Annual Report 2000

2000 Annual Report 2 PRESENTATION OF FINANCIAL INFORMATION Embratel Participações S.A., a corporation organized under the laws of the Federative Republic of Brazil, was formed upon the reorganization of Telecomunicações Brasileiras S.A. Telebrás, a corporation organized under the laws of Brazil that, together with its operating subsidiaries, was the primary provider of public telecommunications services in Brazil. We refer to Telebrás, together with its operating subsidiaries, as the Telebrás System. On May 22, 1998, the shareholders of Telebrás approved the restructuring of the Telebrás System to form, in addition to Telebrás, twelve new telecommunication companies, known as the New Holding Companies, by means of a procedure under Brazilian Corporate Law called cisão or split-up. The New Holding Companies were allocated substantially all of the assets and liabilities of Telebrás, including the shares held by Telebrás of the operating subsidiaries of the Telebrás System. The New Holding Companies, together with their respective subsidiaries, comprise three regional fixed-line operators, eight regional cellular operators and one domestic and international long-distance operator. The restructuring of the Telebrás System into the New Holding Companies and their respective subsidiaries is referred to in this annual report on Form 20-F as the Breakup of Telebrás. We are one of the New Holding Companies formed upon the Breakup of Telebrás. In the Breakup, all of the share capital of Empresa Brasileira de Telecomunicações, or Embratel, held by Telebrás, which represented 98.75% of the total share capital of Embratel, was transferred to us. We are the premier communications provider in Brazil offering a wide array of advanced communications services over our own state-of-the-art network. We are the leading provider of data and Internet services in Brazil. Our service offerings include advanced voice, high-speed data communications services, Internet, satellite data communications and corporate networks. We are uniquely positioned to be the all-distance telecommunications network of South America. Our principal assets are the shares of our operating subsidiary, Embratel. We rely almost exclusively on dividends from Embratel to meet our needs for cash, including for the payment of dividends to our shareholders. See Item 5. Operating and Financial Review and Prospects - B. Liquidity and Capital Resources. In this annual report, the terms Embratel, we, us and our mean Embratel Participações S.A. and our consolidated subsidiaries, unless we indicate otherwise. 3 2000 Annual Report Financial Statements The audited consolidated balance sheets included in this annual report as of December 31, 1999 and 2000 and the related consolidated statements of income, cash flows, changes in financial position and changes in shareholders equity for each of the years ended December 31, 1998, 1999 and 2000, including the notes thereto, are our consolidated financial statements. The selected financial information presented below should be read in conjunction with our consolidated financial statements and the notes thereto. The following paragraphs discuss some important features of the presentation of the selected financial information and our consolidated financial statements. These features should be kept in mind in evaluating the selected financial information and in reading Item 5. Operating and Financial Review and Prospects. Accounting Methodologies in Brazil Until December 31, 1995, publicly-traded companies in Brazil were required to prepare financial statements pursuant to two methods: (1) the corporate law method, which was and remains valid for all legal purposes, including the basis for determining income taxes and the calculation of mandatory minimum dividends; and (2) the constant currency method, to present supplementary price-level adjusted financial statements, pursuant to standards prescribed by the Brazilian securities commission, known as the Comissão de Valores Mobiliários or CVM. · Corporate law method. The corporate law method provides a simplified methodology for accounting for the effects of inflation until December 31, 1995. It consisted of restating permanent assets (property, plant and equipment, investments and deferred charges) and shareholders equity accounts using indices mandated by the federal government. The net effect of these restatements was credited or charged to the statement of operations in a single caption, usually entitled monetary correction adjustments or inflation adjustments. · Constant currency method. Under the constant currency method, all historical Brazilian real amounts in the financial statements and notes thereto are expressed in constant purchasing power as of the latest balance sheet date, in accordance with standards prescribed by the CVM for publicly traded entities. Changes in Reporting of Results of Operations In prior years, our financial statements were prepared in accordance with the constant currency method. In accordance with the discussion paper issued by International Task Force of the American Institute of Certified Public Accountants, known as AICPA, Brazilian companies are now allowed to prepare financial statements in accordance with Brazilian Corporate Law, as the primary basis of accounting in filings with the SEC. In order to conform the financial statements presented to our shareholders in the United States to the same accounting method we use and present to our shareholders in Brazil, management elected to present our financial statements to you in accordance with the accounting principles set forth by Brazilian Corporate Law. Our financial statements and all amounts referred to in this annual report include results based on Brazilian Corporate Law. This differs from amounts reported by us in prior years. Brazilian Corporate Law is considered to be a comprehensive basis of GAAP and it is used as the primary basis of reporting in Brazil. The only difference between Brazilian Corporate Law and the financial statements used in our previous annual reports is that Brazilian Corporate Law does not allow for price-level accounting for periods after December 31, 1995. It also prohibits discounting of fixed rate monetary assets and liabilities, while the 2000 Annual Report 4 constant currency method continues to require price-level accounting and requires discounting if the effect is material. Brazilian Corporate Law and constant currency method are the same in all other material respects. A complete reconciliation of the Brazilian Corporate Law to constant currency method financial statements is included in our consolidated financial statements. The amortization of the restatement of fixed assets which resulted from the inflation accounting in 1996 and 1997, while Brazil was still considered to be a highly inflationary economy for U.S. GAAP purposes, was recognized in the reconciliation to U.S. GAAP, net of related deferred tax. Brazilian Corporate Law and U.S. GAAP Our consolidated financial statements are prepared in accordance with Brazilian Corporate Law method, which differs in certain material respects from generally accepted accounting principles in the United States, or U.S. GAAP. See note 27 to our consolidated financial statements for a summary of the differences between Brazilian Corporate Law accounting method and U.S. GAAP, and a reconciliation to U.S. GAAP of shareholders equity as of December 31, 1998, 1999 and 2000, and net income for the three years ended December 31, 1998, 1999 and 2000. As mentioned above, the Brazilian Corporate Law method financial statements discontinued applying the effects of inflation as of December 31, 1995. Accordingly, the date that the non-monetary assets and liabilities were frozen as the new carrying basis is now different the U.S. GAAP amounts include up to two years of additional inflation. As discussed at the meeting of the International Task Force of AICPA, in determining amounts under U.S. GAAP, the effects of inflation for 1996 and 1997 were determined using the General Price Index. The amortization of the restatement of fixed assets which resulted from the inflation accounting in 1996 and 1997, while Brazil was still considered to be a highly inflationary economy for U.S. GAAP purposes, was recognized in the reconciliation to U.S. GAAP, net of related deferred taxes. Minority Interests The portion of equity and net income attributable to shareholders other than the registrant is reflected as minority interests in our consolidated financial statements. At December 31, 2000, such minority shareholders owned 1.23% of the share capital of Embratel. Approximately 30% of the minority interests in Embratel are held by institutional shareholders, including pension funds. These shareholders obtained their interests in Embratel in auctions held in April 1988, December 1991, and February 1997, whereby Companhia Vale do Rio Doce S.A., Banco do Brasil S.A. and Centrais Elétricas Brasileiras S.A., then state-owned companies that formerly held interests in Embratel, sold their interests to the public. The remainder of the minority interests is held by Companhia Brasileira de Liquidação e Custódia, a clearinghouse of the São Paulo Stock Exchange. For 1996 and 1997, minority interests reflect the interests of shareholders other than Telebrás in the predecessor companies. See Item 4. Information on the CompanyHistory and Development of the Company. Accounting Consequences of the Breakup of Telebrás Our formation and the formation of our subsidiaries

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