Form 6-K
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 6-K

 


 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of the

Securities Exchange Act of 1934

 

For the month of January, 2006

 

Commission File Number 333-09470

 


 

TELESP CELULAR PARTICIPAÇÕES S.A.

(Exact name of registrant as specified in its charter)

 

Telesp Cellular Holding Company

(Translation of Registrant’s name into English)

 


 

Av. Roque Petroni Jr., 1464

4° Andar – Lado “A”

04707-000—São Paulo, SP

Federative Republic of Brazil

(Address of principal executive office)

 


 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F      X            Form 40-F              

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing

the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes                       No      X    

 



Table of Contents

TABLE OF CONTENTS

 

1. Prospectus, dated January 24, 2006, of Telesp Celular Participações S.A.

 

Explanatory Note: The attached prospectus was included in the Registration Statement on Form F-4 of Telesp Celular Participações S.A. (“TCP”) (File No. 333-130410), as amended January 24, 2006. This prospectus also serves as an information statement for holders of American Depositary Shares of TCP and U.S. holders of common shares and preferred shares of TCP to provide information to those holders regarding the mergers described in the prospectus. TCP is therefore hereby submitting a copy of the prospectus under cover of Form 6-K.

 

 


Table of Contents

Signature

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: January 26, 2006

 

TELESP CELULAR PARTICIPAÇÕES S.A.

By:

 

/s/ Paulo Cesar Pereira Teixeira


   

Paulo Cesar Pereira Teixeira

   

Investor Relations Officer


Table of Contents

Prospectus

 

LOGO

 

Telesp Celular Participações S.A.

(Telesp Cellular Holding Company)

 

Telesp Celular Participações S.A., or TCP, has proposed a merger of shares under Brazilian law (incorporação de ações) of its subsidiary Tele Centro Oeste Celular Participações S.A., or TCO, and a merger of companies under Brazilian law (incorporação de empresas) of Tele Leste Celular Participações S.A., or TLE, Tele Sudeste Celular Participações S.A., or TSD, and Celular CRT Participações S.A., or Celular CRT, with TCP. The transaction is referred to herein as the merger. TCP, TCO, TLE, TSD and Celular CRT provide cellular telecommunications services in their respective authorized areas in Brazil under the VIVO brand. If the merger is approved:

 

    TCO will become a wholly owned subsidiary of TCP, and TLE, TSD and Celular CRT will merge with and into TCP, with TCP as the surviving company;

 

    holders of American Depositary Shares, or ADSs, of TCO, TLE and TSD will receive, subject to the procedures described herein and upon payment of the fees and expenses of the depositary of TCO, TLE or TSD, as the case may be, and of the TCP depositary:

 

    3.0830 ADSs of TCP for each TCO ADS they hold;

 

    3.8998 ADSs of TCP for each TLE ADS they hold; and

 

    3.2879 ADSs of TCP for each TSD ADS they hold;

 

    holders of common shares and holders of preferred shares of TCO, TLE, TSD and Celular CRT will receive, without any further action by those holders:

 

    3.0830 common shares, no par value, of TCP for each TCO common share they hold, and 3.0830 preferred shares, no par value, of TCP for each TCO preferred share they hold;

 

    3.8998 common shares, no par value, of TCP for each TLE common share they hold, and 3.8998 preferred shares, no par value, of TCP for each TLE preferred share they hold;

 

    3.2879 common shares, no par value, of TCP for each TSD common share they hold, and 3.2879 preferred shares, no par value, of TCP for each TSD preferred share they hold; and

 

    7.0294 common shares, no par value, of TCP for each Celular CRT common share they hold, and 7.0294 preferred shares, no par value, of TCP for each Celular CRT preferred share they hold.

 

The merger of each of TCO, TSD and Celular CRT with TCP will require the affirmative vote of holders representing at least 50% plus one of the aggregate TCP common shares and preferred shares that are present at a duly convened extraordinary general shareholders’ meeting, and the affirmative vote of holders representing at least 50% plus one of the aggregate common shares of TCO, TSD or Celular CRT, respectively. The merger of TLE with TCP will require the affirmative vote of holders representing at least 50% plus one of the aggregate TCP common shares and preferred shares that are present at a duly convened extraordinary general shareholders’ meeting, and the affirmative vote of holders representing at least 50% plus one of the aggregate common shares and preferred shares of TLE. We expect the merger to be approved because:

 

    our controlling shareholder, which directly and indirectly holds 92.51% of our common shares and 50.02% of our preferred shares, representing 66.09% of our voting shares, has represented to us that it and its subsidiaries will vote the shares of our company they hold in favor of the merger;

 

    we hold 90.59% of the voting common shares of TCO, and we intend to vote the shares of TCO we hold in favor of the merger; and

 

    our controlling shareholder also holds, directly and indirectly, 68.72% of the common shares and 40.95% of the preferred shares of TLE, representing 50.67% of TLE’s total voting shares, 92.01% of TSD’s voting common shares, and 90.57% of Celular CRT’s voting common shares, and has represented to us that it and its subsidiaries will vote the shares of TLE, TSD and Celular CRT they hold in favor of the merger.

 

Holders of preferred shares of TCO, TSD and Celular CRT, and holders of ADSs of TCO and TSD do not have the right to vote on the merger.

 

We will apply to list the TCP ADSs to be received by holders of TCO, TLE and TSD ADSs on the New York Stock Exchange, or the NYSE. Celular CRT does not have an ADS program, and no holder of Celular CRT common shares or preferred shares will receive TCP ADSs. We will apply to list the common shares and preferred shares to be received by holders of TCO, TLE, TSD and Celular CRT on the São Paulo Stock Exchange (Bolsa de Valores de São Paulo), or Bovespa. Upon the completion of the merger and the end of the period for the exercise of appraisal rights, where applicable, TCP will be renamed “Vivo Participações S.A.,” the ticker symbols for the common shares and preferred shares of TCP on Bovespa will change to “VIVO3” and “VIVO4,” respectively, and the ticker symbol for the ADSs of TCP on the NYSE will change to “VIV.”

 

This prospectus has been prepared for holders of common shares and preferred shares of TCO, TLE, TSD and Celular CRT residing in the United States, and for holders of ADSs of TCO, TLE and TSD, to provide information about the merger. This prospectus also serves as an information statement to provide information about the merger to holders of common shares, preferred shares and ADSs of TCP, which holders will continue to hold the same securities after the merger.

 

You should read this prospectus carefully. In particular, please read the section entitled “ Risk Factors” beginning on page 49 for a discussion of risks that you should consider in evaluating the transactions described in this prospectus.

 

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in connection with the merger or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

TCP IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND TCP A PROXY.

 

This prospectus is dated January 24, 2006 and is expected first to be mailed to shareholders on or about that date.


Table of Contents

TABLE OF CONTENTS

 

PRESENTATION OF FINANCIAL INFORMATION

   ii

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

   iv

PART ONE—QUESTIONS AND ANSWERS ABOUT THE MERGER

   1

PART TWO—SUMMARY

   9

The Companies

   9

Terms of the Merger

   15

Summary Historical and Pro Forma Financial Data

   26

Ratio of Earnings to Fixed Charges

   39

Summary Comparative Per Share Data

   40

Exchange Rates

   46

Historical and Pro Forma Share
Information

   47

PART THREE—RISK FACTORS

   49

Risks Relating to the Merger

   49

Risks Relating to the Brazilian Telecommunications Industry and Our Business

   52

Risks Relating to Our Securities

   58

Specific Risks Relating to Our ADSs

   60

Risks Relating to Brazil

   62

PART FOUR—INFORMATION ON THE VIVO COMPANIES

   65

Management Overview

   65

Recent Developments

   68

Management’s Discussion and Analysis of Financial Condition and Results of Operations of TCP

   70

Management’s Discussion and Analysis of Financial Condition and Results of Operations of TCO

   81

Management’s Discussion and Analysis of Financial Condition and Results of Operations of TLE

   90

Management’s Discussion and Analysis of Financial Condition and Results of Operations of TSD

   98

Description of Celular CRT’s Business

   106

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Celular CRT

   109

PART FIVE—THE MERGER

   130

Reasons for the Merger

   130

Effects of the Merger

   130

Background for the Merger

   130

Terms of the Merger

   136

Receipt of Shares and ADSs of TCP

   139

Fractional Shares and ADSs

   142

Appraisal or Dissenters’ Rights

   142

Mailing of Prospectus

   146

Brokerage Commissions

   146

Accounting Treatment of the Merger

   146

Certain Information on the Parent Companies of TCP and the Targets

   147

Management

   150

Material Tax Considerations

   157

Valuation Reports of Goldman Sachs

   169

Comparative Share and Dividend Information

   177

Past Contacts, Transactions, Negotiations and Agreements

   182

Transactions and Arrangements Concerning the Common Shares, Preferred Shares
and ADSs of TCO, TLE, TSD and
Celular CRT

   187

Plans and Proposals

   189

Expenses

   190

Unaudited Pro Forma Combined Financial Information

   190

PART SIX—SHAREHOLDER RIGHTS

   198

General

   198

Information About Historical Dividend Payments

   200

Recent History of TCP Capital Stock

   201

Description of TCP Capital Stock

   202

Description of American Depositary Shares

   210

PART SEVEN—ADDITIONAL INFORMATION FOR SHAREHOLDERS

   219

Where You Can Find More Information

   219

Incorporation by Reference

   219

Enforceability of Civil Liabilities Under U.S. Securities Laws

   221

PART EIGHT—LEGAL AND REGULATORY MATTERS

   223

General

   223

Legal Matters

   223

Experts

   223

PART NINE—FINANCIAL STATEMENTS

   F-1

ANNEX A—Information About Directors and Executive Officers of TCP, TCO, TLE, TSD, Celular CRT and Certain of Their Affiliates

   A-1

 

 

This prospectus includes important business and financial information about TCP that is not included in or delivered with the document. This information is available without charge to security holders upon written or oral request. To obtain timely delivery, security holders must request the information no later than five business days before February 22, 2006, the scheduled date of the extraordinary general shareholders’ meetings scheduled to approve the merger. See “Part Seven: Additional Information for Shareholders—Incorporation by Reference.”

 

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PRESENTATION OF FINANCIAL INFORMATION

 

The following financial statements are included or incorporated by reference in this prospectus:

 

    the audited consolidated financial statements of Telesp Celular Participações S.A., or TCP, as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 incorporated by reference in this prospectus from the Annual Report of Telesp Celular Participações S.A. on Form 20-F for the Fiscal Year Ended December 31, 2004;

 

    the unaudited condensed consolidated interim financial statements of TCP as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005 included in “Part Nine: Financial Statements” of this prospectus;

 

    the audited consolidated financial statements of Tele Centro Oeste Celular Participações S.A., or TCO, as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 incorporated by reference in this prospectus from TCO’s Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004;

 

    the unaudited condensed consolidated interim financial statements of TCO as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005 included in “Part Nine: Financial Statements” of this prospectus;

 

    the audited consolidated financial statements of Tele Leste Celular Participações S.A., or TLE, as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 incorporated by reference in this prospectus from TLE’s Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004;

 

    the unaudited condensed consolidated interim financial statements of TLE as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005 included in “Part Nine: Financial Statements” of this prospectus;

 

    the audited consolidated financial statements of Tele Sudeste Celular Participações S.A., or TSD, as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 incorporated by reference in this prospectus from TSD’s Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004;

 

    the unaudited condensed consolidated interim financial statements of TSD as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005 included in “Part Nine: Financial Statements” of this prospectus;

 

    the audited consolidated financial statements of Celular CRT Participações S.A., or Celular CRT, as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 included in “Part Nine: Financial Statements” of this prospectus; and

 

    the unaudited condensed consolidated interim financial statements of Celular CRT as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005 included in “Part Nine: Financial Statements” of this prospectus.

 

We prepare our financial statements in accordance with accounting practices adopted in Brazil, which include accounting practices derived from the Brazilian corporation law, regulations applicable to public telecommunications service concessionaires and accounting regulations and procedures established by the Brazilian Securities Commission (Comissão de Valores Mobiliários), or CVM. We refer to these accounting practices in this prospectus as generally accepted accounting principles in Brazil, or Brazilian GAAP.

 

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Brazilian GAAP differs in significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. The notes to the financial statements of TCP, TCO, TLE, TSD and Celular CRT included or incorporated by reference in this prospectus contain explanations of these differences as they relate to those companies:

 

    For an explanation of these differences as they relate to TCP, see note 21 to TCP’s unaudited consolidated financial statements as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005 and note 37 to TCP’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004.

 

    For an explanation of these differences as they relate to TCO, see note 37 to TCO’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 and note 21 to TCO’s unaudited consolidated financial statements as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005.

 

    For an explanation of these differences as they relate to TLE, see note 34 to TLE’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 and note 20 to TLE’s unaudited consolidated financial statements as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005.

 

    For an explanation of these differences as they relate to TSD, see note 35 to TSD’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 and note 21 to TSD’s unaudited consolidated financial statements as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005.

 

    For an explanation of these differences as they relate to Celular CRT, see note 31 to Celular CRT’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 and note 19 to Celular CRT’s unaudited consolidated financial statements as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005.

 

References to the “real,” “reais” or “R$” are to Brazilian reais (plural) and the Brazilian real (singular), and references to “U.S. dollars” or “U.S.$” are to United States dollars.

 

This prospectus contains translations of various real amounts into U.S. dollars at specified rates solely for your convenience. You should not construe these translations as representations by us that the real amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated. Unless otherwise indicated, we have translated some Brazilian currency amounts using a rate of R$2.2222 to U.S.$1.00, the PTAX selling rate of the Central Bank of Brazil (Banco Central do Brasil), or the Central Bank, on September 30, 2005.

 


 

In this prospectus, “TCP,” “we,” “us” and “our” refer to Telesp Celular Participações S.A. and its consolidated subsidiaries. References to the “Targets” refer to TCO, TLE, TSD and Celular CRT. References to “New TCP” refer to TCP upon consummation of the merger.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

We have made forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements relate to among other things:

 

    management strategy;

 

    synergies and cost savings;

 

    integration of new business units;

 

    market position and the size of the Brazilian telecommunications market;

 

    statements concerning the operations and prospects of our company and the other VIVO companies;

 

    estimated demand forecasts;

 

    the ability of our company and of the other VIVO companies to secure and maintain telecommunications infrastructure licenses, rights of way and other regulatory approvals;

 

    our strategic initiatives and plans for business growth;

 

    industry conditions;

 

    our funding needs and financing sources;

 

    network completion and product development schedules;

 

    expected characteristics of competing networks, products and services;

 

    influence of controlling shareholders;

 

    litigation; and

 

    the timetable for the merger.

 

Forward-looking statements also may be identified by words such as “believes,” “expects,” “anticipates,” “projects,” “intends,” “should,” “seeks,” “estimates,” “future” or similar expressions. The sections of this prospectus that contain forward-looking statements include:

 

    “Part One: Questions and Answers About the Merger”;

 

    “Part Two: Summary”;

 

    “Part Three: Risk Factors”;

 

    “Part Five: The Merger—Reasons for the Merger”, “—Management” and “—Unaudited Pro Forma Combined Financial Information”;

 

    “Part Six: Shareholder Rights”;

 

    “Part Seven: Additional Information for Shareholders—Enforceability of Civil Liabilities Under U.S. Securities Laws”; and

 

    “Part Eight: Legal and Regulatory Matters—General.”

 

These statements reflect our current expectations. They are subject to a number of risks and uncertainties, including but not limited to changes in technology, regulation, the global cellular communications marketplace and local economic conditions. In light of the many risks and uncertainties surrounding this marketplace, you should understand that we cannot assure you that the forward-looking statements contained in this prospectus will be realized. You are cautioned not to put undue reliance on any forward-looking information.

 

We undertake no obligation to publicly update or revise these forward looking statements after the date we distribute this prospectus.

 

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PART ONE—QUESTIONS AND ANSWERS ABOUT THE MERGER

Q: What is the merger?

 

A: Telesp Celular Participações S.A., or TCP, has proposed a merger of shares (incorporação de ações) of its subsidiary Tele Centro Oeste Celular Participações S.A., or TCO, and a merger of companies (incorporação de empresas) of Tele Leste Celular Participações S.A., or TLE, Tele Sudeste Celular Participações S.A., or TSD, and Celular CRT Participações S.A., or Celular CRT, each a company under common control with TCP. The transaction is referred to herein as the merger. The merger is a Brazilian law procedure under which TCO will become a wholly owned subsidiary of TCP, each of TLE, TSD and Celular CRT will merge with and into TCP with TCP as the surviving company, and holders of common shares, preferred shares or (where applicable) ADSs of TCO, TLE, TSD and Celular CRT will receive common shares, preferred shares or ADSs, respectively, of TCP upon approval of the merger by the requisite percentage of the voting shareholders of TCP, on one hand, and of TCO, TLE, TSD and Celular CRT, as the case may be, on the other hand.

 

Q: What are the reasons for the merger?

 

A: We believe the merger will enable us to:

 

    align the interests of the shareholders of TCP, of its subsidiary TCO, and of TLE, TSD and Celular CRT, which are all currently under common control;

 

    provide you with securities that we expect will enjoy greater market liquidity than the securities you currently hold;

 

    simplify the shareholding and organizational structure of the VIVO business and expand its shareholder base; and

 

    take advantage of important synergies among the companies, which are already operating under the same brand name “VIVO”.

 

Q: What will happen to my shares in the merger?

 

A: If you are a direct holder of common shares or preferred shares of:

 

    TCO, you will receive 3.0830 common shares or preferred shares of TCP for each common share or preferred share of TCO that you hold, respectively;

 

    TLE, you will receive 3.8998 common shares or preferred shares of TCP for each common share or preferred share of TLE that you hold, respectively;

 

    TSD, you will receive 3.2879 common shares or preferred shares of TCP for each common share or preferred share of TSD that you hold, respectively; or

 

    Celular CRT, you will receive 7.0294 common shares or preferred shares of TCP for each common share or preferred share of Celular CRT that you hold, respectively.

 

No further action by you is required. An entry or entries will be made in the share registry of TCP to evidence the common shares and preferred shares of TCP you will receive in the merger.

 

If you are a holder of ADSs of:

 

    TCO, you will receive 3.0830 ADSs of TCP, each representing 1 (one) preferred share of TCP, for each ADS of TCO that you hold, upon surrender of your TCO ADSs and payment of the fees and expenses of the TCO depositary and the TCP depositary;

 

    TLE, you will receive 3.8998 ADSs of TCP, each representing 1 (one) preferred share of TCP, for each ADS of TLE that you hold, upon surrender of your TLE ADSs and payment of the fees and expenses of the TLE depositary and the TCP depositary; or

 

    TSD, you will receive 3.2879 ADSs of TCP, each representing 1 (one) preferred share of TCP, for each ADS of TSD that you hold, upon surrender of your TSD ADSs and payment of the fees and expenses of the TSD depositary and the TCP depositary.

 

If you are a holder of common shares, preferred shares or ADSs of TCP, you will continue to hold those securities after the merger.

 

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PART ONE—QUESTIONS AND ANSWERS ABOUT THE MERGER

 

Q: What shareholder approvals are needed?

 

A: The merger of each of TCO, TSD and Celular CRT with TCP will require the affirmative vote of holders representing at least 50% plus one of the aggregate TCP common shares and preferred shares that are present at a duly convened extraordinary general shareholders’ meeting, and the affirmative vote of holders representing at least 50% plus one of the aggregate common shares of TCO, TSD and Celular CRT, respectively, at separate extraordinary general shareholders’ meetings.

 

The merger of TLE with TCP will require the affirmative vote of holders representing at least 50% plus one of the aggregate TCP common shares and preferred shares that are present at a duly convened extraordinary general shareholders’ meeting, and the affirmative vote of holders representing at least 50% plus one of the aggregate common shares and preferred shares of TLE at an extraordinary general meeting of the shareholders of that company.

 

If you hold common shares of TCP, TCO, TLE, TSD or Celular CRT, or preferred shares of TCP or TLE, you may vote at the TCP, TCO, TLE, TSD or Celular CRT shareholders’ meeting, respectively. If you hold preferred shares of TCO, TSD or Celular CRT, you are not entitled to vote at the TCO, TSD or Celular CRT shareholder meeting. If you hold TCP ADSs or TLE ADSs, you are not entitled to attend the TCP or TLE shareholders’ meeting, but you may communicate your voting instructions to the TCP or TLE depositary, as the case may be. If you hold ADSs of TCO or TSD, you are not entitled to attend or vote at the TCO or TSD shareholders’ meeting.

 

We expect the merger to be approved because:

 

    Brasilcel N.V., or Brasilcel, which directly and indirectly holds 92.51% of our common shares and 50.02% of our preferred shares, representing 66.09% of our voting shares, has represented to us that it and its subsidiaries will vote the shares of our company they hold in favor of the merger;

 

    We hold 90.59% of the voting common shares of TCO, and we intend to vote the shares of TCO we hold in favor of the merger; and

 

    Brasilcel also holds, directly and indirectly, 68.72% of the common shares and 40.95% of the preferred shares of TLE, representing 50.67% of TLE’s total voting shares, 92.01% of TSD’s voting common shares, and 90.57% of Celular CRT’s voting common shares, and has represented to us that it and its subsidiaries will vote the shares of TLE, TSD and Celular CRT they hold in favor of the merger.

 

Q: Do I have appraisal rights?

 

A: Holders of record of common shares of TCO, TLE, TSD and Celular CRT, and holders of record of preferred shares of TSD at the close of business on December 2, 2005 are entitled to appraisal rights in connection with the merger.

 

If you held common shares of TCO, TLE or TSD or preferred shares of TSD on the record date, you will have the right to choose to receive, instead of the TCP common shares or preferred shares, as the case may be, an amount in cash equal to the greater of the amounts shown for that company in the table below:

 

   

Appraisal amounts

the greater of


    Shareholders’ equity
per share in
accordance with
Brazilian GAAP (1)


  Market value of
shareholders’ equity
per share (1)


    (reais per share)

TCO (common
or preferred shares)

  R$ 21.80   R$ 18.38

TLE (common
or preferred shares)

    33.18     24.99

TSD (preferred shares)

    22.31     21.97
 
  (1) Calculated as of September 30, 2005 using the methodology described in “Part Five: The Merger—Appraisal or Dissenters’ Rights.”

 

If you held common shares of Celular CRT on the record date, you will have the right to choose to receive, instead of the TCP common shares,

 

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PART ONE—QUESTIONS AND ANSWERS ABOUT THE MERGER

 

an amount in cash equal to R$37.50 per share, the shareholders’ equity per share of Celular CRT in accordance with Brazilian GAAP, calculated as of September 30, 2005 using the methodology described in “Part Five: The Merger—Appraisal or Dissenters’ Rights.”

 

Holders of record of TCP common shares and preferred shares at the close of business on December 2, 2005 also have the right to choose to receive an amount in cash equal to R$6.52 per share, the shareholders’ equity per share of TCP in accordance with Brazilian GAAP, calculated as of September 30, 2005 using the methodology described in “Part Five: The Merger—Appraisal or Dissenters’ Rights.”

 

If you have appraisal rights, your appraisal rights will lapse not less than 30 days after publication of the minutes of the extraordinary general shareholders’ meeting called to approve the merger. If you have appraisal rights with respect to voting shares, you cannot exercise those appraisal rights if you vote in favor of the merger.

 

If you hold TCP or TSD ADSs, you will not be able to exercise appraisal rights. Even if you held those ADSs on December 2, 2005, the holder of the preferred shares underlying those ADSs on that date was the applicable depositary’s custodian, and the custodian will not exercise appraisal rights on your behalf.

 

Holders of preferred shares of TCO, TLE and Celular CRT and holders of ADSs of TCO and TLE are not entitled to appraisal or dissenters’ rights in connection with the merger under Brazilian law.

 

Q: Why am I receiving this document?

 

A: This document is a prospectus of TCP relating to the common shares and preferred shares of TCP that the shareholders of TCO, TLE, TSD and Celular CRT will receive in the merger. If you hold common shares or preferred shares of TCO, TLE, TSD or Celular CRT or ADSs of TCO, TLE or TSD, you are receiving this prospectus because TCP may be deemed to be offering you its securities for purposes of the U.S. Securities Act of 1933, as amended. If you hold common shares, preferred shares or ADSs of TCP, you are receiving this document to provide you with information about the merger and the matters that will be considered at the TCP shareholders’ meeting.

 

Q: What will be the accounting treatment of the reorganization?

 

A: Under Brazilian GAAP, the body of accounting principles we use to prepare our consolidated financial statements, the merger will be accounted for at book value.

 

Under U.S. GAAP, since TCP and each of the Targets have been under common control since December 27, 2002, the exchange of shares of TCP for common and preferred shares of the Targets held directly or indirectly by Brasilcel will be accounted for at historical cost in a manner similar to a pooling of interests. Accordingly, the assets acquired and the liabilities assumed in the merger, to the extent of the proportionate interests in the Targets under common control, will be accounted for based on the historical carrying values of the assets and liabilities of each of the Targets, as would be reflected in the consolidated financial statements of Brasilcel. The proportionate interests in each of the Targets acquired from shareholders unrelated to the controlling shareholders will be accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. Under the purchase method of accounting, the pro rata assets acquired and liabilities assumed are recorded at their fair values, and any excess of purchase price over the related fair value of net assets acquired is accounted for as goodwill. The financial statements of New TCP presented after the merger will retroactively reflect the combination of TCP and the Targets to the extent of the proportionate interests in the Targets under common control since December 27, 2002, in accordance with Brazilian GAAP and U.S. GAAP.

 

Q: What are the U.S. federal income tax consequences of the merger?

 

A:

If you are a U.S. Holder (as defined in “Part Five: The Merger—Material Tax Considerations—

 

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United States Federal Income Tax Considerations”) of TCO common shares or preferred shares (together the “TCO shares”) or TCO ADSs, the U.S. federal income tax consequences of the merger are uncertain. If required, TCP intends to take the position that, pursuant to the merger, you generally will not recognize gain or loss for U.S. federal income tax purposes on the receipt of TCP common shares or preferred shares (together the “TCP shares”) or TCP ADSs in exchange for your TCO shares or TCO ADSs, except to the extent of any cash received in lieu of fractional shares. If you are a U.S. Holder of common shares or preferred shares (together the “shares”) of TLE, TSD or Celular CRT, or ADSs of TLE or TSD, TCP believes you generally will not recognize gain or loss for U.S. federal income tax purposes on the receipt of TCP shares or TCP ADSs in exchange for shares of TLE, TSD or Celular CRT, or ADSs of TLE or TSD, except to the extent of any cash received in lieu of fractional shares. See “Part Five: The Merger—Material Tax Considerations—United States Federal Income Tax Considerations.” The tax consequences to you of the merger are complex and will depend on your particular facts and circumstances. You should consult your own tax advisor for a full understanding of the tax consequences of the merger to you.

 

Q: When will the merger be completed?

 

A: The extraordinary general shareholders’ meeting of each of TCP, TCO, TLE, TSD and Celular CRT will be held on February 22, 2006, unless any of the meetings is postponed. The merger will be legally effective upon approval of the merger at the shareholder meetings. However, new common shares, preferred shares and ADSs of TCP will not be delivered in the merger until after the end of the period for the exercise of appraisal rights, where applicable, which period will end not less than 30 days after publication of the minutes of the extraordinary general shareholders’ meeting called to approve the merger. See also “Could the merger be unwound?” below.

 

 

Q: Could the merger be unwound?

 

A: Under the Brazilian corporation law, if management believes that the total value of the appraisal rights exercised by the shareholders of TCP, TCO, TLE, TSD and Celular CRT may put at risk the financial stability of New TCP, management may, within 10 days after the end of the appraisal rights period, call an extraordinary general meeting of shareholders to either unwind or ratify the merger. Payment relating to the exercise of the appraisal rights will not be due if the merger is unwound. Because it holds, directly and indirectly, a majority of the voting shares of TCP, TCO, TLE, TSD and Celular CRT, Brasilcel would be able to cause the unwinding of the merger at the applicable extraordinary general shareholders’ meetings.

 

Q: Are any other approvals necessary for the completion of the merger?

 

A: No.

 

Q: After the merger, will I have the same ownership percentage that I now have?

 

A: No. After the merger, New TCP will be a significantly larger company than any of TCP, TCO, TLE, TSD or Celular CRT. You will have a lower percentage ownership in New TCP than you currently have in TCP, TCO, TLE, TSD or Celular CRT. Assuming that none of the common shareholders of TCP, TCO, TLE and Celular CRT and none of the common and preferred shareholders of TSD exercises appraisal rights, the following are the percentages of the outstanding capital stock of TCP that former shareholders of TCO, TLE, TSD and Celular CRT, other than the controlling shareholders, will hold:

 

    former TCO shareholders (other than TCP) will hold approximately 13.40%;

 

    former TLE shareholders (other than Brasilcel) will hold approximately 1.30%;

 

    former TSD shareholders (other than Brasilcel) will hold approximately 1.91%; and

 

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    former Celular CRT shareholders (other than Brasilcel) will hold approximately 5.04%.

 

Based on the assumptions described above, the percentage of the outstanding capital stock of TCP held by existing TCP shareholders (other than Brasilcel and its subsidiaries) will decrease from 33.91% to 15.79%.

 

Q: How will my rights as a shareholder change after the merger?

 

A: Your rights as a shareholder of TCP will be similar to your rights as a shareholder of TCO, TLE, TSD or Celular CRT. “Part Six: Shareholder Rights—General” describes certain differences in the calculation of the preference of preferred shareholders of TCP, TSD, TLE and Celular CRT in the receipt of dividends. The relative amounts that a preferred shareholder would receive under these different calculation methods depends on factors such as the amount of adjusted net income of the company calculated in accordance with the Brazilian corporation law, the company’s capital stock and/or the company’s shareholders’ equity. “Part Six: Shareholder Rights—General” also describes some variations in voting rights of preferred shareholders of the companies.

 

Q: When will I receive my TCP common shares, preferred shares or ADSs?

 

A: Assuming the merger is completed, we will deliver common and preferred shares in connection with the merger after the end of the period for the exercise of appraisal rights, where applicable, which period will end not less than 30 days after the publication of the minutes of the extraordinary general shareholders’ meeting called to approve the merger. During that period, the common shares and preferred shares of TCP, TCO, TLE, TSD and Celular CRT are expected to continue to trade on the São Paulo Stock Exchange under their existing ticker symbols.

 

Assuming the merger is completed, we will make the ADSs representing preferred shares of TCP issued in the merger available to U.S. shareholders within three business days after the related preferred shares are deposited with the depositary’s custodian in Brazil. This deposit is expected to occur after the end of the period for the exercise of appraisal rights, where applicable, which period will end not less than 30 days after the publication of the minutes of the extraordinary general shareholders’ meeting called to approve the merger. During that period, the ADSs of TCP, TCO, TLE and TSD are expected to continue to trade on the New York Stock Exchange under their existing ticker symbols.

 

Q: When will I receive any cash attributable to any fractional TCP security?

 

A: If you hold ADSs of TCO, TLE or TSD and the application of the relevant exchange ratio to the ADSs you hold would result in your receiving a fractional TCP ADS, the depositary under the ADS program of TCO, TLE or TSD, as the case may be, will sell on the open market the fractional TCP ADS to which you would otherwise be entitled. You will receive cash in lieu of any fractional TCP ADS you are entitled to receive based on the net proceeds (after deducting applicable fees and expenses, including sales commissions) from the sale on the New York Stock Exchange of the aggregate number of fractional entitlements to TCP ADSs. Payments for interests in fractional TCP ADSs will be available to registered holders approximately five business days after the applicable depositary completes sales of the aggregated fractional TCP ADSs on the New York Stock Exchange.

 

If you hold common shares or preferred shares of TCO, TLE, TSD or Celular CRT directly, TCP will make available to you any cash to which you are entitled in connection with the payments for fractional interests in TCP common shares or TCP preferred shares five business days after the proceeds of the sale of all such fractional interests by TCP on the São Paulo Stock Exchange become available to TCP.

 

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The sale of such fractional interests in auctions on the São Paulo Stock Exchange will occur as soon as practicable after the completion of the merger and after due notice of the auction is given in accordance with the rules of the São Paulo Stock Exchange.

 

Q: If I hold ADSs of TCO, TLE or TSD, will I have to pay ADS cancellation and issuance fees?

 

A: Yes. If you hold ADSs of TCO, TLE or TSD, you will have to pay the fees of the depositary of TCO, TLE or TSD, as the case may be, in accordance with the applicable deposit agreement for the cancellation each ADS of TCO, TLE or TSD that you hold in connection with the merger. These cancellation fees will not exceed $5.00 per 100 ADSs (or portion thereof) of TCO, TLE or TSD you hold. You will also have to pay the ADS issuance fees of the TCP depositary in accordance with the TCP deposit agreement for each TCP ADS issued to you in connection with the merger. These issuance fees will not exceed $5.00 per 100 ADSs (or portion thereof) of TCP to be issued to you. Given the exchange ratios of TCP ADSs to be received for each ADS of TCO, TLE or TSD that you hold, the maximum ADS cancellation and issuance fees you will have to pay to the depositaries for each ADS of TCO, TLE or TSD that you hold are set forth below:

 

Target ADS


   Maximum ADS
cancellation and
issuance fees payable
in connection with the
merger for each ADS
held


TCO

   US$ 0.20415

TLE

     0.24499

TSD

     0.214395

 

You will also have to pay any applicable stock transfer taxes with respect to the cancellation of your TCO, TLE or TSD ADSs or the issuance of TCP ADSs to you.

 

Q: Will I have to pay brokerage commissions?

 

A: You will not have to pay brokerage commissions if your TCO, TLE, TSD or Celular CRT shares are registered in your name. If your securities are held through a bank or broker or a custodian linked to a stock exchange, you should consult with them as to whether or not they charge any transaction fee or service charges in connection with the merger. If you hold TCO, TLE or TSD ADSs, you will have to pay the ADS cancellation and issuance fees described under “If I hold ADSs of TCO, TLE or TSD, will I have to pay ADS cancellation and issuance fees?” above.

 

Q: What do I need to do now?

 

A: If you hold common shares or preferred shares of TCO, TLE, TSD or Celular CRT, you do not need to do anything to receive TCP common shares or TCP preferred shares, respectively, in the merger. The TCP common shares and the TCP preferred shares are book-entry shares, and an entry or entries will be made in the share registry of TCP to evidence the common shares or preferred shares you will receive.

 

If you hold TCO, TLE or TSD ADSs, the preferred shares underlying those ADSs will become TCP preferred shares by operation of law. If you hold TCO, TLE or TSD ADSs indirectly through a broker or other intermediary, you will automatically receive your new TCP ADSs upon payment of the applicable ADS cancellation, issuance fees and expenses and any stock transfer taxes. However, if you hold ADSs directly as a registered holder, in addition to paying the applicable ADS cancellation fees, issuance fees and expenses and any stock transfer taxes, you must surrender your American Depositary Receipts, or ADRs, representing ADSs to the depositary. Upon surrender of those ADRs, the depositary will deliver the TCP ADSs to the registered holders of former TCO, TLE and TSD ADSs. See “Part Five: The Merger—Receipt of Shares and ADSs of TCP” for more details.

 

Q: What do I need to do if I would like to attend the shareholders’ meeting?

 

A:

TCP—If you hold common shares or if you hold preferred shares directly, you may attend the extraordinary general shareholders’ meeting of

 

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TCP at which the merger will be considered, and you may vote. If you hold ADSs, you are not entitled to attend the shareholders’ meeting, but you may communicate your voting instructions to the TCP depositary.

 

TCO—If you hold common shares, you may attend the extraordinary general shareholders’ meeting of TCO at which the merger will be approved, and you may vote. If you hold preferred shares directly you may attend the general shareholders’ meeting, but you may not vote. If you hold ADSs, you are not entitled to attend or vote at the shareholders’ meeting.

 

TLE—If you hold common shares or if you hold preferred shares directly, you may attend the extraordinary general shareholders’ meeting of TLE at which the merger will be approved, and you may vote. If you hold ADSs, you are not entitled to attend the shareholders’ meeting, but you may communicate your voting instructions to the TLE depositary.

 

TSD—If you hold common shares, you may attend the extraordinary general shareholders’ meeting of TSD at which the merger will be approved, and you may vote. If you hold preferred shares directly you may attend the general shareholders’ meeting, but you may not vote. If you hold ADSs, you are not entitled to attend or vote at the shareholders’ meeting.

 

Celular CRT—If you hold common shares, you may attend the extraordinary general shareholders’ meeting of Celular CRT at which the merger will be approved, and you may vote. If you hold preferred shares you may attend the general shareholders’ meeting, but you may not vote.

 

The shareholders’ meeting of each of TCP, TCO, TLE, TSD and Celular CRT is currently expected to be held on February 22, 2006, at 2:00 p.m., local time, at the respective principal executive offices as follows:

 

Telesp Celular Participações S.A.

Av. Roque Petroni Júnior, 1464

04707-000 - São Paulo, SP

Brazil

 

Tele Centro Oeste Celular Participações S.A.

SCS - Quadra 2, Bloco C, 226

Edificio Telebrasília Celular - 7º andar

70302-916 - Brasília, DF

Brazil

 

Tele Leste Celular Participações S.A.

Av. Roque Petroni Júnior, 1464

04707-000 - São Paulo, SP

Brazil

 

Tele Sudeste Celular Participações S.A.

Praia de Botafogo, 501, Torre Corcovado,

7º andar

22250-040 - Rio de Janeiro, RJ

Brazil

 

Celular CRT Participações S.A.

Rua José Bonifácio, 245, Farroupilha

90040-130 - Porto Alegre, RS

Brazil

 

We have set a record date of December 19, 2005 for purposes of holders of TCP or TLE ADSs who wish to instruct the applicable depositary how to vote the preferred shares underlying those ADSs. That is, holders of ADSs of TCP or TLE as of the close of business on December 19, 2005 may instruct the applicable depositary how to vote the preferred shares underlying the ADSs they held on that date.

 

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Q: Who can help answer my questions?

 

A: If you have any questions about the merger, you can contact

 

Telesp Celular Participações S.A.

Tele Centro Oeste Celular Participações S.A.

Tele Leste Celular Participações S.A.

Tele Sudeste Celular Participações S.A.

Celular CRT Participações S.A.

 

     at the following:

 

Av. Roque Petroni Júnior, 1464

4º Andar - Lado “A”

04707-000 - São Paulo, SP

Brazil

Attention: Charles E. Allen

Telephone: 011-55-11-5105-2276

Facsimile: 011-55-11-5105-2247

email: vsm@vivo.com.br

 

     You may also contact the information agent for the merger:

 

MacKenzie Partners, Inc.

105 Madison Avenue

New York, New York 10016

proxy@mackenziepartners.com

Call Collect: (212) 929-5500

Toll-Free: (800) 322-2885

 

     If you are a holder of TCP, TCO, TLE or TSD ADSs, you may also contact:

 

The Bank of New York

101 Barclay Street

New York, NY 10286

Telephone: (888) BNY-ADRS

 

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The following summary highlights selected information from this prospectus and may not contain all the information that may be important to you. To understand the merger more fully, you should read carefully this entire prospectus.

 

The Companies

 

TCP, TCO, TLE, TSD and Celular CRT, or the VIVO companies, are leading providers of cellular telecommunications in 19 states in Brazil and the Federal District. According to data published by the National Telecommunications Agency (Agência Nacional de Telecomunicações), or Anatel, the VIVO companies have 36.1% of the total market in Brazil and 45.9% of the total market in their authorized areas, with 28.8 million users as of September 30, 2005. Their operations cover an area with approximately 135 million inhabitants, or 73% of the Brazilian population. On a pro forma basis reflecting the merger, the VIVO companies had net operating revenues of R$10,929.3 million for the year ended December 31, 2004 and R$8,308.1 million for the nine months ended September 30, 2005.

 

The VIVO companies are controlled by Brasilcel N.V., or Brasilcel, a joint venture of Portugal Telecom S.G.P.S., S.A., or Portugal Telecom, and Telefónica Móviles S.A., or Telefónica Móviles. The following chart shows the corporate structure of the VIVO companies as of December 4, 2005.

 

LOGO

 

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TCP

 

We are a leading provider of cellular telecommunications services in Brazil through our subsidiaries Telesp Celular S.A., or Telesp Celular, Global Telecom S.A., or Global Telecom, and Tele Centro Oeste Celular Participações S.A., or TCO, according to data regarding market share published by Anatel. We are controlled by Brasilcel, which also controls, directly or indirectly, Tele Sudeste Celular Participações S.A., or TSD, Tele Leste Celular Participações S.A., or TLE, and Celular CRT Participações S.A., or Celular CRT. In the nine months ended September 30, 2005, we had net operating revenues of R$5,491.7 million, and as of September 30, 2005 had 19.4 million cellular lines in service.

 

Telesp Celular provides mobile telecommunications services on the A Band frequency range in the state of São Paulo, covering approximately 248,209 square kilometers, representing approximately 2.9% of Brazil’s territory. This state includes 63 municipalities with populations in excess of 100,000 people, including the city of São Paulo, Brazil’s largest city, with more than 10 million people, and is home to more than 40.1 million people, representing 21.9% of Brazil’s population, estimated based on information published by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE. The A Band frequency used by Telesp Celular covers 77% of the municipalities in the state of São Paulo and 98% of the population of the metropolitan area of São Paulo. Telesp Celular is the leading cellular operator, by number of customers, in the state of São Paulo, according to data published by Anatel.

 

Telesp Celular had net operating revenues of R$3,415.0 million, R$3,993.2 million and R$4,329.0 million in 2002, 2003 and 2004, respectively. In the nine months ended September 30, 2005, Telesp Celular had net operating revenues of R$3,187.0 million. As of September 30, 2005, Telesp Celular had 10.0 million cellular lines in service and a market share of approximately 50.1% in its authorized areas, estimated based on the total number of cellular lines in service in those areas as published by Anatel.

 

Global Telecom provides mobile telecommunications services on the B Band frequency range in the states of Paraná and Santa Catarina. These two states cover an area of approximately 294,661 square kilometers, representing approximately 3.5% of Brazil’s territory, and include 22 municipalities with populations in excess of 100,000 people. The states of Paraná and Santa Catarina are home to approximately 16.0 million people, representing 8.8% of Brazil’s population, estimated based on information published by the IBGE.

 

Global Telecom had net operating revenues of R$512.2 million, R$669.0 million and R$801.6 million in 2002, 2003 and 2004, respectively. In the nine months ended September 30, 2005, Global Telecom had net operating revenues of R$602.5 million. As of September 30, 2005, Global Telecom had 2.8 million cellular lines in service and a market share of approximately 36.2% in its authorized areas, estimated based on the total number of cellular lines in service in those areas as published by Anatel.

 

Telesp Celular has been our wholly owned subsidiary since we completed a corporate restructuring in January 2000. We acquired an 81.61% indirect economic interest in Global Telecom in February 2001, and Global Telecom became our wholly owned subsidiary on December 27, 2002. We acquired 61.10% of the voting capital stock of TCO on April 25, 2003. We acquired additional shares of voting capital stock of TCO in a public tender offer in October 2003, bringing the percentage of TCO’s voting capital stock we owned to 86.19%. In October 2004, we acquired additional shares of voting capital stock and preferred shares of TCO in another public tender offer, and in July 2005 we acquired additional shares of voting capital stock of TCO in a capital increase, bringing the percentage of TCO’s voting capital stock we own to 90.59%. Our net operating revenues for the nine months ended September 30, 2005 included R$1,702.2 million attributable to the consolidation of TCO, R$3,187.0 million attributable to the consolidation of Telesp Celular and R$602.5

 

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million attributable to the consolidation of Global Telecom. After consolidation adjustments, our net operating revenues for the nine months ended September 30, 2005 were R$5,491.7 million.

 

Our principal executive offices are located at Av. Roque Petroni Júnior, 1464, 4º Andar, Lado “A”, 04707-000 – São Paulo, SP, Brazil, and our telephone number is 011-55-11-5105-2276. We are incorporated under the laws of Brazil.

 

For more information about our company, please see our Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004, which is incorporated by reference in this prospectus, including the following sections: “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects,” “Item 7. Major Shareholders and Related Party Transactions,” “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Legal Matters” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

 

TCO

 

According to data published by Anatel, TCO is the leading provider, by number of customers, of cellular telecommunications services in Brazil’s Federal District and in 11 Brazilian states: Acre, Amapá, Amazonas, Goiás, Maranhão, Mato Grosso, Mato Grosso do Sul, Pará, Rondonia, Roraima and Tocantins, an area encompassing 5.8 million square kilometers, approximately 68% of Brazil’s territory, including 34 municipalities with populations in excess of 100,000 people, and 31.8 million people, representing approximately 18% of Brazil’s population.

 

TCO uses the A Band frequency range, covering 50% of the municipalities in the Federal District and in the states of Acre, Goiás, Mato Grosso, Mato Grosso do Sul, Rondonia and Tocantins and 89% of the population of these areas. TCO also uses the B Band frequency range that covers 28% of the municipalities in the states of Amazonas, Amapá, Maranhão, Pará and Roraima and 65% of the population of those states.

 

TCO’s subsidiaries are: Telegoiás Celular S.A., or Telegoiás, Telemat Celular S.A., or Telemat, Telems Celular S.A., or Telems, Teleron Celular S.A., or Teleron, Teleacre Celular S.A., or Teleacre, Norte Brasil Telecom S.A., or NBT, and TCO IP S.A., or TCO IP.

 

TCO and its subsidiaries had aggregate net operating revenues of R$1,572.1 million, R$1,958.9 million and R$2,210.4 million in 2002, 2003 and 2004, respectively. In the nine months ended September 30, 2005, TCO had net operating revenues of R$1,702.2 million. As of September 30, 2005, TCO and its subsidiaries had 6.5 million cellular lines in service and a market share of approximately 47% in its authorized areas, estimated based on the total number of cellular lines in service in those areas as published by Anatel.

 

TCO’s principal executive offices are located at SCS – Quadra 2, Bloco C, 226, Edifício Telebrasília Celular, 7º andar, 70302-916, Brasília, DF, Brazil, and its telephone number is 011-55-61-3962-7756. TCO is incorporated under the laws of Brazil.

 

For more information about TCO, please see TCO’s Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004, which is incorporated by reference in this prospectus, including the following sections: “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects,” “Item 7. Major Shareholders and Related Party Transactions,” “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Legal Matters” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

 

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TLE

 

According to data published by Anatel, TLE is a leading provider of cellular telecommunications services in the states of Bahia and Sergipe through its subsidiaries Telebahia Celular S.A., or Telebahia, and Telergipe Celular, or Telergipe.

 

TLE provides mobile telecommunications services on the A Band frequency range in an area with more than 15.5 million people, representing 8.6% of Brazil’s population, and encompassing 16 metropolitan areas with populations in excess of 100,000 people. TLE covers 31% of the municipalities and 68% of the population in this area.

 

TLE and its subsidiaries had aggregate net operating revenues of R$431.4 million, R$441.3 million and R$487.0 million in 2002, 2003 and 2004, respectively. In the nine months ended September 30, 2005, TLE had net operating revenues of R$418.7 million. As of September 30, 2005, TLE and its subsidiaries had 1.4 million cellular lines in service and a market share of approximately 34.4% in its authorized areas, estimated based on the total number of cellular lines in service in those areas as published by Anatel.

 

TLE’s principal executive offices are located at Av. Roque Petroni Júnior, 1464, 4º Andar – Lado “A”, 04707-000, São Paulo, SP, Brazil, and its telephone number is 011-55-11-5105-2276. TLE is incorporated under the laws of Brazil.

 

For more information about TLE, please see TLE’s Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004, which is incorporated by reference in this prospectus, including the following sections: “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects,” “Item 7. Major Shareholders and Related Party Transactions,” “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Legal Matters” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

 

TSD

 

According to market share data published by Anatel, TSD is a leading provider of cellular telecommunications services in the states of Rio de Janeiro and Espirito Santo through its subsidiaries Telerj Celular S.A., or Telerj, and Telest Celular S.A., or Telest.

 

TSD provides mobile telecommunications services on the A Band frequency range in an area covering approximately 89,774 square kilometers, representing approximately 1.1% of Brazil’s territory. This area is home to more than 18 million people, representing 10.2% of Brazil’s population. TSD covers 100% of the municipalities and 96.8% of the population in this area.

 

TSD and its subsidiaries had aggregate net operating revenues of R$1,847.6 million, R$1,892.5 million and R$1,927.0 million in 2002, 2003 and 2004, respectively. In the nine months ended September 30, 2005, TSD had net operating revenues of R$1,505.3 million. As of September 30, 2005, TSD and its subsidiaries had 4.6 million cellular lines in service and a market share of approximately 44.2% in its authorized areas, estimated based on the total number of cellular lines in service in those areas as published by Anatel.

 

TSD’s principal executive offices are located in Praia de Botafogo, 501, Torre Corcovado, 7º andar, 22250-040, Rio de Janeiro, RJ, Brazil, and its telephone number is 011-55-21-2586-6622. TSD is incorporated under the laws of Brazil.

 

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For more information about TSD, please see TSD’s Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004, which is incorporated by reference in this prospectus, including the following sections: “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects,” “Item 7. Major Shareholders and Related Party Transactions,” “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Legal Matters” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

 

Celular CRT

 

According to data published by Anatel, Celular CRT is a leading provider of cellular telecommunications services in the state of Rio Grande do Sul through its subsidiary Celular CRT S.A. Celular CRT provides mobile telecommunications services on the A Band frequency range in an area with more than 10.5 million people, representing 5.6% of Brazil’s population.

 

Celular CRT had net operating revenues of R$896.3 million, R$1,032.7 million and R$1,174.3 million in 2002, 2003 and 2004, respectively. In the nine months ended September 30, 2005, Celular CRT had net operating revenues of R$892.4 million. As of September 30, 2005, Celular CRT had 3.4 million cellular lines in service and a market share of approximately 50.3% in its authorized area, estimated based on the total number of cellular lines in service in that area as published by Anatel.

 

Celular CRT’s principal executive offices are located at Rua José Bonifácio, 245, Farroupilha, 90040-130 Porto Alegre, RS, Brazil, and its telephone number is 011-55-11-5105-2276. Celular CRT is incorporated under the laws of Brazil.

 

Celular CRT is not subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. For more information about Celular CRT, please see “Part Four: Information on the VIVO Companies—Description of Celular CRT’s Business” and “—Management’s Discussion and Analysis of Financial Condition and Results of Operations of Celular CRT” and the audited consolidated financial statements and unaudited condensed consolidated financial statements of Celular CRT included in this prospectus.

 

VIVO

 

In 2002, Portugal Telecom and Telefónica Móviles transferred all of their investments in cellular telecommunications businesses in Brazil to Brasilcel. Portugal Telecom and Telefonica Móviles are managing this joint venture on an equal basis.

 

All of TCP, TCO, TSD, TLE and Celular CRT are controlled by Brasilcel, directly and/or indirectly, and have been operating under the brand name “VIVO” since April 2003. The VIVO companies pursue a common commercial strategy and are guided by a common management team. VIVO designs marketing, promotional and other initiatives common to all the companies and then tailors those activities to the particular markets of those companies.

 

According to data published by Anatel, VIVO has 36.1% of the total market in Brazil and 45.9% of the total market in its authorized areas, with 28.8 million users as of September 30, 2005. Its operations cover an area with approximately 135 million inhabitants, or 73% of the Brazilian population.

 

Upon the completion of the merger of shares of TCO with TCP and of the merger of companies of each of TCO, TLE, TSD and Celular CRT with TCP, TCP will be renamed “Vivo Participações S.A.” and will be the holding company of TCO and of the subsidiaries of TLE, TSD and Celular CRT.

 

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The following chart shows our expected corporate structure after the merger.

 

 

LOGO

Combined Region

 

The map below shows the regions in Brazil in which VIVO operates.

 

LOGO

 

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Terms of the Merger

 

We are proposing the merger of shares (incorporação de ações) of TCO with TCP, and the merger of companies (incorporações de empresas) of TLE, TSD and Celular CRT with TCP, in each case under Brazilian law. We refer to the transaction herein as the merger.

 

Purpose of and Reasons for the Merger

 

We believe the merger will enable us to:

 

    align the interests of the shareholders of TCP, TCO, TLE, TSD and Celular CRT;

 

    provide you with securities that we expect will enjoy greater market liquidity than the securities you currently hold;

 

    simplify the shareholding and organizational structure of the VIVO business and expand its shareholder base; and

 

    take advantage of important synergies among the companies, which are already operating under a common brand name, “VIVO.”

 

We believe that the potential synergies from the transaction include the elimination of the costs to maintain the registration of the securities of TCO, TLE and TSD under the Exchange Act, the listing of the ADSs of those companies on the New York Stock Exchange and the listing of the common shares and preferred shares of those companies on the São Paulo Stock Exchange. These costs include the preparation of Annual Reports on Form 20-F for those companies, the submission of reports on Form 6-K for those companies, the preparation of audited financial statements reconciled to U.S. GAAP in accordance with the regulations of the U.S. Securities and Exchange Commission and, beginning in 2006, the preparation of reports on the internal control over financial reporting of those companies pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the attestations of such reports by the companies’ independent registered public accounting firm. Although the New TCP will be a larger and more complex company and its compliance costs are expected to increase as a result of the transaction, we believe that this increase will be more than offset by the reduction in these costs with respect to the other companies.

 

We selected the particular structure of this transaction, which includes a merger of shares of TCO with TCP under Brazilian law and concurrent mergers of companies of TLE, TSD and Celular CRT into TCP under Brazilian law, primarily because this structure provides the greatest certainty that unaffiliated shareholders will become shareholders of New TCP and that we will achieve the objectives described above. As an alternative to this structure, our controlling shareholder, Brasilcel, considered conducting a series of public tender offers for cash and/or securities of TCP to existing unaffiliated shareholders of TCO, TLE, TSD and Celular CRT. However, we and our controlling shareholder rejected this alternative because it (1) would not provide the certainty that there would be fewer than 300 U.S. resident holders of the preferred shares and ADSs of TCO, TLE and TSD after the transaction, which is a condition to deregistration of those securities under the Exchange Act, and (2) would not streamline the corporate and shareholder structure without undertaking a subsequent merger.

 

Effects of the Merger on TCP, the Targets and Their Affiliates

 

If the merger is approved:

 

    TCO will become a wholly owned subsidiary of TCP, and TLE, TSD and Celular CRT will merge with and into TCP with TCP as the surviving company;

 

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    direct holders of common shares and preferred shares of TCO will receive 3.0830 common shares or preferred shares of TCP for each common share or preferred share, respectively, they hold without any further action by those holders; holders of ADSs of TCO will receive 3.0830 ADSs of TCP for each ADS they hold, subject to the procedures described herein and upon payment of any fees and expenses of the TCO depositary and of the TCP depositary;

 

    direct holders of common shares and preferred shares of TLE will receive 3.8998 common shares or preferred shares of TCP for each common share or preferred share, respectively, they hold without any further action by those holders; holders of ADSs of TLE will receive 3.8998 ADSs of TCP for each ADS they hold, subject to the procedures described herein and upon payment of any fees and expenses of the TLE depositary and of the TCP depositary;

 

    direct holders of common shares and preferred shares of TSD will receive 3.2879 common shares or preferred shares of TCP for each common share or preferred share, respectively, they hold without any further action by those holders; holders of ADSs of TLE will receive 3.2879 ADSs of TCP for each ADS they hold, subject to the procedures described herein and upon payment of any fees and expenses of the TSD depositary and of the TCP depositary; and

 

    holders of common shares or preferred shares of Celular CRT will receive 7.0294 common shares or preferred shares of TCP for each common share or preferred share, respectively, they hold without any further action by those holders; Celular CRT does not have an ADS program, and no holder of CRT common shares or preferred shares will receive TCP ADSs.

 

As a result of the merger:

 

    New TCP will be a significantly larger company and will be the holding company of TCO and its subsidiaries and of the subsidiaries of TLE, TSD and Celular CRT;

 

    New TCP will be renamed “Vivo Participações S.A.,” the common shares and preferred shares of New TCP will be listed on the São Paulo Stock Exchange and the ADSs of New TCP will be listed on the New York Stock Exchange;

 

    the preferred shares and ADSs of TCO, TLE and TSD are expected to be deregistered under the Exchange Act, and those companies will no longer file Annual Reports on Form 20-F or reports on Form 6-K;

 

    the ADSs of TCO, TLE and TSD will be delisted from the New York Stock Exchange, and the common shares and preferred shares of TCO, TLE, TSD and Celular CRT will be delisted from the São Paulo Stock Exchange; and

 

    any dividends to holders of common shares, preferred shares or ADSs with respect to fiscal years after the fiscal year ended December 31, 2005 will be paid in accordance with the bylaws (estatuto social) of TCP and the Brazilian corporation law, as described in “Part Six: Shareholder Rights.”

 

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As a result of the transaction, TCP will own 100% of the capital stock of TCO, and TLE, TSD and Celular CRT will merge with and into TCP, with TCP as the surviving company. TCP’s interest in the net book value and net income (loss) of each of those companies will therefore increase to 100%. The following table illustrates the effects of the merger on TCP’s interest in the net book value and net income (loss) of TCO, TLE, TSD and Celular CRT.

 

     TCP’s interest in the net book value of the
Targets as of September 30, 2005


 
     Historical

   Pro forma

 
     (R$ millions, unaudited)  

TCO

   R$ 1,487.6 (52.47%)    R$2,835.3 (100% )

TLE

     —      320.0 (100% )

TSD

     —      2,048.7 (100% )

Celular CRT

     —      1,224.1 (100% )

 

     TCP’s interest in the net income (loss) of the Targets

     Nine months ended September 30, 2005

   Year ended December 31, 2004

     Historical

   Pro forma

   Historical

   Pro forma

     (R$ millions, unaudited)

TCO

   R$ 144.7 (52.47%)    R$275.8  (100%)    R$ 256.8 (50.65%)    R$507.1  (100%)

TLE

     —      (54.5) (100%)      —      (34.2) (100%)

TSD

     —      78.0  (100%)      —      92.8  (100%)

Celular CRT

     —      104.5  (100%)      —      181.9  (100%)

 

Effects of the Merger on Unaffiliated Shareholders

 

The benefits and actual or potential adverse effects of the merger for unaffiliated shareholders of the Targets can be summarized as follows:

 

Principal Benefits

 

    The common shares, preferred shares and ADSs of TCP to be received by holders of common shares, preferred shares and ADSs of the Targets are expected to have greater liquidity than the existing common shares, preferred shares and ADSs of the Targets.

 

    Holders of shares and ADSs of TCP will hold an investment in a more diversified cellular telecommunications provider that will provide services in 19 states in Brazil and the Federal District in an area that includes approximately 73% of the Brazilian population. At the same time, holders of shares and ADSs are expected to benefit from synergies to be obtained as a result of the merger.

 

    Holders of shares of TLE would have experienced a decrease in loss from continuing operations per share for the nine months ended September 30, 2005 from R$(5.65) per share on a historical basis under Brazilian GAAP to R$(0.90) per share on a pro forma per share equivalent basis under Brazilian GAAP and from R$(6.22) per share on a historical basis under U.S. GAAP to R$(1.19) per share on a pro forma per share equivalent basis under U.S. GAAP, in each case calculated as described below under “—Summary Comparative Per Share Data.” See also “Part Five: The Merger—Unaudited Pro Forma Combined Financial Information.”

 

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    Holders of shares of TCO, TLE, TSD and Celular CRT would have experienced an increase in book value per share on a U.S. GAAP basis as of September 30, 2005 from R$21.98, R$33.78, R$22.31 and R$37.65 on a historical basis to R$28.27, R$35.76, R$30.15 and R$64.46, respectively, on a pro forma per share equivalent basis, in each case calculated as described below under “—Summary Comparative Per Share Data.” However, book value per share would have decreased on a Brazilian GAAP basis for a holder of TCO, TLE or TSD shares. On a Brazilian GAAP basis, book value per share as of September 30, 2005 was R$21.80, R$33.18, R$22.31 and R$37.50 for TCO, TLE, TSD and Celular CRT, respectively, and would have been R$19.40, R$24.54, R$20.69 and R$44.24, respectively, on a pro forma per share equivalent basis, in each case calculated as described below under “—Summary Comparative Per Share Data.” See also “Part Five: The Merger—Unaudited Pro Forma Combined Financial Information.”

 

Principal Actual or Potential Adverse Effects

 

    Holders of shares of TCO, TSD and Celular CRT would have experienced a decrease in income from continuing operations per thousand shares on a Brazilian GAAP basis for the nine months ended September 30, 2005 from R$2.12, R$0.85 and R$3.20 per share on a historical basis, respectively, to a loss from continuing operations per share of R$(0.71), R$(0.76) and R$(1.62) on a pro forma per share equivalent basis, respectively, in each case calculated as described below under “—Summary Comparative Per Share Data.” Similarly, holders of shares of TCO, TSD and Celular CRT would have experienced a decrease in income from continuing operations per share on a U.S. GAAP basis for the nine months ended September 30, 2005 from R$1.80, R$0.62 and R$2.50 per share on a historical basis, respectively, to a loss from continuing operations per share of R$(0.94), R$(1.01) and R$(2.15) on a pro forma per share equivalent basis, respectively, in each case calculated as described below under “—Summary Comparative Per Share Data.” Holders of shares of TCO, TSD and Celular CRT would also have experienced decreases in income from continuing operations for the fiscal years ended December 31, 2003 and 2004 on a U.S. GAAP basis and (except for holders of shares of TCO and TSD for the fiscal year ended December 31, 2004) on a Brazilian GAAP basis, comparing historical per share amounts to pro forma per share equivalent amounts for those periods, in each case calculated as described below under “—Summary Comparative Per Share Data.” See also “Part Five: The Merger—Unaudited Pro Forma Combined Financial Information.”

 

    As explained above, holders of TCO, TLE and TSD shares would have experienced a decrease in book value per share under Brazilian GAAP (though not under U.S. GAAP) as of September 30, 2005 on a pro forma per share equivalent basis, in each case calculated as described below under “—Summary Comparative Per Share Data.” See also “Part Five: The Merger—Unaudited Pro Forma Combined Financial Information.”

 

    Holders of shares and ADSs of TCO, TSD and Celular CRT would not have received dividends or interest on shareholders’ equity on a pro forma per share equivalent basis in at least the two last fiscal years, as described in “—Summary Comparative Per Share Data,” because TCP does not currently pay dividends or interest on shareholders’ equity due to its net losses. Holders of shares and ADSs of TLE would also not have received dividends or interest on shareholders’ equity on a pro forma per share equivalent basis, but these holders do not currently receive dividends or interest on shareholders’ equity due to TLE’s net losses. However, TCP expects to effect a capital reduction in connection with the merger, intended to permit TCP to resume the payment of dividends or interest on shareholders’ equity more promptly than might otherwise be possible. See “Part Six: Shareholder Rights—Information About Historical Dividend Payments.”

 

   

The method of calculation of the preference of preferred shareholders in the receipt of dividends differs for TLE, TSD and Celular CRT from the method set forth in the bylaws of TCP. The relative amounts

 

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that a preferred shareholder would receive under these different calculation methods depend on factors such as the amount of adjusted net income of the company calculated in accordance with the Brazilian corporation law, the company’s capital stock and/or the company’s shareholders’ equity. The bylaws of TSD provide that preferred shareholders are entitled to receive, out of any mandatory minimum dividends under the Brazilian corporation law, dividends 10% greater than those received by common shareholders. The bylaws of TLE and Celular CRT provide that preferred shareholders are entitled to a preference to receive out of any mandatory minimum dividends an amount equal to the greater of (1) 6% of subscribed capital per share and (2) dividends 10% greater than those received by common shareholders. The TCP bylaws contain a different preference, entitling preferred shareholders to a preference to receive out of any mandatory minimum dividends an amount equal to the greater of (1) 6% of subscribed capital per share and (2) 3% of shareholders’ equity per share. Depending on the level of capital stock, shareholders’ equity and adjusted net income for purposes of the Brazilian corporation law, the TCP preference rule could result in lesser dividends to preferred shareholders (and ADS holders) and common shareholders than would be payable under the bylaws of TLE, TSD and Celular CRT. See “Part Six: Shareholder Rights—General.”

 

    New TCP will be considerably more leveraged than TCO, TSD and Celular CRT. In addition, TCP will assume the liabilities of TLE, TSD and Celular CRT in connection with the merger. See “Part Three: Risk Factors—Risks Relating to the Merger.”

 

    Because New TCP will be a larger company than TCO, TLE, TSD and Celular CRT, the ownership percentage of any existing minority shareholder of the Targets will decrease as a result of the merger. See “Part Three: Risk Factors—Risks Relating to the Merger.”

 

    Holders of ADSs of TCO, TLE and TSD will be required to pay the ADS cancellation and issuance fees described in “Part Five: The Merger—Receipt of Shares and ADSs of TCP.”

 

    U.S. holders of shares or ADSs may have a gain or loss for U.S. federal income tax purposes, as described under “—Material Tax Considerations” below and in “Part Five: The Merger—Material Tax Considerations—United States Federal Income Tax Considerations.”

 

    You may have a gain or loss for Brazilian income tax purposes, as described under “—Material Tax Considerations” below and in “Part Five: The Merger—Material Tax Considerations—Brazilian Tax Considerations.”

 

Material Tax Considerations (Page 157)

 

If you are a U.S. Holder of TCO shares or TCO ADSs, the U.S. federal income tax consequences of the merger are uncertain. If required, TCP intends to take the position that, pursuant to the merger, you generally will not recognize gain or loss for U.S. federal income tax purposes on the receipt of TCP shares or TCP ADSs in exchange for your TCO shares or TCO ADSs, except to the extent of any cash received in lieu of fractional shares. If you are a U.S. Holder of shares of TLE, TSD or Celular CRT, or ADSs of TLE or TSD, TCP believes you generally will not recognize gain or loss for U.S. federal income tax purposes on the receipt of TCP shares or TCP ADSs in exchange for shares of TLE, TSD or Celular CRT, or ADSs of TLE or TSD, except to the extent of any cash received in lieu of fractional shares. You will also be subject to certain U.S. federal income tax consequences as a result of holding TCP shares or TCP ADSs received pursuant to the merger. See “Part Five: The Merger—Material Tax Considerations—United States Federal Income Tax Considerations.”

 

There are reasonable Brazilian legal grounds to sustain that the receipt (resulting from the merger) by a non-Brazilian holder of ADSs or by a U.S. person of common or preferred shares that are registered as a foreign

 

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portfolio investment under Resolution 2,689/00 of the National Monetary Council or are registered as a foreign direct investment under Law 4,131/62 would not be subject to income tax pursuant to Brazilian law. However, Brazilian tax legislation does not contain specific provisions with respect to the merger. See “Part Five: The Merger—Material Tax Considerations—Brazilian Tax Considerations.”

 

Approval of the Merger (Page 136)

 

Brasilcel holds, directly and indirectly, 92.51% of the common shares and 50.02% of the preferred shares of our company, representing 66.09% of our total voting shares. Brasilcel has represented to us that it and its subsidiaries will vote the shares of our company they hold in favor of the merger.

 

Brasilcel also holds, directly and indirectly, 68.72% of the common shares and 40.95% of the preferred shares of TLE, representing 50.67% of TLE’s total voting shares, 92.01% of TSD’s voting common shares, and 90.57% of Celular CRT’s voting common shares. Brasilcel has represented to us that it and its subsidiaries will vote the shares of TLE, TSD and Celular CRT they hold in favor of the merger.

 

We hold 90.59% of the voting common shares of TCO. We intend to vote the shares of TCO we hold in favor of the merger.

 

The merger of each of TCO, TLE, TSD and Celular CRT with TCP will require the affirmative vote of holders representing at least 50% plus one of the aggregate TCP common shares and preferred shares that are present at a duly convened extraordinary general shareholders’ meeting, and the affirmative vote of holders representing at least 50% plus one of the aggregate common shares of TCO, TSD or Celular CRT. The merger of TLE with TCP will require the affirmative vote of holders representing at least 50% plus one of the aggregate TCP common shares and preferred shares that are present at a duly convened extraordinary general shareholders’ meeting, and the affirmative vote of holders representing at least 50% plus one of the aggregate common shares and preferred shares of TLE.

 

The extraordinary general shareholders’ meetings of TCP, TCO, TLE, TSD and Celular CRT are scheduled to be held as follows:

 

February 22, 2006

2 p.m., local time

 

Telesp Celular Participações S.A.

Av. Roque Petroni Júnior, 1464

04707-000 – São Paulo, SP

Brazil

 

Tele Centro Oeste Celular Participações S.A.

SCS – Quadra 2, Bloco C, 226

Edifício Telebrasília Celular, 7º andar

70302-916 – Brasília, DF

Brazil

 

Tele Sudeste Celular Participações S.A.

Praia de Botafogo, 501

Torre Corcovado, 7º andar

22250-040 – Rio de Janeiro, RJ

Brazil

 

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Tele Leste Celular Participações S.A.

Av. Roque Petroni Júnior, 1464

04707-000 – São Paulo, SP

Brazil

 

Celular CRT Participações S.A.

Rua José Bonifácio, 245, Farroupilha

90040-130 – Porto Alegre, RS

Brazil

 

If you hold common shares of TCP, TCO, TSD, TLE or Celular CRT, you may attend and vote at the applicable meeting. If you hold preferred shares of TCO, TSD or Celular CRT directly, you may attend the applicable meeting, but you may not vote. If you hold TCP or TLE preferred shares directly, you may attend and vote at the respective meeting. Under the Brazilian corporation law, you may be required to show documents proving your identity to gain admittance to the meeting. If you grant a proxy to someone to act for you at the meeting, your proxy will be required to show original or certified copies of the documents that grant him or her powers of representation. The proxy must be deposited at the head office of TCP, TCO, TLE, TSD or Celular CRT, as the case may be, no later than 2 p.m., local time, two days before the applicable meeting.

 

If you hold ADSs of TCO or TSD, you are not entitled to attend, or vote through a representative at, the respective shareholders’ meeting. If you hold TCP ADSs or TLE ADSs, you are not entitled to attend the respective shareholders’ meeting, but you may communicate your voting instructions to the TCP depositary or TLE depositary, as the case may be. No holder of preferred shares of TCO, TSD or Celular CRT and no holder of ADSs of TCO or TSD may vote at the applicable meeting.

 

There are no conditions to the completion of each merger other than shareholder approval by TCP, on one hand, and TCO, TSD, TLE or Celular CRT, as the case may be, on the other hand. The approval of the NYSE of the listing of the ADSs of TCP to be delivered in connection with the merger of each of TCO, TLE or TSD, for which we will apply, must be obtained for these shares to be traded by their holders. However, this approval is not a condition to the completion of the merger.

 

The approval of the merger by the Brazilian Securities Commission (Comissão de Valores Mobiliários), or CVM, is not a condition to the merger. See “Part Three: Risk Factors—Risks Relating to the Brazilian Telecommunications Industry and Our Business—The CVM, the Brazilian securities regulator, may suspend for up to 15 days the shareholders’ meetings scheduled to approve the merger.”

 

Receipt of Shares and ADSs of TCP (Page 139)

 

If the merger is approved, each common share or preferred share:

 

    of TCO will become 3.0830 common shares or preferred shares, respectively, of TCP;

 

    of TLE will become 3.8998 common shares or preferred shares, respectively, of TCP;

 

    of TSD will become 3.2879 common shares or preferred shares, respectively, of TCP; and

 

    of Celular CRT will become 7.0294 common shares or preferred shares, respectively, of TCP,

 

in each case without any action by you. Because the common shares and preferred shares of TCP are book-entry shares, an entry or entries will be made in the share registry of TCP to evidence the common shares or preferred shares received in the merger. Neither you nor any other person will receive certificates evidencing common shares or preferred shares of TCP.

 

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Holders of ADSs representing preferred shares will receive:

 

    3.0830 ADSs representing preferred shares of TCP in the merger for each ADS of TCO they hold;

 

    3.8998 ADSs representing preferred shares of TCP in the merger for each ADS of TLE they hold; and

 

    3.2879 ADSs representing preferred shares of TCP in the merger for each ADS of TSD they hold.

 

After the merger becomes effective and the end of the period for the exercise of appraisal rights, where applicable (see “—Appraisal or Dissenters’ Rights”), TCP will deposit with a custodian for The Bank of New York, as depositary under each of the TCO, TLE and TSD ADS programs, the TCP preferred shares issuable in respect of the ADSs of TCO, TLE or TSD then held in that program. The Bank of New York, as depositary, will deposit those TCP preferred shares with the custodian for The Bank of New York, as depositary under the TCP ADS program, and instruct that depositary to cause to be issued and to deliver, subject to payment of the fees and expenses of that depositary under the TCP deposit agreement, as described below, ADSs representing those TCP preferred shares to the depositary for the ADS program of TCO, TLE or TSD, as the case may be. When the TCP ADSs are received in the ADS program of each of TCO, TLE and TSD, the ADSs of each of TCO, TLE and TSD will represent a right to receive TCP ADSs.

 

If you hold ADSs indirectly through a broker or other intermediary, you will automatically receive your TCP ADSs (and cash in lieu of any fractions as described in “Part Five: The Merger—Fractional Shares and ADSs”) upon payment of the depositary’s fees and expenses as provided in each of the TCO, TLE and TSD deposit agreements, as described below.

 

If you hold ADSs directly as a registered holder, you must, in addition to paying the fees and expenses of the depositary described below, surrender your ADRs to the depositary. Registered holders of TCO, TLE and TSD ADSs will be provided with the necessary forms, which will contain instructions on how to surrender their ADRs representing ADSs to the depositary. If you do not receive the necessary forms, you may call The Bank of New York toll-free at 1-888-BNY-ADRS or contact The Bank of New York at 101 Barclay Street, New York, NY 10286. Upon surrender of those ADRs, the depositary will deliver the TCP ADSs to the registered holders of former TCO, TLE and TSD ADSs (and cash in lieu of any fractions as described in “Part Five: The Merger—Fractional Shares and ADSs”). See “Part Five: The Merger—Receipt of Shares and ADSs of TCP—Delivery of TCP ADRs.”

 

If you hold ADSs of TCO, TLE or TSD, you will have to pay the fees of the depositary of TCO, TLE or TSD, as the case may be, in accordance with the applicable deposit agreement for the cancellation each ADS of TCO, TLE or TSD that you hold in connection with the merger. These cancellation fees will not exceed $5.00 per 100 ADSs (or portion thereof) of TCO, TLE or TSD you hold. You will also have to pay the ADS issuance fees of the TCP depositary in accordance with the TCP deposit agreement for each TCP ADS issued to you in connection with the merger. These issuance fees will not exceed $5.00 per 100 ADSs (or portion thereof) of TCP to be issued to you. Given the exchange ratios of TCP ADSs to be received for each ADS of TCO, TLE or TSD that you hold, the maximum ADS cancellation and issuance fees you will have to pay to the depositaries for each ADS of TCO, TLE or TSD that you hold are set forth below:

 

Target ADS


   Maximum ADS
cancellation and
issuance fees payable
in connection with the
merger for each ADS
held


TCO

   US$ 0.20415

TLE

     0.24499

TSD

     0.214395

 

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If you are a holder of common shares, preferred shares or ADSs of TCP, you will continue to hold those securities after the merger.

 

Management (Page 150)

 

TCP is managed, and after the merger will be managed, by a board of directors of nine members, each serving a three-year term expiring at the ordinary general meeting of shareholders to be held by April 2006, except that the term of António Gonçalves de Oliveira will expire in April 2007. The board of executive officers of TCP currently consists of five members, led by Roberto Oliveira de Lima as chief executive officer.

 

TCP is headquartered in São Paulo, Brazil and will maintain that headquarters after the merger.

 

Accounting Treatment of the Merger (Page 146)

 

Under Brazilian GAAP, the body of accounting principles we use to prepare our consolidated financial statements, the merger will be accounted for at book value. Under U.S. GAAP, since TCP and each of the Targets have been under common control since December 27, 2002, the exchange of shares of TCP for common and preferred shares of the Targets held directly or indirectly by Brasilcel will be accounted for at historical cost in a manner similar to a pooling of interests. Accordingly, the assets acquired and the liabilities assumed in the merger, to the extent of the proportionate interests in the Targets under common control, will be accounted for based on the historical carrying values of the assets and liabilities of each of the Targets, as would be reflected in the consolidated financial statements of Brasilcel. The proportionate interests in each of the Targets acquired from shareholders unrelated to the controlling shareholders will be accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations. Under the purchase method of accounting, the pro rata assets acquired and liabilities assumed are recorded at their fair values, and any excess of purchase price over the related fair value of net assets acquired is accounted for as goodwill. The financial statements of New TCP presented after the merger will retroactively reflect the combination of TCP and the Targets to the extent of the proportionate interests in the Targets under common control since December 27, 2002, in accordance with Brazilian GAAP and U.S. GAAP.

 

Stock Exchange Matters

 

Upon the completion of the merger and the end of the period for the exercise of appraisal rights, where applicable (see “—Appraisal or Dissenters’ Rights”), TCP will be renamed Vivo Participações S.A. TCP’s common shares will be traded on the São Paulo Stock Exchange under the ticker symbol “VIVO3” and preferred shares will be traded on the São Paulo Stock Exchange under the ticker symbol “VIVO4.” We will apply to list the ADSs of TCP to be received by holders of TCO, TLE and TSD ADSs on the New York Stock Exchange, and all the ADSs of TCP are expected to trade under the ticker symbol “VIV.”

 

After the merger is complete and the period for the exercise of appraisal rights, where applicable, has ended (see “—Appraisal or Dissenters’ Rights”), preferred shares and common shares of TCO, TLE, TSD and Celular CRT will be delisted from the São Paulo Stock Exchange, and ADSs of TCO, TLE and TSD will be delisted from the New York Stock Exchange.

 

Appraisal or Dissenters’ Rights (Page 142)

 

Holders of record of common shares of TCP, TCO, TLE, TSD and Celular CRT, and holders of record of preferred shares of TCP and TSD at the close of business on December 2, 2005 are entitled to appraisal rights in connection with the merger. If you held common shares of TCO, TLE or TSD or preferred shares of TSD on the

 

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record date, you will have the right to choose to receive, instead of the TCP common shares or preferred shares, as the case may be, an amount in cash equal to the greater of the amounts shown for that company in the table below:

 

    

Appraisal amounts

the greater of


     Shareholders’ equity
per share in
accordance with
Brazilian GAAP (1)


   Market value of
shareholders’ equity
per share (1)


     (reais per share)

TCO (common or preferred shares)

   R$ 21.80    R$ 18.38

TLE (common or preferred shares)

     33.18      24.99

TSD (preferred shares)

     22.31      21.97

(1) Calculated as of September 30, 2005 using the methodology described in “Part Five: The Merger—Appraisal or Dissenters’ Rights.”

 

If you held common shares of Celular CRT on the record date, you will have the right to choose to receive, instead of the TCP common shares, an amount in cash equal to R$37.50 per share, the shareholders’ equity per share of Celular CRT in accordance with Brazilian GAAP, calculated as of September 30, 2005 using the methodology described in “Part Five: The Merger—Appraisal or Dissenters’ Rights.”

 

If you have appraisal rights, your appraisal rights will lapse not less than 30 days after publication of the minutes of the extraordinary general shareholders’ meeting called to approve the merger. If you have appraisal rights with respect to voting shares, you cannot exercise those appraisal rights if you vote in favor of the merger.

 

Holders of record of TCP common shares and preferred shares at the close of business on December 2, 2005 also have the right to choose to receive an amount in cash equal to R$6.52 per share, the shareholders’ equity per share of TCP in accordance with Brazilian GAAP, calculated as of September 30, 2005 using the methodology described in “Part Five: The Merger—Appraisal or Dissenters’ Rights.”

 

If you hold TCP or TSD ADSs, you will not be able to exercise appraisal rights. Even if you held those ADSs on December 2, 2005, the holder of the preferred shares underlying those ADSs on that date was the applicable depositary’s custodian, and the custodian will not exercise appraisal rights on your behalf.

 

Holders of preferred shares of TCO, TLE and Celular CRT and holders of ADSs of TCO and TLE are not entitled to appraisal or dissenters’ rights in connection with the merger under Brazilian law.

 

Valuation Reports of Goldman Sachs (Page 169)

 

In connection with the mergers, our board of directors received valuation reports from Goldman Sachs expressing the view that, as of the date of those reports and based on and subject to the assumptions and considerations described in those reports and based on other matters as Goldman Sachs considered relevant, if the exchange ratio approved by the board of directors of TCP with respect to each merger was within the implied exchange ratios derived from the valuation analyses performed by Goldman Sachs with respect to TCP and TCO, TLE, TSD or Celular CRT, as applicable, then that exchange ratio as of December 4, 2005 would constitute equitable treatment as understood in the manner described in such reports.

 

We urge you to read carefully the summary of the valuation reports set forth in “Part Five: The Merger—Valuation Reports of Goldman Sachs,” which includes information on how to obtain copies of the full reports.

 

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PART TWO—SUMMARY

 

Timetable for the Merger

 

Meeting of the boards of directors of each of TCP, Celular CRT, TCO, TLE and TSD to approve the merger

   December 4, 2005

Announcement of the merger

   December 4, 2005

Mailing of prospectus to holders of TCP, TCO, TLE and TSD ADSs and U.S. holders of common and preferred shares of TCP, TCO, TLE, TSD and Celular CRT

   January 24, 2006

Meeting of shareholders of each of TCP, TCO, TLE, TSD and Celular CRT to approve the merger scheduled for

   February 22, 2006

Beginning of period for exercise of appraisal rights, where applicable

   February 24, 2006

End of period for exercise of appraisal rights, where applicable

   March 27, 2006

Expected last day of trading of common and preferred shares of the Targets on Bovespa and of ADSs of TCO, TLE and TSD on the NYSE

   March 30, 2006

Expected first day of trading of VIVO (New TCP) common shares and preferred shares on Bovespa and ADSs on the NYSE

   March 31, 2006

Depositary for TCO, TLE and TSD ADSs expected to close books for all transfers and other transactions involving ADSs of those companies

   April 4, 2006

Depositary begins to issue VIVO (New TCP) ADRs for ADRs of TCO, TLE and TSD on or about

   April 5, 2006

 

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PART TWO—SUMMARY

 

Summary Historical and Pro Forma Financial Data

 

The following information is provided to aid you in your analysis of the financial aspects of the merger. The historical information below is only a summary derived from the following financial statements included in this prospectus:

 

    the audited consolidated financial statements of TCP, TCO, TLE, TSD and Celular CRT as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 incorporated by reference in this prospectus, and the unaudited condensed consolidated interim financial statements of TCP as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005, included in this prospectus; and

 

    the audited consolidated financial statements of Celular CRT as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 and the unaudited condensed consolidated interim financial statements of Celular CRT as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005, in each case included in this prospectus.

 

You should read this summary historical and pro forma financial data together with these financial statements.

 

The unaudited pro forma combined balance sheet as of September 30, 2005 combines the historical consolidated balance sheets of TCP, TLE, TSD and Celular CRT, giving effect to (1) the merger with respect to the proportionate interest in the Targets under common control as if it had been consummated on December 27, 2002, the date these companies came under common control, and (2) the acquisitions of the minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on September 30, 2005. The unaudited pro forma combined statements of loss for the nine months ended September 30, 2005 and the years ended December 31, 2004 and 2003 combine the historical consolidated statements of income of TCP, TLE, TSD and Celular CRT, giving effect to (1) the merger with respect to the proportionate interest in the Targets under common control as if it had been consummated on December 27, 2002 and (2) the acquisitions of the minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on January 1, 2004.

 

The pro forma adjustments presented in the unaudited pro forma combined financial information give effect to estimates made by our management and assumptions it believes to be reasonable. The unaudited pro forma combined financial information does not include pro forma adjustments to take into account any synergies or cost savings that may or are expected to occur as a result of the merger.

 

The unaudited pro forma combined financial data were prepared for illustrative purposes only. This information does not purport to represent what the actual results of operations or financial position of TCP would have been had the merger actually occurred on the dates specified, nor does it project our results of operations or financial position for any future period or date.

 

The results of operations of TCP, TCO, TLE, TSD and Celular CRT for the nine months ended September 30, 2005 are not necessarily indicative of the operating results to be expected for the entire year ended December 31, 2005.

 

The comparability of TCP’s financial statements as of and for the years presented is limited because:

 

   

We acquired 61.1% of the total voting capital stock (including treasury shares) of TCO on April 25, 2003. We acquired additional shares of voting capital stock of TCO in a public tender offer in November 2003, bringing the percentage of TCO’s total voting capital stock (including treasury shares)

 

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PART TWO—SUMMARY

 

 

we owned to 86.19% and the percentage of TCO’s total capital stock (including treasury shares) we owned to 28.9% (and TCO then held an additional 4.5% of TCO’s voting capital stock in treasury, representing 1.5% of TCO’s capital stock). Since May 1, 2003, we have consolidated TCO due to our acquisition of control.

 

    We acquired additional shares of voting capital stock and preferred shares of TCO in another public tender offer in October 2004, and in July 2005 we acquired additional shares of voting capital stock of TCO in a capital increase and TCO cancelled all treasury shares, bringing the percentage of TCO’s total voting capital stock we own to 90.59% and the percentage of TCO’s total capital stock we own to 52.47%.

 

The historical and pro forma financial data set forth below have been prepared in accordance with Brazilian GAAP. Brazilian GAAP differs in significant respects from generally accepted accounting principles in the United States, or U.S. GAAP.

 

    For an explanation of these differences as they relate to TCP, see note 21 to TCP’s unaudited consolidated financial statements as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005 and note 37 to TCP’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004.

 

    For an explanation of these differences as they relate to TCO see note 37 to TCO’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 and note 21 to TCO’s unaudited consolidated financial statements as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005.

 

    For an explanation of these differences as they relate to TLE see note 34 to TLE’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 and note 20 to TLE’s unaudited consolidated financial statements as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005.

 

    For an explanation of these differences as they relate to TSD see note 35 to TSD’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 and note 21 to TSD’s unaudited consolidated financial statements as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005.

 

    For an explanation of these differences as they relate to Celular CRT see note 31 to Celular CRT’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 and note 19 to Celular CRT’s unaudited consolidated financial statements as of September 30, 2005 and for the nine months ended September 30, 2004 and 2005.

 

For convenience only, some Brazilian currency amounts have been translated into U.S. dollars at a rate of R$2.2222 to U.S.$1.00, the Brazilian Central Bank’s PTAX selling rate on September 30, 2005.

 

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PART TWO—SUMMARY

 

Summary Historical TCP Financial Data

 

    As of or for the nine months ended
September 30,


    As of or for the year ended December 31,

 
    2005

    2005

    2004

    2004

    2004

    2003

    2002

 
          (unaudited)                                
    (U.S.$ millions,
except per
share data)(1)
    (R$ millions, except
per share data)
    (U.S.$ millions,
except per
share data)(1)
   

(R$ millions, except

per share data)

 

Income Statement Data:

                                         

Brazilian GAAP

                                         

Net operating revenue

  2,471.3     5,491.7     5,387.8     3,303.5     7,341.0     6,046.3     3,415.0  

Cost of services and goods sold

  (1,115.8 )   (2,479.6 )   (2,353.4 )   (1,500.8 )   (3,335.1 )   (3,020.5 )   (1,739.4 )

Gross profit

  1,355.5     3,012.1     3,034.4     1,802.7     4,005.9     3,025.8     1,675.6  

Operating expenses:

                                         

Selling expenses

  (805.9 )   (1,790.9 )   (1,318.6 )   (853.4 )   (1,896.4 )   (1,264.9 )   (526.9 )

General and administrative expenses

  (204.8 )   (455.1 )   (506.1 )   (285.7 )   (634.9 )   (561.3 )   (343.2 )

Other net operating income (expenses)

  (129.2 )   (287.0 )   (151.9 )   (71.8 )   (159.6 )   (145.0 )   (39.8 )

Operating income before equity in losses of unconsolidated subsidiary and net financial expenses

  215.6     479.1     1,057.8     591.8     1,315.0     1,054.6     765.7  

Equity in losses of unconsolidated subsidiary

  —       —       —       —       —       —       (890.7 )

Net financial expenses

  (307.8 )   (683.9 )   (751.3 )   (492.9 )   (1,095.4 )   (1,133.5 )   (808.4 )

Operating income (loss)

  (92.2 )   (204.8 )   306.5     98.9     219.6     (78.9 )   (933.4 )

Net non-operating income (expenses)

  5.4     12.0     1.4     (23.0 )   (51.2 )   (25.7 )   10.0  

Income (loss) before income taxes, minority interests and extraordinary item

  (86.8 )   (192.8 )   307.9     75.9     168.4     (104.6 )   (923.4 )

Income taxes

  (119.6 )   (265.8 )   (294.0 )   (147.2 )   (327.0 )   (277.9 )   (46.5 )

Minority interests

  (59.9 )   (133.0 )   (269.4 )   (149.2 )   (331.5 )   (257.7 )   —    

Extraordinary item, net of taxes

  —       —       —       —       —       —       (170.8 )

Net loss

  (266.3 )   (591.6 )   (255.5 )   (220.5 )   (490.1 )   (640.2 )   (1,140.7 )

Net loss per share(2)

  (0.40 )   (0.89 )   (0.00022 )   (0.00019 )   (0.00042 )   (0.00055 )   (0.00097 )

U.S. GAAP

                                         

Net operating revenue

  3,222.0     7,160.0     7,575.1     4,508.9     10,019.7     7,886.5     4,575.0  

Operating income

  309.7     688.3     1,009.9     544.2     1,209.4     1,000.8     328.8  

Net financial expenses

  (299.1 )   (664.7 )   (662.1 )   (443.6 )   (985.8 )   (375.9 )   (1,149.6 )

Equity in losses of unconsolidated subsidiaries

  —       —       —       —       —       —       (759.1 )

Net non-operating income (expenses)

  5.4     12.0     1.4     (23.0 )   (51.2 )   (25.7 )   9.8  

Income (loss) before income taxes and minority interests

  16.0     35.6     349.2     77.6     172.4     599.2     (1,570.1 )

Income taxes and minority interest

  (189.5 )   (421.1 )   (593.5 )   (302.9 )   (673.1 )   (698.0 )   74.4  

Net loss

  (173.5 )   (385.5 )   (244.3 )   (225.3 )   (500.7 )   (98.8 )   (1,495.7 )

Basic and diluted net loss per share—common and preferred(2)

  (0.27 )   (0.61 )   (0.52 )   (0.48 )   (1.08 )   (0.20 )   (5.45 )

Cash Flow Data:

                                         

Cash flows from operating activities

  392.2     871.6     872.4     588.3     1,307.3     1,459.7     984.4  

Cash flows from investing activities

  (498.5 )   (1,107.7 )   (899.1 )   (1,031.1 )   (2,291.4 )   (1,643.3 )   (3,820.5 )

Cash flows from financing activities

  43.1     95.8     376.7     452.7     1,006.1     1,324.6     2,772.3  

 

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PART TWO—SUMMARY

 

    As of or for the nine months
ended September 30,


  As of or for the year ended December 31,

    2005

  2005

  2004

  2004

  2003

  2002

    (unaudited)                
    (U.S.$ millions,
except per
share data)(1)
  (R$ millions,
except per
share data)
  (U.S.$ millions,
except per share
data)(1)
 

(R$ millions, except

per share data)

Balance Sheet Data:

                       

Brazilian GAAP

                       

Property, plant and equipment, net

  2,576.4   5,725.2   2,521.4   5,603.0   5,240.8   4,770.7

Total assets

  6,089.1   13,531.1   6.359.1   14,131.2   13,624.7   9,654.4

Loans and financing—current portion

  738.0   1,640.0   1,303.7   2,897.0   3,993.3   2,068.1

Loans and financing—non-current portion

  1,489.5   3,309.9   929.8   2,066.2   2,295.8   2,392.7

Net assets

  1,942.1   4,315.8   1,308.3   2,907.4   3,393.2   4,010.0

Capital stock

  3,001.6   6,670.2   1,968.2   4,373.7   4,373.7   4,373.7

Number of shares as adjusted to reflect changes in capital
(in thousands)(2)

  662,324   662,324   1,171,784,352   1,171,784,352   1,171,784,352   1,171,784,352

U.S. GAAP

                       

Property, plant and equipment, net

  2,618.8   5,819.4   2,542.4   5,649.7   4,738.3   2,794.5

Total assets

  6,233.2   13,851.4   6,401.9   14,226.3   13,546.5   10,202.0

Loans and financing—current portion

  741.1   1,647.0   1,308.0   2,906.6   3,993.9   2,068.1

Loans and financing—non-current portion

  1,491.7   3,314.8   940.0   2,088.8   2,311.6   2,392.7

Net assets

  1,957.5   4,350.0   1,231.0   2,735.6   3,232.0   3,307.3

Capital stock

  3,001.6   6,670.2   1,968.2   4,373.7   4,373.7   4,373.7

Number of shares as adjusted to reflect changes in capital
(in thousands)(2)

  662,324   662,324   468,714   468,714   468,714   468,714

(1) Translated for convenience only using the PTAX selling rate for U.S. dollars as reported by the Central Bank on September 30, 2005.
(2) On April 1, 2005, TCP’s shareholders approved a 2,500 for one reverse stock split of TCP’s common and preferred shares. Under Brazilian GAAP, reverse stock splits are not reflected retroactively. Had the reverse stock split been reflected retroactively, loss per share as adjusted to reflect changes in capital for the years ended December 31, 2004, 2003 and 2002 and the nine months ended September 30, 2004 would have amounted to R$1.045, R$1.365, R$2.433 and R$0.545, respectively, and the number of shares as adjusted to reflect changes in capital for the years ended December 31, 2004, 2003 and 2002 and the nine months ended September 30, 2004 would have amounted to 468,714, 468,714, 468,714 and 468,714 (in thousands of shares), respectively. Under U.S. GAAP, basic and diluted net loss per share (common and preferred) and the number of shares as adjusted to reflect changes in capital have been retroactively adjusted for all periods presented to reflect the reverse stock split.

 

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PART TWO—SUMMARY

 

Summary Historical TCO Financial Data

 

    As of or for the nine months ended
September 30,


    As of or for the year ended December 31,

 
    2005

    2005

    2004

    2004

    2004

    2003

    2002

 
          (unaudited)                                
    (U.S.$ millions,
except per
share data)(1)
   

(R$ millions, except

per share data)

    (U.S.$ millions,
except per
share data)(1)
   

(R$ millions, except

per share data)

 

Income Statement Data:

                                         

Brazilian GAAP

                                         

Net operating revenue

  766.0     1,702.2     1,601.5     994.7     2,210.4     1.958.9     1,572.1  

Cost of services and goods sold

  (328.2 )   (729.3 )   (619.3 )   (409.7 )   (910.4 )   (904.0 )   (741.8 )

Gross profit

  437.8     972.9     982.2     585.0     1,300.0     1,054.9     830.3  

Operating expenses:

                                         

        Selling expenses

  (224.9 )   (499.7 )   (340.1 )   (212.7 )   (472.7 )   (300.5 )   (215.3 )

General and administrative expenses

  (60.2 )   (133.8 )   (114.1 )   (67.1 )   (149.1 )   (193.3 )   (141.9 )

Other net operating income (expenses)

  0.6     1.3     6.3     1.4     3.1     (13.4 )   (14.6 )

Operating income before net financial income

  153.3     340.7     534.3     306.6     681.3     547.7     458.5  

Net financial income

  41.9     93.2     50.9     28.0     62.2     111.7     4.0  

Operating income

  195.2     433.9     585.2     334.6     743.5     659.4     462.5  

Net nonoperating expenses

  1.4     3.0     (2.1 )   (4.1 )   (9.1 )   (6.4 )   4.3  

Income before income taxes and minority interests

  196.6     436.9     583.1     330.5     734.4     653.0     466.8  

Income and social contribution taxes

  (72.4 )   (161.0 )   (202.4 )   (100.9 )   (224.2 )   (181.1 )   (131.5 )

Minority interests

  —       —       (3.2 )   (1.4 )   (3.2 )   (8.5 )   (6.1 )

Net income

  124.2     275.9     377.5     228.2     507.0     463.4     329.2  

Net income per share(2)

  0.95     2.12     0.00099     0.00060     0.00133     0.00124     0.00088  

Dividends declared per common share(3)—R$

  —       —       —       0.00014     0.00032     0.00030     0.00021  

Dividends declared per preferred share(3)—R$

  —       —       —       0.00014     0.00032     0.00030     0.00021  

Dividends declared per common share(3)—US$

  —       —       —       —       0.00014     0.00014     0.00009  

Dividends declared per preferred share(3)—US$

  —       —       —       —       0.00014     0.00014     0.00009  

U.S. GAAP

                                         

Net revenue

  1,047.7     2,328.2     2,277.2     1,369.7     3,043.8     2,466.5     1,890.8  

Operating income

  157.1     349.2     489.8     278.6     619.1     552.1     444.8  

Net income

  127.7     283.7     349.8     210.6     468.0     487.7     299.3  

Net income (loss) per share(2):

                                         

Common shares—basic

  0.99     2.20     2.79     1.67     3.72     3.93     2.43  

Common shares—diluted

  0.81     1.80     2.46     1.47     3.27     3.87     2.43  

Weighted average number of common shares outstanding— basic (in thousands)

  42,800,490     42,800,490     40,808,487     40,905,944     40,905,944     40,213,981     42,527,967  

Weighted average number of common shares outstanding—diluted (in thousands)

  72,078,725     72,078,725     57,449,870     54,526,923     54,526,923     41,162,605     43,523,491  

Preferred shares—basic

  1.00     2.21     2.79     1.67     3.72     3.93     2.43  

Preferred shares—diluted

  0.81     1.80     2.46     1.53     3.39     3.90     2.43  

Weighted average number of preferred shares outstanding—basic and diluted (in thousands)

  85,734,740     85,734,740     84,757,622     84,995,327     84,995,327     84,255,566     80,093,023  

Cash Flow Data:

                                         

Brazilian GAAP

                                         

Cash flows from operating activities

  168.2     373.8     459.4     303.6     674.6     625.5     615.8  

Cash flows from investing activities

  (97.5 )   (216.6 )   (285.5 )   (188.8 )   (419.6 )   502.9     (520.9 )

Cash flows from financing activities

  (18.9 )   (41.9 )   (104.0 )   (124.1 )   (275.8 )   (314.9 )   (263.1 )

 

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PART TWO—SUMMARY

 

   

As of or for the nine months

ended September 30,


  As of or for the year ended December 31,

    2005

  2005

  2004

  2004

  2003

  2002

    (unaudited)                
    (U.S.$ millions,
except per
share data)(1)
 

(R$ millions,
except per

share data)

  (U.S.$ millions,
except per
share data)(1)
 

(R$ millions, except

per share data)

Balance Sheet Data:

                       

Brazilian GAAP

                       

Property, plant and equipment, net

  509.7   1,132.7   496.9   1,104.3   891.0   891.4

Total assets

  1,711.9   3,804.3   1,618.1   3,595.7   2,654.2   2,364.7

Loans and financing—current portion

  35.2   78.2   46.2   102.7   135.0   325.0

Loans and financing—non- current portion

  28.1   62.5   55.6   123.5   233.1   302.8

Capital stock

  459.8   1,021.7   356.8   793.0   570.1   534.0

Number of shares as adjusted to reflect changes in capital (in thousands)(2)

  130,068   130,068   380,877,925   380,877,925   373,408,642   373,408,642

Net assets

  1,275.9   2,835.3   1,098.7   2,441.5   1,556.1   1,218.5

U.S. GAAP

                       

Property, plant and equipment, net

  541.9   1,204.1   407.8   906.2   811.5   811.9

Total assets

  1,729.1   3,842.4   1,626.6   3,614.7   2,655.0   2,331.7

Loans and financing—current portion

  35.2   78.2   46.2   102.7   135.0   325.0

Loans and financing—non- current portion

  28.1   62.5   55.6   123.5   213.1   302.8

Net assets

  1,286.7   2,859.3   1,122.0   2,493.3   1,545.1   1,183.3

Capital stock

  459.8   1,021.7   356.8   793.0   570.1   534.0

Number of outstanding shares as adjusted to reflect changes in capital (in thousands)(2)

  130,068   130,068   126,959   126,959   124,470   124,470

(1) Translated for convenience only using the PTAX selling rate for U.S. dollars as reported by the Central Bank on September 30, 2005.
(2) On March 31, 2005, TCO’s shareholders approved a 3,000 for one reverse stock split of TCO’s common and preferred shares. Under Brazilian GAAP, reverse stock splits are not reflected retroactively. Had the reverse stock split been reflected retroactively, income per share as adjusted to reflect changes in capital for the years ended December 31, 2004, 2003 and 2002 and the nine months ended September 30, 2004 would have amounted to R$3.993, R$3.723, R$2.645 and R$2.973, respectively, and the number of shares adjusted to reflect changes in capital for the years ended December 31, 2004, 2003, 2002 and the nine months ended September 30, 2004 would have amounted to 126,959, 124,470, 124,470 and 126,959 (in thousands of shares), respectively. Under U.S. GAAP, basic and diluted net income per share (common and preferred) and the number of shares as adjusted to reflect changes in capital have been retroactively adjusted for all periods presented to reflect the reverse stock split.
(3) Interest on shareholders’ equity is included as part of dividends and is presented net of taxes.

 

31


Table of Contents

PART TWO—SUMMARY

 

Summary of Historical TLE Financial Data

 

    As of or for the nine months ended
September 30,


    As of or for the year ended December 31,

 
    2005

    2005

    2004

    2004

    2004

    2003

    2002

 
          (unaudited)                                
    (U.S.$ millions,
except per
share data)(1)
   

(R$ millions, except

per share data)

    (U.S.$ millions,
except per
share data)(1)
   

(R$ millions, except

per share data)

 

Income Statement Data:

                                         

Brazilian GAAP

                                         

Net operating revenue

  188.4     418.7     351.6     219.2     487.0     441.3     431.4  

Cost of services and goods sold

  (105.0 )   (233.4 )   (204.5 )   (127.0 )   (282.2 )   (256.3 )   (241.4 )

Gross profit

  83.4     185.3     147.1     92.2     204.8     185.0     190.0  

Operating expenses:

                                         

Selling expenses

  (63.8 )   (141.8 )   (103.7 )   (66.2 )   (147.1 )   (145.0 )   (116.4 )

General and administrative expenses

  (19.3 )   (42.8 )   (41.8 )   (26.1 )   (57.9 )   (49.3 )   (46.8 )

Other net operating income (expenses)

  (2.1 )   (4.7 )   (4.2 )   (0.4 )   (0.9 )   (3.1 )   2.1  

Operating income before net financial income (expenses)

  (1.8 )   (4.0 )   (2.6 )   (0.5 )   (1.1 )   (12.4 )   28.9  

Net financial expenses

  (20.1 )   (44.7 )   (14.5 )   (11.1 )   (24.7 )   (30.3 )   (32.8 )

Operating loss

  (21.9 )   (48.7 )   (17.1 )   (11.6 )   (25.8 )   (42.7 )   (3.9 )

Net nonoperating income (expenses)

  0.1     0.2     (0.5 )   (0.9 )   (1.9 )   (0.7 )   (1.6 )

Loss before income taxes

  (21.8 )   (48.5 )   (17.6 )   (12.5 )   (27.7 )   (43.4 )   (5.5 )

Income and social contribution taxes

  (2.7 )   (6.0 )   (4.7 )   (3.0 )   (6.6 )   0.8     0.3  

Net loss

  (24.5 )   (54.5 )   (22.3 )   (15.5 )   (34.3 )   (42.6 )   (5.2 )

Net loss per share(2)

  (2.54 )   (5.65 )   (0.00005 )   (0.00003 )   (0.00006 )   (0.00009 )   (0.00001 )

U.S. GAAP

                                         

Net income (loss)

  (27.0 )   (59.9 )   (33.0 )   (21.9 )   (48.7 )   (6.5 )   (56.0 )

Net income (loss) per share(2):

                                         

Common shares—basic

  (2.80 )   (6.22 )   (3.43 )   (2.25 )   (5.00 )   (0.50 )   (6.00 )

Common shares—diluted

  (2.80 )   (6.22 )   (3.43 )   (2.25 )   (5.00 )   (0.50 )   (6.00 )

Weighted average of common shares outstanding—basic (thousands)

  3,352,125     3,352,125     3,340,801     3,342,604     3,342,604     3,320,156     3,320,161  

Weighted average number of common shares outstanding—diluted (thousands)

  3,352,125     3,352,125     3,340,801     8,042,937     8,042,937     6,519,624     7,183,546  

Preferred shares—basic

  (2.80 )   (6.22 )   (3.43 )   (2.25 )   (5.00 )   (0.50 )   (6.00 )

Preferred shares—diluted

  (2.80 )   (6.22 )   (3.43 )   (2.25 )   (5.00 )   (0.50 )   (6.00 )

Weighted average number of preferred shares outstanding—basic and diluted (thousands)

  6,627,392     6,627,392     6,267,722     6,267,722     6,267,722     6,267,722     6,268,740  

Cash Flow Data:

                                         

Brazilian GAAP

                                         

Cash flows from operating activities

  15.1     33.6     5.8     12.6     28.1     126.2     204.8  

Cash flows from investing activities

  (28.3 )   (62.9 )   (59.6 )   (44.6 )   (99.2 )   (65.9 )   (76.3 )

Cash flows from financing activities

  (12.9 )   (28.7 )   21.2     44.2     98.3     (82.1 )   (76.2 )

 

32


Table of Contents

PART TWO—SUMMARY

 

    As of or for the nine months
ended September 30,


  As of or for the year ended December 31,

    2005

  2005

  2004

  2004

  2003

  2002

    (unaudited)                
    (U.S.$ millions,
except per
share data)(1)
  (R$ millions,
except per
share data)
  (U.S.$ millions,
except per
share data)(1)
 

(R$ millions, except

per share data)

Balance Sheet Data:

                       

Brazilian GAAP

                       

Property, plant and equipment, net

  166.5   369.9   175.4   389.7   392.6   464.5

Total assets

  386.9   859.8   429.8   955.1   835.8   956.7

Loans and financing—current portion

  66.0   146.7   23.5   52.3   68.6   99.7

Loans and financing—non- current portion

  52.5   116.6   117.8   261.8   153.7   269.9

Capital stock

  138.1   306.8   137.9   306.4   305.4   305.4

Net assets

  144.0   320.0   168.5   374.5   401.3   443.0

Number of shares as adjusted to reflect changes in capital (in thousands)(2)

  9,644   9,644   480,618,118   480,618,118   479,393,884   479,445,039

U.S. GAAP

                       

Property, plant and equipment, net

  171.7   381.6   183.2   407.0   365.5   439.9

Total assets

  394.2   875.9   440.9   979.7   876.7   947.7

Loans and financing—current portion

  66.0   146.7   23.5   52.3   68.6   99.7

Loans and financing—non- current portion

  52.5   116.6   117.8   261.8   153.7   269.9

Capital stock

  138.1   306.8   137.9   306.4   305.4   305.4

Net assets

  146.6   325.8   173.6   385.7   430.8   437.0

Number of shares as adjusted to reflect changes in capital (in thousands)(2)

  9,644   9,644   9,612   9,612   9,588   9,589

(1) Translated for convenience only using the PTAX selling rate for U.S. dollars as reported by the Central Bank on September 30, 2005.
(2) On March 28, 2005, TLE’s shareholders approved a 50,000 for one reverse stock split of TLE’s common and preferred shares. Under Brazilian GAAP, reverse stock splits are not reflected retroactively. Had the reverse stock split been reflected retroactively, loss per share as adjusted to reflect changes in capital for the years ended December 31, 2004, 2003 and 2002 and the nine months ended September 30, 2004 would have amounted to R$3,568, R$4,443, R$0.542 and R$2.320, respectively, and the number of shares as adjusted to reflect changes in capital for the years ended December 31, 2004, 2003 and 2002 and the nine months ended September 30, 2004 would have amounted to 9,612, 9,588, 9,589 and 9,612 (in thousands of shares), respectively. Under U.S. GAAP, basic and diluted net loss per share (common and preferred) and the number of shares as adjusted to reflect changes in capital have been retroactively adjusted for all periods presented to reflect the reverse stock split.

 

33


Table of Contents

PART TWO—SUMMARY

 

Summary Historical TSD Financial Data

 

    As of or for the nine months ended
September 30,


   

As of or for the year ended

December 31,


 
    2005

    2005

    2004

    2004

    2004

    2003

    2002

 
          (unaudited)           (U.S.$ millions,
except per
share data)(1)
   

(R$ millions, except

per share data)

 
    (U.S.$ millions,
except per
share data)(1)
   

(R$ millions, except

per share data)

     

Income Statement Data:

                                         

Brazilian GAAP

                                         

Net operating revenue

  677.4     1,505.3     1,408.1     867.2     1,927.0     1,892.5     1,847.6  

Cost of services and goods sold

  (349.8 )   (777.4 )   (761.8 )   (500.6 )   (1,112.4 )   (1,052.5 )   (981.7 )

Gross profit

  327.6     727.9     646.3     366.6     814.6     840.0     865.9  

Operating expenses:

                                         

Selling expenses

  (208.0 )   (462.2 )   (360.0 )   (228.8 )   (508.5 )   (387.5 )   (392.5 )

General and administrative expenses

  (66.8 )   (148.4 )   (150.1 )   (84.5 )   (187.8 )   (224.4 )   (229.9 )

Other net operating income (expenses)

  (2.8 )   (6.3 )   (6.0 )   7.6     17.0     13.3     (17.0 )

Operating income before net financial income (expenses)

  50.0     111.0     130.2     60.9     135.3     241.4     226.5  

Net financial income (expenses)

  6.5     14.6     7.0     2.6     5.7     (15.0 )   (15.1 )

Operating income

  56.5     125.6     137.2     63.5     141.0     226.4     211.4  

Net nonoperating expenses

  0.4     0.8     (0.1 )   —       —       (8.6 )   (1.2 )

Income before income taxes

  56.9     126.4     137.1     63.5     141.0     217.8     210.2  

Income and social contribution taxes

  (21.8 )   (48.4 )   (52.5 )   (21.6 )   (48.1 )   (61.6 )   (69.8 )

Net income

  35.1     78.0     84.6     41.9     92.9     156.2     140.4  

Net income per share(2)

  0.38204     0.84897     0.00019     0.00010     0.00021     0.00036     0.00034  

Dividends declared per common share(3)—R$

  —       —       —       0.00002     0.00005     0.00008     0.00023  

Dividends declared per preferred share(3)—R$

  —       —       —       0.00002     0.00005     0.00009     0.00026  

Dividends declared per common share(3)—U.S.$

  —       —       —       —       0.00002     0.00004     0.00010  

Dividends declared per preferred share(3)—U.S.$

  —       —       —       —       0.00002     0.00004     0.00012  

U.S. GAAP

                                         

Net income

  26.8     59.6     26.1     6.2     13.7     116.8     4.0  

Net income (loss) before cumulative effect of adoption of accounting principle per share(2):

                                         

Common shares—basic

  0.28     0.62     0.28     0.068     0.15     1.30     —    

Common shares—diluted

  0.26     0.57     0.26     0.045     0.10     1.15     —    

Weighted average number of common shares outstanding—basic

  38,362,708     38,362,708     37,395,836     37,613,462     37,613,462     33,675,048     29,688,629  

Weighted average number of common shares outstanding—diluted

  48,212,179     48,212,179     44,519,513     46,175,357     46,175,357     45,500,387     44,459,559  

Preferred shares—basic

  0.31     0.69     0.30     0.068     0.15     1.40     0.05  

Preferred shares—diluted

  0.28     0.62     0.28     0.068     0.15     1.25     0.05  

Weighted average number of preferred shares outstanding—basic and diluted

  51,915,007     51,915,007     51,915,007     51,915,007     51,915,007     51,915,007     51,915,007  

Cash Flow Data:

                                         

Brazilian GAAP

                                         

Cash flows from operating activities

  129.8     214.4     277.7     196.7     437.2     737.4     756.9  

Cash flows from investing activities

  (87.1 )   (193.6 )   (126.3 )   (108.4 )   (240.8 )   (255.6 )   (370.5 )

Cash flows from financing activities

  (44.6 )   (25.0 )   (163.2 )   (101.2 )   (224.9 )   (208.7 )   (362.8 )

 

34


Table of Contents

PART TWO—SUMMARY

 

   

As of or for the nine months

ended September 30,


  As of or for the year ended December 31,

    2005

  2005

  2004

  2004

  2003

  2002

    (unaudited)                
   

(U.S.$ millions,
except per

share data)(1)

 

(R$ millions,

except per

share data)

 

(U.S.$ millions,

except per

share data)(1)

 

(R$ millions, except

per share data)

Balance Sheet Data:

                       

Brazilian GAAP

                       

Property, plant and equipment, net

  524.0   1,164.4   568.6   1,263.6   1,398.0   1,585.1

Total assets

  1,254.0   2,786.7   1,304.6   2,899.1   2,824.7   2,793.8

Loans and financing—current portion

  7.0   15.6   22.6   50.3   165.8   200.9

Loans and financing—non-current portion

  —     —     —     —     53.2   259.6

Net assets

  921.9   2,048.7   886.8   1,970.7   1,903.4   1,779.7

Capital stock

  417.6   927.9   401.2   891.5   778.8   685.3

Number of shares as adjusted to reflect changes in capital (in thousands)(2)

  91,831   91,831   449,009,994   449,009,994   432,598,218   414,006,458

U.S. GAAP

                       

Property, plant and equipment, net

  529.9   1,177.6   576.8   1,281.9   1,258.3   1,511.2

Total assets

  1,263.6   2,807.9   1,329.1   2,953.5   2,960.9   2,996.7

Loans and financing—current portion

  7.0   15.6   22.6   50.3   165.8   200.9

Loans and financing—non-current portion

  —     —     —     —     53.2   259.6

Net assets

  921.8   2,048.4   896.1   1,991.3   2,001.7   1,921.3

Number of shares as adjusted to reflect changes in capital (in thousands)(2)

  91,831   91,831   89,802   89,802   86,520   82,801

(1) Translated for convenience only using the PTAX selling rate for U.S. dollars as reported by the Central Bank on September 30, 2005.
(2) On April 1, 2005, TSD’s shareholders approved a 5,000 for one reverse stock split of TSD’s common and preferred shares. Under Brazilian GAAP, reverse stock splits are not reflected retroactively. Had the reverse stock split been reflected retroactively, income per share as adjusted to reflect changes in capital for the years ended December 31, 2004, 2003 and 2002 and the nine months ended September 30, 2004 would have amounted to R$1.034, R$1.805, R$1.696 and R$0.942, respectively, and the number of shares as adjusted to reflect changes in capital for the years ended December 31, 2004, 2003 and 2002 and the nine months ended September 30, 2004 would have amounted to 89,802, 86,520, 82,801 and 89,802 (in thousands of shares), respectively. Under U.S. GAAP, basic and diluted net income per share (common and preferred) and the number of shares as adjusted to reflect changes in capital have been retroactively adjusted for all periods presented to reflect the reverse stock split.
(3) Interest on shareholders’ equity is included as part of dividends and is presented net of taxes.

 

35


Table of Contents

PART TWO—SUMMARY

 

Summary Historical Celular CRT Financial Data

 

    As of or for the nine months ended
September 30,


    As of or for the year ended December 31,

 
    2005

    2005

    2004

    2004

    2004

    2003

    2002

 
          (unaudited)                                
    (U.S.$ millions,
except per
share data)(1)
   

(R$ millions, except

per share data)

    (U.S.$ millions,
except per
share data)(1)
   

(R$ millions, except

per share data)

 

Income Statement Data:

                                         

Brazilian GAAP

                                         

Net operating revenue

  401.6     892.4     852.4     528.4     1,174.3     1,032.7     896.3  

Cost of services and goods sold

  (189.1 )   (420.3 )   (438.7 )   (279.2 )   (620.5 )   (526.2 )   (456.6 )

Gross profit

  212.5     472.1     413.7     249.2     553.8     506.5     439.7  

Operating expenses:

                                         

Selling expenses

  (121.7 )   (270.5 )   (183.0 )   (119.2 )   (264.9 )   (171.3 )   (168.3 )

General and administrative expenses

  (34.4 )   (76.5 )   (71.6 )   (43.0 )   (95.6 )   (89.3 )   (83.1 )

Other net operating income (expenses)

  3.4     7.8     18.7     12.3     27.3     (3.9 )   18.3  

Operating income before net financial income (expenses)

  59.8     132.9     177.8     99.3     220.6     242.0     206.6  

Net financial income (expenses)

  14.9     33.2     28.0     11.6     25.8     17.7     7.5  

Operating income

  74.7     166.1     205.8     110.9     246.4     259.7     214.1  

Net nonoperating expenses

  (1.0 )   (2.3 )   (3.2 )   (3.5 )   (7.7 )   (1.2 )   (3.7 )

Income before income taxes

  73.7     163.8     202.6     107.4     238.7     258.5     210.4  

Income and social contribution taxes

  (26.7 )   (59.4 )   (70.7 )   (25.5 )   (56.7 )   (69.1 )   (62.8 )

Net income

  47.0     104.4     131.9     81.9     182.0     189.4     147.6  

Net income per share(2)

  1.4     3.2     0.042     0.02583     0.05739     0.06107     0.04953  

Dividends declared per common share(3)—R$

  —       —       —       0.01011     0.02246     0.01424     0.01138  

Dividends declared per preferred share(3)—R$

  —       —       —       0.01112     0.02470     0.01566     0.01252  

Dividends declared per common share(3)—U.S.$

  —       —       —       —       0.01011     0.00641     0.00512  

Dividends declared per preferred share(3)—U.S.$

  —       —       —       —       0.01112     0.00705     0.00563  

U.S. GAAP

                                         

Net income

  47.5     105.6     123.0     76.1     169.0     283.3     52.8  

Net income per share(2):

                                         

Common shares—basic

  1.40     3.13     3.69     2.30     5.08     8.73     1.71  

Common shares—diluted

  1.02     2.27     2.87     1.70     3.70     6.46     1.04  

Weighted average number of common shares outstanding—basic

  13,727,168     13,727,168     13,278,320     13,336,348     13,336,348     12,507,868     11,285,041  

Weighted average number of common shares outstanding—diluted

  26,394,416     26,394,416     22,801,747     25,702,368     25,702,367     23,868,997     30,884,109  

Preferred shares—basic

  1.55     3.44     4.06     2.50     5.56     9.57     1.84  

Preferred shares—diluted

  1.13     2.50     3.16     1.83     4.07     7.10     1.14  

Weighted average number of outstanding basic and diluted shares

  18,202,337     18,202,337     18,201,880     18,201,880     18,201,880     18,201,880     18,201,880  

Cash Flow Data:

                                         

Brazilian GAAP

                                         

Cash flows from operating activities

  85.3     189.6     257.6     161.0     368.7     464.7     363.6  

Cash flows from investing activities

  73.5     (163.4 )   (106.9 )   (92.0 )   (204.4 )   (142.9 )   (112.5 )

Cash flows from financing activities

  44.9     (99.7 )   (58.7 )   (66.1 )   (157.7 )   (140.9 )   (91.5 )

 

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PART TWO—SUMMARY

 

    As of or for the nine months
ended September 30,


  As of or for the year ended December 31,

    2005

  2005

  2004

  2004

  2003

  2002

    (unaudited)                
    (U.S.$ millions,
except per
share data)(1)
  (R$ millions,
except per
share data)
  (U.S.$ millions,
except per
share data)(1)
 

(R$ millions except per

share data)

Balance Sheet Data:

                       

Brazilian GAAP

                       

Property, plant and equipment, net

  334.1   742.4   334.4   743.1   734.9   786.3

Total assets

  814.7   1,810.5   865.0   1,922.1   1,739.5   1,678.7

Loans and financing—current portion

  3.3   7.3   48.9   108.7   105.1   140.9

Loans and financing—non-current portion

  60.0   133.3   71.7   159.3   288.5   476.5

Net assets

  550.9   1,224.2   477.7   1,061.6   954.9   817.7

Capital stock

  147.4   327.5   115.8   257.3   157.9   134.5

Number of shares as adjusted to reflect changes in capital (in thousands)(2)

  32,642   32,642   3,171,151   3,171,151   3,100,825   2,979,769

U.S. GAAP

                       

Property, plant and equipment, net

  340.7   757.2   339.0   753.3   743.1   797.4

Total assets

  819.8   1,821.7   869.9   1.933.1   1,764.6   1,681.0

Loans and financing—current portion

  3.3   7.4   48.9   108.7   105.1   140.9

Loans and financing—non-current portion

  60.0   133.3   159.3   71.7   288.5   476.5

Net assets

  553.0   1,228.9   479.3   1,065.2   971.5   742.0

Number of shares as adjusted to reflect changes in capital (in thousands)(2)

  32,642   32,642   31,712   31,712   31,008   29,798

(1) Translated for convenience only using the PTAX selling rate for U.S. dollars as reported by the Central Bank on September 30, 2005.
(2) On March 30, 2005, Celular CRT’s shareholders approved a 100 for one reverse stock split of Celular CRT’s common and preferred shares. Under Brazilian GAAP, reverse stock splits are not reflected retroactively. Had the reverse stock split been reflected retroactively, income per share as adjusted to reflect changes in capital for the years ended December 31, 2004, 2003 and 2002 and the nine months ended September 30, 2004 would have amounted to R$5.739, R$6.108, R$4.953 and R$4.159, respectively, and the number of shares as adjusted to reflect changes in capital for the years ended December 31, 2004, 2003 and 2002 and the nine months ended September 30, 2004 would have amounted to 31,712, 31,008, 29,798 and 31,712 (in thousands of shares), respectively. Under U.S. GAAP, basic and diluted net income per share (common and preferred) and the number of shares as adjusted to reflect changes in capital have been retroactively adjusted for all periods presented to reflect the reverse stock split.
(3) Interest on shareholders’ equity is included as part of dividends and is presented net of taxes.

 

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PART TWO—SUMMARY

 

Summary of Unaudited Pro Forma Combined Financial Data

 

    Pro forma(1)

 
   

As of or for the nine months

ended September 30,


    As of or for the year ended December 31,

 
    2005

    2005

    2004

    2004

    2003

 
    (U.S.$ millions,
except per
share data(2))
   

(R$ millions,
except per

share data)

   

(U.S.$ millions,
except per

share data(2))

   

(R$ millions, except

per share data)

 
    (Unaudited)  

Income Statement Data:

                             

Brazilian GAAP

                             

Net operating revenue

  3,738.7     8,308.1     4,918.3     10,929.3     9,393.5  

Cost of services and goods sold

  (1,759.8 )   (3,910.7 )   (2,407.7 )   (5,350.3 )   (4,836.1 )

Gross profit

  1,978.9     4,397.4     2,510.6     5,579.0     4,557.4  

Operating expenses:

                             

Selling expenses

  (1,199.4 )   (2,665.4 )   (1,267.6 )   (2,816.9 )   (1,968.7 )

General and administrative expenses

  (325.3 )   (722.8 )   (439.3 )   (976.1 )   (924.4 )

Other net operating expenses

  (130.6 )   (290.2 )   (84.6 )   (187.9 )   (138.7 )

Operating income before equity in losses of unconsolidated subsidiary and net financial expenses

  323.6     719.0     719.1     1,598.1     1,525.6  

Net financial expenses

  (306.3 )   (680.8 )   (489.8 )   (1,088.6 )   (1,161.1 )

Operating income (loss)

  17.3     38.2     229.3     509.5     364.5  

Net non-operating expenses

  4.8     10.7     (27.4 )   (60.9 )   (36.1 )

Income (loss) before income taxes, minority interests and extraordinary item

  22.1     48.9     201.9     448.6     328.4  

Income taxes

  (170.9 )   (379.6 )   (197.3 )   (438.5 )   (407.8 )

Minority interests

  —       —       —       —       (257.7 )

Net income (loss)

  (148.8 )   (330.7 )   4.6     10.1     (337.1 )

Net income (loss) per share

  (0.10 )   (0.23 )   0.01     0.01     (0.39 )

U.S. GAAP

                             

Net income (loss)

  (192.9 )   (428.7 )   (217.4 )   (483.0 )   248.8  

Basic net income (loss) per share outstanding (reais)

  (0.14 )   (0.31 )   (0.18 )   (0.39 )   0.29  

Diluted net income (loss) per share outstanding (reais)

  (0.14 )   (0.31 )   (0.18 )   (0.39 )   0.24  

Balance Sheet Data:

                             

Brazilian GAAP

                             

Property, plant and equipment, net

  3,600.9     8,001.9                    

Total assets

  8,534.4     18,965.2                    

Loans and financing

  2,416.3     5,369.5                    

Net assets

  4,039.9     8,977.4                    

Capital stock

  4,185.6     9,301.2                    

Number of shares as adjusted to reflect changes in capital (in thousands)

  1,426,412     1,426,412                    

U.S. GAAP

                             

Shareholders’ equity (in thousands)

  5,885.9     13,079.6                    

(1) The unaudited pro forma combined statements of loss for the nine months ended September 30, 2005 and the years ended December 31, 2004 and 2003 combine the historical consolidated statements of income of TCP, TLE, TSD and Celular CRT, giving effect to (1) the merger with respect to the proportionate interest in the Targets under common control as if it had been consummated on December 27, 2002 and (2) the acquisitions of the minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on January 1, 2004. The unaudited pro forma combined balance sheet as of September 30, 2005 combines the historical consolidated balance sheets of TCP, TLE, TSD and Celular CRT, giving effect to (1) the merger with respect to the proportionate interest in the Targets under common control as if it had been consummated on December 27, 2002, the date these companies came under common control, and (2) the acquisitions of the minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on September 30, 2005.
(2) Translated for convenience only using the PTAX selling rate for U.S. dollars as reported by the Central Bank on September 30, 2005.

 

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PART TWO—SUMMARY

 

Ratio of Earnings to Fixed Charges

 

The table below provides the historical ratio of earnings to fixed charges for each of TCP, TCO, TLE, TSD and Celular CRT, and the pro forma ratio of earnings to fixed charges of the New TCP for the periods indicated.

 

For purposes of calculation of the ratio of earnings to fixed charges, earnings consist of:

 

    income (loss) before income taxes and minority interest;

 

    plus fixed charges (as defined below) and amortization of capitalized interest;

 

    minus interest capitalized and, in the case of TCP, preference share dividend requirements of consolidated subsidiaries payable to third parties.

 

Fixed charges consist of interest costs (expensed or capitalized), amortized premiums, discounts and capitalized expenses related to indebtedness, an estimate of the interest component of rent expense and, in the case of TCP, preferred share dividend requirements of consolidated subsidiaries payable to third parties.

 

Further details on the calculation of the ratios set forth below are provided in Exhibit 12.1 of the registration statement of which this prospectus is a part, which you can obtain as described in “Part Seven: Additional Information for Shareholders—Where You Can Find More Information.”

 

Period


   Historical

   Pro forma

 
   TCP

    TCO

   TLE

    TSD

   Celular
CRT


   New TCP

 

Brazilian GAAP

                                 

Year ended December 31, 2003

   —   (1)   20.54x    —   (2)   4.96x    14.30x    1.55x (3)

Year ended December 31, 2004

   1.38x     38.43x    —   (2)   15.76x    21.20x    2.51x (4)

Nine months ended September 30, 2005

   —   (1)   45.50x    —   (2)   58.50x    26.76x    1.29x (4)

U.S. GAAP

                                 

Year ended December 31, 2003

   1.84x     21.66x    2.39x     4.45x    21.39x    2.75x  

Year ended December 31, 2004

   1.31x     35.14x    —   (5)   4.71x    19.35x    —   (4)(6)

Nine months ended September 30, 2005

   1.09x     45.97x    —   (5)   49.03x    26.29x    —   (4)(6)

(1) In the year ended December 31, 2003 and in the nine months ended September 30, 2005, TCP had deficiencies of R$146.2 million and R$177.2 million, respectively.
(2) In the years ended December 31, 2003 and 2004 and in the nine months ended September 30, 2005, TLE had deficiencies of R$37.5 million, R$25.0 million and R$44.6 million, respectively.
(3) Gives effect to the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002. The unaudited pro forma combined ratio of earnings to fixed charges was prepared for illustrative purposes only.
(4) Gives effect to (a) the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002 and (b) the acquisitions of the minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on January 1, 2004. The unaudited pro forma combined ratio of earnings to fixed charges was prepared for illustrative purposes only.
(5) In the year ended December 31, 2004 and in the nine months ended September 30, 2005, TLE had deficiencies of R$46.9 million and R$52.2 million, respectively.
(6) In the year ended December 31, 2004 and in the nine months ended September 30, 2005, the New TCP would have had deficiencies of R$342.5 million and R$49.0 million, respectively.

 

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Table of Contents

PART TWO—SUMMARY

 

Summary Comparative Per Share Data

 

We present below book value, cash dividend and income (loss) from continuing operations per share data on both a historical basis and an unaudited pro forma combined basis under Brazilian GAAP and U.S. GAAP.

 

We have derived the unaudited pro forma combined information appearing below from the unaudited pro forma combined financial data appearing elsewhere in this prospectus.

 

You should read the information below together with the historical and pro forma financial data of TCP and the historical financial statements of TCP, TCO, TLE, TSD and Celular CRT appearing elsewhere in this prospectus. The unaudited pro forma combined financial data appearing below is for illustrative purposes only. TCP, TCO, TLE, TSD and Celular CRT may have performed differently had they always been a combined entity. You should not rely on this information as being indicative of the actual results of that the combined businesses of these companies will experience after the merger.

 

For more information about historical dividend payments by TCP, TCO, TLE, TSD and Celular CRT, see “Part Six: Shareholder Rights—Information About Historical Dividend Payments.”

 

Brazilian GAAP

 

    Year ended December 31, 2003

 
    (Historical)

  (Pro forma)

 
    TCP

    TCO

  TLE

    TSD

  Celular
CRT


  New TCP

    TCO
per share
equivalent
(1)


    TLE
per share
equivalent
(1)


    TSD
per share
equivalent
(1)


   

Celular
CRT

per share
equivalent
(1)


 
    (Reais)  

Cash dividends declared per thousand common shares(2)

  —       0.30   —       0.09   14.24   —   (3)   —       —       —       —    

Cash dividends declared per thousand preferred shares(2)

  —       0.30   —       0.08   15.66   —   (3)   —       —       —       —    

Income (loss) per share (common/ preferred) from continuing operations

  (0.00055 )   0.00124   (0.00009 )   0.00036   0.06107   (0.39 )(3)   (1.20 )   (1.52 )   (1.28 )   (2.74 )

(1) The TCO, TLE, TSD and Celular CRT per share equivalent data are calculated by multiplying the New TCP pro forma per share amounts by 3.0830, 3.8998, 3.2879 and 7.0294, respectively, representing the number of TCP common shares or preferred shares that will be received for each TCO, TLE, TSD and Celular CRT common share or preferred share, respectively, in the merger, assuming that none of the applicable entitled shareholders of TCP, TCO, TLE, TSD or Celular CRT exercises appraisal rights.
(2) Interest on shareholders’ equity is included and is presented net of taxes. After the pro forma adjustments described in “Part Five: The Merger—Unaudited Pro Forma Combined Financial Information,” pro forma net income of TCP and TLE under Brazilian GAAP were negative for the period. Therefore, no dividends would have been payable on a pro forma basis for the period.
(3) Gives effect to the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002, the date these companies came under common control. The unaudited pro forma combined financial data were prepared for illustrative purposes only.

 

40


Table of Contents

PART TWO—SUMMARY

 

    Year ended December 31, 2004

    (Historical)

  (Pro forma)

    TCP

    TCO

  TLE

    TSD

  Celular
CRT


  New TCP

   

TCO

per share
equivalent
(1)


 

TLE

per share
equivalent
(1)


 

TSD

per share
equivalent
(1)


 

Celular
CRT

per share
equivalent
(1)


    (Reais)

Book value per thousand shares (common/preferred)

  2.48     6.41   0.78     4.39   334.77   5.89 (2)   18.16   22.97   19.37   41.40

Cash dividends declared per thousand common shares(3)

  —       0.32   —       0.05   22.46   —   (4)   —     —     —     —  

Cash dividends declared per thousand preferred shares(3)

  —       0.32   —       0.05   24.70   —   (4)   —     —     —     —  

Income (loss) per share (common/preferred) from continuing operations

  (0.00042 )   0.00133   (0.00006 )   0.00021   0.05739   0.00708 (4)   0.02183   0.02761   0.02328   0.04977

(1) The TCO, TLE, TSD and Celular CRT per share equivalent data are calculated by multiplying the New TCP pro forma per share amounts by 3.0830, 3.8998, 3.2879 and 7.0294, respectively, representing the number of TCP common shares or preferred shares that will be received for each TCO, TLE, TSD and Celular CRT common share or preferred share, respectively, in the merger, assuming that none of the applicable entitled shareholders of TCP, TCO, TLE, TSD or Celular CRT exercises appraisal rights.
(2) Gives effect to (1) the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002, the date these companies came under common control, and (2) the acquisitions of minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on December 31, 2004. The unaudited pro forma combined financial data were prepared for illustrative purposes only.
(3) Interest on shareholders’ equity is included and is presented net of taxes. After the pro forma adjustments described in “Part Five: The Merger—Unaudited Pro Forma Combined Financial Information,” pro forma net income of TCP and TLE under Brazilian GAAP were negative for the period. Therefore, no dividends would have been payable on a pro forma basis for the period.
(4) Gives effect to (1) the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002 and (2) the acquisitions of the minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on January 1, 2004. The unaudited pro forma combined financial data were prepared for illustrative purposes only.

 

41


Table of Contents

PART TWO—SUMMARY

 

    Nine months ended September 30, 2005(1)

 
    (Historical)

  (Pro forma)

 
    TCP

    TCO

  TLE

    TSD

  Celular
CRT


  New TCP

   

TCO

per share
equivalent
(2)


   

TLE

per share
equivalent
(2)


   

TSD

per share
equivalent
(2)


   

Celular
CRT

per share
equivalent
(2)


 
    (Reais)  

Book value per share (common/preferred)

  6.52     21.80   33.18     22.31   37.50   6.29 (3)   19.40     24.54     20.69     44.24  

Income (loss) per share (common/preferred) from continuing operations

  (0.89 )   2.12   (5.65 )   0.85   3.20   (0.23 )(4)   (0.71 )   (0.90 )   (0.76 )   (1.62 )

(1) No dividends or interest on shareholders’ equity were declared in the period.
(2) The TCO, TLE, TSD and Celular CRT per share equivalent data are calculated by multiplying the New TCP pro forma per share amounts by 3.0830, 3.8998, 3.2879 and 7.0294, respectively, representing the number of TCP common shares or preferred shares that will be received for each TCO, TLE, TSD and Celular CRT common share or preferred share, respectively, in the merger, assuming that none of the applicable entitled shareholders of TCP, TCO, TLE, TSD or Celular CRT exercises appraisal rights.
(3) Gives effect to (1) the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002, the date these companies came under common control, and (2) the acquisitions of minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on September 30, 2005. The unaudited pro forma combined financial data were prepared for illustrative purposes only.
(4) Gives effect to (1) the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002 and (2) the acquisitions of the minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on January 1, 2004. The unaudited pro forma combined financial data were prepared for illustrative purposes only.

 

42


Table of Contents

PART TWO—SUMMARY

 

U.S. GAAP

 

    Year ended December 31, 2003(1)

    (Historical)

  (Pro forma)

    TCP

    TCO

  TLE

    TSD

  Celular
CRT


  New
TCP


    TCO
per share
equivalent
(2)


  TLE
per share
equivalent
(2)


  TSD
per share
equivalent
(2)


 

Celular
CRT

per share
equivalent
(2)


    (Reais)

Cash dividends declared per thousand common shares(3)

      0.90       0.45   1.78   (4)        

Cash dividends declared per thousand preferred shares(3)

      0.90       0.41   1.92   (4)        

Income (loss) per share (basic common) from continuing operations

  (0.20 )   3.93   (0.50 )   1.30   8.73   0.29 (4)   0.89   1.12   0.95   2.02

Income (loss) per share (basic preferred) from continuing operations

  (0.20 )   3.93   (0.50 )   1.40   9.57   0.29 (4)   0.89   1.12   0.95   2.02

Income (loss) per share (diluted common) from continuing operations

  (0.20 )   3.87   (0.50 )   1.15   6.46   0.24 (4)   0.74   0.94   0.79   1.69

Income (loss) per share (diluted preferred) from continuing operations

  (0.20 )   3.90   (0.50 )   1.25   7.10   0.24 (4)   0.74   0.94   0.79   1.69

(1) In 2005, the shareholders of each of TCO, TLE, TSD and Celular CRT effected a reverse stock split of their common and preferred shares. Amounts in this table are adjusted to reflect such reverse stock splits.
(2) The TCO, TLE, TSD and Celular CRT per share equivalent data are calculated by multiplying the New TCP pro forma per share amounts by 3.0830, 3.8998, 3.2879 and 7.0294, respectively, representing the number of TCP common shares or preferred shares that will be received for each TCO, TLE, TSD and Celular CRT common share or preferred share, respectively, in the merger, assuming that none of the applicable entitled shareholders of TCP, TCO, TLE, TSD or Celular CRT exercises appraisal rights.
(3) Interest on shareholders’ equity is included and is presented net of taxes. Historical cash dividends and interest on shareholders’ equity declared for purposes of U.S. GAAP for TCO, TLE, TSD and Celular CRT are the same as presented above under Brazilian GAAP because each of TCO, TLE, TSD and Celular CRT pays dividends only based on its results in accordance with the Brazilian corporation law. After the pro forma adjustments described in “Part Five: The Merger — Unaudited Pro Forma Combined Financial Information,” pro forma net income of TCP and TLE under Brazilian GAAP were negative for the period. Therefore, no dividends would have been payable on a pro forma basis for the period.
(4) Gives effect to the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002, the date these companies came under common control. The unaudited pro forma combined financial data were prepared for illustrative purposes only.

 

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PART TWO—SUMMARY

 

    Year ended December 31, 2004(1)

 
    (Historical)

  (Pro forma)

 
    TCP

    TCO

  TLE

    TSD

  Celular
CRT


 

New

TCP


   

TCO

per share
equivalent
(2)


   

TLE

per share
equivalent
(2)


   

TSD

per share
equivalent
(2)


   

Celular
CRT

per share
equivalent
(2)


 
    (Reais)  

Book value per share (common/preferred)

  5.84     19.64   40.12     22.17   33.59   9.12 (3)   28.12     35.57     29.99     64.11  

Cash dividends declared per thousand common shares(4)

  —       0.96   —       2.30   2.27   —   (5)   —       —       —       —    

Cash dividends declared per thousand preferred shares(4)

  —       0.96   —       2.55   2.47   —   (5)   —       —       —       —    

Income (loss) per share (basic common) from continuing operations

  (1.08 )   3.72   (5.00 )   0.15   5.08   (0.39 )(5)   (1.21 )   (1.53 )   (1.29 )   (2.75 )

Income (loss) per share (basic preferred) from continuing operations

  (1.08 )   3.72   (5.00 )   0.15   5.56   (0.39 )(5)   (1.21 )   (1.53 )   (1.29 )   (2.75 )

Income (loss) per share (diluted common) from continuing operations

  (1.08 )   3.27   (5.00 )   0.10   3.70   (0.39 )(5)   (1.21 )   (1.53 )   (1.29 )   (2.75 )

Income (loss) per share (diluted preferred) from continuing operations

  (1.08 )   3.39   (5.00 )   0.15   4.07   (0.39 )(5)   (1.21 )   (1.53 )   (1.29 )   (2.75 )

(1) In 2005, the shareholders of each of TCO, TLE, TSD and Celular CRT effected a reverse stock split of their common and preferred shares. Amounts in this table are adjusted to reflect such reverse stock splits.
(2) The TCO, TLE, TSD and Celular CRT per share equivalent data are calculated by multiplying the New TCP pro forma per share amounts by 3.0830, 3.8998, 3.2879 and 7.0294, respectively, representing the number of TCP common shares or preferred shares that will be received for each TCO, TLE, TSD and Celular CRT common share or preferred share, respectively, in the merger, assuming that none of the applicable entitled shareholders of TCP, TCO, TLE, TSD or Celular CRT exercises appraisal rights.
(3) Gives effect to (1) the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002, the date these companies came under common control, and (2) the acquisitions of the minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on December 31, 2004. The unaudited pro forma combined financial data were prepared for illustrative purposes only.
(4) Interest on shareholders’ equity is included and is presented net of taxes. Historical cash dividends and interest on shareholders’ equity declared for purposes of U.S. GAAP for TCO, TLE, TSD and Celular CRT are the same as presented above under Brazilian GAAP because each of TCO, TLE, TSD and Celular CRT pays dividends only based on its results in accordance with the Brazilian corporation law. After the pro forma adjustments described in “Part Five: The Merger — Unaudited Pro Forma Combined Financial Information,” pro forma net income of TCP and TLE under Brazilian GAAP were negative for the period. Therefore, no dividends would have been payable on a pro forma basis for the period.
(5) Gives effect to (1) the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002 and (2) the acquisitions of the minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on January 1, 2004. The unaudited pro forma combined financial data were prepared for illustrative purposes only.

 

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    Nine months ended September 30, 2005(1)

 
    (Historical)

  (Pro forma)

 
    TCP

    TCO

  TLE

    TSD

  Celular
CRT


  New
TCP


    TCO
per share
equivalent
(2)


    TLE
per share
equivalent
(2)


    TSD
per share
equivalent
(2)


   

Celular
CRT

per share
equivalent
(2)


 
    (Reais)  

Book value per share (common/preferred)

  6.57     21.98   33.78     22.31   37.65   9.17 (3)   28.27     35.76     30.15     64.46  

Income (loss) per share (basic common) from continuing operations

  (0.61 )   2.20   (6.22 )   0.62   3.13   (0.31 )(4)   (0.94 )   (1.19 )   (1.01 )   (2.15 )

Income (loss) per share (diluted common) from continuing operations

  (0.61 )   1.80   (6.22 )   0.57   2.27   (0.31 )(4)   (0.94 )   (1.19 )   (1.01 )   (2.15 )

Income (loss) per share (basic preferred) from continuing operations

  (0.61 )   2.21   (6.22 )   0.69   3.44   (0.31 )(4)   (0.94 )   (1.19 )   (1.01 )   (2.15 )

Income (loss) per share (diluted preferred) from continuing operations

  (0.61 )   1.80   (6.22 )   0.62   2.50   (0.31 )(4)   (0.94 )   (1.19 )   (1.01 )   (2.15 )

(1) No dividends or interests on shareholders’ equity were declared in the period.
(2) The TCO, TLE, TSD and Celular CRT per share equivalent data are calculated by multiplying the New TCP pro forma per share amounts by 3.0830, 3.8998, 3.2879 and 7.0294, respectively, representing the number of TCP common shares or preferred shares that will be received for each TCO, TLE, TSD and Celular CRT common share or preferred share, respectively, in the merger, assuming that none of the applicable entitled shareholders of TCP, TCO, TLE, TSD or Celular CRT exercises appraisal rights.
(3) Gives effect to (1) the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002, the date these companies came under common control, and (2) the acquisitions of minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on September 30, 2005. The unaudited pro forma combined financial data were prepared for illustrative purposes only.
(4) Gives effect to (1) the merger with respect to the proportionate interest in TLE, TSD and Celular CRT under common control with TCP as if the merger had been consummated on December 27, 2002 and (2) the acquisitions of the minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on January 1, 2004. The unaudited pro forma combined financial data were prepared for illustrative purposes only.

 

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Exchange Rates

 

Brazilian Central Bank Rates

 

The following tables set forth information regarding the real/U.S. dollar exchange rate for the periods indicated. The Central Bank allows the real/U.S. dollar exchange rate to float freely but has sometimes intervened to control unstable fluctuations in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to let the real float freely or will intervene in the exchange rate market through a currency band system or otherwise. The real may depreciate or appreciate against the U.S. dollar substantially in the future. For more information on these risks, see “Part Three: Risk Factors—Risks Relating to Brazil—Brazilian government exchange control policies could adversely affect our ability to make payments on foreign currency-denominated debt” and “—Fluctuations in the value of the real against 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 common shares, preferred shares and ADSs.”

 

Before March 4, 2005, there were two legal foreign exchange markets in Brazil, the commercial rate exchange market and the floating rate exchange market. Although these markets were used for different purposes, the exchange rates in those markets were generally the same or very similar. On March 4, 2005, the National Monetary Counsel (Conselho Monetário Nacional) unified the two markets. For periods prior to March 4, 2005, the tables below reflect the selling rate in the commercial rate exchange market.

 

On January 20, 2006, the selling rate was R$2.2756 per U.S.$1.00.

 

     Exchange rate of R$ per U.S.$

     Low

   High

   Average(1)

   Period end

Year ended December 31, 2000

   1.7234    1.9847    1.8295    1.9554

Year ended December 31, 2001

   1.9357    2.8007    2.3522    2.3204

Year ended December 31, 2002

   2.2709    3.9552    2.9309    3.5333

Year ended December 31, 2003

   2.8219    3.6623    3.0715    2.8892

Year ended December 31, 2004

   2.6544    3.2051    2.9171    2.6544

Year ended December 31, 2005

   2.1633    2.7621    2.4341    2.3407

 

Source: U.S. dollar selling rate as published by the Central Bank on its electronic information system, SISBACEN, using transaction PTAX 800, Option 5.

(1) Represents the average of the exchange rates on the last day of each month during the relevant period.

 

    

Exchange rate of

R$ per U.S.$


Month ended


   Low

   High

July 2005

   2.3304    2.4656

August 2005

   2.2767    2.4316

September 2005

   2.2222    2.3623

October 2005

   2.2339    2.2886

November 2005

   2.1633    2.2516

December 2005

   2.1800    2.3735

January 2006 (through January 20, 2006)

   2.2632    2.3460

 

Source: U.S. dollar selling rate as published by the Central Bank on its electronic information system, SISBACEN, using transaction PTAX 800 Option 5.

 

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Federal Reserve Bank of New York Rates

The following tables show, for the periods indicated, certain information regarding the real/U.S. dollar exchange rate, based on the noon buying rate of the Federal Reserve Bank of New York. As of January 20, 2006, the noon buying rate was R$2.2780 to U.S.$1.00.

 

     Exchange Rate of R$ per U.S.$

     Low

   High

   Average(1)

   Period end

Year ended December 31, 2000

   1.7230    1.9840    1.8350    1.9510

Year ended December 31, 2001

   1.9380    2.7880    2.3530    2.3120

Year ended December 31, 2002

   2.2650    3.9450    2.9945    3.5400

Year ended December 31, 2003

   3.6640    2.8270    3.0584    2.8950

Year ended December 31, 2004

   3.2085    2.6510    2.9146    2.6550

Year ended December 31, 2005

   2.1695    2.7755    2.4352    2.3340

 

Source: Federal Reserve Bank of New York


(1) Average of the noon buying rate on the last day of each month in the period.
     Exchange rate of
R$ per U.S.$


Month ended


   Low

   High

July 2005

   2.3265    2.4430

August 2005

   2.2745    2.4500

September 2005

   2.2125    2.3645

October 2005

   2.2295    2.2868

November 2005

   2.1688    2.2546

December 2005

   2.1695    2.3755

January 2006 (through January 20, 2006)

   2.2564    2.3320

 

Source: Federal Reserve Bank of New York

 

Historical and Pro Forma Share Information

The following table shows the closing prices of the common shares, preferred shares and ADSs of TCP, TCO, TLE, TSD and Celular CRT, as well as the equivalent value of TCO, TLE, TSD and Celular CRT common shares and preferred shares and TCO, TLE and TSD ADSs based on the merger ratio, as of December 2, 2005, the last trading day preceding public announcement of this transaction.

     December 2, 2005

     (Actual)

   (Actual)

   (Per share equivalent)

     TCP    TCO    TLE    TSD    Celular
CRT
   TCO    TLE    TSD    Celular
CRT
    
  
  
  
  
  
  
  
  

Common shares(1) (reais)

   8.50    25.50    15.90    18.77    42.00    26.21    33.15    27.95    59.75

Preferred shares(2) (reais)

   9.20    24.50    17.30    19.50    57.00    28.36    35.88    30.25    64.67

ADSs(3) (U.S.$)

   4.14    11.09    7.80    8.83    —      12.76    13.61    16.15    —  

Source: São Paulo Stock Exchange; Bloomberg.


(1) The TCO, TLE, TSD and Celular CRT common share per share equivalent data are calculated by multiplying the TCP actual amounts by 3.0830, 3.8998, 3.2879 and 7.0294, the number of TCP common shares that will be received for each TCO, TLE, TSD and Celular CRT common share, respectively, in the merger.

 

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(2) The TCO, TLE, TSD and Celular CRT preferred share per share equivalent data are calculated by multiplying the TCP actual amounts by 3.0830, 3.8998, 3.2879 and 7.0294, the number of TCP preferred shares that will be received for each TCO, TLE, TSD and Celular CRT preferred share, respectively, in the merger.
(3) The TCO, TLE and TSD ADS per share equivalent data are calculated by multiplying the TCP actual amounts by 3.0830, 3.8998 and 3.2879, the number of TCP ADSs that will be received for each TCO, TLE and TSD ADS, respectively, in the merger.

 

We urge you to obtain current market quotations.

 

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Risks Relating to the Merger

 

We may have actual or potential conflicts of interest relating to the merger.

 

We may have actual or potential conflicts of interest because our controlling shareholders exercise voting control over the board of directors of each of TCO, TLE, TSD and Celular CRT. We have not negotiated the terms of this merger with any person acting on behalf of the minority shareholders of TCO, TLE, TSD or Celular CRT.

 

The TCP securities you receive in the merger will represent an investment in a fundamentally different business from that in which you originally invested.

 

You will receive TCP common shares or TCP preferred shares, or TCP ADSs, for your common shares or preferred shares of TCO, TLE, TSD or Celular CRT, or your ADSs of TCO, TLE or TSD, respectively, in the merger. TCO, TLE, TSD and Celular CRT will all combine with TCP pursuant to separate mergers. This combined entity, which will be renamed “Vivo Participações S.A.” will be a significantly larger company than any of TCP, TCO, TLE, TSD or Celular CRT, will operate in 19 states throughout Brazil and the Federal District, and will have a different financial condition, results of operations and business prospects than any of TCP, TCO, TLE, TSD or Celular CRT individually.

 

Because we are a larger company than any of TCO, TLE, TSD and Celular CRT, and the combined Vivo Participações S.A. will be even larger, your ownership percentage in our company will, as a result of the merger, be less than from your ownership percentage in TCO, TLE, TSD or Celular CRT.

 

You should be aware that because we are a larger company than any of TCO, TLE, TSD and Celular CRT and the combined Vivo Participações S.A. will be even larger, your ownership percentage of our company will be different from the one you have as a shareholder of TCO, TLE, TSD or Celular CRT. Assuming that none of the common shareholders of TCP, TCO, TLE, TSD and Celular CRT, and none of the preferred shareholders of TCP and TSD exercises appraisal rights, former minority shareholders of TCO, TLE, TSD and Celular CRT will hold approximately 13.40%, 1.30%, 1.91% and 5.04%, respectively, of the total capital stock of our company in the aggregate following the merger. Similarly, the percentage of the outstanding capital stock of TCP held by existing minority shareholders of TCP will decrease from 33.91% to 15.79%.

 

In addition, TCP is obligated to issue shares to its controlling shareholder for the amount of a tax benefit realized as a result of a corporate restructuring completed in 2000. TCP expects to issue new shares in respect of this tax benefit in each year until 2010. This issuance of shares may further dilute your holdings of TCP in the future if you do not exercise your preemptive rights (direitos de preferência) in the capital increase. See note 34 to TCP’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 incorporated by reference in this prospectus. Also, if you hold TCP ADSs after the merger, you may not be able to exercise preemptive rights in these capital increases. See “—Specific Risks Relating to Our ADSs—Holders of ADSs may be unable to exercise preemptive rights with respect to our preferred shares underlying the ADSs.”

 

The merger may not result in the benefits that TCP seeks to achieve, including increased share liquidity.

 

TCP is undertaking the merger because it believes that the merger will provide the VIVO companies and their shareholders with a number of advantages, including providing shareholders of TCP, TCO, TLE, TSD and Celular CRT with securities that TCP expects will enjoy greater market liquidity than the securities they currently hold. However, the merger may not accomplish these objectives. TCP cannot predict whether a liquid market for the securities of the New TCP will be maintained. If the merger does not result in increased liquidity for the securities held by shareholders of TCP and the Targets, you may experience a decrease in your ability to sell your shares or ADSs compared to your ability to sell the shares or ADSs you currently hold.

 

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As a result of the merger, TCP will assume the liabilities of TLE, TSD and Celular CRT and will assume all the risks relating to those liabilities.

 

You should be aware that because TCP will assume the liabilities of TLE, TSD and Celular CRT as a result of the merger of these Targets with TCP, any existing known or unknown financial obligation, legal liability or other contingent liability or risk of each of TLE, TSD and Celular CRT will become the responsibility of TCP. These liabilities could cause TCP to be required to make payments, incur charges or take other actions that could adversely affect TCP’s financial position and results of operations and the price of TCP’s securities. As a result, you should carefully consider the information about each of TLE, TSD and Celular CRT that is included in this prospectus, including, without limitation, the audited consolidated financial statements and the unaudited condensed consolidated interim financial statements of each company included in this prospectus and the information set forth in “Item 3.D. Risk Factors” in the Annual Reports on Form 20-F for the Fiscal Year Ended December 31, 2004 of TLE and TSD that are incorporated by reference in this prospectus.

 

We will be more leveraged than any of TCO, TSD or Celular CRT, and a significant portion of our cash flow will have to be used to service our obligations.

 

As of September 30, 2005, TCP, TCO, TSD and Celular CRT had R$5,369.5 million of consolidated total debt on a pro forma basis, only R$140.7 million of which was attributable to TCO, R$263.3 million to TLE, R$15.6 million to TSD and R$140.7 million to Celular CRT. We are subject to the risks normally associated with significant amounts of debt, which could have important consequences to you. Our indebtedness could, among other things:

 

    require us to use a substantial portion of our cash flow from operations to pay our obligations, thereby reducing the availability of our cash flow to fund working capital, operations, capital expenditures, dividend payments, strategic acquisitions, expansion of our operations and other business activities;

 

    increase our vulnerability to general adverse economic and industry conditions;

 

    limit, along with financial and other restrictive covenants in our debt instruments, our ability to borrow additional funds or dispose of assets; and

 

    place us at a competitive disadvantage compared to our competitors that have less debt.

 

We may also need to refinance all or a portion of our debt on or before maturity, and we may not be able to do this on commercially reasonable terms or at all.

 

The exercise of appraisal rights by shareholders of TCP and the Targets could decrease cash balances of the companies and otherwise adversely affect their financial condition.

 

As described in “Part Five: The Merger—Appraisal or Dissenters’ Rights,” holders of record of common shares of TCP, TCO, TLE, TSD and Celular CRT, and holders of record of preferred shares of TCP and TSD, at the close of business on December 2, 2005 are entitled to appraisal rights in connection with the merger and have the right to receive the amounts per share set forth in that section. If holders of a significant number of these shares exercise their appraisal rights, the requirement to make large cash payments could decrease the cash balances of the companies, limit their ability to borrow funds or fund capital expenditures or prevent the companies from complying with existing contractual obligations. In addition, under the Brazilian corporation law, if management believes that the total value of the appraisal rights exercised by shareholders of TCP, TCO, TLE, TSD and Celular CRT may put at risk the financial stability of New TCP, management may, within 10 days after the end of the appraisal rights period, call a general meeting of shareholders to unwind the merger. Because it holds, directly or indirectly, a majority of the voting shares of TCP, TCO, TLE, TSD and Celular CRT, Brasilcel would be able to cause the unwinding of the merger at the applicable general shareholders’ meetings.

 

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We do not anticipate being able to pay dividends in 2005 and possibly in subsequent years.

 

TCP did not pay dividends in 2001, 2002, 2003 or 2004 because of losses incurred from our equity investment in Global Telecom in those years. We recorded a net loss of R$591.6 million in the nine months ended September 2005, and we expect that we will record a net loss for the year ended December 31, 2005. If we record a net loss in 2005, we will not pay dividends for that year. We may also record net losses in subsequent years and be unable to pay dividends in those years. See “Part Five: The Merger—Unaudited Pro Forma Combined Financial Information.”

 

You are being offered a fixed number of shares or ADSs, which involves the risk of market fluctuations.

 

You will receive a fixed number of shares or ADSs in the merger, rather than a number of shares or ADSs with a fixed market value. Consequently, the market values of our shares and ADSs, of the shares and ADSs of TCO, TLE and TSD, and of the shares of Celular CRT may fluctuate significantly from the date of this prospectus to the date of completion of the mergers.

 

On December 2, 2005, the last trading day before announcement of the merger:

 

    the last reported closing price on the São Paulo Stock Exchange for TCP common shares was R$8.50, and the market value of 3.0830 TCP common shares (the number of common shares to be received for each TCO common share in the merger) was R$26.21, the market value of 3.8998 TCP common shares (the number of common shares to be received for each TLE common share in the merger) was R$33.15, the market value of 3.2879 TCP common shares (the number of common shares to be received for each TSD common share in the merger) was R$27.95 and the market value of 7.0294 TCP common shares (the number of common shares to be received for each Celular CRT common share in the merger) was R$59.75;

 

    the last reported closing price on the São Paulo Stock Exchange for TCP preferred shares was R$9.20, the market value of 3.0830 TCP preferred shares (the number of preferred shares to be received for each TCO preferred share in the merger) was R$28.36, the market value of 3.8998 TCP preferred shares (the number of preferred shares to be received for each TLE preferred share in the merger) was R$35.88, the market value of 3.2879 TCP preferred shares (the number of preferred shares to be received for each TSD preferred share in the merger) was R$30.25 and the market value of 7.0294 TCP preferred shares (the number of preferred shares to be received for each Celular CRT preferred share in the merger) was R$64.67; and

 

    the last reported closing price on the New York Stock Exchange for TCP ADSs was U.S.$4.14, and the market value of 3.0830 TCP ADSs (the number of ADSs to be received for each TCO ADS in the merger) was U.S.$12.76, the market value of 3.8998 TCP ADSs (the number of ADSs to be received for each TLE ADSs in the merger) was U.S.$13.61 and the market value of 3.2879 TCP ADSs (the number of ADSs to be received for each TSD ADS in the merger) was U.S.$16.15.

 

The CVM, the Brazilian securities regulator, may suspend for up to 15 days the shareholders’ meetings scheduled to approve the merger.

 

The CVM may suspend for up to 15 days the shareholders’ meetings scheduled to approve the merger in order to analyze the transaction and verify that it does not breach applicable laws or regulations.

 

In 2003, a proposed merger that would have resulted in TCO becoming a wholly owned subsidiary of TCP was enjoined by the CVM on grounds that the transaction was not fair in relation to the preferred shareholders of TCO.

 

Although we believe that the proposed merger described in this prospectus is legal and provides equitable treatment to TCP, TCO, TLE, TSD and Celular CRT, we cannot predict the outcome of any such analysis of the transaction by the CVM.

 

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There is no clear guidance under Brazilian law regarding the income tax consequences to investors resulting from a merger.

 

There is no specific legislation, nor administrative or judicial precedent regarding the income tax consequences to investors resulting from a merger. Based on the opinion of its external tax advisors, TCP believes that there are reasonable legal grounds to sustain that the receipt (resulting from the merger) by a non-Brazilian holder of ADSs or by a U.S. person of common or preferred shares that are registered as a foreign portfolio investment under Resolution 2,689/00 of the National Monetary Council or are registered as a foreign direct investment under Law No. 4,131/62 would not be subject to income tax pursuant to Brazilian tax law. However, this position may not prevail, in which case TCP would be liable to the Brazilian tax authorities for withholding and collecting the taxable capital gains of shareholders resident abroad. While such shareholders would not be directly liable to Brazilian tax authorities, TCP would be entitled to reimbursements from them. For more details on the taxation of capital gains in Brazil, see “Part Five: The Merger—Material Tax Considerations—Brazilian Tax Considerations.”

 

The capital gain arising from a disposition of TCP shares registered as a direct foreign investment in Brazil could be calculated based on the historical amount in Brazilian currency of the investment, rather than the amount in foreign currency registered with the Central Bank of Brazil.

 

There is uncertainty concerning the currency to be used for the purposes of calculating the cost of acquisition of shares registered with the Central Bank of Brazil as a direct investment. Even though a recent precedent of a Brazilian administrative court supports the view that capital gains should be based on the positive difference between the cost of acquisition of the shares in the applicable foreign currency and the value of disposition of those shares in the same foreign currency, tax authorities are not bound by such precedents. For more details on the taxation of capital gains in Brazil, see “Part Five: The Merger—Material Tax Considerations.”

 

Risks Relating to the Brazilian Telecommunications Industry and Our Business

 

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 telecommunications services. Anatel, which is the main telecommunications industry regulator in Brazil, regulates, among other things:

 

    industry policies and regulations;

 

    licensing;

 

    prices;

 

    competition;

 

    telecommunications resource allocation;

 

    service standards;

 

    technical standards;

 

    interconnection and settlement arrangements; and

 

    universal service obligations.

 

This extensive regulation and the conditions imposed by our authorizations to provide telecommunications services may limit our flexibility in responding to market conditions, competition and changes in our cost structure.

 

 

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Our results have been affected, and may continue to be affected in the medium and long term, as a result of the new SMP rules.

 

In 2002, Anatel changed the Personal Mobile Service (Serviço Móvel Pessoal), or SMP, regime (first enacted in December 2000), encouraging companies operating under the Mobile Cellular Service (Serviço Móvel Celular), or SMC, regime to migrate to the SMP regime.

 

Under the SMP regime, we no longer receive payment from our customers for outbound long distance traffic but receive payment for the use of our network in accordance with a network usage remuneration plan. However, the interconnection fees that we receive from long distance operators may not compensate us for the revenues that we would have received from our customers for outbound long distance traffic. See “Part Four: Information on the VIVO Companies—Management Overview—Industry Factors—Recent Regulatory Changes.” Until June 30, 2004, SMP service providers were able to opt to establish a price cap or freely negotiate their interconnection charges. Now, free negotiation is the rule, subject to Anatel regulations relating to the traffic capacity and interconnection infrastructure that must be made available to requesting parties.

 

In addition, under the SMP regime, an SMP operator used to pay for the use of another SMP operator’s network in the same registration area only if the traffic carried from the first operator to the second exceeded 55% of the total traffic exchanged between them. In that case, only those calls that surpassed the 55% level were subject to payment for network usage. As a result, if the traffic we terminate for other SMP operators exceeds the traffic they terminate for our company, our revenues and results of operations may be affected. In the nine months ended September, 30, 2005, for example, this regulatory change contributed to a decrease in our revenues from interconnection fees charged to other companies. See “Part Four: Information on the VIVO Companies—Management’s Discussion and Analysis of Financial Condition and Results of Operations of TCP.”

 

At various times, there have been discussions about reversing the billing system described in the previous paragraph or, alternatively, taking it further by eliminating all payments for network usage between SMP networks. We cannot predict whether the current regulatory regime will remain in place or whether any future regulatory change could have an adverse effect on our results of operations.

 

If the inflation adjustment index now applied to our prices is changed, the new index may not be adequate.

 

The Brazilian government currently uses the General Price Index, or the IGP-DI (the Índice Geral de Preços—Disponibilidade Interna), an inflation index developed by the Fundação Getúlio Vargas, a private Brazilian economic organization, in connection with the prices charged in the telecommunications industry. Beginning in 2007, we expect the Brazilian government to begin to regulate the telecommunications industry based on a model that would analyze companies’ costs based on a hypothetical company’s costs and other factors. In connection with the introduction of this model, the Brazilian government may use a different inflation adjustment mechanism, the IST index (Índice de Serviços de Telecomunicações), beginning in 2008. If this new inflation adjustment mechanism, or any other mechanism chosen by the Brazilian government in the future, does not adequately reflect the true effect of inflation on our prices, our results of operations could be adversely affected.

 

Anatel’s proposal regarding the consolidation of prices could have an adverse effect on our results.

 

Anatel has proposed new regulations on interconnection rules, some of which could have an adverse effect on our results. The public consultation period on Anatel’s proposal ended on October 18, 2004, but final regulations have not been promulgated. The proposals that may adversely affect our results are (1) a proposal that two SMP providers controlled by the same economic group receive only one interconnection charge (VU-M) for calls originated and terminated in their networks rather than the current two VU-Ms, (2) a proposal for new negotiation rules for VU-M prices in which Anatel would have a role in determining prices rather than the

 

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current free negotiation of prices and (3) a proposal for VU-M price unification among SMP providers of the same economic group having significant market power according to a criteria still to be defined. If these regulations take effect, they would have an adverse effect on our results of operations because (1) our interconnection charges would drop significantly, thereby reducing our revenues, (2) Anatel may allow more favorable prices for economic groups without significant market power and (3) the prices we charge in some regions in which we operate are higher than those in some other regions, and consolidation of those prices, competitive pressures and other factors would reduce our average prices and thereby reduce our revenues.

 

We face substantial competition that has reduced our market share and has negatively affected our results of operations.

 

There is substantial competition in the telecommunications industry. We not only compete with companies that provide SMP service and trunking but also with companies that provide fixed-line telecommunications and Internet access services, due to the trend towards the convergence and substitution of SMP services for these other 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 and 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. If we do not keep pace with technological advances, or if we fail to respond timely to changes in competitive factors in our industry, we could continue to lose market share and could suffer a decline in our revenue. Competition from other SMP communications service providers in the regions in which we operate has also affected, and may continue to affect, our financial results by causing, among other things, a decrease in our customer growth rate, decreases in prices and increases in selling expenses.

 

These factors have already contributed to a negative effect on our market share and our results of operations and could have a material adverse effect on our business and results of operations in the future. As a result of competitive pressures, for example, our market share decreased from 54.0% as of September 30, 2004 to 46.5% as of September 30, 2005, and our market share of net additions to our customer base decreased from 43.7% for the nine months ended September 30, 2004 to 23.6% for the nine months ended September 30, 2005. In addition, our net additions of customers decreased 43.2% from the nine months ended September 30, 2004 to the nine months ended September 30, 2005. See “Part Four: Information on the VIVO Companies—Management’s Discussion and Analysis of Financial Condition and Results of Operations of TCP—TCP’s Consolidated Results of Operations for the Nine Months Ended September 30, 2004 and 2005—Operating Data.” Similarly, the market share of TCO, TLE, TSD and Celular CRT in their authorized areas declined in the same period, and the market share of net additions to the customer base of these companies declined significantly. Net additions of customers of each of these companies also declined significantly from the nine months ended September 30, 2004 to the nine months ended September 30, 2005. In addition, our selling expenses for the nine months ended September 30, 2005 grew at a significantly higher rate than our net operating revenue compared to the nine months ended September 30, 2004, and similar trends existed at each of TCO, TLE, TSD and Celular CRT.

 

Recently, there has been consolidation in the Brazilian telecommunications market, and we believe this trend may continue. Consolidation may result in increased competitive pressures within our market. We may be unable to respond adequately to pricing pressures resulting from consolidation, which would adversely affect our business, financial condition and results of operations.

 

In September 2004, Brasil Telecom, the fixed-line incumbent in nine states in Brazil and the Federal District (Anatel’s Region II), launched GSM operations in those states. Brasil Telecom’s authorization area overlaps with

 

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TCO’s in the Brazilian Federal District and in the states of Acre, Goias, Mato Grosso, Mato Grosso do Sul, Rondonia and Tocantins, overlaps with all of Global Telecom’s authorization area (the states of Paraná and Santa Catarina) and overlaps with Celular CRT’s authorization area. The entrance of Brasil Telecom into these markets will increase the competition that Global Telecom, Celular CRT and TCO face in some states. Brasil Telecom has announced that its marketing strategy will be the convergence between its fixed and mobile services, and it is the only company in those states that offers both fixed and cellular services. The entrance of Brasil Telecom into the cellular markets in these states will increase competition for Global Telecom, Celular CRT and TCO and could have a material adverse effect on our results of operations.

 

Our results of operations have been negatively affected by a decrease in our customer growth and could also be affected if our rate of customer turnover increases.

 

Our rate of acquisition of new customers has declined significantly, primarily due to competition and increased market penetration. For example, our net additions of customers decreased 43.2% from the nine months ended September 30, 2004 to the nine months ended September 30, 2005 due to a decrease in the rate of addition of new prepaid customers to 1,530,000 new prepaid customers in the nine months ended September 30, 2005, compared to 2,982,000 new prepaid customers in the comparable period of the prior year. This decrease in the rate of new additions of customers has negatively affected our results of operations and could continue to do so in the future. In addition, if our rate of customer turnover were to increase significantly, our results of operations and or competitive position could be adversely affected. Several factors in addition to competitive pressures could influence our rate of acquisition of new customers and our rate of customer turnover, including limited network coverage, lack of sufficient reliability of our services and 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.

 

Certain debt agreements of our subsidiaries, including TCO, and of TLE, TSD and Celular CRT and their subsidiaries contain financial covenants, and any default under such debt agreements may have a material adverse effect on our financial condition and cash flows.

 

Certain existing debt agreements contain restrictions and covenants and require the maintenance or satisfaction of specified financial ratios and tests. After the merger, the ability of our subsidiaries to meet these financial ratios and tests can be affected by events beyond our and their control, and we cannot assure you that they will meet those tests. Failure to meet or satisfy any of these covenants, financial ratios or financial tests could result in an event of default under these agreements. The existing debt agreements also contain cross-default provisions, so that in certain circumstances, if an event of default occurs under any subsidiary’s agreement, the lenders could elect to declare all amounts outstanding under all of such subsidiary’s agreements to be immediately due and payable, enforce their interests against collateral pledged under the agreements and, in certain circumstances, restrict their ability to make additional borrowings.

 

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In addition, the debt instruments of some of our subsidiaries and of operating subsidiaries of TLE and Celular CRT contain restrictions on the incurrence of further indebtedness. As a result of these covenants and the covenants described above, the ability of our subsidiaries to obtain additional financing after the merger, if needed, may be significantly restricted, and we and they may be prevented from engaging in transactions that might otherwise be beneficial to us.

 

Our controlling shareholders have a great deal of influence over our business.

 

As of September 30, 2005, PT Móveis S.G.P.S., S.A. and Telefónica Móviles, S.A., our principal shareholders, own through Brasilcel, directly and indirectly, approximately 92.51% of our common shares and 66.09% of our total capital stock. PT Móveis is a wholly owned subsidiary of Portugal Telecom. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders” in our Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004, which is incorporated by reference into this prospectus. Our principal shareholders have the power to control us and our subsidiaries, including the power to elect the majority of our directors and officers and determine the outcome of any action requiring shareholder approval, including in certain circumstances transactions with related parties, corporate reorganizations and the timing and payment of our dividends.

 

In addition, Portugal Telecom and Telefónica Móviles share their participation in us equally. Any disagreement or dispute between them may have an impact on the decision-making capabilities of our management.

 

Brasilcel and its subsidiaries will hold no less than 89.03% of our common shares after the merger, assuming that none of the common shareholders of TCP, TCO, TLE and Celular CRT, and none of the common and preferred shareholders of TSD, exercises appraisal rights in connection with the merger.

 

Improper use of our network can adversely affect our costs and results of operations.

 

We incur costs associated with the unauthorized use of our wireless networks, including administrative and capital costs associated with detecting, monitoring and reducing the incidence of fraud. Fraud also affects interconnection costs, capacity costs and payments to other carriers for unbillable fraudulent roaming. See “Item 4.B. Business Overview—Fraud Detection and Prevention” of our Annual Report on Form 20-F for the fiscal year ended December 31, 2004, which is incorporated by reference in this prospectus, for more information regarding the improper use of our network and our efforts to prevent it.

 

Improper use of our network can also increase our selling expenses if we have to increase our provision for doubtful accounts to reflect amounts we do not believe we can collect for improperly made calls. Our subsidiary TCO, for example, recently increased its provision for doubtful accounts more than TLE, TSD and Celular CRT because of previously undetected improper use of TCO’s network. See “Part Four: Information on the VIVO Companies—Management’s Discussion and Analysis of Financial Condition and Results of Operations of TCO.” Any unexpected increase in the improper use of our network in the future could materially adversely affect our costs and results of operations.

 

The cellular industry, including our company, 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 cellular handsets and base stations may cause health problems. If consumers harbor health-related concerns, they may be discouraged from using cellular handsets. These concerns could have an adverse effect on the cellular communications industry and, possibly, expose cellular providers, including our company, to litigation. We cannot predict whether further medical research and studies will refute a link between the radio frequency emissions of cellular handsets and

 

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base stations and these health concerns. Government authorities could increase regulation of cellular handsets and base stations as a result of these health concerns or cellular companies, including our company, 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.

 

Our investment in Global Telecom S.A. has adversely affected, and is expected to continue to adversely affect, our financial performance.

 

Our investment in Global Telecom presents operational and financial risks. Global Telecom started operations in 1999, and its principal competitor in its authorization area has been in operation for a longer period of time and has a larger market share in that area. Global Telecom has had substantial net losses (R$176.7 million in the nine months ended September 30, 2005, R$180.3 million in 2004, R$436.0 million in 2003 and R$771.1 million in 2002) resulting in significant part from capital expenditures, indebtedness and increased expenses in connection with the rapid expansion of its network infrastructure and upgrading of its marketing and commercial capabilities.

 

Since we acquired Global Telecom, Global Telecom’s net losses have negatively affected our financial results. The net losses of Global Telecom described above, as well as the expenses arising from indebtedness we incurred to finance our acquisition of that company, contributed to net losses for our company of R$591.5 million in the nine months ended September 30, 2005, R$490.1 million in 2004, R$640.2 million in 2003 and R$1,140.7 million in 2002. On December 27, 2002, we acquired the remaining shares of Global Telecom and now fully consolidate it in our consolidated financial statements.

 

We expect our investment in Global Telecom to continue to have a material effect on our financial condition and results of operations, in part due to the indebtedness we incurred to make that investment.

 

We face risks associated with litigation.

 

We and our subsidiaries are party to a number of lawsuits and other proceedings. 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.

 

These lawsuits include actions seeking payment by TCO’s subsidiary Telegoiás in the amount of R$24.1 million and by TCO’s former subsidiary Telebrasília Celular S.A., or Telebrasília, (since merged into TCO) in the amount of R$41.3 million, plus adjustment for exchange variations in each case and contractual penalties, on Telecomunicações Brasileiras S.A.—TELEBRAS, or Telebrás, loans assigned to those companies in connection with the privatization of the Telebrás system. The Court of Appeals of the Federal District rendered decisions unfavorable to TCO in these actions, and TCO filed an appeal to the Superior Court of Justice and has been awaiting trial since May 2004. On December 17, 2004, the plaintiff in these actions initiated an enforcement proceeding, claiming the amounts owed to be R$91.5 million from TCO and R$59.3 million from Telegoiás. On August 31, 2005, TCO and Telegoiás filed a motion to stay the enforcement, in which they challenge the amounts claimed by the plaintiff. The motion has not yet been examined by the Judge.

 

Several other lawsuits involving regulatory, intellectual property, tax and other matters are described in “Item 8.A. Consolidated Statements and Other Financial Information—Legal Matters” of our Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004, which is incorporated by reference into this prospectus.

 

In addition, after the effectiveness of the merger, we will assume the liabilities of TLE, TSD and Celular CRT, including the risks they face from litigation. See “—Risks Relating to the Merger—As a result of the merger, TCP will assume the liabilities of TLE, TSD and Celular CRT and will assume all the risks relating to those liabilities.”

 

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We may be required to record impairment charges relating to goodwill and long-lived assets in the future for purposes of U.S. GAAP.

 

For U.S. GAAP purposes, we are required to test our goodwill for impairment at least annually. The difference between the book value of a company and its market value may indicate that an impairment exists. This impairment test is described in note 21.k to our unaudited condensed consolidated interim financial statements included in this prospectus. TCP, in particular, has substantial goodwill, including goodwill relating to TCO with a carrying value of R$735.0 million as of September 30, 2005. We expect that we may be required to record impairment charges relating to our goodwill in future periods, and this would have an adverse effect on our results of operations.

 

In addition, we are required to record impairment charges on long-lived assets, including property, plant and equipment and finite-lived intangible assets (including concessions) if the carrying value of those assets exceeds their fair market value for purposes of U.S. GAAP. This annual impairment test is also described in note 21.k to our unaudited condensed consolidated interim financial statements included in this prospectus. When we performed our last impairment test, our evaluation of our ability to recover the carrying value of our long-lived assets was based upon projections of future operations that assumed a higher level of revenues and gross margin percentages than we have historically achieved. We may not be successful in achieving these improvements in our revenues and gross margin percentages due to the competitive environment, changes in technology or other factors. If we are unable to achieve these improvements, we may be required to record impairment charges relating to our long-lived assets in future periods, and this could have an adverse effect on our operations.

 

Risks Relating to Our Securities

 

Holders of our common shares, preferred shares or ADSs may not receive any dividends.

 

According to the Brazilian corporation law and our bylaws, we must generally pay dividends to all shareholders of at least 25% of our annual net income, as determined and adjusted under the Brazilian corporation law. These adjustments to net income for purposes of calculating the basis for dividends include allocations to various reserves that effectively reduce the amount available for the payment of dividends. However, we were unable to pay minimum dividends in for the fiscal years ended December 31, 2001, 2002, 2003 and 2004 because we had net losses, and we expect to have net losses in the fiscal year ended December 31, 2005. In addition, the Brazilian corporation law permits us to elect not to pay dividends to our shareholders in any particular fiscal year if our board of directors determines that such distributions would be inadvisable in light of our financial condition. See “Part Six: Shareholder Rights—Description of TCP Capital Stock—Allocations of Profits.”

 

Since we are a holding company, our income consists of distributions from our subsidiaries in the form of dividends or other advances and payments. We do not generate our own operating revenues, and we are dependent on dividends and other advances and payments for our cash flow, including to make any dividend payments or to make payments on our indebtedness.

 

Our preferred shares and our ADSs representing preferred shares generally do not have voting rights.

 

In accordance with the Brazilian corporation law and our bylaws, holders of our preferred shares, and therefore of our ADSs representing preferred shares, are not entitled to vote at meetings of our shareholders, except in limited circumstances.

 

Our bylaws state that holders of preferred shares will have full voting rights in the event that we do not pay minimum dividends to those shareholders for three consecutive fiscal years, and those shareholders will retain those voting rights until we again pay minimum dividends. Because we did not pay minimum dividends for the

 

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years ended December 31, 2001, 2002 and 2003, the holders of preferred shares have been able to exercise voting rights since the general shareholders’ meeting held in March 2004. We did not pay minimum dividends in 2004. However, once we again pay minimum dividends, those voting rights will cease.

 

Exchange controls and restrictions on remittances abroad may adversely affect holders of our common shares, preferred shares or ADSs.

 

Brazilian law provides that whenever there is a significant imbalance in Brazil’s balance of payments or a significant possibility that such imbalance will exist, the Brazilian government may impose temporary restrictions on the remittance to foreign investors of the proceeds of their investment in Brazil (as it did for approximately six months in 1989 and early 1990) and on the conversion of Brazilian currency into foreign currencies. These restrictions could hinder or prevent the Brazilian custodian of the preferred shares underlying the ADSs, or direct holders of preferred shares or common shares from converting dividends, distributions or the proceeds from any sale of such shares into U.S. dollars and remitting such U.S. dollars abroad. In such an event, the Brazilian custodian for our preferred shares underlying ADSs will hold the reais that it cannot convert for the account of holders of the ADSs who have not been paid. Neither the custodian nor the depositary will be required to invest the reais or be liable for any interest.

 

Holders of our common shares, preferred shares or ADSs may face difficulties in serving process on or enforcing judgments against us and other persons.

 

We are organized under the laws of Brazil, and most of our directors and executive officers and our independent public accountants reside or are based in Brazil or other countries outside United States jurisdiction. Substantially all of our assets and those of these other persons are located in Brazil or such other countries. As a result, it may not be possible for holders of the common shares, the preferred shares or the ADSs to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders of our common shares, preferred shares or ADSs may face greater difficulties in protecting their interests with respect to actions by us or our directors or executive officers than would shareholders of a U.S. corporation.

 

Actual or anticipated sales of a substantial number of our common shares or preferred shares could decrease the market prices of our common shares or preferred shares and ADSs, respectively.

 

Sales of a substantial number of our common shares or preferred shares could negatively affect the market prices of our common shares or preferred shares and ADSs, respectively. If, in the future, existing or future holders of common shares or preferred shares make substantial sales of shares, the market price of our common shares or preferred shares and ADSs, respectively, may decrease significantly. As a result, holders of the common shares, preferred shares or ADSs may not be able to sell them at a price equal or higher than the price they paid for them.

 

The relative volatility and illiquidity of the Brazilian securities markets may adversely affect holders of our common shares, preferred shares or ADSs.

 

Investments in securities, such as our common shares, our preferred shares and our ADSs, of issuers from emerging market countries, including Brazil, involve a higher degree of risk than investments 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 common shares or the preferred shares at a price and time at which holders wish to do so. The São Paulo Stock

 

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Exchange had a market capitalization of U.S.$472.9 billion as of September 30, 2005, and an average monthly trading volume of approximately U.S.$12.3 billion for the first nine months of 2005. In comparison, the NYSE had a domestic market capitalization of U.S.$13.2 trillion (excluding funds and non-U.S. companies) as of September 30, 2005, and an average monthly trading volume of approximately U.S.$54.9 billion for the first nine months of 2005.

 

There is also 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 52.9% of the aggregate market capitalization of the São Paulo Stock Exchange as of September 30, 2005. The top ten stocks in terms of trading volume accounted for approximately 51.3% of all shares traded on the São Paulo Stock Exchange. A liquid and active market may never develop for our common shares, preferred shares or the ADSs, and as result the ability of holders to sell at the desired price or time may be significantly hindered.

 

Holders of our common shares, preferred shares or ADSs may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company and our shareholders may have fewer and less well-defined rights.

 

Our corporate affairs are governed by our bylaws and the Brazilian corporation law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, or elsewhere outside Brazil. The rights under Brazilian corporation law of a holder of our common shares or preferred shares to protect its interests with respect to actions by us or our directors or executive officers may be fewer and less well-defined than under the laws of those other jurisdictions. In addition, holders of the ADSs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our bylaws and the Brazilian corporation law.

 

Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our common shares, preferred shares or ADSs at a potential disadvantage. In addition, the disclosure required of public companies in Brazil may be less complete or informative than that required of public companies in the United States or in certain other countries.

 

Specific Risks Relating to our ADSs

 

Important Note: Celular CRT does not have an ADS program, and no holder of Celular CRT common shares or preferred shares will receive TCP ADSs.

 

Holders of the ADSs may find it difficult to exercise their voting rights at our shareholders’ meetings.

 

Holders of our ADSs may exercise the limited voting rights with respect to our preferred shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional steps involved in communicating with ADS holders. For example, we are required to publish a notice of our shareholders’ meetings in certain newspapers in Brazil. To the extent that holders of our preferred shares are entitled to vote at a shareholders’ meeting, they will be able to exercise their voting rights by attending the meeting in person or voting by proxy. By contrast, holders of the ADSs will receive notice of a shareholders’ meeting by mail from the depositary following our notice to the depositary requesting the depositary to do so, and they may not receive voting materials in time to instruct the depositary to vote the preferred shares underlying their ADSs. To exercise their voting rights, ADS holders must instruct the depositary on a timely basis. If voting instructions for all or

 

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part of the ADSs are not received timely by the depositary, the depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of the ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of the ADSs may not be able to exercise voting rights, and will have no recourse if the preferred shares underlying their ADSs are not voted as requested.

 

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 the appropriate registration, either under Resolution 2,689/00 of the Brazilian National Monetary Council (Conselho Monetário Nacional), known as Resolution 2,689, and CVM Instruction 325/00 or under Law No. 4,131/62, as described in “Part Six: Shareholder Rights—Description of TCP Capital Stock—Exchange Controls and Central Bank Registration.”

 

If a former holder of ADSs is not registered under Resolution 2,689, it may be subject to less favorable tax treatment on distributions in relation to our preferred shares. See “Part Five: The Merger—Material Tax Considerations—Brazilian Tax Considerations.”

 

Holders of ADSs may be subject to Brazilian income tax on gains from dispositions of ADSs.

 

Brazilian Law No. 10,833, dated December 29, 2003, provides that gains on the disposition of assets located in Brazil by non-residents of Brazil, whether to other non-residents or to Brazilian residents, will be subject to Brazilian taxation. The common shares and preferred shares are expected to be treated as “assets located in Brazil” for purposes of the law, and gains on the disposition of common shares and preferred shares, even by non-residents of Brazil, are expected to be subject to Brazilian taxation. In addition, the ADSs may be treated as “assets located in Brazil” for purposes of the law, and therefore gains on the disposition of ADSs by non-residents of Brazil may also be subject to Brazilian taxation. Although the holders of ADSs outside Brazil may have grounds to assert that Law No. 10,833 does not apply to sales or other dispositions of ADSs, it is not possible to predict whether that understanding will ultimately prevail in the courts of Brazil, given the general and unclear scope of Law No. 10,833 and the absence of judicial court rulings in respect thereto. See “Part Five: The Merger—Material Tax Considerations—Brazilian Tax Considerations.”

 

Holders of ADSs may be unable to exercise preemptive rights with respect to our preferred shares underlying the ADSs.

 

Holders of ADSs will be unable to exercise the preemptive rights relating to our preferred shares underlying ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We may not be obligated to file a registration statement with respect to the shares relating to those preemptive rights or to take any other action to make preemptive rights available to holders of ADSs, and we may not file any such registration statement. If we do not file a registration statement or if we and the depositary decide not to make preemptive rights available to holders of ADSs, those holders may receive only the net proceeds from the sale of their preemptive rights by the depositary, or if they are not sold, their preemptive rights will lapse.

 

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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 common shares, preferred shares and ADSs.

 

In the past, the Brazilian economy has experienced unstable economic cycles, and the Brazilian government has intervened in the Brazilian economy and occasionally made drastic changes in policy. To influence the course of Brazil’s economy, control inflation and effect other policies, the Brazilian government has taken various actions, including using wage and price controls, currency devaluations, capital and exchange controls, limits on imports and blocking access to bank accounts. We have no control over, and cannot predict, what measures or policies the Brazilian government may take in the future. Our business, financial condition, results of operations and the market price of our common shares, preferred shares and ADSs may be adversely affected by changes in government policies, as well as general economic factors, including, without limitation:

 

    fluctuations in exchange rates;

 

    inflation;

 

    exchange control policies;

 

    gross domestic product growth;

 

    social and political instability;

 

    liquidity of domestic capital and lending markets;

 

    price instability;

 

    energy shortages;

 

    interest rates;

 

    tax policies; and

 

    other political, diplomatic, social and economic developments in or affecting Brazil.

 

Uncertainty as to future government policies may contribute to an increase in the volatility of the Brazilian securities markets and securities issued abroad by Brazilian companies. The Brazilian economy grew 5.2% in 2004 and 0.5% and 1.9% in 2003 and 2002, respectively. Due to the limited economic growth in recent years, it is not certain whether the current economic policy will prevail. We can not predict Brazil’s monetary, tax, social security and other policies, neither if such policies will cause an adverse impact to the economy and to our business and results of operations or the market price of our common shares, preferred shares and ADSs.

 

Tax reforms may affect our prices.

 

The Brazilian government has proposed tax reforms that are currently being considered by the Brazilian Congress. If TCP, TCO, TLE, TSD or Celular CRT experience a higher tax burden as a result of the tax reform, they may have to pass the cost of that tax increase to their customers. This increase may have a material negative impact on the dividends paid by our subsidiaries to our company and on our revenues and operating results.

 

Political instability may have an adverse impact on the Brazilian economy.

 

Political crises in Brazil in the past have affected the trust of investors and the public in general, as well as the development of the economy. Political crises may have an adverse impact on the Brazilian economy, our business, financial condition and results of operations and the market price of our common shares, preferred shares and ADSs.

 

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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 some of the Brazilian government’s measures taken in an 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. The inflation rate, as measured by the IGP-DI index, was 12.1% in 2004, 7.7% in 2003 and 26.4% in 2002. Inflation in the nine months ended September 30, 2005 was 0.2%.

 

Future measures taken by the Brazilian government may have an adverse impact on the Brazilian economy, our business, financial condition and results of operation, or on the market price of common shares, preferred shares and ADSs. 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. In addition, high inflation generally leads to higher domestic interest rates and, as a result, the cost of servicing our real-denominated debt may increase. Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic capital and lending markets, which could adversely affect our ability to refinance our indebtedness in those markets.

 

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 common shares, preferred shares and ADSs.

 

The Brazilian currency has been devalued frequently over the past four decades. Throughout this period, the Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. From time to time, there have been significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies. For example, the real depreciated by 15.7% and 34.3% against the U.S. dollar in 2001 and 2002, respectively. In 2003 and 2004, the real appreciated against the U.S. dollar by 22.3% and 8.8%, respectively.

 

Devaluation of the real relative to the U.S. dollar could create additional inflationary pressures in Brazil by generally increasing the price of imported products and requiring recessionary government policies to curb aggregate demand. The sharp depreciation of the real in relation to the U.S. dollar may generate inflation and governmental measures to fight possible inflationary outbreaks, including the increase in interest rates. On the other hand, appreciation of the real against the U.S. dollar may lead to a deterioration of the country’s current account and the balance of payments, as well as dampen export-driven growth. Devaluations of the real would reduce the U.S. dollar value of distributions and dividends on common shares, preferred shares and ADSs and may also reduce the market value of such securities. Any such macroeconomic effects could adversely affect our net operating revenues and our overall financial performance.

 

Devaluation of the real relative to the U.S. dollar may increase the cost of our indebtedness in foreign currency. It would also reduce the U.S. dollar value of our revenues and distribution of dividends. As of September 30, 2005, TCP had R$4,949.9 million in consolidated total debt, of which approximately 60% was denominated in foreign currencies, such as the U.S. dollar and the yen. Also, significant costs relating to our network infrastructure and handset costs are payable or linked to payment by us in U.S. dollars. At the same time, while our foreign currency debt obligations were covered by derivative contracts as of September 30, 2005 and we may derive income from these and other derivative transactions, all of our operating revenues are generated in

 

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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 acquire the technology and the goods that are necessary to operate our business. Although we currently hedge our foreign currency debt, we may decide to change our hedging policy in the future. In addition, when the value of the real increases relative to the U.S. dollar, the decrease in the cost of servicing our debt is offset by our losses on the derivatives associated with it.

 

Fluctuations in interest rates may have an adverse effect on our business and on the market price of our common shares, preferred shares and ADSs.

 

Between February and July 2002, the Central Bank reduced the basic interest rate from 19% to 18%. Between October 2002 and February 2003, the Central Bank increased the basic interest rate by 8.5 percentage points, to 26.5%. In June 2003 the Central Bank started again reducing the basic interest rate. In 2004 and in the first months of 2005 the Central Bank increased the basic interest rate. As of the date of this prospectus, the basic interest rate is 17.25%.

 

As of September 30, 2005, TCP’s total indebtedness was R$4,949.9 million. Approximately 40% of such indebtedness is denominated in reais and mostly pegged to the CDI (Certificado Depositário Interbancário) rate, a Brazilian interbank rate. All other debt was denominated in foreign currencies and fully covered by derivative contracts so that the final cost of the debt and the associated derivative is the CDI rate. As a consequence, an increase in the CDI interest rates and inflation indexes would increase the costs of our debt.

 

Brazilian government exchange control policies could adversely affect our ability to make payments on foreign currency-denominated debt.

 

The purchase and sale of foreign currency in Brazil is subject to governmental control. In the past, the Central Bank has centralized certain payments of principal on external obligations.

 

Many factors could cause the Brazilian government to institute a more restrictive exchange control policy, including, without limitation, the extent of Brazil’s foreign currency reserves, the availability of sufficient foreign exchange, the size of Brazil’s debt service burden relative to the economy as a whole, Brazil’s policy towards the International Monetary Fund, or IMF, and political constraints to which Brazil may be subject. A more restrictive policy could affect the ability of Brazilian debtors (including us) to make payments outside of Brazil to meet foreign currency-denominated obligations.

 

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. Any return to economic turmoil in Argentina or adverse economic developments in other emerging markets may adversely affect investor confidence in securities issued by Brazilian companies, including our common shares, preferred shares and ADSs representing our preferred shares, causing the market price and liquidity of those securities to suffer.

 

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Management Overview

 

TCP, TCO, TLE, TSD and Celular CRT, or the VIVO companies, are leading providers of cellular telecommunications in 19 states in Brazil and the Federal District. According to data published by Anatel, the VIVO companies have 36.1% of the total market in Brazil and 45.9% of the total market in their authorized areas, with 28.8 million users as of September 30, 2005. Their operations cover an area with approximately 135 million inhabitants, or 73% of the Brazilian population. On a pro forma basis reflecting the mergers, the VIVO companies had net operating revenues of R$10,929.3 million for the year ended December 31, 2004 and R$8,308.1 million for the nine months ended September 30, 2005.

 

The VIVO companies are controlled by Brasilcel N.V., a joint venture of Portugal Telecom and Telefónica Móviles. The corporate structure of the VIVO companies before and after the mergers is set forth in “Part Two: Summary” of this prospectus. The VIVO companies provide services in their regions through the following operating subsidiaries:

 

    TCP provides services:

 

    in the state of São Paulo through Telesp Celular S.A.;

 

    in the states of Paraná and Santa Catarina through Global Telecom S.A.; and

 

    through the operating subsidiaries of its subsidiary TCO;

 

    TCO provides services in the states of Acre, Amapá, Amazonas, Goiás, Maranhão, Mato Grosso, Mato Grosso do Sul, Pará, Rondonia, Roraima and Tocantins through several operating subsidiaries and directly in the Federal District;

 

    TLE provides services in the states of Bahia and Sergipe through two operating subsidiaries;

 

    TSD provides services in the states of Espírito Santo and Rio de Janeiro through two operating subsidiaries; and

 

    Celular CRT provides services in the state of Rio Grande do Sul through an operating subsidiary.

 

The VIVO companies pursue a common commercial strategy and are guided by a common management team. All the VIVO companies generate operating revenues in the same way, and they incur the same types of costs of services and goods sold. In addition, although their markets vary, all of the VIVO companies are subject to common trends and government regulations affecting the Brazilian cellular telecommunications industry. At the same time, the VIVO companies closely monitor various other operational and other factors described below.

 

Revenues and Costs

 

The gross operating revenues of the VIVO companies consist of the following:

 

    usage charges, which include charges for outgoing calls, roaming and similar service;

 

    revenues from the sale of handsets and accessories;

 

    monthly subscription charges paid by their contract customers;

 

    interconnection charges (or network usage charges), which are amounts they charge other cellular and fixed-line or long distance service providers for the use of their networks; and

 

    other charges, including charges for the text messaging services (SMS), call forwarding, call waiting, voicemail and call blocking.

 

These gross operating revenues are subject to several value-added and indirect taxes imposed in Brazil at the federal and state levels. These taxes are described in Item 4.B., “Business Overview—Taxes on Telecommunications Services and Handset Sales” in TCP’s Annual Report on Form 20-F for the year ended

 

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December 31, 2004, which is incorporated by reference in this prospectus. In addition, the VIVO companies record their net operating revenues after deduction of sales and services discounts and returns of goods sold. Discounts on handsets and accessories and on services provided are key competitive factors in the Brazilian cellular telecommunications market, and the VIVO companies adjust these discounts frequently in accordance with their competitive strategy.

 

The costs of services and goods of the VIVO companies consist of the following:

 

    depreciation and amortization of the transmission network infrastructure and equipment;

 

    material and services, which are the costs of third-party services (such as network maintenance services), the costs of rented circuits and transmission lines and other costs;

 

    interconnection charges, which are charges the VIVO companies pay to other companies for the use of their networks to complete calls;

 

    personnel expenses relating to sales personnel and other non-administrative personnel, which expenses are generally subject to collective bargaining agreements;

 

    rental, insurance and condominium fees, which include the costs of rented stores and facilities, insurance for their networks and other costs;

 

    cost of handsets and accessories that they sell; and

 

    Fistel and certain other taxes that are not assessed on gross operating revenues. For an explanation of the Fistel tax, see Item 4.B., “Business Overview—Taxes on Telecommunications Services and Handset Sales” in TCP’s Annual Report on Form 20-F for the year ended December 31, 2004.

 

Industry Factors

 

The business of the VIVO companies is influenced by several important factors, including the following:

 

    Shift to Prepaid Services. The Brazilian cellular telecommunications market has been influenced recently by a shift toward prepaid services. Prepaid services generate usage charges and interconnection charges but do not generate monthly subscription charges. Prepaid services have also attracted lower income customers to VIVO’s services. In addition, prepaid customers tend to make fewer outgoing calls than contract customers, and VIVO’s contract customers therefore have a disproportionate impact on usage charges. Because of the importance of contract customers to VIVO’s business, the VIVO companies have undertaken initiatives to maintain and develop the contract customer base, including through the recently launched “Right Planning” loyalty program for contract customers.

 

In 2003, Telesp Celular changed its revenue recognition policy for prepaid services. Before January 1, 2003, revenues from prepaid services were recognized at the time of sale of the prepaid minutes. Thereafter, these revenues have been deferred and recognized as the prepaid minutes are used.

 

    Competition. The VIVO companies face aggressive competition throughout their regions, both from existing competitors and new entrants into the market. In November 2002, for example, a new competitor, TIM, entered the market of Celular CRT and TCO, and in September 2004, Brasil Telecom, the fixed-line incumbent in nine states and the Federal District, began cellular services in its region, which overlaps with that of TCO, Celular CRT and Global Telecom. In the face of this competition, the VIVO companies have generally pursued a strategic focus on profitability and selective customer growth, rather than a specific focus on gaining market share. Within their strategic focus, the VIVO companies pursue a number of strategies to address these competitive pressures, often including discounts on handsets and accessories; loyalty programs, such as the “Right Planning” loyalty program for contract customers, which has generally contributed to a reduction in monthly subscription charges in the short term; and marketing and promotional expenses, which tend to increase selling expenses. Sales and services discounts as a percentage of gross operating revenues vary with the competitive features and demographics of each of the VIVO markets and are currently highest for TSD and TLE.

 

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    Recent Regulatory Changes. In recent years, Anatel, the Brazilian telecommunications regulator, has introduced a number of changes that affect the composition of VIVO’s operating revenues:

 

    Carrier Selection Codes. As of July 6, 2003, cellular telecommunications operators in Brazil were required by the Personal Mobile Service (Serviço Móvel Pessoal), or SMP, rules to implement long distance carrier selection codes (códigos de seleção de prestadora) used by customers to choose their carrier for domestic long distance services (for both “VC2” and “VC3” calls) and international cellular calls. VC2 calls are calls made to parties outside a caller’s area code but inside the same state, and VC3 calls are calls made to parties outside the caller’s state. As a result, VIVO no longer receives revenues from the outgoing calls or incurs costs in connection with VC2 or VC3 or international calls, but instead it receives interconnection charges. This change has tended to decrease both the outgoing calls revenues of the VIVO companies and the interconnection charges they pay to other companies.

 

    Partial “Bill & Keep.” Also in July 2003, Anatel adopted new “partial Bill & Keep” rules for interconnection charges. The rules provide that companies under the SMP regime are not required to pay tariffs for the use of the local network of other SMP providers as long as customers use local service (i.e., make calls in the same registration area) and as long as there is a traffic balance between them. However, if traffic from the SMP provider that originates the call to the SMP provider that terminates the call represents more than 55% of the total local traffic between the two providers, the SMP provider who originates the higher traffic through the other provider’s network must pay to such other provider the local usage tariff for the portion of the traffic that exceeds 55%. This change has tended to decrease the revenues received by the VIVO companies from interconnection fees charged to other companies.

 

    Tariff and Interconnection Rates. Anatel authorizes cellular operators to increase tariffs based upon cumulative inflation over a twelve-month period, measured by the IGP-DI index from February to January of each year. Beginning in 2007, we expect the Brazilian government to begin to regulate the telecommunications industry based on a model that would analyze companies’ costs based on a hypothetical company’s costs and other factors. In connection with the introduction of this model, the Brazilian government may use a different inflation adjustment mechanism, the IST index (Índice de Serviços de Telecomunicações), beginning in 2008.

 

In addition, Anatel established that from July 2004, interconnection rates for wireless networks (the VU-M) would be freely negotiated. Nevertheless, the Brazilian network operators have not been fully successful in negotiating and reaching acceptable interconnection agreements; if telecommunications companies cannot agree on interconnection rates and conditions, Anatel may, by mediation, arbitration or intervention, establish the terms of such interconnection agreements.

 

You should read “Part Three: Risk Factors—Risks Relating to the Brazilian Telecommunications Industry and our Business” for more information about these and other industry factors that the VIVO companies face.

 

Operational and Other Factors

 

The VIVO companies also pay close attention to a number of other operational and other factors that significantly affect their business:

 

   

Customers. VIVO closely monitors changes in both its prepaid and contract customers from period to period. VIVO also tracks its market share for each VIVO company, and it monitors net additions of customers from period to period. As of September 30, 2005 compared to September 30, 2004, the number of prepaid customers increased at a higher rate than the number of contract customers at TCP, TCO and TLE, and the number of contract customers increased at a higher rate at TSD and Celular CRT. The positive impact on revenues from monthly subscription charges was generally more than offset in the nine months ended September 30, 2005 by the cost of the “Rights Planning” loyalty

 

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program VIVO implemented to maintain and increase the number of contract customers. In addition, market share generally decreased from September 30, 2004 to September 30, 2005 due to competitive pressures, and the rate of net additions of prepaid customers in the third quarter of 2005 was lower than the rate in the third quarter of 2004 for the same reason. See below in this “Part Four: Information on the VIVO Companies” for operational data for each of the VIVO companies as of September 30, 2005 and for the fiscal quarter then ended.

 

    Average Revenue Per User (ARPU) and Minutes of Use (MOU). VIVO also tracks the average revenue per user for both contract and prepaid customers for each of the VIVO companies, as well as changes in minutes of use by type of customer. ARPU and MOU generally increased for contract customers in the third quarter of 2005 (except for TSD, where they decreased), but ARPU and MOU generally decreased for prepaid customers. See below in this “Part Four: Information on the VIVO Companies” for operational data for each of the VIVO companies as of September 30, 2005 and for the fiscal quarter then ended.

 

    Changes in Technology. VIVO’s costs are affected by changes in technology, which often require additional investments in network infrastructure and other costs in order to provide quality, competitive service. For example, both TCO and Celular CRT incurred additional depreciation and amortization expenses and materials and services costs in the nine months ended September 30, 2005 in connection with the overlay of more sophisticated Code Division Multiple Access, or CDMA, networks on top of their existing Time Division Multiple Access, or TDMA, networks. Other VIVO companies, such as TSD and TLE, have largely completed their conversions to CDMA technology and currently less affected by these transition costs.

 

    Improper Use of Network. VIVO closely monitors the improper use of its network to minimize lost revenues. The VIVO companies frequently adjust their provisions for doubtful accounts based both on increases in the customer base and on the improper use of the network. TCO, for example, recently increased its provision for doubtful accounts more than TLE, TSD and Celular CRT because of previously undetected improper use of TCO’s network.

 

Recent Developments

 

Issuance of TCP Debentures

 

On May 1, 2005, TCP issued R$1.0 billion in aggregate principal amount of debentures in two series, both maturing in May 2015. The first series, in the aggregate amount of R$200.0 million, bears interest at 103.3% of the average daily interbank deposit rate for deposits of one day (DI—Depósitos Interfinanceiros de um dia, extragrupo), payable semiannually, and is subject to renegotiation of terms (repactuação) in May 2009. The second series, in the aggregate amount of R$800.0 million, bears interest at 104.2% of the average daily interbank deposit rate, payable semiannually, and is subject to renegotiation of terms in May 2010. The proceeds of the issuance of these debentures were used for the repayment of short-term debt.

 

Reverse Stock Split and Change of ADR Ratio

 

On May 4, 2005, TCP completed a reverse stock split, combining each 2,500 common and preferred shares into one common or preferred share, respectively. TCP also changed the ratio of its ADSs to preferred shares such that one ADS now represents one preferred share.

 

Each of TCO, TLE, TSD and Celular CRT completed a similar reverse stock split. TCO combined each 3,000 common and preferred shares into one common or preferred share, respectively. TLE combined each 50,000 common and preferred shares into one common or preferred share, respectively. TSD combined each 5,000 common and preferred shares into one common or preferred share, respectively. Celular CRT combined each 100 common and preferred shares into one common or preferred share, respectively. Each of TCO, TLE and TSD also changed the ratio of its ADSs to preferred shares such that one ADS now represents one preferred share.

 

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Since such reverse stock splits, TCP, TCO, TLE, TSD and Celular CRT shares are traded on the São Paulo Stock Exchange based on a price per share, rather than based on a price per thousand shares.

 

Capital Increase and Cancellation of Treasury Shares

 

On July 29, 2005, the Board of Directors of each of TCP, TCO, TLE, TSD and Celular CRT approved an increase in the capital stock and issued, with due regard to preemptive rights, the amount of new common shares at the issue price set forth in the table below:

 

     Number of shares

   Issue price

TCP

   29,298,932    R$ 8.28

TCO

   3,107,645    R$ 20.56

TLE

   31,915    R$ 15.35

TSD

   2,029,225    R$ 17.98

Celular CRT

   929,892    R$ 35.80

 

The issue price corresponded to 90% of the weighted average of the closing price recorded on the São Paulo Stock Exchange in the 30 trading days from May 16, 2005 (May 13 for TLE) to June 27, 2005 (June 24 for TLE). Preemptive rights could be exercised in the period from June 29, 2005 to July 28, 2005.

 

Each of these capital increases allowed Brasilcel, as controlling shareholder of TCP, TSD, TLE and Celular CRT, and TCP, as controlling shareholder of TCO, to capitalize a portion of the tax benefit related to the goodwill generated in the acquisition process of those companies. CVM regulations permit the acquiror of a publicly held company to capitalize the tax benefits arising from the amortization of goodwill generated in the acquisition of that company, so long as preemptive rights are extended to the other shareholders of the publicly held company in connection with the capital increase. The tax benefits capitalized by Brasilcel in July 2005 with respect to TCP included tax benefits of R$120,850,877 relating to the year ended December 31, 2004 and tax benefits of R$121,744,279 relating to the years 2002 and 2003. The tax benefits capitalized by Brasilcel in July 2005 with respect to TLE, TSD and Celular CRT totaled R$489,733, R$36,485,465 and R$33,290,159, respectively, and related to the year ended December 31, 2004. The tax benefits capitalized by TCP in July 2005 with respect to TCO totaled R$63,893,190 and related to the year ended December 31, 2004. For further information on the earlier corporate restructurings through which the applicable tax benefits were transferred to the VIVO companies, see note 34 to TCP’s audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 incorporated by reference in this prospectus, and notes 30, 26, 27 and 27 to the audited consolidated financial statements as of December 31, 2003 and 2004 and for the three years in the period ended December 31, 2004 of TCO, TLE, TSD and Celular CRT, respectively, included or incorporated by reference in this prospectus.

 

In addition, at the same meeting, the Board of Directors of TCO approved the cancellation of 1,927,812 common shares held in treasury. At a meeting held on March 28, 2005, the Board of Directors of TLE approved the cancellation of 252,498 common shares and 51,102,580 preferred shares held in treasury.

 

As of December 31, 2005, the capital stock of each of the VIVO companies consisted of the following:

 

     Total shares outstanding

   Common shares

   Preferred shares

TCP

   662,324,342    250,457,704    411,866,638

TCO

   130,068,158    44,332,722    85,735,436

TLE

   9,644,278    3,376,560    6,267,718

TSD

   91,831,224    39,916,217    51,915,007

Celular CRT

   33,280,844    14,439,063    18,841,781(1)

(1) Includes 639,444 preferred shares held in treasury that will be transferred to TCP in the merger.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations of TCP

 

TCP’s Consolidated Results of Operations for the Nine Months Ended September 30, 2004 and 2005

 

The following table sets forth certain components of TCP’s income for the periods indicated.

 

     Nine months ended
September 30,


       
     2005

    2004

    % Change

 
     (R$ millions, unaudited)        

Net operating revenue

   5,491.7     5,387.8     1.9 %

Cost of services and goods

   (2,479.6 )   (2,353.4 )   5.4 %
    

 

     

Gross profit

   3,012.1     3,034.4     -0.7 %
    

 

     

Operating expenses:

                  

Selling expenses

   (1,790.9 )   (1,318.6 )   35.8 %

General and administrative expenses

   (455.1 )   (506.1 )   -10.1 %

Other net operating expenses

   (287.0 )   (151.9 )   88.9 %
    

 

     

Operating income net financial expense

   479.1     1,057.8     -54.7 %
    

 

     

Net financial expense

   (683.9 )   (751.3 )   -9.0 %

Operating income (loss)

   (204.8 )   306.5     -166.8 %
    

 

     

Net non-operating (expenses) income

   12.0     1.4     757.1 %
    

 

     

Income (loss) before minority interests and taxes

   (192.8 )   307.9     -162.6 %
    

 

     

Income taxes

   (265.8 )   (294.0 )   -9.6 %

Minority interest

   (133.0 )   (269.4 )   -50.6 %
    

 

     

Net loss

   (591.6 )   (255.5 )   131.5 %
    

 

     

 

Operating Data

 

The following table sets forth certain operating data of TCP.

 

     Nine months ended
September 30,


       
         2005    

        2004    

    % Change

 

Total number of customers (in thousands)

   19,370     16,363     18.4 %

Contract

   3,055     2,787     9.6 %

Prepaid

   16,315     13,576     20.2 %

Market share(1)

   46.5 %   54.0 %   -7.5  p.p.

Net additions (in thousands)

   1,740     3,064     -43.2 %

Contract

   210     82     163.6 %

Prepaid

   1,530     2,982     -48.7 %

Market share of net additions to customer base(1)

   23.6 %   43.7 %   20.1  p.p.

Market penetration(1)

   46.2 %   34.1 %   12.1  p.p.

Customer acquisition cost, per customer(2) (R$)

   151     137     10.7 %

Monthly churn(3)

   1.6 %   1.6 %    

Average revenue per user (R$ per month)

   28.2     34.1     -17.3 %

Contract

   88.3     90.4     -2.3 %

Prepaid

   15.7     20.2     -22.0 %

Total minutes used per customer(4)

   77     90     -14.6 %

Contract

   224     218     2.7 %

Prepaid

   47     59     -20.7 %

Employees

   4,135     4,131     0.1 %

(1) Source: Anatel
(2) Calculated as follows: (70% marketing expenses + costs of the distribution network + handset subsidy) / gross additions.

 

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(3) The number of customers that leave the company during the period, calculated as a percentage of the simple average of customers at the beginning and end of the period.
(4) Total minutes of calls received and made by the company’s customers divided by the average lines in service during the relevant year (including roaming in and excluding roaming out).

 

Net Operating Revenue

 

The composition of operating revenues by category of service is presented in TCP’s consolidated financial statements and discussed below before deduction of value-added and other taxes. The following table sets forth the components of TCP’s operating revenues for the periods indicated, as well as the percentage change of each component from period to period.

 

     Nine months ended
September 30,


       
     2005

    2004

    % Change

 
     (R$ millions, unaudited)        

Gross operating revenue:

                  

Usage charges

   3,246.9     2,824.0     15.0 %

Sales of handsets and accessories

   1,389.9     1,346.0     3.3 %

Monthly subscription charges

   134.1     192.3     -30.3 %

Interconnection fees

   2,221.4     2,331.9     -4.7 %

Other

   495.7     425.3     16.6 %
    

 

     

Total gross operating revenue

   7,488.0     7,119.5     5.2 %
    

 

     

Value-added and other indirect taxes

   (1,423.2 )   (1,296.6 )   9.8 %

Sales and services discounts and return of goods sold

   (573.1 )   (435.1 )   31.7 %
    

 

     

Net operating revenue

   5,491.7     5,387.8     1.9 %
    

 

     

 

The net operating revenue of TCP increased 1.9% to R$5,491.7 million for the nine months ended September 30, 2005 from R$5,387.8 million for the nine months ended September 30, 2004, principally due to an increase in revenues from usage charges and, to a lesser degree, increases in other revenues and in revenues from sales of handsets and accessories. These increases were partially offset by decreases in revenues from monthly subscription charges and interconnection fees.

 

Usage charges. Revenues from usage charges increased 15.0% to R$3,246.9 million for the nine months ended September 30, 2005 from R$2,824.0 million for the nine months ended September 30, 2004, primarily due to an 18.4% increase in the customer base to 19.370 million lines in service as of September 30, 2005 from 16.363 million lines in service as of September 30, 2004. In addition, outgoing traffic grew 8.8%, primarily due to an increase in the customer base subject to contract (who make more outgoing calls than prepaid customers) to 3.1 million lines in service subject to contract (included in the total lines of service above) as of September 30, 2005 from 2.8 million lines as of September 30, 2004.

 

Sales of handsets and accessories. Revenues from sales of handsets and accessories increased 3.3% to R$1,389.9 million for the nine months ended September 30, 2005 from R$1,346.0 million for the nine months ended September 30, 2004. This increase was mainly due to the increase in the customer base described above, which resulted in part from promotional campaigns to acquire new customers. Revenues from handset sales are reported before commissions and promotional discounts and include value-added taxes. In general, the purpose of handset sales is to encourage growth in customers and traffic (and not necessarily to generate profits). Accordingly, we subsidize part of the costs of handsets. Although profit margins vary from one handset model to another, on average profit margins are negative after taxes and discounts. The subsidy strategy resulted in a gross

 

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loss (calculated as the difference from net operating revenues from sales of handsets and accessories minus the cost of handsets and accessories) for TCP of R$367.4 million for the nine months ended September 30, 2005, compared to R$362.5 for the nine months ended September 30, 2004.

 

Monthly subscription charges. Revenues from monthly subscription charges decreased 30.3% to R$134.1 million for the nine months ended September 30, 2005 from R$192.3 million for the nine months ended September 30, 2004. The decrease was principally due to the impact of our “Right Planning” loyalty program, which was introduced in July 2004, and the effects of strong competition. Under that program, we tailor our contracts to the usage needs of our contract customers, seeking to provide competitive prices based on their individual profiles. This program is designed to maintain and increase our contract customer base described above.

 

Interconnection fees. Revenues from interconnection fees decreased 4.7% to R$2,221.4 million for the nine months ended September 30, 2005 from R$2,331.9 million for the nine months ended September 30, 2004. This decrease was principally due to the trend toward a greater volume of cellular to cellular calls and a reduction in volume of fixed line to cellular calls and to the effect of the “partial Bill & Keep” system under Anatel’s Personal Mobile Service (Serviço Móvel Pessoal, or SMP) regime, as described in “—Management Overview” above. The migration of callers away from fixed line services decreases our interconnection fees because the interconnection fees that apply to calls from a fixed line to a cellular line are higher than the fees that apply to calls from a cellular line to another cellular line.

 

Other. Revenues from other services increased 16.6% to R$495.7 million for the nine months ended September 30, 2005 from R$425.3 million for the nine months ended September 30, 2004. This increase was principally due to the increase in our customer base and an increase in the use of data-related services by our customers, including text message services, or SMS, wireless internet services and other value-added services. The increase in the use of data services was due in part to increases in internet access, improvements in data service tools, the launch of new services and an increase in the number of data transmission-enabled handsets. New services launched in the nine months ended September 30, 2005 include: SmartMail, a wireless e-mail service; Corporate VIVO Play 3G, a third generation service providing cellular access to multimedia content; and games.

 

Value-added and other indirect taxes. Value-added taxes and other indirect taxes increased 9.8% to R$1,423.2 million for the nine months ended September 30, 2005 from R$1,296.6 million for the nine months ended September 30, 2004. This increase occurred principally because of the increase in gross operating revenues other than from interconnection fees (which are not subject to these taxes). These value-added and other indirect taxes are described in Item 4.B., “Business Overview—Taxes on Telecommunications Services and Handset Sales” in our Annual Report on Form 20-F for the year ended December 31, 2004, which is incorporated by reference in this prospectus. Value-added taxes and other indirect taxes were 19% of TCP’s gross operating revenue in the nine months ended September 30, 2005, compared to 18% in the nine months ended September 30, 2004. The effective rate of taxes on gross operating revenues varies depending on the composition of our revenues. Interconnection fees, for example, are not subject to these taxes.

 

Sales and services discounts and returns of goods sold. These deductions from operating revenues include discounts on cellular handset sales, discounts on services and returns of goods sold. Discounts and returns increased 31.7% to R$573.1 million for the nine months ended September 30, 2005 from R$435.1 million for nine months ended September 30, 2004. This increase was principally due to increases in discounts on handsets and accessories in response to aggressive competition from other providers. Sales and services discounts and returns of good sold represented 6.1% and 7.7%, respectively, of our gross operating revenues for the nine months ended September 30, 2004 and 2005.

 

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Cost of Services and Goods

 

The following table sets forth the components of TCP’s costs of services and goods sold for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
     2005

    2004

    % Change

 
     (R$ millions, unaudited)        

Depreciation and amortization

   (570.9 )   (538.2 )   6.1 %

Material and services

   (256.3 )   (225.3 )   13.8 %

Interconnection charges

   (121.4 )   (155.9 )   -22.1 %

Personnel

   (47.1 )   (42.8 )   10.0 %

Rental, insurance and other related expenses

   (70.3 )   (69.8 )   0.7 %

Cost of handsets and accessories

   (1,163.6 )   (1,181.6 )   -1.5 %

Fistel and other taxes

   (250.0 )   (139.8 )   78.8 %
    

 

     

Cost of services and goods

   (2,479.6 )   (2,353.4 )   5.4 %
    

 

     

 

Cost of services and goods increased 5.4% to R$2,479.6 million for the nine months ended September 30, 2005 from R$2,353.4 million for the nine months ended September 30, 2004, principally due to increases in tax payments and, to a lesser degree, increases in depreciation and amortization and the cost of third-party services. This increase was partially offset by a decrease in interconnection charges paid to other providers. Our gross profit margin (gross profit as a percentage of net operating revenues) was 54.8% for the nine months ended September 30, 2005, compared to 56.3% for nine months ended September 30, 2004.

 

Depreciation and amortization. Depreciation and amortization expenses increased 6.1% to R$570.9 million for the nine months ended September 30, 2005 from R$538.2 million for the nine months ended September 30, 2004, mainly due to expansion of our transmission network and other assets driven by the expansion in our customer base.

 

Material and services. Cost of material and services increased 13.8% to R$256.3 million for the nine months ended September 30, 2005 from R$225.3 million for the nine months ended September 30, 2004, mainly due to increases in the cost of third-party services and rental payments, such as network maintenance services and the costs of rented circuits and transmission lines. In addition, we incurred greater costs in the nine months ended September 30, 2005 in connection with the ongoing process of overlaying TCO’s older Time Division Multiple Access, or TDMA, network with a more advanced Code Division Multiple Access, or CDMA, network.

 

Interconnection charges. Interconnection charges are charges paid to other companies for the use of their networks to complete calls that originate in our network. Interconnection charges decreased 22.1% to R$121.4 million for the nine months ended September 30, 2005 from R$155.9 million for the nine months ended September 30, 2004, primarily due to the effects of the SMP regime and the “partial Bill & Keep” billing system.

 

Personnel. Personnel expenses increased 10.0% to R$47.1 million for the nine months ended September 30, 2005 from R$42.8 million for the nine months ended September 30, 2004, primarily due to an approximate 6% increase in salaries under the terms of our collective bargaining agreement, which we renegotiate annually to take effect on November 1, and due to training program costs.

 

Rental, insurance and other related expenses. Rental, insurance and condominium fees remained relatively constant at R$70.3 million for the nine months ended September 30, 2005, compared to R$69.8 million for the nine months ended September 30, 2004.

 

Cost of handsets and accessories. Cost of handsets and accessories decreased 1.5% to R$1,163.6 million for the nine months ended September 30, 2005 from R$1,181.6 million for the nine months ended September 30,

 

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2004, primarily due to better terms negotiated with suppliers and because TCP added fewer new customers in the nine months ended September 30, 2005 than in the nine months ended September 30, 2004.

 

Fistel and other taxes. Fistel and other tax expenses increased 78.8% to R$250.0 million for the nine months ended September 30, 2005 from R$139.8 million for the nine months ended September 30, 2004. This increase was primarily due to a change in accounting policy at TCO to bring TCO’s accounting for Fistel and other taxes in line with that of TCP. Beginning in January of 2005, TCO began to accrue amounts monthly for these taxes, as is TCP’s policy, rather than recognize the entire amount of the taxes in December of a given fiscal year. TCP’s results of operations for the nine months ended September 30, 2005, which consolidate the results of TCO, reflect the effect of this change in policy.

 

Operating Expenses

 

The following table sets forth the components of TCP’s operating expenses for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
     2005

    2004

    % Change

 
     (R$ millions, unaudited)        

Selling expenses

   (1,790.9 )   (1,318.6 )   35.8 %

General and administrative expenses

   (455.1 )   (506.1 )   -10.1 %

Other net operating expenses

   (287.0 )   (151.9 )   88.9 %
    

 

     

Operating expenses

   (2,533.0 )   (1,976.6 )   28.1 %
    

 

     

 

TCP’s operating expenses increased 28.1% to R$2,533.0 million in the nine months ended September 30, 2005 from R$1,976.6 million in the nine months ended September 30, 2004. The increase resulted primarily from an increase in selling expenses and other net operating expenses driven by the highly competitive environment and an increase in goodwill amortization, respectively.

 

Selling expenses. Selling expenses increased 35.8% to R$1,790.9 million for the nine months ended September 30, 2005 from R$1,318.6 million for the nine months ended September 30, 2004. This increase was principally due to increases in marketing expenses and expenses for third-party services (such as marketing, client care and call center services); increases in the provision for doubtful accounts; and expenses for depreciation of stores, equipment and other assets. Provisions for doubtful accounts increased 104.1% to R$265.5 million for the nine months ended September 30, 2005 from R$130.1 million for the nine months ended September 30, 2004, mainly due to an increase in our customer base and to the improper use of our network. As a result of this increase, provisions for doubtful accounts were 3.5% of gross revenues for the nine months ended September 30, 2005, compared to 1.8% of gross revenues for the nine months ended September 30, 2004.

 

General and administrative expenses. General and administrative expenses decreased 10.1% to R$455.1 million for the nine months ended September 30, 2005 from R$506.1 million for the nine months ended September 30, 2004, primarily due to savings on third-party services after renegotiations of contracts.

 

Other net operating expense (income). TCP recorded other net operating expense of R$287.0 million for the nine months ended September 30, 2005, compared to other net operating expense of R$151.9 million in the nine months ended September 30, 2004, principally due to the amortization of goodwill generated in the acquisition of TCO and Global Telecom. The amortization period for goodwill generated by the Global Telecom acquisition began in January 2005, and TCP acquired additional shares of TCO in October 2004, increasing amortizable goodwill relating to TCO.

 

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Net Financial Income (Expense)

 

The following table sets forth the components of TCP’s net financial expense for the periods indicated, as well as percentage change of each component from period to period.

 

     Nine months ended
September 30,


       
             2005        

            2004        

    % Change

 
      (R$ millions, unaudited)         

Financial income

   208.2     163.4     27.4 %

Foreign currency exchange gains, net.

   537.9     64.8     730.1 %

Net losses on foreign currency derivative contracts

   (978.9 )   (476.4 )   105.5 %

Financial expenses

   (451.1 )   (503.1 )   -10.3 %
    

 

     

Financial expense, net

   (683.9 )   (751.3 )   -9.0 %
    

 

     

 

Net financial expense decreased 9.0% to R$683.9 million in the nine months ended September 30, 2005 from R$751.3 million in the nine months ended September 30, 2004. This change occurred in part because an increase in the average CDI rate to 14.09% for the nine months ended September 30, 2005 from 11.72% for the nine months ended September 30, 2004 and higher average cash balances at TCO during the period led to higher financial income at TCO, which had a positive effect on TCP’s consolidated financial income. In addition, financial expenses decreased primarily due to more favorable rates obtained upon the renegotiation of financing transactions.

 

Income Taxes

 

Income taxes decreased 9.6% to R$265.8 million for the nine months ended September 30, 2005 from R$294.0 million for the nine months ended September 30, 2004. The decrease was principally due to the decrease in taxable income at the level of Telesp Celular. In spite of the loss before minority interests and taxes of R$192.8 million that we recorded for the nine months ended September 30, 2005, we recorded income taxes in the period because of the taxable income of Telesp Celular and TCO. According to Brazilian tax law, losses from consolidated entities cannot be used to offset income of other consolidated entities.

 

Net Loss

 

As a result of the foregoing, TCP recorded a net loss of R$591.6 million for the nine months ended September 30, 2005, compared with a net loss of R$255.5 million for the nine months ended September 30, 2004.

 

TCP’s Segments

 

The following tables set forth certain information on TCP’s reportable segments for the periods indicated.

 

     Company reportable segments as of September 30, 2005

 
     Telesp
Celular


   Global
Telecom


    TCO

   Other

    Eliminations

    Consolidated

 
     (R$ millions, unaudited)  

Net operating revenue

   3,187.0    602.5     1,702.2    —       —       5,491.7  

Operating income (loss)

   228.5    (219.3 )   216.4    (339.0 )   (91.4 )   (204.8 )

Net income (loss)

   125.4    (219.4 )   58.4    (423.1 )   (132.9 )   (591.6 )

Total assets

   5,937.3    2,632.3     4,787.2    443.6     (269.3 )   13,531.1  

 

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     Company reportable segments as of September 30, 2004

 
     Telesp
Celular


   Global
Telecom


    TCO

   Other

    Eliminations

    Consolidated

 
     (R$ millions, unaudited)  

Net operating revenue

   3,195.9    590.4     1,601.5    —       —       5,387.8  

Operating income (loss)

   534.2    (153.5 )   369.4    (43.2 )   (400.4 )   306.5  

Net income (loss)

   440.0    (150.8 )   161.7    (440.2 )   (266.2 )   (255.5 )

Total assets

   6,107.4    3,563.1     4,223.0    980.8     (743.1 )   14,131.2  

 

Global Telecom

 

The following table sets forth certain components of Global Telecom’s income for the periods indicated.

 

    

Nine months ended

September 30,


       
             2005        

            2004        

    % Change

 
     (R$ millions, unaudited)        

Net operating revenue

   602.5     590.4     2.0 %

Cost of services and goods

   (386.1 )   (404.4 )   -4.5 %
    

 

     

Gross profit

   216.4     186.0     16.3 %
    

 

     

Operating expenses:

                  

Selling expenses

   (231.3 )   (186.7 )   23.9 %

General and administrative expense

   (39.7 )   (45.5 )   -12.7 %

Other net operating (expense) income

   (48.4 )   (22.0 )   120.0 %
    

 

     

Operating income before losses of unconsolidated affiliates and net financial expense

   (103.0 )   (68.2 )   51.0 %
    

 

     

Net financial expense

   (73.7 )   (85.3 )   -13.6 %
    

 

     

Operating loss

   (176.7 )   (153.5 )   15.1 %
    

 

     

Net non-operating (expense) income

   —       0.4     n.a.  
    

 

     

Loss before minority interests and taxes

   (176.7 )   (153.1 )   15.4 %
    

 

     

Income taxes

   —       2.3     n.a.  
    

 

     

Net loss

   (176.7 )   (150.8 )   17.2 %
    

 

     

 

Net operating revenue. The net operating revenue of Global Telecom increased 2.0% to R$602.5 million for the nine months ended September 30, 2005, from R$590.4 million for the nine months ended September 30, 2004. This increase reflects an increase of 9.1% in revenues from services, mainly from usage charges (25%) and data-related services (93%), partially offset by a 9.9% reduction in interconnection fees and by a 24.6% reduction in revenue from sales of handsets and accessories.

 

Cost of services and goods. Cost of services and goods decreased 4.5% to R$386.1 million for the nine months ended September 30, 2005 from R$404.4 million for the nine months ended September 30, 2004, principally due to a 27.7% reduction in the cost of handsets and accessories, partially offset by a 47.7% increase in Fistel and other tax expenses (due primarily to the 22.9% growth in the client base) and by a 10.1% increase in depreciation and amortization expenses. The gross profit margin (gross profit as a percentage of net revenues) was 35.9% for the nine months ended September 30, 2005, compared to 31.5% for nine months ended September 30, 2004.

 

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Operating expenses. Global Telecom’s operating expenses increased 25.6% to R$319.4 million in the nine months ended September 30, 2005 from R$254.2 million in the nine months ended September 30, 2004. The increase resulted mainly from a 23.9% increase in selling expenses, which reached R$231.3 million in the first nine months of 2005, compared to the R$186.7 million in the first nine months of 2004. This increase in selling expenses was principally due to an increase in expenses related to outsourced services (such as marketing) and in the provision for doubtful accounts. This increase was partially offset by a 12.7% decrease in general and administrative expenses to R$39.7 million in the nine months ended September 30, 2005 from R$45.5 million in the same period of 2004, principally due to a reduction in depreciation and amortization expenses.

 

Operating loss. Global Telecom recorded an operating loss of R$176.7 million for the nine months ended September 30, 2005, compared to an operating loss of R$153.5 million for the nine months ended September 30, 2004, principally due to the increase of the operating expenses described above.

 

Net loss. As a result of the foregoing, Global Telecom recorded a net loss of R$176.7 for the nine months ended September 30, 2005, compared with a net loss of R$150.8 million for the nine months ended September 30, 2004.

 

Telesp Celular

 

The following table sets forth certain components of Telesp Celular’s income for the periods indicated.

 

    

Nine months ended

September 30,


       
             2005        

            2004        

    % Change

 
     (R$ millions, unaudited)        

Net operating revenue

   3,187.0     3,195.9     -0.3 %

Cost of services and goods

   (1,364.2 )   (1,329.7 )   2.6 %
    

 

     

Gross profit

   1,822.8     1,866.2     -2.3 %
    

 

     

Operating expenses:

                  

Selling expenses

   (1,059.8 )   (791.8 )   33.8 %

General and administrative expense

   (274.4 )   (340.5 )   -19.4 %

Other net operating (expense) income

   13.3     7.6     75.0 %
    

 

     

Operating income before losses of unconsolidated affiliates and net financial expense

   501.9     741.5     -32.3 %
    

 

     

Net financial expense

   (273.4 )   (207.3 )   31.9 %
    

 

     

Operating income

   228.5     534.2     -57.2 %
    

 

     

Net non-operating (expense) income

   1.7     (0.4 )   n.a.  
    

 

     

Loss before minority interests and taxes

   230.2     533.8     -56.9 %
    

 

     

Income taxes

   (104.8 )   (93.8 )   11.7 %
    

 

     

Net gain

   125.4     440.0     -71.5 %
    

 

     

 

Net operating revenue. The net operating revenue of Telesp Celular decreased 0.3% to R$3,187.0 million for the nine months ended September 30, 2005 from R$3,195.9 million for the nine months ended September 30, 2004, principally due to a 46.8% decrease in revenue from monthly subscription charges due to the particularly intense competition in Telesp Celular’s region. This decrease was offset by a 9.3% increase in revenue from usage charges and a 7.6% increase in revenue from sales of handsets and accessories.

 

Cost of services and goods. Cost of services and goods increased 2.6% to R$1,364.2 million for the nine months ended September 30, 2005 from R$1,329.7 million for the nine months ended September 30, 2004,

 

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principally due to a 8.2% increase in the cost of third-party services (such as call center services, customer service and maintenance), and a 22.3% increase in Fistel and other tax expenses caused by the 14.0% increase in the customer base. These increases were partially offset by a 23.5% reduction in interconnection expenses. The gross profit margin (gross profit as a percentage of net revenues) was 57.2% for the nine months ended September 30, 2005, compared to 58.4% for nine months ended September 30, 2004.

 

Operating expenses. Telesp Celular’s operating expenses increased 17.4% to R$1,320.9 million for the nine months ended September 30, 2005 from R$1,124.7 million for the nine months ended September 30, 2004. The increase resulted mainly from a 33.8% increase in selling expenses to R$1,059.8 million for the nine months ended September 30, 2005 from R$791.8 million for the nine months ended September 30, 2004. This increase in selling expenses was mainly due to an increase in expenses related to outsourced services (such as marketing), depreciation expenses and the provision for doubtful accounts. These increases were partially offset by a 19.4% decrease in general and administrative expenses to R$274.4 million for the nine months ended September 30, 2005 from R$340.5 million for the nine months ended September 30, 2004. The reduction in general and administrative expenses was principally due to a reduction in consultancy and technical services rendered by third parties; a decrease in rental expenses resulting from an increase in the ownership of property; a decrease in insurance and condominium expenses resulting from favorable renegotiations of contracts; and a decrease in income taxes paid by Telesp Celular in accordance with Brazilian tax law on the value of international roaming charges paid to non-Brazilian telecommunications companies.

 

Operating income. Telesp Celular recorded operating income of R$228.5 million for the nine months ended September 30, 2005, compared with operating income of R$534.2 million for the nine months ended September 30, 2004, principally due to the increase in selling expenses described above and an increase in financial expenses in connection with derivative transactions, partially offset by the decrease in general and administrative expenses described above and by foreign exchange gains resulting from the appreciation of the real in relation to the U.S. dollar during the period.

 

Net income. As a result of the foregoing, Telesp Celular recorded operating income of R$125.4 million for the nine months ended September 30, 2005, compared with operating income of R$440.0 million for the nine months ended September 30, 2004.

 

TCO

 

For a discussion of TCP’s TCO segment, see below under “—Management’s Discussion and Analysis of Financial Condition and Results of Operations of TCO.”

 

TCP’s Liquidity and Capital Resources

 

Sources of Funds

 

TCP generated cash flow from operations of R$871.6 million and R$872.4 million in the nine months ended September 30, 2005 and 2004, respectively.

 

TCP had net cash from financing activities of R$95.8 million for the nine months ended September 30, 2005. Although TCP obtained new loans in the aggregate amount of R$2,708.4 million in that period, these were partially offset by loan repayments of R$2,225.8 million and net settlements on derivatives contracts of R$450.1 million.

 

TCP had R$3,309.9 million in long-term loans and financing as of September 30, 2005. TCP’s R$1,640.0 million in short-term indebtedness as of September 30, 2005 consisted primarily of funding from financial institutions. As of September 30, 2005, TCP had working capital (current assets minus current liabilities) of R$442.7 million compared to a working capital deficit of R$1,281.5 million as of December 31, 2004.

 

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TCP’s principal assets are the shares of its subsidiaries. TCP relies exclusively on dividends from TCO, Telesp Celular and Global Telecom to meet its cash needs, including the payment of dividends to its shareholders. TCP controls the payment of dividends by TCO, Telesp Celular and Global Telecom, subject to limitations under Brazilian law. There are no contractual restrictions on the payment of dividends by TCP’s subsidiaries to it.

 

TCP believes that its available borrowing capacity, together with funds generated by operations, should provide sufficient liquidity and capital resources to pursue its business strategy for the foreseeable future with respect to working capital, capital expenditures and other operating needs.

 

Uses of Funds

 

TCP’s principal uses of funds are for capital expenditures and servicing of its debt.

 

Capital expenditures (including capitalized interest) consumed cash flows of R$944.8 million in the nine months ended September 30, 2005, compared to R$899.8 million in the nine months ended September 30, 2004. Repayment of debt consumed cash flows of R$2,225.8 million and R$1,199.0 million in the nine months ended September 30, 2005 and 2004, respectively.

 

     Nine months ended
September 30,


     2005

   2004

     (R$ millions)

Switching equipment

   213.9    286.5

Transmission equipment

   377.2    273.5

Information Technology

   180.9    167.2

Others

   172.8    172.6
    
  

Total capital expenditures

   944.8    899.8
    
  

 

TCP did not pay dividends or interest on shareholders’ equity in the nine months ended September 30, 2005 and 2004. The holders of preferred shares have been entitled to exercise voting rights since the 2004 general shareholders’ meeting and will continue to be so entitled until TCP pays minimum dividends.

 

Debt

 

As of September 30, 2005, TCP’s total debt position was as follows:

 

Debt


   Amount
outstanding
as of
September 30,
2005


     (R$ millions)

Financing from financial institutions

   4,741.8

Financing from suppliers

   3.0

Fixcel (acquisition of TCO)

   10.7

Related parties

   —  

Interest

   194.4

Total long-term debt, excluding the short-term portion

   3,309.9

Short-term debt

   1,640.0

Total debt

   4,949.9

 

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TCP’s long-term debt as of September 30, 2005 matures in accordance with the following schedule. The table below represents only the long-term debt as of September 30, 2005 and does not include the short-term portion of long-term debt as of September 30, 2005, which is included in short-term debt in the table above.

 

Year Ending December 31,


   Principal amount

     (R$ millions)

2006 (from September 30 to December 31)

   90.3

2007

   1,617.2

2008

   547.3

after 2009

   1,055.1

 

As of September 30, 2005, TCP’s total debt was R$4,949.9 million, of which R$2,970.7 million, or 60%, was denominated in foreign currencies and therefore exposed to currency fluctuations. Of that amount, R$2,757.5 million was denominated in U.S. dollars (U.S.$1,240.9 million), R$162.5 million was denominated in yen (¥8,301.2 million) and R$50.7 million was denominated in UMBNDES. The UMBNDES is a rate of BNDES, the Brazilian national development bank, that reflects the daily exchange fluctuations in the UMBNDES basket of currencies, which are the currencies in which BNDES borrows. Devaluation of the real results in exchange losses on foreign currency indebtedness. In order to protect against the risk of devaluation of the real, we have entered into over-the-counter derivative transactions with international and domestic financial institutions. In the nine months ended September 30, 2005, our derivatives positions produced a loss of R$555.8 million, which was partially offset by R$544.3 million of exchange gains on our foreign currency-denominated debt. As of September 30, 2005, we had derivative contracts that covered amounts in excess of our foreign currency-denominated debt.

 

TCP is exposed to interest rate risk as a consequence of its floating rate debt. As of September 30, 2005, approximately 47% of TCP’s interest-bearing liabilities bore interest at floating rates, primarily LIBOR for U.S. dollar-denominated debt and CDI, SELIC, TJLP and UMBNDES for real-denominated debt. Accordingly, TCP’s financing expenses increase if market interest rates increase. As of September 30, 2005, all of TCP’s foreign currency derivatives contracts bore interest payments linked to the CDI rate. The CDI rates as of September 30, 2005 and 2004 were 14.09% and 11.72%, respectively.

 

On May 1, 2005, TCP issued R$1.0 billion in aggregate principal amount of new debentures. See “—Recent Developments—Issuance of TCP Debentures” above.

 

In addition, TCP’s debt as of September 30, 2005 included U.S. dollar-denominated debt issued by several lenders pursuant to Central Bank Resolution No. 2,770, which allows Brazilian banks to make certain U.S. dollar-denominated loans. TCP had U.S.$973.0 million outstanding under such loans as of September 30, 2005. The loans had an average maturity date of September 2006 and an average interest rate of 4.79%.

 

Some of the debt agreements TCP’s subsidiaries contain cross-default provisions, restrictions on changes of control and restrictive covenants relating to the incurrence of indebtedness. Financial ratios apply to some indebtedness of Global Telecom and TCO and involve (1) current ratios, (2) capitalization ratios, (3) EBITDA margins, (4) interest coverage ratios and (5) debt to capital ratios. As of September 30, 2005, TCP and its subsidiaries were in compliance with their restrictive covenants. See note 14 to TCP’s unaudited consolidated financial statements included in this prospectus.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2005, there were no off-balance sheet arrangements. All of TCP’s majority-owned subsidiaries are included in its consolidated financial statements. TCP does not have any interests in, or relationships with, any special purpose entities that are not reflected in its consolidated financial statements.

 

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U.S. GAAP Reconciliation

 

TCP prepares its consolidated financial statements in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. Net losses for the nine months ended September 30, 2004 and 2005 were R$244.3 million and R$385.6 million, respectively, under U.S. GAAP, compared to net losses of R$255.5 million and R$591.6 million, respectively, under Brazilian GAAP. Shareholders’ equity as of December 31, 2004 and September 30, 2005 was R$2,735.6 million and R$4.350.0 million, respectively, under U.S. GAAP, compared to shareholders’ equity of R$2,907.4 million and R$4,315.8 million, respectively, under Brazilian GAAP. See note 21 to TCP’s unaudited consolidated financial statements for a description of the principal differences between Brazilian GAAP and U.S. GAAP as they relate to TCP, and a reconciliation to U.S. GAAP of net losses and total shareholders’ equity.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations of TCO

 

TCO’s Consolidated Results of Operations for the Nine Months Ended September 30, 2004 and 2005

 

The following table sets forth certain components of TCO’s income for the periods indicated.

 

     Nine months ended
September 30,


       
             2005        

            2004        

    % Change

 
     (R$ millions, unaudited)        

Net operating revenue

   1,702.2     1,601.5     6.3 %

Cost of services and goods

   (729.3 )   (619.3 )   17.8 %
    

 

     

Gross profit

   972.9     982.2     -0.9 %
    

 

     

Operating expenses:

                  

Selling expenses

   (499.7 )   (340.1 )   46.9 %

General and administrative expense

   (133.8 )   (114.1 )   17.3 %

Other net operating income

   1.3     6.3     -79.4 %
    

 

     

Operating income before net financial expense

   340.7     534.3     -36.2 %
    

 

     

Net financial expense

   93.2     50.9     83.1 %
    

 

     

Operating income

   433.9     585.2     -25.9 %
    

 

     

Net non-operating (expenses) income

   3.0     (2.1 )   -242.9 %
    

 

     

Income before income taxes and minority interest

   436.9     583.1     -25.1 %
    

 

     

Income taxes

   (161.0 )   (202.4 )   -20.5 %

Minority interest

   —       (3.2 )   n.a.  
    

 

     

Net income

   275.9     377.5     -26.9 %
    

 

     

 

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Operating Data

 

The following table sets forth certain operating data of TCO.

 

     Nine months ended
September 30,


       
             2005        

            2004        

    % Change

 

Total number of customers (in thousands)

   6,561     5,307     23.6 %

Contract

   978     940     4.0 %

Prepaid

   5,583     4,367     27.8 %

Market share(1)

   47.0 %   53.9 %   -6.8  p.p.

Net additions (in thousands)

   740     1,195     -38.1 %

Contract

   32     -9     n.a.  

Prepaid

   708     1,204     -41.2 %

Market share of net additions to customer base(1)

   28.4 %   48.9 %   -20.5  p.p.

Market penetration(1)

   41.2 %   29.7 %   11.5  p.p.

Customer acquisition cost, per customer(2) (R$)

   138     103     34.2 %

Monthly churn(3)

   1.6 %   1.8 %   -0.2  p.p.

Average revenue per user (R$ per month)

   26.4     32.6     -19.1 %

Contract

   82.7     84.8     -2.5 %

Prepaid

   13.9     17.1     -18.9 %

Total minutes used per customer(4)

   75     88     -13.9 %

Contract

   220     206     6.7 %

Prepaid

   45     505     -17.4 %

Employees

   1,263     1,380     -8.5 %

(1) Source: Anatel
(2) Calculated as follows: (70% marketing expenses + costs of the distribution network + handset subsidy) / gross additions.
(3) The number of customers that leave the company during the period, calculated as a percentage of the simple average of customers at the beginning and end of the period.
(4) Total minutes of calls received and made by the company’s customers divided by the average lines in service during the relevant year (including roaming in and excluding roaming out).

 

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Net Operating Revenue

 

The composition of operating revenues by category of service is presented in TCO’s consolidated financial statements and discussed below before deduction of valued-added and other taxes. The following table sets forth the components of TCO’s operating revenues for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
             2005        

            2004        

    % Change

 
     (R$ millions, unaudited)        

Gross operating revenue:

                  

Usage charges

   1,116.9     916.3     21.9 %

Sales of handsets and accessories

   344.3     330.5     4.2 %

Monthly subscription charges

   81.7     117.5     -30.5 %

Interconnection fees

   612.1     643.1     -4.8 %

Other

   167.4     122.3     36.9 %

Total gross operating revenue

   2,322.4     2,129.7     9.0 %
    

 

 

Value-added and other indirect taxes

   (497.6 )   (438.8 )   13.4 %

Sales and services discount and return of goods sold

   (122.6 )   (89.4 )   37.1 %

Net operating revenue

   1,702.2     1,601.5     6.3 %
    

 

 

 

Net operating revenue increased 6.3% to R$1,702.2 million for the nine months ended September 30, 2005 from R$1,601.5 million for the nine months ended September 30, 2004. The increase in net revenues was principally due to an increase in revenues from usage charges and, to a lesser degree, increases in other revenues and in revenues from sales of handsets and accessories. These increases were partially offset by decreases in revenues from monthly subscription charges and interconnection fees.

 

Usage charges. Revenues from usage charges increased 21.9% to R$1,116.9 million for the nine months ended September 30, 2005 from R$916.3 million for the nine months ended September 30, 2004. This increase was principally due to a 23.6% increase in the customer base to 6.561 million lines in service as of September 30, 2005 from 5.307 million lines in service as of September 30, 2004. In addition, outgoing traffic grew by 9.4%, primarily due to an increase in the customer base subject to contract (who make more outgoing calls than prepaid customers) to 978.0 thousand lines in service subject to contract (included in total lines of service above) as of September 30, 2005 from 940.0 thousand lines as of September 30, 2004.

 

Sales of handsets and accessories. Revenues from sales of handsets and accessories increased 4.2% to R$344.3 million for the nine months ended September 30, 2005 from R$330.5 million for the nine months ended September 30, 2004. This increase was mainly due to the increase in the customer base described above, which resulted in part from promotional campaigns to acquire new customers. Revenues from handset sales are reported before commissions and promotional discounts and include value-added taxes. In general, the purpose of handset sales is to encourage growth in customers and traffic. Accordingly, TCO, like TCP, subsidizes part of the costs of handsets. Although profit margins vary from one handset model to another, on average profit margins are negative after taxes and discounts. The subsidy strategy resulted in a gross loss (calculated as the difference from net operating revenues from sales of handsets and accessories minus the cost of handsets and accessories) for TCO of R$154.0 million for the nine months ended September 30, 2005, compared to R$133.0 for the nine months ended September 30, 2004.

 

Monthly subscription charges. Revenues from monthly subscription charges decreased 30.5% to R$81.7 million for the nine months ended September 30, 2005 from R$117.5 million for the nine months ended

 

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September 30, 2004. This decrease was principally due to a decrease in customers subject to monthly subscription charges in a highly competitive environment. The decrease also was affected by the introduction of “Right Planning” loyalty program in May 2004, a program similar to the TCP program of the same name.

 

Interconnection fees. Revenues from interconnection fees decreased 4.8% to R$612.1 million for the nine months ended September 30, 2005 from R$643.1 million for the nine months ended September 30, 2004. This decrease was principally due to the trend toward greater volume of cellular to cellular calls and a reduction in volume of fixed line to cellular calls and to the effect of the partial “Bill & Keep” system under the SMP regime. The migration of calls away from fixed line services decreases TCO’s interconnection fees because the interconnection fees that apply to calls from a fixed line to a cellular line are higher than the fees that apply to calls from a cellular line to another cellular line.

 

Others. Revenues from other services increased 36.9% to R$167.4 million for the nine months ended September 30, 2005 from R$122.3 million for the nine months ended September 30, 2004. The increase was principally due to the increase in TCO’s customer base and an increase in the use of data-related services by our customers, including text message services, or SMS, wireless internet services and other value-added services. The increase in the use of data services was due in part to increases in internet access, improvements in data service tools, an increase in the number of data transmission-enabled handsets and promotional campaigns to encourage the use of value-added services.

 

Value-added and other indirect taxes. Value-added and other indirect taxes increased 13.4% to R$497.6 million for the nine months ended September 30, 2005 from R$438.8 million for the nine months ended September 30, 2004. This increase occurred principally because of the increase in gross operating revenues other than from interconnection fees (which are not subject to these taxes). These value-added and other indirect taxes are the same taxes as those that apply to TCP. Value-added taxes and other indirect taxes were 21.4% of TCO’s gross operating revenue in the nine months ended September 30, 2005, compared to 20.6% in the nine months ended September 30, 2004. The effective rate of taxes on gross operating revenues varies depending on the composition of TCO’s revenues.

 

Sales and services discount and returns of goods sold. Discounts and returns increased 37.1% to R$122.6 million for the nine months ended September 30, 2005 from R$89.4 million for the nine months ended September 30, 2004. This increase was principally due to an increase in discounts on handsets and accessories in response to aggressive competition from other providers. Sales and services discounts and returns of good sold represented 4.2% and 5.3%, respectively, of TCO’s gross operating revenues for the nine months ended September 30, 2004 and 2005.

 

Cost of Services and Goods

 

The following table sets forth the components of TCO’s costs of services and goods sold for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
             2005        

            2004        

    % Change

 
     (R$ millions, unaudited)        

Depreciation and amortization

   (139.5 )   (114.9 )   21.4 %

Material and services

   (64.9 )   (49.3 )   31.6 %

Interconnection charges

   (42.8 )   (59.2 )   -27.7 %

Personnel

   (17.9 )   (15.9 )   12.6 %

Rental, insurance and other related expenses

   (10.7 )   (12.7 )   -15.7 %

Cost of handsets and accessories

   (372.6 )   (360.1 )   3.5 %

Fistel and other taxes

   (80.9 )   (7.2 )   n.a.  
    

 

     

Cost of services and goods

   (729.3 )   (619.3 )   17.8 %
    

 

     

 

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TCO’s cost of services and goods increased 17.8% to R$729.3 million for the nine months ended September 30, 2005 from R$619.3 million for the nine months ended September 30, 2004. The increase was principally due to increases in taxes and, to a lesser degree, increases in depreciation and amortization, the cost of third-party services and the cost of handsets and accessories. The gross profit margin (gross profit as a percentage of net revenues) was 57.2% for the nine months ended September 30, 2005, compared to 61.3% for the nine months ended September 30, 2004.

 

Depreciation and amortization. Depreciation and amortization expenses increased 21.4% to R$139.5 million for the nine months ended September 30, 2005 from R$114.9 million for the nine months ended September 30, 2004. The increase was principally due to investments to overlay TCO’s older TDMA network with a more advanced CDMA network and to improve technical support systems, such as electronic billing and tracking systems. These investments increased TCO’s depreciable assets and hence its depreciation costs.

 

Materials and services. Cost of materials and services increased 31.6% to R$64.9 million for the nine months ended September 30, 2005 from R$49.3 million for the nine months ended September 30, 2004. The increase was principally due to increases in the cost of third-party services and rental payments, such as network maintenance services and the costs of rented circuits and transmission lines. The cost of rented transmission lines increases as TCO expands its network, particularly as TCO operates in a large region in which signals must be transmitted over long distances. In addition, TCO incurred costs in the nine months ended September 30, 2005 in connection with overlaying its TDMA network with a CDMA network.

 

Interconnection charges. Interconnection charges are the charges that TCO pays to other telecommunications providers for the use of their networks to complete local and long-distance calls that originate from TCO’s network. Interconnection charges decreased 27.7% to R$42.8 million for the nine months ended September 30, 2005 from R$59.2 million for the nine months ended September 30, 2004, primarily due to the effects of the SMP regime and the “partial Bill & Keep” billing system.

 

Personnel. Personnel expenses increased 12.6% to R$17.9 million for the nine months ended September 30, 2005 from R$15.9 million for the nine months ended September 30, 2004. This increase was principally due to an approximate 6% increase in salaries under the terms of TCO’s collective bargaining agreement, which it renegotiates annually to take effect on November 1, and due to training program costs

 

Rentals, insurance and other related expenses. Rentals, insurance and condominium fees decreased 15.7% to R$10.7 million for the nine months ended September 30, 2005 from R$12.7 million for the nine months ended September 30, 2004. The decrease was principally due to the termination of leases on certain infrastructure in the nine months ended September 30, 2005.

 

Cost of handsets and accessories. The cost of handsets and accessories increased 3.5% to R$372.6 million for the nine months ended September 30, 2005 from R$360.1 million for the nine months ended September 30, 2004. The increase was principally due to increases in the average prices of handsets sold relating to the improved quality and features of the handsets.

 

Fistel and other taxes. Fistel and other tax expenses increased to R$80.9 million for the nine months ended September 30, 2005 from R$7.2 million for the nine months ended September 30, 2004. The increase was principally due to a change in accounting policy at TCO to bring TCO’s accounting for Fistel and other taxes in line with that of TCP. Beginning in January of 2005, TCO began to accrue amounts monthly for these taxes, as is TCP’s policy, rather than recognize the entire amount of the taxes in December of a given fiscal year.

 

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Operating Expenses

 

The following table sets forth the components of TCO’s operating expenses for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
             2005        

            2004        

    % Change

 
     (R$ millions, unaudited)        

Selling expenses

   (499.7 )   (340.1 )   46.9 %

General and administrative expenses

   (133.8 )   (114.1 )   17.3 %

Other net operating income, net

   1.3     6.3     -79.4 %
    

 

     

Operating expenses

   (632.2 )   (447.9 )   41.1 %
    

 

     

 

Operating expenses increased 41.1% to R$632.2 million for the nine months ended September 30, 2005 from R$447.9 million for the nine months ended September 30, 2004. The increase resulted mainly from the increase in selling expenses in the face of aggressive competition and, to a lesser degree, an increase in general and administrative expenses.

 

Selling expenses. Selling expenses increased 46.9% to R$499.7 million for the nine months ended September 30, 2005 from R$340.1 million for the nine months ended September 30, 2004. The increase was principally due to an increase in TCO’s provision for doubtful accounts, an increase in third-party marketing and promotional services in a highly competitive environment and an increase in commissions paid to independent distributors, which increase with the number of handsets sold. In addition, the migration of customers toward CDMA service led to higher depreciation costs on returned handsets. TCO’s provision for doubtful accounts increased 126.8% to R$111.6 million for the nine months ended September 30, 2005 from R$49.2 million for the nine months ended September 30, 2004, mainly due to an increase in the customer base and the improper use of TCO’s network. As a result of this increase, provisions for doubtful accounts were 4.8% of gross revenues for the nine months ended September 30, 2005, compared to 2.3% of gross revenues for the nine months ended September 30, 2004.

 

General and administrative expenses. General and administrative expenses increased 17.3% to R$133.8 million for the nine months ended September 30, 2005 from R$114.1 million for the nine months ended September 30, 2004. The increase was principally due to a 50.1% increase in third-party services and rental, insurance and condominium fees relating to infrastructure. These increases were partially offset by a reduction in depreciation and amortization expenses; a decrease in administrative personnel expenses; and a decrease in income taxes paid by TCO in accordance with Brazilian tax law on the value of international roaming charges paid to non-Brazilian telecommunications companies.

 

Other net operating (expense) income. For the nine months ended September 30, 2005, TCO had other net operating income of R$1.3 million, compared to other net operating income of R$6.3 million for the nine months ended September 30, 2004. The other net operating income in the nine months ended September 30, 2005 was mainly due to handset manufacturers’ incentives, amounts recovered in litigation and rental income from the sites of our radio-base stations, where TCO sometimes rents space to other providers, partially offset by an increase in ICMS taxes on other income and an increase in reserves for civil litigation.

 

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Net Financial Income (Expense)

 

The following table sets forth the components of TCO’s net financial income for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
             2005        

            2004        

    % Change

 
     (R$ millions, unaudited)        

Financial income

   145.9     119.1     22.5 %

Exchange gain and losses

   7.5     (22.3 )   n.a.  

Net losses on foreign currency derivative contracts

   (19.9 )   (6.8 )   192.6 %

Financial expenses

   (40.3 )   (39.1 )   3.1 %
    

 

     

Financial income, net

   93.2     50.9     83.1 %
    

 

     

 

TCO had net financial income of R$93.2 million for the nine months ended September 30, 2005, compared to net financial income of R$50.9 million for the nine months ended September 30, 2004. This change was due in part to an increase in the average CDI rate to 14.09% for the nine months ended September 30, 2005 from 11.72% for the nine months ended September 30, 2004, which led to increased financial income on higher average cash balances during the period.

 

Income and Social Contribution Taxes

 

Income and social contribution expenses decreased 20.5% to R$161.0 million for the nine months ended September 30, 2005 from R$202.4 million for the nine months ended September 30, 2004. The decrease was principally due to the reduction in income before taxes and minority interest. TCO’s effective tax rate was 36.9% and 34.7% for the nine months ended September 30, 2005 and 2004, respectively.

 

Net Income

 

As a result of the foregoing, TCO recorded net income of R$275.9 million for the nine months ended September 30, 2005, compared to R$377.5 million for the nine months ended September 30, 2004.

 

TCO’s Liquidity and Capital Resources

 

Sources of Funds

 

TCO generated cash flow from operations of R$373.8 million and R$459.4 million in the nine months ended September 30, 2005 and 2004, respectively.

 

TCO had net cash used in financing activities of R$41.9 million in the nine months ended September 30, 2005, compared to net cash used in financing activities of R$104.0 million in the nine months ended September 30, 2004. In the nine months ended September 30, 2005, net cash used in financing activities included loan repayments of R$70.2 million, partially offset by a credit in the amount of R$41.8 million relating to cash received from fractional shares which were sold in an auction in connection with TCO’s reverse stock split and which cash was not claimed by shareholders at such time but which is payable to shareholders upon demand.

 

TCO had R$62.5 million in long-term loans and financing as of September 30, 2005. TCO’s R$78.2 million in short-term indebtedness as of September 30, 2005 consisted primarily of funding from financial institutions. As of September 30, 2005 and December 31, 2004, TCO had working capital (current assets minus current liabilities) of R$1,417.9 million and R$1,078.2 million respectively.

 

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We believe that TCO’s available borrowing capacity, together with funds generated by operations, should provide sufficient liquidity and capital resources to pursue TCO’s business strategy for the foreseeable future with respect to working capital, capital expenditures and other operating needs.

 

Uses of Funds

 

TCO’s principal uses of funds are for capital expenditures, servicing of its debt and payments of dividends to shareholders.

 

Capital expenditures (including capitalized interest) consumed cash flows of R$216.9 million in the nine months ended September 30, 2005, compared to R$286.4 million in the nine months ended September 30, 2004. Repayment of debt consumed cash flows of R$70.2 million and R$137.2 million in the nine months ended September 30, 2005 and 2004, respectively.

 

     Nine months ended
September 30,


         2005    

       2004    

     (R$ millions, unaudited)

Switching equipment

   55.5    110.0

Transmission equipment

   89.1    112.1

Information Technology

   7.7    7.0

Others

   64.6    57.3
    
  

Total capital expenditures

   216.9    286.4

 

TCO did not pay dividends or interest on shareholders’ equity in the nine months ended September 30, 2005 and 2004.

 

Debt

 

As of September 30, 2005, TCO’s total debt position was as follows:

 

Debt


  

Amount

outstanding

as of

September 30,
2005


     (R$ millions)

Financing from banks

   139.0

Interest

   1.7

Related parties

   —  

Total long-term debt, excluding the short-term portion

   62.5

Short-term debt

   78.2

Total debt

   140.7

 

TCO’s long-term debt as of September 30, 2005 matures in accordance with the following schedule. The table below represents only the long-term debt as of September 30, 2005 and does not include the short-term portion of long-term debt as of September 30, 2005, which is included in short-term debt in the table above.

 

Year Ending December 31,


   Principal amount

     (R$ millions)

2006 (from September 30 to December 31)

   20.8

2007

   38.2

2008

   3.5

 

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As of September 30, 2005, TCO’s total debt was R$140.7 million, of which R$49.3 million, or 35%, was denominated in foreign currencies and therefore exposed to currency fluctuations. Of that amount, R$42.3 million was denominated in U.S. dollars (U.S.$19.0 million) and R$7.0 million was denominated in UMBNDES. Devaluation of the real results in exchange losses on foreign currency indebtedness. In order to protect against the risk of devaluation of the real, TCO has entered into over-the-counter derivatives transactions with international and domestic financial institutions. In the nine months ended September 30, 2005, TCO’s derivatives positions produced a loss of R$28.2 million, which was partially offset by the R$11.4 million of exchange gains on TCO’s foreign currency-denominated debt. As of September 30, 2005, TCO had derivative contracts that covered amounts in excess of TCO’s foreign currency-denominated debt.

 

TCO is exposed to interest rate risk as a consequence of its floating rate debt. As of September 30, 2005, approximately 98% of TCO’s interest-bearing liabilities bore interest at floating rates, primarily LIBOR for U.S. dollar-denominated debt, and TJLP and UMBNDES for real-denominated debt. Accordingly, TCO’s financing expenses increase if market interest rates increase. As of September 30, 2005, 100% of TCO’s foreign currency derivatives contracts bore interest payments linked to the CDI rate.

 

Some of the debt agreements of TCO and its subsidiaries contain cross-default provisions, restrictions on changes of control and restrictive covenants relating to the incurrence of indebtedness. Financial ratios include (1) current ratios, (2) capitalization ratios, (3) EBITDA margins, (4) interest coverage ratios and (5) debt to capital ratios. As of September 30, 2005, TCO and its subsidiaries were in compliance with their restrictive covenants. See note 14 to TCO’s unaudited consolidated financial statements included in this prospectus.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2005, there were no off-balance sheet arrangements. All of TCO’s majority-owned subsidiaries are included in its consolidated financial statements. TCO does not have any interests in, or relationships with, any special purpose entities that are not reflected in its consolidated financial statements.

 

U.S. GAAP Reconciliation

 

TCO prepares its consolidated financial statements in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. Net income for the nine months ended September 30, 2004 and 2005 was R$349.8 million and R$283.7 million, respectively, under U.S. GAAP, compared to net income of R$377.5 million and R$275.8 million, respectively, under Brazilian GAAP. Shareholders’ equity as of December 31, 2004 and September 30, 2005 was R$2,493.3 million and R$2,859.3 million, respectively, under U.S. GAAP, compared to shareholders’ equity of R$2,441.5 million and R$2,835.3 million, respectively, under Brazilian GAAP. See note 21 to TCO’s unaudited consolidated financial statements for a description of the principal differences between Brazilian GAAP and U.S. GAAP as they relate to TCO, and a reconciliation to U.S. GAAP of net losses and total shareholders’ equity.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations of TLE

 

TLE’s Consolidated Results of Operations for the Nine Months Ended September 30, 2004 and 2005

 

The following table sets forth certain components of TLE’s income for the periods indicated.

 

     Nine months ended
September 30,


       
     2005

    2004

    % Change

 
     (R$ millions, unaudited)        

Net operating revenue

   418.7     351.6     19.1 %

Cost of services and goods

   (233.4 )   (204.5 )   14.1 %
    

 

 

Gross profit

   185.3     147.1     26.0 %
    

 

 

Operating expenses:

                  

Selling expenses

   (141.8 )   (103.7 )   36.7 %

General and administrative expenses

   (42.8 )   (41.8 )   2.4 %

Other net operating expenses

   (4.7 )   (4.2 )   11.9 %
    

 

     

Operating income before net financial expense

   (4.0 )   (2.6 )   53.8 %
    

 

     

Net financial expense

   (44.7 )   (14.5 )   208.3 %
    

 

     

Operating loss

   (48.7 )   (17.1 )   184.8 %
    

 

     

Net non-operating (expenses) income

   0.2     (0.5 )   -140.0 %
    

 

     

Loss before income taxes

   (48.5 )   (17.6 )   175.6 %
    

 

     

Income taxes

   (6.0 )   (4.7 )   27.7 %
    

 

     

Net loss

   (54.5 )   (22.3 )   144.4 %
    

 

     

 

Operating Data

 

The following table sets forth certain operating data of TLE.

 

     Nine months ended
September 30,


       
         2005    

        2004    

    % Change

 

Total number of customers (in thousands)

   1,437     1,264     13.7 %

Contract

   319     283     12.6 %

Prepaid

   1,118     981     14.0 %

Market share(1)

   34.4 %   45.6 %   -11.2  p.p.

Net additions (in thousands)

   116     138     -15.8 %

Contract

   26     (7 )   n.a.  

Prepaid

   90     145     -38.0 %

Market share of net additions to customer base(1)

   11.0 %   18.8 %   -7.8  p.p.

Market penetration(1)

   26.4 %   17.7 %   8.7  p.p.

Customer acquisition cost, per customer(2) (R$)

   137     121     13.5 %

Monthly churn(3)

   2.8 %   2.8 %   —    

Average revenue per user (R$ per month)

   28.7     28.6     -0.3 %

Contract

   77.3     72.4     6.7 %

Prepaid

   13.6     13.3     2.4 %

Total minutes used per customer(4)

   89     87     2.3 %

Contract

   228     185     22.8 %

Prepaid

   47     53     -10.4 %

Employees

   355     377     -5.8 %

(1) Source: Anatel

 

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(2) Calculated as follows: (70% marketing expenses + costs of the distribution network + handset subsidy) / gross additions.
(3) The number of customers that leave the company during the period, calculated as a percentage of the simple average of customers at the beginning and end of the period.
(4) Total minutes of calls received and made by the company’s customers divided by the average lines in service during the relevant year (including roaming in and excluding roaming out).

 

Net Operating Revenue

 

The composition of operating revenues by category of service is presented in TLE’s consolidated financial statements and discussed below before deduction of value-added and other taxes. The following table sets forth the components of TLE’s operating revenues for the periods indicated, as well as the percentage change of each component from period to period.

 

     Nine months ended
September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions,
unaudited)
       

Gross operating revenue:

                  

Usage charges

   255.6     200.6     27.4 %

Sales of handsets and accessories

   145.9     103.3     41.2 %

Monthly subscription charges

   24.4     29.5     -17.3 %

Interconnection fees

   156.3     148.1     5.5 %

Other

   36.1     22.6     59.7 %
    

 

     

Total gross operating revenue

   618.3     504.1     22.7 %
    

 

     

Value-added and other indirect taxes

   (117.1 )   (99.1 )   18.2 %

Sales and services discount and return of goods sold

   (82.5 )   (53.4 )   54.5 %
    

 

     

Net operating revenue

   418.7     351.6     19.1 %
    

 

     

 

Net operating revenue increased 19.1% to R$418.7 million for the nine months ended September 30, 2005 from R$351.6 million for the nine months ended September 30, 2004. The increase in net revenues was principally due to an increase in revenues from usage charges, sales of handsets and accessories and, to a lesser degree, interconnection fees and other revenues.

 

Usage charges. Revenues from usage charges increased 27.4% to R$255.6 million for the nine months ended September 30, 2005 from R$200.6 million for the nine months ended September 30, 2004, primarily due to a 13.7% increase in the customer base to 1.437 million lines in service as of September 30, 2005 from 1.264 million lines in service as of September 30, 2004. In addition, outgoing traffic grew by 18.3% mainly due to an increase in the customer base subject to contract (who make more outgoing calls than prepaid customers) to 319 thousand lines in service subject to contract (included in the total lines of service above) as of September 30, 2005 from 283 thousand lines as of September 30, 2004.

 

Sales of handsets and accessories. Revenues from sales of handsets and accessories increased 41.2% to R$145.9 million for the nine months ended September 30, 2005 from R$103.3 million for the nine months ended September 30, 2004. This increase was mainly due to an increase in the customer base described above, which resulted in part from promotional campaigns to acquire new customers. Revenues from handset sales are reported before commissions and promotional discounts and include value-added taxes. In general, the purpose of handset sales is to encourage growth in customers and traffic. Accordingly, TLE, like TCP, subsidizes part of the costs of handsets. Although profit margins vary from one handset model to another and from time to time, on average

 

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profit margins are negative after taxes and discounts. The subsidy strategy resulted in a gross loss (calculated as the difference from net operating revenues from sales of handsets and accessories minus the cost of handsets and accessories) for TLE of R$40.9 million for the nine months ended September 30, 2005, compared to R$40.8 for the nine months ended September 30, 2004.

 

Monthly subscription charges. Revenues from monthly subscription charges decreased 17.3% to R$24.4 million for the nine months ended September 30, 2005 from R$29.5 million for the nine months ended September 30, 2004. This decrease was principally due to increased competition and the impact of TLE’s “Right Planning” loyalty program, which was introduced in May 2004 and is similar to the TCP program of the same name. Under this program, TLE tailors its contracts to the usage needs of its contract customers, seeking to provide competitive prices based on their individual profiles. This program intends to increase the loyalty of TLE’s customers.

 

Interconnection fees. Revenues from network usage charges increased 5.5% to R$156.3 million for the nine months ended September 30, 2005 from R$148.1 million for the nine months ended September 30, 2004. This increase was principally due to increases in the inbound traffic entering the network, primarily from long-distance calls.

 

Others. Revenues from other services increased 59.7% to R$36.1 million for the nine months ended September 30, 2005 from R$22.6 million for the nine months ended September 30, 2004. The increase was principally due to the increase in TLE’s customer base and an increase in the use of data services by our customers, including text message services, or SMS, wireless internet services and other value-added services. The increase in the use of data services was due in part to increases in internet access, improvements in data service tools, an increase in the number of data transmission-enabled handsets and promotional campaigns to encourage the use of value-added services.

 

Value-added and other indirect taxes. Value-added and other indirect taxes increased 18.2% to R$117.1 million for the nine months ended September 30, 2005 from R$99.1 million for the nine months ended September 30, 2004. This increase occurred principally because of the increase in gross operating revenues other than from interconnection fees (which are not subject to these taxes). These value-added and other indirect taxes are the same taxes as those that apply to TCP. Value-added taxes and other indirect taxes were 18.9% of TLE’s gross operating revenue in the nine months ended September 30, 2005, compared to 19.7% in the nine months ended September 30, 2004. The effective rate of taxes on gross operating revenues varies depending on the composition of TLE’s revenues.

 

Sales and services discount and returns of goods sold. Deductions from operating revenues include discounts on cellular handset sales, discounts on services and returns of goods sold. Discounts and returns increased 54.5% to R$82.5 million for the nine months ended September 30, 2005 from R$53.4 million for the nine months ended September 30, 2004. The increase was principally due to increases in discounts on handsets and accessories targeted at lower income customers in response to aggressive competition from other providers. Sales and services discounts and returns of good sold represented 10.6% and 13.3%, respectively, of TLE’s gross operating revenues for the nine months ended September 30, 2004 and 2005.

 

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Cost of Services and Goods

 

The following table sets forth the components of TLE’s costs of services and goods sold for the periods indicated, as well as the percentage change of each component from period to period.

 

     Nine months ended
September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions,
unaudited)
       

Depreciation and amortization

   (53.2 )   (56.2 )   -5.3 %

Materials and services

   (34.0 )   (26.7 )   27.3 %

Interconnection charges

   (11.5 )   (12.6 )   -8.7 %

Personnel

   (4.0 )   (2.9 )   37.9 %

Rental, insurance and other related expenses

   (10.4 )   (8.9 )   16.9 %

Cost of handsets and accessories

   (102.5 )   (81.9 )   25.2 %

Fistel and other taxes

   (17.8 )   (15.3 )   16.3 %
    

 

     

Cost of services and goods

   (233.4 )   (204.5 )   14.1 %

 

TLE’s cost of services and goods increased 14.1% to R$233.4 million for the nine months ended September 30, 2005 from R$204.5 million for the nine months ended September 30, 2004. The increase was principally due to an increase in the cost of handsets and accessories and materials and services. The gross profit margin (gross profit as a percentage of net operating revenues) was 44.3% for the nine months ended September 30, 2005, compared to 41.8% for the nine months ended September 30, 2004.

 

Depreciation and amortization. Depreciation and amortization expenses decreased 5.3% to R$53.2 million for the nine months ended September 30, 2005 from R$56.2 million for the nine months ended September 30, 2004. The decrease was principally due to the end of the period of depreciation for certain assets.

 

Materials and services. Cost of materials and services increased 27.3% to R$34.0 million for the nine months ended September 30, 2005 from R$26.7 million for the nine months ended September 30, 2004. The increase was due to increases in the cost of third-party services and rental payments, such as network maintenance services and the costs of rented circuits and transmission lines, resulting mainly from the increase in the customer base, greater penetration of TLE’s network in its region and efforts to increase the quality of the services provided (such as improved coverage).

 

Interconnection charges. Interconnection charges include the charges that TLE pays to other telecommunications providers for the use of their networks to complete local and long-distance calls that originate from TLE’s network. Interconnection charges decreased 8.7% to R$11.5 million for the nine months ended September 30, 2005 from R$12.6 million for the nine months ended September 30, 2004, primarily due to the effects of the SMP regime and the “partial Bill & Keep” billing system.

 

Personnel. Personnel expenses increased 37.9% to R$4.0 million for the nine months ended September 30, 2005 from R$2.9 million for the nine months ended September 30, 2004. This increase was principally due to an approximate 6% increase in salaries under the terms of TLE’s collective bargaining agreement, which is renegotiated annually to take effect on November 1, and due to training program costs.

 

Rentals, insurance and other related expenses. Rentals, insurance and condominium fees increased 16.9% to R$10.4 million for the nine months ended September 30, 2005 from R$8.9 million for the nine months ended September 30, 2004. This increase was principally due to the expansion of TLE’s network and the renegotiation of contracts.

 

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Cost of handsets and accessories. The cost of handsets and accessories increased 25.2% to R$102.5 million for the nine months ended September 30, 2005 from R$81.9 million for the nine months ended September 30, 2004. The increase was principally due to the increase in the customer base, as well as an increase in the average prices of handsets sold related to marketing efforts targeting customers in higher income brackets.

 

Fistel and other taxes. Fistel and other tax expenses increased 16.3% to R$17.8 million for the nine months ended September 30, 2005 from R$15.3 million for the nine months ended September 30, 2004. The increase was principally due to the increase in the customer base.

 

Operating Expenses

 

The following table sets forth the components of TLE’s operating expenses for the periods indicated, as well as the percentage change of each component from period to period.

 

     Nine months ended
September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions,
unaudited)
       

Selling expenses

   (141.8 )   (103.7 )   36.7 %

General and administrative expenses

   (42.8 )   (41.8 )   2.4 %

Other net operating expenses

   (4.7 )   (4.2 )   11.9 %
    

 

     

Operating expenses

   (189.3 )   (149.7 )   26.5 %
    

 

     

 

Operating expenses increased 26.5% to R$189.3 million for the nine months ended September 30, 2005 from R$149.7 million for the nine months ended September 30, 2004. The increase resulted mainly from the increase in selling expenses to face aggressive competition in the market.

 

Selling expenses. Selling expenses increased 36.7% to R$141.8 million for the nine months ended September 30, 2005 from R$103.7 million for the nine months ended September 30, 2004. The increase was principally due to an increase in third-party services (such as marketing and promotional services) in a highly competitive environment, an increase in provisions for doubtful accounts, an increase in the customer base and an increase in commissions to independent distributors in order to attract higher quality customers. TLE’s provision for doubtful accounts increased 63.3% to R$14.7 million for the nine months ended September 30, 2005 from R$9.0 million for the nine months ended September 30, 2004, principally due to an increase in the customer base and the improper use of our network. As a result of this increase, provisions for doubtful accounts were 2.4% of gross revenues for the nine months ended September 30, 2005, compared to 1.8% of gross revenues for the nine months ended September 30, 2004.

 

General and administrative expenses. General and administrative expenses increased 2.4% to R$42.8 million for the nine months ended September 30, 2005 from R$41.8 million for the nine months ended September 30, 2004. The increase was principally due to increases in expenses for outsourced services and in rental, insurance and condominium fees relating to the expansion of our network, partially offset by a decrease in administrative personnel costs and taxes and contributions.

 

Other net operating expense. Other net operating expenses increased 11.9% to R$4.7 million for the nine months ended September 30, 2005 from R$4.2 million for the nine months ended September 30, 2004, due in part to a tax fine imposed, a one-time adjustment to inventory and an increase in reserves for litigation contingencies, partially offset by an increase in income from handset manufacturers’ incentives and from fines.

 

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Net Financial Expense

 

The following table sets forth the components of TLE’s net financial expense for the periods indicated, as well as the percentage change of each component from period to period.

 

     Nine months ended
September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions,
unaudited)
       

Financial income

   5.7     2.1     171.4 %

Foreign currency exchange gain and losses

   53.9     6.8     692.6 %

Net losses on foreign currency derivative contracts

   (89.4 )   (12.2 )   632.8 %

Financial expenses

   (14.9 )   (11.2 )   33.0 %
    

 

     

Financial expense, net

   (44.7 )   (14.5 )   208.3 %
    

 

     

 

TLE had net financial expense of R$44.7 million for the nine months ended September 30, 2005, compared to net financial expense of R$14.5 million for the nine months ended September 30, 2004. This change was due in part to an increase in the average CDI rate to 14.09% for the nine months ended September 30, 2005 from 11.72% for the nine months ended September 30, 2004, which led to increased financial expense on higher net debt during the period. TLE also recorded non-recurring interest expense for a fine relating to ICMS tax (state value-added tax) paid in September 2005. TLE recorded a R$47.1 million increase in exchange gains, which was more than offset by a R$77.3 million increase in losses on foreign currency derivative contracts from period to period.

 

Income and Social Contribution Taxes

 

Income and social contribution tax expenses increased 27.7% to R$6.0 million for the nine months ended September 30, 2005 from R$4.7 million for the nine months ended September 30, 2004, respectively. This increase was principally due to an increase in income before income and social contribution taxes at Telergipe, one of TLE’s operating subsidiaries. In spite of the loss before income and social contribution taxes of R$48.5 million that we recorded for the nine months ended September 30, 2005, we recorded income taxes in the period because of the taxable income of Telergipe. According to Brazilian tax law, losses from consolidated entities cannot be used to offset income of other consolidated entities.

 

Net Loss

 

As a result of the foregoing, TLE recorded a net loss of R$54.5 million for the nine months ended September 30, 2005, compared to R$22.3 million for the nine months ended September 30, 2004.

 

TLE’s Liquidity and Capital Resources

 

Sources of Funds

 

TLE generated cash flow from operations of R$33.6 million and R$5.8 million in the nine months ended September 30, 2005 and 2004, respectively.

 

TLE had net cash used in financing activities of R$28.7 million in the nine months ended September 30, 2005, compared to net cash provided by financing activities of R$21.2 million in the nine months ended September 30, 2004. In the nine months ended September 30, 2005, net cash used in financing activities included loan repayments of R$40.7 million and net settlements on derivative contracts of R$29.6 million, partially offset by new loans obtained of R$36.0 million.

 

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TLE had R$116.6 million in long-term loans and financing as of September 30, 2005. TLE’s R$146.7 million in short-term indebtedness as of September 30, 2005 consisted primarily of funding from financial institutions. As of September 30, 2005, TLE had a working capital deficit (current assets minus current liabilities) of R$109.7 million, compared to working capital of R$46.7 million as of December 31, 2004.

 

We believe that TLE’s available borrowing capacity, together with funds generated by operations, should provide sufficient liquidity and capital resources to pursue TLE’s business strategy for the foreseeable future with respect to working capital, capital expenditures and other operating needs.

 

Uses of Funds

 

TLE’s principal uses of funds are for capital expenditures and servicing of its debt.

 

Capital expenditures (including capitalized interest) consumed cash flows of R$63.0 million in the nine months ended September 30, 2005, compared to R$63.3 million in the nine months ended September 30, 2004. Repayment of debt consumed cash flows of R$40.7 million and R$66.6 million in the nine months ended September 30, 2005 and 2004, respectively. TLE did not pay dividends or interest on shareholders’ equity in the nine months ended September 30, 2005 and 2004, respectively.

 

     Nine months
ended
September 30,


     2005

   2004

     (R$ millions,
unaudited)

Switching equipment

   15.3    31.8

Transmission equipment

   20.9    15.0

Information Technology

   1.9    1.1

Others

   24.9    15.4
    
  

Total capital expenditures

   63.0    63.3

 

Debt

 

As of September 30, 2005, TLE’s total debt position was as follows:

 

Debt


   Amount
outstanding
as of
September 30,
2005


     (R$ millions,
unaudited)

Financing from banks

   257.9

Financing from suppliers

   0.8

Interest

   4.6

Related parties

   —  

Total long-term debt, excluding the short-term portion

   116.6

Short-term debt

   146.7

Total debt

   263.3

 

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TLE’s long-term debt as of September 30, 2005 matures in accordance with the following schedule. The table below represents only the long-term debt as of September 30, 2005 and does not include the short-term portion of long-term debt as of September 30, 2005, which is included in short-term debt in the table above.

 

Year Ending December 31,


   Principal amount

     (R$ millions,
unaudited)

2008

   116.6

 

As of September 30, 2005, TLE’s total debt was R$263.3 million, of which R$263.3 million, or 100%, was denominated in U.S. dollars (US$118.5 million) and therefore exposed to currency fluctuations. Devaluation of the real results in exchange losses on foreign currency indebtedness. In order to protect against the risk of devaluation of the real, TLE has entered into over-the-counter derivatives transactions with international and domestic financial institutions. In the nine months ended September 30, 2005, TLE’s derivatives positions produced a loss of R$89.5 million, which was partially offset by the R$49.5 million of exchange gains on TLE’s foreign currency-denominated debt. As of September 30, 2005, TLE had derivative contracts that covered amounts in excess of TLE’s foreign currency-denominated debt.

 

TLE is exposed to interest rate risk as a consequence of TLE’s floating rate debt. As of September 30, 2005, approximately 44.3% of TLE’s interest-bearing liabilities bore interest at floating rates, primarily LIBOR.

 

In addition, TLE’s debt as of September 30, 2005 included U.S. dollar-denominated debt issued by several lenders pursuant to Central Bank Resolution No. 2,770, which allows Brazilian banks to make certain U.S. dollar-denominated loans. TLE had US$63.6 million outstanding under such loans as of September 30, 2005. The loans had an average maturity date of September 2006 and an average interest rate of 3.32%.

 

Some of the debt agreements of TLE and its subsidiaries contain cross-default provisions, restrictions on changes of control and restrictive covenants relating to the incurrence of indebtedness. Financial ratios involve, (1) interest coverage ratios and (2) debt to capital ratios. As of September 30, 2005, Telebahia, one of TLE’s subsidiaries, was not in compliance with a financial covenant under one of its debt agreements with the European Investment Bank, representing US$38 million in outstanding debt. TLE is in discussions with the European Investment Bank regarding a waiver to this covenant.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2005, there were no off-balance sheet arrangements. All of TLE’s majority-owned subsidiaries are included in its consolidated financial statements. TLE does not have any interests in, or relationships with, any special purpose entities that are not reflected in its consolidated financial statements.

 

Contractual Obligations and Commercial Commitments

 

Total contractual obligations as of September 30, 2005 were R$741.5 million, compared to R$689.3 million as of December 31, 2004, mainly due to an increase in operating leases.

 

U.S. GAAP Reconciliation

 

TLE prepares its consolidated financial statements in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. Net losses for the nine months ended September 30, 2004 and 2005 were R$33.0 million and R$59.9 million, respectively, under U.S. GAAP, compared to net losses of R$22.3 million and R$54.5 million, respectively, under Brazilian GAAP. Shareholders’ equity as of December 31, 2004 and September 30, 2005 was R$385.7 million and R$325.8 million, respectively, under U.S. GAAP, compared to

 

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shareholders’ equity of R$374.5 million and R$320.0 million, respectively, under Brazilian GAAP. See note 20 to TLE’s unaudited consolidated financial statements for a description of the principal differences between Brazilian GAAP and U.S. GAAP as they relate to TLE, and a reconciliation to U.S. GAAP of net losses and total shareholders’ equity.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations of TSD

 

TSD’s Consolidated Results of Operations for the Nine Months Ended September 30, 2004 and 2005

 

The following table sets forth certain components of TSD’s income for the periods indicated.

 

     Nine months ended
September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions, unaudited)        

Net operating revenue

   1,505.3     1,408.1     6.9 %

Cost of services and goods

   (777.4 )   (761.8 )   2.0 %
    

 

     

Gross profit

   727.9     646.3     12.6 %
    

 

     

Operating expenses:

                  

Selling expenses

   (462.2 )   (360.0 )   28.4 %

General and administrative expenses

   (148.4 )   (150.1 )   -1.1 %

Other net operating expenses

   (6.3 )   (6.0 )   5.0 %
    

 

     

Operating income before gains of unconsolidated affiliates and net financial expense

   111.0     130.2     -14.7 %
    

 

     

Net financial expenses

   14.6     7.0     108.6 %
    

 

     

Operating income

   125.6     137.2     -8.5 %
    

 

     

Net non-operating (expenses) income

   0.8     (0.1 )   -900.0 %
    

 

     

Income before minority interests and taxes

   126.4     137.1     -7.8 %
    

 

     

Income taxes

   (48.4 )   (52.5 )   -7.8 %

Minority interests

   —       —          
    

 

     

Net income

   78.0     84.6     -7.8 %
    

 

     

 

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Operating data

 

The following table sets forth certain operating data of TSD.

 

     Nine months ended
September 30,


       
         2005    

        2004    

    % Change

 

Total number of customers (in thousands)

   4,642     4,065     14.2 %

Contract

   1,421     1,181     20.3 %

Prepaid

   3,221     2,884     11.7 %

Market share(1)

   44.2 %   48.4 %   -4.2  p.p.

Net additions (in thousands)

   265     357     -25.8 %

Contract

   162     25     556.5 %

Prepaid

   103     332     -68.9 %

Market share of net additions to customer base(1)

   19.8 %   38.7 %   -18.9  p.p.

Market penetration(1)

   55.7 %   45.1 %   10.6  p.p.

Customer acquisition cost, per customer(2) (R$)

   181     159     -13.5 %

Monthly churn(3)

   2.4 %   2.6 %   -0.2  p.p.

Average revenue per user (R$ per month)

   31.2     34.4     -9.2 %

Contract

   68.5     74.1     -7.6 %

Prepaid

   14.9     16.6     -9.8 %

Total minutes used per customer(4)

   93     98     -5.8 %

Contract

   194     192     -1.1 %

Prepaid

   48     55     -12.6 %

Employees

   1,113     1,236     -10.0 %

(1) Source: Anatel
(2) Calculated as follows: (70% marketing expenses + costs of the distribution network + handset subsidy) / gross additions.
(3) The number of customers that leave the company during the period, calculated as a percentage of the simple average of customers at the beginning and end of the period.
(4) Total minutes of calls received and made by the company’s customers divided by the average lines in service during the relevant year (including roaming in and excluding roaming out).

 

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Net Operating Revenue

 

The composition of operating revenues by category of service is presented in TSD’s consolidated financial statements and discussed below before deduction of valued-added and other taxes. The following table sets forth the components of TSD’s operating revenues for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions, unaudited)        

Gross operating revenue:

                  

Usage charges

   1,016.0     813.6     24.9 %

Sales of handsets and accessories

   470.0     395.7     18.8 %

Monthly subscription charges

   70.2     108.5     -35.3 %

Interconnection fees

   556.4     592.6     -6.1 %

Other

   96.9     46.5     108.4 %
    

 

     

Total gross operating revenue

   2,209.5     1,956.9     12.9 %
    

 

     

Value-added and other indirect taxes

   (474.3 )   (397.5 )   19.3 %

Sales and services discount and return of goods sold

   (229.9 )   (151.3 )   51.9 %
    

 

     

Net operating revenue

   1,505.3     1,408.1     6.9 %
    

 

     

 

Net operating revenue increased 6.9% to R$1,505.3 million for the nine months ended September 30, 2005 from R$1,408.1 million for the nine months ended September 30, 2004, principally due to an increase in revenues from usage charges and, to a lesser degree, increases in revenues from sales of handsets and accessories and other revenues. These increases were partially offset by decreases in revenues from monthly subscription charges and interconnection fees.

 

Usage charges. Revenues from usage charges increased 24.9% to R$1,016.0 million for the nine months ended September 30, 2005 from R$813.6 million for the nine months ended September 30, 2004. This increase was principally due to a 14.2% increase in the customer base to 4.642 million lines in service as of September 30, 2005 from 4.065 million lines in service as of September 30, 2004. In addition, outgoing traffic also grew by 20.8% primarily due to an increase in the customer base subject to contract (who make more outgoing calls than prepaid customers) to 1.4 million lines in service subject to contract (included in the total lines of service above) as of September 30, 2005 from 1.2 million lines as of September 30, 2004.

 

Sales of handsets and accessories. Revenues from sales of handsets and accessories increased 18.8% to R$470.0 million for the nine months ended September 30, 2005 from R$395.7 million for the nine months ended September 30, 2004. This increase was mainly due to the increase in the customer base described above, which resulted in part from promotional campaigns to acquire new customers. Revenues from handset sales are reported before commissions and promotional discounts and include value-added taxes. In general, the purpose of handset sales is to encourage growth in customers and traffic. Accordingly, TSD, like TCP, subsidizes part of the costs of handsets. Although profit margins vary from one handset model to another and from time to time, on average profit margins are negative after taxes and discounts. The subsidy strategy resulted in a gross loss (calculated as the difference from net operating revenues from sales of handsets and accessories minus the cost of handsets and accessories) for TSD of R$131.4 million for the nine months ended September 30, 2005, compared to R$125.2 for the nine months ended September 30, 2004.

 

Monthly subscription charges. Revenues from monthly subscription charges decreased 35.3% to R$70.2 million for the nine months ended September 30, 2005 from R$108.5 million for the nine months ended September 30, 2004. This decrease was principally due to competition and the impact of TSD’s “Right Planning” loyalty program, which was introduced in May 2004 and is similar to the TCP program of the same name.

 

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Interconnection fees. Revenues from interconnection fees decreased 6.1% to R$556.4 million for the nine months ended September 30, 2005 from R$592.6 million for the nine months ended September 30, 2004. This decrease was principally due to the trend toward a greater volume of cellular to cellular calls and a reduction in volume of fixed line to cellular calls and to the effect of the partial “Bill & Keep” system under Anatel’s Personal Mobile Service (Serviço Móvel Pessoal, or SMP) regime. The migration of calls away from fixed line services decreases TSD’s interconnection fees because the interconnection fees that apply to calls from a fixed line to a cellular line are higher than the fees that apply to calls from a cellular line to another cellular line.

 

Others. Revenues from other services increased 108.4% to R$96.9 million for the nine months ended September 30, 2005 from R$46.5 million for the nine months ended September 30, 2004. The increase was principally due to the increase in TSD’s customer base and an increase in the use of data services by our customers, including text message services, or SMS, wireless internet services and other value-added services. The increase in the use of data services was due in part to increases in internet access, improvements in data service tools, the launch of new services and an increase in the number of data transmission-enabled handsets. New services launched in the nine months ended September 30, 2005 include SmartMail, a wireless e-mail service; Corporate VIVO Play 3G, a third generation service providing cellular access to multimedia content; and games.

 

Value-added and other indirect taxes. Value-added and other indirect taxes increased 19.3% to R$474.3 million for the nine months ended September 30, 2005 from R$397.5 million for the nine months ended September 30, 2004. This increase occurred principally because of the increase in gross operating revenues other than from interconnection fees (which are not subject to these taxes). Value-added taxes and other indirect taxes were 21.5% of TSD’s gross operating revenues in the nine months ended September 30, 2005, compared to 20.3% in the nine months ended September 30, 2004. The effective rate of taxes on gross operating revenues varies depending on the composition of TSD’s revenues.

 

Sales and services discount and returns of goods sold. Deductions from operating revenues include discounts on cellular handset sales, discounts on services and returns of goods sold. Discounts and returns increased 51.9% to R$229.9 million for the nine months ended September 30, 2005 from R$151.3 million for the nine months ended September 30, 2004. The increase was principally due to increases in discounts on handsets and accessories in response to aggressive competition from other providers. Sales and services discounts and returns of good sold represented 7.7% and 10.4%, respectively, of TSD’s gross operating revenues for the nine months ended September 30, 2004 and 2005.

 

Cost of Services and Goods

 

The following table sets forth the components of TSD’s costs of services and goods sold for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions, unaudited)        

Depreciation and amortization

   (175.4 )   (206.8 )   -15.2 %

Materials and services

   (96.1 )   (77.2 )   24.5 %

Interconnection charges

   (34.4 )   (41.2 )   -16.5 %

Personnel

   (14.7 )   (12.9 )   14.0 %

Rental, insurance and other related expenses

   (36.7 )   (34.8 )   5.5 %

Cost of handsets and accessories

   (362.5 )   (343.0 )   5.7 %

Fistel and other taxes

   (57.6 )   (45.9 )   25.5 %
    

 

     

Cost of services and goods

   (777.4 )   (761.8 )   2.0 %
    

 

     

 

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TSD’s cost of services and goods increased 2.0% to R$777.4 million for the nine months ended September 30, 2005 from R$761.8 million for the nine months ended September 30, 2004. The increase was principally due to increases in the cost of handsets and accessories, materials and services and taxes, partially offset by decreases in depreciation and amortization expenses and, to a lesser degree, interconnection charges. The gross profit margin (gross profit as a percentage of net operating revenues) was 48.4% for the nine months ended September 30, 2005, compared to 45.9% for the nine months ended September 30, 2004.

 

Depreciation and amortization. Depreciation and amortization expenses decreased 15.2% to R$175.4 million for the nine months ended September 30, 2005 from R$206.8 million for the nine months ended September 30, 2004. The decrease was principally due to our analog assets becoming fully depreciated.

 

Materials and services. Cost of materials and services increased 24.5% to R$96.1 million for the nine months ended September 30, 2005 from R$77.2 million for the nine months ended September 30, 2004. The increase was principally due to an increase in the cost of rental payments, such as the costs of rented circuits and transmission lines, resulting mainly from the increase in the customer base, greater penetration of TSD’s network in its region and efforts to increase the quality of the services provided (such as to provide third generation technology and increased capacity and coverage).

 

Interconnection charges. Interconnection charges are the charges that TSD pays to other telecommunications providers for the use of their networks to complete local and long-distance calls that originate from TSD’s network. Interconnection charges decreased 16.5% to R$34.4 million for the nine months ended September 30, 2005 from R$41.2 million for the nine months ended September 30, 2004, primarily due to the effects of the SMP regime and the “partial Bill & Keep” billing system.

 

Personnel. Personnel expenses increased 14.0% to R$14.7 million for the nine months ended September 30, 2005 from R$12.9 million for the nine months ended September 30, 2004. This increase was principally due to an approximate 6% increase in salaries under the terms of TSD’s collective bargaining agreement, which it renegotiates annually to take effect on November 1, and due to training program costs.

 

Rentals, insurance and other related expenses. Rentals, insurance and other related expenses increased 5.5% to R$36.7 million for the nine months ended September 30, 2005 from R$34.8 million for the nine months ended September 30, 2004. The increase was principally due to expansion of TSD’s network.

 

Cost of handsets and accessories. The cost of handsets and accessories increased 5.7% to R$362.5 million for the nine months ended September 30, 2005 from R$343.0 million for the nine months ended September 30, 2004. The increase was principally due to the increase in the customer base and in average prices of handsets sold relating to marketing efforts targeting customers in higher income brackets.

 

Fistel and other taxes. Fistel and other tax expenses increased 25.5% to R$57.6 million for the nine months ended September 30, 2005 from R$45.9 million for the nine months ended September 30, 2004. The increase was principally due to the increase in the customer base.

 

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Operating Expenses

 

The following table sets forth the components of TSD’s operating expenses for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions, unaudited)        

Selling expenses

   (462.2 )   (360.0 )   28.4 %

General and administrative expenses

   (148.4 )   (150.1 )   -1.1 %

Other net operating income (expense), net

   (6.3 )   (6.0 )   5.0 %
    

 

     

Operating expenses

   (616.9 )   (516.1 )   19.5 %
    

 

     

 

Operating expenses increased 19.5% to R$616.9 million for the nine months ended September 30, 2005 from R$516.1 million for the nine months ended September 30, 2004. The increase resulted mainly from the increase in selling expenses in the face of aggressive competition.

 

Selling expenses. Selling expenses increased 28.4% to R$462.2 million for the nine months ended September 30, 2005 from R$360.0 million for the nine months ended September 30, 2004. The increase was principally due to an increase in third-party services (such as marketing, client care and call center services), marketing and promotional services in a highly competitive environment and an increase in commissions paid to independent distributors (which increased due to the number of handsets sold). TSD’s provision for doubtful accounts increased 3.0% to R$30.5 million for the nine months ended September 30, 2005 from R$29.6 million for the nine months ended September 30, 2004, principally due an increase in the customer base and the improper use of TSD’s network. Provisions for doubtful accounts were 1.4% of gross operating revenues for the nine months ended September 30, 2005, compared to 1.5% of gross operating revenues for the nine months ended September 30, 2004.

 

General and administrative expenses. General and administrative expenses decreased 1.1% to R$148.4 million for the nine months ended September 30, 2005 from R$150.1 million for the nine months ended September 30, 2004. The slight decrease was principally due to favorable renegotiations of contracts.

 

Other net operating (expense) income. Other net operating expense increased 5.0% to R$6.3 million for the nine months ended September 30, 2005 from R$6.0 million for the nine months ended September 30, 2004, principally due to an increase in reserves for litigation contingencies and taxes, partially offset by recovery of expenses due to favorable results in certain litigation and by income from handset manufacturers’ incentives.

 

Net Financial Income (Expense)

 

The following table sets forth the components of TSD’s net financial income for the periods indicated, as well as the percentage change from period to period.

 

    

Nine months ended

September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions, unaudited)        

Financial income

   62.6     53.5     17.0 %

Exchange gain and losses

   10.0     (4.7 )   -312.8 %

Gain (losses) on foreign currency derivative contracts

   (31.1 )   (13.9 )   123.7 %

Financial expenses

   (26.9 )   (27.9 )   -3.6 %
    

 

     

Financial income, net

   14.6     7.0     108.6 %
    

 

     

 

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TSD had net financial income of R$14.6 million for the nine months ended September 30, 2005, compared to net financial income of R$7.0 million for the nine months ended September 30, 2004. This change was due in part to an increase in the average CDI rate to 14.09% for the nine months ended September 30, 2005 from 11.72% for the nine months ended September 30, 2004, which led to increased financial income on higher average cash balances during the period.

 

Income and Social Contribution Taxes

 

Income and social contribution tax expenses decreased 7.8% to R$48.4 million for the nine months ended September 30, 2005 from R$52.5 million for the nine months ended September 30, 2004. This decrease was principally due to the reduction in income before income and social contribution taxes from period to period. TSD’s effective tax rate was 38.3% in both the nine months ended September 30, 2005 and 2004.

 

Net Income

 

As a result of the foregoing, TSD recorded net income of R$78.0 million for the nine months ended September 30, 2005, compared to R$84.6 million for the nine months ended September 30, 2004.

 

TSD’s Liquidity and Capital Resources

 

Sources of Funds

 

TSD generated cash flow from operations of R$214.4 million and R$277.7 million in the nine months ended September 30, 2005 and 2004, respectively.

 

TSD had net cash used in financing activities of R$25.0 million in the nine months ended September 30, 2005, compared to net cash used in financing activities of R$163.2 million in the nine months ended September 30, 2004. In the nine months ended September 30, 2005, net cash used in financing activities included loan repayments of R$28.0 million and net settlements on derivatives contracts of R$33.5 million, partially offset by a credit in the amount of R$37.1 million relating to cash received from fractional shares which were sold in an auction in connection with TSD’s reverse stock split and which cash was not claimed by shareholders at such time but which is payable to shareholders upon demand.

 

TSD had no long-term loans or financing as of September 30, 2005. TSD’s R$15.6 million in short-term indebtedness as of September 30, 2005 consisted primarily of funding from financial institutions. As of September 30, 2005, TSD had working capital (current assets minus current liabilities) of R$653.6 million, compared to working capital of R$466.7 million as of December 31, 2004.

 

We believe that TSD’s available borrowing capacity, together with funds generated by operations, should provide sufficient liquidity and capital resources to pursue TSD’s business strategy for the foreseeable future with respect to working capital, capital expenditures and other operating needs.

 

Uses of Funds

 

TSD’s principal uses of funds are for capital expenditures, servicing of its debt and payments of dividends to shareholders.

 

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Capital expenditures (including capitalized interest) consumed cash flows of R$171.9 million in the nine months ended September 30, 2005 compared to R$126.4 million in the nine months ended September 30, 2004. Repayment of debt consumed cash flows of R$28.0 million and R$144.3 million in the nine months ended September 30, 2005 and 2004, respectively. Capital expenditures were as set forth in the table below.

 

     Nine months ended
September 30,


             2005        

           2004        

     (R$ millions, unaudited)

Switching equipment

   51.4    49.4

Transmission equipment

   58.9    29.5

Information Technology

   6.1    4.0

Others

   55.5    43.5
    
  

Total capital expenditures

   171.9    126.4

 

TSD did not pay dividends or interest on shareholders’ equity in the nine months ended September 30, 2005 and 2004.

 

Debt

 

As of September 30, 2005, TSD’s total debt was R$15.6 million, of which R$15.6 million, or 100%, was denominated in U.S. dollars (U.S.$7.0 million) and therefore exposed to currency fluctuations. Devaluation of the real results in exchange losses on foreign currency indebtedness. In order to protect against the risk of devaluation of the real, TSD has entered into over-the-counter derivatives transactions with international and domestic financial institutions. In the nine months ended September 30, 2005, TSD’s derivatives positions produced a loss of R$10.7 million, which was partially offset by the R$5.6 million of exchange gains on TSD’s foreign currency-denominated debt. As of September 30, 2005, TSD had derivative contracts that covered amounts in excess of TSD’s foreign currency-denominated debt.

 

TSD is exposed to interest rate risk as a consequence of TSD’s floating rate debt. As of September 30, 2005, approximately 53.6% of TSD’s interest-bearing liabilities bore interest at floating rates, primarily LIBOR.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2005, there were no off-balance sheet arrangements. All of TSD’s majority-owned subsidiaries are included in its consolidated financial statements. TSD does not have any interests in, or relationships with, any special purpose entities that are not reflected in its consolidated financial statements.

 

Contractual Obligations and Commercial Commitments

 

Total contractual obligations as of September, 30, 2005 were R$1,212.7 million, compared to R$1,058.1 million as of December 31, 2004, mainly due to an increase in operating leases.

 

U.S. GAAP Reconciliation

 

TSD prepares its consolidated financial statements in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. Net income for the nine months ended September 30, 2004 and 2005 was R$26.1 million and R$59.6 million, respectively, under U.S. GAAP, compared to net income of R$84.6 million and R$78.0 million, respectively, under Brazilian GAAP. Shareholders’ equity as of December 31, 2004 and September 30, 2005 was R$1,991.3 million and R$2,048.4 million, respectively, under U.S. GAAP, compared to

 

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shareholders’ equity of R$1,970.7 million and R$2,048.7 million, respectively, under Brazilian GAAP. See note 21 to TSD’s unaudited consolidated financial statements for a description of the principal differences between Brazilian GAAP and U.S. GAAP as they relate to TSD, and a reconciliation to U.S. GAAP of net income and total shareholders’ equity.

 

Description of Celular CRT’s Business

 

Business Overview

 

Celular CRT Participações S.A., or Celular CRT, provides cellular telecommunications services in the state of Rio Grande do Sul through its wholly owned subsidiary Celular CRT S.A. Celular CRT uses a frequency range known as A Band that covers 69.7% of the municipalities in the state of Rio Grande do Sul and 95.9% of the population of that state. As of September 30, 2005, Celular CRT had 3.4 million cellular lines in service and a market share of approximately 50.3% in its authorization area, estimated based on the total number of cellular lines in service in that area as published by Anatel.

 

The following table sets forth information of Celular CRT’s cellular telecommunications base, coverage and related matters at the dates and for the periods indicated.

 

    

Nine months
ended
September 30,

2005


    Year ended December 31,

 
     2004

    2003

    2002

 

Cellular lines in service at period end (in thousands)

   3,391     3,215     2,523     2,078  

Contract customers

   854     788     687     611  

Prepaid customers

   2,537     2,427     1,836     1,467  

Growth in cellular lines in service during period

   176     692     445     293  

Churn(1)

   1.6 %   1.6 %   1.8 %   1.4 %

Estimated population in concession areas (in millions)(2)

   10.5     10.4     10.3     10.2  

Estimated covered population (in millions)(3)

   10.0     9.9     9.7     9.6  

Percentage of population covered(4)

   95.9 %   95.7 %   95.5     95.4  

Penetration at period-end(5)

   62.0 %   54.0 %   39.0 %   31.0 %

Percentage of municipalities covered

   69.7 %   67.8 %   67.8 %   67.6 %

Average monthly minutes of use per customer(6)

   70.0     79.5     82.3     91.6  

Market share(7)

   50.3 %   54.8 %   60.0 %   65.2 %

(1) Churn is the number of customers that leave Celular CRT during the period, calculated as a percentage of the simple average of customers at the beginning and end of the period.
(2) Projections based on estimates of the IBGE.
(3) Number of people in Celular CRT’s region that can access its cellular telecommunications signal.
(4) Percentage of the population in Celular CRT’s region that can access its cellular telecommunications signal.
(5) Number of cellular lines in service in Rio Grande do Sul, including those of its competitors, divided by the population of its region.
(6) Average monthly minutes of use per lines in service is the total minutes of calls received and made by Celular CRT’s customers divided by the average lines in service during the relevant year (includes roaming in and excludes roaming out).
(7) Estimate based on all lines in service in Rio Grande do Sul at period end.

 

Services

 

Celular CRT provides cellular telecommunications services using both digital and analog technologies. Celular CRT’s network provides both CDMA and TDMA digital services and AMPS, or analog services. All of Celular CRT’s services are provided in the frequency of 850 MHz.

 

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Celular CRT provides voice and ancillary services, including voicemail and voicemail notification, call forwarding, three-way calling, caller identification, short messaging, limitations on the number of used minutes, cellular chat rooms and data services such as wireless application protocol services through which clients can access WAP sites and portals. Celular CRT offers direct access to the Internet through either PCMCIA cards (Personal Computer Memory Card International Association, an organization consisting of some 500 companies that has developed standardized small, credit card-sized devices, called PC Cards) designed to connect compatible PDA’s (Personal Digital Assistant, a handheld device that combines computing, telephone/fax, Internet and networking features) and laptops or cellular phones by cable connection that offers to corporate subscribers secure access to their intranet and office resources. Celular CRT also offers services like Multimedia Message Service, MExE (Mobile Execution Environment) that enables the handset to download applications and execute them using a user interface with icons to identify the main services, such as voicemail, downloads and text messaging (SMS).

 

Celular CRT offers roaming services through agreements with local cellular service providers throughout Brazil and other countries that allow its subscribers to make and receive calls while out of Celular CRT’s authorization area. Celular CRT also provides reciprocal roaming services to subscribers of those cellular service providers while they are in its authorization area.

 

Celular CRT operated 30 points of sale as of December 31, 2004, in addition to an independent authorized service network comprised of both exclusive and nonexclusive dealers, with 965 service points capable of selling services and cell phones. As of December 31, 2004, credit recharges were available for customers at nearly 20,000 sites.

 

Network

 

As of December 31, 2004, Celular CRT’s network, which provides CDMA and TDMA digital and AMPS analog services, covered 67.1% of the municipalities in the state of Rio Grande do Sul, or 95.7% of the population of its region. Celular CRT’s network is connected primarily through a fiber-optic transmission system partially leased from Brasil Telecom. As of December 31, 2004, Celular CRT’s network included 15 cellular switches and 1,563 radio base stations.

 

Competition

 

Celular CRT faces intense competition in all the areas in which it operates, principally from other cellular service providers and also from fixed line operators. Many of these competitors are part of large, national or multinational groups and therefore have access to financing, new technologies and other benefits that derive from being owned by such a group. Fixed line operators generally charge much lower tariffs than cellular service providers.

 

Celular CRT’s principal cellular competitor is Claro (Telet S.A.), which operates in several regions in Brazil, including Celular CRT’s region. Other cellular competitors are Brasil Telecom S.A. and TIM. The main fixed line competitor in its area is Brasil Telecom.

 

Celular CRT also competes with certain other wireless telecommunications services, such as mobile radio (including digital trunking technology, offered by Nextel), paging and beeper services, which are used by some in its area as a substitute for cellular telecommunications services. These competing wireless telecommunications services are generally less expensive than cellular telecommunication services.

 

Satellite-operated services, which provide nationwide coverage, are also 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 Celular CRT offers and do not provide competitive coverage inside buildings.

 

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Other Information

 

Celular CRT’s business is influenced by a number of factors that are common to the VIVO companies. For information on certain of these factors, see the captions “Taxes on Telecommunications Services and Handset Sales,” “Billing and Collection,” “Fraud Detection and Prevention” and “Regulation of the Brazilian Telecommunications Industry” in TCP’s Annual Report on Form 20-F for the year ended December 31, 2004 incorporated by reference in this prospectus.

 

Litigation

 

The following is a description of certain litigation to which Celular CRT is a party. See note 14 to Celular CRT’s unaudited condensed consolidated interim financial statements and note 21 to Celular CRT’s audited consolidated financial statements included in this prospectus for the amounts of reserves established for certain claims in which an unfavorable outcome is considered probable, as well as certain information about amounts involved in claims in which an unfavorable outcome is considered possible.

 

Lune Projetos Especiais Telecomunicação Comércio e Ind. Ltda., or Lune, a Brazilian company, filed lawsuits against 23 wireless telecommunications operators, including Celular CRT. The lawsuits allege that the defendants violated Patent No. 9202624–9, related to a Caller ID system (Equipamento Controlador de Chamadas Entrantes e do Terminal do Usuário), granted to Lune by the Brazilian Intellectual Property Agency—INPI on September 30, 1997. Lune has requested that the defendants cease to provide Caller ID services and seeks payment from them for the alleged unauthorized use of the Caller ID system in an amount equivalent to the payment of fees received by the defendants for use of the Caller ID system. Lune’s right to use the patent was suspended by a federal judge in the State of São Paulo in a proceeding initiated against Lune and INPI by Ericsson Telecomunicações S.A. Telesp Celular and Telerj Celular filed identical lawsuits against Lune and INPI, and those lawsuits are still pending before the courts. We believe based on the opinion of outside counsel that the likelihood of an unfavorable outcome with respect to Lune’s claim against Celular CRT is possible. We are unable to determine at this time the extent of any potential liabilities with respect to this claim.

 

Celular CRT, together with other Brazilian wireless telecommunications operators, are defendants in certain lawsuits brought by the federal public prosecutor’s office and consumer protection associations challenging the deadline for the use of purchased prepaid minutes. Plaintiffs claim that purchased prepaid minutes should not expire after any specified deadline. Conflicting decisions have been issued by the federal courts reviewing this matter. Although we believe that Celular CRT’s criteria for imposing the deadline are in compliance with Anatel’s rules, we believe based on the opinion of outside counsel that an unfavorable outcome with respect to this claim is possible.

 

On November 27, 1998, Law No. 9,718 changed the method of calculation and effectively increased the amounts of certain taxes (the Contribution for the Financing of Social Security (Contribuição para Financiamento da Seguridade Social, or COFINS) and the Social Integration Program (Programa de Integração Social, or PIS)) owed by Celular CRT’s subsidiary. Although we claim that this increase is unconstitutional, based on the opinion of outside counsel we believe that an unfavorable outcome with respect to this claim is possible. However, we do not believe an unfavorable outcome would have a material adverse effect on Celular CRT’s financial condition and results of operations.

 

Several telecommunications operators, including Celular CRT, are defendants in a lawsuit brought by the federal public prosecutor’s office challenging the policy of passing the COFINS and PIS expenses to customers by incorporating them into their charges. Celular CRT is defending on the grounds that COFINS and PIS are cost components of the services provided to customers and, as such, should be incorporated into the price of such services, as is the practice throughout the telecommunications industry. We believe, based on the opinion of outside counsel, that an unfavorable outcome with respect to this claim is remote.

 

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The state of Rio Grande do Sul filed administrative proceedings against Celular CRT in order to collect amounts allegedly due as a result of taxes levied on international calls originated in Brazil during a specified period. We believe, based on the opinion of outside counsel, that an unfavorable outcome with respect to this claim is possible.

 

The municipality of Porto Alegre, in the state of Rio Grande do Sul, filed administrative proceedings against Celular CRT in order to collect amounts allegedly due as a services tax (Imposto Sobre Serviços, or ISS). The municipality claims that the payments received in consideration of the use of Celular CRT’s network could be considered remuneration under “a lease of a movable asset” and that therefore these payments should be subject to the application of ISS. Based on the opinion of counsel, we believe that Celular CRT will be successful in these proceedings, and, accordingly, Celular CRT has not established any reserves for this lawsuit.

 

Celular CRT filed a lawsuit challenging the application of the CIDE tax (Contribução de Intervenção no Domínio Econômico) on the remittances of payments owed to suppliers headquartered outside of Brazil in accordance with technology transfer and technological assistance contracts or trademark and software licenses, in accordance with the terms of Law No. 10,168/2002. We believe, based on the opinion of outside counsel, that an unfavorable outcome with respect to this claim is possible. Celular CRT has established reserves in respect of CIDE amounts not paid.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations of Celular CRT

 

Celular CRT’s Consolidated Results of Operations for the Nine Months Ended September 30, 2004 and 2005

 

The following table sets forth certain components of Celular CRT’s income for the periods indicated.

 

     Nine months ended
September 30,


       
             2005        

            2004        

    % Change

 
     (R$ millions, unaudited)        

Net operating revenue

   892.4     852.4     4.7 %

Cost of services and goods

   (420.3 )   (438.7 )   -4.2 %
    

 

     

Gross profit

   472.1     413.7     14.1 %
    

 

     

Operating expenses:

                  

Selling expenses

   (270.5 )   (183.0 )   47.8 %

General and administrative expense

   (76.5 )   (71.6 )   6.8 %

Other net operating income

   7.8     18.7     -58.3 %
    

 

     

Operating income before net financial expense

   132.9     177.8     -25.3 %
    

 

     

Equity in losses of unconsolidated affiliates

   —       —          

Net financial expense

   33.2     28.0     18.6 %
    

 

     

Operating income

   166.1     205.8     -19.3 %
    

 

     

Net non-operating expenses

   (2.3 )   (3.2 )   -28.1 %
    

 

     

Income before taxes

   163.8     202.6     -19.2 %
    

 

     

Income taxes

   (59.4 )   (70.7 )   -16.0 %
    

 

     

Net income

   104.4     131.9     -20.8 %
    

 

     

 

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Operating data

 

The following table sets forth certain operating data of Celular CRT.

 

     Nine months ended
September 30,


       
             2005        

            2004        

    % Change

 

Total number of customers (in thousands)

   3,391     2,953     14.8 %

Contract

   854     735     16.2 %

Prepaid

   2,537     2,218     14.4 %

Market share(1)

   50.3 %   57.5 %   -7.2  p.p.

Net additions (in thousands)

   176     429     -58.9 %

Contract

   66     48     38.3 %

Prepaid

   110     381     -71.2 %

Market share of net additions to customer base(1)

   20.3 %   47.4 %   -27.1  p.p.

Market penetration(1)

   63.3 %   48.7 %   14.6  p.p.

Customer acquisition cost, per customer(2) (R$)

   185     134     37.6 %

Monthly churn(3)

   1.6 %   1.7 %   -0.1  p.p.

Average revenue per user (R$ per month)

   26.7     29.3     -8.6 %

Contract

   66.7     67.4     -1.0 %

Prepaid

   12.6     14.9     -15.7 %

Total minutes used per customer(4)

   70     80     -12.8 %

Contract

   160     156     2.3 %

Prepaid

   39     53     -25.2 %

Employees

   444     563     -21.1 %

(1) Source: Anatel
(2) Calculated as follows: (70% marketing expenses + costs of the distribution network + handset subsidy) / gross additions.
(3) The number of customers that leave the company during the period, calculated as a percentage of the simple average of customers at the beginning and end of the period.
(4) Total minutes of calls received and made by the company’s customers divided by the average lines in service during the relevant year (including roaming in and excluding roaming out).

 

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Net Operating Revenue

 

The composition of operating revenues by category of service is presented in Celular CRT’s consolidated financial statements and discussed below before deduction of valued-added and other taxes. The following table sets forth the components of Celular CRT’s operating revenues for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions, unaudited)        

Usage charges

   573.9     422.4     35.9 %

Sales of handsets and accessories

   183.2     197.2     -7.1 %

Monthly subscription charges

   78.5     67.7     16.0 %

Interconnection fees

   312.2     340.0     -8.2 %

Other

   108.2     85.6     26.4 %
    

 

     

Total gross operating revenue

   1,256.0     1,112.9     12.9 %
    

 

     

Value-added and other indirect taxes

   (282.0 )   (200.2 )   40.9 %

Sales and services discount and return of goods sold

   (81.6 )   (60.3 )   35.3 %
    

 

     

Net operating revenue

   892.4     852.4     4.7 %
    

 

     

 

Net operating revenue increased 4.7% to R$892.4 million for the nine months ended September 30, 2005 from R$852.4 million for the nine months ended September 30, 2004. The increase in net operating revenue was principally due to an increase in revenues from usage charges and, to a lesser degree, other revenues. These increases were partially offset by decreases in revenues from interconnection fees and sales of handsets and accessories.

 

Usage charges. Revenues from usage charges increased 35.9% to R$573.9 million for the nine months ended September 30, 2005 from R$422.4 million for the nine months ended September 30, 2004. This increase was principally due to the 14.8% increase in the customer base to 3.391 million lines in service as of September 30, 2005 from 2.953 million lines in service as of September 30, 2004. In addition, outgoing traffic grew by 10.7% mainly due to an increase in the customer base subject to contract (who make more outgoing calls than prepaid customers) to 3.1 million lines in service subject to contract (included in the total lines of service above) as of September 30, 2005 from 2.8 million lines as of September 30, 2004.

 

Sales of handsets and accessories. Revenues from sales of handsets and accessories decreased 7.1% to R$183.2 million for the nine months ended September 30, 2005 from R$197.2 million for the nine months ended September 30, 2004. This decrease was principally due to Celular CRT’s strategy in 2005 of seeking to acquire new customers through loyalty programs that provide improved technology at competitive prices, while in 2004 Celular CRT placed greater emphasis on phasing out TDMA service and encouraging customers to use the new CDMA service. Revenues from handset sales are reported before commissions and promotional discounts and include value-added taxes. In general, the purpose of handset sales is to encourage growth in customers and traffic. Accordingly, Celular CRT, like TCP, subsidizes part of the costs of handsets. Although profit margins vary from one handset model to another and from time to time, on average profit margins are negative after taxes and discounts. The subsidy strategy resulted in a gross loss (calculated as the difference from net operating revenues from sales of handsets and accessories minus the cost of handsets and accessories) for Celular CRT of R$73.1 million for the nine months ended September 30, 2005, compared to R$67.2 million for the nine months ended September 30, 2004.

 

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Monthly subscription charges. Revenues from monthly subscription charges increased 16.0% to R$78.5 million for the nine months ended September 30, 2005 from R$67.7 million for the nine months ended September 30, 2004. This increase was principally due to the increase in the customer base subject to contract including, most significantly, corporate customers.

 

Interconnection fees. Revenues from interconnection fees decreased 8.2% to R$312.2 million for the nine months ended September 30, 2005 from R$340.0 million for the nine months ended September 30, 2004. This decrease was principally due to the trend toward a greater volume of cellular to cellular calls and a reduction in volume of fixed line to cellular calls and to the effect of the “partial Bill & Keep” system under Anatel’s Personal Mobile Service (Serviço Móvel Pessoal, or SMP) regime. The migration of callers away from fixed line services decreases Celular CRT’s interconnection fees because the interconnection fees that apply to calls from a fixed line to a cellular line are higher than the fees that apply to calls from a cellular line to another cellular line.

 

Others. Revenues from other services increased 26.4% to R$108.2 million for the nine months ended September 30, 2005 from R$85.6 million for the nine months ended September 30, 2004. The increase was principally due to the increase in Celular CRT’s customer base and an increase in the use of data services by Celular CRT’s customers, including text message services, or SMS, wireless internet services and other value-added services. The increase in the use of data services was due in part to increases in internet access, improvements in data service tools, an increase in the number of data transmission-enabled handsets and promotional campaigns to encourage the use of value-added services.

 

Value-added and other indirect taxes. Value-added and other indirect taxes increased 40.9% to R$282.0 million for the nine months ended September 30, 2005 from R$200.2 million for the nine months ended September 30, 2004 primarily resulting from an increase in tax rates relating to telecommunications services and also from the increase in gross operating revenues other than from interconnection fees (which are not subject to these taxes). These value-added and other indirect taxes are the same taxes as those that apply to TCP. Value-added taxes and other indirect taxes were 22.5% of Celular CRT’s gross operating revenue in the nine months ended September 30, 2005, compared to 18.0% in the nine months ended September 30, 2004. The effective rate of taxes on gross operating revenues varies depending on the composition of Celular CRT’s revenues.

 

Sales and services discount and returns of goods sold. Discounts and returns increased 35.3% to R$81.6 million for the nine months ended September 30, 2005 from R$60.3 million for the nine months ended September 30, 2004. The increase was principally due to increases in discounts on handsets and accessories in response to aggressive competition from other providers. Sales and services discounts and returns of good sold represented 5.4% and 6.5%, respectively, of Celular CRT’s gross operating revenues for the nine months ended September 30, 2004 and 2005.

 

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Cost of Services and Goods

 

The following table sets forth the components of Celular CRT’s costs of services and goods sold for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions, unaudited)        

Depreciation and amortization

   (115.3 )   (119.5 )   -3.5 %

Materials and services

   (46.9 )   (42.2 )   11.1 %

Interconnection charges

   (21.7 )   (21.2 )   2.4 %

Personnel

   (7.1 )   (6.1 )   16.4 %

Rental, insurance and other related expenses

   (14.9 )   (12.6 )   18.3 %

Cost of handsets and accessories

   (169.9 )   (202.2 )   -16.0 %

Fistel and other taxes

   (44.5 )   (34.9 )   27.5 %
    

 

     

Cost of services and goods

   (420.3 )   (438.7 )   -4.2 %
    

 

     

 

Celular CRT’s cost of services and goods decreased 4.2% to R$420.3 million for the nine months ended September 30, 2005 from R$438.7 million for the nine months ended September 30, 2004. The decrease was principally due to a decrease in the cost of handsets and accessories and, to a lesser degree, to a decrease in depreciation and amortization expenses. The gross profit margin (gross profit as a percentage of net operating revenues) was 52.9% for the nine months ended September 30, 2005, compared to 48.5% for the nine months ended September 30, 2004.

 

Depreciation and amortization. Depreciation and amortization expenses decreased 3.5% to R$115.3 million for the nine months ended September 30, 2005 from R$119.5 million for the nine months ended September 30, 2004. The decrease was principally due to certain analog and TDMA assets becoming fully depreciated, and this effect was partially offset by depreciation charges from newly added CDMA infrastructure and equipment.

 

Materials and services. Cost of materials and services increased 11.1% to R$46.9 million for the nine months ended September 30, 2005 from R$42.2 million for the nine months ended September 30, 2004. The increase was due to increases in the cost of third-party services and rental payments, such as network maintenance services and the costs of rented circuits and transmission lines, resulting mainly from the implementation of the new CDMA network. In addition, Celular CRT incurred greater maintenance costs in the nine months ended September 30, 2005 in connection with the installation of a new CDMA network.

 

Interconnection charges. Interconnection charges include the charges that Celular CRT pays to other telecommunications providers for the use of their networks to complete local and long-distance calls that originate from Celular CRT’s network. These interconnection charges increased 2.4% to R$21.7 million for the fine months ended September 30, 2005 from $21.2 million for the nine months ended September 30, 2004, principally due to the 14.1% increase in outgoing traffic, primarily from corporate clients who more frequently call outside Celular CRT’s region and use roaming services.

 

Personnel. Personnel expenses increased 16.4% to R$7.1 million for the nine months ended September 30, 2005 from R$6.1 million for the nine months ended September 30, 2004. This increase was principally due to an approximate 6% increase in salaries under the terms of Celular CRT’s collective bargaining agreement, which it renegotiates annually to take effect on November 1, and due to training programs.

 

Rentals, insurance and other related expenses. Rentals, insurance and other related expenses increased 18.3% to R$14.9 million for the nine months ended September 30, 2005 from R$12.6 million for the nine months

 

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ended September 30, 2004. This increase was principally due to the expansion of Celular CRT’s network, which increased the number of rented sites in connection with an increase in the number of Celular CRT’s radio base stations.

 

Cost of handsets and accessories. The cost of handsets and accessories decreased 16.0% to R$169.9 million for the nine months ended September 30, 2005 from R$202.2 million for the nine months ended September 30, 2004. This decrease was principally due to a decrease in the number of handsets sold because there were fewer new customers added than in the prior period, as well as favorable renegotiations of contracts with our suppliers.

 

Fistel and other taxes. Fistel and other tax expenses increased 27.5% to R$44.5 million for the nine months ended September 30, 2005 from R$34.9 million for the nine months ended September 30, 2004. The increase was principally due to the increase in the customer base.

 

Operating Expenses

 

The following table sets forth the components of Celular CRT’s operating expenses for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions, unaudited)        

Selling expenses

   (270.5 )   (183.0 )   47.8 %

General and administrative expenses

   (76.5 )   (71.6 )   6.8 %

Other net operating income

   7.8     18.7     -58.3 %
    

 

     

Operating expenses

   (339.2 )   (235.9 )   43.8 %
    

 

     

 

Operating expenses increased 43.8% to R$339.2 million for the nine months ended September 30, 2005 from R$235.9 million for the nine months ended September 30, 2004. The increase resulted mainly from the increase in selling expenses in the face of aggressive competition and to a lesser degree, from a decrease in other net operating income.

 

Selling expenses. Selling expenses increased 47.8% to R$270.5 million for the nine months ended September 30, 2005 from R$183.0 million for the nine months ended September 30, 2004. The increase was principally due to an increase in third-party services (such as marketing, client care and call center services) necessary in a highly competitive environment, an increase in depreciation expenses related to stores, equipment and other assets, and an increase in provisions for doubtful accounts mainly due to the increase in the customer base described above and to the improper use of the network. Celular CRT’s provision for doubtful accounts increased 84.1% to R$31.1 million for the nine months ended September 30, 2005 from R$16.9 million for the nine months ended September 30, 2004. As a result of this increase, provisions for doubtful accounts were 2.5% of gross revenues for the nine months ended September 30, 2005, compared to 1.5% of gross revenues for the nine months ended September 30, 2004.

 

General and administrative expenses. General and administrative expenses increased 6.8% to R$76.5 million for the nine months ended September 30, 2005 from R$71.6 million for the nine months ended September 30, 2004. The increase was principally due to increases in rental, insurance and condominium fees and in outsourced services.

 

Other net operating (expense) income. Other net operating income decreased 58.3% to R$7.8 million for the nine months ended September 30, 2005 from R$18.7 million for the nine months ended September 30, 2004. This decrease was principally due to a decrease in recovered expenses.

 

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Net Financial (Expense) Income

 

The following table sets forth the components of Celular CRT’s net financial income for the periods indicated, as well as the percentage change of each component from period to period.

 

    

Nine months ended

September 30,


       
         2005    

        2004    

    % Change

 
     (R$ millions, unaudited)        

Financial income

   69.6     57.4     21.3 %

Foreign currency exchange gain and losses

   40.9     1.3     3,046.2 %

Net losses on foreign currency derivative contracts

   (62.2 )   (9.8 )   534.7 %

Financial expenses

   (15.1 )   (20.9 )   -27.8 %
    

 

     

Financial income, net

   33.2     28.0     18.6 %
    

 

     

 

Celular CRT’s net financial income increased 18.6% to R$33.2 million for the nine months ended September 30, 2005 from $28.0 million for the nine months ended September 30, 2004. This change was due in part to an increase in the average CDI rate to 14.09% for the nine months ended September 30, 2005 from 11.72% for the nine months ended September 30, 2004, which led to increased financial income on higher average cash balances during the period, as well as a decrease in financial expenses due to a decrease in the debt outstanding.

 

Income and Social Contribution Taxes

 

Income and social contribution tax expenses decreased 16.0% to R$59.4 million for the nine months ended September 30, 2005 from R$70.7 million for the nine months ended September 30, 2004. The decrease was principally due to the decrease in income before taxes. Celular CRT’s effective tax rate was 36.2% and 34.9% for the nine months ended September 30, 2005 and 2004, respectively.

 

Net Income

 

As a result of the foregoing, Celular CRT recorded net income of R$104.4 million for the nine months ended September 30, 2005, compared to R$131.9 million for the nine months ended September 30, 2004.

 

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Celular CRT’s Consolidated Results of Operations for the Year Ended December 31, 2003 and 2004

 

The following table sets forth certain components of Celular CRT’s income for the periods indicated.

 

     Year ended December 31,

       
         2004    

        2003    

    % Change

 
     (R$ millions)        

Net operating revenue

   1,174.3     1,032.7     13.7 %

Cost of services and goods

   (620.5 )   (526.2 )   17.9 %
    

 

     

Gross profit

   553.8     506.5     9.3 %
    

 

     

Operating expenses:

                  

Selling expenses

   (264.9 )   (171.3 )   54.6 %

General and administrative expense

   (95.6 )   (89.3 )   7.1 %

Other net operating (expense) income

   27.3     (3.9 )   n.a.  
    

 

     

Operating income before net financial expense

   220.6     242.0     -8.8 %
    

 

     

Net financial expense

   25.8     17.7     45.8 %
    

 

     

Operating income

   246.4     259.7     -5.1 %
    

 

     

Net non-operating expenses

   (7.7 )   (1.2 )   541.7 %
    

 

     

Income before taxes

   238.7     258.5     -7.7 %
    

 

     

Income taxes

   (56.7 )   (69.1 )   -17.9 %
    

 

     

Net income

   182.0     189.4     -3.9 %
    

 

     

 

Net Operating Revenue

 

The composition of operating revenues by category of service is presented in Celular CRT’s consolidated financial statements and discussed below before deduction of valued-added and other taxes. The following table sets forth the components of Celular CRT’s operating revenues for the periods indicated, as well as the percentage change of each component from period to period.

 

     Year ended December 31,

       
         2004    

        2003    

    % Change

 
     (R$ millions)        

Usage charges

   601.7     601.6     —    

Sales of handsets and accessories

   291.7     221.2     31.9 %

Monthly subscription charges

   89.9     104.1     -13.6 %

Interconnection fees

   453.9     406.0     11.8 %

Other

   115.0     65.8     74.8 %
    

 

     

Total gross operating revenue

   1,552.2     1,398.7     11.0 %
    

 

     

Value-added and other indirect taxes

   (287.7 )   (241.7 )   19.0 %

Sales and services discount and return of goods sold

   (90.2 )   (124.3 )   -27.4 %
    

 

     

Net operating revenue

   1,174.3     1,032.7     13.7 %
    

 

     

 

Net operating revenue increased 13.7% to R$1,174.3 million for 2004 from R$1,032.7 million for 2003. The increase in net revenues was principally due to an increase in revenues from sales of handsets and accessories, interconnection fees and other revenues.

 

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Usage charges. Revenues from usage charges remained almost constant at R$601.7 million for 2004, compared to R$601.6 million for 2003. In 2004, the customer base increased 27.4% to 3.215 million lines in service as of December 31, 2004 from 2.523 million lines in service as of December 31, 2003, outgoing traffic increased and sales and services discounts decreased. However, these positive factors were offset by the impact of the long distance carrier selection codes implemented by Anatel in 2003, which allow customers to choose their carrier for domestic and long distance services (VC2 and VC3 calls) and international cellular calls.

 

Sales of handsets and accessories. Revenues from sales of handsets and accessories increased 31.9% to R$291.7 million for 2004 from R$221.2 million for 2003. This increase was mainly due to the 27.4% increase in the customer base described above, which resulted in part from promotional campaigns to acquire new customers. Celular CRT’s strategy of subsidizing a portion of handset costs to encourage growth in customers and traffic resulted in a gross loss (calculated as the difference from net operating revenues from sales of handsets and accessories minus the cost of handsets and accessories) for Celular CRT of R$107.8 million for 2004, compared to a gross gain of R$37.1 million for 2003. The gross loss for 2004 occurred due to incentives to encourage customers to replace TDMA handsets with new CDMA handsets and due to retention campaigns to face competition from a new player in the market.

 

Monthly subscription charges. Revenues from monthly subscription charges decreased 13.6% to R$89.9 million for 2004 from R$104.1 million for 2003. This decrease was principally due to a change in the mix of customers, with customers subject to contract representing 24.5% of the customer base as of December 31, 2004, compared to 27.2% of the customer base as of December 31, 2003. The decrease was also due to the impact of Celular CRT’s “Right Planning” loyalty program, which was introduced in May 2004 and is similar to the TCP program of the same name.

 

Interconnection fees. Revenues from interconnection fees increased 11.8% to R$453.9 million for 2004 from R$406.0 million for 2003. This increase was principally due to the increase in inbound calls from other start-up networks (primarily from long-distance calls) and due to the increase in Celular CRT’s pre-paid client base.

 

Others. Revenues from other services increased 74.8% to R$115.0 million for 2004 from R$65.8 million for 2003. The increase was principally due to the increase in Celular CRT’s customer base and an increase in the use of data services by Celular CRT’s customers, including text message services, or SMS, wireless internet services and other value-added services. The increase in the use of data services was due in part due to increases in internet access, improvements in data service tools and an increase in the number of data transmission-enabled handsets.

 

Value-added and other indirect taxes. Value-added and other indirect taxes increased 19.0% to R$287.7 million for 2004 from R$241.7 million for 2003. This increase occurred principally because of the increase in gross operating revenues other than from interconnection fees (which are not subject to these taxes). Value-added taxes and other indirect taxes were 18.5% of Celular CRT’s gross operating revenue in 2004, compared to 17.3% in 2003.

 

Sales and services discount and returns of goods sold. Discounts and returns decreased 27.4% to R$90.2 million for 2004 from R$124.3 million for 2003. The decrease was principally due to a decrease in discounts on services, partially offset by an increase in discounts on handsets and accessories, which vary according to Celular CRT’s response to competitive pressures.

 

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Cost of Services and Goods

 

The following table sets forth the components of Celular CRT’s costs of services and goods sold for the periods indicated, as well as the percentage change of each component from period to period.

 

     Year ended December 31,

       
         2004    

        2003    

    % Change

 
     (R$ millions)        

Depreciation and amortization

   (162.1 )   (158.7 )   2.1 %

Materials and services

   (55.0 )   (46.9 )   17.3 %

Interconnection charges

   (27.6 )   (59.2 )   -53.4 %

Personnel

   (8.6 )   (7.5 )   14.7 %

Rental, insurance and other related expenses

   (15.8 )   (17.9 )   -11.7 %

Cost of handsets and accessories

   (304.3 )   (198.5 )   53.3 %

Fistel and other taxes

   (47.1 )   (37.5 )   25.6 %
    

 

     

Cost of services and goods

   (620.5 )   (526.2 )   17.9 %
    

 

     

 

Celular CRT’s cost of services and goods increased 17.9% to R$620.5 million for 2004 from R$526.2 million for 2003. The increase was principally due to an increase in the cost of handsets and accessories and, to a lesser degree, materials and services and Fistel and other taxes. The gross profit margin (gross profit as a percentage of net operating revenues) was 47.2% for 2004, compared to 49.0% for 2003.

 

Depreciation and amortization. Depreciation and amortization expenses increased 2.1% to R$162.1 million for 2004 from R$158.7 million for 2003. The increase was principally due to depreciation charges from newly added infrastructure and equipment (relating to the overlay of the new CDMA network), which more than offset reductions in depreciation charges resulting from the full depreciation of certain older analog equipment.

 

Materials and services. Cost of materials and services increased 17.3% to R$55.0 million for 2004 from R$46.9 million for 2003. The increase was principally due to increases in the cost of third-party services such as network maintenance services as a consequence of the CDMA network overlay.

 

Interconnection charges. Interconnection charges decreased 53.4% to R$27.6 million for 2004 from R$59.2 million for 2003, principally because with the introduction of long-distance carrier selection codes in 2003, the costs of VC2 and VC3 long-distance calls are borne by long-distance telecommunications companies rather than cellular telecommunications companies.

 

Personnel. Personnel expenses increased 14.7% to R$8.6 million for 2004 from R$7.5 million for 2003. This increase was principally due to an approximate 7.5% increase in salaries consistent with inflation under the terms of a collective bargaining agreement signed in December 2003, retroactive to November 1, 2003, and due to training programs.

 

Rentals, insurance and other related expenses. Rentals, insurance and other related expenses decreased 11.7% to R$15.8 million for 2004 from R$17.9 million for 2003. This decrease was principally due to the favorable renegotiation of certain rental contracts and a decrease in the number of rented circuits due to the installment of Celular CRT’s own backbone network.

 

Cost of handsets and accessories. The cost of handsets and accessories increased 53.3% to R$304.3 million for 2004 from R$198.5 million for 2003. The increase was principally due to the increase in the volume of handsets and accessories sold, as well as incentives given to encourage customers to replace their TDMA handsets with newer CDMA handsets.

 

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Fistel and other taxes. Fistel and other tax expenses increased 25.6% to R$47.1 million for 2004 from R$37.5 million for 2003. The increase was principally due to a 25.9% increase in the average customer base from period to period.

 

Operating Expenses

 

The following table sets forth the components of Celular CRT’s operating expenses for the periods indicated, as well as the percentage change of each component from period to period.

 

     Year ended December 31,

       
         2004    

        2003    

    % Change

 
     (R$ millions)        

Selling expenses

   (264.9 )   (171.3 )   54.6 %

General and administrative expenses

   (95.6 )   (89.3 )   7.1 %

Other net operating (expenses) income

   27.3     (3.9 )   n.a.  
    

 

     

Operating expenses

   (333.2 )   (264.5 )   26.0 %
    

 

     

 

Operating expenses increased 26.0% to R$333.2 million for 2004 from R$264.5 million for 2003. The increase resulted mainly from the increase in selling expenses in the face of aggressive competition.

 

Selling expenses. Selling expenses increased 54.6% to R$264.9 million for 2004 from R$171.3 million for 2003. The increase was principally due to an increase in third-party services (such as marketing, client care and call centers) necessary in a highly competitive environment and provisions for doubtful accounts. Celular CRT’s provision for doubtful accounts increased 108.6% to R$21.9 million for 2004 from R$10.5 million for 2003, principally due to the increase in the customer base in 2004. As a result of this increase, provisions for doubtful accounts were 1.4% of gross revenues for 2004, compared to 0.8% of gross revenues for 2003.

 

General and administrative expenses. General and administrative expenses increased 7.1% to R$95.6 million for 2004 from R$89.3 million for 2003. The increase was principally due to a R$3.4 million increase in third-party services, a R$1.9 million increase in administrative personnel costs and a R$0.9 million increase in costs of supplies.

 

Other net operating (expense) income. Celular CRT had other net operating income of R$27.3 million for 2004, compared to other net operating expense of R$3.9 million for 2003. The other net operating income recorded in 2004 was principally due to the recovery of expenses in the amount of R$30.9 million resulting from increased efforts to collect monies owed from dealers, as well as income from handset manufacturers’ incentives, partially offset by an increase in taxes.

 

Net Financial (Expense) Income

 

The following table sets forth the components of Celular CRT’s net financial income for the periods indicated, as well as the percentage change of each component from period to period.

 

     Year ended December 31,

       
         2004    

        2003    

    % Change

 
     (R$ millions)        

Financial income

   74.3     83.2     -10.7 %

Foreign currency exchange gain and losses

   23.3     111.1     -79.0 %

Net losses on foreign currency derivative contracts

   (43.5 )   (144.9 )   -70.0 %

Financial expenses

   (28.3 )   (31.7 )   -10.7 %
    

 

     

Financial income, net

   25.8     17.7     45.8 %
    

 

     

 

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Celular CRT’s net financial income increased 45.8% to R$25.8 million for 2004 from R$17.7 million for 2003. This change occurred principally because net losses on foreign currency derivative contracts decreased more than foreign currency exchange gains.

 

Income and Social Contribution Taxes

 

Income and social contribution tax expenses decreased 17.9% to R$56.7 million for 2004 from R$69.1 million for 2003, principally due to the decrease in income before taxes. Celular CRT’s effective tax rate was 23.7% for 2004, compared to 26.7% for 2003. These effective tax rates include the impact of the payment of interest on shareholders’ equity, which is deductible for tax purposes and therefore lowers the effective tax rate.

 

Net Income

 

As a result of the foregoing, Celular CRT recorded net income of R$182.0 million for 2004, compared to R$189.4 million for 2003.

 

Celular CRT’s Consolidated Results of Operations for the Year Ended December 31, 2002 and 2003

 

The following table sets forth certain components of Celular CRT’s income for the periods indicated.

 

     Year ended December 31,

       
         2003    

        2002    

    % Change

 
     (R$ millions)        

Net operating revenue

   1,032.7     896.3     15.2 %

Cost of services and goods

   (526.2 )   (456.6 )   15.2 %
    

 

     

Gross profit

   506.5     439.7     15.2 %
    

 

     

Operating expenses:

                  

Selling expenses

   (171.3 )   (168.3 )   1.8 %

General and administrative expense

   (89.3 )   (83.1 )   7.5 %

Other net operating (expense) income

   (3.9 )   18.3     -121.3 %
    

 

     

Operating income before net financial expense

   242.0     206.6     17.1 %
    

 

     

Net financial expense

   17.7     7.5     136.0 %
    

 

     

Operating income

   259.7     214.1     21.3 %
    

 

     

Net non-operating expenses

   (1.2 )   (3.7 )   -64.9 %
    

 

     

Income before taxes

   258.5     210.4     22.8 %
    

 

     

Income taxes

   (69.1 )   (62.8 )   9.9 %
    

 

     

Net income

   189.4     147.6     28.3 %
    

 

     

 

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Net Operating Revenue

 

The composition of operating revenues by category of service is presented in Celular CRT’s consolidated financial statements and discussed below before deduction of valued-added and other taxes. The following table sets forth the components of Celular CRT’s operating revenues for the periods indicated, as well as the percentage change of each component from period to period.

 

     Year ended December 31,

       
         2003    

        2002    

    % Change

 
     (R$ millions)        

Gross operating revenue:

                  

Usage charges

   601.6     477.2     26.1 %

Sales of handsets and accessories

   221.2     135.2     63.6 %

Monthly subscription charges

   104.1     148.1     -29.7 %

Interconnection fees

   406.0     362.4     12.0 %

Other

   65.8     39.4     67.0 %
    

 

     

Total gross operating revenue

   1,398.7     1,162.3     20.3 %
    

 

     

Value-added and other indirect taxes

   (241.7 )   (216.8 )   11.5 %

Sales and services discount and return of goods sold

   (124.3 )   (49.2 )   152.6 %
    

 

     

Net operating revenue

   1,032.7     896.3     15.2 %
    

 

     

 

Net operating revenue increased 15.2% to R$1,032.7 million for 2003 from R$896.3 million for 2002. The increase in net revenues was principally due to an increase in revenues from usage charges, sales of handsets and accessories, interconnection fees and other revenues.

 

Usage charges. Revenues from usage charges increased 26.1% to R$601.6 million for 2003 from R$477.2 million for 2002. This increase was principally due to the 21.4% increase in the customer base to 2.523 million lines in service as of December 31, 2003 from 2.078 million lines in service as of December 30, 2002. The increase was partially offset by the impact of the long distance carrier selection codes implemented by Anatel on July 1, 2003, which allow customers to choose their carrier for domestic and long distance services (VC2 and VC3 calls) and international cellular calls.

 

Sales of handsets and accessories. Revenues from sales of handsets and accessories increased 63.6% to R$221.2 million for 2003 from R$135.2 million for 2002. This increase was mainly due an increase in selling prices with the objective of minimizing the financial impact of increases in the cost of handsets and accessories, as well as increases in volumes of medium and high-bracket handsets sold compared to the previous year. Celular CRT recorded a net gain from handset and accessory sales (calculated as the difference between net operating revenues from sales of handsets and accessories and the cost of handsets and accessories) of R$37.1 million for 2003 and R$29.7 million for 2002. Generally, however, Celular CRT pursues a strategy of subsidizing a portion of handset costs to encourage growth in customers and traffic, which often results in a net loss from such sales.

 

Monthly subscription charges. Revenues from monthly subscription charges decreased 29.7% to R$104.1 million for 2004 from R$148.1 million for 2003. This decrease was principally due to the migration of customers subject to contract toward contracts with lower monthly subscription charges and also from migration of customers to prepaid service, which effect was partially offset by an increase in Celular CRT’s monthly subscription rates.

 

Interconnection fees. Revenues from interconnection fees increased 12.0% to R$406.0 million for 2003 from R$362.4 million for 2002. This increase was principally due to an increase in average interconnection fee rates, partially offset by a decrease in calls received by the network (due to the entry of a new competitor in the end of 2002) in spite of the increase in the customer base.

 

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Others. Revenues from other services increased 67.0% to R$65.8 million for 2003 from R$39.4 million for 2002. The increase was principally due to the increase in the use of additional services, such as caller ID, data transmission services, text message services, or SMS, and services designed for corporate customers, such as voice mail and SMS services.

 

Value-added and other indirect taxes. Value-added and other indirect taxes increased 11.5% to R$241.7 million for 2003 from R$216.8 million for 2002. This increase was principally due to the 20.3% increase in Celular CRT’s gross operating revenues. However, value-added and other indirect taxes increased less than gross operating revenues because of a change in the composition of Celular CRT’s gross operating revenues, not all of which were subject to ICMS and other indirect taxes during the entire period. Interconnection fees, for example, are not subject to ICMS tax, and increases in our revenues from interconnection fees tend to decrease our effective indirect tax rates. Value-added taxes and other indirect taxes were 17.3% of Celular CRT’s gross operating revenue in 2003, compared to 18.7% in 2002.

 

Sales and services discount and returns of goods sold. Discounts and returns increased 152.6% to R$124.3 million for 2003 from R$49.2 million for 2002. The increase was principally due to an increase in discounts on services and on handsets and accessories to gain new customers in the aftermath of the start-up of operations of a new competitor in November 2002. These discounts vary according to Celular CRT’s desired response to competitive pressures. Sales and services discounts and returns of good sold represented 8.9% and 4.2%, respectively, of Celular CRT’s gross operating revenues for 2003 and 2002.

 

Cost of Services and Goods

 

The following table sets forth the components of Celular CRT’s costs of services and goods sold for the periods indicated, as well as the percentage change of each component from period to period.

 

     Year ended December 31,

       
         2003    

        2002    

    % Change

 
     (R$ millions)        

Depreciation and amortization

   (158.7 )   (154.8 )   2.5 %

Materials and services

   (46.9 )   (44.7 )   4.9 %

Interconnection charges

   (59.2 )   (69.6 )   -14.9 %

Personnel

   (7.5 )   (8.7 )   -13.8 %

Rental, insurance and other related expenses

   (17.9 )   (14.9 )   20.1 %

Cost of handsets and accessories

   (198.5 )   (127.0 )   56.3 %

Fistel and other taxes

   (37.5 )   (36.9 )   1.6 %
    

 

     

Cost of services and goods

   (526.2 )   (456.6 )   15.2 %
    

 

     

 

Celular CRT’s cost of services and goods increased 15.2% to R$526.2 million for 2003 from R$456.6 million 2002. The increase was principally due to an increase in the cost of handsets and accessories, partially offset by a decrease in interconnection charges. The gross profit margin (gross profit as a percentage of net operating revenues) remained almost constant at 49.0% for 2003, compared to 49.1% for 2002.

 

Depreciation and amortization. Depreciation and amortization expenses increased 2.5% to R$158.7 million for 2003 from R$154.8 million for 2002. The increase was principally due to the expansion of Celular CRT’s network and support systems, which increased depreciable assets.

 

Materials and services. Cost of materials and services increased 4.9% to R$46.9 million for 2003 from R$44.7 million for 2002. The increase was principally due to an increase in the customer base and penetration of the network, which result in greater third-party maintenance costs, costs for rented circuits and transmission lines and other costs.

 

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Interconnection charges. Interconnection charges decreased 14.9% to R$59.2 million for 2003 from R$69.6 million for 2002, principally because with the introduction of long-distance carrier selection codes in 2003, the costs of VC2 and VC3 long-distance calls are borne by long-distance telecommunications companies rather than cellular telecommunications companies.

 

Personnel. Personnel expenses decreased 13.8% to R$7.5 million for 2003 from R$8.7 million for 2002. This decrease was principally due to reductions in personnel due to synergies obtained in offering certain uniform services among all the VIVO companies.

 

Rentals, insurance and other related expenses. Rentals, insurance and other related expenses increased 20.1% to R$17.9 million for 2003 from R$14.9 million for 2002. This increase was principally due to the increase in Celular CRT’s customer base, which required expansion of Celular CRT’s network infrastructure, including rented sites where Celular CRT’s radio base stations are located.

 

Cost of handsets and accessories. The cost of handsets and accessories increased 56.3% to R$198.5 million for 2003 from R$127.0 million for 2002. The increase was principally due to the increase in handsets and accessories sold, particularly of more sophisticated handsets that increased the average price per handset.

 

Fistel and other taxes. Fistel and other tax expenses increased 1.6% to R$37.5 million for 2003 from R$36.9 million for 2002. The increase was principally due to the increase in the customer base, partially offset by a favorable change in the method of calculating the Fistel tax. Until mid-2003, the Fistel tax was based on monthly gross additions of clients but was changed in mid-2003 to be based on monthly net additions of clients.

 

Operating Expenses

 

The following table sets forth the components of Celular CRT’s operating expenses for the periods indicated, as well as the percentage change of each component from period to period.

 

     Year ended December 31,

       
         2003    

        2002    

    % Change

 
     (R$ millions)        

Selling expenses

   (171.3 )   (168.3 )   1.8 %

General and administrative expenses

   (89.3 )   (83.1 )   7.5 %

Other net operating (expenses) income

   (3.9 )   18.3     -121.3  
    

 

     

Operating expenses

   (264.5 )   (233.1 )   13.5 %
    

 

     

 

Operating expenses increased 13.5% to R$264.5 million for 2003 from R$233.1 million for 2002. The increase occurred primarily because Celular CRT recorded other net operating expenses in 2003, compared to other net operating income in 2002, and because of an increase in general and administrative expenses.

 

Selling expenses. Selling expenses increased 1.8% to R$171.3 million for 2003 from R$168.3 million for 2002. The increase was principally due to an increase in third-party services (such as marketing, client care and call center services) necessary in a highly competitive environment and in depreciation expenses related to stores, equipment and other assets, partially offset by a reduction in provisions for doubtful accounts. Celular CRT’s provision for doubtful accounts decreased 41.0% to R$10.5 million for 2003 from R$17.8 million for 2002, principally due to more effective methods of assessing the creditworthiness of customers and due to the increase in the prepaid customer base of Celular CRT. Provisions for doubtful accounts were 0.8% of gross revenues for 2003, compared to 1.5% of gross revenues for 2002.

 

General and administrative expenses. General and administrative expenses increased 7.5% to R$89.3 million for 2003 from R$83.1 million for 2002. The increase was principally due to a R$6.7 million increase in

 

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administrative personnel expenses and a R$4.3 increase in depreciation expenses, partially offset by a R$6.8 million decrease in the cost of third-party services (such as consultant and transportation services) due to the renegotiation of contracts.

 

Other net operating (expense) income. Other net operating expense of R$3.9 million for 2003, compared to other net operating income of R$18.3 million for 2002. The expense recorded in 2003 was partly due to a R$7.3 million decrease in recovered expenses and an increase in taxes of R$1.9 million. In addition, Celular CRT’s net reversals of provisions were R$8.0 million lower in 2003 than in 2002.

 

Net Financial (Expense) Income

 

The following table sets forth the components of Celular CRT’s net financial income for the periods indicated, as well as the percentage change of each component from period to period.

 

     Year ended December 31,

       
             2003        

            2002        

    % Change

 
     (R$ millions)        

Financial income

   83.2     24.3     242.8 %

Foreign currency exchange gain and losses

   111.1     (223.3 )   -149.8 %

Gain (losses) on foreign currency derivative contracts

   (144.9 )   239.9     -160.4 %

Financial expenses

   (31.7 )   (33.4 )   -4.8 %
    

 

     

Financial income, net

   17.7     7.5     136.0 %
    

 

     

 

Celular CRT’s net financial income increased 136.0% to R$17.7 million for 2003 from R$7.5 million for 2002. This change was due in part to the operating cash flow generated by the company, which increased average cash balances, as well as an increase in the CDI rate to 23.25% in 2003 from 19.11% in 2002, leading to higher financial income.

 

Income and Social Contribution Taxes

 

Income and social contribution tax expenses increased 10.0% to R$69.1 million for 2003 from R$62.8 million for 2002, principally due to the increase in income before taxes. Celular CRT’s effective tax rate was 26.7% and 29.8% for 2003 and 2002, respectively. These effective tax rates include the impact of the payment of interest on shareholders’ equity, which is deductible for tax purposes and therefore lowers the effective tax rate.

 

Net Income

 

As a result of the foregoing, Celular CRT recorded net income of R$189.4 million for 2003, compared to R$147.6 million for 2002.

 

Celular CRT’s Liquidity and Capital Resources

 

Sources of Funds

 

Celular CRT generated cash flow from operations of R$189.6 million and R$257.6 million in the nine months ended September 30, 2005 and 2004, respectively.

 

Celular CRT generated cash flow from operations of R$368.7 million and R$464.7 million for the year ended December 31, 2004 and 2003, respectively.

 

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Celular CRT had net cash used in financing activities of R$99.7 million in the nine months ended September 30, 2005, compared to net cash used in financing activities of R$58.7 million in the nine months ended September 30, 2004. In the nine months ended September 30, 2005, net cash used in financing activities included loan repayments of R$84.1 million and net settlements on derivative contracts of R$20.2 million.

 

Celular CRT had R$133.3 million in long-term loans and financing as of September 30, 2005, compared to R$159.3 million of long-term loans and financing as of December 31, 2004. Celular CRT had R$7.3 million in short-term loans and financing as of September 30, 2005, consisting primarily of funding from financial institutions, compared to R$108.7 million in short-term loans financing as of December 31, 2004. As of September 30, 2005, Celular CRT had working capital (current assets minus current liabilities) of R$547.5 million, compared to working capital of R$415.1 million as of December 31, 2004.

 

We believe that Celular CRT’s available borrowing capacity, together with funds generated by operations, should provide sufficient liquidity and capital resources to pursue Celular CRT’s business strategy for the foreseeable future with respect to working capital, capital expenditures and other operating needs.

 

Uses of Funds

 

Celular CRT’s principal uses of funds are for capital expenditures, servicing of its debt and payments of dividends to shareholders.

 

Capital expenditures (including capitalized interest) consumed cash flows of R$162.9 million in the nine months ended September 30, 2005, compared to R$107.0 million in the nine months ended September 30, 2004. Capital expenditures (including capitalized interest) consumed cash flows of R$204.3 million in 2004, R$142.7 million in 2003 and R$112.0 million in 2002. Capital expenditures were as set forth in the table below.

 

     Nine months ended
September 30,


             2005        

           2004        

     (R$ millions, unaudited)

Switching equipment

   27.3    39.3

Transmission equipment

   93.7    40.0

Information Technology

   2.3    —  

Others

   39.6    27.7
    
  

Total capital expenditures

   162.9    107.0

 

Repayment of debt consumed cash flows of R$84.1 million and R$67.4 million in the nine months ended September 30, 2005 and 2004, respectively. Repayment of debt consumed cash flows of R$101.6 million in 2004, R$110.4 million in 2003 and R$55.7 million in 2002. Net settlements of derivative contracts provided cash flows of R$20.2 million in the nine months ended September 30, 2005 but represented a use of cash of R$8.8 million in the nine months ended September 30, 2004.

 

Celular CRT paid only minimal dividends and interest on shareholders’ equity in the nine months ended September 30, 2005 and 2004 because those payments are typically recorded in the fourth quarter. Celular CRT paid dividends and interest on shareholders’ equity of R$56.1 million in 2004, R$30.5 million in 2003 and R$35.7 million in 2002.

 

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Debt

 

As of September 30, 2005, Celular CRT’s total debt position was as follows:

 

Debt


  

Amount outstanding
as of

September 30, 2005


     (R$ millions,
unaudited)

Financing from banks

   140.2

Interest

   0.5

Total long-term debt, excluding the short-term portion

   133.3

Short-term debt

   7.3

Total debt

   140.6

 

Celular CRT’s long-term debt as of September 30, 2005 matures in accordance with the following schedule. The table below represents only the long-term debt as of September 30, 2005 and does not include the short-term portion of long-term debt as of September 30, 2005, which is included in short-term debt in the table above.

 

Year Ending December 31,


   Principal amount

     (R$ millions,
unaudited)

2007

   133.3

 

As of September 30, 2005, Celular CRT’s total debt was R$140.6 million, all of which was denominated in U.S. dollars (U.S.$63.3 million) and therefore exposed to currency fluctuations. Devaluation of the real results in exchange losses on foreign currency indebtedness. In order to protect against the risk of devaluation of the real, Celular CRT has entered into over-the-counter derivatives transactions with international and domestic financial institutions. In the nine months ended September 30, 2005, Celular CRT’s derivatives positions produced a loss of R$24.9 million, which was offset by the R$40.7 million of exchange gains on Celular CRT’s foreign currency-denominated debt. As of September 30, 2005, Celular CRT had derivative contracts that covered amounts in excess of its foreign currency-denominated debt.

 

Celular CRT is exposed to interest rate risk as a consequence of its floating rate debt. As of September 30, 2005, approximately 100% of Celular CRT’s interest-bearing liabilities bore interest at floating rates, namely LIBOR.

 

Some of the debt agreements of Celular CRT contain cross-default provisions, restrictions on changes of control and restrictive covenants relating to the incurrence of indebtedness. Financial ratios involve (1) interest coverage ratios and (2) debt to capital ratios. As of September 30, 2005, Celular CRT was in compliance with its restrictive covenants. See note 12 to Celular CRT’s unconsolidated financial statements included in this prospectus.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2005, there were no off-balance sheet arrangements. Celular CRT’s majority-owned subsidiary is included in its consolidated financial statements. Celular CRT does not have any interests in, or relationships with, any special purpose entities that are not reflected in its consolidated financial statements.

 

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Contractual Obligations and Commercial Commitments

 

The following table represents Celular CRT’s consolidated contractual obligations and commercial commitments as of December 31, 2004:

 

     Payments due by period in millions of reais

     Total

   Less than
1 Year


   1-3 Years

   4-5 Years

  

After

5 years


Contractual obligations:

                        

Long-term debt(1)

   268.0    107.1    160.9    0.0    0.0

Capital lease obligations

   —      —      —      —      —  

Operating leases

   480.9    48.6    95.7    94.0    242.6

Unconditional purchase obligations(2)

   169.5    168.2    1.3    0.0    0.0

Other long-term obligations

   32.0    14.1    17.9    0.0    0.0
    
  
  
  
  

Total contractual cash obligations

   950.4    338.0    275.8    94.0    242.6

(1) Not including future interest payments on debt or payments under foreign currency derivatives. We are unable to determine future interest payments because Celular CRT’s debt bears interest at floating rates, and we cannot accurately predict future interest or foreign currency rates. See the discussion above regarding the nature of Celular CRT’s debt and certain related derivative contracts.
(2) These obligations relate to improvements to the network.

 

Total contractual obligations as of September 30, 2005 were R$685.7 million. This reduction was mainly caused by a decrease in long-term debt and unconditional purchase obligations.

 

U.S. GAAP Reconciliation

 

Celular CRT prepares its consolidated financial statements in accordance with Brazilian GAAP, which differs in significant respects from U.S. GAAP. Net income for the nine months ended September 30, 2004 and 2005 was R$123.0 million and R$105.6 million, respectively, under U.S. GAAP, compared to net income of R$131.9 million and R$104.4 million, respectively, under Brazilian GAAP. Under U.S. GAAP, net income was R$52.8 million in 2002, R$283.3 million in 2003 and R$169.0 million in 2004, compared to net income of R$147.6 million in 2002, R$189.4 million in 2003 and R$182.0 million in 2004 under Brazilian GAAP.

 

Shareholders’ equity was R$971.5 million as of December 31, 2003, R$1,065.2 million at December 31, 2004 and R$1,228.9 million as of September 30, 2005 under U.S. GAAP, compared to shareholders’ equity of R$954.9 million as of December 31, 2003, R$1,061.6 million as of December 31, 2004 and R$1,224.2 million as of September 30, 2005 under Brazilian GAAP.

 

See note 19 to Celular CRT’s unaudited consolidated financial statements and note 31 to Celular CRT’s audited consolidated financial statements for a description of the principal differences between Brazilian GAAP and U.S. GAAP as they relate to Celular CRT and a reconciliation to U.S. GAAP of net income and total shareholders’ equity.

 

Celular CRT’s Quantitative and Qualitative Disclosures About Market Risk

 

Celular CRT is exposed to market risk from changes in both foreign currency exchange rates and interest rates. Celular CRT is exposed to foreign currency exchange risk because certain of its costs (mostly interest on debt, capital expenditures and the purchase of handsets) are all or partially denominated in currencies (primarily the U.S. dollar) other than those in which Celular CRT earns revenues (primarily the real). Similarly, Celular CRT is subject to market risk resulting from changes in interest rates that may affect the cost of its financing.

 

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Celular CRT has entered into derivative instruments, such as foreign currency swaps, to manage the exchange rate risk. Celular CRT does not hold or issue derivative or other financial instruments for trading purposes.

 

Exchange Rate Risk

 

The principal foreign exchange rate risk faced by Celular CRT arises from its U.S. dollar-denominated indebtedness. At September 30, 2005, Celular CRT had U.S.$63.3 million of indebtedness denominated in U.S. dollars. Celular CRT’s revenues are earned almost entirely in reais, and Celular CRT has no material U.S. dollar-denominated assets, except for its derivative contracts. As of September 30, 2005, all of Celular CRT’s U.S. dollar-denominated indebtedness and other foreign exchange liabilities were covered by derivative agreements. Under those derivative agreements, Celular CRT’s subsidiary’s U.S. dollar-denominated obligations are swapped for real-denominated obligations bearing interest at rates linked to the CDI rate.

 

Celular CRT’s foreign currency-denominated obligations produced a gain of R$40.9 million in the nine months ended September 30, 2005, a gain of R$23.3 million in 2004, a gain of R$111.1 million in 2003 and a loss of R$223.3 million in 2002. This was offset by Celular CRT’s derivatives, which produced a loss of R$62.1 million in the nine months ended September 30, 2005, a loss of R$43.5 million in 2004, a loss of R$144.9 million in 2003 and a gain of R$239.9 million in 2002. The unrealized gain, net of unrealized costs on foreign exchange derivatives contracts was R$12.5 million and R$66.9 million at December 31, 2004 and 2003 respectively. At December 31, 2002, the unrealized gain, net of unrealized costs on foreign exchange derivatives contracts was R$243.0 million.

 

The potential loss to Celular CRT over one year that would have resulted from a hypothetical, instantaneous and unfavorable change of 1,000 basis points in the foreign exchange applicable to financial assets and liabilities at September 30, 2005 would be approximately R$14.1 million. On the other hand, Celular CRT’s derivative instruments would have a gross gain of R$14.1 million. Exchange rate sensitivity analysis was made by applying a 10% change to the Brazilian Central Bank exchange rate at September 30, 2005 of R$2.2222 to U.S.$1.00, which would represent a devaluation of the real of R$0.2222. We then assumed that this unfavorable currency move would be sustained from September 30, 2005 through September 30, 2006. The foreign exchange loss that affects financial expenses was calculated by applying such devaluation to our indebtedness and foreign exchange purchase commitments, net of derivative instruments.

 

Interest Rate Risk

 

Celular CRT is exposed to interest rate risk as a result of investments of cash and cash equivalents, mainly in short-term real-denominated instruments. At September 30, 2005, this amount totaled R$419.3 million.

 

Additionally, Celular CRT is exposed to interest rate risk as a consequence of its floating rate debt in U.S. dollars and due to the nature of its derivative agreements, whereby its U.S. dollar-denominated obligations are swapped into real-denominated obligations bearing interest linked to the CDI. At September 30, 2005, Celular CRT had R$140.7 million in loans and financing outstanding, all of which bore interest at floating rates. Celular CRT has not entered into derivative contracts or made other arrangements to hedge against this risk. Thus, if interest rates rise, then its financing expenses will probably increase. Celular CRT continuously monitors interest rates to determine whether it should enter into derivative arrangements to protect against this risk.

 

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The potential gain to Celular CRT over one year that would result from a hypothetical, instantaneous and unfavorable change of 100 basis points in the interest rate applicable to financial assets and liabilities at September 30, 2005 would be approximately R$2.5 million. This sensitivity analysis is based on the assumption of an unfavorable 100 basis points increase in the interest rates applicable to each homogeneous category of financial assets and liabilities and sustained over a period of one year. A homogeneous category is defined according to the currency in which financial assets and liabilities are denominated and assumes the same interest rate movement within each homogeneous category, such as U.S. dollars. As a result, Celular CRT’s interest rate risk sensitivity model may overstate the impact of interest rate fluctuations for such financial instruments, as consistently unfavorable movements of all interest rates are unlikely.

 

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Reasons for the Merger

 

We believe that the merger will enable us to:

 

    align the interests of the shareholders of TCP, of its subsidiary TCO, and of TLE, TSD and Celular CRT, which are all currently under common control;

 

    provide you with securities that we expect will enjoy greater market liquidity than the securities you currently hold;

 

    simplify the shareholding and organizational structure of the VIVO business and expand its shareholder base; and

 

    take advantage of important synergies among the companies, which are already operating under a common brand name, “VIVO.”

 

See “Part Two: Summary—Terms of the Merger—Purposes of and Reasons for the Merger” for more information on the reasons for the merger and why we selected this transaction structure.

 

Effects of the Merger

 

See “Part Two: Summary—Terms of the Merger—Effects of the Merger on TCP, the Targets and Their Affiliates” and “—Effects of the Merger on Unaffiliated Shareholders” for a discussion of the benefits and actual or potential adverse effects of the merger on TCP, the Targets, their affiliates and unaffiliated shareholders.

 

Background for the Merger

 

Privatization of Telebrás

 

Before its privatization in 1998, Telebrás and its operating subsidiaries, which we refer to collectively as the “Telebrás system,” held a near monopoly over the provision of public telecommunications services in Brazil. In 1995, the Brazilian federal government began a comprehensive reform of Brazil’s telecommunications regulatory system.

 

In July 1997, Brazil’s national congress adopted the General Telecommunications Law, which provided for the establishment of a new regulatory framework, the introduction of competition and the privatization of the Telebrás system.

 

In January 1998, in preparation for the restructuring and privatization of the Telebrás system, the cellular telecommunications operations of the Telebrás system were spun off into separate companies. In May 1998, the Telebrás system was restructured to form, in addition to Telebrás, 12 new holding companies. Virtually all of the assets and liabilities of Telebrás’s operating subsidiaries were allocated to the new holding companies, which we refer to as the New Holding Companies. The New Holding Companies, together with their respective subsidiaries, consisted of (1) eight cellular holding companies, each in one of eight cellular regions, holding one or more operating companies that provide cellular services; (2) three wireline holding companies, each in one of three wireline regions, holding one or more operating companies that provide local and intraregional long distance services; and (3) Embratel Participações S.A., a holding company of Empresa Brasileira de Telecomunicações S.A.—Embratel.

 

TCP, TCO, TLE and TSD were New Holding Companies. In connection with the reorganization of the Telebrás system:

 

    TCP was allocated all of the share capital held by Telebrás in Telesp Celular, one of the cellular operating companies that provided cellular telecommunications services in the state of São Paulo;

 

    TCO was allocated all of the share capital held by Telebrás in the operating subsidiaries that provided cellular telecommunications service in the western concession region formerly known as Area 7;

 

    TLE was allocated all of the share capital held by Telebrás in the operating subsidiaries that provided cellular telecommunications services in the states of Bahia and Sergipe; and

 

    TSD was allocated all of the share capital held by Telebrás in one of the cellular operating companies that provided cellular telecommunications services in the states of Rio de Janeiro and Espírito Santo.

 

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In July 1998, as part of its restructuring and privatization plan, the Brazilian federal government sold substantially all of its common shares of the New Holding Companies to private sector buyers.

 

Privatization of Companhia Riograndense de Telecomunicações

 

In connection with the reorganization of Companhia Riograndense de Telecomunicações, the government of the state of Rio Grande do Sul sold to Telefónica S.A., or Telefónica, both the fixed line and cellular telecommunications operations, which were then split on June 25, 1998, resulting in the organization and spin off of Celular CRT, the operator that provided cellular telecommunications services in the state of Rio Grande do Sul.

 

Ownership of TCP, TCO, TLE, TSD and Celular CRT After the Privatization

 

TCP and its Subsidiaries

 

The federal government’s shares of TCP were purchased by Portelcom Participações S.A., or Portelcom, a consortium comprised of Portugal Telecom S.A., or Portugal Telecom, which owned 64.2% of Portelcom, and Telefónica, which owned the remaining 35.8% of the shares in Portelcom. In July 1998, Portelcom acquired 51.8% of the common stock of TCP. In 2000, Portugal Telecom increased its participation in TCP to 85.1% of the common shares and 17.7% of the preferred shares through a public tender offer and a later capital increase of TCP.

 

In November 2000, after the approval of Anatel, Telefónica effected a stock swap transaction with Portugal Telecom involving their participations in Telesp Celular and Telecomunicações de São Paulo S.A.-TELESP, known as Telesp. In the stock swap transaction, Telefónica swapped 35.8% of its direct and indirect stake in Portelcom for Portugal Telecom’s 23% indirect stake in SP Telecomunicações Holding. SP Telecomunicações Holding was a consortium of Portugal Telecom and Telefónica Móviles that invested in fix telecommunications. As a consequence of such stock swap transaction, Telefónica Móviles exited from its investment in Portelecom and Portugal Telecom exited form its investment in SP Telecomunicações Holding. This transaction increased Portugal Telecom’s participation in Telesp Celular from 36.2% to 41.2%.

 

In September 2002, TCP undertook a R$2.5 billion capital increase. After this capital increase, Portugal Telecom’s participation in TCP increased to 93.7% of the voting shares, 49.8% of the preferred shares and 65.1% of the total capital.

 

On January 23, 2001, Portugal Telecom and Telefónica Móviles entered into a strategic agreement to create a cellular services company in Brazil that would aggregate all of their investments in cellular telecommunications businesses to the extent permitted under Brazilian law. In December 2002, Anatel approved the joint venture between Portugal Telecom and Telefónica Móviles. This joint venture, named Brasilcel N.V., or Brasilcel, with headquarters in the Netherlands, is managed by Portugal Telecom and Telefónica Móviles on an equal basis.

 

In December 2002, Portugal Telecom and Telefónica Móviles transferred to Brasilcel all their direct and indirect interests in TCP, TCO, TLE, TSD and Celular CRT.

 

As of September 30, 2005, TCP was controlled by Brasilcel (57.23% of our total capital stock) and Portelcom (8.86% of our total capital stock). Portelcom is a direct and indirect wholly owned subsidiary of Brasilcel.

 

Telesp Celular has been a wholly owned subsidiary of TCP since a corporate restructuring in January 2000.

 

Global Telecom was formed to acquire a B Band cellular concession in the states of Paraná and Santa Catarina, known as Area 5. In April 1998, Global Telecom won the concession for Area 5 and, after building out its network, began commercial operations in December 1998. In February 2001, TCP acquired an 81.61% indirect economic interest in Global Telecom through the acquisition of 49% of the voting shares and 100% of the non-voting shares of each of three holding companies that collectively held 95% of the voting shares and

 

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100% of the non-voting shares of Global Telecom. The remaining 5% of Global Telecom’s voting shares were held by another investor who, upon authorization from Anatel in July 2001, sold them to the three holding companies. On December 11, 2002, after all of the TCP operators had switched over to the SMP regime, Anatel approved TCP’s acquisition of the remaining capital stock of the three holding companies, and TCP acquired the remaining portion of those three holding companies on December 27, 2002. On March 31, 2003, after a restructuring process, TCP became the direct holder of 100% of the capital stock of Global Telecom.

 

On April 25, 2003, TCP acquired 61.1% of the total common shares (including treasury shares) of TCO from Fixcel S.A., or Fixcel. On October 9, 2003, TCP launched a tender offer for the remaining common shares of TCO in compliance with Brazilian law, and TCP acquired 74.2% of the available outstanding common shares pursuant to that tender offer.

 

On October 8, 2004, TCP purchased preferred shares of TCO representing 32.8% of TCO’s total preferred shares pursuant to a public tender offer through an auction on the São Paulo Stock Exchange. In July 2005, TCP acquired additional voting capital stock of TCO in a capital increase. See “Part Four: Information on the VIVO Companies—Recent Developments.”

 

The following table provides a summary of TCP’s purchases of TCO’s shares in the past three years.

 

Period    Common shares

   Preferred shares

   Number of
shares
purchased(1)


   Price

   Number of
shares
purchased(1)


   Price

        High

   Low

   Average

        High

   Low

   Average

          (reais)         (reais)

2003

                                       

First quarter

                       

Second quarter

   25,752,136    58.46    58.46    58.46            

Third quarter

                       

Fourth quarter

   10,735,274    50.20    50.20    50.20            

2004

                                       

First quarter

   704,586    25.47    25.47    25.47            

Second quarter

   2,386    13.50    13.50    13.50            

Third quarter

                       

Fourth quarter

               28,084,178    32.10    32.10    32.10

2005

                                       

First quarter

                       

Second quarter

                       

Third quarter

   2,966,415    20.56    20.56    20.56            

Fourth quarter

                       

(1) Amounts reflect retroactively the reverse stock split completed in May 2005. See “Part Four: Information on the VIVO Companies—Recent Developments.”

 

As a result of these transactions, TCP now holds 90.6% of TCO’s common shares, 32.8% of TCO’s preferred shares and 52.5% of TCO’s total capital stock.

 

TCO and its Subsidiaries

 

The federal government’s shares of TCO were purchased by Splice do Brasil Telecomunicações e Electronica S.A., or Splice, through BID S.A., its subsidiary at the time.

 

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Telebrasília, Telegoiás, Telemat, Telems, Teleron and Teleacre were formed on January 5, 1998 by spinning off the cellular telecommunications operations of various operating subsidiaries of Telebrás. Telebrasília merged into TCO on April 26, 2002.

 

On October 19, 1998, Tele Centro Oeste/Inepar, a consortium comprised of Inepar S.A. Indústria e Construções and TCO, was awarded a license to provide cellular telecommunications services in the northwestern concession area formerly known as Area 8. On May 21, 1999, TCO acquired 45% of Tele Centro Oeste/Inepar from Inepar, increasing its holding in the consortium to 95%. Upon acquiring control, TCO renamed Tele Centro Oeste/Inepar “Norte Brasil Telecom S.A.,” or NBT, and registered it as a non-publicly held company.

 

On November 21, 2000, SPLICE IP S.A. was formed as a closed corporation. TCO held 100% of its preferred shares and Splice held 99.99% of its common shares. As of March 5, 2001, the control of SPLICE IP S.A. passed to TCO when TCO bought 99.99% of the common shares from Splice and renamed the entity TCO IP S.A.

 

In 2000 and 2001, TCO conducted tender offers for the remaining publicly held common and preferred shares of Telegoiás, Telemat, Telems, Teleron and Teleacre. Although these tender offers are complete, from time to time TCO voluntarily repurchases small numbers of publicly held shares.

 

On December 31, 2001, Splice transferred all of its shares of BID S.A. to Fixcel. Fixcel sold its interest in TCO to TCP in April 2003, as described in “—TCP and its Subsidiaries” above.

 

TLE and its Subsidiaries

 

As noted above, when the cellular telecommunications businesses of the operating subsidiaries of Telebrás were spun off as individual companies, TLE received all the capital stock held by Telebrás in the subsidiaries that provided cellular telecommunication services in the states of Bahia and Sergipe, namely, Telebahia Celular and Telergipe Celular.

 

In July 1998, the federal government sold almost all of its common shares in the holding companies resulting from the spin-off, including those of TLE, which were purchased by a consortium formed by Iberdrola Investimentos Sociedade Unipessoal Ltda., an investment company controlled by Iberdrola S.A. and Telefónica Internacional S.A., a subsidiary of Telefónica.

 

On May 17, 1999, Iberoleste Participações S.A. purchased 3.07% of Telebahia’s capital stock and 6.54% of Telergipe’s capital stock in a tender offer. In February 2000, Telefónica and Iberdrola transferred their shares to Iberoleste, maintaining their same percentage interest in the consortium.

 

On April 5, 2001, Telefónica purchased all the capital stock directly and indirectly held by the Iberdrola Group in TLE.

 

In 2002 Telefónica transferred to Brasilcel all its interests in TLE.

 

On October 8, 2004, Avista Participações Ltda., a subsidiary of Brasilcel, purchased common shares of TLE representing 10.0% of TLE’s total common shares and preferred shares of TLE representing 29.51% of TLE’s total preferred shares pursuant to a public tender offer through an auction on the São Paulo Stock Exchange. In July 2005, Brasilcel and its affiliates acquired additional voting capital stock of TLE in a capital increase. See “Part Four: Information on the VIVO Companies—Recent Developments.”

 

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As a result of these transactions, Brasilcel now holds 68.72% of TLE’s common shares, 40.95% of TLE’s preferred shares and 50.67% of TLE’s total capital stock.

 

TSD and its Subsidiaries

 

As noted above, when the cellular telecommunications businesses of the operating subsidiaries of Telebrás were spun off as individual companies, TSD received all the capital stock held by Telebrás in the subsidiaries that provided cellular telecommunication services in the States of Rio de Janeiro and Espírito Santo, namely, Telerj Celular and Telest Celular, respectively.

 

In July 1998, the federal government sold almost all of its common shares in the holding companies resulting from the spin-off, including those of TSD, which were purchased by a consortium formed by Telefónica Internacional S.A., Iberdrola Investimentos Sociedade Unipessoal Ltda., NTT Mobile Communications Network, Inc. and Itochu Corporation.

 

In May 2000, Telefónica acquired 67.51% of TSD’s capital stock through an exchange offer. On April 5, 2001, Telefónica purchased from the Iberdrola group, with the authorization of Anatel, 7% of the capital stock of Sudestecel Participações S.A., a holding company that controlled TSD.

 

In 2002 Telefónica transferred to Brasilcel all its interests in TSD.

 

On October 8, 2004, Avista Participações Ltda. purchased common shares of TSD representing 3.27% of TSD’s total common shares and preferred shares of TSD representing 4.89% of TSD’s total preferred shares pursuant to a public tender offer through an auction on the São Paulo Stock Exchange. In July 2005, Brasilcel and its affiliates acquired additional voting capital stock of TSD in a capital increase. See “Part Four: Information on the VIVO Companies—Recent Developments.”

 

As a result of these transactions, Brasilcel now holds 92.01% of TSD’s common shares, 90.27% of TSD’s preferred shares and 91.03% of TSD’s total capital stock.

 

Celular CRT

 

Cellular telecommunications services were first offered in the state of Rio Grande do Sul in December 1992 by a business unit of CRT – Companhia Riograndense de Telecomunicações. The fixed and cellular operations of CRT were split on June 25, 1998, and the cellular operations were spun off as Celular CRT.

 

On May 4, 1999, Celular CRT obtained its registration as a publicly-held company with the CVM for the trading of its shares on the over-the-counter market organized by Sociedade Operadora do Mercado de Ativos—SOMA, starting on May 17, 1999. On September 8, 1999, Celular CRT registered with the Extremo Sul Stock Exchange and Bovespa, pursuant to the applicable laws. The main shareholder of Celular CRT was the state of Rio Grande do Sul. In 1996, the state of Rio Grande do Sul sold part of its stake in Celular CRT to Telefónica. In 1998, the remaining stake of the state of Rio Grande do Sul was sold to Telefónica. In 1999, Portugal Telecom subscribed a share capital increase of Celular CRT.

 

In 2002, the shares owned by PT Móveis—Serviços de Telecomunicações, SGPS and Telefónica were transferred to Brasilcel.

 

On October 8, 2004, Avista Participações Ltda. purchased common shares of Celular CRT representing 4.48% of Celular CRT’s total common shares and preferred shares of Celular CRT representing 23.44% of Celular CRT’s total preferred shares pursuant to a public tender offer through an auction on the São Paulo Stock

 

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Exchange. In July 2005, Brasilcel and its affiliates acquired additional voting capital stock of Celular CRT in a capital increase. See “Part Four: Information on the VIVO Companies—Recent Developments.”

 

As a result of these transactions, Brasilcel now holds 90.57% of Celular CRT’s common shares, 51.47% of Celular CRT’s preferred shares and 68.77% of Celular CRT’s total capital stock (excluding treasury shares).

 

VIVO

 

TCP, TCO, TLE, TSD and Celular CRT are all controlled by Brasilcel and have been operating under the brand name “VIVO” since April 2003. The common commercial strategy of VIVO is to increase customer base as well as revenues, by acquiring new customers as well as maintaining distribution channels.

 

In particular, VIVO’s current strategy focuses on improving its relationship with its best customers, as well as growing in order to benefit from the market potential. VIVO intends to pursue this strategy through technological diversification, the maintenance of a customer-driven strategy aimed at achieving a balance between competitive pricing and quality service, and market segmentation in order to better tailor its commercial efforts.

 

VIVO’s strategy also focuses on managing its business prudently and achieving consistency in its results by adapting to the unique competitive environment of each individual region in which it operates. Ultimately, VIVO pursues a balance of growth and profitability, in order to maintain its margins within manageable levels and avoid loss of value.

 

According to data published by Anatel, VIVO has 36.1% of the total market in Brazil and 45.9% of the total market in its authorized areas, with 28.8 million users as of September 30, 2005. Its operations cover an area with approximately 135 million inhabitants, or 73% of the Brazilian population.

 

Upon the completion of the merger of shares of TCO and the merger of companies of each of TLE, TSD and Celular CRT with TCP, TCP will be renamed “Vivo Participações S.A.” and will be the holding company of TCO and of the subsidiaries of TLE, TSD and Celular CRT.

 

Merger

 

On December 4, 2005, the board of executive officers (diretorias) of TCP, TCO, TLE, TSD and Celular CRT signed a Protocol of Merger of Shares and Merger of Companies and Instrument of Justification containing the terms and conditions of the merger and outlining the reasons for the merger of shares of TCO and the merger of companies of TLE, TSD and Celular CRT, with TCP. On the same date, the boards of directors (conselhos de administração), of TCP and of each of TCO, TLE, TSD and Celular CRT approved the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification.

 

On December 4, 2005, the board of auditors (conselhos fiscais) of TCP and of each of TCO, TLE, TSD and Celular CRT reviewed the terms and conditions of the merger in separate meetings and issued favorable opinions with respect to the merger.

 

On December 5, 2005, TCP, TCO, TLE, TSD and Celular CRT published notices of extraordinary meetings of their respective voting shareholders to approve the merger.

 

Extraordinary general shareholders’ meetings to approve the merger are scheduled for February 22, 2006.

 

Because the VIVO companies are under common control and are guided by a common management team, employees of TCP, TCO, TLE, TSD and Celular CRT have been involved in preparing for and implementing the

 

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merger in the ordinary course of their work, including personnel from the planning, investor relations, finance, accounting and legal departments. This work has included preparation of disclosure for this prospectus and preparation of materials relating to the mergers for disclosure in accordance with Brazilian law. Similarly, officers of the Targets may have been involved in the preparation and implementation of the merger to the extent they are also officers of TCP.

 

Terms of the Merger

 

General

 

The merger must be approved at separate extraordinary general meetings of the shareholders of TCP and of each of TCO, TLE, TSD and Celular CRT scheduled to be held on February 22, 2006.

 

The completion of the merger of shares of TCO with TCP, and of the merger of companies of TLE, TSD and Celular CRT into TCP is contingent upon the approval at the shareholder meetings of holders of at least 50% plus one of the aggregate TCP common shares and preferred shares that are present at a duly convened extraordinary general shareholders’ meeting, and holders of at least 50% plus one of the aggregate common shares of TCO, TSD and Celular CRT, respectively. The completion of the merger of TLE with TCP is contingent upon the approval at the shareholder meetings of holders of at least 50% plus one of the aggregate TCP common shares and preferred shares that are present at a duly convened extraordinary general shareholders’ meeting, and holders of at least 50% plus one of the aggregate common shares and preferred shares of TLE. The holders of preferred shares of TCP and TLE will be entitled to vote on the transaction because those shares currently have voting rights due to the nonpayment of dividends. See “Part Six: Shareholder Rights—Information About Historical Dividend Payments—TCP” and “—TLE.”

 

If the merger is approved:

 

    TCO will become a wholly owned subsidiary of TCP, and TLE, TSD and Celular CRT will merge with and into TCP with TCP as the surviving company;

 

    holders of common shares of TCO and direct holders of preferred shares of TCO will receive 3.0830 common shares or preferred shares of TCP for each common share or preferred share, respectively, they hold without any further action by those holders; holders of ADSs of TCO will receive 3.0830 ADSs of TCP for each ADS they hold in the manner described in “—Receipt of Shares and ADSs of TCP”;

 

    holders of common shares of TLE and direct holders of preferred shares of TLE will receive 3.8998 common shares or preferred shares of TCP for each common share or preferred share, respectively, they hold without any further action by those holders; holders of ADSs of TLE will receive 3.8998 ADSs of TCP for each ADS they hold in the manner described in “—Receipt of Shares and ADSs of TCP”;

 

    holders of common shares of TSD and direct holders of preferred shares of TSD will receive 3.2879 common shares or preferred shares of TCP for each common share or preferred share, respectively, they hold without any further action by those holders; holders of ADSs of TLE will receive 3.2879 ADSs of TCP for each ADS they hold in the manner described in “—Receipt of Shares and ADSs of TCP”; and

 

    holders of common shares or preferred shares of Celular CRT will receive 7.0294 common shares or preferred shares of TCP for each common share or preferred share, respectively, they hold without any further action by those holders; Celular CRT does not have and ADS program.

 

Brasilcel holds, directly and indirectly, 92.51% of the common shares and 50.02% of the preferred shares of TCP, representing 66.09% of TCP’s total voting shares, and has represented to TCP that it and its subsidiaries will vote the shares of TCP they hold in favor of the merger.

 

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TCP holds 90.59% of the voting common shares of TCO, and it intends to vote the shares of TCO it holds in favor of the merger.

 

Brasilcel also holds, directly and indirectly, 68.72% of the common shares and 40.95% of the preferred shares of TLE, representing 50.67% of TLE’s total voting shares, 92.01% of the voting common shares of TSD and 90.57% of the voting common shares of Celular CRT, and has represented to TCP that it and its subsidiaries will vote the shares of TLE, TSD and Celular CRT they hold in favor of the merger.

 

Brasilcel and its subsidiaries will hold no less than 89.03% of TCP’s common shares after the merger, assuming that none of the common shareholders of TCP, TCO, TLE and Celular CRT, and none of the common and preferred shareholders of TSD, exercises appraisal rights in connection with the merger.

 

Under the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification, governing the merger, TCP will undergo a capital increase in the amount of R$2,631,136,636.01 as a result of the merger, from R$6,670,152,498.26 to R$9,301,289,134.27, assuming that common shareholders of TCP, TCO, TLE and Celular CRT, and common and preferred shareholders of TSD do not exercise appraisal rights in connection with the merger. The agreements also provide that Celular CRT’s preferred shares held in treasury will be transferred to TCP in connection with the merger. The Protocol of Merger of Shares and Merger of Companies and Instrument of Justification, which is filed as exhibit to the registration statement of which this prospectus is a part, is incorporated by reference into this prospectus.

 

Brazilian Securities Commission (Comissão de Valores Mobiliários), or CVM, regulations permit the acquiror of a publicly held company to capitalize the tax benefits arising from the amortization of goodwill generated in the acquisition of that company, so long as preemptive rights are extended to the other shareholders of the publicly held company in connection with the capital increase. At the time of the merger, any rights previously held by TCP, in connection with its existing investment in TCO, or by certain controlling shareholders, in the case of TLE and Celular CRT, to capitalize credits of such companies will remain in effect. As a result, upon the merger TCP will retain its prior rights to capitalize its credits in TCO and such controlling shareholders will acquire the right to use their credits in future capital increases of TCP. See the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification, which is incorporated herein by reference. See “Part Seven: Additional Information for Shareholders—Where You Can Find More Information” for instructions on how to obtain copies of this document.

 

There are no conditions to the completion of the merger of shares of TCO with TCP or the merger of companies of each of TLE, TSD and Celular CRT into TCP other than shareholder approval by both TCP, on the one side, and TCO, TLE, TSD and Celular CRT, respectively, on the other side.

 

The approval of the merger by the CVM is not a condition to the merger. However, the CVM has the authority to suspend the shareholders’ meetings for up to 15 days if it believes such a suspension is necessary to enable it to analyze the transaction and verify that it does not breach applicable laws and regulations. See “Part Three: Risk Factors—Risks Relating to the Merger—The CVM, the Brazilian securities regulator, may suspend for up to 15 days the shareholders’ meetings scheduled to approve the merger.”

 

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Date, Time and Place of the Meeting

 

The extraordinary general shareholders’ meeting of each of TCP, TCO, TLE, TSD and Celular CRT is scheduled to be held as follows:

 

February 22, 2006

2 p.m., local time

 

Telesp Celular Participações S.A.

Av. Roque Petroni Júnior, 1464

04707-000 - São Paulo, SP

Brazil

 

Tele Centro Oeste Celular Participações S.A.

SCS - Quadra 2, Bloco C, 226

Edifício Telebrasília Celular, 7º andar

70302-916 - Brasília, DF

Brazil

 

Tele Sudeste Celular Participações S.A.

Praia de Botafogo, 501

Torre Corcovado, 7º andar

22250-040 - Rio de Janeiro, RJ

Brazil

 

Tele Leste Celular Participações S.A.

Av. Roque Petroni Júnior, 1464

04707-000 - São Paulo, SP

Brazil

 

Celular CRT Participações S.A.

Rua José Bonifácio, 245, Farroupilha

90040-130 - Porto Alegre, RS

Brazil

 

Under the Brazilian corporation law, you may be required to show documents proving your identity to gain admittance to the meeting, provided you are entitled to attend the meeting. If you grant a proxy to someone to act for you at the meeting, your proxy will be required to show original or certified copies of the documents that grant him or her powers of representation. The proxy must be deposited at the head office of TCP, TCO, TLE, TSD or Celular CRT, as the case may be, no later than 2 p.m., local time, two days before the applicable meeting and may be revoked in accordance with the Brazilian corporation law.

 

TCP

 

    If you hold common shares, you may attend and vote at the TCP meeting.

 

    If you hold preferred shares, you may attend and vote at the TCP meeting.

 

    If you hold ADSs, you are not entitled to attend the TCP meeting, but you may communicate your voting instructions to the TCP depositary.

 

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TCO

 

    If you hold common shares, you may attend and vote at the TCO meeting.

 

    If you hold preferred shares, you may attend the TCO meeting, but you may not vote.

 

    If you hold ADSs, you are not entitled to attend or vote at the TCO meeting.

 

TLE

 

    If you hold common shares, you may attend and vote at the TLE meeting.

 

    If you hold preferred shares, you may attend and vote at the TLE meeting.

 

    If you hold ADSs, you are not entitled to attend the TLE meeting, but you may communicate your voting instructions to the TLE depositary.

 

TSD

 

    If you hold common shares, you may attend and vote at the TSD meeting.

 

    If you hold preferred shares, you may attend the TSD meeting, but you may not vote.

 

    If you hold ADSs, you are not entitled to attend or vote at the TSD meeting.

 

Celular CRT

 

    If you hold common shares, you may attend and vote at the Celular CRT meeting.

 

    If you hold preferred shares, you may attend the Celular CRT meeting, but you may not vote.

 

We have set a record date of December 19, 2005 for purposes of holders of TCP or TLE ADSs who wish to instruct the applicable depositary how to vote the preferred shares underlying those ADSs. That is, holders of ADSs of TCP or TLE as of the close of business on December 19, 2005 may instruct the applicable depositary how to vote the preferred shares underlying the ADSs they held on that date. A voting instruction form is available to holders of TCP or TLE ADSs from the applicable depositary. If you are a TCP or TLE ADS holder and you do not receive a voting instruction form, you may call The Bank of New York toll-free at 1-888-BNY-ADRS or contact The Bank of New York at 101 Barclay Street, New York, NY 10286. Your voting instructions must be received by The Bank of New York prior to 3:00 p.m., New York City time, on February 16, 2006. Any revocation of your voting instructions must be in writing and must be received by the time indicated in the preceding sentence.

 

There is no record date for purposes of determining direct holders of common shares of TCP or the Targets or preferred shares of TCP or TLE entitled to vote. Abstentions are counted for purposes of establishing a quorum but are not counted as votes for or against any matter voted on at a meeting.

 

Neither TCP nor any of its affiliates is requesting that you send it a proxy. Because Brasilcel and TCP hold a majority of the voting shares of each of the companies involved in the merger, the vote of the unaffiliated shareholders is not needed in order to approve the transaction.

 

Receipt of Shares and ADSs of TCP

 

If the merger is approved, each common share or preferred share:

 

    of TCO will become 3.0830 common shares or preferred shares, respectively, of TCP;

 

    of TLE will become 3.8998 common shares or preferred shares, respectively, of TCP;

 

    of TSD will become 3.2879 common shares or preferred shares, respectively, of TCP; and

 

    of Celular CRT will become 7.0294 common shares or preferred shares, respectively, of TCP,

 

in each case without any action by you. Because the common shares and preferred shares of TCP are book-entry shares, an entry or entries will be made in the share registry of TCP to evidence the common shares or preferred shares received in the merger. Neither you nor any other person will receive certificates evidencing common shares or preferred shares of TCP.

 

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Holders of ADSs representing preferred shares will receive:

 

    3.0830 ADSs representing preferred shares of TCP in the merger for each ADS of TCO they hold;

 

    3.8998 ADSs representing preferred shares of TCP in the merger for each ADS of TLE they hold; and

 

    3.2879 ADSs representing preferred shares of TCP in the merger for each ADS of TSD they hold,

 

in each case in the manner described in “—Delivery of TCP ADRs” below.

 

Although the merger will be effective by operation of law once the requisite shareholder approvals have been obtained, the common and preferred shares of TCP, TCO, TLE, TSD and Celular CRT will continue to trade on the São Paulo Stock Exchange under their existing ticker symbols until the later of:

 

    the end of the period for the exercise of appraisal rights by those shareholders to whom appraisal rights are available (which period will end not less than 30 days after publication of the minutes of the extraordinary general shareholders’ meetings called to approve the merger, as described in “—Appraisal or Dissenters’ Rights” below); and

 

    the end of the period during which management of TCP is permitted pursuant to the Brazilian corporation law to unwind the merger. Under the Brazilian corporation law, if management of TCP believes that the total value of the appraisal rights exercised by shareholders of the Targets may put at risk the financial stability of New TCP, management may, within 10 days after the end of the appraisal rights period, call a general meeting of shareholders to unwind the merger.

 

During the period described above, the ADSs of TCP, TCO, TLE and TSD will continue to trade on the New York Stock Exchange under their existing ticker symbols.

 

TCP has already agreed with the São Paulo Stock Exchange that once such transitional period has elapsed, those shares will trade under the ticker symbol for TCP’s common shares, “VIVO3,” and the ticker symbol for TCP’s preferred shares, “VIVO4,” respectively. TCP will apply to list the TCP ADSs to be received by holders of TCO, TLE and TSD ADSs on the New York Stock Exchange, and all the ADSs of TCP are expected to trade under the symbol “VIV.”

 

Delivery of TCP ADRs

 

Important Note: Celular CRT does not have an ADS program, and no holder of Celular CRT common shares or preferred shares will receive TCP ADRs.

 

Holders of ADSs representing preferred shares:

 

    of TCO will receive 3.0830 ADSs representing preferred shares of TCP for each TCO ADS they hold;

 

    of TLE will receive 3.8998 ADSs representing preferred shares of TCP for each TLE ADS they hold; and

 

    of TSD will receive 3.2879 ADSs representing preferred shares of TCP for each TSD ADS they hold.

 

After the merger becomes effective and the end of the period for the exercise of appraisal rights, where applicable (see “—Appraisal or Dissenters’ Rights”), TCP will deposit with a custodian for The Bank of New York, as depositary under each of the TCO, TLE and TSD ADS programs, the TCP preferred shares issuable in respect of the ADSs of TCO, TLE or TSD then held in that program. The Bank of New York, as depositary, will deposit those TCP preferred shares with the custodian for The Bank of New York, as depositary under the TCP ADS program, and instruct that depositary to cause to be issued and to deliver, subject to payment of the fees and

 

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expenses of that depositary under the TCP deposit agreement, as described below, ADSs representing those TCP preferred shares to the depositary for the ADS program of TCO, TLE or TSD, as the case may be. When the TCP ADSs are received in the ADS program of each of TCO, TLE and TSD, the ADSs of each of TCO, TLE and TSD will represent a right to receive TCP ADSs.

 

If you hold TCO, TLE or TSD ADSs indirectly through a broker or other intermediary, you will automatically receive your new TCP ADSs upon payment of the depositary’s fees and expenses as provided in each of the TCO, TLE and TSD deposit agreements, as described below.

 

If you hold ADSs directly as a registered holder, you must, in addition to paying the fees and expenses required to be paid under the applicable Target deposit agreement and TCP deposit agreement as described below, also surrender your ADRs to the depositary. Registered holders of TCO, TLE and TSD ADSs will be provided with the necessary forms, including a letter of transmittal substantially in the form filed as Exhibit 99.1 to the registration statement of which this prospectus is a part, which will contain instructions on how to surrender their ADRs representing ADSs to the depositary. If you do not receive the necessary forms, you may call The Bank of New York toll-free at 1-888-BNY-ADRS or contact The Bank of New York at 101 Barclay Street, New York, NY 10286. Upon surrender of those ADRs, the depositary will deliver the TCP ADSs to the registered holders of former TCO, TLE and TSD ADSs (and cash in lieu of any fractions as described in “—Fractional Shares and ADSs”).

 

If you hold ADSs of TCO, TLE or TSD, you will have to pay the fees of the depositary of TCO, TLE or TSD, as the case may be, in accordance with the applicable deposit agreement for the cancellation each ADS of TCO, TLE or TSD that you hold in connection with the merger. These cancellation fees will not exceed $5.00 per 100 ADSs (or portion thereof) of TCO, TLE or TSD you hold. You will also have to pay the ADS issuance fees of the TCP depositary in accordance with the TCP deposit agreement for each TCP ADS issued to you in connection with the merger. These issuance fees will not exceed $5.00 per 100 ADSs (or portion thereof) of TCP to be issued to you. Given the exchange ratios of TCP ADSs to be received for each ADS of TCO, TLE or TSD that you hold, the maximum ADS cancellation and issuance fees you will have to pay to the depositaries for each ADS of TCO, TLE or TSD that you hold are set forth below:

 

Target ADS


   Maximum ADS
cancellation and
issuance fees payable
in connection with the
merger for each ADS
held


TCO

   US$0.20415

TLE

   0.24499

TSD

   0.214395

 

You will also have to pay any applicable stock transfer taxes with respect to the cancellation of your TCO, TLE or TSD ADSs or the issuance of TCP ADSs to you.

 

If you are a holder of common shares, preferred shares or ADSs of TCP, you will continue to hold those securities after the merger.

 

Termination of Target ADS Programs

 

The Bank of New York, as depositary under the ADS program of each TCO, TLE and TSD, at the direction of TCO, TLE and TSD, intends to mail notice to the owners of all outstanding ADRs of TCO, TLE and TSD in accordance with the deposit agreements of TCO, TLE and TSD to terminate those deposit agreements and ADS programs after the merger becomes effective and the period for the exercise of appraisal rights (where applicable) has elapsed.

 

The terms of the ADSs of TCP that will be received in connection with the merger are described in “Part Six: Shareholder Information—Description of American Depositary Shares.”

 

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Fractional Shares and ADSs

 

If you hold common shares or preferred shares of TCO, TLE, TSD or Celular CRT and the product of the applicable exchange ratio and the number of common shares or preferred shares of TCO, TLE, TSD or Celular CRT you hold is not a whole number, the number of TCP common shares or preferred shares you will receive in the merger will be rounded down to the largest whole number. We will auction on the open market the fractional TCP common shares or preferred shares to which you would otherwise be entitled. You will receive cash in lieu of any fractional TCP common shares or preferred shares you are entitled to receive based on the net proceeds (after deducting applicable fees and expenses, including the fees charged by the São Paulo Stock Exchange and the CBLC (Companhia Brasileira de Liquidação e Custódia) of 0.027% and 0.0008% respectively, and the sales commissions charged by the brokerage firms that TCP will hire) from the sale on the São Paulo Stock Exchange of the aggregate number of fractional entitlements to TCP common shares and preferred shares.

 

If you hold ADSs of TCO, TLE or TSD and the product of the applicable exchange ratio and the number of ADSs of TCO, TLE or TSD you hold is not a whole number, the number of TCP ADSs you will receive in the merger will be rounded down to the largest whole number. The depositary under the ADS program of TCO, TLE or TSD, as the case may be, will sell on the open market the fractional TCP ADS to which you would otherwise be entitled. You will receive cash in lieu of any fractional TCP ADS you are entitled to receive based on the net proceeds (after deducting applicable fees and expenses, including sales commissions) from the sale on the New York Stock Exchange of the aggregate number of fractional entitlements to TCP ADSs.

 

Payments for interests in fractional TCP ADSs will be available to registered holders approximately five business days after the applicable depositary completes sales of aggregated fractional TCP ADSs on the New York Stock Exchange. Cash payments in respect of fractional TCP ADSs will not be available until the applicable depositary has completed sales of aggregated portions and all those trades have been settled.

 

You do not have to pay in cash any fees or commissions to us, or to the depositary, for the sale of your fractional common shares, preferred shares or ADS since fees and expenses will have already been deducted from any amounts you receive.

 

Appraisal or Dissenters’ Rights

 

Holders of record of common shares of TCP, TCO, TLE, TSD and Celular CRT, and holders of record of preferred shares of TCP and TSD at the close of business on December 2, 2005 are entitled to appraisal rights in connection with the merger.

 

In accordance with the Brazilian corporation law, since the exchange ratios of 3.0830 for TCO, 3.8998 for TLE and 3.2879 for TSD common shares and preferred shares (and ADSs) set forth in the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification (see “—Terms of the Merger”) are lower than the exchange ratios of 3.5844 for TCO, 4.8744 for TLE and 4.2863 for TSD calculated based on the market value of shareholders’ equity, as described below under “—Valuation Reports of Planconsult,” the shareholders of TCO, TLE and TSD on the record date have the right to choose to receive an amount in cash equal to the greater of shareholders’ equity per share in accordance with Brazilian GAAP and the market value of shareholders’ equity per share. Since the exchange ratio of 7.0294 for Celular CRT common shares and preferred shares set forth in the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification is higher than the exchange ratio of 6.7258 calculated based on the market value of shareholders’ equity, the Celular CRT shareholders on the record date have the right to receive an amount in cash equal to the shareholders’ equity per share in accordance with Brazilian GAAP.

 

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Therefore, holders of common shares of Celular CRT, TCO, TLE and TSD, and holders of preferred shares of TSD on the record date will have the right to choose to receive, instead of the TCP common shares or preferred shares, as the case may be, an amount in cash as described in the table below:

 

          Shareholders’ Equity in Accordance
With Brazilian GAAP (1)


   Market Value of Shareholders’
Equity (1)(2)


          (reais per share)

TCO

   the greater of    21.80    18.38

TLE

   the greater of    33.18    24.99

TSD

   the greater of    22.31    21.97

Celular CRT

        37.50     

(1) Calculated as of September 30, 2005 or, if the shareholder so demands, on the basis of a new balance sheet that is as of a date within 60 days of the extraordinary general shareholders’ meeting called to approve the merger.
(2) Market value of shareholders’ equity is determined in accordance with the special methodology described in “—Valuation Reports of Planconsult.”

 

Holders of record of TCP common shares and preferred shares at the close of business on December 2, 2005 also have the right to choose to receive an amount in cash equal to R$6.52 per share, the shareholders’ equity per share of TCP in accordance with Brazilian GAAP, calculated as of September 30, 2005.

 

If you have appraisal rights, your appraisal rights will lapse no less than 30 days after publication of the minutes of the extraordinary general shareholders’ meeting called to approve the merger. TCP will file an English translation of these minutes, which will specify the last date for the exercise of appraisal rights, with the U.S. Securities and Exchange Commission as a Report on Form 6-K. If you have appraisal rights with respect to voting shares, you cannot exercise those appraisal rights if you vote in favor of the merger.

 

If you hold TCP or TSD ADSs, you will not be able to exercise appraisal rights. Even if you held those ADSs on December 2, 2005, the holder of the preferred shares underlying those ADSs on that date was the applicable depositary’s custodian, and the custodian will not exercise appraisal rights on your behalf.

 

Holders of preferred shares of TCO, TLE and Celular CRT and holders of TCO and TLE ADSs are not entitled to appraisal or dissenters’ rights in connection with the merger under Brazilian law.

 

The total shareholders’ equity of each of the companies as of September 30, 2005 used to calculate the shareholders’ equity per share amounts that may be received by certain shareholders upon the exercise of appraisal rights, as described above, was as follows:

 

Company


  

Shareholders’ Equity as

of September 30, 2005


TCP

   R$ 4,315,766,402

TCO

     2,835,326,030

TLE

     320,029,960

TSD

     2,048,695,003

Celular CRT

     1,224,158,787

 

These amounts were based on unconsolidated financial statements as of and for the nine months ended September 30, 2005 of each of TCP, TCO, TLE, TSD and Celular CRT (which may be updated to a date within 60 days before the meetings at the request of a shareholder) prepared in accordance with Brazilian GAAP to comply with statutory requirements in Brazil.

 

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Valuation Reports of Planconsult

 

Planconsult Planejamento e Consultoria Ltda., or Planconsult, has been engaged by each of TCP, TCO, TLE, TSD and Celular CRT to determine the market value of the net equity (shareholders’ equity, or assets minus liabilities) of TCP and each of TCO, TLE, TSD and Celular CRT for purposes of Article 264 of Brazilian Law No. 6,404/76. The valuation reports are subject to the considerations and limitations set forth in the reports. The full valuation reports for each of these companies are contained in Exhibits 2.3.1, 2.3.2, 2.3.3, 2.3.4 and 2.3.5 to the registration statement on Form F-4 of which this prospectus is a part. Copies of these exhibits may be obtained as described in “Part Seven: Additional Information for Shareholders—Where You Can Find More Information.” The description of the Planconsult valuation reports set forth below is qualified in its entirety by reference to the full text of the reports.

 

In preparing its valuation reports, Planconsult:

 

    read the balance sheets as of September 30, 2005 furnished by TCP and each of TCO, TLE, TSD and Celular CRT;

 

    interviewed management of TCP and each of TCO, TLE, TSD and Celular CRT and reviewed documentation furnished by those companies with respect to the aging of accounts receivable and accounts payable, credit controls, derivatives with respect to indebtedness and other matters;

 

    analyzed each asset and liability account on the balance sheets of TCP and each of TCO, TLE, TSD and Celular CRT and, based on that analysis, adjusted each account to market value;

 

    calculated the tax effects of those adjustments that represented a capital gain or loss that would be deductible for tax purposes; and

 

    based on those adjustments and calculations, calculated the market value of the net equity of TCP and each of TCO, TLE, TSD and Celular CRT.

 

In adjusting the asset and liability accounts of each of the companies to market value, Planconsult used the following methodology:

 

    for fixed assets, Planconsult generally obtained records from each company regarding its fixed assets, performed a limited physical inspection of certain of the assets, calculated the estimated replacement value of the assets, estimated the useful lives of the assets and used these estimates to calculate the market value of the assets, except for certain assets of low economic value, which were valued based on their book values;

 

    for most other tangible assets and liabilities, Planconsult either:

 

    determined the aging of the account from information provided by the applicable company and calculated the present value of the account using a discount rate equal to the cost of capital of the VIVO companies, obtained from TCP and each of TCO, TLE, TSD and Celular CRT, adjusted for the relative inflation rates in Brazil and the United States; or

 

    where applicable, determined that the book value approximated the market value; and

 

    for the investments of TCP and each of TCO, TLE, TSD and Celular CRT in their operating subsidiaries, Planconsult calculated the net equity of those subsidiaries based on balance sheets for those subsidiaries as of September 30, 2005 and adjusted accordingly the amounts recorded as equity investments in those subsidiaries by TCP and each of TCO, TLE, TSD and Celular CRT.

 

In rendering its reports, Planconsult relied exclusively on the market value of tangible assets and liabilities and did not assess the market value of intangible assets, including goodwill. In addition, Planconsult did not assess the validity of any liens or encumbrances on the companies’ assets or take any such liens and encumbrances into consideration in rendering its report.

 

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In preparing its reports, Planconsult relied upon the truthfulness, completeness and accuracy of the information obtained from TCP and each of TCO, TLE, TSD and Celular CRT without independent verification. Planconsult did not conduct any general legal, accounting or other due diligence investigation in connection with the preparation of the reports. Planconsult did not evaluate the future profitability of TCP or any of TCO, TLE, TSD or Celular CRT, nor did it independently verify any of the factors used in calculating the cost of capital of the VIVO companies that Planconsult obtained from TCP and each of TCO, TLE, TSD and Celular CRT in order to calculate the present value of certain assets and liabilities. In addition, the valuation reports delivered by Planconsult do not constitute an audit report on the financial statements used in preparing those reports.

 

Neither the independent auditors of TCP, TCO, TLE, TSD and Celular CRT, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the prospective financial information used to prepare the valuation reports, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, this prospective financial information. The independent auditors’ reports included or incorporated by reference in this registration statement relate to the historical financial information of the respective companies, do not extend to the prospective financial information and should not be read to do so.

 

The Planconsult valuation reports do not address the underlying business decision by TCP to engage in the proposed corporate reorganization and do not constitute a recommendation to TCP, each of TCO, TLE, TSD and Celular CRT, or their respective shareholders with respect to the transaction.

 

Based on these assumptions and qualifications, Planconsult concluded that the market value of the net equity of each of the companies as of September 30, 2005 was as follows:

 

Company


  

Market Value of

Net Equity as of September 30, 2005


TCP

   R$ 3,395,399,889.45

TCO

     2,390,078,454.51

TLE

     240,997,096.12

TSD

     2,017,851,499.43

Celular CRT

     1,125,472,314.35

 

If the exchange ratios used to determine the common shares and preferred shares to be received by shareholders of TCO, TLE, TSD and Celular CRT, and the ADSs of TCP to be received by ADS holders of TCO, TLE and TSD in the proposed transaction had been calculated solely based upon the market value of the net equity of the companies, as calculated by Planconsult, the exchange ratios would have been as follows:

 

Company


   Hypothetical Exchange Ratios If Such Ratios Had Been
Calculated Using the Market Value of Net Equity of the
Companies as of September 30, 2005


TCO

   3.5844

TLE

   4.8744

TSD

   4.2863

Celular CRT

   6.7258

 

Planconsult provides valuation services to several large telecommunications companies and has over twenty-five years of experience in assisting major companies in Brazil in several industries. Planconsult has also acted as an advisor in privatization transactions in Brazil and has experience in providing technical and financial due diligence services. Planconsult was selected to prepare the valuation reports based on its experience in preparing such reports and other factors. Planconsult will be paid a fee by TCP, and TCP has agreed to reimburse Planconsult’s expenses.

 

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The valuation reports described above are available for inspection or copying at the principal executive offices of TCP and the Targets set forth in “Part Seven: Additional Information for Shareholders” during their regular business hours by any interested holder of shares or ADSs of the Targets or by any representative of any such holder that has been so designated in writing. See “Part Seven: Additional Information for Shareholders.”

 

Mailing of Prospectus

 

We will mail the prospectus to record holders of common shares and preferred shares of each of TCO, TLE, TSD and Celular CRT who are residents of the United States and whose names appear on our shareholder list. We will mail the prospectus to record holders of ADSs of TCO, TLE and TSD whose names appear on the list of record holders of ADSs maintained by the TCO, TLE and TSD depositaries and will also furnish the prospectus to brokers, banks and similar persons who are listed as participants in a clearing agency’s security position listing for subsequent transmission to beneficial owners of ADSs of TCO, TLE and TSD.

 

In addition, this prospectus serves as an information statement to provide information about the merger to holders of common shares, preferred shares and ADSs of TCP, which holders will continue to hold the same securities after the merger. We will mail the prospectus, as an information statement, to record holders of common shares and preferred shares of TCP who are residents of the United States and whose names appear on our shareholder list. We will mail the prospectus to record holders of ADSs of TCP whose names appear on the list of record holders of ADSs maintained by the TCP depositary and will also furnish the prospectus to brokers, banks and similar persons who are listed as participants in a clearing agency’s security position listing for subsequent transmission to beneficial owners of ADSs of TCP.

 

Brokerage Commissions

 

You do not have to pay any brokerage commissions in connection with the merger if you have your shares of TCO, TLE, TSD or Celular CRT registered in your name. If your securities are held through a bank or broker or a custodian linked to a stock exchange, you should consult with them as to whether or not they charge any transaction fee or service charges in connection with the merger. If you hold ADSs of TCO, TLE or TSD, you will have to pay the fees and expenses described in “—Receipt of Shares and ADSs of TCP—Delivery of TCP ADRs” in connection with the merger.

 

Accounting Treatment of the Merger

 

Under Brazilian GAAP, the body of accounting principles we use to prepare our consolidated financial statements, the merger will be accounted for at book value. Under U.S. GAAP, since TCP and each of the Targets have been under common control since December 27, 2002, the exchange of shares of TCP for common and preferred shares of the Targets held directly or indirectly by Brasilcel will be accounted for at historical cost in a manner similar to a pooling of interests. Accordingly, the assets acquired and the liabilities assumed in the merger, to the extent of the proportionate interests in the Targets under common control, will be accounted for based on the historical carrying values of the assets and liabilities of each of the Targets, as would be reflected in the consolidated financial statements of Brasilcel. The proportionate interests in each of the Targets acquired from shareholders unrelated to the controlling shareholders will be accounted for using the purchase method of accounting in accordance with SFAS No. 141, Business Combinations. Under the purchase method of accounting, the pro rata assets acquired and liabilities assumed are recorded at their fair values, and any excess of purchase price over the related fair value of net assets acquired is accounted for as goodwill. The financial statements of New TCP presented after the merger will retroactively reflect the combination of TCP and the Targets to the extent of the proportionate interests in the Targets under common control since December 27, 2002, in accordance with Brazilian GAAP and U.S. GAAP.

 

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Certain Information on the Parent Companies of TCP and the Targets

 

The following chart shows the simplified corporate structure of TCP, the Targets and their parent companies as of December 4, 2005.

 

LOGO

 

 

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Avista Participações

 

Avista Participações is incorporated under the laws of Brazil under the name Avista Participações Ltda. The principal business of Avista Participações is as a holding company for a portion of Brasilcel’s investment in TLE, TSD and Celular CRT. Its principal executive offices are located at Av. Roque Petroni Junior, 1464, 6º Andar, Lado B—Morumbi, São Paulo, SP, Brazil, 04707-000. Its telephone number is 011-55-11-5105-1155.

 

Brasilcel

 

Brasilcel is a joint venture of Telefónica Móviles, on the one hand, and Portugal Telecom and PT Móveis, on the other, and is managed on an equal basis by those companies. Brasilcel was created pursuant to a strategic agreement signed by Portugal Telecom and Telefónica Móviles in January 2001 to create a cellular services company in Brazil that would aggregate all of the parties’ investments in cellular telecommunications businesses in Brazil to the extent permitted under Brazilian law. After receiving regulatory approval, the Telefónica group and the Portugal Telecom group contributed the shares of several cellular communications companies to Brasilcel in December 2002. See “—Background for the Merger” and “—Transactions and Arrangements Concerning the Common Shares, Preferred Shares and ADSs of TCO, TLE, TSD and Celular CRT—Transactions and Arrangements—Joint Venture Agreement.” Brasilcel holds controlling interests, directly and indirectly, in TCP, TCO, TLE, TSD and Celular CRT. Brasilcel is incorporated under the laws of The Netherlands under the name Brasilcel N.V. Its corporate domicile is located at Strawiskylaan, 3105, 1077 ZX, Amsterdam, The Netherlands.

 

Portelcom Participações

 

Portelcom Participações is incorporated under the laws of Brazil under the name Portelcom Participações Ltda. The principal business of Portelcom Participações is as a holding company for a portion of Brasilcel’s investment in TCP. Its principal executive offices are located at Av. Roque Petroni Junior, 1464, 6º Andar, Lado B—Morumbi, São Paulo, SP, Brazil, 04707-000. Its telephone number is 011-55-11-5105-1155.

 

Portugal Telecom

 

Portugal Telecom is a limited liability holding company, organized as a Sociedade Gestora de Participações Sociais under the laws of the Republic of Portugal under the name Portugal Telecom, SGPS, S.A. The principal business of Portugal Telecom is, through its subsidiaries, the provision of wireline services, including fixed lines, data and business solutions and internet related services; cellular telecommunications services in Portugal and Brazil; multimedia services, including TV programming, film distribution and screening, newspaper publishing and distribution, radio programming and cable internet; and sale of telecommunications equipment. Its principal executive offices are located at Avenida Fontes Pereira de Melo, 40, 1069-300, Lisbon, Portugal. Its telephone number is 011-351-21-500-1701.

 

PT Móveis

 

PT Móveis is a limited liability holding company, organized as a Sociedade Gestora de Participações Sociais under the laws of the Republic of Portugal under the name PT Móveis, SGPS, S.A. PT Móveis is a subsidiary of TMN. The principal business of PT Móveis is as a holding company for Portugal Telecom’s investment in Brasilcel and in Medi Telecom, which provides cellular telecommunications services in Morocco. Its principal executive offices are located at Avenida Álvaro Pais, 02, 1649-041, Lisbon, Portugal. Its telephone number is 011-351-21-791-4400.

 

PTelecom Brasil

 

PTelecom Brasil is incorporated under the laws of Brazil under the name PTelecom Brasil Ltda. The principal business of PTelecom Brasil is as a holding company for a portion of Brasilcel’s interest in Portelcom Participações, which holds a portion of Brasilcel’s interest in TCP. Its principal executive officers are located at Av. Roque Petroni Junior, 1464, 6º Andar, Lado B — Morumbi, São Paulo, SP, Brazil, 04707-000. Its telephone number is 011-55-11-5105-1155.

 

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Sudestecel Participações

 

Sudestecel Participações is incorporated under the laws of Brazil under the name Sudestecel Participações Ltda. The principal business of Sudestecel Participações is as a holding company for a portion of Brasilcel’s investment in TLE, TSD and Celular CRT. Its principal executive offices are located at Av. Roque Petroni Junior, 1464, 6º Andar, Lado B—Morumbi, São Paulo, SP, Brazil, 04707-000. Its telephone number is 011-55-11-5105-1155.

 

Tagilo Participações

 

Tagilo Participações is incorporated under the laws of Brazil under the name Tagilo Participações Ltda. The principal business of Tagilo Participações is as a holding company for a portion of Brasilcel’s investment in TLE and Tele Sudeste Celular Participações S.A. Its principal executive offices are located at Av. Roque Petroni Junior, 1464, 6th Floor—Morumbi, São Paulo, SP, Brazil, 04707-000. Its telephone number is 011-55-11-5105-1155.

 

TBS Celular Participações

 

TBS Celular Participações is incorporated under the laws of Brazil under the name TBS Celular Participações Ltda. The principal business of TBS Celular Participações is as a holding company for a portion of Brasilcel’s investment in Celular CRT. Its principal executive offices are located at Av. Roque Petroni Junior, 1464, 6º Andar, Lado B—Morumbi, São Paulo, SP, Brazil, 04707-000. Its telephone number is 011-55-11-5105-1155.

 

Telefónica

 

Telefónica is incorporated under the laws of Spain under the name Telefónica, S.A. The principal business of Telefónica is, through its subsidiaries, the provision of fixed line and cellular telecommunications services, data transmission services and audiovisual content and media services in Spain, Latin America and other regions. Its principal executive offices are located at Gran Vía, 28, 28013, Madrid, Spain. Its telephone number is 011-34-91-584-0306.

 

Telefónica Internacional

 

Telefónica Internacional is incorporated under the laws of Spain under the name Telefónica Internacional S.A. Telefónica Internacional is a subsidiary of Telefónica. The principal business of Telefónica Internacional is, through its subsidiaries, the provision of fixed line telecommunications services in Latin America. Its principal executive offices are located at Gran Vía 28, 7th Floor, Madrid, Spain, 28013. Its telephone number is 011-34-91 362-6607.

 

Telefónica Móviles

 

Telefónica Móviles is incorporated under the laws of Spain under the name Telefónica Móviles, S.A. Telefónica Móviles is a subsidiary of Telefónica, S.A. Telefónica Móviles, S.A. is a holding company that provides cellular telecommunications services through subsidiaries and investments in Spain, Morocco and Latin America. Telefónica Móviles manages all the cellular assets of the Telefónica Group. Its principal executive offices are located at C/ Goya, 24, 28001, Madrid, Spain. Its telephone number is 011-34-91-423-4400.

 

TMN

 

TMN is a limited liability holding company, organized under the laws of the Republic of Portugal under the name TMN—Telecomunicações Móveis Nacionais S.A. TMN is a subsidiary of Portugal Telecom. The principal

 

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business of TMN is the provision of cellular telecommunications services in Portugal. Its principal executive offices are located at Avenida Álvaro Pais, 02, 1649-041 Lisbon, Portugal. Its telephone number is 011-351-21 791-4400.

 

Directors and Executive Officers

 

The name, business address, business telephone number, principal occupation and recent business history of the directors and executive officers of these companies and of TCO, TLE and Celular CRT are set forth in Annex A to this prospectus. The name, business address, business telephone number, principal occupation and recent business history of the directors and executive officers of TCP are set forth under “—Management” below.

 

During the last five years, TCP has not, and, to the knowledge of TCP, none of TCO, TLE, TSD, Celular CRT, any of the direct and indirect shareholders described above or any of the persons listed on Annex A hereto has been (1) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (2) a party to any judicial or administrative proceeding (excluding matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, U.S. federal or state securities laws, or a finding of any violation of U.S. federal or state securities laws.

 

Management

 

A description of TCP’s management is set forth below.

 

Board of Directors

 

Our administration consists of a board of directors and a board of executive officers. Our shareholders elect the members of the board of directors. The board of directors should maintain a number of members ranging from 3 to 12, each serving a three-year term. The board currently consists of nine members. The term of office of the current members of the board of directors will expire at the ordinary general meeting of shareholders to be held by April 2006, except for António Gonçalves de Oliveira, representative of minority shareholders, whose term will expire in April 2007. The board of directors holds regular quarterly meetings, and the chairman or two board members may call special meetings.

 

The following are the current members of our board of directors and their respective positions.

 

Name


  

Position


Fernando Xavier Ferreira

  

Chairman

Carlos Manuel de Lucena e Vasconcellos Cruz

  

Vice Chairman

Shakhaf Wine

  

Director

Félix Pablo Ivorra Cano

  

Director

Ignacio Aller Mallo

  

Director

Luis Paulo Reis Cocco

  

Director

Luiz Kaufmann

  

Director

Henry Philippe Reichstul

  

Director

António Gonçalves de Oliveira

  

Director

 

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Set forth below are brief biographical descriptions of the directors.

 

Fernando Xavier Ferreira, born on February 13, 1949, is currently Chief Executive Officer of Telecomunicações de São Paulo S.A. and SP Telecomunicações Holding Ltda. Mr. Ferreira is the Chairman of the Supervisory Board of Telecomunicações de São Paulo S.A. and serves as Vice-Chairman of the Board of Directors and Chief Executive Officer of Telefónica Data Brasil Holding S.A. Mr. Ferreira is also a member of the Boards of Directors of Telefónica Internacional S.A. and Telefónica Móviles. Mr. Ferreira is the Chairman of the Supervisory Board of Brasicel and Chairman of the Board of Directors of TCP, TCO, TLE, TSD and Celular CRT. He is also currently the Chief Executive Officer of the Telefónica Group in Brazil and is also a member of the Board of Directors of, among other companies, Telefónica Móviles and Brasilcel. During 1998, Mr. Ferreira served as a member of Anatel. From 1995 to 1998, he was General Director of Telebrás and President of the board of directors of Embratel and Telesp. Mr. Ferreira was President of Telecomunicações do Paraná S.A. Telepar from 1997 to 1999 and Vice President of that company from 1979 to 1987. He is currently a member of the Latin America Committee of the New York Stock Exchange and the Global Infrastructure Commission. He holds a degree in Electrical Engineering from the Catholic University of Rio de Janeiro, Brazil. Mr. Ferreira is a Brazilian citizen, and his current business address is at Rua Martiniano de Carvalho, 851, 01321-001 São Paulo, SP, Brazil.

 

Shakhaf Wine, born on June 13, 1969, has been the President of Portugal Telecom Brasil S.A. since April 2005, a Director of Portugal Telecom since March 2003, and a member of the Board of Directors of Brasilcel since February 2004, of TCP, TCO, TLE, TSD and Celular CRT since March 2004, and of Universo Online S.A. since June 2003. Mr. Wine is also the President of the Audit Committee of Brasilcel. Mr. Wine was a Director of Investment Banking and a Relationship Manager for European corporate clients in the Global Telecommunications Group of Merrill Lynch International from 1998 to 2003. Additionally, he was Senior Associate Director of the Latin American and Telecommunications groups of Deutsche Morgan Grenfell from 1993 until 1998. Previously Mr. Wine was a foreign exchange trader and dealer for the Brazilian Central Bank at Banco Icatu S.A. He holds a degree in Economics from the Catholic University of Rio de Janeiro, Brazil. Mr. Wine is a Brazilian citizen, and his current business address is at Praia de Botafogo, 501, 7º andar, Torre Corcovado, 22250-0040, Rio de Janeiro, RJ, Brazil.

 

Félix Pablo Ivorra Cano, born on July 1, 1946, has been a member of the Board of Directors of TCP, TCO, TLE, TSD and Celular CRT since February 1999. Mr. Ivorra currently is the President of the Board of Directors of Telefónica Móviles and serves on the Board of Directors of Telecomunicações de São Paulo S.A, Brasilcel, Telefónica Móviles SAC Perú, Telefónica Móviles Perú Holding, S.A.A and MobiPay International, S.A. Mr. Ivorra has been Chief Executive Officer of Telerj, Telest, Telebahia and Telergipe from 1999 until 2003, Chief Executive Officer of Celular CRT S.A. from 2001 to 2003, and a Member of the Board of Directors of Telemat, Teleacre, Telems, NBT, Teleron, TCO IP S.A. and Telegoiás since 2003. He joined the Telefónica Group in July 1972 and served in the areas of Technical Specifications, Network Planning, Commercial Planning and as General Director of Advanced Communications. In 1993, he was appointed General Director of the team that founded Telefónica Servicios Móviles, where he held several positions including General Commercial Director and General Director of Business Development. During 1997 and part of 1998, he was chairman of the board of Telefónica Móviles group companies Mensatel, S.A. and Radiored, S.A. He has a degree in Telecommunications Engineering from Escuela Técnica Superior de Engeneria—ETSI in Madrid, and a post–graduate degree in Business Administration from the Instituto Católico de Administração de Empresas–ICADE, also in Madrid. Mr. Cano is a Spanish citizen, and his current business address is at C/ Goya, 24, 28001, Madrid, Spain.

 

Ignacio Aller Mallo, born on December 1, 1945, is a member of the Board of Directors of Telefónica Móviles México, S.A. de C.V., Brasilcel, TCP, TCO, TLE, TSD and Celular CRT. Mr. Aller has served as Chief

 

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Operating Officer of Telefónica Móviles since 2003 and has held several positions at Telefónica de España since 1967. Mr. Mallo is a Spanish citizen, and his current business address is at C/ Goya, 24, 28001, Madrid, Spain.

 

Carlos Manuel de Lucena e Vasconcellos Cruz, born on September 9, 1957, is currently President and Chief Executive Officer of PT Investimentos Internacionais, S.A., PT Móveis and PT Asia, and has been the Chief Executive Officer of Portugal Telecom Investimentos Internacionais–Consultoria Internacional S.A. and PT Ventures, SGPS, S.A. since April 2004. He has been a member of the Board of Directors of PT Corporate–Soluções Empresariais de Telecomunicações e Sistemas, S.A. since June 2003. He was Chief Executive Officer of PT Comunicações, S.A. from May 2002 until January 2004, Chief Executive Officer of PT Prime, SGPS, S.A. from 2002 until January 2004, Chairman of the Board of Directors of PT Prime, SGPS, S.A. from 2002 until January 2004, Chairman of the Board of Directors of PT Contact – Telemarketing e Serviços de Informação, S.A. from 2002 until January 2004 and Chief Executive Officer of PTM.com, SGPS, S.A. from May 2003 until January 2004. Mr. Cruz has been a member of the Board of Directors of Brasilcel since December 2002, Vice Chairman of the Board of Directors of TCP since 2001, and a member of the Board of Directors of TCO, TLE, TSD and Celular CRT since 2003. Mr. Cruz was also Chairman and Chief Executive Officer of Telesp Celular from May 2001 until May 2002 and President and Chief Executive Officer of Tradecom, SGPS, S.A. from 2000 until 2001. Mr. Cruz was an adjunct professor of Universidade Católica Portuguesa and the I.S.C.T.E. (Instituto Superior de Ciências do Trabalho e da Empresa, or the Higher Education Institute for Labor and Corporate Sciences), Portugal, for post–graduate courses and the MBA Program from 2000 until 2001. From 1985 to 1999, Mr. Cruz held various positions with Dun & Bradstreet Corporation and its affiliates. Mr. Cruz holds a degree in business from the I.S.C.T.E. and a post–graduate degree in Management from D.S.E. (the German Foundation for International Development), Germany. Mr. Cruz is a Portuguese citizen, and his current business address is at Avenida Fontes Pereira de Melo, 40, 1069-300 Lisbon, Portugal.

 

Luis Paulo Reis Cocco, born on July 23, 1968, is a member of the Board of Directors of Portugal Telecom Investimentos Internacionais, S.A. and a member of the Board of Directors and of the Audit Committee of Brasilcel. Mr. Cocco is a member of the Board of Directors of PT Móveis—Serviços Telecomunicações, S.A., PT Ventures, SGPS, S.A., PT Brasil S.A., TCP, TCO, TLE, TSD and Celular CRT, ICDL Brasil Certificadora, S.A., Mobitel, S.A., Telecomunicações Públicas de Timor, S.A., PT Prime Tradecom, S.A. and Tradecom SGPS, S.A. From February 2004 to March 2005, Mr. Cocco was Chief Financial Officer of Portugal Telecom Investimentos Internacionais, S.A. Between 2003 and 2004, he was General Director for Planning, Control and Finance of PT Comunicações, S.A., PT Prime, S.A. and PTM.COM, S.A., and General Director for Resources, Planning, IT and Finance of PT Prime, S.A. Between 2000 and 2002, Mr. Cocco was President and Chief Executive Officer (2001-2002) and Chief Financial Officer (2000-2001) of PT Prime Tradecom, S.A. Before joining Portugal Telecom in May 2000, Mr. Cocco had been Vice President of Santander Investment S.A. in Portugal since February 1998. Previous to that Mr. Cocco worked for McKinsey and Company from 1991 to 1993 and from 1995 to 1998. Mr. Cocco holds a Master Degree from Harvard Business School and a Degree in Business Administration from Universidade Católica Portuguesa. Mr. Cocco is a Portuguese citizen, and his current business address is at Av. Fontes Pereira de Melo, nº 40, 1069-300, Lisboa, Portugal.

 

Luiz Kaufmann, born on August 7, 1945, has been a member of the Board of Directors and Audit Committee of TCP, TCO, TLE, TSD and Celular CRT since July 2005. Mr. Kaufmann is a partner at L. Kaufmann Consultores Associados, an investment bank through which Mr. Kaufmann was in charge of the sale of Vésper Brazil from May 2001 to November 2003 and of the sale of Primesys from October 2004 to October 2005. Mr. Kaufmann is also a member of the Board of Directors of Gol Linhas Aéreas Inteligentes and chairman of its audit committee and is a member of the Board of Directors of Medial Saúde. Mr. Kaufman was Chief Executive Officer of Vésper-Brazil from May 2001 to November 2003. Mr. Kaufman was partner of GP Investimentos from 1999 to 2001 and was Chief Executive Officer of Aracruz Celulose S.A. and Chairman of the Board of Directors of Tecflor, a joint venture between Aracruz Celulose and Gutchess International, from November 1993 to April 1998. Mr. Kaufmann began his career at Serete S.A. Engenharia as project engineer in 1968, rising to the

 

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position of Director of Finance and Control by 1974. Mr. Kaufmann then held various other executive positions prior to those described above. Mr. Kaufmann holds a degree from Universidade Federal do Paraná and a Master of Sciences in Industrial Engineering from Illinois Institute of Technology. Mr. Kaufmann is a Brazilian citizen, and his current business address is at Rua Funchal, no. 263, Conjunto 44, São Paulo, SP, Brazil.

 

Henry Philippe Reichstul, born on April 12, 1949, is a member of the Board of Directors and Audit Committee of TCP, TCO, TLE, TSD and Celular CRT. Mr. Reichstul is also a member of the Boards of Directors of Coinbra (Louis Dreyfus-Brasil), Prisma Energy International and TAM S.A. Mr. Reichstul was the Chief Executive Officer of Petrobrás – Petróleo Brasileiro S.A. from March 1999 to December 2001 and was the Chief Executive Officer of Globopar in 2002. Prior to that time, Mr. Reichstul held various positions as an economist and as an executive. Mr. Reichstul has served on the Boards of Directors of Telebrás from 1985 to 1986, Eletrobrás—Centrais Elétricas S.A. from 1985 to 1987 and BNDES from 1986 to 1989. Mr. Reichstul holds a post-graduate degree in Economics from Hertford College of Oxford University. Mr. Reichstul is a Brazilian citizen, and his current business address is at Rua dos Pinheiros, no. 870, 20º Andar, cj. 201 e 202, Pinheiros, São Paulo, SP, Brazil.

 

António Gonçalves de Oliveira, born on May 4, 1944, has been a member of the Board of Directors and Audit Committee of TCO, TLE, TSD and Celular CRT since July 2005, and a member of the Board of Directors and Audit Committee of TCP since March 2001. Mr. Gonçalves de Oliveira is also a member of the board of Previ, a member of the Social and Economic Development Council of the Brazilian Government, a board member of the Small and Medium Company Working Group sponsored by the Brazilian Government, the Vice President of the Brazilian Businessmen’s Association for Market Integration (ADEBIM), a member of the orientation and steering council of Banco do Povo do Estado de São Paulo and President of the Decision Council of the National Employee Association of Banco do Brasil (ANABB). From 1991 to 1995, he served as Director of the Latin American Sociology Association and from 1993 to 1994 he served as the executive coordinator of the Small and Medium Company National Movement (MONAMPE). He holds a degree in Social Sciences from the University of São Paulo, Brazil, and a Master’s Degree in Communication Sciences from the same university. Mr. Gonçalves is a Brazilian citizen, and his current business address is at Av. Brasil, no. 458, São Paulo, SP, Brazil.

 

In accordance with the shareholders’ agreement between Portugal Telecom SGPS. S.A., PT Movéis SGPS, S.A. and Telefónica Móviles S.A., PT Movéis is responsible for the appointment of our Chief Executive Officer and Telefónica Móviles is responsible for the appointment of our Chief Financial Officer.

 

Executive Officers

 

Our bylaws provide for a board of executive officers with eight positions, and each executive officer is elected by the board of directors for a term of three years. Our board of executive officers currently has five members, three of whom hold two positions. The chief executive officer is the chairman and, in his absence or temporary inability to perform his duties, he would be replaced by the vice president for finance, planning and control. In the case of a vacancy in any position in the board of executive officers, the respective replacement will be appointed by the board of directors. In the case of the incapacity of any officer, the chief executive officer will choose a replacement for that officer from among the remaining officers. One officer may be elected for more than one position on the board of executive officers, but the members of the board of executive officers cannot be elected to the board of directors. The board of directors may remove executive officers from office at any time.

 

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The following are the current executive officers, their respective positions and dates of appointment. The current business address of each person is Av. Roque Petroni Junior, 1464, Morumbi, São Paulo, SP, Brazil, 04707-000.

 

Name


  

Position


Roberto Oliveira de Lima

   Chief Executive Officer

Paulo Cesar Pereira Teixeira

   Executive Vice President for Operations, and interim Executive Vice President for Finance, Planning and Control and Investor Relations Officer, appointed on October 25, 2004

Luis Filipe Saraiva Castel-

    

    Branco de Avelar

   Executive Vice President for Marketing and Innovation and Vice President for IT and Product and Service Engineering, appointed on April 16, 2003

Javier Rodriguez Garcia

   Vice President for Technology and Networks, appointed on April 16, 2003

Guilherme Silverio Portela

    

    Santos

   Vice President for Customers, appointed on April 16, 2003

Sérgio Assenço Tavares

    

    dos Santos

   Vice President for Regulatory Matters and Institutional Relations, appointed on January 2, 2006

 

Set forth below are brief biographical descriptions of our executive officers.

 

Roberto Oliveira de Lima, born on April 1, 1951, is Chief Executive Officer and Vice President for Regulatory Matters and Institutional Relations of TCP, TCO, TLE, TSD, Celular CRT, Telerj, Telest, Telebahia, Telergipe, Celular CRT S.A., Telesp Celular, Global Telecom, Telegoiás, Telemat, Telems, Teleacre, Teleron, NBT and TCO IP S.A. Mr. Oliveira de Lima has also been a director of Avista Participações Ltda., Tagilo Participações Ltda., Sudestecel Participações Ltda., TBS Celular Participações Ltda., Ptelecom Brasil Ltda. and Portelcom Participações Ltda., all affiliates of Brasilcel, since 2005. Mr. Oliveira de Lima was Chairman of the Board of Directors of Grupo Credicard from 1999 to 2005 and Chief Executive Officer of Banco Credicard S.A. from 2002 to 2005. Before 1999, Mr. Oliveira de Lima held executive positions at Accor Brasil S.A., Rhodia Rhone Poulec S.A. and Saint Gobain S.A. Mr. Oliveira holds a degree in Administration and an MBA from Fundação Getulio Vargas, Brasil, and a Master’s degree in finance and strategic planning from Institute Superieur des Affaires, Jouy en Josas, France. Mr. Oliveira is a Brazilian citizen.

 

Paulo Cesar Pereira Teixeira, born on June 18, 1957, is the Executive Vice-President for operations (since 2003) and interim Executive Vice President for Finance, Planning and Control and Investor Relations Officer (since July 2005) of TCP, TCO, TLE, TSD, Celular CRT, Telerj, Telest, Telebahia, Telergipe, Celular CRT S.A., Telesp Celular, Global Telecom, Telegoiás, Telemat, Telems, Teleacre, Teleron, NBT and TCO IP S.A. Mr. Teixeira is also a director of Avista Participações Ltda., Tagilo Participações Ltda., Sudestecel Participações Ltda., TBS Celular Participações Ltda., Ptelecom Brasil Ltda. and Portelcom Participações Ltda. Since 1998, Mr. Teixeira has been Vice-President of Telerj, Telest, Telebahia, Telergipe, Celular CRT S.A., and was a member the Board of Directors of Tele Sudeste Celular Participações S.A., TSD, TLE and Celular CRT from 2001 to 2003. In 1998, Mr. Teixeira was a Director of Telepar Celular S.A., Telesc Celular S.A. and CTMR Celular S.A., companies of Telebrás and Vice President of Tele Celular Sul S.A. Mr. Teixeira has been a Director of telecommunications engineering of Mato Grosso do Sul S.A. between 1995 and 1998. From 1980 until 1987, Mr. Teixeira performed several different managerial duties at Companhia Riograndense de Telecomunicações S.A.—CRT and was also a member of the board of directors from 1985 to 1986. In 1987 and 1988, he held several different positions at Telebrás. Mr. Teixeira holds an Electrical Engineering degree from the Catholic University of Pelotas, Brazil. Mr. Teixeira is a Brazilian citizen.

 

Luis Filipe Saraiva Castel-Branco de Avelar, born on April 15, 1954, is the Executive Vice-President for IT and Product and Service Engineering and Executive Vice-President for Marketing and Innovation of each of

 

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TCP, TCO, TLE, TSD, Celular CRT, Telerj, Telest, Telebahia, Telergipe, Celular CRT S.A., Telesp Celular, Global Telecom, Telegoiás, Telemat, Telems, Teleacre, Teleron, NBT and TCO IP S.A. Earlier in his career, Mr. Avelar was the corporate accounts director of Telefones de Lisboa e Porto, an expert in telecommunications services for the European Commission (DG XIII, Telecom Policy Unit) and a strategic planning director at Comunicações Nacionais. From 1993 to 1998, he was a consultant in privatization and regulation projects for the World Bank, the European Bank for Reconstruction and Development and the European Commission. From 1996 to 1998, he was a portfolio director of Portugal Telecom Group and on the strategic marketing board of Portugal Telecom. From 1998 to 2000, Mr. Avelar was a special consultant to the President of TCP for the areas of marketing, sales, strategy, regulation and special projects and, from 2000 to 2001, was an officer of the Internet and E-commerce business unit at the same company. He holds an Electrical-Technical Engineering degree (specialized in Telecommunications and Electronics) from the Lisbon Higher Education Technical Institute. Mr. Avelar is a Portuguese citizen.

 

Javier Rodríguez García, born on December 8, 1955, has been Vice President for Technology and Networks of each of TCP, TLE, TSD and Celular CRT, Telerj, Telest, Telebahia, Telergipe, Celular CRT S.A., Telesp Celular, Global Telecom since May 2003, and TCO, Telegoiás, Telemat, Telems, Teleacre, Teleron, NBT and TCO IP S.A. since April 2005. From 1986 until 1988, Mr. García worked at INDELEC—Indústria Electrónica de Comunicaciones S.A., as the manager responsible for the implementation of an automatic mobile telecommunications project for Telefónica de España S.A. From 1988 until 1990, he worked at Rede Electrica de España S.A. as the person responsible for the installation and maintenance of radio mobile systems in Spain. From 1990 until 1992, Mr. García served as an engineering manager at Telcel S.A., where he was responsible for the implementation of automatic mobile telecommunications system for Telefónica de España S.A. in Barcelona, Madrid and Palma de Mallorca. From 1992 until 1996, he was an engineering manager responsible for the installation and maintenance of systems at Compañia Europea de Radiobusqueda S.A., and from 1996 until 1998, he worked in cellular businesses for the Telefónica Group in Spain and Peru, as a network quality manager and technical area sub-manager, respectively. From 1998 until 2000, Mr. García was the technology manager in the cellular business of the Telefónica Group in Brazil, and from 2000 until 2002 was the network manager of Telerj and Telest. He holds a degree in Technical Telecommunications Engineering from the Technical University of Madrid, Spain. Mr. García is a Spanish citizen.

 

Guilherme Silvério Portela Santos, born on February 3, 1966, is the Vice President for customers of each of TCP, TCO, TLE, TSD, Celular CRT, Telerj, Telest, Telebahia, Telergipe, Celular CRT S.A., Telesp Celular, Global Telecom, Telegoiás, Telemat, Telems, Teleacre, Teleron, NBT and TCO IP S.A. From 1989 until 1993, Mr. Santos was a consultant at McKinsey & Co., and from 1994 until 1998 he worked as an officer for operations and special projects at Parque Expo ’98, S.A. He also has served as a coordination officer at Companhia de Seguros Tranquilidade. Mr. Santos holds a civil engineering degree from the Higher Education Technical Institute, Portugal, and a Master’s degree from INSEAD, France. Mr. Santos is a Portuguese citizen.

 

Sérgio Assenço Tavares dos Santos, born on June 3, 1948, is the Vice President for Regulatory Matters and Institutional Relations of TCP, TCO, TLE, TSD, Celular CRT, Telerj, Telest, Telebahia, Telergipe, Celular CRT S.A., Telesp Celular, Global Telecom, Telegoiás, Telemat, Telems, Teleacre, Teleron, NBT and TCO IP S.A. He was CEO of TCO and its operating subsidiaries and Executive Vice President of Operational Services of TCO between June 2003 and October 2004, and prior to such time he was Manager of the Department of Networks and Operations since May 1998. He was also Manager of the Department of Engineering and Operations of NBT from August 1999 to June 2003 and Superintendent Head of Telebrasília, Telegoiás, Telems, Teleron and Teleacre from January 1998 to June 2003. He was Director of Engineering of Telecomunicações de Brasília S.A.—TELEBRASÍLIA, a fixed telecommunications company, between July 1995 and March 1998, and was also Manager of the Business Unit of Advanced Telecommunications of the Operations Department of Telebrasília from April 1994 until July 1995 and Assessor and Coordinator of Special Projects of the Engineering Department of Telebrasília from September 1993 until March 1994. He held several different positions at

 

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Telebrás from July 1990 until July 1993 and also held several different positions at Telebrasília between March 1976 and July 1990. Mr. Assenço holds an Electrical Engineering degree from the Brasília University, Brazil. Mr. Assenço is a Brazilian citizen.

 

Audit Committee

 

We have an audit committee that has responsibility for, among other things:

 

    overseeing management’s maintenance of the reliability and integrity of our accounting policies and financial reporting and our disclosure practices;

 

    overseeing management’s establishment and maintenance of processes to assure that an adequate system of internal control is functioning;

 

    overseeing management’s establishment and maintenance of processes to assure our compliance with all applicable laws, regulations and corporate policy;

 

    reviewing our annual and quarterly financial statements prior to their filing or prior to the release of earnings;

 

    reviewing the performance of the independent accountants and making recommendations to the board of directors regarding the appointment or termination of the independent accountants and considering and approving any non-audit services proposed to be performed by the independent accountants;

 

    preparing audit committee reports in accordance with applicable laws and regulations; and

 

    reviewing company policies concerning related party transactions.

 

The audit committee has the power to investigate any matter brought to its attention within the scope of its duties and to retain counsel for this purpose where appropriate.

 

The following are the current members of our audit committee.

 

Name


   Position

Luiz Kaufmann

   Member

Henry Philippe Reichstul

   Member

António Gonçalves de Oliveira

   Member

 

Brief biographical descriptions of the members of our audit committee are provided under “—Board of Directors” above.

 

Board of Auditors (Conselho Fiscal)

 

We have a permanent board of auditors with three members. They are elected annually at a general shareholders’ meeting. The board of auditors is not an audit committee for purposes of Rule 10A-3 under the Exchange Act.

 

The board of auditors is responsible for overseeing our management. Its main duties are:

 

    to review and provide an opinion on the annual report of our management;

 

    to review and approve the proposals of management to be submitted to shareholders’ meetings regarding changes in share capital, issuance of debentures and subscription rights, capital investment plans and budgets, distribution of dividends, changes in corporate form, consolidations, mergers or split-ups; and

 

    to review and approve the financial statements for the fiscal year.

 

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The following are the current members of our board of auditors and their alternates.

 

Name


   Position

Nelson Jimenes(1)

   Member

Norair Ferreira do Carmo(2)

   Member

Evandro Luís Pippi Kruel(2)

   Member

João Botelho

   Alternate

Wolney Querino Schüler Carvalho(2)

   Alternate

Fabiana Faé Rodrigues Garcia

   Alternate
 

(1) Appointed by our preferred shareholders.

(2) Appointed by our controlling shareholder.

 

Compensation

 

For the year ended December 31, 2004, we paid to our directors and executive officers as compensation an aggregate amount of R$12.02 million, including bonuses and profit sharing plans. This amount includes performance-based compensation and profit-sharing arrangements applicable to all employees. Furthermore, the members of our board of executive officers are eligible to participate in the same complementary retirement pension plan available to our employees, called TCP Prev. In 2004, we did not contribute any amount to TCP Prev on behalf of our executive officers. The aggregate amount of compensation we paid to members of our board of auditors for the year ended December 31, 2004 was approximately R$0.21 million.

 

Certain Transactions

 

As of December 31, 2005, the members of the board of directors and of the boards of executive officers did not have any transaction or loan with TCP, TCO, TLE, TSD or Celular CRT.

 

Material Tax Considerations

 

Brazilian Tax Considerations

 

The Merger

 

The following discussion is the opinion of Machado, Meyer, Sendacz e Opice Advogados, the Brazilian counsels of TCP, as to the material tax consequences to you of the merger. The following discussion is based on Brazilian law and practice as applied and interpreted as of the date of this prospectus, which are subject to change at any time. There is currently no treaty for the avoidance of double taxation between Brazil and the United States. The following discussion summarizes the principal Brazilian tax consequences of the transactions described in this prospectus to 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 possible Brazilian tax consequences relating to the merger and does not address all the Brazilian tax considerations that may be applicable to any particular non-Brazilian holder. You should consult your own tax advisor regarding taxes that may arise in connection with the merger.

 

Despite the lack of specific provisions in Brazilian tax legislation with respect to the merger, there are reasonable legal grounds to sustain that the receipt (resulting from the merger) by a non-Brazilian holder of ADSs or by a U.S. person of common shares and preferred shares that are registered as a foreign portfolio investment under Resolution 2,689/00 of the National Monetary Council or are registered as a foreign direct investment under Law No. 4,131/62 would not be subject to income tax pursuant to Brazilian law. However, the exercise of appraisal rights is a taxable transaction.

 

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Taxation on Gains

 

Merger. As stated above, there are reasonable legal grounds to sustain that the merger would not be subject to income tax pursuant to Brazilian law. Nevertheless, in case these arguments do not prevail, the following rules will apply to calculate the taxable gains:

 

    gains upon the receipt of preferred shares as a consequence of the cancellation of ADSs are not taxed in Brazil (Resolution CMN/BACEN 1927/92), unless the investor is a resident of a jurisdiction that, under Brazilian law, is deemed to be a tax haven (i.e. a jurisdiction that does not impose income tax or that imposes tax at a rate of less than 20%); and

 

    gains that may be realized through the receipt of shares of TCO, TLE, TSD and Celular CRT for TCP shares (e.g., cases of foreign direct investment under Law 4,131/62) could be subject to tax at a rate of 15%, unless the investor is located in a tax haven, in which case the applicable rate would be 25%. This rule would also apply in the case of an investment made under Resolution 2,689/00, since the merger would be considered a transaction not carried out on a stock exchange. These gains would be measured by the difference between the acquisition cost of the shares of TCO, TLE, TSD and Celular CRT and the amount attributed to the TCP shares received in the merger. Both amounts should be considered in Brazilian currency without any correction for inflation for periods after 1996. Although there is a controversy surrounding this issue, there are arguments to sustain that the acquisition cost of investments governed by the Law 4,131/62 regime should be indexed in foreign currency.

 

Exercise of Appraisal Rights. Gains that may be realized through the exercise of appraisal rights would be subject to tax at a rate of 15%, unless the investor is located in a tax haven, in which case the applicable rate would be 25%. This rule would also apply in the case of an investment made under Resolution 2,689/00, since the merger would be considered a transaction not carried out on a stock exchange. Both amounts should be considered in Brazilian currency without any correction for inflation for periods after 1996. Although there is a controversy surrounding this issue, there are arguments to sustain that the acquisition cost of investments governed by the Law 4,131/62 regime should be indexed in foreign currency.

 

Future Dispositions of TCP’s Securities. Until December 31, 2003, the sale or other disposition of common shares, preferred shares or ADSs entered into by and between non-Brazilian holders outside Brazil was not subject to Brazilian income tax, as such a transaction did not involve payments by a person located in Brazil. Brazilian Law No. 10,833/03 provides that, commencing on February 1, 2004, “the acquiror, individual or legal entity resident or domiciled in Brazil, or the acquiror’s attorney-in-fact, when such acquiror is resident or domiciled abroad, shall be responsible for the retention and payment of the income tax applicable to capital gains under Article 18 of Law 9,249 of December 26, 1995 earned by the individual or legal entity resident or domiciled abroad who disposes of property located in Brazil.”

 

The Brazilian tax authorities have issued an instruction confirming that, pursuant to Law No. 10,833/03, these tax authorities intend to assess income tax on capital gains earned by non-Brazilian residents whose assets are located in Brazil. Holders of ADSs outside Brazil may have grounds to assert that Brazilian Law No. 10,833/03 does not apply to sales or other dispositions of ADSs as ADSs are not assets located in Brazil. However, the sale or other disposition of common shares or preferred shares abroad would be subject to the provisions of Brazilian Law No. 10,833/03. Any capital gains arising from sales or other dispositions outside Brazil would be subject to Brazilian income tax at the rate of 15%, unless the investor is located in a tax heaven, in which case the applicable rate would be 25%. Brazilian Law No. 10,833/03 requires the purchaser of common or preferred shares outside Brazil or its attorney-in-fact in Brazil to withhold the tax.

 

The surrender of ADSs for preferred shares is not subject to Brazilian tax. A holder of ADSs may surrender its ADSs for the underlying preferred shares, sell the preferred shares on a Brazilian stock exchange and remit

 

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abroad the proceeds of the sale within five business days from the date of exchange (in reliance on the depositary’s electronic registration), with no tax consequences.

 

Upon receipt of the underlying preferred shares in exchange for ADSs, a non-Brazilian investor will be entitled to register with the Central Bank the U.S. dollar value of such shares as a foreign portfolio investment under Resolution No. 2689/00. The sale or disposition of common or preferred shares on a Brazilian stock exchange is exempt from capital gains tax, provided that such shares are held by a non-Brazilian holder as a foreign portfolio investment under Resolution No. 2,689/00.

 

Upon receipt of the underlying preferred shares, a non-Brazilian holder is also entitled to register with the Central Bank the U.S. dollar value of such shares as a foreign direct investment under Law 4,131/62. A 15% capital gains tax is applicable to the sale or other disposition of common or preferred shares in Brazil where such shares are held by a non-Brazilian holder as a foreign direct investment and the transaction is performed outside a Brazilian stock exchange. If the non-Brazilian holder is located in a tax haven jurisdiction, the income tax rate will be 25%.

 

As of January 1, 2005, the capital gains arising from transactions carried out on a Brazilian stock exchange (other than transactions including investments not registered under Resolution No. 2,689/00) are to be subject to income tax at the rate of 15%. Also, since January 1, 2005, a withholding tax of 0.005% will be assessed on the sales price or other disposition value of shares sold or disposed of in transactions carried out on a Brazilian stock exchange. The withholding tax must be withheld by one of the following entities: (i) the agent receiving the sale or disposition order from the client; (ii) the stock exchange responsible for registering the transactions; or (iii) the entity responsible for the settlement and payment of the transactions.

 

The deposit of preferred shares in exchange for ADSs is not subject to Brazilian tax, provided that these shares are held by the non-Brazilian holder as a foreign portfolio investment under Resolution No. 2,689/00. In the event TCP’s preferred shares are held by a non-Brazilian holder as a foreign direct investment under Law No. 4,131/62, the deposit of these shares in exchange for ADSs is subject to payment of Brazilian capital gains tax at the rate of 15%.

 

The current preferential treatment for non-Brazilian holders of ADSs and non-Brazilian holders of common or preferred shares under Resolution No. 2,680/00 may not continue in the future.

 

Gain on the disposal of shares is measured by the difference between the amount realized on the sale or other disposition and the acquisition cost of the shares sold. There is uncertainty concerning the currency to be used for the purposes of calculating the cost of acquisition of shares registered with the Central Bank as a direct investment. Although a recent precedent of a Brazilian administrative court supports the view that capital gains should be based on the positive difference between the cost of acquisition of the shares in the applicable foreign currency and the value of disposition of those shares in the same foreign currency, tax authorities are not bound by such precedents.

 

Any exercise of preemptive rights relating to TCP’s common or preferred shares will not be subject to Brazilian taxation. Gains on the sale or assignment of preemptive rights relating to TCP’s common or preferred shares by the depositary may be subject to Brazilian taxation. Tax authorities may attempt to tax such gains even when the sale or assignment of such rights takes place outside Brazil, based on the provisions of Law No. 10,833/03. These authorities may allege that the preemptive rights relate to assets located in Brazil (the preferred shares) and demand payment of capital gains tax at the rate of 15% or 25% (if the beneficiary of the payments is a resident of a tax haven jurisdiction). If the preemptive rights are assigned or sold in Brazil, capital gains tax will apply at a rate of 15%. Sales or assignments of preemptive rights effected on Brazilian stock exchanges are exempt from income tax, provided that such preemptive rights relate to shares registered as a foreign portfolio investment under Resolution No. 2,689/00.

 

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Taxation of Distributions

 

Taxation of Dividends. Dividends paid by TCP 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 common or 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 Shareholders’ Equity. Brazilian corporations may make payments to shareholders characterized as interest on shareholders’ equity as an alternative form of making dividend distributions. The rate of interest may not be higher than the federal government’s long-term interest rate, or the TJLP, as determined by the Central Bank from time to time. 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 shareholders’ equity are decided by the shareholders on the basis of recommendations of the company’s board of directors.

 

Distributions of interest on shareholders’ equity 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 TCP 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 located in a tax haven jurisdiction, the rate will be 25%.

 

No assurance can be given regarding whether TCP’s board of directors will recommend that any future distributions of profits be made by means of interest on shareholders’ equity or by means of dividends.

 

Amounts paid as interest on shareholders’ equity (net of applicable withholding tax) may be treated as payments in respect of the dividends TCP is obligated to distribute to its shareholders in accordance with its by-laws (estatutos) and the Brazilian corporation law. Distributions of interest on capital in respect of the preferred shares, including distributions to the depositary in respect of preferred shares underlying ADSs, may be converted into U.S. dollars and remitted outside of Brazil, subject to applicable exchange controls.

 

Other Brazilian Taxes

 

There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of common shares, preferred shares or ADSs by a non-Brazilian holder except for gift and inheritance taxes which are levied by some states of Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or domiciled within the state to individuals or entities resident or domiciled within such state in Brazil. There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of common shares, preferred shares or ADSs.

 

Under Decree No. 4,494 of December 3, 2002, the amount in reais resulting from the conversion of the proceeds received by a Brazilian entity from a foreign investment in the Brazilian securities market (including those in connection with the investment in TCP’s common shares, preferred shares or ADSs and those made under the provisions of Resolution No. 2,689/00 of the National Monetary Council) is subject to the IOF transaction tax, although at present the rate of such tax is 0%. The IOF tax is also assessed on transactions executed on a stock exchange. As of the date hereof, Article 33, Paragraph 2, of Decree No. 4,494 imposes an IOF tax on such transactions at a 0% rate. The Minister of Finance is empowered to establish the applicable IOF tax rate. Under Law 8,894 of June 21, 1994, such IOF tax rate may be increased at any time to a maximum of 25%, but any such increase will only be applicable to transactions occurring after such increase becomes effective.

 

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The CPMF tax is levied at a rate of 0.38% on all funds transfers in connection with financial transactions in Brazil. Payments of dividends on TCP’s common shares, preferred shares and ADSs are subject to the CPMF tax. However, only TCP is liable for the CPMF tax on its dividends, which are payable without reduction for this tax. The CPMF tax was scheduled to expire in December 2004, but Amendment No. 42 to the Brazilian Constitution extended the CPMF tax through December 31, 2007. Investments under Resolution No. 2,689/00 are exempt from the CPMF tax in respect of transactions carried out on a Brazilian stock exchange. There can be no assurance that the Brazilian government will not extend the payment of the CPMF tax beyond 2007, or will convert it into a new permanent tax.

 

United States Federal Income Tax Considerations

 

The following summary describes the material U.S. federal income tax consequences of the merger and the consequences of ownership of TCP shares or TCP ADSs received pursuant to the merger. The discussion set forth below is only applicable to U.S. Holders (as defined below). Except where noted, it deals only with shares or ADSs held as capital assets and does not address all aspects of U.S. federal income taxation that may be applicable to a holder subject to special treatment under the Internal Revenue Code of 1986, as amended (the “Code”) (including, but not limited to, banks, tax-exempt organizations, regulated investment companies, real estate investment trusts, investors liable for the alternative minimum tax, insurance companies and dealers in securities or foreign currency, holders who have a functional currency other than the U.S. dollar, persons who own 5% or more of TCP shares (by vote), persons that hold their shares as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle, investors in pass-through entities, and holders who acquired TCP shares pursuant to the exercise of an employee stock option or otherwise as compensation). In addition, the discussion does not address the state, local or foreign tax consequences (or other tax consequences such as estate or gift tax consequences) of the merger or ownership of TCP shares or TCP ADSs. The discussion below is based upon the provisions of the Code, and U.S. Treasury regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified (with possible retroactive effect) so as to result in U.S. federal income tax consequences different from those discussed below. Holders should consult their own tax advisors concerning the U.S. federal tax consequences of the merger and ownership of TCP shares or TCP ADSs in light of their particular situations, as well as any consequences arising under the laws of any other taxing jurisdiction.

 

If a partnership holds shares or ADSs of TCP, TCO, TLE or TSD or the shares of Celular CRT, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If a U.S. Holder is a partner of a partnership holding such shares or ADSs, the holder is urged to consult its tax advisors regarding the tax consequences of the merger and the ownership of TCP shares or TCP ADSs.

 

As used herein, the term “U.S. Holder” means a beneficial holder of TCO, TLE, TSD or Celular CRT shares or TCO, TLE or TSD ADSs that is (i) a citizen or resident of the United States, (ii) a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source or (iv) a trust (X) that is subject to the supervision of a court within the United States and the control of one or more United States persons as described in section 7701(a)(30) of the Code or (Y) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person.

 

For purposes of this discussion, the term “Target” means each of TCO, TLE, TSD and Celular CRT individually. Because there are no Celular CRT ADSs, any references to ADSs in the discussion below are not applicable in the case of Celular CRT.

 

None of the parties have requested a ruling from the Internal Revenue Service (the “IRS”) with respect to any of the U.S. federal income tax consequences of the transactions and the following discussion is not binding on the IRS or any court. As a result, there can be no assurance that the IRS will not disagree with or challenge any of the conclusions described below.

 

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The Merger

 

Consequences of the Exchange of TCO Shares or TCO ADSs for TCP Shares or TCP ADSs

 

The U.S. federal income tax consequences of the merger of shares of TCO with TCP are uncertain. If the TCP preferred shares are deemed to be voting stock for U.S. federal income tax purposes, then TCP believes the transaction will be treated as a transaction described in section 351 or section 368(a)(1)(B) of the Code. There is analogous but non-controlling authority suggesting that stock which attains full voting rights upon the occurrence of a future event becomes voting stock once that event occurs. Because the mandatory minimum dividends have not been paid on the preferred shares for at least three consecutive fiscal years, the TCP preferred shares currently have voting rights. Although the proper characterization is uncertain, if required, TCP intends to take the position that its preferred shares are voting stock for U.S. federal income tax purposes and thus that the transaction qualifies as one described in section 351 or section 368(a)(1)(B) of the Code. No assurance can be given that the IRS or a court would agree with this conclusion. U.S. Holders are urged to consult their tax advisors with respect to the treatment of the TCP preferred shares as voting stock and the appropriate characterization of the transaction.

 

If the TCP preferred shares are considered voting stock and the transaction is treated as one described in section 351 or section 368(a)(1)(B) of the Code, TCP believes that the material U.S. federal income tax consequences of the merger of shares of TCO with TCP would be as follows:

 

    subject to the discussion below under “—Passive Foreign Investment Company Rules and TCO,” U.S. Holders will not recognize gain or loss when such holders exchange their TCO shares or TCO ADSs for TCP shares or TCP ADSs, except to the extent of any cash received in lieu of fractional shares of TCP;

 

    the aggregate tax basis in the TCP shares or TCP ADSs that U.S. Holders receive in the transaction (including any fractional shares U.S. Holders are deemed to receive and exchange for cash) will equal the aggregate tax basis in the TCO shares or TCO ADSs surrendered; and

 

    the holding period for the TCP shares or TCP ADSs that a U.S. Holder receives in the transaction will include the U.S. Holder’s holding period for the TCO shares or TCO ADSs surrendered in the exchange.

 

If a U.S. Holder acquired blocks of TCO shares or TCO ADSs at different times and at different prices, the tax basis and holding period in TCP shares or TCP ADSs will be determined with reference to each block of TCO shares or TCO ADSs.

 

Failure to Qualify Under Section 351 or Section 368(a)(1)(B)

 

If the merger of shares of TCO with TCP fails to qualify as a transaction described in section 351 or section 368(a)(1)(B) of the Code, the receipt of TCP shares or TCP ADSs in exchange for TCO shares or TCO ADSs will be a taxable transaction for U.S. federal income tax purposes. A U.S. Holder of TCO shares or TCO ADSs will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the sum of (i) the fair market value of the TCP shares or TCP ADSs received (determined as of the date of the closing of the merger) plus (ii) any cash received in lieu of fractional TCP shares or TCP ADSs and the U.S. Holder’s tax basis in the TCO shares or TCO ADSs exchanged. Gain or loss must be calculated separately for each block of TCO shares or TCO ADSs exchanged by the U.S. Holder. Subject to the discussion under “—Passive Foreign Investment Company Rules and TCO,” such gain or loss generally will be capital gain or loss. Capital gains of individuals derived with respect to capital assets held for more than one year at the time the shares or ADSs are exchanged are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.

 

Any TCP shares or TCP ADSs received in the merger will have a basis for U.S. federal income tax purposes equal to their fair market value (determined as of the closing date of the merger) and a holding period beginning on the day after the closing of the merger.

 

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If a U.S. Holder exchanges TCO preferred shares or TCO ADSs with underlying TCO preferred shares that qualify as “section 306 stock” as defined in section 306 of the Code, such holder’s tax consequences may be different than those described above. Such holders should consult their own tax advisors with respect to their TCO preferred shares or TCO ADSs and the application of the rules thereto under section 306 of the Code.

 

Consequences of the Merger of TLE, TSD and Celular CRT with TCP

 

TCP believes that the material United States federal income tax consequences of the merger of TLE, TSD and Celular CRT with TCP are as follows:

 

    the merger of TLE, TSD and Celular CRT with TCP will each be treated as a reorganization within the meaning of section 368(a) of the Code;

 

    subject to the discussion below under “—Passive Foreign Investment Company Rules and TLE, TSD and Celular CRT”, U.S. Holders will not recognize gain or loss when such holders exchange their TLE, TSD or Celular CRT shares, or TLE or TSD ADSs, solely for TCP shares or TCP ADSs, except to the extent of any cash received in lieu of fractional shares of TCP;

 

    the aggregate tax basis in the TCP shares or TCP ADSs that U.S. Holders receive in the transaction (including any fractional shares holders are deemed to receive and exchange for cash) will equal the aggregate tax basis in the TLE, TSD or Celular CRT shares, or TLE or TSD ADSs, surrendered; and

 

    the holding period for the TCP shares or TCP ADSs that a U.S. Holder receives in the transaction will include the U.S. Holder’s holding period for the shares of TLE, TSD or Celular CRT shares, or TLE or TSD ADSs, surrendered in the exchange.

 

If a U.S. Holder acquired blocks of TLE, TSD or Celular CRT shares, or TLE or TSD ADSs, at different times and at different prices, the tax basis and holding period in TCP shares or TCP ADSs will be determined with reference to each block of TLE, TSD or Celular CRT shares, or TLE or TSD ADSs.

 

Cash in Lieu of Fractional Shares

 

The receipt of cash in lieu of fractional shares of TCP shares or TCP ADSs by a U.S. Holder of Target shares or Target ADSs will result in taxable gain or loss to such U.S. Holder for U.S. federal income tax purposes based upon the difference between the amount of cash received by such U.S. Holder and the U.S. Holder’s adjusted tax basis in the fractional share (determined as described above). The gain or loss will constitute capital gain or loss and will constitute long-term capital gain or loss if the U.S. Holder’s holding period is greater than 12 months as of the date of the merger. For non-corporate U.S. Holders, this long-term capital gain generally will be taxed at reduced rates of taxation. The deductibility of capital losses is subject to limitation.

 

Appraisal or Dissenters’ Rights

 

U.S. Holders of Target common shares or TSD preferred shares who exercise appraisal rights with respect to the merger as discussed in “—Appraisal or Dissenters’ Rights” and who receive cash in respect of the Target common shares or TSD preferred shares will recognize capital gain or loss equal to the difference between the amount of cash received and their aggregate tax basis in their shares.

 

Passive Foreign Investment Company Rules and TCO

 

Based on the projected composition of TCO’s income and valuation of its assets, including goodwill, TCP, as the majority shareholder in TCO does not believe that TCO will be in the current year or has been in 1998 or any subsequent taxable year a passive foreign investment company (a “PFIC”), although there can be no

 

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assurance in this regard. However, PFIC status is a factual determination that is made annually. Accordingly, it is possible that TCO may have been a PFIC in prior taxable years or may become a PFIC in the current taxable year.

 

In general, a company is considered a PFIC for any taxable year if either (i) at least 75% of its gross income is passive income, or (ii) at least 50% of the value of its assets is attributable to assets that produce or are held for the production of passive income. The 50% of value test is based on the average of the value of the company’s assets for each quarter during the taxable year. If the company owns at least 25% by value of another company’s stock, it will be treated, for purposes of the PFIC rules, as owning its proportionate share of the assets and receiving its proportionate share of the income of that company.

 

In determining that TCP does not believe TCO is a PFIC in the current year, TCP relied on TCO’s projected capital expenditure plans and projected revenue for the current year. In addition, these determinations are based on a current valuation of TCO’s assets, including goodwill. In calculating goodwill, TCP valued TCO’s total assets based on its total market value, which, in turn, is based on the market value of TCO’s shares and is subject to change. In addition, TCP made a number of assumptions regarding the amount of this value allocable to goodwill. TCP believes its valuation approach is reasonable. However, it is possible that the IRS may challenge the valuation of TCO’s goodwill, which may also result in TCO being classified as a PFIC. Because TCP valued each Target’s goodwill based on the market value of TCO shares, a decrease in the price of the TCO shares may also result in TCO becoming a PFIC.

 

TCO Transaction Fails to Qualify Under Section 351 or Section 368(a)(1)(B). If a TCO is or was a PFIC for any taxable year during which a U.S. Holder holds TCO shares or TCO ADSs, and the merger does not qualify as a transaction described in section 351 or section 368(a)(1)(B) of the Code, a U.S. Holder holding shares or ADSs in TCO will be subject to special tax rules with respect to any gain realized from the merger. Under these special tax rules (i) the gain from the merger will be allocated ratably over the U.S. Holder’s holding period for the TCO shares or TCO ADSs, (ii) the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which TCO was a PFIC, will be treated as ordinary income, and (iii) the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

In certain circumstances, a U.S. Holder, in lieu of being subject to the excess distribution rules discussed above, may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method provided that such stock is regularly traded on a qualified exchange. If a valid mark-to-market election was made by a U.S. Holder in the current or any prior taxable year (and such election remains in effect), the special tax rules discussed above do not apply. Any gain recognized pursuant to the merger will be treated as ordinary income in the current taxable year. U.S. Holders are urged to consult their tax advisor about the mark-to-market election and whether any such election would be applicable with respect to their particular circumstances.

 

TCO Transaction Qualifies Under Section 351 or Section 368(a)(1)(B). If TCO has been or becomes a PFIC in the current year and the exchange of TCO shares or TCO ADSs for TCP shares or TCP ADSs is treated as a transaction described in section 351 or section 368(a)(1)(B) of the Code, U.S. Holders that held shares or ADSs in any year in which TCO was a PFIC generally would recognize gain upon the exchange of TCO shares or TCO ADSs for TCP shares or TCP ADSs, in a manner similar to that described above, unless TCP is also a PFIC in the current taxable year. As discussed below in “—Ownership of TCP Shares or TCP ADSs—Passive Foreign Investment Company Rules and TCP”, TCP does not believe it is a PFIC, although no assurance can be given in this regard.

 

U.S. Holders are urged to consult their tax advisors concerning the U.S. federal income tax consequences of exchanging TCO shares or TCO ADSs if TCO is considered a PFIC in any taxable year.

 

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Passive Foreign Investment Company Rules and TLE, TSD and Celular CRT

 

Based on information received from TLE, TSD and Celular CRT (which are under common control with TCP), including the projected composition of TLE, TSD and Celular CRT’s income and valuation of their assets, TCP does not believe that any of TLE, TSD or Celular CRT will be in the current year, or has been in 1998 or any subsequent taxable year, a PFIC (as described above under “—Passive Foreign Investment Company Rules and TCO”), although there can be no assurance in this regard. However, PFIC status is a factual determination that is made annually. Accordingly, it is possible that TLE, TSD or Celular CRT may have been a PFIC in prior taxable years or may become a PFIC in the current taxable year.

 

In determining that TCP does not believe TLE, TSD or Celular CRT is a PFIC in the current year, TCP relied on each company’s projected capital expenditure plans and projected revenue for the current year. In addition, its determination is based on a current valuation of each company’s assets, including goodwill. In calculating goodwill, TCP valued each company’s total assets based on its total market value, which, in turn, is based on the market value of the company’s shares and is subject to change. In addition, TCP made a number of assumptions regarding the amount of this value allocable to goodwill. TCP believes its valuation approach is reasonable. However, it is possible that the IRS may challenge the valuation of TLE, TSD or Celular CRT’s goodwill, which may also result in such company being classified as a PFIC. Because TCP valued each company’s goodwill based on the market value of the company’s shares, a decrease in the price of the company’s shares may also result in such company becoming a PFIC.

 

If TLE, TSD or Celular CRT was a PFIC for any year in which a U.S. Holder held TLE, TSD or Celular CRT shares, or TLE or TSD ADSs, then such U.S. Holder generally would recognize gain upon the exchange of TLE, TSD or Celular CRT shares, or TLE or TSD ADSs, for TCP shares or TCP ADSs, in a manner similar to that discussed above under “—Passive Foreign Investment Company Rules and TCO—Transaction Fails to Qualify Under Section 351 or Section 368(a)(1)(B)”, unless TCP is also a PFIC. As discussed below in “—Ownership of TCP Shares or TCP ADSs—Passive Foreign Investment Company Rules and TCP”, TCP does not believe it is a PFIC, although no assurance can be given in this regard.

 

U.S. Holders are urged to consult their tax advisors concerning the U.S. federal income tax consequences of exchanging TLE, TSD or Celular CRT shares, or TLE or TSD ADSs, if TLE, TSD or Celular CRT is considered a PFIC in any taxable year.

 

Information Reporting and Backup Withholding

 

In general, information reporting requirements will apply to the cash payments received pursuant to the merger paid within the United States (and in certain cases, outside of the United States) to U.S. Holders other than certain exempt recipients (such as corporations), and backup withholding may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer identification number or to report dividends and interest required to be shown on its U.S. federal income tax returns. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a refund or a credit against the U.S. Holder’s U.S. federal income tax liability provided the required information is provided to the IRS.

 

Ownership of TCP Shares or TCP ADSs

 

ADSs

 

The U.S. Treasury has expressed concerns that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate U.S. Holders. Accordingly, the analysis of the creditability of Brazilian taxes and the

 

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availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders, each described below, could be affected by actions taken by parties to whom the TCP ADSs are released. Holders of TCP ADSs, for U.S. federal income tax purposes, generally will be treated as the owner of the underlying shares that are represented by such ADSs. Accordingly, deposits or withdrawals of TCP shares for TCP ADSs will not be subject to U.S. federal income tax.

 

Distributions on TCP Shares or TCP ADSs

 

Subject to the discussion under “—Passive Foreign Investment Company Rules and TCP,” the gross amount of distributions paid to U.S. Holders of TCP shares or TCP ADSs (including distributions of interest on capital and amounts withheld from such distributions to reflect Brazilian withholding taxes as described above under “—Brazilian Tax Considerations”) will be treated as dividend income to such U.S. Holders, to the extent paid out of current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such income (including withheld taxes) will be includable in the gross income of a U.S. Holder as ordinary income on the day actually or constructively received by the U.S. Holder, in the case of shares, or by the depositary, in the case of ADSs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code.

 

With respect to non-corporate U.S. Holders, certain dividends received in taxable years beginning before January 1, 2009 from a qualified foreign corporation may be subject to reduced rates of taxation. A foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares (or ADSs backed by such shares) that are readily tradable on an established securities market in the United States. United States Treasury Department guidance indicates that TCP ADSs (which are listed on the NYSE), but not TCP preferred shares or TCP common shares, are readily tradable on an established securities market in the United States. Thus, TCP does not believe that dividends that it pays on its preferred shares that are not evidenced by ADSs or on its common shares currently meet the conditions required for these reduced tax rates. There can be no assurance that TCP ADSs will be considered readily tradable on an established securities market in later years. Non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of TCP’s status as a qualified foreign corporation. In addition, the rate reduction will not apply to dividends if the recipient of a dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. U.S. Holders are urged to consult their tax advisors regarding the application of these rules given their particular circumstances.

 

The amount of any dividend paid in reais will equal the United States dollar value of the reais received calculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. Holder regardless of whether the reais are converted into United States dollars. If the reais received as a dividend is not converted into United States dollars on the date of receipt, a U.S. Holder will have a basis in the reais equal to its United States dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the reais will be treated as United States source ordinary income or loss for U.S. federal income tax and foreign tax credit limitation purposes.

 

Subject to certain conditions and limitations, Brazil’s withholding taxes on dividends, if any, may be treated as foreign taxes eligible for credit against a U.S. Holder’s U.S. federal income tax liability. Instead of claiming a credit, a U.S. Holder may, at its election, deduct such otherwise creditable Brazilian taxes in computing its taxable income, subject to generally applicable limitations under United States law. For purposes of calculating the foreign tax credit, dividends paid on the TCP shares (including TCP preferred shares underlying TCP ADSs) will be treated as income from sources outside the United States and will generally constitute “passive income”. Further, in certain circumstances, if a U.S. Holder:

 

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    has held TCP shares or TCP ADSs for less than a specified minimum period during which the U.S. Holder is not protected from risk of loss, or

 

    is obligated to make payments related to the dividends,

 

the U.S. Holder will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on the TCP shares or TCP ADSs. The rules governing the foreign tax credit are complex. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.

 

To the extent that the amount of any distribution exceeds TCP’s current and accumulated earnings and profits for a taxable year, as determined under U.S. federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the TCP shares or TCP ADSs (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by the investor on a subsequent disposition of the TCP shares or TCP ADSs), and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange (as discussed below). Consequently, such distributions in excess of TCP’s current and accumulated earnings and profits would generally not give rise to foreign source income and a U.S. Holder would not be able to use the foreign tax credit arising from Brazilian withholding tax, if any, imposed on such distribution unless such credit can be applied (subject to applicable limitations) against U.S. federal income tax due on other foreign source income in the appropriate category for foreign tax credit purposes. However, TCP does not intend to keep earnings and profits books in accordance with U.S. federal income tax principles. Therefore, a U.S. Holder should expect that a distribution will generally be treated as dividend (as discussed above).

 

Sale or Exchange of TCP Shares or TCP ADSs

 

Subject to the discussion under “—Passive Foreign Investment Company Rules and TCP,” for U.S. federal income tax purposes, a U.S. Holder will recognize taxable gain or loss on any sale or exchange of a TCP share or TCP ADS in an amount equal to the difference between the amount realized for the TCP share or TCP ADS and the U.S. Holder’s adjusted tax basis (determined in United States dollars) in such share or ADS. Such gain or loss will generally be capital gain or loss. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by a U.S. Holder will generally be treated as United States source gain or loss for foreign tax credit purposes. Consequently, a U.S. Holder may not be able to use any foreign tax credits arising from any Brazilian withholding or other taxes imposed on the disposition of a TCP share or TCP ADS unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources.

 

Other Brazilian Taxes

 

Certain other Brazilian taxes, as discussed in “—Brazilian Tax Considerations,” may not be creditable foreign taxes for U.S. federal income tax purposes, but U.S. Holders may be able to deduct such taxes, subject to certain limitations under the Code. U.S. Holders are urged to consult their tax advisors regarding the U.S. federal income tax consequences of these taxes.

 

Passive Foreign Investment Company Rules and TCP

 

Based on the projected composition of its income and valuation of its assets, including goodwill, TCP does not believe that it is currently (or that it was in 2005) a PFIC, and it does not expect to become one in the future, although there can be no assurance in this regard. However, PFIC status is a factual determination that is made annually. Accordingly, it is possible that TCP may become a PFIC in the current or any future taxable year due to changes in valuation or composition of its income or assets. If TCP is or becomes a PFIC, U.S. Holders could be subject to certain adverse U.S. federal income tax consequences as more fully described below.

 

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In general, a company is considered a PFIC for any taxable year if either (i) at least 75% of its gross income is passive income, or (ii) at least 50% of the value of its assets is attributable to assets that produce or are held for the production of passive income.

 

The 50% of value test is based on the average of the value of TCP’s assets for each quarter during the taxable year. If TCP owns at least 25% by value of another company’s stock, it will be treated, for purposes of the PFIC rules, as owning its proportionate share of the assets and receiving its proportionate share of the income of that company.

 

In determining that it does not expect to be a PFIC, TCP is relying on its projected capital expenditure plans and projected revenue for the current year and for future years. In addition, its determination is based on a current valuation of its assets, including goodwill. In calculating goodwill, TCP has valued its total assets based on its total market value, which, in turn, is based on the market value of its shares and is subject to change. In addition, TCP has made a number of assumptions regarding the amount of this value allocable to goodwill. TCP believes its valuation approach is reasonable. However, it is possible that the IRS may challenge the valuation of TCP’s goodwill, which may also result in it being classified as a PFIC. Because TCP has valued its goodwill based on the market value of its shares, a decrease in the price of its shares may also result in TCP becoming a PFIC.

 

If TCP is a PFIC for any taxable year during which a U.S. Holder holds its TCP shares or TCP ADSs, such U.S. Holder will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition of TCP shares or TCP ADSs. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or the U.S. Holder’s holding period for the TCP shares or TCP ADSs will be treated as excess distributions. Under these special tax rules (i) the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the TCP shares or TCP ADSs, (ii) the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which TCP was a PFIC, will be treated as ordinary income, and (iii) the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

 

Non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from TCP in taxable years beginning prior to January 1, 2009, if TCP is a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. If a U.S. Holder holds TCP shares or TCP ADSs in any year in which TCP is classified as a PFIC, such holder would be required to file Internal Revenue Service Form 8621.

 

In certain circumstances, a U.S. Holder, in lieu of being subject to the excess distribution rules discussed above, may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method provided that such stock is regularly traded on a qualified exchange. The TCP common shares and TCP preferred shares are listed on the São Paulo Stock Exchange, which must meet certain trading, listing, financial disclosure and other requirements to be treated as a qualified exchange under applicable U.S. Treasury regulations for purposes of the mark-to-market election, and no assurance can be given that the TCP common shares or TCP preferred shares will be “regularly traded” for purposes of the mark-to-market election. Under current law, however, the mark-to-market election may be available to U.S. Holders of TCP ADSs, because the ADSs are listed on the NYSE, which constitutes a qualified exchange as designated in the Code, although there can be no assurance that the TCP ADSs will be “regularly traded.”

 

If a U.S. Holder makes an effective mark-to-market election, such holder will include in each year as ordinary income the excess of the fair market value of such holder’s PFIC shares or ADSs at the end of the year over such holder’s adjusted tax basis in the shares or ADSs. U.S. Holders will be entitled to deduct as an ordinary loss each year the excess of such holder’s adjusted tax basis in the TCP shares or TCP ADSs over their fair

 

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market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election.

 

A U.S. Holder’s adjusted tax basis in PFIC shares or ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If a U.S. Holder makes a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the TCP shares or TCP ADSs are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election. U.S. Holders are urged to consult their tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in their particular circumstances.

 

Alternatively, a U.S. Holder of shares or ADSs in a PFIC can sometimes avoid the rules described above by electing to treat the PFIC as a “qualified electing fund” under section 1295 of the Code. This option is not available to U.S. Holders because TCP does not intend to comply with the requirements necessary to permit U.S. Holders to make this election.

 

U.S. Holders are urged to consult their tax advisors concerning the U.S. federal income tax consequences of holding TCP shares or TCP ADSs if TCP is considered a PFIC in any taxable year.

 

Information Reporting and Backup Withholding

 

In general, information reporting requirements will apply to dividends in respect of the TCP shares or TCP ADSs or the proceeds received on the sale, exchange, or redemption of TCP shares or TCP ADSs paid within the United States (and in certain cases, outside of the United States) to U.S. Holders other than certain exempt recipients (such as corporations), and backup withholding may apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer identification number or to report dividends and interest required to be shown on its U.S. federal income tax returns. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a refund or a credit against the U.S. Holder’s U.S. federal income tax liability provided the required information is provided to the IRS.

 

Valuation Reports of Goldman Sachs

 

Under Article 30 of TCP’s by-laws, approval of any merger, spin-off, share exchange, consolidation, or dissolution transaction involving, or winding up, any of TCP’s controlled subsidiaries must be preceded by a financial analysis conducted by an independent firm as to whether any such transaction provides “equitable treatment” to TCP and any of the other companies involved in the transaction. TCP retained Goldman Sachs & Co. and Goldman Sachs & Companhia (together, “Goldman Sachs”) to perform valuation analyses with respect to TCP and each of TCO, TLE, TSD, and Celular CRT (together, for purposes of this section, the “Targets”; and together with TCP, the “Companies”) in connection with the proposed merger of each of TLE, TSD, and Celular CRT into TCP and the proposed merger of shares of TCO into TCP. On December 4, 2005, Goldman Sachs rendered valuation reports to TCP’s Board of Directors, in each case expressing the view that, as of the date of each report and based upon and subject to the assumptions and considerations described in each report and based upon other matters as Goldman Sachs considered relevant, if the exchange ratio approved by TCP’s Board of Directors with respect to the proposed merger of TCP and TLE, TCP and TSD, or TCP and Celular CRT, or the proposed merger of shares of TCO into TCP, as applicable, was within the implied exchange ratios derived from the valuation analyses performed by Goldman Sachs with respect to TCP and the relevant Target, that exchange ratio as of December 4, 2005 would constitute “equitable treatment” as understood in the manner described in the reports summarized below.

 

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You should consider the following when reading the discussion of the valuation reports of Goldman Sachs below:

 

    We urge you to read carefully the entire valuation reports of Goldman Sachs, which are contained in Exhibits 2.2.1, 2.2.2, 2.2.3 and 2.2.4 to our registration statement on Form F-4 of which this prospectus is a part, and which you can obtain as described below in “Part Seven: Additional Information for Shareholders—Where You Can Find More Information,” and are incorporated by reference in this summary. The description of Goldman Sachs’ valuation reports set forth below is qualified in its entirety by reference to the full text of the reports.

 

    Goldman Sachs’ valuation reports were prepared for the exclusive use of TCP’s Board of Directors in connection with its analysis of the proposed mergers, as described further below, and should not be used for any other purposes, including, without limitation, to the formation of capital of TCP under the terms of the Brazilian corporation law, including, but not limited to, its Article 8.

 

    The valuation reports were exclusively addressed to TCP’s Board of Directors and do not address the underlying business decision by TCP to engage in the proposed mergers and do not constitute a recommendation to any of the Companies and/or their respective shareholders (including, but not limited to, as to whether any shareholder should vote in favor of the proposed mergers or exercise any appraisal rights or other rights with respect to the proposed mergers).

 

    Goldman Sachs’ analysis was prepared on the basis that, if the Board of Directors of TCP proposed an exchange ratio with respect to each proposed merger that fell within the range of exchange ratios implied by the ranges of value indications derived from Goldman Sachs’ valuations with respect to TCP and the relevant Target involved in such merger, applied on a consistent basis, then the exchange ratio would constitute “equitable treatment.”

 

In rendering its valuation reports, Goldman Sachs:

 

    reviewed certain financial analyses and forecasts for each of the Companies prepared and approved by the senior management of each;

 

    reviewed publicly available financial statements for the years ended December 31, 2002, 2003 and 2004 of each of the Companies, which were audited by the Companies’ independent auditors; and

 

    reviewed certain other financial information with respect to each of the Companies, including, but not limited to, the cash and bank balances, loans and other debt obligations and hedging and contingencies provisions of each as of September 30, 2005, as set forth in letters from the Companies’ independent auditors, dated December 4, 2005, addressed to each of the Companies and forwarded to Goldman Sachs by the latter, and reflecting the professional judgment of such auditors in accordance with generally accepted accounting procedures in Brazil.

 

Goldman Sachs also held discussions with members of the senior management of each of the Companies with respect to their assessment of the past and current business operations, financial condition and prospects of each of the Companies. The valuation analyses also take into consideration the distribution of interest on net equity, as well as the payment of dividends as anticipated by the Board of Directors of each of the Companies.

 

In preparing its valuation analyses, Goldman Sachs assumed and relied, with the express consent of the Companies and without independent verification, on the accuracy, content, truthfulness, consistency, completeness, sufficiency and integrity of the financial, accounting, legal, tax and other information reviewed by or discussed with it, and Goldman Sachs did not assume any responsibility to independently verify any of the information or to make an independent verification or appraisal of any of the assets or liabilities (contingent or otherwise) of the Companies, nor did Goldman Sachs examine the solvency or fair value of the Companies under any laws concerning bankruptcy, insolvency or similar matters. To this effect, Goldman Sachs assumed no responsibility or

 

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liability with respect to the accuracy, truthfulness, integrity, consistency or sufficiency of such information, for which the respective Companies are solely and exclusively responsible. In addition, Goldman Sachs did not assume any obligation to conduct, and did not conduct, any physical inspection of the properties or facilities of the Companies. With the consent of TCP, Goldman Sachs assumed that the financial analyses and forecasts prepared by the senior management of each of the Companies, as approved by the management of each, were reasonably prepared on a basis reflecting the best currently available estimates and judgments of each of the Companies.

 

Goldman Sachs’ valuation analyses were prepared solely based on the discounted cash flow methodology assuming a stable macroeconomic scenario for Brazil. The valuation analyses and their results do not purport to reflect the prices at which any of the Companies or its respective securities could be sold, nor do they take into account any element of value that may arise from the accomplishment or expectation of the proposed mergers. Goldman Sachs is not an accounting firm and did not provide accounting or audit services in connection with the valuation reports. In addition, because the valuation analyses are based upon forecasts of future financial results, they are not necessarily indicative of actual subsequent results, which may be significantly more or less favorable than those suggested by the analyses. Given, further, that these analyses are intrinsically subject to uncertainties and various events or factors outside the control of the Companies and Goldman Sachs, neither Goldman Sachs, nor any of its affiliates and representatives, assumed any responsibility or liability if future results differ substantially from the projections presented in the valuation analyses and made no representation or warranty with respect to such projections.

 

Goldman Sachs’ valuation analyses are necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Goldman Sachs as of, December 4, 2005, the date of the valuation reports. As a result, the valuation analyses are valid exclusively as of that date, as subsequent events and developments may affect the conclusions reached in the reports. Goldman Sachs did not assume any obligation to update, review, revise or revoke the valuation analyses as a result of any subsequent event or development. With respect to the valuation analyses, TCP and its Board of Directors did not authorize Goldman Sachs to solicit, nor did Goldman Sachs solicit, any indication of interest from third parties to acquire, in whole or in part, any Company’s shares. As a result, the results determined in the valuation analyses do not necessarily correspond to, and should not be construed as representative of, the prices at which any of the Companies could be sold in a third-party acquisition transaction, at which their respective shares or, where applicable, ADSs traded on the date of the valuation reports or trade at any subsequent time, or at which the shares or ADSs of TCP will trade after the proposed mergers.

 

In addition, the valuation analyses (i) treat the Companies as stand-alone operations, and the analyses and results of the valuation analyses therefore do not include any operational, tax or other benefits or losses, or synergies, incremental value and/or costs for the Companies, if any, which may arise from the consummation of the proposed mergers; and (ii) do not address the treatment of the different classes of shares of the Companies, and any adjustments intended to offset, or that may reflect, any specific rights associated with any specific class of shares of the Companies. Goldman Sachs therefore did not express, and the valuation analyses do not contain, any views relating to the distribution of economic value among the various classes of shares of the Companies. In preparing the valuation analyses, in accordance with applicable laws and regulations, Goldman Sachs did not take into account (i) the tax consequences of the proposed mergers for the holders of the Companies’ shares or ADSs; and (ii) the impact of any fees and expenses that may result from the consummation of the proposed mergers, including, but not limited to, those related to any depositary services that may be charged to the holders of TCP, TCO, TLE, or TSD ADSs. In addition, pursuant to applicable laws and regulations, Goldman Sachs excluded the tax-related effects associated with the future use by TCP of the non-amortized goodwill arising from the purchase by TCP of shares of the Targets. The financial calculations contained in the valuation analyses may not always result in a precise sum due to rounding.

 

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The following are summaries of the material analyses conducted by Goldman Sachs in preparation of its valuation reports to TCP as delivered on December 4, 2005, and do not purport to be complete descriptions of the analyses performed by Goldman Sachs. The following summaries of financial analyses include information presented in tabular format. You should read these tables together with the text of each summary.

 

*            *            *

 

Valuation Report: TCP and TCO

 

Goldman Sachs performed a discounted cash flow analysis to generate a range of indicative equity values per share for TCP and TCO. Valuation analyses were performed as of September 30, 2005, based on a projection period from 2005 to 2014. Unlevered free cash flows (before financing costs), based on projections provided by the managements of TCP and TCO, were projected by TCP and TCO in reais (R$) and subsequently converted to U.S. dollars at the average projected exchange rate for each year for purposes of discounting the unlevered free cash flows using the weighted average cost of capital as described below. The valuation analyses assumed that each of TCP and TCO continued to operate as a stand-alone entity but with regard to TCP included the following additional components: (i) projected free cash flows for its wholly owned subsidiaries Telesp Celular S.A. and Global Telecom S.A., (ii) adjustments to reflect the net present value of TCP’s expenses and (iii) the indicative value of TCP’s equity interest in TCO calculated using the discounted cash flow methodology.

 

Enterprise values of TCP and TCO were determined by the sum of (i) the net present value indications calculated as of September 30, 2005 with respect to the unlevered cash flows for the projection period and (ii) the indicative net present value calculated as of September 30, 2005 with respect to the terminal value, determined using the perpetuity growth methodology applied to a normalized unlevered free cash flow (assuming capital expenditures equal to depreciation and excluding temporary tax benefits). “Terminal value” refers to the value of a particular asset at a specific future time. “Present value” refers to the current value of future cash flows (including terminal value) obtained by discounting such future cash flows (including terminal value) based on an interest rate that takes into account risk, the opportunity cost of capital, expected returns and other appropriate factors. The present values of the unlevered free cash flows were calculated using a weighted average cost of capital (“WACC”) between 11.25% and 12.75%. The perpetuity growth rate utilized for calculating the unlevered free cash flow was between 3% and 5%.

 

The indicative equity values calculated for TCP and TCO were determined by subtracting from the enterprise value previously calculated the total value of (i) the net debt and contingencies, as set forth in the audited balance sheets as of September 30, 2005 and (ii) the interest on shareholders’ equity (juros sobre capital próprio) and dividends already declared but not paid, both converted to U.S. dollars at that date for purposes of discounting the unlevered free cash flows using the WACC as described above. The indicative equity values per share for TCP and TCO were determined by dividing the indicative equity value by the total number of shares outstanding. Values were adjusted to reflect the number of treasury shares, which reduces the number of shares used to determine the indicative equity value per share. The valuation analyses result in aggregate equity value indications for TCP and TCO and do not allocate value between any classes of shares. No adjustments were made as to potential benefits that may arise from the transaction, such as synergies or tax gains.

 

Based on these assumptions, the indicative equity value of one share of TCP stock ranged from R$13.33 to R$22.33, and the indicative equity value of one share of TCO stock ranged from R$46.06 to R$61.16. Applying a consistent comparison of the indicative equity values per share of TCP and TCO stock, Goldman Sachs determined that the implied exchange ratio of TCP shares per TCO share ranged from 2.7388, assuming a 5% perpetuity growth rate and an 11.25% WACC, to 3.4562, assuming a 3% perpetuity growth rate and a 12.75% WACC.

 

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The results of Goldman Sachs’ analysis are set forth in the following table.

 

          Perpetuity Growth Rate

          3.0%

   4.0%

   5.0%

            Weighted

            Average

            Cost of

            Capital

   12.75%        3.4562x    3.2941x    3.1274x
   12.00%        3.2370x    3.0830x    2.9239x
   11.25%        3.0387x    2.8913x    2.7388x
                   

 

*            *            *

 

Valuation Report: TCP and TLE

 

Goldman Sachs performed a discounted cash flow analysis to generate a range of indicative equity values per share for TCP and TLE. Valuation analyses were performed as of September 30, 2005, based on a projection period from 2005 to 2014. Unlevered free cash flows (before financing costs), based on projections provided by the managements of TCP and TLE, were projected by TCP and TLE in reais (R$) and subsequently converted to U.S. dollars at the average projected exchange rate for each year for purposes of discounting the unlevered free cash flows using the weighted average cost of capital as described below. The valuation analyses assumed that each of TCP and TLE continued to operate as a stand-alone entity but with regard to TCP included the following additional components: (i) projected free cash flows for its wholly owned subsidiaries Telesp Celular S.A. and Global Telecom S.A., (ii) adjustments to reflect the net present value of TCP’s expenses and (iii) the indicative value of TCP’s equity interest in TCO calculated using the discounted cash flow methodology.

 

Enterprise values of TCP and TLE were determined by the sum of (i) the net present value indications calculated as of September 30, 2005 with respect to the unlevered cash flows for the projection period and (ii) the indicative net present value calculated as of September 30, 2005 with respect to the terminal value, determined using the perpetuity growth methodology applied to a normalized unlevered free cash flow (assuming capital expenditures equal to depreciation and excluding temporary tax benefits). “Terminal value” refers to the value of a particular asset at a specific future time. “Present value” refers to the current value of future cash flows (including terminal value) obtained by discounting such future cash flows (including terminal value) based on an interest rate that takes into account risk, the opportunity cost of capital, expected returns and other appropriate factors. The present values of the unlevered free cash flows were calculated using a weighted average cost of capital (“WACC”) between 11.25% and 12.75%. The perpetuity growth rate utilized for calculating the unlevered free cash flow was between 3% and 5%.

 

The indicative equity values calculated for TCP and TLE were determined by subtracting from the enterprise value previously calculated the total value of (i) the net debt and contingencies, as set forth in the audited balance sheets as of September 30, 2005 and (ii) the interest on shareholders’ equity (juros sobre capital próprio) and dividends already declared but not paid, both converted to U.S. dollars at that date for purposes of discounting the unlevered free cash flows using the WACC as described above. The indicative equity values per share for TCP and TLE were determined by dividing the indicative equity value by the total number of shares outstanding. Values were adjusted to reflect the number of treasury shares, which reduces the number of shares used to determine the indicative equity value per share. The valuation analyses result in aggregate equity value indications for TCP and TLE and do not allocate value between any classes of shares. No adjustments were made as to potential benefits that may arise from the transaction, such as synergies or tax gains.

 

Based on these assumptions, the indicative equity value of one share of TCP stock ranged from R$13.33 to R$22.33, and the indicative equity value of one share of TLE stock ranged from R$51.66 to R$87.58. Applying a consistent comparison of the indicative equity values per share of TCP and TLE stock, Goldman Sachs

 

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determined that the implied exchange ratio of TCP shares per TLE share ranged from 3.8758, assuming a 3% perpetuity growth rate and a 12.75% WACC, to 3.9217, assuming a 5% perpetuity growth rate and an 11.25% WACC.

 

The results of Goldman Sachs’ analysis are set forth in the following table.

 

          Perpetuity Growth Rate

          3.0%

   4.0%

   5.0%

            Weighted

            Average

            Cost of

            Capital

   12.75%            3.8758x    3.8860x    3.8965x
   12.00%            3.8902x    3.8998x    3.9098x
   11.25%            3.9031x    3.9122x    3.9217x
                   

 

*            *            *

 

Valuation Report: TCP and TSD

 

Goldman Sachs performed a discounted cash flow analysis to generate a range of indicative equity values per share for TCP and TSD. Valuation analyses were performed as of September 30, 2005, based on a projection period from 2005 to 2014. Unlevered free cash flows (before financing costs), based on projections provided by the managements of TCP and TSD, were projected by TCP and TSD in reais (R$) and subsequently converted to U.S. dollars at the average projected exchange rate for each year for purposes of discounting the unlevered free cash flows using the weighted average cost of capital as described below. The valuation analyses assumed that each of TCP and TSD continued to operate as a stand-alone entity but with regard to TCP included the following additional components: (i) projected free cash flows for its wholly owned subsidiaries Telesp Celular S.A. and Global Telecom S.A., (ii) adjustments to reflect the net present value of TCP’s expenses and (iii) the indicative value of TCP’s equity interest in TCO calculated using the discounted cash flow methodology.

 

Enterprise values of TCP and TSD were determined by the sum of (i) the net present value indications calculated as of September 30, 2005 with respect to the unlevered cash flows for the projection period and (ii) the indicative net present value calculated as of September 30, 2005 with respect to the terminal value, determined using the perpetuity growth methodology applied to a normalized unlevered free cash flow (assuming capital expenditures equal to depreciation and excluding temporary tax benefits). “Terminal value” refers to the value of a particular asset at a specific future time. “Present value” refers to the current value of future cash flows (including terminal value) obtained by discounting such future cash flows (including terminal value) based on an interest rate that takes into account risk, the opportunity cost of capital, expected returns and other appropriate factors. The present values of the unlevered free cash flows were calculated using a weighted average cost of capital (“WACC”) between 11.25% and 12.75%. The perpetuity growth rate utilized for calculating the unlevered free cash flow was between 3% and 5%.

 

The indicative equity values calculated for TCP and TSD were determined by subtracting from the enterprise value previously calculated the total value of (i) the net debt and contingencies, as set forth in the audited balance sheets as of September 30, 2005 and (ii) the interest on shareholders’ equity (juros sobre capital próprio) and dividends already declared but not paid, both converted to U.S. dollars at that date for purposes of discounting the unlevered free cash flows using the WACC as described above. The indicative equity values per share for TCP and TSD were determined by dividing the indicative equity value by the total number of shares outstanding. Values were adjusted to reflect the number of treasury shares, which reduces the number of shares used to determine the indicative equity value per share. The valuation analyses result in aggregate equity value indications for TCP and TSD and do not allocate value between any classes of shares. No adjustments were made as to potential benefits that may arise from the transaction, such as synergies or tax gains.

 

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Based on these assumptions, the indicative equity value of one share of TCP stock ranged from R$13.33 to R$22.33, and the indicative equity value of one share of TSD stock ranged from R$48.46 to R$66.26. Applying a consistent comparison of the indicative equity values per share of TCP and TSD stock, Goldman Sachs determined that the implied exchange ratio of TCP shares per TSD share ranged from 2.9671, assuming a 5% perpetuity growth rate and an 11.25% WACC, to 3.6360, assuming a 3% perpetuity growth rate and a 12.75% WACC.

 

The results of Goldman Sachs’ analysis are set forth in the following table.

 

          Perpetuity Growth Rate

          3.0%

   4.0%

   5.0%

        Weighted

        Average

        Cost of

        Capital

   12.75%            3.6360x    3.4852x    3.3300x
   12.00%            3.4311x    3.2879x    3.1400x
   11.25%            3.2458x    3.1089x    2.9671x
                   

 

*            *            *

 

Valuation Report: TCP and Celular CRT

 

Goldman Sachs performed a discounted cash flow analysis to generate a range of indicative equity values per share for TCP and Celular CRT. Valuation analyses were performed as of September 30, 2005, based on a projection period from 2005 to 2014. Unlevered free cash flows (before financing costs), based on projections provided by the managements of TCP and Celular CRT, were projected by TCP and Celular CRT in reais (R$) and subsequently converted to U.S. dollars at the average projected exchange rate for each year for purposes of discounting the unlevered free cash flows using the weighted average cost of capital as described below. The valuation analyses assumed that each of TCP and Celular CRT continued to operate as a stand-alone entity but with regard to TCP included the following additional components: (i) projected free cash flows for its wholly owned subsidiaries Telesp Celular S.A. and Global Telecom S.A., (ii) adjustments to reflect the net present value of TCP’s expenses and (iii) the indicative value of TCP’s equity interest in TCO calculated using the discounted cash flow methodology.

 

Enterprise values of TCP and Celular CRT were determined by the sum of (i) the net present value indications calculated as of September 30, 2005 with respect to the unlevered cash flows for the projection period and (ii) the indicative net present value calculated as of September 30, 2005 with respect to the terminal value, determined using the perpetuity growth methodology applied to a normalized unlevered free cash flow (assuming capital expenditures equal to depreciation and excluding temporary tax benefits). “Terminal value” refers to the value of a particular asset at a specific future time. “Present value” refers to the current value of future cash flows (including terminal value) obtained by discounting such future cash flows (including terminal value) based on an interest rate that takes into account risk, the opportunity cost of capital, expected returns and other appropriate factors. The present values of the unlevered free cash flows were calculated using a weighted average cost of capital (“WACC”) between 11.25% and 12.75%. The perpetuity growth rate utilized for calculating the unlevered free cash flow was between 3% and 5%.

 

The indicative equity values calculated for TCP and Celular CRT were determined by subtracting from the enterprise value previously calculated the total value of (i) the net debt and contingencies, as set forth in the audited balance sheets as of September 30, 2005 and (ii) the interest on shareholders’ equity (juros sobre capital próprio) and dividends already declared but not paid, both converted to U.S. dollars at that date for purposes of discounting the unlevered free cash flows using the WACC as described above. The indicative equity values per

 

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share for TCP and Celular CRT were determined by dividing the indicative equity value by the total number of shares outstanding. Values were adjusted to reflect the number of treasury shares, which reduces the number of shares used to determine the indicative equity value per share. The valuation analyses result in aggregate equity value indications for TCP and Celular CRT and do not allocate value between any classes of shares. No adjustments were made as to potential benefits that may arise from the transaction, such as synergies or tax gains.

 

Based on these assumptions, the indicative equity value of one share of TCP stock ranged from R$13.33 to R$22.33, and the indicative equity value of one share of Celular CRT stock ranged from R$104.07 to R$140.96. Applying a consistent comparison of the indicative equity values per share of TCP and Celular CRT stock, Goldman Sachs determined that the implied exchange ratio of TCP shares per Celular CRT share ranged from 6.3119, assuming a 5% perpetuity growth rate and an 11.25% WACC, to 7.8089, assuming a 3% perpetuity growth rate and a 12.75% WACC.

 

The results of Goldman Sachs’ analysis are set forth in the following table.

 

          Perpetuity Growth Rate

          3.0%

   4.0%

   5.0%

            Weighted

            Average

            Cost of

            Capital

   12.75%                7.8089x    7.4721x    7.1256x
   12.00%                7.3492x    7.0294x    6.6993x
   11.25%                6.9335x    6.6280x    6.3119x
                   

 

*            *            *

 

The preparation of financial analyses such as those conducted in the preparation of the valuation analyses is a complex process that involves subjective judgment and is not susceptible to partial analysis or summary description. In arriving at its conclusions, Goldman Sachs did not attribute any particular weight to any particular factor considered by it; rather, Goldman Sachs made qualitative judgments as to the importance and relevance of all the factors considered in the valuation reports. Accordingly, Goldman Sachs believes that the valuation analyses should be considered as a whole and that selecting portions of its analyses or the factors considered as part of those analyses could result in an incomplete and incorrect understanding of the conclusions of the valuation analyses. The results presented in the valuation reports refer solely to the proposed mergers between TCP and Targets and do not extend to any other present or future matters or transactions regarding the Companies, the economic group to which they belong or the sector in which they operate.

 

Goldman Sachs was retained by TCP on October 24, 2005. Pursuant to the engagement letter entered into as of the same date between TCP and Goldman Sachs, Goldman Sachs received a fee for its services upon rendering the reports. Moreover, TCP has agreed to reimburse Goldman Sachs’ expenses and indemnify it for certain liabilities that may arise as a result of this engagement.

 

Goldman Sachs and its affiliates, as part of their investment banking business, are continually engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and other transactions as well as for estate, corporate and other purposes. In addition, Goldman Sachs and its affiliates have provided certain investment banking services to TCP from time to time, including having acted as TCP’s financial advisors in connection with its rights offerings of 2002 and 2004 and in the voluntary tender offer for the acquisition of TCO preferred shares in 2004. Goldman Sachs also has provided and currently is providing certain investment banking services to Telefónica, S.A., one of the indirect controlling shareholders in TCP, including in its cash offer to acquire the entire issued and to be issued share

 

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capital of O2 plc. Goldman Sachs also may provide investment banking services to each of the Companies and their affiliates in the future. In connection with the above-described services, Goldman Sachs has received, and may receive, compensation.

 

Goldman Sachs is a full-service securities firm engaged, either directly or through its affiliates, in securities trading, investment management, financial planning and benefits counseling, risk management, hedging, financing and brokerage activities for both companies and individuals. In the ordinary course of these activities, Goldman Sachs and its affiliates may provide such services to each of the Companies and their respective affiliates, may actively trade their debt and equity securities (or related derivative securities) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities.

 

The valuation reports described above are available for inspection or copying at the principal executive offices of TCP and the Targets set forth in “Part Seven: Additional Information for Shareholders” during their regular business hours by any interested holder of shares or ADSs of the Targets or by any representative of any such holder that has been so designated in writing. See “Part Seven: Additional Information for Shareholders.”

 

Comparative Share and Dividend Information

 

Historical Share Information

 

TCP’s common shares are currently listed on the São Paulo Stock Exchange under the ticker symbol “TSPP3,” preferred shares are currently listed on the São Paulo Stock Exchange under the ticker symbol “TSPP4,” and ADSs representing preferred shares are listed on the NYSE under the ticker symbol “TCP.” Each of our ADSs represents 1 (one) preferred share of TCP. The Bank of New York is TCP’s depositary and issues the ADRs evidencing our ADSs. TCP’s ADSs commenced trading on the NYSE on November 16, 1998.

 

TCO’s common shares are currently listed on the São Paulo Stock Exchange under the ticker symbol “TCOC3,” preferred shares are currently listed on the São Paulo Stock Exchange under the ticker symbol “TCOC4,” and ADSs representing preferred shares are listed on the NYSE under the ticker symbol “TRO.” Each TCO ADS represents 1 (one) preferred share of TCO. The Bank of New York is TCO’s depositary and issues the ADRs evidencing TCO’s ADSs. TCO’s ADSs commenced trading on the NYSE on November 16, 1998.

 

TLE’s common shares are currently listed on the São Paulo Stock Exchange under the ticker symbol “TLCP3,” preferred shares are currently listed on the São Paulo Stock Exchange under the ticker symbol “TLCP4,” and ADSs representing preferred shares are listed on the NYSE under the ticker symbol “TBE.” Each TLE ADS represents 1 (one) preferred share of TLE. The Bank of New York is TLE’s depositary and issues the ADRs evidencing TLE’s ADSs. TLE’s ADSs commenced trading on the NYSE on November 16, 1998.

 

TSD’s common shares are currently listed on the São Paulo Stock Exchange under the ticker symbol “TSEP3,” preferred shares are currently listed on the São Paulo Stock Exchange under the ticker symbol “TSEP4,” and ADSs representing preferred shares are listed on the NYSE under the ticker symbol “TSD.” Each TSD ADS represents 1 (one) preferred share of TSD. The Bank of New York is TSD’s depositary and issues the ADRs evidencing TSD’s ADSs. TSD’s ADSs commenced trading on the NYSE on November 16, 1998.

 

Celular CRT’s common shares are currently listed on the São Paulo Stock Exchange under the ticker symbol “CRTP3” and preferred shares are currently listed on the São Paulo Stock Exchange under the ticker symbol “CRTP5.”

 

TCP, TCO, TLE, TSD and Celular CRT have each completed a reverse stock split and a capital increase during 2005, and TCO and TLE have also completed a cancellation of treasury shares. See “Part Four: Information on the VIVO Companies—Recent Developments.”

 

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The following tables set forth the high and low of the last reported closing prices per TCP common share, per TCP preferred share and per TCP ADS, as compared to the common share, preferred shares and ADS of each of TCO, TLE, TSD and Celular CRT, for the periods indicated. Common share and preferred share prices are as reported on the São Paulo Stock Exchange, ADS prices are as reported on the NYSE.

 

     Common Shares

     TCP

   TCO

   TLE

   TSD

   Celular CRT

     Low

   High

   Low

   High

   Low

   High

   Low

   High

   Low

   High

     (reais)    (reais)    (reais)    (reais)    (reais)

2000

                                                 

Annual

   28.75    74.63    7.50    28.11    52.50    99.50    23.25    54.00    22.10    52.00

2001

                                                 

Annual

   11.63    43.05    16.47    27.54    45.50    115.00    24.05    40.00    25.00    105.00

2002

                                                 

Annual

   6.00    19.87    21.72    27.93    23.00    77.00    24.15    27.95    22.00    50.00

2003

                                                 

Annual

   7.90    16.07    24.30    50.19    17.50    43.50    19.50    27.00    26.00    48.00

First quarter

   7.90    11.50    27.90    40.50    17.50    37.50    24.45    25.75    27.00    31.00

Second quarter

   10.05    12.00    39.30    44.70    22.50    29.00    23.50    27.00    26.00    30.00

Third quarter

   9.00    12.15    41.70    48.00    24.00    34.00    19.50    24.05    29.00    41.00

Fourth quarter

   10.72    16.07    24.30    50.19    30.50    43.50    22.05    25.20    37.00    48.00

2004

                                                 

Annual

   11.33    18.50    23.85    38.70    25.50    42.50    20.25    35.00    32.00    56.00

First quarter

   14.13    17.95    23.85    28.50    33.00    42.50    22.50    27.45    40.00    50.00

Second quarter

   12.83    18.50    28.50    32.40    30.00    36.50    20.25    26.85    32.00    46.30

Third quarter

   12.50    16.12    30.42    33.00    33.50    40.50    22.95    29.50    37.50    53.00

Fourth quarter

   11.33    13.00    35.85    38.70    25.50    40.50    23.10    35.00    37.00    56.00

2005

                                                 

Annual

   7.00    13.70    17.48    48.50    13.10    30.75    15.60    27.30    34.34    55.70

First quarter

   11.83    13.70    39.09    43.18    19.50    26.49    21.45    24.45    34.34    40.81

Second quarter

   8.55    12.70    17.59    48.50    15.00    21.00    17.50    23.00    38.82    43.79

Third quarter

   7.30    8.89    17.48    20.45    13.85    15.80    15.60    19.00    37.80    42.00

Fourth quarter

   7.00    8.50    19.12    25.60    13.10    30.75    15.66    27.30    37.00    55.70

Last six months

                                                 

July 2005

   8.15    8.89    17.48    18.98    13.85    15.80    17.50    19.00    38.50    42.00

August 2005

   8.05    8.81    18.64    20.20    14.40    16.10    17.59    18.50    37.80    40.99

September 2005

   7.30    8.40    19.44    20.45    13.85    15.20    15.60    18.00    38.00    41.00

October 2005

   7.00    7.89    19.12    19.86    13.10    14.20    15.66    18.00    38.00    41.88

November 2005

   7.10    7.43    19.99    22.38    13.30    14.20    17.00    18.00    37.00    40.00

December 2005

   7.60    8.50    22.64    25.60    15.90    30.75    18.05    27.30    39.50    55.70

January 2006 (through January 20)

   8.53    10.16    25.98    31.50    30.90    37.99    26.10    32.00    56.00    68.99

 

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     Preferred Shares

     TCP

   TCO

   TLE

   TSD

   Celular CRT

     Low

   High

   Low

   High

   Low

   High

   Low

   High

   Low

   High

     (reais)    (reais)    (reais)    (reais)    (reais)

2000

                                                 

Annual

   41.65    113.25    10.35    26.70    54.50    119.50    34.00    109.00    28.30    89.00

2001

                                                 

Annual

   13.00    57.50    9.60    27.00    27.50    103.00    25.50    52.50    26.50    112.00

2002

                                                 

Annual

   6.50    23.15    7.08    17.37    17.50    51.00    28.35    34.50    29.70    56.40

2003

                                                 

Annual

   7.93    20.72    11.70    31.41    18.50    42.50    25.50    37.00    30.00    62.95

First quarter

   7.93    12.63    11.70    17.19    18.50    27.00    31.10    34.50    30.00    36.80

Second quarter

   10.48    12.12    15.57    17.70    21.00    24.00    33.95    37.00    32.00    36.35

Third quarter

   9.83    14.97    14.70    23.01    20.00    29.00    25.50    33.20    33.55    49.00

Fourth quarter

   14.08    20.72    21.99    31.41    27.50    42.50    28.45    34.00    48.20    62.95

2004

                                                 

Annual

   16.00    27.67    21.72    35.31    28.50    53.00    23.05    36.70    42.00    67.50

First quarter

   18.50    26.68    26.64    35.31    28.50    42.00    26.55    35.95    52.60    67.50

Second quarter

   18.50    27.67    21.72    34.95    30.00    43.50    23.05    32.50    42.00    64.00

Third quarter

   17.12    23.82    24.06    29.64    38.50    53.00    29.70    36.25    52.00    63.30

Fourth quarter

   16.00    18.93    24.33    30.15    30.50    46.00    29.05    36.70    47.00    64.00

2005

                                                 

Annual

   7.00    19.38    18.13    30.91    12.96    35.39    16.61    29.80    42.45    62.80

First quarter

   14.90    19.38    24.24    30.91    22.50    31.00    24.50    29.80    46.00    54.75

Second quarter

   9.94    15.85    23.10    28.48    17.35    23.49    18.07    25.50    44.40    53.99

Third quarter

   8.31    10.89    20.69    25.07    14.20    18.66    16.73    19.87    42.45    53.50

Fourth quarter

   7.00    9.29    18.13    27.65    12.96    35.39    16.61    29.00    48.00    62.80

Last six months

                                                 

July 2005

   9.40    10.78    22.23    24.25    14.20    18.66    17.63    19.87    42.45    50.00

August 2005

   9.75    10.89    22.46    25.07    14.58    17.44    18.21    19.50    49.10    52.50

September 2005

   8.31    9.72    20.69    23.10    14.57    15.69    16.73    19.00    47.50    53.50

October 2005

   7.00    9.03    18.13    20.52    12.96    14.84    16.61    17.89    48.00    53.12

November 2005

   7.33    8.24    20.10    22.39    14.82    16.10    17.30    18.00    51.99    53.20

December 2005

   8.00    9.29    21.90    27.65    15.71    35.39    17.70    29.00    54.20    62.80

January 2006 (through January 20)

   8.95    11.61    27.00    34.49    34.15    43.50    28.49    36.54    61.29    78.89

 

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     ADSs

     TCP

   TCO

   TLE

   TSD

     Low

   High

   Low

   High

   Low

   High

   Low

   High

     (U.S. Dollars)    (U.S. Dollars)    (U.S. Dollars)    (U.S. Dollars)

2000

                                       

Annual

   21.06    64.50    5.44    15.38    27.50    67.06    17.25    62.25

2001

                                       

Annual

   4.63    31.69    4.28    13.63    10.50    44.44    10.60    26.25

2002

                                       

Annual

   1.71    10.03    2.20    7.45    4.50    22.42    7.70    13.40

2003

                                       

Annual

   2.20    7.08    3.28    10.55    5.05    14.59    7.95    12.80

First quarter

   2.20    3.81    3.28    5.03    5.05    8.20    8.60    9.99

Second quarter

   3.31    4.25    4.90    6.17    6.50    8.73    10.70    12.80

Third quarter

   3.19    5.20    4.74    7.86    6.32    9.97    7.95    12.10

Fourth quarter

   4.85    7.08    7.55    10.55    9.99    14.59    9.75    11.64

2004

                                       

Annual

   5.81    9.66    7.10    12.35    10.01    17.24    7.47    12.76

First quarter

   6.43    9.64    9.03    12.35    10.01    14.80    9.25    12.64

Second quarter

   6.00    9.66    7.10    12.09    10.20    13.73    7.47    11.20

Third quarter

   6.02    7.77    8.11    10.28    12.90    17.24    9.45    12.76

Fourth quarter

   5.81    6.80    8.60    10.75    10.69    16.12    10.45    12.75

2005

                                       

Annual

   3.12    7.52    8.04    12.32    5.70    15.61    7.12    13.65

First quarter

   5.49    7.52    8.95    11.86    8.35    10.86    8.90    9.94

Second quarter

   4.25    6.20    9.68    10.88    6.91    9.77    7.90    9.61

Third quarter

   3.65    4.70    9.06    10.63    6.00    7.80    7.12    8.10

Fourth quarter

   3.12    4.14    8.04    12.32    5.70    15.61    7.28    13.65

Last six months

                                       

July 2005

   4.03    4.70    9.19    10.27    6.00    7.80    7.25    7.85

August 2005

   4.05    4.64    9.41    10.63    6.10    7.65    7.60    7.87

September 2005

   3.65    4.25    9.06    9.90    6.32    6.80    7.12    8.10

October 2005

   3.12    4.00    8.04    9.13    5.70    7.25    7.28    7.93

November 2005

   3.38    3.68    9.05    10.01    6.71    7.25    7.70    8.04

December 2005

   3.63    4.14    9.97    12.32    7.00    15.61    8.00    13.65

January 2006 (through January 20)

   4.10    5.07    12.15    14.86    15.50    19.30    13.10    16.26

 

We urge you to obtain current market quotations.

 

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Dividend Information

 

The following tables show the amount of dividends and interest on shareholders’ equity declared by each of TCP, TCO, TLE, TSD and Celular CRT on common shares and preferred shares, and by each of TCO, TLE and TSD on ADS, for the years 2002 to 2005. The dividend amounts set forth below for each year were paid in the immediately following year. The tables set forth amounts in reais per common shares and preferred shares, and amounts in U.S. dollars per ADSs translated from reais into U.S. dollars at the prevailing rate on each of the respective dates of those payments.

 

     Common shares

     R$ per share(1)

     TCP

   TCO(2)

   TLE

   TSD(3)

   Celular CRT(4)

2002

   —      0.212425    —      0.2315    11.3830

2003

   —      0.295922    —      0.081277    14.2407

2004

   —      0.317172    —      0.046442    19.0879

2005

   —      0.690727    —      0.305462    0.949020

(1) For the years 2002, 2003 and 2004, amounts are per thousand shares. For the year 2005, amounts are per share.
(2) Amounts include both dividends of R$0.356896 per common share, paid on December 22, 2005, and interest on shareholders’ equity of R$0.333831 per common share, for which the payment date will be approved at the general shareholders’ meeting to be held by April 30, 2006.
(3) The payment date for interest on shareholders’ equity will be approved at the general shareholders’ meeting to be held by April 30, 2006.
(4) Amounts include both dividends of R$0.491233 per common share, paid on December 22, 2005, and interest on shareholders’ equity of R$0.457787 per common share, for which the payment date will be approved at the general shareholders’ meeting to be held by April 30, 2006.

 

     Preferred shares

     TCP

   TCO(2)

   TLE

   TSD(3)

   Celular CRT(4)

     R$ per share(1)

2002

   —      0.212425    —      0.2547    12.5214

2003

   —      0.295922    —      0.089405    15.6648

2004

   —      0.317172    —      0.051087    20.9967

2005

   —      0.690727    —      0.336008    1.043922

(1) For the years 2002, 2003 and 2004, amounts are per thousand shares. For the year 2005, amounts are per share.
(2) Amounts include both dividends of R$0.356896 per preferred share, paid on December 22, 2005, and interest on shareholders’ equity of R$0.333831 per preferred share, for which the payment date will be approved at the general shareholders’ meeting to be held by April 30, 2006.
(3) The payment date for interest on shareholders’ equity will be approved at the general shareholders’ meeting to be held by April 30, 2006.

 

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(4) Amounts include both dividends of R$0.540356 per preferred share, paid on December 22, 2005, and interest on shareholders’ equity of R$0.503566 per preferred share, for which the payment date will be approved at the general shareholders’ meeting to be held by April 30, 2006.

 

     ADSs

 
     TCP

   TCO

    TLE

   TSD

 
     U.S.$ per share  

2002

   —      0.2199     —      0.3503  

2003

   —      0.302608     —      0.15555  

2004

   —      0.4035 (1)   —      0.1083 (1)

2005

   —      0.1513 (2)(3)   —      —   (3)

(1) Dividends and interest on shareholders’ equity were paid on December 22, 2005.
(2) Dividends were paid on December 22, 2005.
(3) Interest on shareholders’ equity to be determined at a general meeting of the shareholders to be held no later than April 30, 2006.

 

At the meeting of the voting shareholders of TCP that will consider the mergers described in this prospectus, the voting shareholders will also vote on a proposal for a capital reduction of TCP for the purposes of absorbing existing losses with a view to accelerating TCP’s ability to distribute dividends to its shareholders as soon as it becomes profitable.

 

Past Contacts, Transactions, Negotiations and Agreements

 

Transactions

 

TCP

 

In the ordinary course of its business, TCP has entered into transactions with the Targets and with the controlling shareholders of TCP and the Targets and their affiliates for the use of their networks and long-distance (roaming) cellular communications, for general corporate and administrative services and for other purposes. The principal transactions with unconsolidated related parties are as follows:

 

    Use of network and long-distance (roaming) cellular communications: These transactions involve companies owned by the same group, namely Telerj Celular S.A. (a subsidiary of TSD), Telest Celular S.A. (a subsidiary of TSD), Telecomunicações de São Paulo S.A.—Telesp, or Telesp (a subsidiary of Telefónica Internacional), Celular CRT S.A. (a subsidiary of Celular CRT) and Telecomunicações Móveis Nacionais—TMN (a subsidiary of Portugal Telecom). These transactions include call center services to TMN customers in connection with roaming services in TCP’s network. With the introduction of long-distance Carrier Selection Codes in July 2003, TCP entered into agreements to co-billing services to long-distance operators, including Telesp. These transactions generated net operating revenues of R$1,523.1 million in 2003, R$1,758.9 million in 2004 and R$1,228.5 million in the nine months ended September 30, 2005. TCP and its subsidiaries paid R$224.1 million in 2003, R$288.1 million in 2004 and R$169.6 million in the nine months ended September 30, 2005 recorded as cost of services provided and paid an additional R$15.1 million in 2004 and R$0.0 in the nine months ended September 2005 to Telesp recorded as selling expenses.

 

    PT SGPS, a subsidiary of Portugal Telecom, provided corporate management advisory services to Telesp Celular for a fee calculated based on a percentage (up to 2%) of net revenues, monetarily restated based on currency fluctuations. Telesp Celular paid R$68.3 million in 2003, R$54.6 million in 2004 and R$12.1 million in the nine months ended September 30, 2005 pursuant to this agreement.

 

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    In July 2003, Telesp Celular issued U.S.$120 million in Floating Rate Notes maturing July 29, 2007. At December 2003 and 2004, PT International Finance was the holder of these notes, which bore interest at an annual rate of LIBOR plus 5%. In July 2005, PT International Finance transferred the notes to BIE-Bank & Trust Ltd., an unrelated third party, and interest rate on the notes was reduced to LIBOR plus 1.75%. TCP had financial expenses under these notes of R$83.7 million in 2003, R$141.7 million in 2004 and R$0.0 million in the nine months ended September 30, 2005, paid to PT International Finance.

 

    Call center services were provided by Dedic, a subsidiary of Portugal Telecom, and Atento, a subsidiary of Telefónica, to users of Telesp Celular, TCO and Global Telecom. TCP’s subsidiaries paid R$99.9 million in 2003, R$183.5 million in 2004 and R$178.9 million in the nine months ended September 30, 2005 to Dedic and Atento for these services.

 

    PT Inovação and Primesys, subsidiaries of Portugal Telecom, provided system development and maintenance services to TCP and its subsidiaries. TCP and its subsidiaries paid R$37.9 million in 2003, R$28.0 million in 2004 and R$13.4 million in the nine months ended September 30, 2005 for these services.

 

    Certain expenses (including certain labor and benefit costs, rental expenses and other general administrative expenses) are apportioned among TCP and the Targets and their respective subsidiaries. TCP recovered expenses of R$54.5 million in 2003, R$85.5 million in 2004 and R$35.8 million in the nine months ended September 30, 2005 from TLE, TSD and Celular CRT and their respective subsidiaries. TCP paid expenses of R$63.0 million in 2003, R$67.1 million in 2004 and R$34.6 million in the nine months ended September 30, 2005 to TLE, TSD and Celular CRT and their respective subsidiaries.

 

See note 31 to TCP’s audited consolidated financial statements and note 17 to TCP unaudited condensed consolidated financial statements for further information about TCP’s related party transactions.

 

TCO

 

In the ordinary course of its business, TCO has entered into transactions with TCP and the other Targets and with the controlling shareholders of TCP and the Targets and their affiliates for the use of their networks and long-distance (roaming) cellular communications, for general corporate and administrative services and for other purposes. The principal transactions with unconsolidated related parties are as follows:

 

    Use of network and long-distance (roaming) cellular communications: These transactions involve companies owned by the same group, namely Telesp, Telerj, Telest, Telebahia Celular S.A. (a subsidiary of TLE), Telergipe Celular S.A. (a subsidiary of TLE), Telesp Celular, Global Telecom and Celular CRT S.A. These transactions generated net operating revenues of R$37.3 million in 2003, R$62.7 million in 2004 and R$35.7 million in the nine months ended September 30, 2005. TCO and its subsidiaries paid R$1.9 million in 2003, R$0.0 million in 2004 and R$0.0 million in the nine months ended September 30, 2005 to these companies recorded as cost of services provided. TCO and its subsidiaries also paid R$0.3 million in 2003, R$0.7 million in 2004 and R$0.0 million in the nine months ended September 30, 2005 to Telesp recorded as general and administrative expenses for the same type of services.

 

    Call center services were provided by Dedic and Atento to TCO’s customers. TCO and its subsidiaries paid R$1.0 million in 2003, R$37.0 million in 2004 and R$21.1 million in the nine months ended September 30, 2005 to Dedic and Atento for these services.

 

   

Certain expenses for general corporate and administrative services (including certain labor and benefit costs, rental expenses and other general administrative expenses) are apportioned among TCP and the Targets and their respective subsidiaries. TCO recovered expenses of R$2.4 million in 2003, R$6.7

 

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million in 2004 and R$36.0 million in the nine months ended September 30, 2005 from TCP, TLE, TSD and Celular CRT and their respective subsidiaries. TCO paid expenses of R$26.4 million in 2003, R$65.1 million in 2004 and R$29.1 million in the nine months ended September 30, 2005 to TCP, TLE, TSD and Celular CRT and their respective subsidiaries.

 

See note 32 to TCO’s audited consolidated financial statements and note 19 to TCO’s unaudited consolidated financial statements for further information about TCO’s related party transactions. The amounts included in the bullet points above are included in the amounts reported for TCP above because TCO is a consolidated subsidiary of TCP.

 

TLE

 

TLE has entered into transactions with other companies controlled by TCP and its affiliates for the use of their networks and long-distance (roaming) cellular communications, for general corporate and administrative services and for other purposes. The principal transactions with unconsolidated related parties are as follows:

 

    Use of network and long-distance (roaming) and local cellular communications: These transactions involve companies owned by the same controlling group, namely Telesp Celular, Global Telecom, Telerj, Telest, Telesp, Celular CRT S.A., TCO, Telems Celular S.A. (a subsidiary of TCO), Teleron Celular S.A. (a subsidiary of TCO), Telemat Celular S.A. (a subsidiary of TCO), Teleacre Celular S.A. (a subsidiary of TCO), Telegoiás Celular S.A. (a subsidiary of TCO) and Norte Brasil Telecom S.A., or NBT (a subsidiary of TCO). These transactions generated net operating revenues of R$18.9 million in 2003, R$21.1 million in 2004 and R$13.8 million in the nine months ended September 30, 2005. TLE and its subsidiaries paid R$2.2 million in 2003, R$0.0 million in 2004 and R$0.0 in the nine months ended September 30, 2005 recorded as cost of services provided.

 

    Call center services were provided by Dedic and Atento to TLE’s customers. TLE and its subsidiaries paid R$11.8 million in 2003, R$19.0 million in 2004 and R$18.6 million in the nine months ended September 30, 2005 to Dedic and Atento for these services.

 

    TLE also recorded amounts for consulting and advisory fees paid to Telefónica Móviles in the amount of R$3.8 million for 2003, R$4.8 million for 2004 and R$0.0 million for the nine months ended September 30, 2005.

 

    Certain expenses for general corporate and administrative services (including certain labor and benefit costs, rental expenses and other general administrative expenses) are apportioned among TCP and the Targets and their respective subsidiaries. TLE recovered expenses of R$7.2 million in 2003, R$9.1 million in 2004 and R$5.2 million in the nine months ended September 30, 2005 from TCP, TSD and Celular CRT and their respective subsidiaries. TLE paid expenses of R$12.9 million in 2003, R$15.9 million in 2004 and R$7.1 million in the nine months ended September 30, 2005 to TCP, TSD and Celular CRT and their respective subsidiaries.

 

See note 28 to TLE’s audited consolidated financial statements and note 18 to TLE’s unaudited consolidated financial statements for further information about TLE’s related party transactions.

 

TSD

 

TSD has entered into transactions with other companies controlled by TCP and its affiliates for the use of their networks and long-distance (roaming) cellular communications, for general corporate and administrative services and for other purposes. The principal transactions with unconsolidated related parties are as follows:

 

   

Use of network and long-distance (roaming) and local cellular communications: These transactions involve companies owned by the same controlling group, namely Telesp Celular, Global Telecom, Telebahia, Telergipe, Telesp, Celular CRT S.A., TCO, Telems, Teleron, Telemat, Teleacre, Telegoiás

 

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and NBT. These transactions generated net operating revenues of R$62.7 million in 2003, R$63.6 million in 2004 and R$41.8 million in the nine months ended September 30, 2005. TSD and its subsidiaries paid R$7.0 million in 2003, R$27.0 million in 2004 and R$0.0 in the nine months ended September 30, 2005 recorded as cost of services provided. TSD and its subsidiaries paid an additional R$0.8 in 2003, R$0.9 in 2004 and R$0.0 in the nine months ended September 30, 2005 to Telesp, recorded as general and administrative expenses, for the same type of services.

 

    Call center services were provided by Dedic and Atento to TSD’s customers. TSD and its subsidiaries paid R$45.7 million in 2003, R$61.0 million in 2004 and R$58.6 million in the nine months ended September 30, 2005 to Dedic and Atento for these services.

 

    TSD and its subsidiaries also paid R$21.1 million in 2003, R$0.0 million in 2004 and R$11.8 million in the nine months ended September 30, 2005 to Telefónica Móviles for consulting and advisory fees.

 

    TSD and its subsidiaries also received financial income from Telefónica Móviles and Telefónica Internacional of R$23.8 million in 2003, R$4.6 million in 2004 and R$4.2 million in the nine months ended September 30, 2005, relating to the impact of variations in exchange rates on consulting and advisory fees paid to such entities.

 

    Certain expenses for general corporate and administrative services (including certain labor and benefit costs, rental expenses and other general administrative expenses) are apportioned among TCP and the Targets and their respective subsidiaries. TSD recovered expenses of R$69.5 million in 2003, R$66.6 million in 2004 and R$33.4 million in the nine months ended September 30, 2005 from TCP, TLE and Celular CRT and their respective subsidiaries. TSD paid expenses of R$34.8 million in 2003, R$51.4 million in 2004 and R$22.4 million in the nine months ended September 30, 2005 to TCP, TLE and Celular CRT and their respective subsidiaries.

 

See note 29 to TSD’s audited consolidated financial statements and note 19 to TSD’s unaudited consolidated financial statements for further information about TSD’s related party transactions.

 

Celular CRT

 

Celular CRT has entered into transactions with other companies controlled by TCP and its affiliates for the use of their networks and long-distance (roaming) cellular communications, for general corporate and administrative services and for other purposes. The principal transactions with unconsolidated related parties are as follows:

 

    Use of network and long-distance (roaming) and local cellular communications: These transactions involve companies owned by the same controlling group, namely Telesp Celular, Global Telecom, Telest, Telerj, Telebahia, Telergipe, Telesp, TCO, Telems, Teleron, Telemat, Teleacre, Telegoiás and NBT. These transactions generated net operating revenues of R$22.8 million in 2003, R$23.0 million in 2004 and R$21.0 million in the nine months ended September 30, 2005. Celular CRT and its subsidiary paid R$1.9 million in 2003, R$0.0 in 2004 and R$0.0 in the nine months ended September 30, 2005 recorded as cost of services provided.

 

    Call center services were provided by Atento and Mobitel to Celular CRT’s customers. Celular CRT and its subsidiary paid R$25.7 million in 2003, R$31.6 million in 2004 and R$35.3 million in the nine months ended September 30, 2005 to Mobitel and Atento for these services.

 

    Celular CRT and its subsidiary paid R$8.7 million in 2003, R$9.8 million in 2004 and R$8.0 million in the nine months ended September 30, 2005 to TBS Celular Participações Ltda., one of its direct shareholders and a subsidiary of Brasilcel, for consulting and advisory fees. Celular CRT and its subsidiary also paid R$2.0 million in 2003, R$6.4 million in 2004 and R$6.1 million in the nine months ended September 30, 2005 to Telefónica Gestão de Serviços Compartilhados—T-Gestiona recorded as general and administrative expenses.

 

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    Certain expenses for general corporate and administrative services (including certain labor and benefit costs, rental expenses and other general administrative expenses) are apportioned among TCP and the Targets and their respective subsidiaries. Celular CRT recovered expenses of R$6.8 million in 2003, R$8.7 million in 2004 and R$5.3 million in the nine months ended September 30, 2005 from TCP, TLE and TSD and their respective subsidiaries. Celular CRT paid expenses of R$27.4 million in 2003, R$35.3 million in 2004 and R$15.5 million in the nine months ended September 30, 2005 to TCP, TLE and TSD and their respective subsidiaries.

 

See note 25 to Celular CRT’s audited consolidated financial statements and note 17 to Celular CRT’s unaudited consolidated financial statements for further information about Celular CRT’s related party transactions.

 

Significant Corporate Events

 

TCO has been a subsidiary of TCP since TCP acquired a majority of the common shares of TCO from Fixcel in April 2003. See “—Background for the Merger—Ownership of TCP, TCO, TLE, TSD and Celular CRT After the Privatization—TCP and its Subsidiaries.” During the periods for which financial statements are included in this prospectus, TCP has had no other material contracts, arrangements, understandings, relationships, negotiations or transactions with Fixcel and its affiliates, except for those that led to the acquisition by TCP of the majority of the common shares of TCO.

 

On June 30, 2004, the shareholders of TCO, at an extraordinary general shareholders’ meeting, approved the corporate reorganization of TCO and its subsidiaries Telegoiás, Telems, Telemat, Teleacre and Teleron. The purpose of the restructuring was to (1) transfer a tax benefit corresponding to R$511.1 million from TCP to TCO, generated by the amortization of goodwill in the amount of R$1,503.1 million resulting from the acquisition of control of TCO and its subsidiaries by TCP in 2003, and (2) simplify the corporate structure of TCO’s subsidiaries, whose minority shareholders received shares issued by TCO of the same class as the shares held by them in TCO’s subsidiaries. These subsidiaries of TCO have become wholly owned subsidiaries of TCO. TCP holds a credit in the amount of the tax benefit transferred to TCO. To the extent TCO uses this tax benefit in the future, TCO will undertake a capital increase that will enable TCP to capitalize the amount of the tax benefit used by TCO. The remaining shareholders of TCP will have the right to subscribe for additional shares in the capital increase to maintain their participation in TCO’s share capital. In addition, in connection with the corporate reorganization of TCO and its subsidiaries, TCP agreed to deliver preferred shares of TCO that it holds to minority shareholders of TCO’s subsidiaries who would otherwise have been entitled to receive a fractional preferred share in the reorganization.

 

In July 2005, TCP also capitalized a portion of the tax benefit related to the goodwill generated in the acquisition of TCO. See “Part Four: Information on the VIVO Companies—Recent Developments—Capital Increase and Cancellation of Treasury Shares.”

 

In January 2001, Portugal Telecom and Telefónica Móviles entered into a strategic agreement to create a joint venture named Brasilcel that would aggregate all their investments in cellular telecommunications businesses in Brazil to the extent permitted under Brazilian law. In December 2002, after Anatel approved the joint venture, Portugal Telecom transferred its interests in TCP and Celular CRT to Brasilcel, and Telefónica Móviles transferred its interests in TSD, TLE and Celular CRT to Brasilcel. Since that date, TCP, TLE, TSD and Celular CRT have been under common control. See “—Background for the Merger” and “—Transactions and Arrangements Concerning the Common Shares, Preferred Shares and ADSs of TCO, TLE, TSD and Celular CRT—Transactions and Arrangements—Joint Venture Agreement.”

 

From time to time, Portugal Telecom and Telefónica Móviles have considered various proposals for the restructuring of Brasilcel’s interests in the VIVO companies. Brasilcel also increased its interests in TCP, TLE,

 

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TSD and Celular CRT through public tender offers in October 2004. See “—Background for the Merger—Ownership of TCP, TCO, TLE, TSD and Celular CRT After the Privatization.”

 

In July 2005, Brasilcel capitalized a portion of the tax benefit related to the goodwill generated in the acquisition of TLE, TSD and Celular CRT. See “Part Four: Information on the VIVO Companies—Recent Developments—Capital Increase and Cancellation of Treasury Shares.”

 

Transactions and Arrangements Concerning the Common Shares, Preferred Shares and ADSs of TCO, TLE, TSD and Celular CRT

 

Ownership of Securities

 

As of December 31, 2004, each of the members of the board of directors and of the board of executive officers owned, directly or indirectly, less than 0.01% of any class of TCP shares.

 

The table below illustrates the aggregate number and percentage of common shares and preferred shares of each of TCO, TLE, TSD and Celular CRT that are beneficially owned by TCP, Brasilcel, Telefónica, Telefónica Móviles, Portugal Telecom and PT Móveis, their respective subsidiaries and their directors and executive officers. For information on the companies listed in the tables below, see “—Certain Information on the Parent Companies of TCP and the Targets.”

 

TCO

 

     Beneficial ownership of shares of TCO

 
     Common

    Preferred

 
     Number

   Percent

    Number

   Percent

 

TCP

   40,160,797    90.59 %   28,084,178    32.76 %

TCO’s directors and executive officers in the aggregate

   12    0.00 %   555    0.00 %

 

TLE

 

     Beneficial ownership of shares of TLE

 
     Common

    Preferred

 
     Number

   Percent

    Number

   Percent

 

Brasilcel N.V.

   105,305    3.12 %   218,684    3.49 %

Avista Participações Ltda.

   334,464    9.91 %   1,849,988    29.52 %

Sudestecel Participações Ltda.

   1,832,941    54.28 %   313,990    5.01 %

Tagilo Participações Ltda.

   47,789    1.42 %   183,801    2.93 %

TLE’s directors and executive officers in the aggregate

   10    0.00 %   —      —    

 

TSD

 

     Beneficial ownership of shares of TSD

 
     Common

    Preferred

 
     Number

   Percent

    Number

   Percent

 

Brasilcel N.V.

   8,690,098    21.77 %   37,660,622    72.54 %

Avista Participações Ltda.

   1,238,265    3.10 %   2,539,941    4.89 %

Sudestecel Participações Ltda.

   23,455,288    58.76 %   —      —    

Tagilo Participações Ltda.

   3,343,041    8.38 %   6,663,506    12.84 %

TSD’s directors and executive officers in the aggregate

   9    0.00 %   3    0.00 %

 

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Celular CRT

 

     Beneficial ownership of shares of Celular CRT

 
     Common

    Preferred

 
     Number

   Percent

    Number

   Percent

 

Brasilcel N.V.

   2,966,790    20.55 %   4,785,770    25.40 %

Avista Participações Ltda.

   605,290    4.19 %   4,416,900    23.44 %

TBS Celular Participações Ltda.

   9,505,310    65.83 %   165,846    0.88 %

Celular CRT’s directors and executive officers in the aggregate

   —      —       10    0.00 %

 

To TCP’s knowledge, each one of the persons indicated in the tables above intends to vote its voting shares in favor of the merger.

 

Transactions and Arrangements

 

None of TCP or any of its subsidiaries has effected any transaction in the common shares or preferred shares of TCO, TLE, TSD or Celular CRT or in the ADSs of TCO, TLE or TSD in the past 60 days. To TCP’s knowledge, none of Brasilcel, Telefónica, Telefónica Móviles, Portugal Telecom or PT Móveis or their respective subsidiaries, or any director or executive officer of TCP, TCP’s subsidiaries (including TCO), Brasilcel, Telefónica, Telefónica Móviles, Portugal Telecom or PT Móveis or their respective subsidiaries, or any associate of either TCP or TCO, TLE, TSD or Celular CRT, has effected any transactions in the common shares or preferred shares of TCO, TLE, TSD or Celular CRT or in the ADSs of TCO, TLE or TSD in the past 60 days.

 

TCP and its subsidiaries (including TCO) are not, and to TCP’s knowledge, none of Brasilcel, Telefónica, Telefónica Móviles, Portugal Telecom or PT Móveis or any of the directors or executive officers of TCP, TCP’s subsidiaries (including TCO), Brasilcel, Telefónica, Telefónica Móviles, Portugal Telecom or PT Móveis or their respective subsidiaries is, a party to any agreement, arrangement, understanding or relationship with any other person relating, directly or indirectly, to any of TCO’s, TLE’s, TSD’s or Celular CRT’s securities (including any agreement, arrangement, understanding or relationship concerning the transfer or the voting of any such securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss or the giving or withholding of proxies, consents or authorizations), except, with respect to Telefónica Móviles, Portugal Telecom and PT Móveis, for the joint venture arrangement described below.

 

Joint Venture Arrangement

 

On January 23, 2001, Telefónica Móviles, Portugal Telecom and PT Móveis agreed to create a joint venture to consolidate Telefónica Móviles’ cellular businesses in Brazil with those of Portugal Telecom. Under this joint venture framework agreement, each of the Telefónica group and the Portugal Telecom group agreed to contribute to a 50/50 joint venture certain of its cellular businesses in Brazil, including interests in TCP, TLE, TSD and Celular CRT, as well as other assets or business that are operated for the benefit of the cellular businesses. This joint venture resulted in the formation of Brasilcel, the controlling shareholder of TCP, TCO, TLE, TSD and Celular CRT.

 

On October 17, 2002, Telefónica Móviles, on the one hand, and Portugal Telecom and PT Móveis, on the other, entered into the definitive stockholders’ agreement and subscription agreement that implemented the joint venture framework agreement signed in January 2001. In accordance with these definitive agreements, Telefónica Móviles, on the one hand, and Portugal Telecom and PT Móveis, on the other, have the same voting rights in Brasilcel. This equality in voting rights will continue to exist even if either party’s economic and voting interest is diluted below 50%, but not lower than 40%, as a consequence of a capital increase. The equality in voting rights will cease to exist if the percentage of ownership of one of the parties falls below 40% during an

 

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uninterrupted period of six months. In this event, if the group with the reduced interest were the Portugal Telecom Group, it would be entitled to sell to Telefónica Móviles, which would be obliged to buy (directly or through another company), all of Portugal Telecom’s ownership interest in Brasilcel. This right expires on December 31, 2007. This put option would be exercisable in the 12 months subsequent to the end of the aforementioned six-month period, provided that the Portugal Telecom group had not increased its ownership interest to 50% of the total capital stock of Brasilcel.

 

Also, in accordance with the definitive agreements, the Portugal Telecom group would be entitled to sell to Telefónica Móviles, which would be obligated to buy, all of Portugal Telecom’s ownership interest in Brasilcel should there be a change in control at Telefónica, Telefónica Móviles or any subsidiary of the latter that holds a direct or indirect ownership interest in Brasilcel. Similarly, Telefónica Móviles would be entitled to sell to the Portugal Telecom group, which would be obliged to buy, its ownership interest in Brasilcel if there is a change of control at Portugal Telecom, PT Móveis or any other subsidiary of either company that holds a direct or indirect ownership interest in Brasilcel.

 

The definitive agreements established that the parties to the agreements shall transfer to Brasilcel all of their direct or indirect ownership interests in equity securities, whether voting or non-voting, in cellular properties in Brazil, including any such interests obtained from future acquisitions of Brazilian cellular properties by those parties.

 

On December 27, 2002, following the agreements entered into on October 17, 2002 and after having obtained the necessary authorization from the Brazilian authorities for the contribution, Telefónica Móviles, Portugal Telecom and PT Moveis contributed to Brasilcel all the shares held directly or indirectly by the two groups in their cellular communications companies in Brazil.

 

Plans and Proposals

 

In connection with the merger, TCO will become a wholly owned subsidiary of TCP, and TLE, TSD and Celular CRT will merge into TCP, with TCP as the surviving company. TLE, TSD and Celular CRT will be dissolved, and New TCP will be the holding company of the subsidiaries of those companies. New TCP will be managed by the current management of TCP, as described in “—Management” above.

 

After the consummation of the merger, New TCP intends to undertake one or more further corporate reorganizations involving New TCP and one or more of its wholly owned subsidiaries to further simplify the corporate structure of the VIVO companies. No new or different securities are expected to be issued to shareholders of New TCP in connection with any such reorganizations. In addition, after the consummation of the merger, New TCP intends to restructure its debt, which may include the assumption and/or repayment of TCP debt by one or more of the VIVO companies and their subsidiaries.

 

In connection with the merger, the preferred shares and ADSs of TCO, TLE and TSD are expected to be deregistered under the Exchange Act, and those companies will no longer file Annual Reports on Form 20-F or reports on Form 6-K. In addition, the ADSs of TCO, TLE and TSD will be delisted from the New York Stock Exchange, and the common shares and preferred shares of TCO, TLE, TSD and Celular CRT will be delisted from the São Paulo Stock Exchange. After the consummation of the merger and the completion of the delisting and deregistration of the TCO shares, TCP may cause the bylaws of TCO (which will then be a wholly owned subsidiary) to be amended to simplify its corporate structure and may change the composition of the TCO board, including, without limitation, by seeking the resignation of the independent directors, whose participation on the TCO board will no longer be required because TCO will be a wholly owned subsidiary.

 

None of TCO, TLE, TSD or Celular CRT is undertaking or engaged in any negotiations in response to the merger that relate to a tender offer or other acquisition of the Targets’ securities by TCP, any of the Targets, any of their subsidiaries or any other person or any of the matters listed in the bullet points above.

 

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Expenses

 

The following is an itemized statement of the expenses incurred or estimated to be incurred by TCP in connection with the merger.

 

Filing fees

   U.S.$ 283,345

Legal fees

     1,500,000

Accounting fees and fees for valuation reports

     4,000,000

Printing costs

     750,000

ADR depositary fees and expenses

     750,000

Other

     750,000
    

Total

   U.S.$ 8,033,345
    

 

Unaudited Pro Forma Combined Financial Information

 

The following unaudited pro forma combined financial information gives pro forma effect to (1) our acquisition of a portion of the minority interest of TCO through a public tender offer in October 2004, (2) the proposed merger of shares of TCO with TCP described in this prospectus, and (3) the proposed merger of TSD, Celular CRT and TLE into TCP described in this prospectus. We refer to the events described in clauses (2) and (3) as the “merger.” Because TCP, TLE, TSD and Celular CRT came under common control on December 27, 2002, we have presented unaudited pro forma combined financial information for the year ended December 31, 2003 giving effect to the merger with respect to the proportionate interest in the Targets under common control. This financial information was prepared from, and should be read in conjunction with, the following historical financial statements, including the applicable notes thereto:

 

    our audited consolidated financial statements for the years ended December 31, 2004 and 2003, which are incorporated by reference into this prospectus;

 

    the audited consolidated financial statements of TCO, TLE, TSD and Celular CRT for the years ended December 31, 2004 and 2003, which are incorporated by reference or included in this prospectus;

 

    our unaudited condensed consolidated interim financial statements as of September 30, 2005 and for the nine months ended September 30, 2005, which are included in this prospectus; and

 

    the unaudited condensed consolidated interim financial statements of TCO, TLE, TSD and Celular CRT as of September 30, 2005 and for the nine months ended September 30, 2005, which are included in this prospectus.

 

The unaudited pro forma combined balance sheet as of September 30, 2005 combines the historical consolidated balance sheets of TCP, TLE, TSD and Celular CRT, giving effect to (i) the merger with respect to the proportionate interest in the Targets under common control as if it had been consummated on December 27, 2002, the date these companies came under common control, and (ii) the acquisitions of the minority interests in TCO, TLE, TSD and Celular CRT as if they had occurred on September 30, 2005. The unaudited pro forma combined statements of loss for the nine months ended September 30, 2005 and the years ended December 31, 2004 and 2003 combine the historical consolidated statements of income of TCP, TLE, TSD and Celular CRT, giving effect to the merger with respect to the proportionate interest in the Targets under common control as if the merger had been consummated on December 27, 2002, and the acquisition of the minority interests as if they had occurred on January 1, 2004.

 

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The unaudited pro forma combined financial information was prepared in accordance with Brazilian GAAP, which differs in certain material respects from U.S. GAAP. Note 37 to our audited consolidated financial statements and note 21 to our unaudited condensed consolidated interim financial statements describe the principal differences between Brazilian GAAP and U.S. GAAP as they relate to us. The unaudited pro forma combined financial information includes pro forma reconciliations from Brazilian GAAP to U.S. GAAP of net loss for the nine months ended September 30, 2005 and the years ended December 31, 2004 and 2003, and of shareholders’ equity as of September 30, 2005.

 

The pro forma adjustments presented in the unaudited pro forma combined financial information give effect to estimates and assumptions that our management believes to be reasonable. The unaudited pro forma combined financial information does not include pro forma adjustments to take into account any synergies or cost savings that may or are expected to occur as a result of the merger.

 

This unaudited pro forma combined financial information is being provided for illustrative purposes only. It does not purport to represent our actual financial position or results of operations had the merger occurred on the dates specified, nor does it project our results of operations or financial position for any future period or date.

 

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Telesp Celular Participações S.A.

Unaudited Pro Forma Combined Statement of Income

For the Year Ended December 31, 2003

(in millions of reais)

 

     TCP

    TLE

    TSD

    Celular
CRT


    Effects
of the
merger
(2)


    Eliminations

    Pro forma
TCP


 

Net operating revenue

   6,046.4     441.3     1,892.5     1,032.7           (19.4 )   9,393.5  

Cost of services and goods

   (3,020.5 )   (256.3 )   (1,052.5 )   (526.2 )         19.4     (4,836.1 )

Gross profit

   3,025.9     185.0     840.0     506.5     —       —       4,557.4  

Operating expenses:

                                          

Selling expenses

   (1,264.9 )   (145.0 )   (387.5 )   (171.3 )               (1,968.7 )

General and administrative expenses

   (561.3 )   (49.3 )   (224.4 )   (89.4 )               (924.4 )

Other net operating income (expenses)

   (145.0 )   (3.1 )   13.3     (3.9 )               (138.7 )

Operating income (loss) before net financial income (expenses)

   1,054.7     (12.4 )   241.4     241.9     —       —       1,525.6  

Net financial income (expenses)

   (1,133.5 )   (30.3 )   (15.0 )   17.7                 (1,161.1 )

Operating income (loss)

   (78.8 )   (42.7 )   226.4     259.6     —       —       364.5  

Net non-operating income (expense)

   (25.7 )   (0.7 )   (8.5 )   (1.2 )               (36.1 )

Income (loss) before minority interest and income taxes

   (104.5 )   (43.4 )   217.9     258.4     —       —       328.4  

Income taxes

   (277.9 )   0.8     (61.6 )   (69.1 )   —       —       (407.8 )

Minority interest

   (257.7 )   —       —       —       —             (257.7 )

Net income (loss)

   (640.1 )   (42.6 )   156.3     189.3     —       —       (337.1 )

U.S. GAAP adjustments

   541.5     36.2     (39.4 )   94.0     (46.4 )   —       585.9  

Net income (loss) under U.S. GAAP

   (98.6 )   (6.4 )   116.9     283.3     (46.4 )   —       248.8  

Earnings (loss) per share:

                                          

Loss per share—common and preferred under Brazilian GAAP

                           —       —       (0.39 )

Basic income (loss) per share:

                                          

Common—U.S. GAAP

                                       0.29  

Preferred—U.S. GAAP

                                       0.29  

Diluted income (loss) per share:

                                          

Common—U.S. GAAP

                                       0.24  

Preferred—U.S. GAAP

                                       0.24  

 

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Telesp Celular Participações S.A.

Unaudited Pro Forma Combined Statement of Loss

For the Year Ended December 31, 2004

(in millions of reais, except per share amounts)

 

    TCP

    TLE

    TSD

    Celular CRT

    Tender
offer for
TCO
shares in
Oct. 2004
(1)


    Effects
of the
merger
(2)


    Eliminations

  Pro forma
TCP


 

Net operating revenue

  7,341.0     487.0     1,927.0     1,174.3                     10,929.3  

Cost of services and goods

  (3,335.1 )   (282.2 )   (1,112.5 )   (620.5 )                   (5,350.3 )

Gross profit

  4,005.9     204.8     814.5     553.8               5,579.0  

Operating expenses:

                                             

Selling expenses

  (1,896.4 )   (147.1 )   (508.5 )   (264.9 )                   (2,816.9 )

General and administrative expenses

  (634.9 )   (57.8 )   (187.8 )   (95.6 )                   (976.1 )

Other net operating income (expenses)

  (159.5 )   (0.9 )   17.0     27.3     (71.8 )             (187.9 )

Operating income (loss) before net financial expenses

  1,315.1     (1.0 )   135.2     220.6     (71.8 )         1,598.1  

Net financial income (expenses)

  (1,095.4 )   (24.7 )   5.7     25.8                     (1,088.6 )

Operating income (loss)

  219.7     (25.7 )   140.9     246.4     (71.8 )         509.5  

Net nonoperating expense

  (51.2 )   (1.9 )       (7.8 )                   (60.9 )

Income (loss) before minority interest and income taxes

  168.5     (27.6 )   140.9     238.6     (71.8 )         448.6  

Income taxes

  (327.1 )   (6.6 )   (48.1 )   (56.7 )             (438.5 )

Minority interest

  (331.5 )                     331.5          

Net income (loss)

  (490.1 )   (34.2 )   92.8     181.9     (71.8 )   331.5       10.1  

U.S. GAAP adjustments

  (10.6 )   (14.4 )   (79.2 )   (13.0 )   12.8     (388.7 )     (493.1 )

Net income (loss) under U.S. GAAP

  (500.7 )   (48.6 )   13.6     168.9     (59.0 )   (57.2 )     (483.0 )

Earnings per share:

                                             

Earnings income (loss) per share – common and preferred under Brazilian GAAP

                                    0.01  

Basic loss per share:

                                             

Common – U.S. GAAP

                                          (0.39 )

Preferred – U.S. GAAP

                                          (0.39 )

Diluted loss per share:

                                             

Common – U.S. GAAP

                                          (0.39 )

Preferred – U.S. GAAP

                                          (0.39 )

 

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Telesp Celular Participações S.A.

Unaudited Pro Forma Combined Statement of Loss

For the Nine-Month Period Ended September 30, 2005

(in millions of reais, except per share amounts)

 

     TCP

    TLE

    TSD

    Celular
CRT


    Effects
of the
merger
(2)


    Eliminations

   Pro forma
TCP


 

Net operating revenue

   5,491.7     418.7     1,505.3     892.4                8,308.1  

Cost of services and goods

   (2,479.7 )   (233.4 )   (777.3 )   (420.3 )              (3,910.7 )

Gross profit

   3,012.0     185.3     728.0     472,1     —       —      4,397.4  

Operating expenses:

                                         

Selling expenses

   (1,790.9 )   (141.8 )   (462.2 )   (270.5 )              (2,665.4 )

General and administrative expenses

   (455.1 )   (42.8 )   (148.4 )   (76.5 )              (722,8 )

Other net operating income (expenses)

   (287.0 )   (4.7 )   (6.3 )   7.8                (290,2 )

Operating income before net financial expenses

   479.0     (4.0 )   111.1     132.9     —       —      719.0  

Net financial income (expenses)

   (683.9 )   (44.7 )   14.6     33.2                (680.8 )

Operating income (loss)

   (204.9 )   (48.7 )   125.7     166.1     —       —      38.2  

Net nonoperating income (expense)

   12.0     0.2     0.8     (2.3 )              10.7  

Income (loss) before minority interest and income taxes

   (192.9 )   (48.5 )   126.5     163.8     —       —      48.9  

Income taxes

   (265.8 )   (6.0 )   (48.4 )   (59.4 )   —       —      (379.6 )

Minority interest

   (133.0 )   —       —       —       133.0          —    

Net income (loss)

   (591.7 )   (54.5 )   78.1     104.4     133.0     —      (330.7 )

U.S. GAAP adjustments

   206.0     (5.4 )   (18.4 )   1.1     (281.3 )   —      (98.0 )

Net income (loss) under U.S. GAAP

   (385.7 )   (59.9 )   59.7     105.5     (148.3 )   —      (428.7 )

Earnings (loss) per share:

                                         

Loss per shares—common and preferred under Brazilian GAAP

                           —       —      (0.23 )

Basic loss per share:

                                         

Common—U.S. GAAP

                                      (0.31 )

Preferred—U.S. GAAP

                                      (0.31 )

Diluted loss per share:

                                         

Common—U.S. GAAP

                                      (0.31 )

Preferred—U.S. GAAP

                                      (0.31 )

 

 

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PART FIVE—THE MERGER

 

Telesp Celular Participações S.A.

Unaudited Pro Forma Combined Balance Sheet

As of September 30, 2005

(in millions of reais)

 

    TCP

    TLE

    TSD

    Celular
CRT


    Effects
of the
merger
(2)


    Eliminations

    Pro forma
TCP


 

Current assets:

  4,527.1     263.2     1,342.5     970.1           (22.8 )   7,080.1  

Noncurrent assets:

                                         

Recoverable taxes

  449.0     25.7     85.6     27.9                 588.2  

Deferred income taxes

  901.6     184.3     165.7     54.0                 1,305.6  

Prepaid expenses

  24.5     1.4     16.9     2.7                 45.5  

Other noncurrent assets

  63.2     14.9     9.1     11.1                 98.3  

Total noncurrent assets

  1,438.3     226.3     277.3     95.7                 2,037.6  

Permanent assets:

                                         

Investments

  1,649.5     —       0.5     1.3                 1,651.3  

Goodwill on merged subsidiary, net

  43,5     —       —       —                   43.5  

Property, plant and equipment, net

  5,725.2     369.9     1,164.4     742.4                 8,001.9  

Deferred assets, net

  145.7     0.3     2.1     0.9                 149.0  

Other

  1.8     —       —       —                   1.8  

Total permanent assets

  7,565.7     370.2     1,167.0     744.6                 9,847.5  

Total assets

  13,531.1     859.7     2,786.8     1,810.4           (22.8 )   18,965.2  

Current liabilities:

  4,084.4     372.9     689.0     422.6           (22.8 )   5,546.1  

Noncurrent liabilities

                                         

Loans and financing

  3,309.8     116.6     —       133.3                 3,559.7  

Reserve for contingencies

  212.2     8.3     24.1     2.7                 247.3  

Taxes payable

  177.1     —       —       —                   177.1  

Derivative contracts

  323.4     35.7     —       19.7                 378.8  

Pension and other postretirement benefit plans

  0.4     0.3     0.8     0.6                 2.1  

Other noncurrent liabilities

  38.9     5.9     24.1     7.4                 76.3  

Total noncurrent liabilities

  4,061.8     166.8     49.0     163.7                 4,441.3  

Minority interest

  1,068.8     —       —       —       (1,068.8 )         —    

Shareholders’ equity

                                         

Capital stock

  6,670.2     306.8     927.9     327.5     1,068.8           9,301.2  

Treasury stock

  —       —       —       (11.1 )   11.1           —    

Capital reserve

  793.4     126.4     170.5     498.4     (11.1 )         1,577.6  

Income reserves

  —       —       235.2     304.8     (540.0 )         —    

Accumulated earnings (deficit)

  (3,147.8 )   (113.2 )   715.1     104.5     540.0           (1,901.4 )

Total shareholders’ equity

  4,315.8     320.0     2,048.7     1,224.1     1,068.8           8,977.4  

Funds for capitalization

  0.3     —       0.1     —       —             0.4  

Shareholders’ equity and funds for capitalization

  4,316.1     320.0     2,048.8     1,224.1     1,068.8           8,977.8  

Total liabilities and shareholders’ equity

  13,531.1     859.7     2,786.8     1,810.4     —       (22.8 )   18,965.2  

Shareholders’ equity under Brazilian GAAP

  4,315.8     320.0     2,048.7     1,224.1     1,068.8     —       8,977.4  

U.S. GAAP adjustments (2)

  34.3     5.8     (0.3 )   4.7     4,057.7     —       4,102.2  

Shareholders’ equity under U.S. GAAP

  4,350.1     325.8     2,048.4     1,228.8     5,126.5     —       13,079.6  

 

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PART FIVE—THE MERGER

 

Telesp Celular Participações S.A.

Notes to Unaudited Pro Forma Combined Financial Information

(all amounts in millions of reais, except per share amounts)

 

(1) The pro forma adjustments for the October 2004 tender offer for a portion of the minority interest of TCO represent (i) the pro forma amortization of the goodwill recorded under Brazilian GAAP and (ii) pro forma U.S. GAAP adjustments to reflect purchase accounting in accordance with SFAS No. 141, Business Combinations. Under the purchase method of accounting, the pro rata assets acquired and liabilities assumed are recorded at their fair values, and any excess of the purchase price over the related fair value of net assets acquired is accounted for as goodwill. Under Brazilian GAAP, the goodwill associated with this tender offer amounted to R$478.7, attributed to the projected future profitable operations of TCO, and is being amortized over a five-year period. For U.S. GAAP purposes, we applied the purchase method of accounting in accordance with SFAS No. 141. See Note 37d., “Acquisition of TCO,” to our audited consolidated financial statements for a description of the accounting for the acquisitions and the purchase price allocation that was used for purposes of calculating the U.S. GAAP pro forma adjustments.

 

(2) Under Brazilian GAAP, the merger of shares of TCO with TCP and the merger of companies of TLE, TSD and Celular CRT into TCP will be accounted for based on TCO’s, TLE’s, TSD’s and Celular CRT’s book value of the assets acquired and the liabilities assumed.

 

Under U.S. GAAP, since TCP, TLE, TSD and Celular CRT are controlled by Brasilcel, the acquisition by TCP of Brasilcel’s interests in TLE, TSD and Celular CRT is considered to be a reorganization of companies under common control and will be accounted for in a manner similar to a pooling of interest. Accordingly, the assets acquired and the liabilities assumed in such acquisitions, as they relate to the portion under common control by Brasilcel, will be accounted for based on the historical carrying values of the assets and liabilities, as reflected in the consolidated financial statements of Brasilcel in accordance with EITF No. 90-5, “Exchanges of Ownership Interests between Entities under Common Control.”

 

The historical book value of the concession intangibles and goodwill relating to the acquisitions of TLE, TSD and Celular CRT that were recorded by Brasilcel prior to January 1, 2003 have been pushed down into TCP’s pro forma combined financial information as if the reorganization had occurred on January 1, 2003. The historical book values of these amounts on September 30, 2005 are as follows:

 

Concession intangibles

   744.7

Goodwill

   2,189.1
    

Total

   2,933.8
    

 

The amount of goodwill recorded was amortized up to December 31, 2001 in accordance with SFAS 142, Goodwill and Other Intangible Assets. The concession intangibles are being amortized on a straight-line basis over the terms of the respective company’s licenses, including one renewal period.

 

In October 2004, Brasilcel, either directly or through its wholly-owned subsidiaries, acquired additional interests of 22.7%, 4.2% and 15.8% in TLE, TSD and Celular CRT, respectively, for R$116.9, R$138.4 and R$352.5, respectively, in public tender offers. For U.S. GAAP purposes, these acquisitions of minority interests were accounted for by Brasilcel using the purchase method of accounting in accordance with SFAS No. 141. The amounts recorded by Brasilcel relating to these acquisitions of minority interests have been pushed down into TCP’s pro forma combined financial information as if the acquisitions had occurred on January 1, 2004.

 

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Telesp Celular Participações S.A.

Notes to Unaudited Pro Forma Combined Financial Information

(all amounts in millions of reais, except per share amounts)

 

The following table shows the estimated purchase price allocation that was used for purposes of calculating the U.S. GAAP pro forma adjustments:

 

     TLE

    TSD

   

Celular

CRT


    Total

Amounts representing the historical net assets under U.S. GAAP of the minority interest acquired

   34.1     44.9     67.0     146.0

Interest acquired

   22.7 %   4.2 %   15.8 %    

Fair value adjustments:

                      

Concession intangibles (a)

   46.9     52.1     197.1     296.1

Customer list (b)

   35.9     41.4     88.4     165.7

Purchase price

   116.9     138.4     352.5     607.8

(a) The concession intangibles are being amortized on a straight-line basis over the terms of the respective licenses, including one renewal period, being up to 2023, 2021 and 2022 for TLE, TSD and Celular CRT, respectively.
(b) The customer lists are being amortized on a straight-line basis over a two-year period, representing the average customer life.

 

The portion of the interests acquired by TCP from minority interest holders unrelated to Brasilcel will be accounted for using the purchase method of accounting in accordance with SFAS No. 141. To determine the purchase price paid by TCP for the acquisition of shareholders unrelated to Brasilcel, we have used the number of shares to be issued by TCP based on the exchange ratios disclosed above in this “Part Five: The Merger” and the average market price of TCP’s common and preferred shares four days before December 2, 2005, the last trading day before announcement of the merger, and four days after the announcement of the merger on December 5, 2005. The following table shows the estimated purchase price allocation that was used for purposes of calculating the U.S. GAAP pro forma adjustments:

 

     TCO

    TLE

    TSD

    Celular
CRT


    Total

Amounts representing the historical net assets under U.S. GAAP of the minority interest acquired

   1,090.1     160.7     183.8     400.1     1,834.7

Interest acquired

   47.5 %   49.3 %   8.9 %   32.6 %    

Fair value adjustments:

                            

Concession (a)

   163.8     —       —       122.2     286.0

Customer list (b)

   292.5     —       17.8     138.9     449.2

Property, plant and equipment (c)

   107.0     (2.3 )   25.6     (4.5 )   125.8

Purchase price (d)

   1,653.4     158.4     227.2     656.7     2,695.7

(a) The concession intangibles are being amortized on a straight-line basis over the terms of the respective licenses, including one renewal period, being up to 2020 for TCO and 2022 for Celular CRT.
(b) The customer lists are being amortized on a straight-line basis over a two-year period, representing the average customer life.
(c) The property, plant and equipment fair value adjustments are being amortized over a period of two years for TLE, TSD and Celular CRT and three years for TCO, which represents the weighted average remaining useful life of the related assets.
(d) The purchase price was determined by applying the average market price of R$7.8388 per common share of TCP for 12,862.1, 4,118.4, 10,486.8 and 9,571.7 common shares of TCO, TLE, TSD and Celular CRT, respectively, and R$8.7351 per preferred share of TCP for 177,738.8, 14,434.2, 16,607.0 and 66,591.4 preferred shares of TCO, TLE, TSD and Celular CRT, respectively, held by shareholders unrelated to Brasilcel. See above in this “Part Five: The Merger.”

 

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PART SIX—SHAREHOLDER RIGHTS

 

General

 

TCP, TCO, TLE, TSD and Celular CRT are all incorporated in the Federative Republic of Brazil. If you hold common or preferred shares of TCO, TLE, TSD or Celular CRT, your rights as a holder of securities of those companies are governed by Brazilian law and the bylaws (estatutos sociais) of the applicable company. If you hold common or preferred shares of TCO, TLE, TSD or Celular CRT, your rights as a holder of TCP securities after the merger will be governed by Brazilian law and the bylaws of TCP. You should read the bylaws of TCP and TCO, TLE, TSD or Celular CRT, copies of which are filed as exhibits to the registration statement of which this prospectus is a part.

 

There are no material differences between the rights of common shareholders of TCP and those of common shareholders of TCO, TLE, TSD or Celular CRT. The following table highlights certain differences in the voting rights and dividend rights of preferred shares of TCO, TSD, TLE and Celular CRT compared to preferred shares of TCP.

 

Voting Rights and Dividend Rights of Preferred Shares

Differences in Comparison to TCP

 

   

TCP


 

TCO


 

TLE


 

TSD


 

Celular CRT


Calculation of Dividend Preference for Preferred
Shares (1)
 

Preferred shareholders are entitled to a preference equal to the greater of:

•    6% of subscribed capital per share; or

•    3% of shareholders’ equity per share.

 

Preferred shareholders are entitled to a preference equal to the greater of:

•    6% of subscribed capital per share; or

•    3% of shareholders’ equity per share.

 

Preferred shareholders are entitled to a preference equal to the greater of:

•    6% of subscribed capital per share; or

•    10% more dividends than paid to common shareholders.

  Preferred shareholders are entitled to receive 10% more dividends than paid to common shareholders.  

Preferred shareholders are entitled to a preference equal to the greater of:

•    6% of subscribed capital per share; or

•    10% more dividends than paid to common shareholders.

Voting Rights

of Preferred Shares

 

•    Preferred shareholders have the right to vote on agreements with related parties that are on terms more onerous to the company than customary in the market.

•    Preferred shareholders have the right to vote on the amendment or revocation of certain bylaw provisions.

•    Preferred shareholders currently have full voting rights due to nonpayment of dividends by TCP. (2)

 

•    Preferred shareholders have the right to vote on agreements with related parties that are on terms more onerous to the company than customary in the market.

•    Preferred shareholders have the right to vote on the amendment or revocation of certain bylaw provisions.

 

•    Preferred shareholders have the right to vote on long-term agreements with related parties, except when the contracts contain standard contract provisions.

•    Preferred shareholders have the right to vote on the amendment or revocation of certain bylaw provisions.

•    Preferred shareholders currently have full voting rights due to nonpayment of dividends by TLE. (3)

 

•    Preferred shareholders have the right to vote on long-term agreements with related parties, except when the contracts contain standard contract provisions.

•    Preferred shareholders have the right to vote on the amendment or revocation of certain bylaw provisions.

 

•    Preferred shareholders do not have specific voting rights.

 

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(1) This preference refers to a preference for preferred shareholders in the payment of mandatory minimum dividends pursuant to the Brazilian corporation law. See, for example, “—Description of TCP Capital Stock—Allocations of Profits.”
(2) See “—Information About Historical Dividend Payments—TCP.”
(3) See “—Information About Historical Dividend Payments—TLE.”

 

In addition, the bylaws of Celular CRT, unlike the bylaws of TCP and the other Targets, do not require longer notice periods for Article 136 Meetings, as defined below under “—Description of TCP Capital Stock—Meetings of Shareholders.”

 

TCP believes that the preferred shares of TCP offer substantially the same rights, including, but not limited to, voting, dividends, redemption and liquidation rights, as the preferred shares of the Targets for purposes of the exception to the rules governing going private transactions contained in paragraph (g)(2) of Rule 13e-3 under the Exchange Act. The terms of the preferred shares of TCP and the Targets with respect to redemption rights and liquidation rights are substantially identical, and although TCP believes that the terms of the voting and dividend rights of the preferred shares of TCP and the Targets are substantially the same for purposes of the exception, there are differences in these voting and dividend rights, which are explained in the table above. TCP believes that these voting rights are substantially the same because the differences relate to limited exceptions from the general non-voting nature of the preferred shares. TCP believes that the dividend rights are substantially the same because the preferred shares of all the VIVO companies participate in the profits and losses of the applicable company and are not entitled to a fixed amount of dividends, but rather each company provides a limited preference to preferred shareholders in the payment of mandatory minimum dividends in accordance with one of the criteria permitted for listed preferred shares under the Brazilian corporation law.

 

TCP also believes that the preferred shares of TCP and the Targets are the substantial economic equivalent of a class of common stock. These preferred shares do not have the debt-like features of a fixed dividend amount, a fixed liquidation value, mandatory redemption provisions or covenants. Rather, the preferred shares participate with the common shares in the profits and losses of the company.

 

TCP believes, therefore, that the merger is not a going private transaction because holders of preferred shares of the Targets will receive preferred shares of TCP representing substantially the same rights as the preferred shares of the Targets and because the preferred shares of TCP are the substantial economic equivalent of common stock for purposes of paragraph (g)(2) of Rule 13e-3.

 

If you hold ADSs of TCO, TLE or TSD, your rights are governed by the applicable ADR deposit agreement rather than by Brazilian law and the bylaws of the company, and your rights as a holder of TCP ADSs after the merger will be governed by TCP’s ADR deposit agreement. See “—Description of American Depositary Shares” below.

 

As of December 31, 2005, TCP’s capital stock consisted of 662,324,342 outstanding shares, no par value, divided between 250,457,704 common shares (ações ordinárias) and 411,866,638 preferred shares (ações preferenciais).

 

As of December 31, 2005:

 

    TCO’s capital stock consisted of 130,068,158 outstanding shares, no par value, divided between 44,332,722 common shares (ações ordinárias) and 85,735,436 preferred shares (ações preferenciais);

 

    TLE’s capital stock consisted of 9,644,278 outstanding shares, no par value, divided between 3,376,560 common shares (ações ordinárias) and 6,267,718 preferred shares (ações preferenciais);

 

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    TSD’s capital stock consisted of 91,831,224 outstanding shares, no par value, divided between 39,916,217 common shares (ações ordinárias) and 51,915,007 preferred shares (ações preferenciais); and

 

    Celular CRT’s capital stock consisted of 32,641,400 outstanding shares (excluding treasury shares), no par value, divided between 14,439,063 common shares (ações ordinárias) and 18,202,337 preferred shares (ações preferenciais) (excluding 639,444 preferred shares held in treasury that will be transferred to TCP in the merger).

 

Information About Historical Dividend Payments

 

For a summary of TCP’s, TCO’s, TLE’s, TSD’s and Celular CRT’s payments of dividends and interest on shareholders’ equity for the years 2002, 2003, 2004 and 2005 see “Part Five: The Merger—Comparative Share and Dividend Information—Dividend Information.”

 

TCP

 

We pay our shareholders both dividends and interest on shareholders’ equity. Interest on shareholders’ equity (juros sobre capital proprio) is a form of distribution that is tax deductible in Brazil. We did not pay dividends or interest on shareholders’ equity for the years ended December 31, 2001, 2002, 2003 and 2004 because of net losses in those years.

 

Our bylaws state that holders of preferred shares will have full voting rights in the event that we do not pay minimum dividends to those shareholders for three consecutive fiscal years, and those shareholders will retain those voting rights until we again pay minimum dividends. As from the annual meeting held on March 27, 2004, holders of preferred shares began to have full voting rights since minimum dividends to preferred shares during the last three consecutive years have not been paid. Holders of preferred shares will be able to exercise voting rights until we again pay minimum dividends.

 

At the meeting of the voting shareholders of TCP that will consider the mergers described in this prospectus, the voting shareholders will also vote on a proposal for a capital reduction of TCP for the purposes of absorbing existing losses with a view to accelerating TCP’s ability to distribute dividends to its shareholders as soon as it becomes profitable.

 

TCO

 

TCO pays its shareholders both dividends and interest on shareholders’ equity. In 2002 and 2003, TCO paid only interest on shareholders’ equity. In 2004, TCO paid both dividends and interest on shareholders’ equity. In 2005, TCO declared both dividends and interest on shareholders’ equity.

 

TLE

 

TLE pays its shareholders both dividends and interest on shareholders’ equity. TLE recognized losses in 2002, 2003 and 2004. Therefore, no dividends or interest on equity were paid in this period.

 

TLE’s bylaws state that holders of preferred shares will have full voting rights in the event that TLE does not pay minimum dividends to those shareholders for three consecutive fiscal years, and those shareholders will retain those voting rights until TLE again pays minimum dividends. As from the annual meeting held on March 28, 2005, holders of preferred shares began to have full voting rights since minimum dividends to preferred shares during the last three consecutive years have not been paid. Holders of preferred shares will be able to exercise voting rights until TLE again pays minimum dividends.

 

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TSD

 

TSD pays its shareholders both dividends and interest on shareholders’ equity. In 2002, 2003 and 2004, TSD paid both dividends and interest on shareholders’ equity. In 2005, TSD declared interest on shareholders’ equity.

 

Celular CRT

 

Celular CRT pays its shareholders both dividends and interest on shareholders’ equity. In 2002, Celular CRT paid both dividends and interest on shareholders’ equity. In 2003 and 2004, Celular CRT paid only interest on shareholders’ equity. In 2005, Celular CRT declared both dividends and interest on shareholders’ equity.

 

Recent History of TCP Capital Stock

 

As of September 30, 2005 and as of December 31, 2005, TCP had capital stock of R$6,670,152,498.26 consisting of 662,324,342 outstanding shares, divided between 250,457,704 common shares, no par value (ações ordinárias) (representing capital stock of R$2,522,315,690.53), and 411,866,638 preferred shares, no par value (ações preferenciais) (representing capital stock of R$4,147,836,807.73). TCP is authorized to issue up to 720,000,000 shares of capital stock. There are no outstanding options to purchase TCP shares.

 

The following is a brief history of TCP’s capital stock since January 1, 2002. TCP had capital stock of R$1,873.3 million as of December 31, 2001, consisting of 458,367,772 thousand shares, divided into 160,138,996 thousand common shares and 298,228,776 thousand preferred shares. In September 2002, TCP undertook a capital increase in the amount of R$2,500.3 million, issuing 249,244,868 thousand new common shares and 464,171,712 thousand new preferred shares pursuant to a preemptive rights offering at a price of R$3.50 per one thousand shares and an additional 7,978,645 new preferred shares in an auction on the São Paulo Stock Exchange at an average price of R$3.9207 per one thousand shares. These amounts were paid in cash, except that TCP’s shareholder Portelcom Participações, a subsidiary of Brasilcel, paid by capitalizing certain credits in the amount of R$97.0 million held against TCP relating to tax benefits transferred to TCP.

 

As of December 31, 2003 and 2004, TCP had capital stock of R$4,373.7 million, consisting of 1,171,784,352 thousand shares, divided into 409,383,864 thousand common shares and 762,400,488 thousand preferred shares. In January 2005, TCP undertook a capital increase in the amount of R$2,053.9 million, issuing 143,512,976 thousand new common shares and 267,262,109 thousand new preferred shares pursuant to a preemptive rights offering at a price of R$5.00 per one thousand shares and an additional 91 thousand common shares and 3,999 thousand preferred shares in an auction on the São Paulo Stock Exchange at a minimum price of R$5.00 per thousand shares and at a maximum price of R$6.96 per thousand shares. These amounts were paid in cash, except that Portelcom Participações paid by capitalizing credits in the amount of R$53.9 million held against TCP.

 

In May 2005, TCP undertook a 2,500 to one reverse stock split of its common shares and preferred shares. After the reverse stock split, TCP had 633,025,410 shares, divided into 221,158,772 common shares and 411,866,638 preferred shares. In July 2005, TCP undertook a capital increase in the amount of R$242.6 million, issuing 29,298,932 new common shares at a price of R$8.28 per share. These new shares were subscribed by Portelcom Participações, which paid by capitalizing credits in the amount of R$242.6 million held against TCP. There have been no changes to TCP’s capital stock since this capital increase. Portelcom Participações had remaining credits against TCP in the amount of R$452.3 million as of September 30, 2005 corresponding to tax benefits previously transferred to TCP relating to the goodwill paid by TCP’s controlling shareholders in the privatization process. As the tax benefits are realized over a ten-year period, Portelcom Participações has the right to receive shares in the amount of the benefits realized, and TCP’s other shareholders are entitled to preemptive rights in connection with the issuance of these shares. See note 20 to TCP’s unaudited condensed consolidated interim financial statements included in this prospectus.

 

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Description of TCP Capital Stock

 

Set forth below are the material terms of the capital stock of TCP and brief summaries of certain provisions of TCP’s bylaws and the Brazilian corporation law.

 

Objectives and Purposes

 

We are a publicly traded company registered with the CVM under No. 01771-0. Article 2 of our bylaws provides that our corporate purpose is to:

 

    exercise the control of operating companies which provide cellular mobile telecommunications services, personal mobile services and other services in conformity with the concessions, authorizations and permissions that have been granted to us;

 

    promote, through our subsidiaries or controlled companies that operate under the VIVO brand, the expansion and implementation of the telecommunications services within our concessions, authorizations and permissions;

 

    promote, carry out and direct the financing of capital from internal or external sources to be used by us or our controlled companies;

 

    promote, carry out and encourage study and research activities aimed at the development of the telecommunications sector;

 

    perform, through our subsidiaries and affiliated companies, specialized technical services related to the telecommunications sector;

 

    promote, encourage, carry out and coordinate, through our subsidiaries or controlled companies, the development and training of personnel necessary to perform activities in the telecommunications sector;

 

    carry out and promote the import of goods and services for the operations of our subsidiaries and controlled companies;

 

    execute other activities connected or related to our objectives;

 

    participate in the equity capital of other companies; and

 

    trade equipment and materials necessary or useful for providing telecommunications services.

 

Directors

 

The following is a description of some of the provisions of our bylaws concerning our board of directors:

 

    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; and

 

    The board of directors has the power to allocate between the directors and the executive officers the total remuneration for directors and executive officers determined at a shareholders’ meeting.

 

Pursuant to the Brazilian corporation law, each member of the board of directors must hold at least one share of our capital stock to be elected as a director. Members of the board of directors generally stand for reelection at the same shareholders’ meeting. There are no provisions in our bylaws with respect to:

 

    age limits for retirement of directors; or

 

    anti-takeover mechanisms or other procedures designed to delay, defer or prevent changes in our control.

 

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Although there are no provisions in our bylaws, the Brazilian corporation law prohibits directors from:

 

    performing any act of generosity using corporate assets to the detriment of the corporation;

 

    by virtue of his position, receiving any type of direct, or indirect, personal advantage from third parties, without authorization in the bylaws or from a general meeting; and

 

    taking part in any corporate transaction in which he has an interest that conflicts with an interest of the corporation, nor in the decisions made by the other directors on the matter.

 

Allocations of Profits

 

At each annual shareholders’ meeting, the board of directors is required to recommend how net profits for the preceding fiscal year are to be allocated. Under the Brazilian corporation law, this allocation may be made among (a) dividends and (b) profits reserves.

 

For the purposes of the Brazilian corporation law, net profits are defined as net income after income tax and social contribution for the relevant fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ and management’s participation in a company’s profits.

 

Dividends

 

Mandatory Dividends. Under the Brazilian corporation law and TCP’s bylaws, TCP is required to distribute to all shareholders as a non-cumulative mandatory dividend an amount equal to 25% of adjusted net income. For this purpose, adjusted net income is an amount equal to net profits adjusted to reflect allocations to and from:

 

    the legal reserve;

 

    the contingency reserve; and

 

    the unrealized profits reserve.

 

Allocation of the Mandatory Dividends. In the allocation of any mandatory dividend, preferred shareholders are entitled with preference to receive a non-cumulative annual dividend, equal to the higher of (i) 6% of the amount obtained by dividing the amount of subscribed capital by the number of TCP’s shares or (ii) 3% of the amount obtained by dividing shareholders’ equity by the number of TCP’s shares.

 

In case the amount of mandatory dividends is greater than preferred dividends, after the payment of preferred dividends, the excess will be allocated first as dividend payments to holders of common shares in an amount equal to the preferred dividend received by the preferred shareholders, and the remainder will be distributed equally among holders of preferred and common shares.

 

In case the amount of mandatory dividends is less than the preferred dividends, the mandatory dividends will be fully allocated as preferred dividends and TCP will not be obligated to distribute any mandatory dividends to common shareholders. In this case, TCP must pay preferred dividends out of accumulated profits and other profits reserves, if available.

 

Dividends Relating to Net Profits Remaining After Allocations to Mandatory Dividends and Profits Reserves. Under the Brazilian corporation law, any net profits remaining after allocations to mandatory dividends and profits reserves (as described below) must be distributed to preferred and common shareholders, observing the same preference described above in connection with mandatory dividends.

 

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Profits Reserves

 

The Brazilian corporation law requires the allocation of 5% of the net profits to a statutory reserve (legal reserve), not to exceed 20% of the company’s paid-in capital, which may be used to absorb accumulated losses or increase capital. Other allocations may be made on a discretionary basis by the shareholders to the following reserves:

 

    a contingency reserve, for an anticipated loss that is deemed probable in future years (provided that any amounts so allocated in a previous year must be reversed in the fiscal year in which such loss does not occur or charged off in the event the loss occurs);

 

    an unrealized profits reserve, in an amount equal to the excess between mandatory dividends and the sum of the share of net equity earnings of affiliated companies and profits, gains and earnings in sales and services to be received after the end of the next succeeding fiscal year;

 

    bylaws reserve, in the amount set forth in the bylaws (currently, TCP bylaws do not provide for such type of reserve); and

 

    a retained profits reserve, for plant expansion and other capital investment projects, in an amount based on a capital expenditure budget previously approved by the shareholders (provided that if the budget is for a term greater than one year, it must be reviewed annually by the shareholders until the investment is completed).

 

Restrictions on the Distributions of Dividends and Allocations to Profits Reserves

 

Restrictions on Distributions of Dividends. TCP is permitted to suspend the payment of a mandatory dividend in respect of common shares if:

 

    its board of directors reports to the annual shareholders’ meeting that the distribution would be incompatible with the financial circumstances of that company; and

 

    the shareholders (after reviewing the opinion of the board of auditors) ratify this conclusion at the shareholders’ meeting.

 

In this case:

 

    the management must forward to the CVM, within five days of the shareholders’ meeting, an explanation for the suspension of the payment of the mandatory dividends; and

 

    the amounts not distributed would be recorded as a special reserve and, if not absorbed by losses in subsequent fiscal years, be distributed as dividends as soon as the financial condition of the company permitted.

 

Restrictions on the Allocations to Profits Reserves. Under the Brazilian corporation law, allocations to the bylaws reserve and retained profits reserve may not hinder the payment of mandatory dividends. In addition, any excess of the sum of the profits reserves (other than contingency reserves and unrealized profits reserves) over total capital must be distributed as dividends.

 

The amounts available for distribution are determined on the basis of financial statements prepared in accordance with Brazilian accounting principles.

 

Payment of Dividends

 

TCP is required by the Brazilian corporation law and its bylaws to hold an annual shareholders’ meeting by April 30 of each year, at which an annual dividend may be declared by a decision of TCP’s shareholders on the

 

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recommendation of its 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 corporation law, dividends must be paid on the date determined at a shareholders’ meeting or, in the absence of such determination, within 60 days as of the annual meeting date (and in any event within the same 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 to the company. Dividends are credited to the holder of record of TCP shares.

 

Voting Rights

 

Common Shareholders

 

Each TCP common share entitles the holder to one vote at shareholders’ meetings. TCP’s preferred shares ordinarily do not entitle their holders to vote except in the limited circumstances described below. Under the Brazilian corporation law, a shareholders’ meeting is required in order to:

 

    amend the bylaws (including Article 136 Meetings, as defined below);

 

    elect or discharge corporate officers and auditors at any time;

 

    review the yearly accounts drawn up by the corporation’s officers and to decide on the financial statements presented by them;

 

    authorize the issuance of debentures, except for debentures that are not convertible into shares and without guarantee;

 

    suspend the rights of a shareholder;

 

    approve the appraisal of assets contributed as capital by shareholders;

 

    effect the corporation’s transformation, consolidation, incorporation and divestment, its dissolution and liquidation, to elect and discharge its liquidators, and to examine the liquidators’ accounts; and

 

    authorize the officers to file for bankruptcy or request reorganization.

 

In the case of urgency, the filing for bankruptcy or the request for reorganization may be made by the officers, as agreed with the majority shareholder, if any, which officers must subsequently call a general meeting in order to vote on the matter. Such a meeting would be called by publication of a notice in the official gazette of the state of São Paulo and another Brazilian gazette determined by the shareholders at least 30 days prior to the meeting, but would not generally require any other form of notice.

 

Preferred Shareholders

 

Under the Brazilian corporation law, TCP’s preferred shares acquire full voting rights in the event the company fails for three consecutive fiscal years to pay the mandatory minimum dividend, and those voting rights will continue until TCP again pays mandatory minimum dividends. In addition, in case minority preferred shareholders hold more than 10% of TCP’s total capital (or if they reach such percentage when added to the minority common shareholders, in case neither such preferred shareholders hold 10% of the total capital stock nor such common shareholders hold 15% of the total common shares on their own), such shareholders may appoint one board member and one alternate. In addition, minority preferred shareholders may appoint one member of the board of auditors (and one alternate). In case minority common shareholders hold more than 10% of TCP’s voting capital, such common shareholders may appoint one member of the board of auditors (and one alternate).

 

Because TCP did not pay the mandatory minimum dividends for the years ended December 31, 2001, 2002, 2003, as from the annual meeting held on March 27, 2004, holders of preferred shares began to have full voting

 

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rights. Holders of preferred shares will be able to exercise voting rights until TCP again pays minimum dividends. Once TCP again pays minimum dividends, those voting rights will cease.

 

Under the bylaws of TCP, preferred shareholders are entitled (a) to vote at any meeting to approve any agreement between TCP and a related party if the terms of that agreement is more onerous to TCP than is customary in the market for agreements of the same nature and (b) to vote at any meeting to approve any changes to the bylaws that would revoke such voting rights or would change the provisions of TCP’s bylaws that require that equitable treatment be confirmed by a third-party appraiser in any corporate reorganization transaction involving TCP and a controlled entity and a 30-day call notice be delivered with respect to any Article 136 Meeting (as defined below). In any circumstances in which holders of TCP’s preferred shares are entitled to vote, each preferred share will entitle its holder to one vote.

 

Meetings of Shareholders

 

Under the Brazilian corporation law, notice of a general or extraordinary shareholders’ meeting must be published in the state’s official gazette and another gazette determined by the shareholders at least 15 days before the scheduled date of the meeting (other than in the case of Article 136 Meetings, which require a 30-day advance notice).

 

According to the Brazilian corporation law, a general meeting of shareholders is necessary in order to change the rights of the holders of stock, except that a shareholder may not be deprived of the following rights, whether through a change in the bylaws or a shareholders’ meeting:

 

    the right to participate in corporate profits;

 

    the right to participate in the assets of the corporation in the case of liquidation;

 

    the right to supervise the management of the corporate business as provided for in the Brazilian corporation law;

 

    the right of first refusal in the subscription of shares, founders’ shares convertible into shares, debentures convertible into shares and subscription bonuses; and

 

    the right to withdraw from the corporation as provided in the Brazilian corporation law.

 

Article 136 Meetings are required to:

 

    change the preferences, advantages and conditions for the redemption or amortization of one or more classes of preferred shares or to create a more favored class;

 

    reduce the minimum dividend;

 

    approve the merger, amalgamation or spin-off of TCP;

 

    participate in a group of companies;

 

    change the company’s corporate purpose; and

 

    suspend the liquidation of the company or in case of dissolution of the company.

 

On the first call, a meeting may be held only with a minimum quorum of one-fourth of the holders of voting shares. Extraordinary meetings whose objective is the amendment of the bylaws may be held on the first call only with minimum of two-thirds of the voting capital present. In addition, some decisions require the approval of a qualified quorum of at least one-half of the holders of voting shares.

 

If the quorum is not met on the first call, a second notice must be published at least eight days before the second meeting date (other than in the case of an Article 136 Meeting, which second notice must be published at

 

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least ten days prior to the second meeting). On a second call, a meeting may be held regardless of the number of voting shares represented.

 

The holders attending a general meeting must produce proof of their shareholder status, in accordance with the following rules:

 

    upon request, an owner of a registered share must exhibit a document proving his or her identity; and

 

    as a rule, an owner of a book-entry share or of a share in custody must exhibit or deposit at the corporation, in addition to a document proving his identity, the corresponding proof produced by the financial institution.

 

A shareholder may be represented at a general meeting by a proxy appointed less than one year before, which must be a shareholder, a corporation officer, a lawyer or a financial institution. An investment fund must be represented by its investment fund officer.

 

Preemptive Rights

 

Each TCP shareholder has a general preemptive right to subscribe for shares in any capital increase in proportion to its holdings (other than in public issuance of shares or exchange offers for the acquisition of control of other companies). In the specific case of preferred shareholders, they will not have preemptive rights in connection with issuances of common shares by TCP in order to reduce the minimum number of non-voting shares to 50% of the total number of issued shares. When applicable, shareholders are given a minimum period of 30 days following the publication of a notice of a capital increase to exercise that right.

 

In the event of a capital increase that would maintain or increase the proportion of capital represented by TCP’s preferred shares, holders of preferred shares would have preemptive rights to subscribe only for newly issued preferred shares. In the event of a capital increase that would reduce the proportion of capital represented by TCP’s preferred shares, holders of preferred shares would have preemptive rights to subscribe for preferred shares in proportion to their holdings and to TCP’s common shares only to the extent necessary to prevent dilution of their interests, except as described in the preceding paragraph.

 

According to the Brazilian corporation law, shareholders must pay in full for the shares underwritten or acquired pursuant to the exercise of preemptive rights. Shareholders are not liable for future capital calls by TCP.

 

Appraisal Rights

 

Under Brazilian corporation law, a dissenting shareholder (including a preferred or a common shareholder) may exercise appraisal rights with respect to its shares if TCP’s general shareholders’ meeting decides to:

 

    create a new class of preferred shares with rights superior to those of existing classes;

 

    change any right the preferred shares carry, including their amortization or redemption rights (appraisal rights in this case are limited to the holders of shares of a class whose rights are negatively impacted by such change);

 

    reduce the mandatory dividends;

 

    change TCP’s corporate purpose;

 

    approve (1) a merger (incorporação de ações) involving TCP, (2) a merger of TCP with and into another company, (3) an amalgamation of TCP with another company, (4) the acquisition of another company at a price that exceeds certain limits set forth in Brazilian corporation law, or (5) the participation in a group of companies, in each case provided that certain liquidity and dispersion standards are not met according to the Brazilian corporation law; and

 

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    approve a spin-off of TCP, if in connection with such transaction there is a reduction of minimum dividends, the company becomes part of a group of companies, or there is a change in the company’s corporate purposes (in this last case, except in case the entity receiving the company’s assets has a substantially identical corporate purpose).

 

The right to exercise appraisal rights lapses 30 days after publication of the minutes of the relevant extraordinary general shareholders’ meeting or, if the resolution requires the approval of the majority of TCP’s preferred shares affected by the resolution in a special meeting, within 30 days from the publication of the minutes of that special meeting. TCP would be entitled to reconsider any action giving rise to appraisal rights within ten days after the expiration of those rights if the payments to dissenting shareholders exercising appraisal rights would jeopardize its financial stability.

 

The amount receivable upon the exercise of appraisal rights is the book value of the shares, determined on the basis of the last annual balance sheet approved by the shareholders. If the shareholders’ meeting giving rise to appraisal 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 that shareholders’ meeting.

 

Rights to Share in the Event of Liquidation

 

A general meeting of shareholders may decide that, before completing any liquidation of TCP and after all creditors have been paid, TCP’s assets will be distributed to the shareholders as such assets are ascertained.

 

Form and Transfer

 

TCP’s shares are maintained in book-entry form with a custodian and transfer agent, Banco ABN AMRO Real, and the 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 that remains in the possession of the transfer agent.

 

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 Banco Central do Brasil, or the Central Bank, under Brazilian regulations governing foreign investment in capital markets, the foreign investor should also seek amendment, if necessary, of the appropriate electronic registration through its local agent to reflect the new ownership.

 

The São Paulo Stock Exchange operates a central clearing system in which participating institutions have accounts. All shares placed into the system will be deposited in custody with the stock exchange through a Brazilian institution authorized to operate by the Central Bank and having a clearing account with the stock exchange. The fact that the shares are subject to custody with the stock exchange will be reflected in the register of shareholders. Each participating shareholder will, in turn, be registered in the register of the beneficial shareholders to be maintained by the stock exchange and will be treated in the same way as a registered shareholder.

 

Exchange Controls and Central Bank Registration

 

There are no restrictions on ownership or voting of preferred shares or common shares by individuals or legal entities domiciled outside of Brazil (other than, in the case of common shares, if they constitute a control stake of TCP).

 

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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 that generally requires, among other things, that the relevant investments have been registered with the Central Bank and the CVM. These restrictions on the remittance of foreign capital abroad may hinder or prevent the holders of TCP’s shares, including the preferred shares underlying TCP’s ADSs, from converting dividends, distributions or the proceeds from any sale of these shares into U.S. dollars and remitting the U.S. dollars abroad. A non-Brazilian holder of 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.

 

There are three different mechanisms for effecting Central Bank registration, one that applies to holders of ADSs and two that apply to direct holders of TCP shares.

 

ADSs. The ADSs benefit from the certificate of foreign capital registration that 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 the appropriate registration, either under Resolution 2,689 of the National Monetary Council and CVM Instruction 325, both as amended, or under Law No. 4,131/62, as described below.

 

Resolution 2,689. Investors residing outside Brazil, including institutional investors, are authorized to buy and sell equity instruments, including TCP shares, traded publicly in Brazil under Resolution 2,689 of the National Monetary Council and Instruction CVM 325. With certain limited exceptions, Resolution 2,689 investors are permitted to carry out any type of transaction in the Brazilian financial capital markets involving a security traded on a stock, future or organized over-the-counter market. Investments and remittances are made through the commercial rate exchange market. In order to become a Resolution 2,689 investor, an investor residing outside Brazil must appoint a representative in Brazil with powers to take actions relating to the investment, appoint an authorized custodian in Brazil for the investments, which must be a financial institution duly authorized by the Central Bank and the CVM and through its representative, register itself with the CVM and the investment with the Central Bank. If the holder is not registered under Resolution 2,689, it may be subject to a less favorable tax treatment. See “Part Five: The Merger—Material Tax Considerations—Brazilian Tax Considerations.”

 

Law No. 4,131/62. Direct investors residing outside Brazil may also request registration with the Central Bank under Law No. 4,131/62, which is used by certain investors who do not wish to trade their shares publicly. Registration under Law No. 4,131/62 of preferred shares that have been previously withdrawn from TCP’s ADS program is subject to the approval of the Central Bank.

 

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 federal 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. The federal government may impose similar restrictions on foreign repatriations in the future.

 

The legislation and regulations described in this section “—Exchange Controls and Central Bank Registration” are the same as those that apply to TCO, TLE, TSD and Celular CRT securities.

 

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Description of American Depositary Shares

 

Important Note: Celular CRT does not have an ADS program, and no holder of Celular CRT common shares or preferred shares will receive TCP ADSs.

 

Description of American Depositary Receipts in Respect of Preferred Shares

 

The following is a summary of the material provisions of the deposit agreement among TCP, the depositary, and the registered holders and beneficial owners from time to time of ADSs, pursuant to which the ADSs representing preferred shares are to be issued. This summary is subject to and qualified in its entirety by reference to the deposit agreement, including the form of ADRs attached thereto. The deposit agreement is an exhibit to this registration statement of which this prospectus is a part. Copies of the deposit agreement are available for inspection at the Corporate Trust Office of the depositary, currently located at 101 Barclay Street, New York, NY 10286, and at the office of the custodian, Banco Itau S.A., currently located at Av. Engenheiro Armando de Arruda Pereira 707—9° andar—Torre Eldoro Villela—Jabaquara—CEP 04344-902, São Paulo, Brazil, Attention: Superintendência de Serviços para o Mercado de Capitais. The depositary’s principal executive office is located at One Wall Street, New York, NY 10286.

 

American Depositary Receipts

 

ADRs evidencing ADSs are issuable under the deposit agreement. Each ADR is in registered form and evidences a specified number of ADS, each ADS representing 1 (one) preferred share, deposited with the custodian and registered in the name of the depositary or its nominee. We refer to those preferred shares, together with any additional preferred shares at any time deposited or deemed deposited under the deposit agreement and any and all other securities, cash and other property received by the depositary or the custodian in respect of those preferred shares and at such time held under the deposit agreement as the “deposited securities”. Only persons in whose names ADRs are registered on the books of the depositary are treated by the depositary as the owners of the ADRs.

 

Deposit, Transfer and Withdrawal

 

The bylaws of TCP provide that ownership of capital generally is evidenced only by a record of ownership maintained by TCP or an accredited intermediary, such as a bank, acting as a registrar for the shares. Currently, this function is performed by Banco ABN AMRO Real S.A. as registrar. Accordingly, all references to the deposit and delivery of the preferred shares refer only to book-entry transfers of the preferred shares in Brazil. All references to the deposit, surrender and delivery of the ADSs or the ADRs refer not only to the physical transfer of any certificates evidencing those ADSs but also to any book-entry transfers.

 

The preferred shares represented by ADSs were deposited pursuant to the deposit agreement by book-entry transfer to an account of the custodian and registered in the name of the custodian. The depositary is the holder of record on the books of the custodian of all those preferred shares.

 

The depositary has agreed, subject to the terms and conditions of the deposit agreement, that upon delivery (including by book-entry credit) to the custodian of the preferred shares (or evidence of rights to receive preferred shares) pursuant to appropriate instruments of transfer in a form satisfactory to the custodian and upon payment of the fees, charges and taxes provided in the deposit agreement, the depositary will execute and deliver at its Corporate Trust Office to, or upon the written order of, the person or persons named in the notice of the custodian delivered to the depositary or requested by the person depositing those preferred shares with the depositary, an ADR or ADRs registered in the name or names of such person or persons and evidencing any authorized number of ADSs requested by such person or persons.

 

Upon surrender at the Corporate Trust Office of the depositary of an ADR for the purpose of withdrawal of the deposited securities represented by the ADSs evidenced by that ADR and upon payment of the fees of the

 

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depositary, governmental charges and taxes provided in the deposit agreement, and subject to the terms and conditions of the deposit agreement, the bylaws of TCP, the deposited securities and applicable law, the owner of that ADR will be entitled to book-entry credit with the registrar together with physical delivery, to the owner or upon the owner’s order, as permitted by applicable law, of the amount of deposited securities at the time represented by the ADSs evidenced by that ADR. Any forwarding of share certificates, other securities, property, cash and other documents of title to the owner will be at the risk and expense of the owner.

 

Subject to the terms and conditions of the deposit agreement and any limitations that may be established by the depositary and unless requested by TCP to cease doing so, the depositary may execute and deliver ADRs before receipt of preferred shares (which we refer to as a “pre-release”), may deliver those preferred shares upon receipt and cancellation of ADRs that have been pre-released, whether or not the cancellation is before the termination of that pre-release or the depositary knows that the ADR has been pre-released, and may receive ADRs in lieu of preferred shares in satisfaction of a pre-release.

 

Each pre-release must be:

 

    preceded or accompanied by a written representation and agreement from the person to whom the ADRs are to be delivered that the pre-release or its customer (1) owns the preferred shares or ADRs to be remitted, (2) assigns all beneficial right, title and interest in those preferred shares or ADRs to the depositary for the benefit of the owners and (3) agrees to hold those preferred shares or ADRs for the account of the depositary until their delivery upon the depositary’s request;

 

    at all times fully collateralized with cash or U.S. government securities;

 

    terminable by the depositary on not more than five business days’ notice; and

 

    subject to such further indemnities and credit regulations as the depositary deems appropriate.

 

The depositary will set limits on pre-release transactions to be entered into hereunder with any particular person on a case by case basis as the depositary deems appropriate. The collateral referred to in the second bullet point above will be held by the depositary for the benefit of the owner as security for the performance of the person to whom ADRs are to be delivered of its obligations to the depositary in connection with a pre-release transaction, including that person’s obligation to deliver preferred shares or ADRs upon termination of a pre-release transaction.

 

The depositary will also limit the number of ADRs involved in pre-release transactions so that preferred shares not deposited but represented by ADSs outstanding at any time as a result of pre-releases will not exceed 30% of the ADSs outstanding (without giving effect to ADSs evidenced by ADRs outstanding as a result of the pre-release), but the depositary reserves the right to disregard that limit from time to time as it deems appropriate and may, with the prior written consent of TCP, change that limit for purposes of general application. The depositary may retain for its own account any compensation received by it in connection with the foregoing. Neither TCP nor the custodian will incur any liability to owners of ADRs as a result of these transactions.

 

Dividends, Other Distributions and Rights

 

The depositary is required to convert into U.S. dollars, as promptly as practicable and, in any event, within one business day of receipt, all cash dividends or other distributions, net proceeds from the sale of securities, property or rights denominated in any currency other than U.S. dollars that it receives in respect of the deposited securities if permitted under applicable laws and the depositary determines that the conversion into U.S. dollars and transfer to the United States can be effected on a reasonable basis. If at the time of conversion, the resulting U.S. dollars can, pursuant to applicable law, be transferred out of Brazil for distribution, the depositary will as promptly as practicable distribute the amount received to the owner entitled thereto in proportion to the number

 

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of ADSs evidenced by that owner’s ADRs without regard to any distinctions among owners on account of exchange restrictions or otherwise. The amount distributed will be reduced by any amounts to be withheld by TCP, the depositary or the custodian, including amounts on account of any applicable taxes and certain other expenses.

 

If conversion, transfer or distribution can be effected only with the approval or license of any government or agency thereof, the depositary will file as promptly as practicable an application for approval or license. However, the depositary will be entitled to rely upon Brazilian counsel in such matters, which counsel will be instructed to act as promptly as possible. If, pursuant to applicable law, any foreign currency received by the depositary or the custodian cannot be converted to U.S. dollars, or if any approval or license of any government or agency thereof that is required for the conversion is denied or, in the opinion of the depositary, cannot be promptly obtained at a reasonable cost, the depositary will, (1) as to the portion of the foreign currency that is convertible into U.S. dollars, make the conversion and, if permitted by applicable law, transfer the U.S. dollars to the United States and distribute them to the owners entitled thereto or, to the extent that the transfer is not permitted, hold such U.S. dollars for the benefit of the owners entitled thereto, uninvested and without liability for interest thereon and (2) as to the nonconvertible balance, if any, if requested in writing by an owner, distribute or cause the custodian to distribute the foreign currency (or an appropriate document evidencing the right to receive the foreign currency) received by the depositary or the custodian to that owner, and the depositary will hold or will cause the custodian to hold any amounts of nonconvertible foreign currency not distributed uninvested and without liability for the interest thereon for the respective accounts of the owners entitled to receive those amounts.

 

If TCP declares a dividend in, or free distribution of, additional preferred shares with respect to the preferred shares represented by the ADSs, the depositary may, or will if TCP so requests, distribute as promptly as practicable to the owners of outstanding ADRs entitled thereto, in proportion to the number of ADSs evidenced by their ADRs, additional ADRs evidencing an aggregate number of ADSs that represents the number of preferred shares received as that dividend or free distribution, subject to the terms and conditions of the deposit agreement including the withholding of any tax or other governmental charge and the payment of fees of the depositary.

 

The depositary may withhold any such distribution of ADRs if it has not received satisfactory assurances from TCP that the distribution does not require registration under the Securities Act or is exempt from registration under the provisions of the Securities Act. In lieu of delivering ADRs for fractional ADSs in the event of any dividend or free distribution, the depositary will sell the amount of preferred shares represented by the aggregate of those fractions and distribute the net proceeds in accordance with the deposit agreement. If additional ADRs are not so distributed, each ADSs will thereafter also represent the additional preferred shares distributed upon the deposited securities represented thereby.

 

If TCP offers, or causes to be offered, to the holders of preferred shares any rights to subscribe for additional preferred shares or any rights of any other nature, the depositary, after consultation with TCP, will have discretion as to the procedure to be followed in making such rights available to owners or in disposing of those rights for the benefit of the owners and making the net proceeds available to the owners. If, by the terms of that rights offering or for any other reason, it would be unlawful for the depositary to either make the rights available to any owners or dispose of the rights and make the net proceeds available to those owners, then the depositary will allow the rights to lapse. If at the time of the offering of any rights, the depositary determines in its discretion that it is lawful and feasible to make the rights available to all or certain owners, the depositary may, and at the request of TCP will, distribute to any owners to whom it determines the distribution to be lawful and feasible, in proportion to the number of ADSs held by those owners, warrants or other instruments therefor in such form as it deems appropriate.

 

If the depositary determines that it is not lawful or feasible to make such rights available to all or certain owners, it may, and at the request of TCP, will use its best efforts that are reasonable under the circumstances to

 

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sell the rights, warrants or other instruments in proportion to the number of ADSs held by the owners to whom it has determined it may not lawfully or feasibly make such rights available, and allocate the net proceeds of those sales for the account of those owners otherwise entitled to such rights, warrants or other instruments or an averaged or other practical basis without regard to any distinctions among the owners because of exchange restrictions or the date of delivery of any ADR or ADRs or otherwise. The depositary will not be responsible for any failure to determine that it may be lawful or feasible to make those rights available to owners in general or any owner or owners in particular.

 

In circumstances in which rights would not otherwise be distributed, if an owner requests the distribution of warrants or other instruments in order to exercise the rights allocable to the ADSs of that owner, the depositary will promptly make such rights available to that owner upon written notice from TCP to the depositary that (1) TCP has elected in its sole discretion to permit the rights to be exercised and (2) the owner has executed such documents as TCP has determined in its sole discretion are reasonably required under applicable law. Upon instruction pursuant to those warrants or other instruments to the depositary from that owner to exercise such rights, upon payment by that owner to the depositary for the account of the owner of an amount equal to the purchase price of the preferred shares to be received in exercise of the rights, and upon payment of the fees of the depositary as set forth in those warrants or other instruments, the depositary will, on behalf of that owner, exercise the rights and purchase the preferred shares, and TCP will cause the preferred shares so purchased to be delivered to the depositary on behalf of that owner. As agent for that owner, the depositary will cause the preferred shares so purchased to be deposited, and will execute and deliver ADRs to that owner pursuant to the deposit agreement. Such a disposal of rights may reduce the owners’ proportionate equity interest in TCP.

 

The depositary will not offer rights to owners having an address of record in the United States unless a registration statement under the Securities Act is in effect with respect to those rights and the securities to which the rights relate or unless the offering and sale thereof to those owners are exempt from registration under the Securities Act. However, TCP will have no obligation to file a registration statement under the Securities Act to make available to owners any right to subscribe for or to purchase any of the securities.

 

Whenever the depositary receives any distribution other than cash, preferred shares or rights in respect of the deposited securities, the depositary will, as promptly as practicable, cause the securities or property received by it to be distributed to the owners entitled thereto, after deduction or upon payment of any fees and expenses of the depositary or any taxes or other governmental charges, in proportion to their holdings, respectively, in any manner that the depositary may deem equitable and practicable for accomplishing such distribution. However, if in the opinion of the depositary that distribution cannot be made proportionately among the owners entitled thereto, or if for any other reason (including, but not limited to, any requirement that TCP or the depositary withhold an amount on account of taxes or other governmental charges or that the securities must be registered under the Securities Act, in order to be distributed to owners) the depositary deems the distribution not to be feasible, the depositary may, after consultation with TCP, adopt such method as it may deem equitable and practicable for the purpose of effecting the distribution, including, but not limited to, the public or private sale of the securities or property received, or any part thereof, and the net proceeds of any such sale (net of the fees and expenses of the depositary) will be distributed by the depositary to the owners entitled thereto as in the case of a distribution received in cash.

 

In connection with any distribution to owners, TCP will remit to the appropriate governmental authority or agency all amounts (if any) required to be withheld by TCP and owing to that authority or agency by TCP; and the depositary and the custodian will remit to the appropriate governmental authority or agency all amounts (if any) required to be withheld and owing to such authority or agency by the depositary or custodian. If the depositary determines that any distribution of property other than cash (including preferred shares and rights to subscribe therefor) is subject to any tax or governmental charge that the depositary is obligated to withhold, the depositary may, by public or private sale, dispose of all or a portion of such property in the amounts and in

 

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manner as the depositary deems necessary and practicable to pay those taxes or governmental charges, and the depositary will distribute the net proceeds of any such sale or the balance of any such property after deduction of such taxes or governmental charges to the owners entitled thereto in proportion to the number of ADSs held by them, respectively.

 

Upon any change in nominal or par value, or split-up, consolidation or any other reclassification of deposited securities, or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting TCP or to which it is a party, any preferred shares or other securities that will be received by the depositary or the custodian in exchange for, in conversion of, or in respect of deposited securities will be treated as new deposited securities under the deposit agreement, and ADSs will thenceforth represent, in addition to the existing deposited securities, the right to receive the new deposited securities so received in exchange or conversion, unless additional ADRs are delivered pursuant to the following sentence. In any such case the depositary may, and will if TCP so requests, execute and deliver additional ADRs as in the case of a distribution in preferred shares, or call for the surrender of outstanding ADRs to be exchanged for new ADRs specifically describing the new deposited securities.

 

Record Dates

 

Whenever any cash dividend or other cash distribution becomes payable, or whenever any distribution other than cash is made, or whenever rights are issued with respect to the deposited securities, or whenever for any reason the depositary causes a change in the number of preferred shares that are represented by each ADSs or whenever the depositary receives notice of any meeting of holders of preferred shares or other deposited securities, or whenever the depositary shall find it necessary or convenient, the depositary will fix a record date, which date shall, to the extent practicable, be either the same date as the record date fixed by TCP or, if different from the record date fixed by TCP, fixed after consultation with TCP, (1) for the determination of the owners who will be entitled to receive that dividend, distribution of rights or the net proceeds of the sale thereof or entitled to give instructions for the exercise of voting rights at any such meeting, or (2) on or after which such ADSs will represent the changed number of preferred shares, all subject to the provisions of the deposit agreement.

 

Voting of the Deposited Securities

 

Preferred shares do not entitle their holders to vote on any matter presented to a vote of shareholders of TCP except as set forth under “—Description of TCP Capital Stock—Voting Rights—Preferred Shareholders,” which subsection is hereby incorporated by reference herein. Under those circumstances and if, in the future, the terms of the preferred shares are revised or amended to provide for voting rights, or if the preferred shares obtain voting rights pursuant to the Brazilian corporation law or any change in any other laws, rules, or regulations applicable to those shares or through any change in interpretation of those laws, the following will apply.

 

As soon as practicable after receipt of notice of any meeting or solicitation of consents or proxies of holders of preferred shares or other deposited securities, if requested in writing by TCP, the depositary will mail to all owners a notice, the form of which notice will be in the sole discretion of the depositary, containing:

 

    the information included in the notice of meeting received by the depositary from TCP (or a summary in English of the notice of the meeting);

 

    a statement that the owners as of the close of business on a specified record date will be entitled, subject to any applicable provision of Brazilian law, the bylaws and the provisions of the deposited securities, to instruct the depositary as to the exercise of the voting rights, if any, pertaining to the preferred shares or other deposited securities represented by their respective ADSs; and

 

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    a statement as to the manner in which such instructions may be given, including an express indication that instructions may be given or deemed given in accordance with the last sentence of the next paragraph, if no instruction is received, to the depositary to give a discretionary proxy to a person designated by TCP.

 

Upon the written request of an owner on the record date received on or before the date established by the depositary for that purpose, the depositary will endeavor, insofar as practicable, to vote or cause to be voted the amount of preferred shares or other deposited securities represented by the ADSs evidenced by such ADRs in accordance with the instructions set forth in such request. The depositary may not itself exercise any voting discretion over any preferred shares. If the depositary does not receive instructions from an owner on or before the date established by the depositary for that purpose, the depositary will deem that owner to have instructed the depositary to give a discretionary proxy to a person designated by TCP to vote the underlying preferred shares, provided that no such discretionary proxy will be given with respect to any matter as to which TCP informs the depositary that (1) TCP does not wish such proxy given, (2) substantial opposition exists or (3) the rights of holders of preferred shares will be materially and adversely affected. Under Brazilian law, the depositary may vote the preferred shares or other deposited securities represented by ADSs and evidenced by ADRs in accordance with the instructions of the owners even if those instructions differ among those owners.

 

Owners are not entitled to attend meetings of shareholders. An owner wishing to do so must cancel its ADRs and obtain delivery of the underlying shares, registered in the name of that owner, before the record date for attendance at the meeting.

 

Reports and Other Communications

 

The depositary will make available for inspection by owners at its Corporate Trust Office any reports and communications, including any proxy soliciting materials, received from TCP, which are both (1) received by the depositary as the holder of the deposited securities and (2) made generally available to holders of those deposited securities by TCP. The depositary will also send to owners copies of those reports if and when furnished by TCP pursuant to the deposit agreement. Any reports and communications furnished to the depositary by TCP will be furnished in English to the extent that those materials are required to be translated into English pursuant to any regulations of the U.S. Securities and Exchange Commission, or the SEC.

 

Amendment and Termination of the Deposit Agreement

 

The form of the ADRs and any provision of the deposit agreement may at any time and from time to time be amended by agreement between TCP and the depositary in any respect that they may deem necessary or desirable. Any amendment that imposes or increases any fees or charges (other than taxes and other governmental charges, registration fees, cable, telex or facsimile transmission costs, delivery costs or other such expenses), or that otherwise prejudices any substantial existing rights of owners, will not take effect as to the outstanding ADRs until the expiration of 30 days after notice of that amendment has been given to the owners of outstanding ADRs. Every owner and beneficial owner at the time that amendment becomes effective will be deemed, by continuing to hold that ADR, to consent and agree to the amendment and to be bound by the deposit agreement as amended thereby. In no event will any amendment impair the right of any owner to surrender its ADR and receive the preferred shares and other property represented thereby, except to comply with mandatory provisions of applicable law.

 

The depositary will at any time at the direction of TCP terminate the deposit agreement by mailing a notice of termination to the owners then outstanding at least 30 days before the date fixed in the notice for termination. The depositary may likewise terminate the deposit agreement by mailing a notice of termination to TCP and the owners, if at any time after 60 days have expired after the depositary has delivered written notice of its election to resign to TCP, a successor depositary has not been appointed and accepted its appointment in accordance with the terms of the deposit agreement. If any ADRs remain outstanding after the date of termination, the depositary

 

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thereafter will discontinue the registration of transfer of ADRs, will suspend the distribution of dividends to the holders thereof and will not give any further notices or perform any further acts under the deposit agreement, except for (1) the collection of dividends and other distributions pertaining to the deposited securities, (2) the sale of rights and other property and (3) the delivery of preferred shares, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for surrendered ADRs (after deducting, in each case, the fees of the depositary for the surrender of an ADR and other expenses set forth in the deposit agreement and any applicable taxes or governmental charges).

 

At any time after the expiration of one year from the date of termination, the depositary may sell the deposited securities then held thereunder and hold uninvested the net proceeds of the sale, together with any other cash, unsegregated and without liability for interest, for the pro rata benefit of the owners that have not theretofore surrendered their ADRs. Those owners will then become general creditors of the depositary with respect to those net proceeds. After making such a sale, the depositary will be discharged from all obligations under the deposit agreement, except to account for net proceeds and other cash (after deducting, in each case, the fee of the depositary and other expenses set forth in the deposit agreement for the surrender of an ADR and any applicable taxes or other governmental charges) and certain indemnification obligations. Upon termination of the deposit agreement, TCP will also be discharged from all obligations thereunder, except for certain obligations to the depositary.

 

Charges of Depositary

 

The depositary will charge (to the extent permitted by applicable law) any party depositing or withdrawing preferred shares or any party surrendering ADRs or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by TCP or an exchange of stock regarding the ADRs or deposited securities or a distribution of ADRs pursuant to the deposit agreement), whichever is applicable:

 

    taxes and other governmental charges;

 

    any registration fees that may from time to time be in effect for the registration of transfers of preferred shares generally on the register of TCP or the registrar and applicable to transfers of preferred shares to the name of the depositary or its nominee or the custodian or its nominee on the making of deposits or withdrawals under the deposit agreement;

 

    cable, telex and facsimile transmission expenses expressly provided in the deposit agreement to be at the expense of owners or persons depositing preferred shares;

 

    expenses incurred by the depositary in the conversion of foreign currency pursuant to the deposit agreement;

 

    a fee not in excess of $5.00 per 100 ADSs (or portion thereof) for the execution and delivery of ADRs pursuant to the deposit agreement and the surrender of ADRs pursuant to the deposit agreement;

 

    a fee for the distribution of proceeds of sales of securities or rights pursuant to the deposit agreement.

 

The fee described in the last bullet point may be deducted from such proceeds and will be in an amount equal to the lesser of (1) the fee for issuance of ADSs referred to above that would have been charged as a result of the deposit of those securities (for purposes of this sentence treating all such securities as if they were preferred shares) or preferred shares received in exercise of rights distributed to them pursuant to the deposit agreement, but which securities or rights are instead sold by the depositary and the net proceeds distributed and (2) the amount of those proceeds.

 

The depositary, pursuant to the deposit agreement, may own and deal in any class of securities of TCP and its affiliates and in ADRs.

 

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Liability of Owners or Beneficial Owners for Taxes or Other Charges

 

If any tax or other governmental charge becomes payable by the custodian, the depositary or its nominee with respect to any ADR or any deposited securities represented by the ADSs evidenced by that ADR, that tax or other governmental charge will be payable by the owner or beneficial owner of ADR. The depositary may refuse to effect registration of transfer of the ADR or any split-up or combination thereof or any withdrawal of deposited securities underlying such ADR until that payment is made and may withhold any dividends or other distributions or may sell for the account of that owner or beneficial owner any part or all of the deposited securities underlying that ADR and may apply such dividends or distributions or the proceeds of any such sale in payment of any such tax or other governmental charge (and any taxes or expenses arising out of such sale) and the owner or beneficial owner of such ADR will remain liable for any deficiency.

 

Limitation on Execution, Delivery, Transfer and Surrender of ADRs

 

The ADRs are transferable on the books of the depositary, provided that the depositary may close the transfer books after consultation with TCP to the extent practicable at any time or from time to time when deemed expedient by it in connection with the performance of its duties or at the request of TCP.

 

As a condition precedent to the execution and delivery, registration of transfer, split-up, combination or surrender of any ADR, the delivery of any distribution thereon or the withdrawal of deposited securities, the depositary, TCP, the custodian or the registrar may require payment from the depositor of preferred shares or the presenter of the ADR of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax, charge or fee with respect to preferred shares being deposited or withdrawn) and payment of any other applicable fees provided for in the deposit agreement. The depositary may refuse to deliver ADRs, register the transfer of any ADR or make any distribution of, or related to, the preferred shares until it has received such proof of citizenship, residence, exchange control approval, compliance with all applicable laws or regulations or other information as it may reasonably deem necessary or proper. The delivery, transfer, registration of transfer, split-up, combination and surrender of ADRs generally may be suspended or refused during any period when the transfer books of the depositary, TCP or the registrar are closed or if any such action is deemed necessary or advisable by the depositary or TCP, at any time or from time to time.

 

The depositary will keep books, at its Corporate Trust Office, for the registration and transfer of ADRs, which at all reasonable times will be open for inspection by the owners, provided that inspection will not be for the purpose of communicating with owners in the interest of a business or object other than the business of TCP or a matter related to the deposit agreement or the ADRs.

 

The depositary may upon notice to TCP appoint one or more co-transfer agents reasonably acceptable to TCP for the purpose of effecting transfers, combinations and split-ups of ADRs at designated transfer offices on behalf of the depositary. In carrying out its functions, a co-transfer agent may require evidence of authority and compliance with applicable laws and other requirements by owners or persons entitled to ADRs and will be entitled to protection and indemnity to the same extent as the depositary.

 

Limitation of Liability

 

Neither the depositary nor TCP nor any of their respective directors, employees, agents or affiliates will be liable to any owners or beneficial owners of ADRs if by reason of any provision of any present or future law or regulation of the United States, Brazil or any other country, or of any other governmental or regulatory authority or stock exchange, or by reason of any provision, present or future, of the bylaws, or by reason of any act of God or war or other circumstance beyond its control, the depositary or TCP or any of their respective directors, employees, agents, or affiliates is prevented, delayed or forbidden from, or is subject to any civil or criminal

 

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penalty on account of, doing or performing any act or thing which by terms of the deposit agreement it is provided will be done or performed; nor will the depositary or TCP incur any liability to any owner or beneficial owner of any ADR by reason of any nonperformance or delay, caused as aforesaid, in the performance of any act or thing which by the terms of the deposit agreement it is provided will or may be done or performed, or by reason of any exercise of, or failure to exercise, any discretion provided for under the deposit agreement. Where, by the terms of a distribution or an offering pursuant to the deposit agreement, or for any other reason, the depositary is prevented or prohibited from making such distribution or offering available to owners, and the depositary is prevented or prohibited from making such distribution or offering on behalf of such owners and making the net proceeds available to such owners, then the depositary, after consultation with TCP, will not make that distribution or offering, and will allow the rights, if applicable, to lapse.

 

TCP and the depositary assume no obligation, nor will they be subject to any liability, under the deposit agreement to owners or beneficial owners of ADRs, except that they agree to perform their respective obligations specifically set forth under the deposit agreement without negligence or bad faith.

 

Governing Law

 

The deposit agreement is governed by the laws of the State of New York.

 

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Where You Can Find More Information

 

We have filed with the SEC a registration statement on Form F-4 to register under the Securities Act the common shares and preferred shares of TCP to be received in the merger by holders of common shares and preferred shares, respectively, of TCO, TLE, TSD and Celular CRT residing in the United States, and the ADSs of TCP to be received by holders of TCO, TLE and TSD ADSs. This prospectus, which is part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information with respect to us and our common shares, preferred shares and ADSs, we refer you to the registration statement and the exhibits and schedules filed as a part of the registration statement.

 

TCP, TCO, TLE and TSD file annual reports on Form 20-F and furnish reports on Form 6-K to the SEC under the rules and regulations that apply to foreign private issuers. As foreign private issuers, TCP, TCO, TLE and TSD and their respective shareholders are exempt from some of the reporting requirements of the Exchange Act, including the proxy solicitation rules, the rules regarding the furnishing of annual reports to stockholders and Section 16 short-swing profit reporting for their officers, directors and holders of more than 10% of their shares. You may read and copy any materials filed with the SEC at its Public Reference Room at 100 F Street, N.E., Washington, D.C., 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at http://www.sec.gov that contains reports and other information regarding issuers that file electronically with the SEC. Celular CRT is not subject to the reporting requirements of the Exchange Act.

 

TCP, TCO, TLE, TSD and Celular CRT maintain an internet site at www.vivo.com.br. However, information contained on that internet site is not incorporated by reference in this prospectus. You may also read reports and other information about TCP, TCO, TLE and TSD at the offices of the New York Stock Exchange located at 20 Broad Street, New York, New York 10005. Celular CRT does not have securities listed on the New York Stock Exchange.

 

TCP, TCO, TLE and TSD provide annual reports in English to The Bank of New York, as depositary under the deposit agreements relating to their respective ADR programs. TCP, TCO, TLE and TSD also furnish to the depositary in English all notices of meetings of holders of preferred shares and other reports and communications that are made generally available to holders of preferred shares. Upon written request of TCP, TCO, TLE or TSD, as the case may be, the depositary will mail to all holders of ADSs a notice containing the information (or a summary of the information) contained in any notice of a shareholders’ meeting received by the depositary and all other reports and communications received by the depositary. So long as the applicable ADRs are listed on the New York Stock Exchange, the depositary will mail to all registered holders of ADSs at the company’s expense any notices, reports and other communications that are made generally available to the holders of the applicable company’s preferred shares or, at the company’s request, make these notices, reports and other communications available to all registered holders of ADSs on a basis similar to that for holders of preferred shares or on such other basis as the company may advise the depositary may be required by any applicable law, regulation or stock exchange requirement. Celular CRT does not have an ADS program.

 

Incorporation by Reference

 

The SEC allows us to “incorporate by reference” information into this prospectus, which means that we can disclose important information to you by referring you to another document that we, TCO, TLE or TSD have filed previously with the SEC. The information incorporated by reference is considered to be part of this prospectus, and certain later information that we, TCO, TLE or TSD file with the SEC will automatically update and supersede this information. We incorporate by reference the following documents:

 

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    TCP’s Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004, filed with the SEC on April 15, 2005 (File No. 333-09470), including the financial statements and the audit report thereon included in that Annual Report;

 

    TCP’s Report on Form 6-K filed on April 1, 2005 (File No. 333-09470); TCP’s Report on Form 6-K filed on May 12, 2005 (File No. 333-09470); TCP’s Report on Form 6-K filed on June 30, 2005 (File No. 333-09470); TCP’s Report on Form 6-K filed on July 1, 2005 (File No. 333-09470); and TCP’s Report on Form 6-K filed on August 17, 2005 (File No. 333-09470);

 

    TCO’s Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004, filed with the SEC on April 15, 2005 (File No. 001-14489), including the financial statements and the audit report thereon included in that Annual Report;

 

    TCO’s Report on Form 6-K filed on March 30, 2005 (File No. 001-14489); TCO’s Report on Form 6-K filed on April 5, 2005 (File No. 001-14489); TCO’s Report on Form 6-K filed on May 11, 2005 (File No. 001-14489); TCO’s Report on Form 6-K filed on May 12, 2005 (File No. 001-14489); TCO’s Report on Form 6-K filed on June 30, 2005 (File No. 001-14489); TCO’s Report on Form 6-K filed on August 2, 2005 (File No. 001-14489); and TCO’s Report on Form 6-K filed on September 8, 2005 (File No. 001-14489);

 

    TLE’s Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004, filed with the SEC on April 15, 2005 (File No. 001-14481), including the financial statements and the audit report thereon included in that Annual Report;

 

    TLE’s Report on Form 6-K filed on February 1, 2005 (File No. 001-14481); TLE’s Report on Form 6-K filed on March 29, 2005 (File No. 001-14481); TLE’s Report on Form 6-K filed on June 30, 2005 (File No. 001-14481); TLE’s Report on Form 6-K filed on July 5, 2005 (File No. 001-14481); TLE’s Report on Form 6-K filed on August 2, 2005 (File No. 001-14481); TLE’s Report on Form 6-K filed on August 26, 2005 (File No. 001-14481); and TLE’s Report on Form 6-K filed on January 18, 2006 (File No. 001-14481);

 

    TSD’s Annual Report on Form 20-F for the Fiscal Year Ended December 31, 2004, filed with the SEC on April 15, 2005 (File No. 001-14485), including the financial statements and the audit report thereon included in that Annual Report;

 

    TSD’s Report on Form 6-K filed on March 31, 2005 (File No. 001-14485); TSD’s Report on Form 6-K filed on May 11, 2005 (File No. 001-14485); TSD’s Report on Form 6-K filed on May 12, 2005 (File No. 001-14485); TSD’s Report on Form 6-K filed on May 31, 2005 (File No. 001-14485); and TSD’s Report on Form 6-K filed on June 30, 2005 (File No. 001-14485);

 

    the description of preferred shares and the description of ADRs evidencing ADSs set forth under the caption “Item 14. Description of Securities to Be Registered” in TCP’s registration statement on Form 20-F (File No. 333-09470) filed with the SEC on September 18, 1998, as amended by TCP’s Form 20-F/A filed on November 2, 1998, except to the extent superseded by “Part Six: Shareholder Rights—Description of TCP Capital Stock” and “—Description of American Depositary Shares” of this prospectus;

 

    the Protocol of Merger of Shares and Merger of Companies and Instrument of Justification among Telesp Celular Participações S.A., Tele Centro Oeste Celular Participações S.A., Tele Sudeste Celular Participações S.A., Tele Leste Celular Participações S.A. and Celular CRT Participações S.A., dated December 4, 2005, incorporated by reference to the Form 6-K of Telesp Celular Participações S.A. filed on December 6, 2005; and

 

    any future filings on Form 20-F by TCP, TCO, TLE or TSD made with the SEC under the Exchange Act after the date of this prospectus and prior to the completion of the merger and any future filings on Form 6-K by TCP, TCO, TLE or TSD during such period that are identified in such forms as being incorporated by reference into this prospectus.

 

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We will provide to each person, including any beneficial owner, to whom a prospectus is delivered, upon written or oral request at no cost, a copy of any and all of the information that has been incorporated by reference in this prospectus and that has not been delivered with this prospectus by contacting us, TCO, TLE, TSD or Celular CRT at the following street address, telephone number or e-mail address:

 

Av. Roque Petroni Júnior, 1464—Morumbi

4º Andar—Lado “A”

04707-000—São Paulo, SP

Brazil

Attention: Charles E. Allen

Telephone: 011-55-11-5105-2276

Facsimile: 011-55-11-5105-2247

email: vsm@vivo.com.br

 

You may also contact the information agent for the merger:

 

MacKenzie Partners, Inc.

105 Madison Avenue

New York, New York 10016

proxy@mackenziepartners.com

Call Collect: (212) 929-5500

Toll-Free: (800) 322-2885

 

If you are a holder of ADSs, you may also contact:

 

The Bank of New York

101 Barclay Street

New York, NY 10286

Telephone: 1-888-BNY-ADRS

 

Enforceability of Civil Liabilities Under U.S. Securities Laws

 

We have been advised by our Brazilian counsel, Machado, Meyer, Sendacz e Opice Advogados, that a judgment of a U.S. court for civil liabilities predicated upon the federal securities laws of the United States, subject to certain requirements described below, may be enforced in Brazil. A judgment against TCP, TCO, TLE, TSD or Celular CRT, their respective directors and certain of their respective officers and advisors or any such person would be enforceable in Brazil without reconsideration of the merits upon confirmation of that judgment by the Brazilian Superior Court of Justice. That confirmation generally will occur if the foreign judgment:

 

    fulfills all formalities required for its enforceability under the laws of the country where the foreign judgment is granted;

 

    is issued by a competent court after proper service of process is made in accordance with Brazilian legislation;

 

    is not subject to appeal;

 

    is authenticated by a Brazilian consular office in the country where the foreign judgment is issued and is accompanied by a sworn translation into Portuguese; and

 

    is not contrary to Brazilian national sovereignty or public policy or “good morals.”

 

However, you cannot be certain that this confirmation will be obtained or that it will be obtained in a timely manner. In addition, you cannot be certain that a Brazilian court would enforce a monetary judgment for violations of U.S. securities laws.

 

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We have been further advised by Machado, Meyer, Sendacz e Opice Advogados that original actions predicated on the federal securities laws of the United States may be brought in Brazilian courts and that Brazilian courts may enforce civil liabilities in such actions against each of TCP, TCO, TLE, TSD and Celular CRT, its directors and certain of its officers and advisors.

 

A plaintiff, whether Brazilian or non-Brazilian, who resides outside Brazil during the course of litigation in Brazil must provide a bond to guarantee court costs and legal fees if the plaintiff owns no real property in Brazil that may ensure such payment. This bond must have a value sufficient to satisfy the payment of court fees and defendant’s attorney’s fees, as determined by the Brazilian judge, except in the case of the enforcement of foreign judgments that have been duly confirmed by the Brazilian Superior Court of Justice.

 

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PART EIGHT—LEGAL AND REGULATORY MATTERS

 

General

 

We are not aware of any of the following:

 

    any governmental license or regulatory permit that appears to be material to the businesses of TCP, TCO, TLE, TSD or Celular CRT that might be adversely affected by the merger;

 

    except as described below, any approval or other action by any government or governmental administrative or regulatory authority or agency, domestic or foreign, that would be required for the completion of the merger; or

 

    any consent, waiver or other approval that would be required as a result of or in connection with the merger, including but not limited to, any consents or other approvals under any licenses, concessions, permits and agreements to which any of TCP, TCO, TLE, TSD or Celular CRT is a party that have not been obtained.

 

The approval of the merger by the CVM is not a condition to the merger. See “Part Three: Risk Factors— Risks Relating to the Brazilian Telecommunications Industry and Our Business—The CVM, the Brazilian securities regulator, may suspend for up to 15 days the shareholders’ meetings scheduled to approve the merger.”

 

The approval of the NYSE of the listing of the ADSs of TCP to be delivered in connection with the merger, for which we will apply, must be obtained for such shares to be traded by the holders thereof. However, this approval is not a condition to the completion of the merger.

 

Should any such approval or other action be required, we currently contemplate that such approval will be sought or such action will be taken, as the case may be.

 

We are unable to predict whether it may be necessary to delay the completion of the merger pending the outcome of any approval or other action. We cannot assure you that any approval or other action, if needed, would be obtained or would be obtained without substantial conditions. In addition, we cannot assure you that if the approvals were not obtained or other actions were not taken, adverse consequences might not result to the businesses of the operating companies.

 

Legal Matters

 

We have received an opinion from Machado, Meyer, Sendacz e Opice Advogados, São Paulo, Brazil, with respect to the validity of the common shares and preferred shares of TCP to be issued in connection with the merger. We were advised as to certain matters of U.S. law by Simpson Thacher & Bartlett LLP, New York, New York.

 

Experts

 

The financial statements of TCP as of December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, included in this prospectus have been audited by Deloitte Touche Tohmatsu Auditores Independentes, an independent registered public accounting firm, as stated in their report, which is included and incorporated by reference herein (which report expresses an unqualified opinion and includes explanatory paragraphs related to the difference between accounting practices adopted in Brazil and accounting principles generally accepted in the United States of America, the presentation of the consolidated statements of cash flows and the change in accounting for sales of prepaid cellular minutes under accounting practices adopted in Brazil in 2003), and has been so included and incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

The financial statements of TCO as of December 31, 2004 and 2003, and for the years then ended, included in this prospectus have been audited by Deloitte Touche Tohmatsu Auditores Independentes, an independent registered public accounting firm, as stated in their report, which is included and incorporated by reference herein (which report expresses an unqualified opinion related to the difference between accounting practices adopted in

 

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PART EIGHT—LEGAL AND REGULATORY MATTERS

 

Brazil and accounting principles generally accepted in the United States of America, the presentation of the consolidated statements of cash flows and the change in accounting for sales of prepaid cellular minutes under accounting practices adopted in Brazil in 2003) and includes explanatory paragraphs related to the difference between accounting practices adopted in Brazil and accounting principles generally accepted in the United States of America, the presentation of the consolidated statements of cash flows and the change in basis of presentation from the Constant Currency Method to the Brazilian Corporate Law Method in 2003), and has been so included and incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

The consolidated financial statements of TCO for the year ended December 31, 2002 included in this prospectus have been audited by Ernst & Young Auditores Independentes S.S., independent accountants, as set forth in their report thereon included therein. Such consolidated financial statements are included in this prospectus in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

 

The financial statements of TLE as of December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, included in this prospectus have been audited by Deloitte Touche Tohmatsu Auditores Independentes, an independent registered public accounting firm, as stated in their report, which is included and incorporated by reference herein (which report expresses an unqualified opinion and includes explanatory paragraphs related to the difference between accounting practices adopted in Brazil and accounting principles generally accepted in the United States of America, the presentation of the consolidated statements of cash flows and the change in basis of presentation from the Constant Currency Method to the Brazilian Corporate Law Method in 2003), and has been so included and incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

The financial statements of TSD as of December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, included in this prospectus have been audited by Deloitte Touche Tohmatsu Auditores Independentes, an independent registered public accounting firm, as stated in their report, which is included and incorporated by reference herein (which report expresses an unqualified opinion and includes explanatory paragraphs related to the difference between accounting practices adopted in Brazil and accounting principles generally accepted in the United States of America, the presentation of the consolidated statements of cash flows and the change in basis of presentation from the Constant Currency Method to the Brazilian Corporate Law Method in 2003), and has been so included and incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

The financial statements of Celular CRT as of December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, included in this prospectus have been audited by Deloitte Touche Tohmatsu Auditores Independentes, an independent registered public accounting firm, as stated in their report, which is included and incorporated by reference herein (which report expresses an unqualified opinion and includes explanatory paragraphs related to the difference between accounting practices adopted in Brazil and accounting principles generally accepted in the United States of America and the presentation of the consolidated statements of cash flows), and have been so included and incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

 

Neither the independent auditors of TCP, TCO, TLE, TSD and Celular CRT, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the prospective financial information used to prepare the valuation reports described in “Part Five: The Merger—Appraisal or Dissenters’ Rights—Valuation Reports of Planconsult” and “—Valuation Reports of Goldman Sachs,” nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, this prospective financial information. The independent auditors’ reports included or incorporated by reference in this registration statement relate to the historical financial information of the respective companies, do not extend to the prospective financial information and should not be read to do so.

 

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PART EIGHT—LEGAL AND REGULATORY MATTERS

 

You should rely only on the information incorporated by reference or provided in this prospectus. We have not authorized any person to give any information or to make any representations in connection with the merger other than the information contained or incorporated in this prospectus and, if any person gives other information or makes a representation in connection with the merger, that information or representation must not be relied on as having been authorized by us.

 

This prospectus does not constitute an offer to any person in any jurisdiction in which an offer is unlawful. The offer is not being made to holders of shares in any jurisdiction in which the making or acceptance of the offer would not be in compliance with the laws of that jurisdiction. However, we may, in our sole discretion, take any action we may deem necessary to make the offer in any such jurisdiction and extend the offer to holders of shares in any jurisdiction. In any jurisdiction where the securities, blue sky or other laws require the offer to be made by a licensed broker or dealer, the offer will be deemed to be made on our behalf by one or more registered brokers or dealers licensed under the laws of the relevant jurisdiction.

 

The delivery of this prospectus will not, under any circumstance, create an implication that our affairs have not changed since the date as of which information is furnished or since the date of this prospectus.

 

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PART NINE—FINANCIAL STATEMENTS

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page

Telesp Celular Participações S.A.

    

Unaudited Interim Condensed Consolidated Financial Statements for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-3

Unaudited Interim Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004

   F-4

Unaudited Interim Condensed Consolidated Statements of Loss for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-6

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine-Month Period Ended September 30, 2005

   F-7

Unaudited Interim Condensed Consolidated Statements of Changes in Financial Position for the Nine-Month Periods Ended September 30, 2005 and September 30, 2004

   F-8

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-10

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

   F-11

Tele Centro Oeste Celular Participações S.A.

    

Unaudited Interim Condensed Consolidated Financial Statements for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-46

Unaudited Interim Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004

   F-47

Unaudited Interim Condensed Consolidated Statements of Income for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-49

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine-Month Period Ended September 30, 2005

   F-50

Unaudited Interim Condensed Consolidated Statements of Changes in Financial Position for the Nine-Month Periods Ended September 30, 2005 and September 30, 2004

   F-51

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-52

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

   F-53

Tele Leste Celular Participações S.A.

    

Unaudited Interim Condensed Consolidated Financial Statements for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-80

Unaudited Interim Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004

   F-81

Unaudited Interim Condensed Consolidated Statements of Loss for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-83

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine-Month Period Ended September 30, 2005

   F-84

Unaudited Interim Condensed Consolidated Statements of Changes in Financial Position for the Nine-Month Periods Ended September 30, 2005 and September 30, 2004

   F-85

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-86

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

   F-87

 

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Tele Sudeste Celular Participações S.A.

    

Unaudited Interim Condensed Consolidated Financial Statements for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-112

Unaudited Interim Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004

   F-113

Unaudited Interim Condensed Consolidated Statements of Income for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-115

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine-Month Period Ended September 30, 2005

   F-116

Unaudited Interim Condensed Consolidated Statements of Changes in Financial Position for the Nine-Month Periods Ended September 30, 2005 and September 30, 2004

   F-117

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-118

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

   F-119

Celular CRT Participações S.A.

    

Unaudited Interim Condensed Consolidated Financial Statements for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-144

Unaudited Interim Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004

   F-145

Unaudited Interim Condensed Consolidated Statements of Income for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-147

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine-Month Period Ended September 30, 2005

   F-148

Unaudited Interim Condensed Consolidated Statements of Changes in Financial Position for the Nine-Month Periods Ended September 30, 2005 and September 30, 2004

   F-149

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-150

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

   F-151

Consolidated Financial Statements for the Years Ended December 31, 2004, 2003 and 2002

   F-175

Report of Independent Registered Public Accounting Firm

   F-176

Consolidated Balance Sheets as of December 31, 2004 and 2003

   F-177

Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002

   F-179

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002

   F-180

Consolidated Statements of Changes in Financial Position for the Years Ended December 31, 2004, 2003 and 2002

   F-181

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002

   F-182

Notes to the Consolidated Financial Statements for the Years Ended December 31, 2004, 2003 and 2002

   F-183

 

Definitions:

 

BR CL—Accounting principles in accordance with Brazilian Corporation Law

U.S. GAAP—Accounting principles generally accepted in the United States of America

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

 

INDEX TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

Unaudited Interim Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004.

   F-4 and F-5

Unaudited Interim Condensed Consolidated Statements of Loss for the Nine-Month Periods ended September 30, 2005 and 2004

  

F-6

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine-Month Period Ended September 30, 2005

  

F-7

Unaudited Interim Condensed Consolidated Statements of Changes in Financial Position for the Nine-Month Periods Ended September 30, 2005 and 2004

  

F-8 and F-9

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2005 and 2004

  

F-10

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

  

F-11

 

Definitions:

 

Brazilian GAAP—Generally accepted accounting principles in Brazil

U.S. GAAP—Generally accepted accounting principles in the United States of America

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais)

 

     Note

  

As of

September 30,

2005


  

As of

December 31,

2004


Assets

              

Current assets:

              

Cash and cash equivalents

        1,040,594    1,180,855

Short-term investments pledged as collateral

   11    160,051    —  

Trade accounts receivable, net

   12    1,530,070    1,483,819

Receivable from subsidiaries and affiliates

   17    30,963    33,162

Advances to suppliers

        28,404    44,918

Inventories

        354,927    456,510

Recoverable taxes

   13    414,437    633,357

Deferred income tax

   10c    422,911    237,924

Derivative contracts

   14d    273,566    7,803

Prepaid expenses

        206,401    157,235

Other current assets

        64,763    119,536
         
  

Total current assets

        4,527,087    4,355,119
         
  

Noncurrent assets:

              

Recoverable taxes

   13    448,960    297,478

Deferred income tax

   10c    901,612    1,099,357

Derivative contracts

   14d    —      385,297

Prepaid expenses

        24,476    36,119

Other noncurrent assets

        63,248    74,504
         
  

Total noncurrent assets

        1,438,296    1,892,755
         
  

Permanent assets:

              

Investments

        1,649,540    2,054,963

Goodwill on merged subsidiary, net

        43,537    49,857

Property, plant and equipment, net

        5,725,215    5,603,004

Deferred assets, net

        145,654    174,007

Others

        1,765    1,464
         
  

Total permanent assets

        7,565,711    7,883,295
         
  

Total assets

        13,531,094    14,131,169
         
  

 

The accompanying notes are an integral part of these unaudited

interim condensed consolidated financial statements.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais)

 

     Note

  

As of

September 30,

2005


   

As of

December 31,

2004


 

Liabilities, shareholders’ equity and funds for capitalization

                 

CURRENT LIABILITIES:

                 

Payroll and related accruals

        87,677     84,136  

Trade accounts payable

        1,079,883     1,704,483  

Taxes payable

        352,624     343,366  

Loans and financing

   14a    1,640,020     2,897,003  

Dividends and interest on shareholders’ equity

        81,136     82,281  

Reserve for contingencies

   16    147,156     124,296  

Derivative contracts

   14d    505,974     266,200  

Payables to subsidiaries and affiliates

   17    5,174     23,902  

Deferred service revenue

        101,568     102,159  

Other liabilities

   15    83,184     8,763  
         

 

Total current liabilities

        4,084,396     5,636,589  
         

 

NONCURRENT LIABILITIES:

                 

Loans and financing

   14a    3,309,843     2,066,169  

Reserve for contingencies

   16    212,181     195,434  

Taxes payable

        177,139     189,341  

Derivative contracts

   14d    323,418     153,835  

Provision for pension plan

        358     358  

Other liabilities

   15    38,863     38,920  
         

 

Total noncurrent liabilities

        4,061,802     2,644,057  
         

 

ADVANCE FOR FUTURE CAPITAL INCREASE

        —       1,999,941  
         

 

MINORITY INTEREST

        1,068,852     942,923  
         

 

SHAREHOLDERS’ EQUITY:

                 

Capital stock

   19a    6,670,152     4,373,661  

Capital reserve

   19c    793,396     1,089,879  

Accumulated deficit

        (3,147,783 )   (2,556,160 )
         

 

Total shareholders’ equity

        4,315,765     2,907,380  
         

 

Funds for capitalization

        279     279  
         

 

SHAREHOLDERS’ EQUITY AND FUNDS FOR CAPITALIZATION

        4,316,044     2,907,659  
         

 

Total liabilities, shareholders’ equity and funds for capitalization

        13,531,094     14,131,169  
         

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF LOSS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais, except per shares data)

 

         

Nine-month periods

ended September 30


 
     Note

   2005

    2004

 

Net operating revenue

   4    5,491,745     5,387,805  

Cost of services and goods sold

   5    (2,479,673 )   (2,353,338 )
         

 

Gross profit

        3,012,072     3,034,467  

Operating expenses:

                 

Selling expenses

   6    (1,790,855 )   (1,318,632 )

General and administrative expenses

   7    (455,131 )   (506,130 )

Other operating expenses, net

   8    (286,973 )   (151,928 )
         

 

Operating income before net financial expenses

        479,113     1,057,777  

Net financial expenses

   9    (683,925 )   (751,342 )
         

 

Operating (loss) income

        (204,812 )   306,435  

Net non-operating income

        12,044     1,411  
         

 

Net (loss) income before income and social contribution taxes and minority interest

        (192,768 )   307,846  
         

 

Income and social contribution taxes

   10    (265,847 )   (293,968 )

Minority interest

        (133,008 )   (269,384 )
         

 

Net loss

        (591,623 )   (255,506 )
         

 

Shares outstanding at September 30 (in thousands)

        662,324 (1)   1,171,784,352 (1)
         

 

Loss per shares outstanding at the balance sheet date

        (0.89325 )(1)   (0.00022 )(1)
         

 


(1) On April 1, 2005, the shareholders approved a reverse stock split in the proportion of 2,500 shares to 1 share of the same class. Had the reverse stock split occurred on September 30, 2004, shares outstanding and loss per share for the nine-month period ended September 30, 2004 would have amounted to 468,713,741 and R$0.55, respectively.

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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Table of Contents

TELESP CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2005

(In thousands of Brazilian reais)

 

          Capital reserves

            
     Capital
Stock


   Special
Goodwill
Reserve


    Share
Premium


   Accumulated
Deficit


    Total

 

BALANCE AT DECEMBER 31, 2004

   4,373,661    990,169     99,710    (2,556,160 )   2,907,380  

Capital increase

   2,000,000    —       —      —       2,000,000  

Capitalization of special goodwill reserve

   296,491    (296,491 )   —      —       —    

Premium paid on acquisition of fractional shares

   —      —       8    —       8  

Net loss

   —      —       —      (591,623 )   (591,623 )
    
  

 
  

 

BALANCE AT SEPTEMBER 30, 2005

   6,670,152    693,678     99,718    (3,147,783 )   4,315,765  
    
  

 
  

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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Table of Contents

TELESP CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais)

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

SOURCES OF FUNDS:

            

From operations:

            

Net loss

   (591,623 )   (255,506 )

Items not affecting working capital:

            

Depreciation and amortization

   1,141,929     918,872  

Minority interest

   133,008     269,384  

Monetary and exchange variations on noncurrent assets and liabilities

   (387,853 )   37,863  

Net book value of permanent asset disposals

   811     1,692  

Reserve for contingencies

   10,778     6,198  

Gain on extinguishment of liabilities

   (7,374 )   —    

Long-term deferred income tax

   33,849     16.666  

Gain on change of participation in subsidiaries

   (7,372 )   (3,502 )

Loss on derivate long-term contracts

   431,959     73,547  

Others

   —       294  
    

 

Total from operations

   758,112     1,065,508  
    

 

From shareholders:

            

Capital increase

   2,000,000     —    

Premium paid on acquisition of fractional shares

   8     —    

From third parties:

            

Increase in long-term loans and financing

   1,924,895     809,583  

Special reserve adjustment – merger tax benefit

   27,126     103,890  

Transfer from noncurrent to current assets

   719,961     156,830  

Unclaimed dividends

   —       2,450  

Transfer from permanent to current assets

   5,276     18,546  

Proceeds received from preemptive rights exercised by minority shareholders of TCO

   2,905     1,132  

Transfer from current to noncurrent liabilities

   —       42,616  

Other

   156     108  
    

 

Total sources

   5,438,439     2,200,663  
    

 

 

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Table of Contents

TELESP CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION—(Continued)

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais)

 

     Nine-month periods
ended September 30,


 
     2005

   2004

 

USES OF FUNDS:

           

Additions to property, plant and equipment

   944,773    899,778  

Transfer from noncurrent to current liabilities

   2,725,259    1,027,972  

Increase in deferred assets

   580    1,726  

Increase in escrow deposits on noncurrent assets

   4,658    26,565  

Advances for future capital increases

   4,942    —    

Increase in noncurrent assets

   2,454    —    

Transfer from current to noncurrent assets

   —      24,453  

Increase in deferred taxes

   3,479    33,609  

Increase in prepaid expenses

   27,833    43,349  

Other

   300    155  
    
  

Total uses

   3,714,278    2,057,607  
    
  

INCREASE IN WORKING CAPITAL

   1,724,161    143,056  
    
  

Represented by:

           

Current assets

   171,968    356,960  
    
  

Beginning of period

   4,355,119    4,387,584  

End of period

   4,527,087    4,744,544  

Current liabilities

   1,552,193    (213,904 )
    
  

Beginning of period

   5,636,589    6,453,625  

End of period

   4,084,396    6,667,529  
    
  

INCREASE IN WORKING CAPITAL

   1,724,161    143,056  
    
  

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

F-9


Table of Contents

TELESP CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS

OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(Amounts expressed in thousands of reais, unless otherwise indicated)

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Operating activities:

            

Net cash from operating activities

   871,583     872,457  
    

 

Investing activities:

            

Additions to property, plant and equipment

   (944,773 )   (899,778 )

Additions to deferred assets

   (580 )   (1,726 )

Cash received on sale of property, plant & equipment

   2,959     2,376  

Short-term investments pledged as collateral

   (160,051 )   —    

Other investments

   (5,243 )   —    
    

 

Net cash from investing activities

   (1,107,688 )   (899,129 )
    

 

Financing activities:

            

Loans repaid

   (2,225,782 )   (1,198,900 )

New loans obtained

   2,708,412     1,613,572  

Net settlement on derivatives contracts

   (450,100 )   (35,370 )

Dividends and interest on shareholders’ equity

   (1,145 )   (2,633 )

Capital increase

   58     —    

Premium paid on acquisition of fractional shares

   8     —    

Cash received relating to reverse stock split

   64,393     —    
    

 

Net cash from financing activities

   95,844     376,669  
    

 

Increase (decrease) in cash and cash equivalents

   (140,261 )   349,997  

Cash and cash equivalents:

            

At the beginning of the period

   1,180,855     1,158,849  
    

 

At the end of the period

   1,040,594     1,508,846  
    

 

Supplemental cash flow information             
    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Income and social contribution tax paid

   202,552     354,757  

Interest paid

   304,485     230,453  

Noncash transaction:

            

Contribution of tax benefit by parent company

   133,370     510,788  

Unclaimed dividends

   —       416  

Transfer to advance for suppliers

   5,280     6,563  

Capitalization of funds for future capital increase

   2,000,000     —    

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

F-10


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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

1. Operations and presentation of financial statements

 

a. Incorporation

 

Telesp Celular Participações S.A. (“TCP” or the “Company”) is a publicly held company whose controlling shareholders, on September 30, 2005, are Brasilcel N.V. (57.23% of the total capital stock) and Portelcom Participações S.A. (8.86% of the total capital stock), which is a wholly-owned subsidiary of Brasilcel N.V.

 

The controlling shareholders of Brasilcel N.V. are Telefónica Móviles S.A. (50% of the total capital stock), PT Móveis, Serviços de Telecomunicações, SGPS, S.A. (49.999% of the total capital stock) and Portugal Telecom, SGPS, S.A. (0.001% of the total capital stock).

 

b. Business and background

 

TCP is the controlling shareholder of Telesp Celular S.A. (“TC”), Global Telecom S.A. (“GT”) and Tele Centro Oeste Celular Participações S.A. (“TCO”), which provide cellular telecommunication services in the States of São Paulo, Paraná and Santa Catarina and Federal District, respectively, and exercise activities necessary or useful to perform such services, in accordance with the authorizations granted to them.

 

The authorizations granted to TC, GT and TCO are in force until August 5, 2008, April 8, 2013 and July 24, 2006, respectively, and may be renewed once for a 15-year term by means of the payment of rates of approximately 1% of the operators’ annual revenues.

 

In addition, TCO is the controlling shareholder of the following operators:

 

Operator


   TCO
interest - %


  

Operation area


  

Expiration date

of authorization


Telegoiás Celular S.A.

   100    Goiás and Tocantins    10/29/08

Telemat Celular S.A.

   100    Mato Grosso    03/30/09

Telems Celular S.A.

   100    Mato Grosso do Sul    09/28/09

Teleron Celular S.A.

   100    Rondônia    07/21/09

Teleacre Celular S.A.

   100    Acre    07/15/09

Norte Brasil Telecom S.A. (NBT)

   100   

Amazonas, Roraima, Amapá,

Pará and Maranhão

   11/29/13

 

Telecommunications services provided by the subsidiaries, including related services and tariffs, are regulated by the Federal regulatory authority, the National Telecommunications Agency (ANATEL), as authorized by Law No. 9.472, as of July 16, 1997, and the related regulations, decrees, decisions and plans.

 

On March 28, 2005, the Board of Directors of TCO approved the merger of Teleacre, Telegoiás, Teleron and Telems into the Company, and the merger of Telemat into the subsidiary TCO IP S.A. (“TCO IP”). The merger proposals were presented to ANATEL for approval on June 7 and 27, 2005, respectively. The purpose of these proposed mergers was to achieve financial and operational benefits through reductions in administrative costs.

 

Tender Offer—TCO

 

On October 8, 2004 TCP completed a tender offer for preferred shares of TCO and acquired 32.76% of TCO’s aggregate preferred shares for R$901.5 million. After these acquisitions, TCP owned 90.22% of the voting capital stock of TCO (51.42% of the total capital stock).

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

2. Presentation of financial statements

 

The consolidated financial statements include the accounts of TC, TCO and GT and their respective subsidiaries. Intercompany transactions and balances have been eliminated.

 

In the Company’s opinion, all adjustments necessary for a fair presentation of the unaudited results of operations for the nine-month periods ended September 30, 2005 and 2004 are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for period September 30, 2005 are not necessarily indicative of the results of operations to be expected for the full year. The accompanying consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2004, as appearing in the Company’s Annual Report on Form 20-F filed on April 15, 2005.

 

The presentation of the consolidated financial statements is consistent with the presentation of the published financial statements of the Company in Brazil, from which the financial information was extracted, except for certain reclassifications and changes in terminology within the consolidated balance sheets and the consolidated statements of loss, which have been made to conform the previously published financial statements to the presentation included herein. The financial statements as of September 30, 2004 and December 31, 2004 have been reclassified, where applicable, for comparability.

 

3. Summary of principal accounting practices

 

The unaudited interim condensed consolidated financial statements are expressed in thousands of Brazilian reais (“R$”), except when mentioned, and have been prepared in accordance with accounting practices adopted in Brazil, which include the accounting practices derived from Brazilian corporate law, regulations applicable to public telecommunications service concessionaires and accounting regulations and procedures established by the Brazilian Securities Commission (CVM), hereinafter referred to as “Brazilian GAAP”.

 

The principal accounting practices adopted by the Company and its subsidiaries in the preparation of these interim financial statements are the same as those described in the consolidated financial statements as of and for the year ended December 31, 2004.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

4. Net operating revenue

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Monthly subscription charges

   134,142     192,271  

Usage charges

   3,120,497     2,739,651  

Additional call charges

   126,407     84,358  

Interconnection

   2,221,375     2,331,957  

Other services

   495,708     425,282  
    

 

Total gross revenue from services

   6,098,129     5,773,519  

Value-added tax on services—ICMS

   (994,659 )   (864,053 )

Employees’ profit participation program—PIS/ Social contribution on billing—COFINS

   (218,028 )   (209,116 )

Service tax—ISS

   (2,055 )   (1,802 )

Discounts granted

   (187,850 )   (129,870 )
    

 

Net operating revenue from services

   4,695,537     4,568,678  
    

 

Sale of handsets and accessories

   1,389,910     1,346,040  

Value-added tax on sales—ICMS

   (115,529 )   (129,022 )

Employees’ profit participation program—PIS/ Social contribution on billing—COFINS

   (92,933 )   (92,632 )

Discounts granted

   (62,744 )   (76,424 )

Returns of goods

   (322,496 )   (228,835 )
    

 

Net operating revenue from sales of handsets and accessories

   796,208     819,127  
    

 

Total net operating revenue

   5,491,745     5,387,805  
    

 

 

There are no customers which contributed more than 10% of gross operating revenue in the nine-month periods ended September 30, 2005 and 2004, except for Telecomunicações de São Paulo S.A.—TELESP, a fixed telephone operator in the State of São Paulo, which contributed with approximately 20% and 22% of the gross operating revenue, respectively, mainly through interconnection revenues.

 

5. Cost of services and goods sold

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Personnel

   (47,121 )   (42,843 )

Outside services

   (144,430 )   (130,569 )

Leased lines

   (106,195 )   (89,225 )

Rent, insurance, and other related expenses

   (70,308 )   (69,753 )

Interconnection

   (121,425 )   (155,937 )

Taxes and contributions

   (249,968 )   (139,745 )

Depreciation and amortization

   (570,860 )   (538,217 )

Cost of products sold

   (1,163,606 )   (1,181,630 )

Other

   (5,760 )   (5,419 )
    

 

Total

   (2,479,673 )   (2,353,338 )
    

 

 

F-13


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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

6. Selling expenses

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Personnel

   (152,252 )   (135,361 )

Supplies

   (23,099 )   (29,786 )

Outside services

   (842,902 )   (638,130 )

Advertising

   (234,013 )   (217,933 )

Rent, insurance, and other related expenses

   (28,640 )   (26,265 )

Taxes and contributions

   (1,198 )   (1,224 )

Depreciation and amortization

   (145,470 )   (108,924 )

Allowance for doubtful accounts receivable

   (265,483 )   (130,062 )

Other

   (97,798 )   (30,947 )
    

 

Total

   (1,790,855 )   (1,318,632 )
    

 

 

7. General and administrative expenses

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Personnel

   (99,608 )   (103,122 )

Supplies

   (6,303 )   (4,886 )

Outside services

   (194,159 )   (248,098 )

Rent, insurance, and other related expenses

   (35,190 )   (32,362 )

Taxes and contributions

   (4,430 )   (10,949 )

Depreciation and amortization

   (100,117 )   (93,445 )

Other

   (15,324 )   (13,268 )
    

 

Total

   (455,131 )   (506,130 )
    

 

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

8. Other operating expenses, net

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Income:

            

Late fees and penalties

   48,921     55,211  

Recovered expenses

   27,237     20,561  

Shared infrastructure/EILD

   19,906     9,180  

Commercial incentives

   75,236     36,893  

Other

   7,040     4,295  
    

 

Total

   178,340     126,140  
    

 

Expenses:

            

Reserve for contingencies, net of reversal

   (27,209 )   (23,685 )

Goodwill amortization

   (296,145 )   (149,324 )

Other taxes

   (101,664 )   (72,611 )

Amortization of preoperating expenses

   (29,337 )   (28,962 )

Other

   (10,958 )   (3,486 )
    

 

Total

   (465,313 )   (278,068 )
    

 

Other operating expenses, net

   (286,973 )   (151,928 )
    

 

 

9. Financial expenses, net

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Income:

            

Financial income

   212,908     214,542  

Foreign currency exchange variation

   575,683     566,969  

PIS/COFINS on financial income

   (4,615 )   (51,109 )
    

 

Total

   783,976     730,402  
    

 

Expense:

            

Financial expenses

   (451,147 )   (503,098 )

Monetary/exchange variations

   (37,763 )   (502,193 )

Losses on derivatives contracts, net

   (978,991 )   (476,453 )
    

 

Total

   (1,467,901 )   (1,481,744 )
    

 

Financial expenses, net

   (683,925 )   (751,342 )
    

 

 

F-15


Table of Contents

TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

10. Income taxes

 

The Company and its subsidiaries estimate monthly the amounts for income and social contribution taxes, on an accrual basis. Deferred taxes are provided on temporary differences. Income and social contribution taxes charged to income consist of the following:

 

a. Components of income taxes

 

     Nine-month periods
ended September 30,


     2005

    2004

Income tax

   205,867     132,134

Social contribution tax

   74,185     47,882

Deferred income tax

   (10,445 )   83,266

Deferred social contribution tax

   (3,760 )   30,686
    

 

Total

   265,847     293,968
    

 

 

b. Reconciliation of effective tax rate

 

The following table provides a reconciliation of the amount calculated by applying the combined statutory tax rates on the reported income before taxes and the reported income tax expense for the nine-month periods ended September 30, 2005 and 2004:

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Income (loss) before taxes

   (192,768 )   307,846  

Tax benefit (expense) at combined statutory rate

   65,541     (104,668 )

Permanent additions:

            

Nondeductible allowance for doubtful accounts receivable

   (19,522 )   —    

Donations and other nondeductible expenses

   (19,350 )   (11,675 )

Permanent exclusions:

            

Unrecognized tax loss carryforwards and temporary differences (i)

   (292,055 )   (177,625 )

Others

   (461 )   —    
    

 

Tax expense

   (265,847 )   (293,968 )
    

 


(i) The Company and its subsidiaries “GT” and “TCO IP” did not recognize deferred income and social contribution on tax loss carryforwards and temporary differences, due to projected tax losses to be generated in the short term.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

c. Composition of deferred income tax assets

 

Deferred income tax assets based on temporary differences are comprised of the following:

 

     As of
September 30,
2005


  

As of
December 31,

2004


Tax credits recorded on corporate restructuring

   958,190    985,155

Provision/accrual for:

         

Inventory obsolescence

   11,120    8,388

Contingencies

   85,052    74,842

Doubtful accounts receivable

   42,828    42,688

Derivative transactions

   1,218    4,602

Suppliers

   44,824    60,401

Other

   26,715    2,668

Tax loss carryforwards

   154,576    158,537
    
  

Total deferred taxes

   1,324,523    1,337,281
    
  

Current

   422,911    237,924

Noncurrent

   901,612    1,099,357

 

Deferred taxes have been recorded if it is more likely than not that they will be realized, as follows:

 

a) Tax loss carryforwards will be offset up to a limit of 30% per year of future taxable income.

 

b) Tax credits recorded on corporate restructuring consist of the tax benefits recorded as a result of the corporate restructurings described in Note 20. The realization of these tax credits occurs in the same proportion as the amortization of goodwill, over periods of between five and ten years. Studies by external consultants used in the corporate restructuring processes supported recovery of the amount.

 

c) Temporary differences will be realized upon payment of the accruals, effective losses on bad debts and realization of inventories.

 

At the end of the 2004 fiscal year, the Company prepared technical feasibility studies, approved by the Board of Directors, which indicate full recovery of the deferred taxes recognized, as determined by CVM Resolution No. 371. Management did not identify any changes that could affect the conclusion of these studies at September 30, 2005.

 

11. Short-term investments pledged as collateral

 

    

As of
September 30,

2005


  

As of
December 31,

2004


Short-term investments pledged as collateral (1)

   160,051    —  

(1) Represents short-term investments pledged as collateral in connection with lawsuits.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

12. Trade accounts receivable, net

 

The composition of accounts receivables is as follows:

 

     As of
September 30,
2005


   

As of
December 31,

2004


 

Billed amounts

   813,859     707,609  

Interconnection

   453,010     389,021  

Products sold

   209,274     374,184  

Unbilled amounts from services rendered

   224,214     182,690  

Allowance for doubtful accounts receivable

   (170,287 )   (169,685 )
    

 

Total

   1,530,070     1,483,819  
    

 

 

There are no customers which contribute more than 10% of accounts receivable, net at September 30, 2005 and December 31, 2004, except for amounts receivable from Telecomunicações de São Paulo S.A.—TELESP, which represent approximately 11%, mainly through interconnection charges.

 

Changes in the allowance for doubtful accounts receivable were as follows:

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Balance beginning of year

   169,685     135,841  

Allowance for doubtful accounts receivable charged to selling expenses

   265,483     130,062  

Write-offs

   (264,881 )   (107,239 )
    

 

Ending balance

   170,287     158,664  
    

 

 

13. Recoverable taxes

 

     As of
September 30,
2005


  

As of
December 31,

2004


Prepaid/Recoverable income and social contribution taxes

   371,649    303,217

Withholding income tax

   80,662    220,945

Recoverable ICMS (State VAT)

   219,781    245,447

Recoverable PIS and COFINS (taxes on revenue) and other

   145,839    140,171

Other recoverable taxes

   4,074    —  
    
  
     822,005    909,780

ICMS on deferred sales

   41,392    21,055
    
  

Total

   863,397    930,835
    
  

Current

   414,437    633,357

Noncurrent

   448,960    297,478

 

Recoverable ICMS taxes represent the amount paid in the acquisition of equipment and inventories and may be offset against ICMS on telecommunications services. The noncurrent portion refers to taxes paid on the purchase of property items, which are available for offset over a period of 48 months.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

14. Loans and financing

 

a. Composition of debt

 

Description


  Currency

 

Annual

interest


  Final
maturity


  As of
September 30,
2005


  As of
December 31,
2004


Financial institutions:

                   

Compror

  US$   1% to 6.25%   01/2008 to
01/2015
  194,533   103,841

Compror

  ¥   0.7% to 1.8%   08/2005 to
01/2007
  39,818   —  

BNDES

  TJLP
reference
unit
 

TJLP + 3.5% to

4.6% (*)

  01/2006 to
06/2011
  293,092   366,537

BNDES

  UMBND   3.5% to 4.6%   10/2007 to
07/2011
  50,163   74,981

BNDES

  R$   100% Selic   12/2005   60,951   152,377

Resolutions No. 2770

  US$   1% to 9.8%   10/2005 to
12/2007
  1,967,708   1,738,126

Resolutions No. 2770

  ¥   1% to 2.25%   04/2006 to
12/2007
  121,649   —  

Resolution No. 63

  ¥   1.3% to 1.4%   02/2005 to
05/2005
  —     177,068

Unibanco IGP-M

  R$   IGP-M + 9.0%   09/2007   4,800   —  

Export Development Corporation EDC

  US$  

LIBOR + 3.90%

to 5.0%

  11/2005 to
12/2006
  41,009   71,158

Debentures

  R$   103.3% to 104.4% of CDI   08/2008 to
05/2015
  1,500,000   500,000

Commercial Paper

  US$   LIBOR + 1.75% to 6.55%   09/2007 to
12/2007
  466,662   238,896

Promissory Notes

  R$   101.6% of CDI       —     1,000,000

ICMS—Teleproduzir (i)

  R$   0.2%p.m.   07/2012   —     15,159

Suppliers:

                   

NEC do Brasil

  US$   7.30%   11/2005   3,011   7,192

Affiliated companies:

                   

Commercial paper

  US$   1.825% + LIBOR   07/2004   —     318,528

Investment acquisition—TCO

  R$   CDI + 1%     10,697   53,484

Other

  R$  

Column 27 FGV

inflation index

  08/2008   1,407   1,523

Accrued interest

              194,363   144,302
               
 

Total

              4,949,863   4,963,172
               
 

Current

              1,640,020   2,897,003

Noncurrent

              3,309,843   2,066,169

(*) In the event that the long-term interest rate (TJLP) exceeds 10% p.a., the spread increases to 6%.
(i) This financing was prepaid in August 2005 at a discount of R$7,425, which was recorded as financing income.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

b) Repayment schedule

 

The long-term portion of loans and financing matures is as follows:

 

     2005

2006 (October to December)

   90,245

2007

   1,617,184

2008

   547,284

2009

   21,937

2010

   21,937

2011 and thereafter

   1,011,256
    

Total

   3,309,843
    

 

c) Restrictive covenants

 

GT entered into a loan agreement with the Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social—BNDES), whose balance on September 30, 2005 was R$246,693 (R$304,305 as of December 31, 2004). This loan contains restrictive covenants, which include restrictions as to debt levels, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and a capitalization ratio. As of September 30, 2005, GT was in compliance with all covenants.

 

TCO entered into a loan agreement with BNDES and Export Development Canada—EDC, whose balances on September 30, 2005 were R$96,562 and R$41,009, respectively. Such loans contain restrictive covenants, which include restrictions as to debt levels, EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) and a liquidity ratio. As of September 30, 2005, TCO was in compliance with all covenants.

 

d) Derivative contracts

 

As of September 30, 2005, the Company and its subsidiaries had foreign exchange rate derivative contracts with notional amounts of US$1,296,283 thousand (US$1,078,180 thousand at December 31, 2004), ¥8,301,244 thousand (¥6,879,947 thousand at December 31, 2004) and €13,585 thousand (€25,247 thousand at December 31, 2004), to protect against exchange rate fluctuations on foreign currency obligations. As of September 30, 2005, the Company and its subsidiaries had recorded an accumulated net loss of R$555,826 (R$26,935 as of December 31, 2004) on these contracts.

 

e) Collateral

 

TC’s loans and financing in local currency include R$60,951 at September 30, 2005 in liabilities to BNDES that are secured by customer receivables.

 

GT loans and financing amounting to R$246,693 are secured by accounts receivable, which can be withheld at the option of the lender up to a limit of 300% of the applicable monthly installment.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

TCO has granted security interests as follows:

 

Banks


  

Collateral


BNDES—TCO operators    15% of receivables and Bank Deposit Certificates (CDBs) equivalent to the amount of the next installment payable.
BNDES NBT    100% of receivables and CDBs equivalent to the amount of the next installment payable during the first year and CDBs equivalent to two installments payable in the remaining period.

 

f) Debentures

 

On August 1, 2004 the first public issue of debentures was renegotiated, comprising 5,000 (five thousand) debentures, not convertible into shares, with a unit face amount of R$100 (one hundred thousand reais) maturing on August 1, 2008. The renegotiation reduced the interest rate from 104.6% to 104.4% of the CDI rate until the rate is renegotiated on August 1, 2007.

 

As part of its First Program for the Distribution of Marketable Securities in the amount of R$2,000,000 (two billion reais) initiated on August 20, 2004, the Company issued debentures on May 1, 2005 in the amount of R$1,000,000 (one billion reais) with a maturity of ten years as from the issue date of May 1, 2005.

 

The offer consisted of the issue of 100,000 unsecured debentures, not convertible into shares, with a nominal unit face amount of R$10 (ten thousand reais), totaling R$1,000,000 (one billion reais), in two series, R$200,000 (two hundred million reais), in the first series, and R$800,000 (eight hundred million reais), with a final maturity of May 1, 2015. The debentures bear interest, payable semi-annually, at 103.3% (first series) and 104.2% (second series) of the accumulated average daily CDI rate.

 

The debentures are scheduled for renegotiation on May 1, 2009 (first series) and May 1, 2010 (second series). The Company included the debenture amounts in the long-term maturities schedule above based on these renegotiation dates.

 

15. Other liabilities

 

     As of
September 30,
2005


   As of
December 31,
2004


Accrual for customer reward program (a)

   17,436    8,394

Reverse stock split (b)

   64,393    —  

Other

   40,218    39,289
    
  

Total

   122,047    47,683
    
  

Current

   83,184    8,763

Noncurrent

   38,863    38,920

(a) TC, GT and TCO have reward programs in which the calls are transformed into points usable in future exchanges of handsets. Accumulated points are reserved as they are obtained, based on historical redemption data, accumulated points and average point cost.
(b) Refers to a liability to shareholders for fractions of shares that were not issued on the date of the reverse stock split. This balance is payable upon demand.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

16. Reserve for contingencies

 

The Company and its subsidiaries are parties to certain lawsuits involving labor, tax and civil matters. Management has recorded reserves for cases in which the likelihood of an unfavorable outcome is considered probable by its legal counsel.

 

Components of the reserves are as follows:

 

     As of
September 30,
2005


   As of
December 31,
2004


Tax

   158,072    148,849

TELEBRÁS—Claim

   119,143    113,062

Labor and civil

   82,122    57,819
    
  

Total

   359,337    319,730
    
  

Current

   147,156    124,296

Noncurrent

   212,181    195,434

 

The changes in the reserve for contingencies are as follows:

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Beginning balance at January 1

   319,730     279,625  

Additional provision, net of reversals

   27,209     23,685  

Monetary variation

   17,123     27,802  

Payments

   (4,725 )   (4,454 )
    

 

Ending balance at September 30

   359,337     326,658  
    

 

 

16.1. Telebrás—“TCO”

 

Corresponds to original loans from Telecomunicações Brasileiras S.A.—TELEBRÁS, which according to annex II of the Spin-off Report of February 28, 1998, approved at the General Meeting of May 1998, should have been attributed to the respective holding companies of Telegoiás Celular S.A. and Telebrasília Celular S.A.

 

Realizing there was an error in the allocation of the respective loans at the time of the spin-off, the Company suspended payments and updated the debt according to the variation of the IGP-M + 6% interest per year.

 

In June 1999, the Company filed a lawsuit arguing that the assets corresponding to these liabilities belonged to the Company, in addition to claiming indemnity for the installments paid.

 

On August 1, 2001, a verdict was issued against the Company’s claims, and on October 8, 2001, the Company filed an appeal which was also denied, maintaining the original verdict. The Company subsequently filed a new appeal which is awaiting a decision by the STJ—the Supreme Court.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

16.2. Tax litigation

 

16.2.1. Probable loss

 

No significant new tax claims with a “probable” loss classification were filed in the nine-month period ending September 30, 2005. The evolution of the reserves for tax contingencies substantially corresponds to the monetary restatement of the reserves during the period.

 

16.2.2. Possible loss

 

No significant new tax claims with a “possible” loss classification were filed in the nine-month period ending September 30, 2005. No significant alterations occurred in the claims indicated in this report since the last fiscal year.

 

16.3. Civil and labor suits

 

Include several labor and civil claims. A reserve was posted as demonstrated previously, which is considered to be sufficient to cover the probable losses on these cases.

 

In relation to claims with a “possible” loss classification, the amount involved is R$54,524 for civil claims and R$37,213 for labor claims.

 

17. Transactions with related parties

 

The principal transactions with unconsolidated related parties are as follows:

 

    Use of network and long-distance (roaming) cellular communications: The Company and its subsidiaries also carry out transactions with other companies controlled by our controlling shareholders, such as network use and long distance (roaming) cellular communications agreements. The counterparties to these agreements are Telecomunicações de São Paulo S.A., Telerj Celular S.A., Telest Celular S.A., Telebahia Celular S.A., Telergipe Celular S.A. and Celular CRT S.A. Some of he transactions relating to roaming are based on contracts entered into prior to the break-up of Telebrás. The terms of these agreements are regulated by Anatel. Services to customers of Telecomunicações Móveis Nacionais—TMN roaming in the Company’s network are included.

 

    Technical assistance: Refers to the provision of corporate management advisory services by PT SGPS, calculated based on a percentage of the net services revenue, monetarily restated in accordance with the currency variation.

 

    Loans and financing: Represent loans between companies in the Portugal Telecom Group.

 

    Corporate services: These are passed on to the subsidiaries at the cost effectively incurred for these services.

 

    Call-center services: Provided by Dedic, an affiliate of Portugal Telecom, to users of the telecommunications services of the subsidiaries TC and GT, contracted for 12 months, renewable for the same period.

 

    Systems development and maintenance services: Provided by PT Inovação, an affiliate of Portugal Telecom.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

A summary of balances and transactions with unconsolidated related parties is as follows:

 

     As of
September 30,
2005


    As of
December 31,
2004


 

Assets:

            

Trade accounts receivable

   172,170     168,634  

Receivables from related parties

   30,963     33,162  

Liabilities:

            

Trade accounts payable

   153,199     349,860  

Loans and financing

   556     329,382  

Technical assistance

   37,380     —    

Payables to related parties

   5,174     23,902  
    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Statement of loss:

            

Net operating revenue

   1,228,519     1,280,562  

Cost of services provided

   (169,645 )   (169,725 )

Selling expenses

   (178,973 )   (102,536 )

General, administrative and other operating expenses

   (38,550 )   (106,725 )

Financial income (expenses), net

   10,586     (102,159 )

 

18. Financial instruments and risk management

 

a) Risk considerations

 

TCP, TC, GT and TCO are exposed to the following market risks:

 

Credit risk: resulting from difficulty in collecting telecommunications services provided to customers and revenues from sale of handsets to distribution networks, as well as the risk relating to swap transactions.

 

Interest rate risk: resulting from debt and derivative instruments contracted at floating rates and involving the risk of financial expenses as a result of an unfavorable upward trend in interest rates (mainly LIBOR, EURIBOR, TJLP and CDI).

 

Currency risk: related to debt and derivative instruments contracted in foreign currencies which expose the Company to potential losses from adverse exchange rate fluctuations.

 

The Company and its subsidiaries actively endeavor to mitigate these risks by means of comprehensive risk management procedures, policies and initiatives.

 

Credit risk

 

Credit risk from providing telecommunications services is reduced by monitoring the customer portfolio and addressing delinquent receivables by means of clear policies relating to the concession of postpaid services.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

“TC”, “GT” and “TCO” and its subsidiaries’ have prepaid customers that represent 83.00%, 88.00% and 85.00%, respectively (82.64%, 88.45% and 84.00%, respectively, at December 31, 2004), of their customer bases. These customers do not represent a credit risk.

 

Credit risk from the sale of handsets is managed by following conservative credit policies which include the use of advanced risk management methods such as applying credit scoring techniques, analyzing a potential customer’s balance sheet, and using credit protection agencies’ databases.

 

The Company and its subsidiaries are also exposed to credit risk relating to their financial investments and receivables from swap transactions. The Company and its subsidiaries attempt to diversify such exposure by using reputable financial institutions.

 

Interest rate risk

 

The Company is exposed to interest rate risk, especially associated with variations in the CDI rate relating to its derivative transactions and borrowings contracted in Brazilian reais. The balance of financial investments, also indexed to the CDI, partially neutralizes this effect.

 

The Company is also exposed to fluctuations in the TJLP on financing from BNDES. As of September 30, 2005, the principal of these loans amounted to R$293,092 (R$366,537 as of December 31, 2004). The Company has not entered into derivative operations to hedge against these risks.

 

Foreign currency-denominated loans are also exposed to interest rate risk (LIBOR) associated with foreign loans. As of September 30, 2005, these loans amounted to US$18,454 thousand (US$146,808 thousand as of December 31, 2004).

 

The Company has entered into derivative contracts relating to loans and financings that have variable foreign interest rates (LIBOR) with notional amounts of US$120,000 thousand to convert these loans to loans in reais that accrue interest based on the CDI rate. The Company and its subsidiaries continue to monitor market interest rates in order to evaluate whether to contract other derivatives to protect against the risk of volatility of variable foreign rates for the remaining amounts.

 

Currency risk

 

TC, GT and TCO utilize derivative instruments to protect themselves against currency risk on foreign currency-denominated loans. Such instruments usually include swap, option and forward contracts.

 

The Company’s net exposure to currency risk as of September 30, 2005 is shown in the table below:

 

     In thousands

 
     US$

   

    ¥

 

Loans and financing

   (1,240,830 )   —       (8,301,244 )

Loans and financing—UMBNDES (*)

   (22,817 )   —       —    

Derivative contracts

   1,296,283     13,585     8,301,244  

Other

   (22,795 )   (14,171 )   —    
    

 

 

Net exposure

   9,841     (586 )   —    
    

 

 


(*) UMBNDES is a monetary unit prepared by BNDES, consisting of a basket of foreign currencies, of which the principal is the U.S. dollar. For this reason, the Company and its subsidiaries treat it as the U.S. dollar for purposes of the risk coverage analysis related to fluctuations in exchange rates.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

b) Derivative contracts

 

The Company and its subsidiaries record gains and losses on derivative contracts as net financial income or expenses.

 

Book and estimated market values of loans and financing and derivative instruments are as follows:

 

     Book value

    Market value

    Unrealized
losses


 

Loans and financing

   (4,949,863 )   (4,978,036 )   (28,173 )

Derivative contracts

   (555,826 )   (590,317 )   (34,491 )

Other

   (88,575 )   (88,575 )   —    
    

 

 

Total

   (5,594,264 )   (5,656,928 )   (62,664 )
    

 

 

 

c) Market value of financial instruments

 

The market value of loans and financing and derivative instruments were determined based on the discounted cash flows, utilizing available market information. Accordingly, the estimates presented above are not necessarily indicative of the amounts that could be realized in the current market. The use of different market assumptions may have a material effect on estimates

 

19. Shareholders’ equity

 

a) Capital

 

On January 7, 2005, the Company increased its capital by R$2,053,896 thousand with the issue of 410,779,174 thousand new shares, representing 143,513,067 thousand common shares and 267,266,108 thousand preferred shares.

 

On April 1, 2005, the shareholders approved a reverse stock split of the 1,582,563,526,803 book-entry shares, without par value, represented by 552,896,931,154 common shares and 1,029,666,595,649 preferred shares, in the proportion of 2,500 shares to 1 share of the same class. As a result of the reverse stock split, the Company’s capital was comprised of 633,025,410 book-entry shares, without par value, of which 221,158,772 are common shares and 411,866,638 are preferred shares.

 

On July 29, 2005, the Company announced a capital increase of R$242,595 in favor of the Company’s controlling shareholders, corresponding to the tax benefit that was effectively realized during the 2004 fiscal year from the goodwill recorded by the Company’s controlling shareholders. In connection with this capital increase, the other shareholders are entitled to preemptive rights. The capital increased from R$6,427,557 to R$6,670,152, with the issue of 29,298,932 new common shares. Proceeds received in connection with the exercise of preemptive rights were payable to Portelcom Participações S.A., one of the controlling shareholders of the Company.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The Company’s capital is comprised of shares with no par value, as follows:

 

     Shares as of

     September 30,
2005


   December 31,
2004(1) (2)


Common shares

   250,457,704    409,383,864

Preferred shares

   411,866,638    762,400,488
    
  

Total outstanding shares

   662,324,342    1,171,784,352
    
  

(1) Had the reverse stock split described above occurred on December 31, 2004, shares outstanding would be 163,753,546 and 304,960,195 of common and preferred shares, respectively.
(2) In thousands of shares.

 

b) Interest on shareholders’ equity and dividends

 

The preferred shares do not have voting rights, except in the circumstances stipulated in articles 9 and 10 of the Company’s bylaws. The preferred shares have priority in the reimbursement of capital, without premium, and are entitled to receive dividends of at least 25% of net income for the year, calculated as defined by Article 202 of the Brazilian corporate law, with priority in the payment of minimum, noncumulative dividends based on the greater of the following: (a) 6% per year of the amount resulting from the division of subscribed capital by the total number of shares outstanding, or (b) 3% per year of the amount resulting from the division of shareholders’ equity by the total number of shares outstanding. The preferred shares are then entitled to receive dividends equivalent to those paid to holders of common shares, after dividends in the same amount as the mandatory minimum dividends on preferred shares have been paid to such holders.

 

Pursuant to Article 111, paragraph 1, of Law No. 6,404/76, as from the Annual Meeting held on March 27, 2004, the Company’s preferred shares have been entitled to full voting rights, since the Company has not paid minimum dividends to preferred shares for the past three consecutive years.

 

c) Special goodwill reserve

 

This reserve was formed as a result of the Company’s corporate restructurings, and will be capitalized in favor of the controlling shareholder when the related tax benefits are effectively realized.

 

20. Corporate restructuring

 

At January 14, 2000, the Company completed a corporate restructuring to transfer a tax benefit to the Company related to the goodwill paid by the Company’s controlling shareholders in the privatization process. The goodwill and related tax benefit on the date of transfer amounted to R$3,192,738 and R$1,065,044, respectively. The tax benefit was recorded as deferred tax with a corresponding entry to a special goodwill reserve in shareholders’ equity. This tax benefit is being realized in proportion to the amortization of the goodwill over a period of 10 years. The special goodwill reserve is transferred to capital with a corresponding issuance of shares to the Company’s controlling shareholders as the related tax benefit is realized. In connection with the issuance of these shares, the Company’s other shareholders are entitled to preemptive rights. Proceeds received in connection with the exercise of preemptive rights are payable to the Company’s controlling shareholders. This tax benefit, as of September 30, 2005 and December 31, 2004, amounted to R$ 452,304 and R$ 533,718, respectively.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The Boards of Directors of the Company and TCO approved two corporate restructurings as follows:

 

a) 2004 corporate restructuring:

 

On May 13, 2004, TCP transferred to TCO and its subsidiaries the tax benefit relating to the goodwill paid in the acquisition of a controlling interest in TCO. The goodwill and related tax benefit on the date of transfer amounted to R$1,503,121 and R$511,061, respectively. In connection with this transaction, TCO exchanged shares with the minority shareholders of its subsidiaries, which in turn became wholly-owned subsidiaries.

 

Accounting records kept for corporate and tax purposes have specific accounts related to the merged goodwill, reserve and corresponding amortization, reversals of reserves and tax credit, which balances are as follows:

 

    

At merger

date


    As of
September 30,
2005


   

As of
December 31,

2004


 

Balance sheet:

                  

Goodwill

   1,503,121     1,102,287     1,327,756  

Reserve

   (992,060 )   (727,510 )   (876,319 )
    

 

 

Balance

   511,061     374,777     451,437  
    

 

 

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Goodwill amortization

   (225,471 )   (148,877 )

Reversal of reserve

   148,809     98,259  

Tax credit

   76,662     50,618  
    

 

Effect on results of operations

   —       —    
    

 

 

b) 2005 corporate restructuring:

 

On August 31, 2005, TCP transferred to TCO the tax benefit relating to the goodwill paid in the acquisition of shares in a public tender offer on October 8, 2004. The goodwill and related tax benefit on the date of the transfer amounted to R$392,265 and R$133,370, respectively.

 

     At merger
date


    As of
September 30,
2005


 

Balance sheet:

            

Goodwill

   392,265     385,616  

Reserve

   (258,895 )   (254,507 )
    

 

Balance

   133,370     131,109  
    

 

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

    

Nine-month
periods ended
September 30,

2005


 

Goodwill amortization

   (6,649 )

Reversal of reserve

   4,388  

Tax credit

   2,261  
    

Effect on results of operations

   —    
    

 

The above restructurings had no effect on the Company’s results of operations or shareholders’ equity. In the Company’s financial statements, the tax benefit of R$505,886 (R$374,777 and R$131,109, respectively, referring to the 2004 and 2005 restructurings), as of September 30, 2005, was reclassified in the balance sheet from goodwill to deferred taxes under current assets and long-term receivables.

 

21. Summary of the differences between Brazilian GAAP and U.S. GAAP

 

The Company’s accounting policies comply with Brazilian GAAP, which differ significantly from accounting principles generally accepted in the United States of America (U.S. GAAP) as described below:

 

a. Different criteria for capitalizing and amortizing capitalized interest

 

Until 1997, under Brazilian GAAP as applied by the Company, interest attributable to construction-in-progress was computed at the rate of 12% per year on the balance of construction-in-progress; interest incurred on third-party loans was credited to interest expense and the excess interest capitalized was credited to capital reserves. Subsequent to 1997, interest and monetary correction is capitalized on loans that are designated to finance construction-in-progress.

 

Under U.S. GAAP, in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 34, “Capitalization of Interest Costs”, interest incurred on borrowings is capitalized to the extent that borrowings do not exceed construction-in-progress. The credit is a reduction of interest expense. Under U.S. GAAP, the amount of interest capitalized excludes monetary gains associated with local currency borrowings and the foreign exchange gains and losses on foreign currency borrowings, and other financial expenses related to borrowings.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The effects of these different criteria for capitalizing and amortizing capitalized interest are presented below:

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Capitalized interest

            

U.S. GAAP capitalized interest

   29,815     27,781  

U.S. GAAP capitalized interest on disposals

   (37,798 )   (5,845 )

Brazilian GAAP capitalized interest

   (6,637 )   (4,693 )

Brazilian GAAP capitalized interest on disposals

   29,947     4,875  
    

 

U.S. GAAP difference

   15,327     22,118  
    

 

Amortization of capitalized interest

            

Amortization under Brazilian GAAP

   22,210     22,332  

Capitalized interest on disposals

   (34,861 )   (4,692 )

Amortization under U.S. GAAP

   (23,300 )   (25,742 )

Capitalized interest on disposals

   41,438     5,543  
    

 

U.S. GAAP difference

   5,487     (2,559 )
    

 

 

b. Monetary restatement of 1996 and 1997

 

The amortization of the asset appreciation that originated from the inflation accounting during 1996 and 1997, when Brazil was still considered as high inflationary economy for U.S. GAAP purposes, has been recognized in the reconciliation to U.S. GAAP. The loss related to monetary restatement on disposals of such assets is classified for U.S. GAAP purposes as a component of other operating expense. The resulting step-up is amortized over the remaining lives of the related assets.

 

c. Exchange of shares for minority interest in Telesp Celular S.A, Telebrasília Celular S.A. and Tele Centro Oeste Celular Participações S.A.

 

In January 2000, the Company exchanged 21,211,875,174 of its common shares and 61,087,072,187 of its preferred shares for all of the shares held by minority shareholders of Telesp Celular S.A. In 2002, TCO acquired the minority interest in its subsidiary, Telebrasilia Celular S.A. (“Telebrasilia”) by exchanging shares of TCO for the shares held by the minority shareholders of Telebrasilia. The acquisition increased TCO’s interest in Telebrasilia from 88.25% to 100%. In 2004, TCO acquired the remaining minority interests in its other subsidiaries through an exchange offer. The exchange ratio for these share exchanges was based on the respective market value of the shares exchanged.

 

Under Brazilian GAAP, the share exchanges were recorded at book value. An increase in capital was recorded based on the market value of the Company’s shares, and a capital reserve was recorded for the difference between the market price of the acquired company’s shares and the book value of the shares.

 

Under U.S. GAAP, the exchange of shares for minority interests is accounted for using the purchase method of accounting. The purchase price of the shares is recorded based on the market price of the issuing Company’s shares at the date of the exchange offer. The purchase price is allocated to the proportional assets and liabilities of the acquired minority interest based on their relative fair values. If the fair values of the net assets exceed the purchase price, the difference is recorded as a reduction to the proportional long-lived assets acquired.

 

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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

d. Acquisitions

 

Under Brazilian GAAP, purchases of an equity interest of another company are recorded at book value. The difference between the purchased company’s proportional net assets and the purchase price is recorded as goodwill. The goodwill is first attributed to any appreciation in the values of the permanent assets acquired and amortized based on the useful lives of the underlying permanent assets. Excess goodwill is generally amortized over 10 years on a straight-line basis, based on estimated future profitability.

 

Under U.S. GAAP, the cost of an acquired entity is allocated to the assets acquired, including identifiable intangible assets, and liabilities assumed based on their estimated fair values on the date of acquisition. The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed is recognized as goodwill. Under U.S. GAAP, goodwill is not subject to amortization over its estimated useful life, but rather it is subject to at least an annual assessment for impairment by applying a fair value-based test.

 

The differences between Brazilian GAAP and U.S. GAAP relate to (i) the acquisition of an equity interest in Daini do Brasil S.A. (Daini), Globaltelcom Telecomunicações S.A. (Globaltelcom) and GTPS S.A. Participações em Investimentos de Telecomunicações (“GTPS”) (formerly Inepar S.A. Participação em Investimentos de Telecomunicações), the holding companies which controlled Global Telecom S.A. (collectively, the “Holdings”) on February 6, 2001, (ii) the acquisition of the remaining interest in the Holdings on December 27, 2002, and (iii) the acquisition of TCO on April 25, 2003 and the tender offers to purchase additional shares of TCO in November 2003 and October 2004.

 

Acquisition of GT and Holdings

 

On February 6, 2001, the Company acquired 49% of the outstanding voting shares and 100% of the outstanding non-voting preferred shares of each of the Holdings that collectively held 95% of the voting shares and 100% of the non-voting shares of GT for a total purchase price of R$914,964. The remaining 5% of the voting shares of GT were held by another investor who subsequently sold them to the Holdings upon authorization by ANATEL in July 2001. This purchase was funded by an additional capital contribution by the Company to the Holdings in the amount of R$17,400. The Company’s investment in the Holdings represented an 83% aggregate indirect economic interest of the total equity of GT at December 31, 2001. The balance of the economic interest was held by the Holdings.

 

During 2002, TCP and TC made an intercompany loan to GT amounting to R$3,161,709. As described above, on December 27, 2002, after obtaining approval from ANATEL, TCP purchased the remaining 51% of the outstanding common stock of each of the Holdings (representing an economic interest of 17%) in accordance with the purchase commitment discussed above, for cash of R$290,282 and began to consolidate the Holdings. The total purchase price, considered for U.S. GAAP purposes amounted to R$827,772, representing the cash paid plus the minority interest in the intercompany loans held by the Holdings immediately prior to the date of acquisition. Considering TCP’s direct and indirect interests, TCP then owned 100% of the capital of GT. On December 30, 2002, R$2,310,878 of the intercompany loan was capitalized, in exchange for additional shares of GT capital stock.

 

The acquisition of GT was completed to increase market presence in the south of Brazil and to enable TC and GT to benefit from synergies to be derived from their operations and sales of handsets.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The purchase price of R$914,964 exceeded the Company’s proportionate share of the U.S. GAAP net equity of the Holdings by R$728,868. For U.S. GAAP purposes, the Company allocated this difference as follows:

 

     2002
acquisition


   2001
acquisition


 

Amounts representing 83% and 17% of the historical net assets of Holdings under U.S. GAAP

   273,387    186,096  

Fair value adjustments:

           

Property and equipment

   4,703    (84,116 )(a)

Intangible assets—customer list

   26,856    75,339 (b)

Debt

   4,238    14,353 (c)

Intangible related to concession

   97,190    723,292 (d)

Goodwill

   421,398    —   (e)
    
  

Purchase Price

   827,772    914,964  
    
  


(a) Difference being amortized over approximately 11 years, representing the average remaining useful lives of the relating assets.
(b) Difference being amortized over two years, representing the average customer life.
(c) The adjustment to long-term debt is being amortized by the effective interest method over the remaining maturities of the underlying GT debt obligations.
(d) The concession is being amortized on a straight-line basis over a 12-year period, representing the remaining term of the license.
(e) The goodwill recorded for U.S. GAAP purposes represents the amount paid in excess of the fair value of the Holdings. Under Brazilian GAAP, TCP recorded goodwill amounting to R$290,282.

 

In connection with the 2001 acquisition, the Company committed to purchase the remaining 51% of the outstanding common stock of each of the Holdings for total consideration of US$ 76.3 million, adjusted at a rate of LIBOR plus 4% per year.

 

Prior to the acquisition of the remaining capital stock of the Holdings described below, the Company did not control the Holdings and consequently accounted for its investment in the Holdings under the equity method under Brazilian GAAP and for U.S. GAAP purposes. The equity income or loss of unconsolidated subsidiaries is presented as non-operating income under U.S. GAAP as opposed to operating income under Brazilian GAAP.

 

As discussed above, TCP acquired the remaining interest in the Holdings pursuant to a purchase commitment that fixed the purchase price for the remaining 51% of the outstanding common stock of the Holdings (representing a 17% economic interest). At the date of the acquisition, the contracted purchase price exceeded the fair value of the acquired interest in the Holdings. On December 31, 2002, under Brazilian GAAP, TCP elected to record a reserve for loss on its investments of R$170,846. After the recognition of impairment, the remaining goodwill balance under Brazilian GAAP amounted to R$722,693. Under U.S. GAAP, an impairment of R$421,398 was recorded, representing the total amount of the goodwill balance at December 31, 2002. Under both Brazilian GAAP and U.S. GAAP, the fair value of the Holdings was estimated based on an independent valuation performed by “BES Investimento do Brasil S.A.”

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Following are the components of the U.S. GAAP adjustments to shareholders’ equity related to GT as of September 30, 2005 and December 31, 2004:

 

     As of
September 30,
2005


    As of
December 31,
2004


 

Purchase accounting on acquisition of Holdings:

            

Reversal of goodwill recorded under Brazilian GAAP

   (654,293 )   (722,693 )

Intangible related to concession recorded in U.S. GAAP

   1,176,727     1,176,727  

Amortization of intangible related to concession

   (417,241 )   (348,141 )

Provision for losses recorded under U.S. GAAP

   (89,533 )   (89,533 )

Property, plant and equipment fair value adjustment

   (121,661 )   (121,661 )

Amortization of fair value of property, plant and equipment adjustment

   62,761     52,830  

Customer list intangible asset recorded in U.S. GAAP

   140,035     140,035  

Amortization of customer list

   (140,035 )   (140,035 )

Debt fair value adjustment

   25,800     25,800  

Amortization of debt fair value adjustment

   (24,043 )   (23,371 )
    

 

Total U.S. GAAP adjustments related to acquisition of Holdings

   (41,483 )   (50,042 )
    

 

 

Acquisition of TCO

 

On April 25, 2003, the Company acquired 64.03% of the voting capital of TCO for approximately R$1,505.6 million, and in November 2003 and October 2004, respectively, the Company completed public tender offers to acquire 26.70% of the voting capital and 32.76% of the preferred shares of TCO for R$538.8 million and R$901,502 million, respectively. After these acquisitions, TCP became the holder of 90.73% of the voting capital of TCO (51.42% of the total capital). Additionally, the Company acquired a portion of the remaining balance of the special goodwill reserve of TCO, which was partially capitalized in amount of R$63.893 on July 29, 2005 in its favor, increasing its interest in TCO to 52.47% of the total capital.

 

For U.S. GAAP purposes, the purchase price of such acquisitions was allocated as follows:

 

    

2004

Acquisition


    2003
Acquisition


 

Amounts representing 22.11% and 29.31% of the historical net assets of TCO under U.S. GAAP

   432,344     429,842  

Fair value adjustments:

            

Property and equipment

   27,684     42,211 (a)

Intangible assets—customer list

   158,110     163,885 (b)

Debt

   —       5,125 (c)

Intangible related to concession

   525,052     882,824 (d)

Goodwill

   —       831,052 (e)

Deferred income tax

   (241,688 )   (277,594 )
    

 

Purchase price

   901,502     2,077,345  
    

 

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 


(a) Difference being amortized over approximately 3 years, representing the weighted average remaining useful lives of the relating assets.
(b) Difference being amortized over two years, representing the average customer life.
(c) The adjustment to long-term debt is being amortized by the effective interest method over the remaining maturities of the underlying TCO debt obligations.
(d) The intangible asset related to the concession is being amortized on a straight-line basis over a period of approximately 18 years, representing the remaining term of the license of Area 8 and the remaining term of the license of Area 7, which expire in 2008, plus one extension of 15 years.
(e) The goodwill recorded for U.S. GAAP purposes represents the amount paid in excess of the fair value of TCO. Under Brazilian GAAP, TCP recorded goodwill amounting to R$2,134,824.

 

The following are the components of the U.S. GAAP adjustments to shareholders’ equity related to such acquisitions as of September 30, 2005 and December 31, 2004:

 

     As of
September 30,
2005


    As of
December 31,
2004


 

Purchase accounting on acquisition of TCO:

            

Reversal of goodwill recorded under Brazilian GAAP

   (1,471,163 )   (1,765,532 )

Intangible related to concession recorded in U.S. GAAP

   1,407,876     1,407,876  

Amortization of intangible related to concession

   (252,859 )   (195,398 )

Property, plant and equipment fair value adjustment

   69,895     69,895  

Amortization of fair value of property, plant and equipment adjustment

   (27,986 )   (12,936 )

Customer list intangible asset recorded in U.S. GAAP

   321,995     321,995  

Amortization of customer list

   (240,670 )   (142,714 )

Debt fair value adjustment

   5,125     5,125  

Amortization of debt fair value adjustment

   (3,618 )   (2,936 )

Goodwill recorded in U.S. GAAP

   735,036     786,888  

Deferred income tax

   (340,859 )   (409,633 )
    

 

Total of the U.S. GAAP adjustments related to acquisition of TCO

   202,772     62,630  
    

 

 

e. Pension and other post-retirement benefits

 

TC and TCO participate in two multiemployer benefit plans (PBS-A and PAMA) for their retired employees that are operated and administered by Fundação Sistel de Seguridade Social—SISTEL and provide for the costs of pension and other post-retirement benefits based on a fixed percentage of remuneration, as recommended annually by independent actuaries. For purposes of U.S. GAAP, the Company is only required to disclose its annual contributions and the funded status related to multiemployer plans. These companies also sponsor single-employer defined benefit pension plans (PBS-TCP and PBS-TCO). The provisions of SFAS No. 87, “Employers’ Accounting for Pensions” were applied for the multiemployer plan and the single employer plans with effect from January 1, 1992 because it was not feasible to apply them from the effective date specified in the standard.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Under U.S. GAAP, the liability to be recorded using actuarial calculations based on SFAS No. 87 differs from actuarial calculations under Brazilian GAAP. The U.S. GAAP liability exceeded the Brazilian GAAP estimated liability by R$3,337 and R$4,386 as of September 30, 2005 and December 31, 2004, respectively, and has been recorded in the U.S. GAAP reconciliation as an additional liability. A summary of the difference between Brazilian GAAP and U.S. GAAP in accrued pension and other postretirement plan liabilities is as follows:

 

     As of September 30, 2005

    As of December 31, 2004

 
     U.S.
GAAP


    Brazilian
GAAP


   Accumulated
difference


    U.S.
GAAP


    Brazilian
GAAP


   Accumulated
difference


 

PBS-TCP

   2,426     —      2,426     2,785     —      2,785  

PBS-TCO

   (1,015 )   —      (1,015 )   (1,062 )   —      (1,062 )

TCP-PREV

   1,027     —      1,027     1,117     —      1,117  

TCO-PREV

   1,257     —      1,257     1,904     —      1,904  

PAMA

   —       191    (191 )   —       191    (191 )

PAMA-TCO

   —       167    (167 )   —       167    (167 )
    

 
  

 

 
  

Accrued pension/postretirement liabilities

   3,695     358    3,337     4,744     358    4,386  
    

 
  

 

 
  

 

f. Disclosure requirements

 

U.S. GAAP disclosure requirements differ from those required by Brazilian GAAP. However, in these consolidated financial statements, the level of disclosure has been expanded to comply with U.S. GAAP.

 

g. Interest expense

 

Brazilian GAAP requires that interest be shown as part of operating income. Under U.S. GAAP, interest expense would be shown after operating income and accrued interest would be included in accounts payable and accrued expenses.

 

h. Loss per share

 

Under Brazilian GAAP, net loss per share is calculated based on the number of shares outstanding at the balance sheet date.

 

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, “Earnings per Share”. This statement became effective December 15, 1997, and provides computation, presentation and disclosure requirements for earnings per share.

 

Since the preferred and common stockholders have different dividend, voting and liquidation rights, basic and diluted earnings per share have 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 stock 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 number of common shares outstanding. Net income available to preferred shareholders is the sum of the preferred stock dividends and the preferred shareholders’ portion of undistributed net income. Undistributed net

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

income is computed by deducting total dividends (the sum of preferred and common stock dividends) from net income. Undistributed net income is shared equally by the preferred and common shareholders on a “pro rata” basis. At September 30, 2005 and 2004, the Company was obligated to issue shares to the controlling shareholder for the amount of the tax benefit realized relating to the corporate restructuring described in Note 20. The number of shares issuable was computed considering the balance of the special goodwill reserve (R$693,678 on September 30, 2005 and R$990,169 in September 30, 2004). However, the potentially dilutive shares, consisting solely of the estimate of common shares issuable mentioned above, have been excluded from the computation for the periods presented as their effect would have been anti-dilutive.

 

For the periods presented below, the weighted average number of shares outstanding reflect the effect of the reverse stock split described in Note 19. The computation of basic and diluted earnings per share is as follows:

 

    Nine-month periods ended September 30,

 
    2005

    2004

 
    Common

    Preferred

    Common

    Preferred

 

Basic numerator:

                       

Allocated net loss to common and preferred shareholders

  (137,432 )   (248,188 )   (85,357 )   (158,961 )

Basic denominator:

                       

Weighted average shares outstanding

  226,765,733     409,517,046     163,753,546     304,960,195  

Loss per share—basic

  (0.61 )   (0.61 )   (0.52 )   (0.52 )

Diluted numerator:

                       

Allocated net loss to common and preferred shareholders

  (137,432 )   (248,188 )   (85,357 )   (158,961 )

Diluted denominator:

                       

Weighted average shares outstanding

  226,765,733     409,517,046     163,753,546     304,960,195  

Loss per share—diluted

  (0.61 )   (0.61 )   (0.52 )   (0.52 )

 

The Company’s preferred shares are non-voting, except under certain limited circumstances, and are entitled to a preferential, noncumulative dividend and to priority over the common shares in the event of liquidation of the Company. For all periods presented, the Company did not pay dividends for both preferred and common shares.

 

i. Permanent assets

 

Brazilian GAAP has a class of assets called permanent assets. This is the collective name for all assets on which indexation adjustments were calculated in the corporate and fiscal law accounts of Brazilian companies until December 31, 1995. Under U.S. GAAP, the assets in this classification would be non-current assets and property, plant and equipment.

 

Under Brazilian GAAP, gains and losses on disposals of permanent assets are classified as non-operating results. Under U.S. GAAP, these items are recorded in operating results.

 

 

j. Leases

 

The Company has leased certain computer hardware and software under a non-cancelable lease. Under Brazilian GAAP, all leases are considered to be operating leases, with lease expense recorded when paid. For U.S. GAAP purposes, this lease is considered a capital lease as defined in SFAS No. 13, “Accounting for

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Leases.” Under SFAS No. 13, the Company is required to record the asset at the present value of the minimum lease payments with a corresponding debt obligation. Depreciation is recorded over the shorter of the estimated useful life of the asset or the lease. Interest expense is recognized over the life of the lease and payments under the lease are amortized to principal and interest under the effective interest method.

 

k. Valuation of long-lived assets and goodwill

 

Under Brazilian GAAP, an impairment is recognized on long-lived assets such as property, plant and equipment and concession intangibles if the expected net cash flows generated by the respective asset are not sufficient to cover its book value. Under U.S. GAAP, the Company evaluates long-lived assets for impairment using the criteria set forth in SFAS No. 144, “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of.” In accordance with this standard, the Company periodically evaluates the carrying value of long-lived assets to be held and used, when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from such assets is separately identifiable and is less than their carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the assets.

 

The Company has performed a review of its long-lived assets including property, plant and equipment, finite-lived intangible asset including concession and concluded that the recognition of an impairment charge was not required. The Company’s evaluation of its ability to recover the carrying value of its long-lived assets was based upon projections of future operations that assumed a higher level of revenues and gross margin percentages than the Company has historically achieved. There can be no assurance that the Company will be successful in achieving these improvements in its revenues and gross margin percentages, mainly due to technological and competition environment. Should the Company be unable to achieve such improvements, future impairment provisions may be recorded related to its investments in property, plant and equipment and the licenses acquired to operate its cellular networks by ANATEL.

 

Under Brazilian GAAP, the amount of goodwill impairment, if any, is measured based on projected undiscounted future operating cash flows. Under U.S. GAAP, pursuant to SFAS 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized and is subject to a yearly impairment test. In performing the yearly impairment test, the Company identifies its reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets. The Company then determines the fair value of each reporting unit and compares it to the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, a second step of the impairment test is performed, which involves the determination of the implicit fair value of the reporting unit by performing a hypothetical purchase accounting calculation. If the implicit value of the goodwill exceeds the book value, an impairment is recognized. The Company performed an impairment test for goodwill under U.S. GAAP relating to the TCO reporting unit on December 31, 2004 and determined that the recognition of an impairment loss was not required. The fair value of this reporting unit was estimated using the present value of future cash flows. The carrying amount of this goodwill at September 30, 2005 amounted to R$735,036.

 

l. FISTEL tax

 

Under Brazilian GAAP, the Fistel (Telecommunications Inspection Fund) tax assessed on each activation of a new cellular line is deferred and amortized over the customers’ estimated subscription period. For U.S. GAAP purposes, this tax would be charged directly to the consolidated statement of income.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

m. Revenue recognition

 

For U.S. GAAP, the Company recognizes service revenue as the services are provided. Prepaid service revenue is deferred and amortized based on subscriber airtime usage. Sales of handsets along with the related cost of the handsets are deferred and amortized over their estimated useful life. The excess of the cost over the amount of deferred revenue related to handset sales is recognized on the date of sale. The following is a reconciliation of net revenue between Brazilian GAAP and U.S. GAAP:

 

    

Nine-month periods

ended September 30,


 
     2005

   2004

 

Brazilian GAAP net revenue

   5,491,745    5,387,805  

Reclassification to cost of services and goods:

           

Taxes on sales

   1,421,149    1,294,823  

Roaming charges

   208,223    129,588  

U.S. GAAP adjustments:

           

Free minutes given in connection with sales of handsets

   14,419    (30,922 )

Deferred revenues on sales of handsets, net of amortization

   24,426    777,550  

Deferred revenues on sales of handsets with minute rebates

   —      16,244  
    
  

     7,159,962    7,575,088  
    
  

 

(i) Roaming

 

The Company has roaming agreements with other cellular service providers. When a call is made from within one coverage area by a subscriber of another cellular service provider, that service provider pays the Company for the service at the applicable rates. Conversely, when one of the Company’s customers roams outside the coverage area, the Company pays the charges associated with that call to the cellular service provider in whose region the call was originated and charges the same amount to its subscriber. Under Brazilian GAAP, revenues for roaming charges are recorded net of the related costs when the services are provided. Under U.S. GAAP, revenues and costs for roaming charges should be recorded gross. This difference in accounting had no impact on loss nor on the reconciliation of shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both revenues and cost of goods and services by R$208,223 and R$129,588 for September 30, 2005 and 2004, respectively.

 

(ii) Value-added and other sales taxes

 

Under Brazilian GAAP, these taxes are recorded in revenue net of the related tax expense. Under U.S. GAAP, these taxes are recorded gross as revenue and related cost of services and goods. This difference in accounting has no impact in net income (loss) nor in shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both revenues and cost of goods and services by R$1,421,149 and R$1,294,823 for September 30, 2005 and 2004, respectively.

 

(iii) Deferred revenue on sales of handsets

 

Under Brazilian GAAP, revenues and costs related to handset sales, including applicable value-added and other sales taxes, are recognized when sold. Under U.S. GAAP, revenue on sales of handsets along with the related cost of the handset, including applicable value-added and other sales taxes, are amortized over their estimated useful life. Any excess of the cost over the amount of deferred revenue related to handset sales is

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

recognized on the date of sale. As substantially all of the Company’s handsets are sold below cost, this difference in accounting had no impact on net income (loss) nor in shareholders’ equity. The unamortized balance of deferred handset revenue and the related balance of unamortized deferred handset costs was R$736,250 as of September 30, 2005 and R$760,677 as of December 31, 2004. The impact of this difference under U.S. GAAP was to increase both net revenues and cost of services and goods by R$24,426 and R$777,550 at September 30, 2005 and 2004, respectively.

 

(iv) Free minutes given in connection with sales of handsets

 

Under U.S. GAAP, pursuant to Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables,” the Company began to separately account for free minutes given in connection with sales of handsets. The adoption of EITF No. 00-21 is effective prospectively for transactions entered into as from January 1, 2004. Consequently, a portion of the revenue generated from the sale of handsets is allocated to the free minutes given and deferred based on the fair value of the minutes. The revenues associated with the free minutes are then recognized based on subscriber airtime usage. Under Brazilian GAAP, the Company does not separately account for free minutes given in connection with sales of handsets.

 

n. Derivative financial instruments

 

As mentioned in Note 18, the Subsidiaries have entered into foreign currency swap contracts for long-term agreements at various exchange rates, in the notional amount of US$1,276.8 million, €13,578 million and JPY8,247 million at September 30, 2005 (US$1,057.2 million, €25,136.5 million and JPY6,827.4 million at December 31, 2004). Under Brazilian GAAP, foreign currency swap contracts are recorded at their settlement amount based on the terms of the contract at the balance sheet date.

 

In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which was subsequently amended by SFAS Nos. 137, 138 and 149. SFAS No. 133 must be applied to all derivative instruments and certain derivative instruments embedded in hybrid instruments and requires that such instruments be recorded in the balance sheet either as an asset or liability measured at its fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 on January 1, 2000 did not have a material effect on the Company’s financial statements.

 

If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives that are considered to be effective, as defined, will either offset the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or will be recorded in other comprehensive income until the hedged item is recorded in earnings. Any portion of a change in a derivative’s fair value that is considered to be ineffective, as defined, must be immediately recorded in earnings. Any portion of a change in a derivative’s fair value that the Company has elected to exclude from its measurement of effectiveness, such as the change in time value of option contracts, will also be recorded in earnings.

 

The Company has designated certain cross-currency swap contracts that relate to transactions in which a fixed-rate, foreign currency-denominated loan is converted into a variable-rate, functional currency-denominated loan as fair value hedges. The Company had R$2,114.1 million (US$765.5 million, JPY8,247.0 million) as of September 30, 2005, and R$1,912.9 million (US$653.9 million and JPY6,827.4 million) as of December 31, 2004, of cross-currency swap contracts with a fair value of R$2,205.1 million as of September 30, 2005 (R$1,998.1 million as of December 31, 2004) designated as fair value hedges of a portion of the Company’s foreign currency-denominated debt. The Company is hedging the related foreign currency (U.S. dollar) and

 

F-39


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TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

interest rate risk associated with such indebtedness. These derivatives qualified for hedge accounting as the terms of the swap contracts are equal to the terms of the underlying debt. The Company calculates the effectiveness of these hedges both at inception and on an ongoing basis (i.e. at least quarterly), and ineffectiveness, if any, is recorded in the statement of operations for U.S. GAAP. The hedged debt is also adjusted to fair value under the fair value hedge rules of SFAS 133. At September 30, 2005 and 2004, the fair value of the Company’s debt subject to these accounting hedges is higher than their respective book values by R$12.1 million and R$32.2 million, respectively, representing the related mark-to-market adjustment, which was recorded in the statement of loss as part of financial expense, net for the nine-months ended September 30, 2005 and December 30, 2004. The U.S. GAAP adjustment reflects the difference between the recorded value of these hedges and the related debt under Brazilian GAAP and their fair values under U.S. GAAP.

 

The Company’s remaining derivative contracts for the periods presented have not been accounted for using hedge accounting. Consequently, these derivative contracts are recorded at fair value at September 30, 2005 and December 31, 2004.

 

o. License acquisition interest capitalization

 

The incurred interest between the date of the documentation and the submission of a proposal to obtain a license to provide Band B mobile telephone services and the date of the initial operations of GT was recorded as a deferred asset according to Brazilian GAAP. Under U.S. GAAP, the interest was capitalized as license acquisition cost. The amount of the reversal relates to differences in interest accrued in 1998.

 

p. Amortization of license acquisition costs

 

GT recorded amortization of license acquisition costs during the start-up period as deferred assets according to Brazilian GAAP. Under U.S. GAAP, such amortization was reversed and the amortization period starts on the start-up date, January 1, 1999, the date that GT began to operate.

 

For Brazilian GAAP purposes, the amortization period of the concession (license) for the Band B company Norte Brasil Telecom S.A. (NBT) is 30 years from 2000, which includes an additional 15 years assuming renewal by Anatel. For U.S. GAAP purposes, the amortization period of 15 years includes only the initial term of the concession. In 2001, NBT changed the amortization period to 15 years with the aim of conforming Brazilian GAAP treatment to U.S. GAAP treatment.

 

q. Deferred assets

 

GT has recorded pre-operational costs as deferred assets, to be amortized on a straight-line basis over 10 years, as allowed by Brazilian GAAP. Under U.S. GAAP, these costs are recorded as expenses when incurred.

 

r. Advance to affiliate

 

In January 2002, TCO made an advance payment of R$34,259, adjusted based on market rates, to BID S.A. corresponding to the present value of the tax benefit contributed by BID S.A. to TCO relating to the goodwill paid by BID S.A. for TCO’s shares. With this transaction, TCO relieved itself of the obligation to issue the corresponding shares to BID S.A. in the future. On December 2004, such balance of advance payment was R$15,584. Under Brazilian GAAP, the amount of R$15,584 was recorded as an advance to an affiliate. For U.S. GAAP purposes, such transaction would be recorded as a distribution to shareholders. Additionally, for U.S. GAAP purposes, no interest income would be accrued related to this transaction.

 

In 2005, this advance was converted to capital reserve in TCO, as a special goodwill reserve.

 

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Table of Contents

TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Reconciliation of the Net Loss differences between Brazilian GAAP and U.S. GAAP:

 

    

Nine-month periods

ended September 30,


 
           2005      

          2004      

 

Brazilian GAAP net loss

   (591,623 )   (255,506 )

Add (deduct):

            

Different criteria for:

            

Amortization of monetary restatement of 1996 and 1997

   (14,212 )   (12,697 )

Gain (loss) on disposal of assets monetarily restated in 1996 and 1997

   648     (3,845 )

Capitalized interest

   15,327     22,118  

Amortization of capitalized interest

   5,487     (2,559 )

Sales of handset with minute rebates

   —       16,244  

Pension plan

   1,049     (504 )

Exchange of shares for minority interest:

            

Depreciation of fair value adjustment to fixed assets

   7,010     7,165  

Amortization of concession

   (2,612 )   (1,854 )

FISTEL taxes

   19,940     (40,360 )

Difference in criteria for capital leases

   (4,501 )   10,299  

Derivative contracts

   18,548     82,054  

Amortization of licence acquisition costs

   (7,025 )   (4,363 )

Advance to affiliate

   15,584     29,484  

Amortization of deferred assets

   26,961     27,156  

Donations

   (107 )   8  

Acquisitions:

            

Reversal of goodwill amortization according to Brazilian GAAP

   362,769     175,230  

Reversal of tax benefit on amortization of goodwill according to Brazilian GAAP

   (34,222 )   (17,733 )

Depreciation impact

   (5,120 )   4,658  

Amortization on purchase price allocations to customer list

   (97,957 )   (71,528 )

Amortization of intangible related to concession

   (126,561 )   (162,988 )

Additional interest expense on purchase price allocation of debt.

   (1,354 )   (1,508 )

Free minutes given in connection with sales of handsets

   14,419     (30,922 )

Deferred tax effect on the above adjustments

   30,805     (1,625 )

Minority interest on the above adjustments

   (18,873 )   (10,742 )
    

 

U.S. GAAP net loss

   (385,620 )   (244,318 )
    

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Loss per thousand shares in accordance with U.S. GAAP

            

Common and preferred shares—Basic and diluted

   (0.61 )   (0.52 )

Weighted average common shares—Basic and diluted (thousands)

   226,765,733     163,753,546  
    

 

Weighted average preferred shares—Basic and diluted (thousands)

   409,517,046     304,960,195  
    

 

 

F-41


Table of Contents

TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Reconciliation of the Shareholders’ Equity differences between Brazilian GAAP and U.S. GAAP:

 

     As of
September 30,
2005


   

As of
December 31,

2004


 

Brazilian GAAP shareholders’ equity

   4,315,765     2,907,380  

Add (deduct):

            

Different criteria for:

            

Monetary restatement of 1996 and 1997

   323,218     322,570  

Amortization of monetary restatement of 1996 and 1997

   (315,826 )   (301,614 )

Capitalized interest

   102,627     87,300  

Amortization of capitalized interest

   (4,319 )   (9,806 )

Free minutes given in connection with sales of handsets

   (34,624 )   (49,043 )

Pension plan

   (3,337 )   (4,386 )

Exchange of shares for minority interest:

            

Adjustment to fixed assets exchange of shares for minority interest

   (98,713 )   (98,713 )

Accumulated depreciation

   74,048     67,038  

Adjustment to concession

   68,621     68,621  

Amortization of concession

   (8,598 )   (5,986 )

FISTEL taxes

   (83,482 )   (103,422 )

Value of fixed assets net of depreciation—capital leases

   30,189     35,331  

Capital lease obligations

   —       (641 )

Fair value of derivative contracts

   (46,443 )   (64,991 )

Interest capitalized on license acquisition costs

   42,006     42,006  

Amortization of license acquisition costs

   (895 )   6,130  

Deferred assets, net of accumulated amortization

   (139,477 )   (166,438 )

Advance to affiliate

   —       (15,584 )

Donations

   (966 )   (859 )

Acquisitions:

            

Acquisition of GT and Holdings

   (41,483 )   (50,042 )

Acquisition of TCO

   202,770     62,630  

Deferred taxes on the above adjustments

   (9,834 )   10,505  

Minority interest on the above adjustments

   (21,212 )   (2,339 )
    

 

U.S. GAAP shareholders’ equity

   4,350,035     2,735,647  
    

 

 

     As of
September 30,
2005


    As of
December 31,
2004


 

Supplementary balance sheet information U.S. GAAP:

            

Total assets

   13,851,368     14,226,289  

Property, plant and equipment

   11,845,796     11,506,526  

Accumulated depreciation

   (6,026,349 )   (5,856,873 )
    

 

Net property, plant and equipment

   5,819,447     5,649,653  
    

 

 

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Table of Contents

TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Changes in the consolidated shareholders’ equity under U. S. GAAP

 

     As of
September 30,
2005


 

Shareholders’ equity under U.S. GAAP as of beginning of the year

   2,735,647  
    

Capital increase

   2,000,000  

Premium paid on acquisition of fractional shares

   8  

Net loss

   (385,620 )
    

Shareholders’ equity under U.S. GAAP as of September 30, 2005

   4,350,035  
    

 

22. Additional disclosures required by U.S. GAAP

 

a. Intangible assets

 

Following is a summary of the Company’s intangible assets subject to amortization under U.S. GAAP:

 

     As of and for the Nine-months
ended September 30, 2005


   

As of December 31, 2004 and for

the Nine-months ended

September 30, 2004


 
     Concession

     Software
use rights


    Customer
list


    Concession

     Software
use rights


    Customer
list


 

Gross

   3,671,707      1,618,619     462,030     3,671,707      1,214,080     462,030  

Accumulated amortization

   (1,160,042 )    (848,733 )   (380,706 )   (977,423 )    (675,404 )   (282,749 )
     (89,533 )    —       —       (89,533 )    —       —    
    

  

 

 

  

 

Net

   2,422,132      769,886     81,324     2,604,751      538,676     179,281  
    

  

 

 

  

 

Amortization expense

   182,619      173,329     97,957     218,287      158,095     71,528  
    

  

 

 

  

 

Amortization period

   (a )    5 years     2 years     (a )    5 years     2 years  

 

(a) Amortized on a straight-line method over the concession period until April, 2013 for GT and until 2023 for TCO.

 

The estimated aggregate amortization expense for the next five years is as follows:

 

     Amount

October 1 to December 31, 2005

   163,837

2006

   626,503

2007

   526,723

2008

   325,486

2009

   243,489

January 1 to September 30, 2010

   182,617

 

F-43


Table of Contents

TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

b. Capital leases

 

The following summarizes the amounts related to the assets and accumulated depreciation for U.S. GAAP purposes of the related assets under the Company’s capital lease obligations:

 

    

As of
September 30,

2005


 

Property, plant and equipment:

      

Software

   70,774  

Less: accumulated amortization

   (40,585 )
    

     30,189  
    

 

There is no future minimum payment to be disclosed since all the lease obligations were settled up to September 30, 2005.

 

c. Concentration of risk

 

Credit risk with respect to trade accounts receivable is diversified. The Company continually monitors the level of trade accounts receivable and limits the exposure to bad debts by cutting access to the telephone network if any invoice is 15 days past due. Exceptions comprise telephone services that must be maintained for reasons of safety or national security.

 

In conducting their business, Telesp Celular S.A. and Global Telecom are fully dependent upon the cellular telecommunications authorizations granted by the Federal Government.

 

There is no concentration of available sources of labor, services, concessions or rights, other than those mentioned above, that could, if suddenly eliminated, severely impact the Company’s operations.

 

d. Commitments

 

Budgeted capital expenditure commitments for 2005 are approximately R$1,306.0 million of which R$944.8 million has been incurred in the nine-month period ended September 30, 2005. Most of the 2005 capital expenditures are related to infrastructure, information technology and transmission equipment.

 

The Company is subject to obligations concerning quality of services, network expansion and modernization, as established in our authorizations and our original concession agreements. The Company believes that it is currently in compliance with its quality of service and expansion obligations.

 

e. Segment information

 

The Company has determined that its reportable segments are those that are based on the Company’s method of internal reporting. The reportable segments of the Company are Telesp Celular, Global Telecom and TCO. These reportable segments are strategic business subsidiaries that operate in different concession areas and are in different phases of development and therefore, are managed and funded separately.

 

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Intersegment sales are recorded at cost.

 

F-44


Table of Contents

TELESP CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Following is information on the Company’s reportable segments as of and for the nine-months ended September 30, 2005:

 

     Telesp
Celular


   Global
Telecom


   

Tele Centro

Oeste


   Other

    Eliminations

    Consolidated

 

Net operating revenue

   3,187,017    602,517     1,702,211    —       —       5,491,745  

Operating income (loss)

   228,520    (219,327 )   216,445    (338,986 )   (91,464 )   (204,812 )

Net income (loss)

   125,436    (219,376 )   58,391    (423,066 )   (133,008 )   (591,623 )

Total assets

   5,937,296    2,632,292     4,787,206    443,647     (269,347 )   13,531,094  

 

Following is information on the Company’s reportable segments as of December 31, 2004 and for the nine months ended September 30, 2004:

 

     Telesp
Celular


   Global
Telecom


   

Tele Centro

Oeste


   Other

    Eliminations

    Consolidated

 

Net operating revenue

   3,195,853    590,409     1,601,543    —       —       5,387,805  

Operating income (loss)

   534,159    (153,478 )   369,440    (43,252 )   (400,434 )   306,435  

Net income (loss)

   439,970    (150,823 )   161,716    (440,196 )   (266,173 )   (255,506 )

Total assets

   6,107,360    3,563,059     4,223,061    980,825     (743,136 )   14,131,169  

 

f. New accounting standards

 

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the fair value of the liability can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for the year ended December 31, 2005 for calendar year companies. The Company is currently evaluating FIN 47 to determine the impact on its consolidated financial statements.

 

In March 2004, the Emerging Issues Task Force of the FASB reached a consensus on EITF 03-06 (Participating Securities and the Two-Class Method under FASB Statement No. 128) that an entity would allocate losses to a nonconvertible participating security in periods of net loss if, based on the contractual terms of the participating security, the security had not only the right to participate in the earnings of the issuer, but also a contractual obligation to share in the losses of the issuing entity on a basis that was objectively determinable. Determination of whether a participating security holder has an obligation to share in the losses of the issuing entity in a given period must be made on a period-by-period basis, based on the contractual rights and obligations of the participating security. EITF Issue No. 03-06 is effective for fiscal periods beginning after March 31, 2004. The Company is currently evaluating EITF 03-06 to determine the impact on its consolidated financial statements.

 

* * * * * * * * * * *

 

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Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

 

INDEX TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

Unaudited Interim Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004

   F-47 and F-48

Unaudited Interim Condensed Consolidated Statements of Income for the Nine-Month Periods ended September 30, 2005 and 2004

   F-49

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine-Month Period ended September 30, 2005

   F-50

Unaudited Interim Condensed Consolidated Statements of Changes in Financial Position for the Nine-Month Periods ended September 30, 2005 and 2004

   F-51

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods ended September 30, 2005 and 2004

   F-52

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

   F-53

 

Definitions:

 

Brazilian GAAP—Generally accepted accounting principles in Brazil.

U.S. GAAP—Generally accepted accounting principles in the United States of America.

 

F-46


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A .

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais)

 

     Note

 

As of

September 30,

2005


  

As of

December 31,

2004


ASSETS

             

Current assets:

             

Cash and cash equivalents

       906,421    951,186

Short-term investments pledged as collateral

   11   160,051    —  

Trade accounts receivable, net

   12   570,325    477,135

Inventories

       104,394    193,510

Recoverable taxes

   13   167,240    170,366

Deferred income taxes

  

10c

  178,206    104,016

Prepaid expenses

       63,246    39,960

Other current assets

       21,370    28,145
        
  

Total current assets

       2,171,253    1,964,318
        
  

Noncurrent assets:

             

Recoverable taxes

   13   44,648    42,938

Deferred income taxes

  

10c

  411,440    416,507

Prepaid expenses

       6,416    11,486

Other assets

       15,462    30,072
        
  

Total noncurrent assets

       477,966    501,003
        
  

Permanent assets:

             

Investments

       3,325    4,196

Property, plant and equipment, net

       1,132,686    1,104,290

Deferred assets, net

       19,039    21,848
        
  

Total permanent assets

       1,155,050    1,130,334
        
  

Total assets

       3,804,269    3,595,655
        
  

 

 

The accompanying notes are an integral part of these unaudited

interim condensed consolidated financial statements.

 

F-47


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais)

 

     Note

  

As of

September 30,

2005


  

As of

December 31,

2004


 

LIABILITIES AND SHAREHOLDERS’ EQUITY

                

Current liabilities:

                

Payroll and related accruals

        19,492    21,447  

Accounts payable and accrued expenses

        306,287    467,382  

Taxes other than income taxes

        90,886    102,885  

Dividends payable

        143,249    144,395  

Loans and financing

   14a    78,161    102,727  

Derivative contracts

   14d    21,159    13,930  

Reserve for contingencies

   16    9,528    5,473  

Other current liabilities

   15    84,629    27,922  
         
  

Total current liabilities

        753,391    886,161  
         
  

Noncurrent liabilities:

                

Loans and financing

   14a    62,490    123,557  

Reserve for contingencies

   16    137,072    128,644  

Derivative contracts

   14d    7,067    6,811  

Pension and other post-retirement plans

        167    167  

Other liabilities

   15    8,630    8,687  
         
  

Total noncurrent liabilities

        215,426    267,866  
         
  

Shareholders’ equity:

                

Capital stock

   17a    1,021,737    792,966  

Treasury shares

        —      (49,109 )

Capital reserves

   17c    629,063    574,922  

Income reserves

   17d    692,646    857,524  

Retained earnings

        491,880    265,199  
         
  

Total shareholders’ equity

        2,835,326    2,441,502  
         
  

Funds for capitalization

        126    126  
         
  

SHAREHOLDERS’ EQUITY AND FUNDS FOR CAPITALIZATION

        2,835,452    2,441,628  
         
  

Total liabilities, shareholders’ equity and funds for capitalization

        3,804,269    3,595,655  
         
  

 

 

The accompanying notes are an integral part of these unaudited

interim condensed consolidated financial statements.

 

F-48


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A .

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais, except per shares data)

 

         

Nine-month periods

ended September 30,


 
     Note

   2005

    2004

 

Net operating revenue

   4    1,702,211     1,601,543  

Cost of services and goods sold

   5    (729,350 )   (619,307 )
         

 

Gross profit

        972,861     982,236  

Operating expenses:

                 

Selling expenses

   6    (499,739 )   (340,105 )

General and administrative expenses

   7    (133,847 )   (114,130 )

Other operating income, net

   8    1,326     6,328  
         

 

Operating income before financial net income

        340,601     534,329  

Financial income, net

   9    93,227     50,855  
         

 

Operating income

        433,828     585,184  

Net non-operating (expenses) income

        2,994     (2,074 )
         

 

Net income before income and social contribution taxes and minority interest

        436,822     583,110  

Income and social contribution taxes

   10    (161,048 )   (202,439 )

Minority interest

        —       (3,211 )
         

 

Net income

        275,774     377,460  
         

 

Outstanding shares at September, 30 (in thousands)

   17    130,068 (1)   380,877,925 (1)
         

 

Earnings per shares

        2.12 (1)   0.00099 (1)
         

 

(1) On March 31, 2005, the shareholders approved a reverse stock split in the proportion of 3,000 shares to 1 share of the same class. Had the reverse stock split occurred on September 30, 2004, shares outstanding and earnings per share for the nine-month period ended September 30, 2004 would have amounted to 126,959,308 and R$2.97, respectively.

 

 

The accompanying notes are an integral part of these unaudited

interim condensed consolidated financial statements.

 

F-49


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A .

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2005

(In thousands of Brazilian reais)

 

              Capital reserves

  Income reserves

             
   

Capital

Stock


 

Treasury

shares


   

Interest on

construction


 

Share

premium


 

Special

goodwill

reserve


   

Donations
and

subsidies


 

Tax

incentive


 

Legal

reserve


 

Reserve

for

expansion


   

Retained

earnings


    Total

 

Balances at December 31, 2004

  792,966   (49,109 )   4,505   37,533   532,731     —     153   107,291   750,233     265,199     2,441,502  

Capital increase with reserve—Special Meeting on March 31, 2005

  164,878   —       —     —     —       —     —     —     (164,878 )   —       —    

Capital increase with goodwill reserve - Special Meeting on July 29, 2005

  63,893   —       —     —     (63,893 )   —     —     —     —       —       —    

Special goodwill reserve realization

  —     —       —     —     (15,584 )   —     —     —     —       —       (15,584 )

Special goodwill reserve realization of TCP

  —     —       —     —     133,370     —     —     —     —       —       133,370  

Treasury share disposals

  —     16     —     —     —       —     —     —     —       —       16  

Goodwill on treasury share disposals

  —     —       —     —     24     —     —     —     —       —       24  

Treasury share cancellations

  —     49,093     —     —     —       —     —     —     —       (49,093 )   —    

Donations and subsidies

  —     —       —     —     —       224   —     —     —       —       224  

Net Income

  —     —       —     —     —       —     —     —     —       275,774     275,774  
   
 

 
 
 

 
 
 
 

 

 

Balances at September 30, 2005

  1,021,737   —       4,505   37,533   586,648     224   153   107,291   585,355     491,880     2,835,326  
   
 

 
 
 

 
 
 
 

 

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

F-50


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A .

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais)

 

    

Nine-month periods

ended September 30,


     2005

    2004

SOURCES OF FUNDS:

          

From operations:

          

Net income

   275,774     377,460

Items not affecting working capital:

          

Depreciation and amortization

   191,370     150,658

Minority interest

   —       3,211

Monetary and exchange variations on noncurrent assets and liabilities

   3,417     18,303

Net book value of permanent asset disposals

   139     898

Reserve for contingencies

   2,346     2,306

Loss on derivative long-term contracts

   6,730     1,769

Amortization of goodwill

   1,171     1,171

Long-term deferred income tax

   520     1,936

Gain on extinguishment of liabilities

   (7,374 )   —  

Others

   —       402
    

 

Total

   474,093     558,114
    

 

From shareholders:

          

Treasury stock

   40     —  

Unclaimed dividends and interest on shareholders’ equity

   —       2,450
    

 

Total

   40     2,450
    

 

From third parties:

          

Increase in long-term loans and financing

   —       5,257

Transfer from noncurrent assets to current assets

   135,376     79,102

Special Reserve adjustment—merger tax benefit

   27,126     103,890

Donations and subsidies

   224     —  
    

 

Total Sources

   636,859     748,813
    

 

USES OF FUNDS:

          

Additions to property, plant and equipment

   217,095     286,382

Additions to deferred assets

   —       154

Increase in deferred taxes

   3,479     29,946

Increase in prepaid expenses

   10,448     15,144

Transfer from long-term to current liabilities

   57     —  

Increase in long-term legal deposits

   1,305     —  

Transfer from long term loans, financing and derivatives to current liabilities

   57,504     67,671

Increase in noncurrent assets

   6,966     36,342

Capital reductions

   —       100

Other investments

   300     —  

Treasury stock

   —       55
    

 

Total Uses

   297,154     435,794
    

 

INCREASE IN WORKING CAPITAL

   339,705     313,019
    

 

REPRESENTED BY:

          

Current assets

   206,935     261,124

Beginning of period

   1,964,318     1,618,233

End of period

   2,171,253     1,879,357

Current liabilities

   132,770     51,895

Beginning of period

   886,161     731,491

End of period

   753,391     679,596
    

 

INCREASE IN WORKING CAPITAL

   339,705     313,019
    

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

F-51


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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A .

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais)

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Cash flows provided by operations:

            

Net cash from operating activities

   373,810     459,404  
    

 

Investing activities:

            

Additions to investments

   (300 )   —    

Additions to property, plant and equipment

   (216,871 )   (286,382 )

Addition to deferred assets

   —       (154 )

Short-term investments pledged as collateral

   (160,051 )   —    

Proceeds from asset disposals

   527     1,035  
    

 

Net cash from investing activities

   (376,695 )   (285,501 )
    

 

Financing activities:

            

Loans repaid

   (70,184 )   (137,156 )

New loans obtained

   —       38,063  

Net settlement on derivatives contracts

   (12,419 )   (4,723 )

Proceeds from sale of treasury shares

   40     —    

Purchase of treasury shares

   —       53  

Interest on shareholders’ equity/dividends paid

   (1,146 )   (139 )

Cash received relating to reverse stock split

   41,829     —    

Decrease in capital stock

   —       (100 )
    

 

Net cash from financing activities

   (41,880 )   (104,002 )
    

 

Increase (decrease) in cash and cash equivalents

   (44,765 )   69,901  

Cash and cash equivalents:

            

At the beginning of the period

   951,186     972,054  

At the end of the period

   906,421     1,041,955  
Supplemental cash flow information             
    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Income and social contribution tax paid

   154,006     189,318  

Interest paid

   11,879     14,357  

Noncash transaction:

            

Donations and subsidies

   224     —    

Contribution of tax benefit by shareholders

   133,370     510,788  

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

F-52


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A .

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

1. Operations and background

 

Tele Centro Oeste Celular Participações S.A. (“TCO” or the “Company”) is a publicly-traded company, which, as of September 30, 2005, is controlled by Telesp Celular Participações S.A.—“TCP” (90.59% of the voting capital and 52.47% of total capital).

 

The Company is the controlling shareholder of the operators Telegoiás Celular S.A. (“Telegoiás”), Telemat Celular S.A. (“Telemat”), Telems Celular S.A. (“Telems”), Teleron Celular S.A. (“Teleron”), Teleacre Celular S.A. (“Teleacre”) and Norte Brasil Telecom S.A. (“NBT”), which provides mobile telephone services, including activities necessary or useful to the provision of these services in the north and middle-west regions of Brazil, through authorizations which were granted to them.

 

The authorization granted to TCO expires on July 24, 2006, and its subsidiaries’ authorization expires as follows:

 

Subsidiary


  

Operating area by States


  

Expiration date of

concession/authorization


Telegoiás

   Goiás and Tocantins    10/29/2008

Telemat

   Mato Grosso    03/30/2009

Telems

   Mato Grosso do Sul    09/28/2009

Teleron

   Rondônia    07/21/2009

Teleacre

   Acre    07/15/2009

NBT

  

Amazonas, Roraima, Amapá, Pará and Maranhão

   11/29/2013

 

The above concessions/authorizations may be renewed for a 15-year period. The Company will be subject to an annual fee of approximately 1% of the operating annual revenues during the renewal period.

 

The business of the Company and its subsidiaries is regulated by the National Telecommunications Agency—ANATEL (“Agência Nacional de Telecomunicações”), the telecommunication industry regulator in accordance with Law No. 9,472, of July 16, 1997, and the related regulations, decrees, decisions and complementary plans.

 

On March 28, 2005, the Board of Directors of TCO approved the merger of Teleacre, Telegoiás, Teleron and Telems into the Company, and the merger of Telemat into the subsidiary TCO IP S.A. (“TCO IP”). The merger proposals were presented to ANATEL for approval on June 7 and 27, 2005, respectively. The purpose of these proposed mergers is to achieve financial and operational benefits through reductions in administrative costs.

 

2. Presentation of financial statements

 

The consolidated financial statements include the accounts of TCO and its subsidiaries. Intercompany transactions and balances have been eliminated. The consolidated financial statements include as of September 30, 2005, balances and transactions of the subsidiaries Telegoiás, Telemat, Telems, Teleron, Teleacre, NBT and TCO IP.

 

In the Company’s opinion, all adjustments necessary for a fair presentation of the unaudited results of operations for the nine-month periods ended September 30, 2005 and 2004 are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for period September 30, 2005 are not necessarily indicative of the results of operations to be expected for the full year. The accompanying consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2004, as appearing in the Company’s Annual Report on Form 20-F filed on April 15, 2005.

 

F-53


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The presentation of the consolidated financial statements is consistent with the presentation of the published financial statements of the Company in Brazil, from which the financial information was extracted, except for certain reclassifications and changes in terminology within the consolidated balance sheets and the consolidated statements of loss, which have been made to conform the previously published financial statements to the presentation included herein. The financial statements as of September 30, 2004 and December 31, 2004 have been reclassified, where applicable, for comparability.

 

3. Summary of the principal accounting policies

 

The unaudited interim condensed consolidated financial statements are expressed in thousands of Brazilian reais (“R$”), except when mentioned, and have been prepared in accordance with accounting practices adopted in Brazil, which include the accounting practices derived from Brazilian corporate law, regulations applicable to public telecommunications service concessionaires and accounting regulations and procedures established by the Brazilian Securities Commission (CVM)), hereinafter referred to as “Brazilian GAAP”.

 

The principal accounting practices adopted by the Company and its subsidiaries in the preparation of these interim financial statements are the same as those described in the consolidated financial statements as of and for the year ended December 31, 2004.

 

4. Net operating revenue

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Monthly subscription charges

   81,718     117,505  

Usage charges

   1,074,410     891,307  

Additional call charges

   42,479     25,051  

Interconnection

   612,096     643,069  

Data services

   108,043     79,203  

Other services

   59,363     43,062  
    

 

Gross revenue from services

   1,978,109     1,799,197  

Value-added tax on services–ICMS

   (347,964 )   (286,968 )

PIS and COFINS

   (69,188 )   (62,226 )

ISS

   (497 )   (529 )

Discounts granted

   (76,805 )   (74,969 )
    

 

Net revenue from services

   1,483,655     1,374,505  

Sale of handsets and accessories

   344,247     330,508  

Value-added tax on sales–ICMS

   (52,322 )   (56,560 )

PIS and COFINS

   (27,611 )   (32,479 )

Discounts granted

   (26,721 )   (89 )

Returns of goods

   (19,037 )   (14,342 )
    

 

Net revenue from sales of handsets and accessories

   218,556     227,038  
    

 

Total net operating revenue

   1,702,211     1,601,543  
    

 

 

There are no customers which contributed with more than 10% of total gross operating revenue in the nine-month periods ended September 30, 2005 and 2004, except for Brasil Telecom S.A.—BrT, a fixed-telephone operator, which contributed with approximately 16% and 23% of the total gross revenue, respectively, mainly through interconnection revenues.

 

F-54


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

5. Cost of services and goods sold

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Cost of goods sold

   (372,616 )   (360,058 )

Depreciation and amortization

   (139,540 )   (114,888 )

Personnel

   (17,925 )   (15,937 )

Supplies

   (3,747 )   (3,110 )

Outsourced services

   (32,986 )   (27,315 )

Leased lines

   (28,166 )   (18,882 )

Rent, insurance and other related expenses

   (10,700 )   (12,742 )

Interconnection

   (42,788 )   (59,155 )

Fistel fees and other taxes

   (80,863 )   (7,190 )

Others

   (19 )   (30 )
    

 

Total

   (729,350 )   (619,307 )
    

 

 

6. Selling expenses

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Outsourced services

   (203,897 )   (153,662 )

Personnel

   (57,910 )   (49,534 )

Supplies

   (9,464 )   (12,543 )

Advertising

   (58,582 )   (51,843 )

Rent, insurance and other related expenses

   (6,587 )   (6,239 )

Taxes and contributions

   (396 )   (462 )

Depreciation and amortization

   (33,234 )   (14,051 )

Allowance for doubtful accounts receivable

   (111,636 )   (49,164 )

Others

   (18,033 )   (2,607 )
    

 

Total

   (499,739 )   (340,105 )
    

 

 

7. General and administrative expenses

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Personnel

   (37,027 )   (38,554 )

Supplies

   (2,940 )   (2,390 )

Outsourced services

   (58,458 )   (40,279 )

Rent, insurance and other related expenses

   (11,276 )   (6,234 )

Taxes and contributions

   (1,807 )   (3,184 )

Depreciation and amortization

   (15,383 )   (18,312 )

Others

   (6,956 )   (5,177 )
    

 

Total

   (133,847 )   (114,130 )
    

 

 

F-55


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

8. Other operating income, net

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Income:

            

Fines

   17,033     21,778  

Recovered expenses

   6,842     1,081  

Reversal of reserves for contingencies

   3,895     2,659  

Shared infrastructure

   7,613     3,189  

Sales incentives

   22,219     9,773  

Other

   1,550     176  
    

 

Total

   59,152     38,656  
    

 

Expenses:

            

Reserve for contingencies

   (12,903 )   (9,926 )

Amortization of deferred charges

   (3,213 )   (3,407 )

Amortization of goodwill

   (1,171 )   (1,171 )

Contributions and taxes other than income

   (35,645 )   (16,737 )

Other

   (4,894 )   (1,087 )
    

 

Total

   (57,826 )   (32,328 )
    

 

Other operation income, net

   1,326     6,328  
    

 

 

9. Financial income, net

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Financial income:

            

Interest income

   152,054     131,023  

Monetary/exchange variation on assets

   13,143     127  

PIS/COFINS on financial income

   (6,146 )   (11,953 )
    

 

Total

   159,051     119,197  
    

 

Financial expenses:

            

Interest expense

   (40,342 )   (39,077 )

Monetary/exchange variation on liabilities

   (5,578 )   (22,473 )

Derivative transactions, net

   (19,904 )   (6,792 )
    

 

Total

   (65,824 )   (68,342 )
    

 

Financial income, net

   93,227     50,855  
    

 

 

F-56


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

10. Income and social contribution taxes

 

The Company and its subsidiaries estimate monthly the amounts of income and social contribution taxes on an accrual basis, paying the taxes based on a monthly estimate. The composition of income tax and social contribution is as follows:

 

a) Components of income taxes

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Income tax

   (129,158 )   (116,050 )

Social contribution

   (46,564 )   (41,928 )

Deferred income tax

   10,790     (32,170 )

Deferred social contribution

   3,884     (12,291 )
    

 

Total

   (161,048 )   (202,439 )
    

 

 

b) Reconciliation of effective tax rate

 

The following table provides a reconciliation of the amount calculated by applying the combined statutory tax rates on the reported income before taxes and the reported income tax expense for nine-month periods ended September 2005 and 2004:

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Income before taxes as reported

   436,822     583,110  

Taxes expense at combined statutory rate

   (148,519 )   (198,257 )

Permanent additions:

            

Nondeductible expenses

   (12,123 )   (3,053 )

Others

   (377 )   (1,013 )

Permanent exclusions:

            

Additional income tax difference

   108     —    

Others

   —       (116 )

Unrecognized tax loss carryforwards and temporary differences (i)

   (137 )   —    
    

 

Income and social contribution taxes

   (161,048 )   (202,439 )
    

 

Effective rate

   36.9 %   34.7 %
    

 


(i) The subsidiary TCO IP did not recognize deferred income and social contribution taxes on tax loss carryforwards and temporary differences, due to projected tax losses in the short term.

 

F-57


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

c) Composition of deferred income tax assets

 

Deferred income tax assets based on temporary differences are comprised of the following:

 

    

As of

September 30,

2005


  

As of

December 31,

2004


Tax credits recorded on corporate restructuring

   505,886    451,437

Allowance/reserve for:

         

Inventory obsolescence

   4,399    2,739

Contingencies

   38,130    34,114

Doubtful accounts receivable

   12,772    11,478

Suppliers

   13,562    18,031

Others

   9,028    2,724

Tax loss carryforwards

   5,869    —  
    
  

Total

   589,646    520,523
    
  

Current

   178,206    104,016

Noncurrent

   411,440    416,507
    
  

 

Deferred taxes have been recorded if it is more likely than not that they will be realized, as follows:

 

a) Tax credits recorded on corporate restructuring consist of the tax benefits recorded as a result of the corporate restructurings described in Note 20. The realization of these tax credits occurs in the same proportion as the amortization of goodwill, which ends in July 2010. The recovery of the credit during this period is supported by external consultants’ studies used in the corporate restructuring process.

 

b) Temporary differences: The realization of temporary differences will occur by payment of provisions, effective losses on allowance for doubtful accounts or realization of inventories.

 

c) Tax loss carryforwards will be offset up to a limit of 30% per year of future taxable income.

 

At the end of the 2004 fiscal year, the Company and its subsidiaries prepared technical feasibility studies, approved by the Board of Directors, which indicated full recovery of the deferred taxes recognized as determined by CVM Resolution No. 371. Management did not identify any change that could affect the conclusions of these studies as of September 30, 2005.

 

11. Short-term investments pledged as collateral

 

    

As of

September 30,

2005


  

As of

December 31,

2004


Short-term investments pledged as collateral (1)

   160,051    —  

(1) Represents short-term investments pledged as collateral in connection with lawsuits.

 

F-58


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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

12. Trade accounts receivable, net

 

    

As of

September 30,

2005


   

As of

December 31,

2004


 

Unbilled amounts

   75,073     65,859  

Billed amounts

   295,337     180,907  

Interconnection

   169,533     134,564  

Products sold

   67,945     129,563  

Allowance for doubtful accounts receivable

   (37,563 )   (33,758 )
    

 

Total

   570,325     477,135  
    

 

 

There are no customer which contributed with more than 10% of accounts receivables net at of September 30, 2005 and December 31, 2004, except for Brasil Telecom S.A.—BrT, which represented approximately 8% and 16%,, respectively, mainly through interconnection charges.

 

Changes in the allowance for doubtful accounts receivable were as follows:

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Balance at beginning of year

   33,758     33,828  

Allowance for doubtful accounts receivable charged to selling expenses

   111,636     49,164  

Write-offs

   (107,831 )   (48,894 )
    

 

Ending balance

   37,563     34,098  
    

 

 

13. Recoverable taxes

 

    

As of

September 30,
2005


  

As of

December 31,
2004


Prepaid income and social contribution taxes

   4,566    33,647

Withholding income tax

   76,070    57,808

Recoverable ICMS (State VAT)

   87,630    82,446

Recoverable PIS and COFINS (taxes on revenue) and others

   24,809    32,048
    
  
     193,075    205,949
    
  

ICMS on deferred sales

   18,813    7,355
    
  
     211,888    213,304
    
  

Current

   167,240    170,366

Noncurrent

   44,648    42,938

 

F-59


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

14. Loans and financing

 

a) Composition of debt

 

Description


   Currency

  

Annual

interest


  

Final

maturity


  

As of

September 30,

2005


  

As of

December 31,

2004


BNDES

   R$    TJLP + 3.5% to 4%    01/15/2008    89,561    125,981

Export Development Corporation—EDC

   US$    LIBOR (6 months) + 3.9% to 5%    12/14/2006    41,009    71,158

BNDES—basket of variation

   UMBNDES    Variation UMBNDES basket + 3.5%    01/15/2008    7,001    11,232

Teleproduzir (*)

   R$    0.2% p.m.    07/31/2012    —      15,159

Other

   R$    Column 20-FGV inflation index    10/31/2008    1,407    1,523

Accrued interest

                  1,673    1,231
                   
  

Total

                  140,651    226,284
                   
  

Current

                  78,161    102,727

Noncurrent

                  62,490    123,557

(*) This financing was prepaid in August 2005 at a discount of R$7,425, which was recorded as financing income.

 

TJLP—Brazilian long-term interest rate.

 

UMBNDES—a monetary unit prepared by BNDES, consisting of a basket of foreign currencies, of which the principal currency is the U.S. dollar. For this reason, the Company and its subsidiaries consider it as if it were the U.S. dollar in the risk coverage analysis related to fluctuations in exchange rates.

 

b) Repayment schedule

 

The long-term portion of loans and financing maturities is as follows:

 

Year


   2005

2006 (from October)

   20,772

2007

   38,197

2008

   3,521
    

Total

   62,490
    

 

c) Restrictive covenants

 

The Company has loans and financing from the National Bank for Economic and Social Development (BNDES) and the Export Development Corporation—EDC, which balances at September 30, 2005 were R$96,562 and R$41,009 (R$137,213 and R$71,158 at December 31, 2004), respectively. As of September 30, 2005, the Company and its subsidiaries were in compliance with the financial covenants contained in these instruments.

 

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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

d) Derivative contracts

 

As of September 30, 2005, the Company and its subsidiaries had exchange rate swap contracts with a total notional amounts of US$22,370 thousand (US$31,327 thousand at December 31, 2004), to protect its obligations against exchange fluctuations. Year to date, the Company and its subsidiaries had recorded an accumulated net loss of R$28,226 (R$20,741 at December 31, 2004) on these derivative contracts.

 

e) Collateral

 

Banks


  

Collateral


BNDES—TCO operators

   15% of receivables and Bank Deposit Certificates (CDBs) equivalent to the amount of the next installment payable.

BNDES NBT

   100% of receivables and CDBs equivalent to the amount of the next installment payable during the first year and CDBs equivalent to two installments payable in the remaining period.

 

15. Other liabilities

 

    

As of

September 30,

2005


  

As of

December 31,

2004


Services to be provided—prepaid

   31,218    19,061

Accrual for customer reward program (a)

   5,123    2,089

Payable to related parties

   6,252    6,567

Reverse stock split (b)

   41,829    —  

Other

   8,837    8,892
    
  

Total

   93,259    36,609
    
  

Current

   84,629    27,922

Noncurrent

   8,630    8,687

(a) The Company and its subsidiaries have rewards programs in which the calls are transformed into points usable in future exchanges of handsets. Accumulated points are reserved as they are obtained, based on historical redemption data, accumulated points and average point cost.
(b) Refers to a liability to shareholders for fractions of shares that were not issued on the date of the reverse stock split. This balance is payable upon demand.

 

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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

16. Reserves for contingencies

 

The Company and its subsidiaries are parties to certain lawsuits involving labor, tax and civil matters. Management has recognized reserves for cases in which the likelihood of an unfavorable outcome is considered probable by legal counsel.

 

    

As of

September 30,

2005


  

As of

December 31,

2004


Telebrás

   119,143    113,062

Tax claims

   10,326    11,611

Civil claims

   16,538    8,549

Labor claims

   593    895
    
  

Total

   146,600    134,117
    
  

Current

   9,528    5,473

Noncurrent

   137,072    128,644

 

The changes in the reserve for contingencies are as follows:

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Beginning balance at January 1

   134,117     109,373  

Additional provision, net of reversals

   9,008     7,267  

Monetary variation

   5,434     14,361  

Payments

   (1,959 )   (277 )
    

 

Ending balance at September 30

   146,600     130,724  
    

 

 

Telebrás claim

 

Corresponds to original loans from Telecomunicações Brasileiras S.A.—TELEBRÁS, which according to annex II of the Spin-off Report of February 28, 1998, approved at the General Meeting of May 1998, should have been attributed to the respective holding companies of Telegoiás Celular S.A. and Telebrasília Celular S.A.

 

Realizing there was an error in the allocation of the respective loans at the time of the spin-off, the Company suspended payments and updated the debt according to the variation of the IGP-M + 6% interest per year.

 

In June 1999, the Company filed a lawsuit declaring that the assets corresponding to these liabilities belonged to the Company, in addition to claiming indemnity for the installments paid.

 

On August 1, 2001, a verdict was issued against the Company’s claims, and on October 8, 2001, the Company filed an appeal which was also denied, maintaining the original verdict. The Company subsequently filed a new appeal which is awaiting a decision by the STJ—the Supreme Court.

 

Tax

 

Probable losses

 

No significant new tax claims classified as “probable” losses were incurred in the nine-month period ended September 30, 2005. The changes in the provisions for tax contingencies largely correspond to the monetary restatement on the provisions during the period.

 

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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Possible losses

 

No significant new tax claims classified as “possible” losses were incurred in the nine-month period ended September 30, 2005. No significant alterations occurred in the claims indicated in this report since the last fiscal year.

 

Labor and civil claims

 

Include several labor and civil claims, for which a reserve has been recognized as shown above, in an amount considered to be sufficient to cover probable losses.

 

In the cases in which the chance of loss is classified as possible, the amount involved is R$24,748 for civil claims and R$4,561 for labor claims.

 

17. Shareholders’ equity

 

a) Capital

 

At March 31, 2005, the Company increased its capital by R$164,878, using part of its income reserves.

 

On the same date, the shareholders approved a reverse stock split of 386,664,974,968 shares, without par value, of which 129,458,666,783 were common shares and 257,206,308,185 were preferred shares, in the proportion of 3,000 shares to 1 share of the sameclass. After the reverse stock split, the Company’s capital was represented by 128,888,325 shares, without par value, of which 43,152,889 are common shares and 85,735,436 are preferred shares.

 

The shareholders also approved the cancellation of the 1,927,812 common book-entry shares, without par value, that were held in treasury, without reduction of the capital, in accordance with paragraph 1st of Article 30th of Law No. 6,404/76.

 

On July 29, 2005, the Company announced a capital increase of R$63,893 in favor of the controlling shareholder, but ensuring preemptive rights to other shareholders, corresponding to the tax benefit that was effectively realized during the 2004 fiscal year from the goodwill recorded by the Company’s controlling shareholder. The capital was increased from R$957,844 to R$1,021,737, with the issue of 3,107,645 new common shares. The cash received from the exercise of preemptive rights was paid directly to Telesp Celular Participações S.A.

 

The Company’s share capital, with no par value, is as follows:

 

    

As of

September 30,

2005


  

As of

December 31,

2004 (1) (2)


 

Common shares

   44,332,722    129,458,667  

Preferred shares

   85,735,436    257,206,308  

Treasury common shares and preferred shares

   —      (5,787,050 )
    
  

Total

   130,068,158    380,877,925  
    
  


(1) Had the reverse stock split described above occurred on December 31, 2004, shares outstanding would be 43,152,889 and 85,735,436 of common and preferred shares, respectively and 1,929,017 treasury shares.
(2) In thousands of shares.

 

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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

b) Dividends/interest on shareholders’ equity

 

The preferred shares do not have voting rights, except in the cases stipulated in the bylaws. They are, however, assured priority in the reimbursement of capital, without premium, and the right to participate in dividends to be distributed, corresponding to a minimum of 25% of net income for the fiscal year, calculated in accordance with Article 202 of the Brazilian corporate law. Their priority in receiving minimum non-cumulative dividends is equivalent to the highest of the following values:

 

(i) 6% per year on the amount resulting from the division of the subscribed capital by the aggregate amount of the Company’s shares; or

 

(ii) 3% per year on the amount resulting from the division of the shareholders’ equity by the aggregate amount of the Company’s shares.

 

The preferred shares are also entitled to share remaining dividends paid on pro rata with the common shares, after the common shares receive a dividend equal to the preferred minimum dividends already paid to preferred shares.

 

c) Special goodwill reserve

 

This reserve was formed as a result of the Company’s corporate restructurings, and will be capitalized in favor of the controlling shareholder at the time of effective realization of the related tax benefit.

 

d) Income reserve

 

d.1) Legal reserve

 

The legal reserve is calculated based on 5% of annual net income until its equals 20% of paid-in capital or 30% of capital plus capital reserves; thereafter, allocations to this reserve are no longer mandatory. This reserve is intended to ensure the integrity of capital and can only be used to offset losses or capital increase.

 

d.2) Expansion reserve

 

The special expansion and modernization reserve is used for future investment purposes, based on the capital budget approved by the General Shareholders Meeting.

 

18. Corporate restructuring

 

On May 13, 2004, based on a corporate restructuring, TCP transferred a tax benefit to the Company related to the goodwill paid by TCP in the acquisition of the Company. The goodwill and related tax benefit on the date of transfer amounted to R$1,503,121 and R$511,061, respectively. On August 31, 2005, TCP transferred an additional tax benefit to the Company related to the additional goodwill paid by TCP in the acquisition shares in a public tender offer on October 8, 2004. The goodwill and related tax benefit on the date of transfer amounted to R$392,265 and R$133,370 respectively. The tax benefits are being realized in proportion to the amortization of the goodwill over a period of 5 years. In the Company’s financial statements, the tax benefits of R$ 505,886 (R$374,777 and R$131,109, respectively, referring to the 2004 and 2005 restructurings), as of September 30, 2005, were classified in the balance sheet as deferred taxes under current assets and long-term receivables.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

19. Transactions with related parties

 

The principal transactions with unconsolidated related parties are as follows:

 

    Use of network and long-distance (roaming) cellular communications: these transactions involve companies owned by the same controlling group: Telecomunicações de São Paulo S.A., Telerj Celular S.A., Telest Celular S.A., Telebahia Celular S.A., Telergipe Celular S.A., Telesp Celular S.A., Global Telecom S.A. and Celular CRT S.A. Some of these transactions are based on contracts signed by Telebrás and the operating concessionaires before privatization under the terms established by Anatel.

 

    Corporate services are rendered by the Controlling Group to TCO at the effective cost.

 

    Accounts payable to related parties relate to loans among the Company and its subsidiaries.

 

A summary of balances and transactions with unconsolidated related parties is as follows:

 

    

As of

September 31,

2005


  

As of

December 31,

2004


Assets:

         

Trade accounts receivable

   12,815    11,841

Credit with related companies

   1,313    1,327

Liabilities:

         

Trade accounts payable

   24,969    18,361

Liabilities with related companies

   6,252    6,567

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Statement of income

            

Revenue from telecommunications services

   35,656     —    

Cost of services

   —       (5,165 )

Selling expenses

   (21,073 )   (8,591 )

General and administrative expenses

   (488 )   (17,135 )

 

20. Financial instruments

 

a) Risk considerations

 

The major market risks to which the Company and its subsidiaries are exposed in exercising their activities include:

 

Credit risk arising from any difficulty in collecting amounts receivable related to telecommunications services provided to customers and revenues from the sale of handsets by the Company’s distribution network, as well risks relating to swap transactions.

 

Interest rate risk resulting from debt and derivative instruments contracted at floating rates and involving the risk of increases in interest expenses as a result of an unfavorable upward trend in interest rates (LIBOR, CDI and TJLP).

 

Currency risk related to debt and derivative instruments contracted in foreign currencies which expose the Company to potential losses from adverse exchange rate fluctuations.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The Company and its subsidiaries actively manage their operations to mitigate these risks by means of comprehensive operating procedures, policies and initiatives

 

Credit risk

 

Credit risk from providing telecommunications services is reduced by monitoring the customer portfolio and addressing delinquent receivables by means of clear policies relating to providing postpaid services. As of September 30, 2005 the Company and its subsidiaries’ customers use 85% (84% in December 31, 2004) prepaid services that require pre-loading, which do not represent a credit risk.

 

Credit risk from the sale of handsets is managed by following a conservative credit policy which encompasses the use of advanced risk management methods that include applying credit scoring techniques, analyzing a potential customer’s balance sheet, and making inquires of credit protection agencies’ databases.

 

The Company and its subsidiaries are also exposed to credit risk relating to their financial investments and receivables from swap transactions. The Company and its subsidiaries attempt to diversify such exposure by using reputable financial institutions.

 

Interest rate risk

 

The Company and its subsidiaries are also exposed to fluctuations in the Long-term Interest Rate (TJLP) on financing from BNDES. As of September 30, 2005, the balance of principal of these transactions amounted to R$89,561 (R$125,981 as of December 31, 2004).

 

The Company and its subsidiaries are exposed to interest rate risk, due to exchange derivative transactions and borrowings contracted in Brazilian reais at costs associated with the CDI rate. However, financial investments that are also indexed at CDI partially neutralize such effect.

 

Foreign currency-denominated loans are also exposed to interest rate risk (LIBOR) associated with foreign loans. As of September 30, 2005, these transactions amounted to US$18,454 thousand (US$26,808 thousand as of December 31, 2004).

 

Exchange rate risk

 

The Company and its subsidiaries utilize derivative financial instruments to protect against exchange rate risk on foreign currency denominated loans. Such instruments usually include swap contracts.

 

The Company’s and its subsidiaries’ net exposure to currency risk as of September 30, 2005, is as follows:

 

    

In thousands of

US$


 

Loans and financing

   (19,002 )

Loans and financing—UMBNDES (*)

   (3,163 )

Derivative contracts

   22,370  

Others

   (391 )
    

Net

   (186 )
    


(*) UMBNDES is a monetary unit prepared by BNDES, consisting of a basket of foreign currencies, of which the principal is the U.S. dollar.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

b) Derivative contracts

 

The Company and its subsidiaries record derivative gains and losses as a component of net financial expenses.

 

Book and estimated market values of loans and financing and derivative instruments are as follows:

 

    

Book

value


   

Market

value


   

Unrealized

gain


Loans and financing

   (140,651 )   (138,920 )   1,731

Derivative contracts

   (28,226 )   (27,547 )   679

Other liabilities

   (870 )   (870 )   —  
    

 

 

Total

   (169,747 )   (167,337 )   2,410
    

 

 

 

c) Market value of financial instruments

 

The market value of loans and financing and derivative instruments were determined based on the discounted cash flows, utilizing available market information Accordingly, the estimates presented above are not necessarily indicative of the amounts that could be realized in the a current market. The use of different market assumptions may have a material effect on estimates.

 

21. Summary of differences between Brazilian GAAP and U.S. GAAP

 

The Company’s accounting policies comply with Brazilian GAAP, which differ significantly from generally accepted accounting principles in the United States of America (U.S. GAAP), as described below.

 

a) Different criteria for capitalizing and amortizing capitalized interest

 

Until December 31, 1998, under Brazilian GAAP as applied by the Company, interest attributable to construction-in-progress was computed at the rate of 12% per annum of the balance of construction-in-progress, and that part which related to interest on third-party loans was credited to interest expense based on actual interest costs, with the balance relating to own capital being credited to capital reserves. For the nine-month period ended September 30, 2005 and for the year ended December 31, 2004, the Company did not capitalize interest attributable to construction-in-progress.

 

Under U.S. GAAP, in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 34, “Capitalization of Interest Costs,” interest incurred on borrowings is capitalized to the extent that borrowings do not exceed construction-in-progress. The credit is a reduction of interest expense. Under U.S. GAAP, the amount of interest capitalized excludes the monetary gain associated with local currency borrowings and the foreign exchange gains and losses on foreign currency borrowings.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The effects of these different criteria for capitalizing and amortizing capitalized interest are presented below:

 

    

Nine-month periods

ended September 30,


 
         2005    

        2004    

 

Capitalized interest

            

U.S. GAAP capitalized interest

   5,676     5,111  

U.S. GAAP capitalized interest on disposals

   (37 )   (114 )

Brazilian GAAP capitalized interest on disposals

   34     114  
    

 

U.S. GAAP difference

   5,673     5,111  

Amortization of capitalized interest

            

Amortization under Brazilian GAAP

   6,799     5,996  

Capitalized interest on disposals under Brazilian GAAP

   (29 )   (72 )

Less amortization under U.S. GAAP

   (5,136 )   (6,124 )

Capitalized interest on disposals under U.S. GAAP

   32     72  
    

 

U.S. GAAP difference

   1,666     (128 )
    

 

 

b) Monetary restatement of 1996 and 1997

 

The amortization of the asset appreciation, which originated from the inflation accounting during 1996 and 1997, when Brazil was still considered a high inflationary economy for U.S. GAAP purposes, was recognized in the reconciliation to U.S. GAAP. The resulting step-up is amortized over the remaining lives of the related assets.

 

c) Pension and other post-retirement benefits

 

The Company and its subsidiaries participate in two multiemployer benefit plans (PBS-A and PAMA) for their retired employees that are operated and administered by Fundação Sistel de Seguridade Social—SISTEL and provide for the costs of pension and other post-retirement benefits based on a fixed percentage of remuneration, as recommended annually by independent actuaries. For purposes of U.S. GAAP, the Company is only required to disclose its annual contributions and the funded status related to multiemployer plans. The Company and its Subsidiaries also sponsor a single-employer defined benefit pension plan (PBS-TCO). The provisions of SFAS No. 87, “Employers’ Accounting for Pensions,” were applied for the multiemployer plan and the single employer plans with effect from January 1, 1992, because it was not feasible to apply them from the effective date specified in the standard.

 

Substantially all the active employees have elected to migrate to a Company-sponsored defined contribution pension plan created in 2000 (TCO-PREV). Those who have migrated have been credited individually with the balance of accumulated benefits as of the date of migration. As a result, a settlement and curtailment of the defined benefit pension plan occurred in 2000, as defined in SFAS No. 88. In addition, the Company and its subsidiaries are liable for certain contributions for certain risks involving death or disability.

 

On December 13, 2000, CVM issued Instruction No. 371, which provisions are very similar to SFAS No. 87 and SFAS No. 106, except for the following differences:

 

    A company that participates in a multiemployer defined benefit pension or postretirement benefit plan is required to recognize any assets or liabilities in respect to its participation in such plans, while SFAS standards require only the disclosure of funded status of those plans.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

    The unrecognized net obligation existing at the date of initial application of this standard shall be amortized over five years or the remaining service period or remaining life expectancy, whichever is lower. Alternatively, companies were granted the option to recognize such initial transition obligation as of December 31, 2001, directly to shareholders’ equity. Such option has been adopted by the Company. Under SFAS No. 87, the unrecognized net obligation existing at the date of its initial application is being amortized over the remaining service period.

 

The U.S. GAAP liability exceeded the Brazilian GAAP estimated liability by R$75 as of September 30, 2005, and R$675 as of December 31, 2004.

 

A summary of the difference between Brazilian GAAP and U.S. GAAP in accrued pension and other postretirement plan liabilities is as follows:

 

     As of September 30, 2005

    As of December 31, 2004

 
    

U.S.

GAAP


   

Brazilian

GAAP


  

Accumulated

difference


   

U.S.

GAAP


   

Brazilian

GAAP


  

Accumulated

difference


 

PBS-TCO

   (1,015 )   —      (1,015 )   (1,062 )   —      (1,062 )

TCO-PREV

   1,257     —      1,257     1,904     —      1,904  

PAMA-TCO

   —       167    (167 )   —       167    (167 )
    

 
  

 

 
  

Accrued pension/post-retirement liability

   242     167    75     842     167    675  
    

 
  

 

 
  

 

d) Disclosure requirements

 

U.S. GAAP disclosure requirements differ from those required by Brazilian GAAP. However, in these consolidated financial statements, the level of disclosure has been expanded to comply with U.S. GAAP.

 

e) Financial income (expense)

 

Brazilian GAAP requires that interest be shown as part of operating income. Under U.S. GAAP, interest expense would be shown after the operating income and accrued interest would be included in accounts payable and accrued expenses.

 

f) Earnings per share

 

Under Brazilian GAAP, net income per share is calculated based on the number of shares outstanding at the balance sheet date.

 

Under U.S. GAAP, SFAS No. 128, “Earnings per Share”, the computation is based on the weighted average number of shares outstanding during the period.

 

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, “Earnings per Share”. This statement became effective December 15, 1997, and provides computation, presentation and disclosure requirements for earnings per share.

 

The Company’s preferred shares have certain priority in the payment of minimum, noncumulative dividends. Consequently, basic and diluted earnings per share have been calculated using the “two-class” method. The “two-class” method is an earnings allocation formula that determines earnings per share for

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

preferred and common stock according to the dividends to be paid as required by the Company’s by-laws and participation rights in undistributed earnings. Since the Company has paid preferred dividends in excess of the required minimum for all years presented, distributable and undistributable net income are shared equally by the preferred and common shareholders on a pro rata basis.

 

At September 30, 2005 the Company was obligated to issue shares to the controlling shareholder for the amount of the tax benefit realized relating to the corporate restructuring described in Note 18. The number of shares issuable are considered dilutive as defined in SFAS No. 128 and have been included in the weighted average common shares—diluted presented below. The number of shares issuable was computed considering the balance of the goodwill reserve (R$586,648 as of September 30, 2005 and R$532,732 as of September 30, 2004) by the average price of common shares traded on the São Paulo Stock Exchange (“Bovespa”) during the last 20 trading days of each period.

 

For the periods presented below, the weighted average number of shares outstanding consider the effect of the reverse stock split described in Note 17. The computation of basic and diluted earnings per share is as follows:

 

     Nine-month periods ended September 30,

     2005

   2004

     Common

   Preferred

   Common

   Preferred

Basic numerator:

                   

2004 dividends approved in 2005

   16,594    34,510    —      —  

Basic allocated undistributed earnings

   77,443    155,128    113,666    236,084

Allocated net income available for common and preferred shareholders

   94,037    189,638    113,666    236,084

Basic denominator:

                   

Weighted average shares outstanding

   42,800,490    85,734,740    40,808,487    84,757,622

Basic earnings per share

   2.20    2.21    2.79    2.79

Diluted numerator:

                   

2004 dividends approved in 2005

   23,341    27,763    —      —  

Diluted allocated undistributed earnings

   106,223    126,348    141,294    208,456

Allocated net income available for common and preferred shareholders

   129,564    154,111    141,294    208,456

Diluted denominator:

                   

Weight average shares outstanding

   42,800,490    85,734,740    40,808,487    84,757,622

Dilutive effects of goodwill reserve

   29,278,235    —      16,641,383    —  

Diluted weight average shares

   72,078,725    85,734,740    57,449,870    84,757,622

Diluted earnings per share

   1.80    1.80    2.46    2.46

 

The Company’s preferred shares are non-voting, except under certain limited circumstances, and are entitled to a preferential, noncumulative dividend and to priority over the common shares in the event of liquidation of the Company.

 

g) Reversal of proposed dividends

 

Under Brazilian GAAP, proposed dividends are accrued in the financial statements in anticipation of their approval at the shareholders’ meeting. Under U.S. GAAP, dividends are not accrued until they are formally declared. In 2004, under Brazilian GAAP, proposed dividends amounting to R$51,104 were recorded.

 

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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

h) Permanent assets

 

Brazilian GAAP has a class of assets called “permanent assets”. This is the collective name for all assets on which indexation adjustments were calculated until December 31, 1995. Under U.S. GAAP, the assets in this classification would be non-current assets and property, plant and equipment.

 

i) Leases

 

The Company has leased certain computer hardware and software under non-cancelable leases. Under Brazilian GAAP, all leases are considered to be operating leases, with lease expense recorded when paid. For U.S. GAAP purposes, these leases are considered to be capital leases as defined in SFAS No. 13, “Accounting for Leases”. Under SFAS No. 13, the Company is required to record the asset at the present value of the minimum lease payments with a corresponding debt obligation. Depreciation is recorded over the shorter of the estimated useful life of the asset or the lease. Interest expense is recognized over the life of the lease and payments under the lease are amortized to principal and interest under the effective interest method.

 

j) Valuation of long-lived assets

 

Under U.S. GAAP, the Company evaluates long-lived assets for impairment using the criteria set forth in SFAS No. 144, “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of”. In accordance with this standard, the Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the separately identifiable anticipated undiscounted cash flow from such assets is less than their carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the assets. The Company has not recognize an impairment charge for any of the periods presented.

 

k) Income taxes

 

The Company fully accrues for deferred income taxes on temporary differences between tax and accounting records. The existing policies for providing for deferred taxes are substantially in accordance with SFAS No. 109, “Accounting for Income Taxes”.

 

l) Costs of start-up activities

 

Under Brazilian GAAP, the Company deferred certain start-up costs in relation to the creation of certain subsidiaries.

 

Under U.S. GAAP, AICPA Statement of Position 98-5, “Reporting on the Costs of Start-up Activities” requires costs of start-up activities and organization costs to be expensed as incurred.

 

m) Revenue recognition

 

For U.S. GAAP, the Company recognizes service revenue as the services are provided. Prepaid service revenue is deferred and amortized based on subscriber airtime usage. Sales of handsets along with the related cost of the handsets are amortized over their estimated useful life (2 years). The excess of the cost over the amount of deferred revenue related to handset sales is recognized on the date of sale.

 

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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

(i) Roaming

 

The Company has roaming agreements with other cellular service providers. When a call is made from within one coverage area by a subscriber of another cellular service provider, that service provider pays the Company for the service at the applicable rates. Conversely, when one of the Company’s customers roams outside the coverage area, the Company pays the charges associated with that call to the cellular service provider in whose region the call was originated and charges the same amount to its subscriber. Under Brazilian GAAP, revenues for roaming charges are recorded net of the related costs when the services are provided. Under U.S. GAAP, revenues and costs for roaming charges should be recorded gross. This difference in accounting practices has no impact on net income or shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both revenues and cost of services and goods sold by R$89,729 and R$35,435 at September 30, 2005 and 2004, respectively.

 

(ii) Value-added and other sales taxes

 

Under Brazilian GAAP, these taxes are recorded in revenue net of the related tax expense. Under U.S. GAAP, these taxes are recorded gross as revenue and the related cost of services and goods sold. This difference in accounting has no impact in net or shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both revenues and cost of services and goods sold by R$497,085 and R$438,233 for the nine-month periods ended September 30, 2005 and 2004, respectively.

 

(iii) Deferred revenue sales of handsets

 

Under Brazilian GAAP, revenues and costs related to handset sales, including applicable value-added and other sales taxes are recognized when sold. Under U.S. GAAP, revenue on sales of handsets along with the related cost of the handset, including applicable value-added and other sales taxes, are amortized over their estimated useful life. Any excess of the cost over the amount of deferred revenue related to handset sales is recognized on the date of sale. As substantially all of the Company’s handsets are sold below cost, this difference in accounting policy had no impact on net income or shareholders’ equity. The unamortized balance of deferred handset revenue and the related balance of unamortized deferred handset costs was R$201,359 as of September 30, 2005 and R$230,493 at December 31, 2004, respectively. The impact of this difference under U.S. GAAP was to increase both net revenues and cost of services and goods sold by R$29,133 and R$218,074 for the nine-month periods ended September 30, 2005 and 2004, respectively.

 

(iv) Free minutes given in connection with sales of handsets

 

Under U.S. GAAP, pursuant to Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables,” the Company began to separately account for free minutes given in connection with the sales of handsets. The adoption of EITF No. 00-21 is effective prospectively for transactions entered into as from January 1, 2004. Consequently, a portion of the revenue generated from the sale of handsets is allocated to the free minutes given and deferred based on the fair value of the minutes. The revenues associated with the free minutes are then recognized based on subscriber airtime usage. Under Brazilian GAAP, the Company does not separately account for free minutes given in connection with sales of handsets.

 

n) Amortization of concession

 

For Brazilian GAAP purposes, the concession (license) for the Band B Company NBT was being amortized over 30 years, which included an additional 15 years assuming renewal by Anatel. As from January 2001, the amortization period was prospectively changed to 15 years.

 

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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

For U.S. GAAP purposes, the amortization period of 15 years includes only the initial term of the concession.

 

o) Derivative financial instruments

 

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 amended by SFAS 137, “Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133”, SFAS 138, “Accounting for Derivative Instruments and Certain Hedging Activities” and SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (collectively referred to as Statement SFAS 133). SFAS 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or a liability measured at its fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS 133 on January 1, 2001, did not have an impact on the Company’s results of operations and financial position.

 

Under Brazilian GAAP, the Company records its derivatives contracts as either an asset or liability measured at the spot rates at period end plus the coupon rate as stated in the agreements, and adjustments to contract value are recorded in income.

 

The Company has entered into cross-currency swap contracts whereby the Company earns the exchange variation between the United States dollar and the Brazilian real, and at September 30, 2005 and December 31, 2004 these agreements had total notional amounts of US$22,370 thousand and US$31,327 thousand, respectively. Under U.S. GAAP, these contracts were not designed as hedges for accounting purposes as defined by SFAS 133 and consequently, the changes in fair value of these contracts were recorded in earnings. The fair values adjustments of the Company’s derivative contracts were estimated based on quoted market prices of comparable contracts and at September 30, 2005 and September 30, 2004 were approximately R$679 and R$4,917, respectively.

 

p) Advance to affiliate

 

In January 2002, the Company made an advance payment of R$34,259, adjusted based on market rates, to BID S.A. corresponding to the present value of the tax benefit contributed by BID S.A, relating to the goodwill paid by BID S.A. for the Company’s shares. With this transaction, the Company relieved itself of the obligation to issue the corresponding shares to BID S.A. in the future. Under Brazilian GAAP, in 2004, the amount of R$15,584 was recorded as an advance to affiliate. For U.S. GAAP purposes, such transaction would be recorded as a distribution to a shareholder. Additionally, for U.S. GAAP purposes, no interest income would be accrued related to this transaction.

 

In 2005, this advance was reverted from a capital reserve, as a special goodwill reserve.

 

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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

q) FISTEL tax

 

Beginning in 1999, under Brazilian GAAP, the Fistel (Telecommunications Inspection Fund) tax, assessed on each activation of a new cellular line, is deferred and amortized over the customers’ estimated subscription period. For U.S. GAAP purposes, this tax would be charged directly to the consolidated statements of income. Therefore, the deferred Fistel taxes on activation fees at September 30, 2005 and 2004 are being adjusted in the reconciliation of the income differences between U.S. GAAP and Brazilian GAAP.

 

Reconciliation of the Net Income Differences Between U.S. and Brazilian GAAP

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Brazilian GAAP net income

   275,774     377,460  

Different criteria for:

            

Amortization of monetary restatement of 1996 and 1997

   (1,621 )   (2,554 )

Capitalized interest

   5,673     5,111  

Amortization of capitalized interest

   1,666     (128 )

Amortization of concession–NBT

   (2,406 )   256  

Capital lease

   (676 )   1,305  

Adjustment of advance to affiliate

   —       (1,684 )

Purchase accounting:

            

Depreciation on fixed fair value assets adjustments

   (239 )   (239 )

Amortization on intangible assets

   (2,612 )   (1,854 )

Pension and other postretirement plans

   600     (546 )

Costs of start-up activities and others

   3,213     3,408  

Derivative contracts

   (2,625 )   (2,707 )

Amortization of donations

   117     8  

FISTEL fee

   868     (25,605 )

Free minutes given in connection with sales of handsets

   10,013     (16,059 )

Deferred tax effects of above adjustments

   (4,070 )   13,436  

Effects of minority interest on the above adjustments

   —       142  
    

 

U.S. GAAP net income

   283,675     349,750  
    

 

 

    

Nine-month periods

ended September 30,


     2005

   2004

Net income per share in accordance with U.S. GAAP

         

Earnings per common share—Basic

   2.20    2.79

Weighted average of common share—Basic

   42,800,490    40,808,487
    
  

Common shares—Diluted:

         

Earnings per common share—Diluted

   1.80    2.46

Weighted average of common share—Diluted

   72,078,725    57,449,870
    
  

Preferred shares—Basic:

         

Earning per preferred share—Basic

   2.21    2.79
    
  

Earnings per preferred share—Diluted

   1.80    2.46
    
  

Weighted average of preferred share (basic and diluted)

   85,734,740    84,757,622

 

F-74


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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Reconciliation of the Shareholders’ Equity Differences Between U.S. and Brazilian GAAP

 

    

As of

September 30,

2005


   

As of

December 31,

2004


 

Brazilian GAAP shareholders’ equity

   2,835,326     2,441,502  

Add (deduct):

            

Different criteria for:

            

Monetary restatement of 1996 and 1997 - fixed assets

   87,236     87,236  

Amortization of monetary restatement of 1996 and 1997

   (82,870 )   (81,249 )

Capitalized interest

   13,192     7,519  

Amortization of capitalized interest

   22,964     21,298  

Amortization of concession–NBT

   (5,076 )   (2,670 )

Capital lease

   3,415     4,091  

Adjustment of advance to affiliate

   —       (15,584 )

Purchase accounting:

            

Fixed assets adjustments

   2,958     2,958  

Depreciation on fixed assets adjustments

   (1,109 )   (870 )

Intangible assets

   68,621     68,621  

Amortization on intangible assets

   (8,598 )   (5,986 )

Pension and other post-retirement plans

   (75 )   (675 )

Costs of start-up activities and others

   (18,481 )   (21,694 )

Derivatives contracts

   679     3,304  

Reversal of proposed dividends

   —       51,104  

Donations received

   (1,213 )   (989 )

Amortization of donations

   247     130  

Fistel fee

   (33,531 )   (34,399 )

Free minutes given in connection with sales of handsets

   (11,457 )   (21,470 )

Deferred tax effects of above adjustments

   (12,959 )   (8,889 )
    

 

US GAAP shareholders’ equity

   2,859,269     2,493,288  
    

 

 

Changes in shareholders’ equity under U.S. GAAP

 

    

As of

September 30,

2005


 

Shareholders’ equity under U.S. GAAP as of beginning of the year

   2,493,288  

Capital increase—corporate restructuring

   133,370  

Disposal of treasury shares

   40  

Net income

   283,675  

Payment of dividends

   (51,104 )
    

Shareholders’ equity under U.S. GAAP as of the end of the period

   2,859,269  
    

 

F-75


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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

U.S. GAAP supplementary information

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Reconciliation of the operation income under Brazilian GAAP to operation income under U.S. GAAP

            

Brazilian GAAP operating income as reported

   433,828     585,184  

Reversal of financial (income) expense, net

   (93,227 )   (50,855 )

U.S. GAAP adjustments:

            

Amortization of monetary restatement of 1996 and 1997

   (1,621 )   (2,554 )

Amortization on capitalized interest

   1,666     (128 )

Amortization of concession—NBT

   (2,406 )   256  

Depreciation of capital lease

   (1,317 )   (1,321 )

Fistel fee

   868     (25,605 )

Purchase accounting:

            

Depreciation of fixed assets adjustment

   (239 )   (239 )

Amortization of intangible asset

   (2,612 )   (1,854 )

Pre-operating expenses

   3,213     3,408  

Amortization of donations

   117     8  

Gain on permanent assets disposals

   388     137  

Pension and other postretirement benefits

   600     (546 )

Free minutes given in connection with sales of handsets

   10,013     (16,059 )
    

 

U.S. GAAP operating income

   349,271     489,832  
    

 

 

F-76


Table of Contents

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Reconciliation of net operating revenue and costs of services and goods sold under Brazilian GAAP to U.S. GAAP

            

Brazilian GAAP net operating revenue

   1,702,211     1,601,543  

Reclassification to cost of services and goods sold

            

Taxes on sales

   497,085     438,233  

Increase in revenue for roaming charges

   89,729     35,435  

U.S. GAAP adjustments:

            

Deferred revenues on handset sales, net of amortization

   29,133     218,074  

Free minutes given in connection with sales of handsets

   10,013     (16,059 )
    

 

U.S. GAAP net revenue

   2,328,171     2,277,226  
    

 

Brazilian GAAP cost of services and goods sold

   (729,350 )   (619,307 )

Reclassification to cost of services and goods sold

            

Taxes on sales

   (497,085 )   (438,233 )

Increase in revenue for roaming charges

   (89,729 )   (35,435 )

Deferred cost on handset sales, including taxes on sales, net of amortization during the year

   (29,133 )   (218,074 )

Reclassification from selling expense:

            

Rewards program expense

   (3,230 )   (966 )

U.S. GAAP adjustments:

            

Amortization of monetary restatement of 1996 and 1997

   (1,621 )   (2,554 )

Amortization on capitalized interest

   1,666     (128 )

Amortization of concession—NBT

   (2,406 )   256  

Depreciation of capital lease

   (1,317 )   (1,321 )

Fistel tax

   868     (25,605 )

Purchase accounting

            

Depreciation of fixed assets adjustment

   (239 )   (239 )

Amortization of intangible assets

   (2,612 )   (1,854 )

Amortization of donations

   117     8  

Pension and other post-retirement benefits

   600     (546 )
    

 

U.S. GAAP cost of services and goods

   (1,353,471 )   (1,343,998 )
    

 

U.S. GAAP gross profit

   974,700     933,228  
    

 

 

    

As of

September 30,

2005


   

As of

December 31,

2004


 

Additional information:

            

Total assets under U.S. GAAP

   3,842,371     3,614,669  

Property, plant and equipment

   2,050,900     1,875,268  

Accumulated depreciation

   (1,078,169 )   (969,087 )

Net property, plant and equipment

   972,731     906,181  

 

F-77


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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

22. Additional disclosures required by U.S. GAAP

 

a) Intangible assets subject to amortization

 

Following is a summary of the Company’s intangible assets subject to amortization under U.S. GAAP:

 

     As of September 30, 2005

    As of December 31, 2004

 
     Software

    Concession

    Software

    Concession

 

Gross

   252,297     129,171     209,592     129,171  

Accumulated amortization

   (113,955 )   (36,182 )   (83,602 )   (30,542 )
    

 

 

 

Net

   138,342     92,989     125,990     98,629  
    

 

 

 

 

Aggregate amortization expense for the above intangible assets amounted to R$35,993 and R$24,488 at September 30, 2005 and 2004, respectively.

 

The estimated aggregate amortization expense for the next five years is as follows:

 

     Amount

From October 1 to December 31, 2005

   14,494

2006

   57,976

2007

   57,976

2008

   32,325

2009

   7,517

From January 1 to September 30, 2010

   5,638

 

b) Concentration of risk

 

Credit risk with respect to trade accounts receivable from third parties is diversified. Although collateral is not required, the Company and its subsidiaries 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 Company and its subsidiaries are fully dependent upon the cellular telecommunications concession as granted by the Federal Government.

 

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 operations of the Company and its subsidiaries.

 

c) Capital leases

 

The following summarizes the amounts related to the assets and accumulated depreciation for U.S. GAAP purposes of the related assets under the Company’s capital lease obligations:

 

Property, Plant and Equipment:

      

Software

   8,694  

Less: accumulated amortization

   (5,279 )
    

     3,415  
    

 

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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

There is no future minimum payment to be disclosed since all the lease obligations were settled up to September 30, 2005.

 

d) Commitments

 

Budgeted capital expenditure commitments for 2005 are approximately R$390.5 million of which R$216.9 million has been incurred in the nine-month periods ended September 30, 2005. Most of the 2005 capital expenditures are related to infrastructure, information technology and transmission equipment.

 

The Company is subject to obligations concerning quality of services, network expansion and modernization, as established in our authorizations and our original concession agreements. The Company believes that it is currently in compliance with its quality of service and expansion obligations.

 

e) New accounting standards

 

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”, an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the fair value of the liability can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective December 31, 2005 for calendar year companies. The Company is currently evaluating FIN 47 to determine the impact on its consolidated financial statements.

 

In March 2004, the EITF, of the FASB reached a consensus on EITF 03-06, “Participating Securities and the Two-Class Method under FASB Statement No. 128”, that an entity would allocate losses to a nonconvertible participating security in periods of net loss if, based on the contractual terms of the participating security, the security had not only the right to participate in the earnings of the issuer but also a contractual obligation to share in the losses of the issuing entity on a basis that was objectively determinable. Determination of whether a participating security holder has an obligation to share in the losses of the issuing entity in a given period must be made on a period-by-period basis, based on the contractual rights and obligations of the participating security. EITF Issue No. 03-06 is effective for fiscal periods beginning after March 31, 2004. The Company is currently evaluating EITF 03-06 to determine the impact on its consolidated financial statements.

 

******************************

 

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Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

 

INDEX TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

Unaudited Interim Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004

   F-81 and F-82

Unaudited Interim Condensed Consolidated Statements of Loss for the Nine-Month Periods ended September 30, 2005 and 2004

   F-83

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine-Month Period Ended September 30, 2005

   F-84

Unaudited Interim Condensed Consolidated Statements of Changes in Financial Position for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-85

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-86

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

   F-87

 

Definitions:

 

Brazilian GAAP—Generally accepted accounting principles in Brazil

U.S. GAAP—Generally accepted accounting principles in the United States of America

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais)

 

     Note

   As of
September 30,
2005


  

As of

December 31,

2004


Assets

              

Current assets:

              

Cash and cash equivalents

        28,630    86,606

Trade accounts receivable, net

   11    137,338    127,748

Deferred income taxes

   10c    3,570    —  

Recoverable taxes

   12    38,894    42,266

Inventories

        30,262    53,754

Derivative contracts

   13d    —      443

Prepaid expenses

        12,663    8,347

Advances to supplies

        5,885    552

Other current assets

        5,976    12,211
         
  

Total current assets

        263,218    331,927
         
  

Noncurrent assets:

              

Deferred income taxes

   10c    184,335    187,635

Recoverable taxes

   12    25,682    23,814

Derivative contracts

   13d    —      6,516

Prepaid expenses

        1,369    1,789

Other assets

        14,923    12,988
         
  

Total noncurrent assets

        226,309    232,742
         
  

Permanent assets:

              

Property, plant and equipment, net

        369,884    389,685

Deferred assets, net

        340    625
         
  

Total permanent assets

        370,224    390,310
         
  

Total assets

        859,751    954,979
         
  

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONSENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais)

 

     Note

   As of
September 30,
2005


   

As of

December 31,

2004


 

Liabilities, shareholder’s equity and funds for capitalization

                 

Current liabilities:

                 

Payroll and related accruals

        6,814     6,305  

Accounts payable and accrued expenses

        109,194     172,195  

Taxes payables

        21,898     19,501  

Dividends payable

        443     478  

Loans and financing

   13a    146,725     52,319  

Reserve for contingencies

   15    10,154     8,017  

Derivative contracts

   13d    53,857     15,327  

Other liabilities

   14    23,808     11,092  
         

 

Total current liabilities

        372,893     285,234  
         

 

Noncurrent liabilities:

                 

Loans and financing

   13a    116,621     261,769  

Derivative contracts

   13d    35,683     21,323  

Pension and other post-retirement benefit plans

        278     275  

Reserve for contingencies

   15    8,259     6,816  

Other liabilities

   14    5,950     5,001  
         

 

Total noncurrent liabilities

        166,791     295,184  
         

 

Shareholders’ equity:

                 

Share capital

   17a    306,830     306,375  

Treasury shares

        —       (35 )

Capital reserves

   17c    126,419     126,909  

Accumulated deficit

        (113,219 )   (58,725 )
         

 

Total shareholders’ equity

        320,030     374,524  
         

 

Funds for capitalization

        37     37  
         

 

SHAREHOLDERS’ EQUITY AND FUNDS FOR CAPITALIZATION

        320,067     374,561  
         

 

Total liabilities, shareholders’ equity and funds for capitalization

        859,751     954,979  
         

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF LOSS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais, except per shares data)

 

         

Nine-month periods

ended September 30,


 
     Note

   2005

    2004

 

Net operating revenue

   4    418,696     351,591  

Cost of services and goods sold

   5    (233,434 )   (204,519 )
         

 

Gross profit

        185,262     147,072  

Operating (expenses) income:

                 

Selling expense

   6    (141,774 )   (103,700 )

General and administrative expense

   7    (42,835 )   (41,787 )

Other operating expense, net

   8    (4,676 )   (4,163 )
         

 

Operating loss before financial expense

        (4,023 )   (2,578 )

Financial expense, net

   9    (44,660 )   (14,536 )
         

 

Operating loss

        (48,683 )   (17,114 )

Net non-operating income (expenses)

        235     (466 )
         

 

Loss before income and social contribution taxes

        (48,448 )   (17,580 )

Income and social contribution taxes

   10    (6,046 )   (4,755 )
         

 

Net loss

        (54,494 )   (22,335 )
         

 

Shares outstanding at September 30 (in thousands)

        9,644 (1)   480,618,317 (1)
         

 

Net loss per shares outstanding at the balance sheet date

        (5.65 )(1)   (0.00005 )(1)
         

 


(1) On March 28, 2005 the shareholders approved a reverse stock split in the proportion of 50,000 shares to 1 share of the same class. Had the reverse stock split occurred on September 30, 2004, shares outstanding and loss per share for the nine-month periods ended September 30, 2004 would have amounted to 9,612,366 and R$2.32, respectively.

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2005

(In thousands of Brazilian reais)

 

    

Capital

stock


   

Treasure

shares


   

Capital

reserve


    Accumulated
deficit


    Total

 

Balance as of December 31, 2004

   306,375     (35 )   126,909     (58,725 )   374,524  

Cancellation treasury shares

   (35 )   35     —       —       —    

Capital increase

   490     —       (490 )   —       —    

Net loss

   —       —       —       (54,494 )   (54,494 )
    

 

 

 

 

Balances at September 30, 2005

   306,830     —       126,419     (113,219 )   320,030  
    

 

 

 

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN FINANCIAL POSITION

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais)

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

SOURCES OF FUNDS:

            

From operations:

            

Net loss

   (54,494 )   (22,335 )

Items not affecting working capital:

            

Depreciation and amortization

   84,455     82,709  

Shared system depreciation apportionment

   (1,265 )   (1,380 )

Net book value of permanent asset disposals

   (64 )   763  

Exchange variation on long term liabilities

   (22,989 )   (2,359 )

Exchange and monetary variation on noncurrent assets

   (943 )   (834 )

Loss on derivative long-term contracts

   30,970     6,464  

Taxes and contributions on long term

   2,507     (6,871 )

Reserve for contingencies

   1,443     2,694  

Pension and other post-retirement plans

   57     67  
    

 

Total

   39,677     58,918  

From third parties:

            

Transfer from noncurrent assets to current assets

   18,852     23,358  

Transfer from permanent assets to current assets

   —       772  

Increase in long-term liabilities

   895     —    

Increase in long-term loans and financing

   —       21,806  

Capital reserves–donations

   —       3,418  

Transfer of legal deposits from noncurrent assets to current assets

   1,155     —    
    

 

Total sources

   60,579     108,272  
    

 

USES OF FUNDS:

            

Transfers from long term loans, financing and derivatives to current liabilities

   131,874     1,099  

Increase in noncurrent assets

   6,253     11,557  

Increase in deferred taxes

   9,423     —    

Additions to permanent assets

   63,039     63,321  

Increase in prepaid expenses

   1,629     —    

Increase in legal deposits

   3,100     12,023  

Transfer from long term to current liabilities

   —       2,333  

Transfer from current to noncurrent assets

   1,629     —    
    

 

Total uses

   216,947     90,333  
    

 

INCREASE (DECREASE) IN WORKING CAPITAL

   (156,368 )   17,939  
    

 

REPRESENTED BY:

            

Current assets

   (68,709 )   (10,429 )

Beginning of period

   331,927     219,231  

End of period

   263,218     208,802  

Current liabilities

   (87,659 )   28,368  

Beginning of period

   285,234     269,392  

End of period

   372,893     241,024  
    

 

Increase in working capital

   (156,368 )   17,939  
    

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

OPERATING ACTIVITIES:

            

Net cash from operating activities

   33,609     5,779  

INVESTING ACTIVITIES:

            

Additions to property, plant and equipment

   (63,039 )   (59,903 )

Proceeds from asset disposals

   171     297  
    

 

Net cash from investing activities

   (62,868 )   (59,606 )

FINANCING ACTIVITIES:

            

Loans repaid

   (40,721 )   (66,602 )

Net settlement on derivative contracts

   (29,600 )   (7,967 )

New loans obtained

   36,039     95,791  

Cash received relating to reverse stock split

   5,565     —    
    

 

Net cash from financing activities

   (28,717 )   21,222  

Decrease in cash and cash equivalents

   (57,976 )   (32,605 )

Cash and cash equivalents:

            

At the beginning of year

   86,606     59,427  

At the end of year

   28,630     26,822  
Supplemental cash flow information             
     Nine-month periods
ended September 30,


 
     2005

    2004

 

Income and social contribution tax paid

   11,999     16,797  

Interest paid

   4,098     6,607  

Noncash transaction:

            

Donations recorded as investments

   —       3,418  

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statement.

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

1. Operations and background

 

Tele Leste Celular Participações S.A. (“Tele Leste” or the “Company”) is a publicly held company whose controlling shareholders, on September 30, 2005, are Sudestecel Participações S.A. (22.26% of the total capital stock), Brasilcel N.V. (3.36% of the total capital stock), Tagilo Participações Ltda. (2.4% of the total capital stock) and Avista Participações Ltda. (22.65% of the total capital stock). Sudestecel Participações S.A., Tagilo Participações Ltda. and Avista are wholly owned subsidiaries of Brasilcel N.V.

 

The controlling shareholders of Brasilcel N.V. are Telefónica Móviles, S.A. (50.00% of the total capital stock), PT Móveis, Serviços de Telecomunicações, SGPS, S.A. (49.999% of the total capital stock) and Portugal Telecom, SGPS, S.A. (0.001% of the total capital stock).

 

The Company owns 100% of Telebahia Celular S.A. and Telergipe Celular S.A., which provide, respectively, mobile telephone and other related services in the states of Bahia and Sergipe, including the exercise of activities necessary or useful to perform such services, in accordance with the authorizations granted to them.

 

The authorizations granted to Telebahia and Telergipe shall be in force up to June 29 and December 15, 2008, respectively, and may be renewed once for a 15- year term by means of the payment of rates of approximately 1% of the operators’ annual revenues.

 

Telecommunications services provided by the subsidiaries, including related services and tariffs, are regulated by the Federal regulatory authority, the National Telecommunications Agency (“ANATEL”), as authorized by Law No. 9,472, of July 16, 1997, and the related regulations, decrees, decisions and plans.

 

On July 29, 2005, the Company’s Board of Directors approved the merger of Telergipe Celular S.A., into parent company. The merger proposals were presented to ANATEL for approval on September 8, 2005. The purpose of these proposed mergers is to achieve financial and operational benefits through reductions in administrative costs.

 

2. Presentation of financial statements

 

The consolidated financial statements include the accounts of Tele Leste and its subsidiaries. Intercompany transactions and balances have been eliminated. The consolidated financial statements include as of September 30, 2005, balances and transactions of the subsidiaries Telebahia Celular S.A. (“Telebahia”) and Telergipe Celular Participações S.A. (“Telergipe”).

 

In the Company’s opinion, all adjustments necessary for a fair presentation of the unaudited results of operations for the nine-month periods ended September 30, 2005 and 2004 are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for the period ended at September 30, 2005 are not necessarily indicative of the results of operations expected for the full year. The accompanying consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2004, as appearing in the Company’s Annual Report on Form 20-F filed on April 15, 2005.

 

The presentation of the consolidated financial statements is consistent with the presentation of the published financial statements of the Company in Brazil, from which the financial information was extracted, except for certain reclassifications and changes in terminology within the consolidated balance sheets and the consolidated

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

statements of loss, which have been made to conform the previously published financial statements to the presentation included herein. The financial statements as of September 30, 2004 and for the year ended December 31, 2004, have been reclassified, where applicable, for comparability.

 

3. Summary of principal accounting practices

 

The unaudited interim condensed consolidated financial statements are expressed in thousands of Brazilian reais (“R$”),except when mentioned, and have been prepared in accordance with accounting practices adopted in Brazil, which include the accounting practices derived from Brazilian corporate law, regulations applicable to public telecommunications service concessionaires and accounting regulations and procedures established by the Brazilian Securities Commission (“CVM”), hereinafter referred to as “Brazilian GAAP”.

 

The principal accounting practices adopted by the Company and its subsidiaries in the preparation of these interim financial statements are the same as those described in the consolidated financial statements as of and for the year ended December 31, 2004.

 

4. Net operating revenue

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Monthly subscription charges

   24,378     29,558  

Usage charges

   238,170     180,672  

Additional charges per call

   17,459     19,947  

Interconnection

   156,326     148,099  

Data services

   22,368     9,264  

Other

   13,680     13,309  
    

 

Gross operating revenue from services

   472,381     400,849  

Value-added tax on services—ICMS

   (82,398 )   (65,240 )

PIS and COFINS

   (17,169 )   (14,737 )

Other taxes

   (215 )   (208 )

Discounts granted

   (15,656 )   (10,051 )
    

 

Net operating revenue from services

   356,943     310,613  

Handsets and accessories sold

   145,930     103,278  

Value-added tax on sales—ICMS

   (9,980 )   (12,313 )

Employees’ profit participation program—PIS and social contribution on billing—COFINS

   (7,312 )   (6,574 )

Discounts granted

   (62,578 )   (37,652 )

Returns of goods

   (4,307 )   (5,761 )
    

 

Net operating revenue from sales of handsets and accessories

   61,753     40,978  
    

 

Net operating revenue

   418,696     351,591  
    

 

 

There are no customers which contributed with more than 10% of gross operating revenue in the nine-month periods ended September 30, 2005 and 2004, except for Telemar Norte Leste S.A. - TELEMAR, the fixed telephone operator which contributed with approximately 26% and 30% of gross operating revenue, respectively, mainly through network interconnection revenues.

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

5. Cost of services and goods

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Personnel

   (4,094 )   (2,984 )

Outsourced services

   (14,707 )   (11,894 )

Leased lines

   (18,876 )   (14,644 )

Rent, insurance and other related expense

   (10,376 )   (8,965 )

Interconnection

   (11,501 )   (12,525 )

Taxes and contributions

   (17,782 )   (15,316 )

Depreciation and amortization

   (53,200 )   (56,216 )

Cost of products sold

   (102,516 )   (81,850 )

Other

   (382 )   (125 )
    

 

Total

   (233,434 )   (204,519 )
    

 

 

6. Selling expenses

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Personnel

   (12,928 )   (10,645 )

Supplies

   (2,352 )   (2,761 )

Outsourced services (1)

   (83,005 )   (58,684 )

Rental, insurance and other related expenses

   (2,026 )   (2,020 )

Taxes and contributions

   (76 )   (390 )

Depreciation and amortization

   (21,950 )   (17,462 )

Allowance for doubtful accounts receivable

   (14,652 )   (9,010 )

Other

   (4,785 )   (2,728 )
    

 

Total

   (141,774 )   (103,700 )
    

 


(1) Outsourced services include expenses with advertising in the amount of R$16,182 and R$12,054 in 2005 and 2004, respectively.

 

7. General and administrative expenses

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Personnel

   (8,628 )   (10,024 )

Supplies

   (162 )   (370 )

Outsourced services

   (21,736 )   (19,676 )

Rent, insurance and other related expenses

   (2,422 )   (1,331 )

Taxes and contributions

   (288 )   (1,191 )

Depreciation and amortization

   (9,020 )   (9,031 )

Other

   (579 )   (164 )
    

 

Total

   (42,835 )   (41,787 )
    

 

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

8. Other operating expense, net

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Income:

            

Fines

   3,186     1,775  

Recovered expenses

   877     395  

Reversal of reserves

   614     43  

Shared infrastructure

   1,284     1,056  

Commercial incentives

   3,313     1,824  

Other

   1,477     317  
    

 

Total

   10,751     5,410  
    

 

Expenses:

            

Reserves for contingencies

   (4,277 )   (3,153 )

FUST

   (1,993 )   (1,611 )

FUNTTEL

   (996 )   (805 )

ICMS on other expenses

   (823 )   (611 )

PIS and COFINS on other income

   (1,029 )   (2,195 )

Amortization of deferred charges

   (285 )   —    

Other

   (6,024 )   (1,198 )
    

 

Total

   (15,427 )   (9,573 )
    

 

Other operating expenses, net

   (4,676 )   (4,163 )
    

 

 

9. Financial expense, net

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Financial income:

            

Interest income

   5,799     4,142  

Monetary/exchange variation on assets

   54,701     25,663  

PIS and COFINS on financial income

   (53 )   (2,084 )
    

 

Total

   60,447     27,721  
    

 

Financial expenses:

            

Interest expense

   (14,912 )   (11,242 )

Monetary/exchange variation on liabilities

   (746 )   (18,853 )

Derivative contracts, net

   (89,449 )   (12,162 )
    

 

Total

   (105,107 )   (42,257 )
    

 

Financial expense, net

   (44,660 )   (14,536 )
    

 

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

10. Income and social contribution taxes

 

The Company and its subsidiaries estimate monthly the amounts of income and social contribution taxes on an accrual basis, paying the taxes based on a monthly estimate. Deferred taxes are recognized on temporary differences. Income and social contribution taxes charged to income consist of the following:

 

a. Components of income taxes

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Income tax

   (10,739 )   (2,620 )

Social contribution tax

   (3,722 )   (949 )

Deferred income tax

   6,138     (872 )

Deferred social contribution

   2,277     (314 )
    

 

Total

   (6,046 )   (4,755 )
    

 

 

b. Reconciliation of effective tax rate

 

The following is a reconciliation of the reported income tax expense and the amounts computed by applying the combined statutory tax rate of 34% for the nine-month periods ended September 30, 2005 and 2004:

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Loss before taxes

   (48,448 )   (17,580 )

Tax benefit at the combined statutory rate

   16,472     5,977  

Permanent additions/exclusions:

            

Nondeductible expenses

   (1,497 )   (2,393 )

Unrecorded tax loss carry-forwards

   (21,307 )   (8,356 )

Other

   286     17  
    

 

Total tax expense

   (6,046 )   (4,755 )
    

 

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

c. Composition of deferred income tax assets

 

Deferred income tax assets based on temporary differences are comprised of the following:

 

    

As of

September 30,
2005


  

As of

December 31,

2004


Tax loss carryforwards

   112,448    106,275

Tax credits from corporate restructuring

   55,558    63,702

Reserve for contingencies

   2,151    2,076

Allowance for doubtful accounts receivable

   5,468    4,901

Provision for pension and other postretirement benefit plans

   94    94

Accrual for rewards program

   1,222    —  

Allowance for inventory obsolescence

   398    508

Accelerated book depreciation

   7,314    6,443

Other

   3,252    3,636
    
  

Total

   187,905    187,635
    
  

Current

   3,570    —  

Noncurrent

   184,335    187,635

 

Deferred taxes have been recorded if it is more likely than not that they will be realized as follows:

 

a) Tax loss carry-forwards will be offset up to a limit of 30% per year of future taxable income.

 

b) Tax credits from corporate restructuring: These tax credits represent the tax benefit recorded as a result of the corporate restructuring described in Note 17. The realization of these tax credits occurs in the same proportion as the amortization of goodwill, over a period of ten years.

 

c) Temporary differences: The realization of temporary difference will occur by payment of provisions, the effective loss on allowance for doubtful accounts or provision for obsolescence of inventories.

 

Management has been monitoring the evolution of these credits, and in this respect decided not to recognize deferred income and social contribution on tax losses and temporary differences of the subsidiary Telebahia as of September 30, 2005 totaling R$92,157 and R$93,175 (R$29,569 and R$30,587 at December 31, 2004), respectively.

 

11. Trade accounts receivable, net

 

    

As of

September 30,

2005


   

As of

December 31,

2004


 

Unbilled services

   25,256     19,393  

Billed services

   73,573     56,176  

Interconnection

   34,224     27,853  

Products sold

   20,336     37,122  

Allowance for doubtful accounts receivable

   (16,051 )   (12,796 )
    

 

Total

   137,338     127,748  
    

 

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

There are no customers who contribute with more than 10% of accounts receivable, net at September 30, 2005 and December 31, 2004, except for amounts receivable from Telemar Norte Leste S.A.—TELEMAR, which represent approximately 12.9% and 12.1% of trade accounts receivable, respectively, mainly through interconnection charges.

 

Changes in the allowance for doubtful accounts receivable were as follows:

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Balance at beginning of year

   12,796     14,434  

Allowance for doubtful accounts receivable charged to selling expenses

   14,652     9,010  

Write-offs

   (11,397 )   (10,705 )
    

 

Ending balance

   16,051     12,739  
    

 

 

12. Recoverable taxes

 

    

As of

September 30,

2005


  

As of

December 31,

2004


Prepaid/recoverable income and social contributions taxes

   20,752    24,746

Recoverable state value-added tax (ICMS)

   28,804    25,290

Withholding income tax

   2,133    2,693

Other

   12,887    13,351
    
  
     64,576    66,080
    
  

Current

   38,894    42,266

Noncurrent

   25,682    23,814

 

13. Loans and financing

 

a. Composition of debt

 

Description


   Currency

  

Annual

interest


  

Final

maturity


  

As of
September 30,

2005


  

As of
December 31,

2004


Principal:

                          

Financial Institutions Resolution No. 2,770

   US$      1.09%p.a
to 5.5%p.a
   from 10/04/2005
to 09/22/2006
   129,078    171,724

European Investment Bank—BEI

   US$      1.4%p.a + LIBOR    06/13/2008    116,621    139,303

Compror

   US$      3.77%p.a
to 5.5%p.a
   09/25/2006    12,191    —  

Suppliers:

                          

NEC do Brasil S.A

   US$      7.3%    11/29/2005    781    1,865

Accrued interest

                    4,675    1,196
                     
  

Total

                    263,346    314,088
                     
  

Current

                    146,725    52,319

Noncurrent

                    116,621    261,769

 

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Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Loans and financing are used for expansion and modernization of cellular telephone network, financing fixed assets and working capital.

 

b. Repayment schedule

 

The long-term portion as of September 30, 2005 matures as follows:

 

Year


   2005

2008

   116,621
    

Total

   116,621

 

c. Restrictive covenants

 

The Company has a loan with the European Investment Bank - EIB, the balance of which as of September 30, 2005 was R$116,621 (R$139,303 as of December 31, 2004). According to this agreement, a number of financial covenants should be measured annually.

 

d. Derivatives contracts

 

As of September 30, 2005, the Company had foreign exchange rate derivative contracts with a total notional amounts of US$124,010 thousand (US$125,704 thousand at December 31, 2004) to protect its obligations against exchange fluctuations. Year to date, the subsidiaries had recorded a book loss of R$89,540 (loss of R$29,691 at December 31, 2004) on these derivative contracts.

 

e. Guarantees

 

Bank


  

Guarantees


NEC do Brasil S.A

   Guarantee

Banco Europeu de Investimento–BEI

    

Telebahia Celular S.A.

   Trade risk guaranteed by Banco Espírito Santo

Telergipe Celular S.A.

   Trade risk guaranteed by Banco Espírito Santo

 

14. Other liabilities

 

     As of
September 30,
2005


  

As of

December 31,
2004


Advances from customers—prepaid calling cards

   7,545    5,932

Accrual for customer rewards program (a)

   2,731    2,344

Payable to related parties

   1,725    2,603

Reverse stock split (b)

   5,565    —  

Other

   12,192    5,214
    
  

Total

   29,758    16,093
    
  

Current

   23,808    11,092

Noncurrent

   5,950    5,001

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 


(a) The subsidiaries have a rewards program, in which calls are transformed into points usable in future exchanges of handsets. The accumulated points, net of redemptions, are provisioned, based on historical redemption data, points generated and the average cost of a point.
(b) Refers to a liability to shareholders for fractions of shares that were not issued on the date of the reverse stock split. This balance is payable upon demand.

 

15. Reserve for contingencies

 

The Company is party to a number of lawsuits, related to labor, tax and civil claims. Management, based on external legal counsel’s opinion, has recognized a provision for those claims for which an unfavorable outcome is considered probable.

 

Components of the reserves are as follows:

 

    

As of

September 30,
2005


  

As of

December 31,

2004


Labor Claims

   5,347    4,349

Civil Claims

   4,553    2,311

Tax Claims

   8,513    8,173
    
  

Total

   18,413    14,833
    
  

Current

   10,154    8,017

Noncurrent

   8,259    6,816

 

The changes in the reserve for contingencies are as follows:

 

    

Nine-month

periods

ended September 30,


         2005    

        2004    

Beginning balance at January 1

   14,833     11,527

Additional provision, net of reversals

   3,663     3,110

Monetary variation

   331     343

Payments

   (414 )   —  
    

 

Ending balance at September 30

   18,413     14,980
    

 

 

15.1. Tax litigation

 

15.1.1 Probable loss

 

No significant new tax claims with a “probable” loss classification were incurred in the nine-month period ended September 30, 2005. The evolution of the reserves for tax contingencies substantially corresponds to the monetary variation of the reserves during the period.

 

15.1.2 Possible loss

 

No significant new tax claims with a “possible” loss classification were incurred in the nine-month period ended September 30, 2005. No significant alterations occurred in the claims indicated in this report since the last fiscal year.

 

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Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

15.2. Labor and civil

 

Include several labor and civil claims, and a reserve was posted as shown previously, which is considered to be sufficient to cover probable losses on these cases.

 

In the cases in which the chance of loss is classified as possible, the aggregate amount involved is R$13,127 for civil claims and R$4,761 for labor claims.

 

16. Shareholders’ equity

 

a. Capital

 

At March 28, 2005 the shareholders approved a reverse stock split of the 480,618,117,605 book-entry shares, without par value comprising 167,232,225,653 common shares and 313,385,891,952 preferred shares representing capital, in the proportion of 50,000 (fifty thousand) shares to 1 (one) share of the same class, and the capital was represented by 9,612,362 book-entry shares, without par value of which 3,344,645 are common shares and 6,267,718 are preferred shares.

 

On the same date, the shareholders ratified the cancellation of the 51,355,078 book-entry shares, without par value, comprising 252,498 common shares and 51,102,580 preferred shares, held in treasury.

 

On July 28, 2005, the Company announced a capital increase of R$490 in favor of the controlling shareholders, corresponding to the tax benefit effectively realized during the 2004 fiscal year from the goodwill recorded by the Company’s controlling shareholders, but ensuring preemptive rights to others shareholders. The capital increased from R$306,340 to R$306,830, with the issue of 31,915 new common shares. The funds arising from the exercise of preemptive rights was credited to Sudestecel Participações S.A.

 

The Company’s capital is comprised of shares with no par value, as follows:

 

    

As of

September 30,

2005


  

As of

December 31,

2004 (1)


 

Common shares

   3,376,560    167,232,478,151  

Preferred shares

   6,267,718    313,436,994,532  
    
  

Total

   9,644,278    480,669,472,683  

Treasury shares

   —      (51,355,078 )
    
  

Total outstanding shares

   9,644,278    480,618,117,605  
    
  


(1) Had the reverse stock split described above occurred on December 31, 2004 shares outstanding would be 3,344,650 and 6,268,740 of common and preferred shares, respectively, and 1,027 treasury shares.

 

b. Interest on shareholders’ equity and dividends

 

The preferred shares do not have voting rights, except in the cases stipulated in Articles 3 and 7 of the Company’s bylaws. The preferred shares have priority to receive dividends 10% higher than those attributed to common shares or non-cumulative minimum annual preferred dividends of 6% of their nominal capital value social capital attributed to those shares, whichever is greater. In the case of the payment of minimum annual

 

F-96


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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

preferred dividends of 6% of capital per annum referring to the preferred shares, if there is sufficient balance available after distribution to the holders of preferred shares, the bearers of the common shares will receive the same amount in dividends per share as the preferred shares.

 

At the Ordinary General Meeting on March 28, 2005, the preferred shares were entitled to full voting rights, in accordance with Article 111, paragraph 1, of Law No. 6,474/76, due to the fact that minimum dividends on preferred shareholders were not paid for three consecutive years.

 

c. Special goodwill reserve

 

This reserve was formed as a result of the Company’s corporate restructuring, and will be capitalized in favor of the controlling shareholder at the time of effective realization of the related tax benefit.

 

17. Corporate restructuring

 

On November 29, 2000, the Company completed a corporate restructuring to transfer a tax benefit to the Company related to the goodwill paid by the Company’s controlling shareholders in the privatization process. The goodwill and related tax benefit on the date of transfer amounted to R$376,316 and R$124,344, respectively. The tax benefit was recorded as deferred tax with a corresponding entry to a special goodwill reserve in shareholders’ equity. This tax benefit is being realized in proportion to the amortization of the goodwill over a period of ten years. The special goodwill reserve is transferred to capital with a corresponding issuance of shares to the Company’s controlling shareholders as related tax benefit is realized. In connection with the issuance of these shares, the Company’s other shareholders are entitled to preemptive rights. Proceeds received in connection with the exercise of preemptive rights are payable to the Company’s controlling shareholders. This tax benefit, as of September 30, 2005 and December 31, 2004, amounted to R$55,558 and R$63,702, respectively.

 

18. Transactions with related parties

 

The principal transactions with unconsolidated related parties are:

 

a) Use of network and long-distance (roaming) and local cellular communication: these transactions involve companies owned by the same controlling group, Telesp Celular S.A., Global Telecom S.A., Telerj Celular S.A., Telest Celular S.A., Telecomunicações de São Paulo S.A.—Telesp, Celular CRT S.A., Tele Centro Oeste Celular Participações S.A., Telems Celular S.A., Teleron Celular S.A., Telemat Celular S.A., Teleacre Celular S.A., Telegoiás Celular S.A. and Norte Brasil Telecom S.A. Some of these transactions are based on contracts signed by Telebrás with the concessionaire operators during the period prior to privatization, and the conditions were regulated by ANATEL.

 

b) Corporate management advisory: payable by the subsidiaries to Telefónica Móviles S.A. calculated based on the percentage applied to net income from the services, re-stated according to currency variation.

 

c) Corporate costs: passed on to the subsidiaries under the same controlling group at the cost effectively incurred of the services.

 

d) Call-center services: provided by Atento Brasil S.A. for the users of the subsidiaries’ telecommunications service, contracted for 12 months, renewable for an equal period.

 

e) Systems maintenance: maintenance of the profitability analysis module of the system (MARE) by Telefónica Móbile Solution, contracted for 12 months, renewable for the same period.

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

A summary of balances and transactions with unconsolidated related parties is as follows:

 

     As of
September 30,
2005


  

As of

December 31,

2004


Assets:

         

Accounts receivables

   3,918    5,068

Intercompany credits

   1,876    2,197

Liabilities:

         

Technical assistance

   12,877    15,584

Suppliers and Consignations

   6,033    6,336

Intercompany liabilities

   1,725    2,603

 

    

Nine-month periods

ended September 30,


 

Statements of loss


   2005

    2004

 

Revenue from telecommunication services

   13,837     34,083  

Cost of sales and services

   —       (49 )

Sales expenses

   (18,565 )   (13,869 )

General and administrative Expenses

   (2,822 )   (4,437 )

 

19. Financial instruments and risk management

 

a. Risk considerations

 

The major market risks to which the Company is exposed in conducting business are:

 

Credit Risk resulting from any difficulty in collecting telecommunications services provided to customers and revenues from sale of handsets by the Company’s distribution network, as well risks relating to swap transactions.

 

Interest Rate Risk resulting from debt and derivative instruments contracted at floating rates and involving the risk of financial expenses as a result of an unfavorable upward trend in interest rates (mainly LIBOR and CDI).

 

Exchange Rate Risk related to debt and derivative instruments contracted in foreign currencies which expose the Company to potential losses from adverse exchange rate fluctuations.

 

The Company and its subsidiaries actively manage their operations to mitigate these risks by means of comprehensive operating procedures, policies and initiatives.

 

Credit risk

 

The credit risk from providing telecommunications services is reduced by a strict control of the customer base and active management of default by means of clear policies related to selling postpaid cell phones. As of September 30, 2005, Tele Leste and its subsidiaries had 77.8% (77.8% as of December 31, 2004) of its customer base under the prepaid system, which requires prepaid loading and therefore does not represent any credit risk.

 

Credit risk from the sale of handsets is managed by following conservative credit policy which encompasses the use of advanced risk management methods that include applying credit scoring techniques, analyzing a potential customer’s balance sheet, and using credit protection agencies’ databases.

 

F-98


Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The Company and its subsidiaries are also exposed to credit risk relating to their financial investments and receivables from swap transactions. The Company and its subsidiaries attempt to diversify such exposure by using reputable financial institutions.

 

Interest rate risk

 

The Company is exposed to fluctuations of local interest rates, due to exchange derivative transactions contracted in Brazilian reais at costs associated with the CDI rate. However, financial investments that are also indexed to the CDI, partially reduce this risk.

 

As of September 30, 2005, the loans contracted in foreign currency at variable foreign interest rates (LIBOR) represented a principal of US$52,480 thousand. In these operations, the Company has protection through derivatives (interest rate swaps), which neutralize the risk associated with the variations in the foreign interest rates (LIBOR).

 

Exchange rate risk

 

Telebahia and Telergipe have contracted financial operations with derivatives to protect against exchange variations resulting from foreign currency loans. The instruments normally used are swap contracts.

 

The following table summarizes the net exposure of the Company to foreign currency exchange rate risk as of September 30, 2005:

 

    

In thousands of

US$


 
  

Loans and financing

   (118,507 )

Trade payables—technical assistance

   (5,885 )

Derivative contracts

   124,010  
    

Total

   (382 )
    

 

b. Derivative contracts

 

The Company records the gains and losses with derivative contracts as net financial expenses or income.

 

Book and estimated market values of loans and financing and derivative instruments are as follows:

 

    

Book

value


   

Market

value


   

Unrealized

gain (loss)


 

Other liabilities

   (13,078 )   (13,078 )   —    

Loans and financing

   (263,346 )   (267,016 )   (3,670 )

Derivative instruments

   (89,540 )   (80,958 )   8,582  
    

 

 

Total

   (365,964 )   (361,052 )   4,912  
    

 

 

 

c. Market value of financial instruments

 

The market value of loans and financing and derivative instruments were determined based on the discounted cash flows, utilizing available market information. Accordingly, the estimates presented above are not necessarily indicative of the amounts that could be realized in the current market. The use of different market assumptions may have a material effect on estimates.

 

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Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

20. Summary of the differences between Brazilian and U.S. GAAP

 

The Company’s accounting policies that comply with Brazilian GAAP and that differ significantly from accounting principles generally accepted in the United States of America (U.S. GAAP) are described below:

 

a. Different criteria for capitalizing and amortizing capitalized interest

 

Until December 31, 1993 capitalized interest was not added to the individual assets in property, plant and equipment; instead it was capitalized separately and amortized over a time period different from the useful lives of the related assets. Under U.S. GAAP, capitalized interest is added to the individual assets and is amortized over their useful lives.

 

Also, until December 31, 1998, under Brazilian GAAP as applied by the Company, interest attributable to construction-in-progress was computed at the rate of 12% per annum of the balance of construction-in-progress and that part which relates to interest on third-party loans was credited to interest expense based on actual interest costs, with the balance relating to the Companies’ own capital being credited to capital reserves. For the three-year period ended December 31, 2004, the Company did not capitalize interest attributable to construction-in-progress at the rate of 12%; rather the actual effective interest related to construction-in-progress was used to determine capitalized interest.

 

Under U.S. GAAP, in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 34, “Capitalization of Interest Costs”, interest incurred on borrowings is capitalized to the extent that borrowings do not exceed construction-in-progress. The credit is a reduction of interest expense. Under U.S. GAAP, the amount of interest capitalized excludes monetary gains associated with local currency borrowings and any foreign exchange gains and losses on foreign currency borrowings. The effects of these different criteria for capitalizing and amortizing capitalized interest are presented below:

 

    

Nine-month periods

ended September 30,


 
         2005    

        2004    

 

Capitalized interest difference

            

U.S. GAAP capitalized interest:

            

Interest capitalized during the period

   670     1,321  

Capitalized interest on disposals

   (4,363 )   (443 )
    

 

     (3,693 )   878  

Less Brazilian GAAP capitalized interest:

            

Interest capitalized during the period

   (349 )   (966 )

Capitalized interest on disposals

   4,333     448  
    

 

     3,984     (518 )

U.S. GAAP difference

   291     360  
    

 

Amortization of capitalized interest difference

            

Amortization under Brazilian GAAP

   4,232     2,898  

Capitalized interest on disposals

   (4,335 )   (418 )
    

 

     (103 )   2,480  

Less amortization under U.S. GAAP

   (5,063 )   (2,873 )

Capitalized interest on disposals

   4,365     413  
    

 

     (698 )   (2,460 )

U.S. GAAP difference

   (801 )   20  
    

 

 

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Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

b. Proposed dividends

 

Under Brazilian GAAP proposed dividends are accrued for in the financial statements in anticipation of their approval at the shareholders’ meeting. Under U.S. GAAP, dividends are not accrued until they are formally declared.

 

The interest on shareholders’ equity is a legal liability from the date it is declared, therefore, these amounts must be included as dividends in the year they are proposed for U.S. GAAP purposes.

 

c. Pension and other post retirement benefits

 

The Subsidiaries participate in two multiemployer benefit plans (PBS-A and PAMA) that are operated and administrated by Sistel and provide for the costs of pension and other post-retirement benefits based on a fixed percentage of remuneration, as recommended annually by independent actuaries. For purposes of U.S. GAAP, multiemployer plans are accounted for similar to defined contribution plans and consequently, the Company is required to disclose its annual contributions and funded status of those plans. The Subsidiaries also sponsor a single-employer defined benefit pension plan (PBS-Tele Leste). The provisions of SFAS No. 87, “Employees Accounting for Pensions,” for the purposes of calculating the funded status, were applied with effect from January 1, 1992, because it was not feasible to apply them from the effective date specified in the standard.

 

On December 13, 2000, CVM issued Instruction No. 371, which provisions are very similar to SFAS No. 87 and SFAS No. 106, except for the following differences:

 

    A company that participates in a multiemployer defined benefit pension or postretirement benefit plan is required to recognize any assets or liabilities in respect to its participation in such plans, while U.S. GAAP requires only the disclosure of funded status of those plans.

 

    The unrecognized net obligation existing at the date of initial application of this standard shall be amortized over five years or the remaining service period or remaining life expectancy, whichever is lower. Alternatively, companies were granted the option to amortize such initial transition obligation as of December 31, 2001, directly to shareholders’ equity. Such option has been adopted by the Company. Under SFAS No. 87, the unrecognized net obligation existing at the date of its initial application is being amortized over the remaining service period.

 

    Under Brazilian GAAP actuarial gains and losses are recorded in income when incurred up to the amount of pension liability recorded. Under U.S. GAAP, certain actuarial gains and losses are deferred and amortized over the remaining service period of the active employees expected to receive benefits under the plan.

 

The effects of these different criteria for recognition of pension and other postretirement liabilities on accrued pension (postretirement) liabilities as of September 30, 2005 and December 31 2004, are presented below:

 

     As of September 30, 2005

    As of December 31, 2004

 

Description  


  

U.S.

GAAP


   Brazilian
GAAP


   Accumulated
Difference


   

U.S.

GAAP


   Brazilian
GAAP


  

Accumulated

Difference


 

Active employees defined pension—PBS Tele Leste

   413    —      413     462    142    320  

Multiemployer health care plan—PAMA

   —      278    (278 )   —      133    (133 )

Accrued pension (post-retirement) liability

   413    278    135     462    275    187  
    
  
  

 
  
  

 

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Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

d. Financial expense, net

 

Brazilian GAAP requires interest to be shown as part of operating income. Under U.S. GAAP interest income (expense) would be shown after operating income.

 

e. Permanent assets

 

Brazilian GAAP has a class of assets called “permanent assets”. This is the collective name for all assets on which indexation adjustments were calculated until December 31, 1995 in the corporate and fiscal law accounts of Brazilian companies. Under U.S. GAAP the assets in this classification would be noncurrent assets.

 

f. Monetary restatement of 1996 and 1997

 

The amortization of the asset appreciation, which originated from the inflation accounting during 1996 and 1997, when Brazil was still considered as high inflationary economy for U.S. GAAP purposes, has been recognized as an adjustment to income in the reconciliation to U.S. GAAP. The loss related to monetary restatement on disposals of such assets is classified for U.S. GAAP purposes as a component operating income.

 

g. Taxes on income

 

The Company fully accrues for deferred income taxes on temporary differences between tax and accounting records. The existing policies for providing for deferred taxes are substantially in accordance with SFAS No.109, “Accounting for Income Taxes”, except with respect to social contribution rate adopted, as explained below:

 

    Under Brazilian GAAP, at December 31, 1999 the Company recognized a change in the combined tax rate from 33% to 34% based on a provisional measure for an increase in the social contribution rate from 8% to 9% effective January 1, 2000. Provisional measures are temporary and must be re-approved every 30 days or they lapse. Under SFAS 109, the provisional measures discussed are not considered to be enacted law. Therefore, for 2001 the combined deferred tax effect calculated on temporary differences would be 33%, not 34%. For September 2005 and 2004, no difference related to the social contribution tax rate was considered as the provisional measure was approved in Law 10,637, as of December 30, 2002.

 

    Under Brazilian GAAP, the deferred taxes are presented gross. Under U.S. GAAP, the deferred taxes are presented net.

 

h. Earnings per share

 

Under Brazilian GAAP, net income (loss) per share is calculated based on the number of shares outstanding at the balance sheet date.

 

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, “Earnings per Share”. This statement became effective December 15, 1997, and provides computation, presentation and disclosure requirements for earnings per share.

 

Since the preferred and common stockholders have different dividend, voting and liquidation rights, basic and diluted earnings per share have 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 stock according to the dividends to be paid as required by the Company’s by-laws and participation rights in undistributed earnings.

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Basic earnings per common share is computed by reducing net income by distributed and undistributed net income available to preferred shareholders and dividing net income available to common shareholders by the number of common shares outstanding. Net income available to preferred shareholders is the sum of the preferred stock dividends (a minimum of 6% of preferred capital or 10% higher than those attributed to common shares, whichever is higher, as defined in the Company’s by-laws) and the preferred shareholders’ portion of undistributed net income. Undistributed net income is computed by deducting total dividends (the sum of preferred and common stock dividends) from net income. Undistributed net income is allocated to preferred shares 10% higher than that attributed to common shares on a pro rata basis. The number of shares issuable are considered dilutive as defined in SFAS No. 128 and have been included in the weighted average common shares—diluted presented below. The number of shares issuable was computed considering the balance of the special premiums reserve (R$ 126,419 in September 30,2005 and R$ 123,365 in September 30,2004) by the average price of common shares traded on the São Paulo Stock Exchange (“Bovespa”) during the last 20 trading days of each year. Since the Company had net losses for the months ended September 30, 2005 and 2004, the Company did not pay any dividends for these months. Additionally, the contingently issued shares described above were not considered in the calculation of loss per share for the months ended September 30, 2005 and 2004 because the effect of the contingently issuable shares would have been anti-dilutive.

 

For the periods presented below, the weighted average number of shares outstanding consider the effect of the reverse stock split described in Note 16. The computation of basic and diluted earnings per share is as follows:

 

     Nine-month periods ended September 30,

 
     2005

    2004

 
     Common

    Preferred

    Common

    Preferred

 

Basic numerator:

                        

Allocated net loss to common and preferred shareholders

   (20,856 )   (38,995 )   (11,475 )   (21,529 )

Basic denominator:

                        

Weighted average shares outstanding

   3,352,125     6,267,392     3,340,801     6,267,722  

Basic earnings per share

   (6.22 )   (6.22 )   (3.43 )   (3.43 )

Diluted numerator:

                        

Allocated net loss to common and preferred shareholders

   (20,856 )   (38,995 )   (11,475 )   (21,529 )

Diluted denominator:

                        

Weight average shares outstanding

   3,352,125     6,267,392     3,340,801     6,267,722  

Diluted earnings per share

   (6.22 )   (6.22 )   (3.43 )   (3.43 )

 

The Company’s preferred shares are non-voting, except under certain limited circumstances, and are entitled to a preferential, noncumulative dividend and to priority over the common shares in the event of liquidation of the Company.

 

i. Deferred revenue on sales of handsets

 

Under Brazilian GAAP, revenues and costs from sales of handsets, including applicable value-added and other sales taxes, are recognized at the moment of sale to the customer. Under U.S. GAAP, in accordance with Staff Accounting Bulletin No. 104 (SAB 104), revenues from sales of handsets along with the related costs, including applicable value-added and other sales taxes, are deferred and amortized based on the expected useful life of the handset, estimated by management to be 18 months. Any excess of the cost over the amount of deferred revenue related to handset sales is recognized on the date of sale. As substantially all of the Company’s handsets are sold below cost, this difference in accounting policy had no impact on net loss or shareholders’

 

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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

equity. The amount of unamortized deferred revenue and the related amounts of unamortized deferred costs was R$58,637 at September, 30 2005 and R$32,427 at December 31, 2004. The impact of this difference under U.S. GAAP was to increase both net revenues and cost of services and goods by R$26,210 for the nine-month period ended September, 30 2005 and to decrease those items by R$27,735 for the nine-month period ended September, 30 2004.

 

(i) Value-added and other sales taxes

 

Under Brazilian GAAP, these taxes are recorded in revenue net of the related tax expense. Under U.S. GAAP, these taxes are recorded gross as revenue and the related cost of services and goods. This difference in accounting has no impact in net income (loss) or in shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both revenues and costs of services and goods by R$116,859 and R$98,864 for September, 30 2005 and 2004, respectively, for U.S. GAAP as compared to amounts reported under Brazilian GAAP.

 

(ii) Roaming

 

The company has roaming agreements with other cellular service providers. When a call is made from within one coverage area by a subscriber of another cellular service provider, that service provider pays Tele Leste’s subsidiaries for the service at the applicable rates. Conversely, when one of the subsidiaries’ customers roams outside the coverage area, the subsidiaries pay the charges associated with that call to the cellular service provider in whose region the call was originated and charges the same amount to is subscriber. Under Brazilian GAAP, revenues for roaming charges are recorded net of the related costs when the services are provided. Under U.S. GAAP, revenues and costs for roaming charges should be recorded gross. This difference in accounting practices has no impact on net shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both revenues and cost of goods and services by R$14,949 for September,30 2005 and R$10,329 for September30, 2004.

 

(iii) Free minutes given in connection with sales of handsets

 

Under U.S. GAAP, pursuant to Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables,” the Company began to separately account for free minutes given in connection with the sales of handsets. The adoption of EITF No. 00-21 is effective prospectively for transactions entered into as from January 1, 2004. Consequently, a portion of the revenue generated from the sale of handsets is allocated to the free minutes given and deferred based on the fair value of the minutes. The revenues associated with the free minutes are then recognized based on subscriber airtime usage. Under Brazilian GAAP, the Company does not separately account for free minutes given in connection with sales of handsets.

 

j. Fistel tax

 

Beginning in 1999, under Brazilian GAAP, the Fistel (Telecommunications Inspection Fund) tax, assessed on each activation of a new cellular line, is deferred and amortized over the customers’ estimated subscription period. For U.S. GAAP purposes, this tax would be charged directly to the consolidated statements of income. Therefore, the deferred Fistel taxes on activation fees at September, 30, 2005, and 2004 are being adjusted in the reconciliation of the income differences between U.S. GAAP and Brazilian GAAP.

 

F-104


Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

k. Computer software developed for internal use

 

Under Brazilian GAAP, the costs incurred during the computer software preliminary project stage are capitalized and amortized on a straight-line basis over a period of five to ten years. Under U.S. GAAP, the costs incurred with computer software preliminary project stage must meet specific characteristics to be capitalized. The effect of these different criteria for capitalizing computer software is adjusted in the reconciliation of the income differences between U.S. GAAP and Brazilian GAAP.

 

l. Derivative instruments

 

The subsidiaries have entered into foreign currency derivative contracts for long-term agreements at various exchange rates, in the amount of US$124,010 thousand at September, 30 2005 (US$125,704 thousand at December 31, 2004). Under Brazilian GAAP, foreign currency derivative contracts are recorded at their settlement amount based on the terms of the contract at the balance sheet date.

 

In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which was subsequently amended by SFAS Nos. 137, 138 and 149. SFAS No. 133 must be applied to all derivative contracts and certain derivative contracts embedded in hybrid instruments and requires that such instruments be recorded on the balance sheet either as an asset or liability measured at its fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 on January 1, 2000, did not have a material effect on the Company’s financial statements.

 

If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives that are considered to be effective, as defined, will either offset the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or will be recorded in other comprehensive income until the hedged item is recorded in earnings. Any portion of a change in a derivative’s fair value that is considered to be ineffective, as defined, must be immediately recorded in earnings. Any portion of a change in a derivative’s fair value that the Company has elected to exclude from its measurement of effectiveness, such as the change in time value of option contracts, will also be recorded in earnings.

 

Prior to 2004, none of the Company’s derivative contracts were designated as hedge accounting under the definitions of SFAS No. 133. As such, all changes in the fair value of derivatives are considered ineffective Such ineffectiveness for U.S. GAAP purposes was recorded in the statement of operations as part of financial expense, net for the years ended December 31, 2003 and 2002.

 

Beginning in May 2004, the Company began to designate a portion of new cross currency swap contracts that relate to transactions in which a fixed-rate, foreign currency-denominated loan is converted into a variable-rate, functional currency-denominated loan as fair value hedges. At September 30, 2005, the Company had R$141.3 million (US$63.6 million) and R$171.7 (U$64.7) as of December, 31 2004 of notional value cross currency swap contracts with a fair value of R$144.1 million as of September 30, 2005 (R$173.1 million as of December 31, 2004) designated as fair value hedges of a portion of the Company’s foreign currency denominated debt. The Company is hedging the related foreign currency (US dollar) and interest rate risk associated with such indebtedness. These derivatives qualified for hedge accounting as the terms of the swap contracts are equal to the terms of the underlying debt. The Company calculates the effectiveness of these hedging relationships both at inception and on ongoing basis (i.e. at least quarterly), and ineffectiveness, if any, is recorded in the statement of operations for U.S. GAAP. The hedged debt is also adjusted to fair value under the fair value hedge rules of SFAS 133. At September 30, 2005 and 2004 the fair values of the

 

F-105


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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Company’s debt subject to these accounting hedges are higher than their respective book values by R$0,08 million, representing the related mark-to-market adjustment, which was recorded in the statement of operations as part of financial expense, net for the nine-months ended September 30, 2005 and December 30,2004. The U.S. GAAP adjustment reflects the difference between the recorded value of these hedges and the related debt under Brazilian GAAP and their fair values under U.S. GAAP.

 

The Company’s remaining derivative contracts for the periods presented have not been accounted for using hedge accounting. Consequently, these derivative contracts are recorded at fair value at September 30, 2005 and December 31, 2004.

 

m. Purchase accounting

 

On November 29, 2000, the Tele Leste acquired the minority interests in its Subsidiaries in a transaction involving the exchange of shares. Under Brazilian GAAP, this transaction was recorded at the book value of the minority interests acquired. Under U.S. GAAP, the acquisition of minority interests was recorded using the purchase method of accounting pursuant to APB 16, “Business Combinations,” and the related interpretations. Under U.S. GAAP, the purchase price was determined based on the market price of the Holding Company’s shares for a reasonable period before and after the date the terms of the acquisition were agreed to and announced publicly. The excess purchase price over the book value of the minority interests acquired was recorded based on management’s estimate of the fair values of the underlying assets and liabilities as follows:

 

Fixed assets

   7,215  

Subscriber base intangible asset

   2,382  

Concession

   33,657  

Deferred income tax effects

   (14,274 )
    

Excess purchase price under U.S. GAAP

   28,980  
    

 

The subscriber base intangible asset was completely amortized in November, 2004 over the estimated contractual relationship with subscribers, representing a period of 48 months.

 

The concession in being amortized based on the remaining concession period of the operating companies (until June 2008 for Telebahia Celular S.A. and December 2008 for Telergipe Celular S.A.).

 

F-106


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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Reconciliation of the income differences between U.S. GAAP and Brazilian GAAP

            

Brazilian GAAP net loss for the period

   (54,494 )   (22,335 )

Add (deduct):

            

Different accounting criteria for:

            

Amortization of monetary restatement of 1996 and 1997

   (857 )   (2,982 )

Loss on disposal of assets monetarily restated in 1996 and 1997

   36     (40 )

Capitalized interest

   291     360  

Amortization of capitalized interest

   (801 )   20  

Depreciation of donations

   511     134  

Purchase accounting:

            

Depreciation of fair value fixed assets adjustment

   (758 )   (1,189 )

Amortization of intangible assets

   (3,330 )   (3,780 )

Pension and other postretirement benefits

   52     119  

Deferred Fistel tax on activation fees

   884     57  

Computer software developed for internal use

   —       615  

Derivative instruments

   (4,056 )   (5,843 )

Free minutes given in connection with sales of handsets

   (88 )   (3,636 )

Deferred income tax effects of above adjustments

   2,759     5,496  
    

 

U.S. GAAP net loss for the period

   (59,851 )   (33,004 )
    

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Net income (loss) per shares in accordance with U.S. GAAP

            

Loss per share—Common shares (basic and diluted)

   (6.22 )   (3.43 )

Weighted average common shares—basic and diluted

   3,352,125     3,340,801  

(Loss) per share—Preferred shares (basic and diluted)

   (6.22 )   (3.43 )

Weighted average preferred shares basic and diluted

   6,627,392     6,267,722  

 

F-107


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TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

 

    

As of

September 30,

2005


   

As of

December 31,

2004


 

Reconciliation of the shareholders’ equity differences between U.S. GAAP and Brazilian GAAP

            

Brazilian GAAP shareholders’ equity

   320,030     374,524  

Add (deduct):

            

Different accounting criteria for:

            

Monetary restatement of 1996 and 1997

   47,348     47,312  

Amortization of monetary restatement of 1996 and 1997

   (44,842 )   (43,985 )

Capitalized interest

   540     249  

Depreciation of capitalized interest

   970     1,771  

Donations for investments

   (5,323 )   (5,323 )

Amortization of donations

   845     334  

Purchase accounting:

            

Fixed assets adjustment

   7,215     7,215  

Depreciation of fixed assets adjustment

   (7,215 )   (6,457 )

Intangible assets—concession

   33,657     33,657  

Intangible assets—subscriber base

   —       2,382  

Amortization on intangible assets—concession

   (21,460 )   (18,130 )

Amortization on intangible assets—subscriber base

   —       (2,382 )

Pension and other postretirement benefits

   (135 )   (187 )

Deferred Fistel tax on activation fees

   (4,692 )   (5,576 )

Free minutes given in connection with sales of handsets

   (4,598 )   (4,510 )

Derivatives instruments

   9,175     13,231  

Deferred tax effects of above adjustments

   (5,715 )   (8,474 )
    

 

U.S. GAAP shareholders’ equity

   325,800     385,651  
    

 

 

    

As of

September 30,

2005


 

Changes in shareholders’ equity in accordance with U.S. GAAP

      

Shareholders’ equity under U.S. GAAP as of beginning of the year

   385,651  

Net (loss) for the year

   (59,851 )

Shareholders’ equity under U.S. GAAP as of September 30, 2005

   325,800  
    

 

F-108


Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

U.S. GAAP supplementary information

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Reconciliation of operating income (loss) under Brazilian GAAP To operating income (loss) under U.S. GAAP

            

Brazilian operating (loss)

   (48,683 )   (17,114 )

Reversal of financial expense, net

   44,660     14,536  

U.S. GAAP adjustments:

            

Amortization of monetary restatement of 1996 and 1997

   (857 )   (2,982 )

Loss on disposal of assets monetarily restated in 1996 and 1997

   36     (40 )

Amortization of capitalized interest

   (801 )   20  

Purchase accounting:

            

Depreciation of fixed assets adjustment

   (758 )   (1,189 )

Amortization of intangible assets

   (3,330 )   (3,780 )

Deferred Fistel tax on activation fee

   884     57  

Computer software developed for internal use

   —       615  

Free minutes given in connection with sales of handsets

   (88 )   (3,636 )

Pension and other postretirement benefits

   52     119  

Gain (loss) on permanent assets disposals

   235     (468 )

Depreciation of donations

   511     134  
    

 

U.S. GAAP operating (loss)

   (8,139 )   (13,728 )
    

 

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Reconciliation of net revenues and costs under Brazilian GAAP to net revenues and costs under U.S. GAAP

            

Brazilian GAAP net revenues

   418,696     351,591  

Reclassification to cost of services and goods sold:

            

Taxes on sales

   116,859     98,864  

Increase in roaming revenue

   14,949     10,329  

U.S. GAAP adjustments:

            

Deferred revenues on handset sales, net of amortization

   26,210     (27,735 )

Free minutes given in connection with sales of handsets

   (88 )   (3,636 )
    

 

U.S. GAAP net revenues

   576,626     429,413  

 

F-109


Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Brazilian GAAP cost of services and goods

   (233,434 )   (204,519 )

Reclassification from net revenues:

            

Taxes on sales

   (116,859 )   (98,864 )

Increase in roaming cost

   (14,949 )   (10,329 )

Reclassification from selling expense:

            

Rewards program expense

   (805 )   (98 )

U.S. GAAP adjustments:

            

Amortization of monetary restatement of 1996 and 1997

   (857 )   (2,982 )

Loss on disposal of assets monetarily restated in 1996 and 1997

   36     (40 )

Amortization of capitalized interest

   (801 )   20  

Purchase accounting:

            

Depreciation of fixed assets adjustment

   (758 )   (1,189 )

Amortization of concession

   (3,330 )   (3,780 )

Deferred Fistel tax on activation fee

   884     57  

Pension and other postretirement benefits

   52     119  

Deferred costs on handset sales, including taxes on sales, net of amortizations during the year

   (26,210 )   27,735  
    

 

U.S. GAAP cost of services

   (397,031 )   (293,870 )
    

 

U.S. GAAP gross profit

   179,595     (135,543 )
    

 

    

As of

September 30,

2005


   

As of

December 31,

2004


 

Total assets under U.S. GAAP

   875,888     979,741  

Property, plant and equipment

   1,030,232     1,094,490  

Accumulated depreciation

   (648,614 )   (687,537 )

Net property, plant and equipment

   381,618     406,953  

 

21. Additional disclosures required by U.S. GAAP

 

a. Intangible assets subject to amortization

 

Following is a summary of the Company’s intangible assets subject to amortization under U.S. GAAP:

 

     As of September 30, 2005

    As of December 31, 2004

 
     Software

    Concession

    Subscriber
base


    Software

    Concession

   

Subscriber

base


 

Gross

   86,844     33,657     2,382     67,120     33,657     2,382  

Accumulated amortization

   (51,236 )   (21,460 )   (2,382 )   (41,957 )   (18,130 )   (2,382 )
    

 

 

 

 

 

Net

   35,608     12,197     —       25,163     15,527     —    
    

 

 

 

 

 

 

Aggregate amortization expense for the above intangible assets amounted to R$12,609 and R$14,711 for the nine-month ended September 30, 2005 and 2004, respectively.

 

The estimated aggregate amortization expense for three months 2005 and the next five years is as follows:

 

     Amount

From October 1 to December 31, 2005

   5,452

2006

   21,809

2007

   18,337

2008

   2,207

2009

   —  

 

F-110


Table of Contents

TELE LESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

b. Concentration of risks

 

The credit risk with respect to trade accounts receivable is diversified. The Company and its subsidiaries continually monitor the level of trade accounts receivable and limit the exposure to bad debts by cutting access to originate calls if any invoice is 15 days or more past due. Exceptions comprise telephone services that must be maintained for reasons of safety or national security.

 

In conducting its businesses, Telebahia Celular S.A. and Telergipe Celular S.A. are fully dependent upon the cellular telecommunications concession as granted by the Federal Government.

 

There is no concentration of available sources of labor, services, concessions or rights, other than those mentioned above, that could, if suddenly eliminated, severely impact the operations of the Company and its subsidiaries.

 

c. Commitments

 

Budgeted capital expenditure commitments for 2005 are approximately R$90.9 million of which R$63.0 million has been incurred in the nine-month periods ended September 30, 2005. Most of the 2005 capital expenditures are related to infrastructure, information technology and transmission equipment.

 

The Company is subject to obligations concerning quality of services, network expansion and modernization, as established in our authorizations and our original concession agreements. The Company believes that it is currently in compliance with its quality of service and expansion obligations.

 

d. New accounting pronouncements

 

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”, an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the fair value of the liability can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective December 31, 2005 for calendar year companies. The Company is currently evaluating FIN 47 to determine the impact on its consolidated financial statements.

 

In March 2004, the EITF of the FASB reached a consensus on EITF 03-06, (“Participating Securities and the Two-Class Method under FASB Statement No. 128”), that an entity would allocate losses to a nonconvertible participating security in periods of net loss if, based on the contractual terms of the participating security, the security had not only the right to participate in the earnings of the issuer but also a contractual obligation to share in the losses of the issuing entity on a basis that was objectively determinable. Determination of whether a participating security holder has an obligation to share in the losses of the issuing entity in a given period must be made on a period-by-period basis, based on the contractual rights and obligations of the participating security. EITF Issue No. 03-06 is effective for fiscal periods beginning after March 31, 2004. The Company is currently evaluating EITF 03-06 to determine the impact on its consolidated financial statements.

 

***********************************

 

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Table of Contents

TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

 

INDEX TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

Unaudited Interim Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004

   F-113 and F-114

Unaudited Interim Condensed Consolidated Statements of Income for the Nine-Month Periods ended September 30, 2005 and 2004

   F-115

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine-Month Period Ended September 30, 2005

   F-116

Unaudited Interim Condensed Consolidated Statements of Changes in Financial Position for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-117

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-118

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

  

F-119

 

Definitions:

 

Brazilian GAAP—Generally accepted accounting principles in Brazil

U.S. GAAP—Generally accepted accounting principles in the United States of America

 

F-112


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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais)

 

     Note

   As of
September 30,
2005


  

As of

December 31,
2004


Assets

              

Current assets:

              

Cash and cash equivalents

        349,754    353,906

Short-term investments pledged as collateral

   11    23,172    —  

Trade accounts receivable, net

   12    436,600    407,748

Deferred income taxes

   10c    76,446    73,559

Recoverable taxes

   13    252,899    254,394

Inventories

        81,026    131,578

Advances to suppliers

        4,407    7,997

Derivative contracts

   14b    —      1,477

Prepaid expenses

        51,520    37,298

Other current assets

        66,701    79,919
         
  

Total current assets

        1,342,525    1,347,876
         
  

Noncurrent assets:

              

Tax incentives investments

        1,479    1,479

Deferred income taxes

   10c    165,663    186,430

Recoverable taxes

   13    85,589    75,722

Prepaid expenses

        16,881    15,416

Other noncurrent assets

        7,634    7,582
         
  

Total noncurrent assets

        277,246    286,629
         
  

Permanent assets:

              

Investments

        499    499

Property, plant and equipment, net

        1,164,373    1,263,569

Deferred assets, net

        2,097    513
         
  

Total permanent assets

        1,166,969    1,264,581
         
  

Total assets

        2,786,740    2,899,086
         
  

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais)

 

     Note

   As of
September 30,
2005


  

As of

December 31,
2004


Liabilities, shareholders’ equity and funds for capitalization

              

Current liabilities:

              

Payroll and related accruals

        31,421    28,197

Trade accounts payable

        372,784    564,917

Taxes payable

        73,212    67,722

Dividends payable

        37,194    37,708

Loans and financing

   14a    15,645    50,250

Reserve for contingencies

   16    72,296    61,055

Derivative contracts

   14b    10,677    14,512

Other current liabilities

   15    75,725    56,858
         
  

Total current liabilities

        688,954    881,219
         
  

Noncurrent liabilities:

              

Pension and other post-retirement benefit plans

        778    364

Reserve for contingencies

   16    24,108    22,565

Other noncurrent liabilities

   15    24,074    24,074
         
  

Total noncurrent liabilities

        48,960    47,003
         
  

Shareholders’ equity:

              

Capital stock

   17a    927,945    891,460

Capital reserves

   17c    170,449    206,934

Income reserves

        235,207    235,207

Retained earnings

        715,094    637,132
         
  

Total shareholders’ equity

        2,048,695    1,970,733
         
  

Funds for capitalization

        131    131
         
  

Shareholders’ equity and funds for capitalization

        2,048,826    1,970,864
         
  

Total liabilities, shareholders’ equity and funds for capitalization

        2,786,740    2,899,086
         
  

 

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais, except per share data)

 

         

Nine-month periods

ended September, 30


 
     Note

   2005

     2004

 

Net operating revenue

   4    1,505,273      1,408,130  

Cost of services and goods sold

   5    (777,345 )    (761,808 )
         

  

Gross profit

        727,928      646,322  

Operating expenses:

                  

Selling expenses

   6    (462,226 )    (359,987 )

General and administrative expenses

   7    (148,381 )    (150,109 )

Other operating expenses, net

   8    (6,314 )    (6,038 )
         

  

Operating income before financial expense

        111,007      130,188  

Financial income, net

   9    14,636      7,004  
         

  

Operating income

        125,643      137,192  

Net non-operating income (expenses)

        770      (103 )
         

  

Income before income and social contribution taxes

        126,413      137,089  

Income and social contribution taxes

   10    (48,451 )    (52,498 )
         

  

Net income

        77,962      84,591  
         

  

Outstanding shares at September 30 (in thousands)

        91,831 (1)    449,009,994 (1)
         

  

Earnings per shares

        0.85 (1)    0.00019 (1)
         

  


(1) On April 1, 2005, the shareholders approved a reverse stock split in the proportion of 5,000 shares to 1 share of the same class. Had the reserve stock split occurred on September 30, 2004, shares outstanding and earnings per shares for the nine-month period ended September 30, 2004 would have amounted to 89,801,999 and R$0.94, respectively.

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A .

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2005

(In thousands of Brazilian reais)

 

        Capital reserves

    Income reserves

           
    Capital
Stock


  Tax
incentives


  Special
goodwill
reserve


   

Legal

reserve


  Reserve for
expansion and
modernization


 

Treasury

stock


  Retained
earnings


  Total

Balance at December 31, 2004

  891,460   3,589   203,345     54,910   180,297   —     637,132   1,970,733

Capital increase with reserves

  36,485   —     (36,485 )   —     —     —     —     —  

Net income

  —     —     —       —     —     —     77,962   77,962
   
 
 

 
 
 
 
 

Balance at September 30, 2005

  927,945   3,589   166,860     54,910   180,297   —     715,094   2,048,695
   
 
 

 
 
 
 
 

 

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A .

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF

CHANGES IN FINANCIAL POSITION

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais)

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

SOURCES OF FUNDS:

            

From operations:

            

Net income

   77,962     84,591  

Items not affecting working capital:

            

Depreciation and amortization

   264,707     296,706  

Shared system depreciation apportionment

   4,079     4,446  

Interest and exchange variations on noncurrent items

   —       2,085  

Reserve for contingencies

   5,228     (2,898 )

Net book value of permanent asset disposals

   728     379  

Reserve for pension and other post-retirement benefit plans

   414     95  

Gains on derivative long-term contracts

   —       (448 )

Deferred income taxes on long term

   14,365     30,805  
    

 

Total

   367,483     415,761  
    

 

From third parties:

            

Transfer from noncurrent assets to current assets

   62,202     138,698  
    

 

Total sources

   429,685     554,459  
    

 

USES OF FUNDS:

            

Additions to property, plant and equipment

   169,997     126,414  

Addition to deferred assets

   1,906     212  

Transfer from long-term to current liabilities

   3,684     35,152  

Increase in deferred taxes

   38,360     66,988  

Increase in noncurrent assets

   18,712     22,769  

Increase in prepaid expenses

   10,061     1,502  

Increase in other assets

   51     418  

Transfer from current to noncurrent assets

   —       4,671  
    

 

Total uses

   242,771     258,126  
    

 

INCREASE IN WORKING CAPITAL

   186,914     296,333  
    

 

REPRESENTED BY:

            

Current assets

   (5,351 )   195,589  

Beginning of period

   1,347,876     1,144,703  

End of period

   1,342,525     1,340,292  

Current liabilities

   192,265     100,744  

Beginning of period

   881,219     843,839  

End of period

   688,954     743,095  
    

 

INCREASE IN WORKING CAPITAL

   186,914     296,333  
    

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED

STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais)

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Operating activities:

            
    

 

Net cash from operating activities

   214,402     277,732  
    

 

Investing activities:

            

Additions to property, plant and equipment

   (169,997 )   (126,414 )

Additions to deferred charges

   (1,906 )   (212 )

Short-term investments pledged as collateral

   (23,172 )   —    

Proceeds from asset disposals

   1,491     312  
    

 

Net cash from investing activities

   (193,584 )   (126,314 )
    

 

Financing activities:

            

Loans repaid

   (28,025 )   (144,306 )

Net settlement on derivatives contracts

   (33,498 )   (18,604 )

Dividends and interest on shareholders’ equity paid

   (514 )   (330 )

Cash received relating to reverse stock split

   37,067     —    
    

 

Net cash from financing activities

   (24,970 )   (163,240 )
    

 

(Decrease) in cash and cash equivalents

   (4,152 )   (11,822 )

Cash and cash equivalents:

            

At beginning of the period

   353,906     382,473  
    

 

At end of the period

   349,754     370,651  
    

 

 

Supplemental cash flow information

 

    

Nine-month periods

ended September 30,


     2005

   2004

Income and social contribution tax paid

   18,420    6,481

Interest paid

   3,579    18,830

 

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

1. Operations and background

 

Tele Sudeste Celular Participações S.A. (“Tele Sudeste” or the “Company”) is a publicly-held company whose controlling shareholders, on September 30, 2005, are Brasilcel N.V. (50.47% of total capital stock), Sudestecel Participações S.A. (25.54% of total capital stock), Tagilo Participações Ltda. (10.90% of total capital stock) and Avista Participações Ltda. (4.11% of total capital stock). Sudestecel, Tagilo and Avista are wholly-owned subsidiaries of Brasilcel N.V.

 

The controlling shareholders of Brasilcel N.V. are Telefónica Móviles, S.A. (50.00% of total capital stock), PT Móveis, Serviços de Telecomunicações, SGPS, S.A. (49.999% of total capital stock) and Portugal Telecom, SGPS, S.A. (0.001% of total capital stock).

 

Tele Sudeste has a full controlling interest in the operators Telerj Celular S.A. (“Telerj”) and Telest Celular S.A. (“Telest”), which provide mobile telephone services in the states of Rio de Janeiro and Espírito Santo, respectively, including activities necessary or useful to perform the services, in accordance with the licenses granted to them.

 

The licenses granted to Telerj and Telest are valid until November 30, 2005 and November 30, 2008, respectively, and are renewable once for a 15-year period, by means of the payment of charges equivalent to approximately 1% of the operators’ annual revenues.

 

The business of the subsidiaries, including the services they may provide, is regulated by the National Telecommunications Agency (ANATEL), the telecommunications regulatory agency, in accordance with Law No. 9,472, of July 16, 1997, and complementary regulations, decrees, rulings and plans.

 

On July 29, 2005, the Company’s Board of Directors approved the corporate restructuring of Telest Celular S.A. by a merger with Telerj Celular S.A. The proposed restructuring was submitted to ANATEL on September 6, 2005.

 

The objective of this proposed operation was to obtain financial and operational benefits, including reduced administrative and publishing costs, as well as rationalization of book keeping costs.

 

2. Presentation of financial statements

 

The consolidated financial statements include the accounts of Tele Sudeste and its subsidiaries. Intercompany transactions and balances have been eliminated. The consolidated financial statements include as of September 30, 2005, balances and transactions of the subsidiaries Telerj Celular S.A. (“Telerj”) and Telest Celular S.A. (“Telest”).

 

In the Company’s opinion, all adjustments necessary for a fair presentation of the unaudited results of operations for the nine-month periods ended September 30, 2005 and 2004 are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for the period ended at September 30, 2005 are not necessarily indicative of the results of operations expected for the full year. The accompanying consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2004, as appearing in the Company’s Annual Report on Form 20-F filed on April 15, 2005.

 

The presentation of the consolidated financial statements is consistent with the presentation of the published financial statements of the Company in Brazil, from which the financial information was extracted, except for

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

certain reclassifications and changes in terminology within the consolidated balance sheets and the consolidated statements of loss, which have been made to conform the previously published financial statements to the presentation included herein. The financial statements as of September 30, 2004 and for the year ended December 31, 2004 have been reclassified, where applicable, for comparability.

 

3. Summary of principal accounting practices

 

The unaudited interim condensed consolidated financial statements are expressed in thousands of Brazilian reais (“R$”), except when mentioned, and have been prepared in accordance with accounting practices adopted in Brazil, which include the accounting practices derived from Brazilian corporate law, regulations applicable to public telecommunications service concessionaires and accounting regulations and procedures established by the Brazilian Securities Commission (“CVM”), hereinafter referred to as “Brazilian GAAP”.

 

The principal accounting practices adopted by the Company and its subsidiaries in the preparation of these interim financial statements are the same as those described in the consolidated financial statements as of and for the year ended December 31, 2004.

 

4. Net operating revenue

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Monthly subscription charges

   70,225     108,530  

Usage charges

   991,315     794,191  

Additional charges per call

   24,656     19,416  

Interconnection

   556,430     592,596  

Other services and data services

   96,916     46,491  
    

 

Gross operating revenue from services

   1,739,542     1,561,224  

Value-added tax on services—ICMS

   (350,162 )   (281,286 )

PIS and COFINS

   (62,194 )   (56,404 )

Service tax—ISS

   (925 )   (597 )

Discounts granted

   (52,111 )   (32,592 )
    

 

Net operating revenue from services

   1,274,150     1,190,345  
    

 

Goods sold (handsets and accessories)

   469,976     395,657  

Value-added tax on goods sold—ICMS

   (33,987 )   (34,025 )

PIS and COFINS

   (27,022 )   (25,150 )

Discounts granted

   (147,493 )   (75,400 )

Returns of goods

   (30,351 )   (43,297 )
    

 

Net operating revenue from goods sold (handsets and accessories)

   231,123     217,785  
    

 

Net operating revenue

   1,505,273     1,408,130  
    

 

 

There are no customers which contributed with more than 10% of gross operating revenue in the nine-month periods ended September 30, 2005 and 2004, except for Telemar Norte Leste S.A.- TELEMAR, a fixed telephone operator, which contributed with approximately 17% and 21% of total gross revenue, respectively, mainly through interconnection revenues.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

5. Cost of services and goods sold

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Depreciation and amortization,

   (175,424 )   (206,839 )

Products sold

   (362,549 )   (342,952 )

Interconnection/ interlinks

   (34,414 )   (41,196 )

Leased lines

   (55,906 )   (42,523 )

Outside services

   (38,747 )   (34,133 )

Taxes and contributions,

   (57,584 )   (45,931 )

Rent, insurance and other related expenses

   (36,676 )   (34,754 )

Personnel

   (14,657 )   (12,911 )

Others

   (1,388 )   (569 )
    

 

Total

   (777,345 )   (761,808 )
    

 

 

6. Selling expenses

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Outsourced services

   (241,451 )   (156,142 )

Allowance for doubtful accounts receivable

   (30,498 )   (29,575 )

Personnel

   (34,731 )   (40,809 )

Advertising

   (65,511 )   (61,248 )

Depreciation

   (57,662 )   (54,332 )

Rent, insurance and other related expenses

   (9,364 )   (6,578 )

Supplies

   (7,058 )   (8,263 )

Taxes and contributions

   (311 )   (653 )

Others

   (15,640 )   (2,387 )
    

 

Total

   (462,226 )   (359,987 )
    

 

 

7. General and administrative expenses

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Outsourced services

   (60,786 )   (62,867 )

Depreciation

   (31,299 )   (35,274 )

Personnel

   (35,063 )   (35,315 )

Rent, insurance and other related expenses

   (13,432 )   (9,240 )

Taxes and contributions

   (1,151 )   (1,875 )

Supplies

   (4,176 )   (4,610 )

Others

   (2,474 )   (928 )
    

 

Total

   (148,381 )   (150,109 )
    

 

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

8. Other operating income (expenses), net

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Income:

            

Fines

   8,663     6,506  

Recovered expenses

   18,789     4,069  

Reversal of provisions

   3,616     10,306  

Shared Infrastructure

   3,472     3,218  

Sales incentives

   19,790     8,011  

Others

   4,048     1,451  
    

 

Total

   58,378     33,561  

Expenses:

            

Reserve for contingencies

   (27,795 )   (16,535 )

Other taxes

   (26,176 )   (20,742 )

Amortization of pre-operational expenses

   (322 )   (261 )

Others

   (10,399 )   (2,061 )
    

 

Total

   (64,692 )   (39,599 )
    

 

Other operating expenses, net

   (6,314 )   (6,038 )
    

 

 

9. Financial income, net

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Financial income

            

Interest income

   62,741     59,359  

Monetary/exchange variation on assets

   16,148     19,314  

PIS and COFINS on financial income

   (50 )   (5,885 )
    

 

Total

   78,839     72,788  
    

 

Financial expenses

            

Interest expense

   (26,936 )   (27,898 )

Monetary/exchange variation on liabilities

   (6,127 )   (24,031 )

Derivative contracts, net

   (31,140 )   (13,855 )
    

 

Total

   (64,203 )   (65,784 )
    

 

Financial income, net

   14,636     7,004  
    

 

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

10. Income and social contribution taxes

 

The Company and its subsidiaries estimate monthly the amounts for income and social contribution taxes on an accrual basis, paying the taxes based on the monthly estimate. Deferred taxes are recognized on temporary differences. Income and social contribution taxes charged to income consist of the following:

 

a. Components of income taxes

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Income tax

   (74,812 )   (13,675 )

Social contribution tax

   (26,817 )   (4,686 )

Deferred income tax

   39,101     (25,336 )

Deferred social contribution tax

   14,077     (8,801 )
    

 

Total

   (48,451 )   (52,498 )
    

 

 

 

b. Reconciliation of effective tax rate

 

The following table provides a reconciliation of the amount calculated by applying the combined statutory tax rates on the reported income before taxes and the reported income tax expense for the nine-month periods ended September 30, 2005 and 2004:

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Income before taxes as reported in the accompanying financial statements

   126,413     137,089  

Taxes computed at the combined statutory rate

   (42,980 )   (46,610 )

Permanent additions:

            

Non-deductible expenses

   (4,954 )   (4,397 )

Permanent exclusions:

            

Others

   (517 )   (1,491 )
    

 

Income and social contribution taxes as reported in the accompanying financial statements

   (48,451 )   (52,498 )
    

 

Effective rate

   38.33 %   38.29 %

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

c. Composition of deferred tax assets

 

Deferred income tax assets based on temporary differences are comprised of the following:

 

     As of
September 30,
2005


  

As of

December 31,
2004


Tax credits recorded on corporate restructuring (Note 18)

   2,550    73,608

Accrual/ allowance for:

         

Inventory obsolescence

   6,432    4,789

Contingencies

   36,423    28,431

Doubtful accounts receivable

   19,581    13,644

Reward program

   5,630    5,744

Accelerated book depreciation

   27,425    22,111

Others

   15,307    13,742

Income tax and social contribution tax loss carryforwards

   128,761    97,920
    
  

Total

   242,109    259,989
    
  

Current

   76,446    73,559

Noncurrent

   165,663    186,430

 

Deferred taxes have been recorded if it is more likely than not that they will be realized, as follows:

 

a) Tax loss carryforwards will be offset up to a limit of 30% per year of future taxable income.

 

b) Tax credits recorded on corporate restructuring represent the tax benefit recorded as a result of the corporate restructuring described in Note 18. The realization of these tax credits occurs in the same proportion as the amortization of goodwill, over a period of five years. Studies by external consultants used in the corporate restructuring process supported recovery of the amount within this term.

 

c) Temporary differences will be realized upon the payments of accruals, the effective losses on bad debts and the realization of inventories.

 

At the end of the 2004 fiscal year, the Company prepared technical feasibility studies, approved by the Board of Directors, which indicate full recovery of the deferred taxes recognized, as determined by CVM Resolution No. 371. Management did not identify any changes that could affect the conclusion of these studies as of September 30, 2005.

 

11. Short-term investments pledged as collateral

 

    

As of
September 30,

2005


  

As of
December 31,

2004


Short-term investments pledged as collateral (1)

   23,172    —  

(1) Represents short-term investments pledged as collateral in connection with lawsuits.

 

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

12. Trade accounts receivable, net

 

     As of
September 30,
2005


   

As of

December 31,
2004


 

Unbilled services

   47,175     66,058  

Billed services

   239,703     136,205  

Interconnection

   100,040     99,782  

Products sold

   107,274     146,913  

Allowance for doubtful accounts receivable

   (57,592 )   (41,210 )
    

 

Total

   436,600     407,748  
    

 

 

There are no customers which contribute with more than 10% of accounts receivable, net at September 30, 2005 and December 31, 2004, except for amounts receivable from Telemar Norte Leste S.A.—TELEMAR, which represent approximately 11% and 14% of trade accounts receivable, respectively, mainly through interconnection charges.

 

The changes in the allowance for doubtful accounts receivable were as follows:

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Balance at beginning of year

   41,210     31,685  

Allowance for doubtful accounts receivable charged to selling expenses

   30,498     29,575  

Write-offs

   (14,116 )   (15,325 )
    

 

Ending balance

   57,592     45,935  
    

 

 

13. Recoverable taxes

 

     As of
September 30,
2005


  

As of

December 31,
2004


Prepaid/recoverable income and social contribution taxes

   184,729    174,560

Withholding income tax

   19,712    22,733

Recoverable ICMS (State VAT)

   75,439    70,924

Recoverable PIS and COFINS (revenue taxes paid on purchases of goods and services)

   46,719    42,086

Other recoverable

   2,349    2,812
    
  

Total recoverable taxes

   328,948    313,115

ICMS on deferred sales

   9,540    17,001
    
  

Total

   338,488    330,116
    
  

Current

   252,899    254,394

Noncurrent

   85,589    75,722

 

Recoverable ICMS taxes represent the amount paid in the acquisition of equipment and inventories and may be offset against ICMS on telecommunications services. The noncurrent portion refers to taxes paid on the purchase of property items, which are available for offset over a period of 48 months.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

14. Loans and financing

 

a. Composition of debt

 

Description


   Currency

   Annual interest

   Final
maturity


   As of
September 30,
2005


   As of
December 31,
2004


Financial institutions

                          

Resolution no. 2,770

   US$      10.8%    10/03/2005    3,333    30,526

Resolution no. 4,131

   US$      1.825% + LIBOR    10/18/2005
11/07/2005
   8,390    10,022

NEC do Brasil S.A.

   US$      7.30%    11/29/2005    3,468    8,286

Accrued Interest

                    454    1,416
                     
  
                      15,645    50,250
                     
  

 

The loans and financing are for the expansion and modernization of the cellular telephone network, financing fixed assets and working capital.

 

b. Derivatives contracts

 

On September 30, 2005, the Company has foreign exchange rate derivative contracts with notional amounts of US$27,386 thousand and €714 thousand to protect its obligations against exchange fluctuations. Year to date, the Company recorded an accumulated loss of R$10,677 (R$13,035 at December 31, 2004), on these contracts.

 

15. Other liabilities

 

    

As of

September 30,
2005


   As of
December 31,
2004


Deferred revenues—prepaid customers

   8,279    19,648

Provision reward program (i)

   16,558    16,894

Other liabilities—related parties

   12,246    19,282

Reverse stock split (ii)

   37,067    —  

Others

   25,649    25,108
    
  

Total

   99,799    80,932
    
  

Current

   75,725    56,858

Noncurrent

   24,074    24,074

 


(i) The subsidiaries have fidelity programs, in which calls are transformed into points usable in future exchanges of handsets. The accumulated points, net of redemptions, are provisioned based on historical redemption data, points generated and the average cost of a point.
(ii) Refers to a liability to shareholders for fractions of shares that were not issued on the date of the reverse stock split. This balance is payable upon demand.

 

16. Reserve for contingencies

 

The Company and its subsidiaries are party to certain lawsuits involving labor, tax and civil matters. Management has recognized reserves for cases in which the likelihood of an unfavorable outcome is considered probable by the legal counsel.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Components of the reserve are as follows:

 

     As of
September 30,
2005


  

As of

December 31,
2004


Labor claims

   8,775    10,177

Civil claims

   38,040    25,882

Tax

   49,589    47,561
    
  

Total

   96,404    83,620
    
  

Current

   72,296    61,055

Long-term

   24,108    22,565

 

The changes in the reserve for contingencies are as follows:

 

     Nine-month periods
ended September 30,


     2005

    2004

Beginning balance at January 1

   83,620     75,372

Additional provision net of reversal of provisions

   24,179     6,229

Monetary variation

   3,862     1,021

Payments

   (15,257 )   —  
    

 

Ending balance at September 30

   96,404     82,622
    

 

 

The main tax contingencies, in which the subsidiaries are involved, are as follows:

 

Tax litigation

 

Probable losses

 

No significant new tax claims with a “probable” loss classification were filed in the nine-month periods ended September 30, 2005. The evolution of the reserves for tax contingencies corresponds to the monetary changes in the claims since the last company year.

 

Possible losses

 

No significant new tax claims with a “possible” loss classification were filed in the nine-month periods ended September 30, 2005. No significant alterations occurred in the claims indicated in this report since the last company year.

 

Labor and civil suits

 

Include several labor and civil claims. A reserve was posted as demonstrated previously, which is considered to be sufficient to cover probable losses on these cases.

 

In relation to claims with a “possible” loss classification, the amount involved is R$58,287 for civil claims and R$10,482 for labor claims.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

17. Shareholders’ equity

 

a. Capital

 

At March 29, 2005 the shareholders approved a reverse stock split of 449,009,994,135 book-entry shares, without par value, of which 189,434,957,933 were common shares and 259,575,036,202 were preferred shares, in the proportion of 5,000 (five thousand) shares to 1 (one) share of the same class. After the reverse stock split, the Company’s capital was represented by 89,801,999 book-entry shares, without par value, of which 37,886,992 are common shares and 51,915,007 are preferred shares.

 

On July 29, 2005, the Company announced a capital increase in favor of the controlling shareholders, but assuring preemptive rights to other shareholders, in the amount of R$36,485, corresponding to the tax benefit effectively realized during the 2004 fiscal year from the goodwill recorded by the Company’s controlling shareholders. The capital increased from R$891,460 to R$927,945, with the issue of 2,029,225 new common shares. Proceeds received in connection with the exercise of preemptive right were payable to the Sudestecel Participações S.A. and Tagilo Participações Ltda.

 

The Company’s share capital is comprised of shares with no par value, as follows:

 

     Shares as of

     September 30,
2005


  

December 31,

2004 (1)


Common shares

   39,916,217    189,434,957,933

Preferred shares

   51,915,007    259,575,036,202
    
  

Total outstanding shares

   91,831,224    449,009,994,135
    
  

(1) Had the reverse stock split described above occurred on December 31, 2004, shares outstanding would be 37,886,992 and 51,915,007 of common and preferred shares, respectively.

 

b. Dividends and interest on shareholders’ equity

 

The preferred shares do not have voting rights, except in the cases stipulated in the bylaws, but they are assured priority in the reimbursement of capital, without premium, and the receipt of a dividend 10% (ten percent) higher than that attributed to each common share.

 

The dividends are calculated in accordance with the Company’s bylaws and corporate law, which establishes a minimum dividend of 25% of income for the financial year.

 

c. Special goodwill reserve

 

This reserve was formed as a result of the Company’s corporate restructurings, and will be capitalized in favor of the controlling shareholder at the time of effective realization of the related tax benefit.

 

d. Revenue reserve

 

d.1) Statutory reserve

 

The statutory reserve is calculated based on 5% of net annual income until the reserve reaches 20% of capital or 30% of capital plus capital reserves; from then on, appropriations to this reserve are no longer compulsory. The purpose of this reserve is to ensure the integrity of capital and it may only be used to set off losses or increase capital.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

d.2) Other revenue reserves

 

The special reserve for expansion and modernization is based on the capital expenditure budget prepared by management, which demonstrates the need for funds for investment projects for the coming financial years.

 

18. Corporate restructuring

 

At November 30, 2000, the Company completed a corporate restructuring to transfer a tax benefit to the Company related to the goodwill paid by the Company’s controlling shareholders in the privatization process. The goodwill and related tax benefit on the date of transfer amounted to R$1,393,279 and R$464,842, respectively. The tax benefit was recorded as deferred tax with a corresponding entry to a special goodwill reserve in shareholders’ equity. This tax benefit is being realized in proportion to the amortization of the goodwill over a period of 5 years. The special goodwill reserve is transferred to capital with a corresponding issuance of shares to the Company’s controlling shareholders as related tax benefit is realized. In connection with the issuance of these shares, the Company’s other shareholders are entitled to preemptive rights. Proceeds received in connection with the exercise of preemptive rights are payable to the Company’s controlling shareholders. This tax benefit, as of September 30, 2005 and December 31, 2004, amounted to R$2,550 and R$73,608, respectively.

 

19. Transactions with related parties

 

The main transactions with unconsolidated related parties are as follows:

 

    Use of network and long-distance (roaming) cellular communication: these transactions involve companies owned by the same controlling group, Telesp Celular S.A., Global Telecom S.A., Telebahia Celular S.A., Telergipe Celular S.A., Telecomunicações de São Paulo S.A.—Telesp, Celular CRT S.A., Tele Centro Oeste Celular Participações S.A., Telems Celular S.A., Teleron Celular S.A., Telemat Celular S.A., Teleacre Celular S.A., Telegoiás Celular S.A. and Norte Brasil Telecom S.A. Some of these transactions are based on contracts signed by Telebrás with the concessionaire operators during the period prior to privatization, and the conditions were regulated by ANATEL. As from July 2003, users have been able to select the long-distance operator.

 

    Corporate management advisory: payable by the subsidiaries to Telefónica Móviles S.A. and Telefónica Internacional on account of telecommunications services, calculated based on the percentage applied to net income from the services, restated according to currency variations.

 

    Corporate services: these are passed on to the subsidiaries under the same controlling group at the cost effectively incurred for these services.

 

    Call-center services: provided by Atento Brasil S.A. for the users of the subsidiaries’ telecommunications service, contracted for a period of 12 months, renewable for the same period.

 

    Maintenance of the profitability and cost control system: provided by Telefónica Móbile Solution do Brasil.

 

    Logistics operator and financial and accounting advisory services: provided by Telefônica Gestão de Serviços Ltda.

 

    Voice portal content services: provided by Terra Network Brasil.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

We set forth below a summary of the balances and transactions with unconsolidated related parties:

 

     As of
September 30,
2005


   

As of

December 31,
2004


 

Current assets:

            

Trade accounts receivable

   10,601     10,357  

Others

   29,987     32,430  

Current liabilities:

            

Accounts payable and accrued expenses

   34,698     125,049  

Technical attendance

   45,150     —    

Other liabilities

   12,246     19,282  
    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Statement of income:

            

Net operating revenue

   41,834     43,394  

Cost of services

   (12 )   —    

Selling expenses

   (58,687 )   (44,458 )

General and administrative expenses

   (16,263 )   (10,831 )

Other operating income (expense), net

   60     —    

Financial income (expense), net

   4,266     (519 )

 

20. Financial instruments and risk management

 

a. Risks considerations

 

The major market risks to which Telerj and Telest are exposed in conducting business are:

 

    Credit Risk resulting from any difficulty in collecting telecommunications services provided to customers and revenues from sale of handsets by the Company’s distribution network, as well risks relating to swap transactions.

 

    Interest Rate Risk resulting from debt and derivative instruments contracted at floating rates and involving the risk of financial expenses as a result of an unfavorable upward trend in interest rates (mainly LIBOR and CDI).

 

    Currency Risk related to debt and derivative instruments contracted in foreign currencies which expose the Company to potential losses from adverse exchange rate fluctuations.

 

The Company and its subsidiaries actively manage their operations to mitigate these risks by means of comprehensive operating procedures, policies and initiatives.

 

Credit Risk

 

Credit risk from providing telecommunications services is reduced by monitoring the customer portfolio and addressing delinquent receivables by means of clear policies relating to providing postpaid services. As of September 30, 2005, the subsidiaries’ customers use 69.4% (71.2% as of December 31, 2004) prepaid services that require pre-loading, which do not represent a credit risk.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Credit risk from the sale of handsets is managed by following conservative credit policy which encompasses the use of advanced risk management methods that include applying credit scoring techniques, analyzing a potential customer’s balance sheet, and making inquires of credit protection agencies’ databases.

 

The Company and its subsidiaries are also exposed to credit risk arising out of their financial investments and receivables from swap transactions. The Company and its subsidiaries attempt to diversify such exposure by using reputable financial institutions.

 

Interest Rate Risk

 

Telerj and Telest are exposed to interest rate risk, especially associated with variation in the CDI rate relating to derivative contracts and borrowings contracted in Brazilian reais. The balance of those financial investments also indexed at CDI partially neutralizes this effect.

 

Foreign currency-denominated loans are also exposed to risk of a rise in the floating exchange rates (LIBOR). As of September 30, 2005, the principal amount of these transactions was R$8,390 (R$10,022 on December 31, 2004).

 

Exchange Rate Risk

 

Telerj and Telest utilize derivative instruments to protect themselves against the currency risk on foreign currency-denominated loans. The instruments usually used are swap contracts.

 

The following table summarizes the net exposure of the Company and its subsidiaries to the exchange rate factor as of September 30, 2005:

 

     In thousands
of US$


 

Loans and financing

   (7,040 )

Other liabilities

   (21,346 )

Derivative instruments

   27,386  
    

Net exposure

   (1,000 )
    

 

b. Derivative contracts

 

The Company and its subsidiaries record gains and losses on derivative contracts as net financial income or expenses.

Book and estimated market values of loans and financing and derivative instruments are as follows:

 

     Book
value


    Market
value


    Unrealized
gain (loss)


 

Loans and financing

   (15,645 )   (15,696 )   (51 )

Other liabilities

   (49,902 )   (49,902 )   —    

Derivative instruments

   (10,677 )   (10,647 )   30  
    

 

 

Total

   (76,224 )   (76,245 )   (21 )
    

 

 

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

c. Market value of financial instruments

 

The market value of loans and financing and derivative instruments, were calculated based on discounted cash flows, using available interest rate projections.

 

The market values are calculated in a specific moment, based on available information and evaluation methodologies, therefore the indicated estimates do not necessarily represent market realization values. The use of different assumptions may significantly affect the estimates.

 

21. Summary of the differences between Brazilian GAAP and U.S. GAAP

 

The Company’s accounting policies comply with Brazilian GAAP, which differ significantly from accounting principles generally accepted in the United States of America (U.S. GAAP), as described below:

 

a. Different criteria for capitalizing and amortizing capitalized interest

 

Until December 31, 1998, under Brazilian GAAP as applied by the Company, interest attributable to construction-in-progress was computed at the rate of 12% per year on the balance of construction-in-progress interest incurred on third-party loans was credited to interest expense and the excess interest capitalized was credited to capital reserves.

 

Under U.S. GAAP, in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 34, “Capitalization of Interest Costs,” interest incurred on borrowings is capitalized to the extent that borrowings do not exceed construction-in-progress. The credit is a reduction of interest expense. Under U.S. GAAP, the amount of interest capitalized excludes monetary gains associated with local currency borrowings and the foreign exchange gains and losses on foreign currency borrowings.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The effects of these different criteria for capitalizing and amortizing capitalized interest are presented below:

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Capitalized interest difference

            

U.S. GAAP capitalized interest:

            

Interest capitalized during the period

   2,735     7,691  

Capitalized interest on disposals

   (136 )   (119 )
    

 

     2,599     7,572  

Less Brazilian GAAP capitalized interest:

            

Interest capitalized during the period

   —       —    

Capitalized interest on disposals

   119     109  
    

 

U.S. GAAP difference

   2,718     7,681  
    

 

Amortization of capitalized interest difference

            

Amortization under Brazilian GAAP

   30,862     20,473  

Capitalized interest on disposals

   (81 )   (87 )
    

 

     30,781     20,386  

Less amortization under U.S. GAAP

   (35,516 )   (22,681 )

Capitalized interest on disposals

   92     95  
    

 

     (35,424 )   (22,586 )
    

 

U.S. GAAP difference

   (4,643 )   (2,200 )
    

 

 

b. Reversal of proposed dividends

 

Under Brazilian GAAP proposed dividends are accrued for in the financial statements in anticipation of their approval at the shareholders’ meeting. Under U.S. GAAP, dividends are not accrued until they are formally declared.

 

The interest on shareholders’ equity is a legal liability from the date it is declared, therefore, these amounts are included as dividends in the year they are proposed for U.S. GAAP purposes.

 

c. Pension and other post-retirement benefits

 

The subsidiaries of the Company participate in two multiemployer benefit plans (PBS-A and PAMA) that are operated and administered by Fundação de Seguridade Social-SISTEL, and provide for the costs of pension and other post-retirement benefits based on a fixed percentage of remuneration, as recommended annually by independent actuaries. For purposes of U.S. GAAP, multiemployer plans are accounted for similar to defined contribution plans and consequently, the companies are required to disclose its annual contributions and the funded status of those plans. The Subsidiaries also sponsor a single-employer defined pension benefit plan (PBS-Tele Sudeste). The provisions of FAS No. 87, “Employers’ Accounting for Pensions”, for the purposes of calculating the funded status, were applied with effect from January 1, 1992, because it was not feasible to apply them from the effective date specified in the standard.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

On December 13, 2000, CVM issued Instruction No. 371, which provisions are very similar to SFAS No. 87 and SFAS No. 106, except for the following differences:

 

    A company that participates in a multiemployer defined benefit pension or post-retirement benefit plan is required to recognize any assets or liabilities in respect to its participation in such plans, while SFAS Standards require only the disclosure of funded status of those plans.

 

    The unrecognized net obligation existing at the date of initial application of this standard shall be amortized over five years or the remaining service period or remaining life expectancy, whichever is lower. Alternatively, companies were granted the option to recognize such initial transition obligation as of December 31, 2001, directly to shareholders’ equity. Such option has been adopted by the Company. Under SFAS No. 87, the unrecognized net obligation existing at the date of its initial application is being amortized over the remaining service period.

 

    Under Brazilian GAAP actuarial gains and losses are recorded in income when incurred up to the amount of pension liability recorded. Under U.S. GAAP, certain actuarial gains and losses are deferred and amortized over the remaining service period of the active employees expected to receive benefits under the plan.

 

    The effects of these different criteria for recognition of pension and other post-retirement liabilities on accrued pension (post-retirement) liabilities as of September 30, 2005 and 2004, are presented below:

 

     As of September 30, 2005

    As of December 31, 2004

 
     U.S.
GAAP


   Brazilian
GAAP


  

Accumulated

Difference


    U.S.
GAAP


   Brazilian
GAAP


   Accumulated
Difference


 

Active employees defined pension—PBS Tele Sudeste

   417    —      417     1,104    —      1,104  

Multiemployer health care plan—PAMA

   —      778    (778 )   —      364    (364 )
    
  
  

 
  
  

Accrued pension (post-retirement) liability

   417    778    (361 )   1,104    364    740  
    
  
  

 
  
  

 

d. Interest income (expense)

 

Brazilian GAAP requires interest to be shown as part of operating income. Under U.S. GAAP interest income (expense) would be shown after operating income.

 

e. Permanent assets

 

Brazilian GAAP has a class of assets called “permanent assets”. This is the collective name for all assets on which indexation adjustments were calculated until December 31, 1995 in the corporate and fiscal law accounts of Brazilian companies. Under U.S. GAAP the assets in this classification would be noncurrent assets.

 

f. Monetary restatement of 1996 and 1997

 

The amortization of the asset appreciation, which originated from the inflation accounting during 1996 and 1997, when Brazil was still considered as high inflationary economy for U.S. GAAP purposes, has been recognized as an adjustment to income in the reconciliation to U.S. GAAP. The loss related to monetary restatement on disposals of such assets is classified for U.S. GAAP purposes as a component of operating income.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

g. Income taxes

 

The Company fully accrues for deferred income taxes on temporary differences between tax and accounting records. The existing policies for providing for deferred taxes are consistent with SFAS No.109, “Accounting for Income Taxes”, except with respect to social contribution rate adopted, as explained below:

 

    Under Brazilian GAAP, at December 31, 1999 the Company recognized a change in the combined tax rate from 33% to 34% based on a provisional measure for an increase in the social contribution rate from 8% to 9% effective January 1, 2000. Provisional measures are temporary and must be re-approved every 30 days or they lapse. Under SFAS 109, the provisional measures discussed are not considered to be enacted law the provision measure was approved in law 10.637 as of December 30, 2002. Therefore, until 2002 the combined deferred tax effect calculated on temporary differences would be 33%, not 34%. For September 30, 2005 and 2004, no difference related to the social contribution tax rate. Under Brazilian GAAP, the deferred taxes are presented gross. Under U.S. GAAP, the deferred taxes are presented net.

 

h. Earnings per share

 

Under Brazilian GAAP, net income per share is calculated based on the number of shares outstanding at the balance sheet date.

 

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, “Earnings per Share”. This statement became effective December 15, 1997, and provides computation, presentation and disclosure requirements for earnings per share.

 

Since the preferred and common stockholders have different dividend, voting and liquidation rights, basic and diluted earnings per share have 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 stock 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 distributed and undistributed net income available to preferred shareholders and dividing net income available to common shareholders by the number of common shares outstanding. Net income available to preferred shareholders is the sum of the preferred stock dividends and the preferred shareholders’ portion of undistributed net income. Undistributed net income is computed by deducting total dividends (the sum of preferred and common stock dividends) from net income. Undistributed net income is shared equally by the preferred and common shareholders on a “pro rata” basis. At September 30, 2005 and 2004, the Company was obligated to issue shares to the controlling shareholder for the amount of the tax benefit realized relating to the corporate restructuring described in Note 18. The number of shares issuable are considered dilutive as defined in SFAS No. 128 and have been included in the weighted average common shares—diluted presented below. The number of shares issuable was computed considering the balance of the goodwill reserve (R$166,860 as of September 30, 2005 and R$203,345 as of September 30, 2004) by the average price of common shares traded on the São Paulo Stock Exchange (“Bovespa”) during the last 20 trading days of each period.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

For the periods presented below, the weighted average number of shares outstanding consider the effect of the reverse stock split described in Note 17. The computation of basic and diluted earnings per share is as follows:

 

     Nine-month periods ended September 30,

     2005

   2004

     Common

   Preferred

   Common

   Preferred

Basic numerator:

                   

Actual dividends declared

   1,000    1,508    432    713

Basic allocated undistributed dividends (a)

   22,935    34,142    9,890    15,102

Allocated net income available for common and preferred shareholders

   23,935    35,650    10,322    15,815

Basic denominator:

                   

Weighted average shares outstanding

   38,362,708    51,915,007    37,395,836    51,915,007

Basic earnings per share

   0.62    0.69    0.28    0.30

Diluted numerator:

                   

Actual dividends declared

   1,148    1,360    502    643

Diluted allocated undistributed dividends (a)

   26,128    30,949    10,948    14,044

Allocated net income available for common and preferred shareholders

   27,276    32,309    11,450    14,687

Diluted denominator:

                   

Weight average shares outstanding

   38,362,708    51,915,007    37,395,836    51,915,007

Dilutive effects of premium reserve

   9,849,471    —      7,123,677    —  

Diluted weight average shares

   48,212,179    51,915,007    44,519,513    51,915,007

Diluted earnings per share

   0.57    0.62    0.26    0.28

 

The Company’s preferred shares are non-voting, except under certain limited circumstances, and are entitled to a preferential, noncumulative dividend and to priority over the common shares in the event of liquidation of the Company.

 

i. Deferred revenues on sales of handsets

 

Under Brazilian GAAP, revenues and costs from sales of handsets, including applicable value-added and other sales taxes, are recognized at the moment of sale to the customer. Under U.S. GAAP, in accordance with Staff Accounting Bulletin No. 104 (SAB 104), revenues from sales of handsets along with the related costs, including applicable value-added and other sales taxes, are deferred and amortized based on the expected useful life of the handset, estimated by management to be 18 months. Any excess of the cost over the amount of deferred revenue related to handset sales is recognized on the date of sale. As substantially all of the Company’s handsets are sold below cost, this difference in accounting policy had no impact on net income or shareholders’ equity. The amount of unamortized deferred revenue and the related amounts of unamortized deferred costs was R$211,912 and R$185,428 at September 30, 2005 and December 31, 2004. The impact of this difference under U.S. GAAP was to decrease both net revenues and cost of services and goods by R$26,484 and a increase by R$136,704 at September 30, 2005 and 2004, respectively.

 

j. Value-added and other sales taxes

 

Under Brazilian GAAP, these taxes are recorded as a reduction to revenues. Under U.S. GAAP, these taxes are recorded gross as revenue and related costs of services and goods. Accordingly, this difference in accounting

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

policy has no impact in net (loss) or shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both net revenues and cost of services and goods by R$473,365 and R$396,865 at September 30, 2005 and 2004, respectively.

 

k. Roaming

 

The Company has roaming agreements with other cellular service providers. When a call is made from within one coverage area by a subscriber of another cellular service provider, that service provider pays Tele Leste’s subsidiaries for the service at the applicable rates. Conversely, when one of the subsidiaries’ customers roams outside the coverage area, the subsidiaries pay the charges associated with that call to the cellular service provider in whose region the call was originated and charges the same amount to its subscriber. Under Brazilian GAAP, revenues for roaming charges are recorded net of the related costs when the services are provided. Under U.S. GAAP, revenues and costs for roaming charges should be recorded gross. This difference in accounting practices had no impact on net income shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both revenues and cost of goods and services by R$52,520 and R$40,701 at September 30, 2005 and 2004, respectively.

 

l. Free minutes given in connection with sales of handsets

 

Under U.S. GAAP, pursuant to Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables,” the Company began to separately account for free minutes given in connection with the sales of handsets. The adoption of EITF No. 00-21 is effective prospectively for transactions entered into as from January 1, 2004. Consequently, a portion of the revenue generated from the sale of handsets is allocated to the free minutes given and deferred based on the fair value of the minutes. The revenues associated with the free minutes are then recognized based on subscriber airtime usage. Under Brazilian GAAP, the Company does not separately account for free minutes given in connection with sales of handsets.

 

m. Fistel fee

 

Beginning in 1999, under Brazilian GAAP, the Fistel (Telecommunications Inspection Fund) fee, assessed on each activation of a new cellular line, is deferred and amortized over the customers’ estimated subscription period. For U.S. GAAP purposes, this tax would be charged directly to the consolidated statements of income. Therefore, the deferred Fistel taxes on activation fees at September 30, 2005 and 2004 are being adjusted in the reconciliation of the income differences between U.S. GAAP and Brazilian GAAP.

 

n. Derivative instruments

 

The Company has entered into foreign currency swap and option contracts for long-term agreements at various exchange rates in the notional amount of US$27,386 thousand and €714 thousand at September 30, 2005 and US$58,834 thousand at December 31, 2004. Under Brazilian GAAP, foreign currency swap contracts are recorded in accordance with the terms of the contract as if they had been settled at the balance sheet date.

 

In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which was subsequently amended by SFAS Nos. 137, 138 and 149. SFAS No. 133 must be applied to all derivative instruments and certain derivative instruments embedded in hybrid instruments and requires that such instruments be recorded in the balance sheet either as an asset or liability measured at its fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives that are considered to be effective, as defined, will either offset the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or will be recorded in other comprehensive income until the hedged item is recorded in earnings. Any portion of a change in a derivative’s fair value that is considered to be ineffective, as defined, must be immediately recorded in earnings. Any portion of a change in a derivative’s fair value that the Company has elected to exclude from its measurement of effectiveness, such as the change in time value of option contracts, will also be recorded in earnings.

 

At September 30, 2005 and December 31, 2004 for U.S. GAAP purposes, the Company has not designated its derivative contracts as hedge accounting as defined SFAS No. 133, and consequently, the Company’s derivative contracts are marked to market through earnings, for all periods presented.

 

o. Purchase accounting

 

On November 30, 2000, in connection with the corporate restructuring described in Note 18, the Holding Company acquired the minority interests in the subsidiaries in a transaction involving the exchange of shares. Under Brazilian GAAP, this transaction was recorded at the book value of the minority interests acquired. Under U.S. GAAP, the acquisition of minority interests was recorded using the purchase method of accounting pursuant to APB 16, “Business Combinations,” and the related interpretations. Under U.S. GAAP, the purchase price was determined based on the market price of the Holding Company’s shares for a reasonable period before and after the date the terms of the acquisition were agreed to and announced publicly.

 

Reconciliation of the net income differences between U.S. GAAP and Brazilian GAAP

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Brazilian GAAP net income

   77,962     84,591  

Add (deduct):

            

Different accounting criteria for:

            

Amortization of monetary restatement of 1996 and 1997

   (1,234 )   (2,782 )

Loss on disposal of assets monetarily restated in 1996 and 1997

   (59 )   (39 )

Capitalized interest.

   2,718     7,681  

Amortization of capitalized to interest.

   (4,643 )   (2,200 )

Purchase accounting:

            

Depreciation of fair value adjustment fixed assets

   (1,820 )   (5,456 )

Amortization of subscriber base intangible asset

   —       (25,410 )

Amortization of concession

   (30,216 )   (30,216 )

Deferred Fistel tax on activation fee

   3,359     (2,631 )

Pension and other post-retirement benefits

   1,101     553  

Derivative instruments

   (1,571 )   (7,847 )

Free minutes given in connection with sales of handsets

   4,521     (20,219 )

Deferred tax effect on GAAP adjustments

   9,467     30,112  
    

 

U.S. GAAP net income

   59,585     26,137  
    

 

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

    

Nine-month periods

ended September 30,


     2005

   2004

Net income per thousand shares in accordance with U.S. GAAP

         

Common shares-Basic:

         

U.S. GAAP net income

   0.62    0.28

Weighted average common shares outstanding

   38,362,708    37,395,836
    
  

Common shares-Diluted:

         

U.S. GAAP net income

   0.57    0.26

Weighted average (thousand) common shares outstanding

   48,212,179    44,519,513
    
  

Preferred shares-Basic:

         

U.S. GAAP net income

   0.69    0.30

Weighted average (thousand) preferred shares outstanding

   51,915,007    51,915,007
    
  

Preferred shares-Diluted:

         

U.S. GAAP net income

   0.62    0.28

Weighted average (thousand) preferred shares outstanding

   51,915,007    51,915,007
    
  

 

Reconciliation of the shareholders’ equity differences between U.S. GAAP and Brazilian GAAP

 

     As of
September 30,
2005


   

As of

December 31,
2004


 

Total shareholders’ equity under Brazilian GAAP

   2,048,695     1,970,733  

Add (deduct):

            

Different accounting criteria for:

            

Monetary restatement of 1996 and 1997

   162,044     162,103  

Amortization of monetary restatement of 1996 and 1997

   (160,572 )   (159,338 )

Capitalized interest

   29,397     26,679  

Amortization of capitalized interest

   (17,619 )   (12,976 )

Purchase accounting:

            

Fixed assets adjustment

   31,522     31,522  

Accumulated depreciation

   (31,522 )   (29,702 )

Intangible assets

   352,166     352,166  

Accumulated amortization of intangible assets

   (330,243 )   (300,027 )

Deferred Fistel tax on activation fees

   (14,250 )   (17,609 )

Pension and other post-retirement benefits

   361     (740 )

Fair value of derivative contracts

   31     1,602  

Reversal of proposed dividends

   —       2,508  

Free minutes given in connection with sales of handsets

   (21,783 )   (26,304 )

Deferred tax effects of GAAP adjustments

   159     (9,308 )
    

 

Total shareholders’ equity under U.S. GAAP

   2,048,386     1,991,309  
    

 

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Changes in shareholders’ equity under U.S. GAAP       
     As of
September 30,
2005


 

Shareholders’ equity under U.S. GAAP as of beginning of the year

   1,991,309  

Net income for the period

   59,585  

Dividends paid

   (2,508 )
    

Shareholders’ equity under U.S. GAAP as of September 30, 2005

   2,048,386  
    

 

U.S. GAAP supplementary information

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Reconciliation of operating income under Brazilian GAAP to operating income under U.S. GAAP

            

Brazilian GAAP operating income as reported

   125,643     137,192  

Reversal of financial expense, net

   (14,636 )   (7,004 )

U.S. GAAP adjustments:

            

Amortization of monetary restatement of 1996 and 1997

   (1,234 )   (2,782 )

Loss on disposal of assets monetarily restated in 1996 and 1997

   (59 )   (39 )

Amortization on capitalized interest

   (4,643 )   (2,200 )

Purchase accounting:

            

Depreciation of fixed assets adjustment

   (1,820 )   (5,456 )

Amortization of subscriber base intangible asset

   —       (25,410 )

Amortization of concession

   (30,216 )   (30,216 )

Deferred tax (Fistel) on activation fees

   3,359     (2,631 )

Gain (loss) on permanent assets disposals

   763     (67 )

Pension and other post-retirement benefits

   1,101     553  

Free minutes given in connection with sales of handsets

   4,521     (20,219 )
    

 

U.S. GAAP operating income

   82,779     41,721  
    

 

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Reconciliation of net revenue and costs under Brazilian GAAP to revenue and costs under U.S. GAAP

            

Brazilian GAAP net revenue

   1,505,273     1,408,130  

Reclassification to cost of services and goods

            

Taxes on sales

   473,365     396,865  

Increase in roaming revenue

   52,520     40,701  

U.S. GAAP adjustments

            

Deferred revenues on handset sales, net of amortization

   (26,484 )   136,704  

Free minutes given in connection with sales of handsets

   4,521     (20,219 )
    

 

U.S. GAAP net revenue

   2,009,195     1,962,181  
    

 

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Brazilian GAAP cost of services and goods

   (777,345 )   (761,808 )

Reclassification to cost of services and goods:

            

Taxes on sales

   (473,365 )   (396,865 )

Increase in roaming cost

   (52,520 )   (40,701 )

Reclassification from sales expense:

            

Rewards program expense

   (2,669 )   (37 )

U.S. GAAP adjustments:

            

Amortization of monetary restatement of 1996 and 1997

   (1,234 )   (2,782 )

Loss on disposal of assets monetarily restated in 1996 and 1997

   (59 )   (39 )

Amortization on capitalized interest

   (4,643 )   (2,200 )

Purchase accounting:

            

Depreciation of fixed assets adjustment

   (1,820 )   (5,456 )

Amortization of subscriber base intangible asset

   —       (25,410 )

Amortization of concession

   (30,216 )   (30,216 )

Deferred tax (Fistel) on activation fees

   3,359     (2,631 )

Pension and other post-retirement benefits

   1,101     553  

Deferred costs on handset sales, including taxes on sales, net of amortization during the year

   26,484     (136,704 )
    

 

U.S. GAAP cost of services and goods

   (1,312,927 )   (1,404,296 )
    

 

U.S. GAAP gross profit

   696,268     557,885  
    

 

 

     As of
September 30,
2005


    As of
December 31,
2004


 

Total assets under U.S. GAAP

   2,807,853     2,953,506  

Property, plant and equipment

   3,855,007     3,684,616  

Accumulated depreciation

   (2,677,384 )   (2,402,759 )
    

 

Net property, plant and equipment

   1,177,623     1,281,857  
    

 

 

22. Additional disclosures required by U.S. GAAP

 

a. Intangible assets subject to amortization

 

Following is a summary of the Company’s intangible assets subject to amortization under U.S. GAAP:

 

     As of September 30, 2005

    As of December 31, 2004

 
     Software

    Concession

    Subscriber
base


    Software

    Concession

    Subscriber
base


 

Gross

   305,744     216,648     135,518     283,024     216,648     135,518  

Accumulated amortization

   (204,061 )   (194,725 )   (135,518 )   (168,747 )   (164,509 )   (135,518 )
    

 

 

 

 

 

Net

   101,683     21,923     —       114,277     52,139     —    
    

 

 

 

 

 

 

Aggregate amortization expense for the above intangible assets amounted to R$65,530 and R$108,749 at September 30, 2005 and 2004, respectively.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The estimated aggregate amortization expense for the next years is as follows:

 

     Amount

From October 1 to December 31, 2005

   22,425

2006

   66,218

2007

   30,316

2008

   4,647

 

b. Concentration of risks

 

The credit risk with respect to trade accounts receivable is diversified. The Company and its subsidiaries continually monitor the level of trade accounts receivable and limit the exposure to bad debts by cutting access to the handset network if any invoice is 15 days past due. Exceptions comprise handset services that must be maintained for reasons of safety or national security.

 

In conducting their businesses, Telerj Celular S.A. and Telest Celular S.A. are fully dependent upon the cellular telecommunications concession as granted by the Federal Government.

 

Approximately 31,99% of all employees are members of state labor unions associated with either the Federação Nacional dos Trabalhadores em Telecomunicações (“Fenattel”), or with the Federação Interestadual dos Trabalhadores em Telecomunicações (“Fittel”). The Companies negotiate new collective labor agreements every year with the local union. The collective agreements currently in force expire October, 31, 2006. In 2005, only economics clauses will be renewed.

 

There is no concentration of available sources of labor, services, concessions or rights, other than those mentioned above, that could, if suddenly eliminated, severely impact the operations of the Company an its subsidiaries.

 

c. Commitments

 

Budgeted capital expenditure commitments for 2005 are approximately R$286.1 million of which R$171.9 million has been incurred in the nine-month periods ended September 30, 2005. Most of the 2005 capital expenditures are related to infrastructure, information technology and transmission equipment.

 

The Company is subject to obligations concerning quality of services, network expansion and modernization, as established in our authorizations and our original concession agreements. The Company believes that it is currently in compliance with its quality of service and expansion obligations.

 

d. New accounting pronouncements

 

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”, an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the fair value of the liability can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective December 31, 2005 for calendar year companies. The Company is currently evaluating FIN 47 to determine the impact on its consolidated financial statements.

 

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TELE SUDESTE CELULAR PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

In March 2004, EITF, of the FASB reached a consensus on EITF 03-06 (“Participating Securities and the Two-Class Method under FASB Statement No. 128”) that an entity would allocate losses to a nonconvertible participating security in periods of net loss if, based on the contractual terms of the participating security, the security had not only the right to participate in the earnings of the issuer, but also a contractual obligation to share in the losses of the issuing entity on a basis that was objectively determinable. Determination of whether a participating security holder has an obligation to share in the losses of the issuing entity in a given period must be made on a period-by-period basis, based on the contractual rights and obligations of the participating security. EITF Issue No. 03-06 is effective for fiscal periods beginning after March 31, 2004. The Company is currently evaluating EITF 03-06 to determine the impact on its consolidated financial statements.

 

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

 

INDEX TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

Unaudited Interim Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004

   F-145 and F-146

Unaudited Interim Condensed Consolidated Statements of Income for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-147

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine-Month Period Ended September 30, 2005

   F-148

Unaudited Interim Condensed Consolidated Statements of Changes in Financial Position for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-149

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2005 and 2004

   F-150

Notes to the Unaudited Interim Condensed Consolidated Financial Statements

   F-151

 

Definitions:

 

Brazilian GAAP—Accounting principles generally accepted in Brazil.

U.S. GAAP—Accounting principles generally accepted in the United States of America.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais)

 

     Note

   As of
September 30,
2005


   As of
December 31,
2004


Current assets:

              

Cash and cash equivalents

        419,251    492,732

Trade accounts receivable, net

   10    298,668    262,482

Deferred income taxes

   9c    42,032    30,629

Recoverable taxes

   11    110,386    155,775

Inventories

        45,124    105,432

Advances to suppliers

        6,883    3,351

Derivative contracts

   12d    3    6,123

Prepaid expenses

        28,842    21,656

Other current assets

        18,913    27,106
         
  

Total current assets

        970,102    1,105,286
         
  

Noncurrent assets:

              

Deferred income taxes

   9c    53,986    22,561

Recoverable taxes

   11    27,981    23,039

Derivative contracts

   12d    —      11,707

Prepaid expenses

        2,669    5,917

Other noncurrent assets

        11,117    9,355
         
  

Total noncurrent assets

        95,753    72,579
         
  

Permanent assets:

              

Investments

        1,297    597

Property, plant and equipment, net

        742,432    743,141

Deferred assets, net

        915    506
         
  

Total permanent assets

        744,644    744,244
         
  

Total assets

        1,810,499    1,922,109
         
  

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004

(In thousands of Brazilian reais)

 

     Note

   As of
September 30,
2005


    As of
December 31,
2004


 

Current liabilities:

                 

Payroll and related accruals

        9,092     8,864  

Accounts payable and accrued expenses

        186,387     347,689  

Taxes payable

        73,216     78,359  

Dividends payable

        68,227     68,377  

Loans and financing

   12a    7,328     108,702  

Reserve for contingencies

   14    6,079     4,718  

Derivative contracts

   12d    5,242     4,126  

Other current liabilities

   13    67,029     69,321  
         

 

Total current liabilities

        422,600     690,156  
         

 

Noncurrent liabilities:

                 

Loans and financing

   12a    133,332     159,264  

Pension and other post-retirement benefit plans

        596     479  

Reserve for contingencies

   14    2,744     2,026  

Derivative contracts

   12d    19,696     1,233  

Other noncurrent liabilities

   13    7,374     7,374  
         

 

Total noncurrent liabilities

        163,742     170,376  
         

 

Shareholders’ equity:

                 

Capital stock

   15a    327,522     257,294  

Treasury stock

        (11,070 )   (11,070 )

Capital reserves

   15c    498,420     473,600  

Income reserves

   15d    304,815     341,753  

Retained earnings

        104,470     —    
         

 

Total shareholders’ equity

        1,224,157     1,061,577  
         

 

Total liabilities and shareholders’ equity

        1,810,499     1,922,109  
         

 

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais, except per shares data)

 

          Nine-month periods ended
September 30,


 
     Note

   2005

     2004

 

Net operating revenue

   4    892,356      852,395  

Cost of services and goods sold

   5    (420,272 )    (438,741 )
         

  

Gross profit

        472,084      413,654  

Operating income (expenses):

                  

Selling

   6a    (270,525 )    (183,042 )

General and administrative

   6b    (76,469 )    (71,553 )

Other net

   7    7,802      18,706  
         

  

Operating income before financial income, net

        132,892      177,765  

Financial income net

   8    33,237      28,091  
         

  

Operating income

        166,129      205,856  

Non-operating expenses, net

        (2,272 )    (3,219 )
         

  

Income before income and social contribution tax

        163,857      202,637  

Income and social contribution taxes

   9    (59,387 )    (70,758 )
         

  

Net income

        104,470      131,879  
         

  

Outstanding shares at September 30 (in thousands)

        32,642 (1)    3,171,151 (1)
         

  

Earnings per shares

        3.20 (1)    0.042 (1)
         

  


(1) On March 30, 2005, the shareholders approved a reverse stock split of the shares in the proportion of 100 shares to 1 share of the same class. Had the reverse stock split occurred on September 30, 2004, shares outstanding and earnings per share for the nine-month period ended September 30, 2004 would have amounted to 31,712 and R$4.16, respectively.

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2005

(In thousands of Brazilian reais)

 

              Capital
Reserves


    Income Reserves

         
    Capital
Stock


  Treasury
Stock


    Special
Goodwill
Reserve


    Legal
Reserve


  Contingencies
Reserves


  Reserve For
Expansion and
Modernization


    Retained
Earnings


  Total

Balance at December 31, 2004

  257,294   (11,070 )   473,600     30,439   11,070   300,244     —     1,061,577

Capital increase—Special Meeting on March 31, 2005

  36,938   —       —       —     —     (36,938 )   —     —  

Capital increase—Special Meeting on July 29, 2005

  33,290   —       (33,290 )   —     —     —       —     —  

Contribution of tax benefit by controlling shareholder

  —     —       58,110     —     —     —       —     58,110

Net income

  —     —       —       —     —     —       104,470   104,470
   
 

 

 
 
 

 
 

Balance at September 30, 2005

  327,522   (11,070 )   498,420     30,439   11,070   263,306     104,470   1,224,157
   
 

 

 
 
 

 
 

 

 

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS

OF CHANGES IN FINANCIAL POSITION

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais)

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

SOURCES OF FUNDS:

            

From operations:

            

Net income

   104,470     131,879  

Items not affecting working capital:

            

Depreciation and amortization

   163,352     152,242  

Loss on derivative long-term contracts

   32,705     3,125  

Monetary and exchange variations on long-term liabilities

   (25,931 )   1,880  

Reserve for contingencies

   657     (2,341 )

Net book value of permanent asset disposals

   2,525     1,813  

Pension and other post-retirement benefit plans

   117     —    

Deferred taxes

   —       (16,747 )

Shared system depreciation apportionment

   (2,823 )   (3,069 )

Others

   150     133  
    

 

Total

   275,222     268,915  
    

 

From third parties:

            

Transfer from current to long-term liabilities

   85     —    

Transfer from noncurrent to current assets

   35,999     65,735  

Special goodwill reserve adjustment—merged tax benefit

   11,818     —    
    

 

Total from third parties

   47,902     65,735  
    

 

Total sources

   323,124     334,650  
    

 

USES OF FUNDS:

            

Increase in noncurrent assets

   22,113     —    

Additions to investments

   700     —    

Additions to property, plant and equipment

   162,343     107,148  

Addition to deferred charges

   560     —    

Transfer from long-term to current liabilities

   2,108     110,225  

Transfer from current to noncurrent assets

   2,928     —    

Additions prepayment

   —       5,404  
    

 

Total uses

   190,752     222,777  
    

 

INCREASE IN WORKING CAPITAL

   132,372     111,873  
    

 

REPRESENTED BY:

            

Current assets

   (135,184 )   132,933  

Beginning of period

   1,105,286     882,553  

End of period

   970,102     1,015,486  

Current liabilities

   267,556     (21,060 )

Beginning of period

   690,156     491,776  

End of period

   422,600     512,836  
    

 

INCREASE IN WORKING CAPITAL

   132,372     111,873  
    

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

(In thousands of Brazilian reais)

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

OPERATING ACTIVITIES:

            

Net cash from operating activities.

   189,629     257,554  
    

 

INVESTING ACTIVITIES:

            

Additions to investments

   (700 )   —    

Additions to property, plant and equipment

   (162,343 )   (107,148 )

Additions to deferred charges

   (560 )   —    

Proceeds from asset disposals

   250     225  
    

 

Net cash used in investing activities

   (163,353 )   (106,923 )
    

 

FINANCING ACTIVITIES:

            

Loans repaid

   (84,109 )   (67,380 )

Net settlement on derivatives contracts

   (20,247 )   8,781  

Cash received relating to reverse stock split

   4,749     —    

Dividends and interest on shareholders’ equity paid

   (150 )   (66 )
    

 

Net cash used in financing activities

   (99,757 )   (58,665 )
    

 

Increase (decrease) in cash and cash equivalents

   (73,481 )   91,966  

CASH AND CASH EQUIVALENTS:

            

At the beginning of the period

   492,732     486,119  

At the end of the period

   419,251     578,085  
Supplemental cash flow information             
     Nine-month periods
ended September 30,


 
     2005

    2004

 

Income and social contribution tax paid

   24,933     26,077  

Interest paid

   11,132     12,141  

Noncash transaction:

            

Contribution of tax benefit by controlling shareholder

   58,110     —    

 

 

 

The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

1. Operations and background

 

a) Incorporation

 

Celular CRT Participações S.A. (“CRT” or the “Company”) is a publicly-traded company which, as of September 30, 2005 is controlled by TBS Celular Participações S.A. (29.06% of total capital), Brasilcel N.V. (23.29% of total capital) and Avista Participações Ltda. (15.09% of total capital). TBS Celular Participações S.A. is controlled by in Brasilcel N.V. (96.27% of total capital). Avista Participações Ltda. is a wholly-owned subsidiary of Brasilcel N.V.

 

Brasilcel N.V. is jointly controlled by Telefónica Móviles, S.A. (50.00% of the total capital), PT Móveis, Serviços de Telecomunicações, SGPS, S.A. (49.999% of the total capital), and Portugal Telecom, SGPS, S.A. (0.001% of the total capital).

 

b) Business and regulatory environment

 

CRT has a full controlling interest in the operator Celular CRT S.A., which provides mobile telephone services in the state of Rio Grande do Sul, including activities necessary or useful to performing such services, through the license it was granted.

 

The license granted to the subsidiary Celular CRT S.A. is valid until December 17, 2007, and is renewable once for an additional term of 15 years, by paying annual rates equivalent to approximately 1% of the operator’s annual revenues.

 

The subsidiary’s business, including the services that it may provide, is regulated by the National Telecommunications Agency—ANATEL, the telecommunications regulatory agency, in accordance with Law No. 9,472, of July 16, 1997, and the related regulations, decrees, decisions and plans.

 

On November 4, 2004, the Board of Directors approved the corporate restructuring of Celular CRT S.A., through a merger with Celular CRT Participações S.A. The proposed restructuring was approved by ANATEL on June, 22 2005. The purpose of this operation is to achieve financial and operational benefits through reductions in administrative costs.

 

2. Presentation of financial statements

 

The consolidated financial statements include the accounts of Celular CRT Participações S.A. and its subsidiary. Intercompany transactions and balances have been eliminated. The consolidated financial statements include as of September 30, 2005, balances and transactions of the subsidiary Celular CRT S.A.

 

In the Company’s opinion, all adjustments necessary for a fair presentation of the unaudited results of operations for the nine-month periods ended September 30, 2005 and 2004 are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for the period ended at September 30, 2005 are not necessarily indicative of the results of operations expected for the full year. The accompanying consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements for the year ended December 31, 2004.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The presentation of the consolidated financial statements is consistent with the presentation of the published financial statements of the Company in Brazil, from which the financial information was extracted, except for certain reclassifications and changes in terminology within the consolidated balance sheets and the consolidated statements of loss, which have been made to conform the previously published financial statements to the presentation included herein. The financial statements as of September 30, 2004 and for the year ended December 31, 2004, have been reclassified, where applicable, for comparability.

 

3. Summary of principal accounting practices

 

The unaudited interim condensed consolidated financial statements are expressed in thousands of Brazilian reais (“R$”), except when mentioned and have been prepared in accordance with accounting practices adopted in Brazil which include the accounting practices derived from Brazilian corporate law, regulations applicable to public telecommunication services concessionaires and accounting regulations and procedures established by the Brazilian Securities Commission (“CVM”), hereinafter referred to as “Brazilian GAAP”.

 

The principal accounting practices adopted by the Company and its subsidiaries in the preparation of these interim financial statements are the same as those described in the consolidated financial statements as of and for the year ended December 31, 2004.

 

4. Net operating revenue

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Monthly subscription charges

   78,536     67,672  

Usage charges

   563,261     408,331  

Additional charges per call

   10,667     14,076  

Interconnection

   312,193     340,008  

Other services and data services

   108,122     85,658  
    

 

Gross operating revenue from services

   1,072,779     915,745  
    

 

Value-added tax on services and goods sold—ICMS

   (210,181 )   (139,674 )

PIS and COFINS

   (38,885 )   (33,126 )

Service tax—ISS

   (370 )   (286 )

Discounts granted

   (27,740 )   (25,228 )
    

 

Net operating revenue from services

   795,603     717,431  
    

 

Goods sold (handsets and accessories)

   183,226     197,150  

Value-added tax on services and goods sold—ICMS

   (20,587 )   (13,249 )

PIS and COFINS

   (11,960 )   (13,899 )

Discounts granted

   (42,697 )   (27,491 )

Returns of goods

   (11,229 )   (7,547 )
    

 

Net operating revenue from goods sold (handsets and accessories)

   96,753     134,964  
    

 

Net operating revenue

   892,356     852,395  
    

 

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

There are no customer which contributed with more than 10% of total gross operating revenue in the nine-month periods ended September 30, 2005 and 2004, except for Brasil Telecom S.A—BrT, a fixed-telephone operator, which contributed with approximately 21% and 29% of the total gross revenue, respectively, mainly through interconnection revenues.

 

5. Cost of services and goods sold

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Depreciation and amortization

   (115,310 )   (119,520 )

Products sold

   (169,903 )   (202,201 )

Interconnection/ interlinks

   (21,713 )   (21,182 )

Leased lines

   (21,721 )   (18,587 )

Outside services

   (24,884 )   (23,377 )

Taxes and contributions,

   (44,468 )   (34,862 )

Rent, insurance and other related expenses

   (14,938 )   (12,561 )

Personnel

   (7,036 )   (6,159 )

Other

   (299 )   (292 )
    

 

Total

   (420,272 )   (438,741 )
    

 

 

6. Operating expenses

 

a) Selling expenses

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Outsourced services

   (143,450 )   (93,572 )

Advertising

   (29,082 )   (26,853 )

Allowance for doubtful account receivable

   (31,086 )   (16,883 )

Personnel

   (20,891 )   (19,778 )

Depreciation

   (32,524 )   (17,802 )

Rent, insurance and other related expenses

   (3,128 )   (3,307 )

Supplies

   (3,842 )   (3,886 )

Taxes and contributions

   (64 )   (21 )

Other

   (6,458 )   (940 )
    

 

Total

   (270,525 )   (183,042 )
    

 

 

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Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

b) General and administrative expenses

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Outsourced services

   (36,627 )   (34,675 )

Depreciation

   (15,518 )   (14,920 )

Personnel

   (16,590 )   (16,704 )

Rent, insurance and other related expenses

   (6,068 )   (3,345 )

Taxes and contributions

   (121 )   (142 )

Supplies

   (1,159 )   (1,712 )

Other

   (386 )   (55 )
    

 

Total

   (76,469 )   (71,553 )
    

 

 

7. Other operating income, net

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Income:

            

Fines

   5,105     2,525  

Recovered expenses

   3,241     24,537  

Reversal of reserves

   1,112     558  

Other

   18,645     8,429  
    

 

Total

   28,103     36,049  
    

 

Expenses:

            

Reserves for contingencies

   (4,174 )   (3,194 )

Taxes other than income taxes

   (12,976 )   (12,965 )

Other

   (3,151 )   (1,184 )
    

 

Total

   (20,301 )   (17,343 )
    

 

Other operating income, net

   7,802     18,706  
    

 

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

8. Financial income, net

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Financial income:

            

Interest income

   69,902     64,332  

Monetary/exchange variation on assets

   41,514     32,298  

PIS and COFINS on financial income

   (329 )   (6,972 )
    

 

Total

   111,087     89,658  
    

 

Financial expenses:

            

Interest expense

   (15,144 )   (20,854 )

Monetary/exchange variation on liabilities

   (596 )   (30,961 )

Derivative contracts, net

   (62,110 )   (9,752 )
    

 

Total

   (77,850 )   (61,567 )
    

 

Financial income, net

   33,237     28,091  
    

 

 

9. Income and social contribution taxes

 

Brazilian income taxes comprise federal income tax and the social contribution tax. For the nine month periods ended September 30, 2005 and 2004, the income tax rate was 25% and the social contribution tax rate was 9%. Deferred income tax assets and liabilities related to temporary differences and tax loss carryforwards were calculated at the tax rate of 34%.

 

a) Components of income taxes

 

The composition of income tax expense is as follows:

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Current tax expense

   (70,058 )   (46,538 )

Deferred income tax benefit (expense)

   10,671     (24,220 )
    

 

Total

   (59,387 )   (70,758 )
    

 

 

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Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

b) Reconciliation of effective tax rate

 

The following is a reconciliation of the reported income tax expense and the amount calculated by applying the combined statutory tax rates of 34% for the nine-month periods ended September 30, 2005 and 2004:

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Income before taxes as reported in the accompanying financial statements

   163,857     202,637  

Taxes charged at the combined statutory rate

   (55,711 )   (68,896 )

Permanent additions:

            

Non-deductible expenses

   (3,676 )   (1,853 )

Permanent exclusions:

            

Other

   —       (9 )

Income and social contribution taxes as reported in the accompanying financial statements

   (59,387 )   (70,758 )

Effective rate

   36.24 %   34.92 %

 

c) Composition on deferred income tax assets

 

Deferred income tax assets based on temporary differences are comprised of the following:

 

     As of
September 30,
2005


   As of
December 31,
2004


Tax credit recorded on corporate restructuring

   57,125    24,968

Accrual/allowance for:

         

Inventory obsolescence

   1,869    714

Contingencies

   3,000    2,293

Doubtful accounts receivable

   5,152    3,425

Rewards program

   4,356    3,187

Income tax and social contribution tax losses carryforwards

   6,673    5,662

Other

   17,843    12,941
    
  

Total deferred taxes

   96,018    53,190
    
  

Current

   42,032    30,629

Noncurrent

   53,986    22,561

 

Deferred taxes have been recorded if it is more likely than not that they will be realized, as follows:

 

a) Tax loss carryforwards: are offset up to a limit of 30% of taxable income for each subsequent year.

 

b) Tax credits recorded on corporate restructuring represent the tax benefit recorded as a result of the corporate restructuring described in Note 16. The realization of these tax credits occurs in the same proportion as the amortization of goodwill, over a period of five years. Studies by external consultants used in the corporate restructuring process support the tax credit recovery within that period.

 

c) Temporary differences: will be realized upon payments of the allowances, effective losses on bad debts and realization of inventories.

 

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Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

At the end of the 2004 fiscal year, the Company prepared technical feasibility studies, approved by the Board of Directors, which indicate full recovery of the deferred taxes recognized, as defined by CVM Resolution No. 371. Management did not identify any change that could affect the conclusions of these studies as of September 30, 2005.

 

10. Trade accounts receivable, net

 

     As of
September 30,
2005


   

As of

December 31,
2004


 

Unbilled services

   51,702     55,795  

Billed services

   162,761     76,637  

Interconnection

   75,546     68,652  

Products sold

   23,813     71,472  

Allowance for doubtful accounts receivable

   (15,154 )   (10,074 )
    

 

Total

   298,668     262,482  
    

 

 

There was no customer who represented more than 10% of trade accounts of the Company as of September 30, 2005, and December 31, 2004, except for amounts receivable from Brasil Telecom S.A.—BrT, which represented approximately 16% and 12% of such account, respectively, mainly through intercompany charges.

 

Changes in the allowance for doubtful accounts receivable were as follows:

 

    

As of

September 30,


 
     2005

    2004

 

Balance at beginning of year

   10,074     7,843  

Allowance for doubtful accounts receivable charged to selling expenses

   31,086     16,883  

Write-offs

   (26,006 )   (15,415 )
    

 

Ending balance

   15,154     9,311  
    

 

 

11. Recoverable taxes

 

     As of
September 30,
2005


  

As of

December 31,
2004


Prepaid/recoverable income and social contribution taxes

   34,828    54,585

Withholding income tax

   21,105    38,629

Recoverable ICMS (State VAT)

   47,530    49,705

Recoverable PIS and COFINS (revenue taxes paid on purchases of goods and services)

   21,896    22,359

Other recoverable

   224    188
    
  

Total recoverable taxes

   125,583    165,466
    
  

ICMS on deferred sales

   12,784    13,348
    
  

Total

   138,367    178,814
    
  

Current

   110,386    155,775

Noncurrent

   27,981    23,039

 

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Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

12. Loans and financing

 

a) Composition of debt:

 

Description


  Currency

  Annual
interest


  Final
maturity


  As of
September 30,
2005


 

As of

December 31,
2004


Financial institutions

                     

European Investment Bank—EIB—foreign financing

  US$     1.45% p.a. +
LIBOR
  Sep/2007   133,332   159,264

Citibank—OPIC

  US$     1.65% p.a. +
LIBOR
  Jul/2005   —     33,180

Itaú—assumption of debt

  US$     1.825% p.a.
+ LIBOR
  Oct/2005   1,310   65,954

Resolution No. 4,131

  US$     1.55% p.a.+
LIBOR
  Nov/2005   5,555   6,636

Accrued interest

                463   2,932
                 
 

Total

                140,660   267,966
                 
 

Current

                7,328   108,702

Noncurrent

                133,332   159,264

 

b) Repayment schedule

 

The long-term amounts have the following breakdown by year of maturity:

 

Year


   2005

2007

   133,332
    

Total

   133,332
    

 

c) Restrictive covenants

 

The Company has loans and financing from the European Investment Bank, the balance of which as of September 30, 2005 is R$133,332 (R$159,264 at December 31, 2004). As of September 30, 2005, the Company and its subsidiary were in compliance with the financial covenants in this instrument.

 

d) Derivative contracts

 

As of September 30, 2005, the subsidiary Celular CRT S.A. had foreign exchange rate derivative contracts with a total notional amount of US$63,568 thousand (US$114,542 thousand at December 31, 2004), to cover protect its obligations against exchange fluctuations. Year to date, the subsidiary Celular CRT S.A. had recorded an accumulated net loss of R$24,935 (a gain of R$12,471 as of December 31, 2004), on these derivative contracts.

 

e) Guarantees

 

The guarantees of the Company and its subsidiary are as follows:

 

Banks


  

Guarantees


European Bank—foreign financing

   Bank guarantee

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

13. Other liabilities

 

     As of
September 30,
2005


  

As of

December 31,
2004


Prepaid services

   33,704    44,754

Accrual for customer reward program (a)

   12,812    9,375

Payable to related parties

   3,768    5,735

Provision for pension plan FCRT

   8,677    9,395

Reverse stock split (b)

   4,749    —  

Other

   10,693    7,436
    
  

Total

   74,403    76,695
    
  

Current

   67,029    69,321

Noncurrent

   7,374    7,374
(a) The subsidiary has a reward program, in which calls are transformed into points usable in future exchanges of handsets. The accumulated points, net of the redemptions, are provisioned, based on historical redemption data, points generated and the average cost of a point.
(b) Refers to a liability to shareholders for fractions of shares that were not issued on the date of the reserve stock split. This balance is payable upon demand.

 

14. Reserve for contingencies

 

The Company is party to a number of lawsuits, with respect to labor, tax and civil claims. The Company’s management, based on external legal counsel’s opinion, has recognized a provision for those claims for which an unfavorable outcome is considered probable.

 

Components of the reserve are as follows:

 

     As of
September 30,
2005


  

As of

December 31,
2004


Labor claims

   1,817    885

Civil claims

   7,006    5,173

Disputed tax claims

   —      686
    
  

Total

   8,823    6,744
    
  

Current

   6,079    4,718

Long-term

   2,744    2,026

 

 

The changes in the reserve for contingencies are as follows:

 

     Nine-month periods
ended September 30,


       2005  

      2004  

Beginning balance at January 1

   6,744     4,314

Additional provision net of reversals

   3,062     2,636

Monetary variation

   7     —  

Payments

   (990 )   —  
    

 

Ending balance at September 30

   8,823     6,950
    

 

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The main tax contingencies, in which the subsidiaries are involved, are as follows:

 

14.1. Tax claims

 

14.1.1. Probable losses

 

No new significant claims classified as “probable” loss incurred in the Nine-months ending September 30, 2005. The increase in the reserves for tax contingencies corresponds substantially to the monetary restatement of the reserves during the period.

 

14.1.2. Possible losses

 

No new significant claims classified as “possible” loss were incurred in the Nine-month period ended September 30, 2005. No significant alterations occurred in the claims indicated in this report since the last financial year.

 

14.2. Labor and civil claims

 

There are several labor and civil claims, and a reserve was posted as shown previously, which is considered to be sufficient to cover the probable losses on these cases.

 

The amount involved in claims that are classified as possible losses is R$31,753 for civil and R$6,671 for labor claims.

 

15. Shareholders’ equity

 

a) Capital

 

On March 30, 2005, the Company’s capital was increased by R$36,938, without the issue of new shares, using part of its profits reserves.

 

At March 30, 2005, the shareholders approved a reverse stock split of 3,235,095,228 book-entry shares, without par value, of which 1,350,917,074 were common shares and 1,884,178,154 were preferred shares in the proportion of 100 shares to 1 share of the same class. As a result of the reserve stock split, the Company’s capital was comprised of 32,350,952 book-entry shares, without par value, of which 13,509,171 common shares and 18,841,782 preferred shares.

 

On July 29, 2005, the Company announced a capital increase in favor of the controlling shareholders of R$33,290, corresponding to the tax benefit effectively realized during the fiscal year 2004 from the goodwill recorded by the Company’s controlling shareholders. In connection with this capital increase, the other shareholders are entitled to preemptive rights. The capital was increased from R$294,232 to R$327,522, with the issue of 929,892 new common. The funds arising from possible future exercise of the right of preference, resulting from the exercising of preemptive rights were credited to TBS Celular Participações S.A.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

The Company’s capital is comprised book entry shares, without par value, as follows:

 

     In thousands of shares

 
     As of
September 30,
2005


    As of
December 31,
2004 (1)


 

Common shares

   14,439     1,350,917  

Preferred shares

   18,842     1,884,178  
    

 

Total

   33,281     3,235,095  
    

 

(–) Treasury preferred shares

   (639 )   (63,944 )
    

 

Total outstanding shares

   32,642     3,171,151  
    

 

(1) Had the reverse stock split described above occurred on December 31, 2004, shares outstanding would be 13,509 and 18,842 common and preferred shares, respectively, and 639 treasury shares.

 

b) Interest on shareholders’ equity and dividends

 

In accordance with the bylaws, a minimum of 25% of adjusted net income should be distributed as dividends in each financial year, provided that there are funds available, pursuant to the bylaws.

 

c) Special goodwill reserve

 

This reserve was formed as a result of the Company’s corporate restructuring, and is capitalized in favor of the controlling shareholder at the time of effective realization of the related tax benefit.

 

d) Income reserve

 

1) Statutory reserve

 

The statutory reserve is calculated based on 5% of net annual income until the reserve reaches 20% of paid-in capital or 30% of capital plus capital reserves; from then on, appropriations to this reserve are no longer compulsory. The purpose of this reserve is to ensure the integrity of capital and it may only be used to offset losses or to increase capital.

 

2) Special reserve for expansion

 

The special reserve for expansion and modernization is based on the capital expenditure budget prepared by management, which shows the need for funds for investment projects for the coming financial year.

 

e) Contingency reserve and treasury shares

 

The amounts recorded are derived from the spin-off process of Companhia Riograndense de Telecomunicações—CRT, and their purpose is to make provision for a judicial decision on the lawsuits concerning capitalizations that occurred in that company in financial years 1996 and 1997.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

16. Corporate restructuring

 

On October 11, 2000, the Company completed a corporate restructuring plan to transfer a tax benefit to the Company related to the goodwill paid by the Company’s controlling shareholders on the privatization process. The net goodwill from the reversal of the reserve was totally amortized as of September 30, 2005.

 

On August 31, 2005 the Board of the Company and its subsidiary approved a corporate restructuring plan, with the objective of transferring to the Company the goodwill paid by Avista Participações Ltda. in the purchase of its shareholding in the Company. The goodwill and related tax benefit on the date of transfer amounted to R$170,914 and R$58,110, respectively. The tax benefit was recorded as deferred tax with a corresponding entry to a special goodwill reserve in shareholders’ equity. This tax benefit is being realized in proportion to the amortization of the goodwill over a period of five years. The special goodwill reserve is transferred to capital with a corresponding issuance of shares to the Company’s controlling shareholders as related tax benefit is realized. In connection with the issuance of these shares, the Company’s other shareholders are entitled to preemptive rights. Proceeds received in connection with the exercise of preemptive rights are payable to the Company’s controlling shareholders. This tax benefit, as of September 30, 2005 amounted to R$57,125.

 

17. Transactions with related parties

 

The main transactions with non-consolidated related parties are:

 

a) Use of network and long-distance (roaming) cellular communications: these transactions involve companies belonging to the same controlling group, Telesp Celular S.A., Global Telecom S.A., Telerj Celular S.A., Telest Celular S.A., Telebahia Celular S.A., Telergipe Celular S.A., Tele Centro Oeste Celular S. A., Telems Celular S.A., Teleron Celular S. A., Telemat Celular S.A., Teleacre Celular S.A., Telegoiás Celular S.A. and NBT S.A. and Telecomunicações de São Paulo S.A. Some of these transactions are based on contracts signed by Telebrás with the concessionaire operators during the period prior to privatization, and the conditions were regulated by ANATEL.

 

b) Technical assistance: corresponding to the provision of technical assistance services to TBS Celular Participações S.A., calculated based on a percentage of the net income from the services, adjusted to reflect currency exchange variations.

 

c) Corporate services: these are passed on to the subsidiaries at the cost effectively incurred for these services.

 

d) Call-center services: provided by Atento Brasil S.A. e Mobitel Telecomunicações S.A for the users of the subsidiary’s telecommunications service, contracted for 12 months, renewable for an equal period.

 

e) Logistics operator and financial and accounting advisory services: provided by Telefônica Gestão de Serviços Ltda.

 

f) Voice portal content services: provided by Terra Network Brasil.

 

g) Maintenance: of the profitability and cost control system by Telefônica Móbile Solution do Brasil.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

We present below a summary of the unconsolidated balances and transactions with related parties:

 

     As of
September 30,
2005


    As of
December 31,
2004


 

Current assets:

            

Trade accounts receivable

   6,050     3,926  

Other

   5,144     7,326  

Current liabilities:

            

Accounts payable and accrued expenses

   18,268     25,709  

Other liabilities

   3,768     5,735  
    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Statement of income:

            

Revenue from telecommunications services

   20,244     19,085  

Cost of services rendered

   —       (290 )

Selling expenses

   (35,374 )   (27,820 )

General and administrative expenses

   (16,182 )   (7,431 )

Other operational revenues

   715     —    

Financial revenues

   10     —    

 

18. Financial instruments and risk management

 

a) Risks considerations

 

The major market risks to which Celular CRT S.A. is exposed in conducting its business are:

 

Credit risk resulting from any difficulty in collecting amounts of telecommunications services provided to customers, and the sales of handsets by the Company’s distribution network, as well risks relating to swap transactions.

 

Interest rate risk resulting from the debt and derivatives instruments contracted at floating rates and involving the risk of financial expenses as a result of an unfavorable movement in interest rates (principally Libor and CDI).

 

Currency risk related to debt and derivative instruments contracted in foreign currencies witch expose the Company to potential losses from adverse exchange rate fluctuations.

 

The Company and its subsidiaries actively manage their operations to mitigate these risks by means of comprehensive operating procedures, policies and initiatives.

 

Credit risk

 

The credit risk from providing telecommunications services is reduced by a strict control of the customer base and active management of default by means of clear policies related to selling postpaid sets. As of September 30, 2005, Celular CRT S.A. had 74.86% (75.5% as of December 31, 2004) of its customer base under the prepaid system, which requires prepaid loading, which do not represent any credit risk.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Credit risk from the sale of handsets is managed by following a conservative credit policy which encompasses the use of advanced risk management methods that include applying credit scoring techniques, analyzing a potential customer’s balance sheet, and using credit protection agencies’ databases.

 

The Company is also exposed to credit risk relating to their financial investments and receivables from swap transactions. The Company attempt to diversify such exposure by using reputable financial institutions.

 

Interest rate risk

 

The Company is exposed to interest rate risk especially associated with variations in the CDI rate relating to its derivative transactions and borrowings contracted in Brazilian reais. The financial investments that are also indexed to the CDI partially neutralizes this effect.

 

Foreign currency-denominated loans are also exposed to the risk of a rise in the floating exchange rates (LIBOR). As of September 30, 2005, these operations amounted to US$63,089 thousand (US$99,847 thousand as of December 31, 2004).

 

Of the total loans and financing associated to the variable foreign interest rates (Libor), US$60.000 thousand is protected against variations by derivatives (interest rate swap). The Company continues to monitor the market interest rates with a view to evaluating a possible need to contract other derivatives to hedge against the risk of volatility in the variable foreign rates for its remaining exposure.

 

Currency risk

 

Celular CRT S.A. uses derivative instruments to protect against currency risk on foreign currency-denominated loans and other liabilities. The instruments normally used are swap contracts.

 

The following table summarizes the Company’s net exposure to the exchange rate factor as of September 30, 2005:

 

     US$

 

Loans and financing

   (63,298 )

Other liabilities

   (208 )

Derivative instruments

   63,568  
    

Net exposure

   62  
    

 

b) Derivative contracts

 

Celular CRT S.A. records derivative gains and losses as a component of financial expenses or income.

 

Book and estimated market values of loans and financing and derivative instruments are estimated as follows:

 

     As of September 30, 2005

 
     Book
value


    Market
value


    Unrealized
gain (loss)


 

Loans and financing

   (140,660 )   (144,530 )   (3,870 )

Other liabilities

   (462 )   (462 )   —    

Derivative instruments

   (24,935 )   (17,009 )   7,926  
    

 

 

Total

   (166,057 )   (162,001 )   4,056  
    

 

 

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Market value of financial instruments

 

The market value of the loans, financing and derivative instruments were determined based on discounted cash flows, utilizing available market information. Accordingly, the estimates presented above are not necessary indicative of the amounts that could be realized in the current market. The use of different market assumptions may have material effect on estimates.

 

19. Summary of the differences between Brazilian GAAP and U.S. GAAP

 

A detailed description of the Company’s accounting policies that comply with Brazilian GAAP, which differs significantly from generally accepted accounting principles in the United States of America (“U.S. GAAP”), is included in Note 31 to the consolidated financial statements for the year ended December 31, 2004. The following is a general description of these differences.

 

a) Different criteria for capitalizing and amortizing capitalized interest

 

Until December 31, 1998, under Brazilian GAAP as applied by the Company, interest attributable to construction-in-progress was computed at the rate of 12% per year on the balance of construction-in-progress interest incurred on third-party loans was credited to interest expense and the excess interest capitalized was credited to capital reserves.

 

Under U.S. GAAP, in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 31, “Capitalization of Interest Costs,” interest incurred on borrowings is capitalized to the extent that borrowings do not exceed construction-in-progress. The credit is a reduction of interest expense. Under U.S. GAAP, the amount of interest capitalized excludes monetary gains associated with local currency borrowings and the foreign exchange gains and losses on foreign currency borrowings.

 

     As of September 30,

 
     2005

    2004

 

Capitalized interest difference

            

U.S. GAAP capitalized interest:

            

Interest capitalized during the period

   5,739     2,109  
    

 

U.S. GAAP difference

   5,739     2,109  
    

 

Amortization of capitalized interest difference

            

Amortization under Brazilian GAAP

   3,189     3,736  

Less amortization under U.S. GAAP

   (4,215 )   (4,371 )
    

 

U.S. GAAP difference

   (1,026 )   (635 )
    

 

 

b) Reversal of proposed dividends

 

Under Brazilian GAAP proposed dividends are accrued for in the financial statements in anticipation of their approval at the shareholders’ meeting. Under U.S. GAAP, dividends are not accrued until they are formally declared.

 

The interest on shareholders’ equity is a legal liability from the date it is declared, therefore, these amounts are included as dividends in the year they are proposed for U.S. GAAP purposes.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

c) Pension and other post-retirement benefits

 

The Company sponsors a single-employer defined pension benefit plan (Plano de Benefícios Visão CRT—Plano Visão) implemented by the subsidiary on March 1, 2004. The provisions of SFAS No. 87, “Employers’ Accounting for Pensions”, for the purposes of calculating the funded status, were applied.

 

On December 13, 2000, CVM issued Instruction No. 371, which provisions are very similar to SFAS No. 87 and SFAS No. 106, except for the following differences:

 

    The unrecognized net obligation existing at the date of initial application of this standard shall be amortized over five years or remaining service period or remaining life expectancy, whichever is lower. Alternatively, companies were granted the option to recognize such initial transition obligation as of the beginning of the plan, directly to shareholders’ equity. Such option has been adopted by the Company. Under SFAS No. 87, the unrecognized net obligation existing at the date of its initial application is being amortized over the remaining service period.

 

    Under Brazilian GAAP, actuarial gains and losses are recorded in income when incurred up to the amount of pension liability recorded. Under U.S. GAAP, certain actuarial gains and losses are deferred and amortized over the remaining service period of the active employees expected to receive benefits under the plan.

 

The effects of these different criteria for recognition of pension and other post-retirement liabilities on accrued pension (post-retirement) liabilities as of September 30, 2005, are presented below:

 

     As of September 30, 2005

 
     U.S.
GAAP


   Brazilian
GAAP


   Accumulated
difference


 

Accrued pension (post-retirement) liabilities

   139    596    (457 )
    
  
  

 

     As of December 31, 2004

 
     U.S.
GAAP


   Brazilian
GAAP


  

Accumulated

difference


 

Accrued pension (post-retirement) liabilities

   —      479    (479 )
    
  
  

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

A summary of the liability as of September 30,2005 and December 31, 2004 for the Company’s active employees defined benefit pension plan (Plano Visão CRT) is as follows:

 

Reconciliation of Funded Status

 

Plano Visão CRT

 

     As of
September 30,
2005


   

As of

December 31
2004


 

Accumulated benefit obligation:

            

Vested

   —       —    

Nonvested

   752     649  
    

 

Total

   752     649  

Projected benefit obligation

   1,189     1,006  

Fair value of plan assets

   (593 )   (527 )
    

 

Funded status

   596     479  

Unrecognized net transition obligation

   (457 )   (479 )
    

 

Net amount recognized

   139     —    
    

 

 

d) Interest income (expense)

 

Brazilian GAAP requires interest to be shown as part of operating income. Under U.S. GAAP interest income (expense) would be shown after operating income.

 

e) Permanent assets

 

Brazilian GAAP has a class of assets called “permanent assets”. This is the collective name for all assets on which indexation adjustments were calculated until December 31, 1995 in the corporate and fiscal law accounts of Brazilian companies. Under U.S. GAAP the assets in this classification would be noncurrent assets.

 

f) Monetary restatement of 1996 and 1997

 

The amortization of the asset appreciation, which originated from the inflation accounting during 1996 and 1997, when Brazil was still considered as high inflationary economy for U.S. GAAP purposes, has been recognized as an adjustment to income in the reconciliation to U.S. GAAP. The loss related to monetary restatement on disposals of such assets is classified for U.S. GAAP purposes as a component of operating income.

 

g) Income taxes

 

The Company fully accrues for deferred income taxes on temporary differences between tax and accounting records. The existing policies for providing for deferred taxes are consistent with SFAS No. 109, “Accounting for Income Taxes”, except with respect to social contribution rate adopted, as explained below:

 

Under Brazilian GAAP, at December 31, 1999 the Company recognized a change in the combined tax rate from 33% to 34% based on a provisional measure for an increase in the social contribution rate from 8% to 9%

 

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CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

effective January 1, 2000. Provisional measures are temporary and must be re-approved every 30 days or they lapse. Under SFAS 109, the provisional measures discussed are not considered to be enacted law the provision measure was approved in law 10.637 as of December 30, 2002. Therefore, until 2002 the combined deferred tax effect calculated on temporary differences would be 33%, not 34%. For 2004 and 2003, no difference related to the social contribution tax rate. Under Brazilian GAAP, the deferred taxes are presented gross. Under U.S. GAAP, the deferred taxes are presented net.

 

h) Earnings per share

 

Under Brazilian GAAP, net income per share is calculated based on the number of shares outstanding at the balance sheet date. In these consolidated financial statements, information is disclosed per lot of one thousand shares, because this is the minimum number of shares that can be traded on the Brazilian stock exchanges.

 

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, “Earnings per Share”. This statement became effective December 15, 1997, and provides computation, presentation and disclosure requirements for earnings per share.

 

Since the preferred and common stockholders have different dividend, voting and liquidation rights, basic and diluted earnings per share have 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 stock 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 distributed and undistributed net income available to preferred shareholders and dividing net income available to common shareholders by the number of common shares outstanding. Net income available to preferred shareholders is the sum of the preferred stock dividends (10% higher than those attributed to common shares, as defined in the Company’s by-laws for the years ended December 31, 2004 and 2003) and the preferred shareholders’ portion of undistributed net income. Undistributed net income is computed by deducting total dividends (the sum of preferred and common stock dividends) from net income. Undistributed net income is allocated to preferred shares 10% higher than that attributed to common shares on a pro rata basis. Total dividends are calculated as described in Note 15, as adjusted for the reversal of proposed dividends as discussed in b. above. At September 30, 2005, and 2004, the Company was obligated to issue shares to the controlling shareholders for the amount of the tax benefit realized relating to the corporate restructuring described in Note 16. The number of shares issuable are considered dilutive as defined in SFAS No. 128 and have been included in the weighted average common shares—diluted presented below. The number of shares issuable was computed considering the balance of the goodwill reserve (R$498,420 in September 30, 2005 and R$473,600 in September, 30 2004) by the average price of common shares traded on the São Paulo Stock Exchange (“Bovespa”) during the last 20 trading days of each period.

 

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NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

For the periods presented below, the weighted average number of shares outstanding consider the effect of the reverse stock split described in Note 15. The computation of basic and diluted earnings per share is as follows:

 

     Nine-month periods ended
September 30, 2005


   Nine-month periods ended
September 30, 2004


     Common

   Preferred

   Common

   Preferred

Basic numerator:

                   

Basic allocated undistributed earnings (a).

   42,937    62,628    49,061    73,978

Allocated net income available for common and preferred shareholders

   42,937    62,628    49,061    73,978

Basic denominator:

                   

Weighted average shares outstanding

   13,727,168    18,202,337    13,278,320    18,201,880

Basic earnings per share

   3.13    3.44    3.69    4.06

Diluted numerator:

                   

Diluted allocated undistributed dividends (a)

   60,029    45,537    65,512    57,527

Allocated net income available for common and preferred shareholders

   60,029    45,537    65,512    57,527

Diluted denominator:

                   

Weighted average shares outstanding

   13,727,168    18,202,337    13,278,320    18,201,880

Dilutive effects of goodwill reserve

   12,667,248    —      9,523,427    —  

Diluted weighted average shares

   26,394,416    18,202,337    22,801,747    18,201,880

Diluted earnings per share

   2.27    2.50    2.87    3.16

 

i) Deferred revenues on sales of handsets

 

Under Brazilian GAAP, revenues and costs from sales of handsets, including applicable value-added and other sales taxes, are recognized at the moment of sale to the customer. Under U.S. GAAP, in accordance with Staff Accounting Bulletin No. 104 (SAB 104), revenues from sales of handsets along with the related costs, including applicable value-added and other sales taxes, are deferred and amortized based on the expected useful life of the handset, estimated by management to be 18 months. Any excess of the cost over the amount of deferred revenue related to handset sales is recognized on the date of sale. As substantially all of the Company’s handsets are sold below cost, this difference in accounting policy had no impact on net or shareholders’ equity. The amount of unamortized deferred revenue and the related amounts of unamortized deferred costs was R$106,878 and R$77,344 at September 30, 2005 and 2004, respectively. The impact of this difference under U.S. GAAP was to increase both net revenues and cost of services and goods by R$545 at September 30, 2005 and increase by R$135,981 at September 30, 2004.

 

j) Value-added and other sales taxes

 

Under Brazilian GAAP, these taxes are recorded as a reduction to revenues. Under U.S. GAAP, these taxes are recorded gross as revenue and the related costs of services and goods. This difference in accounting policy has no impact in net (loss) or shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both net revenues and cost of services and goods by R$281,613, and R$199,948 for the nine-month periods ended September 30, 2005 and 2004, respectively.

 

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CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

k) Roaming

 

The Company has roaming agreements with other cellular service providers. When a call is made from within one coverage area by a subscriber of another cellular service provider, that service provider pays Celular CRT’s subsidiary for the service at the applicable rates. Conversely, when one of the subsidiary’s customers roams outside the coverage area, the subsidiary pays the charges associated with that call to the cellular service provider in whose region the call was originated and charges the same amount to its subscriber. Under Brazilian GAAP, revenues for roaming charges are recorded net of the related costs when the services are provided. Under U.S. GAAP, revenues and costs for roaming charges should be recorded gross. This difference in accounting practices has no impact on net (loss) shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both revenues and cost of goods and services by R$26,701 and R$28,414 for September 30, 2005 and 2004, respectively.

 

l) Free minutes given in connection with sales of handsets

 

Under U.S. GAAP, pursuant to Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables,” the Company began to separately account for free minutes given in connection with the sales of handsets. The adoption of EITF No. 00-21 is effective prospectively for transactions entered into as from January 1, 2004. Consequently, a portion of the revenue generated from the sale of handsets is allocated to the free minutes given and deferred based on the fair value of the minutes. The revenues associated with the free minutes are then recognized based on subscriber airtime usage. Under Brazilian GAAP, the Company does not separately account for free minutes given in connection with sales of handsets.

 

m) Fistel tax

 

Beginning in 1999, under Brazilian GAAP, the Fistel (Telecommunication Inspection Fund) tax, assessed on each activation of a new cellular line, is deferred and amortized over the customers’ estimated subscription period. For U.S. GAAP purposes, this tax would be charged directly to the consolidated statements of income. Therefore, the deferred Fistel taxes on activation fees at September 30, 2005 and 2004 are being adjusted in the reconciliation of the income differences between U.S. GAAP and Brazilian GAAP.

 

n) Derivative financial instruments

 

As mentioned in Note 12.d., the Company has entered into foreign currency swap and option contracts for long-term agreements at various exchange rates, in the notional amount of US$63,568 thousand at September, 30 2005 (US$114,542 thousand at December 31, 2004). Under Brazilian GAAP, foreign currency swap contracts are recorded in accordance with the terms of the contract as if they had been settled at the balance sheet date.

 

In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which was subsequently amended by SFAS Nos. 137, 138 and 149. SFAS No. 133 must be applied to all derivative instruments and certain derivative instruments embedded in hybrid instruments and requires that such instruments be recorded in the balance sheet either as an asset or liability measured at its fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met.

 

If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives that are considered to be effective, as defined, will either offset the change in fair value of the hedged

 

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CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

assets, liabilities, or firm commitments through earnings or will be recorded in other comprehensive income until the hedged item is recorded in earnings. Any portion of a change in a derivative’s fair value that is considered to be ineffective, as defined, must be immediately recorded in earnings. Any portion of a change in a derivative’s fair value that the Company has elected to exclude from its measurement of effectiveness, such as the change in time value of option contracts, will also be recorded in earnings.

 

At September 30, 2005 and 2004 for U.S. GAAP purposes, the Company has not designated its derivative contracts as accounting hedges as defined SFAS No. 133, and consequently, the Company’s derivative contracts are marked to market through earnings, for all periods presented.

 

Reconciliation of the net income differences between U.S. GAAP and Brazilian GAAP

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Brazilian GAAP net income

   104,470     131,879  

Add (deduct):

            

Different accounting criteria for:

            

Amortization of monetary restatement of 1996 and 1997

   (128 )   (522 )

Capitalized interest

   5,739     2,109  

Amortization of capitalized interest

   (1,026 )   (635 )

Deferred Fistel tax on activation fee

   6,213     (3,085 )

Pension and other post-retirement benefits

   (22 )   —    

Derivative instruments

   (10,589 )   (5,116 )

Free minutes given in connection with sales of handsets

   1,471     (6,148 )

Deferred tax effect on GAAP adjustments

   (563 )   4,555  
    

 

U.S. GAAP net income

   105,565     123,037  
    

 

    

Nine-month periods

ended September 30


 
     2005

    2004

 

Net income per thousand shares in accordance with U.S. GAAP

            

Common shares—Basic:

            

U.S. GAAP net income

   3.13     3.69  

Weighted average common shares outstanding

   13,727,168     13,278,320  
    

 

Common shares—Diluted:

            

U.S. GAAP net income

   2.27     2.87  

Weighted average (thousand) common shares outstanding

   26,394,416     22,801,747  
    

 

Preferred shares—Basic and diluted:

            

U.S. GAAP net income

   3.44     4.06  

Weighted average (thousand) preferred shares outstanding

   18,202,337     18,201,880  
    

 

U.S. GAAP net income

   2.50     3.16  

Weighted average (thousand) preferred shares outstanding

   18,202,337     18,201,880  
    

 

 

F-171


Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

Reconciliation of the shareholders’ equity differences between U.S. GAAP and Brazilian GAAP

 

     As of
September 30,
2005


    As of
December 31,
2004


 

Brazilian GAAP shareholders’ equity

   1,224,157     1,061,577  

Add (deduct):

            

Different accounting criteria for:

            

Monetary restatement of 1996 and 1997

   25,478     25,478  

Amortization of monetary restatement of 1996 and 1997

   (25,476 )   (25,348 )

Capitalized interest

   15,350     9,611  

Amortization of capitalized interest

   (568 )   458  

Deferred Fistel tax on activation fees

   (11,838 )   (18,051 )

Pension and other postretirement benefits

   457     479  

Derivative contracts

   8,235     18,824  

Free minutes given in connection with sales of handsets

   (4,472 )   (5,943 )

Deferred tax effects of GAAP adjustments

   (2,436 )   (1,873 )
    

 

U.S. GAAP shareholders’ equity

   1,228,887     1,065,212  
    

 

 

Changes in shareholders’ equity under U.S. GAAP

 

     As of
September 30,
2005


Shareholders’ equity under U.S. GAAP as of beginning of the year

   1,065,212

Corporate restructuring

   58,110

Net income for the year

   105,565
    

Shareholders’ equity under U.S. GAAP as of September 30, 2005

   1,228,887
    

 

U.S. GAAP supplementary information

 

     Nine-month periods
ended September 30,


 
     2005

    2004

 

Reconciliation of operating income under Brazilian GAAP to operating income under U.S. GAAP

            

Brazilian GAAP operating income as reported

   166,129     205,856  

Reversal of financial expense, net

   (33,237 )   (28,091 )

U.S. GAAP adjustments:

            

Amortization of monetary restatement of 1996 and 1997

   (128 )   (522 )

Amortization on capitalized interest

   (1,026 )   (635 )

Deferred tax (Fistel) on activation fees

   6,213     (3,085 )

Pension and other post-retirement benefits

   (22 )   —    

Loss on permanent assets disposals

   (2,275 )   (1,588 )

Free minutes given in connection with sales of handsets

   1,471     (6,148 )
    

 

U.S. GAAP operating income

   137,125     165,787  
    

 

 

F-172


Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Reconciliation of net revenue and costs under Brazilian GAAP to revenue and costs under U.S. GAAP

            

Brazilian GAAP net revenue

   892,356     852,395  

Reclassification to cost of services and goods

            

Taxes on sales

   281,613     199,948  

Increase in roaming revenue

   26,701     28,414  

U.S. GAAP adjustments:

            

Deferred revenues on handset sales, net of amortization

   545     135,981  

Free minutes given in connection with sales of handsets

   1,471     (6,148 )
    

 

U.S. GAAP net revenue

   1,202,686     1,210,590  
    

 

    

Nine-month periods

ended September 30,


 
     2005

    2004

 

Brazilian GAAP cost of services and goods

   (420,272 )   (438,741 )

Reclassification to cost of services and goods:

            

Taxes on sales

   (281,613 )   (199,948 )

Increase in roaming cost

   (26,701 )   (28,414 )

Reclassification from sales expense:

            

Rewards program expense

   (4,511 )   (4,170 )

U.S. GAAP adjustments:

            

Amortization of monetary restatement of 1996 and 1997

   (128 )   (522 )

Amortization on capitalized interest

   (1,026 )   (635 )

Deferred tax (Fistel) on activation fees

   6,213     (3,085 )

Pension and other post-retirement benefits

   (22 )   —    

Deferred costs on handset sales, including taxes on sales, net of amortization during the year

   (545 )   (135,981 )
    

 

U.S. GAAP cost of services and goods

   (728,605 )   (811,496 )
    

 

U.S. GAAP gross profit

   474,081     399,094  
    

 

     As of
September 30,
2005


    As of
December 31,
2004


 

Total assets as of September 30

   1,821,680     1,933,081  

Property, plant and equipment

   1,939,669     1,779,523  

Accumulated depreciation

   (1,182,453 )   (1,026,183 )
    

 

Net property, plant and equipment

   757,216     753,340  
    

 

 

F-173


Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE UNAUDITED INTERIM CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts expressed in thousands of Brazilian reais, unless otherwise indicated)

 

20. Additional disclosures required by U.S. GAAP

 

a) Concentration of risks

 

The credit risk with respect to trade accounts receivable is diversified. The Company and its subsidiary continually monitor the level of trade accounts receivable and limit the exposure to bad debts by cutting access to the handset network if any invoice is 15 days past due. Exceptions comprise handset services that must be maintained for reasons of safety or national security.

 

In conducting their businesses, Celular CRT S.A. is fully dependent upon the cellular telecommunications concession as granted by the Federal Government.

 

There is no concentration of available sources of labor, services, concessions or rights, other than those mentioned above, that could, if suddenly eliminated, severely impact the operations of the Company and its subsidiaries.

 

b) Commitments

 

Budgeted capital expenditure commitments for 2005 are approximately R$186.1 million of which R$162.9 million has been incurred in the Nine-month periods ended September 30, 2005. Most of the 2005 capital expenditures are related to infrastructure, information technology and transmission equipment.

 

The Company is subject to obligations concerning quality of services, network expansion and modernization, as established in our authorizations and our original concession agreements. The Company believes that it is currently in compliance with its quality of service and expansion obligations.

 

c) New accounting pronouncements

 

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”, an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the fair value of the liability can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective December 31, 2005 for calendar year companies. The Company is currently evaluating FIN 47 to determine the impact on its consolidated financial statements.

 

In March 2004, the EITF of the FASB reached a consensus on EITF 03-06, “Participating Securities and the Two-Class Method under FASB Statement No. 128”, that an entity would allocate losses to a nonconvertible participating security in periods of net loss if, based on the contractual terms of the participating security, the security had not only the right to participate in the earnings of the issuer, but also a contractual obligation to share in the losses of the issuing entity on a basis that was objectively determinable. Determination of whether a participating security holder has an obligation to share in the losses of the issuing entity in a given period must be made on a period-by-period basis, based on the contractual rights and obligations of the participating security. EITF Issue No. 03-06 is effective for fiscal periods beginning after March 31, 2004. The Company is currently evaluating EITF 03-06 to determine the impact on its consolidated financial statements.

 

* * * * * * * * * * * * * * * * * * * * * * * * * * * * *

 

F-174


Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

   F-176

Consolidated Balance Sheets

   F-177 and F-178

Consolidated Statements of Income

   F-179

Consolidated Statements of Changes in Shareholders’ Equity

   F-180

Consolidated Statements of Changes in Financial Position

   F-181

Consolidated Statements of Cash Flows

   F-182

Notes to the Consolidated Financial Statements for the Years Ended December 31, 2004, 2003 and 2002

  

F-183

 

Definitions:

 

Brazilian GAAP—Generally accepted accounting principles in Brazil

U.S. GAAP—Generally accepted accounting principles in the United States of America

 

F-175


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Celular CRT Participações S.A.

Porto Alegre—RS

 

1. We have audited the accompanying consolidated balance sheets of Celular CRT Participações S.A. and its subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’ equity and changes in financial position for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

2. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

3. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Celular CRT Participações S.A. and subsidiary as of December 31, 2004 and 2003, the results of their operations, changes in shareholders’ equity and the changes in their financial position for each of the three years in the period ended December 31, 2004, in conformity with accounting practices adopted in Brazil.

 

4. Accounting practices adopted in Brazil vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 31 to the consolidated financial statements.

 

5. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The consolidated statements of cash flows for each of the three years in the period ended December 31, 2004 are presented for purposes of additional analysis and are not a required part of the basic financial statements under accounting practices adopted in Brazil. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

 

Deloitte Touche Tohmatsu

Auditores Independentes

 

December 5, 2005

São Paulo, Brazil

 

F-176


Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003

(In thousands of Brazilian reais)

 

     Note

   As of December 31,

        2004

   2003

Current assets:

              

Cash and cash equivalents

   12    492,732    486,119

Trade accounts receivable, net

   13    262,482    176,746

Deferred income taxes

   10    30,629    36,253

Recoverable taxes

   14    155,775    93,223

Inventories

   15    105,432    51,368

Advances to suppliers

        3,351    2,360

Derivative contracts

   20d    6,123    12,521

Prepaid expenses

        21,656    15,877

Other current assets

        27,106    8,086
         
  

Total current assets

        1,105,286    882,553
         
  

Noncurrent assets:

              

Deferred income taxes

   10    22,561    43,028

Recoverable taxes

   14    23,039    10,767

Derivative contracts

   20d    11,707    54,334

Prepaid expenses

        5,917    3,662

Other noncurrent assets

        9,355    9,315
         
  

Total noncurrent assets

        72,579    121,106
         
  

Permanent assets:

              

Investments

        597    262

Property, plant and equipment, net

   16a    743,141    734,861

Deferred assets, net

        506    683
         
  

Total permanent assets

        744,244    735,806
         
  

Total assets

        1,922,109    1,739,465
         
  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-177


Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003

(In thousands of Brazilian reais)

 

          As of December 31,

 
     Note

   2004

    2003

 

Current liabilities:

                 

Payroll and related accruals

        8,864     7,752  

Accounts payable and accrued expenses

   17    347,689     207,371  

Taxes payable

        78,359     76,340  

Dividends and interest on shareholders’ equity

   18    68,377     49,208  

Loans and financing

   20a    108,702     105,105  

Reserve for contingencies

   21    4,718     —    

Derivative contracts

   20d    4,126     —    

Other current liabilities

   19    69,321     46,000  
         

 

Total current liabilities

        690,156     491,776  
         

 

Noncurrent liabilities:

                 

Loans and financing

   20a    159,264     288,478  

Pension and other postretirement benefit plans

   22    479     —    

Reserve for contingencies

   21    2,026     4,314  

Derivative contracts

   20d    1,233     —    

Other noncurrent liabilities

   19    7,374     —    
         

 

Total noncurrent liabilities

        170,376     292,792  
         

 

Shareholders’ equity:

                 

Capital stock

   24a    257,294     157,885  

Treasury stock

        (11,070 )   (11,070 )

Capital reserves

   24b    473,600     506,890  

Income reserves

   24c    341,753     301,192  
         

 

Total shareholders’ equity

        1,061,577     954,897  
         

 

Total liabilities and shareholders’ equity

        1,922,109     1,739,465  
         

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-178


Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais, except earnings per shares data)

 

          Years ended December 31,

 
     Note

   2004

    2003

    2002

 

Net operating revenue

   4    1,174,329     1,032,700     896,315  

Cost of services and goods sold

   5    (620,543 )   (526,173 )   (456,578 )
         

 

 

Gross profit

        553,786     506,527     439,737  

Operating income (expenses):

                       

Selling expenses

   6a    (264,897 )   (171,257 )   (168,335 )

General and administrative expenses

   6b    (95,622 )   (89,350 )   (83,137 )

Other operating expenses, net

   7    27,336     (3,931 )   18,316  
         

 

 

Operating income before financial expense, net

        220,603     241,989     206,581  

Financial income, net

   8    25,829     17,664     7,483  
         

 

 

Operating income

        246,432     259,653     214,064  

Non-operating expenses, net

   9    (7,775 )   (1,207 )   (3,648 )
         

 

 

Income before income tax and social contribution tax

        238,657     258,446     210,416  

Income and social contribution taxes

   10    (56,677 )   (69,081 )   (62,795 )
         

 

 

Net income

        181,980     189,365     147,621  
         

 

 

Shares outstanding at December 31 (in thousands) (1)

        3,171,151     3,100,825     2,979,769  
         

 

 

Earnings per shares (1)

        0.05739     0.06107     0.04954  
         

 

 

 

(1) An Extraordinary Shareholders’ Meeting held on March 30, 2005 approved a reverse split of the shares in the proportion of 100 shares to 1 share of the same class.

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-179


Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

              Capital
Reserves


    Income Reserves

           
    Capital
Stock


  Treasury
Stock


    Special
goodwill
reserve


    Legal
Reserve


  Reserve For
Expansion and
Modernization


    Contingencies
Reserves


  Retained
Earnings


    Total

 

Balance at December 31, 2001

  130,321   (11,070 )   516,454     4,350   58,663     11,070   —       709,788  
   
 

 

 
 

 
 

 

Treasury shares canceled—Extraordinary Shareholders’ Meeting on April 29, 2002

  4,213   —       (4,213 )   —     —           —       —    

Net income

  —     —       —       —     —       —     147,621     147,621  

Appropriations:

                                         

Transfer to legal reserve

  —     —       —       7,381   —       —     (7,381 )   —    

Transfer to expansion reserve

  —     —       —       —     100,544     —     (100,544 )   —    

Interest on shareholders’ equity

  —     —       —       —     —       —     (24,700 )   (24,700 )

Interim dividend

  —     —       —       —     —       —     (14,996 )   (14,996 )
   
 

 

 
 

 
 

 

Balance at December 31, 2002

  134,534   (11,070 )   512,241     11,731   159,207     11,070   —       817,713  

Capital increase—Board of Directors Meeting on March 31, 2003

  23,351   —       (5,351 )   —     (18,000 )   —     —       —    

Net income for the year

  —     —       —       —     —       —     189,365     189,365  

Consolidation adjustment:

                                         

Tax incentive Reserves

  —     —       —       —     —       —     64     64  

Tax rate adjustment on special premium reserve

  —     —       —       —     —       —     2,755     2,755  

Appropriations:

                                         

Transfer to legal reserve

  —     —       —       9,609   —       —     (9,609 )   —    

Transfer to expansion reserve

  —     —       —       —     127,575     —     (127,575 )   —    

Interest on shareholders’ equity

  —     —       —       —     —       —     (55,000 )   (55,000 )
   
 

 

 
 

 
 

 

Balance at December 31, 2003

  157,885   (11,070 )   506,890     21,340   268,782     11,070   —       954,897  

Capital increase—Board of Directors Meeting on March 30, 2004

  99,409   —       (33,290 )   —     (66,119 )   —     —       —    

Net income for the year

  —     —       —       —     —       —     181,980     181,980  

Appropriations:

                                         

Transfer to legal reserve

  —     —       —       9,099   —       —     (9,099 )   —    

Transfer to expansion reserve

  —     —       —       —     97,581     —     (97,581 )   —    

Interest on shareholders’ equity

  —     —       —       —     —       —     (75,300 )   (75,300 )
   
 

 

 
 

 
 

 

Balance at December 31, 2004

  257,294   (11,070 )   473,600     30,439   300,244     11,070   —       1,061,577  
   
 

 

 
 

 
 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-180


Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(in thousands of Brazilian reais)

 

     Years ended December 31,

 
     2004

    2003

    2002

 

SOURCES OF FUNDS:

                  

From operations:

                  

Net income

   181,980     189,365     147,621  

Items not affecting working capital:

                  

Depreciation and amortization

   205,404     197,055     184,760  

Interest and exchange variations on noncurrent items

   10,222     144,743     (181,387 )

Interest and exchange variations on long-term liabilities

   —       (82,413 )   77,122  

Reserve for contingencies

   (2,286 )   2,451     1,079  

Deferred taxes

   —       29,936     43,495  

Net book value of permanent asset disposals

   1,388     540     4,372  

Pension and other post-retirement benefit plans

   479     —       —    

Shared system depreciation apportionment

   (3,250 )   (3,360 )   —    
    

 

 

Total

   393,937     478,317     277,062  
    

 

 

From third parties:

                  

Long-term reserve for reward program

   23,474     —       —    

Decrease in noncurrent assets

   9,399     936     23,197  

Special reserve adjustment—merger tax benefit

   —       2,819     —    

Decrease in deferred and recoverable taxes

   8,194     —       —    
    

 

 

Total from third parties

   41,067     3,755     23,197  
    

 

 

Total sources

   435,004     482,072     300,259  
    

 

 

USES OF FUNDS:

                  

Increase in noncurrent assets

   11,694     1,544     —    

Additions to investments

   335     72     —    

Additions to property, plant and equipment

   204,271     142,660     111,991  

Addition deferred charges

   —       230     655  

Decrease in long-term liabilities

   —       1,643     8,259  

Transfer of loans and derivatives to current liabilities

   119,051     105,563     —    

Interest on shareholders’ equity and dividends

   75,300     55,000     39,696  
    

 

 

Total uses

   410,651     306,712     160,601  
    

 

 

INCREASE IN WORKING CAPITAL

   24,353     175,360     139,658  
    

 

 

REPRESENTED BY:

                  

CURRENT ASSETS AT YEAR END

   1,105,286     882,553     598,135  

CURRENT LIABILITIES AT YEAR END

   (690,156 )   (491,776 )   (382,718 )

Working capital at year end

   415,130     390,777     215,417  

Working capital at beginning of the year

   390,777     215,417     75,759  
    

 

 

INCREASE IN WORKING CAPITAL

   24,353     175,360     139,658  
    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Operating activities:

                  

Net income

   181,980     189,365     147,621  

Adjustments to reconcile net loss to cash provided by operating activities

                  

Depreciation and amortization

   205,404     197,055     184,760  

Shared system depreciation apportionment

   (3,250 )   (3,360 )   —    

Gain (losses) on derivative contracts

   43,482     144,906     (239,911 )

Monetary/exchange variation loans and financing

   (22,948 )   (110,306 )   223,604  

Loss on permanent asset disposals

   1,133     492     4,275  

Allowance for doubtful accounts

   21,941     10,504     17,833  

Increase in customer accounts receivable

   (107,677 )   (61,821 )   (18,821 )

Increase (decrease) in taxes receivable

   (48,733 )   (12,210 )   24,591  

Increase in other current assets

   (79,854 )   (38,602 )   (657 )

Increase in other noncurrent assets

   (2,295 )   (2,250 )   (394 )

Increase (decrease) in payroll and related accruals

   1,112     (371 )   (2,286 )

Increase (decrease) in accounts payable and accrued expenses

   132,944     74,650     (26,283 )

Increase (decrease) in other current liabilities

   23,321     11,072     (2,218 )

Decrease in accrued interest

   (1,051 )   (3,041 )   (54 )

Increase in taxes payable

   2,019     34,948     12,525  

Increase in reserve for contingencies

   2,430     2,452     91  

Increase in pension and other post-retirement benefit Plans

   479     —       —    

Increase in other noncurrent liabilities

   7,374     —       —    

Increase (decrease) derivatives

   10,902     31,228     38,917  
    

 

 

Net cash from operating activities

   368,713     464,711     363,593  
    

 

 

Investing activities:

                  

Additions to investments

   (335 )   (72 )   —    

Additions to property, plant and equipment

   (204,271 )   (142,660 )   (111,991 )

Additions to deferred charges

   —       (230 )   (655 )

Proceeds from asset disposals

   255     48     97  
    

 

 

Net cash from investing activities

   (204,351 )   (142,914 )   (112,549 )
    

 

 

Financing activities:

                  

Loans repaid

   (101,618 )   (110,402 )   (55,866 )

Dividends and interest on shareholders’ equity

   (56,131 )   (30,469 )   (35,681 )
    

 

 

Net cash from financing activities

   (157,749 )   (140,871 )   (91,547 )
    

 

 

Increase (decrease) in cash and cash equivalents

   6,613     180,926     159,497  

Cash and cash equivalents at beginning of year

   486,119     305,193     145,696  

Cash and cash equivalents at end of year

   492,732     486,119     305,193  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

1. Operations and background

 

a. Incorporation

 

Celular CRT Participações S.A. (“Celular CRT” or the “Company”) is a publicly-held company whose controlling shareholders, on December 31, 2004, are TBS Celular Participações S.A. (27.49% of the total capital stock), Brasilcel N.V. (23.96% of the total capital stock) and Avista Participações Ltda. (15.52% of the total capital stock). The following companies have an interest in TBS Celular Participações S.A.: Brasilcel N.V. (96.27% of the total capital stock), Compañia de Comunicaciones do Chile S.A. (2.61% of the total capital stock) and Telefónica Móviles S.A. (1.12% of the total capital stock). Avista Participações Ltda. is a wholly-owned subsidiary of Brasilcel N.V.

 

The controlling shareholders of Brasilcel N.V. are Telefónica Móviles S.A. (50.00% of the total capital stock), PT Móveis, Serviços de Telecomunicações, SGPS, S.A. (49.999% of the total capital stock) and Portugal Telecom, SGPS, S.A. (0.001% of the total capital stock).

 

b. Business and regulatory environment

 

Celular CRT Participações S.A is the controlling shareholder of Celular CRT S.A., which provides cellular telecommunication services in the state of Rio Grande do Sul, including the exercise of activities necessary or useful to perform such services, in accordance with the authorizations granted to it.

 

The authorization granted to Celular CRT S.A. shall be in force up to December 17, 2007 and may be renewed once for a 15 year term by means of the payment of annual rates of approximately 1% of its revenues.

 

As of July 6, 2003, Celular CRT implemented the Carriers Selection Code (CSP) (“Código de Seleção da Prestadora”), by which customers were allowed to choose their carrier for national (VC2 and VC3) and international long-distance services, in compliance with the rules of Personal Mobile Service (SMP) (“Serviço Móvel Pessoal”). In accordance with such system, cellular operators no longer receive VC2, VC3 and shift revenues; instead, they receive interconnection fees for the use of their network on these calls.

 

The subsidiary’s businesses, including the services it may provide, are ruled by the National Telecommunications Agency (ANATEL) (“Agência Nacional de Telecomunicações”), the telecommunication industry regulator, in accordance with Law No. 9,472 of July 16, 1997, and relevant regulations, decrees, decisions and plans.

 

2. Presentation of the financial statements

 

  a. Presentation of consolidated financial statements as of and for the years ended December 31, 2004, 2003 and 2002

 

The accompanying financial statements are a translation and adaptation from those originally issued in Brazil. Certain reclassifications, modifications and changes in terminology have been made in order to conform more closely to reporting practices in the United States.

 

b. Methods of presentation of the financial statements

 

Until December 31, 1995, publicly-traded companies in Brazil were required to prepare financial statements pursuant to methods: (i) the corporate law method, which was and remains valid for all legal purposes, including

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

the basis for determining income taxes and calculation of mandatory minimum dividends; and (ii) the constant currency method, to present supplementary price-level adjusted financial statements, pursuant to standards prescribed by the Brazilian Securities Commission (CVM).

 

(i) The Corporate Law Method

 

The corporate law method provided a simplified methodology for accounting for the effects of inflation until December 31, 1995. It consisted of restating permanent assets (property, plant and equipment, investments and deferred charges and shareholder’s equity accounts using indexes mandated by the Federal Government.

 

The net effect of these restatements was credited or charged to the statement of operations in a single caption, usually entitled “Monetary correction adjustments” or “Inflation adjustments”.

 

(ii) The Constant Currency Method

 

Under the Constant Currency Method, all historical Brazilian real amounts in the financial statements and notes thereto are expressed in constant purchasing power as of the latest balance sheet date, in accordance with standards prescribed by the CVM for publicly traded entities.

 

c. Presentation of financial statements as from January 1, 1996

 

The accompanying consolidated financial statements were prepared in accordance with Brazilian GAAP, standards applicable to concessionaries of public telecommunications services, and accounting standards and procedures established by the Brazilian Securities Commission—CVM, which includes monetary restatement of permanent assets and shareholder’s equity through December 31, 1995 (hereinafter referred to as “Brazilian GAAP”).

 

d. Principles of consolidation

 

These consolidated financial statements include the operations of the CRT Participações S.A. and Celular CRT as of December 31, 2004 and 2003 and for the three years in the period ended December 31, 2004. All inter-company balances and transactions have been eliminated on consolidation.

 

e. Reclassifications

 

Certain reclassifications have been made to the prior periods to conform to the 2004 presentation.

 

3. Summary of principal accounting policies

 

a. Cash and cash equivalents

 

Are considered to be all available balances in cash and banks and highly liquid temporary cash investments, stated at cost, plus accrued interest to the balance sheet date, with original maturity dates of three months or less.

 

b. Trade accounts receivable

 

Accounts receivable from cellular subscribers are calculated at the tariff rate on the date the services were rendered. Trade accounts receivable, net also include services provided to customers up to the balance sheet date, but not yet invoiced, as well as the accounts receivable from the sale of handsets and accessories.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

c. Allowance for doubtful accounts receivable

 

Allowance is provided for trade accounts receivable whose recoverability is not considered probable.

 

d. Foreign currency transactions

 

Transactions denominated in foreign currencies are recorded at the prevailing exchange rate at the date of the related transactions. Foreign currency denominated assets and liabilities are translated using the exchange rate at the balance sheet date. Resulting gains and losses related to exchange variations on foreign currency denominated assets and liabilities are recognized in the statements of operations, as part of financial expense, net.

 

Exchange variation and premiums related to foreign currency are calculated and recorded on an accrual basis regardless of the settlement period.

 

e. Inventories

 

Consist of handsets and accessories stated at the average cost of acquisition. A provision is recognized to adjust the cost of handsets and accessories to net realizable value for inventory considered obsolete.

 

f. Prepaid expenses

 

Are stated at amounts disbursed for expenses which have not been incurred.

 

g. Property, plant and equipment

 

Property, plant and equipment are stated at acquisition or construction cost less accumulated depreciation, restated for inflation until December 31, 1995. Cost incurred for maintenance and repair that increase installed capacity or useful life are capitalized. Other maintenance and repair costs are charged to income as incurred. Depreciation is calculated using the straight-line method based on the estimated useful lives of the underlying assets. Depreciation rates are shown in Note 16 (b).

 

The present value of costs to be incurred to disassemble towers and equipment in leased property is capitalized and amortized over the related equipment’s useful life, not to exceed the term of lease agreements.

 

The Company did not capitalize interest in 2004, 2003 and 2002.

 

h. Vacation payable accrual

 

Cumulative vacation payable due to employees is accrued as earned.

 

i. Accrual for rewards program

 

The subsidiary has implemented a rewards program that enables users to accumulate points based on cellular services used, which may be exchanged in the future for cellular handsets. An accrual is recorded based on points earned as of the balance sheet date which are calculated, considering the cost of the cellular handsets and the expected utilization based on the registered customer’s consumption profile.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

j. Income and social contribution taxes

 

Income and social contribution taxes are calculated and recorded based on the tax rates in effect on the balance sheet date, on an accrual basis. Deferred income taxes attributable to temporary differences and loss carryforwards are recorded as deferred tax assets or liabilities when it is more likely than not that the assets will be realized.

 

k. Loans and financing

 

Loans and financing are updated for monetary and/or exchange variations and include accrued interest to the balance sheet date.

 

l. Fistel fee

 

Fistel (Telecommunication Inspection Fund) fee paid at activation of subscribers are deferred and amortized over the customers’ estimated retention period, equivalent to 24 months.

 

m. Reserve for contingencies

 

A reserve is recorded based on the opinion of management and the Company’s external legal counsel relating to cases in which the likelihood of an unfavorable outcome is considered probable.

 

n. Pension and postretirement benefits

 

The subsidiary, together with other companies of the Brazilian Telecommunications System, sponsors a private pension entity (SISTEL) to manage the pension funds (defined benefit and defined contribution) and other postretirement benefits to their employees. Actuarial liabilities are determined using the projected unit credit method and plan assets are stated at fair market value. Actuarial gains and losses are recorded in income (See Note 26).

 

o. Revenue recognition

 

Revenue from services is recognized when the services are rendered. Billing is on a monthly basis. Unbilled revenues are estimated and recognized as revenue as the services are rendered. Revenue from the sale of prepaid cellular handset cards is deferred and recognized in income when such cards are used, based on minute usage. Revenue from the sale of handsets and accessories is recorded at the moment of the sale to the final customer. Sales made through dealers are recorded as revenue when the handsets are activated.

 

p. Financial expense, net

 

Represents interest earned (incurred) during the period and monetary and exchange variation resulting from financial investments and loans and financing. Gains and losses on derivative contracts are also included in financial expense, net.

 

q. Derivatives

 

The Company enters into certain derivative contracts to manage exposure to foreign currency exchange rate fluctuations in relation to the Brazilian real. These derivative contracts are calculated and recorded based on contractual terms and the exchange rates in effect at the balance sheet date. Resulting gains and losses, realized or unrealized, are recorded as “Financial expense, net”. Premiums paid or received in advance are deferred and amortized over the period of the respective contracts.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

r. Advertising expense

 

Advertising costs are charged to expense as incurred and amounted to R$42,076, R$28,061 and R$26,028 for the years ended December 31, 2004, 2003 and 2002, respectively.

 

s. Employees’ profit sharing

 

Accruals are made to recognize the estimated expenses for employee’s profit sharing, for which payment is subject to approval at the annual Shareholders’ Meeting.

 

t. Earnings per thousands of shares

 

Earnings per thousands of shares are calculated based on the number of shares outstanding at the balance sheet date.

 

u. Segment information

 

The subsidiary operates solely in one segment for local and regional cellular telecommunications. All revenues are generated in relation to services provided in or routed through the state of Rio Grande do Sul.

 

v. Use of estimates

 

The preparation of consolidated financial statements in conformity with Brazilian GAAP requires management to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the period reported. Actual results could differ from those estimates.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

4. Net operating revenue

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Monthly subscription charges

   89,893     104,140     148,113  

Usage charges

   584,025     573,406     446,572  

Roaming charges

   —       10,912     14,700  

Additional charges per call

   17,662     17,239     15,883  

Interconnection

   453,850     406,013     362,392  

Other services and Data services

   114,983     65,823     39,409  
    

 

 

Gross operating revenue from services

   1,260,413     1,177,533     1,027,069  

Value-added tax on services—ICMS

   (200,322 )   (169,499 )   (156,150 )

PIS and COFINS

   (45,670 )   (39,355 )   (36,738 )

Service tax—ISS

   (385 )   (136 )   (16 )

Discounts granted

   (36,252 )   (97,217 )   (35,128 )
    

 

 

Net operating revenue from services

   977,784     871,326     799,037  
    

 

 

Goods sold (handsets and accessories)

   291,737     221,196     135,209  

Value-added tax on goods sold—ICMS

   (20,358 )   (24,316 )   (19,984 )

PIS and COFINS

   (20,901 )   (8,401 )   (3,896 )

Discounts granted

   (41,842 )   (20,057 )   (9,879 )

Returns of goods

   (12,091 )   (7,048 )   (4,172 )
    

 

 

Net operating revenue from goods sold (handsets and accessories)

   196,545     161,374     97,278  
    

 

 

Net operating revenue

   1,174,329     1,032,700     896,315  
    

 

 

 

There are no customers which contributed with more than 10% of total gross operating revenue during the years ended December 31, 2004, 2003 and 2002, except Brasil Telecom S.A., a fixed telephone operator, which contributed with approximately 22.5%, 22.4% and 30.2% of total gross revenue, respectively, mainly through interconnection revenues.

 

5. Cost of services and goods sold

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Depreciation and amortization

   (162,099 )   (158,674 )   (154,765 )

Products sold

   (304,314 )   (198,452 )   (126,950 )

Interconnection/ interlinks

   (27,613 )   (59,181 )   (69,559 )

Leased lines

   (25,030 )   (25,196 )   (33,936 )

Outside services

   (29,326 )   (21,206 )   (10,120 )

Taxes and contributions

   (47,060 )   (37,540 )   (36,910 )

Rent, insurance and other related expenses

   (15,803 )   (17,853 )   (14,922 )

Personnel

   (8,597 )   (7,526 )   (8,735 )

Other

   (701 )   (545 )   (681 )
    

 

 

     (620,543 )   (526,173 )   (456,578 )
    

 

 

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

6. Operating (expenses)

 

a. Selling

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Outsourced services (1)

   (175,972 )   (104,289 )   (98,244 )

Allowance for doubtful accounts receivable

   (21,941 )   (10,504 )   (17,833 )

Personnel

   (27,507 )   (23,074 )   (24,273 )

Depreciation

   (29,683 )   (24,382 )   (20,259 )

Rent, insurance and other related expenses

   (4,467 )   (3,625 )   (3,588 )

Supplies

   (3,668 )   (656 )   (857 )

Taxes and contributions

   (32 )   (32 )   (123 )

Other

   (1,627 )   (4,695 )   (3,158 )
    

 

 

     (264,897 )   (171,257 )   (168,335 )
    

 

 


(1) Outsourced services include advertising in the amount of R$42,076 (R$28,061 in 2003 and R$26,028 in 2002).

 

b. General and administrative

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Outsourced services

   (50,981 )   (47,624 )   (54,460 )

Depreciation

   (13,622 )   (13,999 )   (9,736 )

Personnel

   (23,413 )   (21,474 )   (14,790 )

Rent, insurance and other related expenses

   (5,099 )   (4,513 )   (3,015 )

Taxes and contributions

   (286 )   (162 )   (89 )

Supplies

   (2,154 )   (1,246 )   (973 )

Other

   (67 )   (332 )   (74 )
    

 

 

     (95,622 )   (89,350 )   (83,137 )
    

 

 

 

7. Other operating income (expense), net

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Income:

                  

Fines

   3,478     3,521     4,841  

Recovered expenses

   30,895     1,860     9,202  

Reversal of provisions

   —       3,488     9,400  

Reversal of provisions (contingencies)

   558     —       540  

Trade incentives

   8,052     —       —    

Other

   7,170     1,237     3,515  

Expense:

                  

Reserves for contingencies

   (2,988 )   (2,452 )   (877 )

Taxes other than income taxes

   (15,479 )   (10,098 )   (8,184 )

Other

   (4,350 )   (1,487 )   (121 )
    

 

 

Total

   27,336     (3,931 )   18,316  
    

 

 

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

8. Financial income, net

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Financial income:

                  

Interest income

   88,707     96,321     35,664  

Monetary/exchange variation on assets

   24,415     114,138     1,001  

Derivative contracts, net

   —       —       239,911  

PIS and COFINS on financial income

   (14,369 )   (13,076 )   (11,397 )
    

 

 

Total

   98,753     197,383     265,179  
    

 

 

Financial expenses:

                  

Interest expense

   (28,343 )   (31,774 )   (33,431 )

Monetary/exchange variation on liabilities

   (1,099 )   (3,039 )   (224,265 )

Derivative contracts, net

   (43,482 )   (144,906 )   —    
    

 

 

Total

   (72,924 )   (179,719 )   (257,696 )
    

 

 

Financial income, net

   25,829     17,664     7,483  
    

 

 

 

No interest was capitalized during the year ended December 2004, 2003 and 2002, respectively.

 

9. Nonoperating expense, net

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Loss on permanent asset disposals

   (1,133 )   (492 )   (4,275 )

Additional pension plan expense

   (5,751 )   —       —    

Other

   (891 )   (715 )   627  
    

 

 

     (7,775 )   (1,207 )   (3,648 )
    

 

 

 

10. Income and social contribution taxes

 

Brazilian income taxes comprise federal income tax and the social contribution tax. For the three-year period ended December 31, 2004, the income tax rate was 25% and the social contribution tax rate was 9%. Deferred income tax assets and liabilities related to temporary differences and tax loss carryforwards were calculated at the tax rate of 34%.

 

The composition of income tax expense is as follows:

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Current tax expense

   (63,877 )   (36,886 )   (16,318 )

Deferred income tax benefit (expense)

   7,200     (32,195 )   (46,477 )
    

 

 

Total

   (56,677 )   (69,081 )   (62,795 )
    

 

 

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

The following is a reconciliation of the reported income tax expense and the amount calculated by applying the combined statutory tax rates of 34% in 2004, 2003 and 2002:

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Income before taxes as reported in the accompanying financial statements

   238,657     258,446     210,416  

Taxes charged at the combined statutory rate

   (81,143 )   (87,872 )   (71,541 )

Permanent additions:

                  

Non-deductible expenses

   —       (31 )   (8 )

Other

   (1,514 )   (151 )   (228 )

Permanent exclusions:

                  

Interest on shareholders’ equity (Note 24)

   25,602     18,700     8,397  

Other

   378     273     585  
    

 

 

Income and social contribution taxes as reported in the accompanying financial statements

   (56,677 )   (69,081 )   (62,795 )
    

 

 

Effective rate

   23.7 %   26.7 %   29.8 %
    

 

 

 

The composition of deferred tax assets is as follows:

 

     Years ended
December 31,


     2004

   2003

Deferred tax assets:

         

Tax credits recorded on corporate restructuring (Note 23)

   24,968    58,258

Accrual/allowance for:

         

Inventory obsolescence

   714    236

Contingencies

   2,293    1,467

Doubtful accounts receivable

   3,425    2,667

Rewards program

   3,187    1,726

Income tax and social contribution tax losses carryforwards

   5,662    5,142

Technical assistance

   —      2,963

Pension fund

   3,357    3,826

Other

   9,584    2,996
    
  

Total

   53,190    79,281
    
  

Current

   30,629    36,253

Noncurrent

   22,561    43,028
    
  

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

Deferred taxes have been recorded as it is more likely than not that they will be realized, as follows:

 

a) Tax loss and social contribution carryforwards are offset up to a limit of 30% per year on taxable income for each year.

 

b) Tax credits recorded on corporate restructuring represent the tax benefit recorded as a result of the corporate restructuring described in Note 23. The realization of these tax credits occurs in the same proportion as the amortization of goodwill, over a period of five years from 2000. External consultants opinions used in the corporate restructuring process give grounds to the recovery of the amount within such term.

 

c) Temporary differences: will be realized upon payment of accruals or effective losses on bad debts or realization of inventories.

 

Technical study of feasibility approved by the Company’s Board of Directors indicates the full recovery of recognized deferred tax amounts within the term set forth in CVM Instruction No. 371.

 

11. Supplemental cash flow information

 

     2004

   2003

   2002

Income and social contribution tax paid

   83,185    30,111    4,980

Interest paid

   15,313    21,496    23,803

 

12. Cash and cash equivalents

 

    

As of

December 31,

2004


  

As of

December 31,

2003


Banks

   6,849    5,754

Temporary cash investments

   485,883    480,365
    
  

Total

   492,732    486,119
    
  

 

Temporary cash investments refer principally to bank deposit certificates (CDBs) which are indexed to interbank deposit (CDI) rates.

 

13. Trade accounts receivable, net

 

    

As of

December 31,

2004


   

As of

December 31,

2003


 

Unbilled services

   55,795     37,488  

Billed services

   76,637     56,902  

Interconnection

   68,652     40,875  

Products sold

   71,472     49,324  

Allowance for doubtful accounts receivable

   (10,074 )   (7,843 )
    

 

Total

   262,482     176,746  
    

 

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

There are no customers which contribute with more than 10% of accounts receivable, net at December 31, 2004 and 2003, except for Brasil Telecom S.A- BrT, which represent approximately 12% and 15% respectively, mainly through interconnection.

 

The changes in the allowance for doubtful accounts receivable were as follows:

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Beginning balance

   7,843     6,636     12,939  

Allowance for doubtful accounts receivable charged to selling expenses

   21,941     10,504     17,833  

Write-offs

   (19,710 )   (9,297 )   (24,136 )
    

 

 

Ending balance

   10,074     7,843     6,636  
    

 

 

 

14. Recoverable taxes

 

    

As of

December 31,

2004


  

As of

December 31,

2003


Prepaid/recoverable income and social contribution taxes

   54,585    54,195

Withholding income tax

   38,629    6,502

Recoverable ICMS (state VAT)

   49,705    33,843

Other recoverable

   22,547    2,012
    
  

Total recoverable taxes

   165,466    96,552
    
  

ICMS on deferred sales

   13,348    7,438
    
  

Total

   178,814    103,990
    
  

Current

   155,775    93,223

Noncurrent

   23,039    10,767
    
  

 

15. Inventories

 

    

As of

December 31,

2004


   

As of

December 31,

2003


 

Cellular handsets and accessories

   107,533     52,061  

Reserve for obsolescence

   (2,101 )   (693 )
    

 

     105,432     51,368  
    

 

 

Reserve for obsolescence is calculated for cellular handsets which are considered to be obsolete or for slow moving inventories.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

16. Property, plant and equipment, net

 

a. Composition

 

     As of December 31, 2004

  

As of

December 31, 2003


     Cost

  

Accumulated

depreciation


   

Net book

value


  

Net book

value


Construction-in-progress

   111,545    —       111,545    85,161

Automatic switching equipment

   270,793    (182,044 )   88,749    113,902

Transmission equipment

   726,089    (501,270 )   224,819    216,637

Land

   7,494    —       7,494    6,875

Terminal equipment (1)

   84,911    (51,500 )   33,411    12,918

Buildings

   18,476    (2,522 )   15,954    24,569

Infrastructure

   219,904    (87,279 )   132,625    127,721

Software

   135,079    (84,691 )   50,388    54,123

Other assets

   170,143    (91,987 )   78,156    92,955
    
  

 
  
     1,744,434    (1,001,293 )   743,141    734,861
    
  

 
  

(1) In March 2003, the Company changed its estimate of the useful life of handsets from 24 to 18 months to better reflect the impact of usage of these assets. The effect of this change in estimate in 2003 was to increase depreciation expense by R$6,108 as compared with 2002 year.

 

b. Depreciation rates

 

The annual depreciation rates applied to property, plant and equipment for the years ended December 31, 2004, 2003 and 2002 are as follows:

 

    

As of

December 31,

2004


  

As of

December 31,

2003


Automatic switching equipment

   14.29    14.29

Transmission equipment

   14.29    14.29

Terminal equipment

   66.67    66.67

Buildings

   4.00    4.00

Infrastructure

   4.00—20.00    4.00—20.00

Software rights

   20.00    20.00

Other assets

   10.00—20.00    10.00—20.00

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

c. Rentals

 

The Company rents equipment and premises through a number of operating leases agreements that expire at different dates. Total annual rent expense under these agreements was R$25,030, R$25,196 and R$33,936 for the years ended December 31, 2004, 2003 and 2002, respectively. The Company and its subsidiary lease equipment and property by means of a number of agreements with varying maturity dates. Future minimum rental payments under non-cancelable lease agreements with terms in excess of one year are as follows:

 

Year ending December 31,


  

(Unaudited)

Amount


2005

   5,983

2006

   5,533

2007

   4,996

2008

   4,649

2009 and thereafter

   33,902
    

Total minimum payments

   55,063
    

 

17. Accounts payable and accrued expenses

 

    

As of

December 31,

2004


  

As of

December 31,

2003


Suppliers

   294,624    172,696

Interconnection/connection

   6,679    1,540

Amounts due under SMP

   33,686    22,190

Technical assistance

   9,205    8,715

Other

   3,495    2,230
    
  
     347,689    207,371
    
  

 

18. Dividends payable

 

    

As of

December 31,

2004


  

As of

December 31,

2003


Payable by the Company to:

         

Common shareholders

   25,786    18,236

Preferred shareholders

   38,219    28,514

Prior year dividends not claimed

   4,372    2,458
    
  
     68,377    49,208
    
  

 

Dividends payable as of December 31, 2004 include interest on shareholders’ equity in the amount of R$64,005, net of withholding income tax of R$11,295 (R$46,750 in 2003), which payments are subject to approval at the annual shareholders’ meeting.

 

In accordance with the Company’s by-law and in conformity to the Corporate Law 6.404/76, unclaimed dividends expire after 3 years.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

19. Other liabilities

 

    

As of

December 31,

2004


  

As of

December 31,

2003


Deferred revenues—prepaid customers

   44,754    25,491

Allowance for reward program(a)

   9,375    5,078

Provision for pension plan FCRT

   9,395    11,254

Other liabilities—related parties

   5,735    4,176

Other

   7,436    1
    
  

Total

   76,695    46,000
    
  

Current

   69,321    46,000
    
  

Noncurrent

   7,374    —  
    
  

(a) The Company has reward programs in which the calls are transformed into points usable in future exchanges of handsets. Accumulated points are reserved as they are obtained, based on historical redemption data, accumulated points and average point cost.

 

20. Loans and financing

 

a. Composition of debt

 

Description


  Currency

 

Annual

interest


 

Final

maturity


 

As of

December 31,

2004


 

As of

December 31,

2003


Financial institutions:

                     

Banco Europeu—foreign financing

  US$     1.45% p.a. +
LIBOR
  09/14/07   159,264   173,352

Citibank—OPIC

  US$     1.65% p.a. +
LIBOR
  07/25/05   33,180   72,230

Itaú several—debt assumption

  US$     1.825% p.a.+
LIBOR
  09/20/05 to
10/03/05
  65,954   71,788

Citibank—Resolution No. 4,131

  US$     1.55% p.a. +
LIBOR
  11/07/05   6,636   14,446

Dresdner—Resolution No. 63

  US$     11.0% p.a.   12/27/04   —     28,892

Bank of Tokyo—Resolution No. 4,131

  US$     1.55% p.a. +
LIBOR
  04/30/04   —     28,892

Interest

                2,932   3,983
                 
 
                  267,966   393,583
                 
 

Current

                108,702   105,105

Noncurrent

                159,264   288,478
                 
 

 

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Table of Contents

CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

b. Repayment schedule

 

The long-term portion of loans and financing matures as follows:

 

    

As of

December 31,

2004


Year-

    

2007

   159,264
    

Total

   159,264
    

 

c. Guarantees

 

Banks


  

Guarantee


Banco Europeu—foreign financing

  

Bank guarantee

Citibank

  

Guarantee of Overseas Private Investment Corporation—OPIC

 

d. Derivative contracts

 

On December 31, 2004, the Company had foreign currency exchange contracts with notional amounts of US$114,542 thousand (US$136,504 thousand on December 31, 2003) to protect its obligations against exchange fluctuations. At December 31, 2004, the Company recorded a net gain of R$12,471 (R$66,855 on December 31, 2003), related to these contracts All of these arrangements have contractual maturities in 2005.

 

Under the terms of these arrangements, the Company is required to pay the counter parties the amount that the variation of the CDI (Brazilian bank certificates of deposit rate) on the notional value exceeds the variation of the U.S. dollar exchange rate. If the inverse occurs, the subsidiary is entitled to receive the difference from the counter parties. The gains and losses attributable to these instrument are calculated as if the contract were settled on the balance sheet date and accrued and recognized as an adjustment to financial income or expense in the period in which the change occurs.

 

e. Restrictive covenants

 

The Company entered into loan agreements with Banco Europeu and Citibank—OPIC, whose balances on December 31, 2004 are R$159,264 and R$33,180, respectively. On such date, the Company and its subsidiary reached several economical and financial indexes established in agreement.

 

21. Reserve for contingencies

 

The Company is party to a number of lawsuits, with respect to labor, tax and civil claims. The Company’s management, based on external legal counsel’s opinion, has recognized a provision for those claims for which an unfavorable outcome is considered probable.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

Components of the reserve are as follows:

 

    

As of

December 31,

2004


  

As of

December 31,

2003


Labor claims

   885    438

Civil claims

   5,173    3,678

Disputed tax claims

   686    198
    
  

Total

   6,744    4,314
    
  

Current

   4,718    —  

Long-term

   2,026    4,314
    
  

 

The changes in the reserve for contingencies are as follows:

 

    

Years ended

December 31,


 
     2004

   2003

   2002

 

Beginning balance

   4,314    1,862    1,770  

Additional reserve net of reversal

   2,430    2,452    337  

Adjustments

   —      —      (245 )
    
  
  

Ending balance

   6,744    4,314    1,862  
    
  
  

 

The main tax contingencies, in which the subsidiary is involved, are as follows:

 

21.1. Tax claims

 

21.1.1. Probable losses

 

Based on the opinion of its legal and tax counsels, the Company has no relevant tax claim which possibility of loss is classified as probable.

 

21.1.2. Possible losses

 

Based on the opinion of its legal counsels and tax consultants, management believes that settlement of the following issues shall not represent a relevant adverse affect on its financial situation and, therefore, it did not recognize any provisions in the financial statements as of December 31, 2004.

 

In the cases in which the chance of loss is classified as possible, the amount involved is R$54,156 in relation to the following issues:

 

a) State VAT (ICMS)

 

Celular CRT received a delinquency notice issued by Treasury Secretary of the State of Rio Grande do Sul as a result of the nonpayment of the ICMS allegedly levied on international calls, originated in Brazil during a specified period.

 

Management is of the opinion that the predecessor company should be held liable for any tax liability resulting from ICMS on revenues of international calls recorded during the period prior to its incorporation.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

Management has not established any provision with respect to this notice. The amount involved is approximately R$45,300.

 

b) Tax on Services (ISS)

 

The Treasury Secretary of Porto Alegre issued delinquency notices in the aggregate amount of R$1,613, including: (i) R$875—ISS on accreditation; and (ii) R$738—ISS on related services (call blocking, line transfer, information, notices, etc.).

 

All of these claims are awaiting judgment by the Taxpayer Board of the Municipality of Porto Alegre.

 

c) Income tax on derivative transactions

 

Upon enactment of Law No. 9,779/99, gains from any investment or financial transaction in fixed or variable rate became subject to the withholding income tax, even in case of derivative contracts made by filed a lawsuit objecting to the requirement to pay withholding income tax on derivatives transactions. The decision rendered by the lower court considered the action groundless, and the Company filed an appeal that is awaiting judgment. The amount of R$1,646 has been deposited in court, therefore, no new disbursements shall be required.

 

21.2. Labor and civil claims

 

Include several labor and civil claims, for which a reserve has been provided as shown above, in an amount considered to be sufficient to cover probable losses.

 

In cases in which the chance of loss is classified as possible, the aggregate amount involved is R$24,646 for civil claims and R$5,639 for labor claims.

 

22. Pension and other postretirement benefit plans

 

a) Plano Visão

 

Upon approval of the sponsor withdrawal process with Fundação dos Funcionários da CRT—FCRT, the Complementary Social Security Secretary also approved Plano de Benefícios Visão Celular CRT—Plano Visão, implemented by the Celular CRT Participações S.A. as of March 1, 2004, upon which the mentioned plan has been offered to its participants and has a characteristic of an individual contribution plan managed by Fundação Sistel de Seguridade Social—SISTEL. Plano Visão is funded by contributions made by participants (employees) and by the sponsor, credited to participants’ individual accounts. The sponsor is responsible for the cost of all associated administrative and maintenance expenses, including for the estimate of accounts balances in benefits of participants’ death and disability.

 

The Company’s contributions to Plano Visão Celular are equal to participants’, ranging between 0% and 9% on participation salary, pursuant to the percentage chosen by participant.

 

During the term of ten months ended on December 31, 2004, the Celular CRT Participações S.A. made a contribution to Plano Visão Celular in the amount of R$585.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

The projected unit cost method was used for actuarial appraisal of the plan, which relevant assets are positioned on December 31, 2004.

 

In 2004, the Company recognized pro rata the actuarial cost of R$479.

 

The following table demonstrates the composition of the provision for retirement benefit plans as of December 31, 2004, in addition to other information required by CVM Resolution No. 371, of December 13, 2000, on such plans.

 

     As of
December 31,
2004


Plano Visão

    

Visão

   479
    

Total

   479
    

 

i) Reconciliation of assets and liabilities

 

     As of
December 31,
2004


 

Plano Visão

      

Total actuarial liabilities

   (1,006 )

Assets fair value

   527  
    

Net liabilities

   (479 )
    

 

Although Plano Visão is a defined contribution plan, there is an actuarial risk of death and disability, which shall be borne by the sponsor, and the respective actuarial calculation on such risks is required.

 

ii) Estimated expense for 2005

 

         2005    

 

Plano Visão

      

Service cost

   137  

Interest cost

   105  

Estimate assets earnings

   (74 )

Employees contribution

   (13 )
    

     155  
    

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

iii) Actuarial assumptions

 

    

Plano Visão

As of

December 31,

2004


Actual rate used for discount at current value of actuarial liabilities

   11.30%

Estimate return rate on plan assets

   13.75%

Future salary growth rate

   7.10%

Mortality table

   UP 84 with hazard risk
of 1 year and sex segregated

Disabled mortality table

   IAPB-57

Disability table

   Mercer Disability

% of participants married on retirement date

   95%

Number of retired participants of Plano Visão

   —  

Number of working participants of Plano Visão

   265

 

b) Withdrawal process as sponsor of FCRT plan

 

A sponsorship withdrawal agreement in connection with FCRT plan was executed on December 21, 2001, and approved by the Complementary Social Security Secretary on December 30, 2003.

 

In accordance with this agreement, the Company agreed to transfer to SISTEL the amounts of the reserve of working participants’ savings that migrate to Plano Visão. The reserve has been estimated based on the proportional benefit method.

 

Such transfers begun in October 2004, and on December 31, 2004 have totaled R$8,797.

 

In addition, the Company made a reserve of R$9,395, of which R$5,201 as withdrawal reserve of participants holding an Intention Statement to Migrate to BrTPREV, and who are awaiting the settlement of cases pending in INSS (Social Security) in order to obtain retirement benefits. The provisioned balance shall be transferred during 2005, upon completion of the validation of amounts showed.

 

The amount showed by BrTPREV as contingency liability of judicial and actuarial nature in the amount of R$13,842, which accuracy and chances of being favorable to the Company may not be determined at this time, is being analyzed.

 

23. Corporate restructuring

 

On October 11, 2000, the Company completed a corporate restructuring to transfer a tax benefit to the Company related to the goodwill paid by the Company’s controlling shareholders in the privatization process. The goodwill and related tax benefit on the date of transfer amounted to R$481,402 and R$160,800, respectively. The tax benefit was recorded as deferred tax with a corresponding entry to a special goodwill reserve in shareholders’ equity. This tax benefit is being realized in proportion to the amortization of the goodwill over a period of 5 years. The special goodwill reserve is transferred to capital with a corresponding issuance of shares to the Company’s controlling shareholders as related tax benefit is realized. In connection with the issuance of these shares, the Company’s other shareholders are entitled to preemptive rights. Proceeds received in connection with the exercise of preemptive rights are payable to the Company’s controlling shareholders. This tax benefit, as of December 31, 2004 and December 31, 2003, amounted to R$24,968 and R$58,258, respectively.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

24. Shareholders’ equity

 

a. Capital

 

The Company’s authorized capital at December 31, 2004 was 5 billion shares. Capital subscribed and paid-up at the balance sheet date was represented by the following shares, without par value:

 

Number of shares

(in thousands)


  

Shares

outstanding

December 31,
2003


    Capital
increase
(a)


   Shares
outstanding
December 31,
2004


 

Common shares

   1,280,636     70,281    1,350,917  

Preferred shares

   1,884,178     —      1,884,178  

Total

   3,164,814     —      3,235,095  

(–) Treasury preferred shares

   (63,989 )   —      (63,944 )

Total outstanding

   3,100,825     70,281    3,171,151  

In thousand of Brazilian reais—Corporate law (historical)

   157,885     99,409    257,294  

 

(a) Capitalization of tax credit approved by Board of Directors Meeting on March 31, 2004

 

At Extraordinary Meeting of the Administration Council held on March 30, 2004, an increase of capital stock by R$ 99,409 was approved, through the issuance of 70,281 thousand new shares as a result of the financial realization of part of the capital reserve generated in the corporate restructuring.

 

The capital may be increased only by a decision taken at a shareholder’s meeting or by the Board of Directors in connection with the capitalization of profits or reserves previously allocated to capital increases at a shareholder’s meeting.

 

The preferred shares are non-voting except under limited circumstances, are entitled to receive cash dividends 10% higher than those attributed to common shares and have priority over the common shares in the case of liquidation of the Company.

 

b. Capital reserves

 

Special goodwill reserve

 

This reserve was formed as a result of the corporate restructuring described in Note 23. According to CVM Instruction No. 319, of December 3, 1999, this reserve shall be used in future capital increases on behalf of the controlling shareholders whenever the amortization of the goodwill paid in the acquisition of the Company results in a reduction of income tax and social contribution tax payable.

 

c. Income reserves

 

Statutory reserve

 

Brazilian corporations are required to appropriate 5% of annual net income to a legal reserve until that reserve reaches 20% of paid-in share capital, or 30% of nominal paid-in share capital plus capital reserves; thereafter, appropriations to this reserve are not mandatory. This reserve can be used only to increase share capital or offset accumulated losses.

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

Special reserve for expansion

 

The special reserve for expansion and modernization is based on the capital budget prepared by management, which shows the requirement of funds for investment projects for the next years.

 

d. Contingency reserve

 

The amounts resulted from the spin-off process of Companhia Riograndense de Telecomunicações—CRT and which purpose is to guarantee any judicial decision in connection with judicial actions regarding capitalization realized in 1996 and 1997 by such company.

 

e. Interest on shareholders’ equity and dividends

 

Pursuant to its by-laws, the Company is required to distribute as dividends in respect of each fiscal year ending on December 31, to the extent amounts are available for distribution, an aggregate amount equal to at least 25% of Adjusted Net Income (as defined) on such date. The annual dividend distributed to holders of preferred shares (the “preferred dividend”) has priority in the allocation of Adjusted Net Income. Remaining amounts to be distributed are allocated first to the payment of a dividend to holders of common shares in an amount equal to the preferred dividend and the remainder is distributed equally among holders of preferred shares and common shares. Preferred shares have no voting right, but have priority in the reimbursement of capital, without premium, and are entitled to receive cash dividends 10% higher than those attributed to common shares.

 

For purposes of Brazilian GAAP, and in accordance with the Company’s by-laws, the “Adjusted Net Income” is an amount equal to the Company’s net income adjusted to reflect allocations to or from (i) the legal reserve; (ii) the statutory reserve; (iii) a contingency reserve for anticipated losses, if any; (iv) a reserve for future investment projects, if any and (v) an unrealized income reserve, if any.

 

The proposed dividend was calculated as follows:

 

     2004

    2003

    2002

 

Consolidated net income

   181,980     189,365     147,621  

Add:

                  

Consolidation adjustments

   —       2,819     —    
    

 

 

Net income at Celular CRT Participações S.A. level in accordance with Brazilian GAAP

   181,980     192,184     147,621  
    

 

 

Deduct:

                  

Appropriation to legal reserve

   (9,099 )   (9,609 )   (7,381 )
    

 

 

Adjusted net income

   172,881     182,575     140,240  
    

 

 

Minimum dividend (25% on adjusted net income)

   64,005     46,750     35,991  

Proposed dividend and interest on shareholders’ equity:

                  

Common shares

   25,786     18,236     13,200  

Preferred shares

   38,219     28,514     22,791  
    

 

 

Total

   64,005     46,750     35,991  
    

 

 

     2004

    2003

    2002

 

Dividend and interest on equity per thousand shares (Brazilian reais):

                  

Common shares

   22.46     14.24     11.38  

Preferred shares

   24.70     15.66     12.52  

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

The Celular CRT Participações S.A. has an option to pay interest on shareholders’ equity, deductible for tax purposes, in lieu of paying dividends, which are not tax deductible.

 

In 2004, 2003 and 2002 the Celular CRT Participações S.A. decided to pay interest on shareholders’ equity, which is subject to a 15% withholding tax. The amount of dividends declared, for payment as interest on shareholders’ equity, included applicable withholding tax. Interest on shareholders’ equity proposed by the Celular CRT Participações S.A. management was accounted for considering its approval by the Shareholders’ Meeting.

 

Management proposed for the year ended December 31, 2003 that interest on shareholders’ equity, net of withholding tax, in the amount of R$46,750 (R$14.24 and R$15.66 per thousand shares) payable to common and preferred shares respectively. This interest on shareholders’ equity was approved by Ordinary Shareholders’ Meeting held on March 24, 2004. Management proposed for the year ended December 31, 2002 that interest on shareholders’ equity, net of withholding tax, in the amount of R$35,991 (R$11.38 and R$ 12.52 per thousand shares) payable to common and preferred shares respectively. This interest on shareholders’ equity was approved by Ordinary Shareholders’ Meeting held on March 26,2003.

 

At the 42th Extraordinary Meeting of the Board of Directors held on September 18, 2002 the proposal and payment of interim dividends was approved based on the financial statements as of June 30, 2002, to the holders of common and preferred shares, in the amount of R$12,924, corresponding to R$4.09 and R$ 4.50 per thousand shares, respectively. The payment was made on September 27, 2002. These dividends were approved by Ordinary Shareholders’ Meeting held on March 26, 2003.

 

Also, management proposed supplementary dividends for the year ended December 31, 2002 of R$ 2,072 (R$1.14 per thousand shares), exclusively to preferred shares. These dividends were approved by Ordinary Shareholders’ Meeting held on March 23, 2004 and March 26, 2003, respectively.

 

Dividends are calculated on the Celular CRT Participações S.A. adjusted net income for the year, which is determined using the equity method to account for the participation in the subsidiary net results. Consequently, the items shown as “Consolidation adjustments” in the consolidated statements of changes in shareholders’ equity, which are required to reconcile consolidated net income to the Holding Company’s net income, become part of the basis for calculating dividends.

 

25. Transactions with related parties

 

The main transactions with unconsolidated related parties are as follows:

 

    Celular CRT has entered into a Consulting Service Agreement with TBS Celular Participações S.A. on account of telecommunication services, calculated based on a percentage applied on net revenue from services.

 

    Use of Network and Long Distance (Roaming) Cellular Communications: these transactions involve companies owned by the same group, Telesp Celular S.A., Global Telecom S.A., Telebahia Celular S.A., Telergipe Celular S.A., Telecomunicações de São Paulo S.A.—Telesp, Telerj Celular S.A., Telest Celular S.A., Tele Centro Oeste Celular Participações S.A., Telems Celular S.A., Teleron Celular S.A., Telemat Celular S.A., Teleacre Celular S.A., Telegoiás Celular S.A., Norte Brasil Telecom S.A. and Telecom São Paulo S.A. Some of these transactions are based on contracts signed by TELEBRÁS and the operating concessionaires before privatization under the terms established by ANATEL. As of July 2003, users may choose their carrier for long distance calls.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

    Call-center services: provided by Atento Brasil S.A. to users of subsidiary telecommunications services, contracted for a period of 12 months, renewable for the same period.

 

A summary of the balances and transactions with unconsolidated related parties is as follows:

 

    

As of

December 31,

2004


   

As of

December 31,

2003


 

Balance sheet items:

            

Current assets:

            

Trade accounts receivable

   3,926     3,886  

Other

   7,326     2,872  

Current liabilities:

            

Accounts payable and accrued expenses

   (25,709 )   (30,085 )

Other liabilities

   (5,735 )   (4,176 )

 

(continued next page)

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Statement of income items:

                  

Net Operating Revenue:

                  

Tele Sudeste and subsidiaries

   —       374     3,110  

Tele Leste and subsidiaries

   —       83     437  

Telesp Celular and subsidiaries

   —       1,552     643  

Telecomunicações de São Paulo S.A.—TELESP

   23,042     20,821     —    
    

 

 

Total

   23,042     22,830     4,190  
    

 

 

Cost of Services:

                  

Tele Sudeste and subsidiaries

   —       (298 )   (545 )

Tele Leste and subsidiaries

   —       (67 )   (152 )

Telesp Celular and subsidiaries

   —       (1,345 )   (347 )

Telecomunicações de São Paulo S.A.—TELESP

   —       (141 )   —    
    

 

 

Total

   —       (1,851 )   (1,044 )
    

 

 

Selling Expenses:

                  

Atento Brasil S/A

   (31,598 )   (25,716 )   (25,075 )
    

 

 

Total

   (31,598 )   (25,716 )   (25,075 )
    

 

 

General and Administrative Expenses:

                  

Telecomunicações de São Paulo S.A.—TELESP

   (371 )   —       —    

TBS Celular Participações S.A—Techinical assistance

   (9,770 )   (8,715 )   (8,136 )

Terra Brasil

   (209 )   (531 )   (85 )

Telefônica Gestão de Serviços Compart.—T-Gestiona

   (6,362 )   (1,975 )   —    

Tele Sudeste and subsidiaries

   —       —       (12,867 )

Telesp Celular and subsidiaries

   —       —       (3,907 )
    

 

 

Total

   (16,712 )   (11,221 )   (24,995 )
    

 

 

Financial Income (Expense), net:

                  

Telefonica Empresas S.A

   62     —       —    

T.Empresas Brasil

   2,400     —       (4,133 )
    

 

 

Total

   2,462     —       (4,133 )
    

 

 

Recovered expenses from companies—Joint Venture Brasilcel:

                  

Tele Sudeste and subsidiaries

   1,859     1,821     —    

Tele Leste and subsidiaries

   411     433     —    

Telesp Celular and subsidiaries

   6,406     4,591        
    

 

 

Total

   8,676     6,845     —    
    

 

 

Expenses distributed from companies—Joint Venture Brasilcel:

                  

Tele Sudeste and subsidiaries

   (8,370 )   (10,631 )   —    

Tele Leste and subsidiaries

   (926 )   (896 )   —    

Telesp Celular and subsidiaries

   (26,009 )   (15,888 )   —    
    

 

 

Total

   (35,305 )   (27,415 )   —    
    

 

 

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

26. Management compensation

 

In 2004, 2003 and 2002 management compensation of R$665, R$594 and R$841 respectively, were recorded as expenses.

 

27. Insurance

 

The Company maintains a monitoring policy of risks inherent to its operations. Consequently, on December 31, 2004, the Company had insurance contracts in force to cover operating risks, general liability and health, etc. The Company’s Management is of the opinion that these values are sufficient to cover any losses. The main assets, liabilities or interest covered by insurance and respective amounts are as follows:

 

Modality


  

Amounts insured


Operating risks

   R$796,320

General civil liability—RCG

   R$5,822

Vehicle (officers fleet)

   Fipe Table and R$200 for DC/DM

Vehicle (operational fleet)

   R$200 for DC/DM

 

28. Financial instruments and risk management

 

a. Risks considerations

 

Celular CRT S.A. provides mobile telephone services in the State of Rio Grande do Sul pursuant to the authorization granted by the Federal Government. The operator is also engaged in the purchase and sale of handsets through their own sales networks and distribution channels, thus fostering their essential activities.

 

The major market risks to which Celular CRT S.A is exposed in exercising their activities include:

 

    Credit risk: resulting from any difficulty in collecting telecommunications services provided to their customers and revenues from sale of handsets by the Company’s distribution network, as well as the risk relating to swap transactions.

 

    Interest rate risk: resulting from debt and derivative instruments contracted at floating rates and involving the risk of financial expenses as a result of an unfavorable upward trend in interest rates (mainly LIBOR and CDI).

 

    Currency risk: related to debt and derivative instruments contracted in foreign currencies which expose the Company to potential losses from adverse exchange rate fluctuations.

 

The Company actively manage their operations to mitigate these risks by means of comprehensive operating procedures, policies and initiatives.

 

Credit risk

 

Credit risk from providing telecommunications services is reduced by monitoring the customer portfolio and addressing delinquent receivables by means of clear policies relating to the concession of postpaid services. Celular CRT S.A. customers use 75.5% prepaid services that require pre-loading, thus not representing a credit risk.

 

Credit risk from the sale of handsets is managed by following a conservative credit granting which encompasses the use of advanced risk management methods that include applying credit scoring techniques, analyzing a potential customer’s balance sheet, and using credit protection agencies’ database.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

The Company is also exposed to credit risk relating to their financial investments and receivables from swap transactions. The Company attempt to diversify such exposure by using reputable financial institutions.

 

Interest rate risk

 

The Company is exposed to interest rate risk, due to exchange derivative transactions and borrowings contracted in Brazilian reais associated with the cost of CDI rates. However, financial investments that are also indexed to the CDI neutralize such effect.

 

Foreign currency-denominated loans are also exposed to the risk of increase in floating interest rate (LIBOR). As of December 31, 2004, the principal amount of these transactions was US$99,847 (US$106,726 on December 31, 2003).

 

Exchange rate risk

 

Celular CRT S.A utilizes derivative instruments to protect themselves against the currency risk on foreign currency-denominated loans. The instruments usually used are swap, option and forward contracts.

 

The Company’s net exposure to currency risk as of December 31, 2004 is shown in the table below:

 

     US$

 

Loans and financing

   (100,952 )

Derivative instruments

   114,542  
    

Net exposure

   13,590  
    

 

During 2004, the subsidiary entered into derivative instruments to hedge other foreign currency commitments against exchange variations.

 

b. Derivative contracts

 

The table below shows book values and estimated market values of loans and financing and foreign currency liabilities, as well as derivative operations:

 

     As of December 31, 2004

 
    

Book

value


   

Market

value


   

Unrealized

gain (loss)


 

Loans and financing

   (267,966 )   (273,074 )   (5,108 )

Derivative instruments

   12,471     27,729     15,258  
    

 

 

Total

   (255,495 )   (245,345 )   10,150  
    

 

 

     As of December 31, 2003

 
    

Book

value


   

Market

value


   

Unrealized

gain (loss)


 

Loans and financing

   (393,583 )   (398,688 )   (5,105 )

Derivative contracts

   66,855     95,353     28,498  
    

 

 

Total

   (326,728 )   (303,335 )   23,393  
    

 

 

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

The market value of loans and financing, and derivative instruments were determined based on discounted cash flows, utilizing available market information. Accordingly, the estimates presented above are not necessarily indicative of the amounts that could be realized in the current market. The use of different market assumptions may have a material effect on estimates.

 

29. Telefónica Móviles stock plan

 

In May 2001, Telefónica Móviles, S.A. (“Telefónica Móviles”) launched a stock option plan based on Telefónica Móviles’ stock (the “Plan”) that covered the employees of the Company. Pursuant to the Plan, between May 20 and July 20, 2002, Telefónica Móviles granted a total of 449,624 stock options to the Company’s employees, vesting over a four-year period. The options were granted in Series A, B and C, with strike prices of 11.00 Euros, 16.50 Euros and 7.23 Euros, respectively. The total options granted to each employee consisted of 25% Series A options, 25% Series B options, and 50% Series C options. The market price of Telefónica Móviles’ stock as traded at the Madrid Stock Exchange was 8.28 Euros on December 31, 2003 (6.20 Euros in 2002). The Plan also gives the Company’s employees the option to receive in cash, the appreciation in the market price of Telefónica Móviles’ stock over the respective strike price.

 

In accordance with the stock option plan conditions based on Telefónica Móviles S.A. stocks (MOS Program), the options were required to be settled in the event of a change of control of the Company. In December 2002, Brasilcel N.V. acquired control of the Company and as a result, on December 31, 2003, the existing options were settled. The settlement amount was calculated for 50% of Series C options, considering the final bid price of the Telefónica Moviles, S.A. stock on January 2, 2004, converted at the average exchange rate at the date of payment.

 

In accordance with accounting practices followed in Brazil, the Company is not required to account for any effect of the plan, therefore no effect in the financial statements of the Companies was recorded.

 

30. Subsequent event

 

At March 30, 2005 the shareholders approved a reverse stock split of 3,235,095,228 nominative book entry shares, without par value, of which 1,350,917,074 were common shares and 1,884,178,154 were preferred shares, ,in the proportion of 100 shares to 1 share of the same class. After this reverse stock split, capital became represented by 32,350,952 nominative book entry shares, without par value, of which 13,509,171 common shares and 18,841,782 preferred shares.

 

Had the reverse stock split occurred on December 31, 2004, 2003 and 2002, shares outstanding would have amounted in thousands of share to 32,351, 31,648 and 30,438 respectively.

 

31. Summary of the differences between Brazilian GAAP and U.S. GAAP

 

a. Different criteria for capitalizing and amortizing capitalized interest

 

Until December 31, 1998, under Brazilian GAAP as applied by the Company, interest attributable to construction-in-progress was computed at the rate of 12% per year on the balance of construction-in-progress interest incurred on third-party loans was credited to interest expense and the excess interest capitalized was credited to capital reserves.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

Under U.S. GAAP, in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 34, “Capitalization of Interest Costs,” interest incurred on borrowings is capitalized to the extent that borrowings do not exceed construction-in-progress. The credit is a reduction of interest expense. Under U.S. GAAP, the amount of interest capitalized excludes monetary gains associated with local currency borrowings and the foreign exchange gains and losses on foreign currency borrowings.

 

The effects of these different criteria for capitalizing and amortizing capitalized interest are presented below:

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Capitalized interest difference

                  

U.S. GAAP capitalized interest:

                  

Interest capitalized during the period

   3,463     1,839     3,352  
    

 

 

U.S. GAAP difference

   3,463     1,839     3,352  
    

 

 

Amortization of capitalized interest difference

                  

Amortization under Brazilian GAAP

   5,018     5,839     5,854  

Less amortization under U.S. GAAP

   (5,927 )   (6,475 )   (5,971 )
    

 

 

U.S. GAAP difference

   (909 )   (636 )   (117 )
    

 

 

 

b. Reversal of proposed dividends

 

Under Brazilian GAAP proposed dividends are accrued in the financial statements in anticipation of their approval at the shareholders’ meeting. Under U.S. GAAP, dividends are not accrued until they are formally declared.

 

The interest on shareholders’ equity is a legal liability from the date it is declared, therefore, these amounts are included as dividends in the year they are proposed for U.S. GAAP purposes.

 

c. Pension and other postretirement benefits

 

The Company sponsors a single-employer defined pension benefit plan (Plano de Benefícios Visão CRT—Plano Visão) implemented by the subsidiary on March 1, 2004. The provisions of SFAS No. 87, “Employers’ Accounting for Pensions”, for the purposes of calculating the funded status, were applied.

 

On December 13, 2000, CVM issued Instruction No. 371, which provisions are very similar to SFAS No. 87 and SFAS No. 106, except for the following differences:

 

    The unrecognized net obligation existing at the date of initial application of this standard shall be amortized over five years or remaining service period or remaining life expectancy, whichever is lower. Alternatively, companies were granted the option to recognize such initial transition obligation as of the beginning of the plan, directly to shareholders’ equity. Such option has been adopted by the Company. Under SFAS No. 87, the unrecognized net obligation existing at the date of its initial application is being amortized over the remaining service period.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

    Under Brazilian GAAP, actuarial gains and losses are recorded in income when incurred up to the amount of pension liability recorded. Under U.S. GAAP, certain actuarial gains and losses are deferred and amortized over the remaining service period of the active employees expected to receive benefits under the plan.

 

The effects of these different criteria for recognition of pension and other postretirement benefits on accrued pension (postretirement) benefit as of December 31, 2004, are presented below:

 

     As of December 31, 2004

 
    

U.S.

GAAP


  

Brazilian

GAAP


  

Accumulated

Difference


 

Accrued pension (postretirement) benefit

   —      479    (479 )

 

A summary of the liability as of December 31, 2004 for the Company’s active employees defined benefit pension plan (Plano Visão CRT) is as follows:

 

Reconciliation of Funded Status

 

Plano Visão CRT

 

     As of
December 31,
2004


 

Accumulated benefit obligation:

      

Vested

   —    

Nonvested

   649  
    

Total

   649  

Projected benefit obligation

   1,006  

Fair value of plan assets

   (527 )
    

Funded status

   479  

Unrecognized net transition obligation

   (479 )
    

Net amount recognized

   —    
    

 

d. Interest income (expense)

 

Brazilian GAAP requires interest to be shown as part of operating income. Under U.S. GAAP interest income (expense) would be shown after operating income.

 

e. Permanent assets

 

Brazilian GAAP has a class of assets called “permanent assets”. This is the collective name for all assets on which indexation adjustments were calculated until December 31, 1995 in the corporate and fiscal law accounts of Brazilian companies. Under U.S. GAAP the assets in this classification would be noncurrent assets.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

f. Monetary restatement of 1996 and 1997

 

The amortization of the asset appreciation, which originated from the inflation accounting during 1996 and 1997, when Brazil was still considered as high inflationary economy for U.S. GAAP purposes, has been recognized as an adjustment to income in the reconciliation to U.S. GAAP. The loss related to monetary restatement on disposals of such assets is classified for U.S. GAAP purposes as a component of operating income.

 

g. Income taxes

 

The Company fully accrues for deferred income taxes on temporary differences between tax and accounting records. The existing policies for providing for deferred taxes are consistent with SFAS No.109, “Accounting for Income Taxes”, except with respect to social contribution rate adopted, as explained below:

 

    Under Brazilian GAAP, at December 31, 1999 the Company recognized a change in the combined tax rate from 33% to 34% based on a provisional measure for an increase in the social contribution rate from 8% to 9% effective January 1, 2000. Provisional measures are temporary and must be re-approved every 30 days or they lapse. Under SFAS 109, the provisional measures discussed are not considered to be enacted law the provision measure was approved in law 10.637 as of December 30, 2002. Therefore, until 2002 the combined deferred tax effect calculated on temporary differences would be 33%, not 34%. For 2004 and 2003, no difference related to the social contribution tax rate. Under Brazilian GAAP, the deferred taxes are presented gross. Under U.S. GAAP, the deferred taxes are presented net.

 

h. Earnings per share

 

Under Brazilian GAAP, net income per share is calculated based on the number of shares outstanding at the balance sheet date. In these consolidated financial statements, information is disclosed per lot of one thousand shares, because this is the minimum number of shares that can be traded on the Brazilian stock exchanges.

 

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, “Earnings per Share”. This statement became effective December 15, 1997, and provides computation, presentation and disclosure requirements for earnings per share.

 

Since the preferred and common stockholders have different dividend, voting and liquidation rights, basic and diluted earnings per share have 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 stock 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 distributed and undistributed net income available to preferred shareholders and dividing net income available to common shareholders by the number of common shares outstanding. Net income available to preferred shareholders is the sum of the preferred stock dividends (10% higher than those attributed to common shares, as defined in the Company’s by-laws for the years ended December 31, 2004 and 2003) and the preferred shareholders’ portion of undistributed net income. Undistributed net income is computed by deducting total dividends (the sum of preferred and common stock dividends) from net income. Undistributed net income is allocated to preferred shares 10% higher than that attributed to common shares on a pro rata basis. Total dividends are calculated as described in Note 24. At December 31, 2004, 2003 and 2002, the Company was obligated to issue shares to the

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

controlling shareholders for the amount of the tax benefit realized relating to the corporate restructuring described in Notes 23). The number of shares issuable are considered dilutive as defined in SFAS No. 128 and have been included in the weighted average common shares—diluted presented below. The number of shares issuable was computed considering the balance of the goodwill reserve (R$473,600 in 2004, R$506,890 in 2003 and R$512,241 in 2002) by the average price of common shares traded on the São Paulo Stock Exchange (“Bovespa”) during the last 20 trading days of each year.

 

For the periods presented below, the weighted average number of shares outstanding consider the effect of the reverse stock split described in Note 30. The computation of basic and diluted earnings per share is as follows:

 

   

As of

December 31, 2004


 

As of

December 31, 2003


 

As of

December 31, 2002


    Common

  Preferred

  Common

  Preferred

  Common

  Preferred

    (in thousands, except per share data and percentages)

Basic numerator:

                       

Actual dividends declared

  30,337   44,963   22,215   34,857   14,467   24,979

Basic allocated undistributed dividends (a)

  37,460   56,238   86,993   139,255   4,811   8,537

Allocated net income available for common and preferred shareholders

  67,797   101,201   109,208   174,112   19,728   33,516

Basic denominator

                       

Weighted average shares outstanding

  13,336,348   18,201,880   12,507,868   18,201,880   11,285,041   18,201,880

Basic earnings per share

  5.08   5.56   8.73   9.57   1.71   1.84

Diluted numerator:

                       

Actual dividends declared

  42,327   32,973   31,037   26,035   23,931   15,515

Diluted allocated undistributed earnings (a)

  52,669   41,029   123,039   103,209   8,098   5,250

Allocated net income available for common and preferred shareholders

  94,996   74,002   154,076   129,244   32,029   20,765

Diluted denominator:

                       

Weight average shares outstanding

  13,336,348   18,201,880   12,507,868   18,201,880   11,285,041   18,201,880

Dilutive effects of goodwill reserve

  12,366,020   —     11,361,129   —     19,599,068   —  

Diluted weight average shares

  25,702,368   18,201,880   23,868,997   18,201,880   30,884,109   18,201,880

Diluted earnings per share

  3.70   4.07   6.46   7.10   1.04   1.14

 

(a) Effective December 30, 2002, preferred shareholders are entitled to receive per-share dividends of at least 10% greater than the per-share dividends paid to common shareholders. Undistributed earnings, therefore, from December 30, 2002 forward have been allocated to common and preferred shareholders on a 100 to 110 basis, respectively, based upon the weight average number of shares outstanding during the period to total shares (allocation percentage). Because the allocation percentage for each class differs for basic and diluted earnings per share purpose, allocated undistributed earnings differ for such calculations.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

The Holding Company’s preferred shares are non-voting, except under certain limited circumstances and are entitled to a preferential, noncumulative dividend and to priority over the common shares in the event of liquidation of the Company. For 2004, 2003 and 2002, the Celular CRT Participações S.A. declared dividends of R$24.70, R$15.66 and R$12.52, respectively, per thousand preferred shares and R$22.46, R$14.24 and R$11.38 per thousand common shares, respectively (see Note 24).

 

i. Deferred revenue on sales of handsets.

 

Under Brazilian GAAP, revenues and costs from sales of handsets, including applicable value-added and other sales taxes, are recognized at the moment of sale to the customer. Under U.S. GAAP, in accordance with Staff Accounting Bulletin No. 104 (SAB 104), revenues from sales of handsets along with the related costs, including applicable value-added and other sales taxes, are deferred and amortized based on the expected useful life of the handset, estimated by management to be 18 months. Any excess of the cost over the amount of deferred revenue related to handset sales is recognized on the date of sale. As substantially all of the Company’s handsets are sold below cost, this difference in accounting policy had no impact on net or shareholders’ equity. The amount of unamortized deferred revenue and the related amounts of unamortized deferred costs was R$107,423, R$213,325 and R$194,396 at December 31, 2004, 2003 and 2002, respectively. The impact of this difference under U.S. GAAP was to increase both net revenues and cost of services and goods by R$105,902 in 2004, decrease by R$18,929 in 2003 and decrease by R$20,546 in 2002.

 

j. Value-added and other sales taxes

 

Under Brazilian GAAP, these taxes are recorded as a reduction to revenues. Under U.S. GAAP, these taxes are recorded gross as revenue and the related costs of services and goods. This difference in accounting policy has no impact in net (loss) or shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both net revenues and cost of services and goods by R$287,251, R$241,571 and R$216,768 for 2004, 2003 and 2002, respectively.

 

k. Roaming

 

The Company has roaming agreements with other cellular service providers. When a call is made from within one coverage area by a subscriber of another cellular service provider, that service provider pays Celular CRT’s subsidiaries for the service at the applicable rates. Conversely, when one of the subsidiaries’ customers roams outside the coverage area, the subsidiaries pays the charges associated with that call to the cellular service provider in whose region the call was originated and charges the same amount to its subscriber. Under Brazilian GAAP, revenues for roaming charges are recorded net of the related costs when the services are provided. Under U.S. GAAP, revenues and costs for roaming charges should be recorded gross. This difference in accounting practices has no impact on net (loss) shareholders’ equity. The impact of this difference under U.S. GAAP was to increase both revenues and cost of goods and services by R$37,618 for 2004, R$30,557 in 2003 and R$30,522 in 2002.

 

l. Free minutes given in connection with sales of handsets

 

Under U.S. GAAP, pursuant to Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables,” the Company began to separately account for free minutes given in connection with the sales of handsets. The adoption of EITF No. 00-21 is effective prospectively for transactions entered into as

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

from January 1, 2004. Consequently, a portion of the revenue generated from the sale of handsets is allocated to the free minutes given and deferred based on the fair value of the minutes. The revenues associated with the free minutes are then recognized based on subscriber airtime usage. Under Brazilian GAAP, the Company does not separately account for free minutes given in connection with sales of handsets.

 

m. Fistel tax

 

Beginning in 1999, under Brazilian GAAP, the Fistel (Telecommunication Inspection Fund) tax, assessed on each activation of a new cellular line, is deferred and amortized over the customers’ estimated subscription period. For U.S. GAAP purposes, this tax would be charged directly to the consolidated statements of income. Therefore, the deferred Fistel taxes on activation fees at December 31, 2004, 2003 and 2002 is being adjusted in the reconciliation of the income differences between U.S. GAAP and Brazilian GAAP.

 

n. Derivative financial instruments

 

As mentioned in Note 28.d., the Company has entered into foreign currency swap and option contracts for long-term agreements at various exchange rates, in the notional amount of US$114,542 thousand at December 31, 2004 (US$136,504 thousand at December 31, 2003). Under Brazilian GAAP, foreign currency swap contracts are recorded in accordance with the terms of the contract as if they had been settled at the balance sheet date.

 

In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which was subsequently amended by SFAS Nos. 137, 138 and 149. SFAS No. 133 must be applied to all derivative instruments and certain derivative instruments embedded in hybrid instruments and requires that such instruments be recorded in the balance sheet either as an asset or liability measured at its fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met.

 

If the derivative is designated as a hedge, depending on the nature of the hedge, changes in the fair value of derivatives that are considered to be effective, as defined, will either offset the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or will be recorded in other comprehensive income until the hedged item is recorded in earnings. Any portion of a change in a derivative’s fair value that is considered to be ineffective, as defined, must be immediately recorded in earnings. Any portion of a change in a derivative’s fair value that the Company has elected to exclude from its measurement of effectiveness, such as the change in time value of option contracts, will also be recorded in earnings.

 

At December 31, 2004 and 2003 for U.S. GAAP purposes, the Company has not designated its derivative contracts as accounting hedges as defined SFAS No. 133, and consequently, the Company’s derivative contracts are marked to market through earnings, for all periods presented.

 

o. Stock compensation—Telefónica Móviles Stock Plan

 

In May, 2001, Telefónica Móviles, S.A. (“Telefónica Móviles”) launched a stock option plan based on Telefónica Móviles’ stock (the “Plan”) that covered the employees of the Company. Pursuant to the Plan, between May 20 and July 20, 2002, Telefónica Móviles granted a total of 449,624 stock options to the Company’s employees, vesting over a four-year period. The options were granted in Series A, B and C, with strike prices of 11.00 Euros, 16.50 Euros and 7.23 Euros, respectively. The total options granted to each

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

employee consisted of 25% Series A options, 25% Series B options, and 50% Series C options. The market price of Telefónica Móviles’ stock as traded at the Madrid Stock Exchange was 8.28 Euros on December 31,2003. The Plan also gives the Company’s employees the option to receive in cash, the appreciation in the market price of Telefónica Móviles’ stock over the respective strike price.

 

In accordance with the Plan terms, the existing options are required to be settled in the event of a change in control of the Company. In December 2002, control of the Company was transferred to Brasilcel N.V. and consequently, on December 31, 2003, the options were settled.

 

The settlement amount was calculated for 50% of the Series C options based on the final bid price of Telefonica Moviles, S.A. stock on January 2, 2004, converted using the average exchange rate at the date of payment.

 

Under Brazilian GAAP, the Company does not account for the effect of the Plan. Under U.S. GAAP, equity instruments granted to an employee by a principal stockholder are accounted for by the employer company. Consequently, compensation expense was recorded under U.S. GAAP for this settlement.

 

Reconciliation of the net income differences between U.S. GAAP and Brazilian GAAP

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Brazilian GAAP net income

   181,980     189,365     147,621  

Add (deduct):

                  

Different accounting criteria for:

                  

Amortization of monetary restatement of 1996 and 1997

   (570 )   (3,510 )   (3,403 )

Capitalized interest

   3,463     1,839     3,352  

Amortization of capitalized interest

   (909 )   (636 )   (117 )

Amortization of activation fees

   —       216     1,782  

Deferred Fistel tax on activation fee

   (6,516 )   (3,437 )   3,939  

Pension and other postretirement benefits

   479     —       —    

Derivative instruments

   (9,674 )   148,565     (150,179 )

Stock option compensation (Plan MOS)

   —       (777 )   —    

Free minutes given in connection with sales of handsets

   (5,943 )   —       —    

Reversal of deferred social contribution (1% not enacted)

   —       —       893  

Deferred tax effect on GAAP adjustments

   6,688     (48,369 )   49,173  

Reversal of deferred social contribution tax

               (267 )
    

 

 

U.S. GAAP net income

   168,998     283,256     52,794  
    

 

 

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

Net income per thousand shares in accordance with U.S. GAAP

 

     Years ended December 31,

     2004

   2003

   2002

Common shares—Basic:

              

U.S. GAAP net income

   5.08    8.73    1.71

Weighted average common shares outstanding

   13,336,348    12,507,868    11,285,041
    
  
  

Common shares—Diluted:

              

U.S. GAAP net income

   3.70    6.46    1.04

Weighted average (thousand) common shares outstanding

   25,702,368    23,868,997    30,884,109
    
  
  

Preferred shares—Basic and diluted:

              

U.S. GAAP net income

   5.56    9.57    1.84

Weighted average (thousand) preferred shares outstanding

   18,201,880    18,201,880    18,201,880
    
  
  

U.S. GAAP net income

   4.07    7.10    1.14

Weighted average (thousand) preferred shares outstanding

   18,201,880    18,201,880    18,201,880
    
  
  

 

Reconciliation of the shareholders’ equity differences between U.S. GAAP and Brazilian GAAP

 

     2004

    2003

 

Brazilian GAAP shareholders’ equity

   1,061,577     954,897  

Add (deduct):

            

Different accounting criteria for:

            

Net balance of full indexation on permanent assets in 1996 and 1997

   130     700  

Capitalized interest

   9,611     6,148  

Amortization of capitalized interest

   458     1,367  

Deferred Fistel tax on activation fees

   (18,051 )   (11,535 )

Pension and other postretirement benefits

   479     —    

Derivative contracts

   18,824     28,498  

Free minutes given in connection with sales of handsets

   (5,943 )   —    

Deferred tax effects of GAAP adjustments

   (1,873 )   (8,561 )
    

 

U.S. GAAP shareholders’ equity

   1,065,212     971,514  
    

 

 

Changes in shareholders’ equity under U.S. GAAP

 

     As of December 31,

 
     2004

    2003

    2002

 

Opening Balance

   971,514     741,997     728,649  

Adjustment on premium reserve

   —       2,755     —    

Stock option compensation (MOS Plan)

   —       514     —    

Tax incentive reserve

   —       64     —    

Net income for the year

   168,998     283,256     52,794  

Net income allocation

   —       —       —    

Dividends

   —       (2,072 )   (14,746 )

Interest on shareholders’ equity

   (75,300 )   (55,000 )   (24,700 )
    

 

 

Balance at December 31

   1,065,212     971,514     741,997  
    

 

 

U.S. GAAP supplementary information-

                  

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Reconciliation of operating income under Brazilian GAAP to operating income under U.S. GAAP

                  

Brazilian GAAP operating income as reported

   246,432     259,653     214,064  

Reversal of financial expense, net

   (25,829 )   (17,664 )   (7,483 )

U.S. GAAP adjustments:

                  

Amortization of monetary restatement of 1996 and 1997

   (570 )   (3,510 )   (3,403 )

Amortization on capitalized interest

   (909 )   (636 )   (117 )

Amortization of activation fees

   —       216     1,782  

Deferred tax (Fistel) on activation fees

   (6,516 )   (3,437 )   3,939  

Loss on permanent assets disposals

   (1,133 )   (492 )   (4,275 )

Stock compensation plan—MOS Plan

   —       (777 )   —    

Pension and other postretirement benefits

   479     —       —    

Free minutes given in connection with sales of handsets

   (5,943 )   —       —    
    

 

 

U.S. GAAP operating income

   206,011     233,353     204,507  
    

 

 

     Years ended December 31,

 
     2004

    2003

    2002

 

Reconciliation of net revenue and costs under Brazilian GAAP to revenue and costs under U.S. GAAP

                  

Brazilian GAAP net revenue

   1,174,329     1,032,700     896,315  

Reclassification to cost of services and goods:

                  

Taxes on sales

   287,251     241,571     216,768  

Increase in roaming revenue

   37,618     30,557     30,522  

U.S. GAAP adjustments:

                  

Deferred revenues on handset sales, net of amortization

   105,902     (18,929 )   (20,546 )

Free minutes given in connection with sales of handsets

   (5,943 )   —       —    
    

 

 

U.S. GAAP net revenue

   1,599,157     1,285,899     1,123,059  
    

 

 

Brazilian GAAP cost of services and goods

   (620,543 )   (526,173 )   (456,578 )

Reclassification to cost of services and goods:

                  

Taxes on sales

   (287,251 )   (241,571 )   (216,768 )

Increase in roaming cost

   (37,618 )   (30,557 )   (30,522 )

Reclassification from sales expense:

                  

Rewards program expense

   (4,297 )   (2,439 )   (5,621 )

U.S. GAAP adjustments:

                  

Amortization of monetary restatement of 1996 and 1997

   (570 )   (3,510 )   (3,403 )

Amortization on capitalized interest

   (909 )   (636 )   (117 )

Amortization of activation fees

   —       216     1,782  

Deferred tax (Fistel) on activation fees

   (6,516 )   (3,437 )   3,939  

Pension and other postretirement benefits

   479     —       —    

Stock option compensation—MOS Plan

   —       (777 )   —    

Deferred costs on handset sales, including taxes on sales, net of amortization during the year

   (105,902 )   18,929     20,546  
    

 

 

U.S. GAAP cost of services and goods

   (1,063,127 )   (789,955 )   (686,742 )
    

 

 

U.S. GAAP gross profit

   536,030     495,944     436,317  
    

 

 

 

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CELULAR CRT PARTICIPAÇÕES S.A.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

    

As of

December 31,

2004


   

As of

December 31,

2003


 

Total assets as of December 31

   1,933,081     1,764,642  

Property, plant and equipment

   1,779,523     1,577,002  

Accumulated depreciation

   (1,026,183 )   (833,927 )
    

 

Net property, plant and equipment

   753,340     743,075  
    

 

 

32. Additional disclosures required by U.S. GAAP

 

a. Concentration of risks

 

The credit risk with respect to trade accounts receivable is diversified. The Company and its subsidiary continually monitor the level of trade accounts receivable and limit the exposure to bad debts by cutting access to the handset network if any invoice is 15 days past due. Exceptions comprise handset services that must be maintained for reasons of safety or national security.

 

In conducting their businesses, Celular CRT S.A. is fully dependent upon the cellular telecommunications concession as granted by the Federal Government.

 

Approximately 8.55% of all employees are members of state labor unions associated with either the Federação Nacional dos Trabalhadores em Telecomunicações (“Fenattel”), or with the Federação Interestadual dos Trabalhadores em Telecomunicações (“Fittel”). The Companies negotiate new collective labor agreements every year with the local union. The collective agreements currently in force expire October, 31, 2006.

 

There is no concentration of available sources of labor, services, concessions or rights, other than those mentioned above, that could, if suddenly eliminated, severely impact the operations of the Company and its subsidiary.

 

b. Commitments

 

At December 31, 2004, the Company budgeted capital expenditure commitments amounting to R$204.3 million, principally relating to infrastructure, information technology and transmission equipment.

 

The Company is subject to obligations concerning quality of services, network expansion and modernization, as established in our authorizations and our original concession agreements. The Company believes that it is currently in compliance with its quality of service and expansion obligations.

 

c. New accounting pronouncements

 

In December 2003, the FASB issued a revision to Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46R” or the “Interpretation”). FIN 46R clarifies the application of ARB No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R requires the consolidation of these entities, known as variable interest entities (“VIEs”), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.

 

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

(In thousands of Brazilian reais)

 

Among other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective date of the Interpretation for public companies, to the end of the first reporting period ending after March 15, 2004, except that all public companies must at a minimum apply the provisions of the Interpretation to entities that were previously considered “special-purpose entities” under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after December 15, 2003. The adoption of FIN 46R did not have a material impact on the Company’s financial position, cash flows and results of operations.

 

In November 2002, the Emerging Issues Task Force (“EITF”), of the FASB reached a consensus on EITF 00-21 (“Accounting for Revenue Arrangements with Multiple Deliverables”). EITF 00-21 provides guidance on how to account for arrangements that may involve multiple revenue-generating activities, for example, the delivery of products or performance of services, and/or rights to use other assets. The Company adopted this EITF relating to free minutes given in connection to sales of handsets as from January 1st 2004 (See note 31(l)).

 

In July 2003, the EITF reached consensus in EITF Issue No. 03-11 that determining whether realized gains and losses on derivative contracts not held for trading purposes should be reported on a net or gross basis is a matter of judgment that depends on the relevant facts and circumstances and the economic substance of the transaction. In analyzing the facts and circumstances, EITF Issue No. 99-19, and Opinion No. 29, “Accounting for Nonmonetary Transactions,” should be considered. EITF Issue No. 03-11 is effective for transactions or arrangements entered into after September 30, 2003. The adoption of EITF Issue No. 03-11 did not have a material effect on the Company’s financial statements.

 

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29” (“SFAS 153”), which amends Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions” to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for nonmonetary assets exchanges occurring in fiscal periods beginning after June 15, 2005. The Company will apply this statement in the event that exchanges of nonmonetary assets occur in fiscal periods beginning after June 15, 2005.

 

* * * * * * * * * * * * * * * * * * * * * * * * * * * * *

 

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ANNEX A

 

INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS OF TCP, TCO, TLE, TSD, CELULAR CRT AND CERTAIN OF THEIR AFFILIATES

 

1.    Directors and Executive Officers of TCP.

 

The following table sets forth the name and position of each director and executive officer of TCP. The current business address of each person is at Av. Roque Petroni Junior, 1464, Morumbi, São Paulo, SP, Brazil, 04707-000, except where otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with TCP unless otherwise indicated.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Fernando Xavier Ferreira    Chairman of the Board of Directors    See “Part Five: The Merger — Management.”
Carlos Manuel de Lucena e Vasconcellos Cruz    Vice Chairman of the Board of Directors    See “Part Five: The Merger — Management.”
Shakhaf Wine    Director    See “Part Five: The Merger — Management.”
Felix Pablo Ivorra Cano    Director    See “Part Five: The Merger — Management.”
Ignacio Aller Mallo    Director    See “Part Five: The Merger — Management.”
Luis Paulo Reis Cocco    Director    See “Part Five: The Merger — Management.”
Luiz Kaufmann    Director    See “Part Five: The Merger — Management.”
Henry Philippe Reichstul    Director    See “Part Five: The Merger — Management.”
António Gonçalves de Oliveira    Director    See “Part Five: The Merger — Management.”
Roberto Oliveira de Lima    Chief Executive Officer    See “Part Five: The Merger — Management.”
Paulo Cesar Pereira Teixeira    Executive Vice President for Operations and interim Vice President for Finance, Planning and Control and Investor Relations Officer    See “Part Five: The Merger — Management.”
Luis Filipe Saraiva Castel-Branco de Avelar    Executive Vice President for Marketing and Innovation and Vice President for IT and Product and Service Engineering    See “Part Five: The Merger — Management.”
Javier Rodriguez García    Vice President for Technology and Networks    See “Part Five: The Merger — Management.”
Guilherme Silverio Portela Santos    Vice President for Customers    See “Part Five: The Merger — Management.”

 

A-1


Table of Contents

Name


  

Positions Held


  

Principal Occupation and Business Experience


Sérgio Assenço Tavares dos Santos    Vice President for Regulatory Matters and Institutional Relations    See “Part Five: The Merger — Management.”

 

2.    Directors and Executive Officers of Avista Participações.

 

The following table sets forth the name and position of each director and executive officer of Avista Participações. The current business address of each person is at Av. Roque Petroni Junior, 1464, Morumbi, São Paulo, SP, Brazil, 04707-000, except where otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with Avista Participações unless otherwise indicated. Each person listed below is a citizen of Brazil.

 

Name


  

Positions Held


  

Principal Occupation and
Business Experience


Paulo Cesar Pereira

Teixeira

   Director    See “Part Five: The Merger — Management.”

Roberto Oliveira de Lima

   Director    See “Part Five: The Merger — Management.”

 

3.    Directors and Executive Officers of Brasilcel.

 

The following table sets forth the name and position of each director and executive officer of Brasilcel. The current business address of each person is at Strawiskylaan, 3105, 1077 ZX, Amsterdam, The Netherlands, except where otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with Brasilcel unless otherwise indicated.

 

Name


  

Positions Held


  

Principal Occupation and
Business Experience


Zeinal Abedin M. Bava(1)

  

Director

   Chief Financial Officer of Portugal Telecom, SGPS, S.A. since 2000; Chief Executive Officer of TV Cabo Portugal, S.A. since March 2004; Executive Vice-Chairman of the Board of Directors of PT Comunicações, S.A. since January 2004; Member of the Board of Directors of Telemat Celular S.A., Teleacre Celular S.A., Telems Celular S.A., Norte Brasil Telecom S.A., Teleron Celular S.A., TCO IP S.A., Telegoiás Celular S.A. and Telesp Celular Participações S.A. since 2004. Member of the Board of Directors of PT Corporate — Solucoes Empresariais de Telecomunicaçõese Sistemas, S.A. since June 2003; Chief Executive Officer of PT Multimedia Servicos de Telecomunicações e Multimedia, SGPS, S.A. since May 2003; Member of the Board of Directors of PT Compras — Servicos de Consultoria e Negociacao, S.A. since May 2003; Member of the Board of Directors of Fundacao Portugal Telecom since March 2003; Chairman of the Board of Directors of Previsao — Sociedade Gestora de Fundos de Pensoes, S.A. since March 2003; Chairman of the Board of Directors of PT Servicos de Gestao, S.A. since February 2003; Member of the Board of Directors of Tele Sudeste Participações

 

A-2


Table of Contents

Name


  

Positions Held


  

Principal Occupation and
Business Experience


          S.A. since 2003; Member of the Board of Directors of CRT Celular Participações S.A. since 2003; Member of the Board of Directors of Tele Leste Participações S.A. since 2003; Member of the Board of Directors of Tele Centro Oeste Celular Participações S.A. since 2003; Member of the Board of Directors of Brasilcel, N.V. since December 2002; Vice-Chairman of the Board of Directors of PT Multimedia — Servicos de Telecomunicações e Multimedia, SGPS, S.A. since November 2002; Member of the Board of Directors of Portugal Telecom Brasil, S.A. since July 2002; Member of the Board of Directors of BEST — Banco Electronico de Servico Total, S.A. since May 2001; Vice-Chairman of the Board of Directors of PT Ventures, SGPS, S.A. (formerly Portugal Telecom Internacional, SGPS, S.A.) from 2000 until 2002; Director and Relationship Manager for Portugal of Merrill Lynch International from 1998 until 1999. His current business address is at Avenida Fontes Pereira de Melo, 40, 1069-300 Lisbon, Portugal.

Alvaro Jose Roquette

Morais(1)

   Director    Director and Chief Operating Officer of PT Investimentos Internacionais since March 2004; Director and Chief Operating Officer of PT Comunicações from June 2002 until March 2004. Chief Executive Officer of PT Prime from June 2002 until March 2004; Executive Vice President of Sales and Marketing of Telesp Celular from April 2001 until June 2002; Chief Executive Officer of Tradecom Latin America (PT Group) from September 2000 until April 2001; President and Chief Executive Officer of D&B Spain from January 1999 until September 2000; Chief Executive Officer of Transunion Spain from January 1999 until September 2000; Deputy General Manager and Sales and Marketing Director of D&B Spain in 1998. His current business address is at Avenida Fontes Pereira de Melo, 40, 1069-300 Lisbon, Portugal.

Carlos Manuel de

Lucena e Vasconcellos Cruz

   Director    See “Part Five: The Merger — Management.”

Harry Dirk Hilbert

Moraal(2)

   Director    Senior Client Relationship Manager in ABN AMRO Trust in Amsterdam from 1999 until 2004; Head Client Relationship Department Member in ABN AMRO Trust in Amsterdam since 2004.
Paul Johannes Antonius Wilbrink(2)    Director    Senior Account Manager at ING Trust (Nederland) B.V. from 1999 until 2000; lawyer at Nationale-Nederlanden from 2000 until 2002; Team Manager at ING Trust (Nederland) B.V. from 2002 until 2004; Senior Client Relationship Manager since 2004 at ABN AMRO Trust Company (Nederland) B.V.

 

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Name


  

Positions Held


  

Principal Occupation and
Business Experience


Hendrik Justus Wirix(2)    Director    Deputy Manager and Chief Legal Counsel at ABN AMRO Trust Company (Nederland) B.V. since 1991.
Lara Ieka Runne(2)    Director    Corporate lawyer for ABN AMRO Trust Company (Nederland) B.V. since November 2003; Junior account Manager trust at MeesPierson Trust (Curacao) N.V. from 2002 until 2003 and in 2001; Marketing sales assistant at MeesPierson Trust (Curacao) N.V. in 2002; Worked in sales and marketing for a resort at Curacao from 2000 to 2001.

Marcus Antonius Joseph

Pessel(2)

   Director    Financial Officer and Corporate Officer of ING Trust (Nederland) B.V. from 1997 until 2000 and from 2000 until 2002; Account Manager at Sheltons Trust & Corporate Services in 2002; Senior Client Relationship Manager since 2002 at ABN AMRO Trust Company (Nederland) B.V.

Carlos David Maroto

Sobrado(3)

   Director    Executive Managing Director of Telefónica Europe B.V. since March 2002. Member of the Board of Directors of Telefónica Europe B.V., Atento N.V. and Brasilcel N.V. Manager of Corporate Financing & Documentation Department of Telefónica S.A. from March 2000 until March 2002. Senior Analyst in Financing, Derivatives and Debt-Capital Structure of Telefónica S.A. from 1999 until March 2000. His current business address is at Aert van Nesstraat 45, 3012 CA Rotterdam, The Netherlands.

Antonio Pedro de

Carvalho Viana

Baptista(1)

   Director    Member of the Board of Directors of Telefónica. Served as Chairman and Chief Executive Officer of Telefónica Móviles S.A., since August 2002. He also serves on the Board of Directors of Telefónica Internacional, S.A., Terra Networks, S.A., Telefónica de Argentina, S.A, Brasilcel, N.V, Tele Leste Celular Participações S.A., Tele Sudeste Celular Participações S.A., Telesp Celular Participações, S.A., Tele Centro Oeste Celular Participações S.A., Celular CRT Participações S.A. and Portugal Telecom SGPS, S.A. He was a partner of McKinsey & Co. in Madrid and Lisbon from 1985 to 1991 and served as Executive Advisor of the Banco Portugues de Investimento (BPI) from 1991 to 1996. From 1996 through July 2002, he was President of Telefónica Internacional and Executive President of Telefónica Latinoamerica. His current business address is at Po Recoletos, 7-9, 3a Planta, 28004, Madrid, Spain

Ignacio Aller Mallo

   Director    See “Part Five: The Merger — Management.”

Félix Pablo Ivorra Cano

   Director    See “Part Five: The Merger — Management.”

Ernesto Lopez Mozo(3)

   Director    Chief Financial Officer General Manager for Finance and Management Control of Telefónica Móviles S.A.; Member of the Board of Directors of Telefónica Móviles

 

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Name


  

Positions Held


  

Principal Occupation and
Business Experience


          de Espana, S.A., Mobipay International, S.A., Telefónica Móviles Mexico, S.A. de C.V., Brasilcel N.V, Telesp Celular Participações, S.A., Tele Sudeste Celular Participações, S.A., Tele Leste Celular Participações, S.A., Tele Centro Oeste Celular S.A., Telemat Celular S.A., Teleacre Celular S.A., Telems Celular S.A., Norte Brasil Telecom S.A., Teleron Celular S.A., TCO IP S.A., Telegoias Celular S.A. and Celular CRT Participações, S.A.; worked as Senior Manager in the financing department of Telefónica, S.A., where he was also responsible for relationships with credit rating agencies. His current business address is at C/ Goya, 24, 28001, Madrid, Spain.

Robertus Hendrikus

Lukas Director de

Groot(2)

   Director    Account Manager from 1995 until 2000, Senior Account Manager from 2000 to 2003 and Senior Client Relationship Manager since 2003 at ABN AMRO Trust Company (Nederland) B.V.

Alexander Daniël de

Vreeze(2)

   Director    Head of Commercial Organization and Member of management team of ABN AMRO Trust Company (Nederland) B.V. since 1998. See “Directors and Executive Officers of TCP.”

Fernando Xavier Ferreira

   Director    See “Part Five: The Merger — Management.”

Eduardo Perestrelo

Correia Director de

Matos(1)

   Director    President of Portugal Telecom Brasil S.A.; Member of the Board of Directors of Telemat Celular S.A., Teleacre Celular S.A., Telems Celular S.A., Norte Brasil Telecom S.A., Teleron Celular S.A., TCO IP S.A. and Telegoiás Celular S.A. since 2004. Member of the Board of Directors of PT Móveis, Servicos de Telecomunicações, S.G.P.S., S.A., Tele Centro Oeste Celular Participações S.A., Tele Sudeste Celular Participações S.A., Tele Leste Celular Participações S.A., Celular CRT Participações S.A. and Telesp Celular ParticipaçõesS.A. since 2003; Member of the Board of Directors of Portugal Telecom, S.G.P.S., S.A. from 1996 until May 2002. His current business address is at Av. Brigadeiro Faria Lima, 2277, 15 andar, Suite 1503, 01452-000, São Paulo, SP, Brazil.

Pedro Manuel Brandao

Rodrigues(1)

   Director    Member of the Board of Directors and Executive Officer of Telecomunicações Móveis Nacionais — TMN, since 2003; Member of the Board Directors of PT Móveis, S.G.P.S., S.A., since 2000; Member of the Board of Directors of Telemat Celular S.A., Teleacre Celular S.A., Telems Celular S.A., Norte Brasil Telecom S.A., Teleron Celular S.A., TCO IP S.A. and Telegoiás Celular S.A. since 2004; Member of the Board of Directors of Brasilcel N.V. since 2003; Member of the Board of Directors of Tele Centro Oeste Celular Participações S.A., Tele Sudeste Celular Participações

 

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Name


  

Positions Held


  

Principal Occupation and
Business Experience


          S.A., Tele Leste Celular Participações S.A., Celular CRT Participações S.A. and Telesp Celular Participações S.A since 2003; Member of the Working Group on Public Service Television in 2002; Elected Member of Parliament for Lisbon in 2002 (IX Legislature); Professor at Instituto Superior Tecnico from 1987 to 2000. Member of the Board and Member of the Executive Committee of Banco Mello and Banco Mello de Investimentos from 1994 to 2000; Permanent Member of the Financial International Union (UIF) Consulting Committee from 1994 to 2000. His current business address is at Avenida Alvaro Pais, 02, 1649-0041 Lisbon, Portugal.

Paul Jozef Schmitz(2)

   Director    Senior Account Manager of ABN AMRO Trust Company (Nederland) B.V. since 1993.

Benjamin de Koe(2)

   Director    Account Manager from 1998 until 2002, Senior Client Relationship Manager from 2002 to 2004 and Client Accounting Officer and Client Relationship Manager in 2004 at ABN AMRO Trust Company (Nederland) B.V.

Luis Miguel Gilperez

López(3)

   Director    Executive Director of the International Area of Telefónica Móviles S.A. Member of the Board of Directors of Medi Telecom, S.A., Telefónica Móviles Mexico, S.A. de C.V., Tele Leste Celular Participações S.A., Tele Sudeste Celular Participações, S.A. Celular CRT Participações S.A., Telesp Celular Participações, S.A., Tele Centro Oeste Celular Participações, S.A. Brasilcel N.V., Telemat Celular S.A., Teleacre Celular S.A., Telems Celular S.A., Norte Brasil Telecom S.A., Teleron Celular S.A., TCO IP S.A. and Telegoias Celular S.A. Executive Chairman of MobiPay International S.A. He joined the Telefónica group in 1981. His current business address is at C/ Goya, 24, 28001, Madrid, Spain.

J.C.W. van Burg(2)

   Director    Regional Manager Private Banking from 1999 until 2001, Senior Vice President Business Development in 2001 and 2002, Senior Vice President Group Audit in 2002 and 2003 and Managing Director since 2003 at ABN AMRO Trust Company (Nederland) B.V.

C.J.P. Kluft(2)

   Director    Various positions in ABN AMRO Bank N.V. since 1974; Assistant to the Head of the Legal Department of ABN AMRO Bank Trust Company. See “Directors and Executive Officers of TCP.”

Shakhaf Wine

   Director    See “Part Five: The Merger — Management.”

(1) Portuguese citizen.
(2) Dutch citizen.
(3) Spanish citizen.

 

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4.    Directors and Executive Officers of TCO

 

The following table sets forth the name and position of each director and executive officer of TCO. The current business address of each person is SQS — Quadra 2, Bloco C, 226, Edificio Telebrasilia Celular — 7 andar, 70302-936, Brasilia, D.F., Brazil. Each position set forth opposite an individual’s name refers to a position with TCO unless otherwise indicated.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Fernando Xavier Ferreira

   Chairman of the Board of Directors    See “Part Five: The Merger — Management.”

Carlos Manuel L.

Vasconcellos Cruz

   Vice Chairman of the Board of Directors    See “Part Five: The Merger — Management.”

Felix Pablo Ivorra Cano

   Director    See “Part Five: The Merger — Management.”

Ignacio Aller Mallo

   Director    See “Part Five: The Merger — Management.”

Luis Paulo Reis Cocco

   Director    See “Part Five: The Merger — Management.”

Shakhaf Wine

   Director    See “Part Five: The Merger — Management.”

Luiz Kaufmann

   Director    See “Part Five: The Merger — Management.”

Antonio Goncalves de

Oliveira

   Director    See “Part Five: The Merger — Management.”

Henry Philippe Reichstul

   Director    See “Part Five: The Merger — Management.”

Roberto Oliveira de Lima

   Chief Executive Officer    See “Part Five: The Merger — Management.”

Paulo Cesar Pereira

Teixeira

   Executive Vice President for Operations and interim Vice President for Finance, Planning and Control and Investor Relations Officer    See “Part Five: The Merger — Management.”
Luis Filipe Saraiva Castel- Branco de Avelar    Executive Vice President for Marketing and Innovation and Vice President for IT and Product and Service Engineering    See “Part Five: The Merger — Management.”

Javier Rodriguez Garcia

   Vice President for Technology and Networks    See “Part Five: The Merger — Management.”

Guilherme Portela Santos

   Vice President for Customers    See “Part Five: The Merger — Management.”
Sérgio Assenço Tavares dos Santos    Vice President for Regulatory Matters and Institutional Relations    See “Part Five: The Merger — Management.”

 

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5.    Directors and Executive Officers of TLE

 

The following table sets forth the name and position of each director and executive officer of TLE. The current business address of each person is Av. Roque Petroni Junior, 1464, Morumbi, São Paulo, SP, Brazil, 04707-000. Each position set forth opposite an individual’s name refers to a position with TLE unless otherwise indicated.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Fernando Xavier Ferreira

   Chairman of the Board of Directors    See “Part Five: The Merger — Management.”

Carlos Manuel L.

Vasconcellos Cruz

   Vice Chairman of the Board of Directors    See “Part Five: The Merger — Management.”

Felix Pablo Ivorra Cano

   Director    See “Part Five: The Merger — Management.”

Ignacio Aller Mallo

   Director    See “Part Five: The Merger — Management.”

Luis Paulo Reis Cocco

   Director    See “Part Five: The Merger — Management.”

Shakhaf Wine

   Director    See “Part Five: The Merger — Management.”

Luiz Kaufmann

   Director    See “Part Five: The Merger — Management.”

Antonio Goncalves de

Oliveira

   Director    See “Part Five: The Merger — Management.”

Henry Philippe Reichstul

   Director    See “Part Five: The Merger — Management.”

Roberto Oliveira de Lima

   Chief Executive Officer    See “Part Five: The Merger — Management.”

Paulo Cesar Pereira

Teixeira

   Executive Vice President for Operations and interim Vice President for Finance, Planning and Control and Investor Relations Officer    See “Part Five: The Merger — Management.”

Luis Filipe Saraiva Castel-

Branco de Avelar

   Executive Vice President for Marketing and Innovation and Vice President for IT and Product and Service Engineering    See “Part Five: The Merger — Management.”

Javier Rodriguez Garcia

   Vice President for Technology and Networks    See “Part Five: The Merger — Management.”

Guilherme Portela Santos

   Vice President for Customers    See “Part Five: The Merger — Management.”
Sérgio Assenço Tavares dos Santos    Vice President for Regulatory Matters and Institutional Relations    See “Part Five: The Merger — Management.”

 

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6.    Directors and Executive Officers of TSD

 

The following table sets forth the name and position of each director and executive officer of TSD. The current business address of each person is Praia de Botofago, 501, Torre Corcovado, 7º andar, Rio de Janeiro, RJ, Brazil, 22250-040. Each position set forth opposite an individual’s name refers to a position with TLE unless otherwise indicated.

 

Name


 

Positions Held


 

Principal Occupation and Business Experience


Fernando Xavier Ferreira  

Chairman of the

Board of Directors

  See “Part Five: The Merger — Management.”
Carlos Manuel L. Vasconcellos Cruz   Vice Chairman of the Board of Directors   See “Part Five: The Merger — Management.”
Felix Pablo Ivorra Cano   Director   See “Part Five: The Merger — Management.”
Ignacio Aller Mallo   Director   See “Part Five: The Merger — Management.”
Luis Paulo Reis Cocco   Director   See “Part Five: The Merger — Management.”
Shakhaf Wine   Director   See “Part Five: The Merger — Management.”
Luiz Kaufmann   Director   See “Part Five: The Merger — Management.”
Antonio Goncalves de Oliveira   Director   See “Part Five: The Merger — Management.”
Henry Philippe Reichstul   Director   See “Part Five: The Merger — Management.”
Roberto Oliveira de Lima   Chief Executive Officer   See “Part Five: The Merger — Management.”
Paulo Cesar Pereira Teixeira   Executive Vice President for Operations and interim Vice President for Finance, Planning and Control and Investor Relations Officer   See “Part Five: The Merger — Management.”
Luis Filipe Saraiva Castel-Branco de Avelar   Executive Vice President for Marketing and Innovation and Vice President for IT and Product and Service Engineering   See “Part Five: The Merger — Management.”
Javier Rodriguez Garcia   Vice President for Technology and Networks   See “Part Five: The Merger — Management.”
Guilherme Portela Santos   Vice President for Customers   See “Part Five: The Merger — Management.”
Sérgio Assenço Tavares dos Santos   Vice President for Regulatory Matters and Institutional Relations   See “Part Five: The Merger — Management.”

 

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7.    Directors and Executive Officers of Celular CRT

 

The following table sets forth the name and position of each director and executive officer of Celular CRT. The current business address of each person is Rua José Bonifacio, 245, Farroupilha, Porto Alegre, RS, Brazil, 90040-130. Each position set forth opposite an individual’s name refers to a position with Celular CRT unless otherwise indicated.

 

Name


 

Positions Held


 

Principal Occupation and Business Experience


Fernando Xavier Ferreira  

Chairman of the

Board of Directors

  See “Part Five: The Merger — Management.”
Carlos Manuel L. Vasconcellos Cruz   Vice Chairman of the Board of Directors   See “Part Five: The Merger — Management.”
Felix Pablo Ivorra Cano   Director   See “Part Five: The Merger — Management.”
Ignacio Aller Mallo   Director   See “Part Five: The Merger — Management.”
Luis Paulo Reis Cocco   Director   See “Part Five: The Merger — Management.”
Shakhaf Wine   Director   See “Part Five: The Merger — Management.”
Luiz Kaufmann   Director   See “Part Five: The Merger — Management.”
Antonio Goncalves de Oliveira   Director   See “Part Five: The Merger — Management.”
Henry Philippe Reichstul   Director   See “Part Five: The Merger — Management.”
Roberto Oliveira de Lima   Chief Executive Officer   See “Part Five: The Merger — Management.”
Paulo Cesar Pereira Teixeira   Executive Vice President for Operations and interim Vice President for Finance, Planning and Control and Investor Relations Officer   See “Part Five: The Merger — Management.”
Luis Filipe Saraiva Castel-Branco de Avelar   Executive Vice President for Marketing and Innovation and Vice President for IT and Product and Service Engineering   See “Part Five: The Merger — Management.”
Javier Rodriguez Garcia   Vice President for Technology and Networks   See “Part Five: The Merger — Management.”
Guilherme Portela Santos   Vice President for Customers   See “Part Five: The Merger — Management.”

 

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Name


 

Positions Held


 

Principal Occupation and Business Experience


Sérgio Assenço Tavares dos Santos   Vice President for Regulatory Matters and Institutional Relations   See “Part Five: The Merger — Management.”

 

8.    Directors and Executive Officers of Telefónica.

 

The following table sets forth the name and position of each director and executive officer of Telefónica. The current business address of each person is Gran Via, 28, 28013, Madrid, Spain, except where otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with Telefónica unless otherwise indicated. Each person listed below is a Spanish citizen except Miguel Horta e Costa and Antonio Viana Baptista, who are Portuguese citizens.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


César Alierta Izuel    Chairman of the Board of Directors and Chief Executive Officer    Executive Chairman of the Board of Directors of Telefónica since 2000. From June 1996 until his appointment as Chairman of Telefónica, he was the Chairman of Tabacalera, S.A. which later became Altadis. He has also been a Member of the Board of Directors and Standing Committee of the Madrid Stock Exchange. In January 1997, he was appointed to the Board of Directors of Telefónica, and has also been appointed as Director of Telefónica Internacional (TISA), Plus Ultra, Terra and Iberia. During his years as Chairman of Tabacalera, he was also the Chairman of the Board of Directors of Logista, a subsidiary of the Altadis group. He is currently a Member of the Altadis Board of Directors and Executive Committee.
Isidro Faine Casas    Director    Vice-Chairman of the Board of Directors of Telefónica; General Manager of La Caja de Ahorros y Pensiones de Barcelona (“la Caixa”); Financial Analyst and academic at the “Real Academia de Ciencias Econmocas y Financieras”. His current business address is at Avda. Diagonal, ns. 621-629, Planta 22, 08028, Barcelona, Spain.
Jesus Marria Cadenato Matia    Director    Member of the Board of Directors of Telefónica. He joined Banco Bilbao in 1977, where he held several key management positions in the head office and within the retail branch network. Currently represents BBVA on the Boards of Directors of Iberia Cards and Uno-e Bank. His current business address is at Paseo de la Castellana, 81, Planta 24, 28046, Madrid, Spain.
Maximino Carpio Garcia    Director    Member of the Board of Directors of Telefónica, S.A.; Member of the Economic and Social Council, a Spanish government advisory entity; Member of the Board of Directors and Advisory Committee of Abengoa, S.A.; Member of the Board of Directors of Telefónica Móviles S.A. Professor of Applied Economics at the Universidad Autonoma de Madrid since 1989. Dean of the Economics faculty of Universidad Autónoma de Madrid from 1992 to 1995;

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Head of the Department of Economics and Public Finance from 1984 to 1992 and Head of the Department of Public Economy from 1995 to 1998 at the Universidad Autónoma de Madrid. His current business address is at Dr. Casimiro Morcillo, 39, 28100, Alcobendas, Madrid, Spain.
Carlos Colomer Casellas    Director    Member of the Board of Directors of Telefónica. Chairman of the Colomer Group and Chief Executive Officer; Director of Altadis, S.A.; Chief Operating Officer of INDO, an import-export company; Director of Cataluna for Banco Santander Central Hispano; Director of Hospital General de Cataluna; Member of the Advisory Committee of CVC Capital Partners. His current business address is at c/Arag6, 499, 08013, Barcelona, Spain.
Alfonso Ferrari Herrero    Director    Member of the Board of Directors of Telefónica. Director of CTC Chile S.A. and Telefónica del Peru. From 1995 to 2000, he was Executive Chairman of Beta Capital, S.A. and prior to that he served on several Boards of Directors representing the Banco Urquijo where he was a partner from 1985. His current business address is at C/Santa Engracia, 40, 5a Planta, 28010, Madrid, Spain.
Jose Fernando de Almansa Moreno-Barreda    Director    Member of the Board and President of the International Affairs Committee of the Board at Telefónica S.A.; Member of the Board at Telefónica Móviles S.A., Telefónica de Argentina S.A., Telefónica del Peru S.A, Telecomunicações de São Paulo S.A., and BBVA Bancomer Mexico; Chief of the Royal Household of His Majesty King Juan Carlos I, from 1993 to 2002; Personal Adviser to His Majesty the King. He joined the Spanish Diplomatic Corps, and served from 1976 to 1992, as Secretary of the Spanish Embassy in Brussels, Cultural Counsellor of the Spanish Representation to Mexico, Chief Director for Eastern European Affairs and Atlantic Affairs, Director in the Spanish Foreign Affairs Ministry, Counsellor to the Spanish Permanent Representation to NATO, in Brussels, Minister-Counsellor of the Spanish Embassy in the Soviet Union, General Director of the National Commission for the 5th Centennial of the Discovery of the Americas, and Deputy General Director for Eastern Europe Affairs in the Spanish Foreign Affairs Ministry.
Gonzalo Hinojosa Fernandez de Angulo    Director    Member of the Board of Directors of Telefónica. Chairman and Chief Executive Officer of Cortefiel, S.A.; Director of Banco Central Hispano Americano and a Director of Portland Valderribas from 1991 through 2002. Director of Altadis. His current

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          business address is at Avda. del Llano Castellano, 51-28034, Madrid, Spain.
Miguel Antonio Igrejas Horta e Costa    Director    See “—Directors and Executive Officers of Portugal Telecom.”

Pablo Isla Alvarez de

Tejera

   Director    Member of the Board of Directors of Telefónica. Chairman of the Board of Directors of Altadis, S.A. and Logista, S.A. General Secretary of Banco Popular Espanol from 1998 until 2000; Chairman of the Board of Grupo Altadis and Co-Chairman of Telefónica, S.A. since July 2000. Director of Iberia Lineas Aereas de España, S.A and Mutua Madrilena. His current business address is at C/Eloy Gonzalo, 10, 28010, Madrid, Spain.

Luis Lada Díaz

   Director, General Manager for Development,
Planning and Regulatory Affairs
   Member of the Board of Directors and General Manager for Development, Planning and Regulatory Affairs of Telefónica; In 1989, he was Deputy General Manager for Technology, Planning and International Services from when he left the Telefónica Group to join Amper Group, a telecommunications systems and equipment manufacturer as General Manager for Planning and Control. He was appointed Chief Executive Officer of Telefónica Móviles de España S.A. in 1994; Chairman and President of Telefónica Móviles, S.A. from August 2000 until July 2002. Member of the Board of Directors of Telefónica Móviles, S.A. since 2000, Telefónica Internacional S.A. and Sogecable S.A.

Julio Linares

   Director    Julio Linares is a Telecommunications Engineer who joined Telefónica’s R&D Centre in May 1970 and held various positions there before being appointed Head of Telefónica’s Technology and Technical Regulations Department in 1984. In April 1990, he was appointed General Manager of Telefónica Investigación y Desarrollo (Telefónica I+D). In December 1994, he became Deputy General Manager of Telefónica’s Marketing and Service Development Department in the commercial area, subsequently moving to the position of Deputy General Manager for Corporate Marketing. In July 1997, he was appointed CEO of Telefónica Multimedia and President of Telefónica Cable and Producciones Multitemáticas. In May 1998, he was appointed General Manager of Strategy & Technology at Telefónica, S.A.’s Corporate Centre. He has been the Executive Chairman of Telefónica de España since January 2000, as well as a Chairman of subsidiaries such as TELYCO and Telefónica Cable, and Member of the Board of Directors of companies such as Telefónica Data Corp. and Telefónica I+D. He is a

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Member of the board of The Social Council, Complutense University of Madrid.

Antonio Massanell Lavilla

   Director    Member of the Board of Directors of Telefónica. Senior Executive Vice President of Caja de Ahorros y Pensiones de Barcelona and a Member of the Boards of Directors of Port Aventura, S.A. and Baqueira Beret, S.A.; President of Servihabitat, e-laCaixa, S.A. and Internet Global Congress (IGC). As a representative of Caja de Ahorros y Pensiones de Barcelona, he has worked with the Telefónica Group in the deployment of Caja de Ahorros y Pensiones de Barcelona’s corporate telecoms network. His current business address is at Avda. Diagonal, 621-629, Torre 1.Pl.22, 08028, Barcelona, Spain.
Enrique Used Aznar    Director    Member of the Board of Directors of Telefónica. Chairman of AMPER, S.A. and AmperProgramas; Deputy Chairman of Medidata (Brazil). Served as Chairman of Telefónica Latinoamerica, S.A., Telefónica Móviles, S.A., Estratel and Telefónica Investigación y Desarrollo, S.A.. Held position as Deputy Chairman and Chief Executive Officer of Telefónica Publicidad e Información and Companfa Telecomunicaciones de Chile. Also served as Member of the Board of Directors of Telefónica de Argentina, ATT Network System International and Ericsson (Spain). His current business address is at C/Marconi, 3, Parque Tecnológico de Madrid, Tres Cantos, 28760, Madrid, Spain.
Mario Eduardo Vázquez    Director    Member of the Board of Directors of Telefónica. President of Telefónica de Argentina, Telefónica Móviles Argentina, S.A., Telefónica Comunicaciones Personales, S.A., Atento Argentina, S.A. and Adquira Argentina, S.A.; Chairman of the Board of Directors of Rio Compania de Seguros, S.A.; Director of Banco Rfo de la Plata, S.A., Ríobank International, Corporación Metropolitana de Finanzas, S.A., Heller Financial Argentina, S.A., Heller-Sud Servicios Financieros, S.A., Motorcare Argentina, S.A., Acsa Loss Control, S.A., Central Puerto, S.A. and Indra SI S.A.. His current business address is at Avd. Ingeniero Huergo, 723, Piso 20, C1107AOH, Buenos Aires, Argentina.
Antonio Pedro de Carvalho Viana Baptista    Director    See “—Directors and Executive Officers of Brasilcel.”

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


Gregorio Villalabeitia Galarraga    Director    Member of the Board of Directors of Telefónica. Member of the Board of Directors of Gas Natural, S.A., Iberia Lfneas Aereas de España, S.A. and Repsol YPF, S.A.; General Manager of Caja de Ahorros Vizcaína; Chief Executive of Banco Cooperativo Espanol; Chief Operating Officer of Banco de Credito Local and Chief Executive Officer of Caja Postal in January 1995. Wholesale Banking General Manager of Argentaria in 1998. General Manager of Global Investment Banking of Banco Bilbao Vizcaya Argentaria (BBVA) from 1999 until 2001; General Manager of the Real Estate and Industrial Group of Banco Bilbao Vizcaya Argentaria (BBVA) since 2001. His current business address is at Paseo de la Castellana, 81, Planta 24, 28046, Madrid, Spain.
Vitalino Manuel Nafría Aznar    Director    Mr. Nafría joined Banco Bilbao Vizacaya in 1966 and held different executive positions in the entity. In 1998, he was designated as Executive Officer and Director of Banco Bilbao Vizcaya México. In 2001, he was appointed as Member of the Executive Committee of BBVA Group, and in 2003 he was designated as General Manager of BBVA America. Since 2005, he is General Manager of Retail Banking for Spain and Portugal.
Ramiro Sanchez de Lerín García-Ovies    Director, General Counsel and
Secretary of the
Board
   General Counsel and Secretary to the Board of Directors of Telefónica. Served as “Abogado del Estado” working for the Treasury – Internal Revenue in Madrid (delegación de Hacienda de Madrid). Afterwards he was assigned to the State Secretariat for the European Communities and later to the Foreign Affairs Ministry. He has been General Secretary and Secretary of the Board of Elosda, S.A., Tabacalera, S.A., Altadis, S.A. and Xfera Móviles, S.A. Professor at ICADE, Instituto de Empresa and Escuela de Hacienda Pública.
Calixto Ríos Perez    General Manager of Auditing and Management Resources    General Manager of Auditing and Management Resources at Telefónica. Served as Chief Financial Officer of Tabacalera, S.A. and afterwards as advisor to the Chairmen and Head of Strategy and Planning of Tabacalera/Seita. Served as Corporate General Manager for Institutional Relations of Telefónica. General Manager for Internal Auditing and Communications of Telefónica since 2002.
Santiago Fernandez Valbuena    General Manager of Finance and Shared Resources    General Manager of Finance and Shared Resources of Telefónica since December 2003. Chief Financial Officer of Telefónica since July 2002. He joined Telefónica in 1997 as Chief Executive Officer of Fonditel (Telefónica’s Pension Assets Manager). Served as President of the Research Commission at the Spanish Institute of Financial Analysts.

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


Luis Abril Perez    General Manager
for Corporate Communication
   General Manager for Corporate Communications at Telefónica. General Director for Banesto from 1994 until 1999 and General Director for Communications for BSCH from 1999 until 2001.

Javier Nadal Ariño

   General Manager
for Institutional Relations and the Telefónica
Foundation
   Javier Nadal Ariño is a graduate in telecommunications engineering from the Polytechnic University of Madrid. He has been the Chairman of Telefónica del Perú for the last two years and was previously General Manager for Regulation at Telefónica Internacional for four years and Chairman of Telefónica Argentina for three years. He was General Manager of Telecommunications and the first Chairman of Retevisión. Previously he worked in research and development at Telettra Española in Vimercate (Italy) and Torrejón de Ardoz. He has also worked for the UNDP (United Nations Development Program) in Latin America. He has been Secretary of the Spanish College of Telecommunications Engineering.

Juan Carlos Ros Brugueras

   General Vice
Secretary and
Manager of the
Legal Services
   Mr. Ros was previously General Counsel of Telefónica Internacional, S.A. and he serves as Director of different companies of the Telefónica Group such as CTC Chile, Telefónica de Argentina and Telesp do Brasil.

 

9.    Directors and Executive Officers of Portelcom Participações.

 

The following table sets forth the name and position of each director and executive officer of Portelcom Participações. The current business address of each person is Av. Roque Petroni Junior, 1464, Morumbi, São Paulo, SP, Brazil, 04707-000, except where otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with Portelcom Participações unless otherwise indicated. Each person listed below is a citizen of Portugal.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Paulo Cesar Pereira Teixeira    Director    See “Part Five: The Merger — Management.”

Roberto Oliveira de Lima

   Director    See “Part Five: The Merger — Management.”

 

10.    Directors and Executive Officers of Portugal Telecom.

 

The following table sets forth the name and position of each director and executive officer of Portugal Telecom. The current business address of each person is Avenida Fontes Pereira de Melo, 40, 1069-300, Lisbon, Portugal, except where otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with Portugal Telecom unless otherwise indicated. Each person listed below is a citizen of Portugal, except Fernando Abril-Matroell Hernandez, who is a Spanish citizen, Pedro Sampaio Malan, who is a Brazilian citizen, and Gerald S. McGowan and Peter Eugene Golob, who are United States citizens.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Ernani Rodrigues Lopes    Chairman of the Board of Directors    Chairman of the Board of Directors of SESC—Sociedade de Estudos Superiores de Contabilidade, S.A. since 2003;

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Ambassador of Portugal in Bonn from 1975 until 1979; Ambassador of Portugal in Brussels to the CEE from 1979 until 1983; Minister of Finance from 1983 until 1985; Managing Partner of SaeR—Sociedade de Avaliação de Empresas e Risco, Lda. since 1998; Managing Partner of Ernani R. Lopes & Associados, Lda. since 1997; Member of the Consultive Council of Bank of Portugal since 1997; Member of the Consultive Council of Instituto de Crédito Público since 1997; Member of the European Convention in representation of Portugal since 2002; Chairman of the Board of Bio 21, from 1995 until 2001; President of the General Assembly of Gestifer, SGPS, S.A since 1997; President of the General Assembly of Morate—Sociedade de Investimentos Imobiliarios, S.A since 1989; President of the General Assembly of Lusotur Sociedade Financeira de Turismo, S.A from 1991 until 1998; President of the General Assembly of Inogi—Inovacao Imobilidria, Gestao e Invetimento, S.A since 1989; President of the General Assembly of Socifa—Sociedade de Prestacao de Servicos Financeiros e de Administração e Gestão, S.A from 1988 until 1991; Member of the General Board of Telecel from 1991 until 1994; Member of the General Board of Espfrito Santo Group since 1996; Member of the Board of Directors of Espfrito Santo Resources Ltd since 1990; Vice-President of the Board of Directors of ESPART—Participações Financeiras, SGPS, S.A. from 1990 until 1992; Chairman of the Board of Directors of Escopar — Sociedade Gestora de Participações Sociais, S.A. since 1995; Chairman of the Board of Directors of Espírito Santo Irmãos—Sociedade Gestora de Participações Sociais, S.A. since 1994; Chairman of the Board of Directors of Espírito Santo Property Holding (Portugal) since 1994; Chairman of the Board of Directors of GESTRES—Gestao Estratéegica Espírito Santo, S.A. since 1990; Chairman of the Board of Directors of SFIR—Sociedade de Financiamento e Investimento de Risco, S.A. from 1988 until 1995; Chairman of the Board of Directors of Alcatel—Portugal, Sistemas de Comunicacao, S.A. from 1988 until 1995; Chairman of the Board of Directors of CPR—Companhia Portuguesa de Rating, S.A. from 1969 until 2003.

Miguel Antonio Igrejas

Horta e Costa

   Director, Chief Executive Officer    Chief Executive Officer of Portugal Telecom, SGPS, S.A. since May 28, 2002. Chairman of the Board of Directors of Portugal Telecom Investimentos Internacionais—Consultoria Internacional S.A. since April 2004; Chairman of the Board of Directors of PT Prime, SGPS, S.A. since February 2004; Chief Executive Officer of PT Comunicações, S.A. since

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          January 2004; Chairman of the Board of Directors of PT Sistemas de Informação, S.A. since January 2004; Chairman of the Board of Directors of PT Corporate —Soluções Empresariais de Telecomunicações e Sistemas, S.A. since June 2003; Chairman of the Board of Directors of PT Compras — Servicos de Consultoria e Negociação, S.A. since May 2003; Chairman of the Board of Directors of Fundacao Portugal Telecom since March 2003; Chairman of the Board of Directors of PT Ventures, SGPS, S.A. (ex-Portugal Telecom Internacional, SGPS, S.A.) since December 2002; Chairman of the Board of Directors of PT Multimedia —Servicos de Telecomunicações e Multimedia, SGPS, S.A. since August 2002; Chairman of the Board of Directors of Portugal Telecom Brasil, S.A. since July 2002; Chairman of the Board of Directors of PT Móveis, SGPS, S.A. and TMN — TeleComunicações Móveis Nacionais, S.A. since June 2002; Chairman of the Board of Directors of PT Comunicações, S.A. since May 2002; Vice-Chairman of the Executive Committee of Portugal Telecom, SGPS, S.A. from April 2000 until May 2002; Vice-Chairman of the Board of Directors of PT Investimentos, SGPS, S.A. from 1999 until June 22, 2001; Vice-Chairman of the Board of Directors of Telesp Celular Participações S.A. from 1998 until November 2000; Vice-Chairman of the Board of Directors of PT Multimedia — Servicos de TeleComunicações e Multimedia, SGPS, S.A. from 2000 until 2002; Member of the Board of Directors of Telesp Participações S.A. from 1998 until November 2000; Member of the Board of Directors of Telesp, S.A. from 1998 until November 2000; Chairman of the Board of Directors of Portugal Telecom Internacional, SGPS, S.A. from 2000 until 2002; Chief Executive Officer of Portugal Telecom Internacional, SGPS, S.A. from 1998 until 2000; Member of the Board of Directors of Telefónica, S.A. since 1998; Member of the Board of Directors of SIC, S.A. from 1998 until 2000; Member of the Board of Directors of Alianca Atlantica Holdings since 1997; Vice-Chairman of the Board of Directors of Portugal Telecom Internacional, SGPS, S.A. from 1996 until 1997; Vice-Chairman of the Board of Directors of Companhia Portuguesa Radio Marconi S.A. from 1994 until 1995; Non-executive Member of the Board of Directors of Portugalia-Companhia de Transportes Aereos, S.A. since 1993; Vice- Chairman of the Board of Directors of Banco ESSI, S.A. from 1992 until 1994; Non-executive Member of the Board of Directors of BES Investimento, S.A. since 1999; Chairman and Member of the Board of Directors of SIBS-Sociedade Interbancaria de Servicos, S.A. from 1991 until 1995;

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Chairman of the Board of Directors of Euroges-Aquisição de Créditos a Curto Prazo, S.A. since 1991; Member of the Board of Directors of Banco Espírito Santo e Comercial de Lisboa from 1990 until 1992; Vice-Chairman of Associação Industrial Portuguesa from 1990 until 1994; Secretary of State for Foreign Trade from 1987 until 1990; Vice-Chairman of the Board of Directors of CTT and TLP from 1984 until 1987; Chairman of the Board of Directors of Companhia Portuguesa Radio Marconi S.A. from 1982 until 1984; Director-General of CTT from 1981 until 1982. See “Directors and Executive Officers of TCP.”
Zeinal Abedin M. Bava    Director and Chief Financial Officer    See “— Directors and Executive Officers of Brasilcel.”

Carlos Manuel L.

Vasconcellos Cruz

   Director and Executive Officer    See “Part Five: The Merger — Management.”
Iriarte Jose Araujo Esteves    Director and Executive Officer    Executive Vice-Chairman of the Board of Directors of PT Comunicações, S.A. since January 2004; Chief Executive Officer of TMN—Telecomunicações Móveis Nacionais, S.A. since 1998; Chief Executive Officer of PT Móveis, SGPS, S.A. since 2000; Chairman of the Board of Directors of PT Prime — Soluções Empresariais de Telecomunicações e Sistemas, S.A. since February 2004; Chairman of the Board of Directors of PT Acessos de Internet WiFi, S.A. since January 2004; Member of the Board of Directors of PT Corporate — Soluções Empresariais de Telecomunicações e Sistemas, S.A. since June 2003; Member of the Board of Directors of PT Compras—Servicos de Consultoria e Negociação, S.A. since May 2003; Member of the Board of Directors of Fundação Portugal Telecom since March 2003; Member of the Board of Directors of Brasilcel, N.V. since December 2002; Member of the Board of Directors of Portugal Telecom Brasil, S.A. since July 2002; Member of the Board of Directors of PT Prime, SGPS, S.A. since 2002; Member of the Board of Directors of Telesp Celular Participações, S.A. since April 10, 2001; Member of the Board of Directors of Tele Sudeste Participações, S.A. since 2003; Member of the Board of Directors of CRT Celular Participações, S.A. since 2003; Member of the Board of Directors of Tele Leste Participações, S.A. since 2003; Member of the Board of Directors of Tele Centro Oeste Celular Participações, S.A. since 2003; Vice-Chairman of the Board of Directors of Portugal Telecom Internacional, SGPS, S.A. from 2000 until 2002; Chairman of the Board of Directors of Telepac from 1991 until 1997; Vice-Chairman of the Board of Directors of TMN — Telecomunicações Móveis

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Nacionais, S.A. from 1991 until 1992; Member of the Board of Directors of CTT from 1989 until 1992; Director-General of Telecommunications of CTT from 1986 until 1989; Deputy General Manager of Telecommunications of CTT from 1983 until 1986; Manager of the Telecommunications Business Planning Department of CTT from 1982 until 1983; Regional Telecommunications General Manager of CTT from 1981 until 1982. His current business address is at Avenida Alvaro Pais, 02, 1649-0041 Lisbon, Portugal.
Paulo Jorge da Costa Goncalves Fernandes    Director and Executive Officer    Member of the Board of Directors of PT Corporate — Soluções Empresariais de Telecomunicações e Sistemas, S.A. since June 2003; Chief Executive Officer of PT Sistemas de Informação, S.A. since May 2003; Member of the Board of Directors of PT Compras — Serviços de Consultoria e Negociação, S.A. since May 2003; Member of the Board of Directors of Fundação Portugal Telecom since March 2003; Member of the Board of Directors of Brasilcel, N.V. from December 2002 until July 2003; Vice-Chairman of the Board of Directors of PT Ventures, SGPS, S.A. since December 2002; Member of the Board of Directors of Portugal Telecom Brasil, S.A. since July 2002; Member of the Board of Directors of Telesp Celular Participações, S.A. since April 10, 2001; Member of the Board of Directors of Tele Sudeste Participações, S.A. from January 2003 until July 2003; Member of the Board of Directors of CRT Celular Participações, S.A. from January 2003 until July 2003; Member of the Board of Directors of Tele Leste Participações, S.A. from January 2003 until July 2003; Member of the Board of Directors of Tele Centro Oeste Celular Participações, S.A. from January 2003 until July 2003; Chairman of the Board of Directors of PT — Sistemas de Informação, S.A. since 2000; Partner of McKinsey & Company from 1997 until 2000; Member of McKinsey & Company’s Leadership World Groups for the areas of telecommunications and transportation from 1997 to 2000; Senior Advisor of McKinsey & Company from 1991 until 2000; Partner and Manager of Spades, Lda from 1990 to 1991. His current business address is at Urbanização Tagus Park, Lote 35, 2784-549, Porto Salvo, Portugal.
Joaquim Anibal Freixial de Goes    Director    Member of the Board of Directors of PT Multimedia — Servicos de TeleComunicações e Multimedia, SGPS, S.A. since August 2002; Member of the Board of Directors of Companhia de Seguros Tranquilidade-Vida, S.A. since 2002; Member of the Board of Directors of BEST — Banco Electrónico de Servico Total, S.A. since May 2001; Member of the Board of Directors of Banco Espfrito Santo, S.A. since 2000; Member of the Board

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          of Directors of BES.COM, SGPS, S.A. since 2000; Chairman of the Board of Directors of E.S. INTERACTION, Sistemas de Informacao Interactivos, S.A. since 2000; Member of the Board of Directors of ESDATA, Espfrito Santo Data, SGPS, S.A. since 1999; Member of the Board of Directors of CREDIFLASH, SA since 1999; Head of the Strategic Marketing Department of Banco Espfrito Santo, S.A. from 1995 until 1999; Head of the Strategic Planning Department of CIMPOR — Cimentos de Portugal, S.A. from 1994 until 1995; Senior Consultant of Roland Berger & Partner from 1992 until 1993; Consultant of Roland Berger & from 1989 until 1992.
Henrique Manuel Fusco Granadeiro    Director    Chief Executive Officer of Lusomundo Media, SGPS, S.A. since 2002; Chief Executive Officer of Diario de Notfcias since 2002; Chief Executive Officer of Jornal de Notfcias since 2002; Chief Executive Officer of TSF since 2002; Chief Executive Officer of Jornal do Fundao since 2002; Chief Executive Officer of Acoreana Ocidental since 2002; Chief Executive Officer of DN da Madeira since 2002; Chairman of the Board of Directors of Aleluia-Ceramica Comercio e Indiistria S.A since 2001; Member of the Board of Directors of Parfil SGPS S.A. since 2001; Member of the Strategic Council of Banco Finantia since 2001; Member of the Board of Directors of PT Multimedia — Servicos de TeleComunicações e Multimedia, SGPS, S.A. since 2001; Chairman of the Board of Directors of Margrimar — Marmores e Granitos S.A since 1999; Chairman of Marmetal — Marmores e Materiais de Construcao S.A. since 1999; Member of the Board of Directors of Fundacao Eugenio de Almeida during 1992; Member of the Board of Directors of Controljornal SGPS S.A. from 1990 until 2001; Member of the Board of Directors of Sojornal — Sociedade Jornalistica e Editorial S.A from 1990 until 2001; Member of the Board of Directors of Marcepor-Marmores e Ceramicas de Portugal S.A during 1990; Chairman of Fundacao Eugenio de Almeida from 1989 until 1992; President of IFADAP — Instituto Financeiro de Apoio ao Desenvolvimento da Agricultura e Pescas from 1987 until 1990; Delegate Chairman of Fundacao Eugenio de Andrade from 1981 until 1987; Member of the Board of Directors of M.N. Tiago, Construcoes S.A. during 1981; Member of the Board of Directors of Standart Electrica during 1981; Ambassador of Portugal near O.C.D.E and Chief of the Civil House of the President of Portugal from 1976 until 1979. His current business address is at Av. 5 de Outubro, 208, 1069-203, Lisbon, Portugal.

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


Carlos Alberto de Oliveira Cruz    Director    Member of the Board of Directors of Gerbanca, SGPS, S.A. since March 2003; Chairman of the Board of Directors of Caixa Brasil, SGPS, S.A. since 2001; Vice-Chairman of the Board of Directors of Caixa Geral de Depositos, S.A. from 2000 until April 2004; Vice-Chairman of the Board of Directors of Caixa-Banco de Investimento, S.A. from 2000 until April 2004; Member of the Board of Directors of Unibanco Holdings, S.A. since 2000; Member of the Board of Directors of Banco de Portugal from 1996 until 2000; Representative of Banco de Portugal at Economic Policy Committee from 1996 until 1998; Member of the Board of Directors of Imoleasing from 1989 until 1996; Member of the Board of Directors of Caixa Geral de Depósitos, S.A. from 1984 until 1989; Head of International Relations Department of Banco Pinto & Sotto Mayor, S.A. from 1982 until 1983; Member of the Board of Directors of the Portuguese Electricity Company from 1977 until 1982; Secretary of State for Economic Coordination from 1976 until 1977; Delegate to OECD Economic Committee from 1973 until 1975.
Jorge Humberto Correia Tome    Director    Chief Executive Officer of Caixa — Banco de Investimentos, S.A. since 2002; Chairman of the Board of Directors of TREM II — Aluguer de Material Circulante, ACE since 2002; Member of the Board of Directors of Caixa — Banco de Investimentos, S.A. since 2001; Member of the Board of Directors of Caixa Gestao de Patrimónios since 2001; Member of the Board of Directors of Insurance Companies of BANIF Group: Acoreana, O Trabalho, O Trabalho Vida and Pension Fund Companies from 1996 until 2001; Partner of Coopers & Lybrand from 1995 until 1996; Manager of International Division of Banco Pinto & Sotto Mayor, S.A. in 1995; Member of the Board of Directors of Banco Pinto & Sotto Mayor, S.A. from 1994 until 1995; Member of the Board of SULPEDIP/PME Investimentos from 1989 until 1994; Junior Manager and Principal Manager of Capital Market Division of Banco Pinto & Sotto Mayor, S.A from 1985 until 1989; Senior Auditor with Coopers & Lybrand from 1980 until 1983; Junior Economist in IAPMEI (Institute for Small and Medium Companies) from 1979 until 1980. His current business address is at Rua Barata Salgueiro, 33, 1269-0057, Lisbon, Portugal.
Fernando Maria Costa Duarte Ulrich    Director    Member of the Board of Directors of PT Multimedia — Servicos de TeleComunicações e Multimedia, SGPS, S.A. since August 2002; Member of the Board of Directors of SIC since 2000; Member of the Board of Directors of Impresa since 2000; Member of the Board of Directors of Allianz Portugal since 1999; Vice-

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Chairman of the Board of Directors of BPI-SGPS from 1999 until 2002; Vice-Chairman of the Board of Directors of Banco BPI, S.A. since 1998; Chief Executive Officer of BPI Pensóes, S.A. since 1995; Chief Executive Officer of BPI Vida, S.A. since 1991; Chief Executive Officer of BPI Fundos, S.A. since 1990; Vice-Chairman of the Board of Directors of Banco Portugues de Investimento, S.A. since 1989; Vice-Chairman of the Board of Directors of Banco de Fomento & Exterior, SA from 1996 until 1998; Vice-Chairman of the Board of Directors of Banco Borges & Irmao, SA from 1996 until 1998; Executive Director of Banco Fonsecas & Burnay from 1991 until 1996; Vice-Chairman of the Board of Directors of Banco Fonsecas & Burnay, SA from 1988 until 1996; Executive Director of BPI-Banco Portugues de Investimento, SA from 1985 until 1989; Deputy Manager of SPI-Sociedade Portuguesa de Investimentos from 1983 until 1985; Chief of the Cabinet of the Minister of Finance from 1981 until 1983; Member of the Secretariat for the External Economic Cooperation of the Ministry of Foreign Affairs from 1979 until 1980; Portuguese Delegation to the OECD, from 1975 until 1979; Head of the Financial Markets Unit of the weekly newspaper “Expresso” from 1973 until 1974. His current business address is at Rua Braancamp, 11, 8 o Piso, 1250-0049, Lisbon, Portugal.

Fernando Abril-Martorell

Hernandez

   Director    Member of the Board of Directors of TeleComunicações de São Paulo—Telesp from 2001 until 2003; Chief Operating Officer of Telefónica S.A. from 2000 until 2003; Chief Executive Officer of Telefónica Publicidad e Informacion from 1999 until 2000; Chief Financial Officer of Telefónica, S.A. from 1997 until 1999; Director-General of Corporate Finance of Telefónica Publicidad e Informacion from 1997 until 1999; Head of Treasury Department of JP Morgan from 1987 until 1997.

Antonio Pedro de Carvalho

Viana Baptista

   Director    See “—Directors and Executive Officers of Brasilcel.”

Pedro Sampaio Malan

   Director    Vice-Chairman of the Board of Directors of Unibanco; Chairman of the Board of Directors of Globex-Ponto Frio; Member of the Consulting Committee of Alcoa Alumfnio, S.A.; Minister of Finance in Brazil from 1995 until 2002; Chairman of the Board of Directors of Banco Central do Brasil from 1993 until 1994; Executive Manager of Banco Mundial from 1992 until 1993 and from 1986 until 1990; Executive Manager of Banco Interamericano de Desenvolvimento from 1990 until 1992. His current business address is at Av. Eusebio

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Matoso, 891, 4o andar, 05423-901, São Paulo, SP, Brazil.

Patrick Monteiro de Barros

   Director    Chairman of the Board of Directors of Telexpress Investments Limited since 2002; Member of the Board of Directors of Tosco Corporation from 1995 until 2001; Member of the Board of Directors of Petrogal, Petroleos de Portugal from 1995 until 2000; Member of the Board of Directors of Espfrito Santo Financial Group since 1992; Member of the Board of Directors of Vodafone Portugal from 1992 until 1998; Member of the Board of Directors of Petrocontrol from 1991 until 2000; Chairman and Chief Executive Officer of Argus Resources Ltd. Since 1988; President and Chief Executive Officer of Sigmoil Resources from 1985 until 1988; Senior Vice President of Philipp Brothers from 1985 until 1988; Chairman of the Board of Directors of Protea Holdings Inc. since 1981; Member of the Board of Directors of Sociedade Nacional de Petróleos (SONAP) from 1971 until 1975; General Manager of Supply of Sociedade Nacional de Petróleos (SONAP) from 1967 until 1971; Chairman of Fundacao Monteiro de Barros since 1966.

Luis de Melo

Champalimaud

   Director    Chairman of the Board of Directors of Banco Totta & Acores, S.A. and Credito Predial Portugues, S.A. from January 1997 until January 2000; Chairman of the Board of Directors of Banco Totta e Sotto Mayor de Investimentos, S.A., from March 1996 until January 2000; Chairman of the Board of Directors of Banco Pinto & Sotto Mayor, S.A. from January 1995 until January 2000; Chairman of the Board of Directors of Companhia de Seguros Mundial- Confianca, S.A. from March 1993 until March 1995; Member of the Board of Directors of Companhia de Seguros Mundial-Confianca, S.A. from June 1992 until March 1993; Chief Executive Officer of Soeicom, S.A. from September 1982 until April 1992; Sales Director of Soiecom, S.A. from June 1975 until September 1982.

Jorge Maria Bleck

   Director    Chairman of Credito Predial Portugues since 2000; Vice-Chairman of Banco Santander de Negócios Portugal, S.A since 2000; Vice-Chairman of Banco Santander, S.A since 1999; Member of the Board of Directors of Foggia SGPS, S.A. since 2000.

Carlos Manuel de Almeida

Blanco de Morais

   Director    Professor of the Lisbon University of Law since 1997; Member of the Board of Fundacao D. Pedro IV since 1995; Principal Legal Adviser of the Legal Center near the Portuguese Government since 1993.

Joao Manuel de Mello

Franco

   Director    Member of the Board of Directors of Jose de Mello Participações, SGPS, S.A. since 2002; Vice-Chairman of

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          the Board of Directors of Jose de Mello Imobiliaria since 2002; Chairman of the Board of Directors of Jose de Mello Residencias e Servicos since 2001; Chairman of the Board of Directors of Imopólis (SGFII) since 2001; Chairman of the Board of Directors of Engimais since 2001; Member of the Board of Directors of International Shipowners Reinsurance Co since 1998; Member of our Superior Board from 1996 until 1997; Chairman of the Board of Directors of Soponata-Sociedade Portuguesa de Navios Tanques, S.A. from 1997 until 2001; CEO and Vice-Chairman of the Board of Directors of LISNAVE from 1995 until 1997; Chairman of the Board of Directors of Marconi from 1994 until 1995; Chairman of the Board of Directors of Guine Telecom from 1994 until 1995; Chairman of the Board of Directors of Companhia Santomense de TeleComunicações from 1994 until 1995; Member of the Board of Directors of CN-Comunicações Nacionais S.A. from 1993 until 1995; Chairman of the Directorate of the Portuguese Association for the Development of Communications from 1993 until 1995; Chairman of the Board of Directors of TMN—TeleComunicações Móveis Nacionais, S.A. from 1991 until 1994; Chairman of the Board of Directors of TLP-Telefones de Lisboa e Porto S.A. from 1989 until 1994; Director of TDC-Tecnologia das Comunicações, Lda. from 1986 until 1989.

Gerald S. McGowan

   Director    Ambassador of US to Portugal from 1997 until 2001; Member of the Board of Directors of the Overseas Private Investment Corporation (OPIC) in 1996; Member of the Board of Directors of Virginia Port Authority in 2002; Member of Board of Directors of Cellular Telecomunications Industry Association from 1990 until 1998.

Peter Eugene Golob

   Director    Head of the Merrill Lynch Global Communications Group for Europe from 1998 until 2001; Head of the Telecoms Media Technology Team and Investment Banking Operating Committee of Deutsche Morgan Grenfell from 1995 until 1998; Head of the Telecoms Industry Investment Banking of S.G.Warburg from 1992 until 1995.

Nuno Joao Francisco Soares

de Oliveira Silverio

Marques

   Director    Partner of CIDOT, Comunicacao e Imagem, Lda. since 2002; Partner of Fundaments from 2000 until 2002; Member of the Board of Directors of Telecel, Comunicações Pessoais, S.A from 1992 until 2000; Member of the Board of Directors of Telechamada S.A from 1994 until 1995; Member of the Board of Directors of Quimigal from 1988 until 1991; Manager Quimibro, Comercio Internacional de Metais e Mercadorias Lda. from 1980 until 1988.

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


Thomaz de Mello Paes de

Vasconcellos

   Director    Managing Partner of TPV, Lda. since 1999; Member of the Board of Directors of Grupo Santogal from 1989 until 1998; Controller of Hubbard Group from 1987 until 1988.

Luis Manuel da Costa de

Sousa de Macedo

  

Secretary-General,

Company Secretary

   Secretary-General and Company Secretary of Portugal Telecom, SGPS, S.A. Member of the Board of PT Ventures, SGPS, S.A. (ex-Portugal Telecom Internacional, SGPS, S.A.) since 2000; Manager of Image and Communication Department of Portugal Telecom Group since 1999; Member of the Board of Directors of Banco Espfrito Santo do Oriente since 1996; Member of the Board of Directors of AMSCO —African Management Services Company since 1996; Member of Management and Executive Board of Portuguese-Angolan Chamber of Commerce and Industry since 1996; Member of the Fiscal Board of UCCLA-Uniao das Cidades e Capitais de Lingua Portuguesa since 1996; Chairman of ELO (Associacao Portuguesa para o Desenvolvimento Economico e a Cooperacao) since 1996; Assistant Senior Manager of the Board of Directors of Marconi responsible for the Company’s Communication Office from 1995 until 1999; Secretary of State of Portuguese Communities from 1992 until 1995; Chef de Gabinet of Minister of the “Quality of Life” from 1981 until 1982; Management Consultant, Manager of Human Resources, General Secretary and Manager of Central International Corporate Department of Marconi in 1982; Legal Advisor of CIP — Confederation of Portuguese Industry and several other companies and employers’ associations from 1974 until 1982.

Francisco Jose Meira Silva

Nunes

  

Chief Accounting

Officer and

Manager of

Financial Reporting

and Consolidation

Department

   Chief Accounting Officer and Manager of the Financial Reporting and Consolidation Department of Portugal Telecom since 2003; Member of the Board of Directors of PT Pro, S.A. since February 2003 and Member of its Executive Committee since March 2004; Member of the Board of Directors of PT Compras — Servicos de Consultoria e Negociacao, S.A. since May 2003; Partner of Audit and Business Advisory Services of Andersen from 1999 until 2002; Manager of Audit and Business Advisory Services of Andersen from 1992 until 1999.

Carlos Manuel Mendes

Fidalgo Moreira da Cruz

  

Manager of the

Financing and

Treasury

Department

   Manager of the Financing and Treasury Department of Portugal Telecom since 2001; Managing Director of Portugal Telecom International Finance BV since 2002; Member of the Portuguese Privatisation Commission from 1999 until 2001; Advisor to the Secretary of State for Treasury and Finance since 1996 until 1998; Lecturer of Financial Strategy from 1996 until 2001 at MBA Program — IEP/EGP; Assistant Lecturer of Corporate Finance and Macroeconomics at Oporto University from

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          1987 until 1996; Assistant Lecturer of Firm Valuation from 1994 to 1997 at IESF; Analyst of the Mergers and Acquisitions Department of BPI from 1990 until 1994.

Nuno Bernando Ramires

Leiria Fidalgo Prego

  

Manager of the

Investor Relations

Department

   Manager of the Investor Relations Department of Portugal Telecom since 2004; Head of Equity Research and Telecoms Analyst at BCP Investimento from 2001 until 2004; Portfolio Manager of BPI Fundos from 1999 until 2000; Deputy Director in the Research Department of Banco Finantia from 1996 until 1999.

Miguel Augusto Chambel

Rodrigues

  

Manager of the

Control Department

   Manager of the Control Department of Portugal Telecom since 2004; Manager and Project Leader of the Strategy and Business Development Department of Portugal Telecom, SGPS, S.A. from 2000 until 2004; Member of the Board of Directors of PT Sistemas de Informacao, S.A. from 2003 until 2004; Member of the Board of Directors of PT Ventures, SGPS, S.A. from 2002 until 2004; Project Leader and Consultant at Boston Consulting Group from 1998 until 2000; Analyst at McKinsey and Company from 1993 until 1996.

Maria Paula de Almeida

Martins Canais

  

Manager of the

Planning

Department

   Manager of the Planning Department of Portugal Telecom since 2004; Non-executive Director of Telesp Celular, S.A. from June 2003 until January 2004; Member of the Board of Directors of Telesp Celular Participações, S.A. from January 2002 until June 2003; Executive Vice President of Telesp Celular S.A. from May 2002 until June 2003; Chief Financial Officer of Telesp Celular S.A. from September 2001 until May 2002; Director of Investor Relations of Telesp Celular Participações, S.A. from September 2001 until June 2003; Head of Controlling and Corporate Development Department of Portugal Telecom from 1997 until 2001; Member of the Board of Directors of Telemensagem from 1998 until 1999.

Antonio Manuel Robalo de

Almeida

  

Manager of the

Regulatory

Department

   Manager of the Regulatory Department of Portugal Telecom since 2003. Manager of Regulatory Department of Portugal Telecom, SGPS, S.A. from 2002 until 2003; Manager of Economic Conditions and Regulatory Coordination of PT Comunicações, S.A. since 2000; Manager of Regulation Department of Portugal Telecom, S.A. from 1997 until 2000; Member of the Board of Main Road/ Optimus during 1997; Director of New Telecommunications Business of Sonae Group from 1996 until 1997; Member of the Board of Directors of ICP — Instituto das Comunicações de Portugal from 1989 until 1996; Director of Planning and Development of CTT — Correios e TeleComunicações de Portugal, S.A. from 1986 until 1988; Director of Planning of CTT — Correios e TeleComunicações de Portugal, S.A. from 1985 until 1986; Deputy Director of Planning of CTT —

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Correios e TeleComunicações de Portugal, S.A. from 1984 until 1985; Head of Training Department of CTT — Correios e TeleComunicações de Portugal, S.A. from 1983 until 1984; Head of Human Resources Planning of CTT — Correios e TeleComunicações de Portugal, S.A. from 1982 until 1983.

Rita de Sampaio Nunes

   Manager of the Competition Department    Manager of the Competition Department of Portugal Telecom since 2004; Head of European Community Affairs of ICP-ANACOM-Autoridade Nacional de Communicacoes from 2003 until April 2004; Member of the Regulatory Department of Portugal Telecom, SGPS, S.A. from January 2000 until September 2003; Member of the Regulatory Department of Portugal Telecom, S.A. from October 1998 until December 1999; Seconded National Expert in the European Commission — DG Enterprise and DG Information Society from September 1995 until September 1998; Internal Legal Adviser of the Board of Directors of CN — Communicacoes Nacionais, SGPS, S.A. from April 1993 until August 1995.

Miguel Dias Amaro

   Manager of the Internal Audit Department    Manager of the Internal Audit Department of Portugal Telecom since 2004; Assistant to the CEO of Portugal Telecom, SGPS, S.A. from 2003 to 2004; Equity Analyst (telecommunications sector) in Espfrito Santo ByM (Madrid office) from November 2000 until December 2002; Assistant to the Secretary of State for Treasury and Finance from November 1999 until October 2000; Equity Analyst (Retail and Pulp and Paper sectors) in Espfrito Santo Research from December 1997 until October 1999 (Lisbon office); Head of Sales for Roca Ceramica e Comercio S.A. from 1994 until 1996; Sales Delegate for Roca Ceramica e Comercio S.A. from 1991 until 1994.
Abilio Cesario Lopes Martins    Manager of the Communication Department    Manager of the Communication Department of Portugal Telecom since 2003; Head of Corporate Communication of Portugal Telecom from 2002 until 2003; Media Relations Advisor for Portugal Telecom’s Chief Executive Officer and Head of Corporate Communication for PT Brasil from 2000 until 2002; Consultant JLM & Associados Consultants from 1998 to 2000.
Luis Filipe Nunes Cabral Moura    Manager of the Human Resources Department    Manager of the Human Resources Department of Portugal Telecom since 2000; Manager of Human Resources Department of Portugal Telecom, SA from 1998 until 2000; Manager of Banking Supervision Department of Monetary Authority of Macao from 1995 until 1998; Manager of Financial and Human Resources Department of Monetary Authority of Macao from 1993 until 1995; Manager of Human Resources Division of

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Monetary Authority of Macao from 1991 until 1993; Manager of Macao’s Government Land Department from 1990 until 1991; Manager of Macao’s Government Projects Analysis Department from 1989 until 1990; Operations Research High School Assistant from 1986 until 1989; Economist of a Portuguese Group (SOTRIL) from 1985 until 1986; Economist of Azores’ Planning Department from 1983 until 1985; Adviser of Energy’s Secretary of State from 1983 until 1984; Manager of Plan and Production of Moore Paragon in 1983.

 

11.    Directors and Executive Officers of PTelecom Brasil.

 

The following table sets forth the name and position of each director and executive officer of PTelecom Brasil. The current business address of each person is Av. Roque Petroni Junior, 1464, Morumbi, São Paulo, SP, Brazil, 04707-000, except where otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with PTelecom Brasil unless otherwise indicated. Each person listed below is a Brazilian citizen, except as otherwise indicated below.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Paulo Cesar Pereira

Teixeira

   Director    See “Part Five: The Merger — Management.”

Roberto Oliveira de Lima

   Director    See “Part Five: The Merger — Management.”

 

12.    Directors and Executive Officers of Sudestecel Participações.

 

The following table sets forth the name and position of each director and executive officer of Sudestecel Participações. The current business address of each person is Av. Roque Petroni Junior, 1464, 6º Andar, Morumbi, São Paulo, SP, Brazil, 04707-000, except where otherwise noted below. Each position set forth opposite an individual’s name refers to a position with Sudestecel Participações unless otherwise indicated. Each person listed below is a citizen of Brazil.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Paulo Cesar Pereira

Teixeira

   Director    See “Part Five: The Merger — Management.”
Roberto Oliveira de Lima    Director    See “Part Five: The Merger — Management.”

 

13.    Directors and Executive Officers of Tagilo Participações.

 

The following table sets forth the name and position of each director and executive officer of Tagilo Participações. The current business address of each person is Av. Roque Petroni Jr., 1464, 6th Floor — Morumbi, São Paulo, SP, Brazil, 04707-000, except where otherwise noted below. Each position set forth opposite an individual’s name refers to a position with Tagilo Participações unless otherwise indicated. Each person listed below is a citizen of Brazil.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Roberto Oliveira de Lima

   Director    See “Part Five: The Merger — Management.”

Paulo Cesar Pereira

Teixeira

   Officer    See “Part Five: The Merger — Management.”

 

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14.    Directors and Executive Officers of TBS Celular Participações.

 

The following table sets forth the name and position of each director and executive officer of TBS Celular Participações. The current business address of each person is Av. Roque Petroni Junior, 1464, Morumbi, São Paulo, SP, Brazil, 04707-000, except where otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with TBS Celular Participações unless otherwise indicated. Each person listed below is a Spanish citizen, except as otherwise indicated below.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Paulo Cesar Pereira Teixeira    Director    See “Part Five: The Merger—Management.”
Roberto Oliveira de Lima    Director    See “Part Five: The Merger—Management.”

 

15.     Directors and Executive Officers of Telefónica Móviles.

 

The following table sets forth the name and position of each director and executive officer of Telefónica Móviles. The current business address of each person is C/Goya, 24, 28001 Madrid, Spain, except where otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with Telefónica Móviles unless otherwise indicated. Each person listed below is a Spanish citizen, except as otherwise indicated below.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Antonio Pedro de Carvalho Viana Baptista(1)    Chairman and Chief Executive Officer    See “—Directors and Executive Officers of Brasilcel.”

Luis Lada Díaz

   Director    See “—Directors and Executive Officers of Telefónica.”
Jose María Alvarez-Pallete López    Director    Chairman and Chief Executive Officer of Telefónica Internacional since July 24, 2002; CFO of Telefónica Internacional since February 1999; CFO of Telefónica, S.A. since September 1999; Member of the Board of Directors Telefónica de España; Member of the Board of Directors of Telefónica Móviles; Member of the Board of Directors of Telefónica Móviles España; Member of the Board of Directors of Telefónica Data; Member of the Board of Directors of TPI; Member of the Board of Directors of Telefónica de Argentina; Member of the Board of Directors of Telesp; Member of the Board of Directors of Telefónica CTC Chile; Member of the Board of Directors of Telefónica de Perú; Member of the Board of Directors of Cointel; Member of the Board of Directors of Compañía de Teléfonos de Chile Transmisiones Regionales and Member of the Board of Directors of Telefónica Larga Distancia de Puerto Rico. His current business address is at Gran Vía, 28, Planta 9, 28013, Madrid, Spain.

Lars M. Berg(2)

   Director    Independent investor, consultant and non-executive board member of several companies in the telecommunications and financial industries since August 2000; Member of the Board of Directors of Eniro AB; Member of the Board of Directors of Ratos AB; Member of the Board of Directors of Net Insight AB;

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Member of the Board of Directors of Anoto and Member of the Board of Directors of Viamare Investment A.B.; Mannesmann AG, Dusseldorf—Executive Board Member since 1999; President and Chief Executive Officer of Telia AB, from 1994 until 1999. His current business address is at Kevinge Strand, 39 B, SE-182 31, Danderyd, Sweden.
Miquel Angel Canalejo Larrainzar    Director    Chairman of our Audit and Control Committee; Member of the Board of Directors of Unión Fenosa, S.A. and Azkoyen, S.A.; Chairman of the Board of Directors of Nazca Capital, S.G.E.C.R. and FYCSA; Member of the Board of Directors of Sodena, S.A.; Vice Chairman of Plan International España; Chairman of the Consultive Commission of Institución Futuro. Chairman and Chief Executive Officer of Alcatel Spain from December 1986 until December 2000; President of Alcatel Latinamórica from January 1996 until September 2000. His current business address is at Po Castellana, 151, 2° Drcha., 28046, Madrid, Spain.
Maximino Carpio García    Director    See “—Directors and Executive Officers of Telefónica.”
Enrique Corominas Vila    Director    President of the Control Committee of La Caixa, S.A.; Member of the Board of Directors of Agbar, S.A. and President of its Audit Committee; Member of the Board of Directors of Abertis, S.A.; Member of the Board of Directors of Caprabo, S.A.
Victor Goyenechea Fuentes    Director    Member of the Board of Directors of IP Sistemas, S.A. and Fonytel S.A.; Served as Deputy Director General of Banco Bilbao Vizcaya Argentaria since 1986; Managed BBVA’s Telecommunications, Media and Internet Unit; Deputy General Manager at Telefónica de España S.A. from 1974 to 1986. His current business address is at c/ Almagro, 14, 2a planta, 28010, Madrid, Spain.
Antonio Massanell Lavilla    Director    See “—Directors and Executive Officers of Telefónica.”
Alfonso Merry del Val Gracie    Director    Chief Executive Officer of Hipermercados Continente (España) from 1976 to 2000; Member of the Board of Directors of NH Hoteles, S.A.; Member of the Board of Directors of J. García Carrión, S.A.; Member of the Board of Directors of Corporación Uriach; Member of the Board of Directors of AEGON Unión Aeguradora, S.A; Served as CEO of the merged Company Carrefour in Spain. His current business address is at P° Castellana, 151, 2° B, 28046, Madrid, Spain.
José Fernando de Almansa Moreno-Barreda    Director    See “—Directors and Executive Officers of Telefónica.”
Alejandro Burillo Azcarraga(3)    Director    Founding member of Televisa, and participates in different executive positions in various companies such as PanAmSat, Univisión and ECO among others;

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Founder of Grupo Pegaso since 1996; President of the Board of Directors of Grupo Pegaso; Owner of different soccer teams in Mexico; Adviser of the FIFA President; Founder of Casa Lamm, which promotes different artists in Mexico, and participates in beneficial institutions in Mexico. His current business address is at Paseo de los Tamarindos 400-A—Bosques de las Lomas, 05120, Mexico, DF.
Javier Echenique Landiribar    Director    Member of the Board of Directors of Telefónica Móviles México, S.A. de C.V. and, among others, ACS Actividades de Construcción y Servicios, S.A., URALITA, S.A. Willis Iberia, Edhart y Cía. and Grupo Porres (Mexico). Served as a Member of the Board of Directors of Telefónica de España, S.A., Sevillana de Electricidad, S.A., Autopistas Concesionaria de España, S.A., Finanzia Banco de Crédito, S.A., Metrovacesa and Grupo AXA Aurora over the last five years. Served from 1990 as Executive Officer at various areas of BBVA.
José María Más Millet   

Director and

Secretary

   Secretary of the Board of Directors; Member of the Board of Directors of NH Hoteles, S.A.; Member of the Board of Directors of SOSCUETARA, S.A.; Member of the Board of Directors of SOTOGRANDE, S.A.; Member of the Board of Directors of Telcel, C.A.; Member of the Board of Directors of Telefónica Móviles Colombia, S.A.; Member of the Board of Directors of Aumar, S.A.; General Counsel of Telefónica, S.A. from 1997 to April 2001; Member of the Board of Directors of Caja de Ahorro de Valencia, Castellón y Alicante from 1995 to January 2000.
Ernesto Lopez Mozo    Chief Financial Officer    See “—Directors and Executive Officers of Brasilcel.”
Fernando Herrera Santa Maria   

Chief Commercial

Officer of

Telefónica Móviles

España, S.A.

   Chief Commercial Officer of Telefónica Móviles España, S.A. Mr. Herrera is a Member of the Board of Directors of Telefónica Móviles España, S.A., Telefónica Móviles Mexico, S.A. de C.V. and Chairman of Group 3G UMTS Holding and 3G Mobile AG.
          Mr. Herrera has eight years of experience in the telecommunications industry holding various managerial positions within the Telefónica Group. Prior to this appointment he acted as general Manager of Resources and Management Control of Telefónica Móviles España. He also serves on the Board of Directors of Telefónica Móviles España S.A.
Antonio Hornedo Muguiro   

General Counsel

and Vice Secretary

(non-member) of

the Board of Directors

   General Counsel and Vice-Secretary (non-member) of the Board of Directors. He serves as Director of Telefónica Móviles El Salvador, S.A. de C.V. and Telefónica Móviles Guatemala, S.A. Mr. Hornedo also serves as Secretary (non-member) of Seguros de Vida y Pensiones-ANTARES, S.A. He served as Secretary for

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          Fonditel, EGFP from 1993 to 2000. Until March 1999, he worked as a legal counsel for Telefónica de España.

Ignacio Camarero Garcia

  

Chief Operating

Officer of

Telefónica Móviles

España, S.A.

   Chief Technology Officer. Mr. Camarero currently also serves on the Board of Directors of Telefónica Móviles España, S.A. Telefónica I+D, S.A., MobiPay España, S.A., and Telefónica Aplicaciones y Soluciones. From 1996 to 1998, he served as Vice President and General Manager of Southern Europe for Motorola Inc. and from 1998 to 2001 as Manager of Technology at Airtel España.

Francisco Ruiz Vinuesa

  

Executive Vice-

President for

Mexico, Central

America and the

Caribbean

   Executive Vice-President for Mexico, Central America and the Caribbean. Mr. Ruiz currently serves on the Boards of Directors of Telefónica I+D, Telefónica Móviles Mexico, S.A. de C.V., Telefónica Móviles El Salvador, S.A. and Telefónica Móviles Guatemala, S.A. From 1996 to 2001 he acted as General Manager of Network at Telefónica Móviles España. From 2001 until his appointment to his current position, he served as General Manager of Network Infrastructure for the entire Telefónica Móviles Group.

Belén Amatriaín Corbi

  

Chief Executive

Officer of

Telefónica Móviles

España, S.A.

   Chief Executive Officer of Telefónica Móviles España since May 2005. She was previously, from June 2000, Executive Chairman of Telefónica Publicidad e Información (TPI). She joined the Telefónica Group in 1997 as head of marketing at TPI-Yellow Pages. Two years later she was appointed Chief Operating Officer of the Internet and New Technologies area and to the Board of Directors of Euredit. Ms Amatriain began her professional career in American food multinational Kraft General Foods’ mass marketing department, where she was Product Manager. She continued her career in the Advertising department of BSB, part of the Saatchi & Saatchi group, as Account Manager. She then joined the advertising multinational GREY, where she was Customer Services Director and Director of Media Relations. She was also the founder of Marketing Plan, a retail marketing consultancy, and was Sales and Marketing Director at King’s Educational Group.

Manuel Costa Marques

  

General Manager of

Development of

Latin American

Business

   General Manager of Development of Latin American Business. From 1984 until 1990, he served as Executive Board Member of various financial institutions including a brokerage firm, two leasing companies and CISF, a listed Bank, where he was one of the three members of CISF’s Board Executive Committee. From 1990 until 1997, he was President, CEO and major shareholder of SISF, a holding company of various financial companies. SISF later became part of the Banco Portugues de Investimento Group. In 1997, he served as Managing Director of Banco Portugues de Investimento

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


          heading privatizations of companies, and as Executive Board Member of Finangest, the holding company of all major Portuguese state industrial participations. Mr. Costa Marques also serves as Head of Strategic Planning, M&A and Corporate Finance, and Member of the Board of Directors of Telefónica Internacional, S.A. Mr. Costa Marques also served as a Member of the Board of Directors of Emergia N.V. from June 1999, until December 2002.
Luis Miguel Gilperez Lopez   

Executive Director

of the International

Area of Telefónica

Móviles General

Manager of

Telefónica Móviles

   See “—Directors and Executive Officers of Brasilcel.”

Miguel Menchén

  

General Manager of

Telefónica Móviles

Mexico.

   General Manager of Telefónica Móviles Mexico. Mr. Menchén also serves on the Board of Directors of Telefónica Móviles Mexico, S.A. de C.V. He has also served as executive Director of Telefónica Móviles España, and as Chief Executive Officer of Meditel (Morroco).
Emilio Gayo    General Manager of Operations of Teléfonica Móviles    He was previously a senior partner in Europraxis Consulting in charge of Telecommunication Industry and a Member of its Board of Directors. Prior to joining Europraxis Consulting, he worked at Bain & Company and ATT Network Systems. Mr. Gayo has a degree in telecommunications engineering from the Universidad Politécnica de Madrid and a masters in business administration from IESE.
Eduardo Caride    General Manager of Argentina, Chile and Uruguay    Mr. Caride began his career with Deloitte & Touche. In 1981, he joined Citibank, holding several management positions until 1990, when he joined Telefónica de Argentina, S.A., where he was responsible for the Finance, Insurance, Internal Auditing, Budget and Investor Relations departments. In 1997, he was appointed Head of the Residential Communications Business Unit. In 1998, he became General Manager. Mr. Caride joined Emergia as Chief Operating Officer and in June 2001, he was appointed Executive Chairman of Telefónica Data and Emergia. In 2004, he was appointed General Manager for Argentina, Chile and Uruguay at Telefónica Móviles. He holds a degree as a certified public accountant and a graduate degree in business administration, both from the Economics Faculty of the University of Buenos Aires. Mr. Caride is a Member of the Boards of Directors of Telefónica Móviles Chile, Telefónica Comunicaciones Personales and Abiatar (Uruguay).

(1) Portuguese citizen.
(2) Swedish citizen.
(3) Mexican citizen.

 

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16.    Directors and Executive Officers of TMN.

 

The following table sets forth the name and position of each director and executive officer of TMN. The current business address of each person is Avenida Álvaro Pais, 02, 1649-041 Lisbon, Portugal, except as otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with TMN unless otherwise indicated. Each person listed below is a Portuguese citizen, unless otherwise indicated.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Iriarte José Araújo Esteves    President of the Executive Committee    See “—Directors and Executive Officers of Portugal Telecom.”
António Lopes Soares    Director and Vice-President of the Executive Committee    General Financial Officer of Portugal Telecom, Finance Officer of Telecom Portugal, Member of the Executive Board of CTT, Telecommunications, CFO of CTT.
Maria da Graça Galvão de Carvalho    Director and Executive Officer    Control Officer of TMN, Manager of CTT, Telecom Portugal and Portugal Telecom.
Pedro Manuel Brandão Rodrigues    Director and Executive Officer    See “—Directors and Executive Officers of Brasilcel.”
Luís Felipe Medeiros Cravo Ribeiro    Executive Officer    President of the Executive Committee of Grupo Lusomundo, Member of the Executive Committee of PT Multimédia, President of the Executive Committee of PT Conteúdos, Chairman of the Board of Directors of Sport Tv, Chairman of the Board of Directors of NTV, Chairman of the Board of Directors of Telepac, Member of the Executive Committee of Portugal Telecom Multimedia, Manager of PT Conteúdos, Manager of Portugal Telecom International, Manager and Member of the Executive Committee of Meditelecom (Marrocos), President of the Executive Committee of Optimus S.A., Manager and Member of the Executive Committee of SONAE, Officer of Público S.A., Chairman of the Board of Directors of Telecel.

Maria Etelvina da

Conceição Aguiar dos Santos

   Director and Executive Officer    Legal Counsel and General Secretary of TMN. General Secretary of PT Móveis – Serviços de Telecomunicações, Litigation Officer of TLP – Telefones de Lisboa e Porto.
David José Ferreira Lopes    Executive Officer    Manager and Member of the Executive Committee of Portugal Telecom, Chairman of the Board of Directors of Timor Telecom, Manager of Infonet Portugal, Manager and Executive Officer of Telesp Celular, Officer of the “Core” Network from Portugal Telecom, Member of the Fiscal Board of TV Cabo Portugal.

 

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17.    Directors and Executive Officers of Telefónica Internacional.

 

The following table sets forth the name and position of each director and executive officer of Telefónica Internacional. The current business address of each person is at Gran Via 28, 7th Floor, Madrid, Spain, 28013, except as otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with Telefónica Internacional unless otherwise indicated. Each person listed below is a citizen of Spain, except as otherwise indicated below.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Jose Alvarez-Pallette

López

   Director, President    Chairman and Chief Executive Officer of Telefónica Internacional since July 24, 2002. He began his career at
          Arthur Young Auditors in 1987. In 1988, he joined Benito & Monjardin/Kidder, Peabody & Co., where he held various positions in the research and corporate finance departments. In 1995, he joined Valenciana de Cementos Portland (Cemex) as head of the Investor Relations and Studies department. In 1996, he was promoted to Financial Manager for Telefónica in Spain, and in 1998 to General Manager for Administration and Financial Affairs for Cemex Group’s interests in Indonesia, headquartered in Jakarta. Jose Marria Alvarez-Pallete joined Telefónica in February 1999 as CFO of Telefónica Internacional. In September of the same year, he became CFO of Telefónica, S.A. He is a Member of the following Boards of Directors: Telefónica de Espafa, Telefónica Móviles, Telefónica Móviles Espafa, Telefónica Data, Telefónica Internacional, TPI, Telefónica de Argentina, Telesp, Telefónica CTC Chile, Telefónica de Peril, Cointel, Compafia de Telefonos de Chile Transmisiones Regionales and Telefónica Larga Distancia de Puerto Rico.
Antonio Pedro de Carvalho Viana Baptista(1)    Director    See “—Directors and Executive Officers of Brasilcel.”
Miguel Angel Gutiérrez(2)    Director    Member of the Board of Directors of Telefónica de Argentina S.A.; President of the Board of Directors of Autopistas del Oeste S.A. del Grupo ABERTIS of Spain; Member of the Consulting Committee of The Rohatyn Group Asset Management; President of ADESPA since December 2003; Vice President of the Foundation of the Spanish Chamber of Commerce since January 2004; Member of the Board of Directors of the Argentinean Chamber of Commerce since March 2002; Member IDEA; Member of the Consulting Committee of CIPPEC; Professor — University Di Tella since; President and CEO of Telefónica de Argentina S.A. from February 2002 to June 2003; Managing Director of Emerging Markets at JP Morgan from 1995 to October 2001. Prior to that time, Mr. Gutiórrez held various positions at JP Morgan during his total 21 years with them.

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


Javier Nadal Arino    Director    See “—Directors and Executive Officers of Telefónica.”
Fernando Xavier Ferreira(3)    Director    See “Part Five: The Merger — Management.”
Mario Eduardo Vazquez    Director    See “—Directors and Executive Officers of Telefónica.”
Bruno Pedro Philippi Irarrázabal(4)    Director    President of Telefónica CTC Chile. President at Gener S.A. (Chile) from 1989 until 2000; President of Central Puerto S.A. (Argentina) from 1993 until 2000; Director of Empresa Elóctrica San Juan (Argentina) until 2000; President of Chivor S.A. (Colombia) until 2000; President of Mega S.A. (U.S.A.). Member of the Board of Directors of ICARE since 1993; Member of the General Council of Sociedad de Fomento Fabril since 1994; Member of the Advisory Board of IBM Latin America since 1999; Board Member of the Institute of the Americas from 1997 until 2001.
Eduardo Caride(2)    Director    See “—Directors and Executive Officers of Telefónica Móviles.”
Alfonso Ferrari Herrero    Director    See “—Directors and Executive Officers of Telefónica.”
Enrique Used Aznar    Director    See “—Directors and Executive Officers of Telefónica.”
Gregorio Villalabeitia Galarraga    Director    See “—Directors and Executive Officers of Telefónica.”
Luis Lada Díaz    Director    See “—Directors and Executive Officers of Telefónica.”
Juan Carlos Ros Brugueras    Director    General Secretary and Vice-Secretary of the Administrative Board of Telefónica Internacional S.A. since 1998; Member of the Board of Directors of Telefónica de Argentina S.A.; Member of the Board of Directors of Telecommunicacoes de São Paulo—TELESP S.A.; Member of the Board of Directors of Telefónica Larga Distancia de Puerto Rico Inc.

(1) Portuguese citizen.
(2) Argentinian citizen.
(3) Brazilian citizen.
(4) Chilean citizen.

 

18.    Directors and Executive Officers of PT Móveis.

 

The following table sets forth the name and position of each director and executive officer of PT Móveis. The current business address of each person is Avenida Álvaro Pais Fontes, 02, 1649-041, Lisbon, Portugal, except as otherwise indicated below. Each position set forth opposite an individual’s name refers to a position with PT Móveis unless otherwise indicated. Each person listed below is a Portuguese citizen.

 

Name


  

Positions Held


  

Principal Occupation and Business Experience


Miguel António Igrejas Horta e Costa    Director, President    See “—Directors and Executive Officers of Portugal Telecom.”
Carlos Manuel de L. e Vasconcellos Cruz    Director, Chief Executive Officer    See “Part Five: The Merger — Management.”

 

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Name


  

Positions Held


  

Principal Occupation and Business Experience


Pedro Manuel Brandão Rodrigues    Director    See “—Directors and Executive Officers of Brasilcel.”
Álvaro José Roquette Morais    Director, Chief Operating Officer    See “—Directors and Executive Officers of Brasilcel.”
Diogo Miguel Cabedo Amado Horta e Costa    Director    Executive Vice-President of Portugal Telecom Investimentos Internacionais, SA. since 2004; Marketing & Communication Corporate Director of Portugal Telecom, SGPS, S.A. in 2003; CRM & Knowledge Management General Manager in Portugal Telecom Comunicações Fixas in 2002; Communication Corporate Director of Telesp Celular S.A., São Paulo, Brasil from 2001 to 2002; Marketing & Communication Director in Tradecom (PT e-business unit) in 2000; Senior Corporate Manager — Consulting Services of Dun & Bradstreet Corporation from 1996 until 1999. His current business address is at Avenida Fontes Pereira de Melo, 40, 1069-300 Lisbon, Portugal.

 

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