6-K 1 btm_dfp2005.htm DFP 2005 Provided by MZ Data Products
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 6-K
 
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
 
THROUGH JUNE 28, 2006

(Commission File No. 1-15256)
 

 
BRASIL TELECOM S.A.
(Exact name of Registrant as specified in its Charter)
 
BRAZIL TELECOM COMPANY
(Translation of Registrant's name into English)
 


SIA Sul, Área de Serviços Públicos, Lote D, Bloco B
Brasília, D.F., 71.215-000
Federative Republic of Brazil
(Address of Regristrant's principal executive offices)



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

Form 20-F ___X___ Form 40-F ______

Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(1)__.

Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(7)__.

Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under
the Securities Exchange Act of 1934.

Yes ______ No ___X___

If "Yes" is marked, indicated below the file number assigned to the
registrant in connection with Rule 12g3-2(b):

 


FEDERAL PUBLIC SERVICE   
SECURITIES AND EXCHANGE COMMISSION (CVM) CORPORATE LAW 
STANDARD FINANCIAL STATEMENTS (DFP)  
COMMERCIAL, INDUSTRIAL COMPANY AND OTHERS  Period-ended: December 31, 2005 

REGISTRATION AT THE CVM DOES NOT REQUIRE ANY EVALUATION OF THE COMPANY, BEING ITS DIRECTOR RESPONSIBLE FOR THE VERACITY OF THIS INFORMATION.

01.01 - IDENTIFICATION

1 - CVM CODE
     01131-2
2 - COMPANY NAME
     BRASIL TELECOM S.A.
3 - GENERAL TAXPAYERS’ REGISTER
     76.535.764/0001-43
4 - NIRE
     5.330.000.622-9

01.02 - ADDRESS OF COMPANY’S HEADQUARTERS

1 - COMPLETE ADDRESS
    SIA/SUL - ASP - LOTE D- BL B - 1º ANDAR
2 - DISTRICT
     SIA
3 - ZIP CODE
    71215-000
4 - MUNICIPALITY
     BRASILIA
5 - STATE
     DF
6 - AREA CODE
     61
7 - TELEPHONE NUMBER
     3415-1010
8 - TELEPHONE NUMBER
     3415-1256
9 - TELEPHONE NUMBER
    3 415-1119
10 - TELEX
11 - AREA CODE
    61
12 - FAX
     3415-1593
13 - FAX
    3 415-1315
14 - FAX
     -
 
15 - E-MAIL
     ri@brasitelecom.com.br

01.03 – INVESTOR RELATIONS OFFICER (Address for correspondence to Company)

1 - NAME
     CHARLES LAGANÁ PUTZ
2 - COMPLETE ADDRESS
    SIA/SUL - ASP - LOTE D - BL A - 2º ANDAR 
3 - DISTRICT
     SIA
4 - ZIP CODE
    71215-000
5 - MUNICIPALITY
     BRASILIA
6 - STATE
     DF
7 - AREA CODE
     61
8 - TELEPHONE NUMBER
     3415-1010 
9 - TELEPHONE NUMBER
     -
10 - TELEPHONE NUMBER
     -
11 - TELEX
12 - AREA CODE
    61
13 - FAX
     3415-1593 
14 - FAX
     -
15 - FAX
     -
 
15 - E-MAIL
     cputz@brasiltelecom.com.br 

01.04 - REFERENCE / INDEPENDENT ACCOUNTANT

YEAR  1 – DATE OF THE FISCAL YEAR BEGINNING  2 – DATE OF THE FISCAL YEAR END 
1 – Last  01/01/2005  12/31/2005 
2 – Next to last  01/01/2004  12/31/2004 
3 – Last but two  01/01/2003  12/31/2003 
4 - INDEPENDENT ACCOUNTANT 
KPMG AUDITORES INDEPENDENTES 
5 - CVM CODE 
00418-9 
6 - TECHNICIAN IN CHARGE 
MANUEL FERNANDES RODRIGUES DE SOUSA 
7 - TECHNICIAN’S CPF (INDIVIDUAL TAXPAYER’S ID)
783.840.017-15 

1


01.05 - COMPOSITION OF ISSUED CAPITAL

QUANTITY OF SHARES
(IN THOUSANDS)
1
12/31/2005
2
12/31/2004
3
12/31/2003 
ISSUED CAPITAL      
1 - COMMON 249,597,050   249,597,050  249,597,050 
2 - PREFERRED 305,701,231  300,118,295  300,118,295 
3 - TOTAL 555,298,281  549,715,345  549,715,345 
TREASURY SHARES      
4 - COMMON
5 - PREFERRED 13,679,382  8,106,882  5,297,285 
6 - TOTAL 13,679,382  8,106,882  5,297,285 

01.06 - COMPANY’S CHARACTERISTICS

1 - TYPE OF COMPANY
     COMMERCIAL, INDUSTRIAL COMPANY AND OTHERS
2 - SITUATION
     OPERATING
3 - TYPE OF CONTROLLING INTEREST
     NATIONAL PRIVATE
4 - ACTIVITY CODE
     113 - TELECOMMUNICATION
5 - MAIN ACTIVITY
     PROVIDING SWITCHED FIXED TELEPHONE SERVICE (STFC)
6 - TYPE OF CONSOLIDATED
     TOTAL

01.07 - SUBSIDIARIES EXCLUDED FROM THE CONSOLIDATED FINANCIAL STATEMENTS

1 - ITEM 2 - GENERAL TAXPAYERS’ REGISTER 3 - NAME

01.08 – CASH DIVIDENDS

1 - ITEM 2 - EVENT 3 - APPROVAL 4 - DIVIDEND 5 - BEGINNING
     PAYMENT
6 - TYPE OF
     SHARE 
7 - VALUE OF THE
     DIVIDEND PER
     SHARE
01 RCA 04/20/2005  Interest on shareholders' equity 05/16/2005  Common 0.0003768055
02 RCA 04/20/2005  Interest on shareholders' equity 05/16/2005  Preferred 0.0003768055
03 RCA 12/30/2005  Interest on shareholders' equity 01/14/2006  Common 0.0006064042
04 RCA 12/30/2005  Interest on shareholders' equity 01/14/2006  Preferred 0.0006064042

01.09 - INVESTOR RELATIONS OFFICER

1 - DATE
    03/27/2006 
2 - SIGNATURE
    

2


02.01 - BALANCE SHEET - ASSETS (IN THOUSANDS OF REAIS)

1 - CODE  2 - ACCOUNT DESCRIPTION  3 - 12/31/2005  4 - 12/31/2004  5 - 12/31/2003 
TOTAL ASSETS  15,589,008  16,047,950  14,997,028 
1.01  CURRENT ASSETS  4,669,680  4,834,911  3,918,130 
1.01.01  CASH AND CASH EQUIVALENTS  1,479,040  1,963,524  1,413,334 
1.01.02  CREDITS  1,939,589  1,976,376  1,850,940 
1.01.02.01  ACCOUNTS RECEIVABLE FROM SERVICES  1,939,589  1,976,376  1,850,940 
1.01.03  INVENTORIES  4,977  6,097  8,042 
1.01.04  OTHERS  1,246,074  888,914  645,814 
1.01.04.01  LOANS AND FINANCING  3,873  1,065  1,963 
1.01.04.02  DEFERRED AND RECOVERABLE TAXES  970,189  560,558  492,745 
1.01.04.03  JUDICIAL DEPOSITS  147,724  144,260  40,363 
1.01.04.04  OTHER ASSETS  124,288  183,031  110,743 
1.02  LONG-TERM ASSETS  1,458,523  1,253,526  1,304,969 
1.02.01  SUNDRY CREDITS 
1.02.02  CREDITS WITH RELATED PARTIES  6,965 
1.02.02.01  FROM ASSOCIATED COMPANIES  6,965 
1.02.02.02  FROM SUBSIDIARIES 
1.02.02.03  FROM OTHER RELATED PARTIES 
1.02.03  OTHERS  1,458,523  1,253,526  1,298,004 
1.02.03.01  LOANS AND FINANCING  5,211  96,823  7,513 
1.02.03.02  DEFERRED AND RECOVERABLE TAXES  759,637  602,803  732,010 
1.02.03.03  INCOME SECURITIES  502 
1.02.03.04  JUDICIAL DEPOSITS  638,201  473,980  417,610 
1.02.03.05  INVENTORIES  19,053 
1.02.03.06  OTHER ASSETS  54,972  79,920  121,818 
1.03  PERMANENT ASSETS  9,460,805  9,959,513  9,773,929 
1.03.01  INVESTMENTS  2,481,988  2,028,522  540,975 
1.03.01.01  ASSOCIATED COMPANIES  97,485 
1.03.01.02  SUBSIDIARIES  2,348,514  1,808,246  377,449 
1.03.01.03  OTHER INVESTMENTS  133,470  220,272  66,041 
1.03.02  PROPERTY, PLANT AND EQUIPMENT  6,523,613  7,358,314  8,632,200 
1.03.03  DEFERRED CHARGES  455,204  572,677  600,754 

3


02.02 - BALANCE SHEET - LIABILITIES (IN THOUSANDS OF REAIS)

1 - CODE  2 - ACCOUNT DESCRIPTION  3 - 12/31/2005  4 - 12/31/2004  5 - 12/31/2003 
TOTAL LIABILITIES  15,589,008  16,047,950  14,997,028 
2.01  CURRENT LIABILITIES  4,724,281  3,839,933  3,902,759 
2.01.01  LOANS AND FINANCING  880,891  609,418  572,139 
2.01.02  DEBENTURES  608,226  493,713  1,418,137 
2.01.03  SUPPLIERS  1,264,665  1,060,124  896,789 
2.01.04  TAXES, FEES AND CONTRIBUTIONS  892,165  688,542  457,139 
2.01.04.01  INDIRECT TAXES  705,383  647,644  435,782 
2.01.04.02  TAXES ON INCOME  186,782  40,898  21,357 
2.01.05  DIVIDENDS PAYABLE  376,579  411,232  247,242 
2.01.06  PROVISIONS  366,319  320,224  76,531 
2.01.06.01  PROVISION FOR CONTINGENCIES  320,824  290,727  48,509 
2.01.06.02  PROVISION FOR PENSION PLAN  45,495  29,497  28,022 
2.01.07  RELATED PARTY DEBTS 
2.01.08  OTHERS  335,436  256,680  234,782 
2.01.08.01  PAYROLL, SOCIAL CHARGES AND BENEFITS  60,324  57,316  59,417 
2.01.08.02  CONSIGNMENTS IN FAVOR OF THIRD PARTIES  137,580  73,973  49,009 
2.01.08.03  EMPLOYEE PROFIT SHARING  54,149  52,965  46,242 
2.01.08.04  OTHER LIABILITIES  83,383  72,426  80,114 
2.02  LONG-TERM LIABILITIES  5,362,598  5,719,502  4,422,381 
2.02.01  LOANS AND FINANCING  2,879,653  3,131,535  1,735,563 
2.02.02  DEBENTURES  500,000  1,020,000  910,000 
2.02.03  PROVISIONS  1,360,419  889,612  1,125,894 
2.02.03.01  PROVISION FOR CONTINGENCIES  658,797  400,717  647,826 
2.02.03.02  PROVISION FOR PENSION PLAN  682,594  471,949  478,068 
2.02.03.03  PROVISIONS FOR LOSSES WITH SUBSIDIARIES  19,028  16,946 
2.02.04  RELATED PARTY DEBTS 
2.02.05  OTHERS  622,526  678,355  650,924 
2.02.05.01  PAYROLL, SOCIAL CHARGES AND BENEFITS  4,834  7,850 
2.02.05.02  SUPPLIERS  21,319  3,504  860 
2.02.05.03  INDIRECT TAXES  556,606  601,572  582,495 
2.02.05.04  TAXES ON INCOME  8,872  34,630  26,491 
2.02.05.05  OTHER LIABILITIES  27,755  25,841  25,254 
2.02.05.06  FUNDS FOR CAPITALIZATION  7,974  7,974  7,974 
2.03  DEFERRED INCOME  5,522  7,150  9,044 
2.05  SHAREHOLDERS’ EQUITY  5,496,607  6,481,365  6,662,844 
2.05.01  PAID-UP CAPITAL  3,435,788  3,401,245  3,373,097 
2.05.02  CAPITAL RESERVES  1,362,890  1,459,705  1,524,953 
2.05.02.01  PREMIUM ON SHARE SUBSCRIPTION  334,825  367,269  368,596 
2.05.02.02  SPECIAL GOODWILL ON THE MERGER  59,007  123,378  187,749 
2.05.02.03  DONATIONS AND SUBSIDIES FOR INVESTMENTS  123,551  123,551  123,274 

4


1 - CODE  2 - ACCOUNT DESCRIPTION  3 - 12/31/2005  4 - 12/31/2004  5 - 12/31/2003 
2.05.02.04  INTEREST ON WORKS IN PROGRESS  745,756  745,756  745,756 
2.05.02.05  SPECIAL MONETARY CORRECTION-LAW 
8200/91 
31,287  31,287  31,287 
2.05.02.06  OTHER CAPITAL RESERVES  68,464  68,464  68,291 
2.05.03  REVALUATION RESERVES 
2.05.03.01  COMPANY ASSETS 
2.05.03.02  SUBSIDIARIES/ASSOCIATED COMPANIES 
2.05.04  PROFIT RESERVES  287,672  287,672  273,244 
2.05.04.01  LEGAL  287,672  287,672  273,244 
2.05.04.02  STATUTORY 
2.05.04.03  CONTINGENCIES 
2.05.04.04  REALIZABLE PROFIT RESERVES 
2.05.04.05  PROFIT RETENTION 
2.05.04.06  SPECIAL RESERVE FOR UNDISTRIBUTED 
DIVIDENDS 
2.05.04.07  OTHER PROFIT RESERVES 
2.05.05  RETAINED EARNINGS/ACCUMULATED LOSSES  410,257  1,332,743  1,491,550 

5


03.01 STATEMENT OF INCOME (IN THOUSANDS OF REAIS)

1 - CODE  2 - ACCOUNT DESCRIPTION  3 - 01/01/2005 to 
12/31/2005 
4 - 01/01/2004 to
 12/31/2004 
5 - 01/01/2003 to 
12/31/2003 
3.01  GROSS REVENUE FROM SALES AND/OR SERVICES  13,650,394  12,519,508  11,063,096 
3.02  DEDUCTIONS FROM GROSS REVENUE  (4,141,269) (3,609,723) (3,140,943)
3.03  NET REVENUE FROM SALES AND/OR SERVICES  9,509,125  8,909,785  7,922,153 
3.04  COST OF GOODS AND/OR SERVICES SOLD  (5,706,877) (5,557,599) (4,752,516)
3.05  GROSS INCOME  3,802,248  3,352,186  3,169,637 
3.06  OPERATING INCOME/EXPENSES  (4,662,620) (3,169,449) (3,035,379)
3.06.01  SELLING EXPENSES  (1,222,423) (1,097,478) (947,010)
3.06.02  GENERAL AND ADMINISTRATIVE EXPENSES  (1,056,410) (909,118) (777,631)
3.06.02.01  MANAGEMENT COMPENSATION  (9,173) (7,103) (6,748)
3.06.02.02  OTHER GENERAL AND ADMINISTRATIVE 
EXPENSES 
(1,047,237) (902,015) (770,883)
3.06.03  FINANCIAL  (1,158,103) (1,003,417) (1,091,538)
3.06.03.01  FINANCIAL INCOME  587,307  468,221  293,351 
3.06.03.02  FINANCIAL EXPENSES  (1,745,410) (1,471,638) (1,384,889)
3.06.04  OTHER OPERATING INCOME  370,429  547,387  269,830 
3.06.05  OTHER OPERATING EXPENSES  (956,273) (569,421) (480,405)
3.06.06  EQUITY ACCOUNTING RESULT  (639,840) (137,402) (8,625)
3.07  OPERATING INCOME  (860,372) 182,737  134,258 
3.08  NON-OPERATING INCOME  (130,570) (182,892) (471,721)
3.08.01  REVENUES  34,606  86,513  54,934 
3.08.02  EXPENSES  (165,176) (269,405) (526,655)
3.09  INCOME BEFORE TAXES AND INTEREST  (990,942) (155) (337,463)
3.10  PROVISION FOR INCOME TAX AND SOCIAL 
CONTRIBUTION 
60,771  (103,393) 65,946 
3.11  DEFERRED INCOME TAX 
3.12  STATUTORY INTEREST/CONTRIBUTIONS  (52,400)
3.12.01  INTEREST  (52,400)
3.12.02  CONTRIBUTIONS 
3.13  REVERSAL OF INTEREST ON SHAREHOLDERS’ 
EQUITY 
626,500  444,500  246,200 
3.15  INCOME (LOSS) FOR THE PERIOD  (303,671) 288,552  (25,317)
  NO. SHARES, EX-TREASURY (IN THOUSANDS) 541,618,899  541,608,463  539,447,369 
  EARNINGS PER SHARE    0.00053   
  LOSS PER SHARE  (0.00056)   (0.00005)

6


04.01 STATEMENTS OF CHANGES IN FINANCIAL POSITION (IN THOUSANDS OF REAIS)

1 – CODE  2 – ACCOUNT DESCRIPTION  3 – 01/01/2005 to 
12/31/2005 
4 – 01/01/2004 to 
12/31/2004 
5 – 01/01/2003 to
 12/31/2003 
4.01  SOURCES  4,002,169  5,916,011  3,210,149 
4.01.01  OF OPERATIONS  3,289,292  3,264,609  3,107,668 
4.01.01.01  INCOME/LOSS FOR THE YEAR  (303,671) 288,552  (25,317)
4.01.01.02  AMOUNTS NOT AFFECTING WORKING CAPITAL  3,592,963  2,976,057  3,132,985 
4.01.01.02.01  DEPRECIATION AND AMORTIZATION  2,375,496  2,457,592  2,195,376 
4.01.01.02.02  MONETARY VARIATION AND LONG-TERM INTEREST  31,900  58,304  105,086 
4.01.01.02.03  EQUITY IN SUBSIDIARIES  639,840  137,402  8,625 
4.01.01.02.04  PROVISION FOR CONTINGENCIES  410,118  110,901  299,196 
4.01.01.02.05  INCOME/LOSS IN FIXED ASSETS WRITE-OFF  27,270  59,005  350,552 
4.01.01.02.06  DEFERRED INDIRECT TAXES  43,772  8,094  154,019 
4.01.01.02.07  DEFERRED DIRECT TAXES  (184,361) 146,909  23,720 
4.01.01.02.08  PROVISION FOR PENSION PLAN  253,767  (1,895)
4.01.01.02.09  OTHER  (4,839) (255) (3,589)
4.01.02  FROM SHAREHOLDERS 
4.01.03  FROM THIRD PARTIES  712,877  2,651,402  102,481 
4.01.03.01  INCREASE IN LONG-TERM LIABILITIES  507,243  2,426,589  23,731 
4.01.03.02  DECREASE IN LONG-TERM ASSETS  178,292  194,690  45,167 
4.01.03.03  OTHER  27,342  30,123  33,583 
4.02  USES  5,051,748  4,936,404  3,988,762 
4.02.01  INCREASE IN LONG-TERM ASSETS  174,818  299,286  151,986 
4.02.02  INCREASE IN PERMANENT ASSETS  2,557,605  2,814,515  1,670,705 
4.02.03  DIVIDENDS/INTEREST ON SHAREHOLDERS’ EQUITY  626,500  444,500  246,200 
4.02.04  TRANSFER FROM LONG-TERM LIABILITIES TO 
CURRENT LIABILITIES 
1,630,553  1,340,553  1,832,082 
4.02.05  TRANSFER FROM CURRENT ASSETS TO LONG-TERM ASSETS  53,674 
4.02.06  OWN SHARES ACQUISITION  62,272  37,550  33,018 
4.02.07  OTHER USES  1,097 
4.03  INCREASE/DECREASE IN WORKING CAPITAL  (1,049,579) 979,607  (778,613)
4.04  CHANGES IN CURRENT ASSETS  (165,231) 916,781  495,800 
4.04.01  CURRENT ASSETS AT THE BEGINNING OF THE YEAR  4,834,911  3,918,130  3,422,330 
4.04.02  CURRENT ASSETS AT THE END OF THE YEAR  4,669,680  4,834,911  3,918,130 
4.05  CHANGES IN CURRENT LIABILITIES  884,348  (62,826) 1,274,413 
4.05.01  CURRENT LIABILITIES AT THE BEGINNING OF THE 
YEAR 
3,839,933  3,902,759  2,628,346 
4.05.02  CURRENT LIABILITIES AT THE END OF THE YEAR  4,724,281  3,839,933  3,902,759 

7


05.01 - STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FROM 01/01/2005 TO 12/31/2005 (IN THOUSANDS OF REAIS)

1 - CODE  2 - DESCRIPTION  3 – CAPITAL 
STOCK 
4 – CAPITAL 
RESERVES 
5– REVALUATION
RESERVES
6 – PROFIT 
RESERVES 
7 - ACCRUED 
PROFIT/LOSS 
8 - TOTAL 
SHAREHOLDER’S 
EQUITY 
5.01  OPENING BALANCE  3,401,245  1,459,705  287,672  1,332,743  6,481,365 
5.02  ADJUSTMENTS OF PREVIOUS YEARS 
5.03  INCREASE/DECREASE IN CAPITAL STOCK  34,543  (34,543)
5.03.01  TAX BENEFIT ON AMORTIZATION OF GOODWILL  FROM MERGER  34,543  (34,543)
5.04  REALIZATION OF RESERVES 
5.05  TREASURY STOCK  (62,272) (62,272)
5.06  INCOME/LOSS FOR THE YEAR  (303,671) (303,671)
5.07  ALLOCATIONS  (626,500) (626,500)
5.07.01  PROPOSED DIVIDENDS/INTEREST ON 
SHAREHOLDERS’ EQUITY 
(626,500) (626,500)
5.08  OTHER  7,685  7,685 
5.08.01  PRESCRIBED DIVIDENDS  7,685  7,685 
5.09  ENDING BALANCE  3,435,788  1,362,890  287,672  410,257  5,496,607 

8


05.02 – STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FROM 01/01/2004 TO 12/31/2004 (IN THOUSANDS OF REAIS)

1 - CODE  2 – DESCRIPTION  3 – CAPITAL
STOCK 
4 – CAPITAL
RESERVES 
5–REVALUATION
RESERVES 
6 – PROFIT 
RESERVES 
7 - ACCRUED 
PROFIT/LOSS 
8 - TOTAL 
SHAREHOLDER’S 
EQUITY 
5.01  OPENING BALANCE  3,373,097  1,524,953  273,244  1,491,550  6,662,844 
5.02  ADJUSTMENTS OF PREVIOUS YEARS 
5.03  INCREASE/DECREASE IN CAPITAL STOCK  28,148  (28,148)
5.03.01  TAX BENEFIT ON AMORTIZATION OF
GOODWILL FROM MERGER 
28,148  (28,148)
5.04  REALIZATION OF RESERVES 
5.05  TREASURY STOCKS  (37,550) (37,550)
5.06  INCOME/LOSS FOR THE YEAR  288,552  288,552 
5.07  ALLOCATIONS  14,428  (458,928) (444,500)
5.07.01  CONSTITUTION OF LEGAL RESERVE  14,428  (14,428)
5.07.02  PROPOSED DIVIDENDS/INTEREST ON 
SHAREHOLDERS’ EQUITY 
(444,500) (444,500)
5.08  OTHER  450  11,569  12,019 
5.08.01  DONATIONS AND SUBSIDIES FOR INVESTMENTS  277  277 
5.08.02  FISCAL INCENTIVES – FINAM  173  173 
5.08.03  PRESCRIBED DIVIDENDS    11,569  11,569 
5.09  ENDING BALANCE  3,401,245  1,459,705    287,672  1,332,743  6,481,365 

9


05.03 – STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FROM 01/01/2003 TO 12/31/2003 (IN THOUSANDS OF REAIS)

1 - CODE  2 – DESCRIPTION  3 – CAPITAL 
STOCK 
4 – CAPITAL 
RESERVES 
5–REVALUATION   RESERVES  6 – PROFIT 
RESERVES 
7 - ACCRUED 
PROFIT/LOSS 
8 - TOTAL 
SHAREHOLDER’S 
EQUITY 
5.01  OPENING BALANCE  3,335,770  1,591,454  273,244  1,763,067  6,963,535 
5.02  ADJUSTMENTS OF PREVIOUS YEARS 
5.03  INCREASE/DECREASE IN CAPITAL STOCK  37,327  (37,327)
  TAX BENEFIT ON AMORTIZATION OF GOODWILL             
5.03.01  FROM MERGER  37,327  (37,327)
5.04  REALIZATION OF RESERVES 
5.05  TREASURY STOCKS  (33,018) (33,018)
5.06  INCOME/LOSS FOR THE YEAR  (25,317) (25,317)
5.07  ALLOCATIONS  (246,200) (246,200)
  PROPOSED DIVIDENDS/INTEREST ON             
5.07.01  SHAREHOLDERS’ EQUITY  (246,200) (246,200)
5.08  OTHERS  3,844  3,844 
5.08.01  FISCAL INCENTIVES - FINAM  3,844  3,844 
5.09  ENDING BALANCE  3,373,097  1,524,953  273,244  1,491,550  6,662,844 

10


06.01 - CONSOLIDATED BALANCE SHEET - ASSETS (IN THOUSANDS OF REAIS)

1 - CODE  2 - ACCOUNT DESCRIPTION  3 - 12/31/2005  4 - 12/31/2004  5 - 12/31/2003 
TOTAL ASSETS  16,728,089  17,402,504  15,326,004 
1.01  CURRENT ASSETS  5,388,691  5,802,014  3,985,525 
1.01.01  CASH AND CASH EQUIVALENTS  1,730,083  2,397,810  1,465,765 
1.01.02  CREDITS  2,152,813  2,111,579  1,859,713 
1.01.02.01  ACCOUNTS RECEIVABLE FROM SERVICES  2,152,813  2,111,579  1,859,713 
1.01.03  INVENTORIES  83,035  174,033  8,042 
1.01.04  OTHER  1,422,760  1,118,592  652,005 
1.01.04.01  LOANS AND FINANCING  3,962  2,540  2,446 
1.01.04.02  DEFERRED AND RECOVERABLE TAXES  1,122,548  735,700  501,281 
1.01.04.03  JUDICIAL DEPOSITS  148,469  144,770  40,367 
1.01.04.04  OTHER ASSETS  147,781  235,582  107,911 
1.02  LONG-TERM ASSETS  1,941,931  1,299,476  1,363,061 
1.02.01  OTHER CREDITS 
1.02.02  CREDITS WITH RELATED PARTIES  6,965 
1.02.02.01  FROM ASSOCIATED COMPANIES  6,965 
1.02.02.02  FROM SUBSIDIARIES 
1.02.02.03  FROM OTHER RELATED PARTIES 
1.02.03  OTHER  1,941,931  1,299,476  1,356,096 
1.02.03.01  LOANS AND FINANCING  5,211  8,204  7,513 
1.02.03.02  DEFERRED AND RECOVERABLE TAXES  1,225,631  729,695  736,367 
1.02.03.03  INCOME SECURITIES  2,604 
1.02.03.04  JUDICIAL DEPOSITS  641,267  476,228  417,610 
1.02.03.05  INVENTORIES  19,053 
1.02.03.06  OTHER ASSETS  67,218  85,349  175,553 
1.03  PERMANENT ASSETS  9,397,467  10,301,014  9,977,418 
1.03.01  INVESTMENTS  390,463  477,607  286,418 
1.03.01.01  ASSOCIATED COMPANIES  97,485 
1.03.01.02  SUBSIDIARIES 
1.03.01.03  OTHER INVESTMENTS  390,459  477,603  188,933 
1.03.02  PROPERTY, PLANT AND EQUIPMENT  8,224,949  8,897,226  9,045,955 
1.03.03  DEFERRED CHARGES  782,055  926,181  645,045 

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06.02 - CONSOLIDATED BALANCE SHEET - LIABILITIES (IN THOUSANDS OF REAIS)

1 - CODE  2 - ACCOUNT DESCRIPTION  3 - 12/31/2005  4 - 12/31/2004  5 - 12/31/2003 
TOTAL LIABILITIES  16,728,089  17,402,504  15,326,004 
2.01  CURRENT LIABILITIES  5,480,299  4,808,710  3,957,807 
2.01.01  LOANS AND FINANCING  881,158  609,420  572,139 
2.01.02  DEBENTURES  608,226  493,713  1,418,137 
2.01.03  SUPPLIERS  1,786,535  1,769,480  935,656 
2.01.04  TAXES, FEES AND CONTRIBUTIONS  975,654  798,723  461,878 
2.01.04.01  INDIRECT TAXES  776,527  750,759  439,215 
2.01.04.02  TAXES ON INCOME  199,127  47,964  22,663 
2.01.05  DIVIDENDS PAYABLE  376,579  411,232  247,242 
2.01.06  PROVISIONS  382,138  357,140  76,531 
2.01.06.01  PROVISION FOR CONTINGENCIES  336,643  327,643  48,509 
2.01.06.02  PROVISION FOR PENSION PLAN  45,495  29,497  28,022 
2.01.07  RELATED PARTY DEBTS 
2.01.08  OTHER  470,009  369,002  246,224 
2.01.08.01  PAYROLL, SOCIAL CHARGES AND BENEFITS  78,214  73,238  61,550 
2.01.08.02  CONSIGNMENTS IN FAVOR OF THIRD PARTIES  154,696  114,219  51,747 
2.01.08.03  EMPLOYEE PROFIT SHARING  64,445  60,839  49,006 
2.01.08.04  AUTHORIZATIONS TO EXPLORE TELECOM. SERV.  55,516  44,056 
2.01.08.05  OTHER LIABILITIES  117,138  76,650  83,921 
2.02  LONG-TERM LIABILITIES  5,649,944  6,008,175  4,693,915 
2.02.01  LOANS AND FINANCING  2,918,841  3,158,365  1,735,563 
2.02.02  DEBENTURES  500,000  1,020,000  910,000 
2.02.03  PROVISIONS  1,350,310  883,151  1,128,304 
2.02.03.01  PROVISION FOR CONTINGENCIES  667,716  411,202  650,236 
2.02.03.02  PROVISION FOR PENSION PLAN  682,594  471,949  478,068 
2.02.04  RELATED PARTY DEBTS 
2.02.05  OTHERS  880,793  946,659  920,048 
2.02.05.01  PAYROLL, SOCIAL CHARGES AND BENEFITS  4,834  7,871 
2.02.05.02  SUPPLIERS  21,357  3,504  860 
2.02.05.03  INDIRECT TAXES  560,076  604,942  583,194 
2.02.05.04  TAXES ON INCOME  9,413  35,206  27,005 
2.02.05.05  AUTHORIZATIONS TO EXPLORE TELECOM. SERV.  252,274  261,548  211,847 
2.02.05.06  OTHER LIABILITIES  29,699  28,651  81,297 
2.02.05.07  FUNDS FOR CAPITALIZATION  7,974  7,974  7,974 
2.03  DEFERRED INCOME  84,587  73,978  11,431 
2.04  MINORITY INTEREST  16,652  30,276 
2.05  SHAREHOLDERS’ EQUITY  5,496,607  6,481,365  6,662,844 
2.05.01  PAID-UP CAPITAL  3,435,788  3,401,245  3,373,097 
2.05.02  CAPITAL RESERVES  1,362,890  1,459,705  1,524,953 

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1 - CODE  2 - ACCOUNT DESCRIPTION  3 - 12/31/2005  4 - 12/31/2004  5 - 12/31/2003 
2.05.02.01  PREMIUM ON SHARE SUBSCRIPTION  334,825  367,269  368,596 
2.05.02.02  SPECIAL GOODWILL ON THE MERGER  59,007  123,378  187,749 
2.05.02.03  DONATIONS AND SUBSIDIES FOR
 INVESTMENTS 
123,551  123,551  123,274 
2.05.02.04  INTEREST ON WORKS IN PROGRESS  745,756  745,756  745,756 
2.05.02.05  SPECIAL MONETARY ADJUSTMENT-LAW
 8200/91 
31,287  31,287  31,287 
2.05.02.06  OTHER CAPITAL RESERVES  68,464  68,464  68,291 
2.05.03  REVALUATION RESERVES 
2.05.03.01  COMPANY ASSETS 
2.05.03.02  SUBSIDIARIES/ASSOCIATED COMPANIES 
2.05.04  PROFIT RESERVES  287,672  287,672  273,244 
2.05.04.01  LEGAL  287,672  287,672  273,244 
2.05.04.02  STATUTORY 
2.05.04.03  CONTINGENCIES 
2.05.04.04  REALIZABLE PROFIT RESERVES 
2.05.04.05  PROFIT RETENTION 
2.05.04.06  SPECIAL RESERVE FOR UNDISTRIBUTED 
DIVIDENDS 
2.05.04.07  OTHER PROFIT RESERVES 
2.05.05  RETAINED EARNINGS/ACCUMULATED LOSSES  410,257  1,332,743  1,491,550 

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07.01 - CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS OF REAIS)

1 - CODE  2 - ACCOUNT DESCRIPTION  3 - 01/01/2005 to 
12/31/2005 
4 - 01/01/2004 to 
12/31/2004 
5 - 01/01/2003 to 
12/31/2003 
3.01  GROSS REVENUE FROM SALES AND/OR SERVICES  14,687,239  12,763,442  11,077,381 
3.02  DEDUCTIONS FROM GROSS REVENUE  (4,548,555) (3,698,586) (3,162,187)
3.03  NET REVENUE FROM SALES AND/OR SERVICES  10,138,684  9,064,856  7,915,194 
3.04  COST OF GOODS AND/OR SERVICES SOLD  (6,523,502) (5,828,012) (4,853,373)
3.05  GROSS INCOME  3,615,182  3,236,844  3,061,821 
3.06  OPERATING INCOME/EXPENSES  (4,772,424) (3,140,572) (2,921,228)
3.06.01  SELLING EXPENSES  (1,655,749) (1,085,777) (819,937)
3.06.02  GENERAL AND ADMINISTRATIVE EXPENSES  (1,267,630) (969,584) (795,336)
3.06.02.01  MANAGEMENT COMPENSATION  (11,695) (7,998) (7,094)
3.06.02.02  OTHER GENERAL AND ADMINISTRATIVE
 EXPENSES 
(1,255,935) (961,586) (788,242)
3.06.03  FINANCIAL  (1,222,739) (1,024,014) (1,091,002)
3.06.03.01  FINANCIAL INCOME  664,699  493,298  302,563 
3.06.03.02  FINANCIAL EXPENSES  (1,887,438) (1,517,312) (1,393,565)
3.06.04  OTHER OPERATING INCOME  414,662  577,641  270,362 
3.06.05  OTHER OPERATING EXPENSES  (1,040,968) (638,838) (485,315)
3.06.06  EQUITY ACCOUNTING RESULT 
3.07  OPERATING INCOME  (1,157,242) 96,272  140,593 
3.08  NON-OPERATING INCOME  (149,024) (160,078) (469,045)
3.08.01  REVENUES  44,962  105,306  55,417 
3.08.02  EXPENSES  (193,986) (265,384) (524,462)
3.09  INCOME BEFORE TAXES AND MINORITY
 INTEREST 
(1,306,266) (63,806) (328,452)
3.10  PROVISION FOR INCOME TAX AND SOCIAL 
CONTRIBUTION 
389,066  (43,671) 58,017 
3.11  DEFERRED INCOME TAX 
3.12  STATUTORY INTEREST/CONTRIBUTIONS  (53,783) (1,076)
3.12.01  INTEREST  (53,783) (1,076)
3.12.02  CONTRIBUTIONS 
3.13  REVERSAL OF INTEREST ON SHAREHOLDERS’ 
EQUITY 
626,500  444,500  246,200 
3.14  MINORITY INTEREST  (12,971) (6,276) 14 
3.15  INCOME (LOSS) FOR THE PERIOD  (303,671) 276,964  (25,297)
  NO. SHARES, EX-TREASURY (IN THOUSANDS) 541,618,899  541,608,463  539,447,369 
  EARNINGS PER SHARE    0.00051   
  LOSS PER SHARE  (0.00056)   (0.00005)

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08.01 - CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION (IN THOUSANDS OF REAIS)

1 - CODE  2 - ACCOUNT DESCRIPTION  3 - 01/01/2005 to 
12/31/2005 
4 - 01/01/2004 to 
12/31/2004 
5 - 01/01/2003 to 
12/31/2003 
4.01  SOURCES  3,776,334  5,971,051  3,262,596 
4.01.01  OF OPERATIONS  3,092,274  3,256,806  3,112,616 
4.01.01.01  INCOME/LOSS FOR THE YEAR  (303,671) 276,964  (25,297)
4.01.01.02  AMOUNTS NOT AFFECTING WORKING CAPITAL  3,395,945  2,979,842  3,137,913 
4.01.01.02.01  DEPRECIATION AND AMORTIZATION  2,794,545  2,589,649  2,206,422 
4.01.01.02.02  MONETARY VARIATION AND LONG-TERM INTEREST  57,719  54,863  105,146 
4.01.01.02.03  EQUITY IN SUBSIDIARIES 
4.01.01.02.04  PROVISION FOR CONTINGENCIES  408,675  97,400  299,141 
4.01.01.02.05  INCOME/LOSS IN FIXED ASSETS WRITE-OFF  27,958  54,389  347,885 
4.01.01.02.06  INDIRECT TAXES  43,816  8,094  154,019 
4.01.01.02.07  DEFERRED DIRECT TAXES  (235,252) 146,909  23,720 
4.01.01.02.08  MINORITY INTEREST  12,971  6,276  (14)
4.01.01.02.09  PROVISION FOR PENSION PLAN  253,767  (1,895) 1,686 
4.01.01.02.10  OTHER  31,746  24,157  (92)
4.01.02  FROM SHAREHOLDERS 
4.01.03  FROM THIRD PARTIES  684,060  2,714,245  149,980 
4.01.03.01  INCREASE IN LONG-TERM LIABILITIES  535,999  2,478,532  23,731 
4.01.03.02  TRANSFER FROM LONG-TERM ASSETS TO CURRENT 
ASSETS 
103,153  195,358  48,413 
4.01.03.03  INCORPORATED NET WORKING CAPITAL  39,300 
4.01.03.04  OTHER  44,908  40,355  38,536 
4.02  USES  4,861,246  5,005,465  4,080,695 
4.02.01  INCREASE IN LONG-TERM ASSETS  485,972  327,189  155,666 
4.02.02  INCREASE IN PERMANENT ASSETS  1,977,796  2,818,820  1,757,201 
4.02.03  DIVIDENDS/INTEREST ON SHAREHOLDERS’ EQUITY  626,500  444,500  246,200 
4.02.04  TRANSFER FROM LONG-TERM LIABILITIES TO 
CURRENT LIABILITIES 
1,708,706  1,374,418  1,832,877 
  TRANSFER FROM CURRENT ASSETS TO LONG-TERM       
4.02.05  ASSETS  53,674 
4.02.06  OWN SHARES ACQUISITION  62,272  37,550  33,018 
4.02.07  INCORPORATED NET WORKING CAPITAL  2,988 
4.02.08  OTHER USES  2,059 
4.03  INCREASE/DECREASE IN WORKING CAPITAL  (1,084,912) 965,586  (818,099)
4.04  CHANGES IN CURRENT ASSETS  (413,323) 1,816,489  515,785 
4.04.01  CURRENT ASSETS AT THE BEGINNING OF THE YEAR  5,802,014  3,985,525  3,469,740 
4.04.02  CURRENT ASSETS AT THE END OF THE YEAR  5,388,691  5,802,014  3,985,525 
4.05  CHANGES IN CURRENT LIABILITIES  671,589  850,903  1,333,884 
4.05.01  CURRENT LIABILITIES AT THE BEGINNING OF THE 
YEAR 
4,808,710  3,957,807  2,623,923 
4.05.02  CURRENT LIABILITIES AT THE END OF THE YEAR  5,480,299  4,808,710  3,957,807 

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09.01 – REPORT OF INDEPENDENT ACCOUNTANTS – UNQUALIFIED OPINION 

The Shareholders and Board of Directors
Brasil Telecom S.A.
Brasília - DF

We have reviewed the balance sheets of Brasil Telecom S.A. and the consolidated balance sheets of the Company and its subsidiaries, drawn up on December 31, 2005 and 2004, and respective statements of income, statements of changes in shareholders’ equity and statements of changes in financial position, corresponding to the years ended on that date, prepared under the responsibility of its management. Our responsibility is to express an opinion about these financial statements.

Our review was performed in accordance with auditing standards applicable in Brazil and they comprise: (a) the planning of works, taking into account the relevance of balances, the volume of transactions, accounting systems and internal controls of the Company and its subsidiaries; (b) the verification, based on tests, of evidence and records supporting amounts and financial information disclosed; and (c) the evaluation of most representative accounting practices and estimates adopted by the Company’s management and its subsidiaries, as well as the presentation of financial statements taken as a whole.

In our opinion, the financial statements referred to above properly represent in all their relevant aspects the equity and financial condition of Brasil Telecom S.A., as well as the consolidated equity and financial condition of this Company and its subsidiaries on December 31, 2005 and 2004, the results of its operations, changes in shareholders’ equity and changes in financial position, corresponding to the years ended on that dates, in accordance with accounting practices adopted in Brazil.

Our examination was performed for the purpose of issuing an opinion about the financial statements, taken as a whole. The statements of value added and cash flow represent supplementary information to those statements and are presented to provide an additional analysis. This supplementary information was submitted to the same audit procedures, applied to the financial statements and in our opinion, this is properly presented in all its relevant aspects in relation to the financial statements, taken as a whole.

As disclosed in Note 5 (i), on April 28, 2005, an agreement foreseeing the merger of the subsidiary 14 Brasil Telecom Celular S.A. into Tim Brasil Serviços e Participações S.A. was entered into. The effectiveness of this agreement has been the subject-matter of discussions through various injunctions and, at this moment, it is not possible to forecast possible effects on the financial statements of the Company and its subsidiaries, stemming from the realization or not of such agreement.

March 27, 2006

KPMG Auditores Independentes
CRC-SP-014.428 -“S”-DF

Manuel Fernandes Rodrigues de Sousa
Accountant CRC-RJ-052.428/O -“S”-DF

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10.01 – MANAGEMENT REPORT 

MANAGEMENT REPORT

Dear Sirs and Madams Shareholders:

In compliance with the provisions provided for in the law and in the By-Laws, Brasil Telecom S.A.’s management submits to your analysis the Management Report, the Company’s Consolidated Financial Statements and the Independent Auditors Report, related to the fiscal year ended on December 31st, 2005.

Economic Scenario

In 2005, the Brazilian economy grew by 2.3%, mainly sustained by substantial international demand, which resulted in record trade surpluses.

Inflation as measured by the IPCA index reached 5.69% in 2005 and the exchange-rate ended the year at R$ 2.34 to the dollar, up 13.4% compared to 2004. Interest rates remained high throughout the year, ending 2005 at 18% p.a., peaking at 19.75% p.a. in the third quarter.

In the domestic context, Brasil Telecom considers an environment of continuing moderate economic growth, controlled inflation and falling interest rates. In the international environment, the global economy remains in a sustained growth trend, independently of the uncertainties associated with the Middle East and the upward revision of US interest rates.

Regulatory Environment

The concession contracts for Public Switched Telephone Network (PSTN) were extended in December 2005. These will remain in force to the end of 2025 and will be subject to review every five years, from December 31, 2010.

One of the changes introduced by the new contracts was the charging of local calls on a per minute basis, replacing the old pulse measuring system. The new contracts have guaranteed a subscriber the right to request a detailed breakdown of local calls on their monthly bill. Concessionaires would have had until the end of August 2006 to make the investment necessary for the implementation of this ease. However, a decision by the National Telecommunications Agency (Anatel) in February 2006 postponed the implementation deadline to the end of August 2007.

Another item established under the new contracts refers to the parameters which will serve as the basis for tariff readjustments. From 2006, the Telecommunications Sector Index, created by Anatel and referenced to a basket of public price indices, became the official index for the correction of tariffs in the sector. For 2006 and 2007, Anatel also formulated a calculation model for the transfer factor – or X factor – whose function is to transfer part of the productivity gains achieved by the concessionaires to end-users.

In 2005, the Regulations for the Separation and Allocation of Accounts were published. This expands the base of physical and financial information that the operator must make available to Anatel, which will be used to set the adjustment to public tariffs, as well as determining the value of the interconnection tariffs from 2008 on. Fixed-line concessionaires will be obliged to provide the first set of expanded information in April 2006.

Published in March 2005, the General Interconnection Regulations defined new rules for the interconnection of networks and the relationship among telecommunications service providers.

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Furthermore, in December, Anatel published the Regulations for Individual Special Class Access, whose goal is to facilitate progressive universalization of individual fixed-line telephone access.

For mobile telephone services, the "bill and keep" system was suspended by a ruling from Anatel. It was originally expected that this system would come into force from July 2005, establishing rules for the payment of interconnection charges on calls between mobile telephone operators. Once the "bill and keep" system is implemented, mobile operators would cease to pay the Mobile Network Use Tariff on mobile-mobile calls.

Three themes related to the telecommunications sector, which are currently the subject of ongoing debate in the National Congress, are worth mentioning: the proposal to abolish the fixed monthly basic subscription fee, the project which aims to restructure the Brazilian System for the Defense of Competition and the proposal to alter the General Telecommunications Law, establishing the basis for the creation of a “social telephone service”.

Another important subject, which is present in the discussions about technology convergence, covers the offering of audiovisual content by telecommunications companies. As part of its agenda, the Executive Power is seeking to draw up a law covering mass electronic communication which should, among other things, review the legislation on pay TV and the admittance of foreign capital as a competitive factor, as well as allow the use of funds from the Telecommunications Services Universalization Fund for digital inclusion projects.

Changes in Management

On July 27, 2005 at an Extraordinary General Shareholders’ Meeting, members of the Board of Directors of Brasil Telecom Participações S.A. who were linked to the former manager Opportunity, were dismissed from the Board. At a Board meeting held on August 25, 2005, a new Senior Management was elected, with the Technical Director remaining in place.

At an Extraordinary General Shareholders’ Meeting held on September 30, 2005, the members of the Board of Directors of Brasil Telecom S.A. were also dismissed, with new members being elected in their place. On the same date, at a meeting of the Board of Directors, it was decided to dismiss the Chairman then presiding, and to elect new members to the Senior Management, the Network Officer being reelected. These decisions were ratified by the Board of Directors of Brasil Telecom S.A. at a meeting held on October 5, 2005.

The process of replacing the directors and officers of Brasil Telecom Participações S.A. and Brasil Telecom S.A. was litigious, as demonstrated by the several material facts released by the companies during 2005 and the various lawsuits filed by the former manager aiming at taking back the management of the Companies, which are still ongoing.

Agreements of April 28, 2005 under Opportunity’s Management

On April 28, 2005, while still under the management of the then CEO Carla Cico and Opportunity, Brasil Telecom Participações S.A. and Brasil Telecom S.A. celebrated several agreements involving the Opportunity and Telecom Italia groups (“Agreements of April 28”).

Among these agreements, Brasil Telecom S.A. and its subsidiary 14 Brasil Telecom Celular S.A. (“BTC”) entered into an agreement with TIM International N.V. (“TIMI”) and TIM Brasil Serviços e Participações S.A. (“TIMB”) entitled “Merger Agreement” and a “Protocol” document related to it.

 

18


According to material facts released, the merger was prohibited by injunctions issued by courts in Brazil and the US. And this is also the subject of an arbitration involving the controlling shareholders.

The new management of Brasil Telecom Participações S.A. and Brasil Telecom S.A. believes that the Merger Agreement, the respective Protocol and the other Agreements of April 28, which include the withdrawal and settlement of various court actions involving the Companies, were entered into while a conflict of interests existed, in violation of the Law and the Companies’ Bylaws, as well as being contrary to shareholders’ agreements, and furthermore, lacking the necessary shareholder and corporate approvals. In addition, the new management considers that these agreements are contrary to Companies’ best interests, particularly with regard to the mobile telephone business.

With regard to the Merger Agreement, on March 16, 2006, Brasil Telecom S.A. and BTC entered into arbitration against TIMI and TIMB in order to obtain annulment of this agreement or have it declared null and void. Such arbitration will be carried out according to the rules of the International Chamber of Commerce (“ICC”).

Assessment of the Actions by the Former Managers under the Management of Opportunity

In observance of their fiduciary duties, under the terms of the applicable legislation, the current management of Brasil Telecom Participações S.A. and Brasil Telecom S.A. have carried out internal investigations on the businesses and operations of the former management appointed by Opportunity, having identified management acts indicating abuse of controlling power, breach of fiduciary duties, conflict of interest, as well as violation of the law and the Company Bylaws.

To this end, and in accordance with a notice to shareholders released on December 12, 2005, Brasil Telecom Participações S.A. and Brasil Telecom S.A. filed a formal complaint with the CVM - the Brazilian Securities and Exchange Commission, against its former management, Opportunity Fund and other individuals and companies, both national and foreign, linked in any way to the former, who have been involved with, or participated in any way, or benefited from the actions which are the object of the formal complaint. On March 21, 2006, a further formal complaint, as an amendment to the first complaint, was submitted to CVM, in light of new management actions identified.

Brasil Telecom Participações S.A. and Brasil Telecom S.A. are adopting all necessary legal measures to recover the losses and damages suffered.

The Group

Brasil Telecom Group is comprised of companies which operate in the telecommunications sector, offering a full range services, particularly local fixed-line telecommunications, domestic and international long distance fixed-line telecommunications, mobile telecommunications, data transmission, besides data center and internet services.

Below you may find the group’s corporate structure in a simplified version:

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ON: Voting shares
PN: Preferred shares

Brasil Telecom S.A.

Brasil Telecom S.A. is the company responsible for the providing of fixed-line telephone services – voice and data, both on a local basis as well as long-distance. The public concession covers the states of Rondônia, Acre, Mato Grosso, Mato Grosso do Sul, Tocantins, Goiás, Santa Catarina, Paraná and Rio Grande do Sul, as well as the Federal District. This concession area, which corresponds to Region II in the General Concession Plan, runs along the frontier with Peru, Bolivia, Paraguay, Argentina and Uruguay, and can thus be considered a corridor to Mercosur.

In the last few years, Brasil Telecom S.A. has made some important acquisitions in the telecommunications sector, with the main objective of becoming a complete telecommunications service multi-provider, where convergence is the basic premise. In this manner, Brasil Telecom S.A. is present throughout the entire value chain in this sector.

Brasil Telecom operates outside its concession area, particularly in the three main Brazilian metropolitan areas (São Paulo, Rio de Janeiro and Belo Horizonte), through Brasil Telecom Comunicação Multimídia Ltda. This allows it to serve the corporate market, and so increase its market share in the growing data transmission market.

The Company also acquired a system of sub-sea fiber optic cables which connects Brazil, Venezuela, Bermuda and United States, which guarantees the Company the autonomy to carry international voice and data traffic.

The 3.2 million active users served by the internet service providers iG, iBest and BrTurbo mean that Brasil Telecom is the largest internet access provider in Latin America and one of the 15 largest internet providers in the world, in terms of number of clients. In October 2005, the new management of Brasil

20


Telecom began the process of integrating these three providers, with the object of consolidating the leadership of the Group in the Brazilian internet market. Just as important, or even more important than the traffic generated by these providers and the revenues provided by access and other products, is the exploitation of this relationship channel with clients spread throughout the country.

To complete its strategy of being a complete telecommunications service multi-provider, Brasil Telecom launched its mobile operation in September 2004, developing a combination of innovative promotions focused initially on fixed-line users and broadband access subscribers.

BrT Serviços de Internet S.A.

Through BrTurbo, iBest and iG, Brasil Telecom is able to compete throughout the Brazilian territory in the various segments of the internet, providing a range of converging services with a unified vision and mutual synergy. BrTurbo is the broadband leader in Region II of the General Concession Plan. iBest is the largest dial-up access provider in Region II, while iG - the first in dial-up access in Brazil - is one of the largest content providers with a broadband presence outside Region II.

BrTurbo

To consolidate its brand and strengthen its leadership in the broadband market in Region II, BrTurbo redesigned its portal in 2005, creating a new games channel, starting to use a new platform for the distribution of multimedia content and developing commercial and content partnerships. The company also launched BrTurbo Educa, Gigamail and a photo album, among other things, with the objective of adding value to the portfolio of products and services and, consequently, increasing average revenue per client.

BrTurbo Empresas, focused on small and medium-size enterprises, was reformulated and gained several new functions, which resulted in growth of 30%, in relation to the previous year.

BrTurbo Asas, which uses Wi-Fi, saw its own hotspot network expand by 22%, as a result of partnerships signed with Brazil's main airports. The number of accesses and the utilization time doubled, compared to the previous year.

As a result of these initiatives, BrTurbo’s client base expanded to 548,000 in 2005, 106% larger than the previous year. Thus, for the second year running, BrTurbo doubled the size of its client base.

iBest

iBest consolidated its position as the largest dial-up access provider in Region II, achieving a market share estimated at 50%, at the end of 2005.

iBest has a presence in more than 1,800 towns and cities and has approximately 10 million registered customers and 1.5 million active users. During 2005, it generated 19 billion minutes, an increase of 14% compared to 2004, due to its relationship initiatives and the expansion in the number of points of presence.

During 2005, iBest began to review its portal strategy, internalizing its news channel and improving its navigability. As a result, the frequency of portal use increased by 21%, in terms of single users in the period January to December, according to research from Ibope Net Ratings.

The 2005 edition of the iBest Awards was cause for a double celebration: 10 years of awards and 10 years of commercial internet in Brazil. Approximately 25,000 sites registered, 4 million votes and the

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traditional cash prizes – all made the edition a success, maintaining the iBest Awards as the world’s top internet award ceremony.

iG

On July 26, 2005, Brasil Telecom Subsea Cable Systems (Bermuda) Ltd., a subsidiary of BrT, completed the acquisition of 3,750,500 Voting Class A shares and 6,249,848 Voting Class B shares, issued by iG, due to the exercising of an option granted to shareholders: Global Investments and Consulting Inc., Opportunity Fund and Vicência Participações Ltda.

The purchase took place in accordance with the decisions taken by the Boards of Brasil Telecom Participações S.A. and Brasil Telecom S.A. on December 18, 2003 and under the same conditions as those for the extension of the purchase offer, referred to in the material fact, published on November 24, 2004.

The shares purchased for US$ 27.8 million, represented 25.6% of the total capital of iG. As a result of this purchase, BrT Bermuda together with Brasil Telecom Participações S.A., ended up with 98.2% of the total paid-in capital of iG.

iG was the first free internet access provider in Brazil and it currently has a presence in over 1,200 towns and cities. It has 18 million clients registered and two million active users. During 2005, the 20 billion minutes generated positioned iG as the leader in traffic generation terms in Regions I and III and the largest internet access provider in Brazil, both in terms of traffic and number of users. In addition, its base of broadband access subscribers totaled 180,000 at the end of 2005, up 65% compared to 2004.

iG’s pioneering stance is not limited to free access. The provider created the concept of exclusive web journalism with Último Segundo (up to the last second), built the largest cellular portal – Selig –, was the first company to launch a blog tool in Brazil – Blig – and introduced TV Flash on the homepage of its portal. Today, iG is one of the leaders in advertising sales on the internet. During 2005, in another innovative mood, iG created the largest video center on the Brazilian Internet, Megaplayer, and the music site iG Pop - as well as enlarging its games portal Arena iG, resulting in an increase of 11% in its audience, compared to the previous year, according to Ibope Net Ratings. As well as the distribution of content via computer, iG maintains its strategy of expanding its distribution channels. In addition to offering its content through Selig, iG also distributed content in cinemas, airports and elevators.

Grupo BrT Cabos Submarinos

BrT's sub-sea cable system consists of the following companies: Brasil Telecom Cabos Submarinos (Holding) Ltda., Brasil Telecom Cabos Submarinos Ltda., Brasil Telecom of America Inc., Brasil Telecom Subsea Cable Systems (Bermudas) Ltd. and Brasil Telecom Venezuela S.A. - all either direct or indirect subsidiaries of Brasil Telecom S.A.

The Grupo BrT Cabos Submarinos comprises a network of 22,000 km of leading-edge technology sub-sea fiber-optic cable and an installed capacity of 80 Gbps, which can be expanded up to 1.36 Tbps, connecting the US, Bermuda, Venezuela and Brasil.

During 2005, Brasil Telecom continued its efforts to optimize its costs and expenses, as well as increasing its client base in Brazil, the US, Venezuela and Mercosur. Important strategic alliances were established which allowed the Company to expand the geographical reach of its sub-sea cable system. As a result, the Company started to provide services in Venezuela, today holding approximately 40% of the international IP traffic in that country and also in Uruguay. In this latter country, international traffic through Brasil Telecom is already significant.

 

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The reliability of more than 99.99% of operations in this system results in a higher-quality service for its clients, among them being BrT itself, which thus has managed to guarantee the autonomy necessary to carry international voice, data and particularly, IP traffic. This autonomy has direct impact on reducing interconnection and transport costs. In 2005, Brasil Telecom saved US$ 16 million, as a result of its reduced need to rent international capacity.

BrT Comunicação Multimídia

The brand MetroRED was replaced by the brand Brasil Telecom Comunicação Multimídia, in March 2005, with the aim of further strengthening the Brasil Telecom brand throughout Brazil, and optimizing expenditure on marketing and advertising.

Brasil Telecom Comunicação Multimídia provides services in the data center, internet and Data transmission segments and is the first Brazilian company to introduce the high-quality, high performance and security of fiber optic cables for operation within offices. Brasil Telecom Comunicação Multimídia’s infrastructure includes 1,600 km of inter-city cable which connects São Paulo, Rio de Janeiro and Belo Horizonte, and 343 km of metropolitan network within the cities, which as well as reaching 636 buildings, has the potential to reach a further 5,000.

Brasil Telecom Comunicação Multimídia offers direct access to the main corporate clients in the country, thus being able to offer a differentiated service with a national and international reach, through partnerships with Grupo BrT Cabos Submarinos. Brasil Telecom Comunicação Multimídia has a technologically advanced infrastructure which complements that of Brasil Telecom S.A., with data networks and IP totally integrated and interlinked through a high-speed transport backbone.

Vant

Vant was the first operator in Brazil to offer services with a network directly based on IP technology – Internet Protocol. With a presence in Brazil's main capital cities, Vant operates throughout Brazilian territory and offers a wide-ranging portfolio of voice and data products.

Vant is undergoing a process of shutting down its activities as part of efforts to achieve greater synergy between the companies in the Group, the rationalization of operational costs and expenses, and the use of tax benefits. Its client base is being switched to other companies within the Group, together with its assets.

Brasil Telecom GSM

To be the fourth entrant into the mobile telephone segment never appeared to be an easy task for Brasil Telecom GSM, principally in the Region in which it operates, where the penetration rate in the cell-phone segment is the largest in Brazil: 58.5% in December. Challenges are being overcome day after day and the success of Brasil Telecom GSM can be seen in its substantial portfolio of clients won by the end of 2005: 2.2 million accesses.

With the launching of its mobile operation, Brasil Telecom has become the largest integrated telecommunications network in Region II, providing converging and innovative products and the use of the one-stop-shop concept at its sales outlets.

As a result of its pioneering stance in the providing of converging and innovative services, Brasil Telecom GSM has become a founding partner of the Fixed-Mobile Convergence Alliance (FMCA), which in December had the participation of 22 operating companies. This association has the objective

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of developing new products and technologies, to better meet the needs and demands of its members’ customers. Brasil Telecom GSM is the only operator in Latin America which participates in FMCA.

Sales outlets

To exceed the 2 million client mark, Brasil Telecom GSM used the wide reach of its 3,258 sales outlets, distributed through 20 own stores, 54 kiosks, 1,129 authorized agents and 1,979 re-sellers in the main retail chains, as well as 76 outlets for the sale of telephone card credits.

Coverage

During 2005, Brasil Telecom GSM increased its coverage in 156 new locations. At the end of the year, the company was serving 85.9% of the population in Region II, in 782 locations.

National and international roaming agreement

In 2005, Brasil Telecom GSM entered into data roaming agreements with the mobile telephone companies Claro and Oi, so extending its data network service to every state in Brazil.

According to the voice roaming agreement signed with Oi, our clients do not have to pay an additional charge when using this operator in the states of Region I. In cities and towns not covered by Oi, roaming is carried out by Claro or TIM, with an additional displacement charge.

By the end of 2005, 103 agreements had been signed with international operators in 59 countries. With this, the main tourist routes within Mercosur, North America, Europe and Japan, are now covered by roaming agreements.

Risk factors

Regulatory Risk

Brasil Telecom operates in accordance with the concession contracts and terms of authorizations signed with Anatel and under the general and specific legal terms and regulations that govern the sector. Any alteration in these rules initially established may affect the business. As a result of this, Brasil Telecom monitors the changes taking place in the regulatory framework, taking a proactive stance with the aim of reducing regulatory risk.

Market Risk

34.1% of Brasil Telecom's gross revenues come from local services. The trend of partial replacement of the fixed-network traffic to the mobile-network traffic, is a reality which is being dealt with and faced by Brasil Telecom. To this end, a number of initiatives have been developed, such as the creation of new products and services, with a view to maintaining local traffic. In addition, Brasil Telecom launched its own mobile operation, to ensure that part of the traffic from the fixed-network that is being replaced by mobile network traffic, goes through Brasil Telecom's network.

Competition Risk

Every year, the telecommunications sector becomes increasingly competitive, particularly in the long distance, mobile and data communications segments. Brasil Telecom has a substantial market share in the local and long-distance fixed-line segments. In the area of mobile telecommunications, the Company launched its mobile telephone operations at the end of September 2004 and, after one year and three

 

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months of operations, managed to achieve a market share of 8.7% in Region II, the result of a strategy based on convergence and the launching of revolutionary products.

Technological development, notably the introduction of voice services based on IP protocol (voice over IP, or VoIP), also results in increased competition, with new agents entering the market. However Brasil Telecom offers services and solutions based on IP technology such as PABX Virtual Net and Vetor to the corporate market. Additionally, investment in infrastructure carried out by the Company in the last few years has given Brasil Telecom the ability to provide more sophisticated services for all client segments.

The Company constantly strives for operational efficiency and excellence in its customer relationship, factors that are fundamental in order to guarantee its leadership position in Region II.

Financial Risk

Brasil Telecom's consolidated debt amounted to R$ 4,908.2 million at the end of December, of which 69.7% was long term. The Company adopts a conservative policy in the use of funding, principally in foreign currency. Of its total debt, R$ 1,336.7 million has been contracted in dollars, yen and a basket of currencies, while Brasil Telecom holds exchange-rate hedging protection for 57.2% of this amount.

For the interest rate on its loans, Brasil Telecom was in a privileged position, considering that the average cost in 2005 of its debt was the equivalent to 69.2% of the Domestic Interbank rate.

Operational Risk

With the aim of protecting its assets, Brasil Telecom holds specific insurance, such as Operational Risk and Business Interruption Insurance. The Operational Risk Insurance covers all assets against material damage, caused by fire, lightning, explosion, storms, theft, water damage and flooding, among others. To guarantee complete replacement of its assets, the Company updates the quantity of lines installed in its respective branches, on a monthly basis, and their respective values.

Losses resulting from interruption or interference with the running of the business, caused by possible material damage, are covered under its Business Interruption Insurance.

Policy  Insured Assets  Insured amount 
(millions)
Operational risks  Buildings, machinery, equipment, facilities, call centers, towers, infrastructure, information technology equipment  R$ 11,923 
Business Interruption  Fixed expenses and net income  R$ 8,163 
Surety  Compliance with the concession agreements  R$ 214 
General Civil Responsibility  Physical damage and personal injury to third parties  R$ 10 
General Civil Responsibility  Moral Damages to third parties  R$ 2 

Competition

After the privatization of the Brazilian telecommunications sector, the number of lines in service doubled and the competition for the most attractive clients became fiercer, particularly in the corporate and business segments. In this scenario, in which companies operate in a similar manner, the competitive differential is based on the capacity to propose complete solutions to clients. Brasil Telecom's position

 

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as a provider of complete telecommunications solutions turns it into the only operator, in its area of operation, that is able to offer converging solutions. This strategy not only guarantees its competitive edge in the market, but also helps to build a solid base for the future.

Local Fixed Service

Brasil Telecom's leadership position in the fixed telephone market is impressive: the Company has more than 94.6% of the fixed local accesses in Region II, due to the extension of its network, the quality of products and services provided and the practice of competitive prices. The expansion of the mobile plant and ADSL accesses, both markets in which Brasil Telecom has achieved impressive growth, has directly affected local fixed-line traffic. The presence of competitors was a secondary factor in this movement.

Fixed Domestic Long-Distance Service

Currently, Brasil Telecom is the leader in intra-region long-distance telecommunications services. In the last quarter of 2005, the Company achieved an average market share of 90.6% and 84.1%, respectively, in the intra-sector and intra-region segments.

After its entry into the domestic and international long-distance markets on January 19, 2004, Brasil Telecom has been continuously increasing its market share as a result of the publicity made for its carrier selection code, the strength of its brand and its competitive prices. Therefore, in the last quarter of the year, the Company achieved an average market share of 58.7% in the inter-region segment and 33.8% in the international segment. The competition in the long-distance segment is extremely fierce, mainly due to the various authorizations and licenses granted by Anatel to new competitors.

Data Transmission

The data transmission market has shown itself to be vigorous, increasingly provoking interest from companies. Brasil Telecom's market share in this segment has increased mainly due to the expansion in ADSL accesses and the growth in sales of network formation services. Brasil Telecom has been increasing its leadership in both of these markets.

Mobile Telephone Services

Despite being the last to enter this segment in Region II, Brasil Telecom's mobile operation has achieved impressive expansion in its subscriber base. This growth, by the end of December 2005, represented an 8.7% market share in its area of operations – almost three times 2004’s market share. Considering the period between October 2004 and September 2005, Brasil Telecom GSM became the company to enter fourth in the market with the largest market share in its first year of operations.

This success can be attributed to the success of its launch promotion (Pula-Pula), to the benefits of the convergence offered (Bônus Todo Mês, Bumerangue 14, Amigos Toda Hora and Cartão Único), the strength of the Brasil Telecom brand and the experience of the team responsible for the operation.

Strategic Priorities

As its strategic priorities for 2005, Brasil Telecom has decided to push forward with the expansion of its mobile telephone business, increase of its broadband subscriber’s base, growth of its range of alternative plans offered and increase of its market share in the inter-regional and international segments.

Brasil Telecom GSM achieved a market share of 8.7% at the end of 2005, an impressive result due to the fact that Region II had a penetration rate of 41% when the mobile operations were launched. Also

 

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worth noting is the percentage of monthly paying (post-paid) customers in Brasil Telecom GSM's client base, the best in its region.

Brasil Telecom ended the year with a total of 1,013,900 broadband subscribers, up 89.3% in comparison to the previous year. This figure meant that the Company maintained its leadership, with the best ratio of broadband accesses to lines in service.

Various different alternative plans were launched by Brasil Telecom to adapt its service to the socioeconomic profile of the population in the region where it operates, reducing the amount of fixed-line terminals disconnected. At the end of the year, 8.2% of lines in service were represented by these plans.

In the data transmission market, Brasil Telecom created solutions focused on various sectors of the economy, such as the automotive and agribusiness segments, as well as municipal authorities. Based on analysis and understanding of the inter-relationship of Brasil Telecom's clients with their suppliers, customers and external agents, it was possible to launch a number of segmented promotions, adding security, efficiency, leading-edge technology and greater value to all the participants of these chains.

Perspectives

In 2006 the telecommunications sector is likely to undergo significant transformation, with repercussions on the business model of all the operating companies. New technologies are making the use of broadband accessible, both for fixed-line, as well as mobile telephones, as well as enlarging the range of converging solutions, based principally on internet protocol.

It is already possible to see a trend of replacing fixed-lines by mobile accesses, with an immediate impact on traffic generated by the former and the switching over, still incipient, from conventional voice traffic to VoIP (Voice over Internet Protocol). The result of this process is a reduction in revenue from fixed-line voice traffic.

This reduction would have already been evident in the past few years, if it had not been for tariff increases. Adding to the complexity of this scenario is that the new revenues coming from IP world, for example, are still low and therefore do not compensate for the loss which is being seen in fixed-line voice revenues.

To align its planning with the realities of the market, Brasil Telecom has selected the following priorities for 2006:

1. To defend its main business, that of fixed-line voice traffic;
2. To expand the mobile telephone service, seeking to achieve a satisfactory balance between scale and profitability;
3. To exploit growth opportunities in data and internet, ensuring profitability;
4. To build a portfolio of converging promotions in the customer environment – voice, data and images – to reduce client turnover and increase the average revenue per user;
5. To increase operational efficiency, applying the necessary rigorous controls in terms of cash allocation; and
6. To create value for the shareholder, in an ethical and transparent manner, in its relationships with all its partners.

Network

Brasil Telecom has a network infrastructure which is a model of operational efficiency. Using state-of-the-art technology, it ensures flexibility and quality in the services it provides.

 

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The direction in which the infrastructure network has evolved was based on a converging pattern of services and applications, using the unique network concept, with the flexibility needed to provide different services – in voice, fixed-line or mobile, and data or images segment, to any client, at any place, at any time.

In this picture, in 2005 Brasil Telecom entered a new era of providing telecommunications services, with the Service Creation Environment – a final element which complements the Company’s Next Generation Network - NGN. In this new structure, the services are implemented in a centralized manner and made available in an evenly distributed and efficient way to any network user. Furthermore, since this structure operates under open-market standards, the services may be developed and implemented by a larger number of suppliers.

Also based on the NGN, Brasil Telecom has introduced a new call center infrastructure, a solution that is totally integrated with the client relationship systems, using all the technological resources available, thus reducing the need for investment. This infrastructure allows centralized management, changing the concept of sites to the concept of available resources, reducing the time necessary to launch new services. In addition, the implementation of virtual agents, known as home workers, is made possible.

In 2005, Brasil Telecom carried out the expansion of its Dense Wavelength Division Multiplexing (DWDM) backbone and continued to expand its core data network, which enables services that require a broader bandwidth to be launched. Network access was made available through the Company's own satellite platform, which makes it possible to offer voice and data services in remote or non-accessible locations through conventional networks within and outside Region II.

Still in 2005, Brasil Telecom continued with the introduction of DSLAMs IP/Ethernet (Digital Subscriber Line Access Multiplexer Internet Protocol/Ethernet) equipment, which prepares the network to support technologies such as ADSL 2+ (Asymmetric Digital Subscriber Line) and allows services to be offered at higher speeds. To meet the new demands with high-speed services, the company began to install the Metro-Ethernet access network.

Throughout the year, Brasil Telecom played an active role within various international standardization organizations - The European Telecommunications Standards Institute (ETSI), 3rd Generation Partnership Project (3GPP), Telecoms & Internet Converged Services & Protocols for Advanced Networks (TISPAN) and the Fixed-Mobile Convergence Alliance (FMCA) – following through and influencing the definition of standards which directly affect the development of its networks, as well as reinforcing its strategy to fully exploit the investments made.

Universalization Targets

Brasil Telecom fulfilled its universalization targets for 2005, receiving a favorable opinion from PricewaterhouseCoopers, as can be seen in the next page.

The fulfillment of these targets included the availability of individual and collective services for the Public Switched Telephone Network (PSTN) in more than 619 locations with a population between 300 and 600 inhabitants and the installation of public telephones in 776 localities with population between 100 and 300 inhabitants, all in Region II.

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Universalization Targets

Target  JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Quantity of lines installed (target: 7,889 x Millions of lines) 10,790 10,776   10,787 10,793 10,809 10,806 10,797 10,798 10,796 10,794 10,816 10,815
Quantity of locations with more than 600 inhabitants not served by PSTN with individual lines 
Number of requests of installation of individual lines, fulfilled in more than 2 weeks (target: 1 week)
Number of requests of installation of individual lines made by regular education and health institutions, fulfilled in more than one (1) week (target: 1 week)
Number of requests of installation of individual lines made by speech or hearing impaired individuals, fulfilled in more than 1 week (target: 1 week)
Quantity of pay phones in service (target: 216 x Millions of pay phones) 295.9  295.9  295.9  295.9  295.9  295.8  295.8  295.8  295.8  296.0  296.8  296.9 
Quantity of locations, covered by PSTN with individual lines, which do not meet the distribution of pay phones per one thousand inhabitants, territorially distributed in a uniform manner (target: 3 pay phones per group of one thousand inhabitants)
Quantity of locations, covered by PSTN with individual lines, with an availability of access to pay phone with a distance greater than the target (target: less than 300 meters)
Quantity of locations that do not meet the percentage of pay phones available 24 hours a day for long-distance calls – with capacity of originating and receiving local and domestic long-distance calls (target: 50% of pay phones)
Quantity of locations that do not meet the percentage of payphones available 24 hours a day for additional international long-distance calls (target: 25% of payphones)

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Quantity of requests of payphones in regular education and health institutions fulfilled in more than 1 week (target: 1 week)
Quantity of requests of pay phones made by speech or hearing impaired individuals, and those who use wheelchairs fulfilled in more than 1 week (target: 1 week)
Locations with more than 300 inhabitants, without PSTN, without at least one pay phone (target: larger than 300 inhabitants)
Quantity of locations with more than 1,000 inhabitants, not covered by individual lines 
Quantity of pay phone requests in regular education and health institutions, fulfilled in more than 2 weeks 
Pay phones density per one thousand inhabitants (target: 7.5) 8.30  8.17  8.16  8.16  8.16  8.15  8.15  8.15  8.15  8.15  8.14  8.14 
Quantity of pay phone per 100 installed lines (target: 2.5 pay phones) 2.70  2.69  2.69  2.69  2.68  2.68  2.68  2.70  2.68  2.69  2.69  2.69 
Quantity of locations with PSTN that do not meet the percentage of 2% of pay phones adapted for speech and hearing impaired ;individuals and for those who use wheelchair 

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Quality Targets

Brasil Telecom met and exceeded its targets in 99.5% of quality indicator measurements established by Anatel’s General Target Plan for Quality, as set forth in the following table.

SERVICE QUALITY 
Target  JAN FEB MAR APR MAY JUN JUL  AUG SEP   OCT NOV DEC 
Success dial signal with a maximum waiting period of 3 seconds (target of 98%) – Morning  99.96  99.98  99.98  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0 
Success dial signal with a maximum waiting period of 3 seconds (target of 98%) – Afternoon  99.97  99.98  99.98  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0 
Success dial signal with a maximum waiting period of 3 seconds (target of 98%) – Night  99.97  99.99  99.99  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0 
Rate of completed originated local calls (target of 70%) – Morning  71.45  70.76  70.74  71.15  71.44  71.59  72.39  71.61  71.99  71.55  71.35  71.83 
Rate of completed originated local calls (target of 70%) – Afternoon  71.75  71.10  71.16  71.72  72.09  72.07  71.96  72.23  72.23  72.06  72.04  72.14 
Rate of completed originated local calls (target of 70%) – Night  70.62  70.46  71.10  71.24  70.97  71.65  71.78  71.42  71.67  71.18  70.81  70.58 
Rate of originated local calls not completed due to congestion (target of 4%) – Morning  0.76  0.78  0.80  0.81  0.78  0.94  0.73  0.73  0.80  0.99  0.82  0.69 
Rate of originated local calls not completed due to congestion (target of 4%) – Afternoon  0.86  0.76  0.84  0.99  0.78  0.87  0.97  0.79  0.87  0.84  0.72  0.78 
Rate of originated local calls not completed due to congestion (target of 4%) – Night  1.27  1.34  1.03  0.82  1.42  1.25  0.85  0.92  1.02  1.18  0.94  1.10 
Rate of completed originated DLD calls – consolidated value (target of 70%) – Morning  72.14  71.25  70.86  71.53  72.32  72.46  73.71  72.91  72.92  72.87  72.08  72.73 
Rate of completed originated DLD calls – consolidated value (target of 70%) – Afternoon  72.04  71.36  72.05  72.14  72.80  72.97  73.32  73.28  73.24  73.18  72.47  72.75 
Rate of completed originated DLD calls – consolidated value (target of 70%) – Night  71.41  70.87  71.08  71.57  71.85  72.68  73.01  72.76  73.20  72.76  71.28  70.27 

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Rate of originated DLD calls not completed due congestion – consolidated value (target of 4%) – Morning  1.34  1.42  2.05  1.79  1.35  1.40  1.20  1.21  1.24  1.31  1.31  1.19 
Rate of originated DLD calls not completed due to congestion – consolidated value (target of 4%) – Afternoon  1.61  1.52  1.28  1.76  1.26  1.17  1.24  1.23  1.26  1.18  1.19  1.27 
Rate of originated DLD calls not completed due to congestion – consolidated value (target of 4%) – Night  1.64  1.58  1.46  1.42  1.39  1.26  1.22  1.30  1.31  1.35  1.32  2.20 
FULFILLMENT OF REPAIR REQUESTS 
Rate of repair requests per 100 PSTN accesses (target of 2%) - Full  1.39  1.16  1.23  1.25  1.20  1.20  1.23  1.28  1.31  1.33  1.29  1.26 
 
Rate of fulfillment of repair requests made by residential users within 24 hours (target of 97%) 99.50  99.46  98.63  99.42  99.52  99.61  99.67  99.79  99.60  99.43  99.64  99.61 
Rate of fulfillment of repair requests made by non-residential users within 8 hours (target of 97%) 98.68  98.66  99.09  99.22  99.33  99.36  99.52  99.45  99.01  99.01  99.16  99.45 
Rate of fulfillment of repair requests made by users that are providers of public interest services within 2 hours (target of 98%) 100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0 
FULFILLMENT OF REQUESTS FOR ADDRESS CHANGE 
Rate of fulfillment of requests for address change made by residential users within 3 business days (target of 97%) 99.80  99.87  99.87  99.78  99.91  99.84  99.88  99.91  99.86  99.86  99.89  99.84 
Rate of fulfillment of requests for address change made by non-residential users within 24 hours (target of 97%) 99.08  99.10  99.01  99.24  99.39  99.13  99.37  99.46  99.42  99.10  99.48  99.42 
Rate of fulfillment of requests for address change made by users that are providers of public use services within 6 hours (target of 98%) 100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0 
TELEPHONE ASSISTANCE PROVIDED TO THE USER 
Rate of telephone assistance to the PSTN user within 10 seconds (target of 94%) – Morning  99.51  99.61  98.53  99.12  98.76  99.40  99.51  99.53  99.07  99.07  99.30  97.56 
Rate of telephone assistance to the PSTN user within 10 seconds (target of 94%) – Afternoon  99.66  99.83  99.58  91.89  99.74  99.57  99.47  99.49  99.26  99.31  99.13  99.30 

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Rate of telephone assistance to the PSTN user within 10 seconds (target of ;94%) – Night  99.74  99.90  99.80  99.83  99.84  99.64  99.53  99.61  98.81  99.28  99.43  99.32 
QUALITY FOR PAY TELEPHONES 
Number of pay phones repair requests per 100 pay phones in service (target of 10%) 7.97  5.89  6.65  5.65  5.08  4.81  4.37  3.66  3.79  3.90  4.24  4.19 
Rate of fulfillment of pay phones repair requests within 8 hours (target of 97%) 99.16  99.06  99.55  99.59  99.67  99.63  99.56  99.67  99.23  99.33  99.50  99.51 
USER’S ACCESS CODE INFORMATION 
Rate of information of the user’s access code provided within 30 seconds (target of 97%) 99.02  99.08  99.09  98.91  98.91  99.13  99.10  99.16  99.17  99.04  99.02  98.96 
REPLY TO USER’S MAIL 
Rate of reply to user’s mail within 5 business days (target of 100%) 100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0 
 
PERSONAL ASSISTANCE TO THE USER 
Rate of personal assistance to the user within 10 minutes (target of 95%) N.A.  94.16  95.84  95.84  96.88  97.57  97.74  97.83  96.23  97.81  98.46  96.66 
 
BILLING 
Number of bills with error complaints. in the local mode. for every 1.000 bills issued (target of 2%) 1.95  1.94  1.97  1.96  1.97  1.97  1.97  1.96  1.95  1.94  1.92  1.99 
Number of bills with error complaints. in the Domestic Long-Distance mode. for every 1.000 bills issued (target of 2%) 1.51  1.56  1.66  1.79  1.82  1.82  1.85  1.83  1.74  1.75  1.73  1.77 
Rate of challenged bills with credit returned to the user. referring to the local mode (target of 97%) 100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0 
Rate of challenged bills with credit returned to the user. referring to the Domestic Long-Distance mode (target of 97%) 100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0  100.0 

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NETWORK’S MODERNIZATION 
Local network digitalization rate (target of 95%) 99.72  99.72  99.72  99.72  99.78  99.91  99.94  99.94  99.96  100.0  100.0  100.0 
Total number of accomplished targets (target of 35) 35  34  35  34  35  35  35  35  35  35  35  35 
NA = Not applicable

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Information Technology (IT)

Brasil Telecom works with converging IT solutions which support all the business segments of the Company. Flexibility, agility and availability are strategic directives which guide the search and selection of these solutions.

GSM project

2005 was a year of consolidation for Brasil Telecom GSM, with investments made in technology to guarantee stability within the environment of its systems. More than 200 improvements were implemented in the support systems, in particular the control of multiple balances in the pre-paid platform and the online treatment of returned goods in stores. Furthermore, new systems were developed: commission for the sales force, Business Intelligence in client portfolio composition, national and international roaming and the GSM Virtual Store, the sales channel with the lowest cost of acquisition for Brasil Telecom.

Also worth mentioning is the implementation of anti-fraud initiatives, such as improving security in the registration of clients and control of users in the resale system, as well as the automatic insertion of rules and jamming in the customer care, including the adhesion in the national blacklist system.

Billing Project

The development of management discounts at Brasil Telecom GSM, which involve 36 bands of discount, has improved flexibility in meeting the demand of corporate clients.

In fixed-line operations, improvements were introduced in the system, focused on environment availability and processing performance.

Revenue Guarantee

In 2005, the main focus in the fraud identification environment was increasing functionalities. The inclusion of processes for the detection of fraud in pre-paid accesses allowed Brasil Telecom GSM to obtain analysis of the main fraudsters in this service in terms of receiving calls and recharging credits.

A module for the generation of automatic and selective jamming was included in the Fraud Management System (FMS), which can be configured based on a different combinations of rules. Additionally, the scope of call monitoring under the FMS was expanded, with the inclusion of Brasil Telecom GSM's local calls and on roaming. Thus, the possibility of fraud identification has increased.

Business Intelligence (BI)

BI has an organized, reliable and updated data base which provides support for analysis, decision-making and disseminating knowledge of the business. In order to continue the implementation of BI in Brasil Telecom, the following functionalities were made available in 2005:

  • Directing of actions for ADSL products, intelligent services, connected PC and marketing and sales campaigns;
  • Segmentation of clients by market, assisting the business analysis;
  • Study of local billing behavior for the pulse-minute migration;
  • Billing analysis through measurement of performance, traffic, measured service and monthly and periodic services;

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  • Carrier Selection Code (CSP) 14 market share analysis; and
  • Information on client billing by consultant, for the calculation of variable remuneration.

However, the most important aspect of the year regarding BI, was enabling the availability of information related to the mobile operations, in particular:

  • Daily sales report, allowing better sales control;
  • Incoming revenue, providing financial control for the generation of pre-paid bonuses;
  • Cancellation report, seeking to take action to avoid client losses; and
  • Fraud report in activations.

Client Relationship Management (CRM)

CRM is used to manage the relationship with the client to generate value for the Company. During the next few years, the dialogue between the parties will be encouraged and will allow Brasil Telecom to acquire a greater understanding of its customers and, above all, those who produce the best results. Hence, the Company will be able to take initiatives and adopt strategies to satisfy its clients and even anticipate their future demands.

Call Centers

In 2005, Brasil Telecom prioritized the modernization and expansion of its call centers. Additionally, it introduced a virtual call center, capable of serving the client in a transparent manner, through any means of access. The investments made allowed the following results:

  • A new call center in Goiânia to serve Brasil Telecom GSM, increasing capacity from 1,254 to 1854 service positions;
  • Voice and screen recording resources, seeking to improve monitoring and quality systems; and
  • Automatic pre-dialling and interactive advisory system, seeking greater efficiency and productivity in sales and billing/charging campaigns.

IT and Network Security

In 2005 initiatives were implemented to strengthen the security of wireless network access, the standardization and centralization of control over access applications, analysis of the vulnerabilities of the environment and the publication of norms and directives for information security.

The implementation of an operational security center has allowed the monitoring of security events and the permanent combat of spam in the commercialized ADSL services.

Business Management and Regulatory Projects

In 2005, initiatives were developed to improve business management:

  • Third parties contract management;
  • The implementation of a system which will offer more flexibility in providing information to shareholders.

In compliance with Anatel’s Resolution 86/1998, the 7 to 8 digit migration project was concluded, with repercussions in 25 systems.

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Marketing

Entrepreneurial and Residential Market

The retention strategy in the entrepreneurial and high-consumption residential market continues to be the focus of sales and relationship initiatives. At the end of 2005, Brasil Telecom started to use prediction models for purchases and voluntary cancellations, in order to provide direction for segmented offers.

BrT increased its initiatives of offering intelligent services by sending letters along with the telephone bills in 2005. As a result, there was a 27.8% increase in revenues in comparison to 2004. The caller identification service, which had 1.6 million active clients at the end of 2005, 15.7% higher than the previous year and the virtual answering machine service, which had 285,000 active customers at the end of 2005, 122.1% higher than 2004, were the main highlights.

The Company increased its efforts to sell its hybrid plan (LigMix), aimed at lower-income clients. With a different charging system, which uses the post-paid system for monthly subscribption and local fixed-fixed calls and pre-paid for long distance and fixed-mobile calls. The LigMix plant almost doubled in one year, totaling 783,000 accesses in 2005. Such performance demonstrated the feasibility for expansion in the potential fixed-line market in classes C and D, which were exclusively served by prepaid mobile accesses and pay phones.

Business Market

Throughout 2005, BrT’s action pillars were to increase the average ticket size and maintain the Company's current corporate client base. The reformulation of the “Sob Medida Local” plan allowed the development of upselling offers, with an increase in the pulses-included (franquia) and in the clients’ plant size, with a low impact on their bill.

Initiatives under “14 Sob Medida DDD” plan also contributed to increase revenue from customers in the corporate market, with offers to fit each company’s profile. Interlan and IP Turbo offers resulted in an increase of 86.5% and 58.6% in their respective accesses, thus expanding the penetration in data communication and professional internet services in the segment.

The certification for authorized agents and qualification of managers programs generated positive results for Brasil Telecom: the average monthly revenue generated by the agents increased 65%.

Public Telephony Market

This is a market that is fundamental in serving the low-income population. In this segment, Brasil Telecom obtained a 3.8% increase in gross revenue. During the year, the Company implemented new card distribution policies and launched campaigns encouraging the use of pay phones.

Corporate and Government Market

In 2005, Brasil Telecom strengthened its methodology for mapping value chains, seeking to develop customized solutions and offers, thus reinforcing its strategy of operating in commercial niches. It also increased its presence in São Paulo, Rio de Janeiro, Minas Gerais, Salvador, Recife and Fortaleza.

 

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The consolidation of the mobile operation allowed Brasil Telecom to position itself in the market as a Company with complete and converging solutions. Furthermore, it expanded its operations in the international market, with data communication services and products.

CyDC (Cyber Data Center)

Within the concept of being a complete provider of corporate solutions, Brasil Telecom maintained its policy of offering data center services through its six CyDCs, located in Porto Alegre, Curitiba, São Paulo, Rio de Janeiro and Brasília.

In 2005, Brasil Telecom intensified the integration of services provided by CyDCs, data communication and internet. This initiative enabled the development of more complete offers, exploiting the Company's coverage, plant extension, and quality of data and voice networks.

The adoption of the Application Service Provider (ASP) enabled greater flexibility and specialization in the development of offers directed to specific segments of the market.

Broadband

Brasil Telecom expanded its broadband subscriber base from 535,500 to 1,013,900. Such performance was achieved as a result of a thorough mapping and market intelligence action in Region II. The Company directed its efforts and promotions to locations with potential for commercialization. Furthermore, Brasil Telecom concentrated its efforts on service quality and client relationships, ensuring high satisfaction rates and, as a consequence, the maintenance of its client base, even in light of more aggressive competition from its peers.

The penetration among broadband users will be the base to offer new products and services. Broadband accounts for 10.6% of lines in service, the highest percentage of all Brazil’s fixed-line operators.

New Products and Services

Vetor IPSec (internet protocol security): In opting for Brasil Telecom’s Vetor service, companies and government organizations may contract just one supplier to provide their solution for the formation of a Virtual Private Network (VPN). Brasil Telecom provides a complete solution, with differentiated treatment for corporate applications, software and equipment for the implementation of information security systems and multiple technologies for internet access, from ADSL to Metro Ethernet.

International Private Line (IPL): International solution for dedicated line which ensures security and efficiency in data, voice or video transmission, at several speeds and for a large volume of information. This solution is directed to the corporate market, government, the business sector and also at the secondary market, supplied under the One-Stop-Shop (OSS) concept, where one contact point provides the solution from start to finish. In 2005, its range was expanded to the main capitals of Latin America.

Multi-Conference: Brasil Telecom's complete solution for video, audio and web, which allows the client to use the benefits of state-of-the-art technology without the need to invest in assets of their own. The service is managed by the client, through a portal, where conferences can schedule and operate in a simple and secure manner. Launched in October, focusing on the corporate, government and business markets.

Telefonia IP Corporativa (Corporate IP Telephony): Brasil Telecom's Corporate IP Telephony was launched in a partnership with NEC and Cisco, providing a complete outsourcing of VoIP solutions for

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companies, from the rental of IP equipment to the installation and maintenance of the client's IP network, including the management of the entire infra-structure and centralized support.

Turbo Jogos (Turbo Games): Turbo Jogos was launched in October allowing Brasil Telecom's clients to play online games with a better performance, through a broadband access customized for this application. Turbo Jogos’ objective is to encourage the migration of clients who already have fast internet access to greater speeds, increasing the average revenue per user (ARPU).

VoIPFone: Launched in December, VoIPFone uses VoIP technology as a support for voice services of broadband clients, regardless of the service provider. The product allows savings in the long-distance and mobile calls, as well as to protect Brasil Telecom's revenues against attack from competitors.

PABX (Private Automatic Branch Exchange) Virtual Net: Brasil Telecom has developed new functionalities in its PABX Virtual Net, such as the formation of automatic search and call capturing groups. This product uses NGN, which allows the integration of telephones with different technologies, regardless of their geographic location, in an extensive and unique virtual network, with all the functionalities of a PABX. Directed to companies of any size and operational segment, PABX Virtual Net allows the complete subcontracting of telephone services for its users, assuring access to state-of-the-art technologies, flexibility in service and a reduction in investment and telecommunications expenses.

Expansion of the Intelligent Message Service: Voice, fax and e-mail message storage service on one platform, allowing its recovery through just one access point. Message recovery can be made by fixed or mobile telephone or via the internet.

0300 Service: The charging for the access to non-geographic code 0300 started to be divided between the user and the client of the service, instead of the user bearing all the charge. This change was made in compliance with Anatel’s new rules.

Pula-Pula: Unique and revolutionary offer used as a key promotion in the launch of BrT GSM. Under post-paid plans, the client pays the monthly account and receives the same value in credits for the next month. Under pre-paid plans, the client receives credit minutes equivalent to the amount of minutes incoming from calls received, in the following month. The Pula-Pula promotion was extended for the whole year, with a gradual reduction in benefits granted.

Bônus Todo Mês (Bonus Every Month): BrT GSM’s clients receives minutes in Brasil Telecom fixed-line telephone to make local fixed-fixed calls. The client chooses a Brasil Telecom fixed-line telephone to receive free minutes, every month.

Bumerangue 14 (Boomerang 14): Bumerangue 14 was created for clients who make long distance calls using Brasil Telecom’s CSC (Carrier Selection Code). BrT GSM’s clients who use CSC 14 receive free minutes to be used on local calls.

Amigos Toda Hora (Friends All The Time): A promotion where local calls made to a group of previously selected friends uses reduced tariffs. Post-paid customers may register, at their own criteria, up to 14 destination numbers (at most two fixed lines) where reduced tariffs will be used, while pre-paid clients may register seven numbers (at most two fixed lines).

WAP Show: A product directed to clients who wish to have a personal or corporate WAP site. With WAP Show, the creation and hosting of a WAP site is easy. Furthermore, it is possible to make available, via cell-phone, downloads of sound, applications, photos and even WAP cameras.

 

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Torpedo Rybena: Allows the communication with hearing impaired public by sending messages that are converted to the Língua Brasileira de Sinais (LIBRAS). The hearing impaired person sees messages in LIBRAS on their cell-phone, with animations in flash.

Secretária Virtual Integrada (Integrated Virtual Answering Machine Service): Developed specially for Brasil Telecom’s fixed and mobile users, it allows the integration of the fixed-line voicemail to eight BrT GSM mobile phones’ voice mails.

Tariff Readjustment

On July 1, 2005, Anatel authorized a PSTN tariff adjustment, in compliance with the criteria and conditions established under the Concession Contracts for Local and Domestic Long-distance Services, in effect as of July 3, 2005. The Basic Local Plan had an average readjustment of 7.27%, while the tariffs for Domestic Long Distance Basic Plan had an average increase of 2.94% .

Customer Relationship

Brasil Telecom permanently seeks excellence in its customer relationship with the client. This represents a fundamental factor in differentiating the Company from the competition, guaranteeing its leadership position in the telecommunications market.

In 2005, 214.5 million contacts were carried out through the Company’s several relationship channels. Each of these contacts is viewed as an opportunity to generate value for the customer and for BrT.

Call Centers

Brasil Telecom constantly invests in the modernization and expansion of its call centers, which at the end of December employed 5,300 professionals, responsible for receiving an average of 17.9 million calls per month. There are 5,250 workstations, distributed in five states and the Federal District. In October, a call center was introduced in Goiânia, focused on Brasil Telecom GSM’s clients. Constructed in a space of 14,000 square meters, with state-of-the-art technology, it has 600 workstations. At the end of December, approximately 2,700 professionals, divided between the call centers of Campo Grande and Goiânia, served mobile operations’ clients.

The efforts to train professionals and the improvement in customer care tools led to an evolution of the operational indicators of the call centers, in particular the average index of calls per client, which reached 0.53 in December. This value is equivalent to the best benchmarks in the market.

Sales Centers

Sales centers commercialized 4.9 million products and services during the year, a 40.3% increase as compared to 2004.

In 2005, several actions were developed, such as: revision of the receptive sales processes, revision of the quality-control criteria, improvement of control tools and management systems, intensification of encouragement campaigns, besides training of call center attendants. As a result, ADSL accesses and intelligent services sales, per attendant increased 32% and 40%, respectively, as compared to 2004.

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Retention Centers

Approximately 1.2 million products and services were retained by specialized retention centers. This result is due to the training of call attendants, segmentation for higher value clients, the creation of new offers, implementation of an automatic simulator to offer plans that are adequate for each client’s expenditure profile, and intensification of encouragement campaigns.

Tele-charging Centers

Throughout 2005, R$ 118.5 million were collected by the tele-charging centers, a 358% increase as compared to 2004. The monthly average revenue recovered per attendant increased 311%, as compared to the previous year.

Assistance to the Directory (102)

The assistance to the directory provided 65.3 million numbers and items of information in 2005. During this period, 132.2 million calls were received per month, which represents 53% of the total amount of calls received by the call centers.

Cross-selling and Up-selling

416,900 alternative plans were sold as a result of contacts made by clients to request information or clarify doubts. This encouraged local, national and international long-distance traffic. ADSL access speed upgrade offer was a highlight.

Audio Response Unit (URA)

The service provided by the audio response unit was totally reviewed, improving the interface with the client and increasing the retention rate at customer relationship centers: from 43% in January 2005, to 59% in December. The most requested services by clients were solved quick and automatically, without the participation of call attendants: verifying the value of phone bills, modification of the bill's expiration date, request for a second copy of the bill, consulting the Pula-Pula bonus and registration with Brasil Vantagens.

Website

By the end of the year, Brasil Telecom’s online services in its web site had approximately 721,400 registered clients. This represents a 5% increase in relation to 2004. “Sua Conta” (your account) is still the section in the site responsible for most accesses with 170,200 registrations for the receipt of information on telephone bills via e-mail or website. Throughout the year, 432,200 telephone accounts were sent by e-mail, with total security.

On-site customer care

Brasil Telecom ended 2005 with 2,110 personal on-site customer care spots in its concession area, including its own stores, authorized agents, mail offices, lottery shops and alternative spots (drugstores, markets, among others). In the stores, at the authorized agents, at the mail offices and at the alternative spots, an average of 81,800 people were served per month. In lottery shops, there were 946,100 accesses, a 12% increase as compared to the previous year.

 

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E-mail

In 2005, 276,100 e-mails were received and answered by specialists, who are exclusively dedicated to internet services. To improve the quality of service in this channel and manage a flow of e-mails, a tool was implemented which resulted in a productivity increase of 27.3% .

Letters

Throughout the year, 110,200 letters were received. All letters were answered within a period of five working days.

Operational Performance

Fixed-line Telephony

Plant Indicators – Fixed Telecommunications

 
PLANT    2005    2004    2003 
 
Lines Installed (Thousand)   10,816    10,737    10,687 
Additional Lines Installed (Thousand)   79    50    139 
Lines in Service - LIS (Thousand)   9,560    9,503    9,851 
Additional LIS (Thousand)   57    (348)   386 
Average LIS (Thousand)   9,532    9,677    9,658 
LIS/100 Inhabitants    22.3    22.4    23.4 
Pay phone/1,000 Inhabitants    6.9    7.0    7.0 
Pay phone/100 Installed Lines    2.7    2.8    2.8 
Utilization Rate    88.4%    88.5%    92.2% 
Digitalization Rate    100.0%    99.7%    99.0% 
 

Brasil Telecom’s installed plant reached 10.8 million terminals, an increase of 80,000 lines during the year. The stability of the installed plant is explained by the fact that the demand for fixed-line telephones has been met, considering the income levels of the Brazilian population.

At the end of December, the plant in service reached 9.6 million accesses, a 57,000 increase in 2005. Seeking to avoid cancellations, BrT has been offering alternative plans, such as the hybrid terminal or LigMix - whose main characteristic is a lower subscription fee than the Basic Plan’s.

LigMix offers the client the possibility to control expenses with fixed-line telephony, once long distance and fixed-mobile calls are only made if the client purchases a pre-paid card. For Brasil Telecom, LigMix, besides being more profitable than many alternative plans, also eliminates bad debt. At the end of 2005, the Company had 783,000 hybrid terminals in its plant in service.

Mobile Telephony

By the end of 2005, Brasil Telecom GSM had 2.2 million accesses, an increase of 255.6% compared to its client base in 2004. Another surprise for the market was the post-paid mix, which reached 31.3% at the end of December, exceeding market expectations. The focus on profitable clients is a priority for

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Brasil Telecom GSM and the results obtained are a reflection of the brand presence in the corporate segment and the perception by clients of the benefits of convergence.

The increase in Brasil Telecom GSM's client base also represented a 5.5% market share increase during the year, reaching 8.7% by the end of December 2005. It is worth highlighting the corporate market, which, according to research carried out in July, Brasil Telecom GSM reached a market share equivalent to 15%.

Data Transmission

One of the main highlights of the year in the data transmission segment was the commercialization of ADSL accesses.

Compared to 2004, the number of ADSL accesses in service increased 89.3%, reaching 1,013,900 accesses at the end of 2005. In the last two years, the increase observed amounted to 260%. ADSL access is fundamental to Brasil Telecom's strategy, once it provides higher average revenue per user and also protects the high value client base from competition.

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Consolidated Financial Performance


In 2005, consolidated gross operating revenues amounted to R$ 14,687.2 million, a 15.1% increase in comparison to 2004. This revenue increase of R$ 1,923.8 million was due basically to the following factors:

  • Expansion in the ADSL plant;

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  • An increase in the mobile telephone service subscriber base; and
  • Tariff increases authorized by Anatel, both for fixed- mobile calls, as well as local and long- distance basic plans.

Net consolidated revenues amounted to R$ 10,138.7 million, an 11.8% increased in comparison to 2004.

Consolidated revenues from the local service amounted to R$ 5,006.2 million in 2005, a 6.3% increase in relation to 2004. The increase in local service revenues results from the lower traffic levels, compensated by a tariff increase for the local services basket.

Consolidated revenues from long-distance calls amounted to R$ 1,729.4 million in 2005, in line with the previous year. Despite the increase of R$ 87.8 million and R$ 27.4 million in revenues from inter-region and international long distance segments, respectively, in which Brasil Telecom began its operations in January 2004, the long distance revenue stability is explained by the regulation approved by Anatel in September 2004, which established a new division in the fixed-line local areas in Brazil. According to the regulation, calls between close locations (áreas conurbadas) which used to be long distance calls, are now considered local calls.

In inter-network calls, consolidated revenues amounted to R$ 3,360.7 million in 2005, an 8.5% increase in relation to the previous year. The increase of 7.99% in the VC-1 (fixed-mobile) tariff, authorized by Anatel on June 12, 2005, was the main reason for the increase in revenues.

Regarding interconnection, consolidated revenues amounted to R$ 633.6 million in 2005, a 13.4% reduction in comparison to 2004, mainly reflecting the 13.3% reduction in the local network use tariff , in compliance with the concession contracts.

Consolidated revenues from public telephones amounted to R$ 496.8 million, accounting for 3.4% of 2005’s gross revenue . In the year, revenues from pay telephones increased 3.8%, reflecting an increase in the number of credits sold and a tariff increase.

Consolidated revenue from supplementary and value added services, totaled R$ 459.4 million, a 9.1% increase when compared to 2004. At the end of the year, Brasil Telecom had 7.1 million intelligent services in active operation.

The data communications segment and other services of the main activity generated consolidated gross revenues of R$ 1,923.5 million, an increase of 55.4%, in comparison to revenues registered in 2004. This improved performance reflects the 89.3% increase in the number of ADSL accesses in service and demonstrates the correctness of the strategy adopted by BrT in directing its efforts into a market not exploited by the telecommunications industry until 2001.

In 2005, BrT GSM’s gross revenues totaled R$ 732.3 million, a R$ 644.4 million increase in relation to the previous year. BrT GSM’s client mix reflects an average monthly revenue per user equivalent to that of Band A mobile operators present in Region II: R$ 27.8 during 2005.

Operating Costs and Expenses

Operating costs and expenses, excluding depreciation and amortization, amounted to R$ 7,404.6 million in 2005, equivalent to 50.4% of the consolidated gross operating revenue, compared to 42.9% in 2004. The increase observed is explained by the extraordinary provisions booked, as well as Brasil Telecom GSM’s operation, which has not yet reached maturity, mainly due to a characteristic of the Brazilian mobile telephony market, in which it is a common practice to provide subsidies on the sales of handsets.

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Although Brasil Telecom GSM has acquired a substantial percentage of post-paid clients during 2005, the average subscriber acquisition cost (SAC) reached R$ 209, below the initial estimate of R$ 220.

Personnel costs and expenses, including the remuneration of managers and employees profit sharing, amounted to R$ 628.4 million, an increase of 31.8% in comparison to 2004, due to an increase in the number of employees at Brasil Telecom, as well as a collective labor agreement. Furthermore, until October 2004, BrT GSM booked its costs and operating expenses as investment, once the company was in a pre-operational phase. Thus, in 2004, BrT GSM's payroll corresponded to two months of salaries, as compared to 12 months in 2005.

Interconnection costs amounted to R$ 2,275.8 million, representing 30.7% of costs and operating expenses in 2005, excluding depreciation and amortization (41.9% in 2004). Despite the 4.5% tariff increase for the use of the mobile network related to the VC-1 tariff, which was in effect as of June 12, 2005, interconnection costs decreased R$ 21.6 million in comparison to 2004, a reflection of the savings made due to BrT GSM’s operation.

In 2005, the costs and expenses of subcontracted services, excluding advertising and marketing, amounted to R$ 2,209.9 million. This is equivalent to 29.8% of costs and operating expenses, excluding depreciation and amortization, compared to 28.8% in 2004.

Costs and expenses with advertising and marketing totaled R$ 232.6 million at the end of 2005, a 74.1% increase as compared to 2004. This increase is basically explained by BrT GSM’s marketing campaigns.

Losses with accounts receivable amounted to R$ 449.3 million in 2005, 9.2% higher than the amount of R$ 411.3 million registered in the previous year. Hence, losses with accounts receivable represented 3.1% of gross revenues in 2005, stable in comparison to 2004. In the last quarter of 2005 BrT booked R$ 73.8 million in doubtful accounts provisions, due to risks of losses in client’s bills subject to co-billing procedures of other fixed and mobile telephone operators.

In 2005, Brasil Telecom booked additional pension fund provisions, which amounted to R$ 254.4 million, being as follows :

  • R$ 171.1 million referring to adjustments in the actuarial calculation of retirement plan obligations of Fundação BrT Prev (“Fundação BrT”), by virtue of the adjustment of its mortality table. Fundação BrT will adopt table UP94, segregated by sex and set forward in 2 years, replacing table UP84, based on a recommendation from its independent actuarial consultant; and
  • R$ 83.3 million related to the correction of the pension benefits data base, referring to the breakdown of the families and revision of the purchasing power regarding the benefits granted, according to the inflation index from January to September 2004, referred to the last wage readjustment.

Provisions for contingencies amounted to R$ 482.5 million in 2005, compared to R$ 255.3 million in the previous year. From the total contingency provisions, approximately:

  • R$ 197.8 million refers to Contingencies related to probable risks in 2005 due to labor and social security legal proceedings, in particular regarding BrT’s subsidiary liability, as well as administrative proceedings;
  • R$ 76.9 million refers to Write-off of tax credits, in particular of the ICMS (Value Added) tax levied on supplies used in the maintenance of BrT’s fixed telephone plant and on electric energy consumption; and

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  • R$ 39.4 million, due to the deduction of interconnection costs, in compliance with Law 9,998, dated August 17, 2000, Law 10,052, dated November 28, 2000, and the decision rendered on December 15, 2005 by Anatel, in which the calculation basis of the FUST – Fundo de Universalização de Serviços de Telecomunicações (Universalization of Telecommunications Services Fund) was altered.

Thus, considering the provisions for doubtful accounts, pension fund liabilities and contingencies, Brasil Telecom booked extraordinary adjustments in its operating accounts which amounted to R$ 559 million and R$ 83.3 million in the fourth and third quarters of 2005, respectively.

EBITDA

In 2005, Earnings before Interest, Tax, Depreciation and Amortization (EBITDA), amounted to R$2,734.1 million, 23.7% lower than the amount of R$ 3,585.2 million registered in 2004. Disregarding the extraordinary adjustments of R$ 642.3 million, Brasil Telecom's consolidated EBITDA would have totaled R$ 3,376.4 million, a 5.8% reduction in comparison to 2004.

EBITDA margin reached 27.0% in 2005, as compared to 39.6% in 2004. This reduction basically reflects the adjustments related to the extraordinary provisions, above mentioned, costs and operating expenses, as well as the impact incurring from the mobile operation, which has not yet reached maturity.

Financial Result

The Company's consolidated net financial result in 2005 amounted to a negative R$ 1,222.7 million, including R$ 664.7 million in income, R$ 1,260.9 million in expenses, and R$ 626.5 million referring to interest on shareholders’ equity. Approximately R$ 60.2 million, refer to monetary correction related to the extraordinary adjustments, which caused a reduction of the Company's financial results in 2005. In 2004, the Company registered a negative financial result which amounted to R$ 1,024.0 million, including R$ 493.3 million in income, R$ 1,072.8 million in expenses and R$ 444.5 million in interest on shareholders’ equity.

Non-operating result

The Company registered a negative non-operating result, which amounted to R$ 149.0 million, comprised basically of:

  • R$ 124 million of goodwill amortized in connection to the acquisition of CRT;
  • R$ 18.6 million as a result of the write-off of permanent assets.

Net earnings (loss)

In 2005, Brasil Telecom reported a net loss of R$ 303.7 million, compared to a net earnings of R$ 277.0 million in 2004. This performance was affected by the extraordinary adjustments and the mobile operation, which has not yet reached maturity.

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Investments

The Group invested R$ 1,977.8 million in 2005, as compared to R$ 2,866.9 million in 2004. The 31% reduction in relation to 2004 is explained by BrT GSM, which reduced its investments by approximately R$ 734.4 million, once the network has been built in 2004. Investment in mobile telephony totaled R$ 441.3 million, directed mainly on expanding coverage. Throughout the year, BrT GSM added 156 new locations to its coverage area.

In the fixed line operations, investment increased 22.8% as compared to 2004, amounting to R$ 1,492.2 million in 2005. The highest change can be observed in the Company's data network.

Still during 2005, Brasil Telecom invested R$ 44.3 million in the acquisition of iG shares, increasing its direct and indirect stake in the portal to 98.2% of its social capital.

Indebtedness

 
            Variation 
R$ Million    2005    2004    2005/2004 
 
Short-term    1,489.4    1,103.1    35.0% 
         In R$    1,271.9    962.3    32.2% 
         In US$    43.6    62.6    -30.4% 
         In Currency Basket    70.7    50.4    40.3% 
         In Yens    45.8    4.0    N.A. 
         Hedge Adjustment    57.4    23.8    141.2% 
Long-term    3,418.8    4,178.3    -18.2% 
         In R$    1,950.6    2,596.6    -24.9% 
         In US$    588.6    692.8    -15.0% 
         In Currency Basket    201.9    225.2    -10.4% 
         In Yens    386.1    561.4    N.A. 
         Hedge Adjustment    291.7    102.3    185.1% 
Total Debt    4,908.2    5,281.4    -7.1% 
     (-) Cash    1,730.1    2,397.8    -27.8% 
Net Debt    3,178.1    2,883.6    10.2% 
     (-) Intercompany BRP    619,3    1,046.5    -40.8% 
Net Debt (Ex Intercompany BRP)   2,558.8    1,837.1    39.3% 
 

At the end of 2005, consolidated net debt amounted to R$ 3,178.1 million, a R$ 294.5 million increase as compared to 2004. Regarding the total debt, R$ 632.2 million were denominated in dollars, R$ 272.6 million denominated in currency basket and R$ 431.9 million denominated in yens. 57.2% of our debt affected by exchange rate variation was hedged.

At the end of the year, the total debt amounted to R$ 4,908.2 million. The year-to-date cost in 2005 amounted to 13.1% p.a., or 69.2% of the Domestic Interbank Rate in the same period.

The net debt/shareholders’ equity ratio amounted to 57.8% at the end of 2005, as compared to 44.5% at the end of 2004. In 2005, Brasil Telecom’s net debt was reduced by the distribution of dividends and payment of interest on shareholders’ equity, totaling R$ 626.5 million.

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Corporate Governance

Corporate Governance practiced at Brasil Telecom has the objective of ensuring the quality and transparency of information provided to the market and protecting the interests of investors. In 2005, Brasil Telecom made several improvements to these practices.

In October, Brasil Telecom joined the Brazilian Corporate Governance Institute (IBGC), assuming a commitment to implement the best Corporate Governance practices.

In December, the Company created the Corporate Governance Board, whose principal responsibilities are to facilitate the relationship and communication between the Board of Directors, shareholders and managers; observe the fulfillment of good corporate governance practices; and coordinate efforts for the improvement of governance regulations to which Brasil Telecom has submitted itself.

In addition, an Audit Committee was set up and implemented, whose functions will be exercised by the Company's Fiscal Council, in accordance with the requirements of the Sarbanes-Oxley Act. This law, approved by the United States Congress, has the target of protecting investors from possible accounting fraud within corporations.

Also in December, Brasil Telecom carried out a presentation to the market, explaining the main assumptions with which it developed its 2006 Business Plan. The meeting, held in São Paulo with more than 150 participants, was transmitted live via Internet in two languages, guaranteeing the equal distribution of information provided to the markets in which the Company's shares are traded.

Strengthening internal control processes

The strengthening of Brasil Telecom's internal control processes has always been a common commitment to all areas of the Company. At the same time, internal audit directs its activities to those areas of greatest importance, which have the most impact on operations.

Brasil Telecom has been implementing mechanisms to guarantee the integrity of its main operational processes, having a team to disseminate the main methodologies, thus consolidating a uniform risk management language in the Company.

During the year, the action plans to improve the main controls were finalized and, for the most part, implemented. In this way a basis was built so that, in 2006 the internal control environment can be certified, as required by section 404 of the Sarbanes-Oxley Act.

Independent Auditors

Under the terms of CVM Instruction 381/03, Brasil Telecom S.A. has the procedure of submitting the fees and other types of service to be provided by their independent auditors for approval by the Board of Directors. The contracting policy adopted conforms to principles which preserve the independence of the auditor, according to internationally accepted criteria: the auditor must not audit own work, nor must it exercise management functions for its client or promote its client's interests. On December 1ST, 2005 KPMG Auditores Independentes were contracted by Brasil Telecom S.A. for the providing of a special analysis review service, and the reconciliation of the payments with regard to the obligations and contingencies of Companhia Riograndese de Telecomunicações (CRT). The fees charged by KPMG amounted to R$ 282,000 and the period stipulated for the provision of this service was two months.

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General Shareholders’ Meeting

According to the Bylaws, the General Shareholders’ Meeting is the most important body of the Company, with the powers to resolve on all business related to its social object and take measures which it judges appropriate for the defense and development of the business.

The General Shareholders’ Meetings of Brasil Telecom S.A. are summoned by the Chairman of the Board of Directors, with at least 15- day advance notice for the first convening, and 10-day advance notice for the second convening.

The Annual General Shareholders’ Meeting normally meets during the four months following the end of each fiscal year, in order to (i) examine, discuss and vote on the financial statements; (ii) decide on the destination of net profits earned during the year and the distribution of dividends; and (iii) elect the members of the Fiscal Council and, when appropriate, members for the Board of Directors. An Extraordinary General Meeting is summoned, whenever the interests of the Company require it.

Board of Directors

The Board of Directors of the Company must be composed of seven effective members and an equal number of alternates. The Board meets on a routine basis every two months, and on an extraordinary basis whenever summoned by its Chairman or two Board Members, with a minimum advance notice of 10 days. Decisions are taken on a majority vote basis, provided that the majority of its members are present. In 2005, the Board of Directors met 17 times.

Fiscal Council

According to the Company Bylaws, the Fiscal Council, the body responsible for auditing the management of the Company, must be composed of three to five effective members and an equal number of alternates. The Fiscal Council meets on a routine basis every quarter, and decisions are taken on a majority vote basis, provided the majority of its members are present. The Fiscal Council met seven times during 2005.

Shareholder Remuneration Policy

Brasil Telecom's shareholders are remunerated through dividends or interest on shareholders’ equity, distributing 25% of the Company's adjusted net earnings, in accordance with the terms established under Law 6.404/76 and the Company Bylaws. The Bylaws ensure priority for preferred shares in the receipt of the minimum dividend, not cumulative, equivalent to 3% of the net equity of each share. This is always when the dividend calculated according to these criteria exceeds the dividend of 6% of the paid up capital per share. The Company has adopted the procedure of remunerating the holders of voting and preferred shares on an equal basis, attributing to each a minimum remuneration equivalent to 3% of the net equity per share.

Dividends and Interest on Shareholders’ Equity (ISE)

 
Fiscal    Type    Credit in    Record Date    Payment    Gross Amount    Net Amount 
Year        the            (R$/1,000    (R$/1,000 
        Accounting            shares)   shares)
        Records                 
 
2005    ISE    04/20/2005    05/02/2005    05/16/2005    0.443300632    0.376805537 
 
2005    ISE    12/30/2005    12/12/2005    01/13/2006    0.713416761    0.606404246 
 

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Stock Market

The Bovespa Index had a positive performance in 2005, demonstrating a 27.7% appreciation in relation to 2004. The Bovespa Index ended the year at 33,456 points, a new record, reflecting economic growth, calmness on the political front, a better perception of Brazil by foreign investors and increased credibility with the market regarding the Brazilian Central Bank's economic policy. The total trading volume in 2005 registered a 31.9% increase, totaling R$ 401 billion, the highest amount registered by the São Paulo Stock Exchange.

Brasil Telecom S.A.’s ordinary shares (BRTO3) and preferred shares (BRTO4) ended 2005 quoted at R$ 17.50 and R$ 10.05, respectively, per 1,000 shares. Total trading volume in the ordinary shares amounted to R$ 7.9 million, and R$ 4.3 billion for the preferred shares.

The Dow Jones decreased 0.6%, closing 2005 at 10,718 points. Brasil Telecom S.A.’s (BTM) ADRs closed the year quoted at US$12.91. The trading volume for the year in Brasil Telecom’s ADRs amounted to US$0.2 billion.

Evolution of the Shares’ Price

 
    Closing                 
    Price    As of     In 12    In 24    In 36 
    12/31//2005    December    months    months    months 
 
  Voting Shares (BRTO3) (R$/1,000)   17.50    3.2%    32.1%    22.5%    79.5% 
Preferred Shares (BRTO4) (R$/1,000)   10.05    1.7%    -17.8%    -24.2%    1.8% 
    ADR (BTM) (US$/ADR)   12.91    -2.7%    -7.9%    -6.2%    47.7% 
        Ibovespa (points)   33,456    4.8%    27.7%    50.5%    196.9% 
            Itel (points)   952    4.9%    3.5%    7.2%    78.8% 
            IGC (points)   3,659    5.0%    43.8%    98.3%    256.3% 
        Dow Jones (points)   10,718    -0.8%    -0.6%    2.5%    28.5% 
 

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SOCIAL REPORT

Brasil Telecom is responsible for providing support for social, cultural and sports projects. Furthermore, it is a way of repaying the country and its citizens for the results achieved. During 2005, R$ 15.4 million were invested in 22 social projects, 60 cultural projects and approximately 100 athletes.

Social Projects

To contribute to the sustainable development of the community, the Company created the Brasil Telecom Program for Social Projects’ Support. Its objective is to encourage social equality and citizenship among children, youngsters and adults.

Brasil Telecom's Program for Social Projects’ Support finances programs focused on the development of the health system and the education of children, youngsters and even teachers, in such a way as to fight against poverty and social exclusion, reducing the level of illiteracy, promoting digital inclusion and recovering of citizenship.

Cultural Projects

Since its inception, the Company has assumed the commitment to support and develop culture in Brazil. For this reason it is launched the Brasil Telecom Stimulating Culture Program, based on the valuing and support of cultural projects, which allow not only the expansion of artistic expression, but above all, the strengthening of ties with the community.

The objective of the program is to lead to the discovery of new talent, permitting the decentralization of culture and wider access to art.

Sports Projects

Brasil Telecom is one of the largest private-sector sponsors of Brazilian sport. More than 100 athletes of various Olympic disciplines - triathlon, athletics, volleyball, sailing and swimming - and adventure sports - adventure races and parachuting, carry the Company's brand name. Among those sponsored are award-winning athletes such as Robert Scheidt, eight-time sailing world champion in the laser class; and Alexandre Ribeiro, two-time world Ultraman champion; as well as new talent.

Brasil Telecom also sponsors sports projects: the Brasil Telecom Athletics Team, which trains athletes for the Olympics, based in Presidente Prudente, and the Brasil Telecom Female Volleyball Team, led by two Olympic medalists: William de Carvalho and Renan dal Zotto. The two projects have already produced positive results. In athletics, the 4x100m relay team won the silver medal at the Sydney Olympic Games, the gold medal at the Pan American Games in 2003, as well as being among the finalists at the Athens Olympic Games. In volleyball, the team, champions in 2004 and 2005 in the Brasília championship, came in fourth place in the Super Liga Female Volleyball Championships in the 2004/2005 season.

With respect to the Olympic Games, the Athens Olympics were proof of Brasil Telecom's interest in contributing to the development of national sport, an effort which has been repeating over the last four years. The Company sponsored 25 of the 245 athletes from the Brazilian delegation – more than 10% of the participants. The Company also sponsors three para-athletes, among them being André Ramos, an athlete with impaired vision who has won two athletics medals (one gold and the other, silver), and Rivaldo Martins, an athlete who achieved 6th place in cycling, competing in the category of “amputee with prosthesis”.

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Brasil Telecom also sponsored Ironman Brasil Telecom for the fourth year running, a long-distance triathlon race. The only Latin American phase takes place in Florianópolis. Every year the event gathers an increasing number of participants: in 2005, 41 countries were represented by 1,173 athletes.

Brasil Telecom has been reaping the fruits of these initiatives. The Company was classified, for two years running, in third place in the Ranking of Concept and Image, sponsored by the magazine Running Br, as the Brazilian company that most encouraged and sponsored athletics, triathlon and adventure races. In 2005, Ironman Brasil Telecom was considered, by the same ranking, as the best triathlon event in the country.

Program for the Quality of Life – Live More

Brasil Telecom's Program for the Quality of Life - Viva Mais (Live More), is based on sport, health and leisure. The program which has the object of encouraging employees to improve their physical, mental and emotional health, was improved during 2005, based on suggestions sent in by the employees themselves. The program stimulates the adopting of a healthier lifestyle, through the practice of sport, better time management and aligning personal and professional satisfaction.

Viva Mais Sport

To encourage the practice of sporting activities, BrT promotes programs such as Breakfast Run, Running and Walking and Maratonistas Daqui (Marathon Runners from Here).

The Breakfast Run promotes sporting and recreational activities in open spaces such as parks, followed by a healthy breakfast. In 2005, Breakfast Run had approximately 9,000 participants in various locations. As well as promoting the health of employees, the initiative promotes integration between employees and their families and the Company.

The Running and Walking Program permanently maintains, two or three times a week, a physical education professional to provide orientation to employees on running and walking activities.

Maratonistas Daqui was designed to support employees of Brasil Telecom in national and international marathon races. In 2005, 31 employee-athletes participated in this project.

Also in 2005, was the third edition of the Brasil Telecom Internal Games, which encouraged integration between employees and encouraged the practice of various types of physical activity.

Viva Mais Leisure

Viva Mais Leisure has established partnerships for the benefit of employees and their dependents. Agreements have been signed with cinemas, inns, country hotels, water parks, boat rental companies, dance houses and beauty salons, among others. In addition, Viva Mais Leisure raffles tickets for facilitating and promoting employee access to cultural activities. This initiative is responsible for the already traditional Brasil Telecom Choir Competition and the Christmas Party.

Volunteer Program

Brasil Telecom's volunteer program, Viva Mais Citizenship, encourages the involvement of employees and their families in projects, campaigns and voluntary initiatives. Brasil Telecom's objective with Viva

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Mais Citizenship is to increase the social responsibility of the Company's professionals, transforming them into more aware citizens.

Currently, Viva Mais Citizenship serves 130 registered institutions, helping a public of 1,451 needy minors, 445 senior citizens, 488 children and adults with multiple handicaps, 70 pregnant adolescents and 47 needy families.

Quality in Human Resources

Brasil Telecom has developed acknowledgement programs to reward success and support result achievement, being aware that people are responsible for victories and overcoming of challenges, especially in a constant changing sector where quality of service is fundamental.

Gente em Destaque” (Outstanding People)

The “Gente em Destaque” program seeks to acknowledge employees who, individually or as a team, have introduced projects which stand out for their characteristics of innovation and creativity, or for their results.
For each edition, the categories and prizes are reviewed in order to be in aligned with the Company’s strategies. Thus, “Gente em Destaque” is strengthened by the employees’ significant participation and by the quality of the registered projects. To consolidate the program, Brasil Telecom has being adopting evaluation criterion based on the National Quality Prize (PNQ).

Result Optimization Teams (TOR)

The Result Optimization Teams Program (TOR) comprehends the formation of teams dedicated to challenges associated with the Company’s strategies. Hence, they provide interaction, learning and an exchange of experiences. Throughout 2005, approximately 50 teams were set up, directly involving 350 employees, besides the participation of partners and suppliers.
Created in 2000, the program creates the conditions for the development and maximum use of the workforce's potential. The goal is to achieve targets and overcome challenges. The action of lead teams is part of the TOR structure, which operates in BrT’s headquarters, interacting and supporting the work developed in other branches.

Programa “Arrancada de Vendas – Marque esse Gol” (Sales Boost Program – Score this Goal)

In its fourth edition, the Sales Boost program renewed visual and thematic appeal. Based on the World Cup 2006, “Score this Goal” was the theme chosen to motivate employees reached by the program. As well as stimulating sales, the program seeks to lead the sales force to think of things and moments that leads them overcome challenges.
In 2005, more than 1,200 employees were encouraged to seek and exceed results, as compared to 800 in 2004. The program awards the best salesman in each market, in each branch, with monthly credits in cards. The best teams in the residential, pay phone, retail and credit re-charging markets are also awarded prizes.

Programa “Sou Mais Brasil Telecom” (“Sou Mais Brasil Telecom” program)

The “Sou Mais Brasil Telecom”, launched in February, seeks to encourage its employees to learn about the Company’s products and services, leading them to master purchase, promotion and sales information. Hence, the program seeks to contribute to the development of a business culture. Besides

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being able to participate directly in the Company business, the employee accumulates points which are converted into credits for the purchase of goods and/or services in the authorized dealer network.

By the end of the year, approximately 80% of employees had signed-up for the program, generating approximately 1,750 requests for employees and 2,270 requests for third parties.

Programa Jovem Vendedor (Young Salesman Program)

This program trains and develops recently graduated young employees with the potential to operate in the commercial area, creating a technical reserve of salesman. This initiative guarantees a renewal for the Company and the maintenance of customer care services, since, at any time, they will be ready to take over or replace positions within Brasil Telecom. In 2005, 1,259 candidates participated in the selection process, of which, 25 were hired.

Programa de Incentivo à Proteção da Propriedade Intelectual (Program to Encourage the Protection of Intellectual Property)

The Program to Encourage the Protection of Intellectual Property recognized, in 2005, the employees who developed significant products for the Company and whose inventions were registered at the National Industrial Property Institute (INPI). As well as encouraging the development of innovative projects, the program reinforces the importance of protecting industrial property within BrT.

Programa Adolescente Aprendiz (Adolescent Apprenticeship Program)

The Adolescent Apprenticeship Program has been developed in partnership with non-profit organizations, in compliance with the Apprenticeship Law (Law 10.097/2000) . It seeks to train adolescents and facilitate their entry into the market. In 2005, 93 needy adolescents between 14 and 18, at elementary or high school, participated in the program.

Empresa Jr. (Junior Company)

The program consists of partnerships with junior companies, related to universities and colleges in the main cities in which Brasil Telecom operates. The objective is to develop students in the telecommunications market, through the creation of an interaction channel with BrT clients. Courses are offered for the training of students, which are also followed by professionals in BrT’s Human Resources and Sales areas. In 2005, eight junior companies participated in the program.

Programa Farol (Lighthouse Program)

Implemented in 2005, the Lighthouse Program seeks to establish an information channel between employees, trainees, subcontracted personnel and Brasil Telecom’s management, in order for the information to be always dealt with by the people responsible.

Selection Strategy

Brasil Telecom's workforce is composed of professionals from various organizational and social cultures. The selection and recruiting process is carried out either locally or at a national level, depending on the position to be filled. Brasil Telecom manages its intellectual capital, valuing internal talent and providing career and professional development.

 

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Assessment of young professionals

The assessment consists of a combination of tools for the valuation of professionals which identify their current stage of dedication, in light of the needs of the organization. Thus, the assessment of young professionals seeks to identify employees who are between 20 and 30 years old, with a differentiated potential and performance, who may develop activities with a high degree of complexity and responsibility. In 2005, 232 employees and graduate trainees participated in the assessment, of which 55 stood out.

Internship program

The internship program, which exists in Brasil Telecom for five years, seeks to contribute to the training and development of students, while at the same time identifying future professionals for the Company. The selection process includes group activities and tests in English, Portuguese and general knowledge, as well as interviews. At the end of 2005 of 442 interns, 92 had been hired.

Summer Internship Program

The Summer Internship Program seeks to identify potential Brazilian executives who are enrolled in MBA courses at well known international institutions, such as Harvard, Wharton, Stanford, Darden, Berkeley, Michigan, Kellogg, Chicago, Columbia and London Business School.

The program attracts professionals who wish to develop a career in the telecommunications market and who have the ability to analyze the processes from different perspectives. In its fifth edition, the Summer Internship Program has produced significant results. In a year of work, three professionals participated in the program, of which, two are evaluating proposals to work for Brasil Telecom.

Employee Remuneration Strategy

Brasil Telecom's remuneration strategy has the purpose of providing remuneration which is aligned to the Company’s strategic objectives. It is also seen as being an important tool to attract and retain qualified professionals, committed to the excellence of business. Brasil Telecom carries out researches of the salaries and benefits practiced by the market seeking to maintain its competitiveness. In addition to salary, remuneration is composed of employee profit-sharing, based on the fulfillment of previously agreed targets.

Profit-Sharing Program (PPR)

The profit-sharing program is directly related to the fulfillment of financial, technical, quality and client satisfaction targets. The profit-sharing program for 2005 has the potential to pay up to 1.8 monthly salaries. BrT has already made a provision of R$ 40.3 million for the payment of profit-sharing in 2005, which is likely to involve 6,000 employees.

Brasil Telecom pays an annual bonus to its executives, starting from the management level. Payment of the bonus depends on the fulfillment of previously established targets and represents, on average, between 15% and 47% of the executives’ annual remuneration. In 2005, bonuses were distributed to 353 executives, totaling R$ 28.6 million.

Variable compensation – Sales force

 

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Brasil Telecom also practices variable compensation for its sales force, related to the fulfillment of previously established targets. The objective is to encourage employees who serve BrT GSM, government, corporate and business markets and who work in the call centers - to continually improve the results and increase the loyalty of clients.

Collective Labor Agreement (ACT)

The collective labor agreement for 2004/05 set salary increases which varied from 5.8% to 6.0%, according to salary range and corrected the benefits provided by Brasil Telecom.

Benefits

Brasil Telecom is aware that the benefits it grants make a significant portion of the employee’s income. To this end, the Company invested approximately R$ 46.6 million in benefits throughout 2005.

Health care Insurance

Health care of its employees and their dependents is a priority for Brasil Telecom. Therefore, the Company made every effort to solve all the difficulties which occurred in 2005 in the private health care sector, celebrating a new partnership. Thus, the Company continued to provide medical and hospital services to the beneficiaries of Brasil Telecom's health insurance.

The new partnership, celebrated with Central Nacional Unimed, allows the beneficiaries of the plan located in the states of Mato Grosso, Mato Grosso do Sul, Tocantins, Santa Catarina, the interior of Rio Grande do Sul, Goiás and Rondônia, to receive medical and hospital services in any place in Brazil. Such partnership was celebrated under the same conditions as the co-participation practiced with Bradesco Saúde, which, since 1999 had managed Brasil Telecom's health and dental insurance within the Brazilian territory.

BrT also celebrated a partnership with AON Consulting to manage the health insurance plan and to implement actions to reduce costs, without altering the quality and coverage of the benefits. This happened in compliance with Law 9,656, which regulates private-sector health care insurance.

Meals

The modernization of the suppliers of meal benefits allowed Brasil Telecom to provide meal supplements in several areas of its operation at the same time, by crediting the value of the benefits on electronic cards. This system is applied both for the purchase of food in markets, as well as for the payment of meals in authorized establishments, according to the conditions established by the Worker Meal Program (PAT).

Group Life Insurance

A group life insurance provides serenity for everybody. Those insured and their beneficiaries have the guarantee of severance in the event of an unexpected occurrence. If an employee dies, the group life policy guarantees the beneficiaries 30 times the nominal salary of the individual insured - if the death is by natural causes, 60 times the nominal salary and - if the death was a result of an accident - limited to R$ 900,000. For total impairment due to disease and total or partial impairment due to accident, the severance may be partial or the same as the severance guaranteed in the case of death by natural causes.

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Pension Plan

In 2005, the Company continued the reorganization of its pension plan, in particular the following: approval by the Secretaria de Previdência Complementar - SPC (Complementary Social Security Department) to transfer TCSPREV plan to Fundação 14 de Previdência Privada, the appointment and taking over of the representatives of the participants and beneficiaries of Fundação 14 by the Board and Fiscal Council, the formation of the Electoral Commission which will create the procedures for election of the representatives of the participants and beneficiaries in 2006, and the approval by the SPC of the agreements to enroll in the TCSPREV plan, related to the other groups in the Brasil Telecom economic group, the enrolling of approximately 1,380 new active participants, and a series of seminars about the management of pension arrangements within Brasil Telecom, which also includes the new tax legislation for plans of this type (Law 11,053/04).

At the end of the year, the assets of the four pension plans sponsored by the Company, which have 6,850 active participants and 5,510 retirees and pensioners, totaled approximately R$ 1.7 billion. The monthly contributions by Brasil Telecom amounted to an average of R$ 2.0 million. The benefits paid to retirees and pensioners were approximately R$ 9.7 million a month.

Development Programs

The development of its employees is one of Brasil Telecom's strategies to increase its competitive advantage. This strategy has been recognized internally and externally. The main highlights of 2005 were:

  • The Personnel Management Integrated System was awarded the Candango prize for Excellence in Human Resources, presented by the Brazilian Human Resources Association (ABRH). The case was also presented at the First International Management by Competencies Seminar, held by the University of São Paulo (USP) at the Global Symposium Maximizing People Performance (International Telecommunications Union) and at the Second Annual Human Resources Forum. In partnership with The International Telecommunications Union, Brasil Telecom organized the Latin American Competencies Management Seminar , which included the presence of operating companies and regulatory bodies from 11 countries in Latin America.
  • The distance learning program received the e-Learning Brasil award, which made Brasil Telecom the only company in the country to be chosen as a national benchmark in terms of distance learning, for three consecutive years. The Company started to use the network in LAN houses and cyber cafes to allow courses to be available simultaneously, throughout its area of operation.
  • In a partnership with the University of Brasília (UnB), Brasil Telecom began a Telecommunications Engineering Masters program, with 30 professionals in the areas of Networking, Marketing and Information Technology. The course lasts 18 months and the dissertations are orientated towards the themes which provide solutions and applications which add value to Brasil Telecom.

Internally, in 2005 Brasil Telecom recorded a satisfaction rate of 97%, in research carried out among its employees.

Management by Competencies

In 2005, Brasil Telecom implemented a Personnel Management Integrated System, seeking to integrate Human Resources initiatives using the concept of competence. Competencies which are common to all of Brasil Telecom’s employees are: direction towards the business, focusing on results, direction

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towards the clients, communication, teamwork, negotiation, systematic integrated vision and knowledge management, as well as innovation and direction to changes.

The model directs professionals in businesses on development routes, in accordance with the macro-processes of the telecommunications industry: management, technology infrastructure, market and business support. Each area has specific competencies, related to the processes they are destined for.

The management route emphasizes the development of leadership and the management of people. Among its main initiatives are coaching and the new managers program. The technological infrastructure route, in its first cycle, involved the evaluation of 2,008 employees. The development initiatives deal with the management of knowledge and innovation.

The market-oriented route dedicates attention to direct the client. Brasil Telecom’s sales force, including its partners, were prepared to know thoroughly its products and services and how to develop an efficient sales pitch. The business support route prioritized teamwork and the management of knowledge and innovation.

  Number of Workers  Training Hours  Costs in
 Thousand R$ 
Fixed Telecommunications  19,153  200,944   5,000 
Mobile Telecommunications 9,506  131,883  2,000 

The Personnel Management Integrated System produced significant results in the integration of human resources processes, such as the recruitment and selection process, which uses criterion defined by the System. Therefore, it ensures, as of the start, the alignment of competencies with the specific route.

Health

Among initiatives focused on the health of its employees, developed in 2005 by Brasil Telecom are:

  • Standardization of occupational health service, which provides the same type of service to all employees, independent of their workplace. Medical examinations and visits were carried out to assess the health profile of the workforce, which provides a base for preventive actions. In 2005, 7,229 occupational medical examinations were undertaken.
  • Introduction of the “Semente” program, with the theme “Attitude is the best prevention”. The “Semente” program seeks to disseminate a culture of prevention of STD/AIDS and increase awareness of the harmful effects of drug use. For the development of the activities, teams were set up with the spontaneous participation of employees. These teams are trained to contribute to the activities of orientation, support and case forwarding to the resources offered by the Company, for prevention and treatment.
  • Introduction of the “Com Você” (With You) program, which orientates employees and families on financial, personal and legal questions in a flexible, efficient and private manner. The user is attended by qualified and experienced professionals at any time, including weekends and holidays. Since the introduction of this program, in June, 889 people have benefited from it.
  • The “Incluir” (Inclusion) Program is an initiative by Brasil Telecom to provide opportunities for professional inclusion for handicapped people and generate a culture of respect and appreciation of handicapped persons among employees. For the handicapped professionals who have a qualification that meets the profile of the job position available at the Company, the possibility of participating in the selection process is offered. Training is offered to those without qualifications. Among its own employees, Brasil Telecom ended 2005 with 193 handicapped and rehabilitated personnel, compared to 107 in the previous year.

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Safety in the workplace

In 2005, Brasil Telecom consolidated the process of inspecting its subcontracting companies, operating in three different phases. The first phase was the monthly verification of the obligations which they must present, relating to documents which prove the fulfillment of the required regulation.

The second phase consists of monthly field visits by inspectors of the network. After the inspection, the inspectors send a field report to the work safety department, which consolidates the irregularities, and requests the subcontractors to carry out immediate adequacy.

In the third phase, semester audits evaluate health, safety and environmental actions undertaken during the period.

Brasil Telecom has support groups in all its units, responsible for dealing with crisis. Mainly the evacuation of premises and initial fire combat. In 2005, 374 people were trained for this work.

Workforce

Brasil Telecom ended the year with 6,872 employees, an increase of 2.9% compared to the previous year. Throughout the year 1,196 new employees joined the company, while 1,004 either resigned or were dismissed.

Number of Workers per Company

 
Company    2005    2004    Variation 
 
Brasil Telecom S.A. (BrT)   5,338    5,313    0.5% 
BrT Serviços de Internet S.A. (BrTSI)   82    50    64.0% 
Brasil Telecom GSM (BrT GSM)   1,069    881    21.3% 
Grupo BrT Cabos Submarinos    23    23    0.0% 
iBest    60    71    -15.5% 
Brasil Telecom Comunicação Multimídia    100    121    -17.4% 
iG    192    204    -5.9% 
Vant      17    -52.9% 
 
Total    6,872    6,680    2.9% 
 

From the total 6,872 employees, 106 were licensed at the end of 2005, not being part of Brasil Telecom's effective workforce.

Regarding distribution by function, the main alteration in the Company's own workforce, in comparison to 2004, was related to the area of Information Technology, which saw its workforce reduce by 8.5% in 2005.

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Number of Workers per Area

       
Area  2005  2004  Variation 
       
Marketing  2,623  2,455  6.8% 
                   Marketing and Sales  2,178  2,019  7.9% 
                   Call Centers  445  436  2.1% 
Network  2,321  2,254  3.0% 
                   Expansion  534  560  -4.6% 
                   Operation  1,787  1,694  5.5% 
Information Technology  485  530  -8.5% 
General and Administrative  1,337  1,334  0.2% 
In absence period  106  107  -0.9% 
       
Total  6,872  6,680  2.9% 
       

Employees Profile

Distribution by age

The average age of Brasil Telecom's workforce remained at approximately 36 years in 2005:

Distribution by age

 
Age    2005    %    2004    %    Relative Variation 
 
Until 22 years old    266    3.9%    222    3.3%    0.6 p.p. 
From 23 years old    1,341    19.5%    1,295    19.4%    0.1 p.p. 
From 28 years old    1,460    21.2%    1,359    20.4%    0.8 p.p. 
From 33 years old    1,098    16.0%    1,071    16.0%    0.0 p.p. 
From 38 years old    876    12.7%    883    13.2%    -0.5 p.p. 
From 43 years old    839    12.2%    910    13.6%    -1.4 p.p. 
From 48 years old    713    10.4%    721    10.8%    -0.4 p.p. 
From 53 years old    242    3.5%    189    2.8%    0.7 p.p. 
Over 58 years old    37    0.5%    30    0.4%    0.1 p.p. 
 
Total    6,872    100.0%    6,680    100%    - 
 
Average Age    36.1 years old    36.3 years old     
 

Distribution by time of service

The expansion of the workforce, the result of new staff hired, or the acquisition of new companies, was concentrated in the range of employees who have worked for up to 15 years at Brasil Telecom. The main reduction was seen in the amount of employees who have worked for the Company between 16 and 25 years. Thus, the average time of service by Brasil Telecom's employees dropped from 9.3 years in 2004, to 8.9 years in 2005.

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Distribution by time of service

 
Years of Work    2005    %    2004    %    Relative Variation 
 
Until 2 years    2,687    39.1%    2,481    37.1%    2.0 p.p. 
From 3 to 5 years    1,284    18.7%    1,324    19.8%    -1.1 p.p. 
From 6 to 10 years    782    11.4%    765    11.5%    -0.1p.p.  
From 11 to 15 years    460    6.7%    372    5.6%    1.1 p.p. 
From 16 to 20 years    479    7.0%    521    7.8%    -0.8 p.p. 
From 21 to 25 years    472    6.9%    596    8.9%    -2.0 p.p. 
From 26 to 30 years    581    8.5%    546    8.2%    0.3 p.p. 
Over 31 years    127    1.8%    75    1.1%    0.7 p.p. 
 
Total    6,872    100.0%    6,680    100.0%   
 
Average Period        8.9 years        9.3 years     
 

Distribution by gender

At the end of 2005, Brasil Telecom had 2,317 women employees, which represented 33.7% of the workforce. From this total, 132 women occupied management positions, or 19.2% of the total management body, a 16.7% increase as compared to 2004.

Distribution by gender

 
Gender    2005    %    2004    %    Relative Variation 
 
Male       4,555    66.3%       4,477    67.0%    -0.7 p.p. 
Female       2,317    33.7%       2,203    33.0%    0.7 p.p. 
 
Total       6,872    100%       6,680    100%    - 
 

Distribution by education and schooling

The following table shows that 60.5% of Brasil Telecom's employees had a degree from College/University, as compared to 58.6% in the previous year.

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Distribution by education and schooling

 
Education Level    2005    %    2004    %    Relative Variation 
 
Incomplete Elementary School    22    0.3%    28    0.4%    -0.1 p.p. 
Complete Elementary School    25    0.4%    32    0.5%    -0.1 p.p. 
Incomplete High School    51    0.7%    43    0.6%    0.1 p.p. 
Complete High School    1,347    19.6%    1,470    22.0%    -2.4 p.p. 
Incomplete Higher Education(graduation)   1,269    18.5%    1,196    17.9%    0.6 p.p. 
Complete Higher Education (graduation)   3,113    45.3%    3,061    45.8%    -0.5 p.p. 
Specialization    926    13.5%    765    11.5%    2.0 p.p. 
Master degree/Doctorate/Post-doctorate    119    1.7%    85    1.3%    -0.4 p.p. 
 
Total    6,872    100%    6,680    100%    - 
 

Third parties

At the end of 2005, companies that provide services to Brasil Telecom employed approximately 37,500 people, in call centers, maintenance and operation of internal and external plants, cleaning, surveillance, corporate security and maintenance of information systems.

The Management

* * *

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11.01 – NOTES TO THE FINANCIAL STATEMENTS 
 

NOTES TO THE FINANCIAL STATEMENTS
Years ended on December 31, 2005 and 2004
(In thousands of Brazilian reais)

1. OPERATIONS

BRASIL TELECOM S.A. (“the Company”) is a concessionaire of the Switched Fixed Telephone Service (“STFC”) and operates in Region II of the General Concession Plan, covering the Brazilian states of Acre, Rondônia, Mato Grosso, Mato Grosso do Sul, Tocantins, Goiás, Paraná, Santa Catarina and Rio Grande do Sul, besides the Federal District. In this area of 2,859,375 square kilometers, which corresponds to 34% of the Brazilian territory, the Company renders since July 1998 the STFC in the modalities of local and intra-regional long distances.

With recognition of the prior fulfillment of the obligations for universalization stated in the General Plan of Universalization Goals (“PGMU”), required for December 31, 2003, the Company obtained from the National Agency for Telecommunications (“ANATEL”), on January 19, 2004, issued authorizations for the Company to exploit STFC in the following service modalities: (i) Local and Domestic Long Distance calls in Regions I and III and Sectors 20, 22 and 25 of Region II of the General Concession Plan (“PGO”); and (ii) International Long Distance calls in Regions I, II and III of PGO. As a result of these authorizations, the Company began to exploit the Domestic and International Long Distance Services in the Regions I, II and III, starting on January 22, 2004. In the case of the Local Service in the new regions and PGO sectors, the service began to be rendered as from January 19, 2005.

The Company’s business, as well as the rendered services and the charged fee are regulated by ANATEL.

New concession agreements under the modalities of local and long distance services came into force as of January 1, 2006, effective until December 31, 2025. Additional information about these agreements is mentioned in Note 5.i..

Information related to the quality and universal service targets of the Switched Fixed Telephone Service are available to interested parties on ANATEL’s homepage, in the website www.anatel.gov.br.

The Company is a subsidiary of Brasil Telecom Participações S.A. (“BTP”), incorporated on May 22, 1998 as a result of the privatization of the Telebrás group (State owned holding company of the telecommunication segment).

The Company is registered at the Brazilian Securities and Exchange Commission (“CVM”) and at U.S. Securities and Exchange Commission (“SEC”). Its shares are traded on the São Paulo Stock Exchange (“BOVESPA”), where it also integrates level 1 of Corporate Governance, and trades its American Depositary Receipts - ADRs on the New York Stock Exchange (“NYSE”).

Subsidiaries

a) 14 Brasil Telecom Celular S.A. (“BrT Celular”): a wholly-owned subsidiary incorporated in December 2002 to provide Personal Mobile Service (“SMP”), with authorization to assist the same coverage area where the Company operates with STFC. During the fourth quarter of 2004, BrT Celular

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concluded its implementation process, surpassing the pre-operating stage to the beginning of its commercial operations.

b) BrT Serviços de Internet S.A. (“BrTI”): A wholly-owned subsidiary which started its operations at the beginning of 2002 and provides Internet services and correlated activities.

During the second quarter of 2003, BrTI obtained control of the following companies:

(i) BrT Cabos Submarinos Group

This group of companies operates through a system of submarine fiber optics cables, with connection points in the United States, Bermuda Islands, Venezuela and Brazil, allowing data traffic through packages of integrated services, offered to local and international corporate customers. It is comprised of the following companies:

  • Brasil Telecom Cabos Submarinos do Brasil (Holding) Ltda. (“BrT CSH”)

  • Brasil Telecom Cabos Submarinos do Brasil Ltda. (“BrT CS Ltda.”): BrTI exercises direct control and total control jointly with BrT CSH.

  • Brasil Telecom Subsea Cable Systems (Bermudas) Ltd. (“BrT SCS Bermuda”): it is also an integral part of the Companies BrT Cabos Submarinos and was incorporated by BrTI in the second quarter of 2003. In November 2004, the investment of BrTI became a minority interest, when the Company paid investments and started holding the control of the cable company. On its turn, BrT SCS Bermuda holds the total shares of Brasil Telecom of America Inc. and Brasil Telecom de Venezuela, S.A.

(ii) iBest Group

iBest Companies have their operations concentrated in providing dial up connection to the Internet, sale of advertising space for divulgation in its portal and value-added service with the availability of its Internet access accelerator.

BrTI acquired the iBest Group in June 2003, which is composed of the following companies: iBest Holding Corporation, incorporated in Cayman Islands, and Freelance S.A., established in Brazil.

IG Companies

IG Companies have operations based on providing dial up access to the Internet, inclusively, its mobile internet portal related to mobile telephony in Brazil. They also render value added services related to broadband access to its portal and web page hosting and other services in the Internet market.

On November 24, 2004, BrT SCS Bermuda acquired 63.0% of the total capital, and the resulting control, of Internet Group (Cayman) Limited (“IG Cayman”), incorporated in Cayman Islands. On July 26, 2005, BrT SCS Bermuda complemented the acquisition of additional 25.6% of IG Cayman’s total capital. On the year closing date, the interest held by BrT SCS Bermuda was 88.8% . IG Cayman is a holding which, in its turn, have control of Internet Group do Brasil Ltda. (“IG Brasil”) and Central de Serviços Internet Ltda. (“CSI”), both established in Brazil.

c) MTH Ventures do Brasil Ltda. (“MTH”): On May 13, 2004, the Company acquired 80.1% of the voting capital of MTH, in addition to the 19.9% previously held. MTH, in turn, holds 100% of the capital

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of Brasil Telecom Comunicação Multimídia Ltda. (“BrT Multimídia”), formerly named MetroRED Telecomunicações Ltda. (“MetroRED”).

BrT Multimídia is a service provider of private telecommunications network through optical fiber digital networks, of local scope in São Paulo, Rio de Janeiro and Belo Horizonte, and long distance network connecting these major metropolitan commercial centers. It also has an Internet solution center in São Paulo, which offers co-location, hosting and other value-added services.

d) Vant Telecomunicações S.A. (“VANT”): On May 13, 2004, the Company acquired the total capital stock of VANT, when it acquired the remaining 80.1% of the capital stock of this company.

VANT is a service provider of corporate network services which operates throughout Brazil, and is present in the main Brazilian state capitals, offering voice and data products.

e) Other Service Provider Companies

The Company acquired, at the end of 2004, the companies Santa Bárbara dos Pampas S.A., Santa Bárbara dos Pinhais S.A., Santa Bárbara do Cerrado S.A. and Santa Bárbara do Pantanal S.A. These companies, which were not operating on the year closing date, aim at rendering services in general comprising, among others, the management activities of real states or assets.

Change in the Management

On July 27, 2005, the Extraordinary Shareholders’ Meeting dismissed from office the members of the Company’s Board of Directors connected with former manager Opportunity. At Board of Directors Meeting held on August, 25, 2005, a new Board of Executive Officers was elected, and the Technical Officer was maintained in his position.

At the Extraordinary Shareholders’ Meeting held on September 30, 2005, the Board of Directors members of the Company were dismissed from office and new members were elected. On the same date, the Board of Directors meeting resolved to dismiss the Chairman and to elect new members for the Board of Executive Officers, and the Network Officer was reelected. Such resolutions were ratified by the Board of Directors of the Company in meeting held on October 5, 2005.

The process to change the management of Brasil Telecom Participações S.A. and the Company was litigious, according to various material facts published by the Company during 2005 and various lawsuits brought by the former manager, aiming at recovering the management of the Companies, which are still under progress.

Agreements as of April 28, 2005 under the Previous Management

On April 28, 2005, still under previous management, Brasil Telecom Participações S.A. and Brasil Telecom S.A. entered into various agreements involving the Opportunity Group and Telecom Italia (“April 28 Agreements”).

Among such agreements, Brasil Telecom S.A. and its subsidiary 14 Brasil Telecom Celular S.A. (“BTC”) executed with TIM International N.V. (“TIMI”) and TIM Brasil Serviços e Participações S.A. (“TIMB”) an instrument named as “Merger Agreement” and a “Protocol” related thereto.

 

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As mentioned in material facts published, the merger was forbidden by injunctions issued by the Brazilian and U.S. courts. It is also subject-matter of discussion under arbitration involving the controlling shareholders.

The new management of Brasil Telecom Participações S.A. and Brasil Telecom S.A. understands that the Merger Agreement, the respective Protocol, and other April 28 agreements, which included the waiver and transaction in lawsuits involving the Companies, were entered into with conflict of interests, breaching the laws and the Bylaws of the Companies, and also, in opposition to shareholders’ agreements and without the necessary corporate approvals. In addition, the new management deems that such agreements are contrary to the best interest of the Companies, especially regarding its mobile telephony business.

2. PRESENTATION OF FINANCIAL STATEMENTS

Preparation Criteria

The financial statements have been prepared in accordance with accounting practices adopted in Brazil, in compliance with the Brazilian corporate law, rules of the Brazilian Securities and Exchange Commission (“CVM”) and rules applicable to telephony service concessionaires.

As the Company is registered with the SEC, it is subject to SEC’s standards, and it must prepare financial statements and other information by using criteria that comply with that agency’s requirements. To comply with these requirements and aiming at meeting the market’s information needs, the Company adopts, as a principle, the simultaneous disclosure of information in both markets in their respective languages.

The notes to the financial statements are presented in thousands of reais, unless otherwise demonstrated. According to each situation, they present information related to the Company and the consolidated statements, identified as “PARENT COMPANY” and “CONSOLIDATED”, respectively. When the information is common to both situations, it is indicated as “PARENT COMPANY AND CONSOLIDATED”.

The accounting estimates were based on objective and subjective factors, based on management’s judgment to determine the appropriate amount to be recorded in the financial statements. Significant elements subject to these estimates and assumptions include the residual amount of the fixed assets, allowance for doubtful accounts, inventories and deferred income tax and social contribution, provision for contingencies, valuation of derivative instruments, and assets and liabilities related to benefits to employees. The settlement of transactions involving these estimates may result in significantly different amounts due to the inaccuracy inherent to the process of determining these amounts. Management reviews its estimates and assumptions at least quarterly.

Consolidated Financial Statements

The consolidation was made in accordance with CVM Instruction 247/96 and includes the Company and the companies listed in Note 1.

Some of the main consolidation procedures are:

  • Elimination of balances of the asset and liability accounts among the consolidated companies, as well as revenue and expenses of transactions among them;

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  • Elimination of the balances of the investment accounts and corresponding investor’s shareholdings, reserves and accumulated results in the consolidated companies; and

  • Segregation of the portions of shareholders’ equity and income belonging to minority shareholders, indicated in specific items.

The net income (loss) reconciliation belonging to the Parent Company and the Consolidated is presented as follows:

  2005  2004 
   PARENT COMPANY  (303,671) 288,552 
   Recordings made directly in the Shareholders’ Equity of the diaries     
         Donations and Subsidies for Investments and Other  (11,588)
   CONSOLIDATED  (303,671) 276,964 

Supplementary Information

The Company is presenting as supplementary information the following statements:

Statement of Cash Flows

They were prepared in accordance with Accounting Rules and Procedures - NPC 20 of the Brazilian Institute of Independent Auditors - IBRACON. The statement of cash flow is shown together with Note 18.

Statement of Added Values - DVA

It is shown on Note 43 and prepared pursuant to the Brazilian Accounting Rule – NBC T 3.7, approved by the Resolution of the Federal Accounting Board 1,010/05.

Report per Segment

The company is presenting, supplementary to note 42, the report per business segment. A segment is an identifiable component of the company, intended for service rendering (business segment), or provision of products and services which are subject to different risks and compensations different from those of other segments.

3. SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES

The criteria mentioned in this note refer to the practices adopted by the Company and its subsidiaries that are included in the consolidated balance sheet.

a. Cash and Cash Equivalents: Cash equivalents are temporary high-liquid investments, with immediate maturity. They are recorded at cost, plus income registered until the balance sheet date, and do not exceed market value. Investment funds quotas are appreciated considering the quota values on December 31, 2005.

b. Trade Accounts Receivable: Receivables from users of telecommunications services are recorded at the amount of the fee or the service on the date the service is rendered. Accounts receivable from services include credits for services rendered and not billed until the balance sheet date. Receivables resulting

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from sales of cell phones and accessories are recorded by the amount of sales made, at the moment in which the goods are delivered and accepted by the customer. The criterion adopted for making the allowance for doubtful accounts takes into account the calculation of the actual percentage of losses incurred on each range of accounts receivable. The historic percentages are applied to the current ranges of accounts receivable, also including accounts coming due and the portion yet to be billed, thus composing the amount that could become a future loss, which is recorded as a provision.

c. Material Inventories: Stated at average acquisition cost, not exceeding replacement cost. Inventories are segregated into inventories for plant expansion and those for maintenance and in relation to consolidated statements, goods inventories for resale, mainly composed of cell phones, accessories and electronic cards - chips. The inventories to be used in expansion are classified in property, plant and equipment (construction in progress), and inventories to be used in maintenance are classified as current and long-term assets, in accordance with the period in which they will be used, and the resale inventories are classified as current assets. Obsolete inventories are recorded as allowance for losses. With regard to cell phones and accessories, the subsidiary BrT Celular records the adjustments for the trading prices held as of the balance sheet closing date, in the cases in which the acquisitions presented higher values.

d. Investments: Investments in subsidiaries are assessed using the equity method. Goodwill is calculated based on the expectation of future results and its amortization is based on the expected realization/timing over an estimated period of not more than ten years. Other investments are recorded at acquisition cost, less allowance for losses, when applicable. The investments resulting from income tax incentives are recognized on the date of investment, and result in shares of companies with tax incentives or investment fund quotas. In the period between the investment date and receipt of shares or quotas of funds, they remain recognized in long-term assets. The Company adopts the criterion of using the maximum percentage of tax allocation. These investments are periodically valued and the result of the comparison between its original and market costs, when the latter is lower, results in the constitution of allowances for probable losses.

e. Property, Plant and Equipment: Stated at cost of acquisition and/or construction, less accumulated depreciation. Financial charges for financing assets and construction in progress are capitalized.

The costs incurred, when they represent improvements (increase in installed capacity or useful life) are capitalized. Maintenance and repair are charged to the profit and losses accounts, on an accrual basis.

Depreciation is calculated under the straight-line method. Depreciation rates used are based on expected useful lives of the assets and in accordance with the standards of the Public Telecommunications Service. The main rates used are set forth in Note 27.

f. Deferred Charges: Segregated between deferred charges on amortization and formation. Their breakdown is shown in Note 28. Amortization is calculated under the straight-line method, for a five-year period, in accordance with the legislation in force. When benefits are not expected from an asset, it is written off against non-operating income.

g. Income and Social Contribution Taxes: Corporate income and social contribution taxes are accounted for on an accrual basis. These taxes levied on temporary differences, tax losses and the social contribution negative basis are recorded under assets or liabilities, as applicable, according to the assumption of realization or future demand, within the parameters set forth in the CVM Instruction 371/02.

 

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h. Loans and Financing: These are updated for monetary and/or exchange variations and interest incurred until the balance sheet date. Equal restatement is applied to the guarantee contracts to hedge the debt.

i. Provision for Contingencies: The contingency provisions are made based on a survey of the respective risks and they are quantified according to economic grounds and legal opinions on the contingency proceedings and facts known on the balance sheet date. The basis and nature of the provisions are described in Note 7.

j. Revenue Recognition: Revenues from services rendered are recognized when provided. Local and long distance calls are charged based on time measurement according to the legislation in force. Revenues from sales of payphone cards (Public Use Telephony - TUP), cell phones and accessories are recorded when delivered and accepted by the clients. For prepaid services linked to mobile telephony, the revenue is recognized in accordance with the utilization of services. Revenue is not recognized if there is a significant uncertainty in its realization.

k. Recognition of Expenses: Expenses are recognized on an accrual basis, considering their relation with revenue realization. Expenses related to future periods are deferred.

l. Financial Income (Expense), Net: Financial income comprises interest earned on overdue accounts settled after the term, gains on financial investments and hedges. Financial expenses comprise interest incurred and other charges on loans, financing and other financial transactions.

Interest on Shareholders’ Equity is included in the financial expenses balance, and for financial statement presentation purposes, the amounts are reversed to profit and loss accounts and reclassified as a deduction of retained earnings, in the shareholders’ equity.

m. Research and Development: Costs for research and development are recorded as expenses when incurred, except for expenses with projects linked to the generation of future revenue, which are recorded under deferred assets and amortized over a five-year period from the beginning of the operations.

n. Benefits to Employees: Private pension plans and other retirement benefits sponsored by the Company and its subsidiaries for their employees are managed under three foundations. Contributions are determined on an actuarial basis, when applicable, and accounted for on an accrual basis.

As of December 31, 2001, the Company recorded its actuarial deficit on the balance sheet date against shareholders’ equity, net of its tax effects. As from 2002, as new actuarial revaluations show the necessity for adjustments to the provision, they are recognized in the profit and loss accounts. Additional information on private pension plans is described in Note 6.

o. Profit Sharing: The provision for employees’ profit sharing is recognized on an accrual basis. The calculation of the amount, which is paid in the subsequent year after the provision is recognized, is based on the target program established with the labor union, by means of collective labor agreement, in accordance with Law 10,101/00 and the Company’s Bylaws.

p. Earnings or losses per thousand shares: Calculated based on the number of shares outstanding on the balance sheet closing date, which comprises the total number of shares issued, minus shares held in treasury.

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4. RELATED-PARTIES TRANSACTIONS

Related parties transactions refer to operations with Brasil Telecom Participações S.A., the Company’s parent company, and with the subsidiaries mentioned in Note 1.

Operations between related parties and the Company are carried out under normal prices and market conditions. The main transactions are:

Brasil Telecom Participações S.A.

Dividends/Interest on Shareholders’ Equity: of the Interest on Shareholders’ Equity credited in 2005, the amount of R$ 421,001 (R$ 294,395 in 2004) was destined to the parent company. The balance of the liability of this nature, minus withholding income tax, is R$ 220,708 (R$ 250,236 as of December 31, 2004).

Loans with the Parent Company: Liabilities arose from the spin-off of Telebrás and are indexed to exchange variation, plus interest of 1.75% per year, amounting to R$ 58,798 (R$ 74,523 as of December 31, 2004). The financial gain recognized against the result in 2005, due to the drop of the U.S. dollar was R$ 7,258 (R$ 4,820 of financial gain in 2004).

Debentures: On January 27, 2001, the Company issued 1,300 private debentures at the unit price of R$ 1,000 non-convertible or exchangeable for any type of share, totaling R$ 1,300,000, for the purpose of financing part of its investment program. All these debentures were acquired by the parent company Brasil Telecom Participações S.A. The balance of the debentures par value will be amortized in a remaining installment, equivalent to 40% of issuance, with maturity term on July 27, 2006. The debentures remuneration is equivalent to 100% of the CDI, paid semiannually. The balance of this liability is R$ 560,459 (R$ 972,006 on December 31, 2004) and the charges recognized in the income in 2005 represented R$ 134,923 (R$ 175,956 in 2004).

Sureties and Guarantees: (i) The Company renders sureties as guarantee of loans and financings owed by the Company to the lending financial institutions. In 2005, referring to the guarantee benefit, the Company recorded expenses in favor of the Parent Company at the amount of R$ 2,483 (R$ 3,964 in 2004); and (ii) the Parent Company rendered surety for the Company related to the contracting of insurance policies, guarantee of contractual liabilities (GOC) for 2005, which amounted to R$ 217,142. In 2005, in return to such surety, the Company returned to the Parent Company a quarterly remuneration of R$ 65, representing an annual expense of R$ 260 (R$ 279 thousand in 2004).

Revenues and Accounts Receivable: arising from transactions related to share of resources. The balance receivable is R$ 54 (R$ 184 payable on 12/31/04) and the amounts recorded in income for 2005 comprises operating revenues of R$ 4,291 (R$ 2,933 of operating revenues in 2004).

BrT Serviços de Internet S.A.

Amounts Receivable and Payable, Revenues and Expenses: arising from transactions related to the use of facilities, logistic support and telecommunications services. The balance receivable is R$ 23,126 (R$ 3,757 receivable on 12/31/04). The amounts recorded in income for 2005 represented R$ 66,027 of the operating revenues (R$ 55,008 in 2004) and R$ 172,611 of operating expenses (R$ 152,680 in 2004).

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14 Brasil Telecom Celular S.A

Revenues, Expenses and Amounts Receivable: arising from transactions related to the use of facilities, logistic support and telecommunications services. The balance receivable is R$ 1,680 (R$ 5,858 receivable, on 12/31/04). The amounts recorded in income for 2005 represented R$ 174,375 of the operating revenues (R$ 15,250 in 2004) and R$ 238,026 of operating expenses (R$ 14,148 in 2004).

Vant Telecomunicações S.A.

Accounts Payable, Revenues and Expenses: arising from transactions related to telecommunications services. The balance payable is R$ 320 (R$ 1,208 payable on 12/31/04) and the amounts recorded in income represented R$ 1,910 of operating revenues (R$ 1,154 in 2004) and R$ 1,858 of operating expenses (R$ 2,157 in 2004).

BrT SCS Bermuda

Revenues and Amounts Receivable: arising from transactions related to telecommunications services. The balance receivable is R$ 201. The amounts recorded in income for 2005 represented R$ 201 of operating revenues.

Loans: on 12/31/04 there was a loan agreement granted in U.S. dollar, with an interest rate of 3% p.a., settled in January 2005. The balance of this assets on 12/31/04 was R$ 88,619. The financial revenue until the loan settlement date was R$ 961 (the financial expenses in 2004, motivated by the drop of the U.S. dollar was R$ 2,313).

Freelance S.A.

Revenues and Accounts Receivable: arising from transactions related to the use of telecommunications services. The receivable balance amounts to R$ 769 (R$ 54 receivable on 12/31/04) the recognized revenue in income was R$ 776 (R$ 233 in 2004).

IG Brasil

Revenues and Accounts Receivable: arising from transactions related to the use of telecommunications services. The balance receivable is R$ 733 (R$ 1,720 receivable on 12/31/04) and the revenue recognized in the income was R$ 10,672 (R$ 860 in 2004) and operating expenses R$ 71.

BrT Multimídia

Accounts Payable, Revenues and Expenses: arising from transactions related to telecommunications services. The balance payable is R$ 10,772 (R$ 15,918 payable on 12/31/04). The amounts recorded in income for 2005 represented Operating Revenues of R$ 169 (R$ 15 in 2004) and Operating Expenses of R$ 66,711 (R$ 47,130 in 2004).

Other Related Parties Transactions

Due to the existence of common partners in the control chain of the Company and the Companies mentioned below, the operations among them may be classified, pursuant to CVM Resolution 26/86, as “related-parties transactions”.

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Telemig Celular

The Company and Telemig Celular maintain agreements related to the operations of telecommunications services, comprising CSP 14 – Operator Selection Code, infrastructure rental and co-billing agreements. The amount receivable, resulting from these contracts and agreements is R$ 4,228 (R$ 13,121 in 2004). The amounts recorded in income for 2005 are represented by operating revenues of R$ 151 (R$ 276 in 2004) and operating expenses of R$ 32,979 (R$ 27,102 in 2004).

Amazônia Celular

The Company and Amazônia Celular maintain an agreement concerning operation of telecommunications services, comprising CSP 14 – Operator Selection Code and co-billing agreements. The amount receivable, resulting from these contracts and agreements is R$ 258 (R$ 2,748 in 2004). The amounts recorded in income for 2005 are represented by operating expenses of R$ 6,101 (R$ 9,236 in 2004).

TIM Celular

The Company and TIM’s cell phone companies maintain agreements concerning the operation of telecommunications services, comprising lease of means and co-billing agreements, as well as relationships resulting from CSP. The amount payable, resulting from these transactions is R$ 38,296. The amounts recorded in income for 2005 are represented by operating revenues of R$ 152,611 and operating expenses of R$ 516,048.

Telecom Capital Fund

Based on the information made available to the management in December 2005, it was concluded that in 2003 the Company invested funds in Telecom Capital Fund (“TCF”), an investment fund created in Curacao, in the Netherlands Antilles, with the purpose of “obtaining return rates above the average with moderate risk to investors” by means of investments in “infrastructure in the Latin America focused on telecommunications, Internet and data applications”; As the single provider of the fund, the Company contributed with eighty-four million U.S. dollars (US$ 84,000,000.00) to enable an investment in promissory notes of MetroRED (US$ 41,000,000.00), subsequently used for conversion into shares, and of Highlake International Business Company Ltd. (“HIGHLAKE”) (US$ 43,000,000.00), by means of remuneration of the Libor rate plus 1.5% p.a., with option, to the debtor (HIGHLAKE), of payment and acquittance by conversion of the debt into shares.

With this investment, HIGHLAKE acquired the interest held by Telesystem International Wireless Latin America (“TIW”) in the capital of Telpart Participações S.A., parent company of the holding companies Telemig Celular Participações S.A. and Tele Norte Celular Participações S.A.

Concerning HIGHLAKE, we have noticed that its corporate structure is comprised by Opportunity Fund, with 95% of interest.

In view of the interest of Opportunity Fund in the Company’s control chain, these operations may be classified, under the terms of the CVM Resolution 26/86, as “related-parties transactions”.

In March 2005, HIGHLAKE settled the promissory note held by TCF, without the conversion of the shares and subsequently the discontinuance of the Fund was requested.

 

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On 4/25/05 the balance of the fund quotas was redeemed, at the amount of R$ 137,976. In 2005, until the redemption date, the Company recorded a financial loss of R$ 640, motivated by the exchange loss variation of the U.S. dollar in the respective period. In 2004, due to same reasons, a financial loss of R$ 15,174 was recorded.

Supportcomm S.A.

The Company between 2001 and 2005 entered into five agreements with the company Supportcomm S.A. (“SUPPORTCOMM”) for the supply of material, platforms and technology services, at the total amount of R$ 59,585, out of which R$ 45,176 have already been paid.

In analysis of the ownership structure of SUPPORTCOMM, a 30% interest of Megapart Participações was identified, a company which has Opportunity Fund as partner, with an interest of nearly 100%.

In view of the interest of Opportunity Fund in the Company’s control chain, these operations may be classified, pursuant to CVM Resolution 26/86, as “related-parties transactions”.

Acquisition of IG Cayman Equity Interest

On July 26, 2005, the subsidiary BrT SCS Bermuda acquired 3,750,500 class A common shares and 6,249,848 class B common shares issued by IG Cayman. This equity interest was acquired from the shareholders Opportunity Fund, Vicência Participações Ltda. and Global Investments and Consulting. Inc., companies with common partners in the Company’s control chain. The amount of the acquisition, representing 25.6% of the capital stock of IG Cayman, corresponded to R$ 68,647.

5. MARKET VALUE OF FINANCIAL ASSETS AND LIABILITIES (FINANCIAL INSTRUMENTS) AND RISK ANALYSIS

The Company and its subsidiaries assessed the book value of its assets and liabilities as compared to market or realizable values (fair value), based on information available and valuation methodologies applicable to each case. The interpretation of market data regarding the choice of methodologies requires considerable judgment and determination of estimates to achieve an amount considered adequate for each case. Accordingly, the estimates presented may not necessarily indicate the amounts, which can be obtained in the current market. The use of different assumptions for calculation of market value or fair value may have material effect on the obtained amounts. The selection of assets and liabilities presented in this note took place based on their materiality. Instruments whose values approximate their fair values, for example cash and cash equivalents, accounts receivable, assets and liabilities of taxes, pension funds, among others, and whose risk assessment is not significant, are not mentioned.

In accordance with their natures, the financial instruments may involve known or unknown risks, and the potential of such risks is important for the best judgment. Thus, there may be risks with or without guarantees, depending on circumstantial or legal aspects. Among the principal market risk factors which can affect the Company’s business are the following:

a. Credit Risk

The majority of services provided by Brasil Telecom S.A. are related to the Concession Agreement, and a significant portion of these services is subject to the determination of fees by the regulatory agency. The credit policy, in its turn, in case of telecommunications public services, is subject to legal standards established by the concession authority. The risk exists since the Company may incur losses arising from the difficulty in receiving amounts billed to its customers. In 2005, the Company’s default was 2.91% of

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the gross revenue (3.22% in 2004). By means of internal controls, the level of accounts receivable is constantly monitored, thus limiting the risk of past due accounts by cutting the access to the service (out phone traffic) if the bill is overdue for over 30 days. Exceptions are made for telephone services, which should be maintained for national security or defense.

The Company operates in co-billing, concerning long distance calls with the use of its CSP (Operator Selection Code) originated by subscribers of other fixed and mobile telephony operators. The co-billing accounts receivable are managed by these operators, based on the operational agreements entered into with them and according to the rules set forth by ANATEL. The blocking rules set forth by the regulating agency are the same for the fixed and mobile telephony companies, which are co-billing suppliers. The Company separately controls receivables of this nature and maintain an allowance for losses that may occur, due to the risks of not receiving such amounts.

In respect to mobile telephony, credit risk in cell phones sales and in service rendering in the postpaid category is minimized with the adoption of a credit pre-analysis. Still in relation to postpaid service, whose client base at the end of the year was 31.3% (33.1% on 12/31/04), the receivable accounts are also monitored in order to limit default and the block is made to the service (out of phone traffic) if the bill is overdue for over fifteen days.

b. Exchange Rate Risk

Assets

On 12/31/2004 there was a loan asset granted to BrT SCS Bermuda, whose book and market value was R$ 88,619. This asset, remunerated by pre-fixed interest rates of 3% per annum, was received at early 2005.

Liabilities

The Company has loans and financing contracted in foreign currency. The risk related to these liabilities arises from possible exchange rate fluctuations, which may increase these liabilities balances. Consolidated loans subject to this risk represent approximately 23.3% (25.6% on 12/31/04) of the total liabilities of loans and consolidated financing, minus the contracted hedge balances. In order to minimize this kind of risk, the Company has been entering into exchange hedge agreements with financial institutions. Of the debt installment consolidated in foreign currency, 66% (50.2% on 12/31/04) is covered by hedge operations and financial investments in foreign currency. Unrealized positive or negative effects of these operations are recorded in the profit and loss as gain or loss. In 2005, the negative adjustments of these operations amounted to R$ 266,572 (R$ 92,735 of negative adjustments in 2004).

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Net exposure as per book and market values, at the exchange rate prevailing on the balance sheet closing date, is as follows:

 

  PARENT COMPANY
  2005  2004 
Book
 Value 
Market
 Value 
Book 
Value
 
Market 
Value 
Liabilities         
Loans and Financing  1,040,800  1,086,134  1,294,422  1,317,561 
Hedge Contracts  311,469  301,119  87,190  74,985 
Total  1,352,269  1,387,253  1,381,612  1,392,546 
Current  125,690  126,588  74,199  79,395 
Long-term  1,226,579  1,260,665  1,307,413  1,313,151 

 

  CONSOLIDATED
  2005  2004 
Book
 Value 
Market
 Value 
Book
Value
  
Market
 Value 
Liabilities         
Loans and Financing  1,064,090  1,109,424  1,320,833  1,343,973 
Hedge Contracts  311,469  301,119  87,190  74,985 
Total  1,375,559  1,410,543  1,408,023  1,418,958 
Current  125,690  126,588  74,199  79,395 
Long-term  1,249,869  1,283,955  1,333,824  1,339,563 

The method used for calculation of market value (fair value) of loans and financing in foreign currency and hedge instruments was future cash flows associated to each contracted instruments, minus the market rates in force on the balance sheet date.

c. Interest Rate Risk

Assets

The Company has loans granted to the phone directory company, with interest indexed to the IGP-DI (a national index price), as well as loans resulting from the sale of property, plant and equipment to other telephony companies, remunerated by IPA-OG/Industrial Products of Column 27 (FGV). The Company also has Certificate of Deposits (CDBs) with Banco de Brasília S.A. related to the guarantee to tax incentive granted by the Federal District Government under a program called Programa de Promoção do Desenvolvimento Econômico e Sustentável do Distrito Federal – PRO-DF, (Program to Promote the Economic and Sustained Development of the Federal District), and the remuneration of these securities is equivalent to 95% of the SELIC rate.

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At the balance sheet date, these assets are represented as follows:

  PARENT COMPANY  CONSOLIDATED
  Book and Market Value  Book and Market Value 
2005  2004  2005  2004 
Assets         
Loans subject to:         
   IGP-DI  7,747  7,678  7,836  7,678 
   IPA-OG Column 27 (FGV) 1,337  1,591  1,337  1,591 
   IGP-M  1,475 
Securities subject to:         
   SELIC rate  502  2,604 
Total  9,586  9,269  11,777  10,744 
Current  3,873  1,065  3,962  2,540 
Long-term  5,713  8,204  7,815  8,204 

Liabilities

Brasil Telecom S.A. has loans and financing contracted in local currency subject to interest rates linked to indexing units TJLP, UMBNDES, CDI IGP-M and IGP/DI. The inherent risk in these liabilities arises from possible variations in these rates. The Company has contracted derivative hedge contracts to 22.7% (38% on 12/31/04) of the liabilities subject to the UMBNDES rate, using exchange rate swap contracts. However, the other market rates are continually monitored to evaluate the need to contract derivatives to protect against the risk of volatility of these rates.

In addition to the loans and financing, the Company issued non-convertible private and public debentures, non-convertible or exchangeable for shares. These liabilities were contracted at interest rates linked to the CDI, and the risk associated with this liability results from the possible increase of the rate.

The above mentioned liabilities on the balance sheet closing date are as follows:

  PARENT COMPANY 
  2005  2004 
Book
Value 
Market
Value 
Book
Value
  
Market
Value 
Liabilities         
Loans subject to TJLP  2,076,211  2,077,094  2,012,487  1,882,960 
Debentures – CDI  1,108,226  1,100,815  1,513,713  1,513,755 
Loans subject to UMBNDES  272,601  273,318  275,565  229,177 
Hedge without loans subject to UMBNDES  37,630  27,462  38,979  13,920 
Loans subject to IGPM  8,158  8,158  16,724  16,724 
Loans subject to IGP/DI  3,145  3,145 
Other loans  10,530  10,531  15,586  15,586 
Total  3,516,501  3,500,523  3,873,054  3,672,122 
Current  1,363,427  1,360,208  1,028,932  985,639 
Long-term  2,153,074  2,140,315  2,844,122  2,686,483 

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  CONSOLIDATED 
  2005  2004 
Book 
Value 
Market 
Value
 
Book
Value
 
Market
 Value 
Liabilities         
Loans subject to TJLP  2,076,211  2,077,094  2,012,487  1,882,960 
Debentures – CDI  1,108,226  1,100,815  1,513,713  1,513,755 
Loans subject to UMBNDES  272,601  273,318  275,565  229,177 
Hedge on loans subject to UMBNDES  37,630  27,462  38,979  13,920 
Loans subject to IGP/DI  19,310  19,310 
Loans subject to IGPM  8,158  8,158  16,724  16,724 
Other loans  10,530  10,530  16,007  16,007 
Total  3,532,666  3,516,687  3,873,475  3,672,543 
Current  1,363,694  1,360,475  1,028,934  975,559 
Long-term  2,168,972  2,156,212  2,844,541  2,696,984 

Book value is equivalent to market values where the current contractual conditions for these types of financial instruments are similar to those in which they were originated or they did not present parameters for quotation or contraction.

d. Risk of Not Linking Monetary Restatement Indexes to Accounts Receivable

Loan and financing rates contracted by the Company are not linked to amounts of accounts receivable. Thus, a risk arises, since telephony fees adjustments do not necessarily follow increases in local interest rates, which affect the company’s debts.

e. Contingency Risks

Contingency risks are assessed according to loss hypotheses, as probable, possible or remote. Contingencies considered probable risks are recorded as liabilities. Details of these risks are presented in Note 7.

f. Risks Related to Investments

The Company has investments, which are assessed through the equity method and the acquisition cost. The investments assessed by the equity method are presented in Note 26, for which no market value exists, as they are represented by non-listed companies or private limited companies. Provisions are recorded for losses when the future cash flows expected from an investment lead to loss expectations.

On the balance sheet closing date, an allowance for losses was recorded at the amount of R$ 19,028 (R$ 16,946 on 12/31/04) related to VANT’s unsecured liability.

The investments assessed at acquisition cost are immaterial in relation to total assets. Their associated risks would not cause significant impacts to the Company in case of loss of part of these investments.

g. Financial Investments Risks

The company has temporary high-liquid investments in exclusive financial investment funds (FIFs), whose assets comprise federal securities based on post-fixed, pre-fixed and foreign exchange rates, all subject to CDI, by means of the own backing of these securities or through futures contracts traded at the Futures and Commodities Exchange - BM&F, exclusive financial investment funds (FIFs), subject to exchange variation through futures contracts in dollar with the Futures and Commodities Exchange - BM&F, overnight financial investments, in own portfolio of CDB issued by national financial

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institutions, and own portfolio of CD issued by financial institutions abroad. Overnight investments, in exchange fund and deposit certificates are subject to exchange rate fluctuation risks. The CDB investments, as well as overnight investments that have spread in this type of certificate, are subject to the issuing financial institution credit risk.

The Company maintains financial investments at the amount of R$ 1,428,587 on 12/31/05 (R$ 1,906,781 on 12/31/04). Income earned to the balance sheet closing date is recorded as financial revenue and amounts to R$ 215,744 in 2005 (R$ 194,533 in 2004). Amounts recognized in the consolidated financial statements are R$ 1,667,009 on 12/31/05 (R$ 2,326,497 on 12/31/04), related to investments, and R$ 246,493 in 2005 (R$ 213,453 in 2004), related to earnings.

h. Risk of Early Maturity of Loans and Financing

Liabilities resulting from financing mentioned in the Note 34, concerning agreements of BNDES, public debentures and most of them referring to financial institutions, have clauses that estimate the early maturity of liabilities or retention of amounts pegged to debt covenants, in the cases in which certain minimum amounts for certain indicators are not reached, such as ratios of indebtedness, liquidity, cash generation and other.

Considering the provisions recognized in these present financial statements, provisions of which informed to the market by means of the Material Fact as of 1/4/06, the Company renegotiated all the loan and hedge agreements that had financial covenants related to the Earnings before Interest, Taxes, Depreciation and Amortization – LAJIDA (EBITDA). These renegotiations were successfully concluded in February 2006, when all creditors agreed with the temporary adequacy of covenants and/or waiver.

In the case of financing with direct and indirect onlending of BNDES, as provided for in the agreements, from the publication of the audited financial statements, there will be a future retention three times the amount of the highest falling due installment for the agreements with monthly amortization and once the highest amount of the falling due installment for the agreements with quarterly amortization. The total estimated retention amounts is approximately R$ 252,014, made operational through the partial block of the Company’s financial investments, without prejudice of the remuneration to be received by it. The release of the amount to be blocked will take place when the Company returns to complying with the financial relations set forth in the agreements or it is successful in the renegotiation of financial covenants negotiated.

i. Regulatory Risks

New Concession Agreements

On 12/22/05, new local and domestic long distance concession agreements were entered into by Brasil Telecom S.A., which shall be take effect between January 1, 2006 and December 31, 2025. These new concession agreements, which provide for reviews on a five-year basis, in general have a higher intervention level in the management of the businesses and several provisions defending the consumer’s interest, as noticed by the regulation body. The main highlights are:

  • The burden of the concession defined as 2% of the net revenue from taxes, calculated every two years, starting in 2006 fiscal year, whose initial payment incurs on 4/30/07 and then successively until the end of the concession. This calculation method, concerning accrual, corresponds to 1% for each fiscal year;

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  • The definition of new universalization targets, particularly AICE – Special Class Individual Access, of mandatory offer and the Telecommunications Service Centers – PST, with full burden for the Concessionaire;
  • The possibility of the Regulating Agency to impose mandatory alternative plans;
  • The introduction of Regulating Agency’s right to intervene and modify agreements of the concessionaire with third parties;
  • The inclusion of assets of the parent company, subsidiary, affiliated companies and third parties, indispensable to the concession, as reversible assets;
  • The creation of the Users’ Board in each concession;

Additionally, the regulation connected to the new concession agreement provides for changes in the local calls tariff system, which change from pulse to minute in the regular hours, in amounts of the public tariffs and in the readjustment criteria, which had the individual excursion factor reduced from 9% to 5% and will be then defined by a sector index – IST, in which composition the highest weight is IPCA.

ANATEL, on February 23, 2006, edited the Resolution 432, postponing for a twelve-month period the dates mentioned in Rule 423, as of 12/6/05, which deals with the Amendment to the Tariff System of STFC Basic Plan in the Local Modality Rendered under Public Scheme, bound by the new local concession agreement. Among other postponements, it forbids the implementation of tariff system by minute in basic plans of STFC concessionaries in local modality on date prior to March 1, 2007.

On their turn, the interconnection tariffs, as provided for, are then defined as a percentage public tariff until the implementation of cost model by service/modality, estimated for 2008, as defined in the Regulation for Separation and Accounting Allocation (Resolution 396/05).

Consequently, the operations and the competitive position of the Subsidiary may be affected by effects to derive from new concession agreements. Nevertheless, it is not possible to assess, on the date these financial statements were prepared, the future impacts to be generated by such changes.

Legislative Bill of Change in Telecommunications Act (“LGT”)

On March 6, 2006, the President of Brazil sent to the Brazilian Congress a legislative bill to amend LGT 9,472, as of 7/16/97. The amendment proposed specifically deals with the adoption of distinctive criteria considering the user’s social-economic condition, with a view to ensuring access to telecommunication services. Said project still depends on approval. Currently, the subsidiary Brasil Telecom S.A. cannot access the effects resulting from such initiative to its businesses, should said project obtain approval at the Brazilian Congress.

Overlapping of Licenses

When the Company received the certification for achieving the universalization targets for 2003, set forth by ANATEL, it already provided the fixed telephony service (“STFC”) in the local and domestic long distance modalities (“LDN”) intra-regional in the Region II of the General Concession Plan (“PGO”). After achieving the referred targets, ANATEL, in January 2004, issued authorizations that increase the possibility of Company’s operation: Local STFC and LDN in the Regions I and III of the PGO (and a few sectors of the Region II); International Long Distance (“LDI”) in the Regions I, II and III of the PGO; mobile telephony, by means of the subsidiary 14 Brasil Telecom Celular S.A. (“BrT Celular”), in the Region II of the Personal Mobile Service (“SMP”). The already existing concession agreements were expanded, enabling LDN calls to any part of the Brazilian territory. If Telecom Italia

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International N.V. (“TII”) acquired an indirect controlling interest in the Company, the Company and TIM Brasil Serviços e Participações S.A. (“TIM”) could be considered affiliates under the new Brazilian telecommunications legislation. That would imply the ability of providing domestic (LDN) and international (LDI) fixed and mobile telephony services throughout the same regions of TIM’s, would be subject to risk of being partially closed by ANATEL. On January 16, 2004, ANATEL issued the Act 41,780 establishing an 18-month period for TII to reacquire an indirect controlling interest in the Company, as long as TII did not participate or vote on issues related to the overlapping of services offered by the Company and TIM, such as domestic and international long-distance and mobile services. On June 30, 2004, The Administrative Council of Economic Defense – CADE, in the records of the Write of Prevention 08700.000018/2004 -68, set forth restrictions to the exercise of the control rights on the part of Telecom Italia International N.V. and its representatives at the board of directors of Solpart ParticipaÇões S.A., Brasil Telecom ParticipaÇões S.A. and Brasil Telecom S.A.

On April 28, 2005, TII and TIM and the Company and BrT Celular entered into various corporate agreements, including an instrument called “Merger Agreement” and a “Protocol” related thereto. Among other reasons alleged, this merger operation was justified by the management of that time as possible solution to overlapping of regulatory licenses and authorizations with TIM, to remove sanctions and penalties, which could be imposed by ANATEL. The operation was forbidden by injunctions issued by the U.S. and Brazilian courts. It is also subject-matter of discussion in arbitration involving controlling shareholders. Whether or not confirming the validity of April 2005 agreements, there is the possibility of assets related to fixed and mobile segments (see Note 42) eventually loose their value, as a result of overlapping of operations or sanctions from ANATEL. On the other hand, it is also possible that corporate agreements as of April 28, 2005 are declared null and void by courts or arbitration, which would remove TII from the control block of Brasil Telecom group, eliminating the overlapping of concessions and consequently, the regulatory risk. Nevertheless, at this moment, it is not possible to anticipate such legal developments and their future effects on the financial statements.

On July 7, 2005, ANATEL declared, by means of Act 51,450, that the counting of 18 month-term to solve the overlapping of licenses would start on the date of effective return of TII to the control group of Brasil Telecom S.A. On July 26, 2005, ANATEL, by means of Order 576/2005, declared that the counting of term will start on April 28, 2005. Therefore, according to ANATEL, the interested companies shall adopt the measures necessary to eliminate the overlapping of the concessions until the end of referred term in October 2006, under the penalty of applying legal sanctions, which may affect either companies or both of them.

Depending on final decision of ANATEL, these sanctions may have an adverse and material effect on businesses and operations of the Company.

Regarding the “Merger Agreement” mentioned in this note, the Company and its subsidiary BrT Celular started on March 15, 2006 arbitration against TII and TIM, aiming at annulling it. The Company disclosed material fact about this matter on March 16, 2006, the full content of which is mentioned in the note 44.

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6. BENEFITS TO EMPLOYEES

The benefits described in this note are offered to the employees of the Company and its direct or indirect subsidiaries. These companies are better described jointly, and can be referred to as “Brasil Telecom (group)” and for the purpose of the supplementary pension plan mentioned in this note, are also denominated “Sponsor” or “Sponsors”.

a. Supplementary Pension Plan

The Company sponsors supplementary pension plans related to retirement for its employees and assisted members, and, in the case of the latter, medical assistance in some cases. These plans are managed by the following foundations: (i) FundaÇão 14 de Previdência Privada (“FundaÇão 14”); (ii) FundaÇão BrTPREV (“FBrTPREV”) former CRT, a company merged by the Company on 12/28/00; and (iii) FundaÇão de Seguridade Social (SISTEL), originated from certain companies of the former Telebrás System.

The Company’s Bylaws stipulate approval of the supplementary pension plan policy, and the joint liability attributed to the defined benefit plans is linked to the acts signed with the foundations, with the agreement of the Secretaria de Previdência Complementar – SPC, where applicable to the specific plans.

The plans sponsored are valued by independent actuaries on the balance sheet closing date. In the case of the defined benefit plans described in this explanatory note, immediate recognition of the actuarial gains and losses is adopted. Liabilities are provided for plans which show deficits. This measure has been applied since the 2001 financial year, when the regulations of CVM Resolution 371/00 were adopted. In cases that show positive actuarial situations, no assets are recorded due to the legal impossibility of reimbursing these surpluses.

The characteristics of the supplementary pension plans sponsored by the Company are described below.

FUNDAÇÃO 14

As from the split of the only pension plan managed by SISTEL, the PBS, in January 2000, already predicted the evolution trend for a new stage. Such stage would result in an own and independent management model for TCSPREV pension plan, by means of a specific entity to manage and to operate them, and this fact has become more and more evident throughout the years. This trend also occurred in other main SISTEL pension plan sponsoring companies, which created their respective supplementary pension plan foundations. In this scenario, FundaÇão 14 de Previdência Privada was created in 2004, with the purpose of taking over the management and operation of the TCSPREV pension plan, which started as from March 10, 2005, whose process was backed by the segment’s specific legislation and properly approved by the Secretaria de Previdência Complementar – SPC (the Brazilian pension’s regulatory authority).

In accordance with the Transfer Agreement entered into between FundaÇão Sistel de Seguridade Social and FundaÇão 14 de Previdência Privada, SISTEL, by means of the Management Agreement, has been rendering management and operation services of TCSPREV and PAMEC-BrT plans to FundaÇão 14, after the transferring of these plans, which took place on March 10, 2005, for a period of up to 18 months, while FundaÇão 14 organizes itself to take over the management and operation services of its plans.

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Plans

TCSPREV (Defined Contribution, Settled Benefit and Defined Benefit)
This defined contribution and settled benefit plan was introduced on 2/28/00. On 12/31/01, all pension plans sponsored by the Company with SISTEL were merged, being exceptionally and provisionally approved by the Secretaria de Previdência Complementar – SPC of document sent to that Agency, due to the need for adjustments to the regulations. Thus, TCSPREV is comprised of defined contribution groups with settled and defined benefits. The plans that were merged into the TCSPREV were the PBS-TCS, PBT-BrT, BrT Management Agreement, and the Unusual Contractual Relation Instrument, and the conditions established in the original plans were maintained. In March 2003, this plan was no longer offered to the sponsors’ new contracted ones. However, this plan, concerning the defined contribution, started being offered as of March 2005. TCSPREV currently provides assistance to nearly 61.9% of the staff.

PAMEC-BrT – Health Care Plan for Supplementary Pension Beneficiaries (Defined Benefit)
Destined for health care of retirees and pensioners subject to Grupo PBT-BrT, which was merged into TCSPREV on 12/31/01.

Contributions Established for the Plans

TCSPREV
Contributions to this plan, by group of participants, are established based on actuarial studies prepared by independent actuaries according to regulations in force in Brazil, using the capitalization system to determine the costs. Currently, contributions are made by the participants and the sponsor only for the internal groups PBS-TCS (defined benefit) and TCSPREV (defined contribution). In the TCSPREV group, the contributions are credited in individual accounts of each participant, equally by employee and sponsor, and the basic contribution percentages vary between 3% and 8% of the participant’s salary – limited to R$ 18,582.00 for 2005 - , according to participant’s age. Participants have the option to contribute voluntarily or sporadically to the plan above the basic contribution, but without parity of the Company. In the case of the PBS-TCS group, the sponsor’s contribution corresponds to 12% of the payroll of the participants; while the employees’ contribution varies according to the age, service time and salary. An entry fee may also be payable depending on the age of entering the plan. The sponsors are responsible for the cost of all administrative expenses and risk benefits. In 2005, contributions by the sponsor to the TCSPREV group represented 6.41% of the payroll of the plan participants. For employees, the contributions represented 5.79% .

PAMEC-BrT
The contribution for this plan was fully paid in July 1998, through a single payment. New contributions are limited to future necessity to cover expenses, if that occurs.

FUNDAÇÃO SISTEL DE SEGURIDADE SOCIAL (SISTEL)

The supplementary pension plan, which remains under SISTEL’s management, comes from the period before the Telebrás’ Spin-off and assists participants who had the status of beneficiaries in January 2000 (PBS-A). SISTEL also manages the PAMA/PAMA-PCE pension plan, formed by participants assisted by the PBS-A Plan, the PBS’s plans segregated by sponsor in January 2000 and PBS-TCS’ Internal Group, merged into the TCSPREV plan in December 2001.

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Plans

PBS-A (Defined Benefit)
Maintained jointly with other sponsors subject to the provision of telecommunications services and destined for participants that had the status of beneficiaries on 1/31/00.

PAMA – Health Care Plan for Retirees / PCE – Special Coverage Plan (Defined Contribution)

Maintained jointly with other sponsors subject to the provision of telecommunications services and destined for participants that had the status of beneficiaries on 1/31/00, for the beneficiaries of the PBS-TCS Group, merged into TCSPREV on 12/31/01 and for the participants of PBS’s defined benefit plans sponsored by other companies. According to a legal/actuarial appraisal, the Company’s responsibility is exclusively limited to future contributions. During 2004, an optional migration of retirees and pensioners of PAMA took place for new coverage conditions (PCE). The participants who opted for the migration began to contribute to PCE.

Contributions Established for the Plans

PBS-A
Contributions may occur in case of accumulated deficit. On 12/31/05, the actuarial appraisal date, the plan presented a surplus.

PAMA/PCE
This plan is sponsored by contributions of 1.5% on payroll of active participants subject to PBS plans, segregated and sponsored by several SISTEL sponsors. In the case of Brasil Telecom, the PBS-TCS was merged into the TCSPREV plan on 12/31/01, and began to constitute an internal group of the plan. Contributions by retirees and pensioners who migrated to PCE are also carried out.

FUNDAÇÃO BrTPREV

The main purpose of the Company sponsoring BrTPREV is to maintain the supplementary retirement, pension and other provisions in addition to those provided by the official social security system to participants. The actuarial system for determining the plan’s cost and contributions is collective capitalization, valued annually by an independent actuary.

Plans

BrTPREV
Defined contribution plan and settled benefits, launched in October 2002, destined for the concession of pension plan benefits supplementary to those of the official pension plan and that initially assisted only employees subject to the Subsidiary Rio Grande do Sul. This pension plan remained open to new employees of the Company and its subsidiaries from March 2003 to February 2005, when its offering was suspended. Currently, BrTPREV provides assistance to nearly 35.2% of the staff.

Fundador – Brasil Telecom and Alternativo – Brasil Telecom
Defined benefits plans destined to provide supplementary social security benefits in addition to those of the official social security, closed to the entry of new participants. Currently, these plans assist approximately 0.1% of the staff.

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Contributions Established for the Plans

BrTPREV
Contributions to this plan are established based on actuarial studies prepared by independent actuaries according to the regulations in force in Brazil, using the capitalization system to determine costs. Contributions are credited in individual accounts of each participant, the employee’s and Company’s contributions being equal, the basic percentage contribution varying between 3% and 8% of the participation salary – limited to R$ 19,222.00 for 2005 - , according to the participant’s age. Participants have the option to contribute voluntarily or sporadically to the plan above the basic contribution, but without parity of the sponsor. The sponsor is responsible for the administrative expenses and risk benefits. The Company’s contributions in 2005 represented 6.21% of the payroll of the plan participants, whilst the employee contribution was 5.43% .

Fundador – Brasil Telecom and Alternativo – Brasil Telecom
The regular contribution by the sponsor in 2005 was of 4.06% on the payroll of plan participants, who contributed at variable rates according to age, service time and salary; the average rate in 2005 was 4.06% . With the Alternativo Plan –Brasil Telecom, the participants also pay an entry fee depending on the age of joining the plan.

The technical reserve corresponding to the current value of the Company’s supplementary contribution, as a result of the actuarial deficit of the plans managed by FBrTPREV, have the settlement within the maximum established period of twenty years, as from January 2002, according to Circular 66/SPC/GAB/COA from the Supplementary Pension Department dated 1/25/02. Of the maximum period established, 16 years still remain for complete settlement.

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Status of the Plans Mentioned (SISTEL, FundaÇão 14 and FBrTPREV), pursuant to the CVM Resolution 71/00

Below, data of sponsored private pension plans which maintain liabilities of defined benefit:

  FBrTPREV – BrTPREV, 
Alternativo and Fundador 
FundaÇão 14 – 
TCSPREV 
2005   2004  2005     2004 

RECONCILIATION OF ASSETS AND LIABILITIES 
Actuarial Liabilities with Granted Benefits 
Actuarial Liabilities with Benefits to be Granted 
(=) Total Present Value of Actuarial Liabilities 
Fair Value of the Plan Assets 
1,290,201 
72,608 
1,362,809
 
(634,894)
973,323 
83,379 
1,056,702
 
(555,256)
188,953 
148,220 
337,173
 
(645,051)
171,212 
147,861 
319,073
 
(475,911)
(=) Net Actuarial Liability/(Asset) 727,915  501,446  (307,878) (156,838)

TURNOVER OF ACTUARIAL LIABILITY/(ASSET), NET
Present Value of the Actuarial Liability at the beginning
of the year
  
   Cost of Interest  
   Cost of Current Service  
   Net Benefits Paid  
   Actuarial (Gain) or Loss on the Actuarial Liability 
1,056,702 
164,212 
141 
(103,089)
244,843 
990,752 
160,304 
377 
(92,657)
(2,074)
319,073 
35,187 
4,090 
(16,604)
(4,573)
281,803 
31,013 
3,700 
(13,171)
15,728 
Present Value of the Actuarial Liability at the end of the 
year 
1,362,809  1,056,702  337,173  319,073 
Fair Value of the Plan Assets at the beginning of the year  
   Earnings of the Plan Assets         
   Regular Contributions Received by the Plan  
   Sponsor  
   Participants  
   Amortizing Contributions Received from the Sponsor  
   Payment of Benefits 
555,256 
84,215 
232 
130 
102 
98,280 
(103,089)
486,348 
62,798 
291 
18 
273 
98,476 
(92,657)
475,911 
184,393 
1,351 
796 
555 

(16,604)
436,702 
50,932 
1,448 
889 
559 

(13,171)
Fair Value of the Plan Assets at the end of the year  634,894  555,256  645,051  475,911 
         
(=) Value of Actuarial Liability/(Asset), net(1) 727,915  501,446  (307,878) (156,838)
(1) In the event of net actuarial asset, there is not an accounting recognition in the Sponsor. 


EXPENSE RECOGNIZED IN THE STATEMENT OF INCOME OF BRASIL TELECOM 
   Cost of Current Service 
   Contributions of the Participants 
   Cost of Interest 
   Earnings of the Plan Assets 
   Recognized Actuarial Losses (Gains)
11 
(102)
164,212 
(84,215)
244,843 
359 
(273)
160,304 
(62,798)
(2,074)
4,090 
(555)


3,700 
(559)


Total Recognized Expense  324,749  95,518  3,535  3,141 

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MAIN ACTUARIAL ASSUMPTIONS USED 
Discount Rate of the Actuarial Liability (6% + Inflation) 11.30%  15.54%  11.30%  11.30% 
Total Yield Rate Expected over Plan Assets  12.34%  15.54%  12.34%  18.10% 
Estimated Actual Salary Increase Index  2%  2%  2%  2% 
Estimated Inflation Rate  5.00%  9.00%  5.00%  5.00% 
Overall Mortality Table (2) UP94 + 2  UP84  UP94 + 2  UP84 + 1 
Disablement Table  Álvaro Vindas,
 -20% up to 40
years old; and
+30% over 40
years old. 
Álvaro
Vindas 
Álvaro Vindas,
 -20% up to 40
years old; and
+30% over 40
years old. 
Mercer
Disability 
Disabled Mortality Table  IAPB-57   IAPB-57 
Turnover Rate  Null  Null  0.15/(length 
of service +
1); null from
50 years old
(2) In December 2005, the Board of Executive Officers of the Company, in compliance with recommendation of its independent actuaries, approved the adjustments of actuarial assumptions and started to adopt the overall mortality table UP94 with two-year grievance and separated by gender. The table adopted corresponds to current expectation of longevity of participants of sponsored plans. As an effect of such change, the Company recognized a supplement of R$ 170,505 to the provision for pension fund liabilities..

ADDITIONAL INFORMATION – 2005 
a) The assets and liabilities of BrTPREV, Alternativo and Fundador plans are positioned on 12/31/05. Concerning the TCSTPREV plan, the plan assets refer to 9/30/05, projected for 12/31/05. 
b) The individual data used are as of 9/30/04 and 10/31/04 for TCSPREV and BrTPREV, respectively. These data were projected for 12/31/05. 

  SISTEL – PBS-A  FundaÇão 14 – PAMEC 
2005   2004  2005     2004 

ASSETS AND LIABILITIES RECONCILIATION 
Actuarial Liabilities with Granted Benefits 
Actuarial Liabilities with Benefits to be Granted 
(=) Total Present Value of Actuarial Liabilities
 
Fair Value of the Plan Assets 
570,260 

570,260
 
(738,735)
529,690 

529,690 
(688,827)
1,063
36 
1,099 
(925)
852 
34 
886
 
(1,009)
(=) Actuarial Liability/(Asset), net  (168,475) (159,137) 174  (123)

TURNOVER OF THE ACTUARIAL LIABILITY/(ASSET), NET 
Present Value of the Actuarial Liability at the beginning 
of the year
  
   Cost of Interest  
   Cost of Current Service  
   Net Benefits Paid  
   Actuarial (Gain) or Loss on the Actuarial Liability 
529,690 
57,197 

(46,997)
30,370 
514,254 
55,706 

(44,940)
4,670 
886 
98 

(83)
197 
2,678 
302 

(43)
(2,052)
Present Value of the Actuarial Liability at the end of the
year 
570,260  529,690  1,099  886 
Fair Value of the Plan Assets at the beginning of the year  
   Earnings (Losses) of the Plan Assets  
   Payment of Benefits 
688,827 
96,905 
(46,997)
614,450 
119,317 
(44,940)
1,009 
(1)
(83)
992 
60 
(43)
Fair Value of the Plan Assets at the end of the year  738,735  688,827  925  1,009 
         
(=) Value of Actuarial Liability/(Asset), net(1) (168,475) (159,137) 174  (123)
(1) In the event of net actuarial asset, there is not an accounting recognition in the Sponsor. 

EXPENSE RECOGNIZED IN THE STATEMENT OF INCOME OF BRASIL TELECOM 
Recording (Reversal) of the Actuarial Liability  174  (1,686)
Total Recognized Expense (Revenue) -  -  174  (1,686)

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MAIN ACTUARIAL ASSUMPTIONS USED 
Discount Rate of the Actuarial Liability (6% + Inflation) 11.30%  11.30%  11.30%  11.30% 
Total Yield Rate Expected over Plan Assets  13.75%  12.20%  11.47%  16.51% 
Estimated Index of Nominal Increase of the Benefits  5.00%  5.00%  5.00%  5.00% 
General Mortality Table  UP94 + 2  UP84 + 1  UP94 + 2  UP84 + 1 
Disablement Table  N/A  Mercer Disability 
Starting Age of Benefits  N/ 100% in the eligibility to retirement 
Inflation Estimated Rate  5.00%  5.00%  5.00%  5.00% 
N/A = Not Applicable 

ADDITIONAL INFORMATION – 2005 
a) The plan assets are positioned on 11/30/05. 
b) The individual data used refer to 9/30/05 for PBS-A, projected for 12/31/05. For PAMEC, the individual data used refer to November 2005. 

b. Stock option plan for management and employees

The Extraordinary Shareholders’ Meeting held on April 28, 2000, approved the general plan to grant stock call options to officers and employees of the Company and its subsidiaries. The plan authorizes a maximum limit of 10% of the shares of each class of Company stock. Shares derived from exercising options guarantee the beneficiaries the same rights granted to other Company shareholders. The administration of this plan was entrusted to a management committee appointed by the Board of Directors, which decided only to grant preferred stock options. The plan is divided into two separate programs:

Program A
This program is granted as an extension of the performance objectives of the Company established by the Board of Directors for a five-year period. Until December 31, 2005, no option had been granted.

Program B
The price of exercising is established by the management committee based on the market price of 1000 shares at the date of the grant of option and will be monetarily restated by the IGP-M between the date of signing the contracts and the payment date.

The right to exercise the option is given in the following way and within the following periods:

  First Grant  Second Grant  Third Grant 
As from  Deadline  As from  Deadline  As from  Deadline 
33%  1/1/04  12/31/08  12/19/05  12/31/10  12/21/05  12/31/11 
33%  1/1/05  12/31/08  12/19/06  12/31/10  12/21/06  12/31/11 
34%  1/1/06  12/31/08  12/19/07  12/31/10  12/21/07  12/31/11 

The acquisition periods can be anticipated as a result of the occurrence of events or special conditions established in the option contract. In 2005, options were not granted.

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Information related to the general plan to grant call options is summarized below:

  2005  2004 
Preferred
stock options
(thousand)
Average
exercise price
R$ 
Preferred
stock options 
(thousand)
Average
exercise price
R$ 
Balance at the beginning of the year  1,415,119  13.00  907,469  11.73 
Granted  507,650  15.28 
Extinguished Options  1,004,382  13.00 
Balance at the end of the year  410,737  13.00  1,415,119  13.00 

There has been no granting of call options exercised until the balance sheet closing date and the representation of the options balance in relation to the total of outstanding shares is 0.08% (0.26% in 2004).

Considering the hypothesis that the options will be fully exercised, the opportunity cost of the respective premiums, calculated based on the Black & Scholes method, would be R$ 482 (R$ 1,254 in 2004).

c. Other Benefits to Employees

Other benefits are granted to employees, such as: health/dental care, meal allowance, group life insurance, occupational accident allowance, sickness allowance, transportation allowance, and others.

7. PROVISIONS FOR CONTINGENCIES

a. Contingent Liabilities

The Company and its subsidiaries periodically assess their contingency risks, and also review their lawsuits taking into consideration the legal, economic, and accounting aspects. The assessment of these risks aims to classifying them according to the chances of unfavorable outcome among the alternatives of probable, possible or remote, taking into account, as applicable, the opinion of the legal advisors.

For those contingencies, which the risks are classified as probable, provisions are recognized. Contingencies classified as possible or remote are discussed in this note. In certain situations, due to legal requirements or precautionary measures, judicial deposits are made to guarantee the continuity of the cases in litigation. These lawsuits are under discussion in administrative and judicial spheres and in several levels, from lower courts to the extraordinary ones.

It is also worth mentioning that the notice presented below shows, in some cases, identical objects with different classifications of risk level, fact that is justified by specific factual or procedural status related to each lawsuit.

Labor Claims

The provision for labor claims includes an estimate by the Company’s management, supported by the opinion of its legal counselors, of the probable losses related to lawsuits filed by employees, former employees of the Company, and of service providers related to the labor matter.

Tax Suits

Provisions for tax contingencies mainly refer to issues related to tax collections resulting from different interpretations of the legislation on the part of the Company’s legal advisors and tax authorities.

 

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Civil Suits

The provisions for civil contingencies refers to an estimate of lawsuits related to contractual adjustments arising from Federal Government economic plans, and other cases related to community telephony plans and suit for damages and consumer lawsuits.

Classification by Risk Level

Contingencies for Probable Risk

Contingencies for probable risk of loss, for which provisions are recorded under liabilities, have the following balances:

  PARENT COMPANY   CONSOLIDATED 
Nature  2005  2004     2005  2004 
Labor     564,129  412,730   567,273  414,221 
Tax     142,143  64,703   161,068  109,936 
Civil     273,349  214,011   276,018  214,688 
Total     979,621  691,444  1,004,359  738,845 
Current     320,824  290,727   336,643  327,643 
Long-term     658,797  400,717   667,716  411,202 

Labor

In 2005 there was a net increase of the provision in the amount of R$ 151,399 (R$ 153,052 for the Consolidated), represented by monetary restatements and effects of revaluations of contingent risks, derived from events occurred in the year, which totaled R$ 256,677 (R$ 256,598 for the Consolidated), filing of new lawsuits amounting to R$ 17,722 (R$ 17,943 for the Consolidated), reclassification of other liabilities totaling R$ 1,596 for the Consolidated and reduction due to payments that amounted to R$ 123,000 (R$ 123,085 for the Consolidated).

The revaluations of the contingent risks are mainly connected to reviews of judicial proceedings related to joint/subsidiary liability, overtime, salary parity, risks, reintegration, tenure, remuneration differences and supplement of FGTS indemnifying fine resulting from understated inflation, amounting to R$ 139,204.

The main objects that affect the provisions for labor claims are the following:

(i) Risk Premium – related to the claim of additional payment for hazardous activities, based on Law 7,369/85, regulated by Decree 93,412/86, due to the supposed risk of contact by the employee with the electric power system;

(ii) Salary Differences and Consequences – related, mainly, to requests for salary increases due to supposedly unfulfilled union negotiations. They are related to the repercussion of the salary increase supposedly due on the others sums calculated based on the employees’ salaries;

(iii) Career Plan – related to the request for application of the career and salaries plan for employees of the Santa Catarina Branch (formerly Telesc), with promotions for seniority and merit, supposedly not granted by the former Telesc;

 

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(iv) Joint/Subsidiary Responsibility – related to the request to ascribe responsibility to the Company, made by outsourced personnel, due to supposed nonobservance of their labor rights by their direct employers;

(v) Overtime – refers to the pleading for salary and additional payment due to labor supposedly performed beyond the contracted work time;

(vi) Reintegration – pleading due to supposed inobservance of employee’s special condition, guaranteeing the impossibility of terminating labor contract without cause;

(vii) Request for the application of regulation, which established the payment of the percentage incurring on the Company’s income, attributed to the Santa Catarina Branch; and

(viii) Supplement of FGTS fine arising from understated inflation – it refers to requests to supplement indemnification of FGTS fine, due to the recomposition of accounts of this fund by understated inflation.

Brasil Telecom S.A. filed a lawsuit against Caixa Econômica Federal, with a view to ensuring the reimbursement of all amounts paid for this purpose.

Tax

In 2005, the provision at the amount of R$ 77,440 (R$ 51,132 for the Consolidated) had a net increase, represented by monetary restatements and effects of revaluations of contingent risks, arising from events which occurred in the year, which totaled a reduction of R$ 4,405 (R$ 36,466 for the Consolidated), recording of new provisions at the amount of R$ 87,065 (R$ 92,851 for the Consolidated) and reduction due to payments that totaled R$ 5,220 (R$ 5,253 for the Consolidated).

The entry of new amounts refers to the Company’s decision to record provisions related to ICMS credits, whose validity is questioned by the State Tax Authorities, and a conclusive decision by the Judiciary Branch has not been rendered yet. It is also important to point out that adjustments were made in the Tax Recovery Program (“REFIS”), with partial recognition of the surplus debt.

In addition, the other main provisioned lawsuits refer to the following controversies:

(i) Social Security – related to the non-collection of incident social security in the payment made to cooperative companies, as well as the divergence of understanding about the allowance that comprise the contribution’s salary; and

(ii) Federal Taxes – several assessments challenging supposed irregularities committed by the Company, such as undue tax losses carryforward taken place prior to the merger of the other operators of the Region II of the PGO.

Civil

In 2005, a provision at the amount of R$ 59,338 (R$ 61,330 for the Consolidated) had a net increase, represented by monetary restatements and effects of revaluations of contingent risks, arising from events which occurred in the year, which totaled R$ 101,756 (R$ 102,222 for the Consolidated), filings of new lawsuits at the amount of R$ 46,303 (R$ 48,308 for the Consolidated) and reduction due to payments, which totaled R$ 88,721 (R$ 89,200 for the Consolidated).

 

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The revaluations of contingent risks mainly refer to lawsuits subject to capital participation agreements, lawsuit for damages and consumer lawsuits, which amounted to R$ 48,404.

The lawsuits provided for are the following:

(i) Review of contractual conditions – lawsuit where a company which supplies equipment filed legal action against the Company, asking for a review of contractual conditions due to economic stabilization plans;

(ii) Capital Participation Agreements – TJ/RS (court of appeals) has been firmly positioned as to the incorrect procedure previously adopted by the former CRT in lawsuits related to the application of a rule enacted by the Ministry of the Communications. Such lawsuits are positioned in various phases: lower courts, Court of Appeals and Superior Court of Justice;

(iii) Customer service centers – public civil actions, comprising the closing of customer services centers;

(iv) Free Mandatory Telephone Directories – LTOG’s – lawsuits questioning the non-delivery of printed residential telephone directories; and

(v) Other lawsuits – related to various lawsuits in progress, comprising civil liability suits, indemnifications for contractual termination and consumer matters under procedural progress in the Special Courts, Courts of Law and Federal Courts throughout the country.

Contingencies for Possible Risk

The composition of contingencies with risk level considered to be possible, and therefore not recorded in the accounts, is the following:

  PARENT COMPANY  CONSOLIDATED 
Nature  2005  2004  2005  2004 
Labor  413,729  645,824  419,169  649,328 
Tax  2,130,131  1,233,534  2,175,323  1,249,108 
Civil  1,751,491  1,004,102  1,779,336  1,006,266 
Total  4,295,351  2,883,460  4,373,828  2,904,702 

Labor

In 2005, a net reduction occurred at the amount of R$ 232,095 (R$ 230,159 for the Consolidated), represented by monetary restatements and effects of revaluations of contingent risks, arising from events occurred in the year, which totaled R$ 300,272 (R$ 299,969 for the Consolidated), filings of new lawsuits at the amount of R$ 68,177 (R$ 69,810 for the Consolidated).

The reduction resulted from revaluation of risks mainly referring to reviews of lawsuits related to joint/subsidiary responsibility, overtime, salary parity, risks, reintegration, and tenure, differences of profit sharing and supplement of FGTS indemnifying fine resulting from understated inflation.

The filings of new lawsuits mainly refer to those related to joint/subsidiary responsibility and supplement of FGTS indemnifying fine resulting from understated inflation.

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The main objects that comprise the possible losses of a labor nature are related to joint/subsidiary responsibility, supplement of FGTS indemnifying fine resulting from understated inflation, risk premium, promotions and the request for remuneration consideration for work hours supposedly exceeding the regular workload of hours agreed also contributed to the amount mentioned.

Tax

The increase which took place in 2005 was R$ 896,597 (R$ 926,215 for the Consolidated), presented by monetary restatements and effects of revaluation of contingent risks, arising from events which took place in the year, which totaled R$ 702,031 (R$ 708,278 for the Consolidated) and filings of new lawsuits at the amount of R$ 194,566 (R$ 217,937 for the Consolidated).

The revaluations mainly arise from lawsuits dealing with the assessment of pension plan contribution on allowances, which, according to the understanding of the Company do not comprise the contribution salary, once its exclusion is expressly provided for in the Article 28, paragraph 7, of Law 8,212/91, the Costing Plan.

Matters whose merit have not been conclusively decided by the Higher Courts, such as the transfer of PIS/COFINS, the levy of ISS in auxiliary services and not listed in the Services List attached to LC 116/03, as well as the reversal of ICMS credits, in the interpretation of the Tax Authorities, were reclassified.

The entries of new contingencies refer to amounts supposedly due related to the Fund for Universalization of Telecommunications Service – FUST, by virtue of illegal retroactivity, according to the Company’s understanding of the change in the understanding of its calculation basis by ANATEL, in judicial discussion, new assessments dealing with the supposed levy of ICMS in the activities described in the Agreement 69/98, as well as questioning exemption granted by state law, in addition to the supposed levy of ISS on auxiliary services to communication.

Also concerning FUST, this fund was enacted by Law 9,998/00 and regulated by the Decree 3,624/00, establishing a contribution of 1% over gross revenue from telecommunications, minus the installments of taxes incurring on the referred revenue and the transfers made among operators. The levy started taking place as of 1/1/01.

By means of the Resolution 247, as of 12/14/00, ANATEL ruled the calculation system of the referred contribution, promptly adopted by the Company until 1/31/04, when the regulating agency issued the Order 29/03, which recognized the deductibility of the transfer to other operators, of interconnection in the calculation basis, criterion adopted in the period from February 2004 to November 2005.

On 12/15/05, ANATEL by means of the Abstract 01 determined a new calculation basis for the contribution to FUST, with retroactive effects since 1/1/01. With the increase in the calculation basis by “infralegal” (decree or administrative act of lower hierarchy) normative act and non-retroactivity of effects of Abstract 01/05, the Company brought lawsuit, represented by the Brazilian Association of Switched Fixed Telephone Service Concessionaires– ABRAFIX and jointly with other non-affiliated operators, to remove its application. While the injunction is not granted, the Company opted for judicial deposit as from December 2005.

On 12/31/05 the balance provisioned for FUST, recorded in the indirect taxes liabilities was R$ 8,004, amount of which destined to judicial deposit in January 2006.

 

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The difference of amount among criteria of Resolution 247/00 and Order 29/03 is R$ 34,639, unfavorable to the Subsidiary, which according to its internal and external legal advisors, based on the Federal Constitution and Brazilian Tax Code, the risk of loss associated with the matter under discussion is assessed as possible.

The other main existing lawsuits are represented by the following objects:

(i) INSS assessments, with defenses in administrative proceedings or in court, examining the value composition in the contribution salary owed by the company as example of the reclassifications mentioned in the previous paragraph;

(ii) Administrative defenses in lawsuits filed by the Internal Revenue Service, arising from differences of amounts between DCTF and DIPJ;

(iii) Public class suits questioning the alleged transfer of PIS and COFINS to the end consumers;

(iv) ICMS – On international calls;

(v) ICMS – Differential of rate in interstate acquisitions; and

(vi) Withholding tax (IRRF) – Operations related to hedge for covering debts.

Civil

The increase occurred in 2005 was R$ 747,389 (R$ 773,070 for the Consolidated), represented by monetary restatements and effects of revaluation of contingent risks, arising from event which occurred in the year, which totaled a net reduction of R$ 100,404 (R$ 99,633 for the Consolidated) and filings of new lawsuits at the amount of R$ 847,793 (R$ 872,703 for the Consolidated).

The reduction resulting from revaluation of risks mainly refer to reclassification for probable risk of lawsuits subject to capital participation agreements, lawsuit for damages and consumer lawsuits.

The filings of new lawsuits are basically comprised of lawsuits related to pleadings for distribution of lawsuits of Brasil Telecom S.A., resulting from former PCT’s (Community Telephony Program), civil liability lawsuits and consumer lawsuits.

The main lawsuits are presented as follows:

(i) Repayments resulting from Community Telephony Program lawsuits (PCT) – the plaintiffs intend to repay in lawsuits related to the contracts resulting from the Community Telephony Program. Such proceedings are positioned in various phases: lower courts, Court of Appeals and Superior Court of Justice;

; (ii) Lawsuit for damages and consumer; and

(iii) Contractual – Lawsuits related to the claim for a percentage resulting from the Real Plan, to be applied to a contract for rendering of services, review of conversion of installments in URV and later in reais, related to the supply of equipment and rendering of services.

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Contingencies for Remote Risk

In addition to the claims mentioned, there are other contingencies considered of a remote risk, whose amounts are shown as follows:

  PARENT COMPANY     CONSOLIDATED 
Nature  2005  2004  2005  2004 
Labor  166,119  165,087   166,755  165,332 
Tax  647,778  996,498   676,877  999,069 
Civil  406,242  275,753   406,942  275,983 
Total  1,220,139  1,437,338  1,250,574  1,440,384 

Letters of Guarantee

The Company maintains letters of guarantee agreements executed with financial institutions, characterized as supplementary guarantee for judicial proceedings in temporary execution, totaling R$ 620,739 (R$ 311,976 on 12/31/04). The maturity of these agreements if undetermined and the respective charges vary from 0.50% to 2.00% p.a., representing an average rate of 0.90% p.a. For consolidated effects, the letters of guarantee with such purpose represent R$ 625,759 (R$ 570,560 on 12/31/04), and the charges vary from 0.50% to 2.00% p.a., resulting in a rate equivalent to 0.90% p.a.

Judicial deposits related to contingencies and challenged taxes (suspended demandability) described in Note 24.

b. Contingent Assets

As follows, the tax claims promoted by the Company are shown, through which the recovery of tax paid is claimed, calculated differently from interpretation sustained by its legal advisers, the assessment of success in future filing of appeals is assessed as probable:

PIS/COFINS: judicial dispute about the application of Law 9,718/98, which increased the calculation basis for PIS and COFINS. The period comprised by Law was from February 1999 to November 2002 for PIS and from February 1999 to January 2004 for COFINS. The amount estimated recoverable is R$ 116,220. In November 2005, STF (Federal Supreme Court) concluded the judgment of certain lawsuits dealing with such issue and considered unconstitutional the increase of calculation basis introduced by said Law.

The Company is awaiting the judgments of lawsuits and did not recognize the amount attributed to outstanding contingency in the financial statements

8. SHAREHOLDERS’ EQUITY

a. Capital Stock

The Company is authorized to increase its capital stock, according to a resolution of the Board of Directors, in a total limit of five hundred and sixty billion (560,000,000,000) common or preferred shares, observing the legal limit of two thirds (2/3) for the issue of new preferred shares without voting rights.

By means of a resolution of the General Shareholders’ Meeting or the Board of Directors, the Company’s capital may be increased by the capitalization of retained earnings or reserves prior to this allocated by

95


the General Shareholders’ Meeting. Under these conditions, the capitalization may be effected without modifying the number of shares.

The capital stock is represented by common and preferred stocks, with no par value, and it is not mandatory to maintain the proportion between the shares in the case of capital increases.

By means of a resolution of the General Shareholders’ Meeting or the Board of Directors, the preemptive right for the issue of shares, subscription bonuses or debentures convertible into shares may be excluded, in the cases stipulated in article 172 of Corporation Law.

The preferred shares do not have voting rights, except in the cases specified in paragraphs 1 to 3 of article 12 of the Bylaws, but are assured priority in receiving the minimum non-cumulative dividend of 6% per annum, calculated on the amount resulting from dividing the capital stock by the total number of the Company’s shares or 3% per annum, calculated on the amount resulting from dividing the net book shareholders’ equity by the total number of the Company’s shares, whichever is greater.

Subscribed and paid-up capital as of the balance sheet date is R$ 3,435,788 (R$ 3,401,245 as of 12/31/04) represented by shares without par value as follows:

  In thousands of shares 
Type of Shares  Total of Shares  Treasury Stock  Outstanding Shares 
2005  2004  2005  2004  2005  2004 
Common  249,597,050  249,597,050  249,597,050  249,597,050 
Preferred  305,701,231  300,118,295  13,679,382  8,106,882  292,021,849  292,011,413 
TOTAL  555,298,281  549,715,345  13,679,382  8,106,882  541,618,899  541,608,463 

  2005  2004 
Book Value per thousand Outstanding Shares (R$) 10.15  11.97 

b. Treasury Stock

In the calculation of the book value the shares held in treasury were deducted. These shares held in treasury are derived from the following events:

Merger

The Company holds in treasury preferred stock acquired in the first half of 1998 by the former Companhia Riograndense de TelecomunicaÇões – CRT, the company that was merged by Brasil Telecom S.A. on December 28, 2000. Since the merger, the company has outstanding shares to comply with judicial rules, resulting from ownership claims of the subscribers derived from the merged company. The amount originally paid, in this case, is considered a cost of replacement, according to the control made by the Company, considering the outgoings for the older acquisitions to the more recent ones.

The average acquisition cost originally represented, at CRT, an amount of R$ 1.24 per share. With the swap ratio of shares, resulting from the merger process, each CRT share was swapped for 48.56495196 shares of Brasil Telecom S.A., resulting in an average cost of R$ 0.026 for each share held in treasury.

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The movements of shares held in treasury derived from the merged company were the following:

  2005  2004 
Preferred
shares
(thousands)
Amount  Preferred
shares
(thousands)
Amount 
Opening balance in the year  1,282  30  871,571  20,778 
Quantity of shares being traded again on the market  (870,289) (20,748)
Closing balance in the year  1,282  30  1,282  30 

The retained earnings account represents the origin of the funds invested in the acquisition of these shares held in treasury.

Stock Repurchase Program – Years from 2002 to 2004

Shares resulting from buyback programs are held in treasury, and on 9/13/04 a material fact of the current proposal approved by the Company’s Board of Directors was published, for the repurchase of preferred stocks issued by the Company, for holding in treasury or cancellation, or subsequent sale, under the following terms and conditions: (i) the premium account in the share subscription represented the origin of the funds invested in the purchase of shares; (ii) the authorized quantity for the purchase of own preferred shares for being held in treasury was limited to 10% of outstanding preferred shares; and (iii) the period determined for the acquisition was 365 days, in accordance with CVM Instruction 390/03.

The quantity of shares held in treasury arising from the programs for repurchase of shares was the following:

  2005  2004 
Preferred
shares

(thousands)
Amount  Preferred
 shares
(thousands)
Amount 
Opening balance in the year  8,105,600  92,420  4,847,200  54,870 
Shares acquired  5,572,500  62,272  3,258,400  37,550 
Closing balance in the year  13,678,100  154,692   8,105,600  92,420 

Historical cost in the acquisition of shares held in treasury (R$ per thousand shares) 2005  2004 
 Weighted Average         11.31  11.40 
 Minimum         10.31  10.31 
 Maximum         13.80  13.80 

The unit cost in the acquisition considers the totality of stock repurchase programs.

Until the balance sheet closing date, there were no disposals of preferred shares purchased based on repurchase programs.

Market Value of Shares Held in Treasury

The market value of shares held in treasury, arising from the merger of CRT and the buyback programs, at the market quotation on the balance sheet closing date was the following:

  2005  2004 
Number of preferred shares held in treasury (thousands of shares) 13,679,382  8,106,882 
Quotation per thousand shares at BOVESPA (R$) 10.05  13.70 
Market value  137,478  111,064 

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The Company maintains the balance of shares held in treasury in a separate account. For presentation purposes, the values of shares held in treasury are deducted from the reserves that originated the buyback, and are presented as follows:

  Premium on
Subscription of Shares 
Other Capital Reserves  Retained Earnings 
2005  2004  2005  2004  2005  2004 
Account Balance of Reserves     434,647  404,819  123,334  123,334  410,287  1,332,773 
Shares Held in Treasury     (99,822) (37,550) (54,870) (54,870)        (30) (30)
Balance, Net of Shares Held in Treasury     334,825  367,269  68,464  68,464  410,257  1,332,743 

c. Capital Reserves

Capital reserves are recognized in accordance with the following practices:

Reserve for Premium on Subscription of Shares: results from the difference between the amount paid on subscription and the portion allocated to capital.

Special Goodwill Reserve in the Merger: represents the net value of the contra entry of the goodwill amount recorded in deferred assets, as provided by CVM Instructions 319/99, 320/99 and 349/01. When the corresponding tax credits are used, the reserve is capitalized, annually, on behalf of the controlling shareholder and the minority shareholders existing on its formation date, observing the preemptive right of the other shareholders.

Reserve for Donations and Subsidies for Investments: registered as a result of donations and subsidies received, the contra entry of which represents an asset received by the Company.

Reserve for Special Monetary Restatement as per Law 8,200/91: registered as a result of special monetary restatement adjustments of permanent assets to compensate the distortions in the monetary restatement indices prior to 1991.

Other Capital Reserves: formed by the contra entry of the interest on works in progress up to 12/31/98 and funds invested in income tax incentives.

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Capital Reserves Breakdown

Due to the existence of various capital reserves, below their breakdown, in order to better detail the variations shown in the changes in shareholders’ equity:

  Premium on Share
Subscription 
Goodwill
Special
Reserve on
Merger 
Donations 
and Subsidies 
for

Investments 
Interest on
Work in
Progress 
Premium
on Share 
Subscription 
Treasury
Stocks 
Balances on December 31, 2003  368,596  -  187,749  123,274           745,756 
Capital Stock Increase
       Tax benefit over goodwill       
       amortization in merger 
Additions to Capital Reserves
       
       Donations and subsidies for       
       investments 
Other Uses of Shareholders’ Equity,
 net       
    Stock Repurchase 

36,223

 

 

(37,550)

(64,371)

 

 

277 

 

 
Balances on December 31, 2004  404,819  (37,550) 123,378  123,551           745,756 
Capital Stock Increase       
       Tax benefit over goodwill       
       amortization in merger 
Other Uses of Shareholders’ Equity
       
     Stock repurchase 

29,828 

 

(62,272)

(64,371)

 

   
Balances on December 31, 2005  434,647  (99,822) 59,007  123,551           745,756 

  Monetary 
Restatement
 
Special Law –
 
8200/91 
Others   Total 
Capital 
Reserves
 
Others  Treasury 
Stocks
 
Balances on December 31, 2003  31,287  123,161       (54,870) 1,524,953 
Capital Stock Increase       
       Tax benefit over goodwill amortization in merger 
Additions to Capital Reserves
       
       Donations and Subsidies for Investments       
       Tax incentives – FINAM 
Other Uses of Shareholders’ Equity
       
     Stock repurchase 
 

173 

 

 

(28,148)

277
173 

(37,550)

Balances on December 31, 2004  31,287  123,334       (54,870) 1,459,705 
Capital Stock Increase     
     Tax benefit over goodwill amortization in merger 
Other Uses of Shareholders’ Equity
       
    Stock repurchase 
     

(34,543)

(62,272)

Balances on December 31, 2005  31,287  123,334       (54,870) 1,362,890 

d. Profit Reserves

The profit reserves are recognized in accordance with the following practices:

Legal Reserve: allocation of five percent of the annual net income up to twenty percent of paid-up capital or thirty percent of capital plus capital reserves. The legal reserve is only used to increase capital stock or to absorb losses.

Retained Earnings: recorded at the end of each fiscal year, composed of remaining balances of net income or loss for the year, adjusted according to the terms of article 202 of Law 6.404/76, or by the recording of adjustments from prior years, if applicable.

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e. Dividends and Interest on Shareholders’ Equity

Dividends are calculated pursuant to the Company’s Bylaws and according to the Corporate Law. Mandatory minimum dividends are calculated in accordance with article 202 of Law 6,404/76, and the preferred or priority dividends are calculated in accordance with the company’s Bylaws.

As a result of a resolution by the Board of Directors, the Company may pay or credit, as dividends, interest on shareholders’ equity (JSCP), under the terms of article 9, paragraph 7, of Law 9,249, as of 12/26/95. The interest paid or credited will be offset with the minimum mandatory annual dividend amount, in accordance with article 43 of the Company’s Bylaws.

Mandatory Minimum Dividends calculated in accordance with the article 202 of Law 6,404/76

  2005  2004 
Net Income (Loss) for the Year  (303,671) 288,552 
Plus     
     Amortization of Goodwill Merged, net of taxes  113,679  124,014 
Less     
     Allocation to Legal Reserve  (14,428)
Adjusted Net Income (Loss) (189,992) 398,138 
     25% of Adjusted Net Income  -  99,535 

Interest on Shareholders´ Equity – JSCP Credited

The Company credited Interest on Shareholders’ Equity to its shareholders, according to the ownership position at the date of each credit. The proposal to be submitted for approval of the annual shareholders’ meting considers the distribution of dividends to the retained earnings account, at the amount of R$ 532,525, attributing to dividends the JSCP credited in the fiscal year ended in 2005, net of withholding income tax.

  2005  2004 
Interest on Shareholder’s Equity – JSCP – Credited  626,500  444,500 
     Common Shares  288,713  205,257 
     Preferred Shares  337,787  239,243 
Withholding Income Tax (IRRF) (93,975) (66,675)
Net JSCP  532,525  377,825 
     Common Shares  245,406  174,469 
     Preferred Shares  287,119  203,356 

Total Remuneration per Thousand Shares (in Reais) (1) 2005  2004 
   Common  0.983210  0.699001 
   Preferred  0.983210  0.696398 
   Total Shares  0.983210  0.697598 

(1) The dividends/Interests on Shareholders’ Equity calculation, per thousand shares, take into account the existing outstanding shares on the balance sheet closing date. The variation shown individually in the year of 2004 is due to the composition of existing outstanding shares on the date of the JSCP credit is different from the ownership composition shown on 12/31/2004. Nevertheless, the remuneration per type of share is equitable on the date of respective credits.

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Total remuneration for the shareholders in 2005 and 2004 is equivalent to the distribution of interest on shareholders’ equity, whose value net of withholding tax, exceeded the amount of mandatory dividends and also is greater than the amount of priority dividends and dividends for common shares, calculated under equal conditions.

9. OPERATING REVENUE FROM TELECOMMUNICATIONS SERVICES

  PARENT COMPANY  CONSOLIDATED
     2005 
     2004       2005       2004 
         
Fixed Telephony Service         
 
 Local Service  7,106,242  6,891,760  7,105,756  6,891,760 
 Activation fees  23,370  33,493  23,370  33,493 
 Basic subscription  3,529,105  3,110,050  3,529,066  3,110,050 
 Measured service charges  1,380,860  1,474,503  1,380,616  1,474,503 
 Mobile Fixed – VC1  2,099,736  2,180,947  2,099,545  2,180,947 
 Rent  1,547  1,644  1,542  1,644 
 Other  71,624  91,123  71,617  91,123 
 
 Long Distance Service  2,990,803  2,642,906  2,990,562  2,642,906 
   Intra-Sectorial Fixed  985,492  1,073,434  985,465  1,073,434 
   Intra-Regional Fixed (Inter-Sectorial) 379,855  403,805  379,835  403,805 
   Fixed Inter Regional  302,661  214,835  302,598  214,835 
   Mobile Fixed – VC2 and VC3  1,261,289  916,758  1,261,164  916,758 
   International  61,506  34,074  61,500  34,074 
 
 Interconnection  702,710  734,799  633,642  731,279 
   Fixed-Fixed  397,072  467,995  397,058  467,995 
   Mobile-Fixed  305,638  266,804  236,584  263,284 
 
 Lease of Means  387,679  247,463  307,822  239,143 
 Public Telephony Service  496,778  478,805  496,766  478,805 
 Supplementary Services, Intelligent Network and  Advanced Telephony  460,135  422,360  459,416  421,035 
 Other  38,828  33,194  37,457  33,194 
 
Total of Fixed Telephony Service  12,183,175  11,451,287  12,031,421  11,438,122 
       
Continued… 

 

101


continued

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Mobile Telephony Service         
 
 Telephony  -  -  432,977  18,219 
   Subscription  167,812  10,201 
   Utilization  211,996  5,540 
   Roaming  2,281  208 
   Interconnection  43,214  2,107 
   Other Services  7,674  163 
 
 Sale of Goods  -  -  299,362  69,685 
   Cell Phones  282,051  64,687 
   Electronic Cards – Brasil Chip, Accessories and Other Goods  17,311  4,998 
 
Total of Mobile Telephony Service  -  -  732,339  87,904 
 
Data Transmission and Other Services         
 
 Data Transmission  1,460,792  1,051,424  1,530,985  1,068,779 
 Other Services  6,427  16,797  392,494  168,637 
 
Total of Data Communication Services and Other  1,467,219  1,068,221  1,923,479  1,237,416 
 
Gross Operating Revenue  13,650,394  12,519,508  14,687,239  12,763,442 
 
Deductions from Gross Revenue  (4,141,269) (3,609,723) (4,548,555) (3,698,586)
 Taxes on Gross Revenue  (3,914,220) (3,494,077) (4,219,054) (3,579,541)
 Other Deductions on Gross Revenue  (227,049) (115,646) (329,501) (119,045)
 
Net Operating Revenue  9,509,125  8,909,785  10,138,684  9,064,856 

10. COST OF SERVICES RENDERED AND GOODS SOLD

The costs incurred in the rendering of services and sales of goods are as follows:

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005     2004 
Interconnection  (2,456,842) (2,308,520) (2,275,836) (2,297,450)
Depreciation and Amortization  (2,005,050) (2,115,365) (2,278,510) (2,185,277)
Third-Party Services  (715,246) (623,131) (826,991) (660,744)
Rent, Leasing and Insurance  (229,988) (255,359) (410,226) (342,070)
Personnel  (135,608) (108,799) (158,326) (118,996)
Material  (72,112) (86,043) (73,871) (86,224)
Means of Connection  (70,807) (41,187) (67,894) (22,563)
FISTEL  (16,790) (14,496) (69,402) (14,539)
Goods Sold  (357,680) (94,031)
Other  (4,434) (4,699) (4,766) (6,118)
Total  (5,706,877) (5,557,599) (6,523,502) (5,828,012)

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11. COMMERCIALIZATION OF SERVICES

The expenses related to commercialization activities are detailed according to the following nature:

  PARENT COMPANY  CONSOLIDATED
       2005  2004  2005       2004 
Third-Party Services  (496,178) (410,776) (901,656) (493,909)
Losses on accounts Receivable  (303,717) (350,505) (328,803) (353,803)
Allowance for Doubtful Accounts  (93,267) (54,024) (120,451) (57,475)
Personnel  (176,191) (129,206) (250,223) (146,274)
Rent, Leasing and Insurance  (146,037) (145,815) (6,702) (8,681)
Depreciation and Amortization  (5,257) (5,393) (16,460) (7,182)
Material  (1,391) (1,384) (31,067) (18,076)
Other  (385) (375) (387) (377)
Total  (1,222,423) (1,097,478) (1,655,749) (1,085,777)

12. GENERAL AND ADMINISTRATIVE EXPENSES

The expenses related to administrative activities, which include the information technology expenses are detailed according to the following nature:

  PARENT COMPANY  CONSOLIDATED
       2005  2004  2005  2004 
Third-Party Services  (626,447) (531,836) (713,848) (555,076)
Depreciation and Amortization  (229,437) (198,105) (279,130) (211,413)
Personnel  (156,156) (132,803) (208,204) (149,618)
Rent, Leasing and Insurance  (30,381) (34,706) (38,998) (39,995)
Material  (4,190) (3,957) (14,399) (4,660)
Other  (626) (608) (1,356) (824)
Total  (1,047,237) (902,015) (1,255,935) (961,586)

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13. OTHER OPERATING EXPENSES, NET

The remaining revenue and expenses attributed to operational activities are shown as follows:

  PARENT COMPANY  CONSOLIDATED
  2005   2004   2005  2004 
 Operating Infra-Structure Rent and Other  91,665  49,085  67,937  48,384 
 Fines  83,999  68,153  80,457  67,286 
 Litigation Settlement with Telecommunication         
 Companies  63,937  124,501  63,937  124,501 
 Technical and Administrative Services  56,269  62,414  53,589  60,192 
 Recovered Taxes and Expenses  40,061  97,315  69,237  114,875 
 Subsidies and Donations Received  30,113 
 Reversal of Other Provisions  8,220  19,769  15,963  23,226 
 Dividends of Investments Assessed by the Acquisition  Cost  1,528  360  1,528  360 
 Contingencies – Provision(1) (505,118) (247,523) (481,456) (252,200)
 Pension Funds – Provision and Administrative Costs(2) (266,195) (31,132) (266,195) (31,132)
 Taxes (Other than Gross Revenue, Corporate Income Tax  and Social Contribution) (97,185) (121,671) (120,017) (126,809)
 Goodwill Amortization on the Acquisition of Investments  (22,073) (14,715) (94,458) (61,039)
 Court Fees  (12,344) (4,899) (12,783) (4,963)
 Indemnifications – Telephony and Other  (10,394) (130) (10,465) (337)
 Donations and Sponsorships  (7,026) (10,230) (8,433) (10,991)
 Loss on Write-off of Repair/Resale Inventories  (1,006) (3,785) (2,000) (3,459)
 Other Expenses  (10,182) (9,546) (13,260) (9,091)
 Total  (585,844) (22,034) (626,306) (61,197)

(1) Provisions for contingencies are described in Note 7. 
(2) The supplement of provision for pension funds is represented by the following events: 
 (i)   Adoption of new overall mortality table (UP94 + 2), equivalent to R$ 170,505 recognized in December 2005; and
(ii)   Review of the pension benefits by decease database, regarding the composition of the family group and recovery of the purchasing power of the granted benefits, equivalent to R$ 83,262, recognized in September 2005; 

14. FINANCIAL EXPENSES, NET

  PARENT COMPANY  CONSOLIDATED
   2005  2004  2005   2004 
Financial Revenues  587,307  468,221  664,699  493,298 
     Local Currency  346,453  364,853  386,528  387,156 
     On Rights in Foreign Currency  240,854  103,368  278,171  106,142 
Financial Expenses  (1,745,410) (1,471,638) (1,887,438) (1,517,312)
     Local Currency  (745,505) (840,073) (822,754) (860,746)
     On Liabilities in Foreign Currency  (373,405) (187,065) (438,184) (212,066)
     Interest on Shareholders’ Equity  (626,500) (444,500) (626,500) (444,500)
Total  (1,158,103) (1,003,417) (1,222,739) (1,024,014)

The Interest on Shareholders’ Equity amount was reversed in the determination of the net income, minus retained earnings, in shareholders’ equity, in accordance with CVM Resolution 207/96.

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15. NON-OPERATING EXPENSES, NET

  PARENT COMPANY  CONSOLIDATED
     2005     2004     2005     2004 
Amortization of Special Goodwill on Merger (CVM Instruction 319/99) (173,550) (189,327) (173,550) (189,327)
Reversal of Provision for Maintenance of Integrity of Shareholders’ Equity (CVM Instruction 349/01) 173,550  189,327  173,550  189,327 
Amortization of Goodwill on Merger  (113,679) (124,015) (125,986) (124,738)
Result in the Write-off of Fixed and Deferred Assets  (14,340) (39,775) (18,575) (40,012)
Provision/Reversal for Investment Losses  (7,817) (17,443) (1,028) 399 
Gain (Loss) with Investments  (52,714) (51,471)
Provision/Reversal for Realization Amount and Fixed Asset Losses  2,265  56,828  (506) 62,163 
Other Non-operating Revenues (Expenses) 2,996  (5,773) (2,929) (6,419)
Total  (130,570) (182,892) (149,024) (160,078)

16. INCOME TAX AND SOCIAL CONTRIBUTION ON INCOME

Income tax and social contribution on income are recorded on an accrual basis, and the tax effects on temporary differences are deferred. The provision for income tax and social contribution on earnings recognized in the income statement are as follows:

  PARENT COMPANY  CONSOLIDATED
Income Before Taxes and after Profit Sharing     2005  2004         2005  2004 
(990,942) (52,555) (1,306,266) (117,589)
Income of Companies Not Subject to Income Tax and Social         
Contribution Calculation  -  -  72,515  29,399 
Total of Taxable Income  (990,942) (52,555) (1,233,751) (88,190)
Corporate Income Tax – IRPJ         
IRPJ on Taxable Income (10%+15%=25%) 247,736  13,139  308,438  22,048 
Permanent Additions  (209,711) (94,928) (64,475) (70,227)
   Amortization of Goodwill  (33,938) (31,004) (40,652) (37,475)
   Equity in Subsidiaries  (154,160) (39,660)
   Non-operating Equity in Subsidiaries  (217)
   Exchange Variation on Investments  (11,127) (11,127) (7,180)
   Losses with Investment  (12,899) (12,899)
   Other Additions  (10,486) (11,148) (12,696) (12,673)
Permanent Exclusions  10,674  10,396  8,106  7,191 
   Equity in Subsidiaries  5,327  5,309 
   Exchange Variation on Investments  1,143 
   Dividends of Investments Assessed by Acquisition Cost  382  90  382  90 
   Federal Tax Recoverable  4,184  4,567  4,184  4,567 
   Other Exclusions  781  430  3,540  1,391 
Tax Loss Carryforward  3,782  3,123 
Recording of Deferred Income Tax on Accumulated Tax Losses  37,007  10,100 
Other  (4,814) (7,540) (7,691) (7,241)
IRPJ Effect on Statement of Income  43,885  (78,933) 285,167  (35,006)
Continued… 

105


….Continued

  PARENT COMPANY  CONSOLIDATED
Social Contribution on Net Income – CSLL     2005  2004   2005   2004 
       
Social Contribution on Taxable Income (9%) 89,185  4,730  111,038  7,937 
Permanent Additions  (74,750) (32,721) (22,329) (23,733)
 Amortization of Goodwill  (12,218) (11,161) (14,635) (13,491)
 Equity in Subsidiaries  (55,498) (14,277)
 Non-Operating Equity in Subsidiaries  (78)
 Exchange Variation on Investments  (4,006) (4,006) (2,585)
 Losses with Investments  (4,643) (4,643)
 Other Additions  (3,028) (2,562) (3,688) (3,014)
Permanent Exclusions  3,776  3,706  2,851  2,559 
 Equity in Subsidiaries  1,918  1,911 
 Exchange Variation on Investments  411 
 Dividends of Investments Assessed by Acquisition Cost  138  32  138  32 
 Federal Tax Recoverable  1,506  1,644  1,506  1,644 
 Other Exclusions  214  119  1,207  472 
Compensation of Negative Calculation Basis  1,400  1,122 
Recording of Deferred CSLL on Accumulated Negative         
Calculation Basis  13,323  3,636 
Other  (1,325) (175) (2,384) (186)
Effect of CSLL on Statement of Income  16,886  (24,460) 103,899  (8,665)
Effect of IRPJ and CSLL on Statement of Income  60,771  (103,393) 389,066  (43,671)

In 2005, the indirect subsidiary IG Brasil accomplished the necessary requirements set forth by CVM Instruction 371/02 and recorded in December the credit of deferred taxes related to Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) at the amount of R$ 50,330.

17. EMPLOYEE AND MANAGEMENT PROFIT SHARING

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Employee Profit Sharing  (52,171) (46,112) (63,960) (51,443)
Management Profit Sharing  (1,390) (6,288) (4,273) (6,891)
Total  (53,561) (52,400) (68,233) (58,334)
Allocation to Income:         
   Interests  (52,400) (53,783)
   Costs and Operating Expenses  (53,561) (68,233) (4,551)

18. CASH AND CASH EQUIVALENTS

  PARENT COMPANY  CONSOLIDATED
  2005  2004       2005  2004 
Cash  4,747  364  5,106  2,053 
Bank Accounts  45,706  56,379  57,968  69,260 
High-Liquid Investments  1,428,587  1,906,781  1,667,009  2,326,497 
Total  1,479,040  1,963,524  1,730,083  2,397,810 

High-liquid investments represent amounts invested in exclusive funds managed by financial institutions, guaranteed in federal bonds with average profitability equivalent to interbank deposit rates DI CETIP (CDI), in exclusive funds managed by financial Institutions and guaranteed in futures contracts of dollar traded at the Futures and Commodities Exchange (BM&F), overnight financial investments abroad that earns exchange rate variation plus interest of 4.00% p.a., deposit certificates issued by foreign financial institutions, and Certificate Deposits (CDBs) issued by first-rate financial institutions with average profitability equivalent to CDIs.

106


The Company will be subject to the partial block of its financial investments, at the approximate total amount of R$ 252,014, to occur after the publication of its audited financial statements. Such retention is due to the fact that the Company did not reach certain minimum amounts for certain indicators, such as cash generation, indebtedness and other, established in agreements entered into with financing creditors. Further information about the block and its duration period, during which the investments will continue providing yields to the Company can be checked in Note 5, h.

The breakdown of high-liquid investment portfolio is presented below, on the balance sheet closing date:

  PARENT COMPANY 
  2005 
Financial Institution  Investments Nature 
LTN (swap 
coverage)
LFT  Overnight  NBC-E  Over Selic 
Exclusive Funds           
 ABN Amro  96,143  49,068  1,780 
 Banco do Brasil  20,396  100,635  3,075 
 Bradesco  25,219  10,198  1,120 
 CEF  69,599  26,528  8,906 
 Itaú  46,958  39,538 
 Safra  77,457  8,849  3,332 
 Santander  145,415  82,672  25,065  82 
 Unibanco  50,668  144,413  38 
 Votorantim  140,353  26,702  1,987 
Total Exclusive Funds  672,208  488,603  -  25,065  20,320 
Other Investments           
 Safra  213,028 
Total of Other Investments  -  -  213,028  -  - 
Total High-Liquid Investments  672,208  488,603  213,028  25,065  20,320 
Continued… 

107


…continued

  PARENT COMPANY 
  2005 
Financial Institution  Investments Nature  Rectifier  Total 
NTN-D  Open
 Investment 
Funds (Fixed 
Income)
Provision for
Income Tax
  
Liabilities 
Exclusive Funds           
 ABN Amro  (1,074) (33) 145,884 
 Banco do Brasil  (707) (2) 123,397 
 Bradesco  (164) 36,373 
 CEF  (793) (18) 104,222 
 Itaú  (547) (24) 85,925 
 Safra  (693) (34) 88,911 
 Santander  17,228  (1,843) (22) 268,597 
 Unibanco  (1,197) (25) 193,897 
 Votorantim  (764) (18) 168,260 
Total Exclusive Funds  17,228  -  (7,782) (176) 1,215,466 
Other Investments           
 Safra  213,028 
 Other Institutions  93  93 
Total of Other Investments  -  93  -  -  213,121 
Total High-Liquid Investments  17,228  93  (7,782) (176) 1,428,587 

  CONSOLIDATED
  2005 
Financial Institution  Investment Nature 
LTN (swap
coverage)
 
LFT  Overnight  NBC-E  Over Selic  NTN-D 
Exclusive Funds             
 ABN Amro  96,143  49,068  1,779 
 Banco do Brasil  34,652  215,783  3,080 
 Bradesco  30,899  12,495  1,372 
 CEF  71,506  27,254  244  8,906 
 Itaú  46,958  39,538 
 Safra  77,457  8,849  3,332 
 Santander  154,269  87,704  26,591  87  18,277 
 Unibanco  56,856  162,052  42 
 Votorantim  140,353  26,702  1,987 
Total of Exclusive Funds  709,093  629,445  244  26,591  20,585  18,277 
Other Investments             
 Safra  222,358 
Total of Other Investments  -  -  222,358  -  -  - 
Total High-Liquid Investments  709,093  629,445  222,602  26,591  20,585  18,277 
Continued… 

108


…continued

  CONSOLIDATED
  2005 
Financial Institution  Investments Nature  Rectifier  Total 
Open
 Investment 
Funds (Fixed 
Income)
Bank Deposit
Certificates
 
Provision for 
Income Tax 
Liabilities
Exclusive Funds           
 ABN Amro  (1,074) (33) 145,883 
 Banco do Brasil  12  (1,476) (13) 252,038 
 Bradesco  100  (164) 44,702 
 CEF  (811) (19) 107,080 
 Itaú  (547) (24) 85,925 
 Safra  (693) (34) 88,911 
 Santander  (1,842) (23) 285,063 
 Unibanco  (1,197) (28) 217,725 
 Votorantim  (764) (18) 168,260 
Total of Exclusive Funds  112  -  (8,568) (192) 1,395,587 
Other Investments           
 Safra  468  222,826 
 Other Institutions  37,884  10,712  48,596 
Total of Other Investments  37,884  11,180  -  -  271,422 
Total High-Liquid Investments  37,996  11,180  (8,568) (192) 1,667,009 

Exclusive funds, which are regularly audited and for which there is no unqualified opinion, are subject to liabilities restricted to the payment of services rendered by the asset management, attributed to investment operations, such as custody, audit and other expenses rates, not existing relevant financial liabilities, as well as Company’s assets to guarantee those liabilities.

Statement of Cash Flows

  PARENT COMPANY  CONSOLIDATED
  2005  2004     2005     2004 
Operating Activities         
Net Income (Loss) for the Year  (303,671) 288,552  (303,671) 276,964 
Minority Interest  -  -  12,971  6,276 
Income Items not Affecting Cash  5,189,315  4,218,263  5,265,602  4,262,715 
   Depreciation and Amortization  2,375,496  2,457,592  2,794,545  2,589,649 
   Losses on Accounts Receivables from Services  303,717  350,505  328,803  353,750 
   Allowance for Doubtful Accounts  93,267  54,024  120,451  56,594 
   Provision for Contingencies  505,118  247,523  481,456  252,200 
   Provision for Pension Funds  266,195  31,132  266,195  31,132 
   Deferred Taxes  351,519  213,634  593,294  270,013 
   Income in Permanent Assets Write-off  27,270  59,005  27,958  54,389 
   Financial Charges  626,898  668,025  652,900  648,966 
   Equity in Subsidiaries  639,840  137,402 
   Other (Revenues) Expenses  (5) (579) 6,022 
Continued ...

109


... continued

  PARENT COMPANY  CONSOLIDATED
  2005  2004       2005       2004 
Equity Changes  (1,486,346) (971,092) (2,100,536) (1,400,592)
 Accounts Receivable from Clients  (360,197) (529,965) (490,488) (662,210)
 Inventories  1,120  20,998  90,998  (146,938)
 Judicial Deposits  (167,685) (160,267) (168,738) (163,021)
 Payroll, Social Charges and Benefits  (1,826) (5,117) 142  8,651 
 Accounts Payable and Accrued Expenses  84,598  31,807  50,263  133,161 
 Taxes  (785,085) 106,379  (1,369,806) (130,966)
 Provisions for Contingencies  (216,941) (252,414) (217,538) (252,906)
 Provisions for Pension Plans  (98,280) (98,476) (98,280) (98,476)
 Other Assets and Liabilities Accounts  57,950  (84,037) 102,911  (87,887)
Cash Flow from Operating Activities  3,399,298  3,535,723  2,874,366  3,145,363 

Financing Activities         
 Dividends/Interest on Shareholders’ Equity Paid in the Year  (571,611) (208,089) (571,611) (208,089)
 Loans and Financing  (1,006,213) (11,228) (990,734) (1,502)
     Loans Obtained  507,243  2,426,589  522,722  2,427,008 
     Loans Settled  (958,135) (1,826,308) (958,135) (1,826,308)
     Interest Rates Settled  (555,321) (611,509) (555,321) (602,202)
 Increase (Decrease) of Shareholders’ Equity  11,589 
 Acquisition of Own Shares  (62,272) (37,550) (62,272) (37,550)
 Other Flows from Financing Activities  9,990  (231)
Cash Flow from Financing Activities  (1,640,096) (256,867) (1,614,627) (235,783)

  2005     2004  2005     2004 
Investment Activities         
 Financial Investments  88,360  (87,575) 499  3,389 
 Investments Suppliers  201,365  159,136  25,122  765,779 
 Funds Obtained in the Sale of Permanent Assets  3,028  7,330  3,544  7,367 
 Investments in Permanent Assets  (2,536,439) (2,805,553) (1,956,631) (2,754,070)
       Investments  (2,536,439) (2,339,839) (1,956,631) (2,344,146)
       Investments by Acquisition of New Companies  (465,714) (409,924)
             Acquisition Amount  (465,714) (465,714)
             Cash and Cash Equivalents Added  55,790 
 Other Flows from Investment Activities  (2,004)
Cash Flow from Investment Activities  (2,243,686) (2,728,666) (1,927,466) (1,977,535)
 
Cash Flow for the Period  (484,484) 550,190  (667,727) 932,045 

Cash and Cash Equivalents         
 Closing Balance  1,479,040  1,963,524  1,730,083  2,397,810 
 Opening Balance  1,963,524  1,413,334  2,397,810  1,465,765 
Variation of Cash and Cash Equivalents  (484,484) 550,190  (667,727) 932,045 

110


19. TRADE ACCOUNTS RECEIVABLE

The amounts related to accounts receivable are as follows:

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Billed Services  1,339,991  1,314,433  1,432,862  1,363,406 
Services to be Billed  926,568  893,804  961,060  911,655 
Sales of Goods  2,835  4,677  120,337  79,699 
Subtotal  2,269,394  2,212,914  2,514,259  2,354,760 
Allowance for Doubtful Accounts  (329,805) (236,538) (361,446) (243,181)
   Services Rendered  (329,805) (236,538) (353,078) (241,022)
   Sales of Goods  (8,368) (2,159)
Total  1,939,589  1,976,376  2,152,813  2,111,579 
Due  1,452,630  1,416,212  1,633,154  1,518,169 
Past due:         
 01 to 30 Days  379,398  368,967  398,356  386,039 
 31 to 60 Days  120,932  124,032  130,378  134,899 
 61 to 90 Days  74,815  82,676  82,622  86,120 
 91 to 120 Days  65,022  62,077  71,340  64,723 
 More than 120 Days  176,597  158,950  198,409  164,810 

20. INVENTORIES

The maintenance and resale inventories, to which provisions are recorded for losses or adjustments to the forecast in which they must be realized, are composed as follows:

  PARENT COMPANY  CONSOLIDATED
  2005  2004   2005  2004 
Maintenance Inventory  6,576  8,606  12,497  15,679 
Inventory for Resale (Cell Phones and Accessories) 114,340  209,024 
Provision for the Adjustment to the Realization Value  (37,036) (43,814)
Provision for Potential Losses  (1,599) (2,509) (6,766) (6,856)
Total  4,977  6,097  83,035  174,033 

21. LOANS AND FINANCING - ASSETS

  PARENT COMPANY  CONSOLIDATED
   2005  2004  2005  2004 
Loans and Financing       9,084  97,888  9,173  10,744 
Total       9,084  97,888  9,173  10,744 
Current       3,873  1,065  3,962  2,540 
Long-term       5,211  96,823  5,211  8,204 

Loans and financing credits refer to the transfer of financial resources to the company responsible for the production of phone directories, and result from the sale of fixed assets to other telephony companies. The variations of IGP-DI and IPA-OG/Industrial Products of Column 27 issued by Fundação Getúlio Vargas – FGV are incurred.

On 12/31/2004, an amount of R$ 88,619 was recorded related to a loan agreement entered with BrT SCS Bermuda, remunerated with pre-fixed interest rates of 3% p.a. and settlement of which occurred at early 2005.

111


22. DEFERRED AND RECOVERABLE TAXES

Deferred taxes related to Corporate Income Tax and Social Contribution on Income

  PARENT COMPANY  CONSOLIDATED
   2005   2004     2005   2004 
Corporate Income Tax         
Deferred Income Tax on:         
 Tax Losses  298,795  52,652 
 Provision for Contingencies  244,905  172,861  245,440  172,887 
 Provision for Pension Plan Actuarial Insufficiency Coverage  182,022  125,362  182,022  125,362 
 Allowance for Doubtful Accounts  82,451  59,135  90,216  60,448 
 ICMS - 69/98 Agreement  66,391  50,761  68,601  50,761 
 Exchange Variation Loss - Swap  56,367  56,367 
 Provision for Cofins/CPMF/INSS – Suspended Collection  13,864  16,110  13,864  16,110 
 Provision for Employee Profit Sharing  11,963  10,222  14,029  11,643 
 Goodwill on CRT Acquisition  43,387  43,387 
 Other Provisions  21,580  14,192  24,615  14,648 
 Subtotal  679,543  492,030  993,949  547,898 
Social Contribution on Income         
Deferred Social Contribution on:         
 Negative Calculation Basis  107,736  18,996 
 Provision for Contingencies  88,165  62,230  88,358  62,239 
 Provision for Pension Plan Actuarial Insufficiency Coverage  65,528  45,130  65,528  45,130 
 Allowance for Doubtful Accounts  29,681  21,288  32,478  21,761 
 Exchange Variation Loss – Swap  20,292  20,292 
 Provision for Employee Profit Sharing  4,432  4,229  5,188  4,752 
 Goodwill on CRT Acquisition  15,619  15,619 
 Other Provisions  8,747  6,086  10,622  6,251 
 Subtotal  216,845  154,582  330,202  174,748 
Total  896,388  646,612  1,324,151  722,646 
Current  340,869  275,453  364,919  283,220 
Long-term  555,519  371,159  959,232  439,426 

The following table shows the periods in which the deferred tax assets corresponding to income tax and social contribution on net income (CSLL) are expected to be realized, which are derived from temporary differences between book value on the accrual basis and the taxable income. The realization periods are based on a technical study that used forecast future taxable income, generated in fiscal years when the temporary differences will become deductible expenses for tax purposes. These assets are recorded in accordance with CVM Instruction 371/02 requirements, and technical study was approved by the board of executive officers and the Board of Directors, as well as its examination by the Fiscal Council.

112




  PARENT
COMPANY
 
CONSOLIDATED
2006  340,869  364,919 
2007  126,996  132,735 
2008  93,087  103,737 
2009  70,688  90,703 
2010  61,689  98,671 
2011 to 2013  27,875  358,202 
2014 to 2015  18,583  18,583 
After 2015  156,601  156,601 
Total  896,388  1,324,151 
Current  340,869  364,919 
Long-term  555,519  959,232 

The recoverable amount expected after 2015 is a result of a provision to cover an actuarial insufficiency of pension plans that is being settled according to the maximum remaining period of 16 years, in line with the period established by the Supplementary Pension Department (“SPC”). Despite the time limit stipulated by the SPC and according to the estimated future taxable income, the Company presents conditions to fully offset the deferred taxes in a period lower than ten years, if it opts to fully anticipate the payment of the debt. Tax credits in the amount of R$ 129,416, attributed to the Consolidated, were not recorded due non-existence of necessary requirements for the history and/or future forecast of taxable income in VANT, BrT Multimídia, BrT CSH and BrT CS Ltda, subsidiaries that the Company holds direct or indirect control.

Other Taxes Recoverable

They are comprised of federal withholding taxes and payments made, calculated based on legal estimates, which will be offset against future tax obligations. The ICMS recoverable arises, for the most part, from credits recorded in the acquisition of fixed assets, whose compensation with ICMS payable may occur in up to 48 months, according to Supplementary Law 102/00.

  PARENT COMPANY  CONSOLIDATED
  2005  2004   2005  2004 
ICMS  362,165  324,237  496,163  493,001 
Corporate Income Tax  322,806  72,471  343,272  88,812 
PIS and COFINS  69,022  71,375  100,059  107,755 
FUST  26,745  26,745 
Social Contribution on Net Income  78,595  20,006  80,114  21,660 
Other  850  1,915  4,420  4,776 
Total  833,438  516,749  1,024,028  742,749 
Current  629,320  285,105  757,629  452,480 
Long-term  204,118  231,644  266,399  290,269 

In 2005, the Company written-off the credit related to FUST at the restated amount of R$ 30,811.Such credit had been recognized by its original value in 2004 and considered the exclusion of the interconnection cost of the calculation basis related to contributions previously paid. Such recognition was in accordance with what was ratified by Order 281/04 from ANATEL. However, ANATEL, through Official Letter 256/05 as of 10/19/05, cancelled Order Nr. 281/04, an event which led the Company to proceed with the annulment of credit previously recorded.

113


23. INCOME SECURITIES

Represented by bank deposit certificates (CDB) of Banco de Brasília S.A. – BRB, remunerated with 95% of SELIC rate, maintained as guarantee of the financing obtained through the Program to Promote Integrated Economic and Sustainable Development of the Federal District – PRÓ-DF). These income securities will be maintained during the period of utilization and amortization of financing (liability), whose grace period establishes the first payment for year 2019, payable in 180 monthly, consecutive installments. This asset may be used to pay the final installments of that financing.

  PARENT COMPANY  CONSOLIDATED
  2005  2005 
Banco de Brasília S.A. BRB – Bank Deposit Certificates  502  2,604 
Total  502  2,604 
Long-Term  502  2,604 

24. JUDICIAL DEPOSITS

Balances of judicial deposits related to contingencies and taxes challenged (suspended collection)

  PARENT COMPANY  CONSOLIDATED
Subject to (by Nature of Demands) 2005  2004  2005  2004 
Labor  386,077  318,110  386,829  318,724 
Tax  340,662  272,656  341,867  274,625 
     Taxes Challenged- ICMS 69/98 Agreement  265,894  202,979  266,006  202,987 
     Other  74,768  69,677  75,861  71,638 
Civil  59,186  27,474  61,040  27,649 
Total  785,925  618,240  789,736  620,998 
Current  147,724  144,260  148,469  144,770 
Long-term  638,201  473,980  641,267  476,228 

25. OTHER ASSETS

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Advances to Suppliers  49,394  31,356  47,549  40,720 
Advances to Employees  22,880  22,508  30,593  25,818 
Receivables from Other Telecom Companies  8,018  100,330  8,018  100,330 
Prepaid Expenses  72,714  82,462  90,697  89,865 
Tax Incentives  14,473  14,473  14,473  14,473 
Compulsory Deposits  1,750  1,750  1,750  1,750 
Contractual Guarantees and Retentions  460  1,460  1,299  34,181 
Assets for Sale  578  276  9,175  276 
Other  8,993  8,336  11,445  13,518 
Total  179,260  262,951  214,999  320,931 
Current  124,288  183,031  147,781  235,582 
Long-term  54,972  79,920  67,218  85,349 

114


26. INVESTMENTS

  PARENT COMPANY  CONSOLIDATED
   2005  2004  2005  2004 
Investments Carried Under The Equity Method  2,348,514  1,808,246  -  - 
     14 Brasil Telecom Celular S.A.  1,531,459  1,110,720 
     BrT Serviços de Internet S.A.  367,702  309,350 
     BrT Subsea Cable Systems (Bermudas) Ltd.  336,632  276,555 
     MTH Ventures do Brasil Ltda.  112,717  111,617 
     Santa Bárbara dos Pampas S.A 
     Santa Bárbara dos Pinhais S.A 
     Santa Bárbara do Cerrado S.A 
     Santa Bárbara do Pantanal S.A 
Advances for Future Capital Increase  -  57,649  -  - 
     BrT Serviços de Internet S.A  48,304 
     Vant Telecomunicações S.A.  9,345 
Goodwill Paid on Acquisition of Investments, Net  73,578  95,651  330,551  410,614 
     MTH Ventures do Brasil  73,578  95,651  73,578  95,651 
     IG Cayman  203,168  234,303 
     Companies IBEST  49,102  74,076 
     Companies BRT Cabos Submarinos  4,703  6,584 
Interest Valued at Acquisition Cost  39,148  39,147  39,148  39,148 
Tax Incentives (Net of Allowance for Losses) 20,375  27,456  20,375  27,456 
Other Investments  373  373  389  389 
Total  2,481,988  2,028,522  390,463  477,607 

The Company holds a 100% interest in the capital stock of VANT Telecomunicações S.A., whose 19.9% acquisition process occurred in the fiscal year of 2001, and the remaining acquisition was concluded in the second quarter of 2004. On the balance sheet closing date, VANT negative shareholders’ equity was R$ 19,028 (R$ 16,946 on 12/31/04), and a provision at the amount of the unsecured liabilities of the Subsidiary was recorded in the Company.

Advances for future capital increase in favor of the subsidiaries were considered in the investments appraisal, since the allocated investments are waiting for the formalization of the corporate acts of these companies to perform the respective capital increases in favor of the Company.

Investments Valued Using the Equity Method: the main data related to directly controlled companies are as follows:

  BrT Celular  BrTI  BrT SCS 
2005  2004  2005  2004  2005  2004 
Shareholders’ Equity  1,531,459  1,110,720  367,702  309,350  423,606  372,926 
Capital  2,237,415  1,218,000  388,071  339,767  438,686  404,622 
Book Value per Share/Quota (R$) 684.48  911.92  947.51  910.48  2.16  1.90 
Number of Shares/Quotas Held by the Company         
     Common Shares  2,237,415  1,218,000  388,071  339,767  196,156,891 196,110,176 
Ownership % in Subsidiary’s Capital         
     In Total Capital  100%  100%  100%  100%  79.4689%  74.1584% 
     In Voting Capital  100%  100%  100%  100%  79.4689%  74.1584% 
Net Income (Losses) for the Year  (598,676) (119,100) 10,048  20,291  12,869  (15,108)

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  MTH  VANT 
2005  2004  2005  2004 
Shareholders’ Equity  112,717  111,617  (19,028) (16,946)
Capital Stock  321,150  321,084  123,300  105,959 
Book Value per Share/Quota (R$) 350.98  347.63  (154.32) (159.93)
Number of Shares/Quotas Held by the Company         
     Common Shares  123,300  105,959 
     Quotas  321,150  321,084 
Ownership % in Subsidiary’s Capital         
     In Total Capital  100%  100%  100%  100% 
     In Voting Capital  100%  100%  100%  100% 
Net Income (Losses) for the year  1,034  1,553  (19,423) (2,738)

The equity method result is composed of the following values:

  Operating  Non-Operating 
2005   2004  2005  2004 
14 Brasil Telecom Celular S.A.  (598,676) (107,280)
BrT Serviços de Internet S.A.  10,048  (20,291)
BrT Subsea Cable Systems (Bermudas) Ltd.  (32,823) (8,646) (866)
MTH Ventures do Brasil Ltda.  1,034  1,553 
Vant Telecomunicações S.A.  (19,423) (2,738)
Total  (639,840) (137,402) 5  (866)

The subsidiaries Santa Bárbara dos Pampas S.A., Santa Bárbara dos Pinhais S.A., Santa Bárbara do Cerrado S.A. and Santa Bárbara do Pantanal S.A. are not operating, and the amount of capital stock is R$ 1 (R$ 1 on 12/31/04), for each company, and the Company’s ownership interest in the capital stock of the aforementioned subsidiaries is 100%.

Investments assessed using the cost of acquisition: correspond to shareholding obtained by converting shares or capital quotas of the tax incentive investments in the FINOR/FINAM regional programs, the Incentive Law for Information Technology Companies, and the Audiovisual Law. The amount is predominantly composed of shares of other telecommunications companies located in the regions covered by the regional incentives.

Tax incentives: arise from investments in FINOR/FINAM and audiovisual funds, originated in the portions allocated to income tax due.

Other investments: are related to collected cultural assets.

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27. PROPERTY, PLANT AND EQUIPMENT

  PARENT COMPANY 
Property, Plant and Equipment
 Nature
2005     2004 
Annual 
depreciation 
rates 
Cost Accumulated
depreciation
Net Value  Net Value 
Work in Progress  491,054  491,054  364,632 
Public Switching Equipment  20%  4,924,000  (4,551,306) 372,694  605,353 
Equipment and Transmission Means  17.5%(1) 10,514,674  (8,083,569) 2,431,105  3,046,615 
Termination  20%  483,265  (446,137) 37,128  56,626 
Data Communication Equipment  20%  1,585,524  (800,614) 784,910  708,926 
Buildings  4%  912,015  (496,686) 415,329  406,151 
Infrastructure  9%(1) 3,459,739  (2,034,950) 1,424,789  1,588,171 
Assets for General Use  18.5%(1) 803,808  (536,353) 267,455  257,762 
Land  81,319  81,319  80,997 
Other Assets  19.9%(1) 658,977  (441,147) 217,830  243,081 
Total    23,914,375  (17,390,762) 6,523,613  7,358,314 
(1) Annual weighted average rate. 

According to the STFC concession agreements, the Company’s assets that are indispensable to providing the service and qualified as “reversible assets” will be automatically reverted to ANATEL when the concession ends, and the Company will be entitled to indemnifications established in the legislation and in the respective agreements. The amount of reversible assets on the balance sheet closing date was R$ 20,475,919 for costs, with residual value of R$ 4,827,626 (unaudited information).

  CONSOLIDATED 
Property, Plant and Equipment 
Nature
2005     2004 
Annual 
depreciation
rates
Cost Accumulated 
depreciation 
Net Value  Net Value 
Work in Progress  636,251  636,251  656,703 
Public Switching Equipment  20%  5,017,676  (4,566,952) 450,724  644,494 
Equipment and Transmission Means  17.5%(1) 11,542,468  (8,351,207) 3,191,261  3,645,512 
Termination  20%  483,618  (446,182) 37,436  56,674 
Data Communication Equipment  20%  1,647,380  (834,721) 812,659  733,051 
Buildings  4%  934,657  (504,403) 430,254  426,254 
Infrastructure  9%(1) 3,657,127  (2,079,967) 1,577,160  1,704,986 
Assets for General Use  18.5%(1) 994,576  (604,847) 389,729  361,763 
Land  86,411  86,411  86,089 
Other Assets  19.9%(1) 1,094,048  (480,984) 613,064  581,700 
Total    26,094,212  (17,869,263) 8,224,949  8,897,226 
(1) Annual weighted average rate. 

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Rent Expenses

The Company and its subsidiaries rent properties, posts, access through third-party land areas (roads), equipment, and connection means, formalized through several contracts, which mature on different dates. Some of these contracts are intrinsically related to the provision of services and are long-term agreements. Total rent expenses, means and connections related to such contracts amount to R$ 456,476 (R$ 453,434 in 2004) and R$ 498,340 (R$ 386,021 in 2004) for the Consolidated.

Leasing

The Company has financial leasing agreements for information technology equipment. Recorded leasing expenses amounted to R$ 11,265 (R$ 13,868 in 2004) and R$ 13,032 (R$ 16,678 in 2004) for the Consolidated.

In the year-end closing, the position of amounts payable from lease agreements, per year of disbursements, is as follows:

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
2005  8,468  8,468 
2006  13,420  8,465  14,080  8,465 
2007  13,320  8,512  13,980  8,512 
2008  11,443  6,968  11,608  6,968 
2009  1,909  3,828  1,909  3,828 
2010  1,394  1,394 
2011  1,386  1,386 
2012 and after  2,065  2,065 
Total Minimum Payments to Be Made  40,092  41,086  41,577  41,086 

The average period for contracting information technology equipment is of 47 months and its remuneration is subject to the DI-Over rate variation.

Insurance (unaudited)

An insurance policy program is maintained for covering reversible assets, loss of profits and contract guarantees, as established in the Concession Contract with the government. Insurance expenses were R$ 9,473 (R$ 9,765 in 2004) and R$ 12,448 (R$ 10,624 in 2004) for the Consolidated.

The assets, responsibilities and interests covered by insurance are the following:

                   Type  Coverage  Amount Insured 
2005  2004 
Operating risks  Buildings, machinery and equipment, facilities, call centers, towers, infrastructure and information technology equipment  11,923,121  11,745,459 
Loss of profit  Fixed expenses and net income  8,163,247  7,370,615 
Contract Guarantees  Compliance with contractual obligations  214,142  120,870 
Civil Liability  Telephone service operations  12,000  12,000 

There is also insurance coverage for the management civil liability, supported in the policy of Brasil Telecom Participações S.A., extensive to the Parent Company and the Company ,and the total amount insured is equivalent to thirty million U.S. dollars (US$ 30,000,000,00).

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There is no insurance coverage for optional civil liability related to third party claims involving Company’s vehicles.

The assumptions of adopted risks, given their nature, do not integrate the scope of a financial statement audit, consequently, they were not examined by our independent accountants.

28. DEFERRED CHARGES

  PARENT COMPANY  
  2005  2004 
Cost  Accumulated
 Amortization 
 Net 
Value 
 Net 
Value
 
Data Processing Systems  706,519  (283,683) 422,836  412,209 
Installation and Reorganization Costs  53,522  (27,039) 26,483  39,559 
Goodwill on CRT Merger  620,073  (620,073) 113,680 
Other  14,249  (8,364) 5,885  7,229 
Total  1,394,363  (939,159) 455,204  572,677 

The goodwill arose from the merger of CRT and the amortization was carried out over five years, based on the expected future profitability of the acquired investment. As established in CVM Instruction 319/99, the amortization of goodwill does not affect the calculation basis of the dividends to be distributed by the Company.

  CONSOLIDATED 
  2005  2004 
Cost  Accumulated
 Amortization 
 Net 
Value 
 Net 
Value
 
Data Processing Systems  920,247  (332,636) 587,611  538,470 
Installation and Reorganization Costs  336,519  (149,630) 186,889  258,866 
Goodwill derived from Merger  649,640  (648,492) 1,148  120,346 
Other  14,931  (8,524) 6,407  8,499 
Total  1,921,337  (1,139,282) 782,055  926,181 

29. PAYROLL AND RELATED CHARGES

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Salaries and Compensation  145  3,995  4,553 
Payroll Charges  49,150  50,437  61,091  60,420 
Benefits  5,421  4,964  6,383  5,588 
Other  5,608  6,749  6,745  7,511 
Total  60,324  62,150  78,214  78,072 
Current  60,324  57,316  78,214  73,238 
Long-term  4,834  4,834 

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30. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Suppliers  1,285,984  1,063,628  1,807,892  1,772,984 
Third-Party Consignments (1) 137,580  73,973  154,696  114,219 
Total  1,423,564  1,137,601  1,962,588  1,887,203 
Current  1,402,245  1,134,097  1,941,231  1,883,699 
Long-term  21,319  3,504  21,357  3,504 

(1) On 12/31/05, R$ 57,960 refers to withholding income tax on JSCP credit occurred on 12/30/05. 

The amounts recorded under long-term are derived from liabilities to remunerate the third party network, the settlement of which depends on verification between the operators, such as the reconciliation of traffic.

31. INDIRECT TAXES

  PARENT COMPANY  CONSOLIDATED
     2005   2004   2005   2004 
ICMS (State VAT) 1,076,926  1,106,376  1,124,874  1,192,853 
Taxes On Operating Revenues (PIS and COFINS) 146,934  129,282  158,965  139,773 
Other  38,129  13,558  52,764  23,075 
Total  1,261,989  1,249,216  1,336,603  1,355,701 
Current  705,383  647,644  776,527  750,759 
Long-term  556,606  601,572  560,076  604,942 

The Company paid PIS and COFINS taxes in installments, through the Special Payment in Installments (PAES), whose balance, restated by the long-term interest rate (TJLP), amounts to R$ 31,224 (R$ 42,596 on 12/31/04), to be paid in installments for the remaining 90 months.

The main long-term portion recorded refers to ICMS - 69/98 Agreement, which is being challenged in court, and is being deposited in escrow. It also includes the ICMS deferral, based on incentives by the government of the State of Paraná.

32. TAXES ON INCOME

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Corporate Income Tax         
Payables Due  140,561  36,561  151,510  42,293 
Law 8,200/91 - Special Monetary Restatement  7,323  8,264  7,323  8,264 
Suspended collection  18,577  18,577 
Subtotal  147,884  63,402  158,833  69,134 
Social Contribution on Income         
Payables Due  45,134  9,151  47,071  11,061 
Law 8,200/91 - Special Monetary Restatement  2,636  2,975  2,636  2,975 
Subtotal  47,770  12,126  49,707  14,036 
Total  195,654  75,528  208,540  83,170 
Current  186,782  40,898  199,127  47,964 
Long-term  8,872  34,630  9,413  35,206 

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The Company maintains debts registered at the Tax Recovery Program (“REFIS”), related to the denial of tax losses carried forward, derived from CRT and TBS (merged companies in 2000) at the amount of R$ 33,334, the settlement of which awaits ratification for tax credits offset.

33. DIVIDENDS/INTEREST ON SHAREHOLDERS’ EQUITY AND PROFIT SHARING

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Controlling Shareholders  220,708  250,236  220,708  250,236 
 Dividends/Interest on Shareholders’ Equity  259,656  294,395  259,656  294,395 
 Withholding Income Tax on Interest on Shareholders’ Equity  (38,948) (44,159) (38,948) (44,159)
Minority Shareholders  155,871  160,996  155,871  160,996 
 Dividends/Interest on Shareholders’ Equity  126,744  150,105  126,744  150,105 
 Withholding Income Tax on Interest on Shareholders’ Equity  (19,012) (22,516) (19,012) (22,516)
 Unclaimed Dividends of Previous Years  48,139  33,407  48,139  33,407 
Employees and Management Profit Sharing  54,149  52,965  64,445  60,839 
TOTAL  430,728  464,197  441,024  472,071 

34. LOANS AND FINANCING (Including Debentures)

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Loans  58,378  73,990  81,668  100,820 
Financing  4,362,862  4,744,080  4,379,027  4,744,080 
Accrued Interest and Other on Loans  420  533  420  535 
Accrued Interest and Other on Financing  447,110  436,063  447,110  436,063 
Total  4,868,770  5,254,666  4,908,225  5,281,498 
Current  1,489,117  1,103,131  1,489,384  1,103,133 
Long-term  3,379,653  4,151,535  3,418,841  4,178,365 

Financing

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
BNDES  2,386,442  2,327,031  2,386,442  2,327,031 
Financial Institutions  1,311,564  1,333,577  1,327,729  1,333,577 
Private Debentures  560,459  972,006  560,459  972,006 
Public Debentures  547,767  541,707  547,767  541,707 
Suppliers  3,740  5,822  3,740  5,822 
Total  4,809,972  5,180,143  4,826,137  5,180,143 
Current  1,481,829  1,094,810  1,482,096  1,094,810 
Long-term  3,328,143  4,085,333  3,344,041  4,085,333 

Financing denominated in local currency: bear fixed interest rates from 2.4% p.a. to 14% p.a., resulting in a weighted average rate of 6.5% p.a. and variable interest based on TJLP (Long-term interest rates) plus 3.85% to 6.5% p.a., UMBNDES (unit of the National Social and Economic Development Bank) plus 3.85% p.a. to 6.5% p.a., 100% of CDI, CDI + 1.0%, and General Market Price Index (IGP-M) plus 12% p.a. resulting, these variable interest, in a weighted average rate of 15.1% p.a.

Financing denominated in foreign currency: bear fixed interest rates of 0% to 9.38% p.a., resulting in a weighted average rate of 8.2% p.a. and variable interest rates of LIBOR plus 0.5% to 2.5% p.a., 1.92%

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p.a. over the YEN LIBOR, resulting in a weighted average rate of 2.4% p.a. The LIBOR and YEN LIBOR rates on 12/30/05, semiannual payments were 4.70% p.a. and 0.06938% p.a., respectively.

Private Debentures: bear interest rates of 100% of CDI. The 1,300 private debentures that are non-convertible and cannot be swapped for stock of any kind were issued on January 27, 2001 at a unit price of R$ 1,000 and were fully subscribed by the Parent Company Brasil Telecom Participações S.A. The final maturity of these debentures balance is estimated to 7/27/2006, corresponding to 40% of the issued amount.

Public Debentures:

Third Public Issue: 50,000 debentures non-convertible into shares without renegotiation clause, with a unit face value of R$ 10, totaling R$ 500,000, issued on July 5, 2004. The maturity period is five years, coming due on July 5, 2009. Yield corresponds to an interest rate of 100% of the CDI plus 1% p.a., payable half-yearly.

On December 31, 2005 there were no own issuance debentures acquired.

Loans

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Loans with Parent Company  58,798  74,523  58,798  74,523 
Other Loans  23,290  26,832 
Total  58,798  74,523  82,088  101,355 
Current  7,288  8,321  7,288  8,323 
Long-term  51,510  66,202  74,800  93,032 

The loans balance with the Parent Company is restated according to the U.S. Dollar variation, plus interest of 1.75% p.a..

The amount recorded as Other Loans, at the amount of R$ 23,290 (R$ 26,411 referring to the highest installment on 12/31/04) refers to a VANT’s debt with the former parent company. Such liability is due on 12/31/15, restated only by the U.S. dollar exchange variation.

Repayment Schedule

The long-term debt is scheduled to be paid in the following years:

  PARENT COMPANY  CONSOLIDATED
     2005     2004     2005     2004 
2006  1,238,379  1,238,379 
2007  927,173  788,959  927,173  788,959 
2008  510,736  385,837  510,736  385,837 
2009  914,024  793,960  914,024  793,960 
2010  409,718  290,973  409,718  290,973 
2011  128,431  102,171  128,431  102,171 
As From 2012  489,571  551,256  528,759  578,086 
Total  3,379,653  4,151,535  3,418,841  4,178,365 

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Currency/index debt composition

  PARENT COMPANY  CONSOLIDATED
Restated by     2005     2004     2005     2004 
TJLP (Long-Term Interest Rate) 2,076,211  2,012,487  2,076,211  2,012,487 
CDI  1,108,226  1,513,713  1,108,226  1,513,713 
US Dollars  608,853  728,924  632,143  755,335 
Yens  431,947  565,498  431,947  565,498 
Hedge of the Debt in Yens  311,585  76,659  311,585  76,659 
UMBNDES – BNDES Basket of Currencies  272,601  275,565  272,601  275,565 
Hedge in UMBNDES  37,630  38,979  37,630  38,979 
IGP-M  8,158  16,724  8,158  16,724 
Hedge of the Debt in Dollars  (116) 10,531  (116) 10,531 
IGP-DI  3,145  19,310 
Other  10,530  15,586  10,530  16,007 
Total  4,868,770  5,254,666  4,908,225  5,281,498 

Guarantees

Loans and financing contracted are guaranteed by collateral of pledge of credit rights derived from the provision of telephony services and the Parent Company’s surety.

The Company has hedge contracts on 43.4% (42.4% for the Consolidated) of its U.S. dollar-denominated and yen loans and financing with third parties and 22.7% of the debt in UMBNDES (basket of currencies) with the BNDES, to protect against significant fluctuations in the quotations of these debts restatement factors. Gains and losses on these contracts are recognized on an accrual basis.

35. LICENSES TO EXPLOIT SERVICES

  CONSOLIDATED
  2005  2004 
Personal Mobile Service  295,300  294,404 
Other Authorizations  12,490  11,200 
Total  307,790  305,604 
Current  55,516  44,056 
Long-term  252,274  261,548 

The authorizations for Personal Mobile Services (SMP) are represented by the terms signed, in 2002 and 2004, by the subsidiary 14 Brasil Telecom Celular S.A. with ANATEL, to offer SMP Services for the next fifteen years in the same area of operation where the Company has a concession for fixed telephony. Out of the contracted value, 10% was paid at the time of signing the contract, and the remaining balance was fully recognized in the subsidiary’s liabilities to be amortized in equal, consecutive annual installments, with maturities foreseen for the years 2006 to 2010 (balance of five installments), and 2007 to 2012 (balance of six installments), depending on the fiscal year when the agreements were executed. The remaining balance is adjusted by the variation of IGP-DI, plus 1% per month.

The amount of other authorizations belongs to VANT, referring to the authorization granted to the use of radiofrequency blocks associated with the exploitation of multimedia communication services, obtained from ANATEL. The outstanding balance, with a variation of the IGP-DI, plus 1% a month, will be paid in six equal, consecutive and annual installments, counted as from April 2006.

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36. PROVISIONS FOR PENSION PLANS

They refer to the recognition of the actuarial deficit of the pension and assistance plans managed by Fundações FBrTPREV and SISTEL appraised by independent actuaries and in accordance with Deliberation CVM 371/00. The funds for sponsored supplementary pensions are detailed in Note 6.

  PARENT COMPANY AND
CONSOLIDATED
  2005  2004 
FBrTPREV – BrTPREV, Alternativo and Fundador Plans  727,915  501,446 
Fundação 14 – PAMEC Plan  174 
Total  728,089  501,446 
Current  45,495  29,497 
Long-term  682,594  471,949 

37. DEFERRED INCOME

There are contracts related to the assignment of telecommunications means, for which the customers made advances aimed at obtaining benefits in the future, forecast for realization in the following periods:

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
2005  691  7,547 
2006  691  691  8,910  5,523 
2007  691  691  6,818  5,523 
2008  691  691  6,818  5,523 
2009  691  691  6,789  5,523 
2010  691  691  6,640  5,523 
2011  691  691  6,136  5,072 
2012 onwards  1,376  2,313  42,476  33,744 
TOTAL  5,522  7,150  84,587  73,978 

38. OTHER LIABILITIES

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Liabilities from Acquisition of Tax Credits  37,301  20,897  37,301  20,897 
CPMF - Suspended Collection  27,114  24,806  27,114  24,806 
Self-Financing Funds - Rio Grande do Sul Branch  24,143  24,143  24,143  24,143 
Allowance for Losses with Subsidiaries  19,028  16,946 
Bank Credits and Repeater Receivables under Processing  9,296  7,532  9,860  7,671 
Liabilities with Other Telecommunication Companies  4,322  7,980  1,613  7,980 
Advanced Receivables  1,694  7,750  31,602  7,869 
Self-Financing Installment Reimbursement - PCT  1,185  2,655  1,185  2,655 
Other  6,083  2,504  14,019  9,280 
Total  130,166  115,213  146,837  105,301 
Current  83,383  72,426  117,138  76,650 
Long-term  46,783  42,787  29,699  28,651 

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Self-financing funds - Rio Grande do Sul branch

They correspond to the credits of capital participation, paid by engaged subscribers, for acquisition of the right of use of switched fixed telephone service, still under the elapsed self-financing modality. It happened that, as the shareholders of the Company had fully subscribed the capital increase made to repay in shares the credits for capital participation, there were no unsold shares to be delivered to the engaged subscribers. Part of these engaged subscribers, who did not accept the Company’s Public Offering for return of the referred credits in cash, as established in article 171, paragraph 2, of Law 6,404/76, are awaiting resolution of the ongoing lawsuit, filed by the Public Prosecution Service and Other, aiming at reimbursement in shares.

Self-financing Installment Reimbursement – PCT

This refers to the payment, either in cash or as offset installments in invoices for services of engaged subscribers derived from the Community Telephony Plan - PCT, in return to the obligation of repayment in shares. For these cases, there is settlement or judicial decision.

39. FUNDS FOR CAPITALIZATION

The expansion plans (self-financing) were the means by which the telecommunications companies financed part of the network investments. With the issue of Administrative Rule 261/97 by the Ministry of Communications, this mechanism for raising funds was eliminated, and the existing amount of R$ 7,974 (R$ 7,974 on 12/31/04) is derived from plans sold prior to the issue of the Administrative Rule, the corresponding assets to which are already incorporated in the Company’s fixed assets through the Community Telephony Plant – PCT. For reimbursement in shares, it is necessary to await the judicial ruling on the suits brought by the interested parties.

40. EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION - EBITDA

The EBITDA, reconciled with the operating income, is as follows:

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
Operating Income (Loss) (860,372) 182,737  (1,157,242) 96,272 
Financial Expenses, Net  1,158,103  1,003,417  1,222,739  1,024,014 
Depreciation  2,239,743  2,318,862  2,574,101  2,403,872 
 Amortization of Goodwill/Negative Goodwill in Acquisition of Investments (1) 22,073  14,716  94,458  61,039 
EBITDA  2,559,547  3,519,732  2,734,056  3,585,197 
 
Net Operating Revenue  9,509,125  8,909,785  10,138,684  9,064,856 
 
EBITDA Margin  26.9%  39.5%  27.0%  39.6% 
(1) It does not include the amortization of special goodwill from incorporation recorded in the deferred charges, in the permanent assets, whose amortization expense compose the non-operating income. 

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41. COMMITMENTS

Services Rendered due to Acquisition of Assets

BrT SCS Bermuda acquired fixed assets from an already existing company. Together with the assets of underwater cables acquired, it assumed the obligation of providing data traffic services, initially contracted with the company that sold the assets, which was a beneficiary of the financial resources of the respective advances. The time remaining for the providing of such assumed services is approximately eighteen years.

42. INFORMATION PER BUSINESS SEGMENT – CONSOLIDATED

Information per segments is presented in relation to the Company and its subsidiaries’ business, which was identified based on their performance and management structure, as well as the internal management information.
The operations carried out among the business segments presented were based on conditions equivalent to the market.
The income by segment, as well as the equity items presented, takes into consideration the items directly attributable to the segment, also taking into account those which can be allocated on reasonable basis.

  2005 
Fixed Telephony
and
 Data
Communication 
Mobile
Telephony
Internet  Elimination
among
Segments 
Consolidated 
Gross Operating Revenue  13,924,898  989,263  582,081  (809,003) 14,687,239 
Deductions from Gross Revenue  (4,190,616) (289,415) (68,894) 370  (4,548,555)
Net Operating Revenue  9,734,282  699,848  513,187  (808,633) 10,138,684 
Cost of Services Rendered and Goods Sold           
  (5,911,156) (959,251) (337,784) 684,689  (6,523,502)
Gross Income  3,823,126  (259,403) 175,403  (123,945) 3,615,181 
 
Operating Expenses, Net  (2,916,776) (588,461) (168,405) 123,958  (3,549,684)
 Sale of Services  (1,227,199) (487,783) (115,034) 174,267  (1,655,749)
 General and Administrative Expenses  (1,079,120) (128,092) (58,640) 9,917  (1,255,935)
 Management Compensation  (9,196) (2,499) (11,695)
 Other Operating Expenses, Net  (601,261) 27,414  7,768  (60,227) (626,306)
           
Operating Income (Loss) Before Financial Revenues (Expenses) and Equity Accounting Results  906,350  (847,864) 6,998  13  65,497 
 
Net Income (Loss) for the Period  (271,839) (598,676) 185,919  380,925  (303,671)
 
Trade Accounts Receivable  2,055,750  186,143  62,918  (151,998) 2,152,813 
Inventories  5,372  77,672  -  (9) 83,035 
Fixed Assets, Net  6,814,782  1,339,182  70,985  -  8,224,949 

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  2004
Fixed Telephony
and
 Data
Communication 
Mobile
Telephony
Internet  Elimination
among
Segments 
Consolidated 
Gross Operating Revenue  12,699,485  102,299  310,519  (348,861) 12,763,442 
Deductions from Gross Revenue  (3,634,095) (23,317) (41,174) -  (3,698,586)
Net Operating Revenue  9,065,390  78,982  269,345  (348,861) 9,064,856 
Cost of Services Rendered and Goods Sold  (5,689,884) (147,409) (199,278) 208,559  (5,828,012)
Gross Income  3,375,506  (68,427) 70,067  (140,302) 3,236,844 
 
Operating Expenses, Net  (2,066,208) (104,876) (85,776) 140,302  (2,116,558)
 Sale of Services  (1,102,190) (90,137) (48,054) 154,604  (1,085,777)
 General and Administrative Expenses  (932,444) (14,296) (18,671) 3,825  (961,586)
 Management Compensation  (7,214) (784) (7,998)
 Other Operating Expenses, Net  (24,360) (443) (18,267) (18,127) (61,197)
           
Operating Income (Loss) Before Financial Revenues (Expenses) and Equity Accounting Result  1,309,298  (173,303) (15,709) -  1,120,286 
 
Net Income (Loss) for the Period  294,367  (119,100) 60,042  41,655  276,964 
 
Trade Accounts Receivable  2,070,499  91,233  54,414  (104,567) 2,111,579 
Inventories  7,804  166,229  -  -  174,033 
Fixed Assets, Net  7,679,081  1,149,084  69,061  -  8,897,226 

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43. STATEMENT OF VALUE ADDED – DVA

  PARENT COMPANY  CONSOLIDATED
  2005  2004  2005  2004 
 
REVENUES  13,264,140  12,301,388  14,182,053  12,561,405 
           Sales of Services and Goods  13,650,394  12,519,508  14,687,239  12,763,442 
           Unconditional Discounts and Cancellations  (227,049) (115,646) (329,501) (119,044)
           Losses with Accounts Receivable  (396,984) (404,529) (449,254) (411,279)
           Other Revenues  237,779  302,055  273,569  328,286 
 
INPUTS ACQUIRED FROM THIRD PARTIES  (4,415,400) (4,000,790) (5,241,714) (4,247,727)
           Materials  (77,693) (91,384) (477,017) (208,675)
           Third-Party Services  (4,294,714) (3,874,263) (4,718,331) (4,004,403)
           Other Designations of Third Parties  (42,993) (35,143) (46,366) (34,649)
 
RETENTIONS  (2,880,614) (2,705,115) (3,276,001) (2,841,849)
           Depreciation and Amortization  (2,375,496) (2,457,592) (2,794,545) (2,589,649)
           Provisions for Contingencies  (505,118) (247,523) (481,456) (252,200)
 
NET VALUE ADDED PRODUCED  5,968,126  5,595,483  5,664,338  5,471,829 
 
VALUE ADDED RECEIVED IN TRANSFER  40,660  380,264  734,164  542,042 
           Equity Accounting Result  (639,840) (137,402)
           Dividends (Investments at Acquisition Cost) 1,528  360  1,528  360 
           Financial Revenues  587,307  468,221  664,699  493,298 
           Rental Revenues  91,665  49,085  67,937  48,384 
 
TOTAL VALUE ADDED TO DISTRIBUTE  6,008,786  5,975,747  6,398,502  6,013,871 
 
DISTRIBUTION OF VALUE ADDED         
 
Compensation for Work  682,400  402,589  814,491  443,018 
           Fees, Payroll and Additional Payment  223,752  206,389  307,692  231,495 
           Charges, Social Benefits and Interest  192,453  165,068  240,604  180,391 
           Provision for Pension Plans  266,195  31,132  266,195  31,132 
 
Government – Taxes  4,081,712  3,855,818  4,146,028  3,879,773 
 
Donations and Sponsorships  7,026  10,230  8,433  10,991 
 
Income Earners  1,541,319  1,418,558  1,720,250  1,396,849 
           Rental, Leasing and Insurance  477,214  477,067  523,820  413,323 
           Financial Expenses  1,064,105  941,491  1,196,430  983,526 
             Continued 

128


... continued.

  PARENT COMPANY  CONSOLIDATED
   2005  2004  2005   2004 
         
Shareholders  -  288,552  -  288,552 
           Interest on Shareholders’ Equity  274,124  274,124 
           Allocation for Legal Reserve  14,428  14,428 
         
Minority Interest  -  - 12,971  6,276 
         
Insufficiency of Retained Value  (303,671) - (303,671) (11,588)
         
DISTRIBUTION OF VALUE ADDED  6,008,786  5,975,747  6,398,502  6,013,871 
 
Additional Information: 
     Dividends/JSCP distributed with Value Added of Previous Years  626,500  170,376  626,500  170,376 

44. SUBSEQUENT EVENTS

ANATEL – Edition of Resolution 432/06, published on February 24, 2006

ANATEL extended the dates, which shall be effective for the effects of STFC Basic Plan tariff system under the Local Modality Rendered in Public Scheme.

Further information about the changes and extension of dates are outlined in the Note 5.i, under “New Concession Agreements”.

Material Facts

As follows, the material facts published after December 31, 2005 are reproduced, and they refer to disputes attributed to the management of the Company and Brasil Telecom Participações S.A.:

I – Material Fact as of March 16, 2006:

BRASIL TELECOM S.A. (“Brasil Telecom” or “Company”), in compliance with art. 157 of Law 6,404/76 and CVM Instruction 358/02, hereby informs to its Shareholders and to the market in general the following:

On April 28, 2005, still under the management appointed by the Opportunity Group, Brasil Telecom and its subsidiary, 14 Brasil Telecom Celular S.A. (“BTC”) celebrated with TIM International N.V. (“TIMI”) and TIM Brasil Serviços e Participações S.A. (“TIMB”) several agreements, including a contract entitled “Merger Agreement” (“Acordo de Incorporação”) and a “Protocol” associated to it.

According to material facts disclosed by the Company, the merger was forbidden by injunctions rendered by the Brazilian and American Courts of Law, in lawsuits filed by its controlling shareholders.

Brasil Telecom’s understanding is that the Merger Agreement and its respective Protocol were celebrated, among other grounds, in conflict of interest, violation of the law and the Company’s ByLaws and, still, in breach of shareholders’ agreements and lacking the necessary corporate approvals. Furthermore, the current management considers that such agreements are contrary to the Company’s best interests, specifically regarding its mobile telephony business.

129


Thus, based on the Merger Agreement itself, Brasil Telecom and BTC began an arbitration process on March 15, 2006 against TIMI and TIMB to declare the nullity or to obtain the annulment of the referred agreement. Such arbitration shall be governed by the rules of the International Chamber of Commerce (Câmara de Comércio Internacional).

Brasília/DF, March 16, 2006.

Charles Laganá Putz Investor
Relations Officer
Brasil Telecom S.A.”

II – Material Fact as of March 20, 2006:

BRASIL TELECOM PARTICIPAÇÕES S.A. and BRASIL TELECOM S.A., based on art. 157 of Law 6,404/76, and CVM Instruction 358/02, hereby discloses to the market a decision rendered by the United States District Court of the Southern District of New York on March 16, 2006, as transcribed below:

“UNITED STATES DISTRICT COURT     
SOUTHERN DISTRICT OF NEW YORK     
--------------------------------------------------x     
INTERNATIONAL EQUITY INVESTMENTS, INC.     
and CITIGROUP VENTURE CAPITAL     
INTERNATIONAL BRAZIL, LLC, on behalf of itself    05 Civ. 2745 (LAK)
and Citigroup Venture Capital International Brazil, L.P.     
(f.k.a. CVC/Opportunity Equity Partners, L.P.),     
Plaintiffs,     
v.     
OPPORTUNITY EQUITY PARTNERS, LTD.     
(f.k.a. CVC/Opportunity Equity Partners, Ltd.)    
and DANIEL VALENTE DANTAS,     
Defendants.     
--------------------------------------------------x     

ORDER TO SHOW CAUSE WITH TEMPORARY RESTRAINING ORDER

     Upon consideration of the Affidavit of Carmine D. Bocuzzi in support of Plaintiffs’ Order to Show Cause, sworn to March 15, 2006, and the exhibits thereto, the Memorandum of Law in Support of Plaintiffs’ Motion for a Preliminary Injunction and a Temporary Restraining Order, the Declaration of Flavio Galdino dated March 15, 2006 and the exhibits thereto, the Declaration of John Christopher Brougham, O.C. dated March 15, 2006, and the record in this case, and after hearing consent for both sides, it is hereby:

     ORDERED that defendants Opportunity Equity Partners Ltd. (“Opportunity”) and Daniel Valente Dantas (“Dantas”) SHOW CAUSE before this Court in Courtroom 12D of the United States Courthouse located at 500 Pearl Street, in the borough of Manhattan, City and State of New York, on the 28 day of March 2006, at 10:00 a.m., why an Order should not be made and entered herein, pursuant to Rule 65 of the Federal Rules of Civil Procedure, enjoining defendants Dantas and Opportunity, and their officers, agents, servants, employees, and attorneys, and all those persons in active concert or participation with them who receive actual notice of this Order by personal service or otherwise, from enforcing or otherwise giving effect to any provision of the Amendment to the

130


Amended and Restated Shareholders’ Agreement dated as of September 12, 2003 (the “Umbrella Agreement”), or taking any action in furtherance of the foregoing.

     Sufficient reason being alleged, it is hereby

     ORDERED that, pending a further Order by this Court, defendants Dantas and Opportunity, and their officers, agents, servants, employees, and attorneys, and all those persons in active concert or participation with them who receive actual notice of this Order by personal service or otherwise, are enjoined from enforcing or otherwise giving effect to any provision of the Umbrella Agreement, or taking any action in furtherance of the foregoing; and it is further

     ORDERED that answering papers, if any, shall be filed and served electronically or by hand upon plaintiffs’ attorneys, Howard S. Zelbo, Esq., Cleary Gottlieb Steen & Hamilton LLP, One Liberty Plaza, New York, New York 10006, on or before March 22, 2006 by 1 p.m.; and it is further

     ORDERED that reply papers, if any, shall be filed and served electronically or by hand upon defendants’ attorneys on or before March 24, 2006 at 1 p.m.

SO ORDERED.

Dated: New York, New York
March 16, 2006
Issued at 11:50 a.m.

Lewis A. Kaplan
United States District Judge”

Brasília, March 20, 2006.

Charles Laganá Putz
Investor Relation Officer
Brasil Telecom Participações S.A.
Brasil Telecom S.A.

-.-.-.-.-.-.-.-.-.-.-

131


INDEX

ANNEX  FRAME  DESCRIPTION  PAGE 
01  01  IDENTIFICATION 
01  02  ADDRESS OF COMPANY’S HEADQUARTERS 
01  03  INVESTOR RELATIONS OFFICER - (Address for correspondence to Company)
01  04  REFERENCE/INDEPENDENT ACCOUNTANT 
01  05  COMPOSITION OF ISSUED CAPITAL 
01  06  COMPANY’S CHARACTERISTICS 
01  07  SUBSIDIARIES EXCLUDED FROM THE CONSOLIDATED FINANCIAL STATEMENTS 
01  08  CASH DIVIDENDS 
01  09  INVESTOR RELATIONS OFFICER 
02  01  BALANCE SHEET – ASSETS 
02  02  BALANCE SHEET – LIABILITIES 
03  01  STATEMENT OF INCOME 
04  01  STATEMENT OF CHANGES IN FINANCIAL POSITION 
05  01  STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FROM 01/01/2005 TO 12/31/2005 
05  02  STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FROM 01/01/2004 TO 12/31/2004 
05  03  STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY FROM 01/01/2003 TO 12/31/2003  10 
06  01  CONSOLIDATED BALANCE SHEET – ASSETS  11 
06  02  CONSOLIDATED BALANCE SHEET – LIABILITIES  12 
07  01  CONSOLIDATED STATEMENT OF INCOME  14 
08  01  CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION  15 
09  01  REPORT OF INDEPENDENT ACCOUNTANTS – UNQUALIFIED OPINION  16 
10  01  MANAGEMENT REPORT  17 
11  01  NOTES TO THE FINANCIAL STATEMENTS  64 

132


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

Date: June 28, 2006

 
BRASIL TELECOM S.A.
By:
/SCharles Laganá Putz

 
Name:   Charles Laganá Putz
Title:     Chief Financial Officer