CETIP S.A. Balcão Organizado de Ativos e Derivativos Quarterly information at March 31, 2011

Transcription

1 (A free translation of the original in Portuguese) CETIP S.A. Balcão Quarterly information at March 31, 2011

2 Quarterly information at March 31, 2011 Contents Comments on performance 3-10 Independent auditors review report Balance sheets 13 Statements of income 14 Statements of comprehensive income 15 Statements of changes in shareholders equity 16 Statements of cash flows 17 Statements of value added 18 Notes to the quarterly information

3 Comments on performance Dear Shareholders, We submit to your appreciation the Quarterly Information of CETIP S.A. Balcão Organizado de Ativos e Derivativos for the quarter ended on March 31, 2011, together with the review report of the independent auditors. All the Company s operating and financial information below, except when otherwise indicated, are presented in million of reais based on the individual financial statements prepared according to the generally accepted accounting principles in Brazil established by the Accounting Pronouncement Committee (CPC) and the consolidated financial statements were prepared according to the CPCs and the International Financial Reporting Standards (IFRS) established by the International Accounting Standards Board. Additional information regarding the Company s operating and financial performance are available on the internet at ( Highlights of the Period Dividends Payment On March 29, 2011 the Board of Directors approved the additional distribution of R$11.3 million as dividends relative to the 2010 fiscal year. On April 29, 2011 the Annual General Meeting ratified the distribution of these dividends in the amount of R$ per share. Payment to shareholders with rights to receive dividends was made on May 11, Brazil Index IBrX 100 On May 2, 2011, the new theoretical portfolio of the Brazil Index - IBrX 100 of the BM&FBOVESPA became effective through August In the last review of the index, CETIP was included with a share of 0.624%. To be included on the index, CETIP's stock cumulatively met the following criteria: (i) being among the 100 most liquid on the exchange in the 12 months prior to the review and (ii) has been traded on at least 70% of the trading days in the 12 months prior to the formation of the portfolio. Mid-Large Cap Index - MLCX A new portfolio of the MLCX Index, effective as of May of 2011, includes CETIP, with a relative share of the stocks in the portfolio of 0.649%. The stocks on the index are selected for their liquidity and are weighted by the market value of their shares in free float. Capitalization of a portion of the special goodwill reserve and issue of subscription rights In the meeting held on May 11, 2011, the Board of Directors authorized a capital increase through the capitalization of a portion of the special goodwill reserve from the merger as per Brazilian Securities and Exchange Commission (CVM) Instruction no. 319/99 as detailed below, 3

4 to be homologated after the exercise of subscription rights and subscription of any remaining shares. a) R$4.0 million with the issue of 183,975 common shares to Advent Securities. As established in the Protocol and Justification of Merger, the number of shares to be issued to Advent Securities was established based on the amount corresponding to 30% of the tax credit earned in the 2010 fiscal year divided by the average weighted price of CETIP S.A. s shares in the twenty-one business days prior to the close of the fiscal year - R$ b) R$9.4 million without issue of new shares (amount corresponding to 70% of the tax benefit earned in the 2010 fiscal year) c) due to the capital increase with issue of shares to Advent Securities and to preserve the preference right guaranteed to the Company s other shareholders, the issue of subscription rights to the remaining shareholders was approved, based on the shareholding position on May 16, 2010 at the ratio of new shares to every 100 shares held (total potential issue of 1,659,116 new shares) at a subscription price of R$21.81, representing a capital increase of R$36,2 million. The shares will be traded ex-rights as of May 17, 2011 and subscription rights will be valid for 30 days. Summary A slowdown in the current economic growth cycle in Brazil has been perceived since the last quarters of The slower projected growth rates are related to the increase in the reserve requirement, which, at the end of 2010, took approximately R$60 billion out of circulation in an attempt to restrict consumption, as well as to the increased interest rates, which were up from 10.75% to 11.25% per year in January to 11.75% in March. Even with the rate of expansion of credit operations in the financial system reduced by half in the first quarter of 2011, CETIP saw growth in its volumes registered and under custody. The main instruments registered grew on the order of 34% for Interbank Deposits (DI) and 77% for Bank Deposit Certificates (CDB). Auto sales in Brazil also performed excellently in the quarter, up 13% in the annual comparison with approximately 4 million units sold, with auto financing levels remaining practically stable with a 1% increase. 4

5 Financial Results Analysis Operating revenues The Company s operating revenue reached R$196.9 million in 1Q11 (R$173.1 million of net revenue), with CETIP accounting for 58% of the total and GRV 42%. CETIP s revenues derive from providing registry, custody, transaction, monthly utilization and other services, totaling R$114.8 million in the first quarter of 2011, of which 24% came from custody, 26% from monthly utilization, 21% from registration, 16% from transactions and 13% from other revenues. Revenue from GRV was R$82.1 million, with 55% from SNG Vehicle (Lien), 33% from SNG Contracts, 12% from Selling information and 1%, other revenues and services. Revenue breakdown_cetip 1Q11 Revenue breakdown_grv 1Q11 Other Revenues 13% Registration 21% Selling Other Revenues information 1% 12% Monthly Utilization 26% Custody 24% SNG Contracts 33% SNG Veículos 55% Transactions 16% CETIP Registration Revenue R$23.6 million, chiefly due to (i) volume of DI instruments and (ii) registration of CDBs issued by the financial system. It is worth noting that revenues from preregistration services, introduced in the second quarter of 2010, positively contributed to revenue from this segment. Custody Revenue R$27.7 million due to the increased average volume under custody, primarily related to debentures issues and the increased importance of the fund quota segment in the market. It should be pointed out that the significant growth in volume from Letras Financeiras positively contributed to the total custody revenue. The deposited outstanding balance of this instrument grew from approximately R$1 billion in March of 2010 to around R$54 billion in March of Transaction Revenue R$18.0 million due to the growth in the volume of transactions processed relative to assets under custody. Considering that this revenue is linked to processing events associated with assets under custody, the growth in the number of transactions is largely explains the growth in this revenue line. Monthly Utilization Revenue R$30.4 million, mainly due to the number of transactions with assets under custody and the increased number of CETIP participants. The expansion in the average margin as a result of the reorganization of segment classes according to the user profile with decreasing average margin as a function of volume, also contributed to this result. Other Revenue - R$15.1 million, mainly due to the increase in the number of electronic funds transfers (EFTs) processed, increasing revenue from services provided to the Interbank Payment Chamber (CIP). This increase was driven by the reduction of the minimum amount necessary to 5

6 make an EFT from R$5 thousand to R$3 thousand announced by the Brazilian Federation of Banks Febraban in April of The graphs below show some historical performance data of CETIP's main assets: DI - Registration Volume (R$ billion) CDB - Registration Volume (R$ billion) %: +34% 1,091 %: +77% Q10 1Q11 1Q10 1Q11 Swap - Number of Registrations ('000) %: +2% 48 Debentures - Average Custody Volume (R$ billion) %: +19% Q10 1Q11 1Q10 1Q11 Investment fund-quota - Average Custody Volume (R$ billion) %: +22% Letra Financeira - Outstanding balance (R$ billiom) %: +38% Q10 1Q11 Jan-11 Feb-11 Mar-11 GRV SNG Vehicle the electronic processing and custody system for liens of financial institutions on vehicles contributed with the amount of R$44.8 million to total operating revenue. SNG Contracts platform for custody of credit contracts information totaled R$27.2 million in revenue. Selling Information reached R$9.5 million, contributing with 12% of total gross revenue from GRV. The table below shows some historical performance data for GRV: 6

7 (million) Volume Change (%) SNG Vehicle 1Q11 1Q10 1Q11/1Q10 Number of vehicles sold % New % Used % Number of Vehicles Financed % New % Used % % Vehicles financed / vehicles sold 45% 50% - GRV Contracts Contracts Additions (Units) % % Contracts additions / vehicles financed 68% 29% - Operating expenses Operating expenses totaled R$67.5 million in 1Q11, mainly due to: (i) personnel expenses (R$24.0 million) given the increased number of employees as a result of the acquisition of GRV in December of 2011, representing 36% of operating expenses; (ii) third-party services (R$11.7 million), representing 17% of the total; and (iii) general and administrative expenses (R$5.7 million), representing 8% of total operating expenses. Depreciation and amortization expenses totaled R$16.1 million, primarily due to amortization of intangible assets (contractual relations) registered due to the acquisition of GRV. Operating expenses were diluted over net revenue due the strong performance of the Company s revenue. Other 3% General 8% Outsourced Services 17% Personnel 36% Note: Personnel Expenses include expenses with Board Members remuneration. 7

8 Income Tax and Social Contribution The effective Income Tax and Social Contribution Rate was 37% in the first quarter of Tax amortization of goodwill for expected future profitability from the merger of Advent Depository and GRV Solutions represented a tax savings of approximately R$17.0 million in 1Q11. Net Income and EBITDA The Company s net income reached R$40.0 million in 1Q11 with a net margin at 23.1% due to the Company s good performance in the first quarter of 2011 and the acquisition of GRV in December of The Company s significant revenue generation positively contributed to the expansion of adjusted EBITDA 1, which reached R$128.9 million in 1Q11. Adjusted EBITDA margin was 74.5% over net revenue. CAPEX In the first three months of 2011, CETIP s CAPEX represented 2.3% of net revenue, or R$3.9 million. Some of the main investments made in period that contributed to the increase in our CAPEX are: (i) expansion of servers and adjustment of our processing capacity; and (ii) development of new products. Funds for these investments originate in the Company s operating cash flow, without the need for third-party resources for such investments. Other Financial Highlights The cash flow from operating activities reached R$45.7 million in 1Q11, including the R$37.3 million allocated to marketable securities. Of the total generated by operating activities, R$3.9 million as allocated to CAPEX and R$38.7 million to financing activities, such that of this total, 72% was allocated to the payment of interest on fundraising (debentures) carried out for the acquisition of GRV and 26% to the payment of interest on equity by the Company in the period. The Company s cash flow is primarily derived from its operating activities. Cash needs are chiefly related to investments in system development, acquisition of fixed assets for technological upgrades and servicing the debt contracted for the GRV acquisition. 1 Amount adjusted by expenses with stock-based compensation without cash disbursement in the amount of R$7.3 million. EBITDA (not adjusted) would have been R$121.6 million in 1Q11. Adjusted EBITDA is a non-accounting measure prepared by our Company, reconciled with our financial statements, complying with the provisions of the Oficio Circular CVM no. 01/2007. Adjusted EBITDA is not a measure recognized by Brazilian GAAP. It does not have a standard meaning and may not be comparable to measures with the same nomenclature provided by other companies. Our Company discloses Adjusted EBITDA because it uses the measure to gauge its performance. 8

9 Mar-10 Apr-10 Apr-10 May-10 May-10 Jun-10 Jun-10 Jul-10 Jul-10 Aug-10 Aug-10 Sep-10 Sep-10 Oct-10 Oct-10 Nov-10 Nov-10 Dec-10 Dec-10 Jan-11 Jan-11 Feb-11 Feb-11 Mar-11 Mar-11 Price (R$) Volume (R$ mm) Share Performance From to March 31, 2011, the Company s shares appreciated 90%, as compared to a 3% depreciation of the Bovespa Index. From December 30, 2010 to March 31, 2011, the shares appreciated 14%, as compared to a 1% decline in the Bovespa Index. Currently, the Company s shares are included on four indexes from BM&FBOVESPA: the Mid- Large Cap (MLCX), the Brazil Index IbrX 100, the Differentiated Tag Along Index (ITAG), and the Differentiated Corporate Governance Index (ICG). CTIP3 (R$) vs. Volume (R$ million): (March 31,2010 March 31, 2011) Volume-R$mm Price-R$ Corporate Governance In R$, unless otherwise stated 1Q10 1Q11 Price at the beginning of the period Maximum Average Minimum Price at the end of the period Average daily volume (R$ million) Number of shares (thousand shares) ¹ ¹ Number of shares for the end of the period CETIP is committed to the highest standards of corporate governance. In addition to adhering to the Novo Mercado rules, CETIP maintains solid auto-regulation practices according to the provisions of CVM Instruction no. 461, which regulates the functioning of organized securities markets. Companies listed on the Novo Mercado voluntarily agree to comply with stricter rules than those of Brazilian corporate law, such as: (i) maintain only common shares in their capital stock; (ii) maintain a minimum of 25% free float; (iii) detail and include additional quarterly information; and (iv) publish annual financial statements in English based on international accounting standards. Companies join the Novo Mercado through signature of contracts between the company, its management and controlling shareholders and the BM&FBOVESPA, 9

10 in addition to adaptation of the company s bylaws to the rules contained in the Novo Mercado Listing Rules. Adhesion to the Market Arbitration Chamber The Company joined the Market Arbitration Chamber, as per the clause in its Bylaws. This body, created by the Stock Exchange, arbitrates disputes and controversies that may exist between the controlling shareholders of companies listed on the Novo Mercado and shareholders in general, managers, members of Fiscal Council and the Exchange itself. Relationship with Independent Auditors The Company s policy is governed by the principle of independence of auditors and restricts services to be provided by companies contracted for this purpose. In this sense, in the first quarter of 2011, KPMG Auditores Independentes did not provide other services unrelated to auditing to the Company, being guaranteed the provision of these services in an objective and independent manner. Management Statement As per the provisions in CVM Instruction no. 480/09, Management declares that it has discussed and reviewed the quarterly information for the quarter ended March 31, 2011 and agreed with the opinions expressed in the independent auditors review report. The Board Rio de Janeiro, May 11,

11 (A free translation of the original in Portuguese) Independent auditors review report To The Board of Directors and Shareholders of CETIP S.A. - Balcão Rio de Janeiro - RJ Introduction We have reviewed the individual and consolidated interim financial statements of Cetip S.A. Balcão for the quarter ended March 31, 2011, which comprise the balance sheet and the related statements of income, comprehensive income, changes in shareholders equity and cash flows for the quarter then ended, including the notes to the financial statements. Management is responsible for preparing the individual interim financial statements in accordance with CPC Technical Pronouncement 21 - Interim reporting and the consolidated interim financial statements in accordance with CPC 21 and IAS 34 Interim Financial Reporting, issued by the International Accounting Standards Board - IASB, and for the presentation of these interim financial statements in accordance with the standards issued by the Brazilian Securities and Exchange Commission (CVM). Our responsibility is to express a conclusion on the interim financial statements based on our review. Scope of the review We conducted our review in accordance with Brazilian and International Standard on Review of interim information (NBC TR 2410 and ISRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing, and consequently does enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion about the individual interim financial statements Based on our review, we are not aware of any fact that causes us to believe that the individual interim financial statements referred to above is not prepared, in all material respects, in accordance with CPC 21, applicable to the preparation of interim financial statements and presented in accordance with the standards issued by the Brazilian Securities and Exchange Commission - CVM. 11

12 Conclusion about the consolidated interim financial statements Based on our review, we are not aware of any fact that causes us to believe that the consolidated interim financial statements referred to above is not prepared, in all material respects, in accordance with CPC 21 and IAS 34 applicable to the preparation of interim financial statements, presented in accordance with the standards issued by the Brazilian Securities and Exchange Commission - CVM. Other matters Interim statements of value added We have also reviewed the individual and consolidated interim statements of added value (DVA) for the quarter ended March 31, 2011, the presentation of which in the individual and consolidated interim financial statements is required in accordance with the standards issued by the Brazilian Securities and Exchange Commission and considered supplementary information by the International Financial Reporting Standards (IFRS), which does not require the presentation of the Statement of Value Added. These statements were subject to the same review procedures previously described and based on our review, we are not aware of any fact that would lead us to believe that they have not been fairly stated, in all material respects, in relation to the Company s individual and consolidated interim financial statements taken as a whole. Rio de Janeiro, May 11, 2011 KPMG Auditores Independentes CRC SP /O-6 F-RJ Original version in Portuguese signed by Marco André Coelho de Almeida Accountant CRC RJ /O-0 Jubran Pereira Pinto Coelho Accountant CRC MG /O-0 S RJ 12

13 CETIP S.A. - Balcão Balance sheets In thousands of reais (A free translation of the original in Portuguese) CETIP Consolidated Consolidated Assets Notes 03/31/11 12/31/10 03/31/11 12/31/10 Liabiliaties and shareholders' equity Notes 03/31/11 12/31/10 03/31/11 12/31/10 Current Current Cash and cash equivalents Suppliers Financial investments - available and restricted Labor obligations and social charges Accounts receivable Taxes payable Recoverable taxes and contributions Income tax and social contribution Other receivables Dividends and interest on own capital payable Prepaid expenses Provision GRV acquisition costs Purchase price - deferred payments Non-current Finance lease obligations Other liabilities Long-term receivables Financial investments - available and restricted Non-current Judicial deposits Deferred income tax and social contribution 23a Prepaid expenses Provision for contingencies and legal obligations Deferred income tax and social contribution 23a Debentures issued Other receivables Purchase price - deferred payments Finance lease obligations Investments Investment in associate 9b Shareholders equity Investment in subsidiary 9a Capital 16a Other investments Capital reserves 16b Carrying value adjustments (205) (200) (205) (200) Property and equipment Revenue reserves 16c,d Retained earnings/losses Intangible assets Total assets Total liabiliaties and shareholders' equity The accompanying notes are an integral part of these quarterly information. 13

14 CETIP S.A. - Balcão Statements of income Quarters ended March 31 (A free translation of the original in Portuguese) CETIP Consolidated Notes 1Q11 1Q10 1Q11 Net revenue from services (Operating expenses)/other operating income (66.487) (25.463) (67.549) Personnel expenses (23.433) (13.636) (23.657) Share-based remuneration with no cash disbursement 25c (7.315) (2.217) (7.315) Depreciation and amortization 10 and 11 (15.322) (1.584) (16.058) Outsourced services 19 (11.646) (3.375) (11.719) General and administrative expenses 20 (5.705) (1.997) (5.734) Equipment and systems rental (268) (264) (268) Board members' compensation (374) (392) (374) Taxes and fees (2.190) (201) (2.190) IPO and restructuring expenses 21 - (1.854) - Other operating expenses (325) (9) (325) Other operating income Equity in the results of associate Financial result 22 (42.076) (42.059) Financial income Financial expenses (48.321) (9) (48.322) Income before taxation Income tax and social contribution (22.775) (15.421) (23.627) Current 23c (3.615) (12.594) (4.467) Deferred 23c (19.160) (2.827) (19.160) Net income for the period Net income per share attributable to CETIP's shareholders (expressed in R$) Basic earnings per share 0,1601 0,1245 0,1601 Diluted earnings per share 0,1572 0,1216 0,1572 The accompanying notes are an integral part of these quarterly information. 14

15 CETIP S.A. - Balcão Statements of comprehensive income Quarters ended March 31 In thousands of reais (A free translation of the original in Portuguese) CETIP Consolidated 1Q11 1Q10 1Q11 Net income for the period Other comprehensive income Fair value adjustment of available for sale financial assets (9) (9) Deferred taxes on fair value adjustment 4 (347) 4 Total other comprehensive income (5) 672 (5) Total comprehensive income for the period attributable to CETIP's shareholders The accompanying notes are an integral part of these quarterly information. 15

16 CETIP S.A. - Balcão Statements of changes in shareholders equity Quarters ended March 31 In thousands of reais (A free translation of the original in Portuguese) Carrying Revenue reserves Additional Capital value Legal Statutory Retained dividends Notes Capital reserves adjustments reserve reserve earnings/losses proposed Total At December 31, (200) Comprehensive income Net income for the period Fair value adjustment of available for sale financial assets, net of deferred taxes - - (5) (5) Total comprehensive income for the period - - (5) Transactions with owners and other movements Capital increase - stock option exercises 25c Appropriation - stock option plans 25c Total transactions with owners and other movements At March 31, (205) At December 31, (888) (1.447) Comprehensive income Net income for the period Fair value adjustment of available for sale financial assets, net of deferred taxes Total comprehensive income for the period Transactions with owners and other movements Capital increase - stock option exercises 25c Appropriation - stock option plans 25c Total transactions with owners and other movements At (216) The accompanying notes are an integral part of these quarterly information. 16

17 CETIP S.A. - Balcão Statements of cash flows Quarters ended March 31 In thousands of reais (A free translation of the original in Portuguese) CETIP Consolidated Notes 1Q11 1Q10 1Q11 Cash flows from operating activities Income before taxation Adjustments Depreciation and amortization (Profit)/loss on disposal of permanent assets Equity in the results of associate (5.687) (126) (112) Share-based remuneration with no cash disbursement Interest on financial investments held to maturity (891) (793) (891) Interest on debentures and on purchase price deferred payments Interest on finance leases Adjusted income before taxation Changes in assets and liabilities Non restricted financial investments (35.437) (21.074) (37.333) Accounts receivable (7.349) Recoverable taxes and contributions Other receivables Prepaid expenses (5.305) (5.311) Judicial deposits Suppliers (5.742) (3.183) (5.734) Labor obligations and social charges (8.298) (282) (8.499) Taxes payable (2.860) (2.883) Other liabilities Provision GRV acquisition costs (20.664) - (20.664) Provision for contingencies and legal obligations (68) 265 (68) Cash from operations Income tax and social contribution paid (9.635) (6.791) (10.449) Net cash provided by operating activities Cash flows from investing activities Acquisition of property and equipment (521) (151) (521) Acquisition of intangible assets (3.237) (3.007) (3.237) Acquisition of other invesments (200) - (200) Dividends received from subsidiary Proceeds from sale of property and equipament Net cash used in investing activities 292 (3.158) (3.885) Cash flows from financing activities Payment of interest on debentures (27.925) - (27.925) Payment of finance lease obligations (788) - (788) Proceeds from shares issued - stock option exercises Interest on own capital paid (10.096) (8.946) (10.096) Net cash used in financing activities (38.699) (8.848) (38.699) Increase/(decrease) in cash and cash equivalents (219) Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period The accompanying notes are an integral part of these quarterly information. 17

18 CETIP S.A. - Balcão Statements of value added Quarters ended March 31 In thousands of reais (A free translation of the original in Portuguese) CETIP Consolidated 1Q11 1Q10 1Q11 Income Revenue from services Other operating income Goods and services acquired from third parties (17.753) (7.244) (17.856) General and administrative expenses (5.705) (1.997) (5.734) Outsourced services (11.646) (3.375) (11.719) IPO and restructuring expenses - (1.854) - Other operating expenses (402) (18) (403) Gross value added Depreciation and amortization (15.322) (1.584) (16.058) Net value added generated by the company Value added received through transfer Equity in the results of associate Financial income Total value added to be distributed Distribution of value added Personnel Salaries Benefits Profit sharing Share-based remuneration with no cash disbursement FGTS Board members' compensation Taxes and contributions Municipal Federal Other Third party capital remuneration Interest on debentures and on purchase price deferred payments Interest on finance leases Equipment and systems rental Own capital remuneration Net income retained Value added distributed The accompanying notes are an integral part of these quarterly information. 18

19 (A free translation of the original in Portuguese) CETIP S.A. Balcão 1 Operations CETIP S.A. Balcão ("CETIP" or "Company") is a publicly traded corporation with headquarters in Rio de Janeiro, which resulted from the demutualization process of CETIP - Câmara de Custódia e Liquidação ( CETIP Associação ) occurred in CETIP administers organized over-the-counter (OTC) markets, i.e. environments for trading and registration of securities, government and corporate fixed income bonds and OTC derivatives. It is a systemically important settlement and clearinghouse, as defined by the legislation of the SPB Brazilian Payment System (Law 10,214), which performs the scriptural custody of assets and contracts, registers the transactions carried out in the OTC market, processes the financial settlement and offers to the market an electronic platform for conducting various types of online transactions, such as auctions and trading of government bonds, corporate bonds and fixed income securities. The company is Latin America s largest depository of corporate fixed income securities and the largest chamber for private assets of the Brazilian financial market. Its activities give the necessary support to the entire cycle of transactions with fixed income securities, securities and OTC derivatives. On December 29, 2010, the Company acquired the entire voting share capital of GRV Solutions S.A. ("GRV") and of its subsidiary GRV Info Technology S.A. ("GRV Info"). GRV is the leading private provider of information on liens insertions and removals, with an integrated electronic system and nationwide coverage, provider of a critical infrastructure to the vehicle financing market. GRV Acquisition On December 1 st, 2010, CETIP celebrated with the shareholders of GRV a Contract of Purchase and Sale of Shares, Merger and Other Matters ("Contract") subject to conditions precedent, by means of which were laid down the terms and conditions for the acquisition of 100% of the capital of the GRV by CETIP. The completion of the acquisition was subject to the fulfillment by the parties of certain conditions established in the Contract and subject to the approval of the shareholders of CETIP, in accordance with applicable law. The transaction was completed on December 29, 2010, date on which CETIP acquired control over GRV. The transaction involved a total value of R$ 2,000,000 for the acquisition of 100% of GRV s share capital. The transaction was implemented as follows: 19

20 a) Acquisition by CETIP, of shares representing 77.75% of the total and voting capital of GRV, for a total price of R$ 1,555,021, to be paid as follows: (i) R$ 1,000,000 disbursed in cash at the closing date of the transaction; (ii) R$ 555,000 in three equal installments, adjusted by the IGP-M index + 2.0% p.a., maturing on December 2011, December 2012 and May 2013; and b) Subsequent merger of GRV into CETIP with the delivery of: (i) R$ 445,000 represented by 23,485,202 common shares with no par value issued by CETIP, evaluated based on the volume weighted average price of CTIP3 shares over the trading sessions between October 15, 2010 and November 29, CETIP financed R$ 900,000 of the acquisition price disbursed in cash, through a public distribution with placement efforts constrained pursuant to CVM Instruction no. 476/09, of ordinary debentures, not convertible into shares, in two series of the first issuance of CETIP ("Debentures"). The funds obtained with the issuance were used to pay part of the purchase price. At the Extraordinary General Meeting held on December 29, 2010, the merger of GRV s entire shareholders equity into CETIP was approved, among other things, in accordance with terms of Protocol and Justification Instrument of Merger dated December 2, As a result of the merger of GRV into CETIP, GRV shareholders received, on December 29, 2010 (date on which the transaction was completed), 23,485,202 common shares with no par value issued by CETIP, with the share exchange ratio being the result of negotiations between the Company s management and the shareholders of the GRV, after considering the Company's studies and the opinions of its advisers. Additional information about this business combination is included in Note 8. 2 Presentation and preparation of the quarterly information These quarterly information were approved by the Company's Board of Directors on May 11, a. Basis of preparation The quarterly information have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and financial assets measured at fair value through profit or loss. 20

21 b. Consolidated quarterly information The consolidated quarterly information have been prepared and are being presented in accordance with the accounting practices adopted in Brazil, including the Technical Pronouncement CPC 21 Interim Financial Reporting issued by the Accounting Pronouncement Committee (CPC). The consolidated quarterly information have also been prepared and are being presented in accordance with IAS 34 - Interim Financial Reporting, issued by the International Accounting Standards Board IASB, as well as in accordance with the rules issued by the Brazilian Securities Commission (CVM). The consolidated quarterly information include the balances of CETIP and of its wholly-owned subsidiary, GRV Info, entity acquired in connection with the acquisition of GRV. Considering that the Company did not have any subsidiaries before the acquisition of GRV, no consolidated statements are being presented for the quarter ended March 31, c. Individual quarterly information The individual quarterly information of the parent company were prepared in accordance with the accounting practices adopted in Brazil, including the Technical Pronouncement CPC 21 Interim Financial Reporting and in accordance with the rules issued by the Brazilian Securities Commission. In the individual quarterly information, investments in subsidiaries and associates are accounted for using the equity method of accounting. In the Company s situation, the accounting practices adopted in Brazil differ from the IFRS applicable to separate financial statements only by the measurement of investments in subsidiaries and associates using the equity method of accounting, since that in accordance with IFRS those would be measured at cost or fair value. Nevertheless, there are no differences between the shareholders equity and consolidated net income presented in the consolidated quarterly information and the shareholders equity and net income presented in the individual quarterly information. Therefore, the consolidated quarterly information and the individual quarterly information are being presented in a single set of quarterly information. 21

22 d. Functional and presentation currency The consolidated and individual quarterly information are presented in Brazilian reais, which is the Company s functional currency. e. Segment information Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Executive Board that makes strategic decisions. f. Accounting estimates The preparation of individual and consolidated quarterly information in conformity with IFRS and CPCs requires management to exercise its judgment, to make estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and assumption are constantly revised. Reviews in estimates are recognized in the period in which they are made and in any future periods affected. Information about critical judgments relating to the accounting policies applied and critical estimates and assumptions that could have a significant impact in the amounts reported in the individual and consolidated quarterly information are included in the following notes: (i) Note 8 determination of the fair value of the consideration transferred and the fair value of identifiable assets and liabilities acquired in the business combination; (ii) Notes 10 and 11 determination of the estimated useful life of property and equipment and intangible assets items; (iii) Note 14 determination of provisions for contingent liabilities; (iv) Note 25c determination of the fair value of stock options granted to employees and estimate of the amount of options that will achieve vesting. 22

23 3 Summary of significant accounting policies The main accounting policies described below have been consistently applied to all the periods presented in these individual and consolidated quarterly information. a. Basis of consolidation (i) Business Combination The Company measures the goodwill as the fair value of the consideration transferred, deducting the net fair value of identifiable assets and liabilities assumed, all measured at the date of acquisition. Transaction costs other than those associated with the issuance of debt or equity, which the company incurs in relation to a business combination are recognized as expenses as they are incurred. (ii) Investment in subsidiaries Subsidiaries are all entities in which the Company has the power to determine the financial and operating policies, usually accompanied by a participation of more than half of the voting rights (voting capital). The existence and the effect of potential voting rights currently exercisable or convertible are considered when assessing whether the Company controls another entity. The subsidiaries are fully consolidated from the date on which the control is transferred to the Company. Consolidation is interrupted from the date on which control ends. (iii) Investment in associates Associates are those entities in which the Company, directly or indirectly, has significant influence over the financial and operating policies, but not control. The significant influence supposedly occurs when the company, directly or indirectly, holds between 20 and 50 per cent of the voting rights in another entity. Investments in associates are accounted for using the equity method of accounting and are initially recognized at cost. The Company s share of its associates profits or losses is recognized in the income statement, and its share of movements in reserves is recognized in reserves. The cumulative movements are adjusted against the carrying amount of the investment. The accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Company. 23

24 (iv) Transactions eliminated on consolidation Balances and inter-company transactions, and any income or expenses arising from intercompany transactions are eliminated in the consolidated quarterly information. Unrealized gains arising from transactions with companies accounted for using the equity method of accounting are eliminated against the investment in proportion to the Company s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of an impairment loss. b. Cash and cash equivalents For the purpose of the statement of cash flows, the balance of cash and cash equivalents includes cash, bank deposits and short-term investments (term of up to 3 months), with high liquidity and a negligible risk of change in value. c. Financial instruments i. Classification and measurement of financial assets The Company classifies its financial assets according to the following categories: measured at fair value through profit or loss, loans and receivables, held to maturity and available for sale. The classification depends on the purpose for which the financial assets were acquired and is determined when the asset is first recorded. ii. Financial assets measured at fair value through profit or loss The financial assets measured at fair value through profit or loss are (i) financial assets held for active and frequent trading or (ii) assets designated by the Company, when first recorded, as measurable at fair value through profit or loss. The assets held for trading are classified as current assets irrespective of their contractual maturities. Gains or losses arising from the fair value variations of financial assets measured at fair value through profit or loss are recorded in the statement of income in "financial result" for the period in which they occur. iii. Loans and receivables These comprise loans granted and receivables which are non-derivative financial assets with fixed or determinable payments, not quoted in an active market. The Company's loans and receivables comprise trade accounts receivable, advances and other receivables. Loans and receivables are recorded at amortized cost, based on the effective interest rate method. 24

25 iv. Assets held to maturity These are financial assets quoted in an active market which are acquired with the intention and financial ability to be held in the portfolio up to their maturity. They are recorded at the acquisition cost, plus related earnings which are recognized in the statement of income under "financial result", using the effective interest rate method. v. Available-for-sale financial assets Available-for-sale financial assets are non-derivatives instruments which are classified in this category or not classified in any other. Available-for-sale financial assets are recorded at fair value. Interest on available-for-sale securities, calculated based on the effective interest rate method, is recognized in the statement of income under "financial result". Gains or losses resulting from a change in fair value are recorded net of deferred taxes in shareholders' equity, in the Carrying value adjustments account and are transferred to the statement of income when the asset is sold or becomes impaired. vi. Non-derivative financial liabilities The Company recognizes debt securities issued on the date on which they are originated. All other financial liabilities are initially recognized at the date of negotiation in which the company becomes a part of the contractual provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are withdrawn, cancelled or expired. The company has the following main non-derivative financial liabilities: borrowings, debentures, suppliers and other accounts payable. Such financial liabilities are initially recognized at fair value plus any attributable transaction costs. After initial recognition, these financial liabilities are measured at amortized cost using the effective interest method. vii. Fair value Fair values of investments with public quotations are based on current market prices. For financial assets without an active market or public quotation, the Company determines fair value through valuation techniques, such as discounted cash flows analysis and option pricing models. viii. Impairment of financial assets The Company evaluates, at the balance sheet date, if there is objective evidence that a financial asset or a group of financial assets is overstated (impaired) in relation to its recoverable value. If 25

26 there is such evidence for available-for-sale financial assets, the cumulative loss is transferred from equity to the statement of income d. Accounts receivable and other receivables Accounts receivable from customers correspond to the receivables from customers for the provision of services in the ordinary course of the Company s business. If the term of the receivable is equivalent to one year or less, the accounts receivable are classified as current assets. Otherwise, are presented as non-current assets. Accounts receivable from customers and other receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest rate method minus the provision for impairment, when applicable. In practice, considering the average short-term of these receivables (less than one month), they are usually recognized at the invoiced amount, adjusted by a provision for impairment, if necessary. The impairment provision is recorded when there is objective evidence that the Company may not collect the amounts receivable in accordance with the original contract terms. e. Prepaid expenses Represented by contracts between suppliers and the Company, deriving from the provision of various prepaid services. The amounts are expensed in the income statement over the term of each contract and the extent to which services are received. f. Judicial deposits Judicial deposits are stated as a deduction from the corresponding liability recorded when they cannot be redeemed, unless there is a favorable outcome for the Company in the dispute (Note 14). 26

27 g. Property and equipment Property and equipment items are measured at historical cost of acquisition or construction, less accumulated depreciation and any accumulated impairment losses. The cost of land and buildings was determined by reference to the revaluation previously carried out under the old BR GAAP. The other items of property and equipment were recorded at their historic cost value based on the old BR GAAP. Land and buildings consist of the offices in São Paulo and Rio de Janeiro and are demonstrated by the amount revalued as at December 31, 2007, based on the appraisals carried out for CETIP Association by a duly authorized appraiser, minus any subsequent depreciation for buildings. As allowed by IFRS and CPCs, the Company adopted the revalued residual value as the deemed cost for the buildings and land, thereby maintaining the portion of the revaluation that will be realized through the depreciation or sale of the revalued assets. The corresponding revaluation reserve was capitalized during the merger of CETIP Association's net assets by CETIP in connection with the demutualization process. Depreciation is calculated using the straight-line method at the rates disclosed in Note 10, which take into account the estimated useful lives of the assets. Repairs and maintenance costs are allocated to the statement of income during the period in which they are incurred. h. Intangible assets (i) Goodwill The goodwill is represented by the positive difference between the consideration paid and/or payable for the acquisition of a business and the net amount of the fair value of assets and liabilities of the subsidiary acquired. The goodwill arising from acquisitions of subsidiaries is recorded as "Intangible assets". The goodwill is not amortized but tested annually to assess any impairment losses. The goodwill is accounted at cost less any accumulated impairment losses. Goodwill impairment losses recognized are not reversed. The goodwill is allocated to cash-generating units (UGCs) for impairment testing purposes. The allocation is made for the cash-generating units or groups of cash-generating units which will benefit from the business combination in which the goodwill was originated, and are identified according to the operating segment. 27

28 (ii) Contractual relations Contractual relations acquired in a business combination are recognized at fair value on the date of acquisition. Contractual relations have finite useful life and are stated at their cost less accumulated amortization. Amortization is computed using the straight-line method over the expected life of the contractual relationship at the rates described in Note 11. (iii) Software licenses acquired Software licenses acquired are recorded at total acquisition cost, adjusted when applicable to their recoverable value and amortized over their estimated useful life, at the rates described in Note 11. (iv) Software development Expenses directly related to the development of identifiable software programs, controlled by the Company and which will probably generate economic benefits greater than their cost, are recognized as intangible assets. Direct expenses include the remuneration of the software development team and other expenses directly related to development. Software development expenses recognized as assets are amortized over their estimated useful lives, using the straight-line method, at the rates described in Note 11. Other expenses related to software maintenance or development are recognized as expenses as they are incurred. i. Impairment of non-financial assets Property and equipment and intangible assets are reviewed annually to identify evidence of unrecoverable losses, or whenever events or changes in the circumstances indicate that the carrying value may not be recoverable. In this case, the recoverable value is calculated to verify if there is any loss. Any such loss is recognized at the amount by which the carrying value of the asset exceeds its recoverable value, which is the greater between (i) the net sales price and (ii) the value in use of an asset. j. Suppliers and other accounts payable Accounts payable to suppliers are obligations to pay for goods or services that were purchased from suppliers in the ordinary course of business, being classified as current liabilities if the payment is due in up to one year. Otherwise, the accounts payable are presented as noncurrent liabilities. 28