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, 2011 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, 2011228,503,916Preferred Shares, as of December 31, 2011 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.


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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 ContentsPagePart IITEM 1.

   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

   3ITEM 2.

   OFFER STATISTICS AND EXPECTED TIMETABLE

   3ITEM 3.

   KEY INFORMATION

   3Selected Financial Data

   3Risk Factors

   7ITEM 4.

   INFORMATION ON THE COMPANY

   20Business Overview

   20Strategy

   22History and Development of the Company

   24Our Services

   26Operations

   29Network Technology

   29Customer Care

   30Sales and Marketing

   31The Social Responsibility Project

   32Competition

   32Licenses

   33Description of Property

   34Regulation

   34Legal Proceedings

   41Organizational Structure

   48ITEM 4A.

   UNRESOLVED STAFF COMMENTS

   49ITEM 5.

   OPERATING AND FINANCIAL REVIEW AND PROSPECTS

   49Overview

   49Acquisitions

   51Critical Accounting Polices

   51Financial Statement Presentation

   53Results of Operations

   57Liquidity and Capital Resources

   61Brazilian Economic Environment

   69ITEM 6.

   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

   71Directors and Board Practices

   71Executive Officers and Senior Managers

   76Indemnification

   76Compensation of Directors and Principal Executive Officers

   77 i




Directors’ Service Contracts

   77Employees

   77Share Ownership

   77Variable Compensation Plan and Long-Term Incentive Plan

   77Pension, Retirement and Similar Benefits

   78ITEM 7.

   MAJOR SHAREHOLDERS AND RELATED PARTY**TRANSACTIONS**

   78Major Shareholders

   78Shareholders’ Agreements

   80Related Party Transactions

   82ITEM 8.

   FINANCIAL INFORMATION

   85ITEM 9.

   THE OFFER AND LISTING

   86General

   86Trading Markets

   87ITEM 10.

   ADDITIONAL INFORMATION

   95Memorandum and Articles of Association

   95Material Contracts

   104Exchange Controls

   104Dividend Policy

   106Taxation

   110Documents on Display

   113ITEM 11.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT**MARKET RISK**

   113ITEM 12.

   DESCRIPTION OF SECURITIES OTHER THAN EQUITY**SECURITIES**

   116Part IIITEM 13.

   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

   118ITEM 14.

   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY**HOLDERS AND USE OF PROCEEDS**

   118ITEM 15.

   CONTROLS AND PROCEDURES

   118Disclosure Controls and Procedures

   118Management’s Annual Report on Internal Control over Financial Reporting

   118Changes in Internal Control Over Financial Reporting

   119ITEM 16A.

   **AUDIT COMMITTEE FINANCIAL EXPERT**

   119ITEM 16B.

   CODE OF ETHICS

   119ITEM 16C.

   **PRINCIPAL ACCOUNTANT FEES AND SERVICES**

   119  ii




ITEM 16D.

   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT**COMMITTEES**

   120ITEM 16E.

   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND**AFFILIATED PURCHASERS**

   120ITEM 16F.

   CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT

   120ITEM 16G.

   **CORPORATE GOVERNANCE**

   120Part IIIITEM 17.

   FINANCIAL STATEMENTS

   121ITEM 18.

   FINANCIAL STATEMENTS

   121ITEM 19.

   EXHIBITS

   122      iii




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Certain References and Information In this Form 20-F, references to “Net Serviços,” “Net,” “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, 2011 of R$1.8758 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 26, 2012, the rate of exchange was R$1.8871 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, 2011. 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 and industry consolidation; failure to keep pace with developments in technology; our inability to charge customers for equipments costs related to multiples 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; government regulations and changes therein; factors pertaining to the Internet access portion of our business; unfavorable outcome 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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Developments in any of these areas, which are more fully, described elsewhere in this Form 20‐F and which descriptions are incorporated into this section by reference, 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 In the past years, the exchange rate between the realand the U.S. dollar has experienced significant variation. The information set forth below with respect to exchange rates is based on the official selling rate of the Central Bank of Brazil, or the Central Bank. Exchange Rate of Brazilian Reais per U.S. DollarLow

   

   High

   

   Average(1)

   

   Period - end(Reais per US$1.00)Year2006

   2.0586

   

   2.3711

   

   2.1679

   

   2.13802007

   1.7325

   

   2.1556

   

   1.9300

   

   1.77132008

   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 (through April 26)

   1.7024

   

   1.8871

   

   1.7785

   

   1.8871
 (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 2011

   1.6885

   1.8856November 2011

   1.7270

   1.8937December 2011

   1.7823

   1.8758January 2012

   1.7382

   1.8683February 2012

   1.7017

   1.7376March 2012

   1.7152

   1.8334April 2012 (through April 26)

   1.8256

   1.8871Source: Central Bank
 Under the current floating exchange-rate system, the real may be subject to fluctuations and 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 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 Company adopted International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) for the first time in its consolidated financial statements for the year ended December 31, 2009, which included the comparative consolidated financial statements for December 31, 2008 and, for the balance sheet, January 1, 2008, which was the transition date to IFRS. Therefore, we present in this section financial and operating data derived from our audited consolidated financial statements as of and for the years ended December 2011, 2010, 2009, 2008 and as of January 1, 2008 (date of transition to IFRS). The selected audited consolidated financial data presented in accordance with IFRS set forth below 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 the control of ESC 90 Telecomunicações Ltda., or ESC 90, and ESC 90 became a wholly owned subsidiary of our Company. 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 Net.


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STATEMENT OF COMPREHENSIVE INCOME DATA Year Ended December 31,2011

   

   2011

   

   2010

   

   2009

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

   

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

   

   4,448,980

   

   8,345,397

   

   7,101,588

   

   6,070,401

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

   

   (879,365)

   

   (1,649,512)

   

   (1,695,919)

   

   (1,457,012)

   (1,162,346)Net sales

   

   3,569,615

   

   6,695,885

   

   5,405,669

   

   4,613,389

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

   

   (1,718,443)

   

   (3,223,455)

   

   (2,579,623)

   

   (2,274,916)

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

   

   (800,622)

   

   (1,501,807)

   

   (1,253,037)

   

   (1,035,867)

   (945,202)Depreciation and amortization

   

   (566,103)

   

   (1,061,896)

   

   (901,225)

   

   (618,748)

   (493,368)Other expenses

   

   (15,352)

   

   (28,798)

   

   (13,725)

   

   (60,389)

   (16,905)Total operating costs and expenses

   

   (3,100,520)

   

   (5,815,956)

   

   (4,747,610)

   

   (3,989,920)

   (3,204,872)Operating profit

   

   469,095

   

   879,929

   

   658,059

   

   623,469

   485,537Finance results:Finance expense

   

   (253,698)

   

   (475,886)

   

   (359,422)

   

   (27,335)

   (432,462)Finance income

   

   93,507

   

   175,401

   

   169,354

   

   92,779

   113,935Profit before income taxes and socialcontribution

   

   308,904

   

   579,444

   

   467,991

   

   688,913

   167,010Income taxes and social contribution

   

   (109,964)

   

   (206,271)

   

   (160,840)

   

   47,035

   (146,756)Profit

   

   198,940

   

   373,173

   

   307,151

   

    ́735,948

   20,254Basic and diluted earnings per common share

   

   0.54

   

   1.02

   

   0.84

   

    ́2.01

   0.06Basic and diluted earnings per preferred share

   

   0.60

   

   1.12

   

   0.92

   

   2.22

   0.06Weighted average number of common shares outstanding

   

   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

   

   228,187,562

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

   

   1,003,249

   

   1,881,894

   

   1,236,205

   

   1,002,655

   1,291,643Net cash used in investing activities

   

   (883,722)

   

   (1,657,686)

   

   (1,247,005)

   

   (1,184,624)

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

   

   (173,041)

   

   (324,590)

   

   (183,245)

   

   460,694

   248,162


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As of December 31,2011

   

   2011

   

   2010

   

   2009

   2008

   January

   1, 2008(Convenience translation to US$ in thousands)

   

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

   

   864,429

   

   1,621,495

   

   1,498,838

   

   1,587,515

   1,022,679

   808,876Property, plant and equipment

   

   2,197,871

   

   4,122,766

   

   3,322,350

   

   2,767,037

   2,237,681

   1,649,533Intangible assets

   

   1,306,091

   

   2,449,966

   

   2,485,940

   

   2,523,168

   2,469,757

   2,080,631Prepaid rights for use

   

   169,241

   

   317,463

   

   487,307

   

   659,842

   -

   -Deferred taxes

   

   144,467

   

   270,992

   

   377,352

   

   460,131

   311,716

   413,243Other assets(3)

   

   59,822

   

   112,215

   

   184,386

   

   152,293

   168,941

   221,951Total assets

   

   4,741,921

   

   8,894,897

   

   8,356,173

   

   8,149,986

   6,210,774

   5,174,234Liabilities:Total current liabilities

   

   989,962

   

   1,856,970

   

   1,288,303

   

   1,111,941

   918,074

   604,295Non-current debt

   

   999,261

   

   1,874,414

   

   2,073,386

   

   2,113,329

   1,701,485

   1,094,412Deferred revenues

   

   215,714

   

   404,636

   

   612,190

   

   782,279

   93,912

   41,520Other liabilities (4)

   

   304,422

   

   571,038

   

   567,628

   

   634,922

   725,736

   682,694Total liabilities

   

   2,509,359

   

   4,707,058

   

   4,541,507

   

   4,642,471

   3,439,207

   2,422,921Stockholders’ equity

   

   2,232,562

   

   4,187,839

   

   3,814,666

   

   3,507,515

   2,771,567

   2,751,313Total liabilities and stockholders’ equity

   

   4,741,921

   

   8,894,897

   

   8,356,173

   

   8,149,986

   6,210,774

   5,174,234
  As of December 31,2011

   

   2011

   

   2010

   

   2009

   2008(In kilometers, except percentages)

   

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

   13,433,050

   

   13,433,050

   

   11,543,224

   

   10,776,603

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

   4,730,105

   

   4,730,105

   

   4,212,288

   

   3,689,736

   3,182,196Netcable penetration (7)

   35.2%

   

   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.


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(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 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. In 2009, cable penetration without ESC90 homes passed by cable and total connected pay-television subscribers was 34.4%.


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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, so that an increase in overbuild and competition can adversely impact our business and results of operations. We and our subsidiaries provide cable television services pursuant to the terms and conditions of licenses granted and supervised byAgência Nacional de Telecomunicações,or Anatel, the Brazilian National Telecommunications Agency, the applicable regulatory authority. Anatel has the power to grant licenses to competitors in the same geographic areas in which we already operate. As a result, competing operators may build systems and provide services in areas in which we hold licenses.  On September 12, 2011, Statutory Law No. 12,485, or Law 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, was enacted.Prior to the ratification of Law 12,485 by Anatel, licenses were renewed automatically for successive periods of 15 years, provided that the conditions imposed by Anatel were met, but are now being issued for an indefinite period of use.Under Law 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 and 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.We will keep the authorizations and concessions until we are able to migrate to the new service model. The SEAC will facilitate the existence of more than one cable system operating in the same territory referred to as an “overbuild.” Overbuilds 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: ·cable systems in four of the 100 locations in which we operate, including systems in the cities of São Paulo, Belo Horizonte, Curitiba and Florianópolis; ·direct-to-home, or DTH, services offered in Brazil by Brazilian and international media consortia and by three large telecommunication companies; ·Brazilian broadcast networks and their local affiliates; ·multi-channel multi-point distribution systems, or MMDS, in São Paulo and Rio de Janeiro; ·wireless telephony services and wireless 3G broadband Internet services offered by wireless telephony companies;


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·movie theaters, video rental stores and other entertainment and leisure activities generally; and ·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 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 continue charging our customers for equipment costs related to more than one pay-television outlet per household.  On April 22, 2009, Anatel Resolution No. 528 was published, or Resolution No. 528, prohibiting pay-television providers from charging subscribers content for more than one outlet per household. On March, 19, 2010, Anatel published a clarification to Resolution No. 528, by means of an administrative resolution known as “Sumula 9”which expressly authorizes subscription television operators to charge their customers for the cost of equipment used in multiple outlets, including through rental, lease and sale of decoders. Even after the clarification resulting from Sumula 9, Brazilian federal prosecutors, several consumer defense and protection associations, agencies and customers continue to challenge this rule in court claiming that pay-television operators cannot charge for multiple outlets (the so-called “additional points”) and rental of related equipment. 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. 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 that further increase the number of competitors we face for our video, high-speed Internet and telephony 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. 8


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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, 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. 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 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, 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.” 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% and 23.3% of our net sales in 2011 and 2010, respectively. 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 expenses on our network, which would have a material adverse impact on results of operations. The legislative branch of the municipal government of São Paulo passed a bill which would require 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. The bill is still subject to approval by the mayor of São Paulo. Should the law be enacted, all cable installations would be required to be underground. Presently, substantially all of our network in the city of São Paulo is installed on poles. Our network in the city of São Paulo represents approximately 31% of our total network as of December 31, 2011. Should the mayor approve the bill, we would have to incur significant costs in order to comply with its terms. This would materially and negatively impact our cash flows.


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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, mainly due to Brazil’s economic environment. 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 hackings, 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 on Net could 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. Substantially all of our cable television activities are regulated by Anatel. Regulations cover all facets of the Brazilian cable industry and relate to, among other things, licensing, local access, commercial advertising and foreign investment. Brazilian cable regulations recently underwent massive changes through a new law and currently: =there are no limitations on foreign ownership of cable companies; =there is no limitation on the number of pay-television licenses granted (including cable) 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 licenses 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 and impose sanctions for failure to meet such goals and standards. 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. 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.”


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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 and our subsidiaries are party to several legal proceedings arising out of the regular course of our business. If we receive unfavorable outcomes in these proceedings, our cash flows could be materially and adversely affected. We and our subsidiaries are party to several legal proceedings arising out of the regular course of our business. Such legal proceedings relate predominantly to tax matters and civil and labor disputes. Any litigation connected with such legal proceedings could be costly, time consuming and injure 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.” 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.” 12


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Our controlling shareholder controls most of our corporate transactions and its interests may differ from yours. Telmex Internacional, S.A.B. de C.V., or Telmex Internacional (a subsidiary of América Móvil,S.A.B., de C.V.), through its subsidiaries Embratel Participações S.A., or Embrapar, and Empresa Brasileira de Telecomunicações S.A., or Embratel and together with its controlling shareholders, subsidiaries and affiliates, Telmex Group own, directly or indirectly, 91.86% of our common shares as of December 31, 2011. Law 12,485 expressly revoked previous foreign ownership limitations on the exercise of control over cable companies in Brazil. Thus, during the three-month period ended March, 31, 2012, Embrapar exercised its option to purchase 5.5% of the shares with voting rights of GB Empreendimentos e Participações S.A. (“GB”), which has the direct control of Net, previously held by Globo Comunicação e Participações S.A., or Globo, and together with its controlling shareholders, subsidiaries and affiliates, Globo Group. In view of the exercise of the option, Embrapar and its subsidiary Embratel held 54.5% of the voting capital of GB, and 100% of GB’s preferred shares, as of April 26, 2012. As a result of the acquisition, Embrapar and Embratel owned, directly and indirectly, through GB, 92.2% of Net’s total capital, as of April 26, 2012. See “Item 7. Major Shareholders and Related Party Transactions - Major Shareholders.” Telmex Internacional could have significantly different interests in Net Serviços and our operations and may not be willing or able to provide us with the financial and other support that Globo and our other previous major shareholders have provided to us historically. Grupo Globo has interests in companies that currently or may in the future compete with us, including its interests, and those of the Marinho family, in Sky Brasil, a satellite pay-television provider, and in several broadcast television stations. Telmex Internacional has interests in companies that currently compete or may in the future compete with us, including its interests 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. 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; 13


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·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. Accordingly, the interests of our controlling shareholder may conflict with the interests of holders of our preferred shares, and Telmex International 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 and turmoil in the financial markets 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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Further, because of turmoil in the global financial markets, some financial and other institutions have experienced significant financial distress. Although we have attempted to be prudent in our management of our operations and financial condition, it is not possible to predict how the financial market turmoil and the deteriorating economic conditions may affect our financial position. Additional financial institution failures could restrict our access to the public equity and debt markets. In addition, due to recent consolidation among Brazilian financial institutions, we may not be able to diversify our cash under management and, consequently, if one of the financial institutions in which we deposit our cash becomes bankrupt, our liquidity may be materially adversely affected. 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 12.6% against the U.S. dollar in 2011, from an exchange rate of R$1.6662 per US$1.00 at December 31, 2010 to an exchange rate of R$1.8758 per US$1.00 at December 31, 2011. The average exchange rate in 2011 was R$1.6709 per US$1.00, an increase in value of the real against the U.S. dollar of 5.0% when compared to an average exchange rate of R$1.7589 per US$1.00 in 2010. The real has historically suffered several major depreciations against the U.S. dollar and has been volatile against the U.S. dollar since it was first allowed to float by the Brazilian government in 1999. Given the current state of the Brazilian currency market, we do not attempt to hedge this risk over the long-term. Accordingly, potential 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.


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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. 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, according to the IGP-M, was 7.8% in 2007, 9.8% in 2008, (1.7%) in 2009, 11.3% in 2010 and 5.1% in 2011. Inflation itself and governmental measures to combat inflation have, in the past, had significant negative effects on the Brazilian economy. Since 1999, 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 net 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.


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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 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. 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, 2011, there were approximately 1.4 million of our ADSs outstanding, compared to 2.5 million ADSs as of December 31, 2010 and 62.6 million ADSs as of December 31, 2009.  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.  From January 1, 2011 to January 13, 2011, additional preferred shares were acquired by Embratel from minority shareholders 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 2011 was approximately 4,600 ADSs per day, equivalent to approximately US$44,000 per day. Securities that trade at similar volumes and with a similar float typically 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 likely adversely affected the liquidity and market value of our ADSs. 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 ten largest companies in terms of market capitalization accounted for over 50% of the aggregate market capitalization of the BM&FBovespa in March 2012.


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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. 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.


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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, 2011, we had 4.7 million pay-television connected subscribers in 100 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 4.3 million subscribers as of December 31, 2011. We also provide fixed line telephony through our NET Fone via Embratel service, which had 3.8 million subscribers as of December 31, 2011. As of December 31, 2011, our advanced network of coaxial and fiber-optic cable covered over 75,000 kilometers and passed approximately 13.4 million homes. Most of our customers belong to high and middle income classes, which helps to keep bad debt expense at low levels. In 2011, we had gross sales revenue of R$8,345.4 million. 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. "For the NETS, it is now" is our new approach. Supporting this promise are high speed broadband, up to 100 Mega, 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 and cable television. We are able to offer this Multi Combo due to the commercial partnership among the companies of the Telmex Group in Brazil: Claro, Embratel and us.


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Pay-television In 2004, we began to offer digital cable services to our subscribers. As of December 31, 2011, we offered digital cable in 61 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 2011, we remained the leader of the pay-television market, combining the best programming and the leading movie, sports, entertainment and news channels. We have also led the accelerated adoption of high-definition technology in Brazil. It is this new technological platform that has enabled us to launch innovative products that transform the television viewing experience. 2011 marked the arrival of NOW and a new era in Brazilian television. NET HD clients may now watch their favorite programs anytime they wish through an interactive portal. Through NOW it is possible to watch the NET channel content for free and rent additional content such as the latest movie releases by using just the remote control, without leaving home. We are still the only Brazilian operator to broadcast HD 3D content in Brazil, either through occasional broadcasts or through NOW, which also broadcasts programs in this format. Broadband internet services 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 2011, Net Virtua continued its excellent performance in the broadband segment. Leading the growth of this market and increasingly connecting more Brazilians with quality and high-speed internet, we have played a crucial role in this segment. It is the largest competitive operator in Brazil, taking competition and quality services to the markets in which it operates. Our constant investments in technology, innovation and network capacity make us the leading broadband operator in Brazil. 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.


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In 2011, we maintained our strong growth in the Voice Service segment and remained the leader in local fixed telephony portability with Net Fone Via Embratel. We are a less expensive option in the local fixed telephony segment that was earlier dominated by telecommunication concession holders. 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 a triple-play service offerings (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 and we have been increasing the number of our fixed line telephony subscribers.


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·Continue to rollout digital cable and remain technologically competitive. We offer digital cable in 64 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. ·Enhance our triple play offer.We compete in the triple play market (joint offering of pay-television, broadband Internet and fixed line telephony). 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 Telmex 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. We expect to have HFC network in 42 cities by the end of 2012. ·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 services and our responsiveness to customer inquiries, including improving call centers. Financial Initiatives ·Initiatives to fund our business growth. We expect to fund organic growth in the near term through our own cash flow generation. We have achieved our objective of having a debt amortization schedule compatible with our cash generation, allowing us to sustain growth mainly from our own cash generation. However, we may in the future determine to issue additional indebtedness in order to fund inorganic growth and strategic initiatives. ·Optimize capital expenditures by making targeted investments. Our capital spending plan targets our capital expenditures on triple play services to improve returns on our investments. Pursuant to this plan, we target our capital spending on subscriber acquisition, principally in urban areas, where we anticipate greater demand for broadband Internet, fixed line telephony, basic and digital cable and advanced services, such as HD.


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·Hedge our short-term cash disbursement.We import certain equipment, including set-top boxes and cable modems and we pay for this equipment in U.S. dollars. In addition, a portion of our debt is denominated in U.S. dollars. In order to protect our cash disbursement we hedge our expected cash payments up to the next 36 months. We carry no positions in speculative derivatives. Our derivative positions are exclusively to protect our cash disbursement exposure to the U.S. dollar. ·Continue our focus on corporate governance. Since June 2002, our shares have been listed on the BM&FBovespa’s Special Corporate Governance Level 2, or Level 2, which provides enhanced shareholder protections. We believe that trading our shares on Level 2 brings several benefits to shareholders, including greater transparency and more effective corporate governance. Consistent with this approach, we have established certain voting rights with regard to our preferred shares, and we offer 100.0% tag-along rights to holders of our common and preferred shares. See “Item 9. The Offer and Listing—Trading Markets—Level 2 of the BM&FBovespa.” Our ADSs are also listed on NASDAQ and as of the date of this annual report we are in compliance with their listing requirements. As of December 31, 2011, we were in compliance with the Sarbanes-Oxley Act of 2002. See “Item 15. Controls and Procedures—Disclosure Controls and Procedures.” 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, 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. On January 26, 2012, Anatel approved the transfer of indirect control of us from Globo Group to Embratel. Thus,during the three-month period ended March, 31, 2012, Embrapar acquired our indirect control by acquiring 1,077,520 common shares issued by GB, which directly controls us, previously held by the Globo Group. The acquired shares represent 5.5% of the voting capital of GB and were the subject of a call option granted by Globopar (“Option”), pursuant to GB’s Shareholders’ Agreement entered into on March 21, 2005. Due to the exercise of the Option, as of April 26, 2012, Embrapar and its subsidiary Embratel held a combined 10,612,011 common shares issued by GB, representing 54.5% of the voting capital of GB, and 38,916,293 preferred shares, representing 100% of GB’s preferred shares. As a result of the acquisition, Embrapar and Embratel directly and indirectly own through GB, 92.2% of our total share capital, as of April 26, 2012. 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 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, 2011, we had 4.7 million pay-television subscribers, 4.3 million broadband Internet subscribersand3.8 million fixed line telephony subscribers, as compared to 4.2 million pay-television subscribers, 3.5 million broadband Internet subscribers and 3.2 million fixed line telephony subscribers as of December 31, 2010.


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The table below shows the amount and percentage of our gross sales 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 services and pay-per-view, accounted for the years ended December 31, 2011, 2010, 2009 and 2008: Year Ended December 31,2011

   

   2010

   

   2009

   2008(R$ in thousands)

   %

   

   (R$ in thousands)

   %

   

   (R$ in thousands)

   %

   (R$ in thousands)

   %Gross sales revenue:Pay - television and broadband

   Internet subscriptions

   

   R$ 7,205,616

   86.3%

   

   R$ 6,147,394

   86.6%

   

   R$ 5,301,316

   87.3%

   R$ 4,298,280

   88.6%Sign - on and hook-up fees

   

   17,175

   0.2%

   

   22,057

   0.3%

   

   117,055

   1.9%

   77,459

   1.6%Other services

   

   1,122,606

   13.5%

   

   932,137

   13.1%

   

   652,030

   10.8%

   477,016

   9.8%Total gross sales

   

   R$ 8,345,397

   100%

   

   R$ 7,101,588

   100%

   

   R$ 6,070,401

   100%

   R$ 4,852,755

   100%
 Pay-Television Currently, most 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 100 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. According to Pay-TV Survey No. 181, published in March 2012, we provided service to approximately 37.0% of Brazil’s pay-television subscribers as of December 31, 2011. 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$229.90 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. We offer digital cable services to our subscribers in 61 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. 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.


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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 On June 27, 2004, we entered into an amended and restated programming agreement with a term of 10 years with Net Brasil S.A., or Net Brasil, whereby we obtain all of our programming from Brazilian sources through Net Brasil and all international content from sources outside of Brazil, for our own account and benefit. On June 27, 2004, we also entered into a licensing agreement with Net Brasil, whereby Net Brasil grants us the right to use the “NET” brand name until 2015 and, in the case of termination, for an additional 30 months from the date of termination. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Affiliates—Net Brasil Programming Agreement.” Broadband Internet In April 2000, we launched NET Vírtua. NET Vírtua is, by number of subscribers, the second largest broadband Internet service provider and the largest high-speed cable Internet access service provider in Brazil. As of December 31, 2011, our broadband Internet service was available in the 95 locations in Brazil, including São Paulo, Rio de Janeiro, Brasília, Belo Horizonte, Curitiba, Porto Alegre, Florianópolis, Campo Grande and Goiânia, serving 4.3 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. According to www.teleco.com.br, a website that furnishes telecommunications data, as of December 31, 2011, we were the second largest broadband Internet provider in terms of number of subscribers in Brazil, servicing 25.8% of Brazil’s broadband subscribers. 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$29.80 to R$399.90 per month, as of December 31, 2011. 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, 2011, the service was available in 94 locations including in São Paulo, Rio de Janeiro, Porto Alegre, Curitiba, Florianópolis, Belo Horizonte and Brasília, and we had 3.8 million residential subscribers.  27


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Our Service Packages We currently offer through NET Fone Via Embratel a fixed line telephony service with a minimum monthly subscription fee from R$14.90 to R$79.90, as of December 31, 2011. 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, 2011, triple play packages were available in 91 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, 2011. 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 31,2011

   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


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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 service and Internet access. As of December 31, 2011, our cable network totaled over 75,000 kilometers. As of December 31, 2011, we had coded, or “scrambled,” the signal of 82% of the homes we passed, with the objective of reducing piracy. As of December 31, 2011, we had activated two-way, or bi-directional technology for most of our 12.1 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.


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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, 2011, of 6,594 employees, as well as by employing independent contractors. MMDS In addition to our traditional cable network, we have MMDS licenses in Recife, Porto Alegre and Curitiba, with 32,184 subscribers as of December 31, 2011. 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. Churn rate increased since 2007 primarily due to our acquisition of Vivax, which historically had a higher churn rate than us, but decreased in 2010. 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. Our annual bad debt expense, as a percentage of net sales, has been stable since 2009, as set forth in the table below: Year

   

   Bad Debt as a Percentage of Net Sales2011

   

   0.7%2010

   

   0.8%2009

   

   0.9%


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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 various 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. The Social Responsibility Project In 2011, we continued our social responsibility initiatives, further underlining our commitment to education. As part of this process, we redesigned “NET Educação”, the totally free portal, promoting greater collaboration and interaction among internet users, offering new content to support the educational and learning process. We also invested in teacher training through a distance course - Educonexão - improving teachers’ skills with using of technology in the classroom. Between August 2011 (when it was redesigned) and December 2011, Educonexão registered 454,623 pageviews. We also celebrated two 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 provides training 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. Nearly 1,500 people benefited from this project last year.


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We also launched our Volunteer Program, which gives priority to actions focused on education. Five campaigns were held in 2011 in which 824 employee volunteers took part, collecting almost 15,000 items that were donated. Competition According to Pay-TV Survey No. 181, published in March 2012, we provided services to 37.0% of Brazil’s pay-television subscribers as of December 31, 2011. 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 organizations 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. 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 describes our key sources of competition: 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 54.5 million television households as of December 31, 2010, 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 12,485, 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.


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Cable Overbuilds According to Pay-TV Survey No. 181, as of December 31, 2011, the Brazilian cable industry consisted of 37 operators in approximately 196 municipalities, serving an estimated 5.5 million subscribers. Under Brazilian law, cable television service licenses in a specific service area are non-exclusive licenses. In certain markets our licensed service areas overlap completely with the service areas of other licensees, and there will be increasing overlap with  the enactment of Law 12,485 discussed under “—Competition — DTH.” Currently, there are overbuilt cable systems in the cities of São Paulo, Curitiba,  Florianópolis, Foz do Iguaçu, Guarujá,  Uberlandia, Rio Grande, Vitória and Belo Horizonte. MMDS Pay-television utilizing MMDS technology became available in Brazil in 1991, initially targeting the largest urban areas of the country. According to Pay-TV Survey No. 178, as of December 31, 2011, it was estimated that MMDS accounted for approximately 2.0% of pay-television services in Brazil. We estimate that we accounted for approximately 14% as of December 31, 2011 of all MMDS subscribers in Brazil. 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. 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 product competes with other voice-over-Internet protocol providers. Licenses We currently hold 95 licenses to operate pay-television systems. Three of these licenses are for MMDS service and the remaining 92 are for cable services. The licenses were issued on a non-exclusive basis by Anatel. The licenses are for a term of 15 years and were previously automatically renewable, subject to:


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·satisfactory fulfillment of all technical and financial requirements for establishing a network and operating the business; ·compliance with applicable laws and regulations; and ·the payment of a fee. On September 12, 2011, Law 12,485 was enacted, which provides for SEAC and regulates the pay-TV industry, regardless of the technology used and provides for licenses for indefinite periods of use. See “—Regulation — Pay TV Services-New Legal Framework” and “—Cable-Related Services — Statutory Law No. 12,485/2011.” Description of Property We own most of the fixed assets essential to our operations. As of December 31, 2011, our major fixed assets 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 ·antennas. 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. We lease most of our office space, including our headquarter 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 TV Services - New Legal Framework  As a result of Bill No. 29, that was amended by and republished as Bill No. 116, the Brazilian Congress published Law 12,485, which established the new legal framework of 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.  Before the enactment of Law 12,485, cable television services in Brazil were licensed and regulated by Anatel pursuant to Law No. 8,977, enacted by the Brazilian Congress on January 6, 1995; Decree No. 2,206, enacted by the President of Brazil on April 14, 1997; Ordinance No. 256, issued by the Ministry of Communications on April 18, 1997 and the General Telecommunications Law No. 9,472, enacted on July 16, 1997. The other pay television technologies (DTH, MMDS and TVA) were regulated by specific Anatel regulations and the General Telecommunications Law No. 9,472, enacted on July 16, 1997.


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The General Telecommunications Law No. 9,472 remains in force. The changes in the legal framework brought forth by Law 12,485 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 Cable Law (8,977/1995) 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 applied for the conversion of its old licenses to the new service license; (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 within 180 days of the enactment of Law 12,485; (v) CATV, MMDS, DTH and TVA providers may, at will, convert their old licenses to SEAC authorizations, after the publication of the new service regulation - to be published by Anatel within 180 days from the publication of Law 12,485; (vi) renewals (including the renewal of authorization to use radio frequency), transfers of grants or control, changes in corporate structure or other provider contractual changes relating to the delivery of the old cable TV, DTH, MMDS and TVA services shall not be accepted unless providers decide to convert their old licenses to the new service; (vii) creation of quotas of Brazilian content (a mechanism to promote the production of national content); (viii) the division of the pay television industry into four sectors: producer, programmer, “content packer” and distributor; and; (ix) the new SEAC providers will have must carry obligations, providing access free of charge to the following basic channels (“must carry channels”):  ·channels for the distribution of programming by local uncodified VHF and UHF broadcast stations; ·a channel for transmitting the sessions and proceedings of state and municipal legislatures; ·a channel for transmitting the sessions and proceedings of the federal House of Representatives; ·a channel for transmitting the sessions and proceedings of the federal Senate; ·a channel for use by local universities; ·a channel for use by federal, state and municipal bodies for cultural and educational purposes; ·a channel for use by local non-profit private institutions; ·a channel for use by the Brazilian Supreme Court; ·a channel for use by the official broadcaster of the Executive Branch; ·a channel for use by the Executive Branch as a tool to universalize Constitutional Rights; and ·a channel for use by federal government to promote citizenship.  As a result of Law 12,485, certain rights of Grupo Globo under our Shareholders Agreement will have to be changed. Grupo Globo, Embratel and Embrapar are currently discussing such changes, which will be submitted to ANATEL for approval.  SEAC providers are not permitted to offer commercial advertising on the must carry channels.  Anatel has published Public Consultation No. 65, regarding the Ordinance that will regulate SEAC. The proposed regulation submitted by Anatel states in summary that:(i) the new service may be provided by companies incorporated under Brazilian law with headquarters in the country, with the majority of shares with voting rights belong to individuals residing in Brazil or companies incorporated under Brazilian laws with headquarters in the country, without any additional restriction on foreign ownership of SEAC providers than existed under the CATV services legal framework; (ii) as a rule, there should be no limit to the number of authorizations (to be granted by Anatel) to provide the new service. SEAC authorization will be valid indefinitely and will allow services to be provided nationwide, while CATV licenses were valid for 15 years and renewal was granted if minimal requirements were achieved and licenses were granted to provide service in a specific municipality;  (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; (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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In September 1996, the Ministry of Communications issued Ordinance No. 1,086. This ordinance established Cable Television Rule No. 13/96. Cable Television Rule No. 13/96 subsequently was amended by, and republished as, Ordinance No. 256. Ordinance No. 256 imposes restrictions on the number of areas that can be served by a single cable television system operator, including its affiliates. According to Ordinance No. 256, a single cable system operator, including its affiliates, 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 300,000 or more and less than 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. Ordinance No. 256 grants Anatel the ability to alter or eliminate these ownership restrictions. The term “affiliate” is defined by Federal Decree No. 2,206 as any legal entity that, directly or indirectly, 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 has not announced any changes regarding Ordinance No. 13, but we believe that small changes may occur to adjust to Law 12,485.  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;


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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.  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.  On April 22, 2009, Resolution No. 528 was published, prohibiting pay-television providers from charging subscribers content for more than one outlet per household. On March, 19, 2010, Anatel published Sumula 9which expressly authorizes subscription television operators to charge their customers for the cost of equipment used in multiple outlets, including through rental, lease and sale of decoders. Even after the clarification resulting from Sumula 9, Brazilian federal prosecutors, several state consumer defense associations, agencies and customers continue to challenge this rule in court claiming that pay-television operators cannot charge for additional points and rental of related equipment. 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.


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MMDS Services  As a result of the creation of the SEAC under Law 12,485, only a SEAC license will be 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. Anatel Resolution No. 429, issued and effective on February 13, 2006, provided that the latter frequency range (2,170-2,182 MHz, or the SCM Range) will no longer be available for MMDS services. Instead, the SCM Range will be 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.  More recently, Anatel published the Public Consultation No. 31 defining that 140MHz out of the 2,500-2,690 MHz band will be assigned to mobile services (SMP) instead of MMDS services by the end of 2015. This ruling has been questioned by several associations and Congress, and Anatel has not published a final decision. It is possible that all MMDS operators will be assigned 50 MHz by 2015. As our operations are primarily offered by cable, we do not expect Anatel Public Consultation No. 31 to have a material impact on our MMDS operations.  Broadband Services  On October 31, 2011, Anatel published Ordinance 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.  After  SCM providers should send indicator data to Anatel ten months from the publication of Ordinance No. 574.  The quality goals will become mandatory beginning the thirteenth month after publication 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.


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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. 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 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. 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.


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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, Law 12,485, which provides for SEAC and regulates the pay-television industry, regardless of the technology used, was enacted.  Prior to the ratification of Law 12,485 by Anatel, 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 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. In addition, the referred to law introduced 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 under our Shareholders Agreement may have to be changed. Grupo Globo, Embratel and Embrapar are currently discussing such changes, which will be submitted to ANATEL for approval.


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Legal Proceedings We are party to several tax, 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 reserves for losses with respect to the tax and social security, civil and labor proceedings to which we are a party decreased from R$554.8 million as of December 31, 2010 to R$551.3 million as of December 31, 2011. The table below sets forth the reserves established for administrative and judicial tax and social security proceedings, civil litigation and labor proceedings as of December 31, 2011: (R$ in thousands)Tax and social security related matters

   455,581Labor related matters

   42,163Civil related matters

   53,534Total

   551,278
 Of the R$551.3 million of liabilities listed above, R$174.3 million is currently being disputed in court proceedings and R$377.0 million relates to administrative proceedings which have been brought against us and tax provisions. As of December 31, 2011, we have made judicial deposits in an aggregate amount of R$97.3 million related to such proceedings and disputes. Administrative tax proceedings and tax provisions IOF We and our subsidiaries carried out commercial current account transactions reflecting monetary transfers between ourselves and our subsidiaries. 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$97.5 million with respect to the IOF, as of December 31, 2011. 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 December 2003, the Federal Revenue Service issued a tax assessment notice against our subsidiary Cabodinâmica TV Cabo São Paulo S.A., or Cabodinâmica, which was merged into Net São Paulo in 2004, alleging that Cabodinâmica owes federal corporate income tax, or IRPJ, andContribuição Social sobre o Lucro Líquido, or CSLL, a tax levied upon a company’s net profits, as a result of a 1998 loan transaction between Cabodinâmica and Preferential Holdings Ltda. At the time of the loan transaction, IRPJ and CSLL were imposed only on domestic transactions. Cabodinâmica has presented a defense against the fine on the basis that the loan transaction with Preferential Holdings Ltda. was not a domestic transaction and Cabodinâmica is, therefore, exempt from paying IRPJ and CSLL on the transaction. In May 2007, the lower court decided to uphold the tax assessment notices and Net São Paulo appealed this decision. In March 2010, the Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais) dismissed the appeal filed by us. In March 2011, we presented another appeal to the Superior Board of Tax Appeals (Câmara Superior de Recursos Fiscais) and the decision is pending. We have a provision of R$15.2 million with respect to this matter as of December 31, 2011.


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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 (income taxes) and R$97.8 million (social contribution) but the alleged improper recognition of tax credits with respect to goodwill were upheld. Based on analysis performed by legal counsel, the chances of losing this lawsuit were changed in 2010 from remote to possible. In October, 2010, Net São Paulo appealed this decision and the appeal is pending at the Board of Tax Appeals. In 2011 the amounts were updated to R$307.1 million (IRPJ) and R$109.6 million (CSLL). In April 2012, our subsidiary Net Belo Horizonte Ltda., or Net BH, which was merged into Net Serviços in 2010, received a tax-deficiency notice from the Federal Revenue Service in the total amount of R$46 million alleging that Net BH had improperly recognized tax credits related to goodwill between 2007 and 2008. Based on our experience with a similar tax delinquency notice that we are defending against, we believe that these expenses are in accordance with tax legislation but the probability of loss is possible. ICMS Net Rio had a provision in the amount of R$8.9 million as of December 2011 with respect to the tax assessment notices challenging ICMS tax rate of 5%, which is the tax rate charged on cable television services. The tax assessment notices assumed an ICMS tax rate of 25% should have been applied. Five of these ICMS-related administrative proceedings have resulted in unfavorable decisions and, as a result, Net Rio has provided a guarantee of R$21.4 million in order to continue the appeal process. In December 2011, the provision previously recorded for these liabilities was reversed once we determined that it was not probable that there will be related cash outflow in the future. On October 20, 2008, and February 25, 2010, Net Brasília Ltda., or Net Brasília, received tax assessment notices from the State Internal Revenue of theDistrito Federalin the amounts of R$155.4 million and R$50.5 million, respectively, relating to the ICMS tax. The tax authority claims that during the period from January 2003 to June 2008 and July 2008 to June 2009 Net Brasília should have paid the ICMS on pay-television subscription revenues at a rate of 25% instead of the rate of 10% actually applied by Net Brasília. In the tax authority’s view, the rate reduction benefit allowed by ICMS Agreement No. 57/99 expired on December 31, 2001. Net Brasília filed its defense in the lower administrative court and a decision on its defense is pending. We believe the probability of loss is remote. Therefore, we have not made any provisions in connection with this tax assessment. On August 12, 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, 2011 was R$252,688. 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.


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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 will appeal this decision, but we believe the probability of loss is possible. IRRF On July 6, 2007, the Federal Revenue Service issued an IRRF notice of infraction against our subsidiary Net Rio in the amount of R$19.6 million. The notice alleges a difference between the real value and the stated value of Net Rio’s income from August 2003 to March 2007. In August 2007, Net Rio submitted an appeal to this tax assessment with the Administrative Sector of Federal Revenue Service and its appeal is pending. We have not made any provisions in connection with this tax assessment. We believe the probability of loss is remote. 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 The Senior Notes and Floating Rate Notes are not subject to IRRF and IOF, as long as the average term is not less than 96 months. As result of the fact that some noteholders exercised their rights have the notes repurchased prior to the end of this 96-month-period, the Company recorded a provision of R$155.7 million at December 31, 2011 related to these taxes. IPI On November 18, 2010, the Federal Revenue Service imposed tax assessments of R$22.9 million on our subsidiary Reyc Comércio e Participações Ltda., or Reyc, alleging that additional transactions subject to the Import Duty, or Imposto sobre Produtos Importados, or IPI, were not correctly classified. Reyc filed its defense in the lower administrative court and a decision is pending. We believe the probability of loss is possible and have not made any provisions in connection with this tax assessment. Judicial Tax Proceedings Shadow tax Since 1999, several 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 municipalities currently imposing such a “shadow” tax include São Paulo, Rio de Janeiro, Caxias do Sul, Anápolis, Campinas, Florianópolis, Criciúma, São Carlos, Indaiatuba, Jacareí, Bragança Paulista, Caçapava, Limeira, Rio Claro, São Vicente, Taubaté, São José dos Campos, Brasília, Curitiba, Porto Alegre, Campo Grande and Sumaré.The tax generally applies to power companies and telecommunication companies, among others.


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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. 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. 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.


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Income tax retained on earnings We have brought actions against the Federal Revenue Service to dispute income tax retained on earnings under certain of our hedge transactions. In accordance with preliminary injunctions obtained in these actions, we have not collected or remitted a total amount of R$36.7 million on those transactions as of December 31, 2011. Of this amount, R$11.7 million have been deposited with the court by the financial institution, which liquidated the transactions and is responsible for withholding the income tax. We have not made provisions for the remaining R$25.0 million. In the event of an unfavorable decision, the remaining R$25.0 million will be collected and accounted for as a tax credit available to offset future income tax liabilities. ICMS Net Rio received a tax assessment notice from the State Tax Authority of the State of Rio de Janeiro in the amount of R$51.6 million relating to the ICMS tax. The tax authority alleged that, as a result of delays in the payment of its ICMS tax during the period from September 2001 to October 2002, Net Rio lost its rate reduction benefit. Net Rio presented its administrative defense to the tax authority. In May 2005, Net Rio obtained an unfavorable decision at the lower court with respect to the administrative defense. In June 2005, Net Rio filed an appeal to this decision and in 2008 obtained an unfavorable decision. In January 2009, a tax enforcement action was filed with respect to the delayed payments and Net Rio presented its defense to the lower court, where a decision is pending. The amount under dispute was R$32.4 million as of December 31, 2010, which is guaranteed by a bank bond. Additionally, Net Rio filed a writ of mandamus before the judicial court with regards to the tax assessment. With respect to the writ of mandamus, Net Rio obtained an unfavorable decision from the lower and higher judicial court for the assessed period, with the exception of the period between October and December 2001, for which Net Rio has recorded liabilities in the amount of R$36.0 million, as of December 31, 2011. IPI The Federal Revenue Service has imposed tax assessments of R$17.1million on our subsidiary Reyc Comércio e Participações Ltda., or Reyc, alleging that, for the purpose of the IPI, Reyc did not correctly classify transactions related to the import of our analog decoders. Reyc filed three lawsuits against the imposition of the tax assessments and the lower court’s decision in connection with one of these lawsuits is pending. In May 2005, the court decision for the third lawsuit was favorable to Reyc, but the Federal Revenue Service appealed the decision with a higher court. In June 2009, one lawsuit was decided favorably to Reyc. Reyc has recorded a liability in the amount of R$5.3 million as of December 31, 2011. In spite the lawsuits filed by Reyc, the Federal Revenue Service started a judicial procedure for the enforcement of the tax liability in the amount of R$17.1 million as of December 31, 2011. On March 3, 2007, the Attorney-General of the National Treasury issued an Import Duty federal tax assessment against our subsidiary Reyc in the amount of R$31.4 million alleging a tax payment deficiency as a result of errors in classification of imported goods. On February 14, 2007, the Attorney-General of the National Treasury requested that the Federal Fiscal Enforcement Agency of the City of Florianópolis disregard the corporate entity of Reyc in order to be able to hold Net Serviços, Net Serviços’ subsidiaries and Net Serviços’ shareholders liable for any judgment. On the same day, Reyc requested that a portion of the claim be suspended due to a decision of Federal Justice Court of the State of Santa Catarina granting Reyc an annulment of the claim in the amount of R$31.4 million based on the finding that Reyc’s classifications were correct. An administrative decision from the Federal Fiscal Enforcement Agency of the City of Florianópolis is pending.


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ISS This judicial tax enforcement action was filed after administrative proceedings related to the defense of three tax deficiency notices issued against Net on June 28, 2004 ended unfavorably to us at the administrative level. On October 23, 2009, we filed our defense in the lower court. On September 20, 2010, we obtained a partially favorable decision at the lower court. Two tax deficiency notices were canceled (lower values) and the third deficiency notice (of higher value) obtained an unfavorable decision. We appealed and the decision is pending. The amount involved in this tax enforcement action, as of December 31, 2011, was R$127.3 million. We believe the probability of loss is remote. We have not made a provision in connection with this proceeding. 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 Increase in monthly subscription rates and other contractual disputes We are currently party to nine lawsuits against our subsidiaries as a result of increases in monthly subscription rates proposed by state public attorneys, by consumer protection organizations and by individuals. The plaintiffs in each lawsuit allege that the increases in monthly subscription rates were abusive and unjustified and violate principles of the Brazilian Consumer Defense Code and legislation establishing that contractual payment increases shall only occur once a year. The plaintiffs further argue that the increases were illegal, that the amounts paid should be reimbursed to subscribers and that the clause in our standard subscription contract, which provides for an increase in monthly subscription rates in the event that the cost of providing services increases, should be declared null and void. We obtained unfavorable final decisions for two of our subsidiaries, which have since been merged into us. In both cases, we settled with the General Attorney’s office and agreed to reimburse current and former subscribers in the amount which we increased their monthly subscription. We have complied with one of the agreements and have completed reimbursing such  subscribers; we are in the process of complying with the other agreement. In addition, we have obtained unfavorable decisions for a third subsidiary that has since merged into us, but they are currently before the appeals court. We have obtained favorable court decisions for three cases.  As of December 31, 2011, we recorded liabilities of R$4.5 million for the four remaining lawsuits. If we obtain unfavorable final decisions in these and similar lawsuits, our cash flows could be materially and adversely affected. Moreover, we are party in another four lawsuits filed against our subsidiaries by state public attorneys or by consumer protection organizations, which challenge the validity of certain clauses in our standard subscription contract (i.e. penalty clauses, slip collection clauses, etc.). The plaintiffs seek to prevent us from including clauses that would allow our subsidiaries to charge contractual penalties, for example, but are not seeking monetary compensation. Because our standard subscription contracts no longer include these disputed clauses, we believe that the outcome of such proceedings will not affect our business or cash flows.


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Lawsuits related to signal scrambling and Internet access The consumer defense organizationAssociação Brasileira de Defesa do Consumidor, or ABRASCON, and a credit consumer organizationAssociação dos Consumidores de Crédito, or ANDEC, respectively, filed a lawsuit against us seeking to prevent us from requiring that subscribers connecting to the Internet through Net Vírtua also maintain a contract with an Internet service provider. The plaintiff is seeking R$8.0 million in compensation. We obtained a favorable decision, but a final court decision is still pending. In addition, three similar actions have been filed against our subsidiaries, all pending of judgment by the court. We believe that we have probable and possible chances of loss. Most of these lawsuits do not request damages but unfavorable decisions may involve injunctions against our subsidiaries, such as the prohibiting them from entering into contracts with Internet providers for NET Vírtua subscribers. 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, 2011, all of these of lawsuits were pending and no final decision has been issued. We have a provision in the aggregate amount of R$145.5 million and deposited into court the aggregate amount of R$33.7 million. 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. Other civil public and collective actions Our subsidiaries are defendants in another twenty five civil public and collective actions, all with different claims, which can be summarized as follows: unlawfulness of channels grid modification; unlawfulness of subscribers data form modification; improper collection of taxes and monthly subscription; invalidity of cable television concessions; unlawfulness of bundled sale of products and services. Although most of them do not request damages, all of them request high punitive fines for the case of continuance of those alleged illegal practices, and unfavorable decisions to our subsidiaries may adversely affect their ordinary course of business.


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Labor Claims As of December 31, 2011, we and our subsidiaries were party to 2,493 labor proceedings filed by former employees of our company and our subsidiaries involving total claims of R$42.2 million (calculated based on the award granted by the most recent court decision on the claim and, where no decision has been issued, the amount requested by the plaintiff). These proceedings most frequently involve claims seeking additional compensation for employees performing high-risk activities and for overtime pay and commissions. Organizational Structure 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 is a list of our direct and indirect subsidiaries, as of December 31, 2011: Jurisdiction of Incorporationor Organization

   Direct

   Total Interest (percent)SubsidiaryNet Brasília Ltda

   Brazil

   100

   100Net Rio Ltda

   Brazil

   100

   100Net São Paulo Ltda

   Brazil

   100

   100Reyc Comércio e Participações Ltda

   Brazil

   100

   100Jacarei Cabo S.A*

   Brazil

   100

   100614 TVH Vale Ltda

   Brazil

   100

   100614 Serviços de Internet Maceió Ltda

   Brazil

   100

   100614 Serviços de Internet João Pessoa

   Brazil

   100

   100* Pending approval from Anatel


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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: •

   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, 2011, December 31, 2010 and December 31, 2009.•

   Liquidity and Capital Resources.This section provides an analysis of the our cash flows for the years ended December 31, 2011, December 31, 2010 and December 31, 2009, as well as a discussion of our outstanding debt and commitments that existed as of December 31, 2011. 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. As of December 31, 2011, we had 4.7 million pay-television connected subscribers in 100 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 4.3 million subscribers as of December 31, 2011. We also provide fixed line telephony through our NET Fone via Embratel service, which had 3.8 million subscribers as of December 31, 2011. As of December 31, 2011, our advanced network of coaxial and fiber-optic cable covered over 75,000 kilometers and passed approximately 13.4 million homes. Most of our customers belong to high and middle income classes, which helps to keep bad debt expense at low levels. In 2011, we had gross sales revenue of R$8,345.4 million.


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We principally offer three services – pay-television, broadband Internet and fixed line telephony. 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. Pay-television is our largest service in terms of revenues generated and, as of December 31, 2011, we had 4.7 million pay-television subscribers, of which approximately 58% 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, 2011, we had 4.3 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, 2011, we had 3.8 million residential fixed line telephony 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.


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We believe we continue to have adequate liquidity to meet our liquidity needs for the 2012. As of December 31, 2011, we had R$721.2 million of cash and cash equivalents. Additionally, there are no significant maturities of our short-term or long-term debt prior to June 2012. On May 26, 2011, we redeemed our outstanding US$150.0 million aggregate principal amount of 9.25% perpetual bonds with available cash on hand. In 2012, we intend to maintain our subscriber growth, in terms of net additions, at the 2011 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. ·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) 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. Acquisitions Acquisition of ESC 90 On June 30, 2009, we completed the acquisition of ESC 90 by 100% of the shares representing the capital of ESC 90. ESC 90 has operations in two cities, Vitória and Vila Velha, in the state of Espírito Santo.  The purchase price was R$98 million and we paid for this acquisition in cash on the date of the closing of the transaction. On July 31, 2010, ESC 90 was merged into Net Serviços. Critical Accounting Policies and Estimates We prepared our consolidated financial statements as of and for the year ended December 31, 2011 in accordance with IFRS. 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. 51


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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. 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 4.7% and a market risk premium of 6.5%, 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 2.5%, each for the year ended December 31, 2011. The weighted average cost of debt provided by the third parties, net of taxes was 7.5%, for the year ended December 31, 2011. The cost of equity plus the weighted average cost of debt provided by the third parties resulted in a WACC of fifteen percent for the year ended December 31, 2011.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.


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Our revenue and cost projections vary with the growth of the numbers of subscribers.In 2010, we had negative net cash flow due to an increase in investments in the bidirectional network. In 2011 we also had negative net cash flow as a result of investments in several projects for expansion and network enhancements, in addition to the perpetual bonds settlement, a factor that consumed part of our annual cash.We estimate that the minimum projected 10-year free cash flow beginning in 2013 to be 5.14% in order to avoid a goodwill impairment charge.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, 2011. 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. Financial Statement Presentation Sources of Revenues Monthly subscription fee revenues represent the dominant portion of our revenues, and sign-on and hook-up fees constitute a relatively minor portion of our revenues. All of our revenuesare 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. Subscription fees are recorded in the month the service is provided. Substantially all of our revenues come from monthly subscription fees. ·Sign-on and hook-up fee revenues.We charge subscribers a fee for the installation of the equipment necessary to receive our pay-television, broadband Internet and fixed line telephony services. Sign-on and hook-up fees billed to new subscribers are deferred to the extent that they exceed related direct selling costs. The deferred fees are amortized to revenue over a period of six years, which better represents the estimated average period during which we expect subscribers will remain connected to our cable network. ·Other services revenues.Other services revenues consist of sales of our fixed line telephony services, pay-per-view service, data transmission service, programming guide, technical support services, disconnection/reconnection services, fiber optic rental services and other services. Other services revenues are recorded in the month services are provided.


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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. On April 22, 2009, Resolution No. 528 was published, prohibiting pay-television providers from charging subscribers content for more than one outlet per household. On March, 19, 2010, Anatel published Sumula 9which expressly authorizes subscription television operators to charge their customers for the cost of equipment used in multiple outlets, including through rental, lease and sale of decoders. Even after the clarification resulting from Sumula 9, Brazilian federal prosecutors, several state consumer defense associations, agencies and customers continue to challenge this rule in court claiming that pay-television operators cannot charge for additional points and rental of related equipment. 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. 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, Santa Catarina, Rio Grande do Sul, Amazonas and Distrito Federal, the ICMS tax is levied at a rate of 25%. In Minas Gerais, Paraná, Goiás and Rio de Janeiro, the ICMS tax is levied at a rate of 18%, 27%, 29% and 30%, respectively. 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, Paraíba and Mato Grosso do Sul,where the rate is 12%. ·ISS municipal tax. ISS is a municipal tax on services that is levied at a maximum rate of 5.0% (some municipalities have lower rates) 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.


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·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 2011, 22.6% of our net sales. Programming purchase costs consist of programming fees paid by our operating subsidiaries directly to certain international programmers for the acquisition of new international content from sources outside of Brazil and to Net Brasil primarily in relation to programming produced in Brazil. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Affiliates—Net Brasil Programming Agreement.” 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.” ·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:


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·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: ·Financialexpense. Financial expense consists of monetary correction charges on real-denominated debt, exchange rate losses on U.S. dollar-denominated debt, interest payable on our outstanding debt and other financial expenses, which includes the IOF tax on financial operations and gain or losses from financial instruments. ·Financial income. Financial income consists of interest on cash equivalents, gain on extinguishment of liabilities, exchange rate gains on U.S. dollar-denominated debt, monies collected in the form of penalty and interest payments from late payments of monthly subscription fees. ·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.


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Results of Operations Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Net sales Sales and taxes and other deductions from sales by major category were as follows: Year ended December 31,2011

   

   2010

   % Change(R$ in millions)Gross sales :Pay-television and broadband Internet subscriptions

   7,205.6

   

   6,147.4

   17%Sign-on and hook-up fees

   17.2

   

   22.1

   (22%)Other sales (including pay-per-view and telephony)

   1,122.6

   

   932.1

   20%Total gross sales

   8,345.4

   

   7,101.6

   18%Taxes on sales, discounts and cancellations

   (1,649.5)

   

   (1,696.0)

   (3%)Net sales

   6,695.9

   

   5,405.6

   24%
 Selected subscriber-related key financial indicators 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. Sign-on and hook-up fees decreased primarily due to the fact that we stopped charging sign-on fees for intermediate and top packages and continue to charge sign-on fees only for basic packages. Other sales increased primarily due to an increase in fixed-line telephony revenues, as a result of increases in the subscriber base for this service in 2011. Taxes on sales, discounts and cancellations remained fairly stable principally due to the increase in taxes resulting from higher revenues were opposed to the decrease of discounts and cancellations. As a percentage of total revenues, taxes on sales, 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 sales, 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 sales, other operating costs increased to 25.5% in 2011 compared to 24.4% in 2010. Selling, general and administrative 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 sales, selling, general and administrative 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 acquisition 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 denominated in U.S.dollar.


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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.  Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 Net sales Sales and taxes and other deductions from sales by major category were as follows:  Year ended December 31,2010

   

   2009

   % Change(R$ in millions)Gross Sales:Pay-television and broadband Internet subscriptions

   6,147.4

   

   5,301.3

   16%Sign-on and hook-up fees

   22.1

   

   117.1

   (81%)Other sales (including pay-per-view and telephony)

   932.1

   

   652.0

   43%Total gross sales

   7,101.6

   

   6,070.4

   17%Taxes on sales, discounts and cancellations

   (1,696.0)

   

   (1,457.0)

   16%Net sales

   5,405.6

   

   4,613.4

   17%
  Selected subscriber-related statistics were as follows:  As of December 31,2010

   2009(in thousands)Total connected pay-television subscribers

   4,212

   3,690Total connected broadband Internet subscribers

   3,524

   2,882Total connected fixed line telephony subscribers

   3,153

   2,557Total kilometers of cable network

   66

   61Total homes passed

   11,543

   10,777
  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. Sign-on and hook-up fees decreased primarily due to the fact that we stopped charging sign-on fees for intermediate and top packages and continue to charge sign-on fees only for basic packages. Other sales increased primarily due to the increase in fixed-line telephony revenues, as a result of increases in the subscriber base for this service in 2010.


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Taxes on sales, 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. See “—Overview—Financial Statement Presentation—Taxes and Others Deductions from Revenues” for a discussion of ICMS rates applicable to the individual services and products. As a percentage of total revenues, taxes on sales, discounts and cancellations remained fairly stable at 23.9% in 2010 when compared to 24.0% in 2009. Operating costs and expenses Operating costs and expenses by major category were as follows: Year ended December 31,2010

   2009

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

   (1,262.1)

   (1,037.4)

   22%Other direct operating costs

   (1,317.5)

   (1,237.5)

   6%Selling, general, administrative and other expenses

   (1,266.8)

   (1,096.3)

   16%Depreciation and amortization

   (901.2)

   (618.7)

   46%
 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 sales, programming costs increased to 23.3% in 2010 compared to 22.5% in 2009. 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 sales, other operating costs decreased to 24.4% in 2010 compared to 26.8% in 2009. Selling, general and administrative 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 sales, selling, general and administrative expenses decreased to 23.4% in 2010 compared to 23.8% in 2009. Other expenses decreased mainly due to a reversal of provisions for tax contingencies. Depreciation and amortization expenses increased primarily due to higher depreciation expenses related to increased acquisition of digital set-top boxes and new subscriber installation. Finance results Year ended December 31,2010

   

   2009

   % Change(R$ in millions)Finance resultsFinance expense

   (359.4)

   

   (27.3)

   1.216%Finance income

   169.4

   

   92.8

   83%Total

   (190.0)

   

   65.5

   (390%)


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Finance results were an expense in 2010, compared to an income in 2009, primarily as a result of the appreciation of the real against the U.S. dollar in 2009. The primary impact was related to our dollar-denominated perpetual bonds, senior notes due 2020 issued in November 2009, and our loan with Banco Inbursa. Income taxes and social contribution Year ended December 31,2010

   2009

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

   (160.8)

   47.0

   (442%)
 Income tax and social contribution was an expense in 2010 compared to an income in 2009 because of the recognition of deferred income tax on temporary differences for R$182.3 million higher than in 2009 and also because in 2010 we increased the expenses related to amortization of goodwill tax benefits in R$59.9 million. 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, 2011 and 2010, our net debt, calculated as the sum of “debt”, including the current portion in current liabilities and “debt” in non-current liabilities, minus “cash and cash equivalents”, amounted to R$1,448.2 million and R$1,356.7 million, respectively. Our 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, 2011, our current assets were R$235.5 million smaller than our current liabilities and in December 31, 2010, our current assets were R$210.5 million greater than our current liabilities. The increase in the current liabilities in 2011 is mainly due to the beginning of the annual amortization of our debentures as from June 1, 2012 and to the settlement of perpetual bonds on May 26, 2011.  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.  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.


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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, we were able to use 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. We expect that any additional net cash funding requirements will be preferably financed with long-term financing, including, for example, those under the Government Agency for Machinery and Equipment Financing – FINAME program, and other long-term debt. We are subject to certain restrictive covenants related to our outstanding borrowings, the most important of which are (i) a required net consolidated debt to EBITDA ratio of less than 2.5 and (ii) an EBITDA to expenses net of consolidated interest ratio equal to or higher than 1.5.  As of December 31, 2011 and 2010, we complied with these financial covenants by a significant margin.  We do not expect our ability to comply with these financial covenants in the future to depend on further debt reduction or on improved operating results. Cash Flows Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 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 on disposal of property, plant and equipment

   -

   

   (4.1)Provisions

   (42.3)

   

   (44.4)Increase (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.


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Year ended December 31,2011

   

   2010Investing activities

   (R$ in millions)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. 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 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 provided by 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. Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 Year ended December 31,2010

   

   2009Operating activities

   (R$ in millions)Net income

   307.2

   

   735.9Monetary and exchange rate variations, net

   (69.1)

   

   (177.3)Interest expense on borrowing

   215.1

   

   176.6Losses on derivatives

   65.9

   

   97.4Depreciation and amortization

   901.2

   

   618.7Deferred income tax and social contribution

   82.8

   

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

   (4.1)

   

   7.1Provisions

   (44.4)

   

   (101.3)Decrease in operating assets and liabilities

   (218.4)

   

   (195.9)Net cash provided by operating activities

   1,236.2

   

   1,002.6
 Cash flows from operating activities.Net cash provided by operating activities increased from R$1,002.7 million in 2009 to R$1,236.2 million in 2010, an increase of 23.3%. 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.


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Year ended December 31,2010

   

   2009Investing activities

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

   -

   

   (97.9)Purchase of property, plant and equipment and intangible assets

   (1,249.9)

   

   (1,089.2)Cash proceeds from sale of property, plant and equipment

   2.9

   

   2.5Net cash used in investing activities

   (1,247.0)

   

   (1,184.6)
 Cash flows used in investing activities.We used R$1,247.0 million in cash in investing activities in 2010, an increase of 5.3%, as compared to R$1,184.6 million used in investing activities in 2009. 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 31,2010

   

   2009Financing activities

   (R$ in millions)Proceeds from third party borrowing

   103.6

   

   677.0Repayment of principal

   (92.6)

   

   (46.1)Payment of interest

   (194.3)

   

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

   (183.3)

   

   460.7
 Cash flowsused infinancing activities.We used R$183.3 million in cash in financing activities in 2010, compared to net cash provided by financial activities of R$460.7 million in 2009, primarily due to prepayment of our Bank Credit Notes in the aggregate principal amount of R$30.7 million and prepayment of indebtedness outstanding under FINAME in the aggregate principal amount of R$61.9 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$103.6 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 starting in June 2012. We have historically funded these liquidity requirements through operating cash flows, borrowings under our credit facilities, proceeds of debt and equity financings and capital advances and loans from our shareholders. After taking into consideration the range of projections of cash flows from operations, anticipated capital expenditures, acquisitions and debt principal and interest payment requirements, we do not expect to need to raise funds to meet our anticipated cash requirements in 2012. The amount of our anticipated operating cash flows in 2012 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.


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We had cash and cash equivalents of R$721.2 million as of December 31, 2011, a 12.2% decrease compared to R$821.6 million as of December 31, 2010, mainly as a result of the payment of interest and the prepayment of principal of our debt. Contractual Obligations The following table sets out our major contractual obligations as of December 31, 2011:  Payments due by periodLess than 1 Year

   

   1 – 3 Years

   

   3 – 5 Years

   

   More than 5 Years

   

   Total(R$ in millions)Debt (1)

   295.0

   

   728.4

   

   365.2

   

   780.8

   

   2.169.4Lease of utility poles (2)

   100.4

   

   331.1

   

   246.3

   

   267.0

   

   944.8Lease of office space

   34.7

   

   114.3

   

   85.0

   

   92.2

   

   326.2Programming, equipment and service purchase obligation(3)

   46.4

   

   -

   

   -

   

   -

   

   46.4Total

   476.4

   

   1.173.8

   

   696.5

   

   1.140.0

   

   3.486.7
 ________________________ (1)On May 26, 2011, we redeemed our outstanding US$150,000,000 aggregate principal amount of our 9.25% perpetual bonds with available cash on hand. (2)In addition to the amounts listed in the table above, we are contractually obligated to make lease payments under our utility pole lease 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. (3)Programming, equipment and service purchase obligations reflected 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 2011 and 2010, our capital expenditures of R$1,660.2 million and R$1,249.9 million, respectively, were primarily used to sustain our organic subscriber growth, through the acquisition 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 to acquire such equipment.


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In 2012, we expect to continue to increase the number of our pay-television, broadband Internet and fixed line telephony subscribers. As most of our capital expenditures are related to subscriber acquisition, including the acquisition of equipment and the installation cost, we expect to maintain our annual capital expenditures for this purpose in 2012. In addition, we expect to spend similar amounts as 2011 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 do not plan on making substantial capital expenditures for the encoding of our network. We expect to be able to fund our day-to-day capital expenditures in 2012 using funds from operations. 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, 2011, we had the following debt (including accrued interest) outstanding: (R$ in thousands)U.S. dollar-denominated debt(1):Banco Inbursa S.A.

   379,010Global notes 2020.

   675,622Total U.S. dollar-denominated debt

   1,054,632Real-denominated debt:Non-convertible debentures – 6th Public Issuance

   584,258Bank credit notes

   122,292FINAME

   408,200Total real-denominated debt

   1,114,750Total

   2,169,382
 ________________________ (1)Calculated using the December 31, 2011 exchange rate of R$1.8758 per US$1.00. On May 26, 2011, we redeemed, in whole, our perpetual bonds with available cash on hand. In 2011, the rate used to determine the interest rate of our real-denominated debt was the Brazilian interbank interest rate, or CDI, which was 10.87%.


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At December 31, 2011, the principal maturities of our debt were as follows: Principal Amortization Schedule:

   (R$ in thousands)2012

   255,6972013

   241,8412014

   249,9892015

   240,6302016

   93,6042017-2020

   1,056,3172,138,078Total debt cost

   (9,161)Accrued interest

   40,465Total debt

   2,169,382
 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 may 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. Loan and Guaranty Agreement - Banco Inbursa S.A. We have entered into a Loan and Guaranty Agreement, dated as of June 19, 2008, or the Loan and Guaranty Agreement, with Banco Inbursa S.A., an affiliate of Telmex Internacional, 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. In addition, the Term Credit Facility contains a requirement that we not exceed a maximum ratio of consolidated interest expenses to consolidated EBITDA (as those terms are defined in the Loan and Guaranty Agreement). As of December 31, 2011, we were in compliance with such financial covenants. 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.


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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 Issuancein 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 1and 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 Issuanceand 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 Issuanceas 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.  68


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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). 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, 2011, FINAME outstanding loans amounted R$408.2 million. Off-Balance Sheet Arrangements We are a party to certain swap agreements as part of a program to hedge part of our expenses that are linked to the U.S. dollar in the short- and medium-term, which currently include capital expenditures and interest expense on the perpetual bonds, global notes 2020 and the Loan and Guaranty Agreement with Banco Inbursa. As of December 31, 2011, we had swap agreements in the aggregate notional amount of R$207.5 million with the settlement dates starting in January 2012. Brazilian Economic Environment General Historically, the Brazilian economy has been subject to periodic and occasionally significant intervention by the Brazilian government. The Brazilian government has often changed monetary, credit, tariff, exchange rate and other policies, with the goal of influencing the economy. The Brazilian government’s actions to control inflation and effect other policies have involved wage and price controls, as well as other interventionist measures, such as freezing bank accounts and imposing capital controls. Although the stated intention of the present Brazilian government is to gradually reduce governmental intervention in the economy, it remains possible that future government economic policies could adversely affect our business and financial condition, as could the government’s response to certain political or social developments. Historically, inflation, government actions taken to combat inflation and public speculation about possible future government actions have also contributed significantly to economic uncertainty in Brazil and heightened volatility in the Brazilian securities markets. Beginning in December 1993, the Brazilian government launched an economic stabilization plan, known as the Real Plan, which was intended to reduce inflation by reducing certain public expenditures, collecting liabilities owed to the Brazilian government, increasing tax revenues, continuing a privatization program and introducing into circulation in June 1994 a new currency, the real. Following the implementation of the Real Plan, inflation dropped significantly from previous levels (which at times had exceeded 40% per month) to monthly rates of lower than 1%. In addition, the Brazilian government demonstrated a commitment to instituting conservative fiscal policy. Early in 2000, the Brazilian Congress passed the Fiscal Responsibility Law, which limited public payroll expenditures. The Brazilian gross domestic product, in U.S. dollar terms, increased 4.2% in 2000. A somewhat lower growth rate occurred for 2001 as a result of a Brazilian electricity shortage and the subsequent limitations imposed by the Brazilian government on energy consumption.


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Emerging markets volatility and the 2002 elections in Brazil caused considerable outflows of funds and a decline in the amount of foreign investment in Brazil. These factors adversely affected the Brazilian trading markets and, in October 2002, the real depreciated to its lowest ever value against the U.S. dollar at R$3.9552 per US$1.00. From 2003 through 2011, the federal government generally followed the policies implemented by the previous administration. In the end of 2008 and the first half of 2009, the Brazilian economy stagnated in the wake of the international financial crisis; however, the recession lasted a few quarters until the second quarter of 2009 before the Brazilian economy emerged from recession and resumed GDP growth. Notwithstanding the relatively brief effects of the international crisis, we remain exposed to volatility in the Brazilian currency, inflation, and regulatory changes.See below for a discussion of the impact of inflation on our business.  Since taking office in January 2011, President Dilma Rousself has followed the policies implemented by President Lula’s administration. The world economy has been recovering throughout 2010 and 2011, though effects of the international financial crisis remain, including the possible financial deterioration of countries in the European Union, which may indirectly impact Brazil. In 2010, Brazil experienced strong growth; however, there are concerns regarding the acceleration of inflation. Due to the difficult international economic situation in 2011, it is risky to develop scenarios for longer periods but there are elements that are likely to have a major influence on growth in coming years. First, consumption will continue growing, especially in class C. This growth, however, should be slower than in recent years, due to fiscal conditions that suggest a less aggressive elevation in the real minimum wage, and because of  the economic leap forward of the class has already occurred. Second, the export growth of chains of natural resources will continue accelerating because of Asian demand.  Third is the expansion of investment, especially in the oil industry and certain vendors, such as shipyards, agribusiness, mining and metals. Residential construction will continue growing, as well.  Effects of Inflation and Exchange Rate Fluctuations Until July 1994, Brazil had experienced high and generally unpredictable rates of inflation for many years, as well as a steady depreciationof its currency relative to the U.S. dollar. The following table sets forth Brazilian inflation, as measured by the IGP-M, and thefluctuationof the year-end exchange rate of the real against the U.S. dollar for the periods shown: Year Ended December 31,2011

   2010

   2009

   2008

   2007Inflation (IGP-M Index)

   5.1%

   11.32%

   (1.7)%

   9.8%

   7.8%Currency appreciation (depreciation)

   (12.6%)

   4.3%

   25.5%

   (31.9)%

   17.2%
 As a result of the Real Plan, the rate of inflation and the rate ofdepreciationhave been reduced considerably since July 1, 1994. In recent years, the Brazilian currency has recovered as a result of appreciation of the real. The real depreciated 12.6% as of December 31, 2011 when compared to December 31, 2010.


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Inflation has affected and will continue to affect our results of operations. A portion of our operating expenses (e.g., maintenance, selling, general and administrative expenses) tends to increase with Brazilian inflation. Additionally, a substantial portion of our capital expenditures, primarily network equipment costs, is denominated in or indexed to U.S. dollars. Any changes in exchange rates can result in a relative increase or decrease in the expenses related to such capital expenditures. We have a limited amount of foreign exchange contracts to manage our exposure to the U.S. dollar. See “—Liquidity and Capital Resources—Off-Balance Sheet Arrangements.” On December 31, 2011 and 2010, our U.S. dollar exposure was comprised as follows:  2011

   

   2010(R$ in thousands)Interest payable

   29,820

   

   28,776Accounts payable related to equipment acquired from foreign suppliers

   44,185

   

   24,779Accounts payable related to programming

   2,203

   

   1,873Global notes 2020

   652,321

   

   578,345Perpetual bonds

   -

   

   249,930Banco Inbursa S.A

   372,491

   

   330,429Total

   1,101,020

   

   1,214,132
 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 Board, as indicated in the table below, in order to fill vacant positions as a result of resignations of previous directors and member of the Fiscal Board. The term for directors and members of the Fiscal Board, including the ones elected on April 5, 2012, will end upon the election of new members at our 2012 annual shareholders’ meeting, which is expected to be held on April 30, 2012. 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 10% 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. 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.


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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. Pursuant to a shareholders’ agreement discussed under “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements,” our board of directors is comprised of twelve members and an equal number of alternates. Of these twelve members and twelve alternates, one member and one respective alternate is appointed directly by Grupo Globo, six members and six respective alternates are appointed by GB, which is controlled by Telmex Internacional, and three members and three respective alternates are appointed by Telmex Internacional. Additionally, in accordance with the Level 2 of 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 Current

   TermSinceExpiresOscar Von Hauske Solis

   Chairman, Board of Directors

   April 5, 2012

   April 30, 2012Rossana Fontenele Berto

   Director

   April 30, 2003

   April 30, 2012Jorge Luiz de Barros Nóbrega

   Director

   April 19, 2004

   April 30, 2012Carlos Henrique Moreira

   Director

   April 28, 2005

   April 30, 2012Jose Formoso Martínez

   Director

   April 28, 2005

   April 30, 2012Mauro Szwarcwald

   Director

   April 28, 2006

   April 30, 2012Isaac Berensztejn

   Director

   April 2, 2007

   April 30, 2012Luiz Tito Cerasoli

   Director

   April 30, 2011

   April 30, 2012Antonio Oscar de Carvalho Petersen Filho

   Director

   April 5, 2012

   April 30, 2012Antonio João Filho

   Director

   April 5, 2012

   April 30, 2012Carlos Hernán Zenteno de Los Santos

   Director

   April 5, 2012

   April 30, 2012José Antonio Guaraldi Félix

   Director

   April 5, 2012

   April 30, 2012
 Biographies of Our Board of Directors Oscar Von HauskeSolisis 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. B. 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. Rossana Fontenele Bertohas been a member of our board of directors since April 30, 2003. Ms. Berto has been Director of Strategic Planning of Globo (and prior to their restructuring, of TV Globo and Globopar) since 2002. Prior to that, Ms. Berto was the Managing Director of Sky Brasil from 1999 to February 2002, General Director of Net Rio from 1998 to 1999 and Controller of Multicanal from 1993 to 1998. She is also a board member of Sky Brasil.She holds a B.A. degree from Universidade do Estado do Rio de Janeiro and a MBA degree from Coppead/UFRJ (Rio de Janeiro, Brazil). Jorge Luiz De Barros Nóbregahas been a member of our board of directors since April 2004 and has served as Chairman of the board of directors since that time. Prior, he served as an alternate member for the Chairman of our board of directors. Mr. Nóbrega is Director of the Corporate Center at Organizações Globo and New Media, Radio and Publishing Director. He joined Organizações Globo in 1998 as Strategic Coordination Director. Previously, he held executive positions at Mesbla, a Brazilian retailing group, and Xerox and headed his own consulting firm for 4 years. He graduated in Business Administration from EBAP/Fundação Getúlio Vargas and holds a M.Sc. Degree in Industrial Engineering/Corporate Planning from Universidade Católica do Rio de Janeiro.


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Carlos Henrique Moreirahas been a member of our board of directors since April 29, 2005. Currently he is 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 Martínezhas been a member of our board of directors since April 29, 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. His previous positions include Executive Officer at Telguas S.A, Managing Director at Cablevisión and operations manager and sales manager at Condumex.

Mauro Szwarcwaldhas 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.

Luiz Tito Cesarolihas been the CEO of Cesaroli Telecomunicações since 2009, in addition to acting as a member of the Board of Directors of Anatel from 1999 to 2003. Before joining Anatel, he worked as an engineer with Embratel from 1983 to 1995 and has held positions as an engineer with a number of other telecommunication companies throughout his career, including Telesp and Standard Electrica.  Mr. Cesaroli studied engineering at Universidade Federal do Rio de Janeiro (UFPJ) and Electrical Engineering at Universidade Gama Filho.

Isaac Berensztejnhas 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 Filhois 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 thePontifical 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.





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Antonio João Filhoheld 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 Santosstarted 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. José Antônio Guaraldi Félixbecame 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 Board We maintain a permanent Fiscal Board, 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 votingshares 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.


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Name

   

   Position

   

   Position Held Since

   

   Current Term ExpiresMartin Roberto Glogowsky

   

   Chairman,Conselho Fiscal

   

   July 12, 2005

   

   April 30, 2012Fernando Carlos Ceylão Filho

   

   Director

   

   October 2, 2008

   

   April 30, 2012Eraldo Soares Peçanha

   

   Director

   

   April 5, 2012

   

   April 30, 2012
 Martin Roberto Glogowskyhas 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 Boards and Audit Committees for BM&FBovespa’s Novo Mercado companies. He holds a B.A. degree in Law from the Pontifícia Universidade Católica de São Paulo and a Business Administration degree from the Fundação Getúlio Vargas. Fernando Carlos Ceylão Filhohas been a member of ourConselho Fiscalsince October 2008. 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.  Eraldo Soares Peçanhais currently an associate consultant, working in Corporate Governance, Financial Processes, Controllership, Asset Management and Investor Relations areas in small-sized consulting. Between 2008 and 2011, Mr. Peçanha was Customer Service Executive Officer, in charge of Icatu Seguros’ operations area, and Controllership Officer and Corporate Governance Executive Officer at Embratel between 2003 and 2008. He worked at CSN between 1996 and 2003 as General Controllership Superintendent.  Mr. Peçanha was a sitting member of the Fiscal Council of Companhia Vale do Rio Doce from 1997 to 2000 and Ferrovia Centro-Atlântica and Itá Energética in 1999 and 2000.  Mr. Peçanha also worked at Aracruz Celulose from 1974 to 1996, as well as Lowndes and BANERJ banks from 1970 to 1974.  He holds a degree in Accounting and Business Administration from Cândido Mendes University, Rio de Janeiro. 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 three executive officers. In addition, we currently employ three senior managers that make significant contributions to our business.


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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 Officer

   February, 2012

   February, 2014Daniel Feldmann Barros

   Chief Operating Officer

   February, 2012

   February, 2014
 José Antônio Guaraldi Félixbecame 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 Cardosohas 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 Rodrigo Marques de Oliveirahas 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 Barroshas 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.


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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, the 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, 2011, 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$ 7.2 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, 2011, we had 16,668. At December 31, 2010 and 2009, we had 15,746 and 14,629 employees, respectively.We believe that our relations with our employees and the labor union 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.” 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 includes 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 2011, we reached substantially all pre-determined goals, and amounts under the PPR were paid on February 17, 2012.


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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 26, 2012, none of our outstanding common shares and approximately 0.5 % of our outstanding preferred shares were held in the form of ADSs. On April 26, 2012, there wereapproximately3,500 record holders of our preferred shares, including in the form of ADSs, in the United States. Our controlling shareholder is Telmex Group that on April 26, 2012 held92.2% of our common shares. During the three-month period ended March, 31, 2012, Embrapar acquired our indirect control, as a result of the conclusion of the acquisition of 1,077,520 common shares issued by GB, which has our direct control, 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. Due to the exercise of the Option, Embrapar and its subsidiary Embratel, held a combined 10,612,011 common shares issued by GB, representing 54.5% of the voting capital of GB, and 38,916,293 preferred shares, representing 100% of GB’s preferred shares, as of April 26, 2012. As a result of the acquisition, Embrapar and Embratel directly and indirectly own through GB, 92.2% of our total capital, as of April 26, 2012. Telmex Internacional 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 Telmex Internacional, 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, 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. On March 6, 2012, Embrapar announced that it intends to launch a unified tender offer for the acquisition of all common and preferred shares issued by us, including the shares represented by American Depositary Shares and the shares traded on LATIBEX (“Tender Offer”). The Tender Offer will comprise the following events:  1 – Public tender offer through sale of control, as a result of the exercise of the Option, pursuant to Article 254-A of Law 6,404/76 and item 8.1 of the Corporate Governance Listing Rules for Level 2 of BM&FBOVESPA (“Change of Control Offer”);  2 – Public tender offer for our delisting from Level 2, pursuant to item 11.2 of the Corporate Governance Listing Rules for Level 2 of BM&FBOVESPA (“Level 2 Delisting Offer”); and  78


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3 – Public tender offer for our deregistration as a publicly-held company with CVM, pursuant to Article 4 of Law 6,404/76 and item 10.2 of the Corporate Governance Listing Rules for Level 2 of BM&FBOVESPA (“Deregistration Offer”).  The Tender Offer is: (a) subject to CVM’s registration and approval of the adoption of procedures for the unification of the offerings; and (b) conditioned upon the provisions set forth in the paragraphs below.  In accordance with item 10.3 of the Corporate Governance Listing Rules for Level 2 of BM&FBOVESPA, Embrapar announced that the maximum price it will pay in the Tender Offer, per our common or preferred shares (“Maximum Price”), is R$26.04 per share, adjusted in accordance with the variation of the CDI (“Interbank Certificate of Deposit”) from March 5, 2012 until the date on which an appraisal report, prepared in compliance with item 10.1.1 of the Corporate Governance Listing Rules for Level 2 of BM&FBOVESPA, is issued (“Appraisal Report”). The Maximum Price will serve as the reference price for whether Embratel will be required to conduct (i) the Level 2 Delisting Offer and (ii) the Deregistration Offer. In the event that the price of our shares, calculated pursuant to the Appraisal Report, exceeds the Maximum Price, Embrapar reserves the right to cancel the Deregistration Offer and/or the Level 2 Delisting Offer, maintaining solely the Change of Control Offer, pursuant to Article 254-A of Law 6,404/76 and item 8.1 of the Corporate Governance Listing Rules for Level 2 of BM&FBOVESPA.  On April 5, 2012, our shareholders approved: (a) Banco BTG Pactual S.A. as the specialized company that will prepare the Appraisal Report; (b) our delisting from Level 2, subject to thecompletionof the Tender Offer; and (c) our deregistration as a publicly-held company with CVM, subject to thecompletionof the Tender Offer. Embrapar intends to conduct studies before the Appraisal Report is finalized, in order to analyze the possibility of a corporate reorganization involving us, GB and its subsidiaries to take advantage of synergies and other benefits. As of April 26, 2012, GB is our controlling shareholder, holding 51.0% of our common shares. Telmex Group, in turn, holds a controlling interest in GB. 79


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The following table sets forth, as of April 26, 2012, 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 EquityName

   Number

   Percentage

   Number

   Percentage

   Number

   PercentageGlobo Comunicação e Participações S.A.

   11,855,947

   10.4%

   1,000

   0.0%

   11,856,947

   3.5%GB Empreendimentos e Participações S.A.(1)

   58,374,440

   51.0%

   –

   –

   58,374,440

   17.0%Empresa Brasileira de Telecomunicações S.A

   2,580,655

   2.2%

   210,838,097

   92.2%

   213,418,752

   62.2%Embratel Participações S.A.

   40,928,401

   35.8%

   12,242,351

   5.4%

   53,170,752

   15.5%
 (1)Empresa Brasileira de Telecomunicações S.A. and Embratel Participações S.A., controlled by Telmex Internacional, hold 54.5% of the voting interests of GB and 100% of the non-voting interests of GB, a special purpose company, and Globo Group holds 45.5% of the voting interests of GB. As of April 26, 2012, Globo held, directly, 10.4% of our voting capital and Globo Group held 45.5% of the voting capital of GB. Globo is a Brazilian holding company controlled by the Marinho family with operations in broadcast television, pay-television programming, magazine publishing and printing and interests in cable and satellite television. As of April 26, 2012, non-affiliates owned 0.6% of our common shares and 2.4 % of our preferred shares, representing 1.8% of our total capital stock. Shareholders’ Agreements Grupo Globo, Embratel, Embrapar and GB, together with Telmex Internacional, entered into our shareholders’ agreement, and Grupo Globo and Telmex Internacional entered into a separate shareholders’ agreement with respect to GB, which we refer to as the “GB 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 GB, rights of first refusal, and governance, including the right of each of Grupo Globo, Telmex Internacional and GB to appoint members to our board of directors and board of executive officers. Grupo Globo and Embratel are currently reviewing the shareholders’ agreement to reflect certain restrictions imposed by Law12,485. Right of first refusal and transfer of shares.The shareholders’ agreements establish specific rules for the transfer of our shares and GB shares. In the event that one of the shareholders party to the shareholders’ agreements intends to transfer its shares, such shareholder is required to notify in writing the other shareholders party to the shareholders’ agreements in order to enable them to exercise their right of first refusal. Under the shareholders’ agreements, transfers to our 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 our shares or the shares of GB, except under limited circumstances.


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Previous meetings.The shareholders’ agreements provide that a previous meeting of the representatives of Grupo Globo and Telmex Internacional must be held prior to each of our, or any of our subsidiaries’, general shareholders meetings or board of directors meetings at which a material matter is to be considered. The previous 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. Material matters (as described below) must be approved at a previous 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 previous meeting. Material matters. The shareholders’ agreements require the approval of Grupo Globo, at a previous meeting as described above for specified material matters. These material matters include certain extraordinary corporate transactions relating to us, including certain business combinations, the disposition or acquisition of assets in excess of specified thresholds and dissolving or liquidating us; changes to specified commercial arrangements to which we are party, including certain programming and network arrangements, affiliate transactions and pay-television concession matters; and other matters such as deregistering us as a public company, changing our corporate purpose and determining the compensation and benefits of our key employees. The approval rights are subject to Grupo Globo maintaining specified minimum levels of shareholdings in Net Serviços. Tag-along rights.Under the shareholders’ agreements, in the event of a sale of control of us by any shareholder party to the shareholders’ agreements, the purchaser must agree to undertake a public offering to purchase the shares of the remaining shareholders within a period of no more than 90 days at the same price and under the payment conditions offered to the selling shareholder. Furthermore, in the event that one of the shareholders party to the shareholders’ agreements disposes of all or any part of its common shares or its GB shares, as the case may be, the other shareholders party to the shareholders’ agreements will have the right to require such selling shareholder to include in the sale such other shareholders’ common shares or GB shares, subject to the same price and payment conditions; provided that, if the number of common shares or GB shares, as the case may be, exceeds the number of shares the purchaser is willing to acquire, the number of common shares or GB shares, 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 our board of directors be comprised of eleven sitting members and an equal number of alternate members, all of whom must be shareholders of Net Serviços. Based on current share ownership, one sitting member and one respective alternate member are appointed directly (and can be dismissed) by Grupo Globo, six sitting members and six respective alternate members are appointed (and can be dismissed) by GB (one of which will be appointed by Globo, according to the current ownership), which is controlled by Telmex Internacional, and three sitting members and three respective alternate members are appointed (and can be dismissed) by Embratel and Emprapar, which are controlled by Telmex Internacional. Additionally, in accordance with BM&FBovespa Level 2 listing requirements, two sitting members and two respective alternate members must be appointed by a non‐controlling preferred shareholder. Grupo Globo’s right to appoint directly or through GB members of the board of directors is subject to Grupo Globo maintaining specified minimum levels of shareholdings in Net Serviços. Additionally, in the event that shareholders that are not parties to the shareholders’ agreement become entitled to representation on our board of directors, the total number of members of our board of directors will be recalculated, but in no event shall our board of directors be comprised of fewer than eleven members. Furthermore, shareholders owning more than 50% ofthe common shares subject to the shareholders’ agreements will always be entitled to appoint (and remove) at least a majority of the members of our board of directors.


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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 will be comprised, except under certain circumstances, of the following three executive officers: (i) Chief Executive Officer, (ii) Chief Operating Officer and (iii) Chief Financial Officer. Telmex Internacional has expressly the right to appoint and remove the Chief Operating Officer. Otherwise these officers are appointed, and may be removed by, any shareholder that has control of over 50% of the total amount of our common stock governed by the shareholders’ agreements. After the exercise of the Option, Embrapar has, in practice, the right to appoint and remove all such officers. Business covenants.Under the shareholders’ agreements and subject to certain ownership requirements, Emprapar will agree not to, and not to cause a related party to, own, conduct or participate in the management of any broadcast television or pay-television distribution platform (other than ours and except under certain circumstances) or content production businesses (other than those specified in the shareholders’ agreements) in Brazil. Term.The shareholders’ agreements shall be valid and effective so long as each of Grupo Globo and Embrapar owns (including through GB according to a formula incorporating adjusted interest), directly or indirectly, at least 153,759,717 (10,250,648 given the reverse split effective on August 1, 2006) of our common shares, irrespective of the percentage ownership represented by such common shares. Other.Under certain circumstances, Grupo Globo may exchange our common shares or its GB shares for preferred shares issued by us. In the case of an exchange of our common shares, the ratio for exchange will be one common share to one preferred share. In the case of an exchange of GB shares, the number of preferred shares to be delivered to Grupo Globo will be determined according to a formula incorporating adjusted interest. In either type of exchange, all shareholders party to the shareholders’ agreements are required to waive their rights of first refusal and tag-along rights, as the case may be. 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 Affiliates Net Brasil Programming Agreement Net Brasil is wholly owned by Grupo Globo. On June 27, 2004, we entered into an amended and restated programming agreement with Net Brasil whereby we obtain all of our programming from Brazilian sources through Net Brasil. We obtain directly, for our own account and benefit, all international content from sources outside of Brazil. The amended and restated 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. We pay Net Brasil a fixed brokerage service fee equal to R$154,412 per month, adjusted by the Consumer Price Index.


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On June 27, 2004, we also entered into a licensing agreement with Net Brasil, whereby Net Brasil grants us the right to use the “NET” brand name for 10 years from the date of effectiveness and, in the case of termination, for an additional 30 months from the date of termination. On December 16, 2005, we entered into an amended agreement with Net Brasil whereby we extended the term of the current licensing agreement until 2015. Although with respect to Brazilian programming Net Brasil provides us with exclusive cable-television rights in our licensed areas, it also provides programming to Sky Brasil, a satellite-television provider that competes directly with us and in which Globo owns a interest. In addition, much of the programming that we purchase through Net Brasil is produced by Globosat Programadora Ltda., or Globosat, which is wholly-owned by Globo, and its affiliates. The shareholders’ agreement between Grupo Globo, Embratel, Emprapar, GB and Telmex Internacional provides that our board of directors must approve alterations in certain of our programming arrangements and transactions with affiliates. Furthermore, if Grupo Globo and Telmex Internacional are entitled to elect at least one member to our board of directors, any alterations in these same programming arrangements and transactions with affiliates must also be approved by such directors. See “—Shareholders’ Agreements.” Pursuant to our programming agreements with Net Brasil, we recognized expenses of R$1,087.7 million to Net Brasil in 2011, including programming from Globosat and the brokerage fee. Our liabilities to Net Brasil 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. Programming Guide Our programming guide is produced by Editora Globo S.A., or Editora, a publishing company affiliated with Globo. In 2011 and 2010, we recognized expenses of R$6.1 million and R$11.8 million, respectively, 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.


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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 sales from fixed line telephony services and small and medium business services amounted to R$572.7 million and R$451.1 million for the years ended December 31, 2011 and 2010, 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 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 elected to defer both our rental expenses to Embratel and our rental revenue from Embratel under the IRU agreements. Such amounts will be recognized monthly over the term of the IRU agreements. 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$531.9 million in 2011 and R$370.7 million in 2010. 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, i.e., 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.


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Financing Arrangements with Affiliates Globotel Participações S.A. As a result of certain ownership reorganization among companies controlled by Grupo Globo, on August 31, 2001, our extraordinary shareholder meeting approved the down-stream merger of Globotel Participações S.A., a subsidiary of Roma Participações Ltda., or Romapar, with us. With this merger, we succeeded the merged company in the right of amortizing for Brazilian local statutory and tax purposes a premium of R$452.2 million generated at the acquisition of its ownership in us and certain of our subsidiaries. The amortization of this premium for local statutory purposes results in future tax benefits for us and our subsidiaries over an estimated period of up to six years. As compensation for benefits realized we issued to Romapar: (i) on December 9, 2005, 2,647,107 common and 3,842,018 preferred shares, at a price corresponding to R$13.20 per share; (ii) on May 18, 2006, 1,771,730 common and 2,571,494 preferred shares, at a price corresponding to R$17.10 per share; (iii) on February 1, 2007, 1,146,354 common and 1,881,774 preferred shares at a price corresponding to R$23.25 per share; (iv) January 31, 2008, 1,229,387 common and 2,454,256 preferred shares at a price corresponding to R$19.92 per share; and (v) February 17, 2009, 1,408,161 common and 2,816,320 preferred shares at a price corresponding to R$13.96 per share. Loan Agreement with Banco Inbursa S.A. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resorces–Debt Financing–Loan and Guaranty Agreement.” ITEM 8.          FINANCIAL INFORMATION. Our audited consolidated financial statements as of December 31, 2011 and 2010 and for the years ended on December 31, 2011, 2010 and 2009 are included elsewhere in this Form 20-F.. No significant change has occurred since the date of our audited consolidated financial statements as of and for the year ended December 31, 2011. 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.


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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

   High2007

   19.69

   34.67

   10.76

   18.702008

   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

   14.20Quarter2010:First Quarter

   20.92

   25.11

   11.19

   14.76Second Quarter

   16.91

   23.49

   9.10

   13.28Third Quarter

   16.76

   22.95

   9.40

   13.26Fourth Quarter

   21.56

   23.14

   12.77

   13.982011: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

   10.94


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|                               | BM&FBovespa

   R$ per preferred share | NASDAQ

   US$ per ADS
|------------------------------ | -------------------------------------- | ----------------------
|Month                          |                                        |                       
|                               |                                        |                       
|October 2011                   | 14.42                                  | 18.50                 
|November 2011                  | 17.21                                  | 18.20                 
|December 2011                  | 16.85                                  | 18.88                 
|January 2012                   | 18.16                                  | 22.00                 
|February 2012                  | 19.50                                  | 24.00                 
|March 2012                     | 23.50                                  | 26.49                 
|April 2012 (through April, 26) | 25.80                                  | 26.50                 
|                               |                                        |                       

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, 2011, there were 1.4 million ADSs outstanding. The average daily trading volume of the ADSs on the NASDAQ Global Market during 2011 wasUS$44,000 or 4,600 ADSs. 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 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 corporatelaw, 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 complying with Rule 5605(c), we follow Brazilian corporate law and we maintain a permanent Fiscal Board, orConselho Fiscal. OurConselho Fiscalcomplies with the requirements of Rule 10A-3 of the Exchange Act. 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. Brazilian Stock Exchanges In 2000, Brazilian stock exchanges were reorganized through the execution of a memorandum of understanding. Pursuant to the memorandum, all securities are now traded only on the BM&FBovespa, with the exception of electronically traded public debt securities and privatization auctions, which are traded on the Rio de Janeiro Stock Exchange. In 2011, the BM&FBovespa accounted for 100% of the trading volume of equity securities. The BM&FBovespa is a non-profit entity owned by its member brokerage firms. Trading on the BM&FBovespa is limited to member brokerage firms and a limited number of authorized non-members.


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Trading. Trading is conducted between 11:00 a.m. and 6:00 p.m., or between 10:00 a.m. and 5:00 p.m. during daylight savings time in the United States, on an automated system known as the Computer Assisted Trading System on the BM&FBovespa and on the National Electronic Trading System. The BM&FBovespa also permits trading from 6:45 p.m. to 7:30 p.m. on an online system connected to traditional and Internet brokers called the “After Market.” Trading on the After Market is subject to regulatory limits on price volatility and on the volume of shares transacted through Internet brokers. There are no specialists or officially recognized market makers on the BM&FBovespa. Trading in securities listed on the Brazilian stock exchanges may be effected off the exchanges in certain circumstances, although such trading is very limited. In order to better control volatility, the BM&FBovespa adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the BM&FBovespa Index, or Ibovespa, falls 10% or 15%, respectively, in relation to the index registered in the previous trading session. If you were to trade in our shares on the BM&FBovespa, settlement of transactions would be effected three business days after the trade date without adjustment of the purchase price for inflation. Delivery of and payment for shares are made through the facilities of a clearinghouse, orCâmara Brasileira de Liquidação e Custódia S.A., which maintains accounts for member brokerage firms. The seller is ordinarily required to deliver shares to the exchanges on the second business day following the trade date. Market Size. As of December 31, 2011, the aggregate market capitalization of all the companies listed on the BM&FBovespa was equivalent to approximately R$1.6 trillion. Although any of the outstanding shares of a listed company may trade on a Brazilian stock exchange, in most cases fewer than half of the listed shares are actually available for public trading. The remaining shares are held by small groups of controlling persons, by governmental entities or by one principal shareholder. Although at December 31, 2011 the Brazilian equity market was Latin America’s largest in terms of market capitalization expressed in U.S. dollars, it remains relatively small and less liquid compared to major world markets. In 2011, the average daily trading value on the BM&FBovespa was to approximately R$6.5 billion. Index. Net Serviços has been included as part of the Ibovespa since May 2000. The Ibovespa is the most representative indicator of the performance of the Brazilian stock market. In 2011, Net Serviços was excluded from Ibovespa. Our securities also trade on several additional markets, including the Chicago, Pacific and American option exchanges, on which our options on ADSs began trading in February 2000, and Latibex, the trading market for Latin American companies that trade on the Madrid Stock Exchange, on which our shares began trading in July 2000. 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:


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·appoint a representative in Brazil with power to undertake acts relating to the investment; ·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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Level 2 of the BM&FBovespa On December 11, 2000, the BM&FBovespa launched three new listing segments designed for the trading of shares issued by publicly held companies: the Special Corporate Governance Level 1, the Special Corporate Governance Level 2 and theNovo Mercadoof BM&FBovespa. These listing segments were designed for the trading of shares issued by companies that voluntarily undertake to abide by corporate governance practices and disclosure requirements in addition to those required under Brazilian corporate law. Some of the rules applicable to Level 2 were amended on May 2011. The inclusion of a company in any one of the segments implies the adherence to a series of corporate rules, known generally as good corporate governance practices. These rules are designed to increase shareholders’ rights and enhance the quality of information provided by Brazilian corporations to shareholders. Our shares have been listed in BM&FBovespa’s Level 2 since June 2002. Pursuant to Level 2 requirements, we are required to adopt certain practices as part of our corporate structure. We have adopted such practices as follows: Preferred Shares with Voting Rights. In accordance with Level 2 rules, we have established, voting rights in relation to our preferred shares with respect to: ·our transformation, takeover, merger or spin-off; ·valuation of assets used in increases in our share 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. Tag-Along Rights. Upon the acquisition of a controlling interest in us, pursuant to Level 2 requirements, the purchaser must offer tag-along rights to the remaining shareholders in an amount equivalent to 100% of the price paid for each share in the controlling stake, for holders of common or preferred shares. Prior to the changes implemented in May 2011, the obligation was to extend 100% of the price paid to holder of common shares and 80% to holders of preferred shares. Our by-laws already required the purchaser to offer 100% of the price paid for each share in the controlling stake to holders of our common and preferred shares. Establishment of a single one year mandate for the entire board of directors. Level 2 establishes unified mandate for all members of Board of Directors. Board of Directors must have at least five members, of which at least 20% shall be independent members. Our by-laws provide that our board of directors shall be composed of no fewer than nine and no more than twelve members elected at an annual general meeting of shareholders, each to serve for a one year term, with the option for reelection.


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Free float. Level 2 requires that at all times at least 25% of an issuer’s total capital stock be held by persons or entities other than those party to a shareholders’ agreement. Independent Board members. Level 2 requires that at least 20% of our board members be independent. We have been in compliance with this requirement since this requirement was implemented. Public offers of shares through mechanisms intending to favor capital dispersion and broader retail access. In any and all public distributions of stock, Level 2 requires us to exert our best efforts towards shareholding dispersion. Toward this end, we have adopted special procedures to ensure, in any public offer of our shares by us, (i) access to all interested investors and (ii) allocation of at least 10% of the total distribution to individuals or non-institutional investors. Improvements, in addition to quarterly information statements. In addition to the information to be included in quarterly information statements as required by law, Level 2 requires us to, and we do: ·present a consolidated balance sheet, a consolidated statement of results, a consolidated cash flow statement and a consolidated performance report, whenever we are required to submit year-end consolidated financial statements; ·disclose any direct or indirect ownership interest per type and class exceeding 5% of each type and class of our capital stock, to the level of individual shareholders; ·disclose, on a consolidated basis, the quantity and class of those of our securities held, directly or indirectly, by our controlling shareholders, by members of our board of directors, by our executive officers and by the members of ourConselho Fiscal; ·report any trades of securities held by our controlling shareholders, by members of our board of directors, by our executive officers and by the members of ourConselho Fiscalwithin the preceding twelve months; ·include, in explanatory notes, our cash flow statements; and ·disclose the quantity of our outstanding shares and the percentage expressed in relation to the total amount of shares issued. Furthermore, under Level 2, each fiscal quarter a quarterly information statement must be filed with CVM. The quarterly information statement must include a special report issued by an independent auditor duly registered with CVM, in accordance with CVM regulations. Trading of securities and derivatives by members of our board of directors and Conselho Fiscal, executive officers and controlling shareholders. Pursuant to Level 2 requirements, members of our board of directors andConselho Fiscal, executive officers and controlling shareholders are obligated to report to BM&FBovespa the volume and the class of our securities held by them, directly or indirectly, including any related derivatives. Any trades in securities and derivatives by such persons are reported in detail to BM&FBovespa within ten days as of the last day of the month in which such trade occurs.


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Self-regulatory procedures. We have an internal management committee that adopts internal policies with respect to trading in our securities and related derivatives. This committee has passed the following resolutions: ·from one month before the end of each fiscal year until the publication of the notice to shareholders regarding the availability of our financial statements for such year, our senior managers and controlling shareholders are obligated to abstain from trading in our securities and related derivatives; ·following a decision to raise capital, distribute dividends to shareholders, distribute bonuses in shares or related derivatives or adopt a share split, until the publication of the notice announcing such decision, our senior managers and controlling shareholders are obligated to abstain from trading in our securities and related derivatives; and ·our senior managers and controlling shareholders are obligated to periodically inform BM&FBovespa and us of their plan to trade in our securities and related derivatives, and if such plan changes, they are required to notify BM&FBovespa and us of the change. Shareholder agreement, stock option program and contracts with the same economic group. Upon entering into a shareholders’ agreement with us, Level 2 mandates that within five days of such signature, we file with BM&FBovespa a copy of the agreement. Similarly, a copy of all option plans for our employees and administrators are also to be filed with BM&FBovespa within five days. In addition, whenever a single contract or a series of related contracts within any twelve month period, between ourselves and a subsidiary, senior manager or controlling shareholder, involves an amount equal to or greater than R$200,000 or involves an amount equal to or greater than 1% of our net worth, we are required to notify BM&FBovespa of this fact and make a public disclosure of such contract or series of contracts. Resolution of corporate conflicts through arbitration. Under Level 2, we, our controlling shareholders, senior managers and, to the extent we establish aConselho Fiscal, the members of suchConselho Fiscal,are required to refer to arbitration any and all disputes or controversies relating to the enforcement, validity, efficacy, violation and related effects of: (a) the provisions in the Brazilian corporate law and in our by-laws, (b) the rules issued by the National Monetary Council, the Central Bank and the CVM, (c) all other rules governing capital markets in general, and (d) the directives in the BM&FBovespa listing rules, arbitration rules and the corporate governance Level 2 agreement. As mentioned above, the Level 2 corporate governance requirements of the BM&FBovespa were amended, effective as of May 10, 2011.  In addition to the tag-along rights, the main changes to the Level 2 corporate governance requirements of the BM&FBovespa  include that (i) the company may not establish in its by-laws provisions that limit the number of votes of shareholders at a percentage less than 5% of the capital, except in cases of privatization or limits that are required by law or regulation applicable to the activity performed by the company, (ii) the by-laws shall not have any provision that requires a qualified quorum to the resolution derived from matters that must be submitted to the general meeting, (iii) the by-laws shall not prevent the exercise of voting for or impose burdens to shareholders ("cláusula petrea") (iv) the by-laws shall not permit the accumulation of positions of chairman of the Board of Directors and CEO, (v) the Board of Directors shall issue an opinion,within 15 days from the announcement of a tender offer relating to the acquisition of shares issued by the company, taking into consideration the interests of all shareholders, and (vi) the company shall develop and disseminate a policy for securities trading and code of conduct.


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On April 5, 2012 the Company's shareholders approved the amending of its by-laws to comply with the new Level 2 corporate governance requirements of the BM&FBovespa . Regulation of Brazilian Securities Markets The Brazilian securities markets are principally governed by (i) Law No. 6,385, of December 7, 1976, and Law No. 6,404, of December 15, 1976, which together, as amended and supplemented, comprise Brazilian corporate law and (ii) regulations issued by (a) the CVM, which has general regulatory authority over the stock exchanges and securities markets, (b) the National Monetary Council and (c) the Central Bank, which has licensing authority over financial institutions, including brokerage firms and also regulates foreign investment, the BM&FBovespa and foreign exchange transactions. Such regulations, among others, relate in part to disclosure requirements applicable to issuers of publicly traded securities, the protection of minority shareholders and criminal penalties for insider trading and market manipulation. They also provide for the licensing and oversight of brokerage firms and the governance of the Brazilian stock exchanges. Under Brazilian corporate law, a company is eithercompanhia aberta, or publicly held, as we are, orcompanhia fechada, or closely held. All public companies, including us, are registered with the CVM and are subject to certain reporting requirements. A company registered with the CVM may have its securities traded on the Brazilian stock exchanges or in the Brazilian over-the-counter market. Our preferred shares are listed and traded on the BM&FBovespa and may be traded privately, subject to some limitations. Issuers may request that trading of their securities on the BM&FBovespa be suspended in anticipation of a material announcement. Trading may also be suspended at the discretion of the BM&FBovespa or the CVM due to, among other things, a belief that an issuer has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the BM&FBovespa or the CVM. The Brazilian over-the-counter market consists of direct trades between individuals wherein a financial institution registered with the CVM serves as an intermediary. No special application, other than registration with the Brazilian securities commission, is necessary for securities of a public company to be traded in this market. The CVM requires that notice be given to it of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries. Trading on the BM&FBovespa by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation Shareholders who are not residents of Brazil must register their investment with the Central Bank in order for dividends, sales proceeds or other amounts to be eligible for remittance in foreign currency outside of Brazil. The preferred and common shares underlying our ADSs are deposited with a Brazilian custodian, who acts on behalf of and as agent for the depositary of the ADSs, and who is registered with the Central Bank as the fiduciary owner of such shares. Payments of cash dividends and distributions, if any, on common and preferred shares will be made in reais to the custodian on behalf of the depositary. The custodian will then convert such proceeds into U.S. dollars and will deliver such U.S. dollars to the depositary for distribution to the holders of ADSs. In the event that the custodian is unable to immediately convert the dividends in reais into U.S. dollars, holders of the preferred and common ADSs may be adversely affected by devaluations or other exchange rate fluctuations before suchdividends can be converted and remitted. Fluctuations in the exchange rate between the real and the U.S. dollar may also affect the U.S. dollar equivalent of the real price of the preferred and common shares on the BM&FBovespa.


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The proceeds from the redemption of ADSs may, within five business days from the date of the relevant redemption, be remitted abroad in compliance with the foreign exchange regulatory provisions. Alternatively, the foreign investor may convert the previous ADSs investments into another type of authorized foreign investment, such as foreign direct investment or portfolio investment. Additionally, according to CMN Resolution No. 3,845, dated March 23, 2010, such conversions are subject to simultaneous foreign exchange transactions and the taxes that may be levied thereon. Trading in Brazilian securities markets is not as highly regulated or supervised as it is in the United States and some other markets. Brazilian securities market laws and regulations prohibit market manipulation and insider trading, and require a company’s insiders, including directors, officers and major shareholders, as defined under Brazilian corporate law, to disclose all of their transactions in a given issuer’s securities. Brazilian corporate law also prohibits an issuer from trading in its own shares, subject to very limited exceptions. The enforcement of these legal provisions and the supervision of trading markets, however, are not as well developed as they are in the United States. 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 preferredshare 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:


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·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. 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:


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·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. 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.”  97


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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. 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: ·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. 98


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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. 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 require 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 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.” In accordance with Article 126 of the Brazilian corporate law, 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 total capital stock of a company, if such acquisition of shares was not already effected through a public offering.


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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. 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, 2011, our capital stock amounted to R$5.6 billion, of which R$12.9 million has not been paid in. As of December 31, 2011, 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 effected 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. Changes to Brazilian Corporate Law and Rules Enacted by CVM On October 31, 2001, Law No. 10,303 was passed by the Brazilian legislature amending Brazilian corporate law. Throughout 2001 and 2002, CVM also enacted new rules affecting Brazilian companies. As a result, companies are required to observe, and we adhere to, the following requirements: ·disputes among shareholders are subject to arbitration if so provided by the by-laws of the company. Our by-laws provide that disputes arising or related to (i) our by-laws, (ii) rules enacted by CVM, BM&FBovespa, the Brazilian Central Bank or the National Monetary Council, (iii) rules applicable to the Brazilian capital markets or (iv) Brazilian corporate law are subject to arbitration which shall occur in accordance with the Market Arbitration Chamber created by BM&FBovespa; ·upon a delisting or a substantial reduction in the liquidity of shares resulting from purchase(s) by controlling shareholder(s), a company must engage in a tender offer for all outstanding shares, at a purchase price equal to the fair market value for such shares. If less than 5% of all shares issued and outstanding have not been purchased by such controlling shareholder(s) after the expiration of such tender offer, holders of such shares may decide at a general meeting to redeem those shares for the offering price;


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·non‐controlling shareholders representing at least 15% of voting shares will have the right to elect by separate vote one member of the board of directors; ·non‐voting, non‐controlling shareholders representing at least 10% of the total capital shares will have the right to elect by separate vote one member of the board of directors; ·in the event of a change in control, the purchaser of the controlling stake must offer tag-along rights to all remaining holders of common shares in an amount equal to at least 80% of the price paid for each share of the controlling stake. Our by-laws, as allowed under Brazilian corporate law and in accordance with BM&FBovespa’s  Level 2 rules, 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; ·shareholders are entitled to effect a spin-off only if the spin-off reflects a change in the company’s corporate purpose, a reduction in mandatory dividends or the participation by the company in a centralized group of companies; ·controlling shareholders, the shareholders that elect members to the board of directors and audit committee, if any, the members of the board of directors and audit committee, if any, and executive officers are required to disclose any purchase or sale of a company’s shares to CVM and BM&FBovespa; ·the chairman of any shareholders’ meeting or board of directors or executive officers’ meeting is entitled to enforce the voting provisions of any shareholders’ agreement which has been duly filed with the company; and ·the first and second notices for shareholders’ meetings must be made fifteen and eight days, respectively, before such meeting, except that the CVM may also require the first notice 30 days before a shareholders’ meeting. On July 13, 2007, CVM issued CVM Rule No. 457 to require listed companies to publish their consolidated financial statements according to International Financial Reporting Standards, or IFRS, starting with the year ending December 31, 2010. On December 28, 2007, Law No. 11,638 was enacted and amended numerous provisions of the Brazilian corporate law relating to accounting principles and authority to issue accounting standards. Law No. 11,638 sought to enable greater convergence between Brazilian corporate law and IFRS. To promote convergence, Law No. 11,638 modified certain accounting principles of the Brazilian corporate law and mandated the CVM to issue accounting rules conforming to the IFRS. Additionally, the statute acknowledged a role in the setting of accounting standards for theComitê de Pronunciamentos Contábeis(the Committee for Accounting Pronouncements, or CPC), which is a committee of officials from the BM&FBovespa, industry representatives and academic bodies that has issued accounting guidance and pursued the improvement of accounting standards in Brazil. Law No. 11,638 permits the CVM and the Central Bank to rely on the accounting standards issued by the CPC in establishing accounting principles for regulated entities. On December 3, 2008, Medida Provisória No. 449 was issued by the President and, among other things, amended numerous provisions of the Brazilian corporate law, specifically accounting provisions. On May 27, 2009, Medida Provisória No. 449 was approved in the Congress and became Law No. 11,941. Law No. 11,941 states that companies are considered to be affiliated when the investing company has significant influence over the company it has invested in, meaningthat it holds or exercises the power to participate in the decisions of financial or operating policies of such company, without controlling it. Significant influence is presumed when the investor holds 20% or more of the voting shares of the investee, without controlling it.


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On December 11, 2008, CVM issued CVM Deliberation No. 560, which deals with disclosures regarding accounting standards applied to related party transactions and it is applicable to financial statements as of and for the year ended December 31, 2008. On December 7, 2009, CVM issued Instruction No. 480, establishing new rules for registration and reporting requirements to be met by issuers of securities. The following important rules of Instruction No. 480 include: (i) creation of two classes of issuers: (a) those authorized to negotiate any securities in regulated markets, and (b) those who cannot trade shares, depositary receipts of shares or any other securities convertible into shares of the issuer or give the holder the right to acquire such shares or certificates of shares; (ii) establishment of a new disclosure system, with the creation of the Reference Form to replace the Annual Information Form and adopting high standards of disclosure; (iii) consolidation of the rules and procedures of registration, suspension and cancellation of registration of securities; (iv) extension of the liability of directors; (v) creation of issuers named as "Emissor de Grande Exposição ao Mercado", which accelerates the approval process for a security offering; and (vi) creation of new criteria for foreign issuers to facilitate the issuance of Brazilian Depository Receipts. On December 17, 2009, CVM issued Instruction No. 481, which deals with information requests and public proxy to exercise voting rights in shareholder meetings. Instruction No. 481 establishes important changes to information disclosure requirements prior to the holding of general meetings of shareholders to vote on: (i) matters of special interest to related parties; (ii) elections of senior officers and officers; (iii) retirement plan status; (iv) setting remuneration for officers, including the highest, the lowest and the average individual income and share compensation; (v) capital increase or reduction; (vi) issuance of debentures and warrants; (vii) creation of preferred shares and changes in their characteristics; (viii) reduced mandatory dividend; (ix) acquisition of control of another company; and (x) choice of independent firm to evaluate the fair market value when there is a right of withdrawal. Instruction No. 481 also aims to incentivize participation of minority shareholders: (i) by permitting the use of public attorneys, whose costs should be partially or fully reimbursed by company; (ii) voluntary adoption of electronic proxy, thereby facilitating the participation of absent shareholders; (iii) rules to allow shareholders representing at least 0.5% of the total capital to nominate the candidates for election of the board of directors; and (iv) rules to abolish the obligation of the prior deposit of proxies at the company headquarters. Instruction No. 481 was enacted on January 1, 2010. On June 24, 2011, Law No.12,431 amended Law No. 6,404/76 among other laws. The changes in Brazilian Corporate Law prescribed by Law No.12,431 include the possibility for shareholders of public companies to vote without being present at meetings and for physical shareholder registries to be replaced by electronic registries in public companies, and still require further regulation by the CVM. Among other changes, the amended Brazilian Corporate Law no longer requires members of the board of directors to be shareholders of the company. Information disclosure under Brazilian Rules ·CVM Instruction 358/2002 and it subsequent amendments set forth the general rules for  disclosure of information to the market we have to comply with. These regulations include provisions which: ·determine which information must be filed with the CVM in the form of a notice to the shareholders or a "fato relevante" of a material fact. The "fato relevante" includes any controlling shareholder decisions that could influence the price of our securitiesand any controlling shareholder decision to trade, cease to trade, or exercise any rights under our securities;


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·determine the list of events which are considered material, including, among others: -­the signature, amendment or termination of shareholders’ agreements to which we are a party, or which have been registered in our records; ­-the entry or withdrawal of shareholders that have a financial, operational, technological or management collaboration agreement with us; ­-any authorization to trade our securities in any market, national or abroad; ­-any merger, consolidation or spin-off involving us or our affiliates; ­-any change in the composition of our capital stock; ­-any change in accounting criteria; ­-debt renegotiation; ­-any change in rights and advantages related to securities issued by us; ­-any acquisition by us of our shares to keep in treasury or cancellation, and their sale; ­-our profit or loss and the allocation of our cash dividends; ­-any execution or termination of an agreement, or failure on its implementation, when the expectation of its accomplishment is public's knowledge; and ­-the approval, change or abandonment of a project or delay in its implementation; ·in the event our executive officer in charge of investor relations does not carry out the required disclosure, extend the responsibility to make the required disclosure to our controlling shareholders, our management, the members of our fiscal council and to any member of a technical or consulting body created by our bylaws; ·extend confidentiality obligations related to undisclosed information to, in addition to our management and controlling shareholders, the members of any technical or consulting bodies created by our bylaws and our employees in charge of the issues considered relevant matters; ·disclose the information contained in material facts in all markets where our securities are traded; ·if we acquire a controlling participation in a company that has its securities traded in a market, disclose any intention to delist the company within the period of one year; ·fulfill disclosure requirements related to the acquisition and sale of relevant shareholder participations, or the acquisition and sale of our securities by our managing shareholders, members of our fiscal council or any member of a technical or consulting body created by our bylaws; and ·before a material fact is publicly disclosed, prohibit the trading of our securities by our direct and indirect controlling shareholders, officers, members of our board of directors, fiscal council and any technical or advisory committees or whomever by virtue of their position has knowledge of information related to the material fact.


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·Under CVM rules, we are also required to disclose a series of additional details to the market if our general shareholders meeting is called to decide on an absorption, merger, or split. 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. Net Brasil Programming Agreement On June 27, 2004, we entered into an amended and restated programming agreement with Net Brasil whereby we obtain all of our programming from Brazilian sources through Net Brasil whereas we obtain directly all international content from non-Brazilian sources. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Affiliates—Net Brasil Programming Agreement.” Embratel Indefeasible Right of Use Agreements See Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Affiliates—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 Affiliates—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 Affiliates—Optical Fiber Lease Agreement.” Exchange Controls Until March 2005, there were two legal foreign exchange markets in Brazil, the commercial rate exchange market, or the Commercial Market, and the floating rate exchange market, or the “Floating Market. The Commercial Market was reserved primarily for foreign trade transactions and transactions that generally required prior approval from Brazilian monetary authorities, such as the purchase and sale of registered investments by foreign persons and related remittances of funds abroad. The Floating Market rate generally applied to specific transactions for which Central Bank approval was not required. Both the Commercial Market rate and the Floating Market rate were reported by the Central Bank on a daily basis. The changes to the foreign exchange regulation described below were intended to make foreign exchange transactions simpler and more efficient. On March 4, 2005, the Brazilian National Monetary Council issued Resolution 3,265, introducing several changes in the Brazilian foreign exchange regime, including: (i) the unification of the foreign exchange markets into a single foreign exchange market, called the foreign exchangemarket, for all transactions effective as of March 14, 2005; (ii) the easing of several rules for the acquisition of foreign currency by Brazilian residents; and (iii) the extension of the term for converting foreign currency derived from Brazilian exports. It is expected that the Central Bank will provide further easing of regulations in relation to foreign exchange transactions as well as on payments and transfers of Brazilian currency between Brazilian residents and non-residents (such transfers being commonly known as the international transfer of reais), including those made through the so-called non-resident accounts (also known as CC5 accounts).


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Additionally, on March 9, 2005, the Central Bank issued Circular 3,280, containing the regulations for the foreign exchange market and for international investments, which governs the Brazilian foreign exchange market, Brazilian investments abroad and foreign investment in Brazil. On July 1, 2008, Resolution No. 3,568 revoked Resolution No. 3,265, but kept its main innovation concerning the consolidation of the foreign exchange markets. Therefore, transactions involving foreign currency in the Brazilian market, whether carried out by investors resident or domiciled in Brazil or investors resident or domiciled abroad, must be conducted on this exchange market, through institutions authorized by the Central Bank, subject to the rules of the Central Bank. Foreign currencies may be purchased only through a Brazilian bank authorized to operate in the foreign exchange market. Foreign exchange rates are freely negotiated, but may be strongly influenced by Central Bank intervention. From its introduction on July 1, 1994 through January 1995, the real appreciated against the U.S. dollar. In 1995, the Central Bank announced that it would intervene in the market and buy or sell U.S. dollars, establishing a band within which the real/U.S. dollar exchange rate could fluctuate. This policy resulted in a gradual devaluation of the real against the U.S. dollar. On January 13, 1999, due to monetary pressure, the band was set at R$1.20 and R$1.32 per US$1.00, respectively. Two days later, on January 15, 1999, due to market pressure, the Central Bank abolished the band system and allowed the real-U.S. dollar exchange rate to float freely. Since January 15, 1999, the Central Bank has allowed the real/U.S. dollar exchange rate to float freely and, consequently, since that time, the exchange rate has fluctuated considerably, with the Central Bank intervening only occasionally to control unstable movements. From January 1, 2007 through December 31, 2007, the real appreciated by 17.2%. From January 1, 2008 through December 31, 2008, the real depreciated by 31.9%. From January 1, 2009 through December 31, 2009, the real appreciated by 25.5%. From January 1, 2010 through December 31, 2010, the real appreciated by 4.3%. From January 1, 2011 through December 31, 2011, the real depreciated by 12.6%. It is not possible to predict whether the exchange markets will continue their volatility, whether the Central Bank will continue to let the real float freely, nor whether the real will remain at its present level as compared to the U.S. dollar. Accordingly, it is not possible to predict what impact the Brazilian government’s exchange rate policies may have on us. The Brazilian government could impose a currency band system in the future and/or the real could devalue substantially. The Central Bank may place temporary restrictions on the remittance of foreign capital abroad, including payments of principal, interests or dividends, and on the repatriation of capital if there is a significant imbalance in Brazil's balance of payments, or one is expected. The last occurrence of restrictions on the remittance of foreign capital was in 1989, when for approximately six months in 1989 and early 1990, the Brazilian government suspended all remittances abroad of dividends and invested capital. The Central Bank subsequently released these amounts forremittance abroad in accordance with specific guidelines. The Brazilian government may take similar measures in the future.


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Dividend Policy General We have never paid cash dividends on our preferred shares or ADSs. We are a holding company and our ability to obtain funds for the payment of cash dividends depends entirely on our ability to obtain funds from our subsidiaries and investees. 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. 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.


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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, 2010, 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. 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


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·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, 2011, 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 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”;  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


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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. 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”.


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Discussion on Nil or Low Tax Jurisdictions and on Tax Favorable Jurisdictions.As of January 1, 2009, Law No. 11,727 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 operations 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. 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 fortransactions with maturities of at least 30 days, except that the rate is currently 0% for the certain types of transactions, including:


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·transactions carried out by financial institutions and other institutions authorized by the Central Bank as principals; ·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. 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. 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. ITEM 11.             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Exchange Risk Our foreign currency exposure gives rise to market risks associated with exchange rate movements against the U.S. dollar.


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A substantial portion of capital expenditures, including network equipment costs, and48.6% of our indebtedness was denominated in or indexed to the U.S. dollar, as of December 31, 2011. 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 conditions 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, 2011, 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$2.2510 per US$1.00, or 20.0% depreciation compared to the exchange rate as of December 31, 2011, would be a decrease of R$210.9 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 debt** **as of** **December 31, 2011**

   ****

   **Real depreciation from****Exchange rate of** **R$1.8758 per US$1.00** **to R$2.2510 per US$ 1.00**

   ****

   **Market risk – Impact****on Foreign Exchange** **Losses on loans**(R$ in millions)

   

   (%)

   

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

   379.0

   

   20.0

   

   (75.8)Global Notes 2020

   675.6

   

   20.0

   

   (135.1)Total

   1,054.6

   

   

   

   (210.9) 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$10.1 million in our profit before income taxes. The details of this analysis, which may differ from actual results, are as follows:  **Total debt as of****December 31, 2011**

   ****

   **10%****interest** **Rate** **increase**

   ****

   **Market risk –****Impact on interest** **expense on third** **party borrowings**(R$ in millions)

   

   (basis points)

   

   (R$ in millions)Floating Rate Debt:Debenture-6thPublic Issuance (1)

   584.3

   

   1.09

   

   (6.4)Bank Credit Note (2)

   122.3

   

   1.09

   

   (1.3)FINAME (3)

   408.2

   

   0.6

   

   (2.4)Total

   1,114.8

   

   

   

   (10.1) _______________________________________ (1) Indexed to CDI plus a spread of 1.6% per year. CDI was 10.87% as of December 31, 2011. (2) Indexed to CDI plus a spread of 2.10% per year. CDI was at 10.87% as of December 31, 2011. (3) Indexed to TJLP plus a spread of 3.15% per year or fixed rate between 4.5% and 8.7% per year. TJLP was at 6.0% as of December 31, 2011.


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The percentages and amounts of our debt subject to floating interest rates as of December 31, 2011 were as follows: Percentage of total debt

   Amount in R$ millionsFloating Rate Debt:Denominated in reais

   51.4%

   1,114.8
 Our floating interest rate exposure is primarily subject to the variations of CDI, as well as to TJLP.


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ITEM 12.             DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. Fees and Expenses The following table summarizes the fees and expenses payable by holders of ADRs to the depositary for our ADSs: Persons depositing preferred shares or ADS holders must pay:

   For the following type of service:US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)

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

   ·Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminatesUS$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)

   ·Any cash distribution to ADS holdersUS$1.50 per ADS (to the extent not prohibited by stock exchange rules)

   ·Transfer on registerA fee equivalent to the fee that would be payable if securities distributed to you had been preferred shares and the shares had been deposited for issuance of ADSs

   ·Distribution or sale of securities or net cash proceeds distributed to holders of deposited securities which are distributed by the depositary to ADR holdersUS$0.02 (or less) per ADS per calendar year (to the extent not prohibited by stock exchange rules)

   ·Depositary servicesDelivery fees

   ·Delivery of deposited securitiesExpenses of the depositary in converting foreign currency to U.S. dollarsExpenses of the depositary

   ·Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)Taxes and other governmental charges the depositary or the custodian have to pay on any ADR or preferred share underlying an ADR. For example, stock transfer taxes, stamp duty or withholding taxes

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

   ·No charges of this type are currently made in the Brazilian market


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Payment of Taxes The depositary may deduct the amount of any taxes owed from any payments to you. It may also sell deposited securities, by public or private sale, to pay any taxes owed. You will remain liable if the proceeds of the sale are not sufficient to pay the taxes. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes. Reimbursement of Fees JP Morgan Chase, as depositary, has agreed to reimburse us for expenses we incur that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse us for our continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADSs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of United States federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse us annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to us based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors. The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid. Reimbursement of Fees Incurred in 2011 During 2011, we received from the depositary US$272,000 for standard out-of-pocket maintenance costs for the ADSs, any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.


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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, 2011. 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, 2011 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, 2011. The effectiveness of our internal control over financial reporting as of December 31, 2011 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, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 16A.     Audit Committee Financial Expert. In lieu of complying with Rule 5605(c) of the NASDAQ Corporate Governance rules, we follow Brazilian corporate law and we maintain a permanentConselho Fiscal. OurConselho Fiscalcomplies with the requirements of Rule 10A-3 of the Exchange Act. See “Item 6. Directors, Senior Management and Employees—Directors and Board Practices.” 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 presently 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 2011 and 2010 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)2011

   

   2010Audit-Fees(1)

   1,985.0

   

   2,390.7Audit-Related Fees(2)

   -

   

   293.9Tax Fees(3)

   114.2

   

   466.9Total

   2,099.2

   

   3,151.5
 (1)Audit Fees Audit fees include fees to audit the company’s financial statements prepared in accordance with the IFRS as issued by the IASB and with the accounting practices adopted in Brazil, as well as the audit of the company’s internal controls as at year-end. (2)           Audit-Related Fees Audit-related fees include the audit of target companies. (3)          Tax Fees Tax fees include fees for review of tax returns of selected legal entities in 2011 and 2010.


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Pre-Approval Policies and Procedures During 2011 and 2010, ourConselho Fiscalserved as our audit committee for the purposes of the Sarbanes-Oxley Act of 2002. Accordingly, ourConselho Fiscalestablished pre-approval procedures for the engagement of Ernst & Young Terco Auditores Independentes S.S. as our independent auditor for audit and permitted non-audit services. 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. ITEM 16D.           EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. See “Item 9. The Offer and Listing—Trading Markets—NASDAQ Global Market.” 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. See “Item 9. The Offer and Listing—Trading Markets—NASDAQ Global Market—Compliance with NASDAQ Corporate Governance Rules.” 120


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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 Comprehensive Income for the Years ended December 2011, 2010 and 2009

   F-5Consolidated Balance Sheets as of December 31, 2011 and 2010

   F-6Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2011, 2010 and 2009

   F-8Consolidated Statements of Cash Flows for the Years ended December 31, 2011, 2010 and 2009

   F-9Notes 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)

   

   

   

   

   X4.1

   Shareholders’ Agreement, dated as of March 21, 2005, 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

   

   April 8, 20054.2

   First addendum to the Shareholders’ Agreement, dated as of March 21, 2005, 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

   

   September 6, 20064.3

   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, 2008


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4.8

   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, 20104.13

   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))

   

   

   

   

   X4.15

   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, 2010


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8.1

   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 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 27, 2012


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Net Serviços de Comunicação S.A.  Consolidated Financial Statements  Years ended December 31, 2011, 2010 and 2009


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  CONSOLIDATED FINANCIAL STATEMENTS   Years ended December 31, 2011, 2010 and 2009     Contents  Management’s Report on Internal Control over Financial Reporting

   1Reports of Independent Registered Public Accounting Firm

   2 and 4Audited consolidated financial statementsConsolidated statements of comprehensive income

   5Consolidated balance sheets

   6 and 7Consolidated statements of changes in stockholders’ equity

   8Consolidated statements of cash flows

   9Notes to the consolidated financial statements

   10


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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, 2011, 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, 2011, 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, 2011 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 Felix

   /s/ Roberto Catalão CardosoJosé Antonio Guaraldi Felix

   Roberto Catalão CardosoChief Executive Officer

   Chief Financial Officer   Date:  February 13, 2012  F-1


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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 Net Serviços de Comunicação S.A.’s internal control over financial reporting, as of December 31, 2011, 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, 2011, 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, 2011 and 2010, and related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2011 of Net Serviços de Comunicação S.A. and our report dated February 13, 2012 expressed an unqualified opinion thereon.  São Paulo, Brazil, February 13, 2012   /s/ Ernst & Young Terco Auditores Independentes S.S.Ernst & Young Terco Auditores Independentes S.S. CRC-2SP015199/O-6  /s/ Leonardo Amaral DonatoLeonardo Amaral Donato Accountant 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, 2011 and 2010, and the related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2011. 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, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, 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, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2012, expressed an unqualified opinion thereon.  São Paulo, Brazil, February 13, 2012  /s/ Ernst & Young Terco Auditores Independentes S.S.Ernst & Young Terco Auditores Independentes S.S. CRC-2SP015199/O-6  /s/ Leonardo Amaral DonatoLeonardo Amaral Donato Accountant CRC-1RJ090794/O-0 ‘S’ SP  F-4


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated statements of comprehensive income Years ended December 31, 2011, 2010 and 2009 (In thousands of reais, except for earnings per share)  Notes

   

   12/31/2011

   

   12/31/2010

   

   12/31/2009Net revenues

   4

   

   6,695,885

   

   5,405,669

   

   4,613,389Cost of services rendered

   5/7

   

   (4,146,951)

   

   (3,346,818)

   

   (2,789,812)Gross profit

   

   

   2,548,934

   

   2,058,851

   

   1,823,577Operating expensesSelling expenses

   7

   

   (720,030)

   

   (594,470)

   

   (505,063)General and administrative expenses

   7

   

   (920,177)

   

   (792,597)

   

   (634,656)Other

   7

   

   (28,798)

   

   (13,725)

   

   (60,389)(1,669,005)

   

   (1,400,792)

   

   (1,200,108)Operating profit

   

   

   879,929

   

   658,059

   

   623,469Finance resultsFinance expenses

   6

   

   (475,886)

   

   (359,422)

   

   (27,335)Finance income

   6

   

   175,401

   

   169,354

   

   92,779(300,485)

   

   (190,068)

   

   65,444Profit before income taxes and social contribution

   

   579,444

   

   467,991

   

   688,913Income taxes and social contributionCurrent

   12

   

   (99,911)

   

   (78,063)

   

   (111,561)Deferred

   12

   

   (106,360)

   

   (82,777)

   

   158,596(206,271)

   

   (160,840)

   

   47,035Net income

   

   373,173

   

   307,151

   

   735,948Basic and diluted earnings per share – common

   23

   

   1.02

   

   0.84

   

   2.01Basic and diluted earnings per share – preferred

   23

   

   1.12

   

   0.92

   

   2.22
  Profit for all years is fully attributable to stockholders of the Company.  The Company has no other comprehensive results that should be included in these consolidated statements of comprehensive income.  See accompanying notes to the consolidated financial statements.  F-5


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated balance sheets As at December 31, 2011 and 2010 (In thousands of reais)  Notes

   

   12/31/2011

   

   12/31/2010ASSETSCurrentCash and cash equivalents

   8

   

   721,178

   

   821,560Trade accounts receivable

   9

   

   507,711

   

   350,905Inventories

   10

   

   53,135

   

   82,050Recoverable taxes

   12

   

   115,717

   

   28,385Prepaid expenses

   

   

   29,736

   

   27,433Prepaid rights for use

   19

   

   169,844

   

   172,536Other current assets

   

   

   24,174

   

   15,969Total current assets

   

   

   1,621,495

   

   1,498,838Non-currentJudicial deposits

   11

   

   97,338

   

   83,735Deferred income taxes and social contribution

   12

   

   270,992

   

   377,352Recoverable taxes

   12

   

   5,589

   

   94,516Prepaid rights for use

   19

   

   317,463

   

   487,307Other non-current assets

   

   

   9,288

   

   6,135700,670

   

   1,049,045Property, plant and equipment

   13

   

   4,122,766

   

   3,322,350Intangible assets

   14

   

   2,449,966

   

   2,485,940Total non-current assets

   

   

   7,273,402

   

   6,857,335Total assets

   

   

   8,894,897

   

   8,356,173
           F-6


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Notes

   

   12/31/2011

   

   12/31/2010LIABILITIESCurrentTrade accounts payable

   15

   

   586,489

   

   349,480Accounts payable – programming suppliers

   16

   

   172,345

   

   134,813Taxes payable

   

   

   94,435

   

   65,599Payroll and related charges

   

   

   237,202

   

   180,695Debt

   17

   

   294,968

   

   104,865Related parties

   19

   

   84,490

   

   78,242Copyright payable – ECAD

   18

   

   145,462

   

   99,386Deferred revenue

   19

   

   207,299

   

   208,859Unrealized losses on derivatives

   24/25

   

   12,527

   

   50,857Other current liabilities

   

   

   21,753

   

   15,507Total current liabilities

   

   

   1,856,970

   

   1,288,303Non-currentDebt

   17

   

   1,874,414

   

   2,073,386Deferred revenue

   19

   

   404,636

   

   612,190Provisions

   20

   

   551,278

   

   554,764Other non-current liabilities

   

   

   19,760

   

   12,864Total non-current liabilities

   

   

   2,850,088

   

   3,253,204Stockholders’ equityShare capital

   21

   

   5,599,320

   

   5,599,320Capital reserves

   21

   

   153,168

   

   153,168Accumulated deficit

   

   

   (1,564,649)

   

   (1,937,822)4,187,839

   

   3,814,666Total liabilities and stockholders’ equity

   

   

   8,894,897

   

   8,356,173
  See accompanying notes to the consolidated financial statements.           F-7


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated statements of changes in stockholders’ equity Years ended December 31, 2011, 2010 and 2009 (In thousands of reais)   Number of shares (thousands)

   

   Capital stockCommon

   Preferred

   

   Subscribed

   To be paid in

   Paid in

   

   Capital

   reserves

   

   Accumulated deficit

   TotalBalances at December 31, 2008

   

   113,051

   225,688

   

   5,553,269

   (12,923)

   5,540,346

   

   212,142

   

   (2,980,921)

   2,771,567Capital increase by the absorption of special goodwill reserve

   

   1,408

   2,816

   

   58,974

   -

   58,974

   

   (58,974)

   

   -

   -Net income

   

   -

   -

   

   -

   -

   -

   

   -

   

   735,948

   735,948Balances at December 31, 2009

   

   114,459

   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

   

   114,459

   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

   

   114,459

   228,504

   

   5,612,243

   (12,923)

   5,599,320

   

   153,168

   

   (1,564,649)

   4,187,839
   See accompanying notes to the consolidated financial statements.           F-8


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated statements of cash flows Years ended December 31, 2011, 2010 and 2009 (In thousands of reais) 12/31/2011

   

   12/31/2010

   

   12/31/2009Net cash flows from operating activitiesNet income

   373,173

   

   307,151

   

   735,948Adjustments to reconcile net income to cash flow from operating activitiesMonetary and exchange rate variations, net

   102,264

   

   (69,112)

   

   (177,265)Interest expense on borrowing

   203,040

   

   215,120

   

   176,598Depreciation and amortization

   1,061,896

   

   901,225

   

   618,748Losses on derivative financial instruments

   16,978

   

   65,915

   

   97,345Deferred income taxes and social contribution

   106,360

   

   82,777

   

   (158,596)Loss (gain) on disposal of property, plant and equipment

   (129)

   

   (4,136)

   

   7,118Provisions

   (42,286)

   

   (44,399)

   

   (101,319)Increase/decrease in operating assets and liabilities(Increase) decrease in trade accounts receivable

   (156,806)

   

   (86,953)

   

   (92,010)(Increase) decrease in inventories

   28,915

   

   (23,287)

   

   3,224(Increase) decrease in recoverable taxes

   54,835

   

   7,833

   

   (12,616)(Increase) decrease in prepaid expenses

   (2,303)

   

   5,888

   

   (8,728)(Increase) decrease in other assets

   (24,963)

   

   (14,705)

   

   18,029Increase (decrease) in trade accounts payable and accounts payable – programming suppliers

   274,541

   

   31,976

   

   (56,156)Increase (decrease) in taxes payable

   28,836

   

   (7,257)

   

   (28,983)Increase (decrease) in payroll and related charges

   64,170

   

   (10,260)

   

   23,218Increase (decrease) in deferred revenue

   (213,910)

   

   (169,457)

   

   (18,480)Increase (decrease) in provisions and other

   7,283

   

   47,886

   

   (23,420)Net cash provided by operating activities

   1,881,894

   

   1,236,205

   

   1,002,655Cash flow from investing activitiesAcquisition of business, net of cash received

   -

   

   -

   

   (97,943)Acquisition of property, plant and equipment and intangible assets

   (1,660,193)

   

   (1,249,895)

   

   (1,089,211)Cash proceeds from sale of property, plant and equipment

   2,507

   

   2,890

   

   2,530Net cash used in investing activities

   (1,657,686)

   

   (1,247,005)

   

   (1,184,624)Cash flow from financing activitiesDebtProceeds

   221,197

   

   103,630

   

   677,009Repayments of principal

   (342,099)

   

   (92,600)

   

   (46,090)Repayments of interest

   (203,688)

   

   (194,275)

   

   (170,225)Net cash provided by (used in) financing activities

   (324,590)

   

   (183,245)

   

   460,694Net increase (decrease) in cash and cash equivalents

   (100,382)

   

   (194,045)

   

   278,725Cash and cash equivalents at the beginning of the year

   821,560

   

   1,015,605

   

   736,880Cash and cash equivalents at the end of the year

   721,178

   

   821,560

   

   1,015,605(100,382)

   

   (194,045)

   

   278,725Supplementary disclosure of cash flow informationIncome taxes and social contribution paid

   106,259

   

   100,356

   

   176,104
  See accompanying notes to the consolidated financial statements.   F-9


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 1.Operations  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 on NASDAQ, as American Depositary Shares(“ADS”) in the United States of America, and is subject to the Securities and Exchange Commission (“SEC”) regulations. 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 is 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 Telmex Internacional S.A.B. de C.V. (Telmex), jointly provide voice services under “NET FONE VIA EMBRATEL (NetFone)” brand name.  The Company holds 100% interest in the wholly-owned subsidiaries Net Brasília Ltda., Net Rio Ltda., Net São Paulo Ltda., Reyc Comércio e Participações Ltda., Jacareí Cabo S.A., 614 TVH Vale Ltda., 614 Serviços de Internet Maceió Ltda. and 614 Serviços de Internet João Pessoa Ltda.             F-10


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 1.Operations– continued  During 2010 and 2009, continuing its restructuring process, the Company has merged the net assets of the subsidiaries shown below:  Company

   Date of Incorporation

   Net assets merget

   

   Company

   Date of Incorporation

   Net assets mergetNet Belo Horizonte Ltda.

   11/30/2010

   112,183

   

   614 TVP João Pessoa S.A.

   11/30/2009

   18,316Net Bauru Ltda.

   11/30/2010

   19,617

   

   614 TVT Maceió S.A.

   11/30/2009

   19,723Net Goiânia Ltda.

   11/30/2010

   42,941

   

   Net Campo Grande Ltda.

   10/30/2009

   26,786Net Ribeirão Preto Ltda.

   11/30/2010

   61,288

   

   Net São José do Rio Preto Ltda.

   10/30/2009

   22,610Net Sorocaba Ltda.

   11/30/2010

   58,284

   

   Net Sul Comunicações Ltda.

   10/30/2009

   327,901Net Paraná Comunicação Ltda.

   11/30/2010

   131,909

   

   Net São Carlos Ltda.

   10/30/2009

   11,201Net Campinas Ltda.

   11/30/2010

   91,908

   

   DR – Emp. de Distr. e Recep. de TV Ltda.

   10/30/2009

   120,733Net Recife Ltda.

   07/31/2010

   1,111

   

   Antenas Comunitárias Brasileiras Ltda.

   09/30/2009

   18,117Horizonte Sul Comunicações Ltda.

   07/31/2010

   3,741

   

   Televisão a Cabo Criciúma Ltda.

   09/30/2009

   539ESC90 Telecomunicações Ltda.

   07/31/2010

   34,819

   

   Net Arapongas Ltda.

   09/30/2009

   904Vivax Ltda.

   11/30/2009

   203,482

   

   Net Londrina Ltda.

   09/30/2009

   14,584Net Indaiatuba Ltda.

   11/30/2009

   5,141

   

   Net Maringá Ltda.

   09/30/2009

   9,641Net Franca Ltda.

   11/30/2009

   9,949

   

   614 TVG Guarulhos S.A.

   09/30/2009

   11,203Net Anápolis Ltda.

   11/30/2009

   2,545

   

   614 Telecomunicações Ltda.

   04/30/2009

   20,654TV Jacarandá Ltda.

   11/30/2009

   237

   

   614 Interior Linha S.A.

   04/30/2009

   (903)TV a Cabo Guarapuava Ltda.

   11/30/2009

   437

   

   TVC Oeste Paulista Ltda.

   04/30/2009

   308TV a Cabo Cascavel Ltda.

   11/30/2009

   507

   

   Net Florianópolis Ltda.

   02/28/2009

   275,918
  On September 12, 2011, Statutory Law No. 12485 was enacted, which provides for Audiovisual Communication Conditional Access and regulates the pay-TV industry, regardless of the technology used.  After the above law was ratified by the National Telecommunications Agency (Anatel), no new TV service licenses, authorizations for Television and Audio Signal Broadcasting to Subscribers via Satellite Services – DTH, Multichannel Multipoint Distribution Services - MMDS and Pay Television Special Service shall be granted; the new service model allows only newly created conditional access.Companies have the option to keep the authorizations and concessions up to expiration thereof or can migrate immediately to the new service. The current licenses that were previously renewed automatically for successive periods of 15 years, provided that the conditions were met by Anatel, after the promulgation of the Statutory Law No. 12,485, began to be issued for an indefinite period of use.   F-11


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
  1.Operations– continued  In addition, the referred to law introduced a new business model that allows investment of foreign capital and participation of telecommunication companies in the referred to industry and partially revoked Law No. 8977/95, which regulated cable TV services. The newly created business model divides the value chain between production and distribution, whereby companies producing TV program content may not distribute them and distribution companies may not produce TV program content. The referred to law also sets forth the minimum weekly TV program content produced by independent Brazilian companies (not related to broadcasting companies), and the period of time each pay TV 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 TV customers. The National Telecommunications Agency (Anatel) and the National Film Agency (Ancine), within the authority vested in them, will ratify the provisions of the referred to law within up to 180 days.  The Company entered into an agreement with BM&FBOVESPA to adopt differentiated corporate governance practices, thus becoming 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 the National Monetary Council, the Brazilian Central Bank and the Brazilian Securities and Exchange Commission, regulations of BM&FBOVESPA and other rules applicable to the operation of capital markets 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 consolidated financial statements The Company’s consolidated financial statements for the years ended December 31, 2011, 2010 and 2009were prepared and presented 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.   F-12


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 2. Basis of preparation and presentation of consolidated financial statements– continued  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.  The consolidation process entails the line by line 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 the IASB that were effective for the year ended December 31, 2011.  As from January 1, 2011, the following standards and interpretations became effective: IAS 24 - Related party disclosure (amendment); IFRIC 14 - Prepayments of a minimum funding requirement (amendment); and IFRIC 19 - Extinguishing financial liabilities with equity instruments. The adoption of these standards and interpretations did not impact the consolidated financial statements for the year ended December 31, 2011.  In relation to the standards IFRS 9 Financial Instruments: Classification and Measurement, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Involvement with Other Entities, IFRS 13 Fair Value Measurement, IAS 27 Separate Financial Statements (R) and IAS 28 Investments in Associates and Joint Ventures (R), which are effective for annual periods beginning on or after January 1, 2013, the Company expects that the adoption of such standards will not have a significant impact its consolidated financial statements.  The Company's Board of Directors has power to amend the consolidated financial statements after its issuance. On February 9, 2012, the Company’s Board of Directors approved and authorized the issuance of the Company’s consolidated financial statements.    F-13


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (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 consolidation of the Company 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 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 retranslated to the functional currency at the rate of exchange ruling at the reporting date. Gains and losses arising from difference between translation of the balance of assets and liabilities in foreign currency at year end and the initial translation of the amount of transactions are taken to income in the consolidated statements of comprehensive 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 income in the consolidated statements of comprehensive 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.   F-14


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (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, 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 statements of comprehensive 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 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 performed 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 as income in the consolidated statements of comprehensive income.  3.5 Trade accounts receivable and allowance for doubtful accounts  Trade accounts receivable are recorded at estimated net realizable value and are non interests 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 andany outstanding receivable older than 180 days iswritten off.  The allowance for doubtful accounts is comprised, substantially, of account balancesthat are due within 90 and 180 days.   F-15


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (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 provided 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 fixed asset 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 income in the consolidated statement of comprehensive 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 acquisition date.  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 year. The amortization expense of intangible assets with finite lives is recognized in the consolidated statement of comprehensive income, in the expense category consistent with the function of the intangible asset.  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 estimated useful lives are annually reviewed and any change would be recorded prospectively.  F-16


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 3. Summary of significant accounting policies –continued  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 the end of each year, 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 comprehensive income.  Except for the impairment of goodwill, reversal of losses previously recorded is allowed. The reversal in these circumstances is limited to the depreciated 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.  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 comprehensive income.  There have been no business combinations for the years ended December 31, 2011 and 2010.       F-17


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
  3. Summary of significant accounting policies –continued  3.11 Taxes  Income taxes 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 loss carryforward and temporary differences to the extent that it is probable that future taxable profit will be available against which the tax loss carryforward and temporary differences can be utilized.  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 tax liabilities; and (b) the deferred taxes assets and the deferred tax liabilities are related to the income taxes levied by the same tax authority on either: (i) the same taxable entity; or (ii) different taxable entities which intend to settle tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.         F-18


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
  3. Summary of significant accounting policies –continued  3.11 Taxes- continued  Taxes 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 consolidated balance sheet.  3.12 Provisions  The Company recognizes provisions, which involves management’s significant judgments 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 the available evidences, hierarchy of the laws, available jurisprudence, as well as opinion 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.       F-19


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (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.  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 comprehensive income. On December 31, 2011 and 2010, financial assets classified at fair value through profit or loss are derivative financial instruments.  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 comprehensive income. Losses arising from impairment are recognized in the consolidated statement of comprehensive income as finance expenses. As of December 31, 2011 and 2010, financial assets classified as receivables are trade accounts receivable.     F-20


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (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  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, 2011 and 2010, 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, 2011 and 2010, the Company did not have any available-for-sale financial assets.  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.       F-21


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (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 – continued  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.  Financial assets carried at amortized cost  For financial assets carried at amortized cost, the Company firstly 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.    F-22


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (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  Financial assets carried at amortized cost– continued  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 comprehensive income. Interest income continues to be computed on the reduced carrying amount based on the 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 statements of comprehensive income.  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 statements of comprehensive 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. All 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 trade accounts payable, accounts payable – programming suppliers, other current liabilities, debt and derivative financial instruments.   F-23


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (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  Subsequent measurement  The subsequent 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 statements of comprehensive income. As of December 31, 2011 and 2010, the Company did not have any available-for-sale financial liabilities.  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 comprehensive income when the liabilities are derecognized, as well as during the amortization process through the effective interest rate method. As of December 31, 2011 and 2010, the Company had its debt instruments classified and 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 comprehensive income.      F-24


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 3. Summary of significant accounting policies –continued  3.13 Financial instruments – initial recognition and subsequent measurement –continued  (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 contracts and interest rate 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. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are taken directly to the consolidated statement of comprehensive 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.  (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 24 and 25.     F-25


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 3. Summary of significant accounting policies –continued  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 the consolidated statement of comprehensive income on 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.  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.        F-26


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 3. Summary of significant accounting policies –continued  3.16Significant accounting judgments, estimates and assumptions –continued  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.  b) Valuation of assets acquired and liabilities assumed in business combinations  In recent years, the Company entered into certain business combinations. Under IFRS 3, 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 assumptions used for assessment include estimates of discounted cash flow and discount rates and can result in different estimated values of assets acquired and liabilities assumed.  c) Impairment test  The Company evaluates the existence of any impairment indicator for all long-lived assets at the end of each year. Goodwill and intangible assets with indefinite useful lives are tested for impairment annually and all other times when indicators of impairment exist. Recoverable amounts are determined based on value in use calculations, using discounted cash flows assumptions established by management. Such calculations require the use of estimates, as detailed in note 14.          F-27


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 3. Summary of significant accounting policies –continued  3.16Significant accounting judgments, estimates and assumptions –continued  d) Provisions  Provisions, as described in note20, 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. If the effect of time value of money is material, provisions are discounted using the current rate that reflects, where appropriate, the specific, risks for to the liability. When discounted the increase in provision due to passage of time is recognized as a finance expense.  4. Net revenues   12/31/2011

   

   12/31/2010

   

   12/31/2009Gross revenues

   

   8,345,397

   

   7,101,588

   

   6,070,401Taxes on rendering of services

   

   (1,391,961)

   

   (1,259,841)

   

   (1,094,667)Discounts and cancellations

   

   (257,551)

   

   (436,078)

   

   (362,345)Net revenues

   

   6,695,885

   

   5,405,669

   

   4,613,389
  Taxes on rendering of services consist primarily of ICMS – state value added tax (10% on Pay tv and 25% to 30% on broadband), ISS - municipal tax on rendering of services (2% to 5%) and federal contributions on revenue related to PIS (0.65% or 1.65%) and COFINS (3% or 7.60%).  All the Company’s revenues are generated in Brazil.  5. Cost of services rendered  12/31/2011

   

   12/31/2010

   

   12/31/2009Programming costs

   

   (1,515,728)

   

   (1,262,083)

   

   (1,037,368)Materials and maintenance

   

   (74,672)

   

   (62,785)

   

   (53,488)Personnel

   

   (463,931)

   

   (385,621)

   

   (319,857)Pole rental

   

   (84,100)

   

   (70,457)

   

   (78,629)Depreciation

   

   (757,149)

   

   (600,911)

   

   (496,183)Amortization

   

   (166,347)

   

   (166,284)

   

   (18,713)Third party service

   

   (475,873)

   

   (393,341)

   

   (335,984)Network electrical power

   

   (44,040)

   

   (27,495)

   

   (39,072)Telecommunications

   

   (312,224)

   

   (246,332)

   

   (295,350)Other

   

   (252,887)

   

   (131,509)

   

   (115,168)(4,146,951)

   

   (3,346,818)

   

   (2,789,812)
  F-28


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
  6. Finance results  12/31/2011

   

   12/31/2010

   

   12/31/2009Finance income:Interest on cash and cash equivalents

   

   77,369

   

   84,585

   

   54,027Interest on prepaid rights for use

   

   49,224

   

   46,672

   

   3,779Interests and fines on late monthly payments

   

   39,043

   

   31,938

   

   25,951Interest on tax credits

   

   7,520

   

   5,226

   

   3,143Discounts obtained

   

   619

   

   616

   

   181Other

   

   1,626

   

   317

   

   5,698175,401

   

   169,354

   

   92,779Finance expenses:Finance charges on loans and debentures

   

   (173,071)

   

   (183,710)

   

   (179,355)Monetary exchange rate variation on debt

   

   (68,950)

   

   37,646

   

   195,831Finance charges and monetary exchange(*)

   

   (138,827)

   

   (75,215)

   

   (11,270)Finance charges on provisions for contingencies

   

   661

   

   (10,580)

   

   (12,838)Reversal of PIS/COFINS (note 20)

   

   -

   

   -

   

   124,269Losses on derivatives financial instruments

   

   (16,978)

   

   (65,915)

   

   (97,345)IOF tax on intercompany transactions

   

   (12,949)

   

   (23,343)

   

   (11,185)PIS and COFINS taxes on interest income

   

   (9,598)

   

   (11,041)

   

   (10,870)Interest on suppliers and taxes

   

   (1,770)

   

   (4,895)

   

   (4,808)Discounts provided

   

   (18,402)

   

   (15,107)

   

   (9,892)Other

   

   (36,002)

   

   (7,262)

   

   (9,872)(475,886)

   

   (359,422)

   

   (27,335)Total

   

   (300,485)

   

   (190,068)

   

   65,444
  (*) During the years ended December 31, 2011, 2010 and 2009, finance charges and monetary exchange included: (i) R$50,609, R$47,984 and R$ 11,270, respectively, of interest expenses related to the prepayment of the indefeasible right to use (IRU) with Empresa Brasileira de Telecomunicações S.A. (“Embratel”), a related party (note 19); and (ii) R$88,218, R$27,231 and R$7,385, respectively, of interest expense and US Dollar exchange variation related to amounts borrowed from Banco Inbursa S.A., a related party, and interest expense paid to Embratel.  F-29


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 7. Expenses by nature  The Company presents its consolidated statement of comprehensive income by function. The table below shows details by nature:  12/31/2011

   

   12/31/2010

   

   12/31/2009Programming costs

   

   (1,515,728)

   

   (1,262,083)

   

   (1,037,368)Other costs

   

   (669,279)

   

   (538,577)

   

   (581,707)Third party service

   

   (973,701)

   

   (795,416)

   

   (635,339)Depreciation and amortization

   

   (1,061,896)

   

   (901,225)

   

   (618,748)Payroll expenses

   

   (901,171)

   

   (750,843)

   

   (651,203)Other

   

   (694,181)

   

   (499,466)

   

   (465,555)(5,815,956)

   

   (4,747,610)

   

   (3,989,920)Classified as:Cost of services rendered

   

   (4,146,951)

   

   (3,346,818)

   

   (2,789,812)Selling expenses

   

   (720,030)

   

   (594,470)

   

   (505,063)General and administrative expenses

   

   (920,177)

   

   (792,597)

   

   (634,656)Other

   

   (28,798)

   

   (13,725)

   

   (60,389)(5,815,956)

   

   (4,747,610)

   

   (3,989,920)
   8.  Cash and cash equivalents  12/31/2011

   

   12/31/2010Cash and banks

   

   32,346

   

   43,227Banking deposit certificates

   

   3,417

   

   15,297Fixed-income investment funds

   

   685,415

   

   763,036721,178

   

   821,560
  Bank deposit certificates (CDBs) earn an average of 100 % of the Interbank Certificate of Deposit (CDI) rate (10.87% in 2011 and 10.64% in 2010). 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.   F-30


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 9. Trade accounts receivables  12/31/2011

   

   12/31/2010Trade receivables

   

   565,709

   

   395,465(-) Allowance for doubtful accounts

   

   (57,998)

   

   (44,560)507,711

   

   350,905
  Due dates of trade accounts receivables are as follows:  12/31/2011

   

   12/31/2010Due

   

   308,956

   

   211,820Overdue:Up to 30 days

   

   168,521

   

   116,93931 – 60 days

   

   21,807

   

   18,58061 – 90 days

   

   17,797

   

   11,62891- 180 days

   

   48,628

   

   36,498565,709

   

   395,465
  The average term for receipt of subscriptions receivable is approximately 30 days. The allowance for doubtful accounts is mainly comprised by amounts overdue from 90 to 180 days. Amounts overdue by more than 180 days are written off.  Allowance for doubtful accounts is shown below:  Balances at December 31, 2008

   

   (37,963)Additions

   

   (41,053)Write-offs

   

   36,845Balances 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)
  10. Inventories  12/31/2011

   

   12/31/2010Material for network maintenance

   

   17,626

   

   32,379Material for technical assistance

   

   35,509

   

   49,67153,135

   

   82,050
  In the year ended December 31, 2011, the Company consumed R$74,672 (R$62,785 in 2010 and R$53,488 in 2009) of materials related to maintenance of networks and technical assistance, which were recorded as cost of services rendered.   F-31


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 11. Judicial deposits  The Company has judicial deposits related to the following:  12/31/2011

   

   12/31/2010Labor

   

   11,927

   

   13,754Civil

   

   4,036

   

   2,519Lease of poles and ducts

   

   25,934

   

   21,354Copyrights – ECAD

   

   33,682

   

   25,633Tax

   

   21,759

   

   16,976Social security

   

   -

   

   3,49997,338

   

   83,735
   12. Income taxes and social contribution  a.Income taxes and social contribution  12/31/2011

   

   12/31/2010

   

   12/31/2009Current income taxes and social contribution expenses

   

   (99,911)

   

   (78,063)

   

   (111,561)Deferred income taxes and social contribution on:Tax loss carryforward

   

   (42,721)

   

   (31,332)

   

   (30,986)Goodwill

   

   (90,411)

   

   (89,259)

   

   (29,489)Amortization of property, equipment and intangible assets

   

   16,120

   

   17,073

   

   16,091Other temporary differences

   

   10,652

   

   20,741

   

   202,980Total deferred income taxes and social contribution

   

   (106,360)

   

   (82,777)

   

   158,596Total income taxes and social contribution expense

   

   (206,271)

   

   (160,840)

   

   47,035
  The statutory rates applicable for federal income tax and social contribution are 25% and 9%, respectively, which represent an aggregate rate of 34% in 2011, 2010 and 2009.    F-32


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 12. Income taxesand social contribution– continued  a.Income taxes and social contribution– continued  Amounts reported as income taxes expense in the consolidated statement of comprehensive income  are reconciled to the statutory rates as follows:  12/31/2011

   12/31/2010

   12/31/2009Income before incometaxesand social contribution

   

   579,444

   467,991

   688,913Income taxes and social contribution at the nominal rate of 34%

   

   (197,011)

   (159,117)

   (234,230)(Additions) / exclusions:Income taxes and social contribution on permanently non-deductible expenses

   

   (2,991)

   (2,623)

   (9,297)Other reconciling items:Recognition of deferred income taxes and social contribution on tax losses and negative base from prior years

   

   -

   -

   872Unrecorded benefit from current year tax losses

   

   (32,646)

   (59,338)

   (46,931)Utilization of income taxes and social contribution for the year, whose deferred tax assets were not recognized in prior years

   

   -

   7,825

   47,352Recognition of deferred income taxes and social contribution on temporary differences generated in prior years

   

   22,636

   45,614

   293,736Other

   

   3,741

   6,799

   (4,467)Incometaxesand social contribution for the year

   

   (206,271)

   (160,840)

   47,035Effective tax rate

   

   (35.60%)

   (34.37%)

   6.83%
   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 loss carryforward in a given year to 30% of taxable income.  Deferred tax assets are recognized on tax losses and negative calculation bases for the social contribution taxes are supported by projections of taxable income based on technical feasibility studies. These studies consider the history of profitability of the Company and its subsidiaries 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 tax contingencies and provisions for losses, were recognized based on expectations for their realization.         F-33


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 12.  Income taxes and social contribution– continued  b.Deferred and recoverable taxes  12/31/2011

   

   12/31/2010Recoverable tax:Withhold income tax

   

   46,870

   

   38,515Recoverable federal tax

   

   43,250

   

   66,052Recoverable state tax

   

   29,889

   

   17,572Other

   

   1,297

   

   762121,306

   

   122,901Current

   

   115,717

   

   28,385Non-current

   

   5,589

   

   94,516Deferred taxes:Income taxes:Net operating losses carryforward

   

   186,725

   

   218,239Temporary differences:Provisions

   

   102,870

   

   102,762Allowance for doubtful accounts

   

   16,312

   

   19,712Provision for profit sharing

   

   38,732

   

   25,140Foreign exchange and derivative losses

   

   3,132

   

   12,714Property, equipment, inventories and trade accounts payables

   

   31,613

   

   24,585Tax credit on business combinations

   

   (70,976)

   

   (4,497)Intangible assets

   

   (112,070)

   

   (123,805)Property, plant and equipment

   

   1,138

   

   1,967Other

   

   (181)

   

   (1,215)10,570

   

   57,363197,295

   

   275,602Social contribution:Net operating losses carryforward

   

   69,891

   

   81,098Temporary differences:Provisions

   

   37,033

   

   36,994Allowance for doubtful accounts

   

   5,872

   

   7,076Provision for profit sharing

   

   13,944

   

   9,050Foreign exchange and derivative losses

   

   1,127

   

   4,577Property, equipment, inventories and trade accounts payables

   

   11,381

   

   8,850Tax credit on business combinations

   

   (25,552)

   

   (1,619)Intangible assets

   

   (40,345)

   

   (44,570)Property, plant and equipment

   

   410

   

   708Other

   

   (64)

   

   (414)3,806

   

   20,65273,697

   

   101,750270,992

   

   377,352Deferred tax assets

   

   518,993

   

   562,423Deferred tax liabilities

   

   (248,001)

   

   (185,071)270,992

   

   377,352
  To conform with the presentation adopted in the current year, the comparative balance of deferred income taxes and social contribution liabilities as of December 31, 2010, totaling R$185,071, formerly disclosed separately in the consolidated balance sheet, was reclassified to offset the balance of deferred income taxes and social contribution assets.     F-34


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 12. Income taxes and social contribution– continued  b.Deferred and recoverable taxes– continued Changes in deferred income tax and social contribution

   Net operating losses carryforward

   Temporary differences

   TotalBalances at December 31, 2008

   364,498

   123,872

   488,370Additions

   -

   378,998

   378,998Reductions

   (33,829)

   (191,734)

   (225,563)Balances at December 31, 2009

   330,669

   127,331

   458,000Additions

   -

   46,374

   46,374Reductions

   (31,332)

   (95,690)

   (127,022)Balances at December 31, 2010

   299,337

   78,015

   377,352Additions

   -

   20,713

   20,713Reductions

   (42,721)

   (84,352)

   (127,073)Balances at December 31, 2011

   256,616

   14,376

   270,992
  Estimated realization of deferred tax assets is determined based on the projection of future taxable income, as follows:  2012

   240,5252013

   71,3972014

   109,2232015

   40,6552016 to 2021

   57,193518,993
  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, 2011 that 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.            F-35


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (In thousands of reais)
 12. Income taxes and social contribution– continued  b.Deferred and recoverable taxes– continued  The Company has net operating losses to offset 30% of the annual taxable income, without expiration, for the following amounts:  12/31/2011

   

   12/31/2010Income taxes

   Social contribution

   Total

   

   Income

   taxes

   Social contribution

   TotalGross amounts

   2,803,040

   3,258,005

   -

   

   2,817,601

   3,350,400

   -Tax credit (25%/9%)

   700,760

   293,220

   993,980

   

   704,400

   301,536

   1,005,936Recognized tax credit

   (186,725)

   (69,891)

   (256,616)

   

   (218,239)

   (81,098)

   (299,337)Non-recognized tax credit

   514,035

   223,329

   737,364

   

   486,161

   220,438

   706,599
   F-36


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the consolidated financial statements December 31, 2011, 2010 and 2009 (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, 2008

   4,661,235

   112,471

   42,642

   26,859

   76,151

   5,035

   33,452

   4,540

   4,962,385Additions

   982,325

   21,467

   1,345

   1,798

   7,804

   405

   7,350

   918

   1,023,412Additions through acquisition of companies

   32,136

   692

   68

   220

   8

   115

   210

   -

   33,449Write-offs

   (42,506)

   (1,582)

   (346)

   (435)

   (3)

   (462)

   (88)

   (47)

   (45,469)Balances 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

   8,575,457Accumulated depreciationDepreciation rate per annum

   8.33 a 20%

   20 a 33.33%

   10%

   10%

   4 a 25%

   20%

   20%

   -Balances at December 31, 2008

   (2,542,204)

   (81,485)

   (28,687)

   (15,899)

   (38,111)

   (3,173)

   (15,145)

   -

   (2,724,704)Additions

   (487,042)

   (15,341)

   (3,214)

   (2,062)

   (4,213)

   (1,062)

   (5,957)

   -

   (518,891)Transfers

   1,505

   286

   (197)

   (13)

   (1,454)

   (101)

   506

   502

   1,034Write-offs

   33,267

   1,624

   197

   255

   -

   393

   85

   -

   35,821Balances 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)Net balances at December 31, 2008

   2,119,031

   30,986

   13,955

   10,960

   38,040

   1,862

   18,307

   4,540

   2,237,681Net balances at December 31, 2009

   2,638,716

   38,132

   11,808

   10,723

   40,182

   1,150

   20,413

   5,913

   2,767,037Net 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

   4,122,766
  F-37


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 13. Property, plant and equipment– continued  On December 31, 2011, R$155,364 (R$140,470 at December 31, 2010) from property, plant and equipment were provided as a guarantee of certain legal actions and labor claims.  During the year ended December 31, 2011, the Company transferred from inventories to property, plant and equipment R$105,592 (R$83,983 in 2010).  On December 31, 2011 and 2010, the Company did not identify an indication that the property, plant and equipment may be impaired, as required by IAS 36, Impairment of assets.  14. Intangible assets  Indefinite useful life

   

   Defined useful lifeCost

   Goodwill

   

   Licenses

   

   Software

   

   Customer portfolio

   

   Other

   

   TotalBalances at December 31, 2008

   1,903,563

   

   407,795

   

   362,216

   

   289,223

   

   8,107

   

   2,970,904Additions

   -

   

   -

   

   69,760

   

   -

   

   -

   

   69,760Additions through acquisition of companies

   25,053

   

   30,931

   

   64

   

   15,144

   

   -

   

   71,192Transfers

   -

   

   -

   

   (1,165)

   

   -

   

   -

   

   (1,165)Balances 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

   

   3,226,985Accumulated amortizationAmortization rate per annum

   -

   

   -

   

   20%

   

   16,67%

   

   20%Balances at December 31, 2008

   (178,742)

   

   (1,806)

   

   (225,794)

   

   (89,595)

   

   (5,210)

   

   (501,147)Additions

   -

   

   -

   

   (35,183)

   

   (49,466)

   

   (1,634)

   

   (86,283)Write-offs

   -

   

   -

   

   (93)

   

   -

   

   -

   

   (93)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)Net balances at December 31, 2008

   1,724,821

   

   405,989

   

   136,422

   

   199,628

   

   2,897

   

   2,469,757Net balances at December 31, 2009

   1,749,874

   

   436,920

   

   169,805

   

   165,306

   

   1,263

   

   2,523,168Net 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

   

   2,449,966
  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.   F-38


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 14. Intangible assets– continued  The licenses acquired in connection with business combinations and accounted for based on their fair values at their acquisition date are not amortizedsince they have an indefinite useful life. This indefinite useful life was determined based on the fact that these licenses are automatically renewable if the Company meets the mandatory requirements of Anatel. Brazilian law guarantees renewal of these licenses and the Company has interest in extending them indefinitely.  Intangible assets with indefinite useful life are represented mainly by rights to use software internally developed together with specialized companies, adapted for use of the Company based on existing softwares available in the market, which are amortized over 60 months, and by the customer portfolio, which is amortized over 72 months or 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 comprehensive income.  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, as well as based on the market data obtained from comparable public companies, which represent management’s best estimate of economic conditions related to 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 2012 – 2016, 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.  F-39


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 14. Intangible assets– continued  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.  Estimated future cash flows were discounted at a single discount rate of fifteen 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 payable  12/31/2011

   

   12/31/2010Domestic suppliers

   

   542,303

   

   324,681Foreign suppliers

   

   44,186

   

   24,799586,489

   

   349,480
  The trade accounts payable do not bear interest and usually are settled in 30 days.  16.  Accounts payables – programming suppliers  Description

   

   12/31/2011

   

   12/31/2010Related partiesNet Brasil S.A.

   

   102,146

   

   81,610Third parties

   

   70,199

   

   53,203172,345

   

   134,813
       F-40


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 16.  Accounts payables – programming suppliers– continued  The table below shows programming and related costs incurred:  Operating incomeCompanies

   

   12/31/2011

   12/31/2010

   12/31/2009Related partiesNet Brasil S.A.

   

   (1,085,859)

   (905,929)

   (674,744)GlobosatProgramadoraLtda.

   

   -

   -

   (8,227)(1,085,859)

   (905,929)

   (682,971)Third parties

   

   (429,869)

   (356,154)

   (354,397)(1,515,728)

   (1,262,083)

   (1,037,368)
  Net Brasil S.A., a related party, serves as the Company’s agent and negotiates directly with producers and audiovisual programming suppliers the acquisition of Brazilian content with better prices and payments conditions..  The acquisition of the Brazilian content, agreed between Net Brasil S.A. and the respective programming suppliers are valid until November 2015.  Additionally, the contracts for the acquisition of existing international program content are negotiated directly by the Company and remain valid until 2014.  Until 2010, the pay per view (“PPV”) programming was bought from Globosat. As from 2010, it started being purchased from Net Brasil S.A.   17. Debt  Effective interest rate per annumCurrency

   Nominal interest rate per annum

   12/31/2011

   

   12/31/2010

   

   12/31/2011

   

   12/31/2010Current

   

   Non-current

   

   Total

   

   Current

   

   Non-current

   

   TotalLocal currencyFiname

   R$

   TJLP + 3.15%

   9.15%

   

   9.15%

   

   64,864

   

   51,550

   

   116,414

   

   65,512

   

   80,598

   

   146,110Finame PSI

   R$

   4.50 to 8.70%

   5.10%

   

   4.50%

   

   47,644

   

   244,142

   

   291,786

   

   2,373

   

   110,608

   

   112,981Bank Credit Notes

   R$

   CDI + 2.10% a 2.55%

   12.97%

   

   12.96%

   

   2,292

   

   120,000

   

   122,292

   

   2,679

   

   145,000

   

   147,679114,800

   

   415,692

   

   530,492

   

   70,564

   

   336,206

   

   406,770Foreign currencyGlobal Notes 2020

   US$

   7.50%

   8.57%

   

   8.57%

   

   23,301

   

   652,321

   

   675,622

   

   20,628

   

   578,345

   

   598,973Perpetual Notes

   US$

   9.25%

   10.57%

   

   10.57%

   

   -

   

   -

   

   -

   

   2,495

   

   249,930

   

   252,425Banco Inbursa S.A.

   US$

   7.88%

   9.26%

   

   9.22%

   

   6,519

   

   372,491

   

   379,010

   

   5,653

   

   330,429

   

   336,08229,820

   

   1,024,812

   

   1,054,632

   

   28,776

   

   1,158,704

   

   1,187,480Total loans and financings

   

   

   

   

   

   

   144,620

   

   1,440,504

   

   1,585,124

   

   99,340

   

   1,494,910

   

   1,594,250Debentures12/31/2011

   12/31/2010Non-convertible

   

   

   58,000

   58,000

   

   150,348

   

   433,910

   

   584,258

   

   5,525

   

   578,476

   

   584,001Total

   

   

   

   

   

   294,968

   

   1,874,414

   

   2,169,382

   

   104,865

   

   2,073,386

   

   2,178,251
  F-41


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 17. Debt –continued  a)Loans and financing  Bank Credit Notes  On November 16, 2006, the Company contracted with Itaú Bank BBA S.A., a bank credit note in the total amount of R$220,000, of which R$ 50,000 was prepaid by the Company in 2007.  On August 31, 2009, the loan was amended and repayments of principal rescheduled from 2011 to 2014, 2015 and 2016. Additionally, finance charges were changed from CDI plus a spread of 1.2% per annum to CDI plus a spread of 2.55% per annum as from August 31, 2009, with no retroactive effect.  During the year ended December 31, 2011, the Company amortized in advance part of this loan in the amount of R$25,000 (R$30,663 in 2010).  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.  These notes are guaranteed by all the Company's subsidiaries and they can be settled, in total or partially, at any time.  Perpetual Notes  On November 28, 2006, the Company issued Guaranteed Perpetual Notes amounting to US$150 million (equivalent to R$326,966), with indefinite maturity, annual interest rate of 9.25% per annum payable in the second month of each quarter and guaranteed by all the Company's subsidiaries.  On May 27, 2011, the Company exercised its option to fully prepay the principal of Perpetual Notes in the amount of R$244,320 (equivalent to US$150,000), plus interest of US$5,650 incurred during the period between the last quarterly interest payment made​​on February 27, 2011 and the date these bonds were settled.    F-42


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 17. Debt –continued  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, 2011, funds raised under this program amounted to R$221,197 (R$103,630 in 2010 and R$83,584 in 2009). 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.During the year ended December 31, 2011, the Company amortized Finame and Finame PSI totaling R$72,779 (R$61,937 in 2010 and R$45,090 in 2009).  Banco Inbursa S.A.  On June 19, 2008 the Company, executed a borrowing 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 Telmex Group, which is an 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 from June 2013. This borrowing is guaranteed by all the Company’s subsidiaries.  b)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 remain unchanged.   F-43


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 17. Debt –continued  Covenants  The Company is committed to complying with a number of restrictive covenants related to the outstanding borrowings, the most important of which are:  -Maintenance of the ratio obtained from dividing net consolidated debt by EBITDA, as defined in the debt agreement, at less than 2.5; -Maintenance of the ratio obtained from dividing EBITDA by net expenses of consolidated interest, as defined in the debt agreement, at 1.5 or above.  As of December 31, 2011 and 2010, the Company is in compliance with all financial and non financial covenants.  c)Debt costs  Following the amortization schedule of the debt costs, which are presented offsetting the corresponding debt:  Year

   

   Banco

   Inbursa S.A.

   

   Debentures

   

   Global Notes 2020

   

   Total2012

   

   286

   

   434

   

   616

   

   1,3362013

   

   310

   

   439

   

   616

   

   1,3652014

   

   336

   

   437

   

   616

   

   1,3892015

   

   364

   

   215

   

   616

   

   1,1952016 - 2020

   

   1,515

   

   -

   

   2,361

   

   3,8762,811

   

   1,525

   

   4,825

   

   9,161
  18.  Copyright payable - ECAD  The Company has been discussing amounts charged by ECAD (Escritório Central de Arrecadação e Distribuição), which is an organization that acts as the legal representative for artists and authors to collect, royalties on the artist’s behalf. As of December 31, 2011, related to this matter, the Company had judicial deposits in the amount of R$33,682 (R$25,633 as of December 31, 2010).   F-44


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 19. Related parties  a)Employee benefits Expenses with employees’ salaries, benefits and related charges are as follows: 12/31/2011

   

   12/31/2010

   

   12/31/2009Payroll and related charges

   

   601,882

   

   534,561

   

   432,873Profit sharing plan

   

   152,936

   

   82,077

   

   106,916Statutory benefits

   

   85,480

   

   78,693

   

   67,478Additional benefits

   

   60,873

   

   55,512

   

   43,936901,171

   

   750,843

   

   651,203
  Additional benefits  In addition to the usual benefits required by labor legislation, the Company and its subsidiaries provide additional benefits contracted with third parties, such as: health and dental insurance and group life insurance, whose actuarial risks are not assumed by the Company  Profit sharing plan  The Company and its subsidiaries have supplementary remuneration plans considering the fulfillment of established targets:  (i)Profit Sharing Plan (PPR): the Company must remunerate its staff on the basis of profit sharing up to a limit of three additional monthly salaries, in the event that the performance targets established according to annual planning approved by the Company’s Board of Directors are met.  (ii)AdditionalProfit Participation Plan (PPR - current):the Company also rewards a select number of members of management, directors and managers duly approved by the Board of Directors in the form of differentiated salaries.This supplement is geared to additional targets and in exceptional circumstances may be exempt from these conditions, as decided by the Board of Directors.  F-45


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 19. Related parties– continued  a)Employee benefits– continued  Profit sharing plan– continued  (iii)Long-termProfit Sharing Plan(PPR - non-current): the Company also rewards a select number of members of management, directors and managers duly approved by the Board of Directors in the form of differentiated salaries. The purpose of this supplement is to retain the services of these employees.  (iv)Additional Profit Sharing Plan (PPR):the Company will make an additional payment of up to 0.6 additional monthly salaries to the Company’s employees. The principal purpose of this supplementary payment is to increase fulfillment of the Board of Director's targets from 100% to 120%.  As of December 31, 2011 the Company had a provision with salaries, benefits and related charges related to the Profit sharing plan, amounting to $155,105 (R$100,626 on December 31, 2010).  b)Management’s compensation  The compensation paid to the Company's management for services rendered in their corresponding fields of expertise is as follows:  12/31/2011

   

   12/31/2010

   

   12/31/2009Short-term benefits

   

   3,965

   

   4,053

   

   12,169Long-term benefits

   

   7,932

   

   5,248

   

   3,92111,897

   

   9,301

   

   16,090
  Remuneration consists of fixed and variable compensation profit sharing and additional current and non-current profit sharing bonus plans as mentioned in item a) above.  F-46


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 19. Related parties– continued  c)Related companies  The most significant balances of assets and liabilities as of December 31, 2011 and 2010, and revenues and expenses for the years ended December 31, 2011, 2010 and 2009, arising from the transactions between related parties are as follows:   AssetsTrade accounts receivable

   

   TotalCompanies

   

   12/31/2011

   12/31/2010

   

   12/31/2011

   12/31/2010Entities under common controlGlobosat Programadora Ltda

   

   182

   246

   

   182

   246Primesys Soluções Empresariais S.A.

   

   104

   -

   

   104

   -286

   246

   

   286

   246
   LiabilitiesSuppliers

   

   Programming suppliers

   

   Debt

   

   Related parties

   

   TotalCompanies

   

   12/31/2011

   12/31/2010

   

   12/31/2011

   12/31/2010

   

   12/31/2011

   12/31/2010

   

   12/31/2011

   12/31/2010

   

   12/31/2011

   12/31/2010StockholdersEmp. Brasil de Telecom S.A. – Embratel

   

   60,199

   47,883

   

   -

   -

   

   -

   -

   

   84,490

   78,242

   

   144,689

   126,12560,199

   47,883

   

   -

   -

   

   -

   -

   

   84,490

   78,242

   

   144,689

   126,125Entities under common controlNet Brasil S.A.

   

   -

   -

   

   102,146

   81,610

   

   -

   -

   

   -

   -

   

   102,146

   81,610Banco Inbursa S.A.

   

   -

   -

   

   -

   -

   

   379,010

   336,082

   

   -

   -

   

   379,010

   336,082Procisa do Brasil Proj.Cons. e Inst.Ltda.

   

   1,455

   -

   

   -

   -

   

   -

   -

   

   -

   -

   

   1,455

   -Other

   

   3,338

   3,891

   

   -

   -

   

   -

   -

   

   -

   -

   

   3,338

   3,8914,793

   3,891

   

   102,146

   81,610

   

   379,010

   336,082

   

   -

   -

   

   485,949

   421,583Total

   

   64,992

   51,774

   

   102,146

   81,610

   

   379,010

   336,082

   

   84,490

   78,242

   

   630,638

   547,708Current liabilities

   

   64,992

   51,774

   

   102,146

   81,610

   

   6,519

   5,653

   

   84,490

   78,242

   

   258,147

   217,279Non-current liabilities

   

   -

   -

   

   -

   -

   

   372,491

   330,429

   

   -

   -

   

   372,491

   330,429
    F-47


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 19. Related parties– continued  c)Related companies– continued  The continuity schedule of prepaid rights for use and deferred revenues in transactions with Embratel is as follows:  Assets

   

   LiabilitiesPrepaid use rights

   

   Deferred revenues

   

   TotalNet Fone

   

   Shared servicesCurrent assets

   Non-current assets

   

   Current assets

   Non-current assets

   

   Current assets

   Non-current assets

   

   Current assets

   Non-current assetsBalance at 12/31/2008

   

   -

   -

   

   -

   -

   

   -

   103,462

   

   -

   103,462Additions

   

   175,294

   674,338

   

   180,227

   693,312

   

   -

   61,544

   

   180,227

   754,856Write-offs

   

   (14,702)

   -

   

   (15,115)

   -

   

   (26,495)

   -

   

   (41,610)

   -Transfers

   

   14,496

   (14,496)

   

   14,903

   (14,903)

   

   56,081

   (56,081)

   

   70,984

   (70,984)Balance 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

   407,702
             F-48


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 19. Related parties– continued Operating resultsRental revenue / telecommunications

   

   Financial

   

   Telecommunication expense

   

   Programming

   

   Commissions / programming guide

   

   TotalCompanies

   

   12/31/2011

   12/31/2010

   12/31/2009

   

   12/31/2011

   12/31/2010

   12/31/2009

   

   12/31/2011

   12/31/2010

   12/31/2009

   

   12/31/2011

   12/31/2010

   12/31/2009

   

   12/31/2011

   12/31/2010

   12/31/2009

   

   12/31/2011

   12/31/2010

   12/31/2009StockholdersEmp. Brasil. de Telecom. S.A. – Embratel

   

   572,672

   451,132

   391,624

   

   (15,893)

   (11,850)

   (7,257)

   

   (531,878)

   (370,695)

   (262,890)

   

   

   -

   -

   

   -

   -

   -

   

   24,901

   68,587

   121,477572,672

   451,132

   391,624

   

   (15,893)

   (11,850)

   (7,257)

   

   (531,878)

   (370,695)

   (262,890)

   

   

   -

   -

   

   -

   -

   -

   

   24,901

   68,587

   121,477Entities under the common controlNet Brasil S.A.

   

   -

   -

   -

   

   -

   -

   

   

   -

   -

   -

   

   (1,085,859)

   (905,929)

   (674,744)

   

   (1,797)

   (1,701)

   (1,714)

   

   (1,087,656)

   (907,630)

   (676,458)Editora Globo S.A.

   

   -

   -

   -

   

   -

   -

   

   

   -

   -

   -

   

   -

   

   -

   

   (6,096)

   (11,839)

   (11,504)

   

   (6,096)

   (11,839)

   (11,504)Banco Inbursa S.A.

   

   -

   -

   -

   

   (73,710)

   (16,695)

   84,132

   

   -

   -

   -

   

   -

   

   -

   

   -

   -

   -

   

   (73,710)

   (16,695)

   84,132Telmex do Brasil Ltda.

   

   -

   -

   -

   

   -

   -

   

   

   (47,824)

   -

   -

   

   -

   

   -

   

   -

   -

   -

   

   (47,824)

   -Claro S.A.

   

   -

   -

   -

   

   -

   -

   

   

   (14,062)

   (5,195)

   (6,432)

   

   -

   -

   -

   

   -

   -

   -

   

   (14,062)

   (5,195)

   (6,432)Primesys Soluções Empresariais S.A.

   

   550

   -

   -

   

   -

   -

   -

   

   (60,857)

   (3,841)

   -

   

   -

   -

   -

   

   -

   -

   -

   

   (60,307)

   (3,841)

   -Other

   

   2,073

   2,097

   1,676

   

   -

   -

   -

   

   (5,119)

   (1,133)

   (1,781)

   

   -

   -

   (8,227)

   

   -

   -

   -

   

   (3,046)

   394

   (8,332)2,623

   2,097

   1,676

   

   (73,710)

   (16,695)

   84,132

   

   (127,862)

   (10,169)

   (8,213)

   

   (1,085,859)

   (905,929)

   (682,971)

   

   (7,893)

   (14,110)

   (13,218)

   

   (1,292,701)

   (944,806)

   (618,594)575,295

   453,229

   393,300

   

   (89,603)

   (28,545)

   76,875

   

   (659,740)

   (380,864)

   (271,103)

   

   (1,085,859)

   (905,929)

   (682,971)

   

   (7,893)

   (14,110)

   (13,218)

   

   (1,267,800)

   (876,219)

   (497,117)
     F-49


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 19. Related parties– continued  c)Related companies – continued  The right to use the trademark Net is granted by Net Brasil S.A.,asubsidiary of Globo Comunicação e Participações S.A..  The values and conditions of the programming contracts and pay-per-view (PPV) events with Organizações Globo related companies such as SporTV, GNT, Multishow, Globo News, Futura, Canal Brazil, Sexy Hot, Universal Channel, For Man, Playboy, Vênus and Private are conducted at normal market prices, terms and payment conditions.  The program schedule guides for channels are published and distributed by Editora Globo S.A., a subsidiary of Globo Comunicação e Participações S.A., based on usual market practice prices and terms for this type of operation.  The Company and Empresa Brasileira de Telecomunicações S.A. (Embratel) offer telephony services for subscribers of the Company. The new business model offers an Embratel voice product to existing and prospect subscribers of the Company, which calls for the sharing of results by means of the Company’s bi-directional network. Through the implementation of this business, the Company could then started offering integrated video, broadband and voice (“triple play”) services in its market. Sales of this new 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 network to access final customers, with the simultaneous use of Embratel's communications network.  The Company transactions involving the companies associated with Embratel Participações S.A., are recorded based on prices and conditions defined as follows:        F-50


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 19. Related parties– continued  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) The Company is responsible for invoicing Net Fone customers and passing on the pertinent amounts to Embratel.  c) 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.  d) Network access revenue–Remunerated on the basis of the increase of Net Fone’s subscriber base.  e) Optic fiber lease revenue–Remunerated in accordance with specific contract including usual market condition. The services are paid in advance by Embratel and accordingly the prepayments are recorded as deferred revenue in the consolidated balance sheet.  f) Revenues from Small and Medium-Sized Entities)–These services areremunerated under specific contractual conditions at 50% of net amount of accounts.invoiced by Embratel, net of taxes and interconnection fees.  F-51


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
  19. Related parties– continued  g) Communication expenses such as voice channel, fixed line telephony and Click 21 are recorded on the basis of usual market practice prices and terms for this type of operation.  20. Commitments and provisions  I)Commitments  The Company has several agreements for rental of street lighting poles, underground ducts and offices renewed automatically each year, maturing on different dates. These agreements may be terminated at the request of any party, subject to notice periods ranging from 1 to 2 months. These expenses amounted to R$120,649 during year ended December 31, 2011 (R$97,872 in 2010 and R$102,262 in 2009). There are also commitments, with several suppliers for the purchase of materials and equipment used for subscriber installation in the amount of R$8,941 as of December 31, 2011 (R$11,865 as of December 31, 2010).  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 not controlled by the Company’s management. 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 and prior experience in the claim amounts, has provisions considered enough to cover probable losses in the proceedings in course, as follows:     F-52


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 20. Commitments and provisions– continued  Labor

   

   Civil

   

   Tax

   

   Social security

   

   TotalBalances at December 31, 2008

   

   46,704

   

   34,969

   

   607,273

   

   6,989

   

   695,935Additions to provisions

   

   18,721

   

   23,858

   

   65,466

   

   -

   

   108,045Additions through acquisition of companies

   

   290

   

   25

   

   17,721

   

   -

   

   18,036Inflation adjustments

   

   1,018

   

   373

   

   16,370

   

   276

   

   18,037Amounts used

   

   (11,502)

   

   (13,190)

   

   (51,037)

   

   (155)

   

   (75,884)Unused amounts reversed

   

   (1,655)

   

   -

   

   (150,988)

   

   (6,163)

   

   (158,806)Balances at December 31, 2009

   

   53,576

   

   46,035

   

   504,805

   

   947

   

   605,363Additions to provisions

   

   20,040

   

   22,988

   

   76,659

   

   0

   

   119,687Inflation adjustments

   

   1,484

   

   752

   

   29,033

   

   50

   

   31,319Amounts used

   

   (20,557)

   

   (21,817)

   

   (3,201)

   

   -

   

   (45,575)Unused amounts reversed

   

   (21,357)

   

   (2,387)

   

   (131,993)

   

   (293)

   

   (156,030)Balances at December 31, 2010

   

   33,186

   

   45,571

   

   475,303

   

   704

   

   554,764Additions

   

   29,582

   

   39,329

   

   13,235

   

   -

   

   82,146Inflation adjustments

   

   712

   

   2,932

   

   35,138

   

   18

   

   38,800Amounts used

   

   (17,044)

   

   (32,008)

   

   (7,320)

   

   -

   

   (56,372)Unused amounts reversed

   

   (4,273)

   

   (2,290)

   

   (60,907)

   

   (590)

   

   (68,060)Balances at December 31, 2011

   

   42,163

   

   53,534

   

   455,449

   

   132

   

   551,278
   a) Labor provisions  Labor claims involving the Company and its subsidiaries comprise 2,493 lawsuits, mostly arising from employees and third party claims. The main claims are for secondary liability and dangerous work pay. The Company made judicial deposits of R$11,927 at December 31, 2011 (R$13,754 at December 31, 2010) in relation to labor cases.  II) Provisions  b) Civil provisions  Civil claims relate mainly to service contract terminations, contract reviews, improper collection and negative credit reports, advertising disputes, channel availability, occupational accidents (own employees or outsourcers), 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. Appeals in these civil proceedings mainly relate to indemnifications for personal and material damages sought by subscribers, except for actions relating to lease of poles, in which the Company is requesting to change the monthly rent amounts.  The Company has judicial deposits in the amount of R$29,970 as of December 31, 2011 (R$23,873 at December 31, 2010), in relation to civil claims.      F-53


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 20. Commitments and provisions– continued  c) Tax and social security provisions  Tax charges and contributions calculated and collected by the Company and its subsidiaries, and their income statements, tax and company records, are subject to examination by tax authorities for varying periods under applicable legislation.  The following are the most significant tax and social security contingencies:  a. Value-added tax (ICMS – Imposto sobre circulação de mercadorias e prestação de serviços)  The Company is contesting the ICMS tax rate levied on access provider revenue and also on other revenues for which it has a provision of R$61,775 at December 31, 2011 (R$87,342 at December 31, 2010) in the consolidated basis.  During the year ended December 31, 2011, the Company reversed unused provisions relating to ICMS value-added tax amounting to R$30,496 (R$32,955 in 2010 and R$5,009 in 2009), due to the fact that the time period for bringing claims in the statute of limitations had passed.  II) Provisions –continued  c) Tax and social security provisions  b. Financial Transaction Tax (IOF) The Company and its subsidiaries have centralized cash management and cash transfers made under a current intercompany account. Based on the opinion of its external legal counsel, management understands that such transfers are not subject to IOF charges. However, in view of certain adverse court decisions as to the applicability of this law, the Company has a provision of R$97,492 at December 31, 2011 (R$80,895 at December 31, 2010). During the year ended December 31, 2011, the Company reversed unused provisions related to IOFofR$3,897 (R$21,744in 2010 and R$11,244 in 2009), due to the fact that the time period for bringing claims in the statute of limitations had passed.       F-54


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 20. Commitments and provisions– continued  c. Withholding tax (IRRF) on foreign currency bonds  The Senior Notes and Floating Rate Notes are not subject to IRRF and IOF, as long as the average term is not less than 96 months. Due to the fact that some noteholders exercised their rights in advance, the Company has a provision ofR$155,714 at December 31, 2011(R$148,419at December 31, 2010) related to these taxes.  d) PIS (Programa de Integração Social) and COFINS (Contribuição para o financiamento da seguridade social) – Social contribution taxes  On September 30, 2009, the Company and its legal counsel assessed the progress of legal cases related to the increase in the calculation base for the PIS and the COFINS on income as provided in paragraph 1 of Article 3 of Law No. 9718/98 and revoked by Law No. 11941/09 on May 27, 2009.  Based on the results of this assessment, revocation of the legal provision which created the increased calculation base and the existence of favorable case law related to this matter, the Company reversed its provision of R$124,269. This entry was recorded as a reduction in financial expenses.  During the year ended December 31, 2010, the Company reversed unused provisions related to PIS and COFINS on foreign currency exchange and financial income in the amount of R$44,626, due to the fact that the time period for bringing claims in the statute of limitations had passed.  III) Contingent liabilities not recorded In addition to the contingencies mentioned above, as of December 31, 2011, there are other ongoing legal proceedings amounting toR$ 1,272,179 (R$840,964 as of December 31, 2010), which legal advisors assess as possible, but not probable, losses; thus, no provisions were recorded. The Company does not expect any reimbursement in connection with the outcome of these legal and administrative proceedings.. The most significant claims, in which risk of losses were rated as possible, are summarized below:  F-55


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 20. Commitments and provisions– continued  III) Contingent liabilities not recorded– continued  a. Disallowance of expenses - Income tax and social contribution . The 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$97,821 and the probability of loss initially analyzed as remote, has shifted to possible. The amounts of these proceedings at December 31, 2011 totaled R$ 307,131(IRPJ) and R$ 109,599 (CSLL). On defense, management understands 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, 2011 was R$127,339 (R$115,955 on December 31, 2010).  On defense, management understands that services provided by cable TV companies are classified as communication services instead of public entertainment services.  c. Disallowed expenses and non-proven expenses  In 2007, Net São Paulo and Net Rio received requests from tax authorities amounting to R$97,806 as of December 31, 2011 (R$90,770 as of December 31, 2010) for not having submitted documents supporting their registered expenses within the period determined by the tax inspectors..  On defense, management believes that these expenses are in accordance with tax legislation, so there is therefore no motive for disallowance by tax authorities.  F-56


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 20. Commitments and provisions– continued  III) Contingent liabilities not recorded– continued  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 as of December 31, 2011 was R$252,688.  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 cannot be taxed by ICMS, so there is no motive to lose the tax benefit as alleged by the tax authority. However, considering there is no specific precedent (at both the administrative and judicial levels) on the issue, it is not possible to predict the outcome of this the matter yet.  IV) Other information  Charge for extra outlet  On April 22, 2009, Anatel passed Resolution No. 528, which prevents cable subscription TV operators from charging clients for more than one outlet per residence. The resolution only mentions that certain items such as installation, internal network, converter and signal decoder and other equipment repairs could be charged for by these operators.  The Federal Court inBrasília had extended an injunction based on a case decided by ABTA (The Brazilian Pay TV Association) in 2008, allowing the Company to charge for the additional connections. However, in 2009, the Federal Court in Brasilia revoked the ABTA injunction related to additional connections. Nevertheless, management does not expect any substantial impact on Company operations, since the current sales model for the extra outlet is covered by the charge for the rental of the equipment and the installation fee as provided for in the resolution.   F-57


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 21. Stockholders’ equity  Share capital  As of December 31, 2011, the Company’s share capitalis comprised by 114,459,685 common 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 need 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.  The Company is controlled by GB Empreendimentos e Participações S.A. (“GB”), whose stockholders are Globo Comunicações e Participações S.A., who holds 51 % of its common shares, and Embratel Participações S.A. (Embrapar) and its subsidiary Embratel, that, together, own 49% of the common shares and 100% of preferred shares of GB.  Under the tender public offer of October 7, 2010, of which, until December 31, 2010, Embratel acquired 186,547,731 of the Company’s preferred shares, the holders of the remaining preferred stocks could sell their shares to Embratel by the tender offer price of R$23 adjusted by variation in the reference rate - TR monthly. During the period from January 1, 2011 to January 13, 2011, the final date established under the terms of the tender public offer for the sale of stocks, 7,153,568 preferred stocks were negotiated, increasing the final number of preferred shares held by Embratel to 193,701,299, representing 84.77% of the Company’s preferred shares. In connection with this transaction, Embratel and its parent company, Embrapar, jointly hold, 223,080,448 of the Company’s preferred shares, representing 97.63% of the Company’s preferred shares and 91.86% of the Company’s total shares.  As of December 31, 2011, the Company’s stockholders, Globo Comunicação e Participações S.A. and Embratel Participações S.A. (and its subsidiary Embratel) hold, directly and indirectly, 6.35% and 91.86% of the Company’s share capital, respectively.   F-58


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TABLE OF CONTENTS


NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 21. Stockholders’ equity– continued  Share capital– continued  The by-laws determine distribution of a mandatory dividend of 25% of net income adjusted as per 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% (ten percent) 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.  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 March 21, 2005, a Company Stockholders’ Agreement was executed, whereby any stockholder that wants to transfer part or all of its common shares to a third party must notify in writing the other stockholders, extending preemptive rights.     F-59


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 21. Stockholders’ equity– continued  Stockholders’ agreement – continued  The Company’s Board of Directors is comprised of between 9 (nine) and 12 (twelve) effective members and the same number of alternate members, with at least, twenty percent of its Independent Board members as defined in Regulation Level 2 of BM&FBOVESPA’s Corporate Governance.  All Board of Directors members are elected by the Company’s General Assembly, have an unified term of 1 (one) year, reelection being permitted, having been elected at the Annual General Meeting of April 29, 2011, 1 (one) member and respective alternate appointed by Globo, 6 (six) members and respective alternates appointed by GB, 3 (three) members and 2 (two) alternates appointed by Embrapar, 01 (one) separate member, with no participation in the controlling stockholders of GB and Globo, and 1 (one) an independent member appointed by Embratel. As defined in the stockholders’ agreement and related amendments, the votes of independent member and its alternate will not be bound by decisions taken in the Preliminary Meetings under the stockholders’ agreement.  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 Net Serviços de Comunicação S.A. 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, 2011, the Company obtained tax benefits represented by cash savings of R$9,744(R$8,087 in 2010 and R$13,942 in 2009), resulting from amortization of goodwill calculated byGlobotel Participações S.A.  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 thestockholderGlobo Comunicação e Participações S.A. (successor to Roma Participações S.A.). The remaining stockholders have the option of exercising their right on the subscription of these shares.        F-60


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 22. 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:  12/31/2011

   

   12/31/2010Net Rio Ltda.

   

   238,290

   

   235,459Net Serviços de Comunicação S.A.

   

   47,879

   

   56,284Reyc Comércio e Participações Ltda.

   

   11,932

   

   10,987Net Brasília Ltda.

   

   6,263

   

   -Net São Paulo Ltda.

   

   3,912

   

   3,646308,276

   

   306,376
  23. Earnings per share  Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent 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 parent 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, 2011, 2010 and 2009, the Company had no potential dilutive common shares.  The following table shows earnings per share (in thousands, except for earnings per share):  12/31/2011

   

   12/31/2010

   

   12/31/2009NumeratorProfit for the year

   

   R$ 373,173

   

   R$ 307,151

   

   R$ 735,948DenominatorWeighted average number of common shares

   

   114,459,685

   

   114,459,685

   

   114,301,508Weighted average number of preferred shares

   

   228,503,916

   

   228,503,916

   

   228,187,56210% - Preferred shares

   

   1.10

   

   1.10

   

   1.10Weighted average number of adjusted preferred shares

   

   251,354,308

   

   251,354,308

   

   251,006,318Denominator for basic and diluted earnings per share

   

   365,813,993

   

   365,813,993

   

   365,307,826Basic and diluted earnings per common share

   

   R$ 1.02

   

   R$0.84

   

   R$ 2.0110% - Preferred shares

   

   1.10

   

   1.10

   

   1.10Basic and diluted earnings per preferred share

   

   R$ 1.12

   

   R$0.92

   

   R$ 2.22
     F-61


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 24. 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.  The Company has a formal risk management policy. The Financial Committee supports the Company's Board of Directors and consists of one member from each of the main Stockholders (Globo and Embratel) and management. It examines issues relating to investments, debt and risk management, and refers matters to the approval of the Board of Directors. As required by the Company’s internal policies, the Company's financial results must derive from the Company’s operations rather than gain in the financial market. Results obtained by the application of internal controls to manage risks were satisfactory in relation to their proposed objectives.  b)Fair value  Fair values​​of debt were calculated considering the estimated cost to settle the obligations as of December 31 of each year presented, which includes contractual penalties for early settlement.  Fair values and carrying amounts of debt are shown below:  12/31/2011

   

   12/31/2010Carrying amount

   

   Fairvalue

   

   Carrying amount

   

   FairValueDebentures – 6th issue

   

   584,258

   

   586,949

   

   584,001

   

   575,266Perpetual Notes

   

   -

   

   -

   

   252,425

   

   255,237Global Notes 2020

   

   675,622

   

   769,371

   

   598,973

   

   665,396Banco Inbursa S.A.

   

   379,010

   

   385,643

   

   336,082

   

   345,577Banco Itaú BBA

   

   122,292

   

   122,953

   

   147,679

   

   148,675Finame

   

   408,200

   

   408,200

   

   259,091

   

   259,0912,169,382

   

   2,273,116

   

   2,178,251

   

   2,249,242
         F-62


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 24. Financial instruments– continued  Other financial assets and liabilities have fair values approximated to their carrying amounts.  c)Risks impacting on 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 pegged to 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 as of December 31, 2011, is shown below:  Debt in US dollars:Current:Interest on loans and financing

   

   29,820Suppliers of equipment and others

   

   44,185Programming suppliers

   

   2,20376,208Non-current:Loans payable, net of costs of debts

   

   1,024,812Exposure liability

   

   1,101,020
   b)Risks impacting the Company’s business  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: Itaú, Goldman Sachs, HSBC, Santander, JP Morgan, Morgan Stanley and 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.   F-63


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 24. Financial instruments– continued  For the year ended December 31, 2011, the Company held a derivative instrument (foreign exchange) position of R$207,463 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

   12/31/2011

   12/31/2010

   

   12/31/2011

   12/31/2010

   

   Amount payable“Swaps” contractsAsset positionForeign currency

   207,463

   528,185

   

   202,382

   519,500

   

   -Liability positionRatios (Dollar vs, CDI)

   154,941

   291,585

   

   164,767

   321,043

   

   14,122Rates (PRE) (NDF)

   52,522

   236,600

   

   50,142

   249,314

   

   (1,595)-

   -

   

   (12,527)

   (50,857)

   

   12,527
   The net liability payable of R$12,527 is recognized in the heading “unrealized losses on derivatives” in the consolidated balance sheet. During the year ended December 31, 2011, the Company recognized losses on derivatives of R$16,978 (R$65,915 in 2010 and R$97,341 in 2009), which were recorded as finance expenses.      F-64


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 24. Financial instruments– continued  c)Risks impacting 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, 2011:  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

   

   17

   

   82,600

   

   From 01/26/2012 to 07/25/2013

   

   1.8758

   

   10.87%

   

   1.4069

   

   13.59%

   

   52,486

   

   0.9379

   

   16.31%

   

   90,261NDF

   

   9

   

   28,000

   

   From 01/02/2012 to 03/01/2012

   

   1.8758

   

   10.87%

   

   1.4069

   

   13.59%

   

   5,307

   

   0.9379

   

   16.31%

   

   12,523
  (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

   

   17

   

   82,600

   

   From 01/26/2012 to 07/25/2013

   

   1.8758

   

   10.87%

   

   2.3448

   

   8.15%

   

   27,484

   

   2.8137

   

   5.44%

   

   69,913NDF

   

   9

   

   28,000

   

   From 01/02/2012 to 03/01/2012

   

   1.8758

   

   10.87%

   

   2.3448

   

   8.15%

   

   9,229

   

   2.8137

   

   5.44%

   

   16,554
  (a)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. (b)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.   F-65


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 24. Financial instruments– continued  c)Risks impacting the Company’s business– continued  Foreign exchange rate risk– continued  As of December 31, 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 pegged to floating interest rates, especially CDI and TJLP.  The Company's exposure to floating interest rates as of December 31, 2011 is as follows:  Debentures –6th issuance

   

   584,258Finame

   

   408,200Banco Itaú BBA

   

   122,292Liability exposure

   

   1,114,750(-) Financial investments denominated in reais

   

   688,832Net exposure

   

   425,918
  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 guidelines set by the Company, Centralized fund's portfolio is managed by Itaú Unibanco Asset Management - Banco de Investimento S.A.  The custody and control of the funds are under the responsibility of Banco Itaú;Risk Office Consultoria Financeira Ltda, performs risk management analysis. 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.    F-66


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 24.  Financial instruments– continued  c)Risks impacting the business of the Company– continued  Debt acceleration risk  The Company’s debts contain covenants normally applicable to these types of transactions, in relation to its complying with economic and financial ratios, cash flow requirements and others. The Company has complied with these covenants and they do not restrict its ability to conduct its business in the normal course of operations.  Liquidity risk  Liquidity risk is the risk of a shortfall of funds used for payment of debts. The table below shows payments required for financial liabilities as of December 31, 2011.  Amounts presented below include principal and interest payments calculated using the dollar exchange rate at December 31, 2011 (R$1.8758 /US$ 1) for the debt denominated in US dollars (Global Notes 2020 and Banco Inbursa S.A.). Debentures and bank credit notes (Banco Itaú BBA), which are denominated in Brazilian Reais and are subject to interest based on the interbank deposit certificate index (CDI), were forecasted based on the yield curve for their respective payment dates, in accordance with indices provided by BM&FBOVESPA. Finame loans were estimated based on long-term interest rate (TJLP) of 6.0% + 3.15% per year for the entire period and fixed rate between 4.5%, 5.5% and 8.7% per year.   Maturity

   

   Finame

   

   Global Notes 2020

   

   Banco Inbursa S.A.

   

   Banco Itaú BBA

   

   Debentures

   

   Total2012

   

   132,486

   

   56,264

   

   34,739

   

   14,759

   

   203,991

   

   442,2392013

   

   110,418

   

   56,264

   

   34,739

   

   14,649

   

   187,316

   

   403,3862014

   

   73,455

   

   56,264

   

   34,739

   

   55,770

   

   171,405

   

   391,6332015

   

   61,105

   

   56,264

   

   34,739

   

   48,358

   

   153,901

   

   354,3672016-2020

   

   81,470

   

   909,720

   

   479,378

   

   40,402

   

   -

   

   1,510,970Total

   

   458,934

   

   1,134,776

   

   618,334

   

   173,938

   

   716,613

   

   3,102,595
  Interest payments for US Dollar denominated debt (Global Notes 2020 and Banco Inbursa S.A.) include withholding taxes, as required by the prevailing tax legislation.  F-67


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 25. 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:  • 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, 2011

   (12,527)

   -

   (12,527)

   -Balances at December 31, 2010

   (50,857)

   -

   (50,857)

   -
  Currency swap derivative instruments are mechanisms 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.  As of December 31, 2011, there were no transfers between levels 1 and 2 in relation to fair value measurement or transfers to level 3.    F-68


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to the financial statements December 31, 2011 and 2010 (In thousands of reais)
 26. Insurance  The Company has a policy of contracting insurance coverage for goods subject to risks at amounts deemed sufficient to cover any claims, taking into consideration the nature of its operations.  In August 2011, the Company renewed its policies and the total coverage by nature is as follows:  Nature

   Main coverage

   Maximum annual coverageMulti-risk property insurance

   Fire, lightening, explosion, tornado, electrical damage, theft, valuables inside the premises, riots, strikes and restoration of records, open fidelity, electronic equipment, furniture and flooding,

   70,711Responsibilities

   Civil, operating – commercial/industrial establishments, service providers at the locations of third parties, employer, contingent risks, civil work sites, crossed civil liability, pain and suffering and parking lot valets

   3,000Civil responsibility of the directors and Management officers

   Legal defense costs, legal representation expenses and indemnities for financial losses caused to third parties owed to errors or omissions incurred in management acts, including worldwide coverage,

   28,137
  27. Subsequent event  On January 26, 2012, Anatel approved the transfer of the Company’s indirect control. In regards with that, Anatel authorized the exercise by Embrapar of the call option for the acquisition of shares issued by GB, the entity that directly controls the Company, that are currently held by Globo, in accordance with the provisions of the stockholders’ agreement of GB. Once the call option is exercised, Embrapar, together with its subsidiary Embratel, will be the direct owners of GB and, therefore, the indirect owners of the Company.    F-69


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