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Tele Norte Leste Participacoes S.A. 20-F 2008 As filed with the Securities and Exchange Commission on August 15, 2008
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 20-F/A (Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007 Commission file number: 001-14487
TELE NORTE LESTE PARTICIPAÇÕES S.A. (Exact Name of Registrant as Specified in Its Charter)
Rua Humberto de Campos, 425/8° andar-Leblon 22430-190 Rio de Janeiro, RJ, Brazil (Address of Principal Executive Offices) José Luis Magalhães Salazar Tel: +55 21 3131-1123 Fax: +55 21 3131-1155 Rua Humberto de Campos, 425/8° andar-Leblon 22430-190 Rio de Janeiro, RJ, Brazil (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
* Not for trading, but only in connection with the listing of American Depositary Shares on the New York Stock Exchange. Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the Issuer’s classes of capital or common stock as of the close of the period covered by this Annual Report: 127,373,900 common shares, without par value 254,747,800 preferred shares, without par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
Indicate by check mark which financial statement item the registrant has elected to follow. ¨ Item 17 x Item 18 If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
EXPLANATORY NOTE This Amendment No. 1 on Form 20-F/A, or Amendment No. 1, is being filed solely to amend the Annual Report on Form 20-F for the fiscal year ended December 31, 2007, or the Original Form 20-F, as filed by Tele Norte Leste Participações S.A., or our company, with the U.S. Securities and Exchange Commission on May 5, 2008 to:
Other than as expressly set forth above, this Amendment No. 1 does not, and does not purport to, amend, update or restate the information in the Original Form 20-F or reflect any events that have occurred after the Original Form 20-F was filed.
Reference is made to Item 19 for a list of all financial statements filed as part of this amended annual report.
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There are numerous instruments defining the rights of holders of long-term indebtedness of the Registrant and its consolidated subsidiaries, none of which exceeds 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant hereby agrees to furnish a copy of any such agreements to the Commission upon request.
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SIGNATURES Tele Norte Leste Participações S.A. hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this Amendment No. 1 on its behalf.
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INDEX TO TNL’S FINANCIAL STATEMENTS
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Tele Norte Leste Participações S.A. Consolidated Balance Sheets at December 31 Expressed in millions of Brazilian Reais
The accompanying notes are an integral part of these consolidated financial statements.
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Tele Norte Leste Participações S.A. Consolidated Statements of Operations
The accompanying notes are an integral part of these consolidated financial statements.
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Tele Norte Leste Participações S.A. Statements of Changes in Stockholders’ Equity (Parent Company) Expressed in millions of Brazilian Reais
The accompanying notes are an integral part of these consolidated financial statements.
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Tele Norte Leste Participações S.A. Consolidated statements of changes in financial position
The accompanying notes are an integral part of these consolidated financial statements.
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Tele Norte Leste Participações S.A. Cash flow statement Years ended December 31, 2007, 2006 and 2005
The accompanying notes are an integral part of these consolidated financial statements.
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Tele Norte Leste Participações S.A. (the “Parent Company”) and its subsidiaries are referred to as “the Company” in these financial statements. The Parent Company was constituted on May 22, 1998, upon the split-up of Telecomunicações Brasileiras S.A. (“Telebrás”), primarily to hold interests in other companies and to promote the operating and financial management of its direct and indirect subsidiaries. It is a holding, subsidiary of Telemar Participações S.A. (“Telemar Participações”) which at December 31, 2007 and 2006 held 17.48% of total capital and 52.45% of voting capital. The Parent Company is registered with the “Comissão de Valores Mobiliários — CVM” (Brazilian securities and exchange commission) as a publicly held company whose stock is listed on the “Bolsa de Valores de São Paulo — Bovespa” (São Paulo stock exchange). The Parent Company is also registered with the U.S. Securities and Exchange Commission (SEC) and its American Depositary Shares (ADSs)— Level II are listed on the New York Stock Exchange (NYSE) through American Depositary Receipts (ADRs). 48.89% of our preferred stock is negotiated on the NYSE through ADRs.
Fixed-line telecommunications Telemar Norte Leste S.A. (“Telemar”) is the principal provider of fixed-line telecommunications services in its operation area —Brazil’s Region I — comprising the states of Rio de Janeiro, Minas Gerais, Espírito Santo, Bahia, Sergipe, Alagoas, Pernambuco, Paraíba, Rio Grande do Norte, Ceará, Piauí, Maranhão, Pará, Amazonas, Roraima and Amapá (with the exception of this region’s Sector 3, covering the 57 municipalities of the “Triângulo Mineiro” and “Alto Paranaíba” areas in the state of Minas Gerais, where “Companhia de Telecomunicações do Brasil Central — CTBC” (local telephone company), operates). These services are provided under the terms of the concessions granted by “Agência Nacional de Telecomunicações—Anatel” (national telecommunications agency), the regulatory body for the Brazilian telecom sector, which are in force until 2025. Telemar also holds the Anatel concession to provide national long distance services within Region I. Until July 20, 2002, this concession only allowed for the provision of outgoing and incoming calls within said operating area. As from that date, Telemar is also allowed to provide outgoing calls from Region I (excluding Sector 3) to other regions, due to Telemar’s early meeting of its obligations under the “Plano Geral De Metas de Universalização – PGMU” (general plan for universalization targets), set for December 31, 2003. Telemar is controlled by the Parent Company, which on December 31, 2007 and 2006 held 80.89% of its total capital and 97.24% of its voting capital. On December 22, 2005, new concession contracts were signed, with effect from January 1, 2006 and valid until December 31, 2025. In return, the concession holder has to pay Anatel, every two years, the equivalent of 2% of the previous year’s net revenue from telecom services. At the same time, new quality and universal access targets, defined under the new “Plano Geral de Metas de Qualidade—PGMQ” (general plan for quality targets) and PGMU, came into effect.
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On July 9, 2007, the “Diário Oficial da União—D.O.U” (official federal government gazette) published the contractual amendments covering the transfer of the authorization to provide “Serviço Telefônico Fixo Comutado – STFC” (fixed-line telephone services), from TNL PCS S.A. (“Oi”) to Telemar. STFC has two formats: (i) “Longa Distância Nacional – LDN” (national long distance): in Region II, Region III and Sector 3 of Region I; and (ii) “Longa Distância Internacional –LDI” (international long distance), throughout Brazil. Mobile telecommunications Oi, acquired by Telemar on May 30, 2003, has the corporate purpose of providing “Serviço Móvel Pessoal — SMP” (personal mobile service) for an unlimited period, as long as the authorization terms are met. On March 12, 2001, Anatel granted Oi the right to use the corresponding radio frequencies for a period of 15 years, renewable for another 15 years, under onerous title, in return for the payment, every two years, of 2% of the previous year’s net revenue from SMP. Due to regulatory conditions, the SMP authorization, together with the associated radio frequency rights, only came into effect as from June 26, 2002, when Oi began its commercial operations. Along with the authorization for SMP, Oi was also authorized to provide STFC, for an unlimited period, in the following forms: (i) LDN services in Region II, which covers the states of Rio Grande do Sul, Santa Catarina, Paraná, Mato Grosso do Sul, Mato Grosso, Goiás, Tocantins, Rondônia and Acre and the Federal District; in Region III, which relates to the state of São Paulo; and in Sector 3 of Region I; and (ii) LDI services throughout Brazil. As from November 30, 2005, with its takeover of Pégasus Telecom S.A., Oi also began to provide data transmission services in Regions I, II and III. On December 6, 2007, the D.O.U. published Act nº 68,982, of December 5, 2007, which partially ratifies the result of Anatel´s Public Bid nº 001/2007/SPV, authorizing Oi to provide SMP services and use the corresponding radio frequencies in the state of São Paulo, as well as expanding the band range in certain states within Region I, i.e.: Amazonas, Amapá, Pará, Maranhão, Roraima, Bahia, Espírito Santo, Sergipe, Alagoas, Paraíba, Piauí and Rio Grande do Norte (see Note 19).
F-8
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All telephone services in Brazil are subject to regulation and supervision by Anatel, in accordance with Law nº 9,472, of July 16, 1997.
The financial statements were prepared and are presented in accordance with the accounting principles adopted in Brazil, based on the provisions of Brazilian Corporate Law and the regulations laid down by the CVM. In preparing financial statements, it is necessary to utilize estimates in order to post the values of certain assets, liabilities and other transactions. The Company’s financial statements therefore include estimates regarding the useful life of property, plant and equipment, the provisions needed to cover contingent liabilities, the provision for corporate income tax and similar items. The realized values may differ from the estimated ones. The cash-flow statement was prepared in accordance with “Pronunciamento Técnico NPC 20” (technical pronouncement), issued by “Instituto dos Auditores Independentes do Brasil – IBRACON” (Brazilian institute of independent accountants), considering the principal transactions that have affected the Company’s cash and short-term investments. This statement is broken down into operating, investing and financing activities.
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The consolidated financial statements include the financial statements of the directly owned subsidiaries Telemar, TNL.Net, TNL Trading and TNL PCS Participações, and of the indirectly owned subsidiaries Oi, Telemar Telecomunicações, Paggo, Oi Internet, AIX, Coari, Calais, Serede and Way TV. Moreover, the financial statements of AIX, a company under joint control, were consolidated proportionally to Telemar’s equity stake (50%). The principal consolidation procedures were:
The most significant accounting policies utilized in the preparation of the financial statements are as follows:
The financial statements were prepared and are presented in accordance with the accounting principles adopted in Brazil, based on the provisions of Brazilian corporate law and regulations imposed by the CVM. Cash and cash equivalents are considered to be all highly liquid investments with maturities in less than 90 days.
The accounts receivable from telecommunications services are assessed according to the prevailing tariffs on the date that the services were provided. Accounts receivable also include credits of services provided to customers but not yet billed up to the balance sheet date. The value of the unbilled services rendered is determined using the valuation of metered services based on previous month’s performance. The respective taxes are similarly determined and are accounted for on an accrual basis. Late payment interest is accounted for upon the issue of the first bill following the payment of the overdue bill.
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Trade accounts receivable related to the sale of mobile handsets and accessories are recorded upon the transfer of ownership, net of subsidies. Subsidies on the sale of mobile handsets are deferred (refer to Note 16)
This provision is recorded to recognize probable losses in relation to accounts receivable, considering measures that are taken to restrict services provided to customers whose bills are overdue, as well as to obtain settlement of these accounts, once delay exceeds 60 days, which increase progressively, as follows:
Accounts receivable more than 180 days overdue and the related provision for doubtful accounts are eliminated from the balance sheet.
The Company’s inventories are separated and classified as follows:
Discounts on the sale of postpaid handsets by Oi are considered as prepaid expenses, since they represent part of the effort to attract customers to the customer base for a minimum contractual period. These amounts are amortized over a period of twelve
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months, since these contracts provide for reimbursement in the event of disconnection or migration to a prepaid plan prior to completing one year. Discounts for customers on prepaid plans are not deferred, as these contracts do not provide for an early cancellation fee. The “Fundo de Fiscalização das Telecomunicações—Fistel” (telecommunications inspection fund) fee, paid by Oi upon enabling new users, net of cancelled users, is also recorded as a prepaid expense, and is taken to income during the average customer retention period (churn), which is estimated by management at 24 months. Financial charges paid in advance, with regard to loans and financing, are amortized over the period that the contract is in effect. Furthermore, premiums paid on insurance policies are also treated as prepaid expenses.
Investments consist primarily of (i) investments in subsidiaries and jointly controlled companies, which are accounted for using the equity method, according to CVM Instruction 247/96; and (ii) tax incentives, which are accounted for using the acquisition cost method, restated up to December 31, 1995, less provisions for losses, to recoverability values, when considered necessary. Under Brazilian GAAP, equity investments are investments in companies in which the Company has more than a 20% participation (voting or non-voting stock) and/or influence over management, but without control. Equity accounting adjustments arising from gains and losses due to changes in the holding percentage in capital stock of investees are recorded in non-operating income (expenses), net and reclassified as a separate line item, “equity in earnings of unconsolidated companies, for US GAAP presentation proposes.
Property, plant & equipment are stated at acquisition or construction cost, less accumulated depreciation. Financial charges relating to the construction of fixed assets have been capitalized in accordance with the criteria set down in CVM Resolution no 193/1996. Such capitalization was effected by Telemar until September 2002, since which time there have been no further capitalizations, due to the short duration of the work carried out and the fact that it was not directly financed by third parties. In the case of Oi, capitalization occurred until December 2002, when this practice was discontinued for lack of work-in-progress of significant duration. The greater part of Oi’s expansion is done on the basis of turn-key contracts. At Telemar, up to December 31, 1999, in compliance with Ministry of Communication’s regulations, the interest was calculated monthly, at the rate of 12% p.a., on the outstanding balance of construction-in-progress, capitalized up to the limit of the corresponding financial expenses. The interest calculated at 12% p.a. that exceeded the financial expenses on loans taken out to finance the construction-in-progress was recorded in a capital reserve recorded under stockholders’ equity.
F-13
Spending incurred for maintenance and repairs is only capitalized when it clearly represents an increase in installed capacity or useful life of the item, while all other spending is recorded against income for the period. Up to the present date, the capitalization of these amounts has not had any significant impact on the financial statements, given that the greater part of the maintenance costs represent no real increase in useful life and obsolescence is the principal determinant in this regard. Depreciation is calculated using the straight-line method, at rates that take into account the expected useful life of the item, based on wear and tear and technological obsolescence (see depreciation rates and description of useful life in (Note 18).
Intangible assets are shown at their acquisition cost, less accumulated amortization. The amortization is calculated using the straight-line method, at rates that take into account the expected useful life of the item or, in case of usage rights, according to the period of such authorization’s contract.
Loans and financing are restated according to monetary and exchange variations plus accrued interest up to the balance sheet date. Results from swap operations are determined and recorded on a monthly basis, regardless of their settlement dates. The amounts of loans and financing classified as current and long-term liabilities on the balance sheet include the results of swap operations.
Provision is recorded for amounts due to employees in relation to vacation benefits, in proportion to the period vested, together with the corresponding payroll taxes. Subsidiaries Telemar, Oi and Oi Internet have profit sharing programs, which are granted to all employees who have been with these companies for at least eight months (for more details, see note 30(b)).
Provisions are recorded to cover contingent risk of “probable losses”, based on management’s opinion and the opinion of its internal and external legal advisors. The amounts are recorded, based on estimates of costs of the claims’ outcome. The bases, amounts involved and nature of the main provisions are described in (Note 26).
The Company sponsor’s pension plans for its employees. The “Plano de Benefício Suplementar—PBS- Telemar” and “TelemarPrev” plans are administered by “Fundação Atlântico de Seguridade Social—FASS”
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(social security foundation), while the “Plano de Benefício Suplementar- PBS-Assistidos” plan is administered by “Fundação Sistel de Seguridade Social — Sistel” (social security foundation), and their costs are recognized in the financial statements in accordance with CVM resolution no 371/2000, which means, in the case of the defined benefit schemes (PBS-Assistidos and PBS-Telemar), over the working life of the participants, and in the case of the defined contribution scheme, in line with the monthly contribution payments, based on actuarial calculations approved by the “Secretaria de Previdência Complementar — SPC” (supplementary social security department) (for more details, see Note 30(a)).
Operating revenues are recognized at the time the services are rendered or the ownership of the goods is transferred. Services provided between the last billing date (“cycle”) and the end of each month (“rendered but not yet billed”) are measured based on the performance of the previous month and recognized in the month of accrual. Operating revenues include network rental to other companies or providers, service tariffs based on the number and length of calls (tariffs for local and long-distance calls are based on the time and length of the calls and the distance involved) network services, interconnection, maintenance fees and other value-added services. They also include telephone installation fees and prepaid calling cards. Management believes that the installation fees should not be deferred since the margins are very low. Revenues from prepaid calling cards, used for public telephones, are recognized when the cards are sold and the related costs are recognized when incurred. Due to the turnover of these cards, their impact on the financial statements would not be material. Revenues from calls made by mobile prepaid handsets are recognized upon effective utilization of the credits. Revenues from use of Telemar’s and Oi’s networks by other providers are recorded based on a “Documento de Declaração de Tráfego e Prestação de Serviço —Detraf” (document for declaration of traffic and rendering services) issued by a third party. Besides this, Anatel’s rules on measuring revenues are followed.
These refer basically to interest and monetary and exchange variations on financial investments, loans, financing, debentures and derivatives, which are calculated and accounted for on an accrual basis. Pursuant to the law, interest on shareholders’ capital to be applied to minimum and statutory dividends were accounted for as “Interest expenses” and “Interest income”, and reversed to “Retained earnings” at Telemar and “Investments” at the Parent Company, as they are in essence distribution of income. In order not to distort financial indices and enable the comparison between periods, these reversals are stated in the Interest income and expenses accounts together with the original accounts.
Provisions for deferred and payable income tax and social contribution on temporary differences are recorded at the 34% combined base rate. Prepaid income tax and social contribution are recorded as
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“recoverable taxes” and “deferred taxes”. Tax credits arising from tax loss carry-forwards are recognized as tax assets when future taxable income, discounted to present value, is sufficient to recover these tax credits. The amount of the tax credit recognized is limited to a ten year period forecast. The technical forecast is approved by management, pursuant to CVM resolution Nº 273 and CVM instruction Nº 371 (Note 15).
Telemar has a 50% stake in AIX, which engages in the provision of duct infrastructure for the installation of fiber-optic cables alongside the main highways of the State of São Paulo. The components of assets and liabilities, as well as revenues and expenses of AIX, were aggregated to the consolidated financial statements in proportion to Telemar’s 50% participation. Although proportional consolidation is not allowed under US GAAP, no adjustment has been made for US GAAP presentation purposes because of the immateriality of the amounts involved. AIX’s total assets amounted to R$95 at December 31, 2007 (2006—R$105), its Stockholders’ equity was R$56 at December 31, 2007 (2006—R$64) and its loss for the year 2007 was R$6 (2006—R$2).
Under Brazilian GAAP, a statement of changes in financial position that reflects source and application of funds in terms of movement in working capital needs to be presented. The statement of cash flows may be presented as supplemental information and is optional. Under US GAAP, presentation of a statement of cash flows describing the cash flows provided by or used in operating, investing and financing activities is required. FAS Nº 95, “Statement of Cash Flows,” establishes specific presentation requirements and requires additional disclosures, such as the amount of interest and income taxes paid and non-cash transactions such as acquisition of property, plant and equipment through capital leases, utilization of escrow deposits in settlement of liabilities and debt for equity conversions, among others. The statements of cash flow are included in the Brazilian GAAP financial statements using the presentation basis of NPC-20 from IBRACON. For US GAAP purposes we included a reconciliation to United States Generally Accepted Accounting Principles—US GAAP presentation basis according to Statement of Financial Accounting Standard—SFAS 95 (Note 36(t)).
The consolidated financial statements include estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingencies and the amounts of revenues and expenses. Actual results could differ from those estimates.
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Transactions in foreign currency are recorded at the prevailing exchange rate at the time of the related transactions. Foreign currency-denominated assets and liabilities are translated using the exchange rate at the balance sheet date. Exchange gains and losses on transactions denominated in foreign currencies are generally included in results of operations as incurred.
Under Brazilian GAAP, pre-operational costs are deferred until the start-up of the operations, at which time these costs are amortized on a straight-line basis over a minimum period of 5 year, based on economic feasibility studies.
The Company has entered into derivative transactions to manage its exposure to fluctuations in foreign currency exchange and interest rates. The Company employs risk management strategies using a variety of derivatives including cross-currency interest rate swaps. The Company does not hold derivatives for trading purposes. Under Brazilian GAAP, results from swap operations are determined and recorded by comparing contractual exchange rates to period-end exchange rates, when applicable, regardless of the respective terms for settlement.
Dividends and interest on shareholders’ capital are recorded at year-end based on the amount proposed by management, which is expected to be approved at the next Annual Stockholders’ Meeting.
Advertising and marketing costs are expensed as incurred.
Earnings per share is computed based on Brazilian GAAP net income and the number of shares outstanding at the end of each year.
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Description of the services
The metered services include all calls where the origin and destination are within a single local area of Region I, bearing in mind that the basic residential plan monthly subscription fee carries an exemption covering the first 100 pulses, while the non-residential fee has an exemption covering the first 90 pulses.
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The revenue from excess pulses refers to the charge for pulses in excess of these exemptions. The billing of pulses is calculated as follows: (i) at the normal rate, using the Karlsson Incremented method KA – 240 (multi-metering), whereby a charge is made for a completed connection, at a defined rate per pulse, with an additional pulse charged every 240 seconds. The initial charge is made at random once the call has begun; and (ii) at a reduced rate, using the simple metering method, whereby a charge is made for a completed connection, regardless of the call’s duration. The reduced rate applies to working days, between 12:00 pm and 6:00 am, Saturdays, between 12:00 pm and 6:00 am and from 2:00 pm on, all day on Sundays and on public holidays. On July 31, 2007, the process of migration from pulses to minutes was completed. Under the minutes scheme, the monthly exemption is 200 minutes for residential lines and 150 minutes for non-residential lines. As with the pulses, calls made at the reduced rate are charged a fixed amount “Valor por Chamada Atendida –VCA” (completed call flat fee), equivalent to two minutes. At the normal rate, calls are charged according to their duration, the initial charge being made after 30 seconds, with subsequent increments every six seconds. Telemar also offers business clients with PABX – Private Automatic Branch Exchange (switchboard) systems “Discagem Direta a Ramal – DDR”, a direct dial service (automatic transfer of outside calls to extensions). For companies that need a large number of lines, Telemar offers digital trunk services, which optimize the client’s telephone system. Since August 2002, Telemar has been authorized to provide local services in Regions II and III and in Sector 3 of the “Plano Geral de Outorgas – PGO” (general licensing plan). However, the revenues from such services are not significant.
Fixed-line to mobile calls (VC1) refer to calls made from customers’ fixed phones to customers’ mobile phones. These services also include collect calls made by mobile phone customers to fixed line customers. Local services also include certain additional services, such as messages, ‘follow me’ and conferencing, as well as features such as ISDN – Integrated Services Digital Network (“DVI”), which enables the transmission of voice, data, images and sound over a single digital line, thus allowing the customer to talk on the phone while simultaneously using the internet, for example.
Each state within Telemar’s operating region is divided into various local areas. The calls made from one local area to another are designated LDN. The STFC national long-distance service includes intra-sectorial and inter-sectorial calls (calls between two distinct sectors, even if they are both located within the same state).
Until July 1999, Embratel was the exclusive operator for inter-state long-distance services, but the company was not authorized to provide intra-state long-distance services. At that time, Anatel enhanced the
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competition between the operators of long-distance wireline telephony, by requiring the customer to choose the desired operator for each long-distance call made, by dialing the “Código de Seleção de Prestadora – CSP” (operator selection code) before the “Código Nacional – CN” (national code) and the number of the phone being called. At the same time, Embratel was authorized to provide an intra-state long-distance service throughout the country, including the states of Region I, while Telemar initiated inter-state long-distance services between the states in Region I.
The inter-regional long-distance service corresponds to calls where the origin and destination are in distinct regions of the PGO. Having attained certain universal coverage targets in the 2Q02, Telemar began, in July 2002, to provide inter-regional long-distance services from Region I and, in February 2003, services originating in Regions II and III and in Sector 3 of the PGO. To this end, Telemar signed interconnection contracts with other local wireline operators, so as to be able to directly interconnect with their networks. Furthermore, since July 2002, Telemar has been providing international long-distance STFC services from Regions I, II and III, through the license obtained by Oi, although the customer making the call accesses these services using the same CSP 31. That authorization was transferred by Oi to Telemar, as mentioned in Note 1. For the purpose of providing these services, Telemar has signed various international contracts, to be able to interconnect its network with those of the leading telecom operators abroad.
Telemar owns and operates public telephones throughout Region I, with the exception of PGO Sector 3. At December 31, 2007, Telemar had approximately 584 thousand public telephones in service (2006 – 577 thousand), all of them using pre-paid cards (unaudited figures).
These comprise the 0300, 0500 and 0800 services, through which business deals can be arranged or problems solved by calling a number with one of these prefixes, at a predetermined tariff, to be paid either by the caller or by the company offering the service.
Other services that are provided include changing or reorganizing lines, 102 directory inquiries, call blocking, follow-me, messages, and call waiting, among others.
The post-paid services include messages, call identification, conferencing, follow-me, call waiting and special services, depending on the type of handset and whether it has WAP – Wireless Application Protocol or GPRS – General Packet Radio Service. The services are offered at reduced rates at certain times of day.
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The WAP portal is a channel for making services and content available to the customer, and the following are just some of the facilities available: sending and receiving e-mails; setting up contact groups; access to banking facilities; and purchasing tickets for events. The WAP portal can also be used on-line to schedule personal activities or to start up contact groups. Depending on the handset model, customers can have access to the GPRS service, which is available in all the main towns and cities in Region I. This service enables internet access over a mobile phone, laptop or palm pilot, allowing the customer to hook up to the internet even while speaking on the phone. Customers on post-paid plans pay a monthly subscription fee and the services provided are billed on a monthly basis, while the customers on pre-paid plans purchase cards, the prices of which vary according to the number of minutes of use and type of services they allow. These cards are valid for a limited period of time, once the credit has been activated. Mobile telephone services in Brazil are provided on the basis of “the caller pays”, meaning that the customer only pays for the calls s/he makes, plus any applicable roaming fees. The tariffs vary according to the plan adopted, the origin of the call, its destination and its duration. The minimum charge for a call is 30 seconds, even if the call doesn’t last that long. After the first 30 seconds, the user is charged for every six additional seconds. Oi also earns revenue from roaming contracts with other operators providing domestic and international mobile telephone services. Oi’s billing may be broken down as follows:
This covers revenue from subscriptions to the post-paid plans.
This covers the charges for services based on the number and duration of local and LDN calls made.
This refers to the revenue from the sale of mobile phones, Simcards (Subscriber Identity Module Cards) and other accessories.
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This refers to the revenue from roaming contracts with other operators providing domestic and international mobile telephone services. Every time another mobile operator’s subscriber makes a call within Region I, that operator will pay a contractually agreed fee to Oi, and the inverse occurs if an Oi customer makes a call from another region, in which case the fee is then charged to the Oi subscriber.
These refer mainly to shared-network services and other value-added services, such as sending text messages.
Telemar has contracts with service providers to fixed and mobile (individual and special mobile services) customers covering interconnection and voice traffic. The operators are not allowed to discriminate in any way in providing interconnection services. It is a regulatory requirement that the terms of the contracts be freely negotiated between the parties, although they are still subject to review and approval by the regulator, Anatel. If the parties are unable to reach an agreement, either of them may request Anatel to arbitrate the defining of the contractual terms. Should Anatel not approve any contractual provision, the regulator may demand alterations, as a condition of its ratification. The services provided under the use of the Telemar network are largely related to competition in the long distance market. Consequently, Telemar’s main customers for network use are long distance operators, who pay for use of the network, whether it be local or long distance, to provide such services to their customers. Whenever a slice is won of the long distance operators’ market, this is reflected by an increase in the revenue from Telemar’s long-distance services and a reduction in its revenue from network use, though with a positive net effect on total revenue, due to the difference in the tariffs for the two kinds of service. Although Telemar holds 32 concessions, with separate accounting records (16 local and 16 long distance concessions), because the consolidated balances in these financial statements represent a single legal entity, there is no disclosure of the transactions between the separate concessions, such as, for example, the amounts relating to the “Tarifa de uso de Rede Local—TU-RL” (tariff for use of the local network) that is charged by the local concession to the long-distance concession. The consolidated figures also do not show the revenues and expenses involved in transactions between Telemar and Oi, which are eliminated in the consolidation process.
Oi’s wireless network is directly interconnected with the domestic and international long distance wireline networks of all the companies operating in Region I and of all the Band A, B and E mobile operators in Region I. Oi has contracts with all the other mobile telephone operators in Brazil for roaming, thus providing its subscribers with automatic access to roaming services when they are traveling in areas of Brazil where mobile services using GSM (Global System for Mobile Communications) technology are available. Most of
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the revenue from the growth of the pre-paid customer base represents interconnection tariffs charged when the customers of other wireline or wireless operators utilize the Oi network to make calls to customers in Region I. With the migration of all the mobile operators to the SMP system, customers may now choose the desired CSP for each call made. Up until July 12, 2006, in dealings between mobile operators within the same area, network usage fees would only become due when the traffic originating from either of the two parties represented more than 55% (fifty-five percent) of the total traffic between those two operators. With the publication of resolution nº 438 in the D.O.U. of July 10, 2006, there was a significant change in the system of remuneration for use of the mobile network. As from July 13, 2006, the system of full billing came into force, whereby the “Valor do Uso —Rede Móvel—VU-M” (mobile network usage fee) is due to a mobile operator whenever its network is utilized as the origin or destination of a call.
Telemar provides its clients with a variety of customized high speed data transmission services. These data communication services include interconnection between local area networks at transmission speeds of 34 Mbps or more, as well as videoconferencing, the transmission of video/still pictures, multimedia applications and dedicated internet access through internet service providers, and also private network services that allow clients to avail themselves of networks such as intranet or extranet. Telemar also provides “Serviços de Linhas Dedicadas – SLD” (dedicated line services), leasing these lines to other operators, as well as internet providers and business clients. Other operators, especially those providing wireless telephony services, also lease trunk lines from Telemar to use in their independent networks “Exploração Industrial de Linha Dedicada -EILD” (industrial exploitation of dedicated lines). Data transmission services are provided utilizing Telemar’s regional data transmission network and multiple service network platform, in addition to Oi’s national radio and fiber optic network. Telemar provides its data communication services, in the main towns and cities of Region I, utilizing ISDN and ADSL (Asymmetric Digital Subscriber Line) technology. ISDN lines were first offered to residential customers in January 2000, and ADSL subscriptions became available to small and medium-sized companies in April 2001. In recent years, Telemar has placed emphasis on commercializing its ADSL-based data communication service, sold under the brand name “Oi Velox”, as a means for the residential segment to access the internet. The ADSL technology allows voice and data to be transmitted at high speed over a single pair of copper wires in the access network. Since voice transmission over telephone lines utilizes just one of the many possible frequency bands, the remaining bands can be utilized for data transmission. An ADSL modem is installed on the customer’s conventional line and this, in turn, is connected to a DSLAM (Digital Subscriber Line Access Multiplexor) at the telephone exchange. Customers can use the telephone line and the internet simultaneously and pay a rental fee for the modem plus a fixed monthly subscription fee, independent of the amount of their internet use. The tariffs for the data communication services are determined solely in accordance with market criteria, and are not regulated by Anatel.
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The reconciliation of corporate income tax and social contribution, calculated at the effective and nominal rates, is shown below:
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Income tax and social contribution benefits (expenses) included in the net income for the fiscal year are as follows:
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The management of the investment portfolios is the responsibility of the fund managers, and the consolidation of the financial statements in relation to these funds is not required under the terms of CVM Instruction nº 408/2004.
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All of the Company’s financial investments have immediate liquidity and, accordingly, are treated as cash equivalents.
The aging-list of accounts receivable is shown below:
A 2% fine is charged on the total value of the debt outstanding under accounts in arrears (recorded as “Other operating income”), plus interest of 1% per month, charged on a pro rata basis (recorded as “Interest income”), recognized in the books upon the issue of the next bill after the due date of the overdue bill. Telemar may block outgoing calls, when the bill is 30 days or more overdue, block incoming calls also, when a bill is 60 days or more overdue, and remove the customer’s terminal when the bill is 90 days or more overdue, as long as the customer is given 15 days advance warning. After the removal of the terminal, which is carried out when the payment is between 95 and 110 days overdue, the name of the delinquent customer is forwarded to the appropriate credit protection agencies. The policy adopted by Oi, in accordance with the rules established by Anatel, provides for the partial suspension of services, until full payment has been made of all amounts due, in the case of a payment that is more than 15 days overdue and the customer has not paid and/or straightened out the situation, after receiving notification requesting the payment. The same policy also determines that all outgoing and incoming calls be blocked when a payment is more than 30 days overdue. When a payment is more than 75 days overdue, all services are suspended and the name of the delinquent customer is included in the records of the credit protection services.
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With the publication, on February 13, 2008, of an appendix to Anatel Resolution nº 477, of August 7, 2007, introducing changes to the regulations governing SMP, there are two changes to the rules governing default, as described below:
The roll-forward of the provision for doubtful accounts is demonstrated below:
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Way TV is a company that provides subscription TV services and broadband internet access to the residential, commercial and corporate market segments. This company operates in the cities of Belo Horizonte, Poços de Caldas, Uberlândia and Barbacena, using a hybrid network of fiber optic and bidirectional coaxial cable (HFC) that allows it to offer a broad range of interactive services, such as distance learning, telephony and telemedicine, among others. The contract for the purchase of the stock was signed on August 1, 2006 and the amount paid was held in a blocked account under the custody of Banco do Brasil S.A., awaiting Anatel’s approval of the acquisition of Way TV by TNL PCS Participações S/A. On March 19, 2007, Anatel denied the Request for Prior Consent to the purchase of all the shares in Way TV by TNL PCS Participações S.A., and the company submitted a Request for Reconsideration to Anatel, on April 13, 2007. On October 23, 2007, Anatel reversed its previous decision and granted the prior consent for the Oi group’s take-over of Way TV. On November 12, 2007, ANATEL issued Act nº 68,525, which was published in D.O.U. nº 218 of November 13, 2007, approving the transfer of all the common and preferred shares issued by Way TV to TNL PCS Participações.
On November 30, 2007, Telemar, Hispasat Brasil Ltda. and Hispasat S.A. signed a “Settlement Agreement”, a private agreement for the settlement of mutual obligations containing the following terms:
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As a result of the abovementioned subscription payment, Telemar became a stockholder of Hispamar, with a 19.04% stake.
The Company records its deferred tax credits arising from temporary differences and tax loss carry forwards in accordance with CVM Resolution no 273/1998 and CVM Instruction no 371/2002, which allows tax loss carry forwards to be recorded if, according to approved technical studies, there is sufficient generation of future profits to offset these tax loss carry forwards, up to a limit of ten years.
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The roll-forward of the unrecognized tax credits for 2007 is as follows:
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The Company maintains certain judicial deposits in order to ensure their right of appeal in civil, labor and tax proceedings. In respect of judicial deposits in tax proceedings, we highlight the following:
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Pursuant to the pertinent legislation, during the fiscal year ended on December 31, 2007, the judicial deposits were adjusted monetarily, generating an income on the fiscal claims of R$50 (2006 – R$50), on the labor claims of R$30 and on the civil claims of R$50, recorded under “Net financial income (expenses) – Interest and monetary variation on other assets” (see Note 9).
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Additional information
At December 31, 2007, the remaining balance of the revertible assets is R$6,842 (2006 —R$6,496), comprising assets and construction in progress, switching equipment, transmission equipment, public telephone units, external network, energy equipment, system equipment and operating support equipment. As the regulation is subject to different interpretations, the amount is subject to changes resulting from further internal reviews and Anatel definitions. The increase in the balance of the revertible assets was due to composition changes arising from the release of Anatel Official Notice nº 244, providing an interpretation of Anatel Resolution nº 447, which was previously subject to different interpretations. The table below provides a summary of the comparative positions as of December 31, taking into account the effects of the new interpretation:
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With regard to the contracts signed in 2003 and 2004, Oi made a down-payment of 10% of the contract value, when the contract was signed, and recognized the balance under its liabilities, separated into short and long term, with final maturities in 2011 and 2012, respectively. The outstanding balance is monetarily adjusted according to the “Índice Geral de Preços—Disponibilidade Interna—IGP-DI” (domestic inflation index), plus interest of 1% per month. In December 2007, Oi was the winning bidder for 16 of the 105 frequency lots put out to tender by Anatel, thus conferring the right to provide SMP for an indefinite period and the use of radio frequencies in São Paulo for a period of 15 years, renewable for an equal period (involving an additional R$121), as well as increased band width in some states within Region I (Amazonas, Amapá, Pará, Maranhão, Roraima, Bahia, Espírito Santo, Sergipe, Alagoas, Paraíba, Piauí and Rio Grande do Norte), valid until March 13, 2016 (which involved a further R$11). At the signing of the contract, Oi paid 10% of the contract value and fully recognized the balance outstanding to Anatel for these concessions, under its liabilities. According to the rules of the bid, the outstanding balance may be settled in up to 6 equal, consecutive annual installments, with the first coming due in 2010, though it may be paid in advance. The installments will incur “Índice de Serviços de Telecomunicações – IST” (index for telecommunications services), plus interest of 1% per month.
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Due to the acquisition of Way TV, approved by Anatel on November 14, 2007, the balance in relation to that subsidiary’s authorizations to provide cable TV services was added to the aforementioned balance. The total amount paid for the transfer of the authorizations was R$24, and their amortization has been calculated in line with the remaining validity of said authorizations, the average period being eight years.
These amounts correspond to expenses incurred by certain subsidiaries during their pre-operational phase and are being amortized based on economic feasibility studies. The average amortization period is estimated at ten years for Oi Internet, AIX, Oi and TNL PCS Participações and at five years for Paggo. Way TV has deferred spending that is being amortized in five years, in the case of improvements to third-party property, and ten years, in the case of pre-operational expenses. Consolidated deferred charges can be broken down as follows:
The balances per subsidiary can be summarized as follows:
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The average annual interest rate on local currency debt, which amounted to R$3,001 as of December 31, 2007 (2006—R$2,480), is 10.5% p.a. (2006—10.4%). The average annual interest rate charged for foreign currency debt, which totaled R$2,826 on that same date (2006—R$3,377), is 6.3% p.a. (2006—7.0%) for funds obtained in U.S. dollars, 1.5% p.a. (2006—1.5%) for funds denominated in Japanese Yen and 11.0% p.a. (2006—9.9%) for funds obtained through “Banco Nacional de Desenvolvimento Econômico e Social – BNDES” (national bank for economic and social development) currency basket. The financial charges on the debt are basically composed of interest and monetary and exchange variations, net of the results of swap operations.
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The maturity of long-term debt with third parties has been scheduled as follows:
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Upon the publication of the abovementioned Covenant, Telemar filed a writ against the levying of ICMS on the services of installation and connection (the principal revenues under discussion), and has been recording a monthly provision, monetarily adjusted, in relation to this case. Recently, Telemar obtained favorable definitive rulings in the proceedings it filed in the states of Sergipe, Amazonas and Amapá, with the declaration that it was unconstitutional to charge ICMS on such services. The “Supremo Tribunal de Justiça – STJ” (supreme court) is also tending towards the understanding that ICMS should not be levied on the revenues from connection and other services that prepare the way for telecommunications services.
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In view of the position of the STJ, the management understands that the amounts that have been charged to the subscribers ought to be returned to them, as the legal proceedings are decided in the different states. However, the management considers that the reimbursement of these amounts is conditional upon the subscriber still forming part of the active customer base and being up to date in his or her payments.
The Parent Company and its subsidiaries Telemar and Oi have all adhered to the “Parcelamentos Especiais – PAES” (tax refinancing program) (also known as the “Programa de Recuperação Fiscal II -REFIS II” (also tax refinancing program), governed by Law nº 10,684/2003, with the registration of a substantial portion of the debt to the “Fazenda Nacional” (National Treasury) and the INSS that was due up to February 28, 2003. According to the provisions of Article 7 of the aforementioned law, the Company must maintain regular payment of the installments under the REFIS II, and may be excluded from the program in the event of late payment in three consecutive months or in six alternating months, whichever should happen first. The refinancing has been scheduled over 180 months for the Parent Company and 120 months for its subsidiaries, and the amounts of R$15 (2006 – R$14) (Parent Company) and R$131 (2006 – R$122) (consolidated) were settled on time during the year ended on December 31, 2007, in compliance with the provisions of CVM Instruction nº 346, which address the prompt meeting of the payments as an essential requirement for sustaining the conditions provided for under the REFIS II.
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The amounts covered by the REFIS II are as follows:
A breakdown of the REFIS II amounts, showing principal, fines and interest, is presented below:
These amounts are monetarily adjusted according to the variations of the TJLP, in the amount of R$55 (2006—R$72) being recognized as “Interest expenses” for the fiscal year ended on December 31, 2007 (see Note 9). Faced with the undue classification, by the SRF and the “Procuradoria Geral da Fazenda Nacional – PGFN” (office of the chief attorney for the national treasury), of debts under the PAES program, Telemar felt obliged to file a lawsuit in order to prove its good standing with regard to payment of the installments under the program, as well as to correctly attest to the debts that were included in that program. To this effect, and in view of the concession of a preliminary injunction conditional upon a guarantee, supplementary judicial deposits of approximately R$3 per month were made until such time as an administrative or judicial decision be handed down determining the correct balance of the debts included in the PAES scheme. In May 2006, Telemar obtained a judicial ruling authorizing the monthly guarantee presented in this legal action to be effected by means of a bank guarantee, instead of a cash deposit. In the cases of the Parent Company and Oi, the same error has been committed by the administrative authorities, with the undue inclusion of amounts other than those specified by the companies. On August 22, 2006,
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the SRF removed the Parent company and Oi from the REFIS II program, on the grounds of alleged payment default. Since the management and its legal advisors consider that this exclusion is totally unfounded, given that the calculation of the installments to be paid is based on the amounts that the companies themselves asked to be included, the Parent Company and Oi are taking the necessary administrative and judicial steps for their reinstatement in the REFIS II program. In the event that the REFIS II debt is recalculated without including the benefits provided for in Law nº 10,684/2003, the amount of the long-term debt, totaling R$152, will be transferred to current liabilities.
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In accordance with the terms of the respective legislation, the provisions for legal contingencies are monetarily adjusted on a monthly basis, using the following interest rates:
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The amounts of the provisions in relation to ICMS on the leasing of Internet Protocol—IP gateways, “Instituto Nacional de Colonização e Reforma Agrária – INCRA” (national institute for agricultural colonization and reform), FUST, Funttel and an ICMS power consumption credit are recorded in the respective accounts for these charges, as shown below:
Tax:
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Labor:
Civil:
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The Company also has a number of proceedings in which the expectation of incurring losses is classified as possible, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||