMEs in Latin America from January 2003 to July 2009, and as a consultant of AT Kearney from 2001 to 2002 and of Accenture in 2000. He is a member of the Board of Directors of Tele Norte Leste Participações S.A. Fernando Magalhães Portella. Born May 15, 1951, he holds a degree in agronomy from UNESP, an Executive MBA from Columbia University and is also an alumni of Harvard Business School, where he attended both The General Management Program from February to May, 2000 and The Corporate Leader Program in March 2006. He is the CEO of Jereissati Participações, holding of Jereissati Group.  Prior to


this, he was the Vice President of Citibank Brazil from 1986 to 1992 and a partner of Gemini Consulting from 1992 to 1996. He was also the CEO of the group O Dia de Comunicação, Counselor of the Associação Nacional de Jornais (ANJ) from 1996 to 2003, President of the Associação Brasileira de Marketing e Negócios from January 1999 to December 2000, a member of the Advisory Board of Intermédica Empresa de Saúde S.A. from June 2008 to February 2010, and CEO of the Jaime Camra Organization from July 2006 to January 2011. He acts as a member of the Board of Directors of the Administração da Iguatemi Empresa de Shopping Center S.A. and of Tele Norte Leste Participações S.A.  55 700012274.17


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 Pedro Jereissati.Born May 24, 1978, he holds a degree in Business Administration from Fundação Armando Álvares Penteado – FAAP, and obtained an MBA from Kellogg School of Management of the Northwestern University (Chicago, USA), in 2005.  He joined the Jereissati group in 1995, and currently holds the position of CEO of Telemar Participações S.A., the controlling company of Tele Norte Leste Participações S.A.  He worked for the Jereissati group in the real estate area, which is composed of the shopping centers area and office buildings area.  In 1998, he was transferred to the Jereissati group’s telecommunications company, L.F. Tel S.A..  He was the Vice President of Finance of Iguatemi Empresa de Shopping Centers S.A. from 2005 to 2007.  He was a member of the Board of Directors of Pegasus Telecom and is a member of the Board of Directors of holding companies, such as Jereissati Participações S.A., Telemar Participações S.A., Coari Participações S.A., Calais Participações S.A., CTX Participações S.A., Privatinvest Participações S.A. and Alium Participações S.A., as well as of the telecommunications companies Telemar Norte Leste S.A., Tele Norte Celular Participações S.A., TNL PCS S.A., Tele Norte Leste Participações S.A. and Brasil Telecom S.A., and of Iguatemi Empresa de Shopping Centers S.A.. He is also an Officer of the Telemar Institute (Oi Futuro). Renato Torres de Faria. Born January 11, 1962, he holds a degree in mines engineering. He has been the CFO and the Investor Relations Officer of Andrade Gutierrez Consessões S.A. since May 2002; Superintendent Officer and member of the Board of Directors of Dominó Holdings S.A.; and, Chairman and member of the Board of Directors of Waterport. He is an active member of the Board of Directors of Contax Participações S.A. and is a member of the Board of Directors of the Companhia de Saneamento do Paraná - SANEPAR, and of the Board of the Companhia de Concessões Rodoviárias S.A. – CCR. He is also a Board member of CEMIG. Since 2004, he has been an Officer of the real estate companies of AGSA, including Porto Real Resort and Marina Porto Real in Angra dos Reis - RJ, Parque Prado in Campinas - SP, Terminais Intermodais da Serra in Serra - ES, Flat Cidade Jardim in Sao Paulo - SP, Busca Vida Resort in Salvador - BA, Terminal de Passageiros in Uberlândia - MG, among others. Since February 2009, he has held the position of Executive Superintendent of the AG-Angra Fund. Paulo Roberto Reckziegel Guedes. Born October 25, 1961, he holds a degree in civil engineering from the Universidade Federal do Rio Grande do Sul and an MBA from the Fundação Dom Cabral, in Belo Horizonte. In 1982, he was technical assistant at M. Roscoe S.A. Engenharia Indústria e Comércio. In 1983, he joined the construction company Sultepa S.A., where he was technical assistant in 1983, engineer assistant from 1983 to 1985, chief engineer of works from1986 to 1987, and engineer supervisor from 1987 to 1991. He also held the position of Operational Superintendent of the Consórcio Conesul, representing the construction company Sultepa, from 1991 to 1993. He subsequently moved to the construction company Andrade Gutierrez S.A., where he was the Project Concessions Manager from 1993 to 1999. Since 2000, he has been the Officer of Business Development in the construction company Andrade Gutierrez S.A.. He currently works as a member of the Board of Directors of Contax Participações S.A., Officer of AGC Participações and a representative of the construction company Andrade Gutierrez S.A. He is also a member of the Boards of Directors of CCR, CEMIG, Dominó, Companhia Operadora de Rodovias, Water Port and Light. Armando Galhardo Nunes Guerra Junior.Born February 13, 1956, he holds a degree in Business Administration, Accounting and Economics from the Universidade Católica de Minas Gerais in 1978.  He developed projects in the areas of management and restructuring for companies like Braspérola, Portal Clicon, Cia AIX de Participações, Andrade Gutierrez, Brasil Ferrovias, Ponteio Lar Shopping and Shopping Píer 21.  He has previously served as the President of UNIPAR – União de Indústrias Petroquímicas S.A., FEM – Projetos, Construções e Montagens S.A. and MRS Logística S.A.  He was also the Officer of the Mines and Energy Cabinet and member of the National Council of Privatization


responsible for oversight of the state-owned steel companies, CVRD and DNPM, from March 1990 until October 1993.  He serves on the boards of the following companies: Cosipar – Cia Siderúrgica do Pará., Kepler Weber S.A., MASB – Desenvolvimento Imobiliário S.A and ESTRE Ambiental S.A.  He has previously served on the boards of the following companies: Quattor Participações S.A., Brasil Ferrovias, Unipar, Cosipa, CSN and CST. Chairman of the Board of Directors of Kepler Weber S.A., an investee of PREVI and Banco do Brasil, since October 2007; member of the Board of Directors of Quattor Participações S.A. and Subsidiaries, an investee of Unipar and Petrobrás, from June 2008 to April 2010; and member of the Board of Directors of Brasil Ferrovias S.A. and Subsidiaries, an investee of PREVI, FUNCEF and BNDES, from April 2004 to June 2006.  56 700012274.17


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 Shakhaf Wine.Born June 13, 1969, he holds a degree in economics from PUC, Pontifícia Universidade Católica, of Rio de Janeiro. He has been the CEO and the Chairman of the Board of Directors of Portugal Telecom Brasil S.A. since April 2005; a member of the Board of Directors of Mobitel S.A. since June 2006; Chairman of the Board of Mobitel S.A. since August 2008; Chairman of the Board of PT Multimédia.com Brasil Ltda. and a member of the Board of Directors of Brasilcel N.V. since March 2004; Vice Chairman of the Board of Brasilcel N.V. since August 2008 and President of the Control Committee of Brasilcel N.V. since 2006. He was a member of the Board of Directors of Vivo Participações S.A. from March 2004 to September 2010; Vice Chairman of the Board of Directors of Vivo Participações S.A. from August 2008 to September 2010 and a member of the Board of Directors of Universo Online S.A. from July 2005 to January 2011. Prior to this he worked as member of the Board of Directors of PT Investimentos Internacionais - Consultoria Internacional S.A., a consulting company, from May 2006 to March 2009, as a member of the Board of Directors of PT Participações SGPS S.A., a telecommunications company, from March 2008 to March 2009. Prior to this he was a member of the Board of Directors of PT Móveis - Serviços de Telecomunicações SGPS S.A., a telecommunications company, from May 2006 to March 2009; a member of the Board of Directors of PT Ventures SGPS S.A., a telecommunications company from May 2006 to March 2009; a member of the Board of Directors of Tele Centro Oeste Celular Participações SA, a telecommunications company, from March 2004 to October 2006; a member of the Board of Directors of Tele Sudeste Celular Participações S.A., a telecommunications company, from March 2004 to February 2006; a member of the Board of Directors of Tele Leste Participações S.A., a telecommunications company, from July 2005 to February 2006 and a member of the Board of Directors of Celular CRT Participações S.A., a telecommunications company, from March 2004 to February 2006. Prior to this, he was member of the Board of Directors of Banco1.net S.A., a financial institution, from April 2003 to July 2004; a member of the Board of Directors of PT Multimédia.com Participações Ltda., a Telecommunications company, from April 2005 to November 2007 and an Officer of an Investment Bank and responsible for relationships with European corporate clients in the Global Telecommunications Group of Merrill Lynch International, a financial institution, from 1998 to 2003. Prior to this, he was a Senior Associated Officer of the Latin America Departments and Telecommunications Groups of Deutsche Morgan Grenfell & Co., a financial institution, from 1993 to 1998 and an Interbank Exchange Trader and Dealer of the Central Bank of Brazil at Banco Icatu, a financial institution, from 1991 to 1993. Zeinal Abedin Mahomed Bava.Born November 18, 1965, he holds a degree in electrotechnics and electrical engineering from University College London. He has been Chairman of the Executive Commission of Portugal Telecom SGPS S.A., a Portuguese telecommunications company since March 2008. He has also been Chairman of the Board of Directors of several PT companies: PT Portugal, SGPS S.A. since April 2009; PT Comunicações since April 2009; TMN - Telecomunicações Móveis Nacionais, S.A. since May 2006; Portugal Telecom, Inovação, S.A. since September 2007; PT Prime – Soluções Empresariais de Telecomunicações e Sistemas, S.A. since September 2007; PT Móveis - Serviços de Telecomunicações, SGPS S.A. since November 2008; Portugal Telecom – Investimentos Internacionais, Consultoria Internacional, S.A. since November 2008; PT Participações, S.A. since November 2008 and  Fundação Portugal Telecom since May 2008. Prior to this, he had been Chairman of the Board of Directors of several PT companies: PT Ventures, SGPS, S.A. from November 2008 to July 2010; PT Centro Corporativo, S.A. from March 2006 to April 2009;  PT – Sistemas de Informação, S.A. from September 2007 to April 2009; PT PRO, Serviços Administrativos e de Gestão de Partilhados, S.A. from February 2003 to June 2008; Previsão – Sociedade Gestora de Fundos de Pensões, S.A. from March 2003 to October 2007, TV Cabo Portugal, S.A. from March 2004 to September 2007 and PT Conteúdos – Atividade de Televisão e de Produção de Conteúdos ; Lusomundo Cinemas, S.A., Lusomundo Audiovisuais S.A. and PT


Televisão por Cabo, SGPS, S.A. until September 2007. He was also member of the Board of Directors of Brasilcel, NV from December 2002 to October 2007; Chairman of the Executive Commission of PT Multimédia - Serviços de Telecomunicações e Multimédia, SGPS, S.A. from May 2003 to September 2007 and Vice Chairman of the Board of Directors of PT Multimédia - Serviços de Telecomunicações e Multimédia, SGPS, S.A. from November 2002 to September 2007.  57 700012274.17


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 Manuel Jeremias Leite Caldas.Born January 8, 1956, he holds a degree in Electrical Engineering from Instituto Militar de Engenharia – IME and a masters’ degree and a doctorate in Economics from Fundação Getúlio Vargas – EPGE – FGV.He is a Financial Consultant to Alto Capital Gestora de Recursos since 2007.From 1996 to 2006, he worked at Banco PEBB S.A. as the Technical Department Manager and Chief Economist, currently working on high variable income. He also served as Research Officer to Banco Gulfinvest S.A. in 1995 and as Economic Department Manager of Banco Nacional S.A. between 1991 and 1994.  He was also a Senior Financial Analyst at Banco Bozanno Simonsen S.A. in 1990 and worked at Light SESA as an Engineer from 1981 to 1990. He is member of the Board of Directors of Contax Participações S.A., of the Fiscal Council of COSERN and alternate member of the Fiscal Council of Eletropaulo Executive Officers Our by-laws provide that the Board of Executive Officers shall consist of a President (CEO), a Chief Financial Officer (CFO) and up to three other officers.  The Executive Officers are to be elected by the Board of Directors for a term of three years and may be removed from office at any time.  The current Executive Officers will serve until the first Board of Directors Meeting following the Annual Shareholders’ Meeting in 2012. The following are our current Executive Officers and their respective positions:  Name

   Position

   Date AppointedMichel Neves Sarkis

   President (CEO)

   December 17, 2010Marco Norci Schroeder

   Chief Financial Officer (CFO)

   Investor Relations Officer

   April 26, 2011Dimitrius Rogério de Oliveira

   Officer

   November 30, 2010Eduardo Nunes de Noronha

   Officer

   July 28, 2009Sergio Luiz de Toledo Piza

   Officer

   March 1, 2011
 Michel Neves Sarkis.  Born February 28, 1969, he holds a Bachelor’s Degree in Management from UFES – Universidade Federal do Espírito Santo, a degree in Accounting from Faculdade Costa Braga — São Paulo and an MsS Master of Science in Business Management from Pontifícia Universidade Católica — São Paulo.  He was our CFO from April 2001 to April 2011 and our Investor Relations Officer from December 2004 to April 2011.  Prior to joining us, he worked for five years as an auditor at PricewaterhouseCoopers from June 1990 to August 1995.  He also acted as Divisional Controller of Pepsi in Minas Gerais and Rio de Janeiro for more than two years, from August 1995 to November 1997, where he was responsible for the financial department.  In November 1997, he was appointed General Manager of the Rio de Janeiro Division of Conectel Paging Company.  In 1999, he joined Prosegur Brazil as General Manager of the Bahia and Espírito Santo Division. Marco Norci Schroeder. Born in August 27, 1964, he holds a bachelor’s degree in economics from the Federal University of Rio Grande do Sul (UFRGS) and has completed The General Management Program at Harvard Business School. He served as the Controller of Telemar Norte Leste S.A., a telecommunications company, from January 2002 to April 2011, where he was also a statutory officer without specific designation from August 2010 to April 2011. He served as statutory officer without specific designation at Brasil Telecom S.A., a telecommunications company, from September 2010 to April 2011, and in the holding companies, Tele Norte Celular Participações S.A. from March 2010 to April 2011, and Coari Participações S.A. from September 2010 to April 2011. He also served as Chief Financial Officer of Televisão Cidade S.A. from May 1999 to December 2001, Controller of Net from January 1998 to April 1999, and Chief Financial Officer of Televisão Gaucha S.A. (RBS) from January 1991 to December 1997.


He chairs the Fiscal Council of the Atlantic Social Security Foundation and serves as a Board member of the Sistel Foundation.  58 700012274.17


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 Dimitrius Rogério de Oliveira.Born on February 4, 1973, he has a bachelor’s degree in Electrical Engineering from Universidade Mogi das Cruzes, an MBA in Marketing from ESPM – Escola Superior de Propaganda e Marketing and a specialization in Business Development from BSP – Business School São Paulo. He has acted as Operations Officer at Contax from October 2008 to January 2010 and currently acts as our Officer. He has broad experience in large companies in areas of technical, services, marketing and commercial operations. Prior to joining us, he worked at Ericsson Enterprise from 1994 to 1999, including as Services Manager from 1995 to 1997 and Sales Manager from 1997 to 1999. He also worked as Sales Manager and Contact Centers Consultant (Brazil and Latin America) at Lucent Technologies from 1999 to 2001. From 2001 to 2008, he worked at Avaya Inc and Avaya do Brasil Ltda., serving as Officer of Consulting and Systems Integration for Latin America and Caribbean from 2004 to 2007 and held the position of Sales of Applications Officer and Services Officer of Avaya Brasil from 2007 to 2008. Eduardo Nunes de Noronha.  Born July 29, 1971, he holds a graduate degree in Mechanical Engineering from Universidade Federal de Minas Gerais, a postgraduate degree in Quality Engineering from Pontifícia Universidade Católica de Minas Gerais and has undertaken the Advanced Management Program at Fundação Dom Cabral/INSEAD. He has extensive experience in large-scale companies and has worked in operating process areas, interacting with clients and employees. He has worked as Management and Human Resource Officer at Sadia from 2006 to 2009, Industrial Officer at Coca-Cola/Andina from 2005 to 2006 and a Plant Manager of the Rio de Janeiro branch and Quality and Human Resource Manager at Brahma/AMBEV from 1998 to 2005. Sergio Luiz de Toledo Piza.Born April 22, 1964, he holds a Master’s degree in Business Administration from Fundação Getúlio Vargas – SP. He has 24 years of experience in Human Resources, 14 of which as Executive Officer. He was Executive HR and Administration Officer at Claro from 2008 to 2010 where he also carried out Call Center management. Prior to that, Mr. Piza worked for 14 years at Kraft Foods, having held the positions of HR Officer in Brazil from 1996 to 2003, global HR Officer for the Supply division based in Chicago, USA from 2004 to 2007 and global Corporate Development Officer for Supply Chain from 2007 to 2008. Prior to Kraft, he worked for 9 years at Ford. Fiscal Council According to Brazilian corporate law, the Fiscal Council (conselho fiscal) of a company does not need to operate on a permanent basis.  As a general rule, it shall only be installed, and its members elected, if so required by shareholders representing 10.0% of our common shares or 5.0% of our preferred shares outstanding.  However, CVM Rule 324/00 provides that publicly held companies with capital stock above R$150 million (which is our case) shall install the Fiscal Council if so required by shareholders representing at least  2.0% of common shares or 1.0% of preferred shares. If installed, the Fiscal Council shall consist of three to five effective members and their corresponding alternates, elected at a shareholders’ meeting for a term ending on the date of the Annual Shareholders’ Meeting following their election.  At our Annual Shareholders’ Meeting held on April 25, 2011, our controlling shareholders required the installation of our Fiscal Council and five members and corresponding alternates were elected to serve on our Fiscal Council. The Fiscal Council operates in accordance with the relevant provisions set forth under Brazilian corporate law and in our by-laws.  Under such provisions, the Fiscal Council is a corporate body, independent from our Board of Directors and Board of Executive Officers and from our independent registered public accounting firm.  The Fiscal Council’s primary responsibility under Brazilian law is to monitor management’s activities, review the financial statements, and report its findings to the shareholders. Brazilian corporate law further establishes that the Fiscal Council may not include members that are:  (i) on the Board of Directors; (ii) on the Board of Executive Officers; (iii) employed by us or a


controlled company; or (iv) spouses or relatives of our management, up to and including the third degree of relationship.  Under Brazilian corporate law, holders of preferred shares have the right to elect separately one member of the Fiscal Council.  Also, under Brazilian corporate law, minority groups of shareholders that hold at least 10.0% of the voting shares also have the right to elect separately one member of the Fiscal Council.  59 700012274.17


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 Despite some apparent similarities to the U.S. audit committee as provided for under the Sarbanes-Oxley Act, a Fiscal Council established under Brazilian corporate law has not typically been considered equivalent or comparable to a U.S. audit committee formed according to the provisions of the Sarbanes-Oxley Act and the New York Stock Exchange, or NYSE, listing standards.  The listing standards of the São Paulo Stock Exchange, where our shares are listed, do not require that companies listed with it form or maintain a permanent Fiscal Council or a comparable U.S. audit committee-type body.  As a result, our Fiscal Council will not be upgraded to discharge the same responsibilities of a U.S. audit committee formed according to the provisions of the Sarbanes-Oxley Act and the NYSE listing standards. The following table sets forth the persons elected to our Fiscal Council at our Annual Shareholders’ Meeting held on April 25, 2011, who shall serve as members of that body until the Annual Shareholders’ Meeting of 2012. Name

   PositionAparecido Carlos Correia Galdino

   ChairmanEder Carvalho Magalhães

   Regular MemberSérgio Bernstein

   Regular MemberJosé Luiz Montans Anacleto Júnior

   Regular MemberWancler Ferreira da Silva

   Regular Member
 Aparecido Carlos Correia Galdino. Born April 14, 1951, he holds a degree in business administration from Faculdades Integradas Princesa Isabel. He has worked at Grupo Jereissati since 1971, where has participated in the process of evolution and growth. He is currently the CFO of La Fonte Participações S.A. and of Jereissati Participações S.A.. He has been an elected member of the Fiscal Council of Iguatemi Empresa de Shopping Centers S.A., of the Boards of Directors of La Fonte Telecom S.A. and LF Tel S.A. and of the Grande Moinho Cearense S.A.. He is a member of the Fiscal Council of the telecommunications companies Tele Norte Celular Participações S.A., Brasil Telecom S.A., and of the holdings, Telemar Participações S.A., Coari Participações S.A. and Contax Participações S.A.. Eder Carvalho Magalhães.Born July 1, 1968, he holds a degree in accounting sciences from Instituto Cultural Newton Paiva Ferreira and a masters’ degree (MBA) in Business Administration from IBMEC - Instituto Brasileiro de Mercado de Capitais. His career began in 1987, as a trainee at PriceWaterhouse where he became an Audit Supervisor from 1992 to 1993. Later, he served as a Controller at Fiat Brasil Ltda. from 1993 to 1995. Since 1995, he has been directly responsible for all the accounting operations of the Grupo Andrade Gutierrez’s companies. In January 2002, he assumed the activities of real estate’s Officer of the Grupo Andrade Gutierrez. He is member of the Fiscal Council of Contax Participações S.A. Sérgio Bernstein.Born April 16, 1937, he holds a degree in civil engineering from the Escola Nacional de Engenharia do Rio de Janeiro and has been serving as a local companies’ executive for a long time. He began his career in 1961 as a Finance trainee at General Electric do Brasil, becoming a Controller Officer for 6 years and Financial Vice President for 4 years. Prior to this, he was Financial Vice President of the Grupo Jereissati for 16 years. He is member of the Fiscal Council of the telecommunications companies Telemar Norte Leste S.A., Tele Norte Celular Participações S.A., Tele Norte Leste Participações S.A., Brasil Telecom S.A., and Coari Participações S.A. José Luiz Montans Anacleto Júnior.Born December 7, 1977, he holds a degree in mechanical engineering from Escola Politécnica da Universidade de São Paulo. He has been an analyst at Skopos Administradora de Recursos since December 2002 and was a member of the Fiscal Council of Suzano


Papel e Celulose from 2008 to 2009, of the Fiscal Council of Mahle-Metal Leve S.A. from 2006 to 2007, and of the Fiscal Council of Encorpar (Emp. Nac. Crédito e Part. S.A. Encorpar) from 2005 to 2007. Prior to this, he was a Research Analyst’s assistant in the mining, paper and cellulose, steel and banking fields, at CLSA Corretora from January 2002 to July 2002 and an Intern at Citigroup Asset Management in the optimization processes of Back Office and Front Office from March 2001 to December 2001.  60 700012274.17


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 Wancler Ferreira da Silva.Born July 4, 1943, he holds a degree in accounting sciences from Faculdade de Ciências Econômicas da Universidade Federal do Rio Grande do Sul and an extension in Control Management from Faculdade São Luís, in São Paulo, where he has also worked as a teacher. He has been Executive Partner of WFS Serviços de Contabilidade Ltda. since 1997. Prior to this, he was a manager and officer of PriceWaterhouse Auditores Independentes, where he worked for over 20 years, and a Financial Planning and Budgeting Manager of São Paulo Alpargatas S.A. for 5 years. Compensation of Directors, Executive Officers and Fiscal Council Members For the year ended December 31, 2010, the aggregate amount of compensation, including cash and benefits in kind and stock options, paid by Contax to all of its Directors, Executive Officers and Fiscal Council members was approximately R$6,461 thousand.  Contax is not required under Brazilian law to disclose, and has not otherwise disclosed, the compensation of its Directors, Officers or Fiscal Council members on an individual basis. Share Ownership As of May 31, 2011, the members of Contax Participações S.A.’s Board of Directors and Fiscal Council together beneficially owned less than 0.10% of its common shares or total capital stock. On April 16, 2007, the General Shareholders’ Meeting approved the Stock Option Plan, pursuant to article 168, paragraph 3, of Law no. 6,404/76. Our Executive Officers are limited to purchasing up to 5.0% of the Company’s total capital stock.  61 700012274.17


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 As of May 31, 2011, our Board of Directors and Executive Officers beneficially owned the following percentage of our shares:  Name

   

   Position

   

   Common Shares

   

   Preferred SharesQty.

   

   Total %

   

   Qty.

   

   Total %Fernando Antônio Pimentel Melo

   

   Chairman

   

   *

   

   *

   

   *

   

   *Cristiano Yazbek Pereira

   

   Director

   

   *

   

   *

   

   *

   

   *Fernando Magalhães Portella

   

   Director

   

   *

   

   *

   

   *

   

   *Pedro Jereissati

   

   Director

   

   *

   

   *

   

   *

   

   *Renato Torres de Faria

   

   Director

   

   *

   

   *

   

   *

   

   *Paulo Roberto Reckziegel Guedes

   

   Director

   

   *

   

   *

   

   *

   

   *Armando Galhardo Nunes Guerra Junior

   

   Director

   

   *

   

   *

   

   *

   

   *Shakhaf Wine

   

   Director

   

   *

   

   *

   

   *

   

   *Zeinal Abedin Mahomed Bava

   

   Director

   

   *

   

   *

   

   *

   

   *Manuel Jeremias Leites Caldas

   

   Director

   

   *

   

   *

   

   *

   

   *  __________________ *      Less than 1% of the class of shares.   Name

   

   Position

   

   Common Shares

   

   Preferred SharesQty.

   

   Total %Michel Neves Sarkis

   

   President (CEO)

   

   *

   

   *

   

   —Marco Norci Schroeder

   

   Chief Financial Officer (CFO)/Investor Relations Officer

   

   *

   

   *

   

   —Dimitrius Rogério de Oliveira

   

   Officer

   

   *

   

   *

   

   —Eduardo Nunes Noronha

   

   Officer

   

   *

   

   *

   

   —Sergio Luiz de Toledo Piza

   

   Officer

   

   *

   

   *

   

   —    __________________________ *      Less than 1% of the class of shares   62 700012274.17


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 Employees As of December 31, 2010, we had a total of 86,357 employees distributed among the following locations: City/State

   EmployeesRio de Janeiro/RJ

   13,554Niterói/RJ

   4,162São Paulo/SP

   18,947Salvador/BA

   9,639Recife/PE

   12,901Fortaleza/CE

   7,478Belo Horizonte/MG

   11,105Porto Alegre/RS

   5,540Brasilia/DF

   591Florianópolis/SC

   113Ability/Brazil

   2,327Total

   86,357
 The total Company employees are distributed between our administrative (7.7%) and operational (92.3%) areas. As of December 31, 2010, approximately 21.5% of our employees were members of the telecommunications company workers and switchboard operators unions.  These unions represent the employees’ professional category and are affiliated with the Interstate Federation of Telecommunications Workers (Federação Interestadual dosTrabalhadores em Telecomunicações –Fittel) or National Federation of Telecommunications (Federação Nacional de Telecomunicações– Fenatel).  The base date for the collective labor bargaining agreement for the category is May, at which time salary adjustments are negotiated.  The conditions of the collective labor bargaining agreement are negotiated annually and in a centralized manner with Fittel and the unions of the states where we have operations.  These negotiations are carried out between union representatives and a team of experienced negotiators from Contax S.A. We maintain a courteous and professional relationship with the union representatives and invite them to visit our sites on a regular basis to show the labor condition improvements that we continue to make for our employees. Employee Benefits We provide the following benefits to our employees:  (i) medical plan; (ii) dental plan; (iii) life insurance; (iv) food program for employees who work six hours per day; (v) meal program for employees who work eight hours per day; (vi) transportation; (vii) discount cards or coupons for certain products (e.g., at certain pharmacies); (viii) life insurance and funeral expenses plan; and (ix) daycare assistance.  Officers, managers and coordinators are also entitled to mobile telephones with monthly credits varying from R$60 to R$120. Career and Salary Plan Our remuneration structure was last updated in the second half of 2010, in order to remain competitive in the market and maintain our Career and Salary Plan in line with our goals, taking into consideration our employees’ satisfaction, as well as rewarding individual performance.  There have not been any major changes since then, but it is important to note that it was also designed to provide additional opportunities for our employees, establishing the guidelines for promotions.  63 700012274.17


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 Employees assigned to some of our operations, such as telemarketing, retention, debt collection units and Orbitall operations are eligible for variable remuneration, linked to the achievement of individual as well as collective goals. All employees are eligible for our profit sharing plan, which is linked to both our performance and individual goals set annually. Outsourcing We engage service companies to provide services related to activities, such as janitorial services, security, office assistants and helpdesk. Workplace Health and Safety To comply with current legislation, Specialized Services in Safety Engineering and Occupational Medicine (SESMT) were implemented at all units, seeking to maintain programs that prevent workplace accidents and occupational diseases and injuries, including workplace exercise, which improves quality of life in the work environment. In addition to SESMT, all units have Internal Accident Preventions Commissions (CIPA) that support these programs. Workplace conditions are designed in accordance with the legal requirements and furniture is adjustable to accommodate the physical characteristics of each worker. Item 7.         Major Shareholders and Related Party Transactions Major Shareholders We have two classes of share capital outstanding, common shares and preferred shares.  Only the common shares have full voting rights.  The preferred shares have limited voting rights in connection with certain matters.  See “Item 10. Additional Information — Memorandum and Articles of Association — Voting Rights”. The following table sets forth the beneficial ownership of our common shares by CTX Participações S.A. and by other shareholders holding five percent or more of our common shares, as of May 31, 2011.  Except for the shareholders listed below, we are not aware of any other shareholder beneficially owning more than five percent of our common shares.  None of the major shareholders listed below have any different or special voting rights attached to their shares. There is no ultimate controlling party controlling CTX Participações S.A. that could be deemed to be our parent company. Shareholders

   Number ofcommonshares owned

   Percentage ofoutstandingcommon sharesCTX Participações S.A.

   15,992,959

   69.3%Credit Suisse Hedging-Griffo

   1,684,000

   7.3%Eton Park

   1,314,200

   5.7%Total

   18,991,159

   82.3%
 The following table sets forth, as of May 31, 2011, information concerning the ownership of the common voting shares of CTX Participações S.A. CTX Participações S.A. shareholders

   Number ofcommonshares owned

   Percentage ofoutstandingcommon sharesLF TEL S.A.

   1,137,460,814

   36.80%
  64 700012274.17


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Table of Contents CTX Participações S.A. shareholders

   Number ofcommonshares owned

   Percentage ofoutstandingcommon sharesAG Telecom Participações S.A

   784,730,224

   25.39%Luxemburgo Participações S.A

   352,730,590

   11.41%Portugal Telecom Brasil S.A

   501,119,575

   16.21%Fundação Atlântico de Seguridade Social – FASS

   314,569,805

   10.18%Total

   3,090,611,008

   100.00%
 CTX Participações S.A.’s Shareholders’ Agreements Certain of CTX Participações S.A.’s shareholders were party to two shareholders’ agreements with respect to their interests in CTX Participações S.A. AG Telecom Participações S.A., Luxemburgo Participações S.A. (current denomination of Andrade Gutierrez Investimentos em Telecomunicações S.A.), L.F. Tel S.A., BNDES Participações S.A., Fundação Petrobrás de Seguridade Social – PETROS, Fundação dos Economiários Federais – FUNCEF, Caixa de Previdência dos Funcionários do Banco do Brasil – PREVI and Fundação Atlântico de Seguridade Social were parties to a Shareholders’ agreement, dated April 25, 2008, as amended on January 25, 2011, which governs: (1) special procedures and quorum requirements for the approval of certain corporate resolutions by the management; (2) rules for the election of the members of the board of directors, fiscal council and executive officers; (3) rules with regard to voting rights during the general shareholders’ meetings of CTX Participações; (4) conditions which would constitute a lien on the shares or subscription rights; (5) requirements with regard to the exercise of the right of first refusal and the preemptive rights of the shareholders in the case of a disposal and subscription of shares of CTX Participações; (6) tag-along rights in which the direct or indirect transfer of control of CTX Participações can only be effected; and (7) appraisal rights in the case of a disposal of shares of CTX Participações in the event of a transfer of control of the shareholder. In accordance with the first Shareholders’ agreement, CTX Participações’ controlling shareholders have also agreed to exercise their voting rights in the shareholders’ meetings of CTX Participações in order to:  (1) maintain their investment in Contax Participações S.A.; and (2) have CTX Participações properly manage Contax Participações S.A. and its subsidiaries and assure decisions and actions by the companies’ management are taken in the companies’ best interests and according to market conditions.  Under the first Shareholders’ agreement, CTX Participações’ shareholders must meet prior to any general shareholders’ or Board of Directors’ meeting of CTX Participações or any of their affiliates to vote on the matters to be subsequently submitted at those meetings (“Prior Meetings”).  Each controlling shareholder is entitled to one vote at the Prior Meeting, and all decisions taken in this meeting bind all the controlling shareholders’ votes in the general shareholders’ meetings, including votes of shareholders who have not participated in the Prior Meeting.  The controlling shareholders are also bound to ensure that directors appointed by them vote at meetings of the board of directors in accordance with decisions taken at the Prior Meetings and that such decisions are implemented.  Except as otherwise provided in the shareholders’ agreements, resolutions at the Prior Meetings are passed by the vote of holders of a simple majority of shares.  However, certain matters, such as matters relating to related party transactions and approval of the candidate for the position of CEO of Contax Participações, require the approval of 66.7% of the shares affected by such Shareholders’ agreement; changes in preferences and capital increases require the approval of 70.0% of the shares affected by such shareholders’ agreement; and changes in the corporate purpose and any decision resulting in the change of control of CTX Participações requires the approval of 84.0% of the shares affected by such Shareholders’ agreement. On January 25, 2011 the first shareholders’ agreement was amended to reflect (i) the sale of all shares then held by BNDES Participações S.A. – BNDESPAR, Fundação Petrobrás de Seguridade Social – PETROS, Fundação dos Economiários Federais – FUNCEF and Caixa de Previdência dos Funcionários do Banco do Brasil – PREVI; (ii) the acquisition of 501,119,575 shares issued by CTX Participações by Portugal Telecom Brasil S.A., which adhered to the shareholders’ agreement and was granted the right to appoint members to the board of directors of CTX Participações.  65 700012274.17


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 AG Telecom Participações S.A., Luxemburgo Participações S.A. (current denomination of Andrade Gutierrez Investimentos em Telecomunicações S.A.), L.F. Tel S.A. and Fundação Atlântico de Seguridade Social (CTX Participações’ controlling shareholders) are parties to a second Shareholders’ agreement, also dated April 25, 2008.  This second instrument governs: (1) voting rights during the general shareholders’ meetings of CTX Participações; (2) the holding of Prior Meetings; and (3) the transfer of CTX Participações’ shares owned by its controlling shareholders. Holders of ADSs In the United States, the preferred shares trade in the form of American Depositary Shares, or ADSs, each preferred share is represented by five ADRs of the same type, issued by The Bank of New York, as depositary, pursuant to a Deposit Agreement among us, the Depositary and the registered holders and beneficial owners of ADSs from time to time.  Our ADSs are not listed on any stock exchange in the United States. Related Party Transactions Set forth below is a description of the related party transactions that are material to us.  Related party transactions refer to any loans receivable, accounts receivable from services rendered and any other debts with our shareholders, subsidiaries, unconsolidated affiliates or shareholders.  For further information about transactions with related parties, see Note 30 to our Consolidated Financial Statements. Oi/Contax Contracts We are a party to two main related party agreements with Oi (our main client encompassing Tmar and its wholly owned subsidiary TNL PCS S.A., both of which are indirectly under common control with us): (i) an agreement related to contact center services provided by us to Oi, on a fully outsourced basis; and (ii) an agreement related to telecommunications services provided by Oi to us.  Such agreements were executed on November 30, 2004 and duly approved at Tmar’s Extraordinary Shareholders’ Meeting on December 17, 2004. Prior to such contracts, we performed all contact center activities for Oi under various contracts, both on a fully outsourced as well as on a partially outsourced basis. The total amount of our gross operating revenue derived from Oi was R$1,257.5 million in 2010, R$1,196.0 million in 2009 and R$1,006.1 million in 2008, representing 48.6%, 51.2% and 52.5%, respectively, of our total revenue in those years.  Our relationship with Oi currently comprises several distinct and independent services, such as customer services for Oi’s fixed-line business, outbound telemarketing to attract additional mobile customers, customer support for prepaid and postpaid mobile users, technical support for broadband subscribers and debt collection services. Oi, in turn, is our main telecommunications services provider (fixed-switched telecommunications service, mobile services, long distance/toll-free, data, and other services) and, most importantly, provides such services, directly or through us, to some of our clients, at their option.  The total amount paid to Oi and its subsidiaries for these services was equal to R$25,639 thousand in 2010, R$27,157 thousand in 2009 and R$26,584 thousand in 2008, or 1.3%, 1.6% and 1.8% of our total cost of services and operating expenses in 2010, 2009 and 2008, respectively.  While Oi currently provides most of our telecommunications services, if it were to become unable or unwilling to provide these services, we believe that we would be able to obtain such services from another provider with a minimum of disruption to our business. On December 10, 2010, we and Oi entered into a memorandum of understanding which substantially modified the pricing model by which our customer services product is charged to Oi. Charges are now based on Oi’s total customer base at any given time, rather than on the frequency and the length of calls made by such customers.  66 700012274.17


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 The memorandum of understanding is valid for a period of 120 days from January 1, 2011, and is automatically renewable for three consecutive 120-day periods, up to a maximum period of one year. If a definitive agreement under the terms of the memorandum of understanding is not entered into prior to the end of such period, the services we render to Oi will be governed by the agreement with Oi, as originally entered into on November 30, 2004. Todo/Contax Contracts Todo was created as a supplier of technological solutions designed specifically for contact center operations, having as its first customer Contax S.A., which practically outsourced its entire IT department to Todo.  Through Todo, we intend to supplement our present range of services and take advantage of its expertise and market relationships in order to expand our information technology services outsourcing activities. On March 28, 2011, Contax entered into an agreement with Todo related to services rendered, including business process outsourcing, information technology outsourcing, consulting systems integration and maintenance and support. The term of this contract is from January 1, 2010 through December 31, 2014, and the parties estimate that the total amount involved, during this period, will be R$ 500,000. BNDES/Contax Contracts In 2007, we entered into a loan agreement with BNDES for the total amount of approximately R$216.7 million with the purpose of financing the expansion of our installed capacity, upgrading current facilities, training programs, improving service quality and productivity and investments in marketing activities, within the PROSOFT-Corporate (Software Industry and Correlated Services Development Program). In October 2007, the first tranche of the BNDES loan was provided in the amount of R$100 million, followed by additional tranches on January 28, January 30, June 12 and November 18, 2008, in the amounts of R$40.0 million, R$10.0 million, R$61.8 million and R$4.9 million, respectively, totaling an aggregate of R$216.7 million. In March 2010, we entered into a credit facility agreement with BNDES in the amount of R$323.6 million. In May 2010, the first disbursements under this agreement were received in the amounts of R$70,364 relating to the A loan and R$10,524 relating to the B loan In December 2010, the following additional disbursements were received in the amounts of R$87,000 relating to the A loan and R$13,000 relating to the B loan For a more detailed description of this BNDES loan, see “Item 10. Addition Information — Material Contracts.” Facilities Lease Agreements Some of our facilities are located on real estate that is leased from related parties.  Most of these related-party lease agreements are with Oi.  Lease expense for all related party lease agreements totaled R$9,813 thousand, R$9,502 thousand and R$7,218 thousand in 2010, 2009 and 2008, respectively. Transactions with our Board of Directors or Executive Officers None of the members of our Board of Directors or Executive Officers, or any close member of their respective families, has or has had any direct interest in any transaction effected with us which is or was unusual in its nature or conditions, or significant to our business.  67 700012274.17


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 As of December 31, 2010, no outstanding loans or guarantees thereof had been made to the members of the Boards of Directors or Executive Officers or the Fiscal Council, or any close member of their respective families. CTX Participações Loan Agreement In March 2010, CTX Participações, our parent company, and one of our executive officers entered into a loan agreement, which was negotiated individually by the executive officer and without involvement of the Company, pursuant to which CTX Participações loaned such officer an amount of R$15,769 thousand.  The loan has been satisfied. Potential Business Combination with Dedic As a result of the corporate restructuring of CTX Participações’ share capital, Portugal Telecom Brasil S.A., an affiliate of Portugal Telecom SGPS, S.A., currently owns approximately 16.2% of CTX Participações, our controlling shareholder. See “Item 4: Information on the Company — CTX Participações S.A. Restructuring Process.” On January 25, 2011, we and CTX Participações have agreed with Dedic, a subsidiary of Portugal Telecom SGPS, S.A., to propose to our respective shareholders the integration of our activities by means of a stock incorporation transaction between Contax and Dedic. For more information concerning the proposed business combination, see “Item 4: Information on the Company — Potential Business Combination with Dedic.” Item 8.         Financial Information Consolidated Statements and Other Financial Information See “Item 18.  Financial Statements”. Legal Proceedings General We are party to a number of legal actions arising from our regular course of business.  Although the amount of the total liability that could arise with respect to these actions cannot be accurately predicted, in our opinion, such actions, if decided adversely to us, would not, individually or in the aggregate, have a material adverse effect on our financial condition and results of operations.  We are subject to contingencies with respect to tax, labor and other claims.  The composition of our contingency provisions is as follows as of the dates indicated: At December 31,2010

   2009(in thousands ofreais)NatureLabor

   57,500(1)

   48,362(1)(2)Tax

   30,039

   10,944Civil

   727

   615Total

   88,266

   59,921
 __________________________ (1)Pursuant to the service agreement executed by Oi and Contax S.A., Oi shall be responsible for labor claims arising from the transfer of labor agreements from Oi to Contax S.A.  These amounts have been recorded as “Receivable Credits”.  The amount of labor claims for which Oi is responsible as of December 31, 2009 was R$7,955 thousand, with the other R$40,407 thousand being labor claims filed against Contax S.A. by employees and former employees.  68 700012274.17


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 (2)On September 30, 2009, Contax reviewed the amounts provisioned for labor contingencies to reflect historical averages of amounts paid per claim, which resulted in a reversal of provisions for contingencies in the amount of R$11,799 thousand, of which R$7,558 was reduced from the “Receivable Credits” account referred to above and R$4,241 thousand was recognized as other operating income. Labor Judicial As a part of our ongoing operations, we have been named as a defendant in a number of lawsuits brought by our employees, labor unions and the Labor Public Prosecution Office (Ministério Público do Trabalho).  We have established what we believe to be an adequate reserve to cover these claims. As at December 31, 2010, we were involved in approximately8,796employment-related legal proceedings, as compared to 7,009 as at December 31, 2009.  The total estimated amount involved in these proceedings at December 31, 2010 was R$587,614thousand (U.S.$353,771thousand), as compared to R$504,919 thousand (U.S.$289,186 thousand) at December 31, 2009.  We record provisions for any contingent liabilities based upon our historical losses in similar lawsuits. At December 31, 2010, our provisions for labor related contingencies amounted to approximately R$57,500thousand (U.S.$34,618thousand), as compared to R$48,362 thousand (U.S.$27,699 thousand) at December 31, 2009. As of December 31,2010(in thousands ofreais)Types of risk(1)Probable

   57,500Possible/Remote

   530,114Total

   587,614
 __________________________ (1)   The types of risk have been determined by our management, based on the opinion of external legal counsel and existing legal precedents. Most of these proceedings relate to claims for: (i) overtime; (ii) salary equalization; (iii) continuity of service; and (iv) damages, pain and suffering.  The increase in the number of labor law suits, from 7,009 at December 31, 2009 to 8,796 at December 31, 2010,is directly related to the significant increase in the number of employees since 2004. Administrative Proceedings As at December 31, 2010, approximately208notices of alleged violations of labor laws were pending against us. The amounts involved in such notices of infraction depend on the type of violation, the number of employees involved, and whether the alleged violation is a first time offense. As of December 31, 2010, in order to file administrative appeals, we had made administrative deposits, as required by law, in the approximate amount of R$40,366thousand (U.S.$24,302thousand). We have disputed all these notices of infraction before the administrative authority and are awaiting a final decision in these administrative proceedings.  Nevertheless, if such decisions are not favorable to us in administrative courts, we are allowed and intend to appeal to the judicial courts in order to request not only annulment of any and all liabilities assigned to us by the administrative courts,but also reimbursement for administrative appeals filedon the contingency of payment.  Since based on the advice of our external legal counsel we have classified as “possible” the risk of loss arising from such notices of infraction, neither the values in connection therewith nor such deposits have been provisioned for.  69 700012274.17


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 The alleged labor violations relate mainly to the following infractions:  (i) noncompliance with workplace health and safety rules; (ii) failure to grant intraday and weekly rest breaks; and (iii) failure to satisfy disabled worker hiring quotas. Under Brazilian law, if a company has more than 100 employees, two to five percent of its employees must be rehabilitated social security beneficiaries or qualified persons with disabilities.  Because of our inability to meet this quota, in September 2002, we entered into a Conduct Adjustment Term (Termo deAjuste de Conduta) with the Attorney General for Labor, under which we were granted a period of three years to meet the hiring quota.  However, even though we implemented a program aimed at hiring rehabilitated social security beneficiaries and persons with disabilities, the positions available could not be completely filled. In January 2010, the Office of the Regional Labor Superintendent notified us of claims in connection with charges for social contribution and contributions to the employee dismissal fund (fundo de garantia por tempo de serviço) related to employee transportation vouchers.  The amount claimed in the notification is R$29 million.  We are defending this claim and believe the risk of loss is possible. Tax As of December 31, 2010, we were party to52tax-related judicial claims (being defendants in17of these claims) mainly related toPIS/COFINS,services tax (ISS) and social security taxes owed to the National Institute of Social Security (Instituto Nacional de Seguridade Social- INSS). Our total provisions for tax contingencies amounted to R$30,039 thousand (U.S.$18,085  thousand) as of December 31, 2010, and relate mainly to Social Security Accident Factor (FAP – Fator de Acidente Previdenciário) in the amount of R$14,120 thousand (U.S.$8,501 thousand), PIS/COFINS tax in the amount of R$12,625 thousand (U.S.$7,601 thousand) and provisions for tax claims in the amount of R$4,188 thousand (U.S.$2,521 thousand) relating to tax on services, or ISS. Civil As of December 31, 2010, we were party to 78 civil lawsuits, the vast majority of which relate to improper collection actions with remote probability of loss based on the history of positive results, since we are limited to passing on to consumers the charges issued by our clients, thereby only serving a communicative role between the service provider and the end consumer. Policy on Dividend Distributions The preferred shares are entitled under our by-laws to receive, to the extent of available distributable profits and reserves, a non-cumulative preferred dividend in an amount equal to the greater of (i) six percent per year on the amount resulting from the division of the subscribed capital by the total amount of our shares, and (ii) three percent of the equity value of the share, or the Preferred Dividend.  To the extent there are additional distributable profits, we are also required to distribute to all shareholders an amount equal to at least 25.0% of the adjusted net income, or the General Dividend, determined in accordance with Brazilian corporate law.  Our obligation to pay General Dividends to holders of preferred shares will be met inasmuch as a Preferred Dividend is paid.  Payment of General Dividends may be limited to the net realized income for the year, provided that the difference is recorded as unrealized reserve.  Net income recorded in unrealized income reserve, when realized and as long as not offset by losses for subsequent years, should be added to the first dividend declared after realization.  We may also make additional distributions to the extent of available distributable profits and reserves.  All of the aforementioned distributions may be made as dividends or as tax-deductible interest on capital.  See “Item 10.  Additional Information — Memorandum and Articles of Association — Allocation of Net Income and Distribution of Dividends”.   70 700012274.17


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 Significant Changes See “Item 5. Operating and Financial Review and Prospects”. Item 9.         The Offer and Listing Information Regarding the Price History of the Stock to Be Offered or Listed The principal trading market for the preferred shares is the BM&FBovespa.  As of May 31, 2011, we had approximately one thousand shareholders. The preferred shares commenced trading separately on the BM&FBovespa in August 2005.  The following table sets forth the reported high and low closing sale prices for preferred shares on the BM&FBovespa for the periods indicated, adjusted for dividends and interest on capital. ReaisperPreferred Share(1)High

   Low2006

   16.00

   8.002007

   14.05

   9.202008

   13.00

   5.9520091st Quarter

   11.50

   9.532nd Quarter

   13.89

   10.633rd Quarter

   20.35

   13.564th Quarter

   25.00

   18.8720101st Quarter

   26.11

   23.792nd Quarter

   24.94

   20.003rd Quarter

   28.00

   21.434th Quarter

   32.70

   27.602011January

   31.98

   29.00February

   30.30

   27.85March

   27.35

   24.10April

   26.94

   23.50May

   25.49

   22.65
 __________________________ (1)   Prices per share have been adjusted to reflect the reverse stock split in November 2007 and the reverse stock split and simultaneous stock split in January 2010. See “Item 4. Information on the Company — History and Organizational Structure — Reverse Stock Split and Stock Split”.  Source:Bloomberg In the United States, the preferred shares trade in the form of ADSs, each ADS representing one-fifth of a preferred share, issued by the Depositary pursuant to a Depositary Agreement among the Company, the Depositary and the registered holders and beneficial owners from time to time of ADSs.  As of May 31, 2011, there were 2,683 thousand ADSs outstanding.  The following table sets forth the reported high and low closing sales prices for ADSs for the period indicated.  71 700012274.17


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 U.S. dollars per ADS(1)High

   Low2006

   1.40

   0.672007

   1.50

   0.812008

   1.46

   0.4320091st Quarter

   0.95

   0.772nd Quarter

   1.36

   0.853rd Quarter

   2.19

   1.284th Quarter

   2.72

   2.0720101st Quarter

   2.93

   2.162nd Quarter

   2.70

   2.103rd Quarter

   3.28

   2.314th Quarter

   3.13

   3.752011January

   3.65

   3.40February

   3.46

   3.20March

   3.21

   2.73April

   3.27

   2.86May

   2.97

   2.70
 __________________________ (1)   Prices per ADS have been adjusted to reflect the reverse stock split in November 2007 and the reverse stock split and simultaneous stock split in January 2010. See “Item 4. Information on the Company — History and Organizational Structure — Reverse Stock Split and Stock Split”. Source:Bloomberg Trading on the Brazilian Stock Exchanges  BM&FBovespa is the only Brazilian stock exchange on which private equity and private debt may be traded. BM&FBovespa trading sessions are from 10:00 a.m. to 5:00 p.m., São Paulo time.  During daylight saving time in the United States, the sessions are held from 9:00 a.m. to 4:00 p.m., São Paulo time (closing call is from 4:55 p.m. to 5:00 p.m.).  Equity trading is executed fully electronically through an order-driven trading system calledMegabolsa.  Additionally, the home broker system through the Internet allows retail investors to transmit orders directly to the BM&FBovespa.  The BM&FBovespa also permits trading from 5:45 p.m. to 7:00 p.m. on an online system connected toMegabolsaand Internet brokers called the After Market.  The After Market session is restricted to certain stocks that were traded through the electronic system.  Trading on the After Market is subject to regulatory limits on price volatility and on the volume of shares transacted through Internet brokers.  The CVM has discretionary authority to suspend trading in shares of a particular issuer under specific circumstances.  Securities listed on the BM&FBovespa may also be traded off the exchange under specific circumstances, but such trading is very limited. Settlement of transactions is effected three business days after the trade date, without adjustment for inflation.  Delivery of and payment for shares are made through the facilities of separate clearinghouses for each exchange, which maintain accounts for the 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 clearing house for the BM&FBovespa isCompanhia Brasileira de Liquidação e Custódia,or CBLC, which is owned, among others, by BM&FBovespa. In order to better control volatility, the BM&FBovespa has adopted a “circuit breaker” mechanism pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the index of the stock exchange falls 10% or 15%, respectively, compared to the previous day’s closing index.


If the market falls more than 15% compared to the previous day no more pauses are taken.  The “circuit breaker” is not allowed to be started during the last 30 minutes of the trading session.  72 700012274.17


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 The BM&FBovespa, is significantly less liquid than the NYSE or other major exchanges around the world.  As at December 31, 2010, the aggregate market capitalization of the 381 companies listed on the BM&FBovespa was equivalent to R$2.6 trillion (U.S.$1.5 trillion) and the 10 largest companies listed on that exchange represented approximately 55.3% of the total market capitalization of all listed companies.  In contrast, as at December 31, 2010, the aggregate market capitalization of the 2,238 companies listed on the NYSE was U.S.$13.4 trillion and the 10 largest companies listed on the NYSE represented approximately 19.2% of the total market capitalization of all listed companies. The Brazilian equity market is relatively small and illiquid compared to major world markets.  Although any of the outstanding shares of a listed company may trade on the BM&FBovespa, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling shareholders, by government entities or by one principal shareholder.  For this reason, data showing the total market capitalization of Brazilian stock exchanges tend to overstate the liquidity of the Brazilian equity market. The average daily trading volume of the BM&FBovespa for December 2010 was approximately 13.4 billion shares, which corresponds in terms of value to R$6.3 billion (U.S.$3.8 billion). Trading on Brazilian stock exchanges by nonresidents of Brazil is subject to certain limitations under Brazilian foreign investment legislation.  See “Item 10. Additional Information — Exchange Controls and Other Limitations Affecting Shareholders”. Regulation of the Brazilian Securities Market The Brazilian securities markets are regulated by the CVM, which regulates the stock exchanges and the securities markets generally, and by the Brazilian Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.  The Brazilian securities markets are governed by (i) Law no. 6,385, as amended and supplemented, which is the principal law governing the Brazilian securities markets; (ii) Brazilian corporate law (Law no. 6,404/76), as amended and supplemented; and (iii) the regulations issued by the CVM, the CMN and the Brazilian Central Bank, or collectively, the Securities Laws. Under Brazilian corporate law, a company is either public, acompanhiaaberta, such as Contax, or private, acompanhia fechada.  All public companies are registered with the CVM and are subject to reporting requirements.  A company registered with CVM may have its securities traded either on the BM&FBovespa or in the Brazilian over-the-counter market.  Shares of companies listed on the BM&FBovespa may not simultaneously trade on the Brazilian over-the-counter market.  The shares of a public company may also be traded privately, subject to certain limitations.  To be listed on the BM&FBovespa, a company must apply for registration with the CVM and the BM&FBovespa.  Once the BM&FBovespa has admitted a company to listing and the CVM has accepted its registration as a public company, its securities may be traded on the BM&FBovespa. The trading of securities on the BM&FBovespa may be suspended at the request of a company in anticipation of the announcement of a material event.  Trading may also be suspended by the BM&FBovespa or the CVM, based on or due to a belief that, among other reasons, a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or the BM&FBovespa. The trading of shares is prohibited and/or restricted under certain circumstances as follows:  (i) trading by the company of its own shares except for cancellation or maintenance in treasury for further disposal, according to Rule 10/80, issued by the CVM; (ii) trading by persons who, as a result of their position, title or relationship with the company, have knowledge of the impending disclosure of a material


event; and (iii) trading by directors, officers and members of any technical or advisory body established pursuant to a company’s by-laws during the 15-day period before the disclosure of the company’s quarterly and annual financial statements.  73 700012274.17


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 The Brazilian securities markets are principally governed by the Securities Laws, as well as by regulations issued by the CVM and the CMN.  These laws and regulations, among others, provide for disclosure requirements, restrictions on insider trading and 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 certain other jurisdictions. Recent changes to Brazilian corporate laws and regulations increased the rights of minority shareholders, including holders of preferred shares, by granting them restricted voting rights.  The amended Brazilian corporate law also granted more regulatory power to the CVM. Law No. 11,638/07, effective as of January 1, 2008 and as amended by Law No. 11,941/09, introduced changes to the Brazilian corporate law to be applied in 2010 to financial statements of financial institutions and publicly-held companies.  These changes primarily seek to facilitate the process of converging Brazilian GAAP to IFRS, and permit the CVM to issue new accounting standards and procedures consistent with international accounting standards.  In addition, to ensure consistent presentation of financial statements in prior periods, these changes will require 2009 financial statements to be disclosed together with 2010 financial statements in order to provide comparative information within the financial statements. Disclosure Requirements Through Instruction no. 358, the CVM revised and consolidated the requirements regarding the disclosure and use of information relating to material facts and acts of publicly held companies, including the disclosure of information in the trading and acquisition of securities issued by publicly held companies. The requirements include provisions that: ·establish the concept of a material fact that triggers the reporting requirements.  Material facts include decisions made by the controlling shareholders, resolutions of the general shareholders’ meeting and of management of the company, or any other facts related to the company’s business (whether occurring within the company or otherwise somehow related thereto) that may influence the price of its publicly traded securities, or the decision of investors to trade such securities or to exercise any of such securities’ underlying rights; ·specify examples of facts that are considered to be material, which include, among others, the execution of shareholders’ agreements providing for the transfer of control, the entry or withdrawal of shareholders that maintain any managing, financial, technological or administrative function with or contribution to the company, and any corporate restructuring undertaken among related companies; ·require the Investor Relations Officer to publish and inform the CVM and also the stock exchange and entities of the organized over-the-counter market where the securities issued by the company are traded, as the case may be, of any material events that have occurred or are related to their business; ·require the controlling shareholders, directors, members of the administrative council, members of the Fiscal Council and of any technical and consultative bodies, according to the by-laws, to report any material event they are aware of to the Investor Relations Officer, who will provide for its disclosure.  In the event those people referred to above have personal knowledge about material events and verify omission by the Investor Relations Officer towards investors in the fulfilling of


his communication and disclosure duties, they will only be exempt from liability if they communicate the material events to the CVM immediately;  74 700012274.17


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 ·require simultaneous disclosure of material facts to all markets in which the company’s securities are admitted for trading; ·require the acquirer of a controlling stake in a company to publish material facts, including its intention to promote, or not, within a year, the cancellation of the registration of publicly-held companies; ·establish rules regarding disclosure requirements in the acquisition and disposal of a material stockholding stake; and ·forbid the use of insider information. On December 7, 2009, the CVM enacted CVM Instruction 480, establishing new rules for registration and disclosure of information of issuers of securities admitted for trading in the local regulated markets.  The new regulation focuses on improving the quality of the information reported by issuers.  The annual information report (informações anuais – IAN) was replaced by the reference form (formulário de referência), which must contain all relevant information regarding the issuer and be updated (i) annually, within five months from the closing date of the relevant fiscal year, and (ii) within seven business days after the occurrence of certain events.  The reference form must also be updated and incorporated by reference in the case of any public distribution of securities by the relevant issuer. On December 17, 2009, the CVM enacted CVM Instruction 481 to regulate key issues involving general shareholders’ meetings of publicly-held companies, including: (i) the extent of information and documents to be provided in support of call notices and that are to be disclosed to shareholders prior to such meetings; and (ii) public proxy solicitation in connection with the exercise of voting rights.  The purpose of CVM Instruction 481 is to: (i) improve the quality of information that must be disclosed by companies to their shareholders and to the market prior to shareholders’ meetings; (ii) encourage the use of the internet to disclose information; and (iii) lower the cost of voting and proxy solicitations in order to increase shareholders’ participation at shareholders’ meetings. Item 10.       Additional Information Memorandum and Articles of Association In addition to the description in this Item 10, you should also review the copy of our by-laws incorporated by reference as an exhibit to this annual report.Under Brazilian corporate law, no memorandum or articles of association are required.  Our only constitutive documents are the by-laws and the minutes of the General Shareholders’ Meeting that provided for our incorporation. Organization We are a listed company duly registered with the CVM under no. 01910-0 and our by-laws are filed under no. 33.3.0027541-0 with the Board of Trade (JuntaComercial) of the State of Rio de Janeiro.  According to Article 3 of our by-laws, our business purpose is to participate, directly or indirectly, in other companies as partner, shareholder or quotaholder, in Brazil or abroad.  We have no present intention of listing our shares on any organized market or stock exchange in the United States. Except as described in this section, our by-laws do not contain provisions addressing the duties, authority or liabilities of Directors and senior management, which are instead established by Brazilian corporate law.   75 700012274.17


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 Qualification of Directors Brazilian corporate law provides that only shareholders of a company may be appointed to its Board of Directors.  There is no minimum share ownership or residency requirement for qualification as a Director.  If a Director is a non-Brazilian resident, he or she must appoint an attorney-in-fact to receive service of process. According to Brazilian corporate law, persons disqualified by special law, or sentenced for a bankruptcy offense, fraud, bribery or corruption, misappropriation of public funds or embezzlement, crimes against the national economy or decency or public property, or to any criminal sanction which precludes, even temporarily, access to public office are disqualified for election to an administrative office in the corporation.  A person who has been declared by the CVM to lack capacity is also ineligible to an administrative office in a publicly held corporation. The officers shall have unblemished reputations and are ineligible, except if a waiver is granted by the general shareholders’ meeting, in the following cases:  (i) holding of a position in a competing company, especially on the management board or advisory or finance committees; and (ii) conflicting interests with the company. Allocation of Net Income and Distribution of Dividends Our by-laws require the Board of Directors to recommend, at each annual shareholders’ meeting, the allocation of net income from the preceding fiscal year as follows: ·5.0% to a legal reserve, not to exceed 20.0% of the paid-in capital of Contax; ·at least 25.0% of adjusted net income against payment of dividends.  As required by Brazilian corporate law, such amount will be increased if required to satisfy payment of dividends of preferred shares; and ·respecting the entry in the reserve for profits to be realized, the remaining net income should be allocated in the reserve for expansion for working capital purposes.  The total amount registered in the reserve for expansion together with the amount entered in profit reserves is limited to the total amount recorded as paid-in capital. Whenever we accumulate or reserve profits, the Board of Directors can authorize the allocation of interim dividends, as provided under Brazilian corporate law.  In general, we have to pay dividends first to holders of preferred shares and then to holders of common shares.  The remaining balance will be distributed equally among all of the shares of our capital stock.  Dividends not claimed within three years of the date on which they were made available for distribution will revert to us.  See “Item 8.  Financial Information — Policy on Dividend Distribution”. In lieu of the payment of dividends as stated above, we may elect to make payments to shareholders characterized as interest on our capital.  See “— Taxation — Brazilian Tax Considerations — Distribution of Interest on Capital”. Shareholders’ Meetings and Proxy Solicitation The annual shareholders’ meetings are held once a year, generally during the first four months following the end of the fiscal year.  Extraordinary meetings can be called at any time. Our shareholders have the power to decide any matters related to our corporate purpose and to pass any resolutions they deem necessary for our protection and development through a shareholders’ vote at a shareholders’ meeting.  76 700012274.17


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 We convene the shareholders’ meetings by publishing a notice in the national edition ofValor Econômico, a Brazilian newspaper, and also in the Official Gazette of the State of Rio de Janeiro (Diário Oficial do Estado doRio de Janeiro).  The notice must be published no fewer than three times, the first of which must be at least 15 calendar days prior to the scheduled meeting date. Such call notice must always contain the meeting place, date and time and a detailed agenda.  CVM Instruction 481 of December 17, 2009 determines the requirements with respect to which documents and information must be made available to the shareholders prior to the first call notice.  CVM Instruction 481 also requires that such documents and information be made electronically available on the company’s website. The Board of Directors, or, in some specific situations set forth in Brazilian corporate law, the shareholders or the Fiscal Council, if installed, has the power to call shareholders’ meetings.  A shareholder may be represented at a shareholders’ meeting by its attorney-in-fact so long as that attorney-in-fact was appointed within one year of such meeting.  The attorney-in-fact must be another shareholder, a member of our management, a lawyer, or a financial institution.  The power of attorney granted to the attorney-in-fact must comply with certain formalities set forth by Brazilian law. In order to be legally convened after a first call, a shareholders’ meeting must obtain a quorum representing at least one-quarter of the issued and outstanding voting capital.  If this quorum is not met, a shareholders’ meeting can be held with any quorum after a second call has been published.  However, if the purpose of a shareholders’ meeting is to amend our by-laws, shareholders representing at least two-thirds of the issued and outstanding voting capital must be present.  If this quorum is not met, the Board of Directors may call a second meeting with notice given at least eight calendar days prior to the scheduled meeting, in accordance with the rules of publication described above.  No minimum quorum requirements apply to a second meeting, except that certain voting requirements may still apply as described below. CVM Instruction 481 regulates public proxy solicitations in connection with the exercise of voting rights at a shareholders’ meeting.  All material used in connection with a proxy solicitation must be filed with the CVM and becomes publicly available on its website. For the purposes of conducting a public proxy solicitation, shareholders holding at least 0.5% of a company’s shares can require a list of its shareholders from the company indicating shareholders’ addresses and the number of shares held.  CVM Instruction 481 also allows companies to implement electronic systems in order to distribute and receive proxy solicitations among its shareholders.  As of the date of this annual report, we do not have an electronic system in place for such purpose. Voting Rights Each common share entitles its holder to one vote at our shareholders’ meetings.  Except as otherwise provided by law, resolutions of a shareholders’ meeting are passed by the vote of holders of our common shares.  Abstentions are not taken into account. Holders of preferred shares may acquire full voting rights if we fail to pay dividends for three consecutive years.  They will continue to have voting rights until dividends are duly paid. Pursuant to Brazilian corporate law, the approval of the following matters requires:  (i) a separate vote ofshareholders representing the majority of each class of the outstanding, adversely affected preferred shares; and (ii) avote of shareholders representing the majority of the issued and outstanding common shares: ·the creation of preferred shares or the increase of an existing class of shares without preserving their proportion with other classes of shares, except as already authorized by our by-laws;  77 700012274.17


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 ·a change of a preference, privilege or redemption or amortization provision of any class of preferred shares; and ·the creation of a new class of preferred shares that has a preference, privilege or redemption or amortization provision which is superior to those of existing preferred shares. Preferred shareholders do not have a vote on any other matter in addition to the ones previously mentioned, except that they can elect one member and respective alternate to sit on our Fiscal Council, if installed, and, if they come to hold more than 10.0% of our capital stock, they can elect one member and respective alternate to sit on our Board of Directors.  See “Item 6. Directors, Senior Management and Employees”. Notwithstanding the actions described above, the approval of a majority of the holders of the issued and outstanding common shares is required to approve the following matters: ·a reduction of the mandatory dividend set forth in our by-laws; ·the approval of a merger, spin-off or consolidation; ·our participation in a group of companies, orgrupo de sociedades, the management of which is coordinated through contractual relationships and equity ownership, as defined under Brazilian corporate law; ·a change in our business purpose; ·the creation of founders’ shares (partes beneficiárias); ·the cessation of our liquidation process; and ·approval of our dissolution. Pursuant to Brazilian corporate law, holders of common shares, voting at a shareholders’ meeting, have the exclusive power to: ·amend the by-laws, including changing the rights of holders of common shares; ·elect or dismiss members of the Board of Directors or Fiscal Council, if installed; ·review the yearly accounts prepared by management and accept or reject management’s financial statements, and decide on the allocation of:  (i) net profits for payment of the mandatory dividend; and (ii) funds to the various reserve accounts; ·authorize the issuance of debentures and founders’ shares (partes beneficiárias), except that the Board of Directors is empowered to approve the issuance of simple debentures that are not convertible into shares and have no real guarantee; ·suspend the rights of shareholders who have not fulfilled their obligations as imposed by law or by the by-laws; ·accept or reject the valuation of assets contributed by a shareholder in consideration for issuance of capital stock;  78 700012274.17


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 ·pass resolutions authorizing:  (i) the reorganization of our legal form; (ii) our merger, spin-off, dissolution or liquidation; and (iii) the election or dismissal of liquidators and the inspection of their accounts; and ·authorize our management to file for bankruptcy or requestconcordata(a reorganization process similar to Chapter 11 proceedings under U.S. bankruptcy law). Related Party Transactions According to Brazilian corporate law, a shareholder may not vote on resolutions to approve the following matters:  (i) an evaluation report of property transferred by such shareholder as capital contribution to a company; (ii) the accounts of such shareholder while serving as an officer of a company; or (iii) any other resolution that may benefit such shareholder personally or in which such shareholder and the company may have a conflicting interest.  Resolutions passed with a vote of a conflicted shareholder may be voided and such shareholder held liable for damages and required to account to the company for any benefits incurred. Brazilian corporate law also provides that a Director or Officer shall not take part in any (i) corporate transaction in which they have an interest that conflicts with those of the company, or (ii) decision made by other Directors or Officers regarding such conflicting transaction.  The conflicted Director or Officer shall disclose their impediment to the other Directors or Officers and request that the nature and extent of their interests be recorded in the minutes of the meeting of the Board of Directors or of the Board of Executive Officers.  In addition, a Director or Officer may only execute contracts with a company under reasonable and fair terms in line withprevailing market standards or in accordance with the same guidelines that the company would observe when executing contracts withunrelated third parties.  Any business executed by such Director or Officer and the company which conflicts with these rules may be voided and the Director or Officer required to account to the company for any benefits incurred. Appraisal Rights Brazilian corporate law provides that under certain circumstances a shareholder has the right to require that its equity interests in a company be redeemed for payment.  Such payment shall not be lower than the company’s pro-rata net worth (as per its most recently approved balance sheet) unless an independent valuation were to determine a lower economic value for the company’s equity value. Appraisal rights may be exercised: (i)            by the dissenting or nonvoting holders of the adversely affected class of shares (including any holder of preferredshares of an adversely affectedclass) in the event that theholders ofamajorityof all outstanding common shares authorize: ·the creation of preferred shares or an increase of an existing class of shares without preserving their proportion with other classes of shares, except as already authorized in our by-laws; ·a change in the preferences, privileges, or redemption or amortization provisions of any class of preferred shares; or ·the creation of a new class of preferred shares that has a preference, privilege, or redemption or amortization provision that is superior to those of existing preferred shares.  79 700012274.17


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 (ii)           by all dissenting or nonvoting shareholders, in the event that the holders of a majority of all outstanding common shares authorize: ·a reduction of the mandatory dividend set forth in our by-laws; ·the approval of our consolidation or merger into another company; ·our participation in agrupo de sociedades; ·a change in our business purpose; ·our spin-off, if such spin-off implies (a) a change in our business purpose (except if the spun-off assets revert to a company whose main purpose is the same as ours), (b) a reduction of the mandatory dividend set forth in our by-laws, or (c) our participation in agrupode sociedades; or ·the acquisition of control of another company at a price which exceeds certain limits set forth in Brazilian corporate law. Notwithstanding the above, in the event that we are consolidated or merged with another company, become part of agrupo de sociedades, or acquire the control of another company for a price in excess of certain limits imposed by Brazilian corporate law, holders of any type or class of shares that are marketable and dispersed in the market will not have appraisal rights.  Shares are considered marketable when that type or class of shares is part of a general stock exchange index, as defined by the CVM, in Brazil or abroad.  Shares are considered dispersed in the market when the controlling shareholder, the parent company or other companies under its control hold less than half the total amount of that share type or class. Dissenting or nonvoting shareholders are also entitled to appraisal rights in the event that the entity resulting from a merger or spin-off does not have its shares listed in an exchange or traded in the secondary market within 120 days from the shareholders’ meeting that approved the relevant merger or spin-off. Dissenting or nonvoting shareholders are only entitled to appraisal rights when they are shareholders of record at the time of the first notice calling for a shareholders’ meeting to vote on this matter is published or at the time when a material fact (fato relevante) was announced, whichever occurs earlier. Appraisal rights lapse 30 days after publication of the minutes of the shareholders’ meeting that gave rise to such appraisal rights, except when the resolution is approved pending confirmation by the holders of preferred shares (such confirmation to be given at special meeting to be held within one year).  In this event, such 30-day period for dissenting shareholders begins at the date of publication of the minutes of the shareholders’ meeting.  Within 10 days after expiration of the exercise period of appraisal rights, we are entitled to reconsider any resolution or decision that gave rise to such appraisal rights, in the event that the reimbursement of shares held by dissenting shareholders is deemed to have a negative impact on our financial stability. In any one of the situations explained above, shares would be redeemable at their net book value, based on the most recent balance sheet approved by shareholders.  The reimbursement amount can only be lower than the net book value amount if it is based on the economic value of the enterprise, as determined by an appraisal process in accordance with Brazilian corporate law.  If the shareholders’ meeting that gave rise to such appraisal rights is held more than 60 days after the date of the most recently approved balance sheet, shareholders may require that the reimbursement value of their shares be calculated based on a new balance sheet dated up to 60 days prior to that shareholders’ meeting.   80 700012274.17


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 Liquidation Procedures In the event of our liquidation, the holders of preferred shares would be entitled to priority in relation to holders of common shares in the reimbursement of capital, with no premium.  The reimbursement amount to which they would be entitled is based on the portion of the capital stock represented by the preferred shares, as adjusted from time to time to reflect any capital increases or reductions.  First, after all our creditors have been paid, the residual assets, if any, would be applied towards the amount of capital represented by preferred shares to its respective holders.  Once holders of preferred shares have been fully reimbursed, the holders of the common shares will be reimbursed, to the extent of remaining assets, if any, on the portion of the capital stock represented by common shares.  All our shareholders will participate equally and ratably in any remaining residual assets. Form and Transfer of Securities Our shares are maintained in book-entry form with a transfer agent, Banco do Brasil S.A., or the Registrar, that serves as the registrar for those of our shares that will be freely traded on the BM&FBovespa.  To make a transfer of shares, the Registrar makes an entry in the register by debiting the share account of the transferor and crediting the share account of the transferee. Transfers of shares by a foreign investor are made in the same way and executed by the investor’s local Custodian on the investor’s behalf. The BM&FBovespa and clearing systems, such as member brokerage firms and banks, control Brazil’s clearing house for equity of Brazilian listed companies, the CBLC.  Shareholders may choose, at their discretion, to hold their shares through the CBLC.  Shares are added to the CBLC system through Brazilian institutions that have clearing accounts with the CBLC.  Our shareholder registry indicates which shares are kept at the CBLC system. Transfer of Control The sale of a controlling block of shares of a publicly held company, such as Contax, can only be effected if the acquirer undertakes to make a public offering to purchase the remaining common shares at a price equal to at least 80.0% of the amount paid for each voting share in such controlling block.  Such public offering must comply with the rules issued by the CVM.  In addition, the acquirer may grant the option to the minority shareholders to keep their shares upon receipt of a premium equal to the difference between the market value of the shares and the amount paid for the shares comprising the controlling block. The concept of sale of control is defined by Brazilian corporate law and regulations as the direct or indirect: (i) transfer of (A) shares included in the controlling block or subject to a shareholders’ agreement, or (B) securities convertible into voting shares; or (ii) assignment of shares and other securities subscription rights, or rights attached to securities convertible into shares, that may result in the disposal of control of a company. Amendments Our by-laws were further amended on November 13, 2009, to reflect the reverse stock split and simultaneous stock split as approved at our Extraordinary Shareholders’ Meeting held on that date.  As a result, the caption of article 5 of our by-laws now has the following wording:  “Article 5 – The Company’s Capital Stock comprises R$223,873,116.10 (two hundred and twenty three million, eight hundred and seventy three thousand, one hundred and sixteen reais and ten centavos), divided into 59,770,600 shares, of which 23,089,600 are common shares and 36,681,00 are preferred shares, all registered book-entry shares with no par value”.  81 700012274.17


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 Article 13 of our by-laws was last amended after our Extraordinary Shareholders’ Meeting held on June 17, 2008 to increase the maximum number of members of our Board of Directors from 11 to 13 members. Our by-laws were amended at our Extraordinary Shareholders’ Meeting held on March 30, 2011 to include Article 17-A in order to create a special independent committee, composed of independent members, with the purpose of analyzing the economic conditions of our proposed business combination with Dedic. See “Item 4. Information of the Company — Potential Business Combination with Dedic”. Our by-laws were last amended at our Extraordinary Shareholders’ Meeting held on April 25, 2011 to (a) correct a technical error contained in sub-line “d” of the Article 11, changing the Article from  “17, XXXI” to “Article 17, XXIV” and (b) ratify the number of members of the Fiscal Council in the caption of Article 26, from “3 (three)” to “3 (three) to 5 (five)” members. Disclosure of Shareholder Ownership Brazilian regulations establish that the controlling shareholders, directly or indirectly, and those shareholders who elected the members of the Board of Directors or Fiscal Council, if installed, as well as any other person or group of persons acting together or representing the same interest and who directly or indirectly hold 5.0% or more of any type or class of shares in a publicly held company, disclose their respective shareholdings to the company.  In the event that an acquisition results in a change of control of a company or of its administrative structure, as well as when the acquisition results in the obligation to make a public tender offer, the acquirer of the control of such company shall publish a press release regarding the shareholdings, as required by Brazilian regulations.  The Investor Relations Officer is responsible for transmitting the information to the CVM and the stock exchanges.  Every 5.0% increment or disposal in shareholding must be similarly disclosed.  See “Item 9. The Offer and Listing—Disclosure Requirements”. Material Contracts Oi and Banco Itaú Unibanco Services Agreements We are party to a material contract with Oi relating to contact center services rendered by us to Oi, which was executed on November 30, 2004 and duly approved at Tmar’s Extraordinary Shareholders’ Meeting on December 17, 2004. The total amount of our revenues derived from Oi was R$173.5 million in 2010, R$1,097.1 million in 2009 and R$906.9 million in 2008, representing 48.9%, 50.8% and 51.1%, respectively, of our revenues in those years.  Our relationship with Oi is currently comprised of several distinct and independent services, such as customer services for Oi’s; fixed-line business, outbound telemarketing to attract additional mobile customers, customer service for prepaid and postpaid mobile users, technical support for broadband subscribers and debt collection services. We are also party to a material contract with Itaú Unibanco, one of Brazil’s main banks, relating to contact center services rendered by us to Itaú Unibanco, which was executed on December 18, 2009.  This agreement accounted for a significant portion of our revenues in 2010 (second only to the Oi services agreement). BNDES Loan Agreement On June 20, 2007, our Board of Directors approved the loan agreement of approximately R$217 million from BNDES (the Brazilian Development Bank) to our subsidiary Contax S.A., as approved by the Executive Board of BNDES on May 22, 2007.  Repayment will occur within a six-year settlement term, including a two-year grace period, with an annual cost of TJLP (the Brazilian long-term interest rate) plus 2.0%.  82 700012274.17


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 The funds are for increasing installed capacity, upgrading current facilities, training programs, improving service quality and productivity and investments in marketing activities, within the PROSOFT- Corporate (Software Industry and Correlated Services Development Program). In October 2007, the first tranche of the BNDES loan was provided in the amount of R$100 million, followed by additional tranches on January 28, January 30, June 12 and November 18, 2008, in the amounts of R$40 million, R$10 million, R$61.8 million and R$4.9 million, respectively, totaling an aggregate of R$216.7 million. On March 10, 2010, Contax S.A. entered into a financing agreement with BNDES comprised of two loans in the principal amounts of R$281.4 million (the A loan) and R$42.1 million (the B loan).  The outstanding principal amount of these loans is payable in 60 equal monthly installments commencing on October 15, 2011. The A loan bears interest at 1.73% per annum plus the TJLP rate (a Brazilian long-term interest rate) plus 1.0% per annum, and the proceeds were used to upgrade our existing facilities, improve the quality of service and fund training programs and investments for research and development.  The B loan bears interest at 4.5% per annum, and the proceeds were used to purchase machinery and equipment through an industrial equipment financing program run by the Brazilian Special Agency for Financing Industrial Equipment (Agência Especial de Financiamento Industrial– FINAME). As of April 30, 2011, BNDES had disbursed approximately R$227.7 million under the A loan and R$34.0 million under the B loan. As of May 31, 2011, the TJLP rate was 6.0% per annum. On March 10, 2010, we entered into a credit facility agreement with BNDES in the amount of R$323.5 million, as approved by our Board of Directors on February 3, 2010.  On May 28, 2010, the first tranche of the BNDES loan was disbursed in the amount of R$80.8 million, followed by additional disbursements on December 10, 2010 in the amount of US$100 million and March 22, 2011 in the amount of R$80.8 million.  The total amount received so far from BNDES in connection with this agreement amounts to an aggregate of R$261.6 million.  Banco do Nordeste do Brasil Loan Agreement On March 16, 2010, Contax S.A. entered into a financing agreement with Banco do Nordeste do Brasil under which Banco do Nordeste do Brasil disbursed a loan in the principal amount of R$51.0 million.  The outstanding principal amount of this loan is payable in 36 equal monthly installments from April 2012 to March 2015.  Provided that each of the installments is paid on the due date, this loan will bear interest at a rate of 8.5% per annum.  If any installment is not paid on the relevant due date, the loan will bear interest at a rate of 10.0% per annum. On September 21, 2010, the first disbursement under this agreement was received for a total of R$29.9 million. On December 15, 2010, the second disbursement under this agreement was received for a total of R$21.1 million. Exchange Controls and Other Limitations Affecting Shareholders There are no restrictions on ownership of our capital stock by individuals or legal entities domiciled outside Brazil.  However, the right to convert dividend payments and proceeds from the sale of preferred shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation and foreign exchange regulations, which generally requires, among other things, that the relevant investments be registered with the Brazilian Central Bank.  Such restrictions on the remittance of foreign capital abroad could hinder or prevent the acting as custodian for the Depositary of the preferred shares underlying the ADSs, or holders who have exchanged ADSs for preferred shares from converting dividends, distributions or the proceeds from any sale of such preferred shares into U.S. dollars, as the case may be, and remitting such U.S. dollars abroad.  Holders of ADSs could be adversely affected by delays in, or refusal to grant any, required government approval for


conversions of Brazilian currency payments and remittances abroad of amounts owed to holders of ADSs.  See “Item 3. Key Information — Risk Factors — Risks Relating to the ADSs and the Preferred Shares”.  83 700012274.17


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 Foreign investors may register their investments under Law no. 4,131 or Resolution no. 2,689 of the CMN. Registration under Law no. 4,131 or under Resolution no. 2,689 generally enables foreign investors to convert into foreign currency dividends, other distributions and sales proceeds received in connection with registered investments and to remit such amounts abroad.  Resolution no. 2,689 affords favorable tax treatment to foreign investors who are not resident in a tax haven jurisdiction, or Tax Haven, which is defined under Brazilian tax laws as a country that does not impose taxes or where the maximum income tax rate is lower than 20.0%. All investments made by a foreign investor under Resolution no. 2,689 will be subject to an electronic registration with the Brazilian Central Bank. Under Resolution no. 2,689, foreign investors may invest in almost all financial assets and engage in almost all transactions available to local investors in the Brazilian financial and capital markets, provided that certain requirements are fulfilled.  In accordance with Resolution no. 2,689, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad. Resolution no. 2,689 prohibits the offshore transfer or assignment of title to Brazilian securities, except in the cases of (i) corporate reorganization effected abroad by a foreign investor, or (ii) inheritance. Pursuant to Resolution no. 2,689, foreign investors must: ·appoint at least one representative in Brazil with powers to take action relating to the foreign investment; ·complete the appropriate foreign investor registration forms; ·obtain registration as a foreign investor with the CVM; and ·register their foreign investment with the Brazilian Central Bank. Securities and other financial assets held by the foreign investor pursuant to Resolution no. 2,689 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Brazilian Central Bank or the CVM or in registry, clearing and custody systems authorized by the Brazilian Central Bank or the CVM.  In addition, the trading of securities is restricted to transactions carried out in exchanges or in organized over-the-counter markets recognized by the CVM. Resolution no. 1,927 of the CMN provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. Under the mechanics of an ADS program, the custodian for the Depositary holds those shares that correspond to the ADSs issued abroad so that such shares are blocked from trading on the BM&FBovespa.  The Depositary will keep a record of the ADS holders and record the transfers of ADSs made by such ADS holders.  Distributions made by us will be paid to the custodian, who will remit such distribution outside Brazil to the Depositary, so that it can in turn distribute these proceeds to the ADS holders of record. To allow that dividends paid inreaisbe legally converted into U.S. dollars and remitted outside Brazil to holders of ADSs, the Brazilian Central Bank has issued an electronic certificate of foreign capital registration in the name of the Depositary, which is kept by the custodian on the Depositary’s behalf.  Pursuant to the electronic certificate of foreign capital registration, the custodian is allowed to convert, into foreign currency, dividends and other distributions denominated inreaiswith respect to the preferred


shares represented by ADSs and remit the proceeds of such distributions outside Brazil to the Depositary, so that it can in turn forward such proceeds to the ADS holders of record.  84 700012274.17


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 In the event that a holder of ADSs exchanges such ADSs for preferred shares, the holder will be entitled to continue to rely on the Depositary’s electronic certificate of foreign capital registration for five business days after the exchange, after which the holder must seek to obtain its own electronic certificate of foreign capital registration with the Brazilian Central Bank.  Pursuant to Central Bank Resolution No. 3.845 of March 23, 2010, if an investor elects to hold preferred shares after cancellation of corresponding ADSs, a simultaneous exchange transaction must be effected in order to obtain a certificate of registration of such shares with the Central Bank.  This transaction will be subject to tax in Brazil.  For more information, see “—Taxation—Brazilian Tax Considerations—Other Brazilian Taxes.”  Unless the preferred shares are held by a duly registered investor pursuant to Resolution no. 2,689 or unless a holder of preferred shares applies for and obtains a new certificate of registration, such holder may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, the preferred shares.  Also, if not registered under Resolution no. 2,689, such holder will be subject to less favorable Brazilian tax treatment than a holder of ADSs.  In addition, if the foreign investor resides in a Tax Haven, the investor will also be subject to less favorable tax treatment.  See “Item 3. Key Information.  Risk Factors — Risks Relating to the ADSs and Preferred Shares — If you surrender your ADSs and withdraw preferred shares, you risk losing the ability to remit foreign currency abroad and certain Brazilian tax advantages” and “— Taxation — Brazilian Tax Considerations”. Under current Brazilian legislation, the federal government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments.  For approximately six months in 1989 and early 1990, the Brazilian government froze all dividend and capital repatriations held by the Brazilian Central Bank that were owed to foreign equity investors, in order to preserve Brazil’s 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. Key Information. Risk Factors — Risks Relating to Brazil”. Registered Capital Investments in preferred shares by (i) a holder not deemed to be domiciled in Brazil for Brazilian tax purposes, (ii) a non-Brazilian holder, who is registered with the CVM under Resolution no. 2,689, or (iii) the Depositary are eligible for registration with the Brazilian Central Bank.  Such registration (the amount so registered being referred to as Registered Capital) allows the remittance outside Brazil of foreign currency, converted at the commercial market rate, acquired with the proceeds of distributions on and amounts realized through dispositions of such preferred shares.  The Registered Capital per preferred share purchased in the form of an ADS, or purchased in Brazil and deposited with the Depositary in exchange for an ADS, will be equal to its purchase price (stated in U.S. dollars).  The Registered Capital per preferred share withdrawn upon cancellation of an ADS will be the U.S. dollar equivalent of (i) the average price of a preferred share on the BM&FBovespa on the day of withdrawal; or (ii) if no preferred shares were traded on that day, the average price on the BM&FBovespa during the 15 trading sessions immediately preceding such withdrawal.  The U.S. dollar equivalent will be determined on the basis of the average commercial market rates quoted by the Brazilian Central Bank on such date or dates. A non-Brazilian holder of preferred shares may experience delays in effecting Brazilian Central Bank registration, which may consequently delay remittances of currencies abroad.  Such a delay may adversely affect the amount in U.S. dollars received by the non-Brazilian holder. Taxation The following summary contains a description of the principal Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of shares or ADSs.  Such summary does not, however, purport to be a comprehensive description of all the tax considerations that may be relevant to adecision to purchaseshares or ADSs.  The summary is based upon the tax laws of Brazil and the


United States and regulations under these tax laws as currently in effect, which are subject to change.  Although there is at present 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 shares or ADSs.  Prospective holders of preferred shares or ADSs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of shares or ADSs in their particular circumstances.  85 700012274.17


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 Brazilian Tax Considerations The following discussion summarizes the principal Brazilian tax consequences of the acquisition, ownership and disposition of shares or ADSs by a non-Brazilian holder.  The following is a general discussion only, and therefore does not specifically address all of the Brazilian tax considerations applicable to any particular non-Brazilian holder.  It is based upon the tax laws of Brazil as in effect on the date of this filing, which are subject to change, possibly with retroactive effect, and to differing interpretations, which may result in different tax consequences from those described below. The tax consequences described below do not take into account the effects of any tax treaties or reciprocity of tax treatment entered into by Brazil and other countries.  Please note that Brazil has not entered into any tax treaty with the United States.  Also, the discussion does not address any tax consequences under the tax laws of any state or municipality of Brazil either.  Each prospective investor is urged to consult its own tax advisor about the Brazilian tax consequences of an investment in our shares or the ADSs. Taxation of Dividends Dividends paid by us in cash or in kind from profits of periods beginning on or after January 1, 1996 (i) to the Depositary in respect of shares underlying ADSs or (ii) to a non-Brazilian holder in respect of shares, will generally not be subject to Brazilian withholding tax.  Dividends paid from profits generated before January 1, 1996 may be subject to Brazilian withholding tax at varying rates, according to the tax legislation applicable to each corresponding year. Distribution of Interest on Capital Brazilian corporations may make payments to shareholders characterized as interest on our capital as an alternative form of making dividend distributions.  The rate of interest may not be higher than the Brazilian long-term interest rate, or TJLP, as determined by the Central Bank from time to time.  The total amount distributed as interest on capital may not exceed the greater of (i) 50.0% of net income (after social contribution on profits and before the provision for corporate income tax and the amounts attributable to shareholders as shareholders’ interest on equity) for the year in respect of which the payment or credit is made or (ii) 50.0% of retained earnings for the year prior to the year in respect of which the payment or credit is made.  Payments of interest on capital are decided by the shareholders on the basis of recommendations of a Company’s Board of Directors. Distribution of interest on capital paid to Brazilian and non-Brazilian holders of shares, including payments to the Depositary in respect of shares underlying ADSs, are deductible by us for Brazilian corporate income tax purposes.  Such payments are subject to Brazilian withholding tax at the rate of 15.0%, except for payments to persons situated in Tax Havens (as defined below) which are subject to tax at a 25.0% rate.  Pursuant to Brazilian law, a “Tax Haven” is any country or location that does not impose income tax or where the income tax rate is lower than 20.0% or where the local legislation imposes restrictions on disclosing the shareholding composition or the ownership of the investment or the ultimate beneficiary of the income. No assurance can be given that our Board of Directors will not recommend that future distributions of profits will be made by means of interest on capital instead of by means of dividends.  86 700012274.17


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 Amounts paid as interest on 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 and Brazilian corporate law.  Distributions of interest on capital in respect of our shares, including distributions to the Depositary in respect of shares underlying ADSs, may be converted into U.S. dollars and remitted outside of Brazil, subject to applicable exchange controls. Taxation of Gains Outside Brazil According to Law no. 10,833 of December 29, 2003, capital gains realized on the disposition of assets located in Brazil by a non-Brazilian holder, whether to another non-Brazilian resident or to Brazilian residents, are subject to taxation in Brazil.  In this sense, if the shares are disposed of by a non-Brazilian holder, as they are defined as assets located in Brazil, such holder will be subject to income tax on the gains assessed, following the rules described below, whether the disposition is conducted in Brazil or abroad and with a Brazilian resident or not. Regarding ADSs, although the matter is not free from doubt, the gains realized by a non-Brazilian holder on the disposition of ADSs to another non-Brazilian holder would not be taxed in Brazil, based on the theory that ADSs do not constitute assets located in Brazil for purposes of Law no. 10,833/03. However, we cannot assure you that Brazilian courts would adopt this theory.  Thus, the gain on a disposition of ADSs by a non-Brazilian holder to a resident in Brazil (or possibly even to a non-Brazilian holder in the event of a judicial determination that ADSs would constitute assets located in Brazil) may be subject to income tax in Brazil. The Brazilian tax authorities have issued a normative instruction confirming that, pursuant to Law no. 10,833, they intend to assess income tax on capital gains earned by non-Brazilian residents who earn a capital gain on the disposition of assets located in Brazil, regardless of whether the buyer is a Brazilian resident or not.  Holders of ADSs outside Brazil may have grounds to assert that Brazilian Law no. 10,833 does not apply to sales or other dispositions of ADSs, as ADSs are not assets located in Brazil.  However, except in the situations described below under the heading “— Taxation of Gains in Brazil”, the sale or other disposition of shares abroad would be subject to the provisions of Law no. 10,833.  Considering the general and unclear scope of such provisions and the lack of a final judicial ruling in respect thereof, we are unable to predict whether such understanding will ultimately prevail in of Brazil. Any capital gains arising from sales or other dispositions outside Brazil would be subject to Brazilian income tax at the rate of 15.0% or, if the investor is located in a Tax Haven, 25.0%.  Law no. 10,833 requires the purchaser of our shares outside Brazil or its attorney-in-fact in Brazil to withhold the income tax.  A disposition of shares can only occur abroad if an investor decides to cancel its investment in ADSs and register the underlying shares as a direct foreign investment under Law no. 4,131. Taxation of Gains in Brazil The deposit of shares in exchange for ADSs may be subject to Brazilian tax on capital gains at the rate of 15.0%, or 25.0% in the case of Tax-Haven residents, if the acquisition cost of the shares is lower than (a) the average price per share on a Brazilian stock exchange on which the greatest number of such shares were sold on the day of deposit; or (b) if no shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of  shares were sold in the 15 trading sessions immediately preceding such deposit.  In such case, the difference between the acquisition cost and the average price of the shares calculated as above will be considered to be a capital gain subject to taxation.  Such taxation may not be applicable in case of non-Brazilian holders registered under Resolution no. 2,689 (other than Tax-Haven residents), who are currently not subject to income tax in such a transaction. The withdrawal of ADSs in exchange for shares is not subject to Brazilian tax.  Any exercise of preemptive rights relating to the ADSs will not be subject to Brazilian taxation.  Any gain on the sale or assignment of preemptive rights relating to shares by the depositary on behalf of holders of ADSs will be subject to Brazilian income taxation according to the same rules applicable to the sale or disposition of shares.  87 700012274.17


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 As a general rule, gains realized as a result of a disposition or sale transaction of a share are the positive difference between the amount realized on the sale or exchange and the share’s acquisition cost.  Under Brazilian law, income tax rules on such gains can vary depending on the domicile of the non-Brazilian holder, the type of registration of the investment by the non-Brazilian holder with the Central Bank and how the disposition is carried out, as described below. Capital gains assessed on non-Brazilian holders on a disposition of shares carried out on the Brazilian stock exchange (which includes the organized over-the-counter market) are: ·exempt from income tax when realized by a non-Brazilian holder that (1) has registered its investment in Brazil with the Central Bank under the rules of Resolution no. 2,689, and (2) is not a Tax Haven resident; or ·subject to income tax at a rate of 15% in any other case, including a case of gains assessed by a non-Brazilian holder that is not registered under the rules of Resolution no. 2,689, or is a Tax Haven resident.  In these cases, withholding income tax of 0.005% of the sale value will be applicable and can be later offset with the eventual income tax due on the capital gain. Any other gains assessed on a disposition of our shares that is not carried out on a Brazilian stock exchange are subject to income tax at the rate of 15%, except for a Tax Haven resident which, in this case, is subject to income tax at the rate of 25%.  Transactions conducted in the Brazilian over-the-counter market through a financial institution or other entity authorized by the Central Bank, but not through a system authorized by the Central Bank, are subject to withholding income tax of 0.005% of the sale value, which can be later offset with the eventual income tax due on the capital gain. The current preferential treatment for non-Brazilian holders of ADSs and non-Brazilian holders of shares under Resolution no. 2,689 may not continue in the future. In the case of a redemption of shares or a capital reduction by a Brazilian corporation, with subsequent withdraw of the ADSs, the positive difference between the amount received by the non-resident and the acquisition cost of the shares redeemed is treated as capital gain derived from the sale or exchange of shares not carried out on a Brazilian stock exchange market and is therefore subject to income tax at the rate of 15.0%, or 25.0%, as the case may be. Any exercise of preemptive rights relating to our shares will not be subject to Brazilian taxation.  Gains on the sale or assignment of preemptive rights relating to our shares by the Depositary may be subject to Brazilian taxation, according to the same rules applicable to the sale or disposition of shares.  Tax authorities may attempt to tax such gains even when the sale or assignment of such rights takes place outside Brazil, based on the provisions of Law no. 10,833, as described above. As a non-Brazilian holder of ADSs, you may cancel your ADSs and exchange them for shares and no income tax may be levied on such exchange, as long as the appropriate rules are complied with in connection with the registration of the investment with the Central Bank. Tax on Foreign Exchange and Financial Transactions Foreign Exchange Transactions Brazilian law imposes a Tax on Foreign Exchange Transactions, or IOF/Exchange Tax, on the conversion ofreaisinto foreign currency and on the conversion of foreign currency intoreais.  As from January 2008, the IOF/Exchange Tax rate applicable to almost all foreign currency exchange transactions is 0.38%, except for:  88 700012274.17


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 (i) foreign currency exchange transactions for the inflow of funds made by non-resident investors in the Brazilian capital markets in accordance with the rules enacted by the CMN (except for derivative transactions with pre-defined earnings), in which case the rate is 2%; (ii) foreign currency exchange transactions for the inflow of funds made by non-resident investors in the Brazilian capital markets for the acquisition of shares in registered public offers of securities, in which case the rate is 2%; (iii) foreign currency exchange transactions, including those occurring through simultaneous transactions, for the acquisition of quotas of private equity investment funds (Fundo de Investimento em Participações), emerging companies investment funds (Fundos de Investimento em Empresas Emergentes) and funds-of-funds of such investment funds organized in accordance with the CVM’s rules, in which case the rate is 2%; (iv) foreign currency exchange transactions, derived from the conversion of the nature of the investment from direct foreign investment (under Law 4,131) to investments in stock traded in stock exchanges, in which case the rate is 2%; (v) foreign currency exchange transactions, including those occured through simultaneous transactions, for the inflow of funds made by non-residents in the Brazilian financial and capital markets, other than transactions described in items (i) to (iv) above, among others, including remittances for initial or additional formation of solvency margin required by stock exchanges, in which case the rate is 6%; (vi) payment of dividends and interest on shareholders’ equity, in which case the rate is zero; and (vii) foreign exchange transactions for the return (outflow) of funds related to the investments made by non-residents in the Brazilian financial and capital markets mentioned in items (i) to (v) above, in which case the rate is zero. Upon the cancellation of ADSs, if an investor elects to hold preferred shares corresponding to such ADSs, pursuant to Resolution No. 3.845 of December 17, 2009, a simultaneous exchange transaction is required to be effected and such transaction will subject to IOF/Exchange at the rate of 2%. Notwithstanding these rates currently in force, the President is legally entitled to increase the rate of the IOF/Exchange to a maximum of 25% of the amount of the currency exchange transaction, but only on a prospective basis. Tax on Transactions Involving Bonds and Securities Brazilian law imposes a Tax on Transactions involving Bonds and Securities, or IOF/Bonds Tax, due on transactions involving bonds and securities, including those carried out on a Brazilian stock exchange.  The rate of IOF/Bonds Tax applicable to transactions involving common or preferred shares and common and preferred ADSs is currently zero, although the President is permitted to increase such rate at any time up to 1.5% of the amount of the taxed transaction per each day of the investor’s holding period, but only to the extent there is a gain realized on the transaction and only on a prospective basis.  IOF/Bonds Tax is levied at a rate of 1.5% on the assignment of shares traded in the Brazilian stock market in connection with the issuance of ADSs. Other Brazilian Taxes There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of shares or ADSs by a non-Brazilian holder except for gift and inheritance taxes levied by some states in Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or in the relevant state to individuals or entities that are resident or domiciled within


such state in Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of shares or ADSs.  89 700012274.17


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 As a general rule, until December 31, 2007, transactions carried out in Brazil that resulted in the transfer of funds from an account maintained with a Brazilian financial institution were subject to the Temporary Contribution on Financial Transactions, or CPMF Tax, at the rate of 0.38%.  However, as of January 1, 2008, the CPMF Tax is no longer in force and should not be levied on any debit to bank accounts carried after that date. Certain Material United States Federal Income Tax Considerations The following summarizes certain material U.S. federal income tax considerations applicable to the ownership and disposition of preferred shares or ADSs.  The discussion that follows is based upon the U.S. Internal Revenue Code of 1986, as amended, or the Code, final, temporary and proposed U.S. Treasury Regulations, administrative rulings and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect) or differing judicial interpretations.  We have not sought, and will not seek, any ruling from the U.S. Internal Revenue Service, or the IRS, with respect to the tax consequences discussed herein.  Consequently, the IRS may disagree with or challenge any of such tax consequences. This discussion deals only with preferred shares or ADSs held as capital assets and does not purport to deal with persons in special tax situations, such as financial institutions, insurance companies, tax-exempt organizations, regulated investment companies, real estate investment trusts, dealers in securities or currencies, persons holding shares as a position in a “straddle” or as part of a “hedging” or “conversion” transaction for tax purposes, U.S. Holders (as defined below) whose functional currency is not the U.S. dollar, partnerships or other entities treated as partnerships for U.S. federal income tax purposes, or persons liable for alternative minimum tax.  Furthermore, this discussion does not purport to deal with persons who own, directly or indirectly, 10.0% or more of the total combined voting power of all classes of our stock entitled to vote or 10.0% or more in value of our outstanding stock.  Holders should consult their own tax advisors concerning the application of U.S. federal income tax laws to their particular situations as well as any consequences of the ownership and disposition of preferred shares or ADSs arising under the laws of any other taxing jurisdiction. This summary assumes that we are not a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.  See the discussion under “— U.S. Holders — Passive Foreign Investment Company Rules” below. U.S. Holders As used herein, a U.S. Holder is a beneficial owner of preferred shares or ADSs that is, for U.S. federal income tax purposes: an individual who is a citizen or resident of the United States, a corporation, or any other entity taxable as a corporation, created or organized in or under the laws of the United States or any state thereof or the District of Columbia, an estate the income of which is subject to U.S. federal income tax regardless of its source, or a trust if (i) a court within the United States is able to exercise primary supervision over the trust’s administration and one or more United States persons have the authority to control all substantial decisions of the trust or (ii) the trust has in effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S. person. If a partnership (or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds or disposes of preferred shares or ADSs, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership.  Partners in partnerships holding preferred shares or ADSs should consult their own tax advisors about the U.S. federal income tax consequences to them of holding or disposing of preferred shares or ADSs.   90 700012274.17


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 Treatment of ADS For U.S. federal income tax purposes, a U.S. Holder of an ADS is considered the owner of the preferred shares represented by the ADS.  Accordingly, the conversion of ADSs to preferred shares or the conversion of preferred shares to ADSs will not be a taxable transaction for U.S. federal income tax purposes, and, except as otherwise noted, references in this discussion to the ownership of preferred shares include ownership of the preferred shares underlying the corresponding ADSs. Receipt of Distributions For U.S. federal income tax purposes, a U.S. Holder generally will recognize, to the extent of our current and accumulated earnings and profits, as determined under U.S. federal income tax principles, dividend income on the receipt of distributions of cash or property on preferred shares (including amounts withheld to reflect Brazilian withholding taxes and distributions of interest on capital as described above under “— Brazilian Tax Considerations”) equal to the U.S. dollar value of such distributions on the date of actual or constructive receipt.  Distributions in excess of our current and accumulated earnings and profits will decrease (but not below zero) a U.S. Holder’s adjusted tax basis in the preferred shares, and any remaining amount of the distribution will be taxed as gain from the sale or exchange of the preferred shares.  Because we do not expect to maintain calculations of our earnings and profits in accordance with U.S. federal income tax principles, U.S. Holders should expect that a distribution will generally be reported as dividend income for U.S. federal income tax purposes. Under current law, dividends received before January 1, 2013 by non-corporate U.S. Holders on shares of certain foreign corporations will be subject to U.S. federal income tax at lower rates than other types of ordinary income if certain conditions are met.  However, because our preferred shares and ADSs are not listed, and we do not intend to list the preferred shares or ADSs, on an established securities market in the United States and there is no income tax treaty between Brazil and the United States, we currently do not expect that those conditions will be met with respect to our preferred shares or ADSs.  Thus, we do not expect that dividends we pay will qualify for such reduced rates. Dividends paid on preferred shares will not be eligible for the dividends received deduction available to certain U.S. corporate shareholders. If we make distributions with respect to our preferred shares in a currency other than the U.S. dollar, for U.S. federal income tax purposes, the amount of the distribution will generally equal the fair market value in U.S. dollars of such foreign currency on the date of actual or constructive receipt.  A U.S. Holder will have a tax basis in the foreign currency equal to its U.S. dollar value on the date of receipt, and will generally recognize gain or loss when it sells or exchanges the foreign currency.  Such gain or loss will be taxable as ordinary income or loss from U.S. sources.  The amount of any property other than money that we distribute with respect to our preferred shares will equal its fair market value on the date of distribution. Distributions to U.S. Holders that are treated as dividends for U.S. federal income tax purposes generally will be treated as income from sources outside the United States, and generally will be foreign source “passive” income for foreign tax credit purposes.  Subject to the requirements and limitations imposed by the Code and the Treasury Regulations thereunder, a U.S. Holder may elect to claim any Brazilian tax withheld or paid with respect to any dividends distributed on shares as a foreign tax credit against the U.S. federal income tax liability of the U.S. Holder.  In addition, subject to certain limitations, U.S. Holders who do not elect to claim the foreign tax credit may claim a deduction for any Brazilian tax withheld or paid with respect to shares.  Complex rules determine the availability of the foreign tax credit, and U.S. Holders should consult their tax advisors to determine whether and to what extent U.S. Holders may claim foreign tax credits. Section 305 of the Code provides special rules for the tax treatment of preferred stock.  According to the Treasury Regulations under that section, the term preferred stock generally refers to stock which enjoys certain limited rights and privileges (generally associated with specified dividend and liquidation


priorities) but does not participate in corporate growth to any significant extent.  While our preferred shares have some preferences over our common shares, the preferred shares are not fixed as to dividend payments or liquidation value; thus, although the matter is not entirely clear, we believe and have taken and intend to continue to take the position, that the preferred shares should be treated as “common stock” within the meaning of Section 305 of the Code.  If the preferred shares are treated as “common stock” for purposes of Section 305 of the Code, distributions to U.S. Holders of additional shares of such “common stock” or preemptive rights relating to such “common stock” with respect to their preferred shares or ADSs that are made as part of a pro rata distribution to all shareholders in most instances will not be subject to U.S. federal income tax.  On the other hand, if the preferred shares are treated as “preferred stock” within the meaning of Section 305 of the Code, and if a U.S. Holder receives a distribution of additional shares or preemptive rights as described in the preceding sentence, such distributions (including amounts withheld in respect of any Brazilian taxes) will be treated as dividends that can be included in the U.S. Holder’s gross income to the same extent and in the same manner as distributions payable in cash.  In that event, the amount of such distribution (and the basis of the new shares or preemptive rights so received) will equal the fair market value of the shares or preemptive rights on the date of distribution.  91 700012274.17


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 Sale, Exchange or Other Taxable Disposition of Preferred Shares Upon a sale, exchange or other taxable disposition of preferred shares, a U.S. Holder will generally recognize gain or loss in an amount equal to the difference between the amount realized on the sale, exchange or other taxable disposition and the U.S. Holder’s adjusted tax basis in the preferred shares so sold, exchanged or otherwise subject to disposition.  Any gain or loss recognized will generally be capital gain or loss, and the capital gain or loss will generally be long-term capital gain or loss if the U.S. Holder has held or is treated as having held the preferred shares for more than one year at the time of such sale, exchange or other taxable disposition.  Long-term capital gains recognized by non-corporate U.S. Holders (including individuals) are currently subject to reduced rates of taxation.  The deductibility of capital losses is subject to limitations. The gain or loss from the sale or other disposition of shares will generally be treated as income from sources within the United States for foreign tax credit purposes.  Consequently, in the case of a sale, exchange or other taxable disposition of preferred shares, a U.S. Holder may not be able to claim a foreign tax credit for Brazilian tax imposed on the gain unless it has other income from foreign sources against which it can appropriately apply the credit.  Alternatively, the U.S. Holder may take a deduction for the Brazilian income tax, provided that the U.S. Holder elects to deduct all foreign taxes paid or accrued for the taxable year. Passive Foreign Investment Company (“PFIC”) Rules Based upon current estimates of our gross income, gross assets and the nature of our business, we do not believe that we are, and we do not expect the preferred shares to be considered shares of, a PFIC for U.S. Federal income tax purposes for our current taxable year (although the determination cannot be made until the end of such taxable year), and we do not expect to be classified as a PFIC for the foreseeable future.  In general, a foreign corporation is a PFIC if, for any taxable year in which the U.S. Holder holds stock in the foreign corporation, at least 75.0% of such corporation’s gross income is passive income or at least 50.0% of the value of such corporation’s assets (determined on the basis of a quarterly average) produce passive income or are held for the production of passive income.  The determination of whether the preferred shares constitute shares of a PFIC is a factual determination made annually and thus may be subject to change.  Subject to certain exceptions, once a U.S. Holder’s preferred shares are treated as shares in a PFIC, they remain shares in a PFIC. If, contrary to our belief, we were treated as a PFIC, a U.S. Holder would be subject to special rules with respect to (i) gain realized on the sale or other disposition of preferred shares and (ii) any “excess distribution” by us to the U.S. Holder (generally, any distribution during a taxable year that exceed 125.0% of the average annual taxable distribution the U.S. Holder received on the preferred shares during the preceding three taxable years or, if shorter, the U.S. Holder’s holding period for the preferred shares).  Under those rules (i) the gain or excess distribution would be allocated ratably over the U.S. Holder’s


holding period for the preferred shares, (ii) the amount allocated to the taxable year in which the gain or excess distribution is realized and to taxable years before the first day we became a PFIC would be taxable as ordinary income, and (iii) the amount allocated to each other year (with certain exceptions) would be subject to tax at the highest U.S. federal income tax rate in effect for that year, and an additional amount equal to the interest charge generally applicable to underpayments of tax would be imposed in respect of the tax attributable to each such year.  92 700012274.17


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 A U.S. Holder that owns preferred shares during any year we are a PFIC must file IRS Form 8621.  In general, if we are treated as a PFIC, the rules described in the second paragraph of this section can be avoided by a U.S. Holder that elects to be subject to a mark-to-market regime with respect to our shares.  A U.S. Holder may elect mark-to-market treatment for its preferred shares, provided that the preferred shares constitute “marketable stock” as defined in applicable U.S. Treasury Regulations.  A U.S. Holder electing the mark-to-market regime generally would treat any gain recognized under mark-to-market treatment or on an actual sale as ordinary income and would be allowed an ordinary deduction for any decrease in the value of preferred shares in any taxable year and for any loss recognized on an actual sale, but only to the extent, in each case, of previously included mark-to-market income not offset by previously deducted decreases in value.  A U.S. Holder’s basis in preferred shares would increase or decrease by gain or loss taken into account under the mark-to-market regime.  A mark-to-market election is generally irrevocable. The rules described in the second preceding paragraph can also be avoided by a U.S. Holder that elects to treat us as a “qualified electing fund”.  However, this option will not be available to U.S. Holders because we do not currently plan to provide U.S. Holders with information sufficient to permit U.S.  Holders to make such election. Non-U.S. Holders A Non-U.S. Holder is a holder of our preferred shares or ADSs who is neither a U.S. Holder nor an entity or arrangement treated as a partnership for U.S. federal income tax purposes. Non-U.S. Holders generally will not be subject to U.S. federal income or withholding tax on dividends received from us with respect to preferred shares, unless such income is considered effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, the income is attributable to a permanent establishment or, in the case of an individual Non-U.S. Holder, a fixed base maintained in the United States). Non-U.S. Holders generally will not be subject to U.S. federal income tax on any gain recognized upon the sale, exchange or other taxable disposition of preferred shares unless the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, the income is attributable to a permanent establishment or, in the case of an individual Non-U.S. Holder, a fixed base maintained in the United States) or such Non-U.S. Shareholder is an individual who is present in the United States for 183 days or more during the taxable year of such sale, exchange or other taxable disposition and certain other conditions are met.  If the first exception applies, the Non-U.S. Holder will be subject to U.S. federal income tax on the sale, exchange or other taxable disposition as if such Non-U.S. Holder were a U.S. Holder, as described above.  If the second exception applies, then the Non-U.S. Holder will generally be subject to U.S. federal income tax at a rate of 30.0% on the amount by which such Non-U.S. Holder’s U.S. source capital gains exceed such Non-U.S. Holder’s U.S. source capital losses. In addition, any effectively connected dividends or gains realized by a Non-U.S. Holder that is a corporation for U.S. federal income tax purposes may also be subject to an additional branch profits tax at a rate of 30.0% (or such lower rate as may be specified by an applicable income tax treaty).   93 700012274.17


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 Information Reporting and Backup Withholding In general, information reporting requirements will apply to dividends paid in respect of our shares to non-corporate U.S. Holders or the proceeds received on the sale, exchange or redemption of shares by non-corporate U.S. Holders, and such amounts may be subject to U.S. backup withholding (currently at a rate of 28.0%).  Backup withholding will not apply, however, to a U.S. Holder that (i) is a corporation or comes within certain enumerated categories of persons and, when required, demonstrates this fact or (ii) furnishes a correct taxpayer identification number and makes certain other required certifications.  Generally, a U.S. Holder will provide such certifications on IRS Form W‐9 (Request for Taxpayer Identification Number and Certification) or other substitute form.  A U.S. Holder that is required to but does not furnish us with its correct taxpayer identification number may also be subject to penalties imposed by the Internal Revenue Service.  Non-U.S. Holders generally will not be subject to United States information reporting or backup withholding.  However, Non-U.S. Holders may be required to provide certification of their non-U.S. status in connection with payments received in the United States or through certain U.S.-related financial intermediaries.  Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS. HOLDERS OF PREFERRED SHARES OR ADSS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE APPLICATION OF U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF PREFERRED SHARES OR ADSS ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION. Documents On Display You may read and copy the reports and other information we file with the Securities and Exchange Commission, including this annual report and the exhibits thereto, at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the Commission’s regional offices at 175 W. Jackson Boulevard, Suite 900, Chicago, Illinois 60604, and 3 World Financial Center, Room 4300, New York, New York 10281.  You may also obtain copies of these materials by mail from the Public Reference Room of the Commission at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates.  You may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330.  You may also access our annual reports and some of the other information we file with or submit to the Commission electronically through the Commission’s website atwww.sec.gov. Item 11.       Quantitative and Qualitative Disclosures About Market Risk Foreign Exchange Risk As of December 31, 2010, we did not have any foreign-currency denominated instrument sensitive to changes in foreign exchange rates. Interest Rate Risk Our exposure to the risk of changes in market interest rates mainly relates to our long-term obligations subject to floating interest rates. We have not entered into derivatives contracts to mitigate this risk; however, we continuously evaluate market interest rates with the purpose of monitoring the desirability of entering into these instruments. Our borrowings from BNDES bear fixed interest rates based on the long-term interest rate (TJLP). Because these rates are considered very low, we believe that the volatility risk regarding this part of our debt is very low.  If interest rates increased by 1.0%, the additional amount of annual interest expense would increase by R$3,081 thousand.   94 700012274.17


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 Item 12.       Description of Securities Other than Equity Securities A. Debt Securities. Not applicable. B. Warrants and Rights. Not applicable. C. Other Securities. Not applicable. D. American Depositary Shares. Fees Paid by Our ADS Holders The Depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them.  The Depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. Persons holding, depositing or withdrawing shares must pay

   

   For:$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)

   

   Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property

   Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminatesRegistration or transfer fees

   

   Transfer and registration of shares on our share register to or from the name of the Depositary or its agent when you deposit or withdraw sharesExpenses of the Depositary

   

   Converting foreign currency to U.S. dollarsTaxes and other governmental charges the Depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes

   

   As necessaryAny charges incurred by the Depositary or its agents for servicing the deposited securities

   

   As necessary$0.02 or less per ADS (or portion thereof)

   

   Any cash distributions

   Other services performed by the Depositary in administering the ADRs
  Fees and Payments from the Depositary to Us  In 2010, we did not receive any fees or payments from the Depositary.   95 700012274.17


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  PART II Item 13.       Defaults, Dividend Arrearages and Delinquencies Not applicable. Item 14.       Material Modifications to the Rights of Security Holders and Use of Proceeds On October 17, 2007, we effected a reverse split of all shares representing our capital stock at the ratio of 20 shares for each share of the same type and, on January 15, 2010, we effected, a reverse stock split of all shares representing our capital stock at the ratio of one share for every 50 shares of the same type.  Simultaneously with the January 2010 reverse stock split, we effected a stock split at a ratio of 200 shares for one share of the same type.  See “Item 4. Information on the Company — History and Organizational Structure — Reverse Stock Split and Stock Split”. Item 15.       Controls and Procedures Disclosure Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Based upon and as of the date of our evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective, at the reasonable assurance level, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over our financial reporting.  Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with IFRS, as issued by the IASB.  Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements in accordance with generally accepted accounting principles; providing reasonable assurance that receipts and expenditures of our assets are made only in accordance with management and directors’ authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements would be prevented or detected on a timely basis.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010.  96 700012274.17


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 In reliance on guidance set forth in Question 3 of a “Frequently Asked Questions” interpretative release issued by the Staff of the SEC’s Office of the Chief Accountant and the Division of Corporation Finance in September 2004, as revised on September 24, 2007, regarding Securities Exchange Act Release No. 34-47986, Management’s Report on Internal Control over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, management determined that it would exclude the business of Ability from the scope of its assessment of the effectiveness of internal control over financial reporting for the year ended December 31, 2010. The reason for this exclusion is that Ability was acquired in September 2010 and it was not possible for management to conduct an assessment of internal control over financial reporting in the period between the date the acquisition was completed and the date of management’s assessment. Accordingly, management excluded Ability from its assessment of the effectiveness of internal control over financial reporting during the year ended December 31, 2010. Ability’s total assets represent approximately 8% of the Company’s total assets and total net operating revenue and net income represent approximately 1% and 2% of the Company’s total net operating revenue and net income, respectively, as reflected in the Company’s Consolidated Financial Statements as of and for the year ended December 31, 2010. Ability will be included in management’s assessment of the effectiveness of internal control over financial reporting starting no later than our annual assessment for the fiscal year beginning January 1, 2011. Attestation Reports of the Registered Public Accounting Firm  See reports of Deloitte Touche Tohmatsu Auditores Independentes, an Independent Registered Public Accounting Firm, included under ‘‘Item 18. Financial Statements’’, on pages F-4 and F-6. The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by Deloitte Touche Tohmatsu Auditores Independentes, an Independent Registered Public Accounting Firm, as stated in their report, included herein. Changes in Internal Controls There has been no change in our internal controls over financial reporting during the fiscal year ended December 31, 2010 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.  Item 16A.    Audit Committee Financial Expert We are not subject to any listing standards that require us to form an audit committee pursuant to the Sarbanes-Oxley Act or a board of auditors formed pursuant to local laws that could substantially discharge the duties of an audit committee formed pursuant to the Sarbanes-Oxley Act.  See “Item 6. Directors, Senior Management and Employees — Fiscal Council”.  As a result, we have not identified a member of our Board of Directors who would qualify as an audit committee financial expert. Item 16B.    Code of Ethics The Company has adopted a Code of Ethics that applies to its Directors, Officers, managers, controlling shareholders and members of the Fiscal Council in accordance with CVM rules satisfying the requirements of Brazilian Law.  A copy of this Code of Ethics, as amended on March 1, 2011, is incorporated herein by reference to Exhibit 11.1 to our Registration Statement on Form 20‐F filed on August 10, 2005.  The Company’s Code of Ethicsdoes not address allof the principles set forth by the SEC in Section 406 of the Sarbanes-Oxley Act.  However, it does contain many of the principles set forth in the SEC’s definition of a Code of Ethics, including standards that are (i) reasonably designed to promote full, fair, accurate and timely disclosure in reports and documents that we file with, or submit to, the SEC, and (ii) reasonably designed to deter certain wrongdoing, principally the prohibition against trading on inside information.  Since the adoption of its Code of Ethics, we have not granted any implicit or explicit waivers from any provision thereof to the officers described above.   97 700012274.17


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 Item 16C.    Principal Accountant Fees and Services Fees for professional services provided by Deloitte Touche Tohmatsu Auditores Independentes, the Company’s independent registered public accounting firm, in 2009 and 2010, respectively, in each of the following categories are as follows: Total Fees2009

   2010(in thousands ofreais)Audit Fees(1)

   863

   1,004Total

   863

   1,004
 __________________________ (1)   Audit Fees for the years ended December 31, 2009 and 2010 consist of fees billed for professional services rendered for the audits and reviews of the consolidated financial statements of the Company and other services normally provided in connection with statutory and regulatory filings.  The audit fees include expenses related to compliance with the Sarbanes-Oxley Act.  Pre-approval of Policies and Procedures Our Board of Directors is currently responsible for the oversight of our independent auditor’s work.  Our Board of Directors’ policy is to pre-approve all audit and non-audit services provided by Deloitte Touche Tohmatsu.  These services may include audit services, audit-related services, tax services and other services, as described above.  In such an event, the Board of Directors sets forth its pre-approval in detail, listing the particular services or categories of services which are pre-approved, and setting forth a budget for such services.  The Board of Directors has designated its chairman, currently Mr. Fernando Antônio Pimentel Melo, to issue such pre-approval in certain circumstances. Item 16D.    Exemptions from the Listing Standards for Audit Committees Not applicable. Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers Total Number of SharesPurchased

   Average PricePaid Per Share

   Total Number of SharesPurchased as Part ofPublicly AnnouncedPrograms

   Maximum Number ofShares That May Yet Be Purchased Under theProgramsPeriods in 2010(1)

   Preferred

   Common

   Preferred

   Common

   Preferred

   Common

   Preferred

   CommonJanuary 1 to 31

   —

   —

   —

   —

   —

   —

   —

   —February 1 to 28

   —

   84,400

   —

   28.84

   —

   —

   —

   —March 1 to 31

   —

   131,500

   —

   29.13

   —

   —

   —

   —April 1 to 30

   —

   —

   —

   —

   —

   —

   —

   —May 1to 31

   —

   15,500

   —

   25.91

   —

   —

   —

   —June 1 to 30

   —

   86,400

   —

   29.62

   —

   —

   —

   —July 1 to 31

   —

   63,500

   —

   29.69

   —

   —

   —

   —August 1to 31

   —

   114,200

   —

   29.72

   —

   —

   —

   —Sept. 1 to 30

   —

   191,696

   —

   31.20

   —

   —

   —

   —October 1 to 31

   —

   —

   —

   —

   —

   —

   —

   —Nov. 1 to 30

   —

   —

   —

   —

   —

   —

   —

   —December 1 to 31

   —

   —

   —

   —

   —

   —

   —

   —Total

   —

   687,196

   —

   29.19

   —

   —

   —

   —
  98 700012274.17


---



Table of Contents
 __________________________ (1)   All shares acquired pursuant to the fifth share buyback program for the acquisition of a maximum of 699,800 of our common shares and 1,945,000 of our preferred shares, approved at our Board of Directors’ meeting held on October 27, 2009. Total Number of SharesPurchased

   Average PricePaid Per Share

   Total Number of Shares Purchased as Part of Publicly AnnouncedPrograms

   Maximum Number ofShares That May Yet Be Purchased Under the ProgramsPeriods in 2011

   Preferred

   Common

   Preferred

   Common

   Preferred

   Common

   Preferred

   CommonJanuary 1 to 31

   —

   —

   —

   —

   —

   —

   —

   —February 1 to 28

   —

   —

   —

   —

   —

   —

   —

   —March 1 to 31

   —

   —

   —

   —

   —

   —

   —

   —April 1 to 30

   —

   —

   —

   —

   —

   —

   —

   —May 1 to 31

   —

   —

   —

   —

   —

   —

   —

   —Total

   —

   —

   —

   —

   —

   —

   —

   —
 Item 16F.    Change in Registrant’s Certifying Accountant Previous Independent Registered Public Accounting Firm On April 16, 2009, Contax S.A. dismissed PricewaterhouseCoopers Auditores Independentes as its independent registered public accounting firm.  Contax S.A.’s Board of Directors participated in and approved the decision to dismiss PricewaterhouseCoopers Auditores Independentes as the Company’s independent registered public accounting firm. The reports of PricewaterhouseCoopers Auditores Independentes on the financial statements prepared in accordance with IFRS for the year ended December 31, 2008 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. During the year ended December 31, 2008 and through April 16, 2009, there were no disagreements with PricewaterhouseCoopers Auditores Independentes on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers Auditores Independentes, would have caused them to make reference thereto in their reports on the financial statements for such years. During the year ended December 31, 2008 and through April 16, 2009 there were no reportable events (as defined in Item 16F(a)(1)(v) of Form 20-F). PricewaterhouseCoopers Auditores Independentes has furnished a letter addressed to the SEC, dated June 28, 2010, agreeing with the above statements. See copy of such letter in “Item 19. Exhibits” of our annual report on Form 20-F for the fiscal year ended December 31, 2009. Independent Registered Public Accounting Firm As of April 16, 2009, Contax S.A. engaged Deloitte Touche Tohmatsu Auditores Independentes as its new independent registered public accounting firm.  During the two most recent fiscal years and through April 16, 2009, Contax S.A. did not consult with Deloitte Touche Tohmatsu Auditores Independentes regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on Contax S.A.’s financial statements, and neither a written report was provided to Contax S.A. nor was oral advice provided that Deloitte Touche Tohmatsu Auditores Independentes concluded was an important factor considered by Contax S.A. in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was


either the subject of a disagreement, as that term is defined in Item 16F(a)(1)(iv) of Form 20-F and the related instructions to such Item, or a reportable event, as that term is defined in Item 16F(a)(1)(v) of Form 20-F.  99 700012274.17


---



Table of Contents
 Item16G.   Corporate Governance Not applicable. PART III Item 17.       Financial Statements We have responded to Item 18 in lieu of responding to this item. Item 18.       Financial Statements See pages F-1 through F-13. Item 19.       Exhibits No.

   

   Description1.1

   

   By-laws of Contax Holding as amended as of April 25, 2011. (Filed herewith).2.1

   

   Deposit Agreement, dated as of August 12, 2005, among Contax Holding, The Bank of New York, as Depositary, and Owners and Beneficial Owners of American Depositary Receipts issued thereunder. (Incorporated by reference to Exhibit 2.1 to the Company’s Annual Report on Form 20-F filed on June 29, 2006).4.1

   

   Services Agreement, dated November 30, 2004, among Telemar Norte Leste S.A., TNL PCS S.A. and TNL Contax S.A. (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form 20-F filed on August 10, 2005).4.2

   

   First Amendment, dated December 29, 2004, to the Services Agreement among Telemar Norte Leste S.A., TNL PCS S.A. and TNL Contax S.A. dated November 30, 2004. (Incorporated by reference to Exhibit 4.6 to the Company’s Annual Report on Form 20-F filed on June 29, 2006).4.3

   

   Second Amendment, dated October 18, 2005, to the Services Agreement among Telemar Norte Leste S.A., TNL PCS S.A. and TNL Contax S.A. dated November 30, 2004. (Incorporated by reference to Exhibit 4.7 to the Company’s Annual Report on Form 20-F filed on June 29, 2006).4.4

   

   Third Amendment, dated May 1, 2007, to the Services Agreement among Telemar Norte Leste S.A., TNL PCS S.A., Telemar Internet Ltda. and TNL Contax S.A. dated November 30, 2004. (Incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 20-F filed on June 29, 2007).4.5

   

   Fourth Amendment, dated April 28, 2008, to the Services Agreement among Telemar Norte Leste S.A., TNL PCS S.A., Telemar Internet Ltda. and TNL Contax S.A. dated November 30, 2004. (Incorporated by reference to Exhibit 4.5 to the Company’s Annual Report on Form 20-F filed on June 30, 2009).4.6

   

   Fifth Amendment, dated September 4, 2008, to the Services Agreement among Telemar Norte Leste S.A., TNL PCS S.A., Telemar Internet Ltda. and TNL Contax S.A. dated November 30, 2004. (Incorporated by reference to Exhibit 4.6 to the Company’s Annual Report on Form 20-F filed June 30, 2009).4.7

   

   Sixth Amendment, dated August 1, 2009, to the Services Agreement among Telemar Norte Leste S.A., TNL PCS S.A., Telemar Internet Ltda. and TNL Contax S.A. (Incorporated by reference to Exhibit 4.7 to the Company’s Annual Report on Form 20-F filed on June 29, 2010).4.8

   

   Seventh Amendment, dated October 30, 2009, to the Services Agreement among Telemar Norte Leste S.A., TNL PCS S.A., Telemar Internet Ltda. and TNL Contax S.A. (Incorporated by reference to Exhibit 4.8 to the Company’s Annual Report on Form 20-F filed on June 29, 2010).4.9

   

   Memorandum of Understanding dated December 10, 2010, betweenTelemar Norte Leste S.A., TNL PCS S.A., 14 Brasil Telecom S.A. and the Company (Filed herewith).4.10

   

   Loan Agreement, dated March 16, 2010, between Contax S.A. and Banco do Nordeste do Brasil (Incorporated by reference  to Exhibit 4.22 to Amendment No. 1, to the Company’s Annual Report on Form 20-F filed on September 21, 2010).4.11

   

   Loan Agreement, dated August 23, 2007, between Contax S.A. and BNDES (Incorporated by reference to Exhibit 4.23 to Amendment No. 1, to the Company’s Annual Report on Form 20-F filed on September 21, 2010).4.12

   

   Loan Agreement, dated March 12, 2010, between Contax S.A. and BNDES (Incorporated by reference to Exhibit 4.24 to Amendment No. 1 to the Company’s Annual Report on Form 20-F filed on September 21, 2010).8.1

   

   List of Subsidiaries. (Filed herewith)11.1

   

   Code of Ethics of Contax Holding. (Filed herewith).12.1

   

   Certification of the Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)12.2

   

   Certification of the Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)13.1

   

   Certifications of the Chief Executive Officer and the Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)16.1

   

   Letter from PricewaterhouseCoopers Auditores Independentes with respect to change of auditors. (Incorporated by reference to Exhibit 16.1 to the Company’s Annual Report on Form 20-F filed on June 29, 2010.)
  100 700012274.17


---



SIGNATURES Contax Participações S.A. hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.  CONTAX PARTICIPAÇÕES S.A.By:/s/ Michel Neves SarkisName: Michel Neves SarkisTitle:  Chief Executive OfficerDated: June 27, 2011


---



Contax Participações S.A.Consolidated Financial Statements as of December 31, 2010 and 2009 and for the three years 2010 endedandReports of Independent Registered Public Accounting Firms  Index to the Consolidated Financial Statements

   F-1Management’s Report on Internal Control over Financial Reporting

   F-2Report of Independent Registered Public Accounting Firm, on Internal Control Over Financial Reporting

   F-4Reports of Independent Registered Public Accounting Firms, on Consolidated Financial Statements

   F-6Consolidated Balance Sheets as of December 31, 2010 and 2009

   F-8Consolidated Statements of Income for the Years ended December 31, 2010, 2009 and 2008

   F-9Consolidated Statements of Comprehensive Income for the Years ended December 31, 2010, 2009 and 2008

   F-10Consolidated Statements of Changes in Shareholders’ Equity for the Years ended December 31, 2010, 2009 and 2008

   F-11Consolidated Statements of Cash Flows for the Years ended December 31, 2010, 2009 and 2008

   F-12Notes to the Consolidated Financial Statements for the Years Ended December 31, 2010, 2009 and 2008

   F-13
   F-1




Table of Contents
 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING  The management ofContax Participações S.A. and subsidiaries (the “Company”)is responsible for establishing and maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with International Financial Reporting Standards (IFRSs), as issued by the International Accounting Standards Board (IASB). Our internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs), and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect material misstatements on a timely basis. Therefore even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial and Investor Relations Officer, assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2010, based on the criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”).



Based on our assessment, we have concluded that our internal control over financial reporting was effective at December 31, 2010. F-2




Table of Contents
 In reliance on guidance set forth in Question 3 of a “Frequently Asked Questions” interpretative release issued by the Staff of the SEC’s Office of the Chief Accountant and the Division of Corporation Finance in September 2004, as revised on September 24, 2007, regarding Securities Exchange Act Release No. 34-47986, Management’s Report on Internal Control over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, our management determined that it would exclude the business of Ability Comunicação Integrada Ltda. (“Ability”) from the scope of its assessment of the effectiveness of internal control over financial reporting for the year ended December 31, 2010. The reason for this exclusion is that we acquired Ability in September 2010 and it was not possible for management to conduct an assessment of internal control over financial reporting in the period between the date the acquisition was completed and the date of management’s assessment. Accordingly, management excluded Ability from its assessment of the effectiveness of internal control over financial reporting during the year ended December 31, 2010. Ability’s total assets represent approximately 8% of the Company’s total assets and total net operating revenue and net income represent approximately 1% and 2% of the Company’s total net operating revenue and net income, respectively, as reflected in the Company’s Consolidated Financial Statements as of and for the year ended December 31, 2010. Ability will be included in management’s assessment of the effectiveness of internal control over financial reporting starting no later than our annual assessment for the fiscal year beginning January 1, 2011. The Company’s independent registered public accounting firm, Deloitte Touche Tohmatsu Auditores Independentes, has issuedits report on the effectiveness of the Company’s internal control over financial reporting, included herein.



Rio de Janeiro, June 27, 2011  /s/ Michel Neves Sarkis

   

   /s/ Marco Norci SchroederMichel Neves Sarkis

   

   Marco Norci SchroederChief Executive Officer

   

   Chief Financial and Investor Relations OfficerJune 27, 2011

   

   June 27, 2011
    F-3




Table of Contents
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON INTERNAL CONTROL OVER FINANCIAL REPORTING  To the Board of Directors and Shareholders of Contax Participações S.A.

Rio de Janeiro, Brazil



We have audited the internal control over financial reporting of Contax Participações S.A. and subsidiaries (the “Company”) as of December 31, 2010, based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Ability Comunicação Integrada Ltda. (“Ability”), which was acquired on September 2010 and whose financial statements constitute approximately 8% of total assets and approximately 1% and 2% of net operating revenue and net income, respectively, of the consolidated financial statement amounts as of and for the year ended December 31, 2010. Accordingly, our audit did not include the internal control over financial reporting at Ability. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.    F-4




Table of Contents
 A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards (IFRSs), as issued by the International Accounting Standards Board (IASB). A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards (IFRSs), as issued by the International Accounting Standards Board (IASB), and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.



We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),the consolidated financial statements as of and for the year ended December 31, 2010 of the Company and our report dated June 27, 2011 expressed an unqualified opinion on those financial statements.



/s/Deloitte Touche Tohmatsu Auditores Independentes

Deloitte Touche Tohmatsu Auditores Independentes

Rio de Janeiro, Brazil

June 27, 2011  F-5




Table of Contents
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON CONSOLIDATED FINANCIAL STATEMENTS  To the Board of Directors and Stockholders of Contax Participações S.A.

Rio de Janeiro, Brazil



We have audited the accompanying consolidated balance sheets of Contax Participações S.A. and subsidiaries’ (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of comprehensive income, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2010, in accordance with International Financial Reporting Standards (IFRSs), as issued by the International Accounting Standards Board (IASB).



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 27, 2011, expressed an unqualified opinion on the Company’s internal control over financial reporting.



/s/Deloitte Touche Tohmatsu Auditores Independentes

Deloitte Touche Tohmatsu Auditores Independentes

Rio de Janeiro, Brazil

June 27, 2011    F-6




Table of Contents
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Shareholders Contax Participações S.A.



In our opinion, the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statements for the year ended December 31, 2008 present fairly, in all material respects, the results of operations and cash flows of Contax Participações S.A. and its subsidiaries for the year ended December 31, 2008, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



**/s/ PricewaterhouseCoopers Auditores Independentes**

Rio de Janeiro, June 30, 2009 (except with respect to our opinion on the consolidated financial statements insofar as it relates to the retrospective adjustment on the share amounts and earnings per share for the stock split approved on October 27, 2009, for which the date is June 28, 2010)   F-7




Table of Contents
 CONTAX PARTICIPAÇÕES S.A.CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2010 AND 2009(Amounts in thousands of Brazilian reais – R$)ASSETS

   Note

   2010

   

   2009

   

   EQUITY AND LIABILITIES

   Note

   2010

   

   2009NON-CURRENT ASSETS

   

   

   

   

   

   CAPITAL AND RESERVESProperty, plant and equipment

   10

   405,873

   

   352,473

   

   Issued Capital

   17

   223,873

   

   223,873Goodwill on investments

   11

   49,081

   

   -

   

   Capital reserve

   18

   14,731

   

   19,639Other intangible assets

   12

   69,073

   

   80,446

   

   Profit reserves

   18

   118,329

   

   109,831Judicial deposits

   24

   93,865

   

   53,382

   

   Treasury shares

   19

   (12,147)

   

   (10,686)Restricted cash

   16

   2,013

   

   -

   

   Foreign currency translation reserve

   18

   (46)

   

   -Recoverable taxes

   13

   10,383

   

   8,578

   

   Proposal for additional dividend distribution

   20

   74,231

   

   59,403Deferred tax assets

   14

   64,269

   

   28,773

   

   Equity attributable to the owners of the Parent Company

   

   418,971

   

   402,060Financial investments held to maturity

   16

   69,869

   

   26,590Other assets

   

   12,058

   

   12,769

   

   Non-controlling interests

   21

   2,000

   

   1,445Total non-current assets

   

   776,484

   

   563,011Total Equity

   

   420,971

   

   403,505CURRENT ASSETSTrade receivables

   15

   176,302

   

   128,486

   

   NON-CURRENT LIABILITIESRecoverable taxes

   13

   7,133

   

   3,673

   

   Borrowings

   22

   317,994

   

   149,521Prepaid expenses and other assets

   

   30,835

   

   18,650

   

   Taxes payable

   23

   -

   

   944Cash and cash equivalents

   16

   387,803

   

   357,853

   

   Obligations under finance leases

   25

   -

   

   3,899Total current assets

   

   602,073

   

   508,662

   

   Provision for contingencies

   24

   88,266

   

   59,921Contingent consideration

   24

   45,685

   

   -TOTAL ASSETS

   

   1,378,557

   

   1,071,673

   

   Other liabilities

   26

   1,165

   

   -Total non-current liabilities

   

   453,110

   

   214,285CURRENT LIABILITIESTrade payables

   

   83,160

   

   77,033Borrowings

   22

   64,873

   

   55,070Payroll and related charges

   27

   230,569

   

   197,818Obligations under finance leases

   25

   4,277

   

   10,118Taxes payable

   23

   43,093

   

   33,477Dividends payable

   20

   28,959

   

   32,787Amounts payable to shareholders

   17

   26,374

   

   16,331Other liabilities

   26

   23,171

   

   31,249Total current liabilities

   

   504,476

   

   453,883TOTAL LIABILITIES

   

   957,586

   

   668,168TOTAL EQUITY AND LIABILITIES

   

   1,378,557

   

   1,071,673
  F-8




Table of Contents
  CONTAX PARTICIPAÇÕES S.A.CONSOLIDATED STATEMENTS OF INCOMEFOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008(Amounts in thousands of Brazilian reais - R$, except earnings per share)Note

   2010

   

   2009

   

   2008Net operating revenue(*)

   5

   2,397,996

   

   2,161,019

   

   1,774,728Cost of services

   7.1

   (2,026,392)

   

   (1,760,164)

   

   (1,507,603)Gross profit

   

   371,604

   

   400,855

   

   267,125Operating income (expenses)Selling

   7.1

   (26,976)

   

   (27,709)

   

   (28,488)General and administrative expenses

   7.1

   (138,007)

   

   (130,715)

   

   (84,967)Management fees

   7.1

   (7,142)

   

   (7,879)

   

   (6,317)Financial revenue

   7.4

   33,213

   

   24,531

   

   32,547Financial expenses

   7.4

   (30,681)

   

   (39,922)

   

   (32,597)Other operating expenses, net

   7.2

   (24,440)

   

   (13,440)

   

   (18,626)(194,033)

   

   (195,134)

   

   (138,448)Profit before income tax and social contribution

   

   177,571

   

   205,721

   

   128,677Income tax and social contribution expenses:Current

   8

   (70,708)

   

   (70,998)

   

   (51,370)Deferred

   8

   2,190

   

   (3,666)

   

   5,522Net income for the year

   

   109,053

   

   131,057

   

   82,829Net income attributable to:

   9Owners of the parent company

   

   108,498

   

   131,691

   

   82,826Minority shareholders

   

   555

   

   (634)

   

   3109,053

   

   131,057

   

   82,829Earnings per share:

   9BasicCommon shares (cents per share)

   

   1.82

   

   2.23

   

   1.39Preferred shares (cents per share)

   

   1.83

   

   2.23

   

   1.31DilutedCommon shares (cents per share)

   

   1.80

   

   2.19

   

   1.39Preferred shares (cents per share)

   

   1.83

   

   2.23

   

   1.31(*) Revenues are presented net of sales taxes, returns, allowances and discounts.The accompanying notes are an integral part of these consolidated financial statements.
  F-9




Table of Contents
 CONTAX PARTICIPAÇÕES S.A.STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008(Amounts in thousands of Brazilian reais - R$)Note

   2010

   

   2009

   

   2008Net income for the year

   

   109,053

   

   131,057

   

   82,829Other comprehensive income:Exchange rate difference in the translation of operations abroad:Exchange rate differences in the year

   18

   (46)

   

   -

   

   -109,007

   

   131,057

   

   82,829Total comprehensive income for the year

   

   109,007

   

   131,057

   

   82,829Total comprehensive income attributed to:Owners od the parent company

   

   109,007

   

   131,057

   

   82,829Minority shareholders

   

   (555)

   

   634

   

   (3)108,452

   

   131,691

   

   82,826The accompanying notes are an integral part of these consolidated financial statements.
 F-10




Table of Contents  CONTAX PARTICIPAÇÕES S.A.CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITYFOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009(Amounts in thousands of Brazilian reais - R$)Profit ReservesForeingcurrencytranslationreserve

   

   

   

   Equityattributable tothe owners of theParent CompanyCapitalreserve on sharesubscripitionShare

   

   

   

   

   

   

   Unrealized

   

   Treasury

   

   

   Retained

   

   

   Non-controllingNote

   

   capital

   

   

   Legal

   

   Statutory

   

   reserve

   

   shares

   

   

   earnings

   

   

   interests

   

   TotalBalance at January 1, 2008

   

   

   223,873

   

   9,254

   

   10,845

   

   40,595

   

   16,626

   

   (10,913)

   

   -

   

   6,725

   

   297,005

   

   -

   

   297,005-

   

   

   

   -Acquisition of own shares

   

   

   -

   

   -

   

   -

   

   -

   

   -

   

   (38,935)

   

   -

   

   -

   

   (38,935)

   

   -

   

   (38,935)Dividends lapsed

   

   

   -

   

   28

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   28

   

   -

   

   28Profit for the year

   

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   82,826

   

   82,826

   

   3

   

   82,829Allocation of the net income for the year:Legal reserve

   

   

   -

   

   -

   

   4,620

   

   -

   

   -

   

   -

   

   -

   

   (4,620)

   

   -

   

   -

   

   -Statutory reserve

   

   

   -

   

   -

   

   -

   

   54,415

   

   -

   

   -

   

   -

   

   (54,415)

   

   -

   

   -

   

   -Dividends proposed (R$0.85 per thousand shares)

   

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   (21,947)

   

   (21,947)

   

   -

   

   (21,947)Non-controlling interests

   

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   

   

   -

   

   2,076

   

   2,076Balance at December 31, 2008

   

   

   223,873

   

   9,282

   

   15,465

   

   95,010

   

   16,626

   

   (49,848)

   

   -

   

   8,569

   

   318,977

   

   2,079

   

   321,056Acquisition of own shares

   19

   

   -

   

   -

   

   -

   

   -

   

   -

   

   (314)

   

   -

   

   -

   

   (314)

   

   -

   

   (314)Cancelation of own shares

   19

   

   -

   

   -

   

   -

   

   (39,476)

   

   -

   

   39,476

   

   -

   

   -

   

   -

   

   -

   

   -Dividends lapsed

   20

   

   -

   

   29

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   29

   

   -

   

   29Profit for the year

   20

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   131,691

   

   131,691

   

   (634)

   

   131,057Stock option plan

   29

   

   -

   

   10,328

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   10,328

   

   -

   

   10,328Allocation of net income for the year:Legal reserve

   18

   

   -

   

   -

   

   6,442

   

   -

   

   -

   

   -

   

   -

   

   (6,442)

   

   -

   

   -

   

   -Statutory reserve

   18

   

   -

   

   -

   

   -

   

   32,390

   

   -

   

   -

   

   -

   

   (32,390)

   

   -

   

   -

   

   -Payment of dividends (R$0.85 per thousand shares)

   20

   

   -

   

   -

   

   -

   

   -

   

   (16,626)

   

   -

   

   -

   

   (11,428)

   

   (28,054)

   

   -

   

   (28,054)Dividends proposed (R$1.52 per thousand shares)

   20

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   (30,597)

   

   (30,597)

   

   -

   

   (30,597)Balance at December 31, 2009

   

   

   223,873

   

   19,639

   

   21,907

   

   87,924

   

   -

   

   (10,686)

   

   -

   

   59,403

   

   402,060

   

   1,445

   

   403,505Acquisition of own shares

   19

   

   -

   

   -

   

   -

   

   -

   

   -

   

   (1,461)

   

   -

   

   -

   

   (1,461)

   

   -

   

   (1,461)Other comprehensive income:Exchange rate difference in the translation of operations abroad

   18

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   (46)

   

   -

   

   (46)

   

   -

   

   (46)Profit for the year

   20

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   108,498

   

   108,498

   

   555

   

   109,053Stock option plan2007 Program

   29

   

   -

   

   (7,024)

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   (7,024)

   

   -

   

   (7,024)2010 Program

   29

   

   -

   

   2,116

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   2,116

   

   -

   

   2,116Allocation of net income for the year:Legal reserve

   18

   

   -

   

   -

   

   5,425

   

   -

   

   -

   

   -

   

   -

   

   (5,425)

   

   -

   

   -

   

   -Statutory reserve

   18

   

   -

   

   -

   

   -

   

   3,073

   

   -

   

   -

   

   -

   

   (3,073)

   

   -

   

   -

   

   -Payment of dividends (R$1.52 per thousand shares)

   20

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   (59,403)

   

   (59,403)

   

   -

   

   (59,403)Dividends proposed (R$1.69 per thousand shares)

   20

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   (25,769)

   

   (25,769)

   

   -

   

   (25,769)Balance at December 31, 2010

   

   

   223,873

   

   14,731

   

   27,332

   

   90,997

   

   -

   

   (12,147)

   

   (46)

   

   74,231

   

   418,971

   

   2,000

   

   420,971The accompanying notes are an integral part of these consolidated financial statements.
  F-11




Table of Contents
  CONTAX PARTICIPAÇÕES S.A.CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008(Amounts in thousands of Brazilian reais - R$)2010

   

   2009

   

   2008CASH FLOW FROM OPERATING ACTIVITIESProfit for the year

   

   108,498

   

   131,691

   

   82,826Adjustments to reconcile net income:Depreciation and amortization of non-current assets

   

   122,109

   

   116,411

   

   118,043Loss (gain) on disposal of permanent assets

   

   (6)

   

   1,710

   

   123Impairment of goodwill

   

   

   

   

   

   1,788Contingencies and other provisions

   

   20,913

   

   1,874

   

   16,401Deferred income tax and social contribution

   

   (2,190)

   

   3,666

   

   (5,002)Monetary variation gain

   

   (3,868)

   

   (1,890)

   

   (277)Cost of stock option plan

   

   2,689

   

   9,995

   

   129Interest expenses on loans and financings

   

   21,242

   

   31,015

   

   22,295Non-controlling interest

   

   555

   

   (634)

   

   3Changes in assets and liabilities:Accounts receivable

   

   (34,280)

   

   (26,351)

   

   (17,271)Recoverable taxes

   

   (7,871)

   

   (2,720)

   

   (2,654)Other assets

   

   (11,955)

   

   (10,076)

   

   (8,588)Payroll and related charges

   

   25,537

   

   15,894

   

   38,576Suppliers

   

   2,862

   

   186

   

   4,381Taxes payable

   

   (7,848)

   

   10,362

   

   7,505Other liabilities

   

   4,500

   

   28,783

   

   16,600Interest expenses on loans and financing

   

   (20,483)

   

   (31,130)

   

   (20,105)Net cash provided by operating activities

   

   220,404

   

   278,786

   

   254,773CASH FLOW FROM INVESTING ACTIVITIESInvestment acquisition

   

   (20,019)

   

   -

   

   -Earnings for the sale of property, plant and equipment

   

   179

   

   27

   

   130Additions to property, plant and equipment

   

   (162,533)

   

   (158,901)

   

   (167,930)Judicial deposits

   

   (36,241)

   

   (16,487)

   

   (17,550)Financial investments held to maturity

   

   (39,497)

   

   (26,590)Restricted cash

   

   (2,000)

   

   -

   

   -Net cash used in investment activities

   

   (260,111)

   

   (201,951)

   

   (185,350)CASH FLOW FROM FINANCING ACTIVITIESPayment of capital leases

   

   (9,740)

   

   (11,674)

   

   (18,218)BNDES financing

   

   180,829

   

   (13,332)

   

   116,731Payment of BNDES financing

   

   (54,371)

   

   -

   

   -BNB financing

   

   51,000

   

   -

   

   -Principal monetary variation

   

   -

   

   (210)

   

   -Dividends paid

   

   (89,000)

   

   (49,380)

   

   (13,386)Share buyback payments

   

   (9,061)

   

   (314)

   

   (38,935)Cash used in financing activiies

   

   69,657

   

   (74,910)

   

   46,192Net increase in cash and cash equivalents

   

   29,950

   

   1,925

   

   115,618Cash and cash equivalents at the beginning of the year

   

   357,853

   

   355,928

   

   240,310Cash and cash equivalents at the end of the year

   

   387,803

   

   357,853

   

   355,928Additional information:Income tax and social contriibution paid

   

   69,955

   

   66,194

   

   45,792The accompanying notes are an integral part of these consolidated financial statements.
   F-12




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 1.GENERAL INFORMATION



Contax Participações S.A. (the "Company"), established In July 2000, is a publicly-held company, listed in the BM&FBovespa, whose registered corporate purpose is to hold interests in other commercial enterprises and civil societies as a partner, shareholder or quotaholder in Brazil or abroad.The Company is headquartered at Rua do Passeio no 48 a 56 (Parte), Centro – Rio de Janeiro – RJ.



The Company has (i) Contax S.A. and Ability Comunicação Integrada Ltda., as direct subsidiaries, and (ii) TODO BPO Soluções em Tecnologia S.A., BRC Empreendimentos Imobiliários Ltda, and Contax Sucursal Empresa Extranjera as indirect subsidiaries.The Company and its subsidiaries are jointly referred to in the financial statements as “Company” or “Group”. The operations of the direct and indirect subsidiaries are as follows:



1.1.Contax S.A.



Contax S.A. (“Contax”) was established in December 2002, after changing the corporate name of the extinguished TNext S.A., an entity established in August 1998. Contax is a joint-stock, privately-held company, whose corporate purpose is providing tele-assistance services in general, offering a variety of integrated customer interaction solutions between its customers and their consumers, including telemarketing operations, customer services, customer retention, technical support and bill collection through a variety of communication channels, including telephone contacts, internet access, e-mail, fax, development of technological solutions related to the tele-assistance services, among others.



1.2.Ability Comunicação Integrada Ltda.



In September 2010, Contax acquired the entire control of Ability Comunicação Integrada Ltda. (“Ability”). Incorporated in June 2001, Ability is a limited-liability company whose purpose is to provide services related to publicity and advertising, sales promotion, merchandising and marketing, campaign and publicity planning, publicity consulting, market and public-opinion research, among others.



1.3.TODO Soluções em Tecnologia S.A.



TODO Soluções em Tecnologia S.A. (“TODO”) was established in September 2008, a joint-stock, privately-held company, whose corporate purpose is to provide information technology services, software development and integrated, full and customized solutions, including the full or partial management of the value chain of outsourced processes of business in general; back office processing; customer relationship management, among others.   F-13




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 1.4.BRC Empreendimentos Imobiliários Ltda.



In November 2009, Contax acquired BRC Empreendimentos Imobiliários Ltda.(“BRC”) for R$61. This acquisition aimed at separately developing and executing the real estate project included in the Selective Incentive Program for the adjacent region of Estação da Luz (“Nova Luz Program”), in the downtown area of the city of São Paulo.



1.5.Contax Sucursal Empresa Extranjera



Contax Sucursal Empresa Extranjera (“Contax Argentina”) was incorporated in September 2010 with an initial capital stock of R$817, in the city of Buenos Aires, Argentina. Contax Argentina’s corporate purpose is to provide general telephone services, offering integrated services for client-consumer relations in Argentina.





2.NEW, REVISED OR AMENDED STANDARDS AND INTERPRETATIONS NOT EFFECTIVE AND NOT EARLY ADOPTED



The new pronouncements, changes in the existing pronouncements and new interpretations listed below were published and are mandatory for the years beginning on January 1st, 2011 or after that date.



The Company did not make these changes in advance for the consolidated financial statements of December 31, 2010.



2.1.Amendment to IFRS 7 to Improve Disclosure Requirements on the Transfer of Financial Assets



On October 7, 2010, IASB issued the amendment to IFRS 7 – Financial Instruments: Disclosures, with the improvements that increase the disclosure requirements on the transfer of financial assets. The guideline for the write off of financial assets set forth in IAS 39 – Financial Instruments: Recognition and Measurement, incorporated into the revised version of IFRS 9 – Financial Instruments, has not been amended.



The amendments to IFRS 7 require enhanced level of disclosure when the asset is transferred but not written off, and introduces new disclosures for assets written off, where the company is still subject to continued exposure to the asset after the sale. The purpose of the changes is to clarify the relation among transferred financial assets and the financial obligations and the risks associated to those assets.



The application of the amendments is mandatory for years beginning on or after July 1st, 2011, and allows for early adoption. It is not necessary to disclose information for periods prior to the date of the mandatory adoption of the amendments. The Company is evaluating the effects of adopting such pronouncement.



2.2.IFRS 9 – Financial Instruments (revised in 2010)  F-14




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008 (In thousands of Brazilian reais, except when otherwise indicated)
 In November 2009, IASB issued IFRS 9 – Financial Instruments and, on October 28, 2010, it issued a new revised version of this rule, maintaining the requirements for the classification and measurement of financial assets in compliance with the version published in November 2009 and included a guideline on the classification and  measurement of financial liabilities. As part of IFRS 9 restructuring, IASB also included a guideline on the write off of financial instruments, in addition to the implementation guide of IAS 39 – Financial Instruments: Recognition and Measurement.



IFRS 9 establishes that all financial assets recognized, as set forth by IAS 39 – Financial Instrument: Recognition and Measurement, are subsequently measured at amortized cost or fair value. Specifically, debt instruments held according to a business model whose purpose is to receive cash flows from the agreements, exclusively for the payment of the principal and interest on the principal are usually measured at amortized cost at the end of the following fiscal periods. All other debt instruments and investments in equity instruments are measured at the fair value at the end of the following fiscal periods.



The most significant effect of IFRS 9 on the classification and measurement of financial liabilities refers to the accounting of the changes in the fair value of a financial liability (calculated through the income statement), which can be attributed to changes on the credit risk of that liability. Specifically, according to IFRS 9, for financial liabilities recognized at fair value through the income statement, the value of the change in the fair value of the financial liability can be attributed to changes in the credit risk of that liability and is recognized in “Other comprehensive income”, unless the effects of changes in the credit risk of that liability is recognized in “Other comprehensive results” causes or increases accounting mismatch in the Company’s income. The changes in the fair value, attributed to the credit risk of a financial liability, are not reclassified to the income. According to IAS 39, the total value of the change in the fair value of a financial liability recognized at fair value through result was previously recognized in the result.



The Company is evaluating the possible effects of adopting such pronouncement.



The mandatory application of the revised version of IFRS 9 is January 1st, 2013, the same date of the previous version. The revised version allows for early adoption. If a company decides to apply the guideline relating to the classification and measurement of financial liabilities in advance, it should also apply any other IFRS 9 requirement previously concluded by then. The revised rule should be applied retrospectively according to the IAS 8. F-15




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)


2.3.IAS 24 – Disclosure of Related Party Transactions (revised in 2009)



In 2009, IASB issued the amendment to IAS 24 – Related Party Disclosures. The revised rule simplifies the disclosure requirements for subsidiaries, jointly-owned subsidiaries or significantly influenced by a government (referred to as entities related to the Government) and changes the definition of a related party. The Standard requires the retroactive application. Therefore, on the year of the initial requirement, companies should correct the disclosure for the period under comparison.



Exemptions introduced by the revision of IAS 24 do not affect the Company and its subsidiaries given that they are not entities related to the Government. However, the disclosures related to third party transactions and the balances of consolidated financial statements can be affected when the revised rule is applied in future periods, considering that some parties were not included in the definition of related party and may be within the scope of the revised standard.



The amendments are mandatory for years beginning on or after January 1st, 2011, and allow for early adoption.



2.4.IFRS 10 Consolidated Financial Statements



In 2011 IASB issued IFRS 10. The IFRS 10 replaces the consolidation guidance in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities by introducing a single consolidation model for all entities based on control, irrespective of the nature of the investee (i.e., whether an entity is controlled through voting rights of investors or through other contractual arrangements as is common in special purpose entities). Under IFRS 10, control is based on whether an investor has 1) power over the investee; 2) exposure, or rights, to variable returns from its involvement with the investee; and 3) the ability to use its power over the investee to affect the amount of the returns. This standard has an effective date for annual periods beginning on or after January 1st, 2013 with earlier application permitted so long as each of the new standards IFRS 11, IFRS 12 and amendments of the standards IAS 27 and IAS 28 is also early applied.



2.5.IFRS 11 Joint Arrangements



In 2011 IASB issued IFRS 11. The IFRS 11 introduces new accounting requirements for joint arrangements, replacing IAS 31Interests in Joint Ventures. The option to apply the proportional consolidation method when accounting for jointly controlled entities is removed. Additionally, IFRS 11 eliminates jointly controlled assets to now only differentiate between joint operations and joint ventures. A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and obligations for the liabilities. A joint venture is a joint arrangement whereby the parties that have joint control have rights to the net assets. This standard has an effective date for annual periods beginning on or after January 1st, 2013 with earlier application permitted so long as each of the new standards IFRS 10, IFRS 12 and amendments of the standards IAS 27 and IAS 28 is also early applied.



2.6.IFRS 12 Disclosure of Interests in Other Entities



In 2011 IASB issued IFRS 12. The IFRS 12 requires enhanced disclosures about both consolidated entities and unconsolidated entities in which an entity has involvement. The objective of IFRS 12 is to require information so that financial statement users may evaluate the basis of control, any restrictions on consolidated assets and liabilities, risk exposures arising from involvements with unconsolidated structured entities and non-controlling interest holders' involvement in the activities of consolidated entities. This standard has an effective date for annual periods beginning on or after January 1st, 2013 with earlier application permitted so long as each of the new standards IFRS 10, IFRS 11 and amendments of the standards IAS 27 and IAS 28 is also early applied.



2.7.IFRS 13 Fair Value Measurement



In 2011 IASB issued IFRS 13. The IFRS 13 established a single framework for measuring fair value where that is required by other Standards. The Standard applies to both financial and non-financial items measured at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. IFRS 13 is effective for annual periods beginning on or after January 1st, 2013, with early adoption permitted, and applies prospectively from the beginning of the annual period in which the Standard is adopted.



2.8.IAS 27 Separate Financial Statements (2011)



In 2011, IASB issued the amendment to IAS 27 – Separate Financial Statements. The requirements relating to separate financial statements are unchanged and are included in the amended IAS 27. The other portions of IAS 27 are replaced by IFRS 10. This amendment has an effective date for annual periods beginning on or after January 1st, 2013 with earlier application permitted so long as each of the new standards IFRS 10, IFRS 11, IFRS 12 and amendments of the standard IAS 28 is also early applied.



2.9.IAS 28 Investments in Associates and Joint Ventures (2011)



In 2011, IASB issued the amendment to IAS 28 – Investments in Associates and Joint Ventures. IAS 28is amended for conforming changes based on the issuance of IFRS 10, IFRS 11 and IFRS 12. This amendment has an effective date for annual periods beginning on or after January 1st, 2013 with earlier application permitted so long as each of the new standards IFRS 10, IFRS 11, IFRS 12 and amendments of the standard IAS 28 is also early applied.



2.10.Improvements to IFRSs 2010



On May 6, 2010, IASB issued a document called Improvements to IFRSs 2010, which contains amendments to seven standards. This is the third set of amendments issued through the annual improvement process, intended to make the necessary, but not urgent, improvements to the IFRSs.



The Company’s Management is analyzing possible impacts from the adoption of those improvements on its financial statements. However, it does not expect material impacts.







F-16




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)


The table below summarizes all the improvements made in the existing rules and interpretations:



Rule

   Reason to Change

   Adoption and TransitionIFRS 1 – First-time Adoption of International Financial Reporting Standards

   Change in the accounting policies in the year of the adoption

   Mandatory for the years beginning on or after January 1st, 2011. Early adoption allowed.Revaluation as deemed cost

   Mandatory for the years beginning on or after January 1st, 2011. Early adoption allowed.Use of deemed cost for operations subject to regulatory prices

   Mandatory for the years beginning on or after January 1st, 2011. Early adoption allowed.IFRS 3 – Business Combinations (2008)

   Measurement of minority interest

   Mandatory for the years beginning on or after July 1st, 2010. It should be prospectively applied as of the date the entity adopts the IFRS 3 (2008). Early adoption allowed.Payment of share-based premiums not replaced or voluntarily replaced

   Mandatory for the years beginning on or after July 1st, 2010. It should be prospectively applied as of the date the entity adopts the IFRS 3 (2008). Early adoption allowed.Transition requirements for contingent counterparties of a business combination executed prior to the mandatory adoption date of IFRS 3 (2008)

   Mandatory for the years beginning on or after July 1st, 2010. Early adoption allowed.IFRS 7 – Financial Instruments: Disclosures

   Clarification on disclosures

   Mandatory for the years beginning on or after January 1st, 2011. Early adoption allowed.IAS 1 – Presentation of Financial Statements

   Clarification on the statement of changes of shareholders’ equity

   Mandatory for the years beginning on or after January 1st, 2011. Early adoption allowed.IAS 27 – Consolidated and Separate Financial Statements (2008)

   Transition requirements from the changes introduced by IAS 27 (2008)

   Mandatory for the years beginning on or after July 1st, 2011. Early adoption allowed.IAS 34 – Interim Financial Reporting

   Material events and transactions

   Mandatory for the years beginning on or after January 1st, 2011. Early adoption allowed.IFRIC 13 – Customer Loyalty Programs

   Fair value of premium credits

   Mandatory for the years beginning on or after January 1st, 2011. Early adoption allowed.








F-17






Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 3.SIGNIFICANT ACCOUNTING POLICIES



3.1.Statement of compliance



The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB).



3.2.Basis of presentation



The consolidated financial statements of the Group are presented in thousands of Brazilian reais (R$) and have been prepared on the historical cost basis except for the revaluation of certain financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for assets.



The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.



3.3.Basis of consolidation



3.3.1.Subsidiaries



Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.



Intercompany transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.



3.3.2.Non-controlling interests



The Group applies a policy of treating transactions with non-controlling interests as transactions with parties external to the Group. Disposals of non-controlling interests result in gains and losses for the Group and are recorded in the income statement.



3.4.Business combination



In the consolidated financial statements, business acquisitions are accounted for at the acquisition method. The consideration transferred in a business combination is measured at fair value, calculated as the aggregate of the fair value of the assetstransferred and liabilities assumed by the Group on the acquisition date to the former controlling shareholders of the acquiree and the interests issued by the Group in exchange for the control of the acquiree. Acquisition-related costs are usually recognized in profit or loss when incurred.   F-18




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 Identifiable assets acquired and liabilities assumed are recognized at fair value on the acquisition date, except for:



•Deferred tax assets or liabilities, and assets and liabilities related to employee benefit agreements, which are recognized and measured under IAS 12 – Income Taxes, and IAS 19 – Employee Benefits;



•Liabilities or equity instruments related to share-based payment agreements of the acquiree or payment arrangements based on Group stock, executed to replace the share-based payment agreements of the acquiree, are measured under IFRS 2 – Share-based Payment on the acquisition date; and



•Assets (or disposal groups) classified as held for sale under IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations are measured in compliance with this standard.



Goodwill is measured as the difference between the aggregate of the consideration transferred, the amount of any minority interests in the acquiree, and the fair value of the acquirer's previously-held equity interest in the acquiree, if any; and the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after the assessment, the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed are higher than the aggregate of the consideration transferred, the amount of any minority interests in the acquiree, and the fair value of the acquirer's previously-held equity interest in the acquiree, if any, this surplus is immediately recognized in income as gains.



Minority interests corresponding to current holding and granting holders the right to a proportionate share of the net assets of the entity in case of liquidation may be initially measured at fair value or based on the proportionate share of the non-controlling interests on recognized amounts of identifiable net assets of the acquiree. The measurement method to be applied is chosen on a transaction by transaction basis. Other types of minority interests are fair valued or, when applicable, as determined by another IFRS.   F-19




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 When the consideration transferred by the Group in a business combination includes assets or liabilities derived from a contingent consideration arrangement, the contingent consideration is fair valued on the acquisition date and included in the consideration transferred in a business combination. Changes to the fair value of the contingent consideration classified as adjustments of the measurement period are retrospectively adjusted, with the corresponding adjustment in goodwill. Adjustments to the measurement period correspond to adjustments resulting from additional information obtained during the "measurement period" (which shall not be longer than twelve months from the acquisition date) related to facts and circumstances existing on the acquisition date.



The subsequent accounting for changes to the fair value of the contingent consideration not classified as adjustments of the measurement period depend on how the contingent consideration is classified. Contingent consideration classified as equity is not remeasured at subsequent financial statement dates, and its corresponding settlement is accounted for in equity. Contingent consideration classified as asset or liability is remeasured on subsequent financial statement dates, under IAS 39 and IAS 37 – Provisions, Contingent Liabilities and Contingent Assets, as applicable, and the corresponding gain or loss is recognized in the income.



When a business combination is achieved in stages, the interest previously held by the Group in the acquiree is remeasured at fair value on the acquisition date (that is, the date the Group obtained that control), and the corresponding gain or loss, if any, is recognized in the income. The amounts of the interests in the acquiree prior to the acquisition date previously recognized in "Other comprehensive income" are reclassified in the income, provided that such treatment is appropriate in case such interest is disposed of.



If the initial accounting for a business combination is incomplete by the end of the reporting period when such combination occurred, the Group records provisional amounts for the items whose accounting is incomplete. These provisional amounts are adjusted during the measurement period (see above), or additional assets and liabilities are recognized to reflect new information obtained regarding facts and circumstances existing on the acquisition date that would have affected the amounts recognized on that date if they had been known.



3.5.Goodwill



Goodwill resulting from a business combination is stated at cost on the transaction date (see item 3.4), net of accumulated loss in the recoverable amount, if any.



For purposes of impairment testing, goodwill is allocated to each of the Group's cash-generating units (or groups of cash-generating units) that will benefit from the synergies of the combination. Goodwill generated on the acquisition of Ability in September 2010 was not tested for impairment, because a year has not elapsed since the acquisition date and such goodwill has not presented any indication of impairment. F-20




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 The cash-generating unit’s goodwill was allocated to be tested for impairment on a yearly basis, or at shorter intervals whenever there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is lower than its book value, an impairment loss is firstly allocated to reduce the book value of any goodwill allocated to the unit and later to the other assets of the unit, proportionately to the book value of each of its assets. Any goodwill impairment loss is directly recognized in the income for the period. Impairment losses are not reversed in subsequent periods.



Upon the disposal of the corresponding cash-generating unit, the attributable goodwill amount is included in the calculation of the profit or loss of the disposal.



3.6.Revenue recognition



Revenue comprises the fair value of the consideration received or receivable for services rendered in the normal course of the Group’s activities. Revenue is presented net of sales taxes, returns, allowances, discounts and after eliminating sales within the Group.



The Group recognizes revenue when (i) the amount of revenue can be reliably measured, (ii) it is probable that future economic benefits will flow to the entity and (iii) specific criteria have been met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.



The Group renders services of telemarketing, contact center and credit recovery services to other companies. These services are provided on a speaking time, workstation position or performance basis or as a fixed-price contract.



Revenue from speaking time service contracts is measured on the basis of hours delivered whereas workstation position service contracts’ revenue is measured based on the number of workstation positions that were used by the client.



Revenue from performance targets (i.e., credit recovery services) are recognized based on the fee percentage agreed with the client over the recovered credits and the client’s confirmation of such recovered credits.



If circumstances arise that may change the original estimates of revenues, costs or extent of progress toward completion, estimates are revised. These revisions may result in increases or decreases in estimated revenues or costs and are reflected in income in the period in which the circumstances that give rise to the revision become known by management.   F-21




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements

For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 3.7.Leasing



Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.



Assets held under finance leases are initially recognized as assets of the Group at their fair value at the commencement of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation.



Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss. Contingent rentals are recognized as expenses in the periods in which they are incurred.



Operating lease payments are recognized as expenses on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.



In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.



3.8.Foreign currencies



The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each group entity are expressed in Brazilian reais (R$), which is the functional currency of the Group and the presentation currency for the consolidated financial statements.



3.9.Share-based payments



Share-based payments to employees are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of share-based transactions are set out in Note 29.



The fair value determined at the grant date of the share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the number of equity instruments that will eventually vest. At each balance sheet date, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in profit or loss over the remaining vesting period.   F-22




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 3.10.Taxation



Income tax expense represents the sum of the tax currently payable and deferred tax.



Provisions for deferred and payable income tax and social contribution and tax credit on temporary differences are established at the composite base rate of 34%, comprised of a 25% federal income tax rate plus a 9% social contribution rate.



Prepaid income tax and social contribution are recorded as “Recoverable taxes.”



3.10.1.Current tax



The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.



3.10.2.Deferred tax



Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and their corresponding tax bases used, and is computed using the balance sheet liability method. However, deferred income tax is not accounted for if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.



The carrying amount of deferred tax assets is reviewed at each balance sheet date and is only recognized to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized.



Deferred tax assets are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.



Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.  F-23




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 3.10.3.Current and deferred income tax and social contribution for the period



Current and deferred income tax and social contribution are recognized as expense or revenue in the income for the period, unless these correspond to items recorded under “Other comprehensive income”, or directly in shareholders’ equity, in which case current and deferred taxes are also recognized in “Other comprehensive income” or directly in shareholders’ equity, respectively. Where current and deferred taxes result from the initial recognition of a business combination, the tax effect is included in the accounting for the business combination.



3.11.Property, plant and equipment



Property and equipment held for use in the supply of services, or for administrative purposes, are stated in the balance sheet at original cost, less any subsequent accumulated depreciation and subsequent accumulated impairment losses, when applicable.



Property and equipment are depreciated using the straight-line method over the useful lives of the related assets. Given the complex nature of our telecommunications and IT systems, the estimates of useful lives require considerable judgment and are inherently uncertain, due to rapidly changing technology and practices in our business sector, which could cause early obsolescence of such systems. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.



Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.



The gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in profit or loss.



3.12.Intangible assets



Intangible assets represent principally software, and are reported at cost less accumulated amortization and accumulated impairment losses. Amortization is charged on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.   F-24




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 3.13.Impairment of tangible and intangible assets (excluding goodwill)



Assets that have indefinite useful lives, such as goodwill, are not amortized but tested for impairment at least annually. In addition, at each balance sheet date, the Group reviews its long-lived non-financial assets (such as property and equipment and intangible assets), to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, in connection with events or changes in circumstances that indicate that the carrying amounts of those assets may not be recovered, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.



Recoverable amount is the higher of the asset or group of assets fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.



If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss.



Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss. Impairment loss recognized on goodwill is never reversed in subsequent periods.



3.14.Provisions



Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made for the amount of the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation.   F-25




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 3.15.Financial assets



3.15.1.Classification



The Group classifies its financial assets in the loans and receivables category or as long-term investments depending on the maturity and nature. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. The Group’s loans and receivables comprise “trade and other receivables” in the balance sheet.



3.15.2.Recognition and measurement



Loans and receivables are carried at amortized cost using the effective interest method. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired.



3.16.Financial liabilities and equity instruments issued by the Group



3.16.1.Classification as debt or equity



Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.



3.16.2.Financial liabilities



Financial liabilities are classified as either financial liabilities at fair value through profit & loss or other financial liabilities recorded at amortized cost.



3.16.3.Derecognition of financial liabilities



The Group derecognizes financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.



3.17.Costs and expenses



The operating costs and expenses are recorded on an accrual basis and pertain mainly to personnel expenses.  F-26




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 3.18.Finance income and costs



Finance income and finance costs pertain mainly to interest and inflation adjustments resulting from financial investments loan contracts and leasing contracts, all recorded on an accrual basis.



3.19.Cash and cash equivalents



Comprised of cash balances, bank deposits in cash and financial investments, whose maturity is up to 90 days from the investment date. These financial investments are stated at cost, plus profit earned up to the year-end closing date and their maturity dates are less than 90 days, short term, which are subject to an insignificant risk of change in their value.



3.20.Trade receivables and allowance for doubtful accounts



Trade receivables are recognized initially at fair value which generally represents invoiced amounts and subsequently at outstanding amounts less provision for impairment. An allowance for doubtful accounts is established when there is objective evidence, in addition to whatever guarantees may have been provided by the client, that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within “Selling, general and administrative expenses”. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against “Selling, general and administrative expenses” in the income statement.  F-27




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 3.21.Judicial deposits



The Group questions, in some situations, the legality and/or applicability of certain liabilities and/or lawsuits filed against the Group. Pursuant to these questionings, following the court orders or management’s strategy, amounts may be deposited in specific bank accounts under the Group’s name. Such deposits do not settle the disputed amounts, but entitle the Group to carry the questioning processess. In these situations, although the deposits are still assets of the Group which are inflation adjusted, the amounts are only released upon receipt of a favourable ultimate unappealeble court decision. Judicial deposits are considered to be investing activities for cash flow statement purposes.



3.22.Borrowings



Borrowings are recognized initially at fair value, net of transaction costs. Subsequently, borrowings are accounted for at amortized cost, with interest recognized in income over the borrowing period using the effective interest rate method (Note 22).



3.23.Payroll and related charges



The amounts relate to vacation payable to employees and are recognized on a monthly basis in proportion to the twelve month acquisition period thereof.



The subsidiary Contax has a profit sharing program, for all of its employees, pursuant to an agreement entered into with FITTEL (Interstate Federation of Employees of Telecommunications Companies). This profit sharing program, in which all the employees take part, is based on increasing operating gains and individual performance and the amounts recognized are based on the achievement of such performance targets.



3.24.Trade payables



Trade payables are initially recognized at fair value which generally represents invoiced amounts.



3.25.Dividends distribution



Dividends distribution to the Company’s shareholders is recognized as a liability in the period in which the dividends are approved by the Company’s shareholders.   F-28




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 3.26.Share buy-back



When the Company buys back its own shares, the amount of the consideration paid, including directly attributable costs, is recognized as a deduction from equity under treasury shares.



3.27.Treasury shares



Reacquired own equity instruments (treasury shares) are recognized at cost and deducted from equity. No gain or loss is recognized in the income statement on the purchase, sale, issue or cancellation of the Company's own equity instruments. Any difference between the book value and the consideration is recognized in other capital reserves.  F-29




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 4.CRITICAL ACCOUNTING POLICIES AND ESTIMATES



In preparing the Group’s financial statements, the Group has 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 require management's most difficult, subjective or complex judgments, estimates and assumptions.



The application of these critical accounting policies often requires judgments made by management regarding the effects of matters that are inherently uncertain. These estimates, including but not limited to the provisions for accounts receivable and contingent liabilities, may differ from the actual value of such assets or liabilities. The following is a discussion of our critical accounting policies, including some of the variables, assumptions and sensitivities underlying the estimates relating to:



·revenue recognition;

·impairment of goodwill;

·depreciation of property and equipment;

·contingent consideration measured at fair value;

·payroll and related accruals;

·provision for contingencies;

·deferred and recoverable income tax and social contribution; and

·share-based payments.



4.1.Revenue recognition



The Group recognizes revenues on an accrual basis at the time services are rendered, except with respect to certain performance-based services, for which revenues are recognized upon their measurement and acceptance by our client. Most service contract revenues are calculated based on indicators such as quantity of workstations and speaking time and on performance targets. Revenues are calculated based on information available in our IT systems that relate to the volume of data services rendered to each client. Revenues related to performance-based services are calculated based on data available in Group’s clients’ IT systems. In addition, the Group usually allocates operation managers to review, reconcile and discuss such indicators with clients. Some revenue adjustments are recorded after discussions with such clients.



4.2.Impairment of goodwill



To determine if goodwill is impaired, it is necessary to estimate the value in use of the cash-generating unit goodwill was allocated to. The calculation of the value in use requires that Management estimate the future cash flow expected to be derived from the cash-generating unit, and the appropriate discount rate for the present value to be calculated.   F-30




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 The book value of goodwill on December 31, 2010 was R$49,081.



4.3.Depreciation of property and equipment



The Group depreciates property and equipment using the straight-line method at rates compatible with the useful lives of the underlying assets. As described in Note 10, the Group revises the estimated useful life of property, plant and equipment items on a yearly basis, at the end of each reporting period. For this reporting period, Management has determined that the useful lives of property and equipment items were appropriate and required no adjustments.



4.4.Contingent consideration measured at fair value



Contingent consideration in a business combination is measured at fair value on the date of acquisition as part of the business combination. If the contingent consideration is classified as a derivative, and, therefore, a financial liability is recognized, it must be subsequently remeasured at fair value on the balance sheet date. The fair value is based on the discounted cash flow. The main assumptions take into account the probability of meeting each goal and the discount factor.



4.5.Payroll and related accruals



Payroll and related accruals are the most significant costs of the Group’s operations and are calculated and recorded on an accrual basis by the payroll system. Payroll and related accruals include wages and salaries, paid vacation, Christmas bonus (13th salary), social security charges, executive profit sharing plan and employees’ payroll tax withholdings, most of which are defined by Brazilian labor law.



For paid vacation provisions, each employee is entitled to a 30-day calendar paid annual vacation, corresponding to 133.3% of a monthly salary. The Group records a monthly provision for paid vacations, until such benefit is paid (when employees effectively take their vacations). For the thirteenth salary payment provision, we record a monthly provision equal to 1/12 of each employee’s monthly salary until such benefit is paid. Fringe benefits, such as paid transportation and meal vouchers, are recognized as expenses on a monthly basis when provided to employees.



Management’s executive profit sharing plan is performance-based, based on the achievement of several of our financial and quality targets, as well as individual employees’ targets, determined on an annual basis. This provision is recorded on a monthly basis and is recalculated at year-end based on our best estimate of targets attained, as set in the annual budget process, but the actual total amount is only final after being reviewed and approved by the Board of Directors.   F-31




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements

For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 4.6.Provision for contingencies



The preparation of the consolidated financial statements requires management to make estimates and assumptions regarding contingencies that affect our overall financial condition or relate to the changes in the actual value of liabilities at the date of the consolidated financial statements and accounting for the expenses arising during the reported period. Such contingencies include those related to the legal proceedings discussed in Note 24.



Provisions for contingencies are recognized for the amounts of probable losses determined by management based on legal advice from in-house and external legal counsel regarding the outstanding contingent matters. Management continuously evaluates the provisions for contingencies based on changes in relevant facts, circumstances and events, such as judicial decisions, that may impact our estimates, which in turn could have a material impact on our results of operations and shareholders’ equity. While management believes that the current provisions for contingencies are adequate, there can be no assurance that these factors will not change in the future.



4.7.Deferred and recoverable income tax and social contribution



The Group records deferred tax assets arising from temporary differences between the accounting bases of assets and liabilities and their tax bases. Deferred tax assets are recognized to the extent the Group expects to generate sufficient future taxable profit based on projections and forecasts prepared by the Group’s management. These projections and forecasts include several assumptions related to the performance of the Group, exchange rates, service volumes, tax rates and other factors that could differ from current estimates.



There is no time limit for the use of tax losses carryforwards according to current Brazilian tax regulations. However, accumulated tax losses may be offset up to 30.0% of the annual taxable profit.



4.8.Share-based payments



The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. Theassumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 29.    F-32




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 5.REVENUE



The reconciliation between the gross revenue and net operating revenue reported in the income statement for the year is as follows:   2010

   

   2009

   

   2008Gross revenue

   

   2,588,367

   

   2,335,252

   

   1,916,115Minus:Tax on salesCOFINS

   

   (79,723)

   

   (69,132)

   

   (55,259)ISS

   

   (93,379)

   

   (90,122)

   

   (74,156)PIS

   

   (17,269)

   

   (14,979)

   

   (11,973)Net operating revenue

   

   2,397,996

   

   2,161,019

   

   1,774,728
    5.1.Information about major customers



Included in revenues are R$1,173,544 (2009 - R$1,086,517 and 2008 – R$906,917) related to the Group’s largest customer, representing approximately 49% of total revenue (2009 – 50% and 2008 – 51%).





6.SEGMENT INFORMATION



6.1.Services that generate revenue for reportable segments



During 2010 the Group identified two new reportable segments, in addition to the existing operating segment of telemarketing services. The new operating segments identified are (i) IT services in general and (ii) publicity and advertising services.



In the past two years, IT services provided by TODO did not exceed the quantitative thresholds set forth in paragraph 13 of IFRS 8 (Operating Segments). However, with the enhancement of TODO's operations during 2010, the quantitative thresholds mentioned above have been reached and, consequently, the Group determined to be applicable the presentation of IT services as a separate segment. Additionally, the acquisition of Ability in 2010 led to the entrance of a new reportable segment (i.e., publicity and advertising services).



Additionally, the acquisition of ability in 2010 led to the entrance of a new reportable segment (i.e., publicity and advertising services).



The information presented to the main decision maker to allocate funds and assess the segment performance is focused on the type of services provided, thus, according to the IFRS 8, the Group is divided into 3 segments of operation:



(a)Provision of telephone assistance services in general(Contax and Contax Argentina);



(b)Provision of information technology services in general (TODO); and



(c)Provision of publicity and advertising services (Ability).  F-33




Table of Contents CONTAX PARTICIPAÇÕES S.A. Notes to the Consolidated Financial Statements

For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 6.2.Revenues and results from reportable segments



The table below presents an analysis of income from continuing operations of the Group per reportable segment:   2010Telemarketing services in general

   

   IT services in general

   

   Publicity and advertising  services

   

   Eliminations

   

   ConsolidatedNet operating revenue

   

   2,372,041

   

   95,837

   

   33,488

   

   (103,371)

   

   2,397,996Cost of services rendered

   

   (2,028,198)

   

   (83,410)

   

   (17,542)

   

   102,758

   

   (2,026,392)Gross operating income

   

   343,843

   

   12,428

   

   15,946

   

   (613)

   

   371,604Operating revenue (expenses):Selling

   

   (26,170)

   

   (658)

   

   (181)

   

   32

   

   (26,976)General and administrative

   

   (118,788)

   

   (9,449)

   

   (12,028)

   

   2,258

   

   (138,007)Management fees

   

   -

   

   -

   

   -

   

   (7,142)

   

   (7,142)Equity in subsidiaries

   

   780

   

   -

   

   -

   

   (780)

   

   -Financial revenue

   

   20,638

   

   1,054

   

   75

   

   11,445

   

   33,213Financial expenses

   

   (29,970)

   

   (383)

   

   (130)

   

   (197)

   

   (30,681)Other operating expenses, net

   

   (24,321)

   

   (176)

   

   97

   

   (39)

   

   (24,440)(177,830)

   

   (9,612)

   

   (12,167)

   

   5,577

   

   (194,033)Operating income before income tax and social contribution

   

   166,012

   

   2,816

   

   3,779

   

   4,963

   

   177,571Income tax and social contribution:Current

   

   (66,842)

   

   (784)

   

   (1,099)

   

   (1,985)

   

   (70,708)Deferred

   

   2,576

   

   740

   

   (266)

   

   (860)

   

   2,190Net income for the year

   

   101,747

   

   2,772

   

   2,414

   

   2,118

   

   109,053Minority interest

   

   

   

   

   

   

   

   

   

   (555)Net income for the year

   

   

   

   

   

   

   

   

   

   108,4982009Telemarketing services in general

   

   IT services in general

   

   Publicity and advertising  services

   

   Eliminations

   

   ConsolidatedNet operating revenue

   

   2,164,732

   

   53,955

   

   -

   

   (57,668)

   

   2,161,019Cost of services rendered

   

   (1,766,763)

   

   (48,399)

   

   -

   

   54,998

   

   (1,760,164)Gross operating income

   

   397,969

   

   5,556

   

   -

   

   (2,671)

   

   400,855Operating revenue (expenses):Selling

   

   (27,712)

   

   -

   

   -

   

   3

   

   (27,709)General and administrative

   

   (116,211)

   

   (9,101)

   

   -

   

   (5,403)

   

   (130,715)Management fees

   

   -

   

   -

   

   -

   

   (7,879)

   

   (7,879)Equity in subsidiaries

   

   (2,535)

   

   -

   

   -

   

   2,535

   

   -Financial revenue

   

   19,994

   

   286

   

   -

   

   4,251

   

   24,531Financial expenses

   

   (40,152)

   

   (70)

   

   -

   

   300

   

   (39,922)Other operating expenses, net

   

   (13,236)

   

   (52)

   

   -

   

   (151)

   

   (13,440)(179,851)

   

   (8,937)

   

   -

   

   (6,345)

   

   (195,134)Operating income before income tax and social contribution

   

   218,118

   

   (3,381)

   

   -

   

   (9,016)

   

   205,721Income tax and social contribution:Current

   

   (70,753)

   

   -

   

   -

   

   (245)

   

   (70,998)Deferred

   

   1,774

   

   -

   

   -

   

   (5,440)

   

   (3,666)Net income for the year

   

   149,139

   

   (3,381)

   

   -

   

   (14,702)

   

   131,057Minority interest

   

   

   

   

   

   

   

   

   

   634Net income for the year

   

   

   

   

   

   

   

   

   

   131,691
   F-34




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
   2008Telemarketing services in general

   

   IT services in general

   

   Publicity and advertising  services

   

   Eliminations

   

   ConsolidatedNet operating revenue

   

   1,774,728

   

   -

   

   -

   

   -

   

   1,774,728Cost of services rendered

   

   (1,507,603)

   

   -

   

   -

   

   -

   

   (1,507,603)Gross operating income

   

   267,125

   

   -

   

   -

   

   -

   

   267,125Operating revenue (expenses):Selling

   

   (28,488)

   

   -

   

   -

   

   -

   

   (28,488)General and administrative

   

   (84,967)

   

   -

   

   -

   

   -

   

   (84,967)Management fees

   

   (6,317)

   

   -

   

   -

   

   -

   

   (6,317)Equity in subsidiaries

   

   -

   

   -

   

   -

   

   -

   

   -Financial revenue

   

   32,529

   

   18

   

   -

   

   -

   

   32,547Financial expenses

   

   (32,597)

   

   -

   

   -

   

   -

   

   (32,597)Other operating expenses, net

   

   (18,626)

   

   -

   

   -

   

   -

   

   (18,626)(138,466)

   

   18

   

   -

   

   -

   

   (138,448)Operating income before income tax and social contribution

   

   128,659

   

   18

   

   -

   

   -

   

   128,677Income tax and social contribution:Current

   

   (51,365)

   

   (4)

   

   -

   

   -

   

   (51,370)Deferred

   

   5,522

   

   -

   

   -

   

   -

   

   5,522Net income for the year

   

   82,816

   

   14

   

   -

   

   -

   

   82,829Minority interest

   

   

   

   

   

   

   

   

   

   (3)Net income for the year

   

   

   

   

   

   

   

   

   

   82,826
  The accounting policies for the reportable segments are the same as the Group’s (described in Note 3). 6.3.Assets and liabilities of reportable segments   2010Telemarketing services in general

   

   IT services in general

   

   Publicity and advertising  services

   

   Eliminations

   

   ConsolidatedAssets:Current

   

   473,740

   

   25,644

   

   28,929

   

   73,759

   

   602,073Non-current

   

   647,590

   

   5,789

   

   34,598

   

   39,427

   

   727,403Goodwill

   

   -

   

   -

   

   49,081

   

   -

   

   49,081Total assets

   

   1,121,330

   

   31,433

   

   112,608

   

   113,186

   

   1,378,557Liabilities and  shareholders' equity:Current

   

   427,719

   

   21,407

   

   26,619

   

   28,731

   

   504,476Non-current

   

   402,286

   

   27

   

   10,438

   

   40,359

   

   453,110Total liabilities

   

   830,004

   

   21,433

   

   37,057

   

   69,090

   

   957,586
     F-35




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements

For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)






2009Telemarketing services in general

   

   IT services in general

   

   Publicity and advertising  services

   

   Eliminations

   

   ConsolidatedAssets:Current

   

   509,311

   

   15,052

   

   -

   

   (15,702)

   

   508,662Non-current

   

   531,329

   

   4,947

   

   -

   

   26,735

   

   563,011Total assets

   

   1,040,640

   

   19,999

   

   -

   

   11,034

   

   1,071,673Liabilities and  shareholders' equity:Current

   

   490,778

   

   12,744

   

   -

   

   (49,639)

   

   453,883Non-current

   

   214,258

   

   27

   

   -

   

   -

   

   214,285Total liabilities

   

   705,037

   

   12,770

   

   -

   

   (49,639)

   

   668,168






In order to monitor the segment performance and to allocate funds among the segments:



·Goodwill was allocated to the reportable segments of publicity and advertising as described in Note 11. The assets jointly used by the reportable segments are allocated based on the revenues generated by each reportable segment; and



·All liabilities are allocated to the reported segments, except for “Other financial liabilities”, loans and deferred tax liabilities. Liabilities under the joint responsibility of reportable segments are allocated proportionally to the segment's assets.



6.4.Geographic information



The Group operates in two geographic areas: Brazil (domestic) and Argentina. The revenue from the Group’s continuing operations, resulting from external clients per geographic area is detailed as follows:





Revenue from foreign clients2010

   

   2009

   

   2008Brazil

   

   2,397,309

   

   2,161,019

   

   -Argentina

   

   687

   

   -

   

   -2,397,996

   

   2,161,019

   

   -




F-36






Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 7.INFORMATION ON THE NATURE OF COSTS AND EXPENSES RECOGNIZED IN THE INCOME STATEMENT



The Company reported an income statement classifying the costs and expenses based on their function. The information on the nature of these costs and expenses recognized in the income statement is presented below:   Note

   

   2010

   

   2009

   

   2008Depreciation and amortization

   

   

   122,109

   

   116,410

   

   118,042Personnel expenses

   

   

   1,630,212

   

   1,400,369

   

   1,165,992Raw material and use and consumption materials

   

   

   13,853

   

   11,042

   

   11,766Third party services

   

   

   196,830

   

   182,750

   

   139,489Electricity

   

   

   52,719

   

   45,367

   

   34,140Rent and insurance

   

   

   98,949

   

   97,896

   

   74,735Other expenses

   

   

   138,966

   

   125,995

   

   134,4342,253,638

   

   1,979,829

   

   197,185Classified as:Cost of services rendered

   8.1

   

   2,026,392

   

   1,760,164

   

   -Selling

   8.1

   

   26,976

   

   27,709

   

   84,967General and administrative

   8.1

   

   138,007

   

   130,715

   

   6,317Management compensation

   8.1

   

   7,142

   

   7,879

   

   (32,547)Financial expenses

   8.4

   

   30,681

   

   39,922

   

   138,448Other operating expenses, net

   8.2

   

   24,440

   

   13,440

   

   -2,253,638

   

   1,979,829

   

   197,185
   7.1.Cost of services rendered and operating expenses  2010Cost ofservices

   rendered

   

   Selling

   

   General andadministrative

   

   TotalPersonnel (i)

   1,535,701

   

   12,135

   

   79,688

   

   1,627,524Share-based payment (ii)

   -

   

   -

   

   2,689

   

   2,689Third-party services (iii)

   241,001

   

   2,712

   

   44,581

   

   288,294Depreciation/amortization (iv)

   112,029

   

   4

   

   10,076

   

   122,109Rent and insurance (v)

   93,062

   

   -

   

   5,888

   

   98,950Other inputs

   44,599

   

   12,125

   

   2,227

   

   58,9512,026,392

   

   26,976

   

   145,149

   

   2,198,517
     F-37




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
  2009Cost ofservices

   rendered

   

   Selling

   

   General and

   administrative

   

   TotalPersonnel (i)

   1,315,520

   

   11,161

   

   63,693

   

   1,390,374Share-based payment (ii)

   -

   

   -

   

   9,995

   

   9,995Third-party services (iii)

   241,304

   

   5,824

   

   40,076

   

   287,204Depreciation/amortization (iv)

   98,786

   

   9

   

   17,616

   

   116,411Rent and insurance (v)

   91,981

   

   3

   

   5,915

   

   97,899Other inputs

   12,573

   

   10,712

   

   1,299

   

   24,5841,760,164

   

   27,709

   

   138,594

   

   1,926,4672008Cost ofservices

   rendered

   

   Selling

   

   General and

   administrative

   

   TotalPersonnel (i)

   1,110,073

   

   9,121

   

   46,669

   

   1,165,863Share-based payment (ii)

   -

   

   -

   

   129

   

   129Third-party services (iii)

   207,667

   

   3,245

   

   28,750

   

   239,662Depreciation (iv)

   105,302

   

   9

   

   12,731

   

   118,042Rental and insurance (v)

   72,820

   

   3

   

   1,912

   

   74,735Other inputs

   11,741

   

   16,110

   

   1,093

   

   28,9441,507,603

   

   28,488

   

   91,284

   

   1,627,375
  (i)Costs with personnel have increased due to the growth of the business volume and to salary increases provided for in collective bargaining agreements. (ii)The cost with share-based payment reduced due to certain changes made to the plan in 2009 (Note 29).



(iii)The third-party services considered as Cost of Services Rendered refer mainly to expenses with workstation maintenance, facilities and data processing, while the third-party services considered as selling, general and administrative expenses refer, substantially, to expenses with consulting services, traveling, and legal advice, among others.



(iv)Refers to depreciation and amortization expenses of property, plant and equipment and intangible assets acquired through financial leasing agreements which were classified as fixed assets pursuant to IAS 17 Leases - and have been depreciated on a straight-line basis based on the asset’s expected useful life (Notes 10 and 12).



(v)They substantially represent expenses with rental of properties used in the operations and operational infrastructure of the contact center.   F-38




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)




7.2.Other operating income (expenses), net





2010

   

   2009

   

   2008Other Operating IncomeReversal of provision for contingencies (Note 30)

   17,918

   

   15,123

   

   4,186Penalty over overdue accounts

   135

   

   40

   

   537Recovered expenses

   473

   

   169

   

   814Sale of property, plant and equipment

   179

   

   27

   

   13118,705

   

   15,359

   

   5,668Other Operating ExpensesProvision for contingencies (Note 30)

   (33,390)

   

   (21,035)

   

   (17,425)Municipal Real Estate Tax

   (4,894)

   

   (3,375)

   

   (2,402)Cost of property, plant and equipment written-off

   (173)

   

   (1,761)

   

   (255)Other

   (4,689)

   

   (2,628)

   

   (4,211)(43,146)

   

   (28,799)

   

   (24,293)(24,441)

   

   (13,440)

   

   (18,626)




7.3.Expenses with employees’ benefits



2010

   

   2009

   

   2008Fixed compensation(i)

   

   833,683

   

   722,218

   

   593,309Social charges(ii)

   

   345,839

   

   280,371

   

   230,127Stock option plan

   

   2,689

   

   9,995

   

   1291,182,211

   

   1,012,584

   

   823,565


(i)  Fixed compensation include salaries and fees, paid vacations, thirteenth salary and private pension plan.

(ii) Social charges include contributions to social security - INSS, FGTS, among others.





F-39






Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
  7.4.Financial income (expenses), net 2010

   

   2009

   

   2008Financial incomeYield from investments(i)

   

   26,979

   

   22,330

   

   30,345Interest and monetary variation on other assets

   

   5,637

   

   2,096

   

   1,599Other

   

   597

   

   105

   

   60333,213

   

   24,531

   

   32,5472010

   

   2009

   

   2008Financial expensesInterest and monetary variation on other liabilities

   

   (618)

   

   (288)

   

   (92)Interest and monetary variation of contingencies

   

   (5,547)

   

   (5,890)

   

   (7,274)Interest on BNDES financing (Note 24)

   

   (18,151)

   

   (17,234)

   

   (14,738)Interest on BNB financing (Note 24)

   

   (897)

   

   -

   

   -Interest on leasing (Note 26)

   

   (2,195)

   

   (13,780)

   

   (7,123)Comission - Guarantee letter(ii)

   

   (1,294)

   

   (1,378)

   

   (1,782)Other financial expenses(iii)

   

   (1,979)

   

   (1,352)

   

   (1,588)(30,681)

   

   (39,922)

   

   (32,597)
 (i)The return on Parent Company’s financial investments increased due to the maintenance of a higher cash volume mainly deriving from dividends received in May 2010 and in April 2009. (ii)Cost mainly related to letters of guarantees from financial institutions, presented as guarantee in the BNDES loan (Note 22).



(iii)Refers to bank services, adjustments of short-term liabilities and taxes on foreign operations.





8.INCOME TAXES



Income taxes in Brazil comprise federal income tax and social contribution (which is an additional federal income tax). The deferred tax balances at each period end are computed at the rates to be in force in the subsequent years and the current tax balances at each period end include taxes to be paid currently. The statutory enacted rates applicable for federal income tax and social contribution were 25% and 9%, respectively, which represented a composite statutory rate of 34%, for 2010, 2009 and 2008.   F-40




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements

For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 8.1.Income tax recognized in profit or loss  2010

   

   2009

   

   2008CurrentIncome tax

   (51,238)

   

   (51,430)

   

   (37,221)Social contribution

   (19,470)

   

   (19,568)

   

   (14,149)(70,708)

   

   (70,998)

   

   (51,370)DeferredIncome tax on temporary differences

   2,243

   

   (2,611)

   

   11,121Social contribution on temporary differences

   807

   

   (940)

   

   4,004Income tax on tax losses

   (632)

   

   (85)

   

   (7,053)Social contribution on negative base (tax loss)

   (228)

   

   (30)

   

   (2,550)2,190

   

   (3,666)

   

   5,522Total tax expense

   (68,518)

   

   (74,664)

   

   (45,848)
   The expense for the year can be reconciled to the accounting profit as follows:   2010

   

   2009

   

   2008Profit before tax

   177,570

   

   205,721

   

   128,677Income tax and social contributionat nominal rate (34%)

   (60,374)

   

   (69,945)

   

   (43,750)Tax effects on permanent differences, net(i)

   (10,384)

   

   (5,492)

   

   (4,143)Other

   2,240

   

   773

   

   2,045Income tax and social contributionbenefits (expenses)

   (68,518)

   

   (74,664)

   

   (45,848)Effective income tax and socialcontribution rate

   38.59%

   

   36.29%

   

   35.63%
   (i)This refers basically to expenses with fines, donations, free gifts and sponsorships deemed not deductible, among others.



The tax rate used for the 2010, 2009 and 2008 reconciliations above is the corporate tax rate of 34% payable by corporate entities in Brazil on taxable profits under tax law in that jurisdiction.   F-41




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements

For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 9.EARNINGS PER SHARE



As described in Note 9, as a result of the reverse stock split and simultaneous stock split, in compliance with the paragraph 64 of IAS 33, the information related to the number of shares and earnings per share was adjusted retroactively to reflect the reverse stock split and simultaneous stock split.



9.1.Basic earnings per share



Earnings per shares are basically calculated by dividing the net income for the year, allocated to the Company’s common shareholders, by the weighted average number of common shares available in the year. Net income and weighted average number of thousand shares used to calculate the basic earnings per share are the following:   2010

   

   2009

   

   2008Profit for the year attributed to controlling shareholders:Common shares

   

   41,463

   

   49,947

   

   31,425Preferred shares

   

   67,035

   

   81,744

   

   51,401108,498

   

   131,691

   

   82,826Weighted average number of shares for the purposeof basic earnings per share (all measures):Common shares

   

   22,757

   

   22,425

   

   22,570Preferred shares

   

   36,681

   

   36,681

   

   39,11459,438

   

   59,106

   

   61,684
    Cents per share2010

   

   2009

   

   2008Basic Earnings per shareCommon shares

   

   1.82

   

   2.23

   

   1.39Preferred shares

   

   1.83

   

   2.23

   

   1.31
   9.2.Diluted earnings per share Diluted earnings per share is calculated by dividing the net income allocated to the parent company’s common shareholders (after the adjustment in the denominator to reflect the potential dilutive effect of the stock option plan discussed in Note 29) by the weighted average number of common shares available in the year, plus the weighted average number of common shares that would be issued at the conversion of all potential common shares diluted into common shares. Net income used to calculate all diluted earnings per share is the same used to calculate the basic earnings per share, aspreviously described.    F-42




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 The following table presents the weighted average number of shares for the purposes of diluted earnings per share and the weighted average number of shares used to calculate the basic earnings per share, as follows:   2010

   

   2009

   

   2008Profit for the year attributed to controlling shareholders:Common shares

   

   41,463

   

   49,947

   

   31,425Preferred shares

   

   67,035

   

   81,744

   

   51,401108,498

   

   131,691

   

   82,826Weighted average number of shares for the purposeof basic earnings per share (all measures):Common shares

   

   23,046

   

   22,762

   

   22,570Preferred shares

   

   36,681

   

   36,681

   

   39,11459,727

   

   59,443

   

   61,684
    Cents per share2010

   

   2009

   

   2008Diluted Earnings per ShareCommon shares

   

   1.80

   

   2.19

   

   1.39Preferred shares

   

   1.83

   

   2.23

   

   1.31
   F-43




Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)




10.PROPERTY, PLANT AND EQUIPMENT





Telecom and IT equipment (i)

   

   Furniture,  fixture and equipament (i)

   

   Improvements on  third-party assets (ii)

   

   Construction in progress

   

   Building

   

   Land

   

   Other

   

   TotalCostDecember 31, 2009

   361,134

   

   79,486

   

   243,584

   

   5,473

   

   2,709

   

   831

   

   45,843

   

   739,060Additions

   42,301

   

   18,316

   

   33,023

   

   41,573

   

   -

   

   -

   

   14,380

   

   149,593Disposals

   (99)

   

   (41)

   

   (179)

   

   -

   

   -

   

   -

   

   (39)

   

   (358)Transfers

   1,670

   

   402

   

   7,565

   

   (11,847)

   

   319

   

   -

   

   103

   

   (1,788)December 31,  2010

   405,006

   

   98,163

   

   283,993

   

   35,199

   

   3,028

   

   831

   

   60,287

   

   886,507Accumulated depreciationDecember 31, 2009

   (266,811)

   

   (33,106)

   

   (72,892)

   

   -

   

   (210)

   

   -

   

   (13,568)

   

   (386,587)Amortization

   (50,191)

   

   (10,902)

   

   (27,677)

   

   -

   

   (112)

   

   -

   

   (5,305)

   

   (94,187)Disposals

   94

   

   27

   

   -

   

   -

   

   -

   

   -

   

   23

   

   144Transfers

   346

   

   (189)

   

   21

   

   -

   

   -

   

   -

   

   (182)

   

   (4)December 31, 2010

   (316,562)

   

   (44,170)

   

   (100,548)

   

   -

   

   (322)

   

   -

   

   (19,032)

   

   (480,634)Carrying amountDecember 31, 2009

   94,323

   

   46,380

   

   170,692

   

   5,473

   

   2,499

   

   831

   

   32,275

   

   352,473December 31, 2010

   88,444

   

   53,993

   

   183,445

   

   35,199

   

   2,706

   

   831

   

   41,255

   

   405,873






F-44






Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)
 The following useful lives are used in the calculation of depreciation:  Telecom and IT systems

   3 yearsImprovements on third party assets

   10 yearsFurniture and fixtures

   8 yearsBuilding

   25 yearsOther

   10 years
  (i)The acquired assets’ monthly depreciation rates under the items “IT equipment” and “furniture and fixtures” were reviewed due to the reduction of its economic useful life estimate. The evaluation studies to determine the new economic useful lives of these assets were prepared in accordance with the rules of Brazilian Association of Technical Rules (ABTN) by a specialized consultant qualified for this type of activity and supported by technical appraisal reports. Such evaluation is in conformity with requirements set forth in IAS 16 - Property, Plant and Equipment. (ii)The real estate rental agreements effectiveness varies from 5 up to 10 years. The Company may renew it for the same period.



(iii)Property, plant and equipment in progress mainly include expenses with new constructions and equipment installations until beginning of operations, when it is reclassified to Assets in operation. Additions taken place in the period are stated by the transfers net value.



Finance lease



Assets acquired through finance lease agreements were classified as property, plant and equipment and recorded under “IT equipment” and “Furniture and fixtures” and generated depreciation expenses in the amounts of R$738 and R$7,264 on December 31, 2010 and 2009, respectively.



The book value of property, plant and equipment held under finance lease agreements on December 31, 2010 was R$2,120 (2009 - R$2,790).   F-45




Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




11.GOODWILL ON INVESTMENTS





2010CostDecember 31, 2009

   

   -Additions

   

   49,081Disposals

   

   -Transfers

   

   -December 31, 2010

   

   49,081






In September 2010, Contax acquired full control of Ability for R$72,585, of which R$49,081 as goodwill based on its economic value, due to the estimate of business’ future profitability.





12.OTHER INTANGIBLE ASSETS





Data processing system (Software)

   

   Trademarks and patents

   

   TotalCostDecember 31, 2009

   174,503

   

   -

   

   174,503Additions

   16,595

   

   82

   

   16,677Transfers

   1,787

   

   -

   

   1,787December 31, 2010

   192,885

   

   82

   

   192,967Accumulated amortizationDecember 31, 2009

   (94,057)

   

   -

   

   (94,057)Amortizations

   (29,841)

   

   -

   

   (29,841)Transfers

   4

   

   -

   

   4December 31, 2010

   (123,894)

   

   -

   

   (123,894)Carrying amountDecember 31, 2009

   80,446

   

   -

   

   80,446December 31, 2010

   68,991

   

   82

   

   69,073








Management has estimated a useful life of 5 years for software.



F-46






Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




13.RECOVERABLE TAXES



2010

   

   2009Current

   

   Non

   

   Current

   

   NonCurrent

   CurrentIncome tax recoverable

   32

   

   -

   

   -

   

   -Social contribution recoverable

   11

   

   -

   

   -

   

   -Withholding income tax (i)

   4,638

   

   5,273

   

   2,416

   

   5,091Withholding PIS/COFINS/CSLL

   1,815

   

   -

   

   868

   

   -INSS recoverable

   389

   

   -

   

   389

   

   -ISS recoverable (ii)

   11

   

   5,110

   

   -

   

   3,487Other taxes recoverable

   237

   

   -

   

   -

   

   -7,133

   

   10,383

   

   3,673

   

   8,578




(i)Withholding income tax on financial investment income.



(ii)The ISS recoverable is classified as non-current assets due to the refund maturities with Municipal agencies.





14.DEFERRED TAXES



Deferred income tax and social contribution on the final dates of the fiscal periods refer to:





2010

   

   2009Temporary differences

   

   Income  tax

   

   Social contribution

   

   Total

   

   Temporary differences

   

   Income  tax

   

   Social contribution

   

   TotalAssets:Depreciation

   

   19,148

   

   4,786

   

   1,723

   

   6,510

   

   7,539

   

   1,884

   

   679

   

   2,563Contingent liabilities

   

   74,411

   

   18,603

   

   6,697

   

   25,300

   

   52,018

   

   13,005

   

   4,681

   

   17,686Ability's deferred taxes (i)

   

   80,555

   

   20,139

   

   7,250

   

   27,389

   

   -

   

   -

   

   -

   

   -Profit sharing program

   

   12,762

   

   3,191

   

   1,149

   

   4,340

   

   19,440

   

   4,860

   

   1,750

   

   6,610Tax loss

   

   2,150

   

   537

   

   193

   

   730

   

   5,629

   

   1,407

   

   507

   

   1,914Deferred income tax and social contributions - assets

   

   189,026

   

   47,256

   

   17,011

   

   64,269

   

   84,626

   

   21,157

   

   7,616

   

   28,773






(i)On December 21, 2010, Contax transferred the control of Ability to the Company through a partial spin-off of assets, as well as the liabilities mentioned above (contingent consideration amounting to R$45,585, according to the balance as of December 31, 2010). Therefore, goodwill previously recorded in Contax was transferred to Ability’s records as tax credit in the amount of R$25,284, according to the balance as of December 31, 2010.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)








Up to December 31:2011

   37,9322012

   6,3002013

   6,9002014

   8,8562015

   4,28164,269








(i)Technical studies prepared about future taxable income consider estimates related, among other things, to the Group’s performance, as well as the behavior of operating markets and certain economical aspects. The real amounts may differ from the adopted estimates.





15.TRADE RECEIVABLES





2010

   

   2009ClientsRelated parties

   12,118

   

   15,969Other clients (third parties)

   164,184

   

   112,517176,302

   

   128,486






Total trade receivables (net of allowances) held by the Group at December 31, 2010 amounted to R$176,302 (2009 - R$128,486). The average credit period on sales is 20 days. Interest is charged at 1% per month on the outstanding balance.



Allowance for doubtful accounts is recorded to recognize incurred losses in relation to accounts receivable, whose calculation is based on estimates considering the situation of each customer and the guarantees provided by them. The basis for measurement of the allowance for doubtful accounts considers the position of each overdue client individually. Significant financial difficulties of the debtor, identification that the debtor has entered into bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. At December 31, 2010 and 2009 there was no allowance for doubtful accounts registered.



Out of the balance of trade accounts receivable at the end of the year, R$3,790 and R$2,720 on December 31, 2010 and 2009 corresponds to Telemar Norte Leste S/A (“Oi Fixa”), the main client of the Group (Note 30).



Transactions with related parties account for 46% of the revenues from services rendered in 2010 (2009 –55% and 2008 – 57%).





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)
 Ageing of receivables overdue but not impaired:  2010

   

   2009Due

   162,517

   

   122,518Overdue for up to 30 days

   7,883

   

   4,949Overdue from 31 to 60 days

   1,794

   

   127Overdue from 61 to 90 days

   797

   

   -Overdue from 91 to 180 days

   2,422

   

   -Overdue for over 180 days

   889

   

   892176,302

   

   128,486
  Movement in the allowance for doubtful accounts:  2010

   

   2009Balance at the beginning of the year

   -

   

   3,465Amounts written-off during the year

   -

   

   (3,465)

   (i)Balance at the end of the year

   -

   

   -
   (i)In view of the unsuccessful credit recovery, through administrative and legal collection, the Company wrote off the provision for doubtful accounts.



In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. F-49




Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




16.CASH AND CASH EQUIVALENTS, RESTRICT CASH AND FINANCIAL INVESTMENTS





2010

   

   2009Current:Cash and banks (i)

   70,491

   

   14,446Financial investments (ii)

   317,312

   

   343,407Total current

   387,803

   

   357,853Non-current:Restrict cash (iii)

   2,013

   

   -Long-term investments (iv)

   69,869

   

   26,590Total non-current

   71,882

   

   26,590




(i)The amounts are kept in a current account, as the Group has accounts payable due on the first days of each month, relating to the payment of suppliers, taxes and payroll.



(ii)The financial investments are promptly convertible into a known cash amount and are subject to an insignificant risk of change in said amount. These financial investments refer to Bank Deposit Certificates (CDB), remunerated based on the variation in Interbank Deposit Certificate (CDI).



(iii)As a partial guarantee to the payment of the additional price, as provided for in Ability’s Agreement, Contax offers all funds deposited in the first money market fund. The retained amount under the Agreement is invested in CDBs, paid at a weighted average rate of 99% of the CDI. On December 31, 2010, the balance of the restricted amount recorded in the non-current assets corresponded to R$2,013, with maturity in November 2012 (Note 33).



The restricted amount deposited in a money market fund will be released to the Seller in two annual installments (“annual release”), whereby (i) the first installment, due in the fourth year from the Closing Date (August 16, 2010), will correspond to 50% of the amount resulting from the money market fund, plus proportional earnings from the financial investments, and discounting the amounts corresponding to materialized contingencies (if applicable) and (ii) the second installment, due in the fifth year from the Closing Date, will correspond to the amount remaining in the money market fund, after the release of the first installment, plus proportional earnings from the financial investment, and discounting the amounts corresponding to materialized contingencies (if applicable).



(iv)On December 31, 2010, long-term investments comprised investments in Bank Deposit Certificates (CBD) whose original maturity date are in 2014 (R$28,235) and 2015 (R$35,840) and were acquired with the intention and financial capacity to hold them inthe portfolio up to maturity date. They are evaluated by cost of acquisition, plus the income earned against the income for the year.







F-50






Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




17.ISSUED CAPITAL



17.1.Capital stock



The subscribed and paid-up capital on December 31, 2010 and 2009 was R$223,873, represented by 59,770,600 non-par registered book-entry shares (23,089,600 common shares and 36,681,000 preferred shares). Each common share is entitled to one voting right in the resolutions of the General Meeting.



Share capital2010

   

   2009

   

   200823,089,600 common shares (2009 - 5,772,435 / 2008 - 5,824,772)

   86,483

   

   86,483

   

   82,23736,681,000 preferred shares (2009 - 9,170,250 / 2008 - 10,031,914)

   137,390

   

   137,390

   

   141,636223,873

   

   223,873

   

   223,873






17.1.1.Common shares



Number of shares

   

   Share capitalBalance on December 31, 2008

   5,824,772

   

   82,237Shares canceled on January 15, 2009

   (52,337)

   

   4,246Balance on December 31, 2009

   5,772,435

   

   86,48350 to 1 reverse split

   ÷ 50115,4481 to 200 stock split

   x 200Balance on December 31, 2010

   23,089,600

   

   86,483








Each common share entitles its holder to a voting right at the Company’s General Shareholders’ Meeting. Except for the provisions set forth in law, the resolutions of the General Shareholders’ Meeting are voted by common shareholders. Blank votes will not be computed.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




17.1.2.Preferred Shares





Number of shares

   

   Share capitalBalance on December 31, 2008

   10,031,914

   

   141,636Shares canceled on January 15, 2009

   (861,664)

   

   (4,246)Balance on December 31, 2009

   9,170,250

   

   137,39050 to 1 reverse split

   ÷ 50183,4051 to 200 stock split

   x 200Balance on December 31, 2010

   36,681,000

   

   137,390






The preferred shares issued by the Company shall not have voting rights, but shall have priority of refund in the event the Company is liquidated, without premium, and in the payment of noncumulative minimum dividends of (a) 6% per year, on the amount resulting from the division of the subscribed capital by the number of shares of the Company or (b) 3% of net equity value of shares, prevailing the highest amount between (a) and (b). The payment of such minimum statutory dividends is subject to the existence of distributable profits or realized profit reserves.



The preferred shares may represent up to two thirds of the total shares issued by the Company, with the possibility of changing the previous existing ratio between common and preferred shares.



Preferred shareholders can obtain unrestricted voting rights as of the moment the Company stops paying dividends for 3 (three) consecutive years. Voting rights will last until dividends are duly paid.



Stock option granted to executives by the stock option plan



On December 31, 2010, the beneficiaries of the stock option program held approximately 401,868 stock options for the Company’s common shares; however, 1,868 of those options expire on October 1, 2012 and 300,000 expire on October 1, 2013 and 100,000 expire on October 1, 2014. On December 31, 2009, the program’s beneficiaries held 1,364,068 stock options for the Company’s common shares; however, 330,640 of those options expire on October 1, 2011, 333,428 expire on October 1, 2011, and 350,000 expire on October 1, 2013 and 350,000 expire on October 1, 2014.



Stock options granted within the scope of the stock option plan do not entitle its holders to voting or dividend rights. For more information on the stock option plan, see Note 29.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




17.1.3.Reverse split of shares



First reverse split of shares



At the Extraordinary General Meeting held on October 17, 2007, the reverse split of all shares representing the Company’s capital stock was approved, at the ratio of 20 shares for 1 share of the same type. As per a communication made to the shareholders, a term of until November 16, 2007 was granted to carry out the adjustments to share positions.



Share fractions resulting from reverse split were divided, grouped into whole numbers and sold at Bovespa auction on August 13, 2008, as per Notice to the Market dated August 12, 2008. The amounts resulting from this auction totaled R$ 22,106 thousand, out of which R$ 5,762 thousand were transferred to shareholders of fractioned shares. The R$ 16,282 thousand non-transferred amount corresponds to shareholders whose shares are either blocked or their records are not updated and will be exclusively paid upon the presentation of the supporting documentation evidencing the unblocked shares and/or shareholder’s identification, whichever is the case.



Second reverse split of shares



The following was approved at the Extraordinary General Meeting held on October 27, 2009, (i) the share reverse split, at the 50:1 share ratio, according to the corresponding types and (ii) the concurrent splitting of all shares existing after the reverse split, at the 1:200 share ratio of the same type, pursuant to Article 12 of Law 6,404/76.



The concurrently share reverse split and split aim at: (a) adjusting the shareholder base and decrease the administrative and operating costs for the Company and shareholders; (b) improving the efficiency of records, controls and reporting systems; (c) diminishing the possibilities of errors of information and communication, improving services to the Company’s shareholders; and (d) maintaining the quoted value of Company’s shares in the market at an attractive trading level, providing better liquidity to the Company's shares in the market.



As per the notice to shareholders, a term until January 15, 2010 was granted to carry out the adjustments to share positions.



Once elapsed the terms for shareholding adjustments by shareholders, eventual fractions of shares resulting from the reverse split, except for those which are manifestly expressed by the holder’s nonparticipation in the auction, will be reversely split into whole figures and sold in an auction to be held at BM&FBOVESPA S.A., and the amounts resulting from such sale to be available on behalf of respective shareholder, pursuant to the procedures to be disclosed.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)
  As of January 18, 2010, the Company’s shares began to be traded exclusively at the ratio resulting from the reverse split and simultaneous split of shares, carried out on said date. Said transactions resulted in 59,770,600 shares, of which 23,089,600 are common shares and 36,681,000 are preferred shares. The Company fully sold the fraction of remaining shares, conducted the reverse split and split operations resolved at the Extraordinary General Meeting held on October 27, 2009, in auctions held on May 17, 2010, where 478,750 common shares and 98,466 preferred shares were sold and on May 24, 2010, 181,200 preferred shares were sold.



The sales amount of fractional shares amounted to R$18,707. According to the notice to shareholders, the financial amount refers to the operation made available to shareholders on June 4, 2010, amounting to R$8,398. For shareholders who were not paid due to blocked shares or outdated record, the amount will be retained by the Company and made available to corresponding shareholders for payment by submitting supporting unblocking and identification documentation.  18.RESERVES  2010

   

   2009

   

   2008Capital reserve in share subscription

   14.731

   

   19.639

   

   9.282Legal reserve

   27.332

   

   21.907

   

   15.465Statutory reserve

   90.007

   

   87.924

   

   95.010Unrealized profit reserve

   -

   

   -

   

   16.626132.070

   

   129.470

   

   136.383
   18.1.Capital reserve in share subscription   2010

   

   2009

   

   2008Balance at the beginning of the year

   19,639

   

   9,282

   

   9,254Stock option plan2007 Program

   (7,024)

   

   10,328

   

   -2010 Program

   2,116

   

   -

   

   -Dividends barred

   -

   

   29

   

   28Balance at the end of the year

   14,731

   

   19,639

   

   9,282
   F-54




Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)






18.2.Profit Reserves



18.2.1.Legal Reserve



2010

   

   2009

   

   2008Balance at the beginning of the year

   21,907

   

   15,465

   

   10,845Allocation of profit for the year

   5,425

   

   6,442

   

   4,620Balance at the end of the year

   27,332

   

   21,907

   

   15,465






Pursuant to Article 193 of Brazilian Corporate Law, Contax Participações S.A. is obliged to allocate 5% of its annual net income determined under the accounting practices adopted in Brazil to a legal reserve, up to 20% of the Company’s capital stock. This allocation is optional when the legal reserve added to capital reserves exceed 30% of the capital stock. This reserve may be used to increase capital or offset losses, and may not be distributed as dividends.



18.2.2.Statutory reserve



2010

   

   2009

   

   2008Balance at the beginning of the year

   87,924

   

   95,010

   

   40,594Cancelation of own shares

   -

   

   (39,476)

   

   -Allocation of retained earnings

   3,073

   

   32,390

   

   54,416Balance at the end of the year

   90,997

   

   87,924

   

   95,010








Pursuant to Article 194 of Brazilian Corporate Law and to Article 29 of the Company’s Bylaws, the Company created a Statutory Reserve to ensure the realization of investments by the Company, as well as to preserve its working capital. The Statutory Reserve is limited, together with all other profit reserves, to the amount of the capital stock.



As per resolutions of the Board of Directors, the Statutory Reserve was partially used in share buyback programs (Note 19).



18.2.3.Unrealized profit reserve



**2009**Balance at beginning of the year

   

   16,626Minimun statutory dividends

   

   (16,626)Balance at the end of the year

   

   -






The unrealized profit reserve, as provided for in the Company’s Bylaws, aims at not distributing the portion of unrealized profit as dividends.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)






18.2.4.Foreign currency translation reserve





2010Balance at the beginning of the year

   

   -Foreign exchange differences from the translation of assets from operations abroad

   

   (46)Balance at the end of the year

   

   (46)








Exchange differences related to the translation of net assets of the Group’s operations abroad (Contax Argentina), from its functional currencies (Argentine Peso) to the Group’s presentation currency (Brazilian Real) are directly recognized in “Other comprehensive income” and accumulated in the reserve for the translation of foreign currency. As explained in Note 1, Contax Argentina was incorporated in the fiscal year ended December 31, 2010.





19.TREASURY SHARES



Own equity instruments that are reacquired (treasury shares) are recognized at cost and deduced from shareholders’ equity. No gain or loss is recognized in the income statement upon the purchase, disposal, issue or cancellation of the Group’s own equity instruments. Any difference between the book value and consideration is recognized in other capital reserves.



19.1.Share buyback



From 2006 to 2010, the Company implemented five (5) different share buyback programs, resulting in 15,131 thousand common shares and 56,916 thousand preferred shares repurchased. Out of this total amount, 14,731 thousand common shares and all 56,916 preferred shares repurchased were canceled, and the remaining 400 common shares were held in treasury, not decreasing the Company’s capital stock.



19.1.1.First share buyback program



At the Extraordinary Meeting of the Board of Directors held on June 29, 2006, the share buyback proposal was approved, with funds registered in the Capital Reserve and Statutory Reserve accounts, totaling the buyback of 5,886,972 common shares and 11,773,944 preferred shares, fully cancelled as per resolution of the Extraordinary General Meeting held on November 28, 2006.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




19.1.2.Second share buyback program



At the Extraordinary Meeting held on November 30, 2006, the Board of Directors approved the launch proposal of the share buyback program, with funds registered in the Capital Reserve and Statutory Reserve accounts, which amounted to the buyback of 5,298,300 common shares and 24,058,190 preferred shares, cancelled on July 31, 2007, thus 1,750,000 common shares are held in treasury, as per resolution at the Extraordinary General Meeting held on July 27, 2007.



19.1.3.Third share buyback program



At the Extraordinary Meeting, held on July 26, 2007, the Board of Directors approved the new share buyback program with funds registered in the Capital Reserve and Statutory Reserve accounts, totaling the buyback of 3,193,472 common shares and 18,277,422 preferred shares, cancelled on October 17, 2007, of which 1,750,000 common shares are held in treasury, pursuant to the resolutions of the General Extraordinary Meeting, totaling 3,500,000 common shares in treasury.



19.1.4.Fourth share buyback program



At the Extraordinary Meeting held on September 5, 2008, the Board of Directors approved a new share buyback program, with funds from Capital Reserve and Statutory Reserve accounts, totaling the buyback of 861,664 preferred shares and 52,337 common shares, which remained in treasury.



The Extraordinary General Meeting held on December 17, 2008 approved the cancellation of 52,337 common shares and 861,664 preferred shares held in treasury, without decreasing the Company’s capital stock, and 166,018 common shares remaining in treasury. All of these shares were canceled in January 2009.



19.1.5.Fifth share buyback program



The Extraordinary General Meeting held on October 27, 2009 approved the Company’s Share Buyback Program without reducing the Capital Stock. Funds from the capital and statutory reserves will be used for the acquisition of shares, excluding the amount of treasury shares. The maximum number of shares to be acquired is 699,996 common shares and 1,945,000 preferred shares, which represent less than 10% of outstanding common and preferred shares, respectively. Said Program may be implemented up to October 28, 2010.



Until December 31, 2010 15,120 common shares were subject to the buyback program.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)






R$Thousands of shares

   

   Buyback price

   

   Average price

   

   Maximum price

   

   Minimum pricePreferred shares1st Share Buyback Program

   11,774

   

   21,517

   

   1.83

   

   1.95

   

   1.61Cancellation of shares

   (11,774)

   

   (21,517)

   

   1.832nd Share Buyback Program

   24,058

   

   46,242

   

   1.92

   

   2.00

   

   1.84Cancellation of shares

   (24,058)

   

   (46,242)

   

   1.923rd Share Buyback Program

   18,277

   

   46,424

   

   2.54

   

   2.65

   

   2.46Cancellation of shares

   (18,277)

   

   (46,424)

   

   2.544th Share Buyback Program

   862

   

   36,206

   

   42.00

   

   42.81

   

   41.59Cancellation of shares

   (862)

   

   (36,206)

   

   42.00-

   

   -Common shares1st Share Buyback Program

   5,887

   

   19,097

   

   3.24

   

   3.41

   

   3.12Cancellation of shares

   (5,887)

   

   (19,097)

   

   3.242nd Share Buyback Program

   5,298

   

   16,144

   

   3.05

   

   3.29

   

   2.97Cancellation of shares

   (3,548)

   

   (10,812)

   

   3.053rd Share Buyback Program

   3,193

   

   11,287

   

   3.53

   

   3.62

   

   3.52Cancellation of shares

   (1,443)

   

   (5,102)

   

   3.54Sale of shares

   (180)

   

   (604)

   

   3.363,320

   

   10,913Grouping of shares (1/20)

   166

   

   10,913

   

   65.744th Share Buyback Program

   52

   

   2,729

   

   52.50

   

   52.94

   

   51.73Cancellation of shares

   (52)

   

   (3,270)

   

   62.885th Share Buyback Program

   3

   

   314

   

   97.97

   

   98.83

   

   85.00169

   

   10,686Reverse split (1/50) and Split (1/200) of shares

   677

   

   10,686

   

   15.795th Share Buyback Program

   216

   

   6,311

   

   29.23

   

   30.00

   

   28.50Sale of shares

   (893)

   

   (16,996)

   

   19.045th Share Buyback Program

   102

   

   2,971

   

   29.13

   

   30.00

   

   25.59Sale of shares

   (19)

   

   (568)

   

   29.8983

   

   2,4045th Share Buyback Program

   369

   

   11,254

   

   30.14

   

   32.00

   

   29.25Sale of shares

   (50)

   

   (1,511)

   

   30.22402

   

   12,147






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(In thousands of reais, except when otherwise indicated)




20.RETAINED EARNINGS AND DIVIDENDS



20.1.Retained earnings



2010

   

   2009Balance at the beginning of the year

   

   59,403

   

   8,569Income attributable to the parent company's partners

   

   108,498

   

   131,691Legal reserve

   

   (5,425)

   

   (6,442)Statutory reserve

   

   (3,073)

   

   (32,390)Payment of dividends

   

   (59,403)

   

   (11,428)Dividends proposed

   

   (25,769)

   

   (30,597)Balance at the end of the year

   

   74,231

   

   59,403




20.2.Dividend distribution policy



According to the Company’s by-laws, Contax Holding is obligated to distribute dividends for each fiscal year in the amount of not less than 25% of the net profit, determined under the accounting practices adopted in Brazil, adjusted in accordance with clause 202 of Law No. 6,404/76. The Company may also distribute quarterly dividends, as long as the total amount of dividends paid does not exceed the capital reserve. In accordance with Brazilian Corporate Law, on December 31, 2010, management proposed the payment of R$ 25,769 (December 31, 2009 - R$ 30,597) as the minimum mandatory dividends, prescribed by Law No. 6404/76.



The Annual General Meeting held on April 28, 2010 approved the proposal as to the allocation of net income for the year ended December 31,2009, already included in the financial statements on that date, as follows: (a) accumulated loss carry forward in the amount of R$11,084; (b) allocation of R$6,442 to the legal reserve; (c) distribution of dividends to the Company’s shareholders owning position on June 17, 2010, in the amount of R$90,000, and (d) allocation of R$32,390 to the statutory reserve.



The payment of dividends started on June 28, 2010, and since January 1, 2010 earn interest based on the Reference Rate (TR), and R$89,156 were paid up to December 31, 2010.



The annual dividend distributed to holders of preferred shares (the “Preferred Dividend”) has priority in the allocation of Adjusted Net Income when determining the Preferred Dividend in relation to the general dividend. Remaining amounts to be distributed, if any, are allocated first to the payment of a dividend to holders of common shares in an amount equal to the Preferred Dividend and the remainder, if any, is distributed equally among holders of preferred shares and common shares.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)
   The Preferred Dividends corresponds to a non-cumulative preferred dividend equal to 6% of share capital determined in according to accounting practices adopted in Brazil, in proportion of preferred shares to total capital, or 3% of shareholders’ equity book value per share, whichever is greater. The payment of such minimum statutory dividends is subject to the existence of distributable profits or realized profit reserves. Statutory minimum dividends for the fiscal years ended on December 31, 2010 and 2009 were calculated as follows:   2010

   

   2009Net income for the year

   108,498

   

   139,916Absorption of accumulated losses

   -

   

   (11,084)Recording of legal reserve - 5%

   (5,425)

   

   (6,442)Adjusted net income

   103,073

   

   122,390Minimum mandatory dividends

   (25,769)

   

   (30,597)Dividends in excess

   (74,231)

   

   (59,403)Allocation to the statutory reserve

   3,073

   

   32,390Dividends payableProposed dividends

   100,000

   

   90,000
   The Company’s Management made a proposal to pay proposed dividends in 2010, thirty (30) days after the approval by the Annual General Meeting. The dividends proposed by the Management represent a dividend equivalent to R$1.68439 per common share and R$1.68439 per preferred share.



The minimum mandatory dividends are recorded in the 2010 balance sheet as legal obligations (provisions in current liabilities), and dividends exceeding this minimum as dividends reserve in a special account of the statement of changes in the shareholders' equity.   21.NON-CONTROLLING INTERESTS   2010

   

   2009Balance at the beginning of the year

   1,445

   

   2,079Profit sharing

   555

   

   (634)Balance at the end of the year

   2,000

   

   1,445
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(In thousands of reais, except when otherwise indicated)




22.BORROWINGS





Effectiveness

   

   

   

   FinancialPurpose

   

   Beginning

   

   Maturity

   

   Guarantees

   

   Charges

   

   2010

   

   2009Expansion of installed capacity (BNDES)

   

   10/2007

   

   09/2013

   

   Bank guarantee

   

   TJLP (i) + 2.73% p.a

   

   150,033

   

   204,591Expansion of installed capacity (BNDES)

   

   05/2010

   

   09/2016

   

   Accounts receivable  from OI clients

   

   TJLP (i) + 2.73% p.a

   

   158,052

   

   -Acquisition of domestic machinery and equipment

   

   05/2010

   

   09/2016

   

   Accounts receivable  from OI clients

   

   4.5% p.a

   

   23,579

   

   -Construction of the Santo Amaro site (BNB)

   

   11/2009

   

   03/2016

   

   Accounts receivable from NET clients

   

   10% p.a

   

   51,203

   

   -Current

   

   

   

   

   

   

   

   

   

   64,873

   

   55,070Non-current

   

   

   

   

   

   

   

   

   

   317,994

   

   149,521






(i)The annual long-term interest rate was 6.00% in 2010 (6.00% on December 31, 2009).



22.1.Summary of borrowing agreements



22.1.1.Financing agreement with BNDES (Brazilian Development Bank)



In August, 2007, Contax entered into a loan agreement with BNDES in the amount of R$216,514 with the purpose of financing the expansion of its installed capacity, improving current facilities, qualifying human resources, improving the quality of services rendered, productivity and investing in marketing actions.The financing funds were released in five installments, the first of them in October 2007 and the last in November 2008.



The maturity date of the financial charges was quarterly until September 15, 2009, becoming monthly for the period between October 15, 2009 until the maturity date or settlement of contract. The principal shall be settled monthly as from October 15, 2009.



Contax contractually opted for tendering guarantees through sureties from financial institutions, in this case, receivables and restrictive (financial covenants) structures are not applicable. Costs related to these sureties totaled R$1,075 in the fiscal year ended December 31, 2010 (R$1,234 in 2009) and are recognized in the income statement over the borrowing term within “Finance costs” (Note 7).





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for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)






22.1.2.New agreement with BNDES



In March 2010, Contax entered into a new loan agreement with BNDES in the amount of R$ 323,552, divided into two sub-loans:



Sub-loan “A”in the amount of R$ 281,455 destined to investments to increase the installed capacity and improve facilities, implement quality programs, train human resources and invest in Research and Development, within the scope of BNDES Program for the Development of the National Industry of Software and Information Technology Services – BNDES PROSOFT; and



Sub-loan “B”in the amount of R$ 42,097 thousand destined to investments to acquire domestic machinery and equipment, classified into the criteria of the Special Agency of Industrial Financing - FINAME, required by the project.



Annual interest rate of 1.73% shall incur over the principal amount of sub-loan “A” plus the TJLP (long-term interest rate) variation accrued of 1% p.a., while an annual interest rate of 4.5% shall incur over the sub-loan “B”.



The principal of debt will be settled in 60 monthly and consecutive installments, the first installment maturing on October 15, 2011 and the last installment maturing on September 15, 2016. Financial charges will mature on a quarterly basis between March 2010 and September 2011, and on a monthly basis from October 2011.



Contax will tender as guarantee the receivables deriving from the Services Agreement executed with Oi Fixa, TNL PCS S/A (Oi Móvel) and Telemar Internet Ltda. In addition, during the effectiveness of this Agreement, it shall maintain the Debt Service Coverage Ratio (“Ratio”) equal or higher than 1.65, of which:



a)Debt Service Coverage Ratio calculated by dividing the Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) by Debt Service on a half-yearly basis;



b)    EBITDA corresponds to the operating income before the financial result, income tax and social contribution and depreciation and amortization expenses in the half year;



c)    The Debt Service corresponds to the amount of debt effectively paid to creditors as amortization of principal and interest rates in the half year.



On December 31, 2010, Contax reviewed the restrictive covenants referring to this financing agreement, and it concluded that said Ratio had been honored.





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(In thousands of reais, except when otherwise indicated)








On May 28, 2010 the first releases referring to this agreement were received, R$70,364 referring to the sub-loan “A” and R$10,524 referring to sub-loan “B.” On December 10, 2010 the following releases referring to this agreement were received, R$87,000 referring to sub-loan “A” and R$13,000 referring to sub-loan “B”.



22.1.3.Agreement with Banco do Nordeste do Brasil S.A. (BNB)



In March 2010, Contax executed a loan agreement with BNB in the amount of R$51,000, aiming at financing the implementation of a new operating unit in the city of Recife, state of Pernambuco. The outstanding balance will be adjusted by a fixed rate of 10% p.a., including full performance bonus of 15%. The maturity of financial charges shall occur quarterly until March 2012, and then monthly between April 2012 and March 2015. The principal shall be paid in 36 monthly installments, from April 2012 to March 2015. As long as each installment is paid on the maturity date, the loan will bear interest rate of 8.5% p.a.; otherwise, the interest rate will be 10% p.a.



On September 21, 2010, the first release under this agreement was received for a total of R$29.880. On December 15, 2010 the second release under this agreement was received for a total of R$21,120.



The loan and financing breakdown in the year ended December 31, 2010 is shown as follows:





BNDES

   

   BNBDecember 31, 2009

   204,591

   

   -Release

   180,888

   

   51,000Amortization - principal

   (54,370)

   

   -Amortization - interest

   (17,595)

   

   (694)Interest accrued

   18,150

   

   897December 31, 2010

   331,664

   

   51,203382,867










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(In thousands of reais, except when otherwise indicated)




As of December 31, 2010, the maturities of the principal installment recorded in non-current liabilities are as follows:





Principal2012

   

   103,2992013

   

   93,9562014

   

   53,1782015

   

   40,4282016

   

   27,133317,994








The amount of interest payable will be based on future long-term interest rates.





23.TAXES PAYABLE





2010

   

   2009Income taxes (IRPJ and CSLL)(i)

   

   16,290

   

   11,786Services tax (ISS)

   

   14,344

   

   12,637PIS and COFINS (iii)

   

   9,113

   

   8,273Social Security paid by installments(ii)

   

   646

   

   1,712Other taxes payable

   

   2,700

   

   1343,093

   

   34,421Current

   

   43,093

   

   33,477Non-current

   

   -

   

   944








(i)There are advance payments to offset the taxes calculated, in accordance with the amounts recorded under Recoverable Income Tax and Social Contribution (Note 13).



(ii)Refers to the installments related to the Social Security tax assessment liability, which has been fully transferred to third parties, recorded under “Other Assets” in current assets, without affecting Contax’s results.



(iii)Employees’ profit participation program (PIS) and tax for social security financing (COFINS).





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(In thousands of reais, except when otherwise indicated)




24.PROVISION FOR CONTINGENCIES AND JUDICIAL DEPOSITS



24.1.Contingent assets



The Company has no contingent assets registered.



24.2.Provisions



The Group is party to tax, civil and labor lawsuits filed in the normal course of business and have been discussing these issues in the administrative and judicial levels, and where applicable, it is supported by court deposits.  The Company recognizes a provision when: (a) an entity has a present obligation (legal or constructive) as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation.



24.3.Breakdown of provisions





Court deposits

   

   Provisions2010

   

   2009

   

   2010

   

   2009Tax

   20,156

   

   1,566

   

   30,039

   

   10,944Labor

   73,597

   

   51,807

   

   57,500

   

   48,362Civil

   112

   

   9

   

   727

   

   61593,865

   

   53,382

   

   88,266

   

   59,921






24.3.1.Tax disputes



The Company was party to certain lawsuits mainly related to mandatory contributions due to the INSS, Service Tax (ISS) and Social Integration Program (PIS)/Contribution for Social Security Financing (COFINS).



Until December 31, 2010, the total provisioned for tax claims was R$30,039 (R$10,944 on December 31, 2009). Of this amount, R$12,625 (R$8,457 on December 31, 2009) refer to PIS/COFINS and R$4,188 (R$2,248 on December 31, 2009) refer to ISS.





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(In thousands of reais, except when otherwise indicated)




24.3.2.Labor disputes



a)Lawsuits filed in court



As part of its operations, the Group is the defendant in several lawsuits filed by the Unions and the Labor Prosecution Office, therefore creating a reserve to cover these demands, which the Company’s Management understands to be sufficient. On December 31, 2010, the Company was party to approximately 8,796 labor claims, compared to the 7,009 on December 31, 2009. The total amount estimated for such lawsuits on December 31, 2010 was R$587,614, as compared to the R$504,919 on December 31, 2009. The company records provisions on the history of losses which, on December 31, 2010 amounted to approximately R$57,500, as compared to the R$48,362 on December 31, 2009.



2010

   

   2009Provisions

   

   57,500

   

   48,362Contingencies - Possible/Remote

   

   530,114

   

   456,557Total

   

   587,614

   

   504,919






The lawsuits mainly refer to: (i) over-time; (ii) equal pay; (iii) permanence in the job; and (iv) injury, physical and psychological suffering. The increased number of labor claims, from 7,009 on December 31, 2009 to 8,796 on December 31, 2010, is directly related to the significant increased number of employees since 2004.



b)Administrative proceedings



On December 31, 2010, 208 deficiency notices (39 on December 31, 2009), under the argument of infringement to labor laws, were pending judgment. The amounts of the deficiency notices depend on the type of violation, the number of employees involved and on whether it was the first time the alleged violation occurred in the Company. Court deposits amounting to approximately R$40,366 (R$119,485 on December 31, 2009) were made on December 31, 2010, so that the Company could file for administrative appeals, in accordance with the legal provisions.



The Company has been challenging in full the deficiency notices with the administrative authorities and currently awaits final decisions. In case the administrative proceeding outcome is not favorable, the Company can file a lawsuit requesting the annulment of any and all debt in the administrative proceeding and the reimbursement of fines paid to present funds recorded in a provision for payment purposes.





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(In thousands of reais, except when otherwise indicated)






Considering that the Company, based on the opinion of its external legal advisors, classified as “possible” the risk of loss of the deficiency notices, those were not included in the contingencies and the fine amounts were not deposited.



The abovementioned labor violations mainly refer to (i) the non-compliance with the rules that regulate the occupational health and safety; (ii) the lack of intraday intervals and weekly day-offs given to employees; (iii) the non-compliance with the quota for handicapped employees; and (iv) the lack of an Occupational Accident Prevention Commission (CIPA).



According to the Brazilian law, if an entity has over 100 (one hundred) employees, 2 (two) to 5 (five) per cent of them should be beneficiaries of the social security who were on a labor-related leave or handicapped. Given the Company’s lack of capacity to reach this percentage, in September 2002, the Company entered into a Consent Decree (TAC) with the Labor Prosecutor Office, granting the Company 3 (three) years to comply with the abovementioned quota. However, even with the implementation of a program to hire beneficiaries of the social security who were on a labor-related leave or handicapped, the positions available have not been completely filled yet.



In January 2010, the Regional Labor Superintendence notified the Company based on procedures relating to the social contribution and contributions to the employment security fund for the employees’ transport voucher. The notification corresponds to R$29 million. The Company is currently challenging this lawsuit. Based on the opinion of the external legal advisors, the Management understand that the possibility of an unfavorable decision is possible.



24.3.3.Civil disputes



Until December 31, 2010, the Company was a party to 18 (2009 – 90) civil claims, of which 16 (2009 – 89) of them amounting to less than R$50. There are only 2 (two) cases amounting to more than R$50.



In addition to the civil lawsuits previously mentioned, Contax received a fine from the Brazilian Post Office and Telegraph Company (EBCT), given the breach of contract. The fines, amounting to R$2,645 correspond to breach of confidentiality of telephone messages; fail to transfer reserved telephone lines (0800); and fail answer telephone calls. The Company accrued R$441 until December 31, 2010 (R$441 until December 31, 2009).





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010 (In thousands of reais, except when otherwise indicated)
    24.4.Breakdown of provisions and legal obligations in judicial dispute  The breakdown of provisions and legal obligations in judicial dispute in the fiscal year ended December 31, 2010, is shown below:  TaxesPIS/COFINS (i)

   

   FAP (ii)

   

   Tax on services – ISS

   

   INSS (iii)

   

   CSLL (iv)

   

   Labor (v)

   

   Civil

   

   TotalDecember 31, 2009

   8,457

   

   -

   

   2,248

   

   120

   

   119

   

   48,362

   

   615

   

   59,921Additions

   3,199

   

   14,120

   

   -

   

   -

   

   -

   

   23,368

   

   128

   

   40,815Usage

   -

   

   -

   

   -

   

   -

   

   -

   

   (10,427)

   

   -

   

   (10,427)Reversal

   -

   

   -

   

   -

   

   -

   

   -

   

   (7,449)

   

   (69)

   

   (7,518)Monetary variation

   969

   

   591

   

   101

   

   58

   

   57

   

   3,646

   

   53

   

   5,475December 31, 2010

   12,625

   

   14,711

   

   2,349

   

   178

   

   176

   

   57,500

   

   727

   

   88,266
   (i)Amount accrued on the deduction of the Services Tax (ISS) cost on the calculation basis for determination of Employees' Profit Participation Program (PIS) and Tax for Social Security Financing (COFINS), based on acceptance of the anticipation of the appeal until the trial of Appeal No. 2007.01.00.017041-3/DF, with the Federal Regional Court of the 1st region.  (ii)The Company is arguing in court the application of the multiplier Accident Prevention Factor (FAP) incident on the social security charge of Occupational Injury Risk (RAT), whose new calculation system took effect from January 1, 2010. On February 11, 2010, an injunction was obtained to conduct a judicial deposit of the amount arising from the difference of the multiplier FAP.  (iii)Refers to the 2004 amount of negative basis of social contribution used to offset the estimated payment of subsequent years, without the formality of PER/Dcomp.  (iv)The labor claims filed against Contax by employees and former employees hired in the course of its operations amounted to R$50,985. According to the service agreement executed between Oi Fixa and Contax, it was decided that labor claims caused by migration of labor contracts are the responsibility of that entity, whose amount was recorded in respect of “Credits receivable”. The amount of labor claims under Oi Fixa’s responsibility amounts to R$2,663.  The amount of labor claims referring to Ability (entity acquired by Contax in September 2010) amount to R$3,826.   F-68




Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




24.5.Contingent liabilities classified as possible losses



On January 22, 2010, Contax was assessed by the Regional Labor and Employment Superintendence (SRTE) of Rio de Janeiro, in the amount of R$29,136. In the assessment notice, which concerns the period from January 2001 to February 2009, the demanded amounts relate to the FGTS (Employee Severance Indemnity Fund) (Law 8,036/90) and the Social Contribution (Supplementary Law no 110/01) levied on the cash payments made to Contax’s employees corresponding to the transport voucher fringe benefit. Contax challenged the assessment notice in the administrative level and currently awaits judgment.



The Management, based on the opinion of its external legal counsel, considers the likelihood of loss as possible and did not record any provision for eventual unfavorable outcomes.



In addition to the FGTS notification, on December 31, 2010, the Company had tax and civil contingent liabilities, restated based on the SELIC rate, amounting to R$44,932 and R$26,473, respectively (R$37,704 and R$5,007 on December 31, 2009). These amounts are not provisioned given that Contax filed an appeal and took into consideration the opinion of its external legal counsel, to whom the likelihood of losses is possible or remote.



25.OBLIGATIONS UNDER FINANCE LEASES



Contax has several finance lease agreements related to IT equipment and furniture for the maintenance of its operations. These agreements are recorded at present value in current and non-current liabilities.



The Group has the right, as set forth in the agreement, to acquire the equipment at nominal value (significantly lower than the fair value) at the end of the lease agreements. The Group’s obligations with finance lease agreements are guaranteed by the lessees.





Balance payableLessor

   

   2010

   

   2009Banco Commercial Investiment Trust

   

   -

   

   1,455Unibanco Leasing S/A

   

   -

   

   237HP Financial Services Arrendamento Mercantil S/A

   

   2,724

   

   8,504IBM Brasil-Industria Maquinas e Serviços Limitada

   

   1,424

   

   3,821Bradesco Leasing S/A

   

   129

   

   -Total

   

   4,277

   

   14,017Current

   

   4,277

   

   10,118Non-current

   

   -

   

   3,899










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(In thousands of reais, except when otherwise indicated)






26.OTHER LIABILITIES



2010

   

   2009Other accounts payable

   1,164

   

   1,463Deferred income

   23,107

   

   29,786Advances from clients for promotional onlending

   65

   

   -24,336

   

   31,249Current

   23,171

   

   31,249Non-current

   1,165

   

   -








27.PAYROLL AND RELATED CHARGES



2010

   

   2009Payroll

   57,316

   

   47,664Provisioned vacation

   85,082

   

   71,939Social charges

   72,023

   

   56,682Other

   16,148

   

   21,533230,569

   

   197,818








Social charges are mainly composed of social liabilities.





28.FINANCIAL INSTRUMENTS AND RISK ASSESSMENT



28.1.Purposes and strategies of risk management



The Group’s policy for financial asset management is to constantly pursue the optimization of its profitability in line with risks by establishing criteria and indicators for adjustments of liquidity, credit and market risk.



Additionally, the Group manages its capital aiming to ensure that its entities will be able to continue their operations so as to maximize the return to shareholders through debt optimization and equity accounting. The Group’s capital structure comprises debt, which includes the loan detailed in Note 22, cash and cash equivalents (Note 16) and own capital attributable to controlling shareholders which includes issuance of capital, reserves and retained earnings, as indicated in Notes 17, 18 and 20 respectively.



The Group’s policy is to maintain a strong capital structure so as maintain is growth, reduce capital cost and provide good returns to its shareholders.





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(In thousands of reais, except when otherwise indicated)








The Management believes that the Company’s available funds are sufficient to meet its current needs and will be enough to meet its estimated needs regarding capital expenses and other cash needs for the fiscal year of 2011.



28.1.1.Liquidity and credit risk



The credit risk is the possibility of a party non-complying with an obligation set forth in a financial instrument or agreement with a client, thus resulting in financial losses. The financial instruments that expose the Group to credit concentration risk mainly consist of cash and cash equivalents and accounts receivable. All of the Company’s cash and cash equivalents are held in major Brazilian financial institutions. The Management believes that its credit policies are reasonable and reflect normal conditions of market and risk. The Company Management does not anticipate the failure to comply with agreements by the counterparties and, therefore, does not require collateral guarantees.



a.Financial instruments and cash deposits



The credit risk of balances with banks and financial institutions is managed by the Group’s treasury according to its internal policies. Excess funds are only invested in approved counterparties and within the limit established to each of them. The counterparty’s credit limit is annually revised by the Group’s Board of Directors and may be restated throughout the year whenever necessary, subject to the approval of the Group’s Financial Committee. These limits are established in order to mitigate risk concentration, thus mitigating financial losses in case of a party files for bankruptcy.



b.Accounts receivable



Credit risk related to accounts receivable is mainly minimized due to the financial size of the companies to which the Group provides services. Moreover, the Group continuously monitors its receivables, reassessing, whenever necessary, its credit policies with the purpose of mitigating eventual losses. Whenever necessary, the Group records allowance for doubtful accounts for delinquent customers and applies the collection and negotiation procedures of overdue credits.



The allowance for doubtful accounts is recorded as probable losses in relation to accounts receivable, which is calculated based on estimates considering the situation of each client and guarantees granted by them.



On December 31, 2010, the concentration of clients’ credit risk was not relevant since important financial conglomerates represented approximately 52% (54% on December 31, 2009) of accounts receivable outstanding.





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(In thousands of reais, except when otherwise indicated)










The table below shows a summary of the Group’s financial liabilities based on contractual payments not discounted.



2010Less than 1 year

   

   1 to 2 years

   

   2 to 5 years

   

   More than 5 yearsBorrowings (excluding finance leases)

   

   103,299

   

   197,255

   

   187,561

   

   27,133Obligations under finance leases

   

   4,277

   

   -

   

   -

   

   -Trade payables

   

   83,160

   

   -

   

   -

   

   -2009Less than 1 year

   

   1 to 2 years

   

   2 to 5 years

   

   More than 5 yearsBorrowings (excluding finance leases)

   

   54,182

   

   108,365

   

   40,638

   

   -Obligations under finance leases

   

   10,118

   

   3,899

   

   -

   

   -Trade payables

   

   77,033

   

   -

   

   -

   

   -






28.1.2.Market Risk



Market risk is the possibility that the fair value of future cash flows of a financial instrument changes due to market price fluctuation. Market prices include two types of risk: interest rate risk and foreign exchange risk. Financial instruments affected by market risk include loans payable, deposits and financial instruments available measured at fair value through the income statement.



a)Interest rate risk



Interest rate risk is possibility that the fair value of future cash flows of a financial instrument may change due to fluctuations in the market interest rates. The Group’s exposure to the risk of changes in the market interest rates mainly refer to the Group’s long-term obligations subject to floating interest rates. The Group has not executed derivatives contracts to cover this risk; however it continuously follows up the market interest rates with the purpose of monitoring the eventual need of contract these instruments.



BNDES borrowings bear fixed interest rates based on the long-term interest rate (TJLP) with purposes of financing the expansion of installed capacity, improvement of current facilities, qualification of human resources, enhancement of service quality and productivity, and investments in marketing initiatives. Once these rates are considered very low, the Group believes that there is no low volatility risk regarding this part of the debt.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




b)Foreign exchange risk



Foreign exchange risk is the possibility that the fair value of future cash flows of a financial instrument changes due to foreign exchange rate fluctuations. The Group’s exposure to the risk of changes in foreign exchange rates mainly refers to (i) capital expenditures in the acquisition of IT equipment with imported parts and (ii) the Group’s net investment in subsidiary abroad (Contax Argentina).



Service revenues and costs have basically no exposure to foreign exchange variations, since they are not directly or indirectly pegged to foreign currencies. However, risks related to foreign exchange do exist, given that a significant portion of the Company’s capital expenditures consists of investments in IT equipment which, despite not being expressed in foreign currency, are indirectly impacted by variations in foreign exchange rates because they contain imported parts. In 2010, approximately 28% of the Company’s capital expenditures include equipment with imported parts (2009 – 31%).



Taking into consideration that the Company’s current operations in foreign currency are not material, the Company’s Management decided not to present the sensitivity analysis for foreign currency variations.



28.2.Classification and valuation of the financial instruments



The Company operates with several financial instruments, especially financial investments, accounts receivable, suppliers, loans and financings and leasing.



Its financial assets must be classified into the following categories: measured by fair value through the income statement (destined for trading), loans and receivables, held-to-maturity and available-for-sale securities. The financial liabilities are classified as measured by fair value or amortized cost.



The classification depends on the purpose to which the financial instruments were acquired. Management determines the classification of its financial instruments at the initial recognition.



Cash and cash equivalents were not classified in the category of financial instruments, since they represent high liquid financial assets with an insignificant risk of change in value.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)






The classification of financial instruments per category can be summarized as follows:





2010Financial assets:Trade receivables

   

   Loans and receivablesOther receivables

   

   Loans and receivablesRestrict cash

   

   Held to maturityFinancial investments held to maturity

   

   Held to maturityFinancial liabilities:Trade payables

   

   Amortized costBorrowings

   

   Amortized costObligations under finance leases

   

   Amortized cost








(i)Loans and receivables



This category includes loans granted and receivables which are non-derivative financial assets with fixed or determinate payments, not quoted in an active market. These are included as current assets, except for those with maturity exceeding 12 (twelve) months after the balance sheet date (these are classified as non-current assets). Loans and receivables are accounted by amortized cost, using the real interest rate method.



(ii)Held-to-maturity financial assets



These are basically the financial assets that cannot be classified as loans and receivables, since they are quoted in an active market. In this case, these financial assets are acquired with the intention and financial capacity to be held in portfolio up to maturity. These are measured by acquisition cost, accrued of yields earned with corresponding entry to income for the year. On December 31, 2010, the Company had held-to-maturity financial assets.



(iii)Amortized cost



Amortized cost of a financial asset or liability is the amount by which the financial asset or liability is measured atitsinitial recognition minus principal repayments, plus or minus the cumulative amortization, using the effective interest method of any difference between that initial amount and the maturity amount, minus any reduction (directly or through the use of a reductionaccount)related tothe recoverable amount of the loss or uncollectible amounts.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




28.3.Fair value of financial instruments



The fair value of publicly-quoted investments is based on current purchase prices. For financial instruments without active market or public quote, the Company establishes the fair value through valuation techniques. These techniques include the use of recent operations contracted with third parties, reference to other instruments which are substantially similar, the analysis of discounted cash flows and the option pricing models making use of as much information generated by the market as possible and relying very little on information generated by the Company’s Management.



On the balance sheet date, the Company evaluates if there is any objective evidence that a financial asset or a group of financial assets is recorded at a value higher than its recoverable value. If there is any evidence concerning the available-for-sale financial assets, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any loss for realization of this financial asset previously recognized in income) is excluded from equity and recognized in the income statement.



The book and fair values of the financial instruments are as follows:



Book Value

   

   Fair ValueFinancial assets

   

   2010

   

   2009

   

   2010

   

   2009Loans and receivables:Trade receivables

   

   176,302

   

   128,486

   

   176,302

   

   128,486Other receivables

   

   9,485

   

   11,425

   

   9,485

   

   11,425Held to maturity:Restrict cash

   

   2,013

   

   -

   

   2,013

   

   -Financial investments held to maturity (i)

   

   69,869

   

   26,590

   

   76,629

   

   26,685Total financial assets

   

   257,670

   

   166,501

   

   264,429

   

   166,596Financial liabilitiesAt amortized cost:Trade payables (ii)

   

   83,160

   

   77,033

   

   83,160

   

   77,033Borrowings

   

   360,518

   

   204,591

   

   360,518

   

   204,591Obligations under finance leases

   

   4,277

   

   14,017

   

   4,277

   

   14,017Total financial liabilities

   

   447,955

   

   295,641

   

   447,955

   

   295,641






(i)Measured at fair value for level 2.



(ii)As accounts receivable and payable on average are settled within a 30-day term, the book values substantially represent the fair values on the balance sheet dates.



a)Valuation techniques applied and assumptions made for the purposes of fair value measurement





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)






The fair value measurement of financial assets and liabilities is presented below:



·The fair value of the financial assets and liabilities that present standard terms and conditions and are traded on active markets is determined based on the prices observed in these markets.



·The fair value of the other assets and liabilities (except those mentioned above) is determined using pricing methods that are generally accepted, based on discounted cash flow analyses.



b)Fair value measurements recognized in the balance sheet



The financial instruments that are measured at fair value after initial recognition are classified into Levels 1 to 3 according to the observable level of the fair value:



·Financial instruments are considered Level 1 when valuation is based on quoted (non-adjusted) prices in active markets for identical assets or liabilities.



·Financial instruments are considered Level 2 when valuation is based on other variables in addition to the quoted prices included in Level 1, which are directly (i.e., prices) or indirectly (i.e., based on prices) observable for the asset or liability.



·Financial instruments are considered Level 3 when valuation is based on valuation techniques that include variables for the asset or liability, but that are not based on the observable market data (unobservable data).



28.4.Sensitivity analysis to CDI rate variation



The Company maintains a significant portion of its debt and cash and cash equivalents indexed to CDI variation. On December 31, 2010, the Company recorded a net cash of R$74,553 in the parent company and of R$659 in the consolidated, represented by cash and cash equivalents, net of loans, financing, and leasing.



The market expectation, as per data published by Brazilian Central Bank (Focus Report), with reference date as of February 25, 2011, pointed an effective median rate (Top 5) of Selic estimated at 12.50%, a probable scenario for 2011, against the effective rate of 10.75% verified on December 31, 2010.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




In addition, the Company carried out sensitivity tests for adverse scenarios, taking into account rate deterioration by 25% or 50% higher than the probable scenario, as per chart below:



Scenario I -

   

   Scenario II -Probable

   

   25%

   

   50%Operation

   

   scenario

   

   deterioration

   

   deteriorationEffective rate on December 31, 2010

   

   10.75%

   

   10.75%

   

   10.75%Net cash (ii)

   

   659

   

   659

   

   659CDI estimated annual rate

   

   11.50%

   

   8.63%

   

   5.75%Annual effect on net cash:Decrease

   

   -

   

   (14)

   

   (33)Increase

   

   5

   

   -

   

   -






(i)The net cash includes the amount of R$74,553 related to cash and cash equivalents without reporting debts on December 31, 2010.



(ii)Net cash considers the amount of R$387,803 related to cash and cash equivalents and R$382,867 related to loans and financing and R$4,277 related to leasing.



28.5.Derivatives



On December 31, 2010 and 2009, the Group did not operate with derivative financial instruments.



28.6.Cash and cash equivalents



The recorded values are close to those of the realization or settlement values. Cash surplus is invested, in line with treasury policies, and periodically revalued by the Management.



28.7.Financing



In August 2007, Contax signed a financing agreement with BNDES in the amount of R$216,514 with the purpose of financing the expansion of installed capacity, improving current facilities, qualifying human resources, improving the quality of services and productivity, and investing in marketing actions (Note 22).



In March 2010, Contax entered into a new loan agreement with BNDES in the amount of R$323,552, for investments in the expansion the installed capacity and upgrade of the facilities, implementation of quality programs, human resources qualification and investments in the acquisition of domestic machinery and equipment (Note 22).



In March 2010, Contax executed a loan agreement with BNB, in the amount of R$51,000, aiming at financing the implementation of a new operating unit in the city of Recife, state of Pernambuco (Note 22).





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)






28.8.Leasing



Contax has several leasing, IT equipment, furniture agreements, whose payments were separated between financial charges and decrease in liabilities (Note 25).





29.SHARE-BASED PAYMENTS



The purpose of Contax’s stock options is to grant the option to subscribe common, book-entry shares issued by the Company on behalf of the Management and beneficiaries in order to retain them (or maintain them) and encourage them to contribute to the Company. To have those rights, beneficiaries should remain in service from one to four years (right acquisition periods).



The plans are an onerous business, exclusively civil, and do not have a legal or social security binding nature between the Company and the Grantees, be them employees or not.



The members of the Stock Option Plan Committee meet to decide which managers, employees and service providers will be eligible, the total number of options to be distributed, as well as the acquisition price of each option. Decisions are made based on the Plan’s guidelines. At the discretion of the Compensation Committee, managers, employees and individuals providing services to the Company or its subsidiaries are eligible for this plan.



29.1.Information on the Company’s stock option plan



a)2007 Program



Approved at the Annual General Meeting held on April 16, 2007, the Stock Option Plan was established pursuant to Article 169, paragraph 3, of Law No. 6,404/76. The Management Committee, appointed by the Board of Directors and composed of Board members, manages this plan, whose purpose is to attract executives to the Company, in addition to hold and ensure the close alignment between the Management’s and shareholders’ interests.



The Stock Option Plan initiated in 2007 (“2007 Program”) grants to its beneficiaries, a total corresponding up to 1.9% of the subscribed and paid-up capital stock, representing 350,000 common shares granted within the scope of the 2007 Program. Options may be exercised as of October 1, 2007, in 4 (four) equal annual tranches.  In view of the reverse split and simultaneous stock split occurred on January 18, 2010, the 2007 Program now is represented by 1,400,000 common shares.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements

for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




On September 4, 2009, the Management Committee approved the following changes in the format of 2007 Program, maintaining the conditions already ruled: (i) to adjust the number of options granted to the beneficiaries of the 2007 Program due to the Company reverse stock split at the 20:1 ratio, approved by the Extraordinary General Meeting held on October 17, 2007; (ii) to adjust the options strike price from R$51.20 to R$45.00; (iii) to change the index that adjusts for inflation the options strike price from IGP-M to IPCA to be applied over the strike price of the next annual tranches related to the 2007 Program; (iv) to determine the discontinuance of the obligation to allocate a minimum amount of the annual bonus to acquire shares deriving from options whose initial grace period has already elapsed.



The changes outlined above are applicable as from the second tranche, whether or not the initial grace periods of the corresponding annual tranches have elapsed or not.



The main features of each of the plan’s tranches are shown below:



2007 Program

   Number of options

   

   Grant/amendment date

   

   Vesting date (can be exercised)

   

   Maturity date

   

   Exercise price

   (*)

   Fair value at the grant date

   (*)1st grant:Tranche 1

   87,500

   

   4/16/2007

   

   Apr-07

   

   10/1/2014

   

   51.20

   

   14.13Tranche 2

   87,500

   

   4/16/2007

   

   Oct-08

   

   10/1/2014

   

   45.00

   

   37.31Tranche 3

   87,500

   

   4/16/2007

   

   Oct-09

   

   10/1/2014

   

   45.00

   

   37.31Tranche 4

   87,500

   

   4/16/2007

   

   Oct-10

   

   10/1/2014

   

   45.00

   

   37.31Total options

   350,000






(*)   At the plan’s grant date, for the 1st tranche and on the date the plan was amended for the other tranches.



b)2010 Program



In a meeting, the Stock Option Plan Management Committee approved the creation of a Company Stock Option Program for 2010 (“2010 Program”) in accordance with the Company’s Stock Option Plan (“Plan”), pursuant to article 168, paragraph 3, of Law 6,404/76, which provides that the Company may, within the limits of its authorized capital, and in accordance with the Plan approved at the General Meeting, grant stock options to its managers or employees. Administration of the 2010 Program is incumbent upon the Administration Committee, as defined by the Board of Directors, and is composed of members thereof.



The main goal of the 2010 Program is to attract executives to the Company, aiming to align the executives’ interests with those of the shareholders, in addition to sharing the risks inherent to the capital markets.



The 2010 Program grants beneficiaries a total volume equivalent to 3.1% of the Company’s total capital stock at the time of approval, corresponding to 2,244,611 common shares.





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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)






Beneficiaries may exercise their options over 4 (four) annual equal tranches (“annual tranches”), each corresponding to 25% of the entire option granted, as defined in the agreements. The option related to the first annual tranche may be exercised as of October 1, 2010, and the other options may be exercised annually and successively as of October 1, 2011.



The strike price of the options will be R$25.00 per share, corresponding to the average share price over the last 30 trading days on the BM&FBOVESPA S.A. – Securities, Commodities and Futures Exchange (“BVMF”) – the São Paulo Stock Exchange, to which a 15% discount was applied, as authorized by the Plan. The strike price of the options related to the annual tranches will be restated based on the Broad Consumer Price Index (IPCA).



The main features of each of the plan’s tranches are shown below:



2010 Program

   Number of options

   

   Grant date

   

   Vesting date (can be exercised)

   

   Maturity date

   

   Exercise price

   

   Fair value at the grant date1st grant:Tranche 1

   185,000

   

   08/31/10

   

   Oct-10

   

   Oct-18

   

   25.00

   

   6.84Tranche 2

   185,000

   

   08/31/10

   

   Oct-11

   

   Oct-18

   

   25.00

   

   8.19Tranche 3

   185,000

   

   08/31/10

   

   Oct-12

   

   Oct-18

   

   25.00

   

   9.23Tranche 4

   185,000

   

   08/31/10

   

   Oct-13

   

   Oct-18

   

   25.00

   

   9.88Total options

   740,0002nd grant:Tranche 1

   12,500

   

   12/01/10

   

   Dec-10

   

   Oct-18

   

   27.29

   

   4.46Tranche 2

   12,500

   

   12/01/10

   

   Oct-11

   

   Oct-18

   

   27.29

   

   6.99Tranche 3

   12,500

   

   12/01/10

   

   Oct-12

   

   Oct-18

   

   27.29

   

   8.79Tranche 4

   12,500

   

   12/01/10

   

   Oct-13

   

   Oct-18

   

   27.29

   

   9.84Total options

   50,000






29.2.Information on the price of the Company’s stock option plan



The options were priced according to the Black & Scholes pricing model.



For the 2007 Program, the fair value of the options was calculated again on September 4, 2009, date of the amendments described above, and are shown in the chart below, which refers to tranches 2, 3 and 4 of the plan.





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(In thousands of reais, except when otherwise indicated)






Data inserted in the model:

   2007 Program

   

   2010 Program1st grant

   

   1st grant

   2nd grant1st tranche (before the change)

   2nd to 4th tranches (after the change)Share price at grant date

   64.00

   79.00

   

   32.40

   31.50Exercise price

   51.20

   45.00

   

   25.00

   27.29Option duration

   1 to 4 years

   1 to 4 years

   

   Up to 8 years

   Up to 8 yearsRisk-free return rate

   11.08%

   11.07%

   

   11.19%

   9.13%Dividend yield

   1.40%

   1.50%

   

   6%

   6%Expected volatility

   19.64%

   17.59%

   

   38.44%

   45.26%Fair value of the options (weighted average)

   14.13

   37.31

   

   8.54

   7.52






The table below reconciles the outstanding stock options at the beginning and at the end of the years reported:



2010

   

   2009Average weighted exercise price (R$)

   

   Number of options (thousands)

   

   Average weighted exercise price (R$)

   

   Number of options (thousands)January 1st

   

   

   1,364,068

   

   

   

   1,364,068Granted

   8.47

   

   790,000Exercised

   11.93

   

   (962,200)ExpiredDecember 31

   

   

   1,191,868

   

   

   

   1,364,068




Out of the 1,191,868 outstanding options on December 31, 2010, 599,368 were exercisable on this date. On December 31, 2009, out of the 1,364,068 outstanding options, 1,014,068 were exercisable on this date.



29.3.Stock options exercised on the years reported



The following stock options were exercised on the years reported:



2010

   

   2009Options exercised (thousands)

   Exercise date

   Stock option on the exercise date

   

   Options exercised (thousands)

   Exercise date

   Stock option on the exercise date2007 Program – 1st Grant

   774,700

   08.03.10

   28.50

   

   35,932

   18.10.07

   18.15111,919

   15.03.10

   31.406,081

   19.03.10

   31.494,700

   04.06.10

   28.5010,800

   11.06.10

   29.504,000

   17.06.10

   30.4025,000

   12.11.10

   32.0225,000

   30.11.10

   32.50962,200

   

   

   

   35,932






No stock options were exercised by the beneficiaries of the 2010 Program in the fiscal year 2010.





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Table of Contents CONTAX PARTICIPAÇÕES S.A.  Notes to the Consolidated Financial Statements For the Years ended December 31, 2010, 2009 and 2008

(In thousands of Brazilian reais, except when otherwise indicated)


30.RELATED PARTY TRANSACTIONS



30.1.Balances and transactions





2010Brasil

   

   Brasil

   

   PaggoOi

   

   Oi

   

   Oi

   

   Telecom

   

   Telecom

   

   AdministradoraFixa

   

   Móvel

   

   Internet

   

   Fixa

   

   Móvel

   

   de Crédito

   

   Way TV

   

   BNDES

   

   TotalAssetsAccounts receivable

   3,790

   

   3,311

   

   -

   

   3,886

   

   1,131

   

   -

   

   -

   

   

   

   12,118Accounts receivable - contingencies

   7,063

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   7,06310,853

   

   3,311

   

   -

   

   3,886

   

   1,131

   

   -

   

   -

   

   

   

   19,181LiabilitiesSuppliers

   5,001

   

   175

   

   

   

   

   

   

   

   

   

   

   

   

   

   5,176Loans andFinancing (Note 24)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   331,663

   

   331,6635,001

   

   175

   

   

   

   

   

   

   

   

   

   

   

   331,663

   

   336,8392009Brasil

   

   Brasil

   

   PaggoOi

   

   Oi

   

   Oi

   

   Telecom

   

   Telecom

   

   AdministradoraFixa

   

   Móvel

   

   Internet

   

   Fixa

   

   Móvel

   

   de Crédito

   

   Way TV

   

   BNDES

   

   TotalAssetsAccounts receivable

   2,720

   

   1,382

   

   59

   

   3,608

   

   8,200

   

   -

   

   -

   

   

   

   15,969Accounts receivable - contingencies

   7,955

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   7,95510,675

   

   1,382

   

   59

   

   3,608

   

   8,200

   

   -

   

   -

   

   

   

   23,924LiabilitiesSuppliers

   3,194

   

   605

   

   

   

   

   

   

   

   

   

   

   

   

   

   3,799Loans andFinancing (Note 24)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   204,591

   

   204,5913,194

   

   605

   

   

   

   

   

   

   

   

   

   

   

   204,591

   

   208,390






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Table of Contents CONTAX PARTICIPAÇÕES S.A. AND SUBSIDIARIES  Notes to the financial statements for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)






2010Brasil

   

   BrasilOi

   

   Oi

   

   Oi

   

   Telecom

   

   Telecom

   

   Paggo

   

   PaggoFixa

   

   Móvel

   

   Internet

   

   Fixa

   

   Móvel

   

   Adm. Crédito

   

   Acquirer

   

   Way TV

   

   BNDES

   

   TotalRevenuesRevenues from services rendered

   727,513

   

   371,418

   

   19,560

   

   44,224

   

   71,372

   

   12,109

   

   783

   

   10,491

   

   

   

   1,257,470Costs and expensesCost of services rendered

   (27,569)

   

   (6,720)

   

   

   

   

   

   

   

   

   

   

   

   

   

   -

   

   (34,289)Financial expenses (Note 8)

   -

   

   -

   

   

   

   

   

   

   

   

   

   

   

   

   

   (18,824)

   

   (18,824)(27,569)

   

   (6,720)

   

   

   

   

   

   

   

   

   

   

   

   

   

   (18,824)

   

   (53,113)








2009Brasil

   

   BrasilOi

   

   Oi

   

   Oi

   

   Telecom

   

   Telecom

   

   Paggo

   

   Paggo

   

   AmazôniaFixa

   

   Móvel

   

   Internet

   

   Fixa

   

   Móvel

   

   Adm. Crédito

   

   Acquirer

   

   Celular

   

   Way TV

   

   BNDES

   

   TotalRevenuesRevenues from services rendered

   750,394

   

   362,846

   

   4,893

   

   19,393

   

   33,432

   

   16,420

   

   793

   

   1,361

   

   6,436

   

   

   

   1,195,968Costs and expensesCost of services rendered

   (28,429)

   

   (8,245)

   

   

   

   2

   

   

   

   

   

   

   

   

   

   

   

   -

   

   (36,672)Financial expenses (Note 8)

   -

   

   -

   

   

   

   -

   

   

   

   

   

   

   

   

   

   

   

   (17,234)

   

   (17,234)(28,429)

   

   (8,245)

   

   

   

   2

   

   

   

   

   

   

   

   

   

   

   

   (17,234)

   

   (53,906)






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(In thousands of reais, except when otherwise indicated)


(i)Related party transactions



The Company’s main clients are Oi Fixa and its subsidiary Oi Móvel (hereinafter jointly referred to as “Oi”).



The Company provides a complete set of contact center services to Oi, whose operations include wireline terminals, long-distance services, mobile services, as well as broadband and voice and data services to corporate clients. In addition to traditional consumer services, the Company offers services related to consumer retention and collection for Oi’s corporate and retail clients.



The Company’s current relationship with Oi is represented by several different and independent services, such as customer service to Oi’s wireline segment, strong telemarketing services to attract more mobile clients, customer support to prepaid and post-paid users, technical support to broadband users and collection services.



On the other hand, Oi is the main telecommunications provider (commuted wireline services, mobile services, long distance/free calls, data, among others.) and, most importantly, provide such services directly or through Contax to some of its clients, according to their choice. Although Oi currently provides most of its telecommunication services to the Group, should it become unable to do so or decide to terminate such Service agreements, the Company’s Management understands that it would be possible to hire another company to provide such services without having major interruption on the Company’s businesses.



30.2.Compensation of key management personnel



30.2.1.Operations with the Board of Directors or Board of Executive Officers



Neither the members of the Board of Directors or Board of Executive Officers, nor relatives of their respective families, have or already had any direct interest in any operation made with the Company that is or may be considered unusual by its nature or its conditions or may have been significant for the Company’s business.



During the year ended December 31, 2010, the Group did not grant either short-term loans or guarantees to the members of the Board of Directors, Board of Executive Officers, Fiscal Council, or any relatives of the members’ families.



30.2.2.Financing agreement of CTX Participações S.A.



In March 2010, CTX Participações S.A., the controlling entity of the Company, and one of the Company’s former officers entered into a loan agreement, negotiated only by the former officer, without the Company’s involvement. Such loan, in the amount of R$15,769, matures on March 30, 2011, and is free of interest rates.





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(In thousands of reais, except when otherwise indicated)




30.2.3.Short-term benefits



Short-term benefits include fixed compensation (salaries and fees, paid vacations, thirteenth salary and private pension plan), social charges (contributions to social security - INSS, FGTS, among others) and variable compensation (profit sharing).



30.2.4.Share-based compensation



The members of the Company's Management (Chief Executive Officer and Statutory Executive Officers) participate in the Stock Option Plan (Note 29).



30.2.5.Other



The Group offers the following benefits to its employees: (i) health insurance; (ii) dental insurance; (iii) life insurance; (iv) meal program for employees who work six (6) hours a day; (v) meal program for employees who work eight (8) hours a day; (vi) transportation; (vii) discounts in certain drugstore chains; (viii) a plan for funeral expenses; and (ix) day care assistance. Officers, managers and coordinators are also entitled to use mobile phones with a monthly credit ranging from sixty reais (R$60.00) to one hundred and twenty reais (R$120.00).



The Company does not have additional post-employment obligations, and it does not offer other long-term benefits, such as length of service leave and other length of service benefits. The Company also does not offer other benefits upon the termination of the top management’s labor agreements, besides those agreements envisaged by the Brazilian labor legislation in force.



Pursuant to the Brazilian Corporate Law and the Company’s Bylaws, it shall be incumbent upon shareholders at the General Meeting to establish the Management’s annual overall compensation. The Board of Directors shall distribute the amount among the Management members.



At the (i) Parent Company’s Extraordinary General Meeting held on April 28, 2010, and (ii) the Extraordinary General Meeting of direct subsidiary Contax, held on April 28, 2010, the management’s annual overall compensations for fiscal year 2010 was set at the maximum of R$2,493 and R$3,200, respectively (2009 – R$2,390 and R$3,500, respectively).





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for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




30.3.Compensation of Board Members, Executive Officers and members of the Fiscal Council



During the years ended December 31, 2010 and 2009, the Management compensation (i.e. board members and statutory officers) paid or payable is outlined below:



2010

   

   2009

   

   2008Payroll and related charges

   4,367

   

   2,894

   

   2,735Fees

   

   1,648

   

   1,555

   

   1,222Profit sharing

   

   7,142

   

   3,430

   

   2,360Stock option plan

   

   2,689

   

   9,995

   

   12915,846

   

   17,874

   

   6,446




31.BUSINESS COMBINATIONS



31.1.Acquisitions in 2010



In September 2010, Contax acquired 100% of Ability and recorded goodwill based on its economic value, due to the estimated future profitability of the business.





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(In thousands of reais, except when otherwise indicated)




Fair value recognized in the acquisitionAssets:Cash and cash equivalents

   4,879Accounts receivable

   13,536Deferred income tax and social contribution

   29,834Tax credit

   2,898Property, plant and equipment and intangible assets

   1,749Other assets

   36627,978Liabilities:Suppliers

   (3,186)Payroll and social charges

   (11,650)Taxes payable

   (13,393)Deferred revenues

   (1,247)Other

   (282)(29,758)Total identifiable liabilities, net

   (1,780)Goodwill from acquisition (Note 12)

   49,081Total consideration

   72,585Initial price (payment on demand)

   24,400Retained amount (restrict cash)

   2,000Additional price (contingent consideration)

   46,185




Contingent consideration



As part of the Partnership Interest Purchase and Sale Agreement (“Agreement”), the parties agreed on a contingent consideration. The fair value of the contingent consideration on the acquisition date corresponds to the amount of the outstanding balance, amounting to R$46,185 (“additional price”). This amount represents the best estimate of fair value based on (i) the expected profitability of Ability and (ii) information currently available. The payment of the additional price depends on the compliance with certain conditions related to Ability’s growth and profitability within the next 3 years.



As agreed, the acquisition price, composed of the initial price and additional price, may amount to as much as R$82,474.





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(In thousands of reais, except when otherwise indicated)






The acquisition sought to expand the services offered by Contax, to include specialized operations at sales points, seeking to consolidate its strategy of being the only specialized corporate-services entity throughout the entire chain of relations between entities and their consumers, through multiple contact channels.



31.2.Acquisitions in 2009



BRC was acquired by Contax in November 2009 for the amount of R$61, with the purpose of developing the Nova Luz Program (Note 1).





32.INSURANCE COVERAGE



The Group has a risk management program aiming at minimizing risks, obtaining in the market coverage compatible with its size and operations. Coverage was contracted by amounts deemed as sufficient by Management to cover any eventual losses and casualties, taking into account the nature of its operations, the risks involved in its operations and the guidance of its insurance brokers, ensuring the integrity of assets and the continuity of its operations. All of the Group’s policies are automatically renewed.



On December 31, 2010, the Company had the following main insurance policies contracted with third-parties:



SecuredBranches

   

   amounts

   

   MaturityManagement and officers civil liability(i)

   

   166,540

   

   01.13.2011Fire of property, plant and equipment

   

   97,000

   

   06.15.2011Loss of profit insurance

   

   47,556

   

   06.15.2011General civil liability

   

   10,000

   

   06.15.2011






(i)Maximum limit of guarantee set at US$100 million.





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(In thousands of reais, except when otherwise indicated)




33.COMMITMENTS



33.1.Contractual obligations



The following table presents the Company’s contractual obligations on December 31, 2010:





Payments due per termLess than

   

   

   

   

   

   More thanContractual obligations

   

   Total

   

   1 year

   

   1-3 years

   

   3-5 years

   

   5 yearsLease agreement (facilities) (i)

   

   240,741

   

   72,058

   

   97,505

   

   54,854

   

   16,324Leasing agreement (financial)

   

   4,277

   

   4,277

   

   -

   

   -

   

   -Financing (BNDES) (ii)

   

   331,664

   

   64,670

   

   167,505

   

   72,355

   

   27,134Financing (BNB) (ii)

   

   51,203

   

   203

   

   29,750

   

   21,250

   

   -Total

   

   627,885

   

   141,208

   

   294,760

   

   148,459

   

   43,458






i.A substantial part of the lease agreements referring to the Company’s facilities may be terminated before its maturity, with a prior notice from one (1) to six (6), thus being subject to a termination fee equivalent to three (3) times the monthly rental amount of the property.



ii.Includes payments of estimated interest rates.



33.1.1.Facilities lease agreement



The Company’s operating facilities are located in properties rented from related parties, being a substantial part of lease agreements entered into with Oi Fixa. The effectiveness of these lease agreements range from 5 to 10 years and they have a novation clause for the same period. Additionally, all lease agreements contain clauses of market value review, in case the Group exercises its renewal right. The Group does not have any contractual rights to acquire the leased property at the end of the lease term.



During the years ended on December 31, 2010 and 2009, expenses of all lease agreements corresponded to R$69,931 and R$61,294, respectively.



On December 31, 2010, the Company did not have any other contractual obligations.





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for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)




33.2.Guarantees



On December 31, 2010, sureties and guarantees were granted to other subsidiaries, regarding loans to third parties and legal claims, as follows:



Bank guarantees

   

   2010

   

   2009BNDES

   

   156,101

   

   206,697Contingencies

   

   40,819

   

   21,602Total

   

   196,920

   

   228,299








34.SUBSEQUENT EVENTS



34.1.Integration of Company’s activities with Portugal Telecom, SGPS



In January 2011, the Management Boards of Contax and Mobitel S.A., a subsidiary of Portugal Telecom, SGPS, (“Dedic”) and its subsidiary GPTI Tecnologia da Informação S.A. (“GPTI” or, jointly with Dedic, “Dedic GPTI”) resolved to propose to their shareholders the integration of their activities subject to certain conditions. Considering that they operate in the same business segment and their activities, client database and services provided complement each other, this integration aims to strengthen their market positions.



i.Merger of Dedic shares into Contax



The Agreement for the Merger of Dedic Shares into Contax, subject to certain conditions, provides for the call of the abovementioned companies’ general meetings to resolve on the merger of Dedic shares into Contax, and the consequent increase of Contax’s capital. The amount of Contax’s capital increase will be determined based on the book value Dedic shares, according to the appraisal report prepared at the appropriate time (“Merger of Dedic Shares”). As a result of the Merger of Dedic shares, Contax will issue new common and preferred shares to the current Dedic’s shareholders to replace those held by them.



Contax’s Management hired a fairness opinion, independently prepared by Banco BTG Pactual S.A. (“BTG Pactual”). According to the amounts presented in the report prepared by BTG Pactual, the swap ratio of common shares would vary from 0.0342 to 0.0417 and the swap ratio of preferred shares would vary from 0.0343 to 0.0418 shares issued by Contax for each share issued by Dedic.



Based on the swap ratio, the Managements of Contax and Dedic suggested a swap ratio of common shares corresponding to 0.0362 and of preferred shares corresponding to 0.0363 shares issued by Contax to each share issued by Dedic. This ratio will be adjusted with a possible payment of dividends and with the assumption of debts by those companies.





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(In thousands of reais, except when otherwise indicated)
 Despite the swap ratio proposed by the managements and notwithstanding the Merger of Dedic Shares do not involve the parent company and the subsidiary, the Management of the Companies and of Dedic, in compliance with CVM Advisory Opinion no. 35/08, will properly create an independent committee (“Special Independent Committee”) for the purposes and pursuant to the abovementioned Advisory Opinion. The Special Independent Committee will have an independent financial advisor to assess the conditions of the Merger of Dedic Shares.



The merger of Dedic shares is subject to the approval of the general shareholders’ meetings of both Dedic and Contax, without prejudice of the opinion of the Special Independent Committee.



ii.Purchase and Sale of CTX Participações S.A. Shares



On the same date, shareholders of CTX Participações S.A. (“CTX”), AG Telecom Participações S.A. (“AG Telecom”), L.F. Tel S.A. (“L.F. Tel”) and Fundação Atlântico de Seguridade Social (“FASS”), and Portugal Telecom SGPS and Portugal Telecom Brasil S.A. (jointly “Portugal Telecom”) reached an agreement about their association as CTX’s shareholders in operations resulting in the acquisition of all of the shares currently held by BNDES Participações S.A. - BNDESPAR (“BNDESPAR”), Caixa de Previdência dos Funcionários do Banco do Brasil - PREVI (“PREVI”), Fundação Petrobras de Seguridade Social – PETROS (“PETROS”) and Fundação dos Economiários Federais – FUNCEF (“FUNCEF”), as described below.



By means of the Purchase and Sale Agreements of CTX shares executed in this date between AG Telecom and L.F. Tel, as one party, and PREVI, PETROS and FUNCEF, as the other party; and between Portugal Telecom, as one party, and BNDESPAR, as the other party, and between Portugal Telecom, as one party, and PREVI, PETROS and FUNCEF, as the other party (“Purchase and Sale Agreements”), subject to specific conditions:



(i)AG Telecom and L.F. Tel will acquire part of the interest held by PREVI, PETROS and FUNCEF in CTX; and



(ii)Portugal Telecom will acquire all the interest held by BNDESPAR, in addition to the remaining interest held by PREVI, PETROS and FUNCEF in CTX.



With the conclusion of the operations set forth in the Purchase and Sale Agreements, AG Telecom and L.F. Tel will hold 36.80% each in the capital stock of CTX, and Portugal Telecom will be the direct holder of shares representing 16.21% of CTX’s capital stock.



On the same date, AG Telecom, L.F. Tel, Portugal Telecom and FASS executed the Shareholders’ Agreement (“Shareholders’ Agreement”) that replaces the agreements in effect, which will provide for their relationship as shareholders of CTX. The efficacy of the new Shareholders’ Agreement will be suspended up to the effective acquisition of CTX shares by Portugal Telecom.  F-91




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(In thousands of reais, except when otherwise indicated)




iii.Acquisition by CTX of part of  Contax shares held by Portugal Telecom / CTX’s Capital Increase



According to the Purchase and Sale Agreement of shares executed in this date, subject to specific conditions, including the approval of the Merger of Dedic Shares, CTX will acquire part of the common and preferred shares issued by Contax received by Portugal Telecom as a result of the merger of Dedic shares (“Acquisition of Contax Shares”).



In addition, the Subscription Agreement of CTX Shares was executed on this date, through which Portugal Telecom, AG Telecom, L.F. Tel and FASS undertook, subject to specific conditions, to approve CTX’s capital increase to be subscribed by Portugal Telecom and FASS (“CTX’s Capital Increase”).



Due to the Acquisition of Contax Shares and CTX’s Capital Increase, and taking into consideration the swap relation proposed by the managements of Contax and Dedic, subject to analysis, evaluation and resolution of the Special Independent Committee, Portugal Telecom may hold direct interest of 19.90% in the capital stock of CTX and direct and indirect interest of 19.52% in the capital stock of Contax, and FASS will maintain its direct interest of 10.18% in the capital stock of CTX and the indirect interest of 3.48% in the capital stock of Contax.



iv.Shareholding after the operations described above



After the conclusion of the corporate operations described above, the estimated shareholding of CTX and Contax is as follows:



(i)CTX’s Estimated Shareholding after the conclusion of the operations described above:





Shareholder

   Common shares

   

   Common shares %AG Telecom

   784,730,222

   

   24.12L.F. Tel

   1,137,460,810

   

   34.96Luxemburgo Participações S.A.

   352,730,588

   

   10.84FASS

   331,151,534

   

   10.18Portugal Telecom

   647,451,385

   

   19.9Board members

   10

   

   -Total

   3,253,524,549

   

   100






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(In thousands of reais, except when otherwise indicated)






(ii)Contax’s Estimated Shareholding (in thousands of shares) after the conclusion of the operations described above:



Shareholder

   

   Common shares

   

   Common shares %

   

   Preferred shares

   

   Preferred shares %

   

   Total

   

   Total %CTX Participações S.A.

   

   17,871

   

   72.70%

   

   4,136

   

   10.40%

   

   22,007

   

   34.20%Portugal Telecom

   

   0.000

   

   0.00%

   

   2,782

   

   7.00%

   

   2,782

   

   4.30%Outstanding shares

   

   6,695

   

   27.30%

   

   32,800

   

   82.60%

   

   39,495

   

   61.40%TOTAL

   

   24,566

   

   100.00%

   

   39,718

   

   100.00%

   

   64,284

   

   100.00%






34.2.Allus acquisition



On April 5, 2011, we entered into a stock purchase agreement to acquire all the then-outstanding shares issued by the Allus Group. The Allus Group was indirectly controlled by Eton Park, a global multi-disciplinary investment organization.



The Allus Group is a contact center service provider with operations in Latin America, having 22 units in Argentina, Colombia and Peru, as well as commercial activities in the United States and Spain.  The acquisition of the Allus Group represents a further development of our internationalization strategy focused on Latin America.



The transaction was approved on April 25, 2011 by the shareholders of Contax. The acquisition price to be paid for the Allus Group will range between R$307 million and R$332 million (based on the U.S. dollar to real exchange rate prevailing on the date the transaction was announced), depending on the future EBITDA performance of the Allus Group. In May, 2011, we consummated the acquisition of the Allus Group.



In 2010, the Allus Group’s net revenue was US$174 million. At the end of 2010, the Allus Group had 13.1 thousand employees and 8.5 thousand workstations.



The chart below shows our corporate structure after the acquisition of the Allus Group:





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for the year ended December 31, 2010

(In thousands of reais, except when otherwise indicated)












35.APPROVAL OF CONSOLIDATED FINANCIAL STATEMENTS



The consolidated financial statements were approved by Company's management and authorized for issue on June 27, 2011.





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