Cielo S.A. and Subsidiaries: (Convenience Translation Into English From The Original Previously Issued in Portuguese)

(Convenience Translation into English from the Original Previously Issued in Portuguese)
Cielo S.A. and Subsidiaries

Financial Statements for the Six-month Period Ended June 30, 2011 and Independent Auditors Report
Deloitte Touche Tohmatsu Auditores Independentes
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES BALANCE SHEETS AS AT JUNE 30, 2011 AND DECEMBER 31, 2010 (In thousands of Brazilian reais - R$)
ASSETS CURRENT ASSETS Cash and cash equivalents Trade accounts receivable Receivables from subsidiary Prepaid and recoverable taxes Receivables - securitization abroad Interest receivable - securitization abroad Prepaid expenses Other receivables Total current assets NONCURRENT ASSETS Deferred income tax and social contribution Escrow deposits Other receivables Investments in subsidiaries and joint ventures Property and equipment Intangible assets: Goodwill on acquisition of investments Other intangible assets Total noncurrent assets
Note
Company 06.30.2011 12.31.2010
Consolidated 06.30.2011 12.31.2010
LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Payables to merchants Trade accounts payable Taxes payable Payables to subsidiary Payables - securitization abroad Interest received in advance - securitization abroad Dividends payable Other payables Total current liabilities NONCURRENT LIABILITIES Reserve for contingent liabilities Deferred income tax and social contribution Other payables Total noncurrent liabilities SHAREHOLDERS' EQUITY Capital Capital reserve Treasury shares Earnings reserves Company's owners Noncontrolling interests Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
Note
Company 06.30.2011 12.31.2010
Consolidated 06.30.2011 12.31.2010
4 5 24 6 6
210,889 2,292,212 153 237 7,584 17,736 2,528,811
221,542 2,192,915 165 441 42,027 956 4,781 17,440 2,480,267
253,050 2,336,697 3,534 7,909 28,329 2,629,519
250,603 2,210,282 2,710 42,027 956 4,851 24,892 2,536,321
13 14 15 24 18 18 19.f) 16
1,559,742 180,558 206,798 10,523 61,042 2,018,663
1,168,440 145,875 405,351 25,946 42,003 956 117,958 79,848 1,986,377
1,559,742 230,296 211,487 81,206 2,082,731
1,168,440 180,761 409,042 42,003 956 117,958 97,197 2,016,357
7 17 8 9 10 11
274,943 527,948 666 166,483 343,935 10,143 44,997 1,369,115
245,324 467,245 1,078 76,088 346,498 10,143 40,067 1,186,443
284,436 550,502 727 357,216 86,931 128,475 1,408,287
255,216 489,204 1,090 360,290 53,779 75,506 1,235,085
17 16
555,309 8,653 563,962
495,100 5,452 500,552
586,171 5,165 34,279 625,615
523,633 5,579 31,586 560,798
19.a) 19.b) 19.g)
263,836 89,871 (67,571) 1,029,165 1,315,301 1,315,301 3,897,926
100,000 83,532 (68,823) 1,065,072 1,179,781 1,179,781 3,666,710
263,836 89,871 (67,571) 1,029,165 1,315,301 14,159 1,329,460 4,037,806
100,000 83,532 (68,823) 1,065,072 1,179,781 14,470 1,194,251 3,771,406
TOTAL ASSETS
3,897,926
3,666,710
4,037,806
3,771,406
The accompanying notes are an integral part of these financial statements.
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES INCOME STATEMENT FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2011 AND 2010 (In thousands of Brazilian reais - R$, except earnings per share)
Note NET REVENUE COST OF SERVICES GROSS PROFIT OPERATING INCOME (EXPENSES) Personnel General and administrative Marketing Equity in subsidiaries Other operating expenses, net INCOME FROM OPERATIONS FINANCIAL INCOME (EXPENSES) Financial income Financial expenses Income from prepayment of receivables Adjustment to present value expense Exchange rate change, net 21 22
Company 06.30.2011 06.30.2010 1,873,974 (578,505) 1,295,469 1,910,297 (490,394) 1,419,903
Consolidated 06.30.2011 06.30.2010 1,948,143 (653,880) 1,294,263 1,923,199 (509,117) 1,414,082
22 22 22 8 22 and 31
(58,134) (140,238) (57,473) 1,394 (10,737) 1,030,281
(53,601) (93,903) (57,384) (7,079) (4,615) 1,203,321
(93,513) (95,828) (57,561) (12,187) 1,035,174
(74,483) (66,469) (57,467) (3,400) 1,212,263
30 30 30 30 30
15,843 (34,102) 258,512 (5,272) 1,997 236,978
30,553 (14,733) 170,351 (24,485) 697 162,383
17,238 (34,656) 258,512 (5,272) 1,997 237,819
31,411 (21,172) 170,351 (24,485) 697 156,802
INCOME BEFORE INCOME TAX AND SOCIAL CONTRIBUTION INCOME TAX AND SOCIAL CONTRIBUTION Current Deferred NET INCOME ATTRIBUTABLE TO Company's owners Noncontrolling interests
1,267,259
1,365,704
1,272,993
1,369,065
25 25
(448,646) 29,619 848,232
(478,150) 10,379 897,933
(452,215) 29,438 850,216
(478,150) 7,018 897,933
848,232 1,984 850,216 20.b) 20.b) 1.5588 1.5573 1.6505 1.6495 1.5625 1.5618
897,933 897,933 1.6505 1.6495
BASIC EARNINGS PER SHARE - R$ DILUTED EARNINGS PER SHARE - R$
Comprehensive income: The Company did not record other comprehensive income. Accordingly, a statement of comprehensive income is not presented.
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES STATEMENT OF CHANGES IN EQUITY FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2011 AND 2010 (In thousands of Brazilian reais - R$) Company's owners Earnings reserves Capital Legal budget Earnings reserve reserve retention 15,076 766,897 Total Company's owners 860,429 Total shareholders' equity 860,429
Note BALANCES AS AT DECEMBER 31, 2009 Allocation of earnings retention reserve: Dividends paid Interest on capital paid Capital budget reserve Capital increase Stock options granted Treasury shares Net income Allocation of net income for the six-month periodLegal reserve BALANCES AS AT JUNE 30, 2010 BALANCES AS AT DECEMBER 31, 2010 Allocation of earnings retention reserve: Dividends paid on retained earnings Capital budget reserve Capital increase Stock options granted Stock options exercised during the six-month period Net income Allocation of net income for the six-month periodLegal reserve Effect of noncontrolling shareholders BALANCES AS AT JUNE 30, 2011
Capital 75,379
Capital reserve 72,305
Treasury shares (69,228)
Noncontrolling interests -
33 19.g)
24,621 100,000 100,000
5,230 77,535 83,532
(3,001) -
(15,076) 20,000
143,836 143,836 143,836
(603,775) (9,741) (143,836) (9,545) 897,933 (20,000) 877,933 901,236
(603,775) (9,741) 5,230 (3,001) 897,933 1,147,075 1,179,781
14,470
(603,775) (9,741) 5,230 (3,001) 897,933 1,147,075 1,194,251
(72,229) (68,823)
20,000 20,000
19.f) 19.d) 19.a) 33 19.e) 19.c)
163,836 263,836
6,339 89,871
1,252 (67,571)
(20,000) 42,412 42,412
180,933 (143,836) 180,933
(720,303) (180,933) 848,232 (42,412) 805,820
(720,303) 6,339 1,252 848,232 1,315,301
1,984 (2,295) 14,159
(720,303) 6,339 1,252 850,216 (2,295) 1,329,460
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES STATEMENT OF VALUE ADDED FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2011 AND 2010 (In thousands of Brazilian reais - R$)
Company Note CASH FLOWS FROM OPERATING ACTIVITIES Net income before income tax and social contribution Adjustments to reconcile net income before income tax and social contribution to net cash provided by operating activities: Depreciation and amortization Recognition of allowance for losses on fixed and intangible assets Net book value of fixed and intangible assets written off or sold Share options granted Allowance for investment losses Loss from equipment lease Reserve for contingent liabilities Adjustment to present value of receivables Equity in subsidiaries (Increase) decrease in operating assets: Trade accounts receivable Receivables from subsidiary Prepaid and recoverable taxes Other receivables (current and noncurrent) Escrow deposits Prepaid expenses Increase (decrease) in operating liabilities: Payables to merchants Trade accounts payable Taxes payable Payables to subsidiary Other payables (current and noncurrent) Reserve for contingent liabilities (current and noncurrent) Cash provided by operating activities Interest received Interest paid Income tax and social contribution paid Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Capital increase in subsidiaries Acquisition of equity interest in joint venture Additions to fixed and intangible assets Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Share options exercised Dividends and interest on capital paid Treasury shares Net cash used in financing activities (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 06.30.2011 06.30.2010
Consolidated 06.30.2011 06.30.2010
1,267,259
1,365,704
1,272,993
1,369,065
22 9 33
17 30 8
106,269 2,223 6,430 6,339 14,350 60,209 5,272 (1,394)
89,742 3,916 2,337 5,230 7,963 47,512 58,574 7,079
112,384 2,223 6,985 6,339 14,350 62,841 5,272 -
90,819 3,916 2,496 5,230 202 7,963 51,681 58,574 -
(104,568) 12 204 43,099 (60,703) (2,803)
(550,496) 2,207 (753) 75,717 (67,216) (973)
(126,063) 139 41,809 (61,298) (3,058)
(550,257) (2,855) 80,980 (67,102) (1,016)
376,952 34,683 (9,683) (15,423) (58,564) 1,670,163 1,596 (1,596) (637,517) 1,032,646
203,231 8,075 (1,909) (505) (86,980) (218) 1,168,237 6,478 (6,478) (627,827) 540,410
376,952 41,903 (9,043) (56,804) 1,687,924 1,596 (1,596) (640,934) 1,046,990
203,231 8,972 (1,904) (92,664) (218) 1,167,113 6,478 (6,478) (626,400) 540,713
(89,001) (117,289) (206,290)
(16,049) (120,150) (136,199)
(42,000) (47,000) (118,534) (207,534)
(122,070) (122,070)
19.f)
1,252 (838,261) (837,009) (10,653)
(718,881) (3,001) (721,882) (317,671)
1,252 (838,261) (837,009) 2,447
(718,881) (3,001) (721,882) (303,239)
4 4
210,889 221,542 (10,653)
192,571 510,242 (317,671)
253,050 250,603 2,447
211,041 514,280 (303,239)
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES STATEMENTS OF VALUE ADDED FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2011 AND 2010 (In thousands of Brazilian reais - R$)
Note REVENUES Gross sales of services Losses on equipment lease
Company 06.30.2011 06.30.2010
Consolidated 06.30.2011 06.30.2010
21
2,083,830 (14,350) 2,069,480
2,123,460 (7,963) 2,115,497
2,173,471 (14,350) 2,159,121
2,143,180 (7,963) 2,135,217
INPUTS PURCHASED FROM THIRD PARTIES Service costs Materials, electric power, outside services and other Other expenses, net Loss on realization of assets
(429,611) (194,067) 3,065 547 (620,066) 1,449,414
(359,352) (147,962) 8,506 (5,158) (503,966) 1,611,531
(484,522) (146,837) 799 547 (630,013) 1,529,108
(371,042) (118,877) 9,721 (5,158) (485,356) 1,649,861
GROSS VALUE ADDED RETENTIONS Depreciation and amortization WEALTH CREATED, NET WEALTH RECEIVED IN TRANSFER Equity in subsidiaries Noncontrolling interests Financial income including exchange rate change, net and prepayment of receivables, net
22
(106,269) 1,343,145
(89,742) 1,521,789
(112,384) 1,416,724
(90,819) 1,559,042
1,394 271,080 272,474 1,615,619
(7,079) 177,116 170,037 1,691,826
(1,984) 272,475 270,491 1,687,215
177,974 177,974 1,737,016
30
WEALTH FOR DISTRIBUTION DISTRIBUTION OF WEALTH Personnel and related taxes Profit sharing Taxes, fees and contributions Accrued interest and leases Earnings retention WEALTH DISTRIBUTED
28
19.e)
(71,797) (17,896) (640,967) (36,728) (848,232) (1,615,620)
(68,103) (15,820) (692,792) (17,178) (897,933) (1,691,826)
(106,079) (24,291) (667,230) (41,383) (848,232) (1,687,215)
(85,932) (19,813) (706,711) (26,627) (897,933) (1,737,016)
(Convenience Translation into English from the Original Previously Issued in Portuguese) CIELO S.A. AND SUBSIDIARIES NOTES TO THE FINANCIAL STATEMENTS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2011 (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) 1. GENERAL INFORMATION Cielo S.A. (Company or Cielo) was established on November 23, 1995 in Brazil, and is primarily engaged in providing services related to credit and debit cards and other payment methods, as well as providing related services, such as signing up of merchants and service providers, rental, installation and maintenance of Point of Sales - POS equipment, and data capture and processing of electronic and manual transactions. Cielo is a joint stock corporation based in Barueri, State of So Paulo, registered with BM&FBOVESPA S.A. - So Paulo Stock, Mercantile and Futures Exchange. Cielo is controlled by Banco do Brasil Group and Bradesco Group. On January 23, 2003, the Company set up a branch in Grand Cayman, Cayman Islands (note 23), for the specific purpose of conducting abroad a receivables securitization transaction denominated in foreign currency (notes 6, 18 and 23). The operations of the Companys direct and indirect subsidiaries are as follows: Direct subsidiaries Servinet Servios Ltda. (Servinet) - engaged in the provision of maintenance and contacts with merchants and service providers for acceptance of credit and debit cards and other payment methods; development of related activities in the service segment that are of interest to Servinet; and holding investments in other companies as partner or shareholder. Servrede Servios S.A. (Servrede) - engaged in holding investments in other companies as partner or shareholder. CieloPar Participaes Ltda. (CieloPar) - engaged in holding investments in other companies as partner or shareholder.
Companhia Brasileira de Gesto de Servios (Orizon), formerly Orizon Brasil Processamento de Informaes de Sade Ltda. - engaged in the provision of consulting and data processing services to medical companies in general; management of back office services for health operators in general; electronic network interconnection services between health operators and medical and hospital service providers (e.g.: hospitals, clinics and laboratories), and other health system agents and drugstores, based on a single technology platform; scanning and process automation services, card issuance, call center services and other solutions; card reading and nonfinancial transactions routing services; lease or sale of card readers, other computer-based equipment and systems used for providing its services and equipment technical assistance; and holding investments in local or foreign companies as partner or shareholder. Indirect subsidiaries Prevsade Comercial de Produtos e de Benefcios de Farmcia Ltda. (Prevsade) Orizons subsidiary engaged in medicine benefit services to corporate customers, healthcare plans, public customers, and large laboratories. Prevsade manages the relationship of its customers employees with drugstores, doctors and the contracting company itself. Precisa Comercializao de Medicamentos Ltda. (Precisa) - Orizons subsidiary engaged in the sale of medicines in general, with focus on health prevention and maintenance, with a scheduled delivery system. Precisa is a drugstore focused on the distribution of medicines to Prevsades customers, especially chronic patients. It is responsible for delivering medicines regularly administered to Prevsades customers with chronicle diseases, such as diabetes, cancer and heart and blood pressure conditions, which allows monitoring the delivery and use of medicines, increasing the treatments effectiveness. Multidisplay Comrcio e Servios Tecnolgicos S.A. (Multidisplay) - Servredes subsidiary engaged in data transmission services to load fixed or mobile phone credits, the sale of mobile or fixed phone credits, as well as technology, software development and licensing consulting services, product sale, and technology and sales representation services. M4 Produtos e Servios S.A. (M4 Produtos) - Multidisplays subsidiary engaged in data transmission services to load fixed or mobile phone, prepaid television, prepaid transportation and similar credits; mobile payment and technology consulting services; and software development and licensing. Paggo Solues e Meios de Pagamento S.A. (Paggo Solues) - a subsidiary of CieloPar, is engaged in the accreditation of merchants for acceptance of credit and debit cards; the supply and provision of solutions and electronic means for transaction capture and processing arising from the use of credit and debit cards; and the management of payables to and receivables from the network of authorized merchants, through the capture, transmission, data processing and settlement of electronic transactions with credit and debit cards for mobile payments.
Braspag Tecnologia em Pagamento Ltda. (Braspag) - a subsidiary of CieloPar, engaged in developing computer software; processing electronic transactions; providing advisory services and IT services relating to collection and management of payables and receivables via internet; managing third parties credit cards; obtaining, on behalf of credit card holders and accredited stores, financing with financial institutions; providing guarantees to the parties under credit card businesses. Acquisition of subsidiaries - Multidisplay and M4 Produtos In August 2010, the Company acquired, through its direct subsidiary Servrede, the control of Multidisplay Comrcio e Servios Tecnolgicos S.A. (Multidisplay) and its wholly-owned subsidiary M4 Produtos e Servios S.A. (M4 Produtos), which collectively form M4U, pioneering Brazilian company in and leader of the technology platform development segment both for loading cell phones and mobile payments. The price for the acquisition of 50.1% of the capital of M4U totaled R$50,650, of which R$25,600 was paid on the acquisition date and the remaining balance, recorded as Other payables in noncurrent liabilities, will be paid in 37 monthly installments, beginning on the transaction date, contingent to the attainment of certain financial performance goals, set out in the Share Purchase and Sale Agreement. Investment agreement - Paggo Solues joint venture On September 29, 2010, the Company, Tele Norte Leste Participaes S.A. (TNL) and Paggo Acquirer Gesto de Meios de Pagamento Ltda. (Paggo Acquirer, a TNL subsidiary) entered into an Investment Agreement to govern the interests of Paggo Acquirer and the Company though its subsidiary Cielo Par in a new company called Paggo Solues de Meios de Pagamento S.A. (Paggo Solues). Paggo Acquirer and the Company hold 50% each of the capital of Paggo Solues. Acquisition of subsidiary - Braspag Tecnologia em Pagamento Ltda. On May 23, 2011, the Company acquired, through its direct subsidiary CieloPar, control of Braspag Tecnologia em Pagamento Ltda. (Braspag), a leader in solutions for electronic payment in Brazil. The acquisition of all capital of Braspag amounted to R$40,000, paid in the transaction date. Beginning of the multi-brand environment The cards industry, specifically the accreditation segment, started experiencing a new competitive scenario beginning July 1, 2010, the date the acquirers began to capture and process transactions of all main cards brands. This change is in line with two recommendations suggested by the group formed by the Central Bank of Brazil (BACEN), the Department of Economic Law (SDE) and the Economic Monitoring Department (SEAE): opening accreditation activities and POS interoperability.
10
Beginning July 1, 2010, the Company started capturing and processing MASTERCARD transactions. Other partnerships have also already been announced with AMERICAN EXPRESS (Banco Bankpar S.A. and Tempo Servios Ltda.), JCB and ELO brands, and national brands, such as AURA (part of MASTERCARD operations in Brazil), GOODCARD, MAIS! (from Cred-System Group) and SOROCRED (Sorocred Meios de Pagamento Ltda.). The Companys positioning in the benefits card market was also strengthened by the announced partnership with Ticket, initially for the Ticket Refeio (meal tickets) and Ticket Alimentao (food vouchers) products. As a result, in addition to VISAVALE, the Company began offering TICKET and SODEXO brands, as well as regional vouchers such as Bnus CBA, Cabal, Policard, Verocheque and Sapore. 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES 2.1. Declaration of conformity The Companys financial statements comprise: The Companys consolidated financial statements, which have been prepared in accordance with the international accounting standards (IFRS) issued by the International Accounting Standards Board (IASB), the interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and Brazilian accounting practices, identified as Consolidated. The Companys individual financial statements, which have been prepared in accordance with accounting practices adopted in Brazil, identified as Company. The accounting practices adopted in Brazil comprise the practices incorporated to the Brazilian Corporate Law and the technical pronouncements, instructions and interpretations issued by the Accounting Pronouncements Committee (CPC) and approved by the Brazilian Securities and Exchange Commission (CVM). In the individual financial statements, investments in subsidiaries and joint ventures are stated under the equity method, as required by the legislation prevailing in Brazil. Therefore, these individual financial statements are not considered fully compliant with IFRS, which require these investments to be stated at fair value or cost in the separate financial statements. Since there is no difference between the consolidated shareholders equity and the consolidated net income attributable to the Companys shareholders recorded in the consolidated financial statements prepared under IFRS and the accounting practices adopted in Brazil and the Companys shareholders equity and net income recorded in the individual financial statements prepared under the Brazilian accounting practices, the Company elected to present the individual and consolidated financial statements as a single set in the side-by-side comparison format.
11
2.2. Basis of preparation The financial statements have been prepared based on the historical cost, except if otherwise stated in the following accounting practices. The historical cost is usually based on the fair value of the consideration paid in exchange for an asset. 2.3. Functional and reporting currency The individual and consolidated financial statements are presented in Brazilian reais (R$), which is the functional and reporting currency of the Company. 2.4. Cash and cash equivalents Include cash, bank accounts and highly-liquid short-term investments with low risk of change in the value, stated at cost plus interest earned. Cash and cash equivalents are classified as financial assets measured at fair value and their income is recorded in profit or loss for the six-month period. 2.5. Receivables from card-issuing banks and payables to merchants (transactions pending transfer) Refer to transactions carried out by the holders of credit and debit cards issued by financial institutions, consisting of receivables from card-issuing banks less interchange fees and payables to merchants less processing fees (discount rate), both with maturities of less than one year (see note 13). 2.6. Property and equipment Stated at historical cost, less depreciation. Depreciation is calculated under the straightline method, based upon the estimated useful lives of the assets. The estimated useful lives, the residual values, and depreciation methods are reviewed on an annual basis, and the effects from any changes in estimates are recorded prospectively. Subsequent costs are added to the residual value of property and equipment or recognized as a specific item, as appropriate, only if the economic benefits associated to these items are probable and the amounts can be reliably measured. Other repairs and maintenance are recognized directly in income when incurred. A fixed asset is written off after sale or when there are no future economic benefits arising from its continuous use. Any gains or losses on the sale or write-off of fixed assets are calculated based on the difference between the amounts received and its carrying amount and are recognized in income statement.
12
2.7. Intangible assets Intangible assets acquired separately Intangible assets acquired separately with finite useful lives are stated at cost, less amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis according to the estimated useful lives of the assets. The estimated useful life and amortization method are reviewed on an annual basis and the effect any changes in estimate is accounted for on a prospective basis. Intangible assets acquired separately with indefinite useful lives are stated at cost less accumulated impairment losses. Internally-developed intangible assets - research and development costs Research expenses are recognized as expense when incurred. The internally-generated intangible assets resulting from development costs (or an internal projects development stage) are recognized only if the following conditions are met: The technical feasibility for completing the intangible asset for use or sale. The intention to complete the intangible asset to use it or sell it. The ability to use the intangible asset or sell it. How the intangible asset is reasonably likely to generate future economic benefits. The availability of appropriate technical, financial and other resources to complete the development of the intangible asset to use it or sell it. The ability to reliably measure the expenses attributable to the intangible asset while it is developed. The amount originally recorded of internally generated intangible assets corresponds to the sum up of the expenses that have been incurred since the asset started to meet the recognition criteria previously mentioned. If no internally generated intangible asset may be recognized, the development costs are recognized in the statement of income when incurred. Subsequently to the initial recognition, internally generated intangible assets are stated at cost, less amortization and accumulated impairment losses, similarly to intangible assets acquired separately. Intangible assets acquired in a business combination In the consolidated financial statements, the intangible assets acquired in a business combination and recognized separately from the goodwill are recorded at fair value, which corresponds to its cost on the acquisition date.
13
Write-off of intangible assets An intangible asset is written off after sale or when future economic benefits will not result from its use. Gains or losses on the write-off of an intangible asset are calculated based on the difference between the net revenue from sale and its carrying amount and are recognized in income statement when the asset is written off. 2.8. Impairment of tangible and intangible assets excluding goodwill At the end of each period, the Company and its subsidiaries review the carrying amount of its tangible and intangible assets to determine if there is any indication of impaired. If there is some indication of impairment, the recoverable amount of the asset is estimated to measure the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit of the asset. When a reasonable and consistent basis of allocation may be identified, the corporate assets are also allocated to the individual cash-generating unit or to the smallest group of cash-generating units of this basis of allocation. The recoverable amount of an asset is the higher of its fair value less selling costs or its value in use. In appraising the value in use, the estimated future cash flows are discounted to present value at the discount rate, before taxes, that reflects a current market assessment of the time value of money and the specific risks to the asset to which the estimated future cash flows were not adjusted. If the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the carrying amount is reduced to its recoverable amount. Impairment losses are immediately recognized in income statement. As of June 30, 2011, no events indicating the need to recognize an allowance for losses were identified and, therefore, no allowance for losses was recorded in the financial statements for the period then ended. 2.9. Business combinations In the consolidated financial statements, business acquisitions are recorded under the purchase method. The amount transferred in a business combination is measured at fair value. The acquisition costs are recognized in income statement when incurred. On the acquisition date, the identifiable assets acquired and liabilities assumed are recognized at fair value. The goodwill is measured based on the exceeding amount arising from the sum up of the amount transferred, the noncontrolling interest in the acquiree and the fair value of the acquirers interest previously held in the acquiree on the net amounts on the date of acquisition of the identifiable assets acquired and liabilities assumed. The noncontrolling interests that correspond to current interests and entitle their holders to a proportional portion of the entitys net assets in case of liquidation are measured based on the proportional stake of the noncontrolling interests in the acquirees identifiable net asset amounts recognized.
14
Individual financial statements In the individual financial statements, the Company complies with technical interpretation ICPC 09 - Individual Financial Statements, Separate Financial Statements, Consolidated Financial Statements and Adoption of the Equity Method, according to which the amounts exceeding the acquisition cost on the Companys interest in the fair value of the acquirees identifiable assets, liabilities and contingent liabilities on the acquisition date are recognized as goodwill. The goodwill is added to the carrying amount of the investment. The Companys interests in the fair value of the identifiable assets, liabilities and contingent liabilities exceeding the acquisition cost, after revaluation, is immediately recognized in the statement of income. The amounts transferred and the fair value of assets and liabilities are measured based on the same criteria applicable to the consolidated financial statements. 2.10. Goodwill The goodwill arising from a business combination is stated at cost on the date of the business combination, net of accumulated impairment loss, if any. For impairment test purposes, goodwill is allocated to each one of the cash generating units which will benefit from the business combination synergies The cash-generating units to which goodwill was allocated are tested for impairment annually or more frequently, when there is any indication of impairment. If the recoverable value of a cash-generating unit is lower that its carrying amount, impairment losses are firstly allocated to write down the carrying amount of any goodwill allocated to the Cash Generating Units - CGU and subsequently to the other assets of the CGU, prorated to the carrying amount of each of its assets. Impairment losses on goodwill are directly recorded in income statement for the six-month period. Impairment losses are not reversed in subsequent periods. When the related cash-generating unit is sold, the amount corresponding to the goodwill is included in the calculation of the gains or losses on the sale. 2.11. Investments in subsidiaries and joint ventures A subsidiary is an entity, including an unincorporated entity such as a partnership, in which the parent owns, directly or through other subsidiaries, shareholder rights that entitle it, on a permanent basis, to prevail in corporate decisions and grant it the power to elect the majority of the officers. Prevalence in corporate decision-making and the power to elect the majority of the officers, on a permanent basis, presumably occur when the investor owns more than 50% of the voting capital in other entity. Under this method, the components of assets and liabilities and income and expenses of indirect subsidiaries are added to the fully consolidated accounting positions and the book value of non-controlling interests, determined by applying the interest percentage of non-controlling shareholders in the subsidiarys equity.
15
Joint ventures are those jointly controlled by the Company and one or more partners. Investments in joint ventures are recognized under the proportionate consolidation method, from the date the joint control is acquired. Under this method, the components of a joint ventures assets and liabilities, and income and expenses are added to the consolidated accounting positions proportionally to the venturers interest in its capital. In the individual financial statements, interests in joint ventures are recognized under the equity method. When a Group company conducts transactions with joint ventures, the related gains and losses are recognized in the Groups consolidated financial statements only proportionately to the Groups interests in those joint ventures that are not related to the Group. 2.12. Current and deferred income tax and social contribution The income tax and social contribution expense refers to the total current and deferred taxes. Current Income tax and social contribution are based on annual taxable income. Income tax was calculated at the rate of 15%, plus a 10% surtax on annual taxable income exceeding R$240. Social contribution was calculated at the rate of 9% on adjusted net income. The taxable income is different from net income as it does not include taxable or deductible expenses in other six-month periods and nontaxable and permanently nondeductible items. Income tax and social contribution is calculated individually (per Group company) based on the statutory rates prevailing at the end of the six-month period. Deferred Deferred income tax and social contribution are recognized on the differences between assets and liabilities recognized for tax purposes and related amounts recognized in the consolidated financial statements; however, they are not recognized if generated in the first-time recording of assets and liabilities in transactions that do not affect the tax bases, except in business combinations. Deferred income tax and social contribution are determined based on the tax rates and laws in effect at the date of the financial statements and applicable when the respective income tax and social contribution are paid. Deferred tax assets or liabilities are not recognized on temporary differences arising from goodwill or initial recognition (except for business combinations) of other assets and liabilities in a transaction that does not affect taxable income or book income. Deferred income tax and social contribution assets are recognized only to the extent that it is probable that there will be a positive tax base for which temporary differences can be used and tax loss carryforwards can be offset. The recovery of deferred tax assets balance is reviewed at the end of each six-month period and, when it is no longer probable that future taxable income will be available to allow the recovery of all or part of the assets, the asset is adjusted based on the expected recoverable amount.
16
Deferred tax assets and liabilities are measured at the applicable rates in the period in which the liability or asset are expected to be settled or realized, according to the tax legislation prevailing at the end of each reporting period or to a new legislation, when this has been substantially approved. The deferred tax assets and liabilities are measured to reflect the tax implication that would arise from the way in which the Group expects, at the end of each reporting period, to recover or settle the carrying amount of these assets and liabilities. Current and deferred taxes are recognized in income statement except when they correspond to items recorded in Other comprehensive income, or directly in equity, when these current and deferred taxes are also recognized in Other comprehensive income or directly in equity, respectively. When current and deferred taxes arise from the initial recognition of a business combination, the tax effect is considered in the recognition of the business combination. 2.13. Employee benefits The Company and its subsidiaries are co-sponsors of a defined contribution pension plan. Contributions are made based on a percentage of the employees compensation. Payments to defined contribution plans are recognized as expense when the services they entitle to are provided. 2.14. Financial assets and financial liabilities a) Financial assets Financial assets are classified in the following categories: (i) at fair value through profit or loss; (ii) held to maturity; (iii) loans and receivables; and (iv) available for sale. Classification is made according to the nature and purpose of the financial assets and is determined upon initial recognition. Financial assets at fair value through profit or loss Financial assets are classified at fair value through profit or loss when they are held for trading or designated at fair value through profit or loss when acquired. A financial asset is classified as held for trading if it is: Purchased principally for the purpose of selling it in the near term. Part of a portfolio of identified financial instruments that are jointly managed and for which there is evidence of a recent actual pattern of short-term profit-taking. A derivative that is not a designated and effective hedging instrument in hedge accounting. A financial asset that is not held for trading can be designated at fair value through profit or loss upon initial recognition when:
17
This designation eliminates or significantly reduces an inconsistency that might arise upon measurement or recognition. It is part of a managed group of financial assets or liabilities, or both, and its performance is evaluated based on fair value according to the risk management or investment strategy documented by the Company, and the respective information is internally provided on the same basis. It is part of a contract containing one or more embedded derivatives, and CPC 38 and IAS 39 Financial Instruments: Recognition and Measurement permits that the combined contract as a whole (assets or liabilities) be designated at fair value through profit or loss. Financial assets at fair value through profit or loss are measured at fair value, together with gains and losses recognized in income for the reporting period. Net gains or losses recognized in income include dividends or interest income by the financial asset. Held-to-maturity Financial assets with fixed or determinable payments and fixed maturities, which the Company has the intent and ability to hold to maturity are classified as held to maturity. Held-to-maturity financial assets are measured at amortized cost using the effective interest method, less the allowance for impairment losses. Revenue is recognized using the effective interest method. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market, measured at amortized cost using the effective interest method, less the allowance for impairment losses. Interest income is recognized by applying the effective rate method, except for short-term receivables when the recognition of interest would be immaterial. Available for sale Available-for-sale financial assets are non-derivative financial assets designated as available for sale and not classified in the any of the categories above. Available-for-sale financial assets are measured at fair value. Interest, inflation adjustment and foreign exchange fluctuation, when applicable, are recognized in profit or loss when incurred. Changes arising from measurement at fair value are recognized in a specific line item of shareholders equity when incurred, and are charged to income when realized or considered unrecoverable.
18
Effective interest method A method used to calculate the amortized cost of a financial asset or a financial liability and allocating interest income or interest expenses over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments of receipts (including all fees paid or received that are an integral part of the effective interest rate, transaction costs, and other premiums or discounts) through the expected financial asset life, or, when appropriate, for a shorter period. b) Financial liabilities Financial liabilities are classified at fair value through profit or loss or as other financial liabilities. Financial liabilities at fair value through profit or loss This category includes financial liabilities held for trading or when designated at fair value through profit or loss. A financial liability is classified as held for trading if it is: Incurred principally for the purpose of repurchasing it in the near term. Part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. A derivative that is not designated as an effective hedging instrument. Financial liabilities that are not held for trading can be designated at fair value through profit or loss upon initial recognition when: This designation eliminates or significantly reduces an inconsistency that might arise upon measurement or recognition. They are part of a managed group of financial assets or liabilities, or both, whose performance is valued based on its fair value, in accordance with the Companys documented risk management or investment strategy, and whose related information is provided internally on the same basis. They are part of a contract containing one or more embedded derivatives, and IAS 39 permits that the combined contract as a whole (assets or liabilities) is designated at fair value through profit or loss. Financial liabilities at fair value through profit or loss are stated at fair value, together with gains and losses recognized in income statement. Net gains or losses recognized in profit or loss comprise any interest paid on financial liabilities.
19
Other financial liabilities Other financial liabilities initially measured at fair value, net of transaction costs, and are subsequently measured at amortized cost using the effective interest method, with interest expense recognized on a yield basis. The effective interest method is a method for calculating the amortized cost of a financial liability and allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability or, where appropriate, a shorter period. 2.15. Revenue recognition Revenue is measured at the fair value of the amount received or receivable, less estimated returns, commercial discounts and/or bonuses granted and other similar deductions. Revenues from credit and debit card transactions are recognized when transactions are processed. Revenues from credit card transactions payable in installments are recognized in income when each installment is processed. Revenues from services to associates and merchants are recognized when the service is provided. The income from the dividends of investments is recognized when the shareholders right to receive these dividends is established (provided that it is probable that the future economic benefits will flow to the Group and the amount may be measured reliably). Interest income is recognized when it is probable that the future economic benefits will flow to the Group and the amount may be measured reliably. The interest income is recognized under the straight-line method based on the time and the effective interest rate on the outstanding principal. The effective interest rate is the rate that discounts the estimated future cash receipts during the estimated useful life of the financial assets in relation to the initial net carrying amount of this asset. Revenues from the advance transfer to merchants are recognized on a pro rata basis through their maturities. 2.16. Reserve for contingent liabilities Recognized when there is a present obligation (legal or constructive) as a result of a past event, with probable outflow of resources, and the amount of the obligation can be reliably estimated. The amount recognized as a provision is the best estimate of the settlement amount at the balance sheet date, considering the risks and uncertainties related to the obligation. When the economic benefit required to settle a provision is expected to be received from third parties, this amount receivable is recorded as an asset, only when reimbursement is virtually certain.
20
Provisions recognized by the Company refer substantially to lawsuits arising in the normal course of business, filed by third parties or former employees. These contingencies are assessed by the Companys and its subsidiaries Management and its legal counsel, using criteria that allow their proper measurement, despite the uncertainty concerning the decision, their period and amount. Reserves for tax lawsuits are recorded based on the total taxes under legal dispute, plus inflation adjustment and late payment interest incurred through the balance sheet date. 2.17. Foreign currency Monetary assets and liabilities denominated in foreign currencies were translated into Brazilian reais at the exchange rate in effect at the balance sheet dates, and currency translation differences were recorded in the net income for the six-month periods. 2.18. Share-based compensation The Company offers a stock option plan to its officers and executives, and the officers and executives of its subsidiary Servinet. Options are priced at fair value on the grant date of the plans and are recognized on a straight-line basis in income statement as a contra entry to shareholders equity. At the balance sheet dates, the Company reviews its estimates of the number of vested options based on the plans terms and conditions and recognizes the impact of the revision of initial estimates, if any, in income statement, as a contra entry to shareholders equity, according to the criteria set out in CPC 10 and IFRS 2 - Share-based Payment. 2.19. Use of estimates The preparation of financial statements requires the Management of the Company and its subsidiaries to make estimates and assumptions that affect certain assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses during the six-month period. Significant assets and liabilities subject to these estimates and assumptions include the net book value of property and equipment and intangible assets, allowance for doubtful accounts (on trade accounts receivable from lease of POS equipment), deferred tax and social contribution assets, impairment of goodwill and reserve for contingencies. Actual results could differ from those estimates. The Company and its subsidiaries review estimates and assumptions annually. 2.20. Statement of value added (DVA) The purpose of this statement is to present the wealth created by the Company and its distribution during the six-month period and is presented by Cielo, as required by the Brazilian Corporate Law, as part of the individual financial statements and as supplemental information to the consolidated financial statements, since it is not required by the IFRS.
21
The DVA was prepared based on information obtained in the accounting records that serve as basis for the preparation of financial statements and in accordance with the provisions of CPC 09 - Statement of Value Added. In its first part, the statement of value added presents the wealth created by the Company, represented by the revenues (gross revenue from sales, including taxes, other revenues and the effects of the allowance for doubtful accounts), the inputs acquired from third parties (cost on sales and purchase of materials, electric power and third-party services, including taxes levied at the time of purchase, the effects of losses and recovery of assets amounts, and depreciation and amortization) and the value added received from third parties (equity in subsidiaries, financial income and other revenues). The second part of the DVA presents the distribution of wealth among employees, taxes and contributions, compensation to third parties and shareholders. 2.21. New and revised standards and interpretations already issued but not yet adopted The Company and its subsidiaries did not adopt the following new and revised IFRSs already issued but not yet effective:
Rule Changes to IFRS 1 Title/Change Exemption from the requirement to restate financial statements for comparative purposes, due to the adoption of amendments to IFRS 9 Disclosures - Transfers of Financial Assets Financial instruments Classification, measurement and amendments to IFRS 9 to account for financial liabilities Validity Applicable to annual periods beginning on or after July 1, 2011
Changes to IFRS 7
Applicable to annual periods beginning on or after January 1, 2011 Applicable to annual periods beginning on or after January 1, 2013
Changes to IFRS 9
Changes to IAS 12
Deferred Tax: Recovery of Applicable to annual periods Underlying Assets when the Asset beginning on or after January 1, Is Measured under the Fair Value 2012 Framework of IAS 40 Requirements due to transition to changes arising from IAS 27 Measurement of interests in joint ventures Applicable to annual periods beginning on or after July 1, 2011 Applicable to annual periods beginning on or after January 1, 2013
Improvements to IAS 21, 28 and 31 Changes to IAS 31
The Companys Management understands that the application of the pronouncements mentioned to its financial statements on the required dates may affect the balances previously reported. However, it is not possible to provide a reasonable estimate such impact before a detailed review is conducted at the time of adoption.
22
CPC has not yet issued pronouncements and amendments related to the new and revised IFRSs mentioned above nor related to the amendments already effective to IFRS 1 (various issues), IFRS 3 (various issues), IFRS 7 (clarifications on disclosures), IAS 1 (clarifications on changes in equity), IAS 27 (transition requirements due to changes introduced in 2008), IAS 34 (significant events and transactions) and IFRIC 13 (fair value of premium credits). Considering CPC and CVM commitment to keep the set of standards up-to-date, following amendments made by IASB, these pronouncements and amendments are expected to be issued by CPC and approved by CVM through the date their adoption becomes mandatory. 3. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements comprise the financial statements of the Company and its subsidiaries and joint ventures. Control is obtained when the Company has the power to control an entitys financial and operating policies to obtain benefits from its activities. In the Companys individual financial statements, the financial information on subsidiaries and joint ventures are recognized under the equity method. The net income of the subsidiaries acquired during the six-month period is included in the consolidated statements of income and comprehensive income as of the actual acquisition date. The balance of comprehensive income is attributable to the Companys owners and noncontrolling interests, even if results presented are negative. When necessary, the subsidiaries financial statements are adjusted to conform their accounting practices to those of the Group. All intercompany transactions and balances are fully eliminated in the consolidated financial statements. The consolidated financial statements include the account balances of the Company (parent company), its direct subsidiaries Servinet, Servrede, CieloPar (beginning September 2010), joint venture Orizon (since January 1, 2010) and indirect subsidiaries Prevsade and Precisa, Multidisplay and M4 Produtos (since August 2010); Paggo Solues (since February 28, 2011) and Braspag (since May 23, 2011). In preparing these consolidated financial statements, intercompany balances and transactions have been eliminated. For subsidiaries, the full consolidation concept was applied, intended for investments in subsidiaries and entailing the recognition of all assets, liabilities, income and expenses in the parent company, thus requiring the recognition of non-controlling interests. The assets, liabilities, income and expenses of joint ventures Orizon, Prevsade, Precisa and Paggo Solues have been included proportionately to the Companys interest in their capital, considering the joint control established in the Shareholders Agreements between the Company and the other parties in those joint ventures, based on which none of the parties individually determine the financial and operating policies.
23
The translation into Brazilian reais of the balance sheet of the Grand Cayman branch, originally prepared in US dollars, was made using the exchange rates prevailing at the balance sheet dates and income was translated at the average closing exchange rates of each month. 3.1. Direct (individual control) and indirect subsidiaries: The interests held in the consolidated subsidiaries are as follows: Equity interests - % Total capital Voting capital 06.30.2011 12.31.2010 06.30.2011 12.31.2010 Direct subsidiaries: Servinet Servrede CieloPar Indirect subsidiaries: Multidisplay M4 Produtos Braspag
99.99 99.99 99.99
99.99 99.99 99.99
99.99 99.99 99.99
99.99 99.99 99.99
50.10 50.10 100.00
50.10 50.10 -
50.10 50.10 100.00
50.10 50.10 -
The table below shows all the balances of the direct and indirect subsidiaries assets and liabilities:
06.30.2011 M4 Servinet Servrede CieloPar Multidisplay Produtos Braspag Assets: Current assets Noncurrent assets Total assets Liabilities and shareholders equity: Current liabilities Noncurrent liabilities Shareholders equity Total liabilities and shareholders equity 25,656 42,848 68,504 1,662 65,554 67,216 301 86,050 86,351 7,954 7,627 15,581 38,622 4,036 42,658 4,184 770 4,954
18,211 30,719 19,574 68,504
8 40,058 27,250 67,216
300 86,051 86,351
6,931 8,650 15,581
35,154 59 7,445 42,658
3,314 16 1,624 4,954
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12.31.2010 M4 Servinet Servrede CieloPar Multidisplay Produtos Assets: Current assets Noncurrent assets Total assets Liabilities and shareholders equity: Current liabilities Noncurrent liabilities Shareholders equity Total liabilities and shareholders equity 19,360 43,061 62,421 38,058 75,616 113,674 1 1 7,258 6,860 14,118 30,773 3,612 34,385
16,396 28,123 17,902 62,421
33,810 39,044 40,820 113,674
1 1 06.30.2011
6,444 7,674 14,118
27,357 169 6,859 34,385
M4 Servinet Servrede CieloPar Multidisplay Produtos Income (expenses): Net revenue Gross profit (loss) Profit (loss)from operations before financial income (expenses) Income (loss) before taxes on income Net income (loss) in the six-month period
48,098 45,382 2,301 2,519 1,672
(2,436) 350 386 800
(2,950) (2,950) (2,950)
38,438 2,796 4,329 4,317 3,976
17,586 6,841 4,891 5,072 2,886
06.30.2010 Servinet Servrede Income (expenses): Net revenue Gross profit Income from operations before financial income (expenses) Loss before taxes on income Net loss 30,913 27,057 1,639 (4,562) (7,527) (6) (7) (7)
3.2. Joint ventures (jointly controlled entities) Interests in joint ventures are as follows:
Equity interests - % Total capital Voting capital 06.30.2011 12.31.2010 06.30.2011 12.31.2010 Joint ventures: Orizon Prevsade Precisa Paggo Solues
40.95 40.95 40.95 50.00
40.95 40.95 40.95 -
40.95 40.95 40.95 50.00
40.95 40.95 40.95 -
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The condensed financial information of the joint ventures was consolidated under the proportionate consolidation method, considering the joint control established in the Shareholders Agreements. All the balances of these entities assets and liabilities are as follows:
06.30.2011 Orizon Assets: Current assets Noncurrent assets Total assets Liabilities and shareholders equity: Current liabilities Noncurrent liabilities Shareholders equity Total liabilities and shareholders equity 44,883 61,014 105,897 Precisa 18,823 608 19,431 Prevsade 2,956 313 3,269 Paggo Solues 11,825 100,456 112,281
7,698 1,526 96,673 105,897
4,839 5,716 8,876 19,431
2,275 47 947 3,269
9,733 102,548 112,281
12.31.2010 Orizon Precisa Prevsade Assets: Current assets Noncurrent assets Total assets Liabilities and shareholders equity (deficit): Current liabilities Noncurrent liabilities Shareholders equity (deficit) Total liabilities and shareholders equity (deficit) 41,124 62,004 103,128 17,034 525 17,559 2,102 403 2,505
7,788 3,239 92,101 103,128
3,814 4,890 8,855 17,559
2,598 (93) 2,505
The main line items of the statement of operations for the six-month periods ended June 30, 2011 and 2010 are as follows:
06.30.2011 Orizon Income (expenses): Net revenue Gross profit (loss) Income (loss) from operations before financial income (expenses) Income (loss) before taxes on income Net income (loss) for the six-month period Precisa Prevsade Paggo Solues
28,363 11,426 4,633 6,262 4,572
36,938 1,076 683 212 21
4,103 819 1,209 1,087 1,040
193 (5,782 ) (5,888) (5,899) (5,899)
Orizon Income (expenses): Net revenue Gross profit (loss) Income (loss) from operations before financial income (expenses) Income (loss) before taxes on income Net income (loss) for the six-month period
06.30.2010 Precisa Prevsade
25,000 8,702 583 2,140 1,112
15,167 (283) (437) (493) (551)
4,424 (689) (1,054) (1,038) (918)
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4.
CASH AND CASH EQUIVALENTS Company Consolidated 06.30.2011 12.31.2010 06.30.2011 12.31.2010 Cash and banks: Local currency Foreign currency Short-term investments: Debentures subject to repurchase agreements (a) Bank Certificates of Deposit (CDBs) (a) Money Market Deposit Account (MMDA) (b) Total
948 1,473
1,607 11,643
8,214 1,473
4,456 11,643
190,923 15,258 2,287 210,889
128,586 77,281 2,425 221,542
196,958 44,118 2,287 253,050
131,948 100,131 2,425 250,603
Cash and banks consist of cash on hand and cash available in bank accounts in Brazil and abroad, derived primarily from deposits made by credit and debit card-issuing banks. Such amounts are used to settle transactions with merchants. Short-term investments have the following characteristics: (a) As of June 30, 2011 and December 31, 2010, the average yield of debentures subject to repurchase agreements and CDBs was 101.8% and 101.3% of the interbank deposit rate (CDI), respectively. (b) The funds invested abroad (New York - USA) in MMDA earn yield at a fixed rate of 0.1% per year. These short-term investments are highly liquid and their fair values do not differ from their carrying amounts. 5. TRADE ACCOUNTS RECEIVABLE
Company Consolidated 06.30.2011 12.31.2010 06.30.2011 12.31.2010 Prepayment of receivables (a) Bank account blocking (b) Electronic network interconnection services between health operators (c) Meal ticket and transport card capture and processing (d) Receivables from mobile payment services (e) Disputes of credit card charges (f) Other receivables Total 2,244,606 3,354 3,949 39,649 654 2,292,212 2,178,161 2,902 3,799 234 7,819 2,192,915 2,244,606 3,354 6,563 3,949 31,648 39,649 6,928 2,336,697 2,178,161 2,902 5,624 3,799 11,743 234 7,819 2,210,282
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(a) On September 1, 2008 and January 5, 2009, the Company started to provide prepayment services of receivables in cash and in installments, respectively, to affiliated merchants. As of June 30, 2011, the balance corresponds to prepayment of receivables transactions receivable from the issuing banks within up to 360 days after the date receivables are prepaid to merchants. As of June 30, 2011, this amount is net of the present value adjustment related to the financial income received prior to the date of release of the cash amount of R$81,605 (R$76,333 as of December 31, 2010). (b) The Company offers card-issuing banks bank account blocking services upon prior approval from merchants to block any transfer of receivables from such merchants to another bank. For these services, the Company receives a commission, which is paid in the month subsequent to the request of the bank account blocking by the card-issuing banks. (c) Receivables from the joint venture Orizon arising from the provision of electronic network interconnection services, based on a single technology platform, for exchange of information between health operators and medical and hospital service providers, and any other health system agents and drugstores. (d) Receivables from Companhia Brasileira de Solues e Servios (CBSS) arising from the provision of transportation and meal tickets card capture and processing services. (e) Receivables from credit and debit card holders for electronic payment services and sale of phone credits provided by subsidiaries M4 Produtos and Multidisplay. (f) Refers substantially to receivables from disputes from credit card holders.
The aging of trade accounts receivable is as follows: Company Consolidated 06.30.2011 12.31.2010 06.30.2011 12.31.2010 Current Past-due up to 45 days Total 6. 2,252,563 39,649 2,292,212 2,192,681 234 2,192,915 2,297,048 39,649 2,336,697 2,210,048 234 2,210,282
RECEIVABLES - SECURITIZATION ABROAD Refer to receivables from Banco Bradesco S.A. and Banco do Brasil S.A., contracted in July 2003, in the amount of US$500 million, divided into US$100 million and US$400 million, respectively, with interest rates of 4.777% and 5.911% per year, for quarterly payments over a period of eight years and a grace period of two years. As of June 30, 2011, there is no balance of principal and interest receivable from Banco Bradesco S.A. and Banco do Brasil S.A. considering that the transaction of securitization of foreign receivables was settled in the first half of 2011.
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7.
DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION Deferred income tax and social contribution arise from temporary differences mainly due to temporarily nondeductible provisions and are recorded in noncurrent assets. Deferred income tax and social contribution reflect the tax effects attributable to temporary differences between the tax base of assets and liabilities and the respective book value. Reported amounts are monthly reviewed. Deferred income tax and social contribution are as follows: Company Consolidated 06.30.2011 12.31.2010 06.30.2011 12.31.2010 Temporary differences: Reserve for contingencies Accrual for sundry expenses Discount to present value of prepayment of receivables Allowance for losses on POS equipment Total
186,405 59,354 27,746 1,438 274,943
165,934 52,075 25,953 1,362 245,324
196,850 58,402 27,746 1,438 284,436
175,496 52,405 25,953 1,362 255,216
8.
INVESTMENTS IN SUBSIDIARIES AND JOINT VENTURES 06.30.2011 12.31.2010 Subsidiaries Joint ventures Total Main information on subsidiaries, joint ventures and indirect subsidiaries
Net income (loss) Equity Shareholders equity for the six-month period Equity interests - % In subsidiaries Investments 06.30.2011 12.31.2010 06.30.2011 06.30.2010 06.30.2011 12.31.2010 06.30.2011 06.30.2010 06.30.2011 12.31.2010 Servinet Servrede Orizon (a) and (b) CieloPar Total 19,574 27,150 96,673 86,051 17,902 26,350 92,101 1,672 800 4,572 (2,950) (7,527) (7) 1,112 99.99 99.99 40.95 99.99 99.99 99.99 40.95 99.99 1,672 800 1,872 (2,950) 1,394 (7,527) (7) 455 (7,079) 19,574 27,150 33,708 86,051 166,483 17,902 26,350 31,835 1 76,088
132,775 33,708 166,483
44,253 31,835 76,088
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Indirect joint ventures

Net income (loss) Shareholders equity for the six-month period Equity interests - % 06.30.2011 12.31.2010 06.30.2011 06.30.2010 06.30.2011 12.31.2010 Prevsade (b) Precisa (b) Multidisplay (b) M4 (b) Paggo Solues (b) Braspag (b) 947 8,876 8,650 7,445 102,548 1,624 (93) 8,855 7,674 6,859 1,040 21 3,976 2,886 (5,899) (918) (551) 40.95 40.95 50.10 50.10 50.00 100.00 40.95 40.95 50.10 50.10 -
(a) The amount of R$5,880 is not reflected in the investment because, as mentioned in note 10, it refers to the unrealized gain on capital contribution with goodwill, initially reflected in CBGS Ltda. and transferred to the indirect subsidiary CBGS as a result of the merger. (b) The financial statements as of May 31, 2011 were used to measure investments as of June 30, 2011. Accordingly, the equity in subsidiaries balances refer to the six-month periods ended May 31, 2011 and 2010.
Changes in investments in the six-month period ended June 30, 2011 are as follows: December 31, 2010 Capital increase in subsidiariesCieloPar Equity in subsidiaries June 30, 2011 9. PROPERTY AND EQUIPMENT
Annual depreciation rate - % POS equipment (*) Data processing equipment Machinery and equipment Facilities Furniture and fixtures Vehicles Total 33 20 10 10 10 20 Company 06.30.2011 Accumulated depreciation Net (433,049) 323,752 (18,600) 7,904 (64,274) 3,127 (6,642) 5,423 (2,412) 2,865 (586) 864 (525,563) 343,935 Consolidated 30.06.2011 Accumulated depreciation Net (435,635) 324,156 (24,112) 10,918 (67,930) 3,664 (11,986) 12,885 (3,983) 4,750 (613) 843 (544,259) 357,216 12.31.2010 Net 326,942 8,988 3,835 2,742 2,981 1,010 346,498 31.12.2010 Net 327,488 11,945 4,294 10,535 5,018 1,010 360,290
76,088 89,001 1,394 166,483
Cost 756,801 26,504 67,401 12,065 5,277 1,450 869,498
Annual depreciation rate - % POS equipment (*) Data processing equipment Machinery and equipment Facilities Furniture and fixtures Vehicles Total (*) 33 20 10 10 10 20
Cost 759,791 35,030 71,594 24,871 8,733 1,456 901,475
As of June 30, 2011 and December 31, 2010, a provision for losses on POS equipment is recorded in the amounts of R$4,229 and R$4,007, respectively, as a reduction of the respective account.
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Changes in property and equipment for the six-month period ended June 30, 2011 are as follows:
Company 12.31.2010 POS equipment Data processing equipment Machinery and equipment Facilities Furniture and fixtures Vehicles Total 326,942 8,988 3,835 2,742 2,981 1,010 346,498 Additions/ transfers 97,975 704 2,926 120 101,725 Write-offs (6,430) (6,430) Depreciation 06.30.2011 (94,735) (1,788) (708) (245) (236) (146) (97,858) 323,752 7,904 3,127 5,423 2,865 864 343,935
12.31.2010 POS equipment Data processing equipment Machinery and equipment Facilities Furniture and fixtures Vehicles Total 327,488 11,945 4,294 10,535 5,018 1,010 360,290
Additions/ transfers 97,975 1,032 112 3,567 189 2 102,877
Consolidated Write-offs/ reversals Depreciation (6,434) (3) (334) (142) (10) (6,923) (94,873) (2,205) (750) (893) (373) (159) (99,253)
Merged net assets 149 8 10 58 225
06.30.2011 324,156 10,918 3,663 12,885 4,750 844 357,216
As of June 30, 2011 and December 31, 2010, property and equipment arising from finance lease transactions are represented only by assets classified as data processing equipment in the net amounts of R$265 and R$409, respectively. Average term of depreciation for this equipment is approximately three years. The depreciation of IT equipment purchased through lease transactions for the six-month periods ended June 30, 2011 and 2010, recorded in General and administrative expenses, total R$144 and R$1,438, respectively. As of June 30, 2011 and December 31, 2010, the Company does not have finance leases payable.
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10. GOODWILL ON ACQUISITION OF INVESTMENTS The breakdown of goodwill as of June 30, 2011 is as follows: Company Consolidated Projeto Sade: Goodwill on acquisition of subsidiary (a) Reclassification of the tax benefit from the goodwill merged into Orizon Prevsade Precisa M4 Produtos Paggo Solues Braspag Allowance for losses on goodwill Unrealized income (b) Total
26,269 26,269 (16,126) 10,143
26,269 13,532 3,179 1,457 31,348 (5,224) 38,376 108,937 (16,126) (5,880) 86,931
(a) In calculating equity in subsidiaries CBGS Ltda. and CBGS in 2009, the effects of the Provision for Maintenance of Integrity of Shareholders Equity (PMIPL) in the amounts of R$11,064 and R$15,205, respectively, were eliminated, since the effects related to the goodwill originally reported therein have been reflected in the Company, as established by CVM Instructions 319/99 and 349/01, considering that the mergers carried out in 2009 did not change the economic substance of that goodwill. The recognition of the goodwill was recorded under Other operating (expenses) income, net. (b) Refers to the elimination in the consolidated financial statements of the capital gain generated by CBGS Ltda.s investment at market value in Orizon, its then joint-controlled subsidiary CBGS, in the proportion of CBGS Ltda.s interest in CBGS. Projeto Sade On January 2, 2008, CBGS subscribed 693,480 new common shares without par value in favor of its parent company CBGS, for R$139,045, which represented its fair value as of that date. As part of the payment, CBGS Ltda. delivered all the shares in Polimed Ltda. and Dativa Conectividade em Sade Ltda. for R$71,691, transferring the goodwill on the acquisition of these subsidiaries in the amounts of R$47,145 and R$9,108, respectively, net of amortization incurred through the transaction date, generating payables of R$67,354 within two years after the transaction. In addition, as a result of the portion paid in cash, CBGS Ltda. generated goodwill of R$16,764, net of the allowance for losses and amortization incurred through December 31, 2008. The goodwill generated in CBGS Ltda.s capital subscription process is as follows:
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Goodwill Goodwill recorded in CBGS Ltda. arising from the acquisition of 40.95% interest in CBGS Allowance for losses on goodwill Goodwill recorded in joint venture CBGS: Orizon Dativa 55,880 (39,116) 16,764 47,145 9,108 73,017
Equity interest - %
Net
99.99 55,880 99.99 (39,116) 16,764 40.95 40.95 19,306 3,731 39,801
Acquisition of control - Prevsade and Precisa On March 16, 2009, joint venture CBGS acquired all the shares in Prevsade and Precisa. The investment recorded by CBGS includes a share premium amounting to R$11,322, recorded as goodwill, which is based on expected future earnings of the companies based on the increase in operations expected for future years. Goodwill Prevsade Precisa 7,765 3,557 11,322 Equity interest - % Net
40.95 3,179 40.95 1,457 4,636
Acquisition of control - M4U As described in note 1, in August 2010 subsidiary Servrede acquired 50.1% of the shares in Multidisplay and its wholly-owned subsidiary M4 Produtos. Under CPC 15 - Business Combinations, the goodwill was measured as the amount by which the sum up of: (a) the consideration transferred as payment for the control of the acquire; and (b) the amount of the noncontrolling interest on the acquiree exceeded the fair value (on the date of acquisition) of the identifiable assets acquired. The amount of the investment recorded by Servrede includes the goodwill on acquisition of shares in the amount of R$31,348, generated as follows: Net assets acquired (-) Total consideration paid (-) Fair value of assets acquired Goodwill 2,300 50,650 48,350 17,002 31,348
The fair value of the service agreements, software platform and non-compete clauses (identifiable assets acquired) of M4U in August 2010 were recognized based in the appraisal report prepared by independent appraisers. The assessment, which is in accordance with the International Valuation Standards, was conducted based on market evidences related to the prices of similar transactions.
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Acquisition of interest - Paggo Solues As described in note 1, on February 28, 2011 the acquisition of 50% of the shares in Paggo Solues for R$47,000 was completed, being the amount fully paid on the acquisition date. The amount of the investment recorded by CieloPar includes negative goodwill on acquisition of shares in the amount of R$5,224, generated as follows: Net assets acquired (-) Total consideration paid Negative goodwill 52,224 47,000 (5,224)
By the closing of the financial statements for the six-month period ended June 30, 2011 the appraisal report that will support the allocation of goodwill/negative goodwill arising on the acquisition of Paggo Solues was being prepared. As said appraisal report should be completed by the end of 2011 and, therefore, within the measurement period, the Company will recognize retrospectively in the financial statements for the year ended December 31, 2011 the adjustments to the amounts recorded at the time of the acquisition, as if the business combination had been completed on the acquisition date. Acquisition of control - Braspag On May 23, 2011, 100% the acquisition of 40.000 of the shares in Braspag for R$40,000 was completed, being the amount fully paid on the acquisition date. The amount of the investment recorded by CieloPar in Braspag includes goodwill on acquisition of shares in the amount of R$38,375, generated as follows: Net assets acquired (-) Total consideration paid Goodwill 1,625 40,000 38,375
By the closing of the financial statements for the six-month period ended June 30, 2011 the appraisal report that will support the allocation of goodwill arising on the acquisition of Braspag was being prepared. As said appraisal report should be completed by the end of 2011 and, therefore, within the measurement period, the Company will recognize retrospectively in the financial statements for the year ended December 31, 2011 the adjustments to the amounts recorded at the time of the acquisition, as if the business combination had been completed on the acquisition date.
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11. OTHER INTANGIBLE ASSETS

Company 06.30.2011 12.31.2010 Accumulated amortization Net Net (71,509) 26,015 (6,062) 18,982 (77,571) 44,997 20,012 20,055 40,067
Annual amortization rate - % Software licenses (a) Project development (b) 20 20
Cost 97,524 25,044 122,568
Annual amortization rate - % Software licenses (a) Project development (b) Non-compete agreements (c) Service agreements (c) 20 20 13.5 4
Cost 103,860 25,044 15,197 17,810 161,911
Consolidated 06.30.2011 Merged Accumulated net amortization assets Net (76,863) 52,728 79,725 (6,062) - 18,982 (1,489) - 13,708 (1,750) - 16,060 (86,164) 52,728 128,475
12.31.2010
Net 23,247 20,055 14,758 17,446 75,506
(a)
Refers to items acquired from third parties and used to provide customers data and business transactions processing services. There is no individually material software. Additionally, as of June 30, 2011 and December 31, 2010, the provision for discontinued software of R$4,200 and R$2,200 is recorded as a reduction of the balance in the related account.
(b) Represents expenses on the development of new products and services to increase the Companys and its subsidiaries invoicing and revenues. (c) Correspond to allocations of goodwill on the acquisition of control of M4 Produtos and Multidisplay determined based on an appraisal report prepared by a specialized company on the acquisition date. The main components of calculation of intangible assets are:
The amount of the non-compete agreement (with and without) was calculated through the Income
Approach methodology, by using a discount rate of 17.5% p.a., perpetuity of 4% p.a. and estimated useful life of 89 months.
The four service agreements with telecommunication operators were measured based on the
discounted cash flow of each agreement, by using a discount rate of 16.5% p.a., during the residual life of each agreement, of approximately 53 months.
Changes in intangible assets for the six-month ended June 30, 2011 are as follows: Company 12.31.2010 Additions Amortization 06.30.2011 Software Project development Total 20,012 20,055 40,067 12,911 430 13,341 (6,908) (1,503) (8,411) 26,015 18,982 44,997
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12.31.2010 Software Project development Non-compete agreements Service agreements Total 23,247 20,055 14,758 17,446 75,506
Additions/ transfers 13,004 430 13,434
Consolidated Write-offs/ reversals Amortization (62) (62) (9,192) (1,503) (1,050) (1,386) (13,131)
Merged net assets 52,728 52,728
06.30.2011 79,725 18,982 13,708 16,060 128,475
Amortization expenses of intangible assets were recorded in line item General and administrative expenses in the statement of income. 12. TRANSACTIONS PENDING TRANSFER The amounts due by credit cardholders through the card-issuing banks and the amounts to be transferred to merchants are recorded in memorandum accounts. As of June 30, 2011, the balances are R$27,442,627 (R$26,610,870 as of December 31, 2010) and R$29,002,369 (R$27,779,310 as of December 31, 2010), respectively. In addition to the provision of services consisting of the transfer of credit card transaction amounts between the card-issuing banks and the merchants, the Company also guarantees accredited merchants that they will receive the amounts paid with credit cards. As described in note 26.b), the Company has an instrument to mitigate the credit risk of cardissuing banks, used as a hedge against the risk of default by such banks. Based on the insignificant historical amount of Companys losses due to default from card-issuing banks and the current credit risks of these financial institutions, the Company estimates that the fair value of the guarantees provided to merchants is immaterial and, therefore, is not recognized as a liability. 13. PAYABLES TO MERCHANTS The balance of R$1,559,742 as of June 30, 2010 (R$1,168,440 as of December 31, 2010) corresponds to the difference between the amounts received from cardholders through the card-issuing banks and the amounts to be transferred to merchants. In general, the period of collection from card-issuing banks is 27 days and the average period for payment to merchants is 30 days from the date of transaction. Therefore, the balance payable as of June 30, 2011 refers to a float of approximately three days.
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14. TRADE ACCOUNTS PAYABLE Company Consolidated 06.30.2011 12.31.2010 06.30.2011 12.31.2010 Trade accounts payable Accrued payments to suppliers Total 15. TAXES PAYABLE Company Consolidated 06.30.2011 12.31.2010 06.30.2011 12.31.2010 Income tax and social contribution, net of prepayments Service tax (ISS) Withholding income tax (IRRF) Tax on revenue (COFINS) Tax on revenue (PIS) Other Total 16. OTHER PAYABLES Company 06.30.2011 12.31.2010 Current liabilities: Accrual for sundry expenses Accrued vacation and related taxes Profit sharing Other payables Total Noncurrent liabilities: Payables on the acquisition of subsidiaries (a) Accrual for management retention (b) Other Total Consolidated 06.30.2011 12.31.2010 66,141 114,417 180,558 59,115 86,760 145,875 115,670 114,626 230,296 69,583 111,178 180,761
182,045 3,863 4,917 11,725 4,211 37 206,798
370,915 5,994 8,056 14,676 5,588 122 405,351
183,205 5,023 5,286 12,751 4,542 680 211,487
371,947 6,625 8,525 15,217 5,835 893 409,042
24,584 18,562 17,896 61,042
20,506 15,939 34,796 8,607 79,848
25,001 28,433 25,300 2,472 81,206
20,779 22,648 43,755 10,015 97,197
8,653 8,653
5,452 5,452
25,050 8,653 576 34,279
25,050 5,452 1,084 31,586
(a) Remaining balance payable for the acquisition of Multidisplay and M4 Produtos, contingent to the attainment of certain financial performance goals, as mentioned in note 1.
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(b) Refers to the Management Retention Plan, approved by the Board of Directors in November 2009, applicable to the Companys main executive officers that takes into consideration their performance and permanence in the Company for a period of three years; the expense and related reserve is recognized during the validity of the plan. 17. RESERVE FOR CONTINGENT LIABILITIES AND ESCROW DEPOSITS a) Reserve for contingent liabilities The Company and its subsidiaries are parties to lawsuits and administrative proceedings before courts and governmental bodies, arising in the normal course of business and involving tax, labor and civil matters. Management, based on information and assessments made by its legal counsel, through the review of pending civil and labor lawsuits and, based on past experience on the amounts claimed in lawsuits, has recognized a reserve in an amount considered sufficient to cover probable losses on pending proceedings, as follows:
Additions (a) 54,939 2,259 5,741 62,939 Company Write-offs/ Inflation reversals (b) adjustment 06.30.2011 _________ (23) 284 529,240 (1,743) 981 8,870 (2,423) 194 17,199 (4,189) 1,459 555,309
12.31.2010 Tax Civil Labor 474,040 7,373 13,687 495,100
Consolidated Additions Write-offs/ Inflation 12.31.2010 (a) reversals (b) adjustment Payments 06.30.2011 Tax Civil Labor 496,683 7,373 19,577 523,633 54,939 2,259 11,091 68,289 (23) (1,743) (5,352) (7,118) 467 981 222 1,670 (303) (303) 551,763 8,870 25,538 586,171
(a) Correspond basically to the increase in reserve for contingencies for the six-month period ended June 30, 2011, related to suspended taxes, recorded as a contra entry to General and administrative expenses and Other operating (expenses) income, net in income statement. (b) Basically represented by the reversal of the reserve for tax contingencies due to toll of statute of limitation or change in the opinion of the Companys legal counsel as to the likelihood of loss.
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Civil lawsuits Refer basically to collection of transactions made through the Companys system that were not transferred to merchants in view of noncompliance with clauses of the affiliation contract, and compensation for losses caused by transactions not transferred at that time. As of June 30, 2011, the reserve for probable losses on civil lawsuits totals R$8,870 (Company and Consolidated). In addition, as of June 30, 2011, the Company is a party to public civil lawsuits and civil investigations, most of the them filed by the Public Prosecution Office or professional associations, whose intention is to defend collective interests (such as consumer rights and labor rights). Judicial decisions may grant rights to groups of people (even without their consent). In many situations, the group that will benefit from a favorable outcome will only be defined after the final decision. Labor lawsuits Include 232 labor lawsuits against Cielo and 69 labor lawsuits against Servinet as of June 30, 2011, 101 of which had been filed by former employees. The remaining labor lawsuits, totaling 200, were filed by subcontractors, some of whom claiming the recognition of an employment relationship. Labor lawsuits, when started, are considered of possible likelihood of loss. Only after the court decision is issued, the lawsuits are reclassified to probable or remote loss, depending on the decision and based on the history of losses on similar lawsuits. In general, considering the history of losses, labor lawsuits are related to salary equalization, overtime, annual bonus, rights guaranteed by agreements between the employer and the labor union, recognition of employment relationship, tenure after occupational disease, and pain and suffering. As of June 30, 2011, the reserve for probable losses on labor lawsuits amounts to R$17,199 (Company) and R$25,538 (Consolidated). Tax lawsuits Refer to differences in interpretation by tax authorities, especially regarding: COFINS - non-cumulativeness - in February 2004, the Company and its subsidiary Servinet filed an injunction to avoid payment of COFINS according to Law 10833/03 that requires the noncumulative calculation at the rate of 7.60%, and began to make escrow deposits for amounts determined monthly. As a result, the difference between the COFINS due calculated based on the rate established by the cumulative and noncumulative calculation method is being recorded as reserve for contingencies since then. Escrow deposits have been made for unpaid COFINS amounts. As of June 30, 2011, the accrued balance is R$516,935 - Company (R$537,491 - Consolidated) and the balance of escrow deposits is R$516,935 - Company (R$530,263 - Consolidated). The lawsuit is awaiting judgment of the Federal Supreme Court.
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Amazon Investment Fund (FINAM) - in 2007, the Company received a tax assessment notice for calendar 2002, FY 2003. The Federal Revenue Service alleges that the Request for Review of Tax Incentive Issue Order (PERC) was not filed within the statutory deadline and, therefore, they do not recognize the portion of Corporate Income Tax (IRPJ) related to FINAM. The Company awaits the distribution of the Voluntary Appeal to the Panel of the Board of Tax Appeals. As of June 30, 2011, the accrued balance is R$11,667 (Company and Consolidated). Provisional Act 212/95 PIS/PASEP - in April 1997, the subsidiary Servinet was granted an injunction that exempted it from the payment of PIS based on billings. The Federal Government filed an appeal that was upheld by the court. On August 26, 2010, the subsidiary filed a debt expiration claim with the Third Region Finance Attorney of So Paulo. As of June 30, 2011, the accrued balance is R$1,858 (Consolidated). The Company and its subsidiaries are challenging other interpretations of the law by tax authorities and, therefore, as of June 30, 2011, recognized reserves for contingencies in the amounts of R$638 (Company) and R$747 (Consolidated). The Management of the Company and its subsidiaries, based on the opinion of their legal counsel, believes that the actual disbursement of the reserves for contingencies will not occur before December 31, 2016. Additionally, as of June 30, 2011, the Company and its subsidiaries are parties to tax, civil and labor lawsuits assessed by their legal counsel as possible likelihood of losses, for which no reserve was recorded, as follows: Company Consolidated Tax Civil Labor Total b) Escrow deposits As of June 30, 2011, the Company and its subsidiaries have escrow deposits related to the reserve for tax, labor and civil contingent liabilities, broken down as follows: Company 12.31.2010 Addition Write-off Tax Civil Total 464,042 3,203 467,245 59,586 1,757 61,343 (640) (640) 50,676 102,794 15,866 169,336 68,279 102,794 19,026 190,099
06.30.2011 523,628 4,320 527,948
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Consolidated 12.31.2010 Addition Write-off Tax Civil Labor Total 18. PAYABLES - SECURITIZATION ABROAD 485,596 3,588 20 489,204 59,593 2,340 12 61,945 (647) (647)
06.30.2011 545,189 5,281 32 550,502
Refer to the securitization transaction described in notes 1 and 6, representing the Companys obligation to deliver receivables denominated in foreign currency that were generated or will be generated by the Company against Visa International Service Association, arising mainly from purchases of goods/services with VISA credit and debit cards at Brazilian merchant outlets by individuals residing and domiciled abroad, which were the subject matter of an agreement for assignment of future flow of receivables to Brazilian Merchant Voucher Receivables Limited, a special purpose company established in Grand Cayman, which issued securities in the international market, backed by receivables assigned by the Company. Pursuant to the indenture, Brazilian Merchant Voucher Receivables Limited will pay total obligations in connection with the securitization transaction with the flow of receivables in foreign currency from Visa International Services Association. The banks participating in this transaction (Banco Bradesco S.A. and Banco do Brasil S.A.) entered into a cross guarantee agreement whereby, in the event of default by one of the parties, the other party guarantees the transaction and has the right to exercise the stock option for all or a part of the interest held by the default bank in the Company. The installment portion recognized in current liabilities as of December 31, 2010 was settled in the first half of 2011. 19. SHAREHOLDERS EQUITY a) Capital Capital as of June 30, 2011 is represented by 545,913,520 common shares (1,364,783,800 as of December 31, 2010), fully subscribed and paid-in. The Annual and Extraordinary Shareholders Meeting held on April 29, 2011 approved a capital increase of R$163,836 through the incorporation of the legal reserve of R$20,000 and the capital budget reserve of R$143,836 as of December 31, 2010.
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As commented in item (g) below, due to the changes in treasury shares, the number of shares outstanding as of June 30, 2011 is 544,147,054 (1,360,286,034 shares as of December 31, 2010). Capital can be increased by up to 6 billion common shares, regardless of any amendments to bylaws, at the discretion of the Board of Directors, which has the power to establish the share issue price, the terms and conditions for subscription and payment of shares up to the authorized capital limit. Except in the cases described below, shareholders will have the preemptive right to subscribe for shares issued in a capital increase, which shall be exercised within 30 calendar days after the publication of the minutes of the Board of Directors meeting that approved the capital increase. Within the authorized capital limit, the Company may grant stock option or subscription to Management members and employees. The Board of Directors may exclude the preemptive right or reduce the term for exercising such right in the issuance of shares, debentures convertible into shares or subscription bonus whose placement shall be made upon trade in stock exchanges, public subscription or upon exchange for shares, within the authorized capital limit. The Board of Directors may also resolve on any shares that remained unsubscribed in the capital increase during the term for exercising the preemptive right and establish, prior to their sale on stock exchanges to the benefit of the Company, the apportionment, proportional to the amounts subscribed, among the shareholders that have indicated, in the subscription bulletin or list, interest in subscribing possible remaining shares. b) Capital reserve Represents share-based payment costs and goodwill on the subscription of shares related to capital contributions by shareholders exceeding the amount allocated to capital formation. The capital reserve is R$89,871 as of June 30, 2011 (R$83,532 as of December 31, 2010). c) Earnings reserve - legal Recognized with amounts corresponding to 5% of net income for the year, pursuant to article 193 of Law 6404/76, up to the limit of 20% of capital. The balance as of June 30, 2011 is R$42,412 (R$20,000 as of December 31, 2010). d) Earnings reserve - capital budget The Annual and Extraordinary Shareholders Meeting held on April 29, 2011 approved the capital budget proposal prepared by the Companys Management, pursuant to article 196 of Law 6404/76 and article 5, sole paragraph, of CVM Instruction 469, dated May 2, 2008. The earnings reserve is maintained so as to allow the Company to repurchase its shares in the future (share buyback). The capital budget reserve is R$108,933 as of June 30, 2011 (R$143,836 as of December 31, 2010).
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e) Earnings reserve - earning retention As of June 30, 2011, the balance of the caption Earnings retention of R$805,820 is composed of the net income for the six-month period then ended of R$848,232, deducted by the legal reserve in the amount of R$42,412. The allocation of the Earnings retention reserve will be decided at year-end, pursuant to the Companys bylaws and the Brazilian Corporate Law. f) Dividends and interest on capital Dividends are recognized as liabilities when approved by the Companys shareholders. Under Companys bylaws, shareholders are entitled to a minimum dividend of 50% of net income after the recognition of the legal reserve of 5% of net income for the year until the reserve equals 20% of the capital. The allocation of any remaining balance of net income is decided at the Shareholders Meeting. At year-end, the Company accrues the minimum dividends not paid during the year up to the limit of the previously mentioned minimum mandatory dividend. The Board of Directors decided in the meeting held on February 9, 2011 to distribute supplementary dividends and interest on capital on net income, based on the financial statements for the year ended December 31, 2010, totaling R$838,261, of which R$7,236 was distributed as interest on capital and R$831,025 as dividends. Dividends were paid to shareholders on March 31, 2011. The dividends and interest on capital for the year ended December 31, 2010 were approved by the Annual Shareholders Meeting held on April 29, 2011. g) Treasury shares On November 23, 2009, the Companys Board of Directors, in compliance with article 17 of its bylaws, Article 30 of Law 6404/76, CVM Instruction 10/80, as subsequently amended, and CVM Instruction 358/02, as subsequently amended, approved the buyback of up to 6,000,000 common shares without par value, to be canceled, sold or held in treasury and, primarily, to meet the exercise of the options granted under the Companys Stock Option Plan, with no capital reduction, within 180 days from that date, expiring, therefore, on May 21, 2010. In addition, these share buybacks are limited to the balance available in the caption Capital reserve calculated in the year, pursuant to articles 1 and 12 of CVM Instruction 10/80. The Companys Management should define the number of shares that will be bought back, within the authorized limits, and the buyback timing.
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Changes in treasury shares are stated as follows:

Average price R$ per share 15.32 12.92 12.94 12.76
Shares Closing balance at December 31, 2010 Exercise of stock options: January 2011 March 2011 April 2011 Balance of treasury shares before the bonus Increase in treasury shares due to the bonus (a) Exercise of stock options - March 2011 Balance of treasury shares before the reverse stock split Decrease in treasury shares due to the reverse stock split (b) Exercise of stock options - June 2011 Closing balance as of June 30, 2011 4,497,766 (7,100) (4,999) (10,966) 4,474,701 894,940 (1,500) 5,368,141 (3,578,761) (22,914) 1,766,466
Amount. (68,823) 92 64 145
58
38.80
893 (67,571)
38.99 38.99
(a) Bonus: new common shares were issued, with shareholders being assigned, gratuitously, one new common share for each portion of five common shares held by them, generating an effect of 894,940 new shares. (b) Reverse stock split: in May 2011, due to the reverse stock split of 3 to 1 share, there has been a reduction of 3,578,761 in the number of outstanding shares.
The shares bought back will be held in treasury to be later disposed of, cancelled or used in the future exercise of stock options granted to the Companys officers and employees. 20. EARNINGS PER SHARE a) Change in the number of common shares Shares issued Shares as of December 31, 2010 Exercise of stock options - January 2011 Exercise of stock options - March 2011 Exercise of stock options - April 2011 Bonus effect Balance after bonus Exercise of stock options - May 2011 Reverse split effect Balance after reverse split Exercise of stock options - June 2011 Shares as of June 30, 2011 b) Earnings per share In compliance with CPC 41 and IAS 33 - Earnings per Share, the following tables reconcile the net earnings and weighted average of outstanding shares with the amounts used to calculate the basic and diluted earnings per share. Common 1,360,286,034 7,100 4,999 10,966 272,061,820 1,632,370,919 1,500 (1,088,248,279) 544,124,140 22,914 544,147,054
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On May 2, 2011, capital increased by R$163,836 by means of the capitalization of capital budget and legal reserves, whereby the shareholders were assigned, gratuitously, as a bonus, one new share for each portion of five shares. In addition, on May 4, 2011 a reverse stock split of 3-to-1 based in the number of shares took place. These events have been considered retrospectively in the calculation of basic and diluted earnings per share, as if they had occurred at the beginning of the latest reporting period, as follows: Basic earnings per share
Company 06.30.2011 06.30.2010 Net income for the six-month period available to common shares Weighted average of outstanding common shares (in thousands) Earnings per share (in R$) - basic Consolidated 06.30.2011 06.30.2010
848,232 544,140 1.5588
897,933 544,025 1.6505
850,216 544,140 1.5625
897,933 544,025 1.6505
Diluted earnings per share

Company 06.30.2011 06.30.2010 Net income for the six-month period available to common shares Diluted denominator: Weighted average of outstanding common shares (in thousands) Potential increase in common shares as a result of the stock option plan Total (in thousands) Earnings per share (in R$) - diluted Consolidated 06.30.2011 06.30.2010
848,232
897,933
850,216
897,933
544,140 529 544,669 1.5573
544,025 358 544,383 1.6495
544,025 358 544,383 1.5618
544,025 358 544,383 1.6495
21. NET REVENUE Company 06.30.2011 06.30.2010 Commissions Rental of POS equipment Other services Total gross revenue from services ISS (tax on services) Total 1,491,484 533,031 59,315 2,083,830 (209,856) 1,873,974 1,474,653 598,029 50,778 2,123,460 (213,163) 1,910,297 Consolidated 06.30.2011 06.30.2010 1,489,933 533,483 150,055 2,173,471 (225,328) 1,948,143 1,474,653 598,621 69,906 2,143,180 (219,981) 1,923,199
45
22. EXPENSES BY NATURE The Company elected to report the consolidated income and expenses by nature. As required by CPC and IFRS, the breakdown of costs of services and net operating expenses by nature is presented below: Company Consolidated 06.30.2011 06.30.2010 06.30.2011 06.30.2010 Personnel expenses Depreciation and amortization Professional services (*) Other expenses Total Classified as: Cost of services Personnel expenses General and administrative expenses Marketing Other operating expenses Total 101,762 106,268 378,956 258,101 845,087 95,763 89,742 342,296 172,096 699,897 149,110 112,384 326,873 324,602 912,969 121,318 90,819 309,904 188,895 710,936
578,505 58,134 140,238 57,473 10,737 845,087
490,394 53,601 93,903 57,384 4,615 699,897
653,880 93,513 95,828 57,561 12,187 912,969
509,117 74,483 66,469 57,467 3,400 710,936 services,
(*) Substantially related to the capture and processing of transaction telecommunication, terminal maintenance, supplies and other services. 23. FOREIGN BRANCH
The Company conducts operations (note 1) through its branch in Grand Cayman, Cayman Islands. As of June 30, 2011, the balance sheet and income accounts statement of this branch, consolidated with the Companys accounts (parent company), after eliminations, are as follows: current and noncurrent assets of R$6,634 (R$49,765 as of December 31, 2010), current and noncurrent liabilities - none (R$42,983 as of December 31, 2010) and shareholders equity of R$6,634 (R$6,782 as of December 31, 2010). Net income for the six-month period ended June 30, 2011 amounted to R$148 (R$263 on the six-month period ended June 30, 2010). In the six-month period ended June 30, 2011, the foreign exchange gains on the translation of the financial statements of the Grand Cayman branch, totaling R$163 (R$53 on the six-month period ended 30, 2010) was recorded in Financial income (expenses). 24. RELATED-PARTY TRANSACTIONS In the normal course of activities and under market conditions, the Company conducts transactions with related parties, such as receivables from card-issuing banks, which are the financial groups in which its controlling shareholders hold interests, and expenses on and income from services provided by Servinet, Orizon, Multidisplay and MP4 Produtos.
46
When conducting its business and engaging services, the Company makes market quotations and surveys intended to find the best technical and pricing terms, and the decision on whether or not a transaction should be conducted is made by the chief decision maker of the function purchasing the product or service, regardless of whether such transaction is conducted with related or unrelated parties. Also, the type of business conducted by the Company requires it to enter into agreements with several card-issuing entities, some of which are its direct or indirect shareholders. The Company believes that all the agreements entered into with related parties are carried out on an arms-length basis. The tables below include the balances as of June 30, 2011 and December 31, 2010 and the amounts of transactions with the related parties, broken down by type of agreement, shareholder and subsidiaries, for the six-month periods ended June 30, 2011 and 2010:
Company 06.30.2011 Subsidiaries Servinet Orizon Multidisplay M4 Produtos Total 12.31.2010
Shareholders Banco do Banco Bradesco S.A. Brasil S.A. Assets (liabilities): Short-term investments (a) Trade accounts receivable Receivables securitization abroad (d) Receivables from subsidiary Service agreement with Servinet (f)
Total
128,808 354
17,517 169
146,325 523
86,107 849
(10,523)
153 -
153 (10,523)
42,983 165 (25,946)
Shareholders Banco Banco do Bradesco S.A. Brasil S.A. Revenues: Income from shortterm investments (a) Revenue from other services (b) Revenue from the rental of POS equipment (c) Revenue from securitization of receivables abroad (d) Expenses: Other operating expenses (e) Service agreement with Servinet (f)
Company 06.30.2011 Subsidiaries Servinet Orizon Multidisplay M4 Produtos Total
06.30.2010
Total
6,533 2,590
2,035 1,220
290
1,370
8,568 5,470
7,398 4,196
981
981
846
884
712
1,596
1,415
(5,067) -
(974) -
(56,064)
(6,041) (56,064)
(5,598) (36,035)
47
(a) The terms, charges and interest rates of short-term investments were agreed under conditions similar to those applicable to unrelated parties. (b) Corresponds to fraud prevention and bank account blocking services provided by the Company to the shareholder banks and commissions for the processing of transactions for M4 Produtos and Multidisplay. These related-party transactions are carried out at prices and under conditions similar to the transactions carried out with other issuer banks. (c) See note 5.(c). (d) See note 6. (e) Services contracted with shareholder banks, relating to: (i) corporate collective life insurance, (ii) health and dental insurance and (iii) private pension agreement. The Company understands that the financial conditions adopted by the shareholder banks in respect of prices, terms and other conditions were applied under conditions similar to those adopted with respect to third parties. (f) The Company engaged Servinet to provide POS equipment installation and maintenance service to merchants. The payment for the services provided is determined based on the costs incurred by Servinet when the service is provided, plus taxes and a payment margin.
Main related-party transactions Balances of issuer banks Receivables from issuer banks, whose net amounts are recorded under Payables to merchants, refer to the amounts payable by the issuers to the Company arising from the transactions carried out with credit and debit cards, which will be subsequently transferred by the Company to the authorized merchants. These related-party transactions are carried out at prices and under conditions similar to the transactions carried out with other issuers of credit or debit cards authorized by VISA and MASTERCARD brands. Domicile bank incentives The Company entered into agreements with domicile banks to promote the invoicing of commissions and prepayment of receivables. In these agreements, the Company remunerates the banks based on the performance goals established therein. Bank account blocking Refer to bank account blocking service agreements entered into with various banks, whose service consists of ensuring to the banks the blocking of the bank accounts of the authorized merchants that carry out financial transactions with them. These related-party transactions are carried out at prices and under conditions similar to the transactions carried out with other domicile banks. Recordkeeping of Cielos shares Cielo stock book entry service agreement entered into with Banco Bradesco S.A., whereby it provides stock book entry and share certificate issuance services.
48
Operating services - stock option program Service agreement consisting of the rendering of operating services for the stock option program and the related grants entered into with Bradesco S.A. Corretora de Ttulos e Valores Mobilirios. Other widespread agreements In addition to the balances recorded, the Company engages other services from the main shareholders: Cash Management Services. Insurance. Private pension services. Corporate credit card. International guarantees. Suppliers payment services. Other. 25. INCOME TAX AND SOCIAL CONTRIBUTION The effective income tax and social contribution rate for the six-month periods ended June 30, 2011 and 2010 is as follows:
Company 06.30.2011 06.30.2010 Income before income tax and social contribution Statutory tax rates - % Income tax and social contribution at statutory rates Interest on capital tax benefit Tax incentives (a) Effect on permanent differences, net (b) Income tax and social contribution Current Deferred Consolidated 06.30.2011 06.30.2010
1,267,259 34 (430,868) 7,350 4,491 (419,027) (448,646) 29,619
1,365,704 34 (464,339) 3,312 2,962 (9,706) (467,771) (478,150) 10,379
1,272,993 34 (432,818) 7,350 2,691 (422,777) (452,215) 29,438
1,369,065 34 (465,482) 3,312 2,962 (11,924) (471,132) (478,150) 7,018
(a) Corresponds to tax incentives from the Rouanet Law, Funds for Child and Adolescents Rights, Workers Support Program (PAT) and Sports Law. (b) Represented substantially by reserves for contingencies and equity in subsidiaries, nondeductible from the calculation of taxable income and tax loss carryforwards.
49
26. FINANCIAL INSTRUMENTS The estimated fair values of financial instruments of the Company and its subsidiaries have been determined using available market inputs and appropriate valuation methodologies. However, considerable judgment was required to interpret market data and then develop the most appropriate fair value estimates. Accordingly, estimates presented herein are not necessarily indicative of the amounts that could be realized in the market. The use of different market methodologies may have a material effect on the estimated fair values. These instruments are managed through operating strategies, aimed at liquidity, profitability and security. The control policy consists of permanent monitoring of contracted rates compared to market rates. The Company and its subsidiaries do not have transactions for speculative purposes, derivatives or any other risk assets. a) Financial assets and liabilities The Companys and its subsidiaries financial assets and financial liabilities refer to cash and cash equivalents, trade accounts receivable, receivables and payables from securitization abroad, payables to merchants, and trade accounts payable. The estimated fair values of financial instruments as of June 30, 2011 are as follows: 06.30.2011 Company Carrying Fair amount value Cash and cash equivalents Trade accounts receivable Trade accounts payable Payables to merchants Consolidated Carrying Fair amount value
210,889 210,889 253,050 253,050 2,292,212 2,292,212 2,336,697 2,336,697 180,558 180,558 230,296 230,296 1,559,742 1,559,742 1,559,742 1,559,742
The fair value of financial assets and short- and long-term financing was determined, when applicable, by using current interest rates available for transactions conducted under similar conditions and with similar maturity dates. b) Credit risk The Company has an instrument to mitigate the credit risk of the VISA brand card-issuing banks, used as a hedge against the risk of default by such banks. This hedging instrument consists of the commitment assumed by the VISA brand, pursuant to foreign regulations, to guarantee the transfer to the Companys merchants of all sales made with VISA cards on the related due dates in the event of default by an issuer. The guarantee model implemented by the VISA brand together with the Company prescribes the provision of guarantees (collaterals or bank guarantees) considering the credit risk of the issuer, sales volume with VISA cards and residual risk of default by cardholders. The provision of guarantees is mandatory for all card-issuing banks with credit risk, and amounts are reviewed periodically by VISA and the Company. If the issuer does not provide the requested guarantees, it is not accepted as a member of the system or is disqualified as such.
50
Since July 1, 2010, the Company has also started accrediting the MASTERCARD brand, and the related credit risk is guaranteed by the MASTERCARD brand itself, in case of default by the card-issuing banks with the Company. The MASTERCARD brand requires card-issuing banks participating in the system to provide guarantees, collaterals or bank guarantees. If the issuer does not provide the requested guarantees, it is not accepted as a member of the system or is disqualified as such. The VISA and MASTERCARD systems also prescribe that cardholders can contest transactions made with credit cards within certain timeframes from the date of the transaction. For this purpose, the Company enters into an affiliate agreement with authorized merchants establishing all rules for acceptance of these cards at the point of sale. If transactions are contested by cardholders and the merchant is no longer an affiliated member at the date of the contestation or has no amounts receivable from the Company, then collection will be made through debit to bank account or outside collection agencies and there may be losses to the Company. The Company leases POS equipment to all affiliated merchants that do not have their own systems to capture transactions. The rent is deducted, on the due date, from the amount of transactions payable to merchants. However, the rent may not be received on the due date whenever there are no amounts payable to merchants. In these cases, the Company collects the rent through debit to future sales, bank account or outside collection agencies, and losses on rent may be incurred. c) Risk of fraud The Company uses a sophisticated antifraud system to monitor transactions with credit and debit cards, which detects and identifies suspected fraud at the time of the authorization and sends an alert message to the card-issuing bank for it to contact the cardholder. d) Currency risk The Company enters into forward exchange transactions for US dollars to hedge against fluctuations in exchange rates, which reduces significantly potential currency risks. There are no other material transactions in foreign currency that might cause a significant impact on the income or loss of the Company due to the effects of the volatility of the exchange rate on other assets and liabilities denominated in foreign currencies, principally the US dollar.
51
As of June 30, 2011, the net exposure to foreign exchange rate risk, in thousands of U.S. dollars, is as follows: Company and consolidated Assets: Cash and banks Short-term investments
937 1,466 2,403
Liabilities Payables to merchants
(2,277) (2,277) 126
Long position in US dollars e) Interest rate risk
The Companys results of operations are subject to significant fluctuations resulting from short-term investments with floating interest rates. Pursuant to its financial policies, the Company has maintained its short-term investments at prime banks and has not entered into transactions with financial instruments for speculative purposes. f) Interest rate sensitivity analysis - short-term investments The funds from the Companys short-term investments are impacted by changes in the interbank deposit rate (CDI). As of June 30, 2011, assuming an increase or reduction of 10%, 25% and 50% in the interest rates, there would be an increase or decrease of approximately R$1,692, R$4,231 and R$8,462 in financial income, respectively. This amount was calculated considering the impact of hypothetical increases or decreases in interest rates on the average balance of short-term investments in 2011. g) Derivatives During the six-month periods ended June 30, 2011 and 2010, the Company had no derivative transactions. h) Financial instruments by category
Loans and receivables Company Consolidated 06.30.2011 12.31.2010 06.30.2011 12.31.2010 210,889 2,292,212 2,503,101 221,542 2,192,915 42,983 2,457,440 253,050 2,336,697 2,589,747 250,603 2,210,282 42,983 2,503,868
Assets Cash and cash equivalents Trade accounts receivable Receivables - securitization abroad Total
52
Liabilities Payables to merchants Trade accounts payable Payables - securitization abroad Total
Other financial liabilities Company Consolidated 06.30.2011 12.31.2010 06.30.2011 12.31.2010 1,559,742 180,558 1,740,300 1,168,440 145,875 42,959 1,357,274 1,559,742 230,296 1,790,038 1,168,440 180,761 42,959 1,392,160
27. COMMITMENTS The Company is engaged in the capture, transmission, processing and settlement of transactions with credit and debit cards. To conduct said activities, the Company entered into the following agreements: a) Lease agreements As of June 30, 2011, future annual payments under lease agreements in effect are estimated as follows: Year 2011 (beginning July) 2012 2013 Total 4,479 9,674 10,448 24,601
Most contracts specify a termination fine equivalent to three-month rent, and a partial return can be negotiated for each case. b) Telecommunications, technology and logistics services As of June 30, 2011, future payments under telecommunications, technology and logistics service agreements in effect are estimated as follows: Year 2011 (beginning July) 2012 2013 Total 240,767 520,885 562,555 1,324,207
Transactions capture and processing agreements stipulate termination fines totaling R$61,050. Telecommunications service agreements, which vary according to the operating demand and it is not possible to determine an average term, are subject to an average termination fine of R$26. Logistics service agreements are in effect since June 2007, with a minimum period of 12 months and a termination fine of R$10,438.
53
c) Bank guarantees As of June 30, 2011, based on the agreements in effect, bank guarantees are as follows: Type Guarantee for Personal Recharge and Multioperator (*) 400
(*) Collateral assigned to the subsidiary Multidisplay by financial institutions to secure the payment of agreements with mobile telephone companies (OI/TIM/VIVO). 28. PROFIT SHARING The Company and its subsidiaries pay profit sharing to their employees and officers, subject to the achievement of operational goals and specific objectives, established and approved at the beginning of each year. Employees and Management profit sharing amounts for the six-month periods ended June 30, 2011 and 2010 were recorded in line item Personnel expenses in income statement, as follows: Company 06.30.2011 06.30.2010 Employees Management Total 29. MANAGEMENT COMPENSATION
06.30.2011 Consolidated Compensation Stock option grant Stock options Exercise Fixed Variable Total balance (a) price (b) Officers Board of Directors and Supervisory Board Total 4,380 674 5,054 5,195 5,195 9,575 674 10,249 2,144,500 2,144,500 14.35 14.35
Consolidated 06.30.2011 06.30.2010 19,954 4,337 24,291 16,012 3,801 19,813
13,559 4,337 17,896
12,019 3,801 15,820
(a) Refers to the number of vested options not exercised by June 30, 2011. (b) Refers to the weighted average exercise price of the options at the time they were granted.
The overall annual compensation for 2011 set at the Annual Shareholders Meeting of April 29, 2011 is R$20,000.
54
30. FINANCIAL INCOME (EXPENSES)

Company Consolidated 06.30.2011 06.30.2010 06.30.2011 06.30.2010 Financial income: Earnings from short-term investments Interest on postponed receivables Interest - securitization abroad Reversal of contingencies fine and interest Other financial income
14,181 1,596 66 15,843
11,480 2,711 6,478 9,806 78 30,553
15,262 1,596 380 17,238
12,066 2,711 6,478 9,806 350 31,411
Financial expenses: Interest - securitization abroad Late payment interest and fines Contingencies fine and interest Interest on early exchange Other financial expenses
(1,596) (25) (1,469) (27,272) (3,740) (34,102)
(6,478) (51) (1,407) (5,240) (1,557) (14,733)
(1,596) (346) (1,678) (27,272) (3,764) (34,656)
(6,478) (151) (7,689) (5,240) (1,614) (21,172)
Prepayment of receivables: Income from prepayment of receivables (a) Present value adjustment expenses (b)
258,512 (5,272) 253,240 1,997 236,978
170,351 (24,485) 145,866 697 162,383
258,512 (5,272) 253,240 1,997 237,819
170,351 (24,485) 145,866 697 156,802
Exchange rate variation, net (c) Total
(a) Revenue from the prepayment of receivables in the six-month period ended June 30, 2011 comprises income from the transaction volume for the six-month then ended of R$258,512, plus revenue recorded over the maturities. (b) As described in note 5.(a), the present value adjustment recorded in the consolidated financial statements was calculated on receivables prepayments. The assumptions adopted for the calculation are as follows: Interest rates used are those contracted for the transactions of up to 6.23% per month. Calculations were carried out separately, discounting cash flows for each recorded receivable. The Companys Management recognized the present value adjustment of accounts receivable balance in view of the materiality of values adjusted, of interest rates and transaction terms. Monthly, Management reviews the assumptions mentioned and the changes are recorded in income statement.
(c) Arises basically from the amount received in US dollars from Visa International Service
Association related to transactions with foreign credit and debit cards, the receivables securitization abroad transaction, and gains and losses originally denominated in foreign currency, represented by income in the amount of R$2,203 (R$1,849 as of June 30, 2010) and expenses totaling R$206 (R$1,152 as of June 30, 2010).
55
31. OTHER OPERATING EXPENSES, NET Represented by: Company Consolidated 06.30.2011 06.30.2010 06.30.2011 06.30.2010 Write-off of uncollectible receivables Other net revenues Total 32. INSURANCE As of June 30, 2011, the Company has the following insurance agreements: Type Civil liability and Directors and Officers Nominated risks (fire, windstorm and smoke, electrical damages, electronic equipment, theft and flood) Loss of profits Vehicles Other 33. STOCK OPTION PLAN The Extraordinary Shareholders Meeting held on September 22, 2008 approved the Companys common stock option plan. This plan was confirmed by the Extraordinary Shareholders Meeting held on June 1, 2009 and is effective for ten years from the date the first benefits were granted. Stock options may be granted provided that capital dilution does not exceed, at any time during the effectiveness of the plan, 0.3% per year. Options granted to beneficiaries will be subject to a five-year vesting period from the grant date approved by the Board of Directors. The Companys Board of Directors will define the beneficiaries eligible for the stock option plan annually or at the frequency considered appropriate. At meetings held on July 1, September 23, 2009, and July 6, 2010, the Board of Directors approved the first, second, and third grants of options for the purchase of common shares, respectively, as shown in the table below, without any option for the settlement of options in cash. Under the Stock Option Plan and Vesting Agreement, the first portion of the stock options granted, equivalent to 1/3 of total, will vest after one year. Insured amount 105,000 27,566 10,100 670 2,030 (15,109) 4,372 (10,737) (6,693) 2,078 (4,615) (15,109) 2,922 (12,187) (6,693) 3,293 (3,400)
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Grant date July 1, 2009 September 23, 2009 July 6, 2010 Total
Number of shares Granted Cancelled Balance 1,139,480 220,480 1,073,680 2,433,640 (97,160) 1,042,320 220,480 - 1,073,680 (97,160) 2,336,480
Exercise Fair value price Vesting of options (R$) period (R$ per share) 25.77 5 years 42.10 5 years 39.70 5 years 9.65 11.37 13.07
The fair value of options was measured using the Black & Scholes pricing model, based on the following economic assumptions: Granting date July 2009 September 2009 July 2010 Dividend yield Share price volatility Vesting period 6.66% 36.67% 4 years 6.66% 36.67% 4 years 5.73% 37.51% 4 years
The fair value is allocated to net income for the six-month period with a contra entry to the capital reserve on a straight-line basis over a term of up to 36 months. An expense in the amount of R$6,666 was recognized in the six-month period ended June 30, 2011 (R$5,230 in the six-month period ended June 30, 2010), recorded under Personnel expenses, and 47,479 shares in the amount of R$327 were exercised; the net balance of stock options granted of R$6,339 was recorded under capital reserves as of June 30, 2011 (R$5,230 as of June 30, 2010). 34. PENSION PLAN The Company contributes monthly to a defined contribution pension plan (PGBL) for its employees and contributions made during the six-month period ended June 30, 2011 totaled R$3,010 (R$2,538 as of June 30, 2010), which were recorded in Cost of services and Personnel expenses (Consolidated). 35. APPROVAL OF THE FINANCIAL STATEMENTS These consolidated financial statements were approved by the Companys Board of Directors and authorized for issuance on July 25, 2011.
2011-0398
57

Cielo S.A. and Subsidiaries: (Convenience Translation Into English From The Original Previously Issued in Portuguese)

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Cielo S.A. and Subsidiaries: (Convenience Translation Into English From The Original Previously Issued in Portuguese)

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(Convenience Translation into English from the Original Previously Issued in Portuguese)

Cielo S.A. and Subsidiaries

Deloitte Touche Tohmatsu Auditores Independentes

Company 06.30.2011 12.31.2010

Consolidated 06.30.2011 12.31.2010

Company 06.30.2011 12.31.2010

Consolidated 06.30.2011 12.31.2010

210,889 2,292,212 153 237 7,584 17,736 2,528,811

221,542 2,192,915 165 441 42,027 956 4,781 17,440 2,480,267

253,050 2,336,697 3,534 7,909 28,329 2,629,519

250,603 2,210,282 2,710 42,027 956 4,851 24,892 2,536,321

1,559,742 180,558 206,798 10,523 61,042 2,018,663

1,168,440 145,875 405,351 25,946 42,003 956 117,958 79,848 1,986,377

1,559,742 230,296 211,487 81,206 2,082,731

1,168,440 180,761 409,042 42,003 956 117,958 97,197 2,016,357

274,943 527,948 666 166,483 343,935 10,143 44,997 1,369,115

245,324 467,245 1,078 76,088 346,498 10,143 40,067 1,186,443

284,436 550,502 727 357,216 86,931 128,475 1,408,287

255,216 489,204 1,090 360,290 53,779 75,506 1,235,085

555,309 8,653 563,962

495,100 5,452 500,552

586,171 5,165 34,279 625,615

523,633 5,579 31,586 560,798

19.a) 19.b) 19.g)

263,836 89,871 (67,571) 1,029,165 1,315,301 1,315,301 3,897,926

100,000 83,532 (68,823) 1,065,072 1,179,781 1,179,781 3,666,710

263,836 89,871 (67,571) 1,029,165 1,315,301 14,159 1,329,460 4,037,806

100,000 83,532 (68,823) 1,065,072 1,179,781 14,470 1,194,251 3,771,406

The accompanying notes are an integral part of these financial statements.

Company 06.30.2011 06.30.2010 1,873,974 (578,505) 1,295,469 1,910,297 (490,394) 1,419,903

Consolidated 06.30.2011 06.30.2010 1,948,143 (653,880) 1,294,263 1,923,199 (509,117) 1,414,082

(58,134) (140,238) (57,473) 1,394 (10,737) 1,030,281

(53,601) (93,903) (57,384) (7,079) (4,615) 1,203,321

(93,513) (95,828) (57,561) (12,187) 1,035,174

(74,483) (66,469) (57,467) (3,400) 1,212,263

15,843 (34,102) 258,512 (5,272) 1,997 236,978

30,553 (14,733) 170,351 (24,485) 697 162,383

17,238 (34,656) 258,512 (5,272) 1,997 237,819

31,411 (21,172) 170,351 (24,485) 697 156,802

(448,646) 29,619 848,232

(478,150) 10,379 897,933

(452,215) 29,438 850,216

(478,150) 7,018 897,933

897,933 897,933 1.6505 1.6495

BASIC EARNINGS PER SHARE - R$ DILUTED EARNINGS PER SHARE - R$

The accompanying notes are an integral part of these financial statements.

Capital reserve 72,305

Treasury shares (69,228)

24,621 100,000 100,000

5,230 77,535 83,532

143,836 143,836 143,836

(603,775) (9,741) (143,836) (9,545) 897,933 (20,000) 877,933 901,236

(603,775) (9,741) 5,230 (3,001) 897,933 1,147,075 1,179,781

(603,775) (9,741) 5,230 (3,001) 897,933 1,147,075 1,194,251

19.f) 19.d) 19.a) 33 19.e) 19.c)

(20,000) 42,412 42,412

180,933 (143,836) 180,933

(720,303) (180,933) 848,232 (42,412) 805,820

(720,303) 6,339 1,252 848,232 1,315,301

1,984 (2,295) 14,159

(720,303) 6,339 1,252 850,216 (2,295) 1,329,460

The accompanying notes are an integral part of these financial statements.