UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549  FORM 20-F **** ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2012 Commission file number 0-28860 NET SERVIÇOS DE COMUNICAÇÃO S.A. (Exact name of Registrant as specified in its charter) Net Communications Services Inc.(Translation of Registrant’s name into English)

   The Federative Republic of Brazil(Jurisdiction of incorporation or organization)
 Rua Verbo Divino, 1356 São Paulo-SP-04719-002Brazil(Address of principal executive offices)  José Antonio Guaraldi Felix Telephone: +55-11-2111-2785 Fax: +55-11-2111-2780 E-mail: ri@netservicos.com.br Rua Verbo Divino, 1356 São Paulo-SP-04719-002Brazil (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 registeredAmerican Depositary Shares, evidenced by American Depositary Receipts, each representing one preferred share, no par value

   Nasdaq Global MarketPreferred shares, no par value

   Nasdaq Global Market*
 *Not for trading but only in connection with the registration of the American Depositary Shares. Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 114,459,685Common Shares, as of December 31, 2012228,503,916Preferred Shares, as of December 31, 2012 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES_NOX_ 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. YESNOX 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. YESXNO Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YESXNO Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Act. LARGE ACCELERATED FILERACCELERATED FILERNON-ACCELERATED FILERX Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: [  ] U.S. GAAP [x] International Financial Reporting Standards as issued by International Accounting Standards Board [  ] Other If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ITEM 17ITEM 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). YESNOX


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Table of Contents Page Part I  ITEM 1.

   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

   3ITEM 2.

   OFFER STATISTICS AND EXPECTED TIMETABLE

   3ITEM 3.

   KEY INFORMATION

   3Selected Financial Data

   3ITEM 4.

   INFORMATION ON THE COMPANY

   20Business Overview

   20Strategy

   23History and Development of the Company

   24Organizational Structure

   26Operations

   31Network Technology

   31Customer Care

   32Sales and Marketing

   33The Social Responsibility Project

   34Competition

   34Licenses

   36Description of Property

   36Regulation

   37Legal Proceedings

   42ITEM 5.

   OPERATING AND FINANCIAL REVIEW AND PROSPECTS

   47Overview

   48Critical Accounting Policies and Estimates

   50Financial Statement Presentation

   52Results of Operations

   55Liquidity and Capital Resources

   59ITEM 6.

   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

   68Directors and Board Practices

   68Compensation Committee

   72Executive Officers and Senior Managers

   72Indemnification

   73Compensation of Directors and Principal Executive Officers

   73Directors’ Service Contracts

   73Employees

   73Share Ownership

   73Variable Compensation Plan and Long-Term Incentive Plan

   74Pension, Retirement and Similar Benefits

   74 i


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ITEM 7.

   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

   74Major Shareholders

   74Shareholders’ Agreements

   76Related Party Transactions

   77ITEM 8.

   FINANCIAL INFORMATION

   80ITEM 9.

   THE OFFER AND LISTING

   80General

   80Brazilian Stock Exchanges

   81ITEM 10.

   ADDITIONAL INFORMATION

   83Memorandum and Articles of Association

   83Material Contracts

   88Exchange Controls

   89Dividend Policy

   90Taxation

   94Documents on Display

   101ITEM 11.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK

   102ITEM 12.

   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

   103Part IIITEM 13.

   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

   105ITEM 14.

   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERSAND USE OF PROCEEDS

   105ITEM 15.

   CONTROLS AND PROCEDURES

   105ITEM 16A.

   AUDIT COMMITTEE FINANCIAL EXPERT

   106ITEM 16B.

   CODE OF ETHICS

   106ITEM 16C.

   PRINCIPAL ACCOUNTANT FEES AND SERVICES

   106ITEM 16D.

   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDITCOMMITTEES

   107ITEM 16E.

   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATEDPURCHASERS

   107ITEM 16F.

   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

   107ITEM 16G.

   CORPORATE GOVERNANCE

   107
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|          |                            |    
|--------- | -------------------------- | ---
|          |                            |    
|ITEM 16H. | MINE AND SAFETY DISCLOSURE | 108
|          |                            |    
|Part III 
|          |                            |    
|ITEM 17.  | FINANCIAL STATEMENTS       | 109
|          |                            |    
|ITEM 18.  | FINANCIAL STATEMENTS       | 109
|          |                            |    
|ITEM 19.  | EXHIBITS                   | 110

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Table Of Contents
 Certain References and Information In this Form 20-F, references to “Net Serviços,” “NET,” the “Company,” “we,” “us” and “our” are to Net Serviços de Comunicação S.A. and, unless the context requires otherwise, include the consolidated subsidiaries of Net Serviços de Comunicação S.A. References to our “ADSs” are to our American Depositary Shares, each of which represents one of our preferred shares. All references in this Form 20-F to “Reais,” “Real” or “R$” are to Brazilian Reais, and all references to “U.S. dollars,” “$” or “US$” are to United States dollars. Unless otherwise specified, certain amounts stated in this Form 20-F in U.S. dollars have been translated, for the convenience of the reader, from Reais at the rate in effect on December 31, 2012 of R$2.0435 per US$1.00. These translations should not be construed as a representation that Reais could have been converted into U.S. dollars at that rate on that date or on any other date. On April 19, 2013, the rate of exchange was R$ 2.0089 per US$1.00. See “Exchange Rate Information.” Unless otherwise specified and other than with respect to historical financial statement information, we present all operating statistics and subscriber information concerning Net Serviços as of December 31, 2012. Forward-Looking Statements This Form 20-F contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are intended to enhance your ability to assess our future financial performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results and other developments, and contain words such as “may,” “might,” “should,” “intend,” “expect,” “anticipate,” “plan” and similar expressions. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, our actual results could be materially different from the beliefs we express in our forward-looking statements. The following factors, among others, may have such an impact: competition from other cable operating systems and other service providers; industry consolidation; failure to keep pace with developments in technology; our inability to charge customers for equipment costs related to multiple outlets; increases in churn rates; increases in programming costs; substantial additional expenses on our network; piracy of our pay-television services; dependence on third parties, including suppliers and vendors; interference with our ability to provide our services; increases in use of bandwidth-intensive Internet-based services; new government regulations and changes to existing government regulations; factors pertaining to the Internet access portion of our business; unfavorable outcomes in legal proceedings arising out of the regular course of our business; substantial additional taxes on our network; interests of our current controlling shareholder that may differ from yours; dependence on key members of senior management and any difficulty in hiring new managers; difficulties in integrating companies we acquire; the impact of any weakening of global and Brazilian economic conditions; Brazilian political and economic conditions and interventions by the Brazilian government; and changes in exchange rates, inflation, interest rates and performance of financial markets; developments in, and the perception of risk in, other countries and emerging market economies; restrictions on the movement of capital out of Brazil; limited liquidity of the trading market for ADSs in the U.S.; fewer and less well defined shareholders’ rights related to our ADSs than comparable securities of an U.S. issuer; difficulties in proceedings with respect to your interests as a shareholder; risk of losing the ability to remit foreign currency abroad and unfavorable tax treatment if you exchange your ADSs for preferred shares; difficulty in exercising certain rights related to our ADSs including preemptive rights; no dividend entitlement; and holdings of preferred shares and ADSs subject to dilution.


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Table Of Contents
 Developments in any of these areas, which are more fully described elsewhere in this Form 20‐F, could cause our results to differ materially from results that have been or may be projected by us or on our behalf. We undertake noobligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. We caution that the foregoing list of factors is not exclusive. We urge you not to unduly rely on forward-looking statements contained in this Form 20-F. Exchange Rate Information The information set forth below with respect to exchange rates is based on the official selling rate of the Brazilian Central Bank, or the Central Bank. Exchange Rate of Brazilian Reais per U.S. DollarLow

   High

   Average(1)

   Period - end(Reais per US$1.00)Year2008

   1.5593

   2.5004

   1.8335

   2.33702009

   1.7024

   2.4218

   1.9905

   1.74122010

   1.6654

   1.8811

   1.7589

   1.66622011

   1.5345

   1.9016

   1.6709

   1.87582012

   1.7024

   2.1121

   1.9588

   2.04352013(through April 19)

   1.9528

   2.0471

   1.9847

   2.0089
 (1)Calculated by using the average of the exchange rates on the last day of each month during the relevant period. Low

   High(Reais per US$1.00)MonthOctober 2012

   2.0224

   2.0382November 2012

   2.0312

   2.1074December 2012

   2.0435

   2.1121January 2013

   1.9883

   2.0471February 2013

   1.9570

   1.9893March 2013

   1.9528

   2.0185April 2013 (through April 19)

   1.9736

   2.0239
 Source: Central Bank Under the current floating exchange-rate system, the Real may be subject to depreciation or appreciation against the U.S. dollar and other currencies. Fluctuations in the exchange rate between the Real and the U.S. dollar will affect the U.S. dollar equivalent of the Real-denominated prices of our shares and, as a result, will affect the market prices of our ADSs in the United States.


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Part I ITEM 1.          IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS. Not applicable. ITEM 2.          OFFER STATISTICS AND EXPECTED TIMETABLE. Not applicable. ITEM 3.          KEY INFORMATION. Selected Financial Data The selected audited consolidated financial data presented in accordance with International Financial Reporting Standards (IFRS) as issued by International Accounting Standards Board (IASB) set forth below, as of and for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, should be read in conjunction with, and are qualified in their entirety by reference to, “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements and notes thereto included elsewhere in this Form 20-F. On June 30, 2009, we acquired ESC 90 Telecomunicações Ltda., or ESC 90. The financial results of ESC 90 have been included in our audited consolidated financial statements beginning on June 30, 2009. On July 31, 2010, ESC 90 was merged into our Company. 3


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Table Of Contents
 CONSOLIDATED STATEMENT OF INCOME DATA Year Ended December 31,2012

   

   2012

   

   2011

   

   2010

   2009

   2008(Convenience translation to US$ in thousands, except share amounts)

   

   (R$ in thousands, except per share and share amounts)Gross revenue(1)

   

   4,863,221

   

   9,937,992

   

   8,345,397

   

   7,101,588

   6,070,401

   4,852,755Taxes on revenues, discounts and cancellations (2)

   

   (978,124)

   

   (1,998,796)

   

   (1,649,512)

   

   (1,695,919)

   (1,457,012)

   (1,162,346)Net revenues

   

   3,885,097

   

   7,939,196

   

   6,695,885

   

   5,405,669

   4,613,389

   3,690,409Operating cost and expenses:Programming and other direct operating costs

   

   (1,898,601)

   

   (3,879,791)

   

   (3,223,455)

   

   (2,579,623)

   (2,274,916)

   (1,749,397)Selling, general and administrative expenses

   

   (856,598)

   

   (1,750,458)

   

   (1,501,807)

   

   (1,253,037)

   (1,035,867)

   (945,202)Depreciation and amortization

   

   (635,224)

   

   (1,298,080)

   

   (1,061,896)

   

   (901,225)

   (618,748)

   (493,368)Other expenses

   

   (38,015)

   

   (77,684)

   

   (28,798)

   

   (13,725)

   (60,389)

   (16,905)Total operating costs and expenses

   

   (3,428,438)

   

   (7,006,013)

   

   (5,815,956)

   

   (4,747,610)

   (3,989,920)

   (3,204,872)Operating income

   

   456,659

   

   933,183

   

   879,929

   

   658,059

   623,469

   485,537Finance results:Finance expense

   

   (211,793)

   

   (432,799)

   

   (475,886)

   

   (359,422)

   (27,335)

   (432,462)Finance income

   

   64,203

   

   131,199

   

   175,401

   

   169,354

   92,779

   113,935Income before income taxes and socialcontribution

   

   309,069

   

   631,583

   

   579,444

   

   467,991

   688,913

   167,010Income taxes and social contribution

   

   (116,408)

   

   (237,881)

   

   (206,271)

   

   (160,840)

   47,035

   (146,756)Net income

   

   192,661

   

   393,702

   

   373,173

   

   307,151

   735,948

   20,254Basic and diluted earnings per common share

   

   0.53

   

   1.08

   

   1.02

   

   0.84

   2.01

   0.06Basic and diluted earnings per preferred share

   

   0.58

   

   1.18

   

   1.12

   

   0.92

   2.22

   0.06Weighted average number of common shares outstanding

   

   114,459,685

   

   114,459,685

   

   114,459,685

   

   114,459,685

   114,301,508

   112,947,396Weighted average number of preferred shares outstanding

   

   228,503,916

   

   228,503,916

   

   228,503,916

   

   228,503,916

   228,187,562

   225,479,722OTHER FINANCIAL DATANet cash provided by operating activities

   

   848,172

   

   1,733,239

   

   1,881,894

   

   1,236,205

   1,002,655

   1,291,643Net cash used in investing activities

   

   (1,269,006)

   

   (2,593,213)

   

   (1,657,686)

   

   (1,247,005)

   (1,184,624)

   (1,372,531)Net cash provided by (used in) financing activities

   

   86,714

   

   177,200

   

   (324,590)

   

   (183,245)

   460,694

   248,162


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Table Of Contents
 2012

   

   2012

   

   2011

   

   2010

   

   2009

   

   2008(Convenience translation to US$ in thousands)

   

   (R$ in thousands)CONSOLIDATED BALANCE SHEET DATAAssets:Total current assets

   

   566,345

   

   1,157,326

   

   1,621,495

   

   1,498,838

   

   1,587,515

   

   1,022,679Property, plant and equipment

   

   2,737,829

   

   5,594,753

   

   4,122,766

   

   3,322,350

   

   2,767,037

   

   2,237,681Intangible assets

   

   1,193,690

   

   2,439,306

   

   2,449,966

   

   2,485,940

   

   2,523,168

   

   2,469,757Prepaid rights for use

   

   73,628

   

   150,459

   

   317,463

   

   487,307

   

   659,842

   

   -Deferred taxes.

   

   138,891

   

   283,824

   

   301,495

   

   377,352

   

   460,131

   

   311,716Other assets(3)

   

   65,335

   

   133,512

   

   112,215

   

   184,386

   

   152,293

   

   168,941Total assets

   

   4,775,718

   

   9,759,180

   

   8,925400

   

   8,356,173

   

   8,149,986

   

   6,210,774Liabilities:Total current liabilities

   

   1,281,992

   

   2,619,751

   

   1,856,970

   

   1,288,303

   

   1,111,941

   

   918,074Non-current debt

   

   547,085

   

   1,117,969

   

   1,874,414

   

   2,073,386

   

   2,113,329

   

   1,701,485Deferred revenues

   

   98,409

   

   201,099

   

   404,636

   

   612,190

   

   782,279

   

   93,912Related party

   

   332,762

   

   680,000

   

   -

   

   -

   

   -

   

   -Other liabilities (4)

   

   273,463

   

   558,820

   

   601,541

   

   567,628

   

   634,922

   

   725,736Total liabilities

   

   2,533,711

   

   5,177,639

   

   4,737,561

   

   4,541,507

   

   4,642,471

   

   3,439,207Stockholders’ equity

   

   2,242,007

   

   4,581,541

   

   4,187,839

   

   3,814,666

   

   3,507,515

   

   2,771,567Total liabilities and stockholders’ equity

   

   4,775,718

   

   9,759,180

   

   8,925,400

   

   8,356,173

   

   8,149,986

   

   6,210,774


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Table Of Contents  As of December 31,2012

   

   2011

   

   2010

   

   2009

   

   2008(In kilometers, except percentages)CONSOLIDATED OPERATING DATA(at end of period)Total homes passed by NET cable, excluding optical network(5)

   16,888,357

   

   13,433,050

   

   11,543,224

   

   10,776,603

   

   10,192,715Total NET connected pay-television subscribers(6)

   5,381,275

   

   4,730,105

   

   4,212,288

   

   3,689,736

   

   3,182,196NETcable penetration (7)

   31.9%

   

   35.2%

   

   36.5%

   

   34.2%

   

   31.2%
 
 (1)Revenue includes fees from subscription services (pay-television and broadband Internet), connection fees, pay-per-view and fixed line telephony services (in partnership with Embratel). (2)Taxes and other deductions from revenues consist primarily ofImposto sobre Circulação de Mercadorias e Prestação de Serviços,or ICMS, a value-added tax;Imposto Sobre Serviço,or ISS, a municipal tax;Programa de Integração Social,or PIS, a federal tax;Contribuição para o Financiamento da Seguridade Social,or COFINS, a federal social security tax.See “Item 5. Operating and Financial Review and Prospects—Financial Statement Presentation—Taxes and Other Deductions from Revenues.” (3)Includes judicial deposits, recoverable taxes and other non-current assets.
 (4)Includes deferred taxes, provisions and other non-current liabilities. (5)Includes 147,094 ESC90 homes passed by cable in 2009. (6)Includes 31,054 ESC90 total connected pay-television subscribersin 2009. (7)Cable penetration is calculated by dividing connected subscribers by homes passed as of the end of each year.


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 Risk Factors You should carefully consider the risks and uncertainties described below and the other information in this Form 20-F, including the discussions set forth in “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects,” as well as our audited consolidated financial statements and related notes included elsewhere in this Form 20-F. Risks Related to Our Business We operate our cable systems under licenses that are non-exclusive, and the industry in which we operate is highly competitive. Consequently, an increase in overbuild and competition can adversely impact our business and results of operations. We provide cable television services pursuant to the terms and conditions of licenses granted and supervised by theAgência Nacional de Telecomunicações,or Anatel, the Brazilian National Telecommunications Agency.  On September 12, 2011, the Brazilian government enacted Statutory Law No. 12,485, or Law No. 12,485, which provides for audiovisual communication conditional access, or Conditional Access Service (“SEAC”), and regulates the pay-television industry, regardless of the technology used.Anatelintroduced rules regulating SEAC pursuant to Law No. 12,485 in March 2012.  Prior to the ratification of Law No. 12,485 by Anatel, licenses were renewed automatically for successive periods of 15 years, provided that the conditions imposed by Anatel were met. Under current regulations, licenses are being issued for an indefinite period of use.Under Law No. 12,485, no new television service licenses, authorizations for Television and Audio Signal Broadcasting to Subscribers via Satellite Services (“DTH”), Multichannel Multipoint Distribution Services (“MMDS”) or Pay Television Special Service shall be granted. The new service model allowscompanies to have the option to keep existing authorizations and concessions up to expiration thereof or to migrate immediately to the new service.  In November 2012, Anatel authorized us to provide SEAC by converting existing cable and MMDS licenses. The scope of SEAC authorizations is nationwide, which permits us to operate in any part of Brazil. After complying with all legal requirements, we began to offer cable TV service in 44 other cities, distributed in the states of São Paulo (certain cities in the countryside of São Paulo, Vale do Paraíba region and other cities) and Rio de Janeiro (Baixada Fluminense region, Niterói and São Gonçalo), and other capitals and metropolitan regions of the North and Northeast of the country (Recife, Salvador, São Luis and Belém).  SEAC allowsmore than one cable system to operate in the same territory, which we refer to as an “overbuild, which could adversely affect our growth, financial condition and results of operations by increasing competition or creating competition where none existed previously.  We currently compete with: ·Brazilian broadcast networks and their local affiliates; ·wireless telephony services and wireless 3G broadband Internet services offered by wireless telephony companies; ·movie theaters, video rental stores and other entertainment and leisure activities generally; and


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Table Of Contents
 ·fixed line telephony service providers. We also compete with incumbent telecommunications companies in all cities in which we offer pay-television, broadband Internet and fixed line telephony(in partnership with Embratel) services. Each of these incumbent telecommunications companies has significantly greater financial resources than we do. The attractive demographics of our service territory make it a desirable location for investment by these companies. Their competitive position may be improved due to the recent changes in the current legislative and regulatory framework or if they invest in new technologies or infrastructure. The effects of competition on our business are highly uncertain and will depend on a variety of factors, including economic conditions, regulatory developments, the behavior of our customers and competitors and the effectiveness of measures we take in response to the competition we face. Our ability to compete successfully will depend on customer service, on our marketing strategy and on our ability to anticipate and respond to various competitive factors affecting our industry, including the introduction of new services and technologies, changes in consumer preferences, demographic trends, economic conditions and discount pricing strategies by competitors. If we are unable to successfully respond to competition and compensate for declining prices by adding new customers, increasing usage and offering new services, our revenues and profitability could decline. We may not be able to keep pace with developments in technology. Technology in the communications industry is changing rapidly, which means it is possible that the technology in which we invest for purposes of delivering our new services could be rendered obsolete by the advent of superior or cheaper technology. It is also likely that many of the services we will offer in the future will also be offered by our competitors. Moreover, new technologies have been, and will likely continue to be developed, increasing the number of competitors we face for our video, high-speed Internet and telephony (in partnership with Embratel)services. Therefore, our failure to introduce these new services rapidly and efficiently to the marketplace and to sell them as effectively as our competitors could significantly harm our ability to generate sufficient revenues from such services. New services, once marketed, may not meet consumer expectations or demand, can be subject to delays in development and may fail to operate as intended. A lack of market acceptance of new services which we may offer, or the development of significant competitive services by others, could have a material adverse impact on our revenues and operating cash flow. Technological advances could require us to expend substantial financial resources in the development or implementation of new technologies in order to prevent our services from becoming obsolete, and there is no assurance that sufficient financial resources will be available in order to fund new technology, especially in light of our debt service obligations and restrictive covenants. As a result, significant competition in the future may come from new entrants to our markets that do not face the cost of upgrading an installed base of older equipment. We cannot assure you that demand for new services, such as digital cable television, high-definition cable television, digital video recorder, near video-on-demand and fixed line telephony (in partnership with Embratel) will be sufficient to recover our costs of developing and marketing such services. In addition, we are unable to assure you as to the ultimate effect on us of possible technological changes.


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 Increases in rates of churn could negatively affect our revenues and profitability. Subscriber “churn” is the total number of net disconnected subscribers (excluding temporarily blocked subscribers) for a period as a percentage of the average number of subscribers for the same period. Our ability to generate pay-television, broadband Internet and telephony (in partnership with Embratel) subscription revenues is dependent on our ability to attract and retain subscribers, which entails significant costs. Such costs include marketing expenses and the programming fees we must pay in order to assemble attractive programming packages and keep an adequate level of customer satisfaction, which may be temporarily affected during accelerated growth periods. We also incur certain unrecoverable costs, particularly equipment installation costs, sales commissions and marketing costs, for every new subscriber we connect to our cable network. The fact that we experience a variety of significant fixed costs for each new subscriber means that high rates of subscriber churn could have a material adverse effect on our operating expenses and profitability, especially for services, such as telephony (in partnership with Embratel), where we expect to recover our customer acquisition costs over a longer period. In addition, since 2008 we offer a package targeting a lower income segment. In case of a downturn of the Brazilian economy, or as a result of differences inherent to this new customer segment, we may experience higher churn rates. See “Item 4. Information on the Company—Customer Care—Customer Service and Management of Churn.” We may not be able to continue charging our customers for equipment costs related to more than one pay-television outlet per household.  We charge our customers fees for cable content we provide, in addition to equipment usage fees, for each additional outlet in their household. In April 2009, Anatel enacted new rules prohibiting pay-television providers like us from charging subscribers for content through more than one outlet per household, and, in March 2010, Anatel clarified that subscription television operators could charge customers for the cost of equipment used in multiple outlets, including decoder rentals, leases and sales. However,Brazilian federal prosecutors, several consumer defense and protection associations and customers have brought legal claims to these rules, claiming that pay-television operators cannot charge for multiple outlets or the rental of related equipment. We cannot predict the outcome of these proceedings, and adverse decisions could negatively affect our business, cash flows and results of operations. Increases in our programming costs would adversely affect our cash flow and operating margins. Programming has been, and is expected to continue to be, our largest operating expense, representing 22.6% of our net revenues in 2012 and 2011. Under Brazilian law, our contracts with our current subscribers allow us to increase subscription fees only once every 12 months, and then only in proportion to inflation. Accordingly, these subscriber contracts, along with market constraints, limit our ability to pass along increases in programming costs to our subscribers. The new SEAC may increase our programming costs in the future and any increase in programming costs that we are unable to pass on to subscribers could adversely affect our cash flows and operating margins. We may be subject to substantial additional expenditures on our network, which would have a material adverse impact on results of operations. In 2005, the municipal government of São Paulo enacted a law requiring all cable networks installed in the city of São Paulo on poles belonging to power and telephone utilities and cable companies to be moved to underground facilities. However, to date those requirements have not


been enforced by city officials. There are several issues that could delay or prevent implementation of the law, including the corresponding increase in costs to power providers and the lack of clear guidelines by the municipal government. Currently, our entire network in the city of São Paulo, which represented approximately 14.3% of our total network as of December 31, 2012, is installed on poles. We would incur significant costs in order to comply with the requirements of the law, which would materially and negatively impact our cash flows and results of operations.


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 Piracy could negatively affect our revenues. “Piracy” refers to a household purposely receiving a provider’s services without paying for such services. Piracy of our cable television services occurs principally through illegal cable connections to our network, which provide our services to unauthorized outlets and unauthorized installations. Brazilian pay-television service providers experience a high rate of piracy. If we are not able to control levels of piracy under our network, our revenues could be negatively affected. We depend upon third parties to provide certain sales and customer services. We rely on third party vendors to provide cost-effective and efficient customer services. Among other activities, these outsourced services relate to direct sales and customer relations, including call centers, installation workforce and sales people. If any of our third party service providers were to discontinue their services, due to operating or financial difficulties or otherwise, or were to provide poor service quality or otherwise not meet our specifications, our ability to respond to our customers timely, cost effectively, or at all, would be hindered, which could in turn harm our business. We depend on key suppliers and vendors to provide equipment that we need to operate our business. We depend upon various key suppliers and vendors to provide us network equipment, which we need to expand and operate our business. If these suppliers or vendors fail to provide equipment or services to us on a timely basis or at all due to operating or financial difficulties or otherwise, we could experience disruptions, which could have an adverse effect on our revenues and results of operations. Unforeseen events could interfere with our ability to provide our services. Unforeseen events, such as fissures in our cable network, power outages, natural disasters, fire in our control centers or other similar events could temporarily impair the quality of our signal or prevent us from sending and receiving broadcast signals, as well as cause damage to our equipment. We cannot assure you that should such events occur we would be able to prevent interruptions in our services. Extended interruptions in service may have a negative effect on our revenues to the extent that such interruptions cause customers to cancel services, request for reimbursement or require significant capital resources to correct. A failure in our network and information systems could significantly disturb our operations, which could have a material adverse effect on those operations and our business, results of operations and financial condition. Certain network and information systems are critical to our business activities. Network and information systems may be affected by cyber security incidents which can result from deliberate attacks or system failures. These may include, but are not limited to, computer hacking, computer viruses, worms or other destructive or disruptive software, or other malicious activities.Our inability to operate our networks as a result of such events, even for a limited period of time,


may result in significant expenses and/or loss of market share to other communications providers. In particular, both unsuccessful and successful cyber-attacks on companies have increased in frequency, scope and potential harm in recent years. The costs associated with a major cyber-attack onour operationscould include expensive incentives offered to existing customers and business partners to retain their business, increased expenditures on cyber security measures, lost revenues from business interruption, litigation and damage to our reputation. In addition, if we fail to prevent the theft of valuable information such as financial data, sensitive information about NET and intellectual property, or if we fail to protect the privacy of customer and employee confidential data against breaches of network or IT security, it could result in damage to our reputation, which could adversely impact customer and investor confidence. Any of these occurrences could result in a material adverse effect on our business, results of operations and financial condition.


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 Significant unanticipated increases in the use of bandwidth-intensive Internet-based services could increase our costs.  The rising popularity of bandwidth-intensive Internet-based services poses special risks for our broadband Internet service. Examples of such services include peer-to-peer file sharing services, gaming services and the delivery of video via streaming technology and download. In order to continue to provide high quality service at competitive prices, we need the continued flexibility to develop and refine business models that respond to changing consumer uses and demands and to manage bandwidth usage efficiently. If heavy usage of bandwidth-intensive services grows beyond our current expectations, we may have higher operating costs than currently anticipated to obtain additional bandwidth from third parties or our customers may have a suboptimal experience when using our broadband Internet service. We are subject to extensive government regulations and changes in such regulations could adversely affect our operations. Our pay-televisionactivity is regulated by Anatel. Regulations cover all facets of the Brazilian pay-television industry and relate to, among other matters, licensing, competition, local access and commercial advertising.  Brazilian pay-television regulations underwent significant changes in 2011 and 2012 and currently: =there are no limitations on foreign ownership of cable companies; =there is no limitation on the number of pay-television licenses granted which allows multiple competitors to deploy cable systems in the same region; =we are obliged to distribute a certain amount of Brazilian produced content in our channels; =pay-television authorizations may not be transferred without the approval of Anatel; =pay-television operators are obliged to carry certain channels or content; and =we have to meet certain quality of service goals and maintain quality of service standards set by Anatel, which could impose fines on us for non-compliance. In addition, under Brazilian currency rules, our contracts with our current subscribers allow us to increase subscription fees only once every 12 months and then only in proportion to inflation.


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 The recent changes and any further changes to the Brazilian regulatory framework could have a material adverse impact on our results of operations and financial condition. See “Item 4. Information on the Company—Regulation.” The Internet access portion of our business is subject to a number of factors that could adversely affect its growth and performance. Our business plan depends in part on the continued growth of our broadband Internet service, NET Vírtua. If residential Internet usage, and specifically residential broadband Internet usage, does not increase, or if it declines or evolves away from the technologies in which we invest, our business plan could be adversely affected. The Internet industry in Brazil faces a number of uncertainties, including but not limited to: lack of access to computers among Brazilian consumers; lack of reliable security technologies; privacy concerns; excessive or unduly restrictive government regulation; uncertainty regarding intellectual property rights and other legal issues; and failure of the Internet infrastructure, such as servers and modems, to support current levels of usage growth. In addition, our high-speed Internet customers utilize our network to access the Internet and, as a consequence, we or they may become victim to common malicious and abusive Internet activities, such as peer-to-peer file sharing, unsolicited mass advertising (i.e., “spam”) and dissemination of viruses, worms, and other destructive or disruptive software. These activities could have adverse consequences on our network and our customers, including degradation of service, excessive call volume to call centers, and damage to our or our customers' equipment and data. In addition, any security breaches could damage our reputation and require us to expend resources to remedy. Significant incidents could lead to customer dissatisfaction and, ultimately, loss of customers or revenue, in addition to increased costs to service our customers and protect our network. Any of these and other factors could negatively affect our ability to sell our broadband Internet service or any other Internet-based services we may introduce in the future. In addition, any significant loss of high-speed Internet customers or revenue, or significant increase in costs of serving those customers, could adversely affect our growth, financial condition and results of operations. We are party to several legal proceedings. If we receive unfavorable outcomes in these proceedings, our cash flows could be materially and adversely affected. We are party to several legal proceedings relating to tax matters and civil and labor disputes. Any litigation connected with such legal proceedings could be costly, time consuming and detrimental to our reputation. We cannot assure you that we will obtain a final favorable court decision with regard to any particular proceeding. In addition, we cannot assure you that, should a final judgment be entered against us, the plaintiff will permit, or applicable law will allow, us to pay the imposed judgment over time. If we obtain unfavorable outcomes in such proceedings and if we are forced to pay a large judgment over a short period of time, our cash flows could be materially and adversely affected. See “Item 4. Information on the Company—Legal Proceedings.”


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 We may be subject to substantial additional taxes on our network, which would have a material adverse impact on our business and results of operations. The Brazilian government regularly enacts reforms to tax and other assessment regimes to which we and our customers are subject. We may be subject to substantial additional taxes on our network, which would have a material adverse impact on our business and results of operations. The most significant of these potential additional taxes on our network is the tax on the use of public thoroughfares (which includes the installation and passage of cables), or “shadow” tax. We have not made any reserves for the payment of the shadow tax. If the courts rule that the collection of this tax by the municipalities is valid, the tax would have to be paid retroactively. In addition, if the municipalities which currently impose the tax were successful in implementing and collecting this tax, additional municipalities may seek to impose it. If we are required to pay this tax, our operating results would be materially and adversely affected. See “Item 4. Information on the Company—Legal Proceedings—Judicial Tax Proceedings—Shadow Tax.” Our controlling shareholder controls most of our corporate transactions and its interests may differ from yours. América Móvil S.A.B. de C.V., (“América Móvil”), through its subsidiaries Embratel Participações S.A. (“Embrapar”), Empresa Brasileira de Telecomunicações S.A. (“Embratel”), GB Empreendimentos e Participações S.A. (“GB”) and EG Participações S.A. (“EG”), together with their subsidiaries and affiliates, owned, directly or indirectly, 92.2% of our shares, including 84.5% of our common shares and 97.6% of our preferred shares, as of December 31, 2012. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders.” América Móvil has interests in companies that currently compete or may in the future compete with us, including its interest in Embratel, a telecommunications carrier that offers a wide range of telecommunications services over its network, including high-speed data transmission, Internet services and satellite pay-television service, and Claro S.A. (“Claro”), a wireless carrier that offers wireless voice services under a variety of rate plans. Furthermore, our common shares are the only shares of capital stock that hold full voting rights. In accordance with Brazilian corporate law and our by-laws, holders of the preferred shares, and thus of the ADSs, are entitled to vote at meetings of our shareholders in only limited circumstances. This means, among other things, that you, as a holder of preferred shares or ADSs, are entitled to vote only on the following matters: ·our transformation, consolidation, merger or spin-off; ·valuation of assets used in increases in our capital; ·approval of certain specified agreements between us and our controlling shareholders or their affiliates; ·selection of a specialized firm skilled in determining our fair market value, in relation to a public offering of our shares; and ·a change or repeal of provisions of our by-laws that alter or modify anyBM&FBOVESPA(the Brazilian stock exchange), or BM&FBovespa, requirements.


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 Accordingly, the interests of our controlling shareholder may conflict with the interests of other holders of our preferred shares, and América Móvil may cause us to act in a manner divergent with the interests of such holders. We depend on key members of our senior management. Any difficulty in hiring new managers could adversely affect our ability to operate our business. Our business is managed by a small number of key senior managers. The loss of any of these individuals could materially affect our business. In addition, our success depends on our ability to continue to attract and recruit qualified scientific, technical, managerial and administrative personnel. Competition for qualified personnel in Brazil is strong, and there are generally a limited number of professionals with the requisite experience in the sectors in which we operate. We cannot assure you that we will be able to retain such managers or do so without costs or delays, nor can we assure you that we will be able to find new qualified senior managers, should the need arise. A failure to either retain or to hire new qualified senior managers could adversely affect our business. Acquisitions could prove difficult to integrate or have an adverse effect on ourresults of operations.  We may seek opportunistically to acquire other cable television and broadband Internet service providers. Any acquisition involves numerous risks, including: (1) potential loss of key employees or clients of acquired companies; (2) difficulties integrating acquired personnel and distinct cultures into our business; (3) difficulties integrating acquired companies into our operating, financial planning and financial reporting systems; (4) diversion of management attention from existing operations; and (5) assumption of liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for their failure to comply with applicable telecommunications regulations and tax contingencies.  Acquisitions may also involve significant anticipated and unexpected cash expenditures, debt incurrence and integration expenses that could have a material adverse effect on our financial condition, results of operations and cash flows. Any acquisition may ultimately have a negative impact on our business and financial condition. Weakening economic conditions may negatively impact our ability to attract new subscribers, increase fees and maintain or increase revenues. Most of our revenue comes from residential subscribers whose spending patterns may be affected by prevailing economic conditions. A weakening in general economic conditions could lead to reductions in consumer demand for our services and a continued increase in the number of homes that replace their traditional telephone service with wireless service, which would negatively impact our ability to attract customers, increase rates and maintain or increase subscription revenues. Our ability to achieve incremental growth in pay-television and broadband Internet subscribers is dependent to a large extent on growth in the disposable income of Brazilians. If growth in the disposable income of Brazilians starts to decline, it may negatively impact our ability to gain new pay-television and broadband Internet subscribers. In addition, current subscribers may reduce the advanced or premium services to which they subscribe, or may discontinue subscribing to our cable or broadband Internet services. We may also be unable to increase the fees we charge our subscribers. If economic conditions deteriorate, the growth of our business and results of operations may be adversely affected.


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 Risks Related to Brazil A downturn or increased volatility in the Brazilian economy or the depreciation of the Real could adversely affect our revenues, cash flows and profitability. All of our operations and customers are located in Brazil. Therefore, our results of operations and financial condition depend upon the level of economic growth in Brazil, and, consequently, upon customer demand for our services. Weakness in the Brazilian economy has adversely affected our subscriber and revenue growth in the past. Similar or more severe economic weakness would lead to shortfalls in our revenues and subscriber levels and could have an adverse impact on the market price of our preferred shares and ADSs. See “—Weakening economic conditions may negatively impact our ability to attract new subscribers, increase fees and maintain or increase revenues.” The Real decreased in value by 8.9% against the U.S. dollar in 2012, from an exchange rate of R$1.8758 per US$1.00 at December 31, 2011 to an exchange rate of R$2.0435 per US$1.00 at December 31, 2012. The average exchange rate in 2012 was R$1.9588 per US$1.00, a decrease in value of the Real against the U.S. dollar of 17.2% when compared to an average exchange rate of R$1.6709 per US$1.00 in 2011. The Real has historically suffered several major depreciations against the U.S. dollar and has been volatile against the U.S. dollar. We do not attempt to hedge this risk over the long-term.  Depreciation of the Real against the U.S. dollar could negatively impact the market price of our preferred shares and ADSs. Our revenues are in Reais. A significant percentage of our capital expenditures, including network equipment costs, and a portion of our indebtedness are denominated in or indexed to U.S. dollars. Accordingly, depreciation of the Real against the U.S. dollar would result in decreased cash flows and could result in a net loss as a result of higher financial expenses. Brazilian political and economic conditions have a direct impact on our business, and the Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Our financial condition and results of operations are substantially dependent on the Brazilian economy. The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes drastic changes in monetary, fiscal, taxation, credit, tariff, wage and price controls and other policies in order to influence the course of the economy. In addition, changes in administrations may result in changes in government policy that may affect our business. Our business, financial condition and results of operations may be adversely affected by changes in policy as well as by other factors outside of our control, such as currency fluctuations, inflation, price instability, interest rates, monetary policy, the liquidity of Brazilian capital markets, general economic growth, tax policy, wage and price controls, energy shortages and other political, diplomatic, social and economic developments in or affecting Brazil. We have no control over, and cannot predict, what measures or policies the Brazilian government may take in response to the current or future Brazilian economic situation or how government intervention and government policies will affect the Brazilian economy and, both directly and indirectly, our operations and revenues. Adverse economic, political and social conditions may inhibit demand for our services and create uncertainties regarding our operating environment, which could have a material adverse effect on us.


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 Inflation could increase our costs, contribute significantly to economic uncertainty in Brazil and cause heightened volatility in the Brazilian securities markets. Brazil has, from time to time, experienced extremely high rates of inflation, with annual rates of inflation reaching over 1,000% in the early 1990s, according to theIndice Geral de Preços do Mercado, or IGP-M, a widely used monthly indicator of inflation in Brazil published by the Getúlio Vargas Foundation. Brazil’s rate of inflation (deflation), according to the IGP-M, was 9.8% in 2008, (1.7%) in 2009, 11.3% in 2010, 5.1% in 2011 and 7.8% in 2012. Inflation itself and governmental measures to combat inflation have, in the past, had significant negative effects on the Brazilian economy. Governmental actions to combat inflation, including interest rate increases and intervention in the foreign exchange market through the sale of U.S. dollars and government bonds linked to the U.S. dollar, and public speculation about possible future actions, have also contributed to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets. Should Brazil experience substantial inflation in the future, our costs may increase and our operating and margins may decrease, which may adversely affect our financial condition and results of operations. Inflationary pressures may also curtail our ability to access foreign financial markets and may lead to further government intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Brazilian economy and stall or reverse growth. Government measures to combat inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting the availability of credit and reducing economic growth. Developments and the perception of risk in other countries, including the United States, the European Union and emerging market countries, may adversely affect the market price of Brazilian securities, including the ADSs and our preferred shares. The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, the European Union and emerging market countries.  Although economic conditions in those countries may differ significantly from economic conditions in Brazil, investor’s reactions to developments in other countries may have an adverse effect on the market value of securities of Brazilian issuers.  Crises in the United States, the European Union or emerging market countries may diminish investor interest in securities of Brazilian issuers, including ours.  This could adversely affect the trading price of the ADSs or our preferred shares, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all. Restrictions on the movement of capital out of Brazil may hinder your ability to receive distributions on, and the proceeds of any sale of, the preferred shares or ADSs. Brazilian law permits the Brazilian government to impose restrictions on the conversion of Brazilian currency into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Brazil. The government may impose such restrictions whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance. If introduced, these restrictions would hinder or prevent the conversion of distributions or the proceeds from any sale of the preferred shares or ADSs, as the case may be, from Reais into U.S. dollars and the remittance of U.S. dollars abroad. In the case of ADSs, the custodian, acting on behalf of the depositary for the ADSs, will hold the Reais it cannot convert for the accounts of the American Depositary Receipt, or ADR, holders who have not been paid as a result of the restrictions. The depositary will not reinvest the Reais and will not be liable for any interest on the monies held. In addition, any Reais so held will be subject to depreciation risk.


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 We cannot assure you that the Brazilian government will not impose restrictions on the conversion of Brazilian currency into foreign currencies in the future, temporarily or otherwise. Risks Related to Our Securities The liquidity of the trading market for ADSs in the United States is limited; this could lead to price volatility and a lack of buyers for ADSs. As of December 31, 2012, there were approximately 0.8 million of our ADSs outstanding, compared to 1.4 million ADSs as of December 31, 2011 and 2.5 million ADSs as of December 31, 2010.  This decrease was due to a tender offer by Embratel to purchase all of our preferred shares, including those represented by ADSs, which was completed on October 7, 2010. Additional preferred shares were acquired by Embratel pursuant to the shareholder put right under Brazilian regulations. The average daily trading volume for our ADSs on the Nasdaq Stock Market’s, or NASDAQ, Global Market during 2012 was approximately 6,598 ADSs per day, equivalent to approximately US$84,831 per day. Our ADSs have much lower levels of liquidity than other equity securities traded in the United States. This means there tends to be fewer willing buyers and sellers and fewer trades for our ADSs than for other equity securities. As a result, the price quoted for an ADS may be less reliable and more volatile than that quoted for another equity security traded in the United States. In addition, the reduction in the number of ADSs outstanding resulting from the tender offer and subsequent shareholder put right has adversely affected the liquidity and market value of our ADSs. Additionally, Embratel, its parent company Embrapar and GB are seeking to launch a unified tender offer, consisting of (i) a mandatory tender offer in connection with our change of control and (ii) a voluntary tender offer to delist NET from the Level 2 (defined herein) listing regime of the BM&FBovespa. The unified tender offer will further decrease the number of outstanding ADSs and will adversely affect the liquidity and market value of our ADSs. The unified tender offer by Embrapar, Embratel and GB for our outstanding common and preferred shares (including preferred shares represented by ADSs) may result in the delisting of our shares from the Level 2 listing regime and may be followed by the delisting of our ADSs in the United States and the termination of our ADS program and SEC reporting obligations. The unified tender offer announced by Embrapar in March 2012 is for all of our outstanding publicly held common and preferred shares, including preferred shares represented by ADSs. One of the objectives of the unified tender offer is to satisfy a prerequisite for the delisting of NET from the Level 2 listing regime of the BM&FBovespa. Following NET’s delisting from Level 2, Net will only be subject to the general listing regime, which unlike the Level 2 Regulation, does not require listed companies to comply with certain enhanced shareholder protection rules, including those related to mandatory disclosure, tender offers, delisting, deregistration and general corporate governance.                Our controlling shareholder has indicated that, following completion of the tender offer, if certain conditions are met, it may cause us to terminate the deposit agreement governing our ADSs and delist our ADSs from NASDAQ. Our ADSs and the underlying preferred shares may also become eligible for deregistration under the Exchange Act of 1934, in which case our controlling shareholder will have the ability to cause us to take the steps necessary to complete deregistration. If we deregister our securities in the United States, our public disclosure obligations in the United States and the market for such securities could be limited or eliminated entirely.


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 The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell our shares underlying the ADSs or common share 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 other countries, and these investments are generally considered more speculative in nature. The Brazilian securities market is substantially smaller and less liquid than major securities markets, such as the United States, and may be more volatile. Although you are entitled to withdraw our shares underlying the ADSs from the depositary bank at any time, your ability to sell our shares underlying the ADSs at a price and time acceptable to you may be substantially limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets such as the United States or other countries. The twenty largest companies in terms of market capitalization accounted for over 55% of the aggregate market capitalization of the BM&FBovespa in January 2013. We are subject to different corporate rules and regulations as a Brazilian company, and the preferred shares and ADSs have fewer and less well defined shareholders’ rights. Our corporate affairs are governed by our by-laws and Brazilian corporate law, which differs from the legal principles that would apply if we were incorporated in a United States jurisdiction, such as Delaware or New York, or in other jurisdictions outside Brazil. Under Brazilian corporate law, the rights of those holding preferred shares or ADSs may be fewer and based on less precedent than they would be under the laws of other jurisdictions outside Brazil. The Brazilian securities markets are not as highly regulated or supervised as the United States securities markets or markets in certain other countries. Rules and policies with respect to the preservation of minority shareholder interests and against self-dealing may not be enforced in Brazil to the same extent as such rules are enforced in the United States, and the law may be less developed in such areas, putting holders of the preferred shares and ADSs at a potential disadvantage. Because we are a Brazilian company, you may face difficulties in proceedings with respect to your interests as a shareholder. We are asociedade anônima, or corporation, organized under the laws of Brazil, and all of our directors and officers reside in Brazil. Substantially all of our assets and those of our directors and officers are located in Brazil. As a result, it may not be possible for investors to effect service of process upon us or our directors and officers within the United States or other jurisdictions outside Brazil or to enforce against us or our directors and officers 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 requirements are met, you may face greater difficulties in protecting your interests, in the case of actions against our directors or officers, than would shareholders of a corporation incorporated in a state, or other jurisdiction, of the United States. If you exchange ADSs for preferred shares, you risk losing the ability to remit foreign currency abroad and you risk unfavorable tax treatment. The Brazilian custodian for the preferred shares must obtain an electronic certificate of registration from the Central Bank to be entitled to remit U.S. dollars abroad for distributions relating to the preferred shares or upon the disposition of the preferred shares. If you decide to exchange your ADSs for the underlying preferred shares, you will be entitled to continue to rely, for five business days from the date of the exchange, on the custodian’s electronic certificate of


registration. Thereafter, you may not be able to obtain, and the custodian may not be able to remit, U.S. dollars abroad upon the disposition of the preferred shares unless you obtain your own electronic certificate of registration or register your investment in the preferred shares under specified regulations that entitle foreign investors to buy and sell securities on the BM&FBovespa. These regulations require, among other things, the execution of foreign exchange transactions without actual payment orders, which are subject to IOF tax. If you obtain an electronic certificate of registration, you may be subject to taxation on gains with respect to the preferred shares. In addition, if you are resident in a tax haven jurisdiction, gains with respect to the preferred shares will be subject to unfavorable tax treatment. If you obtain an electronic certificate of registration, you may be subject to unfavorable tax treatment on gains with respect to the preferred shares unless you are resident in a tax haven jurisdiction. See “Item 10. Additional Information—Taxation—Material Brazilian Taxation Considerations.” If you attempt to obtain your own electronic certificate of registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to the preferred shares or the return of your capital in a timely manner.


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 We cannot assure you that the custodian’s electronic certificate of registration or any certificate of foreign capital registration obtained by you may not be affected by future legislative changes, or that additional restrictions applicable to you, the disposition of the underlying preferred shares or the repatriation of the proceeds from any disposition will not be imposed in the future. You might be unable to exercise certain rights, including preemptive rights with respect to the preferred shares. As a holder of ADSs, as opposed to holders of preferred shares, you may find it difficult to exercise some of your rights. For instance, if we fail to timely provide the depositary with voting materials, you may not be able to give instructions to the depositary on how it should vote your ADSs. In addition, you may not be able to exercise the preemptive rights relating to the preferred shares, including preferred shares underlying the ADSs, unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements is available. We are not obligated to file a registration statement with respect to the preferred shares or other securities relating to these preemptive rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from the registration requirements is available, you will receive only the net proceeds from the sale of your preemptive rights by the depositary or, if the preemptive rights cannot be sold by the depositary, they will be allowed to lapse. In addition, with respect to the limited circumstances where preferred shareholders are able to vote, ADS holders may exercise voting rights with respect to our shares represented by ADSs only in accordance with the provisions of the deposit agreement relating to the ADSs. There are no provisions in Brazilian law or in our bylaws that limit ADS holders’ ability to exercise their voting rights through the depositary bank with respect to the underlying shares. However, there are practical limits to the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with such holders. For example, our shareholders will either be notified directly or through notification published in Brazilian newspapers and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders, on the other hand, will not receive notice directly from us. Instead, in accordance with the deposit agreement, we will send notice to the depositary bank, which will, in turn, as soon as possible, mail the notice of such a meeting to holders of ADSs with a statement as to the manner in which instructions may be given by holders. To exercise their voting rights, ADS holders must then instruct the depositary bank how to vote the shares represented by their ADSs or common share ADSs. Because of this extra procedural step involving the depositary bank, the process for exercising voting rights will take longer for ADS holders than for holders of our shares. ADSs for


which the depositary bank does not receive voting instructions in good time will not be able to vote at a meeting.


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 The preferred shares and ADSs do not entitle you to a fixed or minimum dividend. Our by-laws, in accordance with Brazilian corporate law, require that, for any year in which we have “adjusted net profits” (as defined in Brazilian corporate law), we will be required to pay, subject to certain exceptions, a yearly minimum dividend equal to not less than 25.0% of adjusted net profits, referred to as the “mandatory distribution.” Brazilian corporate law, however, permits publicly held companies, such as the Company, to suspend the mandatory distribution of dividends if the board of directors and the audit committee report to the shareholders’ meeting that the distribution would be inadvisable in view of the company’s financial condition. If the board of directors and audit committee so report, the board of directors must file a justification for such suspension with theComissão de Valores Mobiliários(the Brazilian Securities and Exchange Commission), or the CVM, within five days of the shareholders’ meeting. Profits not distributed by virtue of this suspension shall be attributed to a special reserve and, if not absorbed by subsequent losses, shall be paid as dividends as soon as the financial condition of the company permits such payments. Due to our accumulated net loss, historically, we have never declared or paid any cash dividends, nor made any cash distribution on our shares, including the preferred shares underlying our ADSs. In addition, due to the fact that we are seeking new growth opportunities, we do not expect to make any cash distribution in the near future. The issuance by us or our major shareholders or the sale of a substantial number of preferred or common shares could decrease the market price of preferred shares and ADSs and could significantly dilute your holdings. The issuance by us or our major shareholders of a substantial number of preferred or common shares, sales of a substantial number of shares, or the belief that this may occur, could decrease the market price of preferred shares in general and ADSs. In the future, subject to the restrictions of our debt facilities and debt instruments, we may choose to raise further capital by issuing additional preferred shares, convertible securities or other equity-related securities. The timing, terms, size and pricing of any such transaction will depend on investor interest and market conditions. Any issuance of equity or equity-related securities, however, would dilute your holdings-and possibly substantially-to the extent that preemptive rights are not made available to you or exercised by you.  ITEM 4.          INFORMATION ON THE COMPANY. Business Overview We are a leading multiservice company in the pay-television and broadband Internet industries in Brazil. Currently, we are the largest cable operator in Brazil and Latin America, based upon the number of subscribers and homes passed. As of December 31, 2012, we had 5.4 million pay-television connected subscribers in 131 locations within Brazil, including São Paulo and Rio de Janeiro, the two largest Brazilian cities. We are the leading provider of high-speed cable modem Internet access in Brazil through our NET Vírtua service, which had 5.5 million subscribers as of December 31, 2012. We also provide fixed line telephony through our NET Fone Via Embratel service, which had approximately 5.0 million subscribers as of December 31, 2012. As of December 31, 2012, our advanced network of coaxial and fiber-optic cable covered over 99,000 kilometers and passed approximately 16.9 million homes. Most of our customers belong to high and middle income classes, which helps to keep bad debt expense at low levels. In 2012, we had gross revenue of R$9,938.0 million.


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 Currently, our principal services include pay-television and pay-per-view programming under the “NET” brand name, digital cable under the “NET Digital” brand name, high-definition cable television combined with digital video recorder under the “NET Digital HD MAX” brand name, broadband Internet service under the “NET Vírtua” brand name and fixed line telephony service under the “NET Fone Via Embratel” brand name. We are a company that seeks innovation and is the first in delivering solutions to customers. Supporting this promise are high speed broadband, up to 100 Megabits, video on demand service called “NOW” and the Multi Combo, a package of services that is modifying the market as the first joint offering of mobile, fixed telephony (in partnership with Embratel)and cable television. We are able to offer this Multi Combo due to the commercial partnership among the companies of the América Móvil Group in Brazil: Claro, Embratel and us.  Pay-television In 2004, we began to offer digital cable services to our subscribers. As of December 31, 2012, we offered digital cable in 105 locations, including Rio de Janeiro and São Paulo. Through providing digital cable services, we are able to offer subscribers additional channels and value-added programming options and services, such as audio channels containing a variety of music packages, near video-on-demand, interactive services and high-definition content. In 2007, we introduced select high-definition, also referred to as HD, channels in Brazil.  In 2010, we focused on expanding the number of subscribers with HD access and in expanding our HD channels.  As part of this strategy, since 2010 we have been offering higher broadband Internet speeds for customers who subscribe to HD services. According to www.teleco.com.br, we were Brazil’s leading pay-television operator in the HD market as of December 2010. After accelerated growth in 2010 related to the World Cup broadcast, high-definition pay-television remained in high demand in 2011. In addition we launched the NOW service, an on-demand content delivery platform available only to HD subscribers for high-definition on-demand movie rentals and regular programming. In 2012, we continued to obtain excellent results while maintaining an accelerated growth strategy and focus on quality of services provided. In pay-television, we continue to be market leaders, bringing the best programming and the most consecrated channels of movies, sports, news and varieties. NET also has led the rapid adoption of high definition technology in Brazil. We ended the year with 30 new channels launched, including 17 of them in HD, the largest number of pay-television channels distributed in HD on the market. It is this new technological platform that has enabled NET to launch innovative products that transform the experience of watching television in Brazil. Through NET NOW HD (“NOW”) clients can watch their favorite shows at the time they want through an interactive portal. Through NOW, it is possible to watch free channels of NET content and rent additional content, including the latest movie releases, remotely and without leaving home. The service currently offers over 6,000 options of content and, in 2012, the platform reached 60 million programs watched. In 2012, NET also offered its subscribers the first live 3D broadcast of the Olympics, and the most complete coverage of the event, both for linear channels and through NOW. Also in 2012, we launched the NOW Club, a service that allows unlimited access to content through a fixed monthly subscription, with various options for different audiences and interests. The NOW Club already offers the packages “NetMix” (focused on movies, series and children's content), “Philos” (content of arts and documentaries) and “Receita GNT” (with recipes and cooking tips). Broadband Internet services


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 In 2005, we launched high-speed broadband Internet services to our subscribers, offering speeds of 2Mbps, 4Mbps and 8Mbps. In 2008, to respond to a demand for faster connections to the Internet, we increased speeds of NET Vírtua to 3Mbps, 6Mbps and 12Mbps. In 2008, we also began to offer NET Vírtua 5G in the cities of São Paulo and Rio de Janeiro, providing a speed of 60Mbps that combines high network capacity with Docsis 3.0 technology. In 2010, we responded to client needs by launching new speeds of 10Mb, 20Mb, 50Mb and 100Mb, making our Internet services more attractive and maintaining substantial growth of our client base. In 2012, NET Vírtua continued its excellent performance in the broadband segment. According to Anatel, NET continues to lead the growth of this market and connects more and more Brazilians with quality Internet and ultra-speed connections. We heavily invest in technology, innovation and network capacity to maintain that leadership position.  As a pioneer in broadband “High-speed” in the country, NET currently offers connections of up to 100 Megabits per second in all regions where it operates. We are also a leader in Internet Popular, an initiative undertaken in partnership with state governments to offer broadband at affordable prices to increase digital inclusion in Brazil.  We offer NET customers free Wi-Fi in more than 3,000 outdoor spots in nine cities in Brazil. NET also provides Internet access in 14 airports throughout the country through a partnership withEmpresa Brasileira de Infraestrutura Aeroportuária,or Infraero. Fixed line telephony service Since 2006, we have provided a fixed line telephony service in partnership with Embratel, which marked our entry in the triple-play market (joint offering of pay-television, broadband Internet and fixed line telephony). This product, which uses voice-over-Internet protocol technology, works like conventional fixed line telephony and allows the user to make local, long distance and international calls to any telephone or handset, such calls being charged per minute and not by pulse. In addition, subscribers can apply their minimum monthly fee to make any type of call, including local and long distance calls and calls to mobile phones. Subscribers have the benefit of making calls between NET Fone subscribers at no cost within the same city and at the cost of a local call for long distance calls. This service is primarily directed to the residential market and complements our existing services by offering to our subscribers an additional quality service option. In 2008, we launched a new package that includes our fixed line telephony services, broadband Internet at a speed of 100Kbps and free broadcast television through cable under the “Net Fone.com” brand name. This package is targeted at a lower income segment of potential customers for whom pay-television and high-speed broadband Internet are less important. In 2009, we launched broadband Internet services at a speed of 200Kbps under the “Internet Popular” brand name in the state of São Paulo, in connection with São Paulo state’s policy, which exempts Internet services from the ICMS tax if the package offers a minimum speed of 200Kbps at a price no higher than R$29.90, to increase Internet broadband availability to the lower income segment. In 2010, we upgraded from 200Kbps to 512Kbps. In 2012, we maintained our strong growth and continued leadership in local fixed telephony portability with NET Fone Via Embratel. In only six years, NET Fone has reached 5 million customers, becoming the third largest player in fixed telephony in Brazil and positioning itself among the largest operators in the world in cable telephony.  Solutions for Business Launched in 2011, “NET Empresas” is the brand name for our business solutions product line. NET Empresas serves professionals such as lawyers and dentists and small and medium businesses, primarily in the service and trade sectors. Today, NET Empresas already serves more than 220,000 customers. Service plans include combinations of fixed telephony, high speed Internet, wireless and cable TV.


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 Strategy Our goal is to become the leading multi-service provider of entertainment and communications services in the Brazilian residential market. Our strategy for achieving this goal is to provide triple-play services (the joint offering of pay-television, broadband Internet and fixed line telephony). In order to execute this strategy, we focus on (i) retaining our position as the Brazilian pay-television leader in Brazil; (ii) continuing to expand our broadband Internet business, offering our subscribers increasingly rapid connections; (iii) further developing our fixed line telephony business under NET Fone Via Embratel; and (iv) improving customer service. We are taking the following business and financial initiatives in order to support this strategy.  Business Initiatives ·Pursue growth with profitability.We focus our marketing and sales efforts on households covered by our network. Through this targeted marketing approach, we hope to encourage existing customers to migrate to higher-end programming packages and to purchase value-added services, while at the same time attracting new subscribers to our services. ·Continue the growth of NET Vírtua, our broadband Internet service. Broadband Internet has generally an attractive return. The main processes involved in NET Vírtua’s operating structure, including the cost of its link, customer service center and cable modem technology, are regularly reviewed. Since its launch, increasing the transmission speed of NET Vírtua has been an important factor in driving additional growth, as demand from broadband Internet users has increased as a result of the rising popularity of bandwidth-intensive Internet-based services. ·Pursue further growth of fixed line telephony services.Since March 2009, number portability for all telephony subscribers is available in Brazil. We are taking advantage of number portability as we have a lower subscriber base compared to our competitors. We have been doing marketing campaigns targeting subscribers to transfer their main fixed line telephone number to our service (in partnership with Embratel)and we have been increasing the number of our fixed line telephony subscribers. ·Continue to rollout digital cable and remain technologically competitive. We offer digital cable in 80 locations, including Rio de Janeiro and São Paulo. By providing digital cable services, we are able to offer subscribers additional channels and value-added programming options and services, such as audio channels containing a variety of music packages, near video-on-demand and interactive services. Since 2007, we have offered a set-top box which converts the high-definition signal, provides access to digital services and provides recording capabilities. Our subscriber base of HD services has been increasing and we have launched a content-delivery service for HD subscribers. In 2011, we launched the NOW service, an on-demand content delivery platform available only to HD subscribers for high-definition on-demand movie rentals and regular programming. In 2012, NET also offered its subscribers the first live 3D broadcast of the Olympics, and the most complete coverage of the event, both for linear channels and through NOW. Also in 2012, we launched the NOW Club, a service that allows unlimited access to content through a fixed monthly


subscription, with various options for different audiences and interests. The NOW Club already offers packages NetMix (focused on movies, series and children's content), Philos (content of arts and documentaries) and Receita GNT (with recipes and cooking tips).


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 ·Enhance our triple-play offer.We compete in the triple-play market (joint offering of pay-television, broadband Internet and fixed line telephony-services provided in partnershipwith Embratel). We aim to increase the number of subscribers that are using a higher number of our services, thereby increasing our share of our customers’ spending on entertainment and communication. In 2011, we created and launched the Multi Combo, a package of services offering mobile, fixed telephony and cable television. We are able to offer this Multi Combo due to the commercial partnership among the companies of the América Móvil Group in Brazil: Claro, Embratel and us. ·HFC (Hibrid Fiber-Coaxial).In 2012, wetook over operation of the HFC network that Embratel had been building since 2010 for the provision of broadband and voice in cities that do not have NET cable. The HFC networks were built mostly in midsize cities, but were also built in larger, more prominent cities, like Belem, Natal, Cuiabá, São Luis and Teresina and some major cities such as Osasco and Santana do Parnaiba.HFC technology reached 42 cities by the end of2012. ·Provide reliable, high quality products and responsive customer service.We view our business as a service business. Therefore, we aim to provide high quality products and services and achieve higher levels of customer satisfaction in respect of our pay-television, broadband Internet and fixed line telephony (in partnership with Embratel) services and our responsiveness to customer inquiries, including improving call centers. History and Development of the Company Under our previous name, Multicanal Participações S.A., or Multicanal, we first listed our ADSs on the NASDAQ Global Market in October 1996. In late 1997, the major shareholders sold their interests in us to Grupo Globo. In September 1998, Multicanal acquired certain cable assets and related liabilities of Grupo Globo and changed its name to Globo Cabo S.A. The assets we acquired from Grupo Globo included a 50.0% interest in Unicabo Participações e Comunicações S.A, or Unicabo, and controlling interests in three significant metropolitan-area cable operators: Net São Paulo Ltda., or Net São Paulo, Net Rio Ltda., or Net Rio, and Net Brasília Ltda., or Net Brasília. In May 2000, we acquired the remaining 50.0% of Unicabo. In September 2000, we completed the acquisition of Net Sul Holding S.A., the then 99.99% owner of Net Sul Comunicações Ltda., or Net Sul then the second largest cable television operator in Brazil. The Net Sul acquisition significantly increased our subscriber base and provided us access to markets in southern Brazil, a region in which we historically had no presence. In May 2002, we changed our name from Globo Cabo S.A. to Net Serviços de Comunicação S.A. In 2001, our financial condition and results of operations were significantly and adversely affected by foreign and Brazilian economic factors and the depreciation of the Brazilian Real against the U.S. dollar. Because all of our revenue was, and continues to be, denominated in Reais, the depreciation of the Real in 2001 and 2002 resulted in a lower amount of funds in dollar terms being available to us to support our significant U.S. dollar-denominated debt service obligations. In response to these developments, in 2005, we completed a restructuring of our outstanding


indebtedness. Through the restructuring, we achieved our objective of having a debt amortization schedule compatible with our cash generation and that would allow us to sustain organic growth from our own cash generation, making us less dependent of capital markets conditions. In the wake of our debt restructuring, we developed a new strategy of pursuing higher subscriber growth and therefore we increased our capital expenditures. In 2006, we issued new debt instruments with longer maturities and lower costs than our existing debt. As a result of the stability and strength of the Brazilian economy, as well as an increase in the use of the Internet by Brazilian consumers and the consolidation of digital technology in Brazil, in 2006, we started to increase the scope of our bi-directional network and to expand the geographic scope of our digital-based services to continue our current growth on a sustainable basis. In 2007, we concluded the expansion of our bi-directional network targeting high and middle class households, we expanded our digital-based services to several additional geographic regions and we concluded the acquisition of Vivax Ltda., formerly Vivax S.A., or Vivax. In 2008, we launched a new package that includes our fixed line telephony services (in partnership with Embratel), Internet at a speed of 100kbs and free broadcast television through cable under the “Net Fone.com” brand name, which is targeted at a lower income segment of potential customers for whom pay-television and high speed broadband Internet are less important. We also began to offer “Net Vírtua 5G,” which provides a speed of 60Mbps in the cities of São Paulo and Rio de Janeiro, combining our high network capacity with Docsis 3.0 technology, and we concluded the acquisition of 614 Telecomunicações Ltda., 614 TVP João Pessoa S.A. and 614 TVT Maceió S.A., jointly referred to as “BIGTV”. In 2009, we launched a broadband Internet package for the lower income segment in São Paulo and we concluded the acquisition of ESC 90. In 2010, we launched new speeds for our broadband Internet service of 10Mb, 20Mb, 50Mb and 100Mb.


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 In 2010, Embratel conducted a public tender offer to purchase all of our preferred shares, including preferred shares represented by ADSs, other than preferred shares held by its parent company, Embrapar, and, in early 2011, completed the purchase of 193,701,299 or 84.77% of our preferred shares. In connection with this transaction, Embratel and its parent company, Embrapar, jointly hold 223,080,448 of our preferred shares, representing 97.63% of our preferred shares and 91.86% of our total shares.  In March 2012, Embrapar acquired indirect control of the Company by exercising its option to purchase from Globo a controlling interest in GB, NET’s controlling shareholder. In March 2012, Emprapar acquired 1,077,520 shares, representing 5.5% of the voting capital of GB. These shares were subject to a purchase option granted by Globo (the “Option”), pursuant to GB’s Shareholders’ Agreement entered into on March 21, 2005. As a result of our change of control, and following the April 2012 resolution of our shareholders approving our delistingfrom the Level 2 listing regime of the BM&FBovespa, Embratel, Embrapar and GB are seeking to launch a unified tender offer for all of our outstanding common shares and preferred shares, including preferred shares represented by ADSs.  On September 14, 2012, Embrapar announced that it had reached an agreement with Globo to implement a corporate reorganization plan involving the shares of GB and NET held by Embrapar, Embratel and Globo. On September 17, 2012, Globo, Embrapar and Embratel undertook the corporate reorganization plan, which resulted in Embrapar and Embratel no longer directly holding any shares in NET, and Globo no longer holding any interest in GB. After the restructuring, Embrapar and Embratel now hold 100% of the voting and non-voting capital of GB. GB directly owns 89,446,769 common shares and 223,080,448 preferred shares of NET, representing 78.15% of NET’s common shares, 97.63% of its preferred shares and 91.1% of the total number of NET’s common shares and preferred shares.  On December 21, 2012, Embratel, Embrapar, GB and EG entered into a new shareholders’ agreement for NET (the “NET Shareholders’ Agreement”), and Embratel, Embrapar, and Globo


entered into a new shareholders’ agreement for EG (the “EG Shareholders’ Agreement” and, together with the NET Shareholders’ Agreement, the “Shareholders’ Agreements”). Each of the Shareholders’ Agreements was approved by Anatel and has replaced the prior shareholders’ agreements.


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    Organizational Structure   *Telmex Internacional – Subsidiary of América Móvil


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 We were incorporated in 1994 as asociedade anônima, or corporation, under Law 6,404/76 of the Federative Republic of Brazil. We are currently a publicly-held corporation (sociedade por ações) registered with the CVM. We are registered in the commercial registry of the State of São Paulo under number 35.300.177.240. Our registered office is located at Rua Verbo Divino, 1356, São Paulo-SP-04719-002, Brazil, telephone +55 11 2111‐2785. We conduct our cable television and related activities through a group of companies that we have acquired and developed over the past decade. Set forth in the table below a list of our wholly-owned subsidiaries as of December 31, 2012.  Name of Subsidiary

   Jurisdiction of Incorporation or Organization

   Direct Interest

   Total Interest(percent)

   (percent)Net Brasília Ltda.

   Brazil

   100.00

   100.00Net Rio Ltda.

   Brazil

   100.00

   100.00Net São Paulo Ltda.

   Brazil

   100.00

   100.00Reyc Comércio e Participações Ltda.

   Brazil

   100.00

   100.00Jacarei Cabo Ltda.

   Brazil

   100.00

   100.00614 TVH Vale Ltda.

   Brazil

   100.00

   100.00614 Serviços de Internet Maceió Ltda.

   Brazil

   100.00

   100.00614 Seviços de Internet João Pessoa Ltda.

   Brazil

   100.00

   100.00Net Brasil Serviços de Televisão por Assinatura S.A.

   Brazil

   100.00

   100.00
  On April 11, 2013,we and Embrapar announced that we are evaluating the possibility of a corporate reorganization involving Claro, a company also indirectly controlled by América Móvil, intended to consolidate our corporate structure and activities with some of our respective subsidiaries in Brazil into a single company. We will jointly begin to conduct internal analyses and take initial steps with Anatel to assess the feasibility of the reorganization proposal and the conditions to which it may be subjected. The decision whether or not to proceed with the proposal will take into account the results of our analyses and Anatel’s response, among other factors.


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  Our Services We offer our customers traditional pay-television services and programming, as well as new and advanced high bandwidth services such as our broadband Internet services and telephony (in partnership with Embratel) services. As an important part of our overall strategy, in 2006 we launched our triple-play, offering a bundle of cable television, broadband Internet and fixed line telephony services. We plan to continue to enhance and upgrade the services we offer by selectively adding new programming and more advanced products and services as they become available. As of December 31, 2012, we had 5.4 million pay-television subscribers, 5.5 million broadband Internet subscribersand approximately5.0 million fixed line telephony (in partnership with Embratel) subscribers, as compared to 4.7 million pay-television subscribers, 4.3 million broadband Internet subscribers and 3.8 million fixed line telephony subscribers as of December 31, 2011. The table below shows the amount and percentage of our gross revenue that each of our pay-television and broadband Internet subscriptions, sign-on and hook-up fees and other services, which includes fixed line telephony (in partnership with Embratel) services and pay-per-view, accounted for the years ended December 31, 2012, 2011, 2010, 2009 and 2008: Year Ended December 31,2012

   

   2011

   

   2010

   2009

   2008(R$ in thousands)

   %

   

   (R$ in thousands)

   %

   

   (R$ in thousands)

   %

   (R$ in thousands)

   %

   (R$ in thousands)

   %Gross revenue:Pay – television,broadband internet and fixed line telephony subscriptions

   

   R$ 9,820,695

   98.8%

   

   R$ 8,245,511

   98.8%

   

   R$ 6,991,479

   98.4%

   R$ 5,964,335

   98.3%

   R$ 4,769,644

   98,3%Other

   

   117,297

   1.2%

   

   99,886

   1.2%

   

   110,109

   1.6%

   106,066

   1.7%

   83,111

   1.7%Total gross revenue

   

   R$ 9,937,992

   100%

   

   R$ 8,345,397

   100%

   

   R$ 7,101,588

   100%

   R$ 6,070,401

   100%

   R$ 4,852,755

   100%
 Pay-Television Currently, a significant portion of our revenues are derived from our operations related to providing pay-television services, including cable television and pay-per-view services. We offer our pay-television services through the “NET” brand name using our cable television network and, to a lesser extent, through MMDS. We operate in 131 locations in Brazil, including some of Brazil’s most populated metropolitan areas, such as São Paulo, Rio de Janeiro, Belo Horizonte, Porto Alegre, Recife, Brasília, Goiânia, Curitiba and Florianópolis. In order to attract and retain pay-television subscribers, we are committed to offering a broad variety of quality programming coupled with a range of programming packages. Our Programming Packages We offer our pay-television service through various programming packages that provide our customers with a variety of price points and channel selection. Our prices range from R$38.90 to R$269.90 per month. We divide our packages into three major categories: top, which includes the Total and Família packages; intermediate, which includes the Atualidade, Estilo and Diversão packages; and basic, which is represented by the Compacto package.


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 We offer digital cable services to our subscribers in 105 locations under the “NET Digital” brand name. Our digital cable services carry significantly more channels than our analog programming packages. In addition, digital cable allows for high-quality broadcasting and enables us to offer near video-on-demand, a service that offers movies at multiple times in short intervals. In December 2007, we introduced high-definition cable television services under the “NET Digital HD MAX” brand name. The Company ended 2012 with 30 new channels launched, including 17 of them in HD, the largest number of pay-television channels distributed in HD on the market. It is this new technological platform that has enabled NET to launch innovative products that transform the experience of watching TV in Brazil. Through NOW, a video service offered by NET, NET HD clients can watch their favorite shows at the time they want, through an interactive portal. Through NOW, it is possible to watch free channels of NET content and rent additional content, including the latest movie releases, by remote control and without leaving home. Our programming packages include the programming we purchase, as well as other channels that we are required to provide. These required channels include free broadcast television stations generally available in the service area in which a subscriber resides and government public service channels that are available nationwide. Pay-Per-View Alternatives In addition to the programming packages described above, we also offer pay-per-view alternatives. These include a variety of sporting events, musical concerts by national and international artists, and movies. The sporting events include broadcast rights to the Brazilian Soccer Championship and certain popular State Soccer Championships, such as the São Paulo Soccer Championship. Programming Sources We acquire our Brazilian and international programming content subject to agreements that we negotiate with a variety of programming suppliers. For more information about our arrangements with G2C Globosat Comercialização de Conteúdos S.A (“G2C”), see “Item 10. Additional Information—Material Contracts—G2C Programming Agreement.” Broadband Internet In April 2000, we launched NET Vírtua, which is, by number of subscribers, the largest broadband Internet service provider and the largest high-speed cable Internet access service provider in Brazil. As of December 31, 2012, our broadband Internet service was available in the 140 locations in Brazil, including São Paulo, Rio de Janeiro, Brasília, Belo Horizonte, Curitiba, Porto Alegre, Florianópolis, Campo Grande and Goiânia, serving 5.5 million residential subscribers. Until 2004, we offered broadband Internet service only to subscribers of our pay-television service, in accordance with regulations. During 2004, we acquired new licenses, which allow us to sell broadband Internet separately from other services. Since 2005, we have provided high-speed broadband Internet services, and in 2008, we increased the transmission speeds to 3Mbps, 6Mbps and 12Mbps. In 2009, we launched the “Internet Popular” broadband Internet package, offering transmission speed of 200Kbps. In 2010, we increased our transmission speeds to 10Mb, 20Mb, 50Mb and 100Mb. In 2012, NET Vírtua continued its performance in the broadband


segment, having gained the first position in the residential broadband among all fixed line operators in Brazil. NET continues to lead the growth of this market and connects more and more Brazilians with quality Internet and ultra-speed connections. We heavily invest in technology, innovation and network capacity to maintain that leadership position. As a pioneer in highspeed broadband in the country, NET currently offers connections of up to 100 Megabits per second in all regions where we operates. We are also a leader in Internet Popular, an initiative undertaken in partnership with state governments to offer broadband at affordable prices to increase digital inclusion in Brazil.


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 Our Service Packages As with our pay-television offerings, we tailor our Internet access offerings to our subscribers’ needs. Towards that end, we currently offer through NET Vírtua Internet connection speeds ranging from 512 Kbps to 100 Mbps with monthly subscription fees that range in price from R$25.00 to R$499.90 per month, as of December 31, 2012. Fixed Line Telephony In March 2006, we launched, in partnership with Embratel, our fixed line telephony services, NET Fone Via Embratel. NET Fone Via Embratel is primarily directed at the residential market and complements our existing pay-television and broadband Internet services by offering our subscribers an additional fixed line telephony services option. As of December 31, 2012, the service was available in 130 locations including in São Paulo, Rio de Janeiro, Porto Alegre, Curitiba, Florianópolis, Belo Horizonte and Brasília. We have maintained our strong growth and continued leadership in local fixed telephony portability with Net Fone via Embratel. In seven years of existence, Net Fone has reached 5 million customers, becoming the third largest player in fixed telephony in Brazil and positioning itself among the largest operators in the world in cable telephony.  Our Service Packages We currently offer through NET Fone Via Embratel a fixed line telephony service with a minimum monthly subscription fee from R$0 to R$69.90, as of December 31, 2012. Triple-Play In March 2006, we started to offer our triple-play packages, a combination of pay-television, broadband Internet and fixed line telephony services, which have been our primary service offerings directed at the residential market. As of December 31, 2012, triple-play packages were available in 115 locations, including in São Paulo, Rio de Janeiro, Porto Alegre, Curitiba, Florianópolis, Belo Horizonte and Brasília. In 2008, we launched a package that includes our fixed line telephony services, Internet at a speed of 100kbs and free broadcast television through cable under the “Net Fone.com” brand name. This package is targeted at a lower income segment of potential customers for whom pay-television and a high-speed broadband Internet are less important. Our Service Packages We currently offer various combinations of pay-television, broadband Internet and fixed line telephony services through our triple-play packages, with monthly subscription fees that range in price from R$49.70 to R$599.90 per month, as of December 31, 2012.


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 Operations Subscriber and Operational Data In building our network, we have focused primarily on high and middle income households, which have the largest percentage of disposable income available to purchase our services, particularly value-added services. The table below provides certain information about our network and subscribers. As of December 31,2012

   2011(in thousands)Total connected pay-television subscribers

   5,381

   4,730Total connected broadband Internet subscribers

   5,498

   4,264Total connected fixed line telephony subscribers

   4,977

   3,844Total kilometers of cable network

   99

   75Total homes passed

   16,888

   13,433
 Network Technology General Cable television utilizes a broadband network employing radio frequency transmission over fiber-optic and coaxial cable lines to transmit multiple channels carrying images, sound, voice and data between a central facility and the subscriber’s television set. A cable system consists of three major parts: ·A headend, which is the point from which a programming or other signal originates along a network. A headend typically includes a satellite dish, satellite receivers, modulators, amplifiers and video cassette playback machines. Our headends typically receive programming content via satellite and then amplify process and feed this signal into a distribution path that reaches the subscriber. ·A distribution network, which consists of fiber-optic cable and coaxial cable. A signal generally travels most of its distance over fiber-optic cable and is transferred to coaxial cable at a “node.” As it approaches the subscriber, the network carries the signal over progressively smaller cables, terminating with the drop cable that connects to the subscriber’s television receiver. ·A home terminal, or set-top box, which allows an individual subscriber to receive the cable signal. Cable Network Our current network architecture utilizes advanced technologies, including a significant use of fiber-optic cable. Our headends send content via light signals through our optical cable to an optical node where an optical receiver translates the signals into an electric signal that is transmitted over our coaxial cable. The coaxial cable is then divided into individual cables that terminate in individual subscriber households, each of which has been equipped with a set-top box and/or a cable modem. Our network consists of cables having bandwidth capacities of 450 MHz, 550 MHz, and 750 MHz or above. Most of our network has a capacity of at least 550 MHz. This


capacity allows subscribers to access numerous premium services, including pay-per-view services, digital cable, fixed line telephony (in partnership with Embratel) service and Internet access. As of December 31, 2012, our cable network totaled over 99,000 kilometers.


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 As of December 31, 2012, we had coded, or “scrambled,” the signal of almost 100% of the homes we passed, with the objective of reducing piracy. As of December 31, 2012, we had activated two-way or bi-directional technology for most of our 16.9 million homes passed. This technology permits us to offer broadband Internet and fixed line telephony services. Bi-directionality also supports our interactive services by allowing the subscriber to use their remote control to request programming from, and to respond to, the cable operator and allowing a cable operator to transmit to a subscriber specific programs the subscriber has ordered. The architecture allows for future migration to 250 to 500 homes per fiber node design and is designed to create a platform to support services such as pay-per-view television, near video-on-demand and video-on-demand. The platform may be used to support additional services as they become commercially viable and is already being used to provide broadband Internet service through NET Vírtua and fixed line telephony service through NET Fone Via Embratel. In 2010, we invested in certain network improvements, mainly splitting the fiber nodes, so that each node covers less homes, which allows us to provide our customers higher broadband Internet speeds. A substantial portion of our network consists of aerial cables (as opposed to underground cables) often strung on electrical utility poles. We gain access to the utility poles by pole attachment rental agreements with local electrical utilities, which are generally required to provide us this access for a negotiated fee. In Belo Horizonte, our cable network incorporates fiber-optic trunk line distribution capacity leased from Telemar Norte Leste S.A., or Telemar, one of the three Brazilian fixed line telephone companies. We are required to pay Telemar a monthly fee in Belo Horizonte under this lease. We believe that using aerial cables makes outages easier to locate and repair. The most frequent problems we have experienced with our network relate to damage due to automobile accidents in urban areas. We maintain our network by employing a maintenance crew, as of December 31, 2012, of 7,434 employees, as well as by employing independent contractors. MMDS In addition to our traditional cable network, we also use our MMDS technology in Recife, Porto Alegre and Curitiba, cities with 24,513 subscribers as of December 31, 2012. MMDS is a microwave transmission system whereby programming is sent by microwave transmitters from an antenna located on a tower or a building to a small receiving antenna located at a subscriber’s premises where the encoded microwave signals are decoded. Customer Care Customer Service and Management of Churn We believe that, by continuing to focus on customer service, we will be able to maintain our low churn rate and limit bad debt expense. We calculate churn by taking the total number of net disconnected subscribers for a period as a percentage of the average number of paying subscribers for the same period. We include as disconnected only those subscribers whose payment has been in


arrears for more than 30 days. When a subscriber becomes reconnected, that subscriber is netted against the number of disconnected subscribers in that period. Historically, our annual churn rate for pay television has been in the range of approximately 13.0% to 16.0% since 2006. In order to maintain low levels of bad debt, we have adopted a past due disconnection policy whereby we temporarily block the signal of subscribers whose payments are past due and, if the subscriber continues to fail to make payment, we collect the subscriber’s set-top box.


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 Our annual bad debt expense, as a percentage of net sales, has been stable since 2010 with a small increase in 2012, as set forth in the table below: Year

   Bad Debt Expenses as a Percentage of Net Sales2012

   1.3%2011

   0.7%2010

   0.8%
  We manage five large call centers and various smaller call centers and outsource the operation of our call centers to third parties. TNL Contax S.A. and Tivit S.A are the major customer service suppliers to whom we have outsourced the operation of several of our large call centers. We require that the operators of our call centers comply with high standards for service quality. Sales and Marketing We have a centralized sales and marketing team responsible for overseeing our sales and marketing. In addition, we have marketing specialists dedicated specifically to each region and committed to building a detailed action plan for each of our main operations. For each region, we continuously monitor subscriber perception, competition, pricing and service preferences to increase our responsiveness to subscribers. Among our long-term marketing objectives is to increase our market penetration, subscriber loyalty and our growth in revenue per household. Over time, we expect our subscribers to view their cable connection as the best “pipeline” to the home. To achieve this objective, we are pursuing the following strategies: ·introducing new value-added services; ·designing offerings to enable greater opportunities for subscriber entertainment choices; ·packaging product offerings to promote the sale of premium services and niche programming and to provide attractive price/value options; ·targeting marketing opportunities based on demographic data; and ·employing the “NET”, “NET Vírtua”, “NET Digital”, “NET Digital HD MAX” and “NET Fone Via Embratel” brand names to promote subscriber awareness and loyalty. To increase subscriber penetration and to introduce more value added services to our customers, we use coordinated marketing techniques, including telemarketing, the Internet, door-to-door sales, direct mail, retail sales, condominium sales channels and outsourced customer


service centers. Each of these marketing techniques focuses on minimizing our cost of acquisition of new customers.


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 The Social Responsibility Project In 2012, we continued our social responsibility initiatives, further underlining our commitment to education. We continued to improve“NET Educação”,a free website which promotes more collaboration and interaction among Internet users, and offers new content to support the teaching and learning process. We launched the “1st Cultural CompetitionEduconex@o2012- Social Participation,” inviting groups of students and teachers to produce videos focusing on the participation of youth in society. We also invested in teacher training through a distance course named“Educonex@o” ,improving the training of professors in the use of technology in the classroom.Educonexão registered584,613 page views between January and December 2012. We also celebrated three years of the“NET Comunidade” project.The project’s objectives include encouraging the community to play an active role in social transformation and creating the conditions necessary for the population to develop as individuals, professionals and citizens.The project offers a one year “Repórter Comunidade” (Community Reporter) program that providestraining in communication channels and technology, workshops and other activities mediated by social educators. The NET Comunidade project runs in the neighborhoods of Cambuci, in São Paulo, and Vila União, in Campinas.We also consolidated our “Programa Voluntariado” (Volunteer Program), which prioritizes initiatives focused on education. Competition In addition to other pay-television providers, such as DTH, we compete with free broadcast television and other sources of home entertainment generally, including the Internet. We compete with these sources on the basis of price, service offerings and service reliability. Furthermore, new sources of competition have emerged as a result of changing technology and approval by regulatory authorities, which allowed regional telecommunication companies to merge and telecommunications companies to enter the cable television market. In 2007, Anatel approved the acquisition of cable companies by two major telecommunications companies, which has increased competition, particularly in the triple-play market. In 2008, a telecommunication company started to offer triple-play services through fiber network for a limited number of households in certain districts in the city of São Paulo. In addition, the availability of bundled services offerings and of wireless offerings, whether as a single offering or as part of a bundle, has intensified competition. On November 8, 2012, Anatel implemented theGeneral Competition Plan(Plano Geral de Metas da Competição) – PGMC, which proposed measures to, among other things, (i) promote competition among participants in the Brazilian telecommunications market; (ii) diversify the telecommunications services offered, intending to improve the supply of these services to consumers, in terms of price and quality standards; and (iii) establish a summary proceeding for conflicts among telecommunication entities related to competition matters. Anatel may impose the following measures on any company that, individually or together with its related parties, could have significant influence in setting prices for telecommunication services in a particular geographic area of Brazil: ·requirements for additional transparency; ·parameters requiring isonomic and non-discriminatory treatment; ·price controls on wholesale products;


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 ·obligations to provide network access or specific network resources; ·obligations to offer wholesale products under specified conditions; ·obligations to reform specific market failures or to meet regulatory or legal standards; and ·obligations to separate accounting, administrative or organizational divisions. Anatel periodically evaluates the level of competition in different geographic markets, and it will impose such measures only where it determines greater competition is necessary. We do not know if measures such as those described above could be or will be imposed upon us. We expect that competition will continue to intensify in the future, which may negatively affect the growth of revenue generating units or increase churn. In addition, to the extent we expand into additional services, such as interactive services, we will face competition from other providers of each type of service. The following sections describe key sources of competition to our business: Broadcast Television Free broadcast television remains the dominant media provider in Brazil. Brazil represents the largest free broadcast television market in Latin America, with approximately 59.4 million television households as of December 31, 2011, the most recent available data, according to www.teleco.com.br, a website that furnishes telecommunications data. The majority of free television services are broadcast by six privately-owned national broadcast television networks and a government-owned national public television network. These national television networks utilize one or more satellites to retransmit their signals. DTH DTH systems use medium- or high-power satellites to deliver signals to satellite dish antennas installed at residences, hotels and other buildings. DTH systems are less capital intensive than building cable television networks and, until September 2011, different from cable, only DTH had a nation-wide license, allowing DHT operators to offer services more broadly within Brazil. This has changed through Law No. 12,485, as regulated by Resolutions No. 581 and 582 issued by Anatel, which has granted authorization of SEAC, according to which all pay television companies operate under one nationwide license, regardless of technology. See “—Licenses”. Even before the new law, this competitive advantage was offset by several factors. Among these is that DTH tends to entail higher monthly subscription fees than cable. In addition, DTH requires the subscriber to own a special receiver targeted at the satellite, which is not always possible in densely populated areas. Currently, we compete with four DTH operators in all cities where we offer our services. MMDS Pay-television utilizing MMDS technology became available in Brazil in 1991, initially targeting the largest urban areas of the country. Establishing an MMDS system is less capital intensive than constructing a cable television network. While this cost differential may give an MMDS operator some competitive advantage in providing pay-television services, this advantage may be offset by several factors. Among these is that MMDS generally requires a clear line-of-sight because microwave signals will not pass


through obstructions. MMDS, therefore, can generally not be received in “shadowed” areas where microwave transmission is blocked by terrain, buildings or other physical objects, though sometimes blocked signals can be retransmitted by low-power repeaters that can send an otherwise blocked signal over a limited area. Moreover, MMDS has the disadvantages of limited channel capacity, lower reliability and lower quality of signal. In key cities such as São Paulo, Rio de Janeiro and Belo Horizonte, where there are a high concentration of tall buildings and topographical barriers, MMDS is at a disadvantage to cable.


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 Broadband Internet Broadband Internet access is currently being offered in Brazil primarily by telecommunications companies and cable television operators. Cable technology has a competitive advantage over asymmetric digital subscriber line, or ADSL, technology. In addition to higher speeds, broadband cable modem subscribers can download and upload at the same speed while ADSL subscribers experience asymmetrical speeds between download and upload. Fixed Line and Wireless Telephony Fixed line telephony services are currently being offered in Brazil primarily by fixed line and wireless telecommunications companies. In addition, our fixed line telephony (in partnership with Embratel) product competes with other voice-over-Internet protocol providers. Licenses On September 12, 2011, Law No. 12,485 was enacted, which provides for SEAC and regulates the pay-television industry, regardless of the technology used and provides for licenses for indefinite periods of use.As established by Law No. 12,485, Anatel regulates SEAC by means of Resolutions No. 581 and 582, issued on March 26, 2012. InNovember 2012, Anatel authorized us to provide SEAC by converting existing cable and MMDs licenses for the new service. The authorization of SEAC is nationwide, which permits us to operate in any part of Brazil. Description of Property We own most of the property and equipment essential to our operations. As of December 31, 2012, our major property and equipment items were: ·coaxial cable and fiber optic cable; ·set-top boxes and cable modems for subscribers’ homes, including digital and high-definition set-top boxes; ·electronic transmission, receiving, processing and distribution equipment; ·microwave equipment; and ·antenas. We lease some of our distribution facilities from third parties. These facilities include space on utility poles and underground ducts where we place portions of our cable systems, roof rights and land leases which we use to place some of our hub sites and headends and certain portions of the fiber-optic network of the Minas Gerais state Telecommunication Company.


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 We lease most of our office space, including our headquarters located in São Paulo, which consists of approximately 3,200 square meters, and data processing equipment from third parties. We generally own our service vehicles, data processing facilities and test equipment. We anticipate that, upon the expiration of any of our current leasing arrangements, we will be able to renew those arrangements or enter into alternative leasing arrangements at comparable costs. Regulation Pay-television Services - New Legal Framework  In 2011, the Brazilian Congress published Law No. 12,485, which established a new legal framework for pay television in Brazil. This new law creates the SEAC, allowing pay television companies to provide their services over any technology or communication protocols, including CATV, MMDS, DTH, TVA, among others, under a single license.  The changes in the legal framework include:  (i) opening of the pay television market to new competitors; telephone companies (STFC providers) are now allowed to provide CATV services;(ii) partial withdrawal of the previous pay television regulation, resulting in CATV concession contracts remaining in force until the expiration of the terms, unless the CATV provider decides to migrate to the new service; NET has already applied and converted all of its previous cable TV licenses to SEAC licenses; (iii) new  licenses for the old single technology services (CATV, DTH, MMDS and TVA) will no longer be granted; (iv) current pay television providers shall comply with new programming and packaging to include specific Brazilian content; (v) creation of quotas of Brazilian content (a mechanism to promote the production of national content); (vi) the division of the pay television industry into four sectors: producer, programmer, “channel packer” and distributor; and; (vii) the new SEAC providers will have “must carry” obligations, providing access free of charge to basic channels (“must carry channels”) for:  ·channels for the distribution of programming by local uncodified VHF and UHF broadcast stations; ·transmitting the sessions and proceedings of state and municipal legislatures; ·transmitting the sessions and proceedings of the federal House of Representatives; ·transmitting the sessions and proceedings of the federal Senate; ·use by local universities; ·use by federal, state and municipal bodies for cultural and educational purposes; ·use by local non-profit private institutions; ·use by the Brazilian Supreme Court; ·use by the official broadcaster of the Executive Branch; ·use by the Executive Branch as a tool to universalize Constitutional Rights; and ·use by federal government to promote citizenship.  SEAC providers are not permitted to offer commercial advertising on the must carry channels.  In March 2012, Anatel issued Resolution No. 581, which changed a number of rules applicable to cable television in Brazil. The new rules state that: (i) SEAC may only be provided by Brazilian companies with domestic headquarters; (ii) SEAC providers should not be limited in the number, duration or geographic scope of the authorizations which they may be granted; (iii) Companies that hold licenses to the old pay television services (TVC, MMDS, DTH and TVA), directly or through subsidiaries, parent companies or affiliates, will not be allowed to obtain SEAC authorization unless the conversion of such licenses to the new service is made; (iv) the deadline for the start of commercial operation of the new service will be up to 18 months from


the date of publication by Anatel granting administrative action in the Official Gazette; and (v) the SEAC provider may not (a) impose conditions that result in participation in the control of or require any financial interest in the entity providing programming or “content packaging”, (b) compel the programming or “content packaging” entity to provide for exclusivity rights as a condition to the programming agreement. (c) restrict the unaffiliated programming or “content packaging” entity’s market competition capacity, or (d) acquire programming produced outside of Brazil only through a company located in Brazil.


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  Resolution No. 581 also imposes restrictions on the number of areas that can be served by a single cable television system operator, including its affiliates, and such operator may only hold licenses with respect to (i) a maximum of seven areas with a population of 700,000 and above and (ii) a maximum of 12 areas with a population of between 300,000 and 700,000. The restrictions only apply to areas in which the cable system operator, including its affiliates, faces no competition from other pay-television services, excluding services that utilize satellites to transmit their signal. Anatel has the ability to alter or eliminate these ownership restrictions. Affiliate mean an entity holds at least 20% of the voting capital of another legal entity, or any of two legal entities with common ownership of at least 20% of their respective voting capital.  Anatel Resolution No. 411, issued on July 14, 2005, and effective as of January 2006, established mandatory goals for pay-television services in Brazil known as the General Plan of Quality Goals for Pay-Television Services, or PGMQ. The PGMQ establishes a total of ten goals, which we are required to comply with the following goals which are divided into four different groups:  ·Service Quality Goals.  1.      Do not exceed certain ratio of total received complaints to total connected subscribers; 2.      Achieve certain level of total requested installations; and 3.      Not charging a certain percentage of subscribers 24 hours after a disconnection request.  ·Customer Service Goals.  1.      Respond to complaints from subscribers within 7 business days; 2.      Reduce subscriber wait time to less than 20 minutes at our customer relations departments; 3.      Achieve certain level of total received subscriber calls; and 4.      Respond to subscriber calls received at our call centers within 20 seconds.  ·Billing Goal.  1.Do not exceed certain levels of incorrect bills.  ·Service Continuity Goals.  1.      Solve any service interruption within 24 hours; and 2.      Solve subscriber requests for necessary equipment repairs within 24 hours.  In addition, if we do not comply with PGMQ goals, Anatel may impose on us several penalties, such as warnings, fines, temporary suspensions and revocation of our licenses. We have been in compliance with this resolution since it took effect in July 2006.


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  Anatel Resolution No. 488, issued on December 3, 2007, or Resolution 488, amended by Anatel Resolution No. 505 and effective as of June 2008, established the Administrative Act for the Protection of Pay-Television Subscribers (Regulamento de Proteção e Defesa dos Direitos dos Assinantes dos Serviços de Televisão por Assinatura). Among other things, Resolution 488:  ·Requires that we operate a toll free number for the submission of complaints; and ·Establishes the right of subscribers to suspend our services at no charge for up to 120 days every year.  Prior to the issuance of Anatel Resolution No. 488, a subscriber of our pay-television services was charged according to the number of outlets in each home. Effective June 6, 2008, pursuant to Anatel Resolution No. 488, Anatel prohibited pay-television service providers from charging subscribers for more than one outlet per household; on June 5, 2008, however, Anatel adopted Resolution No. 505 and suspended this prohibition under Resolution No. 488. In addition, on June 25, 2008, the 14th Federal District Court ruled that pay-television service providers could continue to charge customers for more than one outlet per household until Anatel approved a final resolution. In April 2009, Anatel enacted new rules prohibiting pay-television providers like us from charging subscribers for content through more than one outlet per household, and, in March 2010, Anatel clarified that subscription television operators could charge customers for the cost of equipment used in multiple outlets, including decoder rentals, leases and sales. However,Brazilian federal prosecutors, several consumer defense and protection associations and customers have brought legal challenges to these rules, claiming that pay-television operators cannot charge for multiple outlets or the rental of related equipment. We cannot predict the outcome of these proceedings, and adverse decisions could negatively affect our business, cash flows and results of operations.  MMDS Services  As a result of the creation of the SEAC under Law No. 12,485 and Anatel Resolution No. 581, only a SEAC license is required to provide pay television using MMDS technology.  Since their establishment in Brazil, MMDS services have been operated on two frequency ranges: 2,500-2,690 MHz and 2,170-2,182 MHz. On August 11, 2011, Anatel issued Resolution No. 544, which modified the frequency range between 2,170-2,182 MHz and 2,500-2,690MHz. Since February 2006,  the SCM Range has not been available for MMDS services. Instead, the SCM Range has been used primarily for multimedia communications services, or SCM. Authorizations for the operation of MMDS services on the SCM Range that were granted by Anatel prior to February 13, 2006 will remain valid until their respective expiration dates. Our current MMDS authorizations expire on February 16, 2024.  Broadband Services  On October 31, 2011, Anatel issued Resolution No. 574 approving the Regulation for the Management of Quality of Service for Multimedia Communications (RGQ-SCM), which established quality standards for broadband services. The quality goals are only required for providers with more than 50,000 accesses in service. All SCM providers are required to send indicator data to Anatel and providers that fail to achieve the quality goals will be subject to


sanctions. The quality goals are divided into three groups: (a) Subscriber Reaction Indicators; (b) Network Indicators; and (c) Customer Service Indicators.


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  After SCM providers should send indicator data to Anatel ten months from the publication of Resolution No. 574. The quality goals became mandatory in the thirteenth month after thepublication of the Ordinance, in November 2012. Cable-Related Services General Prior to the enactment of Amendment No. 8 in 1995, Article 21 of the Federal Constitution required the Brazilian government to operate directly, or through concession, permissions or authorizations granted to companies whose shares were controlled by the Brazilian government, all telephone, telegraph, data transmission or other public telecommunications services. This constitutional requirement was the basis for the establishment of the state-owned telephone monopoly, Telebrás, which held controlling interests in 27 regional telephone operating companies. With the adoption of Amendment No. 8, Article 21 was modified to permit the Brazilian government to operate telecommunications services either, directly or through authorizations, concessions or permissions granted to private entities. Since the enactment of Amendment No. 8, the government has implemented structural reform in the telecommunications sector. The main purpose of this reform was the transfer of the control and operation of the services from the state to private companies. On July 16, 1997, Congress approved Law No. 9,472, known as the General Telecommunications Law, or LGT, which provided the legislative framework and is the basis for telecommunications regulation in Brazil. The LGT governs the regulation of all telecommunications services, with the exception of radio and television broadcasting services. The adoption of the LGT, as well as the privatization of switched fixed telephone and cellular services, has led to sweeping changes in the operating, regulatory and competitive environments of the Brazilian telecommunications sector. The changes include: (i) the establishment of an independent regulator, Anatel, and the development and implementation of comprehensive regulation for the telecommunications sector; (ii) the breakup of the previously existing state-owned telephone monopoly; and (iii) the introduction of competition in the rendering of all telecommunications services. The Telecommunications Sector As part of the restructuring and privatization of the state-owned telecommunications companies, the Brazilian government approved Decree No. 2,534 of April 2, 1998, which established the General Plan of Concessions, also known asPlano Geral de Outorgas, or PGO, for switched fixed telephone carriers. The PGO divided Brazil into four geographic regions, each of which had two switched fixed telephone carriers, one of which held a license to operate a telephone network and the other holding an authorization to do so. The passage of the PGO was the first step toward increased competition within the telecommunications sector. With Anatel Resolution No. 283, which went into effect on November 29, 2001, Anatel began auctioning off new licenses for the rendering of switched fixed telephone services. This was the second step toward increased competition within the telecommunications sector.


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 With respect to cable television services, although the PGO permitted the switched fixed telephone operators to provide other telecommunications services, they were and remain subject to certain limitations. For instance, the license agreement among the Federal Government and the local fixed line telephone carriers prohibits such carriers from providing cable television services or owning interests in cable television carriers in the same switched fixed telephone services license areas. According to Law No. 8,977, the carriers may only provide such cable television services where there is a clear of lack of interest by other private companies to provide such services. In December 2008, Anatel approved a new PGO, allowing the merger of two local fixed line telephone carriers. In order to implement the PGO, Decree No. 6,654 revoked Decree No. 2,534 and brought important updates regarding the business organization of the concessionaires and the geographical basis of their performances, including the removal of impediments to the transfer of control or concession involving concessionaires in distinct regions of the PGO. High-Speed Cable Broadband Internet Services Law No. 8,977, Decree No. 2,206 and Anatel Resolution No. 190, issued in November 1999, authorize cable television operators such as Net Serviços to: ·furnish video and audio signals on their cable networks; and ·utilize their networks to provide value-added services, including high-speed access to Internet service providers that enable the transmission of meteorological, banking, financial, cultural, price and other data. Multimedia Communications Services Anatel issued the SCM Regulation, Resolution No. 272 of August 9, 2001, which permits the offering of capacity for transmission, emission and reception of multimedia information in the format of audio signals, video, data, voice and other sounds, images, texts and other information of any nature, to subscribers within the same area of service, using any means. The SCM is a fixed telecommunication service rendered for the collective interest on a domestic or international basis, excluding fixed telephony, mass electronic communication services (cable television, MMDS and DTH), and broadcast service. According to Resolution No. 272, SCM providers can offer their services to any residential subscriber. Therefore, cable television operators could request an Anatel authorization to offer SCM and then offer high-speed cable broadband Internet service, not only to their cable television subscribers, but to any user of this service located in the licensed area of the cable television operator. Statutory Law No. 12,485/2011 On September 12, 2011, Anatel enacted Law No. 12,485, which provides for SEAC and regulates the pay-television industry, regardless of the technology used. Prior its ratification, licenses were renewed automatically for successive periods of 15 years, provided that the conditions were met by licensee, but are currently being issued for an indefinite period of use.  Under Law No. 12,485, no new television service licenses, authorizations for DTH, MMDS and Pay Television Special Service shall be granted. The new service model only allows SEAC. Companies have the option to keep existing authorizations and concessions up to expiration thereof or can migrate immediately to the new service.


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 In addition, the new lawintroduced a new business model that allows the controlof SEAC providers to be held by foreign controlled entitiesand participation of telecommunication companies in the referred to industry and partially revoked Law No. 8,977/95, which regulated cable television services. The newly created business model divides the value chain between production and distribution, whereby companies producing television program content may not distribute them and distribution companies may not produce television program content. The referred to law also sets forth the minimum weekly television program content produced by independent Brazilian companies (not related to broadcasting companies), and the period of time each pay television channel must broadcast as primetime viewing, as well as the minimum number of channels belonging to Brazilian independent broadcasting companies that should be included in packages offered to pay television customers.  As a result of such rules, certain rights of Grupo Globo were amended in the new shareholders’ agreement entered into by América Móvil and Grupo Globo. Article 42 of Law No. 12,485 provided that both Anatel and theAgência National do Cinema(“ANCINE”) should enact, within their competence, regulations related to the SEAC and the pay-television industry. Pursuant to Article 42, Anatel enacted Resolutions No. 581 and Ancine enacted Normative Instruction No. 100. Resolution No. 581 approved the Conditional Access Service (“SEAC”) Regulation. SEAC changes the framework for pay-television services by unifying the rules for similar services, which were differentiated by technology, e.g. satellite, cable and microwave. Regulation No. 581 covers the cable TV service (“TVC”), the Multichannel Multipoint Distribution Services (“MMDS”), the Television and Audio Signal Broadcasting to Subscribers via Satellite Services (“DTH”) and Special Service Pay-television (“TVA”).  As a result of the creation of SEAC, Anatel expects a significantly increase in the number of subscribers. It is also important to note that Law No. 12,485/11 ended the restrictions on foreign capital to provide such services and we expect this to potentially increase in the number of competitors in the Brazilian market.  ANCINE, on the other hand, enacted Instruction No. 100, which promotes the presence of more national and independent content in pay-television channels, diversification of production and articulation of Brazilian companies that operate in the various links in the supply chain of the sector.  Such Regulation established the decrease of the time devoted to commercials on Pay-television channels, the existence of more Brazilian journalism channels in each channel package and the obligation of carriers to provide clear information on which channels are part of each package and on the full programming to be aired on every channel. Legal Proceedings We are party to several taxes, civil and labor proceedings, both administrative and judicial, arising out of our regular course of business. While it is impossible to determine with certainty the ultimate outcome of these matters, management has established reserves when it can reasonably estimate probable losses based on its analysis of the pending disputes and on the opinion of its legal counsel. Total provision for losses with respect to the tax, civil and labor / social security proceedings to which we are a party decreased from R$551.3 million as of December 31, 2011 to R$375.8 million as of December 31, 2012. The table below sets forth the provision recorded for such administrative and judicial proceedings as of December 31, 2012:


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 (R$ in thousands)Tax matters

   237,486Labor and social security related related matters

   64,609Civil related matters

   73,658Total

   375,753
 Out of the R$375.8 million of provision listed above, R$219.0 million is currently being disputed in court proceedings and R$156.8 million relates to administrative proceedings which have been brought against us and tax provisions. As of December 31, 2012, we have made judicial deposits in an aggregate amount of R$123.4 million related to such proceedings and disputes. Administrative tax proceedings and tax provisions IOF We and our subsidiaries have centralized cash management and cash transfers made under a current intercompany account. The Federal Revenue Service may deem such transfers to be inter-company loans. In the event such transfers are deemed to be inter-company loans, we may be subject to Financial Transactions Tax,Imposto sobre Operações Financeiras, or IOF, on the amount of the loans. IOF applies to loans between non-financial entities at a maximum rate of 1.5% per year where the principal amount and the term for repayment is fixed, and at a daily rate of 0.0041% on the outstanding balance, without limit on the total amount of tax payable, if the principal amount of the loan is not fixed. We have a provision in the amount of R$101.8 million with respect to the IOF, as of December 31, 2012. If we are assessed IOF on the transfers by the Secretariat of Federal Internal Revenue, the assessment could materially and adversely affect our cash flows. IRPJ and CSLL In 2007, Net Rio received a notice from the Federal Revenue Service claiming that Net Rio failed to submit adequate documentation supporting certain expenses. The amount in question amounted to R$54.3 million as of December 31, 2012 (R$53.2 million as of December 31, 2011). We have been advised by external counsel that these expenses were incurred in accordance with applicable tax legislation, and we continue to defend our position. In December 2009, Net São Paulo received a tax-deficiency notice from the Federal Revenue Service in the total amount of R$547.3 million alleging that we had improperly recognized tax credits related to goodwill between 2004 and 2008. By decision of the lower court in October 2010, the amounts were reduced to R$274.1 million (IRPJ) and R$97.8 million (CSLL) but the alleged improper recognition of tax credits with respect to goodwill was upheld. Based on analysis performed by legal counsel, we determined that a loss is possible. In October, 2010, Net São Paulo appealed this decision. In November 2012, the Board of Tax Appeals dismissed the appeal filed by Net São Paulo. We intend to present another appeal to the Superior Board of Tax Appeals. As of December 31, 2012, these claims totaled R$328.2 million (IRPJ) and R$117.1 million (CSLL). In 2012, we received a tax assessment in the amount of R$75.8 million (income tax) and R$25.7 million (social contribution) issued by the Federal Revenue Service. The tax assessment questioned part of the expenses considered as deductible in our calculation of income tax and social contribution bases in the period between 2007 and 2008 related to our subsidiaries Net Belo Horizonte Ltda. and Net Rio Ltda. We filed a defense in the lower administrative court and a decision is pending. We believe that these expenses are deductible in accordance with relevant tax law, and we intend to vigorously defend our position.


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 ISS In 2010, the tax authority of the City of Santo André issued a tax assessment against us claiming that cable TV services must be classified as public entertainment services and are therefore subject to ISS. The amount of this claim at December 31, 2012 was R$135.6 million (R$127.3 million on December 31, 2011).  We have been advised by external counsel thatservices provided by cable TV companies should be classified as communication services instead of public entertainment services,and we continue to defend our position. ICMS In 2011, we were assessed by the Secretary of the Treasury of the State of São Paulo for allegedly failing to include revenues from the rental of equipments in the ICMS tax base after losing the benefit of a reduced ICMS tax base. The amount of this assessment at December 31, 2012 was R$274.2 million. The tax authority claims during the period from January 2008 to November 2009 we should have paid the ICMS on pay-television services revenues at a rate of 25% instead of the rate of 10% actually applied by us. In the tax authority’s view, we lost the rate reduction benefit allowed by ICMS Agreement No. 57/99 because we did not include “locação de equipamento” (rental of equipment) in our revenues. We are supported by the Superior Court of Justice interpretation that the revenues known as “locação de equipamento” are not related to pay-television services and, therefore, this revenue is not affected by changes to the ICMS tax base. In February, 2012, the lower administrative court decided to uphold the tax assessment notices. Net Serviços appealed this decision and in November 2012, the State Board of Tax Appeals (Tribunal de Impostos e Taxas) dismissed our appeal. In December 2012, we presented another appeal to the State Superior Board of Tax Appeals (Câmara Superior de Recursos Fiscais) and the decision is pending. We believe the probability of a loss is possible. Certain of our subsidiaries are contesting the ICMS tax rate levied on access provider revenue, discounts and cancellations, loss of agreement, publicity and other revenues for which we have provisioned R$89.8million as of December 31, 2012 (R$146.5 million as of December 31, 2011). In September 2012, the Company entered into an agreement to settle the ICMS tax on access provider revenue in the State of Espírito Santo in the amount of R$11.6 million. In connection with the settlement agreement, the Company reversed an allowance of R$5.5 million against income for the year.  Because of favorable outcomes in contingencies involving ICMS during the year ended December 31, 2012, the Company reversed provisions of R$34.9 (R$30.5 in December 31, 2011). On March 5, 2013, Net São Paulo received an assessment from the State Tax Authority of the State of São Paulo, which contends that Net São Paulo no longer has the tax benefit allowing it to reduce its ICMS tax basis. The tax authority claimed that Net São Paulo could not exclude certain revenues when calculating the applicable ICMS between January 5, 2010 and May 27, 2011, amounting to R$83.1 million. Our external counsel has advised us that the probability of loss in this matter is possible.


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 Other In addition to the administrative tax proceedings discussed above, we and our subsidiaries are involved in administrative tax proceedings relating to, among other things: (i) tax assessment notices from theInstituto Nacional do Seguro Social, the Social Security National Institute, alleging amounts owed relating to social contributions; (ii) additional amounts allegedly owed with respect to income tax, including the withholding of income tax on the Multicanal Notes and the Net Sul Floating Rate Notes, both of which have been fully repaid; (iii) additional amounts allegedly owed relating to IRPJ and CSLL; and (iv) amounts allegedly due relating toContribuição ao Programa de Integração Social, or PIS, andContribuição para Financiamento da Seguridade Social, or COFINS. We do not expect losses from any of these proceedings, individually or in the aggregate, to have a material adverse effect on our liquidity, our consolidated financial condition or our results of operations. Withholding tax (IRRF) on foreign currency bonds In connection with the restructuring of debt in foreign currency concluded in 2003, the Senior Notes and Floating Rate Notes that the Company issued in the past were not subject to IRRF and IOF, as long as the average term is not less than 96 months. As a result of the fact that some noteholders exercised their rights to have their notes repurchased prior to the end of this 96-month-period, we had, until the last quarter of 2012, a provision related to such taxes. We had a favorable outcome in contingencies involving IRRF in the last quarter of 2012, so we reversed the full amount of R$160.8 million recorded against finance results. Judicial Tax Proceedings Shadow tax Since 1999, many Brazilian municipalities, which currently represent approximately 66% of our homes passed, passed legislation imposing a tax on the use of public thoroughfares, including the installation and passage of cables. This municipal tax is assessed per meter of cable installed in the relevant municipality and the tax rate itself varies widely by municipality. The tax generally applies to power companies and telecommunication companies, among others. We have filed lawsuits in each of these municipalities to challenge the constitutionality and legality of this tax. In these lawsuits, we argue that (i) the tax intrudes upon the exclusive authority of the Brazilian federal government to legislate on telecommunications; and (ii) the legal nature of the tax is not that of a public price, fee or contribution, as defined under Brazilian law. Furthermore, we believe the shadow tax is unconstitutional since it is not included in the list of taxes within the jurisdictional authority of municipalities, as established by the Brazilian federal constitution. In Rio de Janeiro, we won our case in the lower court. However, this decision was reversed on appeal. A decision on our appeal is pending at the higher court. On March 3, 2010, the Municipality of Rio de Janeiro imposed tax assessments of R$4.5 million against Net Rio, charging the shadow tax from 2001 through 2009. Net Rio filed its defense in the lower administrative court and a decision is pending. This charge regards the two lawsuits filed by TELCOMP (Associação Brasileira das Prestadoras de Serviços de Telecomunicações Competitivas) of which Net Rio is a member. In both cases, TELCOMP obtained a favorable decision. Due to this fact we believe the probability of loss is remote. Therefore we have not made any provisions in connection with this tax assessment. In São Paulo, there have been three different decrees imposing a shadow tax. We filed an injunction in the lower court opposing the first decree and were met with an unfavorable decision.


We appealed and are currently awaiting the decision on our appeal. We also filed an injunction in the lower court against this second decree, where we received a favorable decision. We are currently awaiting the decision on the government’s appeal. The second decree, however, has been modified by a third decree. Thus, we filed another injunction in the lower court against this third decree, where we also received a favorable decision. In April 2006, we received an unfavorable decisionby a higher court. In November 2006, we appealed this decision and we are waiting for a new decision.


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 With respect to other municipalities, we have obtained six favorable decisions, which have been appealed by the municipalities, and four unfavorable decisions, which we have appealed. We filed eight lawsuits against nine different municipalities: Jacareí, Bragança Paulista, Limeira, Rio Claro, São Vicente, Taubaté, São José dos Campos and Sumaré. We obtained seven lower court favorable decisions. The municipalities have filed appeals at the higher court. With respect to Limeira, the lower court decision was unfavorable and we filed an appeal at the higher court.  With respect to Sumaré, the lower court has not issued its decision. With respect to São José dos Campos, in 2011, the higher court decided in our favor. The relevant municipalities did not appeal and the decisions are final. On November 20, 2012, the higher court gave a favorable decision to NET with respect to São Vicente. The Municipality of São Vicente did not appeal, and the decision is final. We have not made any provisions for the payment of the shadow tax. The tax varies in each municipality and it is calculated per meter of installed cable. We have approximately 24,000 kilometers of installed cable in the municipalities where this tax exists. If the courts rule that the collection of this tax by the municipalities is valid, the tax would have to be paid retroactively. In addition, if the municipalities which currently impose the tax were successful in implementing and collecting this tax, additional municipalities may seek to impose it. If our appeals fail and we are required to pay this tax, our operating results and cash flows would be materially and adversely affected. Other In addition to the judicial tax proceedings discussed above, we and our subsidiaries are involved in judicial tax proceedings relating to, among other things, theInstituto Nacional do Seguro Social, the Social Security National Institute, with respect to the collection and offsetting of social security contributions. We do not expect losses from any of these proceedings, individually or in the aggregate, to have a material adverse effect on our liquidity, our consolidated financial condition or our results of operations. Civil Claims Civil claims relate mainly to the following matters: service contract terminations, improper collection and negative credit reports, advertising disputes, channel availability, occupational accidents (own employees or outsourced staff), accidents involving third parties other than staff or service providers and claims objecting to certain items in standard contracts adopted by operators, in particular in relation to the increase in our monthly fees in April 1999, and disputes with government agencies. We have made judicial deposits in relation to civil cases that amounted to R$30.2 million at December 31, 2012 (R$30.0 million at December 31, 2011).


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 ECAD settlement In 1996, theEscritório Central de Arrecadação e Distribuição, or ECAD, filed separate lawsuits against each member of the Brazilian pay-television trade association, including separate suits against Net Serviços and each of our cable operating subsidiaries. ECAD is an organization which acts as the legal representative of artists and authors in collecting on behalf of and distributing to such artists and authors royalty payments resulting from the public broadcast of musical compositions in Brazil. ECAD’s complaints sought injunctions and damages on the grounds that the defendant pay-television companies had been using copyrighted musical material in their programming without prior approval and without paying royalties. As of December 31, 2012, all of these of lawsuits were pending and no final decision has been issued. Multiple outlets We are party to thirty two lawsuits filed by state public attorneys or by consumer protection organizations against the fees charged for more than one outlet per household on the grounds that such fee is abusive, unjustified and violates principles of the Brazilian Consumer Defense Code and Anatel Resolution No. 528. See “Risk Factors — Risks Related to Our Business — We may not be able to continue charging our customers for equipment costs related to more than one pay-television outlet per household.” Some of these lawsuits seek, in addition to a prohibition on charging fees, reimbursement for the amounts charged to subscribers for multiple outlets. We believe that our chances of loss are possible and we have not recorded a provision in connection with these proceedings. On March 19, 2010, Anatel issued an administrative resolution known as “Súmula 9” that authorizes rental charges for equipment used in multiple outlets but a definitive resolution has not been reached and the lawsuits remain outstanding. Management does not expect a material impact on the Company's operating activities as the current marketing model only charges the extra point for the rental of equipment and installation fee per point, under the regulations in force, but we cannot predict the outcome of such claims and therefore we are currently unable to assess the impact of Resolution No. 528 on our business, cash flows and results of operations. Labor Claims As of December 31, 2012, we were party to 2,861 labor proceedings filed by former employees involving total claims of R$64.6 million. These proceedings most frequently involve claims seeking additional compensation for employees performing high-risk activities and for overtime pay and commissions.  ITEM 4A.       UNRESOLVED STAFF COMMENTS. We have no unresolved comments from the staff of the U.S. Securities and Exchange Commission, or SEC. ITEM 5.          OPERATING AND FINANCIAL REVIEW AND PROSPECTS. The following discussion should be read in conjunction with ouraudited consolidated financial statements included elsewhere in this Form 20‐F. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors that include, but are not limited to, those set forth


under “Item 3. Key Information—Risk Factors” and elsewhere in this Form 20-F.The following discussion is organized as follows:


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 •

   Overview.This section provides a general description of our business, as well as recent developments we believe are important in understanding the results of operations and financial condition or in understanding anticipated future trends.•

   Critical Accounting Policies and Estimates.This section discusses accounting policies and estimates that require the use of assumptions that were uncertain at the time the estimate was made and that could have a material effect on our consolidated results of operations or financial condition if there were changes in the assumptions or if a different assumption was made. Our significant accounting policies, including those considered to be critical accounting policies and estimates, are summarized in Note 3 to the audited consolidated financial statements included elsewhere in this Form 20-F.•

   Financial Statement Presentation.This section provides a summary of how our operations are presented in the audited consolidated financial statements included elsewhere in this Form 20-F.•

   Results of Operations.This section provides an analysis of our results of operations for the years ended December 31, 2012, December 31, 2011 and December 31, 2010.•

   Liquidity and Capital Resources.This section provides an analysis of the our cash flows for the years ended December 31, 2012, December 31, 2011 and December 31, 2010, as well as a discussion of our outstanding debt and commitments that existed as of December 31, 2012. Included in the analysis of outstanding debt is a discussion of the amount of financial capacity available to fund our future commitments, as well as a discussion of other financing arrangements.•

   Brazilian Economic Environment.This section provides general overview of the Brazilian economic environment and effects of inflation and exchange rate fluctuations.
 Overview We are a leading multiservice company in the pay-television and broadband Internet industries in Brazil. Currently, we are the largest cable operator in Brazil and Latin America, based upon the number of subscribers and homes passed, according to Anatel. As of December 31, 2012, we had 5.4 million pay-television connected subscribers in 131 locations within Brazil, including São Paulo and Rio de Janeiro, the two largest Brazilian cities. We are the leading provider of high-speed cable modem Internet access in Brazil through our NET Vírtua service, which had 5.5 million subscribers as of December 31, 2012. We also provide fixed line telephony through our NET Fone Via Embratel service, which had approximately 5.0 million subscribers as of December 31, 2012. As of December 31, 2012, our advanced network of coaxial and fiber-optic cable covered over 99,000 kilometers and passed approximately 16.9 million homes. Most of our customers belong to high and middle income classes, which helps to keep bad debt expense at low levels. In 2012, we had gross revenue of R$9,938.0 million. We principally offer three services – pay-television, broadband Internet and fixed line telephony (in partnership with Embratel). We market our services separately, but we emphasize the “bundled” packages with multiple services and features. Historically, we have focused primarily on residential customers, while also selling pay-television, broadband Internet and networking and data services to commercial customers. Currently, our principal services include pay-television and


pay-per-view programming under the “NET” brand name, digital cable under the “NET Digital” brand name, high-definition cable television combined with digital video recorder under the “NET Digital HD MAX” brand name, broadband Internet service under the “NET Vírtua” brand name and fixed line telephony service under the “NET Fone Via Embratel” brand name.


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 Pay-television is our largest service in terms of revenues generated and, as of December 31, 2012, we had 5.4 million pay-television subscribers, of which approximately 80.2% subscribed to our digital cable service. Although providing pay-television services is competitive, we expect to continue to increase pay-television revenues through the offering of advanced digital cable services, as well as through price increases and digital cable subscriber growth. Our digital cable subscribers provide a broad base of potential customers for additional services. Pay-television programming costs represent a major component of our expenses and are expected to continue to increase, reflecting programming rate increases on existing services and subscriber growth. We do not expect that our pay-television service margins as a percentage of pay-television revenues will decline over the next few years. As of December 31, 2012, we had 5.5 million broadband Internet subscribers. We expect continued growth in residential broadband Internet subscribers and revenues for the foreseeable future; however, the rate of growth of both subscribers and revenues is expected to continue to slow over time as penetration increases in broadband Internet services. As of December 31, 2012, we had approximately 5.0 million residential fixed line telephony (in partnership with Embratel) subscribers. We expect increases in fixed line telephony subscribers and revenues for the foreseeable future; however, the rate of growth of both subscribers and revenues is expected to slow over time as fixed line telephony services already have high level of penetration and an increasing number of homes in Brazil is replacing their traditional telephone service with wireless phone service. The profitability of our telephony services business is sensitive to customer churn as acquisition costs for certain telephony customers, especially Net Fone.com customers, are recovered over a longer period than, for example, customers who subscribe to pay-television or multiple services. We face intense competition from a variety of alternative information and entertainment delivery sources, principally from other pay-television providers, including DTH providers and certain telecommunications companies, each of which offers a broad range of services. These services are also offered in bundles of pay-television, broadband Internet and fixed line telephony services similar to ours and, in certain cases, these offerings also include wireless services. The availability of these bundled service offerings and of wireless offerings, whether as a single offering or as part of a bundle, has intensified competition. We expect that competition will continue to intensify in the future, which may negatively affect the growth of revenue generating units or increase churn. By continuing to enhance our services with innovative offerings and continuing to focus on customer service, we believe we can distinguish our services from those of our competitors. We believe we continue to have adequate liquidity to meet our liquidity needs for the 2013. As of December 31, 2012, we had R$38.4 million of cash and cash equivalents. In 2013, we intend to maintain our subscriber growth, in terms of net additions, at the 2012 level.  Key factors that will influence our ability to achieve these objectives include: ·Competition. Our triple-play joint offering of pay-television, broadband Internet and fixed line telephony services face a growing number of competitors. We are pursuing a marketing strategy to attract and retain customers. We are working on developing new packages of bundled products to better match customers’ expectations and we are working to improve customer satisfaction.


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 ·Cost control. To maintain our profitability in the increasingly competitive Brazilian environment, we must continue to improve operating efficiency. We plan to do this by limiting operating costs, selling, general and administrative expenses and bad debt expenses. ·New opportunities. Our ability to expand our revenues will depend, in large part, on the success of our strategy for continued growth and increased triple-play (pay-television, broadband Internet and fixed line telephony-service provided in partnership with Embratel) sales. ·Brazilian economic conditions and level of disposable income. Pay-television is still seen in Brazil as a luxury product and faces strong competition from free broadcast television. Our ability to achieve incremental subscriber growth is dependent to a large extent on growth in Brazilians’ disposable income. If growth in Brazilians’ disposable income starts to decline, it may negatively impact our ability to gain new subscribers. ·Excellence. We are investing in improving our technological background and processes in order to provide higher quality services and satisfy our clients. Critical Accounting Policies and Estimates We prepared our consolidated financial statements as of and for the year ended December 31, 2012 in accordance with IFRS as issued by the IASB. The SEC considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations and if it requires significant judgments and estimates on behalf of the management in its application. The development and selection of these critical accounting policies have been determined and reviewed by our management. The following accounting policies are the most critical to us. For a summary of all of our significant accounting policies, including the critical accounting policies discussed below, see the Note 3 to our audited consolidated financial statements included elsewhere in this Form 20‐F. Deferred income taxes The amount of deferred income tax assets is reviewed at each reporting date and reduced by the amount that is no longer recoverable through estimates of future taxable income. Amounts reported involve considerable exercise of judgment by management and future taxable income may be higher or lower than the estimates considered when valuing a deferred tax asset. The Company offsets deferred tax assets and deferred tax liabilities if, and only if: (a) a legally enforceable right exists to set off current tax assets against current income tax liabilities, and (b) the deferred taxes assets and the deferred tax liabilities are related to the income tax charged by the same tax authority (i) in the same taxable entity; or (ii) in different taxable entities that intend to settle tax liabilities and tax assets on a net basis, or realize assets and settle liabilities simultaneously, in each future period in which it is expected that significant amounts of deferred tax assets or tax liabilities can be settled or recovered. Valuation of assets acquired and liabilities assumed in business combinations In recent years, we entered into certain business combinations. Under IFRS 3, we must allocate the cost of the acquired entity to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. Any excess of the cost of the acquired entity over the fair value of assets acquired and liabilities assumed is recorded as goodwill. We exercise significant judgment in identifying tangible and intangible assets and liabilities, valuing such assets and liabilities and determining their remaining useful lives. Management generally engages third party’s valuation consultants to assist in valuing the assets and liabilities. The valuation


assumptions include estimates of discounted cash flow and discount rates. The usage of alternative assumptions would result in different estimates of the value of assets acquired and liabilities assumed.


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 Test of impairment of non-financial assets We evaluate annually the carrying value of goodwill and indefinite-lived intangible assets using a consistent discounted cash flow model. This process involves significant judgmental assumptions and estimates about future cash flows, growth rates and discount rates. Weuse the discounted cash flow model, a technique that is widely used in the valuation of assets. The discount rate assumption is based on the weighted average cost of capital, or WACC. WACC was calculated based on a U.S. historical risk-free rate of 3.8% and a market risk premium of 5.8%, which is calculated as the difference between the return of the stock market and the risk-free rate, adjusted for a Brazilian risk premium of 2.0% and an inflation difference between the United States and Brazil of 2.9%, each for the year ended December 31, 2012. The weighted average cost of debt provided by the third parties, net of taxes was 8.5%, for the year ended December 31, 2012. The cost of equity plus the weighted average cost of debt provided by the third parties resulted in a WACC of 12.89% for the year ended December 31, 2012.The assumptions about future cash flows and growth rates are based on our budget and business plans, as approved by the board of directors, as well as on comparable market analyses. When evaluating whether goodwill is impaired, we compare the fair value of our business to our carrying amount, including goodwill. If our fair value exceeds our carrying amount, goodwill is not deemed impaired and the second step of the impairment test is not performed. If the carrying amount exceeds fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of goodwill with our carrying amount. If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to such excess. The implied fair value of goodwill is determined based on the fair value of our assets and liabilities as if we had been acquired in a business combination and the fair value was the purchase price paid to acquire our assets and liabilities. Our revenue and cost projections vary with the growth of the numbers of subscribers.  In 2011, we had negative net cash flow due to an increase in investments in several projects for expansion and network enhancements, in addition to the perpetual bonds settlement. In 2012, we also had negative net cash flow as a result of investments which was mainly allocated to customer installation, network expansion and improvements on technology. We use conservative assumptions for our long-term business plan, reflecting lower growth of our subscriber base compared to actual sales and household growth in recent periods. We believe that our business plan and impairment analysis are appropriate, even considering a competitive increase in the sector. We did not record an impairment charge for the year ended on December 31, 2012. Provisions We record provisions that involve considerable exercise of judgment by management in estimating tax contingencies and civil liability and labor claims that may be liable for payment in future years as a result of tax inspections by tax authorities. We are also subject to various claims, legal, civil and labor proceedings covering a wide range of issues that arise from the ordinary course of business. We record these liabilities when we determine, based on the opinion of our legal advisors, that losses are probable and can be reasonably estimated. Provisions are reviewed and adjusted to


consider changes in circumstances, such as the applicable limitation period, findings of tax inspections or additional exposures identified based on new issues or court rulings. Actual results may differ from estimates.


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 Financial Statement Presentation Sources of Revenues Monthly subscription fee revenues represent the dominant portion of our revenues. All of our revenues are denominated in Reais. Under Brazilian currency rules, our contracts with our current subscribers allow us to increase subscription fees once every 12 months and then only in proportion to the inflation rate measured based on the IGP-M. Our revenues include the following: ·Monthly subscription revenues.Monthly subscription revenues consist of monthly subscription fees paid by pay-television and broadband Internet subscribers, as well as our fixed line telephony (in partnership with Embratel) services. Subscription fees are recorded in the month the service is provided and fixed line telephony services are recorded in the month services are provided. ·Other services revenues.Other services revenues consist of sales of pay-per-view service, data transmission service, programming guide, technical support services, disconnection/reconnection services, fiber optic rental services, sign-on, hook-up fee and other services. Other services revenues are recorded in the month services are provided. The following are the main factors that have historically influenced our revenues: ·Subscriber base.Most of our revenues are recurring monthly revenues from our subscribers. Thus, key factors to maintaining profitability of our business include controlling the churn rate, increasing sales to existing customers, bundling our services and acquiring new customers. ·Subscription fee levels.Our strategy is to maintain competitive prices compared to our main competitors and at the same time increase average revenue per user by providing bundled products to our premium clients. ·Mix of subscriber base.Historically we have focused on high and middle income class households. In 2008, we launched a lower priced package, Net Fone.com. Changes in our mix of subscribers may affectaverage revenue per user. Taxes and Other Deductions from Revenues Taxes and other deductions from revenues are directly related to our volume of subscription sales. The taxes described below are passed on to our subscribers as part of their subscription fee. Note that our business is also subject to other taxes that are not deducted from revenues. Taxes and other deductions from revenues consist of: ·ICMS value-added tax.In São Paulo, Rio de Janeiro, Santa Catarina, Rio Grande do Sul, Minas Gerais, Paraíba and Distrito Federal, the ICMS tax on communication is levied at a rate of 25%. In Paraná, Goiás, and Mato Grosso do Sul the ICMS tax on communication is levied at a rate of 27%, while in Amazonas the ICMS tax on communication is levied at the highest rate of 30%. However, for pay-television subscription revenues, pay-television sign-on and hook-up fees and


pay-per-view revenues in each of the Brazilian states in which we operate, the ICMS tax is levied at a rate of 10%, except the state of Rio Grande do Sul, where the rate is 12%.


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 ·ISS municipal tax. ISS is a municipal tax on services that is levied at a rate of 2.0 to 5.0% on certain services, such as maintenance and other technical activities. ·PIS-related federal tax. PIS is a federal social security tax that is levied at a rate of 0.65% on revenues derived from pay-television, telecommunication and broadband Internet services and at a rate of 1.65% on revenues derived from all other services. ·COFINS federal social security tax. COFINS is a federal social security tax that is levied at a rate of 3.0% on revenues derived from pay-television, telecommunication and broadband Internet services and at a rate of 7.6% on revenues derived from all other services. Operating Costs and Expenses Our most significant operating costs and expenses are: programming costs and other direct operating costs, which are reported in costs of services rendered in our audited consolidated financial statements; selling, general and administrative expenses, which are reported in selling expenses and general and administrative expenses; and depreciation, which is reported in both costs of services rendered and general and administrative expenses. For more information on cost of services rendered and the classification of our expenses, see Notes 5 and 7 to our audited consolidated financial statements included elsewhere in this Form 20-F. ·Programming costs.Programming has been, and is expected to continue to be, our largest operating expense, representing in 2012, 22.6% of our net revenues. Programming purchase costs consist of programming fees paid by us directly to certain international programmers for the acquisition of international content from sources outside of Brazil and to G2C primarily in relation to programming produced in Brazil. See “Item 4. Information of  the company—Programming Sources” The programming fees we pay are generally highest with respect to the programs obtained for our digital and high-definition programming packages. ·Other direct operating costs.Other direct operating costs include: expenses for utility pole rentals paid to utility companies, electricity, maintenance, bandwidth to access the Internet and other costs that increase as a function of the development of our network, payroll and related charges, and costs related to our customer service, billing and information systems. A substantial portion of our network consists of aerial cables (as opposed to underground cables) often strung on electrical utility poles. We gain access to the utility poles by pole attachment rental agreements with local electrical utilities, which are generally required to provide us this access for a negotiated fee. The rising popularity of bandwidth-intensive Internet-based services poses special risks for our broadband Internet service. Examples of such services include peer-to-peer file sharing services, gaming services and the delivery of video via streaming technology and download. See “Item 3. Key Information—Risk Factors—Significant unanticipated increases in the use of bandwidth-intensive Internet-based services could increase our costs.”


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 ·Selling, general and administrative expenses.Selling, general and administrative expenses includes expenses related to payroll, benefits, sales commissions and consulting, financial advisory and computer software maintenance, as well as expenses related to advertising, provisions and allowance for doubtful accounts receivable. ·Depreciation.Due to the investments we have made in our cable network, set-top boxes, cable modems and subscriber installation, we face significant annual depreciation costs. See “—Depreciation and Amortization” directly below. The following are the principal factors that have historically influenced our operating costs: ·Programming costs. We pay programming costs on a per subscriber base. We expect programming costs to remain as our main cost. Our ability to maintain a good relationship with our programming suppliers and keep prices at attractive levels are important factors for the profitability of our business. ·Selling expenses. Selling expenses includes selling commissions and marketing campaigns to drive subscriber base growth. ·Other costs. Other costs consist principally of the cost of bandwidth to provide our Internet broadband services and call center services. Depreciation and Amortization We depreciate our cable network, decoders, cable modems and fiber optic cable assets using the straight-line method, over the estimated economic useful life of the assets. We estimate the useful life of our cable plant to be from 5 to 12 years for our cable network and 12 years for our fiber optic cable, resulting in annual depreciation rates of 20.0% to 8.3% and 8.3%, respectively. The estimated useful lives of specified items of our cable distribution plant as follows: Useful lifeDescription

   

   (In years)Cable network

   

   5 - 12Decoders and cable modem

   

   5Fiber optic

   

   12Leasehold improvements, installations, fixtures and fittings and other equipment

   

   10Data processing equipment

   

   3 - 5
 Other Income and Expenses Other income and expenses consist of: ·Financeexpense. Finance expense consists of monetary variation charges on Real-denominated debt, exchange rate losses on U.S. dollar-denominated debt, interest on our outstanding debt and other financial expenses, which includes the IOF tax on intercompany transactions, gain or losses from financial instruments and financial discounts given to subscribers. ·Finance income. Finance income consists of interest on cash equivalents and prepaid rights for use, as well as interest and fines from late payments.


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 ·Income taxes and social contribution. Income taxes expenses consist of the IRPJ and the CSLL, which are calculated based on our earnings before taxes on us and are also imposed on each of our operating subsidiaries. Results of Operations Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Net revenues Revenues and taxes and other deductions from revenues by major category were as follows:  Year ended December 31,2012

   2011

   % Change(R$ in millions)Gross revenues:Pay– television,broadband

   Internet and fixed line telephony subscriptions

   9,820.7

   8,245.5

   19%Other

   117.3

   99.9

   17%Total gross revenues

   9,938.0

   8,345.4

   19%Taxes on revenues, discounts and cancellations

   (1,998.8)

   (1,649.5)

   21%Net revenues

   7,939.2

   6,695.9

   19%
  Selected subscriber-related key financial indicators were as follows: As of December 31,2012

   2011(in thousands)Total connected pay-television subscribers

   5,381

   4,730Total connected broadband Internet subscribers

   5,498

   4,264Total connected fixed line telephony subscribers

   4,977

   3,844Total kilometers of cable network

   99

   75Total homes passed

   16,888

   13,433
  Pay-television, broadband Internet and fixed line telephony (in partnership with Embratel) subscription revenues increased as a result of increases in the pay-television, broadband Internet and fixed line telephony subscriber base and the annual price increase on subscribers’ agreements based on the IGP-M inflation index, which were partially offset by lower average revenue per subscriber related to an increase in the sales of our lower priced products. Other revenues increased primarily due to business growth. Taxes on revenues, discounts and cancellations increased principally due to the increase in taxes resulting from higher revenues. Additionally, this increase reflects the higher taxes due to broadband Internet revenue growth, where the ICMS (tax on distribution of goods and services) rate is higher. As a percentage of total gross revenues, taxes on revenues, discounts and cancellations increased to 20.1% in 2012 when compared to 19.8% in 2011.


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 Operating costs and expenses Operating costs and expenses by major category were as follows: Year ended December 31,2012

   2011

   % Change(R$ in millions)Operating costs and expenses:Programming costs

   (1,795.9)

   (1,515.7)

   18%Other direct operating costs

   (2,083.9)

   (1,707.7)

   22%Selling, general, administrative and other expenses

   (1,828.1)

   (1,530.6)

   19%Depreciation and amortization

   (1,298.1)

   (1,061.9)

   22%
 The increase in our pay-television programming costs was primarily due to the increase in our pay-television subscriber base and the increase in programming costs reflecting the price increase by the IGP-M inflation rate. As a percentage of net revenue, programming costs remained fairly stable at 22.6% in 2012 and 2011. Other direct operating costs increased primarily due to: (i) higher call center expenses to service a greater number of subscribers, to address a broader array of products and services to support our growing triple-play customer base which requires more complex customer care, to assure high customer service quality and to comply with the regulation for call centers; (ii) an increase in maintenance services; and (iii) higher network and telecommunications expenses. As a percentage of net revenues, other operating costs increased to 26.2% in 2012 compared to 25.5% in 2011. Selling, general, administrative and other expenses,increased primarily due to higher labor and marketing costs, due to intensified marketing efforts and also driven by business growth.  As a percentage of net revenues, remained fairly stable at 23.0% in 2012 and 22.9% in 2011. Depreciation and amortization expenses increased primarily due to higher depreciation expenses related to the increased purchase of digital set-top boxes and new subscriber installation. Finance results

   Year ended December 31,2012

   2011

   % Change(R$ in millions)Finance resultsFinance expense

   (432.8)

   (475.9)

   (9%)Finance income

   131.2

   175.4

   (25%)Total

   (301.6)

   (300.5)

   -
 Finance results were an expense in 2012 and remained fairly stable in relation to the net expense recorded in 2011. Finance expenses declined in 2012, primarily due to the reduction in our outstanding indebtedness over the course of 2012. During the year ended December 31, 2012, we fully amortized the Non-Convertible Debentures - 6th Public Issuance totaling R$ 580 million, the Bank Credit Notes totaling R$120 million, FINAMES debt (R$112 million) and a portion (R$208 million) of the loan with Banco Inbursa S.A. This decrease in finance expense was partially offset by (i) the depreciation of the Brazilian Real against the U.S. dollar in 2012 and (ii) new finance expenses in connection with other borrowings we made in 2012, such as our R$680 million intercompany loan with América Móvil in May 2012 and R$680 million of commercial paper in November 2012.


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 The decrease in finance income reflects the reduction in our cash equivalents position throughout the year, primarily attributable to capital expenditures. Income taxes and social contribution Year ended December 31,2012

   2011

   % Change(R$ in millions)Income tax and social contribution

   (237.9)

   (206.2)

   15%
  In 2012, income tax and social contribution increased mainly because of the realization of deferred income tax assets on temporary differences recognized in previous years. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Net revenues Revenues and taxes and other deductions from revenues by major category were as follows:  Year ended December 31,2011

   2010

   % Change(R$ in millions)Gross revenues:Pay– television,broadband

   Internet and fixed line telephony subscriptions

   8,245.5

   6,991.5

   18%Other

   99.9

   110.1

   (9%)Total gross revenues

   8,345.4

   7,101.6

   18%Taxes on revenues, discounts and cancellations

   (1,649.5)

   (1,696.0)

   (3%)Net revenues

   6,695.9

   5,405.6

   24%
  Selected subscriber-related statistics were as follows:  As of December 31,2011

   2010(in thousands)Total connected pay-television subscribers

   4,730

   4,212Total connected broadband Internet subscribers

   4,264

   3,524Total connected fixed line telephony subscribers

   3,844

   3,153Total kilometers of cable network

   75

   66Total homes passed

   13,433

   11,543
  Pay-television and broadband Internet subscription revenues increased as a result of increases in the pay-television and broadband Internet subscriber base and the annual price increase on subscribers’ agreements based on the IGP-M inflation index, which were partially offset by lower average revenue per subscriber related to an increase in the sales of our lower priced products. Fixed-line telephony (in partnership with Embratel) revenues increased as a result of the higher number of customers in 2011.  Other revenues increased primarily due to business growth. Taxes on revenues, discounts and cancellations remained fairly stable principally due to the increase in taxes resulting from higher revenues were offset by the decrease in discounts and cancellations by rougly the same amount. As a percentage of total gross revenues, taxes on


revenues, discounts and cancellations decreased at 19.8% in 2011 when compared to 23.9% in 2010.


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 Operating costs and expenses Operating costs and expenses by major category were as follows: Year ended December 31,2011

   2010

   % Change(R$ in millions)Operating costs and expenses:Programming costs

   (1,515.7)

   (1,262.1)

   20%Other direct operating costs

   (1,707.7)

   (1,317.5)

   30%Selling, general, administrative and other expenses

   (1,530.6)

   (1,266.8)

   21%Depreciation and amortization

   (1,061.9)

   (901.2)

   18%
 The increase in our pay-television programming costs was primarily due to the increase in our pay-television subscriber base and the increase in programming costs reflecting the price increase by the IGP-M inflation rate. As a percentage of net revenues, programming costs decreased to 22.6% in 2011 compared to 23.3% in 2010. Other operating costs increased primarily due to: (i) expenses incurred in obtaining additional bandwidth from third parties to support our broadband Internet service growth; (ii) higher call center expenses to service a greater number of subscribers, to address a broader array of products and services to support our growing triple-play customer base which requires more complex customer care, to assure high customer service quality and to comply with the regulation for call centers; (iii) an increase in the number of employees for field services; and (iv) higher network expenses, such as electricity. As a percentage of net revenues, other operating costs increased to 25.5% in 2011 compared to 24.4% in 2010. Selling, general, administrative and other expenses increased primarily due to higher employee and marketing costs and sales commissions, partially offset by lower IT expenses. Employee costs increased primarily due to a headcount increase, marketing costs increased primarily due to intensified marketing efforts and sales commissions increased due to higher number of new entrants to our subscriber base. As a percentage of net revenues, selling, general, administrative and other expenses decreased to 22.9% in 2011 compared to 23.4% in 2010. Depreciation and amortization expenses increased primarily due to higher depreciation expenses related to increased purchase of digital set-top boxes and new subscriber installation.  Finance results Year ended December 31,2011

   2010

   % Change(R$ in millions)Finance resultsFinance expense

   (475.9)

   (359.4)

   32%Finance income

   175.4

   169.4

   4%Total

   (300.5)

   (190.0)

   58%
 Finance results were an expense in 2011 higher than in 2010, primarily as a result of the depreciation of the Real against the U.S. dollar. The primary impact was related to our debt


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 denominated in U.S.dollars. Finance income remained fairly stable when comparing both years. Income taxes and social contribution Year ended December 31,2011

   2010

   % Change(R$ in millions)Income tax and social contribution

   (206.2)

   (160.8)

   28%
  In 2011, income tax and social contribution increased mainly due to higher taxable income earned in some of our operations, as well as due to the realization of deferred income tax assets on temporary differences recognized in previous years. Liquidity and Capital Resources We broadly define liquidity as our ability to generate sufficient cash flow from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet our strategic and financial objectives. Accordingly, liquidity cannot be considered separately from capital resources that consist of current or potentially available future funds for use in meeting debt service requirements and long-range business objectives. Our ability to obtain equity financing depends on the approval from our Board of Directors. As of December 31, 2012 and 2011, our net debt, calculated as the sum of “debt”, included in current liabilities and in non-current liabilities plus intercompany loans with América Móvil, included in “related party” in current liabilities and in non-current liabilities, minus “cash and cash equivalents”, amounted to R$2,581.0 million and R$1,448.2 million, respectively. Net debt is a non-GAAP measure. Management uses net debt as a supplemental measure of capital management in order to calculate our ability to obtain debt financing at appropriate cost. In general, we hold our cash and cash equivalents in Brazilian Reais. Additionally, as of December 31, 2012 and 2011, our current assets were R$1,462.5 million and R$235.5 million, respectively, lower than our current liabilities. The increase in the current liabilities in 2012 is mainly due to the issuance, in November 2012, of a single series of commercial promissory notes (“Commercial Paper”) in an aggregate amount of R$680.0 million, maturing on May 6, 2013. The decrease in current assets in 2012 mainly resulted from the use of cash equivalents in capital expenditures. We expect that any additional net cash funding requirements will be financed with long-term financing, including, for example, those under the Government Agency for Machinery and Equipment Financing – FINAME program, our related parties, or other long-term debt.On May 8, 2012 and on March 26, 2013, the Company entered into five intercompany loans with América Móvil totaling R$1,220.0 million, maturing in 2014 and 2017. The Company used proceeds from those contracts to settle debts and reorganize the capital structure. On May 8, 2012 and on March 26, 2013, the Company entered into five intercompany loans withAmérica Móviltotaling R$1,220.0 million, maturing in 2014 and 2017. The Company used proceeds from those contracts to settle debts and reorganize the capital structure. We are in the process of merging a number of our operating and non-operating subsidiaries into the Company, in order to simplify our corporate structure, improve business synergies and improve administrative and income tax and social contribution efficiencies, which we expect will improve our cash generation.


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 We expect this process of merging subsidiaries into the Company to result in opportunities to reduce certain operational, payroll and related costs, as well as administrative expenses.  In addition, we expect these mergers to improve tax efficiencies, as they will reduce the volume of inter-company transactions and optimize the use of net operating losses (NOLs).  According to Brazilian tax regulations, each company, even part of a group, is individually required to pay taxes, generating as a result tax inefficiencies to the group.  Under Brazilian income tax rules, if an entity generates a loss in a given period, the NOLs generated by that entity in such period may be used to offset up to 30 percent of the entity’s taxable income for the subsequent period.  There is generally no limit on the number of years during which NOLs may be carried forward. As a result of our mergers of operating and non-operating subsidiaries into the Company in 2010 and 2009, in 2012 we were able to begin using NOLs from certain of our subsidiaries to accelerate offsetting of taxable income of other subsidiaries and we were able to reduce taxes payable on inter-company transactions. Our business generates significant cash flows from operating activities.  Given the expected level of capital expenditures needed to support our growth and our schedule for debt amortization payments, we believe that we will be able to meet our short- and long-term liquidity and capital requirements, through our cash flows from operating activities, existing cash and cash equivalents, and, if needed, our ability to obtain future external financing, including from our related parties América Móvil and its subsidiaries. Cash Flows Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Year ended December 31,2012

   

   2011Operating activities

   (R$ in millions)Net income

   393.7

   

   373.2Monetary and exchange rate variations, net

   104.0

   

   102.2Interest expense on borrowing

   172.9

   

   203.0Losses (gain) on derivatives

   (0.2)

   

   16.9Depreciation and amortization

   1,298.1

   

   1,061.9Deferred income tax and social contribution

   151.6

   

   106.4Loss on disposal of property, plant and equipment

   3.1

   

   -Provisions

   (192.3)

   

   (42.3)Increase (decrease) in operating assets and liabilities

   (197.7)

   

   60.6Net cash provided by operating activities

   1,733.2

   

   1,881.9
  Cash flows from operating activities. Historically, we have financed our liquidity and capital requirements primarily with cash provided by our operations and through external financing. Our operating activitieswere our main source of funds in 2012. Cash flows provided by our operating activities decreased by R$148.7 million in 2012 (from R$1,881.9 million in 2011 to $1,733.2 million in 2012).  This decrease was primarily due to increased business operations.  Year ended December 31,2012

   

   2011Investing activities

   (R$ in millions)Purchase of property, plant and equipment and intangible assets

   (2,593.4)

   

   (1,660.2)Cash proceeds from sale of property, plant and equipment

   0.2

   

   2.5Net cash used in investing activities

   (2,593.2)

   

   (1,657.7)


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 Cash flows used in investing activities. We used R$2,593.2 million for cash in investing activities in 2012, an increase of 56.4% as compared to R$1,657.7 million in 2011. This increase was primarily due to investments in equipment related to the growth in our broadband Internet and pay-television subscriber bases. Year ended December 31,2012

   

   2011Financing activities

   (R$ in millions)Proceeds from third party borrowing

   687.1

   

   221.2Proceeds from related party

   680.0

   

   -Repayment of principal

   (1,019.5)

   

   (342.1)Payment of interest

   (170.4)

   

   (203.7)Net cash provided by (used in) financing activities

   177.2

   

   (324.6)
 Cash flows provided by (used in) financing activities. We generated R$177.2 million in net cash in financing activities in 2012, compared to net cash used in financial activities of R$324.6 million in 2011, primarily due to the issuance of commercial paper, totaling up to R$680.0 million and intercompany loans with América Móvil totaling R$680.0 million, which was primarily used to settle our Non-Convertible Debentures - 6th Public Issuance in the amount of R$580 million, our Bank credit note in the amount of R$ 120 miliion and part of out debt with Inbursa Bank totaling R$ 207 million. Year ended December 31,2011

   

   2010Operating activities

   (R$ in millions)Net income

   373.2

   

   307.2Monetary and exchange rate variations, net

   102.2

   

   (69.1)Interest expense on borrowing

   203.0

   

   215.1Losses on derivatives

   16.9

   

   65.9Depreciation and amortization

   1,061.9

   

   901.2Deferred income tax and social contribution

   106.4

   

   82.8Loss (gain) on disposal of property, plant and equipment

   -

   

   (4.1)Provisions

   (42.3)

   

   (44.4)Decrease in operating assets and liabilities

   60.6

   

   (218.4)Net cash provided by operating activities

   1,881.9

   

   1,236.2
 Cash flows from operating activities. Net cash provided by operating activities increased from R$1,236.2 million in 2010 to R$1,881.9 million in 2011, an increase of 52.2%. This increase was primarily due to higher revenues and control over operating costs and expenses, which resulted in increased operating income before depreciation and amortization and a decrease in working capital.  Year ended December 31,2011

   

   2010Investing activities

   (R$ in millions)Acquisition of business, net of cash received

   

   

   -Purchase of property, plant and equipment and intangible assets

   (1,660.2)

   

   (1,249.9)Cash proceeds from sale of property, plant and equipment

   2.5

   

   2.9Net cash used in investing activities

   (1,657.7)

   

   (1,247.0)
 Cash flows used in investing activities.We used R$1,657.7 million in cash in investing activities in 2011, an increase of 32.9%, as compared to R$1,247.0 million used in investing


activities in 2010. This increase was primarily due to investments in equipment related to the growth in our broadband Internet and pay-television subscriber bases.


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 Year ended December 31,2011

   

   2010Financing activities

   (R$ in millions)Proceeds from third party borrowing

   221.2

   

   103.6Repayment of principal

   (342.1)

   

   (92.6)Payment of interest

   (203.7)

   

   (194.3)Net cash provided by (used in) financing activities

   (324.6)

   

   (183.3)
 Cash flows used in financing activities. We used R$324.6 million in cash in financing activities in 2011, compared to net cash used in financial activities of R$183.3 million in 2010, primarily due to prepayment of our perpetual bonds debt in the aggregate principal amount of R$244.3 million plus interest of R$5.6 million and prepayment of indebtedness outstanding under FINAME in the aggregate principal amount of R$72.8 million, as well as increased payment of interest related to our debt.  This was partially offset by the issuance of FINAME in the aggregate principal amount of R$221.2 million. Liquidity Requirements and Sources Most of our capital expenditures are related to customer acquisition activity in connection with our ongoing operations. If we continue at our current rate of growth and consequently continue to increase the number of our pay-television and broadband Internet subscribers, we will need significant cash to fund capital expenditures. Also, we have made interest payments on our debt and scheduled principal payments, with significant maturities in June and December 2012. We have historically funded these liquidity requirements through operating cash flows, borrowings under our credit facilities, proceeds of debtand loans from our shareholders. After taking into consideration the range of projections of cash flows from operations, expected capital expenditures and debt principal and interest payment requirements, we expect to need to raise funds to meet our anticipated cash requirements in 2013. The amount of our anticipated operating cash flows in 2013 and future periods could be adversely affected by a number of factors, many of which are not within our control. Any weakening of the Brazilian economy could result in a decline in the number of our subscribers, which would lower subscription revenues. Depreciation of the Real against the U.S. dollar would also decrease the amount of cash that we have available to cover our U.S. dollar-denominated or U.S. dollar-indexed expenses, which include a significant percentage of our equipment expenses. Our ability to raise short-term or long-term debt financing or equity financing in the future will depend on a number of factors outside of our control, including conditions in Brazil and in international financial markets. We cannot assure you that in the future we will be able to raise debt financing in sufficient amounts to meet our cash requirements or at all. We had cash and cash equivalents of R$38.4 million as of December 31, 2012, a 94.7% decrease compared to R$721.2 million as of December 31, 2011, mainly as a result of an increase in our capital expenditures.


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 Contractual Obligations The following table sets out our major contractual obligations as of December 31, 2012: Payments due by periodLess than 1 Year

   1 – 3 Years

   3 – 5 Years

   More than 5 Years

   Total(R$ in millions)
  Debt

   814.0

   174.9

   227.3

   716.6

   1,932.8Intercompany loans with América Móvil

   -

   -

   686.7

   -

   686.7Lease of utility poles (1)

   145.0

   477.8

   547.9

   628.3

   1,799.0Lease of ducts

   10.7

   35.3

   40.4

   46.4

   132.8Lease of office space

   35.6

   117.2

   134.4

   154.2

   441.4Equipment purchase obligations(2)

   52.8

   -

   -

   -

   52.8Total

   1,058.1

   805.2

   1,636.7

   1,545.5

   5,045.5
 ________________________ (1)In addition to the amounts listed in the table above, we are contractually required to make lease payments under our lease of utility pole arrangements from the time the lease expires until our equipment is removed from such poles. Those fees will be based on the amounts we will be paying at the time those arrangements expire. (2)Equipment purchase obligations included in the table above represent the minimum quantities to be purchased under the applicable agreements. Capital Expenditures A description of our capital expenditures, identified by major category, is as follows: ·subscriber installation, including purchases of set-top boxes and cable modems; ·cable network construction and rebuilding, which primarily includes construction costs related to installing cable system infrastructure in multiple-dwelling units, or MDUs, rebuilding portions of our cable network and the growth or build-out of our cable network; ·broadband Internet network construction and rebuilding, which primarily includes construction costs related to cable modem installation, installing broadband infrastructure in MDUs, rebuilding portions of our broadband network to permit two-way communication and the build-out of our broadband network, including our data center; and ·upgrading existing systems, the purpose of which is principally to improve technical quality, meet regulatory requirements, further improve management controls and support subscriber growth. In 2012 and 2011, our capital expenditures of R$2,593.4 million and R$1,660.2 million, respectively, were primarily used to sustain our organic subscriber growth, through the purchase of equipment such as cable modems, digital set-top boxes, digital video recorder boxes, cable modem termination system, or CMTS, and optical nodes equipment. We import part of this equipment and make payments in U.S. dollars. Thus, the depreciation of the Real against the U.S. dollar can negatively impact our cash disbursements available to purchase such equipment. In 2013, we expect to continue to increase the number of our pay-television, broadband Internet and fixed line telephony (in partnership with Embratel)subscribers. As most of our capital expenditures are related tosubscriber acquisition, including the acquisition of equipment and the


installation cost, we expect to maintain our annual capital expenditures for this purpose in 2013. In addition, we expect to spend similar amounts as 2012 in network improvements, maintenance and systems development for improved customer service and to expand our network, both increasing our bi-directional network and expanding our network to new areas. We expect that any additional net cash fundingrequirements will be preferably financed with long-term financing, including, for example, those under the Government Agency for Machinery and Equipment Financing – FINAME program, our related parties our other long-term debt agreements.


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 These statements are forward-looking statements and are therefore based on estimates and assumptions that are subject to significant uncertainties, many of which are beyond our control or are subject to change. See “Forward-Looking Statements.” Debt Financing As of December 31, 2012, we had the following debt (net of debt cost and including accrued interest) outstanding: (R$ in thousands)U.S. dollar-denominated debt(1):Banco Inbursa S.A.

   206,716Global notes 2020

   737,071Total U.S. dollar-denominated debt

   943,787Real-denominated debt(2):Commercial paper

   686,749Intercompany loans with América Móvil

   686,585FINAME

   302,301Total Real-denominated debt

   1,675,635Total

   2,619,422
 (1)Calculated using the December 31, 2012 exchange rate of R$2.0435 per US$1.00. (2)In 2012, the rates used to determine the interest rate of our Real-denominated debt was the Brazilian interbank interest rate, or CDI, which was 6.90% andLong-Term Interest Rate, or TJLP, which was 5.5%.


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At December 31, 2012, the amortization schedule of our debt (net of debt cost and including accrued interest) was as follows:



Principal Amortization Schedule:

   (R$ in thousands)2013

   778,5292014

   66,6772015

   56,5742016

   54,5482017

   772,6242018-2020

   852,247Total debt cost

   (5,566)Accrued interest

   43,789Total debt

   2,619,422
 Perpetual Bonds On November 28, 2006, we issued 9.25% Guaranteed Perpetual Bonds, or perpetual bonds, in an aggregate principal amount of US$150.0 million. These notes could be redeemed at our option, in whole but not in part, on any interest payment date on or after November 27, 2009 at 100% of the principal amount thereof, plus accrued and unpaid interest and any additional amounts payable. On May 26, 2011, we redeemed, in whole, our perpetual bonds with available cash on hand. Banco Inbursa S.A. As of June 19, 2008, we entered into a loan agreement with Banco Inbursa S.A., an affiliate of América Móvil, and certain of our subsidiaries as guarantors. The Loan and Guaranty Agreement provides for a US$200 million term loan facility, or the Term Credit Facility, guaranteed by our subsidiaries that are a party thereto. Interest on borrowings under the Term Credit Facility accrues at a rate of 7.875% per annum and is payable in arrears on April 15 and October 15 of each year. On June 24, 2008, we drew down the full amount available under the Term Credit Facility. The Term Credit Facility matures on June 18, 2019 and amortizes in three equal installments as follows: one third on June 18, 2017, one third on June 18, 2018 and one third on June 18, 2019. The Term Credit Facility is pre-payable in whole or in part, at any time after the fifth anniversary of the draw date, together with accrued and unpaid interest on the amount prepaid plus certain prepayment fees. We paid Banco Inbursa S.A. a fee of US$1.2 million in connection with entry into the Loan and Guaranty Agreement, which was deferred and will be amortized over the term of the facility using the interest method. The Term Credit Facility contains a number of covenants that, among other things, will limit or restrict our ability and our subsidiaries to incur additional indebtedness (including guarantees of other indebtedness); pay dividends or make other restricted payments; enter into certain types of transactions with affiliates; sell certain assets, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets; and create liens. The Term Credit Facility provides for customary events of default, including non-payment of principal, interest or fees, violation of covenants, material inaccuracy of representations or warranties, specified cross defaults to other material indebtedness, certain bankruptcy events, invalidity of guarantees, material judgments and change of control. On December 26, 2012, the Company settled R$223.8 million of which R$207.7 million (equivalent to US$100.0 million) relates to principal and R$16.1 million relates to premium and interest.


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 Global Notes 2020 On November 4, 2009, we issued 7.50% Guaranteed Senior Notes due 2020 in an aggregate principal amount of US$350.0 million. These notes may be redeemed at our option, in whole or in part, at any time (i) prior to January 27, 2015, at a redemption price, plus accrued and unpaid interest, if any, to the redemption date, equal to the greater of (a) 100% of the principal amount and (b) the sum of the present values of the remaining scheduled payment of principal and interest thereon discounted to the redemption date on a semi-annual basis at the Treasury Rate (as defined in the indenture governing the global notes 2020) plus 50 basis points; and (ii) on or after January 27, 2015, at the following redemption prices (expressed as percentages of the principal amount), plus accrued and unpaid interest and any additional amount payable with respect thereto: (a) 103.75% during the 12-month period commencing on January 27, 2015; (b) 102.5% during the 12-month period commencing on January 27, 2016; (c) 101.25% during the 12-month period commencing on January 27, 2017; and (d) 100% during the 12-month period commencing on January 27, 2018 and thereafter. In the case of partial redemption, no less than US$100.0 million aggregate principal amount must remain outstanding. We pay interest semi-annually in arrears on each interest payment date. The indenture governing the global notes 2020 includes a number of covenants, including limitations on incurrence of additional debt, limitation on liens, limitations on guarantees, limitations on merger, consolidation or sale of assets, certain obligations regarding the payment of dividends and other distributions and certain reporting requirements, subject in each case to important exceptions. Under the indenture governing the global notes 2020, an event of default is generally defined to include non-payment of interest or principal, breach of certain obligations, cross-default (with a US$45 million threshold), unsatisfied judgments and enforcement proceedings (with a US$45 million threshold), insolvency-related events and unenforceability of obligations. The global notes 2020 are jointly guaranteed by all our wholly-owned subsidiaries. Non-Convertible Debentures - 6th Public Issuance Issued on December 27, 2006, the Non-Convertible Debentures - 6th Public Issuance in the aggregate principal amount of R$580.0 million, bear interest at the CDI rate plus 0.70%, payable semi-annually in arrears on June 1 and December 1 of each year. The CDI rate is a Brazilian interest reference rate published by the Brazilian Securities Custody and Settlement Center (Central de Custódia e Liquidação Financeira de Títulos) and is subject to change on a daily basis. Originally, the principal amount of these debentures was payable in four annual installments commencing on December 1, 2010, with the final installment of principal due on December 1, 2013. On September 23, 2009, the debenture holders approved the extension of the maturity of the Non-Convertible Debentures - 6th Public Issuance and the principal amount will be payable in four annual installments commencing on June 1, 2012 with the final installment of principal due on June 1, 2015. The debenture holders’ meeting also approved: (i) changing the interest rate of the Non-Convertible Debentures - 6th Public Issuance as of October 1, 2009 from CDI rate plus 0.70% to CDI rate plus 1.6% per year, and (ii) a R$1,760 renegotiation premium per R$100,000 principal amount of debentures to debenture holders, paid on October 1, 2009. Subject to an optional prepayment provision, we may prepay the debentures at any time, with a premium no greater than 0.50% of the principal amount then outstanding, which premium shall decrease linearly to zero at maturity of the debentures. Under the indenture governing the Non-Convertible Debentures - 6th Public Issuance, an event of default is generally defined to include: non-payment of interest or principal, breach of certain obligations, cross-default (with a R$50 million threshold), change of control, not maintaining Net Debt to EBITDA ratio (as those terms are defined in the Non-Convertible Debentures - 6th Public Issuance indenture) above 2.5x and Interest Coverage ratio (as those terms are defined in the Non-Convertible Debentures - 6th Public Issuance indenture) below 1.5x, unsatisfied judgments and enforcement proceedings, insolvency-related events and unenforceability of obligations.


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 On May 18, 2012, the Company settled all the public debentures of the 6th issue totaling R$611.8 million, of which R$580.0 million refers to the principal amount, R$30.7 million to interest and R$1.1 million award paid to bondholders for early settlement. The resources used for these payments were obtained through debt agreements with the Company's indirect controlling shareholder, América Móvil. Bank Credit Note In connection with the acquisition of Vivax, we assumed debt in the aggregate principal amount of R$220.0 million with Banco Itaú BBA in the form of a Bank Credit Note, or CCB. On July 6, 2007, this loan agreement was renegotiated and amended as to the interest rates, guarantees and financial covenants. The pledge of accounts receivable from subscribers was replaced by our guarantee and the financial covenants were amended to reflect those of the Non-Convertible Debentures - 6th Public Issuance. We may prepay the CCB at any time, with a premium no greater than 0.60% of the principal amount then outstanding, which premium shall decrease linearly to zero at maturity of the CCB. On November 13, 2007, we prepaid R$50.0 million of this debt. On August 31, 2009, this loan agreement was renegotiated and amended as to the interest rates and maturity. The interest rate changed from CDI rate plus 1.2% to CDI rate plus 2.55% per year and the maturity from a bullet payment in November 2011 to be payable in three installments: December 2014, June 2015 and January 2016. In 2011, we prepaid part of our Bank Credit Notes in the aggregate principal amount of R$25.0 million (R$30.7 million in 2010).  During the year ended December 31, 2011, the Company amortized a portion of this loan in the amount of R$25.0 million.  On May 18, 2012, the Company settled the Bank Credit Notes issued by Itaú BBA totaling R$121.2 million of which R$120.0 million refers to the principal amount, R$294 thousand to interest and R$902 thousand to premium paid to notes holder for early settlement. Finame Since 2007, we have obtained asset financing loans with commercial banks under the Government Agency for Machinery and Equipment Financing – FINAME program. These loans bear interest at 3.15% per year plus the Long-Term Interest Rate, or TJLP or fixed rates from 4.5% up to 8.7% per year and five years maturity. The FINAME loans are guaranteed by the digital equipment acquired with the loans. We may prepay the FINAME at any time, with no premium. As of December 31, 2012, FINAME outstanding loans amounted R$302.3 million.  Commercial Paper  On November 7, 2012, we issued a single series of 68 commercial promissory notes in an aggregate amount of R$680.0 million maturing on May 6, 2013.Interest on thepromissory notes will be fully paid on the maturity datein an amount equal to 103.50% of the accumulated variation of the average daily Brazilian DI (interbank deposit) rates.  On April 9, 2013, our Board of Directors approved a second issuance of up to 68 commercial promissory notes in a single series, totaling up to R$680.0 million, maturing 360 days from the issue date. These promissory notes will be publicly offered in Brazil, subject to certain restrictions, and the proceeds will be used to redeem outstandingpromissory notesissued in November 2012.


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 Intercompany Loans (Mutuos)  On May 8, 2012, we entered into three intercompany loans with América Móvil totaling R$686.6 million and maturing in 2017. The interest rate is equivalent to the CDI plus a spread of 1.08% per annum, payable in May and November of each year beginning in November 2012. We primarily used the proceeds from these loans to repay outstanding bank credit notes issued by Banco Itaú BBA and a portion of our outstanding Non-Convertible Debentures - 6th Public Issuance.  On March 26, 2013, we entered into two additional intercompany loans with América Móvil, through certain of our subsidiaries, totaling R$540.0 million, both maturing on March 25, 2014. The loans may be extended for consecutive periods of one year. The interest rate is equivalent to 104% of the CDI payable with the principal on the maturity date. Those subsidiaries used the proceeds from these loans to repay amounts under other intercompany loans, pay dividends and increase the equity of certain of our subsidiaries. Off-Balance Sheet Arrangements We currently do not have any off-balance sheet arrangements. ITEM 6.          DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES. Directors and Board Practices Board of Directors We are managed by ourConselho de Administração, or board of directors, and ourDiretoria, or board of executive officers. In accordance with our by-laws, our directors are elected at a general meeting of shareholders, each to serve for a one year term, with the option for reelection. On April 5, 2012, our shareholders held an extraordinary meeting and elected new directors and one new member to the Fiscal Council, as indicated in the table below, in order to fill vacant positions as a result of resignations of previous directors and a member of the Fiscal Council. The directors and members of the Fiscal Council were elected on April 23, 2013, in the annual shareholders’ meeting. Our by-laws provide that the board of directors shall be composed of no fewer than nine and no more than twelve members. According to our by-laws, each member of our board of directors must be a Net Serviços shareholder. In addition, under Brazilian law, non‐voting, non‐controlling shareholders representing at least 15% of the total capital shares of a company have the right to elect by separate vote one member of a company’s board of directors. Non‐voting, non‐controlling shareholders representing at least 10% of the total capital shares also have the right to elect by separate vote one member of the board of directors. Our by-laws provide that for each member appointed to our board of directors, an alternate member shall be appointed to act in place of the permanent director when such director is not available for conducting board business. The term of such alternate member mirrors the term of his or her corresponding member director. Our by-laws provide that our board of directors shall hold a meeting at least once every quarter or as called by any director. Its responsibilities include, among other things, the establishment of the policy and general strategy of the business and the appointment and supervision of our executive officers.


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 Pursuant to a shareholders’ agreement discussed under “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements,” our board of directors is comprised of ten members and an equal number of alternates, all appointed by affiliates of América Móvil. Additionally, in accordance with the Level 2 of the BM&FBovespa’s Corporate Governance requirements, 20% the members of our board of directors must be independent. Net Serviços’ current directors are: Name

   Position

   Position Held Since

   Current TermExpiresOscar Von Hauske Solis

   Chairman, Board of Directors

   April 5, 2012

   April 30, 2014Carlos Henrique Moreira

   Director

   April 28, 2005

   April 30, 2014Jose Formoso Martínez

   Director

   April 28, 2005

   April 30, 2014Mauro Szwarcwald

   Director

   April 28, 2006

   April 30, 2014Isaac Berensztejn

   Director

   April 2, 2007

   April 30, 2014Fernando Carlos Ceylão Filho

   Director

   April 30, 2012

   April 30, 2014Antonio Oscar de Carvalho Petersen Filho

   Director

   April 5, 2012

   April 30, 2014Antonio João Filho

   Director

   April 5, 2012

   April 30, 2014Carlos Hernán Zenteno de Los Santos

   Director

   April 5, 2012

   April 30, 2014José Antonio Guaraldi Félix

   Director

   April 5, 2012

   April 30, 2014
 Biographies of Our Board of Directors Oscar Von HauskeSolis(55) is a member of the Board of Directors of Embratel Participações S.A., member of the Board of Directors of Empresa Brasileira de Telecomunicações S.A – Embratel and Managing Officer at Telmex Internacional, S. A. de C.V..  He was the Systems and Processes Executive Officer at Teléfonos de México S.A de C.V., Managing Officer’s Assistant at Teléfonos de México de C.V. and the Controller at Fundação e Mecânica Susano Solis S.A and Tenería Company, S.R.L e C.V.  He holds an MBA from ITAM (Mexico) and a degree in Public Accounting from Bancaria y Comercial - Mexico. Carlos Henrique Moreira(77) has been a member of our board of directors since April 28, 2005. He was also Embratel’s chairman of the Board of Directors and Chief Executive Officer. Previously he held the positions of Chief Executive Officer at Algar Telecom Leste, Vice-President at Xerox, Vice President at IBM, Operations Executive Officer at Embratel, member of TELERJ’s board of directors, member of TELESP’s board of directors and Operations Executive Officer at Standard Eléctrica S.A. He holds a bachelor’s degree in Electronic Engineering from the Instituto Tecnológico de Aeronáutica. Jose Formoso Martínez(54) has been a member of our board of directors since April 28, 2005. He holds a bachelor’s degree in Mechanical Engineering from Universidad La Salle, Mexico and a post-graduate degree in Corporate Management from the Instituto Panamericano de Alta Dirección de Empresas, Mexico. Currently, he is the Vice Chairman of Embratel’s board of directors and its Chief Executive Officer. His previous positions include Executive Officer at Telguas S.A, Managing Director at Cablevisión and operations manager and sales manager at Condumex. Mauro Szwarcwald(61) has been a member of our board of directors since April 28, 2006. Currently he is Partner Director at Aplus Consultoria. Previously, he worked as Marketing Vice President at Oracle and Telemar. He also worked as Commercial Operations Executive


Director at Xerox do Brasil. Mauro Szwarcwald has a Masters of Science in Mathematics and Statistics from the University of Rochester. He is an independent member of our board of directors.


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Fernando Carlos Ceylão Filho(61) was a member of ourConselho Fiscalfrom October 2008 to 2011. Currently he is an independent consultant. Previously, Mr. Ceylão was CEO of Globalstar do Brasil S.A., a satellite communications service provider and worked as a director of Americel S.A. In 1969, Mr. Ceylão joined Embratel, occupying various management positions at financial and international departments. In 1995, Mr. Ceylão was a director of Fundação Embratel de Seguridade Social, the pension fund of Embratel. He holds a degree in Law from Universidade Federal do Rio de Janeiro and a MBA in Strategic Management from Fundação Getúlio Vargas/RJ. Isaac Berensztejn(58) has been a member of our board of directors since April 2, 2007. Isaac Berensztejn has been Embratel’s Chief Financial Officer since August 2004. Previously he was the Chief Financial Officer of StarOne for three years. Prior to that he was the Chief Financial Officer of Telecomunicações do Rio de Janeiro S.A. and Telemar Norte Leste S.A. He graduated in Telecommunicastions Engineering from Pontifícia Universidade Católica do Rio de Janeiro, and received a Master of Science degree in Production Engineering from COPPE/UFRJ and an Executive MBA from COPPE-AD/UFRJ. Antonio Oscar de Carvalho Petersen Filho(41) is a member of the Board of Directors of Embratel Participações S.A., member of the Board of Directors of Empresa Brasileira de Telecomunicações S.A. – Embratel, member of the Board of Directors of Star One S. A., President of Instituto Embratel 21 and Executive Officer at Empresa Brasileira de Telecomunicações S.A. – Embratel.  He was the Executive Officer of Legal and Corporate Affairs at Empresa Brasileira de Telecomunicações S.A. – Embratel, Officer at the Brazilian Association of Information Technology and Telecommunications Law – ABDI, Regulatory Legal Officer at Empresa Brasileira de Telecomunicações S.A. – Embratel and Partner at the law firm Carvalho de Freitas e Ferreira Advogados Associados. Mr. Filho holds a degree in Law from the Law Faculty of the Pontifical Catholic University of São Paulo, with emphasis in public international law, international commercial law and economic law, and Economic Sciences from Armando Álvares Penteado Foundation.  He also holds a graduate degree in Public Law from Brazilian Society of Public Law.  Antonio João Filho(57) held the position of Pay-TV Executive Officer at Embratel Group in 2008. Mr. Filho is an electric engineer with specialization in economics and administration.  Between 1976 and 1992, he worked in the area of implementation, operation and distribution of signals at Globo TV and its affiliate EPTV. Between 1993 and 1999, he implemented and managed Unicabo Group’s cable TV operations. As the founding Partner at Tele Design, he was its telecom officer between 1999 and 2003. Between 2003 and 2007 he was Vice Chief Operations Officer at Vivax. Institutionally, Mr. Filho is Technology Vice President at ABTA – Brazilian Association of Pay-TV and Pay-TV Officer at SET – Brazilian Society of Television Engineering.  He holds a degree in Electric Engineering from Engineering Faculty of São Paulo. Carlos Hernán Zenteno de los Santos(42) started his career in the telecommunications market at IBM of Mexico. In 1992 and 1993, Mr. Santos started working at América Móvil, where he held the following positions: Customer Services and Operations Sub-Director, Telcel México; Project leader to implement GSM network, Telcel Mexico; Strategic Planning Sub-Director, Telcel Mexico; Chief Executive Officer,  Porta  Ecuador; Chief Executive Officer at Claro Argentina; Regional Officer at Claro Argentina-Uruguay-Paraguay until August 2010.  Mr. Santos is Chief Executive Officer at Claro Brasil as of September 2010.  He holds a degree in Electronic Engineering from Instituto Tecnológico y de Estudios Superiores de Occidente – ITESO, Guadalajara, Mexico.


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José Antônio Guaraldi Félix(58) became Chief Executive Officer of Net Serviços in January 2008. Mr. Félix had been our Chief Operating Officer since May 2003. Previously, he was the Chief Operating Officer for five years and before a regional officer for two years at Net Serviços. Prior to that he was an officer of Net Sul, where he headed 16 operations in southern Brazil. Mr. Félix worked at RBS from 1980 to 1990, holding various positions in the operational area.Mr. Félix has a degree in Telecommunication Engineering from Pontifícia Universidade Católica do Rio Grande do Sul.Mr. Félix also graduated in Strategic Business Management from Fundação Dom Cabral, from Kellogg School of Management in Chicago, and from Insead Business School in France. Fiscal Council We maintain a permanent Fiscal Council, orConselho Fiscal, that acts as an Audit Committee and complies with Rule 10A-3 of the Exchange Act and the NASDAQ corporate governance rules.Under Brazilian corporate law, theConselho Fiscalis a corporate body independent of the board of directors and independent auditors. TheConselho Fiscal’sprimary responsibilities are to review management’s activities and the company’s financial statements and to report its findings to shareholders.See also “Item 16A. Audit Committee Financial Expert.” Our by-laws provide that theConselho Fiscalshall be composed of no fewer than three and no more than five members. In addition, if we did not maintain a permanentConselho Fiscal, in accordance with Article 161 of Brazilian corporate law, shareholders representing at least 10% of the voting shares or shareholders representing 5% of the non-voting shares would have the right to request the installation of theConselho Fiscal.Under Brazilian corporate law, the holder of non-voting shares have the right to appoint at least one member of theConselho Fiscal.The same right is granted to minority shareholders that hold at least 10% of the voting shares. The remaining holders of voting shares have the right to elect a number of members equal to the sum of members appointed by holders of non-voting shares and by minority holders of voting shares, plus one. Name

   Position

   Position Held Since

   Current Term ExpiresMartin Roberto Glogowsky

   Chairman,Conselho Fiscal

   July 12, 2005

   April 30, 2014Edison Giraldo

   Director

   April 23, 2013

   April 30, 2014João Adamo Junior

   Director

   April 30, 2012

   April 30, 2014
  Martin Roberto Glogowsky(59) has been a member of ourConselho Fiscalsince July 2005. He joined Fundaçao Cesp in 1999 and he has been the Chief Executive Officer since May 2005. Previously, Mr. Glogowsky worked at Banco BBA and Banco Schahin Cury in the capital market department. Currently he is also member of several Boards of Directors, Fiscal Councils and Audit Committees for BM&FBovespa’s Novo Mercado companies. He holds a B.A. degree in Law from Pontifícia Universidade Católica de São Paulo and a Business Administration degree from  Fundação Getúlio Vargas. Edison Giraldo(71)holds a bachelor’s degree in Accounting from the Faculdade de Ciências Políticas e Econômicas of Rio de Janeiro, Brazil. He has previous experience as a member of the Fiscal Council and of the Audit Committee of Embratel Participações S.A. and worked in various roles at Cia. Brasileira de Petroleo Ipiranga, including as Auditor, Accountant, Accounting Division Manager, Corporate Accounting and Tax Advisory Manager and Coordinator for the Accounting and Tax Accountants Working Group formed by accountants of the Ipiranga Group. He has also been a member of the CANC - Audit and Accounting Standards of ABRASCA and a member of the Fiscal Councils of IBP - Brazilian Institute of Oil and Gas and of FFMB - Francisco Martins Bastos Foundation Private Pension. Mr. Giraldo is a retired professor of Tax Accounting at the UFF - Universidade Federal Fluminense and professor of graduate studies in Planning Accounting, Corporate and Tax at the UFF - Universidade Federal Fluminense.


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João Adamo Júnior(43)is currently a General Manager of More Invest Gestão de Recursos Ltda.He is also a Member of the Executive Committee of Mainstay Interest Ltda. He was Director of Vision Brazil Investments from 2007 to 2009 and UBS from 2004 to 2007. From 1997 to 2004 he was CEO of Maxblue DTVM S.A. of Deutsche Bank and was an Associate at Bank Fenícia S.A. from 1992 to 1997. He holds a degree in Law from the Law School of Largo San Francisco and a degree in Business Administration from Fundação Getúlio Vargas. He is currently pursuing a master’s degree in Philosophy at Pontifícia Universidade Católica. Compensation Committee We are currently not required to, and do not, maintain a compensation committee. Executive Officers and Senior Managers Our by-laws provide for a minimum of three and a maximum of four executive officers appointed by our board of directors for renewable two-year terms. Our executive officers are responsible for all matters concerning our day-to-day management and operations. Our executive officers must be residents of Brazil and may or may not be shareholders of Net Serviços. Currently, we employ four executive officers. In addition, we currently employ four senior managers that make significant contributions to our business. Net Serviços’ executive officers are: Name

   Position

   Position Held Since

   Current Term ExpiresJosé Antônio Guaraldi Félix

   Chief Executive Officer

   January 2008

   February 2014Roberto Catalão Cardoso

   Chief Financial Officer

   August 2010

   February 2014Rodrigo Marques de Oliveira

   Chief Strategic Planning Officer

   February 2012

   February 2014Daniel Feldmann Barros

   Chief Operating Officer

   February 2012

   February 2014
 José Antônio Guaraldi Félix(58) became Chief Executive Officer of Net Serviços in January 2008. Mr. Félix had been our Chief Operating Officer since May 2003. Previously, he was the Chief Operating Officer for five years and before a regional officer for two years at Net Serviços. Prior to that he was an officer of Net Sul, where he headed 16 operations in southern Brazil. Mr. Félix worked at RBS from 1980 to 1990, holding various positions in the operational area.Mr. Félix has a degree in Telecommunication Engineering from Pontifícia Universidade Católica do Rio Grande do Sul.Mr. Félix also graduated in Strategic Business Management from Fundação Dom Cabral, from Kellogg School of Management in Chicago, and from Insead Business School in France. Roberto Catalão Cardoso(44)has been our Chief Financial Officer since August 2010. Previously, he worked for seven years at Embratel, where he ultimately held the position of Controller and managed other activities in the financial and business units. At Embratel, Mr. Catalão was actively involved in issues related to the partnership established between Net Serviços and Embratel.  Before joining Embratel, Mr. Catalão worked in large and renowned international audit and consulting firms.  He started his career in Brazilian financial institutions. Mr. Catalão holds a bachelor’s degree in Accounting from the Universidade Federal of Rio de Janeiro and he graduated in Corporate Finance from the Pontifícia Universidade Católica of Rio de Janeiro


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Rodrigo Marques de Oliveira(41) has been our Chief Strategic Planning Officer since December 2009. He served as our Financial Planning Officer since March 2004. Previously, he worked as Head of Research of Banco Santander Brazil for three years. Mr. Marques worked at Banco Bozano Simonsen from 1994 to 2000, as senior analyst and Head of Research. Mr. Marques has a degree in Mechanical Engineering from Pontifícia Universidade Católica do Rio de Janeiro and holds the Chartered Financial Analyst, or CFA, designation. Daniel Feldmann Barros(44) has been our Chief Operating Officer since December 2009. He served as our Regional Operating Officer for São Paulo since June 2005, during which time he was responsible for managing our operation in the city of São Paulo. Previously, he worked as Regional Operating Officer for 33 of our operations in different states. He worked at Net Sul in various positions in the operational units. Mr. Barros has a degree in Telecommunication Engineering from Universidade Federal de Santa Catarina and a degree in Business Administration from the University of California. Indemnification We currently provide insurance for our directors, executive officers and senior managers for indemnification by us or our subsidiaries against any liabilities incurred by the directors, executive officers and senior managers in their official capacity as such. Compensation of Directors and Principal Executive Officers All members of our board of directors and of ourConselho Fiscalare entitled to receive compensation in connection with their serving on our boards. Currently, two independent members of our board of directors and all members of ourConselho Fiscalreceive compensation in connection with their serving on our boards. For the year ended December 31, 2012, the aggregate compensation paid and benefits in kind granted by us to our independent directors, members of ourConselho Fiscaland our principal executive officers for services in all capacities was R$11.6 million. Directors’ Service Contracts Our directors and alternates are not subject to any service contracts with us or any of our subsidiaries. Employees All of our employees are located in Brazil. At December 31, 2012, we had 15,441 employees. At December 31, 2011 and 2010, we had 16,668 and 15,746 employees, respectively. We believe that our relations with our employees and the labor union named “Sindicato Nacional dos Trabalhadores em Empresas Prestadoras de Serviços e Operadoras de Sistemas de Televisão por Assinatura, a Cabo e MMDS” are generally good. Share Ownership No director, executive officer or senior manager of Net Serviços is the record owner of more than 1.0% of our shares. For certain information on the beneficial ownership of our shares, including shares held by affiliates of our directors, see “Item 7. Major Shareholders and Related Party Transactions.”


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Variable Compensation Plan and Long-Term Incentive Plan We currently have two complementary compensation plans as described below: (i) a variable compensation plan, the “Plano de Participação nos Resultados,” or PPR.In accordance with a labor agreement with the union, we pay our employees up to 3.6 monthly wages if we achieve pre-determined financial and operational performance goals established in accordance with the annual goals approved by the board of directors. For a selected number of administrative members, directors and managers, we have individual agreements with individually established goals, which include reaching a certain target number pay-television and broadband Internet subscribers, free cash flow generation and customer satisfaction. (ii) a retention plan was offered to a selected number of administrative employees, officers and managers, with the objective of retention. The expenses related to this plan have been accrued since its inception in 2008. This retention plan was implemented in 2008 in accordance with our previous long-term plan. Expenses are recognized on the accrual basis and the payments on a annual basis. In 2012, we reached around 75% of the pre-determined goals, and amounts accrued in the total amount of R$122.5 million were paid on February 8, 2013. Pension, Retirement and Similar Benefits We currently do not have any pension or retirement plans for our employees. ITEM 7.          MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS. Major Shareholders We have two classes of capital stock authorized and outstanding: common shares and preferred shares. Our common shares have full voting rights. Our preferred shares have voting rights in only limited circumstances. As of April 19, 2013, none of our outstanding common shares and approximately 0.2% of our outstanding preferred shares were held in the form of ADSs. On April 19, 2013, there were approximately 3,000 record holders of our preferred shares, including in the form of ADSs, in the United States. Our controlling shareholder is América Móvil, which on April 19, 2013 indirectly held 92.2% of our common shares. During the three-month period ended March 31, 2012, Embrapar acquired indirect control over us, as a result of the acquisition of 1,077,520 common shares issued by GB, which directly controls us, previously held by Globo Group. The acquired shares represent 5.5% of the voting capital of GB and were subject to the Option, pursuant to GB’s Shareholders’ Agreement entered into on March 21, 2005. On September 14, 2012, Embrapar announced that it had reached an agreement with Globo to implement a corporate reorganization involving the shares of GB and NET held by Embrapar, Embratel and Globo in order to address Anatel’s concerns about Globo, a Brazilian producer of cable television and other media content, being a part of the group controlling NET. On September 17, 2012, Globo, Embrapar and Embratel undertook the corporate reorganization, which resulted in Embrapar and Embratel no longer directly holding any shares in NET, and Globo no longer holding any interest in GB. After the restructuring, Embrapar and Embratel now hold 100% of the voting and total capital of GB. GB directly owns 89,446,769 common shares and 223,080,448 preferred shares of NET, representing 78.15% of NET’s common shares,

97.63% of its preferred shares and 91.1% of the total number of NET’s common shares and preferred shares.


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América Móvil owns and operates the largest telecommunications system in Mexico. It is the sole provider of fixed line telephony services in Mexico and the leading provider of fixed local and long distance telephony services and Internet access in Mexico. The acquisition by América Móvil, through Embrapar, of this additional interest in voting capital of GB constitutes an acquisition of a controlling interest in Net Serviços that, pursuant to our by-laws, and the applicable Brazilian laws and regulations, will require that Embrapar make an offer to purchase all of our outstanding common shares and preferred shares at a price equal to 100% of the price paid by Embrapar for such controlling interest. By acquiring our control, Embrapar aims to expand its operations, as well as the operations of its subsidiaries, in the Brazilian telecommunications market. In March 2012, Embrapar announced that it intends to launch a unified tender offer for the acquisition of any and all of our common and preferred shares, including the shares represented by ADRs and the shares traded on LATIBEX. Embratel, Embrapar and GB are currently seeking to launch the unified tender offer, which would also result in NET’s delisting from the Level 2 differentiated corporate governance segment of the BM&FBovespa, following the CVM’s approval and registration.  On December 21, 2012, Embratel, Embrapar, GB and EG entered into the NET Shareholders’ Agreement, and Embratel, Embrapar, and Globo entered into the EG Shareholders’ Agreement. Each of the Shareholders’ Agreements were approved by Anatel and have replaced the previously existing shareholders’ agreements, as described below. The following table sets forth, as of April 23, 2013, information regarding the beneficial ownership of common shares and preferred shares by each person known by us to own beneficially more than 5% of any class of our equity securities. None of our major shareholders identified in this table has special voting rights. Common Shares

   Preferred Shares

   Total SharesName

   Number

   Percentage

   Number

   Percentage

   Number

   PercentageGB Empreendimentos e Participações S.A.(1)

   89,446,769

   78.2%

   223,080,448

   97.6%

   312,527,217

   91.1%Globo Comunicação e Participações S.A.

   10,211,973

   8.9%

   1,000

   0

   10,212,973

   3.0%EG Participações S.A.

   14,080,704

   12.3%

   0

   0

   14,080,704

   4.1%
 
 (1)GB is wholly-owned by Empratel and Embrapar, which are controlled by América Móvil. As of April 23, 2013, Globo directly held 8.9% of our voting capital and Globo Group held 49.0% of the voting capital and 100% of the non-voting capital of EG Participações S.A. Globo is a Brazilian holding company controlled by the Marinho family with operations in Brazilian broadcast television, pay-television programming, magazine publishing and printing and interests in cable and satellite television. As of April 23, 2013, non-affiliates owned 0.6% of our common shares and 2.4% of our preferred shares (including preferred shares represented by ADRs), amounting to 1.8% of our total capital stock.


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Shareholders’ Agreements On December 21, 2012, Embratel, Embrapar, GB and EG entered into the NET Shareholders’ Agreement, and Globo, Embratel and Embrapar entered into the EG Shareholders’ Agreement. We refer to these shareholders’ agreements together as the Shareholders’ Agreements. The Shareholders’ Agreements contain provisions relating to, among other things, the transfer of our shares and of the shares issued by EG, rights of first refusal, and governance. Right of first refusal and transfer of shares.The Shareholders’ Agreements establish specific rules for the transfer of NET’s shares and EG’s shares. In the event that one or more shareholders party to either of the Shareholders’ Agreements wish to transfer their shares, the transferring shareholders are required to notify in writing the non-transferring shareholders party to such Shareholders’ Agreement in order to enable them to exercise their right of first refusal. Under the Shareholders’ Agreements, transfers of NET’s shares or EG’s shares to NET’s competitors, as defined in the Shareholders’ Agreements, are not permitted. Furthermore, the shareholders party to the Shareholders’ Agreements may not encumber or otherwise create any liens on NET’s shares or EG’s shares, except under limited circumstances. Previous meetings.The Shareholders’ Agreements provide that a meeting of the representatives of Globo, Embratel, Embrapar and GB must be held prior to each of NET, or any of NET’s subsidiaries’, general shareholders meetings or board of directors meetings at which certain matters (“Relevant Matters”) are to be considered. The prior meeting is to establish the position that will be adopted at the general shareholders meeting or board of directors meeting, as the case may be, by the shareholders party to the Shareholders’ Agreements. Relevant matters must be approved at a prior meeting by the affirmative vote of shareholders party to the Shareholders’ Agreements. The shareholders are then required to vote or instruct their respective directors to vote, as the case may be, in accordance with the outcome of the vote at such prior meeting. Material matters. The Shareholders’ Agreements require the approval of Globo, Embratel, Embrapar and GB at a prior meeting as described above for specified Relevant Matters. These Relevant Matters include certain extraordinary corporate transactions relating to NET, including certain business combinations, amendments to NET’s by-laws with respect to certain matters, amendments to any agreements with Globo, execution, renewal or amendment to agreements for the purchase of broadcasting rights from non-Brazilian providers and the exercise of NET’s voting rights in any company controlled by NET with respect to certain matters. Tag-along rights.Under the Shareholders’ Agreements, in the event of a sale of control of NET by any shareholder party to the Shareholders’ Agreements, each of the other shareholders party to the Shareholders’ Agreements will have the right to require such selling shareholder to include in the sale such other shareholder’s shares of NET or EG, subject to the same price and payment conditions; provided that, if the number of shares of NET or EG, as the case may be, exceeds the number of shares the purchaser is willing to acquire, the number of shares of NET or EG, as the case may be, sold will be reduced proportionately for each selling shareholder. Board of directors (Conselho de Administração).The Shareholders’ Agreements require that NET’s board of directors be comprised of ten sitting members and an equal number of alternates. Currently, the board has ten sitting members and equal mumber of alternates who have been appointed (and can be dismissed) by Embrapar and Embratel. Additionally, in accordance with BM&FBovespa Level 2 listing requirements, at least two sitting members and two respective alternates must be independent.


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Board of officers (Diretoria­).The Shareholders’ Agreements provide that our board of officers and the board of officers of each company controlled by us should be professional, and have the structure currently foreseen in our by-laws and the by-laws of our subsidiaries. Business covenants.Under the EG Shareholders’ Agreement and subject to certain ownership requirements, América Móvil agrees not to, and not to cause a related party to, own, conduct or participate in the management of any broadcast television or platform (other than NET’s) or content production businesses (other than those specified in the EG Shareholders’ Agreement) in Brazil. Under the NET Shareholders’ Agreement, Embrapar, Embratel and EG agree to prevent NET from extending a loan to any company that is not controlled by NET.  Term.The Shareholders’ Agreements shall be valid and effective so long as Grupo Globo owns, directly or indirectly, at least 10,250,648 of EG’s shares, irrespective of the percentage ownership represented by such common shares. Related Party Transactions We have engaged in a variety of related party transactions, including the transactions described below. We cannot state with any certainty the extent to which such transactions are comparable to those which might have been obtained from a non-affiliated third party. We intend to enter into any future material related party transactions on terms that are fair and reasonable to us. Material Transactions with Related Parties G2C Programming Agreement On June 27, 2004, we entered into an amended programming agreement with NET Brasil, a wholly-owned subsidiary of Grupo Globo, whereby we obtained all of our programming from Brazilian sources through NET Brasil. Since then, we have obtained directly, for our own account and benefit, all international content from international programming suppliers. The amended programming agreement has a term of ten years but will be automatically renewed unless one party notifies the other of its intent to terminate the agreement at least six months prior to the ten year anniversary of the agreement. In 2012, NET Brasil changed its name to G2C Globosat Comercialização de Conteúdos S.A (G2C). We pay G2C a fixed brokerage service fee equal to approximately R$160,000 per month, adjusted by the Consumer Price Index. Pursuant to our programming agreements with G2C, we recognized expenses of R$1,200.8 million in 2012 (R$1,087.7 million in 2011), including programming from Globosat and the brokerage fee. Our liabilities to G2C are considered normal trading transactions and are classified as “accounts payable – programming suppliers” under current liabilities in the consolidated balance sheet in our audited consolidated financial statements included elsewhere herein.


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Programming Guide Our programming guide is produced by Editora Globo S.A., or Editora, a publishing company affiliated with Globo. In 2012 and 2011, we recognized expenses of R$6.1 million per year for the publication of our program guide. Fixed Line Telephony and Small and Medium Business Services In 2006, we entered into agreements with our shareholder Embratel to offer fixed line telephony services and small and medium business services. With these fixed line telephony services, we can offer triple-play (pay-television, broadband Internet and fixed line telephony) service for households that are covered by our bidirectional network. With these small and medium business services, we provide broadband Internet and fixed line telephony services for potential small- and medium-sized businesses that are covered by our bidirectional network. By offering such services, we intend to create synergies and increase the utilization and profitability of our existing infrastructure. According to the agreement governing fixed line telephony services, as amended, we are responsible for managing the operation of such services, which should strengthen our pay-television and broadband Internet businesses for residential customers. Embratel, which owns the licenses to provide fixed line telephony services, is responsible for investments in infrastructure to offer the services and provides customer service expertise for the fixed line telephony business. Pursuant to the agreement governing fixed line telephony services, as amended, we share with Embratel fixed line telephony services operating results, calculated by subtracting taxes on revenues, interconnection fees and costs incurred in connection with defaulting end users from gross fixed line telephony revenues. According to the agreement governing small and medium business services, as amended, we maintain the infrastructure to provide Embratel corporate Internet protocol access telecommunication services, including certain equipment and general field services. Embratel offers broadband Internet and fixed line telephony services, provides certain required equipment and adapts and manages its information technology systems and applications in connection with services provided to small and medium business. Net revenue from fixed line telephony services and small and medium business services amounted to R$703.5 million and R$572.7 million during the year ended December 31, 2012 and 2011, respectively. Internet Services and IRU Agreements On June 26, 2003, we entered into an agreement with Embratel to acquire access to Embratel’s bandwidth that connects our network to the Internet through private lines. This contract enables us to provide our broadband Internet services. This contract has been amended several times to include certain of our subsidiaries and to update prices and bandwidth capacities to access the Internet. On December 29, 2009, we entered into two indefeasible rights of use (IRU) agreements with Embratel, each with a term of five years beginning on December 1, 2009, to (i) use Embratel’s network for the provision of our broadband Internet service in exchange for a one-time payment in the amount of R$849.6 million; and (ii) allow Embratel to use our transmission capacity in local accesses in our hybrid fiber-coaxial network to provide fixed telephony services in exchange for a one-time payment in the amount of R$873.5 million. For financial accounting purposes, we have


deferred both our rental expenses to Embratel and our rental revenue from Embratel under the IRU agreements. Such amounts are recognized monthly over the term of the IRU agreements.


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Other transactions involving us and companies related to Embratel, such as: (i) private circuits for internal fixed line telephony services; and (ii) general fixed telephony services are provided at prices believed to be at market rates. The amount paid to Embratel for these services, together with bandwidth access to the Internet, totaled R$764.3 million in 2012 and R$531.9 million in 2011. The increase is primarily due to higher cost related to the bandwidth to access the Internet. Optical Fiber Lease Agreement On November 22, 2005, we entered into an agreement with Embratel pursuant to which we lease new and surplus optical fibers, including disconnected optical fibers, to Embratel for an initial term of 10 years. Lease payments under this Optical Fiber Lease Agreement are made on a monthly basis and are calculated based on use. The Optical Fiber Lease Agreement, as amended, prohibits Embratel from providing certain pay-television and residential Internet broadband services through the subject optical fibers and prohibits us from providing certain voice and corporate Internet broadband services through the subject optical fibers. Under the Optical Fiber Lease Agreement, Embratel has a right of first refusal to acquire our optical fiber network should we decide to sell it or any part thereof. Financing Arrangements with Related Parties Intercompany Loans with América Móvil See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resorces–Debt Financing–Intercompany Loans (Mutuos).” Loan Agreement with Banco Inbursa S.A. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resorces–Debt Financing–Banco Inbursa S.A.”


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ITEM 8.          FINANCIAL INFORMATION. Our audited consolidated financial statements as of December 31, 2012 and 2011 and for the years ended on December 31, 2012, 2011 and 2010 are included elsewhere in this Form 20-F. See “Item 4. Information on the Company—Legal Proceedings” for a discussion of our legal proceedings. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources” for a discussion of our financial position and the redemption of our perpetual bonds. See “Item 10. Additional Information—Dividend Policy” for a discussion of our policy on dividend distributions. Item 9.          The Offer and Listing. General The principal non-United States market for our preferred shares is the BM&FBovespa. Our preferred shares are traded on the BM&FBovespa under the symbol “NETC4.” In addition, our shares are also traded in Spain on Latibex under the symbol “XNET.” Since June 2002, we have complied with the requirements of Level 2 of the BM&FBovespa. Level 2 is a listing segment created for the trading of shares issued by companies that voluntarily undertake to comply with certain corporate governance practices and disclosure requirements that are in addition to those imposed by Brazilian law. The inclusion of an issuer in Level 2 signifies the issuer’s compliance with a series of corporate rules, known as good practices of corporate governance, which are more rigid than those required by the Brazilian legislation. These rules increase the rights of the shareholders as well as improve the quality of information we provide to the market. Our predecessor company, Multicanal, conducted an offering of ADSs in October 1996. Each ADS represents one preferred share. The ADSs trade in the United States on the NASDAQ Global Market under the symbol “NETC” and are evidenced by ADRs. The ADSs are outstanding under an amended and restated deposit agreement dated as of July 28, 2006 among us, JPMorgan Chase Bank N.A., or JPMorgan Chase, as depositary, and the owners and holders from time to time of the ADSs. An ADR may represent any number of ADSs. Only persons in whose names ADSs are registered on the books of the depositary are treated as owners of ADSs under the deposit agreement. The table below sets forth, for each period indicated, the high and low closing prices in Reais for the preferred shares on the BM&FBovespa and the high and low closing prices of the ADSs in U.S. dollars as reported by the NASDAQ Global Market. BM&FBovespa

   R$ per preferred share

   NASDAQ

   US$ per ADSYear

   Low

   High

   Low

   High2008

   9.86

   26.06

   3.88

   15.802009

   13.46

   25.23

   5.74

   14.922010

   16.76

   25.11

   9.10

   14.762011

   13.76

   23.00

   7.35

   14.202012

   18.16

   27.40

   9.71

   13.75


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BM&FBovespa

   R$ per preferred share

   NASDAQ

   US$ per ADSLow

   High

   Low

   HighQuarter2011:First Quarter

   13.76

   23.00

   8.37

   14.20Second Quarter

   14.01

   17.45

   8.56

   10.66Third Quarter

   14.00

   16.46

   7.55

   10.59Fourth Quarter

   14.42

   18.88

   7.35

   10.942012:First Quarter

   18.16

   26.49

   9.71

   15.00Second Quarter

   25.80

   27.00

   12.55

   14.24Third Quarter

   26.20

   27.71

   12.55

   13.52Fourth Quarter

   26.76

   27.90

   12.74

   13.49MonthOctober 2012

   26.76

   27.30

   12.89

   13.47November 2012

   27.10

   27.47

   12.79

   13.33December 2012

   27.23

   27.90

   12.74

   13.49January 2013

   27.21

   28.50

   13.14

   13.90February 2013

   27.51

   28.69

   13.58

   14.75March 2013

   28.00

   29.40

   13.93

   14.74April 2013 (through April, 19)

   28.88

   30.50

   14.01

   15.50  Trading Markets NASDAQ Global Market The primary market for our preferred shares held in the form of ADSs is the NASDAQ Global Market. On December 31, 2012, there were 0.8 million ADSs outstanding. The average daily trading volume of the ADSs on the NASDAQ Global Market during 2012 wasUS$84,831 or 6,598 ADSs. Brazilian Stock Exchanges Tax Matters. Trading on Brazilian stock exchanges by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or a non-Brazilian holder, is subject to certain limitations under Brazilian foreign investment legislation. With limited exceptions, non-Brazilian holders may only trade on Brazilian stock exchanges in accordance with the requirements of Resolution No. 2,689, of January 26, 2000, of the National Monetary Council. Under Brazilian tax laws, non-Brazilian holders of securities enjoy favorable tax treatment if they are qualified in terms of Resolution No. 2,689/00. To qualify under this Resolution, a non-Brazilian holder must: ·appoint a representative in Brazil with power to undertake acts relating to the investment;


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·register as a foreign investor with the CVM; and ·register its investment with the Central Bank.  Under Resolution No. 2,689/00, securities held by non-Brazilian holders must be maintained under the custody of, or in deposit accounts held in, financial institutions duly authorized by the Central Bank and the CVM. In addition, under Resolution No. 2,689/00 securities trading are restricted  to transactions on Brazilian stock exchanges or qualified over-the-counter markets.  Registered non-Brazilian holders are allowed to invest in almost any type of investment available to Brazilian citizens in the financial and securities markets, with few exceptions. Registration allows investors to remit foreign currency abroad when funds are distributed to registered shares or if proceeds are received from the disposition of such shares. The funds are converted into foreign currency at the forex market rate.  The registered capital for each share purchased in Brazil and deposited with the custodian is equal to its purchase price (informed in U.S. dollars). If an ADS holder chooses to cancel ADSs in exchange for the underlying shares, the investment in the shares may be registered with the Central Bank. This registration is necessary for the holder to receive dividends or proceeds from the sale of the shares outside of Brazil.  Pursuant to Resolution No. 2,689/00, the registration of a foreign investment is made electronically by the local representative of the foreign investor. The registered capital for a share withdrawn from the depositary bank upon cancellation of an ADS or a common share ADS will be the U.S. dollar equivalent of: ·the average price of the underlying share on the stock exchange on the date of withdrawal; or ·if no shares were sold on that day, the average price on the stock exchange in the 15 trading sessions immediately preceding the withdrawal. ·When a holder of ADSs exchanges ADSs for the underlying shares, the holder is entitled to either: ·sell the shares on the stock exchange and remit the proceeds abroad within five business days; or ·freely convert the investment in the underlying shares to either an investment under Resolution No. 2,689/00 (subject to satisfaction of the legal requirements described above) or a direct foreign investment in Brazil (in accordance with applicable rules). Holders that do not comply with the rules previously described may still register their investment, but the registration process will be subject to detailed procedures established by the Central Bank. Holders that do not comply with these rules may also be subject to monetary penalties. See “Item 10. Additional Information—Taxation—Material Brazilian Taxation Considerations—Taxation of Gains” for a description of certain tax benefits extended to non-Brazilian holders who qualify under Resolution No. 2,689.


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ITEM 10.        ADDITIONAL INFORMATION. Memorandum and Articles of Association Organization, Register and Entry Number We are a publicly held corporation registered with CVM and organized under the laws of the Federative Republic of Brazil. We are registered in the commercial registry of the State of São Paulo under the entry number 35.300.177.240 and in the Taxpayers’ General Registry of the Ministry of Finance under registration number 00.108.786/0001-65. Our constituent document is ourEstatuto Social, which we refer to in this Form 20-F as our by-laws. Object and Purpose Our corporate object and purpose, described in Article Three of our by-laws, are those of a holding company and the distribution of our pay-television and other value-added services to subscribers; the provision of telecommunication services; the distribution of signals of any kind, through local cable networks; and the dissemination of information on local channels. Our subsidiaries also have as their corporate purpose the distribution of our pay-television and other value-added services to subscribers; the provision of telecommunication services; the distribution of signals of any kind, through local cable networks; and the dissemination of information on local channels. We also provide our operating subsidiaries with administrative, financial and consulting support. We may, without restriction, acquire or hold quotas or shares in other companies which carry on activities similar to ours and to those of our subsidiaries, or which engage in trade commerce and representation. Voting Rights Relating to Our Common and Preferred Shares Each holder of our common shares is entitled to one vote per common share at our general shareholders’ meetings; each holder of our preferred shares is entitled to one vote per preferred share at our general shareholders’ meetings exclusively with respect to the following matters in accordance with BM&FBovespa’s Corporate Governance Listing Rules for Level 2: ·our transformation, takeover, merger or spin-off; ·valuation of assets used in determining increases in our capital; ·approval of certain specified agreements between us and our controlling shareholders or their affiliates; ·selection of a specialized firm to determine our fair market value, in relation to a public offering of our shares; and ·change or repeal of provisions of our by-laws that alter or modify any BM&FBovespa requirements. According to Article 111 of the Brazilian corporate law, if a company is required but fails to pay dividends for three consecutive years, the preferred shares acquire voting rights. However, since our preferred shares do not have rights to fixed or minimum dividends, Article 111 is not applicable to us.


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According to the Brazilian corporate law, the resolutions of a general shareholders’ meeting shall be passed by a simple majority of those present. Nevertheless, according to Brazilian corporate law, the approval of shareholders representing at least one-half of our outstanding voting shares shall be necessary for a resolution which: ·creates preferred shares or increases an existing class of shares without maintaining its ratio to the other classes of shares; ·alters a preference, a privilege or a condition of redemption or amortization conferred upon one or more classes of preferred shares, or creates a new, more favored class; ·reduces a mandatory dividend; ·merges the corporation with another corporation or consolidates the corporation; ·participates in a group of corporations as defined under Brazilian corporate law; ·changes the corporation’s corporate purpose; ·liquidation of the corporation; ·creates founders’ shares; ·spins-off the corporation; or ·dissolves the corporation. Shareholders participating in a general shareholders’ meeting have the power to decide the following: ·the grant of guaranties and other securities in favor of third parties; ·cancellation of our registration as a public company; ·cancellation of our registration for trading of shares on Level 2 of the BM&FBovespa; and ·selection of a specialized firm to determine our fair market value, in relation to a public offering of our shares. According to Brazilian corporate law, any shareholder, with or without a right to vote, may attend a general meeting and take part in the discussion of matters submitted for consideration. Generally, apart from certain exceptions provided by law, quorum for a general meeting shall be the presence of shareholders representing at least one-quarter of the voting capital; if quorum is not met, the meeting is reconvened and quorum shall be the presence of any number of shareholders. Each of our ADSs represents one preferred share. Since voting rights are restricted on our preferred shares, the holders of ADSs are only entitled to vote at our shareholders’ meetings on the matters discussed above.


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Conversion Rights Under Brazilian corporate law, the conversion of a class of shares into another class of shares must be expressly authorized in the by-laws of the company. Our by-laws do not contain any such provisions, and therefore unless a shareholders’ meeting expressly approves the amendment of the by-laws, our common shares cannot be converted into preferred shares and our preferred shares cannot be converted into common shares. Preemptive Rights Under Brazilian corporate law, upon the issuance of new common or preferred shares, as the case may be, or securities convertible into shares, all existing shareholders of a particular class have the right to subscribe for new shares of the same class, in proportion to the shares they already own. If, in effecting such preemptive rights, an insufficient amount of new shares exist to assure that all existing shareholders of a certain class are able to exercise their full preemptive rights, the rights may be extended on a pro rata basis to another class of shares so as to enable all existing shareholders who wish to exercise their preemptive rights to do so. Preemptive rights are freely transferable. A minimum period of 30 days following the publication of a notice of a capital increase must be allowed for the exercise of preemptive rights. Brazilian corporate law and our by-laws authorize us to issue shares, or securities convertible into shares, without preemptive rights so long as such shares are sold on a stock exchange, through public subscription or by an exchange of shares in a public tender offer. In the event of a new share issuance, holders of ADSs have preemptive rights to the extent described above. However, holders of ADSs may not be able to exercise their preemptive rights relating to the preferred shares underlying their ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. In addition, our shareholders’ agreements establish certain rules in relation to preemptive rights among our major shareholders. See “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements.” Liquidation Rights In the event of our liquidation, our common and preferred shares have pro rata rights to share in our assets. Preferred shares, however, have priority over common shares in the distribution of capital. Redemption Provision Our by-laws do not contain a redemption provision. However, our shareholders, acting at a general shareholders’ meeting, may elect to effect a redemption of our outstanding shares subject to the satisfaction of certain requirements. Rights of Withdrawal Brazilian corporate law provides that, under certain circumstances, a shareholder has the right to withdraw his or her equity interest from a company in exchange for payment for such shares by the company. In our case, this right of withdrawal may be exercised by dissenting shareholders in the event that at least half of all holders of our outstanding voting shares authorize us to:


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·create new preferred shares or increase the amount of preferred shares already existing without maintaining such existing preferred shares’ ratio to the other classes of existing shares, unless otherwise provided by our by-laws; ·reduce the mandatory distribution of dividends; ·change our corporate purpose; ·merge with another company or consolidate with another company subject to the conditions set forth under Brazilian corporate law; ·transfer all of our shares to another company in order to make us a wholly-owned subsidiary of such company, known asincorporação de ações; ·participate in a centralized group of companies as defined under Brazilian corporate law and subject to the conditions set forth therein; ·alter a preference, privilege or condition of redemption or amortization conferred upon one or more classes of preferred shares, or create a new, more favored class; or ·spin-off. The right of withdrawal lapses 30 days after the publication of the minutes of the shareholders’ meeting that approved the corporate actions described above. We would be entitled to reconsider any action giving rise to withdrawal rights within ten days following the expiration of such rights if the withdrawal of shares of dissenting shareholders would jeopardize our financial stability. With respect to the first and seventh bullet points above, only shareholders affected by such actions have the right to withdraw from the corporation. In addition, shareholders may only exercise the rights of withdrawal with respect to the fourth and seventh bullet points above if such shares are not part of the Ibovespa or any other stock exchange index and if less than 50% of the shares issued by the company are outstanding. Our preferred shares are included in the Ibovespa. This right of withdrawal may also be exercised in the event that the entity resulting from our merger, consolidation or spin-off fails to become a listed company within 120 days of the shareholders’ meeting at which such decision to merge, consolidate or spin-off, as the case may be, was made. Liability for further capital calls Brazilian law does not provide for capital calls. Our shareholders’ liability is limited to the payment of the issue price of the shares subscribed or acquired. Changes in Rights of Shareholders Under Brazilian corporate law, the rights of our shareholders may only be changed by a shareholder resolution amending our by-laws. A resolution to amend the by-laws requires the approval of an absolute majority of votes cast at a shareholders’ meeting. A quorum of not less than two-thirds of the share capital entitled to vote must be present. If the quorum requirement is not met at the initial meeting, the resolution may be approved at a later date by the majority of any number of holders of voting shares present at a second call of the shareholders’ meeting.


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Shareholders’ Meetings Shareholders’ meetings are typically held at our principal office. Shareholders’ meetings are called by publication of a notice in the Diário Oficial, the Brazilian official gazette, and in the Brazilian newspaper Valor Econômico. Our annual shareholders’ meeting must be held during the first four months after the end of the fiscal year and must be convened on not less than fifteen days’ notice. At the annual shareholders’ meeting, the annual report, including a report on our activities during the previous year and our audited financial statements, is presented to the shareholders for examination, discussion and approval. Brazilian corporate law requires that if the board of directors fails to call a shareholders’ meeting within eight days after the receipt of a proper request for such a meeting, an extraordinary meeting may be called upon the request of theConselho Fiscal(if any) or shareholders holding at least 5% of our share capital. If the board of directors fails to call a shareholders’ meeting within 60 days after the receipt of a proper request for such a meeting, any shareholder may call an extraordinary meeting. Pursuant to our shareholders’ agreements, and depending on the subject to be decided, our major shareholders are required to vote in accordance with voting decisions made in their previous meetings. See “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements.” Only shareholders of Net Serviços and attorneys-in-fact of such shareholders may attend a shareholders’ meeting. Attorneys-in-fact must (1) have a power-of-attorney issued at no more than year before the date of the shareholders’ meeting and (2) be (i) a shareholder of Net Serviços; or (ii) a lawyer or a business administrator of a Net Serviços shareholder. The total compensation for our board of directors is determined at our annual shareholders’ meeting and the board of directors distributes such amount among its members as described in our by-laws. Transfer of Shares; Limitations on Shareholdings There are no restrictions on the transferability of our common shares, except as provided under applicable law, in our by-laws or in our shareholders’ agreements. CVM has issued rules providing that whenever a controlling shareholder makes a purchase of any class of shares (or securities convertible into shares) that results in an increase (or a potential increase) by at least 5% of a company’s share capital, the controlling shareholder must immediately provide notice of such purchase to CVM, the stock exchange and the over-the-counter market in which the company’s securities trade. In addition, current CVM regulations require that the controlling shareholder must effect a public offering whenever it purchases shares representing more than one-third of the outstanding shares of any class or type, if such acquisition of shares was not already effected through a public offering. Change of Control Provisions According to the Corporate Governance Listing Rules for Level 2 of the BM&FBovespa, in the event of an acquisition of a controlling interest in us, the purchaser must offer tag-along rights to all of our remaining shareholders in an amount equal to 100% of the price paid for each share of the controlling stake and, for holders of either common or preferred shares. Our by-laws, in that sense, require the purchaser to offer to holders of both common and preferred shares 100% of the price paid for each share in the controlling stake.


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CVM also requires that whenever a publicly held company experiences a change of control, the new controlling shareholder must immediately disclose the transaction to CVM, the stock exchange and the over-the-counter market in which the company’s securities trade. Capitalization As of December 31, 2012, our capital stock amounted to R$5.6 billion, of which R$12.6 million has not been paid in. As of December 31, 2012, our corporate capital consisted of 114,459,685 common shares and 228,503,916 preferred shares. Pursuant to our by-laws, the board of directors may increase our corporate capital up to a maximum amount of R$6.5 billion. This capital increase may be completed without amending our by-laws or obtaining prior shareholder approval and without maintaining the existing proportion among our classes of shares, subject to the applicable limitations under Brazilian law. Material Contracts Shareholders Agreement Our major shareholders are party to two shareholders’ agreements with respect to their ownership of our shares. See “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements” for additional details about the shareholders’ agreements. G2C Programming Agreement On June 27, 2004, we entered into an amended programming agreement with NET Brasil, a wholly-owned subsidiary of Grupo Globo, whereby we obtained all of our programming from Brazilian sources through NET Brasil. Since then, we have obtained directly, for our own account and benefit, all international content from international programming suppliers. The amended programming agreement has a term of ten years but will be automatically renewed unless one party notifies the other of its intent to terminate the agreement at least six months prior to the ten year anniversary of the agreement. In 2012, NET Brasil changed its name to G2C Globosat Comercialização de Conteúdos S.A (G2C). We pay G2C a fixed brokerage service fee equal to approximately R$160,000 per month, adjusted by the Consumer Price Index. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Related Parties—G2C Programming Agreement.” Embratel Indefeasible Right of Use Agreements See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Related Parties —Internet Services and IRU Agreements.” Fixed Line Telephony Offer Agreement See “Item 7. Major Shareholders and Related Party Transactions— Related Party Transactions—Material Transactions with Related Parties —Fixed Line Telephony and Small and Medium Business Services.” OpticalFiber Lease Agreement See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Related Parties —Optical Fiber Lease Agreement.”


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Exchange Controls Under Brazilian corporate law, 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 or common shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investment be registered with the Central Bank of Brazil. These restrictions on the remittance of foreign capital abroad could hinder or prevent the depositary bank and its agents for the preferred shares represented by ADSs from converting dividends, distributions or the proceeds from any sale of preferred shares, common shares or rights, as the case may be, into U.S. dollars and remitting such amounts abroad. 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 could adversely affect holders of ADRs. Under Resolution No. 2,689/2000 of the CMN, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. In accordance with Resolution No. 2,689/2000, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered outside Brazil.  Under Resolution No. 2,689/2000, a foreign investor must:  (1) appoint at least one representative in Brazil, with powers to perform actions relating to its investment,  (2) complete the appropriate foreign investor registration form,  (3) register as a foreign investor with the CVM, and register its foreign investment with the Central Bank of Brazil, and  (4) appoint a custodian, duly licensed by the Central Bank of Brazil, if the Brazilian representative in item (1) is not a financial institution.  Resolution No. 2,689/2000 specifies the manner of custody and the permitted means for trading securities held by foreign investors under the resolution.  Moreover, the offshore transfer or assignment of securities or other financial assets held by foreign investors pursuant to Resolution No. 2,689/2000 is prohibited, except for transfers resulting from a corporate reorganization, or occurring upon the death of an investor by operation of law or will.  Resolution No. 1,927/1992 of the CMN provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. It provides that the proceeds from the sale of ADSs by holders of ADRs outside Brazil are not subject to Brazilian foreign investment controls and holders of ADSs who are not residents of a low-tax jurisdiction (país com tributação favorecida), as defined by Brazilian law, will be entitled to favorable tax treatment.  An electronic registration has been issued to the custodian in the name of the depositary with respect to the ADSs. Pursuant to this electronic registration, the custodian and the depositary are able to convert dividends and other distributions with respect to the underlying shares into foreign currency and to remit the proceeds outside Brazil. If a holder exchanges ADSs for preferred shares, the holder must, within five business days, seek to obtain its own electronic registration with the Central Bank of Brazil under Law No. 4,131/1962 and Resolution No. 2,689/2000. Thereafter, unless the holder has registered its investment with the Central Bank of Brazil, such


holder may not convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such preferred shares.


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Under Brazilian law, whenever there is a serious imbalance in Brazil's balance of payments or reasons to foresee a serious imbalance, the Brazilian government may impose temporary restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil, and on the conversion of Brazilian currency into foreign currencies. Such restrictions may hinder or prevent the custodian or holders who have exchanged ADSs for underlying preferred shares from converting distributions or the proceeds from any sale of such shares, as the case may be, into U.S. dollars and remitting such U.S. dollars abroad. In the event the custodian is prevented from converting and remitting amounts owed to foreign investors, the custodian will hold thereaisit cannot convert for the account of the holders of ADRs who have not been paid. The depositary will not invest thereaisand will not be liable for interest on those amounts. Anyreaisso held will be subject to devaluation risk against the U.S. dollar. Dividend Policy General We have never paid cash dividends on our preferred shares or ADSs. In addition, several of our debt agreements limit our ability to pay dividends. Our by-laws, in accordance with Brazilian corporate law, require that, for any year in which we have “adjusted net profits” (as defined in Brazilian corporate law), we will be required to pay, subject to certain exceptions, a yearly minimum dividend equal to 25% of adjusted net profits, referred to as the “mandatory distribution.” Brazilian corporate law, however, permits publicly held companies, such as us, to suspend the mandatory distribution of dividends if the board of directors and theConselho Fiscalreport to the shareholders’ meeting that the distribution would be inadvisable in view of the company’s financial condition. If the board of directors andConselho Fiscalso report, the board of directors must file a justification for such suspension with CVM within five days of the shareholders’ meeting. Profits not distributed by virtue of this suspension shall be attributed to a special reserve and, if not absorbed by subsequent losses, shall be paid as dividends as soon as the financial condition of the company permits such payments. We have never reported adjusted net profits and consequently have never paid the mandatory distribution. We do not anticipate reporting adjusted net profits in the near-term. We intend to retain any profits in excess of any mandatory distribution in a supplementary reserve for use in the operation and expansion of our business, and therefore we do not anticipate paying any dividends in excess of any mandatory distribution for the foreseeable future. To the extent that we declare and pay dividends on the preferred shares, holders of ADSs on the applicable record date will be entitled to any dividend declared as of such record date in respect of the preferred shares underlying the ADSs, subject to the terms of the amended and restated deposit agreement. We would pay any cash dividend in Reais, so that the exchange rate in effect at the time of payment would determine the dollar value of the dividend received by the depositary, and hence the amount in dollars paid by the depositary to ADS holders upon the depositary’s conversion of the dividend amounts into U.S. dollars. Dividends on Our Common Shares and Our Preferred Shares In accordance with Brazilian corporate law, our common and preferred shares each carry the right to receive mandatory dividends. The preferred shares carry the right to receive in cash a dividend amount of 10% or more over the dividend amount available for distribution on the


common shares. In addition, in the event of our liquidation, preferred shares have priority over common shares in the distribution of capital.


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In the event that we pay dividends to our shareholders in the future, the owners of our shares on the record date, as identified in our shareholder registry, will be entitled to receive the payment. Amounts Available for Distribution At each annual general shareholders’ meeting, shareholders must determine how to allocate net profits from the preceding fiscal year. The board of directors must then approve the decision of the shareholders. For purposes of Brazilian corporate law, net profits are defined as net income after payment of income taxes and social contribution taxes for a given fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ and managements’ participation in the profits. In accordance with Brazilian corporate law and our by-laws, the amount available for dividend distribution is equal to our net profits less any amounts allocated from such net profits to: ·the legal reserve; ·a contingency reserve for anticipated losses; and ·an unrealized revenue reserve. We are required to maintain a legal reserve, to which we must allocate each fiscal year 5% of net profits for such year until the amount reserved equals 20% of our paid-in capital. However, we are not required to make any allocations to our legal reserve in any fiscal year in which the legal reserve, when added to our other established capital reserves, would exceed 30% of our capital. Net losses, if any, may be charged against the legal reserve. AtDecember 31, 2012, our legal reserve had a zero balance. Brazilian corporate law also provides for two additional discretionary allocations of net profits subject to approval by the shareholders at the annual general meeting. First, a percentage of net profits may be allocated to a contingency reserve for anticipated losses deemed probable in future years. Any amount so allocated in a prior year must be (i) reversed, if the loss does not occur, in the fiscal year in which the loss was anticipated or (ii) written-off, if the anticipated loss occurs. Second, if the amount of unrealized revenue exceeds the sum of: ·the legal reserve; ·retained earnings; and ·the contingency reserve for anticipated losses,such excess may be allocated to an unrealized revenue reserve. Under Brazilian corporate law, unrealized revenue is defined as the sum of: ·the share of equity earnings of affiliated companies; and ·profits from installment sales to be received after the end of the next succeeding fiscal year.


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With respect to unrealized revenue reserve, the amount of mandatory dividend exceeding the amount of the realized net profits in a given fiscal year may be allocated in an unrealized revenue reserve. Under Brazilian corporate law, realized revenues shall be the amount exceeding the sum of: ·the net positive result of equity adjustments; and ·profits or revenues from operations with financial results after the end of the next succeeding fiscal year. Under Brazilian corporate law, the by-laws of any company may authorize the creation of a discretionary reserve. By-laws which authorize the allocation of a percentage of a company’s net income to a discretionary reserve must also indicate the purpose of the reserve and the criteria for allocation of, and the maximum amount of, the reserve. Our by-laws require that, after the creation of a reserve as provided under Brazilian corporate law and the distribution of the applicable dividends, the remaining balance shall, upon a proposal submitted by the board of directors and approved by the shareholders in a general meeting, be allocated to a supplementary reserve so as to support the existence of working capital and for future capital appropriations. The amount of such supplementary reserve shall not exceed the capital of Net Serviços. The amounts available for distribution may be further increased by a reversion of the contingency reserve for anticipated losses recorded in prior years but not realized, or further increased or reduced, as the case may be, as a result of allocations of revenue to or from the unrealized reserve. The amounts available for distribution are determined on the basis of financial statements prepared in accordance with Brazilian corporate law. AtDecember 31, 2012, we had no investment reserve. Mandatory Distribution Brazilian corporate law generally requires that the by-laws of a Brazilian company specify for each fiscal year a minimum percentage of net income available for distribution, in the form of dividends, by such company to shareholders. Under our by-laws, such mandatory distribution has been fixed as an amount equal to 25% of net income, to the extent that such amounts are available for distribution. See “—General,” above. Under Brazilian corporate law, the mandatory distribution is based on a percentage of adjusted net income, not lower than 25%, rather than a fixed monetary amount per share.Brazilian corporate law, however, permits publicly held companies, such as our company, to suspend the mandatory distribution of dividends if the board of directors and theConselho Fiscalreport to the shareholders’ meeting that the distribution would be inadvisable in view of the company’s financial condition. If the board of directors andConselho Fiscalso report, the board of directors must file a justification for such suspension with CVM within five days of the shareholders’ meeting. Profits not distributed by virtue of this suspension shall be attributed to a special reserve and, if not absorbed by subsequent losses, shall be paid as dividends as soon as the financial condition of the company permits such payments. Payment of Dividends Brazilian corporate law and our by-laws require us to hold an annual shareholders’ meeting by the fourth month after the end of each fiscal year at which, among other things, shareholders must decide whether or not to we pay an annual dividend. The decision as to whether to pay an annual dividend is based on the financial statements for the relevant fiscal year. Under Brazilian


corporate law, dividends are generally required to be paid within 60 days following the date the dividend is declared, unless a shareholders’ resolution sets forth another date of payment, which, in either case, must occur prior to the end of the fiscal year in which the dividend is declared. A shareholder has a three-year period from the dividend payment date to claim unpaid dividends in respect of his or her shares.


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Our by-laws permit us, upon the approval of our board of directors, to pay interim dividends out of pre‐existing and accumulated profits for the preceding fiscal year or preceding two fiscal quarters. In general, shareholders who are not residents of Brazil must register their Brazilian investments with the Central Bank in order to receive dividends, sales proceeds or other amounts with respect to their foreign investments outside of Brazil. The preferred shares underlying the ADSs are held by JPMorgan Chase, also known as the custodian, as agent for the depositary and JP Morgan Chase is the registered owner of our preferred shares. The depositary electronically registers the preferred shares underlying the ADSs with the Central Bank and, therefore, is able to have dividends, sales proceeds or other amounts with respect to those shares eligible to be remitted outside Brazil. Payments of cash dividends and distributions, if any, will be made in Brazilian currency to the custodian on behalf of the depositary, which will then convert such proceeds into U.S. dollars and will cause such U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. Under current Brazilian law, dividends paid to shareholders who are not Brazilian residents, including holders of ADSs, will not be subject to Brazilian withholding income tax, except for dividends based on profits generated prior to December 31, 1995. According to Brazilian corporate law, preferred shares without voting rights acquire such a right if, during a period provided for in a company’s by-laws (which must not exceed three consecutive fiscal years), such company fails to pay the fixed or minimum dividend to which the preferred shares are entitled. Such voting right shall continue until payment has been made if the dividend is not cumulative, or until all cumulative dividends in arrears have been paid. Pursuant to our by-laws, our preferred shares are not entitled to fixed or minimum dividends; thus, they will not acquire voting rights if we fail to pay dividends. We have not paid dividends to our shareholders in the past, nor do we expect to pay dividends in the foreseeable future. Record of Dividend Payments and Interest Attributed to Shareholders’ Equity Law No. 9,249, dated December 26, 1995, as amended, provides for the distribution of interest attributed to shareholders’ equity as an alternative form of dividend payment to shareholders. Such interest is limited to the daily pro ratavariation of the TJLP, a long-term interest rate that includes an inflation factor reset quarterly. Companies may treat such payments as a deductible expense for corporate income tax and social contribution purposes but the deduction may not exceed the greater of: ·50% of net income for the period in respect of which the payment is made (net income does not include the distribution or income tax deductions); or ·50% of retained earnings. Under Brazilian corporate law, dividend distributions are generally not deductible. However, a Brazilian company may elect to treat dividend distributions as “Interest Distributions,”


in which case such distributions will be deductible, subject to certain limitations. Any payment of interest on shareholders’ equity to holders of ADSs or preferred shares, whether or not they are Brazilian residents, is subject to Brazilian withholding income tax at the rate of 15% or 25% if the beneficiary is a resident in a tax haven. We have not made any such payments of interest to-date.


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Taxation The following summary contains a description of certain Brazilian and U.S. federal income tax consequences of the ownership and disposition of preferred shares or ADSs.  You should know that this summary does not purport to be a comprehensive description of all the tax considerations that may be relevant to a holder of preferred shares or ADSs. Holders of preferred shares or ADSs should consult their own tax advisers to discuss the tax consequences of the purchase, ownership and disposition of preferred shares or ADSs, including, in particular, the effect of any state, local or other national tax laws. Material Brazilian Taxation Considerations The following discussion summarizes certain material Brazilian tax consequences of the acquisition, ownership and disposition of ADSs or preferred shares by a holder that is not domiciled in Brazil for purposes of Brazilian taxation (“Non-Brazilian Holder”). The discussion does not address any tax consequences under the laws of any particular state or municipality of Brazil. The discussion is based upon Brazilian law as currently in effect, subject to differing interpretations, which may result in different tax consequences than those described below; any change in such law may change the consequences described below. This discussion does not specifically address all of the Brazilian tax considerations applicable to any particular Non-Brazilian Holder, and each Non-Brazilian Holder should consult his or her own tax adviser concerning the Brazilian tax consequences of an investment in ADSs or preferred shares. There is no income tax treaty between Brazil and the United States. Income Tax on Dividends. In general, dividends paid by us to Non-Brazilian Holders or the depositary in respect of the preferred shares underlying the ADSs out of profits generated on or after January 1, 1996 will not be subject to withholding income tax in Brazil. However, dividends paid from profits generated on or before December 31, 1995 may be subject to Brazilian withholding income tax at varying rates. Income Tax on Gains. Brazilian law distinguishes between, on the one hand, direct foreign investments in Brazilian companies, or 4,131 Modality Investments, and, on the other hand, foreign investments in securities issued by Brazilian companies through the Brazilian capital markets, or 2,689 Modality Investments. Gains realized outside Brazil by a Non-Brazilian Holder on the disposition of ADSs or shares to another Non-Brazilian Holder are not subject to Brazilian tax. Gains realized by a Non-Brazilian Holder on the disposition of assets located in Brazil, including preferred shares, are subject to Brazilian income tax as of February 2004. Gains realized on a sale or other form of disposition of preferred shares are subject to income tax at a rate of 15%, except in the following situations: the gains are exempt from income tax when cumulatively (A) the gains arise from a sale or disposition of common shares carried out on a Brazilian stock exchange (which includes transactions carried out on an organized over-the-counter market), and (B) the gains are realized by a Non-Brazilian Holder that has registered its investment as a 2,689 Modality Investment and is not resident or domiciled in a country or location (1) that does not impose income tax, or (2) where the maximum income tax rate is lower than 20% (“Nil or Low Tax Jurisdiction”). See “–Discussion on Nil or Low Tax Jurisdictions and on Tax Favorable Jurisdictions”;


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the gains are subject to income tax at a rate of 25% when the gains are realized by a Non-Brazilian Holder that (A) has registered its investment as a 4,131 Modality Investment and (B) is resident or domiciled in a country or location (1) that does not impose income tax, or (2) where the maximum income tax rate is lower than 20%, or (3) the laws of which do not allow access to information related to shareholder composition, ownership of investments, or identification of beneficial owners of earnings attributed to non-residents (“Tax Favorable Jurisdiction”). See “–Discussion on Nil or Low Tax Jurisdictions and on Tax Favorable Jurisdictions”; and  the gains related to day-trade on stock exchange transactions are subject to income tax at a rate of 20%. In the cases above, if the gains are related to transactions conducted on a Brazilian stock exchange (which includes transactions carried out on an organized over-the-counter market) or on a Brazilian non-organized over-the-counter market with intermediation of a financial institution, a withholding income tax of 0.005% will apply and can be offset against the eventual income tax due on the gain. This withholding income tax does not apply in the situation mentioned above where the gains are exempt. Earnings from “day trading” on stock exchanges, commodities and futures, or similar exchanges, are also subject to withholding income tax at a 1.0% rate, and this tax may be deducted from tax on net gains determined in the corresponding month. We understand that ADSs are not assets located in Brazil for the purposes of the abovementioned tax. However, we are unable to predict whether Brazilian courts would concur with our understanding that ADSs are not assets located in Brazil. To date we are not aware of any judicial or administrative precedent on this specific matter. The deposit of preferred shares in exchange for ADSs may be subject to income tax at a rate of 15% or 25%, as the case may be. There may be arguments to claim that this income tax is not due if the preferred shares are registered as 2,689 Modality Investments and the Non-Brazilian Holder is not resident or domiciled in a Nil or Low Tax Jurisdiction. Gains on the disposition of preferred shares obtained upon cancellation of ADSs are not taxed in Brazil if such disposition is made on a Brazilian stock exchange by a Non-Brazilian Holder that has registered its investments as a 2,689 Modality Investment and that is not resident or domiciled in a Nil or Low Tax Jurisdiction, provided that the appropriate rules are complied with in connection with the registration of the investment with the Central Bank. Any gains realized by a Non-Brazilian Holder upon the redemption of preferred shares will be treated as gains from the disposition of such preferred shares not occurring on a stock exchange and will accordingly be subject to income tax at a rate of 15% or 25%, as the case may be. There can be no assurance that the current preferential treatment for Non-Brazilian Holders of ADSs and preferred shares registered as 2,689 Modality Investments will be maintained. Any exercise of preemptive rights relating to our preferred shares or ADSs will not be subject to Brazilian income tax. Gains on the sale or other form of disposition of preemptive rights


relating to our preferred shares will be subject to Brazilian income tax according to the same rules applicable to the sale or other form of disposition of preferred shares.


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Income Tax on Interest on Capital Distributions. Dividend distributions are generally not deductible by us under Brazilian law. However, Brazilian corporations may make payments to shareholders characterized as interest on capital, or interest on capital distributions, as an alternative form of making dividend distributions, in which case such a distribution will be deductible for Brazilian corporate income tax purposes, subject to certain limitations. Our charter does not presently contemplate the payment of interest on capital distributions to shareholders. If we were to make such an interest on capital distribution, Non-Brazilian Holders would incur a 15% withholding income tax with respect to such a distribution. Such withholding would be increased to a rate of 25% for any Non-Brazilian Holders that are domiciled or resident in a Tax Favorable Jurisdiction. See “–Discussion on Nil or Low Tax Jurisdictions and on Tax Favorable Jurisdictions”. Discussion on Nil or Low Tax Jurisdictions and on Tax Favorable Jurisdictions.As of January 1, 2009, Law No. 11,727, as amended, introduced the concept of a “Privileged Tax Regime”, and defined it as a tax regime that (1) does not tax income or taxes income at a maximum rate lower than 20%; or (2) grants tax benefits to non-resident entities or individuals (a) without the requirement to carry out a substantial economic activity in the country or location or (b) conditioned on the non-exercise of a substantial economic activity in the country or location; or (3) does not tax income earned outside of the respective country or location or taxes such income at a maximum rate lower than 20%; or (4) does not allow access to information related to shareholder composition, ownership of assets and rights, or economic transactions that are carried out. Notwithstanding the fact that such Privileged Tax Regime concept was enacted in connection with transfer price rules, there is still no official guidance as to the application of the provisions of Law No. 11,727. As a result, there is no assurance that Brazilian tax authorities will not attempt to apply the concept of Privileged Tax Regimes to other types of transactions, where the concepts of Tax Favorable Jurisdictions or Nil or Low Tax Jurisdictions should be adopted. In addition, prior to Law No. 11,727, Brazilian tax authorities enacted a list of countries and locations considered to be “tax haven jurisdictions” for Brazilian tax purposes, without differentiating among different concepts. A new list considering the provisions of Law No. 11,727 has still not been enacted. Accordingly, there is still no official guidance as to which countries and locations should be defined as Tax Favorable Jurisdictions, Nil or Low Tax Jurisdictions, and/or Privileged Tax Regimes, as the case may be. Tax of Foreign Exchange Transactions, or IOF/Câmbio. The liquidation of foreign exchange agreements related to the conversion of Brazilian currency into non-Brazilian currency, and vice-versa, is subject to the IOF/Câmbio. The rate currently applicable to most types of foreign exchange agreements is 0.38%. As of October 20, 2009 through October 18, 2010 the IOF rate was raised to 2% in exchange transactions for entry of funds in Brazil carried out by foreign investors to be invested in financial and capital markets. On October 19, 2010, the IOF tax rate on such transactions was increased to 6%. Foreign exchange transactions related to outflows of proceeds from Brazil in connection with investments made by foreign investors in the Brazilian financial and capital markets are subject to the IOF/Câmbio at a zero percent rate. This zero percent rate applies to payments of dividends and interest on capital distributions received by foreign investors with respect to investments in the Brazilian financial and capital markets.  On the liquidation of the exchange transactions contracted by foreigner investors, the IOF is charged, among others, at a:


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(i)6% rate on the entry of the sources into Brazil, including simultaneous transactions for constitution of guarantee margin (initial or additional) charged on the stock exchange; (ii)0% rate related to transfers from abroad of sources for application in Brazil on variable income through the stock exchange (as regulated by CMN, and liquidation occurred from December 1, 2011). (iii)0% rate on the entry of sources into Brazil for acquisition of shares on tender offers or for subscription of shares (in both cases if the company issuing is registered for negotiation of the shares in stock exchange and liquidation occurred from December 1, 2011). There is also a 0% rate applicable on the liquidation of simultaneous transactions of exchange contracts from December 1, 2011, on either of the entry of funds into Brazil from the cancelation of depositary receipts, for investments in stocks negotiated in stock exchange, or on the entry in Brazil of investments prompted by the change of the foreign investor regime (from investments under Law No. 4,131) for investments on negotiable stocks in stock exchange (as regulated by the CMN).  In March of 2011, the rate of IOF was raised to 6% for the liquidations of exchange transactions, when the funds enter in Brazil (including simultaneous transactions) related to external loans subject to registration with the Central Bank, contracted directly or from the issuance of titles in the international market with the average due date minimum of: ·Up to 360 days, on transactions contracted from March of 2011; ·Up to 720 days on transactions contracted from April of 2011; ·Up to 1,095 days on transactions contracted from March 1, 2012; ·Up to 1,800 days on transactions contracted from March 12, 2012; ·Up to 365 days on transactions from December 4, 2012 until the present date. The Brazilian government may increase the rate of the IOF/Câmbio to a maximum of 25% of the amount of the foreign exchange agreement at any time, but such an increase would not apply retroactively.  Tax on Bonds and Securities Transactions, or IOF/Títulos. IOF/Títulos may be imposed on transactions related to bonds and securities, such as the acquisition, sale or other disposition of preferred shares, even if such transactions are performed on the BM&FBovespa. The rate of the IOF/Títulos applicable to most transactions involving preferred shares is currently zero percent. In particular, the transfer of shares traded in the Brazilian stock exchange for the issuance of depositary receipts to be traded outside Brazil is currently subject to the IOF/Títulos at a rate of 1.5%.The Minister of Finance has the legal authority to raise the rate to a maximum of 1.5% per day of the amount of taxable transactions during the period in which the investor holds securities, but only to the extent of gains made on the transaction, and not retrospectively. However, taxation would be limited to the gains obtained in each transaction, and would only apply to new transactions, not to transactions that already took place.  IOF is also charged on gains from transactions with terms of up to 30 days for sale, assignment, repurchase or renewal of fixed-income investments or the redemption of shares in financial investment funds, equity funds or investment clubs. The maximum rate of IOF payable in such cases is 1.0% per day and decreases with the duration of the transactions, reaching zero for transactions with maturities of at least 30 days, except that the rate is currently 0% for the certain types of transactions, including: ·transactions carried out by financial institutions and other institutions authorized by the Central Bank as principals;


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·portfolio transactions carried out by mutual funds or investment clubs; ·transactions in equity markets, including stock, futures and commodities exchanges and similar entities; and ·redemptions of shares in equity funds, noting that in case the investor redeems the shares before completing the grace period for credit income, the rate is 0,5% per day over the surrender value of shares in equity funds. The IOF rate is reduced to 0% on transactions with contracts of derivatives to cover risks related to the oscillation of price in foreign currency, from contracts of exportation signed with a person or entity domiciled in Brazil, or on all other transactions with contracts of financial derivatives.  Several requirements have to be met to receive the exemption from the IOF rate in transactions carried out by financial institutions and other institutions authorized by the Central Bank as principals. Other Brazilian Taxes. There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of ADSs or preferred shares by a Non-Brazilian Holder except that certain Brazilian states may impose such taxes in the case of recipients of gifts or inheritances who are domiciliaries or residents of such states. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of ADSs or preferred shares. U.S. Federal Income Tax Considerations The following is a summary of certain U.S. federal income tax consequences of the acquisition, holding or disposition of the preferred shares or ADSs.  This summary applies to U.S. holders, as defined below, who hold their preferred shares or ADSs as capital assets and does not apply to special classes of holders, such as: •          certain financial institutions, •          insurance companies, •          dealers in securities or foreign currencies, •          tax-exempt organizations, •           securities traders who elect to account for their investment in preferred shares or ADSs on a mark-to-market basis, •           persons holding preferred shares or ADSs as part of hedge, straddle, conversion or other integrated financial transactions for tax purposes, •           holders whose functional currency for U.S. federal income tax purposes is not the U.S. dollar, •           partnerships or other holders treated as “pass-through entities” for U.S. federal income tax purposes, •          persons subject to the alternative minimum tax, or •          persons owning, actually or constructively, 10% or more of our voting shares.


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This discussion is based on the Internal Revenue Code of 1986, as amended to the date hereof, administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations, all as in effect on the date hereof.  These authorities are subject to differing interpretations and may be changed, perhaps retroactively, so as to result in U.S. federal income tax consequences different from those discussed below.  There can be no assurance that the U.S. Internal Revenue Service (the “IRS”) will not challenge one or more of the tax consequences discussed herein or that a court will not sustain such a challenge in the event of litigation.  This summary does not address any aspect of state, local or non-U.S. tax law. YOU SHOULD CONSULT YOUR TAX ADVISERS WITH REGARD TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION. This discussion is also based, in part, on representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms. For purposes of this discussion, you are a “U.S. holder” if you are a beneficial owner of preferred shares or ADSs that is, for U.S. federal income tax purposes: •a citizen or resident alien individual of the United States, •a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, or •otherwise subject to U.S. federal income taxation on a net income basis with respect to the preferred shares or ADSs. The term U.S. holder also includes certain former citizens of the United States. In general, if you are the beneficial owner of American depositary receipts evidencing ADSs, you will be treated as the beneficial owner of the preferred shares represented by those ADSs for U.S. federal income tax purposes.  Deposits and withdrawals of preferred shares by you in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.  Your tax basis in such preferred shares will be the same as your tax basis in such ADSs, and the holding period in which preferred shares will include the holding period in such ADSs. Taxation of Dividends The gross amount of a distribution paid on ADSs or preferred shares, including distributions paid in the form of payments of interest on capital for Brazilian tax purposes, out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) will be taxable to you as foreign source dividend income and will not be eligible for the dividends-received deduction allowed to corporate shareholders under U.S. federal income tax law.  The amount of any such distribution will include the amount of Brazilian withholding taxes, if any, withheld on the amount distributed.  To the extent that a distribution exceeds our current and accumulated earnings and profits, such distribution will be treated as a nontaxable return of capital to the extent of your basis in the ADSs or preferred shares, as the case may be, with respect to which such distribution is made, and thereafter as a capital gain. You will be required to include dividends paid in reais in income in an amount equal to their U.S. dollar value calculated by reference to an exchange rate in effect on the date such


distribution is received by the depositary, in the case of ADSs, or by you, in the case of preferred shares.  If the depositary or you do not convert such reais into U.S. dollars on the date they are received, it is possible that you will recognize foreign currency loss or gain, which would be ordinary loss or gain, when the reais are converted into U.S. dollars.  If you hold ADSs, you will be considered to receive a dividend when the dividend is received by the depositary.


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Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by certain noncorporate taxpayers, including individuals, will be subject to taxation at the preferential rates applicable to long-term capital gains if the dividends are “qualified dividends.”  Dividends paid on the ADSs will be treated as qualified dividends if (i) the ADSs are readily tradable on an established securities market in the United States and (ii) the Company was not, in the year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid, a passive foreign investment company (“PFIC”).  The ADSs are listed on the Nasdaq Stock Market’s Global Market, and will qualify as readily tradable on an established securities market in the United States so long as they are so listed.  Based on our audited financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2012 taxable year.  In addition, based on our audited financial statements and our current expectations regarding the value and nature of our assets and the sources and nature of our income, we do not anticipate becoming a PFIC for our 2013 taxable year. Based on existing guidance, it is not entirely clear whether dividends received with respect to the preferred shares will be treated as qualified dividends (and therefore whether such dividends will qualify for the preferential rates of taxation applicable to long-term capital gains), because the preferred shares are not themselves listed on a U.S. exchange.  In addition, the U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs or preferred shares and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends.  Because such procedures have not yet been issued, it is unclear whether we will be able to comply with them.  You should consult your own tax advisers regarding the availability of the reduced dividend tax rate in light of your own particular circumstances. Subject to generally applicable limitations and restrictions, you will be entitled to a credit against your U.S. federal income tax liability, or a deduction in computing your U.S. federal taxable income, for Brazilian income taxes withheld by us.  You must satisfy minimum holding period requirements to be eligible to claim a foreign tax credit for Brazilian taxes withheld on dividends.  The limitation on foreign taxes eligible for credit is calculated separately for specific classes of income.  For this purpose dividends paid by us on our shares will generally constitute “passive income.”  Foreign tax credits may not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities or in respect of arrangements in which a U.S. holder’s expected economic profit is insubstantial.  You should consult your own tax advisers concerning the implications of these rules in light of your particular circumstances. Taxation of Capital Gains Upon a sale or exchange of preferred shares or ADSs, you will recognize a capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount realized on the sale or exchange and your adjusted tax basis in the preferred shares or ADSs.  This gain or loss will be long-term capital gain or loss if your holding period in the preferred shares or ADSs exceeds one year.  The net amount of long-term capital gain recognized by individual U.S. holders generally is subject to taxation at preferential rates.  Your ability to use capital losses to offset income is subject to limitations.


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Any gain or loss will be U.S. source gain or loss for U.S. foreign tax credit purposes.  Consequently, if a Brazilian withholding tax is imposed on the sale or disposition of ADSs or preferred shares, and you do not receive significant foreign source income from other sources you may not be able to derive effective U.S. foreign tax credit benefits in respect of such Brazilian withholding tax.  You should consult your own tax adviser regarding the application of the foreign tax credit rules to your investment in, and disposition of, ADSs or preferred shares. If a Brazilian tax is withheld on the sale or disposition of shares, the amount realized by a U.S. holder will include the gross amount of the proceeds of such sale or disposition before deduction of the Brazilian tax.  SeeMaterial Brazilian Tax Considerationsabove. Information Reporting and Backup Withholding Information returns may be filed with the IRS in connection with distributions on the preferred shares or ADSs and the proceeds from their sale or other disposition.  You may be subject to United States backup withholding tax on these payments if you fail to provide your taxpayer identification number or comply with certain certification procedures or otherwise establish an exemption from backup withholding.  If you are required to make such a certification or to establish such an exemption, you generally must do so on IRS Form W-9. The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the IRS. Documents on Display Statements contained in this Form 20-F as to the contents of any contract or other document filed as an exhibit to this Form 20-F summarize their material terms, but are not necessarily complete. We are also subject to the informational reporting requirements of the Exchange Act, which requires that we file periodic reports and other information with the SEC. As a foreign private issuer, we file annual reports on Form 20-F as opposed to Form 10-K. We do not file quarterly reports on Form 10-Q but file reports in relation to material events on Form 6-K. Our reports and other information filed by us with the SEC may be inspected and copied by the public at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, DC 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website www.sec.gov where those documents electronically filed with the SEC may be found. We furnish JPMorgan Chase, as the depositary in connection with our ADSs, annual reports in English, which include a review of operations and annual audited consolidated financial statements prepared under IFRS. Upon our request, the depositary will promptly mail such reports to all record holders of our ADSs. We also furnish to the depositary, in English, all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. Upon our request, the depositary will make such notices, reports and communications available to holders of our ADSs and will mail to all record holders of our ADSs a notice containing a summary of the information contained in any notice of a shareholders’ meeting it receives. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements and from the rules under the Exchange Act relating to short-swing profit disclosure and liability.


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ITEM 11.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. In addition to the following information about market risk, see note 23 to our 2012 consolidated financial statements. Foreign Exchange Risk Our foreign currency exposure gives rise to market risks associated with exchange rate movements against the U.S. dollar. A substantial portion of capital expenditures, including network equipment costs, and48.8% of our indebtedness was denominated in or indexed to the U.S. dollar, as of December 31, 2012. Substantially all of our revenues are denominated in Brazilian Reais. As a result, we are exposed to currency exchange risks, which may adversely affect our business, financial condition and results of operations. As part of a program to hedge part of our capital expenditures and interest expense linked to the U.S. dollar, as of December 31, 2012, we were a party to certain swap agreements.See also “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Off-Balance Sheet Arrangements” and “Item 10. Additional Information—Exchange Controls”Based on the level and characteristics of our debt indexed to the U.S. dollar, the result from a hypothetical depreciation of the Brazilian Real to R$2.4522 per US$1.00, or 20% depreciation compared to the exchange rate as of December 31, 2012, would be a decrease of R$188.7 million in our profit before income taxes. The details of this analysis, which may differ from actual results, are as follows: Total U.S.Denominated debtas ofDecember 31, 2012

   

   Real depreciation fromExchange rate ofR$2.0435 per US$1.00to R$2.4522 per US$ 1.00

   

   Market risk – Impacton Foreign ExchangeLosses on loans(R$ in millions)

   

   (%)

   

   (R$ in millions)U.S. Dollar DenominatedDebt:Loan Agreement withBanco Inbursa

   

   206.7

   

   20.0

   

   (41.3)Global Notes 2020

   

   737.1

   

   20.0

   

   (147.4)Total

   

   943.8

   

   

   

   (188.7)  Interest Rate Risk Interest rate risk is the effect on our financial results of an increase in interest rates on our floating rate debt indexed to CDI or TJLP. Based on the level and characteristics of our debt, a hypothetical 10% increase in interest rates would result in a decrease of R$11.1 million in our income before income taxes. The details of this analysis, which may differ from actual results, are as follows:


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Total debt as of December 31, 2012

   10% interest Rate increase

   Market risk – Impact on intererest expense on third party borrowings(in millions of Reais)

   (percentage)

   (in millions of Reais)Floating Rate DebtFINAME(1)

   302.3

   0.55

   (1.66)América Móvil S.A.B. de C.V.(2)

   686.7

   0.69

   (4.74)Comercial Paper (3)

   686.6

   0.69

   (4.74)Total

   1,675.6

   

   (11.14)
   (1)Indexed to TJLP plus a spread of 3.15% per year or fixed rate between 4.5% and 8.65% per year. TJLP was at 5.5% as of December 31, 2012. (2)Indexed to CDI plus a spread of 1.08% per year. CDI was 6.9% as of December 31, 2012. (3)Indexed to CDI plus a spread of 3.5% per year. CDI was 6.9% as of December 31, 2012. The percentages and amounts of our debt subject to floating interest rates as of December 31, 2012 were as follows: Percentage of total debt(*)

   Amount in R$ millionsFloating Rate Debt:Denominated in Reais

   64.0%

   1,675.6
 (*) Including intercomany loans with América Móvil Our floating interest rate exposure is primarily subject to the variations of CDI, as well as to TJLP. ITEM 12.        DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. Item 12.A.            Debt Securities Not applicable. Item 12.B.            Warrants and Rights Not applicable. Item 12.C.            Other Securities Not applicable. Item 12.D.            American Depositary Shares JPMorgan Chase Bank, N.A., or the Depositary, serves as the depositary for our ADSs. ADS holders are required to pay various fees to the Depositary, and the Depositary may refuse to provide any service for which a fee is assessed until the applicable fee has been paid. ADS holders are required to pay the Depositary: (i) an annual fee of up to US$0.02 per ADS (to the extent not prohibited by stock exchange rules) for administering the ADS program, and (ii) amounts in respect of expenses incurred by the Depositary or its agents on behalf of ADS


holders, including expenses arising from compliance with applicable law, taxes or other governmental charges, cable, telex and facsimile transmission, or conversion of foreign currency into U.S. dollars. In both cases, the Depositary may decide in its sole discretion to seek payment by either billing holders or by deducting the fee from one or more cash dividends or other cash distributions.


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ADS holders are also required to pay additional fees for certain services provided by the Depositary, as set forth in the table below. Depositary service

   Fee payable by ADS holdersIssuance of ADSs, including issuances resulting from a distribution of preferred shares or rights or other property

   US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates

   US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)Any cash distribution to ADS holders

   US$0.02 (or less) per ADS (to the extent not prohibited by the rules of any stock exchange on which the ADSs are listed for trading)Transfer on register

   US$1.50 per ADS (to the extent not prohibited by stock exchange rules)Delivery of deposited securities

   Delivery fees
  In addition, holders may be required to pay a fee for the distribution or sale of securities or net cash proceeds distributed to holders of deposited securities which are distributed by the Depositary to ADR holders. Such fee would be for an amount equal to the fee for the execution and delivery of ADSs that would be charged as if securities distributed to you had been preferred shares and the shares had been deposited for issuance of ADSs.  Payments by the Depositary The Depositary pays us an agreed amount, which includes reimbursements for certain expenses we incur in connection with the ADS program. These reimbursable expenses currently include, among others, investor relations expenses (including marketing, investor events, training expenses, conference fees, and travel expenses), exchange application and listing fees, establishment and maintenance expenses of the ADS program, standard out-of-pocket maintenance costs for the ADSs, legal and accounting expenses, corporate governance expenses, consulting services and additional payments based on any applicable performance indicators related to the ADR facility. The amount of reimbursement available to us is not calculated based on the fees the Depositary collects from investors. In 2012, we did not receive any payments from the Depositary.


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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. Not applicable. ITEM 15.        CONTROLS AND PROCEDURES. Disclosure Controls and Procedures Our management, including our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2012. 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 our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2012 were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our 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; Attestation Report of the Registrant Public Accounting Firm Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we 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 (COSO). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2012. The effectiveness of our internal control over financial reporting as of December 31, 2012 has been audited by Ernst & Young Terco Auditores Independentes S.S., an independent registered public accounting firm, as stated in its attestation report which is included under Item 18 in this annual report on Form 20-F.


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Changes in Internal Control Over Financial Reporting Our management identified no change in our internal control during the fiscal year ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 16A.     AUDIT COMMITTEE FINANCIAL EXPERT. OurConselho Fiscalhas one “audit committee financial expert,” as defined in Item 16A of Form 20-F under the Exchange Act. Our financial expert is Mr.Martin Roberto Glogowsky and he is independent as defined by Rule 10A-3 of the Exchange Act. ITEM 16B.      CODE OF ETHICS. We have a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer and principal accounting officer or controller. Our code of ethics appears in both English and Portuguese on our website at http://ir.netservicos.com.br. ITEM 16C.     PRINCIPAL ACCOUNTANT FEES AND SERVICES. Ernst & Young Terco Auditores Independentes S.S. acted as our independent auditors for 2012 and 2011 in connection with our IFRS financial statements. The chart below sets forth the fees for services performed by Ernst & Young Terco Auditores Independentes S.S. for those years and breaks down the amounts by category of service in Reais: Total Fees(R$ in thousands)2012

   2011Audit Fees(1)

   2,349.0

   1,985.0Tax Fees(2)

   238.0

   114.2Total

   2,587.0

   2,099.2
  (1)       Audit Fees Audit fees include fees related to the audit of the Company’s financial statements as of December 31, 2012, the audit of the Company’s internal control over financial reporting as of December 31, 2012 and a special audit for the period ended October 30, 2012. (2)       Tax Fees Tax fees include fees for review of tax returns and compliance of selected legal entities in 2012 and 2011. Pre-Approval Policies and Procedures OurConselho Fiscalserves as our audit committee for the purposes of the Sarbanes-Oxley Act of 2002. OurConselho Fiscalreviews the scope of each service to be provided by our independent auditors before our auditors are engaged to render such service in order to ensure that independence is and will be maintained and that the provision of the service is not prohibited under the Sarbanes-Oxley Act of 2002. Each service is approved before our auditors are engaged to render such service.


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ITEM 16D.           EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. In lieu of appointing an audit committee composed of independent members of the Board of Directors, we have established aConselho Fiscal, or fiscal council, in accordance with the applicable provisions of Brazilian corporate law, and provided the fiscal council with additional powers to permit it to meet the requirements of Exchange Act Rule 10A-3(c)(3). ITEM 16E.           PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. Not applicable. ITEM 16F.           CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT. Not applicable. ITEM 16G.          CORPORATE GOVERNANCE. Compliance with Certain NASDAQ Corporate Governance Rules Under the NASDAQ listing rules, a foreign private issuer may follow its home country corporate governance practices in lieu of certain NASDAQ corporate governance rules subject to certain requirements. The practices we follow in lieu of certain NASDAQ rules are described below. Independent directors.Rule 5605(b)(1) requires that a majority of a listed company’s board of directors be comprised of independent directors. In lieu of complying with Rule 5605(b)(1), we follow Brazilian corporate law, which does not require us to have independent directors on our board of directors. However, as required by Level 2 of the BM&FBovespa’s Corporate Governance requirements, 20% of the members of our board of directors are independent. Executive Sessions. Rule 5605(b)(2) requires that a listed company’s independent directors have regularly scheduled meetings at which only independent directors are present. In lieu of complying with Rule 5605(b)(2), we follow Brazilian corporate law, which does not require our independent directors to have regularly scheduled meetings at which only independent directors are present. Compensation of Officers.Rule 5605(d) requires that the compensation of a listed company’s executive officers be determined, or recommended to the board of directors for determination, either by (i) a majority of the independent directors, or (ii) a compensation committee comprised solely of independent directors. In lieu of complying with Rule 5605(d), we follow Brazilian corporate law, which does not require us to have either a compensation committee or independent directors on our board of directors. Compensation of our executive officers is determined by our board of directors. Nomination of Directors.Rule 5605(e)(1) requires that a listed company’s director nominees be selected, or recommended to the board of directors for selection, either by (i) a majority of the independent directors, or (ii) a nominations committee comprised solely of independent directors. In lieu of complying with Rule 5605(e)(1), we follow Brazilian corporate law, which does not require us to have either a nominations committee or independent directors on our board of directors. Instead, our directors are appointed as described under “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements—Board of directors (Conselho de Administração).”


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Nominating Committee Charter. Rule 5605(e)(2) requires that a listed company adopt a formal written charter or board resolution addressing the director nomination process. In lieu of complying with Rule 5605(e)(2), we follow Brazilian corporate law, which does not require us to adopt a formal written charter or board resolution addressing the process for nomination of directors, who are appointed directly by the general shareholders meeting. Audit committee composition.Rule 5605(c) requires, among other things, that a listed company maintain an audit committee comprised of at least three members, each of whom must be independent as defined in the NASDAQ rules. In lieu of appointing an audit committee composed of independent members of the Board of Directors, we have established aConselho Fiscal, or fiscal council, in accordance with the applicable provisions of Brazilian corporate law, and provided the fiscal council with additional powers to permit it to meet the requirements of Exchange Act Rule 10A-3(c)(3).See “Item 6. Directors, Senior Management and Employees—Directors and Board Practices.” Quorum.Rule 5620(c) requires that a listed company’s by-laws provide for a quorum for any meeting of the holders of common stock of at least 33 1/3% of the outstanding shares of the listed company’s common voting stock. In lieu of complying with Rule 5620(c), we follow Brazilian corporate law, which requires a minimum quorum for a shareholders’ meeting of 25% of the outstanding shares of common voting stock on a first summoning of shareholders. Under Brazilian corporate law, however, there is no minimum quorum requirement in the event that a first summoning of shareholders does not elicit a quorum and a second summoning of shareholders is made. Shareholder Approval. Rule 5635 generally requires that a listed company obtain shareholder approval at or prior to the issuance of securities in connection with (a) the establishment or amendment of a compensation arrangement pursuant to which stock may be acquired by officers, directors, employees, or consultants; (b) certain acquisitions of stock of another company; (c) an issuance of securities that will result in a change of control of the issuer; or (d) certain transactions other than a public offering. In lieu of complying with Rule 5635, we follow Brazilian corporate law, which does not require us to obtain shareholder approval at or prior to the issuance of securities in connection with the above mentioned topics. Code of Ethics. Rule 5610 requires that a listed company adopt a code of conduct applicable to all directors, officers and employees, which is publicly available. In lieu of complying with Rule 5610 with respect to our directors, we follow Brazilian corporate law, which does not require us to adopt a code of ethics, such as that required by the NASDAQ rules, for our directors. However, pursuant to applicable Brazilian corporate and securities laws, our directors and officers are required to publicly disclose certain facts and information, including trading in our securities. ITEM 16H.Mine and Safety Disclosure Not applicable.


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Part III ITEM 17.              FINANCIAL STATEMENTS. See “Item 18. Financial Statements.” ITEM 18.              FINANCIAL STATEMENTS. The following financial statements are filed as part of this Form 20-F, together with the reports of the Independent Registered Public Accounting Firm. Net Serviços de Comunicação S.A. Consolidated Financial Statements

   PageManagement’s Report on Internal Control over Financial Reporting

   F-1Reports of Independent Registered Public Accounting Firm

   F-2 and F4Consolidated Statements of Income for the Years ended December 2012, 2011 and 2010

   F-5Consolidated Statements of Comprehensive Income for the Years ended December 2012, 2011 and 2010

   F-6Consolidated Balance Sheets as of December 31, 2012 and 2011

   F-7Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2012, 2011 and 2010

   F-9Consolidated Statements of Cash Flows for the Years ended December 31, 2012, 2011 and 2010

   F-10Notes to the Consolidated Financial Statements

   F-11


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ITEM 19.        EXHIBITS Incorporated by ReferenceExhibit No.

   Exhibit Description

   Form

   SEC File No.

   Exhibit

   Date Filed/ Furnished

   Filed Herewith1.1

   Consolidated By-laws of Net Serviços de Comunicação S.A., as amended on April 5, 2012 (English-language translation)

   20-F

   For 2011

   0-28860

   1.1

   April 26, 20124.1

   Shareholders’ Agreement, dated as of December 21, 2012, among Globo Comunicação e Participações S.A., Embratel Participações S.A., Empresa Brasileira de Telecomunicações S.A., GB Empreendimentos e Participações S.A. and EG Participações S.A. (English-language translation).

   6-K

   0-28860

   

   December 26, 20124.2

   Shareholders’ Agreement, of EG dated as of December 21, 2012, among Globo Comunicação e Participações S.A., GB Empreendimentos e Participações S.A., EG Participações S.A., Embratel Parcipações S.A. and Empresa Brasileira de Telecomunicações S.A. (English-language translation).

   6-K

   0-28860

   

   December 27, 20124.3

   Second addendum to the Shareholders’ Agreement, dated as of April 28, 2006, among Globo Comunicação e Participações S.A., Distel Holdings S.A, Embratel do Brasil Participações S.A., GB Empreendimentos e Participações S.A. and Teléfonos de México, S.A. de C.V., as an intervening party (English-language translation).

   6-K

   0-28860

   

   August 5, 20104.4

   Third addendum to the Shareholders’ Agreement, dated as of September 18, 2009, among Globo Comunicação e Participações S.A., Distel Holdings S.A, Embratel do Brasil Participações S.A., GB Empreendimentos e Participações S.A. and Teléfonos de México, S.A. de C.V., as an intervening party (English-language translation).

   6-K

   0-28860

   

   August 5, 20104.5

   Programming Agreement (Contrato de Comissão), dated as of June 27, 2004, between Net Brasil S.A., Net Serviços de Comunicação S.A. and its Subsidiaries named therein (English-language translation).

   20-F for 2003

   0-28860

   4.2

   June 30, 20044.6

   Licensing Agreement, dated as of June 27, 2004, between Net Brasil S.A., Net Serviços de Comunicação S.A. and its Subsidiaries named therein (English-language translation).

   Amendment No. 1 to F-4

   333-120286

   10.6

   February 7, 20054.7

   Services Agreement and Other Covenants with Empresa Brasileira de Telecomunicações S.A. – Embratel, dated as of December, 2006 (English-language translation).

   20-F for 2007

   0-28860

   4.10

   June 30, 20084.8

   First addendum to the Services Agreement and Other Covenants with Embratel, dated July 31, 2007, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.5

   May 21, 20104.9

   Second addendum to the Services Agreement and Other Covenants with Embratel, dated April 4, 2008 with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.6

   May 21, 20104.10

   Third addendum to the Services Agreement and Other Covenants with Embratel, dated September 25, 2009, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.7

   May 21, 20104.11

   Fourth addendum to the Services Agreement and Other Covenants with Embratel, dated December 29, 2009, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.8

   May 21, 20104.12

   Indefeasible Right Agreement of transmission capacity in local accesses by Embratel to be provided by Net Serviços, dated December 29, 2009, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.9

   May 21, 2010


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4.13

   Indefeasible Right Agreement of transmission capacity in Internet accesses by Net Serviços to be provided by Embratel, dated December 29, 2009, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.10

   May 21, 20104.14

   Telecommunication Service Agreement for provision of Internet services to be provided by Embratel, dated March 28, 2012, with Embratel (English-language translation))

   20-F

   For 2011

   0-28860

   4.14

   April 26, 20124.15

   Telecommunications Service Agreement under the Industrial Exploration Regime and Other Covenants, dated December 7, 2006, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.14

   May 21, 20104.16

   First Addendum to the Telecommunications Service Agreement under the Industrial Exploration Regime and Other Covenants, dated April 18, 2008, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.15

   May 21, 20104.17

   Optical Fiber Lease Agreement, dated November 22, 2005 (English-language translation)

   Schedule 14D-9

   005-84654

   e(18)

   September 14, 20104.18

   First Amendment to the Optical Fiber Lease Agreement, dated August 29, 2008 (English-language translation)

   Schedule 14D-9

   005-84654

   e(19)

   September 14, 20104.19

   Loan and Guaranty Agreement, dated June 19, 2008, among Banco Inbursa S.A., Net Serviços and the guarantor subsidiaries parties thereto.

   Schedule 14D-9

   005-84654

   e(20)

   September 14, 20108.1

   List of Net Serviços de Comunicação S.A.’s Subsidiaries.

   

   

   

   

   X12.1

   Certification of José Antonio Guaraldi Félix, Chief Executive Officer of Net Serviços de Comunicação S.A., pursuant to 15 U.S.C. Section 78(m), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

   

   

   

   X12.2

   Certification of Roberto Catalão Cardoso, Chief Financial Officer of Net Serviços de Comunicação S.A., pursuant to 15 U.S.C. Section 78(m), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

   

   

   

   X13.1

   Certification of José Antonio Guaraldi Félix, Chief Executive Officer of Net Serviços de Comunicação S.A., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

   

   

   

   X13.2

   Certification of Roberto Catalão Cardoso, Chief Financial Officer of Net Serviços de Comunicação S.A., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

   

   

   

   X  111   Table Of Contents We hereby agree to furnish to the SEC copies of any of our long term debt instruments and agreements as the SEC requests. The registrant 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. NET SERVIÇOS DE COMUNICAÇÃO S.A.  /s/ José Antonio Guaraldi Félix             . Name: José Antonio Guaraldi Félix Title: Chief Executive Officer  /s/ Roberto Catalão Cardoso                  . Name: Roberto Catalão Cardoso Title: Chief Financial Officer Date: April 23, 2013


112

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Net Serviços de Comunicação S.A. ****** Consolidated Financial Statements  Years ended December 31, 2012, 2011 and 2010   ** ** **


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  CONSOLIDATED FINANCIAL STATEMENTS   December 31, 2012, 2011 and 2010     Contents   Management’s Report on Internal Control over Financial Reporting

   F-1Reports of Independent Registered Public Accounting Firm

   F-2 and F-4Audited consolidated financial statementsConsolidated statements of income

   F-5Consolidated statements of comprehensive income

   F-6Consolidated balance sheets

   F-7 and F-8Consolidated statements of changes in stockholders’ equity

   F-9Consolidated statements of cash flows

   F-10Notes to the consolidated financial statements

   F-11


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Management’s Report on Internal Control over Financial Reporting  The management of Net Serviços de Comunicação S.A. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.  The company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The 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 generally accepted accounting principles, 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 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 the degree of compliance with the policies or procedures may deteriorate.  Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, based on the criteria set forth by the COSO – Committee of Sponsoring Organization of the Treadway Commission in Internal Control – Integrated Framework. Based on that assessment management has concluded that as of December 31, 2012, the Company’s internal control over financial reporting is effective.  The effectiveness of the company’s internal control over financial reporting as of December 31, 2012 has been audited by Ernst & Young Terco Auditores Independentes S.S., the Company’s independent registered public accounting firm, as stated in their report which appears herein.     /s/ José Antonio Guaraldi Félix

   /s/ Roberto Catalão CardosoJosé Antonio Guaraldi Felix

   Roberto Catalão CardosoChief Executive Officer

   Chief Financial Officer   Date:  April 23, 2013


F-1

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Table Of Contents



Report of
Independent Registered Public Accounting Firm  The
Board of Directors and Stockholders of Net Serviços de Comunicação
S.A.  We have
audited Net Serviços de Comunicação S.A.’s internal control over financial
reporting as of December 31, 2012, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Comission (the COSO criteria). Net Serviços de
Comunicação S.A.’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, 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.  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. 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 generally accepted
accounting principles, 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
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 the degree of compliance
with the policies or procedures may deteriorate.


F-2

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In our opinion, Net Serviços de Comunicação S.A. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria.  We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Net Serviços de Comunicação S.A. as of December 31, 2012 and 2011, and related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012 of Net Serviços de Comunicação S.A. and our report dated April 23, 2013 expressed an unqualified opinion thereon.  São Paulo, Brazil, April 23, 2013   Ernst & Young Terco Auditores Independentes S.S. CRC-2SP015199/O-6   /s/ Leonardo Amaral DonatoLeonardo Amaral DonatoAccountant CRC-1RJ090794/O-0 ‘S’ SP


F-3

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Report of Independent Registered Public Accounting Firm  The Board of Directors and Stockholders of Net Serviços de Comunicação S.A.   We have audited the accompanying consolidated balance sheets of Net Serviços de Comunicação S.A. as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. 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 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 consolidated financial position of Net Serviços de Comunicação S.A. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.  We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Net Serviços de Comunicação S.A.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 23, 2013, expressed an unqualified opinion thereon.  São Paulo, Brazil, April 23, 2013  Ernst & Young Terco Auditores Independentes S.S. CRC-2SP015199/O-6   /s/ Leonardo Amaral DonatoLeonardo Amaral DonatoAccountant CRC-1RJ090794/O-0 ‘S’ SP  F-4


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NET
SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated statements of income Years ended December 31, 2012, 2011 and 2010 (In thousands of Reais, except for earnings per
share)  Notes
    
    12/31/2012
    
    12/31/2011
    
    12/31/2010Net
      revenues
    4
    
    7,939,196
    
    6,695,885
    
    5,405,669Cost
      of services rendered
    5 /
      7
    
    (5,029,267)
    
    (4,146,951)
    
    (3,346,818)Gross
      profit
    
    
    2,909,929
    
    2,548,934
    
    2,058,851Operating expensesSelling expenses
    7
    
    (907,322)
    
    (720,030)
    
    (594,470)General and administrative expenses
    7
    
    (991,740)
    
    (920,177)
    
    (792,597)Other
    7
    
    (77,684)
    
    (28,798)
    
    (13,725)(1,976,746)
    
    (1,669,005)
    
    (1,400,792)Operating profit
    
    
    933,183
    
    879,929
    
    658,059Finance resultsFinance expenses
    6
    
    (432,799)
    
    (475,886)
    
    (359,422)Finance income
    6
    
    131,199
    
    175,401
    
    169,354(301,600)
    
    (300,485)
    
    (190,068)Income before income taxes
    
    
    631,583
    
    579,444
    
    467,991Income taxesCurrent
    12
    
    (86,240)
    
    (99,911)
    
    (78,063)Deferred
    12
    
    (151,641)
    
    (106,360)
    
    (82,777)(237,881)
    
    (206,271)
    
    (160,840)Net
      income
    
    
    393,702
    
    373,173
    
    307,151Basic
      and diluted earnings per share – common
    22
    
    1.08
    
    1.02
    
    0.84Basic
      and diluted earnings per share – preferred
    22
    
    1.18
    
    1.12
    
    0.92
    Net income for all years is
fully attributable to the Company’s stockholders.    See
accompanying notes to the consolidated financial statements.


F-5

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NET
SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated statements of comprehensive income Years ended December 31, 2012, 2011 and 2010 (In thousands of Reais)  12/31/2012
    
    12/31/2011
    
    12/31/2010Net
      income
    
    
    393,702
    
    373,173
    
    307,151Other
      comprehensive income
    
    
    -
    
    -
    
    -Comprehensive income
    
    
    393,702
    
    373,173
    
    307,151
  See
accompanying notes to the consolidated financial statements.


F-6

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NET
SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated balance sheets As at December 31, 2012 and 2011 (In thousands of Reais)  Notes
    
    12/31/2012
    
    12/31/2011ASSETSCurrentCash and cash equivalents
    8
    
    38,404
    
    721,178Trade accounts receivable
    9
    
    757,254
    
    507,711Inventories
    10
    
    68,697
    
    53,135Recoverable taxes
    12
    
    77,115
    
    115,717Prepaid expenses
    
    
    27,818
    
    29,736Prepaid rights for use
    19
    
    167,004
    
    169,844Other current assets
    
    
    21,034
    
    24,174Total current assets
    
    
    1,157,326
    
    1,621,495Non-currentJudicial deposits
    11
    
    123,396
    
    97,338Deferred taxes
    12
    
    283,824
    
    301,495Recoverable taxes
    12
    
    5,682
    
    5,589Prepaid rights for use
    19
    
    150,459
    
    317,463Other non-current assets
    
    
    4,434
    
    9,288567,795
    
    731,173Property, plant and equipment
    14
    
    5,594,753
    
    4,122,766Intangible assets
    15
    
    2,439,306
    
    2,449,966Total non-current assets
    
    
    8,601,854
    
    7,303,905Total assets
    
    
    9,759,180
    
    8,925,400


F-7

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Notes
    
    12/31/2012
    
    12/31/2011LIABILITIESCurrentTrade accounts payable
    15
    
    907,083
    
    731,951Accounts payable – programming
    suppliers
    16
    
    189,460
    
    172,345Taxes payable
    12
    
    93,994
    
    94,435Payroll and related charges
    
    
    243,089
    
    237,202Debt
    17
    
    814,868
    
    294,968Related parties
    18
    
    127,142
    
    84,490Deferred revenues
    18
    
    201,283
    
    207,299Unrealized losses on derivatives
    23 / 24
    
    4,102
    
    12,527Other current liabilities
    
    
    38,730
    
    21,753Total current liabilities
    
    
    2,619,751
    
    1,856,970Non-currentDeferred taxes
    12
    
    164,422
    
    30,503Debt
    17
    
    1,117,969
    
    1,874,414Deferred revenues
    18
    
    201,099
    
    404,636Related parties
    18
    
    680,000
    
    -Provisions
    19
    
    375,753
    
    551,278Other non-current liabilities
    
    
    18,645
    
    19,760Total non-current liabilities
    
    
    2,557,888
    
    2,880,591Stockholders’ equityShare capital
    20
    
    5,599,320
    
    5,599,320Capital reserves
    20
    
    152,122
    
    153,168Accumulated deficit
    
    
    (1,169,901)
    
    (1,564,649)4,581,541
    
    4,187,839Total liabilities and stockholders’
      equity
    
    
    9,759,180
    
    8,925,400
    See accompanying notes to the consolidated financial
statements.


F-8

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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated statements of changes in stockholders’
equity Years ended December 31, 2012, 2011 and 2010 (In thousands of Reais)   Number of shares (thousands)
    
    Share capitalCommon
    Preferred
    
    Subscribed
    To be paid in
    Paid in
    
    Capital
      reserves
    
    Accumulated deficit
    
    TotalBalances at December 31, 2009
    
    114,460
    228,504
    
    5,612,243
    (12,923)
    5,599,320
    
    153,168
    
    (2,244,973)
    
    3,507,515Net income
    
    -
    -
    
    -
    -
    -
    
    -
    
    307,151
    
    307,151Balances at December 31, 2010
    
    114,460
    228,504
    
    5,612,243
    (12,923)
    5,599,320
    
    153,168
    
    (1,937,822)
    
    3,814,666Net income
    
    -
    -
    
    -
    -
    -
    
    -
    
    373,173
    
    373,173Balances at December 31, 2011
    
    114,460
    228,504
    
    5,612,243
    (12,923)
    5,599,320
    
    153,168
    
    (1,564,649)
    
    4,187,839Transfer of capital reserve not utilized to
      accumulated deficit
    
    
    
    
    
    
    
    
    (1,046)
    
    1,046
    
    -Net income
    
    -
    -
    
    -
    -
    -
    
    -
    
    393,702
    
    393,702Balances at December 31, 2012
    
    114,460
    228,504
    
    5,612,243
    (12,923)
    5,599,320
    
    152,122
    
    (1,169,901)
    
    4,581,541
   See accompanying notes to the
consolidated financial statements.


F-9

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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated statements of cash flows Years ended December 31, 2012, 2011 and 2010 (In thousands of
Reais)  12/31/2012
    
    12/31/2011
    
    12/31/2010Net cash flows from operating
      activitiesNet income
    393,702
    
    373,173
    
    307,151Adjustments to reconcile net income to cash flow
      from operating activitiesMonetary and exchange rate variations,
      net
    103,969
    
    102,264
    
    (69,112)Interest expense on debt
    172,892
    
    203,040
    
    215,120Depreciation and amortization
    1,298,080
    
    1,061,896
    
    901,225(Gain) losses on derivative financial
      instruments
    (240)
    
    16,978
    
    65,915Deferred income taxes
    151,641
    
    106,360
    
    82,777Loss (gain) on disposal of property, plant and
      equipment
    3,076
    
    (129)
    
    (4,136)Provisions
    (192,346)
    
    (42,286)
    
    (44,399)Increase/decrease in operating assets and
      liabilities(Increase) decrease in trade accounts
      receivable
    (249,543)
    
    (156,806)
    
    (86,953)(Increase) decrease in inventories
    (15,562)
    
    28,915
    
    (23,287)(Increase) decrease in recoverable
    taxes
    91,990
    
    54,835
    
    7,833(Increase) decrease in prepaid
    expenses
    1,918
    
    (2,303)
    
    5,888(Increase) decrease in other assets
    (19,104)
    
    (24,963)
    
    (14,705)Increase (decrease) in trade accounts payable and
      accounts payable – programming suppliers
    192,247
    
    320,617
    
    53,568Increase (decrease) in taxes payable
    (442)
    
    28,836
    
    (7,257)Increase (decrease) in payroll and related
      charges
    5,887
    
    64,170
    
    (10,260)Increase (decrease) in deferred
    revenues
    (209,553)
    
    (213,910)
    
    (169,457)Increase (decrease) in provisions and
      other
    4,627
    
    (38,793)
    
    26,294Net cash provided by operating
      activities
    1,733,239
    
    1,881,894
    
    1,236,205Cash flow from investing
    activitiesAcquisition of property, plant and equipment and
      intangible assets
    (2,593,399)
    
    (1,660,193)
    
    (1,249,895)Cash proceeds from the sale of property, plant and
      equipment
    186
    
    2,507
    
    2,890Net cash used in investing
    activities
    (2,593,213)
    
    (1,657,686)
    
    (1,247,005)Cash flow from financing
    activitiesDebtProceeds
    687,057
    
    221,197
    
    103,630Repayments of principal
    (1,019,471)
    
    (342,099)
    
    (92,600)Repayments of interest
    (170,386)
    
    (203,688)
    
    (194,275)Related partiesProceeds
    680,000
    
    -
    
    -Net cash provided by (used in) financing
      activities
    177,200
    
    (324,590)
    
    (183,245)Net decrease in cash and cash
      equivalents
    (682,774)
    
    (100,382)
    
    (194,045)Cash and cash equivalents at the beginning of the
      year
    721,178
    
    821,560
    
    1,015,605Cash and cash equivalents at the end of the
      year
    38,404
    
    721,178
    
    821,560(682,774)
    
    (100,382)
    
    (194,045)Supplementary disclosure of cash flow
      informationIncome taxes paid
    88,773
    
    106,259
    
    100,356
   See accompanying notes to the
consolidated financial statements.


F-10

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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 1.Corporate information  Net Serviços de Comunicação S.A. is a
publicly held corporation incorporated under the Brazilian Law. The Company
controls a group of cable subscription television companies, collectively
referred to as “Net Serviços” or “the Company”. Net Serviços de Comunicação
S.A.’s shares are traded on the São Paulo Stock Exchange (“BM&FBOVESPA”),
under the code NETC.  In addition to having common and preferred shares on the
BM&FBOVESPA, the Company holds preferred shares traded at NASDAQ as American
Depositary Shares (“ADS”) in the United States of America and it is subject to
the regulations of the Securities and Exchange Commission (“SEC”). Each ADS
represents 1 preferred share traded under the code NETC.  The Company also has preferred shares that are traded on
the LATIBEX, the Madrid stock exchange, and is therefore subject to the
regulations of the Spanish Comisión Nacional del Mercado de Valores
(“CNMV”).  The Company is located in Brazil and its
headquarters are located at Verbo Divino Street, 1,356, in the city and estate
of São Paulo.  The Company offers cable television
services under “NET” brand name and high-speed Internet access under “NET
VIRTUA” brand name through several cable networks located in the country’s
largest cities. The Company and Empresa Brasileira de Telecomunicações S.A. –
Embratel (“Embratel”), a subsidiary of América Móvil S.A.B. de C.V. (“América
Móvil”), jointly provide voice services under “NET FONE VIA EMBRATEL (NetFone)”
brand name.  The
Company holds 100% interest in the subsidiaries: Net Brasília Ltda., Net Rio
Ltda., Net São Paulo Ltda., Reyc Comércio e Participações Ltda., Jacareí Cabo
Ltda., 614 TVH Vale Ltda., 614 Serviços de Internet Maceió Ltda., 614 Serviços
de Internet João Pessoa Ltda. and Net Brasil Serviços de Televisão por
Assinatura S.A..  In November 2012, the National Telecommunications Agency
(“Anatel”) authorized the Company to provide services under the Conditional
Access Services model (SEAC), through the migration of the Company’s cable and
MMDs licenses to the new service. The authorization to operate under the SEAC
model is nationwide and allows the Company to operate in any location within the
Brazilian territory. In connection with this authorization, after complying with
all existing legal requirements, the Company began to offer pay tv services in
44 other cities located in the states of São Paulo (certain cities in the
countryside of São Paulo, Vale do Paraíba, among other cities), Rio de Janeiro
(Baixada Fluminense region, Niterói and São Gonçalo), and other capitals and
metropolitan regions in the North and Northeast of the country, such as Recife,
Salvador, Sao Luis and Belém.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 1.Corporate information –continued  The Company has an agreement with BM&FBOVESPA to
adopt differentiated corporate governance practices, thus it is eligible for a
Level 2 listing, which was created to distinguish a select group of companies
committed to differentiated corporate governance practices. The Company’s annual
and quarterly financial statements meet the additional requirements of
BM&FBOVESPA. Under the Company’s articles of incorporation, disputes and
controversies arising from or related to their articles of incorporation, Level
2 regulation, provisions of the Brazilian Corporate Law, standards published by
National Monetary Council, the Brazilian Central Bank and the Brazilian
Securities Commission, regulations of the BM&FBOVESPA and other rules
applicable to the operation of the capital market in general are to be resolved
by arbitration to be conducted as per the regulations of the Market Arbitration
Committee set up by BM&FBOVESPA (Arbitration clause).  2.Basis of preparation and presentation of the consolidated
financial statements The Company’s consolidated financial
statements for the year ended December 31, 2012, 2011 and 2010 were prepared in
accordance with International Financial Reporting Standards (IFRS) as issued by
the International Accounting Standards Board (“IASB”).  The
preparation of consolidated financial statements requires the use of certain
accounting estimates by the Company's management. The consolidated financial
statements have been prepared on a historical cost basis, except for the
valuation of certain assets and liabilities acquired in connection with business
combinations and financial instruments, which have been measured at fair
value.  The
consolidated financial statements comprise the financial statements of Net
Serviços de Comunicação S.A. and its wholly-owned subsidiaries as shown in note
1, which have the same reporting period as that of the parent company and
consistent accounting policies.  Subsidiaries are consolidated as from their acquisition
dates, which are the dates on which the Company obtained control, and continue
to be consolidated until the date such control ceases to exist.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 2. Basis of preparation and presentation of the
consolidated financial statements– continued  The consolidation process involves the consolidation of
assets, liabilities, income and expenses, and the elimination of the
following:  ·Net Serviços de Comunicação S.A.’s
interest in share capital, reserves and retained earnings of
subsidiaries; ·Assets and liabilities resulting from
transactions among the group of companies; ·Revenues and expenses arising from
transactions conducted among the group of companies.  The
Company has adopted all standards, reviewed standards and interpretations issued
by IASB that were effective for the year ended December 31, 2012.  Regarding pronouncements IAS 12 (R) – Income Taxes, IFRS
1 (R) – First-time Adoption of IFRS and IFRS 7 (R) – Financial Instruments:
Disclosures, which were reviewed by the IASB and started being applied for the
first time in 2012, they did not impact the Company’s consolidated financial
statements at December 31, 2012 and for the year then ended.  In
relation to the standards IAS 1 (R) – Presentation of Financial Statements, IAS
19 (R) – Employee Benefits, IAS 32 (R) – Financial Instruments: Presentation,
IFRS 1 (R) – First-time Adoption of IFRS, IFRS 7 (R) – Financial Instruments:
Disclosures, IFRS 9 – Financial Instruments,  IFRS 10 – Consolidated
Financial Statements,  IFRS 11 – Joint Arrangements, IFRS 12 – Disclosure
of Interest in Other Entities, IFRS 13 – Fair Value Measurement, IAS 27 –
Separate Financial Statements (R) and IAS 28 – Investments in Associates and
Joint Ventures (R), which were issued (new standards) and /or revised by the
IASB prior to 2012 and whose applications become effective for fiscal years
beginning on or after January 1, 2013, management expects that the adoption of
such standards will not have a significant impact in the Company’s consolidated
financial statements.  The
Company's Board of Directors has power to amend the consolidated financial
statements after its issuance. On April 23, 2013, the Company’s Board of
Directors approved and authorized the issuance of the Company’s consolidated
financial statements.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
  3.Summary of significant accounting policies  3.1 Foreign currency translation  The Company and its subsidiaries are located in and have
their entire operations in Brazil.  The financial statements of each subsidiary included in
the Company’s consolidation are prepared using the functional currency of each
entity. The functional currency of an entity is the currency of the primary
economic environment in which it operates. By defining the functional currency
of each of its subsidiaries, management considered that the currency
significantly influences the selling price of its services and the currency in
which most of the cost of their inputs is paid or incurred. The consolidated
financial statements are shown in Brazilian Reais (R$), which is the functional
and reporting currency of Net Serviços de Comunicação S.A. and all
subsidiaries.  Transactions in foreign currencies are initially recorded
at the functional currency and recorded based on the exchange rates prevailing
at the date of the transaction. Monetary assets and liabilities denominated in
foreign currencies are recorded in the functional currency at the rate of
exchange ruling at the reporting date. Gains and losses arising from differences
in assets and liabilities in foreign currency at year end and the initial amount
are recorded in the consolidated statement of income.  3.2 Revenue recognition  Revenues include subscribers' monthly
fees, connection fees, pay-per-view, high-speed data and telephone services.
Revenues are recorded when services are provided. Connection fees and direct
selling expenses listed are deferred and amortized over the average estimated
period that subscribers remain connected to the system.  Deferred revenue relates mainly to the prepayment of
rights to use the Company’s fiber optic cable network to provide Net Fone
services and rental revenue is released to the consolidated statement of income
over the contractual period. Revenues related to special projects and access to
the network are recognized based on the average estimated period subscribers are
likely to remain connected to the system.  Rental income arising from operating leases of decoders
and modems is accounted for on a straight-line basis over the lease
terms.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3.Summary of significant accounting policies–
continued  3.2 Revenue recognition– continued  For all financial instruments measured at amortized cost
and interest bearing financial assets, interest income or expense is recorded
using the effective interest rate method, which is the rate that exactly
discounts the estimated future cash payments or receipts through the expected
life of the financial instrument or a shorter period, where appropriate, to the
net carrying amount of the financial asset or liability. Interest income is
included in finance income in the consolidated statement of income.  3.3 Adjustment to present value of assets and
liabilities  Long-term monetary assets and liabilities are adjusted to
their present value as are short-term items, if the effect is considered
relevant in relation to the consolidated financial statements taken as a whole.
The adjustment to present value is calculated taking into account contractual
cash flows and the explicit interest rate, or implicit rate in some cases, for
these assets and liabilities.Based on the analyses carried out and management’s best
estimate, the Company concluded that present value adjustment of current
monetary assets and liabilities is not significant in relation to the overall
consolidated financial statements; as such, no adjustment has been
recorded.  3.4Cash and cash equivalents  Cash and cash equivalents include cash, credit balances
in bank accounts and highly liquid investments, readily convertible in a known
cash amount, with insignificant risk of change in value. These investments are
carried at cost plus interest to the date of the balance sheet and measured at
fair value, with gain or loss recorded in the consolidated statement of
income.  3.5 Trade accounts receivable and allowance for doubtful
accounts  Trade accounts receivable are recorded at estimated net
realizable value and are non-interest bearing. The allowance for doubtful
accounts is determined on the basis of the subscriber’s history of default and
its amount is deemed sufficient to cover losses in the realization of accounts
receivable. The average term for receipt from subscribers is approximately 30
days and any outstanding receivable older than 180 days is written off.  The allowance for doubtful accounts is comprised,
substantially, of account balances that are due within 90 to180 days in
arrears.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3.Summary of significant accounting policies –continued  3.6 Inventories  Inventories are stated at the lower of net realizable
value (estimated selling price in the ordinary course of business less estimated
selling costs) and average cost. Provisions for slow moving or obsolete
inventory items are recorded based on management’s best estimate.  3.7 Property, plant and equipment  Property, plant and equipment are stated at historical
cost net of depreciation and impairment losses, if applicable. The cable network
includes capitalized amounts related to services costs and other expenses
incurred during the construction period.  Depreciation is recorded using the straight-line method
over the estimated useful lives of the assets,as disclosed in note13. Subsequent costs are
included in the residual value of the property, plant and equipment or
recognized as a specific item, as applicable, only if the economic benefits
associated with these items are probable and the amounts are reliably measured.
The net book value of any replaced item is written-off.  Other
repairs and maintenance are recognized directly in the consolidated statement of
income, when incurred.  The
residual values and estimated useful lives of property, plant and equipment are
reviewed at the end of each fiscal year and adjusted prospectively, when
necessary.  3.8 Intangible assets  Intangible assets are assessed as having finite or
indefinite estimated useful lives. The cost of intangible assets acquired in a
business combination is the fair value on the date of acquisition.  Intangible assets that have finite useful lives are
amortized over their estimated useful lives, as disclosed in note 14.  The estimated useful lives of intangible assets with
finite useful lives are reviewed at the end of each reporting period. The
amortization expense of intangible assets with finite lives is recognized in the
consolidated statement of income, in the expense category consistent with the
function of the intangible asset.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3. Summary of significant accounting policies –continued  3.8
Intangible assets– continued  Intangible assets with indefinite useful lives are not
amortized; instead they are tested for impairment annually at the
cash-generating unit level, as appropriate and when circumstances indicate that
the carrying value may be impaired. The assessment of indefinite useful life is
reviewed annually to determine whether it is still reasonable. Otherwise, the
change in useful life from indefinite to finite is recorded
prospectively.  Gains and losses arising from derecognition of an
intangible asset are measured as the difference between the net amount obtained
from the sale and the carrying amount of the asset and are recognized in the
consolidated statement of income at the moment the asset is
written-off.  3.9 Provision for impairment of long-lived assets  In accordance with IAS 36, the Company considers the
impairment of long-lived assets, including property and equipment and intangible
assets. At each financial statement date, the Company assesses whether there are
any indicators that an asset may be impaired. If such indicators are identified,
the Company estimates the recoverable value of the asset. The recoverable value
of an asset is the higher of: (a) fair value less costs that would be incurred
to sell it, and (b) its value in use. Value in use is the discounted cash flow
(before taxes) arising from the continuous use of the asset to the end of its
useful life.  Irrespective of the presence of indicators of impairment,
goodwill and intangible assets with indefinite useful lives are tested for
recovery at least once a year.  When the net book value of an asset
exceeds its recoverable value, the impairment loss is recognized in the
consolidated statement of income.  Except for the impairment of goodwill,
reversal of losses previously recorded is allowed. The reversal in these
circumstances is limited to the amortized balance of the asset as at the date of
reversal, assuming that the reversal has not been registered.  3.10 Business combinations and goodwill  Business combinations are recognized using the
acquisition method.The cost of the acquisition is the
fair value of assets and equity instruments paid and liabilities assumed on the
date of acquisition. Identifiable assets acquired and liabilities and
contingencies assumed in a business combination are measured initially at fair
value on the acquisition date.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3.Summary of significant accounting policies –continued  3.10 Business combinations and goodwill –continued  Goodwill represents the excess of acquisition cost over
the net fair value of assets acquired, liabilities assumed and identifiable
contingent liabilities of an acquired subsidiary, at the acquisition date. If
the cost of acquisition is less than the fair value of net assets acquired, the
difference is recognized directly in the consolidated statement of
income.  There
have been no business combinations for the years ended December 31, 2012 and
2011.  3.11 Income taxes  Income tax
and social contribution  The
statutory rates applicable for federal income taxes and social contribution are
15% plus an additional 10% over R$240 for income tax and 9% for social
contribution. Income taxes and social contribution are recognized on the accrual
basis.  Deferred
taxes are recognized using the liability method on temporary differences at the
reporting date between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes. However, deferred income and
social contribution taxes are not recognized when generated upon initial
recording of assets and liabilities in operations not affecting the tax bases,
excepting the case of business combinations. Deferred tax assets and liabilities
are calculated using the tax rates applicable to taxable income in years in
which these temporary differences should be realized based on tax rates that
have been enacted at the reporting date.  A deferred
tax asset shall be recognized for the tax losses carryforward and temporary
differences to the extent that it is probable that future taxable profit will be
available against which the tax losses carryforward and temporary differences
can be utilized.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3.Summary of significant accounting policies –continued  3.11 Income taxes– continued  Income tax
and social contribution –continued  The
Company offsets deferred tax assets and deferred tax liabilities if, and only
if: (a) a legally enforceable right exists to set off current tax assets against
current income tax liabilities; and (b) the deferred taxes assets and the
deferred tax liabilities are related to the income tax levied by the same tax
authority on either: (i) the same taxable entity; or (ii) different taxable
entities that intend to settle tax liabilities and tax assets on a net basis, or
to realize assets and settle liabilities simultaneously, in each future period
in which significant amounts of deferred tax assets or liabilities it are
expected to be settled or recovered.  Tax on
services rendered  Revenues, expenses and assets are recognized net of tax
on services rendered, except:  •Where the taxes on services rendered incurred on a
purchase of assets or services is not recoverable from the tax authorities, in
which case the tax on services rendered is recognized as part of the cost of
acquisition of the asset or as part of the expense item, as
applicable; •Receivables and payables that are stated with the amount
of  tax on services included; and •The net amount of tax on services rendered recoverable
from, or payable to, the tax authorities is included as part of receivables or
payables in the balance sheet.  3.12 Provisions  The
Company recognizes provisions, which involves management’s judgment related to
tax, labor, and civil contingencies, and respective lawyers’ fees, as a result
of a past event, in which it is probable that an outflow of economic benefits
will be required to settle the obligation and a reasonable estimate can be made
of the amount of this obligation. The Company is subject to various legal, civil
and labor proceedings during the normal course of its operations. The Company’s
probability loss assessment includes available evidence, hierarchy of the laws,
available jurisprudence, as well as opinions from legal advisers. Provisions are
reviewed and adjusted to consider changes in circumstances as statute of
limitations, conclusions of tax audits or additional circumstances identified in
base of new subjects or court decisions. The outcome can be different from the
management’s estimates.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3. Summary of significant accounting policies –continued  3.13Financial instruments – initial recognition and
subsequent measurement  (i) Financial
assets  Initial recognition and measurement  Financial assets are classified as: i) financial assets
at fair value through profit or loss; ii) receivables; iii) held-to-maturity
investments; or iv) available-for-sale financial assets. The Company determines
the classification of its financial assets at initial recognition when it
becomes a party to the contractual provisions of the instrument.  Financial assets are initially recognized at fair value
plus, in the case of investments not designated at fair value through profit or
loss, transaction costs that are directly attributable to the acquisition of the
financial
asset.                                    
..Sales and purchases of financial assets that require delivery of assets
within a established schedule by regulation or market convention (regular
purchases) are recognized on transaction date, i.e. the date that the Company
commits to purchase or sell asset. The
Company’s financial assets include cash and cash equivalents, trade accounts
receivable, other current assets and derivative financial
instruments.  Subsequent  measurement  The
subsequent measurement of financial assets depends on their classification as
follows:  Financial assets at fair value through profit or
loss  Financial assets at fair value through profit and loss
are stated in the consolidated balance sheet at fair value, with the related
gains and losses recognized in the consolidated statement of income. On December
31, 2012 and 2011, financial assets classified at fair value through profit or
loss refers to derivative financial instruments.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3. Summary of significant accounting policies –continued  3.13
Financial instruments – initial recognition and subsequent measurement –continued  (i)
Financial assets–continued  Receivables  Receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active market. After
initial measurement, such financial assets are subsequently measured at
amortized cost using the effective interest rate method, less impairment.
Amortized cost is calculated by taking into account any discount or premium on
acquisition and fees or costs that incurred. The amortization based on the
effective interest rate method is included in finance income in the consolidated
statement of income. Losses arising from impairment are recognized in the
consolidated statement of income as finance expenses. As of December 31, 2012
and 2011, financial assets classified as receivables are trade accounts
receivable.  Held-to-maturity investments  Non-derivative financial assets with fixed or
determinable payments and fixed maturities are classified as held-to-maturity
when the Company has the positive intention and ability to hold them to
maturity. As of December 31, 2012 and 2011, the Company did not have any
held-to-maturity investments.  Available-for-sale financial assets  Available-for-sale financial assets are non-derivative
financial assets that are neither classified as financial assets at fair value
through profit or loss, receivables or held-to-maturity investments.
Available-for-sale financial assets include equity instruments and debt
securities. As of December 31, 2012 and 2011, the Company did not have any
available-for-sale financial assets.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3. Summary of significant accounting policies –continued  3.13
Financial instruments – initial recognition and subsequent measurement –continued  (i)
Financial assets–continued  Derecognition  A
financial asset (or, where applicable a part of a financial asset or part of a
group of similar financial assets) is derecognized when:  •The rights to receive cash flows from the asset have
expired; •The Company has transferred its rights to receive cash
flows from the asset or has assumed an obligation to pay the received cash flows
in full without material delay to a third party under a ‘pass-through’
arrangement; and either (a) the Company has transferred substantially all the
risks and rewards of the asset, or (b) the Company has neither transferred nor
retained substantially all the risks and rewards of the asset, but has
transferred control over the asset.  When
the Company has transferred its rights to receive cash flows from an asset or
has entered into a pass-through arrangement, and has neither transferred nor
retained substantially all of the risks and rewards of the asset nor transferred
control over the asset, the asset is recognized to the extent of the Company’s
continuing involvement with the asset. In that case, the Company also recognizes
an associated liability. The transferred asset and the associated liability are
measured on a basis that reflects the rights and obligations that the Company
has retained. Continuing involvement that takes the form of a guarantee over the
transferred asset is measured at the lower of the original carrying amount of
the asset and the maximum amount of consideration that the Company could be
required to repay.  (ii)
Impairment of financial assets  The
Company assesses at each reporting date whether there is any objective evidence
that a financial asset or a group of financial assets is impaired. A financial
asset or a group of financial assets is deemed to be impaired if, and only if,
there is objective evidence of impairment as a result of one or more events that
has occurred after the initial recognition of the asset (an incurred ‘loss
event’) and that loss event has an impact on the estimated future cash flows of
the financial asset or the group of financial assets that can be reliably
estimated.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3. Summary of significant accounting policies –continued  3.13
Financial instruments – initial recognition and subsequent measurement –continued  (ii)
Impairment of financial assets – continued  Evidence of impairment may include indications that the
debtors or a group of debtors is experiencing significant financial difficulty,
default or delinquency in interest or principal payments, the probability that
they will enter bankruptcy or other financial reorganisation and observable data
indicating that there is a measurable decrease in the estimated future cash
flows, such as changes in arrears or economic conditions that correlate with
defaults.  Financial assets carried at amortized cost  For
financial assets carried at amortized cost, the Company first assesses whether
objective evidence of impairment exists individually for financial assets that
are individually significant, or collectively for financial assets that are not
individually significant. If the Company determines that no objective evidence
of impairment exists for an individually assessed financial asset, whether
significant or not, it includes the asset in a group of financial assets with
similar credit risk characteristics and collectively assesses them for
impairment. Assets that are individually assessed for impairment and for which
an impairment loss is, or continues to be, recognized are not included in a
collective assessment of impairment.  If
there is objective evidence that an impairment loss has been incurred, the
amount of the loss is measured as the difference between the asset carrying
amount and the present value of estimated future cash flows (excluding future
expected credit losses that have not yet been incurred). The present value of
the estimated future cash flows is discounted at the financial assets original
effective interest rate. If a loan has a variable interest rate, the discount
rate for measuring any impairment loss is the current 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 consolidated statement of
income. Interest income continues to be accrued on the reduced carrying amount
and is accrued using the rate of interest used to discount the future cash flows
for the purpose of measuring the impairment loss. The interest income is
recorded as part of finance income in the consolidated statement of income.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3. Summary of significant accounting policies –continued  3.13
Financial instruments – initial recognition and subsequent measurement
–continued  (ii) Impairment of financial
assets  Financial assets carried at amortized cost –
continued  Loans
together with the associated allowance are written off when there is no
realistic prospect of future recovery and all collateral has been realized or
has been transferred to the Company. If, in a subsequent year, the amount of the
estimated impairment loss increases or decreases because of an event occurring
after the impairment was recognized, the previously recognized impairment loss
is increased or reduced by adjusting the allowance account. If a future
write-off is later recovered, the recovery is credited to finance expenses in
the consolidated statement of income.  (iii) Financial
liabilities  Initial recognition and measurement  Financial liabilities are classified as financial
liabilities at fair value through profit or loss or loans and borrowings. The
Company determines the classification of its financial liabilities at initial
recognition. Financial liabilities are recognized initially at fair value and in
the case of loans and borrowings, plus directly attributable transaction
costs.  The
Company’s financial liabilities include: (i) trade accounts payable; (ii) trade
accounts payable - programming suppliers; (iii) other current liabilities; (iv)
debt; and (v) derivative financial instruments.  Subsequent measurement  The
measurement of financial liabilities depends on their classification as
follows:  Financial liabilities at fair value through profit or
loss  Financial liabilities at fair value through profit or
loss include derivative financial instruments. Financial liabilities are
classified as held for trading if they are acquired for the purpose of selling
in the near term. Gains or losses on liabilities held for trading are recognized
in the consolidated statement of income. As of December 31, 2012 and 2011, the
Company did not have any financial liabilities at fair value through profit or
loss.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3. Summary of significant accounting policies –continued  3.13
Financial instruments – initial recognition and subsequent measurement
–continued  (iii) Financial
liabilities – continued  Loans
and borrowings  After
initial recognition, interest bearing loans and borrowings are subsequently
measured at amortized cost using the effective interest rate method. Gains and
losses are recognized in the consolidated statement of income when the
liabilities are derecognized, as well as during the amortization process through
the effective interest rate method. As of December 31, 2012 and 2011, the
Company had its debt instruments classified as loans and borrowings.  Derecognition  A
financial liability is derecognized when the obligation under the liability is
discharged or cancelled or expires.  When
an existing financial liability is replaced by another from the same lender on
substantially different terms, or the terms of an existing liability are
substantially modified, such an exchange or modification is treated as a
derecognition of the original liability and the recognition of a new liability,
and the difference in the respective carrying amounts is recognized in the
consolidated statement of income.  (iv)
Derivative financial instruments  The
Company is exposed to market risk arising from its operations, and it uses
derivatives to minimize its exposure to such risks. The Company uses derivative
financial instruments such as forward currency swaps. Such derivative financial
instruments are initially recognized at fair value on the date on which a
derivative contract is entered into and are subsequently remeasured at fair
value. Any gains or losses arising from changes in the fair value of derivatives
are taken directly to the consolidated statement of income. Derivative
instruments are classified as current or non-current or separated into a current
and non-current portion based on an assessment of the underlying contracted cash
flows.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3. Summary of significant accounting policies –continued  3.13
Financial instruments – initial recognition and subsequent measurement
–continued  (v)
Offsetting of financial instruments  Financial assets and financial liabilities are offset and
the net amount reported in the consolidated statement of financial position if,
and only if, there is a currently enforceable legal right to offset the
recognized amounts and there is an intention to settle on a net basis, or to
realize the assets and settle the liabilities simultaneously.  (vi)
Fair value of financial instruments  The
fair value of financial instruments that are traded in active markets at each
reporting date is determined by reference to quoted market prices or dealer
price quotations (bid price for long positions and ask price for short
positions), without any deduction for transaction costs.  For
financial instruments not traded in an active market, the fair value is
determined using appropriate valuation techniques. Such techniques may include
using recent arm’s length market transactions; reference to the current fair
value of another instrument that is substantially the same; a discounted cash
flow analysis or other valuation models.  An
analysis of fair values of financial instruments and further details as to how
they are measured are provided in notes 23 and 24.  3.14 Lease agreements  Leases in
which substantially all the risks and ownership of the asset are not assumed by
the Company are classified as operating leases. Operating lease payments are
recorded in theconsolidated statement of incomeon a
straight-line basis over the lease terms.  The
determination of whether an arrangement is, or contains, a lease is based on the
substance of the arrangement at inception date, whether fulfillment of the
arrangement is dependent on the use of a specific asset or assets or the
arrangement conveys a right to use the asset, even if that right is not
explicitly specified in an arrangement.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3. Summary of significant accounting policies –continued  3.15
Operating segments  Operating segments are defined as components of an
enterprise for which separate financial information is available and is
evaluated on a regular basis by the chief operating decision maker in deciding
how to allocate resources to an individual segment and in assessing performance
of the segment. Since all decisions are made on the basis of consolidated
reports, all services are provided using the same cable network, there are no
managers responsible for any specific element of the business, and all decisions
relating to strategic planning, finance, purchasing, investment and liquidity
application are made on a consolidated basis, the Company has concluded it has a
single reportable segment.  3.16
Significant accounting judgments, estimates and assumptions  The
preparation of financial statements requires management to make judgments,
estimates and assumptions that affect the application of policies and the
reported amounts of assets and liabilities, income and expenses. These estimates
and associated assumptions are based on historical experience and various other
factors believed to be reasonable under the circumstances. Actual results could
differ from these estimates.  These
underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognized in the period in which the estimate is revised. The
estimates and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are discussed below.  a) Deferred income taxes  The
amount of deferred income tax assets, as described in note 12, is reviewed at
each reporting date and reduced by the amount that is no longer recoverable
through estimates of future taxable income. Amounts reported involve
considerable exercise of judgment by management and future taxable income may be
higher or lower than the estimates considered when valuing a deferred tax
asset.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 3. Summary of significant accounting policies –continued  3.16Significant accounting judgments, estimates and
assumptions –continued  b) Valuation of assets acquired and liabilities assumed
in business combinations  In
recent years, the Company entered into certain business combinations. The
Company must allocate the cost of the acquired entity to the assets acquired and
liabilities assumed based on their estimated fair values on acquisition date.
Any excess of the cost of the acquired entity over the fair value of assets
acquired and liabilities assumed is recorded as goodwill. The Company exercises
significant judgment in identifying tangible and intangible assets and
liabilities, valuing such assets and liabilities and determining their remaining
useful lives. Management generally engages third party valuation consultants to
assist in valuing the assets and liabilities.  The
valuation assumptions include estimates of discounted cash flow and discount
rates. Use of alternative assumptions would result in different estimates of the
value of assets acquired and liabilities assumed.  c)
Impairment test  The
Company evaluates the existence of any impairment indicators for all long-lived
assets at each closing date. Goodwill and intangible assets with indefinite
useful lives are tested for impairment annually and when there are indicators of
loss. Recoverable amounts are determined based on value in use calculations,
using the premises of the discounted cash flows established by the management.
Such calculations require the use of estimates, as detailed in note 14.  d)
Provisions  Provisions, as described in note 19, are recognized when
the Company has a present obligation (legal or not formalized) as a result of a
past event, it is probable that an outflow of embodying economic benefits will
be required to settle the obligation and a reasonable estimate can be made of
the amount of this obligation.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 4.
Net revenues  12/31/2012
    
    12/31/2011
    
    12/31/2010Gross revenues
    
    9,937,992
    
    8,345,397
    
    7,101,588Taxes on rendering of
      services
    
    (1,682,201)
    
    (1,391,961)
    
    (1,259,841)Discounts and
      cancellations
    
    (316,595)
    
    (257,551)
    
    (436,078)Net
    revenues
    
    7,939,196
    
    6,695,885
    
    5,405,669
  Taxes on rendering of services consist primarily of ICMS
– state value added tax (10% on Pay tv and 25.0% to 32.0% on broadband), ISS –
municipal tax on rendering of services (2.0% to 5.0%) and the federal
contributions on revenue related to PIS (0.65% or 1.65%) and COFINS (3.0% or
7.60%).  The Company’s revenues are related to
services rendered in the Brazilian territory.  5.
Cost of services rendered  12/31/2012
    
    12/31/2011
    
    12/31/2010Programming costs
    
    (1,795,858)
    
    (1,515,728)
    
    (1,262,083)Materials and maintenance
    
    (91,783)
    
    (74,672)
    
    (62,785)Personnel
    
    (493,468)
    
    (463,931)
    
    (385,621)Pole rental
    
    (93,454)
    
    (84,100)
    
    (70,457)Depreciation
    
    (982,590)
    
    (757,149)
    
    (600,911)Amortization
    
    (166,886)
    
    (166,347)
    
    (166,284)Third party service
    
    (668,067)
    
    (475,873)
    
    (393,341)Network electrical power
    
    (57,158)
    
    (44,040)
    
    (27,495)Telecommunications
    
    (392,513)
    
    (312,224)
    
    (246,332)Other
    
    (287,490)
    
    (252,887)
    
    (131,509)(5,029,267)
    
    (4,146,951)
    
    (3,346,818)


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 6.
Finance results  12/31/2012
    
    12/31/2011
    
    12/31/2010Finance income:Interest on cash equivalents
    
    28,126
    
    77,369
    
    84,585Interest on prepaid rights for use
    
    51,916
    
    49,224
    
    46,672Interest and fines from late payments
    
    48,186
    
    39,043
    
    31,938Other
    
    2,971
    
    9,765
    
    6,159131,199
    
    175,401
    
    169,354Finance expenses:Finance charges on loans and
    debentures
    
    (119,772)
    
    (173,071)
    
    (183,710)Monetary exchange rate variation on
    debt
    
    (59,338)
    
    (68,950)
    
    37,646Finance charges and monetary exchange
    (*)
    
    (191,830)
    
    (138,827)
    
    (75,215)Finance charges and monetary variation on
      provisions, trade accounts payable and other (**)
    
    1,571
    
    (1,109)
    
    (15,475)Gains (losses) on derivatives
    
    240
    
    (16,978)
    
    (65,915)IOF tax on intercompany transactions
    
    (7,036)
    
    (12,949)
    
    (23,343)PIS and COFINS taxes on interest
    income
    
    (8,325)
    
    (9,598)
    
    (11,041)Financial discounts
    
    (29,874)
    
    (18,402)
    
    (15,107)Other
    
    (18,435)
    
    (36,002)
    
    (7,262)(432,799)
    
    (475,886)
    
    (359,422)Total
    
    (301,600)
    
    (300,485)
    
    (190,068)
  (*) During the years ended
December 31, 2012, 2011 and 2010, finance charges and monetary exchange
included: (i) R$53,377, R$50,609 and R$47,984, respectively, of interest
expenses related to prepayment of the indefeasible right to use (IRU) with
Empresa Brasileira de Telecomunicações S.A. (“Embratel”), a related party (note
19); and (ii) R$138,453, R$88,218 andR$27,231, respectively,of
interest expense and US Dollar exchange rate variation related to amounts
borrowed from Banco Inbursa S.A., a related party, and interest expense paid to
Embrateland América Móvil. (**)The
amounts classified as “finance charges and monetary variation on provisions,
trade accounts payable and other” relate to the net effect of the monetary
variation of certain liabilities, such as withholding taxes applicable debt in
foreign currencies and an ongoing dispute related to copyright
payable.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 7.
Expenses by nature  The
Company presents its consolidated statement of income by function. The table
below shows details by nature:  12/31/2012
    
    12/31/2011
    
    12/31/2010Programming costs
    
    (1,795,858)
    
    (1,515,728)
    
    (1,262,083)Other
      costs
    
    (412,455)
    
    (357,055)
    
    (292,245)Third
      party service
    
    (1,320,093)
    
    (973,701)
    
    (795,416)Depreciation and amortization
    
    (1,298,080)
    
    (1,061,896)
    
    (901,225)Payroll expenses
    
    (923,889)
    
    (901,171)
    
    (750,843)Telecommunicationexpenses
    
    (392,513)
    
    (213,224)
    
    (246,332)Commercial expenses
    
    (350,980)
    
    (294,401)
    
    (256,398)Other
    
    (512,145)
    
    (399,780)
    
    (243,068)(7,006,013)
    
    (5,815,956)
    
    (4,747,610)Classified as:Cost of services rendered
    
    (5,029,267)
    
    (4,146,951)
    
    (3,346,818)Selling expenses
    
    (907,322)
    
    (720,030)
    
    (594,470)General and administrative expenses
    
    (991,740)
    
    (920,177)
    
    (792,597)Other
    
    (77,684)
    
    (28,798)
    
    (13,725)(7,006,013)
    
    (5,815,956)
    
    (4,747,610)
  8.  Cash and cash equivalents  12/31/2012
    
    12/31/2011Cash and banks
    
    28,051
    
    32,346Banking deposit certificates
    
    4,337
    
    3,417Fixed-income investment funds
    
    6,016
    
    685,41538,404
    
    721,178
  Bank
deposit certificates (CDBs) earn an average of 100 % of the Interbank
Certificate of Deposit (CDI) rate (6.90% on December 31, 2012 and 10.87% on
December 31, 2011). CDBs are highly liquid investments issued by first-line
banks with floating interest rates based on the CDI rate. The Company has
immediate and total access to these CDBs.  Fixed-income investment funds are represented by quotas
in exclusive investment funds whose assets are mainly CDBs and government bonds.
The Company has immediate and total access to these funds.  Cash
and cash equivalents decreased in 2012 mainly due to the acquisition of
property, equipment and intangible assets.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 9.
Trade accounts receivables  12/31/2012
    
    12/31/2011Trade accounts receivables
    
    859,083
    
    565,709(-) Allowance for doubtful accounts
    
    (101,829)
    
    (57,998)757,254
    
    507,711
  Due dates of trade accounts receivables are as
follows:  12/31/2012
    
    12/31/2011Due
    
    436,601
    
    308,956Overdue:Up to 30 days
    
    264,964
    
    168,52131 – 60 days
    
    39,079
    
    21,80761 – 90 days
    
    27,496
    
    17,79791- 180 days
    
    90,943
    
    48,628859,083
    
    565,709
  The average term for the receipt of subscriptions
receivable is approximately 30 days. Allowance for doubtful accounts is
comprised mainly by amounts overdue from 90 to 180 days. Amounts overdue by more
than 180 days are written-off.  The continuity schedules of the allowance for doubtful
accounts are shown below:  Balances at December 31, 2009
    
    (42,171)Additions
    
    (41,311)Write-offs
    
    38,922Balances at December 31, 2010
    
    (44,560)Additions
    
    (52,071)Write-offs
    
    38,633Balances at December 31, 2011
    
    (57,998)Additions
    
    (104,477)Write-offs
    
    60,646Balances at December 31, 2012
    
    (101,829)


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 10.
Inventories 12/31/2012
    
    12/31/2011Material for network maintenance
    
    24,978
    
    17,626Material for technical assistance
    
    43,719
    
    35,50968,697
    
    53,135
    In
the year ended December 31, 2012, the Company consumed R$91,783 (R$74,672 in
2011 and R$62,785 in 2010) of materials related to maintenance of networks and
technical assistance, which were recorded in cost of services
rendered.  11.
Judicial deposits  The
Company has judicial deposits related to the following: 12/31/2012
    
    12/31/2011Labor
    
    20,165
    
    11,927Civil
    
    9,042
    
    4,036Lease of poles and ducts and copyright
      payable
    
    65,973
    
    59,616Taxes
    
    28,216
    
    21,759123,396
    
    97,338
   12.
Income taxes  a.Income taxes expenses  12/31/2012
    
    12/31/2011
    
    12/31/2010Current income taxes expenses
    
    (86,240)
    
    (99,911)
    
    (78,063)Deferred income taxes:Tax losses carryforward
    
    (41,649)
    
    (42,721)
    
    (31,332)Temporary differences:Goodwill
    
    (137,050)
    
    (90,411)
    
    (89,259)Amortization of property, equipment and intangible
      assets
    
    16,502
    
    16,120
    
    17,073Provision and other
    
    10,556
    
    10,652
    
    20,741(151,641)
    
    (106,360)
    
    (82,777)Income taxes expenses
    
    (237,881)
    
    (206,271)
    
    (160,840)
   The
statutory rates applicable for federal income taxes and social contribution are
25% and 9%, respectively, which represent an aggregate rate of 34% in 2012, 2011
and 2010.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 12.
Income taxes –continued  a.Income taxes expenses –continued  Amounts reported as income taxes expenses in the
consolidated statement of income are reconciled to the statutory rates as
follows:  12/31/2012
    12/31/2011
    12/31/2010Income before incometaxes
    631,583
    579,444
    467,991Income taxes at the nominal rate of
    34%
    (214,738)
    (197,011)
    (159,117)(Additions) / exclusions:Permanent differences
    (2,355)
    (2,991)
    (2,623)Other
      reconciling items:Unrecorded benefit from tax losses carryforward
      generated in the current year
    (20,004)
    (32,646)
    (59,338)Tax losses temporary differences generated
      (realized) in the current year, for which no deferred taxes have been
      recognized
    (4,773)
    22,636
    45,614Other
    3,989
    3,741
    14,624Incometaxesfor the
      year
    (237,881)
    (206,271)
    (160,840)Effective tax rate
    (37.66%)
    (35.60%)
    (34.37%)
  Brazilian tax law allows tax losses to be carried forward
indefinitely to be utilized to off-set future taxable income. Tax legislation
enacted in 1995 limits the utilization of tax losses carryforward in a given
year to 30% of taxable income.  Deferred tax assets are recognized are supported by
projections of taxable income based on technical feasibility studies. These
studies consider the Company’s history of profitability and the prospect of
maintaining current profitability in the future as the basis for estimated
recovery of credits within a period of not more than 10 years. The remaining
deferred tax assets, which are based on temporary differences, mainly for tax
and other provisions, were recognized based on expectations for their
realization.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 12.
Income taxes– continued  b.Recoverable taxes, taxes payable and deferred income
taxes  12/31/2012
    
    12/31/2011Recoverable taxes:Withhold income taxes
    
    19,639
    
    46,870Other federal taxes
    
    18,939
    
    43,250State taxes
    
    36,245
    
    29,889Other
    
    7,974
    
    1,29782,797
    
    121,306Current
    
    77,115
    
    115,717Non-current
    
    5,682
    
    5,589Taxes payable:Federal
    
    63,366
    
    60,387State
    
    26,555
    
    29,633Municipal
    
    4,073
    
    4,41593,994
    
    94,435Deferred taxes:Assets:Tax losses carryforward
    
    214,967
    
    256,616Temporary differences:Provisions
    
    79,952
    
    139,903Allowance for doubtful accounts
    
    36,174
    
    22,184Profit sharing
    
    50,296
    
    52,676Foreign exchange and derivative
losses
    
    28,004
    
    4,259Property, equipment, inventories and trade accounts
      payables
    
    77,668
    
    42,994Other
    
    39
    
    361272,133
    
    262,377487,100
    
    518,993Liabilities:Temporary differencesGoodwill
    
    (233,578)
    
    (96,528)Intangible assets
    
    (133,880)
    
    (151,127)Property and equipment
    
    803
    
    1,548Other
    
    (1,043)
    
    (1,894)(367,698)
    
    (248,001)119,402
    
    270,992Non-current assets
    
    283,824
    
    301,495Non-current liabilities
    
    (164,422)
    
    (30,503)119,402
    
    270,992


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 12.
Income taxes– continued  b.Recoverable taxes, taxes payable and deferred income
taxes –continued  The
continuity schedules of the deferred income taxes assets and liabilities are
shown below:  Changes in deferred income taxes
      assets
    
    Tax losses carryforward
    Temporary differences
    TotalBalances at December 31, 2011
    
    256,616
    44,879
    301,495Addition
    
    -
    190,447
    190,447Reductions
    
    (41,649)
    (180,692)
    (222,341)Reclassification of deferred tax liabilities
    
    -
    14,223
    14,223Balances at December 31, 2012
    
    214,967
    68,857
    283,824
    Changes in deferred income taxes
      liabilities
    
    Temporary differencesBalances at December 31, 2011
    
    30,503Addition
    
    136,804Reductions
    
    (17,108)Reclassification of deferred tax
    assets
    
    14,223Balances at December 31, 2012
    
    164,422
    As of
December 31, 2012, the estimation of realization of deferred tax assets, which
is determined based on the projection of future taxable income, is as
follows:  2013
    
    216,0302014
    
    106,7152015
    
    56,2752016
    
    29,9692017 to 2022
    
    78,111487,100
  The
estimates for recovery of deferred tax assets are reviewed at least once a year
and are based on projections of taxable income considering several financial and
business assumptions prevailing at December 31, 2012, which are the same used
for the assessment of recovery of assets disclosed in note14. Consequently,
these estimates may not realize in the future as expected due to the
uncertainties inherent in these forecasts.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 12.
Income taxes– continued  b.Recoverable taxes, taxes payable and deferred income
taxes– continued  The Company has tax losses carryforward to offset 30% of
the annual taxable income, without expiration, for the following
amounts:  12/31/2012
    
    12/31/2011Income
      taxes
    Social contribution
    Total
    
    Income
      taxes
    Social contribution
    TotalGross amounts
    2,510,402
    2,833,622
    -
    
    2,803,040
    3,258,005
    -Tax credit (25%/9%)
    627,601
    255,026
    882,627
    
    700,760
    293,220
    993,980Recognized tax
    credit
    (156,070)
    (58,897)
    (214,967)
    
    (186,725)
    (69,891)
    (256,616)Non-recognized tax
      credit
    471,531
    196,129
    667,660
    
    514,035
    223,329
    737,364


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 13. Property, plant and equipment Network
    Software and computer equipment
    Machinery and equipment
    Furniture and fixtures
    Facilities and improvements
    Vehicles
    Tools
    Other
    TotalCostBalances at December 31, 2009
    5,633,190
    133,048
    43,709
    28,442
    83,960
    5,093
    40,924
    5,411
    5,973,777Additions
    1,149,341
    6,115
    1,180
    2,411
    11,157
    57
    9,418
    2,732
    1,182,411Transfers
    (93)
    3
    (27)
    32
    (15)
    -
    -
    -
    (100)Write-offs
    (108,906)
    (854)
    -
    (42)
    (23)
    (994)
    (176)
    -
    (110,995)Balances at December 31, 2010
    6,673,532
    138,312
    44,862
    30,843
    95,079
    4,156
    50,166
    8,143
    7,045,093Additions
    1,558,537
    15,488
    660
    1,658
    2,737
    555
    4,348
    -
    1,583,983Transfers
    (1,452)
    93
    28
    298
    322
    -
    48
    1
    (662)Write-offs
    (48,079)
    (3,836)
    -
    (28)
    -
    (808)
    (206)
    -
    (52,957)Balances at December 31, 2011
    8,182,538
    150,057
    45,550
    32,771
    98,138
    3,903
    54,356
    8,144
    8,575,457Additions
    2,401,365
    60,690
    216
    2,176
    5,621
    74
    10,228
    1,414
    2,481,784Transfers
    (9,113)
    939
    11
    228
    10,279
    -
    -
    -
    2,344Write-offs
    (41,548)
    (4,611)
    (137)
    (76)
    (2)
    (1,048)
    (13)
    -
    (47,435)Balances at December 31, 2012
    10,533,242
    207,075
    45,640
    35,099
    114,036
    2,929
    64,571
    9,558
    11,012,150Accumulated depreciationDepreciation rate per annum
    8.33 to 20%
    20 to 33.33%
    10%
    10%
    4 to 25%
    20%
    20%
    -Balances at December 31, 2009
    (2,994,474)
    (94,916)
    (31,901)
    (17,719)
    (43,778)
    (3,943)
    (20,511)
    502
    (3,206,740)Additions
    (593,672)
    (17,868)
    (2,766)
    (2,081)
    (4,351)
    (497)
    (7,045)
    -
    (628,280)Transfers
    62
    (25)
    (9)
    (5)
    14
    -
    -
    -
    37Write-offs
    110,299
    854
    -
    19
    13
    878
    177
    -
    112,240Balances at December 31, 2010
    (3,477,785)
    (111,955)
    (34,676)
    (19,786)
    (48,102)
    (3,562)
    (27,379)
    502
    (3,722,743)Additions
    (746,430)
    (16,701)
    (2,294)
    (1,785)
    (5,180)
    (299)
    (7,838)
    -
    (780,527)Transfers
    46
    -
    -
    -
    -
    -
    (46)
    -
    -Write-offs
    45,728
    3,834
    -
    24
    -
    791
    202
    -
    50,579Balances at December 31, 2011
    (4,178,441)
    (124,822)
    (36,970)
    (21,547)
    (53,282)
    (3,070)
    (35,061)
    502
    (4,452,691)Additions
    (973,404)
    (17,053)
    (1,934)
    (1,907)
    (6,338)
    (283)
    (7,960)
    -
    (1,008,879)Transfers
    -
    -
    -
    (74)
    74
    -
    -
    -
    -Write-offs
    38,581
    4,393
    133
    60
    2
    991
    13
    -
    44,173Balances at December 31, 2012
    (5,113,264)
    (137,482)
    (38,771)
    (23,468)
    (59,544)
    (2,362)
    (43,008)
    502
    (5,417,397)Net balances at December 31, 2010
    3,195,747
    26,357
    10,186
    11,057
    46,977
    594
    22,787
    8,645
    3,322,350Net balances at December 31, 2011
    4,004,097
    25,235
    8,580
    11,224
    44,856
    833
    19,295
    8,646
    4,122,766Net balances at December 31, 2012
    5,419,978
    69,593
    6,869
    11,631
    54,492
    567
    21,563
    10,060
    5,594,753
  On
December 31, 2012, R$169,993 (R$155,364 at December 31, 2011) from property,
plant and equipment were provided as a guarantee of certain legal actions and
labor claims. During the years ended on December 31, 2012 and 2011, the Company
did not identify any indicators that property, plant and equipment may be
impaired, as required by IAS 36, Impairment of assets.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 14. Intangible assets  Indefinite useful life

   

   Finite useful lifeCost

   Goodwill

   

   Licenses

   

   Software

   

   Customer portfolio

   

   Other

   

   TotalBalances at December 31, 2009

   1,928,616

   

   438,726

   

   430,875

   

   304,367

   

   8,107

   

   3,110,691Additions

   -

   

   -

   

   67,484

   

   -

   

   -

   

   67,484Transfers

   -

   

   -

   

   100

   

   -

   

   -

   

   100Write-offs

   -

   

   -

   

   (20,380)

   

   -

   

   -

   

   (20,380)Balances at December 31, 2010

   1,928,616

   

   438,726

   

   478,079

   

   304,367

   

   8,107

   

   3,157,895Additions

   -

   

   -

   

   68,826

   

   -

   

   7,384

   

   76,210Transfers

   -

   

   -

   

   2,678

   

   -

   

   682

   

   3,360Write-offs

   -

   

   -

   

   (10,480)

   

   -

   

   -

   

   (10,480)Balances at December 31, 2011

   1,928,616

   

   438,726

   

   539,103

   

   304,367

   

   16,173

   

   3,226,985Additions

   -

   

   -

   

   111,153

   

   -

   

   1,505

   

   112,658Balances at December 31, 2012

   1,928,616

   

   438,726

   

   650,256

   

   304,367

   

   17,678

   

   3,339,643Accumulated amortizationAmortization rate per annum

   -

   

   -

   

   20%

   

   16.67%

   

   20%Balances at December 31, 2009

   (178,742)

   

   (1,806)

   

   (261,070)

   

   (139,061)

   

   (6,844)

   

   (587,523)Additions

   -

   

   -

   

   (53,601)

   

   (50,727)

   

   (448)

   

   (104,776)Transfers

   -

   

   -

   

   (36)

   

   -

   

   -

   

   (36)Write-offs

   -

   

   -

   

   20,380

   

   -

   

   -

   

   20,380Balances at December 31, 2010

   (178,742)

   

   (1,806)

   

   (294,327)

   

   (189,788)

   

   (7,292)

   

   (671,955)Additions

   -

   

   -

   

   (64,294)

   

   (50,728)

   

   (522)

   

   (115,544)Transfers

   -

   

   -

   

   169

   

   -

   

   (169)

   

   -Write-offs

   -

   

   -

   

   10,480

   

   -

   

   -

   

   10,480Balances at December 31, 2011

   (178,742)

   

   (1,806)

   

   (347,972)

   

   (240,516)

   

   (7,983)

   

   (777,019)Additions

   -

   

   -

   

   (71,301)

   

   (50,729)

   

   (1,288)

   

   (123,318)Balances at December 31, 2012

   (178,742)

   

   (1,806)

   

   (419,273)

   

   (291,245)

   

   (9,271)

   

   (900,337)Net balances at December 31, 2010

   1,749,874

   

   436,920

   

   183,752

   

   114,579

   

   815

   

   2,485,940Net balances at December 31, 2011

   1,749,874

   

   436,920

   

   191,131

   

   63,851

   

   8,190

   

   2,449,966Net balances at December 31, 2012

   1,749,874

   

   437,382

   

   230,983

   

   13,122

   

   8,407

   

   2,439,306
  
 The Company has goodwill arising from the excess of the purchase price over the fair value of net assets of the acquired companies, calculated on the purchase date, based on expectations of future profitability.  The licenses acquired in connection with business combinations and accounted for based on their fair values at their acquisition date are not amortized since they have an indefinite useful life. In the past, the indefinite useful life determination was based on the fact that these licenses were automatically renewable, as long as Company had met the mandatory requirements of Anatel. As described in note 1, in November 2012, all of the Company’s licenses migrated to the Conditional Access Service model (SEAC), which has no expiration dates. Thus, the indefinite useful life determination is still applicable in 2012.  Intangible assets with indefinite useful lives are represented mainly by software internally developed together with specialized companies or adapted for use of the Company based on existing softwares available in the market, which are, in both cases, amortized over 60 months, and by the customer portfolio, which is amortized over 72 months what reflects the average estimated period that subscribers remain connected to the system.The amortization expense is recorded as general and administrative expenses in the consolidated statement of income.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 14.
Intangible assets– continued  The Company tests its goodwill for impairment at least
annually based on its value in use using the discounted cash flow model on the
lowest appropriate cash-generating unit. The Company operates in a single
segment and has a single cash generating unit since it uses a single cable
system to provide all of its services to its customers and all decisions taken
are based on consolidated financial and operating data.  The process of evaluating the value in use includes the
use of assumptions, opinions and estimates of future cash flows, growth and
discount rates. Assumptions of cash flow and growth rate projections are based
on the Company’s annual budget and long-term business plan approved by the Board
of Directors. These assumptions consider also data market related from
comparable public companies and they represent management’s best estimate of
economic conditions of the cash generating unit.  Key
assumptions for the value in use estimate, to which asset recovery is more
sensitive, are described below:  ·Revenue – Revenues were projected on the
basis of the Company’s budget of the next fiscal year and business plan covering
the period of 2013 – 2017, taking into account the growth of the connected
households base, the mix of multiservice offered to pay TV subscribers,
broadband Internet and voice.  ·Costs and operating expenses – The costs and expenses
were projected on the basis of the Company’s historical performance, and expense
growth was projected in line with the growth of the connected homes base taking
into account the expected volume of new sales, installations and changes in mix
of products designed by management.  ·Capital investments – Investments in
property and equipment were estimated on the basis of the infrastructure
required to support the growth of the connected homes base, investments for
renewal and maintenance of cable network and technological changes needed to
enable the continuous offer of value-added multiservice to the base of connected
households.  Key assumptions were made considering the Company’s
historical performance, the current dynamics and market forecasts of pay TV,
broadband internet, voice and reasonable macroeconomic assumptions consistent
with external information sources based on financial market projections
documented and approved by the Company’s management.  Consistent with standard valuation techniques, evaluation
of value in use was made for a 5-year period and thereafter takes into account
the potential for the company to operate for an indeterminate period. Income
growth rates applied are consistent with long-term macroeconomic expectations
and significant demographic data available, which are reviewed on a yearly basis
based on the historical performance and perspectives of the sector where the
Company operates. The nominal growth rate used to extrapolate the projections
beyond the 5-year period was zero per annum.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
  14.
Intangible assets– continued  Estimated future cash flows were discounted at a single
discount rate of twelve point eighty nine per cent in this fiscal
year.  As a result of the impairment testing, management has
concluded there has been no impairment of the Company’s intangible assets, even
when considering conservative assumptions in a sensible adverse
scenario.  15.
Trade accounts payables  12/31/2012
    
    12/31/2011Domestic suppliers
    
    865,287
    
    687,765Foreign suppliers
    
    41,796
    
    44,186907,083
    
    731,951
  Trade
accounts payable include a copyright payable due to ECAD, the Central Bureau of
Collection and Distribution, a body that acts as legal representative of artists
and authors in the collection and distribution of royalty payments due to them
by the public disclosure of musical compositions in Brazil.  To
conform with the presentation adopted in the current year, the comparative
information of copyright payable as of December 31, 2011, which was previously
disclosed separately in the consolidated balance sheet, has been reclassified to
trade accounts payables.  Trade
accounts payable do not bear interest and usually are settled in 30
days  16.  Accounts payables –
programming suppliers  Description
    
    12/31/2012
    
    12/31/2011Related partiesG2C Globosat Comercialização de
      Conteúdos S.A (*)
    
    101,448
    
    102,146DLA, Inc (Digital Latin America, LLC).
    
    2,915
    -
    -Third parties
    
    85,097
    
    70,199189,460
    
    172,345
    The
table below shows programming costs incurred with third and related parties:  Operating resultsCompanies
    
    12/31/2012
    12/31/2011
    12/31/2010Related partiesG2C Globosat Comercialização de Conteúdos S.A
      (*)
    
    (1,198,900)
    (1,085,859)
    (905,929)DLA, Inc (Digital Latin America,
LLC).
    
    (31,627)
    -
    -Third parties
    
    (565,331)
    (429,869)
    (356,154)(1,795,858)
    (1,515,728)
    (1,262,083)
  (*)
Formerly named Net Brasil S.A


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
  16.  Accounts payables –
programming suppliers –continued  The
G2C Globosat Comercialização de Conteúdos S.A (G2C) serves as the agent and
negotiates with producers and audiovisual programming suppliers for the
acquisition of Brazilian content, obtaining best prices and payment
conditions.  The
acquisition contracts of Brazilian content, agreed between G2C and the
respective programming suppliers are valid until November 2015. Additionally, contracts for the acquisition of
international program content are negotiated directly by the Company and are
valid until 2015.  17. Debt  Effective
      interest rate per annumCurrency
    Nominal interest rate per annum
    12/31/2012
    
    12/31/2011
    
    12/31/2012
    
    12/31/2011Current
    
    Non-current
    
    Total
    
    Current
    
    Non-current
    
    TotalLocal
      currencyFiname
    R$
    TJLP +
      3.15%
    8.65%
    
    9.15%
    
    40,321
    
    11,386
    
    51,707
    
    64,864
    
    51,550
    
    116,414Finame
      PSI
    R$
    4.50 to
      8.70%
    5.10%
    
    5.10%
    
    58,886
    
    191,708
    
    250,594
    
    47,644
    
    244,142
    
    291,786Bank Credit Notes
      (CCB)– Itaú BBA
    R$
    CDI + 2.10% to
      2.55%
    -
    
    12.97%
    
    -
    
    -
    
    -
    
    2,292
    
    120,000
    
    122,29299,207
    
    203,094
    
    302,301
    
    114,800
    
    415,692
    
    530,492Foreign
      currencyGlobal Notes
      2020
    US$
    7.50%
    8.57%
    
    8.57%
    
    25,439
    
    711,632
    
    737,071
    
    23,301
    
    652,321
    
    675,622Banco Inbursa
      S.A.
    US$
    7.88%
    9.26%
    
    9.26%
    
    3,473
    
    203,243
    
    206,716
    
    6,519
    
    372,491
    
    379,01028,912
    
    914,875
    
    943,787
    
    29,820
    
    1,024,812
    
    1,054,632Total loans and
      financings
    
    
    
    
    
    
    128,119
    
    1,117,969
    
    1,246,088
    
    144,620
    
    1,440,504
    
    1,585,124Quantity12/31/2012
    12/31/2011Non-convertible
      debentures
    
    
    -
    58,000
    
    -
    
    -
    
    -
    
    150,348
    
    433,910
    
    584,258Commercial
      paper
    
    
    68
    -
    
    686,749
    
    -
    
    686,749
    
    -
    
    -
    
    -Total
    
    
    
    
    
    814,868
    
    1,117,969
    
    1,932,837
    
    294,968
    
    1,874,414
    
    2,169,382
  a)Loans and financing  Finame and Finame PSI  Since 2007, for the purpose of acquiring digital signal
equipment, the Company has received financing using funds from Finame -
Government Agency for Machinery and Equipment Financing. For the year ended
December 31, 2012, funds raised under this program amounted to R$7,057
(R$221,197 in 2011 and R$103,630 in 2010). These contracts are subject to
interest rate at 100% of the long-term interest rate (TJLP) rate plus an average
spread of 3.15% per annum and fixed rates between 4.5%, 5.5% and 8.7% per annum,
a five-year-term, and are collateralized by the assets financed.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 17. Debt– continued  a)Loans and financing– continued  Finame and Finame PSI– continued  During the year ended December 31, 2012, the Company
amortized Finame and Finame PSI totaling R$111,821 (R$72,779 in2011).  Bank Credit Notes  During the year ended December 31, 2011, the Company
amortized portion of this loan in the amount of R$25,000.  On May 18, 2012, the Company settled the Bank Credit
Notes issued by Itaú BBA totaling R$121,196, of which R$120,000 refers to the
principal amount, R$294 to interest and R$902 to premium paid to note holders
for early settlement.  Global Notes 2020  On November 4, 2009, the Company issued Guaranteed Notes
of US$350 million equivalent to R$593,425, with maturity in January 2020 and a
nominal interest rate of 7.5% per annum, payable semiannually in January and
July of each year.  The Notes are guaranteed by all the Company's
subsidiaries and can be settled in total or partially at any time.  Banco
Inbursa S.A.  On June 19, 2008, the Company executed a loan arrangement
with Banco Inbursa S.A., a Mexican bank which is affiliated with the
conglomerate Grupo Carso. Grupo Carso also includes Mexico’s national telephone
company América Móvil Group, which is the ultimate indirect stockholder of the
Company. The borrowing in the amount of US$200,000 (equivalent to R$319,520) is
repayable in 3 annual installments on June 2017, 2018 and 2019.  Interest is payable semi-annually, on October 15 and
April 15 of each year. The Company may, at its option, prepay the borrowing in
whole or in part at any time as from June 2013. This borrowing is guaranteed by
the Company and its subsidiaries.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 17. Debt– continued  a)Loans and financing– continued  Banco
Inbursa S.A. –continued  On
December 26, 2012, the Company settled R$223,751 of this loan, of which
R$207,650 (equivalent to US$ 100 million) for the principal and R$16,101
relating to premium and interest.  During the year ended at December 31, 2012, the Company
paid interest in the amount of R$35,786 (R$30,781 in 2011).  b)Debentures and commercial paper  Debentures  On December 1, 2006, the Company
completed its 6th debenture issuance by offering 58,000 simple debentures, of
the nominal amount, single series, par value, non-secured and subordinated type
in the amount of R$580,000.  On September 23, 2009, as decided during
the Company debenture holders’ meeting, the term of debentures was amended and
repayments were rescheduled from December 1, 2013 to June 1, 2015, with
annual amortization beginning on June 1, 2012. The following decisions were also
approved at the meeting: (i) beginning October 1, 2009, debenture
remuneration corresponded to 100% of the accumulated daily CDI variance plus a
spread of 1.6% per annum as compared to remuneration of 0.7% per annum valid
until September 30, 2009 and (ii) a payment of R$1,760 as a bonus for renewing
debentures was paid on October 1, 2009 to the holder of these
debentures. The remaining items related to the 6th issuance remained
unchanged.  On
May 18, 2012, the Company settled all the public debentures of the 6th issuance
totaling R$611,792, of which R$580,000 relate to the principal amount, R$30,701
to interest and R$1,091 premium paid to bondholders for early settlement. The
resources used for these payments were obtained through loan agreements with the
Company's indirect controlling shareholder.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 17. Debt– continued  b)Debentures and commercial paper  Commercial paper  On
November 7, 2012, the Company issued 68 single series promissory notes
(commercial paper), with face value of R$10,000 per unit, totaling R$ 680,000,
with no guarantees or suretyship and maturing on May 6, 2013. Interest, which is
calculated at 103.5% of the variation of interbank deposit (DI), is fully due at
the maturity date (or earlier, in case the Company decides to do so).  c)Debt costs  The
table below sets forth the amortization schedule of the debt cost:  Year
    
    Banco
      Inbursa S.A.
    
    Global Notes 2020
    
    Commercialpaper
    
    Total2013
    
    155
    
    616
    
    94
    
    8652014
    
    168
    
    616
    
    -
    
    7842015
    
    182
    
    616
    
    -
    
    7982016 - 2020
    
    758
    
    2,361
    
    -
    
    3,1191,263
    
    4,209
    
    94
    
    5,566
  18.
Related parties  a)Management’s compensation  Compensation paid to the Company's management is as
follows:  12/31/2012
    
    12/31/2011
    
    12/31/2010Compensation
    
    3,392
    
    3,965
    
    4,053Profit sharing plan
    
    7,491
    
    7,932
    
    5,24810,883
    
    11,897
    
    9,301
    Remuneration consists of fixed and variable compensation
profit sharing and additional current and non-current profit sharing
bonus.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 18.
Related parties– continued  b)Stockholders and entities under common
control– continued  . AssetsAccounts receivable
    
    Advances
    
    TotalCompanies
    
    12/31/2012
    12/31/2011
    
    12/31/2012
    
    12/31/2012
    12/31/2011Entities under common controlGlobosat Programadora Ltda.
    
    106
    182
    
    -
    
    106
    182Primesys Soluções Empresariais S.A.
    
    408
    104
    
    -
    
    408
    104Telmex do Brasil Ltda.
    
    70
    -
    
    -
    
    70
    -Cablena do Brasil Ltda.
    
    -
    
    
    1,097
    
    1,097
    -Total
      assets
    
    584
    286
    
    1,097
    
    1,681
    286
   LiabilitiesSuppliers
    
    Programming suppliers
    
    Debt
    
    Related parties
    
    TotalCompanies
    
    12/31/2012
    12/31/2011
    
    12/31/2012
    12/31/2011
    
    12/31/2012
    12/31/2011
    
    12/31/2012
    12/31/2011
    
    12/31/2012
    12/31/2011StockholdersEmp. Brasil de Telecom S.A. – Embratel
      (*)
    
    169,312
    60,199
    
    -
    -
    
    -
    -
    
    120,557
    84,490
    
    289,869
    144,689169,312
    60,199
    
    -
    -
    
    -
    -
    
    120,557
    84,490
    
    289,869
    144,689Entities under common controlG2C Globosat Comercialização de Conteúdos S.A.
    
    -
    -
    
    101,448
    102,146
    
    -
    -
    
    -
    -
    
    101,448
    102,146Banco Inbursa S.A. (not include the cost of
      debt)
    
    -
    -
    
    -
    -
    
    207,979
    381,822
    
    -
    -
    
    207,979
    381,822Cablena do Brasil Ltda,
    
    1,579
    -
    
    -
    -
    
    -
    -
    
    -
    -
    
    1,579
    -America Movil. S.A.B de C.V.
    
    -
    -
    
    -
    -
    
    -
    -
    
    686,585
    -
    
    686,585
    -Procisa do Brasil Proj.Cons. e
    Inst.Ltda.
    
    3,195
    1,455
    
    -
    -
    
    -
    -
    
    -
    -
    
    3,195
    1,455DLA, Inc (Digital Latin America,
LLC).
    
    -
    -
    
    2,915
    -
    
    -
    -
    
    -
    -
    
    2,915
    -Primesys Soluções Empresariais S.A.
    
    4,787
    1,830
    
    -
    -
    
    -
    -
    
    -
    -
    
    4,787
    1,830Other
    
    1,009
    1,508
    
    -
    -
    
    -
    -
    
    -
    -
    
    1,009
    1,50810,570
    4,793
    
    104,363
    102,146
    
    207,979
    381,822
    
    686,585
    -
    
    1,009,497
    488,761Total liabilities
    
    179,882
    64,992
    
    104,363
    102,146
    
    207,979
    381,822
    
    807,142
    84,490
    
    1,299,366
    633,450Current
    
    179,882
    64,992
    
    104,363
    102,146
    
    3,629
    6,662
    
    127,142
    84,490
    
    415,016
    258,290Non-current
    
    -
    -
    
    -
    -
    
    204,350
    375,160
    
    680,000
    -
    
    884,350
    375,160
  (*)
Balance represented substantially by transactions involving Netfone and purchase
of Internet link. The increase in the year ended December 31, 2012 is mainly due
to the increase in the number of transactions.  On
May 8, 2012, Net São Paulo Ltda. and Net Rio Ltda. entered into three mutual
agreements with the Company’s ultimate indirect parent company, América Móvil,
totaling R$680,000, maturing in 5 years (2017). The interest rate is equivalent
to the CDI plus a spread of 1.08% per annum, payable in May and November of each
year, beginning in 2012. The Company used proceeds from those contracts to
settle the Bank Credit Notes issued by Banco Itaú BBA and the totality of public
debentures of the 6th issuance.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 18.
Related parties– continued  c)Stockholders and entities under common
control– continued  The continuity schedule of prepaid rights for use and
deferred revenues in transactions with Embratel is as follows:  Assets
    
    LiabilitiesPrepaid rights for use
    
    Deferred revenues
    
    TotalNet Fone
    
    Shared servicesCurrent
    Non-current
    
    Current
    Non-current
    
    Current
    Non-current
    
    Current
    Non-currentBalance at 12/31/2009
    
    175,088
    659,842
    
    180,015
    678,409
    
    29,586
    108,925
    
    209,601
    787,334Additions
    
    -
    -
    
    -
    -
    
    -
    42,042
    
    -
    42,042Write-offs
    
    (175,087)
    -
    
    (180,015)
    -
    
    (31,597)
    -
    
    (211,612)
    -Transfers
    
    172,535
    (172,535)
    
    177,391
    (177,391)
    
    35,169
    (35,169)
    
    212,560
    (212,560)Balance at 12/31/2010
    
    172,536
    487,307
    
    177,391
    501,018
    
    33,158
    115,798
    
    210,549
    616,816Additions
    
    -
    -
    
    -
    -
    
    -
    4,795
    
    -
    4,795Write-offs
    
    (172,536)
    -
    
    (177,391)
    -
    
    (38,015)
    -
    
    (215,406)
    -Transfers
    
    169,844
    (169,844)
    
    174,622
    (174,622)
    
    39,287
    (39,287)
    
    213,909
    (213,909)Balance at 12/31/2011
    
    169,844
    317,463
    
    174,622
    326,396
    
    34,430
    81,306
    
    209,052
    407,702Additions
    
    -
    -
    
    -
    -
    
    -
    152
    
    -
    152Write-offs
    
    (169,844)
    -
    
    (174,623)
    -
    
    -
    (36,496)
    
    (174,623)
    (36,496)Transfers
    
    167,004
    (167,004)
    
    171,704
    (171,704)
    
    (3,261)
    3,261
    
    168,443
    (168,443)Balance at 12/31/2012
    
    167,004
    150,459
    
    171,703
    154,692
    
    31,169
    48,223
    
    202,872
    202,915


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 18. Related parties–
continued  a)Stockholders and entities under common
control– continued   Operating results
      / financial year ended December 31Rental revenues /
      telecommunications
    
    Finance
    Telecommunication
      expenses
    
    Programming
    
    Commissions /
      programming guide
    
    TotalCompanies
    
    2012
    
    2011
    2010
    
    2012
    
    2011
    2010
    
    2012
    
    2011
    2010
    
    2012
    
    2011
    2010
    
    2012
    
    2011
    2010
    
    2012
    
    2011
    2010StockholdersEmp, Brasil, de Telecom, S.A. –
    Embratel
    
    703,539
    
    572,672
    451,132
    
    (17,308)
    
    (15,893)
    (11,850)
    
    (764,328)
    
    (531,878)
    (370,695)
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (78,097)
    
    24,901
    68,587703,539
    
    572,672
    451,132
    
    (17,308)
    
    (15,893)
    (11,850)
    
    (764,328)
    
    (531,878)
    (370,695)
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (78,097)
    
    24,901
    68,587Entities under common controlG2C Globosat
      Comercialização de Conteúdos S.A.
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (1,198,900)
    
    (1,085,859)
    (905,929)
    
    (1,894)
    
    (1,797)
    (1,701)
    
    (1,200,794)
    
    (1,087,656)
    (907,630)Editora Globo
      S.A.
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (6,092)
    
    (6,096)
    (11,839)
    
    (6,092)
    
    (6,096)
    (11,839)Banco Inbursa
      S.A. (not include the cost of debt)
    
    -
    
    -
    -
    
    (85,694)
    
    (73,710)
    (16,695)
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (85,694)
    
    (73,710)
    (16,695)America Movel,
      S,A,B de C.V.
    
    -
    
    -
    -
    
    (36,912)
    
    -
    -
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (36,912)
    
    -
    -Telmex do Brasil
      Ltda.
    
    119
    
    -
    -
    
    -
    
    -
    -
    
    -
    
    (47,824)
    -
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    119
    
    (47,824)
    -Claro
      S.A.
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (12,639)
    
    (14,062)
    (5,195)
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (12,639)
    
    (14,062)
    (5,195)Primesys Soluções
      Empresariais S.A. (“Primasys”)
    
    2,517
    
    550
    -
    
    -
    
    -
    -
    
    (21,448)
    
    (60,857)
    (3,841)
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (18,931)
    
    (60,307)
    (3,841)Procisa do Brasil
      Proj. Cost. e Inst, Ltda. (“Procisa”)
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (13,489)
    
    (3,530)
    -
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (13,489)
    
    (3,530)
    -DLA, Inc (Digital
      Latin America, LLC).
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    -
    
    -
    -
    
    (31,627)
    
    -
    -
    
    -
    
    -
    -
    
    (31,627)
    
    -
    -Other
    
    1,378
    
    2,073
    2,097
    
    -
    
    -
    -
    
    (425)
    
    (1,589)
    (1,133)
    
    -
    
    -
    -
    
    -
    
    -
    (570)
    
    953
    
    484
    3944,014
    
    2,623
    2,097
    
    (122,606)
    
    (73,710)
    (16,695)
    
    (48,001)
    
    (127,862)
    (10,169)
    
    (1,230,527)
    
    (1,085,859)
    (905,929)
    
    (7,986)
    
    (7,893)
    (14,110)
    
    (1,405,106)
    
    (1,292,701)
    (944,806)707,553
    
    575,295
    453,229
    
    (139,914)
    
    (89,603)
    (28,545)
    
    (812,329)
    
    (659,740)
    (380,864)
    
    (1,230,527)
    
    (1,085,859)
    (905,929)
    
    (7,986)
    
    (7,893)
    (14,110)
    
    (1,483,203)
    
    (1,267,800)
    (876,219)


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 18.
Related parties– continued  c)Stockholders and entities under common control– continued   The
amounts and conditions of the programming agreements and pay-per-view (PPV)
events carried out with Organizações Globo relate to companies such as SporTV,
GNT, Multishow, Globo News, Futura, Canal Brazil, Sexy Hot, Universal Channel,
For Man, Playboy, Vênus and Private. The contracts related to Video On Demand
(VOD) are carried out with a subsidiary of América Móvil named DLA,
Inc.  The
program schedule guides for channels are published and distributed by Editora
Globo S.A., a subsidiary of Globo Comunicação e Participações S.A.  The Company and Empresa Brasileira de Telecomunicações
S.A. (Embratel) offer telephony services for the Company’s subscribers. The
business model offers an Embratel voice product to existing and prospect
subscribers of the Company, by means of the Company’s bi-directional network
which calls for the sharing of results. Through the implementation of this
business, the Company could then start offering integrated video, broadband and
voice (“triple play”) services in its market. Sales of this product came on
stream toward the end of March 2006.  The main aim of the partnership between the Company and
Embratel is the offer of voice services based on Embratel licenses for fixed
line telephony services (“Serviço Telefônico Fixo Comutado – STFC”), multimedia
service (“Serviço de Comunicação de Multimídia – SCM”) and/or through any other
structure best suited to development by the parties involved, through the use of
the Company's cable network to access final customers, with the simultaneous use
of Embratel’s communications network.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 18.
Related parties– continued  c)Stockholders and entities under common control– continued  Transactions involving the companies associated with
Embratel Participações S.A. (“Embrapar”) are recorded based on prices and
conditions defined as follows:  a)Prepaid rights for use  a.1) Net Fone revenue — At December 31, 2009, Embratel
invested R$873,539 in theirretractableand indefeasible acquisition of the right to use the
transmission capacity of 3 GBs generated by the coaxial Company’s network, for a
period of five years renewable for the same period through future negotiations
between the parties. The invested value, which was paid in cash, and account as
deferred revenue to be amortized under the terms of the contract in 60 months,
is consistent with the usage of the capacity by Embratel during the period and
considers the finance discount related to the prepayment. Any excess usage is
charged on monthly basis.  a.2) Link internet - The Company provides an
Internet access service known as NetVirtua broadband service using Embratel's IP
backbone infrastructure. At December 31, 2009, the Company invested R$849,632 in
irretractable and irreversible acquisition of a 45 GBs transmission capacity
generated for 5 years renewable for a same period through future negotiations
between the parties classified as prepaid rights for use. The invested value,
which was paid in cash, and recorded as an asset to be amortized under the terms
of the contract in 60 months, is consistent with the usage of the capacity by
the Company during the period and considers the finance discount related to the
prepayment. The excess usage of any monthly capacity is charged according to a
specific agreement and recorded as cost of services rendered.  b) Other services – Remunerated on the basis of
percentage of costs incurred by each project. As per the agreement, these
services are paid in advance by Embratel and are recorded as deferred revenues
in the balance sheet.  c) Network access revenue–Remunerated on the basis of specific contract according
with the transmission speed.  d)
Optic fiber lease revenue – Remunerated in accordance with specific contract
including condition referred between parties and the services are paid in
advance by Embratel. Accordingly, the prepayments are recorded as deferred
revenue in the consolidated balance sheet.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 18.
Related parties– continued  c)Stockholders and entities under common control– continued  e)Revenues from PME (services for small and medium
businesses) – These services are remunerated under specific contractual
conditions at 50% of net amount of accounts invoiced by Embratel, net of taxes
and interconnection fees.  f) Communication expenses such as voice channel and fixed
line telephone are recorded based on prices and contract conditions.  g)
The Company has service agreements with Primesys (SCM), entity controlled by
Embratel, and Procisa (network maintenance), a subsidiary of América
Móvil.  Transactions with related parties listed above, are
generally carried​​on market terms. Regarding to those transactions with
peculiar trading condition characteristics, these transactions are established
with the objective of economic and finance balance for all parties
involved.  19.
Commitments and provisions  I)Commitments  As of December 31, 2012, the Company has the following
firm commitments:  Rental of poles
    
    Rental of ducts
    
    Rental of offices
    
    Equipment purchase
    
    Total2013
    
    145,009
    
    10,703
    
    35,578
    
    52,806
    
    244,0962014
    
    152,027
    
    11,221
    
    37,300
    
    -
    
    200,5482015
    
    159,158
    
    11,748
    
    39,048
    
    -
    
    209,9542016
    
    166,590
    
    12,296
    
    40,873
    
    -
    
    219,7592017 -
    
    174,370
    
    12,871
    
    42,781
    
    -
    
    230,0222018 – thereafter
    
    1,001,873
    
    73,950
    
    245,809
    
    
    
    1,321,632Total
    
    1,799,027
    
    132,789
    
    441,389
    
    52,806
    
    2,426,011


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
  19.
Commitments and provisions– continued  II)Provisions  The
Company and its subsidiaries are involved in legal and administrative
proceedings before several courts and governmental agencies arising during the
normal course of operations, involving tax, labor, civil and other legal
matters. These cases involve tax delinquency notices, compensation claims,
requirements for contract review and other actions for which the amounts claimed
can be substantially different from the final expected settlement value. In
addition, it is not possible to predict when these cases will be settled, as
they are dependent on factors outside the Company management’s control. The
Company does not expect any reimbursement in connection with the outcome of
these legal and administrative proceedings and, based in its legal advisors,
pending judicial analysis a prior experience in the claim amounts, constituted
provision considered enough to cover probable losses in the proceedings in
course, as follows:  Labor / Social security
    
    Civil
    
    Tax
    
    TotalBalances at December 31, 2009
    
    54,523
    
    46,035
    
    504,805
    
    605,363Additions to provisions
    
    20,040
    
    22,988
    
    76,659
    
    119,687Inflation adjustment
    
    1,534
    
    752
    
    29,033
    
    31,319Amounts used
    
    (20,557)
    
    (21,817)
    
    (3,201)
    
    (45,575)Unused amounts reversed
    
    (21,650)
    
    (2,387)
    
    (131,993)
    
    (156,030)Balances at December 31, 2010
    
    33,890
    
    45,571
    
    475,303
    
    554,764Additions
    
    29,582
    
    39,329
    
    13,235
    
    82,146Inflation adjustment
    
    730
    
    2,932
    
    35,138
    
    38,800Amounts used
    
    (17,044)
    
    (32,008)
    
    (7,320)
    
    (56,372)Unused amounts reversed
    
    (4,863)
    
    (2,290)
    
    (60,907)
    
    (68,060)Balances at December 31, 2011
    
    42,295
    
    53,534
    
    455,449
    
    551,278Additions
    
    50,808
    
    31,749
    
    6,495
    
    89,052Inflation adjustment
    
    646
    
    36,755
    
    18,531
    
    55,932Amounts used
    
    (20,481)
    
    (16,691)
    
    (12,639)
    
    (49,811)Unused amounts reversed
    
    (8,659)
    
    (31,689)
    
    (230,350)
    
    (270,698)Balances at December 31, 2012
    
    64,609
    
    73,658
    
    237,486
    
    375,753
  a) Labor provisions  On
December 31, 2012, labor claims involving the Company and its subsidiaries
comprise 2,861 lawsuits (2,493 in 2011), mainly arising from claims of secondary
liability, besides some claims arisen from own employees. The Company has
judicial deposits in the amount of R$20,165 at December 31, 2012 (R$11,927 at
December 31, 2011), in relation to labor cases.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
  19.
Commitments and provisions– continued  II)Provisions– continued  b)
Civil provisions  Civil
claims relate mainly to service contract terminations, improper collection and
negative credit reports supposedly undue, advertising disputes, channel
availability, occupational accidents (own employees or outsourced staff),
accidents involving third parties other than staff or service providers and
claims objecting to certain items in the standard contract adopted by operators,
in particular in relation to the increase in monthly fees in April 1999 and
government agencies processes. The most significant appeals in these civil
proceedings mainly relate to indemnifications for damages sought by subscribers.
 The Company has judicial deposits in the amount of R$30,236 at December
31, 2012 (R$29,970 at December 31, 2011), in relation to civil cases.  c)
Tax  Tax
charges and contributions calculated and collected by the Company and its
subsidiaries, their income tax returns and their tax and finance records, are
subject to examination by tax authorities for varying periods under applicable
legislation.  The
following are the most significant contingencies related to taxes:  a. Value-added tax (ICMS – Imposto sobre circulação de
mercadorias e prestação de serviços)  Some
subsidiaries are contesting the ICMS tax rate levied on access provider revenue,
discounts and cancellations, loss of agreement, publicity and also on other
revenues for which it has a provision of R$89,823at
December 31, 2012 (R$146,519 at December 31, 2011). In September 2012, the
Company signed an agreement of settlement of debt of the ICMS tax on access
provider, in the state of Espírito Santo, in the amount of R$11,596. As a result
of the referred agreement, the Company reversed the allowance amounting to
R$5,519 in the current year.  Because of
favorable outcome in contingencies involving ICMS duringthe
year ended December 31, 2012, the Company reversed provisionsofR$34,941 (R$30,496in 2011).


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
  19.
Commitments and provisions– continued  II)Provisions– continued  c)
Tax– continued  b. Financial Transaction Tax (IOF)) The
Company and its subsidiaries have centralized cash management and cash transfers
made under a current intercompany account. However, practices adopted in the
past and  in view of certain adverse court decisions as to the
applicability of this law, the Company has a provision of R$101,838 at December
31, 2012 (R$97,492 at December 31, 2011) in the basis. Because of
favorable outcome in contingencies involving IOF, during
the year ended December 31, 2012, the Company reversed provisionsofR$1,729 (R$3,897in 2011).  c.Withholding tax (IRRF) on foreign currency
bonds  During the
process of restructuring of debts in foreign currency started in 2003, and the
supposed effect on payment of withholding tax on the interest on these debts,
the Company understands that although such operations, by law at the time, were
not subject to pay this tax, maintained conservatively provision to face with
this risk.  Because of
favorable outcome in contingencies involving IRRF, during
the year ended December 31, 2012, the Company reversed the provision totaling
R$160,790, against finance results.  III)
Contingent liabilities not recorded In
addition to the contingencies mentioned above, as of December 31, 2012, there
are other ongoing legal proceedings amounting toR$1,459,905 (R$1,272,179 as of
December 31, 2011), which legal advisors assess as possible but not
probable losses and thus, no provisions were recorded. The Company does not
expect any reimbursement in connection with the outcome of these legal and
administrative proceedings.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 19.
Commitments and provisions– continued  III)
Contingent liabilities not recorded – continued  c)
Tax– continued  The
most significant claims in which risk of loss were rated as possible are
summarized below:  a. Disallowance of expenses - Income tax and social contribution . On
December 21, 2009, the Company through its subsidiary Net São Paulo Ltda.
received a  tax assessment issued by the Brazilian Internal Revenue Service
questioning part of the expenses considered as deductible in its calculation of
income tax and social contribution bases in the period between 2004 to 2008
amounting to R$403,389 and R$143,914, respectively. Based on the decision at
first instance rendered in 2010, these amounts were reduced to R$274,126 and
R$97,821. The amounts of these proceedings at December 31, 2012 totaled
R$328,184 (IRPJ) and R$117,112 (CSLL). During the year ended on December 31, 2012, the Company received a tax
assessment issued by the Brazilian Internal Revenue Service questioning part of
the expenses considered as deductible in its calculation of income tax and
social contribution bases in the period between 2007 and 2008 related to its
subsidiaries Net Belo Horizonte Ltda. and Net Rio Ltda. in the amount of
R$75,764 (IRPJ) and R$25,701 (CSLL).  The
Company’s lawyers believe that these expenses are in accordance with tax
legislation, so there is therefore no motive for disallowance by tax
authorities.  b. Service Tax (ISS) - levied on services of
public entertainment or amusement, leisure and entertainment and similar
events. In
2010, tax authorities of Santo André city issued a tax assessment notice against
the Company claiming that cable TV services are classified as public
entertainment services and, thus, subject to ISS. The amount of this proceeding
at December 31, 2012 was R$135,632 (R$127,339 at December 31,
2011).  On
defense, our lawyers maintain that services provided by cable TV companies are
classified as communication services instead of public entertainment
services.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 19.
Commitments and provisions– continued  III)
Contingent liabilities not recorded  c.
Disallowed expenses and non-proven expenses  In
2007, the Company through its subsidiary Net Rio Ltda., received requests from
tax authorities alleging not having submitted timely documents supporting
certain registered expenses within the period determined by the tax inspectors.
The amounting on December 31, 2012 was of R$54,342 (R$53,169 as of December 31,
2011).  On
defense, our lawyers believe that these expenses are in accordance with tax
legislation, so there is therefore no motive for disallowance by tax
authorities.  d.
Tax benefit through reduction of ICMS calculation base  On
August 12, 2011, the Company was assessed by the Secretary of the Treasury of
the State of Sao Paulo for the loss of the tax benefit reducing the ICMS tax
base it is entitled to, considering the tax authority alleged that the Company
did not include revenues from the rental of equipments in the ICMS tax base. The
amount of this assessment at December 31, 2012 was R$274,195.  The
Company is supported in the interpretation of the Brazilian Superior Court that
the rental of equipment should not be confused with a subscription TV service
and, therefore, understands that those transactions cannot be taxed by ICMS, and
believes there is much less reasons to lose the tax benefit as alleged by the
tax authority.  Charge for extra outlet  On
April 22, 2009, through Resolution no. 528, Anatel prohibited the Pay TV
operators from charging their customers for more than one point installed in the
home; with however express permission for collection of specific events such as
installation, repair of internal network, converters and decoders signal or
similar equipment. Faced with controversies still existing in the sector about
the subject, Anatel published on March 3, 2010, an interpretation
named Súmula 9, clarifying the possibility of free negotiation of the installed
equipment to provide the service in additional point. In this sense, management
does not expect a material impact on the Company's operating activities as the
current marketing model only charges the extra point for the rental of equipment
and installation fee per point, under the regulations in force.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 20.
Stockholders’ equity  Share
capital  On December 31, 2012, the Company’s share capital is
represented by 114,459,685 ordinary shares and 228,503,916 preferred shares with
no par value.  Share
capital may be raised to a maximum of R$6,500,000 without requirement for a
statutory amendment, as per article 168 of the Brazilian Corporate Law, as
agreed by the Board of Directors, who will determine conditions for the issue as
per article 170, paragraph 1 of the Brazilian Corporate Law.  At
the beginning of 2012, Embratel Participações S.A. (“Embrapar”) acquired
indirect control of the Company, as a result of the conclusion of the
acquisition of 1,077,520 common shares issued by GB Empreendimentos e
Participações S.A. ("GB"), the direct controller of the Company previously held
by Globo Comunicação e Participações S.A. (“Globo”). The acquired shares
represent 5.5% of the voting capital of GB and were subject to a purchase option
granted by Globo (“Option”), pursuant to GB’s Shareholders’ Agreement dated
March 21, 2005.  The Extraordinary Shareholders’ Meeting held on April 5,
2012, decided for the cancellation of the Company’s registration as a
publicly-held company and the discontinuation of the Level 2 Special Corporate
Governance Practices of BM&FBovespa, both subject to the result of the
unified public tender offer for the acquisition of all common and preferred
shares issued by the Company, included those traded at Nasdaq and Latibex of
which the maximum price to be offered will be R$26.04 adjusted by the CDI
(Interbank Certificate of Deposit) as from March 5, 2012, until the date of
delivery of the valuation report of the Company’s shares. In the event of the
price of the shares, calculated pursuant the valuation report, exceeds the
maximum price, Embrapar reserved the right to cancel the public offer for
cancellation of registration and /or the purchase offer for delisting from level
II of BM&FBOVESPA, and to proceed only with the purchase offer through sale
of control.  On
July 6, 2012, Embratel, Embrapar and GB informed the Company of their decision
to give up of the public offer for cancellation of registration as publicly-held
company and their intention to promote only the public offer for sale of control
of the Company, and discontinuity by the Company of the differentiated practices
of Corporate Governance Level 2 of BM&FBOVESPA.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 20.
Stockholders’ equity– continued  Share
capital– continued  In
the last quarter of 2012, Embrapar agreed with Globo the terms and conditions of
a restructuring of shareholdings held by Embrapar, its subsidiary, Embratel, and
Globo, in the capital of the Company and GB. The implementation of this
restructuring was initiated through partial spin-off of GB for an existing
entity, the EG Participações S.A. (“EG”), whose controlling shareholder still
held by Embrapar and Globo participates as a minority shareholder. Thus, GB
holds 89,446,769 common shares and 223,080,448 preferred shares issued by the
Company, representing 78.15% of its voting capital and 97.63% of non-voting
capital, and EG holds 14,080,704 common shares of the Company, representing
12.30% of its voting capital.  The
Company corporate bylaws determine the distribution of a minimum dividend of 25%
of net income, adjusted in accordance with Article 202 of the Brazilian
Corporate Law.  The
preferred shares shall be entitled to vote exclusively on the following matters:
(a) transformation, incorporation, merger or split off of the Company; (b)
valuation of assets intended to comprise the Company’s capital increase; (c)
choice of specialized company to determine the economic value of the Company’s
shares, according to the terms of article 9, “iv”, of the Articles of
Incorporation; and (d) amendments or revocation of provisions to the Articles of
Incorporation which result in noncompliance on the part of the Company with
those requirements provided for in Section IV, item 4.1, of the Corporate
Governance Distinct Practices Regulation - Level 2, instituted by
BMF&BOVESPA and they shall also be entitled to vote in regards to the
approval of contracts between the Company and its majority stockholders, either
directly or through third parties, as well as other companies in which the
majority stockholders hold interest, at any time in the future, on the basis of
legal or statutory provision, the approval of these contracts is decided at the
General Meeting.  Preferred shares are entitled to the receipt of dividends
in cash 10% greater than those paid out on common shares; priority in
reimbursement in the event of the Company’s liquidation without premium at the
value of stockholders’ equity; and treatment equal to that given to stockholders
who exercise the effective power to conduct corporate operation and advice in
relation to the Company organs, either directly or indirectly, in fact or in law
(“Controlling Power”) in the event of the disposal of this Controlling Power,
according to that provided in article 27 of the Company’s Articles of
Incorporation.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
  20.
Stockholders’ equity– continued  Share
capital– continued  Since
preferred shares are not entitled to fixed or minimum dividends, they shall not
acquire voting rights if the Company fails to pay dividends, but will take part
on equal conditions with common shares regarding bonuses distribution. They may
also represent two-thirds (2/3) of the total of shares issued by the Company.
Their issuance may also be altered to the prior existing proportion between
common and preferred shares.  Stockholders’ agreement  On
December 21, 2012, Anatel approved the Company’s new stockholders’ agreement,
whereby the Company's shares may not be transferred or provided as guarantee
during its term, directly or indirectly, to any third party without the
observance of provisions of the Shareholders Agreement of EG including, without
limitation, the procedures on transfer, rights of first refusal to purchase and
tag-along right provided for in the Shareholders Agreement of EG. The agreement
also sets out way of the exercise of voting and holding of general meetings and
meetings of the Board of Directors.The Company’s Board of Directors shall
be composed of no fewer than nine and no more than twelve members and an equal
number of alternates, of which at least 20% must be independent, as defined in
Regulation of Level 2 of Corporate Governance BM&FBOVESPA. According to the
current Shareholders' Agreement, all of the ten existing Board members and their
respective alternates, were elected and can be removed as a member by
shareholders Embratel and Embrapar.  Capital reserves  Capital
reserves are comprised of premium on issuance of shares and debentures and
special reserve of goodwill. The goodwill reserve was generated when Globotel
Participações S.A. was merged into the Company in August 2001. The goodwill
capital reserve represents the tax effect of the goodwill that was transferred
to the Company through the merger.  During the
year ended December 31, 2012, the Company obtained tax benefits represented by
cash savings of R$7,742(R$9,744
in 2011), resulting from amortization of goodwill calculated byGlobotel Participações S.A.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 20.
Stockholders’ equity– continued  Capital reserves– continued  Observing
the preemptive rights of the non-majority stockholders, the portion of the
goodwill reserve related to tax benefits realized may be capitalized in the
future in favor of thestockholderEmbratel.
The remaining stockholders have the option of exercising their right on the
subscription of these shares.  21.
Guarantees  The
Company and some of its subsidiaries have signed surety letters with financial
institutions and insurance contracts mainly for the purpose of guaranteeing
payment of tax suits lodged against the Company by the Brazilian Federal Tax
Authority, the Finance Departments of São Paulo and Rio de Janeiro States, and
the Belo Horizonte Federal Tax Office, as follows:  12/31/2012
    
    12/31/2011Net Rio Ltda.
    
    267,311
    
    238,290Net Serviços de Comunicação S.A.
    
    73,008
    
    47,879Reyc Comércio e Participações Ltda.
    
    12,948
    
    11,932Net Brasília Ltda.
    
    7,557
    
    6,263Net São Paulo Ltda.
    
    4,833
    
    3,912365,657
    
    308,276
   22.
Earnings per share  Basic earnings per share amounts are calculated by
dividing net profit for the year attributable to ordinary equity holders of the
Company by the weighted average number of common shares outstanding during the
year.  Diluted earnings per share amounts are calculated by
dividing the net profit attributable to ordinary equity holders of the Company
by the weighted average number of common shares outstanding during the year plus
the weighted average number of common shares that would be issued on conversion
of all the dilutive potential common shares into common shares.For the years ended December 31, 2012, 2011 and 2010, the
Company had no dilutive potential common shares.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 22.
Earnings per share– continued  The following table shows earnings per share (in
thousands, except for earnings per share):  2012
    
    2011
    
    2010NumeratorNet income for the year
    R$ 393,702
    
    R$ 373,173
    
    R$
      307,151DenominatorWeighted average number of common
    shares
    114,459,685
    
    114,459,685
    
    114,459,685Weighted average number of preferred
      shares
    228,503,916
    
    228,503,916
    
    228,503,91610% - Preferred shares
    1.10
    
    1.10
    
    1.10Weighted average number of adjusted preferred
      shares
    251,354,308
    
    251,354,308
    
    251,354,308Denominator for basic and diluted earnings per
      share
    365,813,993
    
    365,813,993
    
    365,813,993Basic and diluted earnings per common
      share
    R$
      1.08
    
    R$1.02
    
    R$0.8410% - Preferred shares
    1.10
    
    1.10
    
    1.10Basic and diluted earnings per preferred
      share
    R$
      1.18
    
    R$ 1.12
    
    R$0.92
   23.
Financial instruments  a)General considerations  The
Company is exposed to market risks arising from its operations, and uses
derivatives to minimize its exposure to such risks. The Company's revenues are
generated in Brazilian Reais, while the Company debts, interest charges and
accounts payable to equipment suppliers are denominated in foreign currency.
Therefore, the Company’s earnings are sensitive to exchange rate variations, in
particular the US dollar. Market values of the Company's key financial assets
and liabilities were determined using available market information and
appropriate valuation methodologies. The use of different market methodologies
may affect estimated realization values. Capital is managed using operational
strategies aiming for protection, security and liquidity. The control policy
involves constantly monitoring rates contracted against current market rates.
The Company and its subsidiaries do not make speculative investments in
derivatives or other risk assets.  b)Fair value  The
fair value of the Company’s debt has been calculated considering the estimated
cost to settle the outstanding obligations at December 31, 2012, including the
contractual penalties applicable for early payments situations.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 23.
Financial instruments –continued  b)Fair value– continued  Fair
values and carrying amounts of debt, net of debt costs, are shown
below:  12/31/2012
    
    12/31/2011Carrying amount
    
    Fair
      value
    
    Carrying amount
    
    Fair
      ValueDebentures – 6th issue
    
    -
    
    -
    
    584,258
    
    586,949Global Notes 2020
    
    737,071
    
    843,959
    
    675,622
    
    769,371Banco Inbursa S.A.
    
    206,716
    
    208,518
    
    379,010
    
    385,643America Móvil S.A.B de C.V
    
    686,585
    
    686,585
    
    -
    
    -Banco Itaú BBA
    
    -
    
    -
    
    122,292
    
    122,953Finame
    
    302,301
    
    302,301
    
    408,200
    
    408,200Commercial paper
    
    686,749
    
    686,749
    
    -
    
    -2,619,422
    
    2,728,112
    
    2,169,382
    
    2,273,116
   Fair
value of other financial assets and liabilities approximate their carrying
amounts.  c)Risks related to the Company’s business  Foreign exchange rate risk  The
Company's results are subject to foreign exchange fluctuations, depending on the
effects of exchange rate volatility on liabilities denominated in foreign
currencies, particularly the US Dollar. The Company's revenues are generated in
Brazilian Reais, whereas it pays certain equipment and programming content
suppliers in foreign currencies.  The
Company’s foreign currency exposure on December 31, 2012, is shown
below:  Current:Interest on debt
    
    28,912Suppliers of equipment and others
    
    41,796Programming suppliers
    
    2,94473,652Non-current:Debt, net of debt costs
    
    914,875Foreign currency exposure
    
    988,527


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 23.
Financial instruments– continued  c)Risks related to the Company’s business–
continued  Foreign exchange rate risk – continued  The
Company acquired non-speculative derivative financial instruments to hedge
against its foreign currency exposure. The purpose of these transactions is to
minimize the effects of changes in US dollar exchange rate when settling short
term transactions. Counterparties to the contracts are the following banks:
HSBC, Santander, Itaú, JP Morgan, e Standard.  The
Company only enters into foreign exchange derivatives in order to hedge a
portion of its accounts payable to imported equipment suppliers and future
obligations for purchases not yet made, which are or will be linked to the US
dollar, and payments of interest charges on debt. For the year ended December
31, 2012, the Company held a derivative instrument (foreign exchange) position
of R$83,898, (R$207,463 December 31, 2011), relating to interest charges on
loans in foreign currency and commitments to foreign suppliers. Part of total
debt in dollars refers to a loan from Banco Inbursa S.A. due between 2017 and
2019 and Global Notes 2020 due to 2020.  Derivatives financial instruments are as
follows:  Notional amount
    
    Fair value
    
    Accumulated effect
      (current year)Description
    12/31/2012
    12/31/2011
    
    12/31/2012
    12/31/2011
    
    Amount payable“Swaps” contractsAsset
      positionForeign currency
    83,898
    207,463
    
    75,701
    202,382
    
    -Liability positionRatios (Dollar vs, CDI)
    83,898
    154,941
    
    79,803
    164,767
    
    4,102Rates
      (PRE) (NDF)
    -
    52,522
    
    -
    50,142
    
    --
    -
    
    (4,102)
    (12,527)
    
    4,102
  The
net liability payable of R$4,102 is recognized in the unrealized losses on
derivatives account in the consolidated balance sheet. During the year ended
December 31, 2012, the Company recognized a gain of R$240 on derivatives, (loss
of R$16,978 in 2011 and loss of R$65,915 in 2010), which was recorded as finance
results in the consolidated statement of income.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 23.
Financial instruments– continued  c)Risks related to the Company’s business–
continued  Foreign exchange rate risk–
continued  The
following table shows the sensitivity analysis of the Company’s management and
the effect of cash operations with derivative financial instruments outstanding
as of December 31, 2012:  Scenario - currency appreciation (R$/US$) and increase of
interbank rate (CDI)  Operations
    
    Contracts
    
    Probable scenario
    
    Possible adverse scenario (a)
    
    Remote adverse scenario (b)Quantity
    
    Amount
      US$
      (thousands)
    
    Maturity
    
    Dollar rate
      R$
    
    CDI
    
    Dollar rate
      R$
    
    CDI
    
    Loss
    
    Dollar rate
      R$
    
    CDI
    
    LossDollar x
      CDI
    
    8
    
    39,200
    
    From 01/24/2013 to
    07/29/2013
    
    2.0435
    
    6.90
    
    1.5326
    
    8.63
    
    R$24,236
    
    1.0218
    
    10.35
    
    R$44,173
  (a)The possible adverse scenario is represented by a 25%
appreciation of the real against the dollar and an increase of 25% in CDI rate
over the rates of the probable scenario. (b)The
remote adverse scenario is represented by a 50% appreciation of the real against
the dollar and an increase of 50% in CDI rate % over the rates of the probable
scenario.  Scenario - depreciation of Brazilian currency (R$/US$)
and decrease of CDI  Operations
    
    Contracts
    
    Probable scenario
    
    Possible adverse scenario (c)
    
    Remote adverse scenario (d)Quantity
    
    Amount
      US$
      (thousands)
    
    Maturity
    
    Dollar rate
      R$
    
    CDI
    
    Dollar rate
      R$
    
    CDI
    
    Gain
    
    Dollar rate
      R$
    
    CDI
    
    GainDollar x
      CDI
    
    8
    
    39,200
    
    From 01/24/2013 to
    07/29/2013
    
    2.0435
    
    6.90
    
    2.5544
    
    5.18
    
    R$16,255
    
    3.0653
    
    3.45
    
    R$36,823
  (c)The possible adverse scenario is represented by a 25%
depreciation of the real in relation to the dollar and reduction in CDI by 25%
over the rates of the probable scenario. (d)The
remote adverse scenario is represented by a 50% depreciation of the real in
relation to the dollar and reduction of CDI by 50% over the rates of the
probable scenario.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to interim financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 23.
Financial instruments– continued  c)Risks related to the Company’s business–
continued  Foreign exchange rate risk–
continued  On
December 31, 2012 and 2011, the Company holds no leveraged derivatives and no
limits for determining the results of the US dollar appreciating or depreciating
against the Brazilian real.  Interest rate risk  The
Company and its subsidiaries’ results are subject to fluctuations due to the
variation in interest rates on liabilities and assets impacted by floating
interest rates, especially CDI and TJLP.  The
Company's exposure to floating interest rates as of December 31, 2012, is as
follows:  Finame
    
    302,301Commercial paper
    
    686,749America Movil S.A.B de C.V.
    
    686,585Exposure
    
    1,675,635(-) Cash equivalents denominated in
    Reais
    
    10,353Floating interest rate exposure
    
    1,665,282
  Credit risk  Financial instruments, which subject the Company to
credit risks, are mainly represented by cash and cash equivalents and trade
accounts receivable. The Company maintains cash and cash equivalents with a
number of financial institutions and does not limit its exposure to one
institution in particular, according to a formal policy. The Company also holds
units in conservative-profile fixed-income investment funds. The funds’ assets
comprise government bonds and first-tier private securities with low risk
ratings as per the Company’s guidelines. Fixed-income investment fund's
portfolio is managed by Itaú Unibanco Asset Management - Banco de Investimento
S.A.  The
custody and control of the fixed-income investment fund are under the
responsibility of Banco Itaú and Risk Office Consultoria Financeira Ltda. is
responsible for risk management. Management believes the risk of not receiving
amounts due from its counterparties is insignificant.  The
credit risk is concentrated in the subscriber’s accounts receivable and it is
reduced by the large number of subscribers that comprise the Company’s
subscribers’ base.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to interim financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 23.  Financial instruments–
continued  c)Risks related to the Company’s business–
continued  Liquidity risk  Liquidity risk is the risk of a shortfall of funds used
for payment of debt. The table below shows payments required for debt as of
December 31, 2012:   Maturity
    
    Finame
    
    Global Notes 2020
    
    Banco Inbursa S.A.
    
    Commercial paper
    
    América Móvil. S.A.B de C.V.
    
    Total2013
    
    112,265
    
    61,295
    
    18,923
    
    706,763
    
    54,900
    
    954,1462014
    
    75,315
    
    61,295
    
    18,923
    
    -
    
    56,847
    
    212,3802015
    
    62,155
    
    61,295
    
    18,923
    
    -
    
    61,096
    
    203,4692016-2020
    
    83,159
    
    991,052
    
    465,468
    
    -
    
    775,982
    
    2,315,661Total
    
    332,894
    
    1,174,937
    
    522,237
    
    706,763
    
    948,825
    
    3,685,656
    The
amounts presented include principal and interest payments calculated using the
Dollar exchange rate at December 31, 2012 (R$2.0435/US$1) for the debt
denominated in US Dollars (Global Notes 2020 and Banco Inbursa). The Finame loan
was estimated based on the long-term interest rate (TJLP) of 5.5% + 3.15% per
year for the entire year and fixed rate between 4.5% and 5.5% and 8.7% per
year.  Interest payments for US Dollar denominated debt (Global
Notes 2020 and Banco Inbursa S.A.) include withholding taxes, is in accordance
with the prevailing tax legislation.  24.
Measurement and fair value hierarchy  Fair value is an existing price representing the value
that would be received from the sale of an asset, or that would be paid to
transfer a liability in a normal transaction between market
participants.  Therefore fair value is a market-based measurement and
should be determined using the assumptions market participants would make when
pricing an asset or liability. As a basis for consideration thereof, a
three-level fair value hierarchy is determined by prioritizing the inputs used
in measuring fair value as follows:


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to interim financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 24.
Measurement and fair value hierarchy– continued  •Level 1. Observable inputs such as those with prices
quoted in active markets;  •Level 2. Inputs other than those with prices quoted in
active markets, which are observable either directly or indirectly;
and  •Level 3. Unobservable inputs, for which there are few or
no market data, which requires the reporting entity to develop its own
assumptions.  Measurement of fair valueDerivative instruments – currency swap
      contracts
    Quoted prices in active markets for identical
      assets (Level 1)
    Other significant observablesources(Level 2)
    Significant unobservable inputs(Level 3)Balances at December 31, 2012
    (4,102)
    -
    (4,102)
    -Balances at December 31, 2011
    (12,527)
    -
    (12,527)
    -
  Currency swap derivative instruments are tools for
managing risks arising from the effects of a major devaluation of the Brazilian
real against the US dollar, which are inputs, other prices quoted in active
markets, which are directly or indirectly observable.  During the yearended December 31, 2012,there were no transfers between levels 1 and 2 in relation to the measurement of
the fair value or transfers to level 3.  25.
Insurance  The
Company has a policy of contracting insurance coverage for assets subject to
risks at amounts deemed sufficient to cover any claims, taking into
consideration the nature of its operations.  In
August 2012, the Company renewed its policies and the total coverage by
insurance line is as follows:  Insurance line
    Main coverage
    Maximum coverage per yearMulti-risk property insurance
    Fire, lightening, explosion, windstorm, electrical
      damage, theft, valuables inside the establishment, riots, strikes and
      restoration of records, open fidelity, electronic equipment, furniture and
      flooding.
    R$305,276Responsibilities
    Civil, operations – commercial/industrial
      establishments, service provided at the third party establishments of
      third parties, employer, contingent risks, civil constructions works,
      crossed civil liability, pain and suffering damages and parking lot
      valets
    R$3,000Civil responsibility of the officers and managing
      officers
    Legal defense costs, legal representation expenses
      and indemnities for financial losses caused to third parties due to errors
      or omissions incurred in management acts with worldwide
      coverage.
    R$25,000


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to interim financial statements December 31, 2012, 2011 and 2010 (In thousands of Reais)
 26.
Subsequent events  a)On March 5, 2013, the
wholly-owned subsidiary, Net São Paulo Ltda., received an assessment from the
State Tax Authority of the State of São Paulo, which contends that Net São Paulo
Ltda. no longer has the tax benefit allowing it to the reduce its ICMS tax
basis. The tax authority claimed that Net São Paulo Ltda. could not exclude
certain revenues when calculating the applicable ICMS between January 2010 and
May 2011, amounting of R$83,097. Our lawyers concluded that the probability of
loss in this matter is possible, due to the fact that these expenses are in
accordance with tax legislation, so no motive for disallowance by tax
authorities exist.  b)On
March 26, 2013, the Company entered into two mutual agreements, with its
ultimate indirect parent company, América Móvil, totaling R$540,000, maturing on
March 25, 2014, and renewable for additional consecutive periods of
one year. The interest rate is equivalent to 104% of the CDI, payable along with
the principal amount on the maturity date.  c)On April 9, 2013, the Company’s Board of Directors
approved a second issuance of 68 promissory notes, in a single series, with face
value of R$10,000 per unit, totaling R$ 680,000, maturing in 360 days from
the issuance day and with no guarantees or suretyship.  These
promissory notes will be publicly offered through a private placement in Brazil
subject to certain restrictions and proceeds to be obtained will be used to
repay promissory notes related to the first issuance.  d)On
April 11, 2013, the Company and Embrapar announced that they are evaluating the
possibility of a corporate reorganization involving Claro S.A., a company also
indirectly controlled by América Móvil, intended to consolidate the corporate
structure and activities into a single entity. All parties involved will jointly
begin to conduct internal analyses and take initial steps with Anatel to assess
the feasibility of the reorganization proposal and the conditions to which it
may be subjected. The decision whether or not to proceed with the proposal will
take into account the results of these analyses and Anatel’s approval, among
other factors.


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