As filed with the Securities and
Exchange Commission on June 30, 1999
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
FORM 20-F
-------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number: 001-14483
-------------
TELEMIG CELULAR PARTICIPACOES S.A.
(Exact Name of Registrant as Specified in Its Charter)
Telemig Cellular Holding Company The Federative Republic of Brazil
(Translation of Registrant's (Jurisdiction of Incorporation
Name into English) or Organization)
-------------
SCN, Quadra 3, Bloco A, Sobreloja
70713-000 Brasilia-DF, Brazil
(Address of Principal Executive Offices)
-------------
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ----------------------
Preferred Shares, without par value* New York Stock Exchange
American Depositary Shares, each New York Stock Exchange
representing 20,000 Preferred Shares
- -----------------------
* Not for trading, but only in connection with the listing of American
Depositary Shares on the New York Stock Exchange.
Securities registered or to be registered
pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the Issuer's classes
of capital or common stock as of the close of the period covered by this Annual
Report:
124,369,030,532 Common Shares, without par value
210,029,997,060 Preferred Shares, without par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No__
Indicate by check mark which financial statement item the Registrant has
elected to follow.
Item 17 Item 18 X
===============================================================================
<PAGE>
PART I
Item 1. Description of Business............................................1
Item 2. Description of Property...........................................18
Item 3. Legal Proceedings.................................................18
Item 4. Control of Registrant.............................................20
Item 5. Nature of Trading Market..........................................21
Item 6. Exchange Controls and Other Limitations
Affecting Security Holders........................................23
Item 7. Taxation..........................................................24
Item 8. Selected Financial Data...........................................29
Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................31
Item 9A. Quantitative and Qualitative Disclosures About Market Risk........39
Item 10. Directors and Officers of Registrant..............................40
Item 11. Compensation of Directors and Officers............................43
Item 12. Options to Purchase Securities from Registrant or Subsidiaries....44
Item 13. Interest of Management in Certain Transactions....................44
PART II
Item 14. Description of Securities to be Registered........................44
PART III
Item 15. Defaults upon Senior Securities...................................44
Item 16. Changes in Securities, Changes in Security for
Registered Securities and Use of Proceeds.........................44
PART IV
Item 17. Financial Statements..............................................44
Item 18. Financial Statements..............................................44
Item 19. Financial Statements and Exhibits.................................44
Index of Defined Terms.......................................................46
Technical Glossary...........................................................47
<PAGE>
Telemig Celular Participacoes S.A., a corporation organized under the laws
of the Federative Republic of Brazil ("Brazil"), is referred to in this Annual
Report as the "Registrant." Its subsidiary, Telemig Celular S.A., is referred to
as "Telemig Celular." The Registrant and Telemig Celular are referred to
collectively as the "Company." The Registrant is one of the companies formed as
a result of the breakup of Telecomunicacoes Brasileiras S.A. - Telebras
("Telebras") by Brazil's federal government (the "Federal Government") in May
1998. Telemig Celular was formed in January 1998 by spinning off the cellular
telecommunications operations of Telecomunicacoes de Minas Gerais S.A. (the
"Predecessor Company"), an operating company controlled by Telebras. References
to the operations of the Company, prior to January 1998, are to the cellular
operations of the Predecessor Company. See "Description of Business--Historical
Background."
References in this Annual Report to "Preferred Shares" and "Common Shares"
are to the preferred shares and common shares, respectively, of the Registrant.
References to "American Depositary Shares" or "ADSs" are to American Depositary
Shares, each representing 20,000 Preferred Shares. The ADSs are evidenced by
American Depositary Receipts ("ADRs").
References in this Annual Report to (i) the "real," "reais" or "R$" are to
Brazilian reais (plural) and to the Brazilian real (singular), the currency of
Brazil and (ii) "U.S. dollars," "dollars" or "US$" are to United States dollars.
The consolidated financial statements of the Company as of December 31,
1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998 (the
"Consolidated Financial Statements") have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP"). The
Consolidated Financial Statements and other financial information as of and for
the year ended December 31, 1998 are presented in nominal reais and do not
recognize the effects of inflation. The Consolidated Financial Statements and
other financial information for prior dates and periods have been indexed and
expressed in constant reais of December 31, 1997 purchasing power using the
integral restatement method (correcao monetaria integral). Consolidated
financial statements prepared in accordance with generally accepted accounting
principles in Brazil ("Brazilian GAAP") have been published in Brazil.
This Annual Report contains forward-looking statements. The Company and its
representatives may also make forward-looking statements in press releases and
oral statements. Statements that are not statements of historical fact,
including statements about the beliefs and expectations of the Company's
management, are forward-looking statements. The words "anticipates," "believes,"
"estimates," "expects," "forecasts," "intends," "plans," "predicts," "projects"
and "targets" and similar words are intended to identify these statements, which
necessarily involve known and unknown risks and uncertainties. Known risks and
uncertainties, some of which are discussed at pages 15-18 herein, include those
resulting from the short history of the Company as an independent,
private-sector entity and the introduction of competition to the Brazilian
telecommunications sector, as well as those relating to the cost and
availability of financing, the performance of the Brazilian economy generally,
the levels of exchange rates between Brazilian and foreign currencies and the
Federal Government's telecommunications policy. Accordingly, the actual results
of operations of the Company may be different from the Company's current
expectations, and the reader should not place undue reliance on these
forward-looking statements. Forward-looking statements speak only as of the date
they are made, and the Company does not undertake any obligation to update them
in light of new information or future developments.
Certain terms are defined the first time they are used in this Annual
Report. The "Index of Defined Terms" that begins on page 46 lists those terms
and where they are defined. The "Technical Glossary" that begins on page 47
provides the definition of certain technical terms used herein.
<PAGE>
PART I
Item 1. Description of Business
The Company provides cellular telecommunications services under a
concession from the Federal Government (the "Concession") in a region (the
"Region") that includes 93% of the municipalities in the State of Minas Gerais
and approximately 89.3% of the population in the State. The Predecessor Company
began to offer cellular telecommunications services in the Region in April 1993,
and the Company is currently the leading provider of cellular telecommunications
services in the Region. At December 31, 1998, the Company had approximately
448,400 subscribers.
The Registrant and its Operating Subsidiary
Telemig Celular is the operating subsidiary of the Registrant. At December
31, 1998, the Registrant owned 82.9% of the share capital, and 89.2% of the
voting shares of Telemig Celular. Substantially all the Registrant's assets
other than cash consist of shares of Telemig Celular. The Registrant relies
almost exclusively on dividends from Telemig Celular to meet its needs for cash,
including cash to pay dividends to its shareholders. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Registrant's headquarters are located at SCN, Quadra 3, Bloco A,
Sobreloja, 70713-000 Brasilia-DF, Brazil, and its telephone number is
5561-429-5600.
Historical Background
Prior to the incorporation of Telebras in 1972, there were more than 900
telecommunications companies operating throughout Brazil. Between 1972 and 1975,
Telebras and its operating subsidiaries (collectively, the "Telebras System")
acquired almost all the other telephone companies in Brazil and thus came to
have a monopoly over the provision of public telecommunications services in
almost all areas of the country. Beginning in 1995, the Federal Government
undertook a comprehensive reform of Brazil's telecommunications regulatory
system. In July 1997, Brazil's National Congress adopted the Lei Geral de
Telecomunicacoes (the "General Telecommunications Law," and together with the
regulations, decrees, orders and plans on telecommunications issued by Brazil's
Executive Branch, the "Telecommunications Regulations"), which provided for the
establishment of a new regulatory framework, the introduction of competition and
the privatization of Telebras. The General Telecommunications Law established an
independent regulatory agency called Agencia Nacional de Telecomunicacoes -
ANATEL ("Anatel").
In January 1998, in preparation for the restructuring and privatization of
the Telebras System, the cellular telecommunications operations of Telebras'
operating subsidiaries were spun off into separate companies. In May 1998,
Telebras was restructured to form, in addition to Telebras, 12 new holding
companies (the "New Holding Companies") by means of a procedure under Brazilian
corporate law called cisao, or split-up. Virtually all the assets and
liabilities of Telebras, including the shares held by Telebras in the operating
companies of the Telebras System, were allocated to the New Holding Companies.
The split-up of the Telebras System into the New Holding Companies is referred
to herein as the "Breakup" or the "Breakup of Telebras."
The New Holding Companies, together with their respective subsidiaries,
consist of (a) eight cellular service providers, each operating in one of eight
regions (each a "Cellular Region"), (b) three fixed-line service providers, each
providing local and intraregional long-distance service in one of three regions
(each a "Fixed-Line Region") and (c) Embratel Participacoes S.A. - Embratel
("Embratel"), which provides domestic (including intraregional and
interregional) long-distance telephone service and international telephone
service throughout Brazil.
The Registrant is one of the New Holding Companies. In the Breakup, the
Registrant was allocated all the share capital held by Telebras in Telemig
Celular. In July 1998, the Federal Government sold substantially all its shares
of the New Holding Companies, including the Registrant, to private-sector
buyers. The Federal Government's common shares of the Registrant were purchased
by Telpart Participacoes S.A. ("Telpart"), a consortium comprising TIW do Brasil
Ltda. and Newtel Participacoes S.A. See "Control of Registrant."
The Region
The Region covers an area of a little more than 500,000 square kilometers,
representing approximately 6% of Brazil's area. The State of Minas Gerais'
population of over 17.1 million represents approximately 10.5% of the population
of Brazil. In 1996, the per capita income in the State of Minas Gerais was
approximately R$3,810 (in reais of December 31, 1996) and the State of Minas
Gerais generated approximately 8.7% of Brazil's gross domestic product. At
December 31, 1998, the Region had 19 metropolitan areas with populations in
excess of 100,000 people, including the cities of Belo Horizonte, Contagem, Juiz
de Fora and Montes Claros. Companhia de Telecomunicacoes do Brasil Central -
CTBC Telecom ("CTBC Telecom") offers cellular telephone services in the
westernmost part of the State of Minas Gerais. The area covered by CTBC Telecom
includes 7% of the municipalities and 10.7% of the population of the State of
Minas Gerais but is not part of the Region.
Set forth below is a map showing the location of the State of Minas Gerais
within Brazil.
[GRAPHIC OMITTED]
The Company's business, financial condition, results of operations and
prospects depend in part on the performance of the Brazilian economy and the
economy of the Region, in particular. See "--Brazilian Economic Environment."
Services
The Company offers cellular telecommunications services to its subscribers
pursuant to a variety of rate plans. The Company offers analog and digital
cellular telephone services. The introduction of digital technology in 1998
allowed the Company to increase capacity, offer additional value-added services
and provide more secure communication channels. See "--Network." Value-added
services include voicemail, call forwarding, call waiting, caller identification
and three-way calling. The Company also sells cellular telephones in connection
with the provision of digital cellular telecommunications service. At present,
the sale of cellular telephones is not a significant part of the Company's
business.
Through agreements with other cellular service providers, the Company
offers automatic roaming services throughout Brazil that allow subscribers to
make and receive calls while out of the Region. The Company offers international
roaming in Argentina, Uruguay and Paraguay through agreements with local
cellular service providers. The Company also provides cellular
telecommunications services to subscribers of other cellular service providers
while they are in the Region. The Company charges the other service providers
pursuant to roaming agreements for the service provided to their subscribers.
See "--Operating Agreements--Roaming Agreements."
The Company provides subscribers with 24-hour customer service to answer
questions and resolve service problems. During 1998, the Company's customer
service department answered, on average, 322,000 calls per month, with an
average duration of 238 seconds. During the same period, the Company's customer
service department also answered, on average, 290 letters and e-mails per month.
At December 31, 1998, the Company had approximately 700 customer service
attendants.
Sales and Marketing
The Company divides its market into large, medium and small volume users.
The market is further segmented according to profitability level. The Company's
customers consist primarily of businesses and high-income individuals. According
to the Company's research at December 31, 1998, approximately 76% of the
Company's subscribers were male, and the average age of the Company's
subscribers was 33.
Pursuant to Anatel's regulations, cellular telecommunications services must
be provided to all individual applicants, regardless of income level, in the
order in which applications are received. In order to assist in managing the
risk of payment defaults, the Company currently conducts credit checks on its
customers. Service can be interrupted if a customer fails to make timely
payments. See "--Billing and Collection."
Sales Network
The Company markets its services through direct and indirect distribution
channels. The Company targets potential large-account customers through direct
contact by a skilled sales force and provides them with ongoing support. Small
and medium-sized businesses are targeted through a combination of the Company's
corporate client focused sales force, company stores and the marketing efforts
of independent distributors. At December 31, 1998, the Company had 85 company
stores and 180 independent distributors covering all major cities in the Region.
Direct Distribution Channels (Company-owned, staffed and controlled). The
Company provides telecommunications services through company-owned stores. Such
stores are effective in building image and brand awareness through the exclusive
provision of the Company's telecommunications services. Company stores also
provide standard levels of service, greater accountability and consistent
customer service. Although the majority of sales at Company stores consists of
subscriptions for cellular telecommunications service, such stores also sell
handsets, generally for prices at or near cost, in connection with the sale of
such subscriptions.
Indirect Distribution Channels (independently owned and operated).
Independent distributors sell telecommunications services and provide the
Company with sales coverage across the Region with minimal capital investment or
operating expenses. In addition, independent distributors provide customers
accessibility in a broad area of locations, convenience, diversity of products
and pricing alternatives.
Independent distributors receive a fixed commission of R$70 for each new
customer they sign up for service, provided that the customer retains and pays
for service for at least three months. In addition, independent distributors are
eligible for quarterly bonuses for meeting or exceeding certain sales targets
set by the Company. All exclusive independent distributors receive marketing
support and financing from the Company to assure that they maintain certain
standards of service.
Other Marketing Efforts. The Company is developing an "E-Business" program
which focuses on providing Internet based sales and customer service and seeks
to provide convenience to customers in the Region through assistance and
information that will be available 24 hours a day, seven days a week, through
the Company's web site.
The Company is engaged in telemarketing efforts aimed at (i) increasing
average revenue per user through the sales of value-added services, and (ii)
directing customers to service plans that best fit their usage patterns. The
Company also uses telemarketing and direct mailings to solicit potential
customers.
One of the Company's principal shareholders, provides technical assistance
and services to the Company. In addition, the Company has several service
contracts with the Predecessor Company to perform certain administrative tasks.
See Note 9 to the Consolidated Financial Statements.
Network and Subscriber Data
The following table sets forth information on the Company's subscriber
base, coverage and related matters at the dates and for the years indicated.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cellular lines in service at year-end.............................. 233,042 427,815 448,400
Subscriber growth during year...................................... 160% 84% 5%
Estimated population of the Region at
year-end (millions) (1)........................................ 14.9 15.1 15.5
Estimated covered population at
year-end (millions) (2)........................................ 6.8 8.7 10.3
Percentage of population covered at year-end (3)................... 46% 58% 66%
Penetration at year-end (4)........................................ 1.6% 2.8% 2.9%
Percentage of area of state covered at year-end.................... 21% 31% 34%
Average monthly incoming minutes of use per subscriber............. 73 90 82
Average monthly outgoing minutes of use per subscriber............. 76 77 79
Average monthly revenues per subscriber (5)........................ R$119.20 R$99.70 R$80.40
</TABLE>
- ------------------
(1) Estimates of the Instituto Brasileiro de Geografia e Estatistica - IBGE
("IBGE").
(2) Estimates by the Company's management of the number of people within the
Region who can access the Company's cellular telephone signal.
(3) Estimates by the Company's management of the percentage of population of
the Region who can access the Company's cellular telephone signal.
(4) Number of cellular lines in service divided by the population of the State
of Minas Gerais. (5) In nominal reais, net of value-added taxes.
The Concession contains certain network expansion and modernization
obligations. See "--Regulation of the Brazilian Telecommunications
Industry--Obligations of Telecommunications Companies." The Company's management
believes that the Company will be able to meet all such obligations.
Sources of Revenue
The Company generates revenue from (i) usage charges, which include
measured service charges for outgoing calls and roaming and other similar
charges, (ii) monthly subscription charges, (iii) network usage charges, which
are amounts charged by the Company to other cellular and fixed-line service
providers, and to Embratel as the long-distance service provider, for use of the
Company's network, (iv) activation fees, which are one-time sign-up charges paid
to obtain cellular telecommunications services under certain service plans and
(v) other charges, including charges for call forwarding, call waiting and call
blocking. The Company's rates are subject to the approval of Anatel. See
"--Regulation of the Brazilian Telecommunications Industry."
Subscriber Rates
Since October 1994, cellular telecommunications services in Brazil, unlike
North America, has been offered on a "calling party pays" basis, under which the
subscriber pays only for calls that he or she originates (in addition, a
subscriber pays roaming charges on calls made or received outside his or her
home registration area). Subscriber charges are computed based on the
subscriber's calling plan, the location of the party called, the place from
which the call originates and certain other factors, as described below. The
Region is divided into seven registration areas. The lowest base rate per minute
("VC1") applies to calls made by a subscriber in a registration area to persons
in the same registration area. Charges for calls from one registration area to
another within the Region are assessed at a higher rate ("VC2"). Calls from the
Region to persons outside the Region are billed at the highest rate ("VC3").
When a subscriber makes or receives a call while outside the Region, a per-call
surcharge known as "AD" is applicable. When a subscriber receives a call outside
his or her home registration area, the subscriber also pays a certain rate per
minute if the subscriber is located within the Region ("DSL1"), or a higher rate
if the subscriber is located outside the Region ("DSL2"). Measured service
charges are discounted 30% for calls made on Saturdays, Sundays and national
holidays and for calls made between 6 p.m. and 6 a.m. Monday through Friday. A
30% surcharge is imposed on VC1 calls made to other cellular telephones
operating on the competitors' network.
The Company offers seven service plans: the Basic plan with a R$100
activation fee and no minimum service period, for customers who use their
telephones frequently during the day and night; the Classic plan for customers
who use their telephones frequently during the day and night; the Smart plan for
customers who primarily use their telephones at night or on weekends; the Plus
130 and Plus 300 plans for high usage customers, under which the subscriber is
entitled to 130 minutes and 300 minutes, respectively, of calling exempt from
time charges; the Corporate plan for employees of corporations; and the Celular
Card plan, a prepaid service plan which was launched in March 1999. All service
plans except the Basic plan and the Celular Card plan, require the payment of a
fee if the customer terminates service within the first 12 months of initiating
service.
The following table sets forth certain terms of the Company's various plans
of service at March 31, 1999.
<TABLE>
<CAPTION>
Rate Information For The Company's Service Plans
<S> <C> <C> <C> <C> <C> <C> <C>
Plus Plus Celular
Plans (1): Basic Classic Smart 130 300 Corporate (2) Card
Activation Fee.................. 100(3) - - - - - -
Monthly subscription fee
(digital)............. 25.85 24.85 12.78 52.05 88.08 19.94 -
Time charges per minute:
VC1 Peak.................... 0.27 0.27 0.53 0.23 0.21 0.23 0.71
VC1 Off-peak................ 0.19 0.19 0.11 0.16 0.14 0.16 0.24
VC2 Peak (4)................ 0.57 0.57 0.68 0.50 0.50 0.23 0.71
VC2 Off-peak................ 0.40 0.40 0.20 0.35 0.35 0.16 0.24
VC3 Peak.................... 0.65 0.65 0.71 0.61 0.61 0.55 0.71
VC3 Off-peak................ 0.46 0.46 0.46 0.43 0.43 0.38 0.71
DSL1 Peak................... 0.29 0.29 0.29 0.29 0.29 0.00 -
DSL1 Off-peak............... 0.20 0.20 0.20 0.20 0.20 0.00 -
DSL2 Peak................... 0.32 0.32 0.32 0.32 0.32 0.32 -
DSL2 Off-peak............... 0.23 0.23 0.23 0.23 0.23 0.23 -
AD per call (5)................. 0.54 0.54 0.54 0.54 0.54 0.54 -
- -----------------------------------
Minutes free of time
charges.................... - - - 130 300 - -
</TABLE>
- ------------------
(1) All amounts are in nominal reais, net of any applicable value-added taxes.
(2) Before discounts on VC1, VC2, VC3 and monthly subscription fees.
(3) The activation fee for this plan of service was significantly reduced in
1998 from R$330 to R$100.
(4) As of May 10, 1999, there is no longer a difference between VC1 and VC2
rates.
(5) Service charge for calls made or received outside of the Region.
Roaming Fees
The Company also receives revenue pursuant to roaming agreements with other
cellular service providers. See "--Operating Agreements--Roaming Agreements."
When a call is made from within the Region by a subscriber of another cellular
service provider, that service provider pays the Company for the call at the
applicable rate. Conversely, when a Company subscriber makes a cellular call
outside the Region, the Company must pay the charges associated with that call
to the cellular service provider in whose region the call originates.
Network Usage Charges
The Company earns revenue from any call (cellular or fixed-line)
originating with another service provider and terminating on a cellular
telephone within the Region. The Company charges the service provider from whose
network the call originates a network usage charge for every minute the
Company's network is used in connection with the call. See "--Operating
Agreements--Interconnection Agreements." The average network usage tariff
charged by the Company to other service providers in each of 1996, 1997 and 1998
was R$.22 per minute, net of value-added taxes.
Taxes on Telecommunications Services
The cost of telecommunications services to the subscribers includes a
variety of taxes. The average rate of all such taxes, as a percentage of gross
operating revenues for the Company, was approximately 20.5% in 1998. The
principal taxes are a state value-added tax, the Imposto sobre Circulacao de
Mercadorias e Servicos (the "ICMS") and the Imposto sobre Servico (the "ISS").
The ICMS is a tax that the Brazilian states impose at varying rates on certain
revenues from the sale of goods and services, including certain
telecommunications services. The ICMS rate in the State of Minas Gerais is 25%
for domestic telecommunications services. The ISS is a municipal tax imposed on
services not subject to the ICMS and its average rate is 5%.
Other taxes on gross operating revenues include two federal social
contribution taxes, the Programa de Integracao Social ("PIS") and the
Contribuicao para Financiamento da Seguridade Social ("COFINS"), imposed on
certain telecommunications services at a combined rate of 3.65% of gross
operating revenues. Prior to February 1999, the combined rate of both taxes was
2.65%.
In June 1998, the governments of the individual Brazilian states approved
an agreement to interpret existing Brazilian tax law to apply the ICMS to
certain services to which the ICMS had not previously been applied, including
cellular activation and monthly subscription. The agreement also provides that
the ICMS may be applied retroactively to activation services rendered during the
five years preceding June 1998. See "Legal Proceedings."
Billing and Collection
The Company's billing system, which was developed by LHS Communication
Systems Incorporated and has been in operation since October 1998, has three
main functions: (i) subscriber registration, (ii) subscriber information
management and (iii) billing and collection.
Pursuant to Brazilian law, subscribers must receive a bill at least five
days before the due date. If a subscriber's payment is more than 20 days
past-due, service is suspended until full payment for all outstanding charges is
received. If a subscriber's payment is more than 90 days past-due, service is
discontinued.
After each collection cycle, the Company and other telecommunications
services providers reconcile the roaming and network usage fees owed between
them and settle on a net basis. See "--Rates--Roaming Fees" and "--Network Usage
Charges." For international and domestic long-distance calls made by its
subscribers, the Company forwards the amount collected for such calls to
Embratel and charges Embratel a fee for the use of its cellular
telecommunications network.
The Company's bad debt expenses were 1.2%, 9.3.% and 20.9% of operating
revenues in 1996, 1997 and 1998, respectively. The increase in the level of
doubtful accounts is due to a variety of factors. In the fourth quarter of 1998,
the Company put in place new credit and collection policies and an anti-fraud
system in order to reduce the level of bad debt. As a result of these measures,
the Company's management expects that bad debt levels will decline in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
Network
At December 31, 1998, the Company's cellular telecommunications network
covered approximately 34% of the Region and 66% of the Region's population. The
Company continues to expand its cellular telecommunications network to cover as
broad a geographical area as is economically feasible in order to meet consumer
demand. Under the Concession, the Company has certain obligations concerning
network expansion. See "--Regulation of the Brazilian Telecommunications
Industry--Obligations of Telecommunications Companies."
The Company increases the capacity and improves the quality of its cellular
telecommunications network by building new base stations and adding channels to
existing base stations. This development is carried out in response to projected
subscriber demand. Management believes that its cellular telecommunications
network will require further development to meet increasing demand for cellular
telecommunications services in Belo Horizonte and other major metropolitan areas
in the Region. See "--Quality of Service."
At December 31, 1998, the Company's cellular telecommunications network
consisted of nine cellular switches, 423 cells and 27 repeaters. The Company's
three principal switching centers, located in Belo Horizonte, employ four Super
Note NT DMS-MTX switches to provide switching services for Belo Horizonte and
the surrounding metropolitan area. Five other switching centers, located in Juiz
de Fora, Varginha, Divinopolis, Governador Valadares and Belo Horizonte, employ
SNSE NT DMS-MTX switches to provide switching services for the remainder of the
Region. The network is connected primarily by a transmission system (mainly
optical fiber), rented from the Predecessor Company. Since the commencement of
operations, the Company has been interconnected directly with the local PSTNs
and with every Band A service provider in the country, automatically allowing
subscribers to roam throughout Brazil, wherever cellular telecommunications
services exists.
Digitization represents one of the Company's key strategic initiatives.
Prior to 1998, the Company supplied only an AMPS analog cellular
telecommunications service. During 1998, the Company made available digital
service based on the TDMA standard in the metropolitan area of Belo Horizonte
and began implementing digital service in 13 additional cities. At December 31,
1998, approximately 30% of the Company's traffic in the Belo Horizonte
metropolitan area and 4% of the Company's traffic throughout the remainder of
the Region was digital. The Company's management believes that digitization
offers clear advantages over analog technology, including greater network
capacity, reduced operating costs and additional revenue through the sale of
value-added services. Digital cellular telecommunications services also offers
subscribers greater security.
Northern Telecom do Brasil Ltda. ("Northern Telecom") is the Company's
principal supplier of cellular telecommunications equipment.
Fraud Detection and Prevention
Fraud resulting from cloned cellular telephone calls has increased
continuously since the Company began offering cellular telecommunications
services, and the Company's management believes that the incidence of cloning is
likely to continue to increase in the near term. Cloning fraud consists of
duplicating the cellular signal of a bona fide subscriber, enabling the
perpetrator of the fraud to make telephone calls using the subscriber's signal.
Such calls are billed to the subscriber, but the receivable is written off when
the Company discovers that it arose from a fraudulent call. If part of a
fraudulent call is carried by the network of another service provider, the
Company is obligated to pay that service provider the applicable network usage
fee, regardless of whether the Company ever collects the receivable associated
with the call.
The Company has implemented fraud-detection and fraud-prevention measures
in an effort to reduce fraud-related losses. Fraud-detection measures involve
the collection and review of call records to detect abnormal calling patterns.
When abnormal patterns are found, the subscriber is contacted by the fraud
control staff of the Company and, if cloning has occurred, the subscriber's
number is changed. Fraud-prevention measures include restrictions on
international calls from a given number and restrictions on three-way calling by
customers with international direct-dial access. The Company installed a
nation-wide fraud detection system licensed from Digital Equipment Corporation.
This system aids in fraud detection in various ways, including identifying
instances of simultaneous usage by a single subscriber, call frequency and
unusually high usage patterns. The system has been operational within the Region
since the fourth quarter of 1998.
The Company has also experienced a significant increase in the incidence of
subscription fraud. Subscription fraud occurs when a person, typically using a
fictitious identification and address, obtains cellular telecommunications
services with no intention of paying for the service and then incurs substantial
charges before the cellular operator is able to identify the fraud and terminate
service. When the Company discovers that a receivable has been generated by a
fraudulent call, the receivable is written off. In response to the increase in
subscription fraud, the Company has developed subscription fraud prevention
measures that include background checks of its employees; fraud awareness and
prevention training; credit checks of new customers through credit rating
agencies, close monitoring of payments and early disconnection.
The Company's management expects to invest R$1.5 million in fraud-control
systems during 1999.
Quality of Service
The Company has at times experienced quality of service problems, including
busy circuits, lack of system availability and dropped calls. In 1998, the
average "all circuits busy rate" (as a percentage of calls attempted) was 2.8%,
the average system availability on first call attempted was 94.8% and the
average dropped call rate was 2.5%. At present, the Company is not experiencing
any significant quality of service problems and exceeds all applicable quality
of service requirements established by Anatel. See "--Regulation of the
Brazilian Telecommunications Industry--Obligations of Telecommunications
Companies."
Competition
Band B Competition
The General Telecommunications Law provides for the introduction of
competition in telecommunications services in Brazil. The Federal Government has
granted ten licenses to private companies (each, a "Band B Service Provider") to
provide cellular telecommunications services within particular regions of Brazil
on a frequency range referred to as "Band B." The frequency range used by the
cellular service providers that were spun off from the Telebras System,
including the Company (each, a "Band A Service Provider"), is referred to as
"Band A." Each Band B license covers a geographic region which generally
corresponds to a Cellular Region. See "--Regulation of the Brazilian
Telecommunications Industry--Concessions and Licenses."
A license to provide cellular telecommunications services in the Region on
Band B has been granted to Vicunha Telecomunicacoes Ltda. ("Vicunha"), a holding
company that controls Maxitel S.A. ("Maxitel"). Vicunha is a consortium
comprised of (i) Telecom Italia (43%), (ii) the Brazilian textiles group Vicunha
(37%) and (iii) the media group Globo Comunicacoes e Participacoes S.A. and
Banco Bradesco S.A., Brazil's largest private-sector bank (20%). Maxitel paid
R$520 million for its license and commenced providing digital cellular
telecommunications services based on the TDMA standard in the Region in December
1998. At present, Maxitel provides cellular telecommunications services in 11
cities in the State of Minas Gerais, with a market share of approximately 2.4%
at December 31, 1998. The rights and obligations of Maxitel under its license
are substantially the same as the Company's rights and obligations under its
Concession. However, the Concession expires in April 2008, while Maxitel's
license expires in April 2013. Both may be renewed at the discretion of Anatel
for additional 15-year periods. Maxitel has also acquired a license for R$250
million to provide cellular telecommunications services in the neighboring
States of Bahia and Sergipe, where it began to offer digital service in April
1997.
Other Competition
The Company also competes with fixed-line telephone service providers.
Certain of the Company's existing and potential subscribers might increase their
use of fixed-line service to take advantage of the lower prices for
telecommunications services offered by fixed-line providers.
The primary fixed-line service provider in the Region is Tele Norte Leste
Participacoes S.A., which operates under the brand name of Telemar. The second
company to obtain a concession to provide fixed-line telecommunications services
in the Region is Canbra Telefonica S.A. (a consortium comprised of Bell Canada
International, Wireless Local Looping L.P., Qualcomm Incorporated, SLI Wireless
and Taquari Participacoes S.A.). Canbra Telefonica S.A. expects to begin
providing fixed-line telecommunications services to the Region by the end of
1999.
The Company also competes with certain other wireless telecommunications
services, such as mobile radio, paging and beeper services, which are used by
some people in the Region as a substitute for cellular telecommunications
services. These competing wireless telecommunications services are generally
less expensive than cellular telecommunications services.
Technological advances in the telecommunications field, such as Personal
Communications Services ("PCS"), may in the future introduce additional
competition for cellular service providers. PCS services, which are similar to
digital cellular telecommunications services, require a concession from the
Federal Government. The Federal Government has indicated that it does not intend
to issue concessions to provide PCS services until 2000. Satellite services,
which provide nationwide coverage, are available in Brazil. Although satellite
services have the benefit of covering a much greater area than cellular
telecommunications services, they are considerably more expensive than cellular
telecommunications services and do not offer comparable coverage inside
buildings.
There can be no assurance that the entry of new competitors will not have a
material adverse effect on the Company's business, financial condition, results
of operations or prospects. Any adverse effects on the Company's results and
market share from competitive pressures will depend on a variety of factors that
cannot now be assessed with precision and that are beyond the Company's control.
Among such factors are the identity of the competitors, their business
strategies and capabilities, prevailing market conditions at the time, the
regulations applicable to new entrants and the Company and the effectiveness of
the Company's efforts to prepare for increased competition. One or more new
competitors may have technical or financial resources greater than those of the
Company.
Operating Agreements
Interconnection Agreements
The Company has entered into interconnection agreements with Embratel and
the Predecessor Company. The terms of these interconnection agreements include
provisions for the number of connection points, the method by which signals must
be received and transmitted and the costs and fees of interconnection. In
addition, network usage charges are assessed based on the terms of these
agreements. See "--Regulation of the Brazilian Telecommunications
Industry--Obligations of Telecommunications Companies--Interconnection."
Roaming Agreements
Agreements for automatic roaming have been entered into with all the other
Band A Service Providers and with the following Band B Service Providers: BCP
Telecomunicacoes S.A., BCP Nordeste S.A. (formerly BSE S.A.), Telet S.A., Tess
S.A., Maxitel (in the States of Bahia and Sergipe only), Americel S.A. and Algar
Telecomunicacoes Leste S.A. - ATL Global Telecom. These roaming agreements
permit the Company's subscribers to use their cellular telephones on the
networks of other cellular service providers while traveling or "roaming"
outside the Region. Conversely, the Company is required to provide cellular
telecommunications services to subscribers of those cellular service providers
from outside the Region when those subscribers are within the Region. The
agreements require the Company and the other cellular service providers to
provide service to roaming subscribers on the same basis as they provide service
to their own subscribers and to carry out a monthly reconciliation of roaming
subscriber usage charges. The agreements have a three-year term and
automatically renew for further one-year terms.
The Company has also entered into international roaming agreements with
foreign carriers that permit its subscribers to use their cellular telephones in
Argentina, Uruguay and Paraguay and subscribers of those carriers to use their
cellular telephones in the Region. The Company is negotiating an international
roaming agreement that, if concluded, would permit its subscribers to use their
cellular telephones in Portugal. The terms of these international roaming
agreements vary from agreement to agreement.
Employees
At December 31, 1998, the Company had 1440 employees, 31% of whom were
employed in sales and marketing, 14% in engineering, 14% in administration, 38%
in customer service and 3% in information technology. Approximately 18% of all
employees are members of state labor unions associated with the Federacao
Interestadual dos Trabalhadores em Telecomunicacoes ("Fittel"). Telemig Celular
negotiates a new collective labor agreement every year with each local union.
The Company's management considers the relations of the Company with its
work force to be satisfactory. Neither the Company nor the Predecessor Company
has experienced a work stoppage that had a material effect on its operations.
The Company participates in a pension fund administered by Fundacao
Telebras de Seguridade Social - Sistel ("Sistel"), the purpose of which is to
supplement government-provided retirement benefits. The Company makes monthly
contributions to Sistel currently equal to 13.5% of the salary of each employee
who is a Sistel member. Each employee member also makes a monthly contribution
to Sistel based on age and salary. Members of Sistel qualify for full pension
benefits after reaching age 57, provided they have been members of Sistel for at
least ten uninterrupted years and have been affiliated with the social security
system for at least 35 years. Sistel operates independently from the Company,
and its assets and liabilities are fully segregated from those of the Company.
Employees of the Company at the time of the privatization had the right to
maintain their rights and benefits in Sistel.
Sistel is a multi-employer defined benefit plan that covers the former
employees of the Telebras System, and the Company is contingently liable for all
of the unfunded obligations of the plan. (See Note 11 to the Consolidated
Financial Statements). The Company believes that Sistel may be replaced by one
or more separate plans, but there can be no assurances as to when this will
occur or what the consequences will be for the Company or its employees.
Research and Development
In connection with the Breakup, the Company was required to enter into a
three-year contract in May 1998 with the Centro de Pesquisa e Desenvolvimento da
Telebras under which the Company is obligated to contribute a maximum of R$1.2
million during the three years ending May 2001. The Company does not conduct any
independent research and primarily depends upon the manufacturers of
telecommunications products for the development of new hardware.
Capital Expenditures
Prior to privatization, the Company's capital expenditures were planned and
allocated on a system-wide basis and subject to approval by the Federal
Government. These constraints on capital expenditures prevented the Company from
making certain investments that otherwise would have been made to improve
cellular telecommunications services in the Region.
Since the privatization of Telebras, these restrictions have not applied.
The Company is now permitted to determine its own capital expenditure budget,
subject to compliance with certain obligations to expand service under the
Concession. See "--Regulation of the Brazilian Telecommunications
Industry--Obligations of Telecommunications Companies."
The Company's capital expenditure priorities include increasing the level
of digitization of the Company's network capacity, improving overall quality and
increasing network capacity. The Company expects that its capital expenditures
will be approximately R$200 million in 1999.
The Company's capital expenditures for 1996 and 1997, in constant reais of
December 31, 1997, were approximately R$190 million and R$116 million,
respectively, and in 1998, in nominal reais, were approximately R$180 million.
Regulation of the Brazilian Telecommunications Industry
General
The Company's business, including the services it provides and the rates it
charges, is subject to comprehensive regulation under the General
Telecommunications Law, a new comprehensive regulatory framework for the
provision of telecommunications services enacted by Anatel in July 1997 and
various administrative enactments thereunder. Telemig Celular operates under a
Concession that authorizes it to provide specified services and sets forth
certain obligations (the "List of Obligations").
Anatel is the regulatory agency for telecommunications under the October
1997 Regulamento da Agencia Nacional de Telecomunicacoes (the "Anatel Decree").
Anatel is administratively independent and financially autonomous. Anatel
maintains a close relationship with the Ministry of Communications and is
required to report on its activities to the Ministry of Communications. It has
authority to propose and issue regulations that are legally binding on
telecommunications services providers. Any such proposed regulation is subject
to a period of public comment, which may include public hearings, and may be
challenged in Brazilian courts, as may any other action taken by Anatel.
Concessions and Licenses
Concessions and licenses to provide telecommunications services are granted
under the public regime or the private regime. The Concession is granted under
the private regime and Telemig Celular is subject to requirements imposed by
Anatel in the List of Obligations.
Pursuant to the Lei Minima (the "Minimum Law") and the General
Telecommunications Law, the Band A and Band B Service Providers have been
granted concessions. Each concession is a specific grant of authority to supply
cellular telecommunications services, subject to certain requirements contained
in the applicable list of obligations appended to each concession. If a cellular
service provider wishes to offer any telecommunications services other than the
cellular telecommunications services authorized by its concession, it may apply
to Anatel for a license to offer such other services.
Each concession has been granted for an initial period of 15 years and may
be renewed at the discretion of Anatel for further periods of 15 years if the
list of obligations has been met. The initial period of the Concession to
provide cellular telecommunications services in the Region expires in April
2008.
Currently, the number of cellular service providers that may provide
cellular telecommunications services in the Region is limited to one Band A
Service Provider and one Band B Service Provider. Under the Concessions, Anatel
may not authorize additional providers of cellular telecommunications services
until December 31, 1999.
Obligations of Telecommunications Companies
General. As described below, the Company is subject to certain requirements
relating to quality of service, network expansion and interconnection. Anatel
does not currently require network operators to unbundle network elements and
services, although Anatel has stated that it plans to review the issue on a
regular basis and may require unbundling in the future. In an unbundled regime,
each network operator is required to provide a detailed list of network services
and elements which may be purchased separately by a party requesting
interconnection.
Quality of service and network expansion. The Company, like other cellular
service providers, is subject to obligations set forth in the List of
Obligations concerning quality of service and network expansion and
modernization. Failure to meet these obligations may result in fines and
penalties of up to 0.05% of annual net operating revenues per day until the
Company complies with the obligations as well as potential revocation of the
Concession.
The Company's quality of service obligations require: (i) the cellular
network to be fully operational 98% of the time; (ii) the rate of failed call
completion due to signal loss not to exceed 3%; (iii) the rate at which the
cellular network rejects attempted calls because no circuits are available not
to exceed 5%; (iv) the rate at which interconnected calls fail to complete not
to exceed 3%; (v) the cellular network to be available on first call attempts
90% of the time; and (vi) the number of subscription complaints per month (per
100 subscribers) less than five. The Company's network expansion obligations
require the Company to provide cellular telecommunications services to all
municipalities in the Region with more than 100,000 people by November 4, 1999
and to 70% of the municipalities in the Region with more than 30,000 people by
November 4, 2002.
The Company has met or exceeded its network expansion and modernization
obligations stated in the List of Obligations for the period 1998-2002 and at
present is in compliance with its quality of service obligations. While there
can be no assurances the Company's management believes that the Company will be
in compliance with the List of Obligations at all times.
Interconnection. All telecommunications services providers are required to
provide interconnection upon request to any party that provides public
telecommunications services. The terms and conditions of interconnection are to
be freely negotiated between parties, subject to a price cap established by
Anatel. If a company offers any party an interconnection tariff below the price
cap, it must offer that tariff to any other requesting party on a
nondiscriminatory basis. Anatel has stated that for the time being it does not
expect to require network operators to permit co-location of equipment.
Co-location means that a network operator permits another party to place its
switching equipment in or near the local exchange of the network operator and to
connect to the network at this location. Co-location is currently a matter for
negotiation between interested parties.
Rate Regulation
The Concession provides for a price-cap mechanism to set and adjust rates
on an annual basis. The cap is a maximum weighted average price for a basket of
services. The basket includes the services in the Basic Service Plan, including
monthly subscription fees, VC1 charges, VC2 charges, VC3 charges, DSL1 charges,
DSL2 charges, and AD charges, as well as interconnection charges, including
network usage fees and charges to provide a physical connection to the network
(interligacao).
The initial price cap agreed upon by Anatel and the Company in the
Concession is based on previously existing tariffs, which were developed based
on the fully allocated costs of the Company. The initial price cap is adjusted
on an annual basis under a formula set forth in the Concession. The price cap is
adjusted to reflect the rate of inflation as measured by the Indice Geral de
Precos, Disponibilidade Interna ("IGP-DI"), an inflation index developed by the
Fundacao Getulio Vargas, a private Brazilian economic research organization.
The weighted average tariff for the entire basket of services may not
exceed the price cap, but the tariffs for individual services within the basket
may be increased. The Company may increase the tariff for any individual service
by up to 20%, subject to a downward adjustment for inflation effects already
captured in the annual upward adjustments of the overall price cap for the
basket, so long as it adjusts other prices downward to ensure that the weighted
average tariff does not exceed the price cap.
Other telecommunications companies wishing to interconnect with and use the
Company's network must pay certain fees, primarily a network usage fee. The
network usage fee is a flat fee charged per minute of use which represents an
average charge for a basket of network elements and services. The network usage
fee charged by Band A Service Providers is subject to a price cap set by Anatel.
The price cap for the network usage fee varies from company to company based on
the underlying cost characteristics of each company's network.
Brazilian Political Environment
The Brazilian political environment was marked by high levels of
uncertainty after the country returned to civilian rule in 1985, ending 20 years
of military government. The death of a President-elect in 1985 and the
resignation of another President in the midst of impeachment proceedings in
1992, as well as rapid turnover in the Federal Government at and immediately
below the cabinet level, adversely affected the implementation of consistent
economic and monetary policies.
Fernando Henrique Cardoso, who was Finance Minister at the time of
implementation of Brazil's latest economic stabilization plan (the "Real Plan"),
was elected President of Brazil in October 1994 and, in October 1998, was
reelected for an additional four-year term, which began in January 1999.
President Cardoso is the leader of a coalition of six political parties that
represents a majority in the federal Congress. His party, the Brazilian Social
Democratic Party, holds the second largest number of seats in the coalition.
1999 to date has been marked by difficult relations between the Federal
Government and certain state governments. In the 1998 elections for state
governors, candidates from parties allied with the President's coalition
prevailed in 21 of 27 states, including the State of Sao Paulo. Opposition
candidates won in six states, including the States of Rio de Janeiro, Minas
Gerais and Rio Grande do Sul. In January 1999, the new Governor of the State of
Minas Gerais announced that his state would suspend payments on its debt to the
Federal Government for 90 days. The Governor of the State of Rio Grande do Sul
subsequently obtained a court order permitting his state to make its debt
payments into an escrow account, pending resolution of a request of seven states
to renegotiate refinancing agreements they had reached with the Federal
Government in 1997. The Federal Government has responded by seeking to withhold
constitutionally mandated transfers to the State of Minas Gerais. The Federal
Government has notified certain international financial institutions that it
will no longer guarantee those states' obligations to those institutions,
leading the World Bank to suspend loans to the States of Minas Gerais and Rio
Grande do Sul.
In February 1999, certain state governors pressed for a renegotiation of
their states' refinancing agreements with the Federal Government. The President
offered instead to make loans to the states to cover the costs of layoffs and
pension reform and promised to review a law exempting exports from state taxes.
The Federal Government has initiated negotiations with the World Bank to secure
funding for such loans. The Federal Government is also proposing to refinance
certain debt of Brazil's municipalities for a period of 30 years at a rate
equivalent to 9% above the rate of inflation, in return for which the
municipalities are to be required to cut costs sharply and adopt strict fiscal
guidelines.
Conflicts between the Federal Government and state governments could
complicate the passage of the government's fiscal reform package and longer-term
fiscal measures, including a reform of the tax system, and Brazil's ability to
meet the agreed targets under the country's agreements with the International
Monetary Fund (the "IMF"). See "--Brazilian Economic Environment."
Brazilian Economic Environment
The Company's business, prospects, financial condition and results of
operations are dependent on general economic conditions in Brazil, and in
particular on (i) economic growth and its impact on demand for
telecommunications services, (ii) the cost and availability of financing and
(iii) exchange rates between Brazilian and foreign currencies.
For many years before the introduction of the Real Plan in late 1993, the
Brazilian economy was extremely volatile. The Federal Government implemented a
succession of programs intended to stabilize the economy and provide a basis for
sustainable, noninflationary growth. Changes in monetary, credit, tariff and
other policies were frequent and occasionally drastic. In particular, actions to
control inflation, interest rates or consumption included freezing bank
accounts, imposing capital controls, introducing high tariffs and other strong
measures. Changes in policy, social instability and other political and economic
developments, and the Brazilian government's responses to such developments, not
infrequently had a material adverse effect on the Company's business,
operations, financial condition and results of operations.
The Federal Government introduced the Real Plan in December 1993. The Real
Plan is an economic stabilization program intended to reduce the rate of
inflation by reducing certain public expenditures, collecting liabilities owed
to the Federal Government, increasing tax revenues, continuing to privatize
government-owned entities and introducing a new currency. The real was
introduced as Brazil's currency on July 1, 1994, initially with an exchange rate
of R$1.00 to US$1.00. The real appreciated through January 1995 and thereafter
gradually declined in value against the dollar, reaching R$1.2087 to US$1.00 at
December 31, 1998. Notwithstanding the success of the Real Plan in lowering
inflation and stabilizing the Brazilian economy, the Real Plan has also led to
economic slowdown, and a rise in unemployment in most regions and sectors of the
economy.
The Asian financial crisis in 1998 and the ripple effects of that crisis
presented a serious challenge for Brazil. After reaching a historical high of
US$74.7 billion at April 30, 1998, Brazil's international reserves declined to
US$42.4 billion at October 31.
In November 1998, in response to continuing pressure on the real and the
rapid decline in the country's dollar reserves, Brazil negotiated a US$41.5
billion loan package arranged by the IMF. Acceptance of the IMF package
committed Brazil to implement a combination of spending cuts and tax increases.
Brazil received the first installment of approximately US$9.4 billion in two
disbursements. Brazil's level of international reserves stabilized following the
announcement of the support package, reaching US$44.6 billion at December 31,
1998.
After some initial progress in implementing a Fiscal Stabilization Program
announced in late 1998, the Federal Government encountered difficulties in
implementing the program in Congress. See "--Brazilian Political Environment."
The Central Bank of Brazil (the "Central Bank") attempted a controlled
devaluation of the real by widening the band within which the real was permitted
to trade, but subsequent Central Bank intervention failed to keep the rate
within the new band. On January 15, the Central Bank announced that the real
would be permitted to float, with Central Bank intervention to take place only
in times of extreme volatility. Both the level of international reserves and the
value of the real continued to decline. At January 31, Brazil's international
reserves stood at US$36.1 billion and the Commercial Market Rate stood at
R$1.9832 to US$1.00.
In the following weeks, the Federal Government had a series of legislative
successes with its efforts to implement the expense reduction and revenue
enhancement measures under its Fiscal Stabilization Program. Brazil also began
negotiations with the IMF on adjustments to the previously-agreed 1999-2001
economic program, and agreement was reached in March on new economic targets.
Brazil received a second payment, of approximately US$4.9 billion, from the IMF,
followed by an additional US$4.9 billion in bilateral loans under the IMF-led
support package. Subsequent disbursements will depend on Brazil's ability to
meet the agreed primary surplus targets and on Brazil's progress in implementing
fiscal reforms. There can be no assurance that Brazil will be able to meet the
primary surplus targets under its agreement with the IMF and, accordingly, that
the full amount under the IMF-led support package will be available to Brazil.
After giving effect to the inflows from the IMF-led support package,
Brazil's international reserves stood at US$38.9 billion on April 8, 1999. The
Commercial Market Rate stood at R$1.72 to US$1.00. on March 31, 1999.
As a result of the foregoing events, GDP dropped 1.64% during the fourth
quarter of 1998, reflecting declines of 6.45%, 2.45% and 0.65% in the
agricultural, industrial and services sectors, respectively. GDP declined by
0.15% in the full year 1998, compared with 3.47% growth during the preceding
year. Brazil's current account deficit continued to grow in 1998, reaching
US$35.2 billion for 1998, compared with a US$33.4 billion deficit for the
preceding year. At the end of the first quarter of 1999, the current account
deficit stood at US$3.5 billion, the result of a US$535 million trade deficit
and US$3.4 billion in debt service during that quarter. Foreign direct
investment inflows increased 52.6% in 1998, totaling US$26.1 billion. Of that
amount, 23.4%, or US$6.1 billion, resulted from foreign participation in the
national privatization program. In the first two months of 1999, foreign direct
investment inflows totaled US$5.7 billion, bringing such investment to US$29.7
billion in the twelve months ended February 28, 1999.
Developments in Other Emerging Market Countries
The Brazilian securities markets are influenced by economic and market
conditions in other emerging market countries. Although economic conditions are
different in each country, developments in one country can have an effect on
investors' perceptions of the risks of investing in the securities of issuers in
other countries, including Brazil. During 1998 and 1999, the international
financial markets have experienced significant volatility, with significant
adverse effects on demand for and prices of securities of issuers in virtually
all emerging markets, including Brazil.
The current volatility in the securities markets in Latin American and
other emerging market countries has been attributed, at least in part, to the
effects of the Asian and the Russian economic crises of 1997-98. For example,
the crisis in Asia in the fourth quarter of 1997 provoked a significant
financial and economic crisis in Brazil. In August 1998, following the
devaluation of the Russian ruble, Brazil again experienced substantial capital
outflows and significant declines in its stock markets. See "--Brazilian
Economic Environment."
There can be no assurance that the Brazilian securities markets will not
continue to be affected negatively by events elsewhere, especially in emerging
markets, or that such events will not adversely affect the prices of the
Company's securities.
Inflation and Devaluation
Brazil experienced extremely high and generally unpredictable rates of
inflation and of devaluation of Brazilian currency for many years until the
implementation of the Real Plan. Inflation itself, as well as certain
governmental measures to combat inflation, and public speculation about possible
future actions have also historically contributed to economic uncertainty in
Brazil and to heightened volatility in the Brazilian securities markets. See
"--Brazilian Economic Environment."
The following table sets forth the rate of Brazilian inflation, as measured
by the Indice Geral de Precos - Mercado (the General Price Index - Market or
"IGP-M"), and the devaluation of the Brazilian currency against the U.S. dollar
during the periods indicated.
Year ended December 31,
----------------------------------
1996 1997 1998
-------- -------- -------
(percentages)
Inflation (IGP-M)......................... 9.2 7.7 1.8
Devaluation (Brazilian currency
vs. US$)................................ 6.9 7.4 8.3
Under the Real Plan, the rate of Brazilian inflation has decreased
considerably since July 1994. The exchange rate between the real and the U.S.
dollar remained relatively stable from mid-1994 to year-end 1998, but extreme
volatility has returned in 1999. See "--Brazilian Economic Environment." During
the first quarter of 1999, inflation, as measured by the IGP-M, amounted to 7.4%
and the devaluation of the real against the U.S. dollar was 42%.
Inflation and devaluation have potentially adverse consequences for the
Company's business, prospects, financial condition and results of operations.
These factors introduce distortions into the Company's financial statements and
make period-to-period comparisons difficult and unreliable. Differences between
the relative rate of Brazilian inflation as compared to the rates of Brazil's
trading partners, on the one hand, and the rate of currency devaluation, on the
other, can cause balance sheet losses for the Company on its foreign
currency-denominated liabilities. Inflation places pressure on the Company's
rates and may invite Federal Government efforts to control inflation by holding
down the rates that Brazilian public utilities are permitted to charge.
There can be no assurance that Brazilian inflation will remain at modest
rates or, if there is an increase in inflation, that the Company's business,
prospects, financial condition and results of operations will not be adversely
affected.
Item 2. Description of Property
The principal physical properties of the Company consist of transmission
equipment, switching equipment and base stations. The Company's headquarters are
located in Brasilia and the Company leases approximately 8,500 square meters of
office space in the Region.
The Company also owns or leases the sites where its cellular
telecommunications network equipment is installed. At December 31, 1998, the
Company had nine cellular switches in Belo Horizonte, Juiz de Fora, Varginha,
Governador Valadares and Divinopolis and 450 cell sites, of which 50 were
located on land owned by the Company and the remainder on land leased from the
Predecessor Company or third parties. Most of these leases will expire after
December 1999 and are renewable every two years. In addition, the Company leases
109 retail stores throughout the Region.
Item 3. Legal Proceedings
Litigation Related to the Breakup of Telebras
The Breakup of Telebras is subject to several lawsuits in which the
plaintiffs have requested, and in certain cases obtained, preliminary
injunctions against the Breakup. All of these preliminary injunctions have been
quashed by decisions of the relevant Federal Court, although several such
decisions are currently on appeal.
The lawsuits to which the Breakup has been subjected are based on a number
of legal theories, the principal among which are that (i) Brazil's Constitution
requires that the creation of the 12 New Holding Companies be specifically
authorized by the Telecommunications Law; (ii) the Telebras shareholders'
meeting held on May 22, 1998 which approved the Breakup was not properly
convened; (iii) national sovereignty will be threatened if the country's
telecommunications companies are controlled by foreign entities; and (iv) the
Telecommunications Law requires that certain matters, such as the entry of new
competitors and the administration of development and technology funds, be
regulated prior to the Breakup and privatization either by an executive order of
the President or by an act of Congress. If any of the plaintiffs in the
above-described lawsuits ultimately prevails, the Breakup will have to be
reinitiated. This could require, depending upon the prevailing plaintiff's
theory, any combination of (i) amendment of the Telecommunications Law and (ii)
reconvening the May 22, 1998 Telebras shareholders' meeting. It is theoretically
possible under Brazilian law for a court to require that the Breakup be unwound,
although the Company's management believes that this would not be likely to
occur.
Litigation Arising Out of Events Prior to the Breakup
Telebras and the Predecessor Company, the legal predecessors of the
Registrant and Telemig Celular, respectively, are defendants in a number of
legal proceedings including tax and labor-related matters and subject to certain
other claims and contingencies. Liability for any claims arising out of acts
committed by the Predecessor Company prior to the effective date of the spin-off
of the Predecessor Company's cellular assets and liabilities to Telemig Celular
remains with the Predecessor Company, except for labor and tax claims (for which
the Predecessor Company and Telemig Celular are jointly and severally liable by
operation of law) and those liabilities with respect to which the Predecessor
Company had made a specific accounting provision prior to the Breakup assigning
them to Telemig Celular. However, under the shareholders' resolution pursuant to
which the spin-off was effected, Telemig Celular has contribution rights against
the Predecessor Company with respect to the entire amount of any payments made
by Telemig Celular in connection with any labor or tax claims brought against
Telemig Celular and relating to acts committed by the Predecessor Company prior
to the effective date of the spin-off. Any claims against the Predecessor
Company which are not met by the Predecessor Company could result in claims
against Telemig Celular to the extent that Telemig Celular has received assets
which might have been used to settle those claims had they not been spun off
from the Predecessor Company.
Under the terms of the Breakup, liability for any claims arising out of
acts committed by Telebras prior to the effective date of the Breakup remains
with Telebras, except for labor and tax claims (for which Telebras and the New
Holding Companies are jointly and severally liable by operation of law) and any
liability with respect to which Telebras made a specific accounting provision
prior to the Breakup to the extent that such provision has been assigned to the
Registrant or one of the other New Holding Companies. The Company's management
believes that the chances of claims of this nature materializing and having a
material adverse financial effect on the Company are remote.
Litigation Related to the Application of the ICMS
In June 1998, the governments of the individual Brazilian states approved
an agreement to interpret existing Brazilian tax law to apply the ICMS to
certain services, including cellular activation and monthly subscriptions. The
agreement also provides that the ICMS may be applied retroactively to activation
services rendered during the five years preceding June 1998.
The Company's management believes that the attempt by the state government
to extend the scope of the ICMS to services that are supplementary to basic
telecommunications services, such as cellular activation and monthly
subscriptions, is unlawful because (i) the state government acted beyond the
scope of its authority, (ii) its interpretation would subject certain services
which are not telecommunications services to taxation and (iii) new taxes may
not be applied retroactively.
Taxation of Cellular Activation
Telemig Celular has filed a lawsuit with the Treasury Court of the State of
Minas Gerais seeking injunctive relief from retroactive and prospective
application of the ICMS to cellular activation. Telemig Celular has obtained a
temporary injunction relieving it from the payment of the ICMS on cellular
activation during the pendency of the lawsuits. Nonetheless, the tax authorities
may appeal the decisions of the Treasury Court to grant a temporary injunction.
There can be no assurance that Telemig Celular will ultimately prevail in any
appeal relating to the temporary injunction or in the underlying litigation with
respect to application of the ICMS to cellular activation.
There can be no assurance that the Company will prevail in its position
that the new interpretation by the state governments is unlawful. Five-year
retroactive application of the ICMS to cellular activation would have a material
adverse impact on the financial condition and results of operations of the
Company. The Company's management does not believe that the retroactive
application of the ICMS to cellular activation is probable. The Company's
management believes that the Predecessor Company would be liable to Telemig
Celular for any tax liability arising from the retroactive application of the
ICMS to cellular activation recognized prior to 1998. Therefore, no provision
with respect to such application has been made or is expected to be made in the
Consolidated Financial Statements.
The Company has made provisions totaling approximately R$0.9 million for
the application of the ICMS to cellular activation from the effective date of
the agreement to December 31, 1998. Application of the ICMS to cellular
activation for the full year ended December 31, 1998, it would have had a
maximum negative impact estimated at R$2.6 million on results of operations for
1998. The Company's management does not believe that application of the ICMS on
cellular activation, applied on a prospective basis, will have a material impact
on the Company's results of operations.
Taxation of Monthly Subscriptions and Other Services
In December 1998, Telemig Celular filed an injunction with the Treasury
Court of the State of Minas Gerais and therefore suspended the remittance of the
ICMS on monthly subscriptions and additional services and deposited such amounts
in a trust account administered by the courts. There can be no assurance that
the Company will prevail in its proceedings or in the underlying litigation.
Accordingly, the Company has recorded a provision of R$18.7 million in the
Consolidated Financial Statements.
Other Litigation
The Company is a party to certain legal proceedings arising in the normal
course of business. The Company has provided for or deposited in court amounts
to cover its estimated losses due to adverse legal judgments. In the opinion of
the Company's management, such actions, if decided adversely to the Company,
would not have a material adverse effect on the Company's business, financial
condition or results of operations. See Note 13 to the Consolidated Financial
Statements.
Item 4. Control of Registrant
Of the Registrant's two classes of capital stock outstanding, only the
Common Shares have full voting rights. The Preferred Shares have voting rights
under limited circumstances. Telpart owns 51.8% of the Common Shares.
Accordingly, Telpart has the ability to control the election of the Registrant's
Board of Directors and the direction and future operations of the Company.
The following table sets forth information concerning the ownership of
Common Shares by Telpart. The Company is not aware of any other shareholder
owning more than 10.0% of the Common Shares.
Number of Percentage of
Common outstanding
Name of owner Shares owned Common Shares
- ------------- -------------- -------------
Telpart S.A............................ 64,405,151,125 51.79%
The Registrant's officers and directors as a group own less than .01% of
the Common Shares.
Telpart is a consortium comprising TIW do Brasil Ltda. (49%) and Newtel
Participacoes S.A. (51%). Telpart also owns a controlling interest in Tele Norte
Celular Participacoes S.A., the Band A Service Provider in the Cellular Region
that includes the States of Para, Amazonas, Maranhao, Amapa and Roraima.
TIW do Brasil Ltda. is an indirect wholly owned subsidiary of Telesystem
International Wireless, Inc. ("TIW"), a Canadian public company whose shares are
listed on NASDAQ, the Toronto Stock Exchange and the Montreal Exchange. TIW
develops, acquires, owns and operates wireless telecommunications networks in
developing and developed markets throughout the world.
Newtel Participacoes S.A. ("Newtel") is a holding company. Fifty-one
percent of Newtel is owned by Opportunity MEM S.A., which is indirectly held by
investment and mutual funds managed by Opportunity Bank ("Opportunity"), a
private Brazilian investment bank. Forty-nine percent of Newtel is owned by the
following Brazilian pension funds: SISTEL - Fundacao Sistel Seguridade Social,
TELOS - Fundacao Embratel de Seguridade Social, FUNCEF - Fundacao dos
Economiarios Federais; PETROS - Fundacao Petrobras de Seguridade Social and
PREVI - Caixa de Previdencia dos Funcionarios do Banco do Brasil.
At present, the shareholders of Telpart are negotiating a shareholders'
agreement relating to representation of their respective nominees on the Boards
of Directors of Telpart and the Registrant.
Item 5. Nature of Trading Market
The principal trading market for the Preferred Shares is the Bolsa de
Valores de Sao Paulo (the "Sao Paulo Stock Exchange"). The Preferred Shares are
also traded on the Bolsa de Valores do Rio de Janeiro (the "Rio de Janeiro Stock
Exchange") and the seven other Brazilian stock exchanges. At December 31, 1998,
the Registrant had approximately 2.6 million common and preferred shareholders.
The Preferred Shares commenced trading separately on the Brazilian stock
exchanges on September 21, 1998. The following table sets forth the reported
high and low closing sale prices for Preferred Shares of the Registrant as
reported on the Sao Paulo Stock Exchange for the periods indicated.
Nominal reais per 1,000
Preferred Shares
-----------------------
High Low
------ ------
Third quarter 1998 (beginning September 21, 1998).... R$4.50 R$0.88
Fourth quarter 1998.................................. R$2.60 R$0.60
First quarter 1999................................... R$2.45 R$1.15
In the United States, the Preferred Shares trade in the form of ADSs each
representing 20,000 Preferred Shares, issued by The Bank of New York as
depositary (the "Depositary") pursuant to a Deposit Agreement (the "Deposit
Agreement") among the Registrant, the Depositary and the registered holders and
beneficial owners from time to time of ADRs. The ADSs commenced trading
separately on the NYSE on November 16, 1998 under the symbol TMB. At December
31, 1998, there were approximately 209 holders of record of ADSs. The following
table sets forth the reported high and low closing sales prices for ADSs on the
NYSE for the period indicated.
U.S. dollars per ADS
-----------------------
High Low
---- ---
Fourth quarter 1998 (beginning November 16, 1998)... US$37 1/2 US$19 3/4
First quarter 1999.................................. US$14 3/4 US$26 1/4
Trading on the Brazilian Stock Exchanges
Of Brazil's nine stock exchanges, the Sao Paulo Stock Exchange and the Rio
de Janeiro Stock Exchange are the most significant. During 1998, the Sao Paulo
Stock Exchange accounted for approximately 93% of the trading value of equity
securities on all Brazilian stock exchanges, and the Sao Paulo Stock Exchange
and the Rio de Janeiro Stock Exchange together accounted for approximately 99%
of the trading value of equity securities on all Brazilian stock exchanges.
Each Brazilian stock exchange is a nonprofit entity owned by its member
brokerage firms. Trading on each exchange is limited to member brokerage firms
and a limited number of authorized nonmembers. The Sao Paulo Stock Exchange and
the Rio de Janeiro Stock Exchange have two open outcry trading sessions each
day, from 10:30 a.m. to 1:30 p.m. and from 2:30 p.m. to 5:30 p.m., though the
Rio de Janeiro Stock Exchange has recently announced plans to convert its
operations to electronic trading. Trading is also conducted from 10:00 a.m. to
6:00 p.m. on an automated system on the Sao Paulo Stock Exchange and on the
National Electronic Trading System ("SENN"), a computerized system that links
the Rio de Janeiro Stock Exchange electronically with the seven smaller regional
exchanges. There are no specialists or market makers for the Registrant's shares
on the Sao Paulo Stock Exchange. Trading in securities listed on the Brazilian
stock exchanges may be effected off the exchanges in certain circumstances,
although such trading is very limited.
Settlement of transactions is effected three business days after the trade
date without adjustment of the purchase price for inflation. Payment for shares
is made through the facilities of separate clearinghouses for each exchange,
which maintain accounts for member brokerage firms. The seller is ordinarily
required to deliver the shares to the exchange on the second business day
following the trade date. The clearinghouse for the Sao Paulo Stock Exchange is
Companhia Brasileira de Liquidacao e Custodia S.A. - CBLC, which is controlled
mainly by the member brokerage firms and banks that are not members of that
exchange. The clearinghouse for the Rio de Janeiro Stock Exchange is CLC -
Camara de Liquidacao e Custodia S.A., which is 99% owned by that exchange.
At December 31, 1998, the aggregate market capitalization of the 527
companies listed on the Sao Paulo Stock Exchange was approximately R$194.4
billion. Substantially the same securities are listed on the Sao Paulo Stock
Exchange and on the Rio de Janeiro Stock Exchange. Although all the outstanding
listed shares of an exchange-listed company may trade on a Brazilian stock
exchange, in most cases less than half of the listed shares are actually
available for trading by the public, the remainder being held by small groups of
controlling persons that rarely trade their shares. For this reason, data
showing the total market capitalization of Brazilian stock exchanges tend to
overstate the liquidity of the Brazilian equity securities market.
The Brazilian equity market is relatively small and illiquid compared to
major world markets. In 1998, the combined daily trading volumes on the Sao
Paulo Stock Exchange and the Rio de Janeiro Stock Exchange averaged
approximately R$805.5 million. In 1998, the five most actively traded issues
represented approximately 61.5% of the total trading in the cash market on the
Sao Paulo Stock Exchange and approximately 67.2% of the total trading in the
cash market on the Rio de Janeiro Stock Exchange.
Trading on Brazilian stock exchanges by nonresidents of Brazil is subject
to certain limitations under Brazilian foreign investment legislation.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are regulated by the Comissao de Valores
Mobiliarios (the Brazilian Securities Commission or "CVM"), which has authority
over stock exchanges and the securities markets generally, and by the Central
Bank, which has, among other powers, licensing authority over brokerage firms
and regulates foreign investment and foreign exchange transactions. The
Brazilian securities market is governed by Law No. 6,385, as amended (the
"Brazilian Securities Law"), and Law No. 6,404, as amended (the "Brazilian
Corporation Law").
Under the Brazilian Corporation Law, a company is either public, a
companhia aberta, such as the Registrant, or private, a companhia fechada. All
public companies are registered with the CVM and are subject to reporting
requirements. A company registered with the CVM may have its securities traded
either on the Brazilian stock exchanges or in the Brazilian over-the-counter
market. The shares of a public company may also be traded privately, subject to
certain limitations. To be listed on the Brazilian stock exchanges, a company
must apply for registration with the CVM and the stock exchange where the head
office of the company is located. Once this stock exchange has admitted a
company to listing and the CVM has accepted its registration as a public
company, its securities may be traded on all other Brazilian stock exchanges.
Trading in securities on the Brazilian stock exchanges may be suspended at
the request of a company in anticipation of a material announcement. Trading may
also be suspended on the initiative of a Brazilian stock exchange or the CVM,
among other reasons, based on or due to a belief that a company has provided
inadequate information regarding a material event or has provided inadequate
responses to inquiries by the CVM or the relevant stock exchange.
The Brazilian Securities Law provides for, among other things, disclosure
requirements, restrictions on insider trading and price manipulation, and
protection of minority shareholders. However, the Brazilian securities markets
are not as highly regulated and supervised as the United States securities
markets or markets in certain other jurisdictions.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
There are no restrictions on ownership of Preferred Shares or Common Shares
of the Registrant by individuals or legal entities domiciled outside Brazil.
The right to convert dividend payments and proceeds from the sale of shares
into foreign currency and to remit such amounts outside Brazil is subject to
restrictions under foreign investment legislation which generally requires,
among other things, that the relevant investments have been registered with the
Central Bank. Such restrictions on the remittance of foreign capital abroad may
hinder or prevent Banco Itau S.A. (the "Custodian"), as custodian for the
Preferred Shares represented by ADSs, or holders who have exchanged ADRs for
Preferred Shares from converting dividends, distributions or the proceeds from
any sale of such Preferred Shares, as the case may be, into U.S. dollars and
remitting such U.S. dollars abroad. Holders of ADSs could be adversely affected
by delays in, or refusal to grant any, required government approval for
conversions of Brazilian currency payments and remittances abroad of the
Preferred Shares underlying the ADSs.
Under Annex IV to Resolution No. 1,289 of the National Monetary Council, as
amended (the "Annex IV Regulations"), qualified foreign investors (which
principally include foreign financial institutions, insurance companies, pension
and investment funds, charitable foreign institutions and other institutions
that meet certain minimum capital and other requirements) registered with the
CVM and acting through authorized custody accounts managed by local agents may
buy and sell shares on Brazilian stock exchanges without obtaining separate
Certificates of Registration for each transaction. Investors under the Annex IV
Regulations are also entitled to favorable tax treatment. See
"Taxation--Brazilian Tax Considerations." Resolution No. 1,927 of the National
Monetary Council, which is the restated and amended Annex V to Resolution No.
1,289 of the National Monetary Council (the "Annex V Regulations"), provides for
the issuance of depositary receipts in foreign markets in respect of shares of
Brazilian issuers. The ADS program had been approved under the Annex V
Regulations by the Central Bank and the CVM prior to the issuance of the ADSs.
Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil
are free of Brazilian foreign investment controls and holders of the ADSs will
be entitled to favorable tax treatment. See "Taxation--Brazilian Tax
Considerations."
A Certificate of Registration has been issued in the name of the Depositary
with respect to the ADSs and is maintained by the Custodian on behalf of the
Depositary. Pursuant to the Certificate of Registration, the Custodian and the
Depositary are able to convert dividends and other distributions with respect to
the Preferred Shares represented by ADSs into foreign currency and remit the
proceeds outside Brazil. In the event that a holder of ADSs exchanges such ADSs
for Preferred Shares, such holder will be entitled to continue to rely on the
Depositary's Certificate of Registration for five business days after such
exchange, following which such holder must seek to obtain its own Certificate of
Registration with the Central Bank. Thereafter, any holder of Preferred Shares
may not be able to convert into foreign currency and remit outside Brazil the
proceeds from the disposition of, or distributions with respect to, such
Preferred Shares, unless such holder qualifies under the Annex IV Regulations or
obtains its own Certificate of Registration. A holder that obtains a Certificate
of Registration will be subject to less favorable Brazilian tax treatment than a
holder of ADSs. See "Taxation--Brazilian Tax Considerations."
Under current Brazilian legislation, the Federal Government may impose
temporary restrictions on remittances of foreign capital abroad in the event of
a serious imbalance or an anticipated serious imbalance of Brazil's balance of
payments. For approximately six months in 1989 and early 1990, the Federal
Government froze all dividend and capital repatriations held by the Central Bank
that were owed to foreign equity investors, in order to conserve Brazil's
foreign currency reserves. These amounts were subsequently released in
accordance with Federal Government directives. The imbalance in Brazil's balance
of payments increased during 1998, and there can be no assurance that the
Federal Government will not impose similar restrictions on foreign repatriations
in the future.
Item 7. Taxation
The following summary contains a description of the principal Brazilian and
U.S. federal income tax consequences of the acquisition, ownership and
disposition of Preferred Shares or ADSs, but it does not purport to be a
comprehensive description of all the tax considerations that may be relevant to
a decision to purchase Preferred Shares or ADSs. The summary is based upon the
tax laws of Brazil and regulations thereunder and on the tax laws of the United
States and regulations thereunder as in effect on the date hereof, which are
subject to change. Prospective purchasers of Preferred Shares or ADSs should
consult their own tax advisors as to the tax consequences of the acquisition,
ownership and disposition of Preferred Shares or ADSs.
Although there is at present no income tax treaty between Brazil and the
United States, the tax authorities of the two countries have had discussions
that may culminate in such a treaty. No assurance can be given, however, as to
whether or when a treaty will enter into force or how it will affect the U.S.
holders of Preferred Shares or ADSs. Prospective holders of Preferred Shares or
ADSs should consult their own tax advisors as to the tax consequences of the
acquisition, ownership and disposition of Preferred Shares or ADSs in their
particular circumstances.
Brazilian Tax Considerations
The following discussion summarizes the principal Brazilian tax
consequences of the acquisition, ownership and disposition of Preferred Shares
or ADSs by a holder not deemed to be domiciled in Brazil for Brazilian tax
purposes (a "non-Brazilian holder"). This discussion does not address all the
Brazilian tax considerations that may be applicable to any particular
non-Brazilian holder, and each non-Brazilian holder should consult his or her
own tax advisor about the Brazilian tax consequences of investing in Preferred
Shares or ADSs.
Taxation of Dividends
Dividends paid by the Registrant in cash or in kind from profits of periods
beginning on or after January 1, 1996 (i) to the Depositary in respect of
Preferred Shares underlying ADSs or (ii) to a non-Brazilian holder in respect of
Preferred Shares will generally not be subject to Brazilian withholding tax.
Dividends paid from profits generated before January 1, 1996 may be subject to
Brazilian withholding tax at varying rates, except that stock dividends are not
subject to Brazilian tax unless the stock is subsequently redeemed by the
Registrant, or the non-Brazilian holder sells the stock in Brazil, within five
years after the distribution.
The only Brazilian tax treaty now in effect that would (if certain
conditions are met) reduce the rate of the withholding tax on dividends paid
from profits generated before January 1, 1996 is the treaty with Japan, which
would reduce the rate to 12.5% under the circumstances set forth in the treaty.
Taxation of Gains
Gains realized outside Brazil by a non-Brazilian holder on the disposition
of ADSs to another non-Brazilian holder are not subject to Brazilian tax.
Neither the deposit of Preferred Shares in exchange for ADSs nor the withdrawal
of Preferred Shares upon cancellation of ADSs is subject to Brazilian tax.
Non-Brazilian holders are not subject to tax in Brazil on gains realized on
dispositions of Preferred Shares outside Brazil to other non-Brazilian holders.
Gains realized by non-Brazilian holders on dispositions of Preferred Shares
in Brazil or in transactions with Brazilian residents may be free of Brazilian
tax, taxed at a rate of 10% or taxed at a rate of 15%, depending on the
circumstances. Gains on the disposition of Preferred Shares obtained upon
cancellation of ADSs are not taxed in Brazil if such disposition is made, and
the proceeds are remitted abroad, within five business days after cancellation.
Gains on the sale or exchange of duly-registered investments under the Annex IV
Regulations are not subject to Brazilian tax if such sale or exchange occurs on
a Brazilian stock exchange. Gains realized through transactions on Brazilian
stock exchanges are generally subject to tax at a rate of 10%. Gains realized
through off-exchange transactions in Brazil or with Brazilian residents are
generally subject to tax at a rate of 15%. Brazil's tax treaties do not grant
relief from taxes on gains realized on sales or exchanges of Preferred Shares.
Any gains realized by a non-Brazilian holder upon the redemption of
Preferred Shares will be treated as gains from the disposition of such Preferred
Shares to a Brazilian resident occurring off of a stock exchange and will
accordingly be subject to tax at a rate of 15%.
Gain is measured by the difference between the amount in Brazilian currency
realized on the sale or exchange and the acquisition cost of the shares sold,
measured in Brazilian currency without any correction for inflation; the
acquisition cost of shares registered as an investment with the Central Bank is
calculated on the basis of the foreign currency amount registered with the
Central Bank.
There can be no assurance that the current preferential treatment for
holders of ADSs and non-Brazilian holders of Preferred Shares under the Annex IV
Regulations will be maintained.
Any exercise of preemptive rights relating to the Preferred Shares or ADSs
will not be subject to Brazilian taxation. Gains on the sale or assignment of
preemptive rights relating to the Preferred Shares will be treated differently
for Brazilian tax purposes depending on (i) whether the sale or assignment is
made by the Depositary or the investor and (ii) whether the transaction takes
place on a Brazilian stock exchange. Gains on sales or assignments made by the
Depositary on a Brazilian stock exchange are not taxed in Brazil, but gains on
other sales or assignments may be subject to tax at rates up to 15%.
Distributions of Interest on Capital
Brazilian corporations may make payments to shareholders characterized as
interest on the capital of the Registrant as an alternative form of making
dividend distributions. The rate of interest may not be higher than the Federal
Government's long-term interest rate (the "TJLP") as determined by the Central
Bank from time to time (13.48% per annum for the three month period starting
April 1999). The total amount distributed as interest on capital may not exceed
the greater of (i) 50% of net income (before taking such distribution and any
deductions for income taxes into account) for the year in respect of which the
payment is made or (ii) 50% of retained earnings for the year prior to the year
in respect of which the payment is made. Payments of interest on capital are
decided by the shareholders on the basis of recommendations of the company's
board of directors.
Distributions of interest on capital paid to Brazilian and non-Brazilian
holders of Preferred Shares, including payments to the Depositary in respect of
Preferred Shares underlying ADSs, are deductible by the Registrant for Brazilian
corporate income tax purposes. Such payments are subject to Brazilian
withholding tax at the rate of 15%, except for payments to persons who are
exempt from tax in Brazil, which are free of Brazilian tax, and except for
payments to persons situated in jurisdictions deemed to be tax havens (i.e.,
countries that either have no income tax or in which the income tax rate is less
than 20%), which will be subject to tax at a 25% rate.
No assurance can be given that the Board of Directors of the Registrant
will not recommend that future distributions of profits should be made by means
of interest on capital instead of by means of dividends.
Amounts paid as interest on capital (net of applicable withholding tax) may
be treated as payments in respect of the dividends the Registrant is obligated
to distribute to its shareholders in accordance with its Charter and the
Brazilian Corporation Law. Distributions of interest on capital in respect of
the Preferred Shares, including distributions to the Depositary in respect of
Preferred Shares underlying ADSs, may be converted into U.S. dollars and
remitted outside of Brazil, subject to applicable exchange controls.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to
the ownership, transfer or disposition of Preferred Shares or ADSs by a
non-Brazilian holder except for gift and inheritance taxes levied by some states
in Brazil on gifts made or inheritances bestowed by individuals or entities not
resident or domiciled in Brazil or in the relevant State to individuals or
entities that are resident or domiciled within such State in Brazil. There are
no Brazilian stamp, issue, registration, or similar taxes or duties payable by
holders of Preferred Shares or ADSs.
A financial transaction tax (the "IOF tax") may be imposed on the
conversion of Brazilian currency into foreign currency (e.g., for purposes of
paying dividends and interest). The rate of IOF tax rate on such conversions is
currently 0%, but the Minister of Finance has the legal power to increase the
rate to a maximum of 25%. Any such increase will be applicable only
prospectively.
In addition to the IOF tax, a second, temporary tax that applies to the
removal of funds from accounts at banks and other financial institutions (the
"CPMF tax") will be imposed on distributions by the Registrant in respect of
ADSs at the time such distributions are converted into U.S. dollars and remitted
abroad by the Custodian. The CPMF tax will be in effect until June 2002, unless
its term is extended, and such tax will be imposed at a rate of 0.38% from June
1999 until June 2000 and at a rate of 0.30% from June 2000 until June 2002.
Registered Capital
Amounts invested in Preferred Shares by a non-Brazilian holder who
qualifies under the Annex IV Regulations and obtains registration with the CVM,
or by the Depositary representing an ADS holder, are eligible for registration
with the Central Bank. Such registration (the amount so registered is referred
to as "Registered Capital") allows the remittance outside Brazil of foreign
currency, converted at the Commercial Market Rate, acquired with the proceeds of
distributions on, and amounts realized through dispositions of such Preferred
Shares. The Registered Capital per Preferred Share purchased in the form of an
ADS, or purchased in Brazil and deposited with the Depositary in exchange for an
ADS, will be equal to its purchase price (stated in U.S. dollars). The
Registered Capital per Preferred Share withdrawn upon cancellation of an ADS
will be the U.S. dollar equivalent of (i) the average price of a Preferred Share
on the Brazilian stock exchange on which the most Preferred Shares were traded
on the day of withdrawal or, (ii) if no Preferred Shares were traded on that
day, the average price on the Brazilian stock exchange on which the most
Preferred Shares were traded in the fifteen trading sessions immediately
preceding such withdrawal. The U.S. dollar equivalent will be determined on the
basis of the average Commercial Market Rates quoted by the Central Bank on such
date or dates.
A non-Brazilian holder of Preferred Shares may experience delays in
effecting Central Bank registration, which may delay remittances abroad. Such a
delay may adversely affect the amount in U.S. dollars, received by the
non-Brazilian holder.
U.S. Federal Income Tax Considerations
The statements regarding U.S. tax law set forth below are based on U.S. law
as in force on the date of this Annual Report, and changes to such law
subsequent to the date of this Annual Report may affect the tax consequences
described herein. This summary describes the principal tax consequences of the
ownership and disposition of Preferred Shares or ADSs, but it does not purport
to be a comprehensive description of all of the tax consequences that may be
relevant to a decision to hold or dispose of Preferred Shares or ADSs. This
summary applies only to purchasers of Preferred Shares or ADSs who will hold the
Preferred Shares or ADSs as capital assets and does not apply to special classes
of holders such as dealers in securities or currencies, holders whose functional
currency is not the U.S. dollar, holders of 10% or more of the shares of the
Registrant (taking into account shares held directly through depositary
arrangements), tax-exempt organizations, financial institutions, holders liable
for the alternative minimum tax, securities traders who elect to account for
their investment in Preferred Shares or ADSs on a mark-to-market basis, and
persons holding Preferred Shares or ADSs in a hedging transaction or as part of
a straddle or conversion transaction.
Each holder should consult such holder's own tax advisor concerning the
overall tax consequences to it, including the consequences under laws other than
U.S. federal income tax laws, of an investment in Preferred Shares or ADSs.
In this discussion, references to "ADSs" also refer to Preferred Shares,
references to a "U.S. holder" are to a holder of an ADS (i) that is a citizen or
resident of the United States of America, (ii) that is a corporation organized
under the laws of the United States of America or any state thereof, or (iii)
that is otherwise subject to U.S. federal income taxation on a net basis with
respect to the ADS.
For purposes of the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), holders of ADRs will be treated as owners of the ADSs represented by
such ADRs.
Taxation of Dividends
A U.S. holder will recognize ordinary dividend income for U.S. federal
income tax purposes in an amount equal to the amount of any cash and the value
of any property distributed by the Registrant as a dividend to the extent that
such distribution is paid out of the Registrant's current or accumulated
earnings and profits ("e&p"), as determined for U.S. federal income tax
purposes, when such distribution is received by the Custodian or by the U.S.
holder, in the case of a holder of Preferred Shares. To the extent that such a
distribution exceeds the Registrant's e&p, it will be treated as a nontaxable
return of capital, to the extent of the U.S. holder's tax basis in the ADS (or
Preferred Shares, as the case may be), and thereafter as capital gain. The
amount of any distribution will include the amount of Brazilian tax withheld on
the amount distributed and the amount of a distribution paid in reais will be
measured by reference to the exchange rate for converting reais into U.S.
dollars in effect on the date the distribution is received by the Custodian, or
by a U.S. holder, in the case of a holder of Preferred Shares. If the Custodian
or U.S. holder, in the case of a holder of Preferred Shares, does not convert
such reais into U.S. dollars on the date it receives them, it is possible that
the U.S. holder will recognize foreign currency loss or gain, which would be
ordinary loss or gain, when the reais are converted into U.S. dollars. Dividends
paid by the Registrant will not be eligible for the dividends received deduction
allowed to corporations under the Code.
Distributions out of e&p with respect to the ADSs generally will be treated
as dividend income from sources outside of the United States and generally will
be treated separately along with other items of "passive" (or, in the case of
certain U.S. holders, "financial services") income for purposes of determining
the credit for foreign income taxes allowed under the Code. Subject to certain
limitations, Brazilian income tax withheld in connection with any distribution
with respect to the ADSs may be claimed as a credit against the U.S. federal
income tax liability of a U.S. holder if such U.S. holder elects for that year
to credit all foreign income taxes, or such Brazilian withholding tax may be
taken as a deduction. Foreign tax credits will not be allowed for withholding
taxes imposed in respect of certain short-term or hedged positions in securities
or in respect of arrangements in which a U.S. holder's expected economic profit,
after non-U.S. taxes, is insubstantial. U.S. holders should consult their own
tax advisors concerning the implications of these rules in light of their
particular circumstances.
Distributions of additional shares to holders with respect to their ADSs
that are made as part of a pro rata distribution to all shareholders of the
Registrant generally will not be subject to U.S. federal income tax.
A holder of an ADS that is a foreign corporation or nonresident alien
individual (a "non-U.S. holder") generally will not be subject to U.S. federal
income tax or withholding tax on distributions with respect to ADSs that are
treated as dividend income for U.S. federal income tax purposes, and generally
will not be subject to U.S. federal income tax or withholding tax on
distributions with respect to ADSs that are treated as capital gain for U.S.
federal income tax purposes unless such holder would be subject to U.S. federal
income tax on gain realized on the sale or other disposition of ADSs, as
discussed below.
Taxation of Capital Gains
Upon the sale or other disposition of an ADS, a U.S. holder will recognize
gain or loss for U.S. federal income tax purposes in an amount equal to the
difference between the amount realized in consideration for the disposition of
the ADS (excluding the amount of any distribution paid to the Custodian but not
distributed by the Custodian prior to the disposition) and the U.S. holder's tax
basis in the ADS. Such gain or loss generally will be subject to U.S. federal
income tax and will be treated as capital gain or loss. Long-term capital gains
recognized by an individual holder generally are subject to a maximum rate of 20
percent in respect of property held for more than one year. The deductibility of
capital losses is subject to certain limitations. Gain realized by a U.S. holder
on a sale or disposition of ADSs generally will be treated as U.S. source
income. Consequently, if Brazilian tax is imposed on such gain, the U.S. holder
will not be able to use the corresponding foreign tax credit, unless the holder
has other foreign source income of the appropriate type in respect of which the
credit may be used.
A non-U.S. holder will not be subject to U.S. federal income tax or
withholding tax on gain realized on the sale or other disposition of an ADS
unless (i) such gain is effectively connected with the conduct by the holder of
a trade or business in the United States, or (ii) such holder is an individual
who is present in the United States of America for 183 days or more in the
taxable year of the sale and certain other conditions are met.
U.S. Backup Withholding and Information Reporting
The information reporting requirements of the Code generally will apply to
distributions to a U.S. holder. Distributions to non-U.S. holders generally will
be exempt from information reporting and backup withholding under current law
but a non-U.S. holder may be required to establish its non-U.S. status in order
to claim such exemption.
Item 8. Selected Financial Data
Background
The selected financial information presented below should be read in
conjunction with, the Consolidated Financial Statements and the notes thereto,
and Management's Discussion and Analysis of Financial Condition and Results of
Operations. The Consolidated Financial Statements have been audited by Ernst &
Young Auditores Independentes S.C. for 1998 and by KPMG Auditores Independentes
for 1996 and 1997, and their reports on the Consolidated Financial Statements
appear elsewhere in this Annual Report. The Consolidated Financial Statements
are prepared in accordance with U.S. GAAP.
<TABLE>
<CAPTION>
U.S. GAAP Selected Financial Information
Years ended December 31,
---------------------------------------------------
1996 1997 1998
--------------- -------------- ------------------
(thousands of constant reais at (thousands of
December 31, 1997) nominal reais,
except per share
data)
<S> <C> <C> <C>
Statement of operations data:
Revenues................................................ 239,163 374,162 435,305
Operating income........................................ 126,038 110,868 7,498
Income before unallocated interest and taxes............ 113,081 81,464 --
Net income (1).......................................... -- -- 10,376
Basic and diluted earnings in reais per common
thousand shares (1)................................ -- -- 0.03
Other financial data:
EBITDA (2).............................................. 153,351 159,192 110,427
Capital expenditures.................................... 190,144 115,663 179,624
As of December 31,
----------------------------------------------------
1996 1997 1998
--------------- -------------- ------------------
(thousands of constant reais at (thousands of
December 31, 1997) nominal reais,
except per share
data)
Balance sheet data:
Cash and cash equivalents............................... -- 10,160 87,245
Working capital......................................... (24,588) 6,614 (14,607)
Total assets............................................ 450,632 542,718 742,180
Long-term debt (including current portion).............. 134,331 115,343 52,024
Divisional equity....................................... 240,088 332,332 --
Shareholders' equity.................................... -- -- 417,912
</TABLE>
- ------------------
(1) Net income and earnings per share have not been presented for the prior
years, since interest and income taxes could not be segregated from the
Predecessor Company. See Note 2 to the Consolidated Financial Statements.
(2) EBITDA consists of operating income plus depreciation and amortization and,
in 1998, impairment of assets. The Company's management believes that
EBITDA is a standard measure that is commonly reported and widely used by
analysts, investors and others in the wireless communications industry. The
information has been disclosed herein to permit a more complete comparative
analysis of the Company's operating performance and capitalization relative
to other companies in the industry. These indicators should not be
considered as a substitute or alternative for net income or cash flows.
Selected financial information as of and for the years ended December 31,
1994 and 1995 in accordance with U.S. GAAP is not provided because the
accounting records for those years were not maintained in a manner that would
readily permit all costs, assets and liabilities to be segregated between fixed
and cellular telecommunications operations in accordance with U.S. GAAP.
However, selected financial information as of and for the year ended December
31, 1995 in accordance with Brazilian GAAP is available, and is presented below
together with selected financial information as of and for the years ended
December 31, 1996, 1997 and 1998. For the year ended December 31, 1994, net
operating revenues were R$ 20.2 million and the Company had 42,242 subscribers.
Brazilian GAAP Selected Financial Information
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------
1995 1996 1997 1998 (1)
-------- --------- -------- ------------
(thousands of constant reais at (thousands of
December 31, 1997) actual reais,
except per share
data)
<S> <C> <C> <C> <C>
Statement of operations data:
Revenues................................................ 110,641 239,163 374,162 439,647
Operating income before interest and taxes.............. 48,839 132,845 104,640 7,289
Income before unallocated interest and taxes............ 41,916 109,502 78,863 --
Net income (2).......................................... -- -- -- 8,924
Basic and diluted earnings in reais per common
thousand shares (2)................................ -- -- -- 0.03
As of December 31,
--------------------------------------------------------
1995 1996 1997 1998 (1)
-------- -------- ------- ------------
(thousands of constant reais at (thousands of
December 31, 1997) actual reais,
except per share
data)
Balance sheet data:
Cash and cash equivalents............................... -- -- 10,160 87,245
Working capital......................................... (3,082) (24,588) 6,614 (21,839)
Total assets............................................ 288,838 471,794 577,685 763,576
Long-term debt (including current portion).............. -- 134,331 117,105 52,024
Divisional equity....................................... 175,597 257,857 346,433 --
Shareholders' equity.................................... -- -- -- 430,561
</TABLE>
- ------------------
(1) Certain information provided for 1998 differs from the Brazilian GAAP
financial information published in Brazil because the information published
in Brazil has been indexed through 1995, while the financial information
presented here has been indexed through 1997.
(2) Net income and earnings per share have not been presented for the prior
years, since interest and income taxes could not be segregated from the
Predecessor Company.
The following table sets forth the period-end, average, high and low
Commercial Market Rate (through February 21, 1995) and Noon Buying Rate (from
February 22, 1995) expressed in reais per U.S. dollar for the periods indicated.
<TABLE>
<CAPTION>
Average for
Year Year-end year (1) High Low
- ---------------- -------- ----------- ------ ------
<S> <C> <C> <C> <C>
1994 0.8460 0.6450 1.0000 0.1186
1995 0.9722 0.9228 0.9722 0.8450
1996 1.0393 1.0080 1.0413 0.9733
1997 1.1165 1.0805 1.1166 1.0394
1998 1.2085 1.1640 1.2090 1.1160
1999 (through May 31, 1999) 1.7340 1.8553 2.2000 1.2074
</TABLE>
- ------------------
(1) Represents the average of the exchange rates on the last day of each month.
Source: Data as published by the Central Bank through February 21, 1995 and
the Federal Reserve Bank of New York since February 22, 1995.
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's discussion and analysis is intended to assist in the
understanding and assessment of significant changes and trends in the results of
operations and financial condition of the Company. It should be read in
conjunction with the Consolidated Financial Statements and accompanying notes.
All financial data and discussion herein are based upon financial statements
prepared in accordance with U.S. GAAP.
Presentation of Financial Information
On May 22, 1998, in preparation for the privatization, the Telebras System
was restructured to form the 12 New Holding Companies, including the Registrant.
The restructuring of the Telebras System was accomplished by means of a
procedure under Brazilian law called cisao or split-up. Virtually all the assets
and liabilities of Telebras were allocated to the New Holding Companies. In the
Breakup, certain assets and liabilities of Telebras, including 82.9% of the
total share capital of Telemig Celular, were transferred to the Registrant.
The Registrant was created effective February 28, 1998. For 1998, the
Consolidated Financial Statements reflect the consolidated financial condition
and results of operations of the Registrant and Telemig Celular. For earlier
dates and periods, the Consolidated Financial Statements reflect only the
financial condition and results of operations of the cellular operations of the
Predecessor Company. The formation of the Registrant and Telemig Celular has
been accounted for as a reorganization of entities under common control in a
manner similar to a pooling of interests.
Upon its creation, the Registrant received, in addition to its shares of
Telemig Celular, certain assets of Telebras consisting primarily of cash and
loans to Telemig Celular. As a result, the consolidated shareholders' equity of
the Company giving effect to the Breakup of Telebras was R$73.2 million higher
than divisional equity at December 31, 1997. In consolidation, the loans to
Telemig Celular and the related liabilities of Telemig Celular were eliminated,
resulting in a reduction of R$56.8 million in indebtedness compared to December
31, 1997.
Telemig Celular was created, effective January 1, 1998, by splitting up the
Predecessor Company to separate its cellular operations from its fixed-line
operations. The assets and liabilities of the cellular telecommunications
business of the Predecessor Company were transferred to Telemig Celular at their
indexed historical costs. The revenues and expenses associated with such assets
and liabilities were also allocated to Telemig Celular. For 1998, the
Consolidated Financial Statements reflect the operations of Telemig Celular as a
fully independent company. For prior years, the Consolidated Financial
Statements reflect the cellular operations of the Predecessor Company but are
not necessarily indicative of what the financial condition and results of
operations of the Company would have been if the cellular operations of the
Predecessor Company had been a separate legal entity prior to 1998.
In preparing financial statements for years prior to 1998, it was not
possible to determine the amount of the Predecessor Company's cash and
nonspecific debt that should be allocated to the cellular operations, and there
was no shareholders' equity specifically attributable to the cellular
operations. As a result, the presentation of the Consolidated Financial
Statements for 1996 and 1997 is different from 1998. In particular, for 1996 and
1997 the statement of operations does not include interest income or taxes and
includes only the allocable portion of interest expense, and it accordingly does
not present net income and historical earnings per share information.
The Company's accounting methodology changed in 1998 to reflect the lower
level of inflation in Brazil. Through December 31, 1997, the Consolidated
Financial Statements recognize certain effects of inflation and have been
restated in constant reais of December 31, 1997 purchasing power. The
restatement was made using the integral restatement method prescribed by the
CVM, which is an acceptable method of recognizing effects of inflation under
U.S. GAAP. Inflationary gains or losses on monetary assets and liabilities were
allocated to their corresponding income or expense caption in the Consolidated
Statements of Operations. Inflationary gains or losses without a corresponding
income or expense caption were allocated to other net operating income
(expense).
During 1997, the three-year cumulative inflation rate fell below 100%, and
as a result the Company no longer uses the integral restatement method effective
January 1, 1998. Accordingly, the Consolidated Financial Statements for 1998 are
presented in nominal reais and do not recognize effects of inflation. Financial
statements for prior dates and periods, which are restated in constant reais of
December 31, 1997, have not been further restated.
Composition of Operating Revenues and Expenses
The Company generates operating revenues from (a) usage charges, which
include measured service charges based on tenths of a minute of outgoing calls
and roaming and other similar charges, all of which depend upon which service
plan has been selected by the customer; (b) monthly subscription payments, which
depend upon which service plan has been selected by the customer; (c) network
usage charges, which are the amounts charged by the Company to other cellular
and fixed-line telephone service providers for use of the Company's network by
such service providers' customers; (d) activation fees, which are one-time
sign-up charges paid to obtain cellular service and vary with the service plan
selected by the subscriber; and (e) other services and charges including
revenues from sales of handsets. Revenues from sales of handsets were not
significant until the fourth quarter of 1998 and are expected to increase in
1999, although this will not contribute significantly to operating income,
because the Company plans to offer handsets at cost as an incentive for its
customers to subscribe to its services.
The principal taxes deducted from gross operating revenue are (i) a state
value-added tax, the ICMS, imposed on certain operating revenues from
telecommunications services (except for international service, which has been
exempt from the ICMS since September 1996) and (ii) federal social contribution
taxes, including PIS and COFINS. The rate of the ICMS is 25.0%. The combined
rate of PIS and COFINS is 3.65% of gross operating revenues. Prior to February
1999, it was 2.65%.
Operating expenses consist of cost of services, selling, general and
administrative expenses, bad debt expense, depreciation and, in 1998, a charge
for impairment of certain analog transmission equipment. Cost of services
consists primarily of fixed costs such as leased line charges, site rental and
network maintenance, including overhead, as well as variable costs such as
certain interconnection charges. Selling, general and administrative expenses
consist primarily of salaries, wages and related benefits for administrative
personnel, advertising and promotional expenses and other overhead expenses.
Results of Operations
The following discussion presents comparisons of results of operations for
1998 and 1997 and for 1997 and 1996. Because of the extensive changes in the
Company's circumstances in 1998 and related changes in financial statement
presentation, results of operations for 1998 and 1997 are not comparable in many
respects, and results of operations for 1998 are not necessarily indicative of
results to be expected for future periods.
1998 Compared to 1997
Net operating revenues were R$435.3 million in 1998, up 16% from R$374.2
million in 1997. The growth in revenues was attributable mainly to an increase
of more than 40% in the average number of subscribers. This increase was
partially offset by a number of different factors, including (a) a higher
proportion of subscribers under the Smart Plan, which provides for a relatively
low monthly fee; (b) a 3% reduction in average minutes of use per subscriber;
and (c) the reduction of the activation fee during 1998 from R$330 to R$100 to
R$0 for all tariff plans, except for the Basic Plan. Management expects that the
reduction of activation fees, together with reductions in tariffs, will help
stimulate growth in the Company's subscriber base resulting in an increase in
revenues from monthly subscription payments and an increase in revenues from
usage charges as a result of an increase in call volume, but management is not
able to determine the extent to which these effects will offset the reduction in
fees and tariffs. In December 1998, a competing cellular service provider began
operating for the first time in the Region, increasing the availability of
cellular services in the Region. The Company's management expects that the
advent of competition will contribute to declining prices and will affect the
Company's ability to maintain growth in its subscriber base.
Cost of services was R$103.5 million in 1998, down 22% from R$132.4 million
in 1997. The decrease was due mainly to the lower cost of leasing transmission
capacity from the Predecessor Company at negotiated prices in 1998, as compared
to the allocated costs recognized by the Predecessor Company in 1997. The cost
of leased lines may continue to decline because the Company has the option of
installing its own microwave transmission network in some areas as an
alternative to leasing capacity from the Predecessor Company. Lower leased line
costs in 1998 were partially offset by increased interconnection costs, as a
higher volume of calls was subject to network usage charges payable to other
cellular and fixed-line service providers.
Selling, general and administrative expenses were R$130.9 million in 1998,
up 157% from R$50.9 million of allocated costs recognized by the Predecessor
Company in 1997. The increase reflects substantial expenditures for marketing
and promotional campaigns to launch new service plans, as well as an increase in
provisions for contingencies in the amount of R$25.3 million, including R$18.7
million relating to the Company's legal action contesting the application of
ICMS to monthly fees. In addition, selling, general and administrative costs in
1998 reflect the costs associated with the independent operation of the Company
plus the costs of a one-year service contract with the Predecessor Company to
assist the Company in its early stages of autonomy. At present, the Company has
largely ceased to rely on services provided by the Predecessor Company because
during 1998 the Company developed almost fully independent administrative
capabilities.
Bad debt expense was R$90.9 million in 1998, compared to R$34.9 million in
1997. During the year, the Company continued to experience significant bad debt
levels due to a variety of factors, including (a) overall growth in the
Company's accounts receivable; (b) an increase in the number of customers with
relatively lower income (who are more prone to delay paying cellular telephone
bills) due in part to a promotion at the end of 1997 that attracted lower-income
subscribers; (c) subscription fraud; (d) poor credit and collection procedures;
and (e) increased consumer interest rates (which have adversely affected the
ability of consumers to meet payment obligations) resulting from adverse
economic conditions in Brazil. The Company maintains an allowance for past-due
accounts receivable in an amount equal to management's estimate of probable
future losses on such accounts, based on historical losses and the current level
of overdue accounts receivable. The Company also immediately charges off any
account receivable arising from fraud. Cellular service is cut off to customers
who have accounts receivable that are more than 20 days past-due. In the fourth
quarter of 1998, the Company put in place new credit and collection policies and
implemented an anti-fraud system in order to reduce the level of bad debt. As a
result of these measures, management expects that bad debt levels will decline
in the future.
The Company's competitor in the Region began operating in 1998, and at
present it is offering only digital service. As a result, the Company expects to
offer primarily digital service to new customers. This will speed the
obsolescence of the Company's analog equipment, which in the fourth quarter of
1998 triggered a charge of R$47.1 million for impairment of its analog
transmission equipment. Depreciation expense was R$55.8 million in 1998,
compared to R$48.3 million in 1997, reflecting the increased investment in
property, plant and equipment. Additionally at the end of 1998, the Company
revised its estimate of useful lives of property, plant and equipment in light
of the advent of competition and a review of industry practices. This change
will result in a further increase of depreciation expense for 1999 by
approximately R$26 million.
Interest income was R$18.2 million in 1998, due to investment of cash on
hand. The Company did not recognize interest income in 1997. Interest expense
declined by 59%, from R$10.0 million (on an allocated expense basis) in 1997 to
R$4.1 million in 1998, reflecting the R$56.8 million reduction in consolidated
indebtedness resulting from the Breakup of Telebras. Foreign exchange loss was
R$5.8 million in 1998, due to the effect of devaluation of the real on the
Company's debt. Debt was entirely denominated in U.S. dollars and amounted to
R$52.0 million at December 31, 1998. Interest expense can be expected to
increase in 1999 if the Company concludes the equipment financing it is
currently negotiating. The Company will also recognize substantially higher
foreign exchange loss due to the devaluation of the real in 1999. In the first
quarter of 1999, the devaluation of the real against the U.S. dollar was 42%,
resulting in exchange loss of approximately R$22 million.
Income and social contribution taxes were R$4.6 million in 1998. The
effective rate of tax on pretax income was 29%, compared to the combined
statutory rate of 33%. The Company did not incur income and social contribution
taxes in 1997.
Minority interest of R$0.8 million consists of the share of losses of
Telemig Celular that is attributable to shareholders other than the Registrant.
Net income for 1998 was R$10.4 million or R$0.03 per thousand common shares.
1997 Compared to 1996
Net operating revenues were R$374.2 million in 1997, up 56% from R$239.2
million in 1996. The growth in revenues was attributable mainly to an increase
of more than 97% in the average number of subscribers. The rate of revenue
growth lagged behind the rate of subscriber growth in 1997 because (a) most
subscription charges did not increase with inflation; (b) the average monthly
fee for the Company's Basic Service plan declined by 4%; and (c) a higher
proportion of subscribers were under the Smart Plan, which provides for
relatively low monthly payments and activation fees. 1997 revenues were also
positively affected by an increase in the average length of outgoing
cellular-to-cellular calls, which was partially offset by a decline in the total
number of calls. Management believes that the increased average length of
cellular-to-cellular calls resulted from the Company waiving, during most of
1997, the 30% surcharge on certain calls between cellular telephones. An
increase in the volume of calls originating outside the Company's network,
principally calls from fixed-line telephones in Minas Gerais, also contributed
to the 1997 revenue increase.
Cost of services was R$132.4 million in 1997, up 133% from R$56.7 million
in 1996. This increase was related mainly to increased network usage charges
paid to the Predecessor Company and other fixed-line providers throughout
Brazil. The increase in the amount of network usage charges was related to an
increase in the total volume of calls and was partially offset because network
usage charges did not increase with inflation. The increase in cost of services
was also attributable to increased leased line costs. The increase in leased
line usage was a result of the continued expansion of the Company's network from
64 cities at year-end 1996 to approximately 120 cities at year-end 1997.
Selling, general and administrative expenses were R$50.9 million in 1997,
compared to R$28.7 million in 1996. This increase was attributable principally
to increased costs of services provided by the Predecessor Company, reflecting
growth in the Company's business. The amounts of such costs in 1996 and 1997
represent allocations to the Company of personnel and overhead expenses for
services provided by the employees of the Predecessor Company. The allocations
are based on management's estimates of such expenses dedicated to the cellular
business in those years. The increase also reflected increased marketing and
advertising expenses.
Bad debt expense was R$34.9 million in 1997, compared to R$2.8 million in
1996. The increase reflected a R$20.8 million increase in provisions for
accounts receivable more than 90 days past-due. R$14.1 million of the increase
in provisions in 1997 reflected provisions made with respect to accounts
receivable less than 90 days past-due at December 31, 1997, for which management
believed collection was improbable. A significant portion of such accounts
receivable arose from subscription fraud involving nonresidents of Minas Gerais.
Prior to 1997, the Company did not experience significant losses from bad
debts and, accordingly, provisions for past-due accounts receivable were low in
the initial years of operation. This was due in part to the fact that most of
the Company's early subscribers were required to pledge their fixed lines as a
guarantee security for payment for cellular service. Because nonpayment of
cellular accounts would result in subscribers losing fixed-line services, the
subscribers had a strong incentive to pay their cellular accounts. The low
provisions in the Company's initial years of operation also reflected the
unusual market situation that prevailed in the Region where an activated
cellular line was considered to have value because of the high cost and long
wait required to obtain such a line. In view of the value of a cellular line,
many of the Company's subscribers had greater incentive to keep current in their
payments. As the Company began to satisfy a greater proportion of the Region's
demand in 1997, the value of a cellular line declined and the level of
nonpayment among the Company's customers increased. This increase in the rate of
nonpayment among the Company's subscribers also contributed to the 1997 increase
in provisions.
Depreciation expenses were R$48.3 million in 1997, compared to R$27.3
million in 1996. This increase reflected the expansion of the Company's network
through investment in property, plant and equipment.
The Company had allocated interest expense of R$10.0 million in 1997,
compared to zero in 1996. The increase in the Company's allocated interest
expense principally reflects the assignment of R$64.2 million in debt at the
time of the Company's formation. This debt does not necessarily reflect the
amount of debt that the Company would have been required to incur had it
operated as a stand-alone entity from its inception. The debt assigned to the
Company was incurred by the Predecessor Company in the last quarter of 1996. The
significant increase in allocated interest expense also reflects higher interest
payments due to an increase in the Company's average debt in 1997 and an
increase in average interest rates on the Company's debt from 4.5% to 9.5%.
Liquidity and Capital Resources
In 1998, cash provided by operating activities was R$251.8 million. Of this
amount, R$139.2 was attributable to changes in operating assets and liabilities,
primarily an increase of R$91.4 million in accounts payable arising for
equipment purchases. The amount of EBITDA (operating income plus depreciation
and the charge for impairment of long-lived assets) was R$110.4 million.
Although the tax expense for 1998 was only R$4.6 million, total cash
requirements for current income and social contribution taxes in respect of 1998
were R$38.4 million. Additionally, the Company received R$16.5 million in cash
upon the Breakup of Telebras, and at year-end it had cash and cash equivalents
of R$ 77.1 million.
The Company invested R$179.6 million in 1998 in acquisitions of property,
plant and equipment as it continued to develop its network to increase coverage
and quality of service and to prepare for the advent of competition. These
investments were made during a period of transition as Telemig Celular was spun
off from the Predecessor Company at the beginning of the year, Telebras was
broken up and the controlling interest in the Company was sold in August. As a
result, the Company's financing policies were subject to uncertainty throughout
1998, and at year-end the Company had R$123.4 in accounts payable to suppliers,
including R$104.3 million to equipment suppliers. This contributed to a working
capital deficit of R$14.6 million at December 31, 1998.
During the first quarter of 1999, the Company paid approximately R$40
million of its accounts payable to suppliers outstanding at December 31, 1998,
and it expects to refinance approximately R$34 million in a long-term facility
as described below, which will also provide financing for 1999 capital
expenditures. The Company expects to repay the balance out of cash on hand and
operating cash flow.
The Company had R$52.0 million of indebtedness at December 31, 1998, all of
which was unsecured and denominated in U.S. dollars and bore interest at LIBOR
plus 1%. All its indebtedness arises from equipment financing. A portion
represents financing originally incurred by the Predecessor Company and assigned
in 1998 to Telemig Celular. The balance represents financing originally incurred
by Telebras and made available by Telebras to the Predecessor Company. In 1998
the indebtedness was assigned to Telemig Celular, and in the Breakup of Telebras
the credit was assigned to an unaffiliated New Holding Company. Additional
indebtedness to Telebras in the amount of R$56.8 million was also assigned to
Telemig Celular, but the corresponding credit was assigned to the Registrant in
the Breakup of Telebras and has been eliminated in consolidation.
Substantially all the Company's start-up costs and initial capital
investments were financed by cash flows from the fixed-line telephone operations
of the Predecessor Company. Accordingly, the Company's indebtedness does not
reflect the amount of debt the Company would have been required to incur to
build its current network if the Company had operated on a stand-alone basis
from the inception of the Predecessor Company's cellular telecommunications
operations.
The Registrant is required to distribute to its shareholders, either as
dividends or as tax-deductible interest on capital, 25% of its adjusted net
income determined in accordance with Brazilian accounting principles as adjusted
in accordance with Brazilian corporate law. The Registrant is also required to
pay a noncumulative preferred dividend on its preferred shares in an amount
equal to 6% of the share capital attributable to the preferred shares under
Brazilian corporate law; as of December 31, 1998 the calculated preferred
dividend requirement amounted to approximately R$5.8 million. With respect to
the 1998 fiscal year, the calculated preferred dividend on the preferred shares
exceeded the mandatory distribution requirement. For purposes of the mandatory
distribution requirement, the Registrant included in adjusted net income part of
the unrealized income reserve transferred upon the Breakup of Telebras, which
amounted to R$132 million and is included in distributable capital and other
reserves in the shareholders' equity of the Consolidated Financial Statements.
The Company decided to include the unrealized reserve in the calculation of the
mandatory distribution requirements over a ten-year period. There can be no
assurance that the mandatory distribution of the unrealized income reserve will
not result in substantial additional dividend requirements.
The Registrant was formed in 1998, and the cash flows reflected in the
Consolidated Financial Statements for 1996 and 1997 do not reflect any payments
of income and social contribution taxes or dividends or the amount of financing
or debt service the Company would have borne if it had been an independent
company.
The Registrant's only significant asset other than cash is its shares of
Telemig Celular. The Registrant relies almost exclusively on dividends from
Telemig Celular to meet its needs for cash, including for the payment of
dividends to its shareholders. The Registrant controls the payment of dividends
by Telemig Celular, subject to limitations under Brazilian corporate law.
The Company participates in a multi-employer defined benefit plan that
covers the former employees of the Telebras System, and the Company is
contingently liable for the unfunded obligations of the plan. See Note 11 to the
Consolidated Financial Statements.
Capital Expenditures
The Company currently expects that its capital expenditures for the years
1999 through 2001 will aggregate approximately R$450 million, with approximately
R$200 million of that amount falling in 1999. This estimate is based on March
31, 1999 exchange rates, and because a substantial portion of capital
expenditures is denominated in U.S. dollars, further devaluation of the real
could require that the estimate be increased. The estimated amount and timing of
capital expenditures are also subject to a number of other risks and
uncertainties. The Company has entered into a contract with Northern Telecom to
purchase a total of US$154 million in equipment over three years, of which US$85
million is expected to be incurred in 1999.
The Company believes that its capital expenditure requirements can be met
through a combination of cash flow from operations and equipment financing from
a variety of sources. The Company expects to finance a substantial part of its
1999 capital expenditures through one or more new facilities with vendors,
export credit agencies and Brazilian and international financial institutions.
Economic, Regulatory and Competitive Factors
The Company's financial condition and operations are significantly affected
by Brazilian telecommunications regulation, including regulation of tariffs. The
Company's financial condition and results of operations also have been, and are
expected to continue to be, affected by the political and economic environment
in Brazil. In particular, the Company's financial performance will be affected
by (a) economic growth in the region and its impact on demand for
telecommunications services, (b) the cost and availability of financing and (c)
the exchange rates between Brazilian and foreign currencies.
The Company began to face competition in the Region in the fourth quarter
of 1998 and anticipates that competition will contribute to declining prices for
cellular telecommunications services and increasing pressure on operating
margins. The future growth and results of operations of the Company will depend
significantly on a variety of factors, including its ability to attract new
subscribers, the rate of growth of the subscriber base, the usage and revenue
generated from its subscribers, the level of airtime and equipment prices, the
rate of churn and its ability to control costs. The scope of increased
competition and any adverse effects on the Company's results and market share
will depend on a variety of factors that cannot now be assessed with precision
and many of which are beyond the Company's control.
The Brazilian economy has in the past been subject to high levels of
inflation. In 1998, inflation was 1.8% as measured by the IGP-M index, but
inflation has increased in 1999. Inflation for the first quarter of 1999 was
7.4%, and there can be no assurance that it will not remain at a high rate for
the rest of the year. The Company does not expect that increases in its rates
will keep pace with inflation, so high inflation would be likely to have an
adverse effect on the Company's operating margins. High inflation could also
have a variety of other effects on the Company's financial condition and results
of operations that are not at present foreseeable. Because financial information
for the Company for 1996 and 1997 is presented in constant reais as of December
31, 1997, reported revenues for those years reflect average real rates (i.e.,
actual rates as restated in constant currency in accordance with variations in
the applicable index) rather than actual rates.
The Brazilian currency has from time to time been subject to significant
devaluation against the U.S. dollar and other foreign currencies. In 1998,
devaluation of the real was 8.3%, but in the first quarter of 1999 there was a
42% devaluation. Devaluation results in exchange loss on the Company's U.S.
dollar-denominated indebtedness. Indebtedness denominated in U.S. dollars
amounted to R$52.0 million (100% of the Company's indebtedness) at December 31,
1998 and is expected to increase in 1999 and future years. Devaluation also
increases the costs in real terms of equipment that is priced in U.S. dollars,
which constitutes a substantial portion of the Company's capital expenditure
requirements.
Impact of the Year 2000 Issue
The Year 2000 Issue arises because many information technology systems and
embedded systems existing in certain automated equipment and associated software
use two digits, rather than four, to identify a year. Date-sensitive systems may
potentially be unable to process accurately certain data before, on, or after
January 1, 2000 and, if not addressed, the impact on operations and financial
reporting may range from minor errors and miscalculations to significant systems
failure, causing disruptions to various operations and activities, including a
temporary inability to render and send invoices, to process customer orders, to
provide customer service, and to facilitate various engineering and
administrative functions.
Based on recent assessments, the Company determined that it will be
required to modify or replace significant portions of its software and certain
hardware. The Company began independent operations during 1998, and the major
portion of the equipment and software it uses was purchased in 1998 and 1999 and
is Year 2000 compliant. With respect to other equipment and software, however,
if modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
To address the Year 2000 Issue, the Company has formulated a plan to ensure that
the critical, date-sensitive systems and applications it relies on are Year 2000
compliant prior to December 31, 1999.
The Company's plan to address the Year 2000 Issue involves assessment,
remediation, testing and implementation. These phases run concurrently for
different systems. To date, the Company has completed the assessment of all
systems critical to its operation and activities, which require modification or
replacement prior to Year 2000. The remediation phase was completed by March 31,
1999. The testing phase for all significant systems was completed by March 31,
1999, with 100% completion targeted for October 31, 1999.
The Company relies to varying degrees on external business partners, such
as third-party vendors and service providers (including banks for payment
processing) and interconnected telecommunication network operators. For example,
calls originating on the Company's networks that terminate on other networks may
experience problems unless the other networks' systems are Year 2000 compliant.
The Company has begun to ask its external business partners about their progress
in identifying and addressing the Year 2000 Issue. Once such information is
collected, the Company will formulate contingency plans, such as the
identification of alternative Year 2000 compliant service providers. For basic
telephony, however, in most cases there is only one provider and the Company
will not be able to select alternative providers. The inability of external
business partners to complete their Year 2000 compliance process in a timely
fashion could materially impact the Company. The effect of non-compliance by
external agents is not determinable. The Company is in the process of developing
contingency plans for its business critical system in the event of a Year 2000
failure. These contingency plans involve, among other actions, manual
workarounds and adjusting staffing strategies.
The Company will utilize both internal and external resources to reprogram
or replace, test, and implement the software and operating equipment for Year
2000 compliance. The total cost of the Year 2000 project to be incurred in 1999
is estimated at R$0.5 million and is not expected to have a material impact on
the Company's financial position or results of operations.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. There can be no
assurance that there will not be delays, or increased costs associated with the
implementation of required changes, which could have an adverse effect on future
operations. If the Company does not complete any additional phases, its ability
to take customer orders, provide services, invoice customers and collect
payments could be adversely affected.
The foregoing disclosure is based on management's current expectation,
estimates and projections, which could ultimately prove to be inaccurate.
Notwithstanding the efforts described above, the Company could potentially
experience disruptions to some operations or supplies as a result of Year 2000
issues. Such disruptions could include problems from non-compliant systems
utilized by suppliers, customers, governmental entities and others; or the
inability or failure to identify all critical Year 2000 issues or to develop
appropriate contingency plans for all Year 2000 issues that ultimately may
arise. In addition, disruptions in the economy generally resulting from Year
2000 issues could also materially adversely affect the Company. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
The most likely worst case scenario of failure by the Company, the
interconnected telecommunication network operators or its other external
business partners to resolve their Year 2000 Issue would be a temporary slowdown
or cessation of its operations and certain activities in one or more of the
areas in which it is operating at the time of the failure. The impact of such
failure cannot be reasonably estimated at this time.
Item 9A. Quantitative and Qualitative Disclosures About Market Risk
The Company is primarily exposed to market risk from changes in both
foreign currency exchange rates and interest rates. The Company is exposed to
foreign exchange rate risk because certain of its costs and debt are denominated
in currencies (primarily the U.S. dollar) other than those in which it earns
revenues (primarily the real). Similarly, the Company is subject to market risk
deriving from changes in interest rates which may affect the cost of its
financing. The Company does not use derivative instruments, such as foreign
exchange forward contracts, foreign currency options, interest rate swaps and
forward rate agreements, to manage these market risks, nor does it hold or issue
derivative or other financial instruments for trading purposes.
Exchange Rate Risk
The Company has exchange rate exposure with respect to the U.S. dollar. At
December 31, 1998, approximately R$52.0 million of the Company's indebtedness
was denominated in U.S. dollars. In addition, at December 31, 1998, the Company
had firm commitments for capital expenditures in U.S. dollars amounting to
approximately R$186 million. The potential additional costs to the Company that
would result from a hypothetical 25% change in foreign currency exchange rates
would be approximately R$60.0 million.
Interest Rate Risk
At December 31, 1998, the Company had approximately R$52.0 million in loans
and financing outstanding, all of which bore interest at floating rates
(LIBOR-based). The Company invests its excess liquidity (R$87.2 million at
December 31, 1998) mainly in short-term instruments. The potential loss in
earnings to the Company over one year that would have resulted from a
hypothetical, instantaneous and unfavorable change of 100 basis points in the
interest rates applicable to financial assets and liabilities on December 31,
1998 would be approximately R$.5 million. The above sensitivity analysis is
based on the assumption of an unfavorable 100 basis point movement of the
interest rates applicable to each homogeneous category of financial assets and
liabilities and sustained over a period of one year. A homogeneous category is
defined according to the currency in which financial assets and liabilities are
denominated and assumes the same interest rate movement within each homogeneous
category (e.g., U.S. dollars). As a result, the Company's interest rate risk
sensitivity model may overstate the impact of interest rate fluctuations for
such financial instruments as consistently unfavorable movements of all interest
rates are unlikely. See Note 5 to the Consolidated Financial Statements.
Item 10. Directors and Officers of Registrant
Board of Directors
The Registrant is administered by a Board of Directors (Conselho de
Administracao) and a Board of Executive Officers (Diretoria). The Board of
Directors comprises eleven members serving for a term of three years. The Board
of Directors holds a regular meeting once every two months and holds special
meetings when called by the Chairman or by two members of the Board of
Directors.
The following are the current members of the Board of Directors and their
respective positions.
Name Position Date elected
- ----------------- -------- ------------
Arthur Joaquim de Carvalho.......... Chairman August 10, 1998
Gerard Manuel Vazquez............... Director August 10, 1998
Jose Leitao Viana................... Director August 10, 1998
Diogo Luiz Botelho de Vasconcellos.. Director August 10, 1998
Bruno Ducharme...................... Director September 1, 1998
David Travesso Neto................. Director September 1, 1998
Margriet Zwarts..................... Director September 1, 1998
Rene Patoine........................ Director September 1, 1998
Maria Amalia Delfim de Melo Coutrim. Director September 16,1998
Peter Gerald White.................. Director April 23, 1999
Humberto Jose Teofilo Magalhaes..... Director April 23, 1999
Set forth below are brief biographical descriptions of the Directors.
Arthur Joaquim de Carvalho has served as the Chairman of the Board of
Directors since August 1998. On August 10, 1998, he was also elected to the
Board of Directors of Tele Norte Celular Participacoes S.A. In addition, Mr.
Carvalho is a Principal of CVC/Opportunity Equity Partners Ltd., a Cayman
Islands privately owned investment company. He served as a Senior Investment
Officer for private equity at the Opportunity Group. Prior to working at
Opportunity, he served as a Managing Director of Manuel Joaquim de Carvalho
Ltda., an export-oriented agribusiness company. He holds a degree in business
administration from the Federal University of Bahia.
Gerard Manuel Vazquez has served as a member of the Board of Directors
since August 1998. He serves as a member of the Board of Tele Norte Celular
Participacoes S.A. and as President of Tele Norte Celular Participacoes S. A.,
Telet S.A. and Americel S.A. Mr. Vazquez is Vice-President and Executive
Director for Latin America of Telesystem International Wireless Inc. (TIW), a
company of the Telesystem Ltd. group, and from 1994 until 1997 he held the same
positions with Telesystem International Wireless Services Inc. (TIWS). In
addition, from 1995 to 1997, Mr. Vazquez was Executive Director of International
Business Development for the Americas, of Odyssey Telecommunications
International Inc. Mr. Vazquez was a Corporate Vice-President of Future
Electronics, a global electronics components distributor, from 1993 to 1994, and
from 1990 to 1993 led the international marketing team of the communications
satellites division of Spar Aerospace Ltd. Prior to this, he was a Director of
Marketing for Canadair Ltd. from 1987 to 1989, for the CL215 Division, for
Spain, Portugal and Latin America. He has served as Trade Commissioner for the
Canadian Department of External Affairs at the Canadian Embassies in Paris,
Quito and Brasilia. Mr. Vazquez serves on various Boards of Directors. He holds
a bachelor's degree from McGill University, Montreal, Canada and a certificate
in business administration from the University of Ottawa.
Jose Leitao Viana has served as a member of the Board of Directors since
August 1998. Since February 1996, Mr. Viana has been the Investment Director of
Fundacao SISTEL de Seguridade Social. Between 1985 and 1989, he served as the
Financial and Economic Director for Telebras. Mr. Viana holds a degree in
economics from the School of Economic Sciences of the University of the State of
Guanabara and a post-graduate degree in economic engineering and industrial
administration from the National School of Engineering - UFRJ.
Diogo Luiz Botelho de Vasconcellos has served as a member of the Board of
Directors since August 1998. He is the Participation Manager of PREVI - Caixa de
Previdencia dos Funcionarios do Banco do Brasil, where he also served as the
Operational Manager of PREVI. During 1997, Mr. Vasconcellos served as the Staff
Coordinator of Capital Markets for Banco do Brasil S.A. He holds a degree in
accounting.
Bruno Ducharme was appointed to the Board of Directors of the Company in
September 1998. He serves as President and Chief Executive Officer of TIW, as
Executive Vice-President of Telesystem Ltd. ("Telesystem") and as a member of
the Board of Directors of Teleglobe Inc. and of MDSI Mobile Data Solutions Inc.
Mr. Ducharme joined the Telesystem group of companies in 1990 as Vice-President
of Telesystem Financial Corporation and became a Vice-President of Telesystem in
1991. Mr. Ducharme has held a number of executive positions with companies
within the Telesystem group, including Executive Vice-President and Chief
Financial Officer of Teleglobe Inc. in 1993 and President and Chief Executive
Officer of Microcell Telecommunications Inc. in 1994. Mr. Ducharme holds a
bachelor's degree in civil law from McGill University, a master's degree in
business administration from the Wharton School of the University of
Pennsylvania, and a master's degree in international relations from the
University of Pennsylvania.
David Travesso Neto has served as a member of the Board of Directors since
September 1998. He serves as Vice-President of Companhia Energetica de Minas
Gerais - CEMIG and Technical Executive officer of Companhia de Gas de Minas
Gerais - GASMIG. From 1974 to 1986 he served in many positions in Alcan Aluminio
do Brasil S.A. He also served as a professor of engineering at the School of
Engineering of the Federal University of Ouro Preto. He holds a degree in
production engineering from the Polytechnic School of the University of Sao
Paulo, a degree in business administration from the Getulio Vargas Foundation
and a masters degree in business administration from the University of Geneva,
Switzerland.
Margriet Zwarts was elected to the Board of Directors of the Company on
September 1, 1998. She serves as Vice-President of Legal Affairs of Telesystem
International Wireless Inc. Prior to that, she practiced law in private
practice, initially with the Montreal law firm of Martineau, Walker, and since
1989 with the Montreal law firm of Ogilvy Renault, where she had been a partner
since 1991. She holds a bachelor's degree in civil law and a bachelor's degree
in common law, both from McGill University, Montreal, Canada, and a master's
degree in English literature from the University of Toronto. She is a member of
the Quebec Bar and the Law Society of Upper Canada.
Rene Patoine was elected to the Board of Directors of the Company on
September 1, 1998. Mr. Patoine has been Executive Vice-President Operations of
the Company since September 1998. Prior to that time, he served as Executive
Vice-President of Operations of Telesystem International Wireless Inc. He served
as Vice-President of Operations & Strategy Planning for Telecel International
Inc. from 1995 to 1997, Executive Advisor and Engineering Director for Conecel
S.A. in Ecuador from 1993 to 1995, Project Director for Bell Canada
International from 1992 to 1993 and General Manager of Telecel S.A. in Zaire
from 1989 to 1991. He holds a bachelor's degree in electrical engineering from
Sherbrooke University, Quebec, Canada.
Maria Amalia Delfim de Melo Coutrim was elected to the Board of Directors
of the Company on September 16, 1998. Mrs. Coutrim has over 17 years of
experience in equity research. She has worked for Banco Bradesco S.A. and
Triplic Corretora (stock brokerage). She also has served as a Director and
partner of Banco Icatu S.A. She is a partner of CVC/Opportunity Equity Partners
Ltd. and serves as a Director of this company. She holds a degree in economics
from the Federal Rural University in the State of Rio de Janeiro.
Peter Gerald White was elected to the Board of Directors of the Company on
April 23, 1999. He previously served as special assistant to the Federal
Minister of Forestry and Rural Development in Canada, and special assistant to
the Premier of Quebec. He founded the Laval Congress on Canadian Affairs in
1961, and in 1969 formed the Sterling Newspaper Group. He has received the
recognition of Chevalier de l'Ordre National de la Legion d'Honneur in 1997 by
the President of France for his role in developing strong economic ties between
Canada and France. He served as the President of the Canada-France Business Club
and later as Chairman of the Canadian Institute of International Affairs. He
served as Chairman, President and CEO of Domgroup Ltd., Publisher of Saturday
Night Magazine, founding Chairman of Public Policy Forum, President of the
Council for Canadian Unity, Executive Vice-President of The Ravelston
Corporation and Argus Corporation, and Director of Hollinger Inc., UniMedia
Inc., Southam Inc., Telesystem Ltd., Proprietary Energy Industries Inc., Cinram
International, and Normerica Building Systems Inc. He holds a law degree from
the University of Laval.
Humberto Jose Teofilo Magalhaes was elected to the Board of Directors of
the Company on April 23, 1999. He has been employed at Caixa Economica Federal
since 1989 and has served as Manager of the Department of Financial
Administration and Control. He has also served as manager of the Financial
Division of the Region of Ceara, Executive Officer of Credit Policy and Finance
and Executive officer of Fundacao dos Economiarios Federais - FUNCEF. From 1996
to 1999, he served as a member of the Committee on Taxes and Business
Opportunity Evaluation of Caixa Economica Federal, and from 1997 to 1998 he
served as the representative of Caixa Economica Federal before FEBRABAN. He
holds a law degree from the University of Brasilia.
Executive Officers
The following are the Executive Officers and their respective positions.
Name Position
- ---- --------
Marcio Kaiser..................... President and Chief Executive Officer
Joao Cox Neto..................... Chief Financial Officer and Market
Relations Executive Officer
Rene Patoine...................... Executive and Vice-President of Operations
Jose Alberto D'Ambrosio........... Vice-President of Human Resources and
Administration
Antonio Jose Ribeiro dos Santos... Vice-President of Business Development
Benoit Bellerose.................. Corporate Controller
Luiz Gonzaga Leal................. Superintendent of Telemig Celular
Set forth below are brief biographical descriptions of the Executive
Officers not included above.
Marcio Kaiser was appointed President and Chief Executive Officer of
Telemig Celular Participacoes S.A. and Tele Norte Celular Participacoes S.A. on
January 4, 1999. Mr. Kaiser has extensive management and marketing experience in
high technology, particularly the computer technology sector. He was, until
recently, President and Managing Director of Oracle Brazil. Before that, Mr.
Kaiser spent 20 years with IBM Brazil and IBM Latin America. He served
successively as Chief Financial Officer, Regional Director, Country Director of
Sales and Marketing, Vice-President and Director of Technology and Executive
Committee Member for IBM Brazil. He also served as General Services Manager for
IBM Latin America.
Joao Cox Neto has been Chief Financial Officer since April 1, 1999. Prior
to joining Telemig Celular Participacoes S.A. and Tele Norte Celular
Participacoes S.A., Mr. Cox held the position of Chief Financial Officer at
Odebrecht Servicos de Infraestrutura S.A. (OSI), the infrastructure and public
service arm of the Odebrecht Group. Previously, he held various financial
management positions at the Odebrecht Group, including Finance Director for the
holding company and CFO for OPP Petroquimica S.A. Mr. Cox holds a degree in
Economics from Universidade Federal da Bahia and has attended to graduate
studies in Economics at the Universite du Quebec a Montreal and at the Oxford
University's CPS program. Since 1991 Mr. Cox has been a member of the Board of
Directors of several companies in Brazil and Argentina and he is currently a
member of the Board of ABRASCA (Brazilian Association of Public Companies) and
IBRI (Brazilian Institute for Investor Relations).
Jose Alberto D'Ambrosio was appointed Vice President of Human Resources and
Administration on April 1, 1999. Mr. D'Ambrosio previously served as Director of
Human Resources Products and Services at PricewaterhouseCoopers, where he worked
extensively with multinational corporations in directing human resources
consulting projects. Prior to that, he served as a Senior Consultant at Towers
Perrin where he was responsible for designing, implementing and monitoring
Compensation and Benefits Programs as well as for leading the Health Care
consulting practice area in Latin America. Including his first assignment as
Human Resources Manager for Alcoa Aluminio S.A., Mr. D'Ambrosio has 23 years of
experience in the Human Resources field. He holds a degree in economics from
Faculdade de Administracao e Economia de S.J. da Boa Vista/Sao Paulo as well a
Post-Graduate degree in Administration from Instituto Maua de Tecnologia/Sao
Paulo.
Antonio Jose Ribeiro dos Santos has been appointed Vice President of
Business Development. Mr. Santos, with 28 years experience in the Brazilian
telecommunications industry, joined the company's management team from
Telebrasilia S.A., a recently privatized telephone company in Brasilia where he
headed the engineering department. At Telebrasilia, he was responsible for
projects such as the implementation and expansion of cellular lines. Mr. dos
Santos worked for the first private cellular company in Brazil, Americel, as the
head of the Strategic Planning Directory and for the B-Band cellular company in
the State of Rio Grande do Sul, Telet S.A., where he was an Executive Vice
President. He also is a part-time professor at Brasilia University in the
Department of Electric Engineering. Mr. dos Santos graduated from the University
of Brasilia and holds a degree in Electric Engineering.
Benoit Bellerose serves as Corporate Controller of the Company. Prior to
joining the Company, Mr. Bellerose was the assistant controller at Telesystem
International Wireless Inc. Before 1997 Mr. Bellerose was a principal at Ernst &
Young in Canada. Mr. Bellerose holds a bachelor's degree in Business
Administration from the Universite du Quebec a Trois-Rivieres, Canada and is a
member of the Canadian Institute of Chartered Accountants.
Luis Gonzaga Leal has been working for the Predecessor Company for 24
years. In addition to many technical and managerial positions, he served as
Manager of the Engineering and Equipment Department and of the Business Planning
Department. He has served as the Superintendent of Telemig Celular since its
inception. He holds a degree in electronic telecommunications engineering from
the Catholic University of Minas Gerais, and a post-graduate degree from the
Federal University of Minas Gerais.
Item 11. Compensation of Directors and Officers
For the year ended December 31, 1998, the aggregate amount of compensation
paid by the Company to all directors and executive officers as a group was
approximately R$391.5 thousand.
For the year ended December 31, 1998, the Company did not set aside or
accrue monies to provide pension, retirement or similar benefits for officers
and directors.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
None.
Item 13. Interest of Management in Certain Transactions
None.
PART II
Item 14. Description of Securities to be Registered
None.
PART III
Item 15. Defaults upon Senior Securities
Not applicable.
Item 16. Changes in Securities, Changes in Security for Registered Securities
and Use of Proceeds
None.
PART IV
Item 17. Financial Statements
The Registrant has responded to Item 18 in lieu of responding to this Item.
Item 18. Financial Statements
Reference is made to pages F-1 through F-26.
Item 19. Financial Statements and Exhibits
(a) The following Consolidated Financial Statements are filed as part of
this Form 20-F:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Net Interdivisional Cash
Distribution (Receipt)
Consolidated Statements of Changes in Shareholders' Equity
Notes to the Consolidated Financial Statements
(b) Exhibits:
(i). Amendment to the Charter of the Registrant* previously
filed with the Registrant's Registration Statement on
September 18, 1998.
(ii). Amendment to the Deposit Agreement** previously filed
with the Registrant's Registration Statement on
September 18, 1998.
(iii). Cellular System Purchase and Sale Agreement dated as
of November 24, 1998.
- ------------------
* Incorporated by reference to the Holding Company's Form 6-K filed on
April 23, 1999.
** Incorporated by reference to the exhibits filed with the Holding
Company's Current Report on Form F-6 on October 29, 1998
(No. 333-9560).
There are omitted from the exhibits filed with or incorporated
by reference into this Annual Report certain promissory notes
and other instruments and agreements with respect to long-term
debt of the Company, none of which authorizes securities in a
total amount that exceeds 10% of the total assets of the
Company. The Company hereby agrees to furnish to the
Securities and Exchange Commission copies of any such omitted
promissory notes or other instruments or agreements as the
Commission requests.
<PAGE>
INDEX OF DEFINED TERMS
Page
----
AD................................................ 5
ADRs..............................................ii
ADSs..............................................ii
American Depositary Shares........................ii
Anatel.............................................1
Anatel Decree.....................................12
Annex IV Regulations..............................22
Annex V Regulations...............................22
Band A.............................................9
Band A Service Provider............................9
Band B.............................................9
Band B Service Provider............................9
Brazil............................................ii
Brazilian Corporation Law.........................21
Brazilian GAAP....................................ii
Brazilian Securities Law..........................21
Breakup............................................1
Breakup of Telebras................................1
Cellular Region....................................1
Central Bank......................................15
Code..............................................26
COFINS.............................................7
Common Shares.....................................ii
Company...........................................ii
Concession.........................................1
Consolidated Financial Statements.................ii
CPMF tax..........................................25
CTBC Telecom.......................................2
Custodian.........................................22
CVM...............................................21
Deposit Agreement.................................20
Depositary........................................20
dollars...........................................ii
DSL1...............................................5
DSL2...............................................5
e&p...............................................26
Embratel...........................................1
Federal Government................................ii
Fittel............................................11
Fixed-Line Region..................................1
General Telecommunications Law.....................1
IBGE...............................................4
ICMS...............................................6
IGP-DI............................................13
IGP-M.............................................16
IMF...............................................14
IOF tax...........................................25
ISS................................................6
List of Obligations...............................12
Maxitel............................................9
Minimum Law.......................................12
New Holding Companies..............................1
Newtel............................................19
non-Brazilian holder..............................23
non-U.S. holder...................................27
Northern Telecom...................................8
Opportunity.......................................19
PCS...............................................10
PIS................................................7
Predecessor Company...............................ii
Preferred Shares..................................ii
R$ ii
reais.............................................ii
real..............................................ii
Real Plan.........................................14
Region.............................................1
Registered Capital................................25
Registrant........................................ii
Rio de Janeiro Stock Exchange.....................20
Sao Paulo Stock Exchange..........................20
SENN..............................................20
Sistel............................................11
Telebras..........................................ii
Telebras System....................................1
Telecommunications Regulations.....................1
Telemig Celular...................................ii
Telesystem........................................40
Telpart............................................2
TIW...............................................19
TJLP..............................................24
U.S. dollars......................................ii
U.S. GAAP.........................................ii
U.S. holder.......................................26
US$...............................................ii
VC1................................................5
VC2................................................5
VC3................................................5
Vicunha............................................9
<PAGE>
TECHNICAL GLOSSARY
The following explanations are not intended as technical definitions, but
to assist the general reader to understand certain terms as used in this Annual
Report.
Access charge: Amount paid per minute charged by network operators for the
use of their network by other network operators. Also known as an
"interconnection charge" or "network usage charge."
Access gates: The points of interface between the network equipment (either
dedicated or switched) and the transmission media that connect network equipment
to the end user. The quantity of service is directly related to the quantity of
network access gates.
AMPS (Advanced Mobile Phone Service): An analog cellular telecommunications
services standard utilizing the 850 MHz band in use in North America, parts of
South America, Australia and various other areas.
Analog: A mode of transmission or switching which is not digital, e.g., the
representation of voice, video or other modulated electrical audio signals which
are not in digital form.
Analog network: A network using analog technology with circuit switching,
capable of connecting one user with all the users, but with limited transmission
capacity.
ATM (Asynchronous Transfer Mode): A broadband switching technology that
permits the use of one network for different kinds of information (e.g., voice,
data and video).
Automatic international roaming: A service which permits a subscriber to
use his or her cellular telephone on a foreign cellular service provider's
network. The subscriber may receive calls made to the subscriber's regular
cellular telephone number (such calls are "automatically" passed to the foreign
service provider's network).
Band A Service Provider: A former Telebras operating subsidiary that has
been granted a concession to provide cellular telecommunications services in a
particular area within a radio spectrum frequency range referred to by Anatel as
"Band A."
Band B Service Provider: A cellular service provider that has been granted
a concession to provide cellular telecommunications services in a particular
area within a radio spectrum frequency range referred to by Anatel as "Band B."
Base station: A radio transmitter/receiver that maintains communications
with the cellular telephones within a given cell. Each base station in turn is
interconnected with other base stations and with the public switched telephone
network.
Broadband services: Services characterized by a transmission speed of 2
Mbit/s or more. According to international standards, these services are divided
into two categories: (i) Interactive services, including
videotelephone/videoconferencing (both point-to-point and multipoint);
videomonitoring; interconnection of local networks; file transfer; CAD;
high-speed fax; e-mail for moving images or mixed documents; broadband
videotext; video on demand; retrieval of sound programs or fixed and moving
images; and (ii) Broadcast services, such as sound programs, television programs
(including high-definition TV and pay TV) and selective document acquisition.
CATV (Cable television): Cable or fiber-based distribution of TV programs.
CDMA (Code Division Multiple Access): A standard of digital cellular
telecommunications technology.
Cell: The geographic area covered by a single base station in a cellular
telecommunications system.
Cell splitting: The process of dividing cells into smaller coverage areas
by reducing the power output and the antenna height of the base station
transmitter. Cell splitting increases capacity in a particular area by allowing
for the further reuse of frequencies by a cellular telecommunications system.
Cellular service: A mobile telecommunications services provided by means of
a network of interconnected low-powered base stations, each of which covers one
small geographic cell within the total cellular telecommunications system
service area.
Channel: One of a number of discrete frequency ranges utilized by a base
station.
Digital: A mode of representing a physical variable such as speech using
digits 0 and 1 only. The digits are transmitted in binary form as a series of
pulses. Digital networks allow for higher capacity and higher flexibility
through the use of computer-related technology for the transmission and
manipulation of telephone calls. Digital systems offer lower noise interference
and can incorporate encryption as a protection from external interference.
Digital penetration: The substitution of equipment capable of transmitting
digital signals for equipment limited to analog transmission.
Exchange: See Switch.
Frame relay: A data transmission service using fast protocols based on
direct use of transmission lines.
Internet: A collection of interconnected networks spanning the entire
world, including university, corporate, government and research networks from
around the globe. These networks all use the IP (Internet Protocol)
communications protocol.
ISDN (Integrated Services Digital Network): A system in which several
services (e.g., speech and data) may be simultaneously transmitted end-to-end in
digital form.
Leased high-speed data communication: The digital exchange of information
at speeds exceeding 64 kbps transmitted through mediums that are leased to users
for their exclusive use.
Local loop: The system used to connect the subscriber to the nearest
switch. It generally consists of a pair of copper wires but may also employ
fiber-optic circuits, microwave links or other technologies.
Manual international roaming: A service that permits a subscriber to use
his or her cellular telephone on a foreign cellular service provider's network.
The subscriber may only receive calls made to a temporary number issued to the
subscriber by the foreign service provider for use while roaming.
Microcells: A small cell covered by a low-power base station. Microcells
can cover small areas such as a single building.
Network: An interconnected collection of elements. In a telephone network,
these consist of switches connected to each other and to customer equipment. The
transmission equipment may be based on fiber optic or metallic cable or
point-to-point radio connections.
Network usage charge: Amount paid per minute charged by network operators
for the use of their network by other network operators. Also known as an
"access charge" or "interconnection charge."
Optical fiber: A transmission medium which permits extremely high
capacities. It consists of a thin strand of glass that provides a pathway along
which waves of light can travel for telecommunications purposes.
Packet-switched data communication services: Data services based on
parceling or breaking the data stream into packets and switching the individual
packets. Information transmitted is segmented into cells of a standardized
length, which are then transmitted independently of one another, allowing
maximization of available capacity and usage of a single transmission path for
multiple communications. The cells are then reassembled upon reaching their
destination.
PBX (Private Branch Exchange): Telephone switchboard for private use but
linked to the national telephone network.
Penetration: The measurement of the take-up of services. At any date, the
penetration is calculated by dividing the number of subscribers by the
population to which the service is available and multiplying the quotient by
100.
Private leased circuits: Voice, data or image transmission mediums leased
to users for their exclusive use.
PSTN (Public Switched Telephone Network): The public telephone network that
delivers basic telephone service and, in certain circumstances, more advanced
services.
Repeaters: A device that amplifies an input signal for retransmission.
Roaming: A function that enables subscribers to use their cellular
telephone on networks of service providers other than the one with which they
signed their initial contract.
Satellite services: Satellites are used, among other things, for links with
countries that cannot be reached by cable or to provide an alternative to cable
and to form closed user networks.
SDH (Synchronous Digital Hierarchy): A hierarchical set of digital
transport structures, standardized for the transport of suitably adapted
payloads over physical transmission networks.
Sectorization: The process of dividing cells into sectors by using
directional antennae at the base station. Sectorization reduces co-channel
interference which permits smaller cells and increases network capacity.
Switch: These are used to set up and route telephone calls either to the
number called or to the next switch along the path. They may also record
information for billing and control purposes.
TDMA (Time Division Multiple Access): A standard of digital cellular
telecommunications technology.
Universal service: The obligation to supply basic service to all users
throughout the national territory at reasonable prices.
Value Added Services: Value Added Services provide additional functionality
to the basic transmission services offered by a telecommunications network.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TELEMIG CELULAR PARTICIPACOES S.A.
By:/s/ Marcio Kaiser
--------------------
Name: Marcio Kaiser
Title: President and Chief Executive Officer
By:/s/ Joao Cox Neto
--------------------
Name: Joao Cox Neto
Title: Chief Financial Officer and Market
Relations Executive Officer
Dated: June 30, 1999
<PAGE>
TELEMIG CELULAR PARTICIPACOES S.A.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Independent Auditors' Report................................................F-2
Consolidated Balance Sheets.................................................F-4
Consolidated Statements of Operations and
Comprehensive Income........................................................F-5
Consolidated Statement of Cash Flows........................................F-6
Consolidated Statement of Net Interdivisional
Cash Distribution (Receipt).................................................F-7
Consolidated Statement of Changes in Shareholders' Equity...................F-8
Notes to the Consolidated Financial Statements.................F-9 through F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Telemig Celular Participacoes S.A.
We have audited the accompanying consolidated balance sheet of Telemig Celular
Participacoes S.A. as of December 31, 1998, and the related consolidated
statements of operations and comprehensive income, changes in shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Telemig Celular
Participacoes S.A. at December 31, 1998, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
Brasilia, Brazil
February 10, 1999
Ernst & Young Auditores Independentes S.C.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Telemig Celular Participacoes S.A.
Brasilia - DF
We have audited the accompanying consolidated balance sheet of Telemig Celular
Participacoes S.A. as of December 31, 1997, and the related consolidated
statements of operations and comprehensive income, net interdivisional cash
distribution (receipt), and changes in shareholders' equity for each of the
years in the two year period then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing standards
in Brazil, which do not differ in any material respects from generally accepted
auditing standards in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements, referred to above, have been
prepared in accordance with generally accepted accounting principles in the
United States of America and on the basis set out in Note 2 to the consolidated
financial statements. Accordingly, interest income, unallocated interest
expense, income tax expense and the related assets and liabilities are not
included in the consolidated financial statements.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Telemig Celular Participacoes S.A.
as of December 31, 1997, and its results of its operations and its cash flows
for each of the years in the two-year period then ended, in conformity with
accounting principles generally accepted in the United States.
July 17, 1998
Brasilia, Brazil
KPMG Auditores Independentes
<PAGE>
Telemig Celular Participacoes S.A.
[see notes 1, 2, 12 and 13]
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
Figures are in Brazilian Reais - R$
December 31, December 31,
1997 1998
- ---------------------------------------------------------------------------------------------------
[thousands of R$ [thousands of R$
constant - note 2] actual - note 2]
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents 10,160 87,245
Trade receivables, net of allowance for doubtful accounts
of R$25,007 and R$26,078 54,733 49,937
Other receivables -- 8,678
Deferred income taxes 2,029 15,312
Other current assets 2,815 13,766
- --------------------------------------------------------------------------------------------------
69,737 174,938
- --------------------------------------------------------------------------------------------------
Property, plant and equipment, net 470,538 547,233
Deferred income taxes -- 17,886
Other non current assets 2,443 2,123
542,718 742,180
=================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 20,505 123,374
Accrued liabilities 3,347 5,216
Value added and other taxes payable -- 22,427
Income taxes payable -- 19,197
Current portion of long-term debt
Third party 11,963 11,936
Payable to a related party 27,308 --
Other current liabilities -- 7,395
- --------------------------------------------------------------------------------------------------
63,123 189,545
- --------------------------------------------------------------------------------------------------
Deferred income taxes 2,654 --
Long-term debt
Third party 11,761 40,088
Payable to a related party 64,311 --
Provision for contingencies 193 25,465
Minority interest 68,344 69,170
- --------------------------------------------------------------------------------------------------
147,263 134,723
- --------------------------------------------------------------------------------------------------
Shareholders' equity:
Divisional equity 332,332 --
Preferred shares, no par value, issued and outstanding
210,029,997 thousand shares -- 97,700
Common shares, no par value, issued and outstanding
124,369,031 thousand shares -- 57,852
Other capital and reserves -- 251,984
Retained earnings -- 10,376
- --------------------------------------------------------------------------------------------------
332,332 417,912
- --------------------------------------------------------------------------------------------------
542,718 742,180
==================================================================================================
See the accompanying financial statements
</TABLE>
<PAGE>
Telemig Celular Participacoes S.A.
[see notes 1, 2, 12 and 13]
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
Figures are in Brazilian Reais - R$
Year ended December 31,
- --------------------------------------------------------------------------------------------------
1996 1997 1998
- --------------------------------------------------------------------------------------------------
[thousands of R$ [thousands of R$
constant - note 2] actual - note 2]
<S> <C> <C> <C>
Revenues:
Services provided to third parties 191,245 269,136 368,093
Services provided to related parties 47,918 105,026 67,212
- --------------------------------------------------------------------------------------------------
239,163 374,162 435,305
- --------------------------------------------------------------------------------------------------
Cost of services:
Provided by related parties 50,273 118,805 68,182
Others 6,453 13,561 35,322
Selling, general and administrative expenses 28,664 50,881 130,890
Bad debt expense 2,848 34,862 90,927
Other net operating income (2,426) (3,139) (443)
Depreciation 27,313 48,324 55,819
Impairment of long-lived assets -- -- 47,110
- --------------------------------------------------------------------------------------------------
Operating income 126,038 110,868 7,498
Interest income -- -- (18,154)
Interest expense -- -- 4,075
Foreign exchange (gain) loss (20) (47) 5,786
Allocated interest expense -- 10,021 --
Net non-operating income (9,411) 3,269 --
- --------------------------------------------------------------------------------------------------
Income before minority interest, unallocated
interest expense and taxes 135,469 97,625 15,791
Minority interest before unallocated interest
expense and taxes 22,388 16,161
- ------------------------------------------------------------------------
Income before unallocated interest expense
and taxes 113,081 81,464
========================
Income taxes 4,589
Minority interest 826
-----------
Net income and comprehensive income 10,376
======
Basic and diluted earnings, in Reais per
thousand common shares 0.03
==================================================================================================
</TABLE>
See the accompanying notes to the consolidated financial statements
<PAGE>
Telemig Celular Participacoes S.A.
[see notes 1, 2, 12 and 13]
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Figures are in Brazilian Reais - R$
<S> <C>
Year ended
December 31,
1998
- -------------------------------------------------------------------------------------------------
[thousands of R$
actual - note 2]
Operating activities:
Net income 10,376
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 55,819
Deferred income taxes (33,823)
Minority interest 826
Unrealized foreign exchange loss on long-term debt 5,040
Provision for contingencies 25,272
Impairment of long-lived assets 47,110
Compensation expense 1,964
Changes in operating assets and liabilities:
Trade receivables 4,796
Accounts payable and accrued liabilities 13,337
Accounts payable related to additions to property, plant and equipment 91,401
Value added and other taxes payable 22,427
Income taxes payable 19,197
Others (11,914)
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 251,828
- --------------------------------------------------------------------------------------------------
Investing activities:
Additions to property, plant and equipment (179,624)
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (179,624)
- --------------------------------------------------------------------------------------------------
Financing activities:
Repayment of long-term debt (11,597)
Contribution upon Spin-Off 16,478
- --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,881
- --------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents for the year 77,085
Cash and cash equivalents, beginning of the year 10,160
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year 87,245
- --------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Income taxes paid 22,346
Interest paid 4,474
- -------------------------------------------------------------------------------------------------
</TABLE>
See the accompanying notes to the consolidated financial statements
<PAGE>
Telemig Celular Participacoes S.A.
[see notes 1 and 2]
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF NET
INTERDIVISIONAL CASH DISTRIBUTION (RECEIPT)
Figures are in Brazilian Reais - R$
Year ended
December 31,
1996 1997
- -------------------------------------------------------------------------------------------------
[thousands of R$
constant - note 2]
<S> <C> <C>
Operating activities:
Income before unallocated interest expense and taxes 113,081 81,464
Adjustments to reconcile to cash provided by
operating activities:
Depreciation 27,313 48,324
Minority interest in income before unallocated
interest expense and taxes 22,388 16,161
Trade receivables (12,613) (21,158)
Other current assets (672) (5,594)
Other non current assets (2,003) (440)
Accounts payable and accrued liabilities (63,692) 8,931
Value added and other taxes payable 3,570 (5,550)
Other current liabilities 250 (284)
- ---------------------------------------------------------------------------------------------------
87,622 121,854
- ---------------------------------------------------------------------------------------------------
Investing activities:
Additions to property, plant and equipment (190,144) (115,663)
- ---------------------------------------------------------------------------------------------------
Financing activities:
Increase in long-term debt 133,332 17,393
Repayment of long-term debt -- (35,382)
- ---------------------------------------------------------------------------------------------------
133,332 (17,989)
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 30,810 (11,798)
Cash and cash equivalents, beginning of the year -- --
Cash and cash equivalents, end of the year -- (10,160)
- ---------------------------------------------------------------------------------------------------
Net interdivisional cash distribution (receipt) 30,810 (21,958)
===================================================================================================
Supplemental cash distribution information:
Interest paid -- 9,402
===================================================================================================
</TABLE>
See the accompanying notes to the consolidated financial statements
<PAGE>
Telemig Celular Participacoes S.A.
[see notes 1, 2, 12 and 13]
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
Figures are in thousands of constant Brazilian Reais - R$ of December 31, 1997
for the years ended December 31, 1996 and 1997 and in thousands of actual
Brazilian Reais - R$ for the year ended December 31, 1998
Other capital and
reserves
-----------------------
Divisional Preferred Common Distributable Retained
equity shares shares capital Others earnings Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 159,951 -- -- -- -- -- 159,951
- -------------------------------------------------------------------------------------------------------
Income before unallocated
interest expense and taxes 113,081 -- -- -- -- -- 113,081
Deferred taxes (7,618) -- -- -- -- -- (7,618)
Net interdivisional cash (30,810) -- -- -- -- -- (30,810)
distribution
Minority interest effects
other than on income 5,484 -- -- -- -- -- 5,484
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 240,088 -- -- -- -- -- 250,088
- -------------------------------------------------------------------------------------------------------
Income before unallocated
interest expense and taxes 81,464 -- -- -- -- -- 81,464
Deferred taxes (4,845) -- -- -- -- -- (4,845)
Net interdivisional cash 21,958 -- -- -- -- -- 21,958
receipt
Minority interest effects
other than on income (6,333) -- -- -- -- -- (6,333)
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 332,332 -- -- -- -- -- 332,332
- -------------------------------------------------------------------------------------------------------
Contributed capital from the
Spin-Off 73,240 -- -- -- -- -- 73,240
Allocation of divisional
equity as a result of (405,572)97,700 57,852 124,318 125,702 -- --
Spin-Off
Contributed capital -- -- -- -- 1,964 -- 1,964
Net income -- -- -- -- -- 10,376 10,376
- -------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 -- 97,700 57,852 124,318 127,666 10,376 417,912
- -------------------------------------------------------------------------------------------------------
</TABLE>
See the accompanying notes to the consolidated financial statements
<PAGE>
Telemig Celular Participacoes S.A.
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
Amounts are in thousands of constant Brazilian Reais - R$ of December 31, 1997
as of and for the years ended December 31, 1996 and December 31, 1997 and in
thousands of actual Brazilian Reais - R$ as of and for the year ended December
31, 1998
1. Background and description of business
Beginning in 1995, the federal government of Brazil [the "Federal Government"]
undertook a comprehensive reform of the Brazilian regulation of the
telecommunications industry. In July 1997, the Federal Congress adopted a
General Telecommunications Law providing for the privatization of
Telecomunicacoes Brasileiras S.A. ["Telebras"] which, through its 28 operating
subsidiaries, was the primary supplier of public telecommunications services in
Brazil [the "Telebras System"].
In preparation for the privatization of the Telebras System, the operating
subsidiaries were divided into twelve separate groups, (a) three regional fixed
line operators, (b) eight regional cellular operators and (c) one national
long-distance operator. The cellular telecommunications businesses were first
separated from the operating subsidiaries, and subsequently the fixed line
businesses, the new cellular businesses and the long-distance operator were
combined into the twelve separate groups [the "New Holding Companies",
individually, "New Holding Company"]. Both the separation of the cellular
businesses and the subsequent grouping of the former Telebras subsidiaries were
performed using a procedure under Brazilian corporate law called cisao [the
"Spin-Off"]. As part of this process, Telemig Celular Participacoes S.A. was
formed on May 22, 1998, through the Spin-Off of certain assets and liabilities
of Telebras, including 82.9% of the share capital of Telemig Celular S.A. [the
"subsidiary"].
Telemig Celular S.A. was formed on January 5, 1998 and subsequently received on
January 30, 1998 from Telecomunicacoes de Minas Gerais S.A. ["Telemig"] the
assets and liabilities comprising its cellular telecommunications services.
Telemig Celular Participacoes S.A. and its subsidiary, Telemig Celular S.A.
[together the "Company"], are the primary suppliers of cellular
telecommunications services in the state of Minas Gerais under the terms of a
concession granted by the Federal Government on November 4, 1997 [the
"Concession"]. The Concession will expire on April 29, 2008 and may be renewed
at the discretion of Agencia Nacional de Telecomunicacoes ["Anatel"], the
regulatory authority for the Brazilian telecommunications industry, for a
further term of 15 years. Through its predecessor Telemig, the Company has
provided cellular telecommunications services in the state since April 1993.
On July 29, 1998, the Federal Government sold to twelve buyers [the "New
Controlling Shareholders"] its rights to receive shares of the twelve New
Holding Companies upon the distribution of such shares. In connection with this
sale, the Federal Government assigned to the New Controlling Shareholders,
effective August 4, 1998, substantially all its economic and voting rights with
respect to the New Holding Companies.
The Company's business, including the services it may provide and the rates it
charges, is regulated by Anatel and is fully dependent upon the cellular
telecommunications concession granted by the Federal Government.
The Company has made and will be required to make significant capital and
operating expenditures on an ongoing basis in order to deploy its cellular
telecommunications network which will require the Company to seek additional
financing. Some of these investments may be financed through debt denominated in
foreign currencies. The country's currency is subject to significant
devaluation, which could result in difficulties or additional costs in raising
financing. A significant devaluation and a return to high levels of inflation
could have an adverse effect on the Brazilian economy, and, as a result, it
could affect the Company's financial position, cash flows or results of
operations.
2. Presentation of the financial statements
These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and rules and
regulations adopted by the United States Securities and Exchange Commission.
Certain of the comparative figures have been reclassified to conform to the
presentation adopted in the current year.
The Company has also published consolidated financial statements prepared in
accordance with accounting principles generally accepted in Brazil and rules and
regulations adopted by the Brazilian Securities Commission ["CVM"].
a. Basis of presentation prior to December 31, 1997
The Spin-Off of the cellular telecommunications business of Telemig to the
Company was accounted for as a reorganization of entities under common control
in a manner similar to a pooling of interests. The assets and liabilities of the
cellular telecommunications business of Telemig were transferred to the Company
at their indexed historical costs. The revenues and expenses associated with
such assets and liabilities were allocated to the Company. Separate records of
revenues and costs of services of the cellular telecommunications business were
maintained historically. Accordingly, the actual amounts were allocated for the
1996 and 1997 fiscal years included herein.
The consolidated statements of operations and of net interdivisional cash
distribution [receipt] have been prepared to include the historical activity
related to the assets and liabilities transferred. The consolidated financial
statements are not necessarily indicative of what would have been the financial
condition and revenues and expenses of the Company as of December 31, 1997 and
for each year in the two-year period ended December 31, 1997 had the cellular
telecommunications business of Telemig been a separate legal entity during such
period.
With respect to costs [other than costs of services], the methodologies employed
in transferring the assets and liabilities included the specific identification
of costs associated with those assets and liabilities, and the allocation of
costs where specific identification was not possible. Allocations were made
using criteria established by management that were designed to ensure that all
relevant costs were appropriately included in the consolidated statements of
operations for the periods presented. Those allocation criteria included: square
footage [in relation to land and building related expenses], number of terminals
[in relation to general management, accounting, data processing, legal
department and other general staff functions], number of employees [in relation
to the human resources department], number of requisitions issued [in relation
to office material costs] and miles driven [in relation to certain
transportation costs]. Management believes that the amounts included in the
consolidated statements of operations for the years ended December 31, 1996 and
1997 fairly reflect the income before interest income, unallocated interest
expense and taxes of the cellular telecommunications business of Telemig.
Prior to December 31, 1997, cash and certain non-specific debt could not be
segregated from Telemig. Accordingly, these amounts have not been included in
the accompanying consolidated financial statements. Additionally, interest
income and unallocated interest expense relating to the cellular
telecommunications business could not be identified. Consequently, income tax
expense and related liabilities do not appear in the consolidated statements of
operations and balance sheets for 1996 and 1997. The portion of consolidated
equity and income before interest income, unallocated interest expense and taxes
attributable to shareholders other than Telebras at December 31, 1996 and 1997,
and for each of the years in the two-year period ended December 31, 1997 is
reflected as "minority interest" in the consolidated financial statements. At
December 31, 1997, such minority shareholders owned 17.1% of the share capital
of Telemig. All taxes payable at December 31, 1997, related to revenues [ICMS,
PASEP, COFINS] remained with Telemig when the assets and liabilities of the
cellular telecommunications business were transferred to Telemig Celular S.A.
The legal responsibility for their payment remained with Telemig.
Because it was not possible to segregate the cash balances for the cellular
telecommunications business prior to December 31, 1997, a traditional statement
of cash flows could not be prepared for each of the years in the two-year period
ended December 31, 1997. In lieu of detailing the beginning and ending cash and
cash equivalents balances, and the net change in cash and cash equivalents
between years, the net cash transferred to/from the fixed line
telecommunications business of Telemig has been presented as "Net
interdivisional cash distribution [receipt]" in the statements of net
interdivisional cash distribution [receipt].
At December 31, 1997, cash equivalents of R$10,160 comprising an interest
bearing deposit with Banco do Brasil S.A., a government-controlled entity, were
allocated from Telemig to the Company to meet future estimated working capital
requirements.
Since the Company did not exist prior to January 1, 1998, no individual capital
structure was maintained. Consequently, the net assets contributed were shown as
"divisional equity" in the accompanying consolidated balance sheet as of
December 31, 1997, and changes in divisional equity were presented in the
consolidated statements of changes in shareholders' equity for each of the years
in the two-year period ended December 31, 1997.
Earnings per share has not been presented for the years ended December 31, 1996
and 1997, as the consolidated statements of operations exclude interest income,
unallocated interest expense and taxes, as a result of nonspecific cash and debt
not being allocated from Telemig.
Full indexation to December 31, 1997
The consolidated financial statements as of and for the years prior to December
31, 1997 were prepared on a fully indexed basis to recognize the effects of
changes in the purchasing power of the Brazilian currency during the periods
presented.
i. Inflation restatement index
The consolidated financial statements were indexed and expressed in currency of
constant purchasing power of December 31, 1997 by using the Indice Geral de
Precos-Mercado [the General Prices Index-Market or the "IGP-M"] of the Fundacao
Getulio Vargas in 1996 and 1997. Inflation for the two-year period ended
December 31, 1997, as measured by the IGP-M, was as follows:
Period Index Annual inflation
- ------------------------------------------------- -------------------------
%
Year ended December 31, 1996 IGP-M 9.2
Year ended December 31, 1997 IGP-M 7.7
Management believes that this index is an appropriate indication of general
price-level inflation to be used for the years indicated.
The effects of price-level adjustments and the monetary gains or losses
associated with the indexation have not been eliminated in these financial
statements, because the application of inflation restatement as measured by the
IGP-M represents a comprehensive measure of the effects of price level changes
in the Brazilian economy and, as such, is considered a more meaningful
presentation than historical cost-based financial reporting.
In July 1997, the three-year cumulative inflation rate for Brazil fell below
100%. However, for accounting purposes, the constant currency method continued
to be applied through December 31, 1997. The restated balances of non-monetary
assets and liabilities of the Company as of December 31, 1997 were used as the
opening balances on January 1, 1998 and is no longer restated for inflation
beginning January 1, 1998.
ii. Consolidated statements of operations
Items in the consolidated statements of operations for the years ended December
31, 1996 and 1997 are adjusted by:
- - allocating inflationary holding gains or losses on interest bearing
monetary assets and liabilities to their corresponding interest income
and expense captions;
- - allocating inflationary holding gains and losses from other monetary
items to their corresponding income or expense captions. Amounts without
a corresponding income or expense caption were allocated to "Other net
operating income."
iii. Deferred income tax effects of indexation adjustments in 1996 and 1997
As a result of legislation mandating the discontinuation of the indexation
system from January 1, 1996, the indexation of assets and liabilities is not
permitted for tax purposes. Accordingly, a deferred tax liability arises for the
excess of net assets shown for financial reporting purposes over the tax basis
of these net assets. The charge relating to this deferred tax liability of
R$9,867 and R$9,738 in 1996 and 1997, respectively, was recorded directly
against divisional equity.
b. Basis of presentation subsequent to December 31, 1997
On May 22, 1998, the shareholders of Telebras approved the Spin-Off, whereby
existing shareholders received shares in the New Holding Companies in proportion
to their holdings in Telebras. The New Holding Companies contains the assets and
liabilities previously recorded in the accounts of Telebras, with limited
exceptions.
The shareholders also approved a specific structure for the shareholders' equity
of each New Holding Company, which included an allocation of a portion of the
retained earnings of Telebras. This value of allocated retained earnings does
not represent the historical retained earnings of the New Holding Companies and
therefore is presented as "Distributable Capital" on the consolidated statements
of changes in shareholders' equity. The net assets which were spun-off from
Telebras, in addition to its investment in the operating subsidiary, resulted in
a net equity increase of R$73,240 in relation to the Company's historical
divisional equity.
The first column in the table below summarizes the December 31, 1997
consolidated historical balances of the Company, and the "Company Consolidated
Statement" column summarizes the opening consolidated balance sheet at January
1, 1998 of Telemig Celular Participacoes S.A. after giving effect to the
Spin-Off adjustments and elimination. The "Adjustments and Elimination" column
includes (i) the transfer of cash from Telebras to the Company, (ii) the
elimination of inter company loans and payables and (iii) the set up of the
legal capital structure of the Company.
<TABLE>
<CAPTION>
December 31,
1997 Adjustments Company
Historical and Consolidated
Balances Elimination Statement
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents 10,160 16,478 26,638
Other current assets 59,577 -- 59,577
- ----------------------------------------------------------------------------------------------------------------------
69,737 16,478 86,215
Property, plant and equipment, net 470,538 -- 470,538
Other non current assets 2,443 -- 2,443
- ----------------------------------------------------------------------------------------------------------------------
542,718 16,478 559,196
======================================================================================================================
December 31,
1997 Adjustments Company
Historical and Consolidated
Balances Elimination Statement
- ----------------------------------------------------------------------------------------------------------------------
Liabilities
Accounts payable to related party 3,425 (4,352) (927)
Loans from third parties 11,963 -- 11,963
Loans from Telebras 27,308 (27,308) --
Other current liabilities 20,427 (1,299) 19,128
- ----------------------------------------------------------------------------------------------------------------------
63,123 (32,959) 30,164
- ----------------------------------------------------------------------------------------------------------------------
Deferred income taxes 2,654 -- 2,654
Provision for contingencies 193 -- 193
Loans from third party 11,761 -- 11,761
Loans from Telebras 64,311 (23,803) 40,508
Minority interest 68,344 -- 68,344
- ----------------------------------------------------------------------------------------------------------------------
147,263 (23,803) 123,460
- ----------------------------------------------------------------------------------------------------------------------
Divisional equity 332,332 (332,332) --
Share capital -- 155,552 155,552
Other capital and reserves -- 125,702 125,702
Distributable capital -- 124,318 124,318
- ----------------------------------------------------------------------------------------------------------------------
332,332 73,240 405,572
- ----------------------------------------------------------------------------------------------------------------------
542,718 16,478 559,196
======================================================================================================================
</TABLE>
The December 31, 1997 historical balances have been adjusted to record deferred
income tax assets amounting to R$4,652 and to record a corresponding increase to
divisional equity of R$3,858 and minority interest of R$794. This adjustment,
which is related to temporary differences between carrying and tax values of
certain assets, had no impact on the Company's 1997 results of operations
because the 1997 statement of operations did not give effect to income taxes.
Upon formation, the Company's legal capital structure was defined by the
resolutions approved by the Telebras shareholders' meeting of May 22, 1998. The
value of shareholders' equity of R$419,673 includes distributable capital of
R$124,318.
The allocated distributable capital and future retained earnings computed using
Brazilian GAAP will be the basis from which future dividends will be payable.
Brazilian corporate and tax law allows state controlled companies that are
participating in the government's privatization program a three-month delay
between the accounting base date for a Spin-Off and the date on which the
shareholders' meeting approves the Spin-Off, including the related accounting
basis for the net assets spun off. As a result, the consolidated financial
statements of the Company include the results of operations and changes in
financial condition of the subsidiary from January 1, 1998 and the effects of
the cash and other net assets [principally intercompany balances] allocated from
Telebras as of March 1, 1998.
3. Summary of accounting policies
The summary of significant accounting policies is as follows:
a. Consolidation
The consolidated financial statements of the Company for the year ended December
31, 1998 include the accounts of the Company and its subsidiary. All significant
intercompany balances and transactions have been eliminated.
b. Cash equivalents
Cash equivalents consist of highly liquid investments with original maturities
of three months or less.
c. Foreign currency transactions
Transactions in foreign currency are recorded at the prevailing exchange rate at
the time of the related transactions. Foreign currency denominated monetary
assets and liabilities are translated using the exchange rate at the balance
sheet date. Exchange differences are recognized in the statements of operations
as they occur.
d. Property, plant and equipment
Property, plant and equipment are stated at indexed cost through December 31,
1997, and at cost thereafter. Depreciation is provided using the straight-line
method based on the estimated useful lives of the underlying assets as follows:
Years
- -------------------------------------------------------------------------
Buildings 20
Network equipment 6 to 8
Other equipment 4 to 5
- -------------------------------------------------------------------------
Interest incurred on borrowings is capitalized as part of property, plant and
equipment until the asset is placed in service, to the extent that borrowings do
not exceed construction-in-progress. The amount of interest capitalized excludes
the inflationary element in local currency borrowings and the foreign exchange
gains and losses on foreign currency borrowings.
The Company reviews property, plant and equipment for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable [see note 10].
In December 1998, to comply with industry practice, the Company reduced the
estimated useful lives of certain of its assets as follows: network equipment
from 10 to 13 years to 6 to 8 years, buildings from 25 years to 20 years and
other equipment from 5 to 20 years to 4 to 5 years. The Company believes that
the estimated useful lives used by the industry better reflect the period of the
economic benefits to be received from the assets. The effect of this change will
be to increase depreciation expense in future years.
e. Revenue recognition
Revenues for services are recognized when the service is provided. Revenues from
cellular telephone services consist of subscription charges, usage charges,
activation fees, network usage charges and charges for maintenance and other
customer services. Unbilled revenues from the billing date to the month-end are
estimated and recognized as revenue during the month in which the service was
provided. Effective January 1, 1998, the Company defers net activation fees.
These fees are amortized over twelve months, the estimated effective contract
life.
f. Pension and other post-retirement benefits
The Company participates in a multi-employer plan that provides pension and
other post-retirement benefits for its employees. The costs of pension and other
post-retirement benefits are based on a fixed percentage of remuneration, as
recommended annually by independent actuaries. Current costs are determined as
the amount of required contribution for the period and are recorded on an
accrual basis.
g. Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the period
reported. Actual results could differ from those estimates.
h. Advertising costs
Advertising costs are expensed as incurred and included in selling, general and
administrative expenses. They amounted to R$10,560 for the year ended December
31, 1998. The Company did not maintain specific records for prior years.
i. New accounting pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
SFAS No. 133 requires recognition of all derivative instruments as either assets
or liabilities in the balance sheet and measurement of such instruments at fair
value. The standard, which must be adopted in fiscal year 2000 at the latest,
also requires certain disclosures about derivative transactions and hedging
strategies. The financial impact of the eventual adoption of SFAS No. 133 has
not yet been determined.
4. Property, plant and equipment
<TABLE>
<CAPTION>
Accumulated Carrying
Cost depreciation value
- --------------------------------------------------------- -------------------- --------------------- ------------------
<S> <C> <C> <C>
December 31, 1997
Land and buildings 16,163 1,330 14,833
Network equipment 455,895 84,946 370,949
Other equipment 67,086 11,213 55,873
Construction-in-progress 28,883 -- 28,883
- --------------------------------------------------------- -------------------- --------------------- ------------------
568,027 97,489 470,538
=======================================================================================================================
December 31, 1998
Land and buildings 17,880 2,001 15,879
Network equipment 465,181 111,309 353,872
Other equipment 84,744 24,034 60,710
Construction-in-progress 116,772 -- 116,772
- --------------------------------------------------------- -------------------- --------------------- ------------------
684,577 137,344 547,233
=======================================================================================================================
</TABLE>
The amount of interest capitalized as part of property, plant and equipment is
R$2,881, R$1,355 and R$4,371 for the years ended December 31, 1996, 1997 and
1998, respectively.
5. Long-term debt
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Term loan 34,111 30,620
Intercompany loans 57,508 --
Loan payable 23,724 21,404
- -------------------------------------------------------------------------------------------------------------------
115,343 52,024
Less current maturities 39,271 11,936
- -------------------------------------------------------------------------------------------------------------------
76,072 40,088
=======================================================================================================================
</TABLE>
Term loan
The term loan was previously payable to Telebras and was transferred to an
unaffiliated New Holding Company resulting from the break up of Telebras. The
loan is denominated in US dollars, unsecured and bears interest at LIBOR + 1%.
The LIBOR rate was 5.06% at December 31, 1998 [5.85% at December 31, 1997]. It
is due in semi-annual installments through December 2002.
Intercompany loans
The loans from Telebras were denominated in Brazilian Reais and carried interest
at the IGP-M rate plus 1% per month. The IGP-M rate was 7.7% for the year ended
December 31, 1997. These loans were eliminated as part of the Spin-Off [see note
2].
Loan payable
This loan is denominated in US dollars, unsecured and bears interest at a rate
of LIBOR + 1%. The LIBOR rate was 5.06% at December 31, 1998 [5.85% at December
31, 1997]. It is due in semi-annual installments through October 2003.
Minimum annual principal repayments of all long-term debt during the next five
years as at December 31, 1998 are as follows:
- ------------------------------------------------------------------------
1999 11,936
2000 11,936
2001 11,936
2002 11,936
2003 4,280
- ------------------------------------------------------------------------
Total 52,024
========================================================================
6. Capital stock
The capital stock of the Company is comprised of preferred shares and common
shares, all without par value. The Company has 700,000,000 thousand shares
authorized [including both preferred and common shares]. At May 22, 1998 [the
date the Company was legally formed], there were 210,029,997 thousand
outstanding preferred shares and 124,369,031 thousand outstanding common shares.
The capital may be increased by a decision taken at a shareholders' meeting or
by the Board of Directors in connection with the capitalization of profits or
reserves, provided that the amounts were allocated for capital increases at a
previous shareholders' meeting.
The preferred shares are non-voting except under limited circumstances and are
entitled to a preferential, 6% non-cumulative dividend. The preferred shares are
also entitled to priority over the common shares in the case of liquidation of
the Company.
Under the Brazilian Corporation Law, the number of non-voting shares or shares
with limited voting rights, such as the preferred shares, may not exceed
two-thirds of the total number of outstanding shares.
As part of the privatization of Telebras, the Brazilian Federal Government
offered Telebras' employees the right to purchase, at a discounted price, the
Federal Government's entire holding of Telebras preferred shares and the
preferred shares of each of the New Holding Companies created as a result of the
Spin-Off. The period during which employees could subscribe for the shares began
on August 4, 1998, and expired on October 30, 1998. In 1998, the Company
recorded compensation expense and contributed capital in the amount R$1,964
related to this offer.
Dividends
Under Brazilian Corporation Law, dividends can only be paid out of the
distributable capital arising from the Spin-Off and from future retained
earnings. Pursuant to its by-laws, the Company is required to distribute as
dividends in respect of each fiscal year ending on December 31, to the extent
amounts are available for distribution, an aggregate amount equal to at least
25% of Adjusted Net Income [as defined below] on such date. The annual dividend
distributed to holders of preferred shares [the "Preferred Dividend"] has
priority in the allocation of Adjusted Net Income. Remaining amounts to be
distributed are allocated first to the payment of a dividend to holders of
common shares in an amount per share equal to the Preferred Dividend, and the
remainder is distributed equally, on a per share basis, among holders of
preferred shares and common shares.
For the purposes of the Brazilian Corporation Law, and in accordance with the
Company's by-laws, the "Adjusted Net Income" is an amount equal to the Company's
net profits under Brazilian GAAP adjusted to reflect allocations to or from (i)
the legal reserve, (ii) a contingency reserve for anticipated losses, if any,
and (iii) an unrealized revenue reserve, if any. Under Brazilian Corporation
Law, the Company is required to appropriate 5% of its annual earnings calculated
using Brazilian GAAP, after absorbing accumulated losses, to a legal reserve,
which is restricted as to distribution. This reserve may be used to increase
capital or to absorb losses, but may not be distributed as dividends. At
December 31, 1998, the Company's financial statements, prepared using Brazilian
GAAP, presented an unconsolidated total equity of R$ 402,505 including a legal
reserve of R$8,339.
Additionally, Brazilian corporations are permitted to attribute tax-deductible
interest expense on shareholders' equity, which may either be paid in cash, in
the form of a dividend, or used to increase capital stock value for statutory
purposes. For financial reporting purposes, such interest on capital is recorded
as a reduction from retained earnings.
7. Earnings per common share
In these consolidated financial statements, information is disclosed per lot of
one thousand shares, because this is the minimum number of shares that can be
traded on the Brazilian stock exchanges.
As discussed in Note 1, the Company was formed subsequent to December 31, 1997.
The equity structure utilized for earnings per share computations is that of the
new entity formed in May 1998.
Since the preferred and common shareholders have different dividend, voting and
liquidation rights, basic earnings per share has been calculated using the
"two-class" method. The "two-class" method is an earnings allocation formula
that determines earnings per share for preferred and common shares according to
the dividends to be paid as required by the Company's by-laws and participation
rights in undistributed earnings.
Basic earnings per common share is computed by reducing net income by
distributable and undistributable net income available to preferred shareholders
and dividing net income available to common shareholders by the weighted-average
number of common shares outstanding during the period. Net income available to
preferred shareholders is the sum of the preferred dividends [distributable net
income] and the preferred shareholders' portion of undistributed net income.
Undistributed net income is computed by deducting preferred dividends and common
dividends from net income. Undistributed net income is shared equally on a per
share basis by the preferred and common shareholders.
The following table sets forth the computation of basic and diluted earnings per
thousand of common shares:
<TABLE>
<CAPTION>
1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Numerator:
Net income 10,376
Less: Distributable net income available to preferred stockholders (5,862)
Undistributed net income allocated to preferred stockholders (655)
- -----------------------------------------------------------------------------------------------------------------------
Numerator for basic and diluted earnings per thousand shares-income
available to common stockholders 3,859
=======================================================================================================================
Denominator:
Basic and diluted weighted-average number common shares
(in thousands) 124,369,031
- -----------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings, in Reais per thousand common shares 0.03
=======================================================================================================================
</TABLE>
8. Income taxes
Brazilian income taxes comprise federal income tax and the social contribution
tax. The statutory rates for federal income tax and for the social contribution
tax are 25% and 8%, respectively.
Following is the detail of income tax expense for the year ended December 31,
1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Federal income tax charge 28,988
Social contribution tax charge 9,424
Deferred taxes (33,823)
- ----------------------------------------------------------------------------------------------------------------------
Income tax expense as reported in the accompanying financial statements 4,589
======================================================================================================================
</TABLE>
Following is a reconciliation of the reported income tax expense and the amount
calculated by applying the combined statutory tax rate of 33% for the year ended
December 31, 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Tax charge at the combined statutory rate 5,211
Non-deductible expenses 1,359
Non-taxable income (1,981)
- ----------------------------------------------------------------------------------------------------------------------
Income tax expense as reported in the accompanying financial statements 4,589
======================================================================================================================
Following is an analysis of deferred income tax assets and liabilities:
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Impairment of equipment 15,546
Accrued expenses and provision for contingencies 15,773
Allowance for doubtful accounts 8,606
Capitalized interest 10,728
- ----------------------------------------------------------------------------------------------------------------------
50,653
Deferred tax liabilities:
Cumulative indexation differences (17,455)
- ----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 33,198
======================================================================================================================
Current portion 15,312
Long-term deferred income taxes 17,886
- ----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 33,198
======================================================================================================================
</TABLE>
9. Transactions with related parties
Up until the change of control of the Company on August 4, 1998, Empresa
Brasileira de Telecomunicacoes S.A., a long-distance cellular telecommunications
company, Telemig and the other parties to the Telebras group were related to the
Company. The Company has operating agreements with these companies for inter or
intrastate long-distance, international telephone calls, automatic roaming and
interconnection. The Company executed several service contracts with Telemig to
perform certain administrative tasks on the Company's behalf.
One of the Company's shareholders provides technical assistance and services to
the Company. The consideration accrued by the Company for these services
amounted to R$3,489 for 1998.
10. Impairment of long-lived assets
During the fourth quarter of 1998, the Company recorded a write-down of certain
of its analog transmission network equipment amounting to R$47,110.
In early 1998, the Ministry of Communications granted to a newly formed
consortium an additional license to provide enhanced services in the Company's
concession area in the form of digital cellular services. The commercial
operation of the consortium began at the end of 1998. The introduction of
competition with digital capacity in the Company's market resulted in an
acceleration of its plan to replace its existing analog equipment with more
modern digital equipment. As a result, the analog transmission network equipment
will be removed before the end of its useful life due to the declining demand
for analog services.
The amount of the write-down was established by comparing the fair value of the
analog transmission equipment, established based on the expected future cash
flows from the use of this equipment, discounted at a risk-adjusted rate, to the
carrying amount of the impaired equipment.
11. Pension plan and other post-retirement benefit plans
The Company, together with substantially all of the other companies in the
former Telebras group, participates in a multi-employer defined benefit pension
plan and other post-retirement benefit plans administered by the Fundacao
Telebras de Seguridade Social ["Sistel"], a minority shareholder.
Approximately 96% of the Company's employees are covered by these plans. The
Company contributed and charged to expense R$570, R$919, and R$1,479 during
1996, 1997 and 1998 respectively, in respect of pension fund contributions. As a
member of the multi-employer plans, the Company's contributions are not
segregated in separate accounts or restricted to provide benefits only to
employees of the Company.
The Company is contingently liable for the total unfunded projected benefit
obligations [the "Obligations"] of the plans. As at December 31, 1998, these
plans had Obligations amounting to R$3,091,802. There is insufficient
information available to determine the Company's portion of these Obligations,
as the allocation of the plan assets among the sponsors is not determinable at
the moment. If the plans' assets were allocated to the sponsors on a pro rata
basis based on their respective shares of the projected benefit obligations, the
Company's portion of the Obligations would be approximately R$18,696.
The pension benefit is generally defined as the difference between (i) 90% of
the retiree's average salary during the last 36 months indexed to the date of
retirement and (ii) the value of the retirement pension paid by the Brazilian
social security system. For retired employees the initial pension payment is
subsequently adjusted upwards to recognize cost of living increases and
productivity awards granted to active employees. In addition to the pension
supplements, post-retirement health care and life insurance benefits are
provided to eligible pensioners and their dependents.
Contributions to the plans are based on actuarial studies prepared by
independent actuaries. The actuarial studies are revised periodically to
identify whether adjustments to the contributions are necessary.
The provisions of SFAS No. 87, "Employers' Accounting for Pensions", for the
purpose of calculating the funded status, were applied with effects from January
1, 1992, because it was not feasible to apply them from the effective date in
the standard.
Beginning in 1998, the Company adopted the disclosure requirements of SFAS No.
132 "Employers' Disclosures About Pensions and other Post-retirement Benefits"
which revised and standardized employers' disclosures about pension and other
post-retirement benefit plans. It does not change the measurement of recognition
of those plans.
The change in plans assets and benefit obligations of the Sistel pension and
other post-retirement benefit plans (health and life insurance) and the related
actuarial assumptions are as follows:
Change in plan assets
<TABLE>
<CAPTION>
Pension Other
--------------------------------- ---------------------------------
1997 1998 1997 1998
- --------------------------------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Fair value of plan assets at beginning of year 3,430,600 3,897,000 76,600 96,141
Actual return on plan assets 307,400 (199,000) 3,355 (6,285)
Sponsors' contributions 209,000 211,000 28,108 25,528
Plan participant's contributions 114,000 120,000 -- --
Benefits paid (142,000) (192,000) (10,240) (14,198)
Administrative expenses (22,000) (25,000) (1,682) (1,948)
- --------------------------------------------------- ---------------- ---------------- ---------------- ----------------
Fair value of plan assets at end of year 3,897,000 3,812,000 96,141 99,238
=======================================================================================================================
Change in benefit obligations
Pension Other
---------------------------------- ----------------------------------
1997 1998 1997 1998
- ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Benefit obligation at beginning of year 6,637,000 7,258,000 1,170,230 1,471,187
Service cost 323,000 385,000 50,263 49,752
Interest cost 358,000 456,000 72,876 75,615
Actuarial (gains) losses 104,000 (2,196,000) 189,740 (263,368)
Administrative expenses (22,000) (25,000) (1,682) (1,948)
Benefits paid (142,000) (192,000) (10,240) (14,198)
- ------------------------------------------------ ---------------- ----------------- ---------------- -----------------
Benefit obligation at end of year 7,258,000 5,686,000 1,471,187 1,317,040
=======================================================================================================================
1997 1998
- -------------------------------------------------------------------------------------------------------------------
The weighted-average actuarial assumptions, as determined
by actuaries, were as follows
Discount rate for determining projected benefit obligations 6.00% 6.00%
Rate of increase in compensation levels 3.25% 3.25%
Expected long-term rate of return on plan assets 6.00% 10.00%
</TABLE>
The above rates exclude inflation.
Health care cost trend rates of increase were projected at annual rates,
excluding inflation, ranging from 6.48% in 1998 decreasing to 2.00% in 2047. The
effect of a one percent annual increase (decrease) in the assumed health care
cost trend rates would increase (decrease) the accumulated post-retirement
benefits obligation at December 31, 1997 and 1998 by R$237,063 and R$183,160,
respectively. Measurement of the accumulated post-retirement benefit obligation
was based on the same assumptions as were used in the pension fund liability
calculations.
12. Commitments
At December 31, 1998, the Company had capital expenditure commitments of US
$154,000 [R$186,100] expected to be incurred over a three-year period. These
commitments relate to the continuing expansion and modernization of the network.
The Company rents equipment and premises through a number of operating lease
agreements that expire at different dates. Total rent expense under these
agreements was R$2,826, R$7,216 and R$8,089 for the years ended December 31,
1996, 1997 and 1998, respectively.
Future minimum lease payments under noncancelable operating leases with an
initial term of one year or more are as follows at December 31, 1998.
Year ending December 31,
- ------------------------------------------------------------------
1999 7,400
2000 6,300
2001 2,500
2002 1,700
- ------------------------------------------------------------------
2003 400
Total minimum payments 18,300
==================================================================
The Company's concession requires that certain network coverage requirements and
service quality milestones be met to continue to be valid and permit the Company
to operate.
13. Contingencies
ICMS tax on monthly fees and additional services
The Company believes that the ICMS [Imposto sobre Circulacao de Mercadorias e
Servicos], a state value-added tax, relates to telecommunications services and
therefore that the application of ICMS on monthly fees or rentals lacks legal
support, as these do not constitute telecommunications services. In December
1998, the Company filed an injunction with the State Treasury Department and
therefore stopped remitting to the state government the ICMS on monthly fees and
additional services. There can be no assurance that the Company will prevail in
its proceedings and, as a result, a provision of R$18,700 was recorded in the
accompanying consolidated financial statements.
ICMS tax on activation fees and other services
On June 19, 1998, the secretaries of the treasury of the individual Brazilian
states approved an agreement to interpret existing Brazilian tax law to broaden
the application of the ICMS to cover not only telecommunications services but
also other services, including cellular activation, which had not been
previously subject to such tax. Pursuant to this new interpretation of tax law,
the ICMS tax may be applied retroactively for such services rendered during the
last five years.
The Company believes that the attempt by the state treasury secretaries to
extend the scope of ICMS tax to services, which are supplementary to basic
telecommunications services, lacks legal support. In addition, the Company
believes that Telemig, the legal predecessor of the Company's subsidiary, would
be liable for any payments made in connection with any claim arising out of the
retroactive application of the ICMS tax on activation fees for periods prior to
1998.
There can be no assurance that the Company will prevail in its position that the
new interpretation by the state treasury secretaries lacks legal support. If the
ICMS tax was applied retroactively to activation fees earned by Telemig Celular
S.A. since inception on January 5, 1998, it could have a negative impact of
R$2,600 on the financial condition and results of operations of the Company for
the year ended December 31, 1998. The Company does not believe it is probable
that such taxes will be applied retroactively and therefore a provision of R$925
was recorded in the accompanying consolidated financial statements for the
application of ICMS on activation fees from June 19, 1998 only.
Other litigation
The Company is subject to legal proceedings, administrative proceedings and
claims of various types in the ordinary course of its business for which a
provision of R$5,840 has been recorded in these accompanying consolidated
financial statements. In management's opinion, the ultimate settlements, if any,
will not have any additional significantly adverse effect on the Company's
financial condition or results of operations.
Potential litigation
The Company, Telemig, and Telebras are defendants in a number of legal
proceedings and subject to certain other claims and contingencies. Liability for
any claims arising out of acts committed by Telemig prior to May 22, 1998, the
date of the Spin-Off, except for those liabilities for which specific accounting
provisions have been assigned to Telemig Celular S.A., remains with Telemig. Any
claims against Telemig and Telebras could result in claims against the Company
to the extent that Telemig Celular S.A. received assets which might have been
used to settle those claims had they not been spun-off. Under the terms of the
breakup of Telebras, liability for any claims arising out of acts committed by
Telebras prior to the effective date of the breakup remains with Telebras,
except for labor and tax claims, for which Telebras and the Company are jointly
and severally liable, and any liability for which specific accounting provisions
have been assigned to the Company. Creditors of Telebras may challenge this
allocation of liability. Management believes that the chances of any claims
materializing and having a material adverse effect on the Company are remote,
and therefore no provision was made.
14. Financial instruments
a. Fair value of financial assets and liabilities
Estimated fair values of the Company's financial assets and liabilities have
been determined using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop the estimated fair values. Accordingly, the amounts presented
below are not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
values.
The fair value information as of December 31, 1997 and 1998 presented below is
based on pertinent information available to management as of those dates.
Financial assets or liabilities are not shown when no significant difference in
values is believed to exist.
<TABLE>
<CAPTION>
December 31, December 31,
--------------------------- -------------------------
1997 1997 1998 1998
Book Fair Book Fair
value value value value
<S> <C> <C> <C> <C>
Long-term debt
Term loan 34,111 34,871 30,620 29,228
Intercompany loans 57,508 55,397 -- --
Loan payable 23,724 24,260 21,404 20,984
===============================================================================================================
</TABLE>
The carrying value of cash, cash equivalents, trade accounts receivable, other
current assets, accounts payable and accrued liabilities are a reasonable
estimate of their fair value because of the short maturities of such
instruments. Interest rates that are currently available to the Company for
issuance of debt with similar terms and maturities were used to estimate the
fair value of loans and financing.
b. Concentration of risks
Credit risk with respect to trade accounts receivable is diversified. The
Company continually monitors the level of trade accounts receivable and limits
the exposure to bad debts by cutting access to the telephone network if any
invoice is twenty days past due. Exceptions comprise telephone services that
must be maintained for reasons of safety or national security.
There is no concentration of available sources of labor, services, concessions
or rights, other than those mentioned above, that could, if suddenly eliminated,
severely impact the Company's operations.
15. Subsequent event
Brazilian Real devaluation
In January and February 1999, the Brazilian Real devalued against the US dollar.
At December 31, 1998 the exchange rate to the US dollar was 1.2087 and as at
February 10, 1999 was 1.9020, which represents a significant devaluation
compared to December 31, 1998.
This devaluation will have an overall adverse effect on the Brazilian economy,
increase the Company's liabilities denominated in foreign currency and their
related interest expenses and increase the cost of imported equipment. The
Company has certain unsettled liabilities and commitments that are denominated
in US dollars.
Any foreign exchange losses will be recorded in the Company's results in the
period in which the devaluation occurs.
<PAGE>
Exhibit Index
Exhibit Page
Number Description of Exhibit Number
------ ---------------------- ------
10.1 Cellular System Purchase and Sale Agreement
dated as of November 24, 1998.
CELLULAR SYSTEM PURCHASE AND SALE AGREEMENT
THIS CELLULAR SYSTEM PURCHASE AND SALE AGREEMENT ("Agreement") is entered
into as of this 24th day of November, 1998 by and between TELEMIG CELULAR S.A.,
a Brazilian corporation with its head office located at Rua Levindo Lopes, 258,
8th floor Belo Horizonte, MG, Brazil, registered with the Brazilian Registry of
Corporate Taxpayers (CGC/MF) under n(degree) 02.320.739/0001-06 ("Telemig
Celular") and, NORTHERN TELECOM DO BRASIL INDUSTRIA E COMERCIO LTDA., a
Brazilian corporation with its head office located at Av. das Nacoes Unidas.
n(degree) 17891.4(degree) andar. Sao Paulo, SP, Brazil, registered with the
Brazilian Registry of Corporate Taxpayers (CGC/MF) under n(degree)
67.807.859/0001-88 ("Nortel Industria"); NORTHERN TELECOM DO BRASIL COMERCIO E
SERVICOS LTDA., formerly named Nortel Comercio e Servicos Ltda., a Brazilian
corporation with its head office located at Av. das Nacoes Unidas, n(degree)
17891, 10(degree) andar, parte A, Sao Paulo, SP, Brazil, registered with the
Brazilian Registry of Corporate Taxpayers (CGC/MF) under n(degree)
01.993.432/0001-03 ("Nortel Comercio") and NORTHERN TELECOM LIMITED, a Canadian
corporation with head office located at 8200 Dixie Road, Suite 100, Brampton,
Ontario, Canada L6T 5P6 ("Nortel") (collectively, "Nortel").
RECITALS
WHEREAS, Telemig Celular holds a Mobile Cellular Service concession to
provide cellular service (the "Cellular Service") in the State of Minas Gerais,
in the Federative Republic of Brazil.
WHEREAS, Telemig Celular wishes to engage Nortel to provide a Cellular
System including certain design considerations and the deployment of a cellular
network in phases.
WHEREAS, Nortel acknowledges that, in entering into this Agreement,
Telemig Celular is relying on the skill and expertise of Nortel to carry out the
responsibilities it has undertaken pursuant to the terms of this Agreement.
NOW THEREFORE, in consideration of the mutual premises contained herein
the Parties hereto agree as follows:
AGREEMENT
1. DEFINITIONS
Capitalized terms used within this Agreement or within an Exhibit to this
Agreement are defined in this Section in alphabetical order or in an
Exhibit.
Acceptance Date means the date when the Acceptance Tests or Systems
Acceptance Tests are completed to the satisfaction of Telemig Celular in
accordance with Exhibit B of this Agreement.
Acceptance Tests (AT) means the mutually agreed methods of testing and
procedures that will be used to measure the performance of the Cellular
System, Network Elements or Products as administered in accordance with
Exhibit B of this Agreement.
Account Manager means Nortel's account manager responsible for Telemig
Celular's account.
Agreement means this Cellular System Purchase and Sale Agreement, and all
Exhibits attached hereto.
AMPS means Advanced Mobile Phone System technology as described in interim
standard IS-3 (800 MHz) of the Telecommunication Industry Association.
ANATEL (Agencia Nacional de Telecomunicacoes) means the regulatory agency
of the government of the Federative Republic of Brazil. or any successor
thereof charged with licensing Cellular Mobile Service networks.
Associated Company means any Person (as hereinafter defined), now or
hereafter existing, in which the direct or indirect controlling shareholder
of Telemig Celular or direct or indirect group of shareholders of Telemig
Celular having more than 50% of the voting equity of Telemig Celular has
any direct or indirect interest, by record or beneficial ownership alone or
in combination with any other, of 50% or more of the voting equity or
voting rights of the subject Person, or of any option, warrant or right to
acquire any such voting equity or voting rights of the subject Person.
BTS means the Base Transceiver Subsystem, which is the Cellular TDMA/AMPS
Base Station.
Cellular Network means the EFRC/TDMA-IS136/AMPS mobile cellular telephone
network (operating in the 800 MHz ) to be operated by Telemig Celular
within the Territory to provide the Cellular Service and consisting of
networks, network elements, systems, infrastructure, transmission and other
components as specified by Telemig Celular.
Cellular Service means that cellular service to be provided by Telemig
Celular pursuant to the concession granted by ANATEL for the Territory.
Cellular System means that Network Element comprised of the Products and
Software to be provided by Nortel hereunder, including without limitation,
the switching, cell site equipment and associated services.
CFR means Cost and Freight to a designated airport in Brazil, as defined in
the ICC Incoterms 1990 and modified in Section 12.
CFR Price means the amount payable in relation to Imported Products ordered
by Telemig Celular set forth in Exhibit A.
Change Order means a written request for a change in a Phase Acquisition
Document or a Purchase Order resulting from a change in the scope or
content of a Phase, as more specifically described in Exhibit F.
Class A Change means a modification to an existing Product to remedy a
non-conformance to Nortel's specification required to correct design
defects of a type that result in electrical or mechanical inoperative
conditions or extremely unsatisfactory operating conditions or which is
recommended to enhance safety.
Class AC Change means a modification to an existing Product to remedy
electrical or mechanical inoperative conditions or extremely unsatisfactory
operating conditions that result from the Product aging or its use in
specific combination with another Product or the use of a certain feature
or option.
Commissioning or Commissioning Testing means the series of tests performed
by Nortel to verify the proper functioning of a Product and the proper
completion of its installation services prior to administering the
Acceptance Test.
Confidential Information means information that the Parties have agreed to
protect from improper disclosures as per Section 11 of this Agreement.
Conditional Acceptance means the Cellular System has passed certain
portions of the Acceptance Tests required for In-Service as more fully
defined in Exhibit B.
Critical Fault means a failure of the Cellular System or Product to perform
such that system degradation or an unscheduled outage occurs. The following
criteria shall be used to define a critical fault for a switch and a cell
site equipment during the Soak Period: (i) if a Switch ceases call
processing or call processing is degraded ({a} 10% or more of the total
amount of circuits in an interconnection trunk group are out of service;
{b} 10% or more of the Subscribers are out of service; or {c} no usable
billing data is being entered on tape) and during the Soak Period the sum
of unscheduled outages exceeds 1 minute; and (ii) if a Site ceases call
processing or call processing is degraded ({a} 10% or more of the total
amount of circuits in an interconnection trunk group to the switch are out
of service; {b} 10% or more of the Subscribers cannot receive or terminate
calls), excluding blocking due to lack of radios and during the Soak Period
the sum of unscheduled outages exceeds 2 minutes.
CTIA means the Cellular Telecommunication Industry Association, or its
successor organization (USA).
Delivery means delivery of the Products to Telemig Celular's warehouse or
any other predetermined location within the Territory.
Delivery Date(s) means the date or dates specified in a Phase Acquisition
Document or Purchase Order on which a Product is to be delivered.
Documentation means the Nortel's standard Product or Service documentation
for its customers, whether written or supplied in other form, described in
Exhibit E and as amended from time to time.
Embedded Software has the meaning set forth in Section 11 of Exhibit C.
Effective Date means November 24th, 1998.
EIA means the Electronics Industry Association (USA).
Final Acceptance means that a Phase in the implementation of the Cellular
System, or a particular Product or Service has successfully passed
Acceptance Tests.
Force Majeure means any event beyond the reasonable control of the Party
responsible for compliance ("Delayed Party") including failure or delay in
performance by the other Party, acts of God, acts of the public enemy, acts
of civil or military authority, governmental acts or omissions, acts of
nature such as hurricanes, earthquakes, fires, floods, epidemics,
embargoes, war, riots, and loss or damage to goods in transit, strikes in
Delayed Party's operations, and strikes or other labor disputes of national
or regional scope preventing performance hereunder by the Delayed Party
including its sub-contractors and suppliers (when no alternative method of
compliance is reasonably available).
Forecast means a forecast provided by Telemig Celular as per Section 4.1 of
this Agreement.
Imported Product means a Product for which Telemig Celular is identified as
the importer of record.
In-Country Product means a Product which has not been imported.
Implementation Schedule means the implementation schedule for a given Phase
or a portion thereof, a Purchase Order or a Change Order.
MSC or Mobile Switching Center means the Mobile Switching Center, comprised
of the switching and related equipment that routes calls from a mobile
telephone set to the called party (and vice-versa) and performs a variety
of related functions. In the Cellular System, an MSC is also known as an
MTSO (mobile telephone switching office).
Network Element(s) means the elements that constitute the Cellular Network
namely (i) the Cellular System or a portion thereof, (ii) the transmission
system and (iii) the Sites infrastructure.
New Feature(s) means a new Software functionality or substantial
performance improvement that is made available to all users for the then
current Software releases.
Party or Parties means in the singular, Telemig Celular or Nortel, as the
case may be determined from the context, or in the plural, both Telemig
Celular and Nortel.
Person includes, without limitation any individual or group, and any firm,
corporation, company, association, partnership, consortium, joint venture,
trust, or incorporated or incorporated organization established in
accordance with the laws of Brazil.
Phase has the meaning set forth in Section 2.3.
Phase Acquisition Document means a written order by Telemig Celular to
Nortel, substantially in the form of Exhibit F, for the purpose of (i)
defining the scope of a given Phase or a portion thereof, (ii) specifying
the Products, Services and Software to be purchased for such Phase and
their respective prices as per Exhibit A and (iii) including the
Implementation Schedule and the Responsibility Matrix.
Project Manager has the meaning set forth in Sections 5.2. and 5.3.
Product(s) has the meaning set forth in Section 2.4.
Project Suppliers means suppliers other than Nortel retained by Telemig
Celular for the supply of certain products and services required for
implementation of the Cellular Network outside Nortel's scope of supply,
such as suppliers of transmission equipment and civil infrastructure
services.
PSTN or Public Switched Telephone Network means the telephone network that
provides telephone service to the public in a given area.
Punchlist means a list prepared by Nortel and agreed to by Telemig Celular
during the performance of each Acceptance Test that sets forth those
mutually agreed items, if any, to be resolved by Nortel before Final
Acceptance.
Purchase Order means a written order by Telemig Celular to Nortel for the
purchase of specific Products and Services not covered by a Phase
Acquisition Document (i.e. purchase of individual Products and Services).
Ready for In-Service means the availability for Cellular Service of the
Cellular Network, Network Elements or Products of a specified Phase or
expansion after the installation and commissioning thereof have been
completed (K Date), in accordance with the Phase Implementation Schedule.
Responsibility Matrix means the table allocating tasks and responsibilities
between Telemig Celular, Nortel and Project Suppliers for a given Phase.
Section means, when used without any other reference, sections, including
subsections, within this Agreement.
Service(s) has the meaning set forth in Section 2.5.
Shipping Document means a document issued by a carrier evidencing shipment
of Products such as an airway bill, a bill of lading or a conhecimento de
embarque.
Site means any location at which Products and Services provided under this
Agreement are or will be delivered, installed, or performed.
Soak Period means, with respect to a Phase, in the implementation of the
Cellular Network, ninety (90) days of continuous operation of the Cellular
System or Products of such Phase without a Critical Fault. The Soak Period
shall commence upon Ready for In-Service.
Software means the object-code (does not include source code) computer
programs furnished by Nortel to Telemig Celular for use solely in
conjunction with the Cellular System. The term "Software" includes, but
shall not be limited to, computer programs contained on magnetic tape in a
semiconductor device, on a disk or in another memory device or system
memory consisting of (a) hard-wired logic instructions which manipulate
data in central processors, instructions which control input-output
operations, and error diagnostic and recovery routines and (b) sequences of
instructions in machine-readable code that control call processing
peripheral equipment and administration and maintenance functions as well
as associated documentation to describe, maintain or use the programs.
Software Base Load means Software that performs the basic activities in a
Network Element such as but not limited to, hardware control call
processing, cell site control, mobility control, inter-MSC signaling and
interface, PSTN signaling and interface, and user interface. Nortel shall
provide Telemig Celular with Base Loads for Software licensed hereunder to
Telemig Celular as such Base Loads become available and subject to the
terms and conditions set forth in Exhibit C.
Software Documentation means printed materials or electronic media used in
connection with Software. Such as, but not limited to, user manuals, flow
charts,logic diagrams, program descriptions, and specifications. No source
code versions of Software are included in the Software Documentation.
Software Feature(s) means a Software designed to improve
performance/capacity to the Cellular Network and/or RF environment, or
create new Cellular Service (s). Nortel shall provide Telemig Celular with
Features as they become available, subject to the terms and conditions set
forth in Exhibit C.
Software Patch means a Software designed to correct or remove a
reproducible malfunction in a Software.
Software Upgrade means a reissued version or partial update of existing
Software Base Load (with or without the inclusion of optional features)
that adds to, improves or enhances existing Software Features and
capabilities of the Cellular Network.
Subscriber means a legal entity or an individual having the right under the
appropriate agreement with Telemig Celular to use the Cellular Network or
any portion thereof.
TDMA means the Time Division Multiple Access technology as described in
interim standard IS-136(800 MHz) of the Telecommunication Industry
Association.
Term has the meaning set forth in Section 2.1.
Territory means the State of Minas Gerais, in the Federative Republic of
Brazil within which Telemig Celular is authorized to provide Cellular
Service.
TIA or Telecommunication Industry Association means the organization in the
United States of America charged with establishing technical standards for
cellular networks, currently the Telecommunication industry Association, or
its successor
Total Unitary Price means the amount payable in respect of a Product or
Service ordered by Telemig Celular as set forth in Exhibit A to this
Agreement, comprised by the CFR/unit Price of the Product or the unit Price
of the Service, plus the applicable taxes and duties.
Warranty Period means the period during which a Product is covered by
Nortel's warranties under applicable warranty provisions as per Section 9
of this Agreement.
2. TERM AND SCOPE OF AGREEMENT
2.1 TERM. The term of this Agreement shall be three (3) years from the
Effective Date (the "Term").
2.2 SCOPE OF AGREEMENT. The scope of this Agreement is the supply by Nortel to
Telemig Celular and the purchase by Telemig Celular from Nortel within the
Term of this Agreement of Products, Services and Software comprising a
Cellular System for expansion of a Cellular Network in the State of Minas
Gerais, Brazil.
2.2.1 Subject to Force Majeure, Telemig Celular shall buy from Nortel and
Nortel shall sell to Telemig Celular, Products and Services in two
Phases -- the first in the amount of US$85,000,000.00 (eighty-five
million US Dollars) (the "First Phase Value Commitment") and the
second in the amount of US$ 69,000,000.00 (sixty-nine million US
Dollars) (the "Second Phase Value Commitment") -- with a total value
of US$154,000,000.00 (one-hundred and fifty-four million US Dollars),
based on the Total Unitary Prices as set forth in Exhibit A (the
"Total Value Commitment"). Telemig Celular acknowledges that its Total
Value Commitment is derived from the unitary prices set forth in
Exhibit A. The Phase Value Commitments are conditional on the
appropriate financing arrangement being acceptable to Telemig Celular.
2.2.2. REMOVED
2.2.3. REMOVED
2.3 PHASES. Telemig Celular and Nortel agree to breakdown the implementation of
the Cellular Network into Phases, which will be defined in Phase
Acquisition Documents.
2.4 PRODUCTS. Telemig Celular shall purchase from Nortel the TDMA IS-136
products, including drawings, documents, manuals and Software identified in
Exhibit A, which may be manufactured or produced by Nortel or procured by
Nortel from suppliers (collectively the "Products") for incorporation in
the Cellular Network in the Territory.
Products furnished to Telemig Celular under this Agreement are furnished
for use in connection with Telemig Celular's operations of the Cellular
Network and are not furnished for resale.
2.5 SERVICES. Telemig Celular shall purchase from Nortel the services
identified in Annex A.3 of Exhibit A as may be required to implement a
Phase Acquisition Document, a Purchase Order or a Change Order
(collectively the "Services").
2.6 CELLULAR TDMA/AMPS SPECIFICATIONS. Telecommunications standards shall apply
to this Agreement to the extent not inconsistent with any terms or
conditions of this Agreement and regulations issued by the Ministerio das
Comunicacoes or ANATEL. Relevant telecommunications standards include, but
are not limited to the following:
Number Subject
- --------------------------------------------------------------------------------
a) For TDMA
IS-136.1-A 800 MHz TDMA Cellular - Radio Interface - Mobile
Station - Base Station Compatibility - Digital Control
Channel (PN-3474)
IS-136.2-A 800 MHz TDMA Cellular - Radio Iinterface - Mobile
Station - Base Station Compatibility - Traffic Channels
and FSK Control Channel (PN-3474)
IS-137-A 800 MHz TDMA Cellular - Radio Interface - Minimum
Performance Standards for Mobile Stations (PN-3605)
IS-138-A 800 MHz TDMA Cellular - Radio Interface - Minimum
Performance Standards for Base Stations (PN-3606)
IS-641-A TDMA Cellular/PCS - Radio Interface - Enhanced
Full-Rate Speech Codec (PN-3467)
TSB-73 IS-136/IS-136A Compatibility Issues (PN-3617)
IS-669 800 MHz Cellular Systems - TDMA Services - STU 111
(PN-3616)
IS-684 TDMA Cellular/PCS Systems - Radio Interface - Radio
Link Protocol 2 (PN-3658)
IS-685 TDMA Cellular/PCS Systems - TDMA Services - Packet
Switched Data (PN-3680)
IS-686 800 MHz Cellular System, TDMA Radio Interface, Minimum
Performance Standard for Enhanced Full-Rate Speech
Codec (PN-3690)
IS-41-C Networking Operations and Interswitch feature
transparency
TSB-51 Implementation Aspects concerning the use of the R-Data
message in IS-136 (PN-3719)
PN-3731 Inter-operable implementation issues in IS-641
b) For AMPS
AMPS The specifications established in Norma Geral de
Telecomunicacoes n(degree)20/96 issued by the
Ministerio das Communicacoes
c) For Roaming
IS-41-C Networking Operations and Interswitch Feature
Transparency
3. PURCHASE PROCESS
Exhibit F sets forth the procedure agreed to by the Parties for the
purchases to be made under this Agreement.
4. FORECASTS
4.1 FORECASTS. At the end of each six-month period as of the Effective Date,
Telemig Celular shall deliver to Nortel a good faith rolling written
forecast of Telemig Celular's expected purchases of Products and Services
for the subsequent twelve (12) months period. Telemig Celular and Nortel
shall mutually define the form and content of the forecast and its form and
frequency may be modified from time to time by mutual agreement of Telemig
Celular and Nortel. Notwithstanding the foregoing, each such forecast shall
include a summary of the major components of the Cellular System to be
purchased during the period covered and the anticipated dates of Delivery
thereof, categorized as either "Switching Equipment" or "Site Equipment",
in each case including any associated Software. The Parties agree that all
forecasts delivered pursuant to this Section 4.1 are for planning purposes
only and shall create no binding obligations on the Parties.
5. CONTRACT ADMINISTRATION
5.1 CONTRACT ADMINISTRATION BY TELEMIG CELULAR'S ORGANIZATION. Telemig Celular
shall enter into separate agreements with each of the Project Suppliers and
shall be responsible for contract administration and coordination of
project activities within Telemig Celular's internal departments.
5.2 TELEMIG CELULAR'S PROJECT MANAGER. Telemig Celular shall, during the Term
of this Agreement, appoint a Project Manager for the project to be the
liaison with the Nortel's Project Manager, who shall:
(a) be fully cognizant of all the background of the project; and
(b) have authority to make day-to-day decisions, over the project and its
personnel without recourse to his head office;
5.2.1 Telemig Celular's Project Manager Responsibilities. Telemig Celular's
Project Manager shall be responsible for coordinating the Cellular
Network implementation between Nortel and Telemig Celular. This
coordination shall include review and approval of all quotations and
invoices, inventory' control of delivered equipment, ensurance of
compliance with the applicable Implementation Schedules; maintaining
the closest possible cooperation with Nortel's Project Manager; being
available at Sites as reasonably requested; monitoring of the overall
progress of project schedule; liaison with external parties for the
Cellular Network implementation, coordinating with Nortel to conclude
agreement on the Acceptance Tests; and supplying Nortel with
clarifications on the technical specification requirements.
5.3 NORTEL'S PROJECT MANAGER. During the Term of this Agreement, Nortel shall
appoint a Project Manager who shall:
(a) be fully cognizant of the background of the project; and
(b) have authority to make day-to-day decisions, over the project and its
personnel without recourse to his head office.
5.3.1 Nortel's Project Manager Responsibilities. Nortel's Project Manager
shall be responsible for project coordination and liaison with Telemig
Celular's Project Manager. Nortel's Project Manager responsibilities
shall include being available at Sites as reasonably requested;
ensuring compliance with Nortel's obligations under the Implementation
Schedule; coordinating with Telemig Celular to conclude agreement on
the Acceptance Tests; and maintaining the closest possible cooperation
with Telemig Celular's Project Manager.
5.4 NORTEL'S SUBCONTRACTORS. Nortel may employ subcontractors in carrying out
its obligations under this Agreement. Nortel's use of subcontractors shall
not relieve Nortel of its obligations and responsibilities under this
Agreement. Nortel shall supervise the work of Nortel's subcontractors and
shall be liable for any acts or omissions of such subcontractors. Telemig
Celular may, at any time, require Nortel to replace a subcontractor where,
in Telemig Celular's reasonable judgment, the subcontractor is not
performing adequately and/or quality standards are not respected. Any
delays or cost resulting from the replacement of a subcontractor shall be
borne by Nortel.
5.5 TELEMIG CELULAR'S MATERIALS REMAIN PROPERTY OF TELEMIG CELULAR. All plans,
drawings, designs and specifications, submitted by Telemig Celular or on
its behalf and marked confidential are Confidential Information to be
protected in accordance with Section 11 herein shall remain the property of
Telemig Celular, may be copied only in accordance with Section herein and
may not be disclosed to third parties by Nortel without Telemig Celular's
prior written consent. These materials shall be returned to Telemig Celular
promptly upon its request without any copy remaining with Nortel except for
copy to remain with Nortel's counsel for use before a court of law if
required by Nortel.
5.6 NORTEL'S PERSONNEL. Telemig Celular may at any time, request Nortel to
replace an employee where, in Telemig Celular's reasonable judgment. The
employee is not performing adequately. Any delays or costs resulting from
the replacement of Nortel's employee shall be borne by Nortel.
5.7 DOCUMENTS TO BECOME PROPERTY OF TELEMIG CELULAR. Except for Confidential
Information, the documents, which include plans, drawings, designs, and
specifications supplied by Nortel to Telemig Celular in connection with the
Products, shall be the property of Telemig Celular, provided, however, that
title to Nortel's intellectual property rights as stated in Section 10
shall not be conveyed to Telemig Celular at any time. In addition, Telemig
Celular shall have the full right to use the documents supplied by Nortel
which are Confidential Information in the course of the normal operation
and maintenance of the Cellular Network.
5.8 RESPONSIBILITY FOR DOCUMENTS. Each Party supplying technical data or
documents shall be responsible for the completeness and correctness of such
technical data or documents. Where it is found that such technical data or
documents are not complete or are incorrect, each Party shall notify the
responsible Party and thereafter such responsible Party shall promptly
complete and/or correct such technical data or documents.
6. PAYMENT, PRICING AND DISCOUNTS
6.1 GENERAL. The prices and discounts under this Agreement, as detailed in
Exhibit A. Apply to Products, Services and Software furnished by Nortel and
purchased by Telemig Celular in accordance with the Total Value Commitment
indicated in Section 2.2.1.
6.1.1 REMOVED
6.1.2 The Parties acknowledge and agree that the CFR values contained in
Exhibit A may vary depending on whether the Product is imported or
supplied locally, provided that the resulting Total Unitary Price of
the Product being supplied does not exceed the corresponding Total
Unitary Price stated in Exhibit A.
6.2 INVOICES.
6.2.1 Telemig Celular shall have no obligation to pay Nortel for any
charges, unless such charges are expressly authorized by this
Agreement, a Phase Acquisition Document, Purchase Order or a Change
Order and Telemig Celular has received an invoice for such charges.
6.2.2 Each invoice issued hereunder shall reference the Phase Acquisition
Document, the Purchase Order or a Change Order number and identify the
payment event charges and applicable taxes, if any.
6.3 TERMS OF PAYMENT. Telemig Celular shall pay invoiced amounts less any
disputed amounts as set forth below. All payments for Imported Products
shall be made based on their CFR values. All payments for In-Country
Products, Services and Software shall be made based on their Total Unitary
Prices as set forth in Exhibit A. In the event that Telemig Celular wishes
to purchase Imported Products and financing is not available, the Parties
agree to review the payment terms set forth in Section 6.4, consistently
with Brazilian import and currency exchange regulations then in force.
6.4 REMOVED
6.5 REMOVED
6.6 SOFTWARE. The payment terms for Software are set forth in Exhibit C.
6.7 REMOVED
6.8 TRAINING. One-hundred percent (100%) Total Unitary (R$) Price due for
Training shall be paid thirty (30) days after presentation by Nortel of the
relevant invoice for each completed course.
6.9 CURRENCY OF PRICES, ACCOUNTS AND PAYMENTS; IMPORT RESPONSIBILITIES AND
PAYMENT OF IMPORT DUTIES AND TAXES.
6.9.1 The Currency of Accounts shall be U.S. Dollars (US$) for Imported
Products or Brazilian Reais (R$) for In-Country Products and Services,
except as otherwise set forth in Section 6.9.3. Nortel shall identify
the Currency of Accounts used for determining prices and charges under
this Agreement.
6.9.2 The Prices set forth in US$ in Exhibit A for the In-Country Products
and Services shall be converted into Reais on the Effective Date using
the exchange rate for the sale of US dollars published by the Central
Bank of Brazil through the SISBACEN System, Code PTAX 800. Such Prices
are basic for the Effective Date and shall be adjusted once every
twelve (12) months from the Effective Date consistent with existing
legislation or for lesser periods if law permits to take into account
local inflation, in accordance with the relevant indices indicated
below. Furthermore, independently of the date of the issuance of a
Phase Acquisition Document or a Purchase Order, payments made under
that Phase Acquisition Document or Purchase Order for events occurring
after an annual adjustment shall reflect the corresponding adjustment.
- --------------------------------------------------------------------------------
Products and Services Adjustment Indices
- --------------------------------------------------------------------------------
In-Country Equipment and materials Index of the column 27 of the Conjuntura
Economica Magazine, published by Fundcao
Getulio Vargas ("FGV")
- --------------------------------------------------------------------------------
In-Country Services Index of the column 20 of the Conjuntura
Economica Magazine, published by FGV
- --------------------------------------------------------------------------------
6.9.3 On the date of the first delivery to Telemig Celular of any Product
manufactured in Brazil to replace an Imported Product, the CFR (US$)
Price contained in Exhibit A for the replaced Imported Product shall
be converted into Reais using the exchange rate for the sale of US
dollars published by the Central Bank of Brazil through the SISBACEN
System, Code PTAX800 on that date. Thereafter, the Reais Price for any
such Product manufactured in Brazil shall be adjusted on an annual
basis according to the variation of the index of the column 27 of the
Conjuntura Economica Magazine, published by FGV. Invoicing in Reais
for all BTS Equipment shall be initiated on or before October 1, 1999
and for Software on or before December 1, 1999, subject to compliance
with Brazilian applicable laws. The rate applicable to conversion into
Reais for invoicing purposes shall be the same as the one provided for
in this Section 6.9.3. effective on the first date of such invoicing.
6.9.4 REMOVED
6.9.5 To the extent Telemig Celular is the importer of record for a
Product, Nortel shall obtain in the name of Telemig Celular customs
clearance and any necessary governmental authorization for importation
into Brazil and exportation from the country of origin. Telemig
Celular shall be responsible for the timely payment of all Brazilian
import duties and taxes relating to the importation of the Imported
Products into Brazil.
6.10. TAXES
6.10.1 The Total Unitary Prices for the Products set forth in Exhibit A
have been calculated on the assumption that taxes directly incident on
the sale of Products or performance of Services are the Imposto Sobre
Produtos Industrializados (IPI), Imposto Sobre Circulacao de
Mercadorias e Servicos (ICMS), Imposto Sobre Servicos (ISS) and
Imposto de Importacao (II). In addition the Programa de Integracao
Social (PIS) and the Contribuicao para Financiamento da Seguridade
Social (COFINS) taxes have also been applied to the calculation of the
Total Unitary Prices for In-Country Products. If after the Effective
Date any of the foregoing taxes are increased, decreased, eliminated
or modified by operation of law or as a result of change in
interpretation of the law by the tax authorities or in case new taxes
are created that directly apply to the sale of the Products or
performance of the Services, the respective Total Unitary Prices will
be modified to reflect the change.
6.10.2 If after the Effective Date, any Brazilian taxes other than those
referred to in Section 6.10.1, having a measurable impact, in excess
of 3%, on the cost of In-Country Products or Services are increased,
decreased, created or extinguished, then the Parties will negotiate in
good faith an interim adjustment to the Total Unitary Prices set forth
in Exhibit A of the Products or Services affected and such interim
prices shall be applicable to any Purchase Orders issued by Telemig
Celular prior to the first subsequent annual adjustment of the Total
Unitary Prices as set forth in Section 6.9.2. If in the opinion of
Telemig Celular or Nortel, acting reasonably, the first subsequent
annual adjustment of the Total Unitary Prices (as set forth in Section
6.9.2) does not reflect adequately the effect of tax variation on the
Total Unitary Prices of the affected Products or Services, the Parties
will enter into negotiations with the objective of agreeing on a fair
and equitable adjustment of the Total Unitary Prices of such Products
and Services. For the purposes of this Section, Brazilian Taxes in
effect as of the Effective Date are as follows:
<TABLE>
<CAPTION>
Name Denomination Basis for Calculation Rate
<S> <C> <C> <C> <C>
1. INSS Instituto Nacional do Seguro Social Pay roll
Contribuicao Previdenciaria:
i Parte Empresa 20%
i Salario Educacao 2.5%
i INCRA 0.2%
i SENAI/SENAC 1.0%
i SESI/SESC 1.5%
i SEBRAE 0.6%
2. FGTS Fundo de Guarantia do Tempo de Servico Pay roll 8%
3. IOF Imposto sobre Operacoes de Credito, Cambio e Remittance Amount 0%
Seguro ou Relativas a Titulos ou Valores
Mobiliarios (on imported Services and Software)
4. IRF Imposto de Renda on Imported Services Remittance Amount 15%
</TABLE>
6.10.3 For any error, omission or inaccuracy in the tax rates applicable on
the Effective Date as set forth in Exhibit A, Nortel shall bear the
liability for any additional amounts owed by Telemig Celular. Nortel
shall pay Telemig Celular in Brazilian Reais an amount equal to the
difference between the amount of taxes set forth in Exhibit A and the
amount actually due to the Brazilian tax authorities. Nortel to the
extent possible shall make this payment to Telemig Celular in advance
of when Telemig Celular must make its payment to Brazilian tax
authorities. If Telemig Celular is indemnified by Nortel for a tax
liability under this Section, Nortel may have (a) the corresponding
amount refunded to the extent Telemig Celular subsequently recovers
such amount from the tax authorities or (b) request that the amount of
the indemnification be reduced or refunded to Nortel by Telemig
Celular, to the extent that Telemig Celular is entitled to a tax
credit or a tax benefit resulting from application of the indemnified
tax.
6.11 PAST DUE PAYMENTS. Any payment not made as provided in this Section 6 shall
be subject to a late payment charge applied against the unpaid portion of
the charge. The late payment charge shall be applied daily after the due
dates until payment is received. For U.S. Dollar late payments, the daily
late payment charge shall be calculated by multiplying the outstanding
balance by the number of days of delay times twelve percent (12%) per annum
divided by 365 days. For Brazilian Reais late payments the daily rate
payment charge shall be calculated by multiplying the outstanding balance
by the number of days of delay times the annual ANBID rate plus six percent
(6%) per annum divided by 365 days. Any payments more than ninety (90) days
past due shall be considered a Nortel right to terminate under Section
13.8, except where such sums are in dispute as provided in Section 6.12.
6.12 DISPUTED PAYMENTS. Telemig Celular shall notify Nortel of any disputed
invoice within fifteen (15) days of its receipt of such invoice. The
Parties will use their diligent efforts to resolve such dispute
expeditiously. Should Telemig Celular dispute any sums due to Nortel under
this Agreement, Telemig Celular shall pay, in accordance with this
Agreement that part not in dispute. Telemig Celular shall be liable to
Nortel for late payment charges computed in accordance with Section 6.11,
for the amounts due to Nortel should the dispute be resolved in Nortel's
favor. The time for paying the portion of the invoice in dispute shall be
extended by a period of time equal to the time between Nortel's receipt of
such notice from Telemig Celular and the resolution of such dispute plus
five (5) business days.
7. TELEMIG CELULAR RESPONSIBILITIES
Without further limiting the obligations of Telemig Celular under this
Agreement, Telemig Celular agrees to perform the following duties:
7.1 RESPONSIBILITY MATRIX. Telemig Celular shall discharge those
responsibilities identified as those of Telemig Celular, including Telemig
Celular's portion of responsibilities that are to be jointly performed by
Telemig Celular and Nortel, defined in the "Responsibility Matrix" for each
Phase.
7.2 PERFORM TO SCHEDULE. Telemig Celular shall negotiate in good faith the
Implementation Schedule for each Phase and shall adhere to the
Implementation Schedule for performance of its responsibilities set forth
therein and use reasonable efforts to minimize all delays.
7.3 COSTS. Telemig Celular shall bear all the costs of its own legal fees,
interconnection facilities, telephone and utility charges and other
services and items being supplied by Nortel under this Agreement. Telemig
Celular shall be responsible for payment of the costs of additional customs
bonded warehouse storage fees attributable to Telemig Celular's failure to
make payment of importation duties and taxes when due, as set forth in
Section 6.9.5.
7.4 PUNCHLIST. Telemig Celular shall issue the Punchlist.
7.5 ENGINEERING INFORMATION. Telemig Celular shall:
7.5.1 Furnish necessary information reasonably requested by Nortel and in
accordance with the Responsibility Matrix and Implementation Schedule;
7.5.2 Provide, upon reasonable request, Cellular Network usage information
where Nortel's analysis of the Cellular System's requirements has been
requested by Telemig Celular or is otherwise required by a specific
provision of this Agreement in order for Nortel to discharge its
obligations under this Agreement and where the information requested
is reasonably necessary for these purposes.
7.6 OPERATION AND MAINTENANCE. Telemig Celular shall be responsible for the
lawful and proper operation and maintenance of the Cellular Network after
the Ready for In-Service date.
7.7 EXPORT CONTROLS. Where necessitated by the country of origin of the
Products, Telemig Celular shall comply with all applicable export laws and
regulations of the country of origin. Specifically, but without limitation,
where the Products are so subject to export controls. Telemig Celular
agrees that it will not resell or re-export Products or technical data in
any form without obtaining appropriate export or re-export licenses from
the government of the exporting country.
7.8 CELLULAR NETWORK DESIGN AND PERFORMANCE. Telemig Celular shall be
responsible for design specifications, approvals and the Cellular Network
performance resulting therefrom.
7.9 INCORRECT DELIVERY. If Telemig Celular requests that a Product be delivered
to a Site other than the one specified in the Phase Acquisition Document or
Purchase Order, Telemig Celular shall bear any additional expenses in
delivering it to another Site (e.g. transportation expenses, storage,
etc.).
7.10 OTHER OBLIGATIONS. Telemig Celular shall perform all other of its
obligations set out in this Agreement including the following:
(a) allow Nortel's personnel employed in the project access to the Sites
at all reasonable hours, and to permit the use by such personnel of
all routes, roadways and ramps under the control of Telemig Celular
when such access and use are necessary for the proper performance of
Nortel's obligations hereunder;
(b) permit all Nortel's personnel employed in the project hereunder to use
at reasonable times such portions of existing plant or equipment under
Telemig Celular's control as necessary for the proper completion of
such project, and as it will not interfere with Telemig Celular's
business operations;
(c) take reasonable security measures to safeguard Nortel's equipment on
Telemig Celular's premises against all damages or loss caused by
Telemig Celular's employees from the Delivery until the date of Final
Acceptance of all Products;
(d) ensure that Telemig Celular's personnel carrying out activities at the
Sites do not interfere with the progress of Nortel's obligations
hereunder;
(e) provide Nortel with the Nota Fiscal forms in a timely fashion as
Telemig Celular is the importer of record so as to permit Nortel to
fill out said forms appropriately and arrange for transportation of
the Products from customs clearance to Telemig Celular's warehouse or
to the applicable installation Site;
(f) use all reasonable efforts to ensure the PSTN interconnections by the
dates set forth in the Implementation Schedule. Any delay in Telemig
Celular's obtention of the PSTN interconnection to proceed with such
interconnection will temporarily relieve Nortel from meeting scheduled
commitments which are dependent on the interconnection but solely for
the period of time resulting directly from such delay in obtaining the
interconnection;
(g) take all necessary actions in accordance with the relevant Phase
Responsibility Matrix to ensure that Sites are ready and available for
commencement of installation; and
(h) make available at Telemig Celular's warehouse facility a
representative to acknowledge receipt of the Products.
8. NORTEL RESPONSIBILITIES AND REPRESENTATIONS
Nortel, without further limiting the obligations of Nortel under this
Agreement, agrees to perform the following duties:
8.1 RESPONSIBILITY MATRIX. Nortel shall discharge those responsibilities
identified as those of Nortel, including Nortel's portion of
responsibilities that are to be jointly performed by Telemig Celular and
Nortel, defined in each Phase's Responsibility Matrix.
8.2 PERFORM TO SCHEDULE. Nortel shall negotiate in good faith the
Implementation Schedule and adhere to the Implementation Schedule for
performance of its responsibilities set forth therein.
8.3 ACCEPTANCE TESTS. Perform acceptance tests of all Products in accordance
with the procedures set forth in Exhibit B.
8.4 PUNCHLIST. Nortel shall resolve the items indicated on the Punchlist, in
accordance with the procedures set forth in Exhibit B.
8.5 INFORMATION REQUESTED BY TELEMIG CELULAR. Nortel shall furnish to Telemig
Celular necessary information reasonably requested by Telemig Celular and
in accordance with the Responsibility Matrix and Implementation Schedule.
8.6 UPGRADES, NEW PRODUCTS OR SERVICES. Nortel shall make new Products and
Services and upgraded Software available to Telemig Celular when such new
Products, Services or Software upgrades become available.
8.7 TECHNICAL ASSISTANCE AND SERVICES SUPPORT. Free customer service support
(TAS/ETAS) for the Cellular System shall be provided on a per switch basis
for a period of twenty-four (24) months. The support period for each switch
and related cell site shall commence on the earlier of Final Acceptance or
ninety (90) days after Ready for In-Service. The description of Nortel's
customer service support is set forth in Exhibit D.
8.8 RETROFITS. Provided that Telemig Celular has consented in writing, Nortel
shall provide a retrofit package or any change in cellular TDMA/AMPS
standards subsequently put into effect by the government, regulatory
agencies, the TIA, the EIA at Nortel's then prevailing charges.
8.9 DOCUMENTATION. Nortel shall provide Telemig Celular with the Documentation
as set forth in Exhibit E.
8.10 TRAINING. Nortel shall provide the training courses and manuals for Telemig
Celular's employees as set forth in Exhibit H. Telemig Celular shall bear
the travel and living expenses of its personnel. Nortel shall make
available to Telemig Celular its most updated training course description.
8.11 CONFORMITY WITH LAW. The Products and Services ordered hereunder shall
comply with applicable federal, state and local laws, rules and
regulations. Any impact caused by laws, rules and regulations promulgated
after the Effective Date will be subject to agreement of the Parties.
8.12 INPI REGISTRATION. To the extent certain Imported Services under this
Agreement constitute technical assistance, Telemig Celular and Nortel shall
cooperate in registering an agreement for the rendering of such Services
pursuant to the terms of this Agreement with the Brazilian National
Institute of Industrial Property (INPI) to allow the remittance by Telemig
Celular of amounts due hereunder to Nortel for the Imported Services
qualifying as technical assistance.
8.13 SAFETY AND LEGAL STANDARDS. Nortel is responsible for ensuring that proper
safety measures are taken to avoid accidents and that all work performed is
done in accordance with the relevant health and occupational safety laws,
whether the work is performed by Nortel or by Nortel's subcontractors.
Nortel shall be responsible at its own expense for ensuring that all
necessary procedures are in place and supervision is provided to ensure the
safety of all Nortel's personnel or subcontractors who may at any time or
for whatever reason be present on any of the Sites as part of Nortel
carrying out the Services, including but not limited to the Installation
Services. Nortel shall comply with Telemig Celular's security policy for
Sites.
8.14 INSPECTION. Telemig Celular and its employees, agents or representatives
shall at all times have the right to inspect the performance by Nortel of
the Services referred to in Section 2.5. Telemig Celular hall have the
right to order the suspension of a Service being executed, if Telemig
Celular acting reasonably determines that the work is not in conformity
with the terms of this Agreement and applicable laws and regulations. If
Nortel demonstrates that the suspended Service was being performed in
conformity with this Agreement and applicable laws and regulations, then
Nortel shall not be responsible for any delays, penalties or additional
cost arising from the suspension of such Services.
8.15 REPAIR DEPOT. Nortel shall maintain in Brazil a circuit board and component
exchange depot to fulfill Nortel's repair obligations in Exhibit C.
8.16 INCORRECT DELIVERY; EXCESS ITEMS. If any Product is delivered to an
incorrect point, any additional expenses incurred in delivering it to the
correct point of delivery and the risk of transportation shall be borne by
Nortel. Nortel is also responsible for items delivered in excess of those
required in the Phase Acquisition Document or Purchase Order or Change
Order.
8.17 MARKING AND IDENTIFYING GOODS. Nortel's prices for Products include charges
for packing and marking shipping containers in accordance with Nortel's
standard practices. In normal circumstances, Nortel shall:
(i) Enclose a packing memorandum with each shipment and, if shipment
contains more than one package, identify the package containing the
memorandum; and
(ii) Mark Nortel's manufactured Products as practicable for
identification in accordance with Nortel's marking specifications (e.g.,
model/serial number and month and year of manufacture.)
In order to meet Telemig Celular's requests Nortel agrees to work with
Telemig Celular to determine the feasibility of marking shipping canons in
accordance with Telemig Celular's specifications. Where in order to meet
Telemig Celular's requests Nortel packs and/or is required to mark shipping
cartons in accordance with Telemig Celular's specifications. Nortel may
invoice Telemig Celular additional charges for any material efforts
required for such packing and/or marking.
8.18 NORTEL INSURANCE COVERAGE. Nortel agrees to maintain, so long as it
performs installation or other Services hereunder, the following insurance
coverage as well as all other insurance required by law in the jurisdiction
where the work is performed:
8.18.1 Worker's Compensation. Workers' compensation and related insurance
as required by law.
8.18.2 Transportation Insurance. Insurance coverage relating to the
transportation of the Products from the place of manufacture up to the
place of Delivery.
8.18.3 General Liability. The Commercial general liability insurance
coverage, with a limit of at least Ten Million Reais (R10.000.000,00)
per occurrence, and comprehensive motor vehicle liability coverage
with a limit of at least Two Million Reais (R2.000.000,00) for bodily
injury, including death, to any one person. Two Million Reais
(R2.000.000,00) for each occurrence of property damage, and One
Million Reais (R$1.000.000,00) for any other occurrence. The
above-indicated amounts shall be adjusted according to the provisions
of Section 6.9.2 taking into account the index of column 27 of
Conjuntura Economica Magazine published by FGV.
Nortel shall have the option where permitted by law to self-insure any
or all of the foregoing insurance. In the event Nortel exercises said
option, Nortel shall timely inform Telemig Celular in writing.
8.18.4 Demonstration of Insurance. Upon request by Telemig Celular. Nortel
shall demonstrate insurance coverage as required above.
9. WARRANTIES
9.1 PRODUCT WARRANTY. Nortel warrants to Telemig Celular that:
9.1.1 Products. For the period of twenty-four (24) months commencing on the
earlier of Final Acceptance or ninety (90) days after Ready for
in-Service, Nortel's Products will be free from defects in material
and workmanship, and will conform to Nortel's specifications. The
Warranty Period for a Product or part thereof repaired or provided as
a replacement under this Warranty is twelve (12) months or the
unexpired term of the Warranty Period applicable to the repaired or
replaced Product or part, whichever is longer.
9.2 APPLICATION PROCEDURES FOR PRODUCT WARRANTY. The procedures regarding
application for Product Warranty are set forth in Exhibit G.
9.3 SOFTWARE WARRANTY.
9.3.1 Nortel warrants to Telemig Celular that each item of Software, when
delivered to Telemig Celular and properly installed and operated, will
be free from defects which result in reproducible malfunctions which
materially affect the use of the Software in accordance with Nortel's
specifications therefore for a period of twenty four (24) months from
the earlier of Final Acceptance or ninety (90) days after Ready for
in-Service.
9.3.2 With respect to Software from a supplier other than Nortel, Nortel
does hereby assign to Telemig Celular the warranties given to Nortel
by its supplier of such items and such warranties will prevail for a
term of at least twelve (12) months from the earlier of Final
Acceptance or ninety (90) days after Ready for In-Service. If Nortel
is prevented from assigning such warranties, Nortel itself shall fully
warrant such Software for a period of twelve (12) months from Final
Acceptance.
9.4 WARRANTY FOR SERVICES. Nortel warrants to Telemig Celular that Services
will be performed in a careful and workmanlike manner and in accordance
with Nortel's Specifications or any mutually agreed specification for such
Services using material free from defects except where such material is
provided by Telemig Celular. If the Services prove to be not so performed
and if Telemig Celular notifies Nortel within a six (6) month period
commencing on the date of completion of the Services, Nortel, at its option
and expense, either will promptly correct any defects and deficiencies for
which it is responsible or promptly render a full or pro-rated refund or
credit based on the original charge for the Services.
9.5 NO TROUBLE FOUND. If Nortel determines that a Product for which a warranty
is claimed is not defective or not non-conforming, Telemig Celular shall
pay Nortel's reasonably incurred costs of handling, inspecting, testing,
and transporting and, if applicable, traveling and related expenses.
However, if upon return to service the Product apparently fails to operate
properly, Telemig Celular and Nortel shall jointly work to determine the
cause of such failure and, if it is determined that the failure in fact was
the result of a warranted defect or nonconformity in such item, Telemig
Celular's obligation to pay such costs shall be extinguished. In such case
any amount previously paid to Nortel shall promptly be refunded to Telemig
Celular.
9.6 SlGNALING SYSTEMS WARRANTY. Nortel warrants that the operation of its R2,
ISUP/SS7, IS-41 or IS-136 signaling systems comply with the standards in
effect in Brazil on the Effective Date. Connectivity equipment variations
requiring a change in mix or volume to provide for different connectivity
strategies of these standard signaling systems are provisionable,
chargeable items.
Nortel will assume the cost of modifying its Software or Product to the
extent interface incompatibilities to other operator or vendor equipment
arises from the Product deviation from the signaling standards.
Temporary or long term changes that Nortel may be able to supply in the
form in software work-around solutions and/or datafill to overcome other
operator or vendor network deviations from the standards will be provided
free of charge, subject to joint effort to perform the pertinent analysis.
The Parties agree that evolution in generic signaling interfaces in Brazil
after the Effective Date shall be addressed on a case by case basis. Nortel
normally provides the software requirements to comply with the evolution in
generic signaling interfaces free of charge. New Product requirements would
be provisionable, chargeable items.
9.7 BILLING SYSTEM/PSTN COMPATIBILITY WARRANTY. Nortel warrants that its MTX
CDR (Call Detail Record System) Product are PSTN compatible and the
operation of its MTX CDR System complies with the standards in effect in
Brazil on the Effective Date.
Nortel will assume the cost of modifying its MTX CDR or Product to the
extent it is incompatible with other operator or vendor networks and
equipment that comply with generally acceptable billing standards.
In regards to MTX CDR System's compatibility with the PSTN, temporary or
long term changes that Nortel may be able to do in software work-around
solutions and/or datafill to overcome other operator or vendor network
deviations from the requirements will be provided free of charge, subject
to a joint effort to perform the pertinent analysis.
The Parties agree that evolutions in billing and PSTN compatibility
requirements in the Brazilian market after the Effective Date shall be
addressed on a case by case basis. Nortel normally provides the software
requirements to comply with the evolution in billing standards free of
charge. New hardware requirements would be provisionable chargeable items.
9.8 GUARANTEED CAPACITIES.
9.8.1 Nortel warrants that each Network Element and Product identified in
Exhibit A, provided to Telemig Celular pursuant to this Agreement,
shall at all times meet or exceed the applicable guaranteed capacities
determined for each phase in accordance with the associated high level
design (the "Guaranteed Capacities").
9.8.2 If Telemig Celular believes that Nortel has breached its guarantee
under Section 9.8.1 Telemig Celular shall so notify Nortel in writing,
such notice to set forth in reasonable detail the nature of the
suspected breach and the likely impact of such breach on the affected
System(s). If Nortel fails, within thirty (30) days after the date of
Telemig Celular's notice (the "Investigation Period"), to establish,
to Telemig Celular's reasonable satisfaction, that the affected
Product is in compliance with the applicable Guaranteed Capacities or
to cause such Product to so comply, then Telemig Celular shall be
entitled to compensation from Nortel as set forth in this Section 9.8,
provided that Telemig Celular gives written notice to Nortel of its
intent to seek compensation hereunder within fifteen (15) days after
the expiration of such thirty (30) day period.
9.8.3 With respect to any Product described in Exhibit A, that fails to
fulfill the applicable Guaranteed Capacities, Nortel will provide any
additional or enhanced Products and the services necessary to cause
such non-conforming Products (considered together with such additional
Products) to comply with the applicable Guaranteed Capacities. Nortel
shall provide such additional or enhanced Products and services at its
own expense, except to the extent that the Products so provided by
Nortel result in additional capacity (as determined in accordance with
the applicable sections of the high level design associated with the
given phase being available to Telemig Celular in excess of the
Guaranteed Capacity for the non-conforming Product (such excess, the
Excess Capacity), in which case Telemig Celular shall pay Nortel an
amount (not to exceed the Total Unitary Price of such additional
Products) proportional to the Excess Capacity but only to the extent
that the Excess Capacity exceeds the Guaranteed Capacity by 10% or
more. Notwithstanding the foregoing, Nortel shall not issue any
invoice to Telemig Celular, and Telemig Celular shall not be required
to pay any amount, in respect of any Excess Capacity, unless and until
Telemig Celular first uses such Excess Capacity. Title and risk of
loss to any additional Products delivered pursuant to this Section 9.8
shall pass to Telemig Celular at Delivery.
9.9 COSTS NOT TO BE BORNE BY NORTEL. Notwithstanding anything to the contrary
in this Section 9, Nortel shall not be responsible for any of the following
costs incurred by Telemig Celular in connection with Products and Services
provided to Telemig Celular pursuant to Section 9.8.3.
(a) land acquisition or lease costs;
(b) building costs;
(c) operational or maintenance costs associated with the additional
Products; and lost revenue;
9.10 CONSEQUENCES OF FAILURE TO FULFILL THE GUARANTEED CAPACITIES. The provision
of additional Products and Services pursuant to Section 9.8.3, shall be
Telemig Celular's sole remedy for a breach of Section 9.8.1. and Nortel's
sole obligation with respect to the failure of any Product acquired by
Telemig Celular hereunder to fulfill the Guaranteed Capacities provided
that the Products thereafter fulfill the Guaranteed Capacities.
9.11 PRODUCT CHANGES OR SUBSTITUTIONS BY NORTEL. At any time during its
performance of this Agreement, Nortel may implement changes in the Products
identified in Exhibit A, modify the drawings and specifications relating
thereto, or substitute Products of a similar or more recent design. Nortel
will provide Telemig Celular with advance written notice of any change,
modification or substitution, including notice of Nortel's intention to
change the Product price. The notice shall be given at least thirty (30)
days in advance of the effective date of the change, modification or
substitution. However, notice of ten (10) days will be necessary where
Nortel reasonably considers the change as minor, where there is no price
change and where items (a) through (g) set forth below are complied with.
Changes, modifications or substitutions must comply with each of the
following requirements:
(a) it must not adversely affect Telemig Celular's ability to fulfill
its obligations under the Concession or ability to operate its Cellular
Network in accordance with the specifications;
(b) it must not adversely affect physical or functional
interchangeability or performance specifications unless otherwise agreed in
writing by Telemig Celular;
(c) the price for equivalent performance must be the same or lower
than the price provided in this Agreement unless otherwise agreed in
writing by Telemig Celular. This price comparison shall include all
pertinent and related costs to Telemig Celular;
(d) it must not detract from the safety of the Product;
(e) it must have received all necessary regulatory approvals,
including type-acceptance or type-certification, electrical safety agency
approval, etc;
(f) it must be functionally equivalent and plug-compatible with the
prior Product;
(g) it must not in any way reduce or in any way diminish Nortel's
obligations under the warranties provided in this Agreement nor may it
reduce or diminish in any way the scope of warranties and representations
provided to Telemig Celular under this Agreement.
Where each of these requirements has been met to Telemig Celular's
satisfaction Telemig Celular and Nortel shall agree upon a Change Order
reflecting Nortel's proposal.
With respect to changes, modifications, and substitutions that do not
conform to the foregoing requirements, Nortel shall notify Telemig Celular
in writing thirty (30) days prior to their effective dates. In the event
that any such change is not desired by Telemig Celular, Telemig Celular
shall notify Nortel within thirty (30) days from the date of notice and
Nortel shall not furnish any such changed Products to Telemig Celular on
any orders in process at time Nortel is so notified. If a change is
acceptable to Telemig Celular, such change shall be the reflected in a
Change Order.
9.12 YEAR 2000 WARRANTY. Nortel represents and warrants that the Products shall
function, during the applicable Warranty period, with respect to any date
dependent operations prior to, into and through the Year 2000, without any
service affecting non-conformance to its applicable specifications. Nortel
shall in a timely manner designate any hardware and/or any specific
software load or release necessary to be installed with respect to such
Products and Nortel's warranty hereunder is subject to the installation
thereof. If any Product fails to so function, Telemig Celular's remedy and
Nortel's obligation under this warranty is for Nortel to correct such
failure through, at Nortel's option, the repair or replacement or
modification of the relevant hardware and/or software of such Product or
such other actions as Nortel reasonably determines to be appropriate, all
in the time, manner and upon the conditions set out in the hardware and/or
software Warranty provisions of this Agreement with respect to the
Products. The provisions set forth in this Section do not constitute a
representation that the date format used by any Product supplied hereunder
complies with any particular standard. Certain products may continue to use
year representations that do not use four digits where such representations
can be interpreted without ambiguity as to century' and will not give rise
to a breach of the warranty hereunder.
9.13 DISCLAIM1ER OF WARRANTIES/LIMITATION OF LIABILITY.
9.13.1 Exclusions. Telemig Celular hereby agrees that Nortel shall not be
liable or responsible for any deficiencies resulting from:
(a) Nortel's reliance on erroneous material information furnished by
Telemig Celular to Nortel in the Network Documents or agreed to in a
document signed by Telemig Celular Project Manager or an authorized
representative;
(b) reasons of Force Majeure;
(c) unauthorized Telemig Celular material changes, modifications or
revisions to the Products;
(d) as to the Guaranteed Capacities, material reasons attributable to
Telemig Celular, and including: (A) Telemig Celular's failure to apply
Nortel's explicit plans or instructions for system design, preventive and
remedial maintenance, frequency management, parameter adjustments and cell
site traffic engineering for radio capacity; (B) Telemig Celular's failure
to implement all Nortel-recommended recovery and system stabilization
procedures; (C) Telemig Celular's decision not to implement Software
Upgrades and Software Patches promptly upon their availability where such
Software Upgrades and Software Patches are made available by Nortel to
Telemig Celular as provided in this Agreement; (D) Telemig Celular's
failure to replace defective circuit packs; (E) Telemig Celular's failure
to follow applicable explicit instructions of Nortel, where such
instructions are capable of reasonable interpretation and are unambiguous:
(e) modifications, misuse, neglect, or abuse of the Products, except
when made, done or caused by Nortel; improper wiring, repairing, splicing,
alteration, installation, storage or maintenance, except when made, done or
caused by Nortel; use in a manner not in accordance with Nortel's or
vendor's specifications, operating instructions or software license to use
or failure of Telemig Celular to apply previously applicable Nortel
modifications and corrections;
(f) defects in products (and related software) neither manufactured
nor supplied by Nortel under the terms of this Agreement.
In addition, Nortel makes no warranty with respect to Products which have
had their serial numbers or months and year of manufacture removed,
obliterated or altered, and with respect to expendable items, including,
without limitation, fuses, light bulbs, motor brushes, and the like.
9.14. Network Expansion and Spares
9.14.1 REMOVED
9.14.2 Network Expansion Availability. For a period of five (5) years from
the expiration of the Term, Nortel shall make available to Telemig
Celular standard Nortel manufactured Products and Nortel developed
Software that is compatible and functionally equivalent to and will
permit normal Network expansion within the parameter defined by the
specifications and under terms and conditions (including prices)
mutually agreed to by Telemig Celular and Nortel. If Nortel
discontinues the supply of compatible standard Products or Software
during such period of time, and such is not reasonably available from
any other vendor, then Nortel shall make available to Telemig Celular
a commercially reasonable Product for migration to Nortel's
then-current products offerings similar functionality.
Subject to the foregoing nothing herein shall bar Nortel from
discontinuing individual items of hardware Products. Nortel shall
notify Telemig Celular, usually at least one (1) year, before Nortel
discontinues accepting orders for an item of Nortel's manufactured
Product sold under this Agreement. Where Nortel offers a Product for
sale that is equivalent in form, fit and function, the notification
period may vary. Notwithstanding the foregoing, Nortel agrees that it
will not discontinue accepting orders for Products until Nortel and
Telemig Celular have agreed upon a mutually acceptable transition plan
that takes into account Telemig Celular's existing investment in the
item scheduled for discontinuance, including a last opportunity to
order additional numbers of such Products to include in its inventory.
9.14.3 Spare Parts Availability. Nortel warrants the availability of spare
parts or their functional equivalent for the Products for a period of
five (5) years from the expiration of the Term. After the expiration
of the Term, prices for spare parts shall be those in effect at the
time of order placement. Should Nortel during the aforesaid period
discontinue production of any spare parts, Nortel will give Telemig
Celular advance written notice to enable Telemig Celular to place
orders for its requirements of spare parts or enter into any other
mutually satisfactory arrangements with Nortel prior to discontinuance
of production.
10. SOFTWARE LICENSE AND INTELLECTUAL PROPERTY RIGHTS
10.1 RIGHT TO USE SOFTWARE LICENSE. Nortel reserves title to Software and hereby
grants to Telemig Celular a right to use license for said Software either
(i) on a perpetual basis against payment of the respective Software License
Fee set forth in the specific table in Exhibit A or (ii) on a term basis
against payment of the respective Software License Fee set forth in the
specific table in Exhibit A and subject to the terms and conditions
contained in Exhibit C. With respect to Software provided from a supplier
other than Nortel, Nortel warrants it has the right to grant a sublicense
to Telemig Celular to use the Software, in accordance with the terms and
conditions set forth in this Agreement. Such expressly granted rights are
for use of the Software to open the Cellular Network in the Territory only.
10.2 DEFENSE AGAINST INFRINGEMENT CLAIMS. In any claim, action, suit or legal,
arbitration, mediation or other proceedings, Nortel, at Nortel's expense,
shall defend Telemig Celular, directors, officers, agents and employees,
jointly and severally, against any claim that Nortel Products, including
Software, supplied hereunder, (collectively, the "Indemnified Products")
infringes any patent or copyright, trademark, trade secret or other
tangible or intangible property right, whether Brazilian or foreign, which
is recognized or the judgment of which is enforceable in the Territory
(collectively, "Proprietary Rights"), by reason of their use in furnishing
cellular services in accordance with Nortel's specifications provided that
(i) Telemig Celular notifies Nortel in writing of the claim, promptly, but
no later than thirty (30) days after Telemig Celular has received written
notice of such claim, (ii) Nortel has sole control of the defense,
including appeals, and all related settlement negotiations, and (iii) upon
Nortel's request, Telemig Celular gives Nortel information and reasonable
assistance for the defense. Telemig Celular may, at in sole cost, engage
counsel to confer with Nortel in connection with any such claim. Nortel
shall reimburse Telemig Celular its actual reasonable costs for personnel
(including legal counsel) or resources engaged in providing information or
assistance requested by Nortel. Nortel shall indemnify and hold harmless
Telemig Celular, its officers, agents and employees against any such
claims, demands, causes of action, costs, expenses, liabilities, damages or
losses, finally awarded against Telemig Celular by a court of law, agreed
to in settlement or awarded by any other body or person authorized under
law or contract to award such damages on account of such alleged
infringement or violation.
10.3 NORTEL TO ACT. If Telemig Celular's use of the Indemnified Products shall
be enjoined, or in Nortel's opinion, is likely to be enjoined, Nortel
shall, at its option and expense, either procure the right for Telemig
Celular to continue using such Indemnified Products or replace or modify
the Indemnified Products so that they become non-infringing. If none of the
foregoing options is practical, Nortel will remove the enjoined Indemnified
Products and refund to Telemig Celular any amounts paid to Nortel, less a
reasonable charge for any actual period of use by Telemig Celular should
the Indemnified Product so removed be a component of the Cellular Network
and such removal causes any part of the Cellular Network not to meet the
Guaranteed Capacities, then Nortel shall be liable for returning the
Product to the Guaranteed Capacities and for direct damages caused to
Telemig Celular resulting from such actions.
10.4 INFORMATION SUPPLIED BY TELEMIG CELULAR. Notwithstanding the above, Nortel
has no liability for any claim of Proprietary Right infringement to the
extent that (i) it arises directly and wholly from adherence to
specifications, designs, drawings or instructions furnished by Telemig
Celular; or (ii) arises from adherence to instructions to apply Telemig
Celular's trademark, trade name or other company identification; or (iii)
resides in Project Suppliers' equipment which is not of Nortel's origin and
which is furnished by Telemig Celular to Nortel for use under this
Agreement or (iv) relates to uses of Indemnified Products provided by
Nortel in combination with other Indemnified Products furnished either by
Nortel or other, which combination was not installed, recommended or
otherwise approved by Nortel. In the foregoing cases numbered (i) through
(iv), Telemig Celular will defend and save Nortel harmless, subject to the
same terms and conditions and exceptions stated above in Sections 10.5 and
10.6 with respect to the Nortel's obligations.
11. CONFIDENTIALITY
11.1 CONFIDENTIAL INFORMATION DEFINED. "Confidential Information" shall mean
that information disclosed by one Party to the other which at the time of
disclosure is designated as confidential (or like designation), is
disclosed in circumstances of confidence or would be understood by the
Parties exercising reasonable business judgment to be confidential pursuant
to this Agreement and shall include, without implied limitation, formulas,
processes, designs, photographs, plans, samples, Product performance
reports, subscriber lists, pricing information, studies, findings,
inventions, ideas, drawings, schematics, sketches, specifications, parts
lists, technical data, data bases, software in any form, flowcharts,
algorithms, and other business and technical information. Confidential
Information may be communicated orally, in writing, by electronic or
magnetic media, by visual observation and by other means. The Party
receiving said notification shall, from that time forward treat such
information as proprietary. Excluded from Confidential Information is that
which the recipient had in its possession without confidential limitation
prior to disclosure, which is independently developed by either Party,
which is known or becomes known to the general public without breach of
this Agreement or which is rightfully received from a third Party and
without confidential limitation.
11.2 EXCHANGE OF INFORMATION. From time to time during the performance of this
Agreement. The Parties may deem if necessary to provide each other with
Confidential Information. The Parties agree;
11.2.1 Nondisclosure. Each of them shall maintain the confidentiality of
such Confidential Information and not disclose it to any third Party
except as authorized by the original disclosing Party in writing.
11.2.2 "Need to Know" Disclosure. Each of them shall restrict disclosure of
Confidential Information only to employees and Authorized Agents who
have a "need to know." Such Confidential Information shall be handled
with the same degree of care that the receiving Party applies to its
own Confidential Information but in no event no less than reasonable
care.
11.2.3 Precautions. Each of them shall take all necessary and appropriate
precautions to guard the confidentiality of Confidential Information,
including informing its employees and authorized agents who handle
such Confidential Information that it is confidential and not to be
disclosed to others, but in no event, less than reasonable care.
11.2.4 Ownership. Confidential Information is and shall at all times remain
the property of the disclosing Party. No use of any Confidential
Information is permitted except as otherwise provided herein and no
license to a Party under any trademark, patent, copyright, mask work
or any other intellectual property right, is either granted or implied
by the conveying of Confidential Information to such Party.
11.2.5 Use. Each of them shall use such Confidential Information only as
required for the purposes of this Agreement.
11.2.6 Reproduction. Confidential Information furnished in written,
pictorial magnetic or other tangible form shall not be reproduced or
copied, in whole or part, except as reasonably necessary (i) by Nortel
for its performance under this Agreement, and (ii) by Telemig Celular
for its installation, operation and maintenance of items furnished by
Nortel under this Agreement; if copied or reproduced shall bear the
same notices or legends, if any, as the originals and shall, together
with any full or partial copies thereof, be returned, destroyed or
erased (including any computer memory thereof) when no longer needed
for the purposes authorized under this Agreement. The receiving Party
shall use reasonable efforts to return, destroy, or erase such
tangible Confidential Information, (including copies, reproductions or
other documents containing Confidential Information) within ten (10)
business days of the disclosing Party's written request.
11.2.7 Survival. This Section shall continue until termination of this
Agreement; provided, however that all obligations hereunder with
respect to Confidential information received prior to such expiration,
cancellation or termination of this Agreement shall survive such
expiration, cancellation or termination for three (3) years
thereafter, if the Confidential information is business information,
or for five (5) years thereafter, if the Confidential Information is
technical.
11.3 AGREEMENT DISCLOSURE. Except as may be required by applicable law, neither
Nortel nor Telemig Celular shall disclose to any third party the contents
of this Agreement, the Exhibits or any amendments hereto or thereto for a
period of two (2) years after the termination of this Agreement without the
prior written consent of the other Party. Additionally, neither Party shall
disclose the existence of this Agreement where both Parties agree in
writing in advance upon the manner and content of such disclosure. Nortel
to the extent appropriate can disclose the content of the Agreement to its
subcontractors, provided that such subcontractors agree in writing to
maintain such information confidential. Telemig Celular may disclose this
Agreement to banks and financing entities with a view to obtaining funds
provided that the said banks and financing entities agree, in writing to
maintain such information Confidential.
11.4 THIRD PARTIES. Except as provided below with respect to Authorized Agents,
neither Party shall disclose Confidential Information of the other Party
hereto to any third person without such other Party's prior written
consent. Any such consent may be conditioned upon execution by the third
person of a nondisclosure agreement in a form satisfactory to the Party
whose Confidential Information is being disclosed.
11.5 AUTHORIZED AGENTS. For purposes of this Section 11, the term Authorized
Agent" includes an attorney, a consultant, a subcontractor, a Project
Supplier or other third Party, but only to the extent such Party is
performing or enforcing (or assisting the receiving Party to perform or
enforce) or advising the receiving Party with respect to its rights and
obligations under this Agreement, and provided that such third Party agrees
in writing (a copy of which will be produced to the disclosing Party at its
request) to the same conditions respecting the use of Confidential
Information contained in this clause and to any other reasonable conditions
requested by the disclosing Party.
11.6 TRADEMARK AND PUBLICITY. Nothing contained in this Agreement shall be
considered as conferring any right to use any name, trademark or other
designation of either Party hereto, including any contraction,
abbreviation, or simulation of any of the foregoing, in advertising,
publicity or marketing activities. Any publicity advertising, etc., with
regard to this Agreement or the Cellular Network which mentions the other
Party shall be mutually agreed upon in writing prior to disclosure.
12. TITLE AND RISK OF LOSS
12.1 TITLE PASSAGE AND RISK OF LOSS. Title to and risk of loss of Products shall
be transferred to Telemig Celular upon Delivery unless otherwise provided
in this Agreement or as otherwise may be agreed to by the Parties. Title to
Nortel's intellectual property, including Software, patents copywrite,
trademarks and tradenames, shall not be conveyed to Telemig Celular at any
time Telemig Celular shall notify Nortel promptly of any claim with respect
to loss that occurs while Nortel has the risk of loss and shall cooperate
in every reasonable way to facilitate the settlement of any claim.
12.2 LIABILITY FOR NEGLIGENCE. Notwithstanding anything herein to the contrary.
The Party that by negligence intentional act or failure to act where action
is required under this Agreement causes damage, loss or destruction to any
Product shall be liable to the other Party irrespective of the fact that
title and risk of loss of such Product is incumbent upon such other Party.
13. DAMAGES, DELAYS AND TERMINATION
13.1 PROPERTY AND PERSONAL INJURY (TELEMIG CELULAR).
13.1.1 Property Damage. Nortel shall indemnify and hold harmless Telemig
Celular and its directors, officers, agents, servants and employees
from any claim. demand, cause of action, damage, cost, expense, loss
or liability, on account of tangible property damage (including damage
to property owned by third Parties other than Telemig Celular),
arising out of or in connection with this Agreement to the extent such
damages were caused by the negligent acts or omissions, willful
misconduct and strict product liability of Nortel or its agents,
contractors, officers or employees, or any person responsible to
Nortel hereunder while performing under this Agreement provided: (i)
Telemig Celular promptly notifies Nortel in writing of any suits,
claims or demands against Telemig Celular for which Nortel is
responsible under this indemnity, (ii) Telemig Celular gives Nortel
frill opportunity and authority to assume the sole defense of and
settle such suits, and (iii) Telemig Celular furnishes to Nortel upon
request all reasonable information and assistance available to Telemig
Celular for defense against any such suit, claim or demand. Nortel's
liability under this indemnity shall be that proportion directly
attributable to the fault of Nortel or its employees or agents but in
no event exceed Two Million Reais (R$ 2,000,000.00) for any one
occurrence of property damage, such value to be annually adjusted as
per the "IGP-DI Coluna 27" index, issued by FGV.
13.1.2 Personal Injury (Telemig Celular). Nortel shall indemnify and hold
harmless Telemig Celular and its directors, officers, agents, servants
and employees from any claim, demand, cause of action, damage, cost,
expense, loss or liability, on account of death or personal injury
(whether to Telemig Celular, Telemig Celular's officers, agents or
employees or third Parties) arising out of or in connection with this
Agreement to the extent such, injury or death was caused by the
negligent acts or omissions, willful misconduct and strict product
liability of Nortel or its agents, contractors, officers or employees,
or any person responsible to Nortel hereunder while performing under
this Agreement provided: (i) Telemig Celular promptly notifies Nortel
in writing of any suits. claims or demands against Telemig Celular for
which Nortel is responsible under this indemnity, (ii) Telemig Celular
gives Nortel Full Opportunity and authority to assume the sole defense
of and settle such suits, and (iii) Telemig Celular furnishes to
Nortel upon request all reasonable information and assistance
available to Telemig Celular for defense against any such suit, claim
or demand at Nortel's costs. Nortel's liability under this indemnity
shall be that proportion directly attributable to the fault of Nortel
or its employees or agents, or as may be determined by a court of Law.
13.2 REMOVED
13.3. PERFORMANCE BOND. Nortel shall issue a Performance Bond for a value equal
to ten percent (10%) of the total value for each Phase under this
Agreement. The first Phase Performance Bond shall be delivered to Telemig
Celular within thirty (30) days following the signature of this Agreement.
For each of the subsequent Phases a Performance Bond shall be delivered to
Telemig Celular within forty-five (45) days of the issuance by Telemig
Celular of its Phase Acquisition Document. Telemig Celular acknowledges
that each Performance Bond is subject to Instituto de Resseguros do Brasil
(IRB) approval and Nortel is not liable for any delay attributable thereto.
The Performance Bond shall be in favor of Telemig Celular. The Performance
Bond shall be issued by an insurance/surety company acceptable to Telemig
Celular and shall be in form and substance acceptable to Telemig Celular in
the exercise of its reasonable discretion. Telemig Celular may only draw
down on the Performance Bond if (i) Nortel fails to cure a material breach
pursuant to Section 13.8 within 30 days of Telemig Celular's written notice
of breach to Nortel or (ii) the maximum amount of liquidated damages under
Sections 13.7 (Maximum Liquidated Damages) have been attained. Each
Performance Bond shall be released within ten (10) working days following
Final Acceptance of the applicable Phase.
13.4 REMOVED
13.5. REMOVED
13.6. TELEMIG CELULAR DELAY TERMINATION. Should a Telemig Celular delay with
respect to an Implementation Schedule date exceed six (6) months, Nortel
may terminate this Agreement as provided herein for Telemig Celular's
failure to perform. Nortel, however, will notify Telemig Celular at least
thirty (30) days prior to such action and will continue to work in good
faith with Telemig Celular to resolve their delay. Nortel may exercise this
right of termination at any time within ten (10) days after such delay has
exceeded six (6) months. Nortel's right of termination is without prejudice
to any other remedies that Nortel may possess.
13.7. REMOVED
13.8. BREACH BY EITHER PARTY. Where a Party is in material breach of this
Agreement, and where the non-breaching Party has given thirty (30) days
prior written notice specifying the breach to the breaching Party and the
breaching Party has not cured the breach within such 30-day period then the
non-breaching Party may terminate this Agreement without liability.
13.9. BANKRUPTCY. Either Party may terminate this Agreement (except for those
items fully discharged) without liability, if the other Party makes a
general assignment for the benefit of creditors, or if a petition in
bankruptcy or under any insolvency law is filed by or against the other
Party and such petition is not dismissed within sixty (60) days after it
has been filled.
13.10. CONCESSION. Should ANATEL revoke Telemig Celular's Concession and if said
revocation is not reversible on appeal, Nortel may terminate this
Agreement. Nortel's right of termination is without prejudice to any other
remedies Nortel may possess.
13.11. SURVIVAL. Termination of this Agreement, for whatever cause shall be
without prejudice to any right or obligation of any Party hereto in respect
of this Agreement which has arisen prior to such termination or expiration.
If this Agreement is terminated by either Party prior to the completion of
Final Acceptance of the Cellular System or portion thereof as defined in
the relevant Phase Acquisition Document, then such Products actually
delivered to the corresponding Site(s) as of the effective date of
termination shall be submitted to Conditional Acceptance and Final
Acceptance. The Parties' rights and obligations, which by their nature
would continue beyond the termination, cancellation, or expiration of this
Agreement shall survive the termination, cancellation or expiration of this
Agreement.
14. LIMITATION OF LIABILITY
14.1 NORTEL'S JOINT LIABILITY. The Nortel entities shall have joint and several
liability for any liabilities or obligations set forth in this Agreement.
14.2 SCOPE OF LIABILITY. Telemig Celular's exclusive remedies and the entire
liability of Nortel and its affiliates and their employees and agents for
any claim, loss, damage or expense of Telemig Celular or any other entity
arising out of this Agreement, or the use or performance of any Network,
System, Product or Service whether in action for or arising out of the
breach of contract, including negligence, indemnity, or strict liability
shall be as follows:
(1) For delay and penalties - the remedies set forth in Section 13;
(2) For the performance or non-performance of Products and Services or
claims that they do not conform to a warranty - the remedy set forth in the
applicable "warranty(ies)" clause;
(3) For tangible property damage and personal injury caused by
Nortel's negligence - the amount of direct damages as per Sections 13.1.1
and 13.1.2;
(4) For everything other than as set forth above - the amount of the
direct damages not to exceed the purchase price of the Products and
Services giving rise to Telemig Celular's claim, including awarded counsel
fees and costs or eleven percent (11%) of the Phase value, whichever is
lower.
Notwithstanding any other provision of this Agreement, neither Party, its
affiliates and its employees and agents shall have any liability to the
other for any loss of profit or revenues, whether as a result of breach of
contract, warranty, tort (including negligence).
Nortel shall not be responsible for any claim, loss, damage or expense
resulting from Telemig Celular's negligence or willful misconduct.
15. FORCE MAJEURE
15.1 Responsibility IN THE EVENT OF FORCE MAJEURE. Except as explicitly provided
elsewhere in this Agreement, neither Party shall be liable for any delays
in delivery or performance of its respective obligations hereunder or for
failure to manufacture, deliver or comply with this Agreement when caused
by Force Majeure.
Each Party shall promptly notify the other Party of the occurrence of a
Force Majeure if any Force Majeure occurs and results in a delay or failure
in performance by either Party of its obligations under this Agreement, the
Party injured by the other's inability to perform may elect to: (a)
terminate that part of any Phase Acquisition Document or Purchase Order
affected by the Force Majeure as to Products not already shipped or
Services not already rendered if the Force Majeure continues for a period
of forty five (45) days after notification; (b) suspend that part of any
Phase Acquisition Document or Purchase Order; affected by the Force Majeure
for the duration of the Force Majeure, buy, sell, obtain, or furnish
elsewhere Products to be bought, sold, obtained, or furnished hereunder,
and deduct from any Phase Acquisition Document or Purchase Order commitment
the quantity bought, sold, obtained, or furnished or for which such
commitments have been made elsewhere; or (c) resume performance under such
Phase Acquisition Document or Purchase Order once the Force Majeure ceases
with an option for the injured Party to extend the delivery or performance
date up to the length of time the Force Majeure endured. Unless written
notice is given within thirty (30) days after such injured Party is
provided written notice of the occurrence of a Force Majeure, option (c)
shall be deemed selected.
16. ASSIGNMENT This Agreement shall accrue to the benefit of and be binding
upon the Parties hereto and any successor(s) entity into which either Party
shall have been merged to or consolidated with or to which either Party
shall have sold or transferred all or substantially all of its assets.
Except as provided in this Section, neither Party shall assign this
Agreement or any right or interest under this Agreement, nor delegate any
work or obligation to be performed under this Agreement ("an assignment"),
without the prior written consent of the other Party. Any attempted
assignment in contravention of this clause shall be void and ineffective.
For the purpose of this clause the term "Agreement" shall include this
Agreement, any subordinate contracts placed under this Agreement and any
orders placed under such Agreement or any subordinate contract.
The Parties agree that any consent to a requested assignment shall not be
unreasonably withheld or delayed.
The Parties agree that Nortel or Telemig Celular or one of their respective
constituents may assign all or a part of their rights and duties hereunder
to a designated company related to Nortel or to Telemig Celular or a
wholly-owned (directly or indirectly) subsidiary of Nortel or Telemio as
the case may be, provided that Nortel or Telemig Celular remains jointly
and severally responsible for the fulfillment of all obligation incumbent
upon its assignee as per this Agreement. For the purposes of this Section,
a company related to Nortel or to Telemig Celular shall be a company having
the same or substantially the same shareholder ownership as Telemig
Celularor Nortel.
17. REMEDIES
The remedies made available to the Parties for the events specified under
this Agreement are exclusive unless otherwise stated herein.
18. GOVERNING LAW
The validity, construction and interpretation of, and the right and
obligations of the Parties' pursuant to this Agreement and any amendment
hereto shall be governed by the laws of the Federative Republic of Brazil
(including its conflict of laws rules).
19. NOTICE
19.1 GENERAL. Notices required to be given by one Party to another shall be
deemed properly given if reduced to writing and personally delivered or
transmitted by postage prepaid registered or certified post, return receipt
requested, by air courier or by facsimile or other electronic mail with
confirmation receipt. Such notices shall be deemed to have been given and
shall be effective upon receipt.
19.1.1 Notice to Telemig Celular. Nortel shall send notices to Telemig
Celular at the following address:
Telemig Celular S.A.
Rua Levindo Lopes, 258, 8(degree) andar,
Belo Horizonte, MG, Brasil
CEP 30140-170
Attn.: Director Superintendent
Phone: (5531) 259-3077
Fax:: (5531) 259-3076
With a copy (which shall not constitute Notice) to:
Telesystem International Wireless Inc.
1000 de la Gauchetiere Street West, 16th Floor
Montreal, Quebec, Canada
H3B 4W5
Attention: Executive Vice President, Operations
Tel: (1) (514)673-8497
Fax: (1) (514)673-8470
19.1.2 Notice to Nortel. Telemig Celular shall send notices to Nortel at
the following address:
Northern Telecom Limited
Northern Telecom do Brasil Comercio e Servicos Ltda.
Northern Telecom do Brasil Industria e Comercio Ltda.
Av. das Nacoes Unidas, 17891-10(Degree) andar
04795-100 - Sao Paulo - SP - Brasil
Attn.: Vice President Wireless Sales
Phone: (55) (11) 882-4900
Fax: (55) (11) 882-4935
19.2 MODIFICATIONS TO NOTICE ADDRESS. Either Party may change the addresses for
giving notice by providing the other Party with written information about
such change of address in accordance with Section 19.1.
20. SECTION HEADINGS AND PLURALS
20.1 SECTlON HEADINGS. The headings of Sections in this Agreement are provided
for convenience of reference only and are not intended to be a part of or
affect the meaning or interpretation of this Agreement or any Section.
20.2 PLURALS. Any reference herein to singular shall mean plural and vice versa
as the context may so require.
21. WAIVER
Any failure or delay on the part of Nortel or Telemig Celular to exercise
any right, power or privilege or to strictly enforce any such term or
condition of this Agreement, on one or more occasion shall not operate or
be construed as a waiver of the same or any other terms and conditions of
this Agreement on any other occasion.
22. REPRESENTATION OF AUTHORITY
Each Party represents that:
22.1 EXPRESS AUTHORITY. The persons executing this Agreement have express
authority to do so under specific or standing delegation, and in so doing,
to bind the Party thereto; and
22.2 NO VIOLATION. The execution, delivery, and performance of this Agreement
does not violate any provision of any by-law, charter, regulation or any
other governing authority of the Party; and
22.3 DULY AUTHORIZED. The execution, delivery and performance of this Agreement
has been duly authorized by all necessary partnership or corporate action
and this Agreement is a valid and binding obligation of such Party.
23. LEGAL COMPLIANCE
It is the Parties' intention to comply with all applicable federal, state
and local statutes, regulations and orders (if and as applicable to Telemig
Celular or Nortel). To the extent that any provision shall be held to be
invalid, illegal or unenforceable, such provisions shall be considered null
and void but the remaining provisions of this Agreement shall remain in
effect. In the event the invalid, illegal or unenforceable provision is
considered an essential element of this Agreement, the Parties shall
promptly negotiate a replacement provision that is acceptable to both
Parties and is valid, legal and enforceable, and come as close as possible
to reflect accurately the intentions of the Parties underlying the invalid,
illegal or unenforceable provision or provisions.
24. DISPUTE RESOLUTION
24.1 GENERAL. If a dispute arises out of or relates to this Agreement including
any disputes related to payments to be made under the terms of this
Agreement, either Party may request that the Parties seek to resolve the
dispute by negotiation of the appropriate executives of each Party, who
shall have full authority to settle the dispute. The Parties agree to meet
at least once within fifteen (15) days of the request for negotiation to
try to resolve the dispute. If, within thirty (30) days after such meeting,
or the first request for a meeting, should a meeting not be convened, the
Parties have not succeeded in negotiating a resolution of the dispute,
either Party may request that such dispute be resolved by arbitration as
set forth in Section 24.2, the provisions of Brazilian Law 9.307 of
September 23, 1996 applying.
24.2 ARBITRATION. The arbitration shall be conducted by three (3) arbitrators
familiar with the cellular telecommunication industry and shall be held in
Sao Paulo, Brazil in accordance and subject to the Rules of Conciliation
and Arbitration, as promulgated from time to time by the International
Chamber of Commerce (ICC) (the "Rules"), by three (3) arbitrators. Each
Party shall designate one (1) arbitrator, and the two (2) arbitrators so
designated shall appoint the third arbitrator as provided in the Rules. The
arbitrators shall determine the language in which the arbitration shall be
conducted. The arbitrators will allow such discovery as is appropriate,
consistent with the purpose of arbitration in accomplishing fair, speedy,
and cost-effective resolution of disputes. All discoveries will be
completed, and the arbitration hearing will be commenced within forty-five
(45) days after appointment of all of the arbitrators and the arbitration
hearing will conclude within thirty (30) days after it commences. The
arbitrators will make every effort to enforce these timing requirements
strictly but may extend the time periods upon a showing that exceptional
circumstances require extension to prevent manifest injustice. The award
shall be made within six (6) months of the selection of the arbitrator(s).
If judicial enforcement of such arbitration award is sought by either
Party, judgment may be entered upon such award in any court of competent
jurisdiction, or application may be made to such court for a judicial
acceptance of the award and an order of enforcement. The duty of the
Parties to arbitrate any dispute relating to the interpretation or
performance of this Agreement or the grounds for the termination thereof
shall survive the expiration or termination of this Agreement for any
reason. The arbitrator(s) shall apply Brazilian law and the relief awarded
by the arbitrator(s) shall not exceed in form that awardable by a Brazilian
court of competent jurisdiction. In the event of any arbitration or other
legal proceeding to enforce an arbitration award the substantially
prevailing Party if any, shall be entitled to reimbursement for reasonable
attorneys' fees and costs of the proceeding by the other Party or Parties.
The determination of which Party has substantially prevailed and the amount
of attorneys' fees, if any, to be awarded shall be made by the
arbitrator(s), or other person adjudicating the enforcement action at the
same time and in the same proceeding as the underlying enforcement action
being decided, and shall be included in the award. If it is determined in
such enforcement action that there is no substantially prevail in Parties,
and in the underlying arbitration, each Party shall bear its own attorney's
fees and expenses but those related to the costs of the arbitrator(s) shall
be borne equally by the Parties. The arbitrator(s) shall determine the
issues of arbitrability but may not limit expand or otherwise modify, the
terms of the Agreement, nor have authority to award punitive damages in
excess of compensatory damages and each Party irrevocably waives any claim
thereto.
All discussions and documents prepared pursuant to any attempt to resolve a
dispute under this Section 24 are confidential and for settlement purposes
only and shall not be admitted in any court or other forum as an admission
or otherwise against a Party for any purpose unless such restriction is
against public policy in the applicable jurisdiction or a court of
competent jurisdiction by a governmental agency orders such disclosure or
use.
Nothing in this Section 24 shall prevent any Party from seeking injunctive
relief in a judicial proceeding if interim relief from a court is necessary
to preserve the status quo pending resolution or to prevent serious and
irreparable injury to that Party or others.
24.3 CONFIDENTIALITY. The Parties, their representatives, other participants and
arbitrator(s) shall hold the existence content and result of dispute
resolution proceedings in confidence as provided in Section 11 of this
Agreement.
25. CONSENT
Wherever in this Agreement consent, approval or mutual agreement is
required of Telemig Celular or Nortel the appropriate Party agrees not to
unreasonably withhold or delay such consent or approval.
26. COUNTERPARTS
This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original and all of which taken together shall
constitute one and the same instrument. The Parties agree that only one
representative of Telemig Celular and one representative of Nortel shall
initial each page of the Agreement including its Exhibits.
27. REMOVED
28. ENTIRE AGREEMENT
This Agreement and any subordinate agreements and orders accepted pursuant
to this Agreement or any subordinate agreements constitutes the entire
understanding between the Parties concerning the subject matter hereof and
supersedes all prior discussions, agreements and representations, whether
oral or written and whether or not executed by Nortel and Telemig Celular.
All modifications, amendments or other changes made to this Agreement or
any part thereof shall be reduced to writing and executed by authorized
representatives of each Party.
28.1 PRIOR SUPPLY AGREEMENTS
Any Products or Services purchased prior to or to be purchased after the
date hereof by Telemig Celular under the terms and conditions set forth in
supply agreements entered into by Telemig Celular and Promon Eletronica
Ltda., prior to the date hereof, shall not be considered for the purposes
of calculating the Total Volume Commitment referred to in Section 2.2.1.
IN WITNESS HEREOF, THE PARTIES HEREBY EXECUTE THIS AGREEMENT IN THE PRESENCE OF
THE TWO UNDERSIGNED WITNESSES.
TELEMIG CELULAR S.A.
By: /s/Luiz Gonzaga Leal By: /s/ Marcos Pacheco
------------------------- ----------------------
Title: Director Superintendente Title: Network Manager
Attorney-in-Fact
NORTHERN TELECOM DO BRASIL COMERCIO E SERVICOS LTDA.
By: /s/Rene Marie Herve Adam By: /s/ Patricia Veras De C. E. Silva
------------------------- ---------------------------------
Title: Attorney-in-Fact Title: Attorney-in-Fact
NORTHERN TELECOM DO BRASIL INDUSTRIA E COMERCIO LTDA.
By: /s/ Patricia Veras De C. E. Silva
---------------------------------
Title: Attorney-in-Fact
NORTHERN TELECOM LIMITED
By: /s/ Fard Nathos
---------------
Title: Attorney-in Fact
Witness:
1. /s/ Harold Moura Vale Mota 2. /s/ Marcos A. Monges
-------------------------- --------------------
