AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 2000
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 20-F
--------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER: 001-14489
--------------------
TELE CENTRO OESTE CELULAR
PARTICIPACOES S.A.
(Exact Name of Registrant as Specified in Its Charter)
TELE CENTRO OESTE CELLULAR HOLDING THE FEDERATIVE REPUBLIC OF BRAZIL
COMPANY (Jurisdiction of Incorporation or
(Translation of Registrant's Name Organization)
into English)
--------------------
SCS, QUADRA 2, BLOCO C, 7 ANDAR
70319-901 BRASILIA, DF, BRAZIL
(Address of Principal Executive Offices)
--------------------
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
Preferred Shares, without par value* New York Stock Exchange
American Depositary Shares, each New York Stock Exchange
representing 3,000 Preferred Shares
--------------
* 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
----- ------
INDICATE BY CHECK MARK WHICH FINANCIAL STATEMENT ITEM THE REGISTRANT HAS
ELECTED TO FOLLOW.
Item 17 Item 18 X
----- -----
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business......................................... 2
Item 2. Description of Property......................................... 23
Item 3. Legal Proceedings............................................... 23
Item 4. Control of Registrant........................................... 25
Item 5. Nature of Trading Market........................................ 26
Item 6. Exchange Controls and Other Limitations Affecting
Security Holders................................................ 29
Item 7. Taxation........................................................ 31
Item 8. Selected Financial Data......................................... 36
Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 41
Item 9A. Quantitative and Qualitative Disclosures about Market
Risk............................................................ 51
Item 10. Directors and Officers of Registrant............................ 52
Item 11. Compensation of Directors and Officers.......................... 54
Item 12. Options to Purchase Securities from Registrant or
Subsidiaries.................................................... 54
Item 13. Interest of Management in Certain Transactions.................. 54
PART II
Item 14. Description of Securities to be Registered...................... 54
PART III
Item 15. Defaults upon Senior Securities................................. 54
Item 16. Changes in Securities, Changes in Security for
Registered Securities and Use of Proceeds....................... 54
PART IV
Item 17. Financial Statements............................................ 54
Item 18. Financial Statements............................................ 54
Item 19. Financial Statements and Exhibits............................... 55
Index of Defined Terms................................................... 56
Technical Glossary....................................................... 58
<PAGE>
PRESENTATION OF 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., 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. 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 21, 2000, 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$1.8150 to US$1.00. See below "Selected
Financial Data--Exchange Rates."
The consolidated financial statements of the Company as of December 31,
1998 and 1999 and for the years ended December 31, 1997, 1998 and 1999 (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, 1999 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" on page 56 lists those terms and where they
are defined. The "Technical Glossary" that begins on page 58 provides
definitions of certain technical terms used herein.
FORWARD-LOOKING INFORMATION
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 at pages 19-23 herein, 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.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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 in May 1998. Each of the Band A Subsidiaries was formed in
January 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 1998
are to the cellular operations of the Predecessor Companies. See below
"Description of Business--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 May 31, 2000, the Company, including its Band A Subsidiaries and Band B
Subsidiaries, had approximately 1,148,000 subscribers.
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, 1999 and
the Holding Company's shareholding in each Subsidiary at December 31, 1999.
<TABLE>
<CAPTION>
CONTRIBUTION TO
CONSOLIDATED RESULTS HOLDING COMPANY OWNERSHIP
-------------------- -------------------------
% OF NET OPERATING % OF SHARE % OF VOTING
SUBSIDIARY REVENUES CAPITAL STOCK
---------------------- -------------------- ------------ -----------
<S> <C> <C> <C>
Telebrasilia Celular S.A.
("Telebrasilia").................. 41.43 86.81 88.61
Telegoias Celular S.A. ("Telegoias") 22.42 89.00 87.25
Telemat Celular S.A. ("Telemat").... 14.00 91.87 98.40
Telems Celular S.A. ("Telems")...... 14.06 96.01 98.90
Teleron Celular S.A. ("Teleron").... 6.52 91.31 97.31
Teleacre Celular S.A. ("Teleacre").. 2.15 93.00 98.70
Norte Brasil Telecom S.A. ("NBT")... 0.00 95.00 95.00
</TABLE>
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 below "Management's Discussion and Analysis of Financial
Condition and Results of Operations--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 8.9% of the total population of Brazil.
<PAGE>
The Holding Company's headquarters are located at SCS, Quadra 2, Bloco C,
7 andar, 70319-901 Brasilia, DF, Brazil, and its telephone numbeR is
55-61-313-7765.
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, Brazil's National 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 below "Control of
Registrant."
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.
<PAGE>
Set forth below is a map showing the location of the Region within Brazil.
[MAP OF BRAZIL]
<PAGE>
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 at the
dates and for the years indicated.
<TABLE>
<CAPTION>
POPULATION % OF BRAZIL'S % OF BRAZIL'S PER CAPITA INCOME
SUBSIDIARY AREA (MILLIONS)<F1> POPULATION<F1> GDP<F2> (NOMINAL REAIS)<F2>
------------ ------------------- -------------- -------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Telebrasilia Federal District... 1.97 1.20 2.28 10,508
Telegoias .. Goias.............. 4.72 2.88 1.84 3,428
Telegoias .. Tocantins.......... 1.14 0.69 0.20 1,580
Telemat .... Mato Grosso........ 2.38 1.45 1.05 3,972
Telems ..... Mato Grosso do Sul. 1.99 1.21 1.07 4,693
Teleron .... Rondonia........... 1.30 0.79 0.48 3,317
Teleacre ... Acre............... 0.53 0.32 0.15 2,605
NBT ........ Amapa.............. 0.44 0.27 0.18 3,767
NBT ........ Amazonas........... 2.58 1.57 1.66 5,816
NBT ........ Maranhao........... 5.42 3.30 0.85 1,389
NBT ........ Para............... 5.89 3.59 1.69 2,584
NBT ........ Roraima ........... 0.27 0.16 0.07 2,423
REGION............. 28.62 17.44 11.51 4,162
------ ===== ===== ===== =====
------------
<FN>
<F1>
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.
<F2>
SOURCE: Instituto Brasileiro de Geografia e Estatistica - IBGE.
</FN>
</TABLE>
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 below "Description of
Business--Brazilian Economic Environment."
SERVICES
The Company offers analog and digital cellular telecommunications service
to its subscribers under its Basic Service Plan. The Company also offers
ancillary services, including voicemail, call forwarding, call waiting, caller
identification and three-way calling. 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 subscribers.
Service is paid for and credited prior to calls being made. The subscriber must
purchase a card with prepaid credits within 90 days of activation. Once the
credits in a card are used, a new card must be purchased within 180 days, or
else service is canceled and the subscriber must request a new activation in
order to regain service. Prepaid cards are sold in denominations of R$10.00,
R$25.00 and R$50.00. With prepaid cards, subscribers have better control of
their expenses.
Through agreements with other cellular service providers, the Company
offers automatic roaming services throughout Brazil that allow subscribers
(other than prepaid subscribers) to make and receive calls while out of the
Region. 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 below "Description of Business--Operating Agreements--Roaming Agreements."
<PAGE>
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 1999 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 1999. 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 certain customers.
The Company's customers consist primarily of high- and middle-income
individuals. According to the Company's research, as of December 31, 1999,
approximately 67% of the Company's subscribers were male, and 81% of the
Company's subscribers were at least 35 years old.
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 below
"Description of Business--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 45 stores located throughout the Region, with 35 stores located in
Area 7 and 10 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.
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cellular lines in service at year-end <F1>........ 373,510 538,814 851,376
Subscriber growth during year <F1>................ 25.0% 44.3% 58.0%
Estimated population of Region at year-end
(millions)<F2>.................................... 13.5 13.7 28.6
Percentage of population of Region covered at
year-end <F3>..................................... 75.9% 77.8% 82.0%
Penetration at year-end <F4>...................... 2.8% 3.8% 5.79%
Percentage of area of Region covered at
year-end <F5>..................................... 41% 45% 49%
Average monthly incoming minutes of use per
subscriber during year............................ 124.8 116.3 145.3
Average monthly outgoing minutes of use per
subscriber during year............................ 117.8 109.7 100.9
Average monthly revenues per subscriber during
year <F6>......................................... R$126.35 R$108.93 R$81.36
------------
<FN>
<F1>
These numbers have been updated to account for both Areas 7 and 8,
including rural service. In 1998, there were 17,900 rural cellular lines.
In 1999, there were 16,689 rural cellular lines.
<F2>
IBGE estimates.
<F3>
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.
<F4>
Number of cellular lines in service divided by the population of the
Region. These numbers pertain only to Area 7.
<F5>
These numbers pertain only to Area 7.
<F6>
Net operating revenue divided by the average number of subscribers divided
by 12, expressed in constant REAIS of December, 31 1999, net of
value-added taxes.
</FN>
</TABLE>
<PAGE>
The Concessions contain certain network coverage and quality of service
obligations. See below "Description of Business--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) activation fees, which are one-time
charges paid to obtain cellular telecommunications service, (ii) usage charges,
which include measured service charges for outgoing calls and roaming and other
similar charges, (iii) monthly subscription charges, (iv) 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, (v) prepaid handset sales
and (vi) other charges, including charges for call forwarding, call waiting and
call blocking. The Company's rates are subject to regulation by ANATEL. See
below "Description of Business--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.
The following table sets forth the average rates for the Basic Service
Plan for each year in the three-year period ended December 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------ ------ ------
(REAIS) <F1>
<S> <C> <C> <C>
Activation fee <F2>...................... 330.00 151.63 151.63
Monthly subscription fee <F2>............ 25.00 20.20 20.20
Per-minute charges:
VC1 <F2><F3>........................... 0.27 0.27 0.27
VC2 <F3>............................... 0.58 0.40 0.40
VC3 <F3>............................... 0.66 0.66 0.66
DSL1 <F3>.............................. 0.29 0.19 0.19
DSL2 <F3>.............................. 0.33 0.33 0.33
AD (per call)<F3>........................ 0.55 0.29 0.29
------------
<FN>
<F1>
Information for 1997 is presented in constant REAIS of December 31, 1997.
Information for 1998 and 1999 is presented in nominal REAIS.
<F2>
Averages of the rates charged by the Subsidiaries, weighted by number of
subscribers.
<F3>
Weighted AVERAGE peak rates, net of value-added taxes.
</FN>
</TABLE>
<PAGE>
The following table sets forth certain terms of the Company's service
plans, which were implemented as of February 2000.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
| AREA 7 PLANS | BASIC | 240 | 500 |
|--------------------|--------------------------------------------------------------------------------|
| STATES | DF,GO, | AC | MT | DF,GO, | AC | MT | DF,GO, | AC | MT |
| | MS,RO | | | MS,RO | | | MS, RO | | |
|--------------------|--------------------------------------------------------------------------------|
| <S> | <C> <C> <C> | <C> <C> <C> | <C> <C> <C> |
| EXEMPT MINUTES | 0 | 240 | 500 |
|--------------------|--------------------------------------------------------------------------------|
| RESIDENCES<F1><F2> | 162.00 | 162.00 | 162.00 |
|--------------------|--------------------------------------------------------------------------------|
| SUBSCRIPTIONS<F1> | 31.00 | 27.91 | 33.29 | 79.00 | 79.00 | 79.00 | 139.00 | 139.00 | 139.00 |
|--------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| VC1 MF<F1><F3> | 0.4236 | 0.3809 | 0.4556 | 0.4204 | 0.3780 | 0.4521 | 0.4204 | 0.3780 | 0.4521 |
|--------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| VC1 MM<F1><F4> | 0.5507 | 0.4952 | 0.5922 | 0.5466 | 0.4914 | 0.5877 | 0.5466 | 0.4914 | 0.5877 |
|--------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| VC2 <F1> | 0.5700 | 0.4870 | 0.6114 | 0.5700 | 0.4870 | 0.6114 | 0.5700 | 0.4870 | 0.6114 |
|--------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| VC3 <F1> | 1.0355 | 0.8865 | 1.1136 | 1.0231 | 0.8758 | 1.1002 | 1.0231 | 0.8758 | 1.1002 |
|--------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| DSL1 <F1> | 0.3081 | 0.2651 | 0.3305 | 0.3081 | 0.2651 | 0.3305 | 0.3081 | 0.2651 | 0.3305 |
|--------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| DSL2 <F1> | 0.5121 | 0.4398 | 0.5500 | 0.5045 | 0.4319 | 0.5425 | 0.5045 | 0.4319 | 0.5425 |
|--------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| AD <F1> | 0.40 | 0.36 | 0.42 | 0.40 | 0.36 | 0.42 | 0.40 | 0.36 | 0.42 |
-------------------------------------------------------------------------------------------------------
<FN>
<F1>
Amounts are expressed in nominal REAIS.
<F2>
Rates not charged during promotions.
<F3>
"MF" means "mobile fixed."
<F4>
"MM" means "mobile mobile."
</FN>
</TABLE>
The "240" and "500" Plans were developed for high volume subscribers. These
plans include a number of exempt minutes for VC1 calls to a fixed-line
telephone.
<PAGE>
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:
<TABLE>
<CAPTION>
------------------------------------------------------------------
| AREA 8 PLANS | BASIC | ECONOMIC | 100 | 200 | 500 |
|--------------------|-------|----------|-------|-------|--------|
| <S> | <C> | <C> | <C> | <C> | <C> |
| EXEMPT MINUTES | 0 | 0 | 100 | 200 | 500 |
|--------------------|-------|----------|-------|-------|--------|
| RESIDENCES <F1> | 41.51 | 0.00 | 0.00 | 0.00 | 0.00 |
|--------------------|-------|----------|-------|-------|--------|
| SUBSCRIPTIONS <F1> | 30.83 | 27.00 | 54.00 | 80.00 | 150.00 |
|--------------------|-------|----------|-------|-------|--------|
| VC1 MF <F1><F2> | 0.36 | 0.32 | 0.31 | 0.29 | 0.22 |
|--------------------|-------|----------|-------|-------|--------|
| VC1 MM <F1><F3> | 0.46 | 0.42 | 0.31 | 0.29 | 0.22 |
|--------------------|-------|----------|-------|-------|--------|
| VC1 MM (OTHER | | | | | |
| OPER.) <F1><F3> | 0.46 | 0.42 | 0.42 | 0.42 | 0.42 |
|--------------------|-------|----------|-------|-------|--------|
| VC2 <F1> | 0.71 | 0.71 | 0.71 | 0.71 | 0.71 |
|--------------------|-------|----------|-------|-------|--------|
| VC3 <F1> | 0.81 | 0.81 | 0.81 | 0.81 | 0.81 |
|--------------------|-------|----------|-------|-------|--------|
| DSL1 <F1> | 0.36 | 0.36 | 0.36 | 0.36 | 0.36 |
|--------------------|-------|----------|-------|-------|--------|
| DSL2 <F1> | 0.40 | 0.40 | 0.40 | 0.40 | 0.40 |
|--------------------|-------|----------|-------|-------|--------|
| AD <F1> | 0.57 | 0.57 | 0.57 | 0.57 | 0.57 |
------------------------------------------------------------------
<FN>
<F1>
Amounts are expressed in nominal REAIS.
<F2>
"MF" means "mobile fixed."
<F3>
"MM" means "mobile mobile."
</FN>
</TABLE>
Prepaid service rates are charged by the Subsidiaries in accordance with the
following schedule:
<TABLE>
<CAPTION>
TYPE OF RATE TYPE OF CALL SCHEDULE (1) RATE (2)
------------ ------------ ------------ --------
<S> <C> <C> <C>
VC1 or VC2 From Toque Celular to any cellular Normal R$ 0.97
or fixed-line telephone in Area 7.
VC1 or VC2 From Toque Celular to any cellular Special R$ 0.48
or fixed-line telephone in Area 7.
VC1 or VC2 From Toque Celular to any Company 24h R$ 0.48
cellular telephone on any day, and
any local call on Sundays
and national holidays.
VC3 From Toque Celular to any cellular 24h R$ 1.90
or fixed-line telephone outside
of Area 7.
</TABLE>
<TABLE>
<CAPTION>
TYPE OF SERVICE RATE (3)
--------------- --------
<S> <C>
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
</TABLE>
(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.
<PAGE>
ROAMING FEES
The Company also receives revenue pursuant to roaming agreements with
other cellular service providers. See below "Description of Business--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 below "Description of
Business--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.
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 22.1% in 1999. 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%.
Other taxes on gross operating revenues include two federal social
contribution taxes, the PROGRAMA DE INTEGRACAO SOCIAL ("PIS") and the
CONTRIBUICAO PARA FINANCIAMENTO DA SEGURIDADE SOCIAL ("COFINS"), imposed on
certain telecommunications services at a combined rate of 3.65% of gross
revenues.
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, including cellular activation, to which the
ICMS had not previously been applied. The agreement also provides that the ICMS
may be applied retroactively to services rendered during the five years
preceding June 30, 1998. See below "Legal Proceedings--Litigation Related to the
Application of the ICMS."
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, Telebrasilia uses six staggered billing cycles per month,
Teleacre uses three billing cycles per month, and the remaining Subsidiaries use
one billing cycle 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 provisions for doubtful accounts were 5.5%, 6.6% and 7.4% of gross
operating revenues in 1997, 1998 and 1999, respectively. See below "Management's
<PAGE>
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations for the years ended December 31, 1997, 1998
and 1999--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 above "Description of
Business--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 above "Description of Business--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, 1999, the Company's cellular telecommunications network
covered approximately 49% and 1.6% of the area of Area 7 and Area 8,
respectively, and 82% and 35% 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 below "Description of
Business--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, 1999, the Company's cellular telecommunications network
in Area 7 consisted of 12 cellular switches, 537 base stations and 27,879 voice
channels and one national and two regional signaling transfer points. The
Company's six 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 principal
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, 1999, NBT had seven cellular switches in Manaus, Belem, Boa Vista,
Sao Luiz, Macapa, Santarem and Imperatriz and 58 base stations.
The Company continues to increase the capacity and improve the quality of
its cellular telecommunications network by building 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 an AMPS analog cellular telecommunications
service. During 1998, the Company began to supply digital service based on the
TDMA standard in the Federal District, Rondonia, Mato Grosso do Sul, Goias and
Mato Grosso and, in September 1999, in 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.
<PAGE>
Besides increasing the number of cellular platforms, in 1999 the Company
installed voicemail and prepaid platforms in the Region. As of March 13, 2000,
the Company made available a short message service ("SMS") to its subscribers,
named e-celular. SMS allows subscribers using digital cellular handsets to
receive and read messages directly on the screen of their handset. The Company
activated in 2000 a platform for SMS, based in Brasilia, to cover the entire
Region, including Area 8.
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. As a result, 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 below
"Description of Business--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
<PAGE>
to a Cellular Region. See below "Description of Business--Regulation of the
Brazilian Telecommunications Industry--Concessions and Licenses."
OTHER TELEPHONE AND WIRELESS SERVICES
Brazilian telecommunications legislation leaves room for introduction of
even more competition in the wireless telephone market. See below "Description
of Business--Regulation of the Brazilian Telecommunications
Industry--Concessions and Licenses." ANATEL has already announced its intentions
to grant licenses to mobile telephone service providers to provide Personal
Communications Services ("PCS") in the 1.8 GHz frequency range, allowing the
introduction of a third competitor to the incumbent Band A and recently
established Band B, operating in each of the areas of the Region. According to
recent ANATEL declarations, criteria are expected to be determined during the
month of July, 2000, and licenses will be granted by the end of 2000, but there
are no assurances that this schedule will be met.
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, 1999, Americel
had approximately 20% 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 240,000 fixed-line telephones in 2000 and to this end has
invested approximately R$100,000,000. 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, 1999,
Amazonia Celular's subsidiaries had approximately 344,000 subscribers and a
penetration rate of 2.4 subscribers per 100 inhabitants. It provides largely
AMPS service, with TDMA service launched only in September 1999. By the end of
1999, it had a 89.6% market share.
OTHER COMPETITION
Satellite services, which provide nationwide coverage, are available in
Brazil. Although satellite services have the benefit of covering a much greater
<PAGE>
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 facilitate telecommunications between cellular telephone users
and fixed-line telephone users, as well as among cellular telephone users, the
Subsidiaries have entered into interconnection agreements with fixed-line
service providers. The fixed-line interconnection circuits ("EILD") consist of 2
MB bundles for the interconnection of the cellular network with the Switched
Fixed Telephone System ("STFC") and for interconnection among cellular networks
(e.g. between base stations and distribution and control stations).
The Subsidiaries have entered into an EILD service contract (the "EILD
Contract") with companies that are part of fixed-line or long distance networks.
The EILD Contract is essential to the Subsidiaries' capability to provide
telecommunications between cellular and fixed-line users, since the Subsidiaries
own few interconnection circuits of their own.
In consideration for the use of the interconnection circuits of the
fixed-line network, pursuant to the EILD Contract, the Subsidiaries paid an
aggregate amount of R$25.4 million in 1999.
ROAMING AGREEMENTS
Agreements for automatic roaming have been entered into as of March 25,
1998 for terms of 3 years with all the other Band A Service Providers and with
all Band B Service Providers other than Americel, with which the Company is
prohibited from entering into such an agreement pursuant to ANATEL regulations.
The roaming agreements automatically renew for further one-year terms. The
agreements permit the Company's subscribers to use their cellular telephones on
the networks of other cellular service providers while traveling or "roaming"
outside the Region. Conversely, the Company is required to provide cellular
telecommunications 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 that participates in the Finalization Network for National
Automatic Roaming pays a monthly fee equal to R$0.10 per cellular line in
service and R$50.00 per 1,000 calls (originated or received) that involve
roaming.
The Subsidiaries have also entered into international roaming agreements
with foreign carriers that permit their subscribers to use their cellular
telephones in Argentina and Uruguay and subscribers of those carriers to use
their cellular telephones in the Region. The terms of these international
roaming agreements vary from agreement to agreement. The Company has
international roaming agreements with Gateway Providers to permit its
subscribers to have roaming services in North America, Europe, Asia, South
Africa and Australia.
EMPLOYEES
As of December 31, 1999, the Company had a total 1,705 employees (1,084
full-time, 238 trainees and 383 contract), of whom approximately 12% were
<PAGE>
employed in technical or operational positions, 64% in sales, customer service
and marketing and 24% in computing, finance and administrative support.
Approximately 29% of all full-time employees are members of state labor unions
associated with either the Federacao Nacional dos Trabalhadores em
Telecomunicacoes - Fenattel ("Fenattel") or the Federacao Interestadual dos
Trabalhadores em Telecomunicacoes - Fittel ("Fittel"). The process of
negotiating the collective bargaining agreement for 1999/2000 was professional
and resulted in the overwhelming approval by the employees of the Company's
proposals.
The Company's management considers the relations of the Company with its
work force to be satisfactory. Neither the Company nor any Predecessor Company
has experienced a work stoppage that had a material effect on its operations.
The Band A Subsidiaries participate in a pension fund, FUNDACAO TELEBRAS
DE SEGURIDADE SOCIAL - SISTEL ("SISTEL"), the purpose of which is to supplement
government-provided retirement benefits. SISTEL is a multi-employer defined
benefit plan that covers the former employees of the TELEBRAS System, and the
Band A Subsidiaries are contingently liable for all of the unfunded obligations
of the plan. The Band A Subsidiaries make monthly contributions to SISTEL
currently equal to 13.5% of the salary of each employee who is a SISTEL member.
Each employee member also makes a monthly contribution to SISTEL based on age
and salary. Members of SISTEL qualify for full pension benefits after reaching
age 57, provided they have been members of SISTEL for at least ten uninterrupted
years and have been affiliated with the social security system for at least 35
years. SISTEL operates independently from the Company, and its assets and
liabilities are fully segregated from those of the Company. Employees of the
Band A Subsidiaries at the time of the privatization had the right to maintain
their rights and benefits in SISTEL in accordance with the terms in place at
that time. See Note 24 to the Consolidated Financial Statements. In January
2000, SISTEL's assets were segregated by its contributors, and various benefits
plans were developed, including a plan by the Company on behalf of the Band A
Subsidiaries. A new benefits plan is currently being elaborated, which will be
based on a contribution concept, as opposed to a benefits concept. The launch
date is set for June 2000, at which time the Company's affiliates as well as new
participants will switch to the plan.
A Duties and Salaries Plan is being finalized by the consulting firm
William Mercer. Its implementation is in July 2000. Associated with the Duties
and Salaries Plan will be a Variable Remuneration Program, with a view towards a
new approach to compensation.
There are no labor-related circumstances on the part of the Holding
Company or relevant circumstances on the part of the Company that would affect
the results stated herein.
The Subsidiaries contract with third parties for cleaning and security
services, as well as for receptionist services.
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.
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
<PAGE>
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 below "Description of
Business--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, 1999.
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
(MILLIONS OF REAIS) <F1>
<S> <C> <C> <C>
Automatic switching equipment.................. 11.0 28.5 41.4
Other equipment................................ 71.3 98.6 123.5
Real estate.................................... 6.4 1.6 0.5
Other assets <F2>.............................. 8.6 18.2 16.7
--- ---- ----
Total capital expenditures.................. 97.3 146.5 182.0
==== ===== =====
------------
<FN>
<F1>
Information is presented in constant REAIS of December 31, 1999.
<F2>
"Other Assets" does not include expenditures for concessions for Area 8
(R$60.5 millions in 1999 and R$36.4 millions in 1998).
</FN>
</TABLE>
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 subject 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
<PAGE>
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. See below
"Description of Business--Regulation of the Brazilian Telecommunications
Industry--Obligations of Telecommunications Companies."
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.
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
<PAGE>
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. The Subsidiaries have met all the monthly targets so far
and, while there can be no assurances, the Company's management believes that
the Company will keep achieving 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 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 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
<PAGE>
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 "--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 and (vi) SMS. 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
implementation of Brazil's latest economic stabilization plan (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 second largest number of seats in the coalition.
1999 was marked by difficult relations between the Federal Government and
certain state governments. In the 1998 elections for state governors, candidates
from parties allied with the President's coalition prevailed in 21 of 27 states,
including the State of Sao Paulo. Opposition candidates won in six states,
including the States of Rio de Janeiro and Rio Grande do Sul. In January 1999,
the new Governor of the State of Minas Gerais announced that his state would
suspend payments on its debt to the Federal Government for 90 days. The Governor
of the State of Rio Grande do Sul subsequently obtained a court order permitting
his state to make its debt payments into an escrow account, pending resolution
of a request of seven states to renegotiate refinancing agreements they had
reached with the Federal Government in 1997. The Federal Government responded by
seeking to withhold constitutionally-mandated transfers to the State of Minas
Gerais. The Federal Government notified certain international financial
<PAGE>
institutions that it would no longer guarantee those states' obligations to
those institutions, leading the World Bank to suspend loans to the States of
Minas Gerais and Rio Grande do Sul.
In February 1999, state governors and municipal governments began a
renegotiation of their respective refinancing agreements with the Federal
Government in order to stabilize state and municipal cashflows. By the end of
1999, all states and most municipalities had reached agreements with the Federal
Government for the refinancing of certain debt for a period of 30 years.
Throughout 1999 and during the first few months of 2000, the Federal
Government succeeded in obtaining important approvals for its long-term fiscal
reform program. Its proposal for comprehensive restructuring of the Brazilian
tax system received the approval of all legislative commissions of the CAMARA
DOS DEPUTADOS, the Brazilian House of Representatives, and was ready to be voted
on when the Federal Government proposed additional amendments to the text,
causing the process to come to a halt. On the other hand, the Federal Government
obtained a very important victory on spending cuts in the public sector, with
the approval, in May, 2000, of the Complementary Law no. 101, called the Fiscal
Responsibility Law, which imposes a series of responsibilities and budget
targets on public administrators and new criteria for public budget allocation.
On Social Security, the Federal Government has also passed a comprehensive
reform of welfare and retirement regulations, which aims at deficit reduction.
However, in October 1999, the Brazilian Supreme Federal Court found
unconstitutional the levy of social security taxes on public servants, active
and inactive. The Federal Government promptly adopted compensatory measures to
balance the public accounts through the increase in collection effectiveness and
alterations on taxation policy to some segments of the population.
The privatization process is still under way, with the upcoming sale of
federal assets in the energy and sanitation sector as well as the issuance of
concessions of PCS licenses to increase competition in the telecommunications
market. See above "Description of Business-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 at
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.
<PAGE>
The Asian financial crisis in 1998 and the ripple effects of that crisis
presented a serious challenge for Brazil. After reaching a historical high of
US$74.7 billion on April 30, 1998, Brazil's international reserves declined to
US$42.4 billion on October 31, 1998.
In November 1998, in response to continuing pressure on the REAL and the
rapid decline in the country's dollar reserves, Brazil negotiated a US$41.5
billion loan package arranged by the IMF. Acceptance of the IMF package
committed Brazil to implement a combination of spending cuts and tax increases.
Brazil received the first installment of approximately US$9.4 billion in two
disbursements. Brazil's level of international reserves stabilized following the
announcement of the support package, reaching US$44.6 billion at December 31,
1998. At year-end 1998, the Commercial Market Rate stood at R$1.2087 to US$1.00.
After some initial progress in implementing a Fiscal Stabilization Program
announced in late 1998, the Federal Government encountered difficulties in
implementing the program in Congress. 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. Both the level of international reserves
and the value of the REAL continued to decline. On January 31, 1999, Brazil's
international reserves stood at US$36.1 billion and the Commercial Market Rate
stood at R$1.9832 to US$1.00.
In the following weeks, the Federal Government had a series of legislative
successes with its efforts to implement the expense reduction and revenue
enhancement measures under its Fiscal Stabilization Program. Brazil also began
negotiations with the IMF on adjustments to the previously-agreed 1999-2001
economic program, and agreement was reached in March 1999 on new economic
targets. Brazil received a second disbursement, of approximately US$4.9 billion,
from the IMF, followed by an additional US$4.9 billion in bilateral loans under
the IMF-led support package.
After giving effect to the inflows from the IMF-led support package,
Brazil's international reserves stood at US$44.3 billion in April, 1999, and the
Commercial Market Rate stood at R$1.66 to US$1.00 on April 30, 1999. By March
2000, international reserves stood at US$39.2 billion, and the Commercial Market
Rate stood at R$1.74 to US$1.00 on March 31, 2000.
By the end of 1999, GDP grew 1.01%, thus exceeding expectations. During
the first quarter of 2000, GDP grew 1.23% compared to the fourth quarter of 1999
and 3.08% compared to the first quarter of 1999. Growth in the first semester of
2000 was fueled mainly by industry, which experienced 5.69% growth in that
period, followed by services, which grew 2.28%. Agricultural activity decreased
by 0.84%. Brazil's current accounts deficit diminished in 1999, for the first
time since 1992, and closed the year at US$24.4 billion, compared to a 1998
year-end deficit of US$35 billion. At the end of the first quarter of 2000, the
current accounts deficit stood at US$4 billion, compared to a deficit of US$5.2
billion for the first quarter of 1999, representing a 22% reduction.
Foreign direct investment net inflows stood at US$17 billion by year-end
1997, US$25 billion by year-end 1998, and US$30 billion by year-end 1999,
representing proportional growth of 47% in 1998 and 20% in 1999. The first
quarter of 2000 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, when currency exchange volatility
had greatly reduced, the Selic rate was down to 19.03% and has since kept
decreasing, reaching 18.31% on June 15, 2000.
<PAGE>
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 American 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 raise in interest rates in industrialized countries, especially the
United States.
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
above "Description of Business--Brazilian Economic Environment."
The following table sets forth the rate of Brazilian inflation, as
measured by the INDICE GERAL DE PRECOS - MERCADO (the General Price Index -
Market or "IGP-M"), and the devaluation of the Brazilian currency against the
U.S. dollar during the periods indicated. The 1999 inflation index was
significantly impacted by the devaluation of the REAL in the beginning of the
year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
(PERCENTAGES)
<S> <C> <C> <C>
Inflation (IGP-M)............................... 7.7 1.8 20.1
Devaluation (Brazilian currency vs. US$)....... 7.4 8.3 48.0
</TABLE>
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. See above "Description of Business--Brazilian
Economic Environment." During the first quarter of 1999, inflation, as measured
by the IGP-M, amounted to 7.4% and the devaluation of the REAL against the U.S.
dollar was 42%. The devaluation, which peaked at 70.8% and finished the year at
48%, drove the IGP-M to a five-year high of 20.1% for 1999. The first quarter of
2000 showed an inflationary increase of 1.75%, reflecting growth, while the REAL
recovered 2.3% of its value against the US 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.
<PAGE>
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.
ITEM 2. DESCRIPTION OF PROPERTY
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, 1999, the Company had 19
cellular switches and 595 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 3. 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. Recently, the Supreme 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
<PAGE>
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. The Band B
Subsidiary has not been involved in any such lawsuit. 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 has made provisions totaling
approximately R$3.6 million for the application of the ICMS on activation fees
from the effective date of the agreement to December 31, 1999. The Company's
<PAGE>
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.
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. KPMG was dismissed from
the lawsuit by agreeing to a declaration that the account receivable should have
been assigned to the Company and not to Tele Centro Sul. The last action was
issued in February, 2000, when the court ordered the defendants to present
statements in response to documents submitted by the Company.
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. The last action for
both suits was in May 2000, when the court ordered each of the defendants to
present statements in response to documents submitted by Tele Centro Sul.
All three lawsuits have been joined before the same court as they
originate from the same issue concerning the TELEBRAS Loans. The Company's
lawyers believe that the chances of obtaining a favorable outcome of the dispute
are good.
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 24 to the Consolidated Financial
Statements.
ITEM 4. CONTROL OF REGISTRANT
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, 1999, BID S.A., a
subsidiary of Splice, owned 56.06% 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.
<PAGE>
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.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
COMMON OUTSTANDING
NAME OF OWNER SHARES OWNED COMMON SHARES
------------------- -------------- ---------------
<S> <C> <C>
BID S.A....................................... 69,723,351,125 56.06%
All directors and executives officers as a
group......................................... 7 0%
</TABLE>
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.
ITEM 5. NATURE OF TRADING MARKET
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,
1999, the Holding Company had approximately 2.5 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.
<TABLE>
<CAPTION>
NOMINAL REAIS PER 1000 PREFERRED SHARES
---------------------------------------
HIGH LOW
---------------------- ----------------
<S> <C> <C>
Third quarter 1998 (Beginning in
September 21, 1998) R$0.358 R$0.269
Fourth quarter 1998 R$1.229 R$1.130
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
</TABLE>
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, 1999 there were approximately 78 thousand beneficial owners of ADSs. The
following table sets forth the reported high and low closing sales prices for
the ADSs on the NYSE for the period indicated.
<TABLE>
<CAPTION>
U.S. DOLLARS PER ADS
----------------------
HIGH LOW
----------- ----------
<S> <C> <C>
Fourth quarter 1998 (Beginning in
November 16, 1998) US$5.9375 US$2.000
First quarter 1999............................ US$3.6 US$2.375
Second quarter 1999........................... US$4.4388 US$2.438
Third quarter 1999............................ US$3.7500 US$3.125
Fourth quarter 1999........................... US$7.0633 US$3.313
</TABLE>
The common shares and preferred shares of Telebrasilia Celular traded on
the Sao Paulo Stock Exchange from May 18, 1998 to July 30, 1999. On August 30,
<PAGE>
1999, Telebrasilia shares began trading on the Sociedade Operadora do Mercado de
Ativos (SOMA), the over-the-counter market. NBT's shares do not trade on any
stock market, as it is a closely held corporation.
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, 1999, the aggregate market capitalization of the 487
companies listed on the Sao Paulo Stock Exchange was approximately R$408.8
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
<PAGE>
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 1999, the combined daily trading volumes on the Sao
Paulo Stock Exchange and the Rio de Janeiro Stock Exchange averaged
approximately R$371.1 million. In 1999, 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 below
"Exchange Controls and Other Limitations Affecting Security Holders." The CVM
<PAGE>
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 proposal for an amendment of the Brazilian Corporation Law is currently
being discussed in Congress. Although there are no assurances, the proposal is
expected to pass in the near future. The amendment consists mostly of
dispositions to increase protection for minority shareholders.
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 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
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.
<PAGE>
The 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 certificate
of registration (a "Certificate of 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 Certificate of 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 Certificate of 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 above "Nature of Trading Market--Regulation of
Brazilian Securities Markets--Depositary Securities Programs Regulations" and
See below "Taxation--Brazilian Tax Considerations."
A Certificate of 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
below "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.
Although Resolution 2,689 has not changed the rules regarding the Annex V
Regulations, which refer to ADS programs, it provided for a mandatory transfer
of investment registration under Annex IV to registration under Resolution
1,289, setting June 30, 2000 as the deadline. 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 below "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
<PAGE>
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 Certificate of 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.
ITEM 7. 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 Preferred Shares or ADSs.
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 ADSs to another non-Brazilian holder are not subject to Brazilian tax.
Neither the deposit of Preferred Shares in exchange for ADSs nor the withdrawal
of Preferred Shares upon cancellation of ADSs is subject to Brazilian tax.
Non-Brazilian holders are not subject to tax in Brazil on gains realized
on dispositions of Preferred Shares outside Brazil to other non-Brazilian
holders.
Gains realized by non-Brazilian holders on dispositions of Preferred
Shares in Brazil or in transactions with Brazilian residents may be free of
Brazilian tax, taxed at a rate of 10% or taxed at a rate of 15%, depending on
the circumstances. According to the Annex V Regulations, gains on the
disposition of Preferred Shares obtained through transactions on Brazilian stock
<PAGE>
exchange market are not taxed in Brazil, provided that disposition and
remittance of the proceeds abroad are accomplished within five business days
after the sale. After this period, the aforesaid gains will be taxed at a rate
of 10%. Dividends and interest on stockholder's equity are taxed at rates of 0%
and 15% respectively.
Until March, 2000, gains on the sale or exchange of duly-registered
investments under the Annex IV Regulations were not subject to Brazilian tax if
such sale or exchange occurred on a Brazilian stock exchange. As of March 2000,
the Annex IV Regulations in question were revoked by Resolution 2,689. As a
result, institutional foreign investors must adapt their operations to the new
regulations by June 30, 2000. The new taxation shall be as follows: (i) gains
realized through transactions on Brazilian stock exchanges are subject to tax at
a rate of 0%, 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 gains are taxed at a rate of 10%, (ii)
gains realized through off-exchange transactions in Brazil or with Brazilian
residents are generally subject to tax at a rate of 15%, (iii) dividends are
taxed at a rate of 0% and (iv) the distribution of interest on stockholder's
equity is subject to tax at a rate of 15%. Brazil's tax treaties do not grant
relief from taxes on gains realized on sales or exchanges of preferred shares.
Any gains realized by a non-Brazilian holder upon the redemption of
Preferred Shares will be treated as gains from the disposition of such Preferred
Shares to a Brazilian resident occurring off of a stock exchange and will
accordingly be subject to tax at a rate of 15%.
Gain is measured by the difference between the amount in Brazilian
currency realized on the sale or exchange and the acquisition cost of the shares
sold, measured in Brazilian currency without any correction for inflation; the
acquisition cost of shares registered as an investment with the Central Bank is
calculated on the basis of the foreign currency amount registered with the
Central Bank.
There can be no assurance that the current preferential treatment for
holders of ADSs will be maintained.
Any exercise of preemptive rights relating to the Preferred Shares or ADSs
will not be subject to Brazilian taxation. Gains on the sale or assignment of
preemptive rights relating to the Preferred Shares will be treated differently
for Brazilian tax purposes depending on (i) whether the sale or assignment is
made by the Depositary or the investor and (ii) whether the transaction takes
place on a Brazilian stock exchange. Gains on sales or assignments made by the
Depositary on a Brazilian stock exchange are not taxed in Brazil, but gains on
other sales or assignments may be subject to tax at rates up to 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 below "Management's Discussion and Analysis of
Financial Condition and Results of Operations--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 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.
<PAGE>
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 above
"Exchange Controls and Other Limitations Affecting Security Holders."
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, a second, temporary tax that applies to the
removal of funds from accounts at banks and other financial institutions (the
"CPMF tax") has been imposed on distributions by the Holding Company in respect
of ADSs at the time such distributions are converted into U.S. dollars and
remitted abroad by the Custodian. The CPMF tax will be in effect until June
2002, unless its term is extended, and such tax is imposed at a rate of 0.38%
from June 1999 until June 2000 and at a rate of 0.30% from June 2000 until June
2002.
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
ITEM 8. SELECTED FINANCIAL DATA
BACKGROUND
The selected financial information presented below should be read in
conjunction with the Consolidated Financial Statements and the notes thereto.
The 1999 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.
The following paragraphs discuss some important features of the
presentation of the selected financial information and the Consolidated
Financial Statements. These features should be kept in mind in evaluating the
selected financial information and in reading "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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 30
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, 1999 and 1998, divisional equity as of
December 31, 1997, net income for the years ended December 31, 1999 and 1998,
and income before interest income, unallocated interest expense and taxes for
the year ended December 31, 1997.
PRESENTATION OF 1998 INCOME STATEMENT
The consolidated income statement 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 AND 1999
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, 1999 purchasing
power, all in accordance with Brazilian GAAP using the integral restatement
method (CORRECAO MONETARIA INTEGRAL). The Company used the 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 below
"Management's Discussion and Analysis of Financial Condition and Results of
<PAGE>
Operations--Effects of Changes in Presentation of Financial Statements in 1998
and 1999." 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
Income have been allocated to other net operating income in the Consolidated
Statements of Income and the "Income Statement Data" presented below. See Note
2(c) to the Consolidated Financial Statements.
The Consolidated Financial Statements as of December 31, 1997 and 1999 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 year 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 year ended December 31, 1999, have been
restated into currency of December 31, 1999 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 above
"Description of Business--Historical Background" and See Note 2(b) to the
Consolidated Financial Statements.
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 below "Management's Discussion and Analysis of Financial Condition
and See Results of Operations--Effects of Changes in Presentation of Financial
Statements in 1998 and 1999."
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$19.3 million compared to the Company's historical divisional
equity. See Note 26 to the Consolidated Financial Statements. The amount of
distributable retained earnings of the Holding Company includes retained
earnings allocated to the Holding Company in the Breakup of TELEBRAS.
For 1995, 1996 and 1997, the Consolidated Financial Statements present the
financial condition and revenues and expenses of the cellular telecommunications
<PAGE>
business of the Predecessor Companies, and "minority interests" reflect the
interest in the Predecessor Companies of shareholders other than TELEBRAS. As of
December 31, 1999, minority shareholders directly and indirectly owned 13.2%,
10.5%, 8.1%, 4.0%, 8.7%, 6.0% and 5.0% of the share capital of Telebrasilia,
Telegoias, Telemat, Telems, Teleron, Teleacre and NBT, respectively.
<PAGE>
Selected Financial Information
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(THOUSANDS OF REAIS, EXCEPT PER-SHARE DATA)<F1>
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
BRAZILIAN GAAP
Net operating revenue 185,461 358,280 526,361 579,714 606,320
Cost of services 71,649 125,611 220,659 236,765 296,961
-------
Gross profit 113,812 232,669 305,703 342,949 309,359
Operating expenses:
Selling expenses 10,070 18,271 59,191 90,124 107,858
General and administrative
expenses 16,143 26,357 45,305 42,099 58,698
Other net operating income
expense 1,828 3,573 4,338 867 12,751
------
Operating income before interest 89,787 191,614 205,544 209,859 130,052
Allocated interest expense........ 1,777 4,319 4,473
Net interest expense <F2>......... 63,401 43,328
------
Operating income before interest
income and Unallocated
interest expense............... 87,649 187,295 201,071
Operating income.................. 146,458 86,724
Net nonoperating expense.......... -- 60 18,713 5,507
Employees' profit share 76 268 340 1,156 1,697
--- --- ----- -----
Income before interest income,
unallocated interest
Expense, taxes and minority
interests...................... 87,573 187,027 200,671
Income before income taxes and
minority interests <F2>........ 126,589 79,520
Income tax and social
contribution.................... 36,567 27,155
------ ------
Income before minority interests.. 87,573 187,027 200,671 90,022 52,365
Minority interests................ 7,731 19,075 27,993 21,897 10,487
------ ------ ------ ------
Reversal of interest on own
capital......................... -- -- -- 83,445 48,696
Income before interest income,
unallocated interest
expense and taxes <F2>......... 79,842 167,951 172,679
====== ======= =======
Net income........................ 151,570 90,574
======= ======
U.S. GAAP
Income before interest income,
unallocated interest
expense and taxes <F2>......... 171,245 178,660
======= =======
Net income........................ 149,156 29,632
======= ======
Net income per 1,000 shares
outstanding (REAIS)............ 0.45 0.08
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
BALANCE SHEET DATA: (THOUSANDS OF CONSTANTREAIS) <F1>
<S> <C> <C> <C> <C> <C>
BRAZILIAN GAAP
Property, plant and equipment,
net 382,216 628,698 693,935 795,132 904,515
Total assets 409,608 688,997 828,756 1,113,421 1,654,470
Loans and financing 45,489 64,096 47,930 51,164 130,810
Divisional equity 293,061 483,874 617,972 - --
Shareholders' equity 726,807 1,119,243
U.S. GAAP
Property, plant and equipment, net 598,016 648,978 745,126 861,846
Total assets 668,441 798,635 1,084,747 1,297,440
Loans and financing 62,746 47,490 51,164 130,810
-------
Divisional equity 465,620 592,194 -
Shareholders' equity 689,733 740,891
-------
------------
<FN>
<F1>
Information is presented in constant REAIS of December 31, 1999.
<F2>
For 1995, 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. See Note 2(b) to the Consolidated Financial
Statements.
</FN>
</TABLE>
<PAGE>
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 below "Management's Discussion and
Analysis of Financial Condition and Results of Operations--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. See above "Description of
Business--Brazilian Economic Environment." On June 21, 2000, the Commercial
Market Rate was R$1.8121 to US$1.00 and the Noon Buying Rate was R$1.8150 to
US$1.00.
The following table sets forth the period-end, average, high and low
Commercial Market Rates (through February 21, 1995) and Noon Buying Rates (from
February 22, 1995), expressed in REAIS per U.S. dollar, for the periods
indicated.
<TABLE>
<CAPTION>
AVERAGE FOR
PERIOD PERIOD-END PERIOD <F1> HIGH LOW
---------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C>
1995............................... 0.9722 0.9228 0.9722 0.8450
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 (through May 31, 2000)........ 1.8270 1.7844 1.8560 1.7230
------------
<FN>
<F1>
Average of the rates on the last day of each month in the period.
SOURCE: Central Bank through February 21, 1995; Federal Reserve Bank of
New York thereafter.
</FN>
</TABLE>
<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 83.8%, 96.0%,
91.9%, 91.3%, 94.0% and 81.4% of the total share capital of Telegoias, Telems,
Telemat, Teleron, Teleacre and Telebrasilia, 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 "Selected Financial Data."
EFFECTS OF CHANGES IN PRESENTATION OF FINANCIAL STATEMENTS IN 1998 AND 1999
There are three significant differences in presentation between the
Consolidated Financial Statements of the Company for 1997, and for 1998 and
1999. Each of these differences should be taken into account in comparing
financial condition and results of operations for that period.
o 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 and 1999, the
Consolidated Financial Statements reflect the operations of the Subsidiaries
as fully independent companies. For 1997, the Consolidated Financial
Statements reflect the cellular operations of the Predecessor 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.
In preparing financial statements for the years prior to 1998, it was not
possible to determine the amount of the Predecessor Companies' cash and
nonspecific debt that should be allocated to the cellular operations, and
there was no shareholders' equity specifically attributable to the cellular
operations. As a result, the presentation of the Consolidated Financial
Statements is different for 1997 than for 1998 and 1999. In particular, for
1997 the statement of revenues and expenses does not include interest income
or taxes and includes only the allocable portion of interest expense, and it
accordingly does not present net income. See above "Selected Financial Data"
and See Note 2(b) to the Consolidated Financial Statements.
o 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 and 1999, the Consolidated Financial Statements reflect
the consolidated financial condition and results of operations of the Holding
Company and the Band A Subsidiaries.
<PAGE>
o 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 year then ended,
as well as the fully indexed financial statements for all previous periods
and for the year ended December 31, 1999, have been restated into currency of
December 31, 1999 purchasing power. See "Selected Financial Data" and Note
2(c) 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 year ended
December 31, 1998 have been restated in constant REAIS of December 31, 1999
purchasing power as measured by the IGP-M index during 1999 (which produces a
correction of 20.1% of all amounts in 1998). Because the correction factor
applied to 1998 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 and 1999 on the
Company's Consolidated Statements of Income. 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
"Description of Business" 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 above "Description of
Business--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 above "Description of Business--Brazilian Political Environment"
and See above "Description of Business--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 above "Description of Business--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, 1999, the Company had R$62.7
million of indebtedness denominated in U.S. dollars, which constituted all of
the Company's foreign currency indebtedness. Of this amount, R$12 million
represents financing for equipment imports. 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
<PAGE>
plus 6%. Payment of the TELEBRAS Loans has not resumed, and steps are being
taken to resolve the situation. See above "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 not hedged
its foreign currency exposure existing as of December 31, 1999. 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, 1999, substantially all of the Company's interest-bearing
liabilities, including the TELEBRAS Loans, 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.
In May 2000, the Company entered into a Zero Coupon Euro Commercial Paper
Program of US$200 million. The first issuance of the program amounted to US$110
million face amount, drawn on May 23, 2000, with a remuneration of 9.0% to the
investor and is due 360 days after the date of issuance. In order to reduce its
foreign currency exposure, the Company has hedged the entire amount of the
issuance.
<PAGE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
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, 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, %CHANGE
-------------------------- -----------------------
1997 1998 1999 1997-1998 1998-1999
------ ------ ------ ----------- -----------
(MILLIONS OF REAIS) <F1>
<S> <C> <C> <C> <C> <C>
Net operating revenue........ 526.4 579.7 606.3 10.1 4.6
Cost of services............. 220.6 236.7 297.0 7.3 25.4
Gross profit ................ 305.8 343.0 309.4 12.2 (9.8)
Operating expenses:
Selling expenses............. 59.2 90.1 107.9 52.3 19.7
General and administrative
expenses................ 45.3 42.2 58.7 (7.1) 39.4
Other net operating income
(expense)............... 4.3 (0.8) (12.8) n.m. 1,370.7
Total 100.2 133.1 179.3 32.9 34.7
Operating income before
interest..................... 205.5 209.8 130.1 2.1 (38.0)
Allocated interest expense... 4.4 -- -- -- --
Net interest expense<F2>..... -- 63.4 43.3 -- (31.7)
Operating income <F3>........ 201.0 146.4 86.7 (27.2) (40.8)
Net non-operating expense.... 0.1 18.7 5.5 n.m (70.6)
Employees' profit share...... 0.4 1.2 1.7 240.3 46.8
Income before taxes and
minority interests <F2>.... 200.7 126.6 79.5 -- (37.2)
Income tax and social
contribution............... -- 36.5 27.1 n.m. (25.7)
Minority interests........... (28.0) (21.9) (10.5) 21.8 (52.1)
Reversal of interest on own
capital -- 83.5 48.7 -- (41.6)
Income before interest
income, unallocated
interest expense and taxes. 172.7 -- -- --
Net income................... -- 151.6 90.6 (40.2)
------------
<FN>
n.m.: not meaningful
<F1>
Information is presented in constant REAIS of December 31, 1999. Columns
may not add due to rounding.
<F2>
For 1997, prior to the effective creation of the Subsidiaries on January
5, 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.
<F3>
For 1997, information presented reflects operating income before interest
income and unallocated interest expense. See Note 2(b) to the Consolidated
Financial Statements.
</FN>
</TABLE>
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) prepaid handset
sales 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 above
"Description of Business--Sources of Revenue--Subscriber Rates."
<PAGE>
Details of Company Revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, %CHANGE
-------------------------- -----------------------
1997 1998 1999 1997-1998 1998-1999
------ ------ ------ ----------- -----------
(MILLIONS OF REAIS) <F1>
<S> <C> <C> <C> <C> <C>
Gross Operating revenue:
Usage charges.............. 312.4 346.0 335.8 10.7 (2.9)
Monthly subscription
charges.................... 169.8 176.3 192.2 3.8 9.0
Network usage charges...... 130.7 170.7 179.2 31.6 5.0
Activation fees............ 37.7 26.1 3.7 (31.0) (85.7)
Prepaid handsets/cards..... - - 53.3 -- --
Other...................... 10.6 7.7 13.6 (27.3) 76.0
------
Gross operating revenue.... 660.2 726.7 777.9 10.1 7.0
Value-added and other
indirect taxes ............ (133.8) (147.0) (171.6) 9.8 16.7
------
Net Operating Revenue........ 526.4 579.7 606.3 10.1 4.6
======
------------
<FN>
<F1>
Information is presented in constant REAIS of December 31, 1999. See Note
2(c) to the Consolidated Financial Statements. Columns may not add due to
rounding.
</FN>
</TABLE>
Net operating revenues increased by 4.6% in 1999 and 10.1% in 1998. 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 27.7% to 443,537 subscribers in 1998 from 347,300 in 1997. In 1999,
the average number of subscribers increased to 621,043 or by 40.0% from 1998.
The growth in revenues in 1998 and 1999 is due in part to a reduction in, and in
some cases elimination of, in 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. The increase in supply of
telecommunications services occasioned by the introduction of competition into
the Region in November 1997 has tended to reduce the rate of subscriber growth
as well as prices. As a result, management expects the rate of revenue growth to
stabilize.
USAGE CHARGES. Revenues from usage charges increased by 10.7% in 1998 from
1997 and decreased by 2.9% in 1999 from 1998. The increase in 1998 principally
reflected a 20.9% increase in the total outgoing domestic traffic (from 482.1
million minutes in 1997 to 583.1 million minutes in 1998), offset in part by a
significant decrease in outgoing international calls as the Company implemented
various practices restricting such calls in an effort to reduce fraud-related
losses. Excluding revenues from international calls, revenues from usage charges
increased 16.9% to R$343.0 million in 1998 from R$293.4 million in 1997.
Revenues from usage charges on international calls fell from approximately R$19
million in 1997 to R$2.4 million in 1998, reflecting reductions in fraudulent
international long-distance calling, particularly in Telegoias. See above
"Description of Business--Fraud Detection and Prevention." The increase in 1998
was also offset by a reduction in nominal rates at the end of 1997 and again in
early 1998. 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.
MONTHLY SUBSCRIPTION CHARGES. Revenues from monthly subscription payments
increased by 3.8% in 1998 from 1997 and by 9.0% in 1999 from 1998. The growth in
revenues in 1998 was due to the 27.7% increase in the average number of
subscribers, which was almost entirely offset by a 25.6% decrease in rates. The
growth in revenues in 1999 was due mainly to a 24.3% increase in the average
number of contract customers.
NETWORK USAGE CHARGES. Revenues from network usage charges increased by
31.6% in 1998 from 1997 and by 5.0% in 1999 from 1998. The increase in 1998 was
due to growth in the volume of calls to the Company's subscribers originating
outside the Company's network, which grew by 20.9% from 520.3 million minutes in
1997 to 681.3 million minutes in 1998. From 1998 to 1999, traffic increased by
73.7%, from 681.3 million minutes to 1.183 billion minutes. 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,
<PAGE>
thereby diminishing the interconnection fees to be paid (fixed-line network
expenses). See above "Description of Business--Sources of Revenue--Network Usage
Charges."
ACTIVATION FEES. Revenues from activation fees decreased by 31.0% in 1998
from 1997 and by 85.7% in 1999 from 1998. The decrease in 1998 was the result of
a significant decrease in average activation charges, which decreased from R$327
in 1997 to R$110 in 1998 as a result of reduced-activation-fee sales promotions
in the months of May, June, August and September, and the complete suspension of
activation fees beginning in October 1998. 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 continuation of the strategy by the Subsidiaries to enlarge their
subscriber bases, by way of promotions reducing or waiving activation fees.
MERCHANDISE SALES. As of May 1999 the Band A Subsidiaries begin to link
cellular handset sales with the provision of prepaid cellular telecommunications
services. See above "Description of Business--Sources of Revenue--Subscriber
Rates."
OTHER. 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,
decreased by 27.3% in 1998 from 1997 and increased by 76.0% in 1999 from 1998.
The decline from 1997 to 1998 was due principally to the significant reduction
in charges for service transfers, from R$300 to R$30, the reduction of charges
for some additional services and the elimination of charges for others. 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 were R$6.8 million.
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, and 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 20.3% of gross operating revenues in 1997, 20.2% in 1998 and 22.1%
in 1999. 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 above "Legal
Proceedings--Litigation Related to the Application of the ICMS" and Note 24 to
the Consolidated Financial Statements.
<PAGE>
COST OF SERVICES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, % CHANGE
-------------------------- -----------------------
1997 1998 1999 1997-1998 1998-1999
------ ------ ------ ----------- -----------
(MILLIONS OF REAIS) <F1>
<S> <C> <C> <C> <C> <C>
Cost of services:
Depreciation and
amortization.............. 53.6 72.8 109.3 36.0 50.1
Materials and services.... 69.0 65.1 71.8 (5.8) 10.2
Fixed-line network
expenses.................. 72.6 63.9 25.4 (12.0) (60.2)
Fistel fees............... 11.4 16.3 27.4 43.7 67.3
Personnel................. 4.7 7.6 8.2 61.7 8.2
Cost of Goods Sold........ - - 46.3 -- --
-----
Other..................... 9.3 11.0 8.6 18.3 (22.3)
----- ----- -----
Total..................... 220.6 236.7 297.0 7.3 25.4
===== ===== =====
------------
<FN>
<F1>
Information is presented in constant REAIS of December 31, 1999. See
Note 2(c) to the Consolidated Financial Statements. Columns may not
add due to rounding.
</FN>
</TABLE>
Cost of services increased by 25.4% in 1999 from 1998 and by 7.3% in 1998
from 1997. The increase in 1999 resulted principally from an increase in
depreciation and amortization costs related to the growth of the Company's
network and in costs due to the acquisition of handsets, which increase was
partially offset by a decrease in amounts paid for the lease of available
capacity on inter-connecting circuits.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
50.1% in 1999 from 1998 and by 36.0% in 1998 from 1997. The increase reflects
expansion of the Company's network and 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%.
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 expense decreased by 5.8% in 1998
from 1997 and increased by 10.2% in 1999 from 1998. The decrease in 1998 was due
primarily to a decrease of 83%, from R$17.9 million in 1997 to R$3.1 million in
1998, in payments to EMBRATEL in connection with international long-distance
service, principally as a result of reductions in fraudulent international
long-distance calling, particularly in Telegoias. See above "Description of
Business--Fraud Detection and Prevention." This decrease was partially offset by
an increase in the volume of outgoing traffic due to the growth of the Company's
subscriber base. The increase in subscriber base in 1999 was strongly impacted
by the launch of prepaid services and caused a 21.8% increase in third party
services accounts, including network usage charges, fixed telecommunications
costs and technical operational services.
COST OF GOODS SOLD. With the introduction of prepaid cellular service on
May 31, 1999, the cost of handsets accounted for 15.6% of cost of services.
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 60.2% in 1999 from 1998 and by 12.0% in 1998 from 1997. Such
expenses accounted for 8.6% of total costs of services in 1999 compared to 27%
in 1998. The decrease in 1998 was due to ANATEL-mandated discounts in such lease
payments, which initially ranged from 5% to 25% (in March 1998) and were
subsequently increased to a level ranging from 15% to 48% (in May 1998), with
the higher discounts applicable to higher-volume usage of circuits and available
capacity. The decrease in 1999 is due not only to the expansion of the Company
network but also to further reductions in fixed-line interconnection circuit
<PAGE>
lease payments negotiated with the Predecessor Companies. See above "Description
of Business--Operating Agreements--Interconnection Agreements."
FISTEL FEES. Fees payable to finance the FUNDO DE FISCALIZACAO DAS
TELECOMUNICACOES ("Fistel") were R$11.4 million, R$16.3 million and R$27.4
million in 1997, 1998 and 1999, 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 67.3% increase in 1999 was due
principally to the expansion of the Company's subscriber base, which experienced
growth of 58.0% for that period, and to the installation of new base stations.
PERSONNEL. Personnel expenses increased during the period, rising from
R$4.7 million in 1997 to R$7.5 million in 1998 and to R$8.2 million in 1999.
These increases were due principally to increases in the number of employees,
which has kept pace with the growth in the business and in 1998 reflected the
need to create a business infrastructure (such as accounting, finance,
information technology, sales and planning departments) in connection with the
establishment of the Holding Company and the Subsidiaries following the Breakup.
The increase in 1998 also reflects salary increases instituted in order to
attract and maintain engineers and other personnel in an increasingly
competitive environment. This trend continued in 1999 as personnel expenses
relating to services increased by 8.2% from 1998. The increase was mainly due to
an expansion in the Company's work force during this period.
OTHER. Other costs of services include rents for 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
increased by 18.3% in 1998 from 1997 and decreased by 22.3% in 1999 from 1998.
The increase in 1998 reflected the expansion of the Company's network and the
growth of the business. The decrease reflects the renegotiation of contracts for
the expansion of the Company's network.
OPERATING EXPENSES
SELLING EXPENSES. Selling expenses increased 19.7% in 1999 from 1998 and
52.3% in 1998 from 1997. 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 1997 to 1998, selling
expenses increased 52.3%. The increase in 1998 resulted primarily from a
significant increase in marketing and promotional efforts, including advertising
campaigns, the establishment of a network of independent distributors and the
opening of new stores. An increase in the commission paid to independent
distributors also contributed to the growth of selling expenses in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 7.1% in 1998 from 1997 and increased by 39.4% in 1999 from 1998. The
decrease in 1998 resulted primarily from a 33.9% decrease in third-party
expenses in 1998 compared with allocated third-party expenses for general and
administrative services provided by the Predecessor Companies in 1997. This
decrease was partially offset by increases in personnel expenses, which
reflected new hirings to perform general and administrative functions (including
information technology, accounting, auditing, legal and planning) previously
performed by the Predecessor Companies and increased depreciation expenses
(relating principally to the depreciation of real property acquired in
connection with the Company's new headquarters and other administrative
operations). The 1999 increase is due primarily to the increase in corporate
personnel in the Holding Company. Due to the increase, personnel costs accounted
for 25.1% and 35.9% of total costs in 1998 and 1999, respectively, with growth
of 131.6% arising from a 47.9% increase in the number of employees as a result
of the establishment of NBT. Third party services also accounted for significant
growth in expenses of the Company during this period, increasing by 31.2%.
<PAGE>
OTHER NET OPERATING INCOME (EXPENSE). The Company recorded other net
operating expense of R$12.8 million in 1999, compared with R$0.8 million in 1998
and other net operating income of R$4.3 million in 1997. 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$5.4 million, corresponds to 1/60th of the premium.
See Notes 3(g) and 32 to the Consolidated Financial Statements. Other net
operating expenses in 1998 resulted primarily from R$3.4 million in provisions
for contingencies (principally ICMS litigation) and R$2.2 million in research
and development expenses, which were partially offset by R$4.7 million in fines
collected from customers.
NET INTEREST EXPENSE
Net interest expense of R$63.4 million in 1998 and R$43.3 million in 1999
resulted primarily from the payment of dividends in the form of interest on own
capital in the amount of $R83.4 million in 1998 and R$48.7 million in 1999. See
below "Management's Discussion and Analysis of Financial Condition and See below
"Management's Discussion and Analysis of Financial Condition--Liquidity and
Capital Resources." The Company recorded interest income of R$29.3 million in
1998 and R$38.9 million in 1999, 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 1998 and 1999 as well
as the receipt by the Company of R$18.6 million in connection with the Breakup
of TELEBRAS. Such interest income was partially offset by R$8.8 million in 1998
and R$34.2 million in 1999 in interest expense.
NET NON-OPERATING EXPENSE
Write-offs of property, plant and equipment and gains and losses on the
sale of property, plant and equipment are recorded as non-operating income and
expense. The Company recorded net non-operating expense of R$18.7 million in
1998 and R$5.5 million in 1999. Non-operating expense in 1998 and 1999 resulted
primarily from write-offs in the amounts of R$17.8 million and R$5.6 million,
respectively, of certain analog transmission equipment that has become obsolete
as a result of increasing demand for digital telecommunications services.
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$0.4 million, R$1.2 million and R$1.7 million in 1997, 1998 and 1999,
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 13.9% of income before interest income, unallocated
expense, taxes and minority interests in 1997 and 12.6% and 10.4% of income
before minority interests in 1998 and 1999, respectively. The variations in 1998
were due to variations in net income at the Subsidiaries, which have varying
levels of minority shareholder interest among them.
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$97.3 million, R$146.5 million and R$182.0 million in 1997, 1998 and
1999, respectively. These expenditures related primarily to increasing network
capacity, coverage and digitalization. See above "Description of
Business--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
<PAGE>
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 1999, the Holding Company distributed a total of
R$36.5 million (R$72.3 million in 1998) in the form of interest on own capital.
See Note 26(c) to the Consolidated Financial Statements.
Capital expenditures were financed principally with internally generated
cash throughout the period, together with financing in national currency, mainly
R$66.4 million in December 31, 1999 from the National Bank for Economic and
Social Development and financing of R$12.0 million in foreign currency. On May
23, 2000, the Company issued US$110 million face amount under its US$200 million
Zero Coupon Euro Commercial Paper Program. The proceeds of the issuance will be
used for the expansion and modernization of the Company's telecommunications
plant. See above "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Foreign Exchange and Interest Rate Exposure" and Note
33 to the Consolidated Financial Statements.
As of December 31, 1999, the Company had total investment commitments of
R$300 million in 2000 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 2000
capital expenditures will be dedicated to expanding the capacity and coverage of
the Company's network and digitizing the network in all areas.
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 participates in a multi-employer defined benefit plan that
covers the former employees of the TELEBRAS System, and the Company is
contingently liable for the unfunded obligations of the plan. See Notes 25,
30(b) and 31(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 respects 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$149.2 million for 1998 and
R$29.6million for 1999. 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 30(n) to the Consolidated Financial Statements.
<PAGE>
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.
ITEM 9A. 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 above "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Foreign Exchange and Interest Rate Exposure."
EXCHANGE RATE RISK
The Company has exchange rate exposure with respect to the U.S. dollar. At
December 31, 1999 approximately R$62.7 million of the Company's indebtedness was
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$30 million. 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$50.7 million of such indebtedness will be treated for all purposes as a
REAL-denominated liability. See above "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Foreign Exchange and Interest
Rate Exposure" and See Notes 23 and 33 to the Consolidated Financial Statements.
INTEREST RATE RISK
As of December 31, 1999, the Company had approximately R$131 million in
loans and financing outstanding, of which approximately R$68 million bore
interest at fixed rates and approximately R$63 million bore interest at floating
(primarily LIBOR-based) rates. The Company invests its excess liquidity (R$63.1
million at December 31, 1999) 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, 1999 would be
approximately R$1.9 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 23 to the Consolidated Financial Statements.
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
BOARD OF DIRECTORS
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.
<TABLE>
<CAPTION>
NAME POSITION DATE ELECTED
--------- -------- ------------------
<S> <C> <C>
Alexandre Beldi Netto....................... Chairman August 10, 1998
Araldo Alexandre Marcondes de Souza......... Director April 30, 1999
Mario Cesar Pereira de Araujo............... Director August 10, 1998
Jayme da Costa Ribeiro...................... Director August 10,1998
Marco Antonio Beldi......................... Director September 15, 1998
Antonio Fabio Beldi......................... Director September 15, 1998
Nelson Guarnieri de Lara.................... Director September 15, 1998
</TABLE>
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.
JAYME DA COSTA RIBEIRO, 63 years old, has served as member of the Board of
Directors since August 1998. He served as radio telegraphist for the Postal
Service (Departamento de Correios e Telegrafos) and Companhia de Urbanizacao da
Nova Capital do Brasil and as advisor of the Commercial Superintendent of
COTELB. At Telebrasilia he served as special advisor of the Coordination of
Telecommunications Office and of the Presidency, Head of Cabinet of the
Presidency and coordination and human resources director. He also served as
administrative director of Fundacao Telebras de Seguridade Social - SISTEL. He
holds a law degree from CEUB - Centro de Ensino Unificado de Brasilia.
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.
<PAGE>
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 Pontifical 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 elected 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.
<TABLE>
<CAPTION>
NAME POSITION DATE APPOINTED
------------ ------------------------ ------------------
<S> <C> <C>
Mario Cesar Pereira de Araujo...... President and Executive August 10, 1998
Officer for Investor
Relations
Sergio Assenco Tavares dos Santos.. Executive Officer for January 30, 1998
Network and Operations
Paulo Narcelio Simoes Amaral....... Executive Officer for April 30, 1999
Finance and Information
Technology
Getulio Nery Cardoso............... Director of July 28, 1999
Administration and Human
Resources
Jose Paulo Nascimento David........ Executive Officer for October 6, 1999
Business
</TABLE>
SERGIO ASSENCO TAVARES DOS SANTOS, 51 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
University of Brasilia.
PAULO NARCELIO SIMOES AMARAL, 37 years old, has served as an Executive
Officer since April 1999. From 1985 to 1998 he was active in various sectors of
Banco Inter-Atlantico S.A., currently known as Banco Boavista Interatlantico. He
began as a Financial Analyst in 1985, subsequently serving as Managing
Comptroller from 1990-1995 and as Vice-Executive Officer for Product Development
and Corporate Finance from 1995-1997. In 1997 he became Structured Finance
Executive Officer. He assumed his current position as Executive Officer for
Administration and Finance at the Company in 1999. He holds a degree in
Economics from the State University of Rio de Janeiro, post-graduate degrees in
Business Administration from Fundacao Getulio Vargas and International Trade
from the Federal State University of Rio de Janeiro, as well as an MBA in
Finance from IBMEC.
GETULIO NERY CARDOSO, 48 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
<PAGE>
Region for Splice. He has a degree in Electrical Engineering from the
Universidade de Brasilia and has completed extensive related coursework in
Brazil and abroad.
JOSE PAULO NASCIMENTO DAVID, 35 years old, has served temporarily as an
Executive Officer since October 6, 1999. He began his professional career in
naval engineering at the French company Bureau Veritas. He then worked in oil
and oil derivatives marketing for PETROBRAS. He became manager of Supplies,
Natural Gas, Marketing and a chain of convenience stores for Companhia Atlantico
de Petroleo. He also worked as Marketing Manager for Shell Brasil, S.A.. He
transferred to the telecommunications industry a year ago by joining Algar
Telecom Leste, S.A.--ATL, a Band B Service Provider in Rio de Janeiro and
Espirito Santo, as Sales Manager and later as Manager of the Prepaid
Transactions Unit. He has a degree in Naval Engineering from the Universidade
Federal do Rio de Janeiro- UFRJ.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
For the year ended December 31, 1999, the aggregate amount of compensation
paid by the Holding Company to all directors and executive officers of the
Holding Company was approximately R$1.8 million.
For the year ended December 31, 1999, the aggregate amount set aside or
accrued by the Holding Company to provide pension, retirement or similar
benefits for officers and directors of the Holding Company was approximately
R$173 thousand.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
None.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
None.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
None.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
None.
PART IV
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-42.
<PAGE>
ITEM 19. FINANCIAL STATEMENTS AND 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. Amendment to the Charter of the Holding Company previously filed
with the Holding Company's registration statement on September 18,
1998.
2a. Consent of Ernst & Young Auditores Independentes S.C.
2b. Consent of Deloitte Touche Tohmatsu
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.
<PAGE>
<TABLE>
<CAPTION>
INDEX OF DEFINED TERMS
PAGE PAGE
<S> <C> <C> <C>
AD.................................7 e&p...............................34
ADRs..............................25 EILD..............................14
ADSs..............................25 EILD Contract.....................14
American Depositary Shares........25 EMBRATEL...........................3
Americel..........................13 Equity Withdrawing Rights.........29
ANATEL.............................3 Extreme South Stock Exchange......27
ANATEL Decree.....................16 Federal Government.............1 ,15
Annex IV Regulations..............30 Fenattel..........................15
Annex V Regulations...............30 Financial System Law..............28
Area 7.............................2 Fistel............................48
Area 8.............................2 Fittel........................15, 53
Audit Committee...................29 Fixed-Line Region..................3
Band A........................12, 58 Floating Market...................40
Band A Concessions.................2 Floating Market Rate..............40
Band A Service Provider...........12 GDP................................5
Band A Subsidiary..................1 General Telecommunications Law.....3
Band B............................12 Holding Company................1, 15
Band B Concessions.................2 IBGE...............................5
Band B Service Provider...........12 ICMS..............................10
Band B Subsidiary..................1 IGP-DI............................18
Brazil.............................1 IGP-M.............................22
Brazilian Corporation Law.........28 IOF tax...........................33
Brazilian GAAP.....................1 IRS...............................35
Brazilian Securities Law..........28 LIBOR.............................42
Breakup............................3 Minimum Law.......................16
Breakup of TELEBRAS................3 National Monetary Council.........28
Cellular Region....................3 NBT................................2
Cellular Service Rule.............16 New Holding Companies..............3
Central Bank......................28 non-Brazilian holder..............31
Certificate of Registration.......30 non-U.S. holder...................35
CLC...............................27 Noon Buying Rate...................1
Code..............................34 off-peak calls.....................7
COFINS............................10 Parana Stock Exchange.............27
Commercial Market.................40 PCS...............................13
Common Shares.....................25 Pernambuco and Paraiba
Stock Exchange..................27
Company............................1 PETROBRAS.........................53
Concessions........................2 PFIC..............................35
Consolidated Financial Statements..1 PIS...............................10
CPMF tax..........................33 Predecessor Companies.............23
CPqD..............................15 Preferred Shares..................25
Custodian.........................30 R$.................................1
CVM...............................28 REAIS..............................1
Deposit Agreement.................26 REAL...............................1
Depositary........................26 REAL Plan.........................19
dollars............................1 Region.............................3
DSL1...............................7 Registered Capital................33
DSL2...............................7 Rio de Janeiro Stock Exchange.....26
<PAGE>
SAF...............................12 TELEBRAS System....................3
Sao Paulo Stock Exchange..........26 Telebrasilia.......................2
SEC...............................28 Telecommunications Regulations.....3
Service Quality Memorandum........17 Telegoias..........................2
Shareholders Essential Rights.....29 Telemat............................2
SISTEL............................15 Telems.............................2
SMS...............................12 Teleron............................2
Splice.............................3 TJLP..............................32
STFC..............................14 U.S. dollars.......................1
Stock Exchange Unification Program27 U.S. GAAP.........................36
Subsidiaries.......................1 U.S. holder.......................34
Subsidiary.........................1 US$................................1
Tele Centro Sul...................13 VC1................................7
Teleacre...........................2 VC2................................7
TELEBRAS...........................2 VC3................................7
TELEBRAS Loans................25, 42
</TABLE>
<PAGE>
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.
<PAGE>
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
<PAGE>
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 structuresstandardized 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.
<PAGE>
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 14, 2000
<PAGE>
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONTENTS
Report of Ernst & Young Auditores Independentes S.C........................F-2
Report of Deloitte Touche Tohmatsu.........................................F-3
Report of KPMG Auditores Independentes.....................................F-4
Consolidated Balance Sheets................................................F-5
Consolidated Statement of Revenues and Expenses and Consolidated
Statements of Income.....................................................F-7
Consolidated Statement of Net Interdivisional Cash Distribution
and Consolidated Statements of Cash Flows................................F-8
Consolidated Statement of Changes in Divisional Equity and
Consolidated Statements of Changes in Shareholders' Equity..............F-10
Notes to the Consolidated Financial Statements....................F-11 to F-42
<PAGE>
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 sheet of Tele Centro Oeste
Celular Participacoes S.A. and subsidiaries as of December 31, 1999 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements.
We conducted our audit in accordance with auditing standards generally accepted
in Brazil, which are substantially the same as those followed 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 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 consolidated financial position of Tele
Centro Oeste Celular Participacoes S.A. at December 31, 1999, and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles in Brazil and
on the basis described in Note 2, which differ in certain respects from those
followed in the United States of America (See Note 30).
Ernst & Young Auditores Independentes S.C.
/s/ Luiz Carlos Nannini
Partner
Brasilia, Brazil
February 4, 2000 (except for note 33 as to which the date is May 31, 2000)
<PAGE>
REPORT OF DELOITTE TOUCHE TOHMATSU
To the Board of Directors and Shareholders
Tele Centro Oeste Celular Participacoes S.A.
Brasilia - DF
We have audited the accompanying consolidated balance sheet of Tele Centro Oeste
Celular Participacoes S.A. as of December 31, 1998, and the related consolidated
statements of income, changes in financial position, cash flows and changes in
shareholders' equity for the year then ended (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 financial position of Tele Centro Oeste
Celular Participacoes S.A. as of December 31, 1998, and the results of its
operations, changes in its financial position and its cash flows for the year
then ended 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 and the determination of shareholders' equity and financial
position at December 31, 1998 to the extent summarized in note 29 of the
consolidated financial statements.
/s/ DELOITTE TOUCHE TOHMATSU
March 26, 1999 (except for note 29.o for which the date is April 9, 1999, note
31.d for which the date is May 24, 1999 and note 31.a for which the date is May
31, 1999)
<PAGE>
REPORT OF KPMG AUDITORES INDEPENDENTES
To the Board of Directors and Shareholders
Tele Centro Oeste Celular Participacoes S.A.
Brasilia - DF
We have audited the accompanying consolidated statements of revenue and
expenses, net interdivisional cash distribution / (receipt) and changes in
divisional equity of Tele Centro Oeste Celular Participacoes S.A. for the year
ended December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards in Brazil, which do not differ in any material respects from 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 consolidated 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 wel1 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 revenues and expenses and net
interdivisional cash distribution / (receipt) of Tele Centro Oeste Celular
Participacoes S.A. for the year ended December 31, 1997, in conformity with
accounting principles generally accepted in Brazil and on the basis set out in
Note 2, including continued recognition of the effects of changes in the
purchasing power of the Brazilian currency as discussed 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 results of operations for the year ended December
31, 1997, and the divisional equity as of December 31, 1997 to the extent
summarized in Note 30 of the consolidated financial statements.
July 17, 1998
Brasilia, Brazil
/s/ KPMG Auditores Independentes
<PAGE>
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF CONSTANT BRAZILIAN REAIS - R$, OF DECEMBER 31,1999)
<TABLE>
<CAPTION>
NOTE 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. 12 147,124 63,148
Marketable securities.................. - 79,732
Trade accounts receivable, net......... 13 126,466 157,573
Loans and financial investments........ 2,283 4,219
Deferred income and recoverable taxes.. 14 32,280 58,054
Inventories............................ 8 17,405
Other assets........................... 15 7,847 14,691
----------- -----------
Total current assets..................... 316,008 394,822
NONCURRENT ASSETS:
Deferred income and recoverable taxes.. 14 161 561
Loans and financial investments........ 484 -
Other assets........................... 15 1,606 4,062
----------- -----------
Total noncurrent assets.................. 2,251 4,623
PERMANENT ASSETS:
Investments............................ 7 4,055
Property, plant and equipment, net .... 16 795,132 904,515
Deferred charges, net.................. 17 23 346,455
----------- -----------
Total permanent assets................... 795,162 1,255,025
----------- -----------
Total.................................... 1,113,421 1,654,470
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOTE 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Payroll and related accruals........... 18 5,047 5,672
Accounts payable and accrued expenses.. 19 55,787 96,557
Indirect taxes......................... 20 26,227 45,705
Deferred income and taxes payable...... 21 9,493 16,303
Participation in results of operation.. 22 72,050 46,118
Concession Area 8...................... 7,343 16,661
Loans and financing.................... 23 20,437 91,521
Provision for contingencies............ 24 4,134 -
Other payables......................... - 4,630
------------ -----------
Total current liabilities................ 200,518 323,167
NONCURRENT LIABILITIES:
Accounts payable and accrued expenses.. 19 671 558
Deferred income taxes payable.......... 21 22,910 54,416
Loans and financing.................... 23 30,726 39,289
Provision for contingencies............ 24 489 6,504
Concession Area 8...................... 14,687 16,661
------------ -----------
Total noncurrent liabilities............. 69,483 117,428
MINORITY INTERESTS....................... 116,462 94,506
CAPITALIZABLE FUNDS...................... 151 126
SHAREHOLDERS' EQUITY:
Capital................................ 230,666 351,850
Capital reserve........................ - 322,748
Legal reserve.......................... 21,813 27,177
Revenue reserve........................ 150,022 101,929
Retained earnings ..................... 324,306 315,539
------------ -----------
Total shareholders' equity............... 26 726,807 1,119,243
------------ -----------
Total.................................... 1,113,421 1,654,470
============ ===========
</TABLE>
See the accompanying notes to the consolidated financial statements.
<PAGE>
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENT OF REVENUES AND EXPENSES FOR THE
YEAR ENDED DECEMBER 31, 1997 AND CONSOLIDATED
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF CONSTANT BRAZILIAN REAIS, OF DECEMBER, 1999,
EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
NOTE 1997 1998 1999
------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net operating revenue from cellular
telecommunications services............. 4 526,361 579,714 606,320
Cost of services ....................... 5 (220,658) (236,765) (296,961)
----------- ----------- -----------
Gross profit ........................... 305,703 342,949 309,359
Operating expenses:
Selling expenses ................... 6 (59,191) (90,124) (107,858)
General and administrative expenses. (45,306) (42,099) (58,698)
Other net operating income (expense) 7 4,338 (867) (12,751)
----------- ----------- -----------
Operating income before interest........ 205,544 209,859 130,052
Allocated interest expense.............. (4,473) - -
Net interest expense.................... 8 - (63,401) (43,328)
----------- ----------- -----------
Operating income before interest income
and unallocated interest expense........ 201,071 - -
Operating income........................ - 146,458 86,724
Net non-operating income (expense)...... 9 (60) (18,713) (5,507)
Employees' profit share................. (340) (1,156) (1,697)
----------- ----------- -----------
Income before income taxes, unallocated
interest expense and minority interest.. 200,671 - -
Income before income taxes and minority
interest................................ - 126,589 79,520
Income and social contribution taxes.... 10 - (36,567) (27,155)
----------- ----------- -----------
Income before minority interest......... 200,671 90,022 52,365
Minority interest....................... (27,992) (21,897) (10,487)
Reversal of interest on own capital..... - 83,445 48,696
----------- ----------- -----------
Income before interest income,
unallocated interest expense and taxes.. 172,679 - -
Net income.............................. 151,570 90,574
Outstanding shares at end of year
(thousand).............................. 334,399,028 364,399,028
Net income per thousand shares (R$)..... 0.45 0.25
=========== =========== ===========
</TABLE>
See the accompanying notes to the consolidated financial statements.
<PAGE>
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENT OF NET INTERDIVISIONAL CASH DISTRIBUTION FOR THE YEAR
ENDED DECEMBER 31, 1997 AND CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEAR ENDED DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF CONSTANT BRAZILIAN REAIS - R$, OF DECEMBER, 1999)
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................. - 151,570 90,574
Income before interest income, unallocated
interest expense and taxes.................. 172,679 - -
Adjustments to reconcile income before
interest income, unallocated interest
expense and taxes and net income to cash
provided by operating activities:
Depreciation and amortization.............. 54,421 75,689 117,108
Provision for loss of property and
equipment.................................. - 17,831 -
Disposal of permanent assets............... - 1,577 7,229
Minority interests......................... 27,993 21,897 10,487
Allowance for doubtful accounts............ 36,412 47,887 68,359
Decrease (increase) in assets:
Marketable securities..................... - - (79,732)
Trade accounts receivable................. (55,179) (97,936) (99,466)
Inventories............................... - - (17,397)
Taxes receivable.......................... (6,813) (23,474) (26,174)
Other current assets...................... (1,734) (10,001) (10,752)
Increase (decrease) on liabilities:
Personnel, social charges and benefits.... (1,071) 3,562 625
Accounts payable and accrued expenses..... (30,689) 47,495 40,770
Indirect taxes............................ (8,832) 22,722 19,478
Other current liabilities................. (1,663) - 4,630
Accrued interest.......................... 5,035 7,721 2,439
Provision for contingencies............... 1,040 3,312 1,881
Deferred income tax ...................... - (1,510) (4,022)
Participation in results of operation..... - 949 (25,932)
Concession Area 8......................... - - 11,292
Other non-current liabilities............. (108) - (138)
Minority interests........................ - - (24,324)
---------- ---------- ----------
191,491 269,291 86,935
INVESTING ACTIVITIES:
Additions to investments.................... - (7) (4,048)
Additions to property, plant and
equipment................................... (97,252) (183,052) (264,696)
Transfer from fixed assets to
investments................................. - - 36,360
Capitalized interest........................ (1,206) (1,238) -
Addition to deferred assets................. - (23) (29,142)
Proceeds from assets disposal............... 25 - -
---------- ---------- ----------
(98,433) (184,320) (261,526)
<PAGE>
1997 1998 1999
---------- ---------- ----------
FINANCING ACTIVITIES:
Loans repaid................................ (21,965) (8,187) (2,761)
New loans obtained.......................... 764 3,700 79,969
Cash generated by spin-off from Telebras.... - 18,666 -
Capitalizable funds......................... - 151 -
Rights spun-off from Telebras............... - 615 -
Issuance of preferred shares................ - - 57,952
Premium on issue of newshares............... - - 74
Interest on own capital..................... - - (44,619)
---------- ---------- ----------
(21,201) 14,945 90,615
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents.................................... 71,857 99,916 (83,976)
Net interdivisional cash distribution.......... (24,649) - -
Cash and cash equivalents at beginning of year. - 47,208 147,124
---------- ---------- ----------
Cash and cash equivalents at end of year....... 47,208 147,124 63,148
========== ========== ==========
</TABLE>
See the accompanying notes to the consolidated financial statements.
<PAGE>
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENT OF CHANGES IN DIVISIONAL EQUITY FOR THE
YEAR ENDED DECEMBER 31, 1997 AND CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 1998 AND 1999
(IN THOUSANDS OF CONSTANT BRAZILIAN REAIS - R$, OF DECEMBER, 1999)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
-------------------------------------------------------
DIVISIONAL CAPITAL LEGAL REVENUE RETAINED
EQUITY CAPITAL RESERVE RESERVE RESERVE EARNINGS TOTAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996.. 483,874 - - - - - 483,874
Income before interest
income, unallocated interest
expense and taxes............. 172,679 - - - - - 172,679
Net interdivisional cash
distribution.................. (24,649) - - - - - (24,649)
Deferred income tax on full
indexation.................... (20,081) - - - - - (20,081)
Capitalized interest.......... 21,225 - - - - - 21,225
Minority interest effects
other than on income.......... (15,076) - - - - - (15,076)
-------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997.. 617,972 - - - - - 617,972
Spin-off from Telebras........ (617,972) 230,666 - 13,634 232,135 160,817 19,280
Consolidation adjustments.....
Capitalized interest...... - - - - - 10,177 10,177
Donations and others...... - - - - - 99 99
Net income.................... - - - - - 151,570 151,570
Transfer to reserves.......... - - - 8,179 150,022 (158,201) -
Reversal of reserves.......... - - - - (232,135) 232,135 -
Dividends/Interest on own - - - - -
capital....................... (72,291) (72,291)
-------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998.. - 230,666 - 21,813 150,022 324,306 726,807
Capital increase with reserves - 63,232 - - - (63,232) -
Issuance of preferred shares.. - 57,952 - - - - 57,952
Reversal of reserves.......... - - - - (150,022) 150,022 -
Premium on issue of new shares - - 74 - - - 74
Assets incorporated from
Coverage S.A.................. - - 322,674 - - - 322,674
Deferred tax on full
indexation.................... - - - - - (42,338) (42,338)
Net income.................... - - - - - 90,574 90,574
Income appropriation proposal:
Transfer to reserves....... - - - 5,364 101,929 (107,293) -
Interest on own capital.... - - - - - (36,500) (36,500)
-------------------------------------------------------------------
Balance at December 31, 1999.. - 351,850 322,748 27,177 101,929 315,539 1,119,243
==================================================================
</TABLE>
See the accompanying notes to the consolidated financial statements.
<PAGE>
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN THOUSANDS OF CONSTANT BRAZILIAN REAIS, OF DECEMBER,
1999, EXCEPT PER SHARE AMOUNTS)
1. OPERATIONS AND BACKGROUND
Beginning in 1995, the Federal Government of Brazil (the "Federal Government")
undertook comprehensive reform of the Brazilian regulation of the
telecommunications industry. In July 1995 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.
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
separated initially from the operating subsidiaries and subsequently 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 or 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. was formed on May 22, 1998,
through the spin-off of certain assets and liabilities of Telebras, including
83.8%, 96.0%, 91.9%, 91.3%, 94.0% and 81.4% of the share capital of 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., respectively.
Until August 4, 1998, the Companies were controlled by the Federal Government.
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:
<TABLE>
<CAPTION>
COMPANY EXPIRING DATE
------- -------------
<S> <C>
Telegoias Celular S.A. ........................... October 29, 2008
Telems Celular S.A. .............................. September 28, 2009
Telemat Celular S.A. ............................. March 30, 2009
Teleron Celular S.A. ............................. July 21, 2009
Teleacre Celular S.A. ............................ July 15, 2009
Telebrasilia Celular S.A. ........................ July 24, 2006
</TABLE>
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. 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.
<PAGE>
On May 24, 1999, Norte Brasil Telecom S.A. - NBT, a corporation not publicly
traded, was formed with the controlling 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 its activities at the beginning of October
1999. Since its activities to December 31, 1999 were very little, expenditures
made were considered preoperating expenses. As from January 2000, these expenses
will be amortized in proportion to the area serviced.
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.
2. PRESENTATION OF THE FINANCIAL STATEMENTS
A. PRESENTATION OF THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1998 AND 1999
The consolidated financial statements were prepared in accordance with generally
accepted accounting principles in Brazil, the rules applicable to the companies
with concessions to provide telecommunications services and the accounting
principles 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 present the financial equity situation of
Tele Centro Oeste Celular Participacoes S.A. and its subsidiaries.
Minority interest participation is shown in the consolidated statements of
changes in stockholders' equity and results of operations of Tele Centro Oeste
Celular and its subsidiaries. At December 31, 1999 this interest was 13.2%,
10.5%, 8.1%, 4.0%, 8.7%, 6.0% and 5.0% in the stockholders' equity of
Telebrasilia, Telegoias, Telemat, Telems, Teleron and Teleacre and Norte Brasil
Telecom, 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.
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, 1999.
B. PRESENTATION OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997
The consolidated financial statements present the financial position and
revenues and expenses of Tele Centro Oeste Participacoes S.A. and the combined
cellular telecommunications businesses of Telegoias, Telems, Telemat, Teleron,
Teleacre and Telebrasilia. The portion of the consolidated equity and income
before interest income, unallocated interest expense and taxes of the Company
attributable to shareholders of the Company other than Telebras at December 31,
1997, and for each of the years in the two year period ended December 31, 1998
is reflected as "minority interest" in the consolidated financial statements. At
December 31, 1998, such minority shareholders owned directly and indirectly
16.2%, 4.0%, 8.1%, 8.7%, 6.0% and 18.6% of the share capital of Telegoias,
Telems, Telemat, Teleron, Teleacre and Telebrasilia, respectively.
<PAGE>
The formation of the Holding Company and 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. has 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 Telegoias,
Telems, Telemat, Teleron, Teleacre and Telebrasilia were transferred to the
Companies at their indexed historical cost. The revenues and expenses associated
with such assets and liabilities were allocated to the Companies. Separate
records of revenues and cost of services of the cellular telecommunications
businesses of Telegoias, Telems, Telemat, Teleron, Teleacre and Telebrasilia
were maintained historically. Accordingly, actual amounts were allocated for the
periods included herein. The consolidated statements of revenues and expenses
and net interdivisional cash distribution have been prepared to include the
historical activity related to the assets and liabilities transferred. The
consolidated financial statements are not necessarily indicative of what would
have been the financial condition and revenues and expenses of the Companies as
of December 31, 1997 had the cellular telecommunications businesses of
Telegoias, Telems, Telemat, Teleron, Teleacre and Telebrasilia been separate
legal entities during such periods.
With respect to costs, the methodologies employed in transferring the assets and
liabilities included the specific identification of costs associated with those
assets and liabilities, and the allocation of costs where identification was not
possible. Allocations were made using criteria established by management that
were designed to ensure that all relevant costs were appropriately included in
the results of operations for the periods presented. Those allocation criteria
included: square footage (in relation to land and building related expenses),
number of terminals (in relation to general management, accounting, data
processing, legal department and other general staff functions), number of
employees (in relation to the human resources department), number of
requisitions issued (in relation to office material costs) and miles driven (in
relation to certain transportation costs). Management believes that the amounts
included in the combined financial statements fairly reflect the operating
results of the business.
The presentation of the consolidated financial statements is consistent with the
presentation of the published financial statements of Telegoias, Telems,
Telemat, Teleron, Teleacre and Telebrasilia, from which the financial
information was extracted, except for certain reclassifications within the
consolidated statements of financial condition and the consolidated statements
of revenues and expenses which have been made to conform previously published
financial statements to the 1997 presentation within this annual report.
C. 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, 1997 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, 1999, 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, the annual inflation rate was 20.1%, which was considered to have a
material effect on the financial statements. Thus the financial statements of
the Company for the period of three years ended December 31, 1999 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, 1999.
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:
<PAGE>
I. INFLATION INDEX
The consolidated financial statements as of December 31, 1997, 1998 and 1999,
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, 1999 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, 1999, as measured by the IGP-M, was
as follows:
<TABLE>
<CAPTION>
PERIOD ANNUAL INFLATION (%)
------ --------------------
<S> <C>
Year ended December 31, 1997........................ 7.7
Year ended December 31, 1998........................ 1.8
Year ended December 31, 1999........................ 20.1
</TABLE>
II. 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. CONSOLIDATED STATEMENTS OF REVENUES AND EXPENSES AT DECEMBER 31, 1997
Items in the consolidated statements of revenues and expenses are adjusted by:
o allocating inflationary gains or losses on interest bearing monetary assets
and liabilities to their corresponding interest income and expense captions;
o allocating inflationary gains or losses on other monetary assets and
liabilities to their corresponding interest or expense captions. Amounts
without a corresponding income or expense caption were allocated to "Other
net operating income."
IV. DEFERRED INCOME TAX EFFECTS OF INDEXATION ADJUSTMENTS IN 1997 AND 1999
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, 1997 and 1999 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$ 20,081 in 1997 and R$ 42,338 in
1999, were recorded directly against divisional equity and shareholders' equity,
respectively. The tax effect of depreciation and disposals relating to the base
differences (reversal of the charge) in the amount of R$ 8,253 was credited to
the income and social contribution taxes in the consolidated statement of income
in 1999 (R$ 7,559 in 1998).
V. THE RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY BALANCES
BETWEEN CORPORATE LAW AND TOTAL RESTATEMENT IS AS FOLLOWS:
<TABLE>
<CAPTION>
NET INCOME SHAREHOLDERS' EQUITY
-----------------------------------------
1998 1999 1998 1999
-----------------------------------------
<S> <C> <C> <C> <C>
CORPORATE LAW 153,293 107,293 681,996 1,014,492
Restatement of net permanent
assets (9,568) (14,321) 78,174 181,104
Tax effects 7,559 8,253 (25,797) (63,992)
Minority interests 286 (10,649) (7,566) (12,361)
-----------------------------------------
IN CONSTANT CURRENCY 151,570 90,574 726,807 1,119,243
=========================================
</TABLE>
<PAGE>
D. DIVISIONAL EQUITY
As discussed in Note 1, the Companies were formed as a result of the specific
identifications and spin-off of assets, liabilities and 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. Additionally, a consolidated statement of changes in divisional
equity has been provided, which show the changes in the divisional equity for
the period presented.
E. CONSOLIDATED STATEMENTS OF NET INTERDIVISIONAL CASH FLOWS
Because it was not possible to segregate the cash balances for the cellular
telecommunications businesses prior to December 31, 1997 a traditional statement
of cash flows could not be prepared for 1997. In lieu of detailing the beginning
and ending cash and cash equivalent balances, and the net change in cash and
cash equivalents between years, the net cash transferred to/from the fixed line
telephone businesses of Telegoias, Telems, Telemat, Teleron, Teleacre and
Telebrasilia has been presented as "Net interdivisional cash distribution" in
the consolidated statement of net interdivisional cash distribution.
At December 31, 1997 cash and cash equivalents of R$ 47,208 were allocated from
the fixed line businesses to form the working capital of the cellular
businesses.
F. CONSOLIDATION PRINCIPLES
The consolidated financial statements include the financial records of the
Holding Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
3. SUMMARY OF THE PRINCIPAL ACCOUNTING PRACTICES
A. CASH AND CASH EQUIVALENTS
Cash equivalents are considered to be all highly liquid temporary cash
investments with original maturity dates of three months or less.
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.
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 as translation gains/losses in the
consolidated statement of income.
E. INVENTORIES
Inventories are stated at average acquisition cost, not exceeding replacement
cost.
<PAGE>
Inventories are segregated in plant expansion, maintenance and prepaid resale.
Inventories for expansion are classified in construction in progress and
maintenance and resale inventories are classified in current assets.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at average acquisition or construction
cost, monetarily corrected to December 31, 1999, less accumulated depreciation.
The operation right (concession - area 8) of the Band B cellular service related
to subsidiary Norte Brasil Telecom S.A. was recorded at its acquisition cost.
Up to December 31, 1998, in conformity with the norms applicable to
concessionaires of telecommunication public services, annual interest of 12% was
applied monthly on total capital invested in construction in progress to the
date of placement in service. The interest was charged to capital reserve. As
from January 1, 1999, this practice is not required anymore and CVM Instruction
No. 193/96 became to be used (interest capitalization). In 1999, the Company did
not capitalize interest attributable to construction-in-progress
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 following the accrual method.
Depreciation is provided using the straight-line method based on the estimated
useful lives of the underlying assets. In 1999, the depreciation rates of
transmission equipment were changed from 10% to 14.29% and commuting equipment
from 7.69% to 10%, to better reflect the term of their economic benefit. The
principal depreciation rates are shown in note 16 (b).
G. DEFERRED CHARGES
PREOPERATING EXPENDITURES
Income and expenses incurred during the preoperating period of subsidiary Norte
Brasil Telecom S.A. are charged to deferred charges.
Deferred charges were not amortized during 1999, since the subsidiary Norte
Brasil Telecom S.A. is in its preoperating phase, as commented in Note 1.
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$ 322,674, which will be amortized over a
5-year period as commented in Note 32.
H. VACATION PAY ACCRUAL
Cumulative vacation pay due to employees is accrued as earned.
I. INCOME AND SOCIAL CONTRIBUTION TAXES
Income and social contribution taxes are recorded on the accrual basis and
calculated in accordance with the legislation in force. Deferred income taxes
are recognized on timing differences and calculated at the foreseen rates of
their realization or liquidation.
<PAGE>
As described in Note 2 (c) (iv), the expense related to the effects of deferred
taxes from indexation adjustments for 1997 and 1999 are recorded directly
against divisional equity and shareholders' equity, respectively.
J. PROVISION FOR CONTINGENCIES
The provision for contingencies was made based on the estimate of Company legal
advisors on judicial proceedings in process.
K. 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 is recorded as financial
expenses and for financial statement purposes is considered as appropriation of
income in accordance with CVM Deliberation No. 207 of December 12, 1996.
L. PENSION PLAN
The Company and its subsidiaries, except Norte Brasil Telecom S.A., 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
required contribution for the period and are recorded on the accrual basis.
M. EARNINGS PER THOUSAND-SHARE LOT
The information relating to earnings per thousand-share lot was only presented
in 1998 and 1999 as the capital structure of Tele Centro Oeste Celular
Participacoes S.A. was not yet in place at December 31, 1997. In 1998 and 1999,
earnings per thousand-share lot were calculated based on the number of
outstanding shares at the date of the corresponding balance sheet.
N. SEGMENT INFORMATION
The Companies operate solely in one segment of local and regional cellular
telecommunications. All revenues are 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 will also
be generated through the states of Maranhao, Para, Amapa, Roraima e 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
Minority interests refers to shareholders, other than Telebras, in the Companies
in 1997 and shareholders of the Companies, except for the Holding Company, for
the years ended December 31, 1998 and 1999.
<PAGE>
4. NET OPERATING REVENUE FROM CELLULAR TELECOMMUNICATIONS SERVICES
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Monthly subscription charges 169,790 176,313 192,233
Activation fees 37,719 26,017 3,711
Usage charges 312,401 345,954 335,815
Network usage charges 129,668 170,695 179,241
Sale of cellular equipment/cards - - 53,327
Other 10,623 7,722 13,590
---------- ---------- ----------
Total gross operating revenue 660,201 726,701 777,917
Taxes on gross revenue (133,840) (146,987) (171,597)
---------- ---------- ----------
Net operating revenue from cellular
telecommunication services 526,361 579,714 606,320
========== ========== ==========
</TABLE>
There are no customers who contribute more than 10% of gross operating revenues.
5. COST OF SERVICES
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Depreciation and amortization 53,560 72,830 109,322
Personnel 4,661 7,536 8,152
Third party materials and services 69,090 65,094 71,756
Fixed-line network expenses 72,632 63,905 25,462
Fistel fees 11,389 16,365 27,386
Cost of products sold - - 46,309
Other 9,326 11,035 8,574
---------- ---------- ----------
220,658 236,765 296,961
========== ========== ==========
</TABLE>
6. SELLING EXPENSES
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Personnel 5,287 6,409 8,927
Material 210 438 778
Third party services 16,521 34,943 38,998
Rent/leasing/insurance 640 694 1,140
Depreciation and amortization 108 76 32
Taxes, rates and contributions - 4 86
Allowance for doubtful accounts 25,853 (1,366) 5,224
Net losses on trade accounts receivable 10,559 48,926 52,636
Other materials 13 - 37
---------- ---------- ----------
59,191 90,124 107,858
========== ========== ==========
</TABLE>
<PAGE>
7. OTHER NET OPERATING INCOME (EXPENSE)
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Research and development (2,691) (2,158) (763)
Taxes (except income tax) (205) (591) (9,536)
Contingencies (731) (3,373) (1,199)
Fines and expenses recovered 5,310 4,719 2,880
Inflationary gains (losses) 2,587 - -
Amortization of the premium - Coverage - - (5,378)
Participacoes S.A.
Tax incentives - - 3,884
Other 68 536 (2,639)
---------- ---------- ----------
4,338 (867) (12,751)
========== ========== ==========
</TABLE>
8. NET INTEREST EXPENSE
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Interest revenue 29,282 38,953
Interest expense (8,803) (34,175)
Interest on own capital (83,445) (48,696)
Net exchange/ monetary variations (435) 590
---------- ---------
(63,401) (43,328)
========== ==========
</TABLE>
9. NET NON-OPERATING INCOME (EXPENSES)
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Interest on construction-in-progress 1,206 1,238 -
Non-operating financial expenses (1,206) (1,238) -
Loss on the realization of property, - (976) (5,585)
plant and equipment
Provision for losses on the realization
of property, plant and equipment - (17,831) -
Other non-operating income (expenses) (60) 94 78
---------- ---------- ----------
(60) (18,713) (5,507)
========== ========== ==========
</TABLE>
10. INCOME AND SOCIAL CONTRIBUTION TAXES
In 1997 and 1998 the income tax rate was 25% and 8% for social contribution tax.
From May 1, 1999 the rate of social contribution tax on income changed from 8%
to 12%. Deferred taxes are provided for based on temporary differences.
At December 31, 1997, income tax and social contribution expenses have not been
included in the consolidated demonstrations of operations because certain
financial and other revenues/(expenses) of the cellular business were neither
identified nor segregated from Telegoias, Telems, Telemat, Teleron Teleacre e
Telebrasilia, which resulted in an incomplete presentation of income before tax.
INCOME TAXES ARE AS FOLLOWS:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Social contribution tax on income 10,862 5,338
Income tax 33,264 30,070
Deferred taxes (7,559) (8,253)
---------- ----------
36,567 27,155
========== ==========
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1999
----------------------
<S> <C> <C>
Consolidated income before minority interest,
income taxes and reversal of interest on own
capital 126,589 87,773
Social contribution tax 10,127 9,304
Income tax 31,647 21,943
----------------------
Total income taxes 41,774 31,247
Effect of permanent differences (5,207) (4,092)
----------------------
Total income taxes on income statement 36,567 27,155
</TABLE>
======================
11. CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Interest paid 5,764 2,425 487
Cash paid against provisions for 13 330 84
contingencies
Income tax and social contribution paid - 38,079 19,310
Paid concession - 14,329 17,473
</TABLE>
12. CASH AND CASH EQUIVALENTS
At December 31, 1998 and 1999, cash equivalents mainly comprise fixed income
short-term investments.
13. TRADE ACCOUNTS RECEIVABLE, NET
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Accrued amounts 36,357 48,185
Billed amounts 115,593 135,796
Allowance for doubtful accounts (25,484) (26,408)
---------- ----------
126,466 157,573
========== =========
</TABLE>
The changes in the allowance for doubtful accounts are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Initial balance 1,475 26,850 25,484
Provision charged to selling 36,412 47,887 68,359
expense
Write-offs (11,037) (49,253) (67,435)
---------- ---------- ----------
Ending balance 26,850 25,484 26,408
========== ========== ==========
</TABLE>
<PAGE>
14. DEFERRED INCOME AND RECOVERABLE TAXES
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Recoverable income tax 14,012 26,301
Recoverable social contribution tax 1,851 9,733
Deferred income and social contribution taxes 16,539 11,697
Recoverable ICMS tax - 9,555
Other recoverable taxes 39 1,329
---------- ----------
Total 32,441 58,615
========== ==========
Short-term 32,280 58,054
Long-term 161 561
</TABLE>
15. OTHER ASSETS
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Amounts in litigation 3,798 4,296
Balance from transactions with fixed-line 3,574 -
companies
Tax incentives - 3,912
Other 2,081 10,545
---------- ----------
9,453 18,753
========== ==========
Short-term 7,847 14,691
Long-term 1,606 4,062
</TABLE>
16. PROPERTY, PLANT AND EQUIPMENT, NET
A) COMPOSITION
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Construction in progress 160,179 113,984
Automatic switching equipment 96,375 153,855
Transmission and other equipment 616,306 749,117
Land 3,852 4,207
Buildings 28,748 29,098
Computer equipment 3,719 10,361
Exploration right (concession) 36,360 77,354
Other assets 61,516 49,950
---------- ----------
Total cost 1,007,055 1,187,926
Accumulated depreciation (211,923) (283,411)
---------- ----------
795,132 904,515
========== ==========
</TABLE>
B) DEPRECIATION RATES
Depreciation rates applied to property, plant and equipment are as follows:
<TABLE>
<CAPTION>
%
------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Automatic switching equipment 7.69 10.00
Transmission and other equipment 10.00 14.29
Buildings 4.00 4.00
Other assets (excluding land) 5.00 to 20.00 5.00 to 20.00
</TABLE>
<PAGE>
C) RENTAL
The Companies rent equipment and premises through a number of operating
agreements that expire at different dates. Total annual rent expense under these
agreements are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Rental expenses 10,212 12,283 11,378
</TABLE>
Rental commitments relate primarily to facilities where the future minimum
rental payments under leases with remaining non-cancelable terms in excess of
one year are:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
2000 12,737
2001 13,110
2002 13,905
2003 14,748
2004 14,748
2005 14,748
--------
Total 83,996
========
</TABLE>
17. DEFERRED CHARGES, NET
<TABLE>
<CAPTION>
1998 1999
----------------------
<S> <C> <C>
Premium - Coverage Participacoes S.A. - 322,674
Premium amortization - (5,378)
Preoperating expenses - NBT - 29,142
Other 23 17
----------------------
Total 23 346,455
======================
</TABLE>
18. PAYROLL AND RELATED ACCRUALS
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Salaries and wages 942 1,581
Social charges 2,939 3,472
Accrued benefits 1,166 619
---------- ----------
5,047 5,672
========== ==========
</TABLE>
19. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Suppliers 37,674 86,911
Consignment on behalf of third parties 16,155 10,199
Other accounts 2,629 5
---------- ----------
Total 56,458 97,115
========== ==========
Short-term 55,787 96,557
Long-term 671 558
</TABLE>
<PAGE>
20. INDIRECT TAXES
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Value - added taxes 20,052 27,861
Fistel fees 170 14,250
Other taxes on operating revenues 6,005 3,594
---------- ----------
26,227 45,705
========== ==========
</TABLE>
21. DEFERRED INCOME AND TAXES PAYABLE
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Income tax payable 1,262 4,360
Social contribution tax payable 4,781 1,935
Deferred taxes - liability
Difference IPC x BTNF - Law No. 8,200/91 545 432
Effects of full monetary correction 25,798 63,992
Other temporary differences 17 -
---------- ----------
26,360 64,424
---------- ----------
32,403 70,719
========== ==========
Short-term 9,493 16,303
Long-term 22,910 54,416
</TABLE>
22. PARTICIPATION IN RESULTS OF OPERATION
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Interest on shareholders' equity of the year 83,405 44,619
Interest on shareholders' equity of the prior year - 6,556
Withholding tax on interest on shareholders' equity (12,512) (6,693)
Employees' profit sharing 1,157 1,636
---------- ----------
72,050 46,118
========== ==========
</TABLE>
23. LOANS AND FINANCING
<TABLE>
<CAPTION>
Interest and indexation Due date 1998 1999
------------------------------------------------------------------
<S> <C> <C> <C> <C>
NATIONAL CURRENCY
BNDES TJLP plus 7% annual interest 10/8/2000 - 66,425
TELEBRAS IGP-M plus 6% annual interest - 47,619 50,697
OTHER LOANS Industrial products column 20 - FGV 2000 to 2008 3,545 1,713
Foreign currency
Equipment imports U.S. dollar exchange variation
plus Libor and 2% annual
interest 4/28/2000 - 3,649
EXPORT DEVELOPMENT U.S. dollar exchange variation
CORPORATION - EDC plus semester Libor and 3.90%
annual interest 11/22/2005 - 8,326
------------------
51,164 130,810
==================
Short-term 20,437 91,521
Long-term 30,726 39,289
</TABLE>
Libor at December 31, 1999 was 6.5%. TJLP, IGP-M and Industrial Products Column
20-FGV, presented a variation of 12.5%, 20.1% and 7%, respectively in 1999.
<PAGE>
Long-term payment schedule:
<TABLE>
<CAPTION>
Due date 1999
------------------------
<S> <C>
2001 26,010
2002 7,206
2003 1,875
2004 1,875
2005 1,873
2006 209
2007 209
2008 32
---------
Total 39,289
=========
</TABLE>
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..
Based on the understanding that there have been errors in the allocation of the
respective loans at the time of the spin-off, local Company management suspended
the payment flow subsequent to the change of Company's control, subjecting from
January 1999 the total debts owed by subsidiary companies to the IGP-M
indexation plus 6% annual interest.
In June 1999, Tele Centro Oeste Celular Participacoes S.A (parent company) filed
a legal action claiming the ownership of all assets related to these liabilities
(loans and financing) plus accessories as well as compensation of installments
paid.
The Company's lawyers believe that the chances of obtaining a favorable outcome
are good in this case.
In November 1999, local Company management decided to transfer to the holding
company - Tele Centro Oeste Celular Participacoes S.A. - the liability derived
from the loan originally due to Telecomunicacoes Brasileiras S.A. - TELEBRAS,
absorbed by the spin-off process.
24. PROVISION FOR CONTINGENCIES
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Tax claims 3,420 5,554
Labor claims 878 654
Civil claims 325 296
---------- ----------
4,623 6,504
========== ==========
Short-term 4,134 -
Long-term 489 6,504
</TABLE>
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
Telebras, Telegoias, Telems, Telemat, Teleron, Teleacre and Telebrasilia, the
legal predecessors of the Holding Company, and 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., respectively, are defendants in a number of legal
<PAGE>
proceedings and subject to certain other claims and contingencies. Liability for
any claims arising out of acts committed by Telegoias, Telems, Telemat, Teleron,
Teleacre and Telebrasilia prior to the effective date of the spin-off of
Telegoias', Telems', Telemat's, Teleron's, Teleacre's and Telebrasilia's
cellular assets and liabilities to the Companies, will remain with Telegoias,
Telems, Telemat, Teleron, Teleacre and Telebrasilia, except for those
liabilities for which specific accounting provisions have been assigned to the
Companies. Any claims against Telegoias, Telems, Telemat, Teleron, Teleacre and
Telebrasilia that cannot be dealt with by Telegoias, Telems, Telemat, Teleron,
Teleacre or Telebrasilia, have received assets which might have been used to
settle those claims had they not been spun off from Telegoias, Telems, Telemat,
Teleron, Teleacre and Telebrasilia.
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 new 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.
ICMS ON ACTIVATION FEES
On June 19, 1998 the Secretaries of the Treasury of the individual Brazilian
states 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). 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 Treasury 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 Telegoias, Telems, Telemat, Teleron, Teleacre and
Telebrasilia, 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 to
regard the new interpretation by the state treasury secretaries as unlawful. If
the ICMS tax were applied retroactively to activation fees earned during the
past five years, it would generate a maximum liability estimated at 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.
25. PENSION PLAN
The Company and its subsidiaries, except for Norte Brasil Telecom S.A.,
participate in a multi-employer defined benefit pension plan and in other
post-retirement benefit plans managed by the FUNDACAO TELEBRAS DE SEGURIDADE
SOCIAL ("Sistel").
Approximately 90% of the Companies' employees are covered by these plans. The
Companies contributed with and charged to their expense accounts R$1,207,
R$1,826 and R$ 2,136 for their pension funds during 1997, 1998 and 1999,
respectively. The Companies notified Sistel of their intention to withdraw from
the portion of the pension plan covering its active employees. The
post-retirement health care plan and the pension plan for inactive employees
will remain as a multi-employer plan.
<PAGE>
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 annuity payment is
subsequently adjusted upwards to recognize cost of living increases and
productivity awards granted to active employees. In addition to the
supplementary annuity, 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 under Brazilian regulations. These studies are revised
periodically, in order to identify whether adjustments made to contributions are
necessary. An overall summary of the Sistel plan, compliant with accounting
principles generally accepted in Brazil, is presented below:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Accumulated pension and other post-retirement 4,341,826 4,311,895
benefit obligations
Other obligations 375,710 2,052,236
---------- ----------
Total obligations 4,717,536 6,364,131
========== ==========
Combined plan assets:
Financial market 2,958,960 3,685,233
Stocks and shares 2,013,000 2,911,487
Investment properties 473,858 423,899
Loans to beneficiaries 139,141 89,413
Other investments 57,077 44,104
---------- ----------
Total plan assets 5,642,036 7,154,136
---------- ----------
Excess of total plan assets over total obligations 924,500 790,005
========== ==========
</TABLE>
26. SHAREHOLDERS' EQUITY
INCORPORATION OF TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
On May 22, 1998 the shareholders of Telebras approved Telebras' division into
the New Holding Companies using a procedure under Brazilian corporate law called
a CISAO, whereby existing shareholders received shares, in the New Holding
Companies in proportion to their holdings in Telebras. The New Holding Companies
contain the assets and liabilities previously recorded in the accounts of
Telebras, except for the following items which will remain in the books of
Telebras and not be allocated to the New Holding Companies:
o approximately R$117,698 of net assets which have been attributed to a newly
constituted research foundation that will take over the activities previously
performed by the Telebras Campinas Research and Development Center; and,
o approximately R$444,370 of net assets that will provide the funds required to
liquidate Telebras, including approximately R$158,532 of retroactive
dividends to be paid to the holders of new shares issued in April 1998, as a
result of the resolution of the dispute over the capital increase of 1990,
approximately R$60,050 of indemnity payments to employees and approximately
R$104,487 of expenses arising out of the privatization process.
In addition to approving the allocation of assets and liabilities to the New
Holding Companies at the May 22, 1998 meeting, the shareholders also approved a
specific structure for the shareholders' equity of each New Holding Company,
which included the allocation of a portion of the retained earnings.
Consequently, the amounts of the balances of capital, reserves and retained
earnings, together with the corresponding assets and liabilities for the
formation of Tele Centro Oeste Celular Participacoes S.A. were established.
After Telebras retained within its own shareholders' equity sufficient retained
earnings from which to pay dividends on its 1997 earnings and in settlement of
<PAGE>
dividends as a result of settlement of the 1990 disputed share increase,
Telebras allocated to each New Holding Company the balance of its retained
earnings in proportion to the allocated total net assets. This value of
allocated retained earnings does not represent the historical retained earnings
of the holding companies. The assets which were spun-off from Telebras, in
addition to its investment in the operating subsidiaries, resulted in an
increase of R$19,281 in relation to the Company's historical divisional equity.
These values are shown in the "Spin-off from Telebras" column in the following
table. The first column summarizes the December 31, 1997 consolidated historical
balances of the Companies, and the "Holding Company Consolidated Statement"
column summarizes the consolidated balance sheet of Tele Centro Oeste Celular
Participacoes S.A. after the spin-off.
As a result of the legal structure of the spin-off and as allowed under
Brazilian GAAP, a company formed as a result of a cisao will have such retained
earnings in its balance sheet as the parent company shareholders' resolution
adopting the cisao allocates from the parent company to the new company.
Accordingly, upon formation, Tele Centro Oeste Celular Participacoes S.A.'s
legal capital structure was defined by the resolutions approved by the Telebras
shareholders' meeting of May 22, 1998 so that its shareholders' equity of
R$637,253 includes retained earnings of R$406,584. The allocated retained
earnings and future gains will be the basis from which future dividends will be
payable.
The "Adjustments and Eliminations" columns includes (i) the elimination of the
Telebras investment in the Companies and (ii) the elimination of intercompany
loans, payable and receivables.
<TABLE>
<CAPTION>
Adjustments
December 31, 1997 Spin-off from and Consolidated
Historical balances Telebras eliminations Holding
------------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents 47,208 18,666 - 65,874
Intercompany receivables - 396 (396) -
Other current assets 85,939 - - 85,939
Total current assets 133,147 19,062 (396) 151,813
Intercompany receivables - 219 (219) -
------------------- ------------- ------------ ------------
Other noncurrent assets 1,674 - - 1,674
Investments in
subsidiaries - 617,972 (617,972) -
Property, plant and
equipment, net 693,935 - - 693,935
------------------- ------------- ------------ ------------
Total permanent assets 693,935 617,972 (617,972) 693,935
Total assets 828,756 637,253 (618,587) 847,422
=================== ============= ============ ============
Liabilities:
Total current liabilities 37,831 - (396) 37,435
------------------- ------------- ------------ ------------
Loans and financing 36,438 (219) 36,219
Other 32,419 - - 32,419
------------------- ------------- ------------ ------------
Total noncurrent 68,857 - (219) 68,638
liabilities
Minority interests 104,095 - - 104,095
------------------- ------------- ------------ ------------
Divisional equity 617,972 - (617,972) -
Capital - 182,640 - 182,640
Capital reserves - 48,029 - 48,029
Retained earnings - 406,584 - 406,584
Total shareholders'
equity 617,972 637,253 (617,972) 637,253
------------------- ------------- ------------ ------------
Total liabilities and
shareholders' equity 828,756 637,253 (618,587) 847,422
=================== ============= ============ ============
</TABLE>
The formation of the Holding Company and of 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. has been accounted for as a reorganization of
entities under common control in a manner similar to a pooling of interests.
Brazilian corporate and tax law allows state controlled companies that are
participating in the government's privatization program a three month delay
between the accounting base date for a spin-off and the date on which the
shareholders' meeting approves the spin-off, including the related accounting
<PAGE>
basis for the net assets spun off. Furthermore, as allowed by Brazilian
corporate law, the amount shown in the "Spin off from Telebras" column as
"Investment in subsidiaries" was determined based on the balance sheets of those
subsidiaries as of December 31, 1997. As a result, the consolidated financial
statements of the Holding Company will include the results of operations and
changes in financial condition of the subsidiaries from January 1, 1998 and the
effects of the cash allocated from Telebras as of March 1, 1998.
Besides approving the allocation of assets and liabilities to the New Holding
Companies, the shareholders also approved a specific structure for the net
equity of each new holding company in the same Assembly held on May 22, 1998.
Therefore, not only the value of the opening balance of capital was established,
but also the reserves and the accrued profits, as well as the respective assets
and liabilities for the constitution of the Tele Centro Oeste Celular
Participacoes S.A..
Consequent to the legal structuring of the spin-off process, the Tele Centro
Oeste Celular Participacoes S.A. incorporated, at the moment of its
constitution, a net equity value of R$ 590,719. This included accrued profits of
R$ 114,280 and the results of the months of January and February, 1998: R$
1,619.
However, the Company's Administration understands that due to an error made
during the deliberations carried out during the above mentioned Assembly, the
loans cited under Note 23 with their controlled companies Telebrasilia Celular
and Telegoias Celular, were not allocated as the Company's assets. Such loans
total R$ 48,351 according to the criteria established for the segregation of
assets and liabilities provided by Attachment II of the Spin-Off Report, issued
on February 28, 1998 by a specialized company and approved by the May 22
Assembly as Attachment III.
Administration also understands that the above mentioned error resulted from the
fact that the records used by that specialized company do not reflect the
segregation of the loans of this fixed-line system company with the cellular
telephone Companies, as evident in applicable support documentation.
The company submitted the question to a Commercial and Corporate Law specialist,
who acknowledged that the spin-off of the Telecomunicacoes Brasileiras S.A. -
TELEBRAS, did not follow the justified means, thus harming the company it had
just created.
Below are the effects of the Net Equity of the Tele Centro Oeste Celular
Participacoes S.A., in case the above mentioned loans are added to the assets of
this Holding Company.
<TABLE>
<CAPTION>
1998 1999
-----------------------
<S> <C> <C>
Net Shareholder's Equity 726,807 1,119,243
(+) Controlled Companies' loans 48,351 48,351
(+) Appropriation of net financial
charges and taxes 4,310 7,292
(=) Net Shareholders' equity 779,468 1,174,886
</TABLE>
a) Capital
The authorized capital at December 31, 1999 and 1998 is 700,000,000 thousand
shares.
The capital of R$ 351,850 at December 31, 1999 (R$ 230,666 in 1998), subscribed
and paid-in, consists of 364,399,028,000 shares with no par value, distributed
as follows (in thousands):
<TABLE>
<CAPTION>
31/12/98 31/12/99
-------------- --------------
<S> <C> <C>
Common shares 124,369,031 124,369,031
Preferred shares 210,029,997 240,029,997
Total 334,399,028 364,399,028
Book value per thousand shares - Corporate 2.0394685 2.784472
law (in R$)
</TABLE>
The capital stock of Tele Centro Oeste Celular Participacoes S.A. is comprised
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
<PAGE>
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 non-voting except under limited circumstances and are
entitled to a preferential, non-cumulative dividend of 6% per year and to
priority over the common shares in the case of liquidation of Tele Centro Oeste
Celular Participacoes S.A..
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 at Tele Centro Oeste Celular
Participacoes S.A. held on April 30, 1999, the capital increase was approved
through the incorporation of retained earnings in the amount of R$ 63,232
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$ 293,898.
The Extraordinary Shareholders Meeting of Tele Centro Oeste Celular
Participacoes S.A. held on May 27, 1999 approved, and the Administration Council
of July 20, 1999 confirmed, the Company's capital increase of R$ 57,952 through
the issuing of 30,000,000,000 (thirty billion) preferred shares, through private
subscription and cash payment on the subscription date, resulting in subscribed
and paid-in capital of R$ 351,850.
b) Income reserves
Legal reserve
Tele Centro Oeste Celular Participacoes S.A. is obliged by Corporate Law to
direct 5% of its annual profit to the Legal Reserve until this reserve
corresponds to 20% of the Company's realized Capital, or 30% of the Company's
Capital added to the capital reserves. After these limits, the allocation to
these reserves is no longer mandatory. The legal reserve can only be used to
increase the Company's Capital and to absorb losses.
LONG TERM REVENUE RESERVE
Represents earned but unrealized revenues resulting from the balance of the
adjustments of the investments valued using the equity method of accounting. The
reserve is realized when dividends or interest on shareholders' equity are
received, and other events, according to CVM policies. The realization of
reserves is reversed to retained earnings.
Movement of unearned income reserve:
<TABLE>
<CAPTION>
1998 1999
-------------------------
<S> <C> <C>
Income reserve 232,135 150,022
Reversal (232,135) (150,022)
Constitution 150,022 101,929
-------------------------
BALANCE AT DECEMBER 31 150,022 101,929
=========================
</TABLE>
<PAGE>
c) Dividends/interest on own capital
Pursuant to its by-laws, Tele Centro Oeste Celular Participacoes S.A. is
required to distribute as dividends in respect of each fiscal year ending
December 31, to the extent amounts are available for distribution, an aggregate
amount equal to at least 25% of Adjusted Net Income (as defined below) on such
date. 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.
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.
In 1999 the Administration Council decided to distribute interest on
shareholders' equity to its shareholders in the amount of R$36,500, from which
R$31,229 was calculated to the priority value for preferred shares and to
mandatory dividends.
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Year's Net Profit 151,570 90,574
(+) Reversal of long term revenue reserve 232,135 150,022
(-) Long term revenue reserve (150,022) (101,929)
(-) Legal reserve (8,179) (5,364)
(+) Adjustment to determine the Corporate
Legislation calculation basis 11,999 8,389
---------- ----------
(=) Adjusted Net Profit 237,503 124,914
Mandatory Dividends (25%) 59,376 31,229
========== ==========
</TABLE>
As proposal by management, interest on capital was recognized as of December 31,
1998 and 1999, and was treated as dividends, pursuant to art. 9 of Law 9249/95,
net of withholding income tax, after approval at the shareholders' annual
meeting.
d) Retained earnings
The remaining balance of retained earnings, pursuant to Article 202 of Law No.
6,404/76, in the amount of R$ 315,539 at December 31, 1999 (R$ 324,306 in 1998),
will be used for future investments according to the capital budget to be
presented at the Shareholders Meeting.
27. TRANSACTIONS WITH RELATED PARTIES
Before August 4, 1997, the Company was controlled by the Brazilian Federal
Government through Telebras. This originated the transactions with related
parties described below and disclosed in the profit and loss account.
Before August 4, 1997, the main transactions with related parties were effected
with the Empresa Brasileira de Telecomunicacoes S.A. ("Embratel"), a subsidiary
of Telebras, regarding long-distance cellular telecommunication, besides
Telegoias, Telems, Telemat, Teleron, Teleacre and Telebrasilia in using the
respective telecommunications network. The Companies are responsible for billing
cellular subscribers for long-distance calls and collecting payments owed to
other cellular and fixed-line carriers. The collection for outgoing calls is the
responsibility of the Companies and the collection for incoming calls is the
responsibility of the originating telephone company. After the collection cycle
is complete, the Companies and the regional fixed-line and cellular companies
jointly reconcile the amounts collected against the amounts, if any, transferred
to each party, and pay the net amounts outstanding to the appropriate parties,
including the long-distance portion of the charges to Embratel.
<PAGE>
Until the breakup of Telebras, Telegoias, Telems, Telemat, Teleron, Teleacre and
Telebrasilia and the other companies of the Telebras System, each contributed to
the Research and Development Center operated by Telebras (CENTRO DE PESQUISA E
DESENVOLVIMENTO DA TELEBRAS).
Following the breakup of Telebras, the Research and Development Center became a
private, independently administered foundation financed by contributions from
the New Holding Companies resulting from the breakup. Pursuant to a three year
contract signed in May 1998 between the foundation and the Companies, the
Companies are obligated to contribute with a maximum of R$2,133 to the research
and development center during the three years ending May 2001. The current
amount spent in a given year may be adjusted downward at the option of the
foundation.
The Companies believe that except for interest income and the unallocated
interest expense and taxes, all the costs of doing business are reflected in the
consolidated financial statements and that no additional amounts should be added
to the consolidated financial statements as a result of the cessation of the
activities previously performed by Telebras.
Other related parties included until August 4, 1998 are Federal, State and
Municipal Governments. Revenues from telephone calls made by government bodies
and related organizations have not been included below because telephone users
details are not recorded by the Companies.
A summary of the balances and transactions with these related parties is as
follows:
<TABLE>
<CAPTION>
1997
-------------
<S> <C>
Current assets:
Accounts receivable from third parties, net 3,257
Current liabilities:
Loans and financing 11,491
Other liabilities 2,616
Long term obligations:
Loans and financing 36,438
Net operating income resulting from cellular services 132,605
Cost of services rendered 146,162
Operating expenses 53,255
Financial expenses 4,473
</TABLE>
28. INSURANCE
At December 31, 1999, in the opinion of management, all significant and high
risk assets and obligations were insured.
29. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
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 fair value information as of December 31, 1998 and 1999 presented below is
based on pertinent information available to management as of those dates.
Where there is no comparison between the equity value of a financial asset or
liability item at market value, presumably there should be no significant
differences between these amounts.
<PAGE>
<TABLE>
<CAPTION>
1998 1999
---------------------------------------
BOOK FAIR BOOK FAIR
Value value Value value
---------------------------------------
<S> <C> <C> <C> <C>
Deferred tax liabilities 25,797 16,084 18,623 12,811
Loans 51,164 52,272 130,810 130,810
</TABLE>
CASH, CASH EQUIVALENTS, CLIENT ACCOUNTS RECEIVABLE, OTHER CURRENT ASSETS,
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Cash, Cash equivalents, client 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.
DEFERRED TAX LIABILITIES
The fair market value of these instruments were calculated discounting their
future cash flows using the Long Term Interest Rate, disclosed by the Brazilian
Central Bank.
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.
30. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP
The Companies' accounting policies comply with the "generally accepted
accounting principles" in Brazil, the Brazilian "GAAP". The accounting
principles and policies practiced in the United States of America ("US GAAP"),
which differ significantly from the former, are described below.
A. DIFFERENT CRITERIA FOR CAPITALIZING AND AMORTIZING CAPITALIZED INTEREST
Until December 31, 1993, capitalized interest was not added to 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. Also, under Brazilian GAAP,
as applied to companies in the telecommunications industry up to December 31,
1998, interest attributable to construction-in-progress is computed at a rate of
12% per annum of the balance of construction-in-progress and that part which
relates to interest on third party loans is credited to financial expenses based
on actual interest costs; the balance relating to own capital being credited to
capital reserves. As from January 1, 1999, this practice is not required anymore
and CVM Instruction No. 193/96 became to be used. In 1999, the Company did not
capitalize interest attributable to construction-in-progress.
Under US GAAP, in accordance with the provisions of the Statement of Financial
Accounting Standard ("SFAS") No. 34 "Capitalization of Financial Costs", 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. Under US GAAP, the amount of interest capitalized excludes the monetary
gains associated with the borrowing and the foreign exchange gains and losses on
foreign currency borrowings.
<PAGE>
The effects of these different criteria for capitalizing and amortizing
capitalized interest are presented below:
<TABLE>
<CAPTION>
1997 1998 1999
-----------------------------
<S> <C> <C> <C>
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). 6,151 3,419 3,373
INTEREST CAPITALIZED AND CREDITED TO INCOME
MINUS INTEREST CAPITALIZED UNDER BRAZILIAN - 214 -
GAAP:
------------------------------
Total 6,151 3,633 3,373
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) (1,206) (1,237) -
Interest capitalized and credited to
reserves (21,225) (12,005) -
-------------------------------
Total (22,431) (13,242) -
US GAAP difference (16,280) (9,609) 3,373
===============================
AMORTIZATION OF CAPITALIZED INTEREST
DIFFERENCE
Amortization under Brazilian GAAP 3,119 6,405 5,787
Minus the amortization under US GAAP
Difference - accumulated amortization (1,115) (1,765) (1,823)
credited to asset under US GAAP - (80) -
-------------------------------
US GAAP difference 2,004 4,560 3,964
===============================
</TABLE>
B. PENSION AND OTHER POST-RETIREMENT BENEFITS
The Companies participate in multi-employer benefit plans (Sistel) and provide
for the costs of pension and other post-retirement benefits based on a fixed
percentage of remuneration, as recommended annually by independent actuaries.
The provisions of the SFAS 87 - Employers' Accounting for Pensions were applied
to calculate the funded status as of January 1, 1992 because applying them as of
the date specified in the standard was not feasible. In December 1999, are
agreement to withdraw from multi-employer pension plan was reached. See note 31.
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.
E. EMPLOYEES' PROFIT SHARE
Brazilian GAAP requires that employees' profit share be shown as an
appropriation of the net income for the year. Under the US GAAP, the employees'
profit share would be included as an operating expense.
<PAGE>
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 in reversals and provisions for losses in the recuperation of permanent
assets in 1998 totaled R$ 976 and R$17,831, respectively. Such losses were
included in non-operating expenses for Brazilian GAAP purposes. According to US
GAAP, such profits and losses would alter the operating income.
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, because 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 POSTED DIRECTLY TO STOCKHOLDERS' EQUITY
Under Brazilian GAAP, various items are posted directly to divisional equity,
which under US GAAP would be posted to the consolidated statements of revenues
and expenses. One example is capitalized interest. The posting of such items to
divisional equity implies adjustments in the consolidated statement of changes
in stockholders' equity. Since that the original postings 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
the net profit for US GAAP purposes.
I. INCOME TAXES
The Company did not present its income tax up to December 31, 1997, since the
consolidated financial statements do not include certain expenses and revenues,
because non-specific cash and debts were not allocated from Telegoias, Telems,
Telemat, Teleron, Teleacre and Telebrasilia. However, for Brazilian GAAP, the
deferred tax charges relating to the deferred income tax effects of indexation
adjustments for 1997 and 1999, are recorded directly against divisional equity
and shareholders' equity, respectively. Under U.S. GAAP, for purposes of
financial statements, the effects of the indexation adjustments made in 1997 and
1999 on the deferred income tax, would be charged to the income and social
contribution taxes in the consolidated statement of income.
J. EARNINGS PER SHARE
Earnings per share has not been presented for Brazilian GAAP for 1997, as the
capital structure of the Holding Company was not in place at December 31, 1997.
Earnings per share has not been presented for U.S. GAAP for 1997 as the
statements of revenues and expenses exclude interest income, unallocated
interest expense and income taxes as a result of specific cash and debt not
being allocated from Telegoias, Telems, Telemat, Teleron, Teleacre e
Telebrasilia.
In 1998 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 Statements of Financial Accounting Standards
No. 128, "Earnings per Share", the computation is based on the average shares
outstanding during the year.
K. DEFERRED TAXES
The deferred income tax liability resulting from the indexation of permanent
assets of R$20,081 in 1997 and R$ 42,338 in 1999 was charged directly to
divisional equity and shareholders' equity, respectively in accordance with
<PAGE>
Brazilian GAAP, whereas for U.S. GAAP the charge would be to income for the
year. For 1998 and 1999, the deferred tax effect on realization of the
indexation effects amounting R$7,559 and R$ 8,253 was charged directly to the
income statement. Until 1997, the deferred tax effects of the above U.S. GAAP
adjustment of R$ 4,794 in 1997 is not included in the reconciliation of income
differences between U.S. and Brazilian GAAP and for 1998 and 1999 the tax
effects amounting to R$6,496 and R$ 10,746 are included in the income statement.
L. VALUATION OF LONG-LIVED ASSETS
For US GAAP, effective January 1, 1996, the Companies should adopt 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 revision. The carrying value of long-lived assets is
considered impaired when the anticipated undiscounted cash flow from such 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.
M. RETAINED EARNINGS
For Brazilian GAAP, a company formed as a result of a spin-off may have retained
earnings in its balance-sheet if the parent company shareholders' resolution
adopting 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$ 406,586.
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.
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$83,09 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 represents 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.
The Federal Government made 7.2 million lots available for sale, or 60% of the
12.1 million lots that would be taken up 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, 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$152,77. Under U.S. GAAP, the charge for the third quarter would
have been approximately R$62,400, which represents share of the offer
price/market price differential on 60% of the shares offered for which the
measurement date was August 4, 1998. As of October 30, 1998, the original
expiration of the program 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$6,443.
<PAGE>
Although the Federal Government, rather than the Company or Telebras, offered
the shares to employees, under U.S. GAAP the deemed compensation amount is
"pushed down" to each of the New Holding Companies in accordance with the number
of shares purchased by each New Holding Company in accordance with the number of
shares purchased by each New Holding Company and its subsidiaries employees.
P. COSTS OF START-UP ACTIVITIES
According to the Brazilian GAAP, the deferment of start-up costs is possible and
was recorded in relation to the start-up of the operations of Norte Brasil
Telecom S.A.
In April 1998, the AICPA issue Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities". This statement became effective in 1999 and
requires costs of start-up activities and organization cost to be expressed as
incurred.
Thus, the adjustment of R$ 29,142 was recorded for US GAAP purposes.
Q. PREMIUM - COVERAGE PARTICIPACOES S.A.
Adjustments made for US GAAP purposes as the premium computed at the merger of
Coverage Participacoes S.A. On December 14, 1999 has not been realized yet.
The adjustments of R$ 322,674 and R$ 5,378 were recorded in the shareholders'
equity and operating result respectively.
RECONCILIATION OF THE INCOME DIFFERENCES BETWEEN US AND BRAZILIAN GAAP
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------------
<S> <C> <C> <C>
Net income as reported.................... 172,679 151,570 90,574
Different criteria for determining:
Capitalized interest.................. (16,280) (9,609) 3,373
Amortization of capitalized interest.. 2,004 4,560 3,964
Activation income deferral............ - (26,017) (3,682)
Amortization of the activation income - 11,500 17,268
deferral.............................
Stock compensation expense............ - (1,627) -
Costs of start-up activities.......... - - (29,142)
Premium amortization.................. - - 5,378
Pension benefits - SFAS 87
Adjustments.......................... - - (26,861)
Items posted directly to equity
Capitalized interest on construction in
Progress................................ 21,226 10,176 -
Deferred Tax on full indexation... - - (42,338)
Effects of the above adjustments on
deferred taxes............................ - 6,496 10,746
Effects of the above adjustments on
minority shares....................... (969) 2,107 352
-------------------------------
US GAAP net income........................ 178,660 149,156 29,632
===============================
RESULTS PER THOUSAND SHARES ACCORDING TO US
GAAP
Common shares - basic and diluted - 1.20 0.24
Weighted average of outstanding common
shares (thousands) - 124,369,031 124,369,031
Preferred shares - basic and diluted - 0.71 0.12
Weighted average of current preferred shares
(thousands) - 210,029,997 240,029,997
</TABLE>
<PAGE>
RECONCILIATION OF THE SHAREHOLDERS' EQUITY DIFFERENCES BETWEEN US AND
BRAZILIAN GAAP
<TABLE>
<CAPTION>
1998 1999
----------------------
<S> <C> <C>
Shareholders' equity as reported .................. 726,807 1,119,243
Different criteria for:
Capitalized interest ......................... (60,194) (56,821)
Amortization of capitalized interest ......... 10,188 14,152
Activation income deferral ................... (26,017) (29,699)
Amortization of the activation income
deferral.................................... 11,500 28,768
Donations received ........................... (118) (118)
Costs of start-up activities.................. - (29,142)
Premium - Coverage Participacoes
S.A.......................................... - (322,674)
Premium amortization.......................... - 5,378
Pension benefits - SFAS 87 adjustments........ - (26,861)
Effects of the above adjustments on deferred
taxes....................................... 21,331 32,077
Minority interests ........................... 6,588 6,236
----------------------
Shareholders' equity according to US GAAP ......... 689,733 740,891
======================
Additional information:
Total assets under US GAAP...................... 1,084,747 1,297,440
----------------------
Property, plant and equipment................... 946,862 1,131,105
Accumulated depreciation........................ (201,736) (269,259)
----------------------
Net property, plant and equipment............... 745,126 861,846
======================
</TABLE>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1997....................... 592,194
Telebras Spin-off.................................. 19,281
Reversal of stock option plan accrual.............. 1,627
Minority interest on reversal of stock option plan
accrual........................................... (234)
Net income......................................... 149,156
Dividends proposed................................. (72,291)
-----------
Balance at December 31, 1998....................... 689,733
Capital increase with own resources................ 57,952
Premium on issues of new shares.................... 74
Net income......................................... 29,632
Interest on own capital............................ (36,500)
-----------
Balance at December 31, 1999....................... 740,891
===========
</TABLE>
31. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP
A. PENSION PLAN
The Company and its subsidiaries, except for Norte Brasil Telecom S.A.,
participate in multi-employer defined benefit pension and other post-retirement
benefit plans, which are operated and administered by SISTEL.
In December of 1999, the Company and the other companies which participate in
the Sistel plan, reached an agreement to withdraw the active participants from
the pension plan and establish a new plan for each of the companies. The parties
have agreed to allocate the plan assets based on the proportional amount of
liability as calculated under Brazilian accounting principles. The allocation of
the initial transition obligation and unamortized gains and losses was based on
the projected benefit obligation (PBO) of each individual sponsor divided by the
total PBO of Sistel at December 31, 1999. The inactive employees of all the New
Holding Companies which participated in the Sistel defined benefit pension plan
will remain as part of the multi-employer plan in Sistel. The post-retirement
<PAGE>
benefit plans will also remain as a multi-employer plan, however, Sistel will no
longer subsidize life insurance premiums for inactive (retired) employees.
Since withdrawal of the active participants from the plan was probable as of
December 31, 1999, and the liability could be estimated, the Company has
recorded under US GAAP a charge to net income in 1999 for the estimated
liability for the active employees, which totaled R$26,861. Since the Company
remains jointly and severally liable for the multi-employer portion of the plan,
no amounts were recorded under those plans.
A summary of the liability as of December 31, 1999 for the Company's active
employees defined benefit pension plan is as follows:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
FUNDED STATUS:
Accumulated benefit obligation:
Vested........................................ . 1,121
Non vested..................................... 21,854
-----------
Total.......................................... 22,975
===========
Projected benefit obligation...................... 35,056
Fair value of plan assets to be allocated to the
Company......................................... (17,518)
-----------
Projected obligation in excess of assets ....... 17,538
Unrecognized (gains) losses .................... 17,398
Unrecognized net transition obligation ......... (8,075)
-----------
Accrued pension cost.............................. 26,861
===========
</TABLE>
A summary of the Sistel pension plan as of December 31, 1999 for the
multi-employer portion (inactive employees pension plan) is as follows:
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
FUNDED STATUS:
Accumulated benefit obligation:
Vested......................................... 2,649,103
-----------
Projected benefit obligation...................... 2,649,103
Fair value of plan assets......................... (2,479,020)
-----------
Projected obligation in excess of assets........ 170,083
===========
</TABLE>
The funded status of the Sistel pension plans as of December 31, 1998, were as
follows:
PENSION BENEFIT PLAN
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
FUNDED STATUS:
Accumulated benefit obligation:
Vested................................... 2,908,211
Non vested............................... 4,825,691
Total.................................... 7,733,902
Projected benefit obligation................ 9,945,794
Fair value of plan assets................... (4,577,580)
-----------
Projected obligation in excess of assets.... 5,368,214
===========
</TABLE>
<PAGE>
The actuarial assumptions used in 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Discount rate for determining projected
benefit obligations....................... 6.00% 6.00%
Rate of increase in compensation levels..... 3.25% 3.00%
Benefit adjustments......................... 1.50% 0.00%
Expected long-term rate of return on plan
assets.................................... 6.00% 9.00%
</TABLE>
The above are real rates and exclude inflation.
A summary of the post-retirement benefits plan (which remains as a
multi-employer plan) is as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
FUNDED STATUS:
Accumulated post-retirement benefit
obligations:
Active participants...................... 1,220,056 584,080
Inactive participants.................... 531,731 598,377
----------- -----------
1,751,787 1,182,457
=========== ===========
Fair value of plan assets................... (119,177) (156,075)
----------- -----------
Obligations in excess of plan assets........ 1,632,610 1,026,382
=========== ===========
</TABLE>
In December 1999, Sistel agreed with the New Holding Companies that it would no
longer subsidize life insurance premiums for retirees. Therefore, there was a
curtailment of the plan which resulted in a reduction in the accumulated
post-retirement benefit obligation of R$227,980 as of December 31, 1999.
Actuarial assumptions used were as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Discount rate for determining projected
benefit obligations....................... 6.00% 6.00%
Rate of increase in compensation levels..... 3.25% 3.00%
Expected long-term rate of return on plan
assets.................................... 6.00% 9.00%
</TABLE>
Health care cost trend rates of increase were projected at annual rates
excluding inflation ranging from 6.48% in 1998 decreasing to 2.00% in 2047. The
effect of a one percent annual increase (reduction) in the assumed health care
cost trend rates would increase (reduce) the accumulated post-retirement
benefits obligation at December 31, 1999 by R$226,930 (R$ 173,301). Measurement
of the accumulated post-retirement benefit obligation was based on the same
assumptions as were used in the pension fund liability calculations.
CHANGE IN BENEFIT OBLIGATION
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Benefit obligation at the beginning of year .... 1,696,833 1,751,787
Service cost.................................... 59,749 58,897
Interest cost .................................. 90,808 97,681
Benefits paid................................... (17,062) (23,414)
Administrative expenses......................... (2,339) (1,843)
Actuarial (gain) loss........................... (76,202) (472,671)
Curtailment of the plan......................... - (227,980)
----------- -----------
Benefit obligation at end of year............... 1,751,787 1,182,457
=========== ===========
</TABLE>
<PAGE>
CHANGE IN PLAN ASSETS
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Fair value of plan assets at beginning
of year...................................... 115,458 119,177
Employer contributions......................... 30,668 26,130
Plan participants' contribution ............... - -
Benefits paid.................................. (14,409) (23,414)
Administrative expenses........................ (2,339) (1,843)
Actual return on plan assets................... (10,201) 36,025
---------- -----------
Fair value of plan assets at end of year....... 119,177 156,075
========== ===========
</TABLE>
The funded status of the pension and post retirement plans under Brazilian and
US GAAP differ. Benefit obligations differ because they have been prepared using
different actuarial assumptions permitted under Brazilian and US GAAP.
The net assets of the plans differ under Brazilian and US GAAP principally due
to the accrual of income tax contingencies of the pension fund for US GAAP
purposes in the amount of R$765,530 and R$650,446 in 1998 and 1999,
respectively. The contingency arises out of uncertainty as to the income tax
status of Brazilian pension funds in general because the tax law is unclear as
to whether these funds are exempt from tax on their investment gains. Under
Brazilian GAAP, the liability is recorded but not deducted from plan assets for
disclosure purposes.
B. CONCENTRATION OF RISK
Credit risk with respect to trade accounts receivable from third parties is
diversified. 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 29% 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 union. The collective
agreements currently in force expire in November 2000.
There is no concentration of available sources of labor, services, concessions
or rights, other than those mentioned above, that could, if suddenly eliminated,
severely impact the Companies' operations.
C. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", which establishes the standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) as part of a full set of financial statements. This
statement requires that all elements of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
consolidated financial statements. The Company does not have any other
comprehensive income items during 1998 and 1999. As discussed in Note 30d.
certain adjustments were posted directly to shareholder's equity for 1997 as
Telebras was unable to allocate certain items such as taxes and interest to the
Company. Therefore, the presentation of such statement is not included herein.
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". This statement became
effective in 1999 and establishes accounting standards for costs incurred in the
acquisition or development and implementation of computer software. This new
standard requires the capitalization of certain software implementation costs
<PAGE>
relating to software acquired or developed and implemented for the Company's
use. This statement has not presented any significant effect on the Company's
financial position and results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments and for hedging activities by requiring that all derivatives be
recognized in the balance sheet and measured at fair value. SFAS 133 is
effective for fiscal years beginning after June 15, 2000. The Company is
currently evaluating the potential impact of this standard on its financial
position and results of operations.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Views on Selected Revenue Recognition
Issues" ("SAB 101"), which sets forth the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues.
SAB 101 is effective for the second quarter of 2000. The Company will assess the
effect of this new standard during 2000 fiscal year. The Company does not
believe there will be any significant effect on its financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"). FIN 44 is effective July 1, 2000 and should
also be applied to certain events after December 15, 1998 but prior to July 1,
2000. FIN 44 clarifies the application of APB Opinion 25 "Accounting for Stock
Issued to Employees" for certain issues. The Company understands that FIN 44 has
no impact on its financial statements.
32. CORPORATE RESTRUCTURING
On December 3, 1999, the administrators of Tele Centro Oeste Celular
Participacoes S.A. (TCO), Telebrasilia Celular S.A., Telegoias Celular S.A.,
Telemat Celular S.A., Telems Celular S.A., Teleacre Celular S.A., Teleron
Celular S.A. (Operadoras), BID S.A. and Coverage Participacoes S.A., indirect
controller of TCO, published relevant information regarding the intention of
submitting to the respective Administration Councils and Shareholders Meetings
the terms, conditions and justifications for a corporate restructuring and
merger of operating companies at TCO, and simultaneously a company fully
controlled by BID S.A. (Coverage Participacoes S.A.), with an investment in TCO
as its only asset, without any obligation or debt.
On December 13, 1999, TCO, together with the other companies, BID S.A. and
Coverage Participacoes S.A., published a new relevant fact bearing in mind the
publication of CVM Instruction No. 319 and 320/99 and due to the Ordinance
CVM/PTE/ No. 308/99 of the CVM presidency, deciding to suspend the merger
process of the companies, TCO proposed the capital closure of one of these
operating Companies, submitting this proposal to the C.V.M., public offer of
shares acquisition for subsequent registration cancellation.
On December 14, 1999 Coverage Participacoes S.A. was merged into the Company. As
published through appropriate means, the management of TCO and Coverage
understand that the restructuring would result in to the improvement of TCO's
cash flow, as well as assuring the integrity and nonmodification of the
dividends flow to the shareholders of TCO due to the premium amortization.
The premium that could be amortized by TCO corresponds to R$322,674, estimating
its full utilization over a period of 5 year from the merger date. This premium
was recorded in a specific permanent assets account (deferred charges) in
counterpart to a special capital reserve account for future capital increases,
included in shareholders' equity.
In 1999, the amount of R$5,378 was amortized corresponding to 1/60 pro rata
amount of the premium. The respective tax benefit should be subscribed according
to CVM Instruction No. 319/99.
<PAGE>
33. SUBSEQUENT EVENTS
a) Issuing of Commercial Papers and Zero Coupon Euro Commercial Papers
On January 20, 2000 Tele Centro Oeste Celular Participacoes S.A published the
announcement regarding the beginning of distribution of the 1st issuing of
Promissory Notes, comprising 400 notes, with unit value of R$ 500 (five hundred
thousand reais), amounting to R$200,000,000 (two hundred million reais). Until
May 31, 2000 a number of 376 Promissory Notes were issued. The amount was used
in the acquisition of shares from the regional operators which should operate as
private corporations (see note "b" below). The remaining of the funds will be
used in the network expanding activities and offer of new services.
The Promissory Notes could be subscribed at any time within the public
distribution period per unit value with a discount to be granted at the
subscription and payment date in order to adjust the notes to the market value
applicable at the respective issuing date.
These Promissory Notes are due within a period of 360 days from the date of
subscription of each Promissory Note.
In May 2000, the Company entered into a Zero Coupon Euro Commercial Paper
Program of US$ 200 million. The first issuance of the program amounted to US$
110 million face amount, drawn on May 23, 2000, with a remuneration of 9.0% to
the investor and is due 360 days after the date of issuance. In order to reduce
its foreign currency exposure, the Company has hedged the entire amount of the
issuance.
The funds will be used in the network expanding activities and after of new
services.
b) Acquisition of shares
On April 24, 2000, through a public auction held by the SOMA (Negotiation System
of the Assets Market Operator), Tele Centro Oeste Celular Participacoes S.A.-TCO
acquired shares from minority shareholders who agreed with the cancellation of
the publicly traded company registration for the following companies:
-------------------------------------------------------------
| NUMBER OF SHARES - IN UNITS |
------------------------------------------------------------------------------|
| COMPANIES | MANIFESTING | AGREEING | DISAGREEING | ACQUIRED BY |
| | PARTIES | PARTIES | PARTIES | TCO |
|-----------------------------------------------------------------------------|
| TELEMS | 8,297,594 | 8,291,933 | 5,661 | 8,291,933 |
|-----------------------------------------------------------------------------|
| TELEMAT | 18,566,018 | 17,132,090 | 1,433,928 | 17,132,090 |
|-----------------------------------------------------------------------------|
| TELEACRE | 37,044,030 | 36,848,030 | 196,000 | 36,848,030 |
-------------------------------------------------------------------------------
The closing of the capital of Telebrasilia Celular S.A., Telegoias Celular
S.A. and Teleron Celular S.A. was postponed to a date not yet known.
c) Social contribution tax on income
Based on Provisional Measure No. 1,858 of October 26, 1999, the rate of social
contribution tax on income changed from 12% to 9% for the period from February
1, 2000 to December 31, 2002.
<PAGE>
EXHIBIT INDEX
Exhibit 1. Amendment to the Charter of the Holding Company
previously filed with the Holding Company's
registration statement on September 18, 1998..................X-2
Exhibit 2a. Consent of Ernst & Young Auditores Independentes S.C...........X-3
Exhibit 2b. Consent of Deloitte Touche Tohmatsu............................X-4
<PAGE>
EXHIBIT 1
The following amendment to the Holding Company's Charter was approved by the
shareholders at an extraordinary shareholders meeting on July 28, 1999. The
Charter was previously filed with the Holding Company's Registration Statement
on September 18, 1998. An amended Charter, which contained amendments approved
by the shareholders on April 30, 1999 and May 27, 1999, was again filed with the
Company's annual report on July 1, 1999.
Article 22 of the Charter is amended to now read:
"The Board of Executive Officers shall consist of 1 (one) President and 4 (four)
Executive Officers designated Executive Officer for Network and Operations,
Executive Officer for Business, Executive Officer for Finance and Information
Technology, and Executive Officer for Administration and Human Resources,
elected and dismissable at any time by the Board of Directors."
<PAGE>
EXHIBIT 2A
CONSENT OF INDEPENDENT AUDITORS
Tele Centro Oeste Celular Participacoes S.A.
SCN Q.02 Bloco C, 226 -- 6 andar
Brasilia- DF
INDEPEDENT AUDITORS' CONSENT
We consent to the use in this Annual Report on Form 20-F of our report dated
February 4, 2000 (except for note 33 as to which the date is May 31, 2000),
relating to the consolidated financial statements of Tele Centro Oeste Celular
Participacoes S.A., prepared in conformity with accounting principals generally
accepted in Brazil for the year ended December 31, 1999, which appears in such
Annual Report.
Ernst & Young Auditores Independentes S.C.
/s/ Luiz Carlos Nannini
Partner
Brasilia - Brazil July 13, 2000
<PAGE>
EXHIBIT 2B
CONSENT OF INDEPENDENT AUDITORS
Tele Centro Oeste Celular Participacoes S.A.
SCN Q.02 Bloco C, 226 --6 andar
Brasilia- DF
We consent to the use in this Annual Report on Form 20-F of our report dated
February 19, 1999 (except for note 30.p for which the date is April 9, 1999, and
note 29.a, for which the date is May 31, 1999), relating to the financial
statements of Tele Centro Oeste Celular Participacoes S.A., prepared in
conformity with accounting principals generally accepted in Brazil for the year
ended December 31, 1998, which appears in such Annual Report.
/s/ Deloitte Tohmatsu
Rio de Janeiro, July 7, 2000