##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 001-14489 TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A. (Exact name of Registrant as specified in its charter)
 Tele Centro Oeste Cellular Holding Company
(Translation of Registrants name into English) The Federative Republic of Brazil
(Jurisdiction of incorporation or organization) SCS, Quadra 2, Bloco C, 226, 7° andar
70302-916 Brasília, DF, Brazil
(Address of principal executive offices)   Securities registered or to be registered pursuant to Section 12(b) of the Act
 Title of each class:
    
    Name of each exchange on which registered:Preferred Shares, without par value
    
    New York Stock Exchange*American Depositary Shares (as evidenced
by American Depositary Receipts), each
representing 3,000 shares of Preferred Stock
    
    New York Stock Exchange
   *
    
    Not for trading purposes, but only in connection with the registration on
the New York Stock Exchange of American Depositary Shares representing
those preferred shares.   Securities registered or to be registered pursuant to Section 12(g) of the Act:
None   Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None   The number of outstanding shares of each class of stock of Tele Centro
Participações S.A., as of December 31, 2003: 126,433,338,109 Shares of Common Stock
252,766,698,473 Shares of Preferred Stock Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X            No o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o Item 18 X




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TABLE OF CONTENTS  
 PagePART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    1ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3. KEY INFORMATION
    
    
    1ITEM 4. INFORMATION ON THE COMPANY
    
    
    10ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    26ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    38ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    44ITEM 8. FINANCIAL INFORMATION
    
    
    45ITEM
9. THE OFFER AND LISTING
    
    
    50ITEM 10. ADDITIONAL INFORMATION
    
    
    55ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    68ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    69PART II
    
    
    70ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    70ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
    
    
    70ITEM 15. DEFAULTS UPON SENIOR SECURITIES
    
    
    70ITEM
16. [RESERVED]
    
    
    70PART III
    
    
    70ITEM 17. FINANCIAL STATEMENTS
    
    
    72ITEM 18. FINANCIAL STATEMENTS
    
    
    72ITEM 19. EXHIBITS
    
    
    72
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INTRODUCTION All references in this annual report to:  
    
    Tele Centro Oeste Celular Participações S.A., TCO, our
company, our, we and us are to Tele Centro Oeste Celular
Participações S.A. and its consolidated subsidiaries (unless the
context otherwise requires);
    
    Brazilian government are to the federal government of the Federative Republic of Brazil;
    
    real, reais or R$ are to Brazilian reais, the official currency of Brazil;
    
    U.S.$, dollars or U.S. dollars are to United States dollars;
    
    ADRs are to the American Depositary Receipts evidencing our ADSs;
    
    ADSs are to our American Depositary Shares, each
representing 3,000 shares of our preferred shares;
    
    Commission are to the U.S. Securities and Exchange Commission;
    
    CVM are to the Comissão de Valores Mobiliários, the Brazilian securities commission;
    
    Brazilian Central Bank, Central Bank of Brazil or
Central Bank are to the Banco Central do Brasil, the Brazilian
central bank;
    
    General Telecommunications Law are to Lei Geral de
Telecomunicações, as amended, which regulates the telecommunications
industry in Brazil;
    
    Brazilian corporate law are to Law No. 6,404 of December
1976, as amended;
    
    Anatel are to Agência Nacional de Telecomunicações 
ANATEL, the Brazilian telecommunication regulatory agency;
    
    Telebrás are to Telecomunicações Brasileiras S.A. 
TELEBRAS;
    
    CDMA are to Code Division Multiple Access, an aerial
interface technology for cellular networks based on spectral
spreading of the radio signal and channel division in the code
domain;
    
    1XRTT are to 1x Radio Transmission Technology, the CDMA
2000 1X technology, which, pursuant to the ITU (International
Telecommunication Union) and in accordance with the IMT-2000 rules,
is the 3G (third generation) Technology;
    
    TDMA are to Time Division Multiple Access, a radio
interface technology for cellular networks based on spectral
spreading of the radio signal and channel division in the time
domain;
    
    AMPS are to Advanced Mobile Phone System, a radio interface
technology for cellular networks based on spectral spreading of the
radio signal and channel division in the frequency domain;
    
    SMC are to Serviço Movél Celular(Mobile Cellular Service),
a service rendered pursuant to a concession granted by Anatel to
provide mobile service in a specific frequency range; ii




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
    
    SMP are to Serviço Móvel Pessoal(Personal Cellular
Service), a service rendered pursuant to an authorization granted by
Anatel to provide mobile service in a specific frequency range;
    
    WAP are to Wireless Application Protocol, an open and
standardized protocol started in 1997, which allows access to
Internet servers through specific equipment, a WAP Gateway at the
carrier, and WAP browsers in customers handsets;
    
    SMS are to Short Message Service for cellular handsets,
which allow customers to send and receive alphanumerical messages;
    
    Customers are to number of wireless lines in service; and
    
    Net additions are to the total number of new customers
acquired in the period minus the reduction in the number of
customers. 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. TCO IP is an unlisted company created to deliver general
telecommunications services both nationally and internationally, such as
multimedia telecommunications and information services. TCO IP was classified
as a service provider by Anatel. On April 26, 2002, TCO approved the merger of
Telebrasília Celular S.A., or Telebrasília, formerly a subsidiary of TCO, into
our company and the consequent transfer of the concession to explore mobile
cellular services previously held by Telebrasília. Unless otherwise specified, data relating to the Brazilian
telecommunications industry included in this annual report was obtained from
Anatel. PRESENTATION OF FINANCIAL INFORMATION Our consolidated financial statements as of December 31, 2003 and 2002 and
for the years ended December 31, 2003, 2002 and 2001, have been prepared in
accordance with the accounting practices adopted in Brazil, as prescribed by
the Brazilian Corporate Law, or Brazilian Corporate Law Method, which differs
in certain significant respects from generally accepted accounting principles
in the United States, or U.S. GAAP. Note 36 to our financial statements
appearing elsewhere in this annual report describes the principal differences
between the Brazilian Corporate Law Method and U.S. GAAP as they relate to us,
and provides a reconciliation to U.S. GAAP of net income and shareholders
equity. The consolidated financial statements have been audited by Deloitte
Touche Tohmatsu Auditores Independentes as of and for the year ended December
31, 2003 and by Ernst & Young Auditores Independentes S.C as of December 31,
2002 and for the years ended December 31, 2002 and 2001. In previous years, we presented financial information in our annual report
on Form 20-F using the price-level accounting methodology prescribed by the
Brazilian Federal Accountancy Council. The Brazilian Corporate Law Method does
not permit price-level accounting for periods beginning as of 1996. We have
changed to the Brazilian Corporate Law Method in this annual report because we
do not primarily rely on price-level accounting in reporting to investors and
authorities in Brazil. For consistency, we have presented all our financial
information in this annual report according to the Brazilian Corporate Law
Method. As a result, the financial information included in this annual report
as of and for the year ended December 31, 2002 or for previous years is
different from the information we presented in our annual report for the year
ended December 31, 2002 or for previous years. The financial information is presented on a consolidated basis in the form
required by the Brazilian Corporate Law. The operating information is presented
for Region I (NBT) and for Region II (TCO), except where otherwise indicated.
For comparison purposes, the reference to Region I (sub-ranges of the B
frequencies) and Region II (sub-ranges of A frequencies) as Area 8 and Area 7
were respectively maintained in the Authorization Terms for the Personal Mobile
Service (SMP). iii




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FORWARD-LOOKING STATEMENTS Certain information included in this annual report, principally in Item
3.DRisk Factors, Item 4Information on the Company and Item 5Operating
and Financial Review and Prospects, contain information that is
forward-looking, including, but not limited to:  
    
    statements concerning our operations and prospects;
    
    the size of the Brazilian telecommunications market;
    
    estimated demand forecasts;
    
    our ability 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;
    
    quantitative and qualitative disclosures about market risks; and
    
    other statements of managements expectations, beliefs,
future plans and strategies, anticipated developments and other
matters that are not historical facts. Forward-looking statements may also be identified by words such as
believe, expect, anticipate, project, intend, should, seek,
estimate, future or similar expressions. Forward-looking information
involves risks and uncertainties that could significantly affect expected
results. The risks and uncertainties include, but are not limited to:  
    
    the short history of our operations as an independent,
private-sector entity and the introduction of competition to the
Brazilian telecommunications sector;
    
    the cost and availability of financing;
    
    uncertainties relating to political and economic conditions in Brazil;
    
    inflation, interest rate and exchange rate risks;
    
    the Brazilian governments telecommunications policy; and
    
    the adverse determination of disputes under litigation. We undertake no obligation to update publicly or revise any
forward-looking statements because of new information, future events or
otherwise. In light of these risks and uncertainties, the forward-looking
information, iv




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events and circumstances discussed in this annual report might not occur.
Our actual results and performance could differ substantially from those
anticipated in our forward-looking statements. v




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PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION A. Selected Financial Data Our consolidated financial statements included in this annual report on
Form 20-F and the selected financial data presented for the periods described
below have been prepared in accordance with the Brazilian Corporate Law Method,
which is the same basis of accounting used in our annual financial statements
published in Brazil, audited by Deloitte Touche Tohmatsu Auditores
Independentes as of and for the year ended December 31, 2003 and by Ernst &
Young Auditores Independentes S.C. as of December 31, 2002 and for the years
ended December 31, 2002 and 2001. For consistent presentation, we have used the
Corporate Law Method for all periods presented in this annual report on Form
20-F. See Note 2 to the consolidated financial statements. The financial information included in this annual report on Form 20-F is
different from the information we presented in our annual report on Form 20-F
for the year ended December 31, 2002 and for other previous years. See
Presentation of Financial Information for more information about it. Brazilian Corporate Law Method and U.S. GAAP Our consolidated financial statements are prepared in accordance with
Brazilian Corporate Law Method, which differs in certain material respects from
U.S. GAAP. See Note 36 to our consolidated financial statements for a summary
of the differences between Brazilian Corporate Law Method and U.S. GAAP as they
relate to us and a reconciliation to U.S. GAAP of shareholders equity as of
December 31, 2003 and 2002, and net income for the years ended December 31,
2003, 2002 and 2001. Selected Financial Data The following tables present a summary of our selected financial data at
the dates and for each of the periods indicated. You should read the following
information together with our financial statements and the notes thereto
included elsewhere in this annual report and with Item 5. Operating and
Financial Review and Prospects. Year ended December 31,2003

    
    2002
    
    2001
    
    2000
    
    1999(thousands of reais, except per share data)Income Statement Data:Brazilian Corporate Law MethodNet operating revenue
    
    
    1,958,910
    
    
    
    1,572,110
    
    
    
    1,256,085
    
    
    
    903,097
    
    
    
    578,856Cost of services and goods sold
    
    
    (904,022
    )
    
    
    (741,772
    )
    
    
    (620,695
    )
    
    
    (484,579
    )
    
    
    (257,001
    )Gross profit
    
    
    1,054,888
    
    
    
    830,338
    
    
    
    635,390
    
    
    
    418,518
    
    
    
    321,855Operating expenses:Selling expenses
    
    
    (300,516
    )
    
    
    (215,282
    )
    
    
    (194,514
    )
    
    
    (128,162
    )
    
    
    (107,647
    )
 1




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Year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(thousands of reais, except per share data)General and administrative expenses
    
    
    (193,258
    )
    
    
    (141,860
    )
    
    
    (108,333
    )
    
    
    (78,017
    )
    
    
    (57,344
    )Other net operating expenses
    
    
    (13,463
    )
    
    
    (14,628
    )
    
    
    (4,179
    )
    
    
    (8,286
    )
    
    
    (6,542
    )Operating income before net financial result
    
    
    547,651
    
    
    
    458,568
    
    
    
    328,364
    
    
    
    204,053
    
    
    
    150,322Net financial income (expenses)
    
    
    111,670
    
    
    
    3,970
    
    
    
    (6,462
    )
    
    
    912
    
    
    
    14,119Operating income
    
    
    659,321
    
    
    
    462,538
    
    
    
    321,902
    
    
    
    204,965
    
    
    
    164,441Net nonoperating income (expenses)
    
    
    (6,364
    )
    
    
    4,292
    
    
    
    296
    
    
    
    1,448
    
    
    
    (5,069
    )Income before income taxes and minority interest
    
    
    652,957
    
    
    
    466,830
    
    
    
    322,198
    
    
    
    206,413
    
    
    
    159,372Income and social contribution taxes
    
    
    (181,089
    )
    
    
    (131,516
    )
    
    
    (95,879
    )
    
    
    (61,762
    )
    
    
    (34,368
    )Minority interest
    
    
    (8,460
    )
    
    
    (6,131
    )
    
    
    (18,215
    )
    
    
    (15,332
    )
    
    
    (17,711
    )Net income
    
    
    463,408
    
    
    
    329,183
    
    
    
    208,104
    
    
    
    129,319
    
    
    
    107,293Earnings per thousand shares
    
    
    1.24
    
    
    
    0.88
    
    
    
    0.57
    
    
    
    0.35
    
    
    
    0.29Dividends per thousand preferred shares
(R$)
    
    
    0.30
    
    
    
    0.21
    
    
    
    0.20
    
    
    
    0.09
    
    
    
    0.09Dividends per thousand common shares
(R$)
    
    
    0.30
    
    
    
    0.21
    
    
    
    0.20
    
    
    
    0.09
    
    
    
    0.09Dividends per thousand preferred shares
(US$)(1)
    
    
    0.10
    
    
    
    0.07
    
    
    
    0.09
    
    
    
    0.04
    
    
    
    0.05Dividends per thousand common shares
(US$)(1)
    
    
    0.10
    
    
    
    0.07
    
    
    
    0.09
    
    
    
    0.04
    
    
    
    0.05
  (1)
    
    U.S. dollar amount determined according to the applicable exchange rate
at the date of the general shareholders meeting that approved the
dividend distribution. 2




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Year ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(thousands of reais, except per share data)Income Statement Data:U.S. GAAPNet revenue
    
    
    2,409,069
    
    
    
    1,836,867
    
    
    
    1,398,315
    
    
    
    992,144
    
    
    
    752,560Operating income
    
    
    552,143
    
    
    
    444,808
    
    
    
    324,728
    
    
    
    219,047
    
    
    
    86,831Net income
    
    
    487,670
    
    
    
    299,324
    
    
    
    215,965
    
    
    
    146,489
    
    
    
    76,825Net income per thousand shares:Common shares -basic
    
    
    1.31
    
    
    
    0.81
    
    
    
    0.59
    
    
    
    0.40
    
    
    
    0.22Common shares -diluted
    
    
    1.29
    
    
    
    0.81
    
    
    
    0.59
    
    
    
    0.38
    
    
    
    0.20Weighted average number of common shares outstanding  basic (thousands)
    
    
    120,641,944
    
    
    
    127,583,902
    
    
    
    124,882,040
    
    
    
    124,369,031
    
    
    
    124,369,030Weighted average number of common shares outstanding  diluted (thousands)
    
    
    123,487,816
    
    
    
    127,583,902
    
    
    
    136,886,077
    
    
    
    138,097,954
    
    
    
    143,012,534Preferred shares  basic
    
    
    1.31
    
    
    
    0.81
    
    
    
    0.59
    
    
    
    0.40
    
    
    
    0.22Preferred shares -diluted
    
    
    1.30
    
    
    
    0.81
    
    
    
    0.59
    
    
    
    0.39
    
    
    
    0.21Weighted average number of preferred shares outstanding  basic and diluted
(thousands)
    
    
    252,766,698
    
    
    
    240,279,068
    
    
    
    239,964,678
    
    
    
    240,029,997
    
    
    
    227,529,997
 Year ended December 31,(in thousands of reais, except when indicated)2003
    
    2002
    
    2001
    
    2000
    
    1999Cash Flow Data:Brazilian CorporateLaw MethodCash flows provided by operating activities
    
    
    625,483
    
    
    
    615,831
    
    
    
    431,992
    
    
    
    393,895
    
    
    
    263,249Cash flows provided by (used in) investing
activities
    
    
    502,922
    
    
    
    (520,863
    )
    
    
    (425,684
    )
    
    
    (353,986
    )
    
    
    (392,445
    )Cash flows provided by (used in) financing
activities
    
    
    (314,854
    )
    
    
    (263,102
    )
    
    
    (129,802
    )
    
    
    347,134
    
    
    
    69,843Increase/ (decrease) in cash and cash
equivalents
    
    
    813,551
    
    
    
    (168,134
    )
    
    
    (123,494
    )
    
    
    387,043
    
    
    
    (59,353
    )Cash and cash equivalents at beginning of year
    
    
    158,503
    
    
    
    326,637
    
    
    
    450,131
    
    
    
    63,148
    
    
    
    122,501Cash and cash equivalents at end of year
    
    
    972,054
    
    
    
    158,503
    
    
    
    326,637
    
    
    
    450,191
    
    
    
    63,148
 3




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At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(in thousands of reais, except when indicated)Balance Sheet Data:Brazilian Corporate Law MethodProperty, plant and equipment, net
    
    
    891,030
    
    
    
    891,418
    
    
    
    888,039
    
    
    
    841,375
    
    
    
    716,303Total assets
    
    
    2,654,246
    
    
    
    2,364,746
    
    
    
    2,052,136
    
    
    
    1,915,450
    
    
    
    1,473,366Loans and financing  current portion
    
    
    135,042
    
    
    
    324,980
    
    
    
    279,507
    
    
    
    490,239
    
    
    
    91,521Loans and financing  noncurrent portion
    
    
    213,126
    
    
    
    302,800
    
    
    
    237,477
    
    
    
    18,910
    
    
    
    39,289Shareholders equity
    
    
    1,556,086
    
    
    
    1,218,523
    
    
    
    1,010,175
    
    
    
    896,398
    
    
    
    1,014,492Share capital
    
    
    570,095
    
    
    
    534,046
    
    
    
    505,000
    
    
    
    303,000
    
    
    
    303,100Number of outstanding shares as
adjusted to reflect changes in capital
    
    
    373,408,642
    
    
    
    373,408,642
    
    
    
    365,379,257
    
    
    
    364,399,028
    
    
    
    364,399,028U.S. GAAPProperty, plant and equipment, net
    
    
    811,475
    
    
    
    811,948
    
    
    
    826,762
    
    
    
    782,834
    
    
    
    656,903Total assets
    
    
    2,655,017
    
    
    
    2,331,705
    
    
    
    2,045,373
    
    
    
    1,898,104
    
    
    
    1,135,125Loans and financing  current portion
    
    
    135,042
    
    
    
    324,980
    
    
    
    279,507
    
    
    
    490,239
    
    
    
    91,521Loans and financing  noncurrent portion
    
    
    213,126
    
    
    
    302,800
    
    
    
    237,477
    
    
    
    18,910
    
    
    
    39,289Shareholders equity
    
    
    1,545,120
    
    
    
    1,183,295
    
    
    
    1,006,393
    
    
    
    884,755
    
    
    
    668,383Capital stock
    
    
    570,095
    
    
    
    534,046
    
    
    
    505,000
    
    
    
    303,000
    
    
    
    303,100Number of outstanding shares as
adjusted to reflect changes in capital
    
    
    373,408,642
    
    
    
    373,408,642
    
    
    
    365,379,257
    
    
    
    364,399,028
    
    
    
    364,399,028
 Exchange Rates There are two principal legal foreign exchange markets in Brazil: 1) the commercial rate exchange market; and 2) the floating rate exchange market. Most trade and financial foreign-exchange transactions are carried out on
the commercial rate exchange market. These transactions include the purchase
or sale of shares or payment of dividends or interest with respect to shares.
Foreign currencies may only be purchased through a Brazilian bank authorized to
operate in these markets. In both markets, rates are freely negotiated but may
be influenced by Central Bank intervention. In 1999, the Central Bank placed
the commercial exchange rate and the floating rate exchange market under
identical operational limits, which led to a convergence in the pricing and
liquidity of both markets. Since February 1, 1999, the floating market rate
has been the same as the commercial market rate, and the system relying on the
foreign exchange rate band has been eliminated. However, there is no guarantee
that these rates will continue to be the same in the future. Despite the
convergence in pricing and liquidity of both markets, each market continues to
be regulated separately. Since 1999, the Central Bank has allowed the real/U.S. dollar exchange
rate to float freely, and during that period, the real/U.S. dollar exchange
rate has fluctuated considerably. In the past, the Central Bank has intervened
occasionally to control unstable movements in foreign exchange rates. We
cannot predict whether the Central Bank or the Brazilian government will
continue to let the realfloat freely or will intervene in the exchange rate
market through a currency band system or otherwise. The realmay depreciate or
appreciate substantially in the future. For more information on these risks,
see Risk FactorsRisks relating to Brazil. The following tables set forth the commercial selling rate, expressed in
reaisper U.S. dollar (R$/U.S.$), for the periods indicated. 4




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Exchange Rate of R$ per U.S.$Low
    
    High
    
    Average(1)
    
    Year-EndYear ended December 31,1999
    
    
    1.2078
    
    
    
    2.1647
    
    
    
    1.8150
    
    
    
    1.78902000
    
    
    1.7234
    
    
    
    1.9847
    
    
    
    1.8295
    
    
    
    1.95542001
    
    
    1.9357
    
    
    
    2.8007
    
    
    
    2.3522
    
    
    
    2.32042002
    
    
    2.2709
    
    
    
    3.9552
    
    
    
    2.9309
    
    
    
    3.53332003
    
    
    2.8219
    
    
    
    3.6623
    
    
    
    3.0715
    
    
    
    2.8892
   Source:
    
    Central Bank of Brazil, PTAX. PTAX is the average of the exchange rates negotiated in the commercial rate market on a given day.(1)
    
    Represents the average of the exchange rates (PTAX) on the last day of each month during the relevant period. Exchange Rate of R$ per U.S.$Low
    
    HighMonth EndedDecember 31, 2003
    
    
    2.8883
    
    
    
    2.9434January 31, 2004.
    
    
    2.8022
    
    
    
    2.9409February 29, 2004
    
    
    2.9042
    
    
    
    2.9878March 31, 2004
    
    
    2.8752
    
    
    
    2.9410April 30, 2004
    
    
    2.8743
    
    
    
    2.9522May 31, 2004
    
    
    2.9569
    
    
    
    3.2051June 25, 2004
    
    
    3.1030
    
    
    
    3.1651
   Source:
    
    Central Bank of Brazil, PTAX. PTAX is the average of the exchange rates negotiated in the commercial rate market on a given day. B. Capitalization and Indebtedness Not applicable. C. Reasons for the Offer and Use of Proceeds Not applicable. D. Risk Factors This section is intended to be a summary of more detailed discussions
contained elsewhere in this annual report. The risks described below are not
the only ones we face. Our business, results of operations or financial
condition could be harmed if any of these risks materializes and, as a result,
the trading price of the ADSs could decline. Risks Relating to Brazil The Brazilian government has exercised, and continues to exercise,
significant influence over the Brazilian economy. Brazilian political and
economic conditions have a direct impact on our business, operations and the
market price of our preferred shares and our ADSs. In the past, the Brazilian government has intervened in the Brazilian
economy and occasionally made drastic changes in policy. The Brazilian
governments actions to control inflation and affect other policies have often
involved wage and price controls, currency devaluations, capital controls, and
limits on imports, among other things. Our business, financial condition,
results of operations and the market price of our preferred shares and ADSs may
be adversely affected by changes in government policies, as well as general
economic factors, including:  
    
    currency fluctuations;
    
    inflation;
    
    price instability;
    
    energy policy;
    
    interest rates; 5




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
    
    tax policy; and
    
    other political, diplomatic, social and economic developments in or affecting Brazil. Inflation and certain government measures to curb inflation may have
adverse effects on the Brazilian economy, the Brazilian securities market
and/or our business and operations. Brazil has historically experienced extremely high rates of inflation.
Inflation and certain of the Brazilian governments measures taken in the
attempt to curb inflation have had significant negative effects on the
Brazilian economy. Since 1994, Brazils inflation rate has been substantially
lower than in previous periods. However, inflationary pressures persist, and
actions taken in an effort to curb inflation, coupled with public speculation
about possible future governmental actions, have contributed to economic
uncertainty in Brazil and heightened volatility in the Brazilian securities
market. In 2003, the general price index, or the IGP-DI (the #ndice Geral de
Preços  Disponibilidade Interna), an inflation index developed by the Fundação
Getúlio Vargas, a private Brazilian economic organization, reflected inflation
of 7.7%, compared to 26.4% in 2002 and 10.4% in 2001. If Brazil experiences
significant inflation, we may be unable to increase service rates to our
customers in amounts that are sufficient to cover our increasing operating
costs, and our business may be adversely affected. Fluctuations in the value of the real against the value of the U.S. dollar
may adversely affect our ability to pay U.S. dollar-denominated or U.S.
dollar-linked obligations and could lower the market value of our preferred
shares and ADSs. The Brazilian currency has historically experienced frequent devaluations.
The realdevalued against the U.S. dollar by 18.7% in 2001. During 2002, the
realcontinued to undergo significant devaluation due in part to the political
uncertainty in connection with the elections and the global economic slowdown.
In 2002, the realdevalued against the U.S. dollar by 52.3%. In 2003, the
internal economy showed an inflation stabilization and the dissipation about
uncertainty in the Governmental economic team, which promoted an appreciation
of the realby 18.2%. However, there is no guarantee that this trend will
continue or that the exchange rate will remain at current levels. Devaluations
of the realwould reduce the U.S. dollar value of distributions and dividends
on preferred shares and the ADSs and may also reduce the market value of the
preferred shares and the ADSs. See Selected Financial DataExchange Rates
for more information on exchange rates. As of December 31, 2003, we had R$348.1 million in total debt, of which
R$156.9 million was denominated in U.S. dollars. As of December 31, 2003, we
had currency derivatives in place to cover 100% of our U.S. dollar-denominated
debt and U.S. dollar-linked obligations. Also, significant costs relating to
our network infrastructure are payable or linked to payment by us in U.S.
dollars. At the same time, while we may derive income from derivative
transactions denominated in foreign currencies, all of our operating revenues
are generated in reais. To the extent that the value of the realdecreases
relative to the U.S. dollar, our debt becomes more expensive to service and it
becomes more costly for us to import the technology and the goods that are
necessary to operate our business. Deterioration in economic and market conditions in other countries,
especially emerging market countries, may adversely affect the Brazilian
economy and our business. The market for securities issued by Brazilian companies is influenced by
economic and market conditions in Brazil and, to varying degrees, market
conditions in other Latin American and emerging market countries. Although
economic conditions are different in each country, the reaction of investors to
developments in one country may cause the capital markets in other countries to
fluctuate. Developments or conditions in other emerging market countries have
at times significantly affected the availability of credit in the Brazilian
economy and resulted in considerable outflows of funds and declines in the
amount of foreign currency invested in Brazil. Adverse developments in other emerging market countries could lead to a
reduction in both demand and the market price for our preferred shares and
ADSs. 6




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Risks Relating to the Brazilian Telecommunications Industry and Us Extensive government regulation of the telecommunications industry may
limit our flexibility in responding to market conditions, competition and
changes in our cost structure. Our business is subject to extensive government regulation, including any
changes that may occur during the period of our authorization to provide
telecommunication services. Anatel, which is the main telecommunications
industry regulator in Brazil, regulates, among other things:  
    
    industry policies and regulations;
    
    licensing;
    
    tariffs;
    
    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 authorization
to provide telecommunication services may limit our flexibility in responding
to market conditions, competition and changes in our cost structure. Our results may be affected in the medium or long-term as a result of the
new SMP rules. In 2002, Anatel changed the SMP regime (first enacted in December 2000),
thus encouraging companies operating under the SMC system to migrate to the SMP
system. Under the SMP regime, we no longer receive payment from our customers
for outbound long-distance traffic, but we receive payment for the use of our
network, in accordance with the network usage remuneration plan. In 2003, this
change had little impact on us but we cannot assure that in the next years the
interconnection fees that we will receive from long-distance operators will
compensate us for the revenues that we would have received from our customers
for outbound long-distance traffic. Until June 30, 2004, SMP service providers may opt to establish a price
cap or freely negotiate their interconnection charges. After that date, free
negotiation will be the rule, subject to Anatel regulations to be issued in
regarding to the traffic capacity and interconnection infrastructure that must
be made available to requesting parties. In addition, under the SMP regime, an SMP cellular operator will pay for
the use of another SMP cellular operators network in the same registration
area only if the traffic carried from the first operator to the second exceeds
55% of the total traffic exchanged between them. In that case, only those calls
that have surpassed the 55% level will be subject to payment for network usage.
This rule is valid until June 30, 2005, after which no payments will be due for
network usage between SMP networks, regardless of the amount of traffic. As a
result, if the traffic we terminate for other SMP cellular operators exceeds
the traffic they terminate for our company, our revenues and results of
operations may be adversely affected. The new rules may negatively affect our revenues and results of
operations. 7




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If the inflation adjustment index now applied to our tariffs is changed,
the new index may not be adequate. The Brazilian government is considering replacing the IGP-DI, the monetary
adjustment index currently used in connection with the tariffs applied in the
telecommunications industry, with another index, which has not yet been
identified. We cannot assure you that a new index, if any, would adequately
reflect the effect of inflation on our tariffs. We face substantial competition that may reduce our market share and harm
our financial performance. There is substantial competition in the telecommunications industry. We
not only compete with companies that provide wireless services 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
mobile 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, as well as on our ability to anticipate and respond to various
competitive factors affecting the industry, including new services that may be
introduced, changes in consumer preferences, demographic trends, economic
conditions and discount pricing strategies by our competitors. To the extent
that we do not keep pace with technological advances, or fail to timely respond
to changes in competitive factors in our industry, we could lose a portion of
our market share or experience a decline in our revenue. Competition from
other mobile communications service providers in the region in which we operate
may also affect our financial results by causing, among other things, the rate
of our customer growth to decline and bring about decreases in tariff rates and
increases in selling expenses. This could have a material adverse effect on
our results of operations. There has been consolidation in the Brazilian telecommunications market,
and we believe this trend may continue. Consolidations may result in increased
competitive pressures within our market. We may be unable to adequately
respond to pricing pressures resulting from consolidation, which would
adversely affect our business, financial condition and results of operations. Our results of operations would be affected by a high rate of customer
turnover or a decrease in our customer growth. A high rate of customer turnover and/or a decrease in our customer growth
could adversely affect our results of operations as well as our competitive
position. The rate of customer turnover may be the result of several factors,
including limited network coverage and lack of sufficient reliability of our
services, as well as increased competition in the region in which we operate
and the economic conditions in Brazil. The industry in which we conduct our business is subject to rapid
technological changes and these changes could have a material adverse effect on
our ability to provide competitive services. The telecommunications industry is subject to rapid and significant
technological changes. Our success depends, in part, on our ability to
anticipate and adapt in a timely manner to technological changes. We expect
that new products and technologies will emerge and that existing products and
technologies will be further developed. The advent of new products and technologies could have a variety of
consequences for us. These new products and technologies may reduce the price
of our services by providing lower-cost alternatives, or they may be superior
to, and render obsolete, the products and services we offer and the
technologies we use, requiring investment in new technology. The cost of
upgrading our products and technology in order to continue to compete

effectively could be significant, and our ability to fund this upgrading may
depend on our ability to obtain additional financing. Our controlling shareholder has a great deal of influence over our
business. Our controlling shareholder is Telesp Celular Participações S.A. (TCP),
which, in turn, is controlled by PT Móveis, SGPS, S.A. and Telefónica Móviles,
S.A. through Brasilcel. PT Móveis SGPS, S.A. is 100% controlled by Portugal
Telecom, SGPS, S.A. TCP owns 90.7% of TCOs voting capital. See Item 7. Major
Shareholders and 8




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##### Table of Contents



Related Party TransactionsMajor Shareholders. Due to its share
ownership, TCP has the power to control TCO and its subsidiaries, including the
power to elect our directors and officers and to determine the outcome of any
action requiring shareholder approval, including transactions with related
parties, corporate reorganizations and the timing and payment of our dividends.
In addition, as Portugal Telecom and Telefónica Móviles share their
participation in TCP in equal percentages, any disagreement or dispute between
them, as controlling shareholders of TCP, may have an impact on the
decision-making capabilities of TCP management and, consequently, of ours. The wireless industry, including us, may be harmed by reports suggesting
that radio frequency emissions cause health problems and interfere with medical
devices. Media and other reports have suggested that radio frequency emissions from
wireless handsets and base stations may cause health problems. If consumers
harbor health-related concerns, they may be discouraged from using wireless
handsets. These concerns could have an adverse effect on the wireless
communications industry and, possibly, expose wireless providers, including us,
to litigation. We cannot assure you that further medical research and studies
will refute a link between the radio frequency emissions of wireless handsets
and base stations and these health concerns. Government authorities could
increase regulation of wireless handsets and base stations as a result of these
health concerns or wireless companies, including us, could be held liable for
costs or damages associated with these concerns, which could have an adverse
effect on our business. The expansion of our network may be affected by these
perceived risks if we experience problems in finding new sites to expand our
network, which in turn may delay the expansion and may affect the quality of
our services. Risks Relating to Our Preferred Shares and Our ADSs Our preferred shares and our ADSs generally do not have voting rights. In accordance with Brazilian corporate law and our by-laws, holders of our
preferred shares, and therefore of our ADSs, are not entitled to vote at
meetings of our shareholders, except in limited circumstances. See Item
10Additional InformationMemorandum and Articles of Association. You might be unable to exercise preemptive rights with respect to our
preferred shares unless there is a current registration statement in effect
that covers those rights or unless an exemption from registration applies. You will not be able to exercise the preemptive rights relating to our
preferred shares underlying your ADSs unless a registration statement under the
U.S. Securities Act of 1933, as amended, or the Securities Act, is effective
with respect to those rights, or unless an exemption from the registration
requirements of the Securities Act is available. We are not obligated to file
a registration statement. Unless we file a registration statement or an
exemption from registration applies, you may receive only the net proceeds from
the sale of your preemptive rights by the depositary, or, if the preemptive
rights cannot be sold, they will lapse and you will not receive any value for
them. For more information on the exercise of your rights see Item
10Additional Information. An exchange of ADSs for preferred shares risks loss of certain foreign
currency remittance and Brazilian tax advantages. The ADSs benefit from the certificate of foreign capital registration,
which permits The Bank of New York, as Depositary, to convert dividends and
other distributions with respect to preferred shares into foreign currency, and
to remit the proceeds abroad. Holders of ADSs who exchange their ADSs for
preferred shares will then be entitled to rely on the Depositarys certificate
of foreign capital registration for five business days from the date of
exchange. Thereafter, they will not be able to remit non-Brazilian currency
abroad unless they obtain their own certificate of foreign capital
registration, or unless they qualify under Resolution 2,689 of the Central Bank
of Brazil, dated January 26, 2000, known as Resolution 2,689, which entitles
certain investors to buy and sell shares on Brazilian stock exchanges without
obtaining separate certificates of registration. If holders of ADSs do not qualify under Resolution 2,689, they will
generally be subject to less favorable tax treatment on distributions with
respect to our preferred shares. There can be no assurance that the
Depositarys certificate of registration or any certificate of foreign capital
registration obtained by holders of ADSs will not be affected by future
legislative or regulatory changes, or that additional Brazilian law
restrictions applicable to their investment in the ADSs may not be imposed in
the future. 9




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The relative volatility and illiquidity of the Brazilian securities
markets may adversely affect holders of ADSs. Investments in securities, such as the preferred shares or the ADSs, of
issuers from emerging market countries, including Brazil, involves a higher
degree of risk than investing in securities of issuers from more developed
countries. The Brazilian securities market is substantially smaller, less liquid,
more concentrated and more volatile than major securities markets in the United
States. There is also significantly greater concentration in the Brazilian
securities market than in major securities markets in the United States. These
features may substantially limit the ability to sell the preferred shares
underlying the ADSs at a price and time at which holders wish to do so. 
 ITEM 4. INFORMATION ON THE COMPANY A. Our History and Development General We are incorporated under the laws of the Federative Republic of Brazil
under the name Tele Centro Oeste Celular Participações S.A. (Tele Centro Oeste
Cellular Holding Company). We have the legal status of a sociedade por ações,
or stock corporation, operating under the Brazilian corporate law. Our
principal executive offices are located at SCS, Quadra 2, Bloco C, 226, 7
andar, 70302-916 Brasília, DF, Brazil. Our telephone number is
55-61-3962-7717, our facsimile number is 55-61-323-7250, and our website is
located at www.vivo.com.br. The information on our website is not part of this
annual report. Our agent for service of process in the United States is CT
Corporation System, located at 111 Eighth Avenue, New York, New York 10011. According to market share data published by Anatel, we are a leading
provider of cellular telecommunications services in Brazil, controlled by
Telesp Celular Participações S.A. and with seven subsidiaries. Below you will
find a chart(1) showing the major companies in our ownership structure as of
December 31, 2003 . 10




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##### Table of Contents



(FLOW CHART) (1) The percentage of TCP into TCO was calculated by excluding the
treasury shares. Telebrás and the Privatization TCO was created as a result of a restructuring of Telebrás in May 1998.
Before 1972, there were more than 900 telecommunications companies operating
throughout Brazil. Between 1972 and 1975, Telebrás and its operating
subsidiaries , known as the Predecessor Companies, and collectively known as
the Telebrás System, were created, acquiring almost all of the
telecommunication companies in Brazil, and creating a near monopoly over the
provision of public telecommunications services in Brazil. In 1995, the 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 11




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##### Table of Contents



Predecessor Companies assets and liabilities were allocated to the new
holding companies, which we refer to as the New Holding Companies. TCO was one of the New Holding Companies. TCO was allocated all the share
capital held by Telebrás in the operating subsidiaries of the Telebrás System
that provided cellular telecommunications service in Area 7. In July 1998, the
Brazilian government sold substantially all of its shares of the New Holding
Companies, including TCO, to private sector buyers. The Brazilian governments
shares of TCO were purchased by Splice through BID S.A., its subsidiary at that
time. NBT On October 19, 1998, Tele Centro Oeste/Inepar, a consortium comprised of
(i) Inepar S.A. Indústria e Construções (50%) and (ii) TCO (50%), was awarded a
license to provide cellular telecommunications services in Area 8. On May 21,
1999, we acquired 45% of the shares of Tele Centro Oeste/Inepar from Inepar for
R$26.5 million, increasing our holding in the consortium to 95%. Upon
acquiring control, we renamed Tele Centro Oeste/Inepar Norte Brasil Telecom
S.A. and registered it as a non-publicly held company. NBT provides cellular
telecommunications service in the Brazilian States of Amapá, Amazonas,
Maranhão, Pará and Roraima, known as Area 8, under concessions from the
Brazilian government (the B Band Concessions). The A Band Concessions and the
B Band Concessions are collectively referred to as our concessions. TCO IP On November 21, 2000, SPLICE IP S.A. was formed as a closed corporation.
TCO held 100% of its preferred shares and Splice do Brasil Telecomunicações e
Eletrônica S.A., or Splice, held 99.99% of its common shares. As of March 5,
2001, the control of SPLICE IP S.A. changed to TCO, when TCO bought 99.99% of
the common shares from Splice for R$0.05 million, and the name of the
subsidiary changed to TCO IP S.A. Transfer to Fixcel On December 31, 2001, Splice transferred all of its shares in BID S.A.,
TCOs parent company, to Fixcel S.A. for R$860 million. Merger of Telebrasília On April 26, 2002, the management of TCO and its subsidiary, Telebrasília
Celular S.A., concluded all the legal and corporate acts necessary for the
merger of Telebrasília into TCO. The reasons for the merger were: (1) the
concentration of the liquidity of the stocks of TCO group  ́s public companies
into one single company, in order to decrease the capital costs, (2) the
reduction of administrative, operational and financial costs incurred in
connection with keeping two publicly held companies, and (3) the economies
resulting from administrative and commercial sinergies existing between the
companies. The costs of the merger were approximately R$315.000,00, mainly
related to the engagement of specialized companies for the preparation of
valuation reports, legal assistance as well as expenses with the publication of
corporate acts. Each stock of Telebrasília Celular was substituted for
62.311958619 stocks of TCO. Transfer to Telesp Celular Participações S.A. On April 25, 2003, TCP acquired 64.03% of our voting capital stock from
Fixcel S.A. for approximately R$1,505.6 million, corresponding to R$19.48719845
per each lot of 1,000 shares acquired. As of December 31, 2003, TCP has paid
R$1,355.7 million of the total amount and the remaining will be paid in
installments. On May 25, 2003, after acquiring 64.03% of our voting capital, TCP
launched a tender offer for our remaining common shares in compliance with
Brazilian legislation. The acceptance period concluded on November 18, 2003,
and TCP acquired 74.2% of the outstanding available common shares at the price
of R$ 16.73 per 1,000 common shares. The total purchase price for the new
shares amounted to R$538.8 million. At December 31, 2003 TCP held 90.73% of
our common shares, representing a 29.31% interest in us, excluding treasury
shares. TCP also 12




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announced the intention to launch an exchange offer for our remaining shares
through which TCP would have become our sole shareholder. This would have been
followed by a merger of TCO into TCP. After the launch of the exchange offer,
the CVM raised questions on to its compliance with Brazilian law. Although TCP
and TCO believed, and believe, that the exchange offer complied with applicable
law, TCP and TCO decided to terminate the exchange offer in January, 2004. TCP is controlled by Brasilcel N.V., or Brasilcel, a joint venture between
Portugal Telecom and Telefónica Móviles. This joint venture, with headquarters
in the Netherlands, has 56.2% of the total market in Brazil, with 20.7 million
customers at December 31, 2003, according to market share data published by Anatel.
Its operations cover an area of approximately 130 million inhabitants, or 73%
of the Brazilian population, and approximately 83% of its GDP. Portugal
Telecom and Telefónica Móviles are managing the joint venture on an equal
basis. In December 2002, after Anatel approved this joint venture, Portugal
Telecom and Telefónica transferred to Brasilcel all of their direct and
indirect interests in:  
    
    TCP, which controls an A Band operator in the state of São
Paulo and Global Telecom, a B Band operator in the states of Paraná
and Santa Catarina;
    
    Tele Sudeste Celular Participações S.A., which controls A
Band operators in the states of Rio de Janeiro and Espírito Santo;
    
    Tele Leste Celular Participações S.A., which controls A Band
operators in the states of Bahia and Sergipe; and
    
    Celular CRT Participações S.A., which controls an A Band
operator in the state of Rio Grande do Sul. Vivo All of the operating companies participating in the joint venture between
Portugal Telecom and Telefónica Móviles, named Brasilcel, have been operating
under the brand name Vivo since April 2003. The consolidation of a unified
commercial model for the whole country centered on the Vivo brand, substituting
the different brands under which the different companies offered their services
in their respective states. The commercial strategy of Vivo is to increase
their customer base as well as revenues, by retaining customers as well as
maintaining their distribution channels. The launching of the Vivo brand was
accompanied by loyalty programs and other measures designed to contribute to
the success of the commercial strategy. TCO  ́s corporate restructuring On May 14, 2004, the management of TCP and TCO announced a proposal for
corporate restructuring involving TCO and its subsidiaries Telegoiás Celular
S.A., Telems Celular S.A., Telemat Celular S.A., Teleacre Celular S.A. and
Teleron Celular S.A. The purposes of such restructuring are to provide for: (i)
an improvement in the cash flow of TCO and its subsidiaries, resulting from the
transfer of the tax benefit corresponding to R$511 million from TCP to TCO,
generated by the amortization of a goodwill at the amount of R$1,503 million,
originally paid upon the acquisition of TCO and its subsidiaries by TCP in 2003
and (ii) a simplification of the corporate structure of TCOs subsidiaries,
whose minority shareholders will receive shares issued by TCO of the same type
and class in substitution for the shares held by them respectively in TCO
subsidiaries. TCO  ́s subsidiaries will, therefore, become wholly-owned
subsidiaries of TCO, which will improve the capitalization conditions of TCO
and will benefit the minority shareholders of TCO subsidiaries. The intended restructuring shall be made in such a manner as to avoid any
and all negative impacts over the future profits of both TCO and its
subsidiaries, on account of the referred goodwill. The involved companies
expect that the restructuring will be completed by July, 2004. To the extent that the tax benefits corresponding to the amortization of
the deferred assets transferred to the TCO subsidiaries are realized, the
respective especial premium reserves shall be capitalized, through the issuance
of additional shares to TCP. On May 31, 2004, the first step of the restructuring process took place,
concerning the merger of WXYZ0059 Holdings S.A., the holder of the investment
and goodwill of TCO, into TCO. 13




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On June 14, 2004, TCO released a relevant fact regarding the 2nd and 3rd
Stages of the corporate restructuring transaction, as following: (i) TCOs
partial spin-off, capital stock and share of the spinned-off company; and (ii)
Merger of TCO operators shares into TCO, whereby the TCO Operators shall
become wholly-owned subsidiaries of TCO. These steps shall be approved in
special meeting of shareholders in the involved companies for the conclusion of
the restructuring process. Capital Expenditures The primary focus of our capital expenditure program has been, and
continues to be, the improvement of the capacity of the services we currently
offer and the offering of new services as well as the development of
information systems. This includes the increase of our network capacity, the
overlay of 1xRTT technology in our TDMA network, the improvement of our overall
quality, and the increase of the digitalization level of our network. The following table sets forth our capital expenditures for each year in
the three-year period ended December 31, 2003. 2003
    
    2002
    
    2001(millions of reais) (1)Switching equipment
    
    
    27.2
    
    
    
    22.1
    
    
    
    19.6Transmission equipment
    
    
    103.3
    
    
    
    57.2
    
    
    
    80.9Information technology
    
    
    34.1
    
    
    
    43.1
    
    
    
    31.0Others(1)
    
    
    43.0
    
    
    
    48.2
    
    
    
    59.0Total capital expenditures
    
    
    207.6
    
    
    
    170.6
    
    
    
    190.5
   (1)
    
    In 2003, others is composed by land (R$1.3 million), property
constructions (R$4.7 millions), energy equipment (R$3.1 millions), towers
(R$5.7 millions), improvements in properties of third parties (R$3.0
millions), conditioned air (R$1.0 million) and others (R$24.2 millions). We anticipate that our capital expenditures for 2004 will be approximately
R$395 million. We intend to fund these capital expenditures mostly with cash
generated from operations. See Item 5B. Liquidity and Capital Resources. B. Business Overview Overview We provide cellular telecommunications services in Brazils Federal
District and in 11 Brazilian states: Acre, Amazonas, Amapá, Goiás, Maranhão,
Mato Grosso, Mato Grosso do Sul, Pará, Rondônia, Roraima, and Tocantins,
comprising altogether 5.8 million Km2 and 31.8 million people. We are the
leading cellular operator in our Region, according to market share data
published by Anatel. The table below sets forth the net operating revenues for
Telebrasília, Telegoiás, Telemat, Telems, Teleron, Teleacre and NBT for the
periods indicated. Year ended December 31,2003
    
    2002
    
    2001(thousands of reais)Telebrasília Celular/TCO(1)
    
    
    492,283
    
    
    
    437,234
    
    
    
    373,805Telegoiás Celular
    
    
    461,742
    
    
    
    357,744
    
    
    
    279,203Telemat Celular
    
    
    291,793
    
    
    
    219,277
    
    
    
    169,651Telems Celular
    
    
    231,327
    
    
    
    178,766
    
    
    
    143,459Teleron Celular
    
    
    88,753
    
    
    
    66,514
    
    
    
    48,655Teleacre Celular
    
    
    43,733
    
    
    
    34,145
    
    
    
    25.761NBT
    
    
    366,802
    
    
    
    292,465
    
    
    
    216,151Others
    
    
    629
    
    
    
    1,090
    
    
    
    307Intercompany eliminations
    
    
    (18,152
    )
    
    
    (15,125
    )
    
    
    (907
    )Total
    
    
    1,958,910
    
    
    
    1,572,110
    
    
    
    1,256,085
 14




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##### Table of Contents



(1)
    
    As a result of the merger of Telebrasília Celular S.A. into TCO on April
26, 2002, the operating revenues which were earned by Telebrasília Celular
S.A. before the merger became revenues of TCO with a base date for the
merger of December 31, 2001. Our Operations The following tables set forth information on TCO and NBTs cellular
telecommunication base, coverage and related matters at the dates and for the
years indicated. TCO  Area 7 Year ended December 31,2003
    
    2002
    
    2001Cellular lines in service at year-end (in thousands)
    
    
    3,310
    
    
    
    2,469
    
    
    
    1,995Contract customers
    
    
    800
    
    
    
    712
    
    
    
    583Prepaid customers
    
    
    2.510
    
    
    
    1,757
    
    
    
    1,412Customer growth during the year
    
    
    34.1
    %
    
    
    23.8
    %
    
    
    38.6
    %Churn(1)
    
    
    21.84
    %
    
    
    15.19
    %
    
    
    13.23
    %Estimated population of concession areas (million)(2)
    
    
    15,4
    
    
    
    15,2
    
    
    
    14,9Estimated covered population (million)(3)
    
    
    13,6
    
    
    
    13,3
    
    
    
    12,8Percentage of population covered (4)
    
    
    88,6
    %
    
    
    88
    %
    
    
    86
    %Penetration at year-end  TCO(5)
    
    
    31.8
    %
    
    
    16.3
    %
    
    
    13.2
    %Percentage of municipalities covered
    
    
    49.23
    %
    
    
    47.24
    %
    
    
    43.40
    %Average monthly minutes of use per customer(6)
    
    
    103
    
    
    
    112
    
    
    
    116Market share(7)
    
    
    67.5
    %
    
    
    73.0
    %
    
    
    76.9
    %NBT  Area 8
 Year ended December 31,2003
    
    2002
    
    2001Cellular lines in service at year-end (in thousands)
    
    
    802
    
    
    
    598
    
    
    
    417Contract customers
    
    
    150
    
    
    
    149
    
    
    
    112Prepaid customers
    
    
    652
    
    
    
    449
    
    
    
    305Customer growth during the year
    
    
    34.1
    %
    
    
    43.4
    %
    
    
    62.3
    %Churn(1)
    
    
    31.93
    %
    
    
    16.77
    %
    
    
    16.12
    %Estimated population of concession areas (million)(2)
    
    
    16,4
    
    
    
    16,1
    
    
    
    15,8Estimated covered population (million)(3)
    
    
    10,6
    
    
    
    9.7
    
    
    
    8.8Percentage of population covered(4)
    
    
    64.6
    %
    
    
    66.0
    %
    
    
    60.4
    %Penetration at year-end  NBT(5)
    
    
    15.2
    %
    
    
    3.7
    %
    
    
    2.64
    %Percentage of municipalities covered
    
    
    26.93
    %
    
    
    23.62
    %
    
    
    18.32
    %Average monthly minutes of use per customer(6)
    
    
    98
    
    
    
    107
    
    
    
    133Market share(7)
    
    
    32.7
    %
    
    
    35.0
    %
    
    
    31.5
    %
   (1)
    
    Churn is the number of customers that leave us during the year,
calculated as a percentage of the simple average of customers at the
beginning and the end of the year.(2)
    
    Projections based on estimates of Instituto Brasileiro de Geografia e
Estatística  IBGE.(3)
    
    Number of people within our Region that can access our cellular
telecommunication signal.(4)
    
    Percentage of the population in our Region that can access our cellular
telecommunication signal.(5)
    
    Number of cellular lines in service in our Region, including those of our
competitors, divided by the population of our Region.(6)
    
    Average monthly minutes of use per lines in service is the total minutes
of calls received and made by our customers divided by the simple average
of lines in service during the relevant year (includes roaming in and
excludes roaming out).(7)
    
    Information published by Anatel. Our Services We provide cellular telecommunications services in the frequency of 850
MHz using digital technology TDMA and analog technology AMPS. In 2003, we began
overlaying CDMA-1xRTT, reaching several cities, such as Brasília and Goiás. We provide voice service and ancillary services, including voicemail and
voicemail notification, call forwarding, three-way calling, caller
identification, short text messaging, limitation on the number of used minutes,
cellular chat room, and data service such as wireless application protocol
service through which clients can access WAP sites and portals. We offer direct
access to the Internet through either PCMCIA (Personal Computer Memory 15




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##### Table of Contents



Card International Association, an organization consisting of some 500
companies that has developed a standard for small, credit card-sized devices,
called PC Cards) 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. In addition, we launched in 2003 MMS (Multimedia Message Service) and MExE
(Mobile Execution Environment) that enable the handset to download applications
and execute them at the mobile. We also launched a user interface with icons at
the handset to identify the main services, such as Voice Mail, Downloads, SMS,
etc, for a friendlier access to our services. We offer roaming services, through agreements with local cellular service
providers throughout Brazil and other countries that allow our subscribers to
make and receive calls while out of our concession areas. We also provide
reciprocal roaming services to subscribers of those cellular service providers
while they are in our concession areas. Our Region The region in which TCOs subsidiaries operate consists of Area 7 and Area
8, which we refer to as the Region, and covers an aggregate area of
approximately 5.8 million square kilometers and 31.8 million people,
representing approximately 68% of the total area of Brazil and 18% of Brazils
population. In our Region, 34 municipalities have populations in excess of
100,000 people. Area 7, which is serviced by Telegoiás, Telemat, Telems,
Teleron and Teleacre (and former Telebrasília), includes the Federal District
and the following six Brazilian states: Goiás, Tocantins, Mato Grosso, Mato
Grosso do Sul, Rondônia and Acre. Area 8, which is serviced by NBT, includes
the following five Brazilian states: Amapá, Amazonas, Maranhão, Pará and
Roraima. The following tables set forth population, GDP and per capita income
statistics for each state in our Regions at the dates and for the year
indicated. Area
    
    At December 31, 2003
    
    Year ended December 31, 2003Population
    
    % of Brazils
    
    GDP (billions of
    
    % of Brazils
    
    Per capita incomeSubsidiary
    
    State
    
    (million) (1)
    
    population (1)
    
    reais) (2) (3)
    
    GDP (3)
    
    (reais) (2) (3)Telebrasília
    
    Federal District
    
    
    2.16
    
    
    
    1.2
    %
    
    
    37.9
    
    
    
    2.5
    %
    
    
    17,556.08Telegoiás
    
    Goiás
    
    
    5.22
    
    
    
    3.0
    %
    
    
    28.6
    
    
    
    1.9
    %
    
    
    5,480.37Telegoiás
    
    Tocantins
    
    
    1.22
    
    
    
    0.7
    %
    
    
    3.2
    
    
    
    0.2
    %
    
    
    2,623.82Telemat
    
    Mato Grosso
    
    
    2.61
    
    
    
    1.5
    %
    
    
    17.3
    
    
    
    1.1
    %
    
    
    6,606.73Telems
    
    Mato Grosso do Sul
    
    
    2.16
    
    
    
    1.2
    %
    
    
    16.5
    
    
    
    1.1
    %
    
    
    7,643.41Teleron
    
    Rondônia
    
    
    1.44
    
    
    
    0.8
    %
    
    
    7.6
    
    
    
    0.5
    %
    
    
    5,284.42Teleacre
    
    Acre
    
    
    0.60
    
    
    
    0.3
    %
    
    
    2.4
    
    
    
    0.2
    %
    
    
    3,924.67NBT
    
    Amapá
    
    
    0.53
    
    
    
    0.3
    %
    
    
    2.6
    
    
    
    0.2
    %
    
    
    4,863.71NBT
    
    Amazonas
    
    
    2.99
    
    
    
    1.7
    %
    
    
    25.1
    
    
    
    1.7
    %
    
    
    8,383.25NBT
    
    Maranhão
    
    
    5.99
    
    
    
    3.4
    %
    
    
    12.5
    
    
    
    0.8
    %
    
    
    2,080.02NBT
    
    Pará
    
    
    6.50
    
    
    
    3.7
    %
    
    
    25.8
    
    
    
    1.7
    %
    
    
    3,974.79NBT
    
    Roraima
    
    
    0.36
    
    
    
    0.2
    %
    
    
    1.3
    
    
    
    0.1
    %
    
    
    3,560.78Our Region
    
    
    
    
    31.78
    
    
    
    18.0
    %
    
    
    180.8
    
    
    
    12.0
    %
    
    
    5,683.88
   Source:
    
    IBGE. We calculated the GDP for the states based on percentages published by IBGE in previous years.(1)
    
    Estimates from Target 2003  Brazil em Foco.(2)
    
    Our estimates are expressed in nominal reais.(3)
    
    Nominal Brazilian GDP was R$1,515 billion as of December 2003 calculated
by IBGE. Our companys business, financial condition, results of operations and
prospects depend in part on the performance of the Brazilian economy and on the
economy of the Region, in particular. See Item 3D. Risk Factors. 16




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##### Table of Contents



Marketing and Sales We closely follow the developments in the markets where we operate and
constantly launch new promotions. A strong customer acquisition policy has been implemented across all the
companys operators through aggressive mass sales promotions and segmented
actions. Efforts to acquire new customers for prepaid and postpaid services
have mostly been made through joint promotions designed to increase intranet
traffic and stimulate the use of data services. With the premise of keeping a sustainable customer base, the acquisition
promotions have also been open to current customers who wished to change their
cell phones. The company is strongly involved in a high-value customer loyalty
program by offering aggressive discounts on cell phones through direct
marketing actions. TCO currently has 62 shops and kiosks of its own, besides an efficient
authorized service network, on an exclusive or nonexclusive basis, with 1,794
service points capable of selling services and cell phones. The credit
recharges are available for customers in more than 46 thousand sites. Customer Service As part of the strategy for standardizing service provided by TCO
operators to their customers, we have outsourced 100% of the customer services
while keeping full management control. These services are available on a
24-hour basis from our call center and our website. Satisfaction evaluation Customer satisfaction is evaluated by regular satisfaction surveys. More
than 8,700 Vivo customers were interviewed all over the country in 2003 for
aspects such as customer assistance, technical assistance, products and
services. The overall satisfaction mark was 8.25 on a range from 1 to 10.
Several actions have since been carried out in order to increase our customer
satisfaction. Assistance to customer claims TCO is provided with a qualified staff designed to assist and provide
explanations to customers in any and all requests or doubts concerning services
provided. All customers are given a feedback to their requests. Vivo was ranked first in 2003 in a survey entitled Companies that most
respect consumers, carried out by the IBRC (Brazilian Institute of Customer
Relations) for the Consumidor Moderno(Modern Consumer) issue. Our Network Before November 1998, our network used only AMPS analog technology. After
privatization in 1998, we began to use CDMA and TDMA digital technologies.
Digitalization offers certain advantages, such as greater network capacity and
additional revenue through the sale of value-added services. Digital cellular
telecommunications service also reduces the risk of fraud. We continue to
increase network capacity and coverage to improve our quality of service and to
meet customer demand. Our network is connected primarily through a fiber-optic transmission
system leased from incumbent wire line companies, consisting of cellular
switches, base stations and other network elements, such as voicemail, prepaid
service, Short Message Service, Home Location Registers, Signalling Transfer
Point, PDSN and gateways. We continue to increase network capacity and
coverage to improve service quality and to meet consumer demand. 17




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##### Table of Contents



As of December 31, 2003, TCO covered 40.1% of the municipalities, or 76.3%
of the population, in its Region. The network provides CDMA Digital, TDMA
digital and AMPS analog services and it is composed of cellular switches,
base-stations, and other network elements, such as voicemail, prepaid service,
Short Message Service, Home Location Registers, Signalling Transfer Point and
gateways. Nortel Networks  Northern Telecom do Brasil, Motorola do Brasil Ltda.
(presently Motorola Industrial Ltda. and Motorola Services Ltda.) and Ericsson
Telecomunicações S.A. are our principal suppliers. Our advanced network management technology ensures global management and
supervision of all our network processes and network performance. The network
management center is located in Brasília and monitors the critical network
operational parameters of TCO and NBT. This center is able to identify
abnormalities in both our network and in third parties networks, using the
failure and signalling monitoring systems. In addition, quality and service
standards are constantly monitored. The network management center is
integrated with the maintenance and operation teams that maintain and operate
the cellular network elements, as well as cellular infrastructure and
transmission, in addition to the radio network elements and computing bases,
service platforms and communications backbone. Our network is prepared to provide continuity of service for our customers
in the event of network interruptions. We have developed contingency plans for
potential catastrophes in our switching centers, power supply interruptions and
security breaches. Under our authorizations, we are obligated to meet certain requirements
for service quality and annual network expansion. See Regulation of the
Brazilian Telecommunications IndustryObligations of Telecommunications
Companies. We have already achieved all of our required network expansion
obligations. Sources of Revenue We generate revenue from:  
    
    usage charges, which include measured service charges for
calls and other similar charges;
    
    network-usage charges (or interconnection charges), which are
amounts we charge other cellular and fixed-line service providers
for the use of our network;
    
    monthly subscription charges, which are not charged to our prepaid customers;
    
    the sale of cellular handsets and accessories; and
    
    other charges, including charges for call forwarding, call
waiting, call blocking and Data Services, such as short message
service, wap, downloads and MMS services. They are charged only when
the customers plan does not include these services. Our rates are subject to approval by Anatel. See Item 4Information on
the CompanyBusiness OverviewRegulation of the Brazilian Telecommunications
Industry. The table below sets forth our net operating revenues by category of
activity: 18




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##### Table of Contents



2003
    
    2002
    
    2001Monthly subscription charges
    
    
    148,316
    
    
    
    114,956
    
    
    
    121,512Usage charges
    
    
    1,095,847
    
    
    
    882,980
    
    
    
    643,523Roaming charges
    
    
    11,693
    
    
    
    19,356
    
    
    
    17,391Additional call charges
    
    
    30,827
    
    
    
    22,890
    
    
    
    20,877Interconnection
    
    
    776,814
    
    
    
    649,271
    
    
    
    526,846Sale of handsets and prepaid cards
    
    
    383,471
    
    
    
    283,807
    
    
    
    245,932Other services
    
    
    40,308
    
    
    
    15,956
    
    
    
    8,254Gross operating revenue
    
    
    2,487,276
    
    
    
    1,989,216
    
    
    
    1,584,335Taxes on gross revenue, discounts granted and return of goods
    
    
    (528,366
    )
    
    
    (417,105
    )
    
    
    (328,250
    )Net operating revenue
    
    
    1,958,910
    
    
    
    1,572,110
    
    
    
    1,256,085
 Contract Customers Since October 1994, cellular telecommunications service in Brazil has been
offered on a calling party pays basis, under which customers pay only for
calls that they originate. In addition, customers pay roaming charges on calls
made or received outside their home registration area. Customer charges are calculated based on the customers calling plan, the
location of the party called, the place from which the call originates and
certain other factors, as described below. Our Region is divided into 18
registration areas, designated for payment purposes. Interconnection Charges We earn revenues from any call that originates from another cellular or
fixed-line service provider network connecting one of our customers. We charge
the service provider from whose network the call originates a network usage
charge for every minute that our network is used in connection with the call.
See Item 4 Information on the CompanyBusiness OverviewOperating
AgreementsInterconnection Agreements. Tariff increases are subject to
Anatel  ́s review and approval. Bill and Keep Under the SMP system, network remuneration between SMP mobile operators
will only be due if traffic carried in the same registration area between two
networks, in a given direction, exceeds 55% of the total traffic exchanged
between them. In this case, only those calls which have surpassed the 55%
threshold will be subject to payment for network usage. This rule is valid
until June 30, 2005. Thereafter, SMP operators will adopt full Bill and Keep,
by which no remuneration will be due for network usage among SMP networks,
regardless of the amount of carried traffic. Roaming Fees We receive revenue pursuant to roaming agreements with other cellular
service providers. When a customer of another cellular service provider makes
a call within our Region, that service provider pays us for the call at the
applicable rate. Conversely, when one of our customers makes a cellular call
outside of our Region, we must pay the charges associated with that call to the
cellular service provider in whose region the call originates. See Item
4Information on the CompanyBusiness OverviewOperating AgreementsRoaming
Agreements. Handset Sales We sell dual-mode (800MHz CDMA-1xRTT/AMPS and 800MHz CDMA/AMPS) and
tri-mode (1900MHz CDMA and 800MHz CDMA/AMPs) cellular handsets and PCMCIA cards
through our own stores and dealers. We also sell dual-mode TDMA (800MHz
TDMA/AMPS and 800MHz AMPS) for the current TDMA 19




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operation where we are implementing a CDMA overlay. Although we still have some
customers using analog service (approximately 0.8% of our total customer base
at December 31, 2003), we have implemented a series of actions, such as
providing discounts on digital handsets, discounts on monthly fees for digital
services, digital handset rentals and free digital handsets to our high value
customers, to encourage analog customers to transfer to digital service. Our
current suppliers are Motorola, LG, Samsung, Nokia and Toshiba. Operating Agreements TCO has an agreement with Brasil Telecom to lease physical space, real
estate, air conditioning, energy, security and cleaning services. TCO also
leases from Brasil Telecom transmission capacity necessary to complete the
construction of our network infrastructure. Interconnection Agreements The terms of our interconnection agreements include provisions with
respect to the number of connection points and traffic signals. See
"Regulation of the Brazilian Telecommunications IndustryObligations of
Telecommunications Companies and Interconnection. We believe that our subsidiaries have adequate interconnection agreements
with all the fixed line operators they need to provide their services. We also
believe that our subsidiaries have all the necessary interconnection
agreementswith local distance carriers. Roaming Agreements We are a member of the Brazilian Roaming Committee, a group comprised of
21 companies providing cellular services in Brazil through either A and B
bands. The Committee was created to standardize roaming services in Brazil and
elsewhere. The roaming agreements require us and the other cellular service providers
to provide service to roaming customers on the same basis that each member
provides service to its own customers, and to carry out a monthly
reconciliation of roaming customer usage charges. We offer automatic international roaming in Argentina and Uruguay.
Currently the markets of North America, Europe, Africa, Asia and Oceania are
offered to our customers through third-party partners. Taxes on Telecommunications Services and Handset Sales The cost of telecommunications services and handset sales to customers
incorporates a variety of taxes, including:  
    
    ICMS. The principal tax is the Imposto sobre Circulação de
Mercadorias e Serviços, or the ICMS. The ICMS is a tax that the
Brazilian states impose at varying rates from 7% to 27%, on certain
revenues from the sale of goods and services rendered, including
telecommunications services.
    
    COFINS. The Contribuição Para Financiamento da Seguridade
Social, or COFINS, is a social contribution tax on gross operating
revenues at a rate of 3%.
    
    PIS. The Programa de Integração Social, or PIS, is another
social contribution tax that is imposed on gross operating revenue
at a rate of 0.65%. In October 2002, Law No. 10,637 was enacted,
making such contribution noncumulative and increasing the rate to
1.65%, except in connection with telecommunication services, where
the rate continues to be 0.65%.
    
    FUST. On August 17, 2000, the Brazilian federal government
created the Fundo de Universalização dos Serviços de
Telecomunicações, or FUST, a social contribution tax applicable to
all 20




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telecommunications services at a rate of 1%. The purpose of the FUST
tax is to fund a portion of the costs incurred by telecommunication
service providers to meet the universal service targets required by
Anatel in case these costs are not entirely recoverable through the
provision of the telecommunications services.
    
    FUNTTEL. On November 28, 2000, the Brazilian federal
government created the Fundo para Desenvolvimento Tecnológico das
Telecomunicações, or FUNTTEL, a social contribution tax applicable
to all telecommunications services at a rate of 0.5%. The purpose
of the FUNTTEL tax is to promote the development of
telecommunications technology in Brazil and to improve competition.
    
    FISTEL. On July 7, 1966, the Brazilian federal government
created the Fundo de Fiscalização das Telecomunicações, or FISTEL, a
tax applicable to telecommunications transmission equipment. The
purpose of the FISTEL is to provide financial resources for the
Brazilian federal government to control and inspect the industry.The FISTEL tax is comprised of two different fees:  
    
    an installation and inspection fee that is assessed
every time we activate a new cellular number; and
    
    an operation and inspection fee, assessed annually on
the basis of the total number of cellular numbers in use and the
total number of radio base stations installed at the end of the
fiscal year. The installation and inspection fee is assessed based on the net
activation of cellular numbers, i.e., the number of new cellular activations
subtracted from the number of cancelled subscriptions, as well as on the basis
of the net additions of radio base stations. Billing and Collection Pursuant to Brazilian law, customers must receive a bill at least five
days before the due date, and companies must allow customers at least 15 days
from the due date before suspending outgoing service for nonpayment. Customers
may choose from a number of billing options, including traditional paper bills,
direct withdrawal from the customers bank account and some deferred payment
options. We have also introduced a new billing service through which customers
can receive and pay bills via the Internet. We estimate that approximately 70% (by value) of our invoices are paid in
the month they are due. If a subscribers payment is more than 15 days past
due, service may be partially suspended and if it is more than 30 days past
due, service may be totally suspended until payment is received. After 90 days
delinquency, if a subscribers payment is not made, the subscribers
contract may be cancelled, the subscribers name is filed with credit
protection agencies, and the debts are referred to independent collection
agencies. Our net losses on trade accounts receivable were 1.9%, 1.6% and 3.1%
of gross operating revenues in 2003, 2002 and 2001, respectively. These figures
are calculated as dividing the total amount of Provisions for the Allowance for
Doubtful by Gross Operating Revenues. See Item 5  Operating and
Financial Review and Prospects  Operating Results for the Years Ended
December 31, 2003, 2002 and 2001  Operating Expenses  Selling Expenses. Our
company offers the possibility to negotiate debts by means of installments. We receive roaming fees from other cellular service providers when their
subscribers make cellular calls while within our Region, and pay
roaming fees to other cellular service providers when our subscribers
make cellular calls while outside of our Region. See Item 4 -
Information on the Company  Business Overview  Sources of Revenue -
Roaming Fees. We receive network-usage fees from other service
providers when their subscribers make calls that terminate on a
cellular telephone within our Region, and we pay network-usage fees
when our subscribers make calls that terminate on the network of
another service provider. See Item 4  Information on the Company -
Business Overview  Sources of Revenue  Interconnection Charges. At the end
of each month, our company and the other service providers reconcile the
amounts owed between them on a gross basis and settle the balance on a net
basis. For international and domestic long-distance calls made by its
subscribers, our Company forwards the amount registered on account of such
calls to a 21




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clearinghouse operated by Embratel  Empresa Brasileira de
Telecomunicações S.A., and charges the carriers a fee for the use of its
cellular telecommunications network. Fraud Detection and Prevention Generally, we encounter two principal types of fraud: subscription fraud
and cloning fraud. Subscription fraud occurs when a person, typically using
documents that do not belong to him and a fictitious address, obtains cellular
telecommunications service with no intention of paying for the service. We can
usually detect subscription fraud prior to the invoicing of charged
services by analyzing the subscribers use of the cellular line and
information on file with us and with collection agencies. Nevertheless, it is
difficult for us to control this type of fraud because of Anatels application
of Rule 05/78, which prohibits the suspension of service prior to an account
being 15 days past due. We may, however, suspend service when the
subscription is a suspect one and fraud has been confirmed (by means
of specific check-ups). In such cases, the rules imposed by Anatel
do not prevent the suspension of service. In any case, subscription fraud is
one of the most significant problems for cellular companies in Brazil. Cloning fraud consists of duplicating the cellular signal of a
bona fide subscriber, which enables the perpetrator of the fraud to make
telephone calls using the subscribers signal. The mobile identification number
and equipment serial number of the subscriber are captured by the
cloner by using a radio scanner. To avoid inconveniences to
subscribers, we delete the cloned calls from the billing system before issuing
invoices to them. Our fraud-control section can detect the clone and suspend
service immediately after the first cloned call. The subscriber is then
informed and his invoices are scrutinized monthly. Currently, we attempt to
minimize and deter cloning fraud through preventative measures, such as locking
international calls (service is provided only upon request by the subscriber)
and creating a 24-hour fraud control center consisting of 11 analysts
using the Integrated Fraud Detection and Control System, or SAF. The SAF
is linked to a national network, which allows the detection, analysis,
and control of abnormalities in cellular service usage that may
indicate fraud throughout Brazil. Competition We face intense competition in all the areas in which we operate,
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 derives from being owned by such a group. Fixed line
operators generally charge much lower tariffs than cellular service providers. The main cellular competitor of Telegoiás, Telemat, Telems, Teleron, and
Teleacre is Americel S.A. The main fixed line operator in this area is Brasil
Telecom S.A. NBT  ́s main cellular competitor is Amazônia Celular S.A. The fixed
line operator in its area is Telemar Norte Leste S.A. We also compete 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 our Region as a
substitute for cellular telecommunications services. These competing wireless
telecommunications services are generally less expensive than mobile
telecommunications services. Satellite-operated services, which guarantee 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 we offer and do not provide competitive coverage
inside buildings. Currently, our company does not plan to offer
satellite-operated mobile services (other than those included in the roaming
contracts entered into with providers of satellite services), though we may
offer such services in the future. There can be no assurance that the entry of new competitors will not have
significantly adverse effects on our business, financial condition, or the
results of our operations or prospects. Any adverse effects on our market
share, which results from pressures originating from competition, will depend
on several factors which cannot be assessed with precision and which are
therefore beyond our control. Among such factors are the identity of the 22




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competitors, their strategy and ability to conduct business, market conditions
prevailing at the time, rules applicable to the new market participants and to
us, as well as the effectiveness of our efforts to prepare for and to face the
strong competition. There may also be competitors with higher technical
capacity and more resources than ours. Regulation of the Brazilian Telecommunications Industry General Our business, the services we provide and the prices we charge are subject
to regulation under the General Telecommunications Law and various
administrative enactments, which regulate the services provided by Brazilian
telecommunications operators. Anatel is the agency that regulates telecommunications under the General
Telecommunications Law and the July 2001 Regulamento da Agência Nacional de
Telecomunicações, known as the Anatel Decree. Anatel is financially autonomous
and administratively independent of the Brazilian government. However, Anatel
maintains a close relationship to the Ministry of Communications. Any
regulation proposed by Anatel is subject to a period of public comment, which
may include a public hearing. Anatels irregular conduct can be challenged in
the Brazilian courts. On November 25, 1998, Anatel enacted Resolution
73Regulation of Telecommunication Services, which regulates in detail the new
comprehensive framework for the provision of telecommunications services in
Brazil established by the General Telecommunications Law. Concessions and Authorizations Prior to January 2000, Anatel had only authorized two mobile service
providers in each of the ten franchise areas under A Band and B Band. A Band
and B Band mobile service providers were granted concessions pursuant to the
Lei Mínima, or the Minimum Law. Each concession is a specific grant of
authority to supply cellular telecommunications services, subject to certain
requirements contained in the applicable list of obligations appended to each
concession. If a mobile service provider wishes to offer any
telecommunications service other than those authorized by its concession, it
may apply to Anatel for an authorization to offer such other services. In accordance with the General Telecommunications Law, a concession
relates to the provision of telecommunication services under the public regime,
as determined by the public administration. A concession may only be granted
upon a prior auction bidding process. As a result, regulatory provisions are
inserted in the relevant concession agreements and the concessionaire is
subject to public service principles of continuity, changeability and equal
treatment of customers. Also, the government authority is entitled to direct
and control the performance of the services, to apply penalties, and to declare
the expiration of the concession and the return of assets of the concessionaire
to the government authority upon termination of the concession. Another
distinctive feature is the right of the concessionaire to maintain an economic
and financial balance of the concession agreement. The concession is granted
for a fixed period of time and is generally renewable once. An authorization is a permission granted by the public administration
under the private regime, which may or may not be granted upon a prior auction
bidding process, to the extent that the authorized party complies with the
objective and subjective conditions deemed necessary for the rendering of the
relevant type of telecommunication service in the private regime. The
authorization is granted for an indeterminate period of time. Under an
authorization, the government does not guarantee to the authorized company the
economic-financial equilibrium, as is the case under concessions. SMP Regulation In November 2000, Anatel adopted certain regulations for the issuance of
new licenses, which are authorizations to provide wireless communication
services through SMP, personal mobile service, to compete with the then
existing cellular operators in the various regions of Brazil. These
regulations divided Brazil into three main regions covering the same geographic
area as the concessions for the fixed-line telecommunication services. Anatel
organized auctions for three new licenses for each of those regions. The new
licenses provided that the new services would be operated in the 1,800 MHz
radio frequency bands, and they were denominated C Band, D Band and E Band.
These new licenses were auctioned by Anatel and awarded during the first
quarter of 2001 and at the end of 2002. 23




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Under these new licenses:  
    
    services are to be provided using the 1,800MHz frequency;
    
    each operator may provide domestic and international long-distance services in its licensed area;
    
    existing cellular service providers, as long as they do not
have partnerships with fixed-line operators, as well as new entrants
into the Brazilian telecommunications market can bid for C Band, D
Band and E Band licenses. However, fixed-line operators, their
controlling shareholders and affiliated cellular providers can only
bid for D Band and E Band licenses;
    
    a cellular operator, or its respective controlling
shareholders, may not have geographical overlap between licenses;
and
    
    current A Band and B Band cellular service providers can
apply for an extra frequency range. Pursuant to the SMP services regulation each of the three main regions is
divided into registration areas, or tariff areas. On February 3, 2003, TCO chose to replace its SMC Concession Contracts for
Personal Mobile Service Agreements (Termos de Autorização do Serviço Móvel
Pessoal, or SMP) in Regions I (sub-range of B frequencies) and II (sub-range
of A frequencies) of the General Granting Plan (Plano Geral de Outorgas, or
PGO). In addition, TCO has full control of TCO IP S.A., which holds a national
authorization for Multimedia Communication Services (Serviços de Comunicação
Multimídia, or SCM). In order to transfer our services to SMP, we were required to comply with
several technical and operational conditions, including, among others, the
adoption of a carrier selection code for long distance calls originating from
our network. Under the General Telecommunications Law, all mobile telecommunications
service providers must provide interconnection upon the request of any other
mobile or fixed-line telecommunications service provider. Until June 30, 2004,
SMP service providers may opt to establish a price cap or freely negotiate
their interconnection charges. The conditions of the network usage fee
negotiation will be regulated by Anatel. Thereafter, the terms and conditions
of the interconnection are freely negotiated between wireless and fixed-line
operators, subject to compliance with regulations to be established by Anatel
relating to the traffic capacity and interconnection infrastructure that must
be made available to requesting parties. If a service provider offers any
party an interconnection tariff below the price cap, it must offer the same
tariff to any other requesting party on a nondiscriminatory basis. If the
parties cannot reach an agreement on the terms of interconnection, including
with respect to the interconnection tariff, Anatel will act as the final
arbiter. Because Anatel considers us to be affiliated with Telefónica, which
already provides wireline long distance services in the state of São Paulo and
was awarded a license to provide these services nationwide, Anatel will not
award a wireline long distance license to us. Though we and other mobile
operators have requested that Anatel revise the current SMP regime, there can
be no assurance it will do so. Under the SMP regime, we will receive revenues
from interconnection fees paid to us by wireline long distance operators due to
long distance traffic originating and terminating on our network. The authorizations consist of two licenses  one to provide mobile
telecommunications services, and another to use the frequency spectrum for a
period of 15 years. The frequency license is renewable for another 15-year
period upon the payment of an additional license fee. Benefit of the SMP System According to the General Telecommunications Law and Decree No. 2056/96,
control of the concessionaire can only be transferred after five years from the
date of the privatization in the case of A Band concessionaires or the
commencement of services in the case of B Band concessionaires. On the other
hand, under the SMP system, the authorization or control of the authorized
party can be transferred through merger of the relevant cellular mobile service
provider, whether it is providing services under the A Band or the B Band. 24




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Obligations of Telecommunications Companies As a telecommunications service provider, we are subject to regulations
concerning quality of service and network expansion, as established in our
authorizations and our original concession agreements. Any breach by the companies of telecommunications legislation or of any
obligation set forth in their authorizations may result in a fine of up to R$50
million. TCOs new authorizations impose obligations to meet higher quality of
service standards, such as: the systems ability to make and receive calls,
call failure rates, the networks capacity to handle peak periods, failed
interconnection of calls and customer complaints. Anatel published the method
for collecting these quality service standards data on April 23, 2003 (Anatel
Resolution No. 335/03). Interconnection Under the General Telecommunications Law, telecommunications service
providers are classified as providers of either collective or restricted
services. All cellular operators, including SMP service providers, are
classified by Anatel as collective service providers. All providers of
collective services are required to provide interconnection upon request to any
other collective service provider. The terms and conditions of interconnection
are freely negotiated between parties, subject to price caps and other rules
established by Anatel. Providers must enter into interconnection agreements,
regarding, among other things, tariffs, commercial conditions and technical
issues, with all requesting parties on a non-discriminatory basis. If the
parties cannot agree upon the terms and conditions of interconnection, Anatel
may determine terms and conditions by arbitration. Interconnection agreements must be approved by Anatel and may be rejected
if they are contrary to the principles of free competition and the applicable
regulations. Rate Regulation Our authorizations continue to provide for a price-cap mechanism to set
and adjust rates on an annual basis. The cap is a maximum weighted average
price for a package of services. The package consists of the services in our
Basic Plan, including monthly subscription fees, and certain roaming charges,
which are charged for the use of mobile services under the SMP regime. The
price cap is revised annually to reflect the rate of inflation as measured by
the IGP-DI. However, mobile operators are able to freely set the rates for
alternative service plans. The initial price cap agreed to by Anatel and us in our authorizations had
been based on the previously existing or bidding prices, and was adjusted
annually on the basis of a formula contained in our authorizations. The price
cap has been revised to reflect the rate of inflation as measured by the
IGP-DI. The weighted average price for the entire package of services may not
exceed the price cap, but the price for individual services within the package
may be increased. Other telecommunications companies that interconnect with and use our
network must pay certain fees, primarily an interconnection fee. The
interconnection fee is a flat fee charged per minute of use. The
interconnection fee charged by us and other A and B Band service providers is
still subject to a price cap stipulated by Anatel. This price cap is valid
until June 30, 2004 and, thereafter, the terms and conditions of the
interconnection are freely negotiated among the operators. Anatel will regulate
the conditions of the network usage fee negotiation. The price cap for the
interconnection fee varies from company to company, on the basis of the
underlying cost characteristics of each companys network. B Band service
providers are subject to price caps established during the auction process for
their licenses. Internet and Related Services in Brazil In Brazil, Internet service providers, or ISPs, are deemed to be suppliers
of value-added services and not telecommunications service providers. Anatels
Resolution 190 requires cable operators to act as carriers of third-party
Internet service providers. The Brazilian House of Representatives is
considering a law that would penalize Internet service providers for knowingly
providing services that allow illegal goods or services to be sold on the 25




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Internet, and would impose confidentiality requirements on Internet
service providers regarding nonpublic information transmitted or stored on
their networks. C. Organizational Structure Our controlling shareholder is TCP, which, in turn, is controlled by PT
Móveis SGPS, S.A. and Telefónica Móviles, S.A. PT Móveis SGPS, S.A. is 100%
controlled by Portugal Telecom, SGPS, S.A. As of December 31, 2003, TCP owned
90.73% of TCOs common shares. Due to its share ownership, TCP has the power
to control TCO, including the power to elect TCOs Board of Directors and
officers and to determine the direction and future operations of TCO. In
addition, PT Móveis SGPS, S.A. and Telefónica Móviles, S.A. share their
participation in TCP in equal percentages. Our subsidiaries are: Telegoiás, Telemat, Telems, Teleron, Teleacre, NBT
and TCO IP. TCO IP is an unlisted company created to deliver general
telecommunications services both nationally and internationally, such as
multimedia telecommunications and information services. Substantially all of TCOs assets consist of shares in its subsidiaries
and the assets transferred to TCO as a result of the merger with Telebrasília.
TCO relies very substantially on dividends from its subsidiaries to meet its
needs for cash, including cash to pay dividends to its shareholders. See Item
5Operating and Financial Review and ProspectsLiquidity and Capital
Resources. For a more detailed description of our ownership structure, see Our
History and Development. D. Property, Plant and Equipment Our principal physical assets consist of transmission equipment, switching
equipment, base stations and other communication devices, such as voicemail,
prepaid service, SMS, Home Location Registers, Signalling Transfer Point and
gateways. All switches, cell sites, administrative buildings, administrative
facilities, warehouses and stores are insured against damages. At December 31, 2003, TCO had 14 cellular switches and other equipment
installed in 13 owned spaces and one leased space. TCO leases almost all of
the sites in which its cellular telecommunications network equipment is
installed. Its 906 base stations were installed in 801 cell sites,
administrative buildings, administrative facilities and warehouses, and the
average term of these leases is 5 years. In addition, TCO owns administrative
buildings (approximately 33,322 square meters), warehouse space (approximately
2,666 square meters) and 4 stores, and also leases administrative facilities
(approximately 2,598 square meters), warehouse space (approximately 4,032
square meters), three kiosks and 38 retail stores throughout our region. At December 31, 2003, NBT had 12 cellular switches and other equipment
installed in 12 owned spaces. NBT leases almost all of the sites in which its
cellular telecommunications network equipment is installed. Its 193 base
stations were installed in 223 cell sites, administrative buildings,
administrative facilities and warehouses, and the average term of these leases
is 5 years. In addition, NBT owns administrative buildings (approximately 607
square meters) and also leases administrative facilities (approximately 4,230
square meters), warehouse space (approximately 3,096 square meters), five
kiosks and 14 retail stores throughout our region. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion in conjunction with our
consolidated financial statements and accompanying notes and other financial
information included elsewhere in this annual report, and in conjunction with
the financial information included under Item 3A. Selected Financial Data. 26




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Critical Accounting Policies In preparing our consolidated financial statements, we have relied on
estimates and assumptions derived from historical experience and various other
factors that we deemed reasonable and relevant. Critical accounting policies
are those that are important to the portrayal of our financial condition and
results and utilize managements most difficult, subjective or complex
judgments, estimates and assumptions. The significant accounting policies that
we believe are critical to aid in fully understanding and evaluating our
reported financial position and results of operations reported under Brazilian
Corporate Law Method are described in Note 3 to our consolidated financial
statements. A description of the differences in accounting policies between
Brazilian Corporate Law Method and U.S. GAAP is included in Note 37 to our
consolidated financial statements. The application of these critical accounting
policies often requires judgments made by our management regarding the effects
of matters that are inherently uncertain on the carrying value of our assets
and liabilities and the results of our operations. Our results of operation
and financial condition may differ from those set forth in our consolidated
financial statements, if our actual experience differs from managements
assumptions and estimates. The following is a discussion of our critical
accounting policies, including some of the variables, assumptions and
sensitivities underlying the estimates relating to:  
    
    revenue recognition;
    
    depreciation of property, plant and equipment;
    
    valuation of property, plant and equipment;
    
    provisions for contingencies;
    
    deferred income taxes; and
    
    financial instruments. a. Revenue recognition Under Brazilian Corporate Law Method and U.S. GAAP, revenues from
customer calls are based on time used, according to Brazilian Corporate Law
Method, and recognized when services are provided. We consider revenue recognition to be a critical accounting policy,
because of the uncertainties caused by different factors such as the complex
information technology required, high volume of transactions, fraud and piracy,
accounting regulations, managements determination of collectibility and
uncertainties regarding our right to receive certain revenues (mainly revenues
for usage of our network). Significant changes in these factors could cause us
to fail to recognize revenues or to recognize revenues that we may not be able
to realize in the future, despite our internal controls and procedures. We
have not identified any significant need to change our revenue recognition
policy for U.S. GAAP or for Brazilian Corporate Law Method. b. Depreciation and Amortization Depreciation on property, plant and equipment is calculated on a
straight-line method of the estimated useful lives of the underlying assets,
which consider historical information available to us, as well as known
industry trends. The sensitivity of an impact in changes in the useful lives of
property, plant and equipment was assessed by applying a hypothetical decrease
of 10% to the useful lives of switching and transmission equipment existing at
December 31, 2003. This hypothetical change would result in an incremental
increase in the annual depreciation expense of R$14.7 million in the year of
the change. c. Valuation of property, plant and equipment In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying 27




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amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized in the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Under Brazilian Corporate Law Method, the
recoverability of assets as mentioned above, if negative, would indicate the
amount that would be considered impaired. A determination of the fair value of an asset requires management to make
certain assumptions and estimates with respect to projected cash inflows and
outflows related to future revenues and expenditures and expenses. These
assumption and estimates can be influenced by different external and internal
factors, such as economic tendencies, industry trends, interest rates and
changes in the marketplace. The use of different assumptions and estimates
could significantly change our financial statements, for example, if we had
used more conservative assumptions and estimates the expected future net cash
flow may have led us to recognize impairment charges on our property, plant and
equipment, which would have decreased our results of operations and
shareholders equity. No impairment losses have been recognized for any of the
periods presented. d. Provisions for contingencies We are subject to proceedings, lawsuits and other claims related to tax,
labor and civil matters. We are required to assess the likelihood of any
adverse judgments or outcomes to these matters as well as potential ranges of
probable losses. A determination of the amount of reserves required, if any,
for these contingencies is made after careful analysis of each individual
issue, based on legal advice. The required reserves may change in the future
due to new developments in each matter or changes in approach, such as a change
in settlement strategy in dealing with these matters. Future possible changes
in the recorded reserve amounts would impact our results of operations in the
period that such changes are recorded. e. Deferred income taxes We compute and pay income taxes based on results of operations under
Brazilian Corporate Law Method. Under U.S. GAAP, we recognize deferred tax
assets and liabilities based on the differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. We regularly
review the deferred tax assets for recoverability and establish a valuation
allowance if it is more likely than not that the deferred tax assets will not
be realized, based on historical taxable income, projected future taxable
income, and the expected timing of the reversals of existing temporary
differences. When performing such reviews, we are required to make significant
estimates and assumptions about future taxable income. In order to determine
future taxable income, we need to estimate future taxable revenues and
deductible expenses, which are subject to different external and internal
factors, such as economic tendencies, industry trends, interest rates, changes
in our business strategies and changes in the type of services we offer to the
market. The use of different assumptions and estimates could significantly
change our financial statements. For example, if we had used more conservative
assumptions and estimates with respect to our expected future taxable income,
we would be required to recognize valuation allowance charges on deferred
income tax assets, which would decrease our results of operations and
shareholders equity. If we operate at a loss or are unable to generate
sufficient future taxable income, or if there is a material change in the
actual effective tax rates, the time period within which the underlying
temporary differences become taxable or deductible, or any change in our future
projections, we could be required to establish a valuation allowance against
all or a significant portion of our deferred tax assets resulting in a
substantial increase of our effective tax rate and a material adverse impact on
our operating results. f. Financial instruments With respect to financial instruments, we must make assumptions as to
future foreign currency exchange and interest rates. For a discussion of the
possible impact of fluctuations in the foreign currency exchange and interest
rates on our principal financial instruments and positions, see Item
11Quantitative and Qualitative Disclosures About Market Risk. We have no majority-owned subsidiaries that are not included in our
consolidated financial statements, nor do we have any interests in, or
relationships with, any special purpose entities that are not reflected in our
consolidated financial statements. U.S. GAAP Reconciliation We prepare our consolidated financial statements in accordance with the
Brazilian Corporate Law Method, which differs in significant respects from U.S.
GAAP. Under U.S. GAAP, we recorded net income for 2003, 2002 and 2001 of
R$487.7 million, R$299.3 million, and R$216.0 million, respectively, compared
to net income of 28




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R$463.4 million, R$329.2 million, and R$208.1 million, respectively, under
the Brazilian Corporate Law Method. Shareholders equity at December 31, 2003
and 2002 was R$1,545.1 million and R$1,183.3 million, respectively, under U.S.
GAAP, compared to R$1,556.1 million and R$1,218.5 million, respectively, under
the Brazilian corporate law method. See Note 36 to our audited consolidated financial statements for a
description of the principal differences between the Brazilian Corporate Law
Method and U.S. GAAP as they relate to us, and a reconciliation to U.S. GAAP of
net income/loss and total shareholders equity. New Accounting Pronouncements In April 2003, the FASB issued SFAS No.149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. The provisions of this statement are effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of SFAS 149 did not
result in any impact on the Companys financial statements. In April 2003, the FASB issued SFAS No. 150, Accounting for certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
This Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Some of the provisions
of this Statement are consistent with the current definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial Statements. The adoption
of SFAS 150 did not result in any impact on the Companys financial statements. 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. 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 Company does not
anticipate that the adoption of FIN 46R will have a material impact on its
financial position, cash flows and results of operations. In December 2003, the FASB issued SFAS No. 132, Revised 2003, (SFAS
132R), which requires an entity to make additional disclosures about pensions
and other postretirement benefits. These disclosures include information
describing the types of plan assets, investment strategy, measurement date(s),
plan obligations, cash flows and components of net periodic benefit cost. SFAS
132R would be effective for any domestic plans beginning with fiscal years
ending after December 15, 2003 and any foreign plans beginning with fiscal
years ending after June 15, 2004. The Company has adopted these additional
disclosures for the year ended December 31, 2003 (See Note 38.a). In December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104 updates
portions of the interpretive guidance included in Topic 13 of the codification
of Staff Accounting Bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. The company believes it is currently following the
guidance of SAB 104. 29




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In November 2002, the Emerging Issues Task Force (EITF), of the FASB
reached a consensus on EITF 00-21. 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 requirements of EITF 00-21 will be
applicable to agreements entered into for periods beginning after June 15, 2003
and will therefore first apply to the Company for any arrangements entered into
from April 1, 2004. The adoption of this EITF had no impact on the Companys
financial position or results of operations. In May 2003, the EITF reached consensus in EITF Issue No. 01-08 to clarify
the requirements of identifying whether an arrangement should be accounted for
as a lease at its inception. The guidance in the consensus is designed to
mandate reporting revenue as rental or leasing income that otherwise would be
reported as part of product sales or service revenue. EITF Issue No. 01-08
requires both parties to an arrangement to determine whether a service contract
or similar arrangement is, or includes, a lease within the scope of SFAS No.
13, Accounting for Leases. The Company does not anticipate that the adoption
of EITF Issue No. 01-08 will have a material effect on its consolidated results
of operations, cash flows or financial position. 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 Company does not
anticipate that the adoption of EITF Issue No. 03-11 will have a material
effect on its consolidated results of operations, cash flows or financial
position. A. Operating Results Results of Operations for 2003, 2002 and 2001 The following table sets forth certain components of our income, as well
as the percentage change of each year from the prior year, for the years ended
December 31, 2003, 2002, and 2001. The financial statements referring to
December 31, 2002 and 2001 were reclassified when applicable, for comparative
purposes. Statement of Income Year ended December 31,
    
    %Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001(millions of reais)Net operating revenue
    
    
    1,958.9
    
    
    
    1,572.1
    
    
    
    1,256.1
    
    
    
    24.6
    
    
    
    25.2Cost of services and goods sold
    
    
    (904.0
    )
    
    
    (741.8
    )
    
    
    (620.7
    )
    
    
    21.9
    
    
    
    19.5Gross profit
    
    
    1,054.9
    
    
    
    830.3
    
    
    
    635.4
    
    
    
    27.1
    
    
    
    30.7Operating expenses:Selling
    
    
    (300.5
    )
    
    
    (215.3
    )
    
    
    (194.5
    )
    
    
    39.6
    
    
    
    10.7General and administrative
    
    
    (193.2
    )
    
    
    (141.9
    )
    
    
    (108.3
    )
    
    
    36.2
    
    
    
    31.0Other net operating expenses
    
    
    (13.5
    )
    
    
    (14.6
    )
    
    
    (4.2
    )
    
    
    (7.5
    )
    
    
    247.6Total
    
    
    (507.2
    )
    
    
    (371.8
    )
    
    
    (307.0
    )
    
    
    36.4
    
    
    
    21.1Operating income before net financial result
    
    
    547.7
    
    
    
    458.5
    
    
    
    328.4
    
    
    
    19.4
    
    
    
    39.6Financial income (expenses), net
    
    
    111.6
    
    
    
    4.0
    
    
    
    (6.5
    )
    
    
    2,600.0
    
    
    
    (161.5
    )Operating income
    
    
    659.3
    
    
    
    462.5
    
    
    
    321.9
    
    
    
    42.6
    
    
    
    43.7Net non-operating income (expenses)
    
    
    (6.3
    )
    
    
    4.3
    
    
    
    0.3
    
    
    
    (246.5
    )
    
    
    1,333.3Income before taxes and minority interest
    
    
    653.0
    
    
    
    466.8
    
    
    
    322.2
    
    
    
    39.9
    
    
    
    44.9Income and social contribution taxes
    
    
    (181.1
    )
    
    
    (131.5
    )
    
    
    (95.9
    )
    
    
    37.7
    
    
    
    37.1Minority interest
    
    
    (8.5
    )
    
    
    (6.1
    )
    
    
    (18.2
    )
    
    
    39.3
    
    
    
    (66.5
    )Net income
    
    
    463.4
    
    
    
    329.2
    
    
    
    208.1
    
    
    
    40.8
    
    
    
    58.2
 30




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Operating Revenues Our operating revenues are mainly derived from:  
    
    customer usage charges, which include charges for
incoming and outgoing calls, roaming and other similar charges;  
    
    interconnection charges, which are amounts we charge
other cellular and fixed-line service providers for use of our
network in order to complete calls originated outside our
network;  
    
    monthly subscription charges, which we charge exclusively to our contract plan customers;  
    
    sale of cellular handsets and accessories; and  
    
    other service charges, including charges for call
forwarding, call waiting, call blocking and SMS, which are
charged only when the customers plan does not include these
services for free. The composition of our operating revenues has been affected by the shift
toward prepaid services (which generate usage charges and interconnection
charges but do not generate monthly subscription charges, and which have
attracted lower income customers to our services). Net additions increased the
number of contract customers by 10.3% to 950 thousand in 2003, and by 23.9% to
861 thousand in 2002, from 695 thousand million in 2001. Net additions
increased the number of prepaid customers by 43.3% to 3,162 thousand in 2003,
and by 28.5% to 2,207 thousand in 2002, from 1,717 thousand in 2001. Interconnection rates increased by 10.0% in February 2002 and 22.0% since
February 2003. Anatel authorizes cellular operators to increase tariffs based
upon the prior 12-month periods cumulative inflation, measured by the IGP
variation from February to January of each year. As of July 6, 2003, cellular telecommunications operators in Brazil were
required by the SMP rules to implement long distance Carrier Selection Codes
(Códigos de Seleção de Prestadora, or CSP) used by customers to choose their
carrier for domestic long distance services (VC2 and VC3) and international
cellular calls. As a result, TCO no longer receives revenues from VC2 or VC3
calls and international calls. Additionally, in accordance with Anatel regulations, Bill & Keep rules
were adopted for interconnection charges in July 2003. The rules provide that
companies under the SMP regime are not required to pay tariffs for the use of
the local network of another SMP provider 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, when traffic from the SMP provider
that originates the call to the SMP provider that terminates the call
represents more than 55% of the local traffic between the two providers, the
SMP provider who originates the higher traffic must pay the other provider the
local usage tariff for the portion of the traffic that exceeds 55%. The composition of operating revenues by category of service is presented
in our consolidated financial statements and discussed below. We do not
determine net operating revenues (i.e., after deduction of taxes) by category
of service. The following table sets forth certain components of our operating
revenues, as well as the percentage change of each year from the prior year,
for the years ended December 31, 2003, 2002 and 2001. Year ended December 31,
    
    % Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001(millions of reais)Usage charges
    
    
    1,138.4
    
    
    
    925.2
    
    
    
    681.8
    
    
    
    23.0
    
    
    
    35.6Monthly subscription charges
    
    
    148.3
    
    
    
    115.0
    
    
    
    121.5
    
    
    
    29.0
    
    
    
    (5.3
    )Interconnection charges
    
    
    776.8
    
    
    
    649.3
    
    
    
    526.8
    
    
    
    19.6
    
    
    
    23.2Sales of handsets and accessories
    
    
    383.5
    
    
    
    283.8
    
    
    
    245.9
    
    
    
    35.1
    
    
    
    15.4Other
    
    
    40.3
    
    
    
    15.9
    
    
    
    8.3
    
    
    
    153.5
    
    
    
    91.6Total gross operating revenue
    
    
    2,487.3
    
    
    
    1,989.2
    
    
    
    1,584.3
    
    
    
    25.1
    
    
    
    25.6Value-added and other indirect taxes
    
    
    (482.8
    )
    
    
    (377.6
    )
    
    
    (293.2
    )
    
    
    27.8
    
    
    
    28.8Sales and service discount and
return of goods sold
    
    
    (45.6
    )
    
    
    (39.5
    )
    
    
    (35.0
    )
    
    
    15.4
    
    
    
    12.9Net Operating Revenue
    
    
    1,958.9
    
    
    
    1,572.1
    
    
    
    1,256.1
    
    
    
    24.6
    
    
    
    25.2
 31




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Net operating revenues increased by 24.6% to R$1,958.9 million in 2003
from R$1,572.1 million in 2002, which in turn represented a 25.2% increase from
R$1,256.1 million in 2001. The growth in revenues in 2003 was attributed mainly
to a 23.4% increase in local outgoing traffic, a 23.0% increase in usage
charges due to an increase of 34.1% in our customer base, a 38.4% increase in
sales of cellular handsets and accessories; and a 153.5% increase in revenues
from other services, mainly due to intensive campaigns addressed to users of
SMS (Short Message Service), WAP and 1xRTT services. The increase in net
operating revenues in 2002 was principally due to an increase in tariffs
charged to our customers and in interconnection charges; and an increase of
27.2% in our customer base which resulted in an increase in usage charges. The increases in 2003 and 2002 were partially offset by lower average
monthly revenues per customer. The average number of customers, calculated as
the number of customers at the beginning of the year plus the number of
customers at the end of the year, divided by two, increased 31.0% to 3,590
thousand customers in 2003 from 2,740 thousand customers in 2002, representing
in turn a 33.4% increase from 2,054 thousand customers in 2001. Average
monthly net revenues from services per customer decreased principally as a result
of an increase in the percentage of prepaid customers in relation to total
customers as a result of new customers acquired and customers switching from
contract plans to prepaid plans; and the introduction of new service plans
directed at users with lower monthly subscription charges. Usage charges.Usage charges increased 23% to R$1,138.4 million in 2003,
from R$925.2 million in 2002, which in turn represented a 35.6% increase from
R$681.8 million in 2001. This increase was principally due to a 34.0% increase
in the total number of subscribers to 4,112 thousand total lines in service at
December 31, 2003 from 3,068 thousand total lines in service at December 31,
2002. Beginning in July 2003, this increase was partially offset by the impact
of the new rules relating to the long distance Carrier Selection Code described
above. The increase in revenues from customer usage charges in 2002, compared
to 2001, resulted principally from higher usage of our services due to the
increase in our customer base and launching of new plans. Monthly subscription charges.Revenues from monthly subscription charges
increased 29.0% to R$148.3 million in 2003, from R$115.0 million in 2002, which
in turn represented a 5.3% decrease from R$121.5 million in 2001. The increase
in 2003 resulted mainly from an increase of 10.3% in the number of contract
customers and the launch of new plans that are designed to fit a contract
customers profile. The decrease in revenues in 2002 resulted from the launch
of the free minutes plans, where the monthly deductible values (minimum
consumption) are booked as usage revenue. Interconnection charges.Our revenues from interconnection charges
increased 19.6% to R$776.8 million in 2003, from R$649.3 million in 2002, which
in turn represented a 23.2% increase from R$526.8 million in 2001. The
increases in network usage revenues in 2002 and 2003 reflected the increase in
our average interconnection charges, which were higher due to rate increases,
partially offset by a reduction in incoming call traffic, despite the increase
in our customer base of prepaid customers. Beginning in July 2003, the new
rules relating to the long distance Carrier Selection Code and the Bill & Keep
rules described above had little impacts on us in 2003. Sales of handsets and accessories. Revenues from sales of handsets and
accessories increased 35.1% to R$383.5 million in 2003, from R$283.8 million in
2002, which in turn represented a 15.4% increase from R$245.9 million in 2001.
The increase in 2003 resulted mainly from an increase in sales volume,
especially in sales of medium and higher value handsets. 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, as opposed to generating profits on the sales,
and TCO therefore subsidizes portions of the costs of handsets. Although profit
margins vary from one handset model to another and from time to time, profit
margins are generally negative after taxes and discounts. In 2003, 2002 and
2001, the subsidy resulted in a gross loss (calculated as the difference from
net operating revenues from sales minus the cost of goods sold) of
approximately R$88.5 million, R$105.5 million and R$98.3 million on handsets
sales, respectively Other.Revenues from other services increased 153.5% to R$40.3 million in
2003, from R$15.9 million in 2002, which in turn represented a 91.6% increase
from R$8.3 million in 2001. The increases in revenues from other services in
2003 and 2002 were due primarily to increases in the use of the SMS services
and in the number of 32




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subscribers. Value-added and other indirect taxes.Value-added and other indirect
taxes increased 27.8% to R$482.8 million in 2003, from R$377.6 million in 2002,
which in turn represented a 28.8% increase from R$293.2 million in 2001.
Value-added taxes and other indirect taxes on operating revenues were 19.3% of
our gross operating revenues in 2003, 18.9% in 2002 and 18.5% in 2001. The
effective rate of taxes on gross operating revenues varies depending upon the
composition of our revenues, since the interconnection charges are not subject
to ICMS. Sales and service discount and return of goods sold: Sales and service
discount and return of goods sold increased 15.4% to R$45.6 million in 2003,
from R$ 39.5 million in 2002, which in turn represented a 12.9% increase from
R$ 35 million in 2001. Discounts granted vary depending on how competitive the
company intends to be. Cost of Services and Goods Sold The following table sets forth certain components of our cost of services
and goods, as well as the percentage change of each year from the prior year,
for the years ended December 31, 2003, 2002 and 2001. Year ended December 31,
    
    % Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001(millions of reais)Cost of services and goods sold:Depreciation and amortization
    
    
    161.2
    
    
    
    128.7
    
    
    
    118.0
    
    
    
    25.3
    
    
    
    9.1Personnel
    
    
    18.8
    
    
    
    15.6
    
    
    
    12.0
    
    
    
    20.5
    
    
    
    30.0Materials and services
    
    
    90.7
    
    
    
    71.2
    
    
    
    55.8
    
    
    
    27.4
    
    
    
    27.6Interconnection
    
    
    147.1
    
    
    
    142.7
    
    
    
    102.9
    
    
    
    3.0
    
    
    
    38.7Fistel fees
    
    
    85.0
    
    
    
    60.2
    
    
    
    53.2
    
    
    
    41.2
    
    
    
    13.2Cost of goods sold
    
    
    390.0
    
    
    
    314.2
    
    
    
    273.3
    
    
    
    24.1
    
    
    
    15.0Others
    
    
    11.2
    
    
    
    9.2
    
    
    
    5.5
    
    
    
    21.7
    
    
    
    67.3Total
    
    
    904.0
    
    
    
    741.8
    
    
    
    620.7
    
    
    
    21.9
    
    
    
    19.5
 Cost of services and goods sold increased 21.9% to R$904.0 million in
2003, from R$741.8 million in 2002, which in turn represented a 19.5% increase
from R$620.7 million in 2001. The increase in 2003 was principally due to a
24.1% increase in the cost of goods sold, resulting from increases in volume
and in the average cost of handsets, as a result of the sale of more
sophisticated and expensive handset models; a 27.4% increase in the cost of
materials and services; and a 25.3% increase in depreciation and amortization
from 2002 to 2003, resulting from the growth of our network. The increase in
2002 was principally due to an increase in the cost of goods sold, principally
due to an increase in the cost of handsets due to the devaluation of the real
and an increase in the number of more sophisticated handsets sold; and an
increase in fixed-line network expenses, as a result of the increase in the
interconnection charges paid to other cellular service and fixed-line
providers. The gross margin (cost of services and goods divided by net
revenues) was 53.9% in 2003, compared to 52.8% in 2002, and 50.6% in 2001. Depreciation and amortization.Depreciation and amortization expenses
increased 25.3% to R$161.2 million in 2003, from R$128.7 million in 2002, which
in turn represented a 9.1% increase from R$118.0 million in 2001. The increases
in 2003 and 2002 were due primarily to the expansion of our network and
investments in technical support systems, resulting in an increase in
depreciable assets. Personnel.Personnel expenses increased 20.5% to R$18.8 million in 2003,
from R$15.6 million in 2002, which in turn reflected a 30.0% increase from
R$12.0 million in 2001. The increase in 2003, compared to 2002, principally
derived from severance costs relating to a former executive and to an overall
increase in personnel salaries. A contract signed in December 2003, retroactive
to November 1st, established a linear increase of 7.5% in salaries in line with
inflation. The increase in 2002, compared to 2001, principally derived from the
increase in the number of employees we hired to service our expanding network
and customer base. Materials and services.Materials and services include cost of materials
and services received from third-parties, including rents for dedicated lines
paid to other cellular telecommunications service providers, to fixed-line
companies and carriers. Cost of materials and services increased by 27.4% to
R$90.7 million in 2003, from R$71.2 33




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million in 2002, which in turn represented a 27.6% increase from R$55.8
million in 2001. The increase in 2003, compared to 2002, was due primarily to
(1) an increase of R$ 4.5 million in leased lines payable to other
telecommunications service providers, due to increases in traffic and in
tariffs; and (2) an increase in the cost of maintaining our network. The
increase in 2002, compared to 2001, was due primarily to the significant
increase of our network in 2001. Interconnection.Expenses from interconnection include fees we pay to
other telecommunications service providers for the use of their network to
complete local, long distance and international calls originating in our
network. Usage charges increased 3.0% to R$147.1 million in 2003, from R$142.7
million in 2002, which in turn represented a 38.7% increase from R$102.9
million in 2001. The increase in 2003 was due to tariffs increase. The increase
in 2002 resulted principally from an increase in the interconnection rates and
an increase in the number of minutes of outgoing calls from our network, as a
result of an increase in the number of calls originated by users of our plans. Fistel fees.Fistel fees increased 41.2% to R$ 85.0 million in 2003 from
R$60.2 million in 2002, which in turn represented a 13.2% increase from R$53.2
million in 2001. The increases in 2003 and 2002 were principally due to the
expansion of our network (expansion of our subscriber-base and to the
installation of new base-stations). Cost of goods sold.The cost of handsets and accessories sold increased
24.1% to R$390.0 million in 2003, from R$314.2 million in 2002, which in turn
represented a 15.0% increase from R$273.3 million in 2001. The increase in the
cost of goods sold in 2003, compared to 2002, was principally due to an
increase in sales volume and an increase in the average cost of handsets and
the sale of more sophisticated and expensive handset models. Operating Expenses The following table sets forth certain components of our operating
expenses, as well as the percentage change of each component from the prior
year, for each of the years in the three-year period ended December 31, 2003. Year ended December 31,
    
    Percentage change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001(in millions of reais)Operating expenses:Selling expenses
    
    
    (300.5
    )
    
    
    (215.3
    )
    
    
    (194.5
    )
    
    
    39.6
    
    
    
    10.7General and administrative expenses
    
    
    (193.2
    )
    
    
    (141.9
    )
    
    
    (108.3
    )
    
    
    36.2
    
    
    
    31.0Other net operating income (expense)
    
    
    (13.5
    )
    
    
    (14.6
    )
    
    
    (4.2
    )
    
    
    (7.5
    )
    
    
    247.6Total
    
    
    (507.2
    )
    
    
    (371.8
    )
    
    
    (307.0
    )
    
    
    36.4
    
    
    
    21.1
 Operating expenses increased 36.4% to R$507.2 million in 2003, from
R$371.8 million in 2002, which in turn represented a 21.1% increase from
R$307.0 million in 2001. The increase resulted mainly from a 39.6% increase in
selling expenses, which included sales commissions to independent distributors,
and an increase of 36.2% in general and administrative expenses. Selling expenses.Selling expenses increased 39.6% to R$300.5 million in
2003, from R$215.3 million in 2002, which in turn represented a 10.7% increase
from R$194.5 million in 2001. The increase was principally due to an increase
of R$59.3 million in outsourced services, which included sales commissions to
independent distributors reflecting net additions of subscribers, and a 42.3%
increase in provisions for doubtful accounts to R$47.1 million in 2003 from
R$33.1 million in 2002. The increase in 2002, compared to 2001, was due
principally to an increase in outside services, due to an increase in the
dealers commissions. Provisions for the allowance for doubtful accounts, included in selling
expenses, had an increase of 42.3% to R$47.1 million in 2003 from R$33.1
million in 2002, which in turn represented a 31.5% decrease from R$48.3 million
in 2001. The unusual value of R$ 33.1 million in 2002 was due to an agreement
with a wire line company that resulted in a recuperation of R$7.5 million,
which did not happen in 2003. General and administrative expenses. General and administrative expenses
increased 36.2% to R$193.2 million in 2003, from R$141.9 million in 2002, which
in turn represented a 31.0% increase from R$108.3 million in 34




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2001. The increase in 2003, compared to 2002, resulted mainly from a
R$22.8 million increase in personnel, as a result of the hiring of new
employees and of a contract signed in December 2003, retroactive to November
1st, for a linear increase in salaries of 7.5% in line with inflation, as well
as a R$15.9 million increase in outside services, primarily related to
corporate information technology services. The increase in 2002, compared to
2001, resulted mainly from a R$23.7 million increase in outside services, and a
R$16.7 million increase in depreciation. Other net operating income (expense).Net operating expense decreased
7.5% to R$13.5 million in 2003, from R$14.6 million in 2002, which in turn
represented a 247.6% increase from R$4.2 million in 2001. The decrease in other
net operating income in 2003, compared to 2002, resulted mainly from the
reversal of R$5.3 million provision relating to litigation over the assessment
of ICMS tax on activation fees, as well as from a R$5.2 million increase in
revenues from fines received from clients. This was partially offset by the
increase of the expenditures with the Fust and Funttel taxes,which increased
proportionally to the increase of our revenues from telecommunications
services. The increase in 2002, compared to 2001, resulted mainly from an
increase by R$11.3 million in taxes other than income taxes. Net Financial Income (Expenses) The following table sets forth certain components of our net financial
income (expenses), as well as the percentage change of each component from the
prior year, for each of the years in the three-year period ended December 31,
2003. Year ended December 31,
    
    % Change2003
    
    2002
    
    2001
    
    2003-2002
    
    2002-2001(R$ million)Financial income
    
    
    208.4
    
    
    
    159.0
    
    
    
    97.9
    
    
    
    31.1
    
    
    
    62.4Exchange gains (losses)
    
    
    76.4
    
    
    
    (123.9
    )
    
    
    (41.5
    )
    
    
    (161.7
    )
    
    
    198.5(Loss) gains on
foreign currency
derivative contracts
    
    
    (92.7
    )
    
    
    65.5
    
    
    
    7.4
    
    
    
    (241.5
    )
    
    
    785.1Financial expenses
    
    
    (80.5
    )
    
    
    (96.6
    )
    
    
    (70.3
    )
    
    
    (16.7
    )
    
    
    37.4111.6
    
    
    
    4.0
    
    
    
    (6.5
    )
    
    
    2,690.0
    
    
    
    (161.5
    )
 Net financial income (expenses) reflects, among others, the net effect of
interest income and expense, and net effect of exchange rate fluctuation
affecting our loans, financings and derivative operations. See Note 9 to our
consolidated financial statements. Our net financial expenses increased
2,690.0% to R$111.6 million in 2003 from R$ 4.0 million in 2002, which in turn
represented a decrease of 161.5%from R$6.5million in 2001. The increase in 2003
was mainly due to an increase in the financial income and in the exchange gain.
The decrease in 2002 was mainly due tho the exchange rate fluctuation.
Derivative contracts resulted in a loss of R$ 92.7 million in 2003 against a
gain of R$ 65.5 million in 2002. Income and Social Contribution Taxes We incurred income and social contribution taxes in the amount of R$181.1
million in 2003, a 37.7% increase from R$131.5 million in 2002, which in turn
represented a 37.1% increase from R$95.9 million in 2001. The effective income
tax rate before minority interests was approximately 27.7% in 2003, 28.2% in
2002, and 29.8% in 2001. The increase in income and social contribution taxes
vary proportionately to our net income or loss. See Note 11 to our consolidated
financial statements. B. Liquidity and Capital Resources Sources of Funds We generated cash flow from operations of R$625.5 million, R$615.8 million
and R$432.0 million in 2003, 2002 and 2001, respectively. We had R$213.1 million of long-term loans and financing as of December 31,
2003. Our R$135.0 million in 35




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short-term loans and financing as of December 31, 2003 consisted primarily
of funding from financial institutions applied to long lived assets. At
December 31, 2003, we had a working capital (current liabilities minus current
assets) of R$886.7 million, attributable primarily to: (i) an increase of
R$813.6 million in cash and cash equivalents; (ii) a R$170.0 million increase
in customer accounts receivable; and (iii) a R$189.9 million reduction in
short-term loans and financing. Excluding financial items, working capital at
December 31, 2003 was R$59.2 million, representing an increase of R$43.1
million compared to December 31, 2002, attributable primarily to the R$170.0
million increase in customer accounts receivable, partially offset by R$121.9
million increase in accounts payable. Our principal assets are the shares of Telegoiás, Telemat, Telems,
Teleron, Teleacre, NBT and TCO IP, as well as the assets transferred to TCO as
a result of the merger with Telebrasília. We rely on dividends from our
subsidiaries to meet our cash needs, including the payment of dividends to our
shareholders. We control the payment of dividends by our subsidiaries, subject
to limitations under Brazilian law. There are no contractual restrictions on
the payment of dividends by our subsidiaries to us. Uses of Funds Our principal uses of funds are for capital expenditures, servicing our
debt, and payments of dividends to shareholders. Acquisition of property,
plants and equipment used funds in the amount of R$207.6 million, R$170.6
million, and R$190.5 million in 2003, 2002, and 2001, respectively. Dividends
and interest on shareholders equity payments consumed cash flows of R$93.7
million, R$96.4 million, and R$43.3 million, in 2003, 2002, and 2001,
respectively. Payment of debt consumed cash flows of R$285.5 million, R$515.3
million, and R$1,423.2 million, in 2003, 2002 and 2001, respectively. We believe that our available borrowing capacity, together with funds
generated by operations, should provide sufficient liquidity and capital
resources to pursue our business strategy for the foreseeable future, with
respect to working capital, capital expenditures and other operating needs. Capital Expenditures Capital Expenditures. The following table sets forth our capital
expenditures for each year in the three-year period ended December 31, 2003. 2003
    
    2002
    
    2001(millions of reais) (1)Switching equipment
    
    
    27.2
    
    
    
    22.1
    
    
    
    19.6Transmission equipment
    
    
    103.3
    
    
    
    57.2
    
    
    
    80.9Information technology
    
    
    34.1
    
    
    
    43.1
    
    
    
    31.0Others(1)
    
    
    43.0
    
    
    
    48.2
    
    
    
    59.0Total capital expenditures
    
    
    207.6
    
    
    
    170.6
    
    
    
    190.5
 (1) In 2003, others is composed by land (R$1.3 million), property
constructions (R$4.7 millions), equipment of energy (R$3.1 millions), towers
(R$5.7 millions), improvements in properties of third parties (R$3.0 millions),
conditioned air (R$1.0 million) and others (R$24.2 millions). The primary focus of our capital expenditure program has been, and
continues to be, the improvement of the capacity of the services we currently
offer and the offering of new services as well as the development of
information systems. This includes the increase of our network capacity, the
overlay of 1xRTT technology in our TDMA network, the improvement of our overall
quality, and the increase of the digitalization level of our network. We anticipate that our capital expenditures for 2004 will be approximately
R$395.1 million, mainly for investments in network expansion, introduction of
new products and services that will make customers lives easier and to
maximize the use of cellular telephony, besides improving the quality of our
services. Our management expects to finance 2004 capital expenditures
principally with cash generated from operations. Payment of Dividends See Item 8Financial InformationConsolidated Statements and Other
Financial InformationPayment 36




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##### Table of Contents



of Dividends. Debt As of December 31, 2003, TCOs total debt position was as follows: Amount Outstandingas of December 31,Debt
    
    2003(R$ millions)Loans
    
    
    348.1Total long-term debt, excluding the short-term portion
    
    
    213.1Short-term debt
    
    
    135.0Total debt
    
    
    348.1
 As of December 31, 2003, TCOs total debt was R$348.1 million, of which
R$156.9 million, or 45.1%, was denominated in foreign currency (U.S. dollars)
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, we have entered into
over-the-counter derivatives transactions with international and domestic
financial institutions. In 2003 and 2002, our derivatives produced an
accumulated net unrealized loss of R$15.0 million and a net gain of R$51.5
million respectively. We are exposed to interest rate risk as a consequence of
our floating rate debt. At December 31, 2003, approximately 99.5% of our
interest-bearing liabilities bore interest at floating rates, primarily LIBOR
for U.S. dollar-denominated debt and CDI, TJLP and UMBND, a local index, for
real-denominated debt. Accordingly, our financing expenses will increase if
market interest rates, such as LIBOR, CDI or TJLP, rise. At December 31, 2003,
all of our foreign currency derivatives contracts bore interest payments linked
to the Brazilian CDI rate. We have not hedged against the risk of interest
rates increasing. The CDI rates as of December 31, 2003 and 2002 were 16.27%
and 24.83% respectively. Some of the debt agreements of TCO and its subsidiaries contain
restrictive covenants. Financial ratios involve (1) current ratios, (2)
capitalization ratios, (3) EBITDA margins, (4) interest coverage ratios and (5)
debt to capital ratios. As of December 31, 2003 and 2002, we are in compliance
with all of them. C. Research and Development We did not make any contributions or incur any expenses related to
research and development in 2003 and 2002. In 2001, TCO spent R$436,000 on
Research and Development activities. TCO invested in the structuring of its
Network Management Center, particularly in the consolidation of the flaw
management and workforce areas. Moreover, we developed software applications
(for corporate use and client service support) internally or in partnership
with small software development companies. These software applications give us
an important advantage over our competitors in the area of customer service. D. Trend Information A significant growth in cellular telephony is expected to exceed Brazils
economic growth once again in 2004. In 2004, the maintenance of fierce
competition is expected, as a result of the entry of new competitors,
accelerating consolidation of national coverage and continuing efforts towards
improving network technology. E. Off-balance sheet arrangements We do not have any off-balance sheet financing. We have no majority-owned
subsidiaries that are not included in our consolidated financial statements,
nor do we have any interests in, or relationships with, any special purpose
entities that are not reflected in our consolidated financial statements. 37




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##### Table of Contents



F. Tabular disclosure of contractual obligation The following table represents our contractual obligations and commercial
commitments as of December 31, 2003: Payments due by period in millions of reaisLess than
    
    1-3
    
    4-5
    
    After 5Total
    
    1 year
    
    years
    
    years
    
    yearsContractual obligations:Long-term debt
    
    
    318.4
    
    
    
    1.8
    
    
    
    164.8
    
    
    
    151.8
    
    
    
    Capital lease obligations
    
    
    3.9
    
    
    
    3.3
    
    
    
    0.6
    
    
    
    
    
    
    
    Operating leases
    
    
    15.5
    
    
    
    5.2
    
    
    
    7.3
    
    
    
    2.5
    
    
    
    0.5Unconditional purchase obligations
    
    
    266.5
    
    
    
    266.5
    
    
    
    
    
    
    
    
    
    
    
    Other
long-term obligations(1)
    
    
    17.4
    
    
    
    17.1
    
    
    
    0.3
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    
    621.7
    
    
    
    293.9
    
    
    
    173.0
    
    
    
    154.3
    
    
    
    0.5
   (1)
    
    Contracted long-term suppliers or contracted short-term suppliers with
penalties for early termination. 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management Our company is managed by a Board of Directors and a Board of Executive
Officers. Our shareholders elect the members of the board of directors. The
Board of Directors consists of ten members, with a three-year term for each
member. The Board of Directors holds regular meetings every three months and
holds special meetings when called by the Chairman or by two members of the
Board of Directors. After each meeting, the corresponding minutes are prepared
reflecting all the decisions made during the meeting. Listed below are the current members of the Board of Directors and their
respective positions: Name
    
    Position
    
    Date of electionFélix Pablo Ivorra Cano
    
    Board Member
    
    April 29, 2003Shakhaf Wine
    
    Board Member
    
    March 16, 2004Fernando Xavier Ferreira
    
    Board Member
    
    April 29, 2003Luis Miguel Gilpérez López
    
    Board Member
    
    March 16, 2004Ernesto Lopez Mozo
    
    Board Member
    
    April 27, 2003Ignácio Aller Mallo
    
    Board Member
    
    April 27, 2003Zeinal Abedin Mahomed Bava
    
    Board Member
    
    April 27, 2003Carlos Manuel de Lucena e Vasconcelos Cruz
    
    Board Member
    
    April 27, 2003Eduardo Perestrelo Correia de Matos
    
    Board Member
    
    April 27, 2003Pedro Manuel Brandão Rodrigues
    
    Board Member
    
    July 11, 2003
 Set forth below are brief biographical descriptions of the directors: Félix Pablo Ivorra Cano, 58 years old, is the president of the board of
directors and has been a member of the board of directors 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 N.V., Celular CRT Participaçoes, S.A., Tele Sudeste Celular
Participaçoes, S.A., Telesp Celular Participaçoes, S.A., Tele Centro Oeste
Celular Participações, S.A., Tele Leste Celular Participaçoes, S.A., Telefónica
Móviles SAC Perú, Telefónica Móviles Perú Holding, S.A.A and MobiPay
International, S.A. 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 38




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##### Table of Contents



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 telecommunication engineering from Escola Técnica Superior
de Engenharia  ETSI in Madrid, and a post-graduate degree in Business
Administration from the Instituto Católico de Administração de Empresas 
ICADE, also in Madrid. Shakhaf Wine, 36 years old, is currently an executive officer of Portugal
Telecom S.G.P.S. and also a member of the board of directors of Brasilcel N.V.,
Telesp Celular Participações S.A., Tele Centro Oeste Celular Participações
S.A., Tele Sudeste Celular Participações S.A., Celular CRT Participações S.A,
Teleacre Celular S.A., Telegoiás Celular S.A., Norte Brasil Telecom S.A.,
Telemat Celular S.A., Telems Celular S.A., TCO-IP S.A., Teleron Celular S.A.,
Universo Online S.A. e Banco1.Net S.A. Mr Wine was an executive officer of
investment bank and was in charge of the European corporate clients group of
Global Telecommunications of Merrill Lynch International from 1998
until 2003,
Senior Associate Officer of the Latin American and Telecommunications groups of
Deutsche Morgan Grenfell from 1993 until 1998. He holds a degree in economy from
the Pontifícia Universidade Católica do Rio de Janeiro. Fernando Xavier Ferreira,55 years old, is currently the Chief Executive
Officer of the Telefónica Group in Brazil and member among others of the Board
of Directors of Telefónica Móviles, Brasilcel, N.V. Tele Sudeste Celular
Participações, S.A., Celular CRT Participações, S.A., Tele Centro Oeste Celular
Participaçoes, S.A., Tele Leste Celular Participaçoes, S.A. and Telesp Celular
Participações, S.A. 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 S.A. 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. Luis Miguel Gilpérez López, 46 years old, is the Executive Director of the
International Area of Telefónia Móviles. Mr. Gilpérez also serves on the board
of directors of Medi Telecom, S.A., Telefónica Móviles México, S.A. de C.V.,
Tele Sudeste Celular Participaçoes, S.A., Tele Centro Oeste Celular
Participaçoes, S.A., Celular CRT Participaçoes, S.A., Telesp Celular
Participaçoes, S.A. He is also de Executive Chairman of MobiPay International,
S.A. He began his career at an insurance company, where he worked for six
years, in various departments. He joined the Telefónica group in 1981, where
he has worked since then. He has particularly been involved with activities
related to mobile telephony. He was in charge of the services commercial
activities from 1987 to 1993, when Telefónica Móviles España was created. At
Telefónica Móviles España he has held management positions in virtually all its
business areas. He has a post-graduate degree in Business Administration and
holds a degree in Industrial Engineering. Ernesto Lopez Mozo, 40 years old, serves as Chief Financial Officer
General Manager for Finance and Management Control of Telefónica Móviles S.A.
Mr. Lopez is a member of the board of directors of Telefónica Móviles de
España, S.A., Mobipay International, S.A., Telefónia Móviles México, S.A. de
C.V., Brasilcel N.V, Telesp Celular Participações, S.A., Tele Centro Oeste
Celular Participaçoes, S.A., Tele Sudeste Celular Participações, S.A., Tele
Leste Celular Participações S.A. and Celular CRT Participações, S.A. He was
previously a senior manager in the financing department of Telefónica, S.A.,
where he was also responsible for relationships with credit rating agencies.
Before joining Telefónica in March 1999, Mr. Lopez worked for five years at
J.P. Morgan. He holds a degree in civil engineering from ETSICCP in Madrid and
a masters degree in business administration from the Wharton School. Ignacio Aller Malo, 59 years old, is a member of the board of directors
of Telefónia Móviles México, S.A. de C.V., Brasilcel N.V, Telesp Celular
Participações, S.A., Tele Centro Oeste Celular Participaçoes, S.A., Tele
Sudeste Celular Participações, S.A., Tele Leste Celular Participações S.A. and
Celular CRT Participações, S.A. Mr. Aller has served as Chief Operating
Officer of Telefónica Móviles S.A. by 2003 and has held several positions at
Telefónica de España since 1967. Zeinal Abedin Mahomed Bava,38 years old, is currently the 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 PT Corporate  Soluções Empresariais de Telecomunicações e
Sistemas, S.A. since June 2003; Chief Executive Officer of PT MultimediaServiços de Telecomunicações e Multimedia,
SGPS, S.A. since May 2003; 39




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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; Chairman
of the Board of Directors of PrevisãoSociedade Gestora de Fundos de Pensões,
S.A. since March 2003; Chairman of the Board of Directors of PT Serviços de
Gestão, S.A. since February 2003; Member of the Board of Directors of
Brasilcel, N.V. since December 2002; Vice-Chairman of the Board of Directors of
PT MultimediaServiços 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
Electrónico de Serviço Total, S.A. since May 2001; 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 Celular 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 CRT Celular Participações,
S.A. since 2003; Member of the Board of Directors of Tele Leste Celular
Participações, S.A. since 2003; 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; Executive Director of Deutsche Morgan
Grenfell from 1996 until 1998; Executive Director of Warburg Dillon Read from
1989 until 1996. He holds a degree in electronic and electrical engineering
from the University of London B.S.C. Carlos Manuel de Lucena e Vasconcellos Cruz,46 years old, is currently
the Chief Executive Officer of Portugal Telecom Investimentos
InternacionaisConsultoria Internacional S.A. and PT Ventures, SGPS, S.A. since
April 2004; 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 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; Chief Executive
Officer of PTM.com, SGPS, S.A. from May 2003 until January 2004; 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. 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 TMNTelecomunicações
Móveis Nacionais, S.A. from June 2002 until May 2003; Member of Board of
Directors of Telesp Celular Participações S.A. since April 2001; Vice-Chairman
of Telesp Celular Participações S.A. since 2001; Member of the Board of
Directors of Tele Sudeste Celular 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 Celular Participações S.A. since 2003; Member
of the Board of Directors of Tele Centro Oeste Celular Participações, S.A.
since 2003; Chairman and Chief Executive Officer of Telesp Celular S.A. from
May 2001 until May 2002; President and Chief Executive Officer of Tradecom,
SGPS, S.A. from 2000 until 2001; Executive Board Member of PT Prime, SGPS, S.A.
from 2000 until 2001; Invited Professor of Universidade Católica Portuguesa and
ISCTE for Post-Graduate Courses and MBA Program from 2000 until 2001; Member of
World Board of Dun & Bradstreet Corporation, Executive Vice-President of Dun &
Bradstreet Corporation, President and Chief Executive Officer of D&B GMC,
Executive Vice President of D&B Europe, President and Chief Executive Officer
of D&B Iberia, Vice president of Trans Union España Credit Burear S/A from 1997
until 1999; Senior Vice-President of Dun & Bradstreet Corporation, Senior
Vice-President of Dun & Bradstreet Europe, President and Chief Executive
Officer of D&B Iberia & Middle West, Vice-President of A.P.E.I.N. (Associação
Portuguesa de Empresas de Informação de Negócio) in 1996; President & Chief
Executive Officer of Dun & Bradstreet Ibéria in 1995; President and Chief
Executive Officer of Dun & Bradstreet Portugal, Vice-President of Associação
Portuguesa para a Qualidade from 1990 until 1993; President of European
Customer Service group of Dun & Bradstreet in 1992; General Director of Dun &
Bradstreet France in 1989; General Director of Sales of Dun & Bradstreet France
in 1988; Commercial Director of Dun & Bradstreet Portugal in 1987; National
Director of Sales of Dun & Bradstreet Portugal in 1986; Director of Sales
Department of Dun & Bradstreet Portugal in 1985; Senior Economist of
LEASEINVEST from 1983 until 1985; Economist of Finance Ministry of Portugal
from 1978 until 1983. Mr. Cruz holds a degree in business from the I.S.C.T.E.
(Instituto Superior de Ciências do Trabalho e da Empresa or Higher Education
Institute for Labor and Corporate Sciences), Portugal, and a post-graduate
degree in management from D.S.E. (the German Foundation for International
Development), Germany. Eduardo Perestrelo Correia de Matos, 55 years old, is currently the
president of Portugal Telecom Brasil S.A. and a member of the board of
directors of each of PT Móveis, Serviços de Telecomunicações, S.G.P.S., S.A.,
Telesp Celular Participações S.A., Tele Sudeste Celular Participações S.A.,
Tele Centro Oeste Celular Participações S.A., Tele Leste Celular Participações
S.A. and Celular CRT Participações S.A. From 1976 to 1987, Mr. Matos
held various operational positions in the planning and control areas of CTT -
Corrêios e Telecomunicações de 40




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Portugal S.A. and TLP-Telefones de Lisboa e
Porto S.A. From 1987 to 1990 he was the secretary of state for external
transportation and communications in Portugal. In addition, he served as
president at Marconi S.G.P.S. Comunicações, S.A. from 1990 to 1991 and at
Mobitel S.A. from 1991 to 1996. Mr. Matos was also a member of the board of
Portugal Telecom, S.G.P.S., S.A. from 1996 until May 2002. He holds a degree
in economics from the Technical University of Lisbon, Portugal. Pedro Manuel Brandão Rodrigues, 53 years old, is currently also a member
of the board of directors and of the Executive Committe of PT Móveis, S.G.P.S.,
S.A. and of Telecomunicações Móveis Nacionais  TMN. He was ellected for the
Assembly of the Republic in March 2002, and he is a member of the National
Council of Education of Portugal since July 2000. Mr. Brandão was a member of
the board of directors of several Portuguese corporations and, from 1993 to
2000, a member of the Executive Committee of Banco Mello and Banco Mello de
Investimentos. He holds a doctoral degree in engineering from the University of
Birmingham, England, a master degree in production process and management, and
an engineering degree from the Instituto Superior Técnico. Board of Executive Officers The board of executive officers consists of eight members, each elected by
the board of directors for a term of three years. The chief executive officer
is the chairman and, in his absence or temporary inability to perform his
duties, he will 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 shall be appointed by the board of
directors; in case of any inability, the chief executive officer shall choose a
replacement for that officer 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. Listed below are the current members of the Board of Executive Officers
and their respective positions: Name
    
    Position
    
    Date of election/reelectionSérgio Assenço Tavares dos Santos
    
    President,
Executive
Vice-President of
Operations
    
    June 24, 2003Fernando Abella Garcia
    
    Executive Vice
President for IT
and Product and
Service Engineering
    
    June 24, 2003Luís André Carpintero Blanco
    
    Executive Vice
President for
Finance, Planning
and Control, and
Investor Relations
Officer
    
    June 24, 2003Getúlio Nery Cardoso
    
    Executive Vice
President for
Regulatory Matters
and Institutional
Relations
    
    June 24, 2003Antonio Carlos Haidamus Monteiro
    
    Executive Vice
President for
Customers,
Technology and
Networks
    
    June 24, 2003Roberto Iunes Brito
    
    Executive
Vice-President for
Marketing and
Innovation
    
    June 24, 2003
 Set forth below are brief biographical descriptions of the executive
officers: Sérgio Assenço Tavares dos Santos, 56 years old, has served as a Chief
Executive Officer from May to October 1998 and he is currently serving as
President of our company on a temporary basis. He served as Manager of the
Vice-Presidency of Telebras Department of Development and Coordination with
Suppliers; coordinator of the Technical Office for Special Projects of
Telebrasília; and manager of the Advanced Telecommunications Business Unit and
Engineering Director of Telebrasília. He holds a degree in Electrical
Engineering from the University of Brasília. Fernando Abella Garcia, 41 years old, is currently the executive vice
president for finance, planning and control of each of Brasilcel N.V., Tele
Sudeste Celular Participações S.A., Tele Leste Celular Participações S/A,
Celular CRT Participações S.A., Telesp Celular Participações S.A., Telerj
Celular S.A., Telest Celular S.A., 41




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Telebahia Celular S.A., Telergipe Celular
S.A., Celular CRT S.A., Telesp Celular S.A. and Global Telecom S.A. He is also
Investor Relations Officer of Tele Sudeste Celular Participações S.A., Telesp
Celular Participações S.A., Celular CRT Participações S.A. and Tele Leste
Celular Participações S.A. and Executive Vice President for IT and Product and
Service Engineering of Tele Centro Oeste Celular Participações S/A; and a
member of the board of directors of Telefónica Factoring do Brasil Ltda. From
1994 until 1997, Mr. Garcia worked as an external consultant for the Telefónica
Group in several different areas. Since joining he Telefónica Group in 1997,
he has served in different positions in the financial and strategic planning
areas in Spain and Brazil. He was also a member of the board of directors of
Telefónica Móviles S.A.C. in Peru, Telefónica Móvil S.A. in Chile, Telefónica
Móviles El Salvador, S.A. de C.V. in El Salvador and Telefónica Centroamérica
Guatemala, S.A. in Guatemala. Mr. Garcia holds a degree in business from the
Faculty of Economic and Corporate Sciences at Valladolid, Spain, and masters
degree in business administration from the Corporate Institute of Madrid,
Spain. Luis André Carpintero Blanco, 30 years old, has served as Executive
Officer since October 1, 2000. From May 1999 to September 2000 he actively
served in several sectors of TCO group. He started as Administrative Finance
Assistant Director  NBT being later promoted to Manager of the Financial
Department  TCO Group. He worked in the financial market, for the Boa Vista
InterAtlântico Bank, which is associated to the Crédit Agricole and Espirito
Santo Bank, as Manager from 1997 to 1999. He graduated from the Federal
University of Rio de Janeiro with a degree in Production Engineering and he is
currently seeking an MBA at IBMEC in Finance. Getúlio Nery Cardoso, 52 years old, has served as an Executive Officer
since July 28, 1999. He began his career in the Foreign Exchange Department at
the Central Bank of Brazil and later worked in the Production Engineering area
at Petróleo Brasileiro, S.A.  PETROBRÁS. He then became a member of the
Industrial Development Department at Telebrás, specializing in industrial
development for telecommunications. He also served as Commercial Manager for
the Central-Western region of Brazil at Splice. He holds a degree in
Electrical Engineering from the University of Brasília and has concluded
extensive research concerning work in Brazil and abroad. Antonio Carlos Haidamus Monteiro, 50 years old, has served as an Executive
Officer since April 1999. He has served as Executive Director of Coordination
and Operations since December 2001. He also has served as Executive
Vice-President at NBT since November 1999. He began his career in
telecommunications in 1970 at TELEOESTE, which was a phone carrier in the state
of Mato Grosso do Sul before telecommunications carriers were controlled by the
government. He later worked for Embratel, Telerj Celular S.A., and Telemat
S/A, were he was Director of Engineering and President. He holds degrees in
Engineering and Economy, with postgraduate degrees in Optical Fibers and
Corporate Management. Roberto Iunes Brito, 45 years old, has served as an Executive Officer
since August 31, 2001. From August 1998 to August 2001, he served as Regional
Director in charge of competitive strategy and operation results at Telems
Celular S.A. From 1982 to 1998, he served as Manager of the Financial
Department; Assistant of the Administrative and Financial Executive Office;
Manager of the Economic and Financial Planning Department; and Manager of the
Mobile Cellular Telephoning Department at Telecomunicações do Mato Grosso do
Sul S.A., in the Telebrás System. He holds a degree in Economy from the
Catholic University of Mato Grosso do Sul and a post graduate degree from the
Brazilian National Institute for Space Research, Mato Gross do Sul. Board of Auditors (Conselho Fiscal) We have a permanent board of auditors with three members. They are
elected annually at the annual general shareholders meeting. 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 the management bodies to be
submitted to the shareholders meeting regarding changes to share
capital, issuance of debentures and subscription rights, capital
investment plans and budgets, distributions of dividends, changes in
corporate form, consolidations, mergers or split-up; and 42




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
    
    to review and approve the financial statements for the fiscal year. The Board of Auditors holds regular meetings every three months and
special meetings when called by the President or by any member of the Board of
Auditors. Listed below are the current members of the Board of Auditors and their
respective positions: Name
    
    Position
    
    Date of electionJoão Luis Tenreiro Barroso
    
    Member
    
    April 29, 2003Norair Ferreira do Carmo
    
    Member
    
    April 29, 2003André Cavalcanti Banks da Rocha (1)
    
    Member
    
    April 29, 2003Wolnei Quirino Schüler Carvalho
    
    Alternate
    
    April 29, 2003José Guilherme Feijão Queiroz de Ataíde
    
    Alternate
    
    April 29, 2003Marcos Duarte Santos (1)
    
    Alternate
    
    April 29, 2003
  (1)
    
    Appointed by our preferred shareholders. B. Compensation During 2003, the total amount of compensation paid by our company to its
members of the Board of Directors, executive officers and members of the Board
of Auditors was approximately R$ 5.0 million, including bonuses and profit
sharing plans. This amount includes performance remuneration and profit
sharing arrangements applicable to all employees. During 2003, the total amount of expenses made by our company to provide
private pension for our directors was approximately R$224,505.00 C. Board Practices For more detailed information, see Directors and Senior Management,
Board of Executive Officers, and Board of Auditors, above. There are no service contracts between us or our subsidiaries and any of
our directors providing for benefits upon termination of employment. D. Employees As of December 31, 2003, our workforce, comprised of our A Band and B Band
carriers, consisted of 4,014 persons (34.25% more than the number of persons
registered in 2002). Of this total, 1,510 were permanent staff, 73 were
trainees, and 2,431 were personnel outsourced permanently. Our companys
workforce was thus allocated as follows: 80.24% in the Business area
(Marketing, Sales, and Client Service), 7.25% in the Network and Operations
area, 4.73% in the Finance area, 5.11% in the Administration and Human
Resources area, and the remainder 2.67% in the Information Technology and Staff
areas. Approximately 22.72% of our companys personnel is affiliated with labor
unions. The relationships with these unions are considered good. The process
of negotiation of the collective-bargaining agreement for the years 2002 and
2003, as in previous years, was conducted in a professional manner, which made
it easier to gain approval for the collective-bargaining agreement from the
employees. Training and development actions implemented by TCO in the year 2003,
directed mainly to technical and management empowerment of the workforce
employed in the Business, Engineering and Information Technology areas,
together represent investments approaching R$1.6 million. The registered
amount of per capitatraining hours in 2003 was 55.4 hours. By means of our A Band and B Band subsidiaries, we currently sponsor two
types of private pension plans: a defined benefit plan (PBS-TCO) and an hybrid plan, which offers a defined
benefit plan, for unexpected situations, 43




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and defined contribution for
anticipated situations. Expenses related to the sponsorship of private pension
plans for employees and management in 2003 totaled R$ 4,383 million. E. Share Ownership As of December 31, 2003, each of the members of the board of directors and the
board of executive officers owned, directly or indirectly, less than 0.01% of
any class of our shares. We do not offer stock option plans to any of our
directors or employees. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders The common shares have full voting rights and the preferred shares have
limited voting rights. On April 25, 2003, TCP acquired 64.03% of the voting capital stock of TCO
for approximately R$1,505 million, corresponding to R$19.48719845 per each lot
of 1,000 shares acquired. TCP acquired additional shares of voting capital
stock in a public tender offer. As of May 31, 2004, TCP owned 90.7% of the
common shares. Accordingly, TCP does not have different voting rights, but, as
a result of owning more than 50% of our common shares, it can control the
election of TCOs Board of Directors and the direction and future operations of
our company. The following table sets forth information concerning the ownership of
common shares by TCP and by TCOs officers and directors as a group as of May
31, 2004. Number of
    
    Percentage ofCommon
    
    OutstandingName of owner
    
    Shares owned
    
    Common SharesTelesp Celular Participações S.A.
    
    
    111,575,992,041
    
    
    
    90.7All directors and executives officers as a group
    
    
    132,622
    
    
    
    0.0
 We are not aware of any other shareholder owning more than 5.0% of the
common shares. At May 31, 2004, there were approximately 204 record holders of ADSs in
the United States. The ADSs represent approximately 40.48% of our preferred
shares. Brasilcel does not hold ADSs of TCO. B. Related Party Transactions Related Parties  New Controlling Shareholder In April 2003, the transfer of the equity interest held by Fixcel in TCO
to TCP was approved. The principal transactions with unconsolidated related
parties of the new controlling shareholder are as follows:  a.
    
    Use of network and long-distance (roaming) cellular
communication: these transactions involve companies owned by the
same controlling group of Vivo, such as Telecomunicações de São
Paulo S.A., Telerj Celular S.A., (R$0.130 million in expenses in
2003), Telest Celular S.A., (R$0.012 million in revenues in 2003),
Telebahia Celular S.A., (R$0.059 million in expenses), Telergipe
Celular S.A., (R$0.020 million in revenues in 2003), Telesp Celular
S.A., Global Telecom S.A. and Celular CRT S.A. (R$0.020 million in
revenues in 2003). Part of these transactions was established based
on contracts between Telebrás and the operating concessionaires
before privatization under the terms established by Anatel.  b.
    
    Apportionment of general and administrative expenses among
the companies operating under the brand name Vivo (R$23,984 million
in net expenses in 2003). 44




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Related Parties  Former Controlling Shareholder Our majority shareholder in 2002 was BID S.A., which was controlled by
Fixcel S.A., which in turn was under common control of Banco Credibel, SPL
Construtora e Pavimentadora and CSM Cartões S.A. (Splice Group). Prior to 2002,
BID S.A. was controlled by Splice do Brasil S.A. According to a contract entered into between Splice do Brasil S.A. and the
subsidiaries of Tele Centro Oeste Celular Participações S.A., technical
assistance services were payable to Splice do Brasil S.A. corresponding to 1%
of the net operating income. For the year ended December 31, 2002 the amount of
R$12,532 thousand was charged to general and administrative expenses. In January 2002, TCO made an advance payment of R$34,259 thousand to BID
S.A. corresponding to the present value of the tax benefit on the merged
premium. The amount was increased by R$5,967 thousand based on market rates at
December 31, 2002. We entered into transactions with Group Splice companies in 2002 and 2001.
These transactions were mainly related to marketable securities (R$712.1
million in 2002 and R$362.3 million in 2001), short-term investments (R$6.5
million in 2002 and R$17.4 million in 2001), acquisition of property, plant and
equipment (R$7.7 million in 2002 and R$11.8 million in 2001), maintenance
services (R$12.5 million in 2002 and R$2.0 million in 2001) and acquisition of
telephone cards (R$5.9 million in 2002 and R$0.9 million in 2001). The
marketable securities are related to commercial paper issued by Fixcel. The
interest was a 100% of CDI (Interbank Deposit Certificate) plus 2.0% per annum. We have engaged in a number of transactions with related parties. See note
30 to our consolidated financial statements. C. Interests of Experts and Counsel Not applicable. 
 ITEM 8. FINANCIAL INFORMATION A. Consolidated Statements and Other Financial Information See Item 3Key InformationSelected Financial Data and Item
18Financial Statements. Legal Matters Civil Litigation
Related to the Breakup of Telebrás The Breakup of Telebrás is the subject of several lawsuits in which the
plaintiffs are seeking injunctions. Some preliminary injunctions were granted,
but all were quashed by decisions of the relevant federal court. These courts
also decided that the courts of the state of Minas Gerais has original
jurisdiction over the proceedings. Several decisions quashing preliminary
injunctions are on appeal, and if any such appeals are successful, the
shareholders of Telebrás may have to reapprove the Breakup of Telebrás or
legislative action may be required. The theories on which the lawsuits regarding the Breakup of Telebrás are
based include that:  
    
    the Brazilian constitution requires that the General
Telecommunications Law specifically authorize the creation of the 12
New Holding Companies;  
    
    the Telebrás shareholders meeting held on May 22, 1998,
which approved the Breakup of Telebrás, was not properly convened, 45




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
    
    national sovereignty will be threatened if Brazils
telecommunications companies are controlled by foreign entities, and  
    
    the General Telecommunications Law requires that certain
matters, such as the entry of new competitors and the administration
of development and technology funds, be regulated prior to the
Breakup of Telebrás either by an executive order of the President or
by an act of Congress. If any of these lawsuits ultimately succeeds, the Breakup of Telebrás may
have to be reinitiated. This could require, depending upon the prevailing
plaintiffs theory, one or both of the following actions:  
    
    amending the Telecommunications Law; and  
    
    reconvening the May 22, 1998 Telebrás shareholders meeting. It is theoretically possible under Brazilian law for a court to require
that the Breakup of Telebrás be unwound, although we believe that this would
not be likely to occur. We believe that the ultimate resolution of the
proceedings will be favorable and will not have a material adverse effect on
our business or financial position. It is very difficult to quantify what the
potential impact to us would be if the Breakup of Telebrás were to be unwound.
This would require an assessment of the total amount of capital invested by
controlling shareholders in the 12 New Holding Companies and a prediction as to
any possible indemnification that they may be entitled to from the Brazilian
government. The results could be very far reaching and would affect all of the
New Holding Companies. Litigation
Arising Out of Events Prior to the Breakup of Telebrás Telebrás and our subsidiaries Predecessor Companies, our legal
predecessors, and our subsidiaries, respectively, are defendants in a number of
legal proceedings and subject to certain other claims and contingencies
relating to events prior to the Breakup of Telebrás. Liability for claims
arising out of acts committed by the Predecessor Companies prior to the
effective date of the spin-off of the cellular assets and liabilities of the
Predecessor Companies to our subsidiaries remains with the Predecessor
Companies, except for labor and tax claims (for which the Predecessor Companies
and our subsidiaries are jointly and severally liable, as the case may be, by
operation of law) and those liabilities with respect to which the Predecessor
Companies had made specific accounting provisions prior to the Breakup of
Telebrás, assigning them to our subsidiaries. Any claims against the
Predecessor Companies which are not satisfied by the Predecessor Companies
could result in claims against our subsidiaries to the extent that our
subsidiaries have received assets which might have been used to settle those
claims had they not been spun off from the Predecessor Companies. However,
under the shareholders resolution pursuant to which the spin-off was effected,
our subsidiaries have contribution rights against their Predecessor Companies
with respect to the entire amount of any payments made by our subsidiaries in
connection with any labor or tax claims brought against our subsidiaries and
relating to acts committed by the Predecessor Companies prior to the effective
date of the spin-off. We believe that the likelihood that claims of this kind will materialize
and have a material adverse financial effect on us is remote. Litigation
Related to Tax Credits Under certain conditions, Brazilian law permits companies to benefit from
tax credits related to the amortization of goodwill. Despite this fact, an
action was filed on December 16, 1999 against Anatel and the New Holding
Companies, including TCO, that have undergone a corporate restructuring in
connection with the Breakup of Telebrás and that recognized tax credits to
offset premiums paid by their controlling shareholders at the time of their
acquisition. TCO did not become aware of its involvement as a defendant in
this action until April 2002, and filed its answer on October 2, 2002. We do
not think this action will succeed, as we believe the restructuring was done in
compliance with Brazilian law, however, based on the opinion of legal counsel,
the chances of unfavorable outcomes are possible in this case. The extent of any potential liabilities in connection with this action
will be determined in a separate but related lawsuit known as the calculation
of the award, which will only take place if we are unsuccessful in its
defense. 46




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Litigation
Related to the Ownership of the Caller ID In July 2002, we, together with other Brazilian mobile telecommunications
operators, were summoned to defend in a legal action filed by Lune Projetos
Especiais Telecomunicação Comércio Ind. Ltda., or Lune, pursuant to which Lune
claims to be the owner of patents relating to Equipamento Controlador de
Chamadas Entrantes e do Terminal Telefônico, or Caller ID, and also that the
mobile telecommunications operators are using the patent without proper
authorization. Therefore, Lune demands that the operators cease to provide
Caller ID services and that it should be indemnified for the unauthorized use
of the Caller ID system, upon payment of fees received by the operators in
consideration for the use of the system by their customers. We are waiting for
all the defendants named in this action to be summoned so that the response
period can commence. Based on the opinion of our legal counsel, the chances of unfavorable
outcomes are possible in this case. However the indemnification allegedly due
by the mobile operators can not be reasonably estimated as of yet, due to the
fact that the cost of the caller ID service provided by the companies has never
before been calculated separately. Litigation
Related to the Validity of the Minutes in the Prepaid Plans Telegoiás, NBT and Teleron, together with other Brazilian mobile
telecommunications operators, are the defendants in class action suits brought
by the federal public prosecutors office and/or associations for consumers
protection, which challenged the imposition of a deadline for the use of
purchased prepaid minutes. The plaintiffs allege that any purchased prepaid
minutes should not have a time limitation for usage. These lawsuits are still in their initial stages, but our external counsel
and we believe that our criteria for imposing the deadline were in strict
compliance with Anatels rules. Litigation
Relating to Telebrás Loans Under the terms of the Breakup of Telebrás, the Telebrás loans were to
have been distributed through: (i) the assignment of the debt obligation to the
relevant subsidiary and (ii) the assignment of the credit to the relevant New
Holding Company as the new parent of the subsidiary who assumed the debt.
Although the obligation to pay the Telebrás loans was duly assigned to
Telebrasília and Telegoiás, the right to receive such payments was not assigned
to TCO but instead to Tele Centro Sul, one of the New Holding Companies
providing fixed-line services. In light of this departure from the agreed
procedures for assigning the Telebrás loans, payment of the Telebrás loans was
suspended immediately upon the change of control to the TCO. In addition, a
lawsuit was filed in June 1999 in Federal District Court against Tele Centro
Sul, Telebrás and KPMG, the auditors for the Breakup accounting procedures,
requesting liquidated damages and a court ruling recognizing the inappropriate
procedures and non-existence of the debt to Telebrás. Subsequently, KPMG was
dismissed from the lawsuit. In response to the lawsuit filed against it, Tele Centro Sul filed two
counter-lawsuits in October 1999 against Telebrasília and Telegoiás seeking
payment of the Telebrás loans in the amount of R$41.3 million from Telebrasília
and R$24.2 million from Telegoiás. The three lawsuits described above were consolidated in the same court,
given that they deal with the same issue relating to Telebrás loans. In August
2001, the court dismissed our claims against Tele Centro Sul, Telebrás and
KPMG, and partially ruled in favor of Tele Centro Sul and against Telebrasília
and Telegoiás. Tele Centro Sul and we have appealed in the Court of Appeals of the
Federal District (TJDFT). In the action of TCO against Tele Centro Sul, the appeal of TCO was
denied. In the two actions of Tele Centro Sul against Telebrasília and
Telegoiás, the appeals were granted. TCO has appealed in the Court of Special Appeals of the Superior Tribunal
de Justiça (STJ). A final decision unfavorable to TCO with respect to the
necessity of payment by Telebrasília and Telegoiás to Tele Centro Sul, and not
to TCO, is probable. The total amount recorded is R$94.9 million in 2003. On
the specific point regarding indexation of the debts according to exchange variation, a
decision unfavorable to TCO is only possible, since there is a good possibility
that exchange variation will be excluded as a criteria of indexation of the
outstanding balances. The difference in contingencies not recognized between
IGP-M + 6% and the U.S. dollar index is estimated at R$31.7 million on December
31, 2003. 47




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Tax-Related Litigation Related to the Application of the ICMS In June, 1998, the CONFAZ (Conselho Nacional de Política Fazendária)
agreed to apply the ICMS tax to certain service revenues, such as activation
fees, and to make the application to such activation fees retroactive for the
five years preceding June 30, 1998. We believe the extension of the ICMS tax to non-basic telecommunications
services such as cellular activation is unlawful because it would subject to
taxation certain services that are not telecommunications services and because
new taxes may not be applied retroactively. TCO and its Band A subsidiaries filed lawsuits and deposited with the
Court approximately R$ 1.6 million. Litigation Related to the Application of the COFINS and PIS On November 27, 1998, the method for calculating the PIS and COFINS social
contributions was modified by Law no. 9,718, which increased the COFINS
contribution rate from 2% to 3% and authorized the deduction of up to 1/3 of
the amount due as COFINS from the amount due as CSLL. Since our subsidiaries
had a negative tax calculation basis, they could not benefit from this
deduction. Also, Law no. 9,718 indirectly increased the amounts of COFINS and
PIS due by the subsidiaries by including financial revenues in their
calculation basis. Based on our external counsels advice, we believe that this increase is
unconstitutional because: (i) article 195 of the Brazilian constitution, which
was effective when Law no. 9,718 was enacted, provided that the PIS
contribution could only be levied on compensation of employees, revenues and
profits; (ii) in order to increase the COFINS and PIS contributions, it would
be necessary to enact a law called lei complementar,which requires a greater
quorum than the one required to approved a law called lei ordinária,such as
law nr. 9,718; and (iii) the law was made effective before the expiration of
the required 90-day waiting period. TCO has filed lawsuits seeking for injuction. In the meanwhile, it has
deposited with the Court the amounts involved. Based on the changes introduced by the laws nrs. 10.637/02 and 10.833/03,
TCO and its subsidiaries have been including, since December, 2002, financial
revenues in the calculation of the PIS and, since December, 2003, in the
COFINS. Other Litigation We are also party to certain legal proceedings arising in the normal
course of business. Our reserve amounts are sufficient to cover our estimated
losses due to adverse legal judgments. We believe that adverse judgments
arising from these other legal proceedings would not have a material adverse
effect on our business, financial condition or results of operations. Dividend Policy and Dividends We pay our shareholders both dividends and interest on shareholders
equity, which is a form of distribution that is tax-deductible in Brazil. The
following table summarizes our history of payments of dividends and interest on
shareholders equity for the years 2003, 2002 and 2001. The table sets forth
amounts in reaisper thousand common shares and preferred shares and amounts in
U.S. dollars per ADS translated into U.S. dollars at the prevailing selling
rate for Brazilian currency into U.S. dollars in the commercial rate exchange
market on each of the respective dates of such payments. 48




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Dividends plus interest on shareholders equity: Year ended December 31,2003
    
    2002
    
    2001(R$ per thousand)
    
    (U.S.$ per ADS)
    
    (R$ per thousand)
    
    (U.S.$ per ADS)
    
    (R$ per thousand)
    
    (U.S.$ per ADS)Common
    
    
    0.29592
    
    
    
    N/A
    
    
    
    0.212425
    
    
    
    N/A
    
    
    
    0.204234
    
    
    
    N/APreferred
    
    
    0.29592
    
    
    
    0.302608
    
    
    
    0.212425
    
    
    
    0.2199
    
    
    
    0.204234
    
    
    
    0.154778
 Each of our preferred shares is entitled to declared dividends, with
priority to receive a non-cumulative annual dividend, to the extent net profits
or reserves are available for distribution, equal to the higher of (i) 6% of
the amount obtained by dividing the amount of subscribed capital by the number
of our shares and (ii) 3% of the amount of shareholders equity on a per share
basis. To the extent there are additional distributable profits, we are also
required to distribute to all shareholders an amount equal to 25% of adjusted
net income, or the general dividend, determined in accordance with Brazilian
corporate law, including any realization of the unrealized net income reserve.
Each of our preferred shares is also entitled to receive declared profits on
par with common shares, after our common shares have been paid dividends equal
to the minimum priority distribution due to our preferred shares. The
preferred dividend has priority in the distribution of our net profits for the
preceding fiscal year after 5% of our net profits to a legal reserve, not to
exceed 20% of our paid-in capital or an amount. Any amounts distributed after the preferred dividend are allocated first
to dividend payments to holders of common shares in an amount equal to the
preferred dividend and then distributed equally among holders of preferred and
common shares. The Brazilian corporate law also provides for two additional discretionary
allocations of net profits that are subject to approval by the shareholders at
the annual shareholders meeting:  
    
    first, a percentage of net profits may be allocated to the
contingency reserve for anticipated losses that may be charged to it
in future years. Any amount so allocated in a prior year must be
either:  
    
    reversed in the fiscal year in which the loss was
anticipated if such loss does not in fact occur; or  
    
    written off in the event that the anticipated loss occurs;  
    
    second, if the amount of unrealized revenue exceeds the sum of:  
    
    the statutory reserve; and  
    
    retained earnings, such excess may be allocated to the
unrealized profit reserve at the direction of the board of
directors. Allocations may not hinder the payment of mandatory dividends. Unrealized
revenue reserve is defined under the Brazilian corporate law as the sum of:  
    
    the share of equity earnings of affiliated companies, which is not paid as cash dividends; and  
    
    profits as a result of income from operations after the end of the next succeeding fiscal year. The amounts available for distribution are determined on the basis of
financial statements prepared in accordance with the Brazilian Corporate Law
Method. Payment of Dividends We are required by Brazilian Corporate Law and by our by-laws to hold an
annual shareholders meeting by April 30 of each year, at which, among other
things, an annual dividend may be declared by a decision of our shareholders on
the recommendation of our board of directors. The payment of annual dividends
in any given year is based on the financial statements prepared for the
preceding fiscal year ending December 31. Under the Brazilian corporate law,
dividends are required to be paid within 60 days of the annual shareholders
meeting, or on the date determined at a shareholders meeting, but in any case
prior to the end of the fiscal year in which such dividend was declared. A shareholder has a three-year period from the dividend payment date
to claim dividends in respect of its shares, after which time unclaimed
dividends revert back to us. Because our shares are issued in book-entry form,
dividends will be credited to the depositary, which is responsible for the
delivery of the dividends to their respective holders. We are not required to
adjust the amount of paid-in capital for inflation. Annual dividends may be
paid to shareholders on a pro rata basis according to the date when the
subscription price is paid to us. 49




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Our preferred shares underlying the ADSs are held in Brazil by a Brazilian
custodian, Banco Itaú S.A., as the agent for the depositary, which is the
registered owner of our shares. Payments of cash dividends and distributions, if any, will be made in
reaisto the Custodian on behalf of The Bank of New York, as depositary, which
will then convert those proceeds into U.S. dollars and will cause such U.S.
dollars to be delivered to the depositary for distribution to holders of ADRs.
In the event that the Custodian is unable to immediately convert the reais
received as dividends into U.S. dollars, the amount of U.S. dollars payable to
holders of ADRs may be adversely affected by devaluations of the realthat
occur before such dividends are converted and remitted. Dividends in respect
of our preferred shares paid to resident and non-resident shareholders,
including holders of ADSs, are not currently subject to Brazilian withholding
tax. B. Significant Changes On May 14, 2004, the management of TCP and TCO announced a proposal for
corporate restructuring involving TCO and its subsidiaries Telegoiás Celular
S.A., Telems Celular S.A., Telemat Celular S.A., Teleacre Celular S.A. and
Teleron Celular S.A. The purposes of such restructuring are to provide for: (i)
an improvement in the cash flow of TCO and its subsidiaries, resulting from the
transfer of the tax benefit corresponding to R$511 million from TCP to TCO,
generated by the amortization of a goodwill at the amount of R$1,503 million,
originally paid upon the acquisition of TCO and its subsidiaries by TCP in 2003
and (ii) a simplification of the corporate structure of TCOs subsidiaries,
whose minority shareholders will receive shares issued by TCO of the same type
and class in substitution for the shares held by them respectively in TCO
subsidiaries. TCO  ́s subsidiaries will, therefore, become wholly-owned
subsidiaries of TCO, which will improve the capitalization conditions of TCO
and will benefit the minority shareholders of TCO subsidiaries. The intended restructuring shall be made in such a manner as to avoid any
and all negative impacts over the future profits of both TCO and its
subsidiaries, on account of the referred goodwill. The involved companies
expect that the restructuring will be completed by July, 2004. To the extent that tax benefits corresponding to the amortization of the
deferred assets transferred to the TCO subsidiaries are realized, the
respective especial premium reserves shall be capitalized, through the issuance
of shares to TCP. On May 31, 2004, the first step of the restructuring process took place,
concerning the merger of WXYZ0059 Holdings S.A., the holder of the investment
and goodwill of TCO, into TCO. On June 14, 2004, TCO released a relevant fact regarding the 2nd and 3rd
Stages of the corporate restructuring transaction, as following: (i) TCOs
partial spin-off, capital stock and share of the spinned-off company; and (ii)
Merger of TCO operators shares into TCO, whereby the TCO Operators shall
become wholly-owned subsidiaries of TCO. These steps shall be approved in
special meeting of shareholders in the involved companies for the conclusion of
the restructuring process. ITEM 9. THE OFFER AND LISTING A. Offer and Listing Details Brazilian private equity and debt are principally traded on BOVESPA, which
is the trading market for our common and preferred shares. Our preferred
shares began trading on the Brazilian stock exchanges on September 21, 1998.
The following table sets forth the reported high and low closing sale prices
for our preferred shares on BOVESPA, for the periods indicated. 50




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Reais per 1,000Preferred SharesLow
    
    High1999Annual
    
    
    1.08
    
    
    
    3.882000Annual
    
    
    3.02
    
    
    
    8.282001Annual
    
    
    3.08
    
    
    
    8.492002First Quarter
    
    
    4.01
    
    
    
    5.33Second Quarter
    
    
    3.38
    
    
    
    4.78Third Quarter
    
    
    2.29
    
    
    
    3.96Fourth Quarter
    
    
    2.76
    
    
    
    4.752003Annual
    
    
    3.90
    
    
    
    10.47First quarter
    
    
    3.90
    
    
    
    5.73Second quarter
    
    
    5.19
    
    
    
    5.90Third Quarter
    
    
    4.90
    
    
    
    7.67Fourth Quarter
    
    
    7.33
    
    
    
    10.47Last Six MonthsDecember 2003
    
    
    9.48
    
    
    
    10.47January 2004
    
    
    9.29
    
    
    
    11.77February 2004
    
    
    8.88
    
    
    
    10.49March 2004
    
    
    9.51
    
    
    
    11.24April 2004
    
    
    8.41
    
    
    
    11.65May 2004
    
    
    7.24
    
    
    
    8.99June 2004
(Until June 25, 2004)
    
    
    8.43
    
    
    
    9.65
 In the United States, the preferred shares trade in the form of ADSs each
representing 3,000 preferred shares, issued by The Bank of New York, as
Depositary pursuant to a Deposit Agreement among TCO, the Depositary and the
registered holders and beneficial owners from time to time of ADRs. The ADSs
commenced trading separately on the NYSE on November 16, 1998 under the symbol
TRO. At May 31, 2004, there were approximately 204 record holders of ADSs in
the United States. The ADSs represent approximately 40.48% of our preferred
shares. Brasilcel does not hold ADSs of TCO. The following table sets forth the
reported high and low closing sales prices for the ADSs on the NYSE for the
period indicated. U.S. dollars per ADSLow
    
    High1999Annual
    
    
    2.37
    
    
    
    7.062000Annual
    
    
    5.00
    
    
    
    15.872001Annual
    
    
    4.28
    
    
    
    13.622002First quarter
    
    
    5.40
    
    
    
    7.45Second quarter
    
    
    3.85
    
    
    
    6.50Third Quarter
    
    
    2.20
    
    
    
    4.46Fourth Quarter
    
    
    2.27
    
    
    
    4.242003Annual
    
    
    3.28
    
    
    
    10.55First quarter
    
    
    3.28
    
    
    
    5.01Second quarter
    
    
    4.90
    
    
    
    6.17Third Quarter
    
    
    4.74
    
    
    
    7.86Fourth Quarter
    
    
    7.55
    
    
    
    10.55Last Six MonthsDecember 2003
    
    
    9.79
    
    
    
    10.55January 2004
    
    
    9.82
    
    
    
    12.35February 2004
    
    
    9.03
    
    
    
    10.77March 2004
    
    
    9.80
    
    
    
    11.49April 2004
    
    
    8.56
    
    
    
    12.09May 2004
    
    
    7.10
    
    
    
    8.70June 2004
(Until June 25, 2004)
    
    
    8.06
    
    
    
    9.26
 51




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The common shares and preferred shares of Telebrasília traded on BOVESPA
from May 18, 1998 to July 30, 1999. On August 2, 1999, Telebrasília shares
began trading on the Sociedade Operadora do Mercado de Ativos, or SOMA, the
over-the-counter market. On June 7, 2002, Telebrasília shares were substituted
with shares of TCO due to the merger of Telebrasília into TCO. On May 18,
1998, Telegoiás shares began trading on SOMA. The other subsidiaries Telemat,
Telems, Teleron, Teleacre, NBT, and (as of December 10, 2001) Telegoiás are
closely held corporations, and their shares do not trade on any stock market. TCO held a general extraordinary shareholders meeting on April 26, 2002,
in which it approved the merger of Telebrasília into TCO and the consequent
transfer of the concession to explore cellular mobile services previously held
by Telebrasília. B. Plan of Distribution Not applicable. C. Markets Trading on the São Paulo Stock Exchange (BOVESPA) BOVESPA is a non-profit entity owned by its member brokerage firms.
Trading on this exchange is limited to member brokerage firms and a limited
number of authorized nonmembers. Since April 7, 2003, BOVESPA has open outcry trading sessions each day,
from 10:00 a.m. to 1:00 p.m. and from 2:00 p.m. to 4:45 p.m. Trading is also
conducted from 10:00 a.m. to 5:00 p.m. on an automated system on BOVESPA. On
September 20, 1999, BOVESPA launched the After-Market, with the objective of
expanding business opportunities and offering investors a more flexible trading
schedule. After-Market trading takes place from 5:45 p.m. to 7:00 p.m. All
stocks traded during the regular trading session of the day may be traded on
the After-Market. However, only cash market trading via BOVESPAs electronic
trading system is allowed. The maximum variation allowed for stock prices,
whether positive or negative, corresponds to 2% in relation to the closing
price at the regular trading session. In order to better control volatility, BOVESPA has adopted a circuit
breaker system pursuant to which trading sessions may be suspended for a
period of 30 minutes or one hour whenever its indices fall below the limits of
10%, in relation to the index registered in the previous trading session. There are no specialists or market makers for our shares on BOVESPA.
Trading in securities listed on the BOVESPA may be effected off the Exchange in
certain circumstances, although such trading is very limited. Settlement of transactions is effected three business days after the trade
date without adjustment of the purchase price for inflation. Payment for
shares is made through the facilities of a separate clearinghouse, which
maintains accounts for member brokerage firms. The seller is ordinarily
required to deliver the shares to the exchange on the second business day
following the trade date. The clearinghouse for BOVESPA is Companhia
Brasileira de Liquidação e Custódia S.A.  CBLC, which is wholly owned by that
Exchange. At December 31, 2003, the aggregate market capitalization of the 369
companies listed on BOVESPA was approximately U.S.$234.2 billion. Although all
the outstanding shares of an exchange-listed company may trade on BOVESPA, in
most cases the preferred shares or less than half of the listed common shares
are actually available for trading by the public, the remainder being held by
small groups of controlling persons that rarely trade their shares. For this
reason, data showing the total market capitalization of BOVESPA tends to
overstate the liquidity of the Brazilian equity securities market. The Brazilian equity market is relatively small and illiquid compared to
major world markets. In 2003, the combined dayly trading volumes on BOVESPA
averaged approximately U.S.$271.9 million. In 2003, the 10 most actively
traded shares represented approximately 53.5% of the total trading in the cash
market on BOVESPA. Trading on BOVESPA by nonresidents of Brazil is subject to
certain limitations under Brazilian foreign investment legislation. 52




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Regulation of Brazilian Securities Markets The Brazilian securities markets are regulated by the CVM, which has
authority over stock exchanges and the securities markets generally, by the
Conselho Monetário Nacional, or CMN, the National Monetary Council and by the
Central Bank, which has, among other powers, licensing authority over brokerage
firms and regulates foreign investment and foreign exchange transactions. The
Brazilian securities market is governed by Law No. 6,385, as amended, known as
the Brazilian securities law, and by Law No. 6,404, as amended, known as the
Brazilian corporate law. Law No. 10,303 of December 31, 2001 amended the Brazilian corporate law
and the Brazilian securities law. Consequently, some major modifications
resulted for the businesses of the publicly traded companies. Among the changes, Law No. 10,303, along with Executive Order No. 8 and
Decree No. 3.995, all dated October 31, 2001, provided that the CVM was to have
the scope of its authority altered and expanded. Additionally, CVMs
positioning in the regulatory hierarchy as well as its autonomy were modified. The modifications include changes in the proportions of common and
preferred shares, new rules for the issuance of debentures, other parameters
governing the exercise of the right of withdrawal, duties and powers of the
members of the Board of Auditors and the Board of Directors, and the ability of
publicly-traded companies to make publications available over the Internet.
Also provided is the pooling agreement, the so-called block voting by which the
shareholders agree during a prior meeting on the direction of the votes that
will be cast at the general meetings. The purpose of this type of vote is to
prevent any possible individual dissidents or interests from harming corporate
interests. The period established for companies to adapt their by-laws is one year
from the publication of the law on November 1, 2001. Our shareholders held a
general shareholders meeting on March 25, 2004, where they addressed these
modifications in our by-laws. The CVM, which is the agency in charge of regulating the market, now
handles some functions that were reserved to the Banco Central, for example,
the regulation and organization of the futures and commodities markets. Under the Brazilian corporate law, a company is either public, a companhia
aberta, such as our company, or private, a companhia fechada. All public
companies are registered with the CVM and are subject to reporting
requirements. A company registered with the CVM may have its securities traded
either on BOVESPA or on the Brazilian over-the-counter market. The shares of a
public company may also be traded privately, subject to certain limitations.
In order to be listed on the Brazilian stock exchanges, a company must apply
for registration with the CVM and the stock exchange. Once the stock exchange
lists a company and the CVM accepts its registration as a public company, its
securities may start to be traded. Trading in securities on BOVESPA may be suspended at the request of a
company in anticipation of a material announcement. Trading in the securities
of a particular company may also be suspended on the initiative of the BOVESPA
or the CVM, among other reasons, due to a belief that the company has provided
inadequate information regarding a material event or has provided inadequate
responses to inquiries by the CVM or BOVESPA. The Brazilian securities law, Brazilian corporate law and the regulations
issued by the CVM, the CMN and the Central Bank provide, among other things,
disclosure requirements and restrictions on insider trading, price manipulation
and protection of minority shareholders. However, the Brazilian securities
markets are not as highly regulated and supervised as the U.S. securities
markets or markets in some other jurisdictions. Principal Differences Between the Brazilian and the U.S. Corporate Governance
Practices The significant differences between our corporate governance practices and
the NYSE corporate governance standards are as follows: Independence of Directors and Independence Tests The Brazilian corporate law and our bylaws require that our directors be
elected by our shareholders at a general shareholders meeting. All our
directors are appointed by our controlling shareholders. Neither our board of directors nor our management test the independence of
the directors before such 53




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elections are made. However,
both the Brazilian corporate law and CVM establish rules in relation
to certain qualification requirements and restrictions, investiture,
compensation, duties and responsibilities of the companies
executives and directors. Although we believe these rules provide
adequate assurances that our directors are independent, we believe
such rules would permit us to have directors that would not otherwise
pass the independence tests established by the
NYSE. Executive Sessions According to the Brazilian corporate law, up to 1/3 of the members of the
board of directors can be elected into executive positions. The remaining
non-management directors are not expressly empowered to serve as a check on
management and there is no requirement that those directors meet regularly
without management. Notwithstanding, under our bylaws, the members of the
board of executive officers cannot be elected to the board of directors. Committees We are not required under applicable Brazilian corporate law to have, and
accordingly we do not have, a Nominating Committee, Corporate Governance
Committee and Compensation Committee. Pursuant to our bylaws our directors are
elected by our shareholders at a general shareholders meeting. Compensation
for our directors and executive officers is established by our shareholders. Audit Committee and Audit Committee Additional Requirements The Brazilian corporate law requires us to have a board of auditors
(Conselho Fiscal), which is composed of three to five members elected at the
general shareholders meeting. The board of auditors operates independently
from our management and from our external auditors. Its main function is to
examine the financial statements of each fiscal year and provide a formal
report to our shareholders. We have a board of auditors that consists of three
members and three alternates and which meets once a quarter. In April 2003,
the SEC has stated that the listing of securities of foreign private issuers
will be exempt from the audit committee requirements if the issuer meets
certain requirements. We also have an audit committee, whose members do not follow the
independence requirements of the Exchange Act Rule 10A-3(c)(3), as we are
still exempt from such requirements by July 31, 2005 according to the Exchange
Act Rule 10A-3(a)(5)(A). See Item 16D  Exemptions from the Listing Standards
for Audit Committees. Under the Brazilian corporate law, an audit committee member may
simultaneously serve on the audit committees of more than three public
companies. In addition, our company does not impose limitations in this regard
and our board is not required to affirmatively determine and disclose that the
director  ́s ability to effectively serve is not impaired. We are aware that the
members of our audit committee also serve on the audit committees of all of the
other companies that have been operating under the brand name Vivo: TCP, TLE,
TSE and Celular CRT Participações S.A. Shareholder Approval of Equity Compensation Plans Our shareholders do not have the opportunity to vote on all equity
compensation plans. However, any issuance of new shares that exceeds the
authorised capital is subject to shareholder confirmation. Corporate Governance Guidelines We have not adopted any corporate governance guidelines in addition to the
rules imposed upon us by applicable Brazilian law. We believe that the corporate governance guidelines
applicable to us under Brazilian law, such as those regarding insider trading,
public disclosure of material information, and rules on the negotiation of
equities by management and controlling shareholders, are consistent with some
of the guidelines established by the NYSE. 54




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Code of Business Conduct and Ethics Although the adoption of a code of ethics is not required by Brazilian
corporate law, we implemented in June, 2003 our Code of Ethics regulating the
conduct of our senior financial officers. See Item 16B  Code of Ethics. We
do not have a code of business conduct and ethics applicable to all our
Directors and employees. D. Selling Shareholders Not applicable. E. Dilution Not applicable. F. Expenses of the Issue Not applicable. 
 ITEM 10. ADDITIONAL INFORMATION A. Share Capital Not applicable. B. Memorandum and Articles of Association The following summarizes certain material provisions of our by-laws and
Brazilian law, the main bodies of regulation governing us. Copies of our
by-laws have been filed as exhibits to this annual report on Form 20-F. Register Our amended and restated by-laws were registered with the Public Registry
of Brazils Federal District, No. 20030226171 on May 23, 2003, under company
number (NIRE) 53.30000.580-0. Objects and Purposes We are a publicly traded company duly registered with the Brazilian
securities commission under No. 17612. Article 2 of our by-laws provides that
our corporate purpose is to:  
    
    exercise the control of operating SMP;
    
    promote, directly or through our subsidiaries or
controlled companies, the expansion and implementation of the
cellular services within our concessions;
    
    promote, carry out and direct the financing of
capital from internal and external sources to be used by us or
our controlled companies;
    
    promote and encourage study and research
activities aimed at the development of the telecommunications
sector;
    
    perform, directly or through our subsidiaries and
affiliated companies, technical and consulting services in the
areas of telecommunications, Internet, computers, finance and
investor relations; 55




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
    
    promote, encourage and coordinate, directly or
through our subsidiaries or affiliated companies, the
development and training of personnel necessary to perform
activities in the telecommunications sector;
    
    import and export goods and services for our
operations and the operations of our subsidiaries and
affiliated companies;
    
    participate in the equity capital of other companies;
    
    execute other activities connected or related to our object;
    
    perform telecommunication services and related activities;
    
    trade capacity of foreign satellites in Brazil
and exploit Brazilian satellite for transmission of
telecommunication signals;
    
    perform value added services; and
    
    provide telecommunication capacity, connections
and services to companies having authorization, permissions or
concessions to provide telecommunication services and to
companies which provide value added services. Directors Among other powers, the board of directors has the power to:  
    
    approve investments and acquisition of assets, assume
any obligation and execute contracts not included in the budget
for an amount exceeding R$300 million, the public issuance of
promissory notes, and the acquisition of our shares for
cancellation or deposit with a custodian; and
    
    apportion the global remuneration set forth by the
shareholders meeting between the directors and the executive
officers. Pursuant to Brazilian corporate law and our by-laws, each member of the
board of directors must have at least one share of our capital stock to be
elected as a Director. There are no provisions in our by-laws with respect to:  
    
    age limits for retirement of directors; and
    
    anti-takeover mechanisms or other procedures
designed to delay, defer or prevent changes in our control. Although there are no provisions in our by-laws with respect to the
following, they are regulated by Brazilian corporate law and CVM regulations:  
    
    a Directors power to vote on proposals in which
the Director is materially interested;
    
    a Directors power to vote compensation to him or
herself in the absence of an independent quorum;
    
    borrowing powers exercisable by the directors; and
    
    disclosure of share ownership. Rights Attaching to Shares Dividend Rights See Item 8. Financial InformationConsolidated Statements and Other
Financial InformationDividend Policy and Dividends, and Payment of
Dividends. 56




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Voting Rights Each common share entitles the holder to one vote at meetings of
shareholders. Our preferred shares do not entitle the holder to vote except as
discussed in our by-laws in Articles 10 and 12. Holders of our preferred
shares are each entitled to attend or to address meetings of shareholders and
to elect members of our board of directors according to Article 141, fourth
paragraph, II, and Article 141, fifth paragraph, of Law No. 6,404/76, as
amended by Article 8, fourth paragraph of Law No. 10,303/01. One of the members of our board of auditors and his or her alternate are
elected by the majority vote of the holders of our preferred shares present at
the annual meeting of shareholders at which the members of the board of
auditors are elected. Brazilian corporate law provides that certain non-voting shares, such as
our preferred shares, acquire voting rights in the event we fail for three
consecutive fiscal years to pay the mandatory minimum dividend to which such
shares are entitled, until such payment is made. Our preferred shares are entitled to full voting rights in the event that
we fail to pay the mandatory minimum dividends to which they are entitled for
three consecutive years, and with respect to:  
    
    the approval of any long-term contract between us
and our controlled subsidiaries, on the one hand, and any
controlling shareholder or that shareholders affiliates and
related parties, on the other hand; and
    
    changes/eliminations of certain rights and
obligations as provided for in our by-laws. Any change in the preference, benefits, conditions of redemption and
amortization of our preferred shares, or the creation of a class of shares
having priority or preference over our preferred shares, would require the
approval of holders of a majority of our outstanding preferred shares at a
special meeting of holders of our preferred shares. Such a meeting would be
called by publication of a notice in the state official gazette and two other
Brazilian gazettes, as determined by the shareholders, at least thirty days
prior to the meeting, but would not generally require any other form of notice. In any circumstances in which holders of our preferred shares are entitled
to vote, each preferred share will entitle the holder to one vote. Meeting of Shareholders According to Brazilian law, shareholders must be previously convoked in
order for a general or extraordinary shareholders meeting to be installed.
The convocation must be published in the state official gazette and two other
gazettes, as determined by the shareholders, at least 15 days prior to the
meetings scheduled date. If the first meeting is not installed for some
reason, the second convocation must be published at least eight days before the
second meeting date. On the first call, meetings may only be installed with a minimum quorum of
one-fourth of the holders of voting shares. Extraordinary meetings whose
object is the amendment of the by-laws may only be installed on the first call
with a minimum of two-thirds of the voting capital present. In addition, some
decisions require the approval of at least one-half of the holders of voting
shares (qualified quorum). On a second call, the meetings are installed
regardless of quorum. Preemptive Rights Each of our shareholders has a general preemptive right to subscribe for
shares in any capital increase in proportion to its shareholding. A minimum
period of 30 days following the publication of notice of the capital increase
is allowed for the exercise of the right. 57




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In the event of a capital increase, which would maintain or increase the
proportion of capital represented by our preferred shares, holders of ADSs, or
of our preferred shares, would have preemptive rights to subscribe only to our
newly issued preferred shares. In the event of a capital increase, which would
reduce the proportion of capital represented by our preferred shares, holders
of ADSs, or of our preferred shares, would have preemptive rights to subscribe
to our preferred shares in proportion to their shareholdings, and to our common
shares only to the extent necessary to prevent dilution of their interest. Preemptive rights to purchase shares may not be offered to U.S. holders of
our ADSs unless a registration statement under the Securities Act is effective
with respect to the shares underlying those rights, or an exemption from the
registration requirements of the Securities Act is available. Consequently, if
you are a holder of our ADSs who is a U.S. person or is located in the United
States, you may be restricted in your ability to participate in the exercise of
preemptive rights. Right of Redemption Brazilian corporate law provides for the right of redemption to minority
shareholders under certain circumstances. The right of a dissenting shareholder to seek redemption arises in case
our shareholders representing more than 50% of the voting shares, common shares
or preferred shares, as applicable, decide to:  
    
    change the preference of our preferred shares or
to create a class of shares having priority or preference over
our preferred shares, except if such actions are expressly
permitted in the by-laws at the time of their adoption by our
shareholders;
    
    change the preference of our preferred shares,
any right they carry, their amortization or redemption rights,
or to create a class of shares having priority or preference
over our preferred shares;
    
    reduce the mandatory distribution of dividends;
    
    change our corporate purposes;
    
    transfer all of our shares to another company in
order to make us a wholly-owned subsidiary of that company;
    
    approve the acquisition of another company, the
price of which exceeds certain limits set forth in Brazilian
corporate law;
    
    participate in a group of companies, if certain
liquidity standards are not met according to the Brazilian
corporate law as amended by Law No. 10,303/01; and
    
    merge or consolidate us with another company, if
certain liquidity standards are not met according to the
Brazilian corporate law as amended by Law No. 10,303/01. The right to redemption lapses 30 days after publication of the minutes of
the relevant shareholders meeting or, whenever the resolution requires the
approval of the holders of our preferred shares by vote taken in a special
meeting of a majority of the holders of our preferred shares affected by the
resolution, within 30 days from the publication of the minutes of that special
meeting. We would be entitled to reconsider any action giving rise to
redemption rights within 10 days following the expiration of those rights if
the redemption of shares of dissenting shareholders would jeopardize our
financial stability. Unless otherwise provided in our by-laws, which is not the case, shares
are redeemable at their book value, determined on the basis of the last annual
balance sheet approved by the shareholders. If the shareholders meeting
giving rise to redemption rights occurs more than 60 days after the date of the
last annual balance sheet, a shareholder may demand that its shares be valued
on the basis of a new balance sheet that is as of a date within 60 days of such
shareholders meeting. 58




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Form and Transfer Our shares are maintained in book-entry form with a transfer agent, Banco
ABN-AMRO Real S.A., and the transfer of our shares is made in accordance with
the applicable provision of Brazilian corporate law, which provides that a
transfer of shares is effected by an entry made by the transfer agent on its
books, debiting the share account of the seller and crediting the share account
of the purchaser against presentation of a written order of the seller or
judicial authorization or order in an appropriate document which remains in the
possession of the transfer agent. Our preferred shares underlying our ADSs are
registered on the transfer agents records in the name of the Brazilian
depositary. Transfers of shares by a foreign investor are made in the same way and
executed by such investors local agent on the investors behalf except that,
if the original investment was registered with the Central Bank of Brazil under
the Brazilian foreign investment in capital markets regulations, the foreign
investor should also seek amendment, if necessary, through its local agent, of
the certificate of registration to reflect the new ownership. BOVESPA operates a central clearing system. A holder of our shares may
choose, at its discretion, to participate in this system. All shares elected
to be put into the system will be deposited in custody with the relevant stock
exchange through a Brazilian institution duly authorized to operate by the
Central Bank of Brazil and having a clearing account with the relevant stock
exchange. The fact that such shares are subject to custody with the relevant
stock exchange will be reflected in our register of shareholders. C. Material Contracts On February 3, 2003, TCO entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables
it to provide personal cellular services (SMP) in the area corresponding to the
Brazils Federal District. The authorization replaces the concession agreement
entered into with Anatel on November 4, 1997, and authorizes TCO to provide SMP
services until July 24, 2006. It may be renewed for an additional term of
fifteen years upon payment of 2% of TCOs net revenues from usage charges in
the region described above in the year prior to the year when payment is due,
and every two years during the extension period. In consideration for the
authorization, TCO was required to pay R$9.0 thousand. The authorization is a
legal requirement for providing telecommunication services in the region
covered thereby. On February 3, 2003, Telegoiás entered into an authorization agreement
with Anatel, acting as a representative of the Brazilian government, which
enables it to provide personal cellular services (SMP) in the area
corresponding to the states of Goiás and Tocantins, with the exception of the
following municipalities: Buriti Alegre, Cachoeira Dourada, Inaciolândia,
Itumbiara, Paranaiguara and São Simão. The authorization replaces the
concession agreement entered into with Anatel on November 4, 1997, and
authorizes Telegoiás to provide SMP services until October 29, 2008. It may be
renewed for an additional term of fifteen years upon payment of 2% of
Telegoiás net revenues from usage charges in the region described above in the
year prior to the year when payment is due, and every two years during the
extension period. In consideration for the authorization, Telegoiás was
required to pay R$9.0 thousand. The authorization is a legal requirement for
providing telecommunication services in the region covered thereby. On February 3, 2003, Telems entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables
it to provide personal cellular services (SMP) in the area corresponding to the
state of Mato Grosso do Sul, with the exception of the municipality of
Paranaíba. The authorization replaces the concession agreement entered into
with Anatel on November 4, 1997, and authorizes Telems to provide SMP services
until September 28, 2009. It may be renewed for an additional term of fifteen
years upon payment of 2% of Telems net revenues from usage charges in the
region described above in the year prior to the year when payment is due, and
every two years during the extension period. In consideration for the
authorization, Telems was required to pay R$9.0 thousand. The authorization is
a legal requirement for providing telecommunication services in the region
covered thereby. 59




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On February 3, 2003, Telemat entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables
it to provide personal cellular services (SMP) in the area corresponding to the
state of Mato Grosso. The authorization replaces the concession agreement
entered into with Anatel on November 4, 1997, and authorizes Telemat to provide
SMP services until March 30, 2009. It may be renewed for an additional term of
fifteen years upon payment of 2% of Telemats net revenues from usage charges
in the region described above in the year prior to the year when payment is
due, and every two years during the extension period. In consideration for the
authorization, Telemat was required to pay R$9.0 thousand. The authorization
is a legal requirement for providing telecommunication services in the region
covered thereby. On February 3, 2003, Teleron entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables
it to provide personal cellular services (SMP) in the area corresponding to the
state of Rondônia. The authorization replaces the concession agreement entered
into with Anatel on November 4, 1997, and authorizes Teleron to provide SMP
services until July 21, 2009. It may be renewed for an additional term of
fifteen years upon payment of 2% of Telerons net revenues from usage charges
in the region described above in the year prior to the year when payment is
due, and every two years during the extension period. In consideration for the
authorization, Teleron was required to pay R$9.0 thousand. The authorization
is a legal requirement for providing telecommunication services in the region
covered thereby. On February 3, 2003, Teleacre entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables
it to provide personal cellular services (SMP) in the area corresponding to the
state of Acre. The authorization replaces the concession agreement entered
into with Anatel on November 4, 1997, and authorizes Teleacre to provide SMP
services until July 15, 2009. It may be renewed for an additional term of
fifteen years upon payment of 2% of Teleacres net revenues from usage charges
in the region described above in the year prior to the year when payment is
due, and every two years during the extension period. In consideration for the
authorization, Teleacre was required to pay R$9.0 thousand. The authorization
is a legal requirement for providing telecommunication services in the region
covered thereby. On February 3, 2003, NBT entered into an authorization agreement with
Anatel, acting as a representative of the Brazilian government, which enables
it to provide personal cellular services (SMP) in the area corresponding to the
states of Amazonas, Roraima, Amapá, Pará e Maranhão. The authorization
replaces the concession agreement entered into with Anatel on November 27,
1998, and authorizes NBT to provide SMP services until November 29, 2013. It
may be renewed for an additional term of fifteen years upon payment of 2% of
NBTs net revenues from usage charges in the region described above in the year
prior to the year when payment is due, and every two years during the extension
period. In consideration for the authorization, NBT was required to pay R$9.0
thousand. The authorization is a legal requirement for providing
telecommunication services in the region covered thereby. D. Exchange Controls There are no restrictions on ownership of preferred shares or common
shares by individuals or legal entities domiciled outside of Brazil. The right to convert dividend or interest payments and proceeds from the
sale of shares into foreign currency and to remit such amounts outside Brazil
is subject to restrictions under foreign investment legislation which generally
requires, among other things, that the relevant investments have been
registered with the Central Bank and the CVM. Such restrictions on the
remittance of foreign capital abroad may hinder or prevent the custodian for
our preferred shares represented by our ADSs or the holders of our preferred
shares from converting dividends, distributions or the proceeds from any sale
of these preferred shares into U.S. dollars and remitting the U.S. dollars
abroad. Holders of our ADSs could be adversely affected by delays in, or
refusal to grant any, required government approval to convert Brazilian
currency payments on the preferred shares underlying our ADS and to remit the
proceeds abroad. Resolution No. 1,927 of the National Monetary Council provides for the
issuance of depositary receipts in foreign markets in respect of shares of
Brazilian issuers. It restates and amends Annex V to Resolution No. 1,289 of
the National Monetary Council, known as the Annex V Regulations. The ADS
program was approved under the Annex V Regulations by the Central Bank and the
CVM prior to the issuance of the ADSs. Accordingly, the proceeds from the sale
of ADSs by ADR holders outside Brazil are free of Brazilian foreign investment
controls, and holders of the ADSs are entitled to favorable tax treatment. See
Item 10TaxationBrazilian Tax Considerations. 60




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Under Resolution 2,689 of the CMN, foreign investors registered with the
CVM may buy and sell Brazilian securities, including our preferred shares, on
Brazilian stock exchanges without obtaining separate certificates of
registration for each transaction. Registration is available to qualified
foreign investors, which principally include foreign financial institutions,
insurance companies, pension and investment funds, charitable foreign
institutions and other institutions that meet certain minimum capital and other
requirements. Resolution 2,689 also extends favorable tax treatment to
registered investors. See Item 10TaxationBrazilian Tax Considerations. Pursuant to the Resolution 2,689 foreign investors must: (i) appoint at
least one representative in Brazil with the ability to perform actions
regarding the foreign investment; (ii) complete the appropriate foreign
investor registration form; (iii) obtain registration as a foreign investor
with CVM; and (iv) register the foreign investment with the Central Bank. The securities and other financial assets held by a foreign investor
pursuant to Resolution 2,689 must be registered or maintained in deposit
accounts or under the custody of an entity duly licensed by the Central Bank or
by the CVM or be registered in register, clearing and custody systems
authorized by the Central Bank or by the CVM. In addition, the trading of
securities is restricted to transactions carried out on the stock exchanges or
over-the-counter markets licensed by the CVM. Registered Capital Amounts invested in our preferred shares by a non-Brazilian holder who
qualifies under Resolution 2,689 and obtains registration with the CVM, or by
the depositary representing an ADS holder, are eligible for registration with
the Central Bank. This registration (the amount so registered is referred to
as registered capital) allows the remittance outside Brazil of foreign
currency, converted at the commercial market rate, acquired with the proceeds
of distributions on, and amounts realized through, dispositions of our
preferred shares. The registered capital per preferred share purchased in the
form of an ADS, or purchased in Brazil and deposited with the depositary in
exchange for an ADS, will be equal to its purchase price (stated in U.S.
dollars). The registered capital per preferred share withdrawn upon
cancellation of an ADS will be the U.S. dollar equivalent of (i) the average
price of a preferred share on the Brazilian stock exchange on which the most
preferred shares were traded on the day of withdrawal or, (ii) if no preferred
shares were traded on that day, the average price on the Brazilian stock
exchange on which the most preferred shares were traded in the fifteen trading
sessions immediately preceding such withdrawal. The U.S. dollar equivalent
will be determined on the basis of the average commercial market rates quoted
by the Central Bank on these dates. A non-Brazilian holder of preferred shares may experience delays in
effecting Central Bank registration, which may delay remittances abroad. This
delay may adversely affect the amount in U.S. dollars, received by the
non-Brazilian holder. A certificate of registration has been issued in the name of the
depositary with respect to the ADSs and is maintained by the custodian on
behalf of the depositary. Pursuant to the certificate of registration, the
custodian and the depositary are able to convert dividends and other
distributions with respect to the preferred shares represented by our ADSs into
foreign currency and remit the proceeds outside Brazil. In the event that a
holder of ADSs exchanges such ADSs for preferred shares, such holder will be
entitled to continue to rely on the depositarys certificate of registration
for five business days after such exchange, following which such holder must
seek to obtain its own certificate of registration with the Central Bank.
Thereafter, any holder of preferred shares may not be able to convert into
foreign currency and remit outside Brazil the proceeds from the disposition of,
or distributions with respect to, such preferred shares, unless the holder is a
duly qualified investor under Resolution 2,689 or obtains its own certificate
of registration. A holder that obtains a certificate of registration will be
subject to less favorable Brazilian tax treatment than a holder of ADSs. See
Item 10TaxationBrazilian Tax Considerations. If the holder does not qualify under Resolution 2,689 by registering with
the CVM and the Central Bank and appointing a representative in Brazil, the
holder will be subject to less favorable Brazilian tax treatment than a holder
of ADSs. Regardless of qualification under Resolution 2,689, residents in tax
havens are subject to less favorable tax treatment than other foreign
investors. See Item 10TaxationBrazilian Tax Considerations. Under current Brazilian legislation, the federal government may impose
temporary restrictions on 61




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remittances of foreign capital abroad in the event of a serious imbalance
or an anticipated serious imbalance of Brazils balance of payments. For
approximately six months in 1989 and early 1990, the Brazilian government froze
all dividend and capital repatriations held by the Central Bank that were owed
to foreign equity investors, in order to conserve Brazils foreign currency
reserves. These amounts were subsequently released in accordance with federal
government directives. There can be no assurance that the Brazilian government
will not impose similar restrictions on foreign repatriations in the future.
See Item 3Risk FactorsRisks Relating to Brazil. E. Taxation The following discussion contains a description of the material Brazilian
and U.S. federal income tax consequences of the ownership and disposition of
preferred shares or ADSs by certain holders. This summary is based upon the
tax laws of Brazil and the United States as in effect on the date of this
annual report, which are subject to change, possibly with retroactive effect,
and to differing interpretations. You should consult your own tax advisors as
to the Brazilian, U.S. federal or other tax consequences of the purchase,
ownership and disposition of preferred shares or ADSs, including, in
particular, the effect of any state, local or non-U.S., non-Brazilian tax laws.
Although there is presently no income tax treaty between Brazil and the United
States, the tax authorities of the two countries have had discussions that may
culminate in such a treaty. No assurance can be given, however, as to whether
or when a treaty will enter into force or how it will affect the U.S. holders
of preferred shares or ADSs. Brazilian Tax Considerations The following discussion mainly summarizes the principal Brazilian tax
consequences of the acquisition, ownership and disposition of preferred shares
or ADSs by a U.S. holder not deemed to be domiciled in Brazil for Brazilian tax
purposes (a U.S. holder). This discussion does not address all the Brazilian
tax considerations that may be applicable to any particular non-Brazilian
holder, and each non-Brazilian holder should consult its own tax advisor about
the Brazilian tax consequences of investing in preferred shares or ADSs. Taxation of Dividends Dividends paid by us in cash or in kind from profits generated on or after
January 1, 1996 (i) to the depositary in respect of preferred shares underlying
ADSs or (ii) to a U.S. holder or non-Brazilian holder in respect of preferred
shares will generally not be subject to Brazilian withholding tax. We do not
have any undistributed profits generated before January 1, 1996. Distributions of Interest on Capital Brazilian corporations may make payments to shareholders characterized as
interest on capital as an alternative form of making dividend distributions.
The rate of interest may not be higher than the federal governments long-term
interest rate, or the TJLP, as determined by the Central Bank from time to time
(11% per annum for the three-month period beginning January 2003). The total
amount distributed as interest on capital may not exceed the greater of (i) 50%
of net income (before taking the distribution and any deductions for income
taxes into account) for the year in respect of which the payment is made or
(ii) 50% of retained earnings for the year prior to the year in respect of
which the payment is made. Payments of interest on capital are decided by the
shareholders on the basis of recommendations of the companys board of
directors. Distributions of interest on capital paid to Brazilian and non-Brazilian
holders of preferred shares, including payments to the depositary in respect of
preferred shares underlying ADSs, are deductible by us for Brazilian corporate
income tax purposes. These payments to U.S. holders or non-Brazilian holders
are subject to Brazilian withholding tax at the rate of 15%. If the recipient
of the payment is domiciled in a tax haven jurisdiction (i.e, a country that
does not impose any income tax or that imposes tax at a rate of less than 20%),
the rate will be 25%. No assurance can be given that our board of directors will not recommend
that future distributions of profits will be made by means of interest on
capital instead of by means of dividends. 62




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Amounts paid as interest on capital (net of applicable withholding tax)
may be treated as payments in respect of the dividends we are obligated to
distribute to our shareholders in accordance with our by-laws (estatutos) and
the Brazilian corporate law. Distributions of interest on capital in respect
of the preferred shares, including distributions to the depositary in respect
of preferred shares underlying ADSs, may be converted into U.S. dollars and
remitted outside of Brazil, subject to applicable exchange controls. Taxation of Gains Gains realized outside Brazil by a U.S. holder or a non-Brazilian holder
on the disposition of ADSs or preferred shares to another U.S. holder or
non-Brazilian holder are not subject to Brazilian tax. Gains realized by a U.S. holder or a non-Brazilian holder on dispositions
of preferred shares in Brazil or in transactions with Brazilian residents may
be free of Brazilian tax, taxed at a rate of 20% or taxed at a rate of 15%,
depending on the circumstances. Gains on the disposition of preferred shares obtained upon cancellation of
ADSs are not taxed in Brazil if the disposition is made and the proceeds are
remitted abroad within five business days after cancellation, unless the
investor is a resident of a jurisdiction that, under Brazilian law, is deemed
to be a tax haven. Gains realized through transactions with Brazilian residents or through
transactions in Brazil off of the Brazilian stock exchanges are generally
subject to tax at a rate of 15%. Gains realized through transactions on Brazilian stock exchanges are
generally subject to tax at a rate of 20%, unless the investor is entitled to
tax-free treatment for the transaction under Resolution 2,689 of the National
Monetary Council Regulations, described immediately below. Resolution 2,689, which as of March 31, 2000 superseded the Annex IV
Regulations that previously provided tax benefits to foreign investors, extends
favorable tax treatment to a U.S. holder or non-Brazilian holder of preferred
shares who has (i) appointed a representative in Brazil with power to take
action relating to the investment in preferred shares, (ii) registered as a
foreign investor with the CVM and (iii) registered its investment in preferred
shares with the Central Bank. Under Resolution 2,689 securities held by
foreign investors must be maintained under the custody of, or in deposit
accounts with, financial institutions duly authorized by the Central Bank and
the CVM. In addition, the trading of securities is restricted under Resolution
2,689 to transactions on Brazilian stock exchanges or qualified
over-the-counter markets. Investors previously holding preferred shares under
the Annex IV Regulations were required to bring their investments into
conformity with Resolution 2,689 by June 30, 2000. The preferential treatment
generally afforded under Resolution 2,689 and afforded to investors in ADSs is
not available to residents of tax havens. There can be no assurance that the current preferential treatment for U.S.
holders and non-Brazilian holders of ADSs and U.S. holders and non-Brazilian
holders of preferred shares under Resolution 2,689 will be maintained. Gain on the disposition of preferred shares is measured by the difference
between the amount in Brazilian currency realized on the sale or exchange and
the acquisition cost of the shares sold, measured in Brazilian currency,
without any correction for inflation. The acquisition cost of shares
registered as an investment with the Central Bank is calculated on the basis of
the foreign currency amount registered with the Central Bank. See Registered
Capital. Under current law, the tax rate for transactions on a Brazilian stock
exchange is 20% for transactions occurring on or after January 1, 2002.
Brazils tax treaties do not grant relief from taxes on gains realized on sales
or exchanges of preferred shares. Gains realized by a U.S. holder and non-Brazilian holder upon the
redemption of preferred shares will be treated as gains from the disposition of
such preferred shares to a Brazilian resident occurring off of a stock exchange
and will accordingly be subject to tax at a rate of 15%. Any exercise of preemptive rights relating to the preferred shares or ADSs
will not be subject to Brazilian taxation. Gains on the sale or assignment of
preemptive rights relating to the preferred shares will be treated differently
for Brazilian tax purposes depending on (i) whether the sale or assignment is
made by the depositary or 63




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the investor and (ii) whether the transaction takes place on a Brazilian
stock exchange. Gains on sales or assignments made by the depositary on a
Brazilian stock exchange are not taxed in Brazil, but gains on other sales or
assignments may be subject to tax at rates up to 15%. The deposit of preferred shares in exchange for the ADSs is not subject to
Brazilian income tax if the preferred shares we registered under Resolution
2,689 and the respective holder is not in a tax haven jurisdiction. If the
preferred shares are not so registered or the holder is in a tax haven
jurisdiction, the deposit of preferred shares in exchange for ADSs may be
subject to Brazilian capital gains tax at a rate of 15%. The withdrawal of preferred shares in exchange for ADSs is not subject to
Brazilian tax. On receipt of the underlying preferred shares, a U.S. holder or
non-Brazilian holder entitled to benefits under Resolution 2,689 will be
entitled to register the U.S. dollar value of such shares with the Central Bank
as described above, under "Registered Capital. If a U.S. holder or non-Brazilian holder does not
qualify under Resolution 2,689, he will be subject to the less favorable tax
treatment described above in respect of exchanges of preferred shares. Other Brazilian Taxes There are no Brazilian inheritance, gift or succession taxes applicable to
the ownership, transfer or disposition of preferred shares or ADSs by a
non-Brazilian holder except for gift and inheritance taxes levied by some
states in Brazil on gifts made or inheritances bestowed by individuals or
entities not resident or domiciled in Brazil or in the relevant state to
individuals or entities that are resident or domiciled within this state in
Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or
duties payable by holders of preferred shares or ADSs. A financial transaction tax, or the IOF tax, may be imposed on a variety
of transactions, including the conversion of Brazilian currency into foreign
currency (e.g., for purposes of paying dividends and interest). The IOF tax
rate on such conversions is currently 0%, but the minister of finance has the
legal power to increase the rate to a maximum of 25%.Any increase will be
applicable only prospectively. The IOF may also be levied on transactions involving bonds or securities,
or IOF/Títulos, even if the transactions are effected on Brazilian stock,
futures or commodities exchanges. The rate of the IOF/Títulos with respect to
preferred shares and ADSs is currently 0%. The minister of finance, however,
has the legal power to increase the rate to a maximum of 1.5% of the amount of
the taxed transaction per each day of the investors holding period, but only
to the extent of gain realized on the transaction and only on a prospective
basis. In addition to the IOF tax, a second, temporary tax that applies to the
removal of funds from accounts at banks and other financial institutions, or
the CPMF tax, will be imposed on distributions in respect of ADSs at the time
these distributions are converted into U.S. dollars and remitted abroad by the
Custodian. The CPMF tax was to expire in June 2002, but was extended until
December 31, 2004. It is currently imposed at a rate of 0.38%. This rate will
continue until December 31, 2003. After that date, the rate will be decreased
to 0.08% beginning on January 1, 2004. From July 13, 2002, transactions
conducted through the Brazilian stock exchanges in current accounts specified
for stock exchange transactions are exempt from the CPMF tax. U.S. Federal Income Tax Considerations The following discussion is a summary of the material U.S. federal income
tax consequences of the ownership and disposition of our preferred shares or
our ADSs by U.S. Holders, as defined below. This summary is based on the
Internal Revenue Code of 1986, as amended (referred to herein as the Code),
final, temporary and proposed Treasury regulations, administrative
pronouncements of the U.S. Internal Revenue Service (the IRS) and judicial
decisions, all as currently in effect and all of which are subject to change
(possibly with retroactive effect), and to different interpretations. It is
also based in part on representations by the depositary and assumes that each
obligation under the Deposit Agreement and any related agreement will be
performed in accordance with its terms. This discussion deals only with
preferred shares and ADSs held as capital assets (generally, for investment
purposes). It does not discuss all of the tax consequences that may be
relevant to a U.S. Holder in light of the U.S. Holders particular
circumstances or to U.S. Holders subject to special rules, such as financial
institutions, insurance companies, tax-exempt entities, dealers in securities
or foreign currencies, partnerships and other pass-through entities, investors
liable for the alternative minimum tax, persons who hold preferred shares or
ADSs as part of an 64




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integrated investment (including a straddle) comprised of a preferred share or
ADS and one or more other positions for tax purposes, persons whose functional
currency is not the U.S. dollar or persons who actually or constructively own
(directly or indirectly) 10% or more of our voting stock. Holders of preferred
shares or ADSs should consult their own tax advisors with regard to the
application of the U.S. federal income tax laws to their particular situations
as well as any tax consequences arising under the laws of any state, local or
non-U.S. taxing jurisdiction. As used herein, the term U.S. Holder means a beneficial owner of
preferred shares or ADSs that is, for U.S. federal income tax purposes, (1) a
citizen or individual resident of the United States, (2) a corporation (or
other entity treated as a corporation for U.S. federal income tax purposes)
organized under the laws of the United States or of any political subdivision
thereof, (3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source, or (4) a trust (i) if a U.S. court can
exercise primary supervision over the trusts administration and one or more
U.S. persons are authorized to control all substantial decisions of the trust
or (ii) if the trust has a valid election in effect under applicable Treasury
regulations to be treated as a U.S. person. The U.S. federal income tax
treatment of a partner in a partnership that holds our preferred shares or ADSs
will depend on the status of the partner and the activities of the partnership.
Partners in such partnerships should consult their own tax advisors. THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET OUT BELOW IS
INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. PROSPECTIVE PURCHASERS OF
PREFERRED SHARES OR ADSs ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING OR DISPOSING OF
PREFERRED SHARES OR ADSs, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL, NON-U.S. AND OTHER TAX LAWS AND POSSIBLE CHANGES IN TAX LAWS. General In general, for U.S. federal income tax purposes, holders of American
depositary receipts evidencing ADSs will be treated as the beneficial owners of
the preferred shares represented by those ADSs. Taxation of Dividends Distributions made by us of cash or property generally will constitute a
taxable dividend to the extent paid out of our current or accumulated earnings
and profits, as determined under U.S. federal income tax principles. The full
amount of any dividend paid in respect of our preferred shares or ADSs
(including the amount of Brazilian withholding taxes imposed on such dividend)
will be included in the gross income of a U.S. Holder, as ordinary income from
sources outside the United States, at the time that the dividend is received by
the U.S. Holder, in the case of our preferred shares, or by the depositary, in
the case of ADSs. If a distribution made by us exceeds our current and
accumulated earnings and profits, as determined under U.S. federal income tax
principles, such excess will be treated first as a nontaxable return of capital
to the extent of the U.S. Holders adjusted tax basis in our preferred shares
or ADSs, and thereafter as capital gain. The amount of any dividend paid in reaisgenerally will be measured by
reference to the spot rate for converting reaisinto U.S. dollars in effect on
the date that the dividend is received by the U.S. Holder, in the case of our
preferred shares, or by the depositary, in the case of ADSs. A U.S. Holder may
recognize foreign currency gain or loss, which would be treated as ordinary
gain or loss, upon a subsequent conversion of reaisinto U.S. dollars. U.S.
Holders should consult their own tax advisors regarding the calculation and
U.S. federal income tax treatment of foreign currency gain or loss. The amount
of any distribution of property other than cash will be the fair market value
of such property on the date of distribution. Subject to certain exceptions for short-term and hedged positions, the
U.S. dollar amount of dividends received by an individual prior to January 1,
2009 with respect to the ADSs will be subject to taxation at a maximum rate of
15% if the dividends represent qualified dividend income. Dividends paid on
the ADSs will be treated as qualified dividend income if (i) the ADSs are
readily tradable on an established securities market in the United States and
(ii) we were not in the year prior to the year in which the dividend was paid,
and are not in the year in which the dividend is paid, a passive foreign
investment company (PFIC), foreign personal holding company (FPHC) or
foreign investment company (FIC). The ADSs are listed on the New York Stock
Exchange, and may 65




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qualify as readily tradable on an established securities market in the United
States so long as they are so listed. However, no assurances can be given that
the ADSs will be or remain readily tradable. Based on our audited financial
statements as well as relevant market and shareholder data, we believe that we
were not treated as a PFIC, FPHC or FIC for United States federal income tax
purposes with respect to our 2003 taxable year. In addition, based on the our
audited financial statements and current expectations regarding the value and
nature of its assets, the sources and nature of its income, and relevant market
and shareholder data, we do not anticipate becoming a PFIC, FPHC or FIC for its
2004 taxable year. Because these determinations are based on the nature of our
income and assets from time to time, and involve the application of complex tax
rules, no assurances can be provided that we will not be considered a PFIC,
FPHC, or FIC for the current, or any past or future tax year. Based on existing guidance, it is not entirely clear whether dividends
received with respect to the preferred shares will be treated as qualified
dividends, because the preferred shares are not themselves listed on a United
States exchange. In addition, the United States Treasury Department has
announced its intention to promulgate rules pursuant to which holders of ADSs
or preferred stock and intermediaries though whom such securities are held will
be permitted to rely on certifications from issuers to establish that dividends
are treated as qualified dividends. Because such procedures have not yet been
issued, we are not certain that we will be able to comply with them. U.S.
Holders of ADSs and preferred shares should consult their own tax advisors
regarding the availability of the reduced dividend tax rate in the light of
their own particular circumstances. Subject to certain limitations and restrictions, a U.S. Holder will be
entitled to a foreign tax credit against its U.S. federal income tax liability,
or a deduction in computing its U.S. federal taxable income, for Brazilian
income taxes withheld by us. The limitation on foreign taxes eligible for
credit is determined separately with respect to specific classes of income.
For this purpose, dividends paid by us with respect to our preferred shares or
ADSs will generally constitute passive income or, in the case of certain U.S.
Holders, financial services income from sources outside the United States.
The U.S. Treasury Department has expressed concerns that parties to whom
depositary shares such as the ADSs are released may be taking actions that are
inconsistent with the claiming of foreign tax credits by U.S. Holders of such
ADSs. Accordingly, the analysis of the creditability of Brazilian taxes
described above could be affected by future actions that may be taken by the
U.S. Treasury. The rules relating to the calculation of foreign tax credits
and the applicable limitations are complex. U.S. Holders should consult their
own advisors concerning the implications of the foreign tax credit rules in
light of their particular circumstances. Taxation of Capital Gains or Losses Upon a sale or other taxable disposition of preferred shares or ADSs, a
U.S. Holder will recognize capital gain or loss for U.S. federal income tax
purposes equal to the difference, if any, between the amount realized on the
sale or other taxable disposition and the U.S. Holders adjusted tax basis in
the preferred shares or ADSs. Such gain or loss will be capital gain or loss
and will be long-term capital gain or loss if the U.S. Holders holding period
in the preferred shares or ADSs exceeds one year at the time of the sale or
other taxable disposition. Certain U.S. Holders (including individuals) may be
eligible for preferential rates of U.S. federal income tax in respect of
long-term capital gains. The deductibility of capital losses is subject to
limitations under the Code. Gain or loss derived from the sale or other disposition of our preferred
shares or ADSs generally will be treated as U.S. source income or loss for
foreign tax credit purposes. Consequently, if a Brazilian withholding tax is
imposed on the sale or disposition of preferred shares or ADSs, and a U.S.
Holder does not receive significant foreign source income from other sources,
such U.S. Holder may not be able to derive effective U.S. foreign tax credit
benefits in respect of such Brazilian withholding tax. If a Brazilian tax is
withheld on the sale or disposition of preferred shares or ADSs, a U.S.
Holders amount realized will include the gross amount of the proceeds of such
sale or disposition before deduction of the Brazilian tax. See Brazilian Tax
ConsiderationsTaxation of Gains for a description of when a disposition may
be subject to taxation by Brazil. Deposits and withdrawals of preferred shares in exchange for ADSs will not
result in the realization of gain or loss for U.S. federal income tax purposes. 66




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Information Reporting and Backup Withholding Information returns may be filed with the IRS in connection with
distributions on our preferred shares or our ADSs and the payment of proceeds
from their sale or other disposition. A U.S. Holder may be subject to U.S.
backup withholding tax (currently at a rate of 28%) on these payments if such
U.S. Holder fails to provide its taxpayer identification number or comply with
certain certification procedures or otherwise establish an exemption from
backup withholding. Backup withholding is not an additional tax. The amount
of any backup withholding from a payment to a U.S. Holder will be allowed as a
credit against such U.S. Holders U.S. federal income tax liability, if any,
and may entitle such U.S. Holder to a refund, provided that the required
information is timely furnished to the IRS. U.S. HOLDERS AND PROSPECTIVE PURCHASERS OF OUR PREFERRED SHARES OR ADSs
SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE BRAZILIAN, U.S. FEDERAL, STATE,
LOCAL AND OTHER TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF OUR
PREFERRED SHARES OR ADSs BASED UPON THEIR PARTICULAR CIRCUMSTANCES. F. Dividends and Paying Agents Not applicable. G. Statement of Experts Not applicable. H. Documents on Display We are subject to the information requirements of the Exchange Act, except
that as a foreign issuer, we are not subject to the proxy rules or the
short-swing profit disclosure rules of the Exchange Act. In accordance with
these statutory requirements, we file or furnish reports and other information
with the SEC. Reports and other information filed or furnished by us with the
Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commissions Regional Offices at 233 Broadway, New York,
New York 10279 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material may be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. You may also inspect these
reports and other information at the offices of the New York Stock Exchange, 11
Wall Street, New York, New York 10005, on which our ADSs are listed. In addition, the Commission maintains a website that contains information
filed electronically, which can be accessed over the Internet at
http://www.sec.gov. We also file financial statements and other periodic reports with the CVM.
Copies of our annual report on Form 20-F and documents referred to in this
annual report and our by-laws will be available for inspection upon request at
our offices at SCS, Quadra 2, Bloco C, 226 7° andar, 70302-916, Brasília, DF,
Brazil. I. Subsidiary Information Not applicable. 67




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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in both foreign currency
exchange rates and interest rates. The foreign-exchange rate risk arises
because certain of our costs are denominated in currencies (primarily the U.S.
dollar) other than those in which we earn revenues (primarily the real). We
are, however, approximately 100% hedged for exchange rates variation. We are
subject to market risk deriving from changes in interest rates which may affect
the cost of our financing. Interest rate risk results from the possibility
that we may incur losses due to interest rate fluctuations which raise the
balance of liabilities associated with loans and financing obtained in the
market and their financial expenses. We have not entered into derivatives
contracts in order to hedge against this risk. However, we continuously
monitor interest rates in order to evaluate the possible need for derivative
contracts to protect ourselves against the risk of volatility of these rates. We have entered into derivative instruments, such as foreign currency
options and foreign currency swaps to manage the exchange rate risk. We do not
hold or issue derivative or other financial instruments for trading purposes. Exchange Rate Risk On December 31, 2003, approximately R$156.9 million of our indebtedness
was denominated in U.S. dollars. However, due to departures from agreed
procedures in connection with the breakup of Telebrás for assigning the right
to receive payments under such indebtedness, payments on such indebtedness were
suspended in 1998 and our managers have determined that, beginning in 1999,
R$61.6 million of such indebtedness should be treated for all purposes as a
real-denominated liability. See Item 5Operating and Financial Review and
ProspectsForeign Exchange and Interest-Rate Exposure and See Note 34 to our
consolidated financial statements. The potential loss to us over one year that would result from a
hypothetical, instantaneous and unfavorable change of 1,000 basis points in the
foreign exchange rate applicable to financial assets and liabilities on
December 31, 2003 would be approximately R$ 17.7 million. On the other hand,
our derivatives instruments would have a gross gain of R$ 17.67 million. The net loss
would be R$ 0.02 million. Exchange rate sensitivity analysis was made by applying a 10% change to
the Brazilian Central Bank exchange rate on December 31, 2003 of R$2.8892 to
U.S.$1.0, which would represent a devaluation of the realof R$0.2889. We then
assumed that this unfavorable currency move would be sustained from December
31, 2003 through December 31, 2004. The foreign exchange loss that affects
financial expenses was calculated by applying such devaluation to our
indebtedness and foreign exchange purchase commitments (essentially handset
purchases), net of derivative instruments. Interest Rate Risk As of December 31, 2003, we had R$348.1 million in loans and financing
outstanding, of which approximately R$171.1 million bore interest at national
currency floating rates (primarily TJLP), R$ 156.9 million bore interest at
foreign currency floating rates and R$17.9 million bore interest at
fixed dollar rates. We have hedged 101.8% of our foreign exposure existing as
of December 31, 2003 resulting in Interbank Deposit Certificate (Certificado de
Depósito Bancário CDI) denominated debts. The
potential gross gain to us 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 on December 31,
2003 would be approximately R$4.6 million. Interest
rate sensitivity analysis was made by applying a 10% increase to all
floating-rate-denominated debt, assuming that the different indexes
(CDI and TJLP, LIBOR and EURIBOR) would all rise by 10%
instantaneously on December 31, 2003 and that this unfavorable
move would continue for one year. 68




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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 69




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PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS None. 
 ITEM 15. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures.Under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer, we have evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as of
December 31, 2003. Based on that evaluation, our principal executive officer
and principal financial officer have concluded that these controls and
procedures are effective in ensuring that all material information required to
be filed in this annual report has been made known to them in a timely fashion. Changes in internal controls. No significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses, were made as a
result of the evaluation. ITEM 16. [RESERVED] ITEM 16A. Audit Committee Financial Expert As of yet, we have not appointed an audit committee financial expert, as
defined by the SEC. As disclosed in item 16D below, we are currently exempt
from complying with the independence requirements of the audit committee
pursuant to Exchange Act Rule 10A-3(a)(5)(A). ITEM 16B. Code of Ethics In June, 2003, we approved a code of ethics to regulate the conduct of our
senior financial officers. Our code of ethics deals with the following issues:  
    
    honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between personal and
professional relationships;
    
    full, fair, accurate, timely and understandable disclosure in
reports and documents that we file with, or submits to, the CVM and/or
the SEC and in other public communications made by us;
    
    compliance with applicable governmental laws, rules and
regulations;
    
    prompt internal reporting of violations of the code to the Internal
Audit Officer who, after review, has to report them to the CEO and CFO;
and
    
    accountability for adherence to the code. A copy of our code of ethics is filed as an exhibit to this annual report.
A copy of this document is also available on our website (www.vivo.com.br). 70




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There have been no waivers to our code of ethics in 2003. ITEM 16C. Principal
Accountant Fees and Services Deloitte Touche Tohmatsu Auditores Independentes, or Deloitte, acted as
our independent auditor for the year ended December 31, 2003. Ernst & Young
Auditores Independentes S.A., or E&Y, acted as our independent auditor for the
year ended December 31, 2002. The chart below sets forth the total amount
billed to us by Deloitte and E&Y for services performed in the years 2003 and
2002, and breaks down these amounts by category of service: Total Fees(in thousands of reais)2003
    
    2002Audit Fees
    
    $
    621
    
    
    $
    449Audit-Related Fees
    
    $
    199
    
    
    $
    280Tax Fees
    
    
    
    
    
    $
    390All Other Fees
    
    
    
    
    
    
    Total
    
    $
    820
    
    
    $
    1,119
 Audit Fees Audit Fees are the aggregate fees billed by Deloitte and E&Y for the audit
of our consolidated annual financial statements, reviews of interim financial
statements and attestation services that are provided in connection with
statutory and regulatory filings or engagements. Audit-Related Fees Audit-Related
Fees for both years are fees charged by E&Y for
assurance and related services that are reasonably related to the performance
of the audit or review of our financial statements and represent due diligence
services. Tax Fees Tax Fees are fees for professional services rendered by E&Y for tax compliance services. Pre-Approval Policies and Procedures We
have not set pre-approval policies and procedures for audit,
audit-related services, tax services and other services to be
provided by auditors, since we are not required to comply with such
audit committee rule by July 31, 2005, according to Exchange Act
Rule 10A-3(a)(5)(A). ITEM 16D. Exemptions from the Listing Standards for Audit Committees Pursuant to the exemption under Exchange Act Rule 10A-3(c)(3), we have our
conselho fiscal,a board of auditors, which follows the requirements presented
by such rule. Furthermore, our current audit committee does not follow the
independence requirements of such rule, as we are still exempt from such
requirements by July 31, 2005 according to Exchange Act Rule 10A-3(a)(5)(A). ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated
Purchasers Not required for the year ended December 31, 2003. 71




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PART III 
 ITEM 17. FINANCIAL STATEMENTS Not applicable. 
 ITEM 18. FINANCIAL STATEMENTS See our consolidated financial statements beginning on Page F-1. 
 ITEM 19. EXHIBITS 1.1
    
    By-laws (Estatuto Social) of
TCO, as amended (English translation).2.1
    
    Deposit Agreement dated as of
July 27, 1998 between TCO and The Bank of New York, previously
filed with TCOs registration statement on September 18, 1998 and incorporated herein by reference.4.1
    
    Personal Cellular Service
Authorization Agreement (English translation) entered into and
between the Brazilian government, through Anatel, and TCO on
February 3, 2003, incorporated by reference to our annual report
Form 20-F for the fiscal year ended December 31, 2002,
filed on June 24, 2003.4.2
    
    Personal Cellular Service
Authorization Agreement (English translation) entered into and
between the Brazilian government, through Anatel, and Telegoias on
February 3, 2003, incorporated by reference to our annual report
Form 20-F for the fiscal year ended December 31, 2002,
filed on June 24, 2003.4.3
    
    Personal Cellular Service
Authorization Agreement (English translation) entered into and
between the Brazilian government, through Anatel, and Telems on
February 3, 2003, incorporated by reference to our annual report
Form 20-F for the fiscal year ended December 31, 2002,
filed on June 24, 2003.4.4
    
    Personal Cellular Service
Authorization Agreement (English translation) entered into and
between the Brazilian government, through Anatel, and Telemat on
February 3, 2003, incorporated by reference to our annual report
Form 20-F for the fiscal year ended December 31, 2002,
filed on June 24, 2003.4.5
    
    Personal Cellular Service
Authorization Agreement (English translation) entered into and
between the Brazilian government, through Anatel, and Teleron on
February 3, 2003, incorporated by reference to our annual report
Form 20-F for the fiscal year ended December 31, 2002,
filed on June 24, 2003.4.6
    
    Personal Cellular Service
Authorization Agreement (English translation) entered into and
between the Brazilian government, through Anatel, and Teleacre on
February 3, 2003, incorporated by reference to our annual report
Form 20-F for the fiscal year ended December 31, 2002,
filed on June 24, 2003.4.7
    
    Personal Cellular Service
Authorization Agreement (English translation) entered into and
between the Brazilian government, through Anatel, and NBT on
February 3, 2003, incorporated by reference to our annual report
Form 20-F for the fiscal year ended December 31, 2002,
filed on June 24, 2003.8.1
    
    Significant subsidiaries.11.1
    
    Code of Ethics (Codigo de
Etica) of TCO (English translation).12.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.12.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.13.1
    
    Certification of Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.13.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
 There are omitted from the exhibits filed with or incorporated by
reference into this annual report certain promissory notes and other
instruments and agreements with respect to long-term debt of our company, none
of which authorizes securities in a total amount that exceeds 10% of the total
assets of our company. We hereby agree to furnish to the Securities and
Exchange Commission copies of any such omitted promissory notes or other
instruments or agreements as the Commission requests. 72




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SIGNATURE The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. Tele Centro Oeste Celular Participações S.A.By:
    /s/ Sérgio Assenço Tavares dos SantosName:
    Sérgio Assenço Tavares dos SantosTitle:
    President Dated: June 30, 2004




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2003, 2002 and 2001
CONTENTS Report of Independent Registered Public Accounting Firm
    
    
    F-1Report of Ernst & Young Auditores Independentes S.C.
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Income
    
    
    F-4Consolidated Statements of Changes in Financial Position
    
    
    F-5Consolidated Statements of Changes in Shareholders Equity
    
    
    F-6Consolidated Statements of Cash Flows
    
    
    F-7Notes to the Consolidated Financial Statements
    
    
    F-8




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Report of Independent Registered Public Accounting Firm To the Shareholders and Management of
Tele Centro Oeste Celular Participações S.A.:
São Paulo - SP (1) We have audited the accompanying consolidated balance sheet of Tele Centro
Oeste Celular Participações S.A. (a Brazilian Corporation) and subsidiaries as
of December 31, 2003, and the related consolidated statement of income, changes
in shareholders equity and changes in financial position for the year ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. (2) We conducted our audit in accordance with the 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 financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statements presentation. We believe that our
audit provides 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 Tele Centro Oeste Celular Participações S.A. and subsidiaries as of December
31, 2003, and the results of their operations and changes in their financial
position for the year ended December 31, 2003, 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 36 to the consolidated financial statements. (5) Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The consolidated statement of cash flow
for the year ended December 31, 2003 is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements prepared in accordance with 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. (6) As discussed in note 2.c, the Company has changed the basis of presentation
of consolidated the financial statements from the Constant Currency Method to
Brazilian Corporate Law Method. Deloitte Touche Tohmatsu
Auditores Independentes June 15, 2004
São Paulo, Brazil. F-1




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Report of Independent Registered Public Accounting Firm Directors and ShareholdersTele Centro Oeste Celular Participações S.A. We have audited the accompanying consolidated balance sheets of Tele Centro
Oeste Celular Participações S.A. and subsidiaries as of December 31, 2002,
and the related consolidated statements of income, changes in shareholders
equity and cash flows for each of the two years in the period ended December
31, 2002. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance as to
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Tele Centro Oeste Celular Participações S.A. at December 31,
2002, and the consolidated results of its operations and its cash flows for
each of the two years in the period ended December 31, 2002, in conformity
with Brazilian Corporate Law, which differ in certain respects from
accounting principles generally accepted in the United States of America
(See Note 36 to the consolidated financial statements). Ernst & Young Auditores Independentes S.C.
/s/ Luiz Carlos Nannini
Partner Brasília, Brazil February 14, 2003 F-2




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A. 
    Note
    
    2003
    
    2002ASSETSCurrent assetsCash and cash equivalents
    
    
    13
    
    
    
    972,054
    
    
    
    158,503Marketable securities
    
    
    14
    
    
    
    
    
    
    
    712,135Trade accounts receivable, net
    
    
    15
    
    
    
    398,253
    
    
    
    228,256Inventories
    
    
    16
    
    
    
    79,076
    
    
    
    48,369Deferred income taxes and recoverable taxes
    
    
    11
    
    
    
    150,011
    
    
    
    120,117Derivative transactions
    
    
    25
    
    
    
    
    
    
    
    38,441Prepaid expenses
    
    
    17
    
    
    
    12,274
    
    
    
    2,135Other current assets
    
    
    18
    
    
    
    6,565
    
    
    
    5,480Total current assets
    
    
    
    
    
    
    1,618,233
    
    
    
    1,313,436Noncurrent assetsDeferred income taxes and recoverable taxes
    
    
    11
    
    
    
    55,264
    
    
    
    48,449Derivative transactions
    
    
    25
    
    
    
    87
    
    
    
    14,863Other assets
    
    
    18
    
    
    
    58,134
    
    
    
    56,630Total noncurrent assets
    
    
    
    
    
    
    113,485
    
    
    
    119,942Permanent assetsInvestments
    
    
    
    
    
    
    4,588
    
    
    
    8,430Property, plant and equipment, net
    
    
    19
    
    
    
    891,030
    
    
    
    891,418Deferred assets, net
    
    
    20
    
    
    
    26,910
    
    
    
    31,520Total permanent assets
    
    
    
    
    
    
    922,528
    
    
    
    931,368Total assets
    
    
    
    
    
    
    2,654,246
    
    
    
    2,364,746
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(In thousands of Brazilian Reais - R$) Note
    
    2003
    
    2002LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesPayroll and related accruals
    
    
    21
    
    
    
    20,326
    
    
    
    12,028Accounts payable and accrued expenses
    
    
    22
    
    
    
    276,261
    
    
    
    154,389Taxes other than income taxes
    
    
    23
    
    
    
    133,322
    
    
    
    104,638Dividends payable
    
    
    24
    
    
    
    135,119
    
    
    
    99,729Income taxes
    
    
    
    
    
    
    23
    
    
    
    3,192Loans and financing
    
    
    25
    
    
    
    135,042
    
    
    
    324,980Derivative transactions
    
    
    25
    
    
    
    9,426
    
    
    
    1,567Other current liabilities
    
    
    26
    
    
    
    21,972
    
    
    
    14,317Total current liabilities
    
    
    
    
    
    
    731,491
    
    
    
    714,840Noncurrent liabilitiesLoans and financing
    
    
    25
    
    
    
    213,126
    
    
    
    302,800Reserve for contingencies
    
    
    27
    
    
    
    109,373
    
    
    
    99,104Taxes other than income taxes
    
    
    23
    
    
    
    9,972
    
    
    
    4,141Derivative transactions
    
    
    25
    
    
    
    5,667
    
    
    
    273Pension and other post-retirement plans
    
    
    28
    
    
    
    2,810
    
    
    
    464Other liabilities
    
    
    26
    
    
    
    546
    
    
    
    546Total noncurrent liabilities
    
    
    
    
    
    
    341,494
    
    
    
    407,328Minority interests
    
    
    
    
    
    
    25,049
    
    
    
    23,929Shareholders equityShare capital
    
    
    29.a
    
    
    
    570,095
    
    
    
    534,046Treasury shares
    
    
    29.b
    
    
    
    (49,162
    )
    
    
    (49,162
    )Capital reserves
    
    
    29.c
    
    
    
    114,380
    
    
    
    114,380Income reserves
    
    
    29.d
    
    
    
    655,574
    
    
    
    322,165Retained earnings
    
    
    
    
    
    
    265,199
    
    
    
    297,094Total shareholders equity
    
    
    
    
    
    
    1,556,086
    
    
    
    1,218,523Funds for capitalization
    
    
    
    
    
    
    126
    
    
    
    126Total liabilities and shareholders equity
    
    
    
    
    
    
    2,654,246
    
    
    
    2,364,746
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A. 
    Years ended December 31Note
    
    2003
    
    2002
    
    2001Net operating revenue
    
    
    4
    
    
    
    1,958,910
    
    
    
    1,572,110
    
    
    
    1,256,085Cost of services and goods sold
    
    
    5
    
    
    
    (904,022
    )
    
    
    (741,772
    )
    
    
    (620,695
    )Gross profit
    
    
    
    
    
    
    1,054,888
    
    
    
    830,338
    
    
    
    635,390Operating expensesSelling expenses
    
    
    6
    
    
    
    (300,516
    )
    
    
    (215,282
    )
    
    
    (194,514
    )General and administrative expenses
    
    
    7
    
    
    
    (193,258
    )
    
    
    (141,860
    )
    
    
    (108,333
    )Other net operating expenses
    
    
    8
    
    
    
    (13,463
    )
    
    
    (14,628
    )
    
    
    (4,179
    )Operating income before net financial income
(expenses)
    
    
    
    
    
    
    547,651
    
    
    
    458,568
    
    
    
    328,364Net financial income (expenses)
    
    
    9
    
    
    
    111,670
    
    
    
    3,970
    
    
    
    (6,462
    )Operating income
    
    
    
    
    
    
    659,321
    
    
    
    462,538
    
    
    
    321,902Non-operating income (expense), net
    
    
    10
    
    
    
    (6,364
    )
    
    
    4,292
    
    
    
    296Income before income taxes and minority interest
    
    
    
    
    
    
    652,957
    
    
    
    466,830
    
    
    
    322,198Income and social contribution taxes
    
    
    11
    
    
    
    (181,089
    )
    
    
    (131,516
    )
    
    
    (95,879
    )Minority interest
    
    
    
    
    
    
    (8,460
    )
    
    
    (6,131
    )
    
    
    (18,215
    )Net income
    
    
    
    
    
    
    463,408
    
    
    
    329,183
    
    
    
    208,104Outstanding shares at end of year (thousands)
    
    
    
    
    
    
    373,408,642
    
    
    
    373,408,642
    
    
    
    365,379,257Earnings per thousand shares (Brazilian Reais)
    
    
    
    
    
    
    1.24
    
    
    
    0.88
    
    
    
    0.57
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A. 
   (In thousands of Brazilian reais-R$) 2003SOURCES OF FUNDS:From operations:Net income
    
    
    463,408Items not affecting working capital:Depreciation and amortization
    
    
    194,781Minority interest
    
    
    8,460Monetary and exchange variations on noncurrent assets
    
    
    (7,015
    )Monetary and exchange variations on noncurrent liabilities
    
    
    6,698Net book value of permanent asset disposals
    
    
    19,421Reserve for contingencies
    
    
    10,269Unclaimed dividends and interest on capital of subsidiary
    
    
    1,400Negative goodwill on acquisition of investment in NBT
    
    
    2,282Total from operations
    
    
    699,704From shareholders:Unclaimed dividends and interest on shareholders equity
    
    
    4,1554,155From third parties:Decrease in noncurrent assets
    
    
    20,095Transfer from noncurrent assets to current assets
    
    
    16,404Transfer from current to noncurrent liabilities
    
    
    2,346Increase in noncurrent liabilities
    
    
    3,99042,835Total sources
    
    
    746,694USES OF FUNDS:Additions to property, plant and equipment
    
    
    207,644Transfer from noncurrent to current liabilities
    
    
    89,137Transfer to current from noncurrent assets
    
    
    23,027Interest on capital and dividends
    
    
    134,363Minority shareholders
    
    
    4,377Total uses
    
    
    458,548INCREASE IN WORKING CAPITAL
    
    
    288,146REPRESENTED BY:CURRENT ASSETS AT YEAR END
    
    
    1,618,233CURRENT LIABILITIES AT YEAR END
    
    
    (731,491
    )Working capital at year end
    
    
    886,742Working capital at beginning of the year
    
    
    598,596INCREASE IN WORKING CAPITAL
    
    
    288,146
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A. 
     Capital ReservesSpecialShare
    
    Treasury
    
    Interest on
    
    Share
    
    premium
    
    TaxCapital
    
    shares
    
    construction
    
    premium
    
    reserve
    
    IncentiveBalances at December 31, 2000
    
    
    303,000
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    109,860
    
    
    
    Capital increase with reserves
    
    
    202,000
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    (16,602
    )
    
    
    Reversal of reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Treasury shares
    
    
    
    
    
    
    (6,826
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfer to reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest on shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dividends to minority interest of
subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payment to shareholders related to
premium utilization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,485
    )
    
    
    Balances at December 31, 2001
    
    
    505,000
    
    
    
    (6,826
    )
    
    
    
    
    
    
    52
    
    
    
    87,773
    
    
    
    Acquisition of the minority interest
of Telebrasília Celular
S.A.
    
    
    29,046
    
    
    
    
    
    
    
    679
    
    
    
    37,481
    
    
    
    
    
    
    
    153Payment to shareholders related to
premium utilization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,584
    )
    
    
    Treasury Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase of shares (common/preferred)
    
    
    
    
    
    
    (62,913
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Disposal of preferred shares
    
    
    
    
    
    
    9,790
    
    
    
    3,826
    
    
    
    
    
    
    
    
    
    
    
    Cancellation of shares
    
    
    
    
    
    
    10,787
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfer to reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest on shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances at December 31, 2002
    
    
    534,046
    
    
    
    (49,162
    )
    
    
    4,505
    
    
    
    37,533
    
    
    
    72,189
    
    
    
    153Capital increase with retained earnings
    
    
    36,049
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unclaimed dividends of 1999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfer to reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest on shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances at December 31, 2003
    
    
    570,095
    
    
    
    (49,162
    )
    
    
    4,505
    
    
    
    37,533
    
    
    
    72,189
    
    
    
    153
   [Continued from above table, first column(s) repeated] Income ReservesUnrealized
    
    ReserveLegal
    
    income
    
    for
    
    Retainedreserve
    
    reserve
    
    expansion
    
    earnings
    
    TotalBalances at December 31, 2000
    
    
    30,162
    
    
    
    97,675
    
    
    
    
    
    
    
    355,633
    
    
    
    896,398Capital increase with reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (185,382
    )
    
    
    Reversal of reserves
    
    
    
    
    
    
    (97,675
    )
    
    
    
    
    
    
    97,675
    
    
    
    Treasury shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,826
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    208,104
    
    
    
    208,104Transfer to reserves
    
    
    10,405
    
    
    
    
    
    
    
    
    
    
    
    (10,405
    )
    
    
    Interest on shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80,500
    )
    
    
    (80,500
    )Dividends to minority interest of
subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,516
    )
    
    
    (1,516
    )Payment to shareholders related to
premium utilization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,485
    )Balances at December 31, 2001
    
    
    40,567
    
    
    
    
    
    
    
    
    
    
    
    383,609
    
    
    
    1,010,175Acquisition of the minority interest
of Telebrasília Celular
S.A.
    
    
    1,662
    
    
    
    
    
    
    
    
    
    
    
    (31,476
    )
    
    
    37,545Payment to shareholders related to
premium utilization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,584
    )Treasury StockPurchase of shares (common/preferred)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62,913
    )Disposal of preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,616Cancellation of shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,787
    )
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    329,183
    
    
    
    329,183Transfer to reserves
    
    
    16,459
    
    
    
    
    
    
    
    263,477
    
    
    
    (279,936
    )
    
    
    Interest on shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93,499
    )
    
    
    (93,499
    )Balances at December 31, 2002
    
    
    58,688
    
    
    
    
    
    
    
    263,477
    
    
    
    297,094
    
    
    
    1,218,523Capital increase with retained earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,049
    )
    
    
    Unclaimed dividends of 1999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,155
    
    
    
    4,155Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    463,408
    
    
    
    463,408Transfer to reserves
    
    
    23,171
    
    
    
    
    
    
    
    310,238
    
    
    
    (333,409
    )
    
    
    Interest on shareholders equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (130,000
    )
    
    
    (130,000
    )Balances at December 31, 2003
    
    
    81,859
    
    
    
    
    
    
    
    573,715
    
    
    
    265,199
    
    
    
    1,556,086
 The accompanying notes are an integral part of these consolidated financial statements. F-7




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A. 
    2003
    
    2002
    
    2001Cash flows provided by operations:Net income
    
    
    463,408
    
    
    
    329,183
    
    
    
    208,104Adjustments to reconcile net loss to cash provided by operating activities:Depreciation and amortization
    
    
    194,781
    
    
    
    158,750
    
    
    
    138,585Minority interests
    
    
    8,460
    
    
    
    6,131
    
    
    
    18,215Monetary/exchange variation on loans and financing
    
    
    (66,494
    )
    
    
    174,500
    
    
    
    82,003Losses on permanent asset disposals
    
    
    18,894
    
    
    
    14,334
    
    
    
    10,159Losses from changes in shareholdings in subsidiaries
    
    
    252
    
    
    
    (205
    )
    
    
    (1
    )Unclaimed dividends
    
    
    
    
    
    
    (5,418
    )
    
    
    Provision for doubtful accounts
    
    
    47,134
    
    
    
    33,059
    
    
    
    48,334Increase in trade accounts receivable
    
    
    (217,131
    )
    
    
    (74,553
    )
    
    
    (74,086
    )(Increase) decrease in deferred/recoverable taxes
    
    
    (36,709
    )
    
    
    7,272
    
    
    
    (2,176
    )(Increase) decrease in other current assets and inventories
    
    
    (41,931
    )
    
    
    4,093
    
    
    
    20,280(Increase) decrease in other noncurrent assets
    
    
    (1,504
    )
    
    
    (18,448
    )
    
    
    (157
    )(Increase) decrease in derivative transactions  assets
    
    
    53,217
    
    
    
    (50,858
    )
    
    
    227Increase (decrease) in payroll and related accruals
    
    
    8,298
    
    
    
    5,179
    
    
    
    (120
    )Increase (decrease) in accounts payable and accrued
expenses
    
    
    121,872
    
    
    
    1,865
    
    
    
    (75,233
    )Increase in taxes other than income taxes
    
    
    34,515
    
    
    
    27,120
    
    
    
    18,867Increase (decrease) in other current liabilities
    
    
    7,655
    
    
    
    (28,664
    )
    
    
    24,836Increase in accrued interest
    
    
    8,067
    
    
    
    3,821
    
    
    
    Increase (decrease) in income taxes
    
    
    (3,169
    )
    
    
    3,738
    
    
    
    675Increase in reserve for contingencies
    
    
    10,269
    
    
    
    22,628
    
    
    
    13,480Increase in provision for pension and other
post-retirement
plans
    
    
    2,346
    
    
    
    464
    
    
    
    Increase in derivative transactions  liabilities
    
    
    13,253
    
    
    
    1,840
    
    
    
    625,483
    
    
    
    615,831
    
    
    
    431,992Investing activities:Additions to investments
    
    
    
    
    
    
    
    
    
    
    (5,597
    )Acquisition of minority interest in subsidiaries
    
    
    (2,096
    )
    
    
    (729
    )
    
    
    (12,228
    )Marketable securities
    
    
    712,135
    
    
    
    (349,825
    )
    
    
    (203,609
    )Acquisition of concession
    
    
    
    
    
    
    
    
    
    
    (12,110
    )Additions to property, plant and equipment
    
    
    (207,644
    )
    
    
    (170,622
    )
    
    
    (190,521
    )Addition to deferred charges
    
    
    
    
    
    
    
    
    
    
    (1,722
    )Proceeds from asset disposals
    
    
    527
    
    
    
    313
    
    
    
    103502,922
    
    
    
    (520,863
    )
    
    
    (425,684
    )Financing activities:Loans repaid
    
    
    (285,504
    )
    
    
    (515,293
    )
    
    
    (1,423,210
    )New loans obtained
    
    
    64,319
    
    
    
    447,768
    
    
    
    1,349,042Purchase of treasury shares
    
    
    
    
    
    
    (49,297
    )
    
    
    (6,826
    )Payment to shareholders related to premium utilization
    
    
    
    
    
    
    (49,843
    )
    
    
    (5,485
    )Interest on shareholders equity / dividends paid
    
    
    (93,669
    )
    
    
    (96,437
    )
    
    
    (43,323
    )(314,854
    )
    
    
    (263,102
    )
    
    
    (129,802
    )Increase (decrease) in cash and cash equivalents
    
    
    813,551
    
    
    
    (168,134
    )
    
    
    (123,494
    )Cash and cash equivalents at beginning of year
    
    
    158,503
    
    
    
    326,637
    
    
    
    450,131Cash and cash equivalents at end of year
    
    
    972,054
    
    
    
    158,503
    
    
    
    326,637
 The accompanying notes are an integral part of these consolidated financial statements. F-8




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A. 
     1.
    
    Operations and backgroundBeginning in 1995, the Federal Government of Brazil (the Federal
Government) undertook a comprehensive reform of Brazilian the
telecommunications industry. In July 1997 the Federal Congress adopted a
General Telecommunications Law providing for the privatization of
Telecomunicações Brasileiras S.A. (Telebrás) which, through its 28
operating subsidiaries was the primary supplier of public telecommunications
services in Brazil (the Telebrás System).In preparation for the privatization of the Telebrás System, the operating
subsidiaries were divided into twelve separate groups, (a) three regional
fixed-line operators, (b) eight regional cellular operators and (c) one
national long-distance operator. The cellular telecommunications businesses
were first separated from the operating subsidiaries and subsequently from
the fixed-line businesses. The new cellular businesses and the long-distance
operator were combined into the twelve separate groups (the New Holding
Companies). Both the separation of the cellular businesses and the
subsequent grouping of the former Telebrás subsidiaries were performed using
a procedure under Brazilian corporate law called cisão (the spin-off). As
of part of this process Tele Centro Oeste Celular Participações S.A. (the
Holding Company) was formed.Tele Centro Oeste Celular Participações S.A. (the Company or TCO) was
formed on May 22, 1998, through the spin-off of certain assets and
liabilities of Telebrás, including 81.4%, 83.8%, 91.9%, 96.0%, 91.3% and
94.0% of the share capital of Telebrasília Celular S.A., Telegoiás Celular
S.A., Telemat Celular S.A., Telems Celular S.A., Teleron Celular S.A. and
Teleacre Celular S.A., respectively. Until August 4, 1998, the Companies
were controlled by the Federal Government.At December 31, 2003, TCO is owned by Telesp Celular Participações S.A.
(TCP) (90.73% of voting capital and 29.30% of total capital) which in turn
is controlled by Brasilcel N.V. (Brasilcel). Brasilcel is controlled by
Telefónica Móviles, S.A. (50.000% of total capital), PT
Móveis - Serviços de
Telecomunicações, SGPS, S.A. (49.99% of total capital), and Portugal
Telecom, SGPS, S.A. (0.01% of total capital).The Company is the controlling shareholder of 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 provide wireless
communications services, including necessary or useful activities to provide
these services, in conformity with authorizations or concessions received,
described as follows: Expiration date ofSubsidiary
    
    Interest - %
    
    Operating area by States
    
    concession/authorizationTelegoiás
    
    
    97.14
    
    
    Goiás and Tocantins
    
    10/29/2008Telemat
    
    
    97.83
    
    
    Mato Grosso
    
    03/30/2009Telems
    
    
    98.54
    
    
    Mato Grosso do Sul
    
    09/28/2009Teleron
    
    
    97.23
    
    
    Rondônia
    
    07/21/2009Teleacre
    
    
    98.35
    
    
    Acre
    
    07/15/2009NBT
    
    
    100.00
    
    
    Amazonas, Roraima, Amapá, Pará and Maranhão
    
    11/29/2013Telebrasília(i)
    
    
    N/A
    
    
    Distrito Federal
    
    07/24/2006
  (i) Merged into the Company in 2002.The Company also owns TCO IP S.A. (TCO IP) which provides
telecommunications services, Internet access, solutions and other services.Telecommunications services provided by the subsidiaries, including related
services, 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 respective regulations, decrees, decisions, and plans.Changes in OwnershipOn April 10, 2003, ANATEL approved the acquisition by TCP of the controlling
equity interest held by BID S.A. in TCO. On April 25, 2003, TCP completed
the acquisition which represents 20.69% of the total capital and 64.03% of
the voting capital. F-9




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  On September 30, 2003, the Brazilian Securities Commission (CVM) approved
the acquisition by TCP of additional common shares of TCO. On November 18,
2003, TCP acquired 26.70% of the voting capital of TCO (8.62% of total
capital). After this acquisition TCP owned 90.73% of the voting capital of
TCO (29.31% of total capital).Migration from SMC to SMPOn February 3, 2003, ANATEL and TCO and its subsidiaries Telegoiás, Telemat,
Telems, Teleron, Teleacre and NBT, signed a document authorizing Personal
Mobile Service (SMP), effective from the date of publication in the federal
official gazette on February 5, 2003. Authorizations granted to the Company
and its subsidiaries are valid for the remaining periods of the concessions
previously granted and currently replaced, and may be renewed once for
fifteen years, subject to a renewal fee. On July 6, 2003, the wireless
operators implemented the Carrier Selection Code (CSP) on national and
international long distance (VC2 and VC3) calls, in accordance with SMP
rules. The operators no longer receive VC2 and VC3 revenues; instead, they
receive interconnection revenues for the use of their networks on these
calls.2.
    
    Presentation of the Financial Statementsa. Presentation of consolidated financial statements as of December 31,
2003 and 2002 and for the three years in the period ended December 31, 2003The accompanying consolidated financial statements present the consolidated
balance sheets and results of operations in cellular telecommunication
businesses of TCO and its subsidiaries (collectively The Company).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.Minority interest is included in the consolidated financial statements of
TCO as of December 31, 2003. This interest was 2.9%, 2.2%, 1.5%, 2.8% and
1.7% of Telegoiás Celular S.A., Telemat Celular S.A., Telems Celular S.A.,
Teleron Celular S.A. and Teleacre Celular S.A., respectively.b. Methods of presentation of the Financial StatementsUntil December 31, 1995, publicly-traded companies in Brazil were required
to prepare financial statements pursuant to two methods: (i) the corporate
law method, which was and remains valid for all legal purposes, including
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).The Corporate Law MethodThe 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 stockholders equity accounts using indices 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. Under the Constant Currency Method, the financial statements
were adjusted for inflation up to December 31, 2000.The Constant Currency MethodUnder the Constant Currency Method, all historical Brazilian real amounts
in the financial statements and notes thereto are expressed in constant
purchasing power as of latest balance sheet date, in accordance with
standards prescribed by the CVM for publicly traded entities. Under the
Constant Method, the financial statements were adjusted for inflation up to
December 31, 2000. F-10




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  c.
    
    Change in Basis of Presentation of Financial StatementsThe accompanying consolidated financial statements are prepared in
accordance with Brazilian corporate law, 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
BR CL).In prior periods, the Company had prepared its financial statements for
presentation in the United States in accordance with the Constant Currency
Method. In order to conform the financial statements for the use of its
shareholders in the United States to the same basis used in the primary
market in Brazil, the Company has elected to present its financial
statements in accordance with BR CL.All prior periods have been presented in accordance with BR CL, since a
change in the reporting currency requires the restatement of all periods
presented.Summarized financial statements for the two prior years under Constant
Currency MethodFollowing is summarized financial information previously reported using the
Constant Currency Method December 31,2002
    
    2001AssetsCurrent assets
    
    
    1,313,436
    
    
    
    1,058,454Noncurrent assets
    
    
    119,942
    
    
    
    59,538Permanent assets
    
    
    1,073,094
    
    
    
    1,122,333Total assets
    
    
    2,506,472
    
    
    
    2,240,325
 2002
    
    2001Liabilities and Shareholders equityTotal current liabilities
    
    
    720,974
    
    
    
    676,380Total noncurrent liabilities
    
    
    449,373
    
    
    
    371,830Minority interests
    
    
    25,308
    
    
    
    65,557Total shareholders equity
    
    
    1,310,691
    
    
    
    1,126,432Total funds for capitalization
    
    
    126
    
    
    
    126Total liabilities and shareholders equity
    
    
    2,506,472
    
    
    
    2,240,325
 Years ended December 31,2002
    
    2001
    
    2000Income StatementNet operating
revenue
    
    
    1,561,308
    
    
    
    1,248,131
    
    
    
    930,646Cost of goods and
services
    
    
    (779,480
    )
    
    
    (663,158
    )
    
    
    (532,163
    )Gross
profit
    
    
    781,828
    
    
    
    584,973
    
    
    
    398,483Income before taxes and minority
interest
    
    
    303,850
    
    
    
    203,655
    
    
    
    132,802Net income for the year
    
    
    305,094
    
    
    
    178,587
    
    
    
    103,644
  Reconciliation of net income and shareholders equity balances between BR CL
and the Constant Currency Method is as follows: Net income
    
    Shareholders' equity2002
    
    2001
    
    2002
    
    2001BR CL
    
    
    329,183
    
    
    
    208,104
    
    
    
    1,218,523
    
    
    
    1,010,175Restatement of net permanent
assets
    
    
    (46,399
    )
    
    
    (51,270
    )
    
    
    141,726
    
    
    
    188,189Tax effects
    
    
    15,771
    
    
    
    17,403
    
    
    
    (48,179
    )
    
    
    (64,014
    )Minority interests
    
    
    6,539
    
    
    
    4,350
    
    
    
    (1,379
    )
    
    
    (7,918
    )Constant Currency Method
    
    
    305,094
    
    
    
    178,587
    
    
    
    1,310,691
    
    
    
    1,126,432
 F-11




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  d.
    
    Principles of consolidationThese consolidated financial statements include the balances and
transactions of the TCO and its subsidiaries as of December 31, 2003 and
2002 and for the three years in the period ended December 31, 2003. In the
consolidated financial statements, all inter-company balances and
transactions have been eliminated.e.
    
    ReclassificationsCertain reclassifications have been made to the prior periods to conform to
the 2003 presentation.3.
    
    Summary of the principal accounting policies  a.
    
    Cash and Cash EquivalentsAre considered to be all available balances in cash and banks and
all highly liquid temporary cash investments, stated at cost plus
interest accrued to the balance sheet date, with original maturity
dates of three months or less.b.
    
    Trade Accounts Receivable, NetAccounts receivable from telephone subscribers are calculated at the
tariff rate on the date the services were rendered. Trade accounts
receivable also include services provided to customers up to the balance
sheet date but not yet invoiced.c.
    
    Provision for Doubtful AccountsA provision is made for trade accounts receivable for which recoverability
is not considered probable.d.
    
    Foreign Currency TransactionsForeign currency transactions are recorded at the exchange rate in effect
on 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 statement of income as part of the financial expenses,
net. Exchange rate variations and premiums related to derivative contracts
are calculated and recorded at the period end based on the settlement
method.e.
    
    InventoriesInventories consist of cellular handsets, accessories and maintenance
materials stated at average acquisition cost. A provision is recognized
to adjust to realizable value the cost of handsets and accessories
considered obsolete or in quantities greater than those usually sold in a
reasonable period of time.f.
    
    Property, Plant and EquipmentProperty, plant and equipment are stated at acquisition or construction
cost, less accumulated depreciation calculated using the straight-line
method based on the estimated useful lives of these assets. Costs incurred
for repairs and maintenance that represent improvements, increases
capacity or extend the useful lives of assets are capitalized. All other
routine costs are charged to income as incurred.For all periods presented, the Company did not capitalized interest for
financing construction in progress as part of the cost of property, plant
and equipment.g.
    
    Deferred AssetsPre-operating expendituresIncome and expenses incurred during the pre-operating period by the
subsidiary Norte Brasil Telecom S.A. F-12




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  were recorded as deferred charges. The Company began to amortize
these deferred charges on a straight-line basis over a period of 10 years
as from January 2000, when Norte Brasil Telecom S.A. commenced operations.During the latter part of 2000, the Company formed TCO IP, an internet
service provider. Pre-operating costs incurred by TCO IP were capitalized
as deferred charges. The Company began to amortize these costs on a
straight-line basis over a period of 5 years when TCO IP commenced
operations in October 2001h.
    
    Income and Social Contribution TaxesBrazilian income taxes are comprised of the federal income tax and the
social contribution tax. At December 31, 2003, the statutory rates for
the federal income tax and for the social contribution tax were 25% and
9%, respectively. For BR CL purposes, income taxes are accounted for
using the liability method. Deferred income tax assets attributable to
temporary differences, and tax loss carryforwards are recorded if it is
more likely than not that the assets will be realized.i.
    
    Reserve for ContingenciesA reserve for contingencies is recorded based on the opinion of management
and the Companys external legal counsel relating to claims for which the
likelihood of an unfavorable outcome is probable.j.
    
    Net Financial Income (expense)The net financial income (expense) includes interest and monetary
variations resulting from financial investments and loans and financing
obtained and provided. Gains and losses on derivative contracts are
included in the net financial income (expense).k.
    
    DerivativesThe Company enters into certain foreign exchange forward and swap
contracts in order to manage its exposure to fluctuations in exchange
rates and interest rates for debt denominated in foreign currency. These
derivatives are recorded at the exchange rates in effect on the date of
the balance sheet. Gains and losses, realized and unrealized, are
estimated exclusively based on terms of the related contracts and recorded
as net financial expense.l.
    
    Pension and Post-Retirement PlansActuarial 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.m.
    
    Earnings Per Thousand-SharesEarnings per thousand-shares are calculated based on the number of
outstanding shares at the date of the corresponding balance sheets.n.
    
    Revenue RecognitionRevenues from services are recognized when services are provided and are
billed on a monthly basis. Unbilled revenues are provided. Revenues from
sales of prepaid cellular minutes are deferred and recognized in income as
services are effectively provided based on monthly usage. Revenue from the
sale of handsets and accessories is recorded at the moment of the sale to
the final customer.o.
    
    Segment InformationThe Companies operate solely in one segment that provides local and
regional cellular telecommunications services. All revenues were generated
in relation to services provided in or routed through the Federal F-13




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  District and the states of Goiás, Tocantins, Mato Grosso do Sul, Mato
Grosso, Rondônia, Acre, Maranhão, Pará, Amapá, Roraima and Amazonas.p.
    
    Use of EstimatesThe preparation of consolidated financial statements in conformity with BR
CL requires management to make estimates and assumptions related to
assets, liabilities, revenues and expenses for the period being reported.
Actual results could differ from those estimates.q.
    
    Minority interestsThe Company records minority interest in the statements of operations to
reflect the portion of the earnings of majorityowned operations that are
applicable to the minority interest shareholders. See note 2a.r.
    
    Advertising CostsAdvertising costs are expensed as incurred and included in selling
expenses. They amounted to R$48,079, R$33,955 and R$ 26,785, for the
years ended December 31, 2003, 2002, and 2001, respectively.  4.
    
    Net Operating Revenue 2003
    
    2002
    
    2001Monthly subscription charges
    
    
    148,316
    
    
    
    114,956
    
    
    
    121,512Usage charges
    
    
    1,095,847
    
    
    
    882,980
    
    
    
    643,523Roaming charges
    
    
    11,693
    
    
    
    19,356
    
    
    
    17,391Additional call charges
    
    
    30,827
    
    
    
    22,890
    
    
    
    20,877Interconnection
    
    
    776,814
    
    
    
    649,271
    
    
    
    526,846Other services
    
    
    40,308
    
    
    
    15,956
    
    
    
    8,254Gross revenue from services
    
    
    2,103,805
    
    
    
    1,705,409
    
    
    
    1,338,403Value-added tax on services  ICMS
    
    
    (328,796
    )
    
    
    (256,572
    )
    
    
    (200,619
    )Employees profit participation
program PIS/ Social contribution
on billing  COFINS
    
    
    (72,877
    )
    
    
    (61,779
    )
    
    
    (47,475
    )Discounts granted
    
    
    (44,678
    )
    
    
    (23,721
    )
    
    
    (9,217
    )Net revenue from services
    
    
    1,657,454
    
    
    
    1,363,337
    
    
    
    1,081,092Sale of handsets
    
    
    383,471
    
    
    
    276,884
    
    
    
    235,011Value-added tax on sales ICMS
    
    
    (62,939
    )
    
    
    (48,866
    )
    
    
    (36,141
    )Employees profit participation
program PIS/ Social contribution
on billing  COFINS
    
    
    (18,214
    )
    
    
    (10,359
    )
    
    
    (8,977
    )Discounts granted
    
    
    (862
    )
    
    
    (1,960
    )
    
    
    (3,984
    )Returns of goods
    
    
    
    
    
    
    (6,926
    )
    
    
    (10,916
    )Net revenue from sales of
handsets
    
    
    301,456
    
    
    
    208,773
    
    
    
    174,993Total net operating
revenue
    
    
    1,958,910
    
    
    
    1,572,110
    
    
    
    1,256,085
  There were no customers who contributed more than 10% of total gross
operating revenues of the Company in 2003, 2002 and 2001, except for Brasil
Telecom, which contributed approximately 19% of total gross operating
revenues in 2003, 20% in 2002 and 22% in 2001, mainly in relation to
interconnection revenues. F-14




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  5.
    
    Cost of Services and Goods Sold 2003
    
    2002
    
    2001Personnel
    
    
    (18,752
    )
    
    
    (15,581
    )
    
    
    (12,019
    )Outsourced
services
    
    
    (40,112
    )
    
    
    (28,744
    )
    
    
    (18,147
    )Leased lines
    
    
    (36,885
    )
    
    
    (32,348
    )
    
    
    (29,604
    )Rent, insurance and condominium fees
    
    
    (13,710
    )
    
    
    (10,087
    )
    
    
    (8,064
    )Interconnection
    
    
    (147,137
    )
    
    
    (142,741
    )
    
    
    (102,870
    )Fistel fees
    
    
    (85,036
    )
    
    
    (60,178
    )
    
    
    (53,173
    )Depreciation and amortization
    
    
    (161,201
    )
    
    
    (128,749
    )
    
    
    (118,035
    )Cost of goods sold
    
    
    (390,026
    )
    
    
    (314,193
    )
    
    
    (273,299
    )Others
    
    
    (11,163
    )
    
    
    (9,151
    )
    
    
    (5,484
    )Total
    
    
    (904,022
    )
    
    
    (741,772
    )
    
    
    (620,695
    )
  6.
    
    Selling Expenses 2003
    
    2002
    
    2001Personnel
    
    
    (36,222
    )
    
    
    (22,324
    )
    
    
    (20,312
    )Supplies
    
    
    (4,435
    )
    
    
    (4,312
    )
    
    
    (5,000
    )Outsourced
services
    
    
    (194,808
    )
    
    
    (135,512
    )
    
    
    (113,251
    )Rent, insurance and condominium
fees
    
    
    (7,379
    )
    
    
    (5,269
    )
    
    
    (4,074
    )Taxes and
contributions
    
    
    (183
    )
    
    
    (78
    )
    
    
    (62
    )Depreciation and
amortization
    
    
    (7,797
    )
    
    
    (10,164
    )
    
    
    (3,222
    )Provision for doubtful
accounts
    
    
    (47,134
    )
    
    
    (33,059
    )
    
    
    (48,334
    )Others
    
    
    (2,558
    )
    
    
    (4,564
    )
    
    
    (259
    )Total
    
    
    (300,516
    )
    
    
    (215,282
    )
    
    
    (194,514
    )
  7.
    
    General and administrative expenses 2003
    
    2002
    
    2001Personnel
    
    
    (64,946
    )
    
    
    (42,120
    )
    
    
    (34,703
    )Supplies
    
    
    (3,985
    )
    
    
    (3,223
    )
    
    
    (2,883
    )Outsourced
services
    
    
    (87,343
    )
    
    
    (71,394
    )
    
    
    (47,653
    )Rent, insurance and condominium
fees
    
    
    (9,204
    )
    
    
    (4,814
    )
    
    
    (4,533
    )Taxes and
contributions
    
    
    (3,065
    )
    
    
    (2,052
    )
    
    
    (16,661
    )Depreciation and
amortization
    
    
    (24,223
    )
    
    
    (17,932
    )
    
    
    (1,196
    )Others
    
    
    (492
    )
    
    
    (325
    )
    
    
    (704
    )Total
    
    
    (193,258
    )
    
    
    (141,860
    )
    
    
    (108,333
    )
  8.
    
    Other net operating expenses 2003
    
    2002
    
    2001Income:Fines
    
    
    22,168
    
    
    
    16,994
    
    
    
    12,921Recovered
expenses
    
    
    602
    
    
    
    252
    
    
    
    348Reversal of reserves for
contingencies
    
    
    5,869
    
    
    
    396
    
    
    
    760Other
    
    
    4,240
    
    
    
    7,853
    
    
    
    5,651Total
income
    
    
    32,879
    
    
    
    25,495
    
    
    
    19,680Expenses:Reserve for contingencies
    
    
    (3,000
    )
    
    
    (2,799
    )
    
    
    (5,238
    )Telegoiás and NBT goodwill
amortization
    
    
    (1,560
    )
    
    
    (1,560
    )
    
    
    (371
    )Taxes other than on
income
    
    
    (29,916
    )
    
    
    (20,431
    )
    
    
    (9,116
    )Donations and
sponsorships
    
    
    (10,937
    )
    
    
    (9,537
    )
    
    
    (7,330
    )Other
    
    
    (929
    )
    
    
    (5,796
    )
    
    
    (1,804
    )Total
expense
    
    
    (46,342
    )
    
    
    (40,123
    )
    
    
    (23,859
    )Total,
net
    
    
    (13,463
    )
    
    
    (14,628
    )
    
    
    (4,179
    )
 F-15




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  Research and development cost are charged to expense as incurred. Research
and development expenses in 2001 was R$ 436. The Company did not incur
research and development expenses in 2003 and 2002.9.
    
    Net financial income (expense) 2003
    
    2002
    
    2001Interest income
    
    
    208,413
    
    
    
    158,960
    
    
    
    97,894Interest expense
    
    
    (80,538
    )
    
    
    (96,621
    )
    
    
    (70,295
    )Net exchange/ monetary variations
    
    
    76,448
    
    
    
    (123,871
    )
    
    
    (41,512
    )Derivative contracts, net
    
    
    (92,653
    )
    
    
    65,502
    
    
    
    7,451Total, net
    
    
    111,670
    
    
    
    3,970
    
    
    
    (6,462
    )
  10.
    
    Net non-operating income (expense) 2003
    
    2002
    
    2001Gain (Loss) on
investments
    
    
    252
    
    
    
    (205
    )
    
    
    (1
    )Proceeds from disposal of property,
plant and
equipment
    
    
    (18.894
    )
    
    
    (14.334
    )
    
    
    (10.159
    )Unclaimed
dividends
    
    
    
    
    
    
    5,418
    
    
    
    Other non-operating
income
    
    
    12.278
    )
    
    
    13.413
    
    
    
    10.456Total,
net
    
    
    (6,364
    )
    
    
    4,292
    
    
    
    296
  11.
    
    Income and Social Contribution TaxesBrazilian income taxes comprise federal income tax and the social
contribution tax. For the three-year period ended December 2003, the income
tax rate was 25% and the social contribution tax rates were 9%. Deferred
income tax assets and liabilities related to temporary differences and
income and social contribution tax loss carryforwards were calculated at the
tax rate of 34%.The composition of income tax expense is as follows: 2003
    
    2002
    
    2001Income
tax
    
    
    131,795
    
    
    
    77,594
    
    
    
    67,399Social contribution
tax
    
    
    48,642
    
    
    
    27,883
    
    
    
    24,455Deferred taxes
    
    
    652
    
    
    
    26,039
    
    
    
    4,025Total
    
    
    181,089
    
    
    
    131,516
    
    
    
    95,879
  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 2003, 2002 and 2001: 2003
    
    2002
    
    2001Income before taxes as
reported
    
    
    652,957
    
    
    
    466,830
    
    
    
    322,198Taxes charged at the combined statutory
rate
    
    
    222,005
    
    
    
    158,722
    
    
    
    109,547Permanent additions:Donations and
sponsorships
    
    
    1,678
    
    
    
    1,763
    
    
    
    Expired
interest on shareholders equity
    
    
    1,424
    
    
    
    
    
    
    
    Other
    
    
    2,439
    
    
    
    4,621
    
    
    
    2,701Permanent exclusions:Interest on
shareholders equity
    
    
    (44,961
    )
    
    
    (32,176
    )
    
    
    (15,401
    )Other
    
    
    
    
    
    
    
    
    
    
    (63
    )Other items:Unrecognized taxes on temporary differences 
TCO
IP
    
    
    2,193
    
    
    
    
    
    
    
    Surtax
difference
    
    
    (168
    )
    
    
    (168
    )
    
    
    Taxes incentives and
other
    
    
    (3,521
    )
    
    
    (1,246
    )
    
    
    (905
    )Income and social contribution taxes
    
    
    181,089
    
    
    
    131,516
    
    
    
    95,879Effective
rate
    
    
    27,7
    %
    
    
    28,2
    %
    
    
    29,8
    %
 F-16




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##### Table of Contents

\

TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  The composition of deferred and recoverable tax assets is as follows: 2003
    
    2002Recoverable income and social contribution
taxes
    
    
    42,309
    
    
    
    15,055Withholding income
tax
    
    
    28,689
    
    
    
    41,758Recoverable ICMS (State
VAT)
    
    
    54,866
    
    
    
    31,640Recoverable PIS and COFINS (taxes on revenue) and
other
    
    
    273
    
    
    
    1,045Recoverable
taxes
    
    
    126,137
    
    
    
    89,498ICMS on unearned
revenue
    
    
    3,228
    
    
    
    2,506Deferred income and social contribution
taxes
    
    
    75,910
    
    
    
    76,562Total
    
    
    205,275
    
    
    
    168,566Current
    
    
    150,011
    
    
    
    120,117Noncurrent
    
    
    55,264
    
    
    
    48,449
 Deferred income and social contribution taxes are comprised of: 2003
    
    2002Merged tax credit (corporate
restructuring)
    
    
    21,943
    
    
    
    43,886Allowance/Reserve for:Contingencies
    
    
    25,701
    
    
    
    22,209Doubtful
accounts
    
    
    11,501
    
    
    
    9,042Accrued expenses
    
    
    16,765
    
    
    
    1,425Total
    
    
    75,910
    
    
    
    76,562Current
    
    
    52,883
    
    
    
    54,619Noncurrent
    
    
    23,027
    
    
    
    21,943
  Deferred taxes have been recorded as it is more likely than not that they
will be realized, as follows:  a)
    
    The merged tax credit consists of the net balance of goodwill and
the reserve for maintenance of integrity of shareholders equity and is
realized in proportion to the goodwill amortization for TCO and its
subsidiaries; this will be recovered by December 31, 2004. (See note
31)b)
    
    Temporary differences will be realized upon payment of the
accruals, effective losses on bad debts and realization of inventories.  12.
    
    Supplemental Cash Flow Information 2003
    
    2002
    
    2001Cash paid for
interest
    
    
    30,473
    
    
    
    51,718
    
    
    
    85,432Income tax and social contributions
paid
    
    
    197,791
    
    
    
    77,861
    
    
    
    64,446Acquisition of minority interest of Telebrasilia
Celular S.A. through issuance of
shares
    
    
    
    
    
    
    37,545
    
    
    
    Cash paid for
concessions
    
    
    
    
    
    
    
    
    
    
    22,385
  13.
    
    Cash and cash equivalents 2003
    
    2002Banks
    
    
    24,690
    
    
    
    37,141Short-term cash
investments
    
    
    947,364
    
    
    
    121,362Total
    
    
    972,054
    
    
    
    158,503
 F-17




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) Short-term cash investments refer principally consist of fixed-income
investments which are indexed to interbank deposit (CDI) rates and are highly
liquid.  14.
    
    Marketable Securities Marketable securities at December 31, 2003 and 2002 consisted of the following: Interest
    
    Due date
    
    2003
    
    2002Debentures 
FIXCEL
    
    100% CDI plus 2% per year
    
    
    8/8/2003
    
    
    
    
    
    
    
    712,135
    
    
    
    712,135
 On June 27 and August 8, 2003, the Company redeemed the debentures issued by
FIXCEL S.A. (FIXCEL) that were acquired on July 2 and August 13, 2002,
respectively.  15.
    
    Trade Accounts Receivable, Net 2003
    
    2002Unbilled amounts
    
    
    61,300
    
    
    
    47,389Billed amounts
    
    
    370,781
    
    
    
    207,461Provision for doubtful accounts
    
    
    (33,828
    )
    
    
    (26,594
    )Total
    
    
    398,253
    
    
    
    228,256
 There was no customer who represented more than 10% of trade accounts
receivable of the Company in 2003 and 2002, except for Brasil Telecom, which
represented approximately 17.1% and 16.8% of such account in 2003 and 2002,
respectively, mainly in relation to interconnection charges.  The changes in the provision for doubtful accounts are as follows: 2003
    
    2002
    
    2001Balance at beginning of
year
    
    
    26,594
    
    
    
    40,781
    
    
    
    25,826Bad debt
expense
    
    
    47,134
    
    
    
    33,059
    
    
    
    48,334Write-offs
    
    
    (39,900
    )
    
    
    (47,246
    )
    
    
    (33,379
    )Balance at end of
year
    
    
    33,828
    
    
    
    26,594
    
    
    
    40,781
  16.
    
    Inventories 2003
    
    2002Digital
handsets
    
    
    65,490
    
    
    
    36,820Other
    
    
    14,915
    
    
    
    12,501Reserve for
obsolescence
    
    
    (1,329
    )
    
    
    (952
    )Total
    
    
    79,076
    
    
    
    48,369
  17.
    
    Prepaid expenses 2003
    
    2002Advertising
    
    
    9,587
    
    
    
    Financial charges
    
    
    1,036
    
    
    
    1,420Insurance premiums
    
    
    224
    
    
    
    533Others
    
    
    1,427
    
    
    
    182Total
    
    
    12,274
    
    
    
    2,135
 F-18




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  18.
    
    Other assets 2003
    
    2002Employees
advance
    
    
    4,126
    
    
    
    3,747Tax
incentives
    
    
    
    
    
    
    3,913Advance to affiliate for purchase of
shares
    
    
    44,461
    
    
    
    40,226Escrow
deposits
    
    
    13,660
    
    
    
    12,471Other
assets
    
    
    2,452
    
    
    
    1,753Total
    
    
    64,699
    
    
    
    62,110Current
    
    
    6,565
    
    
    
    5,480Noncurrent
    
    
    58,134
    
    
    
    56,630
  19.
    
    Property, Plant and Equipment  a.
    
    Composition 2003
    
    2002Accumulated
    
    Net book
    
    Net bookCost
    
    depreciation
    
    value
    
    valueTransmission
equipment
    
    
    839,910
    
    
    
    (493,521
    )
    
    
    346,389
    
    
    
    325,056Switching
equipment
    
    
    271,136
    
    
    
    (101,530
    )
    
    
    169,606
    
    
    
    194,560Infrastructure
    
    
    177,828
    
    
    
    (71,164
    )
    
    
    106,664
    
    
    
    96,281Land
    
    
    7,898
    
    
    
    
    
    
    
    7,898
    
    
    
    5,830Software use
rights
    
    
    131,854
    
    
    
    (55,260
    )
    
    
    76,594
    
    
    
    64,902Buildings
    
    
    28,682
    
    
    
    (8,132
    )
    
    
    20,550
    
    
    
    17,766Handsets
    
    
    30,295
    
    
    
    (22,620
    )
    
    
    7,675
    
    
    
    6,058Concession
license
    
    
    60,550
    
    
    
    (17,508
    )
    
    
    43,042
    
    
    
    50,172Other
assets
    
    
    63,073
    
    
    
    (28,154
    )
    
    
    34,919
    
    
    
    34,833Construction in
progress
    
    
    77,693
    
    
    
    
    
    
    
    77,693
    
    
    
    95,960Total
    
    
    1,688,919
    
    
    
    (797,889
    )
    
    
    891,030
    
    
    
    891,418
  On January 1, 2003, the Company changed its estimate of the useful life of
handsets from 5 years to 2 years, to better reflect the impact of usage of
these assets. The effect of this reduction in 2003 resulted in an increase
in depreciation expense of R$3,248.  b.
    
    Depreciation RatesDepreciation rates applied to property, plant and equipment are as
follows: %2003
    
    2002
    
    2001Switching equipment
    
    10.00
    
    10.00
    
    10.00Transmission equipment
    
    14.29
    
    14.29
    
    14.29Infrastructure
    
    5.00 to 10.00
    
    5.00 to 10.00
    
    5.00 to 10.00Software use
rights
    
    20.00
    
    20.00
    
    20.00Buildings
    
    4.00
    
    4.00
    
    4.00Terminals
    
    50.00
    
    20.00
    
    20.00Operation license (concession)
    
    6.67
    
    6.67
    
    6.67Other assets (excluding land)
    
    5.00 to 20.00
    
    5.00 to 20.00
    
    5.00 to 20.00
 F-19




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  c.
    
    RentalsThe Company rents equipment and premises through a number of operating
lease agreements. Total rent expense incurred under these agreements is as
follows: 2003
    
    2002
    
    2001Rental
expenses
    
    
    28,869
    
    
    
    20,720
    
    
    
    15,610
  Future minimum rental payments under non-cancelable operating leases with
remaining initial terms in excess of one year at December 31, 2003 are: 2004
    
    
    8,6712005
    
    
    4,7132006
    
    
    2,9412007
    
    
    1,7322008 and
thereafter
    
    
    1,336Total
    
    
    19,393
  20.
    
    Deferred Assets, Net Annual AmortizationRate %
    
    2003
    
    2002Pre-operating
expensesFinancial
expenses
    
    
    10 - 20
    
    
    
    16,701
    
    
    
    16,701General and administrative expenses
    
    
    10 - 20
    
    
    
    27,991
    
    
    
    28,06044,692
    
    
    
    44,761Accumulated
amortizationPre-operating
expenses
    
    
    
    
    
    
    (17,782
    )
    
    
    (13,241
    )Total
    
    
    
    
    
    
    26,910
    
    
    
    31,520
  Norte Brasil Telecom S.A. (NBT) began its operations at the end of October
1999, covering 11 of the 97 cities within the Companys operating area. As
the Companys activities relating to the rendering of services were
insignificant at December 31, 1999, all expenses incurred until this date
were considered as pre-operating and only subject to amortization from
January 2000.  21.
    
    Payroll and Related Accruals 2003
    
    2002Salaries and
wages
    
    
    12,003
    
    
    
    4,041Social
charges
    
    
    7,813
    
    
    
    7,087Accrued
benefits
    
    
    510
    
    
    
    900Total
    
    
    20,326
    
    
    
    12,028
  22.
    
    Accounts Payable and Accrued Expenses 2003
    
    2002Suppliers
    
    
    192,335
    
    
    
    139,618Interconnection
    
    
    26,715
    
    
    
    11,706Amounts payable to long distance operators  SMP
(*)
    
    
    36,035
    
    
    
    Other
    
    
    21,176
    
    
    
    3,065Total
    
    
    276,261
    
    
    
    154,389
  (*) Refers to long-distance services billed to customers and to be
passed on to operators due to the migration to SMP. F-20




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  23.
    
    Taxes other than income taxes 2003
    
    2002Value-added tax
(ICMS)
    
    
    67,214
    
    
    
    48,626PIS and COFINS (taxes on
revenue)
    
    
    16,718
    
    
    
    10,533Fistel
fees
    
    
    55,832
    
    
    
    45,767Fust and
Funttel
    
    
    1,219
    
    
    
    1,060Other
taxes
    
    
    2,311
    
    
    
    2,793Total
    
    
    143,294
    
    
    
    108,779Current
    
    
    133,322
    
    
    
    104,638Noncurrent
    
    
    9,972
    
    
    
    4,141
  The non-current portion refers to the benefit under the Programa
Teleproduzir, an agreement made with the Goiás State Government for
deferral of ICMS payments. Pursuant to this agreement, the ICMS due will be
paid in 84 monthly installments, on a monthly interest rate of 0.02% with a
grace period of 12 months from the final date of utilization of the benefit,
estimated for October 2004.  24.
    
    Dividends payable 2003
    
    2002TCO shareholdersCurrent year dividends and interest on
shareholders equity
    
    
    130,000
    
    
    
    93,499Withholding tax on interest on shareholders
equity
    
    
    (19,500
    )
    
    
    (14,025
    )Prior year dividends not
claimed
    
    
    17,416
    
    
    
    13,805Minority
shareholders
    
    
    7,203
    
    
    
    6,450Total
    
    
    135,119
    
    
    
    99,729
  25.
    
    Loans and Financing  a)
    
    Composition of debt Description
    
    
    
    Annual Interest
    
    Maturity
    
    2003
    
    2002BNDES
    
    R$
    
    TJLP + 3.5% to 4%
    
    
    01/15/2008
    
    
    
    171,067
    
    
    
    207,536Other
    
    R$
    
    Column 20-FGV
    
    
    12/15/2008
    
    
    
    1,845
    
    
    
    1,586Finimp
    
    US$
    
    Libor + interest of 2% to 7%
    
    
    05/17/2004
    
    
    
    29,705
    
    
    
    173,939Resolution No. 2,770
    
    US$
    
    US$+average interest of 7.41%
    
    
    11/29/2004
    
    
    
    1,755
    
    
    
    60,359Export Development
Corporation 
EDC
    
    US$
    
    Libor (6 months) + 3.9% to 5%
    
    
    12/14/2006
    
    
    
    125,509
    
    
    
    162,535BNDES  basket of
currencies
    
    UMBNDES
    
    3.5%
    
    
    01/15/2008
    
    
    
    15,987
    
    
    
    18,004Accrued interest
    
    
    
    
    
    
    
    
    
    
    2,300
    
    
    
    3,821Total
    
    
    
    
    
    
    
    
    
    
    348,168
    
    
    
    627,780Current
    
    
    
    
    
    
    
    
    
    
    135,042
    
    
    
    324,980Noncurrent
    
    
    
    
    
    
    
    
    
    
    213,126
    
    
    
    302,800
 TJLP  Brazilian long-term interest rate. F-21




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  b)
    
    Repayment Schedule  The long-term portion of loans and financing matures as follows: Year2005
    
    
    88,6132006
    
    
    81,1962007
    
    
    39,7212008
    
    
    3,596Total
    
    
    213,126
  c)
    
    Restrictive covenants  The Company has loans and financing from the National Bank for Economic
and Social Development (BNDES) and Export Development Corporation  EDC,
which balances at December 31, 2003 were R$187,054 and R$125,509,
respectively. Such loans and financing have restrictive covenants, which
include restrictions as to debt levels, EBITDA (Earnings Before Taxes,
Interest, Depreciation and Amortization) and liquidity. The Company was
in compliance with all such covenants at December 31, 2003. Furthermore,
these covenants have not restricted the Companys ability to conduct its
normal business or incur additional debt to fund its working capital or
capital expenditures as of the date of this annual report.  d)
    
    Derivative contracts  As of December 31, 2003 and 2002, the Company has exchange contracts
with notional amounts of US$61,239,000 and US$96,789,000 to protect
against exchange rate fluctuations on foreign currency obligations. For
the year ended December 31, 2003 and 2002, the Company recognized an
accumulated net unrealized loss of R$15,006 and net gain of R$51,464,
respectively. At December 31, 2003 and 2002 the Company had recorded an
asset of R$87 and R$53,304, respectively of which R$87 and R$14,863,
respectively is recorded as noncurrent and R$38,441 as of December 31,
2002 in current, and a liability of R$15,093 and R$1,840 as of December
31, 2003 and 2002, respectively of which R$9,426 and R$1,567 as of
December 31, 2003 and 2002is recorded in current and R$5,667 and R$273
as of December 31, 2003 and 2002 in long term.  e)
    
    Guarantees Banks
    
    GuaranteesBNDES  TCO
operators
    
    In the event of default, 15% of receivables and
CDs equivalent to the amount of the next
installment payable are pledged.BNDES
NBT
    
    In the event of default, 100% of receivables and
CDs equivalent to the amount of next installment
payable during the first year and two installments
payable in the remaining period are pledged.
  26.
    
    Other liabilities 2003
    
    2002Services to be provided 
prepaid
    
    
    11,826
    
    
    
    8,039Accrual for customer loyalty program
(i)
    
    
    870
    
    
    
    561Advances from
customers
    
    
    9,276
    
    
    
    5,717Other
    
    
    546
    
    
    
    54622,518
    
    
    
    14,863Current
    
    
    21,972
    
    
    
    14,317Noncurrent
    
    
    546
    
    
    
    546
 F-22




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  (i)
    
    On November 1, 2002, the Company launched a customer loyalty
program whereby the customer makes calls and earns points redeemable
for prizes (call minutes, points in TAM airline loyalty program, and
other). The points expire in 24 months. Accumulated points are accrued
when granted, considering redemption prospects based on the consumption
profile of participant customers. The accrual is reduced when points
are redeemed by customers.  27.
    
    Reserve for ContingenciesThe 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. 2003
    
    2002Telebrás
    
    
    94,931
    
    
    
    82,431Tax
claims
    
    
    11,191
    
    
    
    14,856Civil
claims
    
    
    2,653
    
    
    
    1,539Labor
claims
    
    
    598
    
    
    
    278Total
    
    
    109,373
    
    
    
    99,104
  The changes in the reserve for contingencies are as follows: 2003
    
    2002
    
    2001Beginning balance
    
    
    99,104
    
    
    
    76,476
    
    
    
    62,999Additional reserve
    
    
    3,000
    
    
    
    2,799
    
    
    
    5,238Monetary variation
    
    
    13,138
    
    
    
    20,225
    
    
    
    8,999Reversals
    
    
    (5,869
    )
    
    
    (396
    )
    
    
    (760
    )Ending balance
    
    
    109,373
    
    
    
    99,104
    
    
    
    76,476
  Telebrás claimsThe Telebrás claims related to original loans from Telecomunicações
Brasileiras S.A.  TELEBRÁS, which, according to Attachment II to the
Spin-off Report dated February 28, 1998, approved by the Shareholders
Meeting held in May 1998, and in the opinion of Company management, should
be allocated to the respective holding companies of Telegoiás and
Telebrasília Celular S.A. Although management believes that there was an
error in the allocation of the loans upon the spin-off, the Company has
reserved amounts corresponding to loans payable to Tele Centro Sul
Participações S.A. (Tele Centro Sul) based on external legal counsels
opinion that the possibility of an unfavorable outcome is probable. The
Company is restating the loans based on the general market price index
(IGP-M) plus 6% annual interest. Tele Centro Sul has filed a claim to index
the loans to the U.S. dollar. The Companys external legal counsels opinion
is that an unfavorable outcome is possible relating to the claim referring
to the restatement index. The difference in contingencies not recognized
between IGP-M plus 6% and the U.S. dollar index is estimated at R$31,669 and
R$68,780 as of December 31, 2003 and 2002, respectively.TaxProbable losses  a)
    
    ICMS (State VAT)  The subsidiaries received tax assessment notices related to various ICMS
claims for which a provision of R$1,656 and R$4,920 was recorded at
December 31, 2003 and 2002, respectively.  b)
    
    PIS and COFINS (taxes on revenue)  On November 27, 1998, the calculation of PIS and COFINS was changed by
Law No. 9,718 which: (i) increased the COFINS rate from 2% to 3%, (ii)
authorized a deduction of up to 1/3 of the COFINS amount F-23




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) from the social
contribution (CSLL) tax, and also (iii) indirectly increased COFINS and
PIS due by the subsidiaries, requiring the inclusion of other income in
their tax bases. According to the Companys external legal counsel, this increase is
unconstitutional, since: (i) article 195 of the Constitution of the
Federative Republic of Brazil, which took effect upon publication of Law
No. 9,718, determined that PIS and COFINS should be levied only on
payroll, revenues and profits, (ii) the federal government used an
inadequate method to increase COFINS and PIS, i.e., ordinary law instead
of supplementary law and (iii) the law enacted prior to the expiration
of the 90-day grace. The Company filed a lawsuit challenging the constitutionality of this
change in tax law. In order to suspend the tax credit requirement, a
provision was recorded and escrow deposits were made amounting to
R$9,525 as of December 31, 2003 and 2002. Due to the changes introduced by Law No. 10,637/02, the Company has
included other income in the PIS tax base since December 2002. Possible losses Based on external legal counsel and tax consultants opinions, management
believes that the likehood of an unfavorable outcome relating to the
following claims is possible and consequently has not recorded a provision
for losses related to these claims. a) ICMS The Company received tax assessment notices totaling R$1,596, related to
ICMS claims. b) ISS (municipal service tax) The Company received claims alleging tax debt relating to the period from
October 2000 to May 2002, for the nonpayment of ISS on revenue amounting to
R$452. Labor and Civil Claims A provision for losses on labor and civil claims has been recorded to cover
probable losses. Claims for which the likehood of an unfavorable outcome is
possible amount to R$5,505 and R$4,527 for civil claims and R$1,149 and
R$505 for labor claims as of December 31, 2003 and 2002, respectively. a) Litigation Related to the Ownership of Caller ID In July 2002, we, together with other Brazilian mobile telecommunication
operators, were named as defendants in an action filed by Lune Projetos
Especiais Telecommunicação Comércio Ind. Ltda., or Lune, pursuant to which
Lune claims to be the owner of patents relating to Equipamento Controlador
de Chamadas Entrantes e do Terminal Telefônico, or Caller ID, and also that
the mobile telecommunication operators are using the patent without proper
authorization. Therefore, Lune demands that the operators cease to provide
Caller ID services and that it should be indemnified for the unauthorized
use of the Caller ID system, upon payment of fees received by the operators
in consideration of the use of the system by their customers. Based on the
opinion of our legal counsel, the chance of an unfavorable outcome is
possible in this case. However the indemnification that is allegedly due
from the mobile operators cannot be accurately calculated as of yet due to
the fact that the cost of the caller ID service provided by the companies
has never been separately calculated. b) Litigation Related to the Validity of the Minutes in the Prepaid
Plans We are defendant in various lawsuits brought by the federal public
prosecutors office and an association for consumers protection which
challenged the imposition of a deadline for the use of purchased prepaid
minutes. The plaintiffs allege that any purchased prepaid minutes should
not have a time limitation for usage. Based on external counsels opinion,
we do not believe it will be resolved against our interests. F-24




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) 28. Pension and post-retirement benefit plans The Company and its subsidiaries, together with other companies of the
former Telebrás System, sponsor private pension and health care plans for
retired employees, managed by Fundação Sistel de Seguridade Social
(Sistel). Until December 1999, all sponsors of the plans managed by Sistel
were jointly and severally liable participants in relation to all plans then
existent. On December 28, 1999, single-employer sponsored pension plans for
active employees were created (PBS-TCO). The PBS-A plan for retired
employees and the PAMA plan that provides post-retirement health care
benefits remained as multiemployer plans. The implementation of the
restructuring was approved by the Secretaria de Previdência Complementar
(Secretariat for Social Security and Supplementary Benefits) on January 13,
2000. Contributions to the PBS-TCO Plan are determined in accordance with rules in
force in Brazil. Costing is determined using the capitalization method and
the contribution due by the sponsor is equivalent to 13.5% of the payroll
for employees covered by the plan, of which 12% is allocated to fund the
PBS-TCO Plan and 1.5% for the PAMA Plan. For 99% of the Companys and its subsidiaries employees, there is an
individual defined contribution plan  the TCO PREV Plan, established by
Sistel in August 2000. This plan is maintained by contributions made by both
participants (employees) and the sponsors, which are credited to
participants individual accounts. The Company and its subsidiaries are also
responsible for the administrative and plan maintenance expenses, including
risks of death and disability of participants. The employees participating
in the defined benefit plan (PBS-TCO) were granted the option of migrating
to the TCO PREV Plan. This option was extended to employees who did not
participate in the PBS-TCO Plan, as well as to all new hires. The Companys
contributions to the TCO PREV Plan are equal to those of the participants,
varying from 1% to 8% of the contribution salary, according to the
percentage chosen by the participant. During 2003, the Company contributed R$3 (R$1,792 in 2002) to the PBS-TCO
Plan and R$4,380 (R$3,229 in 2002) to the TCO PREV Plan. The Company elected to recognize actuarial liabilities as provided for in
CVM Resolution No. 371 of December 13, 2000, as a direct charge to
shareholders equity as of December 31, 2001, net of the related tax
effects. The actuarial valuation of the plans was made using the projected
unit credit method. For multiemployer plans (PAMA and PSB-A), apportionment
of assets is made based on the sponsoring entitys actuarial liabilities in
relation to the plans total actuarial liabilities. As of December 31, 2003,
the total liability recognized amounted to R$2,810 (R$464 in 2002). The following summarizes the components of the accrual for retired
employees defined benefit and health care plans as of December 31, 2003 and
2002 and other information required by CVM Instruction No. 371 applicable to
such plans: Plan
    
    2003
    
    2002TCO Prev
    
    
    2,471
    
    
    
    395PAMA
    
    
    339
    
    
    
    69Total
    
    
    2,810
    
    
    
    464
 a) Reconciliation of funded status 2003PAMA
    
    PBS-TCO
    
    PBS-ATCO Prev
    
    (i)
    
    (ii)
    
    (ii)Benefit obligation
    
    
    36,143
    
    
    
    778
    
    
    
    1,737
    
    
    
    3,053Fair value of plan assets
    
    
    (33,672
    )
    
    
    (439
    )
    
    
    (1,884
    )
    
    
    (3,647
    )Funded status
    
    
    2,471
    
    
    
    339
    
    
    
    (147
    )
    
    
    (594
    )
 F-25




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) 2002PAMA
    
    PBS-TCO
    
    PBS-ATCO Prev
    
    (i)
    
    (ii)
    
    (ii)Benefit obligation
    
    
    31,505
    
    
    
    656
    
    
    
    826
    
    
    
    2,524Fair value of plan assets
    
    
    (25,225
    )
    
    
    (291
    )
    
    
    (2,660
    )
    
    
    (3,153
    )Unrecognized net gains (losses)
    
    
    (5,897
    )
    
    
    (292
    )
    
    
    1,446
    
    
    
    440Net liabilities (assets)
    
    
    383
    
    
    
    73
    
    
    
    (388
    )
    
    
    (189
    )
  (i)
    
    Refers to the Companys and its subsidiaries proportional
share in assets and liabilities of the multiemployer plans  PAMA
and PBS-A.  (ii)
    
    Although PBS-TCO and PBS-A (at December 31, 2003) have a
surplus balance, no assets were recognized by the sponsor, since
reimbursing such surplus is not allowed by law. Moreover, PB S-A is
a non-contributory plan, which precludes a reduction of
contributions by the sponsor in the future. b) Net periodic cost for the year 2003
    
    2002TCO Prev
    
    PAMA
    
    TCO Prev
    
    PAMA(iii)Service cost
    
    
    1,343
    
    
    
    5
    
    
    
    941
    
    
    
    Interest cost
    
    
    3,536
    
    
    
    73
    
    
    
    2,996
    
    
    
    Expected return on plan assets
    
    
    
    
    
    
    
    
    
    
    (3,342
    )
    
    
    Amortization of initial
transition obligation
    
    
    
    
    
    
    
    
    
    
    760
    
    
    
    Total
    
    
    4,879
    
    
    
    78
    
    
    
    1,355
    
    
    
    
 c) Change in accrued cost 2003
    
    2002TCO Prev
    
    PAMA
    
    TCO Prev
    
    PAMA(iii)Accrued cost at beginning of the year
    
    
    383
    
    
    
    73
    
    
    
    
    
    
    
    Actuarial (gains) losses for the year
    
    
    (1,436
    )
    
    
    189
    
    
    
    
    
    
    
    Sponsors contributions for the year
    
    
    (1,355
    )
    
    
    (1
    )
    
    
    (972
    )
    
    
    Net periodic cost for the year
    
    
    4,879
    
    
    
    78
    
    
    
    1,355
    
    
    
    Accrued cost at the end of the year
    
    
    2,471
    
    
    
    339
    
    
    
    383
    
    
    
    73
 d) Change in benefit obligation 2003TCO Prev
    
    PAMA
    
    PBS-TCO
    
    PBS-ABenefit obligation as of December 31, 2002
    
    
    31,505
    
    
    
    656
    
    
    
    826
    
    
    
    2,524Service cost
    
    
    1,343
    
    
    
    5
    
    
    
    66
    
    
    
    Interest cost
    
    
    3,536
    
    
    
    73
    
    
    
    91
    
    
    
    275Benefits paid for the year
    
    
    (232
    )
    
    
    (33
    )
    
    
    (278
    )
    
    
    (210
    )Actuarial (gains) losses for the year
    
    
    (9
    )
    
    
    77
    
    
    
    1,032
    
    
    
    464Benefit obligation as of December 31, 2003
    
    
    36,143
    
    
    
    778
    
    
    
    1,737
    
    
    
    3,053
 F-26




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) 2002PAMATCO Prev
    
    (iii)
    
    PBS-TCO
    
    PBS-ABenefit obligation as of December 31, 2001
    
    
    26,619
    
    
    
    
    
    
    
    825
    
    
    
    2,360Service cost
    
    
    940
    
    
    
    
    
    
    
    74
    
    
    
    Interest cost
    
    
    2,996
    
    
    
    
    
    
    
    91
    
    
    
    258Benefits paid for the year
    
    
    (123
    )
    
    
    
    
    
    
    (57
    )
    
    
    (190
    )Actuarial (gains) losses for the year
    
    
    1,073
    
    
    
    
    
    
    
    (107
    )
    
    
    96Benefit obligation as of December 31, 2002
    
    
    31,505
    
    
    
    656
    
    
    
    826
    
    
    
    2,524
 e) Change in plan assets 2003TCO Prev
    
    PAMA
    
    PBS-TCO
    
    PBS-AFair value of plan assets as of December 31, 2002
    
    
    25,225
    
    
    
    291
    
    
    
    2,660
    
    
    
    3,153Benefits paid for the year
    
    
    (232
    )
    
    
    (33
    )
    
    
    (278
    )
    
    
    (210
    )Sponsors contributions for the year
    
    
    1,355
    
    
    
    1
    
    
    
    4
    
    
    
    Return on plan assets for the year
    
    
    7,324
    
    
    
    180
    
    
    
    (502
    )
    
    
    704Fair value of plan assets as of December 31, 2003
    
    
    33,672
    
    
    
    439
    
    
    
    1,884
    
    
    
    3,647
 2002PAMATCO Prev
    
    (iii)
    
    PBS-TCO
    
    PBS-AFair value of plan assets as of December 31, 2001
    
    
    22,812
    
    
    
    
    
    
    
    1,984
    
    
    
    2,701Benefits paid for the year
    
    
    (123
    )
    
    
    
    
    
    
    (57
    )
    
    
    (190
    )Sponsors contributions for the year
    
    
    970
    
    
    
    
    
    
    
    21
    
    
    
    Return on plan assets for the year
    
    
    1,566
    
    
    
    
    
    
    
    712
    
    
    
    642Fair value of plan assets as of December 31, 2002
    
    
    25,225
    
    
    
    291
    
    
    
    2,660
    
    
    
    3,153
  (iii)
    
    The effective date for CVM Resolution No. 371 was December
31, 2002; therefore, no items were recognized during fiscal year
2002 (eg., NPPC, reconciliation of accrued pension cost). f) Net periodic cost estimated for 2004 2004 - Estimated (Unaudited)TCO Prev
    
    PAMA
    
    PBS-TCO
    
    PBS-AService cost
    
    
    1,343
    
    
    
    5
    
    
    
    66
    
    
    
    Interest cost
    
    
    3,536
    
    
    
    73
    
    
    
    91
    
    
    
    275Expected return on assets
    
    
    (3,702
    )
    
    
    (41
    )
    
    
    (384
    )
    
    
    (443
    )Amortization of actuarial losses
    
    
    762
    
    
    
    73
    
    
    
    (123
    )
    
    
    (68
    )Employee contributions
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    Total
    
    
    1,939
    
    
    
    110
    
    
    
    (360
    )
    
    
    (236
    )
 F-27




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) g) Actuarial assumptions 2003TCO Prev
    
    PAMA
    
    PBS-ADiscount rate for determining
benefit obligations
    
    11.30% p.a.
    
    11.30% p.a.
    
    11.30% p.a.Expected return on plan
assets
    
    11.83% p.a.
    
    11.30% p.a.
    
    11.30% p.a.Future salary increases
    
    7.10% p.a.
    
    7.10% p.a.
    
    7.10% p.a.Increase in health care costs
    
    N/A
    
    8.15% p.a.
    
    N/ABenefit increase rate
    
    5.00% p.a.
    
    5.00% p.a.
    
    5.00% p.a.Mortality table
    
    UP84 with 1 year of
    
    UP84 with 1 year of
    
    UP84 with 1 year ofaggravation
    
    aggravation
    
    aggravationBiometric disability table
    
    Mercer
    
    Mercer
    
    Mercer
 2002TCO Prev
    
    PAMA
    
    PBS-ADiscount rate for determining
benefit obligations
    
    11.30% p.a.
    
    11.30% p.a.
    
    11.30% p.a.Expected return on plan assets
    
    14.45% p.a.
    
    14.45% p.a.
    
    14.45% p.a.Future salary increases
    
    8.15% p.a.
    
    8.15% p.a.
    
    5.00% p.a.Increase in health care costs
    
    N/A
    
    10.62% p.a.
    
    N/ABenefit increase rate
    
    5.00% p.a.
    
    5.00% p.a.
    
    5.00% p.a.Mortality table
    
    UP84 with 1 year of
    
    UP84 with 1 year of
    
    UP84 with 1 year ofaggravation
    
    aggravation
    
    aggravationBiometric disability table
    
    Mercer
    
    Mercer
    
    Mercer
 29. Shareholders Equity  a.
    
    CapitalThe authorized capital at December 31, 2003 and 2002 is 700,000,000
thousand shares. The subscribed and paid-in capital at December 31, 2003
corresponds to R$ 570,095 (R$ 534,046 in 2002), represented by
379,200,036,000 shares in 2003 and 2002 with no par value, distributed as
follows (in thousands of shares): December 31, 2003
    
    December 31, 2002Common shares
    
    
    126,433,338
    
    
    
    126,433,338Preferred shares
    
    
    252,766,698
    
    
    
    252,766,698Total
    
    
    379,200,036
    
    
    
    379,200,036(-) Treasury common shares
    
    
    (5,791,394
    )
    
    
    (5,791,394
    )Total outstanding shares
    
    
    373,408,642
    
    
    
    373,408,642Book value per thousand shares  BR CL (in R$)
    
    
    4.1672
    
    
    
    3.2632
 On April 29, 2003, the Company increased its capital by R$36,049, without
issuance of new shares, through capitalization of part of the income reserve
exceeding capital as of December 31, 2002. Preferred shares do not have voting rights, except in the circumstances set
forth in article 12 of the bylaws; they have priority in the redemption of
capital, without premium, are entitled to receive dividends of at least 25% of
net income for the year, calculated as defined by article 202 of corporate
law, have 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, and (c) are entitled to
receive dividends equivalent to those paid to holders of common shares, after
dividends in the same amount as mandatory minimum dividends on
preferred shares have been paid to such holders. F-28




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) b. Treasury shares The following is a summary of treasury stock transactions for
2003 and 2002: (In thousands of shares)Preferred shares
    
    Common SharesTreasury shares, December 31, 2001
    
    
    336,900
    
    
    
    747,178Acquired
    
    
    3,610,300
    
    
    
    5,044,216Sold
    
    
    (3,610,300
    )
    
    
    Canceled
    
    
    (336,900
    )
    
    
    Treasury shares, December 31, 2002 and 2003
    
    
    
    
    
    
    5,791,394
 c. Capital reserves Special premium reserve This reserve (R$72,189 as of December 31, 2003 and 2002) resulted from the
corporate restructuring implemented by the Company and will be capitalized
partially (R$25,436 as of December 31, 2003) in favor of the controlling
shareholder when the related tax benefit is effectively realized and the
remaining balance will offset Other assets  Advance for purchase of shares
(See Note 31). Share premium This reserve represents the excess of share issue or capitalization value
over the value per share at the issuance date. This reserve originated
mainly on the merger of Telebrasília Celular S.A. into the Company. d. Income reserves Legal reserve The legal reserve is calculated based on 5% of annual net income until it
equals 20% of paid-up 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 increase capital. Expansion reserve In accordance with Article 196 of Law No. 6,404/76, management will propose
at the general shareholders meeting the establishment of a retained income
reserve in the amount of R$310,238 relating to the remaining net income
balance for the year, after the allocation of the legal reserve and
dividends. This reserve will be used for future investment purposes based
on the capital budget to be approved by the general shareholders meeting. e. Dividends/interest on shareholders equity Dividends were calculated as follows: 2003
    
    2002
    
    2001Net income for the year
    
    
    463,408
    
    
    
    329,183
    
    
    
    208,104Reversal of unrealized income reserve
    
    
    
    
    
    
    
    
    
    
    97,675Legal reserve
    
    
    (23,171
    )
    
    
    (16,459
    )
    
    
    (10,405
    )Adjusted net income for the year
    
    
    440,237
    
    
    
    312,724
    
    
    
    295,374Mandatory minimum dividends (25%)
    
    
    110,059
    
    
    
    78,181
    
    
    
    73,844Common shares
    
    
    35,558
    
    
    
    26,068
    
    
    
    25,477Preferred shares
    
    
    74,501
    
    
    
    52,113
    
    
    
    48,367
 As determined by management, in 2003, shareholders were credited interest on
shareholders equity of R$130,000 (R$0.348144 per thousand shares), subject
to 15% withholding income tax, resulting in a net of R$110,500 (R$0.295922
per thousand shares). A proposal will be submitted to the Shareholders
Meeting to include interest on shareholders equity, net of withholding
income tax, into the mandatory minimum dividends, as follows: F-29




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) 2003
    
    2002
    
    2001Common shares
    
    
    42,001
    
    
    
    30,208
    
    
    
    27,707Preferred shares
    
    
    87,999
    
    
    
    63,291
    
    
    
    52,793Withholding income tax
    
    
    (19,500
    )
    
    
    (14,025
    )
    
    
    (6,000
    )Total
    
    
    110,500
    
    
    
    79,474
    
    
    
    74,500Dividends per thousand shares  R$
    
    
    0.296
    
    
    
    0.213
    
    
    
    0.204
 30. Transactions with Related Parties Related Parties  New Controlling Shareholder In April  , 2003 BID S.A. sold its equity interest in TCO to TCP. The
principal transactions with unconsolidated related parties of the new
controlling shareholder are as follows: a. Use of network and long-distance (roaming) cellular communication: these
transactions involve companies owned by the same 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. Part of these transactions was established based on
contracts between Telebrás and the operating concessionaires before
privatization under the terms established by ANATEL. b. Corporate services are transferred from the Controlling Group to
TCO at the cost effectively incurred. A summary of balances and transactions with unconsolidated related parties
is as follows: 2003Assets:Trade accounts receivable
    
    
    415Liabilities:Trade accounts payable
    
    
    6,312Interest on shareholders equity
    
    
    32,388
 ConsolidatedStatement of income:Revenue from telecommunications services:Telerj Celular
    
    
    243Telest
    
    
    77Telebahia
    
    
    62Telergipe
    
    
    24CRT
    
    
    243Total 2003
    
    
    649Cost of services provided:Telerj Celular
    
    
    (373
    )Telest
    
    
    (65
    )Telebahia
    
    
    (121
    )Telergipe
    
    
    (4
    )CRT
    
    
    (223
    )Total 2003
    
    
    (786
    )
 F-30




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) Recovery of apportionment expensesTCP and subsidiaries
    
    
    1,318Tele Sudeste and subsidiaries
    
    
    154Tele Leste and subsidiaries
    
    
    618CRT
    
    
    320Total 2003
    
    
    2,410Expenses apportioned:TCP and subsidiaries
    
    
    (15,405
    )Tele Sudeste and subsidiaries
    
    
    (9,485
    )Tele Leste and subsidiaries
    
    
    (780
    )CRT
    
    
    (724
    )Total 2003
    
    
    (26,394
    )
 Related Parties  Former Controlling Shareholder The majority shareholder of the Company in 2002 was BID S.A., which was
controlled by Fixcel S.A., which in turn was under common control with
Banco Credibel, SPL Construtora e Pavimentadora and CSM Cartões S.A. (Splice
Group). Prior to 2002, BID S.A. was controlled by Splice do Brasil S.A. According to a contract entered into between Splice do Brasil S.A. and the
subsidiaries of Tele Centro Oeste Celular Participações S.A., technical
assistance services was payable to Splice do Brasil S.A. corresponding at 1%
of the net operating income. For the year ended December 31, 2002 the amount
of R$ 12,532 was charged to general and administrative expenses. In January 2002, the Company made an advance payment of R$ 34,259 to BID
S.A. corresponding to the present value of the tax benefit on the merged
goodwill. The amount was increased by R$ 5,967 based on market rates at
December 31, 2002. 2002Splice do
    
    
    
    
    
    SPL
    
    CSMFixcel
    
    Brasil
    
    Banco
    
    Construtora e
    
    CartõesS.A.
    
    S.A.
    
    Credibel
    
    Pavimentadora
    
    S.A.
    
    TotalAssetsShort-term investments
    
    
    
    
    
    
    
    
    
    
    6,463
    
    
    
    
    
    
    
    
    
    
    
    6,463Bonds
    
    
    712,135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    712,135Others assets
    
    
    40,226
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,226LiabilitiesSuppliers
    
    
    
    
    
    
    3,215
    
    
    
    49
    
    
    
    
    
    
    
    819
    
    
    
    4,083Interest on own capital
    
    
    14,104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,104
 2002
    
    2001Splice do
    
    
    
    
    
    SPL
    
    CSMFixcel
    
    Brasil
    
    Banco
    
    Construtora e
    
    CartõesS.A.
    
    S.A.
    
    Credibel
    
    Pavimentadora
    
    S.A.
    
    Total
    
    TotalStatement of
income:TransactionsIncome from short-term investments
    
    
    65,169
    
    
    
    44,173
    
    
    
    2,615
    
    
    
    
    
    
    
    
    
    
    
    111,957
    
    
    
    41,038Income on premium (Coverage Participações)
    
    
    5,967
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,967
    
    
    
    Financial expenses
    
    
    16,596
    
    
    
    7,393
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,989
    
    
    
    7,850Maintenance services
    
    
    
    
    
    
    12,532
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,532
    
    
    
    1,968Other materials
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Acquisition of telephone cards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,854
    
    
    
    5,854
    
    
    
    920Acquisition of property, plant and equipment
    
    
    
    
    
    
    4,236
    
    
    
    
    
    
    
    3,458
    
    
    
    
    
    
    
    7,694
    
    
    
    11,795
 F-31




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) 31. Corporate Restructuring In September 2000, the corporate restructuring plan was concluded, in which
the goodwill paid on the privatization process of the Company was
transferred to its subsidiaries. The accounting records maintained for corporate and tax purposes include the
Companies specific accounts related to merged goodwill, the related
reserve, and the respective amortization, reversal and tax credit. As of
December 31, 2003, balances are as follows: Balanceson the date2003
    
    2002
    
    of mergerBalance sheet:Merged goodwill
    
    
    64,538
    
    
    
    129,077
    
    
    
    322,693Merged reserve
    
    
    (42,595
    )
    
    
    (85,191
    )
    
    
    (212,977
    )Net effect of merged tax credit
    
    
    21,943
    
    
    
    43,886
    
    
    
    109,716
 2003
    
    2002Statement of income:Goodwill amortization
    
    
    (64,538
    )
    
    
    (64,538
    )Reversal of reserve
    
    
    42,595
    
    
    
    42,595Tax credit
    
    
    21,943
    
    
    
    21,943Effect on net income
    
    
    
    
    
    
    
 As shown above, the amortization of goodwill, net of the reversal of the
reserve and the corresponding tax credit, results in a zero effect on income
and, consequently, on the basis for calculating the mandatory minimum
dividend. For a better presentation of the financial position of the
Companies in the financial statements, the net amount, which, in essence,
represents the merged tax credit balance, was classified in the balance
sheet as current and noncurrent assets under deferred taxes. The merged tax credit will be capitalized in proportion to its effective
realization. In 2003, the Company and its subsidiaries utilized R$21,943 of
the tax benefits from the restructuring. 32. Management compensation In 2003, 2002 and 2001 management compensation amounting R$2,767, R$3,213
and R$1,516, respectively, was recorded as general and administrative
expenses. 33. Insurance The Company and its subsidiaries monitor risks inherent in their activities.
Accordingly, as of December 31, 2003, the Companies had insurance to cover
operating risks, civil liability, health, etc. Management considers that the
amounts are sufficient to cover possible losses. The principal assets,
liabilities or interests covered by insurance are as follows: Type
    
    Insured amountOperating risks
    
    
    1,581,319General civil liability
    
    
    6,800Vehicle fleet
    
    
    350
 F-32




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) 34. Financial instruments  a)
    
    Risk considerationsThe Company and its subsidiaries provide cellular mobile services in the
States of Goiás, Tocantins, Mato Grosso, Mato Grosso do Sul, Rondônia,
Acre, Amazonas, Roraima, Amapá, Pará, Maranhão and Distrito Federal, in
accordance with the terms of concessions granted by the Federal
Government. The operators are also engaged in the purchase and sale of
handsets through their own sales network as well as distribution
channels, thus fostering their essential activities. The major market
risks to which the Company and its subsidiaries are exposed include: Credit risk: arising from any difficulty in collecting amounts
receivables related to telecommunication services provided to
customers and revenues from the sale of handsets by the distribution
network. Interest rate risk: resulting from debt and goodwill on 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 derivatives contracted in foreign
currency and associated with potential losses resulting from adverse
exchange rate movements.  Since they were formed, the Company and its subsidiaries have been
actively managing and mitigating risks inherent in their operations by
means of comprehensive operating procedures, policies and initiatives. Credit risk Credit risk from providing telecommunication services is minimized by
strictly monitoring the Companys customer portfolio and actively addressing
delinquent receivables by means of clear policies relating to the concession
of postpaid services. The Companys customers that use prepaid services do
not subject Company to a credit risk. 23% Companys customers are post paid
services and consequently subject Company to credit risk. Delinquent
receivables as of December 31, 2003 represented 2.2% of gross revenue (1.62%
as of December 31, 2002). (*) Credit risk from the sale of handsets is managed by following a conservative
credit granting policy which encompasses the use of advanced risk management
methods that include applying credit scoring techniques, analyzing the
potential customers balance sheet, and making inquiries of credit
protection agencies databases. Delinquent receivables in the distribution
network represented 0.11% of handset sales as of December 31, 2003 (1.94%
positive as of December 31, 2002) for the Company. (*) (*) Calculation of delinquent receivables: (losses and provision for delinquent receivables/gross revenues from
services) * 100 (losses and provision for delinquent receivables/gross revenues from
sales of products) * 100 Interest rate risk The Company and its subsidiaries are exposed to fluctuations in the TJLP
(local index) on financing from BNDES. As of December 31, 2003, these
operations amounted to R$171,067. The Company and its subsidiaries have not entered into derivative operations
to hedge against these risks. Foreign currency-denominated loans are also exposed to Libor interest rate
risk associated with foreign loans. As of December 31, 2003, these
operations amounted to US$53,722,000. 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
December 31, 2003 is shown in the table F-33




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) below: 2003
    
    2002Loans and financing  US
    
    
    (54,330
    )
    
    
    (112,874
    )Loans and financing  UMBNDES
    
    
    (5,533
    )
    
    
    (6,480
    )Derivative contracts   US$(notional amount
    
    
    61,239
    
    
    
    96,789Net
    
    
    1,376
    
    
    
    (22,565
    )
 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 consider it as U.S. dollar in the
risk coverage analysis related to fluctuations in exchange rates.  b)
    
    Fair value/ Derivative instrumentsThe Company and its subsidiaries record derivative gains and losses as a
component of net financial expenses.Book and market values of loans and financing, and derivative instruments
are estimated as follows: Year ended December 31, 2003 Book
    
    
    
    
    
    Unrealizedvalue
    
    Market value
    
    gainLoans and financing
    
    
    (348,168
    )
    
    
    (344,996
    )
    
    
    3,172Derivative instruments
    
    
    (15,006
    )
    
    
    (7,368
    )
    
    
    7,638Total
    
    
    (363,174
    )
    
    
    (352,364
    )
    
    
    10,810
 Year ended December 31, 2002 Book
    
    
    
    
    
    Unrealizedvalue
    
    Market value
    
    gainLoans and financing
    
    
    (627,780
    )
    
    
    (608,562
    )
    
    
    19,218Marketable securities
    
    
    712,135
    
    
    
    712,135
    
    
    
    Derivative instruments
    
    
    51,464
    
    
    
    17,527
    
    
    
    (33,937
    )Total
    
    
    135,819
    
    
    
    121,100
    
    
    
    (14,719
    )
  c)
    
    Market value of financial instrumentsThe market values of loans and financing, and swap contracts were
determined based on the discounted cash flows, using projected available
interest and exchange rate information.Estimated market values of the Companys financial assets and liabilities
have been determined using available market information and appropriate
valuation methodologies. Accordingly, the estimates presented above are
not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions may have
a material effect on the estimated market values. 35. Subsequent event On May 14,2004 the management of Telesp Celular Participações S.A. (TCP) and
Tele Centro Oeste Celular Participações S.A. (TCO) announced a proposal for
corporate restructuring involving TCO and its subsidiaries Telegoiás Celular
S.A., Telems Celular S.A., Telemat Celular S.A., Teleacre Celular S.A. and
Teleron Celular S.A. The purposes of such restructuring are to provide for:
(i) an improvement in the cash flow of TCO and its subsidiaries, resulting
from the transfer of the tax benefit corresponding to R$511,061 from TCP to
TCO, F-34




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) generated by the amortization of a goodwill in the amount of R$1,503,121,
originally paid upon the acquisition of TCO and its subsidiaries by TCP in
2003; (ii) a simplification of the corporate structure of TCO subsidiaries,
whose minority shareholders will receive shares issued by TCO of the same
type and class in substitution for the shares held by them respectively in
TCO subsidiaries, there by becoming them wholly-owned subsidiaries of TCO.
As a consequence, this is anticipated to improve the capitalization
conditions of TCO, which should benefit the minority shareholders of TCO
subsidiaries. To the extent that the tax benefit corresponding to the amortization of the
deferred assets transferred to the TCO subsidiaries is released, the
respective special premium reserves will be capitalized through the issuance
of shares to TCP. On May 31, 2004 it took place the first step of the restructuring process,
concerning the merger of WXYZ0059 Holdings S.A., holder of the investment
and goodwill of TCO, into TCO. On June 14, 2004, TCO released a relevant fact with reference the 2nd and
3rd Stages of the corporate restructuring transaction, as following: (i)
TCOs partial spin-off, capital stock and share of the spinned-off company;
and (ii) Merger of TCO operators shares into TCO, whereby the TCO Operators
shall become wholly-owned subsidiaries of TCO. These steps shall be approved
in special meeting of shareholders in the involved companies for the
conclusion of the restructuring process. 36. Summary of Differences between BR CL and US GAAP The Companys accounting policies comply with BR CL which differ
significantly from generally accepted accounting principles in the United
States of America (U.S. GAAP) are described below. As discussed in Note 2.c., the Company changed the basis of presentation of
these financial statements from the Constant Currency Method to BR CL in
2003. Under the Constant Currency Method, the effects of monetary
restatement were recorded until December 31, 2000. This effect was not
eliminated in the prior period reconciliations to US GAAP because the
application of inflation restatement represented a comprehensive measure of
accounting for the effects of Brazilian price-level changes. Under BR CL,
the effects of monetary restatement are recorded until December 31, 1995.
Since Brazil was still considered a highly inflationary economy until 1997,
the U.S. GAAP reconciliation presented below includes an adjustment to
record monetary restatement up to December 31, 1997 (see Note 36.b.). The
applicable prior period US GAAP adjustments have also been restated to
reflect this change in basis of presentation. Following is a reconciliation
of shareholders equity and net income under US GAAP as of December 31, 2002
and for the two years in the period ended December 31, 2002 between the
originally reported amounts and the restated amounts. Shareholdersequity
    
    Net income2002
    
    2002
    
    2001US GAAP as originally reported
    
    
    1,265,284
    
    
    
    287,415
    
    
    
    194,494Effect of change in monetary restatement on US GAAP
adjustments
    
    
    (127,182
    )
    
    
    18,473
    
    
    
    35,024Taxes effects
    
    
    43,242
    
    
    
    (6,281
    )
    
    
    (11,558
    )Minority interests
    
    
    1,951
    
    
    
    (283
    )
    
    
    (1,995
    )US GAAP as restated
    
    
    1,183,295
    
    
    
    299,324
    
    
    
    215,965
  a.
    
    Different Criteria for Capitalizing and Amortizing Capitalized
InterestUntil December 31, 1998, BR CL for telecommunications companies required
that interest attributable to construction-in-progress was computed at a
rate of 12% per annum of the balance of construction-in-progress and the
portion which relates to interest on third party loans was credited to
financial expenses based on actual interest costs. The portion relating to
its own capital was credited to capital reserves. Since January 1, 1999,
this practice has not been applied. In 2003, 2002 and 2001, the Company
did not capitalize interest attributable to construction-in-progress for
BR CL purposes. F-35




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  Under US GAAP, in accordance with provisions of Statement of Financial
Accounting Standard (SFAS) No. 34 Capitalization of Interest Cost,
interest incurred on borrowings is capitalized to the extent that
borrowings do not exceed construction-in-progress. The credit is a
reduction of interest expense. Furthermore, the amount of interest
capitalized excludes the monetary gains associated with the borrowings and
the foreign exchange gains and losses on foreign currency borrowings, and
other financial expenses related to borrowings.The effects of these different criteria for capitalizing and amortizing
capitalized interest are presented below: 2003
    
    2002
    
    2001Capitalized interest differenceUS GAAP Capitalized interest
    
    
    3,129
    
    
    
    13,476
    
    
    
    16,209Amortization of capitalized interest differenceAmortization under BR CL
    
    
    8,935
    
    
    
    7,514
    
    
    
    7,811Less amortization under US GAAP.
    
    
    (8,754
    )
    
    
    (6,460
    )
    
    
    (5,038
    )US GAAP difference
    
    
    181
    
    
    
    1,054
    
    
    
    2,773
  b.
    
    Monetary Restatement of 1996 and 1997The 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, 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 BenefitsThe Company and its Subsidiaries participate in two multiemployer benefit
plans (PBS-A and PAMA) for their retired employees that are operated and
administered 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,
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 pension benefit plan
(PBS-TCO). The provisions of SFAS No. 87  Employers Accounting for
Pensions were applied for the multiemployer plan and the single employer
plans were applied with effect from January 1, 1992, because it was not
feasible to apply them from the effective date specified in the standard
(See Note 28).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.
    
    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 December 31, 2001, directly
to shareholders  ́ equity. Such option has been adopted by the Company. F-36




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) 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 BR CL liability exceeded the U.S. GAAP estimated liability by
R$2,696 as of December 31, 2003, whereas U.S. GAAP estimated liability
exceeded BR CL liability by R$815 as of December 31, 2002. For 2003, a
summary of the difference between BR CL and U.S. GAAP in accrued pension
and other postretirement plans is as follows: 2003AccumulatedU.S. GAAP
    
    BR CL
    
    differencePBS-TCO
    
    
    (1,139
    )
    
    
    
    
    
    
    (1,139
    )TCO-PREV
    
    
    1,253
    
    
    
    2,471
    
    
    
    (1,218
    )PAMA-TCO
    
    
    
    
    
    
    339
    
    
    
    (339
    )Accrued pension/postretirement benefit
    
    
    114
    
    
    
    2,810
    
    
    
    (2,696
    )
 d. Disclosure Requirements US GAAP disclosure requirements differ from those required by BR CL. However,
in these consolidated financial statements, the level of disclosure has been
expanded to comply with US GAAP. e. Financial income (expense) BR CL requires that interest be shown as part of the 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 BR CL, 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. As described in Note 29.a., 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 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. Total dividends are calculated as described in Note 29. 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 December 31, 2003, the Company was obligated to issue shares to the
controlling shareholder for the amount of the tax benefit realized on the
amortization of the intangible related to concession transferred in the merger
(See Note 29c). 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 premium reserve of R$25,436 in 2003 by
the average price of common shares traded on the São PauloStock Exchange
(Bovespa) on the last 20 trading days of each year. F-37




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) The weighted-average number of common and preferred shares used in
computing basic and diluted earnings per share for 2003, 2002 and 2001 was as
follows (in thousands): 2003
    
    2002
    
    2001Common shares  basic
    
    
    120,641,944
    
    
    
    127,583,902
    
    
    
    124,882,040Common shares  diluted
    
    
    123,487,816
    
    
    
    127,583,902
    
    
    
    124,882,040Preferred shares basic and diluted
    
    
    252,766,698
    
    
    
    240,279,068
    
    
    
    239,964,678
 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 2003, 2002 and 2001, the Company credited interest on
shareholders equity of R$0.296, R$0.213 and R$0.204, per thousand of
preferred and common shares, respectively. g. Permanent Assets BR CL 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. h. Leases The Company has leased certain computer hardware and software under
non-cancelable lease. Under BR CL, 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. i. 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 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 for all
periods presented. 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
that 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 concessions acquired to operate its cellular
networks by ANATEL. j. 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. F-38




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) Under BR CL, the deferred taxes are presented gross. Under U.S. GAAP, the
deferred taxes are presented net. k. Costs of Start-up Activities Under BR CL, 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
cost to be expensed as incurred. l. 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. (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 BR
CL, 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. Accordingly this difference in accounting policy has
no impact on net income (loss) or in the reconciliation of 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$59,972, R$55,931 and R$42,795
for 2003, 2002 and 2001, respectively. (ii) Value-added and other sales taxes Under BR CL, 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 sold. Accordingly, this difference in accounting has
no impact in net income or in 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$482,826, R$377,576 and R$293,211 for 2003, 2002 and 2001,
respectively, for U.S. GAAP as compared to amounts reported under BR CL. (iii) Deferred revenue sales of handsets Under BR CL, 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 in shareholders
equity. The unamortized balance of deferred handset revenue and the related
balance of unamortized deferred handset costs was R$434,511, R$399,308 and
R$284,487 at December 31, 2003, 2002 and 2001, respectively. The impact of this
difference under U.S. GAAP was to increase (decrease) both net revenues and
cost of services and goods sold by R$35,203, R$114,821 and R$152,716 at
December 31, 2003, 2002 and 2001, respectively. m. Amortization of Concession For BR CL 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. For US GAAP purposes, the amortization period of 15 years includes only the
initial term of the concession. F-39




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) n. Investments in Marketable Securities Under Brazilian GAAP, marketable securities are valued based on historical cost
plus accrued interest. US GAAP requires securities be valued in accordance
with SFAS 115, Accounting for Certain Investments in Debt and Equity
Securities. Under U.S. GAAP, the FIXCEL debentures were classified as
available-for-sale under SFAS 115. However, since, the fair value approximated
the carrying value, no U.S. GAAP adjustment was required. o. Derivatives and Hedging Activities As of January 1, 2001, the Company adopted Financial Accounting Standards Board
Statement No. 133, Accounting for Derivative Instruments and for Hedging
Activities (SFAS 133), which was issued in June, 1998 and 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 in 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 BRCL, 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. At December 31, 2003 and 2002 the Company had entered into cross currency swaps
contracts whereby the Company earns the exchange variation between the United
States dollar and the Brazilian Real plus 2.21% to 20.0% and pays interest
based on a short term interbank rate. At December 31, 2003 and 2002 these
agreements have total notional amounts of US$ 61,239,000 and US$96,789,000,
respectively, and expire on various dates through 2007. Under U.S. GAAP, these
contracts were not designed as hedges for accounting purposes as defined by
SFAS133 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 December 31, 2003 and 2002 were approximately R$1,561 and R$(33,937),
respectively. Amounts related to 2001 were immaterial. p. Comprehensive Income Under U.S. GAAP, under SFAS No. 130, Reporting Comprehensive Income.,
comprehensive income is equal to net income under USGAAP. q. Unclaimed Dividends The Company recorded the amount of R$ 5,418 relating to unclaimed dividends in
the 2002 operating result for BR CL purposes. Under U.S. GAAP this amount was recorded directly in shareholders equity. r. Acquisition of Minority Interest In 2002, the Company acquired the minority interest in the subsidiary,
Telebrasilia Celular S.A. (Telebrasilia). The acquisition increased the
Companys interest in Telebrasilia from 88.25% to 100%. Under BR CL, the
transaction was recorded at book value. For U.S. GAAP, the Company recorded
the transaction at fair value as required by the purchase method under SFAS No.
141. As a result, for U.S. GAAP purposes the shares issued to purchase the
minority interest were recorded at the fair value of R$64,799 on the date of
the transaction. Additionally, the Company recorded a step up in the fair value
of assets of R$41,294 and deferred income tax liabilities of R$14,040. The step
up in the fair value of assets is being amortized over 19 years and 8 years for
intangibles and fixed assets, respectively, and resulted in additional
depreciation and amortization expense under US GAAP. s. 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 on the merged premium. With this transaction, the Company relieved
itself of issuing the corresponding shares to BID S.A. in the future. Under BR
CL, in 2003 and 2002 the amounts of R$44,461 and R$40,226, respectively, were
recorded as an advance to affiliate. For U.S. GAAP purposes, F-40




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) such transaction would be recorded as a distribution to shareholder.
Additionally, for U.S. GAAP purposes, no interest income would be accrued
related to this transaction. Reconciliation of the Income Differences Between US and BR CL 2003
    
    2002
    
    2001Net income as reported
    
    
    463,408
    
    
    
    329,183
    
    
    
    208,104Different criteria for:Amortization of monetary restatement of 1996 and 1997
    
    
    (11,144
    )
    
    
    (11,144
    )
    
    
    (11,144
    )Loss on disposal of assets monetarily restated in 1996 and 1997
    
    
    (60
    )
    
    
    
    
    
    
    Capitalized interest
    
    
    3,129
    
    
    
    13,476
    
    
    
    16,209Amortization of capitalized interest
    
    
    181
    
    
    
    1,054
    
    
    
    2,773Amortization of concession  NBT
    
    
    3,093
    
    
    
    144
    
    
    
    145Capital lease
    
    
    2,583
    
    
    
    
    
    
    
    Adjustment of advance to affiliate
    
    
    (4,235
    )
    
    
    (5,967
    )
    
    
    Purchase accounting:Depreciation on fixed assets adjustments
    
    
    (318
    )
    
    
    (234
    )
    
    
    Amortization on intangible assets
    
    
    (1,965
    )
    
    
    (1,298
    )
    
    
    Pension and other postretirement plans
    
    
    3,511
    
    
    
    (1,457
    )
    
    
    1,990Costs of start-up activities and others
    
    
    4,610
    
    
    
    4,593
    
    
    
    2,600Derivative instruments
    
    
    41,561
    
    
    
    (33,937
    )
    
    
    Unclaimed dividends
    
    
    
    
    
    
    (5,418
    )Amortization of donations
    
    
    87
    
    
    
    
    
    
    
    Deferred tax effects of above adjustments
    
    
    (15,361
    )
    
    
    9,853
    
    
    
    (4,149
    )Effects of minority interest on the above adjustments
    
    
    (1,410
    )
    
    
    476
    
    
    
    (563
    )US GAAP net income
    
    
    487,670
    
    
    
    299,324
    
    
    
    215,965
 Net income per thousand shares accordance with US GAAP
    
    2003
    
    2002
    
    2001Earnings per thousand common shares  Basic
    
    
    1.31
    
    
    
    0.81
    
    
    
    0.59Weighted average of common shares  -  Basic
    
    
    120,641,944
    
    
    
    127,583,902
    
    
    
    124,882,040Common shares  DilutedEarnings per thousand common shares  Diluted
    
    
    1.29
    
    
    
    0.81
    
    
    
    0.59Weighted average of common shares  Diluted
    
    
    123,487,816
    
    
    
    127,583,902
    
    
    
    124,882,040Preferred shares  BasicEarning per thousand preferred shares  Basic
    
    
    1.31
    
    
    
    0.81
    
    
    
    0.59Earnings per thousand preferred shares  Diluted
    
    
    1.30
    
    
    
    0.81
    
    
    
    0.59Weighted
average of preferred shares (basic and diluted)
    
    
    252,766,698
    
    
    
    240,279,068
    
    
    
    239,964,678
 F-41




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) Reconciliation of the Shareholders Equity Differences Between US and BR
CL 2003
    
    2002Total shareholders equity as reported
    
    
    1,556,086
    
    
    
    1,218,523Add/(deduct):Different criteria for:Monetary restatement of 1996 and 1997 -fixed assets
    
    
    87,236
    
    
    
    87,296Amortization of monetary restatement of 1996 and 1997
    
    
    (77,762
    )
    
    
    (66,618
    )Capitalized interest
    
    
    186
    
    
    
    (2,943
    )Amortization of capitalized interest
    
    
    21,529
    
    
    
    21,348Amortization of concession  NBT
    
    
    (3,012
    )
    
    
    (6,105
    )Capital lease
    
    
    2,583
    
    
    
    Adjustment of advance to affiliate
    
    
    (44,461
    )
    
    
    (40,226
    )Purchase accounting:Fixed assets adjustments
    
    
    2,958
    
    
    
    2,958Depreciation on fixed assets adjustments
    
    
    (552
    )
    
    
    (234
    )Intangible assets
    
    
    38,336
    
    
    
    38,336Amortization on intangible assets
    
    
    (3,263
    )
    
    
    (1,298
    )Pension and other post-retirement plans
    
    
    2,696
    
    
    
    (815
    )Costs of start-up activities and others
    
    
    (26,910
    )
    
    
    (31,520
    )Derivatives instruments
    
    
    7,624
    
    
    
    (33,937
    )Donations received
    
    
    (98
    )
    
    
    (98
    )Amortization of donations
    
    
    87
    
    
    
    Deferred tax effects of above adjustments
    
    
    (17,560
    )
    
    
    (2,199
    )Minority interests
    
    
    (583
    )
    
    
    827Shareholders equity according to US GAAP
    
    
    1,545,120
    
    
    
    1,183,295
 Statements of Changes in Shareholders Equity under U.S. GAAP 2003
    
    2002
    
    2001Shareholders equity under US GAAP as of beginning of the year
    
    
    1,183,295
    
    
    
    1,006,393
    
    
    
    884,755Acquisition of the minority interest of Telebrasília Celular S.A
    
    
    
    
    
    
    64,799
    
    
    
    Acquisition of treasury shares
    
    
    
    
    
    
    (62,913
    )
    
    
    (6,826
    )Reissuance of treasury shares
    
    
    
    
    
    
    13,616
    
    
    
    Adjustment of advance to affiliate
    
    
    
    
    
    
    (34,259
    )
    
    
    Net income
    
    
    487,670
    
    
    
    299,324
    
    
    
    215,965Unclaimed dividends
    
    
    4,155
    
    
    
    5,418
    
    
    
    Dividends to minority shareholders of subsidiaries
    
    
    
    
    
    
    
    
    
    
    (1,516
    )Payment to shareholders  ́ related to premium utilization
    
    
    
    
    
    
    (15,584
    )
    
    
    (5,485
    )Interest on shareholders equity
    
    
    (130,000
    )
    
    
    (93,499
    )
    
    
    (40,000
    )Dividends
    
    
    
    
    
    
    
    
    
    
    (40,500
    )Shareholders equity under US GAAP as of the end of the year
    
    
    1,545,120
    
    
    
    1,183,295
    
    
    
    1,006,393
 F-42




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) US GAAP supplementary information-  2003
    
    2002
    
    2001BR CL operating income as reported
    
    
    659,321
    
    
    
    462,538
    
    
    
    321,902Reversal of financial (income) expense, net
    
    
    (111,670
    )
    
    
    (3,970
    )
    
    
    6,462US GAAP adjustmentsAmortization of monetary restatement of 1996 and 1997
    
    
    (11,144
    )
    
    
    (11,144
    )
    
    
    (11,144
    )Loss on disposal of assets monetarily restated in 1996 and 1997
    
    
    (60
    )
    
    
    
    
    
    
    Amortization on capitalized interest
    
    
    181
    
    
    
    1,054
    
    
    
    2,773Amortization of concession  NBT
    
    
    3,093
    
    
    
    144
    
    
    
    145Fixed assets  reversal of rental expenses
    
    
    8,694
    
    
    
    
    
    
    
    Depreciation of capital lease
    
    
    (2,197
    )
    
    
    
    
    
    
    Purchase accountingDepreciation of fixed assets adjustment
    
    
    (318
    )
    
    
    (234
    )
    
    
    Amortization of intangible asset
    
    
    (1,965
    )
    
    
    (1,298
    )
    
    
    Pre-operating expenses
    
    
    4,610
    
    
    
    4,593
    
    
    
    2,600Amortization of donations
    
    
    87
    
    
    
    
    
    
    
    Unclaimed dividends
    
    
    
    
    
    
    (5,418
    )
    
    
    Pension and other postretirement benefits
    
    
    3,511
    
    
    
    (1,457
    )
    
    
    1,990US GAAP operating income
    
    
    552,143
    
    
    
    444,808
    
    
    
    324,728
 Reconciliation of net operating revenue and costs of services and goods sold
under BR CL to US GAAP- 2003
    
    2002
    
    2001BR CL net operating revenue
    
    
    1,958,910
    
    
    
    1,572,110
    
    
    
    1,256,085Reclassification to cost of services and goods soldTaxes on sales
    
    
    482,826
    
    
    
    377,576
    
    
    
    293,211Increase in revenue for roaming charges
    
    
    59,972
    
    
    
    55,931
    
    
    
    42,795US GAAP adjustmentsDeferred revenues on handset sales, net of amortization
    
    
    (35,203
    )
    
    
    (114,821
    )
    
    
    (152,716
    )US GAAP net revenue
    
    
    2,466,505
    
    
    
    1,890,796
    
    
    
    1,439,375
 F-43




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) 2003
    
    2002
    
    2001BR CL cost of services and goods sold
    
    
    (904,022
    )
    
    
    (741,772
    )
    
    
    (620,695
    )Reclassification to cost of services and goods soldTaxes on sales
    
    
    (482,826
    )
    
    
    (377,576
    )
    
    
    (293,211
    )Increase in revenue for roaming charges
    
    
    (59,972
    )
    
    
    (55,931
    )
    
    
    (42,795
    )Deferred cost on handset sales, including taxes on sales, net of
amortization during the year
    
    
    35,203
    
    
    
    114,821
    
    
    
    152,716Reclassification from selling expenseRewards program expense
    
    
    (309
    )
    
    
    (561
    )
    
    
    US GAAP adjustmentsAmortization of monetary restatement of 1996 and 1997
    
    
    (11,144
    )
    
    
    (11,144
    )
    
    
    (11,144
    )Amortization on capitalized interest
    
    
    181
    
    
    
    1,054
    
    
    
    2,773Amortization of concession  NBT
    
    
    3,093
    
    
    
    144
    
    
    
    145Fixed assets  capital lease
    
    
    8,694
    
    
    
    
    
    
    
    Depreciation of capital lease
    
    
    (2,197
    )
    
    
    
    
    
    
    Purchase accountingDepreciation of fixed assets adjustment
    
    
    (318
    )
    
    
    (234
    )
    
    
    Amortization of intangible assets
    
    
    (1,965
    )
    
    
    (1,298
    )Amortization of donations
    
    
    87
    
    
    
    
    
    
    
    Pension and other post-retirement benefits
    
    
    3,511
    
    
    
    (1,457
    )
    
    
    1,990US GAAP cost of services and goods
    
    
    (1,411,984
    )
    
    
    (1,073,954
    )
    
    
    (810,221
    )US GAAP gross profit
    
    
    1,054,521
    
    
    
    816,842
    
    
    
    629,154
 2003
    
    2002Additional information:Total assets under US GAAP
    
    
    2,655,017
    
    
    
    2,331,705Property, plant and equipment
    
    
    1,592,539
    
    
    
    1,428,866Accumulated depreciation
    
    
    (781,064
    )
    
    
    (616,918
    )Net property, plant and equipment
    
    
    811,475
    
    
    
    811,948
 37. Additional disclosures required by US GAAP a. Pension and Other Postretirement Benefits A summary of the liability as of December 31, 2003 and 2002 for
the Companys and Subsidiaries active employees Change in benefit obligation 2003
    
    2002Benefit obligation at beginning of year
    
    
    32,330
    
    
    
    823Service cost
    
    
    1,400
    
    
    
    61Interest cost
    
    
    3,627
    
    
    
    92Plan participants contributions
    
    
    9
    
    
    
    13Actuarial (gain) loss
    
    
    1,024
    
    
    
    (108
    )Benefits paid
    
    
    (510
    )
    
    
    (56
    )Adoption of SFAS 87  TCO Prev
    
    
    
    
    
    
    31,505Benefit obligation at end of year (a)
    
    
    37,880
    
    
    
    32,330
 F-44




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  Change in plan assets 2003
    
    2002Fair value of plan assets at beginning of year
    
    
    27,885
    
    
    
    1,984Actuarial return on plan assets
    
    
    6,822
    
    
    
    712Actual contribution
    
    
    1,359
    
    
    
    20Benefits paid
    
    
    (510
    )
    
    
    (56
    )Adoption of SFAS 87 TCO Prev
    
    
    
    
    
    
    25,225Fair value of plan assets at end of year (b)
    
    
    35,556
    
    
    
    27,885
  Reconciliation of funded status 2003
    
    2002Funded status (a-b)
    
    
    2,324
    
    
    
    4,445Unrecognized net actuarial (loss) gain
    
    
    2,651
    
    
    
    1,033Unrecognized net transition obligation
    
    
    (4,861
    )
    
    
    (5,281
    )Net amount recognized
    
    
    114
    
    
    
    197
  Amounts recognized in the statement of financial position of: 2003
    
    2002Prepaid benefit cost
    
    
    (1,139
    )
    
    
    (815
    )Accrued benefit cost
    
    
    1,253
    
    
    
    1,012Net amount recognized
    
    
    114
    
    
    
    197
  The accumulated benefit obligation for all defined benefit pension
plans was R$ 36,967 in 2003 and R$ 30,162 in 2002.Information for pension plans with an accumulated benefit obligation
in excess of plan assets: 2003
    
    2002Projected benefit obligation
    
    
    36,143
    
    
    
    31,505Accumulated benefit obligation
    
    
    35,480
    
    
    
    29,413Fair value of plan assets
    
    
    33,672
    
    
    
    25,225
  Disclosure of net periodic pension cost and other benefit obligation
cost 2003
    
    2002
    
    2001Service cost
    
    
    1,400
    
    
    
    61
    
    
    
    111Interest cost on PBO
    
    
    3,627
    
    
    
    92
    
    
    
    263Expected return on assets
    
    
    (4,086
    )
    
    
    (287
    )
    
    
    (435
    )Amortization of initial transition obligation
    
    
    420
    
    
    
    3
    
    
    
    16Amortization of gains
    
    
    (86
    )
    
    
    (32
    )
    
    
    (133
    )Net periodic pension cost and other benefit cost
    
    
    1,275
    
    
    
    (163
    )
    
    
    (178
    )
  Plan assets allocationThe asset allocation for the Companys defined benefit pension plan (PBS-TCO
and TCO-Prev) at the end of 2003 and 2002, and the target allocation for 2004,
by asset category, are as follows. Target
    
    Percentage of Plan Assets atAllocation for
    
    Year End2004
    
    2003
    
    2002Asset categoryEquity securities
    
    
    13.6
    %
    
    
    13.9
    %
    
    
    12.9
    %Loans
    
    
    2.2
    %
    
    
    1.9
    %
    
    
    2.5
    %Fixed income
    
    
    84.2
    %
    
    
    84.2
    %
    
    
    84.6
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 F-45




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  The investment strategy is based on a long-term macroeconomic scenario,
which takes into consideration the assumption of maximization of risk and
return of the several kinds of investments (fixed income, equity securities
and loans), according to limits of allocation imposed by Conselho Monetário
NacionalResolutions. The actuarial assumptions used in 2003 and 2002 were as follows: 2003
    
    2002Discount rate for determining projected benefit obligations
    
    
    11.30
    %
    
    
    11.30
    %Rate of increase in compensation levels
    
    
    7.10
    %
    
    
    8.15
    %Benefit adjustments
    
    
    5.00
    %
    
    
    5.00
    %Expected long-term rate of return on plan assets
    
    
    11.83
    %
    
    
    14.45
    %Inflation
    
    
    5.00
    %
    
    
    4.00
    %Number of active participants  PBS  TCO
    
    
    3
    
    
    
    5Number of active participants  TCO-PREV
    
    
    1,339
    
    
    
    1,050Number of retirees and beneficiaries  PBS  TCO
    
    
    11
    
    
    
    9Number of active participants  TCO  PREV
    
    
    8
    
    
    
    7
 A summary of the SISTEL multiemployer pension plan (inactive employees pension
plan-PBS-A) as of December 31, 2003 and 2002 for the multiemployer pension plan
(inactive employees pension plan-PBS-A), which the Company and its subsidiaries
participate is as follows: Inactive employees pension plan  PBS-A 2003
    
    2002Funded status:Accumulated benefit obligation
Vested
    
    
    3,484,245
    
    
    
    2,922,542Projected benefit obligation
    
    
    3,484,245
    
    
    
    2,922,542Fair value of plan assets
    
    
    4,163,102
    
    
    
    3,650,789Funded status
    
    
    (678,857
    )
    
    
    (728,247
    )
 A summary of the SISTEL multiemployer postretirement benefits plan (health
care plan  PAMA), which the Company and its subsidiaries participate, is as
follows: Health Care Plan  PAMA 2003
    
    2002Funded Status:Accumulated postretirement benefit obligation:Active participants
    
    
    25,678
    
    
    
    46,107Inactive participants
    
    
    783,525
    
    
    
    867,041809,203
    
    
    
    913,148Fair value of plan assets
    
    
    456,509
    
    
    
    405,732Obligations in excess of plan assets
    
    
    352,694
    
    
    
    507,416
 b. Intangible assets subject to amortization Following is a summary of the Companys intangible assets subject to
amortization under US GAAP: 2003
    
    2002Software
    
    Concession
    
    Software
    
    ConcessionGross
    
    
    131,854
    
    
    
    98,886
    
    
    
    93,927
    
    
    
    98,886Accumulated amortization
    
    
    (55,260
    )
    
    
    (23,783
    )
    
    
    (29,025
    )
    
    
    (11,676
    )Net
    
    
    76,594
    
    
    
    75,103
    
    
    
    64,902
    
    
    
    87,210
 F-46




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##### Table of Contents



TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais) Aggregate amortization expense for the above intangible assets amounted to
R$39,368, R$22,815 and R$16,868 for the years ended December 31, 2003, 2002 and
2001, respectively. The estimated aggregate amortization expense for the next five years is as
follows: Amount2004
    
    
    32,3732005
    
    
    32,3732006
    
    
    29,8552007
    
    
    6,0032008
    
    
    6,003
  c.
    
    Concentration of RiskCredit risk with respect to trade accounts receivable from third parties is
diversified. Although collateral is not required, the Companies continually
monitor the level of trade accounts receivable and limit the exposure to bad
debts by cutting access to the telephone network if any invoice is three
telephone bills past-due. Exceptions include telephone services that must
be maintained for reasons of safety or national security.In conducting their businesses, the Companies are fully dependent upon the
cellular telecommunications concession as granted by the Federal Government.Approximately 18,17% of all full-time 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 unions. The collective
agreements currently in force expire in Month October, 31, 2004.There is no concentration of available sources of labor, services,
concessions or rights, other than those mentioned above, that the Company
believes could, if suddenly eliminated, severely impact the Companies
operations.d.
    
    Capital LeasesThe future minimum payments, by year and in the aggregate, under the
Companys non-cancelable lease obligations classified as capital leases are
as follows: 2004
    
    
    3,4982005
    
    
    416Liabilities recorded in the balance sheet for U.S. GAAP purposes
    
    
    3,914Less current portion
    
    
    (3,498
    )Long-term capital lease obligation
    
    
    416
  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
    
    
    8,694Less: accumulated amortization
    
    
    (2,197
    )6,497
 F-47




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  e.
    
    Commitments (Unaudited)At December 31, 2003, the Company budgeted capital expenditure commitments
amounting to R$395.1 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.f.
    
    Segment informationThe Company and its subsidiaries operate solely in one segment for local
and regional cellular telecommunications. All revenues are generated in
relation to services provided in or routed through the states of Goiás,
Tocantins, Mato Grosso, Mato Grosso do Sul, Rondônia, Acre, Amazonas,
Roraima, Amapá, Pará, Maranhão and Distrito Federal.g.
    
    New accounting pronouncementsAmendment of Statement 133 on Derivative Instruments and Hedging ActivitiesIn April 2003, the FASB issued SFAS No.149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The provisions of this statement are
effective for contracts entered into or modified after June 30, 2003, and
for hedging relationships designated after June 30, 2003. The adoption of
SFAS 149 did not result in any impact to the Companys financial statements.Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and EquityIn April 2003, the FASB issued SFAS No. 150, Accounting for certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity. Some of the provisions of this Statement are consistent with the
current definition of liabilities in FASB Concepts Statement No. 6, Elements
of Financial Statements. The adoption of SFAS 150 did not result in any
impact to the Companys financial statements.FIN No. 46 -  Consolidation of Variable Interest Entities -  an
interpretation of ARB No. 51In 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.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 Company does not anticipate that the adoption of FIN 46R will
have a material impact on its financial position, cash flows and results of
operations. F-48




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TELE CENTRO OESTE CELULAR PARTICIPAÇÕES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
For the years ended December 31, 2003, 2002 and 2001
(Amounts expressed in thousands of Brazilian reais)  SFAS No. 132 (Revised 2003) -  Employers Disclosures about Pensions and
Other Postretirement BenefitsIn December 2003, the FASB issued SFAS No. 132, Revised 2003, (SFAS
132R), which requires an entity to make additional disclosures about
pensions and other postretirement benefits. These disclosures include
information describing the types of plan assets, investment strategy,
measurement date(s), plan obligations, cash flows and components of net
periodic benefit cost. SFAS 132R would be effective for any domestic plans
beginning with fiscal years ending after December 15, 2003 and any foreign
plans beginning with fiscal years ending after June 15, 2004. The Company
has adopted these additional disclosures for the year ended December 31,
2003 (See Note 38.a).SAB No. 104  Revenue RecognitionIn December 2003, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB 104
updates portions of the interpretive guidance included in Topic 13 of the
codification of Staff Accounting Bulletins in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The company believes it is
currently following the guidance of SAB 104.EITF 00-21 -  Accounting for Revenue Arrangements with Multiple Element
DeliverablesIn November 2002, the Emerging Issues Task Force (EITF), of the FASB
reached a consensus on EITF 00-21. 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 requirements of EITF 00-21
will be applicable to agreements entered into for periods beginning after 15
June 2003 and will therefore first apply to the Company for any arrangements
entered into from 1 April 2004. The adoption of this EITF had no impact on
the Companys financial position or results of operations.EITF Issue No. 01-08 -  Determining Whether an Arrangement Contains a LeaseIn May 2003, the EITF reached consensus in EITF Issue No. 01-08 to
clarify the requirements of identifying whether an arrangement should be
accounted for as a lease at its inception. The guidance in the consensus is
designed to mandate reporting revenue as rental or leasing income that
otherwise would be reported as part of product sales or service revenue.
EITF Issue No. 01-08 requires both parties to an arrangement to determine
whether a service contract or similar arrangement is, or includes, a lease
within the scope of SFAS No. 13, Accounting for Leases. The Company does
not anticipate that the adoption of EITF Issue No. 01-08 will have a
material effect on its consolidated results of operations, cash flows or
financial position.EITF Issue No. 03-11 -  Reporting Realized Gains and Losses on Derivative
Instruments That Are Subject to FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, and Not Held for Trading
PurposesIn 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 Company does not anticipate that the adoption of EITF Issue No.
03-11 will have a material effect on its consolidated results of operations,
cash flows or financial position. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * F-49