FORM 20-F
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 2003
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-14489
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TELE CENTRO OESTE CELLULAR HOLDING COMPANY
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
THE FEDERATIVE REPUBLIC OF BRAZIL
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
SCS, QUADRA 2, BLOCO C, 226, 7 ANDAR
70319-900 BRASILIA, DF, BRAZIL
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
--------------------
SECURITIES REGISTERED OR TO BE REGISTERED
PURSUANT TO SECTION 12(B) OF THE ACT.
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS: WHICH REGISTERED:
Preferred Shares, without par value New York Stock Exchange*
American Depositary Shares (as evidenced New York Stock Exchange
by American Depositary Receipts), each
representing 3,000 shares of Preferred Stock
----------
* Not for trading purposes, but only in connection with the registration on the
New York Stock Exchange of American Depositary Shares representing those
preferred shares.
--------------------
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
--------------------
The number of outstanding shares of each class of stock of Tele Centro
Participacoes S.A., as of December 31, 2002.
126,433,338,109 SHARES OF COMMON STOCK
252,766,698,473 SHARES OF PREFERRED STOCK
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
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS...............1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.............................1
ITEM 3. KEY INFORMATION.....................................................1
ITEM 4. INFORMATION ON THE COMPANY.........................................11
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.......................31
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.........................41
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS..................47
ITEM 8. FINANCIAL INFORMATION..............................................47
ITEM 9. THE OFFER AND LISTING..............................................54
ITEM 10. ADDITIONAL INFORMATION.............................................57
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........73
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.............74
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES....................74
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS........................................................75
ITEM 15. CONTROLS AND PROCEDURES............................................75
ITEM 16. [RESERVED].........................................................75
PART III
ITEM 17. FINANCIAL STATEMENTS...............................................75
ITEM 18. FINANCIAL STATEMENTS...............................................75
ITEM 19. EXHIBITS...........................................................75
INTRODUCTION
All references in this annual report to:
o "Tele Centro Oeste Celular Participacoes S.A." and "TCO" are to Tele
Centro Oeste Celular Participacoes S.A.;
o "our company," "our," "we" and "us" are to TCO and its subsidiaries
collectively;
o "Brazilian government" are to the federal government of the Federative
Republic of Brazil;
o "REAL," "REAIS" or "R$" are to Brazilian REAIS, the official currency
of Brazil;
o "U.S.$," "dollars" or "U.S. dollars" are to United States dollars;
o "ADRs" are to the American Depositary Receipts evidencing our ADSs;
o "ADSs" are to our American Depositary Shares, each representing 3,000
shares of our preferred shares;
o "Commission" are to the U.S. Securities and Exchange Commission;
o "CVM" are to the COMISSAO DE VALORES MOBILIARIOS, the Brazilian
securities commission;
o "Brazilian Central Bank," "Central Bank of Brazil" or "Central Bank"
are to the BANCO CENTRAL DO BRASIL, the Brazilian central bank;
o "General Telecommunications Law" are to LEI GERAL DE TELECOMUNICACOES,
as amended, which regulates the telecommunications industry in Brazil;
o "Brazilian corporate law" and "Brazilian corporation law" are to Law
No. 6,404 of December 1976, as amended;
o "Anatel" are to AGENCIA NACIONAL DE TELECOMUNICACOES - ANATEL, the
Brazilian telecommunication regulatory agency;
o "Telebras" are to Telecomunicacoes Brasileiras S.A. - TELEBRAS;
o "SMC" are to SERVICO MOVEL CELULAR (Mobile Cellular Service), a system
under which Anatel granted concessions to provide mobile service in a
specific frequency range; and
o "SMP" are to SERVICO MOVEL PESSOAL (Personal Cellular Service), a
service rendered pursuant to a new legislation that authorizes
wireless companies to provide wireless services.
TCO's subsidiaries are: Telegoias Celular S.A., or Telegoias; Telemat
Celular S.A., or Telemat; Telems Celular S.A., or Telems; Teleron Celular S.A.,
or Teleron; Teleacre Celular S.A, or Teleacre; and Norte Brasil Telecom, S.A.,
or NBT. TCO also controls TCO IP, an unlisted company created to deliver general
telecommunications services both nationally and internationally, such as
multimedia telecommunications and information services. TCO IP was classified as
a service provider by Anatel. On April 26, 2002, TCO approved the merger of
Telebrasilia Celular S.A., or Telebrasilia, formerly a subsidiary of TCO, into
our company and the consequent transfer of the concession to explore mobile
cellular services previously held by Telebrasilia.
On April 25, 2003, Telesp Celular Participacoes S.A., or TCP, acquired
61.10% of the voting capital stock of TCO for approximately R$1,505 million,
corresponding to R$19.48719845 per each lot of 1,000 shares acquired. The
agreement also included the acquisition of TCO's subsidiaries, including NBT.
TCP has announced that it will launch, in the second quarter of 2003, a tender
offer for the voting shares of TCO, as legally required by the acquisition of
the control of TCO. The price per share to be offered is equal to 80% of the
price paid to the controlling shareholders. After the acquisition and the tender
offer, TCP expects to incorporate TCO shares and ADSs.
Unless otherwise specified, data relating to the Brazilian
telecommunications industry included in this annual report was obtained from
Anatel.
The "Annex A--Glossary of Telecommunications Terms" that begins on page A-1
provides the definition of certain technical terms used in this annual report.
PRESENTATION OF FINANCIAL INFORMATION
Our consolidated financial statements as of December 31, 2002 and 2001 and
for the years ended December 31, 2002, 2001 and 2000 were prepared in accordance
with generally accepted accounting principles in Brazil, or Brazilian GAAP,
which differs in certain significant respects from generally accepted accounting
principles in the United States, or U.S. GAAP. Note 29 to our financial
statements appearing elsewhere in this annual report describes the principal
differences between the Brazilian GAAP and U.S. GAAP as they relate to us, and
provides a reconciliation to U.S. GAAP of net income/loss and shareholders'
equity. These consolidated financial statements have been audited by Ernst &
Young Auditores Independentes S.C.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. Certain information included in this annual
report, principally in "Item 3.D--Risk Factors," "Item 4--Information on the
Company" and "Item 5--Operating and Financial Review and Prospects," contain
information that is forward-looking, including but not limited to:
o statements concerning our operations and prospects;
o the size of the Brazilian telecommunications market;
o estimated demand forecasts;
o our ability to secure and maintain telecommunications infrastructure
licenses, rights-of-way and other regulatory approvals;
o our strategic initiatives and plans for business growth;
o industry conditions;
o our funding needs and financing sources;
o network completion and product development schedules;
o expected characteristics of competing networks, products and services;
and
o other statements of management's expectations, beliefs, future plans
and strategies, anticipated developments and other matters that are
not historical facts.
Forward-looking statements may also be identified by words such as
"believe," "expect," "anticipate," "project," "intend," "should," "seek,"
"estimate," "future" or similar expressions. Forward-looking information
involves risks and uncertainties that could significantly affect expected
results. The risks and uncertainties include, but are not limited to:
o the short history of our operations as an independent, private-sector
entity and the introduction of competition to the Brazilian
telecommunications sector;
o the cost and availability of financing;
o uncertainties relating to political and economic conditions in Brazil;
o inflation and exchange rate risks;
o the Brazilian government's telecommunications policy; and
o the adverse determination of disputes under litigation.
We undertake no obligation to update publicly or revise any forward-looking
statements because of new information, future events or otherwise. In light of
these risks and uncertainties, the forward-looking information, events and
circumstances discussed in this annual report might not occur. Our actual
results and performance could differ substantially from those anticipated in our
forward-looking statements.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
You should read the selected financial data presented below together with
our consolidated financial statements and the notes thereto. Additionally, Ernst
& Young Auditores Independentes S.C. audited our consolidated financial
statements and their report appears elsewhere in this annual report.
ACCOUNTING CONSEQUENCES OF THE BREAKUP OF TELEBRAS
At the May 22, 1998 Telebras shareholders' meeting, the shareholders
established the shareholders' equity of each New Holding Company formed as a
result of the Breakup of Telebras, 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 TCO, in addition to its investment in
TCO's subsidiaries, resulted in an increase of R$21.2 million compared to our
company's historical divisional equity. The amount of distributable retained
earnings of TCO includes retained earnings allocated to TCO in the Breakup of
Telebras.
As of December 31, 2002, minority shareholders directly and indirectly
owned 2.93% of the share capital of Telegoias, 2.44% of the share capital of
Telemat, 1.55% of the share capital of Telems, 2.79% of the share capital of
Teleron, 1.65% of the share capital of Teleacre and 1.67% of the share capital
of NBT.
BRAZILIAN GAAP AND U.S. GAAP
Our consolidated financial statements are prepared in accordance with
Brazilian GAAP, which differs in certain material respects from U.S. GAAP. See
Note 29 to our 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, 2002 and 2001, and net income
for the years ended December 31, 2002, 2001 and 2000.
PRESENTATION OF 1998 STATEMENT OF OPERATIONS
Our company's consolidated statement of operations for the year ended
December 31, 1998 reflects the operations of each of TCO's subsidiaries for the
full year 1998 and the operations of TCO from February 28, 1998, which is the
effective date of TCO's establishment in the Breakup of Telebras, to December
31, 1998.
CHANGES IN ACCOUNTING METHODOLOGY IN 1999, 2000 AND 2001
Our 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 as of December 31, 2000
purchasing power, all in accordance with Brazilian GAAP using the integral
restatement method (CORRECAO MONETARIA INTEGRAL). We used the general price
index-market, or the IGP-M (INDICE GERAL DE PRECOS -MERCADO), to prepare our
consolidated financial statements and the selected financial data 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 2000, 2001 and 2002." 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 our consolidated statements of
operations have been allocated to other net operating income in our consolidated
statements of operations and the income statement data presented below. See Note
2(b) to our consolidated financial statements.
Our consolidated financial statements as of December 31, 1999 and 2000 and
for the years then ended have been fully indexed using the integral restatement
method. No indexation adjustments were applied to calculate 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.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
(THOUSANDS OF REAIS, EXCEPT PER-SHARE DATA) (1)
INCOME STATEMENT DATA:
BRAZILIAN GAAP
Net operating revenue 637,406 666,660 930,646 1,248,131 1,561,308
Cost of services rendered and cost of products sold (260,327) (326,514) (532,163) (663,158) (779,480)
---------- ---------- ---------- ---------- ----------
Gross income 377,079 340,146 398,483 584,973 781,828
Operating expenses:
Selling expenses (99,093) (118,592) (126,163) (195,020) (218,327)
General and administrative expenses (46,289) (64,539) (78,420) (110,300) (142,319)
Other net operating expense (953) (14,020) ( 9,618) (4,513) (3,828)
---------- ---------- ---------- ---------- ----------
Operating income before net financial result 230,744 142,995 184,282 275,140 417,354
Net interest expense ........................... (69,711) (47,640) (30,063) (43,471) (90,669)
---------- ---------- ---------- ---------- ----------
Operating income................................ 161,033 95,355 154,219 231,669 326,685
Net nonoperating expense........................ (20,575) (6,055) (19,539) (25,668) (19,732)
Employees' participation 1,271 1,866 1,878 2,346 3,103
---------- ---------- ---------- ---------- ----------
Income before income taxes and minority interests...
139,187 87,434 132,802 203,655 303,850
Income and social contribution taxes............ 40,206 29,857 40,159 56,501 (93,799)
---------- ---------- ---------- ---------- ----------
Income before minority interests................ 98,981 57,577 92,643 147,154 210,051
Minority interests.............................. 24,076 11,531 19,980 13,864 408
---------- ---------- ---------- ---------- ----------
Reversal of interest on own capital............. 91,749 53,542 30,981 45,297 94,636
Net income...................................... 166,654 99,588 103,644 178,587 305,094
========== ========== ========== ========== ==========
U.S. GAAP
Net income...................................... 164,000 32,581 104,771 194,494 287,415
========== ========== ========== ========== ==========
Net profit per 1,000 shares outstanding (REAIS). 0.49 0.09 0.29 0.53 0.78
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 2001 2002
---------- ---------- ----------
(R$ MILLION)
CASH FLOW DATA:
BRAZILIAN CORPORATE LAW METHOD
Cash flows from operating activities....... 231,842 424,988 563,571
Cash flows from investing activities....... (199,667) (391,475) (505,800)
Cash flows from financing activities....... 348,524 (168,495) (225,905)
AT DECEMBER 31,
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
BALANCE SHEET DATA: (THOUSANDS OF REAIS) (1)
BRAZILIAN GAAP
Property, plant and equipment, net 874,262 994,531 1,083,754 1,078,882 1,035,518
Total assets 1,224,227 1,819,120 2,154,909 2,240,325 2,506,472
Loans and financing 56,256 143,828 509,149 516,984 627,780
Shareholders' equity 799,138 1,230,628 1,042,172 1,126,432 1,310,691
U.S. GAAP
Property, plant and equipment, net 819,280 947,615 1,057,596 1,071,186 1,046,173
Total assets 1,192,699 1,426,558 2,113,001 2,389,361 2,468,537
Loans and financing 56,256 143,828 509,149 694,339 627,780
Shareholders' equity 758,374 814,623 1,000,123 1,100,291 1,265,284
------------------
(1) Information is presented in constant REAIS as of December 31, 2000 and nominal REAIS as of December 31,
2001 and 2002.
EXCHANGE RATES
There are two legal exchange markets in Brazil:
o the commercial rate exchange market, and
o the floating rate exchange market.
Most trade and financial foreign-exchange transactions, including
transactions relating to the purchase or sale of preferred shares or the payment
of dividends, are carried out on the commercial market at the applicable
commercial market rate. Purchase of foreign currencies in the commercial market
may be carried out only through a Brazilian bank authorized to buy and sell
currency in that market. In both markets, rates are freely negotiated but may be
strongly influenced by Central Bank intervention.
Between March 1995 and January 1999, the Central Bank permitted the gradual
devaluation of the REAL against the U.S. dollar pursuant to an exchange rate
policy that established a band within which the REAL/U.S. dollar exchange rate
could fluctuate.
Responding to pressure on the REAL, on January 13, 1999, the Central Bank
widened the foreign exchange band and on January 15, 1999, allowed the REAL to
float. Since January 15, 1999, the REAL reached a low of R$1.4659 on January 15,
1999 and a high of R$3.9552 on October 22, 2002. On June 20, 2003, the
commercial market rate for purchasing U.S. dollars was R$2.8933 to U.S.$1.00.
See "Item 5--Operating and Financial Review and Prospects--Foreign Exchange and
Interest-Rate Exposure."
The Brazilian government may impose temporary restrictions on the
conversion of REAIS into foreign currencies and on the remittance to foreign
investors of proceeds from their investments in Brazil. Brazilian law permits
the government to impose these restrictions whenever there is a serious
imbalance in Brazil's balance of payments or reason to foresee a serious
imbalance.
The following tables show, for the periods and dates indicated, certain
information regarding the real/U.S. dollar commercial exchange rate.
EXCHANGE RATE OF R$ PER U.S.$
LOW HIGH AVERAGE (1) YEAR END
YEAR ENDED DECEMBER 31, ----------- ----------- ----------- -----------
1998.............................. 1.1165 1.2087 1.1609 1.2087
1999.............................. 1.2078 2.1647 1.8150 1.7890
2000.............................. 1.7234 1.9847 1.8295 1.9554
2001.............................. 1.9357 2.8007 2.3522 2.3204
2002.............................. 2.2709 3.9552 2.9309 3.5333
------------------
Source: Central Bank of Brazil, PTAX. PTAX is the average of the exchange rates negotiated
in the commercial rate market on a given day.
(1) Represents the average of the exchange rates (PTAX) on the last day of each month
during the relevant period.
EXCHANGE RATE OF R$ PER U.S.$
LOW HIGH
----------- -----------
MONTH ENDED
November 30, 2002............................... 3.5035 3.6797
December 21, 2002............................... 3.4278 3.7980
January 31, 2003................................ 3.2758 3.6623
February 28, 2003............................... 3.4930 3.6580
March 31, 2003.................................. 3.3531 3.5637
April 30, 2003.................................. 2.8898 3.3359
May 31, 2003.................................... 2.8653 3.0277
June, 2003 (Until June 20, 2003)................ 2.8491 2.9640
------------------
Source: Central Bank of Brazil, PTAX. PTAX is the average of the exchange rates
negotiated in the commercial rate market on a given day.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
THIS SECTION IS INTENDED TO BE A SUMMARY OF MORE DETAILED DISCUSSIONS
CONTAINED ELSEWHERE IN THIS ANNUAL REPORT. THE RISKS DESCRIBED BELOW ARE NOT THE
ONLY ONES WE FACE. OUR BUSINESS, RESULTS OF OPERATIONS OR FINANCIAL CONDITION
COULD BE HARMED IF ANY OF THESE RISKS MATERIALIZES AND, AS A RESULT, THE TRADING
PRICE OF THE ADSS COULD DECLINE.
RISKS RELATING TO BRAZIL
THE BRAZILIAN GOVERNMENT HAS EXERCISED, AND CONTINUES TO EXERCISE,
SIGNIFICANT INFLUENCE OVER THE BRAZILIAN ECONOMY. BRAZILIAN POLITICAL AND
ECONOMIC CONDITIONS HAVE A DIRECT IMPACT ON OUR BUSINESS, OPERATIONS AND THE
MARKET PRICE OF OUR PREFERRED SHARES AND OUR ADSS.
In the past, the Brazilian government has intervened in the Brazilian
economy and occasionally made drastic changes in policy. The Brazilian
government's actions to control inflation and effect other policies have often
involved wage and price controls, currency devaluations, capital controls, and
limits on imports, among other things. Our business, financial condition,
results of operations and the market price of our preferred shares and ADSs may
be adversely affected by changes in government policies, as well as general
economic factors, including:
o currency fluctuations;
o inflation;
o price instability;
o energy policy;
o interest rates;
o tax policy; and
o other political, diplomatic, social and economic developments in or
affecting Brazil.
TAX REFORMS MAY AFFECT OUR TARIFF RATES.
If our subsidiaries providing telecommunication services experience a
higher tax burden as a result of the tax reform, they may have to pass the cost
of such tax increase to their customers. This increase may have a material
negative impact on their and our revenues and operating results, and as a
result, in the dividends paid by them to us.
INFLATION AND CERTAIN GOVERNMENT MEASURES TO CURB INFLATION MAY HAVE
ADVERSE EFFECTS ON THE BRAZILIAN ECONOMY, THE BRAZILIAN SECURITIES MARKET AND/OR
OUR BUSINESS AND OPERATIONS.
Brazil has historically experienced extremely high rates of inflation.
Inflation and certain of the government's measures taken in the attempt to curb
inflation have had significant negative effects on the Brazilian economy. Since
1994, Brazil's inflation rate has been substantially lower than in previous
periods. However, inflationary pressures persist, and actions taken in an effort
to curb inflation, coupled with public speculation about possible future
governmental actions, have contributed to economic uncertainty in Brazil and
heightened volatility in the Brazilian securities market. In 2002, the general
price index, or the IGP-DI (the INDICE GERAL DE PRECOS -- DISPONIBILIDADE
INTERNA), an inflation index developed by the Fundacao Getulio Vargas, a private
Brazilian economic organization, reflected inflation of 26.4% compared to 10.4%
in 2001 and 9.8% in 2000. If Brazil experiences significant inflation, we may be
unable to increase service rates to our customers in amounts that are sufficient
to cover our increasing operating costs, and our business may be adversely
affected.
FLUCTUATIONS IN THE VALUE OF THE REAL AGAINST THE VALUE OF THE U.S. DOLLAR
MAY ADVERSELY AFFECT OUR ABILITY TO PAY U.S. DOLLAR-DENOMINATED OR U.S.
DOLLAR-LINKED OBLIGATIONS AND COULD LOWER THE MARKET VALUE OF OUR PREFERRED
SHARES AND ADSS.
The Brazilian currency has historically experienced frequent devaluations.
The REAL devalued against the U.S. dollar by 9.3% in 2000 and by 18.7% in 2001.
During 2002, the REAL continued to undergo significant devaluation due in part
to the political uncertainty in connection with the elections and the global
economic slowdown. In 2002, the REAL devalued against the U.S. dollar by 52.3%.
See "Item 3--Key Information--Selected Financial Data--Exchange Rates" for more
information on exchange rates.
As of December 31, 2002, we had R$627.8 million in total debt, of which
67.18% was denominated in foreign currencies. As of December 31, 2002, we had
currency derivatives in place to cover 81.09% of our foreign
currency-denominated debt. Also, significant costs relating to our network
infrastructure and handsets are payable or linked to payment by us in U.S.
dollars. At the same time, while we may derive income from derivative
transactions denominated in foreign currencies, all of our revenues are
generated in REAIS. To the extent that the value of the REAL decreases relative
to the U.S. dollar, our debt becomes more expensive to service and it becomes
more costly for us to import the technology and the goods that are necessary to
operate our business.
DETERIORATION IN ECONOMIC AND MARKET CONDITIONS IN OTHER COUNTRIES,
ESPECIALLY EMERGING MARKET COUNTRIES, MAY ADVERSELY AFFECT THE BRAZILIAN ECONOMY
AND OUR BUSINESS.
The market for securities issued by Brazilian companies is influenced by
economic and market conditions in Brazil and, to varying degrees, market
conditions in other Latin American and emerging market countries. Although
economic conditions are different in each country, the reaction of investors to
developments in one country may cause the capital markets in other countries to
fluctuate. Developments or conditions in other emerging market countries have at
times significantly affected the availability of credit in the Brazilian economy
and resulted in considerable outflows of funds and declines in the amount of
foreign currency invested in Brazil.
For example, in 2001, after a prolonged recession followed by political
instability, Argentina announced that it would no longer continue to service its
public debt. In order to address the deteriorating economic and social crisis,
the Argentine government abandoned its decade-old fixed dollar-PESO exchange
rate, allowing the PESO to float to market rate levels. In 2002, the Argentine
PESO experienced a 237% devaluation against the U.S. dollar. The situation in
Argentina has negatively affected investors' perceptions towards Brazilian
securities.
The recent political crisis in Venezuela may also influence investors'
perception of risk in Brazil. If market conditions in Argentina and Venezuela
continue to deteriorate, they may adversely affect our ability to borrow funds
at a favorable interest rate or to raise equity capital, when and if there is a
need. Adverse developments in Argentina, Venezuela or in other emerging market
countries could lead to a reduction in both demand and the market price for our
preferred shares and ADSs.
RISKS RELATING TO THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY AND US
EXTENSIVE GOVERNMENT REGULATION OF THE TELECOMMUNICATIONS INDUSTRY MAY
LIMIT OUR FLEXIBILITY IN RESPONDING TO MARKET CONDITIONS, COMPETITION AND
CHANGES IN OUR COST STRUCTURE.
Our business is subject to extensive government regulation, including any
changes that may occur during the period of our authorization to provide
telecommunication services. Anatel, which is the main telecommunications
industry regulator in Brazil, regulates, among other things:
o industry policies and regulations;
o licensing;
o tariffs;
o competition;
o telecommunications resource allocation;
o service standards;
o technical standards;
o interconnection and settlement arrangements; and
o universal service obligations.
This extensive regulation and the conditions imposed by our authorization
to provide telecommunication services may limit our flexibility in responding to
market conditions, competition and changes in our cost structure.
OUR RESULTS MAY BE AFFECTED IN THE MEDIUM OR LONG-TERM AS A RESULT OF THE
NEW SMP RULES.
In 2002, Anatel changed the SMP regime (first enacted in December 2000),
thus encouraging companies operating under the SMC system to migrate to the SMP
system. New rules will be applicable to the migrating companies, as contemplated
by Anatel Resolutions Nos. 316/02 through 321/02 and 326/02.
Under the SMP regime, we will no longer receive payment from our customers
for outbound long-distance traffic, but will receive payment for the use of our
network, in accordance with the network usage remuneration plan. However, there
is no assurance that the interconnection fees that we will receive from
long-distance operators will compensate us for the revenues that we would have
received from our customers for outbound long-distance traffic.
The SMP regime establishes free negotiation of the network usage fee among
telecommunication service providers or a confirmation, until June 30, 2004, of
the maximum fee by Anatel. After that date, negotiation of that fee will be the
rule.
We cannot assure you that the new rules will not affect negatively our
revenues and results of operations.
IF THE INFLATION ADJUSTMENT INDEX NOW APPLIED TO OUR TARIFFS IS CHANGED,
THE NEW INDEX MAY NOT BE ADEQUATE.
In order to contain inflation, the Brazilian government is considering
replacing the IGP-DI, the monetary adjustment index currently used in connection
with the tariffs applied in the telecommunications industry, with another index,
which has not yet been identified. We cannot assure you that a new index, if
any, would adequately reflect the effect of inflation on our tariffs.
WE FACE SUBSTANTIAL COMPETITION THAT MAY REDUCE OUR MARKET SHARE AND HARM
OUR FINANCIAL PERFORMANCE.
There is substantial competition in the telecommunications industry. We not
only compete with wireless telecommunications companies, but also with companies
that provide fixed-line telecommunications and Internet access services.
We expect competition to intensify as a result of the entrance of new
competitors and the rapid development of new technologies, products and
services. Our ability to compete successfully will depend on our marketing
techniques, as well as on our ability to anticipate and respond to various
competitive factors affecting the industry, including new services that may be
introduced, changes in consumer preferences, demographic trends, economic
conditions and discount pricing strategies by our competitors. To the extent
that we do not keep pace with technological advances, or fail to timely respond
to changes in competitive factors in our industry, we could lose a portion of
our market share or experience a decline in our revenue. Competition from other
mobile communications service providers in the region in which we operate may
also affect our financial results by causing, among other things, the rate of
our customer growth to decline and bring about decreases in tariff rates and
increases in selling expenses. This could have a material adverse effect on our
results of operations.
There has been consolidation in the Brazilian telecommunications market,
and we believe this trend may continue. Consolidations may result in increased
competitive pressures within our market. We may be unable to adequately respond
to pricing pressures resulting from consolidation, which would adversely affect
our business, financial condition and results of operations.
WE ARE SUBJECT TO COMPETITION FROM SATELLITE SERVICE PROVIDERS.
Satellite service providers could have a material adverse effect on our
company's business, financial condition, results of operations or prospects. Any
adverse effects on our company's results and market share from these competitive
pressures will depend on a variety of factors that cannot now be assessed with
precision and that are beyond our company's control. See "Item 4--Information on
the Company--Business Overview--Competition--Other Competition."
OUR RESULTS OF OPERATIONS WOULD BE AFFECTED BY A HIGH RATE OF CUSTOMER
TURNOVER OR A DECREASE IN OUR CUSTOMER GROWTH.
A high rate of customer turnover and/or a decrease in our customer growth
could adversely affect our results of operations as well as our competitive
position. The rate of customer turnover may be the result of several factors,
including limited network coverage and lack of sufficient reliability of our
services, as well as increased competition in the region in which we operate and
the economic conditions in Brazil.
THE INDUSTRY IN WHICH WE CONDUCT OUR BUSINESS IS SUBJECT TO RAPID
TECHNOLOGICAL CHANGES AND THESE CHANGES COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR ABILITY TO PROVIDE COMPETITIVE SERVICES.
The telecommunications industry is subject to rapid and significant
technological changes. Our success depends, in part, on our ability to
anticipate and adapt in a timely manner to technological changes. We expect that
new products and technologies will emerge and that existing products and
technologies will be further developed.
The advent of new products and technologies could have a variety of
consequences for us. These new products and technologies may reduce the price of
our services by providing lower-cost alternatives, or they may be superior to,
and render obsolete, the products and services we offer and the technologies we
use, requiring investment in new technology. The cost of upgrading our products
and technology in order to continue to compete effectively could be significant,
and our ability to fund this upgrading may depend on our ability to obtain
additional financing.
TCO'S CONTROLLING SHAREHOLDER HAS A GREAT DEAL OF INFLUENCE OVER TCO'S
BUSINESS.
TCO's controlling shareholder is TCP, which, in turn, is controlled by PT
Moveis S.G.P.S., S.A. and Telefonica Moviles, S.A. PT Moveis S.G.P.S., S.A. is
100% controlled by Portugal Telecom, S.G.P.S., S.A. TCP owns 61.10% of TCO's
common shares. Due to its share ownership, TCP has the power to control TCO,
including the power to elect TCO's Board of Directors and to determine the
direction and future operations of TCO. In addition, PT Moveis SGPS, S.A. and
Telefonica Moviles, S.A. share their participation in TCP in equal percentages.
Any disagreement or dispute between them, as controlling shareholders of TCP,
may have an impact on the decision making capabilities of TCP and, consequently,
of TCO's management.
THE WIRELESS INDUSTRY, INCLUDING US, MAY BE HARMED BY REPORTS SUGGESTING
THAT RADIO FREQUENCY EMISSIONS CAUSE HEALTH PROBLEMS AND INTERFERE WITH MEDICAL
DEVICES.
Media and other reports have suggested that radio frequency emissions from
wireless handsets and base stations may cause health problems. If consumers
harbor health-related concerns, they may be discouraged from using wireless
handsets. These concerns could have an adverse effect on the wireless
communications industry and, possibly, expose wireless providers, including us,
to litigation. We cannot assure you that further medical research and studies
will refute a link between the radio frequency emissions of wireless handsets
and base stations and these health concerns. Government authorities could
increase regulation of wireless handsets and base stations as a result of these
health concerns or wireless companies, including us, could be held liable for
costs or damages associated with these concerns, which could have an adverse
effect on our business. The expansion of our network may be affected by these
perceived risks if we experience problems in finding new sites to expand our
network, which in turn may delay the expansion and may affect the quality of our
services.
WE WILL LIKELY INCUR COSTS WITH THE UNAUTHORIZED USE OF OUR CELLULAR
TELECOMMUNICATIONS SERVICES NETWORK.
We will likely incur, among others, interconnection costs, capacity costs,
administrative costs and fraud prevention costs in our efforts to detect,
monitor and reduce the unauthorized use of our cellular telecommunications
services network.
IT MAY BE DIFFICULT TO EFFECT SERVICE OF PROCESS ON OUR COMPANY.
We are organized under Brazilian law and all of our assets are located
outside of the United States. All of our directors and executive officers reside
outside of the United States. Accordingly, it may be difficult to effect service
of process upon our company, our directors or our executive officers, or to
enforce judgments issued by U.S. courts against our company, our directors or
our executive officers, including judgments based on the civil liability
provisions of the U.S. federal securities laws.
TAX REFORMS MAY AFFECT OUR RATES.
If our company experiences a higher tax burden as a result of a tax reform,
we may have to pass the cost of such tax increase to our customers. This
increase may have a material negative impact on our company's revenues. See
"Item 10--Additional Information--Taxation--Brazilian Tax Considerations."
WE FACE RISKS ASSOCIATED WITH LITIGATION.
We are party to lawsuits and other proceedings in the ordinary course of
our business. An adverse outcome in, or any settlement of, these or other
lawsuits could result in significant costs to us. In addition, our senior
management may be required to devote substantial time to these lawsuits, which
they could otherwise devote to our business. For a more detailed description of
these lawsuits, see "Item 8--Financial Information--Consolidated Statements and
Other Financial Information--Legal Matters."
RISKS RELATING TO OUR PREFERRED SHARES AND OUR ADSS
OUR PREFERRED SHARES AND OUR ADSS GENERALLY DO NOT HAVE VOTING RIGHTS.
In accordance with Brazilian corporate law and our by-laws, holders of our
preferred shares, and therefore of our ADSs, are not entitled to vote at
meetings of our shareholders, except in limited circumstances. See "Item
10--Additional Information--Memorandum and Articles of Association."
YOU MIGHT BE UNABLE TO EXERCISE PREEMPTIVE RIGHTS WITH RESPECT TO OUR
PREFERRED SHARES UNLESS THERE IS A CURRENT REGISTRATION STATEMENT IN EFFECT THAT
COVERS THOSE RIGHTS OR UNLESS AN EXEMPTION FROM REGISTRATION APPLIES.
You will not be able to exercise the preemptive rights relating to our
preferred shares underlying your ADSs unless a registration statement under the
U.S. Securities Act of 1933, as amended, or the Securities Act, is effective
with respect to those rights, or unless an exemption from the registration
requirements of the Securities Act is available. We are not obligated to file a
registration statement. Unless we file a registration statement or an exemption
from registration applies, you may receive only the net proceeds from the sale
of your preemptive rights by the depositary, or, if the preemptive rights cannot
be sold, they will lapse and you will not receive any value for them. For more
information on the exercise of your rights see "Item 10--Additional
Information."
AN EXCHANGE OF ADSS FOR PREFERRED SHARES RISKS LOSS OF CERTAIN FOREIGN
CURRENCY REMITTANCE AND BRAZILIAN TAX ADVANTAGES.
The ADSs benefit from the certificate of foreign capital registration,
which permits The Bank of New York, as Depositary, to convert dividends and
other distributions with respect to preferred shares into foreign currency, and
to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for
preferred shares will then be entitled to rely on the Depositary's certificate
of foreign capital registration for five business days from the date of
exchange. Thereafter, they will not be able to remit non-Brazilian currency
abroad unless they obtain their own certificate of foreign capital registration,
or unless they qualify under Resolution 2,689 of the Central Bank of Brazil,
dated January 26, 2000, known as Resolution 2,689, which entitles certain
investors to buy and sell shares on Brazilian stock exchanges without obtaining
separate certificates of registration.
If holders of ADSs do not qualify under Resolution 2,689, they will
generally be subject to less favorable tax treatment on distributions with
respect to our preferred shares. There can be no assurance that the Depositary's
certificate of registration or any certificate of foreign capital registration
obtained by holders of ADSs will not be affected by future legislative or
regulatory changes, or that additional Brazilian law restrictions applicable to
their investment in the ADSs may not be imposed in the future.
THE RELATIVE VOLATILITY AND ILLIQUIDITY OF THE BRAZILIAN SECURITIES MARKETS
MAY ADVERSELY AFFECT HOLDERS OF ADSS.
Investments in securities, such as the preferred shares or the ADSs, of
issuers from emerging market countries, including Brazil, involves a higher
degree of risk than investing in securities of issuers from more developed
countries.
The Brazilian securities market is substantially smaller, less liquid, more
concentrated and more volatile than major securities markets in the United
States. These features may substantially limit the ability to sell the preferred
shares underlying the ADSs at a price and time at which holders wish to do so.
The Sao Paulo Stock Exchange (BOLSA DE VALORES DE SAO PAULO), or BOVESPA, the
main Brazilian stock exchange, had a market capitalization of approximately
U.S.$124 billion as of December 31, 2002, and an average monthly trading volume
of approximately U.S.$4.1 billion for 2002. In comparison, the NYSE had a market
capitalization of U.S.$9.7 trillion as of December 31, 2002, and an average
monthly trading volume of approximately U.S.$859 billion for 2002.
There also is significantly greater concentration in the Brazilian
securities market than in major securities markets in the United States. The ten
largest companies in terms of market capitalization represented approximately
46.8% of the aggregate market capitalization of BOVESPA as of December 31, 2002.
The top ten stocks in terms of trading volume accounted for approximately 56.5%
of all shares traded on BOVESPA.
ITEM 4. INFORMATION ON THE COMPANY
A. OUR HISTORY AND DEVELOPMENT
GENERAL
We are incorporated under the laws of Brazil under the name Tele Centro
Oeste Celular Participacoes S.A. (Tele Centro Oeste Cellular Holding Company).
We have the legal status of a SOCIEDADE POR ACOES, or stock corporation,
operating under the Brazilian corporate law. Our principal executive offices are
located at SCS, Quadra 2, Bloco C, 226, 7 andar, 70319-900 Brasilia, DF, Brazil.
Our telephone number is 55-61-313-7765, our facsimile number is 55-61-323-7250,
and our website is located at www.tco.net.br. The information on our website is
not part of this annual report. Our agent for service of process in the United
States is CT Corporation System, located at 111 Eighth Avenue, New York, New
York 10011.
TELEBRAS AND THE PRIVATIZATION
Prior to the incorporation of Telecomunicacoes Brasileiras S.A. - TELEBRAS
in 1972, more than 900 telecommunications companies operated throughout Brazil.
Between 1972 and 1975, Telebras and its operating subsidiaries acquired almost
all of 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. In 1995, the Brazilian government began to reform Brazil's
telecommunications regulatory system. In July 1997, the Brazilian Congress
adopted the General Telecommunications Law (and together with the regulations,
decrees, orders and plans on telecommunications issued by Brazil's Executive
Branch, collectively, the Telecommunications Regulations). The General
Telecommunications Law provided for the establishment of a new regulatory
framework, the introduction of competition, and the privatization of Telebras.
In January 1998, the cellular telecommunications operations of Telebras'
operating subsidiaries were spun off into separate companies in preparation for
the restructuring and privatization of Telebras. In May 1998, Telebras was
restructured to form, in addition to Telebras, 12 new holding companies, which
we refer to as the New Holding Companies, by means of a procedure under
Brazilian corporate law called CISAO, or split-up. The New Holding Companies
were allocated virtually all of the assets and liabilities of Telebras,
including the shares held by Telebras in the operating companies of Telebras.
The split-up of Telebras 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, (b) three fixed-line service providers, each providing local and
intraregional long-distance service in one of three regions, and (c) Empresa
Brasileira de Telecomunicacoes S.A. -- EMBRATEL, or Embratel, which provides
domestic (including intraregional and interregional) long-distance telephone
service and international telephone service throughout Brazil.
TCO is one of the New Holding Companies. It was created in May 1998. In the
Breakup, TCO 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 Brazilian government
sold substantially all of its shares of the New Holding Companies, including
TCO, to private sector buyers. The Brazilian government's shares of TCO were
purchased by Splice through BID S.A., its subsidiary at that time.
Each of Telebrasilia, Telegoias, Telemat, Telems, Teleron and Teleacre was
formed on January 5, 1998 by spinning off the cellular telecommunications
operations of an operating company controlled by Telebras, collectively known as
the Predecessor Companies. Telebrasilia merged into TCO on April 26, 2002.
References to the operations of our company prior to January 5, 1998 are to the
cellular operations of the Predecessor Companies. Telegoias, Telemat, Telems,
Teleron and Teleacre (and Telebrasilia until April 26, 2002) 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,
known as Area 7, under concessions from the Brazilian government (the A Band
Concessions). The Predecessor Companies began to offer cellular
telecommunications services in Area 7 in December 1991, and our company is the
leading provider of cellular telecommunications services in Area 7.
NBT
On October 19, 1998, Tele Centro Oeste/Inepar, a consortium comprised of
(i) Inepar S.A. Industria e Construcoes (50%) and (ii) TCO (50%), was awarded a
license to provide cellular telecommunications services in Area 8. On May 21,
1999, we acquired 45% of the shares of Tele Centro Oeste/Inepar from Inepar,
increasing our holding in the consortium to 95%. Upon acquiring control, we
renamed Tele Centro Oeste/Inepar "Norte Brasil Telecom S.A." and registered it
as a non-publicly held company. NBT provides cellular telecommunications service
in the Brazilian States of Amapa, Amazonas, Maranhao, Para and Roraima, known as
Area 8, under concessions from the Brazilian government (the B Band
Concessions). The A Band Concessions and the B Band Concessions are collectively
referred to as "our concessions." As of April 2003, our company had 3,202,149
subscribers.
TCO IP
On November 21, 2000, SPLICE IP S.A. was formed as a closed corporation.
TCO held 100% of its preferred shares and Splice do Brasil Telecomunicacoes e
Eletronica S.A., or Splice, held 99.99% of its common shares. As of March 5,
2001, the control of SPLICE IP S.A. changed to TCO, when TCO bought 99.99% of
the common shares from Splice, and the name of the subsidiary changed to TCO IP
S.A.
TRANSFER TO FIXCEL
On December 31, 2001, Splice transferred all of its shares in BID S.A.,
TCO's parent company, to Fixcel S.A.
TRANSFER TO TELESP CELULAR PARTICIPACOES S.A.
On April 25, 2003, TCP acquired 61.10% of the voting capital stock of TCO
for approximately R$1,505 million, corresponding to R$19.48719845 per each lot
of 1,000 shares acquired. The agreement also included the acquisition of TCO's
subsidiaries, including NBT. TCP has announced that it will launch, in the
second quarter of 2003, a tender offer for the voting shares of TCO, as legally
required by the acquisition of the control of TCO. The price per share to be
offered is equal to 80% of the price paid to the controlling shareholders. After
the acquisition and the tender offer, TCP expects to incorporate TCO shares and
ADSs.
PT Moveis S.G.P.S., S.A. and Telefonica Moviles, S.A., the principal
shareholders of TCP, currently own through Brasilcel, N.V., directly and
indirectly approximately 93.7% of TCP's common shares and 65.1% of TCP's total
capital. PT Moveis S.G.P.S., S.A. is 100% controlled by Portugal Telecom,
S.G.P.S., S.A.
CAPITAL EXPENDITURES
Our capital expenditure priorities include increasing our network capacity,
improving our overall quality, and increasing the level of digitalization of our
network.
The following table sets forth our capital expenditures for each year in
the three-year period ended December 31, 2002.
2000 2001 2002
---- ---- ----
(MILLIONS OF REAIS) (1)
Automatic switching equipment....................... 29.1 22.1 22.2
Other equipment..................................... 196.0 100.7 69.3
Real estate......................................... 0.2 1.3 -
Other assets ....................................... 30.4 66.4 79.1
----- ----- -----
Total capital expenditures..................... 255.7 190.5 170.6
===== ===== =====
------------------
(1) Figures in constant REAIS as of December 31, 2000 and nominal REAIS as of
December 31, 2001 and 2002.
B. BUSINESS OVERVIEW
OVERVIEW
We provide cellular telecommunications services in Brazil's Federal
District and in 11 Brazilian states: Acre, Amazonas, Amapa, Goias, Maranhao,
Mato Grosso, Mato Grosso do Sul, Para, Rondonia, Roraima, and Tocantins,
comprising altogether 5.8 million Km2 and 31.2 million people. We are the
leading cellular operator, by number of clients, in our Region according to data
published by Anatel. The table below sets forth the net operating revenues for
Telebrasilia, Telegoias, Telemat, Telems, Teleron, Teleacre and NBT for the
periods indicated.
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 2001 2002
-------- -------- --------
(THOUSANDS OF REAIS)
Telebrasilia Celular/TCO (1) 310.869 371.289 434.100
Telegoias Celular.................. 196.094 277.566 355.491
Telemat Celular.................... 135.131 168.511 217.751
Telems Celular..................... 116.534 142.478 177.441
Teleron Celular.................... 39.678 48.335 66.060
Teleacre Celular................... 19.818 25.588 33.923
NBT................................ 112.523 214.964 290.581
Others............................. - 307 1.090
Deductions from consolidation...... - 907 15.129
--------- --------- ---------
TOTAL.............................. 930.646 1.248.131 1.561.308
========= ========= =========
(1) As a result of the merger of Telebrasilia Celular S.A. into TCO on April
26, 2002, the operating revenues which were earned by Telebrasilia Celular
S.A. before the merger became revenues of TCO with a base date for the
merger of December 31, 2001.
OUR OPERATIONS
The following tables set forth information on TCO and NBT's cellular
telecommunication base, coverage and related matters at the dates and for the
years indicated.
TCO - AREA 7
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
------------ ------------ ------------
Cellular lines in service at year-end (in thousands)............... 1.439 1.995 2.469
Contract customers............................................... 494 583 712
Prepaid customers................................................ 945 1,412 1,757
Churn (1).......................................................... 10.66% 13.23% 15.19%
Estimated population of concession areas (million) (2)............. 14.3 14.9 15.2
Estimated covered population (million) (3)......................... 11.5 12.8 13.3
Percentage of population covered (4)............................... 84% 86% 88%
Penetration at year-end - TCO (5).................................. 10.1% 13.2% 16.3%
Percentage of authorization areas covered.......................... 53% 62% 66%
Estimated market share (6)......................................... 78.4% 76.9% 73.0%
NBT - AREA 8
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
------------ ------------ ------------
Cellular lines in service at year-end (in thousands)............... 257 417 598
Contract customers............................................... 86 112 149
Prepaid customers................................................ 171 305 449
Churn (1).......................................................... 6.22% 16.12% 16.77%
Estimated population of concession areas (million) (2)............. 14.9 15.8 16.1
Estimated covered population (million) (3)......................... 7.4 8.8 9.7
Percentage of population covered (4)............................... 50.3% 60.4% 66.0%
Penetration at year-end - NBT (5).................................. 1.73% 2.64% 3.7%
Percentage of authorization areas covered.......................... 6.59% 17.20% 20.60%
Estimated market share (6)......................................... 25.35 31.5% 35.0%
----------------
(1) Churn is the number of customers that leave us during the year, calculated as a percentage of the simple
average of customers at the beginning and the end of the year.
(2) Projections based on estimates of IBGE.
(3) Number of people within our Region that can access our cellular telecommunication signal.
(4) Percentage of the population in our Region that can access our cellular telecommunication signal.
(5) Number of cellular lines in service.
(6) Estimated percentage of all lines in service in our Region at year-end.
OUR SERVICES
Our company offers mobile telecommunications services to the subscribers of
our Basic Services Plan and optional plans (which include minutes of usage). We
also offer additional services, such as voice mail, call forwarding, call
waiting, caller identification, three-way calling, text messages, CSD services,
and WAP services. In 1999, our company initiated sales of cellular handsets in
connection with the introduction of the prepaid system. This service is an
optional plan which aims to meet the needs of clients with low usage of wireless
services. The service is paid and credited before any calls are made. The
subscriber is required to purchase credit (using prepaid cards or agreements
with lottery houses and financial institutions) which is valid to make calls in
the subsequent 90-day period after activation. Once the credit in a particular
card has been used, a new card should be purchased within a period of 180 days;
otherwise the service will be discontinued and the subscriber will need to
request a new activation to access the service. The prepaid cards are sold in
denominations of R$10.00, R$15.00, R$25.00, and R$50.00. There is a R$5.00 card
that is used exclusively by users of SMS services, which gives clients closer
control of their usage of the service.
Our company offers message services based on the SMS platform in three
different applications: content-push services via SMS, person-to-person
communication, and interactive services. The SMS services are available to both
pre-paid and post-paid clients.
The Web-based short message service allows users to send messages from the
our website directly to clients' handsets. Using the same platform, our company
also sends news (local, national, and international) on several subjects, such
as economy, sports, and weather forecasts, offers access to bank account balance
information in associated banks, and offers appointment reminder services. In
September 2002, we started to charge R$0.03 per message received. As of December
2002, more than one million clients used this service.
In November 2000, the interpersonal message service (currently called
Torpedo) was launched experimentally, and as of August 1, 2001, users have paid
R$0.18 per message sent. At the end of 2001, 5 million messages were billed
monthly. Several factors have been encouraging the use of this service: the
granting of bonuses, the launching of E-XPRESSO CARDS (messages containing
drawings and characters), and the launching of a set number of messages included
in the service plan fee. By December 2002, we had billed 17 million messages.
In January 2001, we launched the WAP service, which allows wireless
Internet access based on cellular technology and is available to all clients who
have handsets equipped with this feature. In order to implement this service,
our company developed a WAP portal through which clients can access other
portals and WAP sites. One of the advantages of this new service is that clients
can customize the portal, making access and browsing faster and more convenient.
Our company has entered into relevant partnership agreements with some of the
main news agencies in Brazil: FOLHA DE SAO PAULO and O ESTADO DE SAO PAULO, as
well as with banks BANCO DO BRASIL and UNIBANCO, and the music production
company SOM BRASIL.
Additionally, we started offering wireless data communication services to
our clients, using CSD technology to connect personal microcomputers and
palm-tops to the Internet via cellular handsets. This gives users greater access
mobility and flexibility.
In 2002, TCO/NBT adopted a communication strategy for products and services
with the creation of the ISSO "umbrella". This package of services includes the
services mentioned above and a series of new features launched in 2002, namely:
o Flash TCO/NBT: a SMS-based content-pull information service. To use
this service, the client writes a message including the code of one of
the contents available on TCO/NBT Flash and sends it to the number
100. The reply message will reach the handset soon thereafter. The
client then presses the "Display" button in order to view the results
on the screen of the handset. (April)
o Music: musical ring tones to be used on compatible cellular handsets.
(February)
o Icons: images that allow the customization of call groups in clients'
handsets. When a message is coming in, the caller can be identified by
means of the symbol selected. (February)
o TCO/NBT Radio: an interactive information and entertainment service
selected on demand by users. The service allows users to access news,
sports news, horoscopes, breaking news, jokes, chats, and young and
adult channels. (June)
o Chat TCO/NBT: chat rooms combining traditional Web chats with cellular
SMS services. (October)
o Games: SMS-based games such as Quiz (question-and-answer game) and
Cabum (strategy game). (November)
Regarding interactive services, our company launched an interactive
promotion platform (GPI) in December 2002, allowing media partners such as
communication vehicles (radio and TV stations, etc.) to use the SMS to promote
contests and conduct surveys and polls with real time results. The platform also
allows among the participating users.
Also in December 2002, we activated SMS interoperability with other
wireless telephone carriers. As of that date, TCO and NBT users started to send
SMS to Telemig Celular and Amazonia Celular users. On May 28, 2003, TCO started
SMS interoperability with all cellular companies controlled by the joint venture
of Portugal Telecom, S.G.P.S., S.A. and Telefonica Moviles, S.A. (called
Brasilcel N.V.), which consists of TCP, Global Telecom, Tele Sudeste Celular,
Tele Leste Celular and CRT Celular users.
Based on the contracts entered into with other providers of wireless
telecommunications services, our company offers automatic roaming services
throughout the Brazilian territory, which allows users of the post-paid system
to make and receive calls while outside of the Region. These automatic roaming
services also allow users of the prepaid services to receive calls while outside
TCO's coverage area, as well as to make calls when they are in Area 7 or Area 8.
As of October 1, 2001, users of the prepaid services have been able to originate
roaming calls while outside Area 7 or Area 8. Our company also offers automatic
international roaming in Argentina and Uruguay by means of agreements entered
into with local wireless telecommunications providers in those countries. In
January 2000, we started to provide international roaming services in more than
60 countries located in North America, Europe, Asia, Southern Africa, and
Australia. By the end of 2002, the service was already available in more than
140 countries in North America, Europe, Asia, Southern Africa, and Australia.
The calls are billed to the user's bills and no credit card or immediate payment
is required. In order to use the international roaming service, users have to
sign a contract with us with a value of R$100.00, after which the service is
activated within a period of 72 hours. Users who intend to use the roaming
service in countries which have the GSM technology also receive a handset for
use while in transit. The user will later pay for the service based on the
amounts charged in the areas where the roaming service was used. Our company
also will offer wireless telecommunications services to the users of other
wireless telecommunication service providers while they are in our Region. Our
company bills the other providers based on what the roaming contracts establish
as to their clients. See "Item 4--Information on the Company--Business
Overview--Operating Agreements--Roaming Contracts."
OUR REGION
The region in which TCO's subsidiaries operate consists of Area 7 and Area
8, which we refer to as the Region, and covers an aggregate area of
approximately 5,803,501 square kilometers, representing approximately 68% of the
total area of Brazil and 18% of Brazil's population. Area 7, which is serviced
by Telegoias, Telemat, Telems, Teleron and Teleacre (and former Telebrasilia),
includes the federal capital, Brasilia, and the surrounding Federal District.
Area 7 also includes the following six Brazilian states: Goias, Tocantins, Mato
Grosso, Mato Grosso do Sul, Rondonia and Acre. Area 8, which is serviced by NBT,
includes the following 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 Area 8.
POPULATION IN % OF BRAZILIAN PER CAPITA % OF BRAZILIAN
SUBSIDIARY AREA MILLIONS (1) POPULATION (1) GDP (2) GDP (2)
------------ ------------------ ------------- --------------- ---------- ---------------
Telegoias Goias 5.21 2.98% 4,316 1.97%
Telegoias Tocantins 1.21 0.69% 2,110 0.22%
Telemat Mato Grosso 2.60 1.49% 5,342 1.22%
Telems Mato Grosso do Sul 2.14 1.23% 5,697 1.08%
Teleron Rondonia 1.43 0.82% 4,065 0.51%
Teleacre Acre 0.59 0.34% 3,037 0.15%
NBT Amapa 0.52 0.30% 4,098 0.18%
NBT Amazonas 2.96 1.70% 6,668 1.71%
NBT Maranhao 5.80 3.32% 1,627 0.84%
NBT Para 6.45 3.70% 3,041 1.72%
NBT Roraima 0.35 0.20% 3,417 0.10%
Telebrasilia (3) Federal District 2.15 1.23% 14,405 2.02%
---------------
(1) Estimates of IBGE. Population figures pertain only to areas serviced by our concessions and do not
pertain to cities not serviced by our concessions.
(2) SOURCE: IBGE.
(3) Until April 26, 2002.
Our 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.
MARKETING AND SALES
Our company classifies users into two main categories: (i) legal entity
clients, which accounted for 14.75% of our revenues in 2002, and (ii) individual
clients, which accounted for 85.25% of our sales in the year 2002. Our company
promotes and sells its services in a number of ways and occasionally develops
special projects and services aimed at specific groups of clients. Our company
also offers support services such as exclusive account managers to certain
clients.
Our contract clients are mainly individuals with moderate or high
purchasing power. According to data gathered by our company on December 31,
2002, approximately 55% of our clients were male and 60% were 40 years old or
younger. According to Anatel regulations, wireless telecommunications services
may be provided to any individual requesting it, and such individuals must be
served in the order in which their corresponding requests are received,
regardless of their income range. In order to assist in the management of risks
and failures in payments, our company performs credit verifications on all our
clients. The services may be interrupted if the client fails to make the
payments on the due dates established. See "Item 4--Information on the
Company--Business Overview--Invoicing, Billing and Collection."
NETWORK SALES
Our company markets its services by means of a network of proprietary
stores, newsstands, supermarkets, and other shops located in the Region. We own
50 stores and 7 kiosks in the Region, with 36 stores and 3 kiosks located in
Area 7 and 14 stores and 4 kiosks located in Area 8. This network enables our
company to market its services and to offer post-sales services to our clients
throughout the entire Region.
Our company maintains contracts with independent distributors who are paid
commissions on each new user they register and on sales of other services.
Commission levels vary based on the exclusivity and sales performance of each
distributor.
QUALITY OF SERVICE
The excellent quality of service and the extensive area covered by TCO are
factors which have had a preponderant influence on the acquisition and
maintenance of the client base. The indicators established by Anatel to measure
the system's technical performance, such as the "rate of outgoing calls
completed," "call establishment rate," and "rate of dropped calls" have exceeded
the targets defined by Anatel in all the networks composing TCO's and NBT's
areas of coverage. Any occurrence of performance degradation is quickly
identified by the Network Management Center, which directly interacts with the
operating and maintenance divisions of the local carriers in order to define
actions for relocation of means and maintenance. If the correction of a problem
requires an action by the planning and engineering division, the division is
informed so as to establish a plan to improve performance by implementing or
modernizing the network equipment.
OUR NETWORK
As of December 31, 2002, our company's cellular telecommunications network
covered approximately 88% of the population of Area 7 and 66% of the population
of Area 8. We continue to expand and optimize our network to cover as broad a
geographic area as is economically feasible in order to meet consumer demand.
Under our concessions, we have certain obligations concerning network coverage.
See "Item 4--Information on the Company--Business Overview--Regulation of the
Brazilian Telecommunications Industry--Obligations of Telecommunications
Companies."
As of December 31, 2002, our network in Area 7 consisted of 13 cellular
switches, 4 stand-alone HLRs, 703 base-stations, 67 repeaters and 50,938 traffic
channels and one national- and two regional-signaling transfer points. Our seven
Nortel DMS-MTX and six Ericsson AXE 10 switches are distributed among our
switching centers, located in Brasilia, Goiania, Palmas, Campo Grande, Cuiaba,
Rondonopolis, SINOP, Porto Velho and Rio Branco. The network is still connected
primarily by a fiber-optic transmission system leased from fixed-line service
providers in the Region, but we have substantially increased our transmission
facilities during the last year. We expect, based on ongoing projects, that in
2003 the network will be connected with our own facilities for the most part,
including radio accesses and long distance back-bone linking major cities in our
service area.
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, 2002, NBT had
12 cellular switches, located in Manaus, Tabatinga, Belem, Santarem, Maraba,
Redencao, Altamira, Sao Luis, Imperatriz, Balsas, Boa Vista and Macapa, with 169
base-stations, 13 repeaters and 11,087 traffic channels. The network is
connected primarily by our own facilities, including radio accesses and
long-distance radio routes.
Nortel and Ericsson are our primary suppliers of cellular infrastructure
and Marconi, NERA and NEC are our main suppliers of transmission equipment.
LogicaCMG, Sixbell and Comverse are our suppliers for our SMS, pre-paid and
voice mail platforms, respectively.
In 1998, we began upgrading our 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 is still one of
our key strategic initiatives, and digital accesses now represent approximately
98% of our accesses and 83% of our radio traffic channels. We understand that
digitalization offers certain advantages, including more network capacity,
reduced operating costs and additional revenues through the sale of value-added
services. Digital services also offer subscribers greater security.
Our company continues to increase its capacity and improve the quality of
its network by deploying new base-stations and by adding digital channels and
features to our existing base-stations. These additions are carried out in
response to projected subscriber demand, as well as to meet national and
international quality standards for cellular telecommunications services. We
believe that our 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, in 2002 we continued evaluating market
demands for new high-speed data services, which will require technology
evolution, through the overlay of a new air interface infrastructure. For this
reason, trials in both 2.5G-available technologies were carried out in 2002 in
Goiania (GSM/GPRS) and Brasilia (CDMA-1xRTT). In addition, we developed plans in
2002 to start designing this possible overlayed network for the next year. Also,
we started a training program for our technical staff to learn more about this
possible new network.
In view of the consolidation process that took place in January 2003
between TCO/NBT and the joint venture of Portugal Telecom, S.G.P.S., S.A. and
Telefonica Moviles, S.A. (called Brasilcel N.V.), CDMA 2000 (1xRTT) has been
specified and deployed as the JV Technology Standard in view of its evolutionary
path to 2.5G in other Brazilian markets. Since then, we have focused our efforts
on defining network requirements for our overlay with this technology. We have
developed a three-year plan for the above-mentioned overlay; a period in which
the state capitals and main cities in Areas 7 and 8 should be served by this
technology, allowing us to provide a new package of high speed data services and
increase the capacity in our network. We will guarantee that there will not be a
degradation in coverage and service quality in the existing TDMA network during
the overlay process. This will result in two good quality overlayed networks
through which we can provide voice and data services. We believe this will be
essential to keep us competitive in this highly disputed market.
In 2002, we also increased our transmission capabilities by deploying
numerous radio links for interconnection purposes as well as to connect cell
sites to switches. Additionally, we began the deployment of our long distance
back-bone network to connect our main cities, 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 was conducted to connect our switches in
Brasilia, Goiania, Rondonopolis, Cuiaba and Campo Grande. In 2002, we built
metropolitan optical networks in Goiania, Cuiaba, Brasilia and Campo Grande. We
expect to activate the long distance back-bone in the first quarter of the next
year reaching approximately 80% of our company's subscribers in Area 7. Also, we
expect to migrate approximately 200 E1 leased lines to our own radio resources
during the next year. This migration will result in a large reduction in our
transmission costs and improvement in network reliability.
In addition to increasing network capacity, we have expanded our voice-mail
and CSD platforms (distributed across the different regions) and prepaid and SMS
platforms (centralized in Brasilia).
In 2002, we increased penetration in the SMS arena by greatly boosting
mobile originated services (M.O.) and information services (e-celular).
Additionally, in 2002, we began to operate push-pull services like CHAT,
BANKING, INFORMATION, GAMING and others, expanding our SMS to a capacity of 160
SMS/S, and ended the year with SMS traffic of more than 2 million messages a
day.
During 2002, TCO conducted an RFP to purchase a WIN platform to be deployed
in the first half of next year. This platform will be able to provide WIN
services for both TDMA and future CDMA 1x subscribers. In the first phase, the
platform will have the capacity to accommodate 30,000 WIN subscribers. Huawei, a
Chinese vendor with 30 million WIN subscribers in the Asia-Pacific countries,
placed the winning bid in the RFP.
Also, during 2002 TCO evaluated the technical and economic aspects of
purchasing and deploying a VASGW (Gateway for Value Added Services ) to improve
the speed of deployment and reliability of new applications in SMS. We believe
that the activation of this platform could boost the speed in offering new
applications and our SMS efficiency could result in additional data revenues for
our company. We expect that deployment of the VASGW will not start until the end
of 2003.
SOURCES OF REVENUE
We generate revenue from:
o usage charges, which include measured service charges for calls and
other similar charges;
o network-usage charges (or interconnection charges), which are amounts
we charge other cellular and fixed-line service providers for use of
our network;
o monthly subscription charges;
o the sale of cellular handsets; and
o other charges, including charges for call forwarding, call waiting and
call blocking.
Our rates are subject to approval by Anatel. See "Item 4--Information on
the Company--Business Overview--Regulation of the Brazilian Telecommunications
Industry."
CONTRACT CUSTOMERS
Since October 1994, cellular telecommunications service in Brazil has been
offered on a "calling party pays" basis, under which customers pay only for
calls that they originate. In addition, customers pay roaming charges on calls
made or received outside their home registration area.
The Region is divided into a total of 92 tariff areas, consisting of 81
tariff areas in Area 7 and 11 tariff areas in Area 8. We apply the lowest base
rate to calls made by a subscriber in a tariff area to a line in the same tariff
area, a higher rate to calls made by a subscriber in one tariff area to a line
within the Region, and the highest rate to calls made by a subscriber in the
Region to persons outside the Region. Additionally, we apply a per-call
surcharge known as "AD" to calls made or received by a subscriber while outside
the Region. Finally, subscribers who receive calls outside the home registration
area pay a certain rate per minute if located within the Region, or a higher
rate if located outside the Region.
INTERCONNECTION CHARGE
We earn revenues from any call that originates from another cellular or
fixed-line service provider network connecting one of our customers. We charge
the service provider from whose network the call originates a network usage
charge for every minute that our network is used in connection with the call.
See Item 4 "Information on the Company--Business Overview--Operating
Agreements--Interconnection Agreements." The average network usage tariff
charged by our company to other service providers was R$0.17 per minute in 1997
and R$0.19 per minute in 1998, in each case 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. In April 2002, Anatel granted a 10.12% increase and the TU-M value
increased to R$0.2959. In February 2003, Anatel granted a 21.99% increase and
the TU-M value rose to R$0.3609, 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. In
April 2002, Anatel granted a 13.64% increase and the TU-M value increased to
R$0.3016. In February 2003, Anatel granted a 21.99% increase and the value of
the TU-M rose to R$0.3679, net of value-added taxes.
ROAMING FEES
We receive revenue pursuant to roaming agreements with other cellular
service providers. When a customer of another cellular service provider makes a
call within our Region, that service provider pays us for the call at the
applicable rate. Conversely, when one of our customers makes a cellular call
outside of our Region, we must pay the charges associated with that call to the
cellular service provider in whose region the call originates. See "Item
4--Information on the Company--Business Overview--Operating Agreements--Roaming
Agreements."
OPERATING AGREEMENTS
INTERCONNECTION AGREEMENTS
Subscribers use the telecommunication services available on the networks
provided by the Switched Fixed Telephone System, the SMC, and the SMP to make
telephone calls. In order to facilitate telecommunications between cellular
telephone users and fixed-line telephone users, as well as among cellular
telephone users, our company must establish Network Interconnection Agreements.
In 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. 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 companies upon the joint technical planning of the connection.
ROAMING AGREEMENTS
Agreements for automatic roaming have been established among most A Band
and B Band cellular service providers, through the ASSOCIACAO BRASILEIRA DE
ROAMING, or ABR. However, Americel S.A. did not enter into an automatic roaming
agreement with us in Area 7 and Tele Norte Celular Participacoes S.A. did not
enter into an automatic roaming agreement with NBT in Area 8 because we are not
obligated to enter into such agreements pursuant to Anatel regulations.
The agreements permit our subscribers to use their cellular phones on
networks of other cellular service providers while traveling or roaming outside
the Region. Conversely, we are required to provide cellular service to
subscribers of those cellular service providers when those subscribers are
within the Region. The agreements require each cellular service provider to
provide service to roaming subscribers on the same basis as it provides service
to its 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 of R$0.05 per originated or terminated call that involves roaming.
Brazilian cellular service providers have also, through ABR, entered into
international roaming agreements with foreign service providers, which permit
the Brazilian service providers' subscribers to use their cellular phones in
Argentina and Uruguay and the foreign service providers' subscribers to use
their cellular phones in Brazil. The terms of these international roaming
agreements vary from agreement to agreement. We also have a roaming agreement
with Gradiente, an international cellular service roaming provider, which
permits our subscribers to have roaming services in North America, Europe, Asia,
Africa and Oceania.
TAXES ON TELECOMMUNICATIONS SERVICES
The cost of telecommunications services to customers incorporates a variety
of taxes, including:
ICMS. The principal tax is the IMPOSTO SOBRE CIRCULACAO DE MERCADORIAS
E SERVICOS, or the ICMS. The ICMS is a tax that the Brazilian states
impose at varying rates on certain revenues from the sale of goods and
services, including telecommunications services. The ICMS rate for
telecommunications services charged in the states of the Region is
25%, except for the states of Mato Grosso and Para, where the rate is
30%, the state of Goias, where the rate is 26%, and the state of
Rondonia, where the rate is 35%. The ICMS is also charged on those
revenues generated with the sales of cellular handsets, at the rate of
17%, with the exception of the state of Goias, where the rate is 7%,
and the state of Tocantins, where the rate is 12%.
COFINS. The CONTRIBUICAO PARA FINANCIAMENTO DA SEGURIDADE SOCIAL, or
COFINS, is a social contribution tax on gross operating revenues. On
November 27, 1998, the Brazilian government, through Law No. 9,718,
increased the COFINS rate from 2% to 3%, allowing a set-off of up to
one-third of the COFINS amount with the amount owed as a result of the
CSLL (Social Contribution on Net Profit). Temporary Measure number
2158, issued in August of 2001 (the most recent version of Temporary
Measure number 1991 -- January 13, 2000), revoked the authorization to
set off one third of the COFINS amount with the amount owed as a
result of the CSLL.
PIS. The PROGRAMA DE INTEGRACAO SOCIAL, or PIS, is another social
contribution tax that is imposed on gross operating revenue at a rate
of 0.65%. In October 2002, Law No. 10,637 was enacted, making such
contribution non-cumulative and increasing the rate to 1.65%, except
in connection with telecommunication services, where the rate
continues to be 0.65%.
FUST. On August 17, 2000, Law No. 9,998, created the FUNDO DE
UNIVERSALIZACAO DOS SERVICOS DE TELECOMUNICACOES, or FUST, a social
contribution tax applicable to all telecommunications 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 the telecommunications services.
The FUST is imposed at a rate of 1% of gross operating revenues
exclusively from telecommunication services, net of ICMS, PIS and
COFINS and its cost may not be passed on to customers. It became
effective on January 1, 2001.
FUNTTEL. On November 28, 2000, the Brazilian government, through Law
No. 10,052, created the FUNDO PARA DESENVOLVIMENTO TECNOLOGICO DAS
TELECOMUNICACOES, or FUNTTEL, a social contribution tax applicable to
all telecommunications 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 the development of new technologies;
o promoting the training of personnel;
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% of gross operating revenues
exclusively from telecommunication services, net of ICMS, PIS and
COFINS, and its cost may not be passed on to customers. It became
effective on March 1, 2001.
FISTEL. On July 7, 1966, the Brazilian government, through Law No.
5,070, created the FUNDO DE FISCALIZACAO DAS TELECOMUNICACOES, or
FISTEL, a tax applicable to telecommunications transmission equipment.
The purpose of the FISTEL is to provide financial resources for the
Brazilian government to control and inspect the industry.
The FISTEL tax is comprised of two different fees:
o an installation and inspection fee that is assessed every time we
activate a new cellular number, as well as every time an
authorization certificate is issued with respect to new equipment
in telecommunications stations. Effective April 2001, the
installation and inspection fee has been assessed based on the
net activation of cellular numbers, i.e., the number of new
cellular activation subtracted by the number of cancelled
subscriptions, as well as on the basis of the net additions of
radio base stations; and
o an operation and inspection fee, assessed annually on the basis
of the total number of cellular numbers in use and the total
number of radio base stations installed at the end of the fiscal
year, which is equal to 50% of the installation and inspection
fee.
INVOICING, BILLING AND COLLECTION
Our company's invoicing system has four main functions: (i) subscriber
registration, (ii) subscriber information management, (iii) accounts receivable
management and (iv) billing and collection. To facilitate the invoicing cycles,
we have eight staggered invoicing cycles per month.
We estimate that approximately 70% (by value) of our invoices are paid in
the month they are due. If a subscriber's payment is more than 15 days past due,
service may be partially suspended and if its more than 30 days past due,
service may be totally suspended until payment is received. After 60 days
delinquency, the subscriber's name is filed with credit protection agencies. If
a subscriber's payment is more than 90 days past due, the subscriber's contract
may be cancelled. After 120 days delinquency, the debts are referred to
independent collection agencies. Our net losses on trade accounts receivable
were 3.8%, 3.1% and 1.67% of gross operating revenues in 2000, 2001 and 2002,
respectively. See "Item 5--Operating and Financial Review and
Prospects--Operating Results for the Years Ended December 31, 2000, 2001 and
2002--Operating Expenses--Selling Expenses." Our company offers the possibility
to negotiate debts by means of installments.
We receive roaming fees from other cellular service providers when their
subscribers make cellular calls while within our Region, and pay roaming fees to
other cellular service providers when our subscribers make cellular calls while
outside of their Region. See "Item 4--Information on the Company--Business
Overview--Sources of Revenue--Roaming Fees." We receive network-usage fees from
other service providers when their subscribers make calls that terminate on a
cellular telephone within our Region, and we pay network-usage fees when our
subscribers make calls that terminate on the network of another service
provider. See "Item 4--Information on the Company--Business Overview--Sources of
Revenue--Interconnection Charges." At the end of each month, our 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, our Company forwards the amount registered on account of such calls
to a clearinghouse operated by Embratel and charges the carriers a fee for the
use of its cellular telecommunications network.
FRAUD DETECTION AND PREVENTION
Generally, we encounter two principal types of fraud: 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. We can
usually detect subscription fraud prior to the invoicing of charged services by
analyzing the subscriber's use of the cellular line and the information on file
with our company and with collection agencies. Nevertheless, it is difficult for
us to control this type of fraud because of Anatel's application of Rule 05/78,
which prohibits the suspension of service prior to an account being 15 days past
due. We may, however, suspend service 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 suspension of service. In any case
subscription fraud is one of the most significant problems for cellular
companies in Brazil.
Cloning fraud consists of duplicating the cellular signal of a BONA FIDE
subscriber, which enables the perpetrator of the fraud to make telephone calls
using the subscriber's signal. The mobile identification number and equipment
serial number of the subscriber are captured by the "cloner" by using a radio
scanner. To avoid inconveniences to subscribers, we delete the cloned calls from
the billing system before issuing invoices to them. Our 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
us, such as blocking international calls (service is provided only upon request
by the subscriber) and creating a 24-hour fraud control center consisting of 11
analysts using the Integrated Fraud Detection and Control System, or SAF. The
SAF was implemented on July 14, 1998 and is linked to a national network, which
allows the detection, analysis, and control of abnormalities in cellular service
usage that may indicate fraud throughout Brazil.
COMPETITION
The General Telecommunications Law provides for the introduction of
competition in telecommunications services in Brazil. The Brazilian government
granted ten licenses to private companies, each a B Band Service Provider, to
provide cellular telecommunications service within particular regions of Brazil
on a frequency range referred to as "B Band." The frequency range used by the
cellular service providers that were spun off from the Telebras System,
including our company, each an A Band Service Provider, is referred to as "A
Band." Each B Band 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 Authorizations."
B BAND COMPETITION IN AREA 7
On December 31, 2002, Americel S.A., whose major shareholders are Ameripar
S.A. (52.94%), Telesystem International Wireless (Brasil), Inc. (20.04%), Bell
Canada International BVI-V Ltd. (18.91%), and BNDES Participacoes S.A. (owner of
100% of the preferred shares), received authorization to provide wireless
telecommunications services in B Band in Area 7. Americel S.A. paid R$338.5
million for this authorization, and started to provide wireless
telecommunications services, based exclusively on the TDMA standard, in the
Region in November of 1997. Americel S.A. does not render analog services in the
Region. The rights and obligations of Americel S.A. while the authorization is
in force are substantially identical to the rights and obligations of our
company concerning our concessions. Americel S.A.'s clients use standard,
bimodal AMPS and TDMA handsets for roaming in the areas where digital services
are not yet available.
A BAND COMPETITION IN AREA 8
In Area 8, NBT, which is the B Band subsidiary, competes with the
subsidiaries of Tele Norte Celular Participacoes S.A., whose trade name is
Amazonia Celular, and whose major shareholder is Telepart Participacoes Ltda.
(51.86%). The services provided are AMPS and TDMA.
COMPETITION IN C BAND
There were no participants in the auction for SMP contracts in C Band,
which was held on January 30, 2001. Anatel might hold a second auction for SMP
contracts in C Band, or issue a public solicitation so as to encourage companies
who may be interested in parts of the C Band frequencies. If only one or two
companies show their interest in each region, Anatel may sell directly to them
and not hold any other auction.
COMPETITION IN D BAND
On February 13, 2001, Anatel held an auction for SMP contracts in D Band.
Telecom Italia Mobile, or TIM, placed the best bid for SMP contracts in D Band,
covering two SMP regions: (i) Brazil's central-southern region, which includes
the concession areas of our subsidiary companies, except NBT, and (ii) the state
of Sao Paulo. TIM paid R$543 million for the contract to operate SMP services in
D Band in the central-southern region, and R$997 million for the contract to
operate SMP services in D Band in the state of Sao Paulo, which represent a 0.6%
and 40.42% premium, respectively, above the minimum bidding price established by
Anatel.
TIM started operations in D Band in 2002 under the condition that the
provider of fixed-line services in each of those regions would advance the
targets set by Anatel for December 2003. Tele Centro Sul Participacoes S.A.,
currently known as Brasil Telecom S.A., is the provider of fixed-line services
in the central-southern region, and Telecomunicacoes de Sao Paulo S.A. --
Telesp, known as Telefonica, is the provider of fixed-line services in the Sao
Paulo state region.
Tele Norte Leste Participacoes S.A, or Telemar, the first fixed-line
carrier in the remaining region, which comprises 16 states in northern and
eastern Brazil, presented the best bid for SMP contracts covering the region in
which it offers fixed network telecommunication services. Telemar paid R$1.1
billion for the SMP contract in D Band, with a premium of 17.23% above the
minimum bidding price set by Anatel, and provide SMP services using GSM
technology. Telemar SMP, or Oi, started operations in D Band in 2002.
COMPETITION IN E BAND
On March 13, 2001, Anatel held an auction for SMP contracts in Bands D and
E. TIM was the only company to present a proposal in the auction held for SMP
contracts in E Band, and obtained a contract to offer SMP services in the region
comprising the 16 states of the northern and the eastern regions of Brazil,
which is the same region in which Telemar operates as a provider of fixed-line
telephone services. No proposals were presented for SMP contracts in E Band in
two other regions. TIM paid R$990 million for the contact, with a 5.32% premium
above the minimum price set by Anatel. On November 19, 2002, Anatel held a
second auction for SMP contracts in E Band for the central-southern region and
for the state of Sao Paulo, as well as for some areas in the northeast of the
country and in the states of Minas Gerais, Parana and Santa Catarina, which TIM
had waived due to the fact that it operates in both A Band and B Band in these
areas. In this auction Brasil Telecom S.A. purchased the license to offer
services in Region II (which consists of Brazil's Federal District and the
states of Tocantins, Goias, Acre, Roraima, Mato Groso, Mato Grosso do Sul,
Parana, Santa Catarina and Rio Grande do Sul) of the PLANO GERAL DE OUTORGAS -
PGO-SMP for R$69.265 million.
D BAND COMPETITION IN AREA 7 OF THE SMC
TIM Brasil is the D Band carrier in Area 7 of the SMC, and started to
provide services in September 2002, using digital GSM technology. Until the end
of 2002, it operated in the metropolitan areas of the Brazilian Federal District
and in the cities of Goiania, Campo Grande, and Cuiaba.
E BAND COMPETITION IN AREA 7 OF THE SMC
Having acquired its license in November 2002, Brasil Telecom S.A. has
announced plans to start operations in the second half of 2003 using digital
technology. Since it also operates fixed-line telecommunications, Brasil Telecom
S.A. has a strong advantage -- the fixed-wireless synergy.
D BAND COMPETITION IN AREA 8 OF THE SMC
Oi is the D Band carrier operating in Area 8 of the SMC, and began offering
services in June 2002, using digital GSM technology. Given that Telemar also
operates fixed-line telecommunications, it has the advantage of fixed-wireless
synergy. Until the end of 2002, it operated in the metropolitan areas of Belem,
Manaus and Sao Luis.
E BAND COMPETITION IN AREA 8 OF THE SMC
Tim Brasil is the E Band carrier operating in Area 8 of the SMC, and
started offering services based on GSM technology in September 2002. Until the
end of 2002, it operated in the metropolitan areas of Belem, Manaus, and Sao
Luis.
OTHER COMPETITION
Our company also competes with providers of fixed-line telephone services.
If enough capital is invested in fixed-line telephone services in Area 7 to
increase the density of fixed lines and improve service, some of our company's
present and potential clients may migrate to providers of fixed-line telephone
services for a number of reasons, such as lower rates. The provider of
fixed-line telephone services in Area 7 is Brasil-Telecom (previously, Tele
Centro Sul Celular Participacoes S.A.). Aiming to promote competition and
improve the quality of services provided in the telecommunications sector, the
Brazilian government granted contracts to other "mirror companies" allowing them
to operate fixed-line services. On September 30, 1999, the Brazilian government
granted Global Village Telecom S.A. a concession to operate fixed-line
telephoning services in the same concession area where Brasil-Telecom operates.
The concession includes a broad authorization to use fixed cellular solutions in
an attempt to quickly distribute fixed lines to users.
In Area 8, the fixed-line provider is Telemar and the mirror-company is
Vesper.
Satellite-operated services, which guarantee nationwide coverage, are
available in Brazil. Although these services have the advantage of covering much
larger areas than those covered by the cellular telecommunications services,
they are considerably more expensive than the cellular telecommunications
services and do not offer competitive coverage inside buildings. Currently, our
company does not plan to offer satellite-operated mobile services (other than
those included in the roaming contracts entered into with providers of satellite
services), though we may offer such services in the future.
There can be no assurance that the entry of new competitors will not have
significantly adverse effects on our company's business, financial statements,
or the results of its operations or its prospects. Any adverse effects on our
company's market share which results from pressures originating from competition
will depend on several factors which cannot be assessed with precision and which
are therefore beyond our company's control. Among such factors are the identity
of the competitors, their strategy and ability to conduct business, market
conditions prevailing at the time, rules applicable to the new market
participants and to our company, as well as the effectiveness of the efforts
made by our company to prepare for and to face the strong competition. There may
also be competitors with higher technical capacity and more resources than those
owned by our company.
REGULATION OF THE BRAZILIAN TELECOMMUNICATIONS INDUSTRY
GENERAL
Our business, the services we provide and the prices we charge are subject
to regulation under the General Telecommunications Law and various
administrative enactments, which regulate the services provided by Brazilian
telecommunications operators.
Anatel is the agency that regulates telecommunications under the General
Telecommunications Law and the July 2001 Regulamento da Agencia Nacional de
Telecomunicacoes, known as the Anatel Decree. Anatel is financially autonomous
and administratively independent of the Brazilian government. However Anatel
maintains a close relationship to the Ministry of Communications. Any regulation
proposed by Anatel is subject to a period of public comment, which may include a
public hearing. Anatel's irregular conduct can be challenged in the Brazilian
courts. On November 25, 1998, Anatel enacted Resolution 73--Regulation of
Telecommunication Services, which regulates in detail the new comprehensive
framework for the provision of telecommunications services in Brazil established
by the General Telecommunications Law.
CONCESSIONS AND AUTHORIZATIONS
Prior to January 2000, Anatel had only authorized two mobile service
providers in each of the ten franchise areas under A Band and B Band. A Band and
B Band mobile service providers were granted concessions pursuant to the LEI
MINIMA, or the Minimum Law. Each concession is a specific grant of authority to
supply cellular telecommunications services, subject to certain requirements
contained in the applicable list of obligations appended to each concession. If
a mobile service provider wishes to offer any telecommunications service other
than those authorized by its concession, it may apply to Anatel for an
authorization to offer such other services.
In accordance with the General Telecommunications Law, a concession relates
to the provision of telecommunication services under the public regime, as
determined by the public administration. A concession may only be granted upon a
prior auction bidding process. As a result, regulatory provisions are inserted
in the relevant concession agreements and the concessionaire is subject to
public service principles of continuity, changeability and equal treatment of
customers. Also, the government authority is entitled to direct and control the
performance of the services, to apply penalties, and to declare the expiration
of the concession and the return of assets of the concessionaire to the
government authority upon termination of the concession. Another distinctive
feature is the right of the concessionaire to maintain an economic and financial
balance of the concession agreement. The concession is granted for a finite
period of time and is generally renewable once.
An authorization is a permission granted by the public administration under
the private regime, which may or not be granted upon a prior auction bidding
process, to the extent that the authorized party complies with the objective and
subjective conditions deemed necessary for the rendering of the relevant type of
telecommunication service in the private regime. The authorization is granted
for an indeterminate period of time. Under the authorization, the government
will not guarantee the economic and financial balance, as it was guaranteed
under the concession.
SMP REGULATION
In November 2000, Anatel adopted certain regulations for the issuance of
new licenses, which are authorizations to provide wireless communication
services through SMP, personal mobile service, to compete with the then existing
cellular operators in the various regions of Brazil. These regulations divided
Brazil into three main regions covering the same geographic area as the
concessions for the fixed-line telecommunication services. Anatel organized
auctions for three new licenses for each of those regions. The new licenses
provided that the new services would be operated in the 1,800 MHz radio
frequency bands, and they were denominated C Band, D Band and E Band. These new
licenses were auctioned by Anatel and awarded during the first quarter of 2001
and at the end of 2002.
Under these new licenses:
o services are to be provided using the 1,800MHz frequency;
o each operator may provide domestic and international long-distance
services in its licensed area;
o existing cellular service providers, as long as they do not have
partnerships with fixed-line operators, as well as new entrants into
the Brazilian telecommunications market could have bid for C Band, D
Band and E Band licenses. However, fixed-line operators, their
controlling shareholders and affiliated cellular providers may only
bid for D Band and E Band licenses;
o a cellular operator, or its respective controlling shareholders, may
not have geographical overlap between licenses; and
o current A Band and B Band cellular service providers could apply for
an extra frequency range.
Pursuant to the SMP services regulation each of the three main regions is
divided into registration areas, or tariff areas.
On February 3, 2003, TCO chose to replace its SMC Concession Contracts for
Personal Mobile Service Agreements (SMP) in Regions I (sub-range of "B"
frequencies) and II (sub-range of "A" frequencies) of the PGO. In addition, TCO
has full control of TCO IP S.A., which holds a national authorization for
Multimedia Communication Services (SERVICOS DE COMUNICACAO MULTIMIDIA, or SCM).
BENEFIT OF THE SMP SYSTEM
According to the General Telecommunications Law and Decree No. 2056/96,
control of the concessionaire can only be transferred after five years from the
date of the privatization in the case of A Band concessionaires or the
commencement of services in the case of B Band concessionaires. On the other
hand, under the SMP system, the authorization or control of the authorized party
can be transferred through merger of the relevant cellular mobile service
provider, whether it is providing services under the A Band or the B Band.
Under a SMP authorization, we could lose the guarantee of the terms and
conditions of the license for the 15-year term. We would, however, gain greater
discretion in running the business and be relieved of the obligation to revert
our operating assets to the Brazilian government when our concessions end.
OBLIGATIONS OF TELECOMMUNICATIONS COMPANIES
As a telecommunications service provider, we are subject to regulations
concerning quality of service and network expansion, as established in our
authorizations and our original concession agreements.
Any breach by the companies of telecommunications legislation or of any
obligation set forth in their authorizations may result in a fine of up to R$50
million.
TCO's new authorizations impose obligations to meet higher quality of
service standards, such as: the system's ability to make and receive calls, call
failure rates, the network's capacity to handle peak periods, failed
interconnection of calls and customer complaints. Anatel published the method
for collecting these quality service standards data on April 23, 2003 (Anatel
Resolution No. 335/03).
INTERCONNECTION
Under the General Telecommunications Law, telecommunications service
providers are classified as providers of either collective or restricted
services. All cellular operators, including SMP service providers, are
classified by Anatel as collective service providers. All providers of
collective services are required to provide interconnection upon request to any
other collective service provider. The terms and conditions of interconnection
are freely negotiated between parties, subject to price caps and other rules
established by Anatel. Providers must enter into interconnection agreements,
regarding, among other things, tariffs, commercial conditions and technical
issues, with all requesting parties on a non-discriminatory basis.
Interconnection agreements must be approved by Anatel and may be rejected
if they are contrary to the principles of free competition and the applicable
regulations. If the parties cannot agree upon the terms and conditions of
interconnection, Anatel may determine terms and conditions by arbitration.
RATE REGULATION
Our 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 in our concessions were based on the previously
existing tariffs, which were developed based on our fully-allocated costs. The
initial price cap is adjusted on an annual basis under a formula set forth in
our concessions 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. We 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 our
network must pay certain fees, primarily a network-usage 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 A Band Service Providers is subject
to a price cap set by Anatel, which varies from company to company, based on the
underlying cost characteristics of each company's network. For a breakdown of
past network usage charges, see "Item 4--Information on the Company--Business
Overview--Sources of Revenue--Interconnection Charges."
ANCILLARY SERVICES, VALUE-ADDED SERVICES AND INTERNET REGULATION
On June 15, 2000, Anatel issued Resolution 226, which amended Norm 23/96.
Under the amended Norm 23/96, cellular service providers are authorized to
provide ancillary services to subscribers in connection with one or more service
plans. We currently offer our TDMA-capable subscribers the following value-added
services: (i) caller identification; (ii) voicemail; (iii) call forwarding; (iv)
call waiting; (v) SMS; (vi) CSD; and (vii) WAP. 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 could be provided
only under test permission and could not be charged. Resolution 226 also
requires cellular service providers to provide subscribers with detailed billing
information for certain services, which were previously considered ancillary
charged for separately. It also modified billing criteria for short repetitive
calls (3 to 30 seconds) of the same origin and destination if the delay between
calls does not exceed 120 seconds.
Value-added services are not considered telecommunications services PER SE
under Brazilian telecommunications regulations, but rather services that add
features to a telecommunications service that supports them. All
telecommunications service providers are required to grant network access to
parties interested in providing value-added services, on a non-discriminatory
basis, if technically feasible to do so. Telecommunications service providers
are also allowed to render value-added services through their own network.
Internet access is considered a value-added service by Brazilian legislation
thus providers of Internet access are not considered telecommunications
companies. Current regulations allow our company and any other interested party
to offer Internet connection services through our network. While setting
consumer pricing for our Internet connection services, we must consider the
costs charged to third parties offering similar services for usage of our
network. Anatel is expected to issue specific regulations in the near future
regarding the use of cellular networks to provide Internet-connection services.
C. ORGANIZATIONAL STRUCTURE
TCO AND ITS OPERATING SUBSIDIARIES
The following table sets forth (i) the contribution made by each subsidiary
to our net operating revenues for the year ending December 31, 2002, and (ii)
TCO's shareholding in each subsidiary on December 31, 2002.
CONTRIBUTION TO
CONSOLIDATED RESULTS TCO OWNERSHIP
-------------------- ----------------------------
% OF NET OPERATING % OF SHARE % OF VOTING
SUBSIDIARY REVENUES CAPITAL STOCK
-------------------- -------------------- ------------ -------------
TCO...................... 26.91% - -
Telegoias................ 22.77% 97.07% 98.59%
Telemat.................. 13.94% 97.56% 99.49%
Telems................... 11.37% 98.45% 99.61%
Teleron.................. 4.23% 97.21% 98.26%
Teleacre................. 2.17% 98.35% 99.96%
NBT...................... 18.61% 98.33% 95.00%
Substantially all of TCO's assets consist of shares in its subsidiaries and
the assets transferred to TCO as a result of the merger with Telebrasilia. TCO
relies very substantially on dividends from its subsidiaries to meet its needs
for cash, including cash to pay dividends to its shareholders. See "Item
5--Operating and Financial Review and Prospects--Liquidity and Capital
Resources."
On October 19, 1998, Tele Centro Oeste/Inepar, a consortium comprised of
(i) Inepar S.A. Industria e Construcoes (50%) and (ii) TCO (50%), was awarded a
license to provide cellular telecommunications services in Area 8. On May 21,
1999, we acquired 45% of the shares of Tele Centro Oeste/Inepar from Inepar,
increasing our holding in the consortium to 95%. Upon acquiring control, we
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 B Band
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, TCO held a general extraordinary shareholders meeting in
which it approved our merger with Telebrasilia and the consequent transfer to us
of the concession to explore mobile cellular services previously held by
Telebrasilia.
On April 25, 2003, TCP acquired 61.10% of the voting capital stock of TCO
for approximately R$1,505 million, corresponding to R$19.48719845 per each lot
of 1,000 shares acquired. The agreement also included the acquisition of TCO's
subsidiaries, including NBT. TCP has announced that it will launch, in the
second quarter of 2003, a tender offer for the voting shares of TCO, as legally
required by the acquisition of the control of TCO. The price per share to be
offered is equal to 80% of the price paid to the controlling shareholders. After
the acquisition and the tender offer, TCP expects to incorporate TCO shares and
ADSs.
D. PROPERTY, PLANTS AND EQUIPMENT
Our principal physical assets consist of transmission equipment, switching
equipment and base-stations. Our properties are located throughout the Region.
We own our headquarters in Brasilia, Goiania, Cuiaba and Porto Velho and also
lease office space in Brasilia (approximately 3,000 square meters), Campo Grande
(approximately 1,800 square meters), Cuiaba (approximately 480 square meters),
Rio Branco (approximately 420 square meters), Amapa (approximately 55 square
meters), Amazonas (approximately 750 square meters), Maranhao (approximately
1,000 square meters) and Para (approximately 4,200 square meters).
Additionally, we lease the sites where our cellular telecommunications
network equipment is installed. As of December 31, 2002, we had 25 cellular
switches and 952 base-stations and repeaters in the Region, of which
approximately 30% were located on land owned by us and the remainder of which
were located on land leased by us.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
FORMATION OF TCO 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,
TCO 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 of 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. TCO 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% of the share capital of Telebrasilia,
83.8% of the share capital of Telegoias, 91.9% of the share capital of Telemat,
96.0% of the share capital of Telems, 91.3% of the share capital of Telecom, and
94.0% of the share capital of Teleacre were transferred to TCO.
On May 24, 1999, NBT was formed as a private corporation with 95%
participation by TCO. 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.
You should read the following discussion in conjunction with our
consolidated financial statements and our notes, which are included elsewhere in
this annual report. The introduction to Item 3, "Selected Financial Data,"
describes certain important features regarding the presentation of our
consolidated financial statements.
EFFECTS OF CHANGES IN PRESENTATION OF FINANCIAL STATEMENTS IN 2000, 2001 AND
2002
Three significant differences in presentation exist among our consolidated
financial statements for 2000, 2001 and 2002. You should take these differences
into account when comparing financial conditions and results of operations for
2000, 2001 and 2002.
FULLY SEPARATE OPERATIONS OF TCO'S SUBSIDIARIES. The Predecessor Companies
were split up effective January 5, 1998, to separate the cellular operations
from the fixed-line operations, resulting in the creation of the A Band
Subsidiaries. The B Band Subsidiary was created in May 1999. For 2000, 2001 and
2002 our consolidated financial statements reflect the operations of TCO's
subsidiaries as fully independent companies.
INDEXATION FOR INFLATION. Our 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 Data" and Note 2(b) to our consolidated financial statements. In
accordance with the constant currency methodology used in the preparation of our
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 our 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 stated that financial statements would not have to be
indexed for 2001 as the three-year cumulative inflation rate in Brazil had
fallen below 100%.
POLITICAL, ECONOMIC, REGULATORY AND COMPETITIVE FACTORS
You should read the following discussion in conjunction with the
"Information on the Company" section included elsewhere in this annual report.
As set forth in greater detail below, our financial condition and operations are
significantly affected by Brazilian telecommunications regulations, including
regulation of tariffs. See "Item 4--Information on the Company--Business
Overview--Regulation of the Brazilian Telecommunications Industry." Our
financial condition, revenues and expenses also have been, and are expected to
continue to be, affected by the political and economic environment in Brazil. In
particular, our 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.
We have faced competition in the Region since November 1997. Our management
expects that, as a result of competition, prices for cellular telecommunications
services will decrease and our operating margins will diminish. The scope of
increased competition and any adverse effects on our results and market share
will depend on a variety of factors that cannot now be assessed with precision
and that are beyond our control. See "Item 4--Information on the
Company--Business Overview--Competition."
FOREIGN EXCHANGE AND INTEREST-RATE EXPOSURE
Our financial condition, 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 (LIBOR, TJLP, UMBNDES and CDI).
Our principal foreign exchange risk arises from our foreign currency
liabilities. At December 31, 2002, our total debt amounted to R$627.780 million
of which 67.18% is denominated in foreign currency (63.53% adjusted by the U.S.
dollar and 3.65% denominated in a currency basket of BNDES). Of our U.S. dollar
denominated debt, 85.75% is protected by hedge operations at the end of the
fourth quarter. From the portion denominated in foreign currency, 81.09% is
protected by hedge operations. The hedge operations were carried out in order to
partially cover the future maturity of debts in U.S. dollars with fixed or
variable interest. The gains or losses from such operations are recorded in the
statement of operations.
R$82.4 million of litigation contingency funds related to loans wrongly
allocated to our 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, which we refer to as 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 TCO. In light of this departure from the agreed procedures
for assigning the right to receive payments under the Telebras loans, payment of
the Telebras loans was suspended immediately upon the change of control of TCO.
Our 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% per year. In June of 1999, we filed a lawsuit
claiming that TCO is the owner of the rights to receive payments for these loans
and seeking an indemnity for principal and interest amounts previously paid to
Telebras. In November of 1999, the obligation under the loans were assigned by
Telebrasilia and Telegoias to TCO. On August 1, 2001, a judgment was entered
denying the demands of TCO. On October 8, 2001, TCO filed an appeal to this
judgment in the Court of Appeals of the Federal District (TJDFT). The Court
unanimously decided against TCO on the appeal and in favor of Tele Centro Sul.
TCO will appeal the decision with the Higher Court of Justice and the Federal
Supreme Court. The contingency related to the difference between the contracts
original interest rates and the interest rates as adjusted to be equal to IGP-M
plus 6% is estimated to be R$68.780. See "Item 8--Financial
Information--Consolidated Statements and Other Financial Information--Legal
Matters--Litigation Related to Telebras Loans."
Our revenues are earned entirely in REAIS, and we have has no
dollar-denominated assets. We have hedged 81.09% of our debt in foreign currency
exposure existing as of December 31, 2002. Thus, if we become obligated to
service and repay the Telebras loans as U.S. dollar obligations, we will
continue to have foreign exchange risk with respect to 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 our operations.
We are exposed to interest-rate risk as a consequence of our floating-rate
debt and our limited, floating-rate, interest-earning assets. The risk relates
to the possibility of our company realizing losses resulting from interest rate
fluctuations, thus increasing the debt balances of loans obtained in the market
and the financial expenses. Our company has not entered into hedge contracts
against this risk. However, we constantly monitor the market interest rates in
order to assess the need for obtaining derivatives and other protection against
the risk of interest rates volatility.
At December 31, 2002, our company had (as explained in Note 28 to our
consolidated financial statements) R$627.780 million in debt, of which R$206.066
million were denominated in national currency floating rates (primarily TJLP),
R$186.256 were denominated in foreign currency floating rates (LIBOR and
currency basket of BNDES) and R$235.459 were denominated in fixed dollar rates.
We have hedged 81.09% of our foreign exposure existing as of December 31, 2002
resulting in CDI denominated debts. Those debts are fully compensated by our
short-term investments (R$121.362 million at December 31, 2002) and debentures
issued by Fixcel S.A. (R$712.135 million at December 31, 2002) that are based on
the CDI flotation.
Our decision to treat the Telebras loans as REAL-denominated obligations
does not change their character as floating-rate interest obligations, although
we are now treating the base rate of interest on the loans as IGP-M rather than
LIBOR. We have not entered into derivative contracts or made other arrangements
to hedge against this risk. Accordingly, should market interest rates rise
(principally IGP-M or, if we become obligated to service and repay the Telebras
loans as U.S. dollar obligations, LIBOR) our financing expenses will increase.
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 our management forms its
judgments about future events, including the variables and assumptions
underlying the estimates, and the sensitivity of those judgments to different
circumstances, we have identified the following critical accounting policies:
o revenue recognition and accounts receivable;
o goodwill, intangible assets and amortization;
o impairment of assets;
o deferred charges; and
o tax contingencies.
Notes 3 and 29 of our consolidated financial statements include a summary
of significant accounting polices in Brazil and the United States and methods
used in the preparation of our consolidated financial statements.
U.S. GAAP RECONCILIATION
We prepare our 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 our
revenues and expenses 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$287.4 million for 2002,
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.
In 2002, our company acquired the minority interest in the subsidiary,
Telebrasilia. The acquisition increased our company's interest in Telebrasilia
from 88.25% to 100%. Under Brazilian GAAP, the transaction was recorded at book
value. For U.S. GAAP, our company recorded the transaction at fair value as
required by the purchase method under SFAS No. 141. As a result, for U.S. GAAP
purposes the shares issued to purchase the minority interest were recorded at
the fair value of R$64,799 on the date of the transaction. Additionally, our
company recorded a step up in the fair value of assets of R$36,520 and deferred
income tax liabilities of R$9,266. The step up in the fair value of assets,
excluding the portion related to goodwill amounting to R$9,266, is being
amortized over 19 years and 8 years for intangibles and fixed assets,
respectively, and resulted in additional depreciation and amortization expense
under U.S. GAAP. See Note 29 to our consolidated financial statements.
NEW U.S. GAAP ACCOUNTING PRONOUNCEMENTS
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.
We believe that adoption of this statement will not have a significant impact on
our financial position or results of operations.
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
to dispose of long-lived assets. 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 our company's
fiscal year 2002 and will be applied prospectively. We are currently in the
process of evaluating the potential impact that the adoption of SFAS 144 will
have on our consolidated financial position and results of operations but
believe that adoption of this statement will not have a significant impact on
our consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 provides guidance related
to accounting for costs associated with disposal activities covered by SFAS 144
or with exit or restructuring activities previously covered by Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 supersedes EITF 94-3 in its
entirety. SFAS 146 requires that costs related to exiting an activity or to a
restructuring not be recognized until the liability is incurred. SFAS 146 will
be applied prospectively to exit or disposal activities that are initiated after
December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, AN INTERPRETATION OF FASB STATEMENTS NO.
5, 57 AND 107 AND A RESCISSION OF FASB INTERPRETATION NO. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on our company's
financial statements. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS 148 also requires that
disclosures of the pro forma effect of using the fair value method of accounting
for stock-based employee compensation be displayed more prominently and in a
tabular format. The transition and annual disclosure requirements of SFAS 148
are effective for our company's fiscal year ending after December 15, 2002. We
do not expect SFAS 148 to have a material effect on our results of operations or
financial condition.
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE ENTITIES, AN INTERPRETATION OF ACCOUNT RESEARCH BULLETIN - ARB NO. 51.
This Interpretation addresses consolidation by business enterprises of variable
interests entities which have one of the following characteristics:
i) the investment at risk is not sufficient to permit the entity to finance
its activities without additional subordinated financial support from other
parties, which is provided through other interests that will absorb some or
all the expected losses of the entity.
ii) the equity investors lack on or more of the following essential
characteristics of a controlling financial interest:
a) the direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights.
b) the obligation to absorb the expected losses of the entity if they
occur, which makes it possible for the entity to finance its
activities.
c) the right to receive the expected residual returns of the entity if
they occur, which is the compensation for the risk of absorbing the
expected losses.
The disclosure requirements are immediately effective for all variable
interest entities created after January 31, 2003 and for the fiscal year or
interim period beginning after June 15, 2003 for variable entities in which an
enterprise holds a variable interest that is acquired before February 1, 2003.
The initial recognition of the Interpretation is applicable after December 31,
2002 and is not expected to have an effect on our financial statements.
A. OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
The following table sets forth certain components of our income for each of
the years in the three-year period ended December 31, 2002.
YEAR ENDED DECEMBER 31, %CHANGE
------------------------------------- -----------------------
2000 2001 2002 2000-2001 2001-2002
-------- -------- -------- --------- ---------
(MILLIONS OF REAIS)(1)
Net operating revenue..................... 930.6 1,248.1 1,561.3 34.1 25.1
Cost of services.......................... 532.2 663.2 779.5 24.6 17.5
Gross profit ............................. 398.5 585.0 781.8 46.8 33.6
Operating expenses:
Cost of Sales............................. 126.2 195.0 218.3 54.5 11.9
General and administrative expenses....... 78.4 110.3 142.3 40.7 29.0
Other net operating income (expense)...... 9.6 4.5 3.8 (53.1) (15.6)
Total 214.2 309.8 364.4 44.6 17.6
Operating income before interest.......... 184.3 275.1 417.4 49.3 50.6
Net interest expense...................... 30.1 43.5 90.7 44.5 108.5
Operating income ........................ 154.2 231.7 326,7 50.3 39.7
Net non-operating expense................. 19.5 25.7 19.7 31.8 (23.3)
Employees' profit share................(2) 1.9 2.3 3.1 21.1 34,8
Income before taxes and minority interests 132.8 203.7 303.9 53.4 49.2
Income tax and social contribution........ 40.2 56.5 93.8 40.5 66.0
Minority interests........................ 20.0 13.9 (0.4) (30.5) (102.9)
Reversal of interest on own capital....... (31.0) (45.3) (94.6) 46.1 108.8
Net income................................ 103.6 178.6 305.1 72.4 70.8
(1) Information is presented in constant REAIS as of December 31, 2000 and nominal REAIS as of December 31, 2001
and 2002. Columns may not add up due to rounding.
(2) Brazilian GAAP requires that employees' profit sharing be shown as an appropriation of the net income for the
year. Under U.S. GAAP, the employees' profit sharing would be included as an operating expense.
OPERATING REVENUES
We generate operating revenue from (i) usage charges, which include
measured service charges based on tenths of a minute for outgoing calls, roaming
and other similar charges, (ii) monthly subscription charges, (iii) network
usage charges, which are the amounts we charged to other cellular and fixed-line
telephone service providers for the use of our network by such service
providers' customers, (iv) handsets and prepaid cards sales, and (v) 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.
Additionally, in 1999, we 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--Contract
Customers."
DETAILS OF COMPANY REVENUE
YEAR ENDED DECEMBER 31, % CHANGE
------------------------------------ ------------------------
2000 2001 2002 2000-2001 2001-2002
-------- -------- -------- --------- ---------
(MILLIONS OF REAIS)
Gross Operating Revenue:
Usage charges (1)....................... 349.9 530.2 678.3 51.5 27.9
Monthly subscription charges (1)........ 194.4 121.5 114.9 (37.5) (5.4)
Network usage charges................... 334.5 526.8 649.3 57.5 23.2
Resale of handsets and prepaid cards.... 274.8 386.7 523.8 40.7 35.4
Others.................................. 11.2 8.3 16.0 (25.9) 92.8
----------------------------------------
Gross operating revenue................. 1,164.9 1,573.4 1,982.3 35.1 26.0
Value-added and other indirect taxes ... (234.2) (325.3) (421.0) 38.9 29.4
Net Operating Revenue...................... 930.6 1,248.1 1,561.3 34.1 25.1
========================================
------------------
(1) Minimum consumption are booked as usage revenue. See Note 2(b) to our
consolidated financial statements.
Net operating revenues increased by 34.1% in 2001 and 25.1% in 2002. This
growth in revenues was attributed mainly to an increase in demand for cellular
services and price adjustments. The average number of subscribers increased by
68.6%, from 1,209,854 subscribers in 2000 to 2,040,323 subscribers in 2001 and
by 32.2%, from 2,040,323 subscribers in 2001 to 2,697,823 subscribers in 2002.
In 2002, the 25.1% increase in revenues compared to 2001 was due to increased
traffic caused by the greater access-base. In 2002, TCO closed the year with
655,224 new subscribers (totaling 3,066,704 accesses as of December 31, 2002, of
which 597,756 were in Area 8 and 2,468,948 in Area 7).
USAGE CHARGES. Revenues from usage charges rose by 51.5% between 2000 and
2001 and rose by 27.9% between 2001 and 2002. The 2002 increase was due to 23.8%
growth in the post-paid base, compared to the year 2001, due to the launching of
new plans and to new subscribes.
MONTHLY SUBSCRIPTION CHARGES. Revenues from monthly subscription payments
decreased by 37.5% between 2000 and 2001 and decreased by 5.4% between 2001 and
2002. The decrease in revenues in 2002 resulted from the launch of the free
minutes plans, where the monthly deductible values (minimum consumption) are
booked as usage revenue.
NETWORK USAGE CHARGES. Revenues from network usage charges increased by
57.5% between 2000 and 2001 and rose by 23.2% between 2001 and 2002. The
increase in these periods reflects the growth in the total number of
subscribers, which leads to an increased volume of calls originating from
outside our network to our subscribers.
RESALE OF HANDSETS AND PREPAID CARDS. Revenues from resale of handsets and
prepaid cards grew by 40.7% between 2000 and 2001 and increased by 35.4% between
2001 and 2002. The increase in these periods was caused by the growth in the
access-base of subscribers, which increased from 1,695,473 in 2000 to 2,411,480
in 2001 and to 3,066,704 in 2002.
OTHERS. Revenues from other services (mainly the SMS), 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
25.9% between 2000 and 2001 and rose by 92.8% between 2001 and 2002. The gradual
fall in 2001 was due to the launch of alternative free minutes plans, whose
deductibles include additional services. The recovery in 2002 was due to the
launching of value-added services based on the SMS taxes on gross revenues.
ICMS, PIS and COFINS are the most significant taxes assessed on revenues.
The ICMS rate for telecommunications services charged in the states of the
Region is 25%, except for the states of Mato Grosso and Para, where the rate is
30%, the state of Goias, where the rate is 26%, and the state of Rondonia, where
the rate is 35%. The ICMS is also charged on those revenues generated with the
sales of cellular handsets, at the rate of 17%, with the exception of the state
of Goias, where the rate is 7%, and the state of Tocantins, where the rate is
12%. PIS and COFINS are imposed at a combined rate of 3.65% of gross operating
revenues. Nonetheless, PIS and COFINS are calculated based on our total revenue,
including financial and other operational revenues. The amount of value-added
and other indirect taxes collected by us represented 20.1% in 2000, 20.7% in
2001 and 21.2% in 2002 of the gross operating revenue. In 2001, the Brazilian
government imposed two new taxes on telecommunications services revenues: the
FUST and the FUNTTEL, which are calculated by applying the 1.5% rate on the
revenue generated by telecommunication services. The variations reflect
increases in our 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
------------------------------------ ------------------------
2000 2001 2002 2000-2001 2001-2002
-------- -------- -------- --------- ---------
(MILLIONS OF REAIS)
Cost of services:
Depreciation......................... 142.8 160.9 166.4 12.7 3,4
Personnel............................ 11.3 11.6 15.6 2.7 34.5
Third-party materials and services... 95.8 126.0 174.9 31.5 38.8
Fixed-line network expenses.......... 26.9 37.7 42.4 40.1 12.5
Fistel tax........................... 51.6 53.2 60.2 3.1 13.2
Cost of sales........................ 194.0 273.3 319.7 40.9 16.9
Others............................... 9.8 0.5 0.3 (94.9) (40.0)
-----------------------------------------------
Total................................ 532.2 663.2 779.5 24.6 17.5
===============================================
------------------
See Note 2(b) to our consolidated financial statements. Columns may not add up due to rounding.
Cost of services increased by 24.6% between 2000 and 2001 and by 17.5% in
2002 compared to previous years. The increase in 2000 and 2001 resulted mainly
from an increase in depreciation and amortization costs relative to the growth
of our network, costs associated with the acquisition of handsets, costs of
supplies and third-party services, and costs of interconnection with the
fixed-telephoning network. The increase in 2002 resulted mainly from an increase
in costs of third-party services (mainly the cost of third-party networks),
costs of interconnection with the fixed-telephone network and costs associated
with the acquisition of handsets.
DEPRECIATION. Depreciation increased by 12.7% between 2000 and 2001 and by
3.4% between 2001 and 2002.
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 our customers. Materials and services expenses increased by
31.5% between 2000 and 2001 and by 38.8% between 2001 and 2002. The increase in
2001 and 2002 reflects the growth of our 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. The increase in the cost of sales reflected the impact of
the growth in subsidies, which went up from R$72,956 thousand in 2001 to
R$97,989 in 2002. The cost of sales was R$273.3 million in 2001 and R$319.7
million in 2002.
FIXED-LINE NETWORK EXPENSES. Fixed-line network expenses represent lease
payments to the Predecessor Companies for use of interconnecting circuits among
our base-stations and switching centers and for reservation of available
capacity on the networks of the Predecessor Companies. Such expenses increased
by 40.1% between 2000 and 2001 and by 12.5% between 2001 and 2002. These
expenses accounted for 5.4% of total costs of services in 2002, compared to 5.7%
in 2001.
FISTEL TAX. Fees payable to finance FISTEL amount to R$51.6 million in
2000, R$53.2 million in 2001 and R$60.2 million in 2002. 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 3.1% increase in 2001 and the
13.2% rise in 2002 were due mainly to the expansion of our subscriber-base and
to the installation of new base-stations.
PERSONNEL. Personnel expenses increased during the period, rising from
R$11.6 million in 2001 to R$15.6 million in 2002. This rise in expenses reflects
salary policies instituted in order to attract and maintain in personnel in an
increasingly competitive environment.
OTHERS. Other costs of services include rents for properties where our
base-stations, towers and switching equipment are located, costs of power
supply, and other similar infrastructure costs. Other costs of services included
R$9.8 million in 2000, R$0.5 in 2001 and R$0.3 million in 2002.
OPERATING EXPENSES
SELLING EXPENSES. Selling expenses increased 54.5% between 2000 and 2001
and 11.9% between 2001 and 2002. The increase in 2001 resulted primarily from an
aggressive marketing campaign, which included advertising campaigns and an
increase in sales commissions to independent distributors. As in the year 2001,
most variations in 2002 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 in 2001 compared to 2000 and a
decrease of 7.3% in 2002 compared to 2001.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 40.7% between 2000 and 2001 and by 29.0% between 2001 and 2002. In
2001, the most significant increase was in depreciation, which rose 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. In 2002, the main increases were associated with
personnel expenses and third-party services. All these increases are compatible
with our growth levels.
OTHER NET OPERATING INCOME (EXPENSE). We recorded other net operating
expenses of R$9.6 million in 2000 and R$4.5 million in 2001, against R$3.9
million in 2002. 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. In 2002, the reduction in net expenses was
due mainly to the increase in revenues from fines received from clients, which
rose from R$12.9 million in 2001 to R$17.0 millions in 2002.
NET FINANCIAL RESULT
Our net financial result of R$43.5 million in 2001 and R$90.7 million in
2002 was due mainly to the payment of dividends in the form of interest on owned
capital. These dividends were valued at R$ 45,3 million in 2001 and R$94,6
million in 2002. See "Item 5--Operating and Financial Review and
Prospects--Liquidity and Capital Resources." We also registered a financial
revenue of R$132.4 million in 2001 and R$239.6 million in 2002, which resulted
mainly from the revenue generated by the average balance of the resources
available and investments in marketable securities. This revenue grew
substantially as a result of increase in marketable securities in 2002. However,
this revenue was offset by financial expenses of R$175,8 million in 2001 and
R$321.1 million in 2002.
NET NON-OPERATING EXPENSE
We recorded net non-operating expenses of R$25.7 million in 2001 and R$19.7
million in 2002. The main component of this item is the amortization of the
premium on the permanent investment, which in 2001 and in 2002 reached R$21.9
million in expenses in each one of the years. The reduction in cost in 2002
results from the interest on shareholder's equity prescribed, which reached
R$5.4 million in income.
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 our company
and the labor unions that represent our employees. Employees profit share was
R$1.9 million in 2000, R$2.3 million in 2001, and R$3.1 million in 2002.
Brazilian GAAP requires that employees' profit sharing be shown as an
appropriation of the net income for the year. Under U.S. GAAP, the employees'
profit sharing would be included as an operating expense.
MINORITY INTERESTS
Minority interests reflect the participation of our minority shareholders
in the net income or loss of TCO's subsidiaries. Minority interests were 16.2%
of income in 2000 and 7.2% of income in 2001, and 0.1% of income in 2002.
B. LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are for capital expenditures and
payments of dividends to shareholders. We made capital expenditures totaling R$
255.7 million in 2000, R$190.5 million in 2001, and R$ 170.6 million in 2002.
These expenditures related primarily to increasing network capacity, coverage
and digitalization. See "Item 4--Information on the Company--Our History and
Development--Capital Expenditures."
TCO is required to distribute to its shareholders, either as dividends or
as tax-deductible interest on its own capital, 25% of its adjusted net income,
including any realization of the net income reserve, determined in accordance
with Brazilian accounting principles and adjusted in accordance with Brazilian
corporate law. TCO is also required to pay a non-cumulative preferred dividend
on its preferred shares in an amount equal to 6% of the amount obtained by
dividing the amount of subscribed capital by the number of our shares and 3% of
the amount of shareholders' equity on a per share basis. In 2002, TCO
distributed a total of R$93.5 million (R$80.5 million in 2001) in the form of
interest on own capital and dividends. See Note 25(e) to our consolidated
financial statements.
Capital expenditures were financed principally with internally generated
cash throughout the period, together with financing in national currency (mainly
R$20.1 million from BNDES) and foreign currency (mainly R$67.9 million from the
Export Development Corporation).
At the annual shareholders meeting on April 29, 2003, we recommended, in
accordance with Section 196 of Law 6.404/76, the creation of a retained profits
reserve in the amount of R$219,225, which corresponds to the balance of the net
profits for 2002 after the allocation for the legal reserve and the payment of
dividends as described above. This retained profit reserve will be utilized for
future investments in accordance with the capital budget approved at such annual
shareholders meeting. In addition, at the annual shareholders meeting we also
requested the approval for the transfer to the 2002 retained profits reserve of
an amount equal to R$44,252, which corresponds to the portion of the 2001
retained profits reserve that was not used for the implementation of the new
overlay network as contemplated in the 2002 capital budget. This transferred
amount will be used for expansion projects in accordance with the 2003 capital
budget. The decision to postpone the implementation of the overlay was based on
the regulatory and market conditions at the time and on the outlook for the
consolidation of mobile telephone companies which had only shown adequate for an
investment decision of that scope in the beginning of 2003.
As of December 31, 2002 we anticipated capital expenditures of R$301
million for 2003. Subsequently our 2003 capital budget has been reduced to $237
million as a result of certain decisions made by Brasilcel N.V. We anticipate
that such expenditures will be funded primarily with retained earnings from
prior years and by financing from external sources. Most of the planned 2003
capital expenditures will be dedicated to implement a new overlay network in the
CDMA technology, expanding the capacity and coverage of our TDMA network, and
the modernization of telecommunication services.
Substantially all of our start-up costs and initial investments for the A
Band Subsidiaries were financed by cash flows from the fixed-line
telecommunications operations of the Predecessor Companies. In the B Band
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 for NBT, our debt does not reflect the amount of debt we
would have been required to incur to build our current network if we had
operated on a stand-alone basis from the inception of the Predecessor Companies'
cellular telephone operations.
TCO's principal assets are the shares of its subsidiaries and the assets
transferred to TCO as a result of the merger with Telebrasilia. TCO relies very
substantially on dividends from its subsidiaries to meet its needs for cash,
including for the payment of dividends to its shareholders. TCO controls the
payment of dividends by its subsidiaries, subject to limitations under the
Brazilian law.
C. RESEARCH AND DEVELOPMENT
In 2002, TCO continued to invest in the structuring of its Network
Management Center, particularly in the consolidation of the flaw management and
workforce areas.
Moreover, we developed software applications (for corporate use and client
service support) internally or in partnership with small software development
companies. These software applications give us an important advantage over our
competitors in the area of customer service.
D. TREND INFORMATION
Although we recognize that third-generation systems (3G) technology, or 3G
technology, is gaining popularity in the mobile communications industry because
of its capacity to give users high-quality multimedia services, such as voice,
data, and video information, we believe that there are still technical and
commercial issues that need to be resolved in connection with such technology.
Because of this, we have decided to wait to deploy this technology until we feel
that it is the right time to do so. Additionally, we expect that, in the near
future, growth in the area of 3G technology will be secondary to growth in the
area of voice because 3G technology is not yet available to users at a
reasonable cost.
We believe that the CDMA 2000 1xRTT system will satisfy our customer needs
longer than initially expected. Also, within the next two years, we may
complement our existing 2G data services, such as the SMS, CSD, WAP and CDMA
2000 1xRTT (which will be deployed in the near future) with CDMA EV-DO in
Brasilia, which should help us deploy 3G technology sooner than expected.
We intend to keep investing in the "wireless Internet" convergence segment.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Our company is managed by a Board of Directors and a Board of Executive
Officers. The Board of Directors consists of ten members, with a three-year term
for each member. The Board of Directors holds regular meetings every three
months and holds special meetings when called by the Chairman or by two members
of the Board of Directors. After each meeting, the corresponding minutes are
prepared reflecting all the decisions made during the meeting.
Listed below are the current members of the Board of Directors and their
respective positions:
Name Position Date of election
------------ ----------------
Felix Pablo Ivorra Cano............................. Board Member April 29, 2003
Iriarte Jose de Araujo Esteves...................... Board Member April 29, 2003
Fernando Xavier Ferreira............................ Board Member April 29, 2003
Antonio Viana-Baptista.............................. Board Member April 29, 2003
Ernesto Lopez Mozo.................................. Board Member April 29, 2003
Ignacio Alleer Mallo................................ Board Member April 29, 2003
Zeinal Abedin Mohamed Bava.......................... Board Member April 29, 2003
Carlos Manuel de Lucena e Vasconcelos Cruz.......... Board Member April 29, 2003
Eduardo Perestrelo Correia de Matos................. Board Member April 29, 2003
Paulo Jorge da Costa Goncalves Fernandes............ Board Member April 29, 2003
Set forth below are brief biographical descriptions of the directors:
FELIX PABLO IVORRA CANO, 56 years old, is the Executive President of the
Board of Directors. He has been a member of the Board of Directors of Tele Leste
Participacoes S.A. since February 1999, and became its President in 2001. He is
also the President of the Board of Directors of Celular CRT Participacoes S.A.
and Tele Sudeste Celular Participacoes S.A., and a member of the Board of
Directors of Telecomunicacoes de Sao Paulo S.A. -- Telesp. He is a Director of
Atento Brasil S.A., 4A Telemarketing, Telefonica Peru and Portelcom
Participacoes S.A. He is the main Executive Officer for Telefonica Moviles in
Brazil and the Vice-President of Telefonica Moviles Latino-America. He is also
the President of the Board of Directors of Brasilcel N.V. After graduating, he
joined the Telefonica group where he worked in the areas of technical
specifications, network planning, commercial planning and developed new
services. In 1993 he was the General Director of the group that funded and
developed Telefonica Moviles. In 1997 and a portion of 1998, Mr. Cano was the
President of the Board of Directors of Mensatel S.A. and Radiored S.A., which
are part of Telefonica Moviles. He has a degree in Telecommunication Engineering
from Escola Tecnica Superior de Engenharia - ETSI in Madrid, and a post-graduate
degree in Business Administration from the Instituto Catolico de Administracao
de Empresas -- ICADE.
IRIARTE JOSE ARAUJO ESTEVES, 53 years old, is currently also the Chairman
of the Board of Directors of TMN-Telecomunicacoes Moveis Nacionais, S.A., the
Chief Executive Officer of TMN, the Chief Executive Officer of PT Moveis,
S.G.P.S., S.A., and a member of the Board of Directors of each of Portugal
Telecom S.G.P.S., S.A., PT Prime S.G.P.S., S.A., Celular CRT Participacoes S.A.,
Tele Leste Celular Participacoes S.A. and Tele Sudeste Participacoes S.A. From
1981 until 1992, Mr. Esteves performed several functions at CTT, Correios e
Telecomunicacoes de Portugal, including Regional Telecommunications General
Manager, Manager of the Telecommunications Business Planning Department, Deputy
General Manager of Telecommunications, Director-general of Telecommunications
and member of the Board of Directors. From 1991 until 1997, Mr. Esteves was the
Chairman of the Board of directors of Telepac, Servicos de Telecomunicacoes,
S.A., and from 1991 until 1992 he was the Vice-Chairman of the board of
directors of TMN. Mr. Esteves was also a Vice-Chairman of the Board of Directors
of Portugal Telecom Internacional S.G.P.S., S.A. from 2000 until 2002. He holds
a degree in Electronic Engineering from the Higher Education Technical
Institute, Portugal.
FERNANDO XAVIER FERREIRA, 55 years old, is currently also the President of
the Telefonica Group in Brazil, the Chairman of the Board of Directors and Chief
Executive Officer of Sudestecel Participacoes S.A, TBS Celular Participacoes
S.A., Iberoleste Participacoes S.A. and Telecomunicacoes de Sao Paulo
S.A.-Telesp, and Vice-Chairman of the Board of Directors of Telefonica Data
Brasil Holding S.A. He is also member of the Board of Directors of each of
Telefonica Moviles S.A., Brasilcel, N.V., Tele Leste Celular Participacoes S.A.,
Tele Sudeste Participacoes S.A., Celular CRT Participacoes S.A. He also
currently serves as Chief Executive Officer of SP Telecomunicacoes Holding S.A.
and Telefonica Data Brasil Holding S.A. Participacoes S.A. Beginning in 1971, he
held various positions at Telecomunicacoes do Parana S.A.-Telepar, including
Vice-President, Economic-Financial and Market Relations Officer and President.
Since that time he has served on the Board of Directors of Telebras, Telesp
Participacoes S.A., Embratel Participacoes S.A., Embratel -- Empresa Brasileira
de Telecomunicacoes S.A., Empresa Brasileira de Correios e Telegrafos -- ECT,
CRT -- Companhia Riograndense de Telecomunicacoes S.A., Telebahia Celular S.A.,
Telergipe Celular S.A. and Tele Sudeste Celular Participacoes S.A. Mr. Ferreira
served as Officer and Chief Executive Officer of Telecomunicacoes Brasileiras
S.A. -- Telebras, Chairman of the Board of Directors of Telerj Celular S.A.,
Chairman of the Board of Directors of Telest Celular S.A., Chairman of the Board
of Directors of Ceterp -- Centrais Telefonicas de Ribeirao Preto S.A., Chief
Financial Officer, Chief Executive Officer, Chairman and Vice-Chairman of the
Board of Directors of Tele Sudeste Celular Participacoes S.A. From December 2001
to April 2003, he was Chief Executive Officer of Tele Leste Celular
Participacoes S.A. and Celular CRT Participacoes S.A. During 1998, he has also
served as a member of a consulting committee of Anatel, and at present is a
member of the Latin American Committee of the New York Stock Exchange and the
Global Information Infrastructure Commission--GIIC. He holds a degree in
Electrical Engineering from the Catholic University of Rio de Janeiro, Brazil,
and attended a business administration course at Western Ontario University,
Canada, in 1982.
ANTONIO VIANA BAPTISTA, 45 years old, is an economist who graduated from
the Catholic University of Lisbon in 1980. He has a post-graduate degree in
European Economy (1981) and an MBA, obtained with a mention of distinction from
INSEAD (Fontainebleu). In August 2002, he was appointed as Executive President
of Telefonica Moviles, S.A. He is member of the Board of Directors, the Delegate
Committee and the Executive Committee of Telefonica S.A. He is also a member of
the Board of Directors of Terra Network, S.G.P.S., S.A., Portugal Telecom
S.G.P.S., S.A., Brasilcel N.V., Tele Sudeste Celular Participacoes, S.A., Tele
Leste Celular Participacoes S.A. and Celular CRT Participacoes S.A. Until July
2002, he served as President of Telefonica Internacional and Executive President
of Telefonica LATAM. Before that he also served from 1991 until 1996, as
Executive Director of BPI (Banco Portugues de Investimento). From 1985 until
1991 he was Principal Partner of McKinsey & Co. in Madrid and Lisbon.
ERNESTO LOPEZ MOZO, 39 years old, serves as Chief Financial Officer General
Manager for Finance and Management of Telefonica Moviles S.A. Mr. Lopez is a
member of the Board of Directors of each of Telefonica Moviles de Espana, S.A.,
Terra Mobile, S.A., Telefonia Moviles Mexico, S.A. de C.V., Brasilcel N.V, Tele
Sudeste Participacoes, S.A., Tele Leste Celular Participacoes, S.A. and Celular
CRT Participacoes, S.A. He was previously a Senior Manager in the Financing
Department of Telefonica, S.A., where he was also responsible for relationships
with credit rating agencies. Before joining Telefonica in March 1999, Mr. Lopez
worked for five years at J.P. Morgan where he was a Vice-President in charge of
the interest rate derivatives trading desk for Spain and Portugal for three
years. At J.P. Morgan, he was also involved in sales to mutual and pension
funds. Before joining J.P. Morgan, Mr. Lopez worked as an engineer, managing the
construction of highways and other infrastructure. He holds a degree in Civil
Engineering from ETSICCP in Madrid and a Masters in Business Administration from
the Wharton School.
IGNACIO ALLER MALO, 58 years old, serves as Chief Operating Officer of
Telefonica Moviles S.A. Mr. Aller is a member of the Board of Directors of Terra
Mobile, S.A., Mobipay Espana, S.A., Mobipay Internacional, S.A., Medi Telecom,
Telefonica Moviles de Espana, S.A., Telefonia Moviles Mexico, S.A. de C.V.,
Brasilcel N.V, Tele Sudeste Celular Participacoes, S.A., Tele Leste Celular
Participacoes, S.A. and Celular CRT Participacoes, S.A. Mr. Aller has held
several positions at Telefonica de Espana since 1967, including Director of
Operations and Information Services in 1986, General Director of Mensatel in
1995 and General Executive Director of Operations of Telefonica Servicios
Moviles in 1999. Mr. Aller has also served as a member of the Board of Directors
of Venturini Espana, S.A., Mensatel and is currently a board member of Telyco
and PMT.
ZEINAL ABEDIN MAHOMED BAVA, 37 years old, is currently also the Chief
Financial Officer of Portugal Telecom S.G.P.S., S.A., the Vice-Chairman of the
Board of Directors of PT Multimedia-Servicos Telecomunicacoes e Multimedia,
S.G.P.S., S.A., a member of the Board of Directors of Brasilcel N.V., the
Chairman of the Board of Directors of P T PRO-Servicos de Gestao S.A., and a
member of the Board of Directors of each of BEST-Banco Electronico de Servico
Total, S.A., Tele Leste Celular Participacoes S.A., Tele Sudeste Participacoes
S.A. and Celular CRT Participacoes S.A. Mr. Bava was Vice-Chairman of the Board
of Directors of Portugal Telecom Internacional, S.G.P.S., S.A. from 2000 until
2002; the Director and Relationship Manager for Portugal of Merrill Lynch
International from 1998 until 1999; an Executive Director of Deutsche Morgan
Grenfell from 1997 until 1998; and an Executive Director of Warburg Dillon Read
from 1989 until 1996. He holds a degree in Electronic and Electrical Engineering
from the University of London B.S.C.
CARLOS MANUEL L. VASCONCELLOS CRUZ, 45 years old, is currently also a
member of the Board of Directors of Portugal Telecom S.G.P.S., S.A., the
Chairman and Chief Executive Officer of PT Prime S.G.P.S., S.A., the Chairman of
the Board of Directors of PT Contact-Telemarketing e Servicos de Informacao,
S.A., Chief Executive Officer of PT Comunicacoes, S.A. and a member of the Board
of Directors of each of Brasilcel N.V., Telecomunicacoes Moveis Nacionais S.A.
-- TMN, Celular CRT Participacoes S.A., Tele Leste Celular Participacoes S.A.
and Tele Sudeste Participacoes S.A. From 1978 to 1983, Mr. Cruz was an economist
at the Ministry of Finance of Portugal, and from 1983 to 1985 he was a senior
economist at LEASEINVEST. From 1985 until 1999, Mr. Cruz performed several
functions worldwide at Dun & Bradstreet Corporation, including President and
Chief Executive Officer of Dun & Bradstreet for Portugal, Iberia and the Middle
East, Executive Vice-President of Dun & Bradstreet for Europe, President and
Chief Executive Officer of Dun & Bradstreet GMC and member of the worldwide
board and Executive Vice-President of Dun & Bradstreet Corporation. From 1990 to
1993, he was also Vice-President of Associacao Portuguesa para a Qualidade. In
1996, he was Vice-President of A.P.E.I.N. -- Associacao Portuguesa de Empresas
de Informacao de Negocios. From 1999 to 2001, Mr. Cruz was the President and
Chief Executive Officer of Tradecom S.G.P.S., and from 2000 he also served as
Executive Manager of PT Prime S.G.P.S., S.A. From 2000 to 2001 he was an invited
professor of Portuguese Catholic University and ISCTE for post- graduation
courses and MBA programs. He also served as President of Telesp Celular S.A.,
from May 2001 until May 2002, and as its Vice-President from September 2001
until May 2002. Mr. Cruz holds a degree in business from the I.S.C.T.E.
(Instituto Superior de Ciencias do Trabalho e da Empresa or Higher Education
Institute for Labor and Corporate Sciences), Portugal, and a post-graduate
degree in management from D.S.E. (the German Foundation for International
Development), Germany.
EDUARDO PERESTRELO CORREIA DE MATOS, 54 years old, is currently also the
President of Portugal Telecom Brasil S.A., and a member of the Board of
Directors of each of PT Moveis, Servicos de Telecomunicacoes, S.G.P.S., S.A.,
Tele Leste Celular Participacoes S.A., Tele Sudeste Participacoes S.A. and
Celular CRT Participacoes S.A. From 1976 to 1984, Mr. Matos held various
operational positions in the planning and control areas of CTT - Correios e
Telecomunicacoes de Portugal S.A. and TLP -- Telefones de Lisboa e Porto S.A.
From 1984 to 1987 he served as General Post Master of CTT and from 1987 to 1990
he was the Secretary of State for External Transportation and Communications in
Portugal. In addition, he served as President at Marconi S.G.P.S. Comunicacoes,
S.A. from 1990 to 1991 and at Mobitel S.A. from 1991 to 1996. Mr. Matos was also
a member of the Board of Directors of Portugal Telecom, S.G.P.S., S.A. from 1996
until May 2002. He holds a degree in Economics from the Technical University of
Lisbon, Portugal.
PAULO JORGE DA COSTA GONCALVES FERNANDES, 37 years old, is currently also
Vice-Chairman of the Board of Directors of PT Ventures, S.G.P.S., S.A., the
Chairman of the Board of Directors of PT - Sistemas de Informacao S.A. and a
member of the board of directors of each of Portugal Telecom S.G.P.S., S.A.,
Brasilcel N.V., Celular CRT Participacoes S.A. Tele Leste Celular Participacoes
S.A. and Tele Sudeste Celular Participacoes S.A. In the period from 1990 through
1991, he was manager and partner at Spades Lda., a company focused on consulting
and information technology services. From 1991 to 2000, he acted as a consultant
for McKinsey & Company, where he was admitted as a partner in 1997, and also
worked as member of the leadership world groups for the telecommunications and
transports industries. Mr. Fernandes holds an Electric-Technical Engineering
degree from the Higher Education Technical Institute of Lisbon, Portugal.
BOARD OF EXECUTIVE OFFICERS
The Board of Executive Officers consists of a President (or CEO), a
Director of Investor Relations, a Director of Coordination and Operations, a
Director of Business, a Director of Finance, a Director of Engineering, and a
Director of Administration and Human Resources. All of these executive officers
were elected for a term of three years on December 13, 2001 by the Board of
Directors, with the exception of the President and Director of Investor
Relations, whose function is temporarily being performed by the Director of
Engineering, elected on January 31, 2003. Executive officers can be removed from
their position at any time.
Listed below are the current members of the Board of Executive Officers and
their respective positions:
NAME POSITION DATE OF ELECTION/REELECTION
----------------------------------- ------------------------------------ ----------------------------
Sergio Assenco Tavares dos Santos.......... President, Director of Investor January 31, 2003
Relations
Sergio Assenco Tavares dos Santos.......... Director of Engineering December 13, 2001
Luis Andre Carpintero Blanco.............. Director of Finance December 13, 2001
Getulio Nery Cardoso...................... Director of Administration and December 13, 2001
Human Resources
Antonio Carlos Haidamus Monteiro.......... Director of Coordination and December 13, 2001
Operations
Roberto Iunes Brito....................... Director of Business December 13, 2001
Set forth below are brief biographical descriptions of the executive
officers:
SERGIO ASSENCO TAVARES DOS SANTOS, 55 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 for Special Projects of Telebrasilia; and manager of the
Advanced Telecommunications Business Unit and Engineering Director of
Telebrasilia. He also served as Chief Executive Officer of our company from May
to August 1998, and he is currently serving as President of our company on a
temporary basis. He holds a degree in Electrical Engineering from the University
of Brasilia.
LUIS ANDRES CARPINTERO BLANCO, 29 years old, has served as Executive
Officer since October 1, 2000. From May 1999 to September 2000 he actively
served in several sectors of TCO group. He started as Administrative Finance
Assistant Director - NBT being later promoted to Manager of the Financial
Department - TCO Group. He worked in the financial market, for the Boa Vista
InterAtlantico Bank, which is associated to the Credit Agricole and Espirito
Santo Bank, as Manager from 1997 to 1999. He graduated from the Federal
University of Rio De Janeiro with a degree in Production Engineering and he is
currently seeking an MBA at IBMEC in Finance.
GETULIO NERY CARDOSO, 51 years old, has served as an Executive Officer July
28, 1999. He began his career in the Foreign Exchange Department at the Central
Bank of Brazil and later worked in the Production Engineering area at Petroleo
Brasileiro, S.A. - PETROBRAS. He then became a member of the Industrial
Development Department at Telebras, specializing in industrial development for
telecommunications. He also served as Commercial Manager for the Central-Western
region of Brazil at Splice. He holds a degree in Electrical Engineering from the
University of Brasilia and has concluded extensive research concerning work in
Brazil and abroad.
ANTONIO CARLOS HAIDAMUS MONTEIRO, 49 years old, has served as an Executive
Officer since April 1999. He has served as Executive Director of Coordination
and Operations since December 2001. He also has served as Executive
Vice-President at NBT since November 1999. He began his career in
telecommunications in 1970 at TELEOESTE, which was a phone carrier in the state
of Mato Grosso do Sul before telecommunications carriers were controlled by the
government. He later worked for Embratel, Telerj Celular S.A., and Telemat, were
he was Director of Engineering and President. He holds degrees in Engineering
and Economy, with post graduate degrees in Optical Fibers and Corporate
Management.
ROBERTO IUNES BRITO, 44 years old, has served as an Executive Officer since
August 31, 2001. From August 1998 to August 2001, he served as Regional Director
in charge of competitive strategy and operation results at Telems Celular S.A.
From 1982 to 1998, he served as Manager of the Financial Department; Assistant
of the Administrative and Financial Executive Office; Manager of the Economic
and Financial Planning Department; and Manager of the Mobile Cellular
Telephoning Department at Telecomunicacoes do Mato Grosso do Sul S.A., in the
Telebras System. He holds a degree in Economy from the Catholic University of
Mato Grosso do Sul and a post graduate degree from the Brazilian National
Institute for Space Research.
BOARD OF AUDITORS
The Board of Auditors consists of three members elected for as term of one
year. The Board of Auditors holds regular meetings every three months and
special meetings when called by the President or by any member of the Board of
Auditors.
Listed below are the current members of the Board of Auditors and their
respective positions:
NAME POSITION DATE OF ELECTION
------------------ ------------ ----------------
Joao Luis Tenreiro Barroso .............. Board Member April 29, 2003
Norair Ferreira do Carmo ................. Board Member April 29, 2003
Luciano Nobrega Queiroga ................. Board Member April 29, 2003
B. COMPENSATION
During 2002, the total amount of compensation by our company to its members
of the Board of Directors, executive officers and members of the Board of
Auditors was approximately R$3.212 million.
During 2002, the total amount of expenses made by our company to provide
private pension for our directors was approximately R$156.0 thousand.
C. BOARD PRACTICES
See "Directors and Senior Management," "Board of Executive Officers", and
"Board of Auditors," above.
D. EMPLOYEES
As of December 31, 2002, our workforce, comprised of our A Band and B Band
carriers, consisted of 2,990 persons (4.3% more than the number of persons
registered in 2001). Of this total, 1,575 were permanent staff, 225 were
trainees, and 1,190 were personnel outsourced permanently. Our company's
workforce was thus allocated as follows: 67.4% in the Business area (Marketing,
Sales, and Client Service), 11.8% in the Network and Operations area, 9.1% in
the Finance area, 5.8% in the Administration and Human Resources area, and the
remainder (5.9%) in the Information Technology and Staff areas.
Our company's permanent staff is considered young, with an average age of
31 years, and most of our staff is of the male gender (51%).
The education level of our workforce is as follows as of December 2002: 57%
have a high school education, 37% have a college education and 5% have above a
college education.
Approximately 22% of our company's personnel is affiliated with labor
unions. The relationships with these unions are considered good. The process of
negotiation of the collective labor agreement for the years 2002 and 2003, as in
previous years, was conducted in a professional manner, which made it easier to
gain approval for the collective labor agreement from the employees.
Training and development actions implemented by TCO in the year 2002,
directed mainly to technical and management empowerment of the workforce
employed in the Business, Engineering and Information Technology areas, together
represent investments approaching R$3.4 million. The registered amount of PER
CAPITA training hours in 2002 was 71 hours.
During 2002, in accordance with our company's employee-retention program,
the salary correction system was maintained in order to eliminate all remaining
discrepancies. Also in 2002, our company implemented the electronic performance
appraisal system and the flexible pay program for the sales and billing areas.
We estimate that the entire organizational structure will be revised in the
first half of 2003, including the career development plan, and that the flexible
pay program will be extended to other areas in our company.
By means of our A Band and B Band subsidiaries, we currently sponsor two
types of private pension plans:
DEFINED BENEFIT PLAN (PBS-TCO)
The PBS-TCO plan resulted from the segregation of the FUNDACAO SISTEL DE
SEGURIDADE SOCIAL'S, or Sistel's, equity in January 2000. It is a "defined
benefit" plan and has five affiliated employees as active participants and nine
former employees as beneficiaries. According to its regulations, in addition to
the supplemental benefit, the plan provides medical care (PAMA) to the 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. We use a capitalization funding system and the
total contribution owed by the sponsor is 13.5% of the participating employees'
payroll, of which 1.5% is directed to sponsoring the PAMA.
HYBRID PLAN (TCO PREV)
TCO's modern and flexible pension plan -- TCO PREV -- was launched in
October 2000, and gained acceptance from nearly 100% of the employees affiliated
to the former plan. It also was approved by both the new employees and by those
not affiliated to the former PBS-TCO. Designed based on the latest plan models
and referred to as "hybrid", this plan offers two different approaches to
benefits. One of them is the "defined benefit" plan, for unexpected situations,
or the so-called Risk Benefits (Temporary Disability, Early Retirement, and
Death Annuity due to death on the job). The other approach is the "defined
contribution" for anticipated situations, that is, the Programmed Benefits
(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 in this new plan may opt to receive benefits upon completing
50 years of age (Early Retirement) or 60 years of age (Normal Retirement). It is
necessary, however, to terminate the participant's relationship with the sponsor
and to contribute to the system during 10 years with no interruptions. The
funding system used by TCO PREV operates on a parity basis between the sponsor
and the participants at the same levels 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 participant accounts.
In addition, the sponsor covers the cost provided for the risk benefits, which
corresponds to 3.338% of the payroll, plus the plans' administration fees,
equivalent to 5% of the contributions.
Expenses related to the sponsorship of private pension plans for employees
and management in 2002 totaled R$3.752 million.
Investments of fund equity for the private pension plans PBS-TCO and TCO
PREV are made in accordance with the policies and guidelines provided by the
Sistel and in conformity with the applicable legislation. The criteria adopted
are exclusively technical and conform to the PLANO DIRETOR DE APLICACAO DO
PATRIMONIO (PDAP), prepared and approved annually by the Foundation's Executive
Board.
E. SHARE OWNERSHIP
All our directors and executive officers hold less than one percent of our
total shares. We do not offer stock option plans to any of our directors or
employees.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The common shares have full voting rights and the preferred shares have
limited voting rights. As of April 25, 2003, TCP owned 61.10% of the common
shares. Accordingly, TCP can control the election of TCO's Board of Directors
and the direction and future operations of our company.
The following table sets forth information concerning the ownership of
common shares by TCP and by TCO's officers and directors as a group.
NAME OF OWNER NUMBER OF PERCENTAGE OF
------------- COMMON OUTSTANDING
SHARES OWNED COMMON SHARES
-------------- --------------
Telesp Celular Participacoes S.A............................ 77,256,410,396 61.10%
All directors and executives officers as a group............ 138,022 0%
On April 25, 2003, TCP acquired 61.10% of the voting capital stock of TCO
for approximately R$1,505 million, corresponding to R$19.48719845 per each lot
of 1,000 shares acquired. The agreement also included the acquisition of TCO's
subsidiaries, including NBT. TCP has announced that it will launch, in the
second quarter of 2003, a tender offer for the voting shares of TCO as legally
required by the acquisition of the control of TCO. The price per share to be
offered is equal to 80% of the price paid to the controlling shareholders. After
the acquisition and the tender offer, TCP expects to incorporate TCO shares and
ADSs.
B. RELATED PARTY TRANSACTIONS
We entered into transactions with Group Splice companies in 2000, 2001 and
2002. These transactions were mainly related to marketable securities (R$712.1
million in 2002, R$362.3 million in 2001 and R$77.7 million in 2000), short-term
investments (R$6.5 million in 2002 and R$17.4 million in 2001), acquisition of
property, plant and equipment (R$7.7 million in 2002, R$11.8 million in 2001 and
R$5.1 million in 2000), maintenance services (R$12.5 million in 2002, R$1.9
million in 2001 and R$3.5 million in 2000) and acquisition of telephone cards
(R$5.8 million in 2002, R$3.4 million in 2001 and R$ 2.1 million in 2000 ).
The marketable securities are related to commercial paper issued by Fixcel
The interest was a 100% of CDI (Interbank Deposit Certificate) plus 2.0% per
annum.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See "Item 3 -- Key Information -- Selected Financial Data" and "Item
18 -- Financial Statements."
LEGAL MATTERS
CIVIL
LITIGATION RELATED TO THE BREAKUP OF TELEBRAS
The Breakup of Telebras is the subject of several lawsuits in which the
plaintiffs are seeking injunctions. Some preliminary injunctions were granted,
but all were quashed by decisions of the relevant federal court. These courts
also decided that the courts of the state of Minas Gerais have original
jurisdiction over the proceedings. Several decisions quashing preliminary
injunctions are on appeal, and if any such appeals are successful, the
shareholders of Telebras may have to reapprove the Breakup of Telebras or
legislative action may be required.
The theories on which the lawsuits regarding the Breakup of Telebras are
based include that:
o the Brazilian constitution requires that the General
Telecommunications Law specifically authorize the creation of the 12
New Holding Companies;
o the Telebras shareholders' meeting held on May 22, 1998, which
approved the Breakup of Telebras, was not properly convened;
o national sovereignty will be threatened if Brazil's telecommunications
companies are controlled by foreign entities; and
o the General 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 of Telebras
either by an executive order of the President or by an act of
Congress.
If any of these lawsuits ultimately succeeds, the Breakup of Telebras will
have to be reinitiated. This could require, depending upon the prevailing
plaintiff's theory, one or both of the following actions:
o amending the Telecommunications Law; and
o reconvening the May 22, 1998 Telebras shareholders' meeting.
It is theoretically possible under Brazilian law for a court to require
that the Breakup of Telebras be unwound, although we believe that this would not
be likely to occur. We believe that the ultimate resolution of the proceedings
will be favorable and will not have a material adverse effect on our business or
financial position. It is very difficult to quantify what the potential impact
to us would be if the Breakup of Telebras were to be unwound. This would require
an assessment of the total amount of capital invested by controlling
shareholders in the 12 New Holding Companies and a prediction as to any possible
indemnification that they may be entitled to from the Brazilian government. The
results could be very far reaching and would affect all of the New Holding
Companies.
LITIGATION ARISING OUT OF EVENTS PRIOR TO THE BREAKUP OF TELEBRAS
Telebras and our subsidiaries' Predecessor Companies, our legal
predecessors, and our subsidiaries, respectively, are defendants in a number of
legal proceedings and subject to certain other claims and contingencies relating
to events prior to the Breakup of Telebras. Liability for claims arising out of
acts committed by the Predecessor Companies prior to the effective date of the
spin-off of the cellular assets and liabilities of the Predecessor Companies to
our subsidiaries remains with the Predecessor Companies, except for labor and
tax claims (for which the Predecessor Companies and our subsidiaries are jointly
and severally liable, as the case may be, by operation of law) and those
liabilities with respect to which the Predecessor Companies had made specific
accounting provisions prior to the Breakup of Telebras, assigning them to our
subsidiaries. Any claims against the Predecessor Companies which are not
satisfied by the Predecessor Companies could result in claims against our
subsidiaries to the extent that our subsidiaries have received assets which
might have been used to settle those claims had they not been spun off from the
Predecessor Companies. However, under the shareholders' resolution pursuant to
which the spin-off was effected, our subsidiaries have contribution rights
against their Predecessor Companies with respect to the entire amount of any
payments made by our subsidiaries in connection with any labor or tax claims
brought against our subsidiaries and relating to acts committed by the
Predecessor Companies prior to the effective date of the spin-off.
We believe that the likelihood that claims of this kind will materialize
and have a material adverse financial effect on us is remote.
LITIGATION RELATED TO TAX CREDITS
Under certain conditions, Brazilian law permits companies to benefit from
tax credits related to the amortization of goodwill. Despite this fact, an
action was filed on December 16, 1999 against Anatel and the New Holding
Companies, including TCO, that have undergone a corporate restructuring in
connection with the Breakup of Telebras and that recognized tax credits to
offset premiums paid by their controlling shareholders at the time of their
acquisition. TCO did not become aware of its involvement as a defendant in this
action until April 2002, and filed its answer on October 2, 2002. We do not
think this action will succeed, as we believe the restructuring was done in
compliance with Brazilian law, however, based on the opinion of legal counsel,
the chances of unfavorable outcomes are possible in this case.
The extent of any potential liabilities in connection with this action will
be determined in a separate but related lawsuit known as the "calculation of the
award," which will only take place if we are unsuccessful in its defense.
LITIGATION RELATED TO THE OWNERSHIP OF THE CALLER ID
In July 2002, we, together with other Brazilian mobile telecommunications
operators, were summoned to defend in a legal action filed by Lune Projetos
Especiais Telecomunicacao Comercio Ind. Ltda., or Lune, pursuant to which Lune
claims to be the owner of patents relating to EQUIPAMENTO CONTROLADOR DE
CHAMADAS ENTRANTES E DO TERMINAL TELEFONICO, or Caller ID, and also that the
mobile telecommunications operators are using the patent without proper
authorization. Therefore, Lune demands that the operators cease to provide
Caller ID services and that it should be indemnified for the unauthorized use of
the Caller ID system, upon payment of fees received by the operators in
consideration for the use of the system by their customers. We are waiting for
all the defendants named in this action to be summoned so that the response
period can commence.
Based on the opinion of our legal counsel, the chances of unfavorable
outcomes are possible in this case. However the indemnification allegedly due by
the mobile operators could not be accurately calculated as of yet, due to the
fact that the cost of the caller ID service provided by the companies has never
before been calculated separately.
LITIGATION RELATED TO THE VALIDITY OF THE MINUTES IN THE PREPAID PLANS
Telegoias, NBT and Teleron, together with other Brazilian mobile
telecommunications operators, are the defendants in class action suits brought
by the federal public prosecutor's office and/or associations for consumers'
protection, which challenged the imposition of a deadline for the use of
purchased prepaid minutes. The plaintiffs allege that any purchased prepaid
minutes should not have a time limitation for usage.
These lawsuits are still in their initial stages, but our external counsel
and we believe that our criteria for imposing the deadline were in strict
compliance with Anatel's rules. In the Telegoias and NBT class actions
injunctions were granted against us. The defendants appealed this decision and
the court agreed to suspend enforcement of the injunctions.
LITIGATION RELATING TO TELEBRAS LOANS
Under the terms of the Breakup of Telebras, 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 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 TCO 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 TCO. In addition, 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.
In response to the lawsuit filed against it, Tele Centro Sul filed two
counter-lawsuits in October 1999 against Telebrasilia and Telegoias seeking
payment of the Telebras loans in the amount of R$41.3 million from Telebrasilia
and R$24.2 million from Telegoias.
The three lawsuits described above were consolidated in the same court,
given that they deal with the same issue relating to Telebras loans. In August
2001, the court dismissed our claims against Tele Centro Sul, Telebras and KPMG,
and partially ruled in favor of Tele Centro Sul and against Telebrasilia and
Telegoias.
In the lawsuit filed by TCO, the decision denied the claim of TCO. In the
two actions brought by Tele Centro Sul, the decision was favorable to Tele
Centro Sul, holding that the amounts claimed were due, but denying the claim of
Tele Centro Sul for application of exchange variation to the debts.
Tele Centro Sul and we have appealed in the Court of Appeals of the Federal
District (TJDFT).
In the action of TCO against Tele Centro Sul, the appeal of TCO was denied.
In the two actions of Tele Centro Sul against Telebrasilia and Telegoias, the
respective appeals of TCO were also denied. However, the appeals of Tele Centro
Sul were granted, revising the lower court decisions to apply the applicable
charges, in particular indexation according to exchange variation.
The three decisions were unanimous. TCO is awaiting the publication of the
decisions to see them in full, and then proceed with applicable appeals. A final
decision unfavorable to TCO with respect to the necessity of payment by
Telebrasilia and Telegoias to Tele Centro Sul, and not to TCO, is probable but,
on the specific point regarding indexation of the debts according to exchange
variation, a decision unfavorable to TCO is only possible, since there is a good
possibility that exchange variation will be excluded as a criteria of indexation
of the outstanding balances.
TAX-RELATED
LITIGATION RELATED TO THE APPLICATION TO THE ICMS
In June 1998, certain Brazilian state governments agreed to apply,
effective July 1st of the same year, the ICMS tax to certain service revenues,
such as activation fees, and to further make the application to such activation
fees retroactive for the five years preceding June 30, 1998. We believe the
extension of the ICMS tax to non-basic telecommunications services such as
cellular activation, is unlawful because:
o the state governments acted beyond the scope of their authority;
o their interpretation would subject certain services that are not
telecommunications services to taxation; and
o new taxes may not be applied retroactively.
Each of the A Band 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
A Band 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 TCO's 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 us 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 TCO's subsidiaries, we believe that the Predecessor
Companies will be liable to TCO's 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
TCO's subsidiaries at the same time. If one of TCO's subsidiaries is compelled
to pay a tax liability, under the Breakup protocol it may seek restitution of
its losses from the Predecessor Company in question.
We have appealed to the Higher Court of Justice (Superior Tribunal de
Justica) and to the Supreme Federal Court (Supremo Tribunal Federal), where a
judgment is pending.
We do not believe that the retroactive application of the ICMS to cellular
activation is probable. Therefore, we have not made nor expect to make a
provision in our consolidated financial statements to this potential application
We have 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, 2002. We do not believe that application of the ICMS to
cellular activation, applied on a prospective basis will have a material impact
on our results.
Recently the Higher Justice Court (SUPERIOR TRIBUNAL DE JUSTICA) determined
in an action filed by Teleamazon Celular, another wireless operating company,
that the ICMS tax could not be assessed on activation fees.
LITIGATION RELATED TO THE APPLICATION OF THE COFINS AND PIS
On November 27, 1998, Brazilian federal government through Law No. 9,718
altered the COFINS and PIS. This new law indirectly raised the COFINS and PIS
contributions owed by the subsidiaries by widening their calculation basis to
include finance revenues. Article 195 of the Brazilian federal constitution,
which was in effect at the time Law No. 9,718 was enacted, provided for the
payment of the COFINS and PIS contributions based on payrolls, invoicing and
profits. However, Law No. 9,718 widened the calculation basis for the PIS
contribution by determining that it be paid over the totality of revenues earned
by companies, including revenues from investments, securitizations and monetary
and exchange rate variations.
Law No. 9,718 also provided for an increase of the COFINS rate from 2% to
3% over the relevant contribution base, effective as of the date of enactment of
the law.
We believe that the Brazilian federal government's attempt to increase the
COFINS and PIS contributions through Law No. 9,718 is unlawful because it did
not comply with the requisite ninety-day waiting period before applying such
law, and because, at the time the law was enacted, the Brazilian federal
constitution:
o set out a different calculation basis for the COFINS and PIS
contributions, as described above; and
o required that tax burdens be increased only through the use of a LEI
COMPLEMENTAR, and not a LEI ORDINARIA.
TCO has filed a lawsuit challenging the alterations in the Brazilian tax
legislation, on the grounds of unconstitutionality. We believe that we will
ultimately prevail in this lawsuit. However, the lawsuit was not successful in
the first and second stages of judgment. We have appealed to the Higher Court of
Justice (Superior Tribunal de Justica) and to the Supreme Federal Court (Supremo
Tribunal Federal), where a judgment is pending. The total amount in dispute is
R$9,709,419.57, which has been deposited with the court.
Notwithstanding the above, after the price war in the Brazilian cellular
market stabilized, the management of our subsidiaries decided to incorporate the
COFINS and PIS tax increase into their final price for goods and services.
LITIGATION RELATED TO THE PASSING OF THE COFINS AND PIS TO CUSTOMERS
We, together with other telecommunication carriers, are defendants in class
action suits brought by the federal public prosecutor's office and/or
associations for consumers' protection, which are challenging our policy of
passing the COFINS and PIS costs to our customers by incorporating them into our
charges. These suits seek to prohibit the transfer of amounts relating to the
contributions to end consumers as well as the reimbursement of twice the amounts
already collected. Alternatively, money damages and pecuniary damage are
requested.
We are contesting the class action suits on the basis that, according to
our understanding, the COFINS and PIS are cost components of the services
provided to our customers and, as such, should be incorporated into the price of
such services, as is the practice throughout the telecommunications industry.
We believe that the probability of success challenging this claim is very
high.
OTHER LITIGATION
We are also party to certain legal proceedings arising in the normal course
of business. Our reserve amounts are sufficient to cover our estimated losses
due to adverse legal judgments. We believe that adverse judgments arising from
these other legal proceedings would not have a material adverse effect on our
business, financial condition or results of operations.
DIVIDEND POLICY AND DIVIDENDS
On June 30, 2002 and on December 31, 2002, we informed our 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 2002 and July to November 2002, in accordance with Article 9 of
Law 9249/95 and Provision Number 207/96 of the CVM, in the values of
R$0.000105485 per share for the January to June 2002 period and R$0.00014442757
per share for the July to November 2002 period with 15% withheld income tax,
which resulted in net interest of R$0.000089662 and R$0.00012276344 per share,
except to those shareholders who were immune or exempt.
The deliberation on TCO's Interest on Own Capital at December 31, 2002 was
based on the balance sheet closed at November 11, 2002 and the TJLP variation
until December 31, 2002.
The corresponding credit on interest on owned capital was written into our
accounting books on December 31, 2002, on an individual basis to each
shareholder, according to their shareholding position on June 30, 2002, and
December 31, 2002, 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 2002, adding such value to the
total amount in dividends distributed by us for all purposes provided in our
bylaws.
On April 29, 2003, the general assembly approved the payment of interest on
owned capital and dividends up to June 30, 2003, in the terms below:
Values
a) Interest on owned capital - Common and Preferred Shares
Gross value per share--Jan. to June 2002 R$0.000105485
Gross value per share--July to Nov. 2002 R$0.00014442757
Net value per share--Jan. to June 2002 R$0.000089662
Net value per share--July to Nov. 2002 R$0.00012276344
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 us in our official communication to the shareholders.
Each of our preferred shares is entitled to declared dividends, with
priority to receive a non-cumulative annual dividend, to the extent net profits
or reserves are available for distribution, equal to the higher of (i) 6% of the
amount obtained by dividing the amount of subscribed capital by the number of
our shares and (ii) 3% of the amount of shareholders' equity on a per share
basis. To the extent there are additional distributable profits, we are also
required to distribute to all shareholders an amount equal to 25% of adjusted
net income, or the general dividend, determined in accordance with Brazilian
corporate law, including any realization of the unrealized net income reserve.
Each of our preferred shares is also entitled to receive declared profits on par
with common shares, after our common shares have been paid dividends equal to
the minimum priority distribution due to our preferred shares. The preferred
dividend has priority in the distribution of our net profits for the preceding
fiscal year after 5% of our net profits to a legal reserve, not to exceed 20% of
our paid-in capital or an amount.
Any amounts distributed after the preferred dividend are allocated first to
dividend payments to holders of common shares in an amount equal to the
preferred dividend and then distributed equally among holders of preferred and
common shares.
The Brazilian corporate law method also provides for two additional
discretionary allocations of net profits that are subject to approval by the
shareholders at the annual shareholders' meeting:
o first, a percentage of net profits may be allocated to the contingency
reserve for anticipated losses that may be charged to it in future
years. Any amount so allocated in a prior year must be either:
o reversed in the fiscal year in which the loss was anticipated if
such loss does not in fact occur; or
o written off in the event that the anticipated loss occurs;
o second, if the amount of unrealized revenue exceeds the sum of:
o the statutory reserve; and
o retained earnings, such excess may be allocated to the unrealized
profit reserve at the direction of the board of directors.
Allocations may not hinder the payment of mandatory dividends. Unrealized
revenue reserve is defined under the Brazilian corporate law method as the sum
of:
o the share of equity earnings of affiliated companies, which is not
paid as cash dividends; and
o profits as a result of income from operations after the end of the
next succeeding fiscal year.
The amounts available for distribution are determined on the basis of
financial statements prepared in accordance with the Brazilian corporate law
method.
PAYMENT OF DIVIDENDS
We are required by Brazilian law to hold an annual shareholders' meeting by
April 30 of each year, at which, among other things, an annual dividend may be
declared by decision of our shareholders on the recommendation of our Board of
Directors. The payment of annual dividends in any given year is based on the
financial statements prepared for the preceding fiscal year ending December 31.
Under the Brazilian corporate law method, dividends are required to be paid
within 60 days of the annual shareholders' meeting, or on the date determined at
a shareholders' meeting, but in any case, prior to the end of the fiscal year in
which such dividend was declared. A shareholder has a three-year period from the
dividend payment date to claim dividends in respect of its shares, after which
time unclaimed dividends revert back to us.
B. SIGNIFICANT CHANGES
See "Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 2001 and 2002," "Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 2000, 2001 and 2002," and Notes 24, 25,
30 and 31 to our consolidated financial statements.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
The principal trading market for the preferred shares is BOVESPA. As of
December 31, 2002, TCO had approximately 2.4 million common and preferred
shareholders.
The preferred shares began 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 our preferred shares of TCO on BOVESPA for
the periods indicated.
NOMINAL REAIS PER
1,000 PREFERRED SHARES
----------------------
LOW HIGH
---------- ---------
1998
ANNUAL (BEGINNING IN SEPTEMBER 21, 1998).......... 0.269 1.229
1999
ANNUAL............................................ 1.083 3.880
2000
ANNUAL............................................ 3.017 8.283
2001
ANNUAL............................................ 3.083 8.492
First quarter..................................... 5.370 8.492
Second quarter.................................... 4.896 6.899
Third Quarter..................................... 3.083 6.517
Fourth Quarter.................................... 4.181 5.655
2002.................................................
First Quarter..................................... 4.012 5.328
Second Quarter.................................... 3.376 4.781
Third Quarter..................................... 2.288 3.961
Fourth Quarter.................................... 2.764 4.751
LAST SIX MONTHS
December 2002..................................... 4.140 4.751
January 2003...................................... 4.430 5.460
February 2003..................................... 3.900 4.850
March 2003........................................ 4.310 5.730
April 2003........................................ 5.190 5.900
May 2003.......................................... 5.290 5.900
June 2003 (Until June 20, 2003)................... 5.400 5.800
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 pursuant to a Deposit Agreement among TCO, 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
--------------------
LOW HIGH
--------------------
1998
ANNUAL (BEGINNING IN NOVEMBER 16, 1998)............. 2.000 5.937
1999
ANNUAL.............................................. 2.375 7.063
2000
ANNUAL.............................................. 5.000 7.063
2001
ANNUAL.............................................. 4.280 15.875
First quarter....................................... 8.000 13.625
Second quarter...................................... 6.850 9.500
Third Quarter....................................... 4.280 8.570
Fourth Quarter...................................... 4.730 7.250
2002...................................................
First quarter....................................... 5.400 7.450
Second quarter...................................... 3.850 6.500
U.S. DOLLARS PER ADS
--------------------
LOW HIGH
--------------------
Third Quarter....................................... 2.200 4.460
Fourth Quarter...................................... 2.270 4.240
LAST SIX MONTHS
December 2002....................................... 3.420 4.240
January 2003........................................ 3.690 4.960
February 2003....................................... 3.280 4.070
March 2003.......................................... 3.550 5.010
April 2003.......................................... 4.900 5.810
May 2003............................................ 5.260 6.030
June 2003 (Until June 20, 2003)..................... 5.580 6.170
The common shares and preferred shares of Telebrasilia traded on BOVESPA
from May 18, 1998 to July 30, 1999. On August 2, 1999, Telebrasilia shares began
trading on the SOCIEDADE OPERADORA DO MERCADO DE Ativos, or SOMA, the
over-the-counter market. On June 7, 2002, Telebrasilia shares were substituted
with shares of TCO due to the merger of Telebrasilia into TCO. On May 18, 1998,
Telegoias shares began trading on SOMA. 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.
TCO held a general extraordinary shareholders meeting on April 26, 2002, in
which it approved the merger of Telebrasilia into TCO and the consequent
transfer of the concession to explore cellular mobile services previously held
by Telebrasilia.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
TRADING ON THE SAO PAULO STOCK EXCHANGE
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 BOVESPA.
Thus, in 2001, BOVESPA accounted for 100% of the trading value of equity
securities on all Brazilian stock exchanges.
BOVESPA is a non-profit entity owned by its member brokerage firms. Trading
on this exchange is limited to member brokerage firms and a limited number of
authorized nonmembers.
Since April 7, 2003, BOVESPA has open outcry trading sessions each day,
from 10:00 a.m. to 1:00 p.m. and from 2:00 p.m. to 4:45 p.m. Trading is also
conducted from 10:00 a.m. to 5:00 p.m. on an automated system on BOVESPA. On
September 20, 1999, BOVESPA launched the After-Market, with the objective of
expanding business opportunities and offering investors a more flexible trading
schedule. After-Market trading takes place from 5:45 p.m. to 7:00 p.m. All
stocks traded during the regular trading session of the day may be traded on the
After-Market. However, only cash market trading via BOVESPA's electronic trading
system is allowed. The maximum variation allowed for stock prices, whether
positive or negative, corresponds to 2% in relation to the closing price at the
regular trading session.
In order to better control volatility, BOVESPA has adopted a "circuit
breaker" system pursuant to which trading sessions may be suspended for a period
of 30 minutes or one hour whenever its indices fall below the limits of 10%, in
relation to the index registered in the previous trading session.
There are no specialists or market makers for our shares on BOVESPA.
Trading in securities listed on the BOVESPA may be effected off the Exchange 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 a separate clearinghouse, which maintains
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 BOVESPA is COMPANHIA BRASILEIRA DE LIQUIDACAO
E CUSTODIA S.A. -- CBLC, which is wholly owned by that Exchange.
At December 31, 2002, the aggregate market capitalization of the 399
companies listed on BOVESPA was approximately U.S.$123.8 billion. Although all
the outstanding shares of an exchange-listed company may trade on BOVESPA, 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 BOVESPA tends 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 2002, the combined monthly trading volumes on BOVESPA
averaged approximately U.S.$4.1 billion. In 2002, the ten most actively traded
issues represented approximately 56.51% of the total trading in the cash market
on BOVESPA. Trading on BOVESPA by nonresidents of Brazil is subject to certain
limitations under Brazilian foreign investment legislation.
REGULATION OF BRAZILIAN SECURITIES MARKETS
The Brazilian securities markets are regulated by the CVM, which has
authority over stock exchanges and the securities markets generally, by the
CONSELHO MONETARIO NACIONAL, or CMN, the National Monetary Counsel and by the
Central Bank, which has, among other powers, licensing authority over brokerage
firms and regulates foreign investment and foreign exchange transactions. The
Brazilian securities market is governed by Law No. 6,385, as amended, known as
the Brazilian securities law, and by the Brazilian corporate law.
Law No. 10,303 of December 31, 2001 amended the Brazilian corporate law and
the Brazilian securities law. Consequently, some major modifications resulted
for the businesses of the publicly traded companies.
Among the changes, Law No. 10,303, along with Executive Order No. 8 and
Decree No. 3.995, all dated October 31, 2001, provided that the CVM was to have
the scope of its authority altered and expanded. Additionally, CVM's positioning
in the regulatory hierarchy as well as its autonomy were modified.
The modifications include changes in the proportions of common and
preferred shares, new rules for the issuance of debentures, other parameters
governing the exercise of the right of withdrawal, duties and powers of the
members of the Board of Auditors and the Board of Directors, and the ability of
publicly-traded companies to make publications available over the Internet. Also
provided is the pooling agreement, the so-called block voting by which the
shareholders agree during a prior meeting on the direction of the votes that
will be cast at the general meetings. The purpose of this type of vote is to
prevent any possible individual dissidents or interests from harming corporate
interests.
The CVM, which is the agency in charge of regulating the market, now
handles some functions that were reserved to the Banco Central, for example, the
regulation and organization of the futures and commodities markets.
Under the Brazilian corporate law, a company is either public, a COMPANHIA
ABERTA, such as our company, or private, a COMPANHIA FECHADA. All public
companies are registered with the CVM and are subject to reporting requirements.
A company registered with the CVM may have its securities traded either on
BOVESPA or on the Brazilian over-the-counter market. The shares of a public
company may also be traded privately, subject to certain limitations. In order
to be listed on the Brazilian stock exchanges, a company must apply for
registration with the CVM and the stock exchange. Once the stock exchange lists
a company and the CVM accepts its registration as a public company, its
securities may start to be traded.
Trading in securities on BOVESPA may be suspended at the request of a
company in anticipation of a material announcement. Trading in the securities of
a particular company may also be suspended on the initiative of the BOVESPA or
the CVM, among other reasons, due to a belief that the company has provided
inadequate information regarding a material event or has provided inadequate
responses to inquiries by the CVM or BOVESPA.
The Brazilian securities law, Brazilian corporate law and the regulations
issued by the CVM, the CMN and the Central Bank provide, among other things,
disclosure requirements and restrictions on insider trading, price manipulation
and protection of minority shareholders. However, the Brazilian securities
markets are not as highly regulated and supervised as the U.S. securities
markets or markets in some other jurisdictions.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
The following summarizes certain material provisions of our by-laws and
Brazilian law, the main bodies of regulation governing us. Copies of our by-laws
have been filed as exhibits to this annual report on Form 20-F.
REGISTER
Our amended and restated by-laws were registered with the Public Registry
of Brazil's Federal District, No. 20030226171 on May 23, 2003, under company
number (NIRE) 53.30000.580-0.
OBJECTS AND PURPOSES
We are a publicly traded company duly registered with the Brazilian
securities commission under No. 17612. Article 2 of our by-laws provides that
our corporate purpose is to:
o exercise the control of operating SMP;
o promote, directly or through our subsidiaries or controlled
companies, the expansion and implementation of the cellular
services within our concessions;
o promote, carry out and direct the financing of capital from
internal and external sources to be used by us or our controlled
companies;
o promote and encourage study and research activities aimed at the
development of the telecommunications sector;
o perform, directly or through our subsidiaries and affiliated
companies, technical and consulting services in the areas of
telecommunications, Internet, computers, finance and investor
relations;
o promote, encourage and coordinate, directly or through our
subsidiaries or affiliated companies, the development and
training of personnel necessary to perform activities in the
telecommunications sector;
o import and export goods and services for our operations and the
operations of our subsidiaries and affiliated companies;
o participate in the equity capital of other companies;
o execute other activities connected or related to our object;
o perform telecommunication services and related activities;
o trade capacity of foreign satellites in Brazil and exploit
Brazilian satellite for transmission of telecommunication
signals;
o perform value added services; and
o provide telecommunication capacity, connections and services to
companies having authorization, permissions or concessions to
provide telecommunication services and to companies which provide
value added services.
DIRECTORS
Among other powers, the Board of Directors has the power to approve
investments and acquisition of assets, assume any obligation and execute
contracts not included in the budget for an amount exceeding R$300 million, the
public issuance of promissory notes, and the acquisition of our shares for
cancellation or deposit with a custodian.
Pursuant to Brazilian corporate law and our by-laws, each member of the
Board of Directors must have at least one share of our capital stock to be
elected as a Director. There are no provisions in our by-laws with respect to:
o age limits for retirement of directors; and
o anti-takeover mechanisms or other procedures designed to delay,
defer or prevent changes in our control.
Although there are no provisions in our by-laws with respect to the
following, they are regulated by Brazilian corporate law and CVM regulations:
o a Director's power to vote on proposals in which the Director is
materially interested;
o a Director's power to vote compensation to him or herself in the
absence of an independent quorum;
o borrowing powers exercisable by the directors; and
o disclosure of share ownership.
RIGHTS ATTACHING TO SHARES
DIVIDEND RIGHTS
See "Item 8. Financial Information--Consolidated Statements and Other
Financial Information--Dividend Policy and Dividends," and "--Payment of
Dividends."
VOTING RIGHTS
Each common share entitles the holder to one vote at meetings of
shareholders. Our preferred shares do not entitle the holder to vote except as
discussed in our by-laws in Articles 10 and 12. Holders of our preferred shares
are each entitled to attend or to address meetings of shareholders and to elect
members of our Board of Directors according to Article 141, fourth paragraph,
II, and Article 141, fifth paragraph, of Law No. 6,404/76, as amended by Article
8, fourth paragraph of Law No. 10,303/01.
One of the members of our Board of Auditors and his or her alternative are
elected by majority vote of the holders of our preferred shares present at the
annual meeting of shareholders at which members of the Board of Auditors are
elected.
Brazilian corporate law provides that certain non-voting shares, such as
our preferred shares, acquire voting rights in the event we fail for three
consecutive fiscal years to pay the mandatory minimum dividend to which such
shares are entitled, until such payment is made.
Our preferred shares are entitled to full voting rights in the event that
we fail to pay the mandatory minimum dividends to which they are entitled for
three consecutive years, and with respect to:
o the approval of any long-term contract between us and our
controlled subsidiaries, on the one hand, and any controlling
shareholder or that shareholder's affiliates and related parties,
on the other hand; and
o changes/eliminations of certain rights and obligations as
provided for in our by-laws.
Any change in the preference, benefits, conditions of redemption and
amortization of our preferred shares, or the creation of a class of shares
having priority or preference over our preferred shares, would require the
approval of holders of a majority of our outstanding preferred shares at a
special meeting of holders of our preferred shares. Such a meeting would be
called by publication of a notice in the state official gazette and two other
Brazilian gazettes, as determined by the shareholders, at least thirty days
prior to the meeting, but would not generally require any other form of notice.
In any circumstances in which holders of our preferred shares are entitled
to vote, each preferred share will entitle the holder to one vote.
MEETING OF SHAREHOLDERS
According to Brazilian law, shareholders must be previously convoked in
order for a general or extraordinary shareholders' meeting to be installed. The
convocation must be published in the state official gazette and two other
gazettes, as determined by the shareholders, at least 15 days prior to the
meeting's scheduled date. If the first meeting is not installed for some reason,
the second convocation must be published at least eight days before the second
meeting date.
On the first call, meetings may only be installed with a minimum quorum of
one-fourth of the holders of voting shares. Extraordinary meetings whose object
is the amendment of the by-laws may only be installed on the first call with a
minimum of two-thirds of the voting capital present. In addition, some decisions
require the approval of at least one-half of the holders of voting shares
(qualified quorum). On a second call, the meetings are installed regardless of
quorum.
PREEMPTIVE RIGHTS
Each of our shareholders 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.
In the event of a capital increase, which would maintain or increase the
proportion of capital represented by our preferred shares, holders of ADSs, or
of our preferred shares, would have preemptive rights to subscribe only to our
newly issued preferred shares. In the event of a capital increase, which would
reduce the proportion of capital represented by our preferred shares, holders of
ADSs, or of our preferred shares, would have preemptive rights to subscribe to
our preferred shares in proportion to their shareholdings, and to our common
shares only to the extent necessary to prevent dilution of their interest.
RIGHT OF REDEMPTION
Brazilian corporate law provides for the right of redemption to minority
shareholders under certain circumstances.
The right of a dissenting shareholder to seek redemption arises in case our
shareholders representing more than 50% of the voting shares, common shares or
preferred shares, as applicable, decide to:
o change the preference of our preferred shares or to create a
class of shares having priority or preference over our preferred
shares, except if such actions are expressly permitted in the
by-laws at the time of their adoption by our shareholders;
o change the preference of our preferred shares, any right they
carry, their amortization or redemption rights, or to create a
class of shares having priority or preference over our preferred
shares;
o reduce the mandatory distribution of dividends;
o change our corporate purposes;
o transfer all of our shares to another company in order to make us
a wholly-owned subsidiary of that company;
o approve the acquisition of another company, the price of which
exceeds certain limits set forth in Brazilian corporate law;
o participate in a group of companies, if certain liquidity
standards are not met according to the Brazilian corporate law as
amended by Law No. 10,303/01; and
o merge or consolidate us with another company, if certain
liquidity standards are not met according to the Brazilian
corporate law as amended by Law No. 10,303/01.
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 our preferred shares by vote taken in a special
meeting of a majority of the holders of our preferred shares affected by the
resolution, within 30 days from the publication of the minutes of that special
meeting. We 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 our financial stability.
Unless otherwise provided in our by-laws, which is not the case, 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
Our 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 Brazilian corporate 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. Our preferred shares underlying our ADSs 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.
BOVESPA operates a central clearing system. A holder of our shares may
choose, at its discretion, to participate in this system. 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 our register of shareholders.
C. MATERIAL CONTRACTS
CREDIT AGREEMENTS WITH BANCO NACIONAL DE DESENVOLVIMENTO ECONOMICO E SOCIAL -
BNDES
CREDIT AGREEMENTS between BNDES and Financing Agents and TCO and Operators
for the financing of projects.
SCOPE
The agreements were entered into to finance the expansion of the TDMA
network in Area 7 and to implement and expand the TDMA network in Area 8. BNDES
provided all of the funds for the financing although some of the funds were
passed through the Financing Agents (BBA, Santander, ABC and BCN for Area 7 and
Unibanco, BBA, Banco do Brasil, Santander and Banco Sudameris for Area 8 - NBT).
On December 31, 2002 the outstanding balance was R$225.376 million.
COVENANTS
The agreements entered into with BNDES and the Financing Agents
(pass-through lenders) include restrictive covenants. On December 31, 2002, TCO
was not in default of its contractual obligations set out in the agreements. A
description of the covenants is set forth below:
(A) TCO COVENANTS
"MAINTAIN, WHILE THE ON-LENDING AGREEMENT IS IN EFFECT, THE FOLLOWING FINANCIAL
RATIOS, UTILIZING THE SEMIANNUAL AND ANNUAL FINANCIAL STATEMENTS AUDITED BY
EXTERNAL AUDITORS THAT ARE REGISTERED WITH THE COMISSAO DE VALORES MOBILIARIOS -
CVM: 1) CAPITALIZATION RATIO (SE/TA - FINANCIAL APPLICATIONS): EQUAL TO OR
GREATER THAN 40% (FORTY PERCENT); 2) CURRENT LIQUIDITY RATIO (CA/CL): EQUAL TO
OR GREATER THAN 1.1. (ONE AND ONE TENTH); 3) DEBT COVERAGE RATIO [(LAJDA +
FINANCIAL APPLICATIONS) / (SHORT TERM DEBT + NET FINANCIAL EXPESES)]: EQUAL TO
OR GREATER THAN 1.3 (ONE AND THREE TENTHS); 4) EBITDA MARGIN RATIO (EBITDA / NET
OPERATING REVENUE): EQUAL TO OR GREATER THAN 28% (TWENTY EIGHT PERCENT) IN THE
YEARS 2001 THROUGH 2003, EQUAL TO OR GREATER THAN 30% (THIRTY PERCENT) FROM 2004
UNTIL THE FINAL PAYMENT OF ALL OUTSTANDING OBLIGATIONS UNDER THE ON-LENDING
AGREEMENT; 5) EBITDA MARGIN RATIO EXCLUDING CELLULAR EQUIPMENT SALES (EBITDA
EXCLUDING CELLULAR EQUIPMENT SALES / NET OPERATING REVENUE EXCLUDING CELLULAR
EQUIPMENT SALES): EQUAL TO OR GREATER THAN 35% (THIRTY FIVE PERCENT); 6) TOTAL
DEBT DIVIDED BY EBITDA RATIO(TOTAL DEBT / EBITDA): LESS THAN OR EQUAL TO 4
(FOUR).
CA = CURRENT ASSETS
CL = CURRENT LIABILITIES
SE = SHAREHOLDERS' EQUITY
TA = TOTAL ASSETS
FINANCIAL APPLICATIONS = CASH + SHORT TERM FINANCIAL APPLICATIONS AND/OR
IMMEDIATE LIQUIDITY FROM FINANCIAL INSTITUTIONS.
LAJDA = EBITDA FOR THE LAST FOUR (4) QUARTERS - (INCOME TAX + SOCIAL
CONTRIBUTION TAXES OVER PROFITS FOR THE LAST FOUR (4) QUARTERS).
NET OPERATING REVENUE FOR THE LAST FOUR (4) QUARTERS.
NET FINANCIAL EXPENSE, EXCLUDING THE CALCULATION OF INTEREST OVER
SHAREHOLDERS' EQUITY = FINANCIAL EXPENSE AS SET OUT IN THE BALANCE SHEET FOR THE
LAST 4 (FOUR) QUARTERS (INCLUDING MONETARY VARIATIONS, CPMF, INTEREST, ETC.) -
FINANCIAL INCOME AS SET OUT IN THE BALANCE SHEET FOR THE LAST 4 (FOUR) QUARTERS.
ADJUST, IN THE EVENT THE ACQUISITION OF A MATERIAL SHARE PARTICIPATION, DIRECT
OR INDIRECT, IN A BAND A TELEPHONY COMPANY IS ANNOUNCED, AS A "RELEVANT FACT" IN
THE MAIN NATIONAL COMMUNICATIONS VEHICLES, THE FINANCIAL RATIO REFERRED TO IN
CLAUSE 13, ITEM V "I", THAT WILL BE IN EFFECT IN ACCORDANCE WITH THE FOLLOWING
CAPITALIZATION RATIOS: 1) EQUAL TO OR GREATER THAN 33% (THIRTY THREE PERCENT),
ON JUNE 30 (THIRTY), 2002; 2) EQUAL TO OR GREATER THAN 35% (THIRTY FIVE
PERCENT), ON DECEMBER 31 (THIRTY ONE), 2002; 3) EQUAL TO OR GREATER THAN 35%
(THIRTY FIVE PERCENT), ON JUNE 30 (THIRTY), 2003; 4) EQUAL TO OR GREATER THAN
40% (FORTY PERCENT), FROM JUNE 30 (THIRTY), 2003; OBTAIN IN THE EVENT OF THE
ACQUISITION OF THE SHARE PARTICIPATION REFERENCED IN CLAUSE 13, ITEM "F", WITHIN
A MAXIMUM PERIOD OF 6 (SIX) MONTHS FROM THE DATE OF THE ACQUISITION, A RATING
EQUIVALENT TO AN INVESTMENT GRADE RATING FROM MOODY'S, FITCH OR STANDARD AND
POORS."
We note, in addition, that the agreement entered into with BNDES is subject
to the "Terms Applicable to Agreements with BNDES", approved by BNDES'
Management Resolution No. 665/87, as modified.
(B) BENEFICIARY'S (NBT) COVENANTS
"MAINTAIN, WHILE THE ON-LENDING AGREEMENT IS IN EFFECT, THE FOLLOWING FINANCIAL
RATIOS, UTILIZING THE SEMIANNUAL AND ANNUAL FINANCIAL STATEMENTS AUDITED BY
EXTERNAL AUDITORS THAT ARE REGISTERED WITH THE COMISSAO DE VALORES MOBILIARIOS -
CVM: 1) CAPITALIZATION RATIO (SE/TA - INTERCOMPANY - FINANCIAL APPLICATIONS):
EQUAL TO OR GREATER THAN 40% (FORTY PERCENT); 2) CURRENT LIQUIDITY RATIO
(CA/CL): EQUAL TO OR GREATER THAN 1.1. (ONE AND ONE TENTH) TO BE CALCULATED
COMMENCING ON DECEMBER OF 2002; 3) EBITDA MARGIN RATIO EXCLUDING CELLULAR
EQUIPMENT SALES (EBITDA EXCLUDING CELLULAR EQUIPMENT SALES / NET OPERATING
REVENUE EXCLUDING CELLULAR EQUIPMENT SALES): EQUAL TO OR GREATER THAN 30%
(THIRTY PERCENT) FROM DECEMBER OF 2002 THROUGH JUNE 2003, AND EQUAL TO OR
GREATER THAN 35% (THIRTY FIVE PERCENT) FROM DECEMBER 2004 UNTIL THE FINAL
PAYMENT OF ALL OUTSTANDING OBLIGATIONS UNDER THE ON-LENDING AGREEMENT.
CA = CURRENT ASSETS
CL = CURRENT LIABILITIES
EBITDA AND NET OPERATING REVENUE FOR THE LAST FOUR (4) QUARTERS.
INTERCOMPANY - INDEBTEDNESS WITH THE GUARANTOR AND WITH THE COMPANIES
CONTROLLED BY THE GUARANTOR.
FINANCIAL APPLICATIONS = CASH + SHORT TERM FINANCIAL APPLICATIONS AND/OR
IMMEDIATE LIQUIDITY FROM FINANCIAL INSTITUTIONS.
SE = SHAREHOLDERS' EQUITY
TA = TOTAL ASSETS"
CREDIT AGREEMENTS WITH EXPORT DEVELOPMENT CANADA
CREDIT AGREEMENTS entered into and between TCO and Export Development
Canada on November 22, 1999 and December 14, 2001.
SCOPE
The agreements provide financing to assist in the purchase of certain goods
and services from Nortel Network regarding the implementation and extension of
our TDMA network. The total amount of the two contracts is U.S.$68 million. At
December 31, 2002, we have R$163,357 million in financing outstanding.
TCO COVENANTS
The agreements include restrictive covenants. On December 31, 2002, TCO was
not in default of its contractual obligations set out in the agreements. A
description of the covenants is set forth below:
o TCO shall not make any Investments other than Permitted
Investments1;
o the Consolidated Cash Flow Coverage Ratio2 on the last day of any
Fiscal Quarter beginning December 31, 2001 to and excluding
September 30, 2003 shall not be less than 1.00 to 1.00 and
thereafter not less than 1.25 to 1.00;
o the Consolidated Leverage Ratio3 shall at all times be no greater
than 1.5 to 1.0; and
o the Consolidated Debt4 to EBITDA5 for the immediately preceding
two Fiscal Quarters multiplied by two (2) shall not exceed 2.5 to
1.0.
DEFINITIONS OF CERTAIN TERMS
1. "PERMITTED INVESTMENTS" means (i) any investments in any Cash Equivalent
and (ii) commercial paper (having a term not exceeding 364 days) issued by
Splice do Brasil Telecomunicacoes e Eletronica S.A. and (iii) debentures issued
by Fixcel S.A. and (iv) obligations of the Guarantors to third parties which
have been assumed by Splice do Brasil Telecomunicacoes e Eletronica S.A. or
Fixcel S.A. or BID S.A., for which the Guarantors remain liable as a result of a
non payment by Splice do Brasil Telecomunicacoes e Eletronica S.A. or Fixcel
S.A. or BID S.A., provided that in no event shall (a) the obligations of Splice
do Brasil Telecomunicacoes e Eletronica S.A., Fixcel S.A., and BID S.A. to the
Guarantors including without limitation those set out in (ii), (iii) and (iv)
exceed a total amount of principal of 660 million Reais plus interest at any
time until and including June 27, 2003 and of 190 million Reais plus interest at
any time after June 27, 2003 until and including August 8, 2003 and (b) any such
exposure under (ii), (iii) and (iv) shall be reduced to zero on or before August
8, 2003, which date shall not be further extended;
2. "CONSOLIDATED CASH FLOW COVERAGE RATIO" means, as of the close of any
Fiscal Quarter, the ratio computed for the period comprised of the four (4)
consecutive Fiscal Quarters ending on the computation date, of (a) EBIDA for
such period TO (b) the amount equal to the sum of: (i) Consolidated Net Interest
Expense for such period; PLUS (ii) all Dividends for such period; plus (iii) the
aggregate principal installments due during the next four fiscal quarters of (A)
the Loan; and (B) all other Indebtedness of the Guarantors (less any Cash
Equivalent as of the computation date) (provided that the sum of (A) plus (B)
less any Cash Equivalent shall never be less than zero for purposes of this
definition);
3. "CONSOLIDATED LEVERAGE RATIO" means the ratio of Consolidated Total
Liabilities (less Cash Equivalents) to Consolidated Total Equity;
4. "CONSOLIDATED DEBT" means, at any time, the aggregate amount of
Indebtedness of the Guarantors on a consolidated basis regardless of when such
obligations must be paid or satisfied, determined after eliminating intercompany
transactions less any Cash Equivalents;
5. "EBITDA" means, for the Guarantors for any period, Consolidated Net
Income (before extraordinary or other non-recurring items) for such period PLUS,
(a) to the extent deducted in determining Net Income for such period, the sum of
(i) Consolidated Net Interest Expense; (ii) Consolidated Tax Expense; and (iii)
depreciation, amortization and other non-cash charges; MINUS (b) the gain (or
PLUS the loss) on monetary correction to the extent reflected in Consolidated
Net Income for such period.
MIGRATION TO SMP
On February 3, 2003, TCO entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables it
to provide personal cellular services (SMP) in the area corresponding to the
Brazil's Federal District. The authorization replaces the concession agreement
entered into with Anatel on November 4, 1997, and authorizes TCO to provide SMP
services until July 24, 2006. It may be renewed for an additional term of
fifteen years upon payment of 2% of TCO's net revenues from usage charges in the
region described above in the year prior to the year when payment is due, and
every two years during the extension period. In consideration for the
authorization, TCO was required to pay R$9.0 thousand. The authorization is a
legal requirement for providing telecommunication services in the region covered
thereby.
On February 3, 2003, Telegoias entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables it
to provide personal cellular services (SMP) in the area corresponding to the
states of Goias and Tocantins, with the exception of the following
municipalities: Buriti Alegre, Cachoeira Dourada, Inaciolandia, Itumbiara,
Paranaiguara and Sao Simao. The authorization replaces the concession agreement
entered into with Anatel on November 4, 1997, and authorizes Telegoias to
provide SMP services until October 29, 2008. It may be renewed for an additional
term of fifteen years upon payment of 2% of Telegoias' net revenues from usage
charges in the region described above in the year prior to the year when payment
is due, and every two years during the extension period. In consideration for
the authorization, Telegoias was required to pay R$9.0 thousand. The
authorization is a legal requirement for providing telecommunication services in
the region covered thereby.
On February 3, 2003, Telems entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables it
to provide personal cellular services (SMP) in the area corresponding to the
state of Mato Grosso do Sul, with the exception of the municipality of
Paranaiba. The authorization replaces the concession agreement entered into with
Anatel on November 4, 1997, and authorizes Telems to provide SMP services until
September 28, 2009. It may be renewed for an additional term of fifteen years
upon payment of 2% of Telems' net revenues from usage charges in the region
described above in the year prior to the year when payment is due, and every two
years during the extension period. In consideration for the authorization,
Telems was required to pay R$9.0 thousand. The authorization is a legal
requirement for providing telecommunication services in the region covered
thereby.
On February 3, 2003, Telemat entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables it
to provide personal cellular services (SMP) in the area corresponding to the
state of Mato Grosso. The authorization replaces the concession agreement
entered into with Anatel on November 4, 1997, and authorizes Telemat to provide
SMP services until March 30, 2009. It may be renewed for an additional term of
fifteen years upon payment of 2% of Telemat's net revenues from usage charges in
the region described above in the year prior to the year when payment is due,
and every two years during the extension period. In consideration for the
authorization, Telemat was required to pay R$9.0 thousand. The authorization is
a legal requirement for providing telecommunication services in the region
covered thereby.
On February 3, 2003, Teleron entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables it
to provide personal cellular services (SMP) in the area corresponding to the
state of Rondonia. The authorization replaces the concession agreement entered
into with Anatel on November 4, 1997, and authorizes Teleron to provide SMP
services until July 21, 2009. It may be renewed for an additional term of
fifteen years upon payment of 2% of Teleron's net revenues from usage charges in
the region described above in the year prior to the year when payment is due,
and every two years during the extension period. In consideration for the
authorization, Teleron was required to pay R$9.0 thousand. The authorization is
a legal requirement for providing telecommunication services in the region
covered thereby.
On February 3, 2003, Teleacre entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables it
to provide personal cellular services (SMP) in the area corresponding to the
state of Acre. The authorization replaces the concession agreement entered into
with Anatel on November 4, 1997, and authorizes Teleacre to provide SMP services
until July 15, 2009. It may be renewed for an additional term of fifteen years
upon payment of 2% of Teleacre's net revenues from usage charges in the region
described above in the year prior to the year when payment is due, and every two
years during the extension period. In consideration for the authorization,
Teleacre was required to pay R$9.0 thousand. The authorization is a legal
requirement for providing telecommunication services in the region covered
thereby.
On February 3, 2003, NBT entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables it
to provide personal cellular services (SMP) in the area corresponding to the
states of Amazonas, Roraima, Amapa, Para e Maranhao. The authorization replaces
the concession agreement entered into with Anatel on November 27, 1998, and
authorizes NBT to provide SMP services until November 29, 2013. It may be
renewed for an additional term of fifteen years upon payment of 2% of NBT's net
revenues from usage charges in the region described above in the year prior to
the year when payment is due, and every two years during the extension period.
In consideration for the authorization, NBT was required to pay R$9.0 thousand.
The authorization is a legal requirement for providing telecommunication
services in the region covered thereby.
D. EXCHANGE CONTROLS
There are no restrictions on ownership of preferred shares or common shares
by individuals or legal entities domiciled outside of Brazil.
The right to convert dividend or interest payments and proceeds from the
sale of shares into foreign currency and to remit such amounts outside Brazil is
subject to restrictions under foreign investment legislation which generally
requires, among other things, that the relevant investments have been registered
with the Central Bank and the CVM. Such restrictions on the remittance of
foreign capital abroad may hinder or prevent the custodian for our preferred
shares represented by our ADSs or the holders of our preferred shares from
converting dividends, distributions or the proceeds from any sale of these
preferred shares into U.S. dollars and remitting the U.S. dollars abroad.
Holders of our ADSs could be adversely affected by delays in, or refusal to
grant any, required government approval to convert Brazilian currency payments
on the preferred shares underlying our ADS and to remit the proceeds abroad.
Resolution No. 1,927 of the National Monetary Council provides for the
issuance of depositary receipts in foreign markets in respect of shares of
Brazilian issuers. It restates and amends Annex V to Resolution No. 1,289 of the
National Monetary Council, known as the Annex V Regulations. The ADS program was
approved under the Annex V Regulations by the Central Bank and the CVM prior to
the issuance of the ADSs. Accordingly, the proceeds from the sale of ADSs by ADR
holders outside Brazil are free of Brazilian foreign investment controls, and
holders of the ADSs are entitled to favorable tax treatment. See "Item
10--Taxation--Brazilian Tax Considerations."
Under Resolution 2,689 of the CMN, foreign investors registered with the
CVM may buy and sell Brazilian securities, including our preferred shares, on
Brazilian stock exchanges without obtaining separate certificates of
registration for each transaction. Registration is available to qualified
foreign investors, which principally include foreign financial institutions,
insurance companies, pension and investment funds, charitable foreign
institutions and other institutions that meet certain minimum capital and other
requirements. Resolution 2,689 also extends favorable tax treatment to
registered investors. See "Item 10--Taxation--Brazilian Tax Considerations."
Pursuant to the Resolution 2,689 foreign investors must: (i) appoint at
least one representative in Brazil with the ability to perform actions regarding
the foreign investment; (ii) complete the appropriate foreign investor
registration form; (iii) obtain registration as a foreign investor with CVM; and
(iv) register the foreign investment with the Central Bank.
The securities and other financial assets held by a foreign investor
pursuant to Resolution 2,689 must be registered or maintained in deposit
accounts or under the custody of an entity duly licensed by the Central Bank or
by the CVM or be registered in register, clearing and custody systems authorized
by the Central Bank or by the CVM. In addition, the trading of securities is
restricted to transactions carried out on the stock exchanges or
over-the-counter markets licensed by the CVM.
REGISTERED CAPITAL
Amounts invested in our preferred shares by a non-Brazilian holder who
qualifies under Resolution 2,689 and obtains registration with the CVM, or by
the depositary representing an ADS holder, are eligible for registration with
the Central Bank. This 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 our 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 these
dates.
A non-Brazilian holder of preferred shares may experience delays in
effecting Central Bank registration, which may delay remittances abroad. This
delay may adversely affect the amount in U.S. dollars, received by the
non-Brazilian holder.
A certificate of registration has been issued in the name of the depositary
with respect to the ADSs and is maintained by the custodian on behalf of the
depositary. Pursuant to the certificate of registration, the custodian and the
depositary are able to convert dividends and other distributions with respect to
the preferred shares represented by our ADSs into foreign currency and remit the
proceeds outside Brazil. In the event that a holder of ADSs exchanges such ADSs
for preferred shares, such holder will be entitled to continue to rely on the
depositary's certificate of registration for five business days after such
exchange, following which such holder must seek to obtain its own certificate of
registration with the Central Bank. Thereafter, any holder of preferred shares
may not be able to convert into foreign currency and remit outside Brazil the
proceeds from the disposition of, or distributions with respect to, such
preferred shares, unless the holder is a duly qualified investor under
Resolution 2,689 or obtains its own certificate of registration. A holder that
obtains a certificate of registration will be subject to less favorable
Brazilian tax treatment than a holder of ADSs. See "Item 10--Taxation--Brazilian
Tax Considerations."
If the holder does not qualify under Resolution 2,689 by registering with
the CVM and the Central Bank and appointing a representative in Brazil, the
holder will be subject to less favorable Brazilian tax treatment than a holder
of ADSs. Regardless of qualification under Resolution 2,689, residents in tax
havens are subject to less favorable tax treatment than other foreign investors.
See "Item 10--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
a serious imbalance or an anticipated serious imbalance of Brazil's balance of
payments. For approximately six months in 1989 and early 1990, the Brazilian
government froze all dividend 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. There can be no assurance that
the Brazilian government will not impose similar restrictions on foreign
repatriations in the future. See "Item 3--Risk Factors--Risks Relating to
Brazil."
E. TAXATION
THE FOLLOWING DISCUSSION CONTAINS A DESCRIPTION OF THE MATERIAL BRAZILIAN
AND UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF PREFERRED SHARES OR ADSS BY A HOLDER, ALSO CALLED A U.S. HOLDER,
THAT IS FOR U.S. FEDERAL INCOME TAX PURPOSES A CITIZEN OR RESIDENT OF THE UNITED
STATES OF AMERICA, A CORPORATION, OR OTHER ENTITY TAXABLE AS A CORPORATION,
CREATED OR ORGANIZED IN OR UNDER THE LAWS OF THE UNITED STATES OF AMERICA OR ANY
STATE THEREOF, AN ESTATE THE INCOME OF WHICH IS SUBJECT TO U.S. FEDERAL INCOME
TAXATION REGARDLESS OF ITS SOURCE, OR A TRUST, IF A COURT WITHIN THE UNITED
STATES OF AMERICA IS ABLE TO EXERCISE PRIMARY SUPERVISION OVER THE
ADMINISTRATION OF THE TRUST AND ONE OR MORE U.S. PERSONS HAVE THE AUTHORITY TO
CONTROL ALL SUBSTANTIAL DECISIONS OF THE TRUST.
This description does not purport to be a comprehensive description of all
of the tax considerations that may be relevant to any particular investor,
including tax considerations that arise from rules of general application to all
taxpayers or to certain classes of investors or that are generally assumed to be
known by investors. In particular, this summary deals only with U.S. holders
that will hold preferred shares or ADSs as capital assets and does not apply to
certain classes of U.S. holders, such as holders of 10% or more of our voting
shares, financial institutions, tax-exempt organizations, insurance companies,
dealers in securities or currencies, securities traders who elect to account for
their investment in preferred shares or ADSs on a mark-to-market basis, persons
holding preferred shares or ADSs as part of a "straddle," "hedging transaction"
or "conversion transaction," and persons that have a "functional currency" other
than the U.S. dollar.
This summary is based upon tax laws of Brazil and the United States as in
effect on the date of this annual report, which are subject to change, possibly
with retroactive effect, and to differing interpretations. You should consult
your own tax advisors as to the Brazilian, United States or other tax
consequences of the purchase, ownership and disposition of preferred shares or
ADSs, including, in particular, the effect of any non-U.S., state or local tax
laws.
Although there is presently no income tax treaty between Brazil and the
United States, the tax authorities of the two countries have had discussions
that may culminate in such a treaty. No assurance can be given, however, as to
whether or when a treaty will enter into force or how it will affect the U.S.
holders of preferred shares or ADSs.
BRAZILIAN TAX CONSIDERATIONS
The following discussion mainly summarizes the principal Brazilian tax
consequences of the acquisition, ownership and disposition of preferred shares
or ADSs by a U.S. holder not deemed to be domiciled in Brazil for Brazilian tax
purposes (a "U.S. 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 its own tax advisor about
the Brazilian tax consequences of investing in preferred shares or ADSs.
TAXATION OF DIVIDENDS
Dividends paid by us in cash or in kind from profits generated on or after
January 1, 1996 (i) to the depositary in respect of preferred shares underlying
ADSs or (ii) to a U.S. holder or non-Brazilian holder in respect of preferred
shares will generally not be subject to Brazilian withholding tax. We do not
have any undistributed profits generated before January 1, 1996.
DISTRIBUTIONS OF INTEREST ON CAPITAL
Brazilian corporations may make payments to shareholders characterized as
interest on capital as an alternative form of making dividend distributions. The
rate of interest may not be higher than the Brazilian government's long-term
interest rate, or the TJLP, as determined by the Central Bank from time to time
(11% per annum for the three-month period beginning January 2003). The total
amount distributed as interest on capital may not exceed the greater of (i) 50%
of net income (before taking the 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 us for Brazilian corporate
income tax purposes. These payments to U.S. holders or non-Brazilian holders are
subject to Brazilian withholding tax at the rate of 15%. If the recipient of the
payment is domiciled in a tax haven jurisdiction (I.E., a country that does not
impose any income tax or that imposes tax at a rate of less than 20%) the rate
will be 25%.
No assurance can be given that our Board of Directors will not recommend
that future distributions of profits will 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 we are obligated to
distribute to our shareholders in accordance with our Charter and the Brazilian
corporate 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.
TAXATION OF GAINS
Gains realized outside Brazil by a U.S. holder or non-Brazilian holder on
the disposition of ADSs or preferred shares to another U.S. holder or
non-Brazilian holder are not subject to Brazilian tax.
Gains realized by U.S. holders or non-Brazilian holder on dispositions of
preferred shares in Brazil or in transactions with Brazilian residents may be
free of Brazilian tax, taxed at a rate of 20% or taxed at a rate of 15%,
depending on the circumstances.
Gains on the disposition of preferred shares obtained upon cancellation of
ADSs are not taxed in Brazil if the disposition is made and the proceeds are
remitted abroad within five business days after cancellation, unless the
investor is a resident of a jurisdiction that, under Brazilian law, is deemed to
be a tax haven.
Gains realized through transactions with Brazilian residents or through
transactions in Brazil off of the Brazilian stock exchanges are generally
subject to tax at a rate of 15%.
Gains realized through transactions on Brazilian stock exchanges are
generally subject to tax at a rate of 20%, unless the investor is entitled to
tax-free treatment for the transaction under Resolution 2,689 of the National
Monetary Council Regulations, described immediately below.
Resolution 2,689, which as of March 31, 2000 superseded the Annex IV
Regulations that previously provided tax benefits to foreign investors, extends
favorable tax treatment to a U.S. holder or non-Brazilian holder of preferred
shares who has (i) appointed a representative in Brazil with power to take
action relating to the investment in preferred shares, (ii) registered as a
foreign investor with the CVM and (iii) registered its investment in preferred
shares with the Central Bank. Under Resolution 2,689 securities held by foreign
investors must be maintained under the custody of, or in deposit accounts with,
financial institutions duly authorized by the Central Bank and the CVM. In
addition, the trading of securities is restricted under Resolution 2,689 to
transactions on Brazilian stock exchanges or qualified over-the-counter markets.
Investors previously holding preferred shares under the Annex IV Regulations
were required to bring their investments into conformity with Resolution 2,689
by June 30, 2000. The preferential treatment generally afforded under Resolution
2,689 and afforded to investors in ADSs is not available to residents of tax
havens.
There can be no assurance that the current preferential treatment for U.S.
holders and non-Brazilian holders of ADSs and U.S. holders and non-Brazilian
holders of preferred shares under Resolution 2,689 will be maintained.
Gain on the disposition of preferred shares is measured by the difference
between the amount in Brazilian currency realized on the sale or exchange and
the acquisition cost of the shares sold, measured in Brazilian currency, without
any correction for inflation. The acquisition cost of shares registered as an
investment with the Central Bank is calculated on the basis of the foreign
currency amount registered with the Central Bank. See "--Registered Capital."
Under current law, the tax rate for transactions on a Brazilian stock
exchange is 20% for transactions occurring on or after January 1, 2002. Brazil's
tax treaties do not grant relief from taxes on gains realized on sales or
exchanges of preferred shares.
Gains realized by a U.S. holder and non-Brazilian holder upon the
redemption of preferred shares will be treated as gains from the disposition of
such preferred shares to a Brazilian resident occurring off of a stock exchange
and will accordingly be subject to tax at a rate of 15%.
Any exercise of preemptive rights relating to the preferred shares or ADSs
will not be subject to Brazilian taxation. Gains on the sale or assignment of
preemptive rights relating to the preferred shares will be treated differently
for Brazilian tax purposes depending on (i) whether the sale or assignment is
made by the depositary or the investor and (ii) whether the transaction takes
place on a Brazilian stock exchange. Gains on sales or assignments made by the
depositary on a Brazilian stock exchange are not taxed in Brazil, but gains on
other sales or assignments may be subject to tax at rates up to 15%.
The deposit of preferred shares in exchange for the ADSs is not subject to
Brazilian income tax if the preferred shares we registered under Resolution
2,689 and the respective holder is not in a tax haven jurisdiction. If the
preferred shares are not so registered or the holder is in a tax haven
jurisdiction, the deposit of preferred shares in exchange for ADSs may be
subject to Brazilian capital gains tax at a rate of 15%.
The withdrawal of preferred shares in exchange for ADSs is not subject to
Brazilian tax. On receipt of the underlying preferred shares, a U.S. holder or
non-Brazilian holder entitled to benefits under Resolution 2,689 will be
entitled to register the U.S. dollar value of such shares with the Central Bank
as described above, under "--Registered Capital." If a U.S. holder or
non-Brazilian holder does not qualify under Resolution 2,689, he will be subject
to the less favorable tax treatment described above in respect of exchanges of
preferred shares.
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 this 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, or the IOF tax may be imposed on a variety of
transactions, including the conversion of Brazilian currency into foreign
currency (E.G., for purposes of paying dividends and interest). The 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 increase will be applicable
only prospectively.
The IOF may also be levied on transactions involving bonds or securities,
or IOF/Titulos, even if the transactions are effected on Brazilian stock,
futures or commodities exchanges. The rate of the IOF/Titulos with respect to
preferred shares and ADSs is currently 0%. The minister of finance, however, has
the legal power to increase the rate to a maximum of 1.5% of the amount of the
taxed transaction per each day of the investor's holding period, but only to the
extent of gain realized on the transaction and only on a prospective basis.
In addition to the IOF tax, a second, temporary tax that applies to the
removal of funds from accounts at banks and other financial institutions, or the
CPMF tax, will be imposed on distributions in respect of ADSs at the time these
distributions are converted into U.S. dollars and remitted abroad by the
Custodian. The CPMF tax was to expire in June 2002, but was extended until
December 31, 2004. It is currently imposed at a rate of 0.38%. This rate will
continue until December 31, 2003. After that date, the rate will be decreased to
0.08% beginning on January 1, 2004. From July 13, 2002, transactions conducted
through the Brazilian stock exchanges in current accounts specified for stock
exchange transactions are exempt from the CPMF tax.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a description of the material United States federal income
tax consequences of the ownership and disposition of our preferred shares or our
ADSs by U.S. Holders, as defined below. This summary is based on the Internal
Revenue Code of 1986, as amended (referred to herein as the "Code"), final,
temporary and proposed Treasury regulations, administrative pronouncements and
judicial interpretations thereof, all of which are subject to change (possibly
with retroactive effect), and to different interpretations. It is also based in
part on representations by the depositary and assumes that each obligation under
the Deposit Agreement and any related agreement will be performed in accordance
with its terms. This discussion deals only with preferred shares and ADSs held
as capital assets. It does not discuss all of the tax consequences that may be
relevant to a holder in light of the holder's particular circumstances or to
holders subject to special rules, such as certain financial institutions,
insurance companies, tax-exempt entities, dealers in securities or foreign
currencies, partnerships and other pass-through entities, investors liable for
the alternative minimum tax, persons who hold preferred shares or ADSs as part
of an integrated investment (including a straddle) comprised of a preferred
share or ADS and one or more other positions for tax purposes, persons whose
functional currency is not the U.S. dollar or persons who actually or
constructively own (directly or indirectly) 10% or more of our voting stock.
Holders of preferred shares or ADSs should consult their own tax advisors with
regard to the application of the United States federal income tax laws
(including recent changes in such laws) to their particular situations as well
as any tax consequences arising under the laws of any states or local or foreign
taxing jurisdiction.
As used herein, the term "U.S. Holder" means a beneficial owner of
preferred shares or ADSs that is, for United States federal income tax purposes,
(1) a citizen or resident of the United States, (2) a corporation (or other
entity treated as a corporation for United States federal income tax purposes)
organized under the laws of the United States or of any political subdivision
thereof, (3) an estate the income of which is subject to United States federal
income taxation regardless of its source, or (4) a trust (i) if a United States
court can exercise primary supervision over the trust's administration and one
or more United States persons are authorized to control all substantial
decisions of the trust or (ii) the trust has a valid election in effect under
applicable Treasury regulations to be treated as a United States person.
In general, for United States federal income tax purposes, holders of ADRs
evidencing ADSs will be treated as the beneficial owners of the preferred shares
represented by those ADSs. Deposits and withdrawals of preferred shares in
exchange for ADSs will not result in the realization of gain or loss for United
States federal income tax purposes.
TAXATION OF DIVIDENDS
Subject to the discussion under "--Passive Foreign Investment Company
Rules" below, distributions (including the amount of any Brazilian taxes
withheld therefrom) paid in respect of our preferred shares or our ADSs,
including distributions paid in the form of payments of interest on capital for
Brazilian tax purposes, will constitute foreign source dividends includible as
ordinary income for U.S. federal income tax purposes to the extent such
distributions are made from our current or accumulated earnings and profits, as
determined in accordance with U.S. federal income tax principles. To the extent,
if any, that the amount of any distribution exceeds our current and accumulated
earnings and profits as so computed, it will first reduce the U.S. Holder's tax
basis in its preferred shares or ADSs to the extent thereof, and, to the extent
in excess of the U.S. Holder's tax basis, will be treated as capital gain.
The amount of a distribution paid in REAIS will be measured by reference to
the spot rate for converting REAIS into U.S. dollars in effect on the date the
distribution is received by the depositary, or by a U.S. Holder, in the case of
a holder of preferred shares. If the depositary (or U.S. Holder, in the case of
a holder of preferred shares), does not convert such REAIS into U.S. dollars at
the spot rate in effect 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. The
amount of any distribution of property other than cash will be the fair market
value of such property on the date of distribution. Dividends paid by us will
not be eligible for the dividends received deduction allowed to corporations
under the Code.
Subject to certain limitations and restrictions, U.S. Holders will be
entitled to a credit against its United States federal income tax liability, or
a deduction in computing its United States federal taxable income, for Brazilian
income taxes withheld by us. The limitation on foreign taxes eligible for credit
is determined separately with respect to specific classes of income. For this
purpose, dividends paid by us with respect to our preferred shares or ADSs will
generally constitute "passive income" or, in the case of certain U.S. Holders,
"financial services income." The U.S. Treasury Department has expressed concerns
that parties to whom depositary shares such as the ADSs are released may be
taking actions that are inconsistent with the claiming of foreign tax credits by
U.S. Holders of such ADSs. Accordingly, the analysis of the creditability of
Brazilian taxes described above could be affected by future actions that may be
taken by the U.S. Treasury.
TAXATION OF CAPITAL GAINS
Subject to the discussion under "--Passive Foreign Investment Company
Rules" below, upon a sale or exchange of preferred shares or ADSs, a U.S. Holder
will recognize capital gain or loss for United States federal income purposes
equal to the difference, if any, between the amount realized on the sale or
exchange and the U.S. Holder's adjusted tax basis in the preferred shares or
ADSs. This gain or loss will be long-term capital gain or loss if the U.S.
Holder's holding period in the preferred shares or ADSs exceeds one year. The
deductibility of capital losses is subject to limitations under the Code. The
gain or loss generally will be treated as U.S. source income or loss.
Consequently, if a Brazilian withholding tax is imposed on the sale or
disposition of preferred shares or ADSs, and a U.S. Holder does not receive
significant foreign source income from other sources, such U.S. Holder may not
be able to derive effective United States foreign tax credit benefits in respect
of such Brazilian withholding tax. If a Brazilian tax is withheld on the sale or
disposition of preferred shares or ADSs, a U.S. Holder's amount realized will
include the gross amount of the proceeds of such sale or disposition before
deduction of the Brazilian tax. See "Item 10--Brazilian Tax
Considerations--Taxation of Gains" for a description of when a disposition may
be subject to taxation by Brazil.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
We believe that we will not be considered a "passive foreign investment
company," or PFIC, for United States federal income tax purposes. However,
because the determination of whether the preferred shares or ADSs constitute
shares of a PFIC will be based upon the composition of our income and assets,
and entities in which we hold at least a 25% interest, from time to time, there
can be no assurance that our preferred shares or our ADSs will not be considered
shares to be of a PFIC for any taxable year. If we were treated as a PFIC for
any taxable year during which a United States Holder held a preferred share or
ADS, certain adverse consequences could apply to the U.S. Holder, including the
imposition of higher amounts of tax than would otherwise apply to a U.S. Holder
and additional tax form filing requirements. U.S. Holders are urged to consult
their tax advisors regarding the consequences to them if we were considered to
be PFIC as well as the availability and advisability of making an election to
avoid the adverse United States federal income tax consequences of PFIC status
should we be classified as a PFIC for any taxable year.
JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF 2003
The recently enacted Jobs and Growth Tax Relief Reconciliation Act of 2003,
or JGTRRA, significantly reduced the applicable rates of tax on both "qualified
dividends" paid to individuals by certain corporations and on certain capital
gains recognized by individuals, effective generally for taxable years beginning
after December 31, 2002 and before January 1, 2009. The discussion in this
section applies only to U.S. Holders who are individuals.
DIVIDENDS. Under JGTRRA, the maximum tax rate on qualified dividends is
15%. With respect to dividends paid by a foreign corporation, such dividends are
qualified dividends, and therefore eligible for the lower rates, if the foreign
corporation is an "eligible foreign corporation." An "eligible foreign
corporation" includes a foreign corporation (i) that is eligible for the
benefits of a comprehensive income tax treaty with the United States which
satisfies certain requirements, or (ii) whose stock is readily tradable on an
established securities market in the United States, provided that the lower rate
of tax only applies to dividends paid on any class of stock that is so traded.
For purposes of clause (ii) of the preceding sentence, a share shall be treated
as so traded if an ADR backed by such share is so traded. Dividends paid on
stock of foreign corporations that are foreign investment companies, PFICs or
foreign personal holding companies, either for the taxable year in which the
dividend is paid or the immediately preceding taxable year, will not constitute
qualified dividends.
We believe that our ADSs and the underlying preferred shares will be
treated as readily tradable on an established securities market in the United
States, and further believe that we are not now, nor do we expect to become, a
foreign investment company, a foreign personal holding company or, as discussed
above, a PFIC. Accordingly, dividends paid on the ADSs or underlying preferred
shares to U.S. Holders will constitute qualified dividends eligible for the
reduced rates of tax under JGTRRA. However, there can be no assurance that the
ADSs and underlying preferred shares will continue to be readily tradable on an
established securities market in the United States. If the ADSs or underlying
preferred shares ceased to be so tradable and we were not eligible for the
benefits of an income tax treaty described in the preceding paragraph, dividends
on the shares that ceased to be so tradable would not be eligible for the
reduced rates of tax. As indicated above, there is presently no income tax
treaty between Brazil and the United States.
Furthermore, because classification as a foreign investment company,
foreign personal holding company or PFIC depends generally on consideration of
certain factors from time to time (including the composition of our assets,
business, and income and on the nature and shareholdings of our shareholders),
we cannot provide any assurance that we will not become a foreign investment
company, a foreign personal holding company or a PFIC in the future. If we were
so to become or be classified for a taxable year, then dividends paid on the
ADSs or underlying preferred shares during such taxable year or the immediately
following taxable year would not constitute qualified dividends, and therefore
would not be eligible for the reduced rates of tax, notwithstanding that the
ADSs or underlying preferred shares may be readily tradable on an established
securities market in the United States.
With respect to any dividend on the ADSs or underlying preferred shares, if
a U.S. Holder does not hold the ADSs or underlying preferred shares unhedged for
more than 60 days during the 120-day period beginning 60 days before the
ex-dividend date for such dividend, the dividend will not qualify for the
reduced rate of tax. Additionally, a U.S. Holder is not eligible for the reduced
rate of tax applicable to otherwise qualified dividends on the ADSs or preferred
shares to the extent the U.S. Holder is obligated to make related payments with
respect to positions (for example, a short sale) in substantially similar or
related property, or if the U.S. Holder elects to treat the dividends as
"investment income" for purposes of the limitation on deductibility of
investment interest. Furthermore, if a U.S. Holder receives any qualified
dividends that constitute extraordinary dividends (within the meaning of Code
section 1059(c)) on the ADSs or underlying preferred shares, any loss on the
U.S. Holder's sale or exchange of such shares shall constitute long-term capital
loss to the extent of such dividends. Finally, special rules apply for
determining the foreign tax credit available to a U.S. Holder with respect to
qualified dividends.
CAPITAL GAINS. Under JGTRRA, the maximum capital gains rate applicable to
individuals is reduced to 15% for gains on the sale or other taxable disposition
of capital assets held for more than one year. The reduced capital gains rates
under JGTRRA are generally applicable to gains properly taken into account on or
after May 6, 2003.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information returns may be filed with the Internal Revenue Service in
connection with distributions on our preferred shares or our ADSs and the
proceeds from their sale or other disposition. A U.S. Holder may be subject to
United States backup withholding tax on these payments if such U.S. Holder fails
to provide its taxpayer identification number or comply with certain
certification procedures or otherwise establish an exemption from backup
withholding. The amount of any backup withholding from a payment to a U.S.
Holder will be allowed as a credit against such U.S. Holder's United States
federal income tax liability and may entitle such U.S. Holder to a refund,
provided that the required information is timely furnished to the Internal
Revenue Service.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT OF EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the information requirements of the Exchange Act, except
that as a foreign issuer, we are not subject to the proxy rules or the
short-swing profit disclosure rules of the Exchange Act. In accordance with
these statutory requirements, we file or furnish reports and other information
with the SEC. Reports and other information filed or furnished by us with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 233 Broadway, New York,
New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material may be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. You may also inspect these
reports and other information at the offices of the New York Stock Exchange, 11
Wall Street, New York, New York 10005, on which our ADSs are listed.
In addition, the Commission maintains a website that contains information
filed electronically, which can be accessed over the Internet at
http://www.sec.gov.
We also file financial statements and other periodic reports with the CVM.
Copies of our annual report on Form 20-F and documents referred to in this
annual report and our by-laws will be available for inspection upon request at
our offices at SCS, Quadra 2, Bloco C, 226 7 andar, 70319-900, Brasilia, DF,
Brazil.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in both foreign currency
exchange rates and interest rates. We are exposed to foreign-exchange rate risk
(only with regard to its non-hedged debt), because certain of our costs are
denominated in currencies (primarily the U.S. dollar) other than those in which
we earn revenues (primarily the REAL). Similarly, we are subject to market risk
deriving from changes in interest rates which may affect the cost of our
financing. Interest rate risk results from the possibility that we 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. We have not entered into derivatives contracts in order to hedge
against this risk. However, we continuously monitor interest rates in order to
evaluate the possible need for derivative contracts to protect ourselves against
the risk of volatility of these rates.
We do not use derivative instruments, such as foreign exchange forward
contracts, foreign currency options and forward rate agreements, to manage these
market risks, nor do we 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
On December 31, 2002, approximately R$398.82 million of our indebtedness
was denominated in U.S. dollars. The potential immediate loss to us on such
indebtedness is R$56.83 million, once R$341.98 related to liabilities in foreign
exchange are hedged against foreign currency exposure. In addition, if such a
change were to be sustained, our 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 our
managers have 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 Note 22 to our consolidated financial
statements.
INTEREST RATE RISK
As of December 31, 2002, we had R$627.780 million in loans and financing
outstanding, of which approximately R$206.066 million bore interest at national
currency floating rates (primarily TJLP), R$186.256 bore interest at foreign
currency floating rates (LIBOR and currency basket of BNDES) and R$235.459 bore
interest at fixed dollar rates. We have hedged 81.09% of our foreign exposure
existing as of December 31, 2002 resulting in CDI denominated debts.
Because we have a positive net financial debt (R$294.3 million at December
31, 2002) and we have invested our excess liquidity in short-term instruments
(R$121.362 million at December 31, 2002) and debentures issued by Fixcel S.A.
(R$712.135 million at December 31, 2002) that are based on the CDI flotation, a
hypothetical and instantaneous 100 basis points increase in the interest rates
applicable to financial assets and liabilities on December 31, 2002 would let us
earn over one year approximately R$ 1.69 million.
The above sensitivity analysis is based on the assumption of a 100 basis
points increase of the interest rate 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, such as U.S dollars. As a result, our
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.
CREDIT RISK OF THE CONCENTRATION OF EXPOSURE TO FIXCEL
We are exposed to a credit risk from the concentration of our exposure to
Fixcel in the amount of R$712.135 million at December 31, 2002. On July 2, 2002
and August 13, 2002, TCO subscribed to debentures issued by Fixcel, part of the
Splice Group, in the amount of R$470 million and R$190 million, respectively,
totaling $660 million. The return on the debentures is the rate per annum equal
to the Interbank Certificate of Deposit - CDI rate, plus 2%. The transfer of the
control of TCO to TCP assures the payment of these debentures, with maturities
on June 27, 2003 and August 8, 2003.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
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. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, we carried
out, under the supervision and with the participation of our management,
including the President and the executive officer of finance, an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon and as of the date of that evaluation, the President and
executive officer of finance concluded that the design and operation of these
disclosure controls and procedures are effective. There were no significant
changes in our internal controls or in other factors that could significantly
affect these internal controls subsequent to the date of their evaluation.
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See our consolidated financial statements beginning on Page F-1.
ITEM 19. EXHIBITS
Documents filed as exhibits to this annual report:
1.1 Amended and Restated By-laws (ESTATUTO SOCIAL) of TCO (English
translation).
1.2 Amendment to the Charter of TCO previously filed with TCO's registration
statement on September 18, 1998 and incorporated herein by reference.
2.1 Deposit Agreement dated as of July 27, 1998 between TCO and The Bank of New
York, previously filed with TCO's registration statement on September 18,
1998 and incorporated herein by reference.
4.1 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and TCO
on February 3, 2003.
4.2 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and
Telegoias on February 3, 2003.
4.3 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and
Telems on February 3, 2003.
4.4 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and
Telemat on February 3, 2003.
4.5 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and
Teleron on February 3, 2003.
4.6 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and
Teleacre on February 3, 2003.
4.7 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and NBT
on February 3, 2003.
4.8 Consent of Ernst & Young Auditores Independentes S.C.
8.1 Significant Subsidiaries.
12.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
12.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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 our company, none of which
authorizes securities in a total amount that exceeds 10% of the total assets of
our company. We hereby agree to furnish to the Securities and Exchange
Commission copies of any such omitted promissory notes or other instruments or
agreements as the Commission requests.
ANNEX A
GLOSSARY OF TELECOMMUNICATIONS TERMS
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.
1XRTT (SINGLE CARRIER RADIO TRANSMISSION TECHNOLOGY): An advanced data
transfer technology, which is the evolution of CDMA.
AMPS (ADVANCED MOBILE PHONE SYSTEM): A form of analog technology.
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.
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).
A BAND 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
"A Band."
B BAND SERVICE PROVIDER: A cellular service provider that has been granted
a concession or an authorization to provide cellular telecommunications services
in a particular area within a radio spectrum frequency range referred to by
Anatel as "B Band."
BASE STATION: A radio transmitter/receiver that maintains communications
with the cellular handsets within a given cell. Each base station in turn is
interconnected with other base stations and with the public switched
telecommunication network.
CELLULAR SERVICE: A cellular 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.
CDI (CERTIFICADO DE DEPOSITO INTERBANCARIO, OR BRAZILIAN INTERBANK OFFERED
RATE): A benchmark Brazilian interest rate that is disclosed daily. It is the
rate used (a) when banks borrow money from other banks, and b) in financial
transactions between companies and banks.
CDMA (CODE DIVISION MULTIPLE ACCESS): A digital technology that divides the
frequency spectrum into multiple code ranges.
COFINS (CONTRIBUICAO PARA FINANCIAMENTO DE SEGURIDADE SOCIAL): A social
contribution tax imposed on gross revenues.
CPMF (CONTRIBUICAO PROVISORIA SOBRE MOVIMENTACAO FINANCEIRA): A
contribution tax imposed on financial transfers and withdrawals.
CSLL (CONTRIBUICAO SOCIAL SOBRE O LUCRO LIQUIDO): A social contribution tax
imposed on income results.
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 calls. Digital systems offer lower noise interference and can
incorporate encryption as a protection from external interference.
EXCHANGE: See Switch.
FRAME RELAY: A data transmission service using fast protocols based on
direct use of transmission lines.
GPRS (GENERAL PACKET RADIO SERVICE): An advanced data transfer technology,
which is a result of the evolution of GSM.
GSM (GLOBAL SYSTEM FOR MOBILE COMMUNICATIONS): A form of digital
technology.
ICMS (IMPOSTO SOBRE CIRCULACAO DE MERCADORIAS E SERVICOS): The value-added
tax that Brazilian states impose on certain revenues from the sale of goods and
services, including telecommunication, intermunicipal and interstate commerce.
IGP-DI (INDICE GERAL DE PRECOS - DISPONIBILIDADE INTERNA OR GENERAL PRICE
INDEX - INTERNAL Availability): An inflation index calculated by the FGV.
IGP-M (INDICE GERAL DE PRECOS - MERCADO OR GENERAL PRICE INDEX - MARKET):
An inflation index calculated by the FGV.
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.
IP (INTERNET PROTOCOL): An interconnection protocol for sub-networks, in
particular for those with different physical characteristics. It is used by the
Internet.
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.
NETWORK: An interconnected collection of elements. In a telecommunication
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 that 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.
PBX (PRIVATE BRANCH EXCHANGE): Telecommunication switchboard for private
use, but linked to the national telecommunication network.
PIS (PROGRAMA DE Integracao SOCIAL): A social contribution tax imposed on
gross revenues.
PRIVATE LEASED CIRCUITS: Voice, data or image transmission mediums leased
to users for their exclusive use.
QOS: A quality of service indicator that considers such variables as
quality of coverage, noise level and dropped calls, and which permits quality
comparisons between networks.
SDH (SYNCHRONOUS Digital HIERARCHY): A hierarchical set of digital
transport structures standardized for the transport of suitably adapted payloads
over physical transmission networks.
SMC (SERVICO MOVEL Celular OR MOBILE CELLULAR SERVICE): A system under
which Anatel granted concessions to provide mobile service in a specific
frequency range.
SMP (SERVICO MOVEL Pessoal OR PERSONAL MOBILE SERVICE): A service rendered
pursuant to a new legislation for wireless companies by which Anatel has
authorized wireless companies to provide mobile communication services.
SMS: A small message service provided by wireless telecommunications.
SWITCH: These are used to set up and route 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 digital technology that divides the
frequency spectrum into multiple time ranges.
UNIVERSAL SERVICE: The obligation to supply basic service to all users
throughout the national territory at reasonable prices.
WAP: Wireless Applications Protocol
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
By: /S/ SERGIO ASSENCO TAVARES DOS SANTOS
----------------------------------------
Name: Sergio Assenco Tavares dos Santos
Title: President
Dated: June 30, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Sergio Assenco Tavares dos Santos, certify that:
1. I have reviewed this annual report on Form 20-F of Tele Centro
Oeste Celular Participacoes S.A.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Acts Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 30, 2003
/S/ SERGIO ASSENCO TAVARES DOS SANTOS
-------------------------------------
Sergio Assenco Tavares dos Santos
President
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Luis Andre Carpintero Blanco, certify that:
1. I have reviewed this annual report on Form 20-F of Tele Centro
Oeste Celular Participacoes S.A.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Acts Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 30, 2003
/S/ LUIS ANDRE CARPINTERO BLANCO
--------------------------------
Luis Andre Carpintero Blanco
Executive Officer of Finance
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
CONTENTS
Report of Ernst and Young Auditores Independentes S.C....................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-5
Consolidated Statements of Cash Flows....................................... F-6
Consolidated Statements of Changes in Shareholders' Equity.................. F-7
Notes to the Consolidated Financial Statements.............................. F-8
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, 2002 and
2001, 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, 2002. 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, 2002 and 2001, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002, 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 and Young Auditores Independentes S.C.
/s/ Luiz Carlos Nannini
Partner
Brasilia, Brazil
February 14, 2003
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2002
(In thousands of Brazilian Reais - R$)
NOTE 2001 2002
------ ----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................ 326,637 158,503
Marketable securities.................................... 12 362,310 712,135
Trade accounts receivable, net........................... 13 186,762 227,881
Deferred income taxes and recoverable taxes.............. 14 120,222 111,242
Handset and accessory inventories........................ 29,399 48,369
Other assets............................................. 33,124 55,306
----------- -----------
Total current assets....................................... 1,058,454 1,313,436
NONCURRENT ASSETS
Deferred income taxes and recoverable taxes.............. 14 55,616 48,459
Judicial deposits........................................ - 12,472
Advance to affiliate..................................... - 40,226
Other assets............................................. 3,922 18,785
----------- -----------
Total noncurrent assets.................................... 59,538 119,942
PERMANENT ASSETS
Investments.............................................. 10,470 8,833
Property, plant and equipment, net ...................... 15 1,078,882 1,035,518
Deferred charges, net.................................... 16 32,981 28,743
----------- -----------
Total permanent assets..................................... 1,122,333 1,073,094
----------- -----------
Total assets............................................... 2,240,325 2,506,472
=========== ===========
See the accompanying notes to the consolidated financial statements.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2002
(In thousands of Brazilian Reais - R$)
NOTE 2001 2002
------ ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Payroll and related accruals............................. 17 6,849 9,388
Accounts payable and accrued expenses.................... 18 152,524 154,390
Indirect taxes........................................... 19 79,869 104,295
Deferred taxes and income taxes payable.................. 20 7,927 5,670
Participation in results of operation.................... 21 109,092 102,832
Loans and financing...................................... 22 279,507 324,980
Other payables........................................... 40,612 19,419
----------- -----------
Total current liabilities.................................. 676,380 720,974
NONCURRENT LIABILITIES
Accounts payable and accrued expenses.................... 18 1,790 4,960
Deferred taxes and income taxes payable.................. 20 56,087 42,509
Loans and financing...................................... 22 237,477 302,800
Provision for contingencies.............................. 23 76,476 99,104
----------- -----------
Total noncurrent liabilities............................... 371,830 449,373
MINORITY INTERESTS......................................... 65,557 25,308
CAPITALIZABLE FUNDS........................................ 126 126
SHAREHOLDERS' EQUITY
Capital.................................................. 588,865 617,911
Capital reserve.......................................... 102,507 129,062
Legal reserve............................................ 46,754 64,875
Expansion reserve........................................ - 263,477
Retained earnings ....................................... 395,132 284,528
Treasury stock........................................... (6,826) (49,162)
----------- -----------
Total shareholders' equity................................. 25 1,126,432 1,310,691
----------- -----------
Total liabilities and shareholders' equity................. 2,240,325 2,506,472
=========== ===========
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, 2000, 2001 and 2002
(In thousands of Brazilian Reais, except shares and per share amounts)
YEARS ENDED DECEMBER 31
----------------------------------------
NOTE 2000 2001 2002
------ ------------ ------------ ------------
Net operating revenue ..................................... 4 930,646 1,248,131 1,561,308
Cost of services rendered and cost of products sold........ 5 (532,163) (663,158) (779,480)
------------ ------------ ------------
Gross margin............................................... 398,483 584,973 781,828
Operating expenses.........................................
Selling expenses ...................................... 6 (126,163) (195,020) (218,327)
General and administrative expenses ................... (78,420) (110,300) (142,319)
Other net operating results............................ 7 (9,618) (4,513) (3,828)
------------ ------------ ------------
Operating income before net financial results.............. 184,282 275,140 417,354
Net financial results...................................... 8 (30,063) (43,471) (90,669)
------------ ------------ ------------
Operating income........................................... 154,219 231,669 326,685
Net non-operating results.................................. 9 (19,539) (25,668) (19,732)
Employees' participation .................................. (1,878) (2,346) (3,103)
------------ ------------ ------------
Income before income taxes and minority interest........... 132,802 203,655 303,850
Income and social contribution taxes....................... 10 (40,159) (56,501) (93,799)
------------ ------------ ------------
Income before minority interest............................ 92,643 147,154 210,051
Minority interest.......................................... (19,980) (13,864) 408
Reversal of interest on own capital........................ 30,981 45,297 94,636
------------ ------------ ------------
Net income................................................. 103,644 178,587 305,094
============ ============ ============
Outstanding shares at end of year (thousands).............. 364,399,028 366,463,335 379,200,036
Profit per thousand shares (R$)............................ 0.28 0.49 0.80
============ ============ ============
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, 2000, 2001 and 2002
(In thousands of Brazilian Reais - R$)
2000 2001 2002
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income..................................................... 103,644 178,587 305,094
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization................................ 154,345 186,056 203,132
Gain (loss) on the disposal of permanent assets.............. (404) 3,834 2,082
Minority interests........................................... 19,980 (13,864) 408
Allowance for doubtful accounts.............................. 54,873 60,479 35,918
Decrease (increase) in assets:
Trade accounts receivable.................................. (42,629) (86,231) (77,037)
Handset and accessory inventories.......................... (32,945) 22,683 (18,970)
Deferred income taxes and recoverable taxes................ (109,214) (2,176) 16,137
Other assets............................................... (9,707) (2,080) (89,743)
Increase (decrease) in liabilities:
Personnel, social charges and benefits..................... 733 (120) 2,539
Accounts payable and accrued expenses...................... 121,591 (74,490) 5,036
Indirect taxes............................................. 10,749 18,867 24,426
Other current liabilities.................................. 3,776 31,745 (21,193)
Accrued interest........................................... 34,641 82,003 178,321
Provision for contingencies................................ 102 13,480 22,628
Deferred income tax ...................................... (20,229) (17,470) (15,835)
Participation in results of operation ..................... 1,073 57,311 (6,260)
Payable for concession (license)........................... (17,215) (19,423) -
Other non-current liabilities.............................. 433 - -
Minority interests......................................... (41,755) (2,715) (3,112)
------------ ------------ ------------
Net cash provided by operating activities...................... 231,842 436,476 563,571
INVESTING ACTIVITIES:
Marketable securities.......................................... (71,034) (203,609) (349,825)
Additions to investments....................................... (1,432) (7,314) -
Additions to property, plant and equipment..................... (255,678) (190,317) (170,622)
Proceeds from disposal, of permanent assets.................... 16,886 11,488 14,647
Addition to deferred assets.................................... (7,024) (1,723) -
Transfer from deferred assets to recoverable taxes............. 118,615 - -
------------ ------------ ------------
Net cash used in investing activities.......................... (199,667) (391,475) (505,800)
FINANCING ACTIVITIES:
Loans repaid................................................... (5,239) (1,423,210) (515,293)
Proceeds from loans............................................ 391,663 1,349,042 447,768
Capitalizable funds............................................ (13) - -
Treasury stock................................................. - (6,826) (49,297)
Dividends to minority interest of subsidiaries................ - (1,516) -
Payment to shareholders' related to premium utilization........ - (5,485) (15,584)
Interest on own capital........................................ (37,887) (80,500) (93,499)
------------ ------------ ------------
Net cash provided by (used in) financing activities............ 348,524 (168,495) (225,905)
Increase (decrease) in cash and cash equivalents.................. 380,699 (123,494) (168,134)
Cash and cash equivalents at beginning of year.................... 69,432 450,131 326,637
------------ ------------ ------------
Cash and cash equivalents at end of year.......................... 450,131 326,637 158,503
============ ============ ============
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, 2000, 2001 and 2002
(In thousands of Brazilian Reais - R$)
CAPITAL LEGAL REVENUE EXPANSION RETAINED TREASURY
CAPITAL RESERVE RESERVE RESERVE RESERVE EARNINGS STOCK TOTAL
------------------------------------------------------------------------------------
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
Acquisition of the minority interest
of Telebrasilia Celular S.A................ 29,046 38,313 1,662 - - (31,746) - 37,545
Payment to shareholders related to
premium utilization........................ - (15,584) - - - - - (15,584)
Treasury Stock.............................
Purchase of shares (common/preferred) - - - - - - (62,913) (62,913)
Disposal of preferred shares.............. - 3,826 - - - - 9,790 13,616
Cancellation of shares.................... - - - - - (10,787) 10,787 -
Net income................................. - - - - - 305,094 - 305,094
Transfer to reserves....................... - - 16,459 - 263,477 (279,936) - -
Interest on own capital.................... - - - - - (93,499) - (93,499)
------------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2002.............. 617,911 129,062 64,875 - 263,477 284,528 (49,162) 1,310,691
====================================================================================
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, 2002, 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
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)
The subsidiary companies controlled by Tele Centro Oeste Celular
Participacoes S.A. were legally formed on January 5, 1998 and the spin-off
from the predecessors was approved during an Extraordinary General
Shareholders Meeting, held on January 30, 1998.
The Concessions may be renewed at the discretion of Anatel (as defined
below) for a further term of 15 years but could be extended for another 15
years. Cellular telecommunications services were first offered in the
states serviced by the subsidiaries of Tele Centro Oeste Celular S.A.
between July 1991 and February 1996.
On May 24, 1999, Norte Brasil Telecom S.A. - NBT, a corporation not
publicly traded, was formed with the Holding Company participating 95% in
its capital. NBT has the objective of operating the cellular service and
activities necessary or convenient for the execution of these services,
comprising the coverage area 8 - Band B, which corresponds to the
geographic areas constituted by the states of Amazonas, Roraima, Amapa,
Para and Maranhao.
Norte Brasil Telecom S.A. started up its operations at the end of October
1999, covering 11 of the 97 cities within their operating area. As their
activities relating to the rendering of services were insignificant at
December 31, 1999, all expenses incurred until this date were considered as
pre-operating and only subject to amortization from January 2000.
The Companies' businesses, including the service they may provide and the
rates they charge are regulated by Agencia Nacional de Telecomunicacoes
("Anatel"), the regulatory authority for the Brazilian telecommunications
industry pursuant to Law No. 9,472 of July 16, 1997.
On April 26, 2002, Tele Centro Oeste Celular Participacoes S.A. merged the
subsidiary Telebrasilia Celular S.A., based on the evaluation of the
latter's shareholders' equity at December 31, 2001, with the aim of
streamlining the corporate structure of the Company and subsidiaries so
that the existing administrative and commercial synergies are used, as well
as concentrating the liquidity of the private companies' shares in one
company only, thus reducing the capital cost. Please note that this merger
operation was authorized by the National Agency of Telecommunications --
ANATEL.
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
a. PRESENTATION OF THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER
31, 2000, 2001 AND 2002
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, 2002. This interest was 2.9%, 2.4%, 1.6%,
2.8%, 1.7% and 1.7% of 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.
As mentioned in the previous note, Telebrasilia Celular S.A. was
merged by TCO on April 26, 2002 and as such, there was no minority
interest in the referred subsidiary at December 31, 2002.
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 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.
IBRACON (the Brazilian Institute of Independent Auditors) issued a
publication stating that financial statements would not have to be
indexed beginning in 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, 2002 and 2001 and for the years 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 2000, the annual inflation rate was 9.95%, which was 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, 2000,
were prepared on a fully indexed basis to recognize the effects
in the purchasing power of the Brazilian currency during the
period 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, 2000, as
measured by the IGP-M, was 9.95%.
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)
II. DEFERRED INCOME TAX EFFECTS OF INDEXATION ADJUSTMENTS IN 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, 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, 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 was credited to the
income and social contribution taxes in the consolidated
statement of income.
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 2002 2001 2002
----------------------------------------------------------------
Corporate law 129,319 208,104 329,183 1,010,175 1,218,523
Restatement of net
permanent assets (27,062) (51,270) (46,399) 188,189 141,726
Tax effects 12,901 17,403 15,771 (64,014) (48,179)
Minority interests (11,514) 4,350 6,539 (7,918) (1,379)
----------------------------------------------------------------
In constant currency 103,644 178,587 305,094 1,126,432 1,310,691
================================================================
c. 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.
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)
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.
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.
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 (CONTINUED)
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.
The Company's management reviews property, plant and equipment for
possible impairment whenever events or changes in circumstances
indicate that the carrying value of an asset or group of assets may
not be recoverable on the basis of undiscounted future cash flows. The
reviews are carried out at the lowest level of asset groups to which
management is able to attribute identifiable future cash flows. The
Company analyzes the net book value of the underlying assets and
adjusts it if the sum of the expected future cash flows is less than
the net book value. These reviews have not indicated the need to
recognize any impairment losses during the years ended December 31,
2000, 2001 and 2002.
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.
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)
h. INCOME AND SOCIAL CONTRIBUTION TAXES
Brazilian income taxes are comprised of the federal income tax and the
social contribution tax. At December 31, 2002, 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 2000 are recorded
directly against shareholders' equity.
i. PROVISION FOR CONTINGENCIES
The provision for contingencies was recorded based on the estimate of
Company legal advisors on judicial proceedings in process.
j. NET FINANCIAL RESULT
The net financial result 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.
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)
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 sells prepaid cards. 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. 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.
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$ 33,955, R$ 26,785, and R$ 24,321, for
the years ended December 31, 2002, 2001, and 2000, respectively.
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)
4. NET OPERATING REVENUE
2000 2001 2002
----------- ----------- -----------
Monthly subscription charges 194,424 121,486 114,955
Usage charges 349,880 530,162 678,349
Network usage charges 334,498 526,846 649,270
Sale of handsets and prepaid cards 274,812 386,665 523,755
Others 11,248 8,255 15,960
----------- ----------- -----------
Gross operating revenue 1,164,862 1,573,414 1,982,289
Taxes on gross revenue (234,216) (325,283) (420,981)
----------- ----------- -----------
Net operating revenue 930,646 1,248,131 1,561,308
=========== =========== ===========
There are no customers who contribute more than 10% of gross operating
revenues.
5. COST OF SERVICES RENDERED AND COSTS OF PRODUCTS SOLD
2000 2001 2002
------------ ------------ ------------
Depreciation and amortization (142,763) (160,887) (166,443)
Personnel (11,276) (11,629) (15,581)
Third party materials and services (95,825) (125,972) (174,921)
Fixed-line network expenses (26,850) (37,669) (42,434)
Fistel tax (51,581) (53,173) (60,178)
Cost of products sold (194,045) (273,299) (319,653)
Others (9,823) (529) (270)
------------ ------------ ------------
(532,163) (663,158) (779,480)
============ ============ ============
6. SELLING EXPENSES
2000 2001 2002
------------ ------------ ------------
Personnel (13,827) (19,592) (22,325)
Third party materials and services (64,000) (118,251) (132,377)
Rent/leasing/insurance (3,326) (4,074) (5,260)
Depreciation - (4,448) (13,234)
Net losses on trade accounts receivable (44,790) (48,301) (44,777)
Others (220) (354) (354)
------------ ------------ ------------
(126,163) (195,020) (218,327)
============ ============ ============
7. OTHER NET OPERATING RESULTS
2000 2001 2002
------------ ------------ ------------
Research and development (617) (436) -
Taxes (except income tax) (9,801) (13,822) (9,632)
Fines and expenses recovered 3,354 12,921 16,994
Donations and sponsorships (3,883) (7,330) (9,535)
Other 1,329 4,154 (1,655)
------------ ------------ ------------
(9,618) (4,513) (3,828)
============ ============ ============
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)
8. NET FINANCIAL RESULTS
2000 2001 2002
------------ ------------ ------------
Interest revenue 102,835 132,339 227,421
Interest expense (98,487) (89,000) (99,581)
Interest on own capital (dividends) (30,981) (45,297) (94,636)
Net exchange/ monetary variations (3,430) (41,513) (123,873)
------------ ------------ ------------
(30,063) (43,471) (90,669)
============ ============ ============
9. NET NON-OPERATING RESULTS
2000 2001 2002
------------ ------------ ------------
Gain (loss) on the disposal of property,
plant and equipment 404 (3,834) (2,082)
Lapsed dividends - - 5,418
Amortization of premium - Coverage and
pre-operating expenditures (21,055) (21,946) (21,946)
Other non-operating income 1,112 112 (1,122)
------------ ------------ ------------
(19,539) (25,668) (19,732)
============ ============ ============
10. INCOME AND SOCIAL CONTRIBUTION TAXES
On January, 2000, the social contribution tax rate was 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:
2000 2001 2002
------------ ------------ ------------
Social contribution tax (14,857) (19,711) (28,965)
Income tax (38,203) (54,193) (80,605)
Deferred taxes 12,901 17,403 15,771
------------ ------------ ------------
(40,159) (56,501) (93,799)
============ ============ ============
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
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:
2000 2001 2002
------------ ------------ ------------
Income before taxes as reported 132,802 203,655 303,850
Social contribution tax at statutory rates (11,952) (18,329) (27,347)
Social contribution tax on permanent additions:
Others (322) (666) (1,649)
Social contribution tax on permanent exclusions:
Premium amortization 3,498 3,833 3,868
Others 8 26 -
Effects on the constant currency method (2,318) - -
Others (223) 42 338
------------ ------------ ------------
Social contribution tax (11,309) (15,094) (24,790)
============ ============ ============
Income tax at statutory rates (33,201) (50,914) (75,963)
Income tax on permanent additions:
Others (702) (2,035) (4,735)
Income tax on permanent exclusions:
Premium amortization 9,635 10,648 10,742
Others 63 37 -
Effects on the constant currency method (5,831) - -
Tax incentives/others 1,186 857 947
------------ ------------ ------------
Income tax (28,850) (41,407) (69,009)
------------ ------------ ------------
Income taxes charge as reported (40,159) (56,501) (93,799)
============ ============ ============
Effective rate 30.21% 27.74% 30.87%
------------ ------------ ------------
11. SUPPLEMENTAL CASH FLOW INFORMATION
2000 2001 2002
------------ ------------ ------------
Cash paid for interest 2,927 85,432 51,718
Cash paid against provisions for contingencies 3,639 - -
Acquisition of minority interest of
Telebrasilia Celular S.A. - - 37,545
Income tax and social contributions paid 54,370 64,446 77,861
Cash paid for concessions 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 2002 consisted of the
following:
INTEREST DUE DATE 2001 2002
--------------------------------------------------------------------------------
Debentures - Unibanco 6/17/2003 and
Leasing Contracts 100% CDI plus 2% p.a. 8/8/2003 - 712,135
Commercial Paper - Prefixed annual rate of 24% to 25%
Splice do Brasil S.A. with Swap of 100% CDI plus 1.5% p.a. 7/5/2002 and
9/30/2002 362,310 -
-----------------------
362,310 712,135
=======================
Tele Centro Oeste Celular Participacoes S.A., directly and through its
subsidiaries, acquired a total of R$ 660,000 in debentures issued by Fixcel
S.A.: R$ 470,000 on July 2, 2002 and R$ 190,000 on August 13, 2002. The
debentures are supported by floating guarantees over Fixcel S.A.'s assets
and surety from Splice do Brasil Telecomunicacoes and Eletronica S.A.
The carrying value of the assets equals the fair value.
13. TRADE ACCOUNTS RECEIVABLE, NET
2001 2002
------------ ------------
Accrued amounts 47,193 47,390
Billed amounts 180,350 207,086
Allowance for doubtful accounts (40,781) (26,595)
------------ ------------
186,762 227,881
============ ============
The changes in the allowance for doubtful accounts are as follows:
2000 2001 2002
------------ ------------ ------------
Balance at beginning of year 29,036 25,826 40,781
Bad debt expense 54,873 60,479 35,918
Write-offs (58,083) (45,524) (50,104)
------------ ------------ ------------
Balance at end of year 25,826 40,781 26,595
============ ============ ============
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
At December 31, 2002, TCO had the following deferred and recoverable taxes:
2001 2002
------------ ------------
Recoverable investment withholding tax 26,583 36,935
Recoverable income and social contribution taxes 48,507 16,623
Recoverable income and social contribution taxes on
premium (Coverage Participacoes S.A.) - (Note 16) 65,830 43,887
Deferred income and social contribution taxes 19,865 36,443
Recoverable ICMS tax 13,355 25,267
Other recoverable taxes 1,698 546
------------ ------------
Total 175,838 159,701
------------ ------------
Short-term 120,222 111,242
Long-term 55,616 48,459
============ ============
TCO and its subsidiaries have generated operating income in recent years
and its budgets indicate similar results for future years. Therefore, in
the opinion of management, the deferred and recoverable taxes are fully
realizable.
Deferred tax assets are comprised of the following:
2001 2002
------------ ------------
Non-deductible provisions:
Allowance for doubtful accounts 13,866 9,042
Contingencies 4,878 22,090
Others 1,121 5,311
------------ ------------
Total 19,865 36,443
============ ============
15. PROPERTY, PLANT AND EQUIPMENT, NET
a. COMPOSITION
2001 2002
------------ ------------
Construction in progress 168,066 96,755
Automatic switching equipment 445,460 483,752
Transmission and other equipment 841,249 932,544
Land 6,271 7,284
Buildings 43,822 48,685
Computer equipment 39,535 45,965
Operation license (concession) 82,484 82,484
Other assets 83,164 158,917
------------ ------------
Total cost 1,710,051 1,856,386
Accumulated depreciation (631,169) (820,868)
------------ ------------
1,078,882 1,035,518
============ ============
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)
b. DEPRECIATION RATES
Depreciation rates applied to property, plant and equipment are as
follows:
%
------------------------------
2001 2002
-------------- --------------
Automatic switching equipment 10.00 10.00
Transmission and other equipment 14.29 14.29
Buildings 4.00 4.00
Operation license (concession) 6.67 6.67
Other assets (excluding land) 5.00 to 20.00 5.00 to 20.00
The Company rents equipment and premises through a number of operating
agreements. Total rent expense incurred under these agreements is as
follows:
2000 2001 2002
------------ ------------ ------------
14,614 15,610 19,598
Future minimum rental payments under non-cancelable operating leases
with remaining initial terms in excess of one year at December 31,
2002 are:
2003 16,395
2004 17,051
2005 17,733
2006 18,442
2007 19,180
------------
Total 88,801
============
16. DEFERRED CHARGES, NET
2001 2002
-------------- --------------
Pre-operating expenditures - NBT 39,055 39,055
Pre-operating expenses amortization (7,808) (12,046)
Other 1,734 1,734
-------------- --------------
Total 32,981 28,743
============== ==============
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.
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)
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:
2001 2002
-------------- --------------
Premium Coverage Participacoes S.A. 354,786 354,786
Write-down (267,013) (288,956)
Future tax benefits 87,773 65,830
Reversal of the provision recorded in 2001 and 2002 (21,943) (21,943)
-------------- --------------
Tax credit at end of the year 65,830 43,887
============== ==============
In 2002 and 2001, 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
2001 2002
-------------- --------------
Salaries and wages 651 1,401
Social charges 5,729 7,087
Accrued benefits 469 900
-------------- --------------
6,849 9,388
============== ==============
18. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
2001 2002
-------------- --------------
Suppliers 143,797 151,873
Payments received on behalf of third parties 9,275 3,065
Other accounts 1,242 4,412
-------------- --------------
Total 154,314 159,350
-------------- --------------
Short-term 152,524 154,390
Long-term 1,790 4,960
============== ==============
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)
19. INDIRECT TAXES
2001 2002
-------------- --------------
Value-added tax 35,205 44,485
Fistel tax 37,770 46,827
Other taxes on operating revenues 6,894 12,983
-------------- --------------
79,869 104,295
============== ==============
20. DEFERRED TAXES AND INCOME TAXES PAYABLE
2001 2002
-------------- --------------
Deferred taxes - liability
Effects of full monetary correction 64,014 48,179
-------------- --------------
64,014 48,179
-------------- --------------
Short-term 7,927 5,670
Long-term 56,087 42,509
============== ==============
21. EMPLOYEES' PROFIT SHARING
2001 2002
-------------- --------------
Interest on own capital for the year 57,288 105,416
Interest on own capital for the prior year 15,664 7,950
Withholding tax on interest on own capital (18,828) (20,565)
Dividends 52,599 6,928
Employees' profit sharing 2,369 3,103
-------------- --------------
109,092 102,832
============== ==============
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
INTEREST AND MONETARY CORRECTION DUE DATE 2001 2002
-----------------------------------------------------------------------------------------------------------------
NATIONAL CURRENCY
BNDES T.J.L.P. plus annual interest from 3.5% to 4%. 1/15/2008 192,030 204,479
BNDES UMBNDES variation plus a loan charge from BNDES
and annual interest from 3.5 % to 4%. 1/15/2008 12,648 22,897
Brasil Telecom S.A. - 5/21/2002 2,917 -
Other loans Industrial Products Column 20 - FGV 2003 to 2008 1,707 1,587
FOREIGN CURRENCY
Finimp Exchange variation based on the U.S. dollar, From
plus Libor and 2% p.a. over Libor, and 7% p.a. 5/19/2003 to
12/12/2003 128,937 174,752
Resolution 2770 Exchange variation based on the U.S. dollar From
plus the average interest rate of 6.41% p.a. 5/12/2003 to
11/29/2004 18,863 60,707
Prepayment Exchange variation based on the U.S. dollar, Libor
plus interest from 1.75% to 1.90% p.a. and
performance premium ranging from 1.20% to 1.30%
p.a. 8/15/2002 98,174 -
Export Development Exchange variation based on the U.S. dollar plus
Corporation - EDC semiannual Libor and annual interest of 3.90% to
5% p.a. 12/13/2006 61,708 163,358
-----------------------
516,984 627,780
Short-term (279,507) (324,980)
-----------------------
Long-term 237,477 302,800
=======================
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.
LIBOR at December 31, 2002 was 1.44%. TJLP, IGP-M, and CDI were 10.0%,
24.83%, and 22.92%, respectively, at December 31, 2002.
Long-term payment schedule:
DUE DATE 2002
---------------- -----------------
2004 89,461
2005 89,461
2006 82,414
2007 38,086
2008 3,378
-----------------
Total 302,800
=================
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)
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, 2002, the Company was in compliance with such covenants.
At December 31, 2002, 86% of loans and financing in foreign currency are
hedged against foreign exchange variation through swap contracts.
23. PROVISION FOR CONTINGENCIES
2001 2002
-------------- --------------
Tax claims 14,148 16,404
Labor claims 201 269
Telebras 61,634 82,431
Others 493 -
-------------- --------------
76,476 99,104
============== ==============
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.
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)
TELEBRAS (Continued)
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.
On August 1, 2001, a sentence was handed down denying the action filed by
Tele Centro Oeste Celular Participacoes S.A., however, on October 8, 2001
Tele Centro Oeste Celular Participacoes S.A. filed an appeal awaiting
decision to date.
According to the opinion of the Company's lawyers, they consider the
chances of unfavorable outcome for these contingencies as probable with
regard to merit, and possible with regard to the adjustment factor. The
difference between the original contract charges and the above mentioned
monetary correction, which has not been recorded, is estimated to be R$
68,780.
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, and Teleacre (the "legal predecessors"
of the Company), and Telebras, Telegoias Celular S.A., Telems Celular S.A.,
Telemat Celular S.A., Teleron Celular S.A., and Teleacre 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.
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)
POTENTIAL LITIGATION (Continued)
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.
ICMS ON ACTIVATION FEES
On June 19, 1998 the Secretaries of the Treasury of the individual
Brazilian states (the "State Secretaries") approved an agreement to
interpret existing Brazilian tax law in order to expand the application of
the Imposto sobre Circulacao de Mercadorias e Servicos (Value-Added Tax on
Sales and Services - ICMS). As a result, this tax then covers not only
telecommunications services, but also other services including the
activation of cellular telephones, which were not previously subject to
such tax and the ICMS tax may be applied retroactively for such services
rendered during the last five years.
The Company believes that the attempt by the State Secretaries to extend
the scope of ICMS tax to services which are supplementary to basic
telecommunications services is unlawful because: (i) the State Secretaries
acted beyond the scope of their authority; (ii) their interpretation would
subject to taxation certain services which cannot be considered
telecommunications services; and (iii) new taxes may not be applied
retroactively. In addition, the Company believes that the legal
predecessors of the Company would be liable for any payments made in
connection with any claim resulting from the retroactive application of the
ICMS tax on activation fees for periods prior to 1998. No provision for
such taxes has been made in the accompanying consolidated financial
statements, since the Company does not believe it is probable that such
taxes will be payable for services rendered during the last five years.
There can be no assurance that the Company will prevail in its position
that the new interpretation of the scope of the ICMS tax by the State
Secretaries is unlawful. If the ICMS tax were applied retroactively to
activation fees earned during the past five years, it would generate an
estimated maximum liability of R$ 77,300 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.
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
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 December
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 this Company. 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.
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, 2002, as well as other information required by the CVM
Instruction No. 371, of December 13, 2000 on such plans. The actuarial
liability will be recorded in the operating result within 05 years.
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)
Reconciliation of assets and liabilities at December 31, 2002
PBS - TCO COMPANY CONSOLIDATED
-------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------
1. Present value of actuarial obligations 355 501 3,350 3,184
2. Fair market value of the plan assets (1,143) (762) (5,813) (4,685)
-------------------------------------------------
3. Present value of obligations (1 + 2) (788) (261) (2,463) (1,501)
4. Actuarial (gains) or losses not recorded 652 - - -
-------------------------------------------------
5. Net actuarial liabilities / (assets) (136) (261) (2,463) (1,501)
=================================================
TCO PREV COMPANY CONSOLIDATED
-------------------------------------------------
2002 2001 2002(a) 2001
-------------------------------------------------
1. Present value of actuarial obligations 27,078 5,993 39,580 33,373
2. Fair market value of the plan assets (23,193) (5,311) (33,949) (29,564)
-------------------------------------------------
3. Present value of obligations (1 + 2) 3,885 682 5,631 3,809
4. Actuarial (gains) or losses not recorded (1,817) - (2,479) -
-------------------------------------------------
5. Net actuarial liabilities / (assets) 2,068 682 3,152 3,809
6. Actuarial liability not recorded due to the deferment
allowed (1,792) - (2,758) -
=================================================
7. Net liabilities recorded in the balance sheet 276 - 394 -
=================================================
(a) At the reconciliation as of December 31, 2002 for TCO PREV Consolidated, the surplus positions were
eliminated as no actuarial assets were recorded by the sponsor.
PAMA COMPANY CONSOLIDATED
-------------------------------------------------
2002 2002
-------------------------------------------------
1. Present value of actuarial obligations 352 623
2. Fair market value of the plan assets (156) (277)
-------------------------------------------------
3. Present value of obligations (1 + 2) 196 346
4. Actuarial (gains) losses - -
5. Net actuarial liabilities / (assets) 196 346
6. Actuarial liability not recorded due to the deferment
allowed (157) (277)
=================================================
7. Net liabilities recorded in the balance sheet 39 69
=================================================
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)
The amounts to be recorded in the statements of income for 2003 and 2002
are stated as follows:
PLAN PBS - TCO (b) COMPANY CONSOLIDATED
-------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------
1. Cost of current services (including interest) 64 71 66 74
2. Participant contributions expected for the year 10 22 10 23
3. Interest on actuarial obligations 40 38 366 349
4. Expected income on assets 166 120 827 665
5. Amortization costs
a) Actuarial (gains) or losses not recorded (27) - (37) -
b) Cost of past services not recorded - - - -
c) Increase in liabilities (assets) not recorded (96) (96) (300) (300)
-------------------------------------------------
d) Total (a+b+c) (123) (96) (337) (300)
-------------------------------------------------
6. Total net expense (income) to be recorded in relation
to installment BD of the plan (1-2+3-4+5d) (195) (129) (742) (565)
=================================================
(b)As the PBS-TCO presents a surplus at December 31, 2002, no income was recorded by the sponsor due to the
legal impossibility of refunding this surplus, apart from the fact that this plan is not contributive and, as
such, it does not allow the reduction to the sponsor contributions in future.
PLAN TCO PREV COMPANY CONSOLIDATED
-------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------
1. Cost of current services (including interest) 827 2,246 1,343 4,172
2. Participant contributions expected for the year - 849 - 1,616
3. Interest on actuarial obligations 2,188 1,774 3,536 2,995
4. Expected income on assets 2,283 1,976 3,702 3,342
5. Amortization costs
a) Actuarial (gains) or losses not recorded - - 2 -
b) Cost of past services not recorded - - - -
c) Increase in liabilities (assets) not recorded 448 448 762 761
-------------------------------------------------
d) Total (a+b+c) 448 448 764 761
-------------------------------------------------
6. Total net expense (income) to be recorded in relation
to installment BD of the plan (1-2+3-4+5d) 1,180 1,643 1,941 2,970
=================================================
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)
PLAN PAMA COMPANY CONSOLIDATED
-------------------------------------------------
2003 2003
-------------------------------------------------
1. Cost of current services (including interest) 3 5
2. Participant contributions expected for the year - -
3. Interest on actuarial obligations 39 69
4. Expected income on assets 22 39
5. Increase in liabilities (assets) not recorded 39 69
------------------------------------------------
6. Total net expense (income) to be recorded in relation
to installment BD of the plan (1-2+3-4+5d) 59 104
================================================
Actuarial assumptions adopted in the calculations:
PBS - TCO TCO PREV
Discount rate for actuarial obligation: 6.0% 6.0%
Income rate expected on the plan assets: 9.0% 9.0%
Estimated rate for salary increase: 3.0% 3.0%
Estimated rate for benefits increase: 0.0% 0.0%
Estimated long-term inflation rate: 5,0% 5,0%
Biometric table of general mortality: UP84 with 1 year UP84 with 1 year
aggravation aggravation
Biometric table of invalidity onset: Mercer Disability Mercer Disability
Expected rotation rate: Null 0,15 / (Service period + 1)
Probability of retirement: First eligibility 100% at the
for a retirement first eligibility
benefit for a Plan benefit
The above mentioned rates do not include inflation.
The Company and subsidiaries have recognized the adjustments resulting from
the application of CVM Resolution No. 371 in the financial statements as of
December 31, 2002, in accordance with NPC 26 of the IBRACON (Brazilian
Institute of Independent Auditors), in the amounts of R$ 315 (Company) and
R$ 463 (consolidated).
During 2002, the Company made contributions to the plans PBS-TCO and TCO
Prev amounting to R$ 1,792 (R$ 552 in 2001), and R$ 3,229 on a consolidated
level (R$ 2,561 in 2001).
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
a. CAPITAL
The authorized capital at December 31, 2002 and 2001 is 700,000,000
thousand shares. The subscribed and paid-in capital at December 31,
2002 corresponds to R$ 617,911 (R$ 588,865 in 2001), represented by
379,200,036,000 shares (366,463,335,000 shares in 2001) with no par
value, distributed as follows (in thousands of shares):
DECEMBER 31, 2001 DECEMBER 31, 2002
------------------- -------------------
Common shares 126,433,338 126,433,338
Preferred shares 240,029,997 252,766,698
------------------- -------------------
Total 366,463,335 379,200,036
Book value per thousand shares - Corporate Law (in R$) 2.756551 3.213404
The preferred shares are non-voting except under limited circumstances
and are entitled to a preferential, noncumulative, 6% dividend based
upon their nominal capital value and to priority over the common
shares in the case of liquidation. 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.
In the General Shareholders Meeting of December 20, 2002, the Company
bylaws were amended to adapt them to the New Corporation Law,
including the first paragraph of article 10, which assures holders of
preferred shares, annually, the right to receive dividend per share
corresponding to 3% of net equity per share as per the latest approved
balance sheet, whenever the established dividend in accordance with
this criterion is higher than the dividend calculated in accordance
with the prior criterion, described in the preceding paragraph.
Under the Company's bylaws, if the Company is able to pay dividends in
excess of the minimum requirement for preferred shareholders and the
remainder of the net income is sufficient to provide equal dividends
to both common and preferred shareholders, then the earnings per share
will be the same for both common and preferred shareholders.
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.
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)
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$16,618,
were issued to BID S.A. in return for the tax benefit derived from the
amortization of the premium reserve.
b. LEGAL RESERVE
Under Brazilian Corporation Law, the Company is required to
appropriate 5% of its annual earnings, calculated using Brazilian
GAAP, after absorbing accumulated losses, to a legal reserve, which is
restricted as to distribution. This reserve may be used to increase
capital or to absorb losses, but may not be distributed as dividends.
c. LONG TERM REVENUE RESERVE
The long-term revenue reserve represents earned but unrealized
revenues resulting from the investments accounted for using the equity
method. The reserve is realized when dividends or interest on
shareholders' equity are received, or other events, according to CVM
policies. Upon realization, the reserves are reversed to retained
earnings.
At December 31, 2002 and 2001, the Company did not record unearned
income reserves as the compulsory dividends did not exceed the
realized income.
d. EXPANSION RESERVE
In accordance with Article 196 of Law No. 6,404/76, management will
propose at the general shareholders meeting the establishment of a
retained income reserve in the amount of R$ 219,225 relating to the
remaining net income balance for the year, after the allocation of the
legal reserve and dividends. This reserve will be used for future
investment purposes based on the capital budget to be approved by 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)
25. SHAREHOLDERS' EQUITY (Continued)
d. EXPANSION RESERVE
Additionally, management will submit for approval and propose to the
ordinary shareholders meeting that R$44,252 of the retained earnings
balance for 2001, which has not been used in investments, be
transferred to the expansion reserve.
e. DIVIDENDS/INTEREST ON OWN CAPITAL
Pursuant to its by-laws, Tele Centro Oeste Celular Participacoes S.A.
is required to distribute as dividends, to the extent amounts are
available for distribution, an aggregate amount equal to at least 25%
of Adjusted Net Income (as defined below) for each fiscal year. The
annual dividend distributed to holders of preferred shares (the
"Preferred Dividend") has priority in the allocation of Adjusted Net
Income. Remaining amounts to be distributed are allocated first to the
payment of a dividend to holders of common shares in an amount equal
to the Preferred Dividend and the remainder is distributed equally
among holders of preferred shares and common shares.
For the purposes of the Brazilian Corporation Law, and in accordance
with Tele Centro Oeste Celular Participacoes S.A.'s by-laws, the
"Adjusted Net Income" is an amount equal to Tele Centro Oeste Celular
Participacoes S.A.'s net profits adjusted to reflect allocations to or
from (i) the statutory reserve, (ii) a contingency reserve for
anticipated losses, if any, and (iii) an unrealized revenue reserve,
if any.
Below is the calculation of the minimum amount of dividends that must
be distributed:
2001 2002
-------------- --------------
Year's net income 208,104 329,183
(+) Reversal of long term revenue reserve 97,675 -
(-) Legal reserve (10,405) (16,459)
-------------- --------------
(=)Adjusted net profit 295,374 312,724
Mandatory dividends (25%) 73,844 78,181
Common shares 25,477 26,068
Preferred shares 48,367 52,113
-------------- --------------
Dividends value per lot of thousand shares - R$ 0.202 0.206
============== ==============
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)
e. DIVIDENDS/INTEREST ON OWN CAPITAL (Continued)
In 2002, interest on shareholders' equity of R$93,499 (R$ 0.246569 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 2002
------------------------------
Common shares 13,775 30,208
Preferred shares 6,225 63,291
Withholding tax (6,000) (14,025)
------------------------------
34,000 79,474
==============================
In 2002 no dividends were proposed as the amount of distributed
interest on shareholders' equity was higher than the minimum required.
At December 31, 2001, dividends of R$ 40,500, to be distributed as
follows:
2001 2002
------------------------------
Common shares 13,932 -
Preferred shares 26,568 -
------------------------------
40,500 -
==============================
f. TREASURY STOCK
The following is a summary of treasury stock transactions for 2002 and
2001:
Preferred shares Common Shares
----------------------------------
Treasury shares, January 1, 2001 - -
Acquired 336,900,000 747,178,000
----------------------------------
Treasury shares, December 31, 2001 336,900,000 747,178,000
Acquired 3,610,300,000 5,044,215,747
Sold (3,610,300,000) -
Canceled (336,900,000) -
----------------------------------
Treasury shares, December 31, 2002 - 5,791,393,747
==================================
Common shares were acquired at a cost ranging from R$ 4.20 to R$ 9.01
per lot of thousand shares.
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)
f. TREASURY STOCK (Continued)
Preferred shares were acquired at a cost ranging from R$ 2.26 to R$
5.86 per lot of thousand shares.
g. 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$284,528 at
December 31, 2002 (R$395,132 in 2001), will be used for future
investments according to the capital budget to be presented at the
General Shareholders Meeting.
26. TRANSACTIONS WITH RELATED PARTIES
2002 2001 2000
------------------------------------------------------------------------------------
SPLICE DO SPL CSM
FIXCEL BRASIL BANCO CONSTRUTORA E CARTOES
S.A. S.A. CREDIBEL PAVIMENTADORA S.A. TOTAL TOTAL TOTAL
------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents - - - - - - - 713
Short-term investments - - 6,463 - - 6,463 17,353 6,527
Debentures 712,135 - - - - 712,135 - -
Commercial paper - - - - - - 362,310 77,743
Loan agreement - - - - - - - 2,673
Others assets 40,226 - - - - 40,226 - -
LIABILITIES
Suppliers - 3,215 49 - 819 4,083 1,241 1,452
Interest on own capital 14,104 - - - - 14,104 6,671 -
Dividends - - - - - - 7,505 -
TRANSACTIONS
Income from short-term investments 65,169 44,173 2,615 - - 111,957 41,038 11,078
Income on premium (Coverage
Participacoes) 5,967 - - - - 5,967 - -
Financial expenses 16,596 7,393 - - - 23,989 7,850 -
Maintenance services - 12,532 - - - 12,532 1,968 3,508
Other materials - - - - - - 10 -
Acquisition of telephone cards - - - - 5,854 5,854 920 2,121
Acquisition of property, plant and
equipment - 4,236 - 3,458 - 7,694 11,795 5,112
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
The majority shareholder of the Company is BID S.A., which is controlled by
Fixcel S.A., which in turn is under common control with Banco Credibel, SPL
Construtora e Pavimentadora and CSM Cartoes S.A. (Splice Group). Prior to
2002, BID S.A. was controlled by Splice do Brasil S.A.
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, 2002 the
amount of R$ 12,532 was charged to general and administrative expenses.
In January 2002, the Company made an advance payment of R$ 34,259 to BID
S.A. corresponding to the present value of the tax benefit on the merged
premium. The amount was increased by R$ 5,967 based on market rates at
December 31, 2002.
All transactions with related parties were carried out in accordance with
the Company's Articles of Incorporation and under agreed upon rates.
27. INSURANCE
At December 31, 2002, in the opinion of management, all significant or high
risk assets and obligations were insured.
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$ 398,819 (R$
307,682 in 2001) 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, 2002.
The fair value information as of December 31, 2002 and 2001 presented
below is based on pertinent information available to management as of
those dates.
2001 2002
------------------------------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
------------------------------------------
Loans and financing 516,984 516,136 627,780 608,562
Marketable securities 362,310 362,310 712,135 712,135
The valuation method used for calculating the market value of loans,
financing and swap contracts was based on discounted cash flow,
considering the expectations of liquidation or realization of
liabilities and assets at market rates in effect at the balance sheet
date. The Company intends to keep the hedge operations up to the
respective maturity.
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.
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)
b. RISK FACTORS
i) EXCHANGE RATE RISK
This risk relates to the possibility of the Company computing losses
derived from foreign exchange rate fluctuations, increasing the debt
balance derived from foreign currency loans obtained in the market and
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, 2002, the total debt amounted to R$ 627,780 of which
67.18% is in foreign currency (63.53% adjusted by the U.S. dollar and
3.65% denominated in a currency basket of BNDES). From the U.S. dollar
portion, 85.75% is protected by hedge operations at the end of the
quarter. From the total in foreign currency, 81.09% was protected by
hedge operation. The hedge operations were carried out in order to
partially cover the future maturity of debts in U.S. dollars, with
fixed or variable interest. The gains or losses from such operations
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 RATE RISK
The 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
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 rates volatility.
At December 31, 2002, the Company presents the amount of R$ 206,066 (R$
196,654 at December 31, 2001) in loans and financing in national currency
obtained at various fluctuating rates (as explained in Note 14) as well as
short-term investments in the amount of R$ 121,362 (R$ 280,730 at December
31, 2001) and investments in marketable securities of R$ 712,135 (R$
362,310 at December 31, 2001) based on the CDI variation.
At December 31, 2002, the Company presents R$ 163,358 (R$ 61,708 at
December 31 2001) in loans and financing in foreign currency at variable
interest rates (Libor renegotiated on a semiannual basis) and hedge
contracts for these operations amounting to R$ 106,930 (R$ 27,374 at
December 31, 2001) at fixed interest rates plus the exchange variation.
Another risk to which Tele Centro Oeste Celular Participacoes S.A. and
subsidiaries are exposed is the noncorrelation between the monetary
correction indices on their debts and accounts receivable. The telephone
charge adjustments do not necessarily correspond to the local interest
rates rise affecting the Company's debts.
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.
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
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, obtaining 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 good rating financial
institutions.
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP
The Company's 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 2002, 2001 and 2000, the
Company did not capitalize interest attributable to
construction-in-progress for Brazilian GAAP.
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)
a. DIFFERENT CRITERIA FOR CAPITALIZING AND AMORTIZING CAPITALIZED
INTEREST (Continued)
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
The effects of these different criteria for capitalizing and
amortizing capitalized interest are presented below:
2000 2001 2002
------ ------ ------
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). 14,118 16,209 13,476
------ ------ ------
US GAAP difference 14,118 16,209 13,476
====== ====== ======
AMORTIZATION OF CAPITALIZED INTEREST DIFFERENCE
Amortization under Brazilian GAAP 10,296 11,323 11,323
Less amortization under US GAAP (4,287) (6,325) (8,165)
------ ------ ------
US GAAP difference 6,639 4,998 3,158
====== ====== ======
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, 2000, accrued pension costs of 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.
f. EMPLOYEES' PROFIT SHARING
Brazilian GAAP requires that employees' profit sharing is presented as
a non-operating expense. Under US GAAP, the employees' profit sharing
would be included as an operating expense.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
29. SUMMARY OF DIFFERENCES BETWEEN BRAZILIAN AND US GAAP (Continued)
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 Brazilian GAAP and is acceptable for 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, were recorded
directly against shareholders' equity. Under U.S. GAAP, for purposes
of financial statements, the effects of the indexation adjustments
made in 2000 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 2002, 2001, and 2000, 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.
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)
k. DEFERRED TAXES
The deferred income tax liability resulting from the indexation of
permanent assets of R$ 23,956 in 2000 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$ 15,771, R$ 17,403 and R$ 12,901 in 2002, 2001 and 2000,
respectively, and was charged directly to the income statement for
Brazilian GAAP and USGAAP purposes. See further information related to
these amounts in note 2.b iii and note 10.
l. VALUATION OF LONG-LIVED ASSETS
SFAS No. 144 provides a single accounting model for long-lived assets
to be disposed of. SFAS No. 144 also changes the criteria for
classifying an asset as held for sale; and 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 Company adopted SFAS No. 144 on January 1,
2002. The adoption of SFAS No. 144 did not affect the Company's
financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets
and liabilities of a disposed group classified as held for sale would
be presented separately in the appropriate asset and liability
sections of the balance sheet.
Goodwill and intangible assets not subject to amortization are tested
annually for impairment, and are tested for impairment more frequently
if events and circumstances indicate that the asset might be impaired.
An impairment loss is recognized to the extent that the carrying
amount exceeds the asset's fair value.
Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, ACCOUNTING FOR
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF.
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)
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 2002 of R$ 28,743 (R$
32,981 in 2001) 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 were 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.
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)
o. 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.
p. 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.
q. 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.
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)
r. 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.
s. DERIVATIVES AND HEDGING ACTIVITIES
As of January 1, 2001, the Company adopted Financial Accounting
Standards Board Statement No. 133, "Accounting for Derivative
Instruments and for Hedging Activities ("SFAS 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). Under Brazilian Corporate Law, the Company has been
recording its hedging activities in the balance sheet as either an
asset or liability measured at the spot rates at December 31, 2002
plus the coupon rate as stated in the agreements and adjustments to
contract value were recorded through income.
SWAPS
At December 31, 2001 and 2002 the Company had entered into swaps
whereby the Company earns the exchange variation between the United
States dollar and the Brazilian Real plus 6.05% to 46.0% and pays
interest based on a short term interbank rate. At December 31, 2002
these agreements have total notional amounts of R$ 241,394, and expire
on various dates through 2006. The fair values adjustments of the
Company's foreign currency and interest rate swap contracts were
estimated based on quoted market prices of comparable contracts, and
at December 31, 2002 were approximately R$ 33,937, before tax. Amounts
related to 2001 were not significant.
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)
t. COMPREHENSIVE INCOME
Under USGAAP, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". Comprehensive income is not different from net
income under USGAAP.
u. LAPSED DIVIDENDS
The Company recorded the amount of R$ 5,418 relating to lapsed
dividends in the 2002 operating result for purposes of Brazilian GAAP.
Under US GAAP there is a basic accounting principle that
non-reciprocal transfers from shareholders to their companies cannot
be recorded as income. Such credit was recorded directly in
shareholders equity for USGAAP purposes.
v. ACQUISITION OF MINORITY INTEREST
In 2002, the Company acquired the minority interest in the subsidiary,
Telebrasilia Celular S.A. (Telebrasilia). The acquisition increased
the Company's interest in Telebrasilia from 88.25% to 100%. Under
Brazilian GAAP, the transaction was recorded at book value. For
USGAAP, the Company recorded the transaction at fair value as required
by the purchase method under SFAS No. 141. As a result, for US GAAP
purposes the shares issued to purchase the minority interest were
recorded at the fair value of R$64,799 on the date of the transaction.
Additionally, the Company recorded a step up in the fair value of
assets of R$36,520 and deferred income tax liabilities of R$9,266. The
step up in the fair value of assets, excluding the portion related to
goodwill amounting to R$9,266, is being amortized over 19 years and 8
years for intangibles and fixed assets, respectively, and resulted in
additional depreciation and amortization expense under US GAAP.
w. ADVANCE TO AFFILIATE
In January 2002, the Company made an advance payment, adjusted based
on market rates, to BID S.A. corresponding to the present value of the
tax benefit on the merged premium. With this transaction, the Company
relieved itself of issuing the corresponding shares to BID S.A. in the
future. Under Brazilian GAAP, the amount of R$40,226 was recorded as
an advance to affiliate. For US GAAP purposes, such transaction would
be recorded as a distribution to shareholder. Additionally, for US
GAAP purposes, no interest income would be accrued related to this
transaction.
RECONCILIATION OF THE INCOME DIFFERENCES BETWEEN US AND BRAZILIAN GAAP
2000 2001 2002
------------ ------------ ------------
Net income as reported...................................... 103,644 178,587 305,094
Different criteria for determining:
Capitalized interest.................................... 14,118 16,209 13,476
Amortization of capitalized interest.................... 6,639 4,998 3,158
Amortization of the activation income deferral.......... 1,024 - -
Costs of start-up activities and others................. (3,116) 2,177 4,238
Pension benefits - SFAS 87 adjustments ................. 28,186 1,990 (1,457)
Amortization of Concession.............................. (2,746) - -
Hedging and derivative financial instruments............ - - (33,937)
Lapsed dividends........................................ - - (5,418)
Depreciation and amortization of step-up in fair value
of assets............................................... - - (1,532)
Adjustment of advance to affiliate...................... - - (5,967)
Items posted directly to equity
Deferred tax on full indexation......................... (23,956) - -
Effects of the above adjustments on deferred taxes........ (14,926) (8,627) 9,329
Effects of the above adjustments on minority interest..... (4,096) (840) 431
------------ ------------ ------------
US GAAP net income.......................................... 104,771 194,494 287,415
============ ============ ============
EARNINGS PER THOUSAND SHARES ACCORDING TO US GAAP
Net income applicable to preferred shares 69,013 127,921 187,732
Net income applicable to common shares 35,758 66,573 99,683
------------ ------------ ------------
Net income 104,771 194,494 287,415
Basic and fully diluted earnings per thousand common and
preferred shares in R$ 0.28 0.53 0.78
============ ============ ============
Weighted average number of shares outstanding (thousands)
Preferred 240,029,997 239,964,678 240,279,068
Common 124,369,031 124,882,040 127,583,902
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
2001 2002
----------- -----------
Shareholders' equity as reported........................................... 1,126,432 1,310,691
Different criteria for:
Capitalized interest................................................... (32,148) (18,672)
Amortization of capitalized interest................................... 27,197 30,355
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................................ (32,981) (28,743)
Pension benefits - SFAS 87 adjustments................................. 642 (815)
Amortization of concession............................................. (2,746) (2,746)
Hedging and derivative financial instruments........................... - (33,937)
Acquisition of the minority interest of Telebrasilia Celular
S.A.................................................................... - 36,520
Depreciation and amortization of step-up in fair value of assets....... - (1,532)
Adjustment of advance to affiliate..................................... - (40,226)
Effects of the above adjustments on deferred taxes..................... 11,716 11,779
Minority interests..................................................... 2,309 2,740
----------- -----------
Shareholders' equity according to US GAAP.................................. 1,100,291 1,265,284
=========== ===========
Additional information:
TOTAL ASSETS UNDER US GAAP............................................... 2,389,361 2,468,537
----------- -----------
Property, plant and equipment............................................ 1,677,904 1,839,666
Accumulated depreciation................................................. (606,718) (793,493)
----------- -----------
Net property, plant and equipment........................................ 1,071,186 1,046,173
=========== ===========
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP
Balances at December 31, 2000.............................................. 1,000,123
Payment to shareholders' related to premium utilization (5,485)
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
Acquisition of the minority interest of Telebrasilia Celular S.A........... 64,799
Payment to shareholders' related to premium utilization (15,584)
Treasury stock............................................................. (49,297)
Adjustment of advance to affiliate......................................... (34,259)
Net income................................................................. 287,415
Interest on own capital.................................................... (93,499)
Lapsed dividends........................................................... 5,418
------------
Balances at December 31, 2002.............................................. 1,265,284
============
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
a. PENSION PLAN
The Company and its subsidiaries, except for Norte Brasil Telecom
S.A., together with substantially all of the other companies in the
former Telebras group, participate in a multi-employer defined benefit
pension plan and other post-retirement benefit plans administered by
the FUNDACAO SISTEL DE SEGURIDADE SOCIAL ("Sistel"), a minority
shareholder.
Effective 2001, the plan was modified and changed into a multiple
employer pension plan with respect to active employees. The plan
assets and liabilities related to active employees were transferred
into a new plan. The benefits remained unchanged. The post retirement
benefit plans remained as unchanged multi-employer plans. Also during
2001, the active employees were able to elect between participation in
this plan, or a defined contribution plan.
The Company contributed R$ 3,229 in 2002 (R$ 2,561 in 2001 and 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.
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)
The change in plans assets and benefit obligation plan and the related
actuarial assumptions are as follows:
CHANGE IN PLAN ASSETS
DEFINED BENEFIT PENSION
-------------------------------
2001 2002
--------------- --------------
Fair value of plan assets at beginning of year 2,964 1,984
Actual return on plan assets 339 712
Sponsors' contributions 164 20
Expenses and distributions (122) (56)
Effect of settlement (39) -
Assets transferred to defined contribution plan (1,322) -
--------------- --------------
Fair value of plan assets at end of year 1,984 2,660
=============== ==============
CHANGE IN BENEFIT OBLIGATIONS
DEFINED BENEFIT PENSION
-------------------------------
2001 2002
--------------- --------------
Benefit obligation at beginning of year 2,333 823
Service cost 111 74
Interest cost 263 92
Actuarial gains 72 (108)
Benefits and expenses paid (122) (56)
Curtailment (1,796) -
Settlement (38) -
--------------- --------------
Benefit obligation at end of year 823 825
=============== ==============
COMPONENTS OF ANNUAL PENSION COST
2000 2001 2002
--------------- -------------- --------------
Service cost 1,558 111 74
Interest cost 3,950 263 92
Expected return on assets (2,645) (435) (287)
Amortization of unrecognized gain (435) (133) (44)
Amortization of initial transition obligation 813 16 2
--------------- -------------- --------------
Net periodic pension cost 2,973 (178) (163)
=============== ============== ==============
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
The weighted-average actuarial assumptions, as determined by
actuaries, were as follows:
2001 2002
--------------- --------------
Discount rate for determining projected benefit obligations 11.30% 11.30%
Rate of increase in compensation levels 8.15% 8.15%
Expected long-term rate of return on plan assets 14.45% 14.45%
2002
---------------
Actuarial present value of benefit obligations:
Vested benefit obligation (543)
Accumulated benefit obligation (749)
Projected benefit obligation (825)
Plan assets at fair value 2,660
---------------
Funded status 1,835
Unrecognized net gain (1,033)
Unrecognized transition obligation 13
---------------
Accrued pension cost recognized for US GAAP (815)
---------------
In 2001, for employees who elected to participate in the defined
contribution plan, pension plan assets of R$ 1,322 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 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 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
------------------------------------------------------------------------------------------------------------
Before After
Curtailment Curtailment
And Effect of Effect of and
Settlement Curtailment 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 obligation 129 (113) - 16
--------------------------------------------------------
Accrued pension cost recognized for US GAAP (1,066) 1,683 25 642
--------------------------------------------------------
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 three telephone bills 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 2003.
There is no concentration of available sources of labor, services,
concessions or rights, other than those mentioned above, that the
Company believes could, if suddenly eliminated, severely impact the
Companies' operations.
TELE CENTRO OESTE CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Amounts expressed in thousands of Brazilian Reais, except per share amounts)
30. ADDITIONAL DISCLOSURES REQUIRED BY US GAAP (Continued)
c. RECENT ACCOUNTING PRONOUNCEMENTS
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 operations.
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 is currently in the process of evaluating the potential impact
that the adoption of SFAS 144 will have on its consolidated financial
position and results of operations, but believes that adoption of this
statement will not have a significant impact on its consolidated
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 provides
guidance related to accounting for costs associated with disposal
activities covered by SFAS 144 or with exit or restructuring
activities previously covered by Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 supersedes EITF
94-3 in its entirety. SFAS 146 requires that costs related to exiting
an activity or to a restructuring not be recognized until the
liability is incurred. SFAS 146 will be applied prospectively to exit
or disposal activities that are initiated after December 31, 2002.
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)
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, AN INTERPRETATION OF FASB STATEMENTS
NO. 5, 57 AND 107 AND A RESCISSION OF FASB INTERPRETATION NO. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees
issued or modified after December 31, 2002 and are not expected to have a
material effect on the Company's financial statements. The disclosure
requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. SFAS 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. The transition and annual disclosure
requirements of SFAS 148 are effective for the Company's fiscal ending
after December 15, 2002. The Company does not expect SFAS 148 to have a
material effect on its results of operations or financial condition.
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE ENTITIES, AN INTERPRETATION OF ACCOUNT RESEARCH BULLETIN -- ARB
NO. 51. This Interpretation addresses consolidation by business enterprises
of variable interests entities which have one of the following
characteristics:
I) THE INVESTMENT AT RISK IS NOT SUFFICIENT TO PERMIT THE ENTITY TO FINANCE
ITS ACTIVITIES WITHOUT ADDITIONAL SUBORDINATED FINANCIAL SUPPORT FROM OTHER
PARTIES, WHICH IS PROVIDED THROUGH OTHER INTERESTS THAT WILL ABSORB SOME OR
ALL THE EXPECTED LOSSES OF THE ENTITY.
II) THE EQUITY INVESTORS LACK ON OR MORE OF THE FOLLOWING ESSENTIAL
CHARACTERISTICS OF A CONTROLLING FINANCIAL INTEREST:
A) THE DIRECT OR INDIRECT ABILITY TO MAKE DECISIONS ABOUT THE ENTITY'S
ACTIVITIES THROUGH VOTING RIGHTS OR SIMILAR RIGHTS.
b) the obligation to absorb the expected losses of the entity if they
occur, which makes it possible for the entity to finance its activities
c) the right to receive the expected residual returns of the entity if
they occur, which is the compensation for the risk of absorbing the
expected losses.
The disclosure requirements is immediately effective for all variable
interest entities created after January 31, 2003 and for the fiscal year or
interim period beginning after June 15, 2003 for variable entities in which
an enterprise holds a variable interest that is acquired before February 1,
2003. The initial recognition of the Interpretation is applicable after
December 31, 2002 and is not expected to have an effect on the Company's
financial statements.
d. EARNINGS PER SHARE
In these consolidated financial statements, information is disclosed
per lot of thousand shares.
Since the preferred and common shareholders have different dividend,
voting and liquidation rights, basic earnings per share has been
calculated using the "two-class" method. The "two-class" method is an
earnings allocation formula that determines earnings per share for
preferred and common shares according to the dividends to be paid as
required by the Company's by-laws and participation rights in
undistributed earnings.
Basic earnings per common share is computed by reducing net income by
distributable and undistributable net income available to preferred
shareholders and dividing net income available to common shareholders
by the weighted-average number of common shares outstanding during the
period. Net income available to preferred shareholders is the sum of
the preferred dividends distributable net income and the preferred
shareholders' portion of undistributed net income.
Undistributed net income is computed by deducting preferred dividends
and common dividends from net income. Undistributed net income is
shared equally on a per share basis by the preferred and common
shareholders.
Under the Company's bylaws, if the Company is able to pay dividends in
excess of the minimum requirement for preferred shareholders and the
remainder of the net income is sufficient to provide equal dividends
to both common and preferred shareholders, then the earnings per share
will be the same for both common and preferred shareholders. The
following table sets forth the computation of basic and diluted
earnings per thousand of common shares:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2000 2001 2002
---------------- -------------- --------------
NUMERATOR:
Net income for the year under US GAAP 104,771 194,494 287,415
Net income available to preferred shareholders -
numerator for earnings per thousand share 69,013 127,921 187,732
---------------- -------------- -------------
Net income available to common shareholders -
numerator for earnings per thousand shares 35,758 66,573 99,683
================ ============== ==============
DENOMINATOR:
Weighted-average outstanding shares (in thousands)
Common............................................... 124,369,031 124,882,040 127,583,902
Preferred............................................ 240,029,997 239,964,678 240,279,068
Earnings per thousand common and preferred shares in R$ 0.28 0.53 0.78
31. SUBSEQUENT EVENTS (UNAUDITED)
On April 10, 2003 the National Telecommunications Agency - ANATEL approved
the transfer of BID S.A.'s ownership of Tele Centro Oeste Celular
Participacoes S.A. to Telesp Celular Participacoes S.A..
On April 25, 2003, Tele Centro Oeste Celular Participacoes S.A. was
notified by its controlling shareholder that the transfer of the Company's
shareholding control to Telesp Celular Participacoes S.A. had occurred.
EXHIBIT INDEX
1.1 Amended and Restated By-laws (ESTATUTO SOCIAL) of TCO (English
translation).
1.2 Amendment to the Charter of TCO previously filed with TCO's registration
statement on September 18, 1998 and incorporated herein by reference.
2.1 Deposit Agreement dated as of July 27, 1998 between TCO and The Bank of New
York, previously filed with TCO's registration statement on September 18,
1998 and incorporated herein by reference.
4.1 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and TCO
on February 3, 2003.
4.2 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and
Telegoias on February 3, 2003.
4.3 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and
Telems on February 3, 2003.
4.4 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and
Telemat on February 3, 2003.
4.5 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and
Teleron on February 3, 2003.
4.6 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and
Teleacre on February 3, 2003.
4.7 Personal Cellular Service Authorization Agreement (English translation)
entered into and between the Brazilian government, through Anatel, and NBT
on February 3, 2003.
4.8 Consent of Ernst and Young Auditores Independentes S.C.
8.1 Significant Subsidiaries.
12.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
12.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.