Algar Telecom S.A. and its Subsidiaries

Algar Telecom S.A. and its Subsidiaries Individual and Consolidated Financial Statements for the Year Ended December 31, 2019 and Independent Auditor’s Report Deloitte Touche Tohmatsu Auditores Independentes

(Convenience Translation into English from the Original Previously Issued in Portuguese)

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(Convenience Translation into English from the Original Previously Issued in Portuguese)

INDEPENDENT AUDITOR’S REPORT ON THE INDIVIDUAL AND CONSOLIDATED FINANCIAL STATEMENTS

To the Management and Shareholders of Algar Telecom S.A. and its subsidiaries

Opinion

We have audited the accompanying individual and consolidated financial statements of Algar Telecom S.A. (“Company”), identified as Parent and Consolidated, respectively, which comprise the individual and consolidated balance sheet as at December 31, 2019, and the related individual and consolidated statements of income, of comprehensive income, of changes in equity and of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the individual and consolidated financial statements referred to above present fairly, in all material respects, the individual and consolidated financial position of Algar Telecom S.A. as at December 31, 2019, and its individual and consolidated financial performance and its individual and consolidated cash flows for the year then ended, in accordance with accounting practices adopted in Brazil and International Financial Reporting Standards - IFRSs, issued by the International Accounting Standards Board - IASB.

Basis for opinion

We conducted our audit in accordance with Brazilian and International Standards on Auditing. Our responsibilities under those standards are further described in the “Auditor’s responsibilities for the audit of the individual and consolidated financial statements” section of our report. We are independent of the Company and its subsidiaries in accordance with the relevant ethical requirements in the Code of Ethics for Professional Accountants and the professional standards issued by the Brazilian Federal Accounting Council (“Comitê de Pronunciamentos Contábeis - CFC”), and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Emphasis of matter

Comparability of the consolidated financial statements

We draw attention to note 1(b) to the individual and consolidated financial statements, which states that the consolidated balance sheet as at December 31, 2019 is not comparable to the consolidated balance sheet as at December 31, 2018 due to the spin-off of the then subsidiary Algar TI Consultoria S.A., on December 2, 2019. Our opinion is not qualified in respect of this matter.

© 2020. For information, contact Deloitte Touche Tohmatsu Limited 2

Key audit matters

Key audit matters - KAMs are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current year. These matters were addressed in the context of our audit of the individual and consolidated financial statements as a whole, and in forming our opinion thereon, and, therefore, we do not provide a separate opinion on these matters.

Recognition of telecommunications revenue

Why it is a KAM

As described in notes 22 and 29 to the individual and consolidated financial statements, the telecommunication sales and service net revenue, recognized by the Company during the year ended December 31, 2019, is R$1,350,027 thousand in the Parent and R$2,126,622 thousand in the consolidated. Due to its representativeness, the telecommunication sales and service net revenue is considered significant by the users of the Company’s financial statements.

Based on these factors, we consider the telecommunications service revenue as a KAM.

How the matter was addressed in our audit

Our audit procedures included, but were not limited to:

i) Understanding and examining the manual entry recorded by the Management of the Company’s subsidiary, relating to the billed revenue and the earned and unbilled revenue by yearend.

ii) Assessing and testing the relevant internal controls related to the revenue recognition process.

iii) Assessing and testing the automated system controls that are considered to be relevant to using our specialists, including:

a) Performing tests involving information security, privileged access management and segregation of duties with an impact on the financial statements, including supplementary tests on mitigating evidence, when applicable.

b) Performing specific tests for voice and data service revenue by the Company’s operational platform.

c) Performing integrity and accuracy tests on the reports used to determine revenue recognition.

iv) Performing sales and service revenue tests, on a sampling basis, for earned and unbilled revenue, examining the corresponding supporting documentation.

v) Performing substantive analytical procedures.

vi) Performing subsequent billing test on earned and unbilled revenue by yearend, as applicable, in the Company’s subsidiary.

vii) Reading the disclosures in the notes to the financial statements.

During the course of our audit, we identified deficiencies in some of the automated internal controls related to the revenue recognition, for which mitigating evidence was provided by the Company. Based on the evidence obtained from performing our procedures described above, including mitigating control test, we believe that the telecommunication revenue and the related disclosures in the notes to the financial statements are acceptable within the context of the audit of the individual and consolidated financial statements as a whole.


State VAT (ICMS) in the PIS and COFINS tax basis

Why it is a KAM

As described in note 7 (ii) to the individual and consolidated financial statements, the Company challenged in courts the inclusion of the State VAT (ICMS) in the taxes on revenue (PIS and COFINS) tax basis, as mostly of its operations is subject to the cumulative tax regime. On June 27, 2019, a final and unappealable decision was handed down and, consequently, the Company recognized the credits from 2010 to 2017 in the amount of R$138,302 thousand (principal) and R$254,502 thousand, including the respective inflation adjustment, in line items “Other operating income” and “Finance income”. The PIS and COFINS tax credit was recognized by the Company based on the opinions from its in-house and outside legal counsel.

Due to the significance of the amounts involved, the complexity of measuring the amounts recognized and the degree of judgment, we consider this matter a key audit matter.



i) Understanding and verifying the process adopted by Management for measuring and recognizing tax credits.

ii) Performing audit procedures, with the support of our tax specialists, in the documentation on the court decision, legal opinions and the legal and tax aspects of the Brazilian laws for the recognition and measurement of tax credits.

iii) Performing substantive audit procedures on a sampling basis of the supporting documentation, as well as of the calculations related to the tax credit amounts recognized by the Company.

iv) Verifying the impairment test of the tax credits recorded prepared by the Company’s Management, as well as their correct presentation and disclosure in the financial statements.

Based on the evidence obtained from performing our procedures described above, we believe that the assessment made by Management and the related disclosures in the notes to the financial statements are appropriate within the context of our audit of the financial statements as a whole.

Adoption of new accounting standard – CPC 06 (R2) / IFRS 16 - Leases

Why it is a KAM

As described in note 3(m) to the individual and consolidated financial statements, upon adoption of the standard on January 1, 2019, the Company and its subsidiaries recognized a right-of-use asset and lease liability in the amount of R$289,839 thousand in the individual financial statements and R$428,467 thousand in the consolidated financial statements.

The adoption of the new accounting standard was considered a KAM due to the complexity of its implementation, as it required Management to assess a significant volume of lease contracts, the use of external specialists, changes in internal processes and controls, as well as the application of judgment in the determination of variables to the calculation of the amounts to be recorded in the financial statements.




i) Testing the design and implementation of significant internal controls related to the quantification of contracts, identification of leases, measurement, recognition and disclosure of leases.

ii) Matching the sample of contracts with the information in the lease calculation system, in addition to recalculating the amounts obtained.

iii) Performing substantive audit procedures on the key assumptions and estimates used by Management to measure the lease liability and the right-of-use asset.

iv) Reading the disclosures in the notes to the financial statements.

Based on the evidence obtained from performing our procedures described above, we consider as acceptable the measurement of the right-of-use asset and lease liability, as well as the disclosures made within the context of our audit of the individual and consolidated financial statements for the year ended December 31, 2019 as a whole.

Other matters

Statements of value added

The individual and consolidated statements of value added (“DVA”) for the year ended December 31, 2019, prepared under the responsibility of the Company’s Management and disclosed as supplemental information for purposes of the IFRSs, were subject to audit procedures performed together with the audit of the Company’s financial statements. In forming our opinion, we evaluated whether these individual and consolidated statements of DVA are reconciled with the financial statements and accounting records, as applicable, and whether their form and content are in accordance with the criteria set out in technical pronouncement CPC 09 - Statement of Value Added. In our opinion, these statements of value added were appropriately prepared, in all material respects, in accordance with the criteria set out in such technical pronouncement and are consistent in relation to the individual and consolidated financial statements as a whole.

Corresponding figures

The corresponding information and figures for the year ended December 31, 2018, presented for purposes of comparison, were previously audited by another auditor, who issued an unqualified report dated February 11, 2019.

Other information accompanying the individual and consolidated financial statements and the independent auditor’s report

Management is responsible for the other information. The other information comprises the Management Report.

Our opinion on the individual and consolidated financial statements does not cover the Management Report and we do not express any form of audit conclusion thereon.

In connection with our audit of the individual and consolidated financial statements, our responsibility is to read the Management Report and, in doing so, consider whether this report is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement in the Management Report, we are required to report that fact. We have nothing to report in this regard.


Management’s Responsibilities and those charged with governance for the individual and consolidated financial statements

Management is responsible for the preparation and fair presentation of the individual and consolidated financial statements in accordance with accounting practices adopted in Brazil and the IFRSs, issued by the IASB, and for such internal control as Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the individual and consolidated financial statements, Management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either intends to liquidate the Company and its subsidiaries or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s and its subsidiaries’ financial reporting process.

Auditor’s responsibilities for the audit of the individual and consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the individual and consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Brazilian and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with Brazilian and International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the individual and consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than of one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control of the Company and its subsidiaries.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management.

• Conclude on the appropriateness of Management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the ability of the Company and its subsidiaries to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the individual and consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company and its subsidiaries to cease to continue as a going concern.


2020-CPS-0210 VF (PA).docx

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the individual and consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the KAM. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The accompanying individual and consolidated financial statements have been translated into English for the convenience of readers outside Brazil.

Campinas, March 17, 2020

DELOITTE TOUCHE TOHMATSU Paulo de Tarso Pereira Jr. Auditores Independentes Engagement Partner

Algar Telecom S.A. Financial statements December 31, 2019 Contents Independent auditor's report ........................................................................................................... 1 Financial statements Balance sheet ................................................................................................................................. 7 Income statement .......................................................................................................................... 9 Statement of comprehensive income ............................................................................................ 10 Statement of changes in equity ..................................................................................................... 11 Statement of cash flows ................................................................................................................ 12 Statement of value added ............................................................................................................. 13 Notes to the financial statements .................................................................................................. 14

7

Algar Telecom S.A. Balance sheet as at December 31, 2019 and 2018 (In thousands of Brazilian reais - R$) Consolidated Individual

Notes 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Assets Current assets Cash and cash equivalents 4 424,373 225,880 377,503 45,629 Trade receivables 6 477,254 596,548 272,322 262,493 Inventories 36,362 39,752 26,619 26,778 Recoverable taxes 7 154,170 91,487 130,689 44,806 Income tax and social contribution for offset 8a 16 16 - - Dividends receivable 21c - - 40,618 51,161 Prepaid expenses 78,655 60,688 57,392 38,519 Other receivables 6,440 13,567 4,734 3,653 Total current assets 1,177,270 1,027,938 909,877 473,039 Noncurrent assets Trade receivables 6 24,646 5,888 20,149 3,482 Recoverable taxes 7 244,063 81,849 207,688 46,557 Deferred income tax and social contribution 8b - 15,333 - - Escrow deposits 16b 27,587 89,723 27,083 70,326 Prepaid expenses 33,811 21,508 20,634 11,135 Short-term investments 5 2,316 3,449 998 434 Indemnity right of provisions - Smart 16a(iv) 30,080 - - - Other receivables 3,254 2,963 947 1,146 365,757 220,713 277,499 133,080 Investments 9 126 126 1,261,168 1,321,804 Property, plant and equipment 10 2,487,526 2,461,048 1,467,177 1,366,665 Intangible assets 11 403,749 549,673 247,741 288,011 Right of use of assets - IFRS 16 3m 344,327 - 251,282 - Total noncurrent assets 3,601,485 3,231,560 3,504,867 3,109,560 Total assets 4,778,755 4,259,498 4,414,744 3,582,599

The accompanying notes are an integral part of these financial statements.

8

Algar Telecom S.A. Balance sheet as at December 31, 2019 and 2018--Continued (In thousands of Brazilian reais - R$) Consolidated Individual

Notes 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Liabilities and equity Current liabilities Borrowings and financing 12 1,566 21,908 1,566 1,670 Debentures 13 35,737 190,805 35,737 140,746 Lease liability - IFRS 16 3b 85,812 - 61,259 - Trade payables 17 244,553 283,935 158,782 170,478 Taxes, fees and contributions 14 85,388 88,284 44,825 41,046 Income tax and social contribution payable 8a 11,263 7,383 7,313 363 Payroll, accruals and related taxes 15 86,539 167,479 49,541 57,500 Dividends payable 19b 105,387 81,706 105,387 81,706 Amounts refundable to shareholders 28,588 29,162 28,588 29,162 Payables for acquisition of equity interest in subsidiaries 1b - 25,617 - - Advanced revenues 18 10,535 34,218 9,390 10,693 Trade notes payable 5,634 10,158 4,650 3,283 Other payables 10,791 16,059 8,809 11,802 Total current liabilities 711,793 956,714 515,847 548,449 Noncurrent liabilities Borrowings and financing 12 6,238 10,494 6,238 7,804 Debentures and promissory notes 13 2,203,904 1,626,249 2,203,904 1,466,243 Lease liability - IFRS 16 3b 270,560 - 198,739 - Payroll, accruals and related taxes 15 7,241 10,474 4,379 4,488 Deferred income tax and social contribution 8b 67,970 54,076 33,666 8,191 Payables for acquisition of companies 1a 19,479 - 19,479 - Provisions 16a 142,686 128,549 89,352 86,090 Advanced revenues 18 22,131 30,541 19,913 24,406 Other payables 3,526 5,473 - - Total noncurrent liabilities 2,743,735 1,865,856 2,575,670 1,597,222 Equity Capital 19a 826,831 1,090,507 826,831 1,090,507 Legal reserve 99,462 84,326 99,462 84,326 Earnings retention reserve 390,188 237,937 390,188 237,937 Valuation adjustments to equity - deemed cost 1b 4,241 18,443 4,241 18,443 Other comprehensive income 1b 2,505 (24,308) 2,505 (24,308) Additional proposed dividends - 30,023 - 30,023 Total equity 1,323,227 1,436,928 1,323,227 1,436,928 Total liabilities and equity 4,778,755 4,259,498 4,414,744 3,582,599 The accompanying notes are an integral part of these financial statements.

9

Algar Telecom S.A. Income statement Years Ended December 31, 2019 and 2018 (In thousands of Brazilian reais – R$, except basic and diluted earnings per share, in Brazilian reais – R$) Consolidated Individual

Notes 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Net operating revenue 22 2,871,117 2,867,298 1,350,027 1,246,202 Cost of sales and services 23 (1,730,499) (1,697,941) (766,942) (672,700) Gross profit or loss 1,140,618 1,169,357 583,085 573,502 Operating income (expenses) Selling expenses 24 (402,266) (401,476) (238,055) (234,591) General and administrative expenses 25 (234,646) (237,889) (138,033) (136,499) Other operating income, net 26 54,478 73,280 62,896 69,452 Share of profit (loss) of subsidiaries 9 - - 176,982 217,060 Operating profit (loss) before finance income (costs) 558,184 603,272 446,875 488,924 Finance income (costs), net 27 (101,185) (137,587) (72,968) (124,173) Finance costs 27 (257,108) (211,130) (207,785) (173,156) Finance income 27 155,923 73,543 134,817 48,983 Profit (loss) before income tax and social contribution 456,999 465,685 373,907 364,751 Income tax and social contribution (154,283) (149,648) (71,191) (48,714) Current 8c (118,395) (90,872) (42,180) (5,440) Deferred 8c (35,888) (58,776) (29,011) (43,274) Profit (loss) for the year 302,716 316,037 302,716 316,037

Number of common shares as at December 31 295,019,806 295,019,806 Weighted average number of shares 295,019,806 280,904,633 Basic and diluted earnings per common share (in R$) 1,03 1,13 The accompanying notes are an integral part of these financial statements.

10

Algar Telecom S.A. Statement of comprehensive income Years Ended December 31, 2019 and 2018 (In thousands of Brazilian reais - R$) Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Profit (loss) for the year 302,716 316,037 302,716 316,037 Balance sheet translation adjustment 547 766 547 766 Total comprehensive income 303,263 316,803 303,263 316,803


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Algar Telecom S.A. Statement of changes in equity Years Ended December 31, 2019 and 2018 (In thousands of Brazilian reais - R$) Earnings reserves

Capital

Earnings retention reserve

Legal reserve

Additional proposed dividends

Valuation adjustments

to equity

Other comprehensive

income Retained earnings

Equity attributable to owners of the

Company Noncontrolling

interests Total Balances as at December 31, 2017 721,421 363,084 68,524 21,896 18,986 (23,946) - 1,169,965 6 1,169,971 Capital payment 369,086 - - - - - 369,086 - 369,086 Effect from first-time adoption of CPC47 (IFRS-15) - - - - - - 27,121 27,121 - 27,121 Realization of deemed cost adjustment - - - - (543) - 543 - - - Translation adjustments to foreign subsidiary’s balance sheet - - - - - 766 - 766 - 766 Approved additional dividends - - - (21,896) - - - (21,896) - (21,896) Valuation adjustments to investment in subsidiary Algar Celular - - - - - - 4,213 4,213 - 4,213 Effect from inflation adjustment to payables for acquisition of subsidiary shares - - - - - (1,128) - (1,128) - (1,128) Profit (loss) for the year - - - - - - 316,037 316,037 - 316,037 Allocation of profit for the year: Recognition of legal reserve - - 15,802 - - - (15,802) - - - Mandatory minimum dividends - - - - - - (75,059) (75,059) - (75,059) Additional proposed dividends - - - 30,023 - - (30,023) - - - Earnings retained in the year - 226,853 - - - - (226,853) - - - Distribution of retained earnings - (352,000) - - - - - (352,000) (6) (352,006) Other variations - - - - - - (177) (177) - (177) Balances as at December 31, 2018 1,090,507 237,937 84,326 30,023 18,443 (24,308) - 1,436,928 - 1,436,928 Capital decrease relating to the Company’s spin-off (note 1b) (263,676) - - - - - - (263,676) - (263,676) Write-off due to the Company’s spin-off (note 1b) - - - - (13,703) - - (13,703) - (13,703) Write-off due to the Company’s spin-off (note 1b) - - - - - 26,266 - 26,266 - 26,266 Write-off due to the Company’s spin-off (note 1b) - (35,623) - - - - - (35,623) - (35,623) Realization of deemed cost - - - - (499) - 499 - - - Approved additional dividends - - - (30,023) - - - (30,023) - (30,023) Translation adjustments to foreign subsidiary’s balance sheet - - - - - 547 - 547 - 547 Effect from adjustment to subsidiary’s equity - - - - - - 448 448 - 448 Profit (loss) for the year - - - - - - 302,716 302,716 - 302,716 Allocation of profit: Recognition of legal reserve - - 15,136 - - - (15,136) - - - Mandatory minimum dividends - - - - - - (100,653) (100,653) - (100,653) Earnings retained in the year - 187,874 - - - - (187,874) - - - Balances as at December 31, 2019 826,831 390,188 99,462 - 4,241 2,505 - 1,323,227 - 1,323,227


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Algar Telecom S.A. Statement of cash flows Years Ended December 31, 2019 and 2018 (In thousands of Brazilian reais - R$) Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Cash flow from operating activities Profit (loss) before income tax and social contribution 456,999 465,685 373,907 364,751 Adjustments to reconcile profit or loss to net cash provided by operating activities: Depreciation and amortization 503,367 364,241 311,567 210,235 Share of profit (loss) of subsidiaries - - (176,288) (217,060) Loss on property, plant and equipment and intangible assets 10,285 3,859 8,538 3,475 Provision for losses on assets - TV 62,390 - 62,390 - Finance charges on borrowings and debentures 198,196 186,329 177,097 152,967 Other finance income (costs), net 19,189 (48,742) 12,071 (28,794) Inflation adjustment to tax credits (116,200) - (116,200) - Write-off of deferred tax liabilities - (15,815) - (15,815) Allowance for doubtful debts 21,389 17,934 17,608 14,747 Recognition of provisions 16,028 (24,584) 7,000 (23,112) Tax credit - PIS and COFINS (138,302) - (138,302) - Other (5,190) - (5,190) - 1,028,151 948,907 534,198 461,394 Changes in assets and liabilities (Increase) in trade receivables (66,520) (64,620) (44,104) (34,295) (Increase) in inventories (8,309) (15,767) (5,825) (12,229) (Increase) decrease in recoverable taxes 1,741 (39,560) 7,488 (35,885) (Increase) decrease in escrow deposits 43,720 (9,266) 42,848 (5,875) (Increase) decrease in prepaid expenses (37,969) (7,239) (28,372) 6,836 (Increase) in other current and noncurrent assets 511 (1,370) 3,746 (650) Increase (decrease) in trade payables (15,168) 30,434 (21,066) 19,488 Increase (decrease) in taxes payable 8,618 (8,384) (8,068) (5,044) Increase (decrease) in taxes, fees and contributions 7,760 (28,234) 3,779 (29,799) Increase (decrease) in advanced revenues (15,472) 2,340 - 485 Increase (decrease) in trade notes payable (1,637) 1,171 1,368 927 Increase (decrease) in other current and noncurrent liabilities 782 (1,482) 9,470 (5,807) Provisions paid (13,149) (18,580) (7,463) (7,032) Income tax and social contribution paid (105,551) (82,018) (36,757) (3,187) Cash and cash equivalents provided by operating activities 827,508 706,332 451,242 349,327 Cash flows from investing activities Payables for acquisition of companies (51,428) (845) (26,361) - Capital contribution in subsidiaries - - (91,300) (177,550) Payables for acquisition of property, plant and equipment and intangible assets (729,170) (721,518) (401,521) (361,705) Cash and cash equivalents involved in the spin-off (76,545) - - 30,932 Acquisition of shares by subsidiary, held in treasury - (17,385) - - Dividends received - - 127,820 76,772 Cash and cash equivalents used in investing activities (857,143) (739,748) (391,362) (431,551) Cash flow from financing activities Additions of borrowings and debentures 785,000 900,500 700,000 800,500 Payment of principal of borrowings and debentures (138,153) (592,517) (79,218) (526,895) Payment of interest/inflation adjustment to borrowings and debentures (208,275) (196,474) (178,655) (168,128) Capital payment - 369,086 - 369,086 Payment of lease liability (104,538) - (64,227) - Reimbursement of capital to shareholders (618) (6,753) (618) (6,753) Payment of dividends (105,288) (426,559) (105,288) (426,496) Cash and cash equivalents provided by (used in) financing activities 228,128 47,283 271,994 41,314 Increase (decrease) in cash and cash equivalents 198,493 13,867 331,874 (40,910) Cash and cash equivalents at the beginning of the year 225,880 212,013 45,629 86,539 Cash and cash equivalents at the end of the year 424,373 225,880 377,503 45,629


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Algar Telecom S.A. Statement of value added Years Ended December 31, 2019 and 2018 (In thousands of Brazilian reais - R$) Consolidated Individual

12/31/2019 12/31/2018 12/31/2019 12/31/2018 Revenues 4,595,832 4,492,320 2,381,857 2,141,658

Sale of goods and services 3,648,478 3,682,592 1,790,821 1,676,858 Revenue from construction of own assets 735,308 653,064 421,260 365,786 Other revenue 233,435 174,598 187,383 113,761 Allowance for doubtful debts (21,389) (17,934) (17,607) (14,747)

Inputs acquired from third parties (including ICMS, IPI, PIS and COFINS) (1,678,840) (1,577,355) (1,023,069) (887,490)

Cost of sales and services (592,074) (599,161) (352,785) (337,603) Supplies, power, outside services and other inputs (1,086,766) (978,194) (670,284) (549,887)

Gross value added 2,916,992 2,914,965 1,358,788 1,254,168 Depreciation and amortization (503,367) (364,241) (311,567) (210,235)

Wealth created by the entity 2,413,625 2,550,724 1,047,221 1,043,933 Wealth received in transfer 155,923 73,543 311,799 266,043

Share of profit (loss) of subsidiaries - - 176,982 217,060 Finance income 155,923 73,543 134,817 48,983

Total wealth for distribution 2,569,548 2,624,267 1,359,020 1,309,976 Wealth distributed 2,569,548 2,624,267 1,359,020 1,309,976

Personnel 974,703 987,392 290,956 277,429 Direct compensation 740,213 749,769 230,067 231,031 Benefits 176,142 180,799 46,744 33,643 Severance Pay Fund (FGTS) 58,348 56,824 14,145 12,755 Taxes, fees and contributions 1,010,104 1,029,337 546,170 512,959 Federal 417,925 435,156 172,688 152,991 State 563,848 562,037 372,943 359,518 Municipal 28,331 32,144 539 450 Interest 210,144 163,775 180,736 144,205 Rentals 71,881 127,726 38,442 59,346 Dividends 100,653 105,082 100,653 105,082 Earnings retained in the year 202,063 210,955 202,063 210,955


Algar Telecom S.A. Notes to the financial statements for the Year Ended December 31, 2019 (In thousands of Brazilian reais - R$, unless otherwise stated)

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1. General information Algar Telecom S.A. (“Algar Telecom” or “Company”), headquartered in the City of Uberlândia, State of Minas Gerais, is a publicly-held company mainly engaged in providing fixed telephony, mobile telephony and data communication services, in conformity with the concessions, authorizations and permits granted by the National Telecommunications Agency (“ANATEL”).

The Company is the holding company operating in the information technology and telecommunications sector, comprising the Algar Group, which operations, including those exercised by its subsidiaries, pursuant to the shareholding position as at December 31, 2019, comprise the provision of fixed and mobile telephony, telecommunications and multimedia, data communication, broadband Internet, Data Center, telecommunication engineering services and other services related to telecommunication activities.

The Company’s and its subsidiaries’ operations do not show relevant seasonality.

Concessions and authorizations

The services offered by the Company, as well as the service fees charged, are regulated by the ANATEL, the agency responsible for regulating the telecommunications sector in Brazil, pursuant to the General Telecommunications Law and its respective regulations. The concessions and authorizations in effect in the year ended December 31, 2019, comprising the Company and subsidiaries Algar Multimídia, Algar Soluções and Smart Telecomunicações (company acquired on July 9, 2019 – note 1f), are as shown in the table below. Company Concession Area of coverage Expiration

Algar Telecom

Concession for provision of switched fixed telephone service (“STFC”)

Region of “Triângulo Mineiro” and some cities in the region of Alto Paranaíba, northwest of the State of São Paulo, south of the State of Goiás and northeast of Mato Grosso do Sul. 12/31/2025

Authorization for provision of international long-distance STFC All Brazilian regions. Indeterminate

Authorization for provision of local and international long-distance STFC All Brazilian regions, except concession area. Indeterminate

Authorization for provision of multimedia communication service (SCM) All Brazilian regions. Indeterminate

Authorization for provision of conditioned access service (SeAC)

All Brazilian regions. Indeterminate


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1. General information - continued

Concessions and authorizations - continued

Company Concession Area of coverage Expiration

Algar Telecom

Authorization for provision of personal mobile service (SMP)

Region of “Triângulo Mineiro” and some cities in the region of Alto Paranaíba, northwest of the State of São Paulo, south of the State of Goiás and northeast of Mato Grosso do Sul.

Linked to the expiration of the radio frequency concessions

Authorization for provision of SMP at the 850 MHz frequency, called Bandwidth A

Region of “Triângulo Mineiro” and some cities in the region of Alto Paranaíba, northwest of the State of São Paulo, south of the State of Goiás and northeast of Mato Grosso do Sul. 01/15/2023

Authorization for provision of SMP at the 1,900 MHz and 2,100 MHz frequencies


04/28/2023, renewable for another 15 years.

Authorization for provision of SMP at the 1,800 MHz frequency, called Bandwidth H

State of Minas Gerais, in cities with area codes 34, 35 and 37, except region of “Triângulo Mineiro”.


Authorization for provision of SMP using 4G technology, at 700 MHz frequency



Algar Multimídia


Algar Soluções


Smart


Relevant events in 2019

a) Acquisition of SMART Telecomunicações

On July 9, 2019, the Company completed the acquisition process (“Closing Instrument”), of Smart Telecomunicações, headquartered in Recife (PE), which is authorized by ANATEL to provide telecommunication services, mainly including communication and multimedia (SCM) services, specialized network and circuit (RCE) services and specialized limited service (SLE).

The maximum acquisition price established was R$49,800, and the consideration to be effectively transferred to the sellers is contingent on future events, including the determination of certain net debt and net working capital amounts, which differences between the realized and estimated amounts will be adjusted in the amount payable, in conformity with a provision set forth in the agreement.


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1. General information -- continued

Relevant events in 2019--continued

a) Acquisition of SMART Telecomunicações--continued On the transaction closing date, the Company paid a cash installment, as agreed, in the total amount of R$22,133. The remaining amount will be paid in five installments, the first maturing in 2019, which was paid in November, and the remaining payable annually, from 2022 to 2025, adjusted based on 90% of the CDI rate. The appraisal report prepared by an independent specialized company for the Purchase Price Allocation (PPA) and respective goodwill measurement relied on the information as at June 30, 2019.

The balances of the main balance sheet accounts as at June 30, 2019 of Smart Telecomunicações, the acquisition basis, are as follows:

Assets Liabilities and equity Current Current Cash and cash equivalents 83 Borrowings and financing 85 Trade receivables 1,216 Trade payables 833 Inventories 954 Taxes, fees and contributions 207 Other receivables 152 Income tax and social contribution payable 474 Total current assets 2,405 Payroll, accruals and related taxes 1,180 Total current liabilities 2,779 Noncurrent Indemnity right of provisions 31,611 Property, plant and equipment 3,445 Noncurrent Cost 4,868 Borrowings and financing 685 (-) Depreciation (1,423) Provisions 31,611 Intangible assets 31 Other payables 968 Cost 49 Total noncurrent liabilities 33,264 (-) Amortization (18) Total noncurrent assets 35,087 Equity Capital 2,500 Earnings reserve 269 Accumulated losses (1,320) Total equity 1,449

Total assets 37,492 Total liabilities

37,492


17


Relevant events in 2019 - continued

a) Acquisition of SMART Telecomunicações - continued

The main information in the appraisal report is summarized below:

(a) Consideration involved, at present value 42,440 (b) Fair value of net assets acquired 21,515 (c) Accounting equity (06/30/2019) 1,449 (d) Surplus (b - c) 20,066 Surplus of property, plant and equipment identified 3,879 Surplus of intangible assets identified 16,187 Trademarks 439 Customer portfolio 3,324 Post use right 12,424 (e) Goodwill arising on future earnings (a - c - d) 20,925

Surplus is net of deferred income tax and social contribution.

b) Spin-off of investment in the Company On December 2, 2019, pursuant to the minutes of the Extraordinary Shareholders’ Meeting, the Company’s partial spin-off was approved, whose spun-off net assets were comprised of the investment balance accounted for under the equity method, corresponding to Algar Telecom’s total interest held in Algar TI.

Due to the spin-off, for purposes of withdrawal of the investment in Algar TI, which was no longer its subsidiary as from that date, the consolidated balance sheet accounts of Algar TI were not included in the Company’s consolidation as at December 31, 2019. Accordingly, the comparison of the consolidated balance sheets as at December 31, 2019 and 2018 must take into consideration the impacts arising from such transaction.


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b) Spin-off of investment in the Company - continued The balances of the main consolidated balance sheet accounts as at November 30, 2019, of Algar TI, the Company’s subsidiary up to December 1, 2019, are shown below:

Algar TI -

consolidated Assets 11/30/2019 Current Cash and cash equivalents 76,545 Trade receivables 165,641 Other receivables 58,664 300,850 Noncurrent Property, plant and equipment 227,462 Intangible assets 169,229 Right of use – CPC 06 (IFRS 16) 20,434 Other receivables 41,807 458,932 Total assets 759,782 Liabilities and equity Current Borrowings and debentures 49,749 Lease liability - CPC 06 (IFRS 16) 13,918 Trade payables 41,750 Payroll, accruals and related taxes 91,272 Other payables 31,260 227,949 Noncurrent Borrowings and debentures 199,714 Lease liability - CPC 06 (IFRS 16) 7,214 Provisions 21,357 Other payables 12,051 240,336 Equity 291,497 Total liabilities and equity 759,782

Algar Telecom’s balance sheet as at September 30, 2019 was used as a basis for the spin-off, which included the spun-off investment balance, in the amount of R$275,485. The November 30, 2019 balance, in the amount of R$286,736 (note 9a), was effectively written off, and the difference of R$4,761, in relation to the November 30, 2019 equity balance of Algar TI, refers to the unrealized profit adjustment for purposes of the equity method of accounting. As shown in the statement of changes in equity, such transaction resulted in the decrease of the Company’s capital by R$263,676, write-off of valuation adjustments to equity (deemed cost of Algar Tecnologia’s assets) in the amount of R$13,703, write-off of a debt balance in the amount of (R$26,266), impact of Algar TI, relating to Algar TI’s stock option, exercised by it, and write-off of the earnings retention reserve in the amount of R$35,623, completing a decrease in equity in the amount of the spun-off investment, totaling R$286,736.


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c) Exclusion of pay TV services from the Company’s product portfolio Pursuant to the agreement entered into in December 2019 with a satellite telecommunication service provider, and approved by Management, the Company has excluded from its product portfolio the television and audio signal satellite broadcasting service (DTH), representing approximately 5.5% of its gross revenue (2.7% in the consolidated), and started to operate as an accredited partner in this line of business.

Relevant events in 2018

d) Mergers and spin-offs of companies

i) Merger of Algar Mídia S.A.

The Annual Shareholders’ Meeting, held on January 1, 2018, approved the merger of subsidiary Algar Mídia S.A. into subsidiary Algar Multimídia S.A.

The merged net assets, corresponding to the account balances as at December 31, 2017, in the amount of R$18,654, are summarized in the table below: Assets 12/31/2017 Current 11,916 Noncurrent 7,911 19,827 Liabilities Current 969 Noncurrent 204 1,173 Merged net assets 18,654

The contra entry to the merged net assets and liabilities, in the acquirer, is an increase in capital by R$12,529, an addition to the earnings retention reserve, in the amount of R$5,109 and also the recognition of a capital reserve in the total amount of R$1,016.


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Relevant events in 2018 - continued d) Mergers and spin-offs of companies - continued

ii) Merger of Rede IPPI Intermediação de Negócios Ltda. As approved at the shareholders’ meeting of Rede IPPI Intermediação de Negócios Ltda., held on January 1, 2018, this company was merged into its parent Algar Multimídia S.A., the Company’s subsidiary. The merged net assets amounted to R$30, recorded against the subsidiary’s investment balance in the acquirer.

iii) Spin-off of Algar TI Consultoria S.A. As approved at the extraordinary shareholders’ meeting held on March 1, 2018, a partial spin-off of subsidiary Algar TI Consultoria S.A. was carried out, whose spun-off net assets, supported by an appraisal report prepared for such purpose, was merged into subsidiary Algar Multimídia S.A. The main purpose of such transaction was the transfer of the data center operation from Algar TI to Algar Multimídia, in view of the possibility of optimizing the administrative and finance costs arising from such activity, which is in line with the business of the acquirer. The spun-off net assets of Algar TI, comprised of balance sheet amounts, are shown below:

Assets 01/31/2018 Noncurrent (property, plant and equipment and intangible assets) 10,092 10,092 Liabilities Current 384 384 Spun-off and merged net assets 9,708

iv) Merger of Algar Celular S.A.

The extraordinary shareholders’ meeting held on April 2, 2018 approved the merger of subsidiary Algar Celular into the Company. The appraisal report on the merged net assets, prepared for such purpose, was dated March 15, 2018 and based on the balance sheet as at February 28, 2018. However, the balances effectively merged were those relating to March 31, 2018. The operating activities previously performed by Algar Celular started to be performed by the acquirer, Algar Telecom.


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1. General information - continued Relevant events in 2018 - continued d) Mergers and spin-offs of companies - continued

iv) Merger of Algar Celular S.A. - continued The account balances as at March 31, 2018, which were recognized by the Company (buyer), are as follows: 03/31/2018 Assets Current assets 178,272 Noncurrent assets 564,336 Total assets 742,608 Liabilities Current liabilities 126,480 Noncurrent liabilities 19,908 Total liabilities 146,388 Net assets of liabilities (i) 596,220 (i) Breakdown of the merged company’s equity: Capital 400,401 Earnings reserve 167,858 Retained earnings 16,877 Advance for future capital increase 7,250 Additional dividends 5,195 Valuation adjustments to equity 1,981 Other comprehensive income (3,342) Total merged company’s equity 596,220

e) Exercise of stock options

In January 2018, subsidiary Algar TI exercised a stock option for 7.52% of its shares, corresponding to 33,903,920 shares proportionally held by two noncontrolling shareholders, under a share purchase and sale agreement. The transaction amount was R$42,452, and the first shareholder received an amount corresponding to 30% of the consideration, the remaining amount being divided into three consecutive semiannual installments, adjusted at 95% of the DI rate. The second shareholder received one of the expected three semiannual installments, adjusted for inflation based on 100% of the DI rate. The balance payable, included in current liabilities, was R$25,617 as at December 31, 2018.


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1. General information - continued Relevant events in 2018 - continued f) Investor acceptance in Algar Telecom S.A.

On July 6, 2018, after fulfillment of all conditions for approval of the transaction for investor acceptance as the Company’s shareholder, Archy LLC started to hold a stake of 25% of capital, corresponding to 74,646,452 common shares. The investment, in the total amount of R$1,000,000, includes the amount of R$352,000, with direct contribution in the Company, in cash, in July 2018, upon the subscription and payment of 26,275,551 new common shares, and the amount of R$648,000, corresponding to the acquisition of 48,370,901 Company’s common shares held by parent Algar S.A. Empreendimentos e Participações. Of this amount, the total amount of R$408,000 was paid in cash in July 2018, and the remaining amount of R$240,000 will be paid in the third anniversary of the transaction in 2021. • Call and put option for indirect subsidiary’s shares On July 6, 2018, parent Algar S.A. ratified the call and put option, dated December 29, 2017, with investor Archy LLC, for the shares indirectly held by the latter in subsidiary Algar TI, which estimated amount is R$86,894. The exercise of said call and put options was contingent on the Company’s corporate restructuring and partial spin-off for withdrawal of the investment in Algar TI, which occurred on December 2, 2019, after satisfaction of the suspensive clause related to Anatel’s approval.

g) Other capital subscriptions and payments In addition to the abovementioned capital contribution made by investor Archy LLC, other noncontrolling shareholders have exercised their preemptive rights upon the subscription and payment of 1,275,455 new common shares, at the total amount of R$17,086. Due to the subscriptions and payments made, pursuant to the minutes of the Board of Directors’ meeting held on September 20, 2018, the Company’s capital increased by R$369,086, corresponding to 27,551,006 common shares, totaling R$1,090,507, divided into 295,019,806 common shares.

h) Acquisition of assets – CEMIG’s bid Algar Soluções, the Company’s subsidiary, was the winning bidder of the bid conducted by CEMIG, according to the homologation process on August 17, 2018, relating to Lot II, comprised of telecommunication, data transmission and Internet assets, covering the States of Goiás, Bahia, Pernambuco and Ceará.


23


Relevant events in 2018 - continued h) Acquisition of assets - CEMIG’s bid - continued

The transaction assets include telecommunication assets, such as POPs stations, metro-ethernet network, FTJ-GPON access network, IP/Internet backbone network, data network equipment, infrastructure equipment, among others, in addition to agreements entered into to meet the telecommunication service capacity and multimedia communication service (MCS) agreements. In November 2018, after fulfillment of the requirements and conditions set forth in the bidding process, the acquisition of the assets was fully settled, upon transfer to the winning bidder, of the restricted account balance, in the amount of R$78,555. The total acquisition cost was R$82,664, including the amount of R$4,109 relating to strategic and financial advisory services provided during the bidding process stages, and also the fees payable, due to the favorable outcome where Algar Soluções was declared the winning bidder, as set forth in the agreement.

2. Basis of preparation

a) Statement of compliance (with respect to IFRSs and CPCs)

The Company’s individual and consolidated financial statements have been prepared in accordance with accounting practices adopted in Brazil, which comprise the provisions of the Brazilian corporate law, set forth in Law No. 6.404/76, as amended by Law No. 11.638/07 and Law No. 11.941/09, and the accounting pronouncements, interpretations and guidelines issued by the Accounting Pronouncements Committee (CPC), as approved by the Brazilian Securities and Exchange Commission (CVM), and in conformity with International Financial Reporting Standards (IFRSs), issued by the International Accounting Standards Board (“IASB”).

All relevant information related to the financial statements, and only this information, is being disclosed and corresponds to the information used by the Company’s Management in its management.

The individual and consolidated financial statements were approved and authorized for issuance by the Board of Directors on March 4, 2020.

b) Basis of measurement The individual and consolidated financial statements have been prepared based on the historical cost and were adjusted to reflect financial assets and financial liabilities measured at fair value through profit or loss.


24

2. Basis of preparation - continued

c) Functional and presentation currency The individual and consolidated financial statements are presented in Brazilian reais - R$, which is the functional currency of the Company and its subsidiaries headquartered in Brazil. The companies headquartered in Argentina, Mexico, Colombia and Chile, the Company’s indirect subsidiaries up to December 1, 2019, have their respective functional currencies, and their financial statements were translated into Brazilian reais (R$) for consolidation purposes.

d) Use of estimates and judgments

The preparation of the individual and consolidated financial statements, pursuant to the prevailing corporate law and the applicable accounting standards, requires Management to make judgments, estimates and assumptions that affect the application of the accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates. Estimates and assumptions are revised on an ongoing basis. Revised accounting estimates are recognized in the period in which estimates are revised and in any future years that may be affected. The information on critical judgments related to the accounting policies adopted that affect the amounts recognized in the individual and consolidated financial statements, as well as the information on uncertainties related to the assumptions and estimates that have a significant risk of resulting in a material adjustment within the next fiscal year, is disclosed in the following notes: • Note 6 - Trade receivables; • Note 8 - Income tax and social contribution; • Note 10 - Property, plant and equipment; • Note 11 - Intangible assets; • Note 3m - Right-of-use asset • Note 16 - Provisions and escrow deposits.


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3. Summary of significant accounting policies The significant accounting policies applied in the preparation of these financial statements are summarized below: These accounting policies were consistently adopted for all reporting periods. a) Basis of consolidation

i) Subsidiaries

Subsidiaries are entities in which the parent, including indirectly, is the owner of shareholder's right that permanently ensures it priority in corporate resolutions and power to elect the majority of officers. Subsidiaries are included in consolidation from the date control is transferred to the Company and cease to be consolidated, where applicable, when control is no longer exercised.

ii) Direct and indirect subsidiaries included in the consolidated financial statements

(i) The Company was spun off on December 2, 2019 to withdraw the investment relating to the direct equity interest in Algar TI. Consequently, the Company’s indirect equity interests also ceased to exist. The preparation of the individual and consolidated financial statements used individual financial information of subsidiaries as at the same reporting date and consistent with the Parent’s accounting policies. The consolidation procedures used by the Company are those set out in CPC 36 (R3) and IFRS 10 - Consolidated Financial Statements

% equity interest In capital In voting capital 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Direct equity interests: Algar Multimídia 100 100 100 100 Algar TI (i) - 100 - 100 Algar Soluções 100 100 100 100 Smart Telecomunicações 100 - 100 -

Indirect equity interests: (i) Algar Tecnologia - 100 - 100 Engeset - 100 - 100 Algar Tecnologia SAS - 100 - 100 Algar Tecnologia Argentina - 100 - 100 Algar Tecnologia Chile - 100 - 100 Algar Tecnologia México - 100 - 100


26

3. Summary of significant accounting policies - continued

b) Foreign currency-denominated transactions Foreign currency-denominated transactions are translated into the Company’s and its subsidiaries’ functional currency at the exchange rates prevailing at the transaction dates. Monetary assets and liabilities denominated and calculated in foreign currency at the balance sheet date are translated into the functional currency at the exchange rate prevailing at that date. Exchange gain or loss on monetary items corresponds to the difference between the amortized cost of the functional currency at the beginning of the year, adjusted by the effective interest and payments during the period, and the amortized cost in foreign currency, translated at the exchange rate prevailing at the end of the year. Foreign currency-denominated non-monetary assets and liabilities that are measured at fair value are translated into the entity’s functional currency at the exchange rate corresponding to the end of the period in which fair value was determined. Foreign currency differences arising from the translation are directly recognized in profit or loss for the year. Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rate prevailing on the transaction date.

c) Current and noncurrent assets

i) Cash and cash equivalents

Comprise the balances of cash, bank deposits, and highly liquid short-term investments, convertible into a known amount of cash, that are subject to an insignificant risk of change in fair value and redeemable within up to 90 days from the investment date.

ii) Investments Investments in subsidiaries and associates in which the Company exercises significant influence, as well as investments in Group companies or companies under common control are accounted for under the equity method. Other investments that are not classified in the category above are stated at acquisition cost, net of the allowance for investment losses, when applicable.


27


c) Current and noncurrent assets - continued

iii) Property, plant and equipment Recognition and measurement Property, plant and equipment items are measured at historical acquisition or construction cost, less recoverable taxes, accumulated depreciation and impairment losses, when applicable. The cost of property, plant and equipment items include all those that are directly attributable to the acquisition or development of the asset. The cost of assets built by the entity itself include the cost of materials and wages of the employees directly involved in the asset construction or development projects. Includes any other costs directly attributable to the asset until it is ready for use as intended by the entity, in addition to the costs on decommissioning of assets and remediation of the sites where these assets are installed, and borrowing costs on qualifying assets. Software purchased that is an integral part of a piece of equipment’s functionality is capitalized as part of such asset. When parts of a property, plant and equipment item have significantly different useful lives, these parts represent individual items and are accounted for and controlled separately, including for depreciation purposes. Gains and losses on the disposal of an asset originate from the difference between the disposal amount and the net amount resulting from the cost less the residual amount and the accumulated depreciation of such asset, and are recognized directly in profit or loss for the year. Subsequent costs Subsequent costs are capitalized to the extent it is probable that future benefits associated with such costs will flow into the Company. Recurring maintenance and repair costs are recorded in profit or loss.


28



iii) Property, plant and equipment - continued Recognition and measurement Depreciation Depreciation is recognized in profit or loss on a straight-line basis according to the estimated useful life of the asset, as follows:

Average useful life in years 12/31/2019 12/31/2018

Buildings and improvements (i) 27 42 Switching equipment 9 9 Terminal equipment 7 7 Transmission equipment and means 18 18 Power and acclimatization equipment 10 13 Infrastructures 29 30 Company cars 6 6 Furniture and fixtures 9 10 Data processing equipment 7 7

(i) The changes in the average useful life of buildings and improvements derive from the non-inclusion of Algar TI

and its subsidiaries in the consolidation as at December 31, 2019, due to the spin-off of the Company’s investment in Algar TI on December 2, 2019.

Leased assets are depreciated over the shorter of the lease term and their useful lives, unless the Company has the intention to obtain ownership at the end of the lease term. Land is not depreciated. The depreciation methods, useful lives and residual values are reviewed at the end of each reporting period and any adjustments are recognized as changes in accounting estimates.


29



iv) Intangible assets Goodwill Goodwill is measured based on the excess amount arising from the sum up of the consideration transferred, the amount of noncontrolling interests in the acquiree and the fair value of the acquirer’s interest previously held in the acquire (if any) on the net amounts on the date of acquisition of the identifiable assets acquired and liabilities assumed. If the revaluation concludes that the net amounts of identifiable assets acquired and liabilities assumed on the acquisition date are higher than the sum of the consideration transferred, the amount of noncontrolling interests in the acquiree and the fair value of the acquirer’s interest previously held in the acquiree (if any), the excess amount is immediately recognized in profit or loss as bargain purchase gain. Goodwill on future earnings, arising from a business combination, is tested for impairment at least annually and, when applicable, is stated net of potential adjustments to reflect the recoverable amount. Concessions and authorizations The Company recognizes an intangible asset, arising from concession or authorization arrangements, when the use by the end users of infrastructure or some exploration right is confirmed, such as in the cases of right of use of the radio frequency wave spectrum (PPDUR) and right of use of Backbone, among others. Other intangible assets Software and enterprise resource management system licenses acquired are measured at cost. Expenses on enterprise resource management systems purchase and implementation are capitalized as intangible assets when it is probable that the future economic benefits they will generate will be higher than their cost, taking into consideration their economic and technological feasibility. Subsequent costs Subsequent costs are capitalized only when they increase the future economic benefits embodied in the specific asset to which they refer. All other costs are recognized in profit or loss when incurred.


30


c) Current and noncurrent assets - continued iv) Intangible assets and goodwill--continued

Amortization Amortization is recognized in profit or loss on a straight-line basis, based on the following estimated useful lives: Average useful life in years

12/31/2019 12/31/2018 Information systems 7 7 Public Price for the Right to Use Radio Frequency (PPDUR) 17 17 Right of use of satellite TV - DTH 15 15 Right of use of backbone 21 20 Trademarks and patents 7 7 Regulatory grants 14 14

v) Financial assets and financial liabilities

Initial recognition The Company must recognize a financial asset or a financial liability in its balance sheet only when it becomes a party to the underlying contract. When recognizing a financial asset for the first time, the entity must classify it, based on three categories: amortized cost, fair value through other comprehensive income (“FVTOCI”) and fair value through profit or loss (“FVTPL”) and measure it according to the criteria set out below. The recognition of the financial liability for the first time requires its classification as subsequently measured at amortized cost, subject to certain exceptions set out in CPC 48. The regular way purchase or sale of financial assets must be recognized and derecognized, as applicable, using the accounting for on the trade date or settlement date.


31


c) Current and noncurrent assets - continued v) Financial assets and financial liabilities

Derecognition of financial assets

A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire, or when the Company transfers the financial asset and such transfer qualifies for derecognition. Derecognition of financial liabilities The Company must derecognize financial liabilities (wholly or partially) in its balance sheet only when they are extinguished, and when the obligation stipulated in the agreement is settled or discharged or when it expires.

Classification of financial instruments The financial asset was classified based on the business model through which such asset is managed based on its contractual cash flows. The classification of the fair value must follow the criteria below, among other applicable guidelines: i) the portion of the change in the fair value that is related to changes in the liability credit risk is recognized in other comprehensive income; ii) the remaining portion of the change in the fair value is recognized in profit or loss for the year. Initial recognition and measurement A financial asset or financial liability is initially measured at fair value plus transaction costs directly attributable to its acquisition or issuance. This condition is not applicable to items measured at fair value through profit or loss.


32


c) Current and noncurrent assets - continued v) Financial assets and financial liabilities - continued

Classification of financial assets The initial recognition of a financial asset requires its measurement at amortized cost, at fair value through other comprehensive income and at fair value through profit or loss. A financial asset is measured at amortized cost if it meets the following conditions: • the asset is held in a business model whose objective is to obtain contractual cash flows; • the contractual terms of the financial asset give rise on specific dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt instrument is measured at fair value through other comprehensive income if it meets both the following conditions: • the asset is held within a business model whose objective is achieved by both obtaining contractual cash flows and selling financial assets; • the contractual terms of the financial asset give rise on specific dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All other financial assets are classified as measured at fair value through profit or loss. Upon initial recognition, the Company may irrevocably designate a financial asset that meets the requirements to be measured at amortized cost, at fair value through other comprehensive income and at fair value through profit or loss, which may ensure the accounting matching with respect to the results generated by the respective asset. Impairment The objective of the new impairment requirements is to recognize the expected credit losses for all financial instruments for which there was a significant increase in the credit risk since the initial recognition, either individually or collectively, considering all reasonable, sustainable information, including prospective information.


33


c) Current and noncurrent assets - continued v) Financial assets and financial liabilities - continued

Recognition of expected credit loss The Company must recognize an allowance for expected credit losses on a financial asset measured at amortized cost, lease receivable, contract asset or borrowing and financial guarantee agreement to which the impairment requirements are applicable. The Company must apply the impairment requirements for recognition and measurement of the allowance for losses on financial assets that are measured at fair value through other comprehensive income. Such allowance must be accounted for in other comprehensive income, without decreasing the carrying amount of the financial asset in the balance sheet. The allowance for losses on financial instruments must be measured at the balance sheet date at the amount corresponding to expected credit losses, if the credit risk of such financial instrument has significantly increased since the initial recognition. If the credit risk of the financial instrument does not increase significantly at the balance sheet date, the allowance for losses on such financial instrument must be measured at the amount corresponding to the 12-month expected credit losses. The amount of expected credit losses (or reversal) necessary to adjust the allowance for losses at the balance sheet date must be recognized in profit or loss as impairment gain or loss.

Nonfinancial assets The carrying amounts of the Company’s and its subsidiaries’ nonfinancial assets, other than inventories and deferred income tax and social contribution, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets with indefinite useful lives, the recoverable amount is estimated annually.

An impairment loss is recognized if the carrying amount of an asset or cash-generating unit (CGU) exceeds its recoverable amount.


34


c) Current and noncurrent assets - continued v) Nonfinancial assets--continued

Impairment The recoverable amount of an asset or cash-generating unit is the higher of its value in use and its fair value less costs to sell. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pretax discount rate that reflects the current market conditions with respect to the capital recoverability period and the specific risks inherent in the asset or CGU. For impairment testing purposes, assets that cannot be tested individually are grouped together in the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash flows of other assets (the “cash-generating unit” or “CGU”). For impairment test of goodwill, the goodwill amount on a business combination is allocated to the CGU or the group of CGUs for which the benefit of combination synergies is expected. Such allocation reflects the lowest level where goodwill is monitored for internal purposes and is not higher than an operating segment determined as prescribed in IFRS 8 and CPC 22. Impairment losses are recognized in profit or loss. Recognized losses relating to the CGUs are initially allocated to write down any goodwill allocated to such CGU (or group of CGUs), and subsequently write down the other assets of the CGU (or group of CGUs) on a pro rata basis. An impairment loss related to goodwill is not reversed. Impairment losses on other assets are reversed only to the extent the carrying amount of the asset does not exceed the carrying amount that would have been determined, less depreciation or amortization, had the impairment loss not been recognized. Management reviews annually the net carrying amount of the assets to assess events or changes in economic, operating or technological circumstances that indicate that assets might be impaired. Whenever such evidence is identified and the net carrying amount exceeds the recoverable amount, an allowance for impairment is recorded to adjust the net carrying amount to the recoverable amount. Such losses are accounted for as other operating expenses, if applicable.


35


d) Current and noncurrent liabilities Current and noncurrent liabilities are stated at known or estimated amounts, plus, when applicable, the corresponding charges, inflation adjustments and/or exchange rate changes incurred through the balance sheet date. When applicable, current and noncurrent liabilities are stated at present value, calculated on a transaction-by-transaction basis, based on interest rates that reflect the term, currency and risk of each transaction. The contra entry to the present value adjustment is the profit or loss line item that originated the related liability. The difference between the present value of a transaction and the nominal value of a liability is recorded in profit or loss over the contractual term, based on the amortized cost method and effective interest method. i) Concession and authorization of telecommunication services payable

The amount due is recorded based on resolutions issued by ANATEL, at the rate of 2% of the net revenue arising from the concession, related to the switched fixed telephone service (STFC), and 2% of the net revenue arising from the personal mobile service (SMP). The amount considers the revenue recognized in the year prior to the payment, net of taxes and social contributions.

ii) Provisions A provision is recognized in the balance sheet when the Company and its subsidiaries have a legal or constructive obligation as a result of a past event, which can be reliably estimated, and it is probable that an outflow of funds will be required to settle the obligation. Provisions are recognized based on the best estimates of the risk involved. The provision for risks is determined by Management according to the expected loss, based on the opinion of the Company's in-house and outside legal counsel, at amounts considered sufficient to cover losses and risks.

iii) Employee benefits Pension plan Contributions to defined contribution pension plans are recognized as employee benefit expenses in profit or loss for the periods during which services are provided by employees.


36


d) Current and noncurrent liabilities - continued iii) Employee benefits - continued

Pension plan - continued Contributions paid in advance are recognized as an asset provided that there is either a cash reimbursement or a reduction in future payments is available. Short-term employee benefits, including profit sharing plan Short-term employee benefit obligations are measured on an undiscounted basis and recognized as costs or expenses as the related service is provided. The liability is recognized at the amount expected to be paid under the cash bonus plan or short-term profit sharing, if the Company and its subsidiaries have a legal or constructive obligation to pay this amount due to a past service provided by the employee and the obligation can be reliably estimated.

iv) Income tax and social contribution Current and deferred income tax and social contribution are calculated at the rate of 15%, plus a 10% surtax on annual taxable income exceeding R$240 for income tax, and 9% on taxable income for social contribution. The offset of tax loss carryforwards is considered, limited to 30% of annual taxable income. Deferred income tax and social contribution are recognized in relation to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the related amounts used for taxation purposes. Deferred income tax and social contribution are measured at the tax rates expected to be applied to temporary differences when they are reversed, based on the laws enacted or substantially enacted at the reporting date.


37


d) Current and noncurrent liabilities - continued iv) Income tax and social contribution - continued

In determining current and deferred income tax, the Company and its subsidiaries take into consideration the impact of uncertainties relating to tax positions assumed and whether the additional payment of income tax and interest has to be made. The Company and its subsidiaries believe that the provision for income tax, recognized in liabilities, is appropriate for all outstanding tax periods based on several factors, including the interpretation of tax laws and past experience. Such assessment is based on estimates and assumptions that may involve several judgments on future events. New information may be disclosed, which would require the Company and its subsidiaries to change their judgments about the adequacy of the existing provision; these changes will impact income tax expenses in the year they are realized. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes imposed by the same tax authority on the same entity subject to taxation. The Company and its subsidiaries disclose deferred tax assets or liabilities in the financial statements. A deferred income tax and social contribution asset is recognized for all unutilized tax losses, tax credits, and deductible temporary differences to the extent that it is probable that future taxable income will be available against which these tax losses, tax credits and deductible temporary differences can be utilized. Deferred income tax and social contribution assets are reviewed at the end of each reporting period and reduced to the extent that their realization is no longer probable.


38


d) Current and noncurrent liabilities - continued

v) Finance lease

Leases where the Company is the lessee and substantially retains the risks and rewards incidental to ownership are classified as finance leases (CPC-06_R1 is effective through December 31, 2018, and the R2 version with significant changes came into effect on January 1, 2019). Leases are recognized at the inception of the lease at the lower of the fair value of the leased item and the present value of the payments set forth in the contract. Interest on lease is recognized in the income statement as finance costs during the contractual term. The Company is a party to tower lease contracts as lessee, arising from a sale-leaseback transaction, comprising the assignment of right and use of towers, which are assets reversible to Anatel, and the concurrent lease of part of the same asset assigned. Although not applicable, leases where the Company is the lessor and transfers substantially all the risks and rewards incidental to ownership to the lessee will be classified as finance leases. The underlying assets will be transferred and recognized as a receivable at the lower of fair value of the leased item and the present value of the receivables set forth in the contract. Interest on lease will be recognized in the income statement as finance income during the contractual term. Leased assets correspond to financial assets classified as loans and receivables

e) Revenue recognition

Revenue and expenses are recognized on an accrual basis. i) Sale of fixed telephony, mobile telephony and broadband Internet services

Revenue deriving from these services are accounted for at the rate amount on the service provision date and is comprised of rates on the subscription, utilization, network use, maintenance and other services provided to subscribers and customers. All services are billed on a monthly basis according to the measurement performed by the operating systems that identify the information for recognition and allocation to the appropriate revenue components. The services provided between the billing date and the end of each month are calculated and recorded as revenue at the service provision month. The revenue related to the sale of prepaid mobile phone recharge credits is deferred and recognized in profit or loss to the extent these credits are effectively consumed.


39


e) Revenue recognition - continued

ii) Equipment rental

Revenue derives from the rental of modems related to the provision of broadband services to retail customers, and also the rental of routers and switches related to the provision of internet services to corporate customers. These amounts are recognized on a monthly basis during the contractual term.

iii) Barter of goods and services

Algar Telecom and Algar Multimídia barter assets and services, that is, exchange services and infrastructures with companies from the same sector or distinct sectors. These revenues are recognized at fair value on accrual basis when risk is transferred, in the case of goods, and services are provided. The barter of infrastructure aims mainly at ensuring the redundancy of the services provided by the entities, such as the continuity of services in case of damages caused to the networks or automated systems, or in case of any other event that may threaten the provision of services by the entities. This is intended to reduce or even eliminate the risks to the end customers of these services.

iv) Revenue from devices and accessories

The Company recognizes revenue from devices and accessories when the customer takes control of the device. In case the customer acquires a device with subsidy, that is, “service + device”, Algar allocates part of its future service revenue to the device and recognizes revenue upon delivery of the device at the beginning of the agreement, which results in a contract asset. The Company adopts the practical expedient to disregard the effects from a significant financing component, when the period between the date the good or service is transferred to the customer and the date in which the customer pays for such good or service corresponds to one year or less. For agreements with terms over one year (only for modem sales), the related amounts are immaterial.


40


e) Revenue recognition - continued

v) Revenue from BPO (Business Process Outsourcing) and technology environment management services

At Algar TI Consultoria S/A (the Company’s subsidiary up to December 1, 2019), service revenues are recognized on a monthly basis according to the measurement performed by the operating systems that identify the information for recognition and allocation to the appropriate revenue components. Services provided and not billed in the respective month are calculated and accounted for as revenue in the service provision month, directly related to their performance up to the monthly closing date. Revenue from the agreement comprises the initial amount stipulated in the agreement plus any changes arising from additional requests, claims and payments of contractual incentives, only to the extent that it is highly probable that a significant reversal of the amount of accumulated revenue will not occur. For variable revenue subject to monthly measurement of the services provided to the customer, the service revenue is recognized at the amount the Company is entitled to charge from the customer, according to the practical expedient.

Critical judgments and estimates The Company’s customers generally enter into a service agreement with a loyalty period in exchange for discounts on devices, rates or also service monthly fees. For accounting purposes, judgment was applied to determine that the contractual period comprises the entire customer loyalty period, concluding that the loyalty period needs to be met due to the collection of a proportional fine, which amount is significant on any time during the period of the agreement with the customer. In those cases where the agreement includes a device and accessories, for which revenue is recognized on a given period, and also services, for which revenue is recognized proportionally over time, judgment is required to determine the Standalone Selling Price (SSP) for each distinct performance obligation and allocate the corresponding revenue. The Company uses a series of factors to estimate the SSP when each product and service is sold separately.

Contract assets and liabilities Contract assets refer mainly to the remaining portion of the Company’s future service revenue allocated to the devices and recognized in revenue upon delivery of the device at the beginning of the agreement, as well as time adjustments to the recognition of other revenue line items. All contract assets are substantially included in the consolidated balance sheet as a component of prepaid expenses. Contract liabilities, recognized in the group of prepaid expenses, refer to the obligation to transfer goods and services to customers, in relation to which the entity has received consideration or the amount is already due by the customer.


41


e) Revenue recognition - continued Cost to obtain contracts with customers An asset is recognized for the incremental costs incurred to obtain a contract with a customer if future benefits from the payment of these costs are expected. These amounts consist of commissions, related benefits and taxes on payroll of the Company’s sales employees and commissions paid to our outsourced distribution channel partners. These costs are amortized proportionally during the estimated customer loyalty period, which excludes future contractual renewals. Deferred costs related to the expenses necessary to obtain an agreement are recognized as a component of prepaid expenses in the consolidated balance sheet.

f) Finance income and costs

Finance income comprises interest on investments made by the Company and its subsidiaries, including income from short-term investments, present value adjustments of financial assets, gains on the sale of financial assets, changes in the fair value of financial assets measured at fair value through profit or loss, and gains on derivatives. Finance costs comprise interest expenses on borrowings and financing, inflation adjustments to taxes in installments and provisions, changes in the fair value of financial assets measured at fair value through profit or loss, impairment losses on financial assets and losses on derivatives recognized in profit or loss. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognized in profit or loss for the year on accrual basis. Exchange gains or losses are stated at their net amounts in profit or loss for the year.

g) Earnings (loss) per share Basic earnings (loss) per share are calculated based on the profit or loss for the year attributable to owners of the Company and the weighted average number of common shares outstanding in the respective year. Diluted earnings (loss) per share are calculated based on the average number of outstanding shares, adjusted by instruments potentially convertible into shares in the reporting years, when applicable.

Algar Telecom S.A. Notes to the financial statements for the Year Ended December 31, 2019 (In thousands of Brazilian reais – R$, unless otherwise stated)

42


h) Segment reporting Information on operating segments is reported consistently with the internal reports provided to the members of the executive board, who are responsible for allocating funds and assessing the performance of the Company’s and its subsidiaries’ segments. The executive board has defined the Company’s operating segments, based on the reports used for strategic decision making, which are mainly segregated between the types of services provided. The segments defined are the following: Telecom – represents the sum of the results of operations and capital employed of the business units (i) fixed telephony; (ii) broadband Internet; (iii) data communication; (iv) mobile telephony; (v) Internet service provider. Tech - BPO/IT management – offers IT solutions for business processes, through an IT infrastructure, managed services, business management and customer relationship. Also comprises the provision of contact center services, BPO (Business Process Outsourcing) and information technology solutions. As from December 2, 2019, this segment does not include the Company’s consolidated financial statements, due to the spin-off of the Company’s investment in Algar TI (note 1b). The information on the applicable segments is set out in note 28, including the main balance sheet and income statement accounts.

i) Equity

Earnings reserve Refers to a type of profit allocation, the legal reserve and earnings retention reserve being applicable to the Company in the reporting years. Legal reserve The Company recognizes the legal reserve in accordance with the Brazilian Corporate Law and its Bylaws, at 5% of profit for the year, limited to 20% of capital. Earnings retention reserve Pursuant to Law 11.638/2007, the Company reclassified the remaining balances of retained earnings to earnings reserves, for purposes of investment in modernization and expansion, as proposed by the Company’s Management, based on the budget approved by the Board of Directors.


43


j) Statement of cash flows

The Company classifies the payment of interest and inflation adjustment to borrowings and debentures, and dividends received, as financing and investing activities in its cash flow, respectively. Such classification was adopted as it refers to borrowing costs and return on investments, in line with item 33 of CPC 03.

k) New standards and interpretations i) Main standards effective beginning January 1, 2019

No new standards and interpretations applicable to the Company and its subsidiaries were issued in 2019, but ICPC 22 (IFRIC 23) - Uncertainty over Income Tax Treatments is effective as from January 1, 2019.

ICPC 23 (IFRIC 7), which provides guidance on the application of the requirements set out in CPC 42 – Financial Reporting in Hyperinflationary Economies, is also effective. As from December 2, 2019, due to the spin-off of the Company’s investment in Algar TI, its shareholding structure does not include companies located in other countries.

ICPC 22 (IFRIC 23) provided more guidance and consistency with respect to the treatment of obscure matters that give rise to uncertainties in the calculation of taxes on income as they are not sufficiently defined in tax laws.

Such interpretation tried to solve a doubt not clarified by CPC 32 – Income Taxes, about what must be included in the financial statements in case of uncertainty involving tax aspects related to the income tax and social contribution.

The entity must measure and recognize current or deferred taxes (assets or liabilities), as set forth in CPC 32 – Income Taxes, based on taxable income, tax bases, tax losses and unutilized tax credits, in addition to the tax rates defined, in accordance with this interpretation. When the entity has doubts on how the tax authority or court will interpret a given tax position adopted when determining the amount payable of income taxes, there is an indication of uncertainty. The previous treatment of such uncertainty is not necessarily incompatible with the provisions in such interpretation. However, currently, it must follow the principle defined for all entities for the sake of the transparency and consistency of the financial statements disclosed. In view of the lack of transparency on how to apply tax laws to specific transactions and circumstances, IFRIC 23 (ICPC 22) determines that an entity must assess whether it is probable that the tax authority or court will accept the tax treatment adopted. That is, the likelihood of acceptance is higher than the likelihood of non-acceptance.


44


k) New standards and interpretations - continued ii) Main standards effective beginning January 1, 2019 - continued If the assessment concludes that the acceptance by the tax authority is not probable, the entity’s accounting records may reflect a tax obligation higher than that determined in the tax calculation, or even recognize a tax asset. In light of the context of ICPC 22, the Company believes that the adoption of such interpretation does not significantly impact its financial statements, as the matters that require in-depth discussion, or that give rise to complex interpretations, when not converging to a desirable level of certainty, are adjusted upon taxable income calculation, thus avoiding the determination of an understated tax obligation or even the recognition of an overstated tax credit. ii) New standards issued and not yet applicable The Company did not adopt the following new and revised IFRSs already issued but not yet effective up to the date of authorization for completion of these financial statements:

- IFRS 17 Insurance Contracts - IFRS 10 - Consolidated Financial Statements and IAS 28 (amendments)

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

- Amendments to IFRS 3 Definition of Business - Amendments to IAS 1 and IAS 8 Definition of Material - Conceptual Framework Conceptual Framework in IFRS Standards

l) Adoption of CPC 47 – Revenue from Contracts with Customers

The adjustments in relation to the practice prior to the adoption of CPC 47 to equity and profit or loss for 2018 are as follows:

Assets Consolidated Individual Current Noncurrent Total Current Noncurrent Total

Balance as at 12/31/2017 887,473 2,806,911 3,694,384 331,027 2,595,907 2,926,934 IFRS15 adjustments: Reallocation of revenues, discounts and subsidies (i) (2,721) - (2,721) - - - Prepaid expense - commissions 38,364 16,777 55,141 19,545 7,010 26,555 Deferred income tax and social contribution - 4,020 4,020 - - - Investment - - - - 9,596 9,596 Balance as at 01/01/2018 923,116 2,827,708 3,750,824 350,572 2,612,513 2,963,085

i) As previous practice, the Company already adopted the recognition of the contract asset arising from subsidies granted on the sale of devices. As at December 31, 2017, the balance of contract assets in the Company’s balance sheet was R$7,294, and after the adjustments arising from adopting the new standard, the balance of contract assets as at January 1, 2018 was R$4,573.


45


l) Adoption of CPC 47 – Revenue from Contracts with Customers – continued

Liabilities and equity Consolidated

Individual

Current Noncurre

nt Equity Total

Current Noncurrent Equity Total Balance as at 12/31/2017 1,041,492 1,482,921 1,169,971 3,694,384

577,912 1,179,057 1,169,965 2,926,934

IFRS15 adjustments: Reallocation of revenues, discounts and subsidies 4,383 7,443 - 11,826

- - - -

Deferred income tax and social contribution - 17,493 - 17,493

- 9,029 - 9,029

First-time adoption adjustment - -

27,121 27,121

- - 17,526 17,526

Valuation adjustments to equity - - - -

- - 9,596 9,596

Balance as at 01/01/2018 1,045,875 1,507,857 1,197,092 3,750,824

577,912 1,188,086 1,197,087 2,963,085

Consolidated

12/31/2018 before

adjustments

Reallocation of revenues,

discounts and

subsidies

Prepaid expense -

commissions 12/31/2018 Net operating revenue 2,861,720 5,578 - 2,867,298 Cost of sales and services (1,697,941) - - (1,697,941) Gross profit or loss 1,163,779 5,578 - 1,169,357 Operating income (expenses) (567,363) (2,005) 3,283 (566,085) Operating profit (loss) before finance income (costs) 596,416 3,573 3,283 603,272 Finance costs, net (137,587) - - (137,587) Profit (loss) before income tax and social contribution 458,829 3,573 3,283 465,685 Income tax and social contribution (147,317) (1,215) (1,116) (149,648) Profit (loss) for the year 311,512 2,358 2,167 316,037

Individual

12/31/2018 before

adjustments

Reallocation of revenues,

discounts and

subsidies

Prepaid expense -

commissions Share of

adjustments 12/31/2018 Net operating revenue 1,245,582 620 - - 1,246,202 Cost of sales and services (672,700) - - - (672,700) Gross profit or loss 572,882 620 - - 573,502 Operating income (expenses) (89,673) (1,299) (642) 7,036 (84,578) Operating profit (loss) before finance income (costs) 483,209 (679) (642) 7,036 488,924 Finance costs, net (124,173) - - - (124,173) Profit (loss) before income tax and social contribution 359,036 (679) (642) 7,036 364,751 Income tax and social contribution (49,163) 231 218 - (48,714) Profit (loss) for the year 309,873 (448) (424) 7,036 316,037


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m) IFRS 16 - Leases IFRS 16, effective beginning January 1, 2019, is equivalent to CPC 06 (R2) – Leases. Such standard, adopted by the Company when it became effective, provides a basis for users of the financial statements to assess the effect that leases have on an entity’s financial position, financial performance and cash flows. The purpose of this standard is the several leases, including leases of right-of-use sublease assets, subject to certain exceptions. When entering into contracts, companies must assess whether the contract is or contains a lease. The contract is or contains a lease if it conveys the right to control the use of an identified asset for a given period, in exchange for a defined consideration.

IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for leases under a single accounting model in the balance sheet. The standard includes two recognition exemptions for lessees: leases of low-value assets and short-term leases (up to 12 months). At the inception of a lease contract, a lessee should recognize a liability relating to lease payments (“lease liability”) and an asset that represents the right to use the underlying asset over the lease term (“right-of-use asset”).

Lessees must separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees must also remeasure the lease liability upon the occurrence of certain events, for instance, a change in the lease term and/or in future lease payments as a result of changing an index or rate used to determine such payments. Overall, lessees will recognize the remeasured value of the lease liability as an adjustment to the right-of-use asset. For the lessor, IFRS 16 does not introduce any substantial change in the accounting method in relation to the currently adopted method, in accordance with IAS 17. Lessors will continue to classify all leases based on the same classification principle established by IAS 17, distinguishing between two types of lease: operating and finance. The Company adopted the standard according to the modified retrospective approach beginning January 1, 2019, considering the right of use equivalent to the lease liability on the first-time adoption date. The contracts that have not been previously identified as containing a lease in light of IAS 17 and IFRIC 04 will not be subject to the adoption of IFRS 16 by the Company. The Company elected to use the exemptions proposed by the standard for short-term lease contracts (up to 12 months) or lease contracts for which the underlying asset has low value.


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m) IFRS 16 – Leases - continued

The Company as lessee A lease is defined as a contract, or part of a contract, that conveys the right to use an asset (underlying asset) over a period, in exchange for a consideration. In applying such standard, the following requirements are observed: • The existence of an asset that can be either explicitly specified in the contract or implicitly

specified by being identified at the time it is made available for use by the Company; • The Company has the right to obtain substantially all the economic benefits from the use of

an identified asset throughout the period of use; • The Company has the right to direct the use of an identified asset throughout the period of

use. Measurement and recognition of contracts in the lessee At lease inception date, the Company recognizes a right-of-use asset and a lease liability in its balance sheet. Lessees must separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. The right-of-use asset is measured at cost, which comprises the initially measured lease liability, including any initial direct costs incurred by the Company, as well as an estimate of any costs to dismantle and remove the asset at the end of the lease term, and any lease payments made before the lease inception date, calculated at present value. The Company depreciates the right-of-use assets on a straight-line basis from the lease inception date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. At the inception date, the Company measures the lease liability at the present value of the lease payments, discounted using the interest rate implicit in the lease, when set forth in the contract. If that rate cannot be determined, the incremental rate is used. The Company used the incremental rate for IFRS 16/ CPC 06 adoption purposes. Lease payments used to measure the lease liability include fixed payments. After the initial measurement, the lease liability is adjusted for inflation and derecognized based on the related payments. In the event of remeasurement or modification, or if there are substantial changes to fixed payments, a recalculation may be required to reflect the event that has occurred. When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or charged to profit or loss if it is already reduced to zero.


48


m) IFRS 16 – Leases - continued The Company elected not to recognize short-term leases (up to 12 months) and leases of low-value assets (up to R$20), thus applying the exemptions set out in the standard. In these cases, lease contracts are directly recognized as operating lease expenses in profit or loss for the period, on an accrual basis, over the lease term. For purposes of controlling and recognizing right-of-use assets and the underlying lease liabilities, the Company elected to create new balance sheet accounts and line items, in order to report the amounts separately from other assets and liabilities and disclose the relevant effects in the income statement line items. The Company recognizes in the statement of cash flows, both the principal and interest in lease liabilities, as financing activities. The Company as lessor As a lessor, the Company classifies its leases as operating or finance leases, which criteria were not changed upon adoption of IFRS 16/ CPC 06. A lease is classified as finance lease if it substantially transfers all risks and rewards incidental to ownership of the underlying asset. If there is no such requirement, the lease is classified as operating lease. Accounting policy applicable before January 1, 2019 Prior to the effective date of IFRS 16 / CPC 06, leases were assessed by the Company considering the concepts of finance lease and operating lease, in order to determine the proper classification for purposes of accounting recognition. a) Finance lease Leases under which all risks and rewards incidental to ownership of leased assets are substantially transferred were classified as finance leases. In this case, the lease terms in relation to the useful lives of the assets, the present value of minimum lease payments compared to the fair value of assets, as well as the likelihood of the Company obtaining ownership of the leased assets at the end of the lease term were also taken into account.


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m) IFRS 16 – Leases - continued b) Operating lease All leases not qualifying for recognition as finance leases were classified as operating leases. The lease payments made by the Company, in the capacity of lessee, were recognized as expenses for the period, on a straight-line basis, over the lease term. For lessors, there is no substantial change in the recognition of leases in view of IFRS 16. Lessors will continue to classify all leases based on the classification principle set out in IAS 17, distinguishing between operating and finance leases. As at June 30, 2019, the Company remeasured the discount rate on leases so as to adjust the rate to the lease terms. Such calculation review also comprised the collaterals provided in the cases of real estate contracts, impacting the rate applied. The Company’s discount rate, initially established at 7.49%, started to comprise numerous rates ranging from 6.36% to 10.25% p.a. Beginning June 30, 2019, the Company started to disclose the amounts relating to the right-of-use assets and lease liabilities, net of PIS and COFINS. On December 18, 2019, the Brazilian Securities and Exchange Commission (CVM) issued Circular Letter 02/19 providing guidance on the accounting for lease assets and liabilities without the segregation of PIS and COFINS, which must be considered both by the lessee and lessor, ensuring the consistency for accounting purposes.


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m) IFRS 16 - Leases - continued PIS and COFINS on lease contracts The Company adjusted the calculations adopted, for the full period covered, so that the lease liability in these financial statements was recognized at its full amount, adjusted to present value, without the balance being decreased by said taxes. In view of the impacts determined, the Company assessed and understood that these impacts were immaterial, therefore not justifying the restatement of the quarterly information previously disclosed.

The main impacts arising from the adoption of the standard are shown below: i) Right of use

Cost Consolidated

12/31/2019

Class of assets Adoption - 01/01/2019 Additions

Write-offs

Write-off of consolidated

balances of Algar TI (spin-off

12/02/2019) Balance - 12/31/2019

Towers 118,676 - - - 118,676 Company cars 32,939 15,849 (2,128) (16,344) 30,316 Properties 176,344 14,481 (4,855) (8,848) 177,122 Photovoltaic power stations 30,390 - - - 30,390 Service position 4,384 - - (4,384) - Optical fibers 62,038 - (3,756) - 58,282 Equipment 3,696 - - (3,696) - 428,467 30,330 (10,739) (33,272) 414,786

Depreciation Consolidated 12/31/2019

Class of assets Adoption - 01/01/2019 Additions

Write-offs

Write-off of consolidated

balances of Algar TI

(spin-off 12/02/2019) Balance - 12/31/2019

Towers - (22,257) - - (22,257) Company cars - (17,260) 758 5,394 (11,108) Properties - (33,334) 1,365 3,415 (28,554) Photovoltaic power stations - (1,994) - - (1,994) Service position - (2,029) - 2,029 - Optical fibers - (6,546) - - (6,546) Equipment - (1,999) - 1,999 - - (85,419) 2,123 12,837 (70,459) Net value 428,467 (55,089) (8,616) (20,435) 344,327


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m) IFRS 16 - Leases - continued

i) Right of use - continued

Cost Individual

12/31/2019

Class of assets Adoption - 01/01/2019 Additions Write-offs

Balance - 12/31/2019

Towers 116,447 - - 116,447 Company cars 14,365 5,351 (824) 18,892 Properties 128,637 8,255 (605) 136,287 Photovoltaic power stations 30,390 - - 30,390 289,839 13,606 (1,429) 302,016

Depreciation Individual 12/31/2019

Class of assets Adoption - 01/01/2019 Additions Write-offs

Balance - 12/31/2019

Towers - (21,780) - (21,780) Company cars - (7,132) 351 (6,781) Properties - (20,301) 122 (20,179) Photovoltaic power stations - (1,994) - (1,994)

- (51,207) 473 (50,734) Balance 289,839 (37,601) (956) 251,282


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ii) Lease liability 12/31/2019

Liabilities Consolidated Individual Lease liability – current 85,812 61,259 Lease liability – noncurrent 270,560 198,739

356,372 259,998

Short-term liabilities Consolidated

12/31/2019

Class of assets Adoption - 01/01/2019 Additions Payments

Write-offs Interest

Write-off of consolidated balances of

Algar TI (spin-off 12/02/2019) Transfers

Balance - 12/31/2019

Towers 26,249 - (27,320) - 8,526 - 18,154 25,609 Company cars 14,499 5,954 (18,855) (1,369) 2,501 (7,040) 16,590 12,280 Properties 38,151 3,224 (39,918) (3,859) 12,517 (2,958) 27,917 35,074 Photovoltaic power stations 3,711 - (3,903) - 2,915 - 880 3,603 Service position 2,276 - (2,194) - 247 (2,276) 1,947 - Optical fibers 9,639 - (9,977) (3,756) 5,464 - 7,876 9,246 Equipment 2,218 117 (2,371) - 200 (1,644) 1,480 - 96,743 9,295 (104,538) (8,984) 32,370 (13,918) 74,844 85,812

Long-term liabilities Consolidated 12/31/2019


Write-offs Interest

Write-off of consolidated balances of

Algar TI (spin-off 12/02/2019) Transfers

Balance - 12/31/2019

Towers 92,427 - - - - - (18,154) 74,273 Company cars 18,440 9,895 - - - (4,226) (16,590) 7,519 Properties 138,194 10,883 - - - (2,714) (27,917) 118,446 Photovoltaic power stations 26,679 - - - - - (880) 25,799 Service position 2,108 - - - - (161) (1,947) - Optical fibers 52,399 - - - - - (7,876) 44,523 Equipment 1,478 115 - - - (113) (1,480) -

331,725 20,893 - - - (7,214) (74,844) 270,560 428,468 30,188 (104,538) (8,984) 32,370 (21,132) - 356,372


53



ii) Lease liability--continued

Short-term liabilities Individual

12/31/2019


Write-offs Interest Transfers

Balance - 12/31/2019

Towers 25,707 - (26,756) - 8,378 17,738 25,067 Company cars 6,009 2,025 (7,781) (473) 1,018 6,785 7,583 Properties 24,086 1,509 (25,787) (484) 9,425 16,257 25,006 Photovoltaic power stations 3,711 - (3,903) - 2,915 880 3,603 59,513 3,534 (64,227) (957) 21,736 41,660 61,259

Long-term liabilities Individual 12/31/2019


Write-offs Interest Transfers

Balance - 12/31/2019

Towers 90,740 - - - - (17,738) 73,002 Company cars 8,356 3,327 - - - (6,785) 4,898 Properties 104,551 6,746 - - - (16,257) 95,040 Photovoltaic power stations 26,679 - - - - (880) 25,799 230,326 10,073 - - - (41,660) 198,739 289,839 13,607 (64,227) (957) 21,736 - 259,998

iii) Minimum payments

Consolidated - 12/31/2019

Up to 1

year 2 to 5 years

6 to 10 years

Over 10 years Total

Potential PIS/COFINS -

9.25% Minimum amounts payable 89,620 244,732 106,286 53,369 494,007 45,696 Interest expenses (26,380) (67,219) (31,001) (13,035) (137,635) -

63,240 177,513 75,285 40,334 356,372 32,964

Individual - 12/31/2019

Up to 1

year 2 to 5 years 6 to 10 years

Over 10 years Total

Potential PIS/COFINS -

9.25% Minimum amounts payable 63,893 187,842 69,820 28,185 349,740 32,351 Interest expenses (18,876) (46,368) (15,995) (8,503) (89,742) -

45,017 141,474 53,825 19,682 259,998 24,050


54



iv) Lease payment not recognized as liability

Upon adoption of certain exemptions set out in IFRS16/ CPC 06, the Company elected not to recognize a lease liability for short-term lease contracts (up to 12 months) and low-value asset leases (up to R$20). Payments made related to these leases are recognized on a straight-line basis in profit or loss. Also, certain variable lease payments cannot be recognized as lease liabilities and are recognized as expenses, when incurred. The expense relating to payments not included in the measurement of a lease liability is broken down as follows: Consolidated 12/31/2019 01/01/2019

Contracts with terms below 12 months (towers) 7,277 14,952 7,277 14,952

v) Contracts per term and discount rate

Annual rate Lease terms With no collateral With collateral (*) 2 years 6.86% 6.36% 3 years 7.21% 6.71% 4 years 7.80% 7.30% 5 years 8.35% 7.85% 6 years 8.86% 8.36% 7 years 9.35% 8.85% 8 years 9.70% 9.20% 9 years 10.00% 9.50% 10 years 10.25% 9.75% 11 years 10.48% 9.98% 12 years 10.66% 10.16% 13 years 10.80% 10.30% 15 years 10.92% 10.42%

(*) Only for properties.


55

4. Cash and cash equivalents

Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018

Cash and banks 10,946 17,563 8,110 5,587 Highly liquid short-term investments 413,427 208,317 369,393 40,042 424,373 225,880 377,503 45,629

Short-term investments refer substantially to Bank Certificates of Deposit (CDBs), yielding interest based on the fluctuation of the Interbank Deposit (CDI) rate, corresponding to 95.2% of the CDI rate in the individual and 95.5% of the CDI rate in the consolidated.

The Company’s and its subsidiaries’ exposure to interest rate risks and a sensitivity analysis for the financial assets and financial liabilities are disclosed in note 28c.

5. Long-term investments

As at December 31, 2019, the Company and its subsidiary Algar Multimídia have investments that are not highly liquid, which were pledged as collateral for lawsuits to which these subsidiaries were parties.

Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Long-term investments: Algar Telecom 998 434 998 434 Algar Multimídia 1,318 1,248 - - Algar Tecnologia - 1,650 - - Algar TI - 117 - - Total long-term investments 2,316 3,449 998 434

6. Trade receivables


Billed amounts 362,402 462,818 224,902 238,482 Unbilled amounts 213,705 239,499 126,656 104,925 576,107 702,317 351,558 343,407 Present value adjustment (3,789) (780) (3,032) (650) Allowance for expected losses (70,418) (99,101) (56,055) (76,782) 501,900 602,436 292,471 265,975 Current assets 477,254 596,548 272,322 262,493 Noncurrent assets 24,646 5,888 20,149 3,482

The information as at December 31, 2018, including in the other tables in this note, shown below, include long-term receivables, when applicable, the model adopted for disclosure in 2019. The Company’s and its subsidiaries’ exposure to credit risks and impairments losses on trade receivables are disclosed in Note 28a.


56

6. Trade receivables a) The aging list of past-due and current amounts is as follows:


Up to 30 days past due 57,673 66,081 39,197 39,336 31 to 60 days past due 22,237 18,906 13,826 12,511 61 to 90 days past due 12,433 11,866 7,940 6,583 91 to 120 days past due 8,892 8,421 6,008 5,226 Over 120 days past due 113,920 122,682 85,448 90,738 Total past due 215,155 227,956 152,419 154,394 Current unbilled amounts 147,247 234,862 72,483 84,091 Unbilled amounts 213,705 239,499 126,656 104,924 576,107 702,317 351,558 343,409

b) Variations in the allowance for expected losses are as follows: Consolidated Individual

12/31/2019 12/31/2018 12/31/2019 12/31/2018 Opening balance (99,101) (112,486) (76,782) (60,337) Merger of subsidiary - Algar Celular - - - (21,759) Recognition of allowance in the period (21,390) (17,934) (17,608) (14,747) Write-off against trade receivables 46,903 31,319 38,335 20,061 Write-off due to the exclusion of Algar TI from consolidation (spin-off of 12/02/2019) 3,170 - - - Closing balance (70,418) (99,101) (56,055) (76,782)

7. Recoverable taxes


State VAT (ICMS) - property, plant and equipment (i) 131,220 104,117 73,717 59,671 Taxes on revenue (PIS / COFINS) (ii) 253,359 26,945 252,842 23,495 Income tax (IRPJ) and social contribution (CSLL) 10,073 15,925 9,094 4,655 Social security contribution (INSS) 2,341 15,144 1,991 1,950 Service Tax (ISS) 281 4,717 278 313 Other 959 6,488 455 1,279 398,233 173,336 338,377 91,363 Current assets 154,170 91,487 130,689 44,806 Noncurrent assets 244,063 81,849 207,688 46,557

(i) The amounts corresponding to “State VAT (ICMS) – property, plant and equipment” refer to ICMS credits arising from the acquisition of property, plant and equipment items, recoverable at the ratio of 1/48 per month, in accordance with Supplementary Law No. 102/2000.

(ii) The increase in PIS and COFINS balances compared to 2018 is due to the recognition of tax credits, adjusted for inflation, according to the final and unappealable lawsuit, which requested to the Federal Courts the acknowledgement of unconstitutionality of including the ICMS in the tax basis of these taxes. On June 27, 2019, the Company obtained a favorable, final decision and recognized a credit in the amount of R$138,302 in other operating income and R$116,200 in finance income related to its inflation adjustment.

An injunction was issued by the Federal Court on October 29, 2019 authorizing the offset of the tax credit. The Company expects that the offset covers a period of approximately 37 months.


57

8. Income tax and social contribution

a) Income tax and social contribution recoverable (payable)


Income tax and social contribution (73,014) (86,609) (7,458) (6,309) Prepaid income tax and social contribution 61,767 79,242 145 5,946

(11,247) (7,367) (7,313) (363) Current asset balance 16 16 - - Current liability balance (11,263) (7,383) (7,313) (363)

b) Deferred income and social contribution assets and liabilities

Consolidated Individual

12/31/2019 12/31/2018 12/31/2019 12/31/2018 Assets Income tax: Tax losses 23,137 51,151 15,913 32,714 Provisions and other 67,443 72,614 52,551 33,372 Deferred income tax - CPC47 - 2,039 - - Deferred income tax - CPC06 - IFRS16 3,008 - 2,179 -

93,588 125,804 70,643 66,086 Social contribution: Tax loss carryforwards 7,496 19,765 7,496 14,000 Provisions and other 22,815 24,053 18,918 12,014 Deferred social contribution - CPC47 - 734 - - Deferred social contribution - CPC06 - IFRS16 1,064 - 784 -

31,375 44,552 27,198 26,014 Total noncurrent assets 124,963 170,356 97,841 92,100

Liabilities Income tax: Temporary deductions 1,615 3,166 - - Deemed cost and other 1,052 7,113 1,052 1,059 Law 11.638/2007 and other 115,472 129,687 78,216 63,795 Deferred income tax - CPC47 21,610 13,901 13,218 7,469 Deferred income tax - CPC48 5,472 2,179 4,211 1,420

145,221 156,046 96,697 73,743 Social contribution: Deemed cost of assets 379 2,561 379 381 Law 11.638/2007 and other 38,602 45,189 28,157 22,967 Deferred social contribution - CPC47 6,832 4,527 4,758 2,689 Deferred social contribution - CPC48 1,899 776 1,516 511

47,712 53,053 34,810 26,548 Total noncurrent liabilities 192,933 209,099 131,507 100,291 Total, net (67,970) (38,743) (33,666) (8,191) Noncurrent asset balance, net - 15,333 - - Noncurrent liability balance, net (67,970) (54,076) (33,666) (8,191)


58

8. Income tax and social contribution - continued The Company and its subsidiaries, based on its expected taxable income generation, established in a technical study prepared by the Company and approved by the Executive Board, recognized tax credits on income tax losses, social contribution losses and temporary differences that can be carried forward indefinitely. The expected realization of deferred income tax and social contribution assets (consolidated) is as follows:

Consolidated 12/31/2019 12/31/2018 2019 - 49,491 2020 36,304 55,907 2021 41,010 64,958 2022 47,649 - 124,963 170,356

c) Taxes on income


12/31/2019 12/31/2018 12/31/2019 12/31/2018 Current: Income tax (87,312) (66,650) (30,786) (4,047) Social contribution (31,083) (24,222) (11,394) (1,393)

(118,395) (90,872) (42,180) (5,440) Deferred: Income tax (24,804) (42,409) (21,067) (31,788) Social contribution (11,084) (16,367) (7,944) (11,486)

(35,888) (58,776) (29,011) (43,274) (154,283) (149,648) (71,191) (48,714)

Income tax (112,116) (109,059) (51,853) (35,835) Social contribution (42,167) (40,589) (19,338) (12,879)

(154,283) (149,648) (71,191) (48,714)


59

8. Income tax and social contribution--continued

d) Statement of effective income tax and social contribution rate

Reconciliation of income tax and social contribution tax expense calculated by applying the combined statutory tax rates and the income tax and social contribution expense recorded in profit or loss is as follows:

Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Profit (loss) before income taxes and share of profit (loss) of subsidiaries

456,999 465,685 196,925 147,691

Income tax and social contribution at the combined statutory tax rate of 34% (155,380) (158,333) (66,955) (50,215) Tax incentives: technological innovation 2,691 5,497 501 1,018 Write-off of deferred taxes on income tax and social contribution losses due to spin-off in Algar Telecom (5,265) - (5,265) - Workers' Meal Program (PAT) 3,384 2,563 1,238 333 Other adjustments 287 625 (710) 150 Income tax and social contribution expense in profit or loss for the year (154,283) (149,648) (71,191) (48,714) Effective tax rate 33,76% 32,14% 36,15% 32,98%

9. Investments

Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Investment in subsidiaries: Investment under the equity method - - 1,220,937 1,321,804 Surplus on acquiree’s assets - - 19,082 - Goodwill on acquisition of company - - 21,149 - Other investments 126 126 - - 126 126 1,261,168 1,321,804


60

9. Investments--continued a) Variations in investments

Algar

Multimídia Algar

Soluções Algar TI Smart Algar

Celular Algar Mídia Total

Balance as at December 31, 2017 481,525 125,298 234,052 - 575,214 18,649 1,434,738 Advances for future capital increase 44,500 124,500 - - - - 169,000 Capitalization of advances for future capital increase - 8,550 - - - - 8,550 Approved additional dividends for 2017 (10,428) (401) (376) (11,205) Annual mandatory minimum dividends (39,082) (330) (11,749) - - - (51,161) Reclassification due to merger of Algar Mídia into Algar Multimídia 18,649 - - - - (18,649) - Algar Celular’s (acquiree) interest in associates 113,547 - 23,888 - - - 137,435 Effect from the merger of the spun-off portion of Algar TI into Algar Multimídia 8,078 - (8,035) - 311 - 354 Effect from inflation adjustment to payables for acquisition of subsidiary shares - - (974) - (154) - (1,128) Share of profit (loss) on translation adjustment to subsidiaries’ balance sheets - - 766 - 68 - 834 Gain (loss) on transfer of equity interest in subsidiary and others (318) 7 (239) - 425 - (125) Effect from first-time adoption adjustments to CPC47 (IFRS 15) 10,640 1,777 (6,588) - 3,984 - 9,813 Share of profit (loss) of subsidiaries 153,842 1,391 49,314 - 12,513 - 217,060 Write-off due to merger on 04/02/2018 by Algar Telecom - - - - (592,361) - (592,361) Balance as at December 31, 2018 780,953 260,792 280,059 - - - 1,321,804 Advance for future capital increase, capitalized in the period - 17,000 - - - - 17,000 Advance for future capital increase to be capitalized - 67,300 - 7,000 - - 74,300 Acquisition of company – investment under the equity method June/19 - Smart - - - 1,449 - - 1,449 Acquisition of company – surplus - Smart - - - 20,066 - - 20,066 Amortization of surplus – Smart - - - (984) - - (984) Acquisition of company - goodwill – Smart - - - 21,149 - - 21,149 Approved additional dividends for 2018 (13,827) (132) (4,699) - - (18,658) Distribution of retained earnings received (58,000) - - - - - (58,000) Annual mandatory minimum dividends (40,291) (327) - - - - (40,618) Share of profit (loss) of subsidiaries 164,048 1,377 11,187 370 - - 176,982 Share of profit (loss) on translation adjustment to subsidiaries’ balance sheets - - 547 - - 547 Effect from adjustment to subsidiary’s equity 32,419 - (358) 806 - - 32,867 Write-off pursuant to investment spin-off in Dec/2019 - - (286,736) - - - (286,736) Balance as at December 30, 2019 865,302 346,010 - 49,856 - - 1,261,168


61

9. Investments--continued

b) Information on direct subsidiaries, based on the accounting information as at December 31, 2019 and 2018 12/31/2019

Algar

Multimídia Algar

Soluções Smart Algar TI

Consultoria (i) Current assets 250,179 52,381 8,414 - Noncurrent assets 927,014 350,940 39,599 - Total assets 1,177,193 403,321 48,013 - Current liabilities 189,319 46,212 3,990 - Noncurrent liabilities 122,572 11,099 34,399 - Equity 865,302 346,010 9,624 - Capital 439,577 265,680 2,500 - Net revenue 665,529 105,464 10,143 202,364 Profit (loss) for the year 164,049 1,377 370 11,089

(i) (i) Algar Telecom was spun off on December 2, 2019 to withdraw the investment relating to the equity

interest in Algar TI. The net revenue and profit or loss reported refer to November 30, 2019 and are included in the consolidated income statement.

12/31/2018

Algar * Celular

Algar Multimídia

Algar TI Consultoria

Algar Soluções

Current assets - 275,935 92,107 33,648 Noncurrent assets - 788,626 467,907 272,850 Total assets - 1,064,561 560,014 306,498 Current liabilities - 162,183 151,509 30,292 Noncurrent liabilities - 67,392 123,587 15,414 Equity - 834,986 284,918 260,792 Capital - 395,077 245,536 124,180 Net revenue 107,621 612,055 232,737 58,632 Profit (loss) for the period 12,493 159,123 49,470 1,391

(*) Information on the 1st quarter of 2018 (company merged on April 2, 2018)

Individual

12/31/2019 and

12/31/2018 12/31/2019 12/31/2018

Algar

Multimídia Algar

Soluções Smart Algar TI Number of shares held: Common shares 41,015 8 492,074,485 Preferred shares 21,250 - - Shares - - 2,500,000 -

62,265 8 2,500,000 492,074,485 Percentage of the Parent’s direct interest: In capital 100% 100% 100% 100% In voting capital 100% 100% 100% 100%


62

10. Property, plant and equipment a) Property, plant and equipment – Net carrying amount - consolidated:

Consolidated

Buildings and

improvements

Switching equipment

Terminal equipment

Transmission equipment and

means

Power and acclimatization

equipment Infrastructure Company

cars

Furniture and

fixtures

Data processing equipment and

other Land

Construction in

progress and other Total

12/31/2019 Cost 162,171 351,810 601,916 2,103,922 114,610 171,008 12,842 97,575 906,675 16,820 375,765 4,915,114 Accumulated depreciation (75,901) (303,357) (226,638) (1,038,791) (75,067) (93,044) (8,048) (66,666) (540,076) - - (2,427,588) Property, plant and equipment, net 86,270 48,453 375,278 1,065,131 39,543 77,964 4,794 30,909 366,599 16,820 375,765 2,487,526

12/31/2018 Cost 293,787 351,522 495,780 1,898,829 183,914 161,752 25,293 121,845 885,882 27,822 443,043 4,889,469 Accumulated depreciation (105,340) (288,885) (253,166) (993,292) (96,096) (86,416) (13,991) (82,744) (508,491) - - (2,428,421) Property, plant and equipment, net 188,447 62,637 242,614 905,537 87,818 75,336 11,302 39,101 377,391 27,822 443,043 2,461,048


63

10. Property, plant and equipment--continued

b) Variations in cost - Consolidated

Consolidated

Buildings and improvements

Switching equipment

Terminal equipment


means



cars

Furniture and

fixtures


other Land

Construction in progress and other Total

12/31/2017 276,696 345,455 410,746 1,536,671 162,120 158,421 35,628 124,606 759,528 27,822 495,771 4,333,464 Additions 186 - 844 63,049 766 34 - 221 15,013 - 582,665 662,778 Write-offs (400) (1,004) (29,007) (11,154) (2,104) (361) (11,318) (1,492) (14,796) - (5,072) (76,708) Transfers * 17,305 7,071 113,197 310,263 23,132 3,658 983 (1,490) 126,137 - (630,321) (30,065) 12/31/2018 293,787 351,522 495,780 1,898,829 183,914 161,752 25,293 121,845 885,882 27,822 443,043 4,889,469 Additions 32 72 - 57 - 1,457 26 22 684 - 664,039 666,389 Write-offs (1) (4,135) (60,213) (21,218) (2,537) (296) (9,006) (1,230) (8,069) - (42) (106,747) Allowance for losses - TV (2,785) - (62,069) (46,120) (2,230) (435) - (2,874) (4,355) - (9,596) (130,464) Acquisition of Smart 2 - - 172 - 1,465 39 135 565 - 2,049 4,427 Surplus on Smart acquisition - - - - - - - - - - 3,879 3,879 Transfers * 12,765 4,351 240,268 272,444 11,534 7,065 256 12,683 153,241 - (721,576) (6,969) Spin-off - write-off of consolidated balances of Algar TI (141,629) - (11,850) (242) (76,071) - (3,766) (33,006) (121,273) (11,002) (6,031) (404,870) 12/31/2019 162,171 351,810 601,916 2,103,922 114,610 171,008 12,842 97,575 906,675 16,820 375,765 4,915,114

(*) The balance of transfers refers to the reclassification of construction in progress, identified as intangible assets.


64

10. Property, plant and equipment - continued

c) Changes in depreciation - Consolidated

Consolidated


Switching equipment

Terminal equipment


means



cars Furniture and

fixtures


other Total 12/31/2017 (98,282) (266,332) (219,040) (927,040) (84,594) (80,629) (19,266) (80,836) (433,059) (2,209,078) Additions (7,652) (22,858) (62,800) (74,416) (12,446) (5,847) (2,472) (8,448) (87,099) (284,038) Write-offs 254 969 28,519 10,847 1,691 185 7,751 1,454 14,682 66,352 Transfers * 340 (664) 155 (2,683) (747) (125) (4) 5,086 (3,015) (1,657) 12/31/2018 (105,340) (288,885) (253,166) (993,292) (96,096) (86,416) (13,991) (82,744) (508,491) (2,428,421) Additions (8,313) (18,596) (76,868) (95,477) (13,733) (6,268) (1,921) (8,417) (105,558) (335,151) Write-offs 12 3,651 51,305 20,028 2,202 256 5,978 872 6,941 91,245 Allowance for losses - TV 1,109 - 33,581 28,011 1,327 337 - 2,297 2,094 68,756 Acquisition of Smart (1) - - (172) - (282) (39) (22) (909) (1,425) Transfers (20) 473 9,470 1,759 (22) (671) 11 (290) (10,710) - Spin-off - write-off of consolidated balances of Algar TI 36,652 - 9,040 352 31,255 - 1,914 21,638 76,557 177,408 12/31/2019 (75,901) (303,357) (226,638) (1,038,791) (75,067) (93,044) (8,048) (66,666) (540,076) (2,427,588)



65


d) Property, plant and equipment – Net carrying amount – Individual:

Individual


Switching equipment

Terminal equipment

Transmission equipment and means



cars

Furniture and

fixtures


other Land


12/31/2019 Cost 122,854 349,990 493,805 1,404,254 82,326 114,168 9,506 71,390 485,446 11,918 193,217 3,338,874 Accumulated depreciation (59,625) (301,741) (184,082) (792,990) (57,553) (72,247) (6,160) (54,236) (343,063) - - (1,871,697) Net balance 63,229 48,249 309,723 611,264 24,773 41,921 3,346 17,154 142,383 11,918 193,217 1,467,177

12/31/2018 Cost 122,120 349,800 425,502 1,317,473 78,902 110,650 12,795 69,261 425,850 11,918 254,687 3,178,958 Accumulated depreciation (56,268) (287,316) (212,170) (780,369) (54,556) (68,271) (7,513) (52,144) (293,686) - - (1,812,293)

Net balance 65,852 62,484 213,332 537,104 24,346 42,379 5,282 17,117 132,164 11,918 254,687 1,366,665


66


e) Variations in cost – Individual

Individual


Switching equipment

Terminal equipment


means



cars

Furniture and

fixtures


other Land


12/31/2017 88,921 225,081 273,998 838,179 62,611 101,755 14,536 62,207 326,061 11,463 303,420 2,308,232 Additions - - - - - - - - - - 334,552 334,552 Write-offs (111) (1,005) (27,093) (11,551) (575) (337) (5,153) (108) (577) - - (46,510) Merger/spin-off 19,723 118,678 86,181 246,440 8,723 8,564 3,212 7,237 58,166 455 42,136 599,515 Transfers * 13,587 7,046 92,416 244,405 8,143 668 200 (75) 42,200 - (425,421) (16,831) 12/31/2018 122,120 349,800 425,502 1,317,473 78,902 110,650 12,795 69,261 425,850 11,918 254,687 3,178,958 Additions - - - 209 - - 16 - 460 - 387,232 387,917 Write-offs - (4,062) (58,296) (20,048) (2,090) (261) (3,459) (446) (3,250) - (7) (91,919) Allowance for losses - TV (2,785) - (62,069) (46,120) (2,230) (435) - (2,874) (4,355) - (9,596) (130,464) Transfers * 3,519 4,252 188,668 152,740 7,744 4,214 154 5,449 66,741 - (439,099) (5,618) 12/31/2019 122,854 349,990 493,805 1,404,254 82,326 114,168 9,506 71,390 485,446 11,918 193,217 3,338,874



67


f) Variations in depreciation - Individual

Individual


Switching equipment

Terminal equipment


means



cars Furniture and

fixtures Data processing

equipment and other Total 12/31/2017 (41,045) (190,900) (137,589) (608,615) (42,479) (58,476) (8,191) (45,604) (214,612) (1,347,511) Additions (3,864) (19,349) (49,258) (45,906) (5,467) (3,627) (936) (4,697) (33,235) (166,339) Write-offs 110 969 24,934 10,589 566 327 3,387 107 562 41,551 Merger/spin-off (11,469) (77,372) (51,199) (133,736) (6,891) (6,636) (4,966) (1,769) (46,774) (340,812) Transfers * - (664) 942 (2,701) (285) 141 3,193 (181) 373 818 12/31/2018 (56,268) (287,316) (212,170) (780,369) (54,556) (68,271) (7,513) (52,144) (293,686) (1,812,293) Additions (4,459) (18,547) (65,292) (61,557) (6,288) (3,891) (968) (4,469) (43,815) (209,286) Write-offs - 3,649 50,329 19,107 1,974 243 2,321 435 3,068 81,126 Allowance for losses - TV 1,109 - 33,581 28,011 1,327 337 - 2,297 2,094 68,756 Transfers * (7) 473 9,470 1,818 (10) (665) - (355) (10,724) - 12/31/2019 (59,625) (301,741) (184,082) (792,990) (57,553) (72,247) (6,160) (54,236) (343,063) (1,871,697)



68

10. Property, plant and equipment - continued Additional information on property, plant and equipment

g) Concession-related assets The concession arrangements related to the switched fixed telephone service (STFC) set forth that the Company’s assets are indispensable to the service provision and qualified as “reversible assets”, and upon the extinguishment of the concession, they will be automatically reversed to ANATEL, the Company’s right to the applicable reimbursement being protected, pursuant to the applicable legislation. The 2018 amounts below refer to the list of reversible assets sent to ANATEL in April 2019. These amounts replace the amounts disclosed upon the presentation of the 2018 financial statements, which were considered as a previous disclosure at the time. The assets listed in 2019, as shown below, are a previous disclosure of the list of reversible assets to be sent for ANATEL’s approval in April 2020, pursuant to the regulation.

Consolidated 12/31/2019 12/31/2018

Cost Accumulated depreciation Net Cost

Accumulated depreciation Net

Buildings and improvements 41,744 (17,049) 24,695 40,972 (15,853) 25,119 Power and acclimatization equipment 67,444 (47,339) 20,105 63,468 (44,186) 19,282 Switching equipment 199,882 (182,833) 17,049 202,697 (181,952) 20,745 Data processing equipment 124,104 (88,173) 35,931 118,915 (77,828) 41,087 Transmission equipment and means 832,171 (600,435) 231,736 766,449 (587,295) 179,154 Terminal equipment 105,457 (57,784) 47,673 101,167 (51,982) 49,185 Infrastructures 100,878 (63,587) 37,291 97,874 (59,962) 37,912 PPDUR concession licenses 5,588 (3,704) 1,884 5,468 (3,404) 2,064 Furniture and fixtures 29,748 (25,274) 4,474 28,511 (23,898) 4,613 Regulatory grants 2,820 (2,444) 376 2,820 (2,390) 430 Information systems 227,221 (189,154) 38,067 218,009 (173,596) 44,413 Land 11,571 - 11,571 11,570 - 11,570 Company cars 8,031 (5,192) 2,839 8,063 (4,463) 3,600 1,756,659 (1,282,968) 473,691 1,665,983 (1,226,809) 439,174


69


h) Assets pledged as collateral As at December 31, 2019 and 2018, the Company and its subsidiaries pledged the following assets as collateral for lawsuits and borrowings and financing: Consolidated 12/31/2019 12/31/2018

Cost Accumulated depreciation Net Cost

Accumulated depreciation Net

Buildings and improvements (*) - - - 70,109 (20,954) 49,155 Power and acclimatization equipment - - - 425 (165) 260 Data processing equipment 333 (198) 135 616 (342) 274 Transmission equipment and means 112 (57) 55 110 (46) 64 Furniture and fixtures - - - 116 (82) 34 Land (*) 36 - 36 11,037 - 11,037 Company cars 163 (92) 71 491 (288) 203 644 (347) 297 82,904 (21,877) 61,027

(*) The changes in these line items derive from the non-inclusion of Algar TI’s and its subsidiaries’ assets, pledged as collateral, as at December 31, 2019, due to the spin-off of the Company’s investment in Algar TI on December 2, 2019.

i) Balances of capitalized borrowing costs in property, plant and equipment In the year ended December 31, 2019, the Company capitalized borrowing costs on qualifying assets of property, plant and equipment in the amount of R$11,749 (R$15,387 in 2018), corresponding to 55% (81.4% in 2018) of total interest recorded and subject to capitalization. The amount totaled R$12,244 (R$16,630 in 2018) in the consolidated, accounting for 31.4% (43.2% in 2018).

j) Idleness of assets The Company and its subsidiaries did not have significant property, plant and equipment items with idle capacity as at December 31, 2019.

k) Construction in progress The main projects comprising “Construction in progress” are:

12/31/2019 Description Consolidated Individual Investment in customer service 188,415 54,122 Investment in network improvements 75,550 54,389 Investment in ultra broadband network 58,223 58,178 Investments in network expansion 6,100 3,795 Investment in IT infrastructure 1,097 889 Investment in infrastructure 97 - Investment in satellite TV 4 4 Devices and materials in progress 41,112 18,494 Other 5,167 3,346 375,765 193,217


70

11. Intangible assets a) Intangible assets – Net carrying amount - consolidated

Consolidated

Trademarks and patents

Public Price for the Right to Use Radio

Frequency (PPDUR) Right of use -

backbone Right of use -

satellite TV - DTH Regulatory

grants Information

systems

Surplus on acquisition of

companies

Goodwill on investments in acquisition of

companies

Intangible assets in progress Total

12/31/2019 Cost 6 6,287 86,114 - 122,024 559,312 16,187 90,642 47,972 928,544 Accumulated amortization (6) (4,141) (46,310) (118) (60,567) (402,102) (984) (10,567) - (524,795) Net balance - 2,146 39,804 (118) 61,457 157,210 15,203 80,075 47,972 403,749

12/31/2018

Cost 6 6,099 83,737 497 118,611 636,224 37,038 264,028 48,740 1,194,980 Accumulated amortization (6) (3,787) (43,067) (423) (52,165) (430,668) (18,451) (96,740) - (645,307)

Net balance - 2,312 40,670 74 66,446 205,556 18,587 167,288 48,740 549,673


71

11. Intangible assets--continued

b) Variations in cost - Consolidated

Consolidated


Public Price for the Right to Use Radio Frequency

(PPDUR)

Right of use -

backbone

Right of use - satellite TV -

DTH Regulatory

grants Information systems


companies


companies


12/31/2017 6 6,082 48,021 497 118,482 587,427 37,038 264,028 35,336 1,096,917 Additions - - - - - 3 - - 70,399 70,402 Write-offs - - - - - (2,404) - - - (2,404) Transfers * - 17 35,716 - 129 51,198 - - (56,995) 30,065 12/31/2018 6 6,099 83,737 497 118,611 636,224 37,038 264,028 48,740 1,194,980

Additions - - - - - 99 - - 74,365 74,464 Write-offs - - - - - (1,737) - (102,788) - (104,525) Spin-off - write-off of consolidated balances of Algar TI - - - - - (134,323) (37,038) (91,747) (10,622) (273,730) Allowance for losses - TV (497) (9) (6,444) - - - (6,950) Surplus and goodwill on acquisition of Smart - - - - - - 16,187 21,149 - 37,336

Transfers * - 188 2,377 - 3,422 65,493 - - (64,511) 6,969 12/31/2019 6 6,287 86,114 - 122,024 559,312 16,187 90,642 47,972 928,544



72


c) Variations in amortization - Consolidated

Consolidated


Public Price for the Right to Use Radio Frequency

(PPDUR)

Right of use -

backbone

Right of use - satellite TV -

DTH Regulatory

grants Information

systems


companies


companies Total 12/31/2017 (6) (3,434) (39,321) (402) (43,601) (370,668) (14,699) (96,740) (568,871) Additions - (353) (3,745) (17) (8,564) (63,772) (3,752) - (80,203) Write-offs - - - - - 2,110 - - 2,110 Transfers * - - (1) (4) - 1,662 - - 1,657 12/31/2018 (6) (3,787) (43,067) (423) (52,165) (430,668) (18,451) (96,740) (645,307) Additions - (354) (3,366) (33) (8,411) (66,290) (4,343) - (82,797) Write-offs - - - - - 1,733 - 86,173 87,906 Spin-off - write-off of consolidated balances of Algar TI - - 165 - - 87,178 21,810 - 109,153 Allowance for losses - TV - - - 338 9 5,921 - - 6,268 Acquisition of Smart - Jun/19 - - - - - (18) - - (18) Transfers * - - (42) - - 42 - - - 12/31/2019 (6) (4,141) (46,310) (118) (60,567) (402,102) (984) (10,567) (524,795)



73


d) Intangible assets – net carrying amount - Individual

Individual

Public Price for the Right to Use Radio Frequency (PPDUR)

Right of use - backbone

Right of use - satellite TV - DTH

Regulatory grants

Information systems


companies


12/31/2019 Cost 5,972 22,850 - 119,081 437,311 17,942 30,674 633,830 Accumulated amortization (3,972) (1,262) - (58,133) (320,989) (1,733) - (386,089) Net balance 2,000 21,588 - 60,948 116,322 16,209 30,674 247,741

12/31/2018 Cost 5,852 20,474 497 115,670 413,302 67,032 27,405 650,232 Accumulated amortization (3,636) (401) (305) (49,917) (286,294) (21,668) - (362,221) Net balance 2,216 20,073 192 65,753 127,008 45,364 27,405 288,011


74

11. Intangible assets--continued e) Variations in cost – Individual

Individual




Regulatory grants

Information systems

Goodwill on investments

in acquisition of companies


12/31/2017 5,787 - - 2,714 302,773 31,958 20,268 363,500 Additions - - - - - - 31,234 31,234 Write-offs - - - - (63) - - (63) Merger/spin-off 62 - 497 112,826 80,248 35,074 10,023 238,730 Transfers * 3 20,474 - 130 30,344 - (34,120) 16,831 12/31/2018 5,852 20,474 497 115,670 413,302 67,032 27,405 650,232 Additions - - - - - - 34,033 34,033 Write-offs - - - - (13) (49,090) - (49,103) Allowance for losses - TV - - (497) (9) (6,444) - - (6,950) Transfers * 120 2,376 - 3,420 30,466 - (30,764) 5,618 12/31/2019 5,972 22,850 - 119,081 437,311 17,942 30,674 633,830


75


f) Variations in amortization - Individual

Individual




Regulatory grants

Information systems


companies Total 12/31/2017 (3,278) - (2,353) (203,950) (10,987) (220,568) Additions (335) (401) (27) (6,081) (37,052) - (43,896) Write-offs - - - - 22 - 22 Merger/spin-off (23) - (278) (41,483) (44,496) (10,681) (96,961) Transfers * - - - - (818) - (818) 12/31/2018 (3,636) (401) (305) (49,917) (286,294) (21,668) (362,221) Additions (336) (861) (33) (8,225) (40,629) - (50,084) Write-offs - - - - 13 19,935 19,948 Allowance for losses - TV - - 338 9 5,921 - 6,268 12/31/2019 (3,972) (1,262) - (58,133) (320,989) (1,733) (386,089)


Algar Telecom S.A. Notes to the financial statements for the Year Ended December 31, 2019 (In thousands of Brazilian reais – R$, unless otherwise stated

76

11. Intangible assets - continued

g) Impairment test of cash-generating units As at December 31, 2019, the Company and its subsidiaries tested their assets for impairment, using the discounted cash flow method. Determining the value in use requires the use of assumptions, judgments and estimates on future cash flows, revenue growth rates, costs and expenses, future investment and working capital estimates and discount rates, which represent the Company’s best estimate, as approved by Management.

Future cash flows were discounted based on the weighted average cost of capital (WACC). The Company’s cost of own capital was calculated using the Capital Asset Pricing Model (CAPM). In line with financial and economic valuation techniques, the value in use was valued for a ten-year period, taking into consideration the economic useful life of the existing assets, as well as their current condition, without new investments that would change such useful life, only those necessary for their maintenance and fulfillment of working capital requirements. Based on the annual impairment test of the Company´s tangible and intangible assets, prepared based on the projections on the financial statements for the year ended December 31, 2019, growth prospects and future results of operations, no losses or indications of losses were identified, since the value in use is higher than net carrying amount at the valuation date. Main assumptions used in the asset impairment test The value in use calculation is mainly impacted by the following assumptions: (i) revenue growth; (ii) variations in the operating profit margin; (iii) Capex volume; and (iv) discount rate. (i) Revenue growth: for the first year, based on budget projections for 2020, approved by Management and, for other years, considering only the maintenance of the number of customers at the currently installed network, without considering growth arising from the network coverage expansion. (ii) Variations in operating margin: take into consideration the historical performance, also reflecting regulatory impacts. (iii) Capex volume: estimated considering the infrastructure necessary to support the replacement of the current customer base and maintenance of the existing plant. Investments in the current network expansion were not considered. (iv) Discount rates: represents the assessment of risks in the current market, and its calculation derives from the weighted average cost of capital (WACC). The WACC takes into consideration both the debt cost, which is based on existing financing, and the equity cost, which corresponds to the return on the capital invested by shareholders, and the segment-specific risk which is incorporated upon the application of individual beta factors. The nominal rate used was 10.91% and projected inflation rate was 4.00%.


77

12. Borrowings and financing The information on the contractual terms of borrowings and financing, which are measured at amortized cost, are described below. Other information, including those on fair value, the exposure to interest rate, foreign currency, and liquidity risks, is described in note 28b. Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018

Borrowings in local currency - 18,686 - - Financing in local currency:

Lease under IAS17 7,804 13,700 7,804 9,474 Other - 16 - -

7,804 32,402 7,804 9,474 Current liabilities 1,566 21,908 1,566 1,670 Noncurrent liabilities 6,238 10,494 6,238 7,804 The Company’s and its subsidiaries’ borrowing and financing agreements are indexed according to the table below: Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 CDI - 18,686 - - TJLP - 4 - - Fixed 7,804 13,712 7,804 9,474 Total 7,804 32,402 7,804 9,474

The annual interest rates on borrowings and financing are as follows:

12/31//2019 Interest Financial institution Consolidated Individual

From 0.00% to 4.0% SBA (Leasing) 7,804 7,804 Total 7,804 7,804

12/31/2018

Interest Financial institution Consolidated Individual From 0.0% to 4.0% CPFL (Leasing) 4,226 - From 4.01% to 6.0% SBA (Leasing) 9,474 9,474 From 6.01% to 8.0% IBM 10,744 - From 8.01% to 10.0% Brasil e IBM 7,954 - From 12.01% to 15.0% Brasil 4 - Total 32,402 9,474

*SBA – New corporate name Highline

Long-term borrowings and financing have the following maturity:

12/31/2019 12/31/2018 Consolidated Individual Consolidated Individual 2021 1,469 1,469 2020 2,971 1,566 2022 1,378 1,378 2021 2,754 1,469 2023 1,293 1,293 2022 1,378 1,378 2024 1,213 1,213 2023 1,378 1,378 After 2024 885 885 After 2023 2,013 2,013 6,238 6,238 10,494 7,804


78

13. Debentures and promissory notes

a) Debentures On March 15, 2018, former subsidiary Algar TI completed its 2nd public issue of nonconvertible debentures, pursuant to CVM Instruction 476, in the amount of R$100,000. The issue, carried out in a single series, is subject to CDI + 1.50% p.a. and has three-year term. The proceeds were used to fulfill the need for investment in Algar TI’s operations. In April 2018, the Company completed its 7th public issue of nonconvertible debentures. 600 thousand debentures were issued, resulting in proceeds in the amount of R$600,000 divided into two series. The first, with five-year term, and subject to CDI + 0.89% p.a. and the second, with seven-year term, and subject to IPCA + 5.54% p.a. The proceeds were used to finance the Company’s investments. The Company also carried out in May 2018 the full optional temporary redemption of the 3rd and 4th issue of debentures. In February 2019, the Company completed its 8th public issue of nonconvertible debentures. R$350,000 were raised upon the issue of 35 thousand debentures, divided into 2 series, the first with five-year term and subject to CDI + 0.60% p.a., and the second with seven-year term and subject to CDI + 0.90% p.a. This debenture issue costs amounted to R$2,547. The proceeds will be used to finance the Company’s investments. On April 18, 2019, former indirect subsidiary Algar Tecnologia completed its 2nd public issue of nonconvertible debentures, pursuant to CVM Instruction 476, in the amount of R$85,000. The issue, carried out in a single series, is subject to CDI + 1.70% p.a. and has five-year term. The proceeds will be used to finance the issuer’s investments. The issue costs amounted to R$402. On October 10, 2019, the Company completed its 9th issue of debentures in the amount of R$350,000. 350 thousand simple, nonconvertible, unsecured debentures were issued in one single series. The debentures have five-year term and are subject to CDI + 0.70% p.a. The proceeds will be used in the Company’s investment programs (CAPEX). Other information, including that on fair value, is described in note 28.


79

13. Debentures and promissory notes - continued a) Debentures - continued

Breakdown of the debenture balances Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Local currency: Principal 2,000,498 1,563,157 2,000,498 1,356,021 Interest 43,350 73,734 43,350 69,735 2,043,848 1,636,891 2,043,848 1,425,756 (-) Unrecognized debenture issue costs (26,152) (26,689) (26,152) (25,619) Total debentures 2,017,696 1,610,202 2,017,696 1,400,137 Promissory notes (note 13b) 221,945 206,852 221,945 206,852 Total debentures and promissory notes 2,239,641 1,817,054 2,239,641 1,606,989 Current liabilities 35,737 190,805 35,737 140,746 Noncurrent liabilities 2,203,904 1,626,249 2,203,904 1,466,243

12/31/2019 Consolidated Individual

Current liabilities

Noncurrent liabilities Total

Current liabilities


Debenture balance 43,350 2,000,498 2,043,848 43,350 2,000,498 2,043,848 (-) Unrecognized issue costs (7,613) (18,539) (26,152) (7,613) (18,539) (26,152) Debenture net amount 35,737 1,981,959 2,017,696 35,737 1,981,959 2,017,696 Promissory notes (note 13b) - 221,945 221,945 - 221,945 221,945 Total debentures and promissory notes 35,737 2,203,904 2,239,641 35,737 2,203,904 2,239,641

12/31/2018 Consolidated Individual

Current liabilities


Current liabilities


Debenture balance 197,715 1,439,176 1,636,891 147,283 1,278,473 1,425,756 (-) Unrecognized issue costs (6,910) (19,779) (26,689) (6,537) (19,082) (25,619) Debenture net amount 190,805 1,419,397 1,610,202 140,746 1,259,391 1,400,137 Promissory notes (note 13b) - 206,852 206,852 - 206,852 206,852 Total debentures and promissory notes 190,805 1,626,249 1,817,054 140,746 1,466,243 1,606,989

The debentures, without deducting issue costs, have the following maturity:

12/31/2019 12/31/2018

Consolidated and Individual Consolidated Individual

2020 43,350 2019 197,715 147,284 2021 193,604 2020 46,432 - 2022 455,366 2021 260,861 189,437 2023 415,928 2022 472,624 451,200 2024 604,166 2023 472,624 451,200 After 2024 331,434 After 2024 186,635 186,635 2,043,848 1,636,891 1,425,756


80

13. Debentures and promissory notes - continued a) Debentures - continued

The Company’s and direct and indirect subsidiaries’ debenture agreements are indexed according to the table below:

Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 CDI 1,396,588 898,464 1,396,588 687,329 IPCA 647,260 738,427 647,260 738,427 Total 2,043,848 1,636,891 2,043,848 1,425,756

As set forth in the agreement, the ratios defined for debentures and promissory notes, calculated on a quarterly basis, are based on the Company’s consolidated financial statements and interim financial information and are shown in the table below.

Consolidated – Algar Telecom 12/31/2019 12/31/2018

Net debt-to-EBITDA - realized = 2,08 = 1,74 Quarterly target < 2,25 < 2,25 EBITDA-to-net finance cost – realized = 5,48 = 7,03 Quarterly target (semiannual: IBM) > 2,00 > 2,00

b) Promissory notes In May 2018, the Company completed its 1st public issue of unsecured promissory notes, in one single series, in the amount of R$200,500. 401 promissory notes were issued, with unit par value of R$500, with no expectation of optional early redemption. The term of the promissory notes corresponds to 42 months, counted from the issue date, maturing on November 22, 2021, subject to CDI rate + 0.80% per year. The proceeds from this issue will be used to fulfill the Company’s cash requirements.

Consolidated and Individual 12/31/2019 12/31/2018

Principal 200,500 200,500 Interest 22,963 8,698 223,463 209,198 (-) Unrecognized interest paid (328) (506) (-) Unrecognized promissory note issue costs (1,190) (1,840)

221,945 206,852 The consolidated balance as at December 31, 2019 do not include the agreements of Algar TI, Algar Tecnologia, due to the spin-off of the Company’s investment in Algar TI, pursuant to corporate resolution (EGM) of December 2, 2019 (note 1b).


81

13. Debentures and promissory notes - continued b) Promissory notes - continued Covenants The Company issues debentures and promissory notes, which are subject to covenants, comprising a debt amount of R$2,267,311 (R$1,846,089 as at December 31, 2018), maturing through 2026. These covenants establish maximum debt ratios and minimum debt service coverage ratios, which must be maintained during the term of the respective agreements. The failure to meet the agreed ratios, during two consecutive periods (quarter or six-month period, pursuant to the agreement), or during four non-consecutive periods, entails the accelerated maturity of borrowings and financing, debentures and promissory notes subject to such contractual provision. As at December 31, 2019 and 2018, all ratios on a quarterly basis were met.

14. Taxes, fees and contributions Consolidated Individual

12/31/2019 12/31/2018 12/31/2019 12/31/2018 PIS 1,612 2,372 987 1,093 IRRF 5,241 8,684 2,730 2,851 COFINS 7,893 10,097 4,953 5,151 ICMS 64,502 54,617 32,470 28,671 ISS 1,616 4,310 1,065 758 INSS 1,270 4,478 440 615 Other current taxes 3,254 3,726 2,180 1,907 85,388 88,284 44,825 41,046

15. Payroll, accruals and related taxes


Salaries and wages 17,448 36,502 9,914 11,084 Taxes on salaries and wages 8,507 17,064 4,654 5,310 Accrued vacation pay and related taxes 43,080 74,274 24,705 23,526 Bonuses 24,193 48,618 14,346 21,680 Other payroll and related taxes 552 1,495 301 388 93,780 177,953 53,920 61,988 Current liabilities 86,539 167,479 49,541 57,500 Noncurrent liabilities (bonuses) 7,241 10,474 4,379 4,488


82

16. Provisions and escrow deposits

The Company and its subsidiaries periodically assess their risks of lawsuits, based on legal, economic and accounting criteria. These risks are assessed based on the expected probable, possible or remote loss, according to the existing payment level, taking into consideration the analysis and opinion of their legal counsel.

Upon legal decision or injunction, escrow deposits are made, which may be related to the lawsuits with or without provisions.

a) Provision for lawsuits and administrative proceedings

Consolidated

Labor Tax

Adm. proceedings

- Anatel Civil and

other Total Provisions as at 12/31/2018 39,489 94,099 57,807 9,032 200,427 Escrow deposits (14,444) (41,682) (2,799) (291) (59,216) Indemnity right of provisions (i) (1,624) (11,038) - - (12,662) Net provisions as at 12/31/2018 23,421 41,379 55,008 8,741 128,549 Provisions as at 12/31/2018 39,489 94,099 57,807 9,032 200,427 Additions (ii) 18,929 6,270 518 9,950 35,667 Inflation adjustments 6,844 3,701 3,018 2,151 15,714 Write-offs (iii) (18,944) (14,664) (1,999) (3,182) (38,789) Payments (3,300) (1,372) (199) (8,278) (13,149) Acquisition of Smart (iv) - 31,611 - 968 32,579 Write-off due to spin-off of Algar Telecom (v) (30,745) (1,350) - (1,359) (33,454) Provisions as at 12/31/2019 12,273 118,295 59,145 9,282 198,995 Escrow deposits (3,278) (43,580) (2,861) (130) (49,849) Net provisions as at 12/31/2019 8,995 74,715 56,284 9,152 149,146 Indemnity right of provisions (i) (120) (6,340) - - (6,460) Net adjusted provisions as at December 31, 2019 8,875 68,375 56,284 9,152 142,686

‘ (i) As set forth in the purchase and sale agreement of Optitel Participações e Franquias S.A. and Optitel Redes e

Telecomunicações Ltda., the sellers are responsible for the taxes, tax and social security contributions, including legal charges, relating to taxable events occurred prior to the transfer of shares to the buyer.

As at December 31, 2019, the respective amount was R$6,460, which provisions are accounted for in Algar Soluções and included in the table above.

Pursuant to the decisions made in the period, R$6,202 were written off, of which R$3,683 relating to the reversal due to statute of limitations and R$2,519 due to transfer to taxes in installments.

(ii) Additions of provisions in the period, arising from new lawsuits and due to change in the likelihood of risk of certain lawsuits, from possible to probable.

(iii) Write-offs due to the statute of limitations of lawsuits and review of the likelihood of risk of certain lawsuits, involving reversal and, in the case of Algar Soluções, transfer to taxes in installments.

(iv) Refers to the inclusion of Smart Telecomunicações in the consolidation. As mentioned in note 1f, this company was acquired by subsidiary the Company in July/2019 and is exposed to tax risks.

The selling shareholders of Smart are responsible for these risks, which taxable event occurred before the transfer of control to the Company, as set forth in the purchase and sale agreement.

The indemnity right, in the amount of R$30,080, was recognized by the acquiree (Smart Telecomunicações), in a specific line item of noncurrent assets, and is being disclosed in the consolidated information.

v) Write-off of the amounts related to Algar TI and its subsidiaries not included in the consolidation as at December 31, 2019, due to the spin-off of the Algar Telecom’s investment in Algar TI, on December 2, 2019. The account balance of provisions on November 30, 2019, in the amount of R$291,497 (note 1b), is net of escrow deposits of R$12,097.


83

16. Provisions and escrow deposits--continued

a) Provision for lawsuits and administrative proceedings--continued

Individual

Labor Tax

Adm. proceedings -

Anatel Civil and

other Total Provisions as at 12/31/2018 7,661 56,834 57,437 7,142 129,074 Escrow deposits (2,823) (37,109) (2,799) (253) (42,984) Net provisions 4,838 19,725 54,638 6,889 86,090 Provisions as at 12/31/2018 7,661 56,834 57,437 7,142 129,074 Additions 1,351 1,802 518 8,365 12,036 Inflation adjustments 753 1,789 3,017 720 6,279 Write-offs (2,393) (613) (1,654) (2,535) (7,195) Payments (110) (167) (173) (7,013) (7,463) Provisions as at 12/31/2019 7,262 59,645 59,145 6,679 132,731 Escrow deposits (1,987) (38,401) (2,861) (130) (43,379) Net provisions as at 12/31/2019 5,275 21,244 56,284 6,549 89,352

Lawsuits and administrative proceedings and other risks mainly comprise: Civil (consolidated provision amount: R$9,282) (i) Lawsuits filed by consumers (inclusion in debtors’ record, accreditation of services,

defense of accounts and service interruption); (ii) Lawsuits filed by former suppliers and/or former business partners; (iii) Class actions filed by consumer protection entities. Regulatory administrative proceedings and lawsuits (consolidated provision amount: R$59,145) (i) Administrative proceedings and lawsuits discussing the penalties imposed by

ANATEL. Labor (consolidated provision amount: R$12,273) (i) Labor claims, involving the Company and subsidiaries Algar Multimídia and Algar

Soluções, discussing employment relationships, subsidiary liability, overtime, wage differences and indemnities for work accidents.

(ii) In December 2019, R$1,572 was written off due to the statute of limitations of

lawsuits under the responsibility of the sellers of Optitel.


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16. Provisions and escrow deposits - continued

a) Provision for lawsuits and administrative proceedings--continued Tax (consolidated provision amount: R$118,295)

(i) Fund for Universal Access to Telecommunications Services (“FUST”): since 2006, the

Company and its subsidiaries (Algar Multimídia and Algar Soluções) discuss in the courts the changes introduced by ANATEL Decision No. 07/2005, which has illegally prohibited the deduction of interconnection revenue and the Industrial Exploitation of Dedicated Lines (EILD) from the tax basis, and imposed its collection retroactively to 2000. Due to the widely accepted case law favorable to the case of the Company and its subsidiaries at the Federal Regional Court of the First Region, in the second quarter of 2017, the provision was partially reversed, and the contested amount continued to be recognized. Despite the partial reversal, the escrow deposits continued to be fully recognized as, according to the prevailing laws, such escrow deposits can only be withdrawn upon final and unappealable decision (provision amount: R$22,085 and restricted escrow deposit: R$30,436).

ii) ICMS: the Company and its subsidiaries Algar Multimídia and Algar Soluções are

discussing the right to ICMS credit; payment of ICMS on lease transactions; payment of ICMS on transactions not included in the legal concept of telecommunications service provision (provision amount: R$6,724).

(iii) Contribution to the Development of the National Film Industry (CONDECINE): the

Company and its subsidiary Algar Multimídia challenge the legality and constitutionality of the contribution for communication companies, as it refers to a contribution for the promotion of the national audiovisual sector with no relation with the provision of communication services that justify the intervention in such economic segment (provision amount: R$11,072 and restricted escrow deposit: R$15,871).

(iv) Writ of security filed by Algar Telecom and its subsidiaries, discussing the failure to

pay IRPJ and CSLL on late payment interest charged from their customers, due to indemnification legal nature of the interest. (provision amount: R$14,097).

(v) Contribution to the Promotion of Public Radio Broadcasting (EBC): the Company

challenges in courts the constitutionality of said contribution due to the breach of the principle of precedence/irretroactivity, as well as due to the lack of relationship between the economic activity performed by the companies and the contribution purpose (provision amount: R$11,898 and restricted escrow deposit: R$11,998).


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a) Provision for lawsuits and administrative proceedings--continued Tax (consolidated provision amount: R$118,295) - continued (vi) PIS, COFINS, IRPJ and CSLL: refers to taxes on the write-off of amounts due to third

parties. The Company and its subsidiary Algar Multimídia recognized a write-off in November 2017, as a result of the applicable statute of limitations (provision amount: R$4,491).

(vii) ISS: The balance as at December 31, 2018 includes the amount of R$2,017 relating to

the challenge made by Algar TI with respect to discrepancies in relation to the beneficiary of the tax payable. Due to the spin-off on December 2, 2019 in Algar Telecom, such amount is not included in the balance for the current year.

b) Escrow deposits

Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Escrow deposits without provisions: Tax 25,501 75,022 25,269 64,750 Labor 1,112 11,820 955 2,956 Civil 696 2,614 581 2,353 Pados – ANATEL 278 267 278 267 27,587 89,723 27,083 70,326 Escrow deposits with provisions: Tax 43,580 41,682 38,401 37,109 Labor 3,278 14,444 1,987 2,823 Civil 130 291 130 253 Pados – ANATEL 2,861 2,799 2,861 2,799 49,849 59,216 43,379 42,984 Total 77,436 148,939 70,462 113,310

c) Lawsuits and administrative proceedings without provision

Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Occupancy of right of way 51,247 41,615 51,247 41,615 TFI 23,964 23,376 23,964 23,376 ICMS 27,743 27,337 13,559 13,233 FUNTTEL 22,090 18,245 20,793 17,079 FUST 67,401 63,522 64,811 61,410 ISS 2,285 83,555 1,955 254 Federal taxes 1,476 13,539 1,115 1,386 INSS FAP - 7,921 - - Labor 44,726 85,180 37,945 35,626 Administrative proceedings – ANATEL 238,736 209,348 238,228 208,794 Civil 16,231 18,626 15,176 12,810 Other 6,201 8,418 6,019 5,838 Total (i) 502,100 600,682 474,812 421,421

(i) The decrease in the balance, as well as the variations in certain line items above, is due to the non-inclusion of amounts relating to Algar TI and certain subsidiaries, due to the spin-off of the Company’s investment in Algar TI, on December 2, 2019 (note 1b)


86

16. Provisions and escrow deposits - continued

c) Lawsuits and administrative proceedings without provision - continued The Company’s and its subsidiaries’ main lawsuits, which risk is assessed by their legal counsel as possible, are those listed below, for which no provision is expected to be recognized: Tax - (amount of R$202,407) (i) Operation Inspection Fee (“TFI”): collection against Algar Telecom upon extension of

the license for the operation of stations. The collection is based on ANATEL Resolution that expanded the levy of such fee. Algar Celular (merged into the Company on April 2, 2018) has filed a lawsuit to discuss such collection (amount involved: R$23,964).

(ii) Fund for Telecommunications Technology Development (“FUNTTEL”) and FUST: the Company and its subsidiaries (Algar Multimídia and Algar Soluções) filed objections against tax assessments relating to differences in the payment of the contributions to FUNTTEL and FUST as a result of the inclusion of interconnection revenue and other service revenue that do not correspond to telecommunication services in the tax basis (amount involved: R$89,491).

(iii) ICMS Import: tax execution filed by the State of Minas Gerais against the Company for collection of ICMS on the import of equipment by its supplier. (amount involved: R$8,979).

(iv) ICMS: the Company and its subsidiaries Algar Multimídia and Algar Soluções filed a lawsuit to discuss the ICMS credit recognized in an establishment different from that indicated in the tax document; requirement related to ICMS on transactions not included in the legal concept of provision of telecommunication services (Amount involved: R$18,764).

(v) Lawsuits filed by Algar Telecom, Algar Multimídia and Algar Soluções against highway concessionaires, discussing the legality of collection of amounts for underground installation of cables at the highway rights of way, as they are considered as common use asset, not comprised in the purpose of the concession granted to the concessionaires (amount involved: R$51,247).

(vi) Contribution to the Development of the National Film Industry (CONDECINE): the Company and its subsidiary Algar Multimídia challenge the legality and constitutionality of the contribution for communication companies, as it refers to a contribution for the promotion of the national audiovisual sector with no relation with the provision of communication services that justify the intervention in such economic segment, and also because the contribution was established without complying with the principles of precedence and irretroactivity (amount involved: R$4,787, deposited in escrow).

(vii) ISS: The Company and its subsidiaries Algar Multimídia and Algar Soluções discuss the definition of the beneficiary of the tax payable (Amount involved: R$2,285).


87


c) Lawsuits and administrative proceedings without provision--continued

(viii) ISS: The balance as at December 31, 2018 includes the amount of R$83,290 relating to lawsuits of Algar TI, Algar Tecnologia and Engeset, not included in the balances as at December 31, 2019, due to the spin-off on December 2, 2019 in Algar Telecom.

(ix) Other tax lawsuits in the amount of R$5,170, involving questioning of sundry nature with possible risk.

Labor - (amount of R$44,726) (i) The Company and its subsidiaries Algar Multimídia e Soluções are parties to labor

lawsuits involving discussions related to pain and suffering and property damages, work period, transportation voucher, benefits and attorneys’ fees.

Regulatory administrative proceedings and lawsuits - (amount involved: R$238,736) (i) Administrative proceedings and lawsuits discussing the penalties imposed by

ANATEL. (ii) Administrative proceedings and lawsuits discussing the difference in the tax basis of

the amounts due upon extension of the STFC concession and SMP authorization. Civil - (amount of R$16,231) (i) Lawsuits filed by consumers (inclusion in debtors’ record, accreditation of services,

defense of accounts and service interruption).

(ii) Lawsuits filed by former suppliers and/or former business partners.

(iii) lawsuits against electric power concessionaires, challenging amounts claimed due to the sharing of infrastructure.

(iv) Lawsuit discussing copyright due to the alleged irregular use of patented service.

(v) Lawsuits discussing the distribution and sale of contactless smart telephone cards for public use.

17. Trade payables Consolidated Individual

12/31/2019 12/31/2018 12/31/2019 12/31/2018 Billed trade payables 199,090 218,585 124,768 133,259 Unbilled trade payables 27,130 48,930 15,681 20,805 Payables for interconnection and joint collection 18,333 16,420 18,333 16,414 244,553 283,935 158,782 170,478


88

18. Advanced revenues

Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Revenue from leases (lease back) 24,105 28,650 24,105 28,650 Revenue from prepaid mobile phone credits 5,198 6,449 5,198 6,449 Unrecognized revenue from BPO/IT services - 15,232 - - Revenue from telecommunication services 3,363 6,185 - - IFRS 15/CPC 47 adjustments - revenue from contracts with customers - 8,156 - - Other - 87 - - 32,666 64,759 29,303 35,099 Current liabilities 10,535 34,218 9,390 10,693 Noncurrent liabilities 22,131 30,541 19,913 24,406

19. Equity a) Capital

The Company’s authorized capital can be increased upon resolution of the General Meeting when fully subscribed or when the difference between the subscribed and authorized capital does not comprise the capitalization for the year. The Company is authorized to increase its capital up to the limit of R$1,721,420. Up to the limit of authorized capital, the subscribed capital can be increased regardless of amendment to the bylaws, upon resolution of the Board of Directors, as proposed by the Executive Board and based on the opinion of the Supervisory Board, when established, and the Board of Director may determine the issue conditions, including price, term and payment method. At the discretion of the Board of Directors, the Company may, within the limit of the authorized capital, issue, with no preemptive right or decrease of the term set forth in paragraph 4, article 171 of the Brazilian Corporate Law, shares, convertible debentures or subscription warrants, which placement is made upon sale on stock exchange or public subscription or through exchange of shares on initial public offering, as set forth in the law, or also, pursuant to special tax incentive law.


89

19. Equity - continued

a) Capital - continued

Common shares entitle their holders to voting rights, each share is entitled to one vote. The meeting of the Board of Directors held on September 20, 2018 approved the Company’s capital increase to 1,090,507, as a result of the subscriptions and payments of 27,551,006 common shares by noncontrolling shareholders, totaling an increase of R$369,086. Pursuant to the extraordinary general meeting held on December 2, 2019, the Company’s capital was decreased by R$263,676, amounting to R$ 826,831, as a result of the spin-off of the Company’s investment in Algar TI. There was no change in the number of shares. As at December 31, 2019 and 2018, the amount of the Company’s capital and the book value per share (VPA) were as follows:

Individual 12/31/2019 12/31/2018

Capital amount 826,831 1,090,507 Number of shares: Common shares 295,019,806 295,019,806 Total shares 295,019,806 295,019,806 Company’s equity 1,323,227 1,436,928 Book value per share (VPA) in R$ 4,4852 4,8706

b) Dividends

In the fiscal year ended December 31, 2019, the Company proposed the payment of mandatory minimum dividends of R$100,653, corresponding to 35% of profit, after deduction of legal reserve, as set forth in the Bylaws.

As at December 31, 2019, the Company recognized balance of dividends payable, in current liabilities, of R$105,387, part relating to 2019 (R$100,653) and part relating to prior years (R$4,374), which amount is available to noncontrolling shareholders.


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19. Equity - continued b) Dividends--continued

The dividends proposed by the Company in the years ended December 31, 2019 and 2018 are as follows.

Individual 12/31/2019 12/31/2018

Profit for the year 302,716 316,037 Legal reserve – 5% (15,136) (15,802) Profit for dividend distribution 287,580 300,235 Mandatory minimum dividends (35%) 100,653 105,082 Dividend per common share (in R$) 0,3411 0,3562

Dividends per class of shares: Number of shares: Common shares 295,019,806 295,019,806 Total shares 295,019,806 295,019,806

Total dividends per class of shares: Total dividends – common shares 100,653 105,082 Total proposed dividends 100,653 105,082

20. Employee benefits Short-term benefits In addition to the obligations arising from the labor law and the agreements with class associations, the Company and its subsidiaries offer healthcare plan, dental care plan, group life insurance, education incentive programs and profit sharing programs to their employees. Accounting provisions are calculated monthly on an estimated basis and are recognized in profit or loss, as a contra entry to “Payroll, accruals and related taxes”. These benefits are recorded as costs and expenses in profit or loss when incurred and the unsettled balances are stated in note 15. The costs and expenses incurred in the period relating to the employee benefits attributable to officers and directors are shown in note 21. Supplementary pension plan - Algar-Prev retirement plan

The Company and its subsidiaries and part of their members contribute as sponsors to a defined contribution retirement plan, managed by BrasilPrev.


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20. Employee benefits - continued The benefits under such plan are summarized as follows: (a) Life retirement benefits: defined contribution plan which reserves are adjusted financially

and not on actuarial basis;

(b) Risk benefits that are structured as defined benefit in the sharing regime. The Company and its subsidiaries are responsible for paying contributions and BrasilPrev recognizes all reserves required to perform the benefit payment-related commitments assumed as from the taxable event date, thus not generating actuarial liabilities for the Company.

The contribution amounts are as follows:

Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Contribution 869 1,533 327 574

21. Related parties

The Company's direct parent is Algar S.A. Empreendimentos e Participações (“Algar S.A.”). The main asset and liability balances as at December 31, 2019 and 2018, as well as the effects from the transactions among related parties on profit or loss for these years are shown below: Consolidated

Balances - current assets 12/31/2019 12/31/2018 Trade receivables Total Trade receivables Total (a) (a)

Parent: Algar S.A. 41 41 97 97 Total 41 41 97 97 Related parties: Algar Tecnologia 348 348 - - Engeset 53 53 - - CTRQ - Rio Quente Resorts 144 144 - - ABC Inco - - 103 103 Space Empreendimentos 1 1 1 1 Other 12 12 - - Total 558 558 104 104 Total related parties 599 599 201 201


92

21. Related parties--continued

Consolidated

Balances - current liabilities 12/31/2019 12/31/2018

Trade

payables

Trade notes

payable Dividends

payable Total Trade

payables

Trade notes

payable Dividends

payable Total (d) (e) (f) (d) (e) (f)

Parent: Algar S.A. 21 4,806 68,179 73,006 - 8,562 50,843 59,405 Total 21 4,806 68,179 73,006 - 8,562 50,843 59,405 Related parties: Algar Tecnologia 3,572 - - 3,572 - - - - Algar TI 1,419 - - 1,419 - - - - Algar Segurança - - - - 436 - - 436 Algar Vigilância - - - - 237 - - 237 Space Empreendimentos 110 - - 110 66 - - 66 Instituto Algar de responsabilidade social 286 -

- 286 - - - -

Archy LLC (shareholder) - - 25,467 25,467 - - 26,588 26,588 Other 183 - 11,741 11,924 84 - - 84 Total 5,570 - 37,208 42,778 823 - 26,588 27,411 Total related parties 5,591 4,806 105,387 115,784 823 8,562 77,431 86,816

Profit or loss - Consolidated 12/31/2019 12/31/2018

Gross operating revenue

Cost of services

Selling expenses

General and administrative

expenses


Cost of services

Selling expenses


expenses (g) (h) (h) (h) (g) (h) (h) (h) Parent: Algar S.A. 82 - (5) - 1,589 (17) - - Total 82 - (5) - 1,589 (17) - - Related parties: Algar Tecnologia 242 (608) (2,395) - - - - - Algar TI Consultoria 3 (309) (424) (1) - - - - Engeset 30 - - - - - - - ABC Inco - - - - 826 - - - Algar Vigilância - - - - 25 (3,303) (4) (742) Algar Segurança - - - - 222 (2,175) (12) (477) Space Empreendimentos 57 (16,713) (8,184) (1,777) 57 (17,438) (8,032) (1,693) Unialgar - - - - - - - - CTRQ - Rio Quente Resorts 1,415 - - (115) 1,292 (58) - - Arvore 3 (1,895) (1,140) (511) 2 (1,549) (1,107) (506) Other 137 (2) (19) - 147 (11) - - Total 1,887 (19,527) (12,162) (2,404) 2,571 (24,534) (9,155) (3,418) Total related parties 1,969 (19,527) (12,167) (2,404) 4,160 (24,551) (9,155) (3,418)


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21. Rel ated parties--continued Individual Balances - current assets 12/31/2019 12/31/2018

Trade

receivables Trade notes receivable

Dividends receivable Total

Trade notes receivable

Dividends receivable Total

(a) (b) (c) (b) (c) Parent: Algar S.A. 41 - - 41 - - - Total 41 - - 41 - - - Direct subsidiaries: Algar Multimídia - 2,443 40,291 42,734 441 39,082 39,523 Algar Soluções - 15 327 342 37 330 367 Algar TI - - - - - 11,749 11,749 Total - 2,458 40,618 43,076 478 51,161 51,639 Related parties: Algar Tecnologia 231 - - 231 - - - Engeset 29 - - 29 245 - 245 CTRQ - Rio Quente Resorts 118 - - 118 - - - Other 4 - - 4 - - - Total 382 - - 382 245 - 245 Total related parties 423 2,458 40,618 43,458 723 51,161 51,884

Individual

Balances - current liabilities

12/31/2019 12/31/2018

Trade

payables

Trade notes

payable Dividends payable Total

Trade payables

Trade notes

payable Dividends payable Total

(d) (e) (f) (d) (e) (f) Parent: Algar S.A. - 4,551 68,179 72,730 - 3,091 50,843 53,934 Total - 4,551 68,179 72,730 - 3,091 50,843 53,934 Direct subsidiaries: Algar Multimídia 300 - - 300 108 185 - 293 Algar Soluções - - - - 28 - - 28 Algar TI - - - - 160 - - 160 Total 300 - - 300 296 185 - 481 Related parties: Algar Tecnologia 3,554 - - 3,554 3,447 - - 3,447 Algar TI 815 - - 815 Engeset 165 - - 165 250 - - 250 Algar Segurança - - - - 315 - - 315 Algar Vigilância - - - - 94 - - 94 Space Empreendimentos 110 - - 110 - - - - Archy LLC (shareholder) - - 25,467 25,467 - - 26,588 26,588 Árvore 172 - - 172 - - - - Other 11 - 11,741 11,752 - - - - Total 4,827 - 37,208 42,035 4,106 - 26,588 30,694 Total related parties 5,127 4,551 105,387 115,065 4,402 3,276 77,431 85,109


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21. Related parties - continued

Profit or loss - Individual 12/31/2019 12/31/2018


Cost of services

Selling expenses


expenses


Cost of services

Selling expenses


expenses (g) (h) (h) (h) (g) (h) (h) (h) Parent: Algar S.A. 82 - (5) - 79 - - - Total 82 - (5) - 79 - - - Direct subsidiaries: Algar Celular - - - - 887 (1,920) (25) - Algar Multimídia 770 (2,292) (547) - 3,689 (4,007) (40) - Algar TI - - - - 177 (424) (334) (26) Total 770 (2,292) (547) - 4,753 (6,351) (399) (26) Related parties: Algar Tecnologia 1,328 (5,406) (29,991) (1) 2,329 (3,973) (27,498) - Algar TI 39 (233) (2,818) (10) - - - - Engeset 97 - (82) - 201 (3) - - Algar Segurança - - - - 105 (1,191) (12) (414) Algar Vigilância - - - - 18 (736) (4) (742) Space Empreendimentos 49 (11,462) (4,866) (1,491) 46 (10,807) (4,677) (1,411) Árvore 3 (1,895) (1,161) (381) 2 (1,545) (1,123) (506) CTRQ - Rio Quente Resorts 1,102 - - (62) 991 - - - Other 134 (2) (18) - 246 (14) - - Total 2,752 (18,998) (38,936) (1,945) 3,938 (18,269) (33,314) (3,073) Total related parties 3,604 (21,290) (39,488) (1,945) 8,770 (24,620) (33,713) (3,099)

The balances and amounts arising from transactions among related parties are as follows: a) Refer to receivables for the provision of services relating to operating activities of the companies. b) Credits for transfer of expenses between Algar Group companies, arising from the shared use of

infrastructure solutions. c) Balances of dividends receivable from subsidiaries. d) Payables for the provision of goods and services arising from transactions of Algar Group

companies. e) Debts due to transfer of expenses between Algar Group companies, arising from corporate

negotiation with the sharing of infrastructure solutions used in operating activities. f) Dividends payable. g) Service revenue pursuant to the companies’ corporate purpose. h) Refer to costs and expenses on telecommunication services; electronic monitoring service,

reception, entrance desk, valet service, document storage, surveillance and armed security services; inventory management and warehousing service, network maintenance, terminal installation, storeroom management and public terminal maintenance; telemarketing service, call center management, rental of service desks, collection and back office.


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21. Related parties - continued Sureties and pledges

12/31/2019

Company Guarantor Financial institution Outstanding

balance Total by

company

Algar Telecom Algar S.A. 5th issue of debentures 239,320 239,320 239,320

Management compensation The compensation of Management members, who are represented by the members of the Board of Directors and statutory officers, responsible for planning, steering and controlling the Company's and its subsidiaries’ business, is calculated as costs and expenses for the period, including related benefits and taxes thereon. The amounts for the periods ended December 31, 2019 and 2018 are as follows: Consolidated Individual

12/31/2019 12/31/2018 12/31/2019 12/31/2018 Wages and other short-term benefits: Board of Directors:

Fixed compensation 4,200 4,200 4,200 4,200 Supervisory Board:

Fixed compensation - 84 - 84 Executive Board:

Fixed compensation 8,765 9,176 1,633 3,055 Variable compensation 5,274 7,126 578 2,199 Private pension plan 392 553 64 138

18,631 21,139 6,475 9,676

22. Net operating revenue Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Telecom 2,807,119 2,698,388 1,790,821 1,676,858

B2B 1,668,563 1,546,493 663,540 650,084 B2C 1,145,767 1,168,586 1,127,281 1,026,774 Eliminations (7,211) (16,691) - -

Tech - BPO/IT Management 841,359 984,204 - -

Tech - BPO/IT Management 879,894 1,030,922 - - Eliminations (38,535) (46,718) - -

Gross operating revenue 3,648,478 3,682,592 1,790,821 1,676,858 Taxes and deductions (777,361) (815,294) (440,794) (430,656) Net operating revenue 2,871,117 2,867,298 1,350,027 1,246,202


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23. Cost of sales and services


12/31/2019 12/31/2018 12/31/2019 12/31/2018 Personnel (634,513) (682,034) (109,445) (109,248) Materials (28,722) (36,084) (8,932) (10,390) Outside services (333,956) (325,682) (169,017) (158,059) Interconnection and connection means (123,230) (119,210) (90,105) (87,461) Rental and insurance (102,129) (163,942) (62,886) (87,941) Depreciation and amortization (362,351) (308,456) (223,596) (175,959) Depreciation - right of use – CPC 06 (IFRS 16) (73,365) - (42,482) - Cost of sales (42,032) (29,497) (37,107) (24,324) Other (30,201) (33,036) (23,372) (19,318)

(1,730,499) (1,697,941) (766,942) (672,700)

24. Selling expenses

Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018 Personnel (180,616) (157,731) (69,882) (70,144) Materials (1,178) (1,383) (466) (600) Outside services (103,643) (100,005) (89,377) (77,021) Advertising and marketing (38,207) (51,705) (21,447) (30,108) Allowance for impairment (21,389) (17,934) (17,608) (14,747) Rental and insurance (8,285) (21,407) (1,743) (10,203) Depreciation and amortization (26,278) (24,926) (20,291) (18,165) Depreciation - right of use – CPC 06 (IFRS 16) (9,026) - (6,483) - Other (13,644) (26,385) (10,758) (13,603)

(402,266) (401,476) (238,055) (234,591)

25. General and administrative expenses


Personnel (108,443) (109,381) (55,872) (53,476) Materials (967) (962) (544) (569) Outside services (82,313) (83,540) (57,529) (58,751) Rental and insurance (992) (3,743) (1,022) (2,380) Depreciation and amortization (24,976) (27,106) (15,489) (16,111) Depreciation - right of use – CPC 06 (IFRS 16) (3,028) - (2,242) - Other (13,927) (13,157) (5,335) (5,212) (234,646) (237,889) (138,033) (136,499)


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26. Other operating income (expenses), net


Telecommunication service concession expenses (3,243) (8,170) (3,243) (7,342) Recognition of provisions (33,815) (48,812) (11,352) (17,274) Reversal of provisions 19,367 66,930 4,764 35,986 Fines on telecommunication services and

agreements 23,575 20,808 15,977 17,838 Reversal of provision for deferred IRPJ/CSLL

liabilities - 15,815 - 15,815 Reversal of PIS/COFINS on the ICMS tax basis - 8,341 - 5,263 Provision for losses on assets - TV (62,390) - (62,390) - Loss on property, plant and equipment and

intangible assets (10,285) (3,859) (8,538) (3,475) Amortization of surplus (4,343) (3,753) (984) - Indemnities from claim losses 498 1,210 198 449 Recoverable taxes 9,537 26,268 5,242 21,885 Contractual fines (8,067) - (905) - PIS and COFINS tax credit (note 6 ii) 138,302 - 138,302 - Write-off of trade receivables (13,081) - (14,290) - Other (1,577) (1,498) 115 307 54,478 73,280 62,896 69,452

27. Finance income (costs), net Consolidated Individual 12/31/2019 12/31/2018 12/31/2019 12/31/2018

Finance income: Income from short-term investments 18,479 18,251 10,616 9,765 Interest on past-due receivables 5,793 6,675 3,943 4,457 Interest on taxes, fees and contributions 7,043 5,567 1,631 4,793 Inflation adjustments and foreign exchange differences 3,679 8,950 371 1,144 Reversal of provisions 3,687 29,461 650 24,843 Inflation adjustment to tax credits (PIS/COFINS) (note 6 ii) 116,200 - 116,200 - Other finance income 1,042 4,639 1,406 3,981 Total finance income 155,923 73,543 134,817 48,983

Finance costs: Interest on borrowings (598) (3,185) (828) (2,495) Interest on debentures and promissory notes (137,934) (105,642) (120,857) (89,791) Inflation adjustments and exchange rate changes (33,612) (35,793) (25,566) (27,714) Discounts granted (8,537) (8,311) (6,105) (6,819) Charges on provisions, fees and taxes (13,540) (11,553) (7,001) (7,086) Taxes, bank fees and commissions (15,264) (24,835) (14,319) (22,345) Interest on lease liability - CPC 06 (IAS 16) (32,368) - (21,735) - Other finance costs (15,255) (21,811) (11,374) (16,906) Total finance costs (257,108) (211,130) (207,785) (173,156)

Finance income (costs), net (101,185) (137,587) (72,968) (124,173)


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28. Financial instruments and risk management The Company is exposed to the following risks: • Credit risk

• Liquidity risk

• Market risk

• Operational risk a) Credit risk

Credit risk is the risk of the Company and its subsidiaries incurring financial losses if a customer or a counterparty to a financial instrument fails to perform its contractual obligations, which arises mainly from receivables on investment securities. The Company’s and its subsidiaries’ assets assessed as exposed to credit risk, subject to probable loss, correspond to trade receivables. In the Company’s opinion, there are no other significant assets subject to this risk. The Company and its subsidiaries continuously monitor the credit granted to its customers and the default level. The credit risk of trade receivables derives from billed and unbilled amounts relating to telecommunication services, resale of cell phones and distribution of prepaid cards and wireless smart cards. Trade receivables Customer access to fixed telephony services is partially suspended whenever its bill is not paid for more than 30 days. After 60 days past-due, access is fully suspended. Exceptions comprise only telephone services that must continue to be provided for national security or protection reasons. Customer access to mobile telephony services is partially suspended whenever its bill is not paid for more than 15 days. After 30 days past-due, access is fully suspended. The Company maintains credit limits to its resellers and distributors of prepaid cards and contactless smart cards, and to resellers of mobile phones, which are defined based on the sales potential, risk history, payment history and default, applying the guarantees using promissory notes and other collaterals.


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28. Financial instruments and risk management - continued a) Credit risk - continued

The credit risk relating to the services provided by Algar Tecnologia, as well as the risk of concentration of revenue on a few customers are mitigated based on a careful credit analysis. Such analysis is defined based on the sales potential, risk history, solvency and customer default, as well as on the distribution of customer agreements into several types of transaction. Similar policies are used for credit analysis comprising the other subsidiaries, and is defined based on the sales potential, risk history, solvency and default. The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. Additionally, the Company’s Management considers the risks by region, based on historical analysis of doubtful debts. The management of credit risks of trade receivables considers the following aspects by company: • At the Company and subsidiaries Algar Multimídia, Algar Soluções, revenues are

diluted through their customer portfolio, with no significant concentration on specific customers.

• Due to the spin-off of the Company’s investment in Algar TI, on December 2, 2019, the

revenue concentration was no longer applicable to the currently consolidated business.

b) Liquidity risk The Company’s Management manages liquidity risks to ensure the performance of obligations on financial liabilities, either through settlement in cash or using other financial assets, maintaining, whenever possible, the planning to fulfill these obligations under normal market conditions or specific conditions, according to the risk level.

The table below shows the contractual maturities of financial liabilities, including estimated interest and excluding the impact of the currency negotiation agreements by the net position:

12/31/2019 – Consolidated and Individual

Carrying amount

Contractual cash flow

1 to 2 years

3 to 5 years

Over 5 years

Non-derivative financial liabilities: Debentures and promissory notes 2,267,311 2,843,495 679,570 1,843,057 320,868 Finance lease 7,804 16,004 2,564 8,144 5,296 Total 2,275,115 2,859,499 682,134 1,851,201 326,164


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28. Financial instruments and risk management - continued b) Liquidity risk--continued

The policy for short-term investments adopted by Management establishes the financial institutions with which the Company can enter into agreements and defines fund allocation percentage rates and the absolute amounts that may be invested in each of these financial institutions.

c) Market risk

Market risks are related mainly to the risks of change in the prices of goods and services offered by the Company, as well as in exchange and interest rates and other rates that can affect its revenue and its asset and liability amounts. Management’s purpose is to manage and control the Company’s exposure to market risks, within compatible limits, overcoming the obstacles to business growth.

The Company may enter into derivative transactions to manage and reduce the risk of exposure to possible fluctuations in exchange rates. When applicable, derivative transactions are recorded in balance sheet accounts to mitigate the Company’s exposure to currency risks and preserve its investment capacity and growth strategy.

Foreign exchange risk Arises from the possibility of fluctuations in the exchange rates of foreign currencies used by the Company and its subsidiaries to acquire equipment and inputs, and contract financial instruments. The Company and its subsidiaries are not exposed to foreign currency fluctuations, relating to borrowings and financing, in the current and comparative period reported in these financial statements. Sensitivity analysis - interest rates - borrowings, financing and debentures, net of short-term investments The scenarios of the exposure of financial instruments (borrowings, financing, debentures and promissory notes) indexed to the interest rate were designed based on the curves determined as at December 31, 2019, observing the impact on finance costs, net of income from short-term investments in the case of the CDI risk variable, within one year. Scenario I corresponds to the interest rates determined on the date above and, in Management’s opinion, it is the most probable scenario on the maturity dates of each of the transactions. For Scenarios II and III, 25% and 50% decreases were considered in the risk variables, respectively.


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28. Financial instruments and risk management - continued

c) Market risk--continued

Assumptions for sensitivity analysis

The Company performed an analysis considering the DI and IPCA rates as at December 31, 2019, extracted from the following external sources, respectively: Cetip, IBGE and Central Bank of Brazil.

Risk variable Scenario I Scenario II Scenario III

DI (%) 4,40% 5,50% 6,60%

Finance income (costs) indexed to the DI 52,990 66,237 79,484 Additional finance charges if the scenario is confirmed - 13,247 26,494

Risk variable Scenario I Scenario II Scenario III

IPCA (%) 3,27% 4,09% 4,91%

Finance income (costs) indexed to the IPCA 21,196 26,496 31,795 Additional finance charges if the scenario is confirmed - 5,300 10,599

d) Operational risks

Operational risks comprise the direct and indirect risks of losses arising from a number of reasons associated to the Group companies’ processes, as well as related to employees, technology and infrastructure, in addition to external market and liquidity factors, such as those arising from lawsuits and regulatory requirements. The Company’s purpose is to manage operational risks and avoid financial losses and damages to the companies' reputation, based on procedures and policies aligned with the Company’s business and activities. The Company’s Senior Management is responsible for developing, implementing and monitoring controls to address operational risks, which is assisted by the Internal Audit area, mainly with respect to periodical reviews of such controls and internal policies, in order to ensure appropriate implementation and operation.

e) Capital management The Company’s solid capital structure results in the trust of investors, creditors and the market and strengthens the basis for future business. The constant monitoring of the return of capital and the adoption of a dividend distribution policy are recognized practices on behalf of the shareholder and the managed business.

The objectives of the companies, including the Company, in managing capital are to ensure that they are always capable of providing return to their shareholders and benefits to other stakeholders, and maintain an optimal capital structure to reduce costs incurred. The Company and its subsidiaries do not enter into complex derivative transactions. The Company and its subsidiaries do not make investments involving derivatives or any other risk assets for speculative purposes.


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28. Financial instruments and risk management--continued

f) Estimated market values Trade receivables - arise directly from the Company’s and its subsidiaries’ operations, are classified at amortized cost and recorded at their original amounts, subject to the allowance for losses. The original net amounts of the allowance approximate their fair values at the balance sheet date. Due from related parties – stated at their original amounts, adjusted for inflation, when applicable. Trade payables - the carrying amounts approximate their fair values. Borrowings, financing and debentures (in local and foreign currency) - measured at amortized cost and recorded at their contractual amounts. Derivatives – measured at their fair values, with a contra entry to profit or loss. Fair value is calculated based on the discounted cash flow and receivables and payables refer to the projected cash flow for the period. To determine the fair value of borrowings, financing, debentures and promissory notes as follows, the Company used interest rates to discount estimated cash flows, when applicable, based on the CDI rate curve at the end of the reporting period, and considers the calculation as level 2 according to the fair value hierarchy described below. The classification of the main financial instruments is as follows: 12/31/2019 Consolidated Individual

Classification Carrying amount Fair value

Carrying amount Fair value

Assets Cash and banks (a) 10,946 10,946 8,110 8,110 Short-term investments

(notes 4 and 5) (a) 415,743 415,743 370,391 370,391 Trade receivables (b) 501,900 501,900 292,471 292,471 928,589 928,589 670,972 670,972 Liabilities Trade payables (b) 244,553 244,553 158,782 158,782 Trade notes payable (b) 8,472 8,472 4,650 4,650 Borrowings and financing (b) 7,804 7,026 7,804 7,026 Debentures (b) 2,043,848 2,115,510 2,043,848 2,115,510 Promissory notes (b) 223,463 226,862 223,463 226,862 Advances from customers (b) 2,446 2,446 829 829 Amounts refundable to shareholders (b) 28,588 28,588 28,588 28,588 2,559,174 2,633,457 2,467,964 2,542,247 (a) Financial assets or financial liabilities measured at fair value, including adjustment to profit or loss; (b) Amortized cost.


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28. Financial instruments and risk management--continued

g) Capital structure risk (or financial risk) Arises from the choice made by the Company and its subsidiaries between own capital (capital contribution and earnings retention) and debt capital to finance their operations. In order to mitigate the liquidity risks and optimize the weighted average cost of capital, the Company and its subsidiaries constantly monitor the levels of indebtedness according to the market standards and the compliance with covenants set forth in loan and financing agreements, debentures and promissory notes. In certain circumstances hedging transactions are undertaken to freeze the finance cost of the operations.

h) Fair value hierarchy The table below presents financial instruments measured at fair value, using valuation methods.

The different levels defined are as follows:

• Level 1: quoted prices (unadjusted) in active markets for similar assets or liabilities;

• Level 2: inputs other than quoted prices included in Level 1, which are observable for assets or liabilities, either directly (i.e., as prices) or indirectly (i.e., derived from prices);

• Level 3: inputs for assets and liabilities that are not based on observable market inputs (unobservable inputs).

Consolidated - 12/31/2019 Level 1 Level 2 Level 3 Total Assets: Cash and banks 10,946 - - 10,946 Short-term investments - 415,743 - 415,743 10,946 415,743 - 426,689

Consolidated - 12/31/2018 Level 1 Level 2 Level 3 Total Assets: Cash and banks 17,563 - - 17,563 Short-term investments - 211,766 - 211,766 17,563 211,766 - 229,329

Individual - 12/31/2019 Level 1 Level 2 Level 3 Total Assets: Cash and banks 8,110 - - 8,110 Short-term investments 370,391 - 370,391 8,110 370,391 - 378,501

Individual - 12/31/2018 Level 1 Level 2 Level 3 Total Assets: Cash and banks 5,587 - - 5,587 Short-term investments - 40,476 - 40,476 5,587 40,476 - 46,063


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29. Segment reporting a) Telecom

The Telecom segment represents the sum of the results of operations and capital employed of the business units (i) fixed telephony; (ii) broadband Internet; (iii) data communication; (iv) mobile telephony; (v) Internet service provider; and (vi) pay TV. In this segment the Company offers specific products and services to corporate customers (B2B), which are comprised of small-, medium- and large-sized companies, and retail customers (B2C). The Company’s growth in the Telecom segment is focused on the geographic expansion of its networks to expand the B2B customer base. The share of gross revenue from B2B customers is the Company’s most significant revenue. This segment comprises the operations of the Company and subsidiaries Algar Multimídia and Algar Soluções.

b) Tech - BPO/IT Management Segment operated by Algar TI and its subsidiaries Algar Tecnologia, Engeset and other entities headquartered in Latin America that offer contact center, BPO (Business Process Outsourcing), and managed services and information technology solutions to corporate customers (B2B). Due to the spin-off in Algar Telecom, on December 2, 2019, for withdrawal of the investment in subsidiary Algar TI, pursuant to the shareholders’ agreement, the consolidated information included the consolidated income statement for the period ended November 30, 2019 of such company, not comprising its balance sheet balances, as shown in the table below, due to the new shareholding structure arising after the spin-off (note 3aii).


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29. Segment reporting--continued

The information by business segment for 2019 and 2018 for the main groups of balance sheet and income statement accounts is as follows.

Telecom Tech - BPO/IT

Management Eliminations Consolidated

12/31/2019 12/31/2018 12/31/2019 12/31/2018 12/31/2019 12/31/2018 12/31/2019 12/31/2018

Assets 4,778,755 3,810,676 - 750,588 - (301,766) 4,778,755 4,259,498

Current assets 1,177,270 742,417 - 302,370 - (16,849) 1,177,270 1,027,938

Noncurrent assets 3,601,485 3,068,259 - 448,218 - (284,917) 3,601,485 3,231,560

Investments 126 280,185 - - - (280,059) 126 126

Property, plant and equipment 2,487,526 2,218,686 - 242,541 - (179) 2,487,526 2,461,048

Intangible assets 403,749 384,689 - 169,663 - (4,679) 403,749 549,673

Right-of-use asset 344,327 - - - - - 344,327 -

.Other noncurrent assets 365,757 184,699 - 36,014 - - 365,757 220,713

Liabilities and equity 4,778,755 3,810,676 - 750,588 - (301,766) 4,778,755 4,259,498

Liabilities 3,455,528 2,373,748 - 465,670 - (16,848) 3,455,528 2,822,570

Current liabilities 711,793 700,720 - 272,842 - (16,848) 711,793 956,714

Lease liability – current 85,812 - - - - - 85,812 -

Other current liabilities 625,981 700,720 - 272,842 - (16,848) 625,981 956,714

Noncurrent liabilities 2,743,735 1,673,028 - 192,828 - - 2,743,735 1,865,856

Lease liability – noncurrent 270,560 - - - - - 270,560 -

Other noncurrent liabilities 2,473,175 1,673,028 - 192,828 - - 2,473,175 1,865,856

Equity 1,323,227 1,436,928 - 284,918 - (284,918) 1,323,227 1,436,928

B2B 1,668,563 1,546,493 - - - - 1,668,563 1,546,493

B2C 1,145,767 1,168,586 - - - - 1,145,767 1,168,586

Tech - BPO/IT Management - - 879,894 1,030,922 (38,535) (46,718) 841,359 984,204

Eliminations (4,540) (12,041) - - (2,671) (4,650) (7,211) (16,691)

Gross revenue 2,809,790 2,703,038 879,894 1,030,922 (41,206) (51,368) 3,648,478 3,682,592

(-) Sales taxes and deductions (683,168) (690,521) (94,326) (124,844) 133 71 (777,361) (815,294)

Net operating revenue 2,126,622 2,012,517 785,568 906,078 (41,073) (51,297) 2,871,117 2,867,298

Depreciation and amortization (450,049) (324,321) (53,318) (39,920) - - (503,367) (364,241)

Operating costs and expenses (1,156,095) (1,167,208) (694,642) (784,047) 41,171 51,470 (1,809,566) (1,899,785) Operating profit (loss) before finance income (costs), share of profit (loss) of subsidiaries and income taxes 520,478 520,988 37,608 82,111 98 173 558,184 603,272

Finance income (costs) (78,203) (124,922) (22,981) (12,666) (1) 1 (101,185) (137,587)

Share of profit (loss) of subsidiaries 11,187 49,644 - - (11,187) (49,644) - -

Profit (loss) before income taxes 453,462 445,710 14,627 69,445 (11,090) (49,470) 456,999 465,685

Income tax and social contribution (150,746) (129,673) (3,537) (19,975) - - (154,283) (149,648)

Profit (loss) 302,716 316,037 11,090 49,470 (11,090) (49,470) 302,716 316,037

Other disclosures: Investment in fixed assets (notes 10 and 11) 714,012 671,422 26,841 61,758 - - 740,853 733,180


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30. Commitments

Property, plant and equipment supply contracts The Company has commitments to national and international suppliers arising from a submarine optical fiber construction contract, connecting Brazil and the United States. These commitments were settled in 2019. The Company and its subsidiaries maintain commitments arising from operating telecommunication tower and property lease contracts, where their administrative head offices, business officers, call centers, telecommunication towers and stores, are located. Most of the contracts were covered by the adoption of IFRS 16 (CPC 06 – R2) on January 1, 2019, and the respective rights of use were recognized as a contra entry to lease liabilities, as disclosed in note 3m. Agreements with content programmers – pay TV The Company has commitments arising from the acquisition of programming content for its pay TV products, which are effective between three and five years. As at December 31, 2019, the Company documented the exclusion of pay TV products from its portfolio and, consequently, the future commitments to the programmers cease to exist.

31. Earnings (loss) per share

Individual Profit for the year 12/31/2019 12/31/2018 Profit for the year 302,716 316,037 Number of common shares at the end of the year 295,019,806 295,019,806 Weighted average number of shares 295,019,806 280,904,633 Basic and diluted earnings per common share (in R$) 1,02 1,13


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2020-CPS-0210 VF.docx

32. Noncash transactions

In the years ended December 31, 2019 and 2018, the main investing activities that did not correspond to variations in cash and cash equivalents are as follows:


12/31/2019 12/31/2018 12/31/2019 12/31/2018 Acquisition of property, plant and equipment and intangible assets payable 80,233 77,869 44,699 35,059 Right-of-use of assets - IFRS 16 / CPC 06 239,789 - 187,055 - Recognition of PIS and COFINS credit, pursuant to final and unappealable decision 138,302 - 138,302 - Acquisition of company (Smart) – partially in installments 19,473 - 19,473 - 477,797 77,869 389,529 35,059 Payment of investments, not affecting additions to the notes on property, plant and equipment and intangible assets (77,869) (107,617) (35,059) (54,186)

33. Insurance coverage As at December 31, 2019, insurance coverage against operational risks was comprised of R$1,564,191 for property damages and R$1,693,023 for loss of profits; R$18,000 for civil liability for the companies, comprising the Company and its subsidiaries Algar Multimídia and Algar Soluções.

34. Events after the reporting period

Impacts from the Coronavirus on the financial statements

The first official communication was issued by the World Health Organization (WHO) on December 31, 2019 addressing the discovery of Coronavirus (COVID-19), which has already spread over several countries. Pursuant to CIRCULAR LETTER/CVM/SNC/SEP/No. 02/2020, which clarifies the importance of discussing this matter in the financial statements, comprising the analysis of the risks, impacts and uncertainties, the Company's Management informs that, in its opinion, it is not yet able to determine, within the context of its operations, the possible economic effects arising from the virus spread. The risks and uncertainties related to this matter that are most likely to be applicable to the Company may be mainly related to supply constraints, either due to the halt in production or the sale of intermediary or end products, as a result of the movement observed in the global supply chains. Also, the Company believes in a potential increase in the demand for Telecom services due to the reduced flow of people in the several economic segments, resulting in the substitution of travel and face-to-face meetings for other ways of communication. The Company will continue to monitor this matter and report any significant effect that may impact its business.

Documents

Algar Telecom S.A. and its Subsidiaries