Edgar Filing: TELEFONICA BRASIL S.A.

vivodf4q13_6k.htm - Generated by SEC Publisher for SEC Filing

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of March, 2014

Commission File Number: 001-14475

TELEFÔNICA BRASIL S.A.

(Exact name of registrant as specified in its charter)

TELEFONICA BRAZIL S.A.

(Translation of registrant’s name into English)

Av. Eng° Luís Carlos Berrini, 1376 - 28º andar

São Paulo, S.P.

Federative Republic of Brazil

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F

Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Yes

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Yes

PKF(2)

TELEFÔNICA BRASIL S.A.

QUARTERLY INFORMATION

DECEMBER 31, 2013

PKF(2)

INDEPENDENT AUDITORS’ REPORT

ON THE FINANCIAL STATEMENTS

To the Shareholders and Management of

TELEFÔNICA BRASIL S.A.

São Paulo - SP

We have examined the individual and consolidated financial statements of TELEFÔNICA BRASIL S.A., identified as Parent Company and Consolidated, respectively, which comprises the balance sheet as at December 31, 2013 and the respective statement of income, of comprehensive income, of changes in shareholders’ equity and of cash flows for the period then ended, as well as a summary of the main accounting practices and other notes.

Management’s responsibility on the financial statements

The Entity’s management is responsible for the preparation and adequate presentation of the individual financial statements in accordance with the accounting practices adopted in Brazil and the consolidated financial statements in accordance with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board – IASB, and in accordance with the accounting practices adopted in Brazil, as well as for the internal controls it has determined as necessary to allow the preparation of financial statements free of material misstatements caused by fraud or error.

Responsibility of the Independent Auditors

Our responsibility is to issue an opinion on these financial statements based on our audit, conducted in accordance with Brazilian and international accounting standards. Those standards require that ethical demands are met and that the audit be planned and executed to obtain reasonable assurance that the financial statements are free of material misstatement.

An audit involves the execution of selected procedures to obtain evidence related to the amounts and disclosures presented in the financial statements. The selected procedures depend on the auditor’s professional judgment, including the assessment of risks of material misstatement in the financial statement caused by fraud or error. In this risk assessment, the auditor considers the internal controls which are relevant to the preparation and adequate presentation of the financial statements of the Association to plan the audit procedures appropriate to the circumstances, but not to express an opinion on the effectiveness of the Association’s internal controls. An audit also includes the assessment of adequacy of the accounting practices used and the reasonableness of the accounting estimates made by the management, as well as the evaluation of the presentation of the financial statements made as a group.

We believe that the audit evidence obtained is sufficient and appropriate to base our opinion.

Opinion on the individual financial statements

In our opinion, the individual financial statements referred to above adequately present, in all relevant aspects, the financial position of TELEFÔNICA BRASIL S.A. as at December 31, 2013, the performance of its operations and cash flows for the year then ended, in accordance with the accounting practices adopted in Brazil.

Opinion on the consolidated financial statements

PKF(2)

In our opinion, the consolidated financial statements referred to above adequately present, in all relevant aspects, the consolidated financial position of TELEFÔNICA BRASIL S.A. as at December 31, 2013, the consolidated performance of its operations and cash flows for the year then ended, in accordance with the international financial reporting standards (IFRS) issued by the International Accounting Standards Board – IASB and accounting practices adopted in Brazil.

Emphases

Investments Evaluation

According to note 2, the individual financial statements were prepared according to the accounting practices adopted in Brazil. In the case of TELEFÔNICA BRASIL S.A., these practices differ from IFRSs, applicable to the separate financial statements, solely referring to the evaluation of investments in subsidiaries and joint subsidiaries by the equity method, however, for IFRS purposes, they would be evaluated at cost or fair value. Our opinion is not with exception due to this matter.

Restatement of corresponding amounts

As mentioned in Note 2, as a consequence of a change in the accounting practice introduced by the adoption of IFRS 11, the consolidated balance sheet referring to the year ended on December 31, 2012 and the respective consolidated statements of income, of comprehensive income, of changes in shareholders’ equity and of cash flows, for the year then ended, presented for comparison purposes, were adjusted and are being restated in accordance with CPC 23 – Accounting Policies, Changes in Estimates and Correction of Error and CPC 26 (R1) – Presentation of the Financial Statements. Our opinion is not changed regarding this matter.

Other Matters

Statement of Value Added

We have also examined the individual and consolidated statement of value added (SVA), referring to the period ended December 31, 2013, prepared under the Company’s management responsibility, the presentation of which is required according to the Brazilian corporate law for listed companies, and, as supplementary information by the IFRSs, which do not require the presentation of the SVA. These statements were submitted to the same audit procedures previously described and, in our opinion, they are adequately presented, in all material aspects, in relation to the financial statements as a whole.

São Paulo, 25 February 2014.

CRC Nº 2SP013002/O-3

Clóvis Ailton Madeira

CTCRC Nº 1SP106895/O-1 "S"

TELEFÔNICA BRASIL S. A.
Balance sheets
At December 31, 2013, 2012 and january 1st, 2012
(In thousands of reais )

		Company		Consolidated					Company		Consolidated
ASSETS	Note	12.31.13	12.31.12	12.31.13	12.31.12	1.1.12	LIABILITIES AND EQUITY	Note	12.31.13	12.31.12	12.31.13	12.31.12	1.1.12
					restated							restated
CURRENT ASSETS		15,632,730	6,515,094	15,936,633	16,209,181	11,759,744	CURRENT LIABILITIES		13,862,290	5,910,070	13,768,244	13,536,792	12,740,699
Cash and cash equivalents	5	6,311,299	3,079,282	6,543,936	7,133,485	2,889,543	Personnel, social charges and benefits	15	427,067	205,780	431,403	416,252	495,527
Trade accounts receivable, net	6	5,541,023	2,150,724	5,802,859	5,546,938	5,128,142	Trade accounts payable	16	6,948,957	2,191,047	6,914,009	5,889,068	6,038,149
Inventories	7	469,586	24,403	505,615	387,809	471,721	Taxes, charges and contributions	17	1,269,105	529,055	1,315,164	1,781,250	1,691,737
Taxes recoverable	8.1	2,168,797	602,328	2,191,962	2,052,421	2,495,065	Loans, financing and lease	18.1	1,236,784	756,371	1,236,784	1,270,122	1,000,082
Judicial deposits and garnishments	9	204,165	-	204,165	126,625	116,421	Debentures	18.2	286,929	702,215	286,929	702,215	468,624
Derivative transactions	36	89,499	39,197	89,499	41,109	1,840	Dividend and interest on equity	19	1,187,556	467,831	1,187,556	467,831	972,986
Prepaid expenses	10	254,743	26,610	257,286	248,337	255,056	Provisions	20	561,403	334,852	561,403	496,790	416,313
Dividend and interest on equity	19	60,346	394,105	1,140	1,140	772	Derivative transactions	36	44,463	8,747	44,463	29,586	51,162
Other assets	11	533,272	198,445	340,171	671,317	401,184	Deferred revenue	21	812,843	69,743	817,551	734,573	761,268
							Payable from reverse split of fractional shares		389,220	345,953	389,220	389,510	389,953
NONCURRENT ASSETS		53,982,379	51,067,347	53,604,442	54,041,911	53,728,817	Authorization license		95,768	-	95,768	994,977	-
Short-term investments pledged as collateral	5	106,239	23,920	106,455	109,708	124,668	Other liabilities	22	602,195	298,476	487,994	364,618	454,898
Trade accounts receivable, net	6	160,478	-	257,086	93,378	84,855
Taxes recoverable	8.1	368,388	549,225	368,388	738,965	1,014,959	NONCURRENT LIABILITIES		12,858,377	6,991,251	12,878,389	12,033,180	9,417,077
Deferred taxes	8.2	-	-	210,294	1,027,888	1,427,499	Personnel, social charges and benefits	15	18,698	13,179	18,698	13,224	15,160
Judicial deposits and garnishments	9	4,123,584	3,068,256	4,148,355	3,909,268	3,374,490	Taxes, charges and contributions	17	52,252	30,057	75,074	488,749	433,071
Derivative transactions	36	329,652	21,465	329,652	286,278	225,935	Deferred taxes	8.2	722,634	1,216,651	722,634	1,216,651	788,954
Prepaid expenses	10	24,879	16,720	25,364	31,396	32,138	Loans, financing and lease	18.1	3,215,156	582,422	3,215,156	3,774,461	3,968,513
Other assets	11	127,567	75,587	127,793	92,308	96,049	Debentures	18.2	4,014,686	2,253,690	4,014,686	2,253,690	787,807
Investments	12	11,089,918	21,561,061	86,349	142,881	152,256	Provisions	20	4,042,789	2,457,632	4,062,410	3,453,637	2,838,028
Property, plant and equipment, net	13	18,377,905	10,020,263	18,441,647	17,604,144	17,146,521	Derivative transactions	36	24,807	3,733	24,807	26,545	78,369
Intangible assets, net	14	19,273,769	15,730,850	29,503,059	30,005,697	30,049,447	Deferred revenue	21	252,351	39,022	253,661	303,362	156,266
							Liabilities for post-retirement benefit plans	35	370,351	372,368	370,351	392,269	308,893
							Other liabilities	22	144,653	22,497	120,912	110,592	42,016

							TOTAL EQUITY		42,894,442	44,681,120	42,894,442	44,681,120	43,330,785

							EQUITY		42,894,442	44,681,120	42,894,442	44,681,120	43,325,717
							Capital	23	37,798,110	37,798,110	37,798,110	37,798,110	37,798,110
							Capital reserves	23	2,686,897	2,686,897	2,686,897	2,686,897	2,719,665
							Income reserves	23	1,287,496	1,100,000	1,287,496	1,100,000	877,322
							Bonus on acquisition of interest from non-controlling shareholders	23	(70,448)	(70,448)	(70,448)	(70,448)	(29,929)
							Other comprehensive income	23	16,849	17,792	16,849	17,792	7,520
							Additional dividend proposed	23	1,175,538	3,148,769	1,175,538	3,148,769	1,953,029
							Non-controlling interest		-	-	-	-	5,068

TOTAL ASSETS		69,615,109	57,582,441	69,541,075	70,251,092	65,488,561	TOTAL LIABILITIES AND EQUITY		69,615,109	57,582,441	69,541,075	70,251,092	65,488,561

TELEFÔNICA BRASIL S. A.
Income statements
Years ended December 31, 2013 and 2012
(In thousands of reais)

		Company		Consolidated
	Note	2013	2012	2013	2012
					restated
NET OPERATING REVENUE	24	23,189,261	12,883,541	34,721,897	33,919,656

Cost of sales	25	(12,452,247)	(7,716,553)	(17,542,167)	(16,557,444)

GROSS PROFIT		10,737,014	5,166,988	17,179,730	17,362,212

OPERATING INCOME (EXPENSES)		(6,421,993)	(122,127)	(12,302,606)	(10,150,704)
Selling expenses	26	(6,591,404)	(3,094,834)	(9,686,170)	(8,693,696)
General and administrative expenses	27	(1,313,365)	(695,824)	(2,177,891)	(2,145,308)
Equity pickup	12	1,913,508	3,995,228	(55,150)	588
Other operating income (expenses), net	28	(430,732)	(326,697)	(383,395)	687,712

OPERATING INCOME BEFORE FINANCIAL INCOME (EXPENSES)		4,315,021	5,044,861	4,877,124	7,211,508

Financial income	29	1,243,109	534,786	1,748,277	1,281,105
Financial expenses	29	(1,512,178)	(677,478)	(1,963,037)	(1,572,369)

INCOME BEFORE TAXES		4,045,952	4,902,169	4,662,364	6,920,244

Income and social contribution taxes	30	(330,007)	(448,596)	(946,419)	(2,468,063)

NET INCOME FOR THE YEAR		3,715,945	4,453,573	3,715,945	4,452,181


Attributable to
Non-controlling interests		-	-	-	(1,392)
Controlling interest		3,715,945	4,453,573	3,715,945	4,453,573

Basic and diluted earnings per common share		3.10	3.72
Basic and diluted earnings per preferred share		3.41	4.09

TELEFÔNICA BRASIL S. A.
Statements of changes in equity
Years ended December 31, 2013 and 2012
(In thousands of reais )
			Capital reserves			Income reserves
	Capital	Premium on acquisition of noncontrolling interests	Special goodwill reserve	Other	Treasury stock	Legal reserve	Tax incentive reserve	Retained earnings	Additional dividend proposed	Other comprehensive income	Company's equity	Noncontrolling interests	Total equity

Balances at December 31, 2011	37,798,110	(29,929)	63,074	2,735,930	(79,339)	877,322	-	-	1,953,029	7,520	43,325,717	5,068	43,330,785

Additional dividend proposed for 2011	-	-	-	-	-	-	-	-	(1,953,029)	-	(1,953,029)	-	(1,953,029)
Unclaimed dividend and interest on equity	-	-	-	-	-	-	-	89,692	-	-	89,692	-	89,692
Other changes	-	-	-	-	-	-	-	(3,240)	-	-	(3,240)	(23)	(3,263)
Repurchase of shares	-	-	-	-	(32,768)	-	-	-	-	-	(32,768)	-	(32,768)
Non-controlling interests	-	(40,519)	-	-	-	-	-	-	-	-	(40,519)	(3,653)	(44,172)
Other comprehensive income	-	-	-	-	-	-	-	(46,056)	-	10,272	(35,784)	-	(35,784)
Net income for the year	-	-	-	-	-	-	-	4,453,573	-	-	4,453,573	(1,392)	4,452,181
Allocation of income:
Legal reserve	-	-	-	-	-	222,678	-	(222,678)	-	-	-	-	-
Interim dividend	-	-	-	-	-	-	-	(1,122,522)	-	-	(1,122,522)	-	(1,122,522)
Additional dividend proposed	-	-	-	-	-	-	-	(3,148,769)	3,148,769	-	-	-	-

Balances at December 31, 2012	37,798,110	(70,448)	63,074	2,735,930	(112,107)	1,100,000	-	-	3,148,769	17,792	44,681,120	-	44,681,120

Additional dividend proposed for 2012	-	-	-	-	-	-	-	-	(3,148,769)	-	(3,148,769)	-	(3,148,769)
Unclaimed dividend and interest on equity	-	-	-	-	-	-	-	116,825	-	-	116,825	-	116,825
DIPJ adjustment - Tax incentives	-	-	-	-	-	-	1,699	(1,699)	-	-	-	-	-
Other comprehensive income	-	-	-	-	-	-	-	14,264	-	(943)	13,321	-	13,321
Net income for the year	-	-	-	-	-	-	-	3,715,945	-	-	3,715,945	-	3,715,945
Allocation of income:
Legal reserve	-	-	-	-	-	185,797	-	(185,797)	-	-	-	-	-
Interim interest on equity	-	-	-	-	-	-	-	(1,738,000)	-	-	(1,738,000)	-	(1,738,000)
Interim dividend	-	-	-	-	-	-	-	(746,000)	-	-	(746,000)	-	(746,000)
Additional dividend proposed	-	-	-	-	-	-	-	(1,175,538)	1,175,538	-	-	-	-

Balances at December 31, 2013	37,798,110	(70,448)	63,074	2,735,930	(112,107)	1,285,797	1,699	-	1,175,538	16,849	42,894,442	-	42,894,442

Outstanding shares (in thousands)													1,123,269
VPA - Net book value of Company's shares													38.19

TELEFÔNICA BRASIL S. A.
Cash flow statements
Years ended December 31, 2013 and 2012
(In thousands of reais )

	Company		Consolidated
	2013	2012	2013	2012
Cash generated by operating activities				restated

Income before taxes	4,045,952	4,902,169	4,662,364	6,920,244

Items not affecting cash

Expenses (revenues) not representing changes in cash	4,363,283	(648,026)	8,440,826	6,147,922
Depreciation and amortization	4,135,668	2,634,616	5,643,310	5,491,776
Foreign exchange (gains) losses on loans	70,612	6,815	98,105	(1,254)
Monetary (gains) losses	135,624	(12,493)	142,289	51,860
Equity pickup	(1,913,508)	(3,995,228)	55,150	(588)
Losses on write-off/sale of goods	(46,235)	(10,747)	(122,598)	(1,049,014)
Provision for impairment - accounts receivable	480,373	267,453	741,274	654,273
Provision (reversal) of trade accounts payable	498,835	(148,914)	579,225	(73,645)
Provision (Write-offs and reversals of) provision for impairment - inventories	(14,728)	(4,351)	(5,901)	791
Pension plans and other post-employment benefits	27,106	9,906	26,986	(3,244)
Provisions for tax, labor, civil and regulatory contingencies	493,965	336,677	660,771	514,840
Interest expense	489,145	274,047	596,292	560,885
Provision for (reversal of) divestiture	3,268	(195)	19,437	(7,854)
Provisions for customer loyalty program	2,154	-	8,915	14,026
Other	1,004	(5,612)	(2,429)	(4,930)

(Increase) decrease in operating assets:	(710,357)	777,537	(1,673,802)	(239,769)
Trade accounts receivable	(870,569)	(131,541)	(1,160,903)	(1,069,335)
Inventories	15,997	11,784	(111,905)	83,122
Taxes recoverable	(75,609)	771,854	(399,105)	589,745
Other current assets	325,239	100,937	37,703	116,129
Other noncurrent assets	(105,415)	24,503	(39,592)	40,570

Increase (decrease) in operating liabilities:	(1,102,498)	(787,012)	(1,853,108)	(2,774,400)
Personnel, social charges and benefits	16,629	(38,658)	20,625	(79,275)
Trade accounts payable	(522,289)	(166,024)	(490,538)	(614,237)
Taxes, charges and contributions	229,493	(87,935)	487,854	134,595
Interest paid	(501,335)	(221,609)	(625,624)	(447,712)
Income and social contribution taxes paid	-	(9,483)	(868,395)	(1,480,205)
Other current liabilities	(343,670)	(226,518)	(341,427)	(219,415)
Other noncurrent liabilities	18,674	(36,785)	(35,603)	(68,151)
Total cash generated by operating activities	6,596,380	4,244,668	9,576,280	10,053,997

Cash generated by (used in) investing activities

Future capital contribution in subsidiaries	(85,250)	(96,607)	-	-
Additions to PP&E and intangible assets (net of donations)	(3,814,802)	(2,051,106)	(5,837,172)	(4,546,663)
Cash received from sale of PP&E items	47,437	40,628	436,386	1,136,633
Cash received from divestitures	-	7,551	-	7,551
Redemption of (investments in) investments in guarantee	267,220	-	22,485	-
Redemption of (increase in) judicial deposits	(67,098)	(101,725)	(168,075)	(326,577)
Dividend and interest on equity received	1,323,026	2,647,353	2,577	8,217
Effect of cash and cash equivalents due to merger/split	3,371,178	-	-	-
Total cash generated by (used in) investing activities	1,041,711	446,094	(5,543,799)	(3,720,839)

Cash used in (generated by) financing activities

Payment of loans, financing and debentures	(2,111,360)	(858,201)	(2,336,023)	(1,288,691)
Loans and debetures raised	2,211,138	2,000,000	2,229,134	2,815,825
Payment net of derivative agreements	29,956	(9,244)	20,667	(45,413)
Payment for reverse split of shares	(289)	-	(289)	-
Dividend and interest on equity paid	(4,535,519)	(3,493,997)	(4,535,519)	(3,493,997)
Acquisition of non-controlling interest	-	(44,172)	-	(44,172)
Repurchase of treasury stock	-	(32,768)	-	(32,768)
Total cash used in (generated by) financing activities	(4,406,074)	(2,438,382)	(4,622,030)	(2,089,216)

Increase (decrease) in cash and cash equivalents	3,232,017	2,252,380	(589,549)	4,243,942

Cash and cash equivalents at beginning of year	3,079,282	826,902	7,133,485	2,889,543
Cash and cash equivalent at end of year	6,311,299	3,079,282	6,543,936	7,133,485

Changes in cash and cash equivalents for the year	3,232,017	2,252,380	(589,549)	4,243,942

TELEFÔNICA BRASIL S. A.
Statements of comprehensive income
Years ended December 31, 2013 and 2012
(In thousands of reais)

	Company		Consolidated
	2013	2012	2013	2012
				restated
Net income for the year	3,715,945	4,453,573	3,715,945	4,452,181

Unrealized losses on investments available for sale	(13,466)	(5,536)	(13,466)	(5,536)
Taxes	4,578	1,882	4,578	1,882
	(8,888)	(3,654)	(8,888)	(3,654)

Cumulative translation adjustments - operations in foreign currency	11,525	5,731	11,525	5,731

Other comprehensive income to be reclassified to gains (losses) for subsequent periods	2,637	2,077	2,637	2,077


Actuarial gains (losses) and limitation effect of the assets of surplus plans	18,993	(83,309)	21,612	(69,782)
Taxes	(6,458)	28,325	(7,348)	23,726
	12,535	(54,984)	14,264	(46,056)

Gains (losses) - derivative transactions	(5,424)	-	(5,424)	12,416
Taxes	1,844	-	1,844	(4,221)
	(3,580)	-	(3,580)	8,195

Interest in comprehensive income of subsidiaries	1,729	17,123	-	-

Other comprehensive income not to be reclassified to gains (losses) for subsequent periods	10,684	(37,861)	10,684	(37,861)

Comprehensive income for the year, net of taxes	3,729,266	4,417,789	3,729,266	4,416,397


Attributable to:
Non-controlling interests	-	-	-	(1,392)
Controlling interest	3,729,266	4,417,789	3,729,266	4,417,789

TELEFÔNICA BRASIL S. A.
Statements of value added
Years ended December 31, 2013 and 2012
(In thousands of reais )

	Company		Consolidated
	2013	2012	2013	2012
				restated
Revenues	30,969,784	17,204,211	46,970,960	46,210,727
Sales	31,019,867	17,146,952	47,095,810	46,066,465
Other revenues	430,290	324,712	616,424	798,535
Provision for impairment - accounts receivable	(480,373)	(267,453)	(741,274)	(654,273)

Inputs acquired from third parties	(12,710,787)	(7,559,445)	(18,027,763)	(15,693,801)
Cost of sales and resales	(7,815,422)	(5,328,483)	(10,714,033)	(9,956,264)
Materials, electric energy, outsourced services and other	(4,949,919)	(2,297,993)	(7,433,734)	(6,837,558)
Loss/recovery of asset values	54,554	67,031	120,004	1,100,021

Gross value added	18,258,997	9,644,766	28,943,197	30,516,926

Retentions	(4,135,668)	(2,634,616)	(5,643,310)	(5,491,776)
Depreciation and amortization	(4,135,668)	(2,634,616)	(5,643,310)	(5,491,776)

Net value added generated	14,123,329	7,010,150	23,299,887	25,025,150

Value added received in transfer	3,156,617	4,530,014	1,693,127	1,281,692
Equity pickup	1,913,508	3,995,228	(55,150)	588
Financial income	1,243,109	534,786	1,748,277	1,281,104

Total value added to be distributed	17,279,946	11,540,164	24,993,014	26,306,842

Distribution of value added	(17,279,946)	(11,540,164)	(24,993,014)	(26,306,842)

Personnel, social charges and benefits	(1,572,734)	(860,657)	(2,334,734)	(2,184,470)
Direct compensation	(1,028,607)	(588,540)	(1,498,143)	(1,467,379)
Benefits	(439,614)	(203,092)	(698,907)	(589,334)
FGTS	(104,513)	(69,025)	(137,684)	(127,757)
Taxes, charges and contributions	(8,649,666)	(4,851,019)	(14,496,157)	(15,929,169)
Federal	(2,663,044)	(1,556,796)	(4,849,278)	(6,368,854)
State	(5,924,082)	(3,235,821)	(9,519,257)	(9,462,721)
Municipal	(62,540)	(58,402)	(127,622)	(97,594)
Debt remuneration	(2,605,080)	(811,014)	(3,615,099)	(2,982,774)
Interest	(1,486,003)	(633,515)	(1,934,369)	(1,527,077)
Rental	(1,119,077)	(177,499)	(1,680,730)	(1,455,697)
Equity remuneration	(3,715,945)	(4,453,573)	(3,715,945)	(4,452,181)
Interest on equity	(1,738,000)	-	(1,738,000)	-
Dividend	(746,000)	(1,122,522)	(746,000)	(1,122,522)
Retained profit	(1,231,945)	(3,331,051)	(1,231,945)	(3,331,051)
Non-controlling interests	-	-	-	1,392
Other	(736,521)	(563,901)	(831,079)	(758,248)
Provisions for tax, labor, civil and regulatory contingencies	(736,521)	(563,901)	(831,079)	(758,248)

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2013 and 2012

(In thousands of reais)

1. OPERATIONS

a. Background information

Telefônica Brasil S.A. (Company or Telefônica Brasil) is a publicly-traded corporation operating in telecommunication services and in the performance of activities that are necessary or useful in the rendering of such services in conformity with the concessions, authorizations and permits it has been or shall be granted. The Company, headquartered at Avenida Engenheiro Luiz Carlos Berrini, nº 1376, in the city of São Paulo, State of São Paulo, Brazil, is a member of Telefonica Group (Group), the telecommunications industry leader in Spain, also being present in several European and Latin American countries. At December 31, 2013 and 2012, Telefónica S.A., holding company of the Group, held a total of73.81% direct and indirect interest in the Company, excluding treasury stock, including 91.76% common shares and 64.60% preferred shares.

b. Corporate restructuring

In order to streamline the Company’s organizational structure, to rationalize the services provided by its subsidiaries and to concentrate service provision into two operating entities, namely the Company and its wholly-owned subsidiary (Telefônica Data S.A., TData or subsidiary), on March 15, 2012, the Company filed with the Brazilian National Telecommunications Agency (ANATEL) a request for previous approval of corporate restructuring, which became legally feasible due to legislation changes applicable to Fixed Switched Telephone Service (STFC) operators through Law No. 12485.

This corporate restructuring process was approved by ANATEL under Act No. 3043, of May 27, 2013, as published in the Federal Official Gazette (DOU) of May 29, 2013, subject to the conditions thereunder.

The Board of Directors’ meeting of June 11, 2013 approved the terms and conditions of the corporate restructuring process involving the Company’s wholly-owned subsidiaries and subsidiaries.

The corporate restructuring included spin-offs and mergers of subsidiaries and of companies directly or indirectly controlled by the Company, so that the economic activities other than telecommunications services, including the provision of Value Added Services as defined in article 61 of the General Telecommunications Law (LGT) (with such activities being jointly and generally referred to as SVAs), provided by the various wholly-owned subsidiaries/subsidiaries were concentrated in TData and the telecommunication services were consolidated by the Company.

All of the spin-offs or split-ups, as the case may be, and the merger of the net assets of the companies involved in the restructuring process took place on the same date and had the same base date (April 30, 2013), as follows: the Company merged (i) the net assets of TData, arising from its spin-off, corresponding to the activities related to the provision of service of Multimedia Communication Service (SCM); (ii) the net assets of Vivo S.A. (Vivo), arising from its split-up, corresponding to the use of Personal Communication Services (SMP), Multimedia Communication Services (SCM) and STFC in local, domestic and international long distance calls in regions I and II of the General Service Concession Plan (PGO); (iii) the net assets of ATelecom S.A. (ATelecom), arising from its split-up, corresponding to the activities related to the provision of Conditional Access Audiovisual Services (SEAC) (through DTH technology) and SCM; and (iv) Telefônica Sistema de Televisão S.A. (TST), which concentrated the activities related to the provision of SEAC and SCM services before its merger into the Company.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2013 and 2012

(In thousands of reais)

The organization chart before the corporate restructuring is summarized as follows:

Please find below a brief description of spin-offs and mergers of companies involved in the Company’s corporate restructuring process.

Merger of Lemontree Participações S.A. (Lemontree), GTR-T Participações e Empreendimentos S.A. (GTR-T), Ajato Telecomunicações Ltda (Ajato), Comercial Cabo TV São Paulo S.A. (CaTV) and TVA Sul Paraná S.A. (TVA) pela TST: Immediately before the merger of TST into the Company, yet on the same date, TST merged its subsidiary Ajato and the Company's wholly-owned subsidiaries Lemontree and GTR-T as well as their related subsidiaries Sul Paraná and CaTV. These entities were valued under the provisions of article 227 of Law No. 6404/76, based on their respective book values as at April 30, 2013, as ratified by the general meeting held by TST. Merger thereof resulted in a R$102,512 increase in TST capital, under the terms of the Merger Protocol of these entities and of TST. After the merger into TST of Lemontree, GTR-T, Ajato, CaTV and Sul Paraná ceased to exist. Except for the Company and TST, aforementioned companies were wholly-owned by T Brasil; therefore, the merger of these companies did not result in any refund to or protection of noncontrolling shareholders of the companies involved.

Merger of TST into the Company: TST was valued under the provisions of article 227 of Law No. 6404/76, based on its respective book value as at April 30, 2013. Considering the merger of Lemontree, GTR-T, Ajato, CaTV and Sul Paraná into TST immediately before the merger of TST into the Company, the total amount of TST net assets (corresponding to the sum of net assets of TST and of the companies merged into it) merged by the Company totaled R$226,106.

Merger of TData net assets: The net assets of TData related to SCM services were spun off and merged into T Brasil, in order to concentrate in its equity the net assets related to SVAs. The amount of TData net assets merged by the Company was valued under the terms of article 227 of Law No. 6404/76, based on its respective book value at April 30, 2013, as ratified by the Company’s general meeting. TData spun-off net assets totaled R$34,724.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2013 and 2012

(In thousands of reais)

Merger of Vivo net assets: Vivo was split up in order to segregate the operation of SMP, SCM and STFC activities in local, domestic and international long distance calls in regions I and II of PGO, with the related net assets being merged by the Company. Value-added services (SVAs) and other non-telecommunication services were merged into TData and Vivo ceased to exist. The amount of Vivo net assets merged by the Company was valued under the terms of article 227 of Law No. 6404/76, based on its respective book value at April 30, 2013, as ratified by the Company’s general meeting. These net assets totaled R$10,228,352.

Merger of ATelecom net assets: ATelecom was split up in order to segregate the net assets related to value-added services provided by ATelecom, which were merged into TData. The net assets of ATelecom’s remaining activities were merged into the Company and ATelecom ceased to exist. The amount of ATelecom net assets merged by the Company was valued under the terms of article 227 of Law No. 6404/76, based on its respective book value at April 30, 2013, as ratified by the Company’s general meeting. These net assets totaled R$348,624.

The merger of companies and net assets previously described did not result in any capital increase or issue of new Company shares; accordingly, the corporate restructuring did not result in any changes in interests currently held by Company shareholders.

There is no question of replacing shares of noncontrolling shareholders of the spun-off companies with shares of the merging company, since the Company was, upon the merger of net assets and/or companies, as the case may be, the sole shareholder of the companies spun off/ merged. Accordingly, an equity valuation report at market price was not prepared for calculating the noncontrolling share replacement ratio as defined in article 264 of Law No. 6404/76 and item VI, paragraph 1, article 2 of CVM Ruling No. 319/99, based on recent understandings expressed by the Brazilian Securities and Exchange Commission (CVM) regarding consultations in connection with similar restructuring processes and based on CVM Rule No. 559, of November 18, 2008.

The merger of entities and spun-off amounts previously described did not interrupt the operations and telecommunication services provided to their customers, and such services were entirely succeeded by the Company.

Company General Shareholders’ Meeting held on July 1, 2013 approved aforementioned corporate restructuring and the organization chart is now as follows:

The restructuring has been accounted for as a reorganization of entities under common control without any substantive change to the equity value of the Company, since all of the entities involved were wholly-owned immediately before and immediately after the restructuring. Accordingly, the restructuring was recorded at the book values of the entities involved. However, as a result of the restructuring, the Company recognized a tax benefit and corresponding deferred tax asset for R$ 319.996, relating to certain tax attributes that were not expected to be realized by certain of the entities prior to the restructuring.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2013 and 2012

(In thousands of reais)

c. Operations

The Company is primarily engaged in the rendering of land-line telephone and data services in the state of São Paulo, under Fixed Switched Telephone Service Concession Arrangement (STFC) and Multimedia Communication Service (SCM) authorizations, respectively. Also, the Company is authorized to render STFC services in Regions I and II of the General Service Concession Plan (PGO/2008) and other telecommunications services, such as SCM (data communication, including broadband internet), SMP (Personal Communication Services) and SEAC (Conditional Access Audiovisual Services) (especially by means of DTH and cable technologies).

Service concessions and authorizations are granted by Brazil's Telecommunications Regulatory Agency (ANATEL), under the terms of Law No. 9472, of July 16, 1997 – General Telecommunications Law (“Lei Geral das Telecomunicações” - LGT), amended by Laws No. 9986, of July 18, 2000 and No. 12485, of September 12, 2011. Operation of such concessions and authorizations is subject to supplementary regulations and plans issued.

c.1) STFC service concession arrangement

The Company is the grantee on an STFC concession to render land-line services in the local network and national long distance calls originated in sector 31 of region III, which comprises the state of São Paulo (except for cities within sector 33), as established in the General Service Concession Plan (PGO/2008).

The Company’s current STFC service concession arrangement is effective until December 31, 2025, and may be subject to reviews on December 31, 2015 and December 31, 2020.

In accordance with the service concession arrangement, every two years, during the arrangement’s 20-year term, the Company shall pay a fee equivalent to 2% (two percent) of its prior-year STFC revenue, net of applicable taxes and social contributions.

c.2) Authorizations and frequencies related to mobile telephone services

Frequency authorizations granted by ANATEL for mobile telephone services may be renewed only once, over a 15-year period, through payment, every two years after the first renewal, of fees equivalent to 2% (two percent) of the Company’s prior-year revenue, net of taxes and social contributions, related to the application of the Basic and Alternative Plans of Service.

In August 2013, the Company and ANATEL executed the authorization terms for the nonexclusive use of radiofrequency blocks, on a primary basis, as a result of the realignment of the “L” band in sub-bands from 1,975 MHz to 1,980 MHz for the mobile station transmission and from 2,165 MHz to 2,170 MHz for nodal station transmission.

These authorizations were issued for the remaining terms established under item 1.9 of Public Notice No. 002/2007/SPV-Anatel, of October 23, 2007, for valuable consideration, associated to the authorization for the rendering of SMP services, amendment No. 01 to authorization No. 078/2012/PVCP/SPV-Anatel of August 14, 2013, published in the Federal Official Gazette of August 16, 2013, effective until April 29, 2023, and may be extended only once, over a 15-year period. Effectiveness of these authorizations is subject to the compliance with the requirements defined in the agreements.

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2013 and 2012

(In thousands of reais)

The Company paid R$451,121 for the aforementioned authorizations, which were recorded as licenses under intangible assets (Note 14) and will be amortized over the remaining periods of the licenses.

Of the lots offered in the sale auctions of national 2.5 GHz bandwidths, linked to the 450 MHz bandwidth, conducted by ANATEL on June 12 and 13, 2012, Vivo (merged into the Company on July 1, 2013) was the winning bidder of lot 3, in accordance with public notice No. 004/2012/PVCP/SPV-Anatel for the sale of 4G broadband. The price offered for lot 3 was R$1,050,000.

On October 11, 2012, through Act No. 5907, ANATEL’s Board decided to approve the nonexclusive use of radiofrequency blocks, on a primary basis, in sub-bands 2550 through 2570 MHz / 2670 through 2690 MHz, in connection with the authorizations to operate the Personal Communications Service (SMP) granted to Vivo (merged into the Company on July 1, 2013), as well as of other radiofrequencies in the 2.5 GHz band by the respective winning bidders of the lots mentioned in the bid. The authorization terms of the above-mentioned radiofrequency bands were executed on October 16, 2012 and published in the Federal Official Gazette (DOU) on October 18, 2012.

Accordingly, upon the actual awarding of such lot, Vivo (merged into the Company on July 1, 2013) increased its service provision capacity powered by 4G technology nationwide and has since then operated in the 2.5GHz bandwidth, with 20+20 MHz band. In addition to the 2.5GHz bandwidth, the acquired lot includes a 450 MHz bandwidth for rural areas in the Brazilian states of Alagoas, Ceará, Minas Gerais, Paraíba, Pernambuco, Piauí, Rio Grande do Norte, São Paulo and Sergipe.

In the fourth quarter of 2012, the total amount of R$1,050,000 was adjusted in accordance with the remaining life of licenses and recorded as licenses in intangible assets (Note 14).

The Company operates SMP services, in accordance with the authorizations given as follows:

Telefônica Brasil S. A.

NOTES TO FINANCIAL STATEMENTS

Years ended December 31, 2013 and 2012

(In thousands of reais)

Operation Area

License Expiration

450 MHz

800 MHz (1)

900 MHz

1800 MHz

1900 MHz (2)

2100 MHz (3)

2.5 GHz

Region 1

Rio de Janeiro

Bandwidth A – 11/29/20

Extension 1 - 04/30/23

Extensions 9 and 10 - 04/30/23

Bandwidth L - 04/30/23

Bandwidth J - 04/30/23

Bandwidth X - 10/18/27

Espírito Santo

Bandwidth A - 11/30/23

Extension 1 - 04/30/23

Extensions 9 and 10 - 04/30/23

Bandwidth L - 04/30/23

Bandwidth J - 04/30/23

Bandwidth X - 10/18/27

Amazonas, Roraima, Amapá, Pará and Maranhão

Bandwidth B - 11/29/28

Extension 2 - 04/30/23

Extensions 7, 9 and 10 - 04/30/23

Bandwidth J - 04/30/23

Bandwidth X - 10/18/27

Minas Gerais (except Triângulo Mineiro)

10/18/27

Bandwidth A - 04/29/23

Extension 2 - 04/30/23

Extensions 11 to 14 - 04/30/23

Bandwidth L - 04/30/23

Bandwidth J - 04/30/23

Bandwidth X - 10/18/27

Minas Gerais (Triângulo Mineiro)

10/18/27

Bandwidth E -04/28/20

Bandwidth E - 04/28/20

Bandwidth L - 04/30/23

Bandwidth J - 04/30/23

Bandwidth X - 10/18/27

Bahia

Bandwidth A - 06/29/23

Extension 1 - 04/30/23

Extensions 9 and 10 - 04/30/23