As filed with the Securities and Exchange Commission on June 30, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 20-F
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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: 001-14475
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TELESP PARTICIPACOES S.A.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
Telesp Holding Company The Federative Republic of Brazil
(Translation of Registrant's Name into English) (Jurisdiction of Incorporation or Organization)
</TABLE>
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Rua Martiniano de Carvalho, 851, 18 andar/parte
01321-001 Sao Paulo, SP, Brazil
(Address of Principal Executive Offices)
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Securities registered or to be registered pursuant to
Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of Each Exchange On Which Registered
------------------- -----------------------------------------
<S> <C>
Preferred Shares, without par value* New York Stock Exchange
American Depositary Shares, each New York Stock Exchange
representing 1,000 Preferred Shares
</TABLE>
- ---------------
* 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>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C>
Item 1. Description of Business..............................................................................1
Item 2. Description of Property.............................................................................26
Item 3. Legal Proceedings...................................................................................26
Item 4. Control of Registrant...............................................................................27
Item 5. Nature of Trading Market............................................................................28
Item 6. Exchange Controls and Other Limitations Affecting Security Holders..................................30
Item 7. Taxation............................................................................................31
Item 8. Selected Financial Data.............................................................................36
Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations...............40
Item 9A. Quantitative and Qualitative Disclosures about Market Risk..........................................50
Item 10. Directors and Officers of Registrant................................................................51
Item 11. Compensation of Directors and Officers..............................................................55
Item 12. Options to Purchase Securities from Registrant or Subsidiaries......................................55
Item 13. Interest of Management in Certain Transactions......................................................55
PART II
Item 14. Description of Securities to be Registered..........................................................55
PART III
Item 15. Defaults upon Senior Securities.....................................................................55
Item 16. Changes in Securities, Changes in Security for Registered Securities and Use of Proceeds............56
PART IV
Item 17. Financial Statements................................................................................56
Item 18. Financial Statements................................................................................56
Item 19. Financial Statements and Exhibits...................................................................56
Index of Defined Terms.......................................................................................57
Technical Glossary...........................................................................................58
</TABLE>
<PAGE>
Telesp 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 "Holding Company." Its subsidiaries, Telecomunicacoes de Sao Paulo S.A.
("Telesp") and Companhia Telefonica da Borda do Campo ("CTBC"), are referred to
as the "Subsidiaries." The Holding Company and the Subsidiaries are referred to
collectively as the "Company." The Holding Company 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. Each of the Subsidiaries is an operating company formerly
controlled by Telebras. In January 1998, Telesp, which had provided both
fixed-line and cellular telecommunications services, spun off its cellular
telecommunications operations into Telesp Celular S.A. ("Telesp Celular"), a new
company that is now under separate control. 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 Holding
Company. References to "American Depositary Shares" or "ADSs" are to American
Depositary Shares, each representing 1,000 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.
All amounts in Brazilian currencies that existed prior to the adoption of the
real as the Brazilian currency on July 1, 1994 have been restated in reais in
this Annual Report.
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 Brazil ("Brazilian GAAP").
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 23-26 herein, include those
resulting from the short history of the Company's operations 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 57 lists those terms
and where they are defined. Technical terms are defined in the Technical
Glossary on page 58.
<PAGE>
PART I
Item 1. Description of Business
The Company provides fixed-line telecommunications services in the
Brazilian State of Sao Paulo under concessions from the Federal Government (the
"Concessions"). The Concessions authorize the Company to provide fixed-line
telecommunications service in an area (the "Region") consisting of the entire
State of Sao Paulo except for a small area where two fixed-line service
providers that were not part of the Telebras System continue to operate
independently. The Company is the only supplier of local fixed-line and
intraregional long-distance telecommunications services in the Region. In April
1999, however, licenses were auctioned to permit a competitor to provide local
fixed-line and intraregional long distance telecommunications services in the
Region in competition with the Company. Megatel do Brasil S.A. ("Megatel")
presented the winning bid for the licenses and received authorization to begin
operations in December 1999. In July 1999, Empresa Brasileira de
Telecomunicacoes S.A. - Embratel ("Embratel") and Bonari Holdings Ltda.
("Bonari") will be authorized to provide intraregional long-distance services in
competition with the Company. See "--Competition." At December 31, 1998, the
Company had 6.4 million lines in service.
The Holding Company and its Operating Subsidiaries
The following table sets forth the contribution made by each Subsidiary to
the Company's net operating revenues for the year ended December 31, 1998 and
the Holding Company's shareholding, direct or indirect, in each Subsidiary at
December 31, 1998.
<TABLE>
<CAPTION>
Contribution to
consolidated results Holding Company ownership
--------------------------- --------------------------------------
Subsidiary % of net operating revenues % of share capital % of voting stock
- ---------- --------------------------- ------------------ -----------------
<S> <C> <C> <C>
Telecomunicacoes de Sao Paulo
S.A. - Telesp................... 91.3 67.7 87.3
Companhia Telefonica da Borda do
Campo - CTBC.................... 8.7 66.8 86.7
</TABLE>
Substantially all of the Holding Company's assets consist of shares in the
Subsidiaries. The Holding Company relies almost exclusively on dividends from
the Subsidiaries and interest on loans to the Subsidiaries 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 Holding Company's headquarters are located at Rua Martiniano de
Carvalho, 851, 18(0) andar/parte, 01321-001, Sao Paulo, SP, Brazil, and its
telephone number is 5511-3177-7893 or 3177-7946.
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 (other than Embratel and CTBC) 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. The New
Holding Companies were allocated virtually all the assets and liabilities of
Telebras, including the shares held by Telebras in the operating companies of
the Telebras System. 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 the
Regions into which Brazil has been divided for purposes of cellular
telecommunications services in the frequency range formerly used by the
companies of the Telebras System (each a "Cellular Region"), (b) three regional
fixed-line service providers, each providing local and intraregional
long-distance service in one of the three regions into which Brazil has been
divided for purposes of fixed-line telecommunications (each a "Fixed-Line
Region"), and (c) Embratel Participacoes S.A. - Embratel, which provides
domestic (including intraregional and interregional) long-distance telephone
service and international telephone service throughout Brazil.
The Holding Company is one of the New Holding Companies. In the Breakup,
the Holding Company was allocated all the share capital held by Telebras in the
operating subsidiaries of the Telebras System that provided fixed-line
telecommunications service in the State of Sao Paulo. In July 1998, the Federal
Government sold substantially all its shares of the New Holding Companies,
including the Holding Company, to private sector buyers. The sale of
substantially all of the Federal Government's shares to private sector buyers is
referred to herein as the "Privatization" or the "Privatization of Telebras."
The Federal Government's shares of the Holding Company were purchased by SP
Telecomunicacoes Holding S.A. (formerly Tele Brasil Sul Participacoes S.A.), a
consortium comprising Telefonica International S.A., Portelcom Fixa S.A., Banco
Bilbao Vizcaya S.A., Iberdrola Investimentos S.U.L. CTC Internacional S.A. and
Telefonica de Argentina S.A. See "Control of Registrant."
The State of Sao Paulo and the Region
The Concessions authorize the Company to provide fixed-line
telecommunications service in the State of Sao Paulo except for a small area
where two fixed-line service providers that were not part of the Telebras System
continue to operate independently. The Region covers approximately 86.6% of the
State of Sao Paulo. The portion of the State of Sao Paulo that is excluded from
the Region represents approximately 4% of total lines in service in the State of
Sao Paulo and 4% of the population of the State of Sao Paulo. The Region has 58
municipalities with populations in excess of 100,000 inhabitants, including the
City of Sao Paulo with approximately 10 million inhabitants.
The State of Sao Paulo covers an area of 248,809 square kilometers,
representing approximately 2.9% of Brazil's area. The population of the State of
Sao Paulo is approximately 35.5 million, 21.7% of Brazil's total population. The
gross domestic product of the State of Sao Paulo in 1998 was an estimated US$280
billion, representing approximately 35% of Brazil's gross domestic product for
the year. Per capita income for the State of Sao Paulo during 1998 was estimated
at US$8,000.
Set forth below is a map showing the location of the Region within Brazil.
[MAP OF BRAZIL}
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
Overview
The fixed-line telecommunications services offered by the Company to its
customers consists of (i) local service, including installation, monthly
subscription, measured service and public telephones, (ii) intraregional
long-distance service, (iii) data transmission, (iv) network services, including
interconnection and leasing of facilities, and (v) other services. Until April
1998, the Company received revenue from outgoing interregional and international
long-distance calls under a revenue-sharing arrangement with Embratel. See
"--Interregional and International Service." The interconnection revenues the
Company receives include fees paid by Embratel, cellular service providers and
other telecommunications companies for use of the Company's network. In April
1999, the Company began to sell handsets and other telephone equipment.
Beginning in 2002, the Company may obtain authorization to provide interregional
and international long-distance service, provided that it has met certain
obligations set forth in the Concessions. See "--Competition" and "--Regulation
of the Brazilian Telecommunications Industry--Obligations of Telecommunications
Companies--Public Regime--Service Restrictions."
The following table sets forth the Company's revenue by type of service for
the indicated years. The Company's tariffs for each category of service are
discussed below under "--Rates." Trends and events affecting the Company's
operating revenue are discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1996 1997 1998
---- ---- ----
(millions of reais)(1)
<S> <C> <C> <C>
Local service........................................................ 1,962 2,637 2,979
Intraregional long-distance service.................................. 1,206 1,032 937
Interregional long-distance service.................................. 840 666 412
International long-distance service.................................. 261 192 97
Data transmission.................................................... 226 170 209
Network services..................................................... 430 669 1,233
Other................................................................ 52 70 68
------- ------- --------
Total................................................................ 4,977 5,436 5,935
Taxes and discounts.................................................. (1,267) (1,349) (1,439)
------- ------- --------
Net operating revenue............................................... 3,710 4,087 4,496
======= ======= ========
</TABLE>
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(1) In constant reais of December 31, 1997 purchasing power for any period
prior to January 1, 1998.
Local Service
Local service includes installation, monthly subscription, measured service
and public telephones. Measured service includes all calls that originate and
terminate within a single local area of the Region ("local calls"). Measured
service includes rental of the Company's network in so far as it relates to
paging services and trunking services. The Company is the only supplier of local
fixed-line and intrastate telecommunications services in the Region. In April
1999, however, licenses were auctioned to permit one competitor to provide local
fixed-line and intraregional long distance telecommunications services in the
Region in competition with the Company. Megatel presented the winning bid for
the licenses and received authorization to begin operations in December 1999.
See "--Competition."
The Company owns and operates public telephones throughout the Region. At
December 31, 1998, the Company had 179,653 public telephones, of which 74% could
be operated with a prepaid card. Anatel's targets require the Company to
increase the number of public telephones to 213,200 by year-end 1999. See
"--Network and Facilities--Network Expansion" and "--Regulation of the Brazilian
Telecommunications Industry--Obligations of Telecommunications
Companies--Network Expansion--General Plan on Universal Service."
Intraregional Long-distance Service
Intraregional long-distance service consists of all calls that originate
within one local area and terminate within another local area of the Region
(together with interregional long-distance service, "interurban" service). The
Company is the sole provider of intraregional long-distance service in the
Region. However, on July 3, 1999, Embratel and Bonari will be authorized to
provide intraregional long-distance services in competition with the Company
and, in December 1999, Megatel is expected to begin to provide local fixed-line
and intraregional long distance services in the Region in competition with the
Company. See "--Competition."
Interregional and International Service
The Company is not authorized to provide interregional or international
long-distance service. Interregional long-distance service consists of calls
between a point within the Region and a point in Brazil outside the Region.
International long-distance service consists of calls between a point within the
Region and a point outside Brazil. Beginning in 2002, at the earliest, the
Company may obtain authorization to provide interregional and international
long-distance service, provided it has met certain obligations contained in the
Concessions. See "--Competition" and "--Regulation of the Brazilian
Telecommunications Industry--Obligations of Telecommunications Companies--Public
Regime--Service Restrictions."
Until July 1998, Embratel and the other operating subsidiaries of the
Telebras System divided the revenue from outgoing interregional and
international long-distance calls. The revenue-sharing arrangement with Embratel
was designed to balance the return on investment of the other operating
subsidiaries. Under this system, each Subsidiary retained a fixed percentage of
the customer charges for outgoing interregional and international long-distance
calls and paid the balance to Embratel. The Subsidiaries generally received no
revenue from incoming interregional or international long-distance calls. The
Company's percentage of revenues from outgoing calls was reset annually. From
April 1997 to July 1998, Telesp's percentage was 53.94% and CTBC's percentage
was 90%. In the case of interregional collect calls, the Company and the other
regional operator divided equally the portion of the customer charge not paid to
Embratel.
In July 1998, the system of revenue sharing between Embratel and the other
operating subsidiaries was discontinued and the Company no longer recognizes
revenues from interregional and international long distance services. The
Company's relationship with Embratel is now governed by interconnection
agreements regulated by Anatel under which Embratel pays the Company fees for
the use of its network. See "--Regulation of the Brazilian Telecommunications
Industry" and "--Network Services." The Company also receives from Embratel a
supplemental per-minute fee called the Parcela Adicional de Transicao ("PAT").
The PAT was implemented in July 1998 (retroactive to April 1998) in order to
reduce the impact of the discontinuation of the revenue-sharing arrangement
between the Company and Embratel. See "--Interregional and International
Service." The PAT will be gradually phased out by June 30, 2001.
Although the revenue-sharing arrangement with Embratel was terminated in
July 1998, the termination of the arrangement was retroactive as of April 1998.
The Company disagreed with the retroactive application of the termination of the
revenue-sharing arrangement and did not reimburse Embratel for the payment
received by the Company under the revenue-sharing arrangement between April 1998
to July 1998. In February 1999, the Company resolved to reimburse Embratel for
the amount due on account of the retroactive application, which totaled R$35.9
million.
Network Services
The Company provides access to its network to other telecommunications
service providers and leases network facilities to telecommunications service
providers and corporate customers.
Use of the Company's interconnection services has grown as a result of the
spin-off of Telesp's cellular telecommunications business, the privatization of
the companies of the Telebras System and the advent of competition in the
telecommunications sector in Brazil. Cellular service providers, Embratel and
other providers of public telecommunications services interconnect with the
Company's network in order to receive calls that originate on the Company's
network, to complete calls that terminate on the Company's network and to
connect central switching stations to the Company's network. In addition,
certain operators of private telecommunications services (such as private
telephone network services and data transmission services) interconnect with the
Company's facilities to complete calls and transmit data in connection with such
services. Revenues from network services consist of (i) lease payments by
cellular providers for use of, and availability of capacity on, the Company's
network and (ii) per-minute network usage fees for use of the Company's network
from Embratel and cellular providers. See "--Rates--Network Services."
Telecommunications service providers that provide interconnection services
are required to provide such services on a non-discriminatory basis. Subject to
certain requirements, they are free to negotiate the terms of their
interconnection agreements but, if the parties fail to reach an agreement,
Anatel will establish the terms of interconnection. See "--Regulation of the
Brazilian Telecommunications Industry--Obligations of Telecommunications
Companies--Interconnection" and "--Rates--Network Usage Charges." The terms of
interconnection, particularly the pricing and technical requirements, may affect
the Company's results of operations, its competitive environment and its capital
expenditure requirements.
Data Transmission Services, Internet Services and Voice and Image
Applications
The Company provides low- and high-speed data transmission services through
private leased circuits, public network infrastructure exchanges, the Company's
data transmission network and access to Embratel's data transmission network.
The Company has provided data transmission services since October 1991. At
December 31, 1998, the Company had more than 103,000 access ports for data
transmission, voice and image applications. The Company invested in data
transmission capacity in response to the growing demand in Brazil for services
that require high-speed dedicated digital circuits, such as data, image and text
transmission, corporate networking and video conferencing.
The Company's data transmission network is comprised of 25,000 access ports
(14,000 dedicated and 11,000 switched). Through its data transmission network
the Company provides SPPAC, SPDADOS, SPFAST and SPVIP services. SPPAC, which is
a packet-switched network, has a line of services providing the user multiple
access databases and home banking services. SPDADOS is a line of digital
services dedicated to voice applications, data and image interlinking to
computers, corporate video conferencing, CAD/CAM software applications, and
other uses characterized by high velocity communication. SPFAST is a line of
services based on the Frame Relay protocol directed to applications that require
high speed and short response time. SPVIP is the provision of telecommunications
services tailored to the specific needs of corporate customers and may include
such services as interconnection of data processing centers, local networks,
digital PBXs and corporate video conferencing.
The Company's management has placed particular emphasis on developing and
improving upon the following data transmission services: (i) data transmission
services using fast protocols (frame relay protocols) based on direct use of the
client's local network, (ii) access services for final users to connect to the
internet protocol network, (iii) dedicated network services to connect to the
internet protocol network, (iv) dedicated network services to connect to the
Internet and (v) virtual private network and interconnection of local networks.
By the second semester of 1999, the Company's management expects to complete its
implementation of 11,000 dial-up access ports to its internet protocol network.
Other Services
The Company provides a variety of other telecommunications services that
extend beyond basic telephone service. The Company also provides interactive
banking services, electronic mail and other similar services.
Quality of Service
Since the beginning of 1990, the Company has improved the quality of its
services through network upgrading and the addition of automatic operational
support systems. The following table sets forth information on service quality
for the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1999 Anatel
1997 1998 target
---- ---- -----------
<S> <C> <C> <C>
Maximum monthly repair requests (% of lines in service).............. 2.8 4.0 3.0
Residential repair response speed (% within 24 hours)................ 81.1 65.4 95.0
Call completion rate during peak periods (% of
calls attempted)(1)............................................ 56.5 58.6 60.0
Dial tone within 3 seconds (% of calls attempted)................... 99.0 99.6 98.0
Billing complaints (% of bills)..................................... n.a. 0.9 0.4
</TABLE>
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(1) Local and domestic long-distance calls.
The Company is required under the Telecommunications Regulations to meet
certain service quality targets relating to call completion rates, repair
requests, and response rate to repair requests, and operator response periods.
See "--Regulation of the Brazilian Telecommunications Industry--Obligations of
Telecommunications Companies--Quality of Service--General Plan on Quality." The
Company has been focusing and will continue to focus on meeting the Anatel
targets that are the most difficult for the Company, such as the targets
relating to public telephone repair requests and response times to
nonresidential and public telephone repair requests. Currently, on a monthly
basis the Company receives public telephone repair requests equivalent to
approximately 19% of public telephones in service per month per line. The
Company is obligated by year-end 1999 to reduce repair requests to 15% of public
telephones in service. During 1998, the Company responded within eight hours to
65% of nonresidential repair requests and 85% of public telephone repair
requests. The Company is obligated by year-end 1999 to respond within eight
hours to 95% of nonresidential and public telephone repair requests. In order to
meet these targets, the Company is developing software that will enable the
Company to test the functioning of public telephones from a centralized
automatic supervision center. The Company is also increasing maintenance
operations in order to improve its response time to public telephone repair
requests. The decrease from 1997 to 1998 in the Company's residential repair
response speed is in large part a result of the rapid increase in the size of
the Company's network. See "--Network Facilities." In July 1999, Anatel expects
to implement the Plano de Numeracao (the "Numbering Plan"). The Numbering Plan
will require a customer to specify a long-distance carrier for each call by
dialing two additional digits. Although the Company is making the necessary
adjustments to its switching stations, including adapting its analog switching
stations, it anticipates future traffic problems at switching stations as a
result of the change in the numbering system, especially in the two to three
weeks following the implementation of the Numbering Plan.
The Company is also obligated to respond to customer complaints about the
Company's services that are filed with the Fundacao de Protecao ao Consumidor -
Procon ("Procon"), a consumer protection agency. Due to the high number of
complaints received by Procon about the Company's services, the Company and
Procon signed an agreement in March 1999 (the "Procon Agreement") under which
the Company agreed to comply with line installation and quality of service
targets. Under this agreement, the Company committed to install lines for those
customers who had subscribed for a line under the prior system of auto-financing
over a period beginning in April 1999. The Company has performed its obligation
as regards line installations as of May 31, 1999. Under the Procon Agreement,
the Company is obligated to offer certain services free of charge to customers
whose lines are not installed within two years from the date on which they
contracted for their line. Such services offered free of charge, include
exemption from activation charges, provision of prepaid telephone cards until
the line is installed and credits from future subscription charges equal to the
number of days the line was installed in excess of the Customer's deadline. As
of April 30, 1999, the value of the free services provided by the Company
pursuant to the Procon Agreement totaled approximately R$13 million.
In the Procon Agreement, the Company also undertook to respond to repair
requests within 5 days by May 1, 1999 and within 3 days by June 1, 1999. The
Company has met both targets. In response to complaints about billing
inaccuracies, the Company committed itself to, among other things: (i) to a
change its bill lay-out, which will be in effect as of July 1999, and (ii) as of
April 1999, to implement a billing system that allocates subscription charges
proportional to the number of days of uninterrupted service. The Company will
incur a penalty of R$100,000 per day for each day the Company is out of
compliance with the targets set forth in the Procon Agreement.
In 1999, Anatel initiated administrative proceedings against the Company in
response to degradations in the Company's quality of service, particularly with
respect to service interruptions and failures to notify customers of changes in
telephone numbers. In May 1999 Anatel fined the Company R$5 million for those
degradations. The amount of the fine was contributed to the Company's customer
that had suffered the degradations.
Rates
Rates for telecommunications services provided by the Company are subject
to comprehensive regulation. See "--Regulation of the Brazilian
Telecommunications Industry--Rate Regulation." Since the relative stabilization
of the Brazilian economy in mid-1994, there have been two major changes in rates
for local and long-distance services. Effective in January 1996, rates for all
services were increased, primarily to compensate for accumulated effects of
inflation. Effective in May 1997, the rate structure was modified through a
tariff rebalancing that resulted in higher charges for measured service and
monthly subscription and lower charges for intraregional, interregional and
international long-distance services. Monthly subscription charges, for example,
were increased by 270% for residential customers and 59% for commercial
customers.
The Concessions establish a price-cap mechanism for annual rate
adjustments, which places an upper limit on a weighted average of the rates for
a basket of local and long-distance and for interconnection. The basket includes
activation and subscription fees and measured usage fees for local,
long-distance and public telephone service. Subject to certain limits, the rates
for individual services within the basket may be increased by up to 9% above the
limit, so long as the weighted average rate for the entire basket does not
exceed the limit. The Concessions provide for the price cap to be adjusted
periodically to take account of inflation, as measured by the Indice Geral de
Precos - Disponibilidade Interna ("IGP-DI").
Anatel has approved a rate increase in June 22, 1999 to average 6.57%
across all telecommunications service providers in Brazil. The increase for each
particular telecommunications service provider will vary.
Local Rates
The Company's revenue from local service consists principally of activation
and installation charges, monthly subscription charges, measured service charges
and public telephone charges. Users of measured service, both residential and
nonresidential, pay for local calls depending on usage. Usage is measured in
pulses. Pulses occur system-wide every four minutes for most local calls and
every sixty seconds for local calls made between certain municipalities. These
system-wide pulses are recorded independently of when individual calls are
actually made. In addition to system-wide pulses, the system records one pulse
for every call when the call is connected. After the first pulse, only
system-wide pulses are used in determining the charge for a call. As a result,
the time between the first pulse and the second (system-wide) pulse may vary.
For example, for a call being charged using four-minute pulse increments, the
time between the first pulse and the second (system-wide) pulse may vary between
one second and four minutes.
Local call charges for normal weekday calls are determined by multiplying
the number of pulses by the charge per pulse. For calls being made any day
between midnight and 6:00 a.m., on Saturdays between 2:00 p.m. and midnight and
all day Sundays and holidays, a caller is charged for only one pulse regardless
of the duration of a call. Each customer receives a total of 90 free pulses per
month. Approximately 71.6% of the Company's customers use over 90 pulses per
month. Measured service charges are the same for all customers.
Since May 1997, the monthly subscription charge (including taxes) has been
R$13.82 for residential customers, R$20.73 for commercial customers and R$27.64
for users of PBX systems and the price of one pulse (including taxes) has been
R$0.08. The following table sets forth selected information on the Company's
subscription charges and measured service charges for local telephone service
for the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1996 1997 1998
------ ------ ------
(reais)(1)
<S> <C> <C> <C>
Average rates for local telephone service(2):
Monthly subscription:
Residential............................................. 3.00 7.78 10.00
Commercial.............................................. 10.46 13.50 15.00
Measured service (per local pulse)........................... 0.038 0.054 0.058
</TABLE>
- -------------------------
(1) In constant reais of December 31, 1997 purchasing power for any period prior
to January 1, 1998.
(2) Average of monthly average rates, net of taxes.
The Company charges an activation charge of R$69.10, including taxes, for
the activation of a line, an installation fee of R$29.65, including taxes, for
the installation of a new line and a fee of R$29.65, including taxes, when a
customer changes addresses. Prior to May 1997, under a system called
"auto-financing," each customer requesting the installation of a line was
required to invest in shares of Telebras or its subsidiaries. The amount to be
invested varied from time to time but was substantial. In 1996, for example, the
required investment for a new line in the State of Sao Paulo was R$1,117.63.
Auto-financing was phased out in 1997, and the activation charge, which was
initially R$300, was reduced to R$80 in October 1997 and R$50, net of taxes, in
March 1998.
Intraregional Long-Distance Rates
Rates for intraregional long-distance calls are computed on the basis of
the time of day, and day of the week, duration and distance of the call and also
vary depending on whether special services, such as operator assistance, are
used. Some intraregional calls made within the same area code may also be
measured by pulses. See "--Regulation of the Brazilian Telecommunications
Industry--Rate Regulation." The following table sets forth selected information
on the Company's domestic long-distance rates during the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1996 1997 1998
------ ------ ------
(reais)(1)
<S> <C> <C> <C>
Domestic long-distance rates(2)(3):
0 to 50 km..................................................... 0.42 0.32 0.32
50 to 100 km................................................... 0.70 0.54 0.54
100 to 300 km.................................................. 1.07 0.81 0.81
Over 300 km.................................................... 1.40 1.08 1.08
</TABLE>
- -------------------------
(1) In constant reais of December 31, 1997 purchasing power for any period
prior to January 1, 1998.
(2) Average of monthly average rates, net of taxes.
(3) Rates for a domestic long-distance call, three minutes in duration between
the hours of 9 a.m. and noon and 2 p.m. and 6 p.m. (peak hours) on
weekdays, net of value-added taxes.
Network Usage Charges
The Company's revenue from network services consists primarily of two basic
categories: payments from other telecommunications service providers on a
per-minute basis to complete calls using the Company's network and payments from
other telecommunications service providers on a contractual basis to use part of
the Company's network. Payments on a per-minute basis include payments from
Embratel and cellular service providers. Payments on a contractual basis include
payments to lease parts of the Company's network by cellular service providers.
Other telecommunications service providers pay the Company a network usage
charge computed on a per-minute basis, to complete a call on the Company's
network. The network usage charge varies depending on whether the
telecommunications service provider uses the Company's local or long-distance
network. Similarly, the Company pays other fixed-line service providers a
network usage charge to complete calls on their networks and the Company pays
cellular service providers a network usage charge to complete calls on their
networks. The terms and conditions of interconnection are freely negotiated
between parties, subject to a price cap established by Anatel. If the Company
offers to any party an interconnection tariff below the price cap, it must offer
that tariff to any other requesting party on a nondiscriminatory basis.
Cellular telecommunications service in Brazil, unlike in North America, is
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). Under the
policy of a calling party pays, a cellular service subscriber generally pays
cellular usage charges only for calls made by the cellular service subscriber
and not for calls received. Calls received by a cellular service subscriber are
paid for by the party that places the call in accordance with a rate based on
cellular per minute charges. For example, a fixed-line service customer pays a
rate based on cellular per minute charges for calls made to a cellular service
subscriber. The cellular base rate per minute charges are generally VC1, for
calls within the locality, VC2, for calls outside the cellular subscriber's
registration area, and VC3, for calls outside the concession area in which the
registration area is located. The Company charges its fixed-line service
customers per minute charges based on either VC1, VC2, or VC3 rates when a
fixed-line service customer calls a cellular subscriber. In turn, the Company
pays the cellular service provider the mobile network usage charge.
For calls made by the Company's customers that terminate on the networks of
Band B operators, the network usage charges the Company must pay to the Band B
operator to complete such calls exceed the retail measured usage charges the
Company is permitted to collect from its customers. This results in losses for
the Company for certain calls made by the Company's customers that terminate on
a Band B network, particularly for calls made during reduced-rate evening hours.
The Company has requested that Anatel either increase the Company's network
usage rates or decrease the Band B network usage rates. Anatel has not yet
provided a response to the Company's request for rate adjustments and there can
be no assurance that Anatel will adjust network usage rates in a way that will
be favorable for the Company. For a discussion of the Company's payments to
cellular service providers see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations for the
years ended December 31, 1996, 1997 and 1998--Cost of services--Services."
The Company's revenue from network services also includes payments from
other telecommunications service providers arranged on a contractual basis to
use part of the Company's network. Other telecommunications service providers,
such as providers of trunking and paging services, may use the Company's network
to connect a central switching station to the Company's network. Some cellular
service providers use the Company's network to connect cellular central
switching stations to the cellular radio base stations. The Company also leases
transmission lines, certain infrastructure and other equipment to other
providers of telecommunications services.
The following table sets forth the average per-minute rates charged by the
Company for network services during the indicated years.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1996 1997 1998
------ ------ ------
(reais)(1)
<S> <C> <C> <C>
Network usage rate (local)(2)..................................... 0.031 0.036 0.036
Network usage rate (long-distance )(2)............................ 0.062 0.066 0.066
Per minute charges for calls made to the cellular network:
VC1.......................................................... 0.37 0.37 0.37
VC2.......................................................... 0.80 0.80 0.80
VC3.......................................................... 0.91 0.91 0.91
</TABLE>
- -------------------------
(1) In constant reais of December 31, 1997 purchasing power for any period
prior to January 1, 1998.
(2) Average of monthly average rates, net of taxes.
Data Transmission Rates
The majority of revenue from data transmission services is generated by
monthly line rental charges for private leased circuits. The balance consists
mainly of nominal charges for access to the data transmission network and
measured service charges based on the amount of data transmitted. Effective in
May 1997, line rental charges for private leased circuits were reduced by 42%.
Rates charged for data transmission services are solely determined by the
Company and are not subject to a rate cap. However, data transmission services
must be offered on a nondiscriminatory basis. The following table sets forth
selected information about the Company's average monthly line rental charges for
private leased circuits service during the indicated years.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1996 1997 1998
--------- --------- ---------
(reais)(1)
<S> <C> <C> <C>
Average rates for monthly line rental per leased circuit: (2)
9.6 Kbits................................................. 2,427.69 1,011.92 749.99
64 Kbits.................................................. 5,940.72 2,335.00 2,028.75
2 Mbits................................................... 45,844.62 29,088.43 25,731.20
</TABLE>
- -------------------------
(1) In constant reais of December 31, 1997 purchasing power for any period
prior to January 1, 1998. (2) Average of monthly average rates, net of
taxes, assuming a transmission distance between 300 and 500 kilometers.
Value-added Taxes on Telecommunications Services
The cost of telecommunications services to the customer includes a variety
of taxes. The average rate of all such taxes, as a percentage of the Company's
gross operating revenues, was 23% in 1998. The principal tax is a state
value-added tax, the Imposto sobre Circulacao de Mercadorias e Servicos
("ICMS"), which the Brazilian states impose at varying rates on revenues from
the provision of telecommunications services. The rate in the State of Sao Paulo
is 25% for domestic telecommunications services.
Other taxes on gross operating revenues include two federal taxes, the
Programa de Integracao Social ("PIS") and the Contribuicao para Financiamento da
Seguridade Social ("COFINS"), imposed on gross operating revenues at a combined
rate of 2.65%. These taxes were increased to a combined rate of 3.65% of gross
operating revenues in February 1999. The increase of 1% may be offset against
the social contribution tax imposed on profits during the same fiscal year.
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 activation and monthly subscription charges, to
which it had not previously been applied. There is a risk that the state
governments could seek to apply the ICMS retroactively to activation and
subscription fees charged during the five years preceding June 30, 1998. See
"Legal Proceedings."
Billing and Collection
The Company sends each customer a monthly bill covering all the services
provided during the prior period. Customers are grouped in fourteen billing
cycles based on the date bills are issued. The telephone bill separately
itemizes long distance calls, calls made on a cellular network, 800 and 900
services and other services such as call waiting, voice mail and call
forwarding. Customer payments are effected under agreements with various banks,
either by debiting the customer's checking account or by direct payment to a
bank.
In 1998, the Company blocked the service of approximately 1.9 million
lines, and approximately 90% of such lines were unblocked following payment of
the overdue amounts. The Company charges interest at a rate of 1% per month plus
a one-time late charge of 2% of the amount outstanding. At December 31, 1998,
8.9% of all receivables had been outstanding between 30 and 90 days and 5.3% of
all receivables had been outstanding for more than 90 days. Under prior
regulations, the Company was not permitted to disconnect a customer's service
until a receivable was outstanding for over 90 days. The Concessions now
authorize the Company to restrict a customer from making outgoing calls after 30
days, restrict a customer from making outgoing or receiving incoming calls after
60 days and disconnect a customer completely after 90 days. The Company's future
disconnection policy will depend on factors such as the level of unmet demand,
the level of competition and regulations governing the Company's disconnection
policy. For a discussion of provisions for past due accounts, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations for the years ended December 31, 1996, 1997
and 1998--Operating expenses--Selling expense."
The Company also receives revenues from network services, primarily from
Embratel and cellular service providers that interconnect with the Company's
network. When an interregional or international long-distance call is originated
on the Company's network, the Company bills its customer, retains any access fee
for use of the Company's network (including, in the case of Embratel, the
supplemental per-minute fee) and transfers the balance to the long-distance
carrier. The Company also bills its customers for calls made from the Company's
fixed-line network to cellular customers. Conversely, calls made from cellular
service customers to fixed-line customers are billed by the cellular service
provider. After the billing cycle is over, the Company and the cellular service
provider reconcile the amounts owed to each other (the fixed and mobile network
usage rates and any fees owed on a contractual basis) and pay the net amount
outstanding to the appropriate party. The Company also provided billing services
to Telesp Celular until it develops its own billing system.
Network and Facilities
General
The Company's network includes installed lines and exchanges, a network of
access lines connecting customers to exchanges, trunk lines connecting exchanges
and long-distance transmission equipment. At December 31, 1998, the Company's
regional telephone network included approximately 6.9 million installed lines,
including public telephone lines, of which 6.4 million were lines in service. Of
the access lines in service at that time, 68.9% were residential lines, 28.6%
were commercial lines and 2.5% were public telephone lines. Intraregional
long-distance transmission is provided by a microwave network and by fiber optic
cable. The Company's management believes that the unmet demand for fixed-line
telecommunications services in the Region is substantial. At December 31, 1998,
37% of the households and 72% of the businesses in the Region had local
telephone service. The customer waiting period for the installation of a new
line varies significantly depending on the capacity of the switching center that
serves the locality.
The following table sets forth selected information about the Company's
network at the dates and for the years indicated.
<TABLE>
<CAPTION>
At and for year ended December 31,
--------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Installed access lines (millions)................................. 4.5 4.9 5.4 6.0 6.9
Access lines in service (millions) (1)............................ 4.3 4.6 5.1 5.6 6.4
Average access lines in service (millions)........................ 4.1 4.4 4.8 5.3 6.0
Lines in service per 100 inhabitants.............................. 13.1 13.7 15.2 16.4 18.8
Percentage of installed access lines connected to digital 33.3 38.0 44.0 56.0 73.0
exchanges.........................................................
Employees per 1,000 access lines installed........................ 5.8 5.1 4.3 4.0 2.8
Number of public telephones (thousands)........................... 120.6 126.6 146.7 168.8 179.6
Local call pulses (billions)...................................... 22.2 23.3 24.3 23.5 23.1
Domestic long-distance call billed minutes (billions)............. 6.3 7.6 8.9 9.9 9.0
International call billed minutes (millions)...................... 94.5 145.5 165.5 202.8 121.3
</TABLE>
- -------------------------
(1) Data includes public telephone lines.
The Company's network strategy is to develop an integrated broadband
network supporting all types of telecommunications services and multimedia, data
and image applications. It is incorporating new digital-based technologies in
its network to increase the integrated services the Company can provide. It is
also developing plans to install ATM-Asynchronous Transfer Mode technology
network and transmission platforms for high-speed switched services that will
accommodate image transmission. By June 1999, the Company's management hopes to
establish an ISDN-Integrated Services Digital Network that will provide
high-quality, high-speed capacity at competitive prices to residential and small
business customers. The Company is also developing a digital-based systems
architecture for the basic local and regional network with a 2.5 Gbit
SDH-Synchronous Digital Hierarchy transmission network linking transit and
tandem switches that will improve service delivery by placing the digital
accesses as close as possible to the user.
The Company began to install digital exchanges in 1982 and fiber optic
cable in 1984. Compared to the older analog technology, digital systems improve
the quality and efficiency of the network, accommodate higher traffic levels,
require less maintenance and permit the Company to offer a broad range of
value-added services simultaneously on the same network, such as voice, text and
data applications. Optical fiber provides greater transmission capacity,
significantly reduces the fading of signals and requires less frequent
amplification, thereby reducing the cost of providing service and increasing
traffic capacity and network reliability. Beginning in 1997, all new lines
installed by the Company were connected to digital exchanges. At May 31, 1998,
the Company's network was approximately 80% digital. By the end of 2005, the
Company plans to have replaced almost all of its analog exchanges with digital
exchanges.
Network Expansion
The Company is required under the Telecommunications Regulations to meet
certain targets relating to network expansion and modernization. See
"--Regulation of the Brazilian Telecommunications Industry--Obligations of
Telecommunications Companies--Network Expansion--General Plan on Universal
Service." The Company has been focusing and will continue to focus on meeting
the Anatel targets that are the most difficult for the Company, such as the
targets relating to maximum waiting periods for the installation of a line,
network digitalization and public telephone availability. The Company is
obligated to reduce the maximum waiting time for installation of a line to four
weeks by year-end 2001. The maximum waiting time for lines installed during 1998
was 107 weeks. The Company is required, by year-end 1999, to make available to
the public 24 hours per day at least 50% of its public telephones in every local
calling area with local and domestic long-distance direct-dial capability and at
least 25% of such public telephones with international long-distance direct-dial
capability. At December 31, 1998, 91.3% of the Company's public telephones
provided local and domestic long-distance direct-dial capability and 0.09% of
such telephones provided international long-distance direct-dial capability.
Competition
The Telecommunications Regulations provide for the introduction of
competition in telecommunications services in Brazil. The Telecommunications
Regulations require Anatel to permit one competitor to provide local fixed-line
telecommunications services in the Region and two additional competitors to
provide intraregional long-distance telecommunications services in the Region.
The new licensees that will compete with the Company will not be subject to the
same service quality and network expansion and modernization obligations that
the Company is subject to under its Concessions. Beginning in 2002, the Company
may face an unlimited number of competitors in local and intraregional
long-distance, and it may itself seek a license to provide interregional and
international long-distance service provided that it has met certain obligations
contained in the Concessions. See "--Regulation of the Brazilian
Telecommunications Industry--Concessions and Licenses."
In April 1999, Megatel won the bid for the operating licenses to provide
local and intraregional long-distance fixed-line services in the Region. Megatel
paid R$70 million for the operating licenses, the minimum price set by the
Brazilian government. By the end of 1999, Megatel plans to provide service to 13
of the 25 municipalities in the State of Sao Paulo with more than 200,000
inhabitants, offering an expected line density of 3.37 lines per 100
inhabitants. Megatel expects that by the end of 2000, it will service
approximately 80% of the Region, offering an expected line density of 5.53 lines
per 100 inhabitants. Megatel is authorized to begin operations in December 1999.
Megatel is a consortium led by WLL International Inc. ("WLL"). WLL and Bell
Canada International ("Bell Canada") each own a 35.3% interest in the
consortium. Qualcomm Incorporated ("Qualcomm") and the Liberman Group of
Argentina (the "Liberman Group") own 16.6% and 12.8% in the consortium,
respectively. The consortium that comprises Megatel also received authorization
under the name Canbra Telefonica S.A. to provide local fixed-line services in
competition with Tele Norte Leste Participacoes S.A. ("Tele Norte Leste"). Tele
Norte Leste is the regional fixed-line service provider operating in the
northern, northeastern and southeastern regions of Brazil, including the State
of Rio de Janeiro.
WLL was formed in June 1998 to provide fixed-line telecommunications and
data transmission services in Latin America. Bell Canada is a subsidiary of BCE
Inc., the largest telecommunications company in Canada and a leading provider of
telecommunications services in markets outside of Canada. Qualcomm is a supplier
of CDMA wireless local loop networks worldwide and develops digital wireless
communications products and services based on its CDMA digital technology. The
Liberman Group invests in fixed wireless telecommunications in Latin America
through SLI Wireless, a part of the Liberman Group.
In July 1999, Embratel is authorized to begin providing intraregional
long-distance telecommunications services in the Region in competition with the
Company. Embratel is controlled by MCI Worldcom, a global telecommunications
company with revenue of more than $30 billion and established operations in over
65 countries.
In January 1999, Bonari was awarded licenses to provide long-distance
services throughout Brazil in competition with Embratel. In July 1999, Bonari,
along with Embratel, will be authorized to provide intraregional long-distance
service in the Region in competition with the Company. The partners that
comprise Bonari include: (i) National Grid, the owner and operator of the
electricity transmission network in the United Kingdom with a quoted market
value of over US$10 billion, (ii) France Telecom, one of the world's leading
telecommunications carriers with 1998 consolidated operating revenues of 24.6
billion euros and (iii) Sprint, a global U.S. based communications company with
US$17 billion in annual revenues.
The Company is also subject to competition from cellular service providers
which would increase if cellular providers were to lower the rates for cellular
service. There are three cellular service providers in the Region: Telesp
Celular, which was spun off from the Company in January 1998, BCP (a consortium
including Bell South Corporation of the US, the media group OESP, Safra Bank and
Splice) and Tess (a consortium including Telia of Sweden, two Brazilian
construction firms and Unibanco). Cellular service providers are also a
significant source of revenue for the Company through network usage fees for the
use of the Company's network and lease payments for use of, and availability of
capacity on, the Company's network. See, "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Non-local Services--Network
Services."
In December 1998, Anatel approved a resolution outlining a numbering plan
for fixed-line service providers in Brazil. The Numbering Plan will promote
competition between providers of fixed-line long-distance services by requiring
the caller to choose a service provider for each long-distance call by prefacing
the call with numbers that identify the carrier. Following the implementation of
the Numbering Plan, the Company's management anticipates that the Company will
experience a loss of market share in respect of intraregional long-distance
service. It is not yet possible to estimate the revenue effect that may result
from such change in market share.
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. Megatel is a potentially powerful competitor with
significant expertise in the areas of building and successfully managing
telecommunications operations, advanced technology and international finance, as
well as prior experience in the State of Sao Paulo. Embratel, the former
long-distance carrier of the Telebras System, has an extensive transmission
network, extensive experience and financial resources. Bonari is owned by
National Grid, Sprint and France Telecom, companies with extensive experience in
network development, installation of optical fiber cable, and at the forefront
of integrating long-distance, local and wireless communications. 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 technical
and financial resources available to the Company's competitors, the business
strategies and capabilities of the competitors, prevailing market conditions,
the regulations applicable to new entrants and the Company and the effectiveness
of the Company's efforts to prepare for increased competition.
Employees
At December 31, 1998, the Company had 18,930 employees. All of the
Company's employees are employed on a full time basis, divided into the
following functions: 0.8% corporate management, 0.8% marketing, 7.9% plant
expansion and modernization, 48.5% plant operation and maintenance, 23.7% client
services, 2.2% human resources, 2.3% budget and finance, 2.6% supplies, 5.3%
information services and 5.9% general administration.
Approximately 53.0% of all employees are members of state labor unions
associated either with the Federacao Nacional dos Trabalhadores em
Telecomunicacoes ("Fenattel") or with the Federacao Interestadual dos
Trabalhadores em Telecomunicacoes ("Fittel"). Some employees in particular job
categories are affiliated with other unions specific to such categories. Each
operating subsidiary of the Company negotiates a new collective labor agreement
every year with the local union. These negotiations are carried out with the
supervision and guidance of the Company, on one side, and Fenattel or Fittel, on
the other. The collective agreements currently in force expire on November 30,
1999. 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 ever experienced a work stoppage that had a material effect on its
operations. Employees of the Company at the time of the privatization had the
right to maintain their rights and benefits in Fundacao Telebras de Seguridade
Social - Sistel ("Sistel"), a multi-employer defined benefit plan that
supplements 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.
See Note 25 to the Consolidated Financial Statements. Employees hired since the
privatization are not members of Sistel and the Company does not contribute to
any pension fund on behalf of such employees.
Sistel covers the employees of the companies of the former Telebras System,
and the Company is contingently liable for all of the unfunded obligations of
the plan. See Note 25 to the Consolidated Financial Statements. The Company and
the other sponsors of Sistel (primarily the former Telebras companies) are
considering a break-up of Sistel that would generate a separate plan for each of
the sponsors for their own employees. The sponsors would expect, however, to
jointly maintain a plan offering the current benefits under Sistel for those
employees who have already retired and the funding for such plan would be
provided by all the sponsors in accordance with the method of allocation used in
the break-up of Sistel. The plans for the new funds would be modified to the
needs of the new sponsors. Because the sponsors are only in the preliminary
stages of discussing the proposed break-up of Sistel, the amounts of the
independent reserve liabilities with respect to each sponsors' respective
participation are not yet measurable and, therefore, the final configuration of
each sponsor's plan and the consequences for the Company or its employees cannot
be assessed.
Research and Development
The Company conducts independent research and development in areas of
telecommunications services but does not independently develop new
telecommunications hardware. The Company primarily depends on manufacturers of
telecommunications products for the development of new hardware.
In connection with the Breakup, the Subsidiaries were required to enter
into three-year contracts which obligate them to contribute in aggregate R$108.3
million in approximately equal installments to the Centro de Pesquisa e
Desenvolvimento da Telebras (the "Center"), a research and development center
formerly operated by Telebras during the three years ending May 2001.
During the effectiveness of its agreement with the Center, the Company has
access to telecommunications software developed by the Center and other
technological services provided by the Center such as equipment testing and
consulting and training services. The Center has also agreed to develop for the
Company a system of billing and collection, a system to facilitate customer
assistance, systems of automation, supervision and repair of the Company's
network and certain additional technological services. The Center may also
provide services to third parties on a fee-for-service basis. The Company may
request additional technological support from the Center than contemplated in
the agreement by contributing additional funds to the Center. The Company's
research and development expenses during 1996, 1997 and 1998, including its
contribution to the Center, were R$ 27.7 million, R$ 23.6 million and R$33.0
million for 1996, 1997 and 1998, respectively.
Capital Expenditures
Before the 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
telecommunications service in the Region. Since the Privatization, 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 Concessions. See "--Regulation of the Brazilian
Telecommunications Industry--Obligations of Telecommunications Companies."
The primary focus of the Company's capital expenditure program has been and
continues to be the expansion, modernization and digitalization of the network
in order to comply with the Anatel targets. See "Regulation of the Brazilian
Telecommunications Industry--Obligations of Telecommunications Companies." For
the future, the Company expects to emphasize the development of the integrated
broadband network, as described under "--Network and Facilities." The Company
anticipates that capital expenditures for 1999 will be R$2,510 million, which is
expected to be mainly funded with internally generated funds from operations.
The following table sets forth the Company's capital expenditures for each
year in the three-year period ended December 31, 1998.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
(millions of reais)(1)
Operational investments (2)........................................ 253.7 148.5 111.2
Telephone equipment:
Exchanges 309.1 364.7 772.5
Transmission.................................................... 87.9 122.2 208.8
Infrastructure.................................................. 79.0 239.5 277.1
External network................................................ 452.3 496.2 1,085.1
Other........................................................... 91.2 58.6 59.9
Data transmission equipment........................................ 50.1 49.9 65.4
------- ------- -------
Total capital expenditures (2)..................................... 1,323.3 1,479.6 2,580.0
======= ======= =======
</TABLE>
- -------------------------
(1) In constant reais of December 31, 1997 purchasing power for any period
prior to January 1, 1998.
(2) Operational investments include investments to replace plant equipment and
other fixed assets generally without altering the capacity of the asset
replaced and certain investments in operational and technical support such
as telecommunications management network systems.
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 and various administrative enactments thereunder. Each of
the Subsidiaries 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 General
Telecommunications Law and the October 1997 Regulamento da Agencia Nacional de
Telecomunicacoes (the "Anatel Decree"). Anatel is administratively independent
and financially autonomous. Anatel is required to report on its activities to
the Ministry of Communications and to the Brazilian Congress. Any proposed
regulation of Anatel is subject to a period of public comment, including public
hearings, and Anatel's decisions may be challenged in the Brazilian courts.
Concessions and Licenses
Concessions and licenses to provide telecommunications services are granted
under the public regime or the private regime. Companies that provide services
under the public regime ("public regime companies") are subject to certain
obligations as to quality of service, continuity of service, universality of
service, network expansion and modernization. Companies that provide services
under the private regime ("private regime companies") are generally not subject
to the requirements as to continuity of service, universality of service or
modernization, but they are subject to certain network expansion and quality of
service obligations set forth in their licenses. The companies that operate in
the public regime include the four primary public regime companies (Embratel,
the Company and the two other regional fixed-line service providers) and certain
other local operators. The four primary public regime companies are the primary
providers of fixed-line telecommunications services in Brazil that include local
service and intraregional, interregional and international long-distance
service. All other telecommunications service providers, including the other
companies authorized to provide fixed-line services in the Company's Region,
operate in the private regime.
Public regime companies, such as the Company, also often offer certain
services in the private regime of which the most significant are data
transmission services.
Fixed-line Services--Public Regime. Each public regime company operates
under concessions that expire in 2005 but, subject to meeting certain
obligations, may be renewed for an additional 20-year period. The Concessions
may also be revoked prior to expiration. See "--Obligations of
Telecommunications Companies--Public Regime--Service Restrictions." Every second
year during the 20-year renewal period, public regime companies will be required
to pay biannual renewal fees equal to 2% of annual net revenues from the
provision of telecommunications services (excluding taxes and social
contributions) during the immediately preceding year.
The Company, like the other regional fixed-line companies, is generally not
permitted to offer interregional, international long-distance service or other
specified telecommunications services until December 31, 2003. However, if all
the Subsidiaries meet their network expansion and universal service targets of
December 31, 2003 by December 31, 2001, the Company would receive authorization
to offer any sort of telecommunications services beginning in 2002, whether or
not in the Region, including interregional and international long-distance
service. See "--Obligations of Telecommunications Companies--Public
Regime--Service Restrictions."
Fixed-line Services--Private Regime. The Telecommunications Regulations
provide for the introduction of competition in telecommunications services in
Brazil by requiring the Federal Government to authorize four private regime
companies--one to provide local service and intraregional long-distance service
in each of the three Fixed-line Regions and one to provide intraregional,
interregional and international long-distance service throughout Brazil. Anatel
has already granted to a private regime operator the licenses to operate in the
Company's Region. Anatel has also granted to two other private regime companies
the licenses to operate in one of the other Fixed-line Regions and the licenses
to provide intraregional, interregional and international long-distance service
in competition with Embratel. The auction for the licenses to operate in the
remaining Fixed-line Region did not attract any bidders and has been rescheduled
for July 12, 1999. Following the completion of the auctions, authorizations will
have been granted in each Fixed-line Region for two regional fixed-line
companies to provide local service (a public regime company and a private regime
company), four fixed-line companies to provide intraregional long-distance
service (a public regime company, two private regime companies and Embratel) and
two companies to provide interregional long-distance and international
long-distance (Embratel and Bonari). Beginning in 2002, Anatel may authorize
additional private regime companies to provide intraregional, interregional and
international telephone long-distance. See "--Competition."
Obligations of Telecommunications Companies.
The Company, like other telecommunications service providers, is subject to
obligations concerning quality of service and network expansion and
modernization. The four public regime companies are also subject to a set of
special restrictions regarding the services they may offer contained in the
Plano Geral de Outorgas ("General Plan of Concessions and Licenses"), and
special obligations regarding service quality, network expansion and
modernization contained in the Plano Geral de Metas de Universalizacao ("General
Plan on Universal Service") and the Plano Geral de Metas de Qualidade ("General
Plan on Quality").
Public Regime--Service Restrictions. The General Plan of Concessions and
Licenses prohibits the regional fixed-line service providers from offering
cellular, interregional long-distance or international long-distance services
and prohibits Embratel from offering local or cellular services until December
31, 2003. Such service restrictions may be suspended by December 31, 2001 for
any company that meets the 2003 targets by December 31, 2001.
Anatel will monitor the progress of Embratel and the regional fixed-line
service providers towards meeting their Lists of Obligations. See tables in
"--Network Expansion--General Plan on Universal Service" and "--Quality of
Service--General Plan on Quality." Anatel may revoke the concessions of
companies that fail to meet their 2003 targets. Each regional fixed-line
provider will be authorized to provide all other telecommunication services
(except for fixed-line services in the private regime within the Region and
cable TV services) either (i) beginning in 2004; or (ii) beginning in 2002,
provided that all of its operating subsidiaries have met their respective 2003
targets.
Public regime companies are also subject to certain restrictions on
alliances, joint ventures, mergers and acquisitions, including:
o a public regime company is prohibited from holding more than 20
percent of the voting stock in any other public regime company for a
five year period beginning July 1998 (following that period the
prohibition is suspended provided that the acquisition is not deemed
detrimental to the implementation of the General Plan of Concessions
and Licenses);
o mergers between regional fixed-line service providers and cellular
service providers are prohibited (this prohibition also applies to
private regime companies); and
o companies offering telephony services are prohibited from offering
cable television (unless a public auction to provide such services in
the relevant region is held and no one appears).
Network Expansion--General Plan on Universal Service. Under the General
Plan on Universal Service, each regional fixed-line service provider is required
to expand fixed-line service within its Fixed-line Region in accordance with the
List of Obligations and Embratel is required to expand access to long-distance
service by installing public telephones in remote regions. No subsidies or other
supplemental financings are anticipated to finance the network expansion
obligations of the public regime companies. Any Subsidiary that meets its 2001
target for maximum waiting time for installation of a line of four weeks by
December 31, 1999 will no longer be subject to the network expansion
requirements. If a public regime company fails to meet its obligations in a
particular Fixed-line Region, Anatel may apply the penalties established in the
Concessions. In the event of extreme failure on account of a public regime
company that endangers the provision of basic telecommunications services to the
region and upon proof that the public region company is incapable of providing
the service, Anatel would be obligated to issue a license to another company to
service the region.
The following table sets forth the Company's network expansion and
modernization obligations as provided in the List of Obligations at the times
indicated and the Company's performance with respect to each category of
obligation at December 31, 1998.
<TABLE>
<CAPTION>
Telesp status
at December
31, By December 31,
------------- --------------------------------------------------------
1998 1999 2000 2001 2002 2003 2004 2005
------------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Minimum number of installed lines
(millions)............................. 6.18 7.00 8.32 9.73 -- -- -- --
Fixed-line service available to all
communities larger than................ -- -- -- 1,000 -- 600 -- 300
Maximum waiting time for installation of a
line (weeks)(1)........................ 107 -- -- 4 3 2 1 --
Minimum number of public telephones in
service (thousands).................... 163.8 193.7 216.0 241.0 -- -- -- --
Minimum number of public telephones per
1,000 inhabitants...................... 5.3 -- -- -- -- 7.5 -- 8.0
Minimum public telephones as a percentage of
fixed lines............................ 0.027 -- -- -- -- 0.025 -- 0.030
Minimum digitalization level of network
(%)(2)................................. 72.6 75 -- 85 -- 95 -- 100
</TABLE>
- -------------------------
(1) Applies only to areas where fixed-line service is fully available.
(2) At May 31, 1999 the digitalization level of the Company as a whole was
approximately 80%.
<TABLE>
<CAPTION>
CTBC status at
December 31, By December 31,
-------------- -------------------------------------------------------
1998 1999 2000 2001 2002 2003 2004 2005
-------------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Minimum number of installed lines
(thousands)............................ 697 833 905 950 -- -- -- --
Fixed-line service available to all
communities larger than................ -- -- -- 1,000 -- 600 -- 300
Maximum waiting time for installation of a
line (weeks)(1)........................ 107 -- -- 4 3 2 1 --
Minimum number of public telephones in
service (thousands).................... 15.8 19.5 21.5 23.5 -- -- -- --
Minimum number of public telephones per
1,000 inhabitants...................... 5.4 -- -- -- -- 7.5 -- 8.0
Minimum public telephones as a percentage
of fixed lines......................... 0.023 -- -- -- -- 0.025 -- 0.003
Minimum digitalization level of network
(%)(2)................................. 74.2 75 -- 85 -- 95 -- 99
</TABLE>
- -------------------------
(1) Applies only to areas where fixed-line service is fully available.
(2) At May 31, 1999 the digitalization level of the Company as a whole was
approximately 80%.
Quality of Service--General Plan on Quality. Under the General Plan on
Quality, each regional fixed-line company and Embratel is required to meet
certain service quality obligations established in its List of Obligations. The
following table sets forth information regarding the Company's obligations at
year-end 1999-2005 and the Company's performance with respect to each category
of obligation at 1998.
<TABLE>
<CAPTION>
Telesp status at
December 31, By December 31,
---------------- ----------------------------------------------------
1998 1999 2000 2001 2002 2003 2004 2005
---------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
99.6 98 -- 99 -- 99.5 -- --
Dial tone within 3 seconds (% of cases).........
Call completion rate during peak periods
(% of calls attempted)(1)...................... 59 60 -- 65 -- 70 -- --
Maximum number of uncompleted calls due
to network congestion (% of
calls attempted)(1)............................. 6 6 -- 5 -- 4 -- --
Maximum monthly repair requests (% of lines in
service)....................................... 4 3 -- 2.5 -- 2 -- 1.5
Maximum monthly public telephone repair
requests (% of public telephones in service)... 20 15 -- 12 -- 10 -- 8
Residential repair response speed (% within
24 hours)(2)................................... 65 95 -- 96 -- 97 -- 98
Nonresidential repair response speed (%
within 8 hours)(3)............................. 65 95 -- 96 -- 97 -- 98
Public telephone repair response speed (%
within 8 hours)................................ 85 95 -- 96 -- 97 -- 98
Operator availability during peak periods (%
response within 10 seconds).................... 40(4) 92 -- 93 -- 94 -- 95
Billing complaints (% of bills issued).......... 0.9 .4 -- .3 -- .2 -- --
</TABLE>
- -------------------------
(1) Local and domestic long-distance calls.
(2) Must always be within 48 hours.
(3) Must always be within 24 hours.
(4) With the initiation of a new call center in January 1999, with improved
computer systems and increased personnel in addition to those required to
staff the new centers, this indicator increased to 95% in May 1999.
<TABLE>
<CAPTION>
CTBC status at
December 31, By December 31,
-------------- ----------------------------------------------------
1998 1999 2000 2001 2002 2003 2004 2005
-------------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dial tone within 3 seconds (% of cases)......... 99.9 98 -- 99 -- 99.5 -- --
Call completion rate during peak periods
(% of calls attempted)(1)...................... 59 60 -- 65 -- 70 -- --
Maximum number of incompleted calls due
to network congestion (% of
calls attempted)(1)............................. 6 6 -- 5 -- 4 -- --
Maximum monthly repair requests (% of lines in
service)....................................... 3.9 3 -- 2.5 -- 2 -- 1.5
Maximum monthly public telephone repair
requests (% of public telephones in service)... 9.5 15 -- 12 -- 10 -- 8
Residential repair response speed (% within
24 hours)(2)................................... 65 95 -- 96 -- 97 -- 98
Nonresidential repair response speed (%
within 8 hours)(3)............................. 65 95 -- 96 -- 97 -- 98
Public telephone repair response speed (%
within 8 hours)................................ 85 95 -- 96 -- 97 -- 98
Operator availability during peak periods (%
response within 10 seconds).................... 40(4) 92 -- 93 -- 94 -- 95
Billing complaints (% of bills issued).......... 0.69 .4 -- .3 -- .2 -- --
</TABLE>
- -------------------------
(1) Local and domestic long-distance calls.
(2) Must always be within 48 hours.
(3) Must always be within 24 hours.
(4) This indicator increased to 95% in May 1999 with the initiation of new call
centers in January 1999 with improved computer systems and increased
personnel.
Fines and Penalties. Failure to meet the network expansion and
modernization obligations in the List of Obligations may result in fines and
penalties of up to R$50 million as well as potential revocation of the
Concessions. Failure to meet the quality of services obligations in the List of
Obligations may result in fines and penalties of up to R$40 million. While there
can be no assurances, the Company's management believes that it will be able to
meet these requirements, however, the Company's ability to meet the quality of
service obligations in the List of Obligations will depend upon certain factors
outside its control. See "--Network and Facilities--Network Expansion" and
"--Customer Services--Quality of Service."
Interconnection. All public regime companies are required to provide
interconnection upon request to any provider of public telecommunications
services. The terms and conditions of interconnection are 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 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.
Rate Regulation
The Concessions provide for a price-cap mechanism to set and adjust rates
on an annual basis. The price-cap mechanism consists of an upper limits placed
on a weighted average rate for two basket of services, one local and one
long-distance. The local basket includes activation charges, monthly
subscription fees and measured usage fees. The long-distance basket includes
four rates for calls of varying distances. The caps for local and long-distance
interconnection services are equal to the caps for the respective baskets.
The initial price caps in the Concessions are based on the previously
existing tariffs, which were developed based on the Company's fully allocated
costs. The price caps are adjusted on an annual basis under a formula set forth
in the Concessions, which provides for two types of adjustments. One adjustment
reflects the rate of deflation or inflation during the relevant period, as
measured by the IGP-DI, an index published by the Fundacao Getulio Vargas, a
private Brazilian economic research organization. The other adjustment is a
reduction in the price-level adjustment determined in accordance with a table of
deemed productivity gains that are phased in during 1998-2005 for some caps and
2001-2005 for others.
Subject to certain limits, the tariffs for individual services within each
basket may be increased as long as the weighted average tariff for the entire
basket does not exceed the price cap. Subject to approval by Anatel, the Company
may also offer alternative plans that are not subject to the price cap. For
instance, customers might be permitted to select a plan that allows unlimited
calling for a set fee rather than paying the per-minute fee under the Company's
basic service plan.
Other telecommunications companies wishing to interconnect with and use the
Company's network must pay certain fees, primarily a flat network usage fee
charged per minute of use, which represents an average charge for a basket of
network elements and services. The flat network usage fee is subject to a price
cap that varies from company to company based on the underlying cost
characteristics of that company's network. For a breakdown of the Company's past
network usage charges, see "--Rates--Network Usage Charges."
Three years from the date of the Concession, Anatel may permit the Company
to set its own tariffs, provided there is effective competition. Excessive
increases in earnings or anti-competitive practices may cause Anatel to revoke
this permission.
For information on the Company's current tariffs and service plans, see
"--Rates."
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 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 and the ripple effects of these crises presented
serious challenges 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. At year-end 1998, the Commercial Market Rate stood at R$1.2087 to US$1.00.
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 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 disbursement, 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$1.7240 to US$1.00. on May 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, investors' reactions to developments in one country
can have an effect on the securities of issuers in other countries, including
Brazil. During 1998 and 1999, the international financial markets have
experienced significant volatility, and a large number of financial market
indices, including those in Brazil, have declined significantly.
The current market volatility in 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. 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.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1996 1997 1998
---- ---- ----
(percentages)
<S> <C> <C> <C>
Inflation (IGP-M)...................................................... 9.2 7.7 1.8
Devaluation (Brazilian currency vs. US$)............................... 6.9 7.4 8.3
</TABLE>
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 approximately 42.5%.
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 invites 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 properties of the Company consist of transmission equipment
(including outside plant and trunk lines), exchange equipment and switching
equipment. The Company's land and buildings principally consist of its telephone
exchanges and other technical, administrative and commercial properties.
Exchanges include local exchanges, "toll" exchanges that connect local exchanges
to long-distance transmission facilities and "tandem" exchanges that connect
local exchanges with each other and with toll exchanges.
The Company's properties are located throughout the State of Sao Paulo. At
December 31, 1998, the Company utilized 1,849 properties, of which 1,505 sites
were owned by the Company. Telesp owns the building in Sao Paulo from which the
majority of its management activities are conducted. Pursuant to Brazilian legal
procedures, liens have been placed on several of the Company's properties
pending the outcome of various legal proceedings to which the Company is a
party.
At December 31, 1998, plant and equipment related to switching stations
represented approximately 24%, transmission equipment represented 30%,
construction in progress represented approximately 16%, buildings, underground
equipment and lines represented approximately 23% and other fixed assets
represented approximately 7% of the net book value of the Company's total fixed
assets. At December 31, 1998, the net book value of the Company's property,
plant and equipment was R$13.9 billion.
Item 3. Legal Proceedings
The legality of the Breakup of Telebras was challenged in numerous legal
proceedings, some of which have now been dismissed. A few, however, are still
pending. The Company's management believes that the ultimate resolution of those
proceedings will not have a material adverse effect on the Company's business or
financial condition.
The Company is a party to certain legal proceedings arising in the normal
course of business, including civil, administrative, tax, social security and
labor proceedings. The Company has provided for or deposited in court amounts to
cover its estimated losses due to adverse legal judgments. In the opinion of
management, such actions, if decided adversely to the Company, would not have a
material adverse effect on the Company's business and financial condition.
The Company is a party to several lawsuits filed by the National Institute
of Social Security in 1997 before the Federal Courts of Sao Paulo relating to
the collection of the Contribuicoes devidas ao Seguro de Acidente de Trabalho
(Workers Accident Insurance Tax or "SAT") for the period between January 1986
and June 1996. The aggregate amount involved in such lawsuits is approximately
R$100 million. The Company has allowed judicial liens to be placed on five of
its properties, valued at approximately R$61.6 million in the aggregate,
pursuant to Brazilian legal procedures pending the outcome of such lawsuits. In
the event the Company prevails in such lawsuits, such liens will be lifted from
the properties.
A class action suit was filed against the Company in 1995 seeking an
injunction against the Company's "servicos 900" (code 900 services). While the
Company's management believes that it will prevail on the merits in this civil
action, the Company faces an estimated loss in revenues of approximately R$23
million per year.
Telebras is the legal predecessor of the Holding Company and is a defendant
in a number of legal proceedings and subject to certain other claims and
contingencies. 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 for which specific accounting provisions have been assigned to
the Holding Company or one of the other New Holding Companies. Creditors of
Telebras had until September 14, 1998 to challenge this allocation of liability.
As of June 23, 1999, no creditor has challenged the allocation. Management of
the Company believes that the chances of any such claims materializing and
having a material adverse financial effect on the Company are remote.
Liability for any claims arising out of acts committed by Telesp prior to
the effective date of the spin-off of Telesp's cellular assets and liabilities
to Telesp Celular remains with Telesp, except for labor and tax claims (for
which Telesp and Telesp Celular are jointly and severally liable by operation of
law) and those liabilities for which specific accounting provisions have been
assigned to Telesp Celular. However, under the shareholders' resolution pursuant
to which the spin-off was effected, Telesp Celular has contribution rights
against Telesp with respect to the entire amount of any payments made by Telesp
Celular in connection with any labor or tax claims brought against Telesp
Celular and relating to acts committed by Telesp prior to the effective date of
the spin-off.
Item 4. Control of Registrant
Of the Holding Company's two classes of capital stock outstanding, only the
Common Shares have full voting rights. The Preferred Shares have voting rights
under limited circumstances. SP Telecomunicacoes Holding S.A. ("SP
Telecomunicacoes") owns 51.8% of the Common Shares. SP Telecomunicacoes was
formerly Tele Brasil Sul Participacoes S.A. Accordingly, SP Telecomunicacoes has
the ability to control the election of the Company's Board of Directors and the
direction and future operations of the Company.
The following table sets forth information concerning the ownership of
Common Stock by SP Telecomunicacoes and by the Company's officers and directors
as a group as of 15. The Company is not aware of any other shareholder owning
more than 10.0% of the Common Shares.
<TABLE>
<CAPTION>
Number of Percentage of
Common Shares outstanding
Name of owner owned Common Shares
- ------------- ------------- -------------
<S> <C> <C>
SP Telecomunicacoes.................................................... 64,405,151,125 51.79
All directors and executive officers as a group (15 persons)........... 37,930 0.00
</TABLE>
The following is a brief description of the shareholders of SP
Telecomunicacoes.
Telefonica Internacional S.A. ("Telefonica") is a subsidiary of Telefonica
de Espana S.A. Telefonica is the controlling shareholder of SP Telecomunicacoes.
Telefonica is dedicated to the telecommunications sector, with activities in
Spain and Portugal and in the Americas. Telefonica provides a comprehensive
range of telecommunications services, including fixed, mobile and public
telephone services to the residential and business markets, as well as
international calls, data transmission and infrastructure services. Its shares
are listed on the Madrid Stock Exchange and on the New York Stock Exchange.
Telefonica is also a participant in the consortia that acquired control of three
other New Holding Companies: Tele Leste Celular Participacoes S.A., Telesp
Celular Participacoes S.A. and Tele Sudeste Celular Participacoes S.A.
Portelcom Fixa S.A. is part of the Portugal Telecom Group ("Portugal
Telecom"). Portugal Telecom is a company dedicated to the telecommunications
sector, more specifically to the establishment, management and exploration of
the telecommunications' infrastructures and the supply of telecommunications
services. It also provides the services of distribution of telecommunications
diffusion signals. Portugal Telecom is also a participant in the consortium that
acquired control of another New Holding Company, Telesp Celular Participacoes
S.A.
Iberdrola Investimentos Sociedade Unipessoal, Lda. is an indirect
subsidiary of Iberdrola. Iberdrola is an electric power company whose major
activity is the generation, transportation, distribution and marketing of
electricity. Iberdrola is also engaged in sectors such as new energy,
engineering, consultancy, telecommunications, information systems, real estate,
and added value services to customers. In Spain, Iberdrola provides electricity
to more than eight million customers, which represent 40% of the peninsular
domestic market. Iberdrola has 30 subsidiaries in Argentina, Bolivia, Brazil,
Colombia, Chile and Guatemala that supply electricity, gas and
telecommunications to over 14 million customers in those countries. Iberdrola is
a participant in the consortia that acquired control of two other New Holding
Companies: Tele Sudeste Celular Participacoes S.A. and Telesp Participacoes S.A.
Banco Bilbao Vizcaya S.A. ("BBV") is part of a Spanish financial group that
is present in 35 countries. BBV's principal business is retail banking, in which
BBV accounts more than 6.5 million clients. It also provides other services
related to retail banking, such as telephone and computer banking. In addition
to retail banking, BBV has six other core business areas, each of which focuses
on a certain group of clients or markets, or has its own geographic
responsibilities. These areas include banks in Spain, banks abroad, wholesale
banking, private banking and asset management and diversification.
CTC Internacional S.A. is a subsidiary of Telefonica de Espana S.A. in
Chile.
Telefonica de Argentina S.A. is a subsidiary of Telefonica de Espana S.A.
in Argentina.
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 Holding Company had approximately 3.1 million 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 Holding Company on
the Sao Paulo Stock Exchange for the periods indicated.
<TABLE>
<CAPTION>
Nominal reais per
1,000 Preferred Shares
----------------------
High Low
------ -----
<S> <C> <C>
Third quarter 1998 (beginning September 21, 1998).............................. 30.50 27.50
Fourth quarter 1998............................................................ 36.10 24.00
</TABLE>
In the United States, the Preferred Shares trade in the form of ADSs, each
representing 1,000 Preferred Shares, issued by The Bank of New York, as
depositary (the "Depositary") pursuant to a Deposit Agreement (the "Deposit
Agreement") among the Holding Company, 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 TSP. At December
31, 1998, there were approximately 94,000 beneficial owners of ADSs. The
following table sets forth the reported high and low closing sales prices for
ADSs on the NYSE for the period indicated.
<TABLE>
<CAPTION>
U.S. dollars per
ADS
-------------------
High Low
---- -----
<S> <C> <C>
Fourth quarter 1998 (beginning November 16, 1998).............................. 31.25 21.50
</TABLE>
The common shares and preferred shares of Telesp and CTBC are also traded
on the Sao Paulo Stock Exchange and the Rio de Janeiro Stock Exchange.
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 non-profit entity owned by its member
brokerage firms. Trading on each exchange is limited to member brokerage firms
and a limited number of authorized non-members. 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 during this time 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 Holding Company'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 US$160.9
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
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 US$757.7 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 67.21% of the total trading in the
cash market on the Rio de Janeiro Stock Exchange.
Trading on Brazilian stock exchanges by non-residents 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 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 Holding Company, 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 Holding Company 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 Holding Company 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
Holding Company, 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 Holding Company 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 Holding Company 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 Holding
Company 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 Holding Company 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 Holding Company 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
Holding Company (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 Holding Company as a dividend to the extent
that such distribution is paid out of the Holding Company'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 Holding Company'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 Holding Company 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
Holding Company 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.
The Consolidated Financial Statements have been audited by Arthur Andersen S/C
for 1998 and by KPMG Auditores Independentes for 1997 and 1996, and their
reports on the Consolidated Financial Statements appear elsewhere in this Annual
Report.
The following paragraphs discuss some important features of the
presentation of the selected financial information and the Consolidated
Financial Statements. These features should be kept in mind in evaluating the
selected financial information and in reading "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Brazilian GAAP and U.S. GAAP
The Consolidated Financial Statements are prepared in accordance with
Brazilian GAAP, which differ in certain material respects from generally
accepted accounting principles in the United States ("U.S. GAAP"). See Note 33
to the Consolidated Financial Statements for a summary of the differences
between Brazilian GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of
shareholders' equity as of December 31, 1997 and 1998 and net income for the
years ended December 31, 1996, 1997 and 1998.
Presentation of 1998 Income Statement
The consolidated income statement of the Company for the year ended
December 31, 1998 reflects the operations of each of the Subsidiaries for the
full year 1998 and the operations of the Holding Company for the period from
February 28, 1998, the effective date of its establishment in the Breakup of
Telebras, to December 31, 1998.
Changes in Accounting Methodology in 1998
For any period prior to January 1, 1998, the Consolidated Financial
Statements and, unless otherwise specified, all financial information included
in this Annual Report recognize certain effects of inflation and are restated in
constant reais of December 31, 1997 purchasing power, all in accordance with
Brazilian GAAP using the integral restatement method (correcao integral). The
Company used the IGP-M inflation index for purposes of preparing its financial
statements for 1996 and 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Effects of Changes in
Presentation of Financial Statements in 1998." Inflationary gains or losses on
monetary assets and liabilities were allocated to their corresponding income or
expense caption in the Consolidated Statements of Income.
For 1998, the Company has not used the integral restatement method to
prepare its financial statements, because the low rate of Brazilian inflation in
1998 (1.8% as measured by the IGP-M) would have made any restatement for 1998
inflation insignificant. The restated balances of nonmonetary assets and
liabilities as of December 31, 1997, which reflect inflation through December
31, 1997, were used as the opening balances for 1998. The Consolidated Financial
Statements as of and for the year ended December 31, 1998 are presented in
nominal reais and do not recognize effects of inflation subsequent to December
31, 1997. Financial statements for prior dates and periods, which were restated
in constant reais of December 31, 1997, have not been further restated.
Accounting Consequences of the Breakup of Telebras
The formation of the Holding Company and the transfer of assets and
liabilities from Telesp to Telesp Celular have been accounted for as a
reorganization of entities under common control in a manner similar to a pooling
of interests. As of December 31, 1997 and for the years ended December 31, 1996
and 1997, the fixed-line telecommunications business of the Subsidiaries is
presented as continuing operations and the cellular telecommunications business
of Telesp is presented as discontinued operations.
The assets and liabilities of the cellular telecommunications business are
presented as net assets of discontinued operations and were transferred to
Telesp Celular at their indexed historical cost. The revenues and expenses
associated with such assets and liabilities were also allocated to Telesp
Celular. For revenues and cost of services, separate records were maintained
historically for the cellular telecommunications business of Telesp, so actual
amounts were allocated to Telesp Celular. Costs other than cost of services were
allocated between Telesp and Telesp Celular using methodologies described in
Note 2.b to the Consolidated Financial Statements. Through December 31, 1997,
cash and certain non-specific debt relating to the cellular telecommunications
business of Telesp could not be segregated from Telesp, so such amounts are
included in unallocated interest income/expense and income tax expense and are
presented after income from discontinued operations.
The Consolidated Financial Statements are not necessarily indicative of
what the financial condition or results of operations of the Company would have
been if Telesp Celular had been a separate legal entity before 1998.
At the May 22, 1998 Telebras shareholders' meeting, the shareholders
established the shareholders' equity of each New Holding Company, and allocated
to each a portion of the retained earnings of Telebras. Telebras retained
sufficient retained earnings from which to pay certain dividends and other
amounts. The balance of Telebras's retained earnings was allocated to each New
Holding Company in proportion to the total net assets allocated to each such
company. The retained earnings so allocated do not represent the historical
retained earnings of the New Holding Companies. The retained earnings allocated
to the Company resulted in an increase of R$461.6 million in relation to the
historical retained earnings of the Subsidiaries. See Note 2.a to the
Consolidated Financial Statements. The amount of distributable retained earnings
of the Holding Company includes retained earnings allocated to the Holding
Company in the Breakup of Telebras.
For 1996 and 1997, "minority interests" in the Consolidated Financial
Statements reflects the interest of shareholders other than Telebras in the
Subsidiaries. For 1998, "minority interests" reflects the interest of
shareholders other than the Holding Company in the Subsidiaries.
Difference from Financial Statements Published in Brazil
The Company's statutory financial statements prepared in accordance with
the Brazilian Corporation Law (the "Statutory Financial Statements") are the
basis for dividend and tax determinations. The Consolidated Financial Statements
include the effects of inflation through December 31, 1997, while the Statutory
Financial Statements include the effects of inflation only through December 31,
1995. The Statutory Financial Statements also differ from the Consolidated
Financial Statements in respect of certain reclassifications and presentation of
comparative information. See Note 2.a to the Consolidated Financial Statements.
Selected Financial Information
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(millions of reais(1),
except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Brazilian GAAP
Net operating revenue.............................. 2,853 2,743 3,710 4,086 4,497
Cost of services................................... (1,620) (1,835) (2,202) (2,387) (2,750)
------ ------ ------ ------ ------
Gross profit....................................... 1,233 908 1,508 1,699 1,747
Operating expenses................................. (687) (588) (607) (690) (828)
------ ------ ------ ------ ------
Operating income before interest
income (expense) (2)............................ 546 320 901 1,009 919
Allocated interest expense (3)..................... (27) (33) (19)
Interest income, net............................... 177
------ ------ ------ ------ ------
Operating income (4)............................... 546 293 868 990 1,096
Net non-operating income (expense)................. (17) (4) 95 15 7
Employees' profit share............................ (32) (53) (44)
------ ------ ------ ------ ------
Income from continuing operations before
unallocated interest income (expense), taxes and
minority interests.............................. 529 289 931 952
Income from discontinued cellular operations....... 196 329 537
Unallocated interest income (5).................... 48 98 203
Unallocated interest expense (5)................... (37) (66) (52) (3)
------ ------ ------ ------
Income before taxes and minority interests......... 492 467 1,306 1,689 1,059
Income and social contribution taxes............... (165) (122) (330) (529) (192)
Minority interests................................. (83) (83) (250) (360) (320)
------ ------ ------ ------ ------
Net income......................................... 244 262 726 800 547
====== ====== ====== ====== ======
<CAPTION>
U.S. GAAP
<S> <C> <C> <C>
Income from continuing operations before unallocated interest
income (expense), income taxes and minority interests..................... 1,074 1,085
Income from discontinued cellular telecommunications operations
before unallocated interest income (expense), income taxes
and minority interests.................................................... 334 537
Net income................................................................... 714 919 671
Net income per thousand shares:
Common shares--Basic......................................................... 2.23 2.86 2.03
Common shares--Diluted....................................................... 1.96 2.75 2.02
Preferred shares--Basic...................................................... 2.23 2.86 2.03
Preferred shares--Diluted.................................................... 1.96 2.75 2.02
</TABLE>
- -------------------------
(1) Presented in constant reais of December 31, 1997 purchasing power for years
prior to 1998. See Note 2 to the Consolidated Financial Statements.
(2) For years prior to 1998, operating income from continuing operations before
interest income (expense).
(3) For 1995, 1996 and 1997, interest expense allocable to continuing
operations. For 1994, the Company is unable to present cellular operations
as discontinued operations, and total interest income and expense have been
presented as unallocated interest income and expense.
(4) For years prior to 1998, operating income from continuing operations before
unallocated interest income (expense), taxes and minority interests.
For years prior to 1998, unallocated interest income and expense represents
interest income and expense that could not be allocated between continuing
and discontinued operations.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(millions of reais (1),
except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Brazilian GAAP
Property, plant and equipment, net.................. 11,791 12,057 12,335 12,589 13,903
Total assets........................................ 12,672 13,102 14,491 15,907 16,894
Loans and financing--current portion................ 680 581 633 28 450
Loans and financing--non current portion............ 897 660 494 473 489
Shareholders' equity................................ 6,730 7,365 8,168 8,877 9,131
<CAPTION>
U.S. GAAP
<S> <C> <C> <C>
Property, plant and equipment, net........................................... 12,136 12,357 13,541
Total assets................................................................. 14,436 15,829 16,750
Loans and financing--current portion......................................... 609 484 817
Loans and financing--non current portion..................................... 494 61
Shareholders' equity......................................................... 8,759 9,297 8,831
</TABLE>
- -------------------------
(1) Presented in constant reais of December 31, 1997 purchasing power for years
prior to 1998. See Note 2 to the Consolidated Financial Statements.
Exchange Rates
The Registrant will pay any cash dividends and make any other cash
distributions with respect to Preferred Shares in Brazilian currency.
Accordingly, exchange rate fluctuations will affect the U.S. dollar amounts
received by the holders of ADSs on conversion by the Depositary of dividends and
distributions in Brazilian currency on the Preferred Shares represented by the
ADSs. Fluctuations in the exchange rate between the Brazilian currency and the
U.S. dollar will also affect the U.S. dollar equivalent of the price of the
Preferred Shares on the Brazilian stock exchanges. Exchange rate fluctuations
may also affect the Registrant's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Foreign Exchange and Interest Rate Exposure." The Registrant does
not hedge its obligations under its foreign currency-denominated indebtedness.
There are two legal exchange markets in Brazil--the commercial rate
exchange market (the "Commercial Market") and the floating rate exchange market
(the "Floating Market"). The Commercial Market is reserved primarily for foreign
trade transactions and transactions that generally require prior approval from
Brazilian monetary authorities, such as the purchase and sale of registered
investments by foreign persons and related remittances of funds abroad.
Purchases and sales of foreign exchange in the Commercial Market may be carried
out only through a financial institution in Brazil authorized to buy and sell
currency in that market. As used herein, the "Floating Market Rate" is the
prevailing selling rate for Brazilian currency into U.S. dollars which applies
to transactions to which the Commercial Market Rate does not apply, as reported
by the Central Bank. Prior to the implementation of the Real Plan, the
Commercial Market Rate and the Floating Market Rate differed significantly at
times. Since the introduction of the real, the two rates have not differed
significantly, although there can be no assurance that there will not be
significant differences between the two rates in the future. Both the Commercial
Market Rate and the Floating Market Rate are freely negotiated but are strongly
influenced by the Central Bank.
Between March 1995 and January 1999, the Central Bank maintained a band
within which the exchange rate between the real and the U.S. dollar fluctuated,
and the Central Bank intervened in the foreign exchange market from time to
time. From January 20, 1998 through December 31, 1998, the band was between
R$1.12 and R$1.22 per US$1.00. In early January 1999, 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. See "Description of Business--Brazilian
Economic Environment.
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
Period Period-end Period(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) Average of the rates on the last day of each month in the period.
Source: Central Bank through February 21, 1995; Federal Reserve Bank
of New York thereafter.
At June 18, 1999, the Commercial Market Rate was R$1.7485 to US$1.00.
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Formation of the Holding Company and Presentation of Financial Information
On May 22, 1998, in preparation for the privatization of the Telebras
System, the Telebras System was restructured to form, in addition to Telebras,
the 12 New Holding Companies. 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 which, together with their respective subsidiaries,
comprise (a) three regional fixed-line service providers, (b) eight regional
Spun-off Companies and (c) one domestic and international long-distance service
provider. The Holding Company is one of the New Holding Companies that was
formed on May 22, 1998 as part of the Breakup of Telebras. In the Breakup,
certain assets and liabilities of Telebras were transferred to the Holding
Company, including the shares of the Subsidiaries owned by Telebras. See Note 1
to the Consolidated Financial Statements.
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto, which
are included elsewhere in this Annual Report. Certain important features of the
presentation of the Consolidated Financial Statements are described in the
introduction to "Selected Financial Data."
Spin-off of Cellular Telecommunications Business
Effective January 1, 1998, the cellular telecommunications businesses of
the Subsidiaries were spun off into separate companies. For 1996 and 1997, the
Consolidated Financial Statements present the fixed-line telecommunications
businesses of the Subsidiaries as continuing operations and the cellular
telecommunications businesses as discontinued operations. See "Selected
Financial Information--Background--Accounting Consequences of the Breakup of
Telebras." Income from the cellular operations (before unallocated interest
expense, taxes and minority interest) accounted for 31.8% of the Company's
income before taxes and minority interest in 1997 and 25.2% in 1996.
Effects of Changes in Rates and Changes in Revenue Sharing
In addition to the spin off of the cellular business of Telesp, there were
three major changes in the structure of telecommunications rates that affected
the Company's results in 1997 and 1998.
o Rate rebalancing. Charges for local and non-local services changed
substantially as part of a rate rebalancing process designed to
eliminate cross-subsidies from long-distance services to local
services. Effective in April and May 1997, rates for measured service
and monthly subscription charges increased, and rates for long-distance
services decreased. Monthly subscription charges, for example,
increased by 270% for residential customers and 59% for commercial
customers. These changes had a positive effect on revenues from local
service and an adverse effect on revenues from non-local services,
which affected 1997 as compared to 1996 (because the changed rates
applied from May 1997 onward) and 1998 as compared to 1997 (because the
changed rates applied for the full year 1998).
o Elimination of Embratel revenue-sharing. Until July 1998, the Company
received a fixed percentage of revenue from interregional and
international long-distance calls carried by Embratel that originated
in the Company's Region. This revenue-sharing arrangement ended
effective July 13, 1998. Since then, the Company receives
interconnection fees from Embratel on a per-minute basis for
interregional and international calls carried by Embratel that are
initiated or completed on the Company's fixed-line network. The Company
also receives from Embratel a supplemental per-minute charge called the
Parcela Adicional de Transicao ("PAT") in order to reduce the impact of
the discontinuation of the revenue-sharing arrangement. From April 1998
through December 1998, the fixed PAT amount was R$0.00924 per minute,
including PIS and COFINS. The PAT will be gradually phased out by June
30, 2001. See "Description of Business--Services--Interregional and
International Service." These changes had a substantial adverse input
on revenues beginning in the second half of 1998.
o Interconnection fees. The Company receives interconnection fees from
cellular operators and, since July 1998, from Embratel. The growth in
cellular telecommunications and the discontinuation of Embratel
revenue-sharing have resulted in substantial growth in interconnection
revenues in 1997 and 1998.
Effects of Changes in Presentation of Financial Statements in 1998
There are two significant differences in presentation between the
Consolidated Financial Statements of the Company for 1998 and for earlier years.
Each of these differences should be taken into account in comparing financial
condition and results of operations for 1998 and for prior years.
o Creation of the Holding Company. The Holding Company was created
effective February 28, 1998 in the Breakup of Telebras. For 1998, the
Consolidated Financial Statements reflect the consolidated financial
condition and results of operations of the Holding Company and the
Subsidiaries. For earlier dates and periods, the Consolidated Financial
Statements reflect only the combined financial condition and results of
operations of the Subsidiaries, except that the portion of equity and
net income attributable to shareholders other than Telebras is
presented as "minority interests."
o Indexation for inflation. The Consolidated Financial Statements for
1996 and 1997 were prepared using the integral restatement method to
recognize the effects of inflation, and presented in constant reais of
December 31, 1997. For 1998, the Company has not used the integral
restatement method to prepare its financial statements, because the low
rate of Brazilian inflation in 1998 (1.8% as measured by the IGP-M)
would have made any restatement for 1998 inflation insignificant.
Management believes that the lack of indexation of the Consolidated
Financial Statements at and for the year ended December 31, 1998 has no
material impact on the comparability of the figures for 1998 with
figures for prior periods. See "Selected Financial Data" and Note 2 to
the Consolidated Financial Statements.
Political, Economic, Regulatory and Competitive Factors
The following discussion should be read in conjunction with the
"Description of Business" section included elsewhere in this Annual Report. As
set forth in greater detail below, the Company's financial condition and
operations are significantly affected by Brazilian telecommunications
regulation, including regulation of tariffs. See "Description of
Business--Regulation of the Brazilian Telecommunications Industry." The
Company's financial condition and net income also have been, and are expected to
continue to be, affected by the political and economic environment in Brazil and
especially in the State of Sao Paulo. See "Description of Business--Brazilian
Political Environment" and "--Brazilian Economic Environment." In particular,
the Company's financial performance will be affected by (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.
The Company is the only supplier of local fixed-line and intrastate
telecommunications services in the Region. In April 1999, however, licenses were
auctioned to permit one competitor to provide local fixed-line and intraregional
long distance telecommunications services in the Region in competition with the
Company. 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 technical and financial resources available
to the Company's competitors, the business strategies and capabilities of the
competitors, prevailing market conditions, the regulations applicable to new
entrants and the Company and the effectiveness of the Company's efforts to
prepare for increased competition. See "Description of Business--Competition."
Foreign Exchange and Interest Rate Exposure
The principal foreign exchange risk faced by the Company arises from
incurring substantially all its liabilities for capital expenditures in U.S.
dollars while its revenues are earned almost entirely in reais. Devaluation of
the real will increase the costs in real terms of the Company's capital
expenditures.
The Company also faces foreign exchange risk as a result of its foreign
currency liabilities. At December 31, 1998, all of the Company's indebtedness,
or R$939.0 million, was denominated in U.S. dollars and Italian lire. The amount
of the Company's indebtedness may increase in order to finance the expansion of
its network. Devaluation of the real results in exchange loss on
foreign-currency indebtedness. In 1998, a small devaluation of the real resulted
in net exchange loss of R$66.2 million. In the first quarter of 1999, the
substantial devaluation of the real (42.5% against the U.S. dollar) resulted in
net exchange loss of R$171 million on short-term debt and R$52 million on
long-term debt. The effect of the devaluation was limited because the Company
repaid part of its foreign currency-denominated indebtedness in early 1999 while
the devaluation was continuing and because of the effect of hedges entered into
in the first quarter.
At December 31, 1998, the Company had not hedged its risks of
foreign-exchange losses arising from its foreign currency indebtedness, but in
the first quarter of 1999 the Company entered into hedging arrangements covering
essentially all of its obligations under foreign-currency indebtedness.
Management may consider entering into further hedging arrangements in the future
if the Company's foreign currency-denominated financing increases.
The Company is exposed to interest rate risk as a consequence of its
floating rate debt. At December 31, 1998, 9.7% of the Company's interest-bearing
liabilities bore interest at floating rates. The Company has not entered into
derivative contracts or made other arrangements to hedge against this risk.
Accordingly, if market interest rates (principally LIBOR) rise, the Company's
financing expenses will increase.
Results of Operations for 1996, 1997 and 1998
The following table sets forth certain components of the Company's net
income, as well as the percentage change of each from the prior year, for each
of the years in the three-year period ended December 31, 1998. The figures for
the year ended December 31, 1998 are presented in nominal reais and do not
recognize effects of inflation subsequent to December 31, 1997. The figures for
prior periods were restated in constant reais of December 31, 1997 and have not
been further restated.
<TABLE>
<CAPTION>
Year ended December 31, % Change
-------------------------------- -----------------
1996 - 1997 -
1996 1997 1998 1997 1998
------ ------ ------ ------ ------
(millions of reais except percentages)(1)
<S> <C> <C> <C> <C> <C>
Net operating revenue................................. 3,710 4,086 4,496 10.1 10.0
Cost of services...................................... (2,202) (2,387) (2,749) 8.4 15.2
-------- -------- --------
Gross profit.......................................... 1,508 1,699 1,747 12.7 2.8
Operating expenses:
Selling expense.................................... (250) (331) (345) 32.3 4.2
General and administrative expense................. (585) (581) (579) (0.8) (0.3)
Other net operating income......................... 228 222 96 (3.0) (56.8)
-------- -------- --------
Total operating expenses......................... (607) (690) (828) 13.7 20.0
Operating income before interest income (expense)(2).. 901 1,009 919 12.0 (9.0)
Allocated interest expense(3)......................... (33) (19) (41.1)
Interest income, net.................................. 177
--------
Operating income(4)................................... 868 990 1,096 14.0 10.7
Net non-operating income (expense).................... 95 15 7 (83.9) (54.7)
Employees' profit share............................... (32) (53) (44) 63.1 (17.8)
-------- -------- --------
Income from continuing operations before unallocated
interest income (expense), taxes and minority
interests........................................... 931 952 2.3
Income from discontinued cellular operations.......... 329 537 63.5
Unallocated interest income(5)........................ 98 203 106.0
Unallocated interest expense(5)....................... (52) (3) (93.5)
-------- ---------
Income before taxes and minority interests............ 1,306 1,689 1,059 29.3 (37.3)
Income and social contribution taxes.................. (330) (529) (192) 59.9 (63.7)
-------- -------- --------
Income before minority interests...................... 976 1,160 867 18.9 (25.3)
Minority interests.................................... (250) (360) (320) 44.2 (11.2)
-------- -------- --------
Net income............................................ 726 800 547 10.2 (31.6)
</TABLE>
- -------------------------
(1) Information for the years ended December 31, 1996 and 1997 is presented in
constant reais of December 31, 1997. Information for the year ended
December 31, 1998 is presented in nominal reais. See Note 2 to the
Consolidated Financial Statements. Columns may not add due to rounding.
(2) For 1996 and 1997, operating income from continuing operations before
interest income (expense).
(3) For 1996 and 1997, interest expense allocable to continuing operations.
(4) For 1996 and 1997, operating income from continuing operations before
unallocated interest income (expense), taxes and minority interests.
(5) For 1996 and 1997, unallocated interest income and expense represents
interest income and expense that could not be allocated between continuing
and discontinued operations.
Net Operating Revenues
The Company's revenues consist primarily of the following:
o local service charges, which include monthly charges, measured service
charges, other local services (such as call waiting, call forwarding,
voice and fax mailboxes, speed dialing and caller ID), and charges for
use of public telephones (including prepaid cards);
o non-local service charges, which include intraregional service charges
for long-distance calls that originate and terminate within the
Company's Region and, prior to July 1998, revenue from Embratel for
interregional and international long-distance calls;
o charges for data transmission;
o charges for network services, which include fees from other
telecommunications service providers on a per-call basis and on a
contractual basis to use part of the Company's network; and
o charges for other services, including telephone directories, equipment
rentals and miscellaneous revenue.
Gross operating revenues are offset by value-added and other indirect taxes
and discounts to customers. The composition of operating revenues by category of
service is presented in the Consolidated Financial Statements and discussed
below before deduction of value-added and other indirect taxes. The Company does
not determine net operating revenues for each category of revenue. The following
table sets forth certain components of the Company's operating revenues, as well
as the percentage change of each from the prior year, for 1996, 1997 and 1998.
<TABLE>
<CAPTION>
Year ended December 31, % Change
--------------------------------- ------------------
1996 - 1997 -
1996 1997 1998 1997 1998
------ ------ ------ ------ ------
(millions of reais except percentages)(1)
<S> <C> <C> <C> <C> <C>
Gross operating revenue:
Local services:
Monthly charges......................... 660 986 1,132 49.4% 14.8%
Measured service charges................ 1,064 1,355 1,544 27.4 13.9
Public telephones....................... 133 174 158 30.7 (9.5)
Other................................... 105 122 145 15.4 18.8
-------- -------- --------
Total................................. 1,962 2,637 2,979 34.4 13.0
Non-local services:
Intra and interregional................. 2,046 1,698 1,349 (17.0) (20.5)
International........................... 261 192 97 (26.3) (49.8)
-------- -------- --------
Total................................. 2,307 1,890 1,446 (18.1) (23.5)
Data transmission......................... 226 170 209 (24.6) 22.9
Network services.......................... 430 669 1,233 55.7 84.3
Other..................................... 52 70 68 34.2 (2.9)
-------- -------- --------
Total gross operating revenue................ 4,977 5,436 5,935 9.2 9.2
Value added and other indirect taxes...... (1,212) (1,299) (1,384) 7.1 6.6
Discounts................................. (55) (51) (55) (6.7) 7.5
-------- -------- --------
Net operating revenue........................ 3,710 4,086 4,496 10.1 10.0
</TABLE>
- -------------------------
(1) Information for the years ended December 31, 1996 and 1997 is presented in
constant reais of December 31, 1997. Information for the year ended
December 31, 1998 is presented in nominal reais.
Net operating revenue increased 10.0% in 1998 and 10.1% in 1997. The
increases were due mainly to growing revenue from local services, because of the
1997 rate increases, and growing interconnection revenue, because of the growth
in cellular telecommunications. These effects were partly offset by declining
revenue from non-local services, because of the 1997 rate reductions and the end
of Embratel revenue-sharing in July 1998.
Local Services
Revenues from local services increased 13.0% in 1998 and 34.4% in 1997. The
increase over the three-year period primarily reflects increased revenue from
monthly charges, due to increases in the number of lines in service and tariff
increases, as well as increased measured service revenues due to tariff
increases. These increases were partly offset by lower billable pulses due to
changes in tariffs.
Monthly charges. Revenues from monthly charges increased 14.8% in 1998 and
49.4% in 1997. The increase in 1998 was due to an increase of 11.1% in the
average number of access lines subject to monthly charges and the full year
effect of the tariff increase in May 1997. In May 1997, monthly subscription
charges increased 270% for residential customers and 59% for commercial
customers, resulting in a 29.7% increase in the average tariff for the year. The
increase in revenues in 1997 reflected a 10.1% increase in the average number of
access lines in service and the May 1997 tariff increase.
Measured service charges. Revenue from measured service charges increased
13.9% in 1998 and 27.4% in 1997. The growth was due principally to a 61.1%
increase in April 1997 in the tariff charged per pulse, which was offset by a
3.7% decrease in 1998 and a 6.4% decrease in 1997 in the number of pulses
exceeding the 90 local call pulses that are included in the monthly subscription
charge. The lower number of pulses was due in part to the effect of the price
increase on usage and in part to a change in the way pulses are counted that
took effect in April 1997. Calls during off-peak hours, which were previously
billed based on duration, are now billed at one pulse per call.
Public telephones. Revenues from charges for use of public telephones
decreased 9.5% in 1998 and increased 30.7% in 1997. The decrease in 1998 was due
to a decrease in the sale of prepaid public telephone cards and tokens primarily
attributable to prepaid public telephone cards issued by other operators. In
January 1999, the Company signed an agreement with the other fixed-line
providers to regulate the issuance of prepaid telephone cards.
Other local services. Revenues from other local services primarily include
revenues from service charges for line installation and activation and charges
for other local services such as call waiting, call forwarding, voice and fax
mailboxes, speed dialing and caller ID. Revenues from other local services
increased 18.8% in 1998 and 15.4% in 1997. The increase in both years was due
mainly to the establishment of installation charges, which replaced the previous
auto-financing system in the second half of 1997. The effect was offset in part
by reductions in the amount of the installation fee in October 1997 and March
1998. There was a 15.0% increase in the number of lines installed in 1998 and an
11.1% increase in the number of lines installed in 1997.
Non-local services
Revenues from non-local services decreased 23.5% in 1998 and 18.1% in 1997,
due to the 1997 rate reduction and the discontinuation of Embratel
revenue-sharing in 1998. Since July 1998, the Company has no revenue from
interregional and international long-distance calling other than interconnection
charges and PAT.
Intraregional and interregional long-distance. Revenues from intraregional
and interregional long-distance service decreased 20.5% in 1998 and 17.0% in
1997. The decrease in 1998 resulted from the discontinuation of the revenue
sharing arrangement between the Company and Embratel, the reductions in rates in
April and May 1997, and an 8.8% reduction in billed minutes. The reduction in
billed minutes was due to a change in May 1997 in the way duration of
long-distance calls is calculated. The decrease in 1997 reflected the rate
reductions and a reduction in the fixed percentage of revenues retained by the
Company from Embratel, which were partially offset by an increase in domestic
long-distance call minutes. See "Description of Business--Rates--Intraregional
Long-Distance Rates."
International long-distance. Revenues from international long-distance
service decreased 49.8% in 1998 and 26.3% in 1997. The decrease in 1998 resulted
primarily from the discontinuation of the revenue-sharing arrangement with
Embratel. The decrease in 1997 reflected the rate reduction in May 1997 and a
reduction in the fixed percentage of revenues retained by the Company from
Embratel, offset in part by a 22.4% increase in the number of international
long-distance call minutes.
Data transmission. Revenues from data transmission increased 22.9% in 1998
and decreased 24.6% in 1997. The increase in 1998 reflected an increase in
access ports from 88,624 at year-end 1997 to 103,252 at year-end 1998, partially
offset by lower rates. The decrease in 1997 was largely due to a 42.0% reduction
in rates charged for high-capacity leased lines partially offset by an 11.4%
increase in the number of access ports from 79,526 in 1996 to 88,624 in 1997.
Network services. Revenues from network services consist of payments from
other telecommunications service providers, primarily Embratel and cellular
service providers. Other service providers pay an interconnection fee on a
per-minute basis to complete calls using the Company's network and also pay to
use part of the Company's network to carry traffic. Revenues from network
services increased by 84.3% in 1998 and 55.7% in 1997. The increase in 1998 was
due to growth in cellular telecommunications and the commencement of
interconnection fees from Embratel. The increase in 1997 was principally due to
growth in cellular telecommunications.
Other Services
Revenues from other services decreased 2.9% in 1998 and increased 34.2% in
1997. The decrease in 1998 reflected discounting of advertising sold in
telephone directories. The increase in 1997 reflected a 19.1% increase in
revenues from telephone books, which increased from R$28.3 million in 1996 to
R$33.7 million in 1997, as well as 61.9% increase in the sharing of revenues
from mobile cellular services received by CTBC, which increased from R$16.8
million in 1996 to R$ 27.2 million in 1997.
Cost of Services
Cost of services includes primarily depreciation and amortization costs,
personnel costs and costs of materials. Cost of services increased 15.2% in 1998
and 8.4% in 1997. The following table sets forth certain components of the
Company's cost of services, as well as the percentage change in each from the
prior year, for 1996, 1997 and 1998.
<TABLE>
<CAPTION>
Year ended December 31, % Change
-------------------------------------- -------------------
1996 - 1997 -
1996 1997 1998 1997 1998
------ ------ ------ ------ ------
(millions of reais except percentages)
<S> <C> <C> <C> <C> <C>
Cost of services:
Depreciation and amortization....... 1,223 1,275 1,452 4.2% 13.9%
Services............................ 367 528 751 44.1 42.1
Personnel........................... 505 488 458 (3.2) (6.3)
Materials........................... 82 68 47 (17.5) (30.0)
Other............................... 25 28 42 12.3 48.7
------ ------ ------
Total cost of services............ 2,202 2,387 2,750 8.4 15.2
</TABLE>
Depreciation and amortization. Depreciation and amortization costs included
in cost of services increased by 13.9% in 1998 and 4.2% in 1997. The increase
over the period principally reflected growth of the Company's network. The
Company's accounting policies and assumptions with respect to depreciation did
not change during this period. In 1999, the Company has modified its
depreciation practices to reduce the average useful life of switching equipment
from 13 years to 8 years and of transmission equipment from 10 years to 8 years.
As a result, the average rate of depreciation of fixed assets was 9.6% in the
first quarter of 1999, compared to 7.9% in 1998.
Services. Expenses for services from third parties increased 42.1% in 1998
and 44.1% in 1997. The increases over the three-year period were principally due
to increased interconnection payments, primarily to cellular companies for calls
originating on the Company's network and terminating on cellular networks.
Personnel. Personnel costs included in cost of services decreased by 6.3%
in 1998 and 3.2% in 1997. The decrease in 1998 was due to reductions in the
workforce and in overtime expenses, partly offset by higher wages negotiated in
December 1997 before the privatization. The average headcount was 22,219 in
1998, down 4.4% from 23,357 in 1997 largely as a result of layoffs of 3,011
employees in December 1998. The Company also recognized R$82.2 million in
severance costs in 1998 due to its program of early retirement. Only part of the
amount was classified as cost of services. The slight decrease in 1997 was
principally due to a decrease in costs associated with benefits to employees of
the Company, including health and other fringe benefits, and an overall decrease
in wages of 4.4% when adjusted for inflation.
Materials and other. Materials costs decreased in 1998 as a result of
renegotiation of prices with suppliers. Other costs increased in 1998 due to the
imposition of the Fistel tax on telecommunications services.
Operating Expenses
Operating expenses increased by 20.0% in 1998 and 13.7% in 1997. The
increase in 1998 was due mainly to a lower level of service fees received from
Telesp Celular, compared to the amounts allocated to the cellular operations in
1997. The increase in 1997 was mainly due to higher selling costs due to
promotional expense.
Selling expense. Selling expense increased by 4.2% in 1998 and 32.3% in
1997. The increase in 1998 was due to an increase in provisions for past due
accounts, which were R$9.0 million, R$8.9 million and R$24.4 million in 1996,
1997 and 1998, respectively. The low level of provisions in 1996 and 1997
reflected the high cost of acquiring a fixed line and the short supply of lines
in the Region, which made customers unlikely to let their accounts become past
due. The higher level of provisions in 1998 reflects the combined effect of a
decrease in the average annual income of the Company's subscribers and Brazil's
economic crisis, which has resulted in increased consumer interest rates and has
adversely affected the ability of some of the Company's customers to meet
payment obligations.
General and administrative expense. General and administrative expense
decreased by 0.3% in 1998 and 0.8% in 1997. The Company recognized a fee of
R$19.8 million in 1998 for management assistance from an affiliate of its
controlling shareholder, which was more than offset by reduced costs
attributable in part to cost-cutting measures in anticipation of the
privatization.
Other net operating income. Other net operating income decreased by 56.8%
in 1998 and 3.0% in 1997. Other net operating income (expense) includes a
variety of revenues and costs. See Note 7 to Consolidated Financial Statements.
The decrease in the net credit in 1998 was due to the lower level of fees
charged to Telesp Celular for administrative services, as it developed
independent systems following the spin-off. The decrease in 1997 principally
reflected a decrease in revenue from fines from delinquent customers,
attributable to new legislation reducing the amount of such fines, and an
increase in revenues from technical and administrative services, attributable to
the growth of the cellular business.
Interest Income, Net
The Company recognized net interest income of R$176.9 million in 1998,
representing the net effect of interest income, interest expense and exchange
gain and loss. See Note 8 to Consolidated Financial Statements. The Company's
indebtedness consists largely of obligations that were transferred to it in the
breakup of Telebras, and it also received in the breakup assets that generated
interest income largely offsetting the Company's interest expense. See
"--Liquidity and Capital Resources." The Company's net interest income
accordingly primarily reflects the investment of cash flow from operations. Net
interest expense for 1998 also includes net exchange loss of R$66.2 million,
attributable primarily to the effect of the devaluation of the real in the
second half of 1998 on the Company's indebtedness. In 1999, the real has
devalued further, resulting in a substantial net exchange loss. See "--Foreign
Exchange and Interest Rate Exposure."
For 1996 and 1997, the Company reported allocated interest expense, which
reflects the portion of interest expense of the Predecessor Companies that was
attributable to their fixed-line businesses, separately from unallocated
interest and expense. The major portion of allocated interest expense
represented interest on indebtedness to Telebras, which was assigned to the
Holding Company upon the split-up of Telebras and accordingly eliminated in
consolidation in 1998.
Employees' profit share
All Brazilian companies are required under Brazilian law to compensate
employees, in addition to their salary and benefits, with profit sharing. The
amount of such profit sharing is determined by negotiation between the Company
and the labor unions representing the employees. The Company's profit sharing
payments are limited to 25% of total proposed dividends and vary according to
the level of dividends.
Liquidity and Capital Resources
The Company's principal capital requirements are for capital expenditures
and payments of dividends to shareholders. Additions to property plant and
equipment totaled R$2,580.0 million, R$1,479.6 million and R$ 1,323.3 million
for the years ended December 31, 1998, 1997 and 1996, respectively. The Company
has planned 1999 capital expenditures of approximately US$1.5 billion, which is
equivalent to approximately R$2.5 billion at current exchange rates. See
"Description of Business--Capital Expenditures." Devaluation of the real would
increase the cost in real terms of much of the Company's capital expenditure
program.
The Holding Company and its Subsidiaries paid dividends of R$113.4 million,
R$258.1 million and R$220.5 million in 1998, 1997 and 1996, respectively.
Dividend payments in the 1996 and 1997 financial statements include all
dividends the Subsidiaries paid to Telebras and to the minority shareholders of
the Subsidiaries. In the 1998 financial statements, dividend payments include
only dividends paid to the minority shareholders of the Subsidiaries, while the
dividends the Subsidiaries paid to Telebras (R$184.0 million) were eliminated in
consolidation. The total dividends the Subsidiaries paid in 1998, including the
amount eliminated in consolidation, was R$297.5 million, compared to R$258.1
million in 1997 and R$220.5 million in 1996.
The Holding Company is required to distribute to its shareholders, either
as dividends or as tax-deductible interest on net worth, 25% of its adjusted net
income determined in accordance with Brazilian accounting principles, as
adjusted in accordance with Brazilian corporate law including any realization of
the net income reserve. The Holding Company is also required to pay a
non-cumulative 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. The Subsidiaries are also subject to mandatory distribution
requirements and are accordingly required to pay dividends to the minority
shareholders as well as to the Holding Company.
The Company's management expects to meet 1999 capital requirements
primarily from cash provided by the Company's operations. Net cash provided by
operations was R$2,127.2 million, R$2,151.3 million and R$1,342.6 million in
1998, 1997 and 1996, respectively. The Company may seek financing for part of
its capital expenditures from suppliers, from Brazilian government agencies or
from Brazilian or international capital markets, depending on market conditions.
In the past, the Company's investing activities were financed using a
combination of inter-company loans from Telebras and the system of
"auto-financing." Under the system of auto-financing, prospective telephone
subscribers were required to make expansion plan contributions directly to the
telephone company from which service was sought. Beginning in June 1995, such
contributions to the Subsidiaries were capitalized by the issuance of preferred
shares to their new subscriber at the first shareholders meeting following the
year in which the subscriber completed payment of the expansion plan
contribution. The system of auto-financing has been terminated, and no new
contracts were signed after June 30, 1997. See Note 27 to the Consolidated
Financial Statements. The Company received resources totaling R$209.1 million,
R$819.0 million and R$698.9 million through the auto-financing system in the
years ended December 31, 1998, 1997 and 1996, respectively.
The Holding Company's principal assets are the shares of the Subsidiaries.
The Holding Company relies almost exclusively on dividends from the Subsidiaries
to meet its needs for cash, including for the payment of dividends to its
shareholders. The Holding Company controls the payment of dividends by the
Subsidiaries, subject to limitations under Brazilian law.
Upon the Breakup of Telebras, indebtedness of Telebras to foreign creditors
in the amount of R$480 million (at February 28, 1998 exchange rates) was
assigned to the Company, together with (a) a loan to Telesp Celular in the
amount of R$346 million (at December 31, 1997 exchange rates), arising from the
onlending of one international borrowing, on terms that mirror those of the
related indebtedness and (b) cash sufficient to repay the balance of the
indebtedness. The Company has no material indebtedness other than the
indebtedness assigned to it in the Breakup, and a substantial portion of such
indebtedness matured and was repaid in the first quarter of 1999.
The Company is party to certain credit agreements that contain covenants
restricting, among other things, (i) the ability of Telebras to dispose of all
or a substantial part of its assets or to cease to control a company that was an
operating subsidiary of the Telebras System and (ii) the ability of the Federal
Government to dispose of its controlling interest in the Telebras System. The
Breakup of Telebras on May 22, 1998, the privatization of the New Holding
Companies on July 29, 1998 and the announced liquidation of Telebras constituted
events of default under such credit agreements. In addition, most of the
Company's other credit agreements include cross-default provisions and
cross-acceleration provisions that would permit the holders of such indebtedness
to declare the indebtedness to be in default and to accelerate the maturity
thereof if a significant portion of the principal amount of the Company's debt
is in default or accelerated. The amount of R$854 million of the Company's
outstanding debt as of December 31, 1998 was in default as a result of the
privatization, of which R$413.2 million was liquidated on February, 1999 at its
maturity date. See Note 23.e to the Consolidated Financial Statements. The
Company is in negotiations with the appropriate creditors with respect to this
indebtedness. Although none of the Company's creditors have notified the Company
that they intend to pursue their rights and remedies with respect to these
defaults, there can be no assurance that the Company will be able to obtain
waivers or that the creditors will not exercise their rights and remedies under
the credit agreements.
U.S. GAAP Reconciliation
The Company prepares its consolidated financial statements in accordance
with Brazilian GAAP, which differs in significant respects from U.S. GAAP. The
differences are described in Note 33 to the Consolidated Financial Statements.
Net income for 1998 is R$670.7 million under U.S. GAAP, compared to R$547.3
million under Brazilian GAAP. Shareholders' equity at December 31, 1998 is
R$8,831 million under U.S. GAAP compared to R$9,131.5 million under Brazilian
GAAP.
The differences between Brazilian GAAP and U.S. GAAP that have the most
significant effects on net income and shareholders' equity are the treatment of
capitalized interest and the accounting for auto-financing contributions. In
addition, under Brazilian GAAP, loans and financing balances in default are not
always classified as current liabilities while under U.S. GAAP, loans and
financings in default or expected to be in default within a year of the balance
sheet date are classified as current obligations unless creditors have provided
the Company waivers for such defaults. Substantially all of the Company's
outstanding debt at December 31, 1998 is in default as a result of the Breakup
of the Telebras System.
Year 2000 Compliance
Year 2000 compliance is the ability of computer hardware and software to
respond to the problems posed by the fact that some computer programs have
traditionally used two digits rather than four to define the applicable year. As
a consequence, any of the Company's computer programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than 2000. This
could result in a system failure or miscalculations causing disruption of
operations, including a temporary inability to process transactions, send
invoices or engage in normal business activities.
At the beginning of 1997 the Company began to address the year 2000
problem. The Company has identified the hardware and software that could be
affected by the year 2000 problem. Specifically, the Company identified and
diagnosed the year 2000 problem in all of the Company's 1,542 central switching
centers, and it has completed an inventory of the Company's 14,300 terminals
(including 9,300 microprocessors) 33,000 computer programs and 18 million lines
of code. All of the Company's switching centers were year 2000 compliant by
April 1999 with the exception of three switching centers that the Company's
management expects will be year 2000 compliant by the end of June 1999. The
Company already has its computer terminals and computer programs year 2000
compliant since January 1999.
The Company has contracted third party operators who work together with
Company employees to address the year 2000 problem. The Company has established
executive and technical committees to oversee year 2000 compliance and report
monthly to the executive officers. The Company's information services department
coordinates the Company's efforts, including the hiring of third parties. The
Company estimates that to achieve year 2000 compliance, the Company's
expenditures will total R$31.7 million on its information systems and its
telecommunications hardware and software. The Company is in the process of
formulating contingency plans in collaboration with the Company's primary
suppliers of telecommunications equipment.
The Company may also be affected by year 2000 problems to the extent that
other entities not affiliated with the Company, including government entities
and businesses, are unsuccessful in addressing this issue. The Company has
arranged and already tested its equipment and systems within the Region a plan
with its suppliers to have around-the-clock technical support provided jointly
by employees of the Company and by employees of its suppliers during the end of
1999 and the beginning of 2000. In July 1999, the Company expects to test
potential scenarios of its system's response to year 2000 problems with other
national telecommunications operators.
The most likely year 2000 worst case scenario that the Company may face
relates to the occurrence of data transmission and billing problems. Such
problems could adversely affect the Company's operations and customer relations.
The Company cannot estimate the potential total lost revenue if such problems
were to occur.
Item 9A. Quantitative and Qualitative Disclosures about Market Risk
The Company is 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 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$939 million of the indebtedness of the
Company was denominated in foreign currency, of which R$525.8 was in U.S.
dollars and R$413.2 in Italian lira. As of December 31, 1999, the potential
immediate loss to the Company that would result from a hypothetical 10% change
in foreign currency exchange rates would be approximately R$94 million. In
February 1999 the Company paid all of its indebtedness in Italian lira on its
maturity date.
The effect of the devaluation was limited because the Company repaid part
of its foreign currency-denominated indebtedness in early 1999 while the
devaluation was continuing and because of the effect of hedges entered into in
the first quarter.
Interest Rate Risk
At December 31, 1998, the Company had approximately R$939 million in loans
and financing outstanding, of which R$854 million bore interest at fixed rates.
The Company invests its cash and cash equivalents (R$896 million at December 31,
1998) mainly in short-term instruments. The potential loss 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$9.8 million. The above sensitivity analyses are 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 fluctuation for such financial instruments as
consistently unfavorable movements of all interest rates are unlikely. See Notes
12 and 23 to the Consolidated Financial Statements.
Item 10. Directors and Officers of Registrant
Board of Directors
The Holding Company is administered by a Board of Directors (Conselho de
Administracao) and a Board of Executive Officers (Diretoria). The Board of
Directors is comprised of a minimum of five and a maximum of fifteen members,
all shareholders, serving for a term of three years. The Board of Directors
holds a regular meeting once each three months and holds special meetings when
called by the Chairman of the Board of Directors.
The following are the current members of the Board of Directors and their
respective positions.
<TABLE>
<CAPTION>
Name Position Date elected
------------- -------------- ------------
<S> <C> <C>
Fernando Xavier Ferreira.......................................... Vice-President 12/17/98
Manuel Ramon Garcia Garcia........................................ Director 12/8/98
Fernando Maria Fournon Gonzales-Barcia............................ Director 8/10/98
Segundo Garcia Quevedo............................................ Director 12/8/98
Juan Perea Saenz de Buruaga....................................... Director 12/8/98
Felix Pablo Ivorra Cano........................................... Director 12/8/98
Juan Carlos Ros Brugueras......................................... Director 12/8/98
Miguel Antonio Igrejas Horta e Costa.............................. Director 12/8/98
Estanislau Jose Mata Costa........................................ Director 12/8/98
Eduardo Augusto Marques Henriques Martins......................... Director 12/8/98
Eduardo Lopez-Aranguren Marcos.................................... Director 12/8/98
Victor Goyenechea Fuentes......................................... Director 12/8/98
Javier Nadal Arino................................................ Director 12/8/98
Fernando Antonio Pimentel de Melo................................. Director 12/8/98
</TABLE>
Set forth below are brief biographical descriptions of the Directors.
Fernando Xavier Ferreira, 50 years old, is President of the Company and
Vice-President for Finance, Control and Resources as well as Vice-President of
the Board of Directors. Beginning in 1971, he held various positions at
Telecomunicacoes do Parana S.A. ("Telepar"), including Vice-President, Director
of Market Relations and President. Since that time he has served on the Board of
Directors of Telebras, Telesp and Embratel. From November 1995 to July 1998, he
was appointed Board Member and President of Telebras. From March to August 1998
he served as Board Member and President of the Holding Company, when he was
reelected in September 1998. From May to August 1998 he was appointed Executive
President and Board Member of Embratel Participacoes S.A.. He has also served as
a member of the Consultive Board of ANATEL - Agencia Nacional de
Telecomunicacoes, and at the present is a member of the Latin American Committee
at the New York Stock Exchange and the Global Information Infrastructure
Commission - GIIC. In September, October and December 1998, he was appointed
Executive President, Vice-President for Finance, Control and Resources and Vice
President of the Board of Directors of Tele Sudeste Celular Participacoes S.A,
respectively. He holds a degree in electrical engineering from the Catholic
University of Rio de Janeiro.
Manuel Ramon Garcia Garcia, 49 years old, has served as a member of the
Board of Directors since December 1998. He also serves as Board member of
Telecomunicacoes de Sao Paulo S.A - TELESP, Companhia Telefonica da Borda do
Campo - CTBC, Telerj Celular S.A., Telest Celular S.A. and Companhia
Riograndense de Telecomunicacoes - CRT. From November 1996 to August 1998 he has
served as the President of Telefonica del Peru. He was appointed President of
Telecomunicacoes de Sao Paulo S.A. - TELESP in February 1999 and has served as
Vice-President since September 1998. He also serves as President of Companhia
Telefonica da Borda do Campo - CTBC since September 1998. He holds an Economics
degree from the Universidade Complutense de Madrid.
Fernando Maria Fournon Gonzales-Barcia, 40 years old, has served as a
member of the Board of Directors since August 1998 and as Chairman of the Board
of Directors from August 1998 to December 1998. In addition he has also served
as Chairman of the Board of Directors of Tele Sudeste Celular Participacoes S.A.
from August 1998 to December 1998. He served as an associate and research
professor at Polytechnic University of Madrid, a systems engineer at the
European Space Agency, a projects engineer at Ericsson S.A. and as Director of
New Projects at Telefonica Internacional. Since February 1997 he has served as
Chief Director at Companhia Riograndense de Telecomunicacoes - CRT. In addition
to his position as a member of the Company, he is also a member of the Board of
Directors of Telecomunicacoes de Sao Paulo S.A. - Telesp, Companhia Telefonica
da Borda do Campo - CTBC, Tele Leste Celular Participacoes S.A., Tele Sudeste
Celular Participacoes S.A., Telerj Celular S.A and Telest Celular S.A. He holds
a degree in telecommunications engineering from the Polytechnic University of
Madrid.
Segundo Garcia Quevedo, 56 years old, has served as a member of the Board
of Directors since December 1998. In addition, he also serves as a Board member
of Companhia Telefonica da Borda do Campo - CTBC and Telecomunicacoes de Sao
Paulo S.A. - Telesp. From August 1998 to December 1998, he served as a Board
member of Tele Sudeste Celular Participacoes S.A., Telest Celular S.A.,
Telebahia Celular S.A. and Telesergipe Celular S.A. Prior to that, he was
Provincial Director of Telefonica de Espana, Operational Director of Companhia
Riograndense de Telecomunicacoes - CRT and Zone Director of Telefonica da
Argentina. He holds a degree in industrial engineering from the Superior
University of Industrial Engineering and a degree as Electric Industrial Expert
from the Technical School of Industrial Experts.
Juan Perea Saenz de Buruaga, 35 years old, has served as a member of the
Board of Directors since December 1998. In addition, he also serves as a Board
member of various telecommunications companies, including Telefonica, Telefonica
Internacional, Telesp Celular Participacoes S.A., Companhia de
Telecomunicaciones de Chile (CTC), Telefonica de Argentina, Telefonica del Peru,
Telefonica Larga Distancia de Puerto Rico (TLD), Companhia Riograndense de
Telecomunicacoes (CRT), Telesp S.A., Companhia Telefonica da Borda do Campo
(CTBC), Telerj Celular S.A., Telest Celular S.A., SP Telecomunicacoes Holding
S.A. (formerly Tele Brasil Sul), Portelcom Participacoes S.A. and Tele Sudeste
Celular Participacoes. As of November 1998, he serves as the President of
Telefonica Comunicaciones Interactivas. From August 1996 to November 1997, he
was the Business Administration Director of Telefonica de Espana S.A. From 1992
to 1994, he served as the Vice-President as well as the European Financial
Institutional Analysis Director of CS First Boston. He holds a Business and
Economics degree from the Deusto University - Bilbao in Spain and an MBA from
Columbia University.
Felix Pablo Ivorra Cano, 52 years old, has served as member of the Board of
Directors since December 1998. He also serves as President of Telerj Celular
S.A. and Telest Celular S.A. since February 1999. He is also member of the Board
of Directors of Telecomunicacoes de Sao Paulo S.A - TELESP, Companhia Telefonica
da Borda do Campo - CTBC, Tele Sudeste Celular Participacoes S.A., Telerj
Celular S.A., Telest Celular S.A. and Telesp Celular Participacoes S.A. Since
1993, he served as General Director of the group which founded and developed
Telefonica Moviles. He has occupied various positions within Telefonica de
Espana in the areas of Commercial, Network and Technical Developments. He holds
a telecommunications engineering degree from ETSI of Madrid and a post-graduate
degree in Business Administration from ICADE.
Juan Carlos Ros Brugueras, 37 years old, has served as a member of the
Board of Directors since December 1998. He also serves as a member of the Board
of Directors of Telecomunicacoes de Sao Paulo S.A. - TELESP, Companhia
Telefonica da Borda do Campo - CTBC, Tele Sudeste Celular Participacoes S.A.,
Telerj Celular S.A., Telest Celular S.A. and Companhia Riograndense de
Telecomunicacoes - CRT. Since May 1998, he has served as the General Secretary
and Vice-Secretary of the Board of Directors of Telefonica Internacional S.A.
From 1985 until 1997 he was a partner at an important law firm in Barcelona. He
holds a Law degree from the Central University of Barcelona.
Miguel Antonio Igrejas Horta e Costa, 50 years old, has served as a member
of the Board of Directors since December 1998. He is also a member of the Board
of Directors of Telecomunicacoes de Sao Paulo S.A. - TELESP, Companhia
Telefonica da Borda do Campo - CTBC, Telesp Celular Participacoes S.A. and SIC -
Sociedade Independente de Comunicacao S.A. He served as Director of CTT
(Correios e Telecomunicacoes de Portugal) from 1981 to 1982 and was appointed
Vice-President of CTT and TLP (Telefones de Lisboa e Porto, S.A.) from 1984 to
1987. From 1982 to 1984 he served as President of Companhia Portuguesa Radio
Marconi S.A. Since 1995 he has served as President of Portugal Telecom
Internacional. From 1987 to 1990 he was appointed Secretary of State for Foreign
Trade. He holds an Economics degree from the Technical University of Lisbon, a
diploma in Business Administration from the University of Navarra as well as a
diploma in "Communications Management" from the Management College British Post
Office in the United Kingdom.
Estanislau Jose Mata Costa, 47 years old, has served as a member of the
Board of Directors since December 1998. He is also a member of the Board of
Directors of Telesp Celular Participacoes S.A. Beginning in 1976 through 1994,
he has held several positions within TLP - Telefones de Lisboa e Porto, S.A.
including that of Director, Economic Advisor and Manager. He also serves as
Director of Portugal Telecom S.A. and Chairman of the Board of Directors of
PREVISAO - Sociedade Gestora de Fundos de Pensao S.A., a pension fund management
company. He received an Economics degree from the Universidade Tecnica de Lisboa
in 1974, a diploma from the program for Business Management from the AESE -
Universidade de Navarra and a Strategic Management degree from the Management
Centre Europe/American Management Association.
Eduardo Augusto Marques Henriques Martins, 53 years old, has served as a
member of the Board of Directors since December 1998. He is also a member of the
Board of Directors of Telesp Celular Participacoes S.A. He serves as a Director
of Paginas Amarelas S.A., Portugal Telecom S.A. and TV Cabo Portugal S.A.. From
1994 to 1996, he served as President of TV Cabo Porto and TV Cabo Douro. From
1992 to 1994 he served as Senior Consultant to the Board of Directors of Telecom
Portugal S.A. He has held several positions within CTT - Correios e
Telecomunicacoes de Portugal from 1978 to 1989, including Associate Director and
Human Resources Department Manager. He holds a law degree from the University of
Coimbra, a Business Administration degree from Brussels University and a
post-graduate degree in Business Administration from AESE - Universidade de
Navarra.
Eduardo Lopez-Aranguren Marcos, 57 years old, has served on the Board of
Directors since December 1998. He also serves on the Board of Directors of
Telecomunicacoes de Sao Paulo S.A. - TELESP, Companhia Telefonica da Borda do
Campo - CTBC and Coelba S.A. From 1982 to 1987, he served as chief of the
Nuclear Security Department. From 1992 to 1993 he also served as Director of
C.T. Guemes S.A., Powerco S.A., Litoral Gas S.A. and TIBSA Inversora S.A in
Argentina. He has also served as Chief Executive Officer of Iberdrola Energia
S.A., the company which manages Iberdrola Group's international energy
activities and Spanish investments in hydroelectric energy, gas and services. He
holds an Engineering degree with a specialization in the field of energy from
the Superior Technical School of Mining Engineering at the Polytechnic
University of Madrid.
Victor Goyenechea Fuentes, 48 years old, has served as a member of the
Board of Directors since December 1998. He also serves as a member of the Board
of Directors of Telecomunicacoes de Sao Paulo S.A. - TELESP, Companhia
Telefonica da Borda do Campo - CTBC and Companhia Riograndense de
Telecomunicacoes - CRT. He also serves as Financial Manager of Banco Bilbao
Vizcaya. He holds an Economics and Business degree from the Deusto University -
Bilbao in Spain.
Javier Nadal Arino, 49 years old, has served as a member of the Board of
Directors since December 1998. He is also a member of the Board of Directors of
Telecomunicacoes de Sao Paulo S.A. - TELESP, Companhia Telefonica da Borda do
Campo - CTBC and Companhia Riograndense de Telecomunicacoes - CRT. In 1978 he
worked with the United Nations as an expert on Data Transmission Services. He
served as Manager of the Telecommunications of Spain from 1985 to 1995 and has
served as Regulatory Manager of Telefonica Internacional since 1997. He was
appointed President of Retevision from 1989 to 1994 and Telefonica de Argentina
from 1995 to 1997. He holds a Telecommunications Engineering degree from the
Polytechnic University in Madrid.
Fernando Antonio Pimentel de Melo, 45 years old, has served as a member of
the Board of Directors since December 1998. He also serves as a member of the
Board of Directors of TELEMAR Nordeste/Norte/Leste. In 1979 he was appointed
attorney of SISTEL in TELPE. From 1980 to 1991 he held various positions within
SISTEL, including Assistant Chairman to the Director, Managing Legal Advisor and
Vice-President of the Administrative Council. He holds a Law degree from the
Federal University of Pernambuco.
Board of Executive Officers
The Board of Executive Officers consists of at least two and at most one or
two other members, shareholders or not, being one President, one Vice-President
for Finance, Control and Resources, one Vice-President for Regulatory Matters
and one Vice-President for Corporate Planning, all elected by the Board of
Directors for a term of three years. An Executive Officer may be removed from
office at any time.
The following are the Executive Officers and their respective positions.
<TABLE>
<CAPTION>
Name Position Date appointed
- ----------- ------------------------------------- -----------------
<S> <C> <C>
Fernando Xavier Ferreira........................ President and Vice-President for September 1998(1)
Finance, Control and Resources
Jonas de Oliveira Junior........................ Vice-President for Regulatory Matters November 1998
and for Corporate Planning
</TABLE>
- ---------------
(1) Fernando Xavier Ferreira was appointed Vice-President for Finance,
Control and Resources in November 1998.
Set forth below is a brief biographical description of the Executive
Officer not included above.
Jonas de Oliveira Junior, 50 years old, has served as an Executive Officer
since November of 1998. He also serves as Vice-President for Regulatory Matters
and for Corporate Planning of the Company and Tele Sudeste Celular Participacoes
S.A. He served various functions in Telebras in the areas of Systems Management,
Technical Planning, Regulations and Human and Financial Resources. Throughout
his career he has worked in the areas of Technical Planning, Structural
Planning, Systems Engineering in Data Communications, Transmissions Systems
Engineering and the Technical Coordination in the Restructuration and
Privatization of TELEBRAS. He holds an Electronic Engineering degree from the
Technological Institute of Aeronautics. He also holds a law degree.
Item 11. Compensation of Directors and Officers
For the year ended December 31, 1998, the aggregate amount of compensation
paid by the Holding Company to all directors and executive officers of the
Holding Company was approximately R$320.03 thousand.
For the year ended December 31, 1998, the officers and directors of the
Holding Company did not receive any pension, retirement or similar benefits.
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
The Company is party to certain credit agreements that contain covenants
restricting, among other things, (i) the ability of Telebras to dispose of all
or a substantial part of its assets or to cease to control a company that was an
operating subsidiary of the Telebras System and (ii) the ability of the Federal
Government to dispose of its controlling interest in the Telebras System. The
Breakup of Telebras on May 22, 1998, the privatization of the New Holding
Companies on July 29, 1998 and the announced liquidation of Telebras constitute
events of default under such credit agreements. In addition, most of the
Company's other credit agreements include cross-default provisions and
cross-acceleration provisions that would permit the holders of such indebtedness
to declare the indebtedness to be in default and to accelerate the maturity
thereof if a significant portion of the principal amount of the Company's debt
is in default or accelerated. The total amount of the Company's outstanding debt
at December 31, 1998 which is currently or is expected to be in default is
approximately R$853.6 million, of which R$413.2 million was liquidated in
February 1999 at its maturity date. The Company is currently in negotiations
with the appropriate creditors with respect to this indebtedness. Although none
of the Company's creditors have notified the Company that they intend to pursue
their rights and remedies with respect to these defaults, there can be no
assurance that the Company will be able to obtain waivers or that the creditors
will not exercise their rights and remedies under the credit agreements.
Item 16. Changes in Securities, Changes in Security for Registered
Securities and Use of Proceeds
None.
PART IV
Item 17. Financial Statements
The Holding Company 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-45.
Item 19. Financial Statements and Exhibits
(a) The following Financial Statements are filed as part of this Form 20-F:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statement of Changes in Financial Position
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
(b) Exhibits
Amendment to the Charter of the Holding Company previously
filed with the Holding Company's Registration Statement on
September 18, 1998, together with an English translation.
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
----
ADRs...............................................ii
ADSs...............................................ii
American Depositary Shares.........................ii
Anatel..............................................1
Anatel Decree......................................18
Annex IV Regulations...............................30
Annex V Regulations................................31
Band A.............................................58
Band B.............................................58
BBV................................................28
Bell Canada........................................14
Bonari..............................................1
Brazil.............................................ii
Brazilian Corporation Law..........................30
Brazilian GAAP.....................................ii
Brazilian Securities Law...........................30
Breakup.............................................2
Breakup of Telebras.................................2
Canbra..............................................1
Cellular Region.....................................2
Center.............................................16
Code...............................................34
COFINS.............................................12
Commercial Market..................................39
Common Shares......................................ii
Company............................................ii
Concessions.........................................1
Consolidated Financial Statements..................ii
CPMF tax...........................................33
CTBC...............................................ii
Custodian..........................................30
Deposit Agreement..................................28
Depositary.........................................28
dollars............................................ii
e&p................................................34
Embratel............................................1
Federal Government.................................ii
Fenattel...........................................16
Fittel.............................................16
Fixed-Line Region...................................2
Floating Market....................................39
General Plan of Concessions and Licenses...........19
General Plan on Quality............................19
General Plan on Universal Service..................19
General Telecommunications Law......................1
Holding Company....................................ii
ICMS...............................................12
IGP-DI..............................................8
Page
----
IGP-M..............................................25
IMF................................................23
IOF tax............................................33
Liberman Group.....................................14
List of Obligations................................17
local calls.........................................4
Megatel............................................14
New Holding Companies...............................2
non-Brazilian holder...............................31
non-U.S. holder....................................35
Numbering Plan......................................7
PAT.................................................5
PIS................................................12
Portugal Telecom...................................28
Preferred Shares...................................ii
Privatization.......................................2
Privitization of Telebras...........................2
Procon..............................................7
Procon Agreement....................................8
Qualcomm...........................................14
R$ ii
reais..............................................ii
real...............................................ii
Real Plan..........................................23
Region..............................................1
Registered Capital.................................33
Rio de Janeiro Stock Exchange......................28
Sao Paulo Stock Exchange...........................28
SAT................................................26
SENN...............................................29
Sistel.............................................16
SP Telecomunicacoes................................27
Statutory Financial Statements.....................37
Subsidiaries.......................................ii
Tele Norte Leste...................................14
Telebras...........................................ii
Telebras System.....................................1
Telecommunications Regulations......................1
Telefonica.........................................27
Telepar............................................52
Telesp.............................................ii
Telesp Celular.....................................ii
TJLP...............................................33
U.S. dollars.......................................ii
U.S. GAAP..........................................36
U.S. holder........................................34
US$................................................ii
WLL................................................14
<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.
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).
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.
Cell: The geographic area covered by a single base station in a cellular
telecommunications system.
Cellular service: A mobile telecommunications service 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.
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.
IP (Internet protocol): An interconnection protocol for sub-networks, in
particular for those with different physical characteristics. It is used by the
Internet.
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 64Kbps 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.
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.
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 Holding Company 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.
TELESP PARTICIPACOES S.A.
By: /s/ Fernando Xavier Ferreira
--------------------------------------------
Name: Fernando Xavier Ferreira
Title: President
By: /s/ Jonas de Oliveira Junior
--------------------------------------------
Name: Jonas de Oliveira Junior
Title: Vice-President for Regulatory Matters
Dated: June 30, 1999
<PAGE>
TELESP PARTICIPACOES S.A.
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report for the year ended December 31, 1998................................ F-2
Independent Auditors' Report for the years ended December 31, 1997 and 1996...................... F-3
Consolidated Balance Sheets...................................................................... F-4
Consolidated Statements of Income................................................................ F-5
Consolidated Statement of Changes in Financial Position.......................................... F-6
Consolidated Statements of Changes in Shareholders' Equity....................................... F-7
Consolidated Statements of Cash Flows............................................................ F-8
Notes to the Consolidated Financial Statements................................................... F-9 through F-45
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Telesp Participacoes S.A.:
(1) We have audited the accompanying consolidated balance sheet of Telesp
Participacoes S.A. as of December 31, 1998, and the related consolidated
statements of income, changes in financial position and changes in
shareholders' equity for the year then ended. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
(2) We conducted our audit 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 consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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.
(3) In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Telesp
Participacoes S.A. as of December 31, 1998, and the results of its
operations and the changes in its financial position for the year then
ended, in conformity with accounting principles generally accepted in
Brazil.
(4) Generally accepted accounting principles in Brazil vary in certain respects
from generally accepted accounting principles in the United States of
America. Application of generally accepted accounting principles in the
United States of America would have affected shareholders' equity as of
December 31, 1998 and the results of operations for the year then ended to
the extent summarized in Note 33 of the consolidated financial statements.
(5) Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The consolidated statement of cash
flow for the year ended December 31, 1998 is presented for purposes of
additional analysis and is not a required part of the basic financial
statements under accounting principles generally accepted in Brazil. Such
information has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial
statements taken as a whole.
Sao Paulo, Brazil
January 20, 1999 (except for notes 26 and 32 Arthur Andersen S/C
as to which the date is May 31, 1999)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Telesp Participacoes S.A.
Brasilia - DF
We have audited the accompanying consolidated balance sheets of Telesp
Participacoes S.A. as of December 31, 1997, and the related consolidated
statements of income, cash flows 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 amounts and disclosures
in the consolidated 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Telesp
Participacoes S.A. as of December 31, 1997, and the results of its operations
and cash flows for each of the years in the two-year period then ended, in
conformity with accounting principles generally accepted in Brazil and on the
basis set out in Note 2, including continued recognition of the effects of
changes in the purchasing power of the Brazilian currency as discussed in Note
2.
Generally accepted accounting principles in Brazil vary in certain respects
from generally accepted accounting principles in the United States of America.
Application of generally accepted accounting principles in the United States of
America would have affected results of operations for each of the years in the
two-year period ended December 31, 1997 and shareholders' equity as of December
31, 1997 to the extent summarized in Note 33 of the consolidated financial
statements.
KPMG Auditores Independentes
July 17, 1998
Brasilia, Brazil
<PAGE>
TELESP PARTICIPACOES S.A.
(See Notes 1 and 2)
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1997 AND 1998
(In thousands of Brazilian Reais-R$)
<TABLE>
<CAPTION>
December 31
------------------------------
Note 1997 1998
-------- -------------- ---------------
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents...................................... 12 858,345 896,102
Trade accounts receivable, net................................. 13 487,396 790,345
Deferred and recoverable taxes ................................ 14 31,054 519,767
Other assets................................................... 15 189,819 153,123
-------------- ---------------
Total current assets............................................. 1,566,614 2,359,337
-------------- ---------------
Noncurrent assets:
Deferred and recoverable taxes................................. 14 11,323 23,268
Other assets................................................... 15 386,348 428,360
-------------- ---------------
Total noncurrent assets.......................................... 397,671 451,628
-------------- ---------------
Permanent assets:
Investments.................................................... 16 93,590 179,886
Property, plant and equipment, net............................. 17 12,589,455 13,902,835
-------------- ---------------
Total permanent assets........................................... 12,683,045 14,082,721
-------------- ---------------
Discontinued operations.......................................... 1,259,819 -
-------------- ---------------
Total assets..................................................... 15,907,149 16,893,686
============== ===============
Current liabilities:
Payroll and related accruals................................... 18 194,025 171,214
Accounts payable and accrued expenses.......................... 19 264,785 899,618
Taxes other than income taxes.................................. 20 226,147 190,650
Dividends payable ............................................. 21 318,572 393,585
Income taxes................................................... 10 133,956 158,457
Loans and financing............................................ 23 28,397 450,287
Provision for contingencies.................................... 24 51,623 45,235
Other liabilities.............................................. 22 216,582 201,910
-------------- ---------------
Total current liabilities........................................ 1,434,087 2,510,956
-------------- ---------------
Noncurrent liabilities:
Income taxes................................................... 10 565,846 493,837
Loans and financing ........................................... 23 472,599 488,712
Provision for contingencies.................................... 24 34,240 70,508
Other liabilities.............................................. 22 25,491 24,207
-------------- ---------------
Total noncurrent liabilities..................................... 1,098,176 1,077,264
-------------- ---------------
Minority interests 3,984,723 4,087,745
-------------- ---------------
Shareholders' equity:
Capital and reserves .......................................... 7,268,928 -
Share capital.................................................. 26a - 3,238,421
Capital reserves .............................................. - 188
Income reserves................................................ 26b - 3,423,547
Retained earnings.............................................. 1,607,744 2,469,299
-------------- ---------------
Total shareholders' equity....................................... 8,876,672 9,131,455
-------------- ---------------
Funds for capitalization:
Expansion plan contribution.................................... 27 490,740 84,864
Other funds.................................................... 22,751 1,402
-------------- ---------------
Total funds for capitalization................................... 513,491 86,266
-------------- ---------------
-------------- ---------------
Total liabilities and shareholders' equity....................... 15,907,149 16,893,686
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
TELESP PARTICIPACOES S.A.
(See Notes 1 and 2)
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS
ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands of Brazilian Reais-R$ - except earnings per thousand shares)
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------
Note 1996 1997 1998
------- -------------- --------------- --------------
Net operating revenue from telecommunications
<S> <C> <C> <C> <C>
services........................................ 4 3,710,205 4,086,668 4,496,143
Cost of 5 (2,202,000) (2,387,337) (2,749,578)
services...........................................
-------------- --------------- --------------
Gross profit....................................... 1,508,205 1,699,331 1,746,565
Operating expenses:
Selling expense................................. 6 (250,307) (331,162) (344,975)
General and administrative expense.............. (585,468) (580,918) (579,180)
Other net operating income...................... 7 228,860 222,105 96,510
-------------- --------------- --------------
Operating income from continuing operations
before interest 901,290 1,009,356 918,920
income/expense......................................
Allocated interest expense......................... (32,880) (19,353) -
Interest income, net............................... 8 - - 176,855
-------------- --------------- --------------
Operating income................................... 868,410 990,003 1,095,775
Net nonoperating income (expense).................. 9 94,716 15,233 6,895
Employees' profit share............................ (32,465) (52,940) (43,501)
-------------- --------------- --------------
Income from continuing operations before
unallocated interest income/expenses, taxes
and minority interests.......................... 930,661 952,296 -
Income from discontinued cellular operations
before unallocated interest income/expense,
taxes and minority interests.................... 328,741 537,377 -
Unallocated interest income........................ 98,405 202,751 -
Unallocated interest expense....................... (51,500) (3,332) -
-------------- --------------- --------------
Income before taxes and minority interests......... 1,306,307 1,689,092 1,059,169
Income and social contribution taxes............... 10 (330,591) (528,672) (191,776)
Minority interests................................. (249,855) (360,296) (320,094)
-------------- --------------- --------------
Net income for the year ........................... 725,861 800,124 547,299
============== =============== ==============
Shares outstanding at the balance sheet date 334,399,028
(thousands) ........................................ ==============
Earnings per thousand shares outstanding at the
balance 1.64
sheet date (Reais)............................. ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
TELESP PARTICIPACOES S.A.
(See notes 1 and 2)
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands of Brazilian Reais-R$)
<TABLE>
<CAPTION>
SOURCE OF FUNDS:
From operations:
<S> <C>
Net income for the year............................................... 547,299
Minority interest..................................................... 320,094
Items not affecting working capital:.................................. 1,559,472
----------
Depreciation and amortization..................................... 1,509,365
Loss from changes in equity holding of subsidiaries............... 38,942
Monetary and exchange variations on noncurrent items, net......... 14,752
Provision for losses on investments............................... (612)
Gain on permanent asset disposals................................. (24,332)
Reserves for contingencies........................................ 53,532
Interest on construction in progress.............................. (32,175)
----------
Total from operations.......................................... 2,426,865
From third parties:
Increase in long-term liabilities..................................... 136,644
Increase in funds for capitalization.................................. 260,776
Forfeited dividends................................................... 6,443
Donations and subsidies for investment................................ 68,604
Transfer from noncurrent to current assets............................ 20,239
Tax incentives........................................................ 6,948
Proceeds from sale of property, plant and equipment and investments... 19,277
Additional net assets received on the breakup of Telebras............. 591,344
----------
Total sources.................................................... 3,537,140
APPLICATIONS OF FUNDS:
Increase in non current assets........................................ 42,474
Increase in permanent assets: 2,747,573
----------
Investments....................................................... 89,821
Property, plant and equipment..................................... 2,657,752
Transfer form long-term to current liabilities........................ 260,775
Dividends............................................................. 463,041
Others................................................................ 307,423
----------
Total applications............................................... 3,821,286
DECREASE IN WORKING CAPITAL............................................... (284,146)
===========
REPRESENTED BY:
Current assets
At the beginning of the year...........................................1,566,614
At the end of the year.................................................2,359,337
---------
792,723
Current liabilities
At the beginning of the year.......................................... 1,434,087
At the end of the year................................................ 2,510,956
==========
1,076,869
==========
DECREASE IN WORKING CAPITAL............................................... (284,146)
===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
TELESP PARTICIPACOES S.A.
(See notes 1 and 2)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands of Brazilian Reais-R$)
<TABLE>
<CAPTION>
Capital and Share Other capital
reserves Capital reserves
---------------- ------------ ------------
<S> <S> <C> <C>
Balances at December 31, 1995............................. 6,637,641 - -
Capital increase:
Expansion plan contributions.......................... 412,278 - -
Donations and subsidies for investments............... 10,886 - -
Capitalized interest on construction in progress.......... 172,469 - -
Change in tax rates....................................... (7,872) - -
Tax incentive investment credits.......................... 16,530 - -
Unclaimed dividends....................................... - - -
Consolidation adjustments:
Capitalized interest.................................. - - -
Others................................................ - - -
Net income for the year................................... - - -
Realization of unrealized income.......................... (242,240) - -
Deferred tax on full indexation........................... - - -
Appropriations:
Transfers to reserves................................. 43,792
Dividends............................................. - - -
Minority interest changes................................. (55,727) - -
---------------- ------------ ------------
Balances at December 31, 1996............................. 6,987,757 - -
Capital increase:
Expansion plan contributions.......................... 1,028,654 - -
Donations and subsidies for investments................... 8,763 - -
Capitalized interest on construction in progress.......... 148,308 - -
Tax incentive investment credits.......................... 53,016 - -
Unclaimed dividends....................................... - - -
Consolidation adjustments:
Capitalized interest.................................. - - -
Expansion plan direct contributions................... - - -
Others................................................ - - -
Net income for the year................................... - - -
Realization of unrealized income.......................... (206,511) - -
Deferred tax on full indexation........................... - - -
Appropriations:
Transfers to reserves................................. 72,992 - -
Dividends............................................. - - -
Minority interest changes................................. (824,051) - -
---------------- ------------ ------------
Balances at December 31, 1997............................. 7,268,928 - -
Spin-off of cellular telecommunications
business............................................... - - -
Additional net assets received on the breakup of
Telebras.............................................. - - -
Allocation between accounts approved by
Shareholders on the breakup of Telebras................ (7,268,928) 3,238,421 -
---------------- ------------ ------------
Balance at May 22, 1998 after the breakup of
Telebras.............................................. - 3,238,421 -
Tax incentive investment credits.......................... - - 188
Consolidation adjustments:
Capitalized interest.................................. - - -
Donations and subsidies for investments............... - - -
Shares subscription premium........................... - - -
Others................................................ - - -
Net income for the year................................... - - -
Realization of unrealized income.......................... - - -
Appropriations:
Transfers to reserves................................. - - -
Dividends............................................. - - -
---------------- ------------ ------------
Balances at December 31, 1998............................. - 3,238,421 188
================ ============ ============
</TABLE>
Income reserves
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Legal Unrealized income Retained
Reserve reserve earnings Total
------------- -------------- -------------- -----------
<S> <S> <C> <C> <C>
Balances at December 31, 1995............................. - - 727,447 7,365,088
Capital increase:
Expansion plan contributions.......................... - - - 412,278
Donations and subsidies for investments............... - - - 10,886
Capitalized interest on construction in progress.......... - - - 172,469
Change in tax rates....................................... - - - (7,872)
Tax incentive investment credits.......................... - - - 16,530
Unclaimed dividends....................................... - - 476 476
Consolidation adjustments:
Capitalized interest.................................. - - 8,600 8,600
Others................................................ - - (3,898) (3,898)
Net income for the year................................... - - 725,861 725,861
Realization of unrealized income.......................... - - 242,240 -
Deferred tax on full indexation........................... - (307,024) (307,024)
Appropriations:
Transfers to reserves................................. (43,792) -
Dividends............................................. - - (263,469) (263,469)
Minority interest changes................................. - - 94,137 38,410
------------- -------------- -------------- -----------
Balances at December 31, 1996............................. - - 1,180,578 8,168,335
Capital increase:
Expansion plan contributions.......................... - - - 1,028,654
Donations and subsidies for investments................... - - - 8,763
Capitalized interest on construction in progress.......... - - - 148,308
Tax incentive investment credits.......................... - - - 53,016
Unclaimed dividends....................................... - - 1,223 1,223
Consolidation adjustments:
Capitalized interest.................................. - - 10,833 10,833
Expansion plan direct contributions................... - - 32,621 32,621
Others................................................ - - 33 33
Net income for the year................................... - - 800,124 800,124
Realization of unrealized income.......................... - - 206,511 -
Deferred tax on full indexation........................... - - (271,469) (271,469)
Appropriations:
Transfers to reserves................................. - - (72,992) -
Dividends............................................. - - (318,572) (318,572)
Minority interest changes................................. - - 38,854 (785,197)
------------- -------------- -------------- -----------
Balances at December 31, 1997............................. - - 1,607,744 8,876,672
Spin-off of cellular telecommunications
business............................................... - - (899,484) (899,484)
Additional net assets received on the breakup of
Telebras.............................................. - - 591,344 591,344
Allocation between accounts approved by
Shareholders on the breakup of Telebras................ 180,884 3,079,882 769,741 -
------------- -------------- -------------- -----------
Balance at May 22, 1998 after the breakup of
Telebras.............................................. 180,884 3,079,882 2,069,345 8,568,532
Tax incentive investment credits.......................... - - - 188
Consolidation adjustments:
Capitalized interest.................................. - - 109,370 109,370
Donations and subsidies for investments............... - - 43,949 43,949
Shares subscription premium........................... - - 88,033 88,033
Others................................................ - - 2,678 2,678
Net income for the year................................... - - 547,299 547,299
Realization of unrealized income.......................... - (777,221) 777,221 -
Appropriations:
Transfers to reserves................................. 47,000 893,002 (940,002) -
Dividends............................................. - - (228,594) (228,594)
------------- -------------- -------------- -----------
Balances at December 31, 1998............................. 227,884 3,195,663 2,469,299 9,131,455
============= ============== ============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
TELESP PARTICIPACOES S.A.
(See Notes 1 and 2)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended December 31, 1996, 1997 and 1998
(In thousands of Brazilian Reais-R$)
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------------
1996 1997 1998
---------------- --------------- ---------------
Cash provided by operations:
<S> <C> <C> <C>
Net income.............................................. 725,861 800,124 547,299
Less: Income from discontinued operations
before taxes and minority interests................... (328,741) (537,377) -
minority interests.........................................
---------------- --------------- ---------------
Net income from continuing operations................... 397,120 262,747 547,299
continuing and discontinued operations.................
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization......................... 1,316,306 1,459,858 1,509,365
Minority interests.................................... 249,855 360,296 320,094
(Gain) on permanent asset disposals................... (82,628) (9,958) (24,332)
Loss from changes in equity holding of subsidiary..... 1,252 721 38,942
Allowance for doubtful accounts....................... 9,006 8,957 24,461
Others................................................ (2,162) 5,347 (5,266)
(Increase) in income tax rate......................... (7,872) - -
(Increase) in trade accounts receivable............... (69,142) (23,734) (327,410)
(Increase) decrease in other current assets.......... (29,740) (6,295) 35,599
(Increase) in other noncurrent assets................. (358,320) (13,902) (25,933)
Increase (decrease) in payroll and related accruals... 36,416 (2,119) (22,811)
Increase in accounts payable and accrued expenses.... 34,750 31,426 568,271
expenses...................................................
Increase (decrease) in taxes other than income taxes. 50,796 17,757 (35,497)
Increase (decrease) in other current liabilities..... 13,177 38,915 (38,661)
Increase (decrease) in accrued interest............... 11,257 (7,115) (6,526)
Increase (decrease) in income taxes................... (158,205) 23,926 (459,014)
Increase (decrease) in provisions for contingencies... (62,788) 8,690 29,880
(Decrease) in other noncurrent liabilities............ (6,459) (4,215) (1,284)
================ =============== ===============
1,342,619 2,151,302 2,127,177
================ =============== ===============
Cash flow from investing activities:
Additions to investments................................ - - (2,675)
Additions to property, plant, and equipment............. (1,323,330) (1,479,615) (2,579,950)
Capitalized interest.................................... (10,618) (8,252) (32,175)
Proceeds from asset disposals........................... 15,556 5,210 19,277
================ =============== ===============
(1,318,392) (1,482,657) (2,595,523)
================ =============== ===============
Cash flow from financing activities:
Loans repaid............................................ (369,568) (619,393) (29,319)
New loans obtained...................................... 245,736 46 471
Expansion plan contributions received................... 698,896 818,992 209,132
Cash received from spin-off of Telebras................. - - 439,216
Dividends paid.......................................... (220,544) (258,148) (113,397)
================ =============== ===============
354,520 (58,503) 506,103
================ =============== ===============
Increase in cash and cash equivalents...................... 378,747 610,142 37,757
Net cash provided by (used in) discontinued operations
before unallocated interest income/expense and taxes.... 217,893 (484,948) -
Cash and cash equivalents at beginning of year............. 136,511 733,151 858,345
---------------- --------------- ---------------
Cash and cash equivalents at end of year................... 733,151 858,345 896,102
---------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
TELESP PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of Brazilian Reais - R$)
1. Operations and background
Beginning in 1995, the federal government of Brazil (the "Federal
Government") undertook a comprehensive reform of the telecommunications
industry. In July 1995 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.
As part of 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
separated from the operating subsidiaries. Subsequently the fixed-line
businesses, the new cellular businesses and the long-distance operator were
combined into the twelve separate groups. 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" or
"spin-off". As part of this process, Telesp Participacoes S.A. (the "Holding
Company") was formed.
Telesp Participacoes S.A. was formed on May 22, 1998, through the spin-off
of certain assets and liabilities of Telebras, including the 71.4% of the share
capital of Telecomunicacoes de Sao Paulo S.A. ("Telesp") and the 29.6% of the
share capital of Telesp's subsidiary Companhia Telefonica da Borda do Campo
("CTBC"), owned by Telebras. Telesp also owned 56.2% of the share capital of
CTBC. At December 31, 1998 Telesp Participacoes S.A. directly and indirectly
owns 67.7% and 66.8% of the share capital of Telesp and CTBC, respectively. The
Holding Company and its subsidiaries, Telesp and CTBC (the "Company") are the
principal providers of fixed-line telecommunications services in the state of
Sao Paulo under the terms of the concessions granted by the Federal Government
which will expire on December 31, 2005 and may be renewed for a further term of
20 years. Until August 4, 1998, the Company was controlled by the Federal
Government.
On January 30, 1998 the cellular telecommunications business of Telesp was
spun off into a new company, Telesp Celular S.A., effective January 1, 1998.
The Company's business, including the services it may provide and the rates
it charges, is regulated by the Agencia Nacional de Telecomunicacoes ("Anatel"),
the regulatory authority for the Brazilian telecommunications industry pursuant
to Law No. 9,472 of July 16, 1997 and the related regulations, decrees, orders
and plans.
2. Presentation of the financial statements
a. Inclusion of the New Holding Company Telesp Participacoes S.A. in the
consolidated financial statements as of and for the period ended December
31, 1998
The consolidated financial statements present the Consolidated Balance
Sheets and results of operations in telecommunications businesses of Telesp
Participacoes S.A. and its subsidiaries (Telesp and CTBC). The portion of equity
and net income attributable to shareholders other than Telesp Participacoes S.A.
at December 31, 1998 and for the year ended December 31, 1998 is reflected as
"minority interests". At December 31, 1998 such minority shareholders owned
32.3% and 33.2% of the share capital of Telesp and CTBC, respectively.
Telesp Participacoes S.A. was formed when the shareholders of Telebras
approved Telebras' division into the New Holding Companies using a procedure
under Brazilian corporate law called "cisao", whereby existing shareholders
received shares in the New Holding Companies in proportion to their holding in
Telebras. The New Holding Companies contained the assets and liabilities
previously recorded in the accounts of Telebras except for those allocated to a
newly independent research foundation and those retained by Telebras for
retroactive dividends and liquidation and other expenses.
In addition to approving the allocation of assets and liabilities to the
new holding companies at the May 22, 1998 meeting, the shareholders of Telebras
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. Consequently, the amounts of the balances of capital,
reserves and retained earnings, together with the corresponding assets and
liabilities for the formation of Telesp Participacoes S.A. were established.
After Telebras retained within its own shareholders' equity sufficient retained
earnings from which to pay dividends on its 1997 earnings and in settlement of
dividends as a result of settlement of the 1990 disputed share increase,
Telebras allocated to each New Holding Company the balance of its Retained
Earnings in proportion to the allocated total net assets. This value of
allocated retained earnings does not represent the historical retained earnings
of the Holding Companies and resulted in an increase of R$461,601 in relation to
the Company's historical retained earnings. This increase has been included in
the consolidated statement of changes in shareholders' equity for the year ended
December 31, 1998.
As a result of the legal structure of the spin-off and as allowed under
Brazilian GAAP, a company formed as a result of a "cisao" will have such
retained earnings in its balance sheet as the parent company shareholders'
resolution adopting the "cisao" allocates from the parent company to the new
company. Accordingly, upon formation, Telesp Participacoes S.A.'s legal capital
structure was defined by the resolutions approved by the Telebras shareholders'
meeting of May 22, 1998 so that its shareholders' equity of R$8,568,532 includes
retained earnings of R$2,069,345. The distributable reserves of Telesp
Participacoes S.A. are composed of retained earnings allocated in the spin-off
plus the retained earnings of the Company following its formation. This new
legal capital structure is shown in the consolidated statement of changes in
shareholders' equity for the year ended December 31, 1998.
Brazilian corporate and tax law allows state controlled companies which 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 Holding Company for 1998 include the results of operations and
changes in financial condition of the subsidiaries from January 1, 1998 and the
effects of the cash, other assets and loans and financing allocated from
Telebras as of March 1, 1998.
The presentation of the consolidated financial statements is consistent
with the presentation of the published financial statements of Telesp
Participacoes, except for certain reclassifications within the consolidated
balance sheets and the consolidated statements of income which have been made to
conform previously published financial statements to the 1998 presentation, and
for the effects of inflation, as discussed in note 2(c).
b. Presentation of the consolidated financial statements for accounting
periods up to December 31, 1997
For accounting periods up to December 31, 1997 consolidated financial
statements present the consolidated financial condition and results of
operations of the Holding Company and its subsidiaries Telesp and CTBC. The
portion of equity and net income attributable to shareholders other than
Telebras at December 31, 1997 and for each of the years in the two year period
ended December 31, 1997 is reflected as "minority interests." At December 31,
1997, such minority shareholders owned 28.6% and 30.2% of the share capital of
Telesp and CTBC, respectively.
The fixed line telecommunications business of the Company is presented as
continuing operations and the cellular telecommunications business is presented
as discontinued operations for all periods. The assets and liabilities of the
cellular telecommunications business are presented as net assets of discontinued
operations. The formation of the Holding Company and the transfer of assets and
liabilities from the Company to Telesp Celular S.A. have been 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 were
transferred from Telesp to Telesp Celular S.A. at their indexed historical cost.
The associated revenues and expenses were also allocated to Telesp Celular S.A.
The consolidated financial statements are not necessarily indicative of the
financial position and results of operations that would have occurred for the
two-year period ended December 31, 1997 had the fixed-line telecommunications
business of the Holding Company and its subsidiaries Telesp and CTBC been a
separate legal entity during such period.
As separate records of revenues and costs of services were maintained for
the cellular business, the actual amounts could be identified and transferred.
With respect to costs other than cost 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 results of operations for the
periods presented. The 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 human resource
related expenses), number of requisitions issued (in relation to office material
costs) and miles driven (in relation to certain transport costs). Management
believes that the amounts included in the financial statements fairly reflect
the operating results of the business.
Prior to December 31, 1997 cash and certain non-specific debt of the
cellular telecommunications business could not be segregated from Telesp.
Accordingly, these amounts are included in the financial statements for periods
ended before January 1, 1998. As a result, interest income and expense relating
to the cellular telecommunications business could not be identified and
consequently, income from discontinued operations is presented before
unallocated interest income/expense and income tax expense.
c. Full indexation to December 31, 1997
As a result of legislation mandating the discontinuation of the indexation
system for Brazilian corporate law accounting and most fiscal purposes, together
with the option granted by the Brazilian Securities Commission (Comissao de
Valores Mobiliarios - CVM), the Telesp Participacoes and its predecessors
consolidated financial statements as of December 31,1997 and for the years then
ended, as published in Brazil, do not recognize the effects of changes in the
purchasing power of the Brazilian currency that would have been required under
the comprehensive indexation system, which was applied through December 31,
1995. Nevertheless, in order to comply with the requirements of accounting
principles ("GAAP") generally accepted in the United States of America, the
accompanying financial statements have been fully indexed through December 31,
1997, which the Company believes also complies with the requirements of
Brazilian GAAP.
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. Beginning January 1, 1998, the
Company no longer uses the integral restatement method to prepare its financial
statements. The restated balances of nonmonetary assets and liabilities as of
December 31, 1997, which reflect inflation through December 31, 1997, were used
as the opening balances for 1998, and statement of income items will no longer
be restated for inflation, as its effects are considered immaterial.
The principal criteria adopted to prepare the fully indexed consolidated
financial statements for the years ended December 31, 1996 and 1997, which were
restated from amounts carved out of the statutory accounting records of Telesp
and CTBC, maintained in accordance with the practices described in Note 3, were
as follows:
i. Inflation restatement index
The consolidated financial statements of 1996 and 1997 were indexed and
expressed in currency of constant purchasing power of December 31, 1997 by using
the monthly average values of the Indice Geral de Precos-Mercado (the General
Prices Index-Market or the "IGP-M") of the Fundacao Getulio Vargas. Inflation
rates for the three year period ended December 31, 1998, as measured by the
IGP-M, were as follows:
Period Index Annual
inflation
%
Year ended December 31, 1996.............. IGP-M 9.2
Year ended December 31, 1997.............. IGP-M 7.7
Year ended December 31, 1998.............. IGP-M 1.8
ii. Consolidated statements of income for 1996 and 1997
Items in the consolidated statements of income are adjusted by:
o allocating inflationary holding gains or losses on interest bearing
monetary assets and liabilities to their corresponding interest income
and expense captions;
o 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 for Brazilian corporate law and most fiscal purposes as from January 1,
1996, the indexation of assets and liabilities for financial reporting purposes
herein 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 the additional
deferred tax liability of R$ 307,024 and R$ 271,469 in 1996 and 1997,
respectively, was recorded directly against retained earnings (see note 10).
d. Principles of consolidation
These consolidated financial statements include the financial records of
the Holding Company and its subsidiaries Telesp and CTBC. All material
intercompany accounts and transactions have been eliminated.
e. Discontinued operations
The consolidated financial statements reflect the cellular
telecommunications business of Telesp as discontinued operations. Accordingly,
the revenues, costs and expenses, assets and liabilities, and cash flows of
these discontinued operations have been excluded from the respective captions in
the consolidated statements of income, balance sheets and statements of cash
flows and have been reported as "Income from discontinued cellular operations
before unallocated interest income/expense, taxes and minority interests"; as
"Net assets of discontinued operations" and as "Net cash provided by (used in)
discontinued operations" for 1996 and 1997.
Summarized financial information for the discontinued operations is as follows:
<TABLE>
<CAPTION>
1996 1997
------------------- --------------------
<S> <C> <C>
Net operating revenues.............................................. 773,936 1,296,265
Income before unallocated interest income/expense, taxes and
minority interests............................................... 328,741 537,377
Current assets...................................................... 128,912 391,475
Property, plant and equipment, net.................................. 1,195,581 1,892,685
Total assets........................................................ 1,334,272 2,291,625
Current liabilities................................................. 252,026 311,644
Total liabilities................................................... 1,059,767 1,031,806
Net assets of discontinued operations............................... 274,505 1,259,819
</TABLE>
3. Summary of the principal accounting practices
a. Cash and cash equivalents
Cash equivalents are considered to be all highly liquid temporary cash
investments with original maturity dates of three months or less.
b. Trade accounts receivable
Telecommunication services accounts receivable are stated at the tariff
value on the date of rendering the service. They also include accounts
receivable for services rendered but not yet billed at balance sheet date.
c. Allowance for doubtful accounts
Provision is made for trade accounts receivable for which recoverability is
considered improbable.
d. Foreign currency transactions
Transactions in foreign currency are recorded at the prevailing exchange
rate at the time of the related transactions. Foreign currency denominated
assets and liabilities are translated using the exchange rate at the balance
sheet date. Exchange differences are recognized in the consolidated statements
of income as they occur.
e. Inventory
Inventories are stated at the lower of indexed cost or replacement value.
Cost of inventories is determined principally on the average cost basis.
Inventories are separated into network expansion and maintenance inventories.
Inventories for use in network expansion are classified as
"Construction-in-progress" under "Property, plant and equipment". Maintenance
inventories are classified as other current assets.
f. Investments
Other investments are recorded at cost less a provision for losses when
considered necessary.
g. Property, plant and equipment
Property, plant and equipment is stated at cost, restated for inflation as
of December 31, 1997, which became the new basis for accounting as described in
note 2(c). Improvements to existing property are capitalized while maintenance
and repair costs are charged to expense as incurred. Materials allocated to
specific projects are added to construction-in-progress. Depreciation is
provided using the straight-line method based on the estimated useful lives of
the underlying assets as determined by the public telecommunications service
regulators. The principal depreciation rates are shown in Note 17(b).
Interest, calculated monthly at a rate of 12% per annum on
construction-in-progress, is capitalized as part of property, plant and
equipment until the asset is placed in service.
h. Vacation pay accrual
Cumulative vacation pay due to employees is accrued as earned.
i. Income and social contribution taxes
Income and social contribution taxes comprise federal income tax and social
contribution tax. Deferred taxes are provided on temporary differences.
j. Loans and financing
Loans and financing include accrued interest to the balance sheet date.
k. Provisions for contingencies
Provisions for contingencies are based on legal advice and management's
opinion as to the likely outcome of the outstanding matters at the balance sheet
date.
l. Revenue recognition
Revenues for all services are recognized when the service is provided.
Revenues from local services consist of line rental charges, service charges
based on the number of calls, network services, including interconnection and
leasing high-capacity lines, maintenance charges and charges for other customer
services. Revenue from local services also includes installation fees which are
recognized when the installation is complete. Charges to customers for domestic,
long-distance and international calls are based on time, distance and use of
services. Billings are monthly; 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.
m. Interest income (expense)
Interest income (expense) represents interest earned (incurred) during the
period and monetary and exchange variation resulting from financial investments
and loans and financing.
n. Research and development
Research and development costs are charged to expense as incurred. Total
research and development costs were R$27,745, R$23,610 and R$32,980 for 1996,
1997 and 1998, respectively.
o. Pension and post-retirement benefits
The Company sponsors a separate entity that provides pensions and other
post-retirement benefits for its employees through a multi-employer plan.
Current contributions and costs are determined actuarially and are recorded on
the accrual basis.
p. Employee's profit share
The Company has made a provision for granting employees the right to a
share of its profits. The amount recorded is the employee's profit share
attributable to the continuing fixed-line telecommunications business.
q. Earnings per thousand shares
Earnings per thousand shares were calculated based on the number of shares
outstanding at the balance sheet date.
r. Segment information
The business operates solely in the segment of local and regional
fixed-line telecommunications. All revenues are generated in relation to
services provided in the state of Sao Paulo.
s. Use of estimates
The preparation of consolidated financial statements in conformity with
Brazilian and US GAAP 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 consolidated financial
statements, and the reported amounts of revenues and expenses during the period
reported. Actual results could differ from those estimates.
t. Minority interests
Minority interests reflected in the consolidated balance sheets at December
31 1998 and in the consolidated statements of income for the years ended
December 31, 1998 relate to the interests of shareholders other than Telesp
Participacoes in Telesp and CTBC, while minority interests reflected in the
balance sheet date at December 31, 1997 and in the consolidated statements of
revenues and expenses for the years ended December 31, 1996 and 1997 relate to
the interest of shareholders other than Telebras in Telesp and CTBC.
4. Operating revenue from fixed telecommunications services
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
Local services:
<S> <C> <C> <C>
Monthly charges........................................... 660,037 985,928 1,132,065
Measured service charges.................................. 1,063,737 1,355,632 1,544,193
Public telephones......................................... 133,270 174,216 157,684
Other..................................................... 105,243 121,500 145,583
============== ============== ==============
Total..................................................... 1,962,287 2,637,276 2,979,525
============== ============== ==============
Non-local services
Intra and interregional................................... 2,046,021 1,697,626 1,349,374
International............................................. 260,943 192,335 96,523
============== ============== ==============
Total..................................................... 2,306,964 1,889,961 1,445,897
============== ============== ==============
Data transmission.............................................. 225,823 170,344 209,341
Network services............................................... 429,700 668,839 1,232,762
Other.......................................................... 52,059 69,840 67,694
-------------- -------------- --------------
Gross operating revenues....................................... 4,976,833 5,436,260 5,935,219
Value added and other indirect taxes........................... (1,212,111) (1,298,722) (1,384,391)
Discounts...................................................... (54,517) (50,870) (54,685)
============== ============== ==============
Net operating revenue.......................................... 3,710,205 4,086,668 4,496,143
============== ============== ==============
</TABLE>
There are no customers who contribute more than 5% of gross operating
revenues.
5. Cost of services
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Depreciation and amortization................................... 1,223,573 1,274,710 1,452,257
Personnel....................................................... 504,810 488,611 457,691
Materials....................................................... 81,887 67,540 47,297
Services........................................................ 366,802 528,482 750,716
Other........................................................... 24,928 27,994 41,617
============== ============== ==============
2,202,000 2,387,337 2,749,578
============== ============== ==============
</TABLE>
6. Selling expense
Included in selling expense are provisions for doubtful customer accounts
receivable of R$9,006, R$8,957 and R$ 24,461 in 1996, 1997 and 1998,
respectively.
7. Other net operating income (expense)
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Taxes other than income taxes................................... (1,353) (3,788) (9,756)
Technical and administrative services........................... 103,990 189,478 45,743
Provision for contingencies (Note 24)........................... (48,972) (58,819) (21,104)
Fines and expenses recovered.................................... 111,461 49,353 45,011
Other........................................................... 63,734 45,881 36,616
-------------- -------------- --------------
228,860 222,105 96,510
============== ============== ==============
</TABLE>
The decrease in "Technical and administrative services" in 1998 was due to
the lower level of fees charged to Telesp Celular for administrative services,
as it developed independent systems following the spin-off.
Fines and expenses recovered primarily represent penalties collected on
past due accounts receivable and recovery of sales taxes of prior periods. The
amount of penalties collected on past due accounts receivable amounted to
R$106,633, R$43,381 and R$ 28,785 in 1996, 1997 and 1998, respectively.
8. Interest income, net
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- -------------
Financial income:
<S> <C> <C> <C>
Interest income........................................... - - 363,995
Monetary/exchange variation............................... - - 24,548
Financial expenses:
Interest expense.......................................... - - (117,024)
Monetary/exchange variation............................... - - (94,664)
-------------
============== ==============
- - 176,855
============== ============== =============
</TABLE>
9. Net nonoperating income (expense)
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Gain on permanent assets disposals.............................. 82,628 9,958 24,332
Loss from changes in equity holding of subsidiaries............. - - (38,942)
Other income.................................................... 12,088 5,275 21,505
============== ============== ==============
94,716 15,233 6,895
============== ============== ==============
</TABLE>
10. Income taxes
As explained in Note 2, as a result of non specific cash and certain non
specific debt not being allocated to the cellular telecommunications business,
the associated interest income and expense was not allocated. As a result,
income tax expense and current tax liabilities have not been allocated to the
discontinued cellular operations in the accompanying financial statements for
1996 and 1997.
Brazilian income taxes comprise federal income tax and the social
contribution tax. In 1996, 1997 and 1998 the income tax rates were 25%, and
social contribution tax were 7.41% in 1996 and 8.00% in 1997 and 1998. As a
result of legislation enacted in 1996, the social contribution tax in 1997 was
no longer deductible from its own computation base, nor was it deductible for
income tax purposes. The changes produced a combined statutory rate of 30.56% in
1996 and 33.00% in 1997 and 1998.
Deferred taxes are provided on temporary differences which include the
effects of indexation adjustments that will not give rise to deductions when
subsequently depreciated, amortized or disposed of.
In prior years the indexation adjustments to permanent assets and
shareholders' equity in accordance with the tax law gave rise to a tax
deductible expense, if the indexation of equity exceeded the indexation of
permanent assets, and to taxable income, called "inflationary profit", if the
indexation of permanent assets exceeded that of equity. In the latter case,
payment of the related tax liability could be deferred until it had been deemed
to have been realized either through depreciation or disposal of the permanent
assets in existence at the time the liability was recorded subject to a minimum
realization rate of 10% per annum (5% per annum prior to 1995).
In 1996 and 1997, management elected to prepay income taxes on inflationary
profit that it had previously deferred. Brazilian companies making such a
prepayment in relation to 1997 were entitled to utilize an income tax rate of
10% instead of the then current rate of 25%. Similar reductions applied to the
prepayments in 1995 and 1996. The result was a gain of R$ 56,932 and R$6,998 for
1996 and 1997, respectively, from the reduction in deferred tax liabilities.
The following is an analysis of the income tax expense (benefit):
<TABLE>
<CAPTION>
1996 1997 1998
-------------- --------------- ---------------
<S> <C> <C> <C>
Social contribution charge...................................... 108,087 136,553 64,628
Income tax...................................................... 270,304 399,117 190,792
Deferred taxes.................................................. - - (63,644)
Effect of rate changes on deferred tax.......................... 9,132 - -
Early payment incentives........................................ (56,932) (6,998) -
============== =============== ===============
Total tax expense............................................... 330,591 528,672 191,776
============== =============== ===============
</TABLE>
Supplementary information regarding taxes posted directly to shareholders'
equity:
<TABLE>
<CAPTION>
1996 1997 1998
--------------- -------------- ---------------
<S> <C> <C>
Deferred taxes.................................................. (307,024) (271,469) -
Effect of rate changes on deferred tax.......................... (7,872) - -
=============== ============== ===============
(314,896) (271,469) -
=============== ============== ===============
</TABLE>
The following is a reconciliation of the amount calculated by applying the
combined statutory tax rates to the reported income before taxes and the
reported income tax expense:
<TABLE>
<CAPTION>
1996 1997 1998
=============== ============== ==============
<S> <C> <C> <C>
Income before taxes as reported in the accompanying
financial statements......................................... 1,306,307 1,689,092 1,059,169
=============== ============== ==============
Tax charge at the combined statutory rate....................... 399,207 557,400 349,526
Permanent additions:
Non-deductible expenses.................................... - 4,698 5,342
Loss from changes in shareholdings in subsidiaries......... 413 238 12,851
Permanent exclusions:
Tax exempt income.......................................... - (372) (352)
Capitalized interest....................................... (7,007) (7,734) (8,044)
Interest on shareholders' equity........................... - - (152,804)
Other...................................................... - - (6,526)
Other items:
Effect of rate changes on deferred tax..................... 9,132 - -
Early payment incentives................................... (56,932) (6,998) -
Other incentives........................................... (14,427) (20,912) (8,217)
Other, net................................................. 205 2,352 -
--------------- -------------- --------------
Income and social contribution taxes as reported in the
accompanying financial statements............................ 330,591 528,672 191,776
=============== ============== ==============
Effective rate.................................................. 25.3% 31.3% 18.1%
=============== ============== ==============
</TABLE>
In 1998, the Company characterized part of its dividends proposed for payment at
the end of 1999 as interest on shareholders' funds. As a result, under Brazilian
tax law, it was entitled to treat this part of the dividend as a deduction for
income tax purposes.
The composition of deferred tax assets and liabilities, based on temporary
differences is as follows:
<TABLE>
<CAPTION>
1997 1998
--------------- ----------------
Deferred tax assets:
<S> <C> <C>
Provisions for contingencies............................................ 24,338 38,196
Provision for pensions.................................................. 8,454 -
--------------- ----------------
Total (see Note 14)..................................................... 32,792 38,196
=============== ================
Deferred tax liabilities:
Additional indexation expense from pre-1990............................. 90,329 75,828
Deferred tax on full indexation......................................... 513,388 469,507
Others.................................................................. - 142
--------------- ----------------
Total................................................................... 603,717 545,477
=============== ================
</TABLE>
The deferred tax on full indexation relate to the difference between the
tax basis of permanent assets, which was not indexed for inflation subsequent to
December 31, 1995, and the reporting basis, which includes indexation through
December 31, 1997.
The composition of tax liabilities is as follows:
<TABLE>
<CAPTION>
1997 1998
--------------- ----------------
<S> <C> <C>
Social contribution tax payable.............................................. 26,415 82,114
Federal income tax payable................................................... 69,670 24,703
Deferred tax liabilities..................................................... 603,717 545,477
=============== ================
Total........................................................................ 699,802 652,294
=============== ================
Current...................................................................... 133,956 158,457
Noncurrent................................................................... 565,846 493,837
=============== ================
</TABLE>
11. Cash flow information
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- ----------------
<S> <C> <C> <C>
Income and social contribution tax paid......................... 523,719 545,336 633,694
Interest paid................................................... 62,295 8,168 63,115
Cash paid against provisions for contingencies.................. 111,760 50,129 1,111
Non cash transactions:
Tax incentive investment credits........................... 16,530 53,016 6,948
Donations and subsidies for investments.................... 10,886 66,769 68,604
Expansion plan contribution converted into share capital
and share premium....................................... 412,278 1,028,654 -
</TABLE>
12. Cash and cash equivalents
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C>
Cash.......................................................................... 288 -
Bank accounts................................................................. 56,309 3,345
Short term investments........................................................ 801,748 892,757
=============== ===============
858,345 896,102
=============== ===============
</TABLE>
All of cash and cash equivalents are denominated in Brazilian Reais.
13. Trade accounts receivable, net
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Accrued amounts................................................................ 230,662 315,041
Billed amounts................................................................. 272,855 505,879
Allowance for doubtful accounts................................................ (16,121) (30,575)
============== ==============
487,396 790,345
============== ==============
</TABLE>
The changes in the allowance for doubtful accounts were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Beginning balance............................................... 1,263 8,066 16,121
Provision charged to selling expense............................ 9,006 8,957 24,461
Write-offs...................................................... (2,203) (902) (10,007)
============== ============== ===============
Ending balance.................................................. 8,066 16,121 30,575
============== ============== ===============
</TABLE>
14. Deferred and recoverable taxes
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Tax deducted at source......................................................... 602 34,720
Social contribution tax........................................................ 1,377 89,636
Recoverable income tax......................................................... 4,525 376,305
Deferred tax assets............................................................ 32,792 38,196
Sales and other taxes.......................................................... 3,081 4,178
============== ==============
42,377 543,035
============== ==============
Current........................................................................ 31,054 519,767
Noncurrent..................................................................... 11,323 23,268
============== ==============
</TABLE>
15. Other assets
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Onlending of financing from COMTEL (see note 23b).............................. 356,872 386,861
Other debtors.................................................................. 14,565 12,666
Maintenance inventories........................................................ 58,976 25,284
Prepayments.................................................................... 8,775 6,536
Recoverable advances........................................................... 58,640 53,385
Tax incentive investments...................................................... 31,120 40,743
Legal Deposits................................................................. 29,087 34,174
Other.......................................................................... 18,132 21,834
============== ==============
576,167 581,483
============== ==============
Current........................................................................ 189,819 153,123
Noncurrent..................................................................... 386,348 428,360
============== ==============
</TABLE>
16. Investments
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Tax incentive investments...................................................... 90,120 76,867
Equity interest at cost:
Alianca Atlantica........................................................... - 23,023
Portugal Telecom ........................................................... - 65,884
Other equity interest....................................................... - 543
-------------- --------------
- 89,450
Other investments.............................................................. 3,470 13,569
============== ==============
93,590 179,886
============== ==============
</TABLE>
17. Property, plant and equipment, net
a. Composition:
<TABLE>
<CAPTION>
1997 1998
---------------------------------------------------------------------------------------
Cost Accum. Net Book Value Cost Accum. Net Book
Depr. Depr. Value
---------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Construction-in-progress............ 1,383,731 - 1,383,731 2,172,256 - 2,172,256
Automatic switching equipment....... 7,646,253 4,498,213 3,148,040 8,279,638 4,884,448 3,395,190
Transmission and other equipment... 9,948,052 5,855,237 4,092,815 10,695,640 6,470,907 4,224,733
Buildings.......................... 5,011,257 2,060,411 2,950,846 5,403,370 2,263,716 3,139,654
Other assets....................... 1,989,900 975,877 1,014,023 1,879,566 908,564 971,002
=========== ========== ========== ========== ========== ===========
Total.............................. 25,979,193 13,389,738 12,589,455 28,430,470 14,527,635 13,902,835
========== ========== ========== ========== ========== ==========
</TABLE>
Other equipment includes: Aerial, underground and building cables,
teleprinters, private automatic exchanges, generating equipment and furniture.
Other assets include: Underground cables, computer equipment, vehicles,
land and other assets. Within "Other assets" the book value of land is R$170,457
at December 31, 1997 and R$ 199,615 at December 31, 1998.
b. Depreciation rates
The annual depreciation rates applied to property, plant and equipment are
as follows:
%
---------------
Automatic switching equipment............................. 7.69
Transmission and other equipment.......................... 10.00
Buildings................................................. 4.00
Other assets (excluding land)............................. 5.00-20.00
c. Rentals
The subsidiaries rent equipment and premises through a number of operating
agreements that expire at different dates. Total annual rent expense under these
agreements was as follows:
1996 1997 1998
=============== ================ ================
Rent expense.... 35,136 41,638 44,392
=============== ================ ================
Rental commitments relate primarily to facilities where the future minimum
rental payments under leases with remaining noncancelable terms in excess of one
year are:
Year ending December 31,
1999.................................. 3,334
2000.................................. 818
2001.................................. 39
--------------------
Total minimum payments................ 4,191
====================
18. Payroll and related accruals
1997 1998
---------------- ---------------
Wages and salaries................... 31,314 21,572
Accrued social security charges...... 92,533 78,812
Accrued benefits..................... 67,965 50,345
Payroll withholdings................. 2,213 20,485
================ ===============
194,025 171,214
================ ===============
19. Accounts payable and accrued expenses
1997 1998
----------------- ------------------
Amounts payable to suppliers......... 196,718 519,050
Other accrued expenses............... 68,067 380,568
================= ==================
264,785 899,618
================= ==================
20. Taxes other than income taxes
<TABLE>
<CAPTION>
1997 1998
----------------- ---------------
<S> <C> <C>
Value-added taxes............................ 208,817 175,918
Other indirect taxes on operating revenues... 17,330 14,732
================= ===============
226,147 190,650
================= ===============
</TABLE>
21. Dividends payable
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
Payable by Telesp Participacoes to:
<S> <C> <C>
Common shareholders............................ - 72,265
Preferred shareholders......................... - 122,040
Payable by subsidiaries to:
Telebras....................................... 181,186 -
Minority shareholders.......................... 137,386 199,280
=============== ===============
318,572 393,585
=============== ===============
</TABLE>
Dividends payable by Telesp Participacoes are net of 15% of withholding
tax.
22. Other liabilities
<TABLE>
<CAPTION>
1997 1998
----------------- ------------------
<S> <C> <C>
Prior year dividends not claimed........... 30,710 48,257
Employees' profit share.................... 43,176 43,843
Other...................................... 168,187 134,017
================= ==================
242,073 226,117
================= ==================
Current.................................... 216,582 201,910
NonCurrent................................. 25,491 24,207
================= ==================
</TABLE>
23. Loans and financing
<TABLE>
<CAPTION>
1997 1998
-------------- ---------------
<S> <C> <C>
Eurobonds originally issued by Telebras...... 125,678 364,400
Financing.................................... 346,826 514,303
Other debt payable to Telebras............... 837 -
Accrued interest............................. 27,655 60,296
============== ===============
500,996 938,999
============== ===============
Current...................................... 28,397 450,287
Noncurrent................................... 472,599 488,712
============== ===============
</TABLE>
a. Eurobonds originally issued by Telebras
<TABLE>
<CAPTION>
Principal Annual Interest
repayment interest payment
Issue Maturity schedule Currency rate schedule 1997 1998
----- -------- -------- -------- ---- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1 1999 upon maturity Lira 13% annual 125,678 364,400
Accrued interest...................................................... 16,857 48,800
============== =============
142,535 413,200
============== =============
</TABLE>
In 1997 the principal amount of R$125,678 refers to the issuance of
Eurobonds by Telebras, corresponding to 198,167,397 Italian lira that was on
loan to Telesp S.A. In 1998 the amount corresponds to 500,000,000 Italian lira
totally on loan to Telesp Participacoes in the breakup of Telebras.
b. Financing
1997 1998
-------------- --------------
Equipment financing from Comtel ... 346,084 374,697
Other financing.................... 742 139,606
Accrued interest.................. 10,788 11,496
============== ==============
357,614 525,799
============== ==============
All financing is in foreign currency and is subject to fixed interest rates
from 10% to 13% per annum and variable interest rates from 1.0% to 1.5% per
annum above LIBOR. LIBOR as of December 31, 1998 was 5.0% per annum.
The loan with Comtel Brasileira Ltda. ("Comtel"), a supplier of
telecommunications equipment, is repayable in full on September 26, 2004. The
loan is denominated in US dollars and bears interest at a rate of 10.75% per
annum. The loan is guaranteed by Telebras. The proceeds of the loan with Comtel
were on loan to Telesp Celular S.A., in connection with the spin-off of the
cellular business on January 1, 1998.
c. Repayment schedule
Noncurrent debt is scheduled to be repaid as follows:
1998
-----------------
2000................................... 29,110
2001................................... 26,589
2002................................... 18,606
2003................................... 3,698
2004................................... 378,395
2005and thereafter..................... 32,314
=================
488,712
=================
d. Currency analysis
Total debt is denominated in the following currencies:
<TABLE>
<CAPTION>
Exchange rate
at December 31, 1998 1997 1998
--------------------------- --------------- -------------
(Units of one
Brazilian real)
<S> <C> <C> <C>
US dollars..................................... 1.2087 358,461 525,799
Italian lira................................... 0.0007288 142,535 413,200
=============== =============
500,996 938,999
=============== =============
</TABLE>
The Company's foreign currency liabilities as at December 31, 1998 were not
hedged.
e. Credit agreement defaults
The Company is party to certain credit agreements that contain covenants
restricting, among other things, (i) the ability of Telebras to dispose of all
or a substantial part of its assets or to cease to control a company that was an
operating subsidiary of the Telebras System and (ii) the ability of the Federal
Government to dispose of its controlling interest in the Telebras System. The
Breakup of Telebras on May 22, 1998 and the privatization of the Company
constituted an event of default under such credit agreements. In addition, most
of the Company's other credit agreements include cross-default provisions and
cross-acceleration provisions that would permit the holders of such indebtedness
to declare the indebtedness to be in default and to accelerate the maturity
thereof if a significant portion of the principal amount of the Company's debt
is in default or accelerated. The amount of R$853,559 of the Company's
outstanding debt as of December 31, 1998 was in default as a result of the
privatization, of which R$413,200 was liquidated in February 1999 at its
maturity date. The Company is currently in negotiations with the appropriate
creditors with respect to this indebtedness.
The consolidated financial statements do not include any adjustments
relating to the recoverability of assets and classification of liabilities that
might be necessary should the Company be unable to renegotiate its credit
agreements. The Company believes that the creditors will renegotiate the terms
of these credit agreements and/or provide appropriate waivers regarding such
defaults.
24. Provisions for contingencies
The Company is a party to certain legal proceedings arising in the normal
course of business, including civil, administrative, tax, social security and
labor proceedings. The Company has provided for the amounts to cover its
estimated losses due to adverse legal judgments. In the opinion of management,
such actions, if decided adversely to the Company, would not have a material
adverse effect on the Company's financial condition.
The components of the charge included in the consolidated statements of
income for contingent liabilities are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------- -------------- --------------
<S> <C> <C> <C>
Additional provisions.................................. 32,101 44,761 21,104
Payments in excess of provisions....................... 16,871 14,058 -
=============== ============== ==============
48,972 58,819 21,104
=============== ============== ==============
</TABLE>
Provisions for contingent liabilities were as follows:
1997 1998
--------------- ---------------
Civil claims...................... 593 22,878
Labor claims...................... 63,740 64,441
Disputed taxes.................... 21,530 28,424
--------------- ----------------
85,863 115,743
=============== ===============
Current........................... 51,623 45,235
Noncurrent........................ 34,240 70,508
=============== ===============
Civil claims
Anatel Resolution 33, published in the Federal Official Journal on July 13,
1998, approved the Regulation "Remuneration for Use of the Networks of the
Switched Fixed Telecommunication Services - STFC Providers" which establishes
tariff criteria for the remuneration of Switched Fixed Service Telecommunication
Networks, to be generally adopted when interconnected with the Networks of Other
Public Interest Telecommunication Service Providers. This Resolution revoked
Ordinance 392 of August 8, 1997, which established percentage splits for
revenues from mutual traffic and divided domestic and international
long-distance call services between the operators, and it was applied
retroactively to April 1, 1998. Thus, the provision for civil claims on December
31, 1998 comprised management's estimate of the probable loss in connection with
such Resolution.
Labor claims
The provision for labor claims comprises management's estimate of the most
probable loss in relation to various suits filed by current and former
employees. The aggregate amount involved in such lawsuits is approximately R$174
million.
Disputed taxes
i. Workers Accident Insurance Tax
The Company is a party to several lawsuits filed by the National Institute
of Social Security in 1997 before the Justica Federal of Sao Paulo relating to
the collection of the Seguro de Acidente de Trabalho (Workers Accident Insurance
Tax or "SAT") for the period between January 1986 and June 1996. The aggregate
amount involved in such lawsuits is approximately R$100 million. The Company has
allowed judicial liens to be placed on five of its properties, valued at
approximately R$61.6 million in the aggregate, pursuant to Brazilian legal
procedures pending the outcome of such lawsuits. In the event the Company
prevails in such lawsuits, such liens will be removed from the properties. As
management believes that the Company will prevail, no provision has been
recorded.
ii. Other taxes
The determination of the manner in which the various federal, state and
municipal Brazilian taxes apply to the operations of the Company is subject to
varying interpretations arising from the unique nature of the Company's
operations. Management believes that its interpretation of the Company's tax
obligations is substantially in compliance with legislation. Accordingly, any
changes in the tax treatment afforded to the Company's operations will be the
result of new legislation or interpretive rulings of the tax authorities that
will, in the opinion of management, not have any retroactive impact. The amount
of disputed taxes provided as of December 31, 1998, relates primarily to two
cases with the tax authorities regarding ICMS (a value added tax) and ISS (a
service tax paid to Municipal District). Management believes the likelihood of
an unfavorable outcome is probable in certain lawsuits and accordingly have made
a provision of R$28,424 at December 31, 1998. The aggregate amount involved in
such lawsuits is approximately R$42 million.
iii. ICMS 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 (Imposto sobre Circulacao de Mercadorias
e Servicos), a state value-added tax, to cover not only telecommunications
services, but also other services, including cellular activation fees, 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 is unlawful because: (i) the state secretaries acted
beyond the scope of their authority; (ii) their interpretation would subject
certain services to taxation which are not considered telecommunications
services; and (iii) new taxes may not be applied retroactively. No provision for
such taxes has been made in the accompanying consolidated financial statements
as the Company does not believe it is probable that such taxes will be payable
for services rendered during the last five years.
There can be no assurance that the Company will prevail in its position
that the new interpretation by the state treasury secretaries is unlawful. If
the ICMS tax were applied retroactively for five years to activation fees earned
by the discontinued cellular operations, it would give rise to a maximum
liability estimated at R$187 million.
iv. Compensation of overpaid FINSOCIAL against COFINS
A predecessor to the COFINS tax on gross operating revenues, called
FINSOCIAL, was originally introduced at a rate of 0.5% which was subsequently
increased in stages to a rate of 2.0%. The timing of these increases was
successfully challenged in court by a number of Brazilian companies, giving rise
to tax credits on account of past overpayments which could be compensated
against current payments of the similar tax, COFINS. The Company recorded a
credit for the overpaid FINSOCIAL tax in 1995 following both a High Court ruling
decreeing the unconstitutionality of the rate increases and subsequent
legislation allowing the taxpayer to offset the overpaid tax against other taxes
due to the same taxing authority. The Company realized the benefit by offsetting
its overpaid FINSOCIAL against current liabilities to COFINS and recognized a
gain of R$ 52,382 thousand in 1995.
The Company has not been questioned by the tax authorities in relation to
this offset. However in 1997 the High Court effectively reversed its earlier
decision and decided that the FINSOCIAL tax rate increases were applicable to
service companies. Nevertheless the Company has maintained the credit taken in
1995 on the grounds that telecommunications services in Brazil are exempt from
COFINS in accordance with the third amendment to the Brazilian Constitution of
March 17, 1993 (Art. 155, ss. 3(0)) and also because they are considered to be a
basic industry for all legal purposes in accordance with Decree 640 of March 2,
1962, which continues to be valid. If the Company were to be successfully
challenged by the tax authorities and the FINSOCIAL tax offset were found to be
without legal support, it would be liable for the unpaid COFINS tax which,
together with interest and penalties for late payment, would comprise a
liability amounting to approximately R$ 84 million as of December 31, 1998, for
which no provision has been established in the attached financial statements.
Other
A class action suit was filed against the Company in 1995 seeking an
injunction against the Company's "servicos 900" (code 900 services). While the
Company believes that it will prevail on the merits in this civil action, the
Company faces an estimated loss in revenues of approximately R$23 million
annually if an injunction is granted.
Telebras, the legal predecessor of the Company, is a defendant in a number
of legal proceedings and subject to other claims and contingencies. 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) and any liability for which specific
accounting provisions have been assigned to the Holding Company or one of the
other New Holding Companies. Creditors of Telebras may challenge this allocation
of liability. Management of the Company believes that the chances of any such
claims materializing and having a material adverse financial effect on the
Company are remote and, accordingly, no provision has been recorded.
Litigation
Management believes it has meritorious defenses to all lawsuits and legal
proceedings in which the Company is a defendant. Based on its evaluation of such
matters, and after consideration of reserves established, management believes
that the resolution of such matters will not have a material adverse effect on
the Company's financial position or results of operations.
25. Provision for pensions
The Companies participate in a multi-employer defined benefit pension plan
and other post retirement benefit plans administered by the Fundacao Telebras de
Seguridade Social ("Sistel").
Approximately 93% of the Companies' employees are covered by these plans.
The Companies contributed and charged to expense R$70,014, R$74,372 and R$68,330
during 1996, 1997 and 1998, respectively, in respect of pension fund
contributions. Information from the plans' administrators is not available to
permit the Companies to determine their share of unfunded vested benefits, if
any. As a member of multi-employer plans, the Companies' contributions are not
segregated in separate accounts or restricted to provide benefits only to
employees of the Companies. The Companies are also contingently liable for the
total obligations of the plans. The Company and the other sponsors of Sistel
(primarily the former Telebras companies) are considering a break-up of Sistel
that would generate a separate plan for each of the sponsors. The sponsors would
expect, however, to jointly maintain a plan offering the current benefits under
SISTEL for those employees who have already retired and the funding for such
plan would be provided by all the sponsors in accordance with the method of
allocation used in the break-up of Sistel. The plans for the new funds would be
modified to the needs of the new sponsors. Because the sponsors are only in the
preliminary stages of discussing the proposed break-up of Sistel, the amounts of
the independent reserve liabilities with respect to each sponsors' respective
participation are not yet measurable and, therefore, the final configuration of
each sponsor's plan and the consequences for the Company or its employees cannot
be assessed.
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 under Brazilian regulations. The actuarial studies are
revised periodically to identify whether adjustments to the contributions are
necessary. A summary relating to the overall Sistel plan, in compliance with
accounting principles generally accepted in Brazil, is as follows:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Accumulated pension and other post retirement benefit obligations................... 3,775,898 3,615,176
Other obligations................................................................... 255,751 312,831
============= =============
Total obligations.............................................................. 4,031,649 3,928,007
============= =============
Combined plan assets:
Interest bearing deposits...................................................... 1,714,153 2,463,747
Stocks and shares.............................................................. 2,360,786 1,676,103
Investment properties.......................................................... 363,305 394,553
Loans to beneficiaries......................................................... 123,428 115,854
Other investments.............................................................. 52,195 47,525
------------- -------------
Total plan assets.............................................................. 4,613,867 4,697,782
============= =============
Excess of total plan assets over total obligations.................................. 582,218 769,775
============= =============
</TABLE>
The financial statements of Sistel also contains reserve for the taxes on
investment income which are contingently payable, totaling R$487,269 and
R$636,652 at December 31, 1997 and 1998, respectively.
26. Shareholders' equity
a. Share capital
The Company's authorized capital at December 31, 1998 was 700 billion
shares. Capital subscribed and paid-up at the balance sheet date in the amount
of R$ 3,238,421 was represented by the following shares, without par value:
<TABLE>
<CAPTION>
Common in Preferred in Total
circulation circulation outstanding
---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
As at December 31, 1998 (in thousands).................... 124,369,031 210,029,997 334,399,028
In Brazilian Reais - 12.31.98............................. 1,204,427 2,033,994 3,238,421
</TABLE>
The capital may be increased only by a decision taken at a shareholders'
meeting or by the Board of Directors in connection with the capitalization of
profits or reserves previously allocated to capital increases at a shareholders'
meeting.
The preferred shares are non-voting except under limited circumstances and
are entitled to a preferential, noncumulative 6% dividend based upon their
nominal capital value and to priority over the common shares in the case of
liquidation of Telesp Participacoes S.A.
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 shares.
b. Income reserves
Legal reserve
Brazilian corporations are required to appropriate 5% of its annual net
income to a legal reserve until that reserve equals 20% of paid-up share
capital, or 30% of nominal paid-up share capital plus capital reserves;
thereafter, appropriations to this reserve are not compulsory. This reserve can
be used only to increase share capital or offset accumulated losses.
Unrealized income reserve
This reserve represents unrealized income derived principally from
indexation gains through 1995 and adjustments to the carrying values of
subsidiaries that were allocated to the Company upon the split up of Telebras.
The reserve is realized as the permanent assets that gave rise to the indexation
gains are depreciated or disposed of, and as dividends are received from the
subsidiaries. Amounts realized are transferred to retained earnings and included
in the computation of dividends.
c. Dividends
Pursuant to its by-laws, Telesp Participacoes S.A. 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 equal to the Preferred Dividend and the remainder is
distributed equally among holders of preferred shares and common shares.
For the purposes of the Brazilian Corporation Law, and in accordance with
Telesp Participacoes S.A.'s by-laws, the "Adjusted Net Income" is an amount
equal to Telesp Participacoes S.A.'s net income adjusted to reflect allocations
to or from (i) legal reserve, (ii) the statutory reserve, (iii) a contingency
reserve for anticipated losses, if any, and (iv) an unrealized income reserve,
if any.
The proposed dividend was calculated as follows:
<TABLE>
<CAPTION>
1998
------------------
<S> <C>
Consolidated net income.................................................................... 547,299
Add:
Consolidation adjustments............................................................. 244,030
Adjustments required to arrive at distributable income on a corporate law basis....... 130,348
==================
Net income on a corporate law basis available at Holding Company level................ 921,677
==================
Add:
Realization of unrealized income reserve.............................................. 777,221
Income of Jan.-Feb./98 - Spin-off from Telebras ..................................... 18,325
Deduct:
Appropriation to legal reserve........................................................ (47,000)
Appropriation to unrealized income reserve............................................ (893,002)
------------------
Adjusted net income........................................................................ 777,221
==================
Proposed dividend:
Common shares......................................................................... 72,265
Preferred shares...................................................................... 122,040
==================
Total.............................................................................. 194,305
==================
Dividend per thousand shares (Brazilian Reais):
Common shares......................................................................... 0.581
Preferred shares...................................................................... 0.581
</TABLE>
In 1998 Telesp Participacoes S.A. declared interest on shareholders'
equity, which is subject to a 15% withholding tax. The amount of dividends
declared by means of interest on shareholders' equity, include applicable
withholding tax. On March 17, 1999, the shareholders approved the creation of a
special reserve for payment of dividends by means of interest on shareholders'
equity in the amount of R$ 223,527 ( R$ 0.668 per thousand shares), including
withholding tax, through an additional realization of the unrealized income
reserve. Thus, total dividends were R$417,832 (R$1.249 per thousand of shares),
as follows:
o R$ 194,305 (R$ 0.581 per thousand shares) to be paid on December 20,
1999; and
o R$ 223,527 (R$ 0.668 per thousand shares), to be paid on a date to be
decided at Shareholders' Meeting to the shareholders as of December
31, 1998.
Dividends are calculated on the holding company's adjusted net income for
the year, which is determined using the equity accounting method for
subsidiaries. Consequently, the items shown as "Consolidation adjustments" in
the consolidated statements of changes in shareholders' equity, which are
required to reconcile consolidated net income to the holding company's net
income, become part of the basis for calculating dividends. Additionally, from
1996 on, due to the cessation of the price level restatement adjustments in the
corporate law basis financial statements, the effect of those adjustments on
consolidated net income in the accompanying financial statements must be
eliminated to arrive at distributable income on a corporate law basis.
27. Expansion plan contributions
Expansion plan contributions were the means by which Telesp financed the
growth of its telecommunications network. The contributions were made by
companies or individuals to be connected to the national telephone network. Such
contributions were paid directly to Telesp and interest received, when payments
were made in installments, was transferred to Telebras. The capital value
received from the prospective telephone subscribers was treated as follows:
o 80% was capitalized by Telesp in the name of Telebras, with the value
per share issued to Telebras being equal to the book value per share
of Telesp at the end of the year preceding the capitalization.
o 20% was remitted by Telesp to Telebras in the month following receipt.
o Until December 31, 1995 the total capital value received was indexed
from the month of receipt to the date of the next audited balance
sheet and then capitalized in the name of the prospective subscriber
by Telebras or by Telesp, at a value per share equal to the equity
value per share shown in the audited balance sheet. From January 1,
1996 indexation was no longer applied and, for contracts signed as
from that date, Telebras or Telesp were allowed the option of using a
market value per share, when that was higher than the equity value.
Also, as from June, 1995, the capitalization of expansion plan
contributions was effected by Telesp issuing its own shares to
expansion plan subscribers.
Expansion plan contributions of R$698,896, R$818,992 and R$ 209,132 in
1996, 1997 and 1998, respectively, were received. Expansion plan contributions
approved by the general meeting of shareholders of its subsidiaries for
capitalization and transfer to shareholders' equity amounted to R$412,278,
R$1,028,654 and R$699,614 in 1996, 1997 and 1998, respectively. The Company's
expansion plan contribution program has been terminated with no new contracts
being signed after June 30, 1997. In December 31, 1998, there were no remaining
balances of expansion plans contributions to be capitalized.
In addition to the expansion plans which it promoted directly, Telesp also
sponsored agreements between companies or individuals in a particular community
and independent contractors who undertook the development of the
telecommunications infrastructure required to connect them to the national
telephone network (Community Expansion Plan). The companies or individuals paid
the contractor. On completion of the project Telesp incorporated the completed
equipment into its fixed assets at the appraised value and credited expansion
plan contributions which are then treated in the same manner as the capital
values received from prospective telephone subscribers, as described above and
the balance as of December 31, 1998 is R$84,864.
28. Transactions with related parties
As a result of the privatization of the Telebras System in August 1998, the
composition of companies considered as related parties has changed.
When the companies were part of the Telebras system, the principal
transactions classified as related-party transactions referred to revenues and
costs with Empresa Brasileira de Telecomunicacoes S.A. ("Embratel") a subsidiary
of Telebras, in respect of long-distance. After privatization, a significant
portion of such transactions is no longer characterized as being with related
parties.
In 1998 the related party transactions took place with Companies that
belong to the new Controlling group, which are Tele Leste Celular Participacoes
S.A., Telebahia Celular S.A., Telergipe Celular S.A., Tele Sudeste Celular
Participacoes S.A., Telerj Celular S.A., Telest Celular S.A., CRT and CRT
Celular, as well as Telesp Celular S.A. Thus in 1997 and 1998 the amounts stated
refer to the transactions with Telebras system and the new Controlling group,
respectively. The transactions with the companies whose amounts had been
eliminated in the consolidation were not included.
Additionally, management fees are paid to Telefonica Internacional S. A. by
the subsidiaries, and correspond to 1% of net revenues. The amount of R$19,760
was allocated to General and Administrative expenses that were included in the
Operating Expense for the year ended December 31, 1998.
A summary of the balances and transactions with these related parties, made
under usual market conditions for these types of operations, is as follows:
<TABLE>
<CAPTION>
1997 1998
--------------- --------------
Current assets:
<S> <C> <C>
Trade accounts receivable.......................... 4,540 69,483
Other assets....................................... 14,633 -
Non current assets:
Other assets....................................... 356,872 387,572
Current liabilities:
Loans and financing................................ 28,397 -
Dividends/Interest on capital...................... 181,186 44,027
Other liabilities.................................. 73,472 83,671
Non current liabilities:
Loans and financing................................ 114,985 -
Other liabilities.................................. 23 -
</TABLE>
<TABLE>
<CAPTION>
1996 1997 1998
-------------- --------------- --------------
<S> <C> <C> <C>
Net operating revenues................... 197,608 351,740 1,332
Cost of services......................... 128,557 240,872 13,371
Operating expenses....................... 683 2,931 19,760
Net interest expense..................... 77,093 28,785 (12,392)
</TABLE>
29. Commitments
a. Capital expenditure
At December 31, 1998 the Company had the following capital expenditure
commitments:
Expected year of expenditure
1999........................................... 1,407,154
2000........................................... 5,509
b. Commitments to Anatel (unaudited)
The following tables set forth the network expansion and modernization
commitments, as stated in the Commitment List for the period 1999-2005, and the
status of the subsidiaries in relation to each of the commitments as of December
31,1998:
<TABLE>
<CAPTION>
Telesp
-----------------------------------------------------------------------------------
Commitment
-----------------------------------------------------------------------------------
Indicator Status as of 1999 2000 2001 2003 2005
12.31.98
-------------- ------------- ------------- ------------ ------------ ------------
Universe
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of telephones (TUP) in 163,800 193,680 216,040 241,010 7.5 / 1000 8.0 / 1000
service inhab. inhab.
Installed lines (x1000) 6,180 7,003 8,320 9,727 - -
Quality
Max. requests for repair per 4.01% 3.0% - 2.5% 2.0% 1.5%
100 STFC access
Max. requests for repair per 20.02% 15.00% - 12.00% 10.00% 8.00%
100 STFC access from TUP
Max. complaints for error per 9.00 4.00 - 3.00 2.00 -
1000 bills issued
Local network digitalization level 72.60% 75.00% - 85.00% 95.00% 100.00%
Dial tone in 3 seconds 99.57% 98.00% - 99.00% 99.50% -
</TABLE>
<TABLE>
<CAPTION>
CTBC
-----------------------------------------------------------------------------------
Commitment
-----------------------------------------------------------------------------------
Indicator Status as of 1999 2000 2001 2003 2005
12.31.98
-------------- ------------- ------------- ------------ ------------ ------------
Universe
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of telephones (TUP) in 15,800 19,530 21,500 23,530 7.5 / 1000 8.0 / 1000
service inhab. inhab.
Installed lines (x1000) 697 833 905 950 - -
1
Quality
Max. requests for repair 3.89% 3.0% - 2.5% 2.0% 1.5%
per 100 STFC access
Max. requests for repair 9.5% 15.00% - 12.00% 10.00% 8.00%
per 100 STFC access from TUP
Max. complaints for error 6.90 4.00 - 3.00 2.00 -
per 1000 bills issued
Local network digitalization 74.19% 75.00% - 85.00% 95.00% 99.00%
level
Dial tone in 3 seconds 99.9% 98.00% - 99.00% 99.50% -
</TABLE>
30. Insurance
At December 31, 1998, in the opinion of management, all significant and
high risk assets and obligations were insured.
31. Fair values 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 was required in
interpreting market data to produce the estimated fair values. Accordingly, the
estimates 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.
Where no comparison of book versus fair value is presented for a financial
asset or liability line item in the schedule below, no significant difference in
values is believed to exist.
<TABLE>
<CAPTION>
1997 1997 1998 1998
Book Fair Book Fair
value value value value
-------------- ------------- ------------- --------------
Assets:
Loans and financing:
<S> <C> <C> <C> <C>
Onlending of financing from Comtel........ 356,862 372,630 386,861 301,278
Liabilities:
Loans and financing:
Loans payable to Telebras................... 143,382 151,803 - -
Other financing............................. 357,614 373,372 938,999 817,936
</TABLE>
Cash, cash equivalents, trade accounts receivable and other assets, accounts
payable and accrued liabilities
The carrying value of cash and cash equivalents, trade accounts receivable
and other assets, accounts payable and accrued liabilities are a reasonable
estimate of their fair values. Account balances approximate market value because
of the short-term maturities of these instruments.
Loans and financing
Interest rates that are currently available to the Company for issuance of
debt with similar terms and maturities were used to estimate fair value.
Derivatives
The company does not have operations with derivatives to protect its
liabilities related to loans and financing in foreign currency.
32. Subsequent event - changes in exchange policies by the Central Bank of
Brazil and devaluation of Brazilian Real
At the end of the first half of January, the Brazilian Central Bank changed
its exchange policy, discontinuing the so-called exchange band through which it
controlled the real fluctuation margin in relation to the U.S. dollar;
thereafter, the exchange rate was freely negotiated in the market. As a
consequence of such change, the real devalued from R$1.2087 per US dollar to
R$1.7240 as of May 31, 1999.
33. Summary of the differences between Brazilian and US GAAP
The Company's accounting policies comply with generally accepted accounting
principles in Brazil ("Brazilian GAAP"). Accounting policies which differ
significantly from generally accepted accounting principles in the United States
of America ("US GAAP") are described below:
a. Different criteria for capitalizing and depreciating capitalized interest
Until December 31, 1993 capitalized interest was not added to the
individual assets in property, plant and equipment, instead it was capitalized
separately and amortized over a time period different from the useful lives of
the related assets. Under US GAAP, capitalized interest is added to the
individual assets and is amortized over their useful lives. Also, under
Brazilian GAAP as applied to companies in the telecommunications industry,
interest attributable to construction-in-progress is computed at the rate of 12%
per annum of the balance of construction-in-progress and that part which relates
to interest on third party loans is credited to interest expense based on actual
interest costs with the balance relating to own capital being credited to
capital reserves.
Under US GAAP, in accordance with the provisions of SFAS 34, interest
incurred on borrowings is capitalized to the extent that borrowings do not
exceed construction-in-progress. The credit is a reduction of interest expense.
Under US GAAP, the amount of interest capitalized excludes the monetary gain
associated with the borrowings and the foreign exchange gains and losses on
foreign currency borrowings. The US GAAP differences between the accumulated
capitalized interest on disposals and in accumulated amortization on disposals
relate to the differences between capitalized interest and related accumulated
amortization under Brazilian and US GAAP which is included in the net book value
of disposed property, plant and equipment.
The effects of these different criteria for capitalizing and depreciating
capitalized interest are presented below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- ------------
Capitalized interest difference US GAAP capitalized interest:
<S> <C> <C> <C>
Interest which would have been capitalized and credited to income
under US GAAP (Being interest incurred on loans from the Company's
parent and from third parties, except in years where total loans
exceeded total construction in progress, when capitalized
interest is reduced proportionately)................................. 117,428 88,600 25,793
Capitalized interest on disposals........................................ 2,854 15,275 (36,592)
----------- ----------- ------------
120,282 103,875 (10,799)
----------- ----------- ------------
Less Brazilian GAAP capitalized interest:
Interest capitalized and credited to income under Brazilian GAAP (Up
to the limit of interest incurred on loans obtained for financing
capital investments).................................................. (20,864) (15,013) (71,612)
Interest capitalized and credited to reserves under Brazilian GAAP
(Difference between total capitalized interest and interest
capitalized and credited to income)................................. (172,469) (148,308) (109,370)
----------- ----------- -----------
Total capitalized interest under Brazilian GAAP (12% per annum,
applied monthly to the balance of construction-in-progress)...... (193,333) (163,321) (180,982)
Capitalized interest on disposals...................................... - - 43,053
----------- ----------- ------------
(193,333) (163,321) (137,929)
----------- ----------- ------------
US GAAP Difference....................................................... (73,051) (59,446) (148,728)
=========== =========== ============
Amortization of capitalized interest difference
Amortization under Brazilian GAAP........................................ 204,360 228,727 163,344
Capitalized interest on disposals........................................ - - (37,218)
----------- ----------- ------------
204,360 228,727 126,126
Less: Amortization under US GAAP......................................... (175,639) (187,299) (138,831)
US GAAP difference in accumulated amortization on disposals........ (2,854) (15,275) 31,632
----------- ----------- ------------
(178,493) (202,574) (107,199)
=========== =========== ============
US GAAP Difference....................................................... 25,867 26,153 18,927
=========== =========== ============
</TABLE>
b. Reversal of proposed dividends
Under Brazilian GAAP proposed dividends are accrued for in the financial
statements in anticipation of their approval at the shareholders' meeting. Under
US GAAP, dividends are not accrued until they are formally declared.
The interest on shareholders' equity is a legal liability from the date it
is declared, therefore, these amounts must be included as dividends in the year
they are proposed for US GAAP purposes.
c. Pension and other post-retirement benefits
The Company participates in a multi-employer plan ("Sistel") and provides
for the costs of pensions and other post retirement benefits based on a fixed
percentage of remuneration, as recommended annually by independent actuaries.
For purposes of US GAAP, the Company is considered to contribute to a
multiemployer plan and consequently is required to disclose its annual
contributions and the funded status of the plan in accordance with US GAAP. Note
34 shows the funded status of Sistel. The provisions of SFAS No. 87, for the
purposes of calculating the funded status, were applied with effect from January
1, 1992, because it was not feasible to apply them from the effective date
specified in the standard.
d. Items posted directly to shareholders' equity accounts
Under Brazilian GAAP various items are posted directly to shareholders'
equity accounts, that, under US GAAP, would be posted to the income statement.
Examples include capitalized interest, the effects of adjustments to tax rates
and tax incentive investment credits received. The posting of such items to
shareholders' equity in the subsidiaries gives rise to consolidation adjustments
in the statements of changes in shareholders' equity. Since the original
postings to equity accounts would, under US GAAP, be made directly to the income
statement, these consolidation adjustments must be included in the
reconciliation of net income in accordance with US GAAP. The effects of changes
in income tax rates posted directly to shareholders' equity accounts arises from
applying increases or decreases in tax rates to the deferred tax liability
relating to the special reserve arising from pre-1990 indexation adjustments to
property, plant and equipment.
e. Earnings per share
Under Brazilian GAAP, net income per share is calculated on the number of
shares outstanding at the balance sheet date. Since the capital structure of the
Holding Company was not in place at December 31, 1997, earnings per share was
not presented for Brazilian GAAP in 1997.
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. Each American Depositary Share
("ADS") is equivalent to one thousand shares.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share". This new statement became effective December 15, 1997,
and provides computation, presentation and disclosure requirements for earnings
per share.
Since the preferred and common stockholders have different dividend, voting
and liquidation rights, Basic and Diluted earnings per share have been
calculated using the "two-class" method. The "two-class" method is an earnings
allocation formula that determines earnings per share for preferred and common
stock 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 stock dividends (a minimum of
6% of preferred capital, as defined in the Company's by-laws) and the preferred
shareholders' portion of undistributed net income. Undistributed net income is
computed by deducting total dividends (the sum of preferred and common stock
dividends) from net income. Undistributed net income is shared equally by the
preferred and common shareholders on a pro rata basis. Total dividends are
calculated as described in Note 26(c). Diluted earnings per share is computed by
reducing net income for an increase to net earnings allocated to minority
shareholders and dividing such net income available to common and preferred
shareholders by the monthly weighted-average number of common and preferred
shares outstanding during the period. The weighted-average (thousand) shares
outstanding for diluted earnings per share is not greater than such shares used
in the basic earnings per share calculation since the dilutive share issue is
that of the Holding Company's subsidiary Telesp, as indicated below.
The weighted-average number of common and preferred shares used in
computing basic earnings per share for 1998 was 124,369,031 thousand and
206,028,812 thousand, respectively. The Company has received certain
contributions from customers or customers have independently paid suppliers of
telecommunications equipment and services for the installation of fixed line
services. These amounts are reflected as "funds for capitalization" in the
accompanying consolidated balance sheets. Once the installation is essentially
complete and the contributions have been received, the funds will be converted
into equity (see Note 27 to the consolidated financial statements). These
activities are dilutive in nature to the shareholders of the Company, whether
the shares to be issued are those of the Holding Company's subsidiary, Telesp
(which will impact the minority interest recognized) or of the Company itself.
The expectation is that the shares would be issued in the subsidiary companies
rather than in the Holding Company based on the manner in which such shares were
issued in 1997 and 1998. The shares are treated as outstanding and included in
the basic EPS calculation only when such funds are converted to equity and the
shares issued. The shares are treated as outstanding for diluted EPS purposes
when expansion plan contributions are received or when Community Expansion Plan
agreements have been approved (see note 27). If subsidiary shares had been
issued historically, the reduction to net income to increase net earnings
allocated to minority shareholders for 1997 and 1998 would have been R$37,922
and R$4,840, respectively.
The Company's preferred shares are non-voting except under certain limited
circumstances and are entitled to a preferential, noncumulative dividend and to
priority over the common shares in the event of liquidation of the Company. In
1998, the amount of dividends paid to the preferred shareholders exceeded the
minimum dividend, and was equal to the amount per share paid to the common
shareholders.
f. Disclosure requirements
US-GAAP disclosure requirements differ from those required by Brazilian
GAAP. However, in these consolidated financial statements, the level of
disclosure has been expanded to comply with US-GAAP.
g. Income taxes
Telesp fully accrues for deferred income taxes on temporary differences
between tax and reporting records. The existing policies for providing for
deferred taxes are substantially in accordance with SFAS 109, "Accounting for
Income Taxes", except in connection with the deferred income tax effects of
indexation adjustments in 1996 and 1997 (see Note 2(c)(iii)). Under US GAAP the
deferred tax effects of the 1996 and 1997 indexation for financial reporting
purposes would be charged to income and social contribution taxes in the
statement of income. Consequently, this is the only material difference in the
implementation of SFAS 109 other than in relation to the US GAAP adjustments
described in this note to the financial statements. Additionally, for US GAAP
purposes, deferred tax assets and liabilities are classified as current or non
current based on the classification of the asset or liability attributing to the
temporary difference.
h. Interest income (expense)
Brazilian GAAP requires interest to be shown as part of operating income.
Under US GAAP interest income (expense) would be shown after operating income.
i. Employees' profit share
Brazilian GAAP requires employees' profit share to be shown after operating
income. Under US GAAP employee profit sharing is included as an expense in
arriving at operating income.
j. Permanent assets
Brazilian GAAP has a class of assets called permanent assets. This is the
collective name for all assets on which indexation adjustments were calculated
in the corporate and fiscal law accounts of Brazilian companies.
Under US GAAP the assets in this classification would be noncurrent assets.
Gains on the disposal of permanent assets were R$82,628, R$9,958 and
R$24,332 in 1996, 1997 and 1998, respectively. For Brazilian GAAP, the gain on
disposal of permanent assets includes the difference between the net book value
of the assets retired from service and the values of the refurbished assets
returned to service at replacement cost values. Such gains are classified as
non-operating income for Brazilian GAAP. Under US GAAP, since assets requiring
refurbishment are not disposed of, the refurbishment activities would not give
rise to gain on disposal. Under US GAAP refurbishment costs meeting the criteria
of capitalization would be added to the cost of the related asset and amortized
over its remaining useful life. The net book value of the refurbished equipment
under Brazilian GAAP does not exceed that under US GAAP, accordingly, no US GAAP
adjustment is reflected in the US GAAP reconciliation. Additionally, under US
GAAP, the difference between the net book value of the assets retired from
service and the value of the refurbished assets returned to service, amounting
to R$88,145, R$6,182 and R$37,781 in 1996, 1997 and 1998, would be a reduction
of the corresponding refurbishment expenses (classified as cost of services
under Brazilian GAAP) rather than a credit to gains on the disposal of permanent
assets (classified as nonoperating income (expense) under Brazilian GAAP).
k. Price-level adjustments and US GAAP presentation
The effects of price-level adjustments have not been eliminated in the
reconciliation to US GAAP nor are the monetary gains or losses associated with
the various US GAAP adjustments separately identified, because the application
of inflation restatement as measured by the UFIR and 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 for both Brazilian and US accounting
purposes.
l. Funds for capitalization
i. Expansion plan contributions
Under Brazilian GAAP, expansion plan contributions received are included in
the consolidated balance sheet below equity until proposed subscribers have paid
for their telephone connection in full and a general meeting of shareholders
approves the capital increases. Until December 31, 1995 expansion plan
contributions were indexed from the month received to the date of the next
audited balance sheet and transferred to equity when capital stock was issued to
the subscriber, at a value per share equal to the equity value per share shown
on the latest audited balance sheet.
From January 1, 1996 indexation was no longer applied and, for contracts
signed as from that date, Telesp was allowed the option of using a value per
share equal to the market value, when this is higher than the equity value. For
US GAAP purposes, a portion of the expansion plan contributions would be
allocated to shareholders' equity based on the market value of the shares to be
issued to subscribers. The remainder of the expansion plan contributions would
be classified as a deferred credit and amortized to reduce depreciation expense
from the time the related construction-in-progress is completed.
The balance of expansion plan contributions at December 31, 1997, which was
recorded under US GAAP as a component of shareholders' equity, represented
contributions that could be converted to shares of Telebras or the operating
subsidiaries at the Company's option. In 1998, the entire amount was converted
to shares of the operating subsidiaries and accordingly transferred to minority
interest.
ii. Donations and subsidies for investments
Under Brazilian GAAP those amounts, which comprise principally the excess
of the value of property, plant and equipment incorporated into the Company's
assets over the corresponding credits to expansion plan contributions received,
are recorded as a credit to other capital reserves. For US GAAP purposes, the
credit to capital reserves would be classified as a deferred credit and
amortized to reduce depreciation expense.
m. Loans and Financing
For US GAAP, loans and financing balances in default or expected to be in
default within a year of the balance sheet date would be classified as current
obligations unless creditors had provided the Company waivers for such defaults.
For Brazilian GAAP, loans and financing balances in technical default are not
always classified as current liabilities. The amount of R$853,859 of the
Company's outstanding debt as of December 31, 1998 was in default as a result of
the privatization, of which R$ 413,200 was liquidated in February, 1999 at its
maturity date. Accordingly, for US GAAP, such amount would be classified as
current liabilities.
n. Valuation of Long-Lived Assets
For US GAAP, effective January 1, 1996 the Company adopted SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." In accordance with this standard, the Company periodically
evaluates the carrying value of long-lived assets to be held and used, when
events and circumstances warrant such a review. The carrying value of long-lived
assets is considered impaired when the anticipated undiscounted cash flow from
such assets is separately identifiable and is less than their carrying value. In
that event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the assets. The adoption of this standard did
not have a material effect on the Company's results or financial condition.
Brazilian GAAP does not require cash flow computations in order to
determine potential asset impairment.
o. Retained earnings
For Brazilian GAAP, a company formed as a result of a spin-off may have
retained earnings in its balance sheet if the parent company shareholders'
resolution adopting the spin-off allocates retained earnings from the parent
company to the new company. Under US GAAP, "retained earnings" allocated in the
spin-off would not be considered historical retained earnings as such amount
would represent capital allocated from the parent company and would be described
as "distributable capital." As a result of the May 22, 1998 spin-off, the
Company had US GAAP distributable capital of R$2,069,345 on May 22, 1998 and R$
2,469,299 on December 31, 1998.
p. Recognition of gains from disputed taxes
Brazilian GAAP is less rigorous than US GAAP in establishing the criteria
which must be met for the recognition of a gain such as the R$52,382 recognized
by the Company in 1995 in relation to overpaid FINSOCIAL taxes (see Note 24).
Under US GAAP this amount would be considered a gain contingency which would not
be recognized until receipt of the benefit were to be considered full and final.
q. Stock compensation
As part of the privatization of the Telebras System, the Federal Government
offered Telebras System employees the right to purchase the Federal Government's
entire holding of Telebras preferred shares and preferred shares of each of the
twelve new holding companies formed as a result of the breakup of Telebras ("New
Holding Companies") (representing 2.18% of the outstanding capital stock of
Telebras and of each New Holding Company) at a price of R$69.24 per lot of
13,000 shares (each a "lot" and comprised of 1,000 preferred shares of each of
Telebras and the twelve New Holding Companies). This price represents a 50% of
discount from the market price of 1,000 Telebras preferred shares at the time
the Federal Government authorized the plan. Each employee had the right to
purchase up to 144 lots of 13,000 preferred shares, subject to proration if the
shares were oversubscribed.
The Federal Government had made 7.2 million lots available for sale, or 60%
of the 12.1 million lots that would be taken up if each employee purchased the
maximum 144 lots allowed. The original period to sign up to purchase the shares
ended on October 30, 1998. On August 4, 1998, the date on which the offer
employees commenced and the measurement date for 60% of the shares, the market
price of 1,000 Telebras shares was R$ 127.20. Under US GAAP, the charge was
R$108,721, which represents Telesp's and CTBC's shares of the offer price/market
price differential on 60% of the shares offered for which the measurement date
was August 4, 1998. As of October 30, 1998, the original expiration of the
program, Telesp and CTBC employees had subscribed to 1,875,798 lots. This amount
is slightly below the 60% pro rata portion available to those employees. The
Brazilian government extended the expiration of the program to April 9, 1999.
Pursuant to the extension, employees could rescind their subscriptions at any
time prior to April 9, 1999 and shares relating to rescinded subscriptions were
reassigned to the remaining subscribers on a pro rata basis.
Although the Federal Government, rather than the Company or Telebras
offered the shares to employees, under U.S. GAAP deemed compensation amount is
"pushed down" to each of the New Holding Companies in accordance with the number
of shares purchased by each New Holding Company and its subsidiaries' employees.
Net income reconciliation of the difference between US and Brazilian GAAP
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ----------------- ----------------
Consolidated net income as reported............................. - - 547,299
<S> <C> <C> <C>
Income from continuing operations, before unallocated interest
income/expense, taxes and minority interests................. 930,661 952,296 -
Add (deduct):
Different criteria for:
Capitalized interest.................................... (73,051) (59,446) (148,728)
Amortization of capitalized interest.................... 25,867 26,153 18,927
Contributions to plant expansion:
Amortization of deferred credit......................... 18,543 19,709 15,371
Donations and subsidies for investment.................. - (32,621) (49,548)
Items posted directly to shareholders' equity:
Interest on construction in progress.................... 176,046 146,638 109,370
Donations and subsidies for investment.................. - 32,621 43,949
Other consolidation adjustments......................... (3,898) 33 90,712
Tax incentive investment credits........................ - - 188
Stock compensation........................................... - - (108,721)
Deferred tax on above adjustments............................ - - 55,825
Minority interest in above - - 96,013
adjustments......................................................
US GAAP income from continuing operations before unallocated
interest 1,074,168 1,085,383 -
income/expense,income taxes and minority interests...........
------------------ ----------------- ----------------
Income from discontinued operations before unallocated interest
income/expense, income taxes and minority interests as 328,741 537,377 -
reported .
Effect of US GAAP differences on income from discontinued
operations.................................................... 5,748 49 -
------------------ ----------------- ----------------
US GAAP income from discontinued operations before unallocated
interest income/expense, income taxes and minority interests. 334,489 537,426 -
------------------ ----------------- ----------------
Items relating to continuing and discontinued operations:
Unallocated interest income.................................... 98,405 202,751 -
Unallocated interest expense................................... (51,500) (3,332) -
Income and social contribution taxes........................... (330,591) (528,672) -
Minority interests, Brazilian GAAP basis....................... (249,855) (360,296) -
Add (deduct):
Items posted directly to shareholders' equity:
Effects in changes in income tax rates.................. (7,872) - -
Deferred tax on full indexation......................... (307,024) (271,469) -
Tax incentive investment credits........................ 16,530 53,016 -
Deferred tax effects of the above adjustments:
In respect of continuing operations..................... 21,916 18,326 -
In respect of discontinued operations................... (212) 4,110 -
Minority interests in the above adjustments.................. 115,699 181,262 -
------------------ ----------------- ----------------
US GAAP net income................................................ 714,153 918,505 670,657
================== ================= ================
</TABLE>
Net income per thousand shares in accordance with US GAAP
<TABLE>
<CAPTION>
1996 1997 1998
------------------ ----------------- ----------------
<S> <C> <C> <C>
Common shares--Basic............................................... 2.23 2.86 2.03
================== ================= ================
Weighted average (thousand) common shares outstanding........ 124,351,903 124,351,903 124,369,031
Common shares--Diluted............................................. 1.96 2.75 2.02
================== ================= ================
Weighted average (thousand) common shares outstanding........ 124,351,903 124,351,903 124,369,031
Preferred shares--Basic............................................ 2.23 2.86 2.03
================== ================= ================
Weighted average (thousand) Preferred shares outstanding..... 196,311,647 196,311,647 206,028,812
Preferred shares--Diluted.......................................... 1.96 2.75 2.02
================== ================= ================
Weighted average (thousand) Preferred shares outstanding..... 196,311,647 196,311,647 206,028,812
Shareholders' equity reconciliation of the difference between US
and Brazilian GAAP
</TABLE>
<TABLE>
<CAPTION>
1997 1998
----------------- ----------------
<S> <C> <C>
Total shareholders' equity as reported....................................... 8,876,672 9,131,455
Add (deduct):
Different criteria for:
Capitalized interest............................................... (403,761) (552,489)
Amortization of capitalized interest............................... 171,578 190,505
Reversal of proposed dividends.......................................... 318,572 -
Reversal of COFINS tax credit........................................... (52,382) (52,382)
Contributions to plant expansion:
Amortization of deferred credit.................................... 75,436 90,807
Subscribed capital stock........................................... 490,740 -
Deferred credit.................................................... (162,079) (167,267)
Donations and subsidies for investment............................. (122,497) (172,045)
Deferred tax effects of above adjustments............................... 162,922 218,747
Minority interest in the above adjustments.............................. (49,418) 143,492
Adjustments in respect of discontinued operations:
Adjustments before income taxes.................................... (12,884) -
Deferred tax effects of these adjustments.......................... 4,252 -
================= ================
US GAAP shareholders' equity................................................. 9,297,151 8,830,823
================= ================
US GAAP supplementary information:
Total assets............................................................ 15,829,256 16,750,448
================= ================
Property, plant and equipment........................................... 25,575,432 27,877,982
Accumulated depreciation................................................ (13,218,160) (14,337,131)
================= ================
Net property, plant and equipment....................................... 12,357,272 13,540,851
================= ================
</TABLE>
The deferred tax effect of the US GAAP adjustments noted above would be
classified mainly as a noncurrent asset in the balance sheet.
Changes in shareholders' equity in accordance with US GAAP
<TABLE>
<CAPTION>
Shareholders' equity
------------------------
<S> <C> <C> <C>
Balances at December 31, 1995............................................. 7,689,291
Expansion plan contributions:
Received................................................................ 696,965
Deferred credits........................................................ (1,384)
Net income................................................................ 714,153
Dividends paid............................................................ (230,556)
Minority interest in Telesp on all movements in shareholders' equity,
except for net income................................................... (109,048)
--------------
Balances at December 31, 1996............................................. 8,759,421
Expansion plan contributions:
Received................................................................ 798,172
Deferred credits........................................................ (567)
Net income................................................................ 918,505
Dividends paid............................................................ 262,247)
Minority interest in Telesp on all movements in shareholders' equity,
except for net income................................................. 916,133)
--------------
Balances at December 31, 1997............................................. 9,297,151
Spin-off of cellular telecommunications business.......................... (893,322)
Additional net assets received on the breakup of Telebras, net of
R$184,080 of intercompany dividends................................... 407,264
Expansion plan contributions:
Deferred credits........................................................ (5,188)
Transferred to minority interests....................................... (490,740)
Net income................................................................ 670,657
Stock compensation, net of minority interest of R$35,126.................. 73,595
Interest on shareholders' equity paid..................................... (228,594)
--------------
Balances at December 31, 1998............................................. 8,830,823
==============
</TABLE>
34. Additional disclosures required by US GAAP
a. Pension and post-retirement benefits
The Companies, together with substantially all of the other companies in
the Telebras group, participate in a multi-employer defined benefit pension and
other post-retirement benefit plans, which are operated and administered by
Sistel. The funded status of the Sistel pension and other post-retirement
benefit plans and the related actuarial assumptions in accordance with US GAAP,
are as follows:
Pension benefit plan
<TABLE>
<CAPTION>
1997 1998
---------------- ----------------
Funded status:
Accumulated benefit obligation:
<S> <C> <C>
Vested....................................................... 1,919,975 2,421,646
Non vested................................................... 3,479,300 4,018,319
================ ================
Total........................................................ 5,399,275 6,439,965
================ ================
Projected benefit obligation...................................... 7,258,074 8,281,791
Fair value of plan assets......................................... (3,897,051) (3,811,718)
================ ================
Projected obligation in excess of assets.......................... 3,361,023 4,470,073
================ ================
</TABLE>
<TABLE>
<CAPTION>
The actuarial assumptions used were as follows:
1997 1998
---------------- ----------------
<S> <C> <C>
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 are real rates and exclude inflation.
Amortization of the unrecognized liability at transition: 18.19 years
commencing on January 1, 1991.
Change in benefit obligation
<TABLE>
<CAPTION>
1997 1998
---------------- ----------------
<S> <C> <C>
Benefit obligation at the beginning of year ........................... 6,022,228 7,258,074
Service cost .......................................................... 323,536 385,239
Interest cost ......................................................... 358,102 455,256
Benefits paid.......................................................... (142,355) (192,155)
Administrative expenses................................................ (22,074) (24,763)
Actuarial (gain) loss.................................................. 718,637 400,140
================ ================
Benefit obligation at end of year...................................... 7,258,074 8,281,791
================ ================
Change in plan assets
</TABLE>
<TABLE>
<CAPTION>
1997 1998
---------------- ----------------
<S> <C> <C>
Fair value of plan assets at beginning of year ........................ 3,112,848 3,897,051
Employer contributions................................................. 209,483 210,534
Plan participants' contribution ....................................... 114,165 119,594
Benefits paid.......................................................... (142,355) (192,155)
Administrative expenses................................................ (22,074) (24,763)
Actual return on plan assets........................................... 624,984 (198,543)
================ ================
Fair value of plan assets at end of year............................... 3,897,051 3,811,718
================ ================
</TABLE>
Other post-retirement benefits plan
<TABLE>
<CAPTION>
1997 1998
---------------- ----------------
Funded status:
Accumulated post-retirement benefit obligations:
<S> <C> <C>
Retirees and dependents...................................... 380,561 442,769
Fully eligible active plan participants...................... 34,589 31,282
Other active plan participants............................... 997,791 984,650
---------------- ----------------
1,412,941 1,458,701
---------------- ----------------
Fair value of plan assets......................................... (96,141) (99,238)
---------------- ----------------
Obligations in excess of plan assets............................. 1,316,800 1,359,463
================ ================
</TABLE>
Amortization of the unrecognized liability at transition: 18.84 years commencing
on January 1, 1992.
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 in the assumed health care cost trend
rates would increase the accumulated post-retirement benefits obligation at
December 31, 1998 by R$238,530. Measurement of the accumulated post-retirement
benefit obligation was based on the same assumptions as were used in the pension
fund liability calculations.
Change in benefit obligation
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Benefit obligation on the beginning of year ........................... 1,170,230 1,412,941
Service cost .......................................................... 50,264 49,752
Interest cost ......................................................... 72,876 75,615
Benefits paid.......................................................... (10,239) (14,208)
Administrative expenses................................................ (1,682) (1,948)
Actuarial (gain) loss.................................................. 131,492 (63,451)
============== ==============
Benefit obligation at end of year...................................... 1,412,941 1,458,701
============== ==============
</TABLE>
Change in plan assets
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Fair value of plan assets at beginning of year ........................ 69,506 96,141
Employer contributions................................................. 25,896 23,328
Plan participants' contribution ....................................... - -
Benefits paid.......................................................... (8,028) (11,998)
Administrative expenses................................................ (1,681) (1,948)
Actual return on plan assets........................................... 10,448 (6,285)
============== ==============
Fair value of plan assets at end of year............................... 96,141 99,238
============== ==============
</TABLE>
The funded status of the pension and post retirement plans under Brazilian
and US GAAP differ. Benefit obligations differ because they have been prepared
using different actuarial assumptions permitted under Brazilian and US GAAP.
The net assets of the plans differ under Brazilian and US GAAP principally
due to the accrual of income tax contingencies of the pension fund for US GAAP
purposes in the amount of R$487,269 and R$636,652 in 1997 and 1998,
respectively. The contingency arises out of uncertainty as to the income tax
status of Brazilian pension funds in general because the tax law is unclear as
to whether these funds are exempt from tax on their investment gains. Under
Brazilian GAAP, the liability is recorded but not deducted from plan assets for
disclosure purposes.
b. Concentration of risk
Credit risk with respect to customer accounts receivable is diversified.
The Company continually monitors the level of customer accounts receivable and
limits the exposure to bad debts by cutting access to the telephone network if
any invoice is one month past due. Exceptions comprise telephone services that
must be maintained for reasons of safety or national security.
For conducting its business, the Company is fully dependent upon the
fixed-line telecommunications concession as granted by the Federal Government.
Approximately 53% of all employees are members of state labor unions
associated either with the Federacao Nacional dos Trabalhadores em
Telecomunicacoes-Fenattel, or with the Federacao Interestadual dos Trabalhadores
em Telecomunicacoes-Fittel. Management negotiates a new collective labor
agreement every year with the local union.
The collective agreement currently in force expires in November 1999.
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.
c. New accounting pronouncements
SFAS No. 130, "Reporting Comprehensive Income"
SFAS No. 130 establishes the standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and losses)
as part of a full set of financial statements. This statement requires that all
elements of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
does not have items that could be considered under this statement.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information"
SFAS No. 131 establishes the standards for the manner in which public
enterprises are required to report financial and descriptive information about
their operating segments. The standard defines operating segments as components
of an enterprise for which separate financial information is available and
evaluated regularly as a means for assessing segment performance and allocating
resources to segments. A measure of profit or loss, total assets and other
related information are required to be disclosed for each operating segment. In
addition, this standard requires the annual disclosure of: information
concerning revenues derived from the enterprise's products or services;
countries in which it earns revenues or hold assets, and major customers.
The business operates solely in the segment of local and regional
fixed-line telecommunications. All revenues are generated in relation to
services provided in the state of Sao Paulo.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"). SFAS No. 133 is effective
for transactions entered into after January 1, 2000. FAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of hedge transaction and the type of hedge transaction. The ineffective
portion of all hedges will be recognized in earnings. The Company is in the
process of determining the impact that the adoption of FAS 133 will have on its
results of operations and financial positions.
SOP 98-1, "Accounting for the costs of Computer Software Developed or Obtained
for Internal Use"
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), effective for
fiscal years beginning after December 15, 1998. SOP 98-1 requires the
capitalization of certain costs incurred during an internal-use development
project. The adoption of SOP 98-1 is not expected to have a material impact on
the Company's financial position or results of operations.
<PAGE>
Exhibit Index
Exhibit Page
Number Description of Exhibit Number
------ ---------------------- ------
3.1 Amendment to the Charter of the Holding
Company previously filed with the Holding
Company's Registration Statement on September
18, 1998, together with an English
translation.
- --------------------------------------------------------------------------------
ESTATUTO SOCIAL
- --------------------------------------------------------------------------------
Estatuto Social devidamente aprovado e consolidado, conforme
deliberacao ocorrida na 4(a) Assembleia Geral Extraordinaria,
realizada em 08.12.98
[Estatuto Social]
<PAGE>
ESTATUTO SOCIAL
CAPITULO I - DAS CARACTERISTICAS DA SOCIEDADE
REGIME JURIDICO
Art. 1 - Telesp Participacoes S.A. e uma sociedade anonima, regida pelo presente
Estatuto Social e demais dispositivos legais aplicaveis, com prazo de duracao
indeterminado.
OBJETO SOCIAL
Art. 2 - A Sociedade tem por objeto:
I - exercer o controle das sociedades exploradoras de servicos publicos de
telefonia fixa na Regiao III, a que se refere o Plano Geral de Outorgas aprovado
pelo Decreto n(0) 2.534, de 02 de abril de 1998;
II - promover, atraves de sociedades controladas ou coligadas, a expansao e
implantacao de servicos de telefonia fixa, em sua respectiva area de concessao;
III - promover, realizar ou orientar a captacao, em fontes internas e externas,
de recursos a serem aplicados pela Sociedade ou pelas suas controladas;
IV - promover e estimular atividades de estudos e pesquisas visando ao
desenvolvimento do setor de telefonia fixa;
V - executar, atraves de sociedades controladas ou coligadas, servicos tecnicos
especializados, relativos a area de telefonia fixa;
VI - promover, estimular e coordenar, atraves de suas sociedades controladas ou
coligadas, a formacao e o treinamento do pessoal necessario ao setor de
telefonia fixa;
VII - realizar ou promover importacoes de bens e servicos para as suas
sociedades controladas e coligadas;
VIII - exercer outras atividades afins ou correlatas ao seu objeto social;
IX - participar do capital de outras sociedades; e
X - comercializar equipamentos e materiais necessarios ou uteis a exploracao de
servicos de telecomunicacoes.
SEDE
Art. 3 - A Sociedade tem sede na Capital do Estado de Sao Paulo, podendo criar e
extinguir, por decisao do Conselho de Administracao, filiais, agencias e
sucursais, escritorios, departamentos e representacoes, em qualquer ponto do
territorio nacional ou do exterior.
CAPITULO II - DO CAPITAL
CAPITAL AUTORIZADO
Art. 4 - A Sociedade esta autorizada a aumentar seu capital social ate o limite
de 700.000.000.000 (setecentos bilhoes) de acoes, ordinarias ou preferenciais,
sendo o Conselho de Administracao o orgao competente para deliberar sobre o
aumento e a consequente emissao de novas acoes, dentro do limite do capital
autorizado.
Paragrafo 1(0) - Nao ha obrigatoriedade, nos aumentos de capital, de se guardar
proporcao entre o numero de acoes de cada especie, observando-se entretanto que
o numero de acoes preferenciais, sem direito a voto ou com voto restrito, nao
podera ultrapassar 2/3 das acoes emitidas.
Paragrafo 2(0) - Os acionistas terao direito de preferencia para subscricao de
aumento de capital, na proporcao do numero de acoes que possuirem. Por
deliberacao do Conselho de Administracao, podera ser excluido o direito de
preferencia nas emissoes de acoes, debentures conversiveis em acoes e bonus de
subscricao, cuja colocacao seja feita mediante venda em Bolsa de Valores ou
subscricao publica, permuta por acoes em oferta publica de aquisicao de
controle, nos termos dos artigos 257 e 263 da Lei das S.A., bem como, gozo de
incentivos fiscais, nos termos de legislacao especial, conforme faculta o artigo
172 da Lei 6.404/76.
CAPITAL SUBSCRITO
Art. 5 - O capital social subscrito, totalmente integralizado, e de
R$3.236.420.616,47 (tres bilhoes, duzentos e trinta e seis milhoes, quatrocentos
e vinte mil, seiscentos e dezesseis reais e quarenta e sete centavos),
representado por 334.399.027.592 (trezentos e trinta e quatro bilhoes, trezentos
e noventa e nove milhoes, vinte e sete mil, quinhentas e noventa e duas) acoes,
sendo 124.369.030.532 (cento e vinte e quatro bilhoes, trezentos e sessenta e
nove milhoes, trinta mil, quinhentas e trinta e duas) acoes ordinarias e
210.029.997.060 (duzentos e dez bilhoes, vinte e nove milhoes, novecentas e
noventa e sete mil e sessenta) acoes preferenciais, todas escriturais, sem valor
nominal.
Paragrafo Unico - As acoes serao mantidas em conta de deposito em instituicao
financeira em nome de seus titulares, sem emissao de certificados.
CAPITULO III - DAS ACOES
ACOES ORDINARIAS
Art. 6 - A cada acao ordinaria corresponde um voto nas deliberacoes das
Assembleias Gerais de Acionistas.
ACOES PREFERENCIAIS
Art. 7 - As acoes preferenciais nao tem direito a voto, exceto nas hipoteses
previstas nos artigos 9 e 10 abaixo, sendo a elas assegurada prioridade: (i) no
reembolso de capital, sem premio, e (ii) no pagamento de dividendos minimos, nao
cumulativos, de 6% (seis por cento) ao ano sobre o valor resultante da divisao
do capital subscrito pelo numero total de acoes da Sociedade.
Paragrafo Unico - Sera concedido as acoes preferenciais direito de voto pleno,
caso a Sociedade deixe de pagar os dividendos minimos a que fazem jus, por 3
(tres) exercicios sociais consecutivos, direito que conservarao ate o seu
pagamento.
CAPITULO IV -DA ASSEMBLEIA GERAL
Art. 8 - As Assembleias Gerais de Acionistas realizar-se-ao: (i) ordinariamente,
uma vez por ano, nos 4 (quatro) primeiros meses seguintes ao encerramento de
cada exercicio social, nos termos do art. 132 da Lei 6.404/76 e, (ii)
extraordinariamente, sempre que necessario, seja em funcao dos interesses
sociais, ou de disposicao deste Estatuto Social, ou quando a legislacao
aplicavel assim o exigir.
Paragrafo Unico - As Assembleias Gerais de Acionistas serao convocadas pelo
Conselho de Administracao, cabendo ao Presidente do referido orgao
consubstanciar o aludido ato.
Art. 9 - Devera ser submetida a aprovacao previa da Assembleia Geral de
Acionistas a celebracao de quaisquer contratos de longo prazo entre a Sociedade
ou suas controladas, de um lado e, o acionista controlador ou sociedades
controladas, coligadas, sujeitas a controle comum ou controladoras deste ultimo,
ou que de outra forma constituam partes relacionadas a Sociedade, de outra
parte, salvo quando os contratos obedecerem a clausulas uniformes.
Art. 10 - Sem prejuizo do disposto no ss. 1(0) do art. 115 da Lei n(0) 6.404/76,
os titulares de acoes preferenciais terao direito a voto na deliberacao da
assembleia referida no art. 9, assim como naquelas referentes a alteracao ou
revogacao dos seguintes dispositivos estatutarios:
I - art. 9;
II - paragrafo unico do art.11; e
III - art. 31.
Art. 11 - As Assembleias Gerais de Acionistas serao presididas pelo Presidente
do Conselho de Administracao, que devera indicar, dentre os presentes, o
Secretario. Em caso de ausencia do Presidente do Conselho de Administracao, os
acionistas escolherao o presidente e o secretario da mesa.
Paragrafo Unico - Nas hipoteses do art. 136 da Lei n(0) 6.404/76, a primeira
convocacao da Assembleia Geral de Acionistas sera feita com 30 (trinta) dias de
antecedencia, no minimo, e com antecedencia minima de 10 (dez) dias, em segunda
convocacao.
Art. 12 - Somente poderao tomar parte e votar na Assembleia Geral os acionistas
cujas acoes estejam registradas em seu nome, no livro proprio, ate 72 (setenta e
duas) horas antes da data designada para a respectiva Assembleia.
Paragrafo 1(0) - O edital de convocacao podera condicionar a presenca do
acionista, na Assembleia, ao deposito, na sede da Sociedade, do comprovante de
sua qualidade de acionista, expedido pela propria Sociedade ou pela instituicao
depositaria das acoes da Sociedade, com ate 72 (setenta e duas) horas de
antecedencia da data marcada para a realizacao da Assembleia Geral de
Acionistas.
Paragrafo 2(0) - O edital de convocacao tambem podera condicionar a
representacao do acionista por procurador, em Assembleia, ao deposito do
respectivo instrumento de mandato na sede da Sociedade, com ate 72 (setenta e
duas) horas de antecedencia da data marcada para a realizacao da Assembleia
Geral de Acionistas.
CAPITULO V - DA ADMINISTRACAO DA SOCIEDADE
Art. 13 - A Administracao da Sociedade compete ao Conselho de Administracao e a
Diretoria, com as atribuicoes conferidas por lei e pelo presente Estatuto
Social. Os seus membros serao eleitos para um mandato de 3 (tres) anos, sendo
permitida a reeleicao, estando eles dispensados de oferecer garantia para o
exercicio de suas funcoes.
Paragrafo 1o - Todos os membros do Conselho de Administracao e da Diretoria
tomarao posse mediante assinatura dos correspondentes termos, permanecendo nos
respectivos cargos ate a efetiva posse dos seus sucessores .
Paragrafo 2o - A Assembleia Geral de Acionistas devera fixar a remuneracao
global dos administradores da Sociedade, incluindo os beneficios de qualquer
natureza e as verbas de representacao, sendo o Conselho de Administracao
competente para distribuir essa remuneracao entre os seus membros e os da
Diretoria.
Paragrafo 3o - A Assembleia Geral de Acionistas podera atribuir aos
administradores participacao nos lucros da Sociedade, desde que observado o
disposto no art. 152, ss. 1o e ss. 2o da Lei 6.404/76, conforme proposta
apresentada pela administracao.
CONSELHO DE ADMINISTRACAO
COMPOSICAO
Art. 14 - O Conselho de Administracao sera composto de, no minimo, 5 (cinco) e
no maximo 15 (quinze) membros, todos acionistas da Sociedade e residentes no
pais, eleitos e destituiveis do orgao pela assembleia geral, computados neste
numero os membros do Conselho eleitos pelos acionistas minoritarios, se houver.
Paragrafo Unico - O Conselho de Administracao devera nomear, dentre os seus
membros, o Presidente do orgao, ou seu substituto, no caso de vacancia. A
criterio do Conselho de Administracao, podera ser nomeado e/ou destituido o
Vice-Presidente do orgao.
SUBSTITUICAO
Art. 15 - Ocorrendo impedimento ou ausencia do Presidente do Conselho de
Administracao, este sera substituido pelo Vice-Presidente, se houver. Na
ausencia do Vice-Presidente, o Presidente sera substituido por outro membro do
Conselho por ele indicado.
Paragrafo 1(0) - No caso de impedimento ou ausencia de qualquer outro membro do
Conselho de Administracao, o Conselheiro impedido ou ausente devera indicar, por
escrito, seu substituto, dentre os demais membros do Conselho de Administracao,
para representa-lo e deliberar na reuniao a qual nao puder estar presente, nos
termos do disposto no paragrafo 3(0) do artigo 19 deste estatuto.
Paragrafo 2(0) - Os membros do Conselho de Administracao que indicarem
representantes, conforme disposto no paragrafo anterior, serao considerados,
para todos os efeitos, presentes a respectiva reuniao.
Art. 16 - Ocorrendo vacancia nos cargos de membros do Conselho de Administracao,
restando numero inferior ao minimo de membros previsto no art. 14 supra, devera
ser convocada Assembleia Geral de Acionistas para eleicao de substitutos.
COMPETENCIA
Art. 17 - Compete ao Conselho de Administracao:
I - fixar a orientacao geral dos negocios da Sociedade;
II- aprovar o orcamento e o plano anual de negocios da Sociedade;
III - convocar a Assembleia Geral de Acionistas;
IV - aprovar as demonstracoes financeiras e o relatorio da administracao da
Sociedade e submete-los a Assembleia Geral de Acionistas;
V - eleger ou destituir, a qualquer tempo, os membros da Diretoria, fixando-lhes
as atribuicoes, observadas as disposicoes legais e estatutarias;
VI - fiscalizar a gestao dos Diretores da Sociedade, examinar, a qualquer tempo,
os livros da Sociedade, solicitar informacoes sobre os contratos celebrados ou
em via de celebracao, ou quaisquer outros atos;
VII - aprovar o regimento interno da Sociedade, definindo sua estrutura
organizacional e detalhando as respectivas competencias, observadas as
disposicoes legais e estatutarias;
VIII - aprovar e alterar o regimento interno do Conselho de Administracao;
IX - deliberar sobre emissao de acoes pela Sociedade, com aumento de capital,
dentro do limite do capital autorizado, definindo os termos e as condicoes dessa
emissao;
X - deliberar sobre a emissao de bonus de subscricao;
XI - deliberar, por delegacao da Assembleia Geral de Acionistas, acerca dos
seguintes aspectos nas emissoes de debentures pela Sociedade: (i) oportunidade
da emissao, (ii) epoca e condicoes de vencimento, amortizacao ou resgate, (iii)
epoca e condicoes do pagamento dos juros, da participacao nos lucros e do premio
de reembolso, se houver, (iv) modo de subscricao ou colocacao e, (v) tipo das
debentures;
XII - deliberar sobre a emissao de notas promissorias para distribuicao publica
("Commercial Papers") e sobre a submissao das acoes da Sociedade a regime de
deposito para comercializacao dos respectivos certificados ("Depositary
Receipts");
XIII - autorizar a aquisicao de acoes de emissao da Sociedade, para cancelamento
ou permanencia em tesouraria e posterior alienacao;
XIV - aprovar a alienacao de bens do ativo permanente, a constituicao de onus
reais e a prestacao de garantias a obrigacoes de terceiros; de valor superior a
R$ 5.000.000,00 (cinco milhoes de reais);
XV - aprovar a assuncao de qualquer obrigacao nao prevista no orcamento da
Sociedade em valor superior a R$250.000.000,00 (duzentos e cinquenta milhoes de
reais);
XVI - autorizar a celebracao de contratos, nao previstos no orcamento da
Sociedade, em valor superior a R$250.000.000,00 (duzentos e cinquenta milhoes de
reais);
XVII - aprovar a realizacao de investimentos e a aquisicao de ativos, nao
previstos no orcamento, em valor superior a R$250.000.000,00 (duzentos e
cinquenta milhoes de reais);
XVIII - autorizar a aquisicao de participacao acionaria em carater permanente em
outras sociedades em valor superior a R$10.000,00 (dez mil reais) e a oneracao
ou a alienacao de participacao acionaria;
XIX - aprovar a distribuicao de dividendos intermediarios;
XX - escolher ou destituir os auditores independentes; e
XXI - indicar e destituir o titular da auditoria interna.
Paragrafo Unico - A alienacao de bens do ativo permanente, a constituicao de
onus reais e a prestacao de garantias a obrigacoes de terceiros, em valores
superiores aos estabelecidos acima, serao aprovadas caso a caso pelo Conselho de
Administracao e, em valores iguais ou inferiores aos acima estabelecidos,
deverao obedecer ao disposto em plano de alienacao estabelecido pelo Conselho de
Administracao e, a ser implementado pela Diretoria.
Art. 18 - As atribuicoes especificas do Presidente do Conselho de Administracao
sao: (a) representar o Conselho na convocacao da Assembleia Geral de Acionistas;
(b) presidir a Assembleia Geral de Acionistas e escolher o Secretario, dentre os
presentes; e (c) convocar e presidir as reunioes do Conselho de Administracao.
REUNIOES
Art. 19 - O Conselho de Administracao reunir-se-a, (i) ordinariamente, uma vez a
cada tres meses e, (ii) extraordinariamente, mediante convocacao do seu
Presidente, lavrando-se ata de suas deliberacoes.
Paragrafo 1(0) - As reunioes do Conselho deverao ser convocadas por escrito, com
no minimo, 48 (quarenta e oito) horas de antecedencia, devendo a convocacao
conter a ordem do dia e as materias a serem deliberadas na respectiva reuniao.
Paragrafo 2(0) - O Conselho de Administracao deliberara por maioria de votos,
presente a maioria de seus membros em exercicio, cabendo ao Presidente, alem do
voto comum, o de qualidade, nos casos de empate.
Paragrafo 3(0) - E facultado a qualquer dos membros do Conselho fazer-se
representar por outro Conselheiro nas reunioes as quais nao puder comparecer,
desde que tal outorga de poderes de representacao seja efetuada mediante
instrumento firmado por escrito.
DA DIRETORIA
COMPOSICAO
Art. 20 - A Diretoria sera composta de no minimo 2 (dois) e no maximo 4 (quatro)
membros, acionistas ou nao, residentes no pais, eleitos pelo Conselho de
Administracao, para ocupar os seguintes cargos:
a) Diretor Presidente
b) Vice-Presidente de Financas, Controle e Recursos
c) Vice-Presidente de Planejamento Corporativo e
d) Vice-Presidente de Assuntos Regulatorios.
Paragrafo unico- Um mesmo Diretor podera ser eleito para acumular as atribuicoes
de mais de um cargo da Diretoria.
Art. 21 - Em suas ausencias e impedimentos temporarios, o Diretor Presidente
designara o seu substituto. No caso de vacancia de cargo da Diretoria, a
respectiva substituicao sera deliberada pelo Conselho de Administracao;
ocorrendo impedimento, o Diretor Presidente designara o substituto do Diretor
impedido, dentre os demais Diretores.
COMPETENCIA COLEGIADA DA DIRETORIA E REPRESENTACAO DA SOCIEDADE
Art. 22 - A Diretoria e o orgao de representacao ativa e passiva da Sociedade,
cabendo a mesma e aos seus membros a pratica de todos os atos necessarios ou
convenientes a gestao dos negocios sociais. Compete a Diretoria, coletivamente,
o seguinte:
I. propor ao Conselho de Administracao planos e programas gerais da Sociedade,
especificando os planos de investimento na expansao e modernizacao da
planta;
II. submeter a apreciacao do Conselho de Administracao a alienacao ou oneracao
de bens imoveis da Sociedade, bem como, autorizar, dentro dos limites
estabelecidos pelo Conselho de Administracao, a alienacao ou oneracao dos
demais bens do ativo permanente, a constituicao de onus reais e a prestacao
de garantias a obrigacoes de terceiros.
III. elaborar as demonstracoes financeiras e os resultados do exercicio e a
proposta de distribuicao de dividendos, inclusive os intermediarios e a
aplicacao de recursos excedentes a serem submetidos a apreciacao do
Conselho Fiscal, da Auditoria Externa e do Conselho de Administracao;
IV. aprovar o plano de cargos e salarios, o regulamento e os quadros de pessoal
da Sociedade, bem como, os termos e condicoes de acordos coletivos de
trabalho a serem firmados com os sindicatos representativos das categorias
dos empregados da Sociedade e a adesao de politica ou desligamento de
fundos de pensao;
V. quando for o caso, praticar os seguintes atos, dentro dos limites fixados
pelo Conselho de Administracao: a) ratificar as compras de materiais e
equipamentos e a contratacao de bens, obras e servicos; b) ratificar as
vendas de bens do ativo circulante; e c) autorizar a contratacao de
financiamentos e emprestimos pela Sociedade;
VI. aprovar a celebracao de outros contratos, nao mencionados acima, de acordo
com os limites impostos pelo Conselho de Administracao.
Paragrafo 1(0) - As deliberacoes da Diretoria serao tomadas por maioria de
votos, presente a maioria de seus membros, cabendo ao Presidente, alem do voto
comum, o de qualidade, nos casos de empate.
Paragrafo 2(0) - Observadas as disposicoes contidas neste Estatuto Social, serao
necessarias, para vincular a Sociedade, (i) a assinatura conjunta de 2 (dois)
Diretores, exceto em casos de urgencia, nos quais sera permitida a assinatura
isolada do Diretor Presidente "ad referendum" da Diretoria nos termos do
disposto no artigo 23, I-(k) abaixo; (ii) a assinatura de 1(um) Diretor em
conjunto com 1(um) Procurador, (iii) a assinatura de 2 (dois) Procuradores em
conjunto, desde que investidos de poderes especificos.
Paragrafo 3(0) - As procuracoes outorgadas em nome da Sociedade o serao sempre
por 2 (dois) Diretores, devendo especificar os poderes conferidos e, com excecao
daquelas para fins judiciais, deverao ter um periodo maximo de validade de 1
(um) ano.
COMPETENCIA DOS DIRETORES
Art. 23 - Sao as seguintes as competencias especificas de cada um dos membros da
Diretoria:
I - Diretor Presidente
a) representar a Sociedade, em Juizo ou fora dele, perante as suas
controladas, os acionistas e o publico em geral, podendo nomear
procuradores em conjunto com outro Diretor e designar prepostos, bem como,
delegar competencia aos demais Diretores para a pratica de atos
especificos;
b) supervisionar todas as atividades da Sociedade e aprovar as propostas
relativas as diretrizes corporativas para o desenvolvimento estrategico da
mesma e das sociedades das quais a Sociedade seja controladora direta ou
indiretamente;
c) acompanhar e fiscalizar a implementacao das determinacoes do Conselho de
Administracao;
d) designar representantes da Sociedade nas assembleias de empresas
controladas e de outras de cujo capital participe;
e) avaliar o desempenho e verificar o cumprimento das metas estabelecidas nos
orcamentos de investimentos e custos das sociedades controladas pela
Sociedade, direta ou indiretamente, ou de outras de cujo capital participe;
f) supervisionar e dirigir as atividades relacionadas a orientacao, assessoria
e representacao juridica da Sociedade e de suas controladas, diretas ou
indiretas;
g) supervisionar e orientar as atividades de comunicacao interna, com
entidades externas e com a imprensa de forma geral, relativas a Sociedade e
suas controladas, diretas ou indiretas;
h) supervisionar e orientar as atividades de marketing corporativo, inclusive
publicidade, patrocinios e desenvolvimento da imagem da Companhia e de suas
controladas, diretas ou indiretas;
i) convocar as reunioes de Diretoria;
j) decidir sobre materia especifica de sua area de competencia, em
conformidade com as politicas e diretrizes estabelecidas pela Diretoria
Colegiada;
k) Praticar atos de urgencia "ad referendum" da Diretoria.
II - Vice-Presidente de Financas, Controle e Recursos
a) dirigir as atividades de coordenacao do planejamento e desenvolvimento
empresarial, no ambito da Sociedade e de suas controladas;
b) coordenar a integracao das atividades das controladas e coligadas da
Sociedade;
c) estabelecer as diretrizes para a gestao de recursos financeiros da
Sociedade e de suas controladas;
d) estabelecer as diretrizes para a gestao e desenvolvimento de recursos
humanos e supervisionar a execucao dessas atividades;
e) estabelecer as diretrizes relacionadas a gestao financeira e ao suprimento
de materiais no ambito da Sociedade e, supervisionar a politica de
suprimento de materiais das empresas das quais a Sociedade participe de
modo a maximizar a sinergia entre as mesmas;
f) estabelecer as diretrizes para as atividades relacionadas aos sistemas de
informacao e supervisionar a execucao destas atividades;
g) decidir sobre materia especifica de sua area de competencia em conformidade
com as politicas e diretrizes estabelecidas pela Diretoria Colegiada;
h) coordenar a implantacao de politicas de trabalho que venham a ser
definidas;
i) executar outras atividades delegadas pelo Diretor Presidente.
III - Vice-Presidente de Planejamento Corporativo
a) propor e avaliar os impactos das mudancas tecnologicas da Sociedade diante
dos cenarios de sua atuacao, identificar e propor novas oportunidades de
negocios ou desenvolvimento das atividades ja exercidas pela Sociedade;
b) avaliar o estabelecimento de parcerias, propor e selecionar parceiros
ideais para cada atividade;
c) estabelecer e propor diretrizes e estrategias de negocios para a Sociedade,
suas controladas e coligadas;
d) acompanhar o desempenho das controladas da Sociedade, visando otimizar e
desenvolver as atividades da Sociedade;
e) consolidar os diversos planos de negocios especificos dentro do plano
corporativo global.
IV- Vice-Presidente de Assuntos Regulatorios
a) avaliar e monitorar o desenvolvimento da atuacao dos competidores no ambito
das questoes regulatorias;
b) representar a Sociedade perante a ANATEL e demais orgaos regulatorios e,
estabelecer contatos;
c) avaliar as politicas e objetivos do orgao regulador e efetuar propostas de
estrategia e atuacao da Sociedade perante o referido orgao;
d) identificar, priorizar e fazer cumprir as determinacoes, normas e
regulamentacoes de ordem regulatoria, bem como estabelecer e propor
alternativas para a adequacao dos interesses da Sociedade;
e) formular e propor objetivos e definir estrategias para gerenciamento e
negociacao dos aspectos de ordem regulatoria, visando defender e integrar
os interesses da Sociedade e de suas controladas, inclusive antecipando
eventuais pontos de questionamento e conflito;
f) supervisionar a gestao dos contratos de concessao e demais compromissos da
Sociedade e de suas controladas perante os orgaos reguladores;
g) decidir sobre materia especifica de sua area de competencia, de
conformidade com as politicas e diretrizes estabelecidas pela Diretoria
Colegiada.
CAPITULO VI - DO CONSELHO FISCAL
Art. 24 - O Conselho Fiscal, de carater permanente, sera composto de, no minimo,
3 (tres) e, no maximo, 5 (cinco) membros efetivos e igual numero de suplentes.
Paragrafo 1o - A remuneracao dos membros do Conselho Fiscal, alem do reembolso
das despesas de locomocao e estada necessarias ao desempenho da funcao, sera
fixada pela Assembleia Geral de Acionistas que os eleger e nao podera ser
inferior, para cada membro em exercicio, a dez por cento da que, em media, for
atribuida a cada Diretor, nao computados beneficios de qualquer natureza, verbas
de representacao e participacao nos lucros.
Paragrafo 2o - Ocorrendo vacancia no cargo de membro do Conselho Fiscal, este
sera substituido por seu respectivo suplente. Havendo vacancia da maioria dos
cargos, a assembleia geral devera ser convocada para proceder a eleicao de seus
substitutos.
Paragrafo 3(0) - O Conselho Fiscal reunir-se-a, (i) ordinariamente, uma vez a
cada trimestre e, (ii) extraordinariamente, mediante convocacao do Presidente do
Conselho de Administracao, ou de 2 (dois) membros do Conselho Fiscal,
lavrando-se ata de suas deliberacoes.
Paragrafo 4(0) - As reunioes do Conselho Fiscal serao convocadas por escrito
com, no minimo, 48 (quarenta e oito) horas de antecedencia, devendo a convocacao
conter a ordem do dia, com a relacao das materias a serem apreciadas, na
respectiva reuniao.
CAPITULO VII - DO EXERCICIO SOCIAL E DAS DEMONSTRACOES FINANCEIRAS
EXERCICIO SOCIAL
Art. 25 - O exercicio social coincidira com o ano civil, podendo ser levantados,
alem do anual, balancos semestrais ou trimestrais.
DESTINACAO DOS LUCROS
Art. 26 - Os dividendos serao pagos, prioritariamente, as acoes preferenciais,
ate o limite da preferencia; a seguir serao pagos aos titulares de acoes
ordinarias ate o mesmo limite das preferenciais; o saldo sera rateado por todas
as acoes, em igualdade de condicoes.
Art. 27 - Juntamente com as demonstracoes financeiras, o Conselho de
Administracao apresentara, a Assembleia Geral Ordinaria, proposta sobre (i) a
participacao dos empregados e administradores nos lucros e (ii) a destinacao
integral do lucro liquido.
Paragrafo 1(0) - Do lucro liquido do exercicio: (i) 5% (cinco por cento) serao
destinados para a reserva legal, visando assegurar a integridade fisica do
capital social, limitada a 20% (vinte por cento) do capital social
integralizado; (ii) 25 % (vinte e cinco por cento) do lucro liquido ajustado na
forma dos incisos II e III do art. 202 da Lei n(0) 6.404/76 serao
obrigatoriamente distribuidos como dividendo minimo obrigatorio a todos os
acionistas, sendo este valor aumentado ate o montante necessario para o
pagamento do dividendo prioritario das acoes preferenciais; e (iii) o saldo
remanescente, apos atendidas as disposicoes contidas nos itens anteriores deste
artigo, tera a destinacao determinada pela Assembleia Geral de Acionistas, com
base na proposta do Conselho de Administracao contida nas demonstracoes
financeiras. Caso o saldo das reservas de lucros ultrapasse o capital social, a
Assembleia Geral de Acionistas deliberara sobre a aplicacao do excesso na
integralizacao ou no aumento do capital social ou na distribuicao de dividendos
adicionais aos acionistas.
Paragrafo 2(0) - Os dividendos nao reclamados em 03 (tres) anos, contados da
deliberacao de sua distribuicao, reverterao em favor da Sociedade.
Art. 28 - A Sociedade podera declarar, por deliberacao do Conselho de
Administracao, dividendos: (i) a conta do lucro apurado em balancos semestrais;
(ii) a conta de lucros apurados em balancos trimestrais, desde que o total dos
dividendos pagos em cada semestre do exercicio social nao exceda o montante de
reservas de capital de que trata o paragrafo primeiro do artigo 182 da Lei
6.404/76, ou (iii) a conta de lucros acumulados ou de reservas de lucros
existentes no ultimo balanco anual ou semestral.
Paragrafo Unico - Os dividendos intermediarios distribuidos nos termos deste
artigo serao imputados ao dividendo minimo obrigatorio.
Art. 29 - Por deliberacao do Conselho de Administracao e, observadas as
disposicoes legais, a Sociedade podera pagar, aos seus acionistas, juros sobre o
capital proprio, os quais poderao ser imputados ao dividendo minimo obrigatorio,
"ad referendum" da assembleia geral.
CAPITULO VIII - DISPOSICOES GERAIS
Art. 30 - A Sociedade entrara em liquidacao nos casos previstos em lei,
competindo a Assembleia Geral de Acionistas determinar o modo da liquidacao e
indicar o liquidante.
Art. 31 - A aprovacao, pela Sociedade, atraves de seus representantes, de
operacoes de fusao, cisao, incorporacao ou dissolucao de suas controladas sera
precedida de analise economico-financeira por empresa independente, de renome
internacional, confirmando estar sendo dado tratamento equitativo a todas as
sociedades interessadas, cujos acionistas terao amplo acesso ao relatorio da
citada analise.
Art. 32 - Em tudo o que for omisso o presente Estatuto Social, a Sociedade se
regera pelas disposicoes legais que forem aplicaveis.
<PAGE>
Estatuto Social da Telesp Participacoes S/A devidamente
aprovado e consolidado, conforme deliberacao ocorrida na 4(a)
Assembleia Geral Extraordinaria, realizada em 08.12.98
Presidente da Assembleia Secretaria da Assembleia
Fernando Xavier Ferreira Suely Valerio Pinoti
[Estatuto Social]
<PAGE>
CHARTER OF
TELESP PARTICIPACOES S.A.
CHAPTER I
CHARACTERISTICS OF THE COMPANY
Art. 1 - TELESP PARTICIPACOES S.A., is a corporation, governed by this
Charter and by applicable legal provisions, with an indefinite duration.
Art. 2 - The purposes of the Company are:
I. to exercise control over the companies providing public fixed-line
telephone services in Region III, as referred to in the General
Concession Plan approved by Decree No. 2,543 of April 2, 1998;
II. to promote, through subsidiaries or affiliates, the expansion and
establishment of fixed-line telephone services in its concession area;
III. to promote, carry out or direct the acquisition of funds from internal
or external sources to be used by the Company or by its subsidiaries;
IV. to promote and foster study and research activities aimed at the
development of the fixed-line telephone sector;
V. to provide, through subsidiaries or affiliates, specialized technical
services in the fixed-line telephone sector;
VI. to promote, foster, and coordinate, through its subsidiaries or
affiliates, the education and training of the personnel required in
the fixed-line telephone sector;
VII. to carry out and promote the importation of goods and services for its
subsidiaries or affiliates;
VIII. to carry out other activities that are similar or related to its
corporate purposes;
IX. to invest in shares of other companies; and
X. to market equipment and materials necessary or useful to provide
telecommunications services.
PRINCIPAL OFFICE
Art. 3 - The principal office of the Company is situated in the State of
Sao Paulo, and the Company may, by decision of the Board of Directors, open or
close subsidiaries, agencies, branches, offices, departments and representative
offices anywhere in Brazil or abroad.
CHAPTER II
AUTHORIZED CAPITAL
Art. 4 - The Company is authorized to increase its capital up to
700,000,000,000 (seven hundred billion) shares, common or preferred, and the
Board of Directors is the competent corporate body to authorize the increase and
issuance of new shares within this limit of the authorized capital.
ss. 1. It is not necessary, when increasing its capital, to maintain the
proportions of the number of common and preferred shares, observing that, the
number of preferred shares without voting rights or with restricted voting
rights shall not exceed 2/3 (two-thirds) of the shares issued.
ss. 2. The shareholders will have preemptive rights to subscribe to shares
issued as a result of capital increases, in proportion to their holdings. The
Board of Directors may decide to eliminate preemptive rights to subscribe to
shares, convertible debentures and subscription rights that are to be placed by
public issue or sale on a stock exchange, exchange for shares in a public offer
for acquisition of control as provided in Arts. 257 and 263 of the Corporation
Law as well as issued to take advantage of tax incentives, as provided by
special law, as provided by under Art. 172 of Law 6,404/76.
SUBSCRIBED CAPITAL
Art. 5 - The corporate capital, fully subscribed and paid in, is
R$3,236,420,616.47 (three billion, two hundred thirty six million, four hundred
twenty thousand, six hundred sixteen reais and forty seven centavos),
represented by 334,399,027,592 (three hundred thirty four billion, three hundred
ninety nine million, twenty seven thousand, five hundred and ninety two) shares,
consisting of 124,369,030,532 (one hundred twenty four billion, three hundred
sixty nine million, thirty thousand, five hundred and thirty two) registered
common shares and 210,029,997,060 (two hundred ten billion, twenty nine million,
nine hundred ninety seven thousand and sixty) registered preferred shares, all
without par value.
Sole Paragraph - Shares of the Company shall be in book entry form, shall
be held on deposit with a financial institution in the names of the owners and
shall not be certificated.
CHAPTER III
COMMON SHARES
Art. 6 - Each ordinary share shall correspond to one vote at the Meetings
of Shareholders.
PREFERRED SHARES
Art. 7 - Preferred shares are not entitled to voting rights except as
provided in the sole paragraph of Arts. 9 and 10 hereunder being entitled to
priority (i) in the repayment of corporate capital, without premium, and (ii) in
the payment of minimum non-cumulative dividends of 6% (six percent) per year, on
the amount computed by dividing the corporate capital by the total number of
shares of the Company.
Sole Paragraph - Preferred shares will become entitled to vote if the
Company fails to pay the minimum dividends as provided herein for a period of 3
(three) consecutive years, and shall retain said right until repayment is made.
CHAPTER IV
MEETING OF SHAREHOLDERS
Art. 8 - The Meeting of Shareholders shall take place: (i) ordinarily, once
per year, within four months of the end of each fiscal year, in accordance with
Art. 132 of Law 6,404/76, and (ii) extraordinarily, whenever necessary, in the
corporate interest, or as required by this Charter or when the applicable
legislation so requires it.
Sole Paragraph - The Meeting of Shareholders shall be called by the Board
of Directors, and minutes of meetings shall be approved by the Chairman.
Art. 9 - The Meeting of Shareholders must approve before execution any
long-term contracts between the Company or its subsidiaries, on the one hand,
and the controlling shareholder or its subsidiaries, affiliates, entities under
common control or controlling shareholders of the latter, or companies that are
otherwise related parties with respect to the Company, on the other hand, except
when the contracts consist of standard forms.
Art. 10 - Without prejudice to the provisions of paragraph 1 of Art. 115 of
the Law 6,404/76, preferred shareholders shall have the right to vote on
decisions taken at the Meeting of Shareholders referred to in Art. 9, as well as
those relating to the amendment or revocation of the following provisions of
this Charter:
I. Art. 9;
II. sole paragraph of Art. 11; and
III. Art. 31.
Art. 11 - The Meeting of Shareholders shall be opened by the Chairman of
the Board of Directors, and shall proceed to the appointment of the secretary
from among those attending. In case of absence of the Chairman of the Board of
Directors, the shareholders shall elect the chairman and secretary to preside
during the meeting.
Sole Paragraph - In the cases provided for in Art. 136 of Law 6,404/76, the
first notice of the Meeting of Shareholders shall be given at least 30 (thirty)
days in advance and the second notice shall be given at least 10 (ten) days in
advance.
Art. 12 - Only those shareholders whose shares are registered under their
name in the Company's register, up to 72 hours before the designate date for the
respective meeting will be able to take part and vote in the Meeting of
Shareholders
ss. 1. The call for Meeting of Shareholders may set forth as a condition
for the admission of shareholders, in the Meeting of Shareholders, the deposit,
at the Company's principal offices, evidence of being a shareholder, provided by
the Company or the depositary institution holding the shares of the Company, up
to 72 (seventy-two) hours prior to the date scheduled for the Meeting of
Shareholders.
ss. 2. The call for Meeting of Shareholders may also set forth as a
condition for the representation of shareholders by attorney's-in-fact, in the
Meeting of Shareholders, for the deposit of the instruments granting said power
at the Company's principal office, up to 72 (seventy-two) hours prior to the
date scheduled for the Meeting of Shareholders.
CHAPTER V
MANAGEMENT OF THE COMPANY
Art. 13 - The Company shall be managed by the Board of Directors and by the
Board of Executive Officers, with their powers conferred by law or by this
Charter. Their members shall be elected for 3 (three) years, and are allowed to
be re-elected, being exempt from guaranteeing that they shall perform their
functions.
ss. 1. All the members of the Board of Directors and the Board of Executive
Officers shall take office by means of signature of their corresponding terms of
office, and remain in their respective positions until their successors take
office.
ss. 2. The Meeting of Shareholders shall establish the compensation of the
management of the Company, including benefits of any kind and representation
fees, and the Board of Directors shall allocate the compensation among its
members and of the Board of Executive Officers.
ss. 3. The Meeting of Shareholders may allow the managers to receive a
portion of the Company's profits, in accordance with Art. 152, ss. 1 and ss. 2
of Law 6,404/76.
BOARD OF DIRECTORS
COMPOSITION
Art. 14 - The Board of Directors shall be composed of, at least, 5 (five),
and, at most, 15 (fifteen) members, all of them shareholders of the Company and
residents of Brazil, appointed for and removed from the Board by the Meeting of
Shareholders, and within these members, if any, are those elected by the
minority shareholders.
Sole Paragraph -The Board of Directors shall nominate, from their own
members, the Chairman or his/her alternate, in case of the Chairman's absence.
At the Board of Directors discretion, it may appoint and/or dismiss the
Vice-Chairman of the Board of Directors.
REPLACEMENT
Art. 15 - In the event of absence or impediment, the Chairman of the Board
of Directors shall be replaced by the Vice-Chairman, if any. In the event of
absence of the Vice-Chairman, the Chairman shall be replaced by another member
of the Board of Directors as designated by the Chairman.
ss. 1. In case of absence or impediment of any other member of the Board of
Directors, the absent member shall indicate in writing, his/her name, his/her
alternate among the other members of the body, to represent him/her and
deliberate on his/her behalf for the meeting that he/she shall be absent, in
accordance with ss. 3 of Art. 19 of this Charter.
ss. 2. The members of the Board of Directors who appoint alternates, as
provided for herein, shall be considered to be present at the meeting.
Art. 16 - In the event of vacancies in the Board of Directors, with a
number of remaining members inferior to the minimum stipulated in Art. 14, a
Meeting of Shareholders must be called to elect replacements.
POWERS
Art. 17 - The Board of Directors shall:
I. set the general business policy of the Company and ensure the
execution thereof;
II. approve the budget and annual business plan of the Company;
III. call Meetings of Shareholders;
IV. approve and submit to the Meeting of Shareholders the financial
statements and the report of management;
V. elect the Company's Executive Officers and remove them from office at
any time, and establish their powers, in accordance with applicable
law and the provisions of this Charter;
VI. supervise the management of the Company by the Executive Officers;
examine the Company's books at any time; and request information
regarding contracts that have been concluded or that are in the
process of being concluded, or any other documents;
VII. approve the Internal Regulations of the Company, define its
organizational structure and specify the powers of each Executive
Officer, in accordance with applicable law and the provisions of this
Charter;
VIII. approve or amend the Internal Regulations of the Board;
IX. decide on the issuance of shares, within the limits of the authorized
capital, as permitted by applicable law and this Charter;
X. decided on the issuance of subscription rights;
XI. decide, by delegation of the Meeting of Shareholders, on the following
aspects of issuing debentures of the Company: (i) opportunity for
issuance, (ii) maturity and conditions of expiration, repayment and
redemption, (iii) interest terms and timing of interest payments,
equity participations and redemption premiums, if any, (iv)
subscription and placement methods and (v) type of debentures;
XII. decide on the issuance of promissory notes for public placement
(Commercial Paper) and on the submission of shares of the Company to
be deposited for the issuance of their respective certificates
(Depositary Receipts);
XIII. authorize purchases of shares of the Company for cancellation or
retention in treasury and subsequent disposal;
XIV. approve the sale of fixed assets, creation of liens on property and
guarantees of third-party obligations, with a value exceeding
R$5,000,000 (five million reais);
XV. approve the undertaking of any obligation not provided for in the
budget of the Company, with a value exceeding R$250,000,000.00 (two
hundred and fifty million reais);
XVI. approve the execution of contracts not provided for in the budget of
the Company, with a value exceeding R$250,000,000.00 (two hundred and
fifty million reais);
XVII. approve equity investments and the acquisition of assets not provided
for in the budget of the Company, with a value exceeding
R$250,000,000.00 (two hundred and fifty million reais);
XVIII. authorize permanent equity participations in other companies with a
value over R$10,000 (ten thousand reais) and the disposal or sale of
equity participations;
XIX. approve the distribution of intermediary dividends;
XX. appoint the independent auditors and remove them from office; and
XXI. appoint and remove from office the Internal Auditor.
Sole Paragraph - The sale of fixed assets, creation of liens on property
and guarantees of third-party obligations, in excess of the aforementioned
amount, shall be approved on a case-by-case basis by the Board of Directors and,
in amounts equal to or lesser of the aforementioned amount, shall be in
accordance with the established guidelines for disposals set by the Board of
Directors and, implemented by the Board of Executive Officers.
Art. 18 - The specific powers of the Chairman of the Board of Directors
are: (a) represent the Board of Directors in the Meeting of Shareholders, (b)
preside over the Meeting of Shareholders and to chose a Secretary, from among
those present, and (c) to open and preside over the meetings of the Board of
Directors.
MEETINGS
Art. 19 - The Board of Directors shall meet (i) ordinarily, once each
quarter and (ii) extraordinarily, when they are called by the Chairman, and
minutes of the meetings shall be kept.
ss. 1. The meetings of the Board of Directors shall be notified in writing
with, at least, 48 (forty-eight) hours notice, and the notice shall indicate the
agenda and the matter to be decided in the respective meeting.
ss. 2. The Board of Directors shall decide by majority voting, being
present a majority of its members, and the Chairman shall have a casting vote in
addition to his regular vote, in case of a tie.
ss. 3. Any member of the Board of Directors may be represented by another
member in meetings when he/she shall not be able to attend, so long as such
power of representation is made through a written document.
BOARD OF EXECUTIVE OFFICERS
Art. 20 - The Board of Executive Officers shall consist of, at least 2
(two) and no more than 4 (four) members, shareholders or not, residents of
Brazil, elected by the Board of Directors, to take the following positions:
a) President;
b) Vice-President for Finance, Control and Resources;
c) Vice-President for Corporate Planning; and
d) Vice-President for Regulatory Matters.
Sole Paragraph - The same Executive Officer may be elected to more than one
position on the Board of Executive Officers.
Art. 21 - In case of temporary absence or impediment, the President shall
designate his/her replacement. In case of a vacancy of a position on the Board
of Executive Officers, a replacement shall be chosen by the Board of Directors,
and in cases of impediment, the President shall designate a replacement for the
Executive Officer, from among the other Executive Officers.
POWERS OF THE BOARD OF EXECUTIVE OFFICERS
AND REPRESENTATION OF THE COMPANY
Art. 22 - The Board of Executive Officers is the body that actively and
passively represents the Company, and the Board of Executive Officers and its
members shall have the required and necessary authority to conduct the corporate
business. The Board of Executive Officers shall have the following collective
powers:
I. to propose to the Board of Directors policies and guidelines of the
Company, specifying the investment plans for the modernization and
expansion of the network;
II. to submit for deliberation to the Board of Directors the disposal or
creation of liens on property of the Company, as well as authorize,
within the limits established by the Board of Directors, the disposal
or creation of liens on property of fixed assets, a creation of liens
on property and guarantees of third-party obligations;
III. to prepare the financial statements and the results of the fiscal year
and the proposal for the distribution of dividends, including
intermediary and the application of surplus resources to be submitted
to the Statutory Audit Committee, External Auditors and the Board of
Directors;
IV. to approve the plan of appointments and salaries, the regulation and
the human resources of the Company, as well as, the terms and
conditions of the collective labor agreements to be executed with
syndicates representing different categories of employees of the
Company and the adherence of policies or the termination of pension
funds;
V. when the case may be, perform the following functions, within the
limits imposed by the Board of Directors: a) ratify the purchase of
materials and equipment and the contracting of goods, workmanship or
services; b) ratify the sale of current assets, and c) authorize the
contracting of financing and loans by the Company.
VI. to approve the execution of other contracts, not mentioned above, in
accordance with the limits set by the Board of Directors.
ss. 1. The Board of Executive Officers shall decide by majority voting,
being present the majority of its members, and the President shall have a
casting vote in addition to his regular vote, in case of a tie.
ss. 2. In accordance with the provisions set forth in this Charter, all
documents binding the Company shall be signed (i) by 2 (two) Executive Officers,
except in emergency cases, where the sole signature of the President "ad
referendum" of the Board of Executive Officers in accordance with Art. 23, I-(k)
below, (ii) by 1 (one) Executive Officer together with 1 (one) attorney-in-fact,
or (iii) by 2 (two) attorneys-in-fact, with duly designated powers.
ss. 3. The powers-of-attorney granted in the name of the Company shall be
executed by 2 (two) Executive Officers, which shall specify the powers granted
and with exception of those granted for judicial powers, shall remain in effect
for a period not to exceed 1 (one) year.
POWERS OF THE EXECUTIVE OFFICERS
Art. 23 - The specific powers of each of the members of the Board of
Executive Officers are as follows:
I. PRESIDENT
a) to represent the Company in court or otherwise, vis-a-vis its
subsidiaries, the shareholders and the general public, with power
to appoint, jointly with another Executive Officer,
attorneys-in-fact or name representatives as well as delegate
responsibilities to the remaining Executive Officers for specific
measures to be taken;
b) to supervise all of the activities of the Company and to approve
the proposals relating to corporate directives for the strategic
development of the Company and corporations which the Company
controls either directly or indirectly;
c) to supervise and check the implementation of the decisions of the
Board of Directors;
d) to appoint persons to represent the Company at meetings of
shareholders of its subsidiaries and of other companies in which
it has an equity interest;
e) to follow the developments and verify the meeting of the goals
established in the investment estimates and costs of the
corporations controlled by the Company, directly or indirectly,
or other companies in which it has an equity interest;
f) to supervise and manage the activities relating to the
management, auditing and legal representation of the Company and
its subsidiaries, direct or indirect;
g) to supervise and manage the activities of corporate marketing,
including publicity, sponsorships and development of the
Company's image and of its direct or indirect subsidiaries;
h) to call meetings of the Board of Executive Officers;
i) to decide matters under its own competency area, in accordance
with the policies and directives of the Board of Executive
Officers;
j) to carry out emergency actions referred to him by the Board of
Executive Officers.
II. Vice-President for Finance, Control and Resources
a) to manage the corporate planning and business development
coordinating activities for the Company and its subsidiaries;
b) to coordinate the integration of the activities of the Companies
subsidiaries or affiliates;
c) to establish the directives for the management of the financial
resources of the Company and its subsidiaries;
d) to establish the directives relating to the management and
development of human resources and supervise the implementation
of said activities;
e) to establish the directives relating to the financial management
and the supply of materials for the Company and supervise the
policies of the supply of materials to companies that the Company
participates in, to ensure synergies of supply between companies;
f) to establish the directives for activities relating to
information systems and to supervise the implementation of said
activities;
g) to decide matters under its own competency area, in accordance
with the policies and directives of the Board of Executive
Officers;
h) to coordinate the introduction of work policies that shall be
determined;
i) to carry out other activities delegated to it by the President.
III. Vice-President for Corporate Planning
a) to propose and evaluate the impact of the Company's technological
changes on its performance, and identify and propose new business
opportunities or further development of activities presently
conducted by the Company;
b) to evaluate the establishment of partnerships, proposing and
selecting the ideal partners for each activity;
c) to propose and establish directives and business strategies for
the Company and its subsidiaries and affiliates;
d) to follow the performance of the Company's subsidiaries, with the
purpose of optimizing and developing the Company's activities;
e) to consolidate the several specific business plans to fit into
the Company's global corporate plan.
IV. Vice-President for Regulatory Matters
a) to evaluate and monitor the development of competitors with
regards to regulatory matters;
b) to represent the Company before the Agencia Nacional de
Telecomunicacoes--ANATEL and other regulatory agencies and to
establish contacts;
c) to evaluate the policies and objectives of the regulatory
agencies and to propose strategies and actions of the Company
before the regulatory agency;
d) to identify, prioritize, and ensure compliance of the
resolutions, norms and regulations of the regulatory agency, as
well as establish and propose alternatives for the adaptation of
the Company's interests;
e) to formulate and propose objectives and define strategies for the
management and negotiation of the regulatory orders, for the
purposes of upholding and integrating the Company's interests and
those of its subsidiaries, including the forecasting of eventual
questions and conflicts;
f) to supervise the execution of the concession agreements and other
agreements of the Company and its subsidiaries before the
regulatory agencies;
g) to decide matters under its own competency area, in accordance
with the policies and directives of the Board of Executive
Officers;
CHAPTER VI
STATUTORY AUDIT COMMITTEE
Art. 24 - The Statutory Audit Committee is the body that audits the
management of the Company, shall function on a permanent basis and it shall have
a minimum of 3 (three) and no more than 5 (five) members with an equal number of
alternates.
ss. 1. The compensation of the members of the Statutory Audit Committee, as
well as the reimbursement for travel and lodging expenses incurred while
performing their duties, shall be determined by the Meeting of Shareholders that
appoints them, and the compensation of each active member shall be no less than
one-tenth, on average, of the compensation of each Executive Officer, without
calculating benefits of any kind, representation fees and profit sharing.
ss. 2. If there is a vacancy in the position of a member of the Statutory
Audit Committee, the member shall be substituted by his/her alternate. If more
than half of the positions become vacant and there are no alternates to meet, a
Meeting of Shareholders shall be called to elect replacements.
ss. 3. The Statutory Audit Committee shall meet (i) ordinarily, once each
quarter and (ii) extraordinarily, when they are called by the Chairman, or by 2
(two) members of the Statutory Audit Committee, and minutes of the meetings
shall be kept.
ss. 4. The meetings of the Statutory Audit Committee shall be convened in
writing with, at least, 48 (forty-eight) hours notice, and the notice shall
indicate the agenda and the matter to be decided in the respective meeting.
CHAPTER VII
FISCAL YEAR AND FINANCIAL STATEMENTS
Art. 25 - The fiscal year shall coincide with the civil year. In addition
to annual financial statements, quarterly and biyearly ones may also be
prepared.
DISTRIBUTION OF PROFITS
Art. 26 - The minimum mandatory dividend amount shall be allocated first to
payment of the preferred dividends on preferred shares, up to the preferred
limit, and thereafter by payments to the holders of common shares up to the same
limit as the preferred shares. The balance, if any, shall be paid pro rata to
all the shares on equal terms.
Art. 27 - Along with the financial statements, the Board of Directors shall
submit to the Meeting of Shareholders proposals regarding (i) managers and
employees profit sharing and (ii) aggregate distribution of the net profits.
ss. 1 - The net profits shall be allocated as follows: (i) 5% (five
percent) to the legal reserve, in order to assure the physical integrity of the
capital stock, which may not exceed 20% (twenty percent) of the paid-in capital;
(ii) 25% (twenty five percent) of the net profits adjusted in accordance with
items II and III of Art. 202 of Law No. 6,404/76 shall be distributed as minimum
mandatory dividends to all shareholders, in accordance with the provisions of
the following article, and this amount shall be increased until it equals the
amount to be paid as preferred dividends on the preferred shares; and (iii) the
balance of the net profits not allocated to the payment of the minimum mandatory
dividend or the preferred dividends on preferred shares shall be allocated to an
additional reserve for expansion of the Company's businesses, which may not
exceed 80% (eighty percent) of the capital stock. Once this limit is reached,
the Meeting of Shareholders shall decide to allocation of the balance, to
pay-in, subscribe capital stock or to an increase in the capital stock or to the
distribution of additional dividends to the shareholders.
ss. 2. Dividends not claimed within 3 (three) years, from the date of
distribution, shall revert to the Company.
Art. 28 - By decision of the Board of Directors, the Company may declare
dividends from: (i) profits verified in semi-annual financial statements; (ii)
profits verified in quarterly financial statements, as long as the total amount
of dividends paid in each half of the fiscal year does not exceed the amount of
capital reserves referred to in the Art. 182, first paragraph of Law 6,404/76,
or (iii) accumulated profits or profit reserves which appear in the latest
annual or semi-annual financial statements.
Sole Paragraph - Intermediary dividends distributed in the terms of this
article shall be considered part of the minimum mandatory dividend amount.
Art. 29 - By decision of the Board of Directors, "ad referendum" of the
Meeting of Shareholders, and in accordance with the applicable legal provisions,
the Company may pay interest on net worth to its shareholders, which will be
considered as part of the minimum mandatory dividend amount.
CHAPTER VIII
GENERAL AND TRANSITORY PROVISIONS
Art. 30 - The Company shall be liquidated in the cases provided for by law,
or by decision of the Meeting of Shareholders, which shall determine the manner
of liquidation and shall appoint the liquidator.
Art. 31 - Approval by the Company, through its representatives, of mergers,
split-ups, consolidations, or dissolutions of its subsidiaries shall be preceded
by an economic-financial analysis performed by an independent company of
recognized international standing, to confirm that all of the companies involved
are being treated equitably; the shareholders of the companies involved shall
have full access to the report on the analysis.
Art. 32 - In all that has been omitted from this Charter, the Company shall
be ruled by applicable law.
