Form 20-F
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 2001
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 20-F
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER: 001-14489
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TELE CENTRO OESTE CELULAR
PARTICIPACOES S.A.
(Exact Name of Registrant as Specified in Its Charter)
TELE CENTRO OESTE CELLULAR HOLDING COMPANY THE FEDERATIVE REPUBLIC OF BRAZIL
(Translation of Registrant's Name into English) (Jurisdiction of Incorporation or Organization)
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SCS, QUADRA 2, BLOCO C, 7 ANDAR
70302-916 BRASILIA, DF, BRAZIL
(Address of Principal Executive Offices)
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SECURITIES REGISTERED OR TO BE REGISTERED
PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Preferred Shares, without par value* New York Stock Exchange
American Depositary Shares, each New York Stock Exchange
epresenting 3,000 Preferred Shares
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*Not for trading, but only in connection with the listing of American Depositary
Shares on the New York Stock Exchange.
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE
ACT:NONE
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION
15(D) OF THE ACT: NONE
INDICATE THE NUMBER OF OUTSTANDING SHARES OF EACH OF THE ISSUER'S CLASSES
OF CAPITAL OR COMMON STOCK AS OF THE CLOSE OF THE PERIOD COVERED BY THIS ANNUAL
REPORT:
124,369,030,532 Common Shares, without par value
240,029,997,060 Preferred Shares, without par value
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
Yes X No
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INDICATE BY CHECK MARK WHICH FINANCIAL STATEMENT ITEM THE REGISTRANT HAS
ELECTED TO FOLLOW.
Item 17 Item 18 X
--- ---
TABLE OF CONTENTS
PAGE
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS................2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE..............................2
ITEM 3. KEY INFORMATION......................................................2
ITEM 4. INFORMATION ON THE COMPANY...........................................10
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.........................33
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES...........................43
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS....................48
ITEM 8. FINANCIAL INFORMATION................................................48
ITEM 9. THE OFFERING AND THE LISTING.........................................52
ITEM 10. ADDITIONAL INFORMATION...............................................57
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........69
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...............70
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES......................70
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.............................................................70
ITEM 15. DEFAULTS UPON SENIOR SECURITIES......................................70
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS..................................................70
ITEM 17. FINANCIAL STATEMENTS.................................................70
ITEM 18. FINANCIAL STATEMENTS.................................................70
ITEM 19. EXHIBITS.............................................................70
CURRENCY AND FINANCIAL INFORMATION
In this Annual Report, Tele Centro Oeste Celular Participacoes S.A., a
corporation organized under the laws of the Federative Republic of Brazil
("Brazil"), is referred to as the "Holding Company," and the Holding Company and
its Subsidiaries are collectively referred to as the "Company." Telebrasilia
Celular S.A. ("Telebrasilia"), Telegoias Celular S.A. ("Telegoias"), Telemat
Celular S.A. ("Telemat"), Telems Celular S.A. ("Telems"), Teleron Celular S.A.
("Teleron"), Teleacre Celular S.A ("Teleacre") and Norte Brasil Telecom, S.A.
("NBT") are collectively referred to as the "Subsidiaries," and each is
separately referred to as a "Subsidiary." Norte Brasil Telecom, S.A. is also
referred to as the "Band B Subsidiary," while each of the remaining Subsidiaries
is also referred to as a "Band A Subsidiary."
References to (i) the "REAL," "REAIS" or "R$" are to Brazilian REAIS (plural)
and the Brazilian REAL (singular) and (ii) "U.S. dollars," "dollars" or "US$"
are to United States dollars.
On June 05, 2001, the Noon Buying Rate in New York City for cable transfers as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate") was R$2.390 to US$1.00. SEE ITEM 3 "KEY
INFORMATION--EXCHANGE RATES."
The consolidated financial statements of the Company as of December 31, 1999 and
2000 and for the years ended December 31, 1998, 1999 and 2000 (the "Consolidated
Financial Statements") have been prepared in accordance with generally accepted
accounting principles in Brazil ("Brazilian GAAP"). The Consolidated Financial
Statements and, unless otherwise specified, the other financial data included
herein recognize certain effects of inflation and are restated in constant REAIS
of December 31, 2000 purchasing power using the integral restatement method
(CORRECAO MONETARIA INTEGRAL).
Certain terms are defined the first time they are used in this Annual Report.
The "Index of Defined Terms" that begins on page 72 lists those terms and where
they are defined. The "Technical Glossary" that begins on page 74 provides
definitions of certain technical terms used herein.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements. The Company and its
representatives may also make forward-looking statements in press releases and
oral statements. Statements that are not statements of historical fact,
including statements about the beliefs and expectations of the Company's
management, are forward-looking statements. The words "anticipates," "believes,"
"estimates," "expects," "forecasts," "intends," "plans," "predicts," "projects"
and "targets" and similar words are intended to identify these statements, which
necessarily involve known and unknown risks and uncertainties. Known risks and
uncertainties, some of which are discussed herein in Item 3 "Key
Information--Risk Factors," include those resulting from the short history of
the Company's operations as an independent, private-sector entity and the
introduction of competition to the Brazilian telecommunications sector, as well
as those relating to the cost and availability of financing, the performance of
the Brazilian economy generally, the levels of exchange rates between Brazilian
and foreign currencies and the telecommunications policy of Brazil's federal
government (the "Federal Government"). Accordingly, the actual results of
operations of the Company may be different from the Company's current
expectations, and the reader should not place undue reliance on these
forward-looking statements. Forward-looking statements speak only as of the date
they are made, and the Company does not undertake any obligation to update them
in light of new information or future developments.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL INFORMATION
Background
The selected financial information presented below should be read in conjunction
with the Consolidated Financial Statements and the notes thereto. The 2000
Consolidated Financial Statements have been audited by Ernst & Young Auditores
Independentes S.C., and their report on the Consolidated Financial Statements
appears elsewhere in this Annual Report.
BRAZILIAN GAAP AND U.S. GAAP
The Consolidated Financial Statements are prepared in accordance with Brazilian
GAAP, which differ in certain material respects from generally accepted
accounting principles in the United States ("U.S. GAAP"). See Note 29 to the
Consolidated Financial Statements for a summary of the differences between
Brazilian GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of shareholders'
equity as of December 31, 2000, 1999 and 1998, net income for the years ended
December 31, 2000, 1999 and 1998.
PRESENTATION OF 1998 STATEMENT OF OPERATIONS
The Consolidated Statements of Operations of the Company for the year ended
December 31, 1998 reflects the operations of each of the Subsidiaries for the
full year 1998 and the operations of the Holding Company for the period from
February 28, 1998, the effective date of its establishment in the Breakup of
TELEBRAS, to December 31, 1998.
CHANGES IN ACCOUNTING METHODOLOGY IN 1998, 1999 AND 2000
The Consolidated Financial Statements and, unless otherwise specified, all
financial information included in this Annual Report recognize certain effects
of inflation and are restated in constant REAIS of December 31, 2000 purchasing
power, all in accordance with Brazilian GAAP using the integral restatement
method (CORRECAO MONETARIA INTEGRAL). The Company used the INDICE GERAL DE
PRECOS -MERCADO (the General Price Index - Market or "IGP-M") inflation index
for purposes of preparing the Consolidated Financial Statements and the selected
financial information presented below on the basis of Brazilian GAAP. SEE ITEM 5
"OPERATING AND FINANCIAL REVIEW AND PROSPECTS --EFFECTS OF CHANGES IN
PRESENTATION OF FINANCIAL STATEMENTS IN 1998, 1999 AND 2000." Inflationary gains
or losses on (i) monetary assets and liabilities and, where possible, other
monetary items have been allocated to their corresponding interest income or
expense captions and (ii) amounts without corresponding income or expense
captions in the Consolidated Statements of Operations have been allocated to
other net operating income in the Consolidated Statements of Operations and the
"Income Statement Data" presented below. SEE NOTE 2(B) TO THE CONSOLIDATED
FINANCIAL STATEMENTS.
The Consolidated Financial Statements as of December 31, 1999 and 2000 and for
the years then ended have been fully indexed using the integral restatement
method. No indexation adjustments were applied in calculating financial position
as of December 31, 1998 or results of operations for the year then ended because
the low rate of Brazilian inflation in 1998 (1.8% as measured by the IGP-M)
would have made any restatement for 1998 inflation insignificant. However, the
financial statements as of December 31, 1998 and for the years then ended, as
well as the fully indexed financial information in the Consolidated Financial
Statements and the selected financial information presented below for all
previous periods and as of and for the years ended December 31, 1999 and 2000,
have been restated into currency of December 31, 2000 purchasing power.
ACCOUNTING CONSEQUENCES OF THE BREAKUP OF TELEBRAS
The formations of the Holding Company and the Subsidiaries have been accounted
for as a reorganization of entities under common control in a manner similar to
a pooling of interests. The assets and liabilities of the cellular
telecommunications businesses of the Predecessor Companies were transferred to
the Subsidiaries at their indexed historical cost. The revenues and expenses
associated with such assets and liabilities were also allocated to the
Subsidiaries. For revenues and costs of services, separate records were
maintained historically for the cellular telecommunications businesses of the
Predecessor Companies, so actual amounts were allocated to the Subsidiaries.
Costs other than costs of services were allocated using methodologies described
in Note 2 to the Consolidated Financial Statements. The consolidated statements
of revenues and expenses and net interdivisional cash receipt (distribution)
include the historical activity related to the assets and liabilities
transferred. The Consolidated Financial Statements are not necessarily
indicative of what the financial condition or the revenues and expenses of the
Company would have been if the cellular telecommunications businesses of the
Predecessor Companies had been separate legal entities before 1998. SEE ITEM 4
"INFORMATION ON THE COMPANY--HISTORICAL BACKGROUND."
Cash and certain nonspecific debt relating to the cellular telecommunications
businesses of the Predecessor Companies could not be segregated from the
Predecessor Companies prior to December 31, 1997, and such amounts were not
reflected in the Company's statement of financial condition prior to January 1,
1998. As a result, interest income, unallocated interest expense and income tax
expense were not identified or reflected in the Consolidated Financial
Statements for any period prior to January 1, 1998. Because these revenues and
expenses are not included in the Consolidated Financial Statements, historical
income per share and dividend per share information was not included in the
table below for any period prior to January 1, 1998. SEE ITEM 5 "OPERATING AND
FINANCIAL REVIEW AND PROSPECTS--EFFECTS OF CHANGES IN PRESENTATION OF FINANCIAL
STATEMENTS IN 1998, 1999 AND 2000."
At the May 22, 1998 TELEBRAS shareholders' meeting, the shareholders established
the shareholders' equity of each New Holding Company and allocated to each a
portion of the retained earnings of TELEBRAS. TELEBRAS retained sufficient
earnings from which to pay certain dividends and other amounts. The balance of
its retained earnings was allocated to each New Holding Company in proportion to
the total net assets allocated to each such company. The retained earnings so
allocated do not represent the historical retained earnings of the New Holding
Companies. The assets that were spun off from TELEBRAS to the Holding Company,
in addition to its investment in the Subsidiaries, resulted in an increase of
R$21.2 million compared to the Company's historical divisional equity. The
amount of distributable retained earnings of the Holding Company includes
retained earnings allocated to the Holding Company in the Breakup of TELEBRAS.
For 1996 and 1997, the Consolidated Financial Statements present the financial
condition and revenues and expenses of the cellular telecommunications business
of the Predecessor Companies, and "minority interests" reflect the interest in
the Predecessor Companies of shareholders other than TELEBRAS. As of December
31, 2000, minority shareholders directly and indirectly owned 11.8%, 7.8%, 2.7%,
1.8%, 3.0%, 1.7% and 5.0% of the share capital of Telebrasilia, Telegoias,
Telemat, Telems, Teleron, Teleacre and NBT, respectively.
Selected Financial Information
YEAR ENDED DECEMBER 31,
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1996 1997 1998 1999 2000
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(THOUSANDS OF REAIS, EXCEPT PER-SHARE DATA) (1)
INCOME STATEMENT DATA:
BRAZILIAN GAAP
Net operating revenue 393,935 578,744 637,406 666,660 930,646
Cost of services rendered and cost of products 138,111 242,619 260,327 326,514 532,163
sold ------- ------- ------- ------- -------
255,824 336,125 377,079 340,146 398,483
Gross income
Operating expenses:
Selling expenses 20,089 65,082 99,093 118,592 126,163
General and administrative expenses 28,980 49,814 46,289 64,539 78,420
Other net operating expense 3,928 4,770 953 14,020 9,618
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Operating income before net financial result 210,683 225,999 230,744 142,995 184,282
Allocated interest expense....................... 4,749 4,918
Net interest expense (2)......................... 69,711 47,640 30,063
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Operating income before interest income and
unallocated interest expense..................... 205,934 221,081
Operating income................................. 161,033 95,355 154,219
Net nonoperating expense......................... -- 66 20,575 6,055 19,539
Employees' participation 295 374 1,271 1,866 1,878
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Income before interest income, unallocated
interest expense, taxes and minority interests. 205,639 220,641
Income before income taxes and minority 139,187 87,434 132,802
interests (2)................................
Income and social contribution taxes............. 40,206 29,857 40,159
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Income before minority interests................. 205,639 220,641 98,981 57,577 92,643
Minority interests............................... 20,973 30,779 24,076 11,531 19,980
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Reversal of interest on own capital.............. -- -- 91,749 53,542 30,981
Income before interest income, unallocated
interest expense and taxes (2)................. 184,666 189,863
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Net income....................................... 166,654 99,588 103,644
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U.S. GAAP
Income before interest income, unallocated
interest expense and taxes (2)................. 188,287 196,440
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Net income....................................... 164,000 32,581 104,771
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Net profit per 1,000 shares outstanding (REAIS).. 0.49 0.09 0.29
AT DECEMBER 31,
1996 1997 1998 1999 2000
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BALANCE SHEET DATA: (THOUSANDS OF CONSTANT REAIS) (1)
BRAZILIAN GAAP
Property, plant and equipment, net 691,265 762,994 874,262 994,531 1,083,754
Total assets 757,565 911,232 1,224,227 1,819,120 2,154,909
Loans and financing 70,475 52,700 56,256 143,828 509,149
Divisional equity 532,028 679,472 - - -
Shareholders' equity 799,138 1,230,628 1,042,172
U.S. GAAP
Property, plant and equipment, net 657,530 713,563 819,280 947,615 1,057,596
Total assets 734,963 878,114 1,192,699 1,426,558 2,113,001
Loans and financing 68,990 52,216 56,256 143,828 509,149
Divisional equity 511,958 651,128 - - -
Shareholders' equity 758,374 814,623 1,001,123
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(1) Information is presented in constant REAIS of December 31, 2000.
(2) For 1996 and 1997, prior to the effective creation of the Subsidiaries
on January 1, 1998, the Company did not recognize interest income or taxes,
and recognized only the portion of interest expense that was specifically
attributable to the cellular operations of the Predecessor Companies.
Exchange Rates
The Registrant will pay any cash dividends and make any other cash distributions
with respect to Preferred Shares in Brazilian currency. Accordingly, exchange
rate fluctuations will affect the U.S. dollar amounts received by the holders of
ADSs on conversion by the Depositary of dividends and distributions in Brazilian
currency on the Preferred Shares represented by the ADSs. Fluctuations in the
exchange rate between Brazilian currency and the U.S. dollar will also affect
the U.S. dollar equivalent of the price of the Preferred Shares on the Brazilian
stock exchanges. SEE ITEM 5 "OPERATING AND FINANCIAL REVIEW AND PROSPECTS --
FOREIGN EXCHANGE AND INTEREST RATE EXPOSURE."
There are two legal exchange markets in Brazil--the commercial rate exchange
market (the "Commercial Market") and the floating rate exchange market (the
"Floating Market"). The Commercial Market is reserved primarily for foreign
trade transactions and transactions that generally require prior approval from
Brazilian monetary authorities, such as the purchase and sale of registered
investments by foreign persons and related remittances of funds abroad.
Purchases and sales of foreign exchange in the Commercial Market may be carried
out only through a financial institution in Brazil authorized to buy and sell
currency in that market. As used herein, the "Floating Market Rate" is the
prevailing selling rate for Brazilian currency into U.S. dollars which applies
to transactions to which the Commercial Market Rate does not apply, as reported
by the Central Bank. Prior to the implementation of the REAL Plan, the
Commercial Market Rate and the Floating Market Rate differed significantly at
times. Since the introduction of the REAL, the two rates have not differed
significantly, although there can be no assurance that there will not be
significant differences between the two rates in the future. Both the Commercial
Market Rate and the Floating Market Rate are freely negotiated but are strongly
influenced by the Central Bank. The Commercial Market and the Floating Market
were unified by the Central Bank in 1999 following the decision to allow the
value of the REAL to float. However, transactions are still classified as
"Commercial Market" and "Floating Market" transactions.
Between March 1995 and January 1999, the Central Bank maintained a band within
which the exchange rate between the REAL and the U.S. dollar fluctuated, and the
Central Bank intervened in the foreign exchange market from time to time. From
January 20, 1998 through December 31, 1998, the band was between R$1.12 and
R$1.22 per US$1.00. In early January 1999, the Central Bank attempted a
controlled devaluation of the REAL by widening the band within which the REAL
was permitted to trade, but subsequent Central Bank intervention failed to keep
the rate within the new band. On January 15, 1999, the Central Bank announced
that the REAL would be permitted to float, with Central Bank intervention to
take place only in times of extreme volatility. On June 5, 2001, the Commercial
Market Rate was R$2.3629 to US$1.00.
The following table sets forth the period-end, average, high and low Noon Buying
Rates expressed in REAIS per U.S. dollar, for the periods indicated.
AVERAGE FOR
PERIOD PERIOD-END PERIOD (1) HIGH LOW
---------------- ---------------- ------------------ ----------- --------------
1996................................................ 1.0393 1.0080 1.0413 0.9733
1997................................................ 1.1165 1.0805 1.1166 1.0394
1998................................................ 1.2087 1.1640 1.2090 1.1160
1999................................................ 1.8090 1.8191 2.200 1.2074
2000................................................ 1.8270 1.7844 1.8560 1.7230
2001 (through May 31, 2001)......................... 2.3590 2.1123 2.3590 1.9380
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(1) Average of the rates on the last day of each month in the period.
SOURCE: Federal Reserve Bank of New York; Board of Governors of the Federal
Reserve System (for 2001).
RISK FACTORS
FACTORS RELATING TO BRAZIL:
INFLATIONARY RISK.
Brazil has historically experienced extremely high rates of inflation. Inflation
itself, as well as certain governmental measures to combat inflation, have had
significant negative effects on the Brazilian economy in general. At the
beginning of 1994, the Brazilian government introduced the REAL Plan, an
economic stabilization plan designed to reduce inflation by reducing certain
public expenditures, collecting liabilities owed to the Brazilian government,
increasing tax revenues, continuing the privatization program and introducing a
new currency (the "REAL Plan"). On July 1, 1994, as part of the REAL Plan, the
Brazilian government introduced the REAL, which replaced the CRUZEIRO REAL as
the official currency of Brazil. Since the introduction of the REAL Plan,
Brazil's inflation rate has been substantially lower than in previous periods.
The devaluation of the REAL was the primary cause of the increase in inflation
in 1999. SEE ITEM 4 "INFORMATION ON THE COMPANY--INFLATION AND DEVALUATION."
Brazil may again experience high levels of inflation in the future. There is no
assurance that recent lower levels of inflation will continue. Future
governmental actions (including additional actions to adjust the value of the
Brazilian currency) may trigger increases in inflation. Accordingly, periods of
substantial inflation may in the future have material adverse effects on the
Brazilian economy, the Brazilian financial markets and on the Company's
business, financial condition and results of operations.
Exchange rate instability and fluctuations in the value of Brazil's currency
against the value of the U.S. dollar may result in uncertainty in the Brazilian
economy and the Brazilian securities market, which may adversely affect the
Company's financial condition and results of operations and the market value of
the Company's equity securities.
The Company cannot predict the effects that the Brazilian government's exchange
rate policies may have on it. In addition, it may be adversely affected by any
future devaluations of the REAL against the U.S. dollar because a significant
portion of its revenues and assets are denominated in REAIS, while a substantial
portion of its debt and other liabilities are denominated in U.S. dollars. SEE
ITEM 11 "QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK--EXCHANGE
RATE RISK."
INTEREST RATE INSTABILITY.
The Company may be adversely affected unfavorable changes in the interest rates
applicable to its financial assets and liabilities and cannot predict interest
rate fluctuations or the affects on its financial assets and liabilities. SEE
ITEM 11 "QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK--INTEREST
RATE RISK."
OTHER EMERGING MARKET RISK.
Brazil is generally considered by international investors to be an "emerging
market." As a result, the market for securities issued by Brazilian companies
and banks is influenced by economic and market conditions in other countries, to
varying degrees. For example, the Brazilian financial markets were adversely
affected by the Mexican liquidity crisis at the end of 1994, the Asian financial
crisis at the end of 1997, the Russian financial crisis in 1998 and the
Argentine crisis in 2000 and could be further affected by future crises. SEE
ITEM 4 "INFORMATION ON THE COMPANY--DEVELOPMENTS IN OTHER EMERGING MARKET
COUNTRIES."
TAX REFORMS.
If as a result of a tax reform the Company experiences a higher tax burden, it
may pass on the cost of the tax increase to its customers. This increase may
have a material negative impact on the Company's revenues. See Item 10
"Additional Information--Brazilian Tax Considerations."
FACTORS RELATING TO THE COMPANY:
THE COMPANY OPERATES IN A RAPIDLY EVOLVING INDUSTRY.
The Company's prospects must be considered in light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in new and rapidly
evolving industries, such as the wireless telecommunications industry. To
address these risks and uncertainties, it must, among other things:
o attract consumers to its products and services;
o expand its network and maintain network quality;
o maintain and enhance its brand, and expand its product and service
offerings;
o attract, integrate, retain and motivate qualified personnel; and
o adapt to meet changes in its markets and competitive developments.
The Company may not be successful in accomplishing these objectives.
THE COMPANY RELIES ON KEY PERSONNEL TO CONDUCT ITS BUSINESS AND OPERATIONS.
The success of the Company's business depends on its ability to attract and
retain highly qualified technical and management personnel. In general, the
Company's employees do not have long-term employment contracts. The loss of key
personnel could have a material effect on the Company's business.
INTERCONNECTION FLUCTUATIONS.
The Company is paid a fee from other cellular service providers for every minute
that a subscriber of other cellular service providers based outside of the
Region uses its network. Similarly, the Company pays a fee to other providers
for every minute that one of the Company's subscribers uses a network outside
the Region. The Company's subscribers may spend more time in other coverage
areas than they currently do and subscribers of other cellular providers may
spend less time in the Region or may use the Company's services less than they
currently do. As a result, the Company may receive less interconnection revenue
than it presently does or it may have to pay more interconnection fees than the
interconnection revenue it collects. SEE ITEM 4 "INFORMATION ON THE
COMPANY--OPERATING AGREEMENTS."
TECHNOLOGICAL ADVANCES BY COMPETITORS.
The Company currently uses TDMA technology in the wireless services it provides.
TDMA is a relatively new technology and it may not provide the advantages
expected by the Company. If another technology becomes the preferred industry
standard, the Company may be at a competitive disadvantage and competitive
pressures may require it to change its digital technology at substantially
increased costs.
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades in
existing analog wireless systems, the upcoming introduction of the personal
communication services, or PCS, through the GSM technology, evolving industry
standards, ongoing improvements in the capacity and quality of digital
technology, shorter development cycles for new products and enhancements and
changes in end-user requirements and preferences. If the Company is unable to
keep pace with these technological changes, the technology used on the Company's
network may become obsolete. SEE ITEM 4 "INFORMATION ON THE
COMPANY--COMPETITION."
UNAUTHORIZED USE OF THE COMPANY'S NETWORK.
The Company will likely incur costs associated with the unauthorized use of its
cellular telecommunications services network, including administrative and
capital costs associated with detecting, monitoring and reducing the incidence
of fraud. Fraud impacts interconnection costs, capacity costs, administrative
costs, fraud prevention costs and payments to other carriers for unbillable
fraudulent roaming. RISKS RELATED TO THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY
GOVERNMENT REGULATION.
The Company's principal business activities are subject to the provisions of
applicable laws and the regulations issued by ANATEL, as well as the terms and
conditions set forth in its Concessions and the interconnection and roaming
agreements entered into by the Company. Changes in the interpretation of such
laws and regulations, the terms and conditions set forth in the Concessions or
the interconnection and roaming agreements met by the Company could have a
material adverse effect on the Company's financial condition and results of
operations. SEE ITEM 4 "INFORMATION ON THE COMPANY--REGULATION OF THE BRAZILIAN
TELECOMMUNICATIONS INDUSTRY."
ABILITY TO INCREASE TELECOMMUNICATIONS SERVICES RATES.
Under the Concessions, the Company is required to render certain basic services
under its basic service plan as well as allowed to create additional services
plans. The Concessions provide for a price-cap mechanism to set and adjust rates
on an annual basis under a formula set forth in the Concessions. The cap is a
maximum weighted average price for a basket of services. The price cap is
adjusted to reflect the rate of inflation as measured by the INDICE GERAL DE
PRECOS -- DISPONIBILIDADE INTERNA ("IGP-DI"), an inflation index developed by
the FUNDACAO GETULIO VARGAS, a private Brazilian economic research organization.
The weighted average tariff for the entire basket of services may not exceed the
price cap, but the tariffs for individual services within the basket may be
increased. The Company may increase the tariff for any individual service by up
to 20%, subject to a downward adjustment for inflation effects already captured
in the annual upward adjustments of the overall price cap for the basket, so
long as we adjust other prices downward to ensure that the weighted average
tariff does not exceed the price cap. As a result, the Company's ability to
increase the rates it charges for its services is limited. SEE ITEM 4
"INFORMATION ON THE COMPANY--REGULATION OF THE TELECOMMUNICATIONS INDUSTRY--RATE
REGULATION."
COMPETITION.
Beginning in 2002, the Company will face competition from additional companies
that will offer PCS services. The Company will have the option to exchange its
existing cellular concession for PCS authorization contracts. If it does not
change its concessions, the Company may not be able to efficiently compete with
the new entrants in its market. The Company also competes with companies which
provide other wireless services, such as mobile radio and paging services and
with fixed line telecommunications service providers.
There can be no assurance that the entry of new competitors will not have a
material adverse effect on the Company's business, financial condition, results
of operations or prospects. Any adverse effects on its results and market share
from competitive pressures will depend on a variety of factors that cannot now
be assessed with precision and that are beyond its control. Among such factors
are the identity of the competitors, their business strategies and capabilities,
prevailing market conditions at the time, the regulations applicable to the
Company and to new entrants and the effectiveness of the Company's efforts to
prepare for increased competition. One or more new competitors may have
technical or financial resources greater than the Company's. If the Company is
unable to compete successfully, it may experience increasing rates of customer
turnover, which would adversely affect its financial condition and results of
operations. SEE ITEM 4 "INFORMATION ON THE COMPANY--COMPETITION."
SATELLITE SERVICES.
The entry of providers of satellite services could have a material adverse
effect on the Company's business, financial condition, results of operations or
prospects. Any adverse effects on the Company's results and market share from
competitive pressures will depend on a variety of factors that cannot now be
assessed with precision and that are beyond the Company's control. SEE ITEM 4
"INFORMATION ON THE COMPANY--COMPETITION--OTHER COMPETITION."
Recent emergency measures enacted by the Brazilian government to restrain
electric power consumption may cause an economic slowdown, which would increase
the Company's costs and risk of service interruption and decrease its revenues
and customer base.
The combination of a general expansion in demand for electric power not followed
by sufficient increase in total power generation capacity, with a lower than
expected level of the hydrographic basins that feed the most important
hydroelectric plants, has resulted in an unbalance between the availability and
demand of electric power in Brazil. In May, 2001, the Brazilian government
instituted a series of measures aimed at immediately reducing power demand
levels in order to avoid risk of sudden blackouts in parts of the country. Such
emergency measures include the creation of the Electric Energy Crisis Management
Board (CAMARA DE GESTAO DA CRISE Energetica), with powers to, among others,
enact resolutions setting forth mandatory reduction in power consumption levels,
alteration in electric power tariffs, propose taxation changes in power supply
services and determine the suspension of power supply to selected consumers
groups.
Pursuant to the resolutions enacted by the Electric Energy Crisis Management
Board so far, we are subject to a mandatory reduction of our power consumption
levels to 80% of the average consumption level verified in the months of May,
June and July 2000. Compliance with such level shall be assessed per consumption
unit (i.e. each cell site; each switch), penalty for non-compliance being the
increase in prices for power consumed above permitted levels, to be calculated
according to the prevailing rate at the Wholesale Energy Market - MAE (MERCADO
ATACADISTA DE ENERGIA), and in extreme cases of shortage, suspension of power
supply for that consumption unit for one day per each 3% consumed above the
permitted level.
As for new facilities and sites established amid the expansion of the network,
distribution channels or administrative premises, requests for new connections
shall only be fulfilled by power distribution utilities if the consumption level
of such new facility is found to be equal to or below 80% of power consumption
pattern defined for such kind of facility.
Although such measures are expected to be enough to limit power consumption in
Brazil to safe levels until the increase in generation capacity is carried out
through investments by private enterprises and state-owned companies, there is a
risk of failure to attain reduction objectives, which would ultimately result in
systematic and controlled blackouts in alternating areas.
New emergency regulation as currently determined may affect the Company
negatively due to: (i) an increase in electric power acquisition costs in case
the Company fails to meet reduction levels; (ii) an interruption of operation of
all or part of the network, or all or part of the distribution channels, due to
short-period power supply interruption, in case of non-compliance with permitted
level or even in case a systematic and controlled blackout policy is
implemented; and (iii) difficulties for network expansion due to restrictions
for local power suppliers to perform new power connections.
In order to mitigate the above mentioned negative impacts, the Company has
developed contingency plans that include (i) the substitution of equipment and
apparatus for more power efficient models; (ii) the acquisition of power
generators in crucial facilities to avoid interruption of operation and attain
some level of self-sufficiency; and (iii) the adoption of operating procedures
to save power. Management believes the contingency plan shall greatly reduce the
risks of the aforementioned negative impacts, with relatively low investments.
Pending tax reform in Brazil may increase our tax burden resulting in a
reduction of profits. The Brazilian government has proposed broad tax reform in
Brazil, which is mainly designed to reduce the public deficit through a tax
increase. The tax reform bill was expected to be approved by the Brazilian
Congress in 2001. The political environment during the first semester of the
Brazilian Congress, however, does not favor extensive reforms of Brazilian tax
legislation and, thus, it is likely that tax reform will be postponed. If tax
reform is approved, the Company's tax burden will increase and its profits may
decrease.
It is anticipated that the reform may include the creation of a value added tax
on goods and services which would replace six existing taxes (including the
social contribution on profits, or CSL, the federal tax on industrial products,
or IPI, the Turnover Tax, or PIS, the Social Security Financing Contribution
("COFINS"), the state tax on the circulation of goods and services, or ICMS, and
the municipal tax on services, or ISS). In addition, the CPMF, a temporary tax
on financial transactions, may be replaced by a permanent federal tax on
financial transactions. Although we cannot predict the outcome of the tax reform
in Brazil, we may have a higher tax burden if the tax reform bill is approved
and implemented as presented to the Brazilian Congress.
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
The exact name of the Company, as specified in its charter is Tele Centro Oeste
Celular Participacoes S.A. (Tele Centro Oeste Cellular Holding Company). The
Company is incorporated under the jurisdiction of the Federative Republic of
Brazil. Its headquarters are located at SCS, Quadra 2, Bloco C, 7 andar,
70302-916 Brasilia, DF, Brazil, and its telephone number is 55-61-313-7765.
The Holding Company is one of the companies formed as a result of the breakup of
Telecomunicacoes Brasileiras S.A. - TELEBRAS ("TELEBRAS") by the Federal
Government on May 22, 1998. Each of the Band A Subsidiaries was formed on
January 5, 1998 by spinning off the cellular telecommunications operations of an
operating company controlled by TELEBRAS (collectively, the "Predecessor
Companies"). References to the operations of the Company prior to January 5,
1998 are to the cellular operations of the Predecessor Companies. SEE ITEM 4
"INFORMATION ON THE COMPANY--HISTORY AND DEVELOPMENT OF THE COMPANY--HISTORICAL
BACKGROUND."
The Band A Subsidiaries of the Company provide cellular telecommunications
services in Brazil's Federal District and in the Brazilian States of Goias, Mato
Grosso do Sul, Mato Grosso, Rondonia, Acre and Tocantins (collectively, "Area
7") under concessions from the Federal Government (the "Band A Concessions").
The Predecessor Companies began to offer cellular telecommunications services in
Area 7 in December 1991, and the Company is the leading provider of cellular
telecommunications services in Area 7. The Band B Subsidiary of the Company
provides cellular telecommunications service in the Brazilian States of Amapa,
Amazonas, Maranhao, Para and Roraima (collectively, "Area 8") under concessions
from the Federal Government (the "Band B Concessions"). The Band A Concessions
and the Band B Concessions are collectively referred to as the "Concessions." As
of April 2001, the Company, including its Band A Subsidiaries and Band B
Subsidiaries, had approximately 1,966,000 subscribers.
On November 21, 2000, SPLICE IP S.A. was formed as a closed corporation. The
Holding Company held 100% of its preferred shares and Splice do Brasil
Telecomunicacoes e Eletronica S.A. held 100% of its common shares. On March 5,
2001, the control changed to the Holding Company, through the acquisition of
100% of the common shares from Splice do Brasil Telecomunicacoes e Eletronica
S.A. and the name of the subsidiary changed to TCO IP S.A.
Historical Background
Prior to the incorporation of TELEBRAS in 1972, there were more than 900
telecommunications companies operating throughout Brazil. Between 1972 and 1975,
TELEBRAS and its operating Subsidiaries (collectively, the "TELEBRAS System")
acquired almost all the other telephone companies in Brazil and thus came to
have a monopoly over the provision of public telecommunications services in
almost all areas of the country. Beginning in 1995, the Federal Government
undertook a comprehensive reform of Brazil's telecommunications regulatory
system. In July 1997, the Brazilian Congress passed the Law no. 9.472, known as
the LEI GERAL DE TELECOMUNICACOES (the "General Telecommunications Law," and
together with the regulations, decrees, orders and plans on telecommunications
issued by Brazil's Executive Branch, the "Telecommunications Regulations"),
which provided for the establishment of a new regulatory framework, the
introduction of competition and the privatization of TELEBRAS. The General
Telecommunications Law established an independent regulatory agency called
Agencia Nacional de Telecomunicacoes - ANATEL ("ANATEL").
In January 1998, in preparation for the restructuring and privatization of the
TELEBRAS System, the cellular telecommunications operations of TELEBRAS'
operating subsidiaries were spun off into separate companies. In May 1998,
TELEBRAS was restructured to form, in addition to TELEBRAS, 12 new holding
companies (the "New Holding Companies") by means of a procedure under Brazilian
corporate law called CISAO, or split-up. Virtually all the assets and
liabilities of TELEBRAS, including the shares held by TELEBRAS in the operating
companies of the TELEBRAS System, were allocated to the New Holding Companies.
The split-up of the TELEBRAS System into the New Holding Companies is referred
to herein as the "Breakup" or the "Breakup of TELEBRAS."
The New Holding Companies, together with their respective subsidiaries, consist
of (a) eight cellular service providers, each operating in one of eight regions
(each a "Cellular Region"), (b) three fixed-line service providers, each
providing local and intraregional long-distance service in one of three regions
(each a "Fixed-Line Region"), and (c) Embratel Participacoes S.A. - EMBRATEL
("EMBRATEL"), which provides domestic (including intraregional and
interregional) long-distance telephone service and international telephone
service throughout Brazil.
The Holding Company is one of the New Holding Companies. In the Breakup, the
Holding Company was allocated all the share capital held by TELEBRAS in the
operating subsidiaries of the TELEBRAS System that provided cellular
telecommunications service in Area 7. In July 1998, the Federal Government sold
substantially all its shares of the New Holding Companies, including the Holding
Company, to private-sector buyers. The Federal Government's shares of the
Holding Company were purchased by Splice do Brasil Telecomunicacoes e Eletronica
S.A., through its subsidiary BID S.A. ("Splice"). SEE ITEM 7 "MAJOR SHAREHOLDERS
AND RELATED PARTY TRANSACTIONS--MAJOR SHAREHOLDERS."
The Region
The region in which the Subsidiaries operate (the "Region") consists of Area 7
and Area 8 and covers an aggregate area of approximately 5,803,501 square
kilometers, representing approximately 68% of the total area of Brazil and 17%
of Brazil's population. Area 7, which is serviced by the Band A Subsidiaries,
includes the federal capital, Brasilia, and the surrounding Federal District, as
well as six Brazilian states. The six states that make up the balance of Area 7
are Goias, Tocantins, Mato Grosso, Mato Grosso do Sul, Rondonia and Acre. Area
8, which is serviced by the Band B Subsidiary, includes five Brazilian states:
Amapa, Amazonas, Maranhao, Para and Roraima.
Set forth below is a map showing the location of the Region within Brazil.
The following table sets forth population, Gross Domestic Product ("GDP") and
per capita income statistics for each state in Area 7 and in Area 8.
POPULATION % OF BRAZIL'S % OF BRAZIL'S PER CAPITA INCOME
SUBSIDIARY AREA (MILLIONS)(1) POPULATION (1) GDP (2) (NOMINAL REAIS)(2)
----------- -------------------------- ---------------- ----------------- -------------- ---------------------
Telebrasilia..... Federal District........... 2.01 1.21 2.75 13,053
Telegoias ....... Goias...................... 4.82 2.95 1.91 3,672
Telegoias ....... Tocantins.................. 1.16 0.68 0.21 1,752
Telemat ......... Mato Grosso................ 2.39 1.47 1.08 4,244
Telems .......... Mato Grosso do Sul......... 2.00 1.22 1.10 5,033
Teleron ......... Rondonia................... 1.32 0.81 0.50 3,611
Teleacre ........ Acre....................... 0.54 0.33 0.16 2,826
NBT ............. Amapa...................... 0.46 0.28 0.16 3,565
NBT ............. Amazonas................... 2.62 1.68 1.65 5,990
NBT ............. Maranhao................... 5.50 3.33 0.79 1,348
NBT ............. Para....................... 6.00 3.65 1.70 2,698
NBT ............. Roraima ................... 0.30 0.19 0.08 2,862
REGION..................... 29.12 17.80 12.09 4,221
------ ===== ===== ===== =====
(1) Estimates of the Instituto Brasileiro de Geografia e Estatistica - IBGE
(the "IBGE"). Demographical information pertains only to areas serviced by
the Concessions and does not pertain to the cities that are not serviced
by the Concessions.
(2) SOURCE: Instituto Brasileiro de Geografia e Estatistica - IBGE.
The Company's business, financial condition, results of operations and prospects
depend in part on the performance of the Brazilian economy and the economy of
the Region, in particular. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--BRAZILIAN ECONOMIC ENVIRONMENT."
Capital Expenditures
Prior to privatization, the Company's capital expenditures were made as part of
system wide planning and allocation of capital expenditures by TELEBRAS, which
were subject to approval by the Federal Government. These constraints on capital
expenditures prevented the Company from making certain investments that
otherwise would have been made to improve cellular telecommunications service in
the Region. Since the privatization of TELEBRAS, these restrictions have not
applied. The Company is now permitted to determine its own capital expenditure
budget, subject to its obligations under the Concessions to meet certain network
coverage obligations and quality of service standards. SEE ITEM 4 "INFORMATION
ON THE COMPANY--BUSINESS OVERVIEW--REGULATION OF THE BRAZILIAN
TELECOMMUNICATIONS INDUSTRY--OBLIGATIONS OF TELECOMMUNICATIONS COMPANIES."
The Company's capital expenditure priorities include increasing network
capacity, improving overall quality and increasing the level of digitalization
of the Company's network.
The following table sets forth the Company's capital expenditures for each year
in the three-year period ended December 31, 2000.
1998 1999 2000
----------- ------------ ------------
(MILLIONS OF REAIS) (1)
Automatic switching equipment........................................ 31.3 49.7 29.1
Other equipment...................................................... 108.4 148.2 196.0
Real estate.......................................................... 1.7 0.6 0.2
Other assets (2)..................................................... 19.8 19.9 30.4
---- ---- ----
Total capital expenditures..................................... 161.3 218.4 255.7
===== ===== =====
------------------
(1) Information is presented in constant REAIS of December 31, 2000.
(2) "Other Assets" does not include expenditures for concessions for Area
8 (R$72.6 millions in 1999 and R$40.0 millions in 1998).
BUSINESS OVERVIEW
Services
The Company offers cellular telecommunications service to its subscribers under
its Basic Service Plan and the Alternative Service Plans with minute-based
deductibles. The Company also offers ancillary services, including voicemail,
call forwarding, call waiting, caller identification, three-way calling,
short-message services (messaging, information and news), e-web service and
wireless application protocol ("WAP") services. In 1999 the Company began
selling cellular handsets in connection with the introduction of prepaid
service. The prepaid service is an alternative plan designed for lower volume
cellular service subscribers. Service is paid for and credited prior to calls
being made. The subscriber must purchase credit (using pre-paid cards or
agreements with lottery houses and financial institutions) that is valid for
outgoing calls within 90 days of activation. Once the credit is used, a new
credit must be purchased within 180 days, or service is canceled and the
subscriber must request a new activation in order to regain service. Prepaid
credits are sold in denominations of R$10.00, R$25.00 and R$50.00. With prepaid
service, subscribers have better control of their expenses.
The short-message service known as E-CELULAR allows users to send messages with
a maximum of 150 characters from the Company's website, directly to customers'
handsets. Using the same platform, the Company also releases news on general
topics (regional, national and international) such as economy, sports, weather
forecast, horoscopes, access to account balances in associated banks' balance
and agendas. More than 200,000 customers are already using this service, with
over 400,000 messages sent daily. In July 2000, the Company launched
experimentally a new service called the e-WAP, which is a cellular-based
Internet-access service that will be available in the first semester of 2001 to
all customers who own handsets equipped with this feature. In order to implement
this service, the Company has developed a WAP portal, through which the customer
will be able to access other portals and websites. One of the advantages of this
new service is that customers have the capability of customizing the portal,
which makes access and navigation faster and more convenient. The Company has
already formed valuable partnerships with, among others, FOLHA DE SAO PAULO and
the ESTADO DE SAO PAULO (major Brazilian news agencies), as well as with BANCO
DO BRASIL, UNIBANCO and BANCO ITAU (important banking institutions) and SOM
BRASIL (record producers). Nearly R$20 million has already been invested in this
service and almost 10% of the customers are expected to be using the e-WAP
services by the end of 2001.
One other service made available to the Company's customers is the e-web, which
uses CSD technology (Circuit Switched Data) to connect personal micro-computers
and palm-tops to the Internet through cellular handsets. This provides users
with considerable access mobility and flexibility.
Through agreements with other cellular service providers, the Company offers
automatic roaming services throughout Brazil that allow post-paid subscribers to
make and receive calls while out of the Region. These automatic roaming services
also allow prepaid service subscribers to receive calls when out of the TCO
Region or to make calls if located in Area 7 or Area 8. The Company offers
international roaming in Argentina and Uruguay through agreements with local
cellular service providers in those countries. As of January 2000, the Company
began offering international roaming in over 60 countries in North America,
Europe, Asia, South Africa and Australia. Calls are billed to the subscriber's
cellular bill. No credit card or immediate payment is required. In order to use
international roaming, subscribers sign a contract with the Company in the
amount of R$100.00, and in 48 hours the service is activated. Subscribers who
wish to use international roaming in countries with GSM technology also receive
a handset for use while in transit. The Subscriber is billed later for the
handset usage according to the effective rates of the region where the roaming
occurred. The Company also provides cellular telecommunications service to
subscribers of other cellular service providers while they are in the Region.
The Company charges the other service providers pursuant to roaming agreements
for the service provided to their subscribers. SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--OPERATING AGREEMENTS--ROAMING AGREEMENTS."
Sales and Marketing
The Company divides its subscribers into two main categories: (i) business
customers, consisting of businesses with four or more cellular telephones, who
accounted for 3% of the Company's revenue in 2000 and (ii) individual customers,
consisting of individuals and businesses with fewer than four cellular
telephones, who accounted for 97% of the Company's revenue during 2000. The
Company varies the manner in which it markets and promotes its services and
occasionally develops special plans and services for particular categories of
customers. The Company provides additional support services, such as dedicated
account representatives, to corporate customers.
The Company's customers consist primarily of high- and middle-income
individuals. According to the Company's research, as of December 31, 2000,
approximately 65% of the Company's subscribers were male, and 43% were 29 years
old or younger. Pursuant to ANATEL's regulations, cellular telecommunications
service is provided to all individual applicants, regardless of income level, in
the order in which applications are received. In order to assist in managing the
risk of payment defaults, the Company conducts credit checks on its customers.
Service can be interrupted if a customer fails to make timely payments. SEE ITEM
4 "INFORMATION ON THE COMPANY--BUSINESS OVERVIEW--BILLING AND COLLECTION."
Sales Network
The Company markets its services through a network of Company-owned stores and
magazine stands, supermarkets and specialty stores in the Region. The Company
owns 42 stores located throughout the Region, with 32 stores located in Area 7
and 12 stores located in Area 8. This network enables the Company to market its
service and provide aftersales services to subscribers throughout the Region.
The Company maintains contracts with independent distributors, who receive a
commission per new subscriber. The level of commission varies based on
exclusivity and the distributor's sales performance.
Network and Subscriber Data
The following table sets forth information on the Company's subscriber base,
coverage and related matters at the dates and for the years indicated.
1998 1999 2000
--------- ----------- -----------
Cellular lines in service at year-end (1)................................. 538,814 851,376 1.712.184
Subscriber growth during year (1)......................................... 44.3% 58.0% 101.%
Estimated population of Region at year-end (millions)(2).................. 13.7 28.6 29.1
Percentage of population of Region covered at year-end (3)................ 77.8% 82.0% 84.0%
Penetration at year-end (4)............................................... 3.8% 5.79% 10.06%
Percentage of area of Region covered at year-end (5)...................... 45% 49% 53%
Average monthly incoming minutes of use per subscriber during year........ 116.3 145.3 103.1
Average monthly outgoing minutes of use per subscriber during year........ 109.7 100.9 54.6
Average monthly revenues per subscriber during year (6)................... R$119.77 R$89.46 R$62.20
------------------
(1) These numbers have been updated to account for both Areas 7 and 8,
including rural service. In 1999, there were 16,689 rural cellular lines.
In 2000, there were 16,711 rural cellular lines.
(2) IBGE estimates.
(3) Management estimates of the percentage of population of the Region who can
access the Company's cellular telephone signal. These numbers pertain only
to Area 7.
(4) Number of cellular lines in service divided by the population of the
Region. These numbers pertain only to Area 7.
(5) These numbers pertain only to Area 7.
(6) Net operating revenue divided by the average number of subscribers divided
by 12, expressed in constant REAIS of December, 31 2000, net of value-added
taxes.
The Concessions contain certain network coverage and quality of service
obligations. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY--OBLIGATIONS
OF TELECOMMUNICATIONS COMPANIES." The Company's management believes that the
Company will be able to meet all such obligations.
Sources of Revenue
The Company generates revenue from (i) usage charges, which include measured
service charges for outgoing calls and roaming and other similar charges, (ii)
monthly subscription charges, (iii) network usage charges, which are amounts
charged by the Company to other cellular and fixed-line service providers for
use of the Company's network, (iv) prepaid handset sales and (v) other charges,
including charges for call forwarding, call waiting and call blocking. The
Company's rates are subject to regulation by ANATEL. SEE ITEM 4 "INFORMATION ON
THE COMPANY--BUSINESS OVERVIEW--REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS
INDUSTRY."
Subscriber Rates
Since October 1994, cellular telecommunications service in Brazil, unlike in
North America, has been offered on a "calling party pays" basis, under which the
subscriber pays only for calls that he or she originates (in addition, a
subscriber pays roaming charges on calls received, as well as those made,
outside his or her home registration area). The Region is divided into 92 tariff
areas, with 81 in Area 7 and 11 in Area 8. The lowest base rate ("VC1") applies
to calls made by a subscriber in a tariff area to a line in the same tariff
area. Charges for calls from one tariff area to another within the Region are
assessed at a higher rate ("VC2"). Calls from the Region to persons outside the
Region are billed at the highest rate ("VC3"). When a subscriber makes or
receives a call while outside the Region, a per-call surcharge known as "AD" is
applicable. When a subscriber receives a call outside the home registration
area, the subscriber also pays a certain rate per minute if the subscriber is
located within the Region ("DSL1"), or a higher rate if the subscriber is
located outside the Region ("DSL2"). Measured service charges are discounted 30%
for calls made between 9:00 p.m. and 7:00 a.m. any day or at any time on Sundays
and national holidays ("off-peak calls"). A 30% surcharge is imposed on VC1
calls from one cellular telephone to another, compared to calls from a cellular
telephone to a fixed-line telephone. As a means of incentive to usage, the
alternative plan service called ESSENCIAL "Essential" offers deductibles of 50,
100, 150 and 300 minutes in calls of types VC1 and VC2, with cheaper rates for
the minutes exceeding these limits. The following table sets forth the average
rates for the Basic Service Plan for each year in the three-year period ended
December 31, 2000.
Year ended December 31,
1998 1999 2000
(reais)(1)
Activation fee (2) 151.63 151.63 0
Monthly subscription fee (2) 20.20 20.20 22.12
Per-minute charges:
VC1 (2)(3) 0.27 0.27 0.3023
VC2 (3) 0.40 0.40 0.4067
VC3 (3) 0.66 0.66 0.7383
DSL1 (3) 0.19 0.19 0.2199
DSL2 (3) 0.33 0.33 0.3654
AD (per call)(3) 0.29 0.29 0.29
Information for 1998, 1999 and 2000 is presented in nominal REAIS.
(1) Averages of the rates charged by the Subsidiaries, weighted by number of
subscribers.
(2) Weighted AVERAGE peak rates, net of value-added taxes.
The following table sets forth certain terms of the Company's service plans,
which were implemented as of February 2000.
AREA 7 PLANS 240 500
------------------ ------- -------
STATES DF,TO, DF,
MS,RO AC GO MT TO,MS, AC GO MT
RO
------------------ ------- ------ ------ ------ ------ ------ ------ ------
EXEMPT MINUTES 240 500
------------------ ------ ------
RESIDENCES (1) (2) 162.00 162.00
------------------ ------ ------
SUBSCRIPTIONS (1) 79.00 79.00 80.13 79.00 139.00 139.00 140.98 139.00
VC1 MF (1)(3) 0.4204 0.3780 0.4264 0.4521 0.4204 0.3780 0.4264 0.4521
VC1 MM (1)(4) 0.5466 0.4914 0.5544 0.5877 0.5466 0.4914 0.5544 0.5877
VC2 (1) 0.5700 0.4870 0.5781 0.6114 0.5700 0.4870 0.5781 0.6114
VC3 (1) 1.0231 0.8758 1.0377 1.1002 1.0231 0.8758 1.0377 1.1002
DSL1 (1) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
DSL2 (1) 0.5045 0.4319 0.5117 0.5425 0.5045 0.4319 0.5117 0.5425
AD (1) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(1) Amounts are expressed in nominal REAIS.
(2) Rates not charged during promotions.
(3) "MF" means "mobile fixed."
(4) "MM" means "mobile mobile."
(5) The "240" and "500" Plans were developed for high volume subscribers.
These plans include a number of exempt minutes for VC1 calls to fixed-line
and intra-network cellular telephones.
The table below shows the service plans launched in July, 2000.
PLANS PLANO TCO - 12 ESSENCIAL 50 ESSENCIAL 100 ESSENCIAL 150 ESSENCIAL 300
------------ -------------- ------------- -------------- -------------- --------------
STATE GO OTHER GO OTHER GO OTHER GO OTHER GO OTHER
------------ ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
FREE MINUTES 0 50 MIN. 100 MIN. 150 MIN. 300 MIN.
------------ -------------- -------------- -------------- --------------- -------------
ACTIVATION 0,00 0,00 0,00 0,00 0,00
------------ -------------- -------------- -------------- --------------- -------------
BASIC SUBSCRIPTION 10,14 10,00 39,56 39,00 59,84 59,00 69,98 69,00 110,55 109,00
VC-1 MF 0,70 0,69 0,60 0,59 0,47 0,46 0,44 0,43 0,34 0,33
VC-1 MM TCO 0,70 0,69 0,60 0,59 0,47 0,46 0,44 0,43 0,34 0,33
VC-1 MM B 0,70 0,69 0,60 0,59 0,47 0,46 0,44 0,43 0,34 0,33
VC-2 0,70 0,69 0,60 0,59 0,47 0,46 0,44 0,43 0,34 0,33
VC-3 1,05 1,04 1,22 1,20 1,22 1,20 1,11 1,10 1,04 1,03
DSL-1 0,41 0,40 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00
DSL-2 0,51 0,51 0,51 0,51 0,51 0,51 0,51 0,51 0,51 0,51
AD 0,41 0,40 0,00 0,00 0,00 0,00 0,00 0,00 0,00 0,00
Note: subscriptions to Plans ESSENCIAL 50, 100, 150 and 300 include respectively
50, 100, 150 and 300 minutes of VC1 and VC2 calls for both cellular and
fixed-line numbers originated within Area 7.
Aside from its Basic Service Plan, NBT has implemented other service plans in
Area 8. NBT's service plan rates are set out in the following table:
AREA 8 PLANS BASIC ECONOMIC 100 200 500 EASY COLLEGE STUDENT
------------ ----- -------- --- --- --- ---- ----------------
TIME (1) REGULAR REDUCED
------------ ------- -------
EXEMPT MINUTES (5) 0 0 100 200 500 0 0
RESIDENCES (2) 41.51 0.00 0.00 0.00 0.00 0.00 0.00
SUBSCRIPTIONS (2) 30.83 27.00 54.00 80.00 150.00 12.00 15.00
VC1 MF (2)(3) 0.36 0.32 0.31 0.29 0.22 0.59 0.67 0.21
VC1 MM (2)(4) 0.46 0.42 0.31 0.29 0.22 0.59 0.59 0.18
VC1 MM (OTHER OPER.) (2) 0.46 0.42 0.42 0.42 0.42 0.59 0.89 0.43
(4)
VC2 MF(2) 0.71 0.71 0.71 0.71 0.71 0.59 0.77 0.27
VC2 MM(2) 0.71 0.71 0.71 0.71 0.71 0.59 0.63 0.18
VC2 MM (OTHER OPER.) (2) 0.71 0.71 0.71 0.71 0.71 0.59 0.89 0.43
VC3 (2) 0.81 0.81 0.81 0.81 0.81 0.99 0.99 0.56
DSL1 (2) 0.36 0.36 0.36 0.36 0.36 0.59 0.33 0.10
DSL2 (2) 0.40 0.40 0.40 0.40 0.40 0.59 0.99 0.56
AD (2) 0.57 0.57 0.57 0.57 0.57 0.59 0.40
(1) Regular hours from Monday through Saturday between 07:00 and 21:00 and
Reduced Hours from Monday through Saturday between 21:00 and 07:00 and
Sundays and national holidays.
(2) Amounts are expressed in nominal REAIS.
(3) "MF" means "mobile fixed."
(4) "MM" means "mobile mobile."
(5) "Deductibles" refers to VC1 MF and VC1 MM-NBT calls.
The table below shows the service plans launched in September, 2001.
SERVICES ESSENTIAL 50 ESSENTIAL 100 ESSENTIAL 150 ESSENTIAL 300
--------------------------- ------------ ------------- ------------- -------------
SUBSCRIPTION 39.00 49.00 59.00 99.00
VC1/VC2 MM NBT E MF 0.32 0.32 0.32 0.32
VC1/VC2 MM ANOTHER OPERATOR 0.42 0.42 0.42 0.42
VC3 0.81 0.81 0.81 0.81
DSL1 0.00 0.00 0.00 0.00
DSL2 0.40 0.40 0.40 0.40
AD 0.00 0.00 0.00 0.00
Note: subscriptions to Plans ESSENCIAL 50, 100, 150 and 300 include
respectively 50, 100, 150 and 300 minutes of VC1 and VC2 calls for NBT
mobile and fixed lines originated within Area 8.
TCO/NBT offer two types of pre-paid service plans: TOQUE and TOQUE SIMPLES.
Prepaid service rates are charged by the Subsidiaries in accordance with the
following schedule:
TYPE OF RATE TYPE OF CALL SCHEDULE RATE (2)
------------ ------------ -------- --------
(1) Toque Toque
Simples
VC1 or VC2 From Toque Celular to any cellular or
fixed-line telephone in Area 7. Normal R$0.97 0.79
VC1 or VC2 From Toque Celular to any cellular or Special R$0.48 0.79
fixed-line telephone in Area 7.
VC1 or VC2 From Toque Celular to any Company cellular 24h R$0.48 0.79
telephone on any day, and any local call on
Sundays and national holidays.
VC3 From Toque Celular to any cellular or 24h R$1.90 1.90
fixed-line telephone outside of Area 7.
DSL1 Received when roaming within Area 7 24h Free Free
DSL2 Received when roaming within Area 8 24h 0.43 0.43
Received when roaming outside Areas 7 and 8 1.00 1.00
AD Based on Calls Originated or Received when 24h Free Free
roaming within Areas 7 or 8
Based on Calls Received when roaming outside 0.44 0.44
Areas 7 and 8
TYPE OF SERVICE RATE (3)
-------------- --------
Voicemail/Answering Service R$0.39
Confirmation of Provision of Service R$5.00
Surcharge for obtaining balance information more than twice daily R$0.20
(1) The Special Schedule is available in the Federal District, Goias and
Tocantins from 9:00 p.m. to 9:00 am; in Mato Grosso and Mato Grosso do Sul
from 8:00 p.m. to 8:00 am; in Rondonia from 7:00 p.m. to 7:00 am; and in
Acre from 6:00 p.m. to 6:00 am.
(2) All amounts in reais, inclusive of taxes, charged per minute for calls
made by the cellular telephone inside the caller's tariff area.
The table below shows the rates practiced in Area 8:
Rate
-----------------------
Service Type of Call Hours Toque Toque
Simples
------- ------------ ----- ----- -------
VC1 or To any cellular or fixed line in Area 8 Normal 0.96 0.76
VC2 Special 0.48 0.76
To any Area 8 cellular Normal 0.73 0.76
Special 0.48 0.76
VC3 To any cellular or fixed line outside Area 8 24 h 0.96 0.96
DSL1 Based on Calls received when roaming in Area 8 24 h Free Free
DSL2 Based on Calls received when roaming in Area 7 24 h Free Free
Based on Calls received when roaming outside 1.00 1.00
Areas 7 and 8
AD Based on Calls received when roaming in Areas 24 h Free Free
7 and 8
Based on Calls received when roaming outside 0.44 0.44
Areas 7 and 8
Additional Services Application Rate
---------------------------------------------- ----------- ----
Message retrieval Per minute 0.39
Fee for balance inquiry once per day Per call Free
Fee for balance inquiry more than once per day Per call 0.10
ROAMING FEES
The Company also receives revenue pursuant to roaming agreements with other
cellular service providers. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--OPERATING AGREEMENTS--ROAMING AGREEMENTS." When a call is made from
within the Region by a subscriber of another cellular service provider, that
service provider pays the Company for the call at the applicable rate.
Conversely, when a Company subscriber makes a cellular call outside the Region,
the Company must pay the charges associated with that call to the cellular
service provider in whose region the call originates.
NETWORK USAGE CHARGES
Pursuant to interconnection agreements with other telecommunications providers,
the Company earns revenues from any call (cellular or fixed-line) originating
with another cellular or fixed-line service provider and terminating on a
cellular telephone within the Region. SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--OPERATING AGREEMENTS--INTERCONNECTION AGREEMENTS."
The Company charges the service provider from whose network the call originates
a network usage charge for each minute the Company's network is used in
connection with the call. The average network usage tariff charged by the
Company to other service providers in 1997 and 1998 was R$0.17, R$0.19 per
minute, respectively, net of value-added taxes. Through October of 1999, the
network usage tariff was R$0.19. As of November, 1999, ANATEL granted an
increase of 14.7%, increasing the tariff to R$0.2180. In December 2000, ANATEL
authorized a 23.26% readjustment and the value of the TU-M rose to R$0.2687, net
of value-added taxes. In Area 8, where the NBT operates, the values of the TU-M
was R$0.21 until October 2000. After October and the 26.38% readjustment
authorized by ANATEL the TU-M rose to R$0.2654, net of value-added taxes.
TAXES ON TELECOMMUNICATIONS SERVICES
The cost of telecommunications services to the subscriber includes a variety of
taxes. The average rate of all such taxes, as a percentage of gross operating
revenues for the Company, was approximately 20.1% in 2000.
o ICMS. The principal tax is a state value-added tax, the IMPOSTO SOBRE
CIRCULACAO DE MERCADORIAS E SERVICOS (the "ICMS"), which the Brazilian
states impose at varying rates on certain revenues from the provision
of telecommunications services. The ICMS rate in each state in the
Region is 25% for domestic telecommunications services, except in the
State of Acre, where the rate for domestic telecommunications services
is 17% for intrastate calls and 13% for interstate calls, and in the
State of Mato Grosso, where the ICMS rate is 30%.
In June 1998, the governments of the individual Brazilian states
approved an agreement to interpret existing Brazilian tax law to apply
the ICMS effective July 1, 1998 to certain services to which the ICMS
had not previously been applied, including cellular activation. The
agreement also provides that the ICMS may be applied retroactively to
activation services rendered during the five years preceding June 30,
1998. SEE ITEM 8 "FINANCIAL INFORMATION--CONSOLIDATED STATEMENTS AND
OTHER FINANCIAL INFORMATION--LEGAL PROCEEDINGS--LITIGATION RELATED TO
THE APPLICATION OF THE ICMS."
o COFINS. The Contribuicao Social para o Financiamento da Seguridade
Social, or COFINS, is a social contribution tax on gross revenues
(operating and financial). On November 27, 1998, the Brazilian
government, through Law no. 9,718, increased the COFINS rate from 2%
to 3%, allowing a set-off of up to 1/3 of the COFINS amount with the
amount owed as a result of the Contribuicao Social Sobre Lucro
Liquido, or CSL. The Provisional Measure no 1991-13 of January 13,2000
had revoked the allowance to set-off of up to 1/3 of the COFINS amount
with the amount owed as a result of the CSL for periods after January
1, 2000.
o PIS. The Programa de Integracao Social, or PIS, is another social
contribution tax which, together with the COFINS, is imposed on
certain telecommunications services at a combined rate of 3.65% of
gross revenues (operating and financial).
o FUST. On August 17, 2000, the Brazilian government, through Law no.
9,998, created the Fundo de Universalizacao dos Servicos de
Telecomunicacoes, or FUST, a social contribution tax applicable to all
telecommunication services. The purpose of the FUST tax is to fund a
portion of the costs incurred by telecommunication service providers
to meet the universal service targets required by ANATEL, in case
these costs are not entirely recoverable through the provision of
telecommunication services. The FUST is imposed at a rate of 1% on
gross operating revenues and its cost may not be passed to
subscribers.
o FUNTTEL. On November 28, 2000, the Brazilian government, through Law
no. 10,052, created the Fundo para Desenvolvimento Tecnologico das
Telecomunicacoes, or FUNTTEL, a social contribution tax applicable to
all telecommunication services. The purpose of the FUNTTEL tax is to
promote the development of telecommunications technology in Brazil and
to improve competition in the industry by:
o Encouraging research and development of new technologies;
o Promoting the qualification of human resources;
o Creating new employment opportunities; and
o Allowing small and medium companies to access the lending market.
The FUNTTEL is imposed at a rate of 0.5% on gross operating revenues
and its cost may not be passed to subscribers.
o FISTEL. On July 7, 1966, the Brazilian government, through Law
no. 5,070, created the Fundo de Fiscalizacao das Telecomunicacoes
("FISTEL"), a tax applicable to telecommunication services. The
purpose of FISTEL is to provide financial resources to the
Brazilian government for promoting the control and inspection of
the sector.
FISTEL is supported by two fees: a fee for inspection and installing
assessed on authorized telecommunication stations at the time of the
issuance of the authorization certificate. There is a fixed value for
this fee according to the kind of equipment. The other is a fee for
inspection and operation that is annually assessed on the total number
of stations authorized until December 31 of the previous year. The
latter fee corresponds to 50% of the estimated fee for inspection and
installing.
BILLING AND COLLECTION
The Company's billing system has four main functions: (i) subscriber
registration, (ii) subscriber information management, (iii) accounts payable
management and (iv) billing and collection. To facilitate the billing and
collection processes, there are eight staggered billing cycles per month.
The Company allows subscribers at least 15 days from the due date before
suspending service for nonpayment. The Company's management estimates that
approximately 50% (by value) of its invoices are paid on or before the due date.
If a subscriber's payment is more than 15 days past due, service may be
suspended until full payment for all outstanding charges is received. After 60
days delinquency, the subscriber is referred to a collection agency. If a
subscriber's payment is more than 90 days past due, service may be discontinued.
The Company's net losses on trade accounts receivable were 6.5%, 7.4% and 3.8%
of gross operating revenues in 1998, 1999 and 2000, respectively. SEE ITEM 5
"OPERATING AND FINANCIAL REVIEW AND PROSPECTS--OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 1998, 1999 AND 2000--OPERATING EXPENSES--SELLING EXPENSES."
Until November 1999, the collection of accounts past due over 60 days was
contracted to third parties. As of November 1999, the Company has effected the
collection of its own accounts and hopes to reduce the delinquency rate of its
subscribers. For subscribers whose service is canceled due to over 90 days
delinquency, the Company offers a 20% discount for installment payments, and a
30% discount for cash payments, of amounts due.
The Company receives roaming fees from other cellular service providers when
their subscribers make cellular calls while within the Region, and pays roaming
fees to other cellular service providers when its subscribers make cellular
calls while outside of the Region. SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--SOURCES OF REVENUE--ROAMING FEES." The Company
receives network usage fees from other service providers when their subscribers
make calls that terminate on a cellular telephone within the Region, and the
Company pays network usage fees when its subscribers make calls that terminate
on the network of another service provider. SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--SOURCES OF REVENUE--NETWORK USAGE CHARGES." After
each collection cycle is over, the Company and the other service providers
reconcile the amounts owed between them and settle on a net basis. For
international and domestic long-distance calls made by its subscribers, the
Company forwards the amount collected for such calls to EMBRATEL and charges
EMBRATEL a fee for the use of its cellular telecommunications network.
NETWORK
As of December 31, 2000, the Company's cellular telecommunications network
covered approximately 85% and 58% of the population of Area 7 and Area 8,
respectively. The Company continues to expand its cellular telecommunications
network to cover as broad a geographical area as is economically feasible in
order to meet consumer demand. Under the Concessions, the Company has certain
obligations concerning network coverage. SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS
INDUSTRY--OBLIGATIONS OF TELECOMMUNICATIONS COMPANIES." At present, the Company
is in compliance with its network coverage obligations and has met or exceeded
all ANATEL requirements.
As of December 31, 2000, the Company's cellular telecommunications network in
Area 7 consisted of 13 cellular switches, 601 base stations, 35 repeaters and
36.060 voice channels and one national and two regional signaling transfer
points. The Company's seven Nortel DMS-MTX and five Ericsson AXE 10 switches are
distributed among its switching centers, which are located in Brasilia, Goiania,
Palmas, Campo Grande, Cuiaba, Rondonopolis, Porto Velho and Rio Branco. The
network is connected primarily by a fiber-optic transmission system leased from
fixed-line service providers in the Region. Nortel and Ericsson are the
Company's primary suppliers of cellular telecommunications equipment.
On October 7, 1999, NBT commenced providing cellular telephone services, using
the Nortel DMS-MTX cellular platform throughout its network. As of December 31,
2000, NBT had nine cellular switches in Manaus, Belem, Santarem, Maraba,
Redencao, Sao Luis, Imperatriz, Boa Vista, Macapa, 112 base stations and 6.874
voice channels.
The Company continues to increase the capacity and improve the quality of its
cellular telecommunications network by deploying new base stations and adding
channels to existing base stations. This development is carried out in response
to projected subscriber demand and international quality standards for cellular
telecommunications service. The Company's management believes that its cellular
telecommunications network will require further development to continue to meet
the demand for cellular telecommunications services in the states' capitals and
their surrounding metropolitan areas.
Digitalization represents one of the Company's key strategic initiatives. Until
1997, the Company supplied only AMPS analog cellular telecommunications service.
Since 1998, the Company has been up-grading its network to supply digital
service based on the TDMA standard in the Federal District, Rondonia, Mato
Grosso do Sul, Goias, Mato Grosso, Acre and Tocantins. The Company's management
believes that digitalization offers certain advantages, including greater
network capacity, reduced operating costs and additional revenues through the
sale of value-added services. Digital cellular telecommunications services also
offer subscribers greater security.
In 2000, the Company also increased its transmission capabilities by deploying
numerous radio links to connect cell sites to switches. Additionally, for
interconnection purposes, the Company started deploying and projecting long haul
transmissions to connect its main routes, such as Campo Grande -Dourados in the
State of Mato Grosso do Sul. These changes should reduce the Company's
connection costs.
Besides increasing the number of cellular platforms, in 2000 the Company
expanded its voice-mail and prepaid platforms in the Region. As of March 13,
2000, the Company made available the short message service ("SMS") to its
subscribers, named E-CELULAR. SMS allows subscribers using digital cellular
handsets to receive and send messages directly on the screen of their handset.
The Company activated in 2000 its platform for SMS, based in Brasilia, to cover
the entire Region, including Area 8.
Also, in 2000, the company activated CSD (Circuit Switched Data) platforms in
Brasilia, Goiania, Campo Grande, Cuiaba, Belem, Manaus and Sao Luis and, in late
November, the Company will activate its WAP (Wireless Application Protocol)
Gateway provided by Ericsson to provide customers with data services and to
obtain convergence with the Internet. The service started with slow growth due
to the lack of handsets available in the market, but it is now gaining force due
to the increasing availability of handsets and the new applications being
developed.
In 2000, the Company acquired a telecommunications network management system
from TTI, an Israeli company, which is expected to supervise the entire Region
network by July 2001. This telecommunications system is expected to operate
through a 24 hours per day/7 days per week management center, currently being
installed in Brasilia.
FRAUD DETECTION AND PREVENTION
The two principal types of fraud encountered by the Company are subscription
fraud and cloning fraud. Subscription fraud occurs when a person, typically
using a fictitious identification and address, obtains cellular
telecommunications service with no intention of paying for the service and then
incurs substantial charges before the cellular service provider is able to
identify the fraud and terminate service. Such fraud is detected prior to the
invoicing of charged services by means of analysis of the use of the cellular
line and of information on the subscriber on file with the Company and with
collection agencies. However, controlling this type of fraud is made difficult
by virtue of ANATEL's application of Rule 05/78, which prohibits the suspension
of service prior to an account being 15 days past due. However, service may be
still suspended when the subscription is a suspect one and fraud has been
confirmed (by means of specific check-ups). In such cases, the rules imposed by
ANATEL do not prevent the discontinuance of service. Nonetheless, subscription
fraud constitutes one of the most significant problems for cellular companies in
Brazil.
Cloning fraud consists of duplicating the cellular signal of a BONA FIDE
subscriber, enabling the perpetrator of the fraud to make telephone calls using
the subscriber's signal. The MIN (user identification number) and ESN (equipment
serial number) of the subscriber are captured by the cloner through the use of a
radio scanner. Such calls are billed to the subscriber but the receivable is
written off when the Company discovers that it arose from a fraudulent call. The
Company's fraud control section can detect the clone and, as of the first cloned
call, suspend service immediately. The subscriber is then informed and his
invoices are scrutinized monthly. Currently, cloning fraud is under control due
to preventative measures taken by the Company such as blocking international
calls (service is provided only pursuant to the subscriber's request) and the
creation of a 24 hour fraud control center, consisting of 17 analysts and
utilizing the Integrated Fraud Detection and Control System ("SAF"). SAF began
functioning on July 14, 1998 and is linked to a national network. SAF allows the
detection, analysis and control of abnormalities of cellular service usage that
may indicate fraud throughout the national territory and almost in real time.
QUALITY OF SERVICE
In the past, the Company's cellular telecommunications network was subject to
occasional congestion in certain areas, primarily the Brasilia metropolitan
area. Congestion can result in the inability to make calls and the premature
termination of calls. The Company's service problems were worsened by
government-imposed constraints on the Company's capital expenditure budget until
July 1998, which prevented the Company from increasing network capacity to meet
demand for cellular telecommunications service in parts of the Region. SEE ITEM
4 "INFORMATION ON THE COMPANY--HISTORY AND DEVELOPMENT OF THE
CORPORATION--CAPITAL EXPENDITURES." Following the Breakup, thE Company was no
longer subject to government imposed capital expenditure constraints, which
allowed for increased investment in the Company's cellular telecommunications
network. Network congestion in the concession areas of Telebrasilia Celular and
Teleacre Celular in the past limited the Company's ability to meet demand for
cellular telecommunications services and resulted in the creation of waiting
lists to obtain such services. However, by November 1998 the congestion problems
had been resolved and the Company had eliminated all waiting lists.
COMPETITION
The General Telecommunications Law provides for the introduction of competition
in telecommunications services in Brazil. The Federal Government has granted ten
licenses to private companies (each a "Band B Service Provider") to provide
cellular telecommunications service within particular regions of Brazil on a
frequency range referred to as "Band B." The frequency range used by the
cellular service providers that were spun off from the TELEBRAS System,
including the Company (each a "Band A Service Provider") is referred to as "Band
A." Each Band B license covers a geographic region which generally corresponds
to a Cellular Region. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY--CONCESSIONS
AND LICENSES."
BAND B COMPETITION IN AREA 7
A license to provide cellular telecommunications services in Area 7 on Band B
has been granted to Americel, S.A. ("Americel"), whose shareholders include Bell
Canada International BVI-V Ltda. (20%), Telesystem International Wireless
(Brazil), Inc. (20%) and various Brazilian pension funds. Americel paid R$338.5
million for the license. Americel began to provide digital cellular
telecommunications service based exclusively on the TDMA standard in the Region
in November 1997. Americel does not provide analog services in the Region.
Americel's rights and obligations under its license are substantially identical
to the Company's rights and obligations under the Concessions. Americel's
subscribers use dual-mode AMPS and TDMA standard handsets in order to roam in
areas where digital service is not yet available.
The Company's management estimates that, as of December 31, 2000, Americel had
approximately 21.6% of the market, covering principally the state capitals and
surrounding metropolitan areas.
The Company also competes with fixed-line telephone service providers. Certain
of the Company's existing and potential subscribers might shift to fixed-line
service providers for a number of reasons, including price, if enough capital
were invested in the fixed-line telephone industry in Area 7 to increase
fixed-line density and improve service. The fixed-line service provider in Area
7 is Tele Centro Sul Celular Participacoes S.A. ("Tele Centro Sul"). To increase
competition and improve the quality of service, the Federal Government has
granted concessions to other "mirror companies" to provide fixed-line services.
On September 30, 1999, the Federal Government granted a concession to Global
Village Telecom, S.A. to provide fixed-line telecommunications services in the
same concession area as Tele Centro Sul. Global Village Telecom S.A. has
undertaken to install 650,000 fixed-line telephones until 2002 and to this end
will invest approximately R$1 billion. The concession includes a broad
authorization to use fixed wireless solutions to attain rapid deployment of
fixed-lines to subscribers.
BAND A COMPETITION IN AREA 8
In Area 8, the Band B Subsidiary competes with the subsidiaries of Tele Norte
Celular Participacoes S.A., whose commercial name is Amazonia Celular and whose
shareholders include Telesystem International Wireless (Brasil), Inc., Banco
Opportunity S.A. and Brazilian pension funds. As of December 31, 2000, Amazonia
Celular's subsidiaries had approximately 756,502 subscribers and a penetration
rate of 5.09 subscribers per 100 inhabitants. It provides largely AMPS service,
with TDMA service launched only in September 1999. By the end of 2000, it had a
74.7% market share.
PCS COMPETITION
In November 2000, ANATEL published regulations for the issuance of new licenses
to provide wireless communication services through a new technology known as
personal communication services, or PCS. New PCS licenses will compete with
existing cellular operators in each region. PCS, which is similar to digital
cellular telecommunications services, will operate at the 1.8 GHz frequency
range. The regulations divided Brazil into three regions covering the same
geographic area as the concession for the fixed-line telecommunication services
and provide for three PCS licenses to be granted in each of these regions. The
three licenses in each region are referred to as Band C, Band D and Band E,
respectively. ANATEL held auctions for PCS licenses during the first quarter of
2001 in which some of these PCS licenses were awarded and plans to hold
additional auctions in the future to sell the remaining PCS licenses. According
to the PCS regulations:
o Each successful bidder will receive, besides an authorization to
provide PCS service in the relevant region, an authorization to
provide domestic and international long-distance services in that
region;
o Existing cellular service providers, as well as new entrants in the
Brazilian telecommunications market, may bid for Band C, Band D and
Band E PCS licenses. However, fixed-line operators and their
controlling shareholders may only bid for Band D and Band E PCS
licenses;
o A cellular or PCS operator, or its respective controlling
shareholders, may not hold more than one license in any region.
Accordingly, a cellular operator that is awarded a PCS license which
results in a geographical overlap between its licenses has two
alternatives: (i) it may sell its stake in its existing cellular
operator within six months of executing the contract relating to the
PCS license; or (ii) it may renounce the PCS license in the geographic
regions where the overlap exists.
o Current Band A and Band B cellular service providers were given the
option of exchanging their existing concession for PCS licenses. SEE
ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS OVERVIEW--REGULATION OF
THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY."
BAND C COMPETITION
There were no participants in the auction for the Band C PCS licenses held on
January 30, 2001. ANATEL plans to hold a second auction for the Band C PCS
licenses.
BAND D COMPETITION
On February 13, 2001, ANATEL held an auction for the Band D PCS licenses.
Telecom Italia Mobile ("TIM"), bid successfully for the Band D PCS licenses
covering two of the PCS regions - the center-south of Brazil region, which
comprises the concession areas of our Subsidiaries, with the exception of
Teleacre Celular S.A., Teleron Celular S.A. and Norte Brasil Telecom S.A, and
the Sao Paulo State region. TIM paid R$543 million for the Band D PCS license in
the center-south region and R$997 million for the Band D PCS license in the
State of Sao Paulo, representing premiums of 0.6% and 40.42%, respectively,
above the minimum bid price established by ANATEL.
TIM will be permitted to commence Band D operations in 2002 provided that the
fixed-line service provider in each of these regions achieves the operational
targets established by ANATEL by December 2001. Tele Centro Sul Participacoes
S.A., known as Brasil Telecom, is the fixed-line provider in the center-south
region and Telecomunicacoes de Sao Paulo S.A. - Telesp, known as Telefonica, is
the fixed-line provider in the Sao Paulo State region.
Tele Norte Leste Participacoes S.A ("Telemar"), the primary fixed-line operator
in the remaining region, comprising of 16 states in the north and east of
Brazil, bid successfully for the PCS license covering the region in which it
offers fixed-line telecommunications services. Telemar paid R$1.1 billion for
the Band D PCS license, which represents a 17.23% premium above the minimum bid
price established by ANATEL, and will provide PCS services through GSM
technology. Telemar will be permitted to commence Band D operations in 2002
provided that it achieves the operational targets established by ANATEL by
December 2001.
BAND E COMPETITION
On March 13, 2001, ANATEL held an auction for the Band E PCS licenses. TIM was
the only bidder in the Band E PCS auction, acquiring a license to provide PCS
services in the region comprising of the 16 states in the north and east of
Brazil, in which Telemar operates as a fixed-line provider. There were no
bidders for the Band E PCS licenses in the two other regions. TIM paid R$990
million for the license, which represents a 5.32% premium above the minimum bid
price established by ANATEL. TIM will also be permitted to commence Band E PCS
operations in 2002, provided that Telemar achieves the operational targets
established by ANATEL by December 2001.
ANATEL plans to hold a second auction for the Band E PCS licenses in the
center-south and the Sao Paulo State regions.
OTHER COMPETITION
Satellite services, which provide nationwide coverage, are available in Brazil.
Although satellite services have the benefit of covering a much greater area
than cellular telecommunications services, they are considerably more expensive
than cellular telecommunications services and do not offer comparable coverage
inside buildings. The Company does not plan to offer mobile satellite services
(other than pursuant to a roaming arrangement with a satellite service
provider), although it may consider doing so in the future.
There can be no assurance that the entry of new competitors will not have a
material adverse effect on the Company's business, financial condition, results
of operations or prospects. Any adverse effects on the Company's results and
market share from competitive pressures will depend on a variety of factors that
cannot now be assessed with precision and that are beyond the Company's control.
Among such factors are the identity of the competitors, their business
strategies and capabilities, prevailing market conditions at the time, the
regulations applicable to new entrants and the Company and the effectiveness of
the Company's efforts to prepare for increased competition. One or more new
competitors may have technical or financial resources greater than those of the
Company.
OPERATING AGREEMENTS
INTERCONNECTION AGREEMENTS
In order to make telephone calls, subscribers use the telecommunication services
available on the networks provided by the SWITCHED FIXED TELEPHONE SYSTEM
("STFC") and the CELLULAR MOBILE SERVICE ("SMC"). In order to facilitate
telecommunications between cellular telephone users and fixed-line telephone
users, as well as among cellular telephone users, it is necessary to establish
Network Interconnection Agreements.
Each network makes its Interconnection Points available, and circuits with 2 Mb
are used to establish the physical connection between these points. These
physical connections may be provided by any of the parts or by both parts or,
under extraordinary circumstances, they may be obtained through contracts with
third parties.
In Network Interconnection Agreements, the responsibility for providing the
physical connection is shared equally by the two companies and the
responsibility for physically building each connection is normally established
by the Parts in common agreement upon the joint technical planning of the
connection.
ROAMING AGREEMENTS
Agreements for automatic roaming have been established, through the National
Roaming Committee ("CGR"), among all the Band A and Band B cellular service
providers, except Americel S.A. with the Company in Area 7 and Tele Norte
Celular Participacoes S.A. with NBT in Area 8, with which the Company is not
obligated to enter into such an agreement pursuant to ANATEL regulations.
The agreements permit the Company's subscribers to use their cellular phones on
networks of other cellular service providers while traveling or "roaming"
outside the Region. Conversely, the Company is required to provide cellular
service to subscribers of those cellular service providers when those
subscribers are within the Region. The agreements require the Company and the
other cellular service providers to provide service to roaming subscribers on
the same basis as they provide service to their own subscribers and to carry out
a monthly reconciliation of roaming subscriber usage charges.
Each company participating in the National Automatic Roaming Network pays a fee
equal to R$0.05 per originated or terminated call that involves roaming.
The Brazilian cellular service providers have also, through CGR, entered into
international roaming agreements with foreign Service Providers, which permit
their subscribers to use their cellular phones in Argentina and Uruguay and
subscribers of those service providers to use their cellular phones in Brazil.
The terms of these international roaming agreements vary from agreement to
agreement. The Company also has a roaming agreement with Gradiente, an
international cellular service roaming provider, to permit its subscribers to
have roaming services in North America, Europe, and many countries in Asia,
South Africa and Oceania.
REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY
GENERAL
The Company's business, including services provided and rates charged, is
subject to comprehensive regulation under the General Telecommunications Law
(Federal Law n(0) 9,472/97), Federal Law n(0) 9,295/96, also known as The LEI
MINIMA (the "Minimum Law"), Federal Decree n(0) 2,056/96 that establishes
general rules for cellular servicE (the "Cellular Service Rule") and a series of
administrative-level regulations enacted by the Ministry of Communications and
ANATEL, among them ANATEL Resolution n(0) 73, which sets the general rules foR
telecommunications services. Each of the Subsidiaries operates under a
Concession that authorizes it to provide cellular services and sets forth
certain obligations.
ANATEL is the regulatory agency for telecommunications in Brazil. It is
established by the General Telecommunications Law and operates under the October
1997 REGULAMENTO DA AGENCIA NACIONAL DE TELECOMUNICACOES (the "ANATEL Decree").
ANATEL is a government body governed by a separate regulatory scheme. It has
administrative and financial independence and is linked but not subordinated to
the Ministry of Communications. ANATEL has authority to issue legally binding
regulations to telecommunications service providers. Any such proposed
regulation is subject to a period of public comment, which may include public
hearings. Due to its independent status, decisions or regulations enacted by
ANATEL are not sub to appeal to any other government body, i.e. they can only be
challenged administratively within ANATEL or judicially. ANATEL directors have
fixed tenures, which further strengthens its autonomy.
CONCESSIONS AND LICENSES
Concessions and licenses to provide telecommunications services are granted
either under the public regime or the private regime. Only fixed-line
concessionaires are currently operating under the public regime. Services
provided under the private regime can be considered of collective interest or
restricted interest. While public services are subject to requirements that
arise from the General Telecommunications Law and the May 1998 Decree that
establishes the GENERAL FIXED-LINE SERVICE UNIVERSALIZATION TARGET PLAN,
collective interest private regime services are only subject to requirements
imposed by ANATEL on the Concessions. Restricted interest private services are
subject to no substantial requirements, other than in connection with
radio-frequency usage, when applicable.
The Subsidiaries operate under the collective interest private regime, being
subject to a series of requirements imposed on the Concessions.
Pursuant to the Minimum Law and the General Telecommunications Law, the Band A
and Band B Service Providers have been granted Concessions. Each Concession is a
specific grant of authority to supply cellular telecommunications services,
subject to certain requirements contained in the applicable obligations provided
for under each concession. If a cellular service provider wishes to offer any
telecommunications service other than the cellular service authorized by its
concession, it may apply to ANATEL for a license to offer such other services.
Each Concession has been granted for an initial period of 15 years, renewable
for another 15 years if the obligations imposed on the Concession have been met.
Previously under the Concessions, Band A and Band B Service Providers were
guaranteed that ANATEL would not authorize additional providers of cellular
telecommunications services until December 31, 1999. As this restriction has now
expired, the only limitation to the granting of licenses to new cellular service
providers within the Region is in the General Telecommunications Law, which
provides that the number of authorizations issued within a determined region
will be limited when (i) the entry of a new service provider is technically
impossible (e.g. lack of radio spectrum capacity) or (ii) the increase in number
of competitors would affect the financial soundness of the existing service
providers.
ANATEL, through its resolutions 235 and 254, which were enacted in September
2000 and January 2001, respectively, granted the cellular service providers
operating under the Concessions the option of converting, at their own
discretion, their concession agreements into PCS authorization agreements. Upon
choosing such conversion, the cellular service provider would receive, for each
of the Concessions being converted, an authorization to provide cellular
service, an authorization to provide domestic long-distance service and an
authorization to provide international long-distance service, as well as the
right to use an additional 10 MHz band at the 1.9GHz range to provide cellular
service. This additional radio frequency band, however, would be charged to the
service provider choosing the conversion option.
The Company is currently analyzing whether to make the conversion. If the
Company opts to convert, the additional band would require payment of
approximately R$85 million. Operating under an authorization would implicate the
loss of the guarantee of the terms and conditions of the license for the 15-year
term, however, it would give the Company greater discretion in running the
business and relieve the Company of the obligation to revert its operating
assets to the Brazilian government when the Concessions end.
OBLIGATIONS OF TELECOMMUNICATIONS COMPANIES
QUALITY OF SERVICE, NETWORK COVERAGE AND CUSTOMER CARE. All cellular
telecommunications service providers are subject to obligations concerning
quality of service, network coverage and customer care, arising from the
Concessions or from the MEMORANDUM OF UNDERSTANDING FOR CELLULAR SERVICE
PROVIDING SUPERVISION (the "Service Quality Memorandum"), entered into and
between the Subsidiaries and ANATEL in November 18, 1999.
Under the Concessions, the Company's quality of service obligations require
that: (i) the cellular network be fully operational 98% of the time; (ii) the
rate of failed call completion due to signal loss not exceed 3%; (iii) the rate
at which attempted calls fail due to voice channel congestion at peak hours not
exceed 5%; (iv) the drop rate for connected calls not exceed 3%; (v) the
cellular network be available on first call attempts 90% of the time; and (vi)
the number of subscriber complaints per month not exceed 5%. The Company's
network coverage obligations require the Company to provide cellular
telecommunications services to all municipalities in the Region with populations
greater than 100,000 by November 4, 1999 and to 70% of the municipalities in the
Region with populations greater than 30,000 by November 4, 2002. Customer care
obligations under the Concessions require activation to be effective, depending
on the district or municipality, within: (i) 180 business days of an activation
request during the first year of operation; (ii) 120 business days of an
activation request during the second year of operation; (iii) 30 business days
of an activation request during the third year of operation; (iv) 15 business
days of an activation request during the forth year of operation; and (v) 5
business days of an activation request during and after the fifth year of
operation.
The Company is currently in compliance with all quality and customer care
obligations as defined by ANATEL and has met or exceeded its network coverage
obligations under the Concessions from 1998 to the present time. Failure to meet
these obligations may result in fines and penalties of up to 0.05% of net
operating revenues per day until the Company complies with these obligations, as
well as potential revocation of the Concessions. While there can be no
assurances, the Company's management believes that the Company will remain in
compliance with its obligations under the Concessions at all times.
The Service Quality Memorandum provides for a commitment by the Subsidiaries to
employ their best efforts to achieve the following service quality ratios by
June 2001: (i) monthly rate of general subscriber complaints less than 3.5%;
(ii) monthly rate of subscriber complaints about network coverage plus
complaints about system's lack of capacity less than 1.5%; (iii) monthly rate of
completed calls to customer service centers, at peak hours, greater than 80%;
(iv) monthly rate of effectively responded subscriber communications greater
than 97%; (v) monthly rate of subscribers attending customer service facilities
and being assisted in 10 minutes or less greater than 80%; (vi) number of bills
with error complaints per thousand issued, for one-month periods, less than 10;
(vii) monthly rate of connected calls, originated from Company's subscribers at
peak hours, greater than 57%; (viii) monthly rate of calls connected in less
than 15 seconds during peak hours greater that 85%; and (xiv) monthly rate of
dropped calls at peak hours smaller than 3%. All cellular service providers must
submit monthly reports regarding such rates to ANATEL. Whenever
under-performance is unjustified and best efforts to avoid the failure are not
proven, ANATEL can audit the respective cellular service provider. If auditing
results point to complete disregard by the concessionaire of its obligations to
provide quality and continuous cellular service, such service provider may
suffer intervention by ANATEL and possible license revocation. With the
exception of NBT, which has not complied with the target described in section
(vii) above, the Subsidiaries have met all the monthly targets so far. While
there can be no assurances, the Company anticipates that NBT will soon comply
with all the monthly targets and that the Company will continue to reach such
targets at all times.
INTERCONNECTION. All telecommunications service providers are required to
provide interconnection upon request to any party that provides public
telecommunications services. The terms and conditions of interconnection are to
be freely negotiated between parties, subject to a price cap established by
ANATEL. If a company offers any party an interconnection tariff below the price
cap, it must offer that tariff to any other requesting party on a
nondiscriminatory basis.
ANATEL has stated that for the time being it does not expect to require network
service providers to permit co-location of equipment. Co-location means that a
network operator permits another party to place its switching equipment in or
near the local exchange of the network operator and to connect to the network at
this location. Co-location is currently a matter for negotiation between
interested parties.
ANATEL does not currently require network operators to unbundle network elements
and services, although ANATEL has stated that it plans to review the issue on a
regular basis and may require unbundling in the future. In an unbundled regime,
each network operator is required to provide a detailed list of network services
and elements which may be purchased separately by a party requesting
interconnection.
RATE REGULATION
The Concessions provide for a price-cap mechanism to set and adjust rates on an
annual basis. The cap is a maximum weighted average price for a basket of
services. The basket includes the services in the Basic Service Plan, including
monthly subscription fees, VC1 charges, VC2 charges, VC3 charges, DSL1 charges,
DSL2 charges, and AD charges, as well as interconnection charges, including
network usage fees and charges to provide a physical connection to the network
(INTERLIGACAO).
The initial price cap agreed upon by ANATEL and the Company in the Concessions
is based on previously existing tariffs, which were developed based on the fully
allocated costs of the Company. The initial price cap is adjusted on an annual
basis under a formula set forth in the Concessions. The price cap is adjusted to
reflect the rate of inflation as measured by the IGP-DI.
The weighted average tariff for the entire basket of services may not exceed the
price cap, but the tariffs for individual services within the basket may be
increased. The Company may increase the tariff for any individual service by up
to 20%, subject to a downward adjustment for inflation effects already captured
in the annual upward adjustments of the overall price cap for the basket, so
long as it adjusts other prices downward to ensure that the weighted average
tariff does not exceed the price cap.
Other telecommunications companies wishing to interconnect with and use the
Company's network must pay certain fees, primarily a network usage fee. The
network usage fee is a flat fee charged per minute of use, which represents an
average charge for a basket of network elements and services. The network usage
fee charged by Band A Service Providers is subject to a price cap set by ANATEL.
The price cap for the network usage fee varies from company to company based on
the underlying cost characteristics of each company's network. For a breakdown
of the Company's past network usage charges, SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--SOURCES OF REVENUE--NETWORK USAGE CHARGES."
ANCILLARY SERVICES, VALUE-ADDED SERVICES AND INTERNET REGULATION
Under the recently amended Norm 23/96, cellular service providers are authorized
to provide ancillary services to subscribers in connection with one or more
service plans. The Company currently offers its TDMA capable subscribers the
following value-added services: (i) caller identification; (ii) voice mail;
(iii) call forwarding; (iv) call waiting; (v) three-way calling; (vi) SMS; (vii)
e-web; and (viii) WAP. On June 15, 2000, ANATEL issued Resolution 226, amending
Norm 23/96. Resolution 226 requires all cellular service providers to offer
voicemail service in all service plans, defines strict rules for billing
air-time in connection with voicemail usage and authorizes the service providers
to provide and charge for SMS in connection with one or more service plans.
Before Resolution 226, SMS was provided only under test permission and could not
be charged. Resolution 226 also requires cellular service providers to provide
detailed billing to subscribers, which was formerly considered ancillary and
charged for separately. It also modifies billing criteria for short repetitive
calls (3 to 30 seconds) of the same origin and destination, provided that the
delay between calls does not exceed 120 seconds.
Value-added services are not considered under Brazilian telecommunications
regulations to be telecommunications services per se, but rather an activity
that adds features to a telecommunications service that supports them.
Regulations oblige all telecommunication service providers to grant network
access to any party interested in providing value-added services, on a
non-discriminatory basis, unless technical impossibilities arise.
Telecommunications service providers are also allowed to render value-added
services through their own network. Internet access is considered by Brazilian
legislation as a value-added service, and its providers are not considered to be
telecommunication companies. Current regulations allow the Company or any other
interested party to offer Internet connection services through the Company's
network. While setting consumer pricing for its Internet connection services,
the Company must consider the costs charged to third parties offering similar
services for the Company's network usage. ANATEL is expected to issue specific
regulations in the near future regarding the use of cellular networks to provide
Internet connection services.
BRAZILIAN POLITICAL ENVIRONMENT
The Brazilian political environment was marked by high levels of uncertainty
after the country returned to civilian rule in 1985, ending 20 years of military
government. The death of a President-elect in 1985 and the resignation of
another President in the midst of impeachment proceedings in 1992, as well as
rapid turnover in the federal government at and immediately below the cabinet
level, adversely affected the implementation of consistent economic and monetary
policies.
Fernando Henrique Cardoso, who was Finance Minister at the time of the
implementation of the REAL Plan, was elected President of Brazil in October 1994
and, in October 1998, was reelected for an additional four-year term, which
began in January 1999. President Cardoso is the leader of a coalition of six
political parties that represents a majority in the federal Congress. His party,
the Brazilian Social Democratic Party, holds the third largest number of seats
in the coalition.
The legislative agenda in 2000 was dominated by discussions regarding proposed
reforms to Brazil's corporations law, as well as discussions regarding fiscal
reform. While the corporations law reform was successfully approved by the House
of Representatives, the fiscal reform, although undergoing significant evolution
as far as discussions and partisan negotiations are concerned, has not yet been
submitted to vote in the Brazilian Congress. It is expected to be submitted to
the Brazilian Congress in 2001.
Between the second semester of 2000 and the first semester of 2001, the
legislative branch of the government has allegedly been involved in a series of
situations linked to corruption and there have been reports of rivalries among
key partisan leaders. The election of a new President of the Senate, followed by
the accusation of senators, including the former President of the Senate, of
wrongfully disclosing the contents of a secret voting list, have dominated the
political arena during the first months of 2001.
The electric power crisis and the effect that the contingency measures may have
on Fernando Henrique Cardoso's popularity currently are the most prominent
issues, amid the arrangements for Presidential succession in year 2002.
The privatization process is still under way, with the upcoming sale of federal
assets in the energy generation and sanitation sector as well as the issuance of
pending PCS licenses to increase competition in the telecommunications market.
SEE ITEM 4 "INFORMATION ON THE COMPANY-BUSINESS OVERVIEW-REGULATION OF THE
BRAZILIAN TELECOMMUNICATIONS INDUSTRY-CONCESSIONS AND LICENSES."
BRAZILIAN ECONOMIC ENVIRONMENT
The Company's business, prospects, financial condition and results of operations
are dependent on general economic conditions in Brazil, and in particular on (i)
economic growth and its impact on demand for telecommunications services, (ii)
the cost and availability of financing and (iii) exchange rates between
Brazilian and foreign currencies.
For many years before the introduction of the REAL Plan in late 1993, the
Brazilian economy was extremely volatile. The Federal Government implemented a
succession of programs intended to stabilize the economy and provide a basis for
sustainable, noninflationary growth. Changes in monetary, credit, tariff and
other policies were frequent and occasionally drastic. In particular, actions to
control inflation, interest rates or consumption included freezing bank
accounts, imposing capital controls, introducing high tariffs and other strong
measures. Changes in policy, social instability and other political and economic
developments, and the Brazilian government's responses to such developments, not
infrequently had a material adverse effect on the Company's business,
operations, financial condition and results of operations.
The Federal Government introduced the REAL Plan in December 1993. The REAL Plan
is an economic stabilization program intended to reduce the rate of inflation by
reducing certain public expenditures, collecting liabilities owed to the Federal
Government, increasing tax revenues, continuing to privatize government-owned
entities and introducing a new currency. The REAL was introduced as Brazil's
currency on July 1, 1994, initially with an exchange rate of R$1.00 to US$1.00.
The REAL appreciated through January 1995 and thereafter gradually declined in
value against the dollar, reaching R$1.2087 to US$1.00 on December 31, 1998.
Notwithstanding the success of the REAL Plan in lowering inflation and
stabilizing the Brazilian economy, the REAL Plan has also led to economic
slowdown, and a rise in unemployment in most regions and sectors of the economy.
After the REAL devaluation in 1999 and a period of adjustment to a new regime of
free floating exchange rates, the Brazilian economy returned to a growth path in
the year 2000. Although the year 2001 shows trends for a higher rate of growth
by the end of the year, the recent energy crisis is expected to have a negative
effect on the growth of the Brazilian economy, causing many analysts to review
growth forecasts for 2001.
By the end of 2000, GDP grew 4.5%, thus exceeding expectations. Brazil's current
accounts deficit diminished in 2000 and closed the year at US$24.6 billion,
compared to a 1999 year-end deficit of US$25.4 billion.
Foreign direct investment net inflows stood at US$17 billion by year-end 1997,
US$25 billion by year-end 1998, US$30 billion by year-end 1999, and US$ 33
billion by year-end 2000, thus representing proportional growth of 10% in 2000.
The first quarter of 2001 showed foreign direct investment net inflows of US$6.8
billion.
Brazilian internal interest rates have added momentum to the economic growth. By
year end 1998, the Selic rate, the basic interest rate for the economy, stood at
28.96% per year. Shortly after the January 1999 devaluation of the REAL, the
Selic rate peaked at 44.99% in March, 1999 while the monetary authorities
struggled to hold down inflationary pressure and the outflow of investment from
the country. By year-end 1999, the Selic rate was down to 19.03% and closed the
year 2000 at 15.75%, reaching 16.75% on June 1, 2001.
DEVELOPMENTS IN OTHER EMERGING MARKET COUNTRIES
The Brazilian securities markets are influenced by economic and market
conditions in other emerging market countries. Although economic conditions are
different in each country, developments in one country can have an effect on
investors' perceptions of the risks of investing in the securities of issuers in
other countries, including Brazil. From 1998 through 2000, the international
financial markets have experienced significant volatility, with significant
adverse effects on demand for and prices of securities of issuers in virtually
all emerging markets, including Brazil.
The current volatility in the securities markets in Latin America and other
emerging market countries has been attributed, at least in part, to the effects
of the Asian and the Russian economic crises of 1997-98 and to the recent
increase in interest rates in industrialized countries, especially the United
States. Recently, the growing concern in the financial markets of whether
Argentina will be able to keep the currency parity system with the dollar and to
avoid a default on its foreign debt has created a significant movement of
investors to hedge against a possible devaluation in the Argentine local
currency and consequently the Brazilian Real, creating some pressure at the
exchange rates of the free floating Real against the Dollar.
There can be no assurance that the Brazilian securities markets will not
continue to be affected negatively by events elsewhere, especially in emerging
markets, or that such events will not adversely affect the prices of the
Company's securities.
INFLATION AND DEVALUATION
Brazil experienced extremely high and generally unpredictable rates of inflation
and of devaluation of Brazilian currency for many years until the implementation
of the REAL Plan. Inflation itself, as well as certain governmental measures to
combat inflation, and public speculation about possible future actions have also
historically contributed to economic uncertainty in Brazil and to heightened
volatility in the Brazilian securities markets. SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--BRAZILIAN ECONOMIC ENVIRONMENT."
The following table sets forth the rate of Brazilian inflation, as measured by
the IGP-M, and the devaluation of the Brazilian currency against the U.S. dollar
during the periods indicated. Although the 1999 inflation index was
significantly impacted by the devaluation of the REAL in the beginning of the
year, the 2000 index showed a return to the one digit levels of annual
inflation, which indicates that the impact from the devaluation has been
absorbed.
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
---------- --------- --------
(PERCENTAGES)
Inflation (IGP-M)........................... 1.8 20.1 9.95
Devaluation (Brazilian currency vs. US$).... 8.3 48.0 9.3
Under the REAL Plan, the rate of Brazilian inflation has decreased considerably
since July 1994. The exchange rate between the REAL and the U.S. dollar remained
relatively stable from mid-1994 to year-end 1998, but extreme volatility
returned in 1999. The exchange rate then reached a more stable pace in 2000 and
remained stable, until recently, when the economic crisis in Argentina, as well
as internal political factors contributed to an increase in exchange rates
During the first quarter of 2000, inflation, as measured by the IGP-M, amounted
to 1.75% and the devaluation of the REAL against the U.S. dollar was -2.33%,
showing an increase in the value of the Real. The devaluation in 2000, peaked at
9.53% and finished the year at 9.3%. The first quarter of 2001 showed an
inflationary increase of 1.42%, reflecting growth, while the REAL lost 10.54% of
its value against the U.S. dollar.
Inflation and devaluation have potentially adverse consequences for the
Company's business, prospects, financial condition and results of operations.
These factors introduce distortions into the Company's financial statements and
make period-to-period comparisons difficult and unreliable. Differences between
the relative rate of Brazilian inflation as compared to the rates of Brazil's
trading partners, on the one hand, and the rate of currency devaluation, on the
other, can cause balance sheet losses for the Company on its foreign
currency-denominated liabilities. Inflation places pressure on the Company's
rates and invites Federal Government efforts to control inflation by holding
down the rates that Brazilian public utilities are permitted to charge.
There can be no assurance that Brazilian inflation will remain at modest rates
or, if there is an increase in inflation, that the Company's business,
prospects, financial condition and results of operations will not be adversely
affected.
ORGANIZATIONAL STRUCTURE
The Holding Company and its Operating Subsidiaries
The following table sets forth the contribution made by each Subsidiary to the
Company's net operating revenues for the year ending December 31, 2000 and the
Holding Company's shareholding in each Subsidiary at December 31, 2000.
CONTRIBUTION TO
CONSOLIDATED RESULTS HOLDING COMPANY OWNERSHIP
--------------------- --------------------------------
% OF NET OPERATING % OF SHARE % OF VOTING
SUBSIDIARY REVENUES CAPITAL STOCK
---------- --------------------- ------------------- ------------
Telebrasilia........................................ 33.53 88.21 90.87
Telegoias........................................... 21.07 92.22 91.18
Telemat............................................. 14.63 97.31 99.42
Telems.............................................. 12.52 98.19 99.54
Teleron............................................. 4.26 96.98 97.99
Teleacre............................................ 2.13 98.29 99.96
NBT................................................. 12.09 95.00 95.00
Substantially all the Holding Company's assets consist of shares in the
Subsidiaries. The Holding Company relies almost exclusively on dividends from
the Subsidiaries to meet its needs for cash, including cash to pay dividends to
its shareholders. SEE ITEM 5 "OPERATING AND FINANCIAL REVIEW AND
PROSPECTS--LIQUIDITY AND CAPITAL RESOURCES."
On October 19, 1998 Tele Centro Oeste/Inepar, a consortium comprised of (i)
Inepar S.A. Industria e Construcoes (50%) and (ii) the Holding Company (50%),
was awarded a license to provide cellular telecommunications services in Area 8.
On May 21, 1999, the Company acquired 45% of the shares of Tele Centro
Oeste/Inepar from Inepar, increasing its holding in the consortium to 95%. Upon
acquiring control, the Company renamed Tele Centro Oeste/Inepar "Norte Brasil
Telecom S.A." and registered it as a non-publicly held company. On October 7,
1999, NBT began providing Band B digital cellular telecommunications service in
Area 8 in competition with Tele Norte Celular Participacoes S.A. Area 8 covers
approximately 41% of the territory and 9% of the total population of Brazil.
PROPERTY, PLANTS AND EQUIPMENT
The principal physical properties of the Company consist of transmission
equipment, switching equipment and base stations. The Company's properties are
located throughout the Region. The Company owns its headquarters in Brasilia.
The Company also leases office space in Brasilia (approximately 267 square
meters), Campo Grande (approximately 1,500 square meters), Cuiaba (approximately
465 square meters), Goiania (approximately 810 square meters), Porto Velho
(approximately 650 square meters), Rio Branco (approximately 220 square meters),
Amapa (approximately 78 square meters), Amazonas (approximately 847 square
meters), Maranhao (approximately 885 square meters), Para (approximately 453
square meters) and Roraima (approximately 105 square meters).
The Company also leases sites where its cellular telecommunications network
equipment is installed. As of December 31, 2000, the Company had 22 cellular
switches and 713 base stations in the Region, of which approximately 8.5% were
located on land owned by the Company and the remainder of which were located on
land leased by the Company. Most of these leases do not expire prior to 2003. In
addition, the Company leases two retail stores in the Region.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Formation of the Registrant and Presentation of Financial Information
On May 22, 1998, in preparation for the privatization of the TELEBRAS System,
the TELEBRAS System was restructured to form, in addition to TELEBRAS, the
Holding Company and eleven other New Holding Companies. The restructuring of the
TELEBRAS System was accomplished by means of a procedure under Brazilian law
called CISAO, or split-up. Virtually all the assets and liabilities of TELEBRAS
were allocated to the New Holding Companies which, together with their
respective subsidiaries, comprise (a) three fixed-line service providers, (b)
eight cellular service providers and (c) one domestic and international
long-distance service provider. The Registrant is one of the New Holding
Companies that was formed on May 22, 1998 as part of the Breakup of TELEBRAS. In
the Breakup, certain assets and liabilities of TELEBRAS, including 81.4%, 83.8%,
91.9%, 96.0%, 91.3% and 94.0% of the share capital of Telebrasilia, Telegoias,
Telemat, Telems, Teleron and Teleacre, respectively, were transferred to the
Holding Company.
On May 24, 1999, NBT was constituted as a private corporation with 95%
participation by the Holding Company. NBT's operating objective is to explore
cellular services as well as all necessary and useful activities for delivery of
these services within Area 8. NBT commenced operations on October 7, 1999.
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto, which are included
elsewhere in this Annual Report. Certain important features of the presentation
of the Consolidated Financial Statements are described in the introduction to
Item 3A, "Selected Financial Information."
Effects of Changes in Presentation of Financial Statements in 1998, 1999 and
2000
There are three significant differences in presentation between the Consolidated
Financial Statements of the Company for 1998, 1999 and 2000. Each of these
differences should be taken into account in comparing financial condition and
results of operations for that period.
FULLY SEPARATE OPERATIONS OF THE SUBSIDIARIES. The Band A Subsidiaries were
created effective January 5, 1998, by splitting up the Predecessor Companies to
separate their cellular operations from their fixed-line operations. The Band B
Subsidiary was created in May 1999. For 1998, 1999 and 2000, the Consolidated
Financial Statements reflect the operations of the Subsidiaries as fully
independent companies Costs were specifically identified where possible and
divided accordingly between fixed and cellular operations. Where specific
identification was not possible, costs were allocated between the Predecessor
Companies' fixed-line and cellular operations in accordance with the methodology
set forth in Note 2 to the Consolidated Financial Statements. It should not be
assumed that the financial condition and results of operations of the cellular
operations of the Predecessor Companies would have been the same if they had
been separate legal entities or if their businesses had been operated as
independent businesses prior to 1998.
CREATION OF THE HOLDING COMPANY. The Holding Company was created on May 22, 1998
in the Breakup of TELEBRAS, and its assets were valued as of February 28, 1998.
For 1998, 1999 and 2000, the Consolidated Financial Statements reflect the
consolidated financial condition and results of operations of the Holding
Company and the Band A Subsidiaries.
INDEXATION FOR INFLATION. The Consolidated Financial Statements are prepared on
a fully indexed basis to recognize the effects of changes in the purchasing
power of the Brazilian currency during the periods presented. No indexation
adjustments were applied during the year ended December 31, 1998 on account of
the insignificant level of inflation during that year. However, the financial
statements as of December 31, 1998 and for the years then ended, as well as the
fully indexed financial statements for all previous periods and for the years
ended December 31, 1999 and 2000, have been restated into currency of December
31, 2000 purchasing power. SEE ITEM 3 "KEY INFORMATION--SELECTED FINANCIAL
INFORMATION" AND NOTE 2(B) TO THE CONSOLIDATED FINANCIAL STATEMENTS. In
accordance with the constant currency methodology used in the preparation of the
Consolidated Financial Statements, all of the amounts presented for the years
ended December 31, 1998 and 1999 have been restated in constant REAIS of
December 31, 2000 purchasing power as measured by the IGP-M index during 2000
(which produces a correction of 9.95% of all amounts in 1999). Because the
correction factor applied to 1998 and 1999 amounts exceeded the rate of price
inflation for many revenue and cost items, the accounting correction is itself a
significant explanatory factor for the changes recorded for such items between
1998, 1999 and 2000 on the Company's Consolidated Statements of Operations. As a
result of this monetary restatement, year-over-year percentage calculations
emphasize decreases and dampen increases in such revenue and cost items.
Political, Economic, Regulatory and Competitive Factors
The following discussion should be read in conjunction with the "Information on
the Company" section included elsewhere in this Annual Report. As set forth in
greater detail below, the Company's financial condition and operations are
significantly affected by Brazilian telecommunications regulation, including
regulation of tariffs. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY." The
Company's financial condition and revenues and expenses also have been, and are
expected to continue to be, affected by the political and economic environment
in Brazil. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS OVERVIEW--BRAZILIAN
POLITICAL ENVIRONMENT AND BRAZILIAN ECONOMIC ENVIRONMENT." In particular, the
Company's financial performance will be affected by (i) national economic growth
and its impact on demand for telecommunications services, (ii) the cost and
availability of financing and (iii) the exchange rates between Brazilian and
foreign currencies.
The Company has faced competition in the Region since November 1997. The
Company's management expects that, as a result of competition, prices for
cellular telecommunications services will decline and the Company's operating
margins will diminish. The scope of increased competition and any adverse
effects on the Company's results and market share will depend on a variety of
factors that cannot now be assessed with precision and are beyond the Company's
control. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--COMPETITION."
Foreign Exchange and Interest Rate Exposure
The Company's financial condition and revenues and expenses may be affected by
changes in foreign currency exchange rates (primarily the U.S. dollar/REAL rate)
and market rates of interest (primarily the London Interbank Offered Rate
("LIBOR").
The principal foreign exchange risk faced by the Company arises from its foreign
currency liabilities. As of December 31, 2000, the Company had R$236.4 million
of indebtedness denominated in U.S. dollars (of this amount, R$207.9 million
were Euro Commercial Papers and R$28.5 million represented financing for
equipment imports) and R$53.1 million of contingency related to loans wrongly
allocated to the Company at the time of the spin-off of TELEBRAS. The balance of
this amount arose when, under certain agreed procedures for the Breakup of
TELEBRAS, certain loans (the "TELEBRAS Loans") were to have been spun off from
the TELEBRAS system through (i) the assignment of the obligation to pay the
TELEBRAS Loans and (ii) the assignment of the right to receive such payments.
Although the obligation to pay the TELEBRAS Loans was duly assigned to
Telebrasilia and Telegoias, the right to receive such payments was not assigned
to the Holding Company. In light of this departure from the agreed procedures
for assigning the right to receive payments under the TELEBRAS Loans in
connection with the Breakup of TELEBRAS, payment of the TELEBRAS Loans was
suspended immediately upon the change of control of the Holding Company. The
Company's management has determined that, beginning in January 1999, the
TELEBRAS Loans will be treated for all purposes as REAL-denominated liabilities
bearing interest at a rate equal to the IGP-M plus 6%. Payment of the TELEBRAS
Loans has not resumed, and steps are being taken to resolve the situation. SEE
ITEM 8 "FINANCIAL INFORMATION--CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
INFORMATION--LEGAL PROCEEDINGS--LITIGATION RELATED TO TELEBRAS LOANS."
The Company's revenues are earned almost entirely in REAIS, and the Company has
no material dollar-denominated assets. The Company has hedged the Euro
Commercial Papers' foreign currency exposure existing as of December 31, 2000.
Thus, if despite the determination of management to treat the TELEBRAS Loans as
REAL-denominated liabilities, the Company becomes obligated to service and repay
the TELEBRAS Loans as U.S. dollar obligations, the Company will continue to have
foreign exchange risk in respect of the TELEBRAS Loans. Devaluations of the REAL
results in exchange loss on foreign currency indebtedness. Therefore, decreases
in the value of the REAL relative to the dollar could have a material adverse
effect on the Company.
The Company is exposed to interest rate risk as a consequence of its floating
rate debt and limited floating rate interest-earning assets. As of December 31,
2000, substantially all of the Company's interest-bearing liabilities, including
the TELEBRAS contingency, bore interest at floating rates. The decision of the
Company's management to treat the TELEBRAS Loans as REAL-denominated obligations
does not change their character as floating-rate interest obligations, although
the base rate of interest on the loans is now being treated by the Company as
IGP-M rather than LIBOR. The Company has not entered into derivative contracts
or made other arrangements to hedge against this risk. Accordingly, should
market interest rates (principally IGP-M or, if the Company becomes obligated to
service and repay the TELEBRAS Loans as U.S. dollar obligations, LIBOR) rise,
the Company's financing expenses will increase.
On January 12, 2001, the Holding Company announced the beginning of the
distribution of the second issuance of promissory notes, comprising of 500
notes, with unit value of R$500,000, amounting to R$250 million. During this
phase, the total number of existing promissory notes was subscribed and the
amount was used at the payment of the first issuing. These promissory notes
should become due within a maximum period of 180 days from the date of
subscription of each promissory note.
On January 2, 2001, the bridge loans with Banco Nacional do Desenvolvimento
Economico e Social ("BNDES") for subsidiaries Telebrasilia, Telegoias, Telemat,
Telems, Teleron and Teleacre were converted into long-term loans. The operation
amount corresponded to R$43,8 million with payment becoming due after a period
of 5 (five years). The operation's amortization will be recorded quarterly and
should cover the principal plus interest. The charges derived from the operation
were based on the TJLP (Long-term Interest Rate) published by the Central Bank
of Brazil, plus 2.5% per year as basic spread of BNDES and 1.5% per year as
risks remuneration to the financial institutions.
OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
The following table sets forth certain components of the Company's income for
each of the years in the three-year period ended December 31, 2000.
YEAR ENDED DECEMBER 31, %CHANGE
------------------------------------ -----------------------------
1998 1999 2000 1998-1999 1999-2000
--------- ---------- -------- --------------- -------------
(MILLIONS OF REAIS) (1)
Net operating revenue..................... 637.4 666.7 930.6 4.6 39.6
Cost of services.......................... 260.3 326.5 532.2 25.4 63.0
Gross profit ............................. 377.1 340.1 398.5 (9.8) 17.2
Operating expenses:
Selling expenses.......................... 99.1 118.6 126.2 19.7 6.4
General and administrative expenses....... 46.3 64.5 78.4 39.4 21.5
Other net operating income (expense)...... (1.0) (14.0) (9.6) n.m. (31.4)
Total 146.3 197.2 214.2 34.7 8.6
Operating income before interest.......... 230.7 143.0 184.3 (38.0) 28.9
Net interest expense(2)................... 69.7 47.6 30.1 (31.7) (36.9)
Operating income (3)..................... 161.0 95.4 154.2 (40.8) 61.7
Net non-operating expense................. 20.6 6.1 19.5 (70.6) 222.7
Employees' profit share................... 1.3 1.9 1.9 46.8 0.6
Income before taxes and minority 139.2 87.4 132.8 (37.2) 51.9
interests..............................
Income tax and social contribution........ 40.2 29.9 40.2 (25.7) 34.5
Minority interests........................ 24.1 11.5 20.0 (52.1) 73.3
Reversal of interest on own capital 91.7 53.5 31.0 (41.6) (42.1)
Net income................................ 166.7 99.6 103.6 (40.2) 4.1
------------------
n.m.: not meaningful
(1) Information is presented in constant REAIS of December 31, 2000. Columns
may not add due to rounding.
OPERATING REVENUES
The Company generates operating revenue from (i) activation fees, which are
one-time sign-up charges paid to obtain cellular service, (ii) usage charges,
which include measured service charges based on tenths of a minute of outgoing
calls and roaming other similar charges, (iii) monthly subscription charges,
(iv) network usage charges, which are the amounts charged by the Company to
other cellular and fixed-line telephone service providers for use of the
Company's network by such service providers' customers (E.G., when one of such
customers calls one of the Company's subscribers), (v) resale of handsets and
prepaid cards and (vi) other services and charges, which primarily include fees
arising from the transfer of cellular service from one user to another, and fees
paid by subscribers for supplemental services such as call forwarding, call
waiting and call blocking. In 1999, the Company began to sell handsets in
connection with the provision of prepaid cellular telecommunications services.
SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS OVERVIEW--SOURCES OF
REVENUE--SUBSCRIBER RATES."
Details of Company Revenue
YEAR ENDED DECEMBER 31, % CHANGE
-------------------------------------- ----------------------------
1998 1999 2000 1998-1999 1999-2000
--------- ------------ ------------- -------------- -------------
(MILLIONS OF REAIS) (1)
Gross Operating Revenue:
Usage charges........................... 380.4 369.2 349.9 (2.9) (5.2)
Monthly subscription charges............ 193.9 211.4 194.4 9.0 (8.0)
Network usage charges................... 187.7 197.1 334.5 5.0 69.7
Activation fees......................... 28.6 4.1 - (85.7) n.m.
Resale of handsets and prepaid cards.... - 58.6 274.8 n.m. 368.7
Others.................................. 8.5 14.9 11.2 76.0 (24.7)
--------------------------------------------
Gross operating revenue................. 799.0 855.3 1.164.9 7.0 36.2
Value-added and other indirect taxes ... (161.6) (188.7) (234.2) 16.7 24.1
Net Operating Revenue...................... 637.4 666.7 930.6 4.6 39.6
============================================
------------------
(1) Information is presented in constant REAIS of December 31, 2000. SEE NOTE
2(B) TO THE CONSOLIDATED FINANCIAL STATEMENTS. Columns may not add due to
rounding.
Net operating revenues increased by 39.6% in 2000 and 4.6% in 1999. The growth
in revenues over this three-year period was driven principally by increases in
demand for cellular services. The average number of subscribers increased 40.0%
to 621,043 subscribers in 1999 from 443,537 in 1998. In 2000, the average number
of subscribers increased to 1,209,854 or by 94.8% from 1999. The growth in
revenues in 1999 is due in part to a reduction in, and in some cases elimination
of, activation fees, which in turn facilitated new entries, increased the
subscriber base and generated additional revenue. The introduction of new
services, such as prepaid and revenue generated by roaming fees, also
contributed to the increased revenue. In 2000, the significant increase in
number of customers was due to the performance of NBT, which reached almost
257,000 subscribers by December 31 and to the launching of alternative post-paid
plans and new services, such as voice mail, short message and WAP (Wireless
Application Protocol).
USAGE CHARGES. Revenues from usage charges decreased by 2.9% in 1999 from 1998
and by 5.2% in 2000 from 1999. As of January 1999, once previous accounting
discrepancies by TELEBRAS were corrected, the Company ceased recognizing
international traffic as revenue and expenses, since this traffic was due to
EMBRATEL. To that extent, the variation in revenue from usage charges in 1999
from 1998, exclusive of international calls, was generated mostly by an 11.3%
increase in outgoing domestic calls, from 583.1 million minutes to 649.1 million
minutes. In 2000, the reduction of revenues from usage charges was caused by the
decrease of 4.4% in the average number of contract customers.
MONTHLY SUBSCRIPTION CHARGES. Revenues from monthly subscription payments
increased by 9.0% in 1999 from 1998 and decreased by 8.0% in 2000 from 1999. The
growth in revenues in 1999 was due mainly to a 24.3% increase in the average
number of contract customers. The decrease in 2000 principally reflected the
4.4% reduction in the average number of these customers.
NETWORK USAGE CHARGES. Revenues from network usage charges increased by 5.0% in
1999 from 1998 and 69.7% in 2000 from 1999. The increase in 1999 was due to
growth in the volume of calls to the Company's subscribers originating outside
the Company's network, which grew by 73.7% from 681.3 million minutes in 1998 to
1,183 million minutes in 1999. The 1999 result reflects the renegotiation of
tariffs between the Company and the fixed-line service providers in the Region,
which account for 53% of the total traffic, thereby diminishing the
interconnection fees to be paid (fixed-line network expenses). SEE ITEM 4
"INFORMATION ON THE COMPANY--BUSINESS OVERVIEW--SOURCES OF REVENUE--NETWORK
USAGE CHARGES." From 1999 to 2000, the increase in network usage charges
reflected the increase in the total number of subscribers, resulting in an
increase in the volume of calls received by the Company's subscribers.
ACTIVATION FEES. Revenues from activation fees decreased by 85.7% in 1999 from
1998 and were no longer charged in 2000. These decreases in activation charges
were partially offset by an increase of 27.7% in the average number of
subscribers in 1998. The decrease in revenues from activation fees in 1999 was
due to the strategy by the Subsidiaries to enlarge their subscriber bases, by
way of promotions reducing or waiving activation fees. In 2000, in continuation
of this strategy, activation fees were completely suspended.
RESALE OF HANDSETS AND PREPAID CARDS. As of May 31, 1999 the Band A Subsidiaries
began to link cellular handset sales with the provision of prepaid cellular
telecommunications services. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--SOURCES OF REVENUE--SUBSCRIBER RATES." Revenues from resale of
handsets and prepaid cards grew 368.7% from 1999 to 2000. In this period, the
number of prepaid customers increased from 286,844 to 1,115,962.
OTHERS. Revenues from other services, which principally include fees earned from
the transfer of cellular telephone service from one user to another and
supplemental services such as call forwarding, call waiting and call blocking,
increased by 76.0% in 1999 from 1998 and decreased by 24.7% in 2000 from 1999.
The significant increase from 1998 to 1999 was due mainly to the expansion of
the roaming network, which Telebrasilia obtained by participating in the
formation of a national roaming system. Thus, the Subsidiaries paid roaming
charges when their subscribers accessed the roaming network, Telebrasilia also
benefited ratably from the revenue of the service providers that make up the
system. In December 1999, revenue from roaming charges was R$7.5 million. That
revenue was no longer receivable in 2000, causing a decline in total revenues
for the year.
VALUE-ADDED AND OTHER INDIRECT TAXES. The principal taxes assessed on revenues
are ICMS, PIS and COFINS. The ICMS rate in each state in the Region is 25%,
except in the State of Acre, where the rate for domestic telecommunications
services is 17% for intrastate calls and 13% for interstate calls, in the State
of Mato Grosso, where, as of January 1999 the ICMS rate was raised from 25% to
30%. The rate on sales of prepaid cellular handsets in the Region is 17%, except
in Goias where it is 7%. PIS and COFINS are imposed at a combined rate of 3.65%
of gross operating revenues. Nonetheless, PIS and COFINS are calculated based on
the total revenue of the Company, including financial revenue. The amount of
value-added and other indirect taxes collected by the Company represented 20.2%
in 1998, 22.1% in 1999 and 20.1% in 2000. The variations reflect increases in
the Company's gross operating revenue during each period, as well as changes in
rates and the basis for calculating the aforementioned taxes. Activation fees
became subject to ICMS for the first time with effect from July 1, 1998, which
increased the effective rate of taxation of operating revenues in 1998. SEE ITEM
8 "FINANCIAL INFORMATION--CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
INFORMATION--LEGAL PROCEEDINGS--LITIGATION RELATED TO THE APPLICATION OF THE
ICMS" AND NOTE 23 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
COST OF SERVICES
YEAR ENDED DECEMBER 31, % CHANGE
----------------------------------------- -------------------------------
1998 1999 2000 1998-1999 1999-2000
------------ -------------- ------------- --------------- ---------------
(MILLIONS OF REAIS) (1)
Cost of services:
Depreciation........................... 80.1 120.2 142.8 50.1 18.8
Personnel.............................. 8.3 9.0 11.3 8.2 25.8
Third party materials and services..... 71.6 78.9 95.8 10.2 21.5
Fixed-line network expenses............ 70.3 28.0 26.9 (60.2) (4.1)
Fistel tax............................. 18.0 30.1 51.6 67.3 71.3
Cost of products sold.................. - 50.9 194.0 n.m. 281.1
Others................................ 12.1 9.4 9.8 (22.3) 4.2
----------------------------------------------
Total................................. 260.3 326.5 532.2 25.4 63.0
==============================================
------------------
(1) Information is presented in constant REAIS of December 31, 2000. SEE NOTE
2(B) TO THE CONSOLIDATED FINANCIAL STATEMENTS. Columns may not add due to
rounding.
Cost of services increased by 63.0% in 2000 from 1999 and by 25.4% in 1999 from
1998. The increase in 1999 and 2000 resulted principally from an increase in
depreciation costs related to the growth of the Company's network and in costs
due to the acquisition of handsets. In 1999, this increase was partially offset
by a decrease in amounts paid for the lease of available capacity on
inter-connecting circuits.
DEPRECIATION. Depreciation increased by 18.8% in 2000 from 1999 and by 50.1% in
1999 from 1998. The increase in 2000 reflects the expansion of the Company's
network. In addition, the growth in 1999 also reflects the Company's revision of
its depreciation policies and election to modify the depreciation periods for
certain equipment in light of technological developments and changing
international business practices. Effective January 1, 1999, the rate of
depreciation of transmission equipment increased from 10% to 14.29% and that of
switching equipment from 7.69% to 10%.
THIRD PARTY MATERIALS AND SERVICES. Materials and services include costs of
materials and services received from third parties, including network usage
charges paid to other cellular telecommunications service providers, to
fixed-line companies and to EMBRATEL for the completion on their networks of
calls originated by the Company's customers. Materials and services expenses
increased by 10.2% in 1999 from 1998 and by 21.5% in 2000 from 1999. The
increase in 1999 and 2000 principally reflected the growth of subscriber base,
especially with prepaid services, causing an increase in the volume of calls
subject to network usage charges payable to other telecommunications service
providers.
COST OF PRODUCTS SOLD. With the introduction of prepaid cellular service on May
1999, the Company began to purchase cellular handsets to resell to its
customers. The cost of products sold was R$50.9 million in 1999 and R$194.0
million in 2000.
FIXED-LINE NETWORK EXPENSES. Fixed-line network expenses represent lease
payments to the Predecessor Companies for use of interconnecting circuits among
the Company's base stations and switching centers and for reservation of
available capacity on the networks of the Predecessor Companies. Such expenses
decreased by 4.1% in 2000 from 1999 and by 60.2% in 1999 from 1998. Such
expenses accounted for 8.6% of total costs of services in 1999 compared to 27%
in 1998. The decrease in 1999 and 2000 is due mainly to reductions in fixed-line
interconnection circuit lease payments negotiated with the Predecessor
Companies. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS OVERVIEW--OPERATING
AGREEMENTS--INTERCONNECTION AGREEMENTS."
FISTEL TAX. Fees payable to finance FISTEL were R$18.0 million, R$30.1 million
and R$51.6 million in 1998, 1999 and 2000, respectively. Fistel fees are
assessed against cellular service providers for existing facilities (based on
the number of active cellular lines), for the installation of new facilities and
for each activation of a new cellular line. The 71.3% increase in 2000 was due
principally to the expansion of the Company's subscriber base and to the
installation of new base stations.
PERSONNEL. Personnel expenses increased during the period, rising from R$8.3
million in 1998 to R$9.0 million in 1999 and to R$11.3 million in 2000. These
increases were due principally to augments in the number of employees, which has
kept pace with the growth in the business. The growth also reflects salary
policies instituted in order to attract and maintain engineers and other
personnel in an increasingly competitive environment.
OTHERS. Other costs of services include rents of properties where the Company's
base stations, towers and switching equipment are located, costs of power supply
and other similar infrastructure costs. Other costs of services were R$12.1
million, R$9.4 million and R$9.8 million in 1998, 1999 and 2000, respectively.
The decrease in 1999 reflects the renegotiations of contracts for the expansion
of the Company's network. In 2000, these policies have continued and the
expenses remain constant.
OPERATING EXPENSES
SELLING EXPENSES. Selling expenses increased 6.4% in 2000 from 1999 and 19.7% in
1999 from 1998. The increase in 1999 resulted primarily from an aggressive
marketing campaign for prepaid services, which included advertising campaigns
and an increase in sales commissions to independent distributors. In addition,
the standardization of policy among the Subsidiaries relative to provisions for
doubtful accounts resulted in a change in calculation methodology as of December
1998. The methodology comprises the recording of a provision to cover 100% of
accounts past due over 90 days. For accounts not yet billed, accounts not yet
due and accounts past due less than 90 days, the percentages historically
obtained from write-offs are applied to the gross revenues of the last 12
months. Prior to December 1998, provisions were based on 100% of accounts past
due over 120 days. In the period from 1999 to 2000, selling expenses increased
6.4%. The increase in 2000 also resulted from significant efforts in marketing
and promotional campaigns and expenses related to sales commissions. This
increase was partially offset by a 29.6% decrease on net losses on trade
accounts receivable. This reduction was caused by strong efforts in billing and
collection processes in order to reduce subscribers' delinquency rates.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 39.4% in 1999 from 1998 and by 21.5% in 2000 from 1999. The
increase of these expenses in 1999 and 2000 is due primarily to the increase in
corporate personnel in the Holding Company. Due to the increase, personnel costs
accounted for 35.9% and 34.7% of total costs in 1999 and 2000, respectively.
Third party services also accounted for significant growth in expenses of the
Company during this period.
OTHER NET OPERATING INCOME (EXPENSE). The Company recorded other net operating
expense of R$1.0 million in 1998, compared with R$14.0 million in 1999 and R$9.6
million in 2000. Other net operating expenses in 1999 resulted principally from
the amortization of the deferred charge representing premium, which arose from
the merger into the Company, on December 14, 1999, of COVERAGE PARTICIPACOES
S.A., a subsidiary of BID S.A. with an investment in the Company as its only
asset, is being amortized over a five year period. This amount, R$5.9 million,
corresponds to 1/60th of the premium. The reduction of Other Net Operating
Expenses in 2000 resulted mainly from the practice adopted this year to register
the above mentioned amortization as non-operating expenses. SEE NOTES 3(G) AND
31 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
NET INTEREST EXPENSE
Net interest expense of R$47.6 million in 1999 and R$30.1 million in 2000
resulted primarily from the payment of dividends in the form of interest on own
capital in the amount of R$53.5 million in 1999 and R$31.0 million in 2000. SEE
ITEM 5 "OPERATING AND FINANCIAL REVIEW AND PROSPECTS--LIQUIDITY AND CAPITAL
RESOURCES." The Company recorded interest income of R$42.8 million in 1999 and
R$102.8 million in 2000, which resulted principally from interest income on the
Company's average balance of cash and cash equivalents, which increased
significantly as a result of increased cash generation in 1999 and 2000. Such
interest income was partially offset by R$37.6 million in 1999 and R$98.5
million in 2000 in interest expense.
NET NON-OPERATING EXPENSE
The Company recorded net non-operating expense of R$20.6 million in 1998, R$6.1
million in 1999 and R$19.5 million in 2000. Non-operating expenses in 1998 and
1999 resulted primarily from losses or write-offs on the sale of property, plant
and equipment in the amounts of R$19.6 million and R$6.1 million, respectively,
of certain analog transmission equipment that has become obsolete as a result of
increasing demand for digital telecommunications services. The non-operating
expense in 2000 is due to the inclusion of the amortization of the deferred
charge, as mentioned in the section "Other Net Operating Income (Expense)"
above. SEE NOTES 3(G) AND 31 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
EMPLOYEES' PROFIT SHARING
All Brazilian companies are required under Brazilian law to compensate employees
with profit sharing in addition to their salary and benefits. The amount of such
profit sharing is determined by negotiation between the Company and the labor
unions representing the employees. Employees profit share was R$1.3 million,
R$1.9 million and R$1.9 million in 1998, 1999 and 2000, respectively.
MINORITY INTERESTS
Minority interests reflect the participation of minority shareholders in the
Subsidiaries in the net income or loss of such Subsidiaries, as the case may be.
Minority interests were 12.6%, 10.4% and 16.2% of income before minority
interests in 1998, 1999 and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are for capital expenditures and
payments of dividends to shareholders. The Company made capital expenditures
totaling R$161.3 million, R$218.4 million and R$255.7 million in 1998, 1999 and
2000, respectively. These expenditures related primarily to increasing network
capacity, coverage and digitalization. SEE ITEM 4 "INFORMATION ON THE
COMPANY--HISTORY AND DEVELOPMENT OF THE COMPANY--CAPITAL EXPENDITURES."
The Holding Company is required to distribute to its shareholders, either as
dividends or as tax-deductible interest on own capital, 25% of its adjusted net
income determined in accordance with Brazilian accounting principles, as
adjusted in accordance with Brazilian corporate law, including any realization
of the net income reserve. The Holding Company is also required to pay a
non-cumulative preferred dividend on its Preferred Shares in an amount equal to
6% of the share capital attributable to the Preferred Shares under Brazilian
corporate law, which requirement may also be satisfied by distributions of
interest on own capital. In 2000, the Holding Company distributed a total of
R$37.9 million (R$40.1 million in 1999) in the form of interest on own capital.
SEE NOTE 25(D) TO THE CONSOLIDATED FINANCIAL STATEMENTS.
Capital expenditures were financed principally with internally generated cash
throughout the period, together with financing in both national currency (mainly
R$84.0 million in December 31, 2000 from the National Bank for Economic and
Social Development and R$186.9 million in promissory notes) and foreign currency
(mainly R$22.0 million from Export Development Corporation and R$207.9 million
in euro commercial papers). In January 2001, the Company announced the issuance
of R$250 million in promissory notes. Also, in January, the Subsidiaries' bridge
loans with the National Bank for Economic and Social Development were converted
into long-term loans. The proceeds of the loans will be used for the expansion
and modernization of the Company's telecommunications plant. SEE ITEM 5
"OPERATING AND FINANCIAL REVIEW AND PROSPECTS--FOREIGN EXCHANGE AND INTEREST
RATE EXPOSURE" AND NOTE 32 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
As of December 31, 2000, the Company anticipated R$250 million in 2001 capital
expenditures. Management expects that such expenditures will be funded primarily
with internally generated cash, supplemented by financings from external
sources. Most of the planned 2001 capital expenditures will be dedicated to
expanding the capacity and coverage of the Company's network, together with the
modernization of telecommunication services.
Substantially all of the Company's start-up costs and initial investments were
financed by cash flows from the fixed-line telecommunications operations of the
Predecessor Companies. Accordingly, the Company's debt does not reflect the
amount of debt the Company would have been required to incur to build its
current network if the Company had operated on a stand-alone basis from the
inception of the Predecessor Companies' cellular telephone operations.
The Holding Company's principal assets are the shares of the Subsidiaries. The
Holding Company relies almost exclusively on dividends from the Subsidiaries to
meet its needs for cash, including for the payment of dividends to its
shareholders. The Holding Company controls the payment of dividends by the
Subsidiaries, subject to limitations under Brazilian law.
The Company and Subsidiaries, except for NBT, make payments towards private
pension plans and towards medical assistance for retired employees, which are
controlled by Sistel Social Security Foundation ("SISTEL"). Until December 1999,
all sponsors showed solidarity towards the Sistel Benefits Pan ("PBS") and the
Medical Assistance Plan for the Retired ("PAMA"). On December 28, 1999, the
sponsors of the PBS and PAMA plans negotiated conditions for the creation of
individual pension plans per sponsor maintaining the solidarity only for those
already assisted by the plan and under such conditions at January 31, 2000,
which resulted in a restructuring proposal for the Sistel Statute and Regulation
that was approved by the Complementary Pension Department on January 13, 2000.
Due to the discontinuation of the solidarity concept occurred in December 1999,
the Company and subsidiaries individually sponsored a Defined Benefits
Retirement Plan ("Plan PBS TCO"), which covers approximately 5% of the employees
working for these companies. SEE NOTES 24, 29(B) AND 30(A) TO THE CONSOLIDATED
FINANCIAL STATEMENTS.
U.S. GAAP Reconciliation
The Company prepares its consolidated financial statements in accordance with
Brazilian GAAP, which differ in significant aspects from U.S. GAAP. The
principal differences between Brazilian GAAP and U.S. GAAP as they affected the
Company's revenues and expenses are during the reported periods are: (i) until
December 31, 1998 under Brazilian GAAP, interest on loans to finance
construction in progress is capitalized at the rate of 12% per annum of the
total value of construction in progress, regardless of the amount of interest
actually incurred on such loans, while under U.S. GAAP interest is capitalized
based on the interest rate on the debt incurred up to the lower of the amount of
construction in progress and the total loans incurred; (ii) until December 31,
1993 capitalized interest under Brazilian GAAP was not added to individual
assets but was capitalized separately and amortized over a time period different
from the estimated useful lives of the related assets, while under U.S. GAAP
capitalized interest is added to the cost of individual assets and is amortized
over their estimated useful lives; and (iii) in accordance with Brazilian GAAP,
the deferred tax liability arising out of the indexation of permanent assets was
charged to divisional equity, whereas under U.S. GAAP the charge would be to
income for the year. Net income under U.S. GAAP was R$32.6 million for 1999 and
R$104.8 million for 2000. Until December 31, 1997, under both Brazilian and U.S.
GAAP, revenues from activation fees were recognized upon activation of a
customer's services. Under U.S. GAAP, effective January 1, 1998, net revenues
from activation fees will be deferred and amortized over the estimated effective
contract life. SEE NOTE 29 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
YEAR 2000 COMPLIANCE
The Company evaluated its most probable worst case scenarios in relation to the
year 2000, formulated contingency plans with respect to such scenarios and
commissioned a Year 2000 contingency plan for the Company. The Company's
telecommunications and information systems, including those of the Subsidiaries,
experienced no interruption or adverse effect during the transition to the Year
2000. Such transition took place uneventfully and as planned by the Company.
RESEARCH AND DEVELOPMENT
In connection with the Breakup, the Company was required to enter into a
three-year contract effective as of August 1998 with the Fundacao Centro de
Pesquisa e Desenvolvimento em Telecomunicacoes ("CPqD") under which the Company
is obligated to contribute R$1.8 million to CPqD during the three years ending
August 2001. During the effectiveness of its agreement with CPqD, the Company
has access to equipment testing and consulting and training services, and the
Company has commissioned CPqD to perform a number of research and development
projects for the Company. Prior to the Breakup, a share of a contribution made
to CPqD by the Predecessor Companies was allocated in the Company based on the
number of its licenses in service. The Company depends primarily upon the
manufacturers of telecommunications products for the development of new hardware
and does not conduct any independent research. The contract will terminate by
July 2001, at which point, it will be renegotiated.
TREND INFORMATION
Third-generation systems ("3G systems") represent the main focus of the trends
in mobile communication. 3G systems should allow access to information at speeds
as high as 2,048 kbit/s, therefore making available multimedia services
involving voice, data, images and sound of optimum quality. Naturally, these
services will not be completely and widely available in the beginning, given
that there are still several technical difficulties, such as the required range
of frequency and, most importantly, the applications and services available. Its
growth is expected to be secondary compared with voice in future years until
users feel the need to have access to all types of communication at reasonable
costs.
The Company believes that the great appeal of such systems will consist in
Internet navigation at speeds as high as or even higher than household modem
connections, marketed in package-mode, which should be enough to disseminate
wireless Internet on a definitive basis. Such systems will be attractive in
several other ways, but the market needs to be prepared with applications and
services that justify the cost paid by users. Therefore, the Company believes
that the main application in these systems will be the Internet and not the
high-speed multimedia services, at least initially.
Consistent with these predictions, the Company believes that 2.5G systems, which
are systems that will allow data transmission at speeds significantly lower than
in 3-G systems, will last longer than expected. In addition, they will be able
to meet the needs of the vast majority of users. The companies which manage to
prepare their networks to use 2.5G systems will certainly have excellent
opportunities to remain consonant with the trends of the market, and when this
market reaches a more mature stage, they will be able to take wider and higher
steps towards 3-G systems.
TDMA technology has encountered several pitfalls along its evolution. Its
natural path towards the EDGE (Enhanced Data for GSM Evolution), as advocated by
the TDMA community within the Universal Wireless Consortium (UWC) has
demonstrated some important defections, which may represent delays and even
commercial unavailability.
The Company is closely tracking all these alternatives in technological
evolution, with a participation in the Brazilian Commission of Communications
"COMISSAO BRASILEIRA DE COMUNICACOES," where it monitors and analyzes the
progress of 3-G systems.
In consonance with these trends of thinking on what the future of wireless
telecommunications will be like, the Company has maintained its position as a
leading company in the market. During 2000 and early in 2001, the Company
launched many services before the competition, such as the SHORT MESSAGE SERVICE
and the WIRELESS APPLICATION PROTOCOL (WAP).
This fact is important in the wireless segment, since it not only demands a new
positioning of the products throughout the market, but also shows that the
telecommunication segment needs to be concerned with the entire chain of
products, from the content to the terminal handsets, from the network nucleus to
the aerial interface.
The Company will continue to invest in the "wireless Internet" convergence
segment. Moreover, new service alternatives will be made available during 2001.
It is still not possible to calculate the impact on the Company's revenues and
profitability of launching the new third-generation services, because no country
has yet reached the evolutionary stage of such systems.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
The Holding Company is administered by a Board of Directors (Conselho de
Administracao) and a Board of Executive Officers (Diretoria). The Board of
Directors comprises seven members serving for a term of three years. The Board
of Directors holds a regular meeting each three months and holds special
meetings when called by the Chairman or by two members of the Board of
Directors.
The following are the current members of the Board of Directors and their
respective positions.
NAME POSITION DATE ELECTED
------- ---------------- ------------------
Alexandre Beldi Netto...................... Chairman April 26, 2001
Araldo Alexandre Marcondes de Souza........ Director April 26, 2001
Mario Cesar Pereira de Araujo.............. Director April 26, 2001
Ricardo de Souza Adenes.................... Director April 26, 2001
Marco Antonio Beldi........................ Director April 26, 2001
Antonio Fabio Beldi........................ Director April 26, 2001
Nelson Guarnieri de Lara................... Director April 26, 2001
Set forth below are brief biographical descriptions of the Directors.
ALEXANDRE BELDI NETTO, 78 years old, has served as Chairman of the Board of
Directors since August 1998. He has served as Chief Executive Officer of CiA.
Rede Telefonica Sorocaba. He is the President of the Superior Council of
Cultural Association for the Technological Renovation of Sorocaba of the
University of Sorocaba and Chief Executive Officer of SPL Construtora e
Pavimentadora Ltda. and Banco Credibel. He also serves as an Executive Officer
for SELTE, Splice do Brasil and Credibel Factoring. He holds a degree in
accounting from the Escola de Comercio de Sorocaba (Sorocaba School of
Commerce).
ARALDO ALEXANDRE MARCONDES DE SOUZA, 51 years old, has served as a member of the
Board of Directors since April 1999. He serves as an Executive Officer of SPL -
Construtora e Pavimentadora Ltda. He holds a civil engineering degree from the
State University of Campinas.
MARIO CESAR PEREIRA DE ARAUJO, 51 years old, has served as a member of the Board
of Directors since August 1998. He has served Empresa Brasileira de
Telecomunicacoes S.A. - EMBRATEL as an engineer and as Head of Department of
Projects and Contracting and Installation of Networks and Systems of
Telecommunications. He also served as Chief of Section in Telecomunicacoes do
Rio de Janeiro S.A. - Telerj. He holds an engineering degree from the Federal
University of Rio de Janeiro.
RICARDO DE SOUZA ADENES, 44 years old, has served as member of the Board of
Directors since April 26, 2001. He has served Splice do Brasil S.A. as Chief
Financial Officer since 1999. He also served as Corporate Business Manager in
Banco do Brasil from 1995 to 1999 and as Chief Financial Officer in Banco do
Estado de Pernambuco S.A. ("BANDEPE"), from 1992 to 1995. He holds a degree in
economics from Associacao de Ensino Unificado do Distrito Federal ("AEUDF") and
a master's degree in economics from Fundacao Getulio Vargas.
MARCO ANTONIO BELDI, 48 years old, has served as a member of the Board of
Directors since September 1998. Before joining Splice do Brasil Telecomunicacoes
e Eletronica S.A. as Chief Financial Officer, he served as Chief Financial
Officer of Banco Credibel, CRTS - Construtora de Redes Telefonicas Sorocabana
and Beldi Participacoes e Representacoes Ltda. He holds a degree in mechanical
engineering from the State University of Campinas (UNICAMP), as well as a law
degree from Itu Law School - SP.
ANTONIO FABIO BELDI, 46 years old, has served as a member of the Board of
Directors since September 1998. Before joining Splice do Brasil Telecomunicacoes
e Eletronica S.A. as Superintendent Director, he served as an executive officer
at Banco Credibel and Faculdade de Engenharia de Sorocaba (Sorocaba College of
Engineering) and Superintendent Director of Beldi Participacoes e Eletronica
S.A. He holds a degree in civil engineering from the Pontificia Catholic
University of Campinas - SP.
NELSON GUARNIERI DE LARA, 71 years old, has served as a member of the Board of
Directors since September 1998. He joined Splice do Brasil Telecomunicacoes e
Eletronica S.A. as General Counsel in 1983 and has served as such since then. He
holds a law degree from the University of Sao Paulo.
Alexandre Beldi Netto is father of Marcos Antonio Beldi e Antonio Fabio Beldi.
BOARD OF EXECUTIVE OFFICERS
The Board of Executive Officers consists of one President and Executive Officer
for Investor Relations, one Executive Officer for Network and Operations, one
Executive Officer for Finance and Information Technology, one Director of
Administration and Human Resources and one Executive Officer for Business. All
Executive Officers were elected on April 26, 2001, by the Board of Directors,
for a term of three years. An Executive Officer may be removed from office at
any time.
The following are the Executive Officers and their respective positions.
NAME POSITION DATE APPOINTED
--------------------------------------- ------------------------------------------------------ --------------------
Mario Cesar Pereira de Araujo.......... President and Executive Officer for Investor Relations August 10, 1998
Sergio Assenco Tavares dos Santos...... Executive Officer for Network and Operations January 30, 1998
Luis Andre Carpintero Blanco........... Executive Officer for Finance October 1, 2000
Getulio Nery Cardoso................... Director of Administration and Human Resources July 28, 1999
Joao Roberto Brito..................... Executive Officer for Business November 27, 2000
Set forth below are brief biographical descriptions of the Executive Officers.
SERGIO ASSENCO TAVARES DOS SANTOS, 52 years old, has served as an Executive
Officer since May 1998. He served as manager of the vice-presidency of TELEBRAS'
Department of Development and Coordination with Suppliers; coordinator of the
Technical Office Special Projects of Telebrasilia; and manager of the Advanced
Telecommunications Business Unit and Engineering Director of Telebrasilia. He
also served as the Chief Executive Officer of the company from May to August
1998. He holds a degree in electrical engineering from the Federal State
University of Brasilia.
LUIS ANDRE CARPINTERO BLANCO, 27 years old, has served as an Executive Officer
since October 1, 2000. From May 1999 to September 2000, he actively took part in
several areas of the Company. He started as Administrative and Financial
Director of NBT and Manager in the Financial Department of the Company. He
worked in the stock market with BANCO BOA VISTA INTERATLANTICO, which is
associated with the CREDIT AGRICOLE, and as manager in the BANCO ESPIRITO SANTO
from 1997 to 1999. He holds a production engineering degree from the Federal
University of Rio de Janeiro.
GETULIO NERY CARDOSO, 49 years old, has served as an Executive Officer since
July 28, 1999. He began his professional career in the Central Bank's Foreign
Exchange Department. Later, he joined the Production Engineering sector of
Petroleo Brasileiro, S.A.--PETROBRAS ("PETROBRAS"). He then joined TELEBRAS'
Department of Industrial Development, specializing in telecommunications
industrial development. He then became Commercial Manager for the Central West
Region for Splice. He holds a degree in Electrical Engineering from the
Universidade de Brasilia and has completed extensive related coursework in
Brazil and abroad.
JOAO ROBERTO BRITO, 39 years old, has served as an Executive Officer since
November 27, 2000. In 1990, he took over the Administration of Finance and
Control of TELEVISAO GAUCHA S/A, which belongs to the GRUPO RBS (REDE BRASIL SUL
DE COMUNICACOES), and was promoted to General Manager of RBS VIDEO in Sao Paulo
in 1993. In 1995, he became Director of Finance and Administration of NET, a
cable-television corporation based in Sao Paulo. He was Director of Operations
with NET in Porto Alegre in 1997 and in 1998 he became General Director of NET
in the state of Parana. From 1999 to March 2000, he was Director of operations
of Theme Park HOPI HARI, in Sao Paulo. From March 2000 to November 2000, he was
Chief Operating Officer of DIRECT TO COMPANY S.A., a satellite-television
network directed to the corporate market. He holds a business administration
degree from the Federal University of Rio Grande do Sul and he specialized in
direct marketing at the FUNDACAO GETULIO Vargas. He also obtained a degree from
the Kellogg's Executive Business Program, offered at the Northwestern
University, in the United States.
AUDIT COMMITTEE
The Holding Company is audited by an Audit Committee (Conselho Fiscal). The
Audit Committee comprises three members serving for a term of one year. The
Audit Committee holds a regular meeting each month and holds special meetings
when called by the President or by any member of the Board of Directors.
The following are the current members of the Audit Committee and their
respective positions.
NAME POSITION DATE ELECTED
------------ ----------------- -----------------------
Augusto Patarelli.................. Chairman April 26, 2001
Aureo Monteiro de Moraes........... Director April 26, 2001
Francisco Jose Becker Dias......... Director April 26, 2001
Set forth below are brief biographical descriptions of the members of Audit
Committee.
AUGUSTO PATARELLI, 53 years old, has served as Chairman of the Audit Committee
since April 26, 2001. He also has served as Chief Financial Officer of Produtiva
Cooperativa de Trabalho e Consultoria S.A. since 1999. He served as Manager of
Planning Department of Telecomunicacoes Brasileiras S.A. - Telebras, from 1993
to 1998. He holds an economics and administration degree from the Franca College
in Sao Paulo.
AUREO MONTEIRO DE MORAES, 50 years old, has served as Director of the Audit
Committee since April 26, 2001. He has served as Manager of Corporate
Proceedings in Telecomunicacoes Brasileiras S.A. - Telebras. He holds an
administration degree from University Catolica of Brasilia.
FRANCISCO JOSE BECKER DIAS, 52 years old, has served as Director of the Audit
Committee since April 26, 2001. He has served as Executive Director of Banco
Fibra S.A. since 1994. From 1991 to 1994, he served as Executive Director of
Banco BMG S.A. He also served as Vice-president of Banco Norchem S.A., from 1989
to 1991. He served as Director of Metro Banco S.A., from 1988 to 1989. He also
served as Director of Banco Iochpe S.A. from 1985 to 1988. He holds an
electrical engineering degree from the Federal University of Rio Grande do Sul.
He also holds a master's degree in production engineering from the Federal
University of Rio de Janeiro and a PhD in Accounting and Finance from the
University of Lancaster (England).
COMPENSATION
For the year ended December 31, 2000, the aggregate amount of compensation paid
by the Holding Company to all directors, executive officers and members of the
Audit Committee of the Holding Company was approximately R$1.82 million.
For the year ended December 31, 2000, the aggregate amount set aside or accrued
by the Holding Company to provide pension, retirement or similar benefits for
officers, directors and members of the Audit Committee of the Holding Company
was approximately R$170.2 thousand.
BOARD PRACTICES
See "Board of Executive Officers" and "Audit Committee" above.
EMPLOYEES
On December 31, 2000, the Company's workforce consisted of 2,397 persons, of
which 1,327 were employed personnel, 330 were interns and 740 were outsourced
personnel. Of this total, 66.0% were allocated in the Marketing, Sales and
Client Attention areas; 9.0% in the Service Development, Implementation,
Maintenance and Optimization areas; and the remaining 25.0% in the Information
Technology, Finance, Administration and Human Resources areas.
The average age of the Company's employees is 31 years, and 50.7% of the
employees are male. Furthermore, the level of education of the Company's
employees is as follows: Elementary: 2.0%; High School: 56.0%; Graduate: 37%;
Post-Graduate / Specialized: 5.0%.
Approximately 25% of the Company's employed personnel are affiliated with the
state's labor unions, which are associated with the Brazilian Federation of
Telecommunication Labor ("Fenattel") or to the Interstate Federation of
Telecommunication Labor ("Fittel"). Like the previous years, the process of
negotiating the agreement involved in the collective wage adjustment for
2000/2001 was conducted in a businesslike manner, which made it easy for the
workers meeting in assembly to vote for its approval.
In 2000, the Company invested R$1,921 thousand in training and development,
specifically in the areas of Sales, Client Attention, Technical, Operational and
Information Technology. This resulted in significant gains in productivity.
In July 2000, the new Career Plan started to be implemented, for which new
descriptions of the positions in the Company defined more clearly the
responsibilities and attributions of every employee. The Company expects to
implement a competency-based performance appraisal system in the first semester
of 2001, which should ease the implementation of the new remuneration policy to
be used in the future.
In an effort to reduce and eventually eliminate all the uncertainty involved in
the financing of the defined benefit plans, as in the former PBS-TCO plan, the
Company launched a new pension plan in October 2000 called TCO PREV. This hybrid
plan has defined contributions for the programmable benefits and defined
benefits for the so-called risk benefits, namely Medical and Hospital Care,
Disability and Death Before Retirement.
Unlike the plan formerly used, the new plan separates its benefits from social
security, and participants may request to leave the plan when they reach 50
years of age (Anticipated Retirement) or 60 years of age (Normal Retirement). In
either case, the participant is required to have been on the plan for a minimum
of 10 years with no interruption of his contributions to Sistel. The calculation
of the programmable benefits considers the total balance of the participant's
contribution plus the total contributions made by the sponsor, plus the plan's
profitability. Below are the levels of the participants' and the sponsor's
contributions:
Participants' contributions:
o Basic Contribution: monthly and optional between the percentages that vary
between 3.0% and 8.0% of the participation salary (limited to the ceiling
of R$13,000.00), according to the age group;
o Voluntary contribution: monthly and limited to 22.0% of the participation
salary and to the participants who already contribute with 8.0%;
o Random Contribution: occasional and must be at least 10% of the maximum
participation salary.
Sponsor's contribution:
o Normal Contribution: monthly and in the value equivalent to the Basic
Contribution of the active participant;
o Specific Contribution: monthly and must observe the minimum benefit
provided by law;
o Variable Contribution: occasional and must observe uniform and
non-discriminatory criteria for associated participants;
o Risk Contribution: monthly and equivalent to 3.338% of the sum of all
participation salaries;
o Administrative Contribution: monthly and equivalent to 5.0% of the sum of
all contributions made by the participants and by the sponsor.
The new plan TCO PREV has already enrolled nearly 100% of the employees
affiliated to the former PBS-TCO plan.
As to the outsourcing of its activities, during 2000, the Company maintained all
contracts entered into with contractors, mainly for reception, security and
cleaning services and entered into a contract with Arthur Andersen to conduct a
study to identify further functions that can be outsourced as of 2001.
SHARE OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
All Directors and Executive Officers hold less than one percent of the class of
shares. There is no stock options plan to any director or other employee in the
Company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
References in this Annual Report to "Preferred Shares" and "Common Shares" are
to the preferred shares and common shares, respectively, of the Holding Company.
References to "American Depositary Shares" or "ADSs" are to American Depositary
Shares, each representing 3,000 Preferred Shares. The ADSs are evidenced by
American Depositary Receipts ("ADRs").
Of the Holding Company's two classes of capital stock outstanding, only the
Common Shares have full voting rights. The Preferred Shares have voting rights
under limited circumstances. As of December 31, 2000, BID S.A., a subsidiary of
Splice, owned 53.80% of the Common Shares. Accordingly, BID S.A. has the ability
to control the election of the Holding Company's Board of Directors and the
direction and future operations of the Company.
The following table sets forth information concerning the ownership of Common
Shares by BID S.A. and by the Holding Company's officers and directors as a
group.
NUMBER OF PERCENTAGE OF
COMMON OUTSTANDING
NAME OF OWNER SHARES OWNED COMMON SHARES
----------------- ------------------- -------------------
BID S.A............................................................ 66,905,151,125 53.80%
All directors and executives officers as a group................... 7 0%
Splice is a Brazilian company engaged in the development, manufacture and supply
of digital electronic and telecommunications equipment. Its business activities
include manufacturing, import/export of telecommunications equipment,
installation of telephone lines in rural and urban areas, financing of telephone
lines directly to the subscribers and providing alphanumeric paging services in
ten of the largest Brazilian cities.
RELATED PARTY TRANSACTIONS
The Company effected transactions with Splice and subsidiaries of Splice in 1999
and 2000. These transactions were mainly related to marketable securities
(R$77.7 million in 2000 and R$7.8 million in 1999), short term investments
(R$6.5 million in 2000), acquisition of property, plant and equipment (R$5.1
million in 2000 and R$6.2 million in 1999), maintenance services (R$3.5 million
in 2000) and acquisition of telephone cards (R$2.1 million in 2000).
The marketable securities are related to Commercial Papers issued by Splice do
Brasil S/A. The interest was a pre-fixed annual rate of 19% with 106% swap of
CDI (Interbank Deposit Certificate). There were no material related party
transactions in 1998. See Note 26 to the Consolidated Financial Statements.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Consolidated Financial Statements
See Item 18 "Financial Statements."
Legal Proceedings
LITIGATION RELATED TO THE BREAKUP OF TELEBRAS
The Breakup of TELEBRAS is subject to several lawsuits in which plaintiffs have
requested, and in certain cases obtained, preliminary injunctions against the
Breakup. All of these preliminary injunctions have been quashed by Federal Court
decisions. These lawsuits are all being challenged on the basis of court
competence. The Supreme Federal Court of Justice ruled that the Federal Courts
of Minas Gerais and Brasilia were competent to hear the cases. As a result, all
of the appeals have been sent back to the lower courts.
The lawsuits are based on a number of legal theories, including that (i)
Brazil's Constitution requires that the creation of the 12 New Holding Companies
be specifically authorized by the Telecommunications Law; (ii) the shareholders'
meeting of TELEBRAS held on May 22, 1998 which approved the Breakup was not
properly convened; (iii) national sovereignty will be threatened if the
country's telecommunications companies are controlled by foreign entities; and
(iv) the Telecommunications Law requires that certain matters, such as the entry
of new competitors and the administration of development and technology funds,
be regulated prior to the Breakup and privatization, either by an executive
order of the President or by an act of Congress.
If any of these lawsuits ultimately succeeds, the Breakup will have to be
reinitiated. This could require, depending upon the prevailing plaintiff's
theory, any combination of (i) amendment of the Telecommunications Law and/or
(ii) reconvening the May 22, 1998 TELEBRAS shareholders' meeting. It is
theoretically possible under Brazilian law for a court to require that the
Breakup be undone, although the Company's management believes that this would
not be likely to occur.
LITIGATION ARISING OUT OF EVENTS PRIOR TO THE BREAKUP
TELEBRAS and the legal predecessors of the Holding Company and the Subsidiaries,
respectively (the "Predecessor Companies"), are defendants in a number of legal
proceedings and subject to certain other claims and contingencies. Liability for
any claims arising out of acts committed by the Predecessor Companies or
TELEBRAS prior to the effective date of the Breakup remains with the Predecessor
Companies or TELEBRAS, as the case may be, except for those liabilities which
under specific accounting provisions have been assigned to the Subsidiaries
and/or the New Holding Companies. Any claims against the Predecessor Companies
which are not satisfied by the Predecessor Companies or TELEBRAS for reasons of
insufficient assets could result in claims against the Subsidiaries or the New
Holding Companies to the extent that either have received assets which might
have been used to satisfy those claims had they not been spun off.
With respect to labor and tax claims, the Subsidiaries and the New Holding
Companies, by law, have joint and several liability with the Predecessor
Companies and TELEBRAS, respectively. However, under the terms of the Breakup,
the Predecessor Companies and TELEBRAS remain liable to the Subsidiaries and the
New Holding Companies, respectively, for any such claims arising out of acts
committed by the Predecessor Companies or TELEBRAS, as the case may be, prior to
the effective date of the Breakup, except for any liability for which specific
accounting provisions have been assigned to the Holding Company or one of the
other New Holding Companies. The Company's management believes that the chances
of claims of this nature materializing and having a material adverse financial
effect on the Company are remote.
LITIGATION RELATED TO THE APPLICATION OF THE ICMS
In June 1998, the governments of the individual Brazilian states approved an
agreement to interpret existing Brazilian tax law to apply the ICMS in respect
of certain revenues, including cellular activation fees and monthly subscription
charges, that had not previously been subject to such taxes. Under Brazilian
law, there is a risk that the state governments could seek to apply this
interpretation retroactively to activation and subscription fees charged during
the five years preceding June 30, 1998. The Company's management believes that
the attempt by the state governments to extend the scope of the ICMS to services
that are supplementary to basic telecommunications services is unlawful because:
(i) the state governments acted beyond the scope of their authority, (ii) their
interpretation would subject to taxation certain services, particularly cellular
activation, that are not considered to be payments for telecommunications
services and (iii) new taxes may not be applied retroactively.
TAXATION OF CELLULAR ACTIVATION
Each of the Band A Subsidiaries has filed a lawsuit in the Treasury Court of the
state in which it is located seeking injunctive relief from retroactive and
prospective application of the ICMS to activation fees and has made a provision
for the contingency that ICMS may be payable on such fees. Each of the Band A
Subsidiaries, except Telemat, Telems and Teleron, has either obtained a
temporary injunction relieving it from the payment of the ICMS on activation
fees during the pendency of the lawsuits or is depositing with the applicable
Treasury Court the amount of ICMS that would be payable if the Subsidiary does
not prevail in such lawsuit. Telemat is collecting and paying ICMS on activation
fees as if the interpretation were valid from November 30, 1998 and is
accounting for such payments as expenses. Teleron is paying similar fees but is
accounting for such payments as debt. In both cases, the judgments are being
appealed. As for Telems, the temporary injunction relieving it from payment was
lifted, and a judgment is pending. The amount that may be due is being
provisioned. The tax authorities of the states where the lawsuits are pending
may appeal the decisions of the Treasury Court to grant temporary injunctions.
There can be no assurance that the Subsidiaries will ultimately prevail in any
appeal relating to the temporary injunctions or in the underlying litigation
with respect to application of the ICMS to activation fees. If the ICMS were
applied retroactively to activation fees earned by the Company during the last
five years, it would give rise to a maximum liability estimated at R$77.3
million. In accordance with clause 2.1.5 of the Breakup protocol signed by the
Predecessor Companies and the Subsidiaries, the Company believes that the
Predecessor Companies will be liable to the Subsidiaries for any tax liability
arising from the retroactive application of the ICMS to revenue recognized from
cellular activation prior to 1998. However, such liability for prior debts is
not automatically attributable to the Predecessor Companies, since the tax
authorities by law may file suit against both the Predecessor Companies and the
Subsidiaries at the same time. If a Subsidiary is compelled to pay a tax
liability, under the Breakup protocol it may seek restitution of its losses from
the Predecessor Company in question.
The Company's management does not believe that the retroactive application of
the ICMS to cellular activation is probable. Therefore, no provision with
respect to such application has been made or is expected to be made in the
Consolidated Financial Statements. The Company's management does not believe
that application of the ICMS to cellular activation, applied on a prospective
basis, will have a material impact on the Company's results of operations.
To date no definitive position has been taken by the Courts with regard to the
levy of ICMS on activation fees. However, the Brazilian Supreme Court of Justice
has not granted an injunction as requested by other States through appeals in
similar lawsuits filed by taxpayers. A definitive judgment from the Brazilian
Supreme Court of Justice is still being awaited. It should be mentioned that
there are few decisions from higher courts about same discussion, but a recently
one obtained by Telefonica Celular (the concessionaire of the Rio de Janeiro
region) express that the ICMS is not applicable on cellular activation fees.
LITIGATION RELATED TO TELEBRAS LOANS
Under the terms of the Breakup, several loans existing between TELEBRAS and its
subsidiaries (the "TELEBRAS Loans") were to have been distributed through: (i)
the assignment of the debt obligation to the relevant subsidiary and (ii) the
assignment of the credit right to the relevant New Holding Company as the new
parent of the subsidiary who assumed the debt. Although the obligation to pay
the TELEBRAS Loans was duly assigned to Telebrasilia and Telegoias, the right to
receive such payments was not assigned to the Holding Company but instead to
Tele Centro Sul, one of the New Holding Companies providing fixed-line services.
In light of this departure from the agreed procedures for assigning the TELEBRAS
Loans, payment of the TELEBRAS Loans was suspended immediately upon the change
of control to the Holding Company, and a lawsuit was filed in June 1999 in
Federal District Court against Tele Centro Sul, TELEBRAS and KPMG, the auditors
for the Breakup accounting procedures, requesting liquidated damages and a court
ruling recognizing the inappropriate procedures and non-existence of the debt to
TELEBRAS. Subsequently, KPMG was dismissed from the lawsuit. The last action was
issued in November, 2000, when the court ordered specification of evidence by
the parties as the Company moved for an adjudication of the dispute and TCS
requested expert opinion in connection with the TELEBRAS Loan documents The
parties are awaiting a decision by the judge to move forward to court hearings
or production of evidence.
In response to the lawsuit filed against it, Tele Centro Sul filed two
counter-lawsuits in October 1999 against Telebrasilia and Telegoias,
respectively, seeking payment of the TELEBRAS Loans in the amount of R$41.3
million from Telebrasilia and R$24.2 million from Telegoias. Status of this
lawsuit is identical to the one discussed in the preceding paragraph.
All three lawsuits have been joined before the same court as they involve the
same issue concerning the TELEBRAS Loans.
LITIGATION RELATED TO THE ALTERATION OF THE PIS AND COFINS TAX BASIS
The CONTRIBUICAO SOCIAL PARA O FINANCIAMENTO DA SEGURIDADE SOCIAL, or COFINS, is
a social contribution tax on gross revenues (operating and financial). On
November 27, 1998, the Brazilian government, through Law no. 9,718, increased
the COFINS rate from 2% to 3%, and changed its tax basis from gross operating
revenues to all gross revenues (operating and financial). The PROGRAMA DE
INTEGRACAO SOCIAL, or PIS, is another social contribution tax which, together
with the COFINS, is imposed on certain telecommunications services at a combined
rate of 3.65%. PIS tax basis was also changed from gross operating revenues to
all gross revenues (operating and financial).
To create a new tax, the Brazilian Federal Constitution requires that Congress
pass a Complimentary Law, which requires a higher approval rate in Congress than
an Ordinary Law. However, Law no. 9,718 is an Ordinary Law, which is inferior to
a Complimentary Law. Accordingly, TCO has filed a lawsuit against those
alterations in the Brazilian tax legislation, on the grounds of
unconstitutionality. The Company believes that it will prevail in such lawsuit.
Despite this belief, the lawsuit was not successful in the first stage of
judgment. The Company has filed an appeal and a judgment is pending. The total
amount involved is R$5.8 million, which has been deposited in court.
OTHER LITIGATION
The Company is a party to certain legal proceedings arising in the normal course
of business. The Company has provided for or deposited in court amounts to cover
its estimated losses due to adverse legal judgments. In the opinion of the
Company's management, such actions, if decided adversely to the Company, would
not have a material adverse effect on the Company's business, financial
condition or results of operations. SEE NOTE 23 TO THE CONSOLIDATED FINANCIAL
STATEMENTS.
Policy on Dividend Distributions
On February 7, 2001, the Company informed its shareholders that the Board of
Directors had approved the payment of interest on owned capital in accordance
with the statement of financial position for the period ending on December 31,
2000 and in accordance with Article 9 of Law 9249/95 and Provision Number 207/96
of the Brazilian Securities Exchange Commission (CVM), in the value of
R$0.0000528123 per share, with 15% withheld income tax, which results in net
interest of R$0.0000448904 per share, except to those shareholders who are
immune or exempt.
The corresponding credit was written in the Company's accounting books on
December 31, 2000, on an individualized basis to each shareholder, according to
their shareholding position on February 19, 2001, rendering the shares
prior-to-Interest on Owned Capital as of February 20, 2001.
The value of the interest, net of the applicable withheld income tax, will be
ascribed to the value of the mandatory dividend and the statutory dividend on
the preferred shares, relative to the fiscal year 2000, adding such value to the
total amount in dividends distributed by the Company for all purposes provided
in the Company's bylaws.
On April 26, 2001, the general assembly approved the distribution of the
complementary dividends relative to the fiscal year 2000, in the terms bellow:
Values
a) Interest on owned capital - Common and Preferred Shares
Gross value per share R$0.0000528123
Net value per share R$0.0000448904
b) Dividend
Value per share - Common and Preferred R$0.0000511581
Income Tax
Upon approval of the accounting credit of the interest on owned capital, income
tax was withheld at the rate of 15%, except for purposes of payment to those
shareholders who had proved immune or exempt to such tax within the period
specified by the Company in official communication to the shareholders,
published in GAZETA MERCANTIL and in the DIARIO OFICIAL on February 8, 2001. The
payment of the gross value is guaranteed to shareholders considered immune by
law. The dividend is not subject to income tax.
On May 25, 2001, the Company commenced payment of interest on owned capital and
complementary dividend relative to the fiscal year 2000, approved in the General
Ordinary Shareholders Meeting held on April 26, 2001.
SIGNIFICANT CHANGES
See "Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1999 and 2000", "Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 1998, 1999 and 2000", and Notes 22, 24,
31 and 32 to the Consolidated Financial Statements.
ITEM 9. THE OFFERING AND THE LISTING
OFFER AND LISTING DETAILS
The principal trading market for the Preferred Shares is the Bolsa de Valores de
Sao Paulo (the "Sao Paulo Stock Exchange"). The Preferred Shares are also traded
on the Bolsa de Valores do Rio de Janeiro (the "Rio de Janeiro Stock Exchange")
and the seven other Brazilian stock exchanges. As of December 31, 2000, the
Holding Company had approximately 2.4 million common and preferred shareholders.
The Preferred Shares commenced trading separately on the Brazilian stock
exchanges on September 21, 1998. The following table sets forth the reported
high and low closing sale prices for Preferred Shares of the Holding Company on
the Sao Paulo Stock Exchange for the periods indicated.
NOMINAL REAIS PER 1000 PREFERRED SHARES
---------------------------------------------
HIGH LOW
--------------------- -----------------------
1998 (Beginning in September 21, 1998) ......................... R$1.229 R$0.269
1999............................................................ R$3.880 R$1.083
2000............................................................ R$8.283 R$3.017
NOMINAL REAIS PER 1000 PREFERRED SHARES
---------------------------------------------
HIGH LOW
--------------------- -----------------------
First quarter 1999.............................................. R$2.146 R$1.083
Second quarter 1999............................................. R$2.414 R$1.974
Third quarter 1999.............................................. R$2.242 R$1.921
Fourth quarter 1999............................................. R$3.880 R$2.155
First quarter 2000.............................................. R$8.283 R$3.017
Second quarter 2000............................................. R$7.282 R$4.651
Third quarter 2000.............................................. R$8.183 R$5.734
Fourth quarter 2000............................................. R$6.808 R$4.833
NOMINAL REAIS PER 1000 PREFERRED SHARES
---------------------------------------------
HIGH LOW
--------------------- -----------------------
November 2000................................................... R$6.508 R$5.288
December 2000................................................... R$6.808 R$5.334
January 2001.................................................... R$8.283 R$5.834
February 2001................................................... R$7.646 R$5.943
March 2001...................................................... R$7.475 R$5.034
April 2001...................................................... R$6.350 R$4.485
In the United States, the Preferred Shares trade in the form of ADSs each
representing 3,000 Preferred Shares, issued by The Bank of New York, as
depositary (the "Depositary") pursuant to a Deposit Agreement (the "Deposit
Agreement") among the Holding Company, the Depositary and the registered holders
and beneficial owners from time to time of ADRs. The ADSs commenced trading
separately on the NYSE on November 16, 1998 under the symbol TRO. As of December
31, 2000 there were approximately 171 registered owners of ADSs and
approximately 56.03 million outstanding ADRs. The following table sets forth the
reported high and low closing sales prices for the ADSs on the NYSE for the
period indicated.
U.S. DOLLARS PER ADS
-------------------------------------------
HIGH LOW
--------------------- ---------------------
1998 (Beginning in November 16, 1998) .......................... US$5.937 US$2.000
1999............................................................ US$7.063 US$2.375
2000............................................................ US$15.875 US$5.000
U.S. DOLLARS PER ADS
-------------------------------------------
HIGH LOW
--------------------- ---------------------
First quarter 1999.............................................. US$3.600 US$2.375
Second quarter 1999............................................. US$4.438 US$2.448
Third quarter 1999.............................................. US$3.750 US$3.125
Fourth quarter 1999............................................. US$7.063 US$3.313
First quarter 2000.............................................. US$15.875 US$5.000
Second quarter 2000............................................. US$13.000 US$8.813
Third quarter 2000.............................................. US$14.750 US$10.500
Fourth quarter 2000............................................. US$11.688 US$8.500
U.S. DOLLARS PER ADS
-------------------------------------------
HIGH LOW
--------------------- ---------------------
November 2000................................................... US$11.625 US$8.813
December 2000................................................... US$11.688 US$8.813
January 2001.................................................... US$14.188 US$9.625
February 2001................................................... US$12.740 US$9.500
March 2001...................................................... US$12.200 US$7.500
April 2001...................................................... US$8.750 US$6.600
The common shares and preferred shares of Telebrasilia traded on the Sao Paulo
Stock Exchange from May 18, 1998 to July 30, 1999. On August 02, 1999,
Telebrasilia shares began trading on the Sociedade Operadora do Mercado de
Ativos (SOMA), the over-the-counter market. On May 18, 1998, Telegoias shares
began trading on the Sociedade Operadora do Mercado de Ativos (SOMA), the
over-the-counter market. The other subsidiaries' shares, Telemat, Telems,
Teleron, Teleacre and NBT, do not trade on any stock market, as they are closely
held corporations.
Restructuring of the Brazilian Stock Exchanges
In January 2000, a Memorandum of Understanding was entered into by the Sao Paulo
Stock Exchange and the Rio de Janeiro Stock Exchange, beginning a unification
program for the Brazilian stock exchanges that aims at concentrating all stock
trades and clearances in the Sao Paulo Stock Exchange and creating an electronic
market under the management of the Rio de Janeiro Stock Exchange for primary and
secondary trading of government bonds (the "Stock Exchange Unification
Program").
Under the Stock Exchange Unification Program, the clearinghouse of the Rio de
Janeiro Stock Exchange, CLC - Camara de Liquidacao e Custodia S.A. (the "CLC"),
which was 99% owned by the Rio de Janeiro Stock Exchange, was transferred to the
ownership of the Sao Paulo Stock Exchange.
Three other memoranda of understanding have been entered into by the Sao Paulo
Stock Exchange and the Bolsa de Valores do Extremo Sul (the "Extreme South Stock
Exchange"), the Bolsa de Valores do Parana (the "Parana Stock Exchange") and the
Bolsa de Valores de Pernambuco e Paraiba (the "Pernambuco and Paraiba Stock
Exchange"), respectively. These memoranda also provide for the concentration of
all stock trades and clearances in the Sao Paulo Stock Exchange, leaving the
other three exchanges with duties to promote the capital markets, by conducting
training programs and carrying out marketing activities to spread the stock
market culture throughout the States of Santa Catarina, Rio Grande do Sul,
Parana, Pernambuco and Paraiba.
Trading on the Brazilian Stock Exchanges
Of Brazil's nine stock exchanges, the Sao Paulo Stock Exchange is the most
significant and will further increase its significance after the Stock Exchange
Unification Program is fully implemented. During 1999, the Sao Paulo Stock
Exchange accounted for approximately 95% of the trading value of equity
securities on all Brazilian stock exchanges, and the Sao Paulo Stock Exchange
and the Rio de Janeiro Stock Exchange together accounted for approximately 99%
of the trading value of equity securities on all Brazilian stock exchanges.
Each Brazilian stock exchange is a non profit entity owned by its member
brokerage firms. Trading on each exchange is limited to member brokerage firms
and a limited number of authorized non-members. The Sao Paulo Stock Exchange has
two open outcry trading sessions each day. The sessions run from 10:00 a.m. to
1:00 p.m. and from 2:00 a.m. to 4:45 p.m. on the Sao Paulo Stock Exchange.
Trading is also conducted from 10:00 a.m. to 5:00 p.m. on an automated system
and from 6:00 p.m. to 10:00 p.m. on the After Market, which trading is limited
only to stocks traded during market hours. There are no specialists or market
markers for the Holding Company's shares on the Sao Paulo Stock Exchange.
Trading in securities listed on the Brazilian stock exchanges may be executed
off the organized exchanges in certain circumstances, although such trading is
very limited.
Settlement of transactions is effected three business days after the trade date
without adjustment of the purchase price for inflation. Payment for shares is
made through the facilities of separate clearinghouses for each exchange, which
maintain accounts for member brokerage firms. The seller is ordinarily required
to deliver the shares to the exchange on the second business day following the
trade date. The clearinghouse for the Sao Paulo Stock Exchange is COMPANHIA
BRASILEIRA DE LIQUIDACAO E CUSTODIA S.A. - CBLC, which is controlled mainly by
the member brokerage firms and banks that are not members of that exchange. The
Sao Paulo Stock Exchange will also rely on the services of the CLC after the
Stock Exchange Unification Program is fully implemented.
At December 31, 2000, the aggregate market capitalization of approximately 500
companies listed on the Sao Paulo Stock Exchange was approximately US$225.5
billion. Substantially the same securities are listed on the Sao Paulo Stock
Exchange and on the Rio de Janeiro Stock Exchange. Although all the outstanding
shares of an exchange-listed company may trade on a Brazilian stock exchange, in
most cases less than half of the listed shares are actually available for
trading by the public, the remainder being held by small groups of controlling
persons that rarely trade their shares. For this reason, data showing the total
market capitalization of Brazilian stock exchanges tend to overstate the
liquidity of the Brazilian equity securities market.
The Brazilian equity market is relatively small and illiquid compared to major
world markets. In 2000, the combined daily trading volumes on the Sao Paulo
Stock Exchange and the Rio de Janeiro Stock Exchange averaged approximately
US$422 million. In 2000, the stocks of the approximately 40 companies that
comprise the stock index of the Sao Paulo Stock Exchange (about 40 companies)
accounted for approximately 80% of all trading on the spot markets in all
Brazilian stock exchanges.
Trading on Brazilian stock exchanges by nonresidents of Brazil is subject to
certain limitations under Brazilian foreign investment legislation.
Regulation of Brazilian Securities Markets
GENERAL
The Brazilian securities market is regulated by the COMISSAO DE VALORES
MOBILIARIOS (the "CVM"), which is the Brazilian equivalent of the U.S.
Securities and Exchange Commission (the "SEC"), and the BANCO CENTRAL DO BRASIL,
which is the Brazilian central bank (the "Central Bank"), both subordinated to
the CONSELHO MONETARIO NACIONAL, the highest regulatory entity within the
National Financial System (the "National Monetary Council"). While the CVM has
authority over the organized exchanges and over other parties operating in the
securities markets, including public companies which are bound by its
regulations, the Central Bank has, among other powers, licensing authority over
financial institutions, including brokerage firms, and regulates foreign
investment and foreign exchange transactions. The National Monetary Council
enacts general rules that set the policy for both organs to pursue their
regulatory activity. The main legislation under which the Brazilian securities
market is regulated are the Law no. 6,385/76, as amended (the "Brazilian
Securities Law"), the Law no. 6,404/76, as amended (the "Brazilian Corporation
Law") and the Law no. 4,595/64 as amended (the "Financial System Law").
Under the Brazilian Corporation Law, a company is either public, a COMPANHIA
ABERTA, and is allowed to issue publicly traded securities, such as the Holding
Company, or private, a COMPANHIA FECHADA, and its securities are only traded
privately. All public companies are registered with the CVM and are subject to
reporting requirements to keep such status. The shares of a public company may
also be traded privately, but subject to certain limitations. In order to have
its shares traded on Brazilian stock exchanges, a public company must be listed
on its stock exchange of choice, being subject to the requirements of such
exchange, with right of appeal to the CVM if the exchange denies the listing
request. Once admitted to list on one Brazilian stock exchange, the public
company's shares can be traded in any other Brazilian stock exchange that
matches the minimum listing requirements of the first exchange.
Trading in securities on the Brazilian stock exchanges may be suspended at the
request of a company in anticipation of a material announcement. Trading may
also be suspended on the initiative of a Brazilian stock exchange or the CVM,
among other reasons, based on or due to a belief that a company has provided
inadequate information regarding a material event or has provided inadequate
responses to inquiries by the CVM or the relevant stock exchange.
In general, the Brazilian Securities Law provides for, among other things,
disclosure requirements, restrictions on insider trading and price manipulation,
and protection of minority shareholders. However, the Brazilian securities
market is not as highly regulated and supervised as the United States securities
markets or markets in certain other jurisdictions.
DEPOSITARY SECURITIES PROGRAMS REGULATIONS
All ADS programs must also be registered and approved by the CVM, as set forth
in the National Monetary Council regulation for such programs. SEE ITEM 10
"ADDITIONAL INFORMATION--EXCHANGE CONTROLS." The CVM Instruction 317/99, as
amended, provides that, in order for level II or III ADS programs to be approved
by CVM, there must be a cooperation agreement entered into by the relevant
Brazilian stock exchange and the foreign stock exchange on which the ADSs are
listed, such agreement being previously approved by CVM. The Holding Company's
ADS program is a level II program and has been duly registered and approved by
the CVM and a cooperation agreement has been entered into by the Sao Paulo Stock
Exchange and the New York Stock Exchange, bringing the Holding Company's ADS
program into full compliance with Brazilian legislation.
MINORITY SHAREHOLDERS PROTECTION
The Brazilian Corporation Law provides for essential shareholder rights (the
"Shareholders Essential Rights"), which are: (i) to receive dividends from the
company; (ii) to receive a share of the company's assets in the event of
liquidation; (iii) look over the company's management as provided under the Law;
(iv) right of first refusal to subscribe to new stock or convertible securities
issued following a capital increase, in order to maintain the same proportional
stock holding in the company; and (v) to withdraw from the company, receiving
net worth value for the equity holding, if any of the following is resolved
against the opposition of the shareholder (the "Equity Withdrawing Rights"): (A)
creation of a new class of capital stock or increase in one of the existing
classes, without keeping the same proportion with the remaining existing
classes; (B) alterations in the conditions attributed to one or more classes of
preferred shares, or the creation of a more privileged class of preferred
shares; (C) reduction of mandatory profit distribution; and (D) the company's
merger or amalgamation into another company. The Equity Withdrawing Rights "(A)"
and "(B)" above are only available to the holders of the affected classes of
shares.
Inspection rights provided by the Law consist of the right of shareholders
representing at least 10% of the voting shares or shareholders representing at
least 5% of the non-voting shares, to summon the CONSELHO FISCAL, a board
established to audit and inspect management and to assess its compliance with
the law and company's By-laws (the "Audit Committee"). Such board will have
three to five members, of which the non-voting shareholders will elect one and
the minority voting stock holders representing at least 10% of total voting
stock will elect another. In the case of a public company, such as the Holding
Company, the CVM enacted a regulation in January 2000 lowering the threshold to
summon the Audit Committee to 2% and 1% of voting stock and non-voting stock,
respectively, applicable to corporations with over 150 million REAIS of capital
stock, e.g. the Holding Company.
In an effort to increase the protection of minority shareholders of publicly
traded companies in Brazil, the CVM has enacted a series of regulations
broadening the range and assurance of minority shareholders rights, among these
CVM Instruction no. 323/00 that defines several hypotheses that constitute abuse
of power by the controlling shareholders, and CVM Instructions 299 and 319, both
enacted in 1999, establishing protective rules in the event of corporate
restructuring via merger, incorporation, spin-off, increase of stockholding by
the controlling shareholder or sale of a controlling number of shares, among
other dispositions.
A bill to amend the Brazilian Corporation Law is currently pending approval by
the Brazilian Senate. If passed in its current form, the Law of the Corporations
(Law 6.404/76) will be substantially amended. These amendments will bring the
following changes with respect to the Company:
o Preferred shares representing 10% of the outstanding shares not held by the
controlling shareholders would be entitled to appoint a representative to
the Company's Board of Directors;
o Preferred shares and common shares not held by the Company's controlling
shareholders would have the collective right to appoint a representative to
the Company's Audit Committee;
o Disputes among shareholders would be subject to arbitration, if provided
for in the Company's bylaws;
o Shareholders representing 10% of the Company's outstanding shares would be
entitled to call a shareholders' meeting to deliberate with respect to any
conflict of interest involving the Company's management;
o A tender offer at a purchase price equal to the fair market value for all
outstanding shares would be required upon a delisting or a substantial
reduction in liquidity of the Company's shares as a result of purchases by
the controlling shareholders;
o Any sale of control would require a tender offer to purchase the minority
shareholders' common shares, and, if provided for in the Company's bylaws,
for the minority shareholders preferred shares, as well as at a purchase
price at least equal to 80% of the price per share paid to the controlling
shareholder;
o Shareholders would be afforded dissenters' redemption rights upon a
spin-off only if it entailed a change in the corporate purpose, a reduction
in mandatory dividends or participation in a conglomerate of companies;
o The controlling shareholders, the members of the Board of Directors and
Audit Committee and the Executive Officers would be required to disclose
any purchase or sale of Company shares to the Brazilian Securities
Commission and the Sao Paulo stock exchange;
o The Company's Executive Officers and two-thirds of the members of the Board
of Directors would have to reside in Brazil; and
o The Company would be permitted to use the Internet as an additional method
of information disclosure.
The summary above contains a brief description of principal protections granted
by Brazilian legislation to the minority stockholders of public companies in
general. Prospective purchasers or Holders of Preferred Shares or ADSs of the
Company should consult their own legal advisors as to the specific and
applicable rights, to which they are entitled as Holders of Preferred Shares or
ADSs.
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
BUSINESS PURPOSE
The Company's business purpose is defined in Article 2 of the Company's by-laws
as to: (i) exercise control of the Company's operating cellular service under
the Concessions; (ii) promote, through its affiliate companies the expansion and
implementation of the cellular service within its area of Concession; (iii)
promote, perform or advise the acquisition, from domestic or foreign sources, of
funds to be invested by the Company or its Subsidiaries; (iv) promote and
stimulate the research and development activities related to mobile telephony
sectors; (v) perform, through its affiliate companies, technical services in
connection with the field of mobile telephony; (vi) promote, stimulate and
coordinate, through its affiliate companies, the training of personnel necessary
for the mobile telephony sector; (vii) perform or promote the import of goods
and services to its affiliate companies; (viii) hold equity participation in
other companies; and (ix) perform other activities related to Company's business
purposes.
SHARE CAPITAL
The Company's capital stock is comprised of preferred shares and common shares,
all without par value. At October 10, 2000, the Company's capital was comprised
by a total of 364,399,027,592 shares, 240,029,997,060 being preferred shares and
124,369,030,532 common shares. The Company's share capital may be increased by
resolution of the Board of Directors, up to the limit of 700,000,000,000 shares
as authorized by the by-laws. Any increase in the authorized capital limit must
be approved by shareholders' vote.
The Company's preferred shares are non-voting except under limited circumstances
and are entitled to a preferential, noncumulative dividend and to priority over
the common shares in the case of the Company's liquidation.
Under Brazilian corporation law, the number of non-voting shares or shares with
limited voting rights, such as the Company's preferred shares, may not exceed
two-thirds of the total number of shares.
The majority of the members of the Company's Board of Directors were elected by
the controlling shareholders of the Company's common stock. Board members, even
if appointed and/or elected by one specific shareholder, have fiduciary duties
towards all shareholders and the obligation to perform their duties on behalf of
the Company's interests.
DISCLOSURE OF INCREASE IN PARTICIPATION
Pursuant to Instruction no. 299/99 of the COMISSAO DE VALORES MOBILIARIOS
("CVM"), the Brazilian securities commission, as amended, any increase in equity
participation in the Company, by the controlling shareholder of the Company,
which equals to or exceeds 5% of any class of ordinary or preferred shares, must
be communicated immediately, by such controlling shareholder, to the CVM and to
the relevant stock exchange where the Company's shares are traded (the Sao Paulo
Stock Exchange). The concept includes a potential increase defined as the
acquisition of convertible debentures or warrants by such controlling
shareholder.
Upon receipt of such communication, the CVM may order such controlling
shareholder to publish such information in the newspapers commonly used by the
Company to publish relevant notices and financial reports.
In addition, pursuant to Instruction no. 69/87 of the CVM any person or group of
persons acting together who achieves equity participation in the Company which
exceeds 10% of any class of voting shares, shall disclose to the CVM the
identity, number of shares and other securities acquired and the purpose of such
acquisition. Unless CVM dismisses the need for publication, the acquirers must
publish a notice in the newspapers commonly used by the Company and inform the
relevant stock exchange.
VOTING RIGHTS
Each of the Company's common shares entitles the holder to one vote at meetings
of shareholders. The Company's preferred shares do not entitle the holder to
vote except as set forth below.
One of the three members of the Company's permanent audit committee is elected
by majority vote of the holders of the Company's preferred shares.
Brazilian corporation law provides that non-voting shares, such as the Company's
preferred shares, acquire voting rights in the event that the Company fails, for
three consecutive fiscal years, to pay minimum dividends to such shares.
The Company's preferred shares are entitled to full voting rights with respect
to: (i) the approval of any long-term contract between the Company and its
affiliates, on one side, and any controlling shareholder of the Company or, that
shareholder's affiliates and related parties, on the other; (ii) resolutions
modifying certain provisions of the Company's by-laws; and (iii) any resolution
submitted to the shareholders' meeting for delisting the Company.
Any change in the preference, benefits, conditions of redemption and
amortization of the preferred shares, or the creation of a class of shares
having priority or preference over the preferred shares, would require the
approval of the holders of a majority of such preferred shares at a special
meeting of preferred shareholders. Such a meeting would be called by publication
of notices in Brazilian newspapers.
In any circumstances in which holders of preferred shares are entitled to vote,
each preferred share will entitle the holder to one vote.
PREEMPTIVE RIGHTS
Each shareholder has a general preemptive right to subscribe for shares in any
capital increase, in proportion to its shareholding. A minimum period of 30 days
following the publication of notice of the capital increase is allowed for the
exercise of the right. The preemptive right can be negotiated by its holder with
other parties. However, a shareholders' meeting is authorized to eliminate
preemptive rights with respect to the issuance of new shares, debentures and
warrants convertible into new shares up to the limit of the authorized share
capital, provided that the distribution of these securities is effected: (i) on
a stock exchange; (ii) in a public offering; (iii) through an exchange of shares
in a public offering the purpose of which is to takeover control of another
company, or (iv) to benefit from certain tax incentives.
In the event of a capital increase, which would maintain or increase the
proportion of capital represented by preferred shares, holders of the Company's
ADSs, or of the Company's preferred shares, would have preemptive rights to
subscribe the newly issued preferred shares. In the event of a capital increase,
which would reduce the proportion of capital represented by the Company's
preferred shares, holders of the Company's ADSs, or of preferred shares, would
have preemptive rights to subscribe to preferred shares, in proportion to their
shareholdings and to common shares only to the extent necessary to prevent
dilution of their interest in the Company.
RIGHT OF REDEMPTION
Subject to the right of a dissenting shareholder to seek redemption upon a
decision made at a shareholders' meeting by shareholders representing over 50%
of the voting shares, the Company's common shares or the Company's preferred
shares are not redeemable. The dissention of a shareholder upon a decision on
the following matters shall entail the right of redemption: (i) to change the
preference condition of the Company's preferred shares or to create a class of
shares having priority or preference over the Company's preferred shares; (ii)
to reduce the mandatory of dividend amount; (iii) to change the Company's
corporate purposes; (iv) to swap all of the Company's shares with those of
another company in order to make the Company a wholly-owned subsidiary of that
company; (v) to approve the takeover of another company, the price of which
exceeds certain limits set forth in the Brazilian corporation law; (vi) to merge
or consolidate the Company with another company, if certain liquidity standards
of our shares, provided in the Brazilian corporation law, are not met; and to
become a member of a conglomerate of companies, if certain liquidity standards
of our shares, provided in the Brazilian corporation law, are not met.
The right to redemption lapses 30 days after publication of the minutes of the
relevant shareholders' meeting or, whenever the resolution requires the approval
of the holders of preferred shares by vote taken in a special meeting of a
majority of the holders of preferred shares affected by the resolution within 30
days from the publication of the minutes of that special meeting. The Company
would be entitled to reconsider any action giving rise to redemption rights
within 10 days following the expiration of those rights if the redemption of
shares of dissenting shareholders would jeopardize the financial stability of
the Company, as the case may be.
Shares are redeemable at their book value, determined on the basis of the last
annual balance sheet approved by the shareholders. If the shareholders' meeting
giving rise to redemption rights occurs more than 60 days after the date of the
last annual balance sheet, a shareholder may demand that its shares be valued on
the basis of a new balance sheet that is as of a date within 60 days of such
shareholders' meeting.
FORM AND TRANSFER
The Company's shares are maintained in book-entry form with a transfer agent,
Banco ABN-AMRO Real S.A., and the transfer of our shares is made in accordance
with the applicable provision of the Brazilian corporation law, which provides
that a transfer of shares is effected by an entry made by the transfer agent on
its books, debiting the share account of the seller and crediting the share
account of the purchaser, against presentation of a written order of the seller,
or judicial authorization or order, in an appropriate document which remains in
the possession of the transfer agent. The Company's preferred shares underlying
the Company's ADS are registered on the transfer agent's records in the name of
the Brazilian depositary.
Transfers of shares by a foreign investor are made in the same way and executed
by such investor's local agent on the investor's behalf except that, if the
original investment was registered with the Central Bank of Brazil under the
Brazilian foreign investment in capital markets regulations, the foreign
investor should also seek amendment, if necessary, through its local agent, of
the certificate of registration to reflect the new ownership.
The Sao Paulo stock exchange operates a central clearing system. A holder of
Company's shares may choose, at its discretion, to participate in these systems.
All shares elected to be put into the system will be deposited in custody with
the relevant stock exchange, through a Brazilian institution duly authorized to
operate by the Central Bank of Brazil and having a clearing account with the
relevant stock exchange. The fact that such shares are subject to custody with
the relevant stock exchange will be reflected in the Company's register of
shareholders.
MATERIAL CONTRACTS
Cellular Service Authorization Agreement entered into and between the Brazilian
government, through ANATEL, and Tele Centro Oeste/Inepar Ltda., (currently NBT)
on November 27, 1998.
SCOPE
The contract authorizes NBT to exclusively use certain sub-band cellular
frequencies from 835.0 to 845.0 MHz and certain associated radio frequencies
from 880.0 to 890.0 MHz and 891.5 to 894.0 Mhz for transmission in Area 8.
The authorization to operate the cellular services is for an indefinite term,
subject to certain conditions. However, the authorization to use the radio
frequency is limited to 15 years and may be renewed once for another 15 years.
CONSIDERATION
NBT agreed to pay R$60.5 million to ANATEL for the right to explore the cellular
service and to use the associated radio frequency as follows:
o R$24.2 million on the date of the signature of the authorization term,
equivalent to 40% of the total amount;
o R$12.1 million on November 27, 1999, equivalent to 20% of the total
amount;
o R$12.1 million on November 27, 2000, equivalent to 20% of the total
amount;
o R$12.1 million on November 27, 2001, equivalent to 20% of the total
amount.
These amounts are adjusted by 1% per month in accordance with the IGP-DI.
MAIN CONDITIONS OF THE CONTRACT
The operation of the service is the responsibility and risk of NBT. NBT's
remuneration is based on customers' payments, and the service will be performed
in conformity to ANATEL Public Tender Proposal ("Proposal") and will observe the
conditions of the Methodology of Execution, and the elements of the Price
Proposal for the right to use the service and the associated radio frequencies,
which is established in Annexes 1, 2 and 3 of the contract. Third parties can be
contracted by the authorized, without prejudice of the liabilities related to
the services, even if caused by third parties. In addition, all fiscal
regulations must be respected. The installation and operation of the service are
subject to ANATEL quality control guidelines.
SERVICE RATES AND PRICES
Service prices are subject to the price cap presented in the Proposal. There is
a differentiation between "basic" and "non-essential" services. "Basic" services
include monthly subscription fees, VC1 charges, VC2 charges, VC3 charges, DSL1
charges, DSL2 charges, and AD charges, as well as interconnection charges,
including network usage fees and charges to provide a physical connection to the
network. "Non-essential" services are optional and can vary in price according
to technical and geographic characteristics. SEE ITEM 4 " INFORMATION ON THE
COMPANY - REGULATION OF THE TELECOMMUNICATIONS INDUSTRY - RATE REGULATION."
ANATEL RIGHTS, GUARANTEES AND OBLIGATIONS
In general, ANATEL is responsible for: the general supervision of the
performance of the Cellular Mobile Service; the legal and normative application
of penalties, including those referred in the authorization term; the
termination of the authorization, in the manner and circumstances prescribed by
law; the execution of the norms defined in the service, including the
interconnection with the public network; the guarantee of quality of service;
the assurance of competition; and the declaration of public utility of certain
services when necessary.
NBT RIGHTS, GUARANTEES AND OBLIGATIONS
In general, NBT is responsible for: the assurance of an available and
commercially operational Mobile Cellular Service in accordance with the
authorization, the performance of services at prices in conformity with the
agreement and the Proposal; providing information about implementation,
improvements or expansion of the service, being emphasized that ANATEL will keep
this information confidential; the use of certified equipment, the allowance of
access to documents and places related to the authorization; the maintenance of
the integrity of the assets of the service; the continuance of an updated
inventory and register of patrimony used in the operation of the service; the
maintenance of adequate customer care; the annual publication of the company
financial demonstratives; and the promotion of the balance of the economic
financial condition of the authorization.
CUSTOMER RIGHTS AND OBLIGATIONS
NBT, besides observing the general legal dispositions related to customers'
rights, has to respect customers' rights to receive adequate service, legal and
contractual information (including from ANATEL), and also the right to have
freedom of choice related to the use of the service.
Customers, in order to receive the service, are asked to keep in good condition
equipment relating to the security of third parties; and to timely effect
payment of charges and taxes due.
INTERVENTION
Anatel can intervene in the authorization in order to keep the proper
performance of the service in conformity with applicable legislation, when the
authorization clauses or applicable regulation are not complied with. When such
intervention, is no longer warranted, the administration of the service will
revert back to NBT. If the intervention does not comply with legal and
regulatory requirements, such intervention will be declared null and void, with
the immediate devolution of the service to NBT.
TERMINATION OF THE AUTHORIZATION
The authorization may be terminated either by Anatel or by resignation of NBT.
Total or partial non-performance of the terms and conditions of the
authorization may result in regulatory, intervention and, ultimately,
termination of the authorization by Anatel. Where termination by Anatel is due
to non-compliance with regulatory or legal dispositions, administrative
procedures and due process of law shall be observed.
PENALTIES
If in default, NBT will be subject to penalties, which may include fines up to
0.05% of NBT's net revenue.
ASSIGNMENT
Either the authorization or NBT's rights and interests may be transferred, after
60 months from the beginning of the commercial operation of the service, subject
to ANATEL approval, and after the payment of a fiscalization tax.
RENEWAL
The authorization for the use of the radio frequencies may be renewed for
another 15 years, at NBT's discretion, provided it complies with all terms and
conditions of the authorization and requests renewal 20 months prior to
expiration of the first term. Renewal will be subject to a new payment schedule
for the use of the radio frequencies, to be set by Anatel at the time.
EXCHANGE CONTROLS
There are no restrictions on ownership of Preferred Shares or Common Shares of
the Holding Company by individuals or legal entities resident or headquartered
outside Brazil. However, there are certain registration requirements to assure
repatriation of relevant investment principal and gains.
The right to convert dividend or interest on equity payments and proceeds from
the sale of shares into foreign currency for remittance abroad is subject to
restrictions under foreign investment legislation, which requires, among other
things, that the relevant investments be registered with the Central Bank under
the proper title.
Annex V to Resolution 1,289 of the National Monetary Council, as amended (the
"Annex V Regulations") is the main regulatory rule that governs ADS programs; it
establishes foreign exchange procedures for currency flows under such programs.
Under the Annex V Regulations, a foreign investment registration (a
"Registration") is issued by the Central Bank in favor of the Depositary and
held by Banco Itau S.A., which has custody of the Preferred Shares underlying
the ADSs (the "Custodian"), on the Depositary's behalf. The Registration applies
to the entire Preferred Shares portfolio held by the Custodian on behalf of the
Depositary as agent for the ADS Holders. It allows the Custodian and the
Depositary to convert dividends, interest on equity payments or share sale
proceeds, in respect of the Preferred Shares represented by the ADSs, into
foreign currency and remit such amounts outside Brazil. The amount provided in
the Registration varies depending on the number of ADSs and Preferred Shares in
the Depositary portfolio. When new Preferred Shares are added to the Depositary
portfolio, new ADSs are issued. Conversely, when Preferred Shares are subtracted
from the Depositary Portfolio, a number of ADSs are canceled. Other Annex V
Regulations provide for a requirement of prior approval by the CVM of ADS
programs and favorable tax treatment. SEE ITEM 9 "THE OFFERING AND THE
LISTING--MARKETS--REGULATION OF BRAZILIAN SECURITIES MARKETS--DEPOSITARY
SECURITIES PROGRAMS REGULATIONS" AND ITEM 10 "ADDITIONAL
INFORMATION--TAXATION--BRAZILIAN TAX CONSIDERATIONS."
A Registration has been issued in the name of the Depositary with respect to the
ADSs and is maintained by the Custodian on behalf of the Depositary.
Accordingly, the Custodian and the Depositary are able to convert into foreign
currency and remit outside Brazil all dividends, interest on equity payments or
share sale proceeds with respect to the Preferred Shares underlying the ADSs.
Brazilian legislation also provides for direct foreign investment in the
Brazilian stock market without the need for an ADS program. Such investments
previously were regulated by Annex IV to Resolution 1,289 of the National
Monetary Council (the "Annex IV Regulations"), pursuant to which qualified
foreign investors (mostly financial institutions, insurance companies, pension
and mutual funds, charitable foundations and other institutions that meet
certain minimum capital and other requirements) registered with the CVM and
invested through custody accounts managed by authorized local agents. Qualified
foreign investors could buy and sell shares on Brazilian stock exchanges without
obtaining a separate Certificate of Registration for each transaction.
Investments under Annex IV are also entitled to favorable tax treatment. SEE
ITEM 10 "ADDITIONAL INFORMATION--TAXATION--BRAZILIAN TAX CONSIDERATIONS."
However, in January 2000, the National Monetary Council enacted Resolution
2,689, which provides a comprehensive regulatory framework to direct foreign
investment in Brazilian capital markets. Under Resolution 2,689, any individual
or legal entity, including mutual funds and other collective investment
vehicles, resident or headquartered abroad, may directly invest in Brazilian
capital markets. With few exceptions, this includes virtually all investment
options available to Brazilian residents such as publicly traded stocks (e.g.
the Preferred Shares), fixed-income securities and derivatives. In order to
qualify for registration of investments, the foreign investor must empower an
agent in Brazil, which if not a financial institution must sub-contract one,
submit a standard form and register with the CVM. Investments under the
Resolution 2,689 will be electronically registered with the Central Bank through
SISBACEN (the electronic network linking the Central Bank to Brazilian financial
institutions), and remittances outside Brazil are made through foreign exchange
contracts based on such registration.
Other regulations concerning investment vehicles with foreign stockholders and
foreign capital fixed-income mutual funds, among others, were also affected and
are being substituted by Resolution 2,689. Resolution 2,689 also kept open the
option for Annex V investors (e.g. the ADS holders) to transfer to direct
ownership of the Preferred Shares instead of holding an ADS. In this case, the
ADS holder would cancel its ADS, continuing to rely on its Annex V registration
for five business days, thereafter having to obtain a Resolution 2,689
registration in its own name, with minimal difference in tax treatment. SEE ITEM
10 "ADDITIONAL INFORMATION--TAXATION--BRAZILIAN TAX CONSIDERATIONS."
Under current Brazilian legislation, the Federal Government may impose temporary
restrictions on remittances of foreign capital abroad in the event of an actual
or anticipated serious imbalance of Brazil's balance of payments. For
approximately six months in 1989 and early 1990, the Federal Government froze
all dividends and capital repatriations held by the Central Bank that were owed
to foreign equity investors, in order to conserve Brazil's foreign currency
reserves. These amounts were subsequently released in accordance with Federal
Government directives. Holders of ADSs could be adversely affected by delays in,
or refusal to grant any, required government approval for conversions of
Brazilian currency payments and remittances abroad of the Preferred Shares
underlying the ADSs. Although the ADS program is properly approved by competent
bodies and the relevant Registration has been issued in favor of the Depositary,
there can be no assurances that the Federal Government will not impose
restrictions on foreign repatriations in the future.
TAXATION
The following summary contains a description of the principal Brazilian and U.S.
federal income tax consequences of the acquisition, ownership and disposition of
Preferred Shares or ADSs, but it does not purport to be a comprehensive
description of all the tax considerations that may be relevant to a decision to
purchase Preferred Shares or ADSs. The summary is based upon the tax laws of
Brazil and regulations thereunder and on the tax laws of the United States and
regulations thereunder as in effect on the date hereof, which are subject to
change. PROSPECTIVE PURCHASERS OF PREFERRED SHARES OR ADSS SHOULD CONSULT THEIR
OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF PREFERRED SHARES OR ADSS.
Although there is at present no income tax treaty between Brazil and the United
States, the tax authorities of the two countries have had discussions that may
culminate in such a treaty. No assurance can be given, however, as to whether or
when a treaty will enter into force or how it will affect the U.S. holders of
the Company's preferred shares or ADSs. In spite of the fact that there is not a
tax treaty between Brazil and the United States, the Brazilian income tax rules
foresee that in case of reciprocal tax treatment between countries, individuals
are allowed to deduct from income tax owed to the recipient country the amount
previously collected in the other country upon remittance. With reference to the
United States, the Brazilian Federal Revenue Service issued the ATO DECLARATORIO
no 28 on April 26, 2000, which established reciprocal tax treatment between
Brazil and United States.
Brazilian Tax Considerations
The following discussion summarizes the principal Brazilian tax consequences of
the acquisition, ownership and disposition of Preferred Shares or ADSs by a
holder not deemed to be domiciled in Brazil for Brazilian tax purposes (a
"non-Brazilian holder"). This discussion does not address all the Brazilian tax
considerations that may be applicable to any particular non-Brazilian holder,
and each non-Brazilian holder should consult his or her own tax advisor about
the Brazilian tax consequences of investing in Preferred Shares or ADSs.
TAXATION OF DIVIDENDS
Dividends paid by the Holding Company in cash or in kind from profits of periods
beginning on or after January 1, 1996 (i) to the Depositary in respect of
Preferred Shares underlying ADSs or (ii) to a non-Brazilian holder in respect of
Preferred Shares will generally not be subject to Brazilian withholding tax.
Dividends paid from profits generated before January 1, 1996 may be subject to
Brazilian withholding tax at varying rates, except that stock dividends are not
subject to Brazilian tax unless the stock is subsequently redeemed by the
Holding Company, or the non-Brazilian holder sells the stock in Brazil, within
five years after the distribution.
The only Brazilian tax treaty now in effect that would (if certain conditions
are met) reduce the rate of the withholding tax on dividends paid from profits
generated before January 1, 1996 is the treaty with Japan, which would reduce
the rate to 12.5% under the circumstances set forth in the treaty.
TAXATION OF GAINS
Gains realized outside Brazil by a non-Brazilian holder on the disposition of
Preferred ADSs to another non-Brazilian holder are not subject to Brazilian tax.
The withdrawal of Preferred Shares in exchange for Preferred ADSs is not subject
to Brazilian tax. The deposit of Preferred Shares in exchange for Preferred ADSs
is not subject to Brazilian tax provided that the Preferred Shares are
registered by the investor or its agent under the Central Bank's Annex IV
Regulations and, as of March 31, 2000, under Resolution 2,689/00 (foreign
investments registered under Annex IV Regulations must be conformed to the new
rules set forth by Resolution 2,689/00 by June 30, 2000).
In the event that the Preferred Shares are not so registered, the deposit of
Preferred Shares in exchange for Preferred ADSs may be subject to Brazilian
capital gains tax at the rate of 15%.
On receipt of the underlying Preferred Shares, a non-Brazilian holder who
qualifies under the Annex IV Regulations and, as of March 31, 2000, under
Resolution 2,689/00, will be entitled to register the U.S. dollar value of such
shares with the Central Bank as described below.
Non-Brazilian holders are not subject to tax in Brazil on gains realized on
sales of Preferred Shares that occur abroad or on the proceeds of a redemption
of, or a liquidating distribution with respect to Preferred Shares. As a general
rule, non-Brazilian holders are subject to a withholding tax imposed at a rate
of 10% on gains realized on sales or exchanges of Preferred Shares that occur in
Brazil to or with a resident of Brazil, outside of a Brazilian stock exchange.
Non-Brazilian holders are subject to withholding tax at a rate of 15% on gains
realized on sales or exchanges in Brazil of Preferred Shares that occur on a
Brazilian Stock Exchange unless such sale is made by a non-Brazilian holder who
is not resident in a tax haven (as described below) and on a Brazilian stock
exchange within five business days of the withdrawal of such Preferred Shares in
exchange for Preferred ADSs and the proceeds thereof are remitted abroad within
such five-day period or such sales are made under the Annex IV Regulations by
certain qualified institutional non-Brazilian holders which register with the
CVM. Gains realized from transactions on a Brazilian stock exchange by an
investor under Annex IV Regulations are not subject to tax (except as described
below).
The "gain realized" as a result of a transaction on a Brazilian stock exchange
is the difference between the amount in Brazilian currency realized on the sale
or exchange and the acquisition cost measured in Brazilian currency, without any
correction for inflation, of the shares sold. The "gain realized" as a result of
a transaction that occurs other than on a Brazilian stock exchange will be the
positive difference between the amount realized on the sale or exchange and the
acquisition cost of the Preferred Shares, both such values to be taken into
account in REAIS. There are grounds, however, to hold that the "gain realized"
should be calculated based on the foreign currency amount registered with the
Central Bank. There can be no assurance that the current preferential treatment
for holders of Preferred ADSs and for certain non-Brazilian holders of Preferred
Shares under the Annex IV Regulations will continue in the future or that such
treatment will not be changed in the future.
As of January 1, 2000, the preferential treatment under Annex IV is no longer
applicable if the non-Brazilian holder of the Preferred ADSs or Preferred shares
is resident in a tax haven - I.E., countries which do not impose income tax or
where such tax is imposed at a tax bracket within a range between 0% to a
maximum rate of 20% - in accordance with Law No. 9,959, of January 27, 2000. In
other words, gains realized by such holder on the sale or exchange in Brazil
that occur in the spot market of shares traded on a Brazilian stock exchange
will be taxed at a rate of 10% (to be increased to 20% as of January 1, 2002, in
accordance with the same Law). Law 9,959 also provides that such rate of 10% on
gains realized on the sale or exchange in Brazil of preferred shares, that occur
on a Brazilian Stock Exchange, will be increased to 20% for transactions carried
out on or after January 1, 2002.
Any exercise of preemptive rights relating to the Preferred Shares will not be
subject to Brazilian taxation. Any gain on the sale or assignment of preemptive
rights relating to the Preferred Shares by the Depositary on behalf of holders
of Preferred ADSs, will be subject to Brazilian income taxation at the rate of
15%, unless such sale or assignment is performed within Brazilian stock
exchanges, in which the gains are exempt from withholding income tax.
Any gain on the sale or assignment of preemptive rights relating to Preferred
Shares, will be subject to Brazilian income tax at the same rate applicable to
the sale or disposition of Preferred Shares. The maximum rate of such tax is
currently 15%.
DISTRIBUTIONS OF INTEREST ON CAPITAL
Brazilian corporations may make payments to shareholders characterized as
interest on the capital of the Holding Company as an alternative form of making
dividend distributions. SEE ITEM 5 "OPERATING AND FINANCIAL REVIEW AND
PROSPECTS--LIQUIDITY AND CAPITAL RESOURCES." The rate of interest may not be
higher than the Federal Government's long-term interest rate (the "TJLP") as
determined by the Central Bank from time to time (11.00% per annum for the three
month period ending June 30, 2000). The total amount distributed as interest on
capital may not exceed the greater of (i) 50% of net income (before taking such
distribution and any deductions for income taxes into account) for the year in
respect of which the payment is made or (ii) 50% of retained earnings for the
year prior to the year in respect of which the payment is made. Payments of
interest on capital are decided by the shareholders on the basis of
recommendations of the company's board of directors.
Distributions of interest on capital paid to Brazilian and non-Brazilian holders
of Preferred Shares, including payments to the Depositary in respect of
Preferred Shares underlying ADSs, are deductible by the Holding Company for
Brazilian corporate income tax and social contribution on profits purposes. Such
payments are subject to Brazilian withholding tax at the rate of 15%, except for
payments to persons who are exempt from tax in Brazil, which are free of
Brazilian tax, and except for payments to persons situated in jurisdictions
deemed to be tax havens (I.E., countries that either have no income tax or in
which the income tax rate is less than 20%), which will be subject to tax at a
25% rate.
No assurance can be given that the Board of Directors of the Holding Company
will not recommend that future distributions of profits should be made by means
of interest on capital instead of by means of dividends.
Amounts paid as interest on capital (net of applicable withholding tax) may be
treated as payments in respect of the dividends the Holding Company is obligated
to distribute to its shareholders in accordance with its Charter and the
Brazilian Corporation Law. Distributions of interest on capital in respect of
the Preferred Shares, including distributions to the Depositary in respect of
Preferred Shares underlying ADSs, may be converted into U.S. dollars and
remitted outside of Brazil, subject to applicable exchange controls. SEE ITEM 10
"ADDITIONAL INFORMATION--EXCHANGE CONTROLS."
OTHER BRAZILIAN TAXES
There are no Brazilian inheritance, gift or succession taxes applicable to the
ownership, transfer or disposition of Preferred Shares or ADSs by a
non-Brazilian holder except for gift and inheritance taxes levied by some states
in Brazil on gifts made or inheritances bestowed by individuals or entities not
resident or domiciled in Brazil or in the relevant State to individuals or
entities that are resident or domiciled within such State in Brazil. There are
no Brazilian stamp, issue, registration, or similar taxes or duties payable by
holders of Preferred Shares or ADSs.
A financial transaction tax (the "IOF tax") may be imposed on the conversion of
Brazilian currency into foreign currency (E.G., for purposes of paying dividends
and interest). The rate of IOF tax rate on such conversions is currently 0%, but
the Minister of Finance has the legal power to increase the rate to a maximum of
25%. Any such increase will be applicable only prospectively.
In addition to the IOF tax, the temporary contribution on financial transactions
("CPMF tax") is currently levied at a rate of 0.38% on all fund transfers in
connection with financial transactions in Brazil. The CPMF tax rate will remain
0.38% until its expected expiration in June 2002. Although the CPMF tax is set
to expire on June 16, 2002, the Brazilian Congress is discussing the possibility
of converting this temporary tax into a permanent tax.
REGISTERED CAPITAL
Amounts invested in Preferred Shares by a non-Brazilian holder who qualifies
under the Annex IV Regulations and obtains registration with the CVM, or by the
Depositary representing an ADS holder, are eligible for registration with the
Central Bank. Such registration (the amount so registered is referred to as
("Registered Capital") allows the remittance outside Brazil of foreign currency,
converted at the Commercial Market Rate, acquired with the proceeds of
distributions on, and amounts realized through dispositions of such Preferred
Shares. The Registered Capital per Preferred Share purchased in the form of an
ADS, or purchased in Brazil and deposited with the Depositary in exchange for an
ADS, will be equal to its purchase price (stated in U.S. dollars). The
Registered Capital per Preferred Share withdrawn upon cancellation of an ADS
will be the U.S. dollar equivalent of (i) the average price of a Preferred Share
on the Brazilian stock exchange on which the most Preferred Shares were traded
on the day of withdrawal or, (ii) if no Preferred Shares were traded on that
day, the average price on the Brazilian stock exchange on which the most
Preferred Shares were traded in the fifteen trading sessions immediately
preceding such withdrawal. The U.S. dollar equivalent will be determined on the
basis of the average Commercial Market Rates quoted by the Central Bank on such
date or dates.
A non-Brazilian holder of Preferred Shares may experience delays in effecting
Central Bank registration, which may delay remittances abroad. Such a delay may
adversely affect the amount in U.S. dollars, received by the non-Brazilian
holder.
U.S. Federal Income Tax Considerations
The statements regarding U.S. tax law set forth below are based on U.S. law as
in force on the date of this Annual Report, and changes to such law subsequent
to the date of this Annual Report may affect the tax consequences described
herein. This summary describes the principal tax consequences of the ownership
and disposition of Preferred Shares or ADSs, but it does not purport to be a
comprehensive description of all of the tax consequences that may be relevant to
a decision to hold or dispose of Preferred Shares or ADSs. This summary applies
only to purchasers of Preferred Shares or ADSs who will hold the Preferred
Shares or ADSs as capital assets and does not apply to special classes of
holders such as dealers in securities or currencies, holders whose functional
currency is not the U.S. dollar, holders of 10% or more of the shares of the
Holding Company (taking into account shares held directly through depositary
arrangements), tax-exempt organizations, financial institutions, holders liable
for the alternative minimum tax, securities traders who elect to account for
their investment in Preferred Shares or ADSs on a mark-to-market basis, and
persons holding Preferred Shares or ADSs in a hedging transaction or as part of
a straddle or conversion transaction.
Each holder should consult such holder's own tax advisor concerning the overall
tax consequences to it, including the consequences under laws other than U.S.
federal income tax laws, of an investment in Preferred Shares or ADSs.
In this discussion, references to a "U.S. holder" are to a holder of an ADS or
Preferred Shares (i) that is a citizen or resident of the United States of
America, (ii) that is a corporation organized under the laws of the United
States of America or any state thereof, or (iii) that is otherwise subject to
U.S. federal income taxation on a net basis with respect to the ADS or Preferred
Shares.
For purposes of the U.S. Internal Revenue Code of 1986, as amended (the "Code"),
U.S. holders of ADSs will be treated as owners of the Preferred Shares
underlying such ADSs.
TAXATION OF DIVIDENDS
A U.S. holder will recognize ordinary dividend income for U.S. federal income
tax purposes in an amount equal to the amount of any cash and the value of any
property distributed by the Holding Company as a dividend to the extent that
such distribution is paid out of the Holding Company's current or accumulated
earnings and profits ("e&p"), as determined for U.S. federal income tax
purposes, when such distribution is received by the Custodian, in the case of
ADSs, or by the U.S. holder, in the case of Preferred Shares. To the extent that
such a distribution exceeds the Holding Company's e&p, it will be treated as a
nontaxable return of capital, to the extent of the U.S. holder's tax basis in
the ADS (or Preferred Shares, as the case may be), and thereafter as capital
gain. The amount of any distribution taken into account for U.S. federal income
tax purposes is the gross amount of the distribution without reduction for any
Brazilian tax withheld on the amount distributed, and the amount of a
distribution paid in REAIS will be measured by reference to the exchange rate
for converting reais into U.S. dollars in effect on the date the distribution is
received by the Custodian, in the case of ADSs, or by a U.S. holder, in the case
of Preferred Shares. If the Custodian or U.S. holder, as the case may be, does
not convert such REAIS into U.S. dollars on the date it receives them, it is
possible that the U.S. holder will recognize foreign currency loss or gain,
which would be ordinary loss or gain, when the REAIS are converted into U.S.
dollars. Dividends paid by the Holding Company will not be eligible for the
dividends received deduction allowed for certain dividends received by
corporations under the Code.
Distributions out of e&p with respect to the ADSs or Preferred Shares generally
will be treated as dividend income from sources outside of the United States and
generally will be treated separately along with other items of "passive" (or, in
the case of certain U.S. holders, "financial services") income for purposes of
determining the credit for foreign income taxes allowed under the Code. Subject
to certain limitations, Brazilian income tax withheld in connection with any
distribution with respect to the ADSs or Preferred Shares may be claimed as a
credit against the U.S. federal income tax liability of a U.S. holder if such
U.S. holder elects for that year to credit all foreign income taxes, or such
Brazilian withholding tax may be taken as a deduction. Foreign tax credits will
not be allowed for withholding taxes imposed in respect of certain short-term or
hedged positions in securities or in respect of arrangements in which a U.S.
holder's expected economic profit, after non-U.S. taxes, is insubstantial. U.S.
holders should consult their own tax advisors concerning the implications of
these rules in light of their particular circumstances.
A holder of an ADS or Preferred Share that is a foreign corporation or
nonresident alien individual (a "non-U.S. holder") generally will not be subject
to U.S. federal income tax or withholding tax on distributions with respect to
ADSs or Preferred Shares that are treated as dividend income for U.S. federal
income tax purposes, and generally will not be subject to U.S. federal income
tax or withholding tax on distributions with respect to ADSs or Preferred Shares
that are treated as capital gain for U.S. federal income tax purposes unless
such holder would be subject to U.S. federal income tax on gain realized on the
sale or other disposition of ADSs or Preferred Shares, as discussed below.
TAXATION OF CAPITAL GAINS
Upon the sale or other disposition of an ADS or Preferred Share, a U.S. holder
will recognize gain or loss for U.S. federal income tax purposes in an amount
equal to the difference between the amount realized in consideration for the
disposition of the ADS or Preferred Share (excluding the amount of any
distribution paid by the Holding Company to the Custodian but not distributed by
the Custodian prior to the disposition) and the U.S. holder's tax basis in the
ADS or Preferred Share. Such gain or loss generally will be subject to U.S.
federal income tax and will be treated as capital gain or loss. The
deductibility of capital losses is subject to certain limitations. Gain realized
by a U.S. holder on a sale or disposition of ADSs or Preferred Shares generally
will be treated as U.S. source income. Consequently, if Brazilian tax is imposed
on such gain, the U.S. holder will not be able to use the corresponding foreign
tax credit, unless the holder has other foreign source income of the appropriate
type in respect of which the credit may be used.
A non-U.S. holder will not be subject to U.S. federal income tax or withholding
tax on gain realized on the sale or other disposition of an ADS or Preferred
Share unless (i) such gain is effectively connected with the conduct by the
holder of a trade or business in the United States, or (ii) such holder is an
individual who is present in the United States of America for 183 days or more
in the taxable year of the sale and certain other conditions are met.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
Dividend payments with respect to ADSs or Preferred Shares and proceeds from the
sale, exchange or redemption of ADSs or Preferred Shares may be subject to
information reporting to the U.S. Internal Revenue Service ("IRS") and possible
U.S. backup withholding at a 31% rate. Backup withholding will not apply,
however, to a holder who furnishes a correct taxpayer identification number or
certificate of foreign status and makes any other required certification or who
is otherwise exempt from backup withholding. Persons exempt from backup
withholding include, for example, all corporations and certain non-U.S. persons
who hold their ADSs or Preferred Shares (and receive all payments thereon or in
respect thereof) through a broker or other intermediary who is neither a U.S.
person nor has any significant U.S. connection. Any U.S. person required to
establish its exempt status generally must provide such certification on IRS
Form W-9 (Request for Taxpayer Identification Number and Certification).
Finalized treasury regulations, which are generally applicable to payments made
after December 31, 2000, have generally expanded the circumstances under which
information reporting and backup withholding may apply.
Amounts withheld as backup withholding may be credited against a holder's U.S.
federal income tax liability, and a holder may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS and furnishing any required information. U.S.
holders of ADSs or Preferred Shares should consult their tax advisors regarding
the application of the information reporting and backup withholding rules.
PASSIVE FOREIGN INCOME COMPANY CONSIDERATIONS
The Holding Company believes that its ADSs and Preferred Shares should not be
treated as stock of a passive foreign investment company (a "PFIC") for U.S.
federal income tax purposes, but this conclusion is a factual determination made
annually and thus is subject to change.
The Holding Company will be a PFIC with respect to a U.S. holder if, for any
taxable year in which the U.S. holder holds ADSs or Preferred Shares, either (i)
at least 75% of the gross income of the Holding Company for the taxable year is
passive income or (ii) at least 50% of the average fair market value of the
Holding Company's assets consists of assets that produce or are held for the
production of passive income. For this purpose, passive income generally
includes dividends, interest, royalties, rents (other than rents and royalties
derived from the active conduct of a trade or business and not derived from a
related person), annuities and gains from assets that produce passive income.
For the purpose of the PFIC tests, the Holding Company will be treated as owning
directly its percentage share of the assets of its subsidiaries and of receiving
directly its percentage shares of each of those subsidiaries' income, if any, so
long as the Holding Company owns, directly or indirectly, at least, 25% by value
of the particular subsidiary's stock.
If the Holding Company were to become a PFIC, a U.S. holder of ADSs or Preferred
Shares generally would be subject to adverse tax consequences with respect to
certain distributions on, and gains realized from a disposition of, ADSs or
Preferred Shares. U.S. holders should consult their own tax advisors regarding
the potential application of the PFIC rules to their ownership of ADSs or
Preferred Shares.
DOCUMENTS ON DISPLAY
The documents referred to herein may be inspected at the Company's
registered office at SCS, Quadra 2, Bloco C, 7 andar, 70302-916, Brasilia, DF,
Brazil.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in both foreign currency
exchange rates and interest rates. The Company is exposed to foreign exchange
rate risk because certain of its costs are denominated in currencies (primarily
the U.S. dollar) other than those in which it earns revenues (primarily the
REAL). Similarly, the Company is subject to market risk deriving from changes in
interest rates which may affect the cost of its financing. The Company does not
use derivative instruments, such as foreign exchange forward contracts, foreign
currency options, interest rate swaps and forward rate agreements, to manage
these market risks, nor does it hold or issue derivative or other financial
instruments for trading purposes, except for the hedge contracted for the Zero
Coupon Euro Commercial Paper. SEE ITEM 5 "OPERATING AND FINANCIAL REVIEW AND
PROSPECTS--FOREIGN EXCHANGE AND INTEREST RATE EXPOSURE."
EXCHANGE RATE RISK
The Company has exchange rate exposure with respect to the U.S. dollar. On
December 31, 2000, approximately R$236.4 million of the Company's indebtedness
and R$53.1 million of the Company's contingencies were denominated in U.S.
dollars. The potential immediate loss to the Company on such indebtedness that
would result from a hypothetical 50% change in foreign currency exchange rates
would be approximately R$14 million, once R$207.9 related to Euro Commercial
Paper are hedged against foreign currency exposure. In addition, if such a
change were to be sustained, the Company's cost of financing would increase in
proportion to the change. However, due to departures from agreed procedures in
connection with the Breakup of TELEBRAS for assigning the right to receive
payments under such indebtedness, payments on such indebtedness were suspended
in 1998 and the Company's management has determined that, beginning in 1999,
R$53.1 million of such indebtedness will be treated for all purposes as a
REAL-denominated liability. SEE ITEM 5 "OPERATING AND FINANCIAL REVIEW AND
PROSPECTS--FOREIGN EXCHANGE AND INTEREST RATE EXPOSURE" AND SEE NOTES 22 AND 32
TO THE CONSOLIDATED FINANCIAL STATEMENTS.
INTEREST RATE RISK
As of December 31, 2000, the Company had approximately R$509.1 million in loans
and financing outstanding, of which approximately R$480.6 million bore interest
at fixed rates and approximately R$28.5 million bore interest at floating
(primarily LIBOR-based) rates. The Company invests its excess liquidity (R$450.1
million at December 31, 2000) mainly in short-term instruments. The potential
loss to the Company over one year that would have resulted from a hypothetical,
instantaneous and unfavorable change of 100 basis points in the interest rates
applicable to financial assets and liabilities on December 31, 2000 would be
approximately R$9.2 million. The above sensitivity analysis is based on the
assumption of an unfavorable 100 basis point movement of the interest rates
applicable to each homogeneous category of financial assets and liabilities and
sustained over a period of one year. A homogeneous category is defined according
to the currency in which financial assets and liabilities are denominated and
assumes the same interest rate movement within each homogeneous category (e.g.
U.S. dollars). As a result, the Company's interest rate risk sensitivity model
may overstate the impact of interest rate fluctuations for such financial
instruments, as consistently unfavorable movements of all interest rates are
unlikely. SEE NOTE 22 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
None.
ITEM 17. FINANCIAL STATEMENTS
The Holding Company has responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to pages F-1 through F-55.
ITEM 19. EXHIBITS
(a) The following Consolidated Financial Statements are filed as part of
this Form 20-F:
Independent Auditors' Report
Consolidated Statement of Financial Condition and Consolidated Balance
Sheets
Consolidated Statement of Revenues and Expenses and Statements of
Income
Consolidated Statement of Net Interdivisional Distribution and
Consolidated Statements of Cash Flow
Consolidated Statement of Changes in Divisional Equity and
Consolidated Statements of Changes in Shareholders' Equity
Notes to the Consolidated Financial Statements
(b) Exhibits
1.1 By-laws of the Holding Company previously filed with the Holding
Company's registration statement on September 18, 1998 and
incorporated herein by reference.
1.2 Amendment to the Charter of the Holding Company previously filed
with the Holding Company's registration statement on September 18,
1998 and incorporated herein by reference.
2.1 Deposit Agreement dated as of July 27, 1998 between the Holding
Company and The Bank of New York, previously filed with the Holding
Company's registration statement on September 18, 1998 and
incorporated herein by reference.
4.1 Standard Concession Agreement for Mobile Cellular Service
(original and English translation), previously filed with the Holding
Company's registration statement on September 18, 1998 and
incorporated herein by reference.
4.2 Cellular Service Authorization Agreement (original) entered into
and between the Brazilian Government, through Anatel, and Tele Centro
Oeste/Inepar Ltda., currently Norte Brasil Telecom S.A., on November
27, 1998.
THERE ARE OMITTED FROM THE EXHIBITS FILED WITH OR INCORPORATED BY REFERENCE INTO
THIS ANNUAL REPORT CERTAIN PROMISSORY NOTES AND OTHER INSTRUMENTS AND AGREEMENTS
WITH RESPECT TO LONG-TERM DEBT OF THE COMPANY, NONE OF WHICH AUTHORIZES
SECURITIES IN A TOTAL AMOUNT THAT EXCEEDS 10% OF THE TOTAL ASSETS OF THE
COMPANY. THE COMPANY HEREBY AGREES TO FURNISH TO THE SECURITIES AND EXCHANGE
COMMISSION COPIES OF ANY SUCH OMITTED PROMISSORY NOTES OR OTHER INSTRUMENTS OR
AGREEMENTS AS THE COMMISSION REQUESTS.
INDEX OF DEFINED TERMS
PAGE PAGE
AD.....................................15 EILD Contract...........................14
ADRs...................................48 EMBRATEL................................11
ADSs...................................48 Equity Withdrawing Rights...............11
American Depositary Shares.............48 Extreme South Stock Exchange............54
Americel...............................22 Federal Government.......................1
ANATEL.................................10 Fenattel................................46
ANATEL Decree..........................25 Financial System Law....................55
Annex IV Regulations...................61 Fistel..................................19
Annex V Regulations.....................8 Fittel..................................47
Area 7.................................10 Fixed-Line Region.......................11
Area 8.................................10 Floating Market..........................5
Audit Committee........................29 Floating Market Rate.....................5
Band A.................................23 GDP.....................................12
Band A Concessions.....................10 General Telecommunications Law..........10
Band A Service Provider................23 Holding Company..........................1
Band A Subsidiary.......................1 IBGE....................................12
Band B.................................22 ICMS....................................18
Band B Concessions.....................10 IGP-DI...................................8
Band B Service Provider................21 IGP-M...................................31
Band B Subsidiary.......................1 IOF tax.................................64
Brazil..................................1 IRS.....................................66
Brazilian Corporation Law..............56 LIBOR...................................34
Brazilian GAAP..........................1 Minimum Law.............................25
Brazilian Securities Law...............56 National Monetary Council...............55
Breakup................................11 NBT......................................1
Breakup of TELEBRAS....................11 New Holding Companies...................10
Cellular Region........................11 non-Brazilian holder....................62
Cellular Service Rule..................26 non-U.S. holder.........................62
Central Bank...........................56 Noon Buying Rate.........................1
Certificate of Registration............30 off-peak calls..........................15
CLC....................................54 Parana Stock Exchange...................54
Code...................................66 PCS......................................7
COFINS..................................9 Pernambuco and Paraiba Stock Exchange...54
Commercial Market.......................5 PETROBRAS...............................45
Common Shares..........................48 PFIC....................................67
Company.................................1 PIS................................ .....9
Concessions............................10 Predecessor Companies...................10
Consolidated Financial Statements.......1 Preferred Shares........................48
CPMF tax...............................64 R$ ......................................1
CPqD...................................42 reais....................................1
Custodian..............................60 real.....................................1
CVM....................................11 REAL Plan...............................29
Deposit Agreement......................53 Region..................................11
Depositary.............................53 Registered Capital......................64
dollars.................................1 Rio de Janeiro Stock Exchange...........52
DSL1...................................15 SAF.....................................22
DSL2...................................15 Sao Paulo Stock Exchange................52
e&p....................................65 SEC.....................................55
EILD...................................14 Service Quality Memorandum..............26
PAGE PAGE
Shareholders Essential Rights..........56 Telecommunications Regulations..........10
SISTEL.................................41 Telegoias...............................1
SMS....................................21 Telemat.................................1
Splice.................................11 Telems..................................1
STFC...................................24 Teleron.................................1
Stock Exchange Unification Program.....54 TJLP...................................43
Subsidiaries............................1 U.S. dollars............................1
Subsidiary..............................1 U.S. GAAP...............................2
Tele Centro Sul........................22 U.S. holder............................65
Teleacre................................1 US$.....................................1
TELEBRAS...............................10 VC1....................................15
TELEBRAS Loans.........................34 VC2....................................15
TELEBRAS System........................10 VC3....................................15
Telebrasilia............................1 WAP....................................13
TECHNICAL GLOSSARY
The following explanations are not intended as technical definitions, but to
assist the general reader to understand certain terms as used in this Annual
Report.
ACCESS CHARGE: Amount paid per minute charged by network operators for the use
of their network by other network operators. Also known as an "interconnection
charge" or "network usage charge."
ACCESS GATES: The points of interface between the network equipment (either
dedicated or switched) and the transmission media that connect network equipment
to the end user. The quantity of service is directly related to the quantity of
network access gates.
AMPS (ADVANCED MOBILE PHONE SERVICE): An analog cellular telecommunications
service standard utilizing the 850 MHz band, in use in North America, parts of
South America, Australia and various other areas.
ANALOG: A mode of transmission or switching which is not digital, e.g., the
representation of voice, video or other modulated electrical audio signals which
are not in digital form.
ANALOG NETWORK: A network using analog technology with circuit switching,
capable of connecting one user with all the users, but with limited transmission
capacity.
ATM (ASYNCHRONOUS TRANSFER MODE): A broadband switching technology that permits
the use of one network for different kinds of information (e.g., voice, data and
video).
AUTOMATIC INTERNATIONAL ROAMING: A service which permits a subscriber to use his
or her cellular telephone on a foreign cellular service provider's network. The
subscriber may receive calls made to the subscriber's regular cellular telephone
number (such calls are "automatically" passed to the foreign service provider's
network).
BAND A SERVICE PROVIDER: A former TELEBRAS operating subsidiary that has been
granted a concession to provide cellular telecommunications services in a
particular area within a radio spectrum frequency range referred to by ANATEL as
"Band A."
BAND B SERVICE PROVIDER: A cellular service provider that has been granted a
concession to provide cellular telecommunications services in a particular area
within a radio spectrum frequency range referred to by ANATEL as "Band B."
BASE STATION: A radio transmitter/receiver that maintains communications with
the cellular telephones within a given cell. Each base station in turn is
interconnected with other base stations and with the public switched telephone
network.
BROADBAND SERVICES: Services characterized by a transmission speed of 2 Mbit/s
or more. According to international standards, these services are divided into
two categories: (i) Interactive services, including
videotelephone/videoconferencing (both point-to-point and multipoint);
videomonitoring; interconnection of local networks; file transfer; CAD;
high-speed fax; e-mail for moving images or mixed documents; broadband
videotext; video on demand; retrieval of sound programs or fixed and moving
images; and (ii) Broadcast services, such as sound programs, television programs
(including high-definition TV and pay TV) and selective document acquisition.
CATV (CABLE TELEVISION): Cable or fiber-based distribution of TV programs.
CDMA (CODE DIVISION MULTIPLE ACCESS): A standard of digital cellular
telecommunications technology.
CELL: The geographic area covered by a single base station in a cellular
telecommunications system.
CELL SPLITTING: The process of dividing cells into smaller coverage areas by
reducing the power output and the antenna height of the base station
transmitter. Cell splitting increases capacity in a particular area by allowing
for the further reuse of frequencies by a cellular telecommunications system.
CELLULAR SERVICE: A mobile telecommunications service provided by means of a
network of interconnected low-powered base stations, each of which covers one
small geographic cell within the total cellular telecommunications system
service area.
CHANNEL: One of a number of discrete frequency ranges utilized by a base
station.
DIGITAL: A mode of representing a physical variable such as speech using digits
0 and 1 only. The digits are transmitted in binary form as a series of pulses.
Digital networks allow for higher capacity and higher flexibility through the
use of computer-related technology for the transmission and manipulation of
telephone calls. Digital systems offer lower noise interference and can
incorporate encryption as a protection from external interference.
DIGITAL PENETRATION: The substitution of equipment capable of transmitting
digital signals for equipment limited to analog transmission.
EXCHANGE: See Switch.
FRAME RELAY: A data transmission service using fast protocols based on direct
use of transmission lines.
INTERNET: A collection of interconnected networks spanning the entire world
including university, corporate, government and research networks from around
the globe. These networks all use the IP (Internet Protocol) communications
protocol.
ISDN (INTEGRATED SERVICES DIGITAL NETWORK): A system in which several services
(e.g., speech and data) may be simultaneously transmitted end-to-end in digital
form.
LEASED HIGH-SPEED DATA COMMUNICATION: The digital exchange of information at
speeds exceeding 64 Kbps transmitted through mediums that are leased to users
for their exclusive use.
LOCAL LOOP: The system used to connect the subscriber to the nearest switch. It
generally consists of a pair of copper wires, but may also employ fiber-optic
circuits, microwave links or other technologies.
MANUAL INTERNATIONAL ROAMING: A service that permits a subscriber to use his or
her cellular telephone on a foreign cellular service provider's network. The
subscriber may only receive calls made to a temporary number issued to the
subscriber by the foreign service provider for use while roaming.
MICROCELLS: A small cell covered by a low-power base station. Microcells can
cover small areas such as a single building.
NETWORK: An interconnected collection of elements. In a telephone network, these
consist of switches connected to each other and to customer equipment. The
transmission equipment may be based on fiber optic or metallic cable or
point-to-point radio connections.
NETWORK USAGE CHARGE: Amount paid per minute charged by network operators for
the use of their network by other network operators. Also known as an "access
charge" or "interconnection charge."
OPTICAL FIBER: A transmission medium which permits extremely high capacities. It
consists of a thin strand of glass that provides a pathway along which waves of
light can travel for telecommunications purposes.
PACKET-SWITCHED DATA COMMUNICATION SERVICES: Data services based on parceling or
breaking the data stream into packets and switching the individual packets.
Information transmitted is segmented into cells of a standardized length, which
are then transmitted independently of one another, allowing maximization of
available capacity and usage of a single transmission path for multiple
communications. The cells are then reassembled upon reaching their destination.
PBX (PRIVATE BRANCH EXCHANGE): Telephone switchboard for private use, but linked
to the national telephone network.
PENETRATION: The measurement of the take-up of services. At any date, the
penetration is calculated by dividing the number of subscribers by the
population to which the service is available and multiplying the quotient by
100.
PRIVATE LEASED CIRCUITS: Voice, data or image transmission mediums leased to
users for their exclusive use.
PSTN (PUBLIC SWITCHED TELEPHONE NETWORK): The public telephone network that
delivers basic telephone service and, in certain circumstances, more advanced
services.
REPEATERS: A device that amplifies an input signal for retransmission.
ROAMING: A function that enables subscribers to use their cellular telephone on
networks of service providers other than the one with which they signed their
initial contract.
SATELLITE SERVICES: Satellites are used, among other things, for links with
countries that cannot be reached by cable or to provide an alternative to cable
and to form closed user networks.
SDH (SYNCHRONOUS DIGITAL HIERARCHY): A hierarchical set of digital transport
structures standardized for the transport of suitably adapted payloads over
physical transmission networks.
SECTORIZATION: The process of dividing cells into sectors by using directional
antennae at the base station. Sectorization reduces co-channel interference
which permits smaller cells and increases network capacity.
SWITCH: These are used to set up and route telephone calls either to the number
called or to the next switch along the path. They may also record information
for billing and control purposes.
TDMA (TIME DIVISION MULTIPLE ACCESS): A standard of digital cellular
telecommunications technology.
UNIVERSAL SERVICE: The obligation to supply basic service to all users
throughout the national territory at reasonable prices.
VALUE ADDED SERVICES: Value Added Services provide additional functionality to
the basic transmission services offered by a telecommunications network.
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Holding Company certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
By: /S/ MARIO CESAR PEREIRA DE ARAUJO
-----------------------------------------
Name: Mario Cesar Pereira de Araujo
Title: President
Dated: July 16, 2001
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CONTENTS
Report of Ernst & Young Auditores Independentes S.C..................... F-2
Report of Deloitte Touche Tohmatsu.......................................... F-3
Consolidated Balance Sheets................................................. F-4
Consolidated Statements of Operations....................................... F-6
Consolidated Statements of Cash Flows....................................... F-7
Consolidated Statements of Changes in Shareholders' Equity.................. F-8
Notes to the Consolidated Financial Statements.............................. F-9
REPORT OF ERNST & YOUNG AUDITORES INDEPENDENTES S.C.
Directors and Shareholders
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
We have audited the accompanying consolidated balance sheets of Tele Centro
Oeste Celular Participacoes S.A. and subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Brazil and in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of Tele
Centro Oeste Celular Participacoes S.A. at December 31, 2000 and 1999, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted in Brazil,
which differ in certain respects from those followed in the United States of
America (See Note 29).
Ernst & Young Auditores Independentes S.C.
/s/ Luiz Carlos Nannini
Partner
Brasilia, Brazil
February 2, 2001 (except for note 16 as to which the date is March 28, 2001)
REPORT OF DELOITTE TOUCHE TOHMATSU
To the Board of Directors and Shareholders of
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
Brasilia - DF, Brazil
We have audited the accompanying consolidated statements of income, cash flows
and changes in shareholders' equity of Tele Centro Oeste Celular Participacoes
S.A. for the year ended December 31, 1998 (all expressed in Brazilian REAIS).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations, cash flows and
changes in shareholders' equity of Tele Centro Oeste Celular Participacoes S.A.
for the year ended December 31, 1998, in conformity with accounting principles
generally accepted in Brazil and on the basis set out in note 2.
Generally accepted accounting principles in Brazil vary in certain respects from
generally accepted accounting principles in the United States of America.
Application of generally accepted accounting principles in the United States of
America would have affected the determination of net income for the year ended
December 31, 1998 to the extent summarized in note 29 of the consolidated
financial statements.
/s/ DELOITTE TOUCHE TOHMATSU
March 26, 1999
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 2000
(In thousands of constant Brazilian Reais - R$)
NOTE 1999 2000
----------- -------------- --------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................ 69,432 450,131
Marketable securities.................................... 12 87,667 158,701
Trade accounts receivable, net........................... 13 173,254 161,010
Loans and financial investments.......................... 4,639 -
Deferred income taxes and recoverable taxes.............. 14 63,831 107,380
Handset and accessory inventory........................ 19,137 52,082
Other assets............................................. 16,154 28,275
-------------- --------------
Total current assets....................................... 434,114 957,579
NONCURRENT ASSETS
Deferred income taxes and recoverable taxes.............. 14 617 66,282
Loans and financial investments......................... - 2,673
Other assets............................................. 4,466 4,018
-------------- --------------
Total noncurrent assets.................................... 5,083 72,973
PERMANENT ASSETS
Investments.............................................. 4,458 5,445
Property, plant and equipment, net ...................... 15 994,531 1,083,754
Deferred charges, net.................................... 16 380,934 35,158
-------------- --------------
Total permanent assets..................................... 1,379,923 1,124,357
-------------- --------------
============== ==============
Total assets............................................... 1,819,120 2,154,909
============== ==============
See the accompanying notes to the consolidated financial statements.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 2000
(In thousands of constant Brazilian Reais - R$)
NOTE 1999 2000
----------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payroll and related accruals............................. 17 6,236 6,969
Accounts payable and accrued expenses.................... 18 106,166 227,757
Indirect taxes........................................... 19 50,253 61,002
Deferred taxes and income taxes payable.................. 20 17,925 9,838
Participation in results of operation.................... 21 50,708 51,781
Loans and financing...................................... 22 100,629 490,239
Payable for concession (license)......................... 18,319 19,423
Other payables........................................... 5,092 8,867
-------------- --------------
Total current liabilities.................................. 355,328 875,876
NONCURRENT LIABILITIES
Accounts payable and accrued expenses.................... 18 614 1,047
Deferred taxes and income taxes payable.................. 20 59,831 71,646
Loans and financing...................................... 22 43,199 18,910
Provision for contingencies.............................. 23 7,151 62,996
Payable for concession (license)......................... 18,319 -
-------------- --------------
Total noncurrent liabilities............................... 129,114 154,599
MINORITY INTERESTS......................................... 103,911 82,136
CAPITALIZABLE FUNDS........................................ 139 126
SHAREHOLDERS' EQUITY
Capital.................................................. 386,865 386,865
Capital reserve.......................................... 354,867 124,610
Legal reserve............................................ 29,882 36,349
Revenue reserve.......................................... 112,073 97,675
Retained earnings ....................................... 346,941 396,673
-------------- --------------
Total shareholders' equity................................. 25 1,230,628 1,042,172
-------------- --------------
Total liabilities and shareholders' equity................. 1,819,120 2,154,909
============== ==============
See the accompanying notes to the consolidated financial statements.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
December 31, 1998, 1999 and 2000
(In thousands of constant Brazilian Reais, except shares and per share amounts)
YEARS ENDED DECEMBER 31
--------- ----------------------------------------------------
NOTE 1998 1999 2000
--------- ---------------- ----------------- ---------------
Net operating revenue ..................................... 4 637,406 666,660 930,646
Cost of services rendered and cost of products sold........ 5 (260,327) (326,514) (532,163)
---------------- ----------------- ---------------
Gross margin............................................... 377,079 340,146 398,483
Operating expenses
Selling expenses ...................................... 6 (99,093) (118,592) (126,163)
General and administrative expenses ................... (46,289) (64,539) (78,420)
Other net operating results............................ 7 (953) (14,020) (9,618)
---------------- ----------------- ---------------
Operating income before net financial results.............. 230,744 142,995 184,282
Net financial results...................................... 8 (69,711) (47,640) (30,063)
---------------- ----------------- ---------------
Operating income........................................... 161,033 95,355 154,219
Net non-operating results.................................. 9 (20,575) (6,055) (19,539)
Employees' participation................................... (1,271) (1,866) (1,878)
---------------- ----------------- ---------------
Income before income taxes and minority interest........... 139,187 87,434 132,802
Income and social contribution taxes....................... 10 (40,206) (29,857) (40,159)
---------------- ----------------- ---------------
Income before minority interest............................ 98,981 57,577 92,643
Minority interest.......................................... (24,076) (11,531) (19,980)
Reversal of interest on own capital........................ 91,749 53,542 30,981
---------------- ----------------- ---------------
Net income................................................. 166,654 99,588 103,644
================ ================= ===============
Outstanding shares at end of year (thousands).............. 334,399,028 364,399,028 364,399,028
Profit per thousand shares (R$)............................ 0.50 0.27 0.28
================ ================= ===============
See the accompanying notes to the consolidated financial statements.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
December 31, 1998, 1999 and 2000
(In thousands of constant Brazilian Reais - R$, of December, 2000)
1998 1999 2000
--------------- --------------- ---------------
OPERATING ACTIVITIES:
Net income.......................................................... 166,654 99,588 103,644
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization..................................... 83,221 128,762 154,345
Provision for loss of property and equipment...................... 19,606 - -
Disposal of permanent assets...................................... 1,734 7,948 16,482
Minority interests................................................ 24,076 11,531 19,980
Allowance for doubtful accounts................................... 52,653 75,162 54,873
Decrease (increase) in assets:
Trade accounts receivable....................................... (107,682) (109,365) (42,629)
Inventories..................................................... - (19,128) (32,945)
Deferred income taxes and recoverable taxes..................... (25,810) (28,779) (109,214)
Other assets.................................................... (10,997) (11,822) (9,707)
Increase (decrease) is on liabilities:
Personnel, social charges and benefits.......................... 3,916 687 733
Accounts payable and accrued expenses........................... 52,222 44,827 121,591
Indirect taxes.................................................. 24,983 21,416 10,749
Other current liabilities....................................... - 5,092 3,776
Accrued interest................................................ 8,489 2,682 34,641
Provision for contingencies..................................... 3,642 2,068 102
Deferred income tax ............................................ (1,660) (4,422) (20,229)
Participation in results of operation........................... 1,043 (28,513) 1,073
Payable for concession (license)................................ - 12,416 (17,215)
Other non-current liabilities................................... - (151) 433
Minority interests.............................................. - (26,745) (41,755)
--------------- --------------- ---------------
Net cash provided by operating activities........................... 296,090 183,254 248,728
INVESTING ACTIVITIES:
Marketable securities............................................... - (87,667) (71,034)
Additions to investments............................................ (8) (4,451) (1,432)
Additions to property, plant and equipment (201,269) (291,038) (255,678)
Transfer from fixed assets to investments........................... - 39,978 -
Capitalized interest................................................ (1,361) - -
Addition to deferred assets......................................... (25) (32,042) (7,024)
Transfer from deferred assets to recoverable taxes.................. - - 118,615
--------------- --------------- ---------------
Net cash used in investing activities............................... (202,663) (375,220) (216,553)
FINANCING ACTIVITIES:
Loans repaid........................................................ (9,002) (3,036) (5,239)
Proceeds from loans................................................. 4,068 87,927 391,663
Cash generated by spin-off from Telebras............................ 20,524 - -
Capitalizable funds................................................. 166 - (13)
Rights spun-off from Telebras....................................... 676 - -
Issuance of preferred shares........................................ - 63,719 -
Premium on issue of new shares...................................... - 82 -
Interest on own capital............................................. - (49,059) (37,887)
--------------- --------------- ---------------
Net cash provided by financing activities........................... 16,432 99,633 348,524
Increase in cash and cash equivalents.................................. 109,859 (92,333) 380,699
Cash and cash equivalents at beginning of year......................... 51,906 161,765 69,432
--------------- --------------- ---------------
Cash and cash equivalents at end of year............................... 161,765 69,432 450,131
=============== =============== ===============
See the accompanying notes to the consolidated financial statements.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1998, 1999 AND 2000
(In thousands of constant Brazilian Reais - R$, of December, 2000)
SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------
DIVISIONAL CAPITAL LEGAL REVENUE RETAINED
EQUITY CAPITAL RESERVE RESERVE RESERVE EARNINGS TOTAL
-----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997......... 679,472 - - - - - 679,472
Spin-off from Telebras............... (679,472) 253,622 - 14,991 255,237 176,821 21,199
Consolidation adjustments............
Capitalized interest............. - - - - - 11,190 11,190
Donations and others............. - - - - - 108 108
Net income........................... - - - - - 166,654 166,654
Transfer to reserves................. - - - 8,993 164,952 (173,945) -
Reversal of reserves................. - - - - (255,237) 255,237 -
Dividends/Interest on own capital.... - - - - - (79,485) (79,485)
-----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998......... - 253,622 - 23,984 164,952 356,580 799,138
Capital increase with reserves....... - 69,525 - - - (69,525) -
Issuance of preferred shares......... - 63,718 - - - - 63,718
Reversal of reserves................. - - - - (164,952) 164,952 -
Premium on issue of new shares....... - - 81 - - - 81
Assets incorporated from
Coverage S.A....................... - - 354,786 - - - 354,786
Deferred tax on full indexation ..... - - - - - (46,551) (46,551)
Net income........................... - - - - - 99,588 99,588
Transfer to reserves................. - - - 5,898 112,073 (117,971) -
Interest on own capital.............. - - - - - (40,132) (40,132)
-----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999.........
- 386,865 354,867 29,882 112,073 346,941 1,230,628
Provision for reduction of assets
incorporated from Coverage........... - - (230,257) - - - (230,257)
Reversal of reserves................. - - - - (112,073) 112,073 -
Deferred tax on full indexation...... - - - - - (23,956) (23,956)
Net income........................... - - - - - 103,644 103,644
Transfer to reserves................. - - - 6,467 97,675 (104,142) -
Interest on own capital/dividends.... - - - - - (37,887) (37,887)
-----------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000......... - 386,865 124,610 36,349 97,675 396,673 1,042,172
-----------------------------------------------------------------------------------------
See the accompanying notes to the consolidated financial statements.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
1. OPERATIONS AND BACKGROUND
Beginning in 1995, the Federal Government of Brazil (the "Federal
Government") undertook a comprehensive reform of the Brazilian regulation of
the telecommunications industry. In July 1997 the Federal Congress adopted a
General Telecommunications Law providing for the privatization of
Telecomunicacoes Brasileiras S.A. ("Telebras") which, through its 28
operating subsidiaries was the primary supplier of public telecommunications
services in Brazil (the "Telebras System").
In preparation for the privatization of the Telebras System, the operating
subsidiaries were divided into twelve separate groups, (a) three regional
fixed-line operators, (b) eight regional cellular operators and (c) one
national long-distance operator. The cellular telecommunications businesses
were first separated from the operating subsidiaries and subsequently from
the fixed-line businesses. The new cellular businesses and the long-distance
operator were combined into the twelve separate groups (the "New Holding
Companies"). Both the separation of the cellular businesses and the
subsequent grouping of the former Telebras subsidiaries were performed using
a procedure under Brazilian corporate law called CISAO (the "spin-off"). As
of part of this process Tele Centro Oeste Celular Participacoes S.A. (the
"Holding Company") was formed.
Tele Centro Oeste Celular Participacoes S.A. (the "Company") was formed on
May 22, 1998, through the spin-off of certain assets and liabilities of
Telebras, including 81.4%, 83.8%, 91.9%, 96.0%, 91.3% and 94.0% of the share
capital of Telebrasilia Celular S.A., Telegoias Celular S.A., Telemat
Celular S.A., Telems Celular S.A., Teleron Celular S.A., and Teleacre
Celular S.A., respectively. Until August 4, 1998, the Companies were
controlled by the Federal Government.
At December 31, 2000, 53.8% of the common shares were owned by BID S.A.
Tele Centro Oeste Celular Participacoes S.A. and its subsidiaries (the
"Companies") are the primary suppliers of cellular telecommunications
services in the states of Goias, Tocantins, Mato Grosso do Sul, Mato Grosso,
Rondonia, Acre and the Federal District under the terms of concessions
granted by the Federal Government on November 4, 1997 (the "Concessions").
The Concessions will expire as follows:
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
1. OPERATIONS AND BACKGROUND (Continued)
COMPANY EXPIRATION
------- ----------
Telebrasilia Celular S.A.............. July 24, 2006
Telegoias Celular S. A. .............. October 29, 2008
Telemat Celular S.A. ................. March 30, 2009
Telems Celular S.A. .................. September 28, 2009
Teleron Celular S.A. ................. July 21, 2009
Teleacre Celular S.A. ................ July 15, 2009
The subsidiary companies controlled by Tele Centro Oeste Celular
Participacoes S.A. were legally formed on January 5, 1998 and the spin-off
from the predecessors was approved during an Extraordinary General
Shareholders Meeting, held on January 30, 1998.
The Concessions may be renewed at the discretion of Anatel (as defined
below) for a further term of 15 years but could be extended for another 15
years. Cellular telecommunications services were first offered in the states
serviced by the subsidiaries of Tele Centro Oeste Celular S.A. between July
1991 and February 1996.
On May 24, 1999, Norte Brasil Telecom S.A. - NBT, a corporation not publicly
traded, was formed with the Holding Company participating 95% in its
capital. NBT has the objective of operating the cellular service and
activities necessary or convenient for the execution of these services,
comprising the coverage area 8 - Band B, which corresponds to the geographic
areas constituted by the states of Amazonas, Roraima, Amapa, Para and
Maranhao.
Norte Brasil Telecom S.A. started up its operations at the end of October
1999, covering 11 of the 97 cities within their operating area. As their
activities relating to the rendering of services were insignificant at
December 31, 1999, all expenses incurred until this date were considered as
pre-operating and only subject to amortization from January 2000.
The Companies' businesses, including the service they may provide and the
rates they charge are regulated by Agencia Nacional de Telecomunicacoes
("Anatel"), the regulatory authority for the Brazilian telecommunications
industry pursuant to Law No. 9,472 of July 16, 1997.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais,
of December, 2000, except per share amounts)
2. PRESENTATION OF THE FINANCIAL STATEMENTS
a. PRESENTATION OF THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1998, 1999 AND 2000
The consolidated financial statements were prepared in accordance with
generally accepted accounting principles in Brazil and regulations
established by CVM - Comissao de Valores Mobiliarios (Brazilian
Securities Commission).
The incorporation of the net assets spun-off from Telebras was carried
out on February 28, 1998. At this date, the equity accounting of
investments was calculated based on the investee's shareholders' equity
as of December 31, 1997. Accordingly, the statement of operations
includes the parent company's operations for the period commencing March
1 until December 31, 1998, and the operating results of the subsidiaries
for the 12 months of 1998.
The consolidated financial statements include Tele Centro Oeste Celular
Participacoes S.A. and its majority - owned subsidiaries.
Minority interest is included in the consolidated financial statements of
the Company. At December 31, 2000, this interest was 11.8%, 7.8%, 2.7%,
1.8%, 3.0%, 1.7% and 5.0% of Telebrasilia Celular S.A., Telegoias Celular
S.A., Telemat Celular S.A., Telems Celular S.A., Teleron Celular S.A.,
Teleacre Celular S.A. and Norte Brasil Telecom S.A., respectively.
The presentation of the consolidated financial statements (assets,
liabilities and operating results) is consistent with the published
financial statements of Tele Centro Oeste Celular Participacoes S.A. and
its subsidiaries and considers the elimination of intercompany
transactions in accordance with generally accepted accounting principles
in Brazil.
The consolidated financial statements were prepared on a fully indexed
basis to recognize the effects of changes in the purchasing power of the
Brazilian currency until December 31, 2000.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
2. PRESENTATION OF THE FINANCIAL STATEMENTS (Continued)
b. INFLATION ACCOUNTING METHODOLOGY
As a result of legislation mandating the discontinuation of the
indexation system for Brazilian corporate law accounting and most fiscal
purposes, together with the option granted by the Brazilian Securities
Commission (Comissao de Valores Mobiliarios - CVM), the consolidated
financial statements of Tele Centro Oeste Celular as of December 31, 2000
and for the year then ended, as published in Brazil, do not recognize the
effects of changes in the purchasing power of the Brazilian currency that
would have been required under the comprehensive indexation system,
applied through December 31, 1995. In July 1997, the three-year
cumulative inflation rate for Brazil fell below 100%. However, for
accounting purposes, the Company applied the constant currency method
through December 31, 2000, as required by Brazilian generally accepted
accounting principles when the inflation rate is material. During 1998,
the inflation rate was 1.8%. Therefore, monetary correction was not
applied in 1998.
For 1999 and 2000, the annual inflation rates were 20.1% and 9.95%,
respectively, which were considered to have a material effect on the
financial statements. Thus the financial statements of the Company for
the three-year period ended December 31, 2000 were prepared using the
integral restatement method, in order to express the balances of the
Company in currency of constant purchasing power of December 31, 2000.
The principal criteria adopted to prepare the fully indexed consolidated
financial statements are in conformity with the accounting records of
Tele Centro Oeste Celular and its subsidiaries, which observe the
accounting practices mentioned in note 3, as follows:
i. INFLATION INDEX
The consolidated financial statements as of December 31, 1998, 1999
and 2000, were prepared on a fully indexed basis to recognize the
effects in the purchasing power of the Brazilian currency during the
periods presented and expressed in currency of constant purchasing
power of December 31, 2000 by using the monthly average values of the
INDICE GERAL DE PRECOS-MERCADO (the General Prices Index-Market or
the "IGP-M") of the FUNDACAO GETULIO VARGAS. Inflation for the three
year period ended December 31, 2000, as measured by the IGP-M, was as
follows:
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
2. PRESENTATION OF THE FINANCIAL STATEMENTS (Continued)
b. INFLATION ACCOUNTING METHODOLOGY (Continued)
PERIOD ANNUAL INFLATION (%)
------ --------------------
Year ended December 31, 1998................ 1.80
Year ended December 31, 1999................ 20.10
Year ended December 31, 2000................ 9.95
ii. 1998 INFLATION
Considering the low level of inflation in 1998, the Company
considered the variation of the IGP-M in 1998 equal to 0% for
purposes of applying the constant currency method. Management
believes that applying the variation of 1.8 % would not be material
to the Company's financial statements.
iii. DEFERRED INCOME TAX EFFECTS OF INDEXATION ADJUSTMENTS IN 1999 AND
2000
As a result of legislation mandating the discontinuation of the
indexation system for Brazilian corporate law and most fiscal
purposes as from January 1, 1996, the indexation of assets and
liabilities for financial reporting purposes at December 31, 1999
and 2000 is not permitted for tax purposes. Accordingly, a deferred
tax liability arises from the excess of net assets shown for
financial reporting purposes over the tax basis of these net
assets. The charge relating to the additional deferred tax
liability of R$ 23,956 in 2000 (R$ 46,551 in 1999), was recorded
directly against shareholders' equity. The tax effect of
depreciation and disposals relating to the base differences
(reversal of the charge) in the amount of R$ 12,901 in 2000 (R$
9,074 in 1999) was credited to the income and social contribution
taxes in the consolidated statement of income.
iv. THE RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY BALANCES
BETWEEN CORPORATE LAW AND TOTAL RESTATEMENT IS AS FOLLOWS:
NET INCOME SHAREHOLDERS' EQUITY
------------------------------------------------------
1999 2000 1999 2000
------------------------------------------------------
Corporate law 117,970 129,319 1,115,452 896,398
Restatement of net permanent assets (15,746) (27,062) 199,127 239,459
Tax effects 9,074 12,901 (70,360) (81,416)
Minority interests (11,710) (11,514) (13,591) (12,269)
------------------------------------------------------
In constant currency 99,588 103,644 1,230,628 1,042,172
======================================================
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
2. PRESENTATION OF THE FINANCIAL STATEMENTS (CONTINUED)
c. DIVISIONAL EQUITY
As discussed in note 1, the Companies were formed as a result of the
specific identification and spin-off of assets, liabilities, revenues and
expenses comprising the cellular telecommunications businesses of
Telegoias, Telems, Telemat, Teleron, Teleacre and Telebrasilia. Since
Tele Centro Oeste Celular Participacoes S.A. did not exist prior to
January 1, 1998 no individual capital structure was maintained.
Consequently, the net assets contributions have been shown as "divisional
equity" in the accompanying consolidated financial statements.
d. CONSOLIDATION PRINCIPLES
The consolidated financial statements include the financial records of
the Holding Company and its majority - owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
3. SUMMARY OF THE PRINCIPAL ACCOUNTING PRACTICES
a. CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturity of three months or less at the time of purchase.
b. TRADE ACCOUNTS RECEIVABLE
Accounts receivable from telephone subscribers are calculated at the
tariff rate on the date the services were rendered. Trade accounts
receivable also include services provided to customers up to the balance
sheet date but not yet invoiced.
c. ALLOWANCE FOR DOUBTFUL ACCOUNTS
An allowance was made for trade accounts receivable for which
recoverability is considered improbable.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
3. SUMMARY OF THE PRINCIPAL ACCOUNTING PRACTICES (CONTINUED)
d. FOREIGN CURRENCY TRANSACTIONS
Transactions in foreign currency are recorded at the prevailing exchange
rate at the time of the related transactions. Foreign currency
denominated assets and liabilities are translated using the exchange rate
at the balance sheet date. Exchange differences are recognized in the
statements of operations as they occur.
e. HANDSET AND ACCESSORY INVENTORIES
Inventories are stated at the lower cost or market, whereby costs are
determined using the average acquisition cost method.
f. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at average acquisition or
construction cost, monetarily corrected to December 31, 2000, less
accumulated depreciation.
The operation right (concession - area 8) of the Band B cellular services
related to subsidiary Norte Brasil Telecom S.A. was recorded at its
acquisition cost and is being amortized in accordance with the concession
terms.
The materials for plant expansion are stated at average acquisition cost.
Maintenance and repair expenses representing improvements (increase of
installed capacity or useful life) are capitalized, while the remaining
are charged to operating results when incurred.
Depreciation is provided using the straight-line method based on the
estimated useful lives of the underlying assets. The respective
depreciation rates are described in note 15.
g. DEFERRED CHARGES
PRE-OPERATING EXPENDITURES
Income and expenses incurred during the pre-operating period faced by the
subsidiary Norte Brasil Telecom S.A. are charged to deferred charges.
Deferred charges were not amortized during 1999 as the subsidiary Norte
Brasil Telecom S.A. did not commence operations until January 2000.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
3. SUMMARY OF THE PRINCIPAL ACCOUNTING PRACTICES (Continued)
PREMIUM IN THE MERGER OF COVERAGE PARTICIPACOES S.A.
On December 14, 1999, the Company's parent company Coverage Participacoes
S.A. was merged into the Company with the purpose of obtaining the tax
benefit of premium amortization in the amount of R$ 354,786, which will
be amortized over a 5-year period as discussed in note 31. As the merger
was into a wholly owned subsidiary, there was no effect on the
consolidated financial statements.
h. INCOME AND SOCIAL CONTRIBUTION TAXES
Brazilian income taxes are comprised of the federal income tax and the
social contribution tax. At December 31, 2000, the statutory rates for
the federal income tax and for the social contribution tax were 25% and
9%, respectively. For Brazilian GAAP purposes, income taxes are accounted
for using the liability method.
As described in note 2 (b) (iii), the expense related to the effects of
deferred taxes from indexation adjustments for 1999 and 2000 are recorded
directly against shareholders' equity.
i. PROVISION FOR CONTINGENCIES
The provision for contingencies was recorded based on the estimate of
Company legal advisors on judicial proceedings in process.
j. NET FINANCIAL RESULT
The net financial result represents interest and monetary variations
resulting from financial investments and loans and financing obtained and
conceded. Interest charged on own capital compose the balance of these
accounts. In compliance with the tax legislation, the interest on own
capital is recorded as financial expenses and considered as destination
of result for financial statement purposes, according to CVM Deliberation
No. 207 of December 12, 1996.
k. PENSION PLAN
The Company and its subsidiaries, participate in a multi-employer plan
that provides pension and other post-retirement benefits for its
employees. Current costs are determined as the amount of the required
contribution for the period and are recorded on the accrual basis.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
3. SUMMARY OF THE PRINCIPAL ACCOUNTING PRACTICES (Continued)
l. PROFIT PER THOUSAND-SHARES
Profit per thousand-shares were calculated based on the number of
outstanding shares at the date of the corresponding balance sheets.
m. REVENUE RECOGNITION
Revenues for services and equipment are recognized when the service is
provided or when the equipment is sold, respectively. Revenues from
cellular telephone services consist of subscription charges, usage
charges, network usage charges and charges for maintenance and other
customer services. Unbilled revenues from the billing date to the
month-end are estimated and recognized as revenues during the month in
which the service was provided. Revenues from equipment sales refer to
sales of handsets.
The Company began selling prepaid cards during 1999. The revenue from the
sales of these cards is recognized according to the minutes used for each
card. Revenue from unused minutes is deferred until used. Because amount
deferred is immaterial, it has been included in other liabilities.
n. SEGMENT INFORMATION
The Companies operate solely in one segment of local and regional
cellular telecommunications. Until 1999, all revenues were generated in
relation to services provided in or routed through the states of Goias,
Tocantins, Mato Grosso do Sul, Mato Grosso, Rondonia, Acre and the
Federal District. As of 2000, revenues were also generated through the
states of Maranhao, Para, Amapa, Roraima and Amazonas.
o. USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
Brazilian GAAP and US GAAP requires management to make estimates and
assumptions related to assets, liabilities, revenues and expenses for the
period being reported. Actual results could differ from those estimates.
p. MINORITY INTERESTS
The Company records minority interest expense, which reflects the portion
of the earnings of majority-owned operations that are applicable to the
minority interest partners. See note 2a.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
3. SUMMARY OF THE PRINCIPAL ACCOUNTING PRACTICES (Continued)
q. ADVERTISING COSTS
Advertising costs are expensed as incurred and included in selling
expenses. They amounted to R$24,321 and R$19,207 for the years ended
December 31, 2000 and 1999, respectively. The Company did not maintain
specific records for prior years.
4. NET OPERATING REVENUE
1998 1999 2000
----------- ----------- ----------
Monthly subscription charges 193,859 211,364 194,424
Activation fees 28,606 4,080 -
Usage charges 380,383 369,235 349,880
Network usage charges 187,682 197,079 334,498
Resale of handsets and prepaid cards - 58,634 274,812
Others 8,491 14,942 11,248
Gross operating revenue 799,021 855,334 1,164,862
Taxes on gross revenue (161,615) (188,674) (234,216)
----------- ----------- ----------
Net operating revenue 637,406 666,660 930,646
=========== =========== ==========
There are no customers who contribute more than 10% of gross operating
revenues.
5. COST OF SERVICES RENDERED AND COSTS OF PRODUCTS SOLD
1998 1999 2000
----------- ----------- ----------
Depreciation 80,078 120,202 142,763
Personnel 8,286 8,963 11,276
Third party materials and services 71,572 78,897 95,825
Fixed-line network expenses 70,265 27,996 26,850
Fistel tax 17,994 30,111 51,581
Cost of products sold - 50,918 194,045
Others 12,132 9,427 9,823
----------- ----------- ----------
260,327 326,514 532,163
=========== =========== ==========
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
6. SELLING EXPENSES
1998 1999 2000
---------------- -------------- -------------
Personnel 7,047 9,815 13,827
Third party materials and services 38,902 43,734 64,000
Rent/leasing/insurance 763 1,253 3,326
Depreciation 84 35 -
Net losses on trade accounts receivable 52,293 63,618 44,790
Others 4 137 220
---------------- -------------- -------------
99,093 118,592 126,163
================ ============== =============
7. OTHER NET OPERATING RESULTS
1998 1999 2000
----------------- -------------- -------------
Research and development (2,373) (839) (617)
Taxes (except income tax) (650) (10,485) (9,801)
Contingencies (3,709) (1,318) -
Fines and expenses recovered 5,189 3,167 3,354
Amortization of the premium-Coverage
Participacoes S.A. - (5,913) -
Tax incentives - 4,271 -
Other 590 (2,903) (2,554)
----------------- -------------- -------------
(953) (14,020) (9,618)
================= ============== =============
8. NET FINANCIAL RESULTS
1998 1999 2000
----------------- --------------- -------------
Interest revenue 32,196 42,830 102,835
Interest expense (9,679) (37,576) (98,487)
Interest on own capital (dividends) (91,749) (53,542) (30,981)
Net exchange/ monetary variations (479) 648 (3,430)
----------------- -------------- -------------
(69,711) (47,640) (30,063)
==================================================
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
9. NET NON-OPERATING RESULTS
1998 1999 2000
----------------- --------------- ---------------
Interest on construction-in-progress 1,361 - -
Non-operating financial expenses (1,361) - -
Loss on the disposal of property, plant
and equipment (1,073) (6,141) 404
Provision for losses on the realization of
property, plant and equipment (19,606) - -
Amortization of premium - Coverage
and pre-operating expenditures - - (21,055)
Other non-operating income 104 86 1,112
----------------- --------------- ---------------
(20,575) (6,055) (19,539)
================= =============== ===============
10. INCOME AND SOCIAL CONTRIBUTION TAXES
In 1998 the income tax rate was 25% and 8% for social contribution tax. From
May 1, 1999 the rate of social contribution tax changed from 8% to 12%. In
2000, the income tax rate was 25% and the rate of social contribution was
12% in January and 9% from February to December. Deferred taxes are provided
for based on temporary differences.
Income taxes are as follows:
1998 1999 2000
-------------- --------------- ---------------
Social contribution tax 11,943 5,868 14,857
Income tax 36,574 33,063 38,203
Deferred taxes (8,311) (9,074) (12,901)
-------------- --------------- ---------------
40,206 29,857 40,159
============== =============== ===============
The table below is a reconciliation of tax expense recognized in the
consolidated income statement and the amount calculated in accordance with
the legislation in force:
1998 1999 2000
-------------- ------------- -------------
Social contribution tax at statutory rates (11,135) (8,087) (14,117)
Social contribution tax on permanent additions (40) (9,039) (6,717)
Social contribution tax on permanent exclusions 268 8,636 7,680
Effects on the constant currency method (841) (3,216) (1,877)
Others (195) 5,838 174
-------------- ------------- -------------
Social contribution tax (11,943) (5,868) (14,857)
============== ============= =============
Income tax at statutory rates (34,796) (21,858) (33,200)
Income tax on permanent additions (125) (18,757) (18,661)
Income tax on permanent exclusions 1,406 17,939 17,939
Effects on the constant currency method (2,631) (10,708) (5,739)
Tax incentives/others (428) 321 1,458
-------------- ------------- -------------
Income tax (36,574) (33,063) (38,203)
============== ============= =============
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
10. INCOME AND SOCIAL CONTRIBUTION TAXES (Continued)
Income taxes in Brazil include federal income tax and a social contribution
tax. From January 1, 1998 to April 30, 1999 the social contribution tax rate
was 8%. Effective May 1, 1999 to January 31, 2000, the social contribution
tax rate was increased to 12%. On February 1, 2000 the rate was decreased to
9%. The federal income tax rate was 25% for all periods presented.
11. SUPPLEMENTAL CASH FLOW INFORMATION
1998 1999 2000
--------------- ------------ -----------
Cash paid for interest 2,666 535 2,927
Cash paid against provisions for contingencies 363 92 3,639
Income tax and social contributions paid 41,869 21,232 54,370
Cash paid for concessions 15,755 19,212 19,289
12. MARKETABLE SECURITIES
Marketable securities at December 31, 2000 and 1999 consisted of the
following:
INTEREST DUE DATE 1999 2000
-------------- --------------- ----------- -----------
Notes from Central Bank of Brazil - 100% of CDI 9/17/2001 and
Special issue - public titles 6/17/2004 38,655 39,007
issue - public titles
Debentures - Unibanco leasing contracts 100% of CDI 5/1/2003 27,153 28,165
Commercial Paper - Splice do Brasil S.A. 106% of CDI 1/12/2001 8,567 77,743
3/19/2001 and
Bank Certificate Deposit - Unibanco 100% of CDI 4/25/2001 13,292 13,786
----------- -----------
87,667 158,701
=========== ===========
The carrying value of the assets equals the fair value.
13. TRADE ACCOUNTS RECEIVABLE, NET
1999 2000
------------ ------------
Accrued amounts 52,980 42,948
Billed amounts 149,310 143,888
Allowance for doubtful accounts (29,036) (25,826)
------------ ------------
173,254 161,010
============ ============
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
13. TRADE ACCOUNTS RECEIVABLE, NET (Continued)
The changes in the allowance for doubtful accounts are as follows:
1998 1999 2000
---------------- ------------------- -----------------
Balance at beginning of year 29,522 28,020 29,036
Bad debt expense 52,653 75,162 54,873
Write-offs (54,155) (74,146) (58,083)
------------------- -----------------
---------------- ------------------- -----------------
Balance at end of year 28,020 29,036 25,826
================ =================== =================
14. DEFERRED INCOME TAXES AND RECOVERABLE TAXES
1999 2000
------------------- -----------------
Recoverable income and social contribution taxes 39,620 47,970
Recoverable income and social contribution taxes on
premium (Coverage Participacoes S.A.) - (Note 16) - 87,773
Deferred income and social contribution taxes 12,861 18,853
Recoverable ICMS tax 10,506 17,764
Other recoverable taxes 1,461 1,302
------------------- -----------------
Total 64,448 173,662
=================== =================
Short-term 63,831 107,380
=================== =================
Long-term 617 66,282
=================== =================
Deferred tax assets are comprised of the following:
1999 2000
------------------ -------------
Non-deductible provisions:
Allowance for doubtful accounts 9,919 7,744
Contingencies 2,443 9,933
Others 499 1,176
------------------ -------------
Total 12,861 18,853
================== =============
15. PROPERTY, PLANT AND EQUIPMENT, NET
a. COMPOSITION
1999 2000
------------------ --------------
Construction in progress 125,327 206,052
Automatic switching equipment 169,166 344,140
Transmission and other equipment 823,668 761,476
Land 4,626 4,888
Buildings 31,994 41,339
Computer equipment 11,392 17,866
Operation license (concession) 85,052 82,484
Other assets 54,921 80,019
------------------ --------------
Total cost 1,306,146 1,538,264
Accumulated depreciation (311,615) (454,510)
------------------ --------------
994,531 1,083,754
================== ==============
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
15. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
b. DEPRECIATION RATES
Depreciation rates applied to property, plant and equipment are as
follows:
%
------------------------------------
1999 2000
----------------- ----------------
Automatic switching equipment 10.00 10.00
Transmission and other equipment 14.29 14.29
Buildings 4.00 4.00
Operation License (concession) 3.33 3.33
Other assets (excluding land) 5.00 to 20.00 5.00 to 20.00
c. RENT EXPENSES
The Company rents equipment and premises through a number of operating
agreements. Total rent expense incurred under these agreements is as
follows:
1998 1999 2000
------------ ---------- -----------
Rent expense 13,505 12,510 14,614
Future minimum rental payments under non-cancelable operating leases with
remaining initial terms in excess of one year at December 31, 2000 are:
2001 15,158
2002 15,765
2003 16,395
2004 17,051
2005 17,733
2006 18,442
--------------
Total 100,544
==============
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
16. DEFERRED CHARGES, NET
1999 2000
------------------------------
Premium - Coverage Participacoes S.A. 354,786 -
Premium amortization (5,913) -
Pre-operating expenditures - NBT 32,042 38,998
Pre-operating expenses amortization - (3,908)
Other 19 68
------------------------------
Total 380,934 35,158
==============================
Norte Telecom S.A. began its operations at the end of October 1999, covering
11 of the 97 cities within the Company's operating area. As the Company's
activities relating to the rendering of services were insignificant at
December 31, 1999, all expenses incurred until this date were considered as
pre-operating and only subject to amortization from January 2000.
According to Instruction No. 349 of the CVM (Brazilian Equivalent of the
Securities and Exchange Commission of the U.S.) dated March 6, 2001, the
Company decided on March 28, 2001 to reduce the value of the premium to an
amount, which represents the future tax benefit, since the amortization is a
tax-deductible expense.
The change in the account value is summarized as follows:
2000
----------------
Premium Coverage Participacoes S.A. 354,786
Write-down (230,257)
----------------
Future tax benefits 124,529
Reversal of the provision recorded in 1999 and 2000 (22,105)
Monetary correction (14,651)
----------------
Tax credit at December 31, 2000 87,773
================
During 2000, the net amount of the premium and the provision to be
amortized, which represents future tax benefits, was recorded in the balance
sheet as current and non-current assets under "deferred taxes recoverable".
The deferred assets amortization and provision reversal are recorded as a
non-operating result and the corresponding tax credit as income and social
contribution taxes, canceling the operating result effect.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
17. PAYROLL AND RELATED ACCRUALS
1999 2000
--------------- ---------------
Salaries and wages 1,738 1,394
Social charges 3,818 5,113
Accrued benefits 680 462
--------------- ---------------
6,236 6,969
=============== ===============
18. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1999 2000
---------------- -------------
Suppliers 95,560 223,891
Payments received on behalf of third parties 11,214 4,414
Other accounts 6 499
---------------- -------------
Total 106,780 228,804
================ =============
Short-term 106,166 227,757
================ =============
Long-term 614 1,047
================ =============
19. INDIRECT TAXES
1999 2000
---------------- ---------------
Value-added tax 30,634 25,939
Fistel tax 15,668 28,355
Other taxes on operating revenues 3,951 6,708
---------------- ---------------
50,253 61,002
================ ===============
20. DEFERRED TAXES AND INCOME TAXES PAYABLE
1999 2000
--------------- -------------
Income tax payable 4,794 68
Social contribution tax payable 2,128 -
Deferred taxes - liability
Difference IPC x BTNF - Law No. 8,200/91 474 -
Effects of full monetary correction 70,360 81,416
--------------- -------------
Subtotal deferred taxes 70,834 81,416
--------------- -------------
77,756 81,484
=============== =============
Short-term 17,925 9,838
=============== =============
Long-term 59,831 71,646
=============== =============
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
21. EMPLOYEES' PROFIT SHARING
1999 2000
----------------------------------
Interest on shareholders' equity for the year 49,059 25,111
Interest on shareholders' equity for the prior year 7,208 9,841
Withholding tax on interest on shareholders' equity (7,359) (3,778)
Dividends - 18,642
Employees' profit sharing 1,800 1,965
----------------------------------
50,708 51,781
==================================
22. LOANS AND FINANCING
INTEREST AND INDEXATION FINAL DUE DATE 1999 2000
-------------------------------------------------------------------------------------
NATIONAL CURRENCY
BNDES * TJLP * plus 7% 1/2/2001 73,036 84,026
Commercial Paper 103.5% of CDI* 1/12/2001 - 186,913
Telebras IGP-M plus 6% - 55,742 -
Other loans Industrial products column 20 - FGV 2000 to 2008 1,883 1,771
FOREIGN CURRENCY
U.S dollar exchange variation and LIBOR *
Banco ABC do Brasil plus 1.125% 4/23/2001 - 6,086
Euro Commercial Paper 103% of CDI * 5/18/2001 - 207,943
Export Development US dollar exchange variation and LIBOR plus
Corporation - EDC 3.90% 11/22/2005 9,155 21,954
U.S. dollar exchange variation and LIBOR plus
Equipment imports 2% 4/28/2000 4,012 -
Others - 456
-----------------------
143,828 509,149
=======================
Short-term 100,629 490,239
=======================
Long-term 43,199 18,910
=======================
* BNDES - National Bank for Economic and Social Development
TJLP - "Taxa de Juros de Longo Prazo," a long term interest rate,
reset quarterly by the Brazilian Central Bank
LIBOR - London Interbank Offered Rate
CDI - "Certificado de Deposito Interbancario," which is the
Brazilian interbank borrowing rate
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
22. LOANS AND FINANCING (Continued)
LIBOR at December 31, 2000 was 6.65%. TJLP, IGP-M, CDI and Industrial
Products Column 20-FGV, were 9.75%, 9.95%, 15.7% and 3.79%, respectively in
2000.
Long-term payment schedule:
DUE DATE 2000
--------------------------------
2002 4,563
2003 4,563
2004 4,563
2005 4,561
2006 220
2007 220
2008 220
----------------
Total 18,910
================
The original loans from Telecomunicacoes Brasileiras S.A. - TELEBRAS which,
according to Attachment II of the Spin-off Report of February 28, 1998,
approved by the Shareholders Meeting of May 1998, should be charged to the
respective Holding parent company of Telegoias Celular S.A. and Telebrasilia
Celular S.A..
Local management believes there were errors in the allocation of the
respective loans at the time of the spin-off and therefore suspended the
payment flow subsequent to the change of the Company's control. The amount
is accrued and is being increased annually at IGP-M plus 6%.
In June 1999, Tele Centro Oeste Celular Participacoes S.A. filed a legal
action claiming the ownership of all assets related to these liabilities
(loans and financing) and reimbursement of installments paid.
The Company's lawyers believe that the chances of obtaining a favorable
outcome, in this case, are good.
In November 1999, the Company's management decided to transfer to Tele
Centro Oeste Celular Participacoes S.A. the liability derived from the loan
originally due to Telecomunicacoes Brasileiras S.A. - TELEBRAS.
In 2000, this amount was reclassified to provision for contingencies (see
note 23).
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
23. PROVISION FOR CONTINGENCIES
1999 2000
--------------- ---------------
Tax claims 6,107 8,721
Labor claims 719 654
Telebras - 53,128
Others 325 493
--------------- ---------------
7,151 62,996
=============== ===============
CIVIL AND LABOR CLAIMS
The provision for labor and civil claims are management's estimates of the
most probable losses in relation to various suits filed by current and
former employees, suppliers, fiscal lawsuits and others.
POTENTIAL LITIGATION
Telegoias, Telems, Telemat, Teleron, Teleacre and Telebrasilia (the "legal
predecessors" of the Company), and Telebras, Telegoias Celular S.A., Telems
Celular S.A., Telemat Celular S.A., Teleron Celular S.A., Teleacre Celular
S.A. and Telebrasilia Celular S.A. are defendants in a number of legal
proceedings and subject to certain other claims and contingencies. Liability
for any claims arising out of acts committed by the legal predecessors prior
to the effective date of the spin-off of the legal predecessors' cellular
assets and liabilities to the Companies will remain with the legal
predecessors, except for those liabilities for which specific accounting
provisions have been assigned to the Companies. Any claims against the legal
predecessors that cannot be settled by them have received assets which might
have been used to settle those claims had they not been spun off from the
legal predecessors.
Under the terms of the breakup of Telebras, liability for any claims
resulting from actions taken by Telebras prior to the effective date of the
breakup remains with Telebras, except for labor and tax claims (in which
case Telebras and the Holding Company are jointly and severally liable) and
any liability for which specific accounting provisions have been assigned to
the Holding Company. Creditors of Telebras may question this allocation of
liability. Management believes that the chances of any claims materializing
and having a significantly adverse financial effect on the Companies and/or
the Holding Company are remote, and therefore no provision has been made.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
23. PROVISION FOR CONTINGENCIES (Continued)
ICMS ON ACTIVATION FEES
On June 19, 1998 the Secretaries of the Treasury of the individual Brazilian
states (the "State Secretaries") approved an agreement to interpret existing
Brazilian tax law in order to expand the application of the Imposto sobre
Circulacao de Mercadorias e Servicos (Value-Added Tax on Sales and Services
- ICMS). As a result, this tax then covers not only telecommunications
services, but also other services including the activation of cellular
telephones, which were not previously subject to such tax and the ICMS tax
may be applied retroactively for such services rendered during the last five
years.
The Company believes that the attempt by the State Secretaries to extend the
scope of ICMS tax to services which are supplementary to basic
telecommunications services is unlawful because: (i) the State Secretaries
acted beyond the scope of their authority; (ii) their interpretation would
subject to taxation certain services which cannot be considered
telecommunications services; and (iii) new taxes may not be applied
retroactively. In addition, the Company believes that the legal predecessors
of the Company would be liable for any payments made in connection with any
claim resulting from the retroactive application of the ICMS tax on
activation fees for periods prior to 1998. No provision for such taxes has
been made in the accompanying consolidated financial statements, since the
Company does not believe it is probable that such taxes will be payable for
services rendered during the last five years.
There can be no assurance that the Company will prevail in its position that
the new interpretation of the scope of the ICMS tax by the State Secretaries
is unlawful. If the ICMS tax were applied retroactively to activation fees
earned during the past five years, it would generate an estimated maximum
liability of R$77,300. If the ICMS tax were applied retroactively to
activation fees earned by the Company's subsidiaries since its onset on
January 5, 1998, it could have a material negative impact not only on the
financial condition of the Company, but also on the results of its
operations after January 5, 1998.
24. PENSION PLAN
The Company and subsidiaries, except for Norte Brasil Telecom S.A., make
payments towards private pension plans and of medical assistance for retired
employees which are controlled by Sistel Social Security Foundation -
SISTEL. Until December 1999 all sponsors showed solidarity towards the
Sistel Benefits Plan (PBS) and the Medical Assistance Plan for the Retired
(PAMA). On December 28, 1999 the sponsors of plans PBS and PAMA negotiated
the creation of multiple employer pension plans by sponsor, maintaining the
solidarity only for those inactive or retired employees as of January 31,
2000. This resulted in a restructuring proposal under the Sistel Statute and
Regulation which was approved by the Complementary Pension Department on
January 13, 2000.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
24. PENSION PLAN (Continued)
The status of the Defined Benefits Retirement Plan (PBS-A) and Medical
Assistance Plan for the Retired (PAMA), which still shows solidarity between
the sponsors at December 31, 2000 and 1999, is as follows:
2000
-------------------------------------------------------------
PBS-A PAMA Total 1999 (a)
-------------- --------------- ------------------------------
Mathematical reserves and funds 3,016,486 497,932 3,514,418 4,829,056
Other liabilities 57,798 431,573 489,371 649,540
-------------- --------------- ------------------------------
Total reserves and other liabilities 3,074,284 929,505 4,003,789 5,478,596
(-) Total Sistel assets 3,374,869 929,505 4,304,374 7,183,875
-------------- --------------- --------------- --------------
(=) Accumulated surplus 300,585 - 300,585 1,705,279
============== =============== ==============================
(a) refers to the status of the PBS and PAMA plans controlled by Sistel at
December 31, 1999.
Due to the discontinuation of the solidarity (i.e. multi-employer) concept
in December 1999, the Company and subsidiaries individually sponsored a
Defined Benefits Retirement Plan - Plan PBS TCO, which covers approximately
5% of the employees working for these companies. Apart from the
supplementation benefit, medical assistance (PAMA) is offered to retired
personnel and dependents at a shared cost. The contributions towards plans
PBS TCO and PAMA are determined based on actuarial studies and prepared by
independent actuaries in accordance with current norms established in
Brazil. The contribution is 13.5% of the payroll covering the employees who
are included in the plan, from which 12% is allocated to the cost for plan
PBS TCO.
At the end of 2000, Sistel introduced a defined contribution plan (Benefits
Plan TCO PREV). The defined contribution plan is supported by contributions
made by the participants (employees) and by the sponsor, which are credited
to the individual accounts of the participants. The Companies are
responsible for administrative expenses. The employees participating in the
Defined Benefits Plan (PBS TCO) were given the option to join the defined
contribution until January 31, 2001.
Employees not participating in the defined benefit pension plan and new
employees can contribute up to 22% of their salary to a defined contribution
plan. Employees may make additional occasional contributions. The Company
matches 100% of the contributions varying from 3% to 8% depending on the
employee's age. Additionally, the Company will make variable contributions,
of not less than the statutory minimums, based on certain criteria which are
applied uniformly to all employees.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
24. PENSION PLAN (Continued)
The status of the Defined Pension and Benefit Plans PBS TCO and TCO PREV
at December 31, 2000 is as follows:
PBS TCO 2000
------- ------------
Mathematical reserves and funds 14,261
Other liabilities 1,831
------------
Total reserves and other liabilities 16,092
(-) Total of plan assets 16,406
------------
(=) Accumulated surplus 314
============
TCO PREV 2000
------- ------------
Mathematical reserves and funds 12,753
Other liabilities 1,575
------------
Total reserves and other liabilities 14,328
(-) Total plan assets 14,328
------------
(=) Accumulated surplus -
============
During 2000, the Company made contributions to the Plan PBS TCO and TCO
PREV. in the amount of R$ 2,087.
25. SHAREHOLDERS' EQUITY
a. CAPITAL
The authorized capital at December 31, 2000 and 1999 is 700,000,000
thousand shares.
The capital of R$ 386,865 at December 31, 2000 and 1999, subscribed and
paid-in, consists of 364,399,028,000 shares with no par value,
distributed as follows (in thousands):
DECEMBER 31, 1999 DECEMBER 31, 2000
---------------------- ---------------------
Common shares 124,369,031 124,369,031
Preferred shares 240,029,997 240,029,997
---------------------- ---------------------
Total 364,399,028 364,399,028
Book value per thousand shares - Corporate Law (in R$) 3.061073 2.459935
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
25. SHAREHOLDERS' EQUITY (Continued)
a. CAPITAL (Continued)
The capital stock of Tele Centro Oeste Celular Participacoes S.A.
consists of preferred shares and common shares, all without par value. At
May 22, 1998, there were 210,029,997 thousand outstanding preferred
shares (inclusive of 13,718,350 thousand preferred shares resulting from
the settlement in April 1998 with Telebras as discussed below) and
124,351,903 thousand outstanding common shares (net of 17,128 thousand
shares of treasury).
The preferred shares are entitled to a dividend 6% greater than that of
the common shares. Earnings may be used to increase capital or otherwise
appropriated, consequently such earning would no longer be available as
dividends. Therefore, there is no assurance that preferred shareholders
will receive the 6% premium on undistributed earnings. The unit of one
thousand shares is used because this is the basis for quotation and
trading on the Sao Paulo Stock Exchange.
Under the Brazilian Corporation Law, the number of non-voting shares or
shares with limited voting rights, such as the preferred shares, may not
exceed two-thirds of the total number of shares.
On June 7, 1990, the Board of Directors of Telebras authorized an
increase in Telebras share capital by public offer. During the offer
period the CVM initiated an investigation as to whether Brazilian
securities law and regulations regarding the correct pricing of the new
shares issued had been violated, because the shares were issued at a
discount to equity value per share. After its investigation the CVM
notified the Federal Prosecutor's Office that it believed no violation
occurred since the price was established in line with market prices for
Telebras' shares traded on the Brazilian stock exchanges. Nevertheless,
the Federal Prosecutor decided to pursue the issue through judicial
channels. In April 1998, resolution was reached on the disputed Telebras
capital increase of 1990. In connection with the resolution Telebras
issued 13,718,350 thousand shares of preferred stock.
Through an Extraordinary Shareholders' Meeting of Tele Centro Oeste
Celular Participacoes S.A. held on April 30, 1999, a capital increase was
approved through the incorporation of retained earnings in the amount of
R$69,525 without the issuing of new shares, under the terms of Article
169, Paragraph I of Law No. 6,404/76 and Article 6 of the Social Statute.
Therefore, the value of the Company's subscribed and paid-in capital
became R$323,147.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
25. SHAREHOLDERS' EQUITY (Continued)
a. CAPITAL (Continued)
The Extraordinary Shareholders' Meeting of Tele Centro Oeste Celular
Participacoes S.A., which was held on May 27, 1999, approved, and the
Administration Council of July 20, 1999 confirmed, the Company's capital
increase of R$63,718 through the issuance of 30,000,000,000 (thirty
billion) preferred shares, via a private offering, resulting in
subscribed and paid-in capital of R$386,865.
b. LEGAL RESERVE
Under Brazilian Corporation Law, the Company is required to appropriate
5% of its annual earnings, calculated using Brazilian GAAP, after
absorbing accumulated losses, to a legal reserve, which is restricted as
to distribution. This reserve may be used to increase capital or to
absorb losses, but may not be distributed as dividends.
c. LONG TERM REVENUE RESERVE
The long-term revenue reserve represents earned but unrealized revenues
resulting from the investments accounted for using the equity method. The
reserve is realized when dividends or interest on shareholders' equity
are received, and other events, according to CVM policies. Upon
realization, the reserves are reversed to retained earnings. Changes in
reserve are outlined as follows:
1999 2000
-------------------------------------
Income reserve 164,952 112,073
Reversal (164,952) (112,073)
Annual reserve 112,073 97,675
-------------------------------------
Balance at December 31 112,073 97,675
=====================================
d. DIVIDENDS/INTEREST ON OWN CAPITAL
Pursuant to its by-laws, Tele Centro Oeste Celular Participacoes S.A. is
required to distribute as dividends, to the extent amounts are available
for distribution, an aggregate amount equal to at least 25% of Adjusted
Net Income (as defined below) for each fiscal year. The annual dividend
distributed to holders of preferred shares (the "Preferred Dividend") has
priority in the allocation of Adjusted Net Income. Remaining amounts to
be distributed are allocated first to the payment of a dividend to
holders of common shares in an amount equal to the Preferred Dividend and
the remainder is distributed equally among holders of preferred shares
and common shares.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
25. SHAREHOLDERS' EQUITY (Continued)
d. DIVIDENDS/INTEREST ON OWN CAPITAL (Continued)
For the purposes of the Brazilian Corporation Law, and in accordance with
Tele Centro Oeste Celular Participacoes S.A.'s by-laws, the "Adjusted Net
Income" is an amount equal to Tele Centro Oeste Celular Participacoes
S.A.'s net profits adjusted to reflect allocations to or from (i) the
statutory reserve, (ii) a contingency reserve for anticipated losses, if
any, and (iii) an unrealized revenue reserve, if any.
Below is the calculation of the minimum amount of dividends that must be
distributed:
1999 2000
---------------- ----------------
Year's net income 99,588 103,644
(+) Reversal of long term revenue reserve 164,952 112,073
(-) Long term revenue reserve (112,073) (97,675)
(-) Legal reserve (5,898) (6,467)
(+) Adjustment to determine the Corporate Law calculation basis (9,224) 18,750
---------------- ----------------
(=) Adjusted net profit 137,345 130,325
Mandatory dividends (25%) 34,337 32,581
Common shares 11,721 11,122
Preferred shares 22,616 21,459
---------------- ----------------
Dividends value per lot of thousand shares - R$
0.094 0.089
================ ================
The Administration Council agreed to distribute interest on shareholders'
equity to its shareholders in the amount of R$37,887 and R$40,132 in 2000
and 1999, respectively, from which R$32,581 and R$34,337 in 2000 and
1999, respectively, was calculated to the priority value for preferred
shares and to mandatory dividends.
Subsequent to approval at the annual shareholders' meeting, interest on
capital was recognized as of December 31, 2000 and 1999, and was treated
as dividends, pursuant to art. 9 of Law 9249/95, net of withholding
income tax.
e. RETAINED EARNINGS
The remaining balance of retained earnings of R$396,673 at December 31,
2000 (R$346,941 in 1999), will be used for future investments according
to the capital budget as presented at the Shareholders Meeting, and in
accordance with Article 202 of Law No. 6,404/76.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
26. TRANSACTIONS WITH RELATED PARTIES
2000 1999
----------------------------------------------------------------------------
SPL CSM
SPLICE DO BANCO CONSTRUTORA E CARTOES
BRASIL CREDIBEL PAVIMENTADORA S.A. TOTAL TOTAL
----------------------------------------------------------------------------
ASSETS
Cash and cash equivalents - 713 - - 713 337
Short-term investments - 6,527 - - 6,527 369
Commercial paper 77,743 - - - 77,743 7,792
Loan agreement 2,673 - - - 2,673 -
LIABILITIES
Suppliers 1,410 - - 42 1,452 200
TRANSACTIONS
Income from short-term investments 10,588 490 - - 11,078 2,081
Maintenance services 3,508 - - - 3,508 276
Acquisition of telephone cards - - - 2,121 2,121 282
Acquisition of property, plant and
equipment 3,760 - 1,352 - 6,231
5,112
The majority shareholder of the Company is BID S.A., which is controlled by
Splice do Brasil, which in turn is under common control with Banco Credibel,
SPL Construtora e Pavimentadora and CSM Cartoes S.A.
27. INSURANCE
At December 31, 2000, in the opinion of management, all significant or high
risk assets and obligations were insured.
28. FINANCIAL INSTRUMENTS
Estimated fair values of the Companies' financial assets and liabilities
have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment was required in
interpreting market data to produce the estimated fair values. Accordingly,
the estimates presented below are not necessarily indicative of the amounts
that could be realized in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material
effect on the estimated fair values.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
28. FINANCIAL INSTRUMENTS (Continued)
The fair value information as of December 31, 2000 and 1999 presented below
is based on pertinent information available to management as of those dates.
1999 2000
---------------------------------------------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
---------------------------------------------------------
Loans and financing 143,828 143,828 509,149 509,149
Marketable securities 87,667 87,667 158,701 158,701
CASH, CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, OTHER CURRENT ASSETS, ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
Cash, cash equivalents, accounts receivable, other current assets, accounts
payable and accrued expenses represent a reasonable estimate of their fair
market value. The cash equivalents are represented mainly by short term
financial investments. The fair market values of such investments and other
short term investments, as well as the bank deposits that do not meet the
definition of short term investments were estimated using the rates
currently offered for deposits with similar due dates.
LOANS AND FINANCING
Interest rates currently available for the Companies when issuing debts with
similar conditions were used in order to estimate the fair market value.
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP
The Companies' accounting policies comply with the accounting principles
generally accepted in Brazil ("Brazilian GAAP"). The accounting principles
and policies practiced in the United States of America ("US GAAP"), which
differ significantly from Brazilian GAAP, are described below.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
a. DIFFERENT CRITERIA FOR CAPITALIZING AND AMORTIZING CAPITALIZED INTEREST
Until December 31, 1993, interest was not capitalized as part of the
individual assets in property, plant and equipment; instead, it was
capitalized separately and amortized over a time period different from
the useful lives of the related assets. Under US GAAP, capitalized
interest is added to the individual assets and is amortized over their
estimated useful lives. Additionally, until December 31, 1998, Brazilian
GAAP for telecommunications companies required that interest attributable
to construction-in-progress be computed at 12% per annum and that the
part that related to interest on third party loans be credited to
financial expenses based on actual interest costs; the balance relating
to own capital was credited to capital reserves. Beginning January 1,
1999, this practice was no longer required. In 2000 and 1999, the Company
did not capitalize interest attributable to construction-in-progress for
Brazilian GAAP.
Under US GAAP, according to Statement of Financial Accounting Standard
("SFAS") No. 34 "Capitalization of Interest Cost", the interest incurred
on borrowings is capitalized to the extent that borrowings do not exceed
construction-in-progress. The credit is a reduction of interest expense.
Furthermore, the amount of interest capitalized excludes the monetary
gains associated with the borrowing and the foreign exchange gains and
losses on foreign currency borrowings.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
a. DIFFERENT CRITERIA FOR CAPITALIZING AND AMORTIZING CAPITALIZED INTEREST
(Continued)
The effects of these different criteria for capitalizing and amortizing
capitalized interest are presented below:
1998 1999 2000
-----------------------------------------
CAPITALIZED INTEREST DIFFERENCE
US GAAP CAPITALIZED INTEREST
Interest which would have been capitalized
and credited to income under US GAAP (where
interest incurred on loans from the parent
Company and from third-parties, net of gains
and losses due to monetary variations, except
in years where total loans exceeded total
construction-in-progress, when capitalized
interest is reduced proportionally). 3,995 3,709 14,118
INTEREST CAPITALIZED AND CREDITED TO INCOME
MINUS INTEREST CAPITALIZED UNDER BRAZILIAN
GAAP:
Interest capitalized and credited to income
(up to the limit of interest incurred on
loans obtained for financing capital
investments, net of gains and losses
resulting from currency/monetary variations) (1,360) - -
Interest capitalized and credited to reserves (13,200) - -
-----------------------------------------
Total (14,560) - -
US GAAP difference (10,565) 3,709 14,118
=========================================
AMORTIZATION OF CAPITALIZED INTEREST DIFFERENCE
Amortization under Brazilian GAAP 7,042 6,363 10,926
Less amortization under US GAAP (2,028) (2,005) (4,287)
-----------------------------------------
US GAAP difference 5,014 4,358 6,639
=========================================
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
b. PENSION AND OTHER POST-RETIREMENT BENEFITS
The Company participates in a multi-employer pension plan with respect to
its retired employees and a multiple employer with respect to its active
employees. The Company also participates in multi-employer
post-retirement benefit plan for all of its retired employees and active
employees electing the defined contribution plan. Under Brazilian GAAP,
annual pension contributions are expensed as the annual pension cost, and
no liability for future obligations is recorded. US GAAP requires
accounting for such benefit costs in accordance with SFAS 87 "Employers'
Accounting for Pensions." At December 31, 1999 and 2000, accrued pension
costs of R$ 29,534 and R$ 1,358, respectively were recorded for US GAAP
purposes. See note 30a. During 2000, the Company introduced a defined
contribution plan in which active employees could elect participation in
lieu of participation in the defined benefit pension plan. Employees who
elected participation in the defined contribution plan automatically lose
their right to participate in the post-retirement health care plan.
c. DISCLOSURE REQUIREMENTS
US GAAP disclosure requirements differ from the Brazilian ones. However,
in these consolidated financial statements, the level of disclosure has
been expanded to comply with US GAAP.
d. INTEREST EXPENSE
Brazilian GAAP requires that interest be shown as part of the operating
profit. Under US GAAP, interest expense would be shown after the
operating profit and accrued interest would be included in accounts
payable and accrued expenses. Additionally, under Brazilian GAAP,
interest expense may be imputed on capital and included in operating
income. This imputed interest is then reversed from non-operating income.
Under US GAAP, interest is not imputed on capital.
e. EMPLOYEES' PROFIT SHARING
Brazilian GAAP requires that employees' profit sharing be shown as an
appropriation of the net income for the year. Under US GAAP, the
employees' profit sharing would be included as an operating expense.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
f. PERMANENT ASSETS
Brazilian GAAP includes a class of assets called `permanent assets'. This
is the collective name for all assets subject to indexation adjustments,
according to Brazil's corporation law and the tax legislation. Under US
GAAP, the assets in this classification would be noncurrent assets and
property, plant and equipment.
Losses and provisions for losses in the recuperation of permanent assets
in 1998 and 1999 totaled R$ 1,073 and R$ 19,606, respectively. Such
losses were included in non-operating expenses for Brazilian GAAP
purposes. According to US GAAP, such profits and losses would be included
in operating income.
In 1999 and 2000, there were no changes to the amount previously accrued.
g. PRICE-LEVEL ADJUSTMENTS AND US GAAP PRESENTATION
The effects of price-level adjustments have not been eliminated from the
reconciliation with US GAAP, nor are the monetary gains or losses
associated with the various US GAAP adjustments identified separately.
The application of inflation restatement as measured by the UFIR and the
IGP-M represents a comprehensive measure of the effects of price level
changes in the Brazilian economy and, as such, is considered a more
meaningful presentation than the historical cost-based financial
reporting for both Brazilian and US accounting purposes.
h. ITEMS RECORDED DIRECTLY TO STOCKHOLDERS' EQUITY
Under Brazilian GAAP, various items are recorded directly to equity,
which under US GAAP would be recorded in the consolidated statements of
revenues and expenses. One example is capitalized interest until 1998.
The recording of such items to divisional equity implies adjustments in
the consolidated statement of changes in stockholders' equity. Since the
original amounts recorded to the equity accounts would, under US GAAP, be
made directly to the consolidated statements of revenues and expenses,
the adjustment is also included in the reconciliation of net income for
US GAAP purposes.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
i. INCOME TAXES
For Brazilian GAAP, the deferred tax charges relating to the deferred
income tax effects of indexation adjustments for 2000 and 1999, are
recorded directly against shareholders' equity. Under U.S. GAAP, for
purposes of financial statements, the effects of the indexation
adjustments made in 2000 and 1999 on the deferred income tax, would be
charged to the income and social contribution taxes in the consolidated
statements of operations.
j. EARNINGS PER SHARE
In 2000 and 1999, the Brazilian GAAP computation of earnings per share is
based on shares outstanding at year end, and does not distinguish between
common and preferred shares. Under U.S. GAAP Statement of Financial
Accounting Standards No. 128, "Earnings per Share", the computation is
based on the weighted average shares outstanding during the year.
k. DEFERRED TAXES
The deferred income tax liability resulting from the indexation of
permanent assets of R$ 23,956 in 2000 and R$ 46,551 in 1999 was charged
directly to shareholders' equity in accordance with Brazilian GAAP,
whereas for U.S. GAAP the charge would be to income for the year. For
2000 and 1999, the deferred tax effect on realization of the indexation
effects amounting R$ 12,901 and R$ 9,074 was charged directly to the
income statement.
l. VALUATION OF LONG-LIVED ASSETS
For US GAAP, effective January 1, 1996, the Companies adopted SFAS No 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." According to this standard, the Companies
periodically evaluate the carrying value of long-lived assets to be held
and used, when events and circumstances warrant such review. The carrying
value of long-lived assets is considered impaired when the anticipated
undiscounted cash flow from assets is separately identifiable and is less
than their carrying value. In that event, a loss is recognized based on
the amount by which the carrying value exceeds the fair market value of
the assets. The adoption of this standard did not have a material effect
on the Companies' results or financial condition.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
m. RETAINED EARNINGS
For Brazilian GAAP, a company formed as a result of a spin-off may have
retained earnings on its balance sheet if the parent company's
shareholders' resolution for the spin-off allocates retained earnings
from the parent company to the new company. Under US GAAP, "retained
earnings" allocated in the spin-off would not be considered historical
retained earnings, since such amount would represent capital allocated
from the parent company and would be described as "distributed capital."
As a result of the May 22, 1998 spin-off, the Company was allocated
distributed capital of R$ 447,049.
n. REVENUE RECOGNITION
Until December 31, 1997, under both Brazilian and US GAAP, revenues from
activation fees were recognized upon activation of each customer's
services. Under US GAAP, effective as of January 1, 1998, net revenues
from activation fees will be deferred and amortized over the estimated
effective contract life. For the year ended December 31, 2000, there were
no differences regarding the revenue recognition criteria between
Brazilian GAAP and US GAAP because the Companies ceased charging
activation fees.
o. STOCK COMPENSATION
As part of the privatization of the Telebras System, the Federal
Government offered Telebras System employees the right to purchase the
Federal Government's entire holding of Telebras common and preferred
shares of each of the twelve new holding companies formed as a result of
the split of Telebras ("New Holding Companies") (representing 2.18% of
the outstanding capital stock of Telebras and of each New Holding
Company) at a price of R$ 91.36 per lot of 13,000 shares (each "lot"
comprised of 1,000 preferred shares of each, Telebras and the twelve New
Holding Companies). This price represented a 50% discount from the market
price of 1,000 Telebras preferred shares at the time the Federal
Government authorized the plan. Each employee had the right to purchase
up to 144 lots of 13,000 preferred shares, to be allocated pro-rata if
the shares were oversubscribed.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
o. STOCK COMPENSATION (Continued)
The Federal Government made 7.2 million lots available for sale, or 60%
of the 12.1 million lots that would have been made available if each
employee purchased the maximum allowed 144 lots. The period to sign up to
purchase the shares ended on October 30, 1998. On August 4, 1998, the
date on which the offer to employees commenced and the measurement date
for 60% of the shares, the market price of 1,000 Telebras shares was R$
167,97. Under U.S. GAAP, the charge in 1998 would have been approximately
R$ 68,600, which represents the offer price/market price differential on
60% of the shares offered. Under Brazilian GAAP, no compensation expense
was recognized. As of October 30, 1998, the original expiration of the
programs, the Company's employees had subscribed to 92,692 lots. Pursuant
to an extension, employees could rescind their subscriptions at any time
prior to April 9, 1999 and shares relating to rescinded subscriptions
were assigned to the remaining subscribers on a pro rata basis. The
difference between the 60% of the shares recorded at December 1998 and
the ultimate number of shares subscribed by the Company's employees was
R$ 7,084.
Although the Federal Government, rather than the Company or Telebras,
offered the shares to employees, under U.S. GAAP the deemed compensation
amount is "pushed down" to each of the New Holding Companies in
accordance with the number of shares purchased by each New Holding
Company in accordance with the number of shares purchased by each New
Holding Company and its subsidiaries employees.
p. COSTS OF START-UP ACTIVITIES
According to the Brazilian GAAP, the deferment of start-up costs is
possible and was recorded in relation to the start-up of the operations
of Norte Brasil Telecom S.A.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities". This statement became effective in
1999 and requires costs of start-up activities and organization cost to
be expensed as incurred.
Thus, the adjustment in 2000 of R$ 35,158 (R$ 32,042 in 1999) was
recorded for US GAAP purposes.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
q. PREMIUM - COVERAGE PARTICIPACOES S.A.
As discussed in note 16, in 1999 the Company recognized an asset for
Brazilian GAAP purposes of R$ 354,786, and the related amortization of R$
5,913, as a result of an intangible asset created when BID S.A. purchased
the controlling interest of the Holding Company, and subsequently pushed
the asset down to the Holding Company. For US GAAP purposes, these
amounts were excluded from net equity and net income in 1999. In 2000, as
a result of a change in Brazilian accounting principle, only the future
tax benefits of the transaction could be considered as an asset. Under
Brazilian GAAP the amortization of the premium is recorded as an expense
in the net nonoperating results with an equal offsetting reduction of the
tax provision. Under US GAAP only the current and deferred provision is
affected. Also during 2000, as a result of the transaction described in
note 31, the future amortization deductions of this amount became
utilizable for tax purposes. Therefore, for US GAAP purposes, in
accordance with EITF 94-10, the future tax benefits resulting from
transactions with shareholders were recognized as an asset but are not
included in the Company's income statement, but rather in equity.
r. AMORTIZATION OF CONCESSION
For Brazilian GAAP purposes, the amortization period of the concession
(license) for the Band B Company, Norte Brasil Telecom S.A. is 30 years,
which includes an additional 15 years assuming renewal by Anatel. For US
GAAP purposes, the amortization period of 15 years includes only the
initial term of the concession.
s. INTEREST ON OWN CAPITAL
For Brazilian GAAP purposes, the interest on one's own capital is
considered a financial expense in operating income, and then reclassified
to equity as a dividend. For US GAAP purposes, interest on one's own
capital directly reduces equity as a dividend.
t. INVESTMENTS IN MARKETABLE SECURITIES
Under Brazilian GAAP, marketable securities are valued based on
historical cost plus accrued interest. US GAAP requires securities be
valued in accordance with SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities". All the marketable securities would be
considered available-for-sale under SFAS 115, however since the fair
value equals the carrying value there is no adjustment to equity.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
RECONCILIATION OF THE INCOME DIFFERENCES BETWEEN US AND BRAZILIAN GAAP
1998 1999 2000
---------------------------------------------
Net income as reported......................................... 166,654 99,588 103,644
Different criteria for determining:
Capitalized interest................................... (10,565) 3,709 14,118
Amortization of capitalized interest................... 5,014 4,358 6,639
Activation income deferral............................. (28,606) (4,048) -
Amortization of the activation income deferral......... 12,644 18,986 1,024
Stock compensation expense............................. (1,789) - -
Costs of start-up activities and others................ (32,042) (3,116)
Premium amortization................................... - 5,913 -
Pension benefits - SFAS 87 adjustments............... - (29,534) 28,186
Amortization of Concession............................. - - (2,746)
Items posted directly to equity
Capitalized interest on construction in progress....... 11,190 - -
Deferred tax on full indexation. - (46,551) (23,956)
......................................
Effects of the above adjustments on deferred taxes....... 7,142 11,815 (14,926)
Effects of the above adjustments on minority shares...... 2,317 387 (4,096)
---------------------------------------------
US GAAP net income........................................... 164,001 32,581 104,771
=============================================
EARNINGS PER THOUSAND SHARES ACCORDING TO US GAAP
Net income applicable to preferred shares 105,223 21,367 70,375
Net income applicable to common shares 58,778 11,214 34,396
---------------------------------------------
Net income 164,001 32,581 104,771
Basic earnings per thousand shares in R$:
Preferred 0.50 0.10 0.29
=============================================
Common 0.47 0.09 0.28
=============================================
Weighted average number of shares outstanding (thousands)
Preferred 210,029,997 223,591,641 240,029,997
Common 124,369,031 124,369,031 124,369,031
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
RECONCILIATION OF THE SHAREHOLDERS' EQUITY DIFFERENCES BETWEEN US AND BRAZILIAN GAAP
1999 2000
-------------------------------------
Shareholders' equity as reported .............................. 1,230,628 1,042,172
Different criteria for:
Capitalized interest ................................. (62,476) (48,358)
Amortization of capitalized interest ................. 15,560 22,199
Activation income deferral ........................... (32,655) (32,655)
Amortization of the activation
income deferral.................................... 31,631 32,655
Donations received ................................... (130) (130)
Costs of start-up activities and others............... (32,042) (35,158)
Premium - Coverage Participacoes S.A. ................ (354,786) -
Premium amortization.................................. 5,913 -
Pension benefits - SFAS 87 adjustments................ (29,534) (1,348)
Amortization of concession - (2,746)
Effects of the above adjustments on deferred taxes....
35,269 20,343
Minority interests ................................... 7,245 3,149
-------------------------------------
Shareholders' equity according to US GAAP ................... 814,623 1,000,123
=====================================
Additional information:
Total assets under US GAAP............................... 1,426,558 2,113,001
-------------------------------------
Property, plant and equipment............................ 1,243,670 1,489,906
Accumulated depreciation................................. (296,055) (432,310)
-------------------------------------
Net property, plant and equipment........................ 947,615 1,057,596
=====================================
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP
Balance at December 31, 1998............................................ 758,375
Capital increase with own resources..................................... 63,718
Premium on issues of new shares......................................... 81
Net 32,581
income..................................................................
Interest on own capital................................................. (40,132)
--------------
Balance at December 31, 1999............................................ 814,623
Recoverable taxes on premium - Coverage Participacoes S.A. 118,616
Net income.............................................................. 104,771
Interest on own capital/dividends....................................... (37,887)
--------------
Balance at December 31, 2000............................................ 1,000,123
==============
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP
a. PENSION PLAN
The Company and its subsidiaries, except for Norte Brasil Telecom S.A.,
together with substantially all of the other companies in the former
Telebras group, participate in a multi-employer defined benefit pension
plan and other post-retirement benefit plans administered by the FUNDACAO
SISTEL DE SEGURIDADE SOCIAL ("Sistel"), a minority shareholder.
Effective 2001, the plan was modified and changed into a multiple
employer pension plan with respect to active employees. The plan assets
and liabilities related to active employees were transferred into a new
plan. The benefits remained unchanged. The post retirement benefit plans
remained as unchanged multi-employer plans. Also during 2001, the active
employees were able to elect between participation in this plan, or a
defined contribution plan.
Substantially all of Company's employees are covered by these plans. The
Company contributed R$ 2,136 and R$ 1,519 in 1999 and 1998, respectively,
in respect to pension fund contributions. The Company contributed R$
2,087 in 2000 with respect to post retirement plans.
In 1999, Sistel approved changes to the plan statutes resulting in the
break up of plan assets and liabilities related to the active
participants of each sponsor. Sistel did not break up plan assets and
liabilities related to inactive participants and, thus, the Company will
continue to sponsor the Sistel plan for such inactive participants.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP (Continued)
a. PENSION PLAN (Continued)
The pension benefit is generally defined as the difference between (i)
90% of the retiree's average salary during the last 36 months indexed to
the date of retirement and (ii) the value of the retirement pension paid
by the Brazilian social security system. For retired employees the
initial pension payment is subsequently adjusted upwards to recognize
cost of living increases and productivity awards granted to active
employees. In addition to the pension supplements, post-retirement health
care and life insurance benefits are provided to eligible pensioners and
their dependents.
Contributions to the plans are based on actuarial studies prepared by
independent actuaries. The actuarial studies are revised periodically to
identify whether adjustments to the contributions are necessary.
The change in plans assets and benefit obligation plan and the related
actuarial assumptions are as follows:
CHANGE IN PLAN ASSETS
DEFINED BENEFIT PENSION
------------------------------
2000
------------------------------
Fair value of plan assets at beginning of year 17,518
Actual return on plan assets 8,267
Sponsors' contributions 2,862
Expenses and distributions (201)
Assets transferred to defined contribution plan (25,482)
------------------------------
Fair value of plan assets at end of year 2,964
==============================
CHANGE IN BENEFIT OBLIGATIONS
DEFINED BENEFIT PENSION
------------------------------
2000
------------------------------
Benefit obligation at beginning of year 35,056
Service cost 2,643
Interest cost 3,950
Actuarial gains (8,195)
Benefits and expenses paid (201)
Curtailment (10,629)
Settlement (20,291)
------------------------------
Benefit obligation at end of year 2,333
==============================
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP (Continued)
a. PENSION PLAN -- Continued
COMPONENTS OF ANNUAL PENSION COST
2000
---------------------------
Net service cost 1,558
Interest cost 3,950
Expected return on assets (2,645)
Amortization of unrecognized gain (703)
Amortization of initial transition obligation 813
---------------------------
Net periodic pension cost 2,973
===========================
The weighted-average actuarial assumptions, as determined by actuaries,
were as follows:
2000 1999
------------------------------------
Discount rate for determining projected benefit obligations 11.30% 11.30%
Rate of increase in compensation levels 8.15% 8.15%
Expected long-term rate of return on plan assets 14.45% 14.45%
In 2000, for employees who elected to participate in the defined
contribution plan, pension plan assets of R$25,482 were transferred to
the employee's account in the defined contribution plan. The Company made
no additional contributions during 2000. Under the provisions of
Statement of Financial Accounting Standard No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," the effects of employees electing to withdraw from
the defined benefit plan in order to participate in the defined
contribution plan constitutes a curtailment which resulted in the
recognition of a gain of R$ 3,512 to the Company. Additionally, the
transference of plan assets to the defined contribution plan constitutes
a settlement, which also resulted in the recognition of a gain of R$
23,198 to the Company.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP (Continued)
a. PENSION PLAN (Continued)
Before After
Curtailment Effect of Effect of Curtailment
AND SETTLEMENT CURTAILMENT SETTLEMENT AND SETTLEMENT
--------------- ------------- ----------- -------------
Actuarial present value of benefit obligations:
Vested benefit obligation (2,938) 0 1,771 (1,166)
Accumulated benefit obligation (22,111) 0 20,291 (1,820)
Projected benefit obligation (33,252) 10,629 20,291 (2,333)
Plan assets at fair value 28,445 0 (25,482) 2,964
--------------- ------------- ----------- -------------
Funded status (4,807) 10,629 (5,191) 631
Unrecognized net gain (30,512) 0 28,389 (2,124)
Unrecognized transition obligation 7,262 (7,117) 0 145
--------------- ------------- ----------- -------------
Accrued pension cost recognized for US GAAP (28,057) 3,512 23,198 (1,348)
--------------- ------------- ----------- -------------
B. CONCENTRATION OF RISK
Credit risk with respect to trade accounts receivable from third parties
is diversified. Although collateral is not required, the Companies
continually monitor the level of trade accounts receivable and limit the
exposure to bad debts by cutting access to the telephone network if any
invoice is fifteen days past-due. Exceptions include telephone services
that must be maintained for reasons of safety or national security.
In conducting their businesses, the Companies are fully dependent upon
the cellular telecommunications concession as granted by the Federal
Government.
Approximately 25% of all full-time employees are members of state labor
unions associated with either the Federacao NACIONAL DOS TRABALHADORES EM
TELECOMUNICACOES ("Fenattel"), or with the FEDERACAO INTERESTADUAL DOS
TRABALHADORES EM TELECOMUNICACOES ("Fittel"). The Companies negotiate new
collective labor agreements every year with the local unions. The
collective agreements currently in force expire in November 2001.
There is no concentration of available sources of labor, services,
concessions or rights, other than those mentioned above, that the Company
believes could, if suddenly eliminated, severely impact the Companies'
operations.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP (Continued)
c. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities",
which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The statements require entities
that use derivative instruments to measure these instruments at fair
value and record them as assets or liabilities on the balance sheet. It
also requires entities to reflect the gains or losses associated with
changes in the fair value of these derivatives, either in earnings or as
a separate component of comprehensive income, depending on the nature of
the underlying contract or transaction. Because of the Company's limited
use of derivatives, management does not anticipate that the adoption of
SFAS No. 133 will have a material effect on the financial statements.
Tele Centro Oeste Celular Participacoes S.A. will adopt SFAS 133
effective January 1, 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 provides additional guidance on revenue
recognition as well as criteria for when revenue is generally realized
and earned and also requires the deferral of incremental direct selling
costs. The Company's adoption of SAB No. 101 in 2000 had no effects on
the earnings or financial position of the Company.
31. CORPORATE RESTRUCTURING
In order to fully utilize the tax benefits that will arise from the
amortization of the premium discussed in note 16, a corporate restructuring
was approved in an Extraordinary Shareholders' Meeting.
This corporate restructuring has essentially pushed down from Tele Centro
Oeste Participacoes S.A. to the operating companies, a portion of the
premium, which will be amortized at the operating company level.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
32. SUBSEQUENT EVENTS
a. On January 12, 2001 the Holding Company issued R$ 250,000 of 180-day
commercial paper, consisting of 500 notes with a face value of R$ 500
each. A portion of the proceeds was used to pay the existing commercial
paper.
b. On January 2, 2001, the bridge loans with Banco Nacional do
Desenvolvimento Economico e Social - BNDES for subsidiaries Telebrasilia
Celular S.A., Telegoias Celular S.A., Telemat Celular S.A., Telems
Celular S.A., Teleron Celular S.A. and Teleacre Celular S.A. were
converted into long-term loans. The principal amount of R$ 43,835 is due
after a period of 5 (five years). The interest rate is the TJLP plus 4%.
c. In 2000, the Federal Government established the following contributions,
which will affect the future operations of the Company:
CONTRIBUTION FOR THE FUND OF GLOBALIZATION OF TELECOMMUNICATIONS SERVICES
- "FUST"
Fust was established by Law 9,998 of August 17, 2000, in order to provide
resources to cover the cost exclusively attributed to the accomplishment
of obligations for globalization of telecommunication services that
cannot be recovered with efficient service exploration of that is not
responsibility of the concessionaire.
The contribution to this Fund started on January 2, 2001, by all
telecommunications services companies at the rate of 1% of the amount of
gross operating telecommunications services revenue.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of constant Brazilian Reais, of December, 2000,
except per share amounts)
32. SUBSEQUENT EVENTS (Continued)
CONTRIBUTION FOR THE FUND OF TELECOMMUNICATIONS TECHNOLOGICAL DEVELOPMENT -
"FUNTTEL"
Funttel was established by Law 10,052 of November 28, 2000, in order to
stimulate the process of technological innovation, enhance the human
resources capacity, generate new job positions and promote access by small
and medium companies to capital resources, in order to amplify the
competitiveness of the Brazilian Telecommunications Industry.
The contribution of Funttel will begin on March 28, 2001, by all
telecommunications services companies at the rate of 0.5% of the amount of
gross operating telecommunications services revenue.
EXHIBIT INDEX
1.1 By-laws of the Holding Company previously filed with the
Holding Company's registration statement on September 18, 1998
and incorporated herein by reference.
1.2 Amendment to the Charter of the Holding Company previously
filed with the Holding Company's registration statement on
September 18, 1998 and incorporated herein by reference.
2.1 Deposit Agreement dated as of July 27, 1998 between the
Holding Company and The Bank of New York, previously filed
with the Holding Company's registration statement on September
18, 1998 and incorporated herein by reference.
4.1 Standard Concession Agreement for Mobile Cellular Service
(original and English translation), previously filed with the
Holding Company's registration statement on September 18, 1998
and incorporated herein by reference.
4.2 Cellular Service Authorization Agreement (summary) entered
into and between the Brazilian Government, through Anatel, and
Tele Centro Oeste/Inepar Ltda., currently Norte Brasil Telecom
S.A., on November 27, 1998.