Form 20-F
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 2002
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 20-F
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION FILE NUMBER: 001-14489
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TELE CENTRO OESTE CELULAR
PARTICIPACOES S.A.
(Exact Name of Registrant as Specified in Its Charter)
TELE CENTRO OESTE CELLULAR HOLDING COMPANY THE FEDERATIVE REPUBLIC OF BRAZIL
(Translation of Registrant's Name into (Jurisdiction of Incorporation
English) or Organization)
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SCS, QUADRA 2, BLOCO C, 7 ANDAR
70.319-900 BRASILIA, DF, BRAZIL
(Address of Principal Executive Offices)
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SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(B)
OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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:
126,433,338,109 Common Shares, without par value
252,766,698,473 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
TABLE OF CONTENTS
PAGE
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS ..............2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.............................2
ITEM 3. KEY INFORMATION.....................................................2
ITEM 4. INFORMATION ON THE COMPANY.........................................15
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.......................49
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.........................62
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..................69
ITEM 8. FINANCIAL INFORMATION..............................................70
ITEM 9. THE OFFERING AND THE LISTING.......................................76
ITEM 10. ADDITIONAL INFORMATION.............................................85
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........101
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES............102
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...................102
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS ..............................................102
ITEM 15. DEFAULTS UPON SENIOR SECURITIES...................................102
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED
SECURITIES AND USE OF PROCEEDS...................................102
ITEM 17. FINANCIAL STATEMENTS..............................................102
ITEM 18. FINANCIAL STATEMENTS..............................................103
ITEM 19. EXHIBITS..........................................................103
CURRENCY AND FINANCIAL INFORMATION
In this Annual Report, Tele Centro Oeste Celular Participacoes S.A., a
corporation organized under the laws of the Federative Republic of Brazil
("Brazil"), is referred to as the "Holding Company," and the Holding Company and
its Subsidiaries are collectively referred to as the "Company." Telebrasilia
Celular S.A. ("Telebrasilia"), Telegoias Celular S.A. ("Telegoias"), Telemat
Celular S.A. ("Telemat"), Telems Celular S.A. ("Telems"), Teleron Celular S.A.
("Teleron"), Teleacre Celular S.A ("Teleacre"), and Norte Brasil Telecom, S.A.
("NBT") are collectively referred to as the "Subsidiaries," and each one 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." The Holding Company also controls
TCO IP, an unlisted company created to deliver general telecommunications
services, including multimedia telecommunication and information services both
at the national and the international levels. TCO IP was classified as a service
provider by the Brazilian National Telecommunications Agency (AGENCIA NACIONAL
DE TELECOMUNICACOES)--ANATEL. SEE ITEM 4 "INFORMATION ON THE COMPANY--HISTORY
AND DEVELOPMENT OF THE COMPANY."
On April 26, 2002, the Holding Company held a General Extraordinary Shareholders
Meeting in which it approved the merger of Telebrasilia into the Company and the
consequent transfer of the concession to explore mobile cellular services
previously held by Telebrasilia.
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 24, 2002, the Noon Buying Rate in New York City for cable transfers, as
certified for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate") was R$2.8290 to US$1.00. SEE ITEM 3 "KEY
INFORMATION--EXCHANGE RATES."
The consolidated financial statements of the Company as of December 31, 2000 and
2001 and for the years ended December 31, 1999, 2000 and 2001 (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, all other financial data included
herein recognize certain effects of inflation and are restated in constant REAIS
of December 31, 2000 purchasing power using the integral restatement method
(CORRECAO MONETARIA INTEGRAL).
In 2001, IBRACON (the Brazilian Institute of Independent Auditors) issued a
publication stating that financial statements would not have to be indexed for
2001 as the three-year cumulative inflation rate in Brazil fell below 100%.
Certain terms are defined the first time they are used in this Annual Report.
The "Index of Defined Terms" that begins on page 109 lists those terms and where
they are defined. The "Technical Glossary" that begins on page 112 provides
definitions of certain technical terms used herein.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements. The Company and its
representatives may also make forward-looking statements in press releases and
oral statements. Statements that are not statements of historical fact,
including statements about the beliefs and expectations of the Company's
management, are forward-looking statements. The words "anticipates," "believes,"
"estimates," "expects," "forecasts," "intends," "plans," "predicts," "projects"
and "targets" and similar words are intended to identify these statements, which
necessarily involve known and unknown risks and uncertainties. Known risks and
uncertainties, some of which are discussed herein in Item 3 "Key
Information--Risk Factors," include those resulting from the short history of
the Company's operations as an independent, private-sector entity and the
introduction of competition to the Brazilian telecommunications sector, as well
as those relating to the cost and availability of financing, the performance of
the Brazilian economy generally, the levels of exchange rates between Brazilian
and foreign currencies and the telecommunications policy of Brazil's federal
government (the "Federal Government"). Accordingly, the actual results of
operations of the Company may be different from the Company's current
expectations, and the reader should not place undue reliance on these
forward-looking statements. Forward-looking statements speak only as of the date
they are made, and the Company does not undertake any obligation to update them
in light of new information or future developments.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL INFORMATION
BACKGROUND
The selected financial information presented below should be read in conjunction
with the Consolidated Financial Statements and the notes thereto. The 2001
Consolidated Financial Statements have been audited by Ernst & Young
Auditores Independentes S.C., and their report on the Consolidated Financial
Statements appears elsewhere in this Annual Report.
BRAZILIAN GAAP AND U.S. GAAP
The Consolidated Financial Statements are prepared in accordance with Brazilian
GAAP, which differ in certain material respects from generally accepted
accounting principles in the United States ("U.S. GAAP"). See Note 29 to the
Consolidated Financial Statements for a summary of the differences between
Brazilian GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of shareholders'
equity as of December 31, 2001 and 2000, and net income for the years ended
December 31, 2001, 2000 and 1999.
PRESENTATION OF 1998 STATEMENT OF OPERATIONS
The Consolidated Statements of Operations of the Company for the year ended
December 31, 1998 reflects the operations of each of the Subsidiaries for the
full year 1998 and the operations of the Holding Company for the period from
February 28, 1998, the effective date of its establishment in the Breakup of
TELEBRAS, to December 31, 1998.
CHANGES IN ACCOUNTING METHODOLOGY IN 1999, 2000 AND 2001
The Consolidated Financial Statements and, unless otherwise specified, all
financial information included in this Annual Report recognize certain effects
of inflation and are restated in constant REAIS of December 31, 2000 purchasing
power, all in accordance with Brazilian GAAP using the integral restatement
method (CORRECAO MONETARIA INTEGRAL). The Company used the INDICE GERAL DE
PRECOS -MERCADO (the General Price Index - Market or "IGP-M" inflation index for
purposes of preparing the Consolidated Financial Statements and the selected
financial information presented below on the basis of Brazilian GAAP. SEE ITEM 5
"OPERATING AND FINANCIAL REVIEW AND PROSPECTS--EFFECTS OF CHANGES IN
PRESENTATION OF FINANCIAL STATEMENTS IN 1999, 2000 AND 2001." Inflationary gains
or losses on (i) monetary assets and liabilities and, where possible, other
monetary items have been allocated to their corresponding interest income or
expense captions and (ii) amounts without corresponding income or expense
captions in the Consolidated Statements of Operations have been allocated to
other net operating income in the Consolidated Statements of Operations and the
"Income Statement Data" presented below. SEE NOTE 2(B) TO THE CONSOLIDATED
FINANCIAL STATEMENTS.
The Consolidated Financial Statements as of December 31, 2000 and 2001 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 years ended December 31, 2000 and 2001,
have been restated into currency of December 31, 2001 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 certain criteria
established by the Company's management. The consolidated statements of revenues
and expenses and net interdivisional cash receipt (distribution) include the
historical activity related to the assets and liabilities transferred. The
Consolidated Financial Statements are not necessarily indicative of what the
financial condition or the revenues and expenses of the Company would have been
if the cellular telecommunications businesses of the Predecessor Companies had
been separate legal entities before 1998. SEE ITEM 4 "INFORMATION ON THE
COMPANY--HISTORICAL BACKGROUND."
Cash and certain nonspecific debt relating to the cellular telecommunications
businesses of the Predecessor Companies could not be segregated from the
Predecessor Companies prior to December 31, 1997, and such amounts were not
reflected in the Company's statement of financial condition prior to January 1,
1998. As a result, interest income, unallocated interest expense and income tax
expense were not identified or reflected in the Consolidated Financial
Statements for any period prior to January 1, 1998. Because these revenues and
expenses are not included in the Consolidated Financial Statements, historical
income per share and dividend per share information was not included in the
table below for any period prior to January 1, 1998. SEE ITEM 3 "SELECTED
FINANCIAL INFORMATION."
At the May 22, 1998 TELEBRAS shareholders' meeting, the shareholders established
the shareholders' equity of each New Holding Company and allocated to each a
portion of the retained earnings of TELEBRAS. TELEBRAS retained sufficient
earnings from which to pay certain dividends and other amounts. The balance of
its retained earnings was allocated to each New Holding Company in proportion to
the total net assets allocated to each such company. The retained earnings so
allocated do not represent the historical retained earnings of the New Holding
Companies. The assets that were spun off from TELEBRAS to the Holding Company,
in addition to its investment in the Subsidiaries, resulted in an increase of
R$21.2 million compared to the Company's historical divisional equity. The
amount of distributable retained earnings of the Holding Company includes
retained earnings allocated to the Holding Company in the Breakup of TELEBRAS.
For 1997, the Consolidated Financial Statements present the financial condition
and revenues and expenses of the cellular telecommunications business of the
Predecessor Companies, and "minority interests" reflect the interest in the
Predecessor Companies of shareholders other than TELEBRAS. As of December 31,
2001, minority shareholders directly and indirectly owned 11.75%, 3.26%, 2.51%,
1.61%, 2.88%, 1.69% and 1.67% of the share capital of Telebrasilia, Telegoias,
Telemat, Telems, Teleron, Teleacre and NBT, respectively.
SELECTED FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31,
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1997 1998 1999 2000 2001
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(THOUSANDS OF REAIS, EXCEPT PER-SHARE DATA)(1)
INCOME STATEMENT DATA:
BRAZILIAN GAAP
Net operating revenue 578,744 637,406 666,660 930,646 1,248,131
Cost of services rendered and
cost of products sold 242,619 260,327 326,514 532,163 663,158
------- ------- ------- ------- ---------
Gross income 336,125 377,079 340,146 398,483 584,973
Operating expenses:
Selling expenses 65,082 99,093 118,592 126,163 195,020
General and administrative
expenses 49,814 46,289 64,539 78,420 110,300
Other net operating expense 4,770 953 14,020 9,618 4,513
------- ------- ------- ------- ---------
Operating income before net
financial result 225,999 230,744 142,995 184,282 275,140
Allocated interest expense........ 4,918
Net interest expense (2).......... 69,711 47,640 30,063 43,471
------- ------- ------- ---------
Operating income before interest
income and unallocated interest
expense......................... 221,081
Operating income.................. 161,033 95,355 154,219 231,669
Net nonoperating expense.......... 66 20,575 6,055 19,539 25,668
Employees' participation.......... 374 1,271 1,866 1,878 2,346
------- ------- ------- ------- ---------
Income before interest income,
unallocated interest expense,
taxes and minority interests.... 220,641
Income before income taxes and
minority interests (2).......... 139,187 87,434 132,802 203,655
Income and social contribution
taxes........................... 40,206 29,857 40,159 56,501
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Income before minority interests.. 220,641 98,981 57,577 92,643 147,154
Minority interests................ 30,779 24,076 11,531 19,980 13,864
------- ------- ------ ------- ---------
Reversal of interest on own
capital......................... - 91,749 53,542 30,981 45,297
Income before interest income,
unallocated interest expense
and taxes(2).................... 189,863
=======
Net income........................ 166,654 99,588 103,644 178,587
======= ====== ======= =======
U.S. GAAP
Income before interest income,
unallocated interest expense
and taxes(2).................... 196,440
=======
Net income........................ 164,000 32,581 104,771 194.494
======= ======= ======= =======
Net profit per 1,000 shares
outstanding (REAIS)............. 0.49 0.09 0.29 0.53
AT DECEMBER 31,
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1997 1998 1999 2000 2001
--------- ------- ------- ------- ---------
(THOUSANDS OF REAIS)(1)
BALANCE SHEET DATA:
BRAZILIAN GAAP
Property, plant and
equipment, net 762,994 874,262 994,531 1,083,754 1,078,882
Total assets 911,232 1,224,227 1,819,120 2,154,909 2,240,325
Loans and financing 52,700 56,256 143,828 509,149 516,984
Divisional equity 679,472 - - - -
Shareholders' equity 799,138 1,230,628 1,042,172 1,126,432
U.S. GAAP
Property, plant and
equipment, net 713,563 819,280 947,615 1,057,596 1,071,186
Total assets 878,114 1,192,699 1,426,558 2,113,001 2,389,361
Loans and financing 52,216 56,256 143,828 509,149 694,339
Divisional equity 651,128 - - -
Shareholders' equity 758,374 814,623 1,000,123 1,100,291
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(1) Information is presented in constant REAIS of December 31, 2000 and nominal
REAIS of December 31, 2001.
(2) For 1997, prior to the effective creation of the Subsidiaries on January 1,
1998, the Company did not recognize interest income or taxes, and
recognized only the portion of interest expense that was specifically
attributable to the cellular operations of the Predecessor Companies.
EXCHANGE RATES
The Company will pay any cash dividends and make any other cash distributions
with respect to Preferred Shares in Brazilian currency. Accordingly, exchange
rate fluctuations will affect the U.S. dollar amounts received by the holders of
"ADSs" on conversion by the Depositary of dividends and distributions in
Brazilian currency on the Preferred Shares represented by the ADSs. Fluctuations
in the exchange rate between Brazilian currency and the U.S. dollar will also
affect the U.S. dollar equivalent of the price of the Preferred Shares on the
Brazilian stock exchanges. SEE ITEM 5 "OPERATING AND FINANCIAL REVIEW AND
PROSPECT--FOREIGN EXCHANGE AND INTEREST RATE EXPOSURE."
There are two legal exchange markets in Brazil--the commercial rate exchange
market (the "Commercial Market") and the floating rate exchange market (the
"Floating Market"). The Commercial Market is reserved primarily for foreign
trade transactions and transactions that generally require prior approval from
Brazilian monetary authorities, such as the purchase and sale of registered
investments by foreign persons and related remittances of funds abroad.
Purchases and sales of foreign exchange in the Commercial Market may be carried
out only through a financial institution in Brazil authorized to buy and sell
currency in that market. As used herein, the "Floating Market Rate" is the
prevailing selling rate for Brazilian currency into U.S. dollars which applies
to transactions to which the Commercial Market Rate does not apply, as reported
by the Central Bank. Prior to the implementation of the REAL Plan, the
Commercial Market Rate and the Floating Market Rate differed significantly at
times. Since the introduction of the REAL, the two rates have not differed
significantly, although there can be no assurance that there will not be
significant differences between the two rates in the future. Both the Commercial
Market Rate and the Floating Market Rate are freely negotiated but are strongly
influenced by the Central Bank. The Commercial Market and the Floating Market
were unified by the Central Bank in 1999 following the decision to allow the
value of the REAL to float. However, transactions are still classified as
"Commercial Market" and "Floating Market" transactions.
Between March 1995 and January 1999, the Central Bank maintained a band within
which the exchange rate between the REAL and the U.S. dollar fluctuated, and the
Central Bank intervened in the foreign exchange market from time to time. From
January 20, 1998 through December 31, 1998, the band was between R$1.12 and
R$1.22 per US$1.00. In early January 1999, the Central Bank attempted a
controlled devaluation of the REAL by widening the band within which the REAL
was permitted to trade, but subsequent Central Bank intervention failed to keep
the rate within the new band. On January 15, 1999, the Central Bank announced
that the REAL would be permitted to float, with Central Bank intervention to
take place only in times of extreme volatility. On June 10, 2002, the Commercial
Market Rate was R$2.6390 to US$1.00.
The following table sets forth the period-end, average, high and low Noon Buying
Rates expressed in REAIS per U.S. dollar, for the periods indicated.
AVERAGE
FOR
PERIOD PERIOD-END PERIOD(1) HIGH LOW
------ ---------- --------- ---- ---
1997............................... 1.1165 1.0805 1.1166 1.0394
1998............................... 1.2087 1.1640 1.2090 1.1160
1999............................... 1.8090 1.8191 2.200 1.2074
2000............................... 1.8270 1.7844 1.8560 1.7230
2001 .............................. 2.3120 2.3630 2.7880 1.9380
2002 (through May 31, 2002)........ 2.5220 2.4055 2.5380 2.2730
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(1) Average of the rates on the last day of each month in the period. SOURCE:
Federal Reserve Bank of New York; Board of Governors of the Federal Reserve
System (for 2002).
RISK FACTORS
Below are described the risk factors that relate materially to the Company and
to investments in its Preferred Shares or ADRs. The Company's business, results
of operations and financial condition could be harmed if any of these risks
materialize and, as a result, the trading price of its Preferred Shares or ADRs
could decline, leading the holders of the Company's ADRs to lose substantial
portions of their investment.
The information included in this Annual Report concerning Brazil has been
included herein to the extent publicly available. Such information is assumed to
be correct and has not been independently verified.
FACTORS RELATING TO BRAZIL
INFLATIONARY RISK
Brazil has historically experienced extremely high rates of inflation. Inflation
itself, as well as certain governmental measures to combat inflation, have had
significant negative effects on the Brazilian economy in general. At the
beginning of 1994, the Brazilian government introduced the REAL Plan, an
economic stabilization plan designed to reduce inflation by reducing certain
public expenditures, collecting liabilities owed to the Brazilian government,
increasing tax revenues, continuing the privatization program and introducing a
new currency (the "REAL Plan"). On July 1, 1994, as part of the REAL Plan, the
Brazilian government introduced the REAL, which replaced the CRUZEIRO REAL as
the official currency of Brazil. Since the introduction of the REAL Plan,
Brazil's inflation rate has been substantially lower than in previous periods.
The devaluation of the REAL was the primary cause of the increase in inflation
in 1999. SEE ITEM 4 "INFORMATION ON THE COMPANY--INFLATION AND DEVALUATION."
Brazil may again experience high levels of inflation in the future. There is no
assurance that recent lower levels of inflation will continue. Future
governmental actions (including additional actions to adjust the value of the
Brazilian currency) may trigger increases in inflation. Accordingly, periods of
substantial inflation may in the future have material adverse effects on the
Brazilian economy, the Brazilian financial markets and on the Company's
business, financial condition and results of operations.
Exchange rate instability and fluctuations in the value of Brazil's currency
against the value of the U.S. dollar may result in uncertainty in the Brazilian
economy and the Brazilian securities market, which may adversely affect the
Company's financial condition and results of operations and the market value of
the Company's equity securities.
The Company cannot predict the effects that the Brazilian government's exchange
rate policies may have on it. In addition, it may be adversely affected by any
future devaluations of the REAL against the U.S. dollar because a significant
portion of its revenues and assets are denominated in REAIS, while a substantial
portion of its debt and other liabilities are denominated in U.S. dollars.
However, it should be noted that 87% of the Company's liabilities denominated in
U.S. dollars are hedged in REAIS. SEE ITEM 11 "QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK--EXCHANGE RATE RISK."
INTEREST RATE INSTABILITY
The Company may be adversely affected by unfavorable changes in the interest
rates applicable to its financial assets and liabilities and cannot predict
interest rate fluctuations or the affects on its financial assets and
liabilities. SEE ITEM 11 "QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK--INTEREST RATE RISK."
OTHER EMERGING MARKET RISK
Brazil is generally considered by international investors to be an "emerging
market." As a result, the market for securities issued by Brazilian companies
and banks is influenced by economic and market conditions in other countries, to
varying degrees. For example, the Brazilian financial markets were adversely
affected by the Mexican liquidity crisis at the end of 1994, the Asian financial
crisis at the end of 1997, the Russian financial crisis in 1998 and the
Argentine crisis in 2000 and could be further affected by future crises. SEE
ITEM 4 "INFORMATION ON THE COMPANY--DEVELOPMENTS IN OTHER EMERGING MARKET
COUNTRIES." After prolonged periods of recession, followed by political
instability, Argentina announced in 2001 that it would not service its public
sector debt. In order to address the aggravated economic and social crisis, the
Argentinean government abandoned its decade-old fixed dollar-peso exchange rate
and created a floating, exchange-rate regime in January, 2002. Since Argentina
is an important trade partner of Brazil, a continuation of the Argentinean
crisis could affect both the revenues and the profitability of Brazilian
companies having significant ties with Argentina.
The Argentinean crisis may also affect the perception of risk in Brazil by
foreign investors. If events in Argentina continue to deteriorate, they may
adversely affect the Company's ability to borrow funds at an acceptable interest
rate and raise equity capital when needed. Since approximately 57% of the
Company's long-term debt at March 31, 2002 is scheduled to mature in 2003 and
2004, these events could cause the Company to delay its capital expenditure
plans, therefore adversely affecting the price of its securities.
SERVICE OF PROCESS
The Company is organized under the Brazilian legislation and all of its assets
are located outside of the United States. All of its directors and executive
officers reside outside of the United States. As a result, it may be difficult
to effect service of process upon the Company or those persons in the United
States or to enforce judgments issued by U.S. courts against the Company or
those persons, including judgments based on the civil liability provisions of
the federal securities laws of the United States.
TAX REFORMS
If as a result of a tax reform the Company experiences a higher tax burden, it
may pass on the cost of the tax increase to its customers. This increase may
have a material negative impact on the Company's revenues. SEE ITEM 10
"ADDITIONAL INFORMATION--BRAZILIAN TAX CONSIDERATIONS."
POLITICAL RISK
Presidential elections in Brazil are scheduled to take place in October, 2002.
The Company cannot anticipate the outcome of the elections or the policies to be
adopted by the new administration or the impact such policies may have on
Brazilian economic conditions and on the Company's results of operations. These
and other future developments in the Brazilian economy and government policies
may reduce the demand for the Company's services in Brazil, adversely affecting
its financial condition and results of operations and impacting the market price
of its Preferred Shares and ADSs.
FACTORS RELATING TO THE COMPANY
THE COMPANY OPERATES IN A RAPIDLY EVOLVING INDUSTRY
The Company's prospects must be considered in light of the risks, uncertainties,
expenses and difficulties frequently encountered by companies in new and rapidly
evolving industries, such as the wireless telecommunications industry. To
address these risks and uncertainties, it must, among other things:
o attract consumers to its products and services;
o expand its network and maintain network quality;
o maintain and enhance its brand, and expand its product and service offerings;
o attract, integrate, retain and motivate qualified personnel; and
o adapt to meet changes in its markets and competitive developments.
The Company may not be successful in accomplishing these objectives.
THE COMPANY RELIES ON KEY PERSONNEL TO CONDUCT ITS BUSINESS AND OPERATIONS.
The success of the Company's business depends on its ability to attract and
retain highly qualified technical and management personnel. Most of the
Company's employees have not signed long-term employment contracts. The loss of
key personnel could have a material effect on the Company's business.
INTERCONNECTION FLUCTUATIONS
The Company is paid a fee from other cellular service providers for every minute
that a subscriber of other cellular service providers based outside of the
Region uses its network. Similarly, the Company pays a fee to other providers
for every minute that one of the Company's subscribers uses a network outside
the Region. The Company's subscribers may spend more time in other coverage
areas than they currently do and subscribers of other cellular providers may
spend less time in the Region or may use the Company's services less than they
currently do. As a result, the Company may receive less interconnection revenue
than it presently does or it may have to pay more interconnection fees than the
interconnection revenue it collects. SEE ITEM 4 "INFORMATION ON THE
COMPANY--OPERATING AGREEMENTS."
TECHNOLOGICAL ADVANCES BY COMPETITORS
The Company presently uses TDMA technology in all wireless services it provides.
TDMA is now considered a mature and well-tested technology, but it may not
provide the advantages expected by the Company for high-speed data transmission
in its wireless network. Eventual stronger demands on the part of the market for
this kind of service may leave the Company in an unfavorable position and reduce
its competitive advantage. Pressure exerted by competitors may require the
Company to change or update its technology to meet higher industry standards
allowing the deployment of this type of service, which may result in
substantially higher costs in the network.
The wireless telecommunications industry has been experiencing significant
technological changes, as demonstrated by the increasing pace of recent upgrades
observed in existing digital second-generation networks--e.g. (2G) to 2.5G and
later to 3G.
As the pace of development of new technology increases, network and handset
costs may decline, creating service economies to end users. If the Company is
unable to keep pace with these technological changes, the technology used by the
company may become obsolete and abandoned in the long term. SEE ITEM 4
"INFORMATION ON THE COMPANY-COMPETITION."
UNAUTHORIZED USE OF THE COMPANY'S NETWORK
The Company will likely incur costs associated with the unauthorized use of its
cellular telecommunications services network, including administrative and
capital costs associated with detecting, monitoring and reducing the incidence
of fraud. Fraud impacts interconnection costs, capacity costs, administrative
costs, fraud prevention costs and payments to other carriers for unbillable
fraudulent roaming.
RISKS RELATED TO THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY
GOVERNMENT REGULATION
The Company's principal business activities are subject to the provisions of
applicable laws and the regulations issued by ANATEL, as well as the terms and
conditions set forth in its Concessions and the interconnection and roaming
agreements entered into by the Company. Changes in the interpretation of such
laws and regulations, the terms and conditions set forth in the Concessions or
the interconnection and roaming agreements met by the Company could have a
material adverse effect on the Company's financial condition and results of
operations. SEE ITEM 4 "INFORMATION ON THE COMPANY--REGULATION OF THE BRAZILIAN
TELECOMMUNICATIONS INDUSTRY."
ABILITY TO INCREASE TELECOMMUNICATIONS SERVICES RATES
According to the terms of the Concessions, the Company is required to render
certain basic services under its basic service plan. It is also allowed to
create additional services plans. The Concessions provide for a price cap
mechanism to set and adjust rates on an annual basis, following a formula set
forth in the Concessions. The cap is a maximum weighted-average price for a
basket of services, 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% above the rate of inflation measured by the variation of IGP-DI, subject
to a downward adjustment for inflation effects already captured in the annual
upward adjustments of the overall price cap for the basket, provided that other
prices are adjusted downwards to ensure that the weighted average tariff does
not exceed the price cap. This results in a limitation to the Company's ability
to increase the rates charged for its services. SEE ITEM 4 "INFORMATION ON THE
COMPANY--REGULATION OF THE TELECOMMUNICATIONS INDUSTRY--RATE REGULATION."
COMPETITION
Beginning in 2002, the Company may face competition from other companies that
will offer PCS services similar to those existing in the United States. In 2001,
the Brazilian market began shift towards the PCS system, called "SMP" in Brazil
(Personal Mobile System). ANATEL intends to replace SMC (Cellular Mobile System)
with PCS. The main difference between this and the U.S. PCS system is that the
licensing regime will change from a concession-based regime to a more flexible
"authorization"-based regime. The Company will be able to choose whether or not
to convert its existing cellular concession into PCS authorization contracts. If
it does not change its concessions, the Company may not be able to efficiently
compete with new market entrants.
The Company also competes with companies providing other wireless services, such
as mobile radio and pager services, and with fixed-line telecommunications
service providers.
There can be no assurance that the entry of new competitors will not have a
material adverse effect on the Company's business, financial condition, results
of operations or prospects. Any adverse effects on its results and market share
from competitive pressures will depend on a variety of factors that cannot now
be assessed with precision and that are beyond its control. Among such factors
are the identity of the competitors, their business strategies and capabilities,
prevailing market conditions at the time, the regulations applicable to the
Company and to new entrants and the effectiveness of the Company's efforts to
prepare for increased competition. One or more new competitors may have
technical or financial resources greater than the Company's. If the Company is
unable to compete successfully, it may experience increasing rates of customer
turnover, which would adversely affect its financial condition and results of
operations. SEE ITEM 4 "INFORMATION ON THE COMPANY--COMPETITION."
SATELLITE SERVICES
The entry of providers of satellite services could have a material adverse
effect on the Company's business, financial condition, results of operations or
prospects. Any adverse effects on the Company's results and market share from
competitive pressures will depend on a variety of factors that cannot now be
assessed with precision and that are beyond the Company's control. SEE ITEM 4
"INFORMATION ON THE COMPANY--COMPETITION--OTHER COMPETITION."
ELECTRIC POWER SHORTAGE
Emergency measures enacted by the Brazilian government in 2001 to restrain
electric power consumption caused an economic slowdown. The combination of a
general expansion in demand for electric power, not followed by sufficient
increase in total power generation capacity, along with low water levels in the
basins feeding the main hydroelectric plants, resulted in an imbalance between
the demand for electric power and the amount of energy available in Brazil. In
May, 2001, the Brazilian government issued a series of measures aimed at
immediately reducing power-demand levels in order to avoid the risk of sudden
blackouts in parts of the country. Among those measures was the creation of the
Electric Energy Crisis Management Board (CAMARA DE GESTAO DE ENERGIA ELETRICA),
with the power to enact resolutions setting forth mandatory reductions in
power-consumption levels, to propose taxation changes in power supply services,
to determine the suspension of power supply to select consumer groups, and other
rights.
The Brazilian energy crisis did not disrupt the Company's operations, nor did it
produce any increase in costs or decrease in revenues or customer base. Thanks
to a contingency plan adopted by the Company, no interruptions of any nature as
a result of the energy shortage were registered as to the operations of the
Company's network and its distribution channels.
Long before to the energy crisis, all Company stations had been equipped with
energy systems consisting of rectifiers and battery banks, which allow cellular
mobile equipment to operate for a minimum of eight hours in case of interruption
of electrical supply by the public concessionaires.
The actions effectively carried out as part of the contingency plan designed by
the Company were divided in two main categories: the first consisted of actions
to maintain network operations during blackouts--whether planned or involuntary,
whether short or long; the second consisted of measures aimed at bringing the
Company's consumption of power to levels compliant with the targets imposed by
the government.
Maintaining network operations primarily involved (i) the review of all existing
energy systems in the network (rectifiers, generators and battery banks) so as
to guarantee their perfect operation in the event of a blackout; (ii) an
increase in the capacity of the battery banks and/or the installation of
generators at critical sites; and (iii) the acquisition of portable generators
for all regional plants in order to supply the main stations in the event of a
planned blackout for a period of time longer than what the battery banks could
provide.
The Company took the following actions in order to comply with consumption
targets: (i) activating installed generators during hours of high power
consumption, mainly in the Commutation and Control Center (CENTRAL DE COMUTACAO
E CONTROLE or "CCC") buildings and in the administration buildings; (ii)
revising the consumption targets with the energy concessionaires; (iii) revising
the lighting and air-conditioning systems, including replacing equipment and
lamps with more efficient and economical models; (iv) implementing corrective
measures associated with the use of air-conditioning equipment, lighting and
elevators; (v) altering the air-conditioning systems in all radio base stations,
which are the largest energy consumers in the Company, including the
installation of devices to allow a more controlled use of outside air for
cooling down the inner part of the stations and therefore allowing
air-conditioning sets to be turned off. Together, these measures reduced power
use by up to 30% and brought the Company's overall consumption to target levels.
There were no restrictions to the expansion of the network thanks to the energy
efficiency of the Company's new stations. While the limit on the amount of
energy supplied to new installations was set at 500KVA, the Company's
administrative and CCC buildings demand a maximum consumption of 225KVA.
The measures described above allowed the Company's network to operate with no
interruptions in power supply. Not only were there no additional costs or power
supply interruptions due to the shortage of energy, but the Company faces the
possible prospect of new shortages with confidence.
PENDING TAX REFORM IN BRAZIL MAY INCREASE THE COMPANY'S TAX BURDEN, RESULTING
IN A REDUCTION OF PROFITS
The Brazilian government has proposed a broad tax reform in Brazil, which is
mainly designed to simplify the tax system, reduce the number of taxes and the
burden on the private sector, by reducing or eliminating cumulative taxes (which
affect the cost of production) while not reducing the amount of revenues to the
Brazilian Treasury. The tax reform bill was expected to be approved by the
Brazilian congress in 2001 but was not, due to unfavorable political conditions.
In addition, because of the presidential elections, it is likely that the reform
will be postponed again in 2002. If tax reform is approved, the Company's tax
burden may increase and its profits may decrease.
It is anticipated that the reform may include the creation of a value-added tax
on goods and services which would replace six existing taxes (including the
social contribution on net profits (CONTRIBUICAO SOCIAL SOBRE O LUCRO LIQUIDO or
"CSLL"), the federal tax on industrial products, or IPI, the Turnover Tax, or
PIS, the Social Security Financing Contribution ("COFINS"), the state tax on the
circulation of goods and services, or "ICMS," and the municipal tax on services,
or ISS). In addition, the CPMF, a temporary tax on financial transactions, may
be replaced by a permanent federal tax on financial transactions. Although we
cannot predict the outcome of the tax reform in Brazil, we may have a higher tax
burden if the tax reform bill is approved and implemented as presented to the
Brazilian Congress.
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
The exact name of the Company, as specified in its charter is Tele Centro Oeste
Celular Participacoes S.A. (Tele Centro Oeste Cellular Holding Company). The
Company is incorporated under the jurisdiction of the Federative Republic of
Brazil. Its headquarters are located at SCS, Quadra 2, Bloco C, 7 andar,
70.319-900 Brasilia, DF, Brazil, and its telephone number is 55-61-313-7765.
The Holding Company is one of the companies formed as a result of the breakup of
Telecomunicacoes Brasileiras S.A. - TELEBRAS ("TELEBRAS") by the Federal
Government on May 22, 1998. Each of the Band A Subsidiaries was formed on
January 5, 1998 by spinning off the cellular telecommunications operations of an
operating company controlled by TELEBRAS (collectively, the "Predecessor
Companies"). References to the operations of the Company prior to January 5,
1998 are to the cellular operations of the Predecessor Companies. SEE ITEM 4
"INFORMATION ON THE COMPANY--HISTORY AND DEVELOPMENT OF THE COMPANY--HISTORICAL
BACKGROUND."
The Band A Subsidiaries of the Company provide cellular telecommunications
services in Brazil's Federal District and in the Brazilian States of Goias, Mato
Grosso do Sul, Mato Grosso, Rondonia, Acre and Tocantins (collectively, "Area
7") under concessions from the Federal Government (the "Band A Concessions").
The Predecessor Companies began to offer cellular telecommunications services in
Area 7 in December 1991, and the Company is the leading provider of cellular
telecommunications services in Area 7. The Band B Subsidiary of the Company
provides cellular telecommunications service in the Brazilian States of Amapa,
Amazonas, Maranhao, Para and Roraima (collectively, "Area 8") under concessions
from the Federal Government (the "Band B Concessions"). The Band A Concessions
and the Band B Concessions are collectively referred to as the "Concessions." As
of April 2002, the Company, including its Band A Subsidiaries and Band B
Subsidiaries, had approximately 2,576,056 subscribers.
On November 21, 2000, SPLICE IP S.A. was formed as a closed corporation. The
Holding Company held 100% of its preferred shares and Splice do Brasil
Telecomunicacoes e Eletronica S.A. ("Splice") held 99.99% of its common shares.
As of March 5, 2001, the control changed to the Holding Company, through the
acquisition of 99.99% of the common shares from Splice and the name of the
subsidiary changed to TCO IP S.A.
On December 31, 2001, Splice transferred all of its shares in BID S.A., the
parent company of the Holding Company, to Fixcel S.A.
HISTORICAL BACKGROUND
Prior to the incorporation of TELEBRAS in 1972, there were more than 900
telecommunications companies operating throughout Brazil. Between 1972 and 1975,
TELEBRAS and its operating Subsidiaries (collectively, the "TELEBRAS System")
acquired almost all the other telephone companies in Brazil and thus came to
have a monopoly over the provision of public telecommunications services in
almost all areas of the country. Beginning in 1995, the Federal Government
undertook a comprehensive reform of Brazil's telecommunications regulatory
system. In July 1997, the Brazilian Congress passed the Law no. 9.472, known as
the LEI GERAL DE TELECOMUNICACOES (the "General Telecommunications Law," and
together with the regulations, decrees, orders and plans on telecommunications
issued by Brazil's Executive Branch, the "Telecommunications Regulations"),
which provided for the establishment of a new regulatory framework, the
introduction of competition and the privatization of TELEBRAS. The General
Telecommunications Law established an independent regulatory agency called
Agencia Nacional de Telecomunicacoes - ANATEL ("ANATEL").
In January 1998, in preparation for the restructuring and privatization of the
TELEBRAS System, the cellular telecommunications operations of TELEBRAS'
operating subsidiaries were spun off into separate companies. In May 1998,
TELEBRAS was restructured to form, in addition to TELEBRAS, 12 new holding
companies (the "New Holding Companies") by means of a procedure under Brazilian
corporate law called CISAO, or split-up. Virtually all the assets and
liabilities of TELEBRAS, including the shares held by TELEBRAS in the operating
companies of the TELEBRAS System, were allocated to the New Holding Companies.
The split-up of the TELEBRAS System into the New Holding Companies is referred
to herein as the "Breakup" or the "Breakup of TELEBRAS."
The New Holding Companies, together with their respective subsidiaries, consist
of (a) eight cellular service providers, each operating in one of eight regions
(each a "Cellular Region"), (b) three fixed-line service providers, each
providing local and intraregional long-distance service in one of three regions
(each a "Fixed-Line Region"), and (c) Embratel Participacoes S.A. - EMBRATEL
("EMBRATEL"), which provides domestic (including intraregional and
interregional) long-distance telephone service and international telephone
service throughout Brazil.
The Holding Company is one of the New Holding Companies. In the Breakup, the
Holding Company was allocated all the share capital held by TELEBRAS in the
operating subsidiaries of the TELEBRAS System that provided cellular
telecommunications service in Area 7. In July 1998, the Federal Government sold
substantially all its shares of the New Holding Companies, including the Holding
Company, to private-sector buyers. The Federal Government's shares of the
Holding Company were purchased by Splice, through its then subsidiary BID S.A..
SEE ITEM 7 "MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS--MAJOR
SHAREHOLDERS."
THE REGION
The region in which the Subsidiaries operate (the "Region") consists of Area 7
and Area 8 and covers an aggregate area of approximately 5,803,501 square
kilometers, representing approximately 68% of the total area of Brazil and 17%
of Brazil's population. Area 7, which is serviced by the Band A Subsidiaries,
includes the federal capital, Brasilia, and the surrounding Federal District, as
well as six Brazilian states. The six states that make up the balance of Area 7
are Goias, Tocantins, Mato Grosso, Mato Grosso do Sul, Rondonia and Acre. Area
8, which is serviced by the Band B Subsidiary, includes five Brazilian states:
Amapa, Amazonas, Maranhao, Para and Roraima.
The following table shows population, Gross Domestic Product ("GDP") and PER
CAPITA income statistics for each state in Area 7 and in Area 8.
POLULATION % OF % OF
IN BRAZILIAN PER CAPITA BRAZILIAN
SUBSIDIARY AREA MILLIONS(1) POPULATION(1) GDP(2) GDP(2)
---------- ---- ----------- ------------ ---------- ---------
Telebrasilia Federal District 2.04 1.21% 10,935 2.28%
Telegoias Goias 4.99 2.95% 3,603 1.84%
Telegoias Tocantins 1.16 0.68% 1,832 0.22%
Telemat Mato Grosso 2.50 1.47% 4,695 1.20%
Telems Mato Grosso do Sul 2.08 1.22% 5,255 1.12%
Teleron Rondonia 1.38 0.81% 5,255 0.52%
Teleacre Acre 0.56 0.33% 2,817 0.16%
NBT Amapa 0.48 0.28% 3,392 0.16%
NBT Amazonas 2.84 1.68% 5,577 1.60%
NBT Maranhao 5.64 3.33% 1,402 0.81%
NBT Para 6.19 3.65% 2,705 1.71%
NBT Roraima 0.32 0.19% 2,558 0.08%
---------------
(1) Estimates of the Instituto Brasileiro de Geografia e Estatistica - IBGE
(the "IBGE"). Population figures pertain only to areas serviced by the
Concessions and do not pertain to cities not serviced by the Concessions.
(2) SOURCE: Instituto Brasileiro de Geografia e Estatistica - IBGE.
The Company's business, financial condition, results of operations and prospects
depend in part on the performance of the Brazilian economy and on the economy of
the Region, in particular. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--BRAZILIAN ECONOMIC ENVIRONMENT."
CAPITAL EXPENDITURES
Prior to privatization, the Company's capital expenditures were made as part of
system wide planning and allocation of capital expenditures by TELEBRAS, which
were subject to approval by the Federal Government. These constraints on capital
expenditures prevented the Company from making certain investments that
otherwise would have been made to improve cellular telecommunications service in
the Region. Since the privatization of TELEBRAS, these restrictions have not
applied. The Company is now permitted to determine its own capital expenditure
budget, subject to its obligations under the Concessions to meet certain network
coverage obligations and quality of service standards. SEE ITEM 4 "INFORMATION
ON THE COMPANY--BUSINESS OVERVIEW--REGULATION OF THE BRAZILIAN
TELECOMMUNICATIONS INDUSTRY--OBLIGATIONS OF TELECOMMUNICATIONS COMPANIES."
The Company's capital expenditure priorities include increasing its network
capacity, improving its 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, 2001.
1999 2000 2001
---- ---- ----
(MILLIONS OF REAIS) (1)
Automatic switching equipment............... 49.7 29.1 22.1
Other equipment............................. 148.2 196.0 100.7
Real estate................................. 0.6 0.2 1.3
Other assets (2)............................ 19.9 30.4 66.4
----- ----- ----
Total capital expenditures.............. 218.4 255.7 190.5
===== ===== =====
---------------
(1) Figures in constant REAIS of December 31, 2000 and nominal REAIS of
December 31, 2001.
(2) Not including expenditures for concessions for Area 8 (R$72.6 million in
1999).
BUSINESS OVERVIEW
SERVICES
The Company offers cellular telecommunications service to its subscribers under
its Basic Service Plan and the Alternative Service Plans with minute-based
deductibles. The Company also offers ancillary services, including voicemail,
call forwarding, call waiting, caller identification, three-way calling,
short-message services (messaging, information and news), CSD (Circuit-Switched
Data) service and wireless application protocol ("WAP") services. In 1999 the
Company began selling cellular handsets in connection with the introduction of
prepaid service. The prepaid service is an alternative plan designed for lower
volume cellular service subscribers. Service is paid for and credited prior to
calls being made. The subscriber must purchase credit (using pre-paid cards or
agreements with lottery houses and financial institutions) that is valid for
outgoing calls within 90 days of activation. Once the credit is used, a new
credit must be purchased within 180 days, or service is canceled and the
subscriber must request a new activation in order to regain service. Prepaid
credits are sold in denominations of R$10.00, R$25.00 and R$50.00. With prepaid
service, subscribers have better control of their expenses.
Messaging services based on the SMS platform are offered by the Company in two
different applications: content-push service and person-to-person communication.
Both SMS services are available for prepaid- and postpaid customers.
The short-message service known as E-CELULAR allows users to send messages from
the Company's website, directly to customers' handsets. Using the same platform,
the Company also releases news on general topics (regional, national and
international) such as economy, sports, weather forecast, horoscopes, access to
account balances in associated banks' balance and agendas. More than 550,000
customers are already using this service, with over 1,000,000 messages sent
daily.
In November, 2000, the interpersonal messaging service known as the E-XPRESSO
was launched experimentally, and since August 1, 2001, subscribers have had to
pay R$0.18 for each message sent. Today, person-to-person communication accounts
for over 5 million messages sent monthly. In January 2001, the Company launched
a new service called the E-WAP, a cellular-based, Internet-access service
available to all customers who own handsets equipped with this feature. In order
to implement this service, the Company has developed a WAP portal through which
customers can access other portals and websites. One of the advantages of this
new service is that customers can customize the portal, making both access and
navigation faster and more convenient. The Company has already formed valuable
partnerships with major Brazilian news agencies FOLHA DE SAO PAULO and O ESTADO
DE SAO PAULO, as well as with BANCO DO BRASIL, UNIBANCO and BANCO BRADESCO (two
large banking institutions) and SOM BRASIL (music producers).
One other service the Company has made available to its customers is the E-WEB,
which uses CSD technology (Circuit-Switched Data) to connect personal
micro-computers and palm-tops to the Internet through cellular handsets. This
provides users with considerable access mobility and flexibility.
Through agreements with other cellular service providers, the Company offers
automatic roaming services throughout Brazil that allow post-paid subscribers to
make and receive calls while out of the Region. These automatic roaming services
also allow prepaid service subscribers to receive calls when out of the TCO
Region or to make calls if located in Area 7 or Area 8. As of October 1, 2001,
pre-paid subscribers have been able to originate calls while roaming outside
Area 7 and Area 8. The Company offers international roaming in Argentina and
Uruguay through agreements with local cellular service providers in those
countries. As of January 2000, the Company began offering international roaming
in over 60 countries in North America, Europe, Asia, South Africa and Australia.
Calls are billed to the subscriber's cellular bill. No credit card or immediate
payment is required. In order to use international roaming, subscribers sign a
contract with the Company in the amount of R$100.00, and in 48 hours the service
is activated. Subscribers who wish to use international roaming in countries
with GSM technology also receive a handset for use while in transit. The
Subscriber is billed later for the handset usage according to the effective
rates of the region where the roaming occurred. The Company also provides
cellular telecommunications service to subscribers of other cellular service
providers while they are in the Region. The Company charges the other service
providers pursuant to roaming agreements for the service provided to their
subscribers. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--OPERATING AGREEMENTS--ROAMING AGREEMENTS."
SALES AND MARKETING
The Company divides its subscribers into two main categories: (i) business
customers, consisting of businesses with four or more cellular telephones, who
accounted for 8% of the Company's revenue in 2001 and (ii) individual customers,
consisting of individuals and businesses with fewer than four cellular
telephones, who accounted for 92% of the Company's revenue during 2001. The
manner in which the Company markets and promotes its services varies, with
occasional plans and services developed specially for particular categories of
customers. The Company provides corporate customers with additional support
services, such as dedicated account representatives.
The Company's customers consist primarily of high- and middle-income
individuals. According to the Company's research, as of December 31, 2001,
approximately 55% of the Company's subscribers were male, and 60% were 40 years
old or younger. Pursuant to ANATEL's regulations, cellular telecommunications
service is provided to all individual applicants, regardless of income level, in
the order in which applications are received. In order to assist in managing the
risk of payment defaults, the Company conducts credit checks on its customers.
Service can be interrupted if a customer fails to make timely payments. SEE ITEM
4 "INFORMATION ON THE COMPANY--BUSINESS OVERVIEW--BILLING AND COLLECTION."
SALES NETWORK
The Company markets its services through a network of Company-owned stores and
magazine stands, supermarkets and specialty stores in the Region. The Company
owns 52 stores and 4 kiosks located throughout the Region, with 37 stores and 3
kiosks located in Area 7, and 15 stores and 1 kiosk located in Area 8. This
network enables the Company to market its service and provide after-sales
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.
SOURCES OF REVENUE
The Company generates revenue from (i) usage charges, which include measured
service-charges for outgoing calls and roaming and other similar charges, (ii)
monthly subscription charges, (iii) network-usage charges, which are amounts
charged by the Company to other cellular and fixed-line service providers for
use of the Company's network, (iv) prepaid handset sales and (v) other charges,
including charges for call forwarding, call waiting and call blocking. The
Company's rates are subject to regulation by ANATEL. SEE ITEM 4 "INFORMATION ON
THE COMPANY--BUSINESS OVERVIEW--REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS
INDUSTRY."
SUBSCRIBER RATES
Since October 1994, cellular telecommunications service in Brazil, unlike in
North America, has been offered on a "calling party pays" basis, under which the
subscriber pays only for calls that he or she originates (in addition, a
subscriber pays roaming charges on calls received, as well as those made,
outside his or her home registration area).
The Region is divided into 92 tariff areas, with 81 in Area 7 and 11 in Area 8.
The lowest base rate ("VC1") applies to calls made by a subscriber in a tariff
area to a line in the same tariff area. Charges for calls from one tariff area
to another within the Region are assessed at a higher rate ("VC2"). Calls from
the Region to persons outside the Region are billed at the highest rate ("VC3").
When a subscriber makes or receives a call while outside the Region, a per-call
surcharge known as "AD" is applicable. When a subscriber receives a call outside
the home registration area, the subscriber also pays a certain rate per minute
if the subscriber is located within the Region ("DSL1"), or a higher rate if the
subscriber is located outside the Region ("DSL2"). Measured service charges are
discounted 30% for calls made between 9:00 p.m. and 7:00 a.m. any day or at any
time on Sundays and national holidays ("off-peak calls"). A 30% surcharge is
imposed on VC1 calls from one cellular telephone to another, compared to calls
from a cellular telephone to a fixed-line telephone. As a means of incentive to
usage, the alternative plan service called ESSENCIAL (Essential) offers
deductibles of 50, 100, 150, 300, 600 and 1,000 minutes for NBT and 50, 100,
150, 300, 650 and 1,100 minutes for the Company in calls of types VC1 and VC2,
with cheaper rates for the minutes exceeding these limits. The following table
sets forth the average rates for the Basic Service Plan for each year in the
three-year period ended December 31, 2001.
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 2000 2001
----------- ------------ ------------
(REAIS) (1)
Activation fee (2) 151.63 - -
Monthly subscription fee (2) 20.20 22.12 30.76
Per-minute charges:
VC1 (2) 0.27 0.3023 0.3320
VC2 (2) 0.40 0.4067 0.4458
VC3 (2) 0.66 0.7383 0.8120
DSL1 (2) 0.19 0.2199 0.2410
DSL2 (2) 0.33 0.3654 0.4010
AD (per call) (2) 0.29 0.29 0.31
---------------
Information for 1999, 2000 and 2001 is presented in nominal reais.
(1) Averages of the rates charged by the Subsidiaries, weighted by number of
subscribers.
(2) Weighted AVERAGE peak rates, net of value-added taxes.
The following table sets forth certain terms of the Company's service plans,
which were implemented as of February, 2000.
----------------------------------------------------------------------
AREA 7 PLANS 240 500
----------------------------------------------------------------------
STATES DF,TO, DF, TO,
MS,RO, GO MT MS,RO, GO MT
AC AC
----------------------------------------------------------------------
EXEMPT MINUTES 240 500
----------------------------------------------------------------------
RESIDENCES (1)(2) 162.00 162.00
----------------------------------------------------------------------
SUBSCRIPTIONS (1) 79.00 80.13 79.00 139.00 140.98 139.00
----------------------------------------------------------------------
VC1 MF (1)(3) 0.4204 0.4264 0.4521 0.4204 0.4264 0.4521
----------------------------------------------------------------------
VC1 MM (1)(4) 0.5466 0.5544 0.5877 0.5466 0.5544 0.5877
----------------------------------------------------------------------
VC2 (1) 0.5700 0.5781 0.6114 0.5700 0.5781 0.6114
----------------------------------------------------------------------
VC3 (1) 1.0231 1.0377 1.1002 1.0231 1.0377 1.1002
----------------------------------------------------------------------
DSL1 (1) 0.00 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
DSL2 (1) 0.5045 0.5117 0.5425 0.5045 0.5117 0.5425
----------------------------------------------------------------------
AD (1) 0.00 0.00 0.00 0.00 0.00 0.00
----------------------------------------------------------------------
---------------
(1) Amounts are expressed in nominal REAIS.
(2) Rates not charged during promotions.
(3) "MF" means "mobile-fixed."
(4) "MM" means "mobile-mobile."
(5) These plans include a number of exempt minutes for VC1 calls to
fixed-line and intra-network cellular telephones.
The table below shows the service plans launched in July, 2000.
--------------------------------------------------------------------------------
PLANO ESSENCIAL ESSENCIAL ESSENCIAL ESSENCIAL
PLANS TCO-12 50 100 150 300
--------------------------------------------------------------------------------
STATE GO OTHER GO OTHER GO OTHER GO OTHER GO OTHER
--------------------------------------------------------------------------------
FREE MINUTES 0 50 MIN. 100 MIN. 150 MIN. 300 MIN.
--------------------------------------------------------------------------------
ACTIVATION 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------
BASIC
SUBSCRIPTION 10.14 10.00 39.56 39.00 9.84 59.00 69.98 69.00 110.55 109.00
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
VC-1 MF 0.70 0.69 0.60 0.59 0.47 0.46 0.44 0.43 0.34 0.33
--------------------------------------------------------------------------------
VC-1 MM TCO 0.70 0.69 0.60 0.59 0.47 0.46 0.44 0.43 0.34 0.33
--------------------------------------------------------------------------------
VC-1 MM B 0.70 0.69 0.60 0.59 0.47 0.46 0.44 0.43 0.34 0.33
--------------------------------------------------------------------------------
VC-2 0.70 0.69 0.60 0.59 0.47 0.46 0.44 0.43 0.34 0.33
--------------------------------------------------------------------------------
VC-3 1.05 1.04 1.22 1.20 1.22 1.20 1.11 1.10 1.04 1.03
--------------------------------------------------------------------------------
DSL-1 0.41 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------
DSL-2 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51
--------------------------------------------------------------------------------
AD 0.41 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------
Note: subscriptions to ESSENCIAL 50, 100, 150 and 300 plans include respectively
50, 100, 150 and 300 minutes of VC1 and VC2 calls for both cellular and
fixed-line numbers originated within Area 7.
The table below shows the service plans launched in June, 2001.
--------------------------------------------------------------------------------
PLANS ESSENCIAL 650 ESSENCIAL 1100
--------------------------------------------------------------------------------
STATE GO MT OTHER GO MT OTHER
--------------------------------------------------------------------------------
FREE MINUTES 650 MIN. 1100 MIN.
--------------------------------------------------------------------------------
ACTIVATION 0.00 0.00
--------------------------------------------------------------------------------
BASIC
SUBSCRIPTION 181.55 192.49 179.00 303.26 321.54 299.00
--------------------------------------------------------------------------------
VC-1 MF 0.31 0.33 0.31 0.31 0.33 0.31
--------------------------------------------------------------------------------
VC-1 MM TCO 0.31 0.33 0.31 0.31 0.33 0.31
--------------------------------------------------------------------------------
VC-1 MM B 0.31 0.33 0.31 0.31 0.33 0.31
--------------------------------------------------------------------------------
VC-2 0.31 0.33 0.31 0.31 0.33 0.31
--------------------------------------------------------------------------------
VC-3 0.77 0.81 0.76 0.71 0.75 0.70
--------------------------------------------------------------------------------
DSL-1 0.00 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------
DSL-2 0.51 0.54 0.50 0.51 0.54 0.50
--------------------------------------------------------------------------------
AD 0.00 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------
Note: subscriptions to ESSENCIAL 650 and 1100 plans include respectively 650 and
1100 minutes of VC1 and VC2 calls for both cellular and fixed-line numbers
originated within Area 7.
Aside from its Basic Service Plan, NBT has implemented other service plans in
Area 8. NBT's service plan rates are set out in the following tables:
The table below shows the rates of the service plans for the states of AP, AM,
MA, and RR.
--------------------------------------------------------------------------------
AREA 8 PLANS BASIC ECONOMY 100 200 500 EASY COLLEGE STUDENT
TIME(1) REGULAR REDUCED
--------------------------------------------------------------------------------
EXEMPT MINUTES(5) 0 0 100 200 500 0 0
--------------------------------------------------------------------------------
RESIDENCES(2) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------
SUBSCRIPTIONS(2) 36.44 31.99 59.00 84.96 165.00 15.00 17.99
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
VC1 MF(2)(3) 0.44 0.35 0.35 0.33 0.30 0.65 0.74 0.23
--------------------------------------------------------------------------------
VC1 MM(2)(4) 0.57 0.46 0.35 0.33 0.30 0.65 0.69 0.21
--------------------------------------------------------------------------------
VC1 MM (ANOTHER 0.57 0.46 0.44 0.44 0.44 0.65 1.04 0.50
CARRIER)(2)(4)
--------------------------------------------------------------------------------
VC2 MF(2) 0.83 0.78 0.75 0.75 0.75 0.65 0.85 0.30
--------------------------------------------------------------------------------
VC2 MM(2) 0.83 0.78 0.75 0.75 0.75 0.65 0.69 0.20
--------------------------------------------------------------------------------
VC2 MM (ANOTHER 0.83 0.78 0.75 0.75 0.75 0.65 1.04 0.50
CARRIER)(2)
--------------------------------------------------------------------------------
VC3(2) 0.98 0.89 0.85 0.85 0.85 1.09 1.29 0.73
--------------------------------------------------------------------------------
DSL1(2) 0.42 0.39 0.39 0.39 0.39 0.65 0.35 0.11
--------------------------------------------------------------------------------
DSL2(2) 0.49 0.44 0.44 0.44 0.44 0.65 1.29 0.73
--------------------------------------------------------------------------------
AD(2) 0.68 0.66 0.66 0.66 0.66 0.65 0.43
--------------------------------------------------------------------------------
---------------
(1) Regular hours from Monday through Saturday between 07:00 and 21:00 and
Reduced Hours from Monday through Saturday between 21:00 and 07:00 and
Sundays and national holidays.
(2) Amounts are expressed in nominal REAIS.
(3) "MF" means "mobile-fixed."
(4) "MM" means "mobile-mobile."
(5) "Deductibles" refers to VC1 MF and VC1 MM - NBT Calls.
The table below shows the rates of the service plans for the state of PA.
--------------------------------------------------------------------------------
AREA 8 PLANS BASIC ECONOMY 100 200 500 EASY COLLEGE STUDENT
TIME(1) REGULAR REDUCED
--------------------------------------------------------------------------------
EXEMPT MINUTES (5) 0 0 100 200 500 0 0
--------------------------------------------------------------------------------
RESIDENCES (2) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------
SUBSCRIPTIONS (2) 39.18 34.39 63.45 91.36 177.44 16.13 19.35
--------------------------------------------------------------------------------
VC1 MF (2)(3) 0.4764 0.38 0.38 0.36 0.32 0.69 0.80 0.24
--------------------------------------------------------------------------------
VC1 MM (2)(4) 0.6192 0.50 0.38 0.36 0.32 0.69 0.74 0.23
--------------------------------------------------------------------------------
VC1 MM (ANOTHER 0.6192 0.50 0.47 0.47 0.47 0.69 1.12 0.54
CARRIER) (2) (4)
--------------------------------------------------------------------------------
VC2 MF(2) 0.8996 0.84 0.81 0.81 0.81 0.69 0.92 0.32
--------------------------------------------------------------------------------
VC2 MM(2) 0.8996 0.84 0.81 0.81 0.81 0.69 0.74 0.21
--------------------------------------------------------------------------------
VC2 MM (ANOTHER 0.8996 0.84 0.81 0.81 0.81 0.69 1.12 0.54
CARRIER) (2)
--------------------------------------------------------------------------------
VC3 (2) 1.0628 0.96 0.92 0.92 0.92 1.18 1.39 0.78
--------------------------------------------------------------------------------
DSL1 (2) 0.4589 0.42 0.42 0.42 0.42 0.69 0.38 0.12
--------------------------------------------------------------------------------
DSL2 (2) 0.5314 0.47 0.47 0.47 0.47 0.69 1.39 0.78
--------------------------------------------------------------------------------
AD (2) 0.73 0.71 0.71 0.71 0.71 0.69 0.47
--------------------------------------------------------------------------------
---------------
(1) Regular hours from Monday through Saturday between 07:00 and 21:00 and
Reduced Hours from Monday through Saturday between 21:00 and 07:00 and
Sundays and National Holidays.
(2) Amounts are expressed in nominal REAIS.
(3) "MF" means "mobile-fixed."
(4) "MM" means "mobile-mobile."
(5) "Deductibles" refers to VC1 MF and VC1 MM - NBT Calls.
The table below shows the service plans launched in September, 2001, in the
states of AP, AM, MA, and RR.
--------------------------------------------------------------------------------
SERVICES ESSENTIAL ESSENTIAL ESSENTIAL ESSENTIAL
50 100 150 300
--------------------------------------------------------------------------------
SUBSCRIPTION 39.00 55.00 69.00 118.92
--------------------------------------------------------------------------------
VC1/VC2 MM NBT AND MF 0.36 0.36 0.36 0.36
--------------------------------------------------------------------------------
VC1/VC2 MM (ANOTHER CARRIER) 0.45 0.45 0.43 0.43
--------------------------------------------------------------------------------
VC3 0.87 0.87 0.87 0.87
--------------------------------------------------------------------------------
DSL1 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------
DSL2 0.40 0.40 0.40 0.40
--------------------------------------------------------------------------------
AD 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------
Note: subscriptions to ESSENCIAL 50, 100, 150 and 300 plans include respectively
50, 100, 150 and 300 minutes of VC1 and VC2 calls for NBT mobile- and
fixed-lines originated within Area 8.
The table below shows the service plans launched in September, 2001, in the
state of PA.
--------------------------------------------------------------------------------
SERVICES ESSENTIAL ESSENTIAL ESSENTIAL ESSENTIAL
50 100 150 300
--------------------------------------------------------------------------------
SUBSCRIPTION 41.94 59.14 74.20 127.88
--------------------------------------------------------------------------------
VC1/VC2 MM NBT AND MF 0.39 0.39 0.39 0.39
--------------------------------------------------------------------------------
VC1/VC2 MM (ANOTHER CARRIER) 0.48 0.48 0.46 0.46
--------------------------------------------------------------------------------
VC3 0.94 0.94 0.94 0.94
--------------------------------------------------------------------------------
DSL1 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------
DSL2 0.43 0.43 0.43 0.43
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AD 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------
Note: subscriptions to ESSENCIAL 50, 100, 150 and 300 plans include respectively
50, 100, 150 and 300 minutes of VC1 and VC2 calls for NBT mobile- and
fixed-lines originated within Area 8.
The table below shows the service plans launched in March, 2001, in the States
of AP, AM, MA, and RR.
--------------------------------------------------------
SERVICES ESSENTIAL ESSENTIAL
600 1000
--------------------------------------------------------
SUBSCRIPTION 189.00 297.15
--------------------------------------------------------
VC1/VC2 MM NBT AND MF 0.36 0.36
--------------------------------------------------------
VC1/VC2 MM (ANOTHER CARRIER) 0.43 0.43
--------------------------------------------------------
VC3 0.87 0.87
--------------------------------------------------------
DSL1 0.00 0.00
--------------------------------------------------------
DSL2 0.40 0.40
--------------------------------------------------------
AD 0.00 0.00
--------------------------------------------------------
Note: subscriptions to ESSENCIAL 600 and 1000 plans include respectively 600 and
1000 minutes of VC1 and VC2 calls for NBT mobile- and fixed-lines originated
within Area 8.
The table below shows the service plans launched in March, 2001, in the State of
PA.
--------------------------------------------------------
SERVICES ESSENTIAL ESSENTIAL
600 1000
--------------------------------------------------------
SUBSCRIPTION 203.24 319.54
--------------------------------------------------------
VC1/VC2 MM NBT AND MF 0.39 0.39
--------------------------------------------------------
VC1/VC2 MM (ANOTHER CARRIER) 0.46 0.46
--------------------------------------------------------
VC3 0.94 0.94
--------------------------------------------------------
DSL1 0.00 0.00
--------------------------------------------------------
DSL2 0.43 0.43
--------------------------------------------------------
AD 0.00 0.00
--------------------------------------------------------
Note: subscriptions to ESSENCIAL 600 and 1000 plans include respectively 600 and
1000 minutes of VC1 and VC2 calls for NBT mobile- and fixed-lines originated
within Area 8.
TCO/NBT offers two types of pre-paid service plans: TOQUE and TOQUE SIMPLES.
Pre-paid service rates, in Area 7, are charged by the Subsidiaries in accordance
with the following schedule:
--------------------------------------------------------------------------------
TYPE OF CALL SCHEDULE RATE (2)
------------ --------- -----
(1)
--------------------------------------------------------------------------------
TOQUE TOQUE
SIMPLES
--------------------------------------------------------------------------------
From TOQUE CELULAR to any cellular-
VC1 or VC2 or fixed-line handset in Area 7. Normal R$0.97 0.79
--------------------------------------------------------------------------------
From TOQUE CELULAR to any cellular-
VC1 or VC2 or fixed-line handset in Area 7. Special R$0.48 0.79
--------------------------------------------------------------------------------
From TOQUE CELULAR to any Company
VC1 or VC2 cellular telephone on any day, and 24h R$0.48 0.79
any local call on Sundays and
national holidays.
--------------------------------------------------------------------------------
VC3 From TOQUE CELULAR to any cellular- or 24h R$1.90 1.90
fixed-line handset outside of Area 7.
--------------------------------------------------------------------------------
DSL1 Received when roaming within Area 7 24h Free Free
--------------------------------------------------------------------------------
Received when roaming within Area 8 0.43 0.43
DSL2 ------------------------------------- 24h ------- -------
Received when roaming outside Areas 7 1.00 1.00
and 8
--------------------------------------------------------------------------------
Based on Calls Originated or Received
AD when roaming within Areas 7 or 8 Free Free
------------------------------------- 24h ------- -------
Based on Calls Received when roaming 0.44 0.44
outside Areas 7 and 8
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TYPE OF SERVICE RATE (3)
--------------------------------------------------------------------------------
Voicemail/Answering Service R$0.39
--------------------------------------------------------------------------------
Confirmation of Provision of Service R$5.00
--------------------------------------------------------------------------------
Surcharge for obtaining balance information more than twice daily R$0.20
--------------------------------------------------------------------------------
---------------
(1) The Special Schedule is available in the Federal District, Goias and
Tocantins from 9:00 p.m. to 9:00 am; in Mato Grosso and Mato Grosso do Sul
from 8:00 p.m. to 8:00 am; in Rondonia from 7:00 p.m. to 7:00 am; and in
Acre from 6:00 p.m. to 6:00 am.
(2) All amounts are expressed in REAIS, including taxes charged per minute of
calls made by cellular telephones inside the caller's tariff area.
The table below shows the rates practiced in State of AP, AM, MA, and RR:
--------------------------------------------------------------------------------
RATE
SERVICE TYPE OF CALL HOURS ------------------------
TOQUE TOQUE
SIMPLES
--------------------------------------------------------------------------------
To any cellular or fixed Normal 0.96 0.76
line in Area 8 -------------------------------------
VC1 Special 0.48 0.76
or ----------------------------------------------------------------------
VC2 To any Area 8 cellular Normal 0.73 0.76
----------------------------------------------------------------------
Special 0.48 0.76
--------------------------------------------------------------------------------
VC3 To any cellular or fixed 24 h 0.96 0.96
line outside Area 8
--------------------------------------------------------------------------------
DSL1 Based on Calls received when 24 h Free Free
roaming in Area 8
--------------------------------------------------------------------------------
Based on Calls received when 0.43 0.43
roaming in Area 7
DSL2 --------------------------------- 24 h ------------------------
Based on Calls received when 1.00 1.00
roaming outside Areas 7 and 8
--------------------------------------------------------------------------------
Based on Calls received when Free Free
roaming in Areas 7 and 8
AD --------------------------------- 24 h ------------------------
Based on Calls received when 0.44 0.44
roaming outside Areas 7 and 8
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL SERVICES APPLICATION RATE
--------------------------------------------------------------------------------
Message retrieval per minute 0.39
--------------------------------------------------------------------------------
Fee for one daily balance inquiry per call Free
--------------------------------------------------------------------------------
Fee for more than one daily balance inquiry per call 0.10
--------------------------------------------------------------------------------
The table below shows the rates practiced in the state of PA:
--------------------------------------------------------------------------------
RATE
SERVICE TYPE OF CALL HOURS ------------------------
TOQUE TOQUE
SIMPLES
--------------------------------------------------------------------------------
To any cellular or fixed line in Normal 1.03 0.81
Area 8 ----------------------------------
VC1 Special 0.51 0.81
or ----------------------------------------------------------------------
VC2 Normal 0.78 0.81
To any Area 8 cellular ----------------------------------
Special 0.51 0.81
--------------------------------------------------------------------------------
VC3 To any cellular or fixed line 24 h 1.03 1.03
outside Area 8
--------------------------------------------------------------------------------
DSL1 Based on Calls received when 24 h Free Free
roaming in Area 8
--------------------------------------------------------------------------------
Based on Calls received when 0.47 0.47
roaming in Area 7
DSL2 --------------------------------- 24 h ------------------------
Based on Calls received whe 1.07 1.07
roaming outside Areas 7 and 8
--------------------------------------------------------------------------------
Based on Calls received when Free Free
roaming in Areas 7 and 8
AD --------------------------------- 24 h --------------------
Based on Calls received when 0.48 0.48
roaming outside Areas 7 and 8
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL SERVICES APPLICATION RATE
--------------------------------------------------------------------------------
Message retrieval per minute 0.42
--------------------------------------------------------------------------------
Fee for one daily balance inquiry per call Free
--------------------------------------------------------------------------------
Fee for more than one daily balance inquiry per call 0.11
--------------------------------------------------------------------------------
ROAMING FEES
The Company also receives revenues pursuant to roaming agreements with other
cellular service providers. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--OPERATING AGREEMENTS--ROAMING AGREEMENTS." When a call is made from
within the Region by a subscriber of another cellular service provider, that
service provider pays the Company for the call at the applicable rate.
Conversely, when a Company subscriber makes a cellular call outside the Region,
the Company must pay the charges associated with that call to the cellular
service provider in whose region the call originates.
NETWORK USAGE CHARGES
Pursuant to interconnection agreements with other telecommunications providers,
the Company earns revenues from any call (cellular or fixed-line) originating
from another cellular- or fixed-line service provider and terminating on a
cellular telephone within the Region. SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--OPERATING AGREEMENTS--INTERCONNECTION AGREEMENTS."
The Company charges the service provider from whose network the call originates,
a network-usage charge for each minute of use of the Company's network 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. In November, 1999, ANATEL granted an increase
of 14.7%, raising the tariff to R$0.2180. In December 2000, ANATEL authorized a
23.26% readjustment and the value of the TU-M rose to R$0.2687, net of
value-added taxes. In Area 8, where the NBT operates, the value of the TU-M was
R$0.21 until October 2000. After October and the 26.38% readjustment authorized
by ANATEL, the TU-M rose to R$0.2654, net of value-added taxes.
TAXES ON TELECOMMUNICATIONS SERVICES
The cost of telecommunications services to the subscriber includes a variety of
taxes. The average rate of all such taxes, as a percentage of gross operating
revenues for the Company, was approximately 20.7% in 2001.
o ICMS. The main tax is a state value-added tax, the IMPOSTO SOBRE CIRCULACAO
DE MERCADORIAS E SERVICOS (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 Acre, where the rate for domestic telecommunications
services is 17% for intrastate calls and 13% for international calls, in Mato
Grosso and Para, where the ICMS rate is 30%, and in Goias, which raised its ICMS
rate from 25% to 26%. The rate on sales of prepaid cellular handsets in the
Region is 17%, except in Goias where it is 7%.
In June, 1998, the governments of the individual Brazilian states approved an
agreement to interpret existing Brazilian tax law to apply the ICMS to certain
services to which the ICMS had not previously been applied, including cellular
activation, effective as of July 1, 1998. The agreement also provides that the
ICMS may be applied retroactively to activation services rendered during the
five years preceding June 30, 1998. SEE ITEM 8 "FINANCIAL
INFORMATION--CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION--LEGAL
PROCEEDINGS--LITIGATION RELATED TO THE APPLICATION OF THE ICMS."
o COFINS. THE CONTRIBUICAO SOCIAL PARA O FINANCIAMENTO DA SEGURIDADE SOCIAL,
or COFINS, is a social contribution tax on gross revenues (operating and
financial). On November 27, 1998, the Brazilian government increased the COFINS
rate from 2% to 3% by issuing Law no. 9718, which allowed a set-off of up to 1/3
of the COFINS amount with the amount owed as a result of the Contribuicao Social
Sobre Lucro Liquido, or CSL. Provisional Measure number 2158 of August 2001,
(last version of the Provisional Measure number 1991-13 of January 13,2000) had
revoked the allowance to set-off of up to 1/3 of the COFINS amount with the
amount owed as a result of the CSL for periods after January 1, 2000.
o PIS. THE PROGRAMA DE INTEGRACAO SOCIAL, or PIS, is another social
contribution tax which, together with the COFINS, is imposed on certain
telecommunications services at a combined rate of 3.65% of gross revenues
(operating and financial).
o FUST. On August 17, 2000, the Brazilian government created the FUNDO DE
UNIVERSALIZACAO DOS SERVICOS DE TELECOMUNICACOES, or FUST, by issuing Law no.
9998. It consists in a social contribution tax applicable to all
telecommunication services. The purpose of the FUST tax is to fund a portion of
the costs incurred by telecommunication service providers to meet the universal
service targets required by ANATEL, in case these costs are not entirely
recoverable through the provision of telecommunication services. The FUST is
imposed at a rate of 1% on gross operating revenues and its cost may not be
passed to subscribers.
o FUNTTEL. On November 28, 2000, the Brazilian government created the FUNDO
PARA DESENVOLVIMENTO TECNOLOGICO DAS TELECOMUNICACOES, or FUNTTEL, by issuing
Law no. 10052. It consists in a social contribution tax applicable to all
telecommunication services. The purpose of the FUNTTEL tax is to promote the
development of telecommunications technology in Brazil and to improve
competition in the industry by:
o Encouraging research and development of new technologies;
o Promoting the empowerment of human resources;
o Creating new employment opportunities; and
o Allowing small and medium-sized companies to access the
lending market.
The FUNTTEL is imposed at a rate of 0.5% on gross operating revenues and its
cost may not be passed to subscribers.
o FISTEL. On July 7, 1966, the Brazilian government created the FUNDO DE
FISCALIZACAO DAS TELECOMUNICACOES ("FISTEL") by issuing Law no. 5070. It
consists in a tax applicable to telecommunication services. The purpose of the
FISTEL is to provide financial resources to the Brazilian government for
promoting the control and inspection of the sector.
FISTEL is supported by two fees: a fee for inspection and installation assessed
at authorized telecommunication stations at the time of the issuance of the
authorization certificate. There is a fixed-value for this fee according to the
kind of equipment. The other is a fee for inspection and operation that is
annually assessed on the total number of stations authorized until December 31
of the previous year. The latter fee corresponds to 50% of the estimated fee for
inspection and installation.
BILLING AND COLLECTION
The Company's billing system has four main functions: (i) subscriber
registration, (ii) subscriber information management, (iii) accounts payable
management and (iv) billing and collection. To facilitate the billing and
collection processes, there are eight staggered billing cycles per month.
The Company allows subscribers at least 15 days from the due date before
suspending service for nonpayment. The Company's management estimates that
approximately 50% (by value) of its invoices are paid on or before the due date.
If a subscriber's payment is more than 15 days past due, service may be
suspended until full payment for all outstanding charges is received. After 60
days delinquency, the subscriber is referred to a collection agency. If a
subscriber's payment is more than 90 days past due, service may be suspended.
The Company's net losses on trade accounts receivable were 7.4%, 3.8% and 3,1%
of gross operating revenues in 1999, 2000 and 2001, respectively. SEE ITEM 5
"OPERATING AND FINANCIAL REVIEW AND PROSPECTS--OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 1999, 2000 AND 2001--OPERATING EXPENSES--SELLING EXPENSES."
Until November 1999, the collection of accounts past due over 60 days was
contracted to third parties. As of November 1999, the Company has effected the
collection of its own accounts and hopes to reduce the delinquency rate of its
subscribers. For subscribers whose service is canceled due to over 90 days
delinquency, the Company offers a 20% discount for installment payments, and a
30% discount for cash payments, of amounts due.
The Company receives roaming fees from other cellular service providers when
their subscribers make cellular calls while within the Region, and pays roaming
fees to other cellular service providers when its subscribers make cellular
calls while outside of the Region. SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--SOURCES OF REVENUE--ROAMING FEES." The Company
receives network-usage fees from other service providers when their subscribers
make calls that terminate on a cellular telephone within the Region, and the
Company pays network-usage fees when its subscribers make calls that terminate
on the network of another service provider. SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--SOURCES OF REVENUE--NETWORK USAGE CHARGES." After
each collection cycle is over, the Company and the other service providers
reconcile the amounts owed between them and settle on a net basis. For
international and domestic long-distance calls made by its subscribers, the
Company forwards the amount collected for such calls to EMBRATEL and charges
EMBRATEL a fee for the use of its cellular telecommunications network.
NETWORK
As of December 31, 2001, the Company's cellular telecommunications network
covered approximately 86% and 55% of the population of Area 7 and Area 8,
respectively. The Company continues to expand its cellular telecommunications
network to cover as broad a geographical area as is economically feasible in
order to meet consumer demand. Under the Concessions, the Company has certain
obligations concerning network coverage. SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS
INDUSTRY--OBLIGATIONS OF TELECOMMUNICATIONS COMPANIES." At present, the Company
is in compliance with its network coverage obligations and has met or exceeded
all ANATEL requirements.
As of December 31, 2001, the Company's cellular telecommunications network in
Area 7 consisted of 14 cellular switches, 650 base-stations, 43 repeaters and
43,310 traffic channels and one national- and two regional-signaling transfer
points. The Company's nine Nortel DMS-MTX and five Ericsson AXE 10 switches are
distributed among its switching centers, 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, but has substantially increased its own
transmission facilities during the last year.
Since October, 1999, when NBT commenced providing cellular telephone services in
Area 8 using the Nortel DMS-MTX cellular infrastructure, it has rapidly
increased its penetration into Area 8. As of December 31, 2001, NBT had 11
cellular switches, located in Manaus, Tabatinga, Belem, Santarem, Maraba,
Redencao, Altamira, Sao Luis, Imperatriz, Boa Vista and Macapa, with 139
base-stations, 10 repeaters and 8,969 traffic channels. The network is connected
primarily by Company facilities, including radio accesses and long-distance
radio routes.
Nortel and Ericsson are the Company's primary suppliers of cellular
infrastructure. Also, Marconi, NERA and NEC are the Company's main suppliers of
transmission equipment.
Since 1998, the Company has been upgrading its network to supply digital service
based on the TDMA standard in the Federal District, as well as in Rondonia, Mato
Grosso do Sul, Goias, Mato Grosso, Acre and Tocantins. Digitalization still
accounts for one of the Company's key strategic initiatives and digital accesses
now represent more than 95% of the Company's access. Company 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.
The Company continues to increase its capacity and improve the quality of its
network by deploying new base-stations and by adding channels to its existing
base-stations. This development is carried out in response to projected
subscriber demand, as well as to national and international quality standards
for cellular telecommunications service. The Company's management believes that
its network will require further development to continue to meet the demand for
cellular services in the states' capitals and their surrounding metropolitan
areas. For this reason, work was started in 2001 to meet market demands for new
high-speed data services, which will require technology evolution, through the
overlay of a new air interface infrastructure (even 1X RTT or GPRS ), with
trials scheduled by 2002 in Goiania (GSM) and Brasilia (CDMA), located in Area
7.
In 2001, the Company also increased its transmission capabilities by deploying
numerous radio links for interconnection purposes and to connect cell sites to
switches. Additionally, the Company began designing and deploying its long-haul
transmission network to connect its main routes, such as the Campo Grande
-Dourados, in the State of Mato Grosso do Sul, now in operation, also expanding
the Brasilia-Goiania route. A project has begun to build its connecting switches
in Brasilia, Goiania, Rondonopolis, Cuiaba and Campo Grande. In 2001, the
Company commenced building an article transmission network in Goiania, Cuiaba,
Brasilia and Campo Grande.
In addition to increasing network capacity, in 2001 the Company has greatly
expanded its voice-mail and CSD- "Circuit Switched Data" platforms (distributed
across the different regions), prepaid and Short Message Service ("SMS")
platforms (centralized in Brasilia), in order to support demand for this
value-added service both for TCO and NBT.
In 2001, in the SMS arena, the Company increased its penetration by providing,
in addition to information services (e-celular), Mobile originated services
(M.O.) and also began developing push-pull services like CHAT, BANKING,
INFORMATION and others, expected to be operational this year.
In 2001, the company activated CSD (Circuit Switched Data) platforms in
Rondonopolis, Porto Velho, Rio Branco, Palmas, Macapa and Boa Vista, completing
CSD coverage for the vast majority of its network. Combined with the activated
WAP (Wireless Application Protocol) Gateway provided by Ericsson, customers with
WAP-capable phones are being provided with data services to obtain convergence
with the Internet. The service started with slow growth due to the
unavailability of WAP handsets in the market, but it is now gaining force due to
the increasing availability of handsets and the new applications that are being
developed.
During the year 2001, TCO deployed infrastructure to allow prepaid customers to
use roaming services, and conducted a business and a technical trial in order to
evaluate the main capabilities of a WIN platform, provided by ERICSSON. It also
conducted an RFP (REQUEST FOR PROPOSAL) to evaluate the market and the
technology available for voice-portal platforms. The results of these projects
are now being evaluated on their technical and economic aspects.
In 2001, the Company deployed its network management system, acquired from TTI,
an Israeli company, which has supervised the network in the entire region of TCO
and NBT since August, 2001. Items such as performance, number of faults and
network configuration are among the main ones being monitored by the management
system. The management center, located in Brasilia, is a 24-hour / 7-day
operating system.
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 documents that do not belong to him and a fictitious address, obtains
cellular telecommunications service with no intention of paying for the service.
Such fraud can be detected prior to the invoicing of charged services by means
of analysis of the use of the cellular line and of information on the subscriber
on file with the Company and with collection agencies. However, controlling this
type of fraud is made difficult by virtue of ANATEL's application of Rule 05/78,
which prohibits the suspension of service prior to an account being 15 days past
due. However, service may still be suspended when the subscription is a suspect
one and fraud has been confirmed (by means of specific check-ups). In such
cases, the rules imposed by ANATEL do not prevent the discontinuance of service.
Nonetheless, subscription fraud constitutes one of the most significant problems
for cellular companies in Brazil.
Cloning fraud consists of duplicating the cellular signal of a BONA FIDE
subscriber, enabling the perpetrator of the fraud to make telephone calls using
the subscriber's signal. The MIN (mobile identification number) and ESN
(equipment serial number) of the subscriber are captured by the "cloner" by
using a radio scanner. The cloned calls are retired from the billing system
before issuance of the invoice, to avoid inconveniences to the subscriber. The
Company's fraud-control section can detect the clone and suspend service
immediately after the first cloned call. 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 upon request by the subscriber) and the creation
of a 24-hour fraud control center consisting of 14 analysts using the Integrated
Fraud Detection and Control System ("SAF"). The SAF was implemented on July 14,
1998 and it is linked to a national network, allowing the detection, analysis
and control of abnormalities in cellular service usage that may indicate fraud
throughout the national territory, almost in real time.
QUALITY OF SERVICE
In the past, the Company's cellular telecommunications network was subject to
occasional congestion in certain areas, primarily the Brasilia metropolitan
area. Congestion can result in the inability to make calls and the premature
termination of calls. The Company's service problems were worsened by
government-imposed constraints on the Company's capital expenditure budget until
July 1998, which prevented the Company from increasing network capacity to meet
demand for cellular telecommunications service in parts of the Region. SEE ITEM
4 "INFORMATION ON THE COMPANY--HISTORY AND DEVELOPMENT OF THE
CORPORATION--CAPITAL EXPENDITURES." Following the Breakup, the Company was no
longer subject to government-imposed, capital-expenditure constraints, and this
allowed for increased investment in the Company's cellular telecommunications
network. In the past, network congestion in the concession areas of Telebrasilia
Celular and Teleacre Celular 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 congestion problems
had been resolved and the Company had eliminated all its waiting lists.
COMPETITION
The General Telecommunications Law provides for the introduction of competition
in telecommunications services in Brazil. The Federal Government has granted ten
licenses to private companies (each a "Band B Service Provider") to provide
cellular telecommunications service within particular regions of Brazil on a
frequency range referred to as "Band B." The frequency range used by the
cellular service providers that were spun off from the TELEBRAS System,
including the Company (each a "Band A Service Provider") is referred to as "Band
A." Each Band B license covers a geographic region which generally corresponds
to a Cellular Region. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY--CONCESSIONS
AND LICENSES."
BAND B COMPETITION IN AREA 7
A license to provide cellular telecommunications services in Area 7 on Band B
has been granted to Americel, S.A. ("Americel"), whose shareholders include Bell
Canada International (BCI) BVI-V Ltda. (15.4%), Telesystem International
Wireless (TIW) (Brazil), Inc. (16.3) and several 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, 2001, Americel had
approximately 23,0% of the market, covering mainly state capitals and their
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 is provided in
Area 7 by Brasil-Telecom (formerly, Tele Centro Sul Celular Participacoes S.A.).
In order to increase competition and improve service quality, the Federal
Government has also granted concessions for providing fixed-line services to
other "mirror companies." On September 30, 1999, the Federal Government granted
a fixed-line telecommunications service concession to Global Village Telecom,
S.A. ("GVT"), to operate in the same concession area as Brasil-Telecom. Global
Village Telecom S.A. has undertaken to install 650,000 fixed lines until 2002
and for this will invest approximately R$1 billion. The concession agreement
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 among
whose shareholders are Telesystem International Wireless (Brasil), Inc., Banco
Opportunity S.A., and Brazilian pension funds. As of December 31, 2001, Amazonia
Celular's subsidiaries had approximately 908.621 subscribers and a penetration
rate of 5.9 subscribers per 100 inhabitants. It provides largely AMPS service,
with TDMA service launched only in September 1999. By the end of 2001, it had a
69% market share.
PCS COMPETITION
In November 2000, ANATEL published regulations for the issuance of new licenses
to provide wireless communication services through new PCS technology. New PCS
licenses will compete with existing cellular carriers in each region. PCS, which
is similar to digital cellular telecommunications services, will operate at the
1.8 GHz frequency range. The regulations divided Brazil into three regions
covering the same geographic area as the concession for the fixed-line
telecommunication services and provide for three PCS licenses to be granted in
each of these regions. The three licenses in each region are referred to as Band
C, Band D and Band E, respectively. ANATEL held auctions for PCS licenses during
the first quarter of 2001, in which some of these PCS licenses were awarded and
plans to hold additional auctions in the future to sell the remaining PCS
licenses. According to the PCS regulations:
o Each successful bidder will receive, in addition to an authorization to
provide PCS service in the relevant region, an authorization to provide domestic
and international long-distance services in that region;
o Existing cellular service providers, as well as new entrants in the
Brazilian telecommunications market, may bid for Band C, Band D and Band E PCS
licenses. However, fixed-line carriers and their controlling shareholders may
only bid for Band D and Band E PCS licenses;
o A cellular or PCS carrier, or its respective controlling shareholders, may
not hold more than one license in any region. Accordingly, a cellular carrier
that is awarded a PCS license which results in a geographical overlap between
its licenses, has two alternatives: (i) it may sell its stake in its existing
cellular carrier within six months of executing the contract relating to the PCS
license; or (ii) it may renounce the PCS license in the geographic regions where
the overlap exists.
o Current Band A and Band B cellular service providers were given the option
of exchanging their existing concession for PCS licenses. SEE ITEM 4
"INFORMATION ON THE COMPANY--BUSINESS OVERVIEW--REGULATION OF THE BRAZILIAN
TELECOMMUNICATIONS INDUSTRY."
BAND C COMPETITION
There were no participants in the auction for the Band C PCS licenses held on
January 30, 2001. ANATEL plans to either hold a second auction for the Band C
PCS licenses or to make a public solicitation to entice companies possibly
interested in some parts of the Band C frequencies. Should only one or two in
each region show interest, ANATEL can sell directly to them without a new
auction.
BAND D COMPETITION
On February 13, 2001, ANATEL held an auction for the Band D PCS licenses.
Telecom Italia Mobile ("TIM"), bid successfully for the Band D PCS licenses
covering two of the PCS regions: the center-south region of Brazil, which
comprises the concession areas of our Subsidiaries, with the exception of
Teleacre Celular S.A., Teleron Celular S.A. and Norte Brasil Telecom S.A, and
the Sao Paulo State region. TIM paid R$543 million for the Band D PCS license in
the center-south region and R$997 million for the Band D PCS license in the
State of Sao Paulo, representing premiums of 0.6% and 40.42%, respectively,
above the minimum bid price established by ANATEL.
TIM will be permitted to commence Band D operations in 2002 provided that the
fixed-line service provider in each of these regions achieves the operating
targets established by ANATEL by December 2001. Tele Centro Sul Participacoes
S.A., now known as Brasil Telecom S.A., is the fixed-line provider in the
center-south region and Telecomunicacoes de Sao Paulo S.A. - Telesp, known as
Telefonica, is the fixed-line provider in the Sao Paulo State region.
Tele Norte Leste Participacoes S.A ("Telemar"), the primary fixed-line carrier
in the remaining region, comprising 16 states in the north and east of Brazil,
bid successfully for the PCS license covering the region in which it offers
fixed-line telecommunications services. Telemar paid R$1.1 billion for the Band
D PCS license, which represents a 17.23% premium above the minimum bid price
established by ANATEL, and will provide PCS services using GSM technology.
Telemar will be permitted to commence Band D operations in 2002 provided that it
achieves the operating targets established by ANATEL by December 2001.
BAND E COMPETITION
On March 13, 2001, ANATEL held an auction for the Band E PCS licenses. TIM was
the only bidder in the Band E PCS auction, acquiring a license to provide PCS
services in the region comprising the 16 states in the north and east of Brazil,
in which Telemar operates as a fixed-line provider. There were no bidders for
the Band E PCS licenses in the two other regions. TIM paid R$990 million for the
license, which represents a 5.32% premium above the minimum bid price
established by ANATEL. TIM will also be permitted to commence Band E PCS
operations in 2002 provided that Telemar achieves the operating targets
established by ANATEL by December 2001.
ANATEL held a second auction for the Band E PCS licenses in the center-south and
the Sao Paulo State regions.
OTHER COMPETITION
Satellite services providing nationwide coverage are available in Brazil.
Although satellite services have the benefit of covering a much greater area
than cellular telecommunications services, they are considerably more expensive
than cellular telecommunications services and do not offer comparable coverage
inside buildings. The Company does not plan to offer mobile satellite services
(other than pursuant to a roaming arrangement with a satellite service
provider), although it may consider doing so in the future.
There can be no assurance that the entry of new competitors will 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 resulting from competitive pressures will depend on a variety of factors
that cannot now be assessed with precision and that are beyond the Company's
control. Among such factors are the identity of the competitors, their business
strategies and capabilities, prevailing market conditions at the time, the
regulations applicable to new entrants and the Company and the effectiveness of
the Company's efforts to prepare for increased competition. One or more new
competitors may have technical or financial resources greater than those of the
Company.
OPERATING AGREEMENTS
INTERCONNECTION AGREEMENTS
In order to make telephone calls, subscribers use the telecommunication services
available on the networks provided by the SWITCHED FIXED TELEPHONE SYSTEM
("STFC") and the CELLULAR MOBILE SERVICE ("SMC"). In order to facilitate
telecommunications between cellular telephone users and fixed-line telephone
users, as well as among cellular telephone users, it is necessary to establish
Network Interconnection Agreements.
Each network makes its Interconnection Points available, and circuits with 2 Mb
are used to establish the physical connection between these points. These
physical connections may be provided by any of the parts or by both parts or,
under extraordinary circumstances, they may be obtained through contracts with
third parties.
In Network Interconnection Agreements, the responsibility for providing the
physical connection is shared equally by the two companies and the
responsibility for physically building each connection is normally established
by the Parts in common agreement upon the joint technical planning of the
connection.
ROAMING AGREEMENTS
Agreements for automatic roaming have been established, through the National
Roaming Committee ("CGR"), among all the Band A and Band B cellular service
providers, except Americel S.A. with the Company in Area 7 and Tele Norte
Celular Participacoes S.A. with NBT in Area 8, with which the Company is not
obligated to enter into such an agreement pursuant to ANATEL regulations.
The agreements permit the Company's subscribers to use their cellular phones on
networks of other cellular service providers while traveling or "roaming"
outside the Region. Conversely, the Company is required to provide cellular
service to subscribers of those cellular service providers when those
subscribers are within the Region. The agreements require the Company and the
other cellular service providers to provide service to roaming subscribers on
the same basis as they provide service to their own subscribers and to carry out
a monthly reconciliation of roaming subscriber usage charges.
Each company participating in the National Automatic Roaming Network pays a
monthly fee equal to R$0.05 per originated or terminated call that involves
roaming. The Brazilian cellular service providers have also, through CGR,
entered into international roaming agreements with foreign Service Providers,
which permit their subscribers to use their cellular phones in Argentina and
Uruguay and subscribers of those service providers to use their cellular phones
in Brazil.
The terms of these international roaming agreements vary from agreement to
agreement. The Company also has a roaming agreement with Gradiente, an
international cellular service roaming provider, to permit its subscribers to
have roaming services in North America, Europe, Asia, Africa and Oceania.
REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY
GENERAL
The Company's business, including services provided and rates charged, is
subject to comprehensive regulation under the General Telecommunications Law
(Federal Law no 9,472/97), Federal Law no 9,295/96, also known as the LEI MINIMA
(the "Minimum Law"), Federal Decree no 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 no 73, which sets the general rules for
telecommunications services. Each of the Subsidiaries operates under a
Concession that authorizes it to provide cellular services and sets forth
certain obligations.
ANATEL is the regulatory agency for telecommunications in Brazil. It is
established by the General Telecommunications Law and operates under the October
1997 REGULAMENTO DA AGENCIA NACIONAL DE TELECOMUNICACOES (the "ANATEL Decree").
ANATEL is a government body governed by a separate regulatory scheme. It has
administrative and financial independence and is linked but not subordinated to
the Ministry of Communications. ANATEL has authority to issue legally binding
regulations to telecommunications service providers. Any such proposed
regulation is subject to a period of public comment, which may include public
hearings. Due to its independent status, decisions or regulations enacted by
ANATEL are not sub to appeal to any other government body, i.e. they can only be
challenged administratively within ANATEL or judicially. ANATEL directors have
fixed tenures, which further strengthens its autonomy.
CONCESSIONS AND LICENSES
Concessions and licenses to provide telecommunications services are granted
either under the public regime or the private regime. Only fixed-line
concessionaires are currently operating under the public regime. Services
provided under the private regime can be considered of collective interest or
restricted interest. While public services are subject to requirements that
arise from the General Telecommunications Law and the May 1998 Decree that
establishes the GENERAL FIXED-LINE SERVICE UNIVERSALIZATION TARGET PLAN,
collective interest private regime services are only subject to requirements
imposed by ANATEL on the Concessions. Restricted interest private services are
subject to no substantial requirements, other than in connection with
radio-frequency usage, when applicable.
The Subsidiaries operate under the collective interest private regime, being
subject to a series of requirements imposed on the Concessions.
Pursuant to the Minimum Law and the General Telecommunications Law, the Band A
and Band B Service Providers have been granted Concessions. Each Concession is a
specific grant of authority to supply cellular telecommunications services,
subject to certain requirements contained in the applicable obligations provided
for under each concession. If a cellular service provider wishes to offer any
telecommunications service other than the cellular service authorized by its
concession, it may apply to ANATEL for a license to offer such other services.
Each Concession has been granted for an initial period of 15 years, renewable
for another 15 years if the obligations imposed on the Concession have been met.
Previously under the Concessions, Band A and Band B Service Providers were
guaranteed that ANATEL would not authorize additional providers of cellular
telecommunications services until December 31, 1999. As this restriction has now
expired, the only limitation to the granting of licenses to new cellular service
providers within the Region is in the General Telecommunications Law, which
provides that the number of authorizations issued within a determined region
will be limited when (i) the entry of a new service provider is technically
impossible (e.g. lack of radio spectrum capacity) or (ii) the increase in number
of competitors would affect the financial soundness of the existing service
providers.
ANATEL, through its resolutions 235 and 254, which were enacted in September
2000 and January 2001, respectively, granted the cellular service providers
operating under the Concessions the option of converting, at their own
discretion, their concession agreements into PCS authorization agreements. Upon
choosing such conversion, the cellular service provider would receive, for each
of the Concessions being converted, an authorization to provide cellular
service, an authorization to provide domestic long-distance service and an
authorization to provide international long-distance service, as well as the
right to use an additional 10 MHz band at the 1.9GHz range to provide cellular
service. This additional radio frequency band, however, would be charged to the
service provider choosing the conversion option. ANATEL modified these initial
rules, and currently the 1.9 GHz range is no longer licensed and these
frequencies are now reserved to 3G.
The Company is currently analyzing whether to make the conversion. If the
Company opts to convert, the additional band now in the C Band 1.8 GHz would
require payment of approximately R$100 million, with ANATEL allowing payment in
up to six installments. Operating under an authorization would imply the loss of
the guarantee of the terms and conditions of the license for the 15-year term.
It would, however, give the Company greater discretion in running the business
and relieve the Company of the obligation to revert its operating assets to the
Brazilian government when the Concessions end.
OBLIGATIONS OF TELECOMMUNICATIONS COMPANIES
QUALITY OF SERVICE, NETWORK COVERAGE AND CUSTOMER CARE. All cellular
telecommunications service providers are subject to obligations concerning
quality of service, network coverage and customer-care, arising from the
Concessions or from the MEMORANDUM OF UNDERSTANDING FOR CELLULAR SERVICE
PROVIDING SUPERVISION (the "Service Quality Memorandum"), entered into between
the Subsidiaries and ANATEL in November 18, 1999.
Under the Concessions, the Company's quality of service obligations require
that: (i) the cellular network be fully operational 98% of the time; (ii) the
rate of failed call completion due to signal loss not exceed 3%; (iii) the rate
at which attempted calls fail due to voice channel congestion at peak hours not
exceed 5%; (iv) the drop rate for connected calls not exceed 3%; (v) the
cellular network be available on first call attempts 90% of the time; and (vi)
the number of subscriber complaints per month not exceed 5%. The Company's
network coverage obligations require the Company to provide cellular
telecommunications services to all municipalities in the Region with populations
greater than 100,000 by November 4, 1999 and to 70% of the municipalities in the
Region with populations greater than 30,000 by November 4, 2002. Customer-care
obligations under the Concessions require activation to be effective, depending
on the district or municipality, within: (i) 180 business days of an activation
request during the first year of operation; (ii) 120 business days of an
activation request during the second year of operation; (iii) 30 business days
of an activation request during the third year of operation; (iv) 15 business
days of an activation request during the forth year of operation; and (v) 5
business days of an activation request during and after the fifth year of
operation.
The Company is currently in compliance with all quality and customer care
obligations as defined by ANATEL and has met or exceeded its network coverage
obligations under the Concessions from 1998 to the present time. Failure to meet
these obligations may result in fines and penalties of up to 0.05% of net
operating revenues per day until the Company complies with these obligations, as
well as potential revocation of the Concessions. While there can be no
assurances, the Company's management believes that the Company will remain in
compliance with its obligations under the Concessions at all times.
The Service Quality Memorandum provides for a commitment by the Subsidiaries to
employ their best efforts to achieve the following service quality ratios by
June 2001: (i) monthly rate of general subscriber complaints lower than 3.5%;
(ii) monthly rate of subscriber complaints about network coverage, plus
complaints about the system's lack of capacity lower 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, lower 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
(ix) 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 monthly targets so far.
INTERCONNECTION. All providers of telecommunications services 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 but Resolution 274 of
September, 5, 2001 regulates the co-location of infra-structure among power, oil
and telecom companies. CO-LOCATION means that a network carrier permits another
party to place its switching equipment in or near the local exchange of the
network carrier, 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 carriers to "unbundle" network
elements and services, although ANATEL has announced plans to review the issue
on a regular basis and may require unbundling in the future. In an unbundled
regime, each network carrier is required to provide a detailed list of network
services and elements which may be purchased separately by a party requesting
interconnection.
Although in general the Company has already reached and even exceeded the
targets announced by ANATEL described above, it still practices the continuous
improvement policy applied to the Quality of Service (QoS), which is the reason
for its international standard of performance, as shown in the table below:
3.5 QUALITY INDICATORS
================================================================================
MONTHLY QUALITY INDICATORS TCO
(COLLECTED AT PEAK HOURS) ----------------------------------
FEB/02 MAR/02 VARIATION %
--------------------------------------------------------------------------------
PVMC 1 - Rate of Subscriber Complaints (L) 0.62 0.64 3%
--------------------------------------------------------------------------------
PVMC 2 - Rate of subscriber complaints 0.15 0.18 17%
about network coverage plus system's
lack of capacity per 1,000 lines in
service (L)
--------------------------------------------------------------------------------
PVMC 3 - Rate of completed calls to 97.86 97.48 0%
customer-service centers (H)
--------------------------------------------------------------------------------
PVMC 4 - Rate of effectively-responded 100.00 99.97 0%
subscriber communications (H)
--------------------------------------------------------------------------------
PVMC 5 - Rate of subscribers attending 89.61 92.59 3%
customer-service facilities (H)
--------------------------------------------------------------------------------
PVMC 6 - Rate of bills with error 3.43 3.08 -11%
complaints per 1,000 issued (L)
--------------------------------------------------------------------------------
PVMC 7 - Rate of originated calls, 59.32 58.86 -1%
connected (H)
--------------------------------------------------------------------------------
PVMC 8 - Rate of calls connected in less 96.18 96.02 0%
than 15 seconds (H)
--------------------------------------------------------------------------------
PVMC 9 - Rate of dropped calls (L) 1.52 1.58 4%
================================================================================
(H) The higher, the better.
(L) The lower, the better.
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
(INTERCONNECTION).
The initial price cap agreed upon by ANATEL and the Company in the Concessions
is based on previously-existing tariffs, which were developed based on the
fully-allocated costs of the Company. The initial price cap is adjusted on an
annual basis under a formula set forth in the Concessions. The price cap is
adjusted to reflect the rate of inflation as measured by the IGP-DI.
The weighted average tariff for the entire basket of services may not exceed the
price cap, but the tariffs for individual services within the basket may be
increased. The Company may increase the tariff for any individual service by up
to 20%, over the rate of inflation measured by the variation of IGP-DI, subject
to a downward adjustment for inflation effects already captured in the annual
upward adjustments of the overall price cap for the basket, as long as it
adjusts other prices downward to ensure that the weighted average tariff does
not exceed the price cap.
Other telecommunications companies wishing to interconnect with and use the
Company's network must pay certain fees, primarily a network-usage fee. The
network-usage fee is a flat fee charged per minute of use which represents an
average charge for a basket of network elements and services. The network-usage
fee charged by Band A Service Providers is subject to a price cap set by ANATEL.
The price cap for the network-usage fee varies from company to company, based on
the underlying cost characteristics of each company's network. For a breakdown
of the Company's past network usage charges, SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--SOURCES OF REVENUE--NETWORK USAGE CHARGES."
ANCILLARY SERVICES, VALUE-ADDED SERVICES AND INTERNET REGULATION
Under the recently-amended Norm 23/96, cellular service providers are authorized
to provide ancillary services to subscribers in connection with one or more
service plans. The Company currently offers its TDMA-capable subscribers the
following value-added services: (i) caller identification; (ii) voice mail;
(iii) call forwarding; (iv) call waiting; (v) SMS; (vi) CSD; and (vii) WAP. On
June 15, 2000, ANATEL issued Resolution 226, amending Norm 23/96. Resolution 226
requires all cellular service providers to offer voicemail service in all
service plans, defines strict rules for billing air-time in connection with
voicemail usage and authorizes the service providers to provide and charge for
SMS in connection with one or more service plans. Before Resolution 226, SMS was
provided only under test permission and could not be charged. Resolution 226
also requires cellular service providers to provide subscribers with detailed
billing, 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 and every 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 usage of the Company's network. ANATEL is expected to issue
specific regulations in the near future regarding the use of cellular networks
to provide Internet-connection services.
BRAZILIAN POLITICAL ENVIRONMENT
The Brazilian political environment was marked by high levels of uncertainty
after the country returned to civilian rule in 1985, ending 20 years of military
government. The death of a President-elect in 1985 and the resignation of
another President in the midst of impeachment proceedings in 1992, as well as
rapid turnover in the federal government at and immediately below the cabinet
level, adversely affected the implementation of consistent economic and monetary
policies.
Fernando Henrique Cardoso, who was Finance Minister at the time of the
implementation of the REAL Plan, was elected President of Brazil in October,
1994 and in October, 1998 he was reelected for an additional four-year term,
which began in January 1999. President Cardoso is the leader of a coalition of
six political parties that represents a majority in the federal Congress. His
party, the Brazilian Social Democratic Party, holds the third largest number of
seats in the coalition.
During the first semester of 2001, the legislative branch of the government was
involved in a series of situations linked to corruption and there were reports
of rivalries among key partisan leaders in the Senate. The election of a new
President of the Senate, followed by the accusation of senators, including the
former President of the Senate, of wrongfully disclosing the contents of a
secret voting list, dominated the political arena the during the first months of
2001.
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, non-inflationary growth. Changes in monetary, credit, tariff and
other policies were frequent and occasionally drastic. In particular, actions to
control inflation, interest rates and consumption included freezing bank
accounts, imposing capital controls, introducing high tariffs and other strong
measures. Changes in policy, social instability and other political and economic
developments, and the Brazilian government's responses to such developments, not
infrequently had a material adverse effect on the Company's business,
operations, financial condition and results of operations.
The Federal Government introduced the REAL Plan in December 1993. The REAL Plan
is an economic stabilization program intended to reduce the rate of inflation by
reducing certain public expenditures, collecting liabilities owed to the Federal
Government, increasing tax revenues, continuing to privatize government-owned
entities and introducing a new currency. The REAL was introduced as Brazil's
currency on July 1, 1994, initially with an exchange rate of R$1.00 to US$1.00.
The REAL appreciated through January 1995 and thereafter gradually declined in
value against the dollar, reaching R$1.2087 to US$1.00 on December 31, 1998.
Notwithstanding the success of the REAL Plan in lowering inflation and
stabilizing the Brazilian economy, the REAL Plan has also led to economic
slowdown and to a rise in unemployment in most regions and sectors of the
economy.
After the devaluation of the REAL in 1999 and a period of adjustment to a new
regime of free-floating exchange rates, the Brazilian economy returned to a
growth path in the year 2000. GDP grew 4.5% in 2000 and 4.36% by the end of
2001. GDP was affected by Brazil's electric energy crisis, the decline in
international markets and economic crises in emerging markets, especially
Argentina. Brazil's current accounts deficit remained at approximately 4% of GDP
in 2001.
Foreign direct investment net inflows stood at US$30 billion by year-end 1999,
US$33 billion by year-end 2000, and US$22 billion by year-end 2001.
Brazilian internal interest rates have added momentum to the economic growth.
Shortly after the January 1999 devaluation of the REAL, the Selic rate peaked at
44.99% in March, 1999 while the monetary authorities struggled to hold down
inflationary pressure and the outflow of investment from the country. By
year-end 1999, the Selic rate was down to 19.03% and closed the year 2000 at
15.75%. On June 3, 2001, the Selic rate was 17.98% and closed the year 2001 at
19.05%.
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 2001, the international
financial markets have experienced significant volatility, with significant
adverse effects on demand for and prices of securities of issuers in virtually
all emerging markets, including Brazil.
The current volatility in the securities markets in Latin America and other
emerging market countries has been attributed, at least in part, to the effects
of the Asian and the Russian economic crises of 1997-98 and to the recent
increase in interest rates in industrialized countries, especially the United
States. More recently, Argentina announced in 2001 that it would not service its
public sector debt and abandoned its decade-old fixed dollar-peso exchange rate,
creating a floating exchange rate regime in January, 2002. In addition to
affecting both the revenue and profitability of Brazilian companies having
significant ties with Argentina, the Argentinean crisis may also affect the
perception of risk in Brazil by foreign investors. SEE ITEM 3 "KEY
INFORMATION--RISK FACTORS--FACTORS RELATING TO BRAZIL-OTHER EMERGING MARKET
RISK."
There can be no assurance that the Brazilian securities markets will not
continue to be affected negatively by events elsewhere, especially in emerging
markets, or that such events will not adversely affect the prices of the
Company's securities.
INFLATION AND DEVALUATION
Brazil experienced extremely high and generally unpredictable rates of inflation
and of devaluation of Brazilian currency for many years until the implementation
of the REAL Plan. Inflation itself, as well as certain governmental measures to
combat inflation, and public speculation about possible future actions have also
historically contributed to economic uncertainty in Brazil and to heightened
volatility in the Brazilian securities markets. SEE ITEM 4 "INFORMATION ON THE
COMPANY--BUSINESS OVERVIEW--BRAZILIAN ECONOMIC ENVIRONMENT."
The following table sets forth the rate of Brazilian inflation, as measured by
the IGP-M, and the devaluation of the Brazilian currency against the U.S. dollar
during the periods indicated.
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1999 2000 2001
------ ------ ------ -------
(PERCENTAGES)
Inflation (IGP-M).......................... 1.8 20.1 9.95 10.38
Devaluation (Brazilian currency vs. US$)... 8.3 48.0 9.3 18.67
Under the REAL Plan, the rate of Brazilian inflation has decreased considerably
since July, 1994. The exchange rate between the real and the U.S. dollar
remained relatively stable from mid-1994 to year-end 1998, but extreme
volatility returned in 1999. The exchange rate then reached a more stable pace
in 2000 and remained stable until recently, when the economic crisis in
Argentina, as well as internal political factors, contributed to an increase in
interest rates. During the year 2001, inflation amounted to 10.38% and the
devaluation of the REAL against the U.S. dollar was 18.67%, as measured by the
IGP-M, showing an increase in value. Inflation has peaked at 11.19% in 2002, as
measured by the IGP-M.
Inflation and devaluation have potential 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, may lead to balance-sheet losses for the Company on its foreign-currency
denominated liabilities (only regarding foreign currency debts, not hedged
debts). Inflation puts pressure on the Company's rates and invites Federal
Government efforts to control inflation by holding down the rates that Brazilian
public utilities are permitted to charge.
There can be no assurance that Brazilian inflation will remain at modest rates
or, if there is an increase in inflation, that the Company's business,
prospects, financial condition and results of operations will not be adversely
affected.
ORGANIZATIONAL STRUCTURE
THE HOLDING COMPANY AND ITS OPERATING SUBSIDIARIES
The following table sets forth the contribution made by each Subsidiary to the
Company's net operating revenues for the year ending December 31, 2001 and the
Holding Company's shareholding in each Subsidiary at December 31, 2001.
CONTRIBUTION TO
CONSOLIDATED
RESULTS HOLDING COMPANY OWNERSHIP
--------------- ----------------------------
% OF NET
OPERATING % OF SHARE % OF VOTING
SUBSIDIARY REVENUES CAPITAL STOCK
------------- --------------- ----------- --------------
Telebrasilia......... 29.75% 88.25 90.95
Telegoias............ 22.24% 96.74 98.44
Telemat.............. 13.50% 97.49 99.45
Telems............... 11.42% 98.39 99.58
Teleron.............. 3.87% 97.12 98.13
Teleacre............. 2.05% 98.31 99.96
NBT.................. 17.22% 98.33 95.00
Substantially all the Holding Company's assets consist of shares in the
Subsidiaries. The Holding Company relies almost exclusively on dividends from
the Subsidiaries to meet its needs for cash, including cash to pay dividends to
its shareholders. SEE ITEM 5 "OPERATING AND FINANCIAL REVIEW AND
PROSPECTS--LIQUIDITY AND CAPITAL RESOURCES."
On October 19, 1998 Tele Centro Oeste/Inepar, a consortium comprising (i) Inepar
S.A. Industria e Construcoes (50%) and (ii) the Holding Company (50%), was
awarded a license to provide cellular telecommunications services in Area 8. On
May 21, 1999, the Company acquired 45% of the shares of Tele Centro Oeste/Inepar
from Inepar, increasing its holding in the consortium to 95%. Upon acquiring
control, the Company renamed Tele Centro Oeste/Inepar "Norte Brasil Telecom
S.A." and registered it as a non-publicly held company. On October 7, 1999, NBT
began providing Band B digital cellular telecommunications service in Area 8 in
competition with Tele Norte Celular Participacoes S.A. Area 8 covers
approximately 41% of the territory and 9% of the total population of Brazil.
On April 26, 2002, Tele Centro Oeste Celular Participaoes S.A. held a General
Extraordinary Shareholders Meeting in which it approved the merger of
Telebrasilia into the Company and the consequent transfer of the concession to
explore mobile cellular services previously held by Telebrasilia.
PROPERTY, PLANTS AND EQUIPMENT
The Company's principal physical assets 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, 2001, the Company had 22 cellular
switches and 787 base-stations in the Region, of which approximately 30% were
located on land owned by the Company and the remainder of which were located on
land leased by the Company. Most of these leases do not expire prior to 2003. In
addition, the Company leases two retail stores in the Region.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
FORMATION OF THE REGISTRANT AND PRESENTATION OF FINANCIAL INFORMATION
On May 22, 1998, in preparation for the privatization of the TELEBRAS System,
the TELEBRAS System was restructured to form, in addition to TELEBRAS, the
Holding Company and eleven other New Holding Companies. The restructuring of the
TELEBRAS System was accomplished by means of a procedure under Brazilian law
called CISAO, or split-up. Virtually all the assets and liabilities of TELEBRAS
were allocated to the New Holding Companies which, together with their
respective subsidiaries, comprise (a) three fixed-line service providers, (b)
eight cellular service providers and (c) one domestic and international
long-distance service provider. The Registrant is one of the New Holding
Companies that was formed on May 22, 1998 as part of the Breakup of TELEBRAS. In
the Breakup, certain assets and liabilities of TELEBRAS, including 81.4%, 83.8%,
91.9%, 96.0%, 91.3% and 94.0% of the share capital of Telebrasilia, Telegoias,
Telemat, Telems, Teleron and Teleacre, respectively, were transferred to the
Holding Company.
On May 24, 1999, NBT was constituted as a private corporation with 95%
participation by the Holding Company. NBT's operating objective is to explore
cellular services as well as all necessary and useful activities for delivery of
these services within Area 8. NBT commenced operations on October 7, 1999.
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the notes thereto, which are included
elsewhere in this Annual Report. Certain important features of the presentation
of the Consolidated Financial Statements are described in the introduction to
Item 3A, "Selected Financial Information."
EFFECTS OF CHANGES IN PRESENTATION OF FINANCIAL STATEMENTS IN 1999, 2000 AND
2001
There are three significant differences in presentation between the Consolidated
Financial Statements of the Company for 1999, 2000, and 2001. Each of these
differences should be taken into account when comparing financial conditions and
results of operations for that period.
FULLY SEPARATE OPERATIONS OF THE SUBSIDIARIES. The Band A Subsidiaries were
created effective January 5, 1998, by splitting up the Predecessor Companies to
separate their cellular operations from their fixed-line operations. The Band B
Subsidiary was created in May 1999. For 1999, 2000 and 2001, the Consolidated
Financial Statements reflect the operations of the Subsidiaries as fully
independent companies.
INDEXATION FOR INFLATION. The Consolidated Financial Statements are prepared on
a fully-indexed basis to recognize the effects of changes in the purchasing
power of the Brazilian currency during the periods presented. No indexation
adjustments were applied during the year ended December 31, 1998 on account of
the insignificant level of inflation during that year. However, the financial
statements as of December 31, 1998 and for the years then ended, as well as the
fully indexed financial statements for all previous periods and for the years
ended December 31, 1999 and 2000, have been restated into currency of December
31, 2000 purchasing power. SEE ITEM 3 "KEY INFORMATION--SELECTED FINANCIAL
INFORMATION" AND NOTE 2(B) TO THE CONSOLIDATED FINANCIAL STATEMENTS. In
accordance with the constant currency methodology used in the preparation of the
Consolidated Financial Statements, all of the amounts presented for the years
ended December 31, 1998 and 1999 have been restated in constant REAIS of
December 31, 2000 purchasing power as measured by the IGP-M index during 2000
(which produces a correction of 9.95% of all amounts in 1999). Because the
correction factor applied to 1998 and 1999 amounts exceeded the rate of price
inflation for many revenue and cost items, the accounting correction is itself a
significant explanatory factor for the changes recorded for such items between
1998, 1999 and 2000 on the Company's Consolidated Statements of Operations. As a
result of this monetary restatement, year-over-year percentage calculations
emphasize decreases and dampen increases in such revenue and cost items.
In 2001, IBRACON (the Brazilian Institute of Independent Auditors) issued a
publication stating that financial statements would not have to be indexed for
2001 as the three-year cumulative inflation rate in Brazil fell below 100%.
POLITICAL, ECONOMIC, REGULATORY AND COMPETITIVE FACTORS
The following discussion should be read in conjunction with the "Information on
the Company" section included elsewhere in this Annual Report. As set forth in
greater detail below, the Company's financial condition and operations are
significantly affected by Brazilian telecommunications regulation, including
regulation of tariffs. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY." The
Company's financial condition and revenues and expenses also have been, and are
expected to continue to be, affected by the political and economic environment
in Brazil. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS OVERVIEW--BRAZILIAN
POLITICAL ENVIRONMENT AND BRAZILIAN ECONOMIC ENVIRONMENT." In particular, the
Company's financial performance will be affected by (i) national economic growth
and its impact on demand for telecommunications services, (ii) the cost and
availability of financing and (iii) the exchange rates between Brazilian and
foreign currencies.
The Company has faced competition in the Region since November 1997. The
Company's management expects that, as a result of competition, prices for
cellular telecommunications services will decline and the Company's operating
margins will diminish. The scope of increased competition and any adverse
effects on the Company's results and market share will depend on a variety of
factors that cannot now be assessed with precision and are beyond the Company's
control. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--COMPETITION."
FOREIGN EXCHANGE AND INTEREST-RATE EXPOSURE
The Company's financial condition and revenues and expenses may be affected by
changes in foreign currency exchange rates (primarily the U.S. dollar/REAL rate)
and market rates of interest (primarily the London Interbank Offered Rate
("LIBOR").
The principal foreign exchange risk faced by the Company arises from its foreign
currency liabilities. As of December 31, 2001, the Company had R$307.68 million
of indebtedness denominated in U.S. dollars. In order to reduce this risk, the
Company has entered into hedge-type contracts (swaps to CDI) with financial
institutions. At December, 31, 2001, part of the Company's financial
indebtedness was denominated in U.S. Dollars, when approximately 87% of the
Company's indebtedness in foreign currency was covered by active positions of
hedge-operations. The hedge transactions were realized in order to partially
cover future maturity dates of the debts denominated in U.S. Dollars, indexed at
fixed or variable interest rates. The profits or losses of these operations are
registered in the Company's statement of results.
R$61.6 million of litigation contingency funds related to loans wrongly
allocated to the Company at the time of the spin-off of TELEBRAS. The balance of
this amount arose when, under certain agreed procedures for the Breakup of
TELEBRAS, certain loans (the "TELEBRAS Loans") were to have been spun off from
the TELEBRAS system through (i) the assignment of the obligation to pay the
TELEBRAS Loans and (ii) the assignment of the right to receive such payments.
Although the obligation to pay the TELEBRAS Loans was duly assigned to
Telebrasilia and Telegoias, the right to receive such payments was not assigned
to the Holding Company. In light of this departure from the agreed procedures
for assigning the right to receive payments under the TELEBRAS Loans in
connection with the Breakup of TELEBRAS, payment of the TELEBRAS Loans was
suspended immediately upon the change of control of the Holding Company. The
Company's management determined that as of January 1999 the TELEBRAS Loans would
for all purposes be treated as REAL-denominated liabilities bearing interest at
a rate equal to the IGP-M plus 6%. Payment of the TELEBRAS Loans has not
resumed, and steps are being taken to resolve the situation. SEE ITEM 8
"FINANCIAL INFORMATION--CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
INFORMATION--LEGAL PROCEEDINGS--LITIGATION RELATED TO TELEBRAS LOANS."
The Company's revenues are earned entirely in REAIS, and the Company has no
dollar-denominated assets. The Company has hedged 87% of its debt in foreign
currency exposure existing as of December 31, 2001. 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, 2001, the Company had R$209.3 million in loans and financing in
Brazilian currency indexed at different floating rates, R$280.7 million in
financial investments, R$362.3 million in other investments in securities based
on the CDI variation (Explanatory Note 25a) plus R$61.6 million in loans and
financing denominated in foreign currency (Libor, renegotiated biannually) and
R$27.4 million in hedge funds for these operations, invested at fixed interest
rates and added monthly variations.
Substantially all of the Company's interest-bearing liabilities, including the
TELEBRAS contingency, bear 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 December, 2001, NBT signed a new contract with the National Bank for Economic
and Social Development (BANCO NACIONAL DE DESENVOLVIMENTO ECONOMICO E SOCIAL or
"BNDES"). The transaction amount corresponded to R$167.6 million with payment
becoming due after a period of six years. The principal amortization will be
paid monthly after a 12-month grace period. Amortization of the interest will be
paid quarterly during the grace period of the principal and monthly thereafter.
The charges derived from the operation for R$16.8 million (called "Sub Credito
B") were based on the UNIDADE MONETARIA DO BANCO NACIONAL DE DESENVOLVIMENTO
ECONOMICO E SOCIAL (UMBNDES), which is the weighted averaged cost of all fees
and expenses incurred by BNDES when obtaining foreign currency capital,
published by the Brazilian Central Bank, plus a 2.5% annual margin of BNDES and
a 1.0% annual risk remuneration to the financial institutions. The charges
derived from the transaction for the R$150.8 million (called Sub Credito A) were
based on the "TJLP" (Federal Government Long-term Interest Rate) published by
the Brazilian Central Bank, plus a 2.5% annual margin of BNDES and a 1.0% annual
risk remuneration to the financial institutions. The contract with BNDES
includes certain restrictive covenants. As of March 31, 2002, the Company did
not have difficulty complying with these covenants.
OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
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, 2001.
YEAR ENDED DECEMBER 31, %CHANGE
----------------------- -------
1999 2000 2001 1999- 2000-
---- ---- ---- 2000 2001
---- ----
(MILLIONS OF REAIS) (1)
Net operating revenue.............. 666.7 930.6 1.248.1 39.6 34.1
Cost of services................... 326.5 532.2 663.2 63.0 24.6
Gross profit ...................... 340.1 398.5 585.0 17.2 46.8
Operating expenses:
Cost of Sales...................... 118.6 126.2 195.0 6.4 54.5
General and administrative expenses 64.5 78.4 110.3 21.6 40.7
Other net operating income 14.0 9.6 4.5 (31.4) (53.1)
(expense)....................
Total 197.2 214.2 309.8 8.6 44.6
Operating income before interest... 143.0 184.3 275.1 28.9 49.3
Net interest expense............... 47.6 30.1 43.5 (36.8) 44.5
Operating income .................. 95.4 154.2 231.7 61.6 50.3
Net non-operating expense.......... 6.1 19.5 25.7 219.7 31.8
Employees' profit share............ 1.9 1.9 2.3 0.0 21.1
YEAR ENDED DECEMBER 31, %CHANGE
----------------------- -------
1999 2000 2001 1999- 2000-
---- ---- ---- 2000 2001
---- ----
(MILLIONS OF REAIS) (1)
Income before taxes and minority 87.4 132.8 203.7 51.9 53.4
interests........................
Income tax and social contribution. 29.9 40.2 56.5 34.5 40.5
Minority interests................. 11.5 20.0 13.9 73.9 (30.5)
Reversal of interest on own capital (53.5) (31.0) (45.3) (42.1) 46.1
Net income......................... 99.6 103.6 178.6 4.0 72.4
---------------
(1) Information is presented in constant REAIS of December 31, 2000 and nominal
REAIS of December 31, 2001. Columns may not add due to rounding.
OPERATING REVENUES
The Company generates operating revenue from (i) activation fees, which are
one-time sign-up charges paid to obtain cellular service, (ii) usage charges,
which include measured service charges based on tenths of a minute of outgoing
calls and roaming and 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) sales of handsets and
prepaid cards, and (vi) other services and charges, which primarily include fees
arising from the transfer of cellular service from one user to another, and fees
paid by subscribers for supplemental services such as call forwarding, call
waiting and call blocking. In 1999, the Company began to sell handsets in
connection with the provision of prepaid cellular telecommunications services.
SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS OVERVIEW--SOURCES OF
REVENUE--SUBSCRIBER RATES."
Prior to privatization, the Company's capital expenditures were part of a
system-wide planning and allocation of capital expenditures conducted by
TELEBRAS, which were subject to approval by the Federal Government. These
constraints on capital expenditures prevented the Company from making certain
investments that otherwise would have been made in order to improve cellular
telecommunications service in the Region. Since the privatization of TELEBRAS,
these restrictions have been lifted. The Company can now design its own capital
expenditure budget, subject to its obligations under the Concessions to meet
certain network coverage and quality of service standards. SEE ITEM 4
"INFORMATION ON THE COMPANY--BUSINESS OVERVIEW--REGULATION OF THE BRAZILIAN
TELECOMMUNICATIONS INDUSTRY--OBLIGATIONS OF TELECOMMUNICATIONS COMPANIES."
The Company's capital expenditure priorities include increasing its network
capacity, improving its overall quality and increasing the level of digitization
of the Company's network.
DETAILS OF COMPANY REVENUE
YEAR ENDED DECEMBER 31, %CHANGE
----------------------- -------
1999 2000 2001 1999- 2000-
---- ---- ---- 2000 2001
---- ----
(MILLIONS OF REAIS) (1)
Gross Operating Revenue:
Usage charges.................... 369.2 349.9 530.2 (5.2) 51.5
Monthly subscription charges..... 211.4 194.4 121.5 (8.0) 37.5)
Network usage charges............ 197.1 334.5 526.8 69.7 57.5
Activation fees.................. 4.1 - - n.m. -
Resale of handsets and prepaid 58.6 274.8 386.7 68.9 40.7
cards..............................
Others........................... 14.9 11.2 8.3 24.8) 25.9)
---------------------------
Gross operating revenue.......... 855.3 1,164.9 1,573.4 36.2 35.1
Value-added and other indirect (188.7) (234.2) (325.3) 24.1 38.9
taxes .............................
Net Operating Revenue.............. 666.7 930.6 1,248.1 39.6 34.1
===========================
---------------
(1) Information is presented in constant REAIS of December 31, 2000 and nominal
REAIS of December 31, 2001. SEE NOTE 2(B) TO THE CONSOLIDATED FINANCIAL
STATEMENTS. Columns may not add due to rounding.
Net operating revenues increased by 39.6% in 2000 and 34.1% in 2001. The growth
in revenues over this three-year period was driven mainly by increases in demand
for cellular services. The average number of subscribers increased by 94.8%,
from 621,043 in 1999 to 1,209,854 subscribers in 2000. In 2001, the average
number of subscribers increased to 2,053,477, or by 69.7%, compared to 2000. The
growth in revenues in 1999 was due in part to a reduction in activation fees,
and in some cases to their elimination, which in turn not only facilitated new
entries but also increased the subscriber-base and generated additional revenue.
The introduction of new services such as prepaid service, and revenue generated
by roaming fees, also contributed to the increased revenue. In 2000, the
significant increase in number of customers was due to the performance of NBT,
which reached almost 257,000 subscribers by December 31, and to the launching of
alternative post-paid plans and new services, such as voice mail, short message
and WAP (Wireless Application Protocol). In 2001, the 34.1% increase in revenues
compared to 2000 was due to the increased traffic caused by the greater
access-base. TCO closed the year 2001 with 716,022 new subscribers compared to
2000, totaling 2,428,206 accesses at December 31, 2001, of which 416,760 were in
Area 8 and 2,011,446 in Area 7.
USAGE CHARGES. Revenues from usage charges decreased by 5.2% between 1999 and
2000 and rose by 51.5% between 2000 and 2001. In 2000, the reduction of usage
revenues was caused by a 4.4% reduction in the average number of post-paid
subscribers. The 2001 increase was due to 20% growth in the post-paid base
compared to the year 2000, due to the launching of the ESSENCIAL plans.
MONTHLY SUBSCRIPTION CHARGES. Revenues from monthly subscription payments
decreased by 8.0% between 1999 and 2000 and 37.5% between 2000 and 2001. The
decrease in revenues in 2000 was due mainly to a 4.4% reduction in the average
number of contract customers, and in 2001 it resulted from the launching of the
ESSENCIAL plans, the monthly deductible values (minimum consumption) of which
are accounted as usage revenue.
NETWORK USAGE CHARGES. Revenues from network usage charges increased by 69.7%
between 1999 and 2000, and 57.5% between 2000 and 2001. The increase in these
periods reflected the growth in the total number of subscribers, which led to an
increased volume of calls to Company subscribers originating outside the
Company's network.
ACTIVATION FEES. The fall in the revenues from activation fees was caused by the
fact that the Subsidiary companies maintained their strategy to widen their
subscriber base by means of providing discounts and even exemptions from payment
of activation fees. The activation fees were entirely suspended in 2000.
RESALE OF HANDSETS AND PREPAID CARDS. Revenues from resale of handsets and
prepaid cards grew by 368.9% between 1999 and 2000 and by 40.7% between 2000 and
2001. The increase in these periods were caused by the growth in the access-base
of Company's pre-paid subscribers, which went up from 286,844 in 1999 to
1,115,962 in 2000 and to 1,716,398 in 2001.
OTHERS. Revenues from other services, which mainly 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
24.8% between 1999 and 2000 and by 25.9% between 2000 and 2001. The gradual fall
was due to the launching of alternative ESSENCIAL plans, whose deductibles
include additional services.
TAXES ON GROSS REVENUES. The most significant taxes assessed on revenues are
ICMS, PIS and COFINS. The ICMS rate in each state in the Region is 25%, except
in the State of Acre, where the rate for domestic telecommunications services is
17% for intrastate calls and 13% for interstate calls, in the State of Mato
Grosso, where, in January 1999 the ICMS rate was raised from 25% to 30%. The
state of Para also raised its ICMS rate from 25% to 30% in January, 2001, and
the same took place in the state of Goias, which raised its ICMS rate from 25%
to 26% in the same month. 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 22.1% in 1999, 20.1% in 2000 and 20.7% in 2001. In 2001, the
Federal Government instituted two new taxes applicable on telecommunications
services revenues: the FUST - Fundo de Universalizacao do Servico de
Telecomunicacoes and the FUNTTEL - Fundo para o Desenvolvimento Tecnologico das
Telecomunicacoes. Both the FUST and the FUNTTEL are calculated by applying the
1.5% rate on the revenue generated by telecommunication services. 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.
COST OF SERVICES
YEAR ENDED DECEMBER 31, %CHANGE
----------------------- -------
1999 2000 2001 1999- 2000-
---- ---- ---- 2000 2001
---- ----
(MILLIONS OF REAIS) (1)
Cost of services:
Depreciation.................... 120.2 142.8 160.9 18.8 12.7
Personnel....................... 9.0 11.3 11.6 25.6 2.7
Third-party materials and 78.9 95.8 126.0 21.4 31.5
services........................
Fixed-line network expenses..... 28.0 26.9 37.7 (3.9) 40.1
Fistel tax...................... 30.1 51.6 53.2 71.4 3.1
Cost of sales................... 50.9 194.0 273.3 281.1 40.9
Others.......................... 9.4 9.8 0.5 4.2 (94.9)
---------------------------
Total........................... 326.5 532.2 663.2 63.0 24.6
===========================
---------------
(1) Information is presented in constant REAIS of December 31, 2000 and nominal
reais of December 31, 2001. SEE NOTE 2(B) TO THE CONSOLIDATED FINANCIAL
STATEMENTS. Columns may not add due to rounding.
Cost of services increased by 63.0% between 1999 and 2000 and by 24.6% in 2001
compared to previous years. The increase in 2000 and 2001 resulted principally
from an increase in depreciation and amortization costs relative to the growth
of the Company's network, and in costs associated with the acquisition of
handsets, as well in the costs of supplies and third-party services and the
costs of interconnection with the fixed-telephoning network.
DEPRECIATION. Depreciation increased by 18.8% between 1999 and 2000 and by 12.7%
between 2000 and 2001. The increase in 2000 reflects the expansion of the
Company's network.
THIRD-PARTY SUPPLIES AND SERVICES. Supplies and services include costs of
materials and services received from third parties, including network
usage-charges paid to other cellular telecommunications service providers, to
fixed-line companies and to EMBRATEL for the completion on their networks of
calls originated by the Company's customers. Materials and services expenses
increased by 21.4% between 1999 and 2000 and 31.5% between 2000 and 2001. The
increase in 1999 and 2000 principally reflected the growth of subscriber base,
especially with prepaid services, causing an increase in the volume of calls
subject to network usage charges payable to other telecommunications service
providers.
COST OF SALES. With the introduction of prepaid cellular service on May 1999,
the Company began to purchase cellular handsets to resell to its customers. The
increase in the cost of sales also reflected the impact of the growth in
subsidies, which went up from R$28,721 thousand in 2000 to R$72,956 in 2001. The
cost of sales was R$194 million in 2000 and R$273.3 million in 2001.
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 3.9% between 1999 and 2000 and increased by 40.1% between 2000 and
2001. Such expenses accounted for 5.7% of total costs of services in 2001,
against 5.1% in 2000. SEE ITEM 4 "INFORMATION ON THE COMPANY--BUSINESS
OVERVIEW--OPERATING AGREEMENTS--INTERCONNECTION AGREEMENTS."
FISTEL TAX. Fees payable to finance FISTEL were R$30.1 million, R$51.6 million
and R$53.2 million in 1999, 2000 and 2001, respectively. Fistel fees are
assessed against cellular service providers for existing facilities (based on
the number of active cellular lines), for the installation of new facilities and
for each activation of a new cellular line. The 71.3% increase in 2000 and the
3.1% rise in 2001 were due mainly to the expansion of the Company's
subscriber-base and to the installation of new base-stations.
PERSONNEL. Personnel expenses increased during the period, rising from R$9
million in 1999 to R$11.3 million in 2001. These increases were due above all to
augments in the number of employees, which has kept pace with the growth in the
business. The growth also reflected salary policies instituted in order to
attract and maintain engineers and other personnel in an increasingly
competitive environment.
OTHERS. Other costs of services include rents of properties where the Company's
base-stations, towers and switching equipment are located, costs of power supply
and other similar infrastructure costs. Other costs of services were R$9.4
million, R$9.8 million and R$0.5 million in 1999, 2000 and 2001, respectively.
OPERATING EXPENSES
SELLING EXPENSES. Selling expenses increased 6.4% between 1999 and 2000 and
54.5% between 2000 and 2001. The increase in 2000 resulted primarily from an
aggressive marketing campaign for prepaid services, which included advertising
campaigns and an increase in sales commissions to independent distributors. The
increase in 2000 also resulted from significant efforts in marketing and
promotional campaigns and expenses related to sales commissions. This increase
was partially offset by a 29.6% decrease on net losses on trade accounts
receivable. This reduction was caused by strong efforts in billing and
collection processes in order to reduce subscribers' delinquency rates. As in
the year 2000, most variations in 2001 were observed in the marketing expenses,
as well as in the promotional campaigns and sales commissions. Net losses on
accounts receivable from subscribers suffered a 7.8% rise against 2000, but
comparing to the total net revenue, which went up by 34.1% in the same period,
it becomes evident that the Company gained some efficiency in the charging and
billing processes, which consequently reduced the rate of delinquency.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 21.6% and 39.4% between 1999 and 2000 and by 40.7% between 2000 and
2001. The increase of these expenses in 2000 is due primarily to the increase in
corporate personnel in the Holding Company. Due to the increase, personnel costs
accounted for 34.7% of total costs in 2000. In 2001, the most significant
increase was in depreciation, which went up from R$5.6 million in 2000 to R$19.9
million in 2001, because of the increased investment in fixed assets. There was
also a 41% increase in Personnel Expenses and a 19% rise in Third-Party
services. All these increases are compatible with the Company's growth levels.
OTHER NET OPERATING INCOME (EXPENSE). The Company recorded other net operating
expense of R$14.0 million in 1999 and R$9.6 million in 2000, against R$4.5
million in 2001. Other net operating income (expense) in 2000 resulted
principally from fines received by subscribers in connection with changes to the
prepaid services. In 2001, the reduction of the operating income (expense)
resulted mainly from a 285% growth in fines and recovered expenses, from R$3.35
million in 2000 to R$12.92 million in 2001. This growth, however, was partially
offset by a 41% increase in the payment of taxes, which increased from R$9.8
million to R$13.82 million in 2001.
NET FINANCIAL RESULT
The Company's Net Financial Result of R$30.1 million in 2000 and R$43.5 million
in 2001 was due mainly to the payment of dividends in the form of interest on
owned capital, in the value of R$31 million in 2000 and R$45.3 million in 2001.
SEE ITEM 5 "FINANCIAL AND OPERATING ANALYSES AND PERSPECTIVES--LIQUIDITY AND
CAPITAL RESOURCES." The Company also registered a financial revenue of R$102.8
million in 2000 and R$132.4 million in 2001, which resulted mainly from the
revenue generated by the average balance of the resources available, which
increased substantially as a result of increased cash generation in 2000 and
2001. This revenue was partially offset by financial expenses of R$98.5 million
in 2000 and R$133.3 million in 2001. In 2001, there was a material increase in
the net monetary variations, going from R$3.4 million in 2000 to R$41.5 million
in 2001 as a result of the devaluation of the real against the dollar.
NET NON-OPERATING EXPENSE
The Company recorded net non-operating expenses of R$19.5 million in 2000 and
R$25.7 million in 2001. The increase in non-operating expenses in 2001 resulted
primarily from an increase in losses or write-offs on the sale of property,
plant and equipment in the amount of R$3.8 million, of certain analog
transmission equipment which became 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$1.9 million,
R$1.9 million and R$2.3 million in 1999, 2000 and 2001, 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 10.4%, 16.2% and 7.2% of income before minority
interests in 1999, 2000 and 2001, respectively.
DISCUSSION ON CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are both important to the portrayal
of our financial condition and results and require our management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. As the
number of variables and assumptions affecting the possible future resolution of
the uncertainties increase, those judgments become even more subjective and
complex. In order to provide an understanding about how the Company's management
forms its judgments about future events, including the variables and assumptions
underlying the estimates, and the sensitivity of those judgments to different
circumstances, the Company has identified the following critical accounting
policies: ? revenue recognition and accounts receivable; ? goodwill, intangible
assets and amortization; ? impairment of assets; ? deferred charges; and ? tax
contingencies.
Notes 3 and 29 of the consolidated financial statements include a summary of
significant accounting polices in Brazil and the United States and methods used
in the preparation of the consolidated financial statements.
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$218.4 million, R$255.7 million and 190.5 million in 1999, 2000, and
2001 respectively. These expenditures related primarily to increasing network
capacity, coverage and digitalization. SEE ITEM 4 "INFORMATION ON THE
COMPANY--HISTORY AND DEVELOPMENT OF THE COMPANY--CAPITAL EXPENDITURES."
The Holding Company is required to distribute to its shareholders, either as
dividends or as tax-deductible interest on own capital, 25% of its adjusted net
income determined in accordance with Brazilian accounting principles, as
adjusted in accordance with Brazilian corporate law, including any realization
of the net income reserve. The Holding Company is also required to pay a
non-cumulative preferred dividend on its Preferred Shares in an amount equal to
6% of the share capital attributable to the Preferred Shares under Brazilian
corporate law, which requirement may also be satisfied by distributions of
interest on own capital. In 2001, the Holding Company distributed a total of
R$80.5 million (R$37.9 million in 2000) in the form of interest on own capital
and dividends. SEE NOTE 25(D) TO THE CONSOLIDATED FINANCIAL STATEMENTS.
Capital expenditures were financed principally with internally generated cash
throughout the period, together with financing in national currency (mainly
R$137,8 million from BNDES) and foreign currency (mainly R$50,9 million from
Export Development Corporation). In January and February of 2001, the
Subsidiaries' bridge loans with BNDES were converted into long-term loans. The
proceeds of the loans will be used for the expansion and modernization of the
Company's telecommunications plant. SEE ITEM 5 "OPERATING AND FINANCIAL REVIEW
AND PROSPECTS--FOREIGN EXCHANGE AND INTEREST RATE EXPOSURE" AND NOTE 32 TO THE
CONSOLIDATED FINANCIAL STATEMENTS.
As of December 31, 2001, the Company anticipated capital expenditures of R$250
million for 2002. The Management expects that such expenditures will be funded
primarily with internally-generated cash, supplemented by financing from
external sources. Most of the planned 2002 capital expenditures will be
dedicated to expanding the capacity and coverage of the Company's network, the
modernization of telecommunication services and the implementation of a new
overlay network technology to be defined by the Company.
Substantially all of the Company's start-up costs and initial investments of the
Band A Subsidiaries were financed by cash flows from the fixed-line
telecommunications operations of the Predecessor Companies. In the Band B
Subsidiary (NBT), such costs and investments were financed by the generation of
cash by TCO, complemented by financings from Brazilian and foreign banking
institutions. Except regarding NBT, 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 the Brazilian law.
U.S. GAAP RECONCILIATION
The Company prepares its consolidated financial statements in accordance with
Brazilian GAAP, which differ in significant aspects from U.S. GAAP. The
principal differences between Brazilian GAAP and U.S. GAAP as they affected the
Company's revenues and expenses are during the reported periods are: (i) until
December 31, 1998, under Brazilian GAAP, interest on loans to finance
construction in progress is capitalized at the rate of 12% per annum of the
total value of construction in progress, regardless of the amount of interest
actually incurred on such loans, while under U.S. GAAP interest is capitalized
based on the interest rate on the debt incurred up to the lower of the amount of
construction in progress and the total loans incurred; (ii) until December 31,
1993 capitalized interest under Brazilian GAAP was not added to individual
assets but was capitalized separately and amortized over a time period different
from the estimated useful lives of the related assets, while under U.S. GAAP
capitalized interest is added to the cost of individual assets and is amortized
over their estimated useful lives; and (iii) in accordance with Brazilian GAAP,
the deferred tax liability arising out of the indexation of permanent assets was
charged to shareholders' equity, whereas under U.S. GAAP the charge would be to
income for the year. Net income under U.S. GAAP was R$32.6 million for 1999,
R$104.7 million for 2000 and R$194.4 million for 2001. 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 have been deferred and
amortized over the estimated effective contract life. SEE NOTE 29 TO THE
CONSOLIDATED FINANCIAL STATEMENTS.
RESEARCH AND DEVELOPMENT
In 2001, the Company substantially invested in the improvement of the quality of
all services provided to customers, with a focus on the creation of a
specially-designated area where the Company's Network Management Center - NMC is
located. The system was provided by TTI, an Israeli company, and was customized
with the active participation of Company specialists.
The NMC structure is based on three areas: Configuration Management, Traffic and
Performance Management and Fault and Work-Force Management.
CONFIGURATION MANAGEMENT controls the resources available on the network using
tools such as databases that describe the physical and logical resources of the
network, the connections among them and how they are used. This area provides
several internal customers inside the Company with up-to-date information,
including the other NMC management areas, planning and engineering areas.
TRAFFIC AND PERFORMANCE MANAGEMENT controls the network's behavior by collecting
performance and traffic data from network elements. Based on these elements the
system creates, calculates and analyzes indexes that track the quality of
service being offered to the customers, allowing the identification of
opportunities to improve such quality.
FAULT AND WORK FORCE MANAGEMENT performs full-time supervision of the network.
Its main goals are to drastically reduce the impact of network problems on the
quality of service, as well as to reduce the number of problems in the network
and the time required to fix them. The tools used are related to real-time alarm
monitoring, remote control of network elements and work-force coordination.
TREND INFORMATION
Third-generation systems ("3G systems") represent the main focus of the trends
in mobile communication. 3G systems should allow access to information at speeds
as high as 2,048 kbit/s, therefore making available multimedia services
involving voice, data, images and sound of optimum quality. Naturally, these
services will not be completely and widely available in the beginning, given
that there are still several technical difficulties, such as the required range
of frequency and, most importantly, the applications and services available. Its
growth is expected to be secondary compared with voice in future years, until
users feel the need to have access to all types of communication at reasonable
costs.
The Company believes that the great appeal of such systems will consist in
Internet browsing at speeds as high as or even higher than household-modem
connections and marketed in package-mode, which should be enough to disseminate
wireless Internet on a definitive basis. Such systems will be attractive in
several other ways, but the market needs to be prepared with applications and
services that justify the cost paid by users. Therefore, the Company believes
that the main application in these systems will be the Internet and not the
high-speed multimedia services, at least initially.
Consistent with these predictions, the Company believes that 2.5G systems, which
are systems that will allow data transmission at speeds significantly lower than
in 3G systems, will last longer than expected. In addition, they will be able to
meet the needs of the vast majority of users. The companies which manage to
prepare their networks to use 2.5G systems will certainly have excellent
opportunities to remain consonant with the trends of the market, and when this
market reaches a more mature stage, they will be able to take wider and higher
steps towards 3-G systems.
The Company is closely tracking all these alternatives in technological
evolution, with a participation in the BRAZILIAN COMMISSION OF COMMUNICATIONS
(the "Comissao Brasileira de Comunicacoes"), where it monitors and analyzes the
progress of 3-G systems.
In consonance with these trends of thought on what the future of wireless
telecommunications will be like, the Company has maintained its position as a
leading company in the market. During 2001, the Company leveraged data services
throughout existing media, such as the SHORT MESSAGE SERVICE, the CIRCUIT
SWITCHED DATA (CSD) and the WIRELESS APPLICATION PROTOCOL (WAP).
This fact is important in the wireless segment, since it not only demands a new
positioning of the products throughout the market, but also shows that the
telecommunication segment should be concerned with the entire chain of products,
from the content to the terminal handsets, from the network core to the aerial
interface.
The Company will continue to invest in the "wireless Internet" convergence
segment. Moreover, the Company intends to make available new service
alternatives in 2002.
It is still not possible to calculate the impact on the Company's revenues and
profitability of launching the new third-generation services, because no country
has yet reached the evolutionary stage of such systems.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
The Holding Company is administered by a Board of Directors (CONSELHO DE
ADMINISTRACAO) and a Board of Executive Officers (DIRETORIA). The Board of
Directors comprises seven members serving for a term of three years. The Board
of Directors holds a regular meeting each three months and holds special
meetings when called by the Chairman or by two members of the Board of
Directors.
The following are the current members of the Board of Directors and their
respective positions.
NAME POSITION REELECTION
---- -------- ----------
Alexandre Beldi Netto................... Chairman April 26, 2001
Araldo Alexandre Marcondes de Souza..... Member April 26, 2001
Mario Cesar Pereira de Araujo........... Member April 26, 2001
Ricardo de Souza Adenes................. Member April 26, 2001
Marco Antonio Beldi..................... Member April 26, 2001
Antonio Fabio Beldi..................... Member April 26, 2001
Nelson Guarnieri de Lara................ Member April 26, 2001
Set forth below are brief biographical descriptions of the Directors.
ALEXANDRE BELDI NETTO, 81 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 and Credibel Factoring. He holds a degree in Accounting from
the Escola de Comercio de Sorocaba (Sorocaba School of Commerce), in the state
of Sao Paulo.
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. Mr. Souza holds a degree in Civil Engineering
from the State University of Campinas, in the state of Sao Paulo.
MARIO CESAR PEREIRA DE ARAUJO, 54 years old, has served as a member of the Board
of Directors since August 1998. He has also served Empresa Brasileira de
Telecomunicacoes S.A. - EMBRATEL as engineer and as Head of Projects Department,
Contracting and Installation of Networks and Telecommunications Systems. Mr.
Araujo also served as Chief of Section in Telecomunicacoes do Rio de Janeiro
S.A. - TELERJ. He holds a degree in Engineering from the Federal University of
Rio de Janeiro.
RICARDO DE SOUZA ADENES, 44, has served as a member of the Board of Directors
since April 26, 2001. He has also served as Financial Director of Splice do
Brasil Telecomunicacoes e Eletronica S.A. since 1999. From 1995 to 1999, Mr.
Adenes served as Corporate Business Manager of Banco do Brasil and, from 1992 to
1995, as Financial Director of Banco do Estado de Pernambuco S.A. (BANDEPE). He
holds a degree in Economics from Associacao de Ensino do Distrito Federal
(AEUDF) and an M.A. in Economics from Fundacao Getulio Vargas.
MARCO ANTONIO BELDI, 50 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. Mr. Beldi holds a degree in
Mechanical Engineering from the State University of Campinas (UNICAMP), as well
as a degree in Law from Itu Law School, in the state of Sao Paulo.
ANTONIO FABIO 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 Superintendent Director, Mr. Beldi served as Executive
Officer at Banco Credibel and Faculdade de Engenharia de Sorocaba (Sorocaba
College of Engineering) and as Superintendent Director of Beldi Participacoes e
Eletronica S.A. He holds a degree in Civil Engineering from the Pontifical
University of Campinas, in the state of Sao Paulo.
NELSON GUARNIERI DE LARA, 74 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.
Mr. Lara holds a degree in Law from the University of Sao Paulo.
Alexandre Beldi Netto is the father of Marcos Antonio Beldi and Antonio Fabio
Beldi.
BOARD OF EXECUTIVE OFFICERS
The Board of Executive Officers consists of one President and Executive Officer
of Investor Relations, one Executive Officer of Coordination and Operations, one
Executive Officer of Businesses, one Executive Officer of Finance, one Executive
Officer of Engineering, and one Executive Officer of Administration and Human
Resources. They all were elected by the Board of Directors on December 13, 2001,
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.
DATE OF
NAME POSITION REELECTION
---- -------- ----------
Mario Cesar Pereira de Araujo President and Head of Investor Dec. 13, 2001
de Araujo.................... Relations
Sergio Assenco Tavares dos Executive Officer of Engineering Dec. 13, 2001
Santos.......................
Luis Andre Carpintero Executive Officer of Finance Dec. 13, 2001
Blanco.......................
Getulio Nery Cardoso......... Executive Officer of Dec. 13, 2001
Administration and
Human Resources
Antonio Carlos Haidamus Executive Officer of Dec. 13, 2001
Monteiro..................... Coordination and Operations
Roberto Iunes Brito.......... Executive Officer of Businesses Dec. 13, 2001
Set forth below are brief biographical descriptions of the Executive Officers.
MARIO CESAR PEREIRA DE ARAUJO, 54 years old, has served as a member of the Board
of Directors since August 1998. He has also served Empresa Brasileira de
Telecomunicacoes S.A. - EMBRATEL as engineer and as Head of Projects Department,
Contracting and Installation of Networks and Telecommunications Systems. Mr.
Araujo also served as Chief of Section in Telecomunicacoes do Rio de Janeiro
S.A. - TELERJ. He holds a degree in Engineering from the Federal University of
Rio de Janeiro.
SERGIO ASSENCO TAVARES DOS SANTOS, 54 years old, has served as an Executive
Officer since May, 1998. He served as manager of the vice-presidency of
TELEBRAS' Department of Development and Coordination with Suppliers; coordinator
of the Technical Office Special Projects of Telebrasilia; and manager of the
Advanced Telecommunications Business Unit and Engineering Director of
Telebrasilia. He also served as the Chief Executive Officer of the Company from
May to August 1998. He holds a degree in electrical engineering from the Federal
State University of Brasilia.
LUIS ANDRE CARPINTERO BLANCO, 28 years old, has served as an Executive Officer
since October 1, 2000. From May 1999 to September 2000, he actively took part in
several areas of the Company. He started as Administrative and Financial
Director of NBT and Manager in the Financial Department of the Company. He
worked in the stock market with BANCO BOA VISTA INTERATLANTICO, which is
associated with the CREDIT AGRICOLE, and as manager in the BANCO ESPIRITO SANTO
from 1997 to 1999. He holds a production engineering degree from the Federal
University of Rio de Janeiro.
GETULIO NERY CARDOSO, 50 years old, has served as an Executive Officer since
July 28, 1999. He began his professional career in the Central Bank's Foreign
Exchange Department. Later, he joined the Production Engineering sector of
Petroleo Brasileiro, S.A.--PETROBRAS ("PETROBRAS"). He then joined TELEBRAS'
Department of Industrial Development, specializing in telecommunications
industrial development. He then became Commercial Manager for the Central West
Region for Splice. He holds a degree in Electrical Engineering from the
Universidade de Brasilia and has completed extensive related coursework in
Brazil and abroad.
ANTONIO CARLOS HAIDAMUS MONTEIRO, 48 years old, has been working for TCO since
April 1999, and has served as Executive Officer of Coordination and Operations
since December 2001. He has also served as Executive Vice-President of NBT since
November 1999. Mr. Monteiro started his career in the Telecommunications field
in 1970, working for the former TELEOESTE, a Mato Grosso do Sul telephone
service carrier, before telecommunication carriers became state-owned companies.
Subsequently, he worked for Embratel, TELERJ and TELEMAT, where he served as
Director of Engineering and President. He holds degrees in engineering and in
economics, and specialized in fiber optics and corporate management.
ROBERTO IUNES BRITO, 43 years old, has been Director since August 31, 2001. From
August 1998 to August 2001, he served as Regional Director of Telems Celular
S.A.. Mr. Brito is responsible for competitive strategy and for the operating
incomes of Telems Celular. From 1982 to 1998, he was Manager of the Financial
Department, was responsible for the administrative and financial structure,
assistant to the Administrative-Financial board, manager of the Economic and
Financial Planning Department, and manager of the Cellular Telephone Department
in Telecommunicacoes do Mato Grosso do Sul S.A., belonging to the Telebras
System. Mr. Brito holds a degree in economics from the Catholic University of
Mato Grosso do Sul and an M.A. from INPE, in that state.
AUDIT COMMITTEE
The Company's Statutory "Audit Committee" consists of 5 (five) members elected
for a term of one year. The council meets regularly every 3 (three) months and
in extraordinary meetings when summoned by the President or by any of its
members.
The following are the current members of the Audit Committee and their
respective positions.
NAME POSITION REELECTION
---- -------- ----------
Augusto Patarelli ..................... Adviser April 29, 2002
Aureo Monteiro de Moraes .............. President April 29, 2002
Francisco Jose Becker Dias ............ Adviser April 29, 2002
Rene de Oliveira Garcia Junior......... Adviser April 29, 2002
Joao Jose Caiafa Torres................ Adviser April 29, 2002
Set forth below are brief biographical descriptions of the members of the Audit
Committee.
AUGUSTO PATARELLI, 53 years old, was reelected member of the Audit Committee on
April 29, 2002. Mr. Patarelli has served as Financial Director of Produtiva
Cooperativa de Trabalho e Consultoria S.A. since 1999, and served as Manager of
the Planning Department of Telecomunicacoes Brasileiras S.A. -Telebras, from
1993 to 1998. He holds degrees in economics and business administration from the
University of Franca, in Sao Paulo.
AUREO MONTEIRO DE MORAES, 50 years old, was reelected member of the Audit
Committee, which elected him President of the Council on April 29, 2002. Mr.
Moraes has served as Manager of Corporative Procedures in Telecomunicacoes
Brasileiras S.A. - Telebras. He holds a degree in Business Administration from
the Pontifical Catholic University of Brasilia.
FRANCISCO JOSE BECKER DIAS, 52, was reelected member of the Audit Committee on
April 29, 2002. He has served as Executive Director of Banco Fibra S.A. since
1994. Mr. Dias served as Executive Director of Banco BMG S.A. from 1991 to 1994,
and as Vice-president of Banco Norchem S.A. from 1989 to 1991. He also served as
Director of both Metro Banco S.A., from 1988 to 1999, and of Banco Iochpe S.A.,
from 1985 to 1988. He holds a degree in electrical engineering from the Federal
University of Rio Grande do Sul. He specialized in production engineering from
the Federal University of Rio de Janeiro and holds a Ph.D. in accounting and
finance from the University of Lancaster, in England.
RENE DE OLIVEIRA GARCIA JUNIOR, 42 years old, was a member of the statutory
audit committee of Telebrasilia Celular from April 2000 to March 2001. He was
elected member of the Audit Committee on April 29, 2002. He serves as Economics
Consultant, Corporate Advisor, and Projects Coordinator for the Brazilian
Institute of Economics of Fundacao Getulio Vargas (FGV). He is a professor at
the Economics Department of IBMEC; served as Director and substitute for the
President of the COMISSAO DE VALORES MOBILIARIOS, which is the Brazilian
Securities and Exchange Commission ("CVM"). Academic Background: he holds a
degree in economics from the State University of Rio de Janeiro; a degree in
business administration from FGV; an M.A. in economics from FGV; a Ph.D. in
economics from FGV; specialized in Capital Market and Operating Strategies in
Derivatives at INSEAD, in Fontainebleau, in France.
JOAO JOSE CAIAFA TORRES, 63 years old, has served as member of the
Administration Council of Telebrasilia Celular from April 2001 to March 2002,
and was elected member of TCO's Statutory Audit Committee on April 29, 2002. He
served as Technical Assistant, Advisor to the Vice-President, and Department
Manager for Banco do Brasil. He served as Technical Assistant for the Treasury
Department, Administrative Assistant, and Research Assistant for the State
Development Council, in the state of Minas Gerais government; Professor of
Business Administration in the University of Itauna, in Minas Gerais; he served
as counsel for PREVI, Ligas de Aluminio S.A., S.A. Mineracao da Trindade, Telesp
Celular S.A. and ITAUSA Investimentos S.A. He holds a degree in accounting and
an M.A. in Business Administration from the Federal University of Minas Gerais.
COMPENSATION
For 2001, the amount of expenses incurred by the Company to all the directors
and members of the Controlling Company's Statutory Audit Committee was
approximately R$2.5 million.
For 2001, the amount spent by TCO to provide their directors with a private
pension plan was approximately R$174.3 thousand.
BOARD PRACTICES
See "Board of Executive Officers" and "Audit Committee," above.
EMPLOYEES
On December 31, 2001, TCO's workforce consisted of 2,867 persons, 19.6% greater
than the amount registered in 2000. Of this total, 1,461 were permanent staff,
278 interns and 1,128 regular contracted third-parties. The workforce was
allocated as follows: 70.9% in Business (Marketing, Sales and Client Service);
9.5% in Engineering; 9.5% in Finance; 4.0% in Administration and Human
Resources; 3.9% in Information Technology; and 2.2% in the president's office.
The Company's permanent staff is considered young, having an average of 31 years
of age, most of which is male (51%).
As to education level, the following distribution was found in December, 2001:
2% elementary school; 58% high school; 36% college level, and 4% at
specialization levels.
Approximately 25% of the Company's personnel are affiliated to labor unions. The
relationships with these entities are considered good, since the process of
negotiation of the Collective Labor Agreement 2001/2002, as in previous years,
was conducted in a professional way, which made it easier for them to have it
approved by the employees meeting in assembly.
Training and development actions implemented by TCO along the year 2001 and
directed mainly to technical and management empowerment of the workforce
employed in the Business, Engineering and Information Technology areas, together
represent investments approaching R$3.3 million. This amount exceeded the
investments made in the year 2000 by 73%. The amount of hours/year in 2001 grew
by 105% compared to 2000.
The consolidation of the implementation of the new Career Development Plan is
part of the Company's employee-retention program and managed to correct all
remaining salary discrepancies. Also in 2001, the Company prepared new policies
for performance evaluation and variable pay programs. These programs are
expected to be implemented in the first half of 2002.
Presently, TCO sponsors two types of private pension plan programs for its
employees:
a)- Defined-Benefit Plan (PBS-TCO):
The PBS-TCO plan resulted from the segregation of Fundacao Sistel de Seguridade
Social's ("Sistel's") equity in January, 2000. It is a "defined benefit" plan
and has nine affiliated employees as active participants and eight former
employees as assisted members (BENEFICIARIOS ASSISTIDOS). According to the
plan's policy, in addition to a supplemental benefit, the plan provides medical
care (PAMA) to retired affiliates and their beneficiaries, with shared cost,
upon the use of the services. The PBS-TCO plan premiums are established
annually, based on actuarial valuations prepared by an independent actuary, in
accordance with the applicable norms effective in the country. The funding
system used is that of capitalization and the total contribution owed by the
sponsor is 13.5% on the participating employees' payroll, of which 1.5 % is
directed to sponsoring the PAMA.
b)- Hybrid Plan (TCO PREV):
The Company's modern and flexible pension plan - TCO PREV - was launched in
October, 2000, and gained acceptance from nearly 100% of employees formerly
affiliated with the PBS-TCO plan, as well as from new employees and those
previously under no plan. Designed based on the latest plan models and referred
to as a "hybrid," this plan offers two different approaches to benefits. One of
them is the "defined benefit" plan, for unexpected situations, the so-called
Risk Benefits (Temporary Disability, Permanent Disability and Death Annuity due
to death on the job). The other approach is the "Programmed Benefits" for
anticipated situations (Normal Retirement and Early Retirement). In this new
plan, the Programmed Benefits are not linked to the basic official social
security, unlike the old plan. Participants of this new plan may request to
receive benefits after 50 years of age (Early Retirement) or after 60 years of
age (Normal Retirement). It is necessary, however, to terminate the
participant's relationship with the sponsor and to contribute to System during
10 years with no interruptions. The funding system used by Programmed Benefits
operates on a parity basis between the sponsor and the participants at the same
level as the normal contribution, which vary between 3% and 8% of the monthly
salaries. The contributions made by the participants and by the sponsor are
credited to individual participants' accounts. In addition, the sponsor covers
the cost provided for the risk benefits, corresponding to 3.338% of the payroll,
plus the plans' administration fees, which correspond to 5% of the
contributions.
The expenses incurred by the Company during 2001 related to private pension
plans sponsored for its employees, including the management staff, totaled
R$2.856 million.
Investments of fund equity for the PBS-TCO and TCO PREV plans are made in
accordance with the policies and guidelines provided by Sistel and in conformity
with the applicable legislation. The criteria adopted are exclusively technical
and respect the PLANO DIRETOR DE APLICACAO DO PATRIMONIO (PDAP), prepared and
approved annually by the Foundation's Executive Board.
SHARE OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
All Directors and Executive Officers hold less than one percent of the class of
shares. There is no stock options plan for any director or other employee in the
Company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
References in this Annual Report to "Preferred Shares" and "Common Shares" are
to the preferred shares and common shares, respectively, of the Holding Company.
References to "American Depositary Shares" or "ADSs" are to American Depositary
Shares, each representing 3,000 Preferred Shares. The ADSs are evidenced by
American Depositary Receipts ("ADRs").
Of the Holding Company's two classes of capital stock outstanding, only the
Common Shares have full voting rights. The Preferred Shares have voting rights
under limited circumstances. As of December 31, 2001, BID S.A. owned 53.22% of
the Common Shares. Accordingly, BID S.A. has the ability to control the election
of the Holding Company's Board of Directors and the direction and future
operations of the Company.
The following table sets forth information concerning the ownership of Common
Shares by BID S.A. and by the Holding Company's officers and directors as a
group.
NUMBER OF PERCENTAGE OF
COMMON OUTSTANDING
NAME OF OWNER SHARES OWNED COMMON SHARES
------------- ------------ -------------
BID S.A................................... 67.919.110.396 53.22%
All directors and executives
officers as a group..................... 6 0%
Splice is a Brazilian company engaged in the development, manufacture and supply
of digital electronic and telecommunications equipment. Its business activities
include manufacturing, import/export of telecommunications equipment,
installation of telephone lines in rural and urban areas, financing of telephone
lines directly to the subscribers and the provision of alphanumeric paging
services in ten of the largest Brazilian cities.
On December 31, 2001, Splice transferred all of its shares in BID S.A. to Fixcel
S.A., a holding company.
RELATED PARTY TRANSACTIONS
The Company effected transactions with Splice and subsidiaries of Splice in
1999, 2000 and 2001. These transactions were mainly related to marketable
securities (R$362.3 million in 2001, R$77.7 million in 2000 and R$7.8 million in
1999), short-term investments (R$17.3 million in 2001 and R$6.5 million in
2000), acquisition of property, plant and equipment (R$11.8 million in 2001,
R$5.1 million in 2000 and R$6.2 million in 1999), maintenance services (R$1.9
million in 2001 and R$3.5 million in 2000) and acquisition of telephone cards
(R$0.9 million in 2001 and R$2.1 million in 2000).
The marketable securities are related to Commercial Papers issued by Splice do
Brasil S/A. The interest was a pre-fixed annual rate of 24-25% with swap of 100%
of CDI (Interbank Deposit Certificate) plus 1.5% per annum.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS.
See Item 18 "Financial Statements."
LEGAL PROCEEDINGS
LITIGATION RELATING TO THE BREAKUP OF TELEBRAS
The Breakup of TELEBRAS is subject to several lawsuits in which plaintiffs have
requested, and in certain cases obtained, preliminary injunctions against the
Breakup. All of these preliminary injunctions have been quashed by Federal Court
decisions. These lawsuits are all being challenged on the basis of court
competence. The Supreme Federal Court of Justice ruled that the Federal Courts
of Minas Gerais and Brasilia were competent to hear the cases. As a result, all
of the appeals have been sent back to the lower courts.
The lawsuits are based on a number of legal theories, including that (i)
Brazil's Constitution requires that the creation of the 12 New Holding Companies
be specifically authorized by the Telecommunications Law; (ii) the shareholders'
meeting of TELEBRAS held on May 22, 1998 which approved the Breakup was not
properly convened; (iii) national sovereignty will be threatened if the
country's telecommunications companies are controlled by foreign entities; and
(iv) the Telecommunications Law requires that certain matters, such as the entry
of new competitors and the administration of development and technology funds,
be regulated prior to the Breakup and privatization, either by an executive
order of the President or by an act of Congress.
If any of these lawsuits ultimately succeeds, the Breakup will have to be
reinitiated. This could require, depending upon the prevailing plaintiff's
theory, any combination of (i) amendment of the Telecommunications Law and/or
(ii) reconvening the May 22, 1998 TELEBRAS shareholders' meeting. It is
theoretically possible under Brazilian law for a court to require that the
Breakup be undone, although the Company's management believes that this would
not be likely to occur.
LITIGATION RESULTING FROM EVENTS OCCURRED PRIOR TO BREAKUP
TELEBRAS and the legal predecessors of the Holding Company and the Subsidiaries,
respectively (the Predecessor Companies), are defendants in a number of legal
proceedings and subject to certain other claims and contingencies. Liability for
any claims arising out of acts committed by the Predecessor Companies or
TELEBRAS prior to the effective date of the Breakup remains with the Predecessor
Companies or TELEBRAS, as the case may be, except for those liabilities which
under specific accounting provisions have been assigned to the Subsidiaries
and/or the New Holding Companies. Any claims against the Predecessor Companies
which are not satisfied by the Predecessor Companies or TELEBRAS for reasons of
insufficient assets could result in claims against the Subsidiaries or the New
Holding Companies to the extent that either have received assets which might
have been used to satisfy those claims had they not been spun off.
With respect to labor and tax claims, the Subsidiaries and the New Holding
Companies, by law, have joint and several liability with the Predecessor
Companies and TELEBRAS, respectively. However, under the terms of the Breakup,
the Predecessor Companies and TELEBRAS remain liable to the Subsidiaries and the
New Holding Companies, respectively, for any such claims arising out of acts
committed by the Predecessor Companies or TELEBRAS, as the case may be, prior to
the effective date of the Breakup, except for any liability for which specific
accounting provisions have been assigned to the Holding Company or one of the
other New Holding Companies. The Company's management believes that the chances
of claims of this nature materializing and having a material adverse financial
effect on the Company are remote.
LITIGATION RELATING 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 ON CELLULAR TELEPHONE ACTIVATION
Each of the Band A Subsidiaries has filed a lawsuit in the Treasury Court of the
state in which it is located seeking injunctive relief from retroactive and
prospective application of the ICMS to activation fees and has made a provision
for the contingency that ICMS may be payable on such fees. Each of the Band A
Subsidiaries, except Telemat, Telems and Teleron, has either obtained a
temporary injunction relieving it from the payment of the ICMS on activation
fees during the pendency of the lawsuits or is depositing with the applicable
Treasury Court the amount of ICMS that would be payable if the Subsidiary does
not prevail in such lawsuit. Telemat is collecting and paying ICMS on activation
fees as if the interpretation were valid from November 30, 1998 and is
accounting for such payments as expenses. Teleron is paying similar fees but is
accounting for such payments as debt. In both cases, the judgments are being
appealed. As for Telems, the temporary injunction relieving it from payment was
lifted, and a judgment is pending. The amount that may be due is being
provisioned. The tax authorities of the states where the lawsuits are pending
may appeal the decisions of the Treasury Court to grant temporary injunctions.
There can be no assurance that the Subsidiaries will ultimately prevail in any
appeal relating to the temporary injunctions or in the underlying litigation
with respect to application of the ICMS to activation fees. If the ICMS were
applied retroactively to activation fees earned by the Company during the last
five years, it would give rise to a maximum liability estimated at R$77.3
million. In accordance with clause 2.1.5 of the Breakup protocol signed by the
Predecessor Companies and the Subsidiaries, the Company believes that the
Predecessor Companies will be liable to the Subsidiaries for any tax liability
arising from the retroactive application of the ICMS to revenue recognized from
cellular activation prior to 1998. However, such liability for prior debts is
not automatically attributable to the Predecessor Companies, since the tax
authorities by law may file suit against both the Predecessor Companies and the
Subsidiaries at the same time. If a Subsidiary is compelled to pay a tax
liability, under the Breakup protocol it may seek restitution of its losses from
the Predecessor Company in question.
The Company's management does not believe that the retroactive application of
the ICMS to cellular activation is probable. Therefore, no provision with
respect to such application has been made or is expected to be made in the
Consolidated Financial Statements. The Company has already made provisions which
amount to R$3.6 million for the collection of ICMS on the activation of cellular
telephones from the actual agreement date until December 31, 2001. The Company's
management does not believe that application of the ICMS to cellular activation,
applied on a prospective basis, will have a material impact on the Company's
results of operations.
To date no definitive position has been taken by the Courts with regard to the
levy of ICMS on activation fees. However, the Brazilian Supreme Court of Justice
has not granted an injunction as requested by other States through appeals in
similar lawsuits filed by taxpayers. A definitive judgment from the Brazilian
Supreme Court of Justice is still being awaited. It should be mentioned that
there are few decisions from higher courts about same discussion, but a recently
one obtained by Telefonica Celular (the concessionaire of the Rio de Janeiro
region) express that the ICMS is not applicable on cellular activation fees.
LITIGATION RELATING TO TELEBRAS LOANS
Under the terms of the Breakup, several loans existing between TELEBRAS and its
subsidiaries (the TELEBRAS Loans) were to have been distributed through: (i) the
assignment of the debt obligation to the relevant subsidiary and (ii) the
assignment of the credit right to the relevant New Holding Company as the new
parent of the subsidiary who assumed the debt. Although the obligation to pay
the TELEBRAS Loans was duly assigned to Telebrasilia and Telegoias, the right to
receive such payments was not assigned to the Holding Company but instead to
Tele Centro Sul, one of the New Holding Companies providing fixed-line services.
In light of this departure from the agreed procedures for assigning the TELEBRAS
Loans, payment of the TELEBRAS Loans was suspended immediately upon the change
of control to the Holding Company, and a lawsuit was filed in June 1999 in
Federal District Court against Tele Centro Sul, TELEBRAS and KPMG, the auditors
for the Breakup accounting procedures, requesting liquidated damages and a court
ruling recognizing the inappropriate procedures and non-existence of the debt to
TELEBRAS. Subsequently, KPMG was dismissed from the lawsuit. The last action was
issued in November, 2000, when the court ordered specification of evidence by
the parties as the Company moved for an adjudication of the dispute and TCS
requested expert opinion in connection with the TELEBRAS Loan documents The
parties are awaiting a decision by the judge to move forward to court hearings
or production of evidence.
In response to the lawsuit filed against it, Tele Centro Sul filed two
counter-lawsuits in October 1999 against Telebrasilia and Telegoias,
respectively, seeking payment of the TELEBRAS Loans in the amount of R$41.3
million from Telebrasilia and R$24.2 million from Telegoias. Status of this
lawsuit is identical to the one discussed in the preceding paragraph. In
November 2000, the Court summoned the parties for clarification of evidences, as
TCO had required a summary judgment and TCS had required an examination of the
accounts and an entry. Subsequently, the judge deemed the records sufficient.
The three lawsuits described above were grouped in the same Court, given that
they deal with the same issue relating to TELEBRAS loans. In August, 2001, the
court dismissed the Company's claims against Tele Centro Sul, TELEBRAS and KPMG,
and partially ruled in favor of Tele Centro Sul partially against Telebrasilia
and Telegoias.
The Company and Tele Centro Sul have appealed in the Supreme Court of the
Federal District (TJDF), where the matters are now pending.
LITIGATION RELATED TO THE ALTERATION OF THE PIS AND COFINS TAX BASIS
The CONTRIBUICAO SOCIAL PARA O FINANCIAMENTO DA SEGURIDADE SOCIAL, or COFINS, is
a social contribution tax on gross revenues (operating and financial). On
November 27, 1998, the Brazilian government, through Law no. 9,718, increased
the COFINS rate from 2% to 3%, and changed its tax basis from gross operating
revenues to all gross revenues (operating and financial). The PROGRAMA DE
INTEGRACAO SOCIAL, or PIS, is another social contribution tax which, together
with the COFINS, is imposed on certain telecommunications services at a combined
rate of 3.65%. PIS tax basis was also changed from gross operating revenues to
all gross revenues (operating and financial).
By changing the original PIS and COFINS tax basis, the Brazilian Government
created new taxes. In such case, the Brazilian Federal Constitution requires
that Congress pass a Complimentary Law, which requires a higher approval rate in
Congress than an Ordinary Law. However, Law no. 9,718 is an Ordinary Law, which
is inferior to the Complimentary Law. Accordingly, TCO has filed a lawsuit
against those alterations in the Brazilian tax legislation, on the grounds of
unconstitutionality. The Company believes that it will prevail in such lawsuit.
Despite this belief, the lawsuit was not successful in the first stage of
judgment. The Company has filed an appeal and a judgment is pending. The total
amount involved is R$5,805,499.56, which has been deposited in court.
LITIGATION RELATING TO THE BAR OF TRANSFER OF COFINS AND PIS TO THE END
CONSUMER
As imposed on telecommunications carriers, the social contribution tax described
above results in the transfer of costs of such contributions to consumers in
their respective telephone bills. The National Association of Protection of
Credit Consumers (ANDEC) and the Department of Justice of certain Brazilian
states have filed class action suits against the telecommunication companies to
avoid the transfer of these costs to consumers. These suits seek to prohibit the
transfer of amounts relating to the contributions to end consumers residing in
the states of Minas Gerais and Maranhao (NBT), as well as the reimbursement of
twice the amounts already collected. Alternatively, money damages for pain and
suffering and pecuniary damage are requested.
The Company's management does not believe that the suit will be successful, as
this practice of transfer is supported by the Brazilian Legal System.
OTHER LITIGATION
The company is currently involved in several legal suits relating to its
operations. Therefore, it has either arranged to or deposited in escrow the
amounts destined to cover possible losses resulting from adverse judicial
decisions. The Company's management considers that if such acts were decided
against the Company's interests, this would not significantly impact the
Company's businesses, its Balance sheets or the results of its operations. SEE
"NOTE TO THE CONSOLIDATED FINANCIAL STATEMENTS."
POLICY ON DIVIDEND DISTRIBUTIONS
On July 6, 2001 and on December 20, 2001, the Company informed its shareholders
that the Board of Directors had approved the payment of interest on owned
capital in accordance with the statement of financial position for the periods
January to June 2001 and July to December 2001, respectively, in accordance with
Article 9 of Law 9249/95 and Provision Number 207/96 of the CVM, in the values
of R$0.0000409318 and R$0.000068422056 per share, respectively for each period,
with 15% withheld income tax, which resulted in net interest of R$0.0000347920
and R$0.000058158748 per share, except to those shareholders who were immune or
exempt.
On March 14, 2002, the Board of Directors approved the payment of dividends at
R$0.000110843947 per share free of income tax for all shareholders who held
shares on March 25, 2002.
The corresponding credit on interest on owned capital was written in the
Company's accounting books on December 31, 2001, on an individual basis to each
shareholder, according to their shareholding position on July 16, 2001, and
December 31, 2001, respectively for each of the above mentioned periods.
The value of the interest, net of the applicable withheld income tax, is
ascribed to the value of the mandatory dividend and the statutory dividend on
the preferred shares, relative to the fiscal year 2001, adding such value to the
total amount in dividends distributed by the Company for all purposes provided
in the Company's bylaws.
On April 26, 2002, the general assembly approved the payment of interest on
owned capital and dividends for up to September 30, 2002, in the terms below:
Values
a) Interest on owned capital - Common and Preferred Shares
Gross value per share--Jan. to July 2001 R$0,0000409318
Gross value per share--July to Dec. 2001 R$0,000068422056
Net value per share--Jan. to July 2001 R$0,0000347920
Net value per share--July to Dec. 2001 R$0,000058158748
b) Dividend
Value per share - Common and Preferred R$0,000110843947
Income Tax
Upon approval of the accounting credit of the interest on owned capital, income
tax was withheld at the rate of 15%, except for purposes of payment to those
shareholders who had proved immune or exempt from such tax within the period
specified by the Company in official communication to the shareholders.
SIGNIFICANT CHANGES
See "Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 2000 and 2001," "Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 1999, 2000 and 2001," and Notes 24, 25,
30 and 31 to the Consolidated Financial Statements.
ITEM 9. THE OFFERING AND THE LISTING
OFFER AND LISTING DETAILS
The principal trading market for the Preferred Shares is the BOLSA DE VALORES DE
SAO PAULO (the "Bolsa de Valores de Sao Paulo"). The Preferred Shares are also
traded on the RIO DE JANEIRO STOCK EXCHANGE (the "Bolsa de Valores do Rio de
Janeiro") and the seven other Brazilian stock exchanges. As of December 31,
2001, the Holding Company had approximately 2.4 million common and preferred
shareholders.
The Preferred Shares commenced trading separately on the Brazilian stock
exchanges on September 21, 1998. The following table sets forth the reported
high and low closing sale prices for Preferred Shares of the Holding Company on
the Sao Paulo Stock Exchange for the periods indicated.
NOMINAL REAIS
PER 1,000 PREFERRED
SHARES
-------------------
HIGH LOW
------- -------
1998 (Beginning in September 21, 1998) .............. R$1.229 R$0.269
1999................................................. R$3.880 R$1.083
2000................................................. R$8.283 R$3.017
2001................................................. R$8.492 R$3.083
NOMINAL REAIS
PER 1,000 PREFERRED
SHARES
-------------------
HIGH LOW
------- -------
First quarter 2000................................... R$8.283 R$3.017
Second quarter 2000.................................. R$7.282 R$4.651
Third quarter 2000................................... R$8.183 R$5.734
Fourth quarter 2000.................................. R$6.808 R$4.833
First quarter 2001................................... R$8.492 R$5.370
Second quarter 2001.................................. R$6.899 R$4.896
Third quarter 2001................................... R$6.517 R$3.083
Fourth quarter 2001.................................. R$5.655 R$4.181
NOMINAL REAIS
PER 1,000 PREFERRED
SHARES
-------------------
HIGH LOW
------- -------
November 2001........................................ R$5.655 R$4.528
December 2001........................................ R$5.588 R$5.010
January 2002......................................... R$5.560 R$4.420
February 2002........................................ R$4.752 R$4.254
March 2002........................................... R$5.269 R$4.459
April 2002........................................... R$5.070 R$4.580
May 2002 R$4.690 R$4.230
In the United States, the Preferred Shares trade in the form of ADSs each
representing 3,000 Preferred Shares, issued by The Bank of New York, as
depositary (the "Depositary") pursuant to a Deposit Agreement (the "Deposit
Agreement") among the Holding Company, the Depositary and the registered holders
and beneficial owners from time to time of ADRs. The ADSs commenced trading
separately on the NYSE on November 16, 1998 under the symbol TRO. As of December
31, 2001 there were approximately 150 registered owners of ADSs and
approximately 50.86 million outstanding ADRs. The following table sets forth the
reported high and low closing sales prices for the ADSs on the NYSE for the
period indicated.
U.S. DOLLARS PER ADS
--------------------
HIGH LOW
--------- --------
1998 (Beginning in November 16, 1998) ............... US$ 5.937 US$2.000
1999................................................. US$ 7.063 US$2.375
2000................................................. US$15.875 US$5.000
2001................................................. US$13.625 US$4.280
U.S. DOLLARS PER ADS
--------------------
HIGH LOW
--------- --------
First quarter, 2000.................................. US$15.875 US$5.000
Second quarter, 2000................................. US$13.000 US$8.813
Third quarter, 2000.................................. US$14.750 US$10.500
Fourth quarter, 2000................................. US$11.688 US$8.500
First quarter, 2001.................................. US$13.625 US$8.000
Second quarter, 2001................................. US$9.500 US$6.850
Third quarter, 2001.................................. US$8.570 US$4.280
Fourth quarter, 2001................................. US$7.250 US$4.730
U.S. DOLLARS PER ADS
--------------------
HIGH LOW
--------- --------
November 2001........................................ US$7.000 US$5.300
December 2001........................................ US$7.250 US$6.450
January 2002......................................... US$7.450 US$5.750
February 2002........................................ US$6.320 US$5.400
March 2002........................................... US$6.900 US$5.770
April 2002........................................... US$6.500 US$5.850
May 2002 US$5.800 US$5.050
The common shares and preferred shares of Telebrasilia traded on the Sao Paulo
Stock Exchange from May 18, 1998 to July 30, 1999. On August 02, 1999,
Telebrasilia shares began trading on the Sociedade Operadora do Mercado de
Ativos (SOMA), the over-the-counter market. On June 7, 2002, Telebrasilia shares
were substituted with shares of the Holding Company due to the merger of
Telebrasilia into the Holding Company. On May 18, 1998, Telegoias shares began
trading on the Sociedade Operadora do Mercado de Ativos (SOMA), the
over-the-counter market. The other Subsidiaries Telemat, Telems, Teleron,
Teleacre, NBT, and (as of December 10, 2001) Telegoias are closely held
corporations, and their shares do not trade on any stock market.
The Holding Company held a general extraordinary shareholders meeting on April
26, 2002, in which it approved the meger of Telebrasilia into the Holding
Company and the consequent transfer of the concession to explore cellular mobile
services by the Company previously held by Telebrasilia.
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
Pursuant to an agreement reached by Brazil's nine stock exchanges, as of April
2000, all of Brazil's stock markets have been centralized in the Sao Paulo Stock
Exchange. Thus, in 2001, the Sao Paulo Stock Exchange accounted for 100% 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 p.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, 2001, the aggregate market capitalization of approximately 428
companies listed on the Sao Paulo Stock Exchange was approximately US$185.4
billion. Substantially the same securities are listed on the Sao Paulo Stock
Exchange and on the Rio de Janeiro Stock Exchange. Although all the outstanding
shares of an exchange-listed company may trade on a Brazilian stock exchange, in
most cases less than half of the listed shares are actually available for
trading by the public, the remainder being held by small groups of controlling
persons that rarely trade their shares. For this reason, data showing the total
market capitalization of Brazilian stock exchanges tend to overstate the
liquidity of the Brazilian equity securities market.
The Brazilian equity market is relatively small and illiquid compared to major
world markets. In 2000, the combined daily trading volumes on the Sao Paulo
Stock Exchange and the Rio de Janeiro Stock Exchange averaged approximately
US$265 million. In 2001, the stocks of the approximately 30 companies that
comprise the stock index of the Sao Paulo Stock Exchange (about 30 companies)
accounted for approximately 79.5% 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 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 by Law no.
10,303/01 (the "Brazilian Corporation Law") and the Law no. 4,595/64 as amended
(the "Financial System Law").
Under the Brazilian Corporation Law, a company is either public, a COMPANHIA
ABERTA, and is allowed to issue publicly traded securities, such as the Holding
Company, or private, a COMPANHIA FECHADA, and its securities are only traded
privately. All public companies are registered with the CVM and are subject to
reporting requirements to keep such status. The shares of a public company may
also be traded privately, but subject to certain limitations. In order to have
its shares traded on Brazilian stock exchanges, a public company must be listed
on its stock exchange of choice, being subject to the requirements of such
exchange, with right of appeal to the CVM if the exchange denies the listing
request. Once admitted to list on one Brazilian stock exchange, the public
company's shares can be traded in any other Brazilian stock exchange that
matches the minimum listing requirements of the first exchange.
Trading in securities on the Brazilian stock exchanges may be suspended at the
request of a company in anticipation of a material announcement. Trading may
also be suspended on the initiative of a Brazilian stock exchange or the CVM,
among other reasons, based on or due to a belief that a company has provided
inadequate information regarding a material event or has provided inadequate
responses to inquiries by the CVM or the relevant stock exchange.
In general, the Brazilian Securities Law provides for, among other things,
disclosure requirements, restrictions on insider trading and price manipulation,
and protection of minority shareholders. However, the Brazilian securities
market is not as highly regulated and supervised as the United States securities
markets or markets in certain other jurisdictions.
DEPOSITARY SECURITIES PROGRAMS REGULATIONS
All ADS programs must also be registered and approved by the CVM, as set forth
in the National Monetary Council regulation for such programs. SEE ITEM 10
"ADDITIONAL INFORMATION--EXCHANGE CONTROLS." The CVM Instruction 317/99, as
amended, provides that, in order for level II or III ADS programs to be approved
by CVM, there must be a cooperation agreement entered into by the relevant
Brazilian stock exchange and the foreign stock exchange on which the ADSs are
listed, such agreement being previously approved by CVM. The Holding Company's
ADS program is a level II program and has been duly registered and approved by
the CVM and a cooperation agreement has been entered into by the Sao Paulo Stock
Exchange and the New York Stock Exchange, bringing the Holding Company's ADS
program into full compliance with Brazilian legislation.
MINORITY SHAREHOLDERS PROTECTION
The Brazilian Corporation Law provides for essential shareholder rights (the
"Shareholders Essential Rights"), which are: (i) to receive dividends from the
company; (ii) to receive a share of the company's assets in the event of
liquidation; (iii) look over the company's management as provided under the Law;
(iv) right of first refusal to subscribe to new stock or convertible securities
issued following a capital increase, in order to maintain the same proportional
stock holding in the company; and (v) to withdraw from the company, receiving
net worth value for the equity holding, if any of the following is resolved
against the opposition of the shareholder (the "Equity Withdrawing Rights"): (A)
creation of a new class of capital stock or increase in one of the existing
classes, without keeping the same proportion with the remaining existing
classes; (B) alterations in the conditions attributed to one or more classes of
preferred shares, or the creation of a more privileged class of preferred
shares; (C) reduction of mandatory profit distribution; and (D) the company's
merger or amalgamation into another company. The Equity Withdrawing Rights "(A)"
and "(B)" above are only available to the holders of the affected classes of
shares.
Inspection rights provided by the Law consist of the right of shareholders
representing at least 10% of the voting shares or shareholders representing at
least 5% of the non-voting shares, to summon the Audit Committee (CONSELHO
FISCAL), which is established to audit and inspect management and to assess its
compliance with the law and company's By-laws. Such board will have 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, which 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 new law (Law No. 10.303/01) alters and adds provisions to the Brazilian
Corporation Law and to the Brazilian Securities Law. The new law was approved
and published on October 31, 2001 and became effective as of March 1, 2002.
Despite the effectiveness of the new law and of its implementing regulation,
corporations should have adapted their bylaws to the new rules by shareholder
resolution no later than February 28th, 2003.
Below is a summary of the main amendments introduced by Law 10.303/01, which
applies to privately-held corporations:
PREFERRED SHARES
o New limit of 50% maximum of non-voting preferred stock (instead of 2/3 as
before) shall be applied as of March 1, 2002 to new corporations and
newly-listed (publicly held) corporations (art. 15, ss.2).
o Preferred shareholders may no longer elect to receive dividends 10% higher
than those paid to common shares, instead of fixed or minimum dividends (art.
17, I).
o Preferred share benefits now include: (i) preference as to receipt of
dividends, whether fixed or minimum, AND/OR (ii) preference as to receipt of
refund of capital, with or without premium (art. 17, I, II and III). Independent
of these preferences, preferred shares must have one of the following
advantages, expressed and detailed in the bylaws, in order to be traded: (x)
dividends equivalent to at least 25% of net profit, with a minimum of 3% of the
corporation's net worth and, in case of minimum dividends, never less than the
dividends paid to the common shares; (y) dividends per share at least 10% higher
than those paid to common shares; or (z) right to be included in a public offer
for alienation of control, with the same rights of the common shares described
in art. 254-A, and dividends at least equal to the common shares.
o Bylaws may not limit, except for fixed dividend preferred shares, the right
to participate in increase of capital resulting from the capitalization of
reserve funds or profits (art. 17, ss.5).
o In case of privatization, the privatized corporation may create a special
class of preferred shares with exclusive property of the government, with
specific statutory rights, including the right of veto over certain matters
specified on the statute (art. 17, ss.7).
DEBENTURE BONDS
o Clarification of rule that debenture bonds may include a
monetary-adjustment clause based on any index not expressly prohibited by law
(art.54, ss.1), with the permission to assure the holder of an option to choose
between redeeming titles in currency or in assets (art. 54, ss.2).
o Registration of the term-of-issue with the Board of Trade, not with the
Real Estate Registry (art. 62, I e II).
o Clarification of the rule that debenture bonds are fungible, with allowance
for deposits in custody and no requirement to issue certificates (art. 63).
ARBITRATION CLAUSE
o Bylaws may include provision for compulsory arbitration in case of dispute
between shareholders and the corporation, and between controlling shareholders
and minority shareholders (art. 109, ss.3).
SHAREHOLDERS AGREEMENT
o Term of shareholders agreement may be conditioned upon occurrence of a
future and uncertain event (art. 118,ss.6).
o Shareholders Agreement may provide for pooling of vote exercisable via
attorney-in-fact with powers granted for over 1 year (art. 118,ss.7).
o Shareholder or director vote not conforming to the Shareholders Agreement
will not be taken into account (art. 118, ss.8), and in case of abstention or
absence of the shareholder or director, the voting rights of such shareholder or
director are transferred to any person prejudiced by such abstention or absence,
provided that such person votes in conformity with the Shareholders Agreement
(art. 118, ss.9).
o Each Shareholder bound by a shareholders agreement shall appoint a
representative to receive communications and provide the corporation with
information (art. 118, ss.10). The corporation has the right to demand
explanation from such representative regarding the content of the clauses of the
Shareholder Agreement (art. 118, ss.11).
RIGHT TO WITHDRAW
o A dissenter may withdraw from the corporation if the corporation merges
with another corporation or becomes a member of a conglomerate of corporations,
provided that the class of shares owned by the dissenter does not have liquidity
and dispersion in the market. A class of shares has liquidity when such shares
integrate a general index representing a group of securities transacted in a
stock market in Brazil or abroad. A class of shares has dispersion when the
controlling shareholder represents less than fifty percent (50%) of the shares
of such class (art.137, II). A dissenter may also withdraw in the event of a
spin-off of the corporation, provided that (a) there is a change in the
corporate purpose, unless the assets are transferred to a another corporation
whose prevalent activity remains the same as the corporate purpose of the
spun-off corporation; (b) a reduction of the mandatory dividend occurs; or (c)
the spun-off corporation becomes a member of a conglomerate of corporations
(art. 137, III).
BOARD OF DIRECTORS
o Bylaws may allow employees to appoint, in assembly, a representative to be
member of the Board of Directors (art. 140).
o Bylaws may state qualified quorum for deliberations of the Board of
Directors regarding certain matters, which will bind all shareholders (art. 140,
IV).
o Minority shareholders representing at least 20% of the voting capital of
privately-held corporations will no longer have the right to separately elect a
member of the Board of Directors (art. 141, ss.4). Instead, either the minority
shareholders representing fifteen percent (15%) of the voting capital, or ten
percent (10%) of the capital represented by preferred shares with non-voting or
restricted voting rights, will have the right to elect one member of the Board,
in a separate vote excluding the controlling shareholder, provided that the
minority shareholders own such shares for at least a period of three
uninterrupted months immediately prior to the date of the general meeting.
o In order to be admitted to the Board of Directors, foreign persons must
maintain a Brazilian resident attorney-in-fact for at least 3 years after the
end of his/her office term (art. 146, ss.2).
o Directors are expressly prohibited (i) from acting simultaneously as
directors of competing corporations; and (ii) from having conflicting interests
with the corporation (art. 147, ss. 3).
STATUTORY AUDIT COMMITTEE
o Increase of the type of individual action that may be taken by the members
of the Audit Committee by authorizing the Audit Committee and each of its
members, individually, to: (i) supervise the acts of the administrators and
verify the fulfillment of his/her legal and contractual duties; and (ii) keep
administration bodies and the General Shareholders Assemblies informed of any
errors, frauds or crimes that they may discover, also advising the company on
the proper course of action to be taken (art. 163, I and IV).
o Clarification of the rule that requests for explanation or information made
by the Audit Committee relate to its supervisory function (art. 163, ss.2), and
that its duties must always be exercised to the benefit of the corporation, with
no permission to a member of the Audit Committee to use legal prerogatives to
the detriment to the corporation or for personal or third-party benefit (art.
165, ss.1).
RETENTION AND RESERVE OF PROFITS
o Whenever the capital budget related to the retention of net profit has a
term longer than one fiscal year, it should be reviewed annually in order to
avoid inappropriate retention of profit (art. 196, ss. 2).
o Only the amount corresponding to the total mandatory dividend exceeding the
realized amount of net profit of the fiscal year may be transferred to the
reserve of profits to be realized (other rules about the profits reserve are set
forth in the first and second paragraphs of article 197). According to the
previous system, all profit financially not realized exceeding the amount used
to fund legal reserves (arts. 193 to 196) may be deducted from net profit of the
fiscal year for purposes of assessment of the net adjusted profit, which is the
base of calculation of the minimum mandatory dividend.
o Capital reserves may only be used to (i) absorb losses that exceed
accumulated profits; (ii) redeem, reimburse or purchase shares, (iii) redeem
beneficiary interests, (iv) integrate the corporation's capital, or (v) pay
dividends to preferred shares where such right is guaranteed (art. 200).
REDEMPTION OF SHARES
o Redemption of one or more classes of shares should be submitted to
shareholder approval in General Assembly representing at least half of the
shares of the class(es) in question. However, bylaws may dispose otherwise (art.
44, ss. 6).
MERGER WITH CONTROLLED COMPANY
o Expansion of procedures already foreseen for upstream mergers to downstream
mergers (art. 264,ss.4).
STATUTE OF LIMITATION
o Except in the cases subject to one year statute of limitation (art. 287,
I), all lawsuits filed by shareholders against the corporation, regardless of
the foundation of the action, will be subject to a statute of limitation of
three years (art. 287, II, g).
The summary above contains a brief description of principal protections granted
by Brazilian legislation to the minority stockholders of public companies in
general. Prospective purchasers or Holders of Preferred Shares or ADSs of the
Company should consult their own legal advisors as to the specific and
applicable rights, to which they are entitled as Holders of Preferred Shares or
ADSs.
ITEM 10. ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
BUSINESS PURPOSE
The Company's business purpose is defined in Article 2 of the Company's by-laws
as to: (i) exercise control of the Company's operating cellular service under
the Concessions; (ii) promote, through its affiliate companies the expansion and
implementation of the cellular service within its area of Concession; (iii)
promote, perform or advise the acquisition, from domestic or foreign sources, of
funds to be invested by the Company or its Subsidiaries; (iv) promote and
stimulate the research and development activities related to mobile telephony
sectors; (v) perform, through its affiliate companies, technical services in
connection with the field of mobile telephony; (vi) promote, stimulate and
coordinate, through its affiliate companies, the training of personnel necessary
for the mobile telephony sector; (vii) perform or promote the import of goods
and services to its affiliate companies; (viii) hold equity participation in
other companies; and (ix) perform other activities related to Company's business
purposes.
SHARE CAPITAL
The Company's capital stock is comprised of preferred shares and common shares,
all without par value. At April 26, 2002, the Company's capital comprised a
total of 379,200,036,582 shares, 252,766,698,473 being preferred shares and
126,433,338,109 common shares. The Company's share capital may be increased by
resolution of the Board of Directors, up to the limit of 700,000,000,000 shares
as authorized by the by-laws. Any increase in the authorized capital limit must
be approved by shareholders' vote.
The Company's preferred shares are non-voting except under limited circumstances
and are entitled to a preferential, non-cumulative dividend and to priority over
the common shares in the case of the Company's liquidation.
Under Brazilian corporation law, the number of non-voting shares or shares with
limited voting rights, such as the Company's preferred shares, may not exceed
fifty percent (50%) of the total number of shares, although corporations already
existing at the time of enactment of the new corporation law will have the right
to maintain the old parameters of 1/3 of common shares and 2/3 of preferred
shares.
The majority of the members of the Company's Board of Directors are elected by
the controlling shareholders of the Company's common stock. Board members, even
if appointed and/or elected by one specific shareholder, have fiduciary duties
towards all shareholders and the obligation to perform their duties on behalf of
the Company's interests. According to the new corporation law, minority
shareholders representing at least 10% of preferred shares or 15% of common
shares, in each case, will have the right to appoint a representative to the
Company's Board of Directors in a separate vote excluding the controlling
shareholder, provided that the minority shareholders own such shares for at
least a period of three uninterrupted months immediately prior to the date of
the general meeting.
DISCLOSURE OF INCREASE IN PARTICIPATION
Pursuant to Instruction no. 299/99 of the CVM, as amended, any increase in
equity participation in the Company, by the controlling shareholder of the
Company, which equals to or exceeds 5% of any class of ordinary or preferred
shares, must be communicated immediately, by such controlling shareholder, to
the CVM and to the relevant stock exchange where the Company's shares are traded
(the Sao Paulo Stock Exchange). The concept includes a potential increase
defined as the acquisition of convertible debentures or warrants by such
controlling shareholder.
Upon receipt of such communication, the CVM may order such controlling
shareholder to publish such information in the newspapers commonly used by the
Company to publish relevant notices and financial reports. In addition, pursuant
to Instruction no. 69/87 of the CVM any person or group of persons acting
together who achieves equity participation in the Company which exceeds 10% of
any class of voting shares, shall disclose to the CVM the identity, number of
shares and other securities acquired and the purpose of such acquisition. Unless
CVM dismisses the need for publication, the acquirers must publish a notice in
the newspapers commonly used by the Company and inform the relevant stock
exchange.
VOTING RIGHTS
Each of the Company's common shares entitles the holder to one vote at meetings
of shareholders. The Company's preferred shares do not entitle the holder to
vote except as set forth below.
One of the three members of the Company's permanent audit committee is elected
by majority vote of the holders of the Company's preferred shares.
Brazilian corporation law provides that non-voting shares, such as the Company's
preferred shares, acquire voting rights in the event that the Company fails, for
three consecutive fiscal years, to pay minimum dividends to such shares.
The Company's preferred shares are entitled to full voting rights with respect
to: (i) the approval of any long-term contract between the Company and its
affiliates, on one side, and any controlling shareholder of the Company or, that
shareholder's affiliates and related parties, on the other; (ii) resolutions
modifying certain provisions of the Company's by-laws; and (iii) any resolution
submitted to the shareholders' meeting for delisting the Company.
Any change in the preference, benefits, conditions of redemption and
amortization of the preferred shares, or the creation of a class of shares
having priority or preference over the preferred shares, would require the
approval of the holders of a majority of such preferred shares at a special
meeting of preferred shareholders. Such a meeting would be called by publication
of notices in Brazilian newspapers. The CVM may authorize, even in case of
special meetings of preferred shareholders, a reduction of the quorum under this
article in the case of a publicly-held corporation whose shares are widely held
and whose last three general meetings were attended by shareholders representing
less than one-half of the voting shares. In any circumstances in which holders
of preferred shares are entitled to vote, each preferred share will entitle the
holder to one vote.
PREEMPTIVE RIGHTS
Each shareholder has a general preemptive right to subscribe for shares in any
capital increase, in proportion to its shareholding. A minimum period of 30 days
following the publication of notice of the capital increase is allowed for the
exercise of the right. The preemptive right can be negotiated by its holder with
other parties. However, a shareholders' meeting is authorized to eliminate
preemptive rights or to reduce such 30-day term, with respect to the issuance of
new shares, debentures and warrants convertible into new shares up to the limit
of the authorized share capital, provided that the distribution of these
securities is effected: (i) on a stock exchange; (ii) in a public offering;
(iii) through an exchange of shares in a public offering the purpose of which is
to takeover control of another company, or (iv) to benefit from certain tax
incentives. (The new law grants the possibility to reduce the 30-day term to
exercise the mentioned right, in cases pursuant to an exchange for shares in a
public offer for the acquisition of control.)
In the event of a capital increase, which would maintain or increase the
proportion of capital represented by preferred shares, holders of the Company's
ADSs, or of the Company's preferred shares, would have preemptive rights to
subscribe the newly issued preferred shares. In the event of a capital increase,
which would reduce the proportion of capital represented by the Company's
preferred shares, holders of the Company's ADSs, or of preferred shares, would
have preemptive rights to subscribe to preferred shares, in proportion to their
shareholdings and to common shares only to the extent necessary to prevent
dilution of their interest in the Company.
RIGHT OF REDEMPTION
Subject to the right of a dissenting shareholder to seek redemption upon a
decision made at a shareholders' meeting by shareholders representing over 50%
of the voting shares, the Company's common shares or the Company's preferred
shares are not redeemable. The dissention of a shareholder upon a decision on
the following matters shall entail the right of redemption: (i) to change the
preference condition of the Company's preferred shares or to create a class of
shares having priority or preference over the Company's preferred shares; (ii)
to reduce the mandatory of dividend amount; (iii) to change the Company's
corporate purposes; (iv) to swap all of the Company's shares with those of
another company in order to make the Company a wholly-owned subsidiary of that
company; (v) to approve the takeover of another company, the price of which
exceeds certain limits set forth in the Brazilian corporation law; (vi) to merge
or consolidate the Company with another company, if certain liquidity standards
of our shares, provided in the Brazilian corporation law, are not met; and (vii)
to become a member of a conglomerate of companies, if certain liquidity
standards of Company shares, provided in the Brazilian corporation law, are not
met. The right to redemption lapses 30 days after publication of the minutes of
the relevant shareholders' meeting or, whenever the resolution requires the
approval of the holders of preferred shares by vote taken in a special meeting
of a majority of the holders of preferred shares affected by the resolution
within 30 days from the publication of the minutes of that special meeting. The
Company would be entitled to reconsider any action giving rise to redemption
rights within 10 days following the expiration of those rights if the redemption
of shares of dissenting shareholders would jeopardize the financial stability of
the Company, as the case may be.
Shares are redeemable at their book value, determined on the basis of the last
annual balance sheet approved by the shareholders. If the shareholders' meeting
giving rise to redemption rights occurs more than 60 days after the date of the
last annual balance sheet, a shareholder may demand that its shares be valued on
the basis of a new balance sheet that is as of a date within 60 days of such
shareholders' meeting.
FORM AND TRANSFER
The Company's shares are maintained in book-entry form with a transfer agent,
BANCO ABN-AMRO REAL S.A., and the transfer of our shares is made in accordance
with the applicable provision of the Brazilian corporation law, which provides
that a transfer of shares is effected by an entry made by the transfer agent on
its books, debiting the share account of the seller and crediting the share
account of the purchaser, against presentation of a written order of the seller,
or judicial authorization or order, in an appropriate document which remains in
the possession of the transfer agent. The Company's preferred shares underlying
the Company's ADS are registered on the transfer agent's records in the name of
the Brazilian depositary.
Transfers of shares by a foreign investor are made in the same way and executed
by such investor's local agent on the investor's behalf except that, if the
original investment was registered with the Central Bank of Brazil under the
Brazilian foreign investment in capital markets regulations, the foreign
investor should also seek amendment, if necessary, through its local agent, of
the certificate of registration to reflect the new ownership.
The Sao Paulo stock exchange operates a central clearing system. A holder of
Company's shares may choose, at its discretion, to participate in these systems.
All shares elected to be put into the system will be deposited in custody with
the relevant stock exchange, through a Brazilian institution duly authorized to
operate by the Central Bank of Brazil and having a clearing account with the
relevant stock exchange. The fact that such shares are subject to custody with
the relevant stock exchange will be reflected in the Company's register of
shareholders.
MATERIAL CONTRACTS
CELLULAR SERVICE AUTHORIZATION AGREEMENT entered into and between the Brazilian
government, through Anatel, and Tele Centro Oeste/Inepar Ltda., (currently NBT)
on November 27, 1998.
SCOPE
The contract authorizes NBT to exclusively use certain sub-band cellular
frequencies from 835,0 to 845,0 MHz and certain associated radio frequencies
from 880,0 to 890,0 MHz and 891,5 to 894,0 Mhz for transmission in Area 8.
The authorization to operate the cellular services is for na indefinite term,
subject to certain conditions. However, the authorization to use the radio
frequency is limited to 15 years and may be renewed once for another 15 years.
CONSIDERATION
NBT agreed to pay R$60,550,000.00 to ANATEL for the right to explore the
cellular service and to use the associated radio frequency as follow:
o R$24,220,000.00 in the date of the signature of the authorization term,
equivalent to 40% of the total amount;
o R$12,110,000.00 in November 27, 1999, equivalent to 20% of the total amount;
o R$12,110,000.00 in November 27, 2000, equivalent to 20% of the total amount;
o R$12,110,000.00 in November 27, 2001, equivalent to 20% of the total amount.
These amounts are adjusted by 1% per month in accordance with the IGP-DI.
MAIN CONDITIONS OF THE CONTRACT
The operation of the service is the responsibility and risk of NBT. NBT's
remuneration is based on customers' payments, and the service will be performed
in conformity to ANATEL Public Tender Proposal ("Proposal") and will observe the
conditions of the Methodology of Execution, and the elements of the Price
Proposal for the right to use the service and the associated radio frequencies,
which is established in Annexes 1, 2 and 3 of the contract. Third parties can be
contracted by the authorized, without prejudice of the liabilities related to
the services, even if caused by third parties. In addition, all fiscal
regulations must be respected. The installation and operation of the service are
subject to ANATEL quality control guidelines.
SERVICE RATES AND PRICES
Service prices are subject to the price cap presented in the Proposal. There is
a differentiation between "basic" and "non-essential" services. "Basic" services
include monthly subscription fees, VC1 charges, VC2 charges, VC3 charges, DSL1
charges, DSL2 charges, and AD charges, as well as interconnection charges,
including network usage fees and charges to provide a physical connection to the
network. "Non-essential" services are optional and can vary in price according
to technical and geographic characteristics. SEE ITEM 4 " INFORMATION ON THE
COMPANY - REGULATION OF THE TELECOMMUNICATIONS INDUSTRY - RATE REGULATION."
ANATEL RIGHTS, GUARANTEES AND OBLIGATIONS
In general, ANATEL is responsible for: the general supervision of the
performance of the Cellular Mobile Service; the legal and normative application
of penalties, including those referred in the authorization term; the
termination of the authorization, in the manner and circumstances prescribed by
law; the execution of the norms defined in the service, including the
interconnection with the public network; the guarantee of quality of service;
the assurance of competition; and the declaration of public utility of certain
services when necessary.
NBT RIGHTS, GUARANTEES AND OBLIGATIONS
In general, NBT is responsible for: the assurance of an available and
commercially operational Mobile Cellular Service in accordance with the
authorization, the performance of services at prices in conformity with the
agreement and the "Proposal"; providing information about implementation,
improvements or expansion of the service, being emphasized that ANATEL will keep
this information confidential; the use of certified equipment, the allowance of
access to documents and places related to the authorization, the maintenance of
the integrity of the assets of the service; the continuance of an updated
inventory and register of patrimony used in the operation of the service; the
maintenance of adequate customer care; the annual publication of the company
financial demonstratives; and the promotion of the balance of the economic
financial condition of the authorization.
CUSTOMER RIGHTS AND OBLIGATIONS
NBT, besides observing the general legal dispositions related to customers'
rights, has to respect customers' rights to receive adequate service, legal and
contractual information (including from ANATEL), and also the right to have
freedom of choice related to the use of the service.
Customers, in order to receive the service, are asked to keep in good condition
equipment relating to the security of third parties; and to timely effect
payment of charges and taxes due.
INTERVENTION
Anatel can intervene in the authorization in order to keep the proper
performance of the service in conformity with applicable legislation, when the
authorization clauses or applicable regulation are not complied with. When such
intervention, is no longer warranted, the administration of the service will
revert back to NBT. If the intervention does not comply with legal and
regulatory requirements, such intervention will be declared null and void, with
the immediate devolution of the service to NBT.
TERMINATION OF THE AUTHORIZATION
The authorization may be terminated either by Anatel or by resignation of NBT.
Total or partial non-performance of the terms and conditions of the
authorization may result in regulatory, intervention and, ultimately,
termination of the authorization by Anatel. Where termination by Anatel is due
to non-compliance with regulatory or legal dispositions, administrative
procedures and due process of law shall be observed.
PENALTIES
If in default, NBT will be subject to penalties, which may include fines up to
0.05% of NBT's net revenue.
ASSIGNMENT
Either the authorization or NBT's rights and interests may be transferred, after
60 months from the beginning of the commercial operation of the service, subject
to ANATEL approval, and after the payment of an inspection tax.
RENEWAL
The authorization for the use of the radio frequencies may be renewed for
another 15 years, at NBT's discretion, provided it complies with all terms and
conditions of the authorization and requests renewal 20 months prior to
expiration of the first term. Renewal will be subject to a new payment schedule
for the use of the radio frequencies, to be set by Anatel at the time.
EXCHANGE CONTROLS
There are no restrictions on ownership of Preferred Shares or Common Shares of
the Holding Company by individuals or legal entities resident or headquartered
outside Brazil. However, there are certain registration requirements to assure
repatriation of relevant investment principal and gains.
The right to convert dividend or interest on equity payments and proceeds from
the sale of shares into foreign currency for remittance abroad is subject to
restrictions under foreign investment legislation, which requires, among other
things, that the relevant investments be registered with the Central Bank under
the proper title.
Annex V to Resolution 1,289 of the National Monetary Council, as amended (the
"Annex V Regulations") is the main regulatory rule that governs ADS programs; it
establishes foreign exchange procedures for currency flows under such programs.
Under the Annex V Regulations, a foreign investment registration (a
"Registration") is issued by the Central Bank in favor of the Depositary and
held by Banco Itau S.A., which has custody of the Preferred Shares underlying
the ADSs (the "Custodian"), on the Depositary's behalf. The Registration applies
to the entire Preferred Shares portfolio held by the Custodian on behalf of the
Depositary as agent for the ADS Holders. It allows the Custodian and the
Depositary to convert dividends, interest on equity payments or share sale
proceeds, in respect of the Preferred Shares represented by the ADSs, into
foreign currency and remit such amounts outside Brazil. The amount provided in
the Registration varies depending on the number of ADSs and Preferred Shares in
the Depositary portfolio. When new Preferred Shares are added to the Depositary
portfolio, new ADSs are issued. Conversely, when Preferred Shares are subtracted
from the Depositary Portfolio, a number of ADSs are canceled. Other Annex V
Regulations provide for a requirement of prior approval by the CVM of ADS
programs and favorable tax treatment. SEE ITEM 9 THE "OFFERING AND THE
LISTING--MARKETS--REGULATION OF BRAZILIAN SECURITIES MARKETS--DEPOSITARY
SECURITIES PROGRAMS REGULATIONS" AND ITEM 10 "ADDITIONAL
INFORMATION--TAXATION--BRAZILIAN TAX CONSIDERATIONS."
A Registration has been issued in the name of the Depositary with respect to the
ADSs and is maintained by the Custodian on behalf of the Depositary.
Accordingly, the Custodian and the Depositary are able to convert into foreign
currency and remit outside Brazil all dividends, interest on equity payments or
share sale proceeds with respect to the Preferred Shares underlying the ADSs.
Brazilian legislation also provides for direct foreign investment in the
Brazilian stock market without the need for an ADS program. Such investments
previously were regulated by Annex IV to Resolution 1,289 of the National
Monetary Council (the "Annex IV Regulations"), pursuant to which qualified
foreign investors (mostly financial institutions, insurance companies, pension
and mutual funds, charitable foundations and other institutions that meet
certain minimum capital and other requirements) registered with the CVM and
invested through custody accounts managed by authorized local agents. Qualified
foreign investors could buy and sell shares on Brazilian stock exchanges without
obtaining a separate Certificate of Registration for each transaction.
Investments under Annex IV are also entitled to favorable tax treatment. SEE
ITEM 10 "ADDITIONAL INFORMATION--TAXATION--BRAZILIAN TAX CONSIDERATIONS."
However, in January 2000, the National Monetary Council enacted Resolution
2,689, which provides a comprehensive regulatory framework to direct foreign
investment in Brazilian capital markets. Under Resolution 2,689, any individual
or legal entity, including mutual funds and other collective investment
vehicles, resident or headquartered abroad, may directly invest in Brazilian
capital markets. With few exceptions, this includes virtually all investment
options available to Brazilian residents such as publicly traded stocks (e.g.
the Preferred Shares), fixed-income securities and derivatives. In order to
qualify for registration of investments, the foreign investor must empower an
agent in Brazil, which if not a financial institution must sub-contract one,
submit a standard form and register with the CVM. Investments under the
Resolution 2,689 will be electronically registered with the Central Bank through
SISBACEN (the electronic network linking the Central Bank to Brazilian financial
institutions), and remittances outside Brazil are made through foreign exchange
contracts based on such registration.
Other regulations concerning investment vehicles with foreign stockholders and
foreign capital fixed-income mutual funds, among others, were also affected and
are being substituted by Resolution 2,689. Resolution 2,689 also kept open the
option for Annex V investors (e.g. the ADS holders) to transfer to direct
ownership of the Preferred Shares instead of holding an ADS. In this case, the
ADS holder would cancel its ADS, continuing to rely on its Annex V registration
for five business days, thereafter having to obtain a Resolution 2,689
registration in its own name, with minimal difference in tax treatment. SEE ITEM
10 "ADDITIONAL INFORMATION--TAXATION--BRAZILIAN TAX CONSIDERATIONS."
Under current Brazilian legislation, the Federal Government may impose temporary
restrictions on remittances of foreign capital abroad in the event of an actual
or anticipated serious imbalance of Brazil's balance of payments. For
approximately six months in 1989 and early 1990, the Federal Government froze
all dividends and capital repatriations held by the Central Bank that were owed
to foreign equity investors, in order to conserve Brazil's foreign currency
reserves. These amounts were subsequently released in accordance with Federal
Government directives. Holders of ADSs could be adversely affected by delays in,
or refusal to grant any, required government approval for conversions of
Brazilian currency payments and remittances abroad of the Preferred Shares
underlying the ADSs. Although the ADS program is properly approved by competent
bodies and the relevant Registration has been issued in favor of the Depositary,
there can be no assurances that the Federal Government will not impose
restrictions on foreign repatriations in the future.
TAXATION
The following summary contains a description of the principal Brazilian and U.S.
federal income tax consequences of the acquisition, ownership and disposition of
Preferred Shares or ADSs, but it does not purport to be a comprehensive
description of all the tax considerations that may be relevant to a decision to
purchase Preferred Shares or ADSs. The summary is based upon the tax laws of
Brazil and regulations thereunder and on the tax laws of the United States and
regulations thereunder as in effect on the date hereof, which are subject to
change, possibly with retroactive effect, and also based on the representations
of the Depositary and on the assumption that each obligation in the Deposit
Agreement relating to ADSs and any related documents will be performed in
accordance with its terms. PROSPECTIVE PURCHASERS OF PREFERRED SHARES OR ADSS
SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF THE
ACQUISITION, OWNERSHIP AND DISPOSITION OF PREFERRED SHARES OR ADSS.
Although there is at present no income tax treaty between Brazil and the United
States, the tax authorities of the two countries have had discussions that may
culminate in such a treaty. No assurance can be given, however, as to whether or
when a treaty will enter into force or how it will affect the U.S. holders of
the Company's preferred shares or ADSs. In spite of the fact that there is not a
tax treaty between Brazil and the United States, the Brazilian income tax rules
foresee that in case of reciprocal tax treatment between countries, individuals
are allowed to deduct from income tax owed to the recipient country the amount
previously collected in the other country upon remittance. With reference to the
United States, the Brazilian Federal Revenue Service issued the ATO DECLARATORIO
no 28 on April 26, 2000, which established reciprocal tax treatment between
Brazil and United States.
BRAZILIAN TAX CONSIDERATIONS
The following discussion summarizes the principal Brazilian tax consequences of
the acquisition, ownership and disposition of Preferred Shares or ADSs by a
holder not deemed to be domiciled in Brazil for Brazilian tax purposes (a
"non-Brazilian holder"). This discussion does not address all the Brazilian tax
considerations that may be applicable to any particular non-Brazilian holder,
and each non-Brazilian holder should consult his or her own tax advisor about
the Brazilian tax consequences of investing in Preferred Shares or ADSs.
TAXATION OF DIVIDENDS
Dividends paid by the Holding Company in cash or in kind from profits of periods
beginning on or after January 1, 1996 (i) to the Depositary in respect of
Preferred Shares underlying ADSs or (ii) to a non-Brazilian holder in respect of
Preferred Shares will generally not be subject to Brazilian withholding tax.
Dividends paid from profits generated before January 1, 1996 may be subject to
Brazilian withholding tax at varying rates, except that stock dividends are not
subject to Brazilian tax unless the stock is subsequently redeemed by the
Holding Company, or the non-Brazilian holder sells the stock in Brazil, within
five years after the distribution.
The only Brazilian tax treaty now in effect that would (if certain conditions
are met) reduce the rate of the withholding tax on dividends paid from profits
generated before January 1, 1996 is the treaty with Japan, which would reduce
the rate to 12.5% under the circumstances set forth in the treaty.
TAXATION OF GAINS
Gains realized outside Brazil by a non-Brazilian holder on the disposition of
Preferred ADSs to another non-Brazilian holder are not subject to Brazilian tax.
The withdrawal of Preferred Shares in exchange for Preferred ADSs is not subject
to Brazilian tax. The deposit of Preferred Shares in exchange for Preferred ADSs
is not subject to Brazilian tax provided that the Preferred Shares are
registered by the investor or its agent under the Central Bank's Annex IV
Regulations and, as of March 31, 2000, under Resolution 2,689/00 (foreign
investments registered under Annex IV Regulations must be conformed to the new
rules set forth by Resolution 2,689/00 by June 30, 2000).
In the event that the Preferred Shares are not so registered, the deposit of
Preferred Shares in exchange for Preferred ADSs may be subject to Brazilian
capital gains tax at the rate of 15%.
On receipt of the underlying Preferred Shares, a non-Brazilian holder who
qualifies under the Annex IV Regulations and, as of March 31, 2000, under
Resolution 2,689/00, will be entitled to register the U.S. dollar value of such
shares with the Central Bank as described below.
Non-Brazilian holders are not subject to tax in Brazil on gains realized on
sales of Preferred Shares or ADSs that occur abroad or on the proceeds of a
redemption of, or a liquidating distribution with respect to Preferred Shares.
As a general rule, non-Brazilian holders are subject to a withholding tax
imposed at a rate of 15% on gains realized on sales or exchanges of Preferred
Shares that occur in Brazil to or with a resident of Brazil, outside of a
Brazilian stock exchange.
Non-Brazilian holders are subject to withholding tax at a rate of 10% (increased
to 20% for transactions carried out on or after January 1, 2002) on gains
realized on sales or exchanges in Brazil of Preferred Shares that occur on a
Brazilian Stock Exchange unless such sale is made by a non-Brazilian holder who
is not resident in a tax haven (as described below) and on a Brazilian stock
exchange within five business days of the withdrawal of such Preferred Shares in
exchange for Preferred ADSs and the proceeds thereof are remitted abroad within
such five-day period or such sales are made under the Annex IV Regulations by
certain qualified institutional non-Brazilian holders which register with the
CVM. Gains realized from transactions on a Brazilian stock exchange by an
investor under Annex IV Regulations are not subject to tax (except as described
below).
The "gain realized" as a result of a transaction on a Brazilian stock exchange
is the difference between the amount in Brazilian currency realized on the sale
or exchange and the acquisition cost measured in Brazilian currency, without any
correction for inflation, of the shares sold. The "gain realized" as a result of
a transaction that occurs other than on a Brazilian stock exchange will be the
positive difference between the amount realized on the sale or exchange and the
acquisition cost of the Preferred Shares, both such values to be taken into
account in REAIS. There are grounds, however, to hold that the "gain realized"
should be calculated based on the foreign currency amount registered with the
Central Bank. There can be no assurance that the current preferential treatment
for holders of Preferred ADSs and for certain non-Brazilian holders of Preferred
Shares under the Annex IV Regulations will continue in the future or that such
treatment will not be changed in the future.
As of January 1, 2000, the preferential treatment under Annex IV is no longer
applicable if the non-Brazilian holder of the Preferred ADSs or Preferred shares
is resident in a tax haven - I.E., countries that do not impose income tax or
where the income tax rate is less than 20% - in accordance with Law No. 9959, of
January 27, 2000.
In other words, gains realized by such holder on the sale or exchange in Brazil
that occur in the spot market of shares traded on a Brazilian stock exchange
will be taxed at a rate of 10%.). Law 9,959 also provides that such rate of 10%
on gains realized on the sale or exchange in Brazil of preferred shares, that
occur on a Brazilian Stock Exchange, will be increased to 20% for transactions
carried out on or after January 1, 2002.
Any exercise of preemptive rights relating to the Preferred Shares will not be
subject to Brazilian taxation. Any gain on the sale or assignment of preemptive
rights relating to the Preferred Shares by the Depositary on behalf of holders
of Preferred ADSs, will be subject to Brazilian income taxation at the rate of
15%, unless such sale or assignment is performed within Brazilian stock
exchanges, in which the gains are exempt from withholding income tax.
Any gain on the sale or assignment of preemptive rights relating to Preferred
Shares, will be subject to Brazilian income tax at the same rate applicable to
the sale or disposition of Preferred Shares. The maximum rate of such tax is
currently 15%.
DISTRIBUTIONS OF INTEREST ON CAPITAL
Brazilian corporations may make payments to shareholders characterized as
interest on the capital of the Holding Company as an alternative form of making
dividend distributions. SEE ITEM 5 "OPERATING AND FINANCIAL REVIEW AND
PROSPECTS--LIQUIDITY AND CAPITAL RESOURCES." The rate of interest may not be
higher than the Federal Government's long-term interest rate (the TJLP) as
determined by the Central Bank from time to time (9.5% per annum for the three
month period ending June 30, 2001). The total amount distributed as interest on
capital may not exceed the greater of (i) 50% of net income (before taking such
distribution and any deductions for income taxes into account) for the year in
respect of which the payment is made or (ii) 50% of retained earnings for the
year prior to the year in respect of which the payment is made. Payments of
interest on capital are decided by the shareholders on the basis of
recommendations of the company's board of directors.
Distributions of interest on capital paid to Brazilian and non-Brazilian holders
of Preferred Shares, including payments to the Depositary in respect of
Preferred Shares underlying ADSs, are deductible by the Holding Company for
Brazilian corporate income tax and social contribution on profits purposes. Such
payments are subject to Brazilian withholding tax at the rate of 15%, except for
payments to persons who are exempt from tax in Brazil, which are free of
Brazilian tax, and except for payments to persons situated in jurisdictions
deemed to be tax havens (I.E., countries that either have no income tax or in
which the income tax rate is less than 20%), which will be subject to tax at a
25% rate.
No assurance can be given that the Board of Directors of the Holding Company
will not recommend that future distributions of profits should be made by means
of interest on capital instead of by means of dividends.
Amounts paid as interest on capital (net of applicable withholding tax) may be
treated as payments in respect of the dividends the Holding Company is obligated
to distribute to its shareholders in accordance with its Charter and the
Brazilian Corporation Law. Distributions of interest on capital in respect of
the Preferred Shares, including distributions to the Depositary in respect of
Preferred Shares underlying ADSs, may be converted into U.S. dollars and
remitted outside of Brazil, subject to applicable exchange controls. SEE ITEM 10
"ADDITIONAL INFORMATION--EXCHANGE CONTROLS."
OTHER BRAZILIAN TAXES
There are no Brazilian inheritance, gift or succession taxes applicable to the
ownership, transfer or disposition of Preferred Shares or ADSs by a
non-Brazilian holder except for gift and inheritance taxes levied by some states
in Brazil on gifts made or inheritances bestowed by individuals or entities not
resident or domiciled in Brazil or in the relevant State to individuals or
entities that are resident or domiciled within such State in Brazil. There are
no Brazilian stamp, issue, registration, or similar taxes or duties payable by
holders of Preferred Shares or ADSs.
A financial transaction tax (the "IOF tax") may be imposed on the conversion of
Brazilian currency into foreign currency (e.g., for purposes of paying dividends
and interest). The rate of IOF tax rate on such conversions is currently 0%, but
the Minister of Finance has the legal power to increase the rate to a maximum of
25%. Any such increase will be applicable only prospectively.
In addition to the IOF tax, the temporary contribution on financial transactions
("CPMF tax") is currently levied at a rate of 0.38% on all fund transfers in
connection with financial transactions in Brazil. The CPMF tax charging period
was expected to expire on June 16, 2002. However, the Brazilian Congress enacted
Constitutional Amendment 37 on June 13, 2002, which has extended the charging
period of the CPMF tax until December 31. 2004. Constitutional Amendment 37 also
provided that the CPMF tax will be levied at a rate of 0,38% until December 31,
2003, and 0,08% during the rest of the period until December 31, 2004. Another
relevant issue related to CPMF tax rules is the possibility of exemption to
stock exchange transactions performed in Brazil, authorized by Constitutional
Amendment 37 and to be implemented by federal regulations.
REGISTERED CAPITAL
Amounts invested in Preferred Shares by a non-Brazilian holder who qualifies
under the Annex IV Regulations and obtains registration with the CVM, or by the
Depositary representing an ADS holder, are eligible for registration with the
Central Bank. Such registration (the amount so registered is referred to as
("Registered Capital") allows the remittance outside Brazil of foreign currency,
converted at the Commercial Market Rate, acquired with the proceeds of
distributions on, and amounts realized through dispositions of such Preferred
Shares. The Registered Capital per Preferred Share purchased in the form of an
ADS, or purchased in Brazil and deposited with the Depositary in exchange for an
ADS, will be equal to its purchase price (stated in U.S. dollars). The
Registered Capital per Preferred Share withdrawn upon cancellation of an ADS
will be the U.S. dollar equivalent of (i) the average price of a Preferred Share
on the Brazilian stock exchange on which the most Preferred Shares were traded
on the day of withdrawal or, (ii) if no Preferred Shares were traded on that
day, the average price on the Brazilian stock exchange on which the most
Preferred Shares were traded in the fifteen trading sessions immediately
preceding such withdrawal. The U.S. dollar equivalent will be determined on the
basis of the average Commercial Market Rates quoted by the Central Bank on such
date or dates.
A non-Brazilian holder of Preferred Shares may experience delays in effecting
Central Bank registration, which may delay remittances abroad. Such a delay may
adversely affect the amount in U.S. dollars, received by the non-Brazilian
holder.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The statements regarding U.S. tax law set forth below are based on U.S. law as
in force on the date of this Annual Report, and changes to such law subsequent
to the date of this Annual Report may affect the tax consequences described
herein. This summary describes the principal tax consequences of the ownership
and disposition of Preferred Shares or ADSs, but it does not purport to be a
comprehensive description of all of the tax consequences that may be relevant to
a decision to hold or dispose of Preferred Shares or ADSs. This summary applies
only to purchasers of Preferred Shares or ADSs who will hold the Preferred
Shares or ADSs as capital assets and does not apply to special classes of
holders such as dealers in securities or currencies, holders whose functional
currency is not the U.S. dollar, holders of 10% or more of the shares of the
Holding Company (taking into account shares held directly through depositary
arrangements), tax-exempt organizations, financial institutions, holders liable
for the alternative minimum tax, securities traders who elect to account for
their investment in Preferred Shares or ADSs on a mark-to-market basis, and
persons holding Preferred Shares or ADSs in a hedging transaction or as part of
a straddle or conversion transaction.
Each holder should consult such holder's own tax advisor concerning the overall
tax consequences to it, including the consequences under laws other than U.S.
federal income tax laws, of an investment in Preferred Shares or ADSs.
In this discussion, references to a "U.S. holder" are to a holder of an ADS or
Preferred Shares (i) that is a citizen or resident of the United States of
America, (ii) that is a corporation organized under the laws of the United
States of America or any state thereof, or (iii) that is otherwise subject to
U.S. federal income taxation on a net basis with respect to the ADS or Preferred
Shares.
For purposes of the U.S. Internal Revenue Code of 1986, as amended (the "Code"),
U.S. holders of ADSs will be treated as owners of the Preferred Shares
underlying such ADSs.
TAXATION OF DIVIDENDS
A U.S. holder will recognize ordinary dividend income for U.S. federal income
tax purposes in an amount equal to the amount of any cash and the value of any
property distributed by the Holding Company as a dividend to the extent that
such distribution is paid out of the Holding Company's current or accumulated
earnings and profits ("e&p"), as determined for U.S. federal income tax
purposes, when such distribution is received by the Custodian, in the case of
ADSs, or by the U.S. holder, in the case of Preferred Shares. To the extent that
such a distribution exceeds the Holding Company's e&p, it will be treated as
a nontaxable return of capital, to the extent of the U.S. holder's tax basis in
the ADS (or Preferred Shares, as the case may be), and thereafter as capital
gain. The amount of any distribution taken into account for U.S. federal income
tax purposes is the gross amount of the distribution without reduction for any
Brazilian tax withheld on the amount distributed, and the amount of a
distribution paid in REAIS will be measured by reference to the exchange rate
for converting REAIS into U.S. dollars in effect on the date the distribution is
received by the Custodian, in the case of ADSs, or by a U.S. holder, in the case
of Preferred Shares. If the Custodian or U.S. holder, as the case may be, does
not convert such REAIS into U.S. dollars on the date it receives them, it is
possible that the U.S. holder will recognize foreign currency loss or gain,
which would be ordinary loss or gain, when the REAIS are converted into U.S.
dollars. Dividends paid by the Holding Company will not be eligible for the
dividends received deduction allowed for certain dividends received by
corporations under the Code.
Distributions out of e&p with respect to the ADSs or Preferred Shares
generally will be treated as dividend income from sources outside of the United
States and generally will be treated separately along with other items of
"passive" (or, in the case of certain U.S. holders, "financial services") income
for purposes of determining the credit for foreign income taxes allowed under
the Code. Subject to certain limitations, Brazilian income tax withheld in
connection with any distribution with respect to the ADSs or Preferred Shares
may be claimed as a credit against the U.S. federal income tax liability of a
U.S. holder if such U.S. holder elects for that year to credit all foreign
income taxes, or such Brazilian withholding tax may be taken as a deduction.
Foreign tax credits will not be allowed for withholding taxes imposed in respect
of certain short-term or hedged positions in securities or in respect of
arrangements in which a U.S. holder's expected economic profit, after non-U.S.
taxes, is insubstantial. U.S. holders should consult their own tax advisors
concerning the implications of these rules in light of their particular
circumstances.
A holder of an ADS or Preferred Share that is a foreign corporation or
nonresident alien individual (a "non-U.S. holder") generally will not be subject
to U.S. federal income tax or withholding tax on distributions with respect to
ADSs or Preferred Shares that are treated as dividend income for U.S. federal
income tax purposes, and generally will not be subject to U.S. federal income
tax or withholding tax on distributions with respect to ADSs or Preferred Shares
that are treated as capital gain for U.S. federal income tax purposes unless
such holder would be subject to U.S. federal income tax on gain realized on the
sale or other disposition of ADSs or Preferred Shares, as discussed below.
TAXATION OF CAPITAL GAINS
Upon the sale or other disposition of an ADS or Preferred Share, a U.S. holder
will recognize gain or loss for U.S. federal income tax purposes in an amount
equal to the difference between the amount realized in consideration for the
disposition of the ADS or Preferred Share (excluding the amount of any
distribution paid by the Holding Company to the Custodian but not distributed by
the Custodian prior to the disposition) and the U.S. holder's tax basis in the
ADS or Preferred Share. Such gain or loss generally will be subject to U.S.
federal income tax and will be treated as capital gain or loss. The
deductibility of capital losses is subject to certain limitations. Gain realized
by a U.S. holder on a sale or disposition of ADSs or Preferred Shares generally
will be treated as U.S. source income. Consequently, if Brazilian tax is imposed
on such gain, the U.S. holder will not be able to use the corresponding foreign
tax credit, unless the holder has other foreign source income of the appropriate
type in respect of which the credit may be used.
A non-U.S. holder will not be subject to U.S. federal income tax or withholding
tax on gain realized on the sale or other disposition of an ADS or Preferred
Share unless (i) such gain is effectively connected with the conduct by the
holder of a trade or business in the United States, or (ii) such holder is an
individual who is present in the United States of America for 183 days or more
in the taxable year of the sale and certain other conditions are met.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
Dividend payments with respect to ADSs or Preferred Shares and proceeds from the
sale, exchange or redemption of ADSs or Preferred Shares may be subject to
information reporting to the U.S. Internal Revenue Service ("IRS") and possible
U.S. backup withholding at a rate currently equal to 30%. 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).
Amounts withheld as backup withholding may be credited against a holder's U.S.
federal income tax liability, and a holder may obtain a refund of any excess
amounts withheld under the backup withholding rules by filing the appropriate
claim for refund with the IRS and furnishing any required information. U.S.
holders of ADSs or Preferred Shares should consult their tax advisors regarding
the application of the information reporting and backup withholding rules.
PASSIVE FOREIGN INCOME COMPANY CONSIDERATIONS
The Holding Company believes that its ADSs and Preferred Shares should not be
treated as stock of a passive foreign investment company (a "PFIC") for U.S.
federal income tax purposes, but this conclusion is a factual determination made
annually and thus is subject to change.
The Holding Company will be a PFIC with respect to a U.S. holder if, for any
taxable year in which the U.S. holder holds ADSs or Preferred Shares, either (i)
at least 75% of the gross income of the Holding Company for the taxable year is
passive income or (ii) at least 50% of the average fair market value of the
Holding Company's assets consists of assets that produce or are held for the
production of passive income. For this purpose, passive income generally
includes dividends, interest, royalties, rents (other than rents and royalties
derived from the active conduct of a trade or business and not derived from a
related person), annuities and gains from assets that produce passive income.
For the purpose of the PFIC tests, the Holding Company will be treated as owning
directly its percentage share of the assets of its subsidiaries and of receiving
directly its percentage shares of each of those subsidiaries' income, if any, so
long as the Holding Company owns, directly or indirectly, at least, 25% by value
of the particular subsidiary's stock.
If the Holding Company were to become a PFIC, a U.S. holder of ADSs or Preferred
Shares generally would be subject to adverse tax consequences with respect to
certain distributions on, and gains realized from a disposition of, ADSs or
Preferred Shares. U.S. holders should consult their own tax advisors regarding
the potential application of the PFIC rules to their ownership of ADSs or
Preferred Shares.
DOCUMENTS ON DISPLAY
The documents referred to herein may be inspected at the Company's registered
office at SCS, QUADRA 2, BLOCO C, 7 ANDAR, 70.319-900, BRASILIA, DF, BRAZIL.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in both foreign currency
exchange rates and interest rates. The Company is exposed to foreign-exchange
rate risk (only with regard to its non-hedged debt), 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. Interest rate risk results from the possibility that
the Company may incur losses due to interest rate fluctuations which raise the
balance of liabilities associated with loans and financing obtained in the
market and their financial expenses. The Company has not entered into
derivatives contracts in order to hedge against this risk. However, the Company
continuously monitors interest rates in order to evaluate the possible need for
derivative contracts to protect it against the risk of volatility of these
rates.
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. SEE ITEM 5 "OPERATING AND FINANCIAL REVIEW AND
PROSPECTS--FOREIGN EXCHANGE AND INTEREST RATE EXPOSURE."
EXCHANGE RATE RISK
The Company has exchange rate exposure with respect to the U.S. dollar. On
December 31, 2001, approximately R$307.68 million of the Company's indebtedness
and R$61.6 million of the Company's contingencies were denominated in U.S.
dollars. The potential immediate loss to the Company on such indebtedness that
would result only in the amount of R$39,9 million, once R$267.78 related to
liabilities in foreign exchange are hedged against foreign currency exposure. In
addition, if such a change were to be sustained, the Company's cost of financing
would increase in proportion to the change. However, due to departures from
agreed procedures in connection with the Breakup of TELEBRAS for assigning the
right to receive payments under such indebtedness, payments on such indebtedness
were suspended in 1998 and the Company's management has determined that,
beginning in 1999, R$61.6 million of such indebtedness will be treated for all
purposes as a REAL-denominated liability. SEE ITEM 5 "OPERATING AND FINANCIAL
REVIEW AND PROSPECTS--FOREIGN EXCHANGE AND INTEREST RATE EXPOSURE" AND SEE NOTES
22 AND 32 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
INTEREST RATE RISK
As of December 31, 2001, the Company had approximately R$516,9 million in loans
and financing outstanding, of which approximately R$248,9 million bore interest
at fixed rates and approximately R$268,0 million bore interest at floating
(primarily LIBOR and TJLP-based) rates. The Company invests its excess liquidity
(R$280,7 million at December 31, 2001) 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,
2001. The above sensitivity analysis is based on the assumption of an
unfavorable 100 basis point movement of the interest rates applicable to each
homogeneous category of financial assets and liabilities and sustained over a
period of one year. A homogeneous category is defined according to the currency
in which financial assets and liabilities are denominated and assumes the same
interest rate movement within each homogeneous category (e.g. U.S. dollars). As
a result, the Company's interest rate risk sensitivity model may overstate the
impact of interest rate fluctuations for such financial instruments, as
consistently unfavorable movements of all interest rates are unlikely. SEE NOTE
22 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
None.
ITEM 17. FINANCIAL STATEMENTS
The Holding Company has responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to pages F-1 through F-42.
ITEM 19. EXHIBITS
(a) The following Consolidated Financial Statements are filed as part of
this Form 20-F:
Independent Auditors' Report
Consolidated Statement of Financial Condition and Consolidated Balance
Sheets
Consolidated Statement of Revenues and Expenses and Statements of
Income
Consolidated Statement of Net Interdivisional Distribution and
Consolidated Statements of Cash Flow
Consolidated Statement of Changes in Divisional Equity and
Consolidated Statements of Changes in Shareholders' Equity
Notes to the Consolidated Financial Statements
(b) Exhibits
1.1 By-laws of the Holding Company previously filed with the Holding
Company's registration statement on September 18, 1998 and
incorporated herein by reference.
1.2 Amendment to the Charter of the Holding Company previously filed
with the Holding Company's registration statement on September
18, 1998 and incorporated herein by reference.
2.1 Deposit Agreement dated as of July 27, 1998 between the Holding
Company and The Bank of New York, previously filed with the
Holding Company's registration statement on September 18, 1998
and incorporated herein by reference.
4.1 Standard Concession Agreement for Mobile Cellular Service
(original and English translation), previously filed with the
Holding Company's registration statement on September 18, 1998
and incorporated herein by reference.
4.2 Cellular Service Authorization Agreement (original) entered into
and between the Brazilian Government, through Anatel, and Tele
Centro Oeste/Inepar Ltda., currently Norte Brasil Telecom S.A.,
on November 27, 1998.
4.3 Consent of Ernst & Young Auditores Independentes S.C.
THERE ARE OMITTED FROM THE EXHIBITS FILED WITH OR INCORPORATED BY REFERENCE INTO
THIS ANNUAL REPORT CERTAIN PROMISSORY NOTES AND OTHER INSTRUMENTS AND AGREEMENTS
WITH RESPECT TO LONG-TERM DEBT OF THE COMPANY, NONE OF WHICH AUTHORIZES
SECURITIES IN A TOTAL AMOUNT THAT EXCEEDS 10% OF THE TOTAL ASSETS OF THE
COMPANY. THE COMPANY HEREBY AGREES TO FURNISH TO THE SECURITIES AND EXCHANGE
COMMISSION COPIES OF ANY SUCH OMITTED PROMISSORY NOTES OR OTHER INSTRUMENTS OR
AGREEMENTS AS THE COMMISSION REQUESTS.
INDEX OF DEFINED TERMS
PAGE
----
3G systems...................................................................61
AD...........................................................................21
ADRs.........................................................................68
ADSs.........................................................................68
American Depositary Shares...................................................68
Americel.....................................................................35
ANATEL.......................................................................16
ANATEL Decree................................................................39
Annex IV Regulations.........................................................92
Annex V Regulations..........................................................92
Area 7.......................................................................15
Area 8.......................................................................15
Audit Committee..............................................................65
Band A.......................................................................35
Band A Concessions...........................................................15
Band A Service Provider......................................................35
Band A Subsidiary.............................................................1
Band B.......................................................................35
Band B Concessions...........................................................15
Band B Service Provider......................................................35
Band B Subsidiary,............................................................1
BNDES........................................................................52
Bolsa de Valores de Sao Paulo................................................75
Bolsa de Valores do Rio de Janeiro...........................................75
Brazil........................................................................1
Brazilian Corporation Law....................................................80
Brazilian GAAP................................................................1
Brazilian Securities Law.....................................................80
Breakup......................................................................16
Breakup of TELEBRAS..........................................................16
CCC..........................................................................14
Cellular Region..............................................................16
Cellular Service Rule........................................................39
Central Bank.................................................................80
CGR..........................................................................39
Circuit Switched Data........................................................33
CLC..........................................................................78
Code.........................................................................98
PAGE
----
COFINS.......................................................................14
Comissao Brasileira de Comunicacoes..........................................61
Commercial Market.............................................................6
Common Shares................................................................68
Company.......................................................................1
Concessions..................................................................15
Consolidated Financial Statements.............................................1
CPMF tax.....................................................................97
CSLL.........................................................................14
Custodian....................................................................92
CVM..........................................................................66
Deductibles..................................................................24
Deposit Agreement............................................................77
Depositary...................................................................77
dollars.......................................................................1
DSL1.........................................................................21
DSL2.........................................................................21
e&.......................................................................98
EMBRATEL.....................................................................16
emerging market...............................................................9
Equity Withdrawing Rights....................................................81
Extreme South Stock Exchange.................................................79
Federal Government............................................................2
financial services...........................................................99
Financial System Law.........................................................80
FISTEL.......................................................................31
Fixed-Line Region............................................................16
Floating Market...............................................................6
Floating Market Rate..........................................................7
GDP..........................................................................17
General Telecommunications Law...............................................16
GVT..........................................................................36
Holding Company...............................................................1
IBGE.........................................................................17
ICMS.........................................................................14
IGP-DI.......................................................................12
IGP-M.........................................................................2
Income Statement Data.........................................................3
IOF tax......................................................................97
PAGE
----
IRS.........................................................................100
LIBOR........................................................................50
Minimum Law..................................................................39
minority interests............................................................4
mirror companies.............................................................36
National Monetary Council....................................................80
NBT...........................................................................1
New Holding Companies........................................................16
non-Brazilian holder.........................................................94
non-U.S. holder..............................................................99
Noon Buying Rate..............................................................1
Norte Brasil Telecom S.A.....................................................48
off-peak calls...............................................................21
Parana Stock Exchange........................................................79
Pernambuco and Paraiba Stock Exchange........................................79
PETROBRAS....................................................................64
PFIC........................................................................100
Predecessor Companies........................................................15
Preferred Shares.............................................................68
Proposal.....................................................................90
R$............................................................................1
reais.........................................................................1
real..........................................................................1
Real Plan.....................................................................8
Region.......................................................................16
Registered Capital...........................................................97
Registration.................................................................92
SAF..........................................................................34
SEC..........................................................................80
Service Quality Memorandum...................................................41
Sistel.......................................................................68
Shareholders Essential Rights................................................81
SMC..........................................................................38
SMS..........................................................................33
SMP..........................................................................12
Splice.......................................................................15
STFC.........................................................................38
Stock Exchange Unification Program...........................................78
Sub Credito B................................................................52
Subsidiaries..................................................................1
Subsidiary....................................................................1
Teleacre......................................................................1
TELEBRAS.....................................................................15
TELEBRAS Loans...............................................................51
TELEBRAS System..............................................................15
Telebrasilia..................................................................1
Telecommunications Regulations...............................................16
PAGE
----
Telegoias.....................................................................1
Telemar......................................................................37
Telemat.......................................................................1
Telems........................................................................1
Teleron.......................................................................1
TIM..........................................................................37
TJLP.........................................................................52
U.S. dollars..................................................................1
U.S. GAAP.....................................................................2
U.S. holder..................................................................98
US$...........................................................................1
VC1..........................................................................21
VC2..........................................................................21
VC3..........................................................................21
WAP..........................................................................18
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 carriers for the use of
their network by other network carriers. Also known as an "interconnection
charge" or "network usage charge."
ACCESS GATES: The points of interface between the network equipment (either
dedicated or switched) and the transmission media that connect network equipment
to the end user. The quantity of service is directly related to the quantity of
network access gates.
AMPS (ADVANCED MOBILE PHONE SERVICE): An analog cellular telecommunications
service standard utilizing the 850 MHz band, in use in North America, parts of
South America, Australia and various other areas.
ANALOG: A mode of transmission or switching which is not digital, e.g., the
representation of voice, video or other modulated electrical audio signals which
are not in digital form.
ANALOG NETWORK: A network using analog technology with circuit switching,
capable of connecting one user with all the users, but with limited transmission
capacity.
ATM (ASYNCHRONOUS TRANSFER MODE): A broadband switching technology that permits
the use of one network for different kinds of information (e.g., voice, data and
video).
AUTOMATIC INTERNATIONAL ROAMING: A service which permits a subscriber to use his
or her cellular telephone on a foreign cellular service provider's network. The
subscriber may receive calls made to the subscriber's regular cellular telephone
number (such calls are "automatically" passed to the foreign service provider's
network).
BAND A SERVICE PROVIDER: A former TELEBRAS operating subsidiary that has been
granted a concession to provide cellular telecommunications services in a
particular area within a radio spectrum frequency range referred to by ANATEL as
"Band A."
BAND B SERVICE PROVIDER: A cellular service provider that has been granted a
concession to provide cellular telecommunications services in a particular area
within a radio spectrum frequency range referred to by ANATEL as "Band B."
BASE STATION: A radio transmitter/receiver that maintains communications with
the cellular telephones within a given cell. Each base station in turn is
interconnected with other base-stations and with the public switched telephone
network.
BROADBAND SERVICES: Services characterized by a transmission speed of 2 Mbit/s
or more. According to international standards, these services are divided into
two categories: (i) Interactive services, including
videotelephone/videoconferencing (both point-to-point and multipoint);
videomonitoring; interconnection of local networks; file transfer; CAD;
high-speed fax; e-mail for moving images or mixed documents; broadband
videotext; video on demand; retrieval of sound programs or fixed and moving
images; and (ii) Broadcast services, such as sound programs, television programs
(including high-definition TV and pay TV) and selective document acquisition.
CATV (CABLE TELEVISION): Cable or fiber-based distribution of TV programs.
CDMA (CODE DIVISION MULTIPLE ACCESS): A standard of digital cellular
telecommunications technology.
CELL: The geographic area covered by a single base station in a cellular
telecommunications system.
CELL SPLITTING: The process of dividing cells into smaller coverage areas by
reducing the power output and the antenna height of the base station
transmitter. Cell splitting increases capacity in a particular area by allowing
for the further reuse of frequencies by a cellular telecommunications system.
CELLULAR SERVICE: A mobile telecommunications service provided by means of a
network of interconnected low-powered base-stations, each of which covers one
small geographic cell within the total cellular telecommunications system
service area.
CHANNEL: One of a number of discrete frequency ranges utilized by a base
station.
DIGITAL: A mode of representing a physical variable such as speech using digits
0 and 1 only. The digits are transmitted in binary form as a series of pulses.
Digital networks allow for higher capacity and higher flexibility through the
use of computer-related technology for the transmission and manipulation of
telephone calls. Digital systems offer lower noise interference and can
incorporate encryption as a protection from external interference.
DIGITAL PENETRATION: The substitution of equipment capable of transmitting
digital signals for equipment limited to analog transmission.
EXCHANGE: See Switch.
FRAME RELAY: A data transmission service using fast protocols based on direct
use of transmission lines.
INTERNET: A collection of interconnected networks spanning the entire world
including university, corporate, government and research networks from around
the globe. These networks all use the IP (Internet Protocol) communications
protocol.
ISDN (INTEGRATED SERVICES DIGITAL NETWORK): A system in which several services
(e.g., speech and data) may be simultaneously transmitted end-to-end in digital
form.
LEASED HIGH-SPEED DATA COMMUNICATION: The digital exchange of information at
speeds exceeding 64 Kbps transmitted through mediums that are leased to users
for their exclusive use.
LOCAL LOOP: The system used to connect the subscriber to the nearest switch. It
generally consists of a pair of copper wires, but may also employ fiber-optic
circuits, microwave links or other technologies.
MANUAL INTERNATIONAL ROAMING: A service that permits a subscriber to use his or
her cellular telephone on a foreign cellular service provider's network. The
subscriber may only receive calls made to a temporary number issued to the
subscriber by the foreign service provider for use while roaming.
MICROCELLS: A small cell covered by a low-power base station. Microcells can
cover small areas such as a single building.
NETWORK: An interconnected collection of elements. In a telephone network, these
consist of switches connected to each other and to customer equipment. The
transmission equipment may be based on fiber optic or metallic cable or
point-to-point radio connections.
NETWORK USAGE CHARGE: Amount paid per minute charged by network carriers for the
use of their network by other network carriers. Also known as an "access charge"
or "interconnection charge."
OPTICAL FIBER: A transmission medium which permits extremely high capacities. It
consists of a thin strand of glass that provides a pathway along which waves of
light can travel for telecommunications purposes.
PACKET-SWITCHED DATA COMMUNICATION SERVICES: Data services based on parceling or
breaking the data stream into packets and switching the individual packets.
Information transmitted is segmented into cells of a standardized length, which
are then transmitted independently of one another, allowing maximization of
available capacity and usage of a single transmission path for multiple
communications. The cells are then reassembled upon reaching their destination.
PBX (PRIVATE BRANCH EXCHANGE): Telephone switchboard for private use, but linked
to the national telephone network.
PENETRATION: The measurement of the take-up of services. At any date, the
penetration is calculated by dividing the number of subscribers by the
population to which the service is available and multiplying the quotient by
100.
PRIVATE LEASED CIRCUITS: Voice, data or image transmission mediums leased to
users for their exclusive use.
PSTN (PUBLIC SWITCHED TELEPHONE NETWORK): The public telephone network that
delivers basic telephone service and, in certain circumstances, more advanced
services.
REPEATERS: A device that amplifies an input signal for retransmission.
ROAMING: A function that enables subscribers to use their cellular telephone on
networks of service providers other than the one with which they signed their
initial contract.
SATELLITE SERVICES: Satellites are used, among other things, for links with
countries that cannot be reached by cable or to provide an alternative to cable
and to form closed user networks.
SDH (SYNCHRONOUS DIGITAL HIERARCHY): A hierarchical set of digital transport
structures standardized for the transport of suitably adapted payloads over
physical transmission networks.
SECTORIZATION: The process of dividing cells into sectors by using directional
antennae at the base station. Sectorization reduces co-channel interference
which permits smaller cells and increases network capacity.
SWITCH: These are used to set up and route telephone calls either to the number
called or to the next switch along the path. They may also record information
for billing and control purposes.
TDMA (TIME DIVISION MULTIPLE ACCESS): A standard of digital cellular
telecommunications technology.
UNIVERSAL SERVICE: The obligation to supply basic service to all users
throughout the national territory at reasonable prices.
VALUE ADDED SERVICES: Value Added Services provide additional functionality to
the basic transmission services offered by a telecommunications network.
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Holding Company certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
By: /S/ MARIO CESAR PEREIRA DE ARAUJO
--------------------------------------------
Name: Mario Cesar Pereira de Araujo
Title: President
Dated: July 1, 2002
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CONTENTS
Report of Ernst & Young Auditores Independentes S.C..................... F-1
Consolidated Balance Sheets................................................. F-2
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Cash Flows....................................... F-5
Consolidated Statements of Changes in Shareholders' Equity.................. F-6
Notes to the Consolidated Financial Statements...............................F-7
REPORT OF INDEPENDENT AUDITORS
Directors and Shareholders
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
We have audited the accompanying consolidated balance sheets of Tele Centro
Oeste Celular Participacoes S.A. and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Brazil and in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance as to whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tele
Centro Oeste Celular Participacoes S.A. at December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in Brazil, which differ in certain respects from
those followed in the United States of America (See Note 29).
Ernst & Young Auditores Independentes S.C.
/s/ Luiz Carlos Nannini
Partner
Brasilia, Brazil
January 31, 2002
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(In thousands of Brazilian Reais - R$)
NOTE 2000 2001
------ ---------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................ 450,131 326,637
Marketable securities.................... 12 158,701 362,310
Trade accounts receivable, net........... 13 161,010 186,762
Deferred income taxes and
recoverable taxes....................... 14 107,380 120,222
Handset and accessory inventories........ 52,082 29,399
Other assets............................. 28,275 33,124
----------- -----------
Total current assets....................... 957,579 1,058,454
NONCURRENT ASSETS
Deferred income taxes and
recoverable taxes....................... 14 66,282 55,616
Loans and financial investments.......... 2,673 -
Other assets............................. 4,018 3,922
----------- -----------
Total noncurrent assets.................... 72,973 59,538
PERMANENT ASSETS
Investments.............................. 5,445 10,470
Property, plant and equipment, net ...... 15 1,083,754 1,078,882
Deferred charges, net.................... 16 35,158 32,981
----------- -----------
Total permanent assets..................... 1,124,357 1,122,333
----------- -----------
Total assets............................... 2,154,909 2,240,325
=========== ===========
See the accompanying notes to the consolidated financial statements.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(In thousands of Brazilian Reais - R$)
NOTE 2000 2001
------ ---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payroll and related accruals............... 17 6,969 6,849
Accounts payable and accrued expenses...... 18 227,757 152,524
Indirect taxes............................. 19 61,002 79,869
Deferred taxes and income taxes payable.... 20 9,838 7,927
Participation in results of operation...... 21 51,781 109,092
Loans and financing........................ 22 490,239 279,507
Payable for concession (license)........... 19,423 -
Other payables............................. 8,867 40,612
----------- -----------
Total current liabilities.................... 875,876 676,380
NONCURRENT LIABILITIES
Accounts payable and accrued expenses...... 18 1,047 1,790
Deferred taxes and income taxes payable.... 20 71,646 56,087
Loans and financing........................ 22 18,910 237,477
Provision for contingencies................ 23 62,996 76,476
----------- -----------
Total noncurrent liabilities................. 154,599 371,830
MINORITY INTERESTS........................... 82,136 65,557
CAPITALIZABLE FUNDS.......................... 126 126
SHAREHOLDERS' EQUITY
Capital.................................... 386,865 588,865
Capital reserve............................ 124,610 102,507
Legal reserve................................ 36,349 46,754
Revenue reserve............................ 97,675 -
Retained earnings ......................... 396,673 395,132
Treasury stock............................. - (6,826)
----------- -----------
Total shareholders' equity................... 25 1,042,172 1,126,432
----------- -----------
Total liabilities and shareholders' equity... 2,154,909 2,240,325
=========== ===========
See the accompanying notes to the consolidated financial statements.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
December 31, 1999, 2000 and 2001 (In thousands of
Brazilian Reais, except shares and per share amounts)
YEARS ENDED DECEMBER 31
----------------------------------------
NOTE 1999 2000 2001
---- --------- ---------- ----------
Net operating revenue................. 4 666,660 930,646 1,248,131
Cost of services rendered and
cost of products sold................. 5 (326,514) (532,163) (663,158)
--------- ---------- ----------
Gross margin.......................... 340,146 398,483 584,973
Operating expenses
Selling expenses ................. 6 (118,592) (126,163) (195,020)
General and administrative
expenses........................ (64,539) (78,420) (110,300)
Other net operating results....... 7 (14,020) (9,618) (4,513)
--------- ---------- ----------
Operating income before net
financial results.................... 142,995 184,282 275,140
Net financial results.................. 8 (47,640) (30,063) (43,471)
--------- ---------- ----------
Operating income....................... 95,355 154,219 231,669
Net non-operating results.............. 9 (6,055) (19,539) (25,668)
Employees' participation............... (1,866) (1,878) (2,346)
--------- ---------- ----------
Income before income taxes
and minority interest 87,434 132,802 203,655
Income and social contribution
taxes................................ 10 (29,857) (40,159) (56,501)
--------- ---------- ----------
Income before minority interest......... 57,577 92,643 147,154
Minority interest....................... (11,531) (19,980) (13,864)
Reversal of interest on own capital..... 53,542 30,981 45,297
--------- ---------- ----------
Net income.............................. 99,588 103,644 178,587
========= ========== ==========
Outstanding shares at
end of year (thousands)............... 364,399,028 364,399,028 366,463,335
Profit per thousand shares (R$)......... 0.27 0.28 0.49
========= ========== ==========
See the accompanying notes to the consolidated financial statements.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
December 31, 1999, 2000 and 2001
(In thousands of Brazilian Reais - R$)
1999 2000 2001
--------- ---------- ----------
OPERATING ACTIVITIES:
Net income............................... 99,588 103,644 178,587
Adjustments to reconcile
net income to cash provided by
operating activities:
Depreciation and amortization........... 128,762 154,345 186,056
Disposal of permanent assets............ 7,948 16,482 15,322
Minority interests...................... 11,531 19,980 (13,864)
Allowance for doubtful accounts......... 75,162 54,873 60,479
Decrease (increase) in assets:
Trade accounts receivable............. (109,365) (42,629) (86,231)
Handset and accessory inventories..... (19,128) (32,945) 22,683
Deferred income taxes and
recoverable taxes..................... (28,779) (109,214) (2,176)
Other assets.......................... (11,822) (9,707) (2,080)
Increase (decrease) in liabilities:
Personnel, social charges
and benefits.......................... 687 733 (120)
Accounts payable and accrued
expenses.............................. 44,827 121,591 (74,490)
Indirect taxes........................ 21,416 10,749 18,867
Other current liabilities............. 5,092 3,776 31,745
Accrued interest...................... 2,682 34,641 82,003
Provision for contingencies........... 2,068 102 13,480
Deferred income tax .................. (4,422) (20,229) (17,470)
Participation in results
of operation.......................... (28,513) 1,073 57,311
Payable for concession (license)...... 12,416 (17,215) (19,423)
Other non-current liabilities......... (151) 433 -
Minority interests.................... (26,745) (41,755) (2,715)
--------- --------- ---------
Net cash provided by operating
activities............................... 183,254 248,728 447,964
INVESTING ACTIVITIES:
Marketable securities.................... (87,667) (71,034) (203,609)
Additions to investments................. (4,451) (1,432) (7,314)
Additions to property, plant and
equipment................................ (291,038) (255,678) (190,317)
Transfer from fixed assets
to investments........................... 39,978 - -
Addition to deferred assets.............. (32,042) (7,024) (1,723)
Transfer from deferred assets
to recoverable taxes..................... - 118,615 -
--------- --------- ---------
Net cash used in investing activities.... (375,220) (216,553) (402,963)
FINANCING ACTIVITIES:
Loans repaid.............................. (3,036) (5,239) (1,423,210)
Proceeds from loans....................... 87,927 391,663 1,349,042
Capitalizable funds....................... - (13) -
Issuance of preferred shares.............. 63,719 - -
Premium on issuance of new shares......... 82 - -
Treasury stock............................ - - (6,826)
Dividends to minority interest
of subsidiaries.......................... - - (1,516)
Payment to shareholders' related
to premium utilization.................... - - (5,485)
Interest on own capital................... (49,059) (37,887) (80,500)
--------- --------- ---------
Net cash provided by (used in)
financing activities...................... 99,633 348,524 (168,495)
Increase (decrease) in cash and
cash equivalents............................. (92,333) 380,699 (123,494)
Cash and cash equivalents at
beginning of year............................ 161,765 69,432 450,131
--------- --------- ---------
Cash and cash equivalents at end of year..... 69,432 450,131 326,637
========= ========= =========
See the accompanying notes to the consolidated financial statements.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1999, 2000 AND 2001
(In thousands of Brazilian Reais - R$)
CAPITAL LEGAL REVENUE RETAINED TREASURY
CAPITAL RESERVE RESERVE RESERVE EARNINGS STOCK TOTAL
------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1998..... 253,622 - 23,984 164,952 356,580 - 799,138
Capital increase
with reserves......... 69,525 - - - (69,525) - -
Issuance of preferred
shares...... 63,718 - - - - - 63,718
Reversal of
reserves.............. - - - (164,952) 164,952 - -
Premium on issue of
new shares............ - 81 - - - - 81
Assets incorporate
from Coverage S.A..... - 354,786 - - - - 354,786
Deferred tax on
full indexation....... - - - - (46,551) - (46,551)
Net income............ - - - - 99,588 - 99,588
Transfer to reserves.. - - 5,898 112,073 (117,971) - -
Interest on own
capital............... - - - - (40,132) - (40,132)
-------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1999..... 386,865 354,867 29,882 112,073 346,941 - 1,230,628
Provision for
reduction of assets
incorporated from
Coverage.............. - (230,257) - - - - (230,257)
Reversal of reserves.. - - - (112,073) 112,073 - -
Deferred tax on full
indexation............ - - - - (23,956) - (23,956)
Net income............ - - - - 103,644 - 103,644
Transfer to reserves.. - - 6,467 97,675 (104,142) - -
Interest on own
capital/dividends..... - - - - (37,887) - (37,887)
--------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 2000..... 386,865 124,610 36,349 97,675 396,673 - 1,042,172
Capital increase
with reserves......... 202,000 (16,618) - - (185,382) - -
Payment to
shareholders' related
to premium
utilization........... - (5,485) - - - - (5,485)
Treasury stock........ - - - - - (6,826) (6,826)
Dividends to minority
interest of
subsidiaries.......... - - - - (1,516) - (1,516)
Reversal of reserves.. - - - (97,675) 97,675 - -
Net income............ - - - - 178,587 - 178,587
Transfer to reserves.. - - 10,405 - (10,405) - -
Interest on own
capital/dividends..... - - - - (80,500) - (80,500)
--------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 2001..... 588,865 102,507 46,754 - 395,132 (6,826) 1,126,432
====================================================================
See the accompanying notes to the consolidated financial statements.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
1. OPERATIONS AND BACKGROUND
Beginning in 1995, the Federal Government of Brazil (the "Federal
Government") undertook a comprehensive reform of the Brazilian regulation
of the telecommunications industry. In July 1997 the Federal Congress
adopted a General Telecommunications Law providing for the privatization of
Telecomunicacoes Brasileiras S.A. ("Telebras") which, through its 28
operating subsidiaries was the primary supplier of public
telecommunications services in Brazil (the "Telebras System").
In preparation for the privatization of the Telebras System, the operating
subsidiaries were divided into twelve separate groups, (a) three regional
fixed-line operators, (b) eight regional cellular operators and (c) one
national long-distance operator. The cellular telecommunications businesses
were first separated from the operating subsidiaries and subsequently from
the fixed-line businesses. The new cellular businesses and the
long-distance operator were combined into the twelve separate groups (the
"New Holding Companies"). Both the separation of the cellular businesses
and the subsequent grouping of the former Telebras subsidiaries were
performed using a procedure under Brazilian corporate law called CISAO (the
"spin-off"). As of part of this process Tele Centro Oeste Celular
Participacoes S.A. (the "Holding Company") was formed.
Tele Centro Oeste Celular Participacoes S.A. (the "Company") was formed on
May 22, 1998, through the spin-off of certain assets and liabilities of
Telebras, including 81.4%, 83.8%, 91.9%, 96.0%, 91.3% and 94.0% of the
share capital of Telebrasilia Celular S.A., Telegoias Celular S.A., Telemat
Celular S.A., Telems Celular S.A., Teleron Celular S.A. and Teleacre
Celular S.A., respectively. Until August 4, 1998, the Companies were
controlled by the Federal Government.
At December 31, 2001, 53.8% of the common shares were owned by BID S.A.
Tele Centro Oeste Celular Participacoes S.A. and its subsidiaries (the
"Companies") are the primary suppliers of cellular telecommunications
services in the states of Goias, Tocantins, Mato Grosso do Sul, Mato
Grosso, Rondonia, Acre and the Federal District under the terms of
concessions granted by the Federal Government on November 4, 1997 (the
"Concessions"). The Concessions will expire as follows:
COMPANY EXPIRATION
------- ----------
Telebrasilia Celular S.A....................... July 24, 2006
Telegoias Celular S. A. ....................... October 29, 2008
Telemat Celular S.A. .......................... March 30, 2009
Telems Celular S.A. ........................... September 28, 2009
Teleron Celular S.A. .......................... July 21, 2009
Teleacre Celular S.A. ......................... July 15, 2009
SECTION 1.
The subsidiary companies controlled by Tele Centro Oeste Celular
Participacoes S.A. were legally formed on January 5, 1998 and the spin-off
from the predecessors was approved during an Extraordinary General
Shareholders Meeting, held on January 30, 1998.
The Concessions may be renewed at the discretion of Anatel (as defined
below) for a further term of 15 years but could be extended for another 15
years. Cellular telecommunications services were first offered in the
states serviced by the subsidiaries of Tele Centro Oeste Celular S.A.
between July 1991 and February 1996.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
1. OPERATIONS AND BACKGROUND (Continued)
On May 24, 1999, Norte Brasil Telecom S.A. - NBT, a corporation not
publicly traded, was formed with the Holding Company participating 95% in
its capital. NBT has the objective of operating the cellular service and
activities necessary or convenient for the execution of these services,
comprising the coverage area 8 - Band B, which corresponds to the
geographic areas constituted by the states of Amazonas, Roraima, Amapa,
Para and Maranhao.
Norte Brasil Telecom S.A. started up its operations at the end of October
1999, covering 11 of the 97 cities within their operating area. As their
activities relating to the rendering of services were insignificant at
December 31, 1999, all expenses incurred until this date were considered as
pre-operating and only subject to amortization from January 2000.
The Companies' businesses, including the service they may provide and the
rates they charge are regulated by Agencia Nacional de Telecomunicacoes
("Anatel"), the regulatory authority for the Brazilian telecommunications
industry pursuant to Law No. 9,472 of July 16, 1997.
2. PRESENTATION OF THE FINANCIAL STATEMENTS
a. PRESENTATION OF THE FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1999, 2000 AND 2001
The consolidated financial statements were prepared in accordance with
Brazil's Corporation Law and regulations established by CVM - Comissao
de Valores Mobiliarios (Brazilian Securities Commission).
The consolidated financial statements present the financial position and
result of operations of Tele Centro Oeste Celular Participacoes S.A.
(TCO) and its subsidiaries.
Minority interest is included in the consolidated financial statements
of TCO as of December 31, 2001. This interest was 11.8%, 3.2%, 2.5%,
1.6%, 2.9%, 1.7% and 1.7% of Telebrasilia Celular S.A., Telegoias
Celular S.A., Telemat Celular S.A., Telems Celular S.A., Teleron Celular
S.A., Teleacre Celular S.A. and Norte Brasil Telecom S.A., respectively.
The presentation of the consolidated financial statements (assets,
liabilities and operating results) is consistent with the published
financial statements of Tele Centro Oeste Celular Participacoes S.A. and
its subsidiaries and considers the elimination of intercompany
transactions in accordance with Brazil's Corporation Law.
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 through December 31, 2000. Thus the financial
statements of the Company for each of the two years in the period ended
December 31, 2000 were prepared using the integral restatement method,
in order to express the balances of the Company in the currency of
constant purchasing power at December 31, 2000.
For 2001, IBRACON (the Brazilian Institute of Independent Auditors)
issued a publication stating that financial statements would not have to
be indexed for 2001 as the three-year cumulative inflation rate in
Brazil fell below 100%.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
2. PRESENTATION OF THE FINANCIAL STATEMENTS (Continued)
b. INFLATION ACCOUNTING METHODOLOGY
As a result of legislation mandating the discontinuation of the
indexation system for Brazilian corporate law accounting and most fiscal
purposes, together with the option granted by the Brazilian Securities
Commission (Comissao de Valores Mobiliarios - CVM), the consolidated
financial statements of Tele Centro Oeste Celular as of December 31,
2001 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%. For
accounting purposes, the Company applied the constant currency method
through December 31, 2000, as required by Brazilian generally accepted
accounting principles when the inflation rate is material.
For 1999 and 2000, the annual inflation rates were 20.10% and 9.95%,
respectively, which were considered to have a material effect on the
financial statements. Thus the financial statements of the Company were
prepared using the integral restatement method, in order to express the
balances of the Company in currency of constant purchasing power of
December 31, 2000.
The principal criteria adopted to prepare the fully indexed consolidated
financial statements are in conformity with the accounting records of
Tele Centro Oeste Celular and its subsidiaries, which observe the
accounting practices mentioned in note 3, as follows:
I. INFLATION INDEX
The consolidated financial statements as of December 31, 1999 and
2000, were prepared on a fully indexed basis to recognize the
effects in the purchasing power of the Brazilian currency during the
periods presented and expressed in the currency of constant
purchasing power at December 31, 2000 by using the monthly average
values of the INDICE GERAL DE PRECOS-MERCADO (the General Prices
Index-Market or the "IGP-M") of the FUNDACAO GETULIO VARGAS.
Inflation for the periods ended December 31, 1999 and 2000, as
measured by the IGP-M, was as follows:
PERIOD ANNUAL INFLATION (%)
------ --------------------
Year ended December 31, 1999.................. 20.10
Year ended December 31, 2000.................. 9.95
II. DEFERRED INCOME TAX EFFECTS OF INDEXATION ADJUSTMENTS IN 1999 AND
2000
As a result of legislation mandating the discontinuation of the
indexation system for Brazilian corporate law and most fiscal
purposes at January 1, 1996, the indexation of assets and
liabilities for financial reporting purposes at December 31, 1999
and 2000 is not permitted for tax purposes. Accordingly, a deferred
tax liability arises from the excess of net assets shown for
financial reporting purposes over the tax basis of these net assets.
The charge relating to the additional deferred tax liability of R$
23,956 in 2000 (R$ 46,551 in 1999), was recorded directly against
shareholders' equity. The tax effect of depreciation and disposals
relating to the base differences (reversal of the charge) in the
amount of R$ 12,901 in 2000 (R$ 9,074 in 1999) was credited to the
income and social contribution taxes in the consolidated statement
of income.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais,
except per share amounts)
2. PRESENTATION OF THE FINANCIAL STATEMENTS (Continued)
b. INFLATION ACCOUNTING METHODOLOGY (Continued)
III. THE RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY BALANCES
BETWEEN CORPORATE LAW AND TOTAL RESTATEMENT IS AS FOLLOWS:
NET INCOME SHAREHOLDERS' EQUITY
-----------------------------------------------
2000 2001 2000 2001
-----------------------------------------------
Corporate law 129,319 208,104 896,398 1,010,175
Restatement of net
permanent assets (27,062) (51,270) 239,459 188,189
Tax effects 12,901 17,403 (81,416) (64,014)
Minority interests (11,514) 4,350 (12,269) (7,918)
-----------------------------------------------
In constant currency 103,644 178,587 1,042,172 1,126,432
===============================================
d. CONSOLIDATION PRINCIPLES
The consolidated financial statements include the financial records of
the Holding Company and its majority - owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
3. SUMMARY OF THE PRINCIPAL ACCOUNTING PRACTICES
a. CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturity of three months or less at the time of purchase.
b. TRADE ACCOUNTS RECEIVABLE, NET
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 in
the statements of operations as they occur.
e. HANDSET AND ACCESSORY INVENTORIES
Inventories are stated at the lower cost or market, whereby costs are
determined using the average acquisition cost method.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
3. SUMMARY OF THE PRINCIPAL ACCOUNTING PRACTICES (Continued)
f. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at average acquisition or
construction cost, monetarily corrected to December 31, 2000, less
accumulated depreciation.
The operation right (concession - area 8) of the - Band B cellular
services relate to subsidiary Norte Brasil Telecom S.A. was recorded at
its acquisition cost and is being amortized in accordance with the
concession terms. In 2001, the Company changed the amortization period
to 15 years, with the aim of conforming the Brazilian GAAP with US GAAP.
The materials for plant expansion are stated at average acquisition
cost.
Maintenance and repair expenses representing improvements (increase of
installed capacity or useful life) are capitalized while the remaining
are charged to operating results when incurred.
Depreciation is provided using the straight-line method based on the
estimated useful lives of the underlying assets. The respective
depreciation rates are described in note 15.
g. DEFERRED CHARGES
PRE-OPERATING EXPENDITURES
Income and expenses incurred during the pre-operating period by the
subsidiary Norte Brasil Telecom S.A. are charged to deferred charges.
Deferred charges were not amortized during 1999 as the subsidiary Norte
Brasil Telecom S.A. did not commence operations until January 2000.
During the latter part of 2000, TCO IP, an internet service provider,
was formed and all the pre-operating costs were capitalized as deferred
charges through October 2001 when TCO IP began operations.
PREMIUM IN THE MERGER OF COVERAGE PARTICIPACOES S.A.
On December 14, 1999, the Company's parent company Coverage
Participacoes S.A. was merged into the Company with the purpose of
obtaining the tax benefit of premium amortization in the amount of R$
354,786, which will be amortized over a 5-year period. As the merger was
into a wholly owned subsidiary, there was no effect on the consolidated
financial statements.
h. INCOME AND SOCIAL CONTRIBUTION TAXES
Brazilian income taxes are comprised of the federal income tax and the
social contribution tax. At December 31, 2001, the statutory rates for
the federal income tax and for the social contribution tax were 25% and
9%, respectively. For Brazilian GAAP purposes, income taxes are
accounted for using the liability method.
As described in note 2 (b) (ii), the expense related to the effects of
deferred taxes from indexation adjustments for 1999 and 2000 are
recorded directly against shareholders' equity.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
3. SUMMARY OF THE PRINCIPAL ACCOUNTING PRACTICES (Continued)
i. PROVISION FOR CONTINGENCIES
The provision for contingencies was recorded based on the estimate of
Company legal advisors on judicial proceedings in process.
j. NET FINANCIAL RESULT
The net financial result includes interest and monetary variations
resulting from financial investments and loans and financing obtained
and provided. Interest on own capital/dividends is also included in this
account. In compliance with the tax legislation, the interest on own
capital/dividends is recorded as a financial expense for financial
statement purposes, according to CVM Deliberation No. 207 of December
12, 1996.
k. PENSION PLAN
The Company and its subsidiaries, participate in a multi-employer plan
that provides pension and other post-retirement benefits for its
employees. Current costs are determined as the amount of the required
contribution for the period and are recorded on the accrual basis.
l. PROFIT PER THOUSAND-SHARES
Profit per thousand-shares were calculated based on the number of
outstanding shares at the date of the corresponding balance sheets.
m. REVENUE RECOGNITION
Revenues for services and equipment are recognized when the service is
provided or when the equipment is sold, respectively. Revenues from
cellular telephone services consist of subscription charges, usage
charges, network usage charges and charges for maintenance and other
customer services. Unbilled revenues from the billing date to the
month-end are estimated and recognized as revenues during the month in
which the service is provided. Revenues from equipment sales refer to
sales of handsets.
The Company began selling prepaid cards during 1999. The revenue from
the sales of these cards is recognized according to the minutes used for
each card. Revenue from unused minutes is deferred until used. Because
the amount deferred is immaterial, it has been included in other
liabilities.
n. SEGMENT INFORMATION
The Companies operate solely in one segment of local and regional
cellular telecommunications. Until 1999, all revenues were generated in
relation to services provided in or routed through the Federal District
and the states of Goias, Tocantins, Mato Grosso do Sul, Mato Grosso,
Rondonia, Acre, Maranhao, Para, Amapa, Roraima and Amazonas.
o. USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
Brazilian GAAP and US GAAP requires management to make estimates and
assumptions related to assets, liabilities, revenues and expenses for
the period being reported. Actual results could differ from those
estimates.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
3. SUMMARY OF THE PRINCIPAL ACCOUNTING PRACTICES (Continued)
p. MINORITY INTERESTS
The Company records minority interest in the statements of operations to
reflect the portion of the earnings of majority-owned operations that
are applicable to the minority interest partners. See note 2a.
q. ADVERTISING COSTS
Advertising costs are expensed as incurred and included in selling
expenses. They amounted to R$ 26,785, R$ 24,321, and R$19,207 for the
years ended December 31, 2001, 2000, and 1999, respectively.
4. NET OPERATING REVENUE
1999 2000 2001
--------- ---------- ---------
Monthly subscription charges 211,364 194,424 121,486
Activation fees 4,080 - -
Usage charges 369,235 349,880 530,162
Network usage charges 197,079 334,498 526,846
Sale of handsets and
prepaid cards 58,634 274,812 386,665
Others 14,942 11,248 8,255
--------- ---------- ----------
Gross operating revenue 855,334 1,164,862 1,573,414
Taxes on gross revenue (188,674) (234,216) (325,283)
--------- ---------- ----------
Net operating revenue 666,660 930,646 1,248,131
========= ========== ==========
5. COST OF SERVICES RENDERED AND COSTS OF PRODUCTS SOLD
1999 2000 2001
--------- ---------- ----------
Depreciation and amortization (120,202) (142,763) (160,887)
Personnel (8,963) (11,276) (11,629)
Third party materials
and services (78,897) (95,825) (125,972)
Fixed-line network expenses (27,996) (26,850) (37,669)
Fistel tax (30,111) (51,581) (53,173)
Cost of products sold (50,918) (194,045) (273,299)
Others (9,427) (9,823) (529)
--------- ---------- ----------
(326,514) (532,163) (663,158)
========= ========== ==========
There are no customers who contribute more than 10% of gross operating
revenues.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A. NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Amounts expressed in
thousands of Brazilian Reais, except per share amounts)
6. SELLING EXPENSES
1999 2000 2001
--------- ---------- ----------
Personnel (9,815) (13,827) (19,592)
Third party materials and
services (43,734) (64,000) (118,251)
Rent/leasing/insurance (1,253) (3,326) (4,074)
Depreciation (35) - (4,448)
Net losses on trade accounts
receivable (63,618) (44,790) (48,301)
Others (137) (220) (354)
--------- ---------- ----------
(118,592) (126,163) (195,020)
========= ========== ==========
7. OTHER NET OPERATING RESULTS
1999 2000 2001
--------- ---------- ----------
Research and development (839) (617) (436)
Taxes (except income tax) (10,485) (9,801) (13,822)
Contingencies (1,318) - -
Fines and expenses recovered 3,167 3,354 12,921
Amortization of the premium -
Coverage Participacoes S.A. (5,913) - -
Tax incentives 4,271 - -
Other (2,903) (2,554) (3,176)
--------- ---------- ----------
(14,020) (9,618) (4,513)
========= ========== ==========
8. NET FINANCIAL RESULTS
1999 2000 2001
--------- ---------- ----------
Interest revenue 42,830 102,835 132,339
Interest expense (37,576) (98,487) (89,000)
Interest on own capital
(dividends) (53,542) (30,981) (45,297)
Net exchange/ monetary
variations 648 (3,430) (41,513)
--------- ---------- ----------
(47,640) (30,063) (43,471)
========= ========== ==========
9. NET NON-OPERATING RESULTS
1999 2000 2001
--------- ---------- ----------
Loss on the disposal of
property, plant and equipment (6,141) 404 (3,834)
Amortization of premium -
Coverage and
pre-operating expenditures - (21,055) (21,946)
Other non-operating income 86 1,112 112
--------- ---------- ----------
(6,055) (19,539) (25,668)
========= ========== ==========
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
10. INCOME AND SOCIAL CONTRIBUTION TAXES
From January to April 1999, the social contribution tax rate was 8%. From
May 1, 1999 to January 31, 2000, the social contribution tax rate was
increased to 12%. On February 1, 2000, the rate was reduced to 9% and has
not changed since that date. The income tax rate was 25% for all periods
presented.
Income taxes are as follows:
1999 2000 2001
--------- ---------- ----------
Social contribution tax (5,868) (14,857) (19,711)
Income tax (33,063) (38,203) (54,193)
Deferred taxes 9,074 12,901 17,403
--------- ---------- ----------
(29,857) (40,159) (56,501)
========= ========== ==========
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:
1999 2000 2001
--------- ---------- ----------
Social contribution tax at statutory
rates (8,087) (14,808) (22,946)
Social contribution tax on permanent
additions:
Others taxes non-deductible (539) - -
Others (200) (322) (666)
Social contribution tax on permanent
exclusions:
Premium amortization - 3,498 3,833
Others 336 8 26
Effects on the constant currency method (3,216) (3,010) -
COFINS (compensation) 4,942 - -
Others 896 (223) 42
--------- ---------- ----------
Social contribution tax (5,868) (14,857) (19,711)
========= ========== ==========
Income tax at statutory rates (21,858) (40,297) (63,739)
Income tax on permanent additions:
Others taxes non-deductible (1,236) - -
Others (394) (702) (2,035)
Income tax on permanent exclusions:
Premium amortization - 9,635 10,648
Others 812 63 37
Effects on the constant currency method (10,708) (8,403) -
Tax incentives/others 321 1,501 896
--------- ---------- ----------
Income tax (33,063) (38,203) (54,193)
========= ========== ==========
11. SUPPLEMENTAL CASH FLOW INFORMATION
1999 2000 2001
--------- ---------- ----------
Cash paid for interest 535 2,927 85,432
Cash paid against provisions for 92 3,639 -
contingencies
Income tax and social contributions 21,232 54,370 64,446
paid
Cash paid for concessions 19,212 19,289 22,385
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
12. MARKETABLE SECURITIES
Marketable securities at December 31, 2001 and 2000 consisted of the
following:
INTEREST DUE DATE 2000 2001
----------------------------------------------------------------
Notes from Central Foreign exchange
Bank of Brazil - variation plus annual
Especial Issuing - interest of 6% with Swap 9/17/2001 and
government securities of 100% CDI 6/17/2004 39,007 -
Debentures - Unibanco Prefixed annual rate of
Leasing Contracts 15% with Swap of 100% CDI 5/1/2003 28,165 -
Bank Deposit Prefixed annual rate of
Certificate - Unibanco 15% with Swap of 100% CDI 3/19/2001 and
4/25/2001 13,786 -
Commercial Prefixed annual rate of
Paper-Splice do 24% to 25% with Swap of 7/5/2002 and
Brasil S.A. 100% CDI plus 1.5% p.a. 9/30/2002 77,743 362,310
---------------------
158,701 362,310
=====================
The carrying value of the assets equals the fair value.
13. TRADE ACCOUNTS RECEIVABLE, NET
2000 2001
--------------- -------------
Accrued amounts 42,948 47,193
Billed amounts 143,888 180,350
Allowance for doubtful accounts (25,826) (40,781)
--------------- -------------
161,010 186,762
=============== =============
The changes in the allowance for doubtful accounts are as follows:
1999 2000 2001
------------ -------------- --------------
Balance at beginning of year 28,020 29,036 25,826
Bad debt expense 75,162 54,873 60,479
Write-offs (74,146) (58,083) (45,524)
------------ -------------- --------------
Balance at end of year 29,036 25,826 40,781
============ ============== ==============
14. DEFERRED INCOME TAXES AND RECOVERABLE TAXES
At December 31, 2001, TCO had the following deferred and recoverable taxes:
2000 2001
--------------- -------------
Recoverable investment withholding tax - 26,583
Recoverable income and social contribution 47,970 48,507
taxes
Recoverable income and social contribution
taxes on premium (Coverage Participacoes 87,773 65,830
S.A.) - (Note 16)
Deferred income and social contribution taxes 18,853 19,865
Recoverable ICMS tax 17,764 13,355
Other recoverable taxes 1,302 1,698
--------------- -------------
Total 173,662 175,838
--------------- -------------
Short-term 107,380 120,222
Long-term 66,282 55,616
================ =============
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
14. DEFERRED INCOME TAXES AND RECOVERABLE TAXES (Continued)
TCO and its subsidiaries have generated operating income in recent years
and its budgets indicate similar results for future years. Therefore, the
deferred and recoverable taxes are fully realizable.
Deferred tax assets are comprised of the following:
2000 2001
--------------- -------------
Non-deductible provisions:
Allowance for doubtful accounts 7,744 13,866
Contingencies 9,933 4,878
Others 1,176 1,121
--------------- -------------
Total 18,853 19,865
=============== =============
15. PROPERTY, PLANT AND EQUIPMENT, NET
a. COMPOSITION
2000 2001
--------------- -------------
Construction in progress 206,052 168,066
Automatic switching equipment 344,140 445,460
Transmission and other equipment 761,476 841,249
Land 4,888 6,271
Buildings 41,339 43,822
Computer equipment 17,866 39,535
Operation license (concession) 82,484 82,484
Other assets 80,019 83,164
--------------- -------------
Total cost 1,538,264 1,710,051
Accumulated depreciation (454,510) (631,169)
--------------- -------------
1,083,754 1,078,882
=============== =============
b. DEPRECIATION RATES
Depreciation rates applied to property, plant and equipment are as
follows:
%
------------------------------
2000 2001
--------------- -------------
Automatic switching equipment 10.00 10.00
Transmission and other equipment 14.29 14.29
Buildings 4.00 4.00
Operation license (concession) 3.33 6.67
Other assets (excluding land) 5.00 to 20.00 5.00 to 20.00
The exploration right balance started being amortized in 2001 at a 6.67%
annual rate in order to adapt the amortization-period to the concession
term.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
15. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
The Company rents equipment and premises through a number of operating
agreements. Total rent expense incurred under these agreements is as
follows:
1999 2000 2001
---------- -------- ---------
12,510 14,614 15,610
Future minimum rental payments under non-cancelable operating leases with
remaining initial terms in excess of one year at December 31, 2001 are:
2002 15,765
2003 16,395
2004 17,051
2005 17,733
2006 18,442
----------------
Total 85,386
================
16. DEFERRED CHARGES, NET
2000 2001
--------------- -------------
Pre-operating expenditures - NBT 38,998 39,055
Pre-operating expenses amortization (3,908) (7,808)
Other 68 1,734
--------------- -------------
Total 35,158 32,981
=============== =============
Norte Brasil Telecom S.A. (NBT) began its operations at the end of October
1999, covering 11 of the 97 cities within the Company's operating area. As
the Company's activities relating to the rendering of services were
insignificant at December 31, 1999, all expenses incurred until this date
were considered as pre-operating and only subject to amortization from
January 2000.
According to Instruction No. 349 of the CVM (Brazilian Equivalent of the
Securities and Exchange Commission of the U.S.) dated March 6, 2001, the
Company decided on March 28, 2001 to reduce the value of the premium to an
amount, which represents the future tax benefit, since the amortization is
a tax-deductible expense.
The change in the account value is summarized as follows:
2000 2001
--------------- -------------
Premium Coverage Participacoes S.A. 354,786 354,786
Write-down (230,257) (267,013)
--------------- -------------
Future tax benefits 124,529 87,773
Reversal of the provision recorded in 2000
and 2001 (22,105) (21,943)
Monetary correction (14,651) -
--------------- -------------
Tax credit at end of the year 87,773 65,830
=============== =============
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
16. DEFERRED CHARGES, NET (Continued)
In 2001 and 2000, the net amount of the premium and the provision to be
amortized, which represents future tax benefits, was recorded in the
balance sheet as current and noncurrent assets under "deferred taxes
recoverable". The deferred assets amortization and provision reversal are
recorded as a nonoperating result and the corresponding tax credit as
income and social contribution taxes, canceling the operating result
effect.
17. PAYROLL AND RELATED ACCRUALS
2000 2001
--------------- -------------
Salaries and wages 1,394 651
Social charges 5,113 5,729
Accrued benefits 462 469
--------------- -------------
6,969 6,849
=============== =============
18. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
2000 2001
--------------- -------------
Suppliers 223,891 143,797
Payments received on behalf of third parties 4,414 9,275
Other accounts 499 1,242
--------------- -------------
Total 228,804 154,314
--------------- -------------
Short-term 227,757 152,524
Long-term 1,047 1,790
=============== =============
19. INDIRECT TAXES
2000 2001
--------------- -------------
Value-added tax 25,939 35,205
Fistel tax 28,355 37,770
Other taxes on operating revenues 6,708 6,894
--------------- -------------
61,002 79,869
=============== =============
20. DEFERRED TAXES AND INCOME TAXES PAYABLE
2000 2001
--------------- -------------
Income tax payable 68 -
Deferred taxes - liability
Effects of full monetary correction 81,416 64,014
--------------- -------------
Subtotal deferred taxes 81,416 64,014
--------------- -------------
81,484 64,014
--------------- -------------
Short-term 9,838 7,927
Long-term 71,646 56,087
=============== =============
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
21. EMPLOYEES' PROFIT SHARING
2000 2001
--------------- -------------
Interest on own capital for the year 25,111 57,288
Interest on own capital for the prior year 9,841 15,664
Withholding tax on interest on own capital (3,778) (18,828)
Dividends 18,642 52,599
Employees' profit sharing 1,965 2,369
--------------- -------------
51,781 109,092
=============== =============
22. LOANS AND FINANCING
INTEREST AND MONETARY CORRECTION DUE DATE 2000 2001
--------------------------------------------------------------------------------------------------
NATIONAL CURRENCY
BNDES T.J.L.P. plus annual interest from 3.5% to 1/15/2002
4%. and 84,026 192,030
1/15/2008
BNDES UMBNDES variation plus a loan charge from 1/15/2002
BNDES and annual interest from 3.5% to 4% . and
1/15/2008 - 12,648
COMMERCIAL PAPER Annual discount of 19% applied on the
subscription date with Swap of 103.5% of 1/12/2001 186,913 -
CDI.
BRASIL TELECOM S.A. - 5/21/2002 - 2,917
OTHER LOANS Industrial Products Column 20 - FGV 2002 to 1,771 1,707
2008
FOREIGN CURRENCY
Finimp Exchange variation based on the U.S. 10/3/2002
dollar, plus Libor and 0.93% p.a. over e 6,542 11,125
Libor, and 2.47% p.a. 10/30/2002
COMPROR Exchange variation based on the U.S. dollar
plus annual interest of 9.30% 1/7/2002 - 4,447
PREPAYMENT Exchange variation based on the U.S.
dollar, Libor plus interest from 1.75% to 3/14/2002
1.90% p.a. and performance premium ranging and
from 1.20% to 1.30% p.a. 8/15/2002 - 98,174
DEBT ASSUMPTION - Exchange variation based on the U.S. dollar From
FINIMP plus Libor and interest from 0.5% to 2.45% 2/25/2002
p.a. to - 128,937
10/21/2002
LOAN FROM SUPPLIER Exchange variation based on the U.S. dollar
plus annual interest of 6.05%. 11/29/2004 - 3,291
EURO COMMERCIAL Annual discount of 9.5 with exchange
PAPER variation based on the U.S. dollar. 5/18/2001 207,943 -
EXPORT DEVELOPMENT Exchange variation based on the U.S. dollar
CORPORATION - EDC plus semiannual Libor and annual interest 11/22/2005 21,954 61,708
of 3.90%.
---------------------
509,149 516,984
Short-term 490,239 279,507
---------------------
Long-term 18,910 237,477
=====================
Euro Commercial Paper 103% of CDI* 5/18/2001 207,943 -
Export Development U.S. dollar exchange variation and
Corporation - EDC Libor plus 3.90% 11/22/2005 21,954 61,708
Others 456 -
--------------------
509,149 516,984
--------------------
Short-term 490,239 279,507
--------------------
Long-term 18,910 237,477
====================
*
BNDES - National Bank for Economic and Social Development.
UMBNDES - Monetary Index of
TJLP - "Taxa de Juros de Longo Prazo," a long term interest rate, reset
quarterly by the Brazilian Central Bank.
LIBOR - London Interbank Offered Rate.
CDI - "Certificado de Deposito Interbancario," which is the Brazilian
interbank borrowing rate.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
22. LOANS AND FINANCING (Continued)
LIBOR at December 31, 2001 was 2.4%. TJLP, IGP-M , and CDI were 10.0%,
9.9%, and 19.02%, respectively, at December 31, 2001.
Long-term payment schedule:
DUE DATE 2001
-------------- ------------
2003 55,320
2004 66,735
2005 66,735
2006 25,402
2007 21,176
2008 2,109
------------
Total 237,477
============
GUARANTEES:
BANKS GUARANTEES
---------------------------- --------------------------------------------
BNDES - TCO Operators 15% of receivables and CDB (Bank Deposit
Certificate) pledged in the amount of the
next installment due
BNDES - NBT 100% of receivables and CDB pledged in the
amount of the next installment due during
the first year and CDB pledged in the amount
equivalent to two installments due in the
remaining periods
EDC Guarantee from TCO and other subsidiaries
Other loans and financing Guarantee from TCO
The agreements with BNDES and EDC include several covenants. At December
31, 2001, the Company was in compliance with such covenants.
At December 31, 2001, 87% of loans and financing in foreign currency are
hedged against foreign exchange variation through swap contracts.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
23. PROVISION FOR CONTINGENCIES
2000 2001
--------------- -------------
Tax claims 8,721 14,148
Labor claims 654 201
Telebras 53,128 61,634
Others 493 493
--------------- -------------
62,996 76,476
=============== =============
TELEBRAS
This provision corresponds to 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 General Shareholders
Meeting of May 1998, should be charged to the respective holding controlled
by Telegoias Celular S.A. and Telebrasilia Celular S.A.
Local management, based on the understanding that the respective loans were
wrongly allocated at the time of the spin-off, suspended the payments flow
subsequent to the changes in Company's controls. These loans are being
indexed by the IGP-M (Market General Price Index) plus 6% annual interest.
In June 1999, Tele Centro Oeste Celular Participacoes S.A. (parent company)
filed a legal action claiming that the assets related to these obligations
- loans and financing - belong to the Company as well as the respective
accessories, plus compensations for the installments paid.
In November 1999, the Company's management decided to transfer to the
actual holding - Tele Centro Oeste Celular Participacoes S.A., the
liability derived from the loan originally due to Telecomunicacoes
Brasileiras S/A - TELEBRAS and absorbed during the spin-off process.
CIVIL AND LABOR CLAIMS
The provision for labor and civil claims are management's estimates of the
most probable losses in relation to various suits filed by current and
former employees, suppliers, fiscal lawsuits and others.
POTENTIAL LITIGATION
Telegoias, Telems, Telemat, Teleron, Teleacre and Telebrasilia (the "legal
predecessors" of the Company), and Telebras, Telegoias Celular S.A., Telems
Celular S.A., Telemat Celular S.A., Teleron Celular S.A., Teleacre Celular
S.A. and Telebrasilia Celular S.A. are defendants in a number of legal
proceedings and subject to certain other claims and contingencies.
Liability for any claims arising out of acts committed by the legal
predecessors prior to the effective date of the spin-off of the legal
predecessors' cellular assets and liabilities to the Companies will remain
with the legal predecessors, except for those liabilities for which
specific accounting provisions have been assigned to the Companies. Any
claims against the legal predecessors that cannot be settled by them have
received assets which might have been used to settle those claims had they
not been spun off from the legal predecessors.
Under the terms of the breakup of Telebras, liability for any claims
resulting from actions taken by Telebras prior to the effective date of the
breakup remains with Telebras, except for labor and tax claims (in which
case Telebras and the Holding Company are jointly and severally liable) and
any liability for which specific accounting provisions have been assigned
to the Holding Company. Creditors of Telebras may question this allocation
of liability. Management believes that the chances of any claims
materializing and having a significantly adverse financial effect on the
Companies and/or the Holding Company are remote, and therefore no provision
has been made.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
23. PROVISION FOR CONTINGENCIES (Continued)
ICMS ON ACTIVATION FEES
On June 19, 1998 the Secretaries of the Treasury of the individual
Brazilian states (the "State Secretaries") approved an agreement to
interpret existing Brazilian tax law in order to expand the application of
the Imposto sobre Circulacao de Mercadorias e Servicos (Value-Added Tax on
Sales and Services - ICMS). As a result, this tax then covers not only
telecommunications services, but also other services including the
activation of cellular telephones, which were not previously subject to
such tax and the ICMS tax may be applied retroactively for such services
rendered during the last five years.
The Company believes that the attempt by the State Secretaries to extend
the scope of ICMS tax to services which are supplementary to basic
telecommunications services is unlawful because: (i) the State Secretaries
acted beyond the scope of their authority; (ii) their interpretation would
subject to taxation certain services which cannot be considered
telecommunications services; and (iii) new taxes may not be applied
retroactively. In addition, the Company believes that the legal
predecessors of the Company would be liable for any payments made in
connection with any claim resulting from the retroactive application of the
ICMS tax on activation fees for periods prior to 1998. No provision for
such taxes has been made in the accompanying consolidated financial
statements, since the Company does not believe it is probable that such
taxes will be payable for services rendered during the last five years.
There can be no assurance that the Company will prevail in its position
that the new interpretation of the scope of the ICMS tax by the State
Secretaries is unlawful. If the ICMS tax were applied retroactively to
activation fees earned during the past five years, it would generate an
estimated maximum liability of R$ 82,000 and it could have a material
negative impact not only on the financial condition of the Company, but
also on the results of its operations after January 5, 1998.
24. PENSION PLAN
Tele Centro Oeste Celular Participacoes S.A., together with other companies
of the former Telebras System, make payments towards private pension plans
and of medical assistance for retired employees, controlled by Sistel
Social Security Foundation - SISTEL. Up until December 1999, all sponsors
of the plans controlled by SISTEL showed solidarity towards the Benefits
Plan existing at that time. On December 28, 1999, the sponsors of the plans
controlled by SISTEL negotiated conditions for the creation of individual
pension plans per sponsor (PBS-TCO), maintaining the solidarity only for
the participants already assisted by the plan and under such conditions at
January 31, 2000 (PBS-A), resulting in a restructuring proposal on the
Sistel Statute and Regulation which was approved by the Complementary
Pension Department on January 13, 2000.
Due to the discontinuation of the solidarity concept occurred in 1999, Tele
Centro Oeste Celular Participacoes S.A. individually sponsors a Defined
Benefits Retirement Plan PBS-TCO, which covers approximately 1% of the
employees working for the Company at December 31, 2001. Apart from the
supplementation benefit, the Company is participant of a multi-sponsored
plan of medical assistance for retired employees and dependents at a shared
cost (PAMA). The contributions towards plan PBS-TCO are determined based on
actuarial studies prepared by independent actuaries in accordance with
current norms established in Brazil. The cost determination regime is based
on capitalization and the contribution due by the sponsor is 13.5% on
payroll covering the employees who are participating in the plan, from
which 12% is allocated to the costing for plan PBS-TCO and 1.5% for plan
PAMA.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
24. PENSION PLAN (Continued)
For the other 99% of employees from Tele Centro Oeste Celular Participacoes
S.A., there is an individual defined contribution plan - Benefits Plan
TCOPREV, instituted by Sistel in August 2000. The Plan TCOPREV is supported
by contributions made by participants (employees) and by the sponsor which
are credited to individual accounts on behalf of the participants. Tele
Centro Oeste Celular Participacoes S.A. is responsible for the costs
relating to all administrative and maintenance expenses of the plan,
including death and invalidity risks. The employees taking part of the
Defined Benefits Plan (PBS-TCO) were given the option to joint plan
TCOPREV, which was also offered to the employees not taking part of plan
PBS-TCO, as well as to all newly hired employees. The Company's
contributions towards plan TCOPREV are equal to those made by the
participants, up to 8% of the participation salary, according to the
percentage chosen by the participant.
We present below the consolidated position of the provision for the defined
benefits pension plan and medical assistance for retired employees at
December 31, 2001, as well as other information required by the CVM
Instruction No. 371, of December 13, 2000 on such plans.
PBS - TCO
Reconciliation of assets and liabilities at December 31, 2001
COMPANY CONSOLIDATED
--------- --------------
1. Present value of actuarial obligations with cover 501 3,184
2. Present value of actuarial obligations without cover - -
--------- --------------
3. Present value of actuarial obligations 501 3,184
4. Fair market value of the plan assets 762 4,685
--------- --------------
5. Present value of obligations exceeding the (261) (1,501)
fair market value of assets (3 - 4)
6. Net actuarial liabilities / (assets) --------- --------------
a) Net actuarial liabilities / (assets) (261) (1,501)
b) Actuarial liabilities / (assets) already - -
provided for --------- --------------
c) Additional actuarial liabilities / (261) (1,501)
(assets) (a - b) ========= ==============
TCO PREV
Reconciliation of assets and liabilities at December 31, 2001
COMPANY CONSOLIDATED
--------- --------------
1. Present value of actuarial obligations with cover 5,993 33,373
2. Present value of actuarial obligations without cover - -
--------- --------------
3. Present value of actuarial obligations 5,993 33,373
4. Fair market value of the plan assets 5,311 29,564
--------- --------------
5. Present value of obligations exceeding the 682 3,809
fair market value of assets (3 - 4)
6. Net actuarial liabilities / (assets) --------- --------------
a) Net actuarial liabilities / (assets) 682 3,809
b) Actuarial liabilities / (assets) already - -
provided for --------- --------------
c) Additional actuarial liabilities / 682 3,809
(assets) (a - b) ========= ==============
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
24. PENSION PLAN (Continued)
Expenses to be recorded in 2002
COMPANY CONSOLIDATED
--------- --------------
1. Cost of current services (with interest) 1,034 4,173
2. Expected contributions from participants for 2002 - -
3. Interest on actuarial obligations 528 2,996
4. Expected income from assets 591 3,345
5. Amortization costs
a) Actuarial (gains) or losses not recorded - -
b) Cost of past services not recorded - -
c) Increase in unrecorded liabilities - -
d) Total (a+b+c) - -
--------- --------------
6. Total expenses recorded (1-2+3-4+5d) 971 3,824
========= ==============
Actuarial assumptions adopted in the calculations:
Discount rate for the actuarial 11.30% p.a. ( 6.0% real e 5.0% inflation)
obligation:
Expected interest rates on the plan 14.45% p.a. ( 9.0% real e 5.0% inflation)
assets:
Estimated salary increase index: 8.15% p.a. ( 3.0% real e 5.0% inflation)
Estimated benefit increase index: 5.00% p.a. ( 0.0% real e 5.0% inflation)
Biometrics table for general death rate: UP84 with 1 year aggravation
Biometrics table for disability: Disability table
Expected rotation rate: 0.15 / (Service Period + 1)
Possibility of retirement: 100% at the first eligibility to a benefit
from the Plan
The Company has not recognized the adjustments resulting from the
application of the CVM Resolution No. 371 in the financial statements as of
December 31, 2001, which is the adequate procedures.
During 2001, the Company made contributions to the Plan PBS TCO and TCO
PREV in the amount of R$ 2,561 (R$ 2,087 in 2000).
25. SHAREHOLDERS' EQUITY
a. CAPITAL
The authorized capital at December 31, 2001 and 2000 is 700,000,000
thousand shares. The subscribed and paid-in capital at December 31, 2001
corresponds to R$ 588,865 (R$ 386,865 in 2000), represented by
366,463,335,000 shares (364,399,028,000 shares in 2000) with no par
value, distributed as follows (in thousands of shares):
DECEMBER 31, DECEMBER 31,
2000 2001
------------ ------------
Common shares 124,369,031 126,433,338
Preferred shares 240,029,997 240,029,997
------------ ------------
Total 364,399,028 366,463,335
Book value per thousand shares - Corporate 2.459935 2.756551
Law (in R$)
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
25. SHAREHOLDERS' EQUITY (Continued)
a. CAPITAL (Continued)
The preferred shares are entitled to a dividend 6% greater than that of
the common shares. Earnings may be used to increase capital or otherwise
appropriated, consequently such earning would no longer be available as
dividends. Therefore, there is no assurance that preferred shareholders
will receive the 6% premium on undistributed earnings. The unit of one
thousand shares is used because this is the basis for quotation and
trading on the Sao Paulo Stock Exchange.
Under the Brazilian Corporation Law, the number of non-voting shares or
shares with limited voting rights, such as the preferred shares, may not
exceed two-thirds of the total number of shares.
On June 7, 1990, the Board of Directors of Telebras authorized an
increase in Telebras share capital by public offer. During the offer
period the CVM initiated an investigation as to whether Brazilian
securities law and regulations regarding the correct pricing of the new
shares issued had been violated, because the shares were issued at a
discount to equity value per share. After its investigation the CVM
notified the Federal Prosecutor's Office that it believed no violation
occurred since the price was established in line with market prices for
Telebras' shares traded on the Brazilian stock exchanges. Nevertheless,
the Federal Prosecutor decided to pursue the issue through judicial
channels. In April 1998, resolution was reached on the disputed Telebras
capital increase of 1990. In connection with the resolution Telebras
issued 13,718,350 thousand shares of preferred stock.
At a meeting held on June 22, 2001, the Board of Directors of Tele
Centro Oeste Celular Participacoes S.A. decided on the acquisition, at
market value, of up to 28,150,000,000 shares issued by the Company as
follows: 4,750,000,000 common shares and 23,400,000,000 preferred shares
representing up to 10% of outstanding common shares and up to 10% of
outstanding preferred shares, for cancellation or maintenance in
treasury and subsequent disposal, without reducing the capital.
On August 27, 2001, the Extraordinary Shareholders Meeting approved the
Company's capital increase through capitalization of retained earnings
in the amount of R$ 185,382, without the issuance of shares.
On the same date, 2,064,307,557 common shares, amounting to R$16,618,
were issued to BID S.A. in return for the tax benefit derived from the
amortization of the premium reserve.
b. LEGAL RESERVE
Under Brazilian Corporation Law, the Company is required to appropriate
5% of its annual earnings, calculated using Brazilian GAAP, after
absorbing accumulated losses, to a legal reserve, which is restricted as
to distribution. This reserve may be used to increase capital or to
absorb losses, but may not be distributed as dividends.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
25. SHAREHOLDERS' EQUITY (Continued)
c. LONG TERM REVENUE RESERVE
The long-term revenue reserve represents earned but unrealized revenues
resulting from the investments accounted for using the equity method.
The reserve is realized when dividends or interest on shareholders'
equity are received, and other events, according to CVM policies. Upon
realization, the reserves are reversed to retained earnings. Changes in
reserve are outlined as follows:
2000 2001
--------------- -------------
Income reserve 112,073 97,675
Reversal (112,073) (97,675)
Annual reserve 97,675 -
--------------- -------------
Balance at December 31 97,675 -
=============== =============
At December 31, 2001, the Company did not record income reserves as the
compulsory dividends portion did not exceed the realized income.
d. DIVIDENDS/INTEREST ON OWN CAPITAL
Pursuant to its by-laws, Tele Centro Oeste Celular Participacoes S.A. is
required to distribute as dividends, to the extent amounts are available
for distribution, an aggregate amount equal to at least 25% of Adjusted
Net Income (as defined below) for each fiscal year. The annual dividend
distributed to holders of preferred shares (the "Preferred Dividend")
has priority in the allocation of Adjusted Net Income. Remaining amounts
to be distributed are allocated first to the payment of a dividend to
holders of common shares in an amount equal to the Preferred Dividend
and the remainder is distributed equally among holders of preferred
shares and common shares.
For the purposes of the Brazilian Corporation Law, and in accordance
with Tele Centro Oeste Celular Participacoes S.A.'s by-laws, the
"Adjusted Net Income" is an amount equal to Tele Centro Oeste Celular
Participacoes S.A.'s net profits adjusted to reflect allocations to or
from (i) the statutory reserve, (ii) a contingency reserve for
anticipated losses, if any, and (iii) an unrealized revenue reserve, if
any.
Below is the calculation of the minimum amount of dividends that must be
distributed:
2000 2001
--------------- -------------
Year's net income 103,644 208,104
(+) Reversal of long term revenue reserve 112,073 97,675
(-) Long term revenue reserve (97,675) -
(-) Legal reserve (6,467) (10,405)
(+)Adjustment to determine the Corporate Law 18,750 -
calculation basis
--------------- -------------
(=)Adjusted net profit 130,325 295,374
Mandatory dividends (25%) 32,581 73,844
Common shares 11,122 25,477
Preferred shares 21,459 48,367
--------------- -------------
Dividends value per lot of thousand 0.089 0.202
shares - R$ =============== =============
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
25. SHAREHOLDERS' EQUITY (Continued)
d. DIVIDENDS/INTEREST ON OWN CAPITAL (Continued)
In 2001, interest on shareholders' equity of R$40,000 (R$ 0.109353 per lot
of thousand shares) was paid to shareholders as a dividend. This dividend
was paid net of a 15% withholding tax. As approved at a shareholders'
meeting, this dividend was distributed as follows:
2001 2000
-------------------------------
Common shares 13,775 6,569
Preferred shares 26,225 12,676
Withholding tax (6,000) (2,887)
-------------------------------
34,000 16,358
===============================
Additionally, dividends of R$ 40,500 were accrued at December 31, 2001 (R$
18,642 in 2000), to be distributed as follows:
2001 2000
-------------------------------
Common shares 13,932 6,363
Preferred shares 26,568 12,279
-------------------------------
40,500 18,642
===============================
e. TREASURY STOCK
At December 31, 2001, treasury stock represents 336,900,000 preferred
shares and 747,178,000 common shares.
Preferred shares were acquired at a cost ranging from R$ 4.38 to R$ 5.86
per thousand shares.
Common shares were acquired at a cost ranging from R$ 4.24 to R$ 8.50
per thousand shares.
f. RETAINED EARNINGS
The remaining balance of retained earnings, adjusted in accordance with
Article 202 of Law No. 6,404/76, in the amount of R$ 395,133 at December
31, 2001 (R$ 396,673 in 2000), will be used for future investments
according to the capital budget to be presented at the General
Shareholders Meeting.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
26. TRANSACTIONS WITH RELATED PARTIES
2001 2000 1999
-------------------------------------------------------------------
SPLICE SPL CSM
DO BANCO CONSTRUTORA CARTOES
BRASIL CREDIBEL E S.A. TOTAL TOTAL TOTAL
S.A. PAVIMENTADORA
-------------------------------------------------------------------
ASSETS
Cash and cash - - - - - 713 337
equivalents
Short-term investments - 17,353 - - 17,353 6,527 369
Commercial paper 362,310 - - - 362,310 77,743 7,792
Loan agreement - - - - - 2,673 -
LIABILITIES
Suppliers 556 - 22 663 1,241 1,452 200
Interest on own 6,671 - - - 6,671 - -
capital
Dividends 7,505 - - - 7,505 - -
TRANSACTIONS
Income from 39,788 1,250 - - 41,038 11,078 2,081
short-term
investments
Financial expenses 7,850 - - - 7,850 - -
Maintenance services 1,968 - - - 1,968 3,508 276
Other materials - - - 10 10 - -
Acquisition of - - - 920 920 2,121 282
telephone cards
Acquisition of
property, plant and 9,338 - 2,457 - 11,795 5,112 6,231
equipment
The majority shareholder of the Company is BID S.A., which is controlled by
Splice do Brasil, which in turn is under common control with Banco
Credibel, SPL Construtora e Pavimentadora and CSM Cartoes S.A.
The Company and subsidiaries obtain loans in the financial market and
transfer the proceeds to related parties through Debt Assumption Agreements
with the aim of reducing loan costs. The loans obtained are transferred to
related parties at the same rates originally charged plus a premium.
According to a contract entered into between Splice do Brasil S.A. and the
subsidiaries of Tele Centro Oeste Celular Participacoes S.A., technical
assistance services are payable to Splice do Brasil S.A. corresponding at
1% of the net operating income. For the year ended December 31, 2001 the
amount of R$ 1,932 was charged to general and administrative expenses.
All transactions with related parties were carried out in accordance with
the Company's Articles of Incorporation and under normal market conditions.
27. INSURANCE
At December 31, 2001, in the opinion of management, all significant or high
risk assets and obligations were insured.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
28. FINANCIAL INSTRUMENTS
a. FAIR VALUE 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 use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair values.
The amount relating to foreign currency loans indexed at originally
contracted rates corresponds to R$ 307.682 which has been monetarily
adjusted by rates derived from swap contracts. The difference between
the loan amounts and the swap contracts was recorded as other payables
at December 31, 2001. The fair value information as of December 31, 2001
and 2000 presented below is based on pertinent information available to
management as of those dates.
2000 2001
-----------------------------------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
-----------------------------------------------
Loans and financing 509,149 509,149 327,432 326,584
Marketable securities 158,701 158,701 362,310 362,310
CASH, CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, OTHER CURRENT ASSETS,
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Cash, cash equivalents, accounts receivable, other current assets,
accounts payable and accrued expenses represent a reasonable estimate of
their fair market value. The cash equivalents are represented mainly by
short term financial investments. The fair market values of such
investments and other short term investments, as well as the bank
deposits that do not meet the definition of short term investments were
estimated using the rates currently offered for deposits with similar
due dates.
LOANS AND FINANCING
Interest rates currently available for the Companies when issuing debts
with similar conditions were used in order to estimate the fair market
value.
b. RISK FACTORS
The risk factors affecting the Company's financial instruments are the
following:
(i) EXCHANGE RATE RISK
Exchange rate risk relates to the possibility of the Company
computing losses derived from foreign exchange rate fluctuations,
increasing the debt balance of foreign currency loans obtained in
the market and the corresponding financial expenses. In order to
reduce this type of risk, the Company enters into hedge contracts
(swaps of CDI) with financial institutions.
At December 31, 2001, part of the Company's loans and financing were
denominated in U.S. dollars and 87% of such loans and financings
were covered by hedge contracts. The gains or losses resulting from
these hedge contracts are recorded in the statement of operations.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
28. FINANCIAL INSTRUMENTS (Continued)
(ii) INTEREST RATES RISK
Interest rate risk relates to the possibility of the Company
computing losses resulting from interest rate fluctuations,
increasing the debt balances of loans obtained in the market and the
financial expenses. The Company has not entered into hedge contracts
against this risk. However, the Company constantly monitors the
market interest rates in order to assess the need for contracting
derivatives and obtain protection against the risk of interest rate
volatility.
(iii) OPERATING CREDIT RISK
The risk relates to the possibility of the Company computing losses
derived from difficulties in collecting the amounts billed to
customers, represented by cellular equipment dealers and
distributors of prepaid telephone cards. In order to reduce this
type of risk, the Company performs credit analyses supporting the
risk management over collection problems and monitors the accounts
receivable from subscribers, blocking the calling capacity in case
customers fail to pay their debts. With respect to shops and
distributors, the Company maintains individual credit limits based
on the analysis of sales potential, risk history and collection
problem risks.
CREDIT RISK LINKED TO RENDERING OF SERVICES
The credit risk in relation to accounts receivable from cellular
telephone services is diversified.
CREDIT RISK LINKED TO THE SALE OF EQUIPMENT
The Company's policy for selling equipment and distributing prepaid
telephone cards is closely related to the credit risk levels
accepted during the normal course of business. The selection of
partners, the diversification of receivables portfolio, the
monitoring of loan terms, position and request limits established
for dealers, constitution of actual guarantees are procedures
adopted by the Company in order to minimize possible collection
problems with its trading partners.
(iv) FINANCIAL CREDIT RISK
The risk relates to the possibility of the Company computing losses
derived from difficulties in the realization of short-term
investments and hedge contracts. The Company and subsidiaries
minimize the risks associated with these financial instruments by
investing with reputable financial institutions.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP
The Companies' accounting policies comply with the accounting principles
generally accepted in Brazil ("Brazilian GAAP"). The accounting principles
and policies practiced in the United States of America ("US GAAP"), which
differ significantly from Brazilian GAAP, are described below.
a. DIFFERENT CRITERIA FOR CAPITALIZING AND AMORTIZING CAPITALIZED INTEREST
Through December 31, 1993, interest was not capitalized as part of the
individual assets in property, plant and equipment. Instead, it was
capitalized separately and amortized over a time period different from
the useful lives of the related assets. Under US GAAP, capitalized
interest is added to the individual assets and is amortized over their
estimated useful lives. Additionally, until December 31, 1998, Brazilian
GAAP for telecommunications companies required that interest
attributable to construction-in-progress was computed at a rate of 12%
per annum of the balance of construction-in-progress and the portion
which relates to interest on third party loans was credited to financial
expenses based on actual interest costs. The portion relating to its own
capital was credited to capital reserves. Since January 1, 1999, this
practice was not required anymore and CVM Instruction No. 193/96 came to
be used. In 2001, 2000 and 1999, the Company did not capitalize interest
attributable to construction-in-progress for Brazilian GAAP.
Under US GAAP, according to Statement of Financial Accounting Standard
("SFAS") No. 34 "Capitalization of Interest Cost", the interest incurred
on borrowings is capitalized to the extent that borrowings do not exceed
construction-in-progress. The credit is a reduction of interest expense.
Furthermore, the amount of interest capitalized excludes the monetary
gains associated with the borrowing and the foreign exchange gains and
losses on foreign currency borrowings.
b. DIFFERENT CRITERIA FOR CAPITALIZING AND AMORTIZING CAPITALIZED INTEREST
(Continued)
The effects of these different criteria for capitalizing and amortizing
capitalized interest are presented below:
1999 2000 2001
---------- ----------- ---------
CAPITALIZED INTEREST DIFFERENCE
US GAAP CAPITALIZED INTEREST
Interest which would have been capitalized and
credited to income under US GAAP (where
interest incurred on loans from the parent
Company and from third-parties, net of gains
and losses due to monetary variations, except
in years where total loans exceeded total
construction-in-progress, when capitalized
interest is reduced proportionally). 3,709 14,118 16,209
US GAAP difference ---------- ----------- ---------
3,709 14,118 16,209
========== =========== =========
AMORTIZATION OF CAPITALIZED INTEREST DIFFERENCE
Amortization under Brazilian GAAP 6,363 10,926 11,323
Less amortization under US GAAP (2,005) (4,287) (6,325)
---------- ----------- ---------
US GAAP difference 4,358 6,639 4,998
========== =========== =========
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
c. PENSION AND OTHER POST-RETIREMENT BENEFITS
The Company participates in a multi-employer pension plan with respect
to its retired employees and a multiple employer with respect to its
active employees. The Company also participates in multi-employer
post-retirement benefit plan for all of its retired employees and active
employees electing the defined contribution plan. Under Brazilian GAAP,
annual pension contributions are expensed as the annual pension cost,
and no liability for future obligations is recorded. US GAAP requires
accounting for such benefit costs in accordance with SFAS 87 "Employers'
Accounting for Pensions." At December 31, 1999 and 2000, accrued pension
costs of R$ 29,534 and R$ 1,358, respectively were recorded for US GAAP
purposes. See note 30a. During 2000, the Company introduced a defined
contribution plan in which active employees could elect participation in
lieu of participation in the defined benefit pension plan. Employees who
elected participation in the defined contribution plan automatically
lose their right to participate in the post-retirement health care plan.
d. 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.
e. INTEREST EXPENSE
Brazilian GAAP requires that interest be shown as part of the operating
profit. Under US GAAP, interest expense would be shown after the
operating profit and accrued interest would be included in accounts
payable and accrued expenses. Additionally, under Brazilian GAAP,
interest expense may be imputed on capital and included in operating
income. This imputed interest is then reversed from non-operating
income. Under US GAAP, interest is not imputed on capital.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
f. EMPLOYEES' PROFIT SHARING
Brazilian GAAP requires that employees' profit sharing be shown as an
appropriation of the net income for the year. Under US GAAP, the
employees' profit sharing would be included as an operating expense.
g. 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.
h. PRICE-LEVEL ADJUSTMENTS AND US GAAP PRESENTATION
The effects of price-level adjustments have not been eliminated from the
reconciliation with US GAAP, nor are the monetary gains or losses
associated with the various US GAAP adjustments identified separately.
The application of inflation restatement as measured by the UFIR and the
IGP-M represents a comprehensive measure of the effects of price level
changes in the Brazilian economy and, as such, is considered a more
meaningful presentation than the historical cost-based financial
reporting for both Brazilian and US accounting purposes.
i. INCOME TAXES
For Brazilian GAAP, the deferred tax charges relating to the deferred
income tax effects of indexation adjustments for 2000 and 1999, were
recorded directly against shareholders' equity. Under U.S. GAAP, for
purposes of financial statements, the effects of the indexation
adjustments made in 2000 and 1999 on the deferred income tax, would be
charged to the income and social contribution taxes in the consolidated
statements of operations.
j. EARNINGS PER SHARE
In 2001, 2000, and 1999, the Brazilian GAAP computation of earnings per
share is based on shares outstanding at year end, and does not
distinguish between common and preferred shares. Under U.S. GAAP
Statement of Financial Accounting Standards No. 128, "Earnings per
Share", the computation is based on the weighted average shares
outstanding during the year, excluding treasury stock.
k. DEFERRED TAXES
The deferred income tax liability resulting from the indexation of
permanent assets of R$ 23,956 in 2000 and R$ 46,551 in 1999 was charged
directly to shareholders' equity in accordance with Brazilian GAAP,
whereas for U.S. GAAP the charge would be to income for the year. The
deferred tax effect related to previously recorded indexation of
permanent assets amount to R$ 17,403, R$ 12,901 and 9,074 in 2001, 2000
and 1999, respectively, and was charged directly to the income
statement.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
l. VALUATION OF LONG-LIVED ASSETS
For US GAAP, effective January 1, 1996, the Companies applied SFAS No
121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." According to this standard, the
Companies periodically evaluate the carrying value of long-lived assets
to be held and used, when events and circumstances warrant such review.
The carrying value of long-lived assets is considered impaired when the
anticipated undiscounted cash flow from assets is separately
identifiable and is less than their carrying value. In that event, a
loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the assets. The application of this
standard has not had a material effect on the Companies' results or
financial condition.
m. 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 certain subsidiaries.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities". This statement became effective in
1999 and requires costs of start-up activities and organization cost to
be expensed as incurred.
Thus, the adjustment to shareholders' equity in 2001 of R$ 32,981 (R$
35,158 in 2000) was recorded for US GAAP purposes.
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. Beginning in 2000, there were no differences
regarding the revenue recognition criteria between Brazilian GAAP and US
GAAP because the Companies ceased charging activation fees.
o. RETAINED EARNINGS
For Brazilian GAAP, a company formed as a result of a spin-off may have
retained earnings on its balance sheet if the parent company's
shareholders' resolution for the spin-off allocates retained earnings
from the parent company to the new company. Under US GAAP, "retained
earnings" allocated in the spin-off would not be considered historical
retained earnings, since such amount would represent capital allocated
from the parent company and would be described as "distributed capital."
As a result of the May 22, 1998 spin-off, the Company was allocated
distributed capital of R$ 447,049.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
p. PREMIUM - COVERAGE PARTICIPACOES S.A.
As discussed in note 16, in 1999 the Company recognized an asset for
Brazilian GAAP purposes of R$ 354,786, and the related amortization of
R$ 5,913, as a result of an intangible asset created when BID S.A.
purchased the controlling interest of the Holding Company, and
subsequently pushed the asset down to the Holding Company. For US GAAP
purposes, these amounts were excluded from net equity and net income in
1999. In 2000 and 2001, as a result of a change in Brazilian accounting
principle, only the future tax benefits of the transaction could be
considered as an asset. Under Brazilian GAAP the amortization of the
premium is recorded as an expense in the net nonoperating results with
an equal offsetting reduction of the tax provision. Under US GAAP only
the current and deferred provision is affected. Also since 2000, the
future amortization deductions of this amount became utilizable for tax
purposes. Therefore, for US GAAP purposes, in accordance with EITF
94-10, the future tax benefits resulting from transactions with
shareholders were recognized as an asset but are not included in the
Company's income statement, but rather in equity.
q. AMORTIZATION OF CONCESSION
For Brazilian GAAP purposes, the amortization period of the concession
(license) for the Band B Company, Norte Brasil Telecom S.A. is 30 years
in 2000, which included an additional 15 years assuming renewal by
Anatel. For US GAAP purposes, the amortization period of 15 years
includes only the initial term of the concession.
In 2001, the Company changed the amortization period to 15 years with
the aim of conforming the Brazilian GAAP treatment with the US GAAP
treatment.
r. INTEREST ON OWN CAPITAL
For Brazilian GAAP purposes, the interest on one's own capital is
considered a financial expense in operating income, and then
reclassified to equity as a dividend. For US GAAP purposes, interest on
one's own capital directly reduces equity as a dividend.
s. INVESTMENTS IN MARKETABLE SECURITIES
Under Brazilian GAAP, marketable securities are valued based on
historical cost plus accrued interest. US GAAP requires securities be
valued in accordance with SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities". All the marketable securities would be
considered available-for-sale under SFAS 115, however since the fair
value equals the carrying value there is no adjustment to equity.
t. DERIVATIVES AND HEDGING ACTIVITIES
As of January 1, 2001, for US GAAP purposes, the Company adopted
Financial Accounting Standards Board Statement No.133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Statement 133) which was
issued in June, 1998 and its amendments Statements 137, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE EFFECTIVE
DATE OF FASB STATEMENT NO. 133 AND 138, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES issued in June 1999 and June
2000, respectively (collectively referred to as Statement 133).
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
u. DERIVATIVES AND HEDGING ACTIVITIES--continued
As a result of adoption of Statement 133 for US GAAP purposes, the
Company calculated the fair value of its foreign currency swaps
agreements. The difference between fair value and book value is not
significant, so no adjustment was made in the financial statements.
v. DEBT ASSUMPTION AGREEMENTS
The Company and subsidiaries obtain loans in the financial market and
transfer the proceeds to related parties through Debt Assumption
Agreements. In accordance with Brazilian GAAP, the resulting balance
sheet amounts were set-off, but for US GAAP purposes they have been
restated in the balance sheet.
RECONCILIATION OF THE INCOME DIFFERENCES BETWEEN US AND BRAZILIAN GAAP
1999 2000 2001
---------- ----------- ---------
Net income as reported.......................... 99,588 103,644 178,587
Different criteria for determining:
Capitalized interest......................... 3,709 14,118 16,209
Amortization of capitalized interest......... 4,358 6,639 4,998
Activation income deferral................... (4,048) - -
Amortization of the activation income deferral 18,986 1,024 -
Costs of start-up activities and others...... (32,042) (3,116) 2,177
Premium amortization......................... 5,913 - -
Pension benefits - SFAS 87 adjustments ...... (29,534) 28,186 1,990
Amortization of Concession................... - (2,746) -
Items posted directly to equity
Deferred tax on full indexation.............. (46,551) (23,956) -
Effects of the above adjustments on deferred 11,815 (14,926) (8,627)
taxes........................................
Effects of the above adjustments on minority 387 (4,096) (840)
shares....................................... ---------- ----------- ---------
US GAAP net income.............................. 32,581 104,771 194,494
========== =========== =========
EARNINGS PER THOUSAND SHARES ACCORDING TO US
GAAP
Net income applicable to preferred shares 21,367 70,375 130,449
Net income applicable to common shares 11,214 34,396 64,045
Net income ---------- ----------- ---------
32,581 104,771 194,494
Basic and fully diluted earnings per thousand shares
in R$:
Preferred 0.10 0.29 0.54
Common ========== =========== =========
0.09 0.28 0.51
========== =========== =========
Weighted average number of shares outstanding
(thousands) 223,591,641 240,029,997 239,964,678
Preferred 124,369,031 124,369,031 124,882,040
Common
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
RECONCILIATION OF THE SHAREHOLDERS' EQUITY DIFFERENCES BETWEEN US AND BRAZILIAN GAAP
2000 2001
------------ -----------
Shareholders' equity as reported ............... 1,042,172 1,126,432
Different criteria for:
Capitalized interest ....................... (48,358) (32,148)
Amortization of capitalized interest ....... 22,199 27,197
Activation income deferral ................. (32,655) (32,655)
Amortization of the activation income deferral....... 32,655 32,655
Donations received ......................... (130) (130)
Costs of start-up activities and others..... (35,158) (32,981)
Pension benefits - SFAS 87 adjustments...... (1,348) 642
Amortization of concession (2,746) (2,746)
Effects of the above adjustments on deferred taxes... 20,343 11,716
Minority interests ......................... 3,149 2,309
------------ -----------
Shareholders' equity according to US GAAP ...... 1,000,123 1,100,291
Additional information: ============ ===========
Total assets under US GAAP.................... 2,113,001 2,389,361
------------ -----------
Property, plant and equipment................. 1,489,906 1,677,904
Accumulated depreciation...................... (432,310) (606,718)
------------ -----------
Net property, plant and equipment............. 1,057,596 1,071,186
============ ===========
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP
Balances at December 31, 1999................... 814,623
Recoverable taxes on premium - Coverage
Participacoes S.A............................. 118,616
Net income...................................... 104,771
Interest on own capital/dividends............... (37,887)
------------
Balances at December 31, 2000................... 1,000,123
Payment to shareholders' related to premium (5,485)
utilization Treasury stock.................... (6,826)
Dividends to minority interest of subsidiaries.. (1,516)
Net income...................................... 194,494
Interest on own capital/dividends............... (80,500)
------------
Balances at December 31, 2001................ 1,100,291
============
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP
a. PENSION PLAN
The Company and its subsidiaries, except for Norte Brasil Telecom S.A.,
together with substantially all of the other companies in the former
Telebras group, participate in a multi-employer defined benefit pension
plan and other post-retirement benefit plans administered by the
FUNDACAO SISTEL DE SEGURIDADE SOCIAL ("Sistel"), a minority shareholder.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP (Continued)
a. PENSION PLAN (Continued)
Effective 2001, the plan was modified and changed into a multiple
employer pension plan with respect to active employees. The plan assets
and liabilities related to active employees were transferred into a new
plan. The benefits remained unchanged. The post retirement benefit plans
remained as unchanged multi-employer plans. Also during 2001, the active
employees were able to elect between participation in this plan, or a
defined contribution plan.
Substantially all of Company's employees are covered by these plans. The
Company contributed R$ 2,136 and R$ 1,519 in 1999 and 1998,
respectively, in respect to pension fund contributions. The Company
contributed R$ 2,561 in 2001 (R$ 2,087 in 2000) with respect to post
retirement plans.
In 1999, Sistel approved changes to the plan statutes resulting in the
break up of plan assets and liabilities related to the active
participants of each sponsor. Sistel did not break up plan assets and
liabilities related to inactive participants and, thus, the Company will
continue to sponsor the Sistel plan for such inactive participants.
The pension benefit is generally defined as the difference between (i)
90% of the retiree's average salary during the last 36 months indexed to
the date of retirement and (ii) the value of the retirement pension paid
by the Brazilian social security system. For retired employees the
initial pension payment is subsequently adjusted upwards to recognize
cost of living increases and productivity awards granted to active
employees. In addition to the pension supplements, post-retirement
health care and life insurance benefits are provided to eligible
pensioners and their dependents.
Contributions to the plans are based on actuarial studies prepared by
independent actuaries. The actuarial studies are revised periodically to
identify whether adjustments to the contributions are necessary.
The change in plans assets and benefit obligation plan and the related
actuarial assumptions are as follows:
CHANGE IN PLAN ASSETS
DEFINED BENEFIT PENSION
----------------------------
2000 2001
------------- -------------
Fair value of plan assets at beginning 17,518 2,964
of year
Actual return on plan assets 8,267 339
Sponsors' contributions 2,862 164
Expenses and distributions (201) (122)
Effect of settlement - (39)
Assets transferred to defined (25,482) (1,322)
contribution plan ------------- -------------
Fair value of plan assets at end of year 2,964 1,984
============= =============
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP (Continued)
a. PENSION PLAN -- Continued
CHANGE IN BENEFIT OBLIGATIONS
DEFINED BENEFIT PENSION
----------------------------
2000 2001
------------- -------------
Benefit obligation at beginning of year 35,056 2,333
Service cost 2,643 111
Interest cost 3,950 263
Actuarial gains (8,195) 72
Benefits and expenses paid (201) (122)
Curtailment (10,629) (1,796)
Settlement (20,291) (38)
------------- -------------
Benefit obligation at end of year 2,333 823
============= =============
COMPONENTS OF ANNUAL PENSION COST
2000 2001
------------- -------------
Net service cost 1,558 80
Interest cost 3,950 263
Expected return on assets (2,645) (435)
Amortization of unrecognized gain (703) (102)
Amortization of initial transition 813 16
obligation ------------- -------------
Net periodic pension cost 2,973 (178)
============= =============
The weighted-average actuarial assumptions, as determined by actuaries,
were as follows:
2000 2001
------------- -------------
Discount rate for determining projected 11.30% 11.30%
benefit obligations
Rate of increase in compensation levels 8.15% 8.15%
Expected long-term rate of return on 14.45% 14.45%
plan assets
In 2001, for employees who elected to participate in the defined
contribution plan, pension plan assets of R$ 1,322 (R$ 25,482 in 2000)
were transferred to the employee's account in the defined contribution
plan. Under the provisions of Statement of Financial Accounting Standard
No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," the effects
of employees electing to withdraw from the defined benefit plan in order
to participate in the defined contribution plan constitutes a
curtailment which resulted in the recognition of a gain of R$ 1,683 (R$
3,512 in 2000) to the Company. Additionally, the transference of plan
assets to the defined contribution plan constitutes a settlement, which
also resulted in the recognition of a gain of R$ 25 (R$ 23,198 in 2000)
to the Company.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP (Continued)
a. PENSION PLAN -- Continued
2001
--------------------------------------------------------------------------------------
After
Before Curtailment
Curtailment Effect of Effect of and
And Curtailment Settlement Settlement
Settlement
------------------------------------------------
Actuarial present value of benefit
obligations:
Vested benefit obligation (524) - - (524)
Accumulated benefit obligation (723) - - (723)
Projected benefit obligation (2,657) 1,796 38 (823)
Plan assets at fair value 2,022 - (38) 1,984
------------------------------------------------
Funded status (635) 1,796 - 1,161
Unrecognized net gain (560) - 25 (535)
Unrecognized transition 129 (113) - 16
obligation
------------------------------------------------
Accrued pension cost recognized for
US GAAP (1,066) 1,683 25 642
------------------------------------------------
2000
--------------------------------------------------------------------------------------
After
Before Curtailment
Curtailment Effect of Effect of and
And Curtailment Settlement Settlement
Settlement
------------ ------------ ---------- -----------
Actuarial present value of benefit
obligations:
Vested benefit obligation (2,938) - 1,771 (1,166)
Accumulated benefit obligation (22,111) - 20,291 (1,820)
Projected benefit obligation (33,252) 10,629 20,291 (2,333)
Plan assets at fair value 28,445 - (25,482) 2,964
------------------------------------------------
Funded status (4,807) 10,629 (5,191) 631
Unrecognized net gain (30,512) - 28,389 (2,124)
Unrecognized transition 7,262 (7,117) - 145
obligation
------------------------------------------------
Accrued pension cost recognized for
US GAAP (28,057) 3,512 23,198 (1,348)
------------------------------------------------
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP (Continued)
b. CONCENTRATION OF RISK
Credit risk with respect to trade accounts receivable from third parties
is diversified. Although collateral is not required, the Companies
continually monitor the level of trade accounts receivable and limit the
exposure to bad debts by cutting access to the telephone network if any
invoice is fifteen days past-due. Exceptions include telephone services
that must be maintained for reasons of safety or national security.
In conducting their businesses, the Companies are fully dependent upon
the cellular telecommunications concession as granted by the Federal
Government.
Approximately 25% of all full-time employees are members of state labor
unions associated with either the Federacao NACIONAL DOS TRABALHADORES
EM TELECOMUNICACOES ("Fenattel"), or with the FEDERACAO INTERESTADUAL
DOS TRABALHADORES EM TELECOMUNICACOES ("Fittel"). The Companies
negotiate new collective labor agreements every year with the local
unions. The collective agreements currently in force expire in November
2002.
There is no concentration of available sources of labor, services,
concessions or rights, other than those mentioned above, that the
Company believes could, if suddenly eliminated, severely impact the
Companies' operations.
c. SWAPS
At December 31, 2001 and 2000 the Company had foreign currency swaps
agreements in order to reduce this type of risk. The fair values of the
Company's foreign currency swap contracts were estimated based on quoted
market prices of comparable contracts, and at December 31, 2001 and 2000
were substantially the same as book value.
d. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial
statements. The adoption of SAB 101 did not have a material effect on
the Company's results of operations and financial position.
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS 141 requires that all business
combinations be accounted for by the purchase method of accounting and
changes the criteria for recognition of intangible assets acquired in a
business combination. The provisions of SFAS 141 apply to all business
combinations initiated after June 30, 2001. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized; however, these assets must be reviewed at least annually for
impairment. Intangible assets with finite useful lives will continue to
be amortized over their respective useful lives. The standard also
establishes specific guidance for testing for impairment of goodwill and
intangible assets with indefinite useful lives. The provisions of SFAS
142 will be effective for the Company's fiscal year 2002. However,
goodwill and intangible assets acquired after June 30, 2001 are subject
immediately to the non-amortization provisions of SFAS 142. The Company
does not expect that the adoption of SFAS 141 and 142 will have a
material effect on its financial position or results of operations.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP (Continued)
d. RECENT ACCOUNTING PRONOUNCEMENTS--continued
In June of 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," on the accounting for obligations associated
with the retirement of long-lived assets. SFAS 143 requires a liability
to be recognized in the financial statements for retirement obligations
meeting specific criteria. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company believes that adoption of
this statement will not have a significant impact on its financial
position or results of operation.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting
model for long-lived assets to be disposed of. Among other provisions,
the new rules change the criteria for classifying an asset as
held-for-sale. The standard also broadens the scope of businesses to be
disposed of that qualify for reporting as discontinued operations, and
changes the timing of recognizing losses on such operations. The
provisions of SFAS 144 will be effective for the Company's fiscal year
2002 and will be applied prospectively. The Company believes that
adoption of this statement will not have a significant impact on its
financial position or results of operation.
31. SUBSEQUENT EVENTS (UNAUDITED)
In order to rationalize the corporate structure of the Company and its
subsidiaries, a reorganization was carried out by means of the merger of
Telebrasilia Celular S.A. on April 26, 2002 by Tele Centro Oeste Celular
Participacoes S.A., taking advantage of the administrative and
commercial synergies in place and concentrating the liquidity of listed
companies' shares in a sole company, thereby reducing capital cost. The
terms and conditions of this restructuring were negotiated by both
companies' management in a Special General Meeting also held on April
26, 2002, which approved that the substitutions were made based on the
shareholders' equity at book value with the delivery of preferred shares
only, even to common shareholders. This merger was subject to the
authorization by the National Telecommunications Agency - ANATEL, and
restructuring was approved by Act NO 24991, of April 23, 2002.
EXHIBIT INDEX
1.1 By-laws of the Holding Company previously filed with the Holding
Company's registration statement on September 18, 1998 and
incorporated herein by reference.
1.2 Amendment to the Charter of the Holding Company previously filed
with the Holding Company's registration statement on September
18, 1998 and incorporated herein by reference.
2.1 Deposit Agreement dated as of July 27, 1998 between the Holding
Company and The Bank of New York, previously filed with the
Holding Company's registration statement on September 18, 1998
and incorporated herein by reference.
4.1 Standard Concession Agreement for Mobile Cellular Service
(original and English translation), previously filed with the
Holding Company's registration statement on September 18, 1998
and incorporated herein by reference.
4.2 Cellular Service Authorization Agreement entered into and between
the Brazilian Government, through Anatel, and Tele Centro
Oeste/Inepar Ltda., currently Norte Brasil Telecom S.A., on
November 27, 1998, previously filed with the Holding Company's
annual report on July 16, 2001 and incorporated herein by
reference.
4.3 Consent of Ernst & Young Auditores Independentes S.C.