The information in this section should be read in conjunction with our consolidated financial statements, and the notes thereto, included elsewhere in this annual report. Our consolidated financial statements have been prepared in accordance with Brazilian Corporate Law, which differs in certain respects from U.S. GAAP. Please refer to note 27 to our consolidated financial statements for a discussion of these differences.

   
Year Ended December 31,
   
1996
1997
1998
1999
2000
   
(in thousands of reais, except per share data)
                     
Income Statement Data (continuing operations, unless otherwise stated):                    
Brazilian Corporate Law:                    
Net operating revenue from telecommunications services  
$ 1,894,093
$ 2,163,864
$ 4,000,106
$ 5,183,927
$ 6,714,508
Cost of services(1)
(1,008,477)
(904,830)
(2,785,741)
(3,619,914)
(4,399,267)
Gross profit
885,616
1,259,034
1,214,365
1,564,013
2,315,241
Operating expenses:
Selling expense
(145,378)
(215,742)
(180,176)
(425,895)
(795,470)
General and administrative expense
(216,757)
(312,459)
(374,194)
(383,453)
(660,712)
Other net operating income (expense)
(57,507)
(77,257)
(577,244)
40,566
(12,250)
Operating income (loss) before interest
465,974
635,576
82,751
795,231
846,809
Financial income
145,361
152,989
245,854
326,956
275,181
Financial expense
(89,609)
(108,001)
(177,124)
(630,416)
(463,497)
Operating income
521,726
698,564
151,481
491,771
658,493
Net other non-operating income (expense)
(75,511)
(149,302)
(65,975)
(37,650)
111,224
Income (loss) before taxes and other charges
446,215
549,262
85,506
454,121
769,717
Income and social contribution tax (expense) benefit
(18,991)
(10,480)
63,585
(1,241)
(145,312)
Income before employees' profit share and minority interests
427,224
538,782
149,091
452,880
624,405
Employees' profit share
(21,000)
(30,623)
(24,000)
(36,000)
(36,775)
Income before minority interests
406,224
508,159
125,091
416,880
587,630
Minority interests(2)
(5,079)
(6,352)
(1,513)
(5,249)
(10,540)
Net income
401,145
501,807
123,578
411,631
577,090
U.S. GAAP(3)
Operating income from continuing operations
180,704
360,682
447,275
741,633
808,927
Income from continuing operations
350,939
451,550
418,412
424,743
658,669
Income from discontinued operations(4)
1,976,429
3,127,941
-
-
-
Net income(5)
2,327,368
3,579,491
418,412
424,743
658,669
Net income per thousand shares-basic(6) Common Shares:
Continuing operations
1.10
1.41
1.27
1.28
1.98
Discontinued operations
6.16
9.75
-
-
-
Total(5)
7.26
11.16
1.27
1.28
1.98
Preferred shares:
Continuing operations
1.10
1.41
1.27
1.28
1.98
Discontinued operations
6.16
9.75
-
-
-
Total(5)
7.26
11.16
1.27
1.28
1.98
Number of shares outstanding:
Common shares (thousands)
124,351,903
124,351,903
124,369,031
124,369,031
124,369,031
Preferred shares (thousands)
196,311,647
196,311,647
210,029,997
208,545,197
208,549,997
Cash dividend paid per thousand shares:
Common shares (thousands)
-
-
-
-
0.4239
Preferred shares (thousands)
-
-
-
0.3830
0.4239
           
Balance Sheet Data (continuing operations):          
Brazilian Corporation Law          
Property, plant and equipment, net
5,435,440
5,626,360
6,023,703
6,958,154
7,467,125
Total assets
6,813,091
7,249,785
8,527,507
9,653,467
11,762,357
Loans and financing - current portion
139,858
108,406
155,088
602,235
881,899
Loans and financing - non-current portion
416,326
471,468
511,085
878,661
1,364,390
Shareholders' equity
5,233,915
5,503,460
5,510,581
5,717,988
6,082,170
U.S. GAAP
Property, plant and equipment, net
5,649,204
5,833,519
6,286,183
7,235,693
7,862,919
Total assets
7,570,111
7,891,234
8,998,963
10,106,562
12,251,542
Loans and financing - current portion
137,109
487,190
638,044
1,206,005
881,899
Loans and financing - non-current portion
448,578
79,825
28,129
274,891
1,364,390
Shareholders' equity - continuing operations
5,231,809
5,452,054
5,637,273
5,787,147
6,279,877
U.S. GAAP - Total Operations:
Total assets including net assets of discontinued operations(3)(4)
32,634,242
34,482,612
-
-
-

 
New Holding Company - Brazilian Corporate Law Shareholders' Equity(7)
May 22, 1998
  (in thousands of reais)
Share capital
2,134,427
Income reserves
2,336,988
Retained earnings
994,594
Total shareholders' equity
5,466,009
   


  (1) Cost of services is presented in accordance with Brazilian Corporate Law and, accordingly, includes depreciation and amortization charges in addition to interconnection and facilities fees, personnel expenses, third party services and other miscellaneous costs of providing services. See "Item 5. Operating and Financial Review and Prospects - A. Operating Results - Results of operations for the years ended December 31, 1998, 1999 and 2000".
   
  (2) Minority interests represent the portion of net income attributable to shareholders other than the registrant.
   
  (3) Under U.S. GAAP, we were considered to be the continuing entity of the Telebrás System for financial reporting purposes. As a result, all operations of Telebrás and its subsidiaries, except for Embratel, were considered to be discontinued operations through December 31, 1997. Although the registrant was not formed until May 22, 1998, the spin-off was effective using balances as of February 28, 1998, and includes all income and expense for the period from January 1, 1998, through February 28, 1998, except for interest income arising from minor allocations of cash from Telebrás at February 28, 1998.
   
  (4) The discontinued operations pertain to the operations of Telebrás (other than Embratel) in connection with the restructuring of the Telebrás System. See note 29 to our consolidated financial statements for additional discussion, including the reflecting discontinued operations through December 31, 1997.
   
  (5) U.S. GAAP net income and net income per thousand shares for the years ended December 31, 1998, 1999 and 2000 does not include net income relating to the discontinued operations of Telebrás and its subsidiaries, except for those operations of Embratel. See note 27 to our consolidated financial statements.
   
  (6) Reflects U.S. GAAP net income per thousand shares of the registrant. The registrant was not formed until subsequent to December 31, 1997. Accordingly, the equity structure utilized for the earnings per share computations is that of the registrant as of May 22, 1998 (the date of its formation). At the date of formation, the registrant had 124,351,903 thousand common shares (net of 17,128 thousand common shares in treasury) and 196,311,647 thousand preferred shares outstanding (exclusive of 13,718,350 thousand preferred shares resulting from the settlement in April 1998 with Telebrás). See note 27 to our consolidated financial statements. In April 1998, 13,718,350 thousand preferred shares were issued. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share". This new statement became effective for consolidated financial statements for periods ending after December 15, 1997, and provides computation, presentation and disclosure requirements for earnings per share. Since the preferred and common stockholders have different dividend, voting and liquidation rights, basic and diluted earnings per share have been calculated using the "two-class" method. The "two-class" method is an earnings allocation formula that determines earnings per share for preferred and common shares according to the dividends to be paid as required by our by-laws and participation rights in undistributed earnings. Basic earnings per share is computed by dividing income available to common and preferred shareholders by the weighted-average number of common and preferred shares outstanding, respectively, during the period. There were no common stock equivalents outstanding during the years ended December 31, 1996, 1997, 1998, 1999 and 2000.
   
  (7) On May 22, 1998, the shareholders of Telebrás approved Telebrás' division into the New Holding Companies, whereby existing shareholders received shares in the New Holding Companies in proportion to their holdings in Telebrás. In addition to approving the allocation of assets and liabilities to the New Holding Companies at the May 22, 1998 meeting, the shareholders also approved a specific structure for the shareholders' equity of each New Holding Company which included an allocation of a portion of the retained earnings of Telebrás. In this manner, the balances of capital, reserves and retained earnings, together with the corresponding assets and liabilities, for the formation of the registrant were established. For U.S. GAAP purposes, the "retained earnings" allocated from Telebrás would be referred to as unrealized earnings reserve as this amount represents capital allocated from Telebrás. See note 27 to our consolidated financial statements.