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and Subsidiaries
Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
KPDS 76847
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Contents
Report Independent Auditors on review of Financial Information Notes to the individual and consolidated financial statements 3 12
Introduction We have audited the accompanying individual and consolidated financial statements of Cielo S.A. (Company), respectively referred to as Company and Consolidated, which comprise the balance sheet as of December 31, 2013, the statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of the Company financial statements in accordance with Brazilian accounting practices and the Consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and the Brazilian accounting practices, and for such internal control as Management determines is necessary to enable the preparation of these financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion on the Company financial statements In our opinion, the Company financial statements give a true and fair view of the financial position of Cielo S.A. as of December 31, 2013, and of its financial performance and its consolidated cash flows for the year then ended in accordance with Brazilian accounting practices. Opinion on the Consolidated financial statements In our opinion, the Consolidated financial statements give a true and fair view of the financial position of Cielo S.A. as of December 31, 2013, and of its consolidated financial performance and its consolidated cash flows for the year then ended, in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board IASB. Emphasis of a matter As described in Note 2, the Company financial statements were prepared in accordance with accounting practices adopted in Brazil. Regarding Cielo S.A., these practices differ from the IFRS applicable to the Company financial statements only with respect to the valuation of the investments in controlled companies and jointly-controlled companies using the equity method of accounting, while for IFRS purposes it would be cost or fair value. Our opinion is not qualified in respect of this matter. Other matters Audit of the previous years amounts The audit of the financial statements for the year ended December 31, 2012, originally prepared before the adjustments resulting from the change in accounting practices described in note 3, was conducted under the responsibility of other independent auditors, who issued an unqualified audit report dated February 6, 2013. As part of the audit of the 2013 financial statements, we have also examined the adjustments described in note three that were made to change the financial information of December 31, 2012 and the beginning balances of January 1, 2012 of the balance sheet (that originated from the financial statements as of December 31, 2011). In our opinion, these adjustments are adequate and have been correctly made. We were not engaged to audit, review or apply other procedures to the financial statements of Cielo S.A. for 2012 or to the beginning balances of January 1, 2012, and therefore we do not issue an opinion or any type of assurance on the 2012 financial statements taken as a whole. Our opinion does not have a change related to this issue.
Statements of value added We have also examined the Company and Consolidated statements of value added prepared under the responsibility of the Companys management for the year ended December 31, 2013, whose reporting is required by Brazilian Corporate Law, which governs corporations, and is considered supplementary information by the International Financial Reporting Standards (IFRS), which do not require the presentation of the statement of value added. These statements were subjected to the same auditing procedures previously described and, in our opinion, are fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.
Osasco, January 28, 2014 KPMG Auditores Independentes CRC 2SP014428/O-6 Original in Portuguese signed by Cludio Roglio Sertrio Accountant CRC 1SP198789/O-0
Consolidated (IFRS and BR GAAP) 12/31/2013 12/31/2012 (Republished) Liabilities and Equity Note
Current Assets Cash and cash equivalents Trade accounts receivable Trade receivables from subsidiaries Advanced and recoverable taxes Prepaid expenses Other receivables Total current assets Noncurrent Assets Deferred income tax and social contribution Escrow deposits Other receivables Investments Property and equipment Intangible assets: Goodwill on acquisition of investments Other intangible assets Total noncurrent assets
4 5 22
Current Liabilities Payables to merchants Borrowings and financing Trade accounts payable Taxes payable Payables to subsidiaries Dividends payable Other payables Total current liabilities
12 13 14 15 22 18.g) 16
6 17 7 8
Noncurrent liabilities Borrowings and financing Provision for risks Deferred income tax and social contribution Other payables Total noncurrent liabilities
13 17 6 16
9 10
Equity Capital Capital reserve Treasury shares Comprehensive income Earnings reserves Attributed to shareholders of Cielo S.A. Shareholders other than Cielo S.A.'s Total equity
Total assets
11,585,874
8,449,472
13,310,582
10,027,508
Company (BR GAAP) Note 12/31/2013 12/31/2012 (Republished) 5,031,557 (1,504,889) 3,526,668
Consolidated (IFRS and BR GAAP) 12/31/2013 12/31/2012 (Republished) 5,385,252 (1,807,613) 3,577,639
Net Revenue Cost of Services Gross Profit Operating Income (Expenses) Personnel General and administrative Sales and marketing Equity in subsidiaries Other operating expenses, net Operating Income Finance Income (Expenses) Finance income Financial expenses Revenues from advanced receivables Adjustments to present value Exchange rate changes, net
20 21
21 21 21 7 21 and 29
28 28 28 28 28
Operating Income Before Income Tax And Social Contribution Income Tax and Social Contribution Current Deferred Net Profit for the Year Attributed to Shareholders of Cielo S.A. Shareholders other than Cielo S.A.
4,017,604
3,510,046
4,038,657
3,526,704
23 23
Basic Earnings per Share (in R$) - Basic Basic Earnings per Share (in R$) - Diluted
19.b) 19.b)
3.41071 3.40585
2.96569 2.96166
3.41071 3.40585
Net profit for the year Comprehensive income Exchange differences in the conversion of foreign transactions: Exchange differences of foreign transactions Gains and losses from hedge instruments (NDF) on foreign transactions, net of taxes Gains and losses from hedge instruments (bonds) on foreign transactions, net of taxes Changes in the period Total comprehensive income for the year Attributed to Shareholders of Cielo S.A. Shareholders other than Cielo S.A.
2,673,601
2,680,676
2,674,070 7,075
2,331,146 6,002
Attributed to controlling interest Earnings reserves Additional proposed dividends 346,760 346,760 (346,760) 443,403 Total Controlling Interest 1,409,593 115,503 1,525,096 (346,760) (5,800) 11,063 33,249 2,326,167 (716,508) (360,099) (31,244) (35,916) Noncontrolling interest Total Equity
Note
Capital
Earnings retention 115,503 (115,503) 2,326,167 (47,233) (716,508) (360,099) (443,403) (31,244) (35,916) (680,213) (11,551) -
Comprehensive income -
Balances as of December 31, 2011 (originally disclosed) Adjustments resulting from changes in accounting practice Allocation of the effects of changes in accounting practice Balances as of January 01, 2012 Dividends paid in addition to the minimum mandatory dividends in 2011 Capital increase Acquisition of treasury shares Stock options granted Sale of treasury shares under the stock option plan Net profit for the year Allocation of net income for the year: Legal reserve Dividends paid Proposed dividends Additional dividends to the minimum mandatory dividends Interest on capital paid Proposed interest on capital Capital budget reserve Allocation of the effects of changes in accounting practice Effect from other shareholders other than Cielo S.A. on consolidated entities Comprehensive income: Exchange differences in the conversion of foreign transactions: Exchange differences of foreign transactions Gains and losses from hedge instruments on foreign transactions, net of taxes Balance as of December 31, 2012 (Republished) Dividends paid in addition to the minimum mandatory dividends in 2012 Capital increase Acquisition of treasury shares Stock options granted Sale of treasury shares under the stock option plan Net profit for the year Allocation of net income for the year: Legal reserve Dividends paid Proposed dividends Dividends in addition to the minimum non-discretionary dividends Interest on capital paid Proposed interest on capital Capital budget reserve Effect from other shareholders other than Cielo S.A. on consolidated entities Comprehensive income: Exchange differences in the conversion of foreign transactions: Exchange differences of foreign transactions Gains and losses from hedge instruments on foreign transactions, net of taxes Balance as of December 31, 2013
1,424,564 115,503 1,540,067 (346,760) (5,800) 11,063 33,249 2,332,169 (716,508) (360,099) (31,244) (35,916) (12,039)
500,000 500,000 -
99,951 (314) -
100,000 100,000 -
6,845 (1,866) 2,404,227 (443,403) (66,702) (314) 53,057 2,673,601 (791,300) (414,410) (49,400) (46,000) -
6,845 (1,866) 2,413,161 (443,403) (66,702) (314) 53,057 2,680,676 (791,300) (414,410) (49,400) (46,000) (3,955)
1,000,000
99,637
(37,055)
200,000
1,551,385
500,410
12,054
Cash flow from operating activities Income before income tax and social contribution Adjustments to reconcile income before income tax and social contribution To net cash provided by operating activities: Depreciation and amortization Recognition (reversal) of provision for losses on property and equipment and intangible assets Residual cost of property and equipment and intangible assets written off or sold Stock options granted Losses on non-performing loans and chargebacks Provision for risks tax, civil, labor Adjustment to present value of trade accounts receivable Interest of shareholders other than Cielo S.A. Exchange change on interest deriving from borrowings and financing raised abroad Interest on borrowings and financing Impairment of goodwill Equity in subsidiaries (Increase) decrease in operating assets: Trade accounts receivable Trade receivables from subsidiaries Advanced 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 subsidiaries Other payables (current and noncurrent) Payment of tax, civil and labor lawsuits Cash from operations Interest paid Income tax and social contribution Net cash provided by operating activities Cash Flow From Investing Activities Capital increase in subsidiaries and joint ventures Receipt due to the gain on hedge instruments on foreign operations Payment for loss on hedge instruments on foreign operations Receipt of compensation Payment of remaining balance related to acquisition of subsidiary Acquisition of interest in subsidiaries, net of cash acquired Cash received from subsidiary - Capital reduction Dividends from subsidiaries Addition POS, net FINAME borrowings Additions to property and equipment and intangible assets, excluding acquisitions POS Net cash used in investing activities Cash Flow From Financing Activities Acquisition of treasury shares Borrowings raised abroad Sale of treasury shares under the stock option plan Borrowings FINAME, net acquisition POS Payment of principal IRRF on interest on capital paid Dividends and interest on capital paid Net cash provided by (used in) financing activities Effect from exchange rate changes on cash and cash equivalents of foreign subsidiary Increase (decrease) in Cash and Cash Equivalents Cash And Cash Equivalents Closing balance Opening balance Increase (decrease) in Cash and Cash Equivalents
4,017,604
3,510,046
4,038,657
3,526,704
8 and 10 8 and 10
29 17 28
13 9 7
309,912 376 25,440 (314) 72,453 216,957 93,888 23 64,583 30,479 (17,399)
289,070 124 15,275 11,063 51,463 181,551 30,419 (38) 25,888 16,500 (2,922)
391,211 376 30,650 (314) 72,453 221,221 93,888 7,075 23 96,821 30,479 2,089
315,881 124 15,726 11,063 51,463 181,477 30,419 6,002 (38) 35,974 16,500 815
17
17
1,615,533 85,109 (16,585) 1,161 12,068 (7,175) 3,487,226 (63,164) (1,482,697) 1,941,365
942,261 119,974 2,180 354 (3,339) (6,298) 2,398,762 (21,696) (1,180,196) 1,196,870
13
9 16 7 7 8 and 13 8 and 10
(633,951)
4,375
(20,504) 3,105 10,800 (36,617) (22,490) (695,282)
(4,101)
4,375
(20,504) -
(1,365,256)
(36,600) (51,191) (1,473,277)
(5,800)
2,599,888
33,249 (863,727) (5,824) (1,408,144) 349,642 9,784 132,412
4 4
10
Company (BR GAAP) Note Revenues Sales of services Losses on leased equipment 12/31/2013 12/31/2012 (Republished) 5,605,834 (46,624) 5,559,210
Consolidated (IFRS and BR GAAP) 12/31/2013 12/31/2012 (Republished) 5,996,810 (47,161) 5,949,649
20
Inputs from third parties Cost of services Materials, electric energy, outside services and others Other payables, net Gain (loss) on realization of assets
Gross value added Retentions Depreciation and amortization Wealth created, net Wealth received in transfer Equity in subsidiaries Interest of shareholders other than Cielo S.A. Finance income, including exchange rate changes and advanced receivables, net
4,352,326
8 and 10
(309,912) 4,042,414
(289,070) 3,563,264
(391,211) 4,290,296
(315,881) 3,745,620
28
Total wealth for distribution Distribution of wealth Personnel and related taxes Profit-sharing Taxes and contributions Accrued interest and leasing Dividends and Interest on capital paid Earnings retention Wealth distributed
5,186,191
26
18.g)
11
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Operations
Cielo S.A. (the 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 corporation headquartered in Barueri, State of So Paulo, whose shares are traded on BM&FBOVESPA S.A. - Bolsa de Valores, Mercadorias e Futuros, under ticker symbol CIEL3, and its subsidiaries comprise Banco do Brasil and Bradesco conglomerates. The operations of the Companys direct subsidiaries, indirect subsidiaries and joint ventures 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) and CieloPar Participaes Ltda. (CieloPar) mainly engaged in holding investments in other companies as partner or shareholder (holdings). In December 2012, these holdings were merged with an into by the then subsidiaries Multidisplay and Braspag, respectively, at carrying amounts and as of November 30, 2012. Cielo USA, Inc. (Cielo USA) - Founded in June 2012, mainly engaged in holding investments in other companies as partner or shareholder ("holdings"). As December 31, 2013, this "holding" have control of the Me-S. Multidisplay Comrcio and Servios Tecnolgicos S.A. (Multidisplay) - 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. Braspag Tecnologia em Pagamento Ltda. (Braspag) - engaged in software development; automated transaction processing; IT services for collection and management of trade accounts payable and receivable using the Internet.
12
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Indirect subsidiaries
M4Produtos e Servios S.A. (M4Produtos) - 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. Merchant e-Solutions, Inc. ( Me-S) - Cielo USAs subsidiary engaged in the provision of services related to the facilitation of electronic payments with either credit or debit cards, comprising transaction authorization, financial clearing, and the notification of transactions to merchants.
Joint ventures
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. 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. Guilher Comrcio, Importao, Exportao e Distribuio de Medicamentos e Tecnologia para Sade Ltda. (Guilher) - Orizons subsidiary engages in the import, export, distribution, and sale of medicine pharmaceuticals and pharmaceutical raw materials, products and equipment technology for health. Paggo Solues e Meios de Pagamento S.A. (Paggo) - engaged in the accreditation of merchants for acceptance of credit and debit cards through the capture, transmission, data processing and settlement of electronic transactions with credit and debit cards for mobile payments. Cielo and its subsidiaries are also referred to as Group throughout this report.
Corporate restructuring
In 2012, the Group implemented a corporate restructuring process to simplify its operating structure:
a.
In September 2012, CieloPars capital reduction, in the amount of R$48,718, was approved, and CieloPars interest in Paggo started to be directly held by Cielo. Capital was reduced at carrying amounts and, therefore, no gains or losses were recorded. 13
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
b.
c.
In December 2012, the Shareholders Meeting approved the downstream merger of CieloPar with and into Braspag, in accordance with the Merger Agreement and Rationale. As a result of this merger, CieloPar was liquidated and Braspag became its successor. CieloPars equity was valued on November 30, 2012 at R$17,874, at its carrying amount, according to the Accounting Valuation Report for Merger Purposes issued by a specialized independent firm.
d.
In December 2012, the Extraordinary Shareholders Meeting approved the downstream merger of Servrede with and into Multidisplay, in accordance with the Merger Agreement and Rationale. As a result of this merger, Servrede was liquidated and Multidisplay became its successor. Servredes equity was valued on November 30, 2012 at R$25,187, at its carrying amount, according to the Accounting Valuation Report for Merger Purposes issued by a specialized independent firm.
e.
depreciation of equipment acquired based on the fair values arising from the initial recognition of the business combination; (ii) determined the borrowing costs as if such borrowing had been raised on January 1, 2012; (iii) calculated the amortization of the related items to the allocation of goodwill arising on the acquisition as if the allocation was made on January 1, 2012.
2
2.1
14
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
The Companys consolidated financial statements, which have been prepared in accordance with the International Financial Reporting Standards - IFRSs issued by the International Accounting Standards Board - IASB and in accordance with accounting practices adopted in Brazil, identified as Consolidated (IFRS and BR GAAP) . The accounting practices adopted in Brazil include those established in the Brazilian Corporate Law, as well as 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 of accounting in accordance with the legislation prevailing in Brazil. Thus, the individual financial statements are not considered to be in conformity with IFRSs, which requires investments in subsidiaries to be accounted for separately from the parent company at fair value or cost.
2.2
Basis of preparation
The financial statements have been prepared based on the historical cost, except if otherwise stated. The historical cost is generally based on the fair value of the consideration paid in exchange for assets.
2.3
15
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
The goodwill and adjustments to the fair value of identifiable assets acquired and liabilities assumed arising from the acquisition of a foreign subsidiary are recognized as assets and liabilities and translated based on the exchange rate at the end of the reporting period. Exchange differences are recognized in equity. When a foreign transaction is written off (e.g.: disposal of interest, transfer of control of an investee or jointly-controlled entity, or loss of significant influence over an associate, whenever there are foreign transactions), the amount of the accumulated exchange rate change relating to such transaction recorded in the Groups equity is reclassified to profit or loss for the year .
2.4
2.5
a.
b.
c.
d.
e.
f.
2.6
16
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
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 profit or loss when incurred. An item of property and equipment is written off upon disposal or when there is no future economic benefits resulting from its continuous use. Any gain or loss from the sale or write-off of an item of property and equipment is determined by the difference between the sales amount received and the carrying value of the asset sold, recognized in profit or loss.
2.7
17
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
2.8
2.9
Business combinations
In the consolidated financial statements, business combinations are stated under the acquisition method. The consideration transferred in a business combination is measured at fair value. Acquisition-related costs have been recognized in the income, when incurred. The identifiable assets acquired and liabilities assumed are recognized at fair value on the acquisition date. Goodwill is measured based on the exceeding amount arising from the sum up of the amount transferred, the noncontrolling interest in the acquire and the fair value of the acquirers interest previously held in the acquire 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.
2.10
Goodwill
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 of the Company that 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 amount of a cash-generating unit is lower than its carrying amount, the impairment loss is first allocated to reduce the carrying amount of any goodwill allocated to the unit, and subsequently to the other assets of the cash-generating unit, proportionally to the carrying amount of each of its assets. Any goodwill impairment loss is directly recognized in profit or loss. Impairment losses are not reversed in subsequent periods.
18
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
2.11
2.12
Current taxes
The provision for the Companys income tax and social contribution is calculated based on the taxable income for the year. 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 profit.
Deferred taxes
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 period end of financial statements and applicable when the respective income tax and social contribution are paid. 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 is reviewed at the end of each reporting 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, these are adjusted to their expected recoverable amount. Current and deferred taxes are recognized in profit or loss, except when they correspond to items recorded in Comprehensive income, or directly in equity. In these cases, current and deferred taxes are recognized in Comprehensive income, in equit y. When current and deferred taxes result from the initial recognition of a business combination, the tax effect is accounted for on the recognition of a business combination.
19
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
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. Additionally, the Company has a Corporate Education Program whose objective is to reach learning, ensuring mapping and dissemination of key knowledge through practical and educational activities that encourage the creation, acquisition, dissemination, use and sharing of knowledge, focus to business results. The Company's development activities focused on all employees such as, leadership development, e-learning, training contract, on-demand training, continuing education and languages. Additionally, the Company offers its employees other benefits such as health insurance, dental care, life insurance and personal accident. Costs related actions described are recognized in income when incurred.
2.14 a.
20
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
b.
Financial liabilities
Financial liabilities are classified as follows: (i) at fair value through profit or loss; or (ii) as other financial liabilities. Financial liabilities at fair value through profit or loss This category includes financial liabilities held for trading or measured at fair value through profit or loss.
A financial liability is classified as held for trading if it is: (i) incurred principally for the purpose of repurchasing it in the near term; (ii) 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; (iii) 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: (i) this designation eliminates or significantly reduces an inconsistency that might arise upon measurement or recognition; (ii) they are part of a managed group of financial assets or liabilities, or both, whose performance is valued based on fair value,
21
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
in accordance with the Companys documented risk management or investment strategy, and whose related information is provided internally on the same basis; (iii) 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, with any gains and losses recognized in profit or loss. Net gains or losses recognized in profit or loss comprise any interest paid on financial liabilities.
2.15
Derivatives
In the period from August 23, 2012 to November 16, 2012 the Company entered into Nondeliverable Forward - NDF derivative transactions to manage its exposure to currency fluctuations in foreign investments. The Company used derivatives until raising third-party funds by issuing foreign currency-denominated bonds on November 16, 2012. The gains and losses on derivatives, net of taxes, are recognized in Comprehensive income in equity, and will be reclassified to profit or loss upon the sale of the foreign investments. There are no outstanding derivatives in the individual and consolidated financial statements for the year ended December 31, 2013.
2.16
Hedge accounting
In the period from August 23 to November 16, 2012, the Group designated NDF transactions, a hedge instrument for currency risks, as hedge of net investments in foreign transactions. On November 16, 2012, the Group designated the fundraising of third-party funds by issuing bonds, a hedge instrument for foreign currency-related risks, as hedge of net investments in foreign transactions. On the dates the derivative was contracted and the funds related to the bond issue were raised, the Company documented the relationship between the hedging instrument and the hedged asset, including the description of its goals and risk management strategies. Additionally, at the inception of the hedge and on an ongoing basis, the Company documents whether the hedging instrument that is used in a hedge relationship is highly effective in offsetting changes in the fair value. For hedges of net investments in foreign transactions, the gains or losses on the effective portion of the hedging instrument are recorded in Comprehensive income and accumulated in line item Hedge of net investment in foreign transactions, in the case of the NDF designation, and in line item Exchange differences arising on translation foreign loans, in the case of the foreign fundraising (bonds) designation. Any gains or losses on the ineffective portion, if any, are immediately recorded in profit or loss for the year. 22
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Any hedge gains and losses related to the accumulated effective portion in the reserve for translation of foreign currency are reclassified to profit or loss for the period when the foreign investment is sold. The Company projects the need to renew or contract new transactions to replace in case the derivative instrument expires before the hedged item.
2.17
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 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 prepayment of receivables to merchants are recognized on a pro rata basis through their maturities. In the case of Me-S, in the context of its agreements with the banks, it assumes liabilities of the acquirer bank and is, therefore, accountable for the interchange rates. In addition, the bank receives market rates for its services and, therefore, is not exposed to the agreements risks and rewards. Additionally, there are factors such as the portability of the contracts with merchants and the fact that Me-S has a direct interaction with its clients, on a daily basis, and it holds the transactions credit risk. As a result, Me -S is the main debtor and recognizes revenue based on its gross amount and the interchange is recognized as cost of services.
2.18
23
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
2.19
2.20
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 profit or loss as a contra entry to equity. At the end of each reporting period, 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 the statement of income, as a contra entry to equity.
2.21
Use of estimates
The preparation of individual and consolidated financial statements requires the Companys and its subsidiaries Management to make estimates that affect certain assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses for the year. Significant assets and liabilities subject to these estimates include the residual value of property and equipment and intangible assets, allowance for doubtful accounts (on trade accounts receivable from lease of POS equipment), deferred income tax and social contribution assets, appreciation of derivative financial instruments, impairment of goodwill and provision for risks. Since managements judgement involves making estimates concerning the probability of occurrence of future events actual results could differ from those estimates. The Company and its subsidiaries review estimates and assumptions at least annually.
2.22
2.23
New and revised standards and interpretations issued and not yet adopted
The Group did not adopt the new and revised IFRSs already issued but not yet adopted below: Amendments to IAS 32 - Offsetting of Financial Assets and Liabilities - outline the classification of certain rights denominated in foreign currency as equity instruments or financial liabilities. (effective for annual periods beginning on or after January 1, 2014)
24
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
IFRS 9 - Financial Instruments - introduces new requirements for classification, measurement and write-off of financial assets and liabilities. (effective for annual periods beginning on or after January 1, 2015) The Companys Management considered these new IFRSs and it does not expect significant effects on the amounts reported.
2.24
25
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
IAS 31 - "Interest in Joint Ventures". According to IFRS 11 and CPC 19 (R2), these subsidiaries were classified as "joint ventures" and recorded under the equity method, resulting in having to record proportionate interest in the net assets of the Group, the companies income and comprehensive income for the year ended December 31, 2013 in a single account presented in the consolidated financial statements and the consolidated statements and comprehensive income as "investment" and equity", respectively.
Change in accounting policy - recognition of revenue earned from commissions on installment sales
Since 2009, the means of payment market has been undergoing major changes which have affected its business structure, among which the opening of the market to the multibrand system, the introduction of new card associations, the entrance of new competitors, mainly foreigners, and the possibility of capture equipment operating in an interchangeable manner stand out. In October 2013 Federal Law 12865/13 was enacted which, together with Regulations and Circular Letters issued by the National Monetary Council and the Central Bank of Brazil, respectively established a regulatory framework for the industry. Those recurring changes have created a new environment in the means of payment industry in which the amount of information available has expanded and, together with the reinforcement of the history of transactions and the improvement in controls, has allowed, after the implementation of a system project, to measure revenue amounts on the capture date. Given this new world of information and believing to have reached the stability allowed by the new regulatory environment originating from the Central Bank's recent regulation, together with the scenario of new information gathered, Management decided to reassess some accounting practices and found the opportunity to review the accounting policy applied for recognition of revenue earned from commissions on installment sales. Therefore, Management found that the new accounting policy used for recognizing commissions earned on installment sales would bring more transparency, more compliance with market practices and therefore easier interpretation of results by investors and market agents. Accordingly, the accounting policy changed in such a manner that the recognition of revenue earned from commissions on installment sales started to be made when the business transaction occurs ("first installment or capture"), considering that the transaction is completed and revenue is generated virtually at this moment, and that after the change in accounting practices costs linked to the transaction were also recognized on the date the transaction was captured. This change in accounting policy was recognized in accordance with CPC Technical Pronouncement 23 - Accounting Policies, Change in Estimate and Correction of Error. Due to the application of this pronouncement, the Company prepared its opening balance sheet, considering the application of these new accounting standards and the change in accounting policy on December 31, 2011. The consolidated financial statements consisting of the statements of income and cash flows for the year ended December 31, 2012 were prepared.
26
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Balance sheet for the year ended December 31, 2011 and 2012
Company (BR GAAP) Effect of change in accounting policy(**) Effect of change in accounting 12/31/2012 policy(**) (Republished) 5,888,237 2,561,235 8,449,472
Assets: Current Noncurrent Total assets Liabilities and equity: Current Noncurrent Equity Total Liabilities and equity
12/31/2011 12/31/2012 (Republished) (Published) 3,240,503 1,676,032 4,916,535 5,888,237 2,561,235 8,449,472
(115,503) 115,503 -
(127,054) 127,054 -
Total assets Liabilities and equity: Current Noncurrent Equity Total Liabilities and equity
5,076,431
(5,952)
5,070,479
10,037,189
(9,681)
10,027,508
(115,503) 115,503 -
(127,054) 127,054 -
27
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Income: Net revenues Gross Profit Operating income Operating income before income tax and social contribution Profit for the year
Effect of Effect of change in Effect of change in 12/31/2012 accounting 12/31/2012 12/31/2012 joint accounting 12/31/2012 (Published) policy (**) (Republished) (Published) ventures (*) policy (**) (Republished) 5,008,553 3,509,166 2,733,427 3,492,544 2,314,616 23,004 17,502 17,502 17,502 11,551 5,031,557 3,526,668 2,750,929 3,510,046 2,326,167 5,427,406 3,574,618 2,765,265 3,511,694 2,320,618 (65,158) (14,481) (793) (2,492) 23,004 17,502 17,502 17,502 11,551 5,385,252 3,577,639 2,781,974 3,526,704 2,332,169
Company (BRGAAP) and Consolidated (IFRS and BRGAAP) Effect of change in accounting policy (**) 0.01768 0.01764 Effect on stock dividends (Note 19) (0.59328) (0.59150)
Earnings per share: Earnings per share (in R$) basic Earnings per share (in R$) - diluted
Statements of Cash Flows for the year ended December 31, 2012
Company (BR GAAP) 12/31/2012 Effect of change in accounting (Published) policy (**) 3,492,544 1,077,435 1,196,870 (695,282) (460,099) 41,489 17,502 (17,502) 12/31/2012 (Republished) 3,510,046 1,055,132 1,196,870 (695,282) (460,099) 41,489
Income: Income before income tax and social contribution Increase (decrease) in operating liabilities Net cash provided by operating activities Net cash used in investing activities Net cash provided by (used in) financing activities Increase in cash and cash equivalents
28
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Company (BR GAAP) and Consolidated (IFRS and BR GAAP) Effect of change in accounting policy (**) 17,502 (17,502) -
Income: Income before income tax and social contribution Adjustments to reconcile income before income tax and social contribution (Increase) decrease in operating assets Increase (decrease) in operating liabilities Interest paid and income tax and social contribution Net cash (used in) provided by operating activities Net cash (used in) investing activities Net cash provided by financing activities Effect from Exchange rates on cash and cash equivalents of foreign subsidiary Increase in cash and cash equivalents (*) (**)
12/31/2012 (Published) 3,511,694 661,672 (2,786,832) 1,085,057 (1,220,982) 1,250,609 (1,471,795) 349,642 9,784 138,240
Effect of joint ventures (*) (2,492) 3,734 9,073 (17,297) 2,636 (4,346) (1,482) (5,828)
12/31/2012 (Republished) 3,526,704 665,406 (2,777,759) 1,050,258 (1,218,346) 1,246,263 (1,473,277) 349,642 9,784 132,412
Effect of proportional consolidation of "Joint ventures" Paggo, Orizon, Prevsade and Precisa adjusted for comparison purposes with the consolidated financial statements. Effect of the change in accounting practice consisting of the recognition of commission revenue earned from credit card installment sales, adjusted for comparison with the Company and Consolidated financial statements.
Additionally, it is worth emphasizing that the adjustments resulting from changes in accounting practices related to revenue recognition of credit sales, increased net revenue and net profit for the year ended December 31, 2013 for R$34,104 and R$ 15,839, respectively.
3.1
50.10 100.00
50.10 100.00
50.10 100.00
50.10 100.00
29
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
The balances of assets and liabilities of direct and indirect subsidiaries as of December 31, 2013 and 2012, and the main statement of income line items for the year ended December 2013 and 2012 are as follows:
12/31/2013 S ervinet Multidisplay Assets: Current assets Noncurrent assets Total assets Liabilities and equity: Current liabilities Noncurrent liabilities Equity Total liabilities and equity M4 Produtos Braspag Me-S Cielo US A
S ervinet Multidisplay Assets: Current assets Noncurrent assets Total assets Liabilities and equity: Current liabilities Noncurrent liabilities Equity Total liabilities and equity
Braspag
Me-S
Cielo US A
12/31/2013 Cielo US A
S ervinet Profit or loss: Net revenue Gross profit (loss) Operating profit (loss) before finance income Profit (loss) before income tax and social contribution Profit for the year
Multidisplay
M4 Produtos
Braspag
Me-S
30
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
S ervinet S ervrede CieloPar Profit or loss: Net revenue Gross profit (loss) Operating profit (loss) before finance income Profit (loss) before income tax and social contribution Profit for the year
Multidisplay
Me-S
(5,797) 1,820
4,825 (1,849)
6,598 4,429
(4,393) (1,318)
(1,844) (1,598)
12,903 12,028
15,507 10,322
5,436 3,896
3.2
Joint ventures
Interests in joint ventures include:
Interest - % Total capital 12/31/2013 Joint ventures: Orizon Prevsade Precisa Guilher Paggo 12/31/2012 Voting capital 12/31/2013 12/31/2012
The joint ventures assets and liabilities as of December 31, 2013 and 2012, and the main statement of income line items for the year ended December 31, 2013 and 2012:
12/31/2013 Orizon Assets: Current assets Noncurrent assets Total assets Liabilities and equity: Current liabilities Noncurrent liabilities Equity (equity deficiency) Total liabilities and equity Precisa Prevsade Paggo Guilher
212 16 228
65 163 228
31
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
12/31/2012 Orizon Assets: Current assets Noncurrent assets Total assets Liabilities and equity: Current liabilities Noncurrent liabilities Equity (equity deficiency) Total liabilities and equity Precisa Prevsade Paggo
Orizon Income: Net Revenue Gross profit (loss) Operating profit (loss) before finance income Profit (loss) before income tax and social contribution Profit (loss) for the year
Precisa
Prevsade
Paggo
Guilher
12/31/2012 Orizon Profit or loss: Net revenue Gross profit (loss) Operating profit (loss) before finance income Profit (loss) before income tax and social contribution Profit (loss) for the year Precisa Prevsade Paggo
12/31/2012 12/31/2013
32
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
The balances under line item 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, in the case of the Company, and by the card association members, in the case of Me-S. Such amounts are used to settle transactions with merchants. These short-term investments are highly liquid and their fair values do not differ materially from their carrying amounts.
(a)
The balance corresponds to prepayment of receivables to merchants relating to card transactions that will be received from the issuing banks within up to 360 days after the date receivables are prepaid to merchants. Additionally, as of December 31, 2013, this amount is net of the adjustment to present value relating to the finance income received in advance on the date of release of cash in the amount of R$225,507 (R$131,619 as of December 31, 2012), as it is related to the prepayment of receivables at sight and installment sales with original maturity after the date of the reporting periods. Corresponds to the receivables recognized by subsidiary M e-S. These correspond to the receivables from the card association members for processed financial transactions that were authorized but not yet received by M e-S by the end of the reporting periods. These amounts receivable are usually received on the business day following the transaction capture date. The card association sends to M e-S the amounts due to merchants for processing, net of the interchange fee withheld by the card-issuing banks. Correspond to the interchange fees prepaid by subsidiary M e-S to the merchants during the month. These interchange fees, as well as the commission on the services provided by M e-S, are received at the beginning of the month subsequent to the transaction month. The Company offers for issuing bank account lock 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 lock by the issuing banks. Receivables from Companhia Brasileira de Solues e Servios - CBSS arising from the provision of transportation and meal tickets card capture and processing services.
(b)
(c)
(d)
(e)
33
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
(f) (g)
Receivables from electronic payment services provided by subsidiaries M 4Produtos and M ultidisplay through cell phones and sale of phone credits with credit cards. Refer substantially to receivables from disputes from credit card holders. (chargeback)
325,594
307,717
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 related carrying amount. Reported amounts are monthly reviewed.
(a) Deferred income tax and social contribution are as follows: Company (BR GAAP) 12/31/2013 Temporary differences: Provision for risks Accrual for sundry expenses Discount to present value of prepayment of receivables Allowance for losses on POS equipment Effect on allocation of subsidiarys acquisition price Total 12/31/2012 Consolidated (IFRS and BR GAAP) 12/31/2013 12/31/2012
34
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
(b)
Breakdown of deferred income tax liabilities recognized by foreign companies Consolidated (IFRS and BR GAAP) 12/31/2013 Temporary differences: Fair value of M e-Ss intangibles, acquired in 2012 Other temporary differences Total 12/31/2012
Deferred income and social contribution tax assets as of December 31, 2013, as shown in 6 (a), were recognized on temporary differences. According to Management's best estimate, tax credits recognized on the provision for sundry expenses, adjustment to present value of accounts receivable from discount of receivables and allowance for losses on POS equipment, in the amount of R$234,641(R$ 238,420 - Consolidated) will be realized during 2014. The portion of tax credits on the allowance for risks, in the amount of R$342,773 (R$354,122 - Consolidated), will be realized upon the final settlement of each lawsuit, according to proceedings described in note 18.
Investments
Company (BR GAAP) 12/31/2013 Subsidiaries Joint ventures Total 803,793 46,388 850,181 12/31/2012 695,064 42,977 738,041 Consolidated (IFRS and BR GAAP) 12/31/2013 46,388 46,388 12/31/2012 42,977 42,977
The primary information about investment amounts and equity income recorded in the Financial Statements of the Parent Company for subsidiaries, indirect subsidiaries and joint ventures entities are shown in the table below.
35
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Equity interest - %
Investments 12/31/2012
12/31/2013 12/31/2012 12/31/2013 12/31/2012 12/31/2013 12/31/2012 12/31/2013 12/31/2012 12/31/2013 Subsidiaries: Servinet Servrede (e) Multidisplay(e) CieloP ar (d) Braspag (d) Cielo USA Subsidiaries Total Jointly controlled entities: Orizon (a) P aggo (b) Jointly controlled entities Total Total
19,488
(1,373)
803,793
695,064
129,064 (1,167)
120,699 (1,138)
8,365 (11,028)
16,120 (4,614)
40.95 50.00
40.95 50.00
3,425 (5,514)
6,600 (2,305)
46,972 (584)
43,546 (569)
(2,089) 17,399
4,295 2,922
46,388 850,181
42,977 738,041
The primary information about investment amounts and equity income recorded in the Financial Statements of the parent company for jointly-controlled entities are shown in the table below.
Adjusted equity (shareholders def icit) 12/31/2013 Jointly controlled entities: Orizon (a) P aggo (b) (c) Total Prof it (loss) f or the year Equity interest - % 12/31/2012 Equity in investees f or the year 12/31/2013 12/31/2012 Investments 12/31/2013 12/31/2012
129,064 (1,167)
120,699 (1,138)
8,365 (11,028)
16,120 (14,830)
40.95 50.00
40.95 50.00
Key Financial Information concerning the indirect subsidiaries and jointly controlled entities.
Equity 12/31/2013 P revsade P recisa Guilher Multidisplay (e) M4P rodutos P aggo (b) (c) Braspag (d) Me-S (a) 6,863 9,339 163 20,628 274,906 12/31/2012 3,055 15,157 14,549 187,069 Prof it (loss) f or the year 12/31/2013 3,807 (5,817) (278) 12,479 58,430 12/31/2012 2,391 5,117 11,443 10,322 (14,830) 3,527 14,131 Equity interest - % 12/31/2013 40.95 40.95 40.95 50.10 100.00 12/31/2012 40.95 40.95 50.10 100.00
The amount of R$5,880 is not reflected in the investment because it refers to the unrealized gain on capital contribution wit h goodwill, initially reflected in CBGS Ltda. and transferred to the indirect subsidiary CBGS as a result of the merger. In Novembe r 2009, CBGS was merged into subsidiary Orizon. As described in note 1, on September 3, 2012, the capital reduction of CieloP ar was approved and the interest held by CieloPa r in P aggo started to be directly held by the Company. The investment recognized by Cielo considers the adjustments to the opening balance sheet of subsidiary Paggo arising from th e adoption of the purchase price allocation procedures, as prescribed by CP C 15 - Business Combinations, mainly represented by the provision for losses on software platforms, as described in note 9. As described in note 1, on December 18, 2012, the merger of CieloP ar with and into Braspag was approved and the interest held by CieloPar in Braspag started to be directly held by the Comp any.
(b) (c)
(d)
36
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
(e)
As described in note 1, on December 18, 2012, the merger of Servrede with and into Multidisplay was approved and the interest held by Servrede in Multidisplay started to be directly held by the Company.
The consolidation of the financial information of direct subsidiaries Multidisplay, Braspag and indirect subsidiaries M4Produtos and Me-S (acquired on August 31, 2012) was based on the financial information for the year ended November 30, 2013 to calculate the investments as of December 31, 2013. Accordingly, the equity in investees refers to the 12-month period ended November 30, 2013.
The Company has investments in foreign controlled companies whose financial statements were originally prepared in accordance with the accounting practices accepted in the United States (U.S. GAAP). No adjustments are made in the financial statements of foreign controlled companies, given that there are no significant differences in relation to Brazilian accounting practices and IFRS.
Changes in investments for the years ended December 31, 2013 and 2012 are as follows:
Company (BR GAAP) Balance as of December 31, 2011 Capital increase: CieloPar Cielo USA Paggo Capital increase through the assumption of debt Servrede (a) Exchange variation on investment abroad Effect of corporate restructuring in September 2012: Capital decrease CieloPar (b) Capital decrease Servrede (c) Reconstitution of the effects of provisions PM IPL in subsidiaries: Servrede (d) CieloPar (d) Dividends receivable: Servinet Servrede Equity in investees Balance as of December 31, 2012 Capital increase: Paggo Exchange differences on foreign investments Dividends receivable: M ultidisplay Equity in investees Balance as of December 31, 2013 (a) 176,060 3,500 630,451 31,441 6,845 (46,979) (3,105) (27,842) (24,452) (9,000) (1,800) 2.922 738,041 (815) 42,977 Consolidated (IFRS and BR GAAP) 39,691 4,101 -
Consists of an increase in capital through the assumption of the debt originally incurred by controlled company Servrede which, after the increase in capital, became controlled by Cielo. This debt corresponded to the variable portion related to the acquisition of control over M ultidisplay and M 4Produtos, settled in September 2013. CieloPars capital reduction in the amount of R$48,718 was performed based on the delivery of the book networth composed of: (i) R$1,739 investment and (ii) goodwill transfer in the acquisition of Paggo, amounting to R$46,979, to the Company, classified in intangible assets.
(b)
37
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
(c) (d)
As per Note 1, on September 27, 2012, Servrede Servios S.A.s capital reduction , by means of the return of cash and cash equivalent surpluses to the Company , was approved. According to ICPC 09 - Individual Financial Statements, Separate Financial Statements, Consolidated Financial Statements and Application of the Equity M ethod and the provisions of CVM Instruction 319/99, changed by CVM Instruction 349/01, the balances of allocated items and goodwill (net of the accumulated amortization effects) in controlled companies Servrede and CieloPar were fully written off upon the merger, through the recognition of a provision directly against equity in the amounts of R$42,185 and R$37,050, respectively. Since there is evidence of actual economic benefits to be gained from the future reduction in taxes due to the recognition of the goodwill by merging companies M ultidisplay and Braspag for tax benefit purposes, deferred income tax and social contribution tax assets were recognized against the equity accounted mentioned above in controlled companies Servrede and CieloPar in the amounts of R$14,343 and R$12,597, respectively. The net effect reduced the equity of controlled companies Servrede and CieloPar by R$27,842 and R$24,452, respectively.
Consolidated (IFRS and BR GAAP) 12/31/2013 Annual depreciation rate - % POS equipment (*) Data processing equipment M achinery and equipment Facilities Furniture and fixtures Vehicles Total (*) 33 20 10 10 10 20 Accumulated depreciation (762,252) (44,045) (46,312) (14,718) (5,504) (1,551) (874,382) 12/31/2012
As of December 31, 2013 and 2012, provisions for losses on POS equipment were recorded in the amounts of R$3,599 and R$3,223, respectively, as a reduction of the related under line item.
Changes in property and equipment for the years ended December 31, 2013 and 2012 are as follows:
38
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
12/31/2012 POS equipment Data processing equipment M achinery and equipment Facilities Furniture and fixtures Vehicles Total 452,617 21,864 1,427 5,470 3,545 1,378 486,301
Consolidated (IFRS and BR GAAP) Foreign exchange changes 31 391 283 14 719
12/31/2012 POS equipment Data processing equipment M achinery and equipment Facilities Furniture and fixtures Vehicles Total 452,748 25,909 1,903 11,918 5,350 1,378 499,206
Company (BR GAAP) 12/31/2011 POS equipment Data processing equipment M achinery and equipment Facilities Furniture and fixtures Vehicles Total 476,102 18,487 2,450 6,027 3,830 1,363 508,259 Additions 258,566 8,897 110 172 310 711 268,766 Write-offs (15,072) (2) (201) (15,275) Depreciation (266,979) (5,520) (1,133) (729) (593) (495) (275,449) 12/31/2012 452,617 21,864 1,427 5,470 3,545 1,378 486,301
Consolidated (IFRS and BR GAAP) Merged net assets 121 1,636 184 6 1,947
12/31/2011 POS equipment Data processing equipment M achinery and equipment Facilities Furniture and fixtures Vehicles Total 476,102 20,784 2,831 12,571 5,712 1,363 519,363
As of December 31, 2013 and 2012, there are no net amounts related to finance lease operations.
39
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
As of December 31, 2013 and 2012, the Company entered into loan agreements with the National Bank for Economic and Social Development (BNDES - Finame) to acquire new POS equipment, as described in Note 13.(a).
20,690 -
20,690 -
20,690 10,658
20,690 10,658
(a)
In calculating equity in subsidiaries Servrede and CieloPar in 2012, the effects of PM IPL provisions, in the amounts of R$20,690 and R$25,966, respectively, were eliminated for maintaining the integrity of the equity (PM IPL) , since the effects related to the goodwill originally reported therein have been reflected in the Company, as established by the CVM Instructions 319/99 and 349/01, considering that the mergers carried out in 2012 did not change the economic substance of that goodwill. As there are evidences of actual economic benefits to be earned as a result of the future decrease in taxes due to the utilization of the goodwill tax benefit by the merging companies M ultidisplay and Braspag, deferred income tax and social contribution assets were recognized against the equity line item referred to above in subsidiaries Servrede and CieloPar, amounting to R$14,343 and R$12,597, respectively. In the consolidated financial statement, tax credits were reclassified from line item Deferred income tax and social contribution to underline item Goodwill.
(b)
Changes in goodwill during the years ended December 31, 2013 and 2012 are as follows:
40
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Company (BR GAAP) Balance as of December 31, 2011 Effect of the corporate restructuring: Reduction in the capital of CieloPar through the transfer of Paggo's interest to the Company New recognition of goodwill due to the downstream merger of CieloPar into Braspag (see note 7.(c)). New recognition of goodwill due to the downstream merger of Servrede into M ultidisplay (see note 7.(c)). Impairment goodwill Goodwill on the acquisition of M e-S Exchange variation Balance as of December 31, 2012 Acquisition adjustments (a) Impairment of goodwill Exchange variation Balance as of december 31, 2013 (a) Refers to adjustments in the purchase price of the share, as follows: 10,143
In November 2012, the Me-S was assessed by Washington State in relation to differences of interpretation regarding the calculation basis for calculating taxes on income earned in the period 2006-2009. The amount of R $ 8,189, which was paid by the Me-S and was returned by sellers Cielo USA in January 2013 being the aforementioned amount recorded as a reduction of goodwill. In December 2012, the Me-S identified tax credits in the amount of R$ 6,222 in the opening balance sheet dated as of August 31, 2012 by increasing its equity at that date. In the same manner, Cielo USA recorded this amount as a reduction of goodwill, and consequently, an increase in investment at the acquisition date. In 2013, Me-S revalued deferred income tax liabilities in the amount of R$9,938 in the opening balance sheet dated August 31, 2012, increasing its equity on that date. Likewise, Cielo USA recognized that amount as a write-down to goodwill and therefore an increase in investment on the day of acquisition.
Health project
In January, 2008, CBGS subscribed 693,480 new common shares without par value in favor of its parent CBGS Ltda., 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. (Dativa) 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. Additionally, 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.
41
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
99.99 99.99
Goodwill recorded in joint venture CBGS: Orizon Dativa Goodwill initially recorded Effect of tax benefit of goodwill incorporated by Orizon Total
40.95 40.95
The fair value of the service agreements, software platform and noncompeting clauses (identifiable assets acquired) of M 4U in August 2010 was recognized according to the appraisal report prepared by independent appraisers.
Due to the commencement of the restructuring process mentioned in Note 1, the tax benefit from the goodwill for R$10,658 was incorporated by the subsidiary Multidisplay. Therefore, the remaining value of Goodwill in the amount of R$ 20,690 was reconstituted in the Company as set out by CVM Rule No. 319/99 and 349/01.
In September 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
42
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
(through its subsidiary CieloPar) in a new company called Paggo Solues e Meios de Pagamento S.A. Accordingly, the Company sought to improve its range of products, aligned with its strategy adopted for the mobile payment sector. Paggo Acquirer and the Company hold 50% each of the capital of Paggo. On February 28, 2011, the interest in Paggo was acquired for R$47,000, whose amount was fully paid on the acquisition date. The amount of the investment recorded by Cielo includes goodwill on acquisition of shares in the amount of R$46,979, generated as follows:
Net assets acquired Fair value of assets acquired (*) Fair value of net assets acquired (-) Total consideration paid Goodwill initially recorded (*) 52,224 (52,203) 21 47,000 46,979
Corresponds basically to the provision for loss of software licenses recognized in jointly -controlled entity Paggo in the balance sheet as of February 28, 2011, date of recognition of the effects of allocation of goodwill on the acquisition of joint control. The adjustments related to the allocation of the purchase price were recognized retrospectively on the amounts recorded upon acquisition, as if the business combination had been concluded on that date.
Based on the appraisal report on the allocation of goodwill arising from the acquisition of Paggo, prepared by independent appraisers, and according to CPC 15 - Business Combinations, the Companys Management believes that the amount paid is basically reflected in expected future earnings, i.e., goodwill. Acquisition of control - Braspag In May, 2011, the Company acquired, through its direct subsidiary CieloPar, 100% of the shares of Braspag, a leading payment processing company in the Brazilian electronic payment industry. All the shares of Braspag were acquired for R$40,000. The amount of the investment recorded by CieloPar included goodwill on acquisition of shares in the amount of R$39,343, generated as follows:
Net assets acquired Fair value of net liabilities acquired (*) Fair value of net assets acquired Acquisition price Goodwill initially recognized (*) 1,624 (967) 657 40,000 39,343
According to the appraisal report used to allocate the purchase price of Braspag, prepared by independent appraisers taking into consideration the characteristics of the acquire, the intangible assets identified were the software platform and the customer portfolio totaling R$4,638, net of the provision for tax and social security contingencies of R$5,605.
43
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Due to the commencement of the restructuring process mentioned in Note 1, the tax benefit from the goodwill for R $13,377 was incorporated by the subsidiary Braspag. Therefore, the remaining value of Goodwill in the amount of R $ 25,966 was reconstituted in the Company as set out by CVM in Rule No. 319/99 and 349/01.
On acquisition date, tax benefits amounting to R$6,222 was identified and recognized. Refers to the allocation of the following adjustments at fair value of the following intangible assets: (i) software platform of R$223,300; (ii) relationship with clients of R$512,778; (iii) noncompete agreements with sellers of client portfolios of R$71,862; and (iv) other intangible assets of R$13,398, totaling R$821,338. For acquisition accounting purposes and in accordance with the US tax law, the fair value of the acquisition of the investments allocated to intangible assets is not deductible for US income tax calculation purposes. Accordingly, a provision for deferred income tax was recognized. These deferred amounts are amortized in profit or loss proportionally to the amortization of intangible assets in the year. On acquisition date, a provision for probable losses on tax contingencies amounting to R$8,114 was identified and recognized.
(c)
(d)
44
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
The amount of the investment recorded by Cielo USA includes goodwill on acquisition of shares in the amount of R$818,875, generated as follows:
Net assets acquired Fair value of assets acquired and liabilities assumed Fair value of net assets acquired Purchase price: Acquisition of control - M e-S Cash and cash equivalents acquired Goodwill initially recognized 180,098 447,483 627,581 1,365,256 81,200 818,875
10
Consolidated (IFRS and BR GAAP) 12/31/2013 Annual amortization rate - % Software (a) Project development (b) Noncompete agreement (c) Service agreement (d) Relationship with customers (e) Trademarks (f) Total 6.66 - 20 20 7.5 - 50 4 - 20 4 - 20 10 Accumulated amortization (138,263) (107,188) (41,230) (13,438) (29,856) (906) (330,881) 12/31/2012
(a)
Software - refers to software licenses acquired from third parties and used to provide services relating to information processing and business transactions with customers. Additionally, in 2012, when 100% of Me-Ss capital stock was acquired, the adjustme nt to fair value of the software platform was recognized in Cielo USA in the amount of R$223,300 (equivalent to US$110,000 thousand). The independent appraisal firm engaged to issue the appraisal report measured the software platforms fair value using the average of the values obtained from applying the approaches Relief-from-Royalty (at a 16% royalty fee) and Cost Approach - Thirdparty Cost Estimates. The useful life defined for this software platform is 15 years. Project development - refers to expenses on the development of new products or services
(b)
45
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
designed to increase the Companys and its subsidiaries invoicing and revenues. There are other intangible generated from the allocation of the price paid for the acquisition of control of M4U, Braspag and Me-S, in August 2010, May 2011 and August 2012, respectively. These intangibles were recorded based on appraisal reports prepared as of those dates by independent appraisers. The criteria used to measure the value of these intangible assets are described as follows. (c) Noncompete agreement: Multidisplay e M4U - the amount of the noncompete agreement (With and Without) was calculated under the Income Approach, by using a discount rate of 17.5% per year, perpetuity of 4% per year and estimated useful life of 89 months. Me-S - Me-S entered into a contract with Synovus Financial Corporation, under which no competition shall exist in relation to the portfolio acquired from Columbus Bank and Trust Company (CB&T) and any new customers acquired through CB&T as a result of the Recommendation Agreement. The fair value of this agreement was estimated using the With and Without approach, while its useful life was defined to be the expiration date of the agreement. Additionally, Cielo USA entered into a noncompete agreement with approximately 10 employees, maturing 18 months after the end of the transaction. The fair value of this agreement was estimated based on the With and Without approach, and its useful life was defined to be the expiration date of the agreement. (d) Service agreements: Multidisplay e M4U - 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% per year, during the residual life of each agreement, of approximately 53 months. Me-S - when Me-S acquired CB&Ts customer portfolio, it entered into an agreement under which it would have preference in referring new customers. The fair value of this agreement was estimated based on the Excess Earnings approach, and its useful life was defined to be the expiration date of the agreement, that is, 2020. Relationship with customers: Braspag - the principal component of the portfolio of intangible assets is the customer portfolio, which was valued under the Income Approach, taking into consideration the balance of active customers and the respective churn rate, using an estimated useful life of 120 months. Me-S - Me-Ss customer portfolio was classified under three main groups: e -commerce, bank customer and B2B/Others. Each portfolio was valued separately under the Excess Earnings approach and taking into consideration each portfolios specific and individual features. A 10% per year discount rate was used for e -commerce and bank customer portfolios and 11% for B2B/Others. The estimated useful life was based on the years in which each portfolio reaches approximately 80% and 90% of the accumulated amount of the
(e)
46
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
discounted cash flow. An interval between the lowest and the highest value obtained was adopted. (f) Trademarks - valued under the Relief-from-Royalty approach, assuming a 0.3% royalty fee, based on parameters obtained from the Royalty Source Intellectual Property Database , and a discount rate of 10%. Changes in intangible assets for the years ended December 31, 2013 and 2012 are as follows:
Company (BR GAAP) 12/31/2012 Software Project development Relationship with customers Noncompete agreement Service agreements Total 35,042 14,473 412 7,006 6,957 63,890 Additions 30,160 Amortization (12,122) (2,997) (47) (1,460) (3,359) (19,985) 12/31/2013 53,080 11,476 365 5,546 3,598 74,065
30,160
Consolidated (IFRS and BR GAAP) Foreign exchange variation 34,687 7,389 70,751 13,552 896 735 128,010
12/31/2012 Software Project development Relationship with customers Noncompete agreement Service agreements Trademarks Total 282,407 73,627 511,489 105,661 27,028 5,776 1,005,988
Company (BR GAAP) Reflex of intangible assets 1,526 412 7,006 6,957 15,901
12/31/2011 Software Project development Relationship with customers Noncompete agreement Service agreements Total 31,768 17,479 49,247
47
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Consolidated (IFRS and BR GAAP) Foreign exchange variation (2,761) 400 (7,167) (714) (95) (75) (10,412) Merged net assets 12/31/2012 11,196 60,824 35,714 107,734 282,407 73,627 511,489 105,661 27,028 5,776 1,005,988
12/31/2011 Software Project development Relationship with customers Noncompete agreement Service agreements Trademarks Total 40,849 17,479 1,357 12,658 14,674 87,017
Additions Write-offs Amortizations 244,557 1,220 522,829 64,313 20,790 6,000 859,709 (14) (198) (212) (11,420) (6,098) (5,530) (6,310) (8,341) (149) (37,848)
Expenses on the amortization of intangible assets were recorded in line items General and administrative expenses and Cost of sales in the statement of income.
11
In addition to the provision of services consisting of the transfer of credit and debit card transaction amounts between the card-issuing banks and the merchants, the Company also guarantees accredited merchants that they will unconditionally receive the amounts of transactions paid using credit cards. As described in note 24.c), the Company adopts a strategy to mitigate card-issuing banks credit risk itself against the risk of default by such financial institutions. 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.
48
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
12
Payables to merchants
Company (BR GAAP) 12/31/2013 Transactions pending transfer (a) Payables to merchants (b) M erchant deposits (c) Total 4,120,948 4,120,948 12/31/2012 Consolidated (IFRS and BR GAAP) 12/31/2013 4,120,948 192,826 91,161 4,404,935 12/31/2012
2,432,962 2,432,962
2,432,962
216,026 78,004 2,726,992
(a)
Transactions pending transfer - Transactions pending transfer correspond to the difference between the amounts received from cardholders relating to transactions made by cardholders and the amounts to be transferred to merchants. In general, the settlement term for credit card issuers with the Company is 28 days, while the Companys average settlement term with merchants is 30 days. Therefore, the balance payable as of December 31, 2013 and 2012 refers to a float of approximately two days. Payables to merchants - Represented by amounts due to merchants by M e-S related to transactions captured and processed until the balance sheet dates. Such amounts are settled on the day following the date on which transactions are captured. M erchant deposits - M e-S maintains escrow deposits from clients in order to hedge against the potential risk of complaints from credit card holders due to fraud in the transaction or bankruptcy of merchant.
(b)
(c)
13
(a)
Finame
The weighted average rate of the financial charges is 5.08% per year as of December 31, 2013 (7.77% per year as of December 31, 2012). The Company is the beneficiary of a credit facility with BNDES relating to Finame on lending transactions, i.e., a loan granted by BNDES to finance the acquisition of new machinery and equipment manufactured in Brazil. Such transfer occurs through the extension of credit to the Company, generating rights received by the accredited financial institution as a financial agent, in this case, Bank of Brazil SA, Bank Safra SA and HSBC Bank Brazil SA, who contract with the Company such financing transactions.
49
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
The contracts are guaranteed the transfer of fiduciary ownership of property acquired through Finame.
(b)
50
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
14
15
Taxes Payable
Company (BR GAAP) 12/31/2013 Income tax and social contribution, net of prepayments Tax on revenue (Cofins) Withholding income tax (IRRF) Service tax (ISS) Tax on revenue (PIS) Other taxes payable Total 12/31/2012 Consolidated (IFRS and BR GAAP) 12/31/2013 12/31/2012
51
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
16
Other payables
Company (BR GAAP) 12/31/2013 Current liabilities: Accrual for sundry expenses Accrued vacation and related charges Profit-sharing Payables on the acquisition of subsidiaries (*) Other payables Total Noncurrent liabilities: Other payables Total 12/31/2012 Consolidated (IFRS and BR GAAP) 12/31/2013 12/31/2012
64,408
138,130
3,991
6,857 162,597
9,749 206,506
12,616 220,077
142,121
(*)
In September 2013 we performed the payment of R$32,544 for the remaining balance payable related to the acquisition of M 4U, which was contingent on the attainment of certain financial performance goals, as described in Note 9.
17
a.
52
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Consolidated (IFRS and BR GAAP) Write-offs/ reversals (ii) (1,600) (7,754) (7,872) (17,226) Inflation adjustment 770 1,786 376 2,932
Company (BR GAAP) Write-offs/ reversals (ii) (62) (5,739) (7,541) (13,342) Inflation adjustment 1,961 1,070 111 3,142
Consolidated (IFRS and BR GAAP) Write-offs/ reversals (ii) (62) (9,634) (11,862) (21,558) Inflation adjustment 2,011 1,070 130 3,211
12/31/2011 Tax Civil Labor Total (i) 625,293 16,324 36,263 677,880
Correspond mainly to the increase in the provision for tax risks for the year ended December 30, 2013 and 2012, relating to taxes with suspended payment, recorded as a balancing item to Taxes on services, and other additions to the provision for civil and labor risks, represented by new lawsuits and changes in the assessment of the likelihood of losses made by the legal counsel, which were recorded as a balancing item to Other operating expenses, net, in the statement of income. Basically represented by the reversal of the provision for civil and labor risks due to prescription of the allowed time to start legal proceedings, settlement of lawsuits or change in the risk of loss as assessed by the Companys and its subsidiaries legal counsel. In the current year, the Company and its controlled companies, by entering into legal agreements or being rendered unfavorable decisions, settled 1,039 civil and labor lawsuits, in the amount of R$8,815, M oreover, the Company and controlled company Servinet joined the Scheme for the Installment Payment or Payment of Federal Tax Debts (Refis 2013), established by Law 11941/09 and reintroduced by Law 12865/13, by opting to pay tax liabilities in cash, totaling R$1,408, related to six tax lawsuits.
(ii)
(iii)
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 December 31, 2013, the provision for probable losses on civil lawsuits totals R$18,236 (Company), and R$19,945 (Consolidated), and the escrow deposit balance is R$ 5,023 (Company) and R$5,040 (Consolidated).
53
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Additionally, as of December 31, 2013, the Company is a party to public civil lawsuits and civil investigations, most of them filed by the Public Prosecution Office or professional organizations, whose intention is to defend collective interests (such as consumers and workers rights). Judicial decisions may grant rights to groups of people (even without their consent). In many situations, the group in availing a favorable outcome will only be defined after the final decision.
Labor lawsuits
Refers to labor lawsuits that, as of December 31, 2013, include 302 claims against the Company and 72 against the subsidiaries, totaling 374 claims, out of which 98 had been filed by former employees, and the other remaining 276 claims were filed by subcontractors, some of whom claiming the recognition of an employment relationship. The risk of loss on labor claims, when these are started, is assessed as possible. Only after the court decision is issued, the lawsuits are reclassified to probable or remote loss, depending on the decision and based on the history of losses on similar lawsuits. In general, labor lawsuits are related to salary equalization, overtime, annual bonus, rights guaranteed by agreements between the employer and the labor union, recognition of employment relationship, tenure after occupational disease, and pain and suffering. As of December 31, 2013, the provision for probable losses on labor claims amounts to R$ 71,066 (Company) and R$ 83,853 (consolidated), and the escrow deposit balance is R$6,493 (Company) and R$ 8,643 (consolidated).
Tax lawsuits
Refer to differences in interpretation by tax authorities, especially regarding: Noncumulative Cofins - in February 2004, the Company and its subsidiary Servinet filed an injunction to avoid payment of Cofins according to Law 10833/03, which requires the noncumulative calculation at the rate of 7.6%, 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 provision for risks since then. Escrow deposits have been made for unpaid Cofins amounts. In November 2011, Servinet withdrew the lawsuit for joining the installment payment program introduced by Law 11941/09 and is currently awaiting for the definition of the amounts to be converted into Federal Governments funds and the amounts to be calculated by the company, Cielos lawsuit is halted in the Federal Regional Court of the 3rd Region/SP due to the recognition of the matter by the Federal Supreme Court in the court records of the Extraordinary Appeal, which is pending judgment. As of December 31, 2013, the provision for risks totals R$903,255 (Company) and R$923,811 (Consolidated), and the escrow deposit balance is R$887,873 (Company) and R$909,070 (Consolidated). Amazon Investment Fund (FINAM) - in 2007, the Company received a tax assessment notice for calendar year 2002, fiscal year 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 administrative proceedings are pending inclusion in the trial docket for judgment of the voluntary appeal filed by the Company by the Administrative Board of Tax Appeals (CARF). As of December 31, 2013, the balance of the provision recognized is R$14,242 (Company and Consolidated).
54
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Social contribution (CSLL) 2002 - in 2007, a tax assessment notice was filed against the Company to require the payment of CSLL (adjustment portion) for calendar year 2002, plus tax assessment fine (75%) and late payment interest, as well as separate fine (50%) on the estimated CSLL amounts not paid. Due to the maintenance of the tax assessment notice at the administrative level, in July 2011, the Company decided to challenge the amounts in the court. The tax credits were fully deposited in escrow accounts and is being challenged in the court through an annulment action filed in August 2011. Currently, the tax debt annulment action is pending decision. As of December 31, 2013, the balance of the provision recognized is R$10,895 (Company and consolidated), and the escrow deposit amount is R$10,895 (Company and consolidated). Negative Balance of IRPJ of the year 2008 - In 2009, the Company offset the negative balance of income (IRPJ) for calendar year 2008 for tax debts owed in 2009 upon presentation of Settlement Statement (PER / DCOMP). In assessing the Settlement Statement in 2012, the Internal Revenue Service of Brazil did not approve the tax credit and, therefore, issued Order No, 022 405 395. In January 2013, the Company filed a Lawsuit for Annulment of Tax Debt in the Civil Court of the Judiciary Subsection of Osasco / SP, in order to demonstrate and prove the negative credit balance of the 2008 calendar year. The full amount of the tax credit is deposited in escrow. As of December 31, 2013, the accrued balance for risks is R$ 7,045 and the value of the escrow deposit is R$ 7,045, for the parent Company and Consolidated entities. The Company and its subsidiaries are challenging other interpretations of the law by tax authorities and, therefore, as of December 31, 2013, recognized provisions for risks in the amounts of R$4,164 (Company) and R$4,233 (Consolidated). To cover other lawsuits assessed by the legal counsel as possible loss, the Company and its subsidiaries maintains escrow deposits in the amount of R$7,976 (Company) and R$10,716 (Consolidated). The Companys and its subsidiaries Management, based on the opinion of their legal counsel, believes that the actual disbursement of the provision for risks will not occur before December 31, 2018. Additionally, as of December 31, 2013 and 2012, 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 provision was recorded, as follows:
Company (BR GAAP) 12/31/2013 Tax Civil Labor Total 86,788 57,992 41,643 186,423 12/31/2012 85,623 104,810 27,297 217,730 Consolidated (IFRS and BR GAAP) 12/31/2013 92,222 57,993 51,463 201,678 12/31/2012 98,850 104,810 32,057 235,717
55
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Refis 2013 Payment or Installment Payment of Federal Tax Debts Law 11941/09 and Law 12865/2013
In December 2013, the parent company and its controlled company, Servinet, joined the Scheme for the Installment Payment or Payment of Federal Tax Debts, established by Law 11941/09, whose deadline was extended by Law 12865/13. Tax liabilities discussed in six lawsuits were paid in cash by applying deductions allowed by the law (100% of late payment fines and tax deficiency penalty, 45% of default interest and 100% of legal charges). For three of those lawsuits a deposit in court had been made which was required to be converted into revenue for the federal government to settle the tax obligation. In the Company and Consolidated financial statements payments of R$337 and R$1,408 were made and the deposits in court that were converted into revenue for the federal government totaled R$7,058 and R$7,103, respectively. The effect of the reversal of the provision accrued for the proceedings and of the recognition of the debts that were included in the REFIS had an impact on the year's results, originating an expense of R$7,395 (Company) and R$6,526 (Consolidated). The discount totaled R$3,890 (Company) and R$4,821 (Consolidated).
Escrow deposits
In the year ended December 31, 2013 and 2012, the Company and its subsidiaries have escrow deposits related to the provision for tax, labor and civil risks, broken down as follows:
Company (BR GAAP) 12/31/2012 Tax Civil and labor Total 738,372 7,248 745,620 Addition 182,475 4,715 187,190 Write-off (7,058) (447) (7,505) 12/31/2013 913,789 11,516 925,305
Consolidated (IFRS and BR GAAP) 12/31/2012 Tax Civil and Labor Total 762,352 9,040 771,392 Addition 182,477 5,253 187,730 Write-off (7,103) (610) (7,713) 12/31/2013 937,726 13,683 951,409
56
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Company (BR GAAP) 12/31/2011 Tax Civil and Labor Total 592,458 4,759 597,217 Addition 145,914 2,489 148,403 12/31/2012 738,372 7,248 745,620
Consolidated (IFRS and BR GAAP) 12/31/2011 Tax Civil and Labor Total 616,439 6,219 622,658 Addition 145,914 2,874 148,788 Write-off (1) (53) (54) 12/31/2012 762,352 9,040 771,392
18
a.
Equity
Social Capital
Capital as of December 31, 2013 is represented by 786,115,469 shares (655,096,224 shares as of December 31, 2012), fully subscribed and paid in. According to the minutes of the Annual General Meeting and Special Meeting held on April 26, 2013 approved the capital increase of the Company in the amount of R$ 500,000. For realization of the capital increase was partly used the balance from the budget reserve capital. As commented in note 19,a), the number of shares outstanding as of December 31, 2013 is 785,408,414 (654,368,446 shares as of December 31, 2012). Share capital can be increased by up to 2,400,000,000 additional 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 until 30 days as from 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.
57
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
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$99,637, as of December 31, 2013 (R$99,951 as of December 31, 2012).
Treasury shares
Currently the Company doesnt have a program to repurchase its own shares . On December 11, 2013, the Company's Board of Directors, pursuant to article 19 of its bylaws, article 30 of Law 6404/76, CVM Instruction 10/80, as amended, and CVM Instruction 358/02 and its subsequent amendments, approved the acquisition of up to four million and four hundred thousand (4,400,000) common shares, without par value, issued by the Company itself, for cancellation, disposal of or maintenance in Treasury and particularly to allow the exercise of the option granted under the Company's Share Option Plan, with no reduction in share capital, within 365 days from the disclosure of the significant event of the offering. Moreover, these acquisitions of shares issued by the Company itself are limited to the balance available under the "Capital reserve" caption calculated during the fiscal year, in compliance with articles one and 12 of Instruction 10/80. The Company's Management is responsible for deciding when and what number of shares to buy, within authorized limits. Changes in treasury shares are stated as follows:
Company (BR GAAP) and Consolidated (IFRS and BR GAAP) Average cost R$ per share 32.17 32.17 32.17 34.57 45.85 45.85 45.85 45.85 38.18 38.18 38.18 38.18 38.18 38.18 38.18 38.18 52.41 52.41 52.41
S hares Balance on January 1, 2013 Sale in January 2013 Sale in February 2013 Buy-back in February 2013 Buy-back in M arch 2013 Sale in M arch 2013 Sale in April 2013 Balance on treasury shares before the bonus Increase of treasury shares due to the bonus (*) Sale in M ay 2013 Sale in June 2013 Sale in July 2013 Sale in August 2013 Sale in September 2013 Sale in October 2013 Sale in November 2013 Sale in December 2013 before buy -back Buy-back in December 2013 Sale in December 2013 Balance as of December 31, 2013
(*)
Value (23,410) 368 1,373 (4,066) (38,488) 551 2,608 (61,064) 89 184 28,759 10,828 1,149 4,799 2,151 65 (24,155) 140 (37,055)
727,778 (11,455) (42,672) 70,819 660,000 (14,591) (56,938) 1,332,941 266,588 (2,342) (4,808) (753,310) (283,637) (30,098) (125,713) (56,334) (1,710) 368,160 (2,682) 707,055
Bonus: new ordinary shares were issued, attributing to shareholders, free of charge, as a bonus one new common share for each batch of five common shares they held, generating the total effect of 266,588 new shares .
58
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
The shares bought back will be held in treasury to be later disposed of, cancelled or used in the exercise of stock options granted to the Companys officers and employees .
Under Companys bylaws, shareholders are entitled to a minimum dividend of 50% of profit after the recognition of the legal reserve of 5% of net profit for the year until the reserve equals 20% of the capital. The allocation of the remaining balance of profit for the year 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. Under by laws, the Company may prepare semiannual or shorter balance sheets and, based on
59
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
them, in accordance with the limits provided for applicable law, the Board of Directors may approve the distribution of dividends against profit. The Board of Directors may also declare intermediary dividends against existing profit based on the last balance sheet approved by the shareholders. The Board of Directors meeting, held on February 6th, 2013, approved the distribution of supplementary dividends and interest on capital, based on the financial statements as of December 31, 2012, in the amount of R$803,502. These dividends and interest on equity capital were paid to shareholders on March 28, 2013. In accordance with a Board of Directors Meeting held on August 21, 2013, it was resolved the distribution of 70% of the income for the six-month period ended June 30, 2013 in the amount of R$840,700, R$49,400 of which on an interest on shareholders equity basis and R$791,300 on a dividends basis. The shareholders payout was made to the shareholders on September 30, 2013. Moreover, on January 28, 2014, the Board of Directors approved, subject to ratification by the Annual Shareholders Meeting that will be held on March 31, 2014, the proposal for payment of dividends and interest on equity capital, in the amounts of R$914,820 and R$46,000, respectively, for the results reported in the second half of 2013. These results, in addition to dividends and interest on equity capital of R$840,700 paid in September 2013, correspond to a distribution of 70% of the profit reported in 2013. Dividends were calculated as follows:
Profit of the year Income reserve - statutory reserve Calculation base for minimum dividends Interim dividends paid Dividends provisioned Interest on equity capital payable Interest on equity capital provisioned IRRF on interest on equity capital Annual minimum non-discretionary dividends - 50% Amount in excess of the minimum non-discretionary dividends 2,673,601 (100,000) 2,573,601 791,300 414,410 49,400 46,000 (14,309) 1,286,800 500,410
The portion of dividends in excess of the minimum non-discretionary dividend, declared by Management after the accounting period the financial statements refer to, but before the authorization date to issue those financial statements, should not be recorded as a liability in the related financial statements and the effects of the portion of supplemental dividends should be disclosed in a note. As of December 31, 2013 the amount in excess of the minimum nondiscretionary dividend of R$500,410 was recognized in equity as "Additional proposed dividend".
60
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
19
a.
11,455 42,672 (70,819) (660,000) 14,591 56,938 130,752,657 2,342 4,808 753,310 283,637 30,098 125,713 56,334 4,392 (368,160) 785,408,414
61
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
20
Net revenue
Company (BR GAAP) 12/31/2013 Gross operating revenue Tax on services Total 6,357,492 (644,975) 5,712,517 12/31/2012 5,605,834 (574,277) 5,031,557 Consolidated (IFRS and BR GAAP) 12/31/2013 7,416,883 (682,643) 6,734,240 12/31/2012 5,996,810 (611,558) 5,385,252
Gross operating revenue is comprised of commissions charged to merchants, rental of POS equipment and services rendered for the use of network, as well as other services related to electronic payment means.
21
Expenses by nature
The Company elected to present the consolidated statement of income by function. The breakdown of costs of services and net operating expenses by nature is as follows:
62
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Company (BR GAAP) 12/31/2013 Personnel expenses Depreciation and amortization Professional services Acquiring costs (a) Sales and marketing (b) Cost of mobile phone credits in subsidiaries (c) Other Total Classified as: Cost of services provided Personnel expenses General and administrative expenses Sales and marketing Other operating expenses, net Total (a) (b) (c) 276,503 309,912 319,295 1,408,043 236,413 47,520 2,597,686 12/31/2012 221,208 289,070 237,015 1,234,891 236,412 64,954 2,283,550
Consolidated (IFRS and BR GAAP) 12/31/2013 404,027 391,211 281,446 2,009,751 255,954 114,711 91,040 3,548,140 12/31/2012 321,397 315,881 116,442 1,382,224 240,682 121,907 103,931 2,602,464
Acquiring costs are mainly represented by expenses on logistics and maintenance of POS equipment, supplies to merchants, customer registration and service, telecommunication services, and capture and processing of transactions . M arketing and sales expenses include campaigns for trademark development, marketing and advertising, internal marketing and sales incentives to partners and issuing banks. Correspond to the cost of the product sold related to the credit minutes for cell phones sold by the subsidiary M ultidisplay.
22
63
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Company (B R G AAP) 12/31/2013 Shareholders B anco B radesco Assets (Liabilities): Short-term investments (a) Trade accounts receivable Receivables from subsidiaries and joint ventures P ayables to subsidiaries and joint ventures B anco do B rasil Subsidiaries and Joint Ventures M4 Produtos Cielo USA 12/31/2012
Servinet
Orizon
Paggo
B raspag
Total
Total
71,880 2,110
2,753 1,838
74,633 3,948
88,157 4,026
(12,127)
45 -
(130)
28 (313)
73 (12,570)
149 (11,409)
Company (B R G AAP) 12/31/2013 Shareholders B anco B radesco Revenues: Income from shortterm investments (a) Revenue from other services (b) Revenue from the rental of P OS equipment (c) Expenses: Other operating expenses - membership commission Other operating expenses (d) Service agreement with Servinet (e) Data processing services (f) (a) (b) B anco do B rasil Subsidiaries and Joint Ventures M4 Multidisplay Produtos 12/31/2012
Servinet
Orizon
Paggo
B raspag
Total
Total
5,407 20,182
992 18,485
1,437
4,623
428
354
6,399 45,509
8,217 30,632
1,115
1,115
407
(6,163) (15,578) -
(5,240) (2,714) -
(114,900) -
(2,354)
(4,116) (5,372)
(2,663)
The terms, charges and interest rates of short -term investments were agreed under conditions similar to those applicable to unrelated parties. Correspond to fraud prevention and bank account blocking services provided by the Company to the shareholder banks and commis sions for the processing of transactions for M4P rodutos and Multidisplay . These related-party transactions are carried out at prices and under conditions similar to the transactions carried out with other issuing banks. See Note 5.(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 shareholders in respect of prices, terms and other condi tions were applied under conditions similar to those adopted with respect to third parties. The Company engaged Servinet to provide P OS 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. Refer to data processing services provided by M4P rodutos and Braspag .
(c) (d)
(e)
(f)
Receivables from issuing banks, whose net amounts are recorded under the caption 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
64
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
prices and under conditions similar to the transactions carried out with other issuers of credit or debit cards.
Bank account lock Refers to bank account lock 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.
65
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Cash management services. Insurance. Private pension services. Corporate credit card. Payment to suppliers.
23
The donations to the Cultural and Artistic Activities (Rouanet Law), Sports and Fund for Children and Adolescents Rights were recorded in line item Income tax expenses - current. The tax incentives recorded in line item Income tax expenses - current, in Company and Consolidated, totaled R$25,690 for the year ended December 31, 2013 (R$19,279 for the year ended December 31, 2012).
66
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
24
Financial instruments
The estimated fair values of the Groups financial assets and financial liabilities were determined using available market inputs and appropriate valuation methodologies. However, considerable judgment was required to interpret market input 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 significant effect on the estimated realizable values. These financial instruments are managed through operating strategies which aim at obtaining liquidity, security, and profitability. The control policy consists of permanent monitoring of the contracted rates compared to market rates. The Group does not make investments for speculative purposes, either in derivatives or any other risk assets.
a.
(i) (ii)
Debt is defined as short- and long-term borrowings, as detailed in note 13. Equity includes the entire share capital and the Groups reserves, managed as capital .
67
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
12/31/2013 Company (BR GAAP) Accounting amount 257,145 8,314,607 73 925,305 435,342 4,120,948 12,570 1,544,641 Market value 257,145 8,314,607 73 925,305 435,342 4,120,948 12,570 1,431,863 Consolidated (IFRS and BR GAAP) Accounting amount 423,062 8,638,509 642 951,409 497,165 4,404,935 2,488,485 Market value 423,062 8,638,509 642 951,409 497,165 4,404,935 2,278,013
Type Cash and cash equivalents Trade accounts receivable Receivables from subsidiaries and Joint ventures Escrow deposits Trade accounts payable Payables to merchants Payables to subsidiaries Borrowings and financing Loans and receivables Loans and receivables Loans and receivables Loans and receivables Other financial liabilities Other financial liabilities Other financial liabilities Other financial liabilities
The market value of financial assets and financial liabilities 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.
Credit risk
The Company has an instrument to mitigate the credit risk of the VISA 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. 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 brand 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.
68
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
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.
Risk of fraud
The Company uses an 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.
69
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Currency risk
The Group conducts a few transactions in foreign currency, mainly represented by transactions performed by foreign credit card holders in establishments in Brazil. In addition, as described in note 1, on August 31, 2012 the Company acquired the control of Me-S through its holding Cielo USA, both headquartered in the United States of America, whose transactions are conducted in US dollar (functional currency). The exposures to currency risks are managed in accordance with the criteria set by the policies approved using currency futures contracts. As of December 31, 2013, the net exposure to foreign exchange rate risk, in thousands of US dollars, is as follows:
Company (BR GAAP) Assets: Cash and cash equivalents Trade accounts receivable Other assets Investments in foreign currency Property and equipments Intangible assets, including goodwill Total Consolidated (IFRS and BR GAAP)
Liabilities: Payables to merchants Other liabilities Repayment of borrowings and financing - principal Repayment of borrowings and financing - interest Repayment of borrowings and financing - expenses Deferred income tax Tax effect on hedge instruments - bonds designated as hedge of the net foreign investment Total Long position in US dollars
The Company enters into forward exchange transactions for US dollars to hedge against fluctuations in exchange rates, which reduces significantly potential currency risks.
70
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Company (BRGAAP) and Consolidated (IFRS e BR GAAP) 10% Profit or loss (i) Equity (i) (i) 345 72 25% 864 179 50% 1,727 358
Refers mainly to the exposure of trade accounts receivable and trade accounts payable in US dollars at the end of each reporting period.
Liquidity risk
The Group manages the liquidity risk by maintaining proper reserves, bank and other credit facilities to raise new borrowings that it considers appropriate, based on the continuous monitoring of budgeted and actual cash flows, and the combination of the maturity profiles of financial assets and financial liabilities.
The funds from the Companys short-term investments are impacted by changes in the CDI rate (source: Cetip) and borrowings are impacted by the changes in the long-term interest rate - TJLP (source: Central Bank of Brazil - Bacen)) and Libor (source: Bloomberg). As of December 31, 2013, assuming an increase or reduction of 10%, 25% and 50% in the interest rates, there would be an increase or decrease in finance income or costs, as follows:
Company (BR GAAP) 10% Short-term investments Borrowings and financing 1,819 6,365 25% 4,549 15,913 50% 9,097 31,826 Consolidated (IFRS and BR GAAP) 10% 1,978 9,511 25% 4,946 23,779 50% 9,891 47,557
25
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 December 31, 2013, future annual payments under lease agreements in effect are estimated as follows:
71
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Most contracts specify a termination fine equivalent to three-month rent, and a partial return can be negotiated for each case.
Transactions capture and processing agreements stipulate termination fines totaling R$3,205. Logistics service agreements are in effect since June 2007, with a minimum period of 12 months and a termination fine of R$5,539. Telecommunication agreements stipulate termination fines totaling R$29,705.
26
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 year ended December 31, 2013 and 2012 were recorded in line item Personnel expenses in the statement of income, as follows:
Company (BR GAAP) 12/31/2013 Employees Officers Total 41,092 13,759 54,851 12/31/2012 29,913 11,681 41,594 Consolidated (IFRS and BR GAAP) 12/31/2013 55,377 14,614 69,991 12/31/2012 42,778 12,902 55,680
72
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
27
Management compensation
Key Management personnel includes the members of the Board of Directors and the officers.
12/31/2013 Variable (*) 11,054 11,054 12/31/2012 Variable (*) 9,410 9,410
Fixed Officers Board of Directors Total (*) Not including the stock option plan (see note 31). 5,748 1,458 7,206
Managements (Executive Committee and Board of Directors) overall compensation in 2013, set by the Annual General Meeting held on April 26, 2013, was R$32,468, plus related taxes and contributions thereon, as prescribed by the prevailing laws. For the supervisory Board the compensation for the year ended in December 31, 2013 and 2012 presents the amount of R$ 309.
28
73
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
(a) (b)
Revenue from the prepayment of receivables for the year ended December 31, 2013 and 2012 comprises income from the transaction volume for year end. As described in note 5,(a), the fair value adjustment recorded in the consolidated financial statements information was calculated on the prepayment receivables. The assumptions adopted for the calculation are as follows:
Interest rates use were the same contractors on prepayment of receivables from customers. Calculations were carried out separately, discounting cash flows for each recorded receivable. The Companys Management recognized the fair 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 profit or loss for the year.
(c)
It follows basically the amount received in U.S. dollars. Visa International Service Association and M asterCard Worldwide relating to transactions with foreign cards, credit and debit cards, and gains and losses originally denominated in foreign currency, represented by: Company (BR GAAP) 12/31/2013 Exchange rate changes, net: Revenue Expenses Total 1,366 (1,116) 250 12/31/2012 8,554 (2,915) 5,639 Consolidated (IFRS and BR GAAP) 12/31/2013 1,392 (1,135) 257 12/31/2012 8,561 (2,917) 5,644
29
74
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
30
Insurance
As of December 31, 2013, 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 POS equipment warehousing POS equipment transportation Insured Amount 105,000 28,271 13,925 1,091 161,987 1,183,058
31
75
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Number of shares Bonus 2012 68,717 40,505 163,314 262,413 19,369 554,318 Bonus 2013 5,344 11,462 71,403 273,433 189,146 23,246 14,149 588,183
Grant date July 2009 September 2009 July 2010 July 2011 July 2012 July 2013 February 2012 (Restrict shares) February 2013 (Restrict shares) Total
Granted 1,042,320 220,480 1,073,680 1,315,854 987,487 1,049,141 96,850 70,819 5,856,631
Exercise price (R$ per share) 19.74 29.43 27.78 21.71 37.07 43.26 -
Fair Value of Options (R$ per share) 10.43 13.75 13.38 12.48 18.34 20.16 52.28 52.46
For the fair value of the options, from 2011, was measured using the binomial pricing model. In the previous years, the Company used the Black & Scholes methodology, based on the following economic assumptions:
Grating date
July and S eptember 2009 Dividend yield Share price volatility Vesting period 6.66% 36.67% 5 years
Fair value is allocated to the profit or loss for the year and a contra-entry to the capital reserve using the straight-line method is allocated over the periods of up to 24 and 36 months. A provision of R$18,045 net of charges was recognized for the year ended December 31, 2013 (R$12,851 for the year ended December 31, 2012), contra-entry of which is the account Personnel expenses . These amount correspond to the portion of Statutory Directors the amount of R$4,234 net of charges (R$2,320 as of December 31, 2012). Were exercised 1,386,290 shares in amount of R$18,359 for the year ended December 31, 2013 (985,271 shares amounting to R$1,788 for the year ended December 31, 2012), and the total stock options granted which was recorded, as of December 31, 2013, in the account Capital Reserve in equity amounted (R$314), (R$11,063 as of December 31, 2012).
32
a.
Employee benefits
Pension plan
The Company and subsidiary Servnet contributes monthly to a defined contribution pension plan (PGBL) for its employees, and contributions made during the year ended December 31, 2013, amounted to R$7,222 (R$6,554 as of December 31, 2012), recorded under line items Cost of services and Personnel expenses .
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Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Others benefits
Besides the benefit of pension plan the company and its subsidiaries offer their employees, which include: health insurance, dental care, life insurance and personal accident and professional training, the amount of these expenses totaled R$24,839 in the year ended December 31, 2013 (R$ 16,353 as of December 31, 2012).
33
Noncash transactions
Company (BR GAAP) 31/12/2013 Acquisition of POS equipment through new Finame loans Capital reduction in CieloPar Exchange rate changes on net foreign investments Reconstitution of the effects of provisions PM IPL in subsidiaries: CieloPar Servrede Capital increase through the assumption of debt Exchange rate on borrowings and financing Allocation of PPA related to the acquisition of the S-M e, net of tax effects Dividends and interest on capital proposed Adjustment of tax credits carried to the opening balance of M e-S and recognized as an adjustment to goodwill 294,085 93,250 31/12/2012 222,147 46,979 6,845 Consolidated (IFRS e BR GAAP) 31/12/2013 294,085 93,250 31/12/2012 222,147 6,845
34
Segment reporting
The Company has a single business segment, which is reported consistently with the internal reports provided to the Chief Operating Decision-Maker CODM. This segment derives from the provision of services related to the capture and processing of credit and debit card transactions, other payment means and related services. With regard to information on geographical area, the Company conducts transactions in Brazil and in the United States of America through its subsidiaries Me-S and Cielo USA. Summarized financial data for those subsidiaries is disclosed in Note 3.
35
Other matters
Executive Act 627, passed on November 11, 2013, and Regulatory Instruction issued by Brazilian Federal Revenue Service 1.397, of September 16, 2013, introduced significant changes in federal tax rules. The provisions of the Executive Act are set to come into effect in calendar year 2015 and they may be applied earlier as from calendar year 2014, at the discretion of taxpayers.
77
Cielo S.A. and Subsidiaries Consolidated and Individual Financial Statements for the Year Ended December, 31, 2013 and Independent Auditors Report
Based on the analysis made by Management about the tax impacts of the new provisions, we concluded that no dividends or interest on equity capital are distributed in amounts higher than those calculated in accordance with accounting methods and criteria in effect on December 31, 2007. Therefore, Management considers that no further taxes will be levied in the distribution of profit made over the past five years. Management is evaluating whether it will decide to apply the provisions of the Executive Act earlier in 2014.
36
The individual and consolidated financial statements were approved by the Companys Board of Directors and authorized for issuance on January 28, 2014.
78
DEAR SHAREHOLDERS:
We present this Management Report and the Financial Statements of Cielo S. A. for the fiscal years ended December 31, 2013 and 2012, accompanied by the Independent Auditors Report and the Audit Committee's Opinion.
In 2013 Cielo continued to be the leader in its industry and invested in the differentiation of its product and services portfolio. In the competition scenario, the year saw no ruptures and was marked with the entry of new players, which is healthy for the evolution of the industry. We believe in the solidity of our fundamentals, which have reflected on the consistency of our results quarter after quarter. A testament to our solid foundation is the companys market capitalization, which closed the year at R$51.6 billion on Bovespas last trading session (December 30, 2013). We captured R$448.8 billion, equivalent to nearly 9% of the countrys GDP (considering the first nine months of the year), and overcame the statistical challenge of growing more than ourselves due to the high comparison basis. The regulatory scenario of the cards industry also gained a new format, and all players are now regulated by the Central Bank and the Brazilian Monetary Council, under Law 12,865 of October 9, 2013. There was great expectation around this matter, and it was addressed when the regulator was determined and the first circular and normative letters were published, contributing to the consolidation of an egalitarian environment. The year also saw an above-expectations growth in the electronic payments industry. Even though the economic scenario was weakened, the growth pace of the electronic payments industry was maintained due to the effect of the replacement of cash and checks, which has continued to be seen in all regions of the country, especially in the interior. Cards currently represent 27% of everything households consume in Brazil, and this stake has potential for growth. No businesssmall retailer, independent professionals, industry, or large retailercan ignore the advantages of accepting card payments; the machines have to be seen as service provided, especially in view of the international events to be held in the country, like the World Cup and the Olympics. Cielos geographic footprint, with nationwide presence at more than 1.5 million points of sale; our high service level, especially customer service; its state-of-the-art equipment; our intrinsic culture of innovationall of these factors have put us in a position of privilege. Cielos innovation is based on two fundamental pillars: technology and products/services. In terms of our equipment base, we invested more than R$294 million reais in 2013, mostly new wireless devices, bringing clients, merchants, independent professionals and large retailers convenience and savings as the wireless device is also exempted from phone charges. Our base closed the year at 1.8 million installed devices, 57% of which are mobile machines. Being ahead requires that the leader has an even greater capacity to reinvent itself; this is Cielos permanent challenge. Joining, for instance, continuous investment in innovation and the well done basics is what several stakeholders expect from the Company. Our financial results indicate that
our business model has been efficient for the market, and we will continue to invest in a portfolio of differentiated products and services, which positions Cielo as a financial services company that delivers what is best in the market in terms of product, quality, and customer service, especially results to shareholders, contributing to create the image that Cielos device is a service hub for customers. Proving that, in February 2013 we launched the tax payment solution at the Federal Revenue Service airport stations, which translates into convenience for Brazilian tourists. Passengers arriving from international flights at the main airports of the country can pay import taxes using their debit cards on Cielos devices through the electronic reading of a tax collection document (DARF), without needing to leave the area where luggage is checked. In November 2013, Cielo announced the evolution of Cielo Mobile, becoming the first players in the market to offer payment with debit cards and vouchers or the Credirio function for payment in up to 48 installments, in addition to spot credit or in up to 6 installments, using the reader of cards with chips and password, ensuring a greater conversion of sales. Focused on independent professionals, micro-entrepreneurs and merchants, this product transports all advantages of the POS to the mobile arena, strengthening our vision for this segment, and becoming the most comprehensive solution of the market also in mobile payment. We have adopted the strictest security standards established by the electronic payments industry globally. All information transferred through Cielo Mobile is encrypted, protected, and no data card number or password is stored in the smartphone, tablet, or the card reader itself. The platform also counts on Cielo Lynx, an exclusive anti-fraud neural system that monitors 100% of the transactions that pass through our infrastructure. In the sustainability front, Cielo seeks structured practices, like publishing an audited Sustainability Report that complies with international standards and follows the Global Reporting Initiative (GRI) criteria, a Greenhouse Gas Emissions Inventory, in addition to implementing several policies addressing important matters such as the environment, and people and corporate risks management, gathered in a very strict Code of Ethics for employees and suppliers. In November 2013, we were listed on the Corporate Sustainability Index (ISE) portfolio, for the period between 1/6/2014 and 1/2/2015. This So Paulo Stock, Commodities and Futures Exchanges (BM&FBovespa) index is a tool to evaluate the performance of publicly held companies regarding corporate sustainability. With this listing, Cielo is now part of a distinguished group of publicly held companies, recognized for the liquidity of their stock and for their good management and governance practices. In December 2013, Cielo reported to the market the change in accounting for commission revenues from card sales in installments. Therefore, Cielos result will now reflect the accounting for revenues from commissions from installment sales all at once, on the date of the first installment or capture, instead of recognizing them installment by installment, as it had been done so far. Innovation, sustainability, and originality increase the Companys visibility amon g its various stakeholders. Proof is found in market awards and recognition, such as being named Best in the Services industry in the Best and Biggest ranking from Exame magazine for the seventh consecutive year. It was also the winner, for the third time in a row, in the Financial Services ranking As Melhores da Dinheiro 2013 of Isto Dinheiro magazine. Cielo has been elected, for the second consecutive time, the best company in the Financial Services industry in the poca Negcios 360 yearbook of poca Negcios magazine. We were number one in the Financial
Services category among the most innovative companies in terms of customer relationship, according to the ranking of Consumidor Moderno Magazine / Dom Strategy Partners. We also won an Industry Highlight Award as the best in value creation in the Financial Services sector in 2012, according to the Brazilian Association of Publicly-Held Companies (Abrasca). It is also one of the 20 Most Valuable Brands of Brazil in Isto Dinheiro magazines ranking, prepared in a partnership with BrandAnalytics/Milward Brow, and was named the 11th most valuable brand of Brazil in the 2013 Most Valuable Brazilian Brands ranking of consulting firm Interbrand. In addition to the recognition in the industry and financial segments, we are also awarded for our people management practices. In 2013, Cielo was chosen for the thirteenth consecutive year as one of the Best 150 Companies To Work For by the guide in Voice S/A magazine, and for the third consecutive time in the same publication as one of the Best Companies to Begin Your Career. Cielo ranked 2nd in the Best in People Management ranking, in the 1,001-to-2,000 employees category, of Valor Econmico and Aon Hewitt. Voc RH also recognized Cielos Organizational Development Vice-President as the Best HR Professional in the Banks and Services category, and the same publication chose Cielo as the company that has a CEO who is Partners with HR. Internationally, Cielo took the top spot in the financial institutions category (ex-banks) of Institutional Investor Magazines 2013 Latin America Executive Team ranking, winning Best IR Team, Best CEO, Best CFO according to both the buy-side and the sell-side, and Best and ThirdBest IR Professionals according to the buy-side. In financial terms, our net revenue in 2013 expanded 25.0% over 2012 to R$6.734 billion, with net income up 14.9% to R$2.674 billion. Financial volume was up 17.1% year-over-year to R$448.8 billion in 2013. Our dividends policy assures, based on the corporate bylaws, the distribution of a minimum annual dividend of 50% of earned income after constitution of a legal reserve with 5% of the net income for the year until this reserve reaches 20% of the capital stock. Dividends and interest on equity are paid twice a year, in March and September. For 2013, as the Board of Directors approved, ad referendum of the General Meeting, the proposal for payment of interest on equity and dividends will correspond to about 70% of the total net profit in 2013, or R$1.802 billion. Regarding the future, we shall keep on focusing on our exclusiveness and innovation strategy. The pillars supporting this strategy will be the maintenance of the organic growth and a better product and service offer through unique solutions such as our loyalty programs, increased network availability with more modern equipment and greater proximity to our clients through our sales team, in addition to positioning Cielo as a pool of services for the merchants business: productivity management, convenience and revenue increase, security, payment, and financing. We believe 2014 will be without a doubt a more challenging year due to increased competition, but we will continue to focus on our goals, supported by a winner strategy.
OPERATING PERFORMANCE
TRANSACTION FINANCIAL VOLUME In 2013, Cielo captured 4.902 billion transactions, up 13.9% over 2012. The transaction financial volume totaled R$448.8 billion, up 17.1% over the R$383.3 billion in 2012.
Specifically with credit cards, transaction financial volume totaled R$279.6 billion in 2013, up 14.1% year-over-year. With debit cards, transaction financial volume totaled R$169.2 billion in 2013, growing 22.2% in the period.
POINTS OF SALE MERCHANT AND EQUIPMENT BASE The number of Points of Sale Merchants totaled 1.474 million at the end of 2013, up 10.9% yearover-year. Active points-of-sale mechant are those that made at least one transaction in the past 60 days. For 30 days activity, the year-over-year increase reached 11.3%.
2013 1,474
2012 1,329
2013 1,426
2012 1,282
The installed POS base expanded 6.0% compared to 2012. WiFi/GPRS equipment represented 56.7% of the installed base.
POS terminals # Installed POS % Wireless 2013 1,831 56.7% 2012 1,727 47.0% 2013 X 2012 6.0% 9.7 p.p
FINANCIAL PERFORMANCE
COMPARISON OF THE ANNUAL ENDED AT DECEMBER 31, 2013 AND 2012 NET REVENUE The Company and its subsidiaries net revenue from capture, transmission, processing and transaction settlement services for transactions with credit and debit cards, POS rental and other revenues increased R$1,349.0 million, or 25.0%, to R$6,734.2 million in 2013, as compared to R$5,385.2 million in 2012. This increase is substantially related to the consolidation of the financial statements of Merchant e-Solutions (Me-S), started from 4Q12, the appreciation of the dollar and the expansion of the Companys business.
COST OF SERVICES PROVIDED The cost of services provided increased R$742.0 million or 41.1% to R$2,549.6 million in 2013, compared to R$1,807.6 million in 2012. This increase was chiefly due to the following: (i) (ii) (iii) Increase of R$427.1 million due to the increased costs of subsidiaries, mainly impacted by the consolidation of Me-S which began in 4Q12; Increase of R$134.5 million in brand fees from the increased number of transactions and the consolidation of Merchant e-Solutions (Me-S) starting in 4Q12; Increase of R$86.0 million due to increased logistics and processing services costs, especially related to equipment maintenance and activation after versions upgrades, exchange of discontinued equipment for new ones, increase in wireless technology equipment, increase in the number of maintenance, acquisition of inputs for terminals and call center; Increase of R$57.5 million due to higher depreciation and amortization costs, chiefly explained due to the amortization of intangible due to the consolidation of Cielo USA, renewal of the installed POS base and the increase in wireless terminals in the total base; and others.
(iv)
OPERATING EXPENSES Operating expenses increased R$204.9 million or 25.8% to R$1,000.6 million in 2013, compared to R$795.7 million in 2012. The major changes are the following: Personnel expenses. Personnel expenses increased R$58.3 million or 27.9% to R$267.3 million in 2013, compared to R$209.0 million in 2012. This variation is mainly due to the adjustment in wages established by an agreement with the union in August, 2013, the consolidation of Merchant e-Solutions (Me-S), initiated on 4Q12 and the increase in the number of employees of the Company and its subsidiaries. General and administrative expenses. General and administrative expenses increased R$69.0 million or 31.3% to R$289.7 million in 2013, compared to R$220.7 million in 2012. The variation was chiefly the result of the consolidation of Me-S, initiated on 4Q12. Sales and marketing expenses. Sales and Marketing expenses increased R$15.3 million or 6.3% to R$256.0 million in 2013, compared to R$240.7 million in 2012. mainly due to the result of the consolidation of Me-S, initiated on 4Q12 and increased marketing campaigns. Equity equivalence. Equity equivalence registered variation of R$1.3 million, to R$2.1 million expense in 2013, compared to R$0.8 million expense in 2012. The increase is primarily due to the net results of controlled companies, compared to 2012. Other net operating expenses. Other net operating expenses increased R$61.0 million or 49.1% to R$185.5 million in 2013, compared to R$124.5 million in 2012. The increase is substantially related to the review in the criterion for recoverability of outstanding balances of customers blocked
for fraud, complementary provision for impairment to goodwill of Paggo in 2013 and increased provisions for losses on doubtful accounts and increase in the provision for contingencies. FINANCIAL RESULT The financial result totaled R$854.6 million in 2013, a 14.8% increase from the R$744.7 million recorded in 2012. Financial revenues. Financial revenue decreased R$2.5 million or 11.0% to R$20.1 million in 2013, as compared to R$22.6 million in 2012. This variation is explained by the slight decrease in the balance of financial investments in 2013. Financial expenses. Financial expenses increased R$172.5 million or 170.9% from R$100.9 million in 2012 to R$273.4 million in 2013. This variation is mainly due to the appropriation of interest on loans and financing, related to bonds issue and new Finame contracts as well as to the increase in the volume of prepayments operations with issuer banks to foster the prepayment operation. Prepayment of receivables and adjustment to present value. Revenue from prepayment of receivables net of the adjustment to present value increased R$290.2 million or 35.5% to R$1,107.7 million in 2013, compared to R$817.5 million in 2012. The increase in revenue from prepayment of receivables, net of the adjustment to present value is chiefly due to the increased prepaid financial operations volume in 2013 and to the continuous product expansion. EBITDA
EBITDA corresponds to net income, plus depreciation and amortization, income tax and social contribution and financial income/expenses. It should be noted that, for this calculation, the share of shareholders other than Cielo S.A. is added to the parent company's net income.
EBITDA (R$ million) Cielo Net Income Other Shareholders that not of Cielo S.A. Financial Income Income Tax and Social Contribution Depreciation and Amortization EBITDA % Margem EBITDA
EBITDA is not financial performance measurements recognized under Brazilian GAAP, IFRS or U.S. GAAP and should not be considered individually as an alternative to net income, an operating performance measurement or as an alternative to operating cash flow or as a measurement of liquidity. EBITDA present limitations that impair their use as a measurement of the Company's
profitability since they do not take into consideration certain costs and expenses that result from the Company's business that could have a significant effect on its net income, such as financial expenses, taxes, depreciation, capital expenses and other related charges. Despite these considerations, the Company's Board believes that EBITDA is important parameters for investors as they provide relevant information on our operating results and th e segments profitability.
ARBITRATION CHAMBER
The Company is subject to arbitration at the Market Arbitration Chamber, according to the arbitration clause in its bylaws. CORPORATE GOVERNANCE
Cielo is listed on the So Paulo Stock, Commodities and Futures Exchange BM&FBovespas Novo Mercado, which is the result of the Companys having implemented the most advanced corporate governance level. In this sense, the Company is committed to voluntarily adopting corporate governance and shareholder rights practices that go beyond those required by the law, always observing an ethical and sustainable conduct. Reflecting that, the Company adopts some practices that go beyond those established by Novo Mercado, such as, for example, setting a collegiate and individual self-evaluation mechanism for the Board of Directors, restricting the exchange of information to the Corporate Governance Electronic Portal, maintaining Dividends, Securities Trading, Related-Party Transactions and Conflict of Interests Policies, in addition to a Code of Ethics that sets the rules of conduct in the relationship with all stakeholders, namely employees, customers, suppliers, investors, regulators, the society, and government. For the interests of the management to be in line with those of the shareholders, especially minority shareholders, the management and the performance of Cielo is monitored by a Board of Directors comprised of 10 members, at least 20% of which are independent members, a non-permanent Audit Committee with at least one independent member, a Board of Executive Officers with seven members that responds directly to the Board of Directors and is in charge of conducting the Companys businesses, and by Committees and Forums that advise the Board of Directors and Board of Executive Officers, respectively. Since June 1, 2011, Cielo has been listed on the OTCQX International over-the-counter market, a premium segment of the U.S. market, which distinguished the major international companies from other securities traded on the U.S. OTC market based on the quality of their operating businesses, reporting excellence, and listing on qualified foreign stock exchanges.
Under CVM Rule 381/03, we inform that during 2013 the Company contracted the independent audit services of KPMG. The Companys Policy for contracting independent audit services seeks to ensure that there are no conflicts of interest, loss of independence or objectivity. These principles, based on internationally accepted principles, consist of: (a) the auditor should not audit his own work, (b) the auditor should not exercise management positions at his client, and (c) the auditor should not foster the interests of the client. Cielo declares that the independent auditors and the parties related to them did not directly provide services to the Company unrelated to external audit in 2013. It also declares that after having complied with the companys corporate governance requirements, which state that every extraordinary contracting of direct or indirect independent audit of the Companys financial statements has to be authorized by the Board of Directors (article 5, letter k o f the Internal Statute), the members of the Board of Directors have authorized the contracting of the current independent auditor by its U.S. subsidiary Merchant e-Solutions to attest to the quality of the IT services provided by the subsidiary to its customers. These services totaled US$180,000 (one hundred and eighty thousand dollars), representing approximately 20% of the total fees for financial statement auditing. Performance reporting information on EBITDA, financial volume and number of transactions, discount rates, industry and sector information, net revenue additions, number of employees, total investments, and managerial revenue was not reviewed by the independent auditors in fiscal year 2013.
In compliance with the provisions of CVM Instruction no. 480/09, the Management declares that it has discussed, reviewed and concurred with the views expressed in the independent auditors' report and the respective financial statements for the fiscal year ended December 31, 2013.