As filed with the Securities and Exchange Commission on June 30, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number: 001-14485
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TELE SUDESTE CELULAR PARTICIPACOES S.A.
(Exact Name of Registrant as Specified in Its Charter)
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Tele Sudeste Cellular Holding Company The Federative Republic of Brazil
(Translation of Registrant's (Jurisdiction of Incorporation
Name into English) or Organization)
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Rua Martiniano de Carvalho 851, 18(0) 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:
Name of Each Exchange
Title of Each Class On Which Registered
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Preferred Shares, without par value* New York Stock Exchange
American Depositary Shares, each New York Stock Exchange
representing 5,000 Preferred Shares
- ------------
* Not for trading, but only in connection with the listing of American
Depositary Shares on the New York Stock Exchange.
Securities registered or to be registered pursuant to Section 12(g) of the
Act: None
Securities for which there is a reporting obligation pursuant to Section
15(d) of the Act: None
Indicate the number of outstanding shares of each of the Issuer's classes
of capital or common stock as of the close of the period covered by this Annual
Report:
124,369,030,532 Common Shares, without par value
210,029,997,060 Preferred Shares, without par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No|_|
Indicate by check mark which financial statement item the Registrant has
elected to follow.
Item 17|_| Item 18 |X|
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<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business.........................................1
Item 2. Description of Property........................................19
Item 3. Legal Proceedings..............................................19
Item 4. Control of Registrant..........................................20
Item 5. Nature of Trading Market.......................................21
Item 6. Exchange Controls and Other Limitations
Affecting Security Holders.....................................23
Item 7. Taxation.......................................................24
Item 8. Selected Financial Data........................................29
Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................34
Item 9A. Quantitative and Qualitative Disclosures About Market Risk.....43
Item 10. Directors and Officers of Registrant...........................43
Item 11. Compensation of Directors and Officers.........................46
Item 12. Options to Purchase Securities
from Registrant or Subsidiaries................................46
Item 13. Interest of Management in Certain Transactions.................46
PART II
Item 14. Description of Securities to be Registered.....................46
PART III
Item 15. Defaults upon Senior Securities................................46
Item 16. Changes in Securities, Changes in
Security for Registered Securities and Use of Proceeds.........47
PART IV
Item 17. Financial Statements...........................................47
Item 18. Financial Statements...........................................47
Item 19. Financial Statements and Exhibits..............................47
Index of Defined Terms....................................................48
Technical Glossary........................................................49
<PAGE>
PRESENTATION OF FINANCIAL INFORMATION
In this Annual Report, Tele Sudeste Participacoes S.A., a corporation
organized under the laws of the Federative Republic of Brazil ("Brazil"), is
referred to as the "Holding Company," and the Holding Company and its
Subsidiaries are referred to collectively as the "Company." Its subsidiaries,
Telerj Celular S.A. ("Telerj Celular") and Telest Celular S.A. ("Telest
Celular"), are collectively referred to herein as the "Subsidiaries."
References to (i) the "real," "reais" or "R$" are to Brazilian reais
(plural) and the Brazilian real (singular) and (ii) "U.S. dollars," "dollars" or
"US$" are to United States dollars.
The consolidated financial statements of the Company as of December 31,
1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998 (the
"Consolidated Financial Statements") have been prepared in accordance with
generally accepted accounting principles in Brazil ("Brazilian GAAP"). The
Consolidated Financial Statements and other financial information as of and for
the year ended December 31, 1998 are presented in nominal reais and do not
recognize the effects of inflation. The Consolidated Financial Statements and
other financial information for prior dates and periods have been indexed and
expressed in constant reais of December 31, 1997 purchasing power using the
integral restatement method (correcao monetaria integral).
Certain terms are defined the first time they are used in this Annual
Report. The "Index of Defined Terms" that begins on page 48 lists those terms
and where they are defined. The "Technical Glossary" that begins on page 49
provides definitions of certain technical terms used herein.
FORWARD-LOOKING INFORMATION
This Annual Report contains forward-looking statements. The Company and its
representatives may also make forward-looking statements in press releases and
oral statements. Statements that are not statements of historical fact,
including statements about the beliefs and expectations of the Company's
management, are forward-looking statements. The words "anticipates," "believes,"
"estimates," "expects," "forecasts," "intends," "plans," "predicts," "projects"
and "targets" and similar words are intended to identify these statements, which
necessarily involve known and unknown risks and uncertainties. Known risks and
uncertainties, some of which are discussed at pages 16-19 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.
<PAGE>
PART I
Item 1. Description of Business
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 was formed in January 1998 by spinning off the cellular
telecommunications operations of an operating company controlled by Telebras
(collectively, the "Predecessor Companies"). References to the operations of the
Company, prior to January 1998, are to the cellular operations of the
Predecessor Companies. See "--Historical Background."
The Company provides cellular telecommunications services in the Brazilian
States of Rio de Janeiro and Espirito Santo (the "Region") under concessions
from the Federal Government (the "Concessions"). Cellular telecommunications
services were first offered in the State of Rio de Janeiro in November 1990, and
the Company is the leading provider of cellular telecommunications services in
the Region. At December 31, 1998, the Company had 772,141 subscribers.
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 ending December 31, 1998 and
the Holding Company's shareholding in each Subsidiary at December 31, 1998.
Contribution to
consolidated Holding Company ownership
------------ -------------------------
results
% of net operating % of share % of voting
Subsidiary revenues capital stock
- ---------- -------- ------- -----
Telerj Celular........ 85.2 70.7 85.0
Telest Celular........ 14.8 85.2 93.3
Substantially all the Holding Company's assets consist of shares in the
Subsidiaries. The Holding Company relies almost exclusively on dividends from
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 5521-586-6629.
Historical Background
Prior to the incorporation of Telebras in 1972, there were more than 900
telecommunications companies operating throughout Brazil. Between 1972 and 1975,
Telebras and its operating subsidiaries (collectively, the "Telebras System")
acquired almost all the other telephone companies in Brazil and thus came to
have a monopoly over the provision of public telecommunications services in
almost all areas of the country. Beginning in 1995, the Federal Government
undertook a comprehensive reform of Brazil's telecommunications regulatory
system. In July 1997, Brazil's National Congress adopted the Lei Geral de
Telecomunicacoes (the "General Telecommunications Law," and together with the
regulations, decrees, orders and plans on telecommunications issued by Brazil's
Executive Branch, the "Telecommunications Regulations"), which provided for the
establishment of a new regulatory framework, the introduction of competition and
the privatization of Telebras. The General Telecommunications Law established an
independent regulatory agency called Agencia Nacional de Telecomunicacoes -
ANATEL ("Anatel").
In January 1998, in preparation for the restructuring and privatization of
the Telebras System, the cellular telecommunications operations of Telebras'
operating subsidiaries were spun off into separate companies. In May 1998,
Telebras was restructured to form, in addition to Telebras, 12 new holding
companies (the "New Holding Companies") by means of a procedure under Brazilian
corporate law called cisao, or split-up. Virtually all the assets and
liabilities of Telebras, including the shares held by Telebras in the operating
companies of the Telebras System, were allocated to the New Holding Companies.
The split-up of the Telebras System into the New Holding Companies is referred
to herein as the "Breakup" or the "Breakup of Telebras."
The New Holding Companies, together with their respective subsidiaries,
consist of (a) eight cellular service providers, each operating in one of eight
regions (each a "Cellular Region"), (b) three fixed-line service providers, each
providing local and intraregional long-distance service in one of three regions
(each a "Fixed-Line Region"), and (c) Embratel Participacoes S.A. - Embratel
("Embratel"), which provides domestic (including intraregional and
interregional) long-distance telephone service and international telephone
service throughout Brazil.
The 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 cellular
telecommunications service in the States of Rio de Janeiro and Espirito Santo.
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 Federal Government's common shares of the Holding Company were purchased by
a consortium comprised of Telefonica Internacional S.A., Iberdrola Investimentos
Sociedade Unipessoal Ltda., NTT Mobile Communications Network, Inc. and Itochu
Corporation (collectively, the "Telefonica Consortium"). See "Control of
Registrant."
The Region
The Region covers an area of approximately 90,000 square kilometers (44,000
in the State of Rio de Janeiro and 46,000 in the State of Espirito Santo),
representing approximately 1% of Brazil's area. Its population of 16.5 million
represents approximately 10.2% of the population of Brazil. Over 95% of the
population of the State of Rio de Janeiro and approximately 78% of the
population of the State of Espirito Santo live in urban areas. The Region has 26
municipalities with populations in excess of 100,000 people, including the
cities of Rio de Janeiro, Niteroi, Nova Iguacu and Vitoria. In 1997, the Region
generated approximately 13.6% of Brazil's gross domestic product; the services
sector accounted for approximately 59.3% of the Gross Domestic Product ("GDP")
of the State of Rio de Janeiro and 55.4% of the GDP of the State of Espirito
Santo. (As reported in the "Atlas do Mercado Brasileiro" in 1997).
Set forth below is a map showing the location of the Region within Brazil.
[GRAPHIC OMITTED]
The following table sets forth population, GDP and per-capita income
statistics for each state in the Region at the dates and for the year indicated.
<TABLE>
<CAPTION>
At July 1, 1998 Year ended December 31,
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1997 Population % of Brazil's GDP(1) (billions % of Brazil's Per Capita income(1)
State (millions)(1) population (1) of nominal reais) GDP (1) (nominal reais)
- ----- ------------- -------------- ----------------- ------- ---------------
Rio de Janeiro
<S> <C> <C> <C> <C> <C>
(Telerj Celular).......... 13.7 8.4 88.0 11.7 7,558
Espirito Santo
(Telest Celular).......... 2.8 1.7 16.8 1.9 6,251
------ ------ ------ ------
Region....................... 16.5 10.2 104.8 13.6
====== ====== ====== ======
</TABLE>
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(1) Estimates of the Instituto Brasileiro de Geografia e Estatistica - IBGE
("IBGE").
The Company's business, financial condition, results of operations and
prospects depend in part on the performance of the Brazilian economy and the
economy of the Region, in particular. See "--Brazilian Economic Environment."
Services
The Company offers cellular telecommunications services to its subscribers
pursuant to a variety of rate plans. In August 1998, the Company began offering
digital cellular telecommunications service. The introduction of digital
technology has allowed the Company to increase capacity, offer additional
value-added services and provide more secure communication channels. See
"--Network." The Company also offers ancillary services, including voicemail,
call forwarding, call waiting, caller identification and three-way calling,
depending on the Company's plan of service. The Company began to sell handsets
in November 1998 in connection with the provision of cellular telecommunications
service.
Through agreements with other cellular service providers, the Company
offers automatic roaming services throughout Brazil that allow subscribers to
make and receive calls while out of the Region. The Company offers international
roaming in Argentina, Uruguay and Paraguay through agreements with local
cellular service providers. The Company also provides cellular
telecommunications service to subscribers of other cellular service providers
while they are in the Region. The Company charges the other service providers
pursuant to roaming agreements for the service provided to their subscribers.
See "--Operating Agreements--Roaming Agreements."
The Company's customer service departments have approximately 524 customer
service attendants, of whom 485 are third-party employees. These attendants
provide 24-hour customer service in order to resolve customer service problems.
At December 31, 1998, the Company had one customer service attendant for every
1,474 subscribers. During 1998, the customer service team answered, on average,
24,036 calls per working day.
Sales and Marketing
The Company divides its subscribers into business users and personal users.
At December 31, 1998, 6.4% were business users (cellular telecommunications
service registered through businesses) and 93.6% were personal users. However,
the Company's management believes that a significant number of personal users
use their cellular phones for both personal and business purposes. Of the
current subscribers, approximately 9% are heavy users (over 300 outgoing minutes
per month), approximately 14% are moderate users (from 150 to 300 outgoing
minutes per month), approximately 32% are regular users (from 50 to 150 outgoing
minutes per month) and approximately 45% are occasional users (fewer than 50
outgoing minutes per month).
Measures are being developed to improve the services offered to the
Company's high and medium use clients in order to increase customer loyalty.
Such measures include the introduction of digital technology and the
implementation of additional service plans tailored to various user segments.
See "--Rates." During the second quarter of 1999, the Company introduced prepaid
cellular telecommunications service. Such service has no activation fee and
allows customers to pay only for services used.
From time to time, the Company offers various short-term promotions in
connection with the provision of cellular telecommunications services.
Promotions in connection with introduction of digital service have included
providing high-use customers with digital cellular handsets at significant
discounts or free of charge and a one-month promotion, the Basic Express Plan,
that provided a digital cellular handset, battery and charger at a reduced price
and free ancillary services during the first six months of service.
With respect to personal users, the Company's customers consist primarily
of high and middle income individuals. Pursuant to Anatel's regulations,
cellular telecommunications service is provided to all individual applicants,
regardless of income level, in the order in which applications are received.
Service can be interrupted if a customer fails to make timely payments. See
"--Billing and Collection."
Sales Network
The Company markets its services through a network of direct sales
personnel and independent distributors in the Region. At December 31, 1998, the
Company had 37 company-owned stores and 426 independent distributors covering 58
major cities in the Region. However, 88.5% of the Company's distribution network
is in the State of Rio de Janeiro. Through its direct sales force and
independent distributors, the Company is able to sell its cellular
telecommunications services and provide after-sales services to subscribers at
convenient locations.
Independent Distributors. The Company selects its independent distributors
by assessing their premises, technological capabilities and financial condition.
All of the Company's independent distributors receive basic training and a
commission for the sale of Company's services. Contracts with independent
distributors are established on an exclusive basis but can be terminated at the
Company's discretion in the event of actions by an independent distributor
contrary to the Company's operating policies or business ethics.
Network and Subscriber Data
The following table sets forth information on the Company's subscriber
base, coverage and related matters at the dates and for the years indicated.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cellular lines in service at year-end.......................222,921 548,471 772,141
Subscriber growth during year............................... 51.7% 146.0% 41.2%
Estimated population of Region at year-end (thousands) (1).. 15,840 16,340 16,456
Estimated covered population at year-end (millions) (2)..... 13.5 14.9 15.9
Percentage of population of Region covered at year-end (3).. 85.2% 91.1% 96.5%
Penetration at year-end (4)................................. 1.4% 3.4% 4.7%
Average monthly incoming minutes of use per subscriber...... 83.3 87.5 98.9
Average monthly outgoing minutes of use per subscriber...... 145.0 115.7 122.0
Average monthly revenues per subscriber (5).................R$140.07 R$138.52 R$105.00
</TABLE>
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(1) IBGE estimates.
(2) Management estimates of the number of people in the Region who can access
the Company's signal - based on Anatel calculations.
(3) Management estimates of the percentage of population of the Region that can
access the Company's signal - based on Anatel calculations.
(4) Number of cellular lines in service divided by the estimated population of
the Region.
(5) In nominal reais, net of value-added taxes; Rio de Janeiro only for 1996;
weighted average of Rio de Janeiro and Espirito Santo for 1997 and 1998.
Sources of Revenue
The Company generates revenue from (i) activation fees, which are one time
charges paid to obtain cellular telecommunications service, (ii) usage charges,
which include measured service charges for outgoing calls and roaming and other
similar charges, (iii) monthly subscription charges, (iv) network usage charges,
which are amounts charged by the Company to other cellular and fixed-line
service providers, and to Embratel as the long-distance provider, for use of the
Company's network, and (v) other charges, including charges for call forwarding,
call waiting and call blocking. The Company's rates are subject to the approval
of Anatel. See "--Regulation of the Brazilian Telecommunications Industry."
Subscriber Rates
Since October 1994, cellular telecommunications service in Brazil, unlike
North America, has been offered on a "calling party pays" basis, under which the
subscriber pays only for calls that he or she originates. (In addition, a
subscriber pays roaming charges on calls made or received outside his or her
home registration area).
Subscriber charges are computed based on the subscriber's calling plan, the
location of the party called, the place from which the call originates and
certain other factors, as described below. The Region is divided into three
registration areas. The lowest base rate per minute ("VC1") applies to calls
made by a subscriber in a registration area to persons in the same registration
area. Charges for calls from one registration area to another within the Region
are assessed at a higher rate ("VC2"). Calls from the Region to persons outside
the Region are billed at the highest rate ("VC3"). When a subscriber makes or
receives a call while outside the Region, a per-call surcharge known as "AD" is
applicable. When a subscriber receives a call outside his or her home
registration area, the subscriber also pays a certain rate per minute if the
subscriber is located within the Region ("DSL1"), or a higher rate if the
subscriber is located outside the Region ("DSL2"). Measured service charges are
discounted 30% for calls made on Sundays and national holidays and for calls
made between 9:00 p.m. and 7:00 a.m., Monday through Saturday ("off-peak
calls"). A 30% surcharge is imposed on VC1 calls from one cellular telephone to
another.
The following table sets forth the average rates for the Basic Plan for
each year in the three-year period ended December 31,
1998 in nominal reais.
1996 1997 1998
---- ---- ----
Activation fee (1)............. R$ 306.12 R$ 308.16 R$ 258.89
Monthly subscription fee (2)... 28.07 28.00 28.00
Time charges per minute:
VC1 (2)(3).................. 0.29 0.28 0.28
VC2 (3) 0.58 0.58 0.58
VC3 (3) 0.66 0.66 0.66
DSL1 (3).................... 0.29 0.29 0.29
DSL2 (3).................... 0.33 0.33 0.33
AD (per call)(2)............... 0.55 0.55 0.55
- ---------------------------------------
(1) Data include COFINS (2%) and PIS (0.65%). 1996 and 1997 data based on
year-end data and 1998 based on month-end data. The activation fee was
R$300 in Rio de Janeiro and R$230 in Espirito Santo until November 1998 and
December 1998, respectively, when it was reduced to R$80.
(2) Weighted averages of the rates.
(3) Weighted average peak rates, net of value-added taxes.
At December 31, 1998, the Company offered four plans of service. These
plans included the CellBusiness 300 Plan, the CellPack 150 Plan, the CellPop
Plan and the Basic Plan. A majority of the Company's customers subscribe to the
Basic Plan. The Company plans to offer additional service plans in the future.
The Basic Plan includes all the services offered by the Company, both
analog and digital. The CellPop Plan, which is designed for customers in rural
areas of Rio de Janeiro and in the whole State of Espirito Santo who do not
require roaming services, provide discounts on activation fees, monthly
subscription charges and measured service charges. The CellBusiness 300 and the
CellPack 150 Plans feature fixed charges for monthly usage of 300 minutes and
150 minutes local calls, respectively, and are intended for heavy and moderate
users.
Roaming Fees
The Company receives revenue pursuant to roaming agreements with other
cellular service providers. When a call is made from within the Region by a
subscriber of another cellular service provider, that service provider pays the
Company for the call at the applicable rate. Conversely, when a Company
subscriber makes a cellular call outside the Region, the Company must pay the
charges associated with that call to the cellular service provider in whose
region the call originates. See "--Operating Agreements--Roaming Agreements."
Network Usage Charges
The Company earns revenues from any call (cellular or fixed-line)
originating with another cellular or fixed-line service provider and terminating
on a cellular telephone within the Region. The Company charges the service
provider from whose network the call originates a network usage charge for every
minute the Company's network is used in connection with the call. See
"--Operating Agreements--Interconnection Agreements." The average network usage
tariff charged by the Company to other service providers in 1996, 1997 and 1998
was R$0.21, R$0.22 and R$0.22 per minute, respectively, net of value-added
taxes.
Taxes on Telecommunications Services
The cost of telecommunications services to the subscribers includes a
variety of taxes. The average rate of all such taxes, as a percentage of gross
operating revenues for the Company, was approximately 27.9% in 1998. The
principal tax is a state value-added tax, the Imposto sobre Circulacao de
Mercadorias e Servicos (the "ICMS"). The ICMS is a tax that the Brazilian states
impose at varying rates on certain revenues from the sale of goods and services,
including certain telecommunications services. During 1998, the ICMS rate for
domestic telecommunications services was 37% in the State of Rio de Janeiro and
25% in the State of Espirito Santo.
Other taxes on gross operating revenues include two federal social
contribution taxes, the Programa de Integracao Social ("PIS") and the
Contribuicao para Financiamento da Seguridade Social ("COFINS"), imposed on
certain telecommunications services at a combined rate of 3.65% of gross
operating revenues. Prior to February 1999, the combined rate of both taxes was
2.65%.
In June 1998, the governments of the individual Brazilian states approved
an agreement to interpret existing Brazilian tax law to apply the ICMS effective
July 1, 1998 to certain services to which the ICMS had not previously been
applied, including cellular activation. The agreement also provides that the
ICMS may be applied retroactively to activation services rendered during the
five years preceding June 30, 1998. See "Legal Proceedings."
Billing and Collection
The Company's billing system has four main functions: (i) subscriber
registration, (ii) subscriber information management, (iii) accounts payable
management and (iv) billing and collection. To smooth the billing and collection
cycles, the Company uses ten staggered billing cycles each month.
Pursuant to Brazilian law, subscribers must receive a bill at least five
days before the due date and companies must allow subscribers at least 15 days
from the due date before suspending service for nonpayment. Pursuant to Company
policy, if a subscriber's payment is more than 30 days past-due, service is
suspended until full payment for all outstanding charges is received.
If a subscriber's payment is more than 90 days past-due, service is
discontinued.
After each collection cycle, the Company and other telecommunications
service providers reconcile the roaming and network usage fees owed between them
and settle on a net basis. See "--Rates--Roaming Fees" and "--Network Usage
Charges." For international and domestic long-distance calls made by its
subscribers, the Company charges Embratel a fee for the use of its cellular
telecommunications network and forwards the net amount collected for such calls
to Embratel.
When the Subsidiaries were spun off from the Predecessor Companies, each of
them used the billing system of its respective Predecessor Company. Upon the
Breakup of Telebras, the Company began to take steps to make the Subsidiaries
operationally independent from the Predecessor Companies. The billing systems
were an important focus of this effort. Each Subsidiary's customer data base was
migrated from the system of its respective Predecessor Company to its own
system, and a period of adjustment followed, as the Subsidiaries sought to deal
with inadequacies in the databases received. Since July 1998, the Company has
been implementing a new billing system, developed by CONDEC/ITS - ALIANZA. The
rate of growth of the Company's business in 1998 and 1999 to date has required
that the Company continue to pay special attention to the billing system, in
order to make it more efficient and responsive to the Company's needs.
The Company provisions 100% for customer accounts over 90 days past-due and
writes off customer accounts that are over 180 days past-due. The Company's
provisions for doubtful accounts were 0.85%, 1.13% and 8.12% of gross operating
revenues in 1996, 1997 and 1998, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of Operations
for 1996, 1997 and 1998--Operating expenses."
Network
At December 31, 1998, the Company's cellular telecommunications network
covered 96.5% of the Region's population. The Company continues to expand its
cellular telecommunications network to cover as broad a geographical area as is
economically feasible in order to meet consumer demand. Under the Concessions,
the Company has certain obligations concerning network expansion. See
"--Regulation of the Brazilian Telecommunications Industry--Obligations of
Telecommunications Companies."
The Company plans to centralize its network administration system in the
City of Rio de Janeiro. This system is capable of monitoring the base stations,
switching centers and all critical network operational parameters. In addition,
technicians operating this system will have the ability to rapidly evaluate and
respond to technical difficulties in network operations. The Company analyzes
the performance data generated by this system in order to make the operating
adjustments and capital expenditures necessary to maintain and enhance network
operations.
At December 31, 1998, the Company's cellular telecommunications network
consisted of ten analog communication switching centers (one in Espirito Santo
and nine in Rio de Janeiro), four digital communication switching centers, four
gateways and two Home Location Registers. The Company also had 526 Analog Base
Stations (459 in Rio de Janeiro and 67 in Espirito Santo), 155 Mini-Analog Base
Stations (148 in Rio de Janeiro and seven in Espirito Santo), 42 microcells, 187
Digital Base Stations and ten Mini-Digital Base Stations.
Digitalization represents one of the Company's key strategic initiatives.
The Company's management believes that digitalization offers certain advantages,
including greater network capacity, reduced operating costs and additional
revenues through the sale of value-added services. Digital cellular
telecommunications services also offer subscribers greater security. Prior to
1998, the Company supplied only an AMPS analog cellular telecommunications
service. In July 1998, the Company began the process of converting to digital
technology in the Rio de Janeiro metropolitan area. The new digital cellular
equipment is supplied by NEC do Brasil S.A. ("NEC") and will include a digital
cellular telecommunications network based on Code Division Multiple Access
("CDMA") technology. In August 1998, the Company began supplying digital
cellular telecommunications service.
In building its cellular telecommunications network, the Company has
purchased cellular equipment manufactured by NEC for the State of Rio de Janeiro
and by Nortel S.A. for the State of Espirito Santo. In 1998 the Company invested
approximately R$180 million in its cellular telecommunications network.
Fraud Detection and Prevention
Cloning fraud consists of duplicating the cellular signal of a bona fide
subscriber, enabling the perpetrator of the fraud to make telephone calls using
the subscriber's signal. Such calls are billed to the subscriber but the
receivable is written off when the Company discovers that it arose from a
fraudulent call. If part of a fraudulent call is carried by the network of
another service provider, the Company is obligated to pay that service provider
the applicable network usage fee, regardless of whether the Company ever
collects the receivable associated with the call. The Company's management
believes that the introduction of digital service is significantly reducing the
incidence of cloning fraud. Fraud resulting from cloned cellular telephone calls
is not a significant problem for the Company.
Subscription fraud occurs when a person, typically using a fictitious
identification and address, obtains cellular telecommunications service with no
intention of paying for the service and then incurs substantial charges before
the cellular operator is able to identify the fraud and terminate service.
Historically, the majority of losses relating to fraud are a result of
subscription fraud.
The Company has implemented fraud-detection and fraud-prevention measures
in an effort to reduce fraud-related losses. Fraud-detection measures employed
by the Company include the manual review of call detail records in the State of
Rio de Janeiro. These records are analyzed to identify abnormal calling
patterns. When abnormal patterns are found, the subscriber is contacted by the
fraud control staff of the Company and, if cloning has occurred, the
subscriber's number is changed. This review and monitoring process has not been
implemented in the State of Espirito Santo as access to international calls
(where the major incidences of such fraud occur) is only available to
approximately 1% of subscribers. Fraud-prevention measures include restrictions
on international calls from a given number, restrictions on international calls
to certain high-risk destinations and restrictions on three-way calling by
customers with international direct-dial access.
The Company has installed a nation wide fraud detection system licensed
from Digital Equipment Corporation. This system aids in fraud detection in
various ways, including identifying simultaneous usage by a single subscriber,
call frequency and unusually high usage patterns. At present, there are seven
regional centers linked to Embratel that cover the Cellular Regions served by
the former Telebras System. As a result, the Company is able to monitor phone
usage by its subscribers even when they are outside of the Region. The
anti-fraud system shows calls considered to be unusual and provides historical
usage data in order to help determine if such calls are fraudulent. Upon
discovering fraudulent usage, the subscriber's cellular telecommunications
service is blocked. In the State of Rio de Janeiro, the antifraud system became
operational in early 1998, without the help of the regional centers, which
became operational during the second and third quarters of 1998. Telest Cellular
began using the antifraud system in February 1999.
During 1997 and 1998, the Company spent approximately R$2.5 million on the
implementation of its antifraud system. The Company's management expects to
invest R$2 million in fraud-control systems during 1999. During 1998, the
Company attributed approximately R$3 million in losses to subscription fraud.
Quality of Service
The Company's cellular telecommunications network is at times subject to
congestion, primarily in the metropolitan area of the city of Rio de Janeiro.
Congestion can result in subscribers occasionally being unable to make calls and
can cause calls to terminate prematurely. The Company's service problems have
been exacerbated because of government-imposed constraints on the Company's
capital expenditure budget, which prevented the Company from increasing network
capacity to meet demand for cellular telecommunications service in parts of the
Region. See "--Capital Expenditures." The Company does not compensate
subscribers who claim to have been adversely affected by network congestion.
In addition, network congestion has occasionally forced the Company to
reduce the rate at which it processes applications for cellular
telecommunications service. After the introduction of digital telecommunications
services in November 1998 and the resulting increase in system capability, the
Company began servicing the waiting lists created in prior years. At April 30,
1999, the Company no longer had a waiting list; however, a number of applicants
on the waiting list did not ultimately become subscribers.
Competition
Band B Competition
The General Telecommunications Law provides for the introduction of
competition in telecommunications services in Brazil. The Federal Government has
granted ten licenses to private companies (each a "Band B Service Provider") to
provide cellular telecommunications service within particular regions of Brazil
on a frequency range referred to as "Band B." The frequency range used by the
cellular service providers that were spun off from the Telebras System,
including the Company (each a "Band A Service Provider") is referred to as "Band
A." Each Band B license covers a geographic region which generally corresponds
to a Cellular Region. See "--Regulation of the Brazilian Telecommunications
Industry--Concessions and Licenses."
A license to provide cellular telecommunications services in the Region on
Band B has been granted to a consortium (ATL - Algar Telecom Leste) ("ATL")
whose members include (i) the Brazilian industrial group (and owner of Companhia
de Telecomunicacoes do Brasil Central S.A. - "CTBC Telecom"), Grupo Algar, (ii)
Korea Mobile Telecom and (iii) the Brazilian construction company, Queiroz
Galvao. The rights and obligations of the consortium under its concessions are
substantially the same as the Company's rights and obligations under its
Concessions. The consortium paid R$1.5 billion (approximately US $1.3 billion)
for the license and began providing cellular telecommunications services in the
Rio de Janeiro metropolitan area and other areas on an experimental basis in
December 1999.
In December 1998, ATL began to sell cellular telephones in the Rio de
Janeiro metropolitan area as part of a kit, known as a Fast Fone, which includes
a TDMA cellular telephone and a prepaid calling card with a credit of R$50.00.
This system allows customers to begin with the prepayment plan, and switch to a
different plan by filling out a form requesting the change and forwarding it to
ATL. In March ATL began expanding its coverage area. The Company's management
believes that ATL will utilize TDMA digital technology for its entire system and
will sell telephones through various channels. Assuming the use of such
technology, the Company's current subscribers will not be able to use their
current telephones if they switch their service to ATL.
Other Competition
The Company also competes with fixed-line telephone service providers.
Certain of the Company's existing and potential subscribers might shift to
fixed-line service providers to take advantage of the lower prices for
telecommunications services offered by fixed-line providers if the quality of
the services provided was improved. Quality of service concerns associated with
the fixed-line service provider include installation delays, service
interruptions and service availability. However, the quality of service of
fixed-line providers could improve, if competitors make significant investments
in the fixed-line telephone network in the Region.
However, the Company's management does not believe fixed-line service
providers present significant competition for the provision of
telecommunications services, as a majority of the Company's current subscribers
have fixed lines. The primary fixed-line service providers in the Region are
Telecomunicacoes do Espirito Santo S.A. - Telest and Telecomunicacoes do Rio de
Janeiro S.A. - Telerj, which are controlled by Tele Norte Leste Participacoes
S.A. The second company to obtain a concession to provide fixed-line
telecommunications service in the Region is Canbra Telefonica S.A. (a consortium
comprised of Bell Canada International, Wireless Local Looping L.P., Qualcomm
Incorporated, SLI Wireless and Taquari Participacoes S.A.). Canbra Telefonica
S.A. is expected to begin providing fixed-line telecommunications service in the
Region by the end of 1999.
The Company also competes with certain other wireless telecommunications
services, such as mobile radio, paging and beeper services, which are used by
some in the Region as a substitute for cellular telecommunications services.
These competing wireless telecommunications services are generally less
expensive than cellular telecommunications services. With the increase in
competition in the sector, the consequent increase in wireless
telecommunications services offered and a decrease in prices for cellular
telecommunications services, those other wireless telecommunications services
are losing their market share.
Technological advances in the telecommunications field, such as Personal
Communications Services ("PCS"), may in the future introduce additional
competition for cellular service providers. PCS services, which are similar to
digital cellular telecommunications services, require a concession from the
Federal Government. The Federal Government has indicated that it does not intend
to issue concessions to provide PCS services until 2001. Satellite services,
which provide nationwide coverage, are available in Brazil. Although satellite
services have the benefit of covering a much greater area than cellular
telecommunications services, they are considerably more expensive than cellular
telecommunications services and do not offer comparable coverage inside
buildings. The Company does not plan to offer mobile satellite services (other
than pursuant to a roaming arrangement with a satellite service provider) or PCS
services, although it may consider doing so in the future.
There can be no assurance that the entry of new competitors will not have a
material adverse effect on the Company's business, financial condition, results
of operations or prospects. Any adverse effects on the Company's results and
market share from competitive pressures will depend on a variety of factors that
cannot now be assessed with precision and that are beyond the Company's control.
Among such factors are the identity of the competitors, their business
strategies and capabilities, prevailing market conditions at the time, the
regulations applicable to new entrants and the Company and the effectiveness of
the Company's efforts to prepare for increased competition. One or more new
competitors may have technical or financial resources greater than those of the
Company.
Operating Agreements
Interconnection Agreements
The Company has entered into interconnection agreements with Embratel and
each of the Predecessor Companies. The terms of these interconnection agreements
include provisions for the number of connection points, the method by which
signals must be received and transmitted, and the costs and fees of
interconnection. In addition, network usage charges are assessed based on the
terms of these agreements. See "--Regulation of the Brazilian Telecommunications
Industry--Obligations of Telecommunications Companies--Interconnection."
Roaming Agreements
Agreements for automatic roaming have been entered into with all the other
Band A Service Providers and all the Band B Service Providers. These roaming
agreements permit the Company's subscribers to use their cellular telephones on
the networks of other cellular service providers while traveling or "roaming"
outside the Region. Conversely, the Company is required to provide cellular
telecommunications service to subscribers of those cellular service providers
from outside the Region when those subscribers are within the Region. The
agreements require the Company and the other cellular service providers to
provide service to roaming subscribers on the same basis as they provide service
to their own subscribers and to carry out a monthly reconciliation of roaming
subscriber usage charges. The agreements have a three-year term and
automatically renew for further one-year terms.
The Company has also entered into international roaming agreements with
foreign carriers that permit its subscribers to use their cellular telephones in
Argentina, Uruguay and Paraguay and subscribers of those carriers to use their
cellular telephones in the Region. The Company is negotiating an international
roaming agreement that, if concluded, would permit its subscribers to use their
cellular telephones in Portugal. The terms of these international roaming
agreements vary from agreement to agreement.
Employees
At December 31, 1998, the Company had 794 full-time employees.
Approximately 32.4% of the Company's employees were employed in technical or
operational positions, 31.9% in sales and marketing, 18.5% in finance and
administrative support and 17.2% in customer service. Approximately 33.9% of all
employees are members of state labor unions associated with either the Federacao
Nacional dos Trabalhadores em Telecomunicacoes - Fenattel ("Fenattel") or the
Federacao Interestadual dos Trabalhadores em Telecomunicacoes - Fittel
("Fittel"). Each Subsidiary negotiates a new collective labor agreement every
two years with each local union. The collective agreements now in force expire
in November 2000.
The Company's management considers the relations of the Company with its
work force to be satisfactory. Neither the Company nor any Predecessor Company
has experienced a work stoppage that had a material effect on its operations.
The Company participates in a pension fund, Fundacao Telebras de Seguridade
Social - Sistel ("Sistel"), the purpose of which is to supplement
government-provided retirement benefits. The Company makes monthly contributions
to Sistel currently equal to 13.5% of the salary of each employee who is a
Sistel member. Each employee member also makes a monthly contribution to Sistel
based on age and salary. Members of Sistel qualify for full pension benefits
after reaching age 57, provided they have been members of Sistel for at least
ten uninterrupted years and have been affiliated with the social security system
for at least 35 years. Sistel operates independently from the Company, and its
assets and liabilities are fully segregated from those of the Company. Employees
of the Company at the time of the privatization had the right to maintain their
rights and benefits in Sistel. Since December 1998, new employees have not been
allowed to join Sistel. However, the Company, is developing a new plan for its
employees and has been making provisions for payments to the plan ultimately
chosen.
Sistel is a multiemployer defined benefit plan that covers the former
employees of the Telebras System, and the Company is contingently liable for all
of the unfunded obligations of the plan. See Note 24 to the Consolidated
Financial Statements. The Company believes that Sistel may be replaced by one or
more separate plans, but there can be no assurances as to when this will occur
or what the consequences will be for the Company or its employees.
Research and Development
In connection with the Breakup, the Company was required to enter into a
three-year contract in May 1998 with the Centro de Pesquisa e Desenvolvimento da
Telebras (the "Center") the research and development center formerly operated by
Telebras and now administered as a private foundation. The Company's aggregate
expenditures on research and development, including its contribution to the
Center were R$2.7 million, R$3.1 million and R$2.3 million for 1996, 1997 and
1998, respectively.
Since the Breakup, the Center has continued to develop telecommunications
technology as a private, independently administered nonprofit foundation
financed with resources from the public and private sector. In connection with
the Breakup, the Company was required to enter into a three-year contract in May
1998 with the Center under which the Company is obligated to contribute a
maximum of R$2.4 million to the Center during the three years ending May 2001.
The Company does not conduct any independent research and primarily depends upon
the manufacturers of telecommunications products for the development of new
hardware. 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 may also provide services to third
parties such as Band B Service Providers on a fee-for-service basis. In
addition, the Company utilizes the research and development centers of Grupo
Telefonica, making use of software and related items. At present the Company
does not intend to carry out its own independent research. The Company depends
upon the manufacturers of telecommunications products for the development of new
hardware.
Capital Expenditures
Prior to privatization, the Company's capital expenditures were planned and
allocated on a system-wide basis and subject to approval by the Federal
Government. These constraints on capital expenditures prevented the Company from
making certain investments that otherwise would have been made to improve
cellular telecommunications service in the Region. Since the privatization of
Telebras, these restrictions have not applied. The Company is now permitted to
determine its own capital expenditure budget, subject to compliance with certain
obligations to expand service under the Concessions. See "--Regulation of the
Brazilian Telecommunications Industry--Obligations of Telecommunications
Companies."
The Company's capital expenditure priorities include increasing network
capacity and coverage and improving the overall quality of its network. The
Company has budgeted of R$377 million in 1999 capital expenditures,
approximately R$325 million in the State of Rio de Janeiro and approximately
R$52 million in the State of Espirito Santo. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The following table sets forth the Company's capital expenditures for each
year in the three-year period ended December 31, 1998.
Year ended December 31,
-----------------------
1996 1997 1998
---- ---- ----
(thousands of reais)(1)
Automatic switching equipment......... 90,756 47,820 82,764
Other equipment....................... 294,609 155,232 82,065
Real estate........................... 15,789 8,139 4,698
Other assets.......................... 66,463 35,201 14,594
-------- -------- --------
Total capital expenditures....... 467,617 246,392 184,121
======= ======= =======
- --------------
(1) 1996 and 1997 information is presented in constant reais of December 31,
1997 purchasing power. 1998 information is presented in nominal reais. See
Note 2(c) to the Consolidated Financial Statements.
Regulation of the Brazilian Telecommunications Industry
General
The Company's business, including the services it provides and the rates it
charges, is subject to comprehensive regulation under the General
Telecommunications Law, a new comprehensive regulatory framework for the
provision of telecommunications services enacted by Anatel in July 1997 and
various administrative enactments thereunder. 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 October
1997 Regulamento da Agencia Nacional de Telecomunicacoes (the "Anatel Decree").
Anatel is administratively independent and financially autonomous. Anatel
maintains a close relationship with the Ministry of Communications and is
required to report on its activities to the Ministry of Communications. It has
authority to propose and issue regulations that are legally binding on
telecommunications service providers. Any such proposed regulation is subject to
a period of public comment, which may include public hearings, and may be
challenged in Brazilian courts, as may any other action taken by Anatel.
Concessions and Licenses
Concessions and licenses to provide telecommunications services are granted
under the public regime or the private regime. The Concessions are granted under
the private regime and the Subsidiaries are subject to requirements imposed by
Anatel in the List of Obligations.
Pursuant to the Lei Minima (the "Minimum Law") and the General
Telecommunications Law, the Band A and Band B Service Providers have been
granted concessions. Each concession is a specific grant of authority to supply
cellular telecommunications services, subject to certain requirements contained
in the applicable list of obligations appended to each concession. If a cellular
service provider wishes to offer any telecommunications service other than the
cellular telecommunications service authorized by its concession, it may apply
to Anatel for a license to offer such other services.
Each concession has been granted for an initial period of 15 years, and may
be renewed at the discretion of Anatel for further periods of 15 years if the
list of obligations has been met. The Concession to provide cellular
telecommunications services in the States of Rio de Janeiro and Espirito Santo
expires in November 2005 and November 2008, respectively.
Currently, there is a limit on the number of cellular service providers
that may provide cellular telecommunications services in the Region, one
Band A Service Provider and one Band B Service Provider. Under the Concessions,
Anatel may not authorize additional providers of cellular telecommunications
services until December 31, 1999.
Licenses may be granted to any company wishing to offer any other
telecommunications services in the private regime (including any services
currently offered solely by public regime companies) except cellular
telecommunications services. The Company has not been granted any licenses as of
the date of this Annual Report.
Obligations of Telecommunications Companies
General. As described below, the Company is subject to certain requirements
relating to quality of service, network expansion and interconnection. Anatel
does not currently require network operators to unbundle network elements and
services, although Anatel has stated that it plans to review the issue on a
regular basis and may require unbundling in the future. In an unbundled regime,
each network operator is required to provide a detailed list of network services
and elements which may be purchased separately by a party requesting
interconnection.
Quality of service and network expansion. The Company, like other cellular
service providers, is subject to obligations set forth in the List of
Obligations concerning quality of service and network expansion and
modernization. Failure to meet these obligations may result in fines and
penalties of up to 0.05% of annual net operating revenues per day until the
Company complies with the obligations as well as potential revocation of the
Concessions.
The following two tables set forth the Company's certain obligations as
provided in the List of Obligations at the times indicated, and the Company's
performance with regard to each category of obligation at December 31, 1998.
While there can be no assurances, the Company expects to be in compliance with
the List of Obligations at all times.
Telerj Celular Status Minimum Coverage Required
at December 31, by November 4,
1998 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
Number of cities in which
service is offered with
populations of:(1)
30,000 to 50,000........... 9 -- -- -- -- 10
50,000 to 75,000........... 13 -- -- -- 15 --
75,000 to 100,000.......... 1 -- -- 1 -- --
100,000 to 200,000......... 11 -- 13 -- -- --
Over 200,000 or state
capitals................. 9 9 -- -- -- --
Maximum average installation
waiting time (2).......... 0 180 120 30 15 5
- -----------
(1) For services to be deemed to be offered in any city, service must be
available to at least 30% of the population.
(2) Number of days between request for service and connection in areas with
cellular telecommunications service.
Telest Celular Status Minimum Coverage Required
at December 31, by November 4,
1998 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
Number of cities in which
service is offered with
populations of:(1)
30,000 to 50,000........... 4 -- -- -- -- 4
50,000 to 75,000........... 5 -- -- -- 5 --
75,000 to 100,000.......... 2 -- -- 2 -- --
100,000 to 200,000......... 5 -- 5 -- -- --
Over 200,000 or state
capitals................. 1 1 -- -- -- --
Maximum average installation
waiting time (2).......... 0 180 120 30 15 5
- -------------------
(1) For services to be deemed to be offered in any city, service must be
available to at least 30% of the population.
(2) Number of days between request for service and connection in areas with
cellular telecommunications service.
Telerj Celular Telest Celular Maximum/Minimum
Status at Status at Required
--------- --------- --------
Minimum average level of system
availability (1).................... 99.7% 99.9% 98%
Maximum network drop rate (2)........... 0.3% 1.4% 3%
Maximum "all circuits busy" rate (3).... 16.5% 1.5% 5%
Maximum interconnection drop rate (4)... 0.0% 0.0% 3%
Minimum average system availability on
first call attempt.................. 83.5% 98.5% 90%
Maximum number of customer complaints
per month (per 100 subscribers)..... 3 3.2 4
- --------------
(1) Percentage of time system is operational and available for call
origination, transport and completion.
(2) Rate of failed call completion due to signal loss between radio base
station and switching centers.
(3) Rate at which system rejects attempted calls during peak period because no
circuits are available.
(4) Rate at which interconnected calls fail to complete during peak periods.
Interconnection. All telecommunications service providers are required to
provide interconnection upon request to any party that provides public
telecommunications services. The terms and conditions of interconnection are to
be freely negotiated between parties, subject to a price cap established by
Anatel. If a company offers any party an interconnection tariff below the price
cap, it must offer that tariff to any other requesting party on a
nondiscriminatory basis.
Anatel has stated that for the time being it does not expect to require
network operators to permit co-location of equipment. Co-location means that a
network operator permits another party to place its switching equipment in or
near the local exchange of the network operator and to connect to the network at
this location. Co-location is currently a matter for negotiation between
interested parties.
Rate Regulation
The Concessions provide for a price-cap mechanism to set and adjust rates
on an annual basis. The cap is a maximum weighted average price for a basket of
services. The basket includes the services in the Basic Service Plan, including
monthly subscription fees, VC1 charges, VC2 charges, VC3 charges, DSL1 charges,
DSL2 charges, and AD charges, as well as interconnection charges, including
network usage fees and charges to provide a physical connection to the network.
The initial price cap agreed upon by Anatel and the Company in the
Concessions is based on previously existing tariffs, which were developed based
on the fully-allocated costs of the Company. The initial price cap is adjusted
on an annual basis under a formula set forth in the Concessions. The price cap
is adjusted to reflect the rate of inflation as measured by the Indice Geral de
Precos - Disponibilidade Interna ("IGP-DI"), an inflation index developed by the
Fundacao Getulio Vargas, a private Brazilian economic research organization.
The weighted average tariff for the entire basket of services may not
exceed the price cap, but the tariffs for individual services within the basket
may be increased. The Company may increase the tariff for any individual service
by up to 20%, subject to a downward adjustment for inflation effects already
captured in the annual upward adjustments of the overall price cap for the
basket, so long as it adjusts other prices downward to ensure that the weighted
average tariff does not exceed the price cap.
Other telecommunications companies wishing to interconnect with and use the
Company's network must pay certain fees, primarily a network usage fee. The
network usage fee is a flat fee charged per minute of use, which represents an
average charge for a basket of network elements and services. The network usage
fee charged by Band A Service Providers is subject to a price cap set by Anatel.
The price cap for the network usage fee varies from company to company based on
the underlying cost characteristics of each company's network. For a breakdown
of the Company's past network usage charges, see "--Rates--Network Usage
Charges."
Brazilian Political Environment
The Brazilian political environment was marked by high levels of
uncertainty after the country returned to civilian rule in 1985, ending 20 years
of military government. The death of a President-elect in 1985 and the
resignation of another President in the midst of impeachment proceedings in
1992, as well as rapid turnover in the Federal Government at and immediately
below the cabinet level, adversely affected the implementation of consistent
economic and monetary policies.
Fernando Henrique Cardoso, who was Finance Minister at the time of
implementation of Brazil's latest economic stabilization plan (the "Real Plan"),
was elected President of Brazil in October 1994 and, in October 1998, was
reelected for an additional four-year term, which began in January 1999.
President Cardoso is the leader of a coalition of six political parties that
represents a majority in the federal Congress. His party, the Brazilian Social
Democratic Party, holds the second largest number of seats in the coalition.
1999 to date has been marked by difficult relations between the Federal
Government and certain state governments. In the 1998 elections for state
governors, candidates from parties allied with the President's coalition
prevailed in 21 of 27 states, including the State of Sao Paulo. Opposition
candidates won in six states, including the States of Rio de Janeiro, Minas
Gerais and Rio Grande do Sul. In January 1999, the new Governor of the State of
Minas Gerais announced that his state would suspend payments on its debt to the
Federal Government for 90 days. The Governor of the State of Rio Grande do Sul
subsequently obtained a court order permitting his state to make its debt
payments into an escrow account, pending resolution of a request of seven states
to renegotiate refinancing agreements they had reached with the Federal
Government in 1997. The Federal Government has responded by seeking to withhold
constitutionally-mandated transfers to the State of Minas Gerais. The Federal
Government has notified certain international financial institutions that it
will no longer guarantee those states' obligations to those institutions,
leading the World Bank to suspend loans to the States of Minas Gerais and Rio
Grande do Sul.
In February 1999, certain state governors pressed for a renegotiation
of their states' refinancing agreements with the Federal Government. The
President offered instead to make loans to the states to cover the costs of
layoffs and pension reform and promised to review a law exempting exports from
state taxes. The Federal Government has initiated negotiations with the World
Bank to secure funding for such loans. The Federal Government is also proposing
to refinance certain debt of Brazil's municipalities for a period of 30 years at
a rate equivalent to 9% above the rate of inflation, in return for which the
municipalities are to be required to cut costs sharply and adopt strict fiscal
guidelines.
Conflicts between the Federal Government and state governments could
complicate the passage of the government's fiscal reform package and longer-term
fiscal measures, including a reform of the tax system, and Brazil's ability to
meet the agreed targets under the country's agreements with the International
Monetary Fund (the "IMF"). See "--Brazilian Economic Environment."
Brazilian Economic Environment
The Company's business, prospects, financial condition and results of
operations are dependent on general economic conditions in Brazil, and in
particular on (i) economic growth and its impact on demand for
telecommunications services, (ii) the cost and availability of financing and
(iii) exchange rates between Brazilian and foreign currencies.
For many years before the introduction of the Real Plan in late 1993, the
Brazilian economy was extremely volatile. The Federal Government implemented a
succession of programs intended to stabilize the economy and provide a basis for
sustainable, noninflationary growth. Changes in monetary, credit, tariff and
other policies were frequent and occasionally drastic. In particular, actions to
control inflation, interest rates or consumption included freezing bank
accounts, imposing capital controls, introducing high tariffs and other strong
measures. Changes in policy, social instability and other political and economic
developments, and the Brazilian government's responses to such developments, not
infrequently had a material adverse effect on the Company's business,
operations, financial condition and results of operations.
The Federal Government introduced the Real Plan in December 1993. The Real
Plan is an economic stabilization program intended to reduce the rate of
inflation by reducing certain public expenditures, collecting liabilities owed
to the Federal Government, increasing tax revenues, continuing to privatize
government-owned entities and introducing a new currency. The real was
introduced as Brazil's currency on July 1, 1994, initially with an exchange rate
of R$1.00 to US$1.00. The real appreciated through January 1995 and thereafter
gradually declined in value against the dollar, reaching R$1.2087 to US$1.00 at
December 31, 1998. Notwithstanding the success of the Real Plan in lowering
inflation and stabilizing the Brazilian economy, the Real Plan has also led to
economic slowdown, and a rise in unemployment in most regions and sectors of the
economy.
The Asian financial crisis in 1998 and the ripple effects of that crisis
presented a serious challenge for Brazil. After reaching a historical high of
US$74.7 billion at April 30, 1998, Brazil's international reserves declined to
US$42.4 billion at October 31.
In November 1998, in response to continuing pressure on the real and the
rapid decline in the country's dollar reserves, Brazil negotiated a US$41.5
billion loan package arranged by the IMF. Acceptance of the IMF package
committed Brazil to implement a combination of spending cuts and tax increases.
Brazil received the first installment of approximately US$9.4 billion in two
disbursements. Brazil's level of international reserves stabilized following the
announcement of the support package, reaching US$44.6 billion at December 31,
1998. 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 of Brazil (the "Central Bank") attempted a
controlled devaluation of the real by widening the band within which the real
was permitted to trade, but subsequent Central Bank intervention failed to keep
the rate within the new band. On January 15, the Central Bank announced that the
real would be permitted to float, with Central Bank intervention to take place
only in times of extreme volatility. Both the level of international reserves
and the value of the real continued to decline. At January 31, Brazil's
international reserves stood at US$36.1 billion and the Commercial Market Rate
stood at R$1.9832 to US$1.00.
In the following weeks, the Federal Government had a series of legislative
successes with its efforts to implement the expense reduction and revenue
enhancement measures under its Fiscal Stabilization Program. Brazil also began
negotiations with the IMF on adjustments to the previously-agreed 1999-2001
economic program, and agreement was reached in March on new economic targets.
Brazil received a second payment, of approximately US$4.9 billion, from the IMF,
followed by an additional US$4.9 billion in bilateral loans under the IMF-led
support package. Subsequent disbursements will depend on Brazil's ability to
meet the agreed primary surplus targets and on Brazil's progress in implementing
fiscal reforms. There can be no assurance that Brazil will be able to meet the
primary surplus targets under its agreement with the IMF and, accordingly, that
the full amount under the IMF-led support package will be available to Brazil.
After giving effect to the inflows from the IMF-led support package,
Brazil's international reserves stood at US$38.9 billion on April 8, 1999. The
Commercial Market Rate stood at R$1.72 to US$1.00. on March 31, 1999.
As a result of the foregoing events, GDP dropped 1.64% during the fourth
quarter of 1998, reflecting declines of 6.45%, 2.45% and 0.65% in the
agricultural, industrial and services sectors, respectively. GDP declined by
0.15% in the full year 1998, compared with 3.47% growth during the preceding
year. Brazil's current account deficit continued to grow in 1998, reaching
US$35.2 billion for 1998, compared with a US$33.4 billion deficit for the
preceding year. At the end of the first quarter of 1999, the current account
deficit stood at US$3.5 billion, the result of a US$535 million trade deficit
and US$3.4 billion in debt service during that quarter. Foreign direct
investment inflows increased 52.6% in 1998, totaling US$26.1 billion. Of that
amount, 23.4%, or US$6.1 billion, resulted from foreign participation in the
national privatization program. In the first two months of 1999, foreign direct
investment inflows totaled US$5.7 billion, bringing such investment to US$29.7
billion in the twelve months ended February 28, 1999.
Developments in Other Emerging Market Countries
The Brazilian securities markets are influenced by economic and market
conditions in other emerging market countries. Although economic conditions are
different in each country, developments in one country can have an effect on
investors' perceptions of the risks of investing in the securities of issuers in
other countries, including Brazil. During 1998 and 1999, the international
financial markets have experienced significant volatility, with significant
adverse effects on demand for and prices of securities of issuers in virtually
all emerging markets, including Brazil.
The current volatility in the securities markets in Latin American and
other emerging market countries has been attributed, at least in part, to the
effects of the Asian and the Russian economic crises of 1997-98. For example,
the crisis in Asia in the fourth quarter of 1997 provoked a significant
financial crisis in Brazil. In August 1998, following the devaluation of the
Russian ruble, Brazil again experienced substantial capital outflows and
significant declines in its stock markets. See "--Brazilian Economic
Environment."
There can be no assurance that the Brazilian securities markets will not
continue to be affected negatively by events elsewhere, especially in emerging
markets, or that such events will not adversely affect the prices of the
Company's securities.
Inflation and Devaluation
Brazil experienced extremely high and generally unpredictable rates of
inflation and of devaluation of Brazilian currency for many years until the
implementation of the Real Plan. Inflation itself, as well as certain
governmental measures to combat inflation, and public speculation about possible
future actions have also historically contributed to economic uncertainty in
Brazil and to heightened volatility in the Brazilian securities markets. See
"--Brazilian Economic Environment."
The following table sets forth the rate of Brazilian inflation, as measured
by the Indice Geral de Precos - Mercado (the General Price Index - Market or
"IGP-M"), and the devaluation of the Brazilian currency against the U.S. dollar
during the periods indicated.
Year ended December 31,
1996 1997 1998
---- ---- ----
(percentages)
Inflation (IGP-M)............................ 9.2 7.7 1.8
Devaluation (Brazilian currency vs. US$)..... 6.9 7.4 8.3
Under the Real Plan, the rate of Brazilian inflation has decreased
considerably since July 1994. The exchange rate between the real and the U.S.
dollar remained relatively stable from mid-1994 to year-end 1998, but extreme
volatility has returned in 1999. See "--Brazilian Economic Environment." During
the first quarter of 1999, inflation, as measured by the IGP-M, amounted to 7.4%
and the devaluation of the real against the U.S. dollar was 42%.
Inflation and devaluation have potentially adverse consequences for the
Company's business, prospects, financial condition and results of operations.
These factors introduce distortions into the Company's financial statements and
make period-to-period comparisons difficult and unreliable. Differences between
the relative rate of Brazilian inflation as compared to the rates of Brazil's
trading partners, on the one hand, and the rate of currency devaluation, on the
other, can cause balance sheet losses for the Company on its foreign
currency-denominated liabilities. Inflation places pressure on the Company's
rates and may invite Federal Government efforts to control inflation by holding
down the rates that Brazilian public utilities are permitted to charge.
There can be no assurance that Brazilian inflation will remain at modest
rates or, if there is an increase in inflation, that the Company's business,
prospects, financial condition and results of operations will not be adversely
affected.
Item 2. Description of Property
The Company's headquarters are in Sao Paulo.
The principal physical properties of the Company consist of transmission
equipment, switching equipment and base stations. The Company leases the sites
where its cellular telecommunications network equipment is installed. At
December 31, 1998, the Company had 14 cellular switches, 13 in Rio de Janeiro
and one in Espirito Santo, and 920 cell sites, 846 in Rio de Janeiro and 74 in
Espirito Santo. Most of these leases do not expire prior to 2002. In addition,
the Company leases 18 retail stores throughout the Region.
Item 3. Legal Proceedings
Litigation Related to the Breakup of Telebras
The Breakup of Telebras was subject to numerous lawsuits in which the
plaintiffs sought, and in certain cases obtained, preliminary injunctions
against the Breakup on constitutional and pother grounds. All of these
preliminary injunctions were subsequently quashed, but appeals are still pending
in a number of cases. It is theoretically possible under Brazilian law for a
court to require that the Breakup be unwound. The Company's management believes,
however, that the likelihood of an unfavorable outcome in any of these suits
remaining is remote.
Litigation Arising Out of Events Prior to the Breakup
Telebras and the Predecessor Companies, the legal predecessors of the
Holding Company, and the Subsidiaries, respectively, are defendants in a number
of legal proceedings and subject to certain other claims and contingencies
relating to events prior to the Breakup. Liability for claims arising out of
acts committed by the Predecessor Companies prior to the effective date of the
spin-off of the cellular assets and liabilities of the Predecessor Companies to
the Subsidiaries remains with the Predecessor Companies, except for labor and
tax claims (for which the Predecessor Companies and the Subsidiaries are jointly
and severally liable, as the case may be, by operation of law) and those
liabilities with respect to which the Predecessor Companies had made specific
accounting provisions prior to the Breakup, assigning them to the Subsidiaries.
Any claims against the Predecessor Companies which are not satisfied by the
Predecessor Companies could result in claims against the Subsidiaries to the
extent that the Subsidiaries have received assets which might have been used to
settle those claims had they not been spun off from the Predecessor Companies.
However, under the shareholders' resolution pursuant to which the spin-off was
effected, the Subsidiaries have contribution rights against the Predecessor
Companies with respect to the entire amount of any payments made by the
Subsidiaries in connection with any labor or tax claims brought against the
Subsidiaries and relating to acts committed by the Predecessor Companies prior
to the effective date of the spin-off.
The Company's management believes that the chances that claims of this kind
will materialize and have a material adverse financial effect on the Company are
remote.
Litigation Related to the Application of the ICMS
In June 1998, the governments of the individual Brazilian states approved
an agreement to interpret existing Brazilian tax law to apply the ICMS effective
July 1, 1998 to certain services, including cellular activation charges. The
agreement also provides that the ICMS may be applied retroactively to activation
services rendered during the five years preceding June 30, 1998.
The Company's management believes that the attempt by the state governments
to extend the scope of the ICMS to services that are supplementary to basic
telecommunications services, such as cellular activation, is unlawful because
(i) the state governments acted beyond the scope of their authority, (ii) their
interpretation would subject certain services that are not telecommunications
services to taxation and (iii) new taxes may not be applied retroactively.
Each of the Subsidiaries has filed suit with the Treasury Court of the
state in which it is located seeking injunctive relief from retroactive and
prospective application of the ICMS to cellular activation charges and has
obtained a temporary injunction relieving it from the payment during the
pendency of the suits. Nonetheless, the tax authorities of the states where the
lawsuits are pending may appeal those decisions. There can be no assurance that
the Subsidiaries will ultimately prevail in any appeal relating to the temporary
injunctions or in the underlying litigation with respect to application of the
ICMS to cellular activation.
The Company has not made provision for the application of the ICMS on
cellular activation. Five-year retroactive application of the ICMS to cellular
activation, if borne by the Company, would have a material adverse impact on the
financial condition and results of operations of the Company. However, the
Company's management does not believe that the retroactive application is
probable. Moreover, the Company's management believes that the Predecessor
Companies would be liable to the Subsidiaries for any tax liability arising from
the retroactive application. The Company's management does not believe that
application of the ICMS cellular activation, applied on a prospective basis,
would have a material impact on the Company's financial condition or results of
operations. Application of the ICMS to cellular activation for the full year
ended December 31, 1998, would have a maximum negative impact estimated at
R$18.0 million on results of operations for 1998.
Item 4. Control of Registrant
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 5,000 Preferred Shares. The ADSs are
evidenced by American Depositary Receipts ("ADRs").
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. The Telefonica Consortium owns 51.8% of the Common
Shares; accordingly, the Telefonica Consortium has the ability to control the
election of the Holding 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 Shares by each member of the Telefonica Consortium at November 30, 1998.
The Company is not aware of any other shareholder owning more than 10.0% of the
Common Shares.
Percentage of
Number of Common outstanding
Name of owner Shares owned Common Shares
- ------------- ------------ -------------
Telefonica Internacional S.A. ......... 53,134,249,678 42.72
Iberdrola.............................. 4,508,360,579 3.62
Itochu................................. 2,254,180,289 1.81
NTT.................................... 4,508,360,579 3.62
As a group, the Holding Company's officers and directors held less than
0.1% of the common shares outstanding.
The following is a brief description of the members of the Telefonica
Consortium.
Telefonica Internacional S.A. is a subsidiary of Telefonica de Espana S.A.
("Telefonica"). 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 four
other New Holding Companies: Tele Leste Celular Participacoes S.A., Telesp
Celular Participacoes S.A., Telesp Participacoes S.A. and Companhia Riograndense
de Telecomunicacoes.
Iberdrola Investimentos Sociedade Unipessoal Ltda. 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 value added services to customers. In Spain, it provides electricity
to its more than eight million customers, which represents 40% of the peninsular
domestic market. Iberdrola has interests in companies in Argentina, Bolivia,
Brazil, Colombia, Chile and Guatemala that supply electricity, gas and
telecommunications to over ten million customers in those countries. Iberdrola
is also a participant in the consortia that acquired control of two other New
Holding Companies: Tele Leste Celular Participacoes S.A. and Telesp
Participacoes S.A.
NTT Mobile Communications Network, Inc. is a company fully dedicated to
telecommunications. NTT performs the following activities: (i) infrastructure
building and maintenance, (ii) development, maintenance, sale and leasing of
mobile telephone-related products and services, (iii) development, production
and sale of software related to mobile communication activities, (iv) sale of
communication equipment, and (v) research and consultancy related to
telecommunications.
Itochu Corporation is a Japanese company with a wide range of activities,
which include the production of raw material such as organic and synthetic
fibers, mining, food and beverages (alcoholic and non-alcoholic), fertilizers
and animal feed, wood, raw material for ceramic production and construction
materials, pulp and paper, rubber, leather and its derivatives, petroleum and
its derivatives, pharmaceutical and veterinary products, chemical products
(agrochemical and others), land and maritime transportation, forestry,
construction and generation and distribution of electrical power.
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 2.5 million common and preferred
shareholders.
The Preferred Shares commenced trading separately on the Brazilian stock
exchanges on September 21, 1998. The following table sets forth the reported
high and low closing sale prices for Preferred Shares of the Holding Company on
the Sao Paulo Stock Exchange for the periods indicated.
Nominal reais per
1,000 Preferred Shares
----------------------
High Low
---- ---
Third quarter 1998
(beginning September 21, 1998).................... 4.39 3.30
Fourth quarter 1998................................ 7.42 2.90
In the United States, the Preferred Shares trade in the form of ADSs, each
representing 5,000 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 TSD. At December
31, 1998, there were approximately 240 holders of record of ADSs. The following
table sets forth the reported high and low closing sales prices for ADSs on the
NYSE for the period indicated.
U.S. dollars per ADS
--------------------
High Low
---- ---
Fourth quarter 1998
(beginning November 16, 1998) ................... 29 15/16 17 5/8
The common shares and preferred shares of Telerj Celular have traded on the
Sao Paulo and Rio de Janeiro Stock Exchanges since May 18, 1998.
Trading on the Brazilian Stock Exchanges
Of Brazil's nine stock exchanges, the Sao Paulo Stock Exchange and the Rio
de Janeiro Stock Exchange are the most significant. During 1998, the Sao Paulo
Stock Exchange accounted for approximately 93% of the trading value of equity
securities on all Brazilian stock exchanges, and the Sao Paulo Stock Exchange
and the Rio de Janeiro Stock Exchange together accounted for approximately 99%
of the trading value of equity securities on all Brazilian stock exchanges.
Each Brazilian stock exchange is a nonprofit entity owned by its member
brokerage firms. Trading on each exchange is limited to member brokerage firms
and a limited number of authorized nonmembers. The Sao Paulo Stock Exchange and
the Rio de Janeiro Stock Exchange have two open outcry trading sessions each
day, from 10:30 a.m. to 1:30 p.m. and from 2:30 p.m. to 5:30 p.m., though the
Rio de Janeiro Stock Exchange has recently announced plans to convert its
operations to electronic trading. Trading is also conducted from 10:00 a.m. to
6:00 p.m. on an automated system on the Sao Paulo Stock Exchange and on the
National Electronic Trading System ("SENN"), a computerized system that links
the Rio de Janeiro Stock Exchange electronically with the seven smaller regional
exchanges. There are no specialists or market makers for the 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 R$194.4
billion. Substantially the same securities are listed on the Sao Paulo Stock
Exchange and on the Rio de Janeiro Stock Exchange. Although all the outstanding
shares of an exchange-listed company may trade on a Brazilian stock exchange, in
most cases less than half of the listed shares are actually available for
trading by the public, the remainder being held by small groups of controlling
persons that rarely trade their shares. For this reason, data showing the total
market capitalization of Brazilian stock exchanges tend to overstate the
liquidity of the Brazilian equity securities market.
The Brazilian equity market is relatively small and illiquid compared to
major world markets. In 1998, the combined daily trading volumes on the Sao
Paulo Stock Exchange and the Rio de Janeiro Stock Exchange averaged
approximately R$805.5 million. In 1998, the five most actively traded issues
represented approximately 61.5% of the total trading in the cash market on the
Sao Paulo Stock Exchange and approximately 67.2% of the total trading in the
cash market on the Rio de Janeiro Stock Exchange.
Trading on Brazilian stock exchanges by nonresidents of Brazil is subject
to certain limitations under Brazilian foreign investment legislation.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are regulated by the Comissao de Valores
Mobiliarios (the Brazilian Securities Commission or "CVM"), which has authority
over stock exchanges and the securities markets generally, and by the Central
Bank, which has, among other powers, licensing authority over brokerage firms
and regulates foreign investment and foreign exchange transactions. The
Brazilian securities market is governed by Law No. 6,385, as amended (the
"Brazilian Securities Law") and Law No. 6,404, as amended (the "Brazilian
Corporation Law").
Under the Brazilian Corporation Law, a company is either public, a
companhia aberta, such as the 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 such
payments or 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 are 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 1996 and 1997, 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 31
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, 1998, net income for the year ended
December 31, 1998, divisional equity as of December 31, 1996 and 1997 and income
before interest income, unallocated interest expense and taxes for the two years
ended December 31, 1996 and 1997.
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 have been allocated to their corresponding
income or expense caption in the Consolidated Statements of Income. Inflationary
gains or losses without a corresponding income or expense caption have been
allocated to other net operating income (expense). See Note 2(c) to the
Consolidated Financial Statements.
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 formations of the Holding Company and the Subsidiaries 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 businesses of the Predecessor Companies were transferred to
the Subsidiaries, at their indexed historical cost. The revenues and expenses
associated with such assets and liabilities were also allocated to the
Subsidiaries. For revenues and costs of services, separate records were
maintained historically for the cellular telecommunications businesses of the
Predecessor Companies, so actual amounts were allocated to the Subsidiaries.
Costs other than cost of service were allocated using methodologies described in
Note 2 to the Consolidated Financial Statements. The consolidated statements of
revenues and expenses and of net interdivisional cash distribution (receipt)
include the historical activity related to the assets and liabilities
transferred. The Consolidated Financial Statements are not necessarily
indicative of what the financial condition or the revenues and expenses of the
Company would have been if the cellular telecommunications businesses of the
Predecessor Companies had been separate legal entities before 1998. See
"Description of Business--Historical Background" and Note 2(b), to the
Consolidated Financial Statements.
Cash and certain nonspecific debt relating to the cellular
telecommunications businesses of the Predecessor Companies could not be
segregated from the Predecessor Companies prior to December 31, 1997, and such
amounts were not reflected in the Company's statement of financial condition
prior to January 1, 1998. As a result, interest income, unallocated interest
expense and income tax expense were not identified or reflected in the
Consolidated Financial Statements for any period prior to January 1, 1998.
Because these revenues and expenses are not included in the Consolidated
Financial Statements, historical income per share and dividend per share
information was not included in the table below for any period prior to January
1, 1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations for 1996, 1997 and 1998--Interest
expense."
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 its 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 assets which were spun-off from
Telebras to the Holding Company included, in addition to its investment in the
Subsidiaries, claims against the Subsidiaries that resulted in an increase of
R$389.1 million compared to the Company's historical divisional equity. See Note
2(b) 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.
As of December 31, 1997 and for the years ended December 31, 1996 and 1997,
the Consolidated Financial Statements present the consolidated financial
condition and revenues and expenses of the cellular telecommunications
businesses of the Predecessor Companies, which were spun off into the
Subsidiaries effective January 1, 1998. For 1996 and 1997, "minority interests"
reflects the interests of shareholders other than Telebras in the Predecessor
Companies. For 1998, "minority interests" reflect the interest of shareholders
other than the Holding Company in the Subsidiaries. At December 31, 1998, such
minority shareholders directly and indirectly owned 29.3% and 14.8% of the share
capital of Telerj Celular and Telest Celular, respectively.
<PAGE>
Selected Financial Information
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1996 1997 1998
---- ---- ---- ----
(thousands of reais) (1)
Income Statement Data:
<S> <C> <C> <C> <C>
Brazilian GAAP
Net operating revenue............................. 212,247 309,513 584,411 922,671
Cost of services.................................. (81,705) (119,799) (230,603) (431,679)
------- -------- -------- --------
Gross profit...................................... 130,542 189,714 353,808 490,992
Operating expenses:
Selling expense............................... (10,643) (17,713) (28,541) (150,689)
General and administrative expense............ (19,643) (30,475) (59,318) (61,864)
Other net operating income (expense).......... 4,893 4,562 (213) (7,896)
------- -------- -------- --------
Operating income before interest.................. 105,149 146,088 265,736 270,543
Allocated interest expense........................ (1,129) (13,855) (35,611)
------- -------- --------
Interest expense, net............................. (9,828)
--------
Operating income before interest income and
unallocated interest expense.................. 104,020 132,233 230,125
Operating income.................................. 260,715
Net nonoperating income........................... -- -- -- (637)
Employees' profit share........................... (20) (78) (669) (1,123)
------- -------- -------- --------
Income before interest income, unallocated
interest expense, taxes and minority interests 104,000 132,155 229,456
Income before minority interests and taxes........ 258,955
Income and social contribution taxes............ (52,951)
Income before minority interests................. 104,000 132,155 229,456 206,004
Minority interests............................... (17,190) (20,687) (61,994) (35,359)
------- --------- --------- ---------
Income before interest income, unallocated
interest expense and taxes.................... 86,810 111,468 167,462
======= ======== ========
Net income....................................... 170,645
=========
Earnings per thousand shares..................... 0.51
U.S. GAAP
Income before interest income, unallocated
interest expense and taxes................... 122,380 176,390
======== ========
Net income....................................... 165,307
========
Net income per thousand shares:
Common shares - basic........................ 0.50
Common shares - diluted...................... 0.50
Preferred shares - basic..................... 0.50
Preferred shares - diluted................... 0.50
</TABLE>
- --------------
(1) Information for 1996 and 1997 is presented in constant reais of December
31, 1997 purchasing power. Information for 1998 is presented in nominal
reais.
<TABLE>
<CAPTION>
At December 31,
---------------
1995 1996 1997 1998
---- ---- ---- ----
Balance Sheet Data: (thousands of reais , except per-share data)(1)
Brazilian GAAP
<S> <C> <C> <C> <C>
Property, plant and equipment, net................ 381,168 825,179 1,046,174 1,118,195
Total assets...................................... 391,339 855,862 1,172,792 1,483,412
Loans and financing - current portion ............ 15,315 285,536 313,828 9,626
Loans and financing - non current portion......... 55,277 12,252 146,171 25,178
Divisional equity................................. 294,301 334,937 460,962
Shareholders' equity.............................. 953,955
U.S. GAAP
Property, plant and equipment, net............................. 819,025 1,033,447 1,111,150
Total assets................................................... 851,739 1,164,265 1,484,502
Loans and financing - current portion.......................... 273,531 277,001 7,764
Loans and financing - non current portion...................... 12,252 143,134 25,178
Divisional equity.............................................. 331,440 454,638
Shareholders' equity........................................... 941,602
</TABLE>
- ------------
(1) Information for 1996 and 1997 is presented in constant reais of December
31, 1997 purchasing power. Information for 1998 is presented in nominal
reais.
Net operating revenue for 1994 was R$107.1 million. The Company has not
presented selected financial information as of and for the year ended December
31, 1994, because the accounting records for that year were not maintained in a
manner that would enable all costs, assets and liabilities to be segregated
between fixed and cellular telecommunications operations. The Company's cellular
telecommunications business in 1994 was in a developmental stage, with 89,886
subscribers at December 31, 1994, and has limited relevance to the Company's
current operations. The Company's management accordingly believes that the
omitted selected financial information as of and for the year ended December 31,
1994 would not be material to an understanding of the trends in the Company's
costs in the periods presented or in future periods.
Exchange Rates
The Holding Company 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 Holding Company's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Foreign Exchange and Interest Rate Exposure." The Holding Company
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.
Average for
Period Period-end Period (1) High Low
- ------ ---------- ---------- ---- ---
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
- ---------
(1) Average of the rates on the last day of each month in the period. Sources:
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 Holding Company and the eleven other 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 cellular service providers and
(c) one domestic and international long-distance service provider. In the
Breakup, certain assets and liabilities of Telebras, including 70.7% and 85.2%
of the total share capital of Telerj Celular and Telest Celular, respectively,
were transferred to the Holding Company.
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."
Effects of Changes in Presentation of Financial Statements in 1998
There are three 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 Fully separate operations of the Subsidiaries. The Subsidiaries
were created effective January 1, 1998, by splitting up the
Predecessor Companies to separate their cellular operations from
their fixed-line operations. For 1998, the Consolidated Financial
Statements reflect the operations of the Subsidiaries as fully
independent companies.
o For prior years, the Consolidated Financial Statements reflect
the cellular operations of the Predecessor Companies. Costs were
specifically identified where possible and divided accordingly
between fixed and cellular operations. Where specific
identification was not possible, costs were allocated between the
Predecessor Companies' fixed-line and cellular operations in
accordance with the methodologies set forth in Note 2(a) to the
Consolidated Financial Statements. It should not be assumed that
the financial condition and results of operations of the cellular
operations of the Predecessor Companies would have been the same
if they had been operated as independent businesses prior to
1998.
In preparing financial statements for years prior to 1998, it was
not possible to determine the amount of the Predecessor
Companies' cash and nonspecific debt that should be allocated to
the cellular operations, and there was no shareholders' equity
specifically attributable to the cellular operations. As a
result, the presentation of the Consolidated Financial Statements
is different for 1996 and 1997 than for 1998. In particular, for
1996 and 1997 the statement of revenues and expenses does not
include interest income or taxes and includes only the allocable
portion of interest expense, and it accordingly does not present
net income. See "Selected Financial Data" and Note 2(b) to the
Consolidated Financial Statements.
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 cellular
operations of the Predecessor Companies.
Upon its creation, the Holding Company received, in addition to
the shares of the Subsidiaries, certain assets of Telebras
consisting primarily of claims against the Subsidiaries. These
assets and the related liabilities of the Subsidiaries are
eliminated in consolidation. As a result, the consolidated
indebtedness of the Company as of December 31, 1998 is
substantially lower than the combined indebtedness shown in the
Consolidated Financial Statements as of December 31, 1997, while
the consolidated shareholders' equity of the Company at December
31, 1998 is substantially higher than the divisional equity at
December 31, 1997.
o Cessation of integral restatement method. Through December 31,
1997, the Consolidated Financial Statements have been restated to
recognize certain effects of inflation and restated in constant
reais of December 31, 1997 purchasing power. The restatement was
effected in accordance with Brazilian GAAP using the integral
restatement method prescribed by the CVM.
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 for 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(c) 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 results
of 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 results of operations also have been, and are
expected to continue to be, affected by the political and economic environment
in Brazil. 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 in the Region and its impact
on demand for telecommunications services, (ii) the cost and availability of
financing and (iii) the exchange rates between Brazilian and foreign currencies.
Competitors began providing telecommunications services in the Region in
competition with the Company in December 1998 and management expects that, as a
result, prices for cellular telecommunications services will decline and the
Company's operating margins will diminish. The scope of increased competition
and any adverse effects on the Company's results and market share will depend on
a variety of factors that cannot now be assessed with precision and are beyond
the Company's control. See "Description of Business--Competition."
Foreign Exchange and Interest Rate Exposure
The principal foreign exchange risk faced by the Company arises from its
U.S. dollar denominated indebtedness. At December 31, 1998, the Company had
R$34.8 million of indebtedness, primarily supplier credits, all of which was
denominated in U.S. dollars. The Company's revenues are earned almost entirely
in reais, and the Company has no material dollar-denominated assets. The Company
does not hedge its foreign currency exposure and, accordingly, any decrease in
the value of the real relative to the dollar could have a material adverse
effect on the Company. The Company also faces foreign exchange risk because
substantially all of its capital expenditures are incurred in dollars.
Devaluation of the real increases the cost in real terms of many of the
Company's capital expenditures.
The Company is exposed to interest rate risk as a consequence of its
floating rate debt and limited floating rate interest earning assets. At
December 31, 1998, 100% of the Company's indebtedness bore interest at floating
rates. The Company has not entered into derivative contracts or made other
arrangements to hedge against this risk. Accordingly, should market interest
rates (principally LIBOR), the Company's financing expenses will increase.
Year 2000 Compliance
Some computer programs use two digits rather than four to identify years,
which can cause them to treat references to the year 2000 as references to the
year 1900. Mistakes of this kind in Company computer programs running
date-sensitive applications could cause miscalculations or lead to a system
failure that would disrupt the Company's operations, resulting in a temporary
inability to process transactions, send invoices or engage in normal business
activities. "Year 2000 compliance" refers to preparing a system to respond to
problems of this nature upon the advent of the year 2000.
The majority of the Company's computer systems were recently acquired and,
according to the expectations of the Company and its outside consultants, the
Company's computer systems already address the year 2000 issue. The Company is
implementing its own software applications minimizing its dependence in the area
of information technology on the Predecessor Companies, as well as implementing
new versions of basic softwares. Furthermore, the Company is developing software
that will allow the sharing of information with third parties who have not fully
addressed the year 2000 issue in order to reduce or eliminate the impact of such
third parties' noncompliance on the Company. The Company is reviewing and
testing all of its major systems. Management expects that all of its internal
systems will be year 2000 compliant by the third quarter of 1999 and that the
cost of such compliance will be approximately R$0.77 million. Furthermore, the
Company is also analyzing its existing systems and believes these systems are
adequately prepared to face the year 2000 issue. However, the Company may be
affected by year 2000 problems to the extent that other entities not affiliated
with the Company are unsuccessful in achieving year 2000 compliance. Despite the
preventive measures taken by the Company, no assurances can be given that the
year 2000 issue will not have an adverse impact on the financial condition and
results of operations of the Company. At May 31, 1999, the Company had not
determined its most probable worst case scenarios in relation to the year 2000
or formulated contingency plans in respect of such scenarios.
Results of Operations for 1996, 1997 and 1998
The following table sets forth certain components of the Company's 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.
<TABLE>
<CAPTION>
Year ended December 31, Percentage change
------------------------------------- ------------------------
1996 1997 1998 1996-1997 1997-1998
-------- -------- -------- --------- ---------
(thousands of reais) (1)
<S> <C> <C> <C> <C> <C>
Net operating revenue...................... 309,513 584,411 922,671 88.8 57.9
Cost of services.......................... (119,799) (230,603) (431,679) 92.5 87.2
-------- -------- --------
Gross profit ............................. 189,714 353,808 490,992 86.5 38.8
Operating expenses:
Selling expense....................... (17,713) (28,541) (150,689) 61.1 428.0
General and administrative expense.... (30,475) (59,318) (61,864) 94.6 4.3
Other net operating income (expense).. 4,562 (213) (7,896) -- --
-------- -------- -------
Total............................ (43,626) (88,072) (220,449) 101.9 150.3
-------- -------- --------
Operating income before interest.......... 146,088 265,736 270,543 81.9 1.8
Interest expense, net (2)................. (13,855) (35,611) (9,828) 157.0 (72.4)
-------- -------- -------
Operating income (2)..................... 132,233 230,125 260,715 74.0 13.3
Net nonoperating income................... -- -- (637) -- --
Employees' profit share................... (78) (669) (1,123) 757.7 67.9
-------- -------- -------
Income before minority interests and 132,155 229,456 258,955 73.6 12.9
taxes (2)...........................
Income and social contribution taxes...... (52,951)
Minority interests........................ (20,687) (61,994) (35,359) 199.7 (43.0)
-------- -------- -------
Income before interest income,
unallocated interest expense and taxes. 111,468 167,462 -- 50.2 --
======== ========
Net income................................ 170,645
=======
</TABLE>
- ---------------------------------------
(1) Information for 1996 and 1997 is presented in constant reais of December 31,
1997 purchasing power. Information for 1998 is presented in nominal reais.
Columns may not add due to rounding.
(2) For 1996 and 1997, prior to the effective creation of the Subsidiaries on
January 1, 1998, the Company did not recognize interest income or taxes and
recognized only the portion of interest expense that was specifically
attributable to the cellular operations of the Predecessor Companies
Operating Revenues
The Company generates revenue from (i) usage charges, which include
measured service charges for outgoing calls and roaming and other similar
charges, (ii) monthly subscription charges, (iii) interconnection charges, which
are amounts charged by the Company to other cellular and fixed-line service
providers for use of the Company's network, (iv) sale of handsets, which are
amounts charged for the sale of cellular telephone sets, (v) activation fees,
which are one-time charges paid to obtain cellular telecommunications service,
and (vi) other charges, including charges for call forwarding, call waiting and
call blocking. 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 each of the years in the three-year period ended December 31,
1998.
<TABLE>
<CAPTION>
Year ended December 31, Percentage change
-------------------------------------- ------------------------
1996 1997 1998 1996-1997 1997-1998
------- -------- --------- --------- ---------
(thousands of reais)(1)
<S> <C> <C> <C> <C> <C>
Gross operating revenue:
Usage charges......................... 208,632 339,234 623,744 62.6 83.9
Monthly subscription charges.......... 86,057 154,707 328,141 79.8 112.1
Network usage charges................. 57,677 113,236 179,567 96.3 58.6
Sale of handsets...................... -- -- 89,215 -- --
Activation fees....................... 35,198 102,004 40,277 189.8 (60.5)
Other................................. 17,412 21,869 19,522 25.6 (10.7)
------- -------- --------
Gross operating revenue............... 404,976 731,050 1,280,466 80.5 75.2
Value-added and other indirect taxes.. (95,463) (146,639) (357,795) 53.6 144.0
------- -------- --------
Net operating revenue.................. 309,513 584,411 922,671 88.8 57.9
======= ======== ========
</TABLE>
- ------------------
(1) Information for 1996 and 1997 is presented in constant reais of December 31,
1997 purchasing power. Information for 1998 is presented in nominal reais.
Columns may not add due to rounding.
Net operating revenues increased by 57.9% in 1998 and 88.8% in 1997. The
growth in revenues over the three-year period was driven principally by
increases in the Company's subscriber base, as well as the sale of cellular
telephone sets beginning in the fourth quarter of 1998. The number of
subscribers at year end increased 40.8% to 772,141 subscribers in 1998 from
546,780 subscribers in 1997, which in turn represented a 146.0% increase from
222,921 subscribers in 1996. Average monthly revenues per subscriber were
R$105.00 in 1998, but are expected to decrease in 1999 as subscribers migrate to
less expensive plans and prepaid service.
Usage charges. Revenues from usage charges increased 83.9% in 1998 and
62.6% in 1997. The increases in 1997 and 1998 reflected increases in outgoing
traffic due to the growing subscriber base, which management expects will
continue in 1999. Average traffic per subscriber was stable, but management
expects it to decrease in 1999, particularly because prepaid service will
represent a growing proportion of the subscriber base. In 1997, the increase in
traffic was partially offset by a small reduction in Telerj Celular's average
VC1 rate and a reduction in real rates due to inflation.
Monthly subscription charges. Revenues from monthly subscription charges
increased by 112.1% in 1998 and 79.8% in 1997. The increase in 1998 reflected
the growth in the Company's subscriber base and a significant increase in the
ICMS tax rate in the State of Rio de Janeiro from 25% to 37% and in the State of
Espirito Santo from 17% to 25%. The increase in 1997 principally reflected the
growth in the average number of subscribers, offset in part by a reduction in
the monthly subscription charge and a reduction in real rates due to inflation.
Network usage charges. Revenues from network usage increased 58.6% in 1998
and 96.3% in 1997. In 1997 and 1998 the increase in network usage revenues
reflected an increase in the total number of subscribers and an increase in
telephone usage, resulting in an increase in the volume of calls received by the
Company's subscribers.
Sale of handsets. The Company began to sell cellular telephone sets in
December 1998. In 1998, the revenues from these sales were R$89.2 million. Sales
of cellular telephone sets are generally priced near cost, and do not result in
significant gross profits.
Activation fees. Revenues from activation fees declined by 60.5% in 1998
and increased by 189.8% in 1997. The decline in 1998 principally reflected a
decrease in the average price of activation fees from R$308 to R$80 by year-end.
The decline in activation fee revenues was also due to a reduction in the number
of new subscribers from 325,550 in 1997 to 223,670 in 1998. In 1999, management
expects that revenues from activation fees will continue to decline as a result
of increased competition and resultant changes in pricing. The increase in 1997
principally reflected an increase in the number of new subscribers, which was
offset in part by a reduction in real rates due to inflation.
Other. Revenues from other services decreased 10.7% in 1998, after
increasing 25.6% in 1997. The decrease in revenues from other services in 1998
principally reflected a decrease in the number of transfers of service from one
subscriber to another, a practice that is prevalent in the Rio de Janeiro
metropolitan area where demand for cellular telephone service is high. The
increases in 1997 reflected principally an increase in fees from the transfer
and service from one subscriber to another as well as an increase in fees
arising from the programming of new handsets when subscribers upgrade their
equipment.
Value-added and other indirect taxes. Value-added and other indirect taxes
increased 144.0% in 1998 and 53.6% in 1997. The increases reflect increases in
the Company's gross operating revenue during the period. The increase in 1998
also reflects an increase in the ICMS tax rate in the State of Rio de Janeiro
from 25% to 37% and in the State of Espirito Santo from 17% to 25%. Taxes on
operating revenues were 23.6% of gross operating revenues in 1996, 20.1% in 1997
and 27.9% in 1998.
Cost of Services
Cost of services increased 87.2% in 1998 and 92.5% in 1997. The gross
profit margin (gross profit as a percentage of net revenues) was 53.2% in 1998,
compared to 60.5% in 1997 and 61.3% in 1996. The decline in 1998 is principally
a result of the sale of handsets near cost, which contributed approximately
R$89.2 million to revenues. The following table sets forth certain components of
the Company's costs of services, 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.
<TABLE>
<CAPTION>
Year ended December 31, Percentage Change
------------------------------------- --------------------------
1996 1997 1998 1996-1997 1997-1998
------- ------- ------ ----------- -----------
(thousands of reais)(1)
<S> <C> <C> <C> <C> <C>
Cost of services:
Depreciation and amortization...... 43,284 69,066 115,626 59.6 67.4
Materials and services............. 49,605 77,398 97,076 56.0 25.4
Sale of handsets................... -- -- 87,076 -- --
Fixed-line network expenses........ 26,016 71,002 99,007 172.9 39.4
Fistel fees and other.............. -- 11,942 15,336 28.4
Rental fees and other.............. 136 327 14,512 140.4 --
Personnel.......................... 758 868 3,046 14.5 250.9
------- ------- ------
Total................................. 119,799 230,603 431,679 92.5 87.2
======= ======= =======
</TABLE>
- ---------------------------------------
(1) Information for 1996 and 1997 is presented in constant reais of December 31,
1997 purchasing power. Information for 1998 is presented in nominal reais.
Columns may not add due to rounding.
Depreciation and amortization. Depreciation and amortization expenses grew
throughout the 1996 to 1998 period, reflecting the expansion of the Company's
network. In 1999 such expenses will continue to grow as the Company expands its
network to meet demand for cellular services in the Region.
Materials and services. Materials and services include costs of materials
and services received from third parties and other telecommunications service
providers. Cost of materials and services increased 25.4% in 1998 and 56.0% in
1997. The increases in 1997 and 1998 principally reflected an increase in the
volume of calls subject to network usage charges payable to other cellular and
fixed-line telephone service providers. The increase in call volume in 1998 was
offset in part by a reduction in the costs of third party materials and
services, as the Company was able to benefit from economies of scale by making
purchases in conjunction with other telecommunication service providers
controlled by or affiliated with Telefonica Internacional S.A. and by a
reduction in costs achieved by a higher level of automation.
Purchase of handsets. During the fourth quarter of 1998, the Company
purchased cellular telephone handsets for resale. At the end of 1998 the cost of
these handsets was R$87.0 million.
Fixed-line network expenses. Fixed-line network expenses represent payments
for use of circuits between the Company's base stations and switching centers
and between the Company's network and the networks of the Predecessor Companies
and Embratel. Such expenses increased 39.4% in 1998 and 172.9% in 1997. In 1998,
the costs associated with an increase in usage of the Company's network were
offset in part by a negotiated reduction in the rate payable to the Predecessor
Companies. The increase in fixed-line network expenses in 1997 reflected
expansion of the Company's network in the State of Rio de Janeiro from 21
municipalities at year-end 1996 to 65 municipalities at year-end 1997.
Fistel fees and other. The Company recorded R$11.9 million and R$15.3
million in payments to Fistel in 1997 and 1998, respectively. The increase in
1998 reflects an increase in the number of subscribers and the expansion of the
network areas that are subject to Fistel. Prior to 1997, Fistel payments were
assessed directly against consumers of telecommunications services. Beginning in
1997, telecommunications service providers, including the Company, are required
to make Fistel payments.
Rental fees and other. Equipment rental fees and other infrastructure costs
increased to R$14.5 million in 1998 from R$0.3 million in 1997, which in turn
represented an increase from R$0.1 million in 1996. Prior to 1998, the costs of
the cellular business, including rental of base stations, were not fully
recognized and reflected only an allocation of a portion of the actual cost
related to the cellular operations of the Predecessor Companies.
Personnel. Personnel expenses increased from R$0.8 million in 1996 to R$0.9
million in 1997 and to R$3.0 million in 1998. The increase in 1997 was due
principally to an increase in the number of employees. The increase in 1998
principally reflects the costs associated with the conversion of independent
contractor employees to salaried employees of the Company, as well as an
increase in the total number of employees. Management expects that personnel
expenses will continue to increase significantly in 1999 as the Company
continues to hire additional employees in order to service its growing
subscriber base.
Operating Expenses
Selling expense. Selling expense increased 428.0% to R$150.6 million in
1998 from R$28.5 million in 1997, which in turn represented a 61.1% increase
from R$17.7 million in 1996. The increase in selling expense in each period
principally reflected bad debt expense, as discussed below. In 1998, the
increase in selling expense also reflected a significant increase in commissions
paid to dealers for new subscriptions, as a higher percentage of new subscribers
came through independent dealers than in prior years. In 1999, management
expects selling expense to continue to increase because of marketing costs
associated with the introduction of new service plans and a continued increase
in dealer commissions.
Bad debt expense in 1998 consisted of R$23 million in provisions and a
one-time write-off of R$81 million recognized directly as a loss. The provision
was R$8.3 million in 1997 and R$3.4 million in 1996. The increase in 1998 was
the result of a number of factors, including (i) decreases in the average annual
income of the Company's customers, (ii) increased consumer interest rates in
Brazil and its adverse impact on the ability of consumers to meet payment
obligations, (iii) increased accessibility of cellular telecommunications
services, (iv) migration of each Subsidiaries customer database from the billing
system at its respective Predecessor Company to the new billing system, and (v)
the inability of the Company to suspend service in a timely fashion as a result
of nonpayment, because of regulations established by the Programa Estadual de
Orientacao e Protecao ao Consumidor - PROCON, a federal consumer protection
agency. The Company expects that the level of bad debt expense as a percentage
of revenues will not increase in 1999, assuming the economic environment in the
Region remains stable. A deterioration in economic conditions, especially in the
State of Rio de Janeiro, would be likely to have an adverse effect on bad debt
expense. The Company recently initiated a number of practices to reduce the
level of overdue accounts receivable. The Company provisions 100% for accounts
receivable over 90 days past due and charges off immediately any account
receivable arising from fraud, although the amounts of such charge-offs were not
material during the periods under consideration.
General and administrative expense. General and administrative expenses
increased 4.3% in 1998 and 94.6% in 1997. The increase in expenses in 1998 was a
result of the growth of the Company's subscriber base and its business
generally, offset in part by the inclusion of the bad debt provisions for
December 1998 in selling expense. On December 2, 1998, in connection with the
split-up of the Predecessor Companies, the Company contracted with the
Predecessor Companies for the continued provision of certain services by their
employees, as well as the continued sharing of certain overhead costs. Since
1998, the Company has been developing its own independent administrative and
billing systems, and it has virtually ceased to rely on the Predecessor
Companies. The increase in 1997 was due principally to an increase in the
allocation to the Company of general and administrative personnel and overhead
expenses shared with the fixed-line divisions of the Predecessor Companies and
reflected the growth of the Company's business.
Other net operating income. The Company had other net operating expense of
R$7.9 million and R$0.2 million in 1998 and 1997, respectively, and other net
operating income of R$4.6 million in 1996. The 1998 increase in other net
operating expense principally reflects a R$4.7 million increase in sponsorships
and provisions for contingencies. The 1997 decrease in other net operating
income principally reflected a R$0.5 million increase in research and
development expenses and a R$3.8 million decrease in fines and interest received
from delinquent customers.
Interest Expense
The Company recognized net interest expense of R$9.8 million in 1998,
representing the net effect of interest income, interest expense and exchange
gain and loss. See Note 8 to Consolidated Financial Statements. Net interest
expense for 1998 includes net exchange loss of R$2.8 million, attributable
primarily to the effect of the devaluation of the real in the second half of
1998 on the Company's indebtedness, all of which is denominated in U.S. dollars.
Management anticipates a significant increase in net interest expense in 1999,
and expects to record significant losses on foreign exchange variation due to
the approximately 43% devaluation of the real during the first half of 1999.
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 cellular businesses. 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. Allocated interest expense increased 157.0%
in 1997 due to higher interest payments resulting from an increase in the
Company's average debt from R$138.1 million in 1996 to R$404.6 million in 1997
and an increase in average interest rates from 9.7% in 1996 to 15% in 1997. This
increase in allocated interest expense was offset in part by inflationary gains
resulting from the application of the constant currency method.
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, but is limited to 25% of total
proposed dividends. The Company has established two additional limits. The
Company has decided to limit employees' share of profits to the lower of (i) the
aggregate of the employees' December compensation in the appropriate year and
(ii) 50% of the Company's net income adjusted for dividends. Employees' profit
share was R$78 thousand, R$0.7 million and R$1.1 million in 1996, 1997 and 1998,
respectively, and was based on agreements with the labor unions representing the
employees.
Net Nonoperating Expense
Net nonoperating expense was R$0.6 million in 1998, principally reflecting
a loss on permanent asset disposals. There was no net nonoperating expense in
1996 or 1997.
Income and Social Contribution Taxes
Brazilian income taxes comprise federal income tax and the social
contribution tax. In 1998, the federal income tax rate was 25% and the social
contribution tax rate was 8%. The effective income tax rate before minority
interests was approximately 20%. The effective income tax rate was lower than
the statutory tax rate because the Company made distributions to its
shareholders in the form of interest on capital, which is deductible for tax
purposes.
The Company did not recognize income tax or social contribution expense in
the Consolidated Financial Statements for 1997 or 1996. See Note 2 to the
Consolidated Financial Statements.
Minority Interests
Minority interest in 1998 reflects the interest of minority shareholders in
the operating subsidiaries. Minority interest for 1996 and 1997 reflects the
interest of shareholders other than Telebras in the Predecessor Companies.
Liquidity and Capital Resources
The Company had R$35 million of total indebtedness at December 31, 1998.
The Company's indebtedness represented financing from suppliers for the purchase
of equipment, all of which is dollar denominated and secured by a pledge of the
equipment so financed. See Note 22 to the Consolidated Financial Statements.
The Company has budgeted R$377 million in 1999 capital expenditures.
Management expects to finance two-thirds of 1999 capital expenditures from
internally-generated cash and to finance the balance through borrowing. In the
first half of 1999, the Company issued approximately R$120 million in commercial
paper and expects to replace it with financing from export credit agencies.
Although the Company has not yet prepared a budget for capital expenditures for
the year 2000, management believes that such expenditures will be less than in
1999.
Substantially all the Company's start-up costs and initial capital
investments were financed by cash flows from the fixed-line telephone operations
of the Predecessor Companies. Accordingly, the Company's indebtedness does not
reflect the amount of debt the Company would have been required to incur to
build its current network had the Company been operated on a stand-alone basis
from the inception of the Predecessor Companies' cellular telecommunications
operations.
The Holding Company is required to distribute to its shareholders, either
as dividends or as tax deductible interest on capital, 25% of its adjusted net
income determined 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 noncumulative
preferred dividend on its preferred shares in an amount equal to 6% of the share
capital attributable to the preferred shares in accordance with 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 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.
The Company's participates in a multi-employer defined benefit plan that
covers the former employees of the Telebras System, and the Company is
contingently liable for the unfunded obligations of the plan. See Note 24 to the
Consolidated Financial Statements.
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 31 to the Consolidated Financial Statements.
Net income for 1998 is R$165.3 million under U.S. GAAP, compared to R$170.6
million under Brazilian GAAP. Shareholders' equity at December 31, 1998 is
R$941.6 million under U.S. GAAP, compared to R$954.0 million under Brazilian
GAAP. The differences between Brazilian GAAP and U.S. GAAP have the most
significant effects on net income and shareholders' equity are the treatment of
capitalized interest and, since January 1, 1998, the manner in which revenues
from activation fees are recognized.
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.
Approximately R$35 million of the Company's indebtedness is denominated in U.S.
dollars. The potential immediate loss to the Company that would result from a
hypothetical 10% change in foreign currency exchange rates would be
approximately R$3.5 million. In addition, if such a change were to be sustained,
the Company's cost of financing would increase in proportion to the change.
Interest Rate Risk
At December 31, 1998, the Company had approximately R$35 million in loans
and financing outstanding, boring interest at floating rates of interest
(primarily LIBOR-based). The Company invests its cash and cash equivalents (R$68
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$1.03 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 fluctuations for such financial
instruments as consistently unfavorable movements of all interest rates are
unlikely. See Note 22(d) 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 nine 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.................................................. Chairman December 8, 1998
Fernando Maria Fournon Gonzales-Barcia.................................... Alternate December 8, 1998
Joao Carlos de Almeida.................................................... Director December 8, 1998
Juan Carlos Ros Brugueras................................................. Alternate December 8, 1998
Juan Perea Saenz de Buruaga............................................... Director December 8, 1998
Esteban Serra Mont........................................................ Director December 8, 1998
Jose Manuel Romao Mateus.................................................. Director December 8, 1998
Jorge Hachiya Saeki....................................................... Director December 8, 1998
Orildo de Almeida Fontes.................................................. Director December 8, 1998
</TABLE>
Set forth below are brief biographical descriptions of the Directors.
Fernando Xavier Ferreira, 50 years old, is President of the Company and
Chairman 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 Participacoes S.A. and Embratel. From
November 1995 to July 1998, he served as a Board Member and President of
Telebras. From March to August 1998 he served as a Board Member and President of
the Holding Company, being reelected in December and September 1998,
respectively. From May to August 1998 he was the Executive President and a Board
Member of Embratel. He has also served as a member of the Consultative Board of
Anatel, and at the present is a member of the Latin American Committee of the
New York Stock Exchange and the Global Information Infrastructure Commission -
GIIC. In September, November and December of 1998, he was appointed Executive
President, Vice-President for Finance, Control and Resources and Vice President
of the Board of Directors of Telesp Participacoes S.A., respectively. He holds a
degree in electrical engineering from the Catholic University of Rio de Janeiro.
Fernando Maria Fournon Gonzales-Barcia, 40 years old, has served as a
member of the Board of Directors since August 1998. In addition, he has served
as Chairman of the Board of Directors of Telesp 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
Companhia Telefonica da Borda do Campo - CTBC, Tele Leste Celular Participacoes
S.A., Telesp 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.
Joao Carlos de Almeida, 56 years old, has served as a member of the
Board of Directors since December 1998. He has served as Manager of the Legal
Department of Telepar and General Counsel of Itaipu Binacional. He has also
served as Head of the Legal Department of Telebras and General Counsel of Telesp
Participacoes S.A. He holds a law degree from the Universidade Federal do
Parana.
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, Telesp 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 a major law firm in Barcelona, Spain. He holds a law degree from
the Central University of Barcelona.
Juan Perea Saenz de Buruaga, 35 years old, has served as a member of the
Board of Directors since December 1998. In addition, he 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 Telesp
Participacoes S.A. 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 a Master's in Business
Administration from Columbia University.
Esteban Serra Mont, 50 years old, has served as a member of the Board of
Directors since December 1998. He joined Iberdrola S.A. in 1980 and has served
as executive for management of International Investment of Iberdrola Energia
S.A., the company which manages the Iberdrola Group's international energy
activities and Spanish investments in water, gas and services, and
Vice-President of Litoral Gas in Argentina and Eletropaz in Bolivia. In addition
to his position as member of the Board of Directors of the Company, he is also a
member of the Boards of Directors of Eletroandina and Colbun in Chile, Cosern,
Coelba, CRT and Riogas in Brazil and Gas de Colombia. He holds a Ph.D. in
economics from the University of Barcelona.
Jose Manuel Romao Mateus, 49 years old, has served as Chief Executive
Officer and member of the Board of Telesp Celular S.A. since 1998. He also
serves as Chief Executive Officer and member of the Board of Telesp Celular
Participacoes S.A. since 1998. Between April and August of 1998, he served as a
member of the Board of Companhia Geral de Cale Cimento S.A. From 1997 until
1998, he served as Senior Consultant to the Company's Board of Directors. In
addition, he has served as President and Chief Executive Officer of TMN
(1994-1997), member of the Board of Directors of Portugal Telecom (1992-1994),
member of the Executive Committee of the Board of Directors of Associacao
Industrial Portuense (1988-1992), Deputy Shipping Director at Transinsular -
Transportes Maritimos Insulares S.A. (1986-1988), Field Engineer at Schlumberger
(1982-1984) and Maintenance and Production engineer with Merck, Sharp & Dohme
(1980-1982). He holds a degree in mechanical engineering from the Technical
University of Lisbon and a Master's degree in Business Management from Stirling
University in England.
Jorge Hachiya Saeki, 38 years old, has served as a member of the Board of
Directors since December 1998. He has been a partner at Seikie Advogados since
1997. He has served as tax supervisor of Ernst & Whitney from 1984 to 1997.
Previously he was served in the legal department of the Itochu Corporation in
Tokyo. He holds a law degree from the School of Law of the University of Sao
Paulo and has completed post-graduate work at Harvard Law School.
Orildo de Almeida Fontes, 59 years old, has served as a member of the
Board of Directors since December 1998. He has served with Banco de Brasil S.A.
in various positions including Deputy Chief of PRESI-COTEC (1990-1994), Deputy
Chief of the Comptrollers Officer (1987-1990) and Assistant to the Coordinator
of the Comptrollers Office (1980-1987). He has also served as Technical
Assistant of the Comptrollers Office (1978-1980) and Head of Service of the
branch office in Mato Dentro, Minas Gerais (1975-1978).
He holds a degree in economics from the University of Juiz de Fora.
Board of Executive Officers
The Board of Executive Officers consists of at least two and at most four
members, 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; Interim Vice-President for September 11, 1998(1)
Finance, Control and Resources
Jonas de Oliveira Junior ........................ Vice-President for Regulatory Matters; September 11, 1998
Interim Vice-President for
Corporate Planning
</TABLE>
- ---------------------------------------
(1) Fernando Xavier Ferreira was appointed Interim Vice-President for Finance,
Control and Resources on October 11, 1998.
Set forth below is a brief biographical description of the Executive
Officers not included above.
Jonas de Oliveira Junior, 50 years old, has served as an Executive Officer
since September of 1998. He also serves as Vice-President for Regulatory Matters
and for Corporate Planning of the Company and Telesp Participacoes S.A. He
served various functions at 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 Restructuring and
Privatization of Telebras. He holds an Electronic Engineering degree from the
Technological Institute of Aeronautics. He also holds a law degree from the
Centro Universitario de Brasilia - CEUB.
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$367.3 thousand.
For the year ended December 31, 1998, the officers and directors of the
Holding Company did not receive any pension, retirement or similar.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
None.
Item 13. Interest of Management in Certain Transactions
In December 1998 the Common and Preferred shareholders of the Holding
Company approved the Company's participation in a management contract with
Telefonica for the provision of certain services. As of August 1998, the Company
began paying management fees to Telefonica in an amount corresponding to
approximately 1% of net revenues. Such management fees are payable through
August 2003.
PART II
Item 14. Description of Securities to be Registered
None.
PART III
Item 15. Defaults upon Senior Securities
Not applicable.
Item 16. Changes in Securities, Changes in Security for Registered Securities
and Use of Proceeds
Not applicable.
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 Consolidated Financial Statements are filed as
part of this Form 20-F:
Independent Auditors' Reports
Consolidated Balance Sheet and Statement of Financial Condition
Consolidated Statements of Income and of Revenues and Expenses
Consolidated Statements of Cash Flows and of Net
Interdivisional Cash Distribution (Receipt)
Consolidated Statements of Changes in Financial Position
Consolidated Statements of Changes in Shareholders' Equity
and of Changes in Divisional Equity
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.
Amendment to the Deposit Agreement* previously filed with the
Holding Company's Registration Statement on September 18,
1998.
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.
- --------
* Incorporated by reference to the exhibit filed with the Holding Company's
Current Report on Form F-6 on November 6, 1998 (No. 333-9454).
<PAGE>
INDEX OF DEFINED TERMS
Page
----
AD..................................................5
ADRs...............................................20
ADSs...............................................20
American Depositary Shares.........................20
Anatel..............................................1
Anatel Decree......................................13
Annex IV Regulations...............................24
ATL.................................................9
Band A..............................................9
Band A Service Provider.............................9
Band B..............................................9
Band B Service Provider.............................9
Brazil.............................................ii
Brazilian Corporation Law..........................23
Brazilian GAAP.....................................ii
Brazilian Securities Law...........................23
Breakup.............................................2
Breakup of Telebras.................................2
CDMA................................................8
Cellular Region.....................................2
Center.............................................11
Central Bank.......................................17
Code...............................................27
COFINS..............................................6
Commercial Market..................................33
Common Shares......................................20
Company............................................ii
Concessions.........................................1
Consolidated Financial Statements..................ii
CPMF tax...........................................27
CTBC Telecom........................................9
Custodian..........................................23
CVM................................................23
Deposit Agreement..................................22
Depositary.........................................22
dollars............................................ii
DSL1................................................5
DSL2................................................5
e&p................................................28
Embratel............................................2
Federal Government..................................1
Fenattel...........................................11
Fittel.............................................11
Fixed-Line Region...................................2
Floating Market....................................33
Floating Market Rate...............................33
GDP.................................................2
General Telecommunications Law......................1
Holding Company....................................ii
IBGE................................................3
ICMS................................................6
IGP-DI.............................................15
IGP-M..............................................18
IMF................................................16
IOF tax............................................26
List of Obligations................................13
Minimum Law........................................13
NEC.................................................8
New Holding Companies...............................1
non-Brazilian holder...............................25
non-U.S. holder....................................28
off-peak calls......................................5
PCS................................................10
PIS.................................................6
Predecessor Companies...............................1
Preferred Shares...................................20
R$.................................................ii
reais..............................................ii
real...............................................ii
Real Plan..........................................16
Region..............................................1
Registered Capital.................................27
Rio de Janeiro Stock Exchange......................21
Sao Paulo Stock Exchange...........................21
SENN...............................................22
Sistel.............................................11
Subsidiaries.......................................ii
Telebras............................................1
Telebras System.....................................1
Telecommunications Regulations......................1
Telefonica.........................................21
Telefonica Consortium...............................2
Telepar............................................44
Telerj Celular.....................................ii
Telest Celular.....................................ii
TJLP...............................................26
U.S. dollars.......................................ii
U.S. GAAP..........................................29
U.S. holder........................................27
US$................................................ii
VC1.................................................5
VC2.................................................5
VC3.................................................5
<PAGE>
TECHNICAL GLOSSARY
The following explanations are not intended as technical definitions, but
to assist the general reader to understand certain terms as used in this Annual
Report.
Access charge: Amount paid per minute charged by network operators for the
use of their network by other network operators. Also known as an
"interconnection charge" or "network usage charge."
Access gates: The points of interface between the network equipment (either
dedicated or switched) and the transmission media that connect network equipment
to the end user. The quantity of service is directly related to the quantity of
network access gates.
AMPS (Advanced Mobile Phone Service): An analog cellular telecommunications
service standard utilizing the 850 MHz band, in use in North America, parts of
South America, Australia and various other areas.
Analog: A mode of transmission or switching which is not digital, e.g., the
representation of voice, video or other modulated electrical audio signals which
are not in digital form.
Analog Base Station: A radio transmitter/receiver that maintains
communications with the analog cellular telephones within a given cell.
Analog network: A network using analog technology with circuit switching,
capable of connecting one user with all the users, but with limited transmission
capacity.
ATM (Asynchronous Transfer Mode): A broadband switching technology that
permits the use of one network for different kinds of information (e.g., voice,
data and video).
Automatic international roaming: A service which permits a subscriber to
use his or her cellular telephone on a foreign cellular service provider's
network. The subscriber may receive calls made to the subscriber's regular
cellular telephone number (such calls are "automatically" passed to the foreign
service provider's network).
Band A Service Provider: A former Telebras operating subsidiary that has
been granted a concession to provide cellular telecommunications services in a
particular area within a radio spectrum frequency range referred to by Anatel as
"Band A."
Band B Service Provider: A cellular service provider that has been granted
a concession to provide cellular telecommunications services in a particular
area within a radio spectrum frequency range referred to by Anatel as "Band B."
Base station: A radio transmitter/receiver that maintains communications
with the cellular telephones within a given cell. Each base station in turn is
interconnected with other base stations and with the public switched telephone
network.
Broadband services: Services characterized by a transmission speed of 2
Mbit/s or more. According to international standards, these services are divided
into two categories: (i) Interactive services, including
videotelephone/videoconferencing (both point-to-point and multipoint);
videomonitoring; interconnection of local networks; file transfer; CAD;
high-speed fax; e-mail for moving images or mixed documents; broadband
videotext; video on demand; retrieval of sound programs or fixed and moving
images; and (ii) Broadcast services, such as sound programs, television programs
(including high-definition TV and pay TV) and selective document acquisition.
BTS: Is a base station for digital cellular telecommunications.
CATV (Cable television): Cable or fiber-based distribution of TV programs.
CDMA (Code Division Multiple Access): A standard of digital cellular
telecommunications technology.
Cell: The geographic area covered by a single base station in a cellular
telecommunications system.
Cell splitting: The process of dividing cells into smaller coverage areas
by reducing the power output and the antenna height of the base station
transmitter. Cell splitting increases capacity in a particular area by allowing
for the further reuse of frequencies by a cellular telecommunications system.
Cellular service: A mobile telecommunications 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.
Channel: One of a number of discrete frequency ranges utilized by a base
station.
Digital: A mode of representing a physical variable such as speech using
digits 0 and 1 only. The digits are transmitted in binary form as a series of
pulses. Digital networks allow for higher capacity and higher flexibility
through the use of computer-related technology for the transmission and
manipulation of telephone calls. Digital systems offer lower noise interference
and can incorporate encryption as a protection from external interference.
Digital Base Station: A radio transmitter/receiver that maintains
communications with the digital cellular telephones within a given cell.
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.
Home Location Register (HLR): Is a system that monitors the most recent
recorded position of a substation while inside the region.
Internet: A collection of interconnected networks spanning the entire
world, including university, corporate, government and research networks from
around the globe. These networks all use the IP (Internet Protocol)
communications protocol.
ISDN (Integrated Services Digital Network): A system in which several
services (e.g., speech and data) may be simultaneously transmitted end-to-end in
digital form.
Leased high-speed data communication: The digital exchange of information
at speeds exceeding 64 Kbps transmitted through mediums that are leased to users
for their exclusive use.
Local loop: The system used to connect the subscriber to the nearest
switch. It generally consists of a pair of copper wires, but may also employ
fiber-optic circuits, microwave links or other technologies.
Manual international roaming: A service that permits a subscriber to use
his or her cellular telephone on a foreign cellular service provider's network.
The subscriber may only receive calls made to a temporary number issued to the
subscriber by the foreign service provider for use while roaming.
Microcells: A small cell covered by a low-power base station. Microcells
can cover small areas such as within a single building.
Mini-Base Station: A radio transmitter/receiver that maintains
communications with the cellular telephones within a limited area.
Mini-Analog Base Station: A radio transmitter/receiver that maintains
communications with the analog telephones within a limited area.
Mini-Digital Base Station: A radio transmitter/receiver that maintains
communications with the digital cellular telephones within a limited area.
Network: An interconnected collection of elements. In a telephone network,
these consist of switches connected to each other and to customer equipment. The
transmission equipment may be based on fiber optic or metallic cable or
point-to-point radio connections.
Network usage charge: Amount paid per minute charged by network operators
for the use of their network by other network operators. Also known as an
"access charge" or "interconnection charge."
Optical fiber: A transmission medium which permits extremely high
capacities. It consists of a thin strand of glass that provides a pathway along
which waves of light can travel for telecommunications purposes.
Packet-switched data communication services: Data services based on
parceling or breaking the data stream into packets and switching the individual
packets. Information transmitted is segmented into cells of a standardized
length, which are then transmitted independently of one another, allowing
maximization of available capacity and usage of a single transmission path for
multiple communications. The cells are then reassembled upon reaching their
destination.
PBX (Private Branch Exchange): Telephone switchboard for private use, but
linked to the national telephone network.
Penetration: The measurement of the take-up of services. At any date, the
penetration is calculated by dividing the number of subscribers by the
population to which the service is available and multiplying the quotient by
100.
Private leased circuits: Voice, data or image transmission mediums leased
to users for their exclusive use.
PSTN (Public Switched Telephone Network): The public telephone network that
delivers basic telephone service and, in certain circumstances, more advanced
services.
Repeaters: A device that amplifies an input signal for retransmission.
Roaming: A function that enables subscribers to use their cellular
telephone on networks of service providers other than the one with which they
signed their initial contract.
Satellite services: Satellites are used, among other things, for links with
countries that cannot be reached by cable or to provide an alternative to cable
and to form closed user networks.
SDH (Synchronous Digital Hierarchy): A hierarchical set of digital
transport structures, standardized for the transport of suitably adapted
payloads over physical transmission networks.
Sectorization: The process of dividing cells into sectors by using
directional antennae at the base station. Sectorization reduces co-channel
interference which permits smaller cells and increases network capacity.
Switch/Switching Centers: 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.
Visitor Location Register (VLR): Is a system that monitors the recorded
position of a cellular user roaming in the Region.
<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.
TELE SUDESTE CELULAR 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>
TELE SUDESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
CONTENTS
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 Sheet and Statement of
Financial Condition............................................. F-4
Consolidated Statements of Income and of Revenues
and Expenses.................................................... F-5
Consolidated Statement of Changes in Financial
Position........................................................ F-6
Consolidated Statements of Changes in Shareholders'
Equity and Changes in Divisional Equity......................... F-7
Consolidated Statements of Cash Flows and of Net
Interdivisional Cash Distribution (Receipt)..................... F-8
Notes to the Consolidated Financial Statements..... F-9 through F-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Tele Sudeste Celular Participacoes S.A.:
(1) We have audited the accompanying consolidated balance sheet of Tele Sudeste
Celular 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 Tele
Sudeste Celular 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 31 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 21, 1999 (except for notes 25 and 30 as to Arthur Andersen S/C
which the date is May 31, 1999)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Tele Sudeste Celular Participacoes S.A.
Brasilia - DF
We have audited the accompanying consolidated statements of financial
condition of Tele Sudeste Celular Participacoes S.A. as of December 31, 1997,
and the related consolidated statements of revenues and expenses, net
interdivisional cash distribution (receipt) and changes in divisional 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 consolidated 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.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in Brazil and on the
basis set out in Note 2 to the consolidated financial statements. Accordingly,
interest income, unallocated interest expense, income tax expense and the
related assets and liabilities are not included in the consolidated financial
statements.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Tele Sudeste Celular Participacoes S.A. as of December 31, 1997, and
its revenues and expenses and net interdivisional cash distribution (receipt)
for each of the years in the two-year period ended December 31, 1997, 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 revenues and expenses of the year ended December 31,
1997 and the divisional equity as of December 31, 1997 to the extent summarized
in Note 31 of the consolidated financial statements.
KPMG Auditores Independentes
July 17, 1998
Brasilia, Brazil
<PAGE>
TELE SUDESTE CELULAR PARTICIPACOES S.A.
(See notes 1 and 2)
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 1997
(In thousands of Brazilian Reais-R$)
<TABLE>
<CAPTION>
December 31
--------------------------------
Note 1997 1998
-------- =============== --------------
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents.......................................... 12 37,463 84,260
Trade accounts receivable, net..................................... 13 85,653 199,746
Deferred and recoverable taxes..................................... 14 2,566 45,175
Other assets....................................................... 15 923 34,594
-------------- --------------
Total current assets................................................. 126,605 363,775
-------------- --------------
Noncurrent assets:
Other assets....................................................... 15 13 1,390
-------------- --------------
Total noncurrent assets.............................................. 13 1,390
-------------- --------------
Permanent assets:
Investments........................................................ - 52
Property, plant and equipment, net................................. 16 1,046,174 1,118,195
-------------- --------------
Total permanent assets............................................... 1,046,174 1,118,247
-------------- --------------
Total assets......................................................... 1,172,792 1,483,412
-------------- --------------
Current liabilities:
Payroll and related accruals....................................... 17 2,868 5,557
Accounts payable and accrued expenses.............................. 18 38,969 144,410
Taxes other than income taxes...................................... 19 3,670 46,342
Dividends payable.................................................. 20 - 76,007
Income taxes....................................................... 10 3,698 5,961
Loans and financing................................................ 22 313,828 9,626
Provision for contingencies........................................ 23 531 1,729
Other liabilities.................................................. 21 938 1,123
-------------- --------------
Total current liabilities............................................ 364,502 290,755
-------------- --------------
Noncurrent liabilities:
Income taxes....................................................... 10 40,637 35,612
Loans and financing................................................ 22 146,171 25,178
Provision for contingencies........................................ 23 - 7
-------------- --------------
Total noncurrent liabilities......................................... 186,808 60,797
-------------- --------------
Minority interest.................................................... 160,520 177,774
-------------- --------------
Divisional equity.................................................... 460,962 -
Shareholders' equity
Share capital...................................................... 25a 306,458
Income reserves.................................................... 25b 90,765
Retained earnings.................................................. 556,732
--------------
Total shareholders' equity........................................... 953,955
--------------
Funds for capitalization:
Other funds........................................................ 131
--------------
Total funds for capitalization....................................... 131
-------------- --------------
Total liabilities and divisional equity /shareholders' equity....... 1,172,792 1,483,412
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
TELE SUDESTE CELULAR PARTICIPACOES S.A.
(See Notes 1 and 2)
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31,
1998, AND OF REVENUES AND EXPENSES FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996
(In thousands of Brazilian Reais-R$ - except earnings per thousand shares)
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------
Note 1996 1997 1998
--------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net operating revenue.................................. 4 309,513 584,411 922,671
Cost of services....................................... 5 (119,799) (230,603) (431,679)
-------------- -------------- --------------
Gross profit........................................... 189,714 353,808 490,992
Operating expenses:
Selling expense..................................... 6 (17,713) (28,541) (150,689)
General and administrative expense (30,475) (59,318) (61,864)
Other net operating income (expense)................ 7 4,562 (213) (7,896)
-------------- -------------- --------------
Operating income before interest....................... 146,088 265,736 270,543
Allocated interest expense............................. 8 (13,855) (35,611) -
Interest expense, net.................................. 8 - - (9,828)
-------------- -------------- --------------
Operating income, before interest income and unallocated
Interest expense.................................... 132,233 230,125 -
Operating income....................................... - - 260,715
Net nonoperating expense............................... 9 - - (637)
Employees' profit share................................ (78) (669) (1,123)
-------------- -------------- --------------
Income before interest income, unallocated interest
Expense, taxes and minority interests.............. 132,155 229,456 -
Income before minority interests and taxes............. - - 258,955
Income and social contribution taxes................... 10 - - (52,951)
Minority interests..................................... (20,687) (61,994) (35,359)
-------------- -------------- --------------
Income before interest income, unallocated interest
Expense and taxes.................................. 111,468 167,462 -
-------------- --------------
Net income ............................................ 170,645
--------------
Shares outstanding at the balance sheet date (thousands) 334,399,028
--------------
Earnings per thousand shares outstanding at the balance
sheet date (Brazilian Reais).................... 0.51
--------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
TELE SUDESTE CELULAR 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$)
SOURCE OF FUNDS:
From operations:
Items not affecting working capital:
Net income........................................ 170,645
Depreciation...................................... 121,652
Loss on permanent asset disposals................. 648
Financial charges on long-term items.............. 5,172
Minority interest................................. 35,359
Reserve for contingencies......................... 7
Interest on construction in progress.............. (7,052)
----------------
Total from operations.......................... 326,431
From third parties:
Additional net assets received on the
breakup of Telebras................................. 389,058
Increase in funds for capitalization................ 131
--------------
Total sources.................................. 715,620
===============
APPLICATIONS OF FUNDS:
Dividends proposed.................................. 85,312
Transfers from long-term to current liabilities..... 133,833
Increase in non current assets...................... 1,377
Additions to permanent assets....................... 184,181
----------------
Total applications............................. 404,703
================
INCREASE IN WORKING CAPITAL.................................. 310,917
================
REPRESENT BY:
CURRENT ASSETS AT YEAR END................................... 363,775
CURRENT LIABILITIES AT YEAR END.............................. (290,755)
----------------
Working capital at year end.................................. 73,020
Working capital at the beginning of the year................. (237,897)
----------------
Increase in working capital.................................. 310,917
================
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
TELE SUDESTE CELULAR PARTICIPACOES S.A.
(See notes 1 and 2)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR
ENDED DECEMBER 31, 1998 AND CHANGES IN DIVISIONAL EQUITY FOR THE
YEARS ENDED DECEMBER 31, 1996 AND 1997
(In thousands of Brazilian Reais-R$)
<TABLE>
<CAPTION>
Shareholders' Equity
---------------------------------------------------------------
Income reserves
-----------------------
Unrealized
Divisional Share Legal income Retained
Equity Capital Reserve reserve earnings Total
------ ------- ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995..................... 244,653 - - - - 244,653
Income before interest income, unallocated
Interest expense and taxes.................. 111,468 - - - - 111,468
Capitalized interest............................. 19,067 - - - - 19,067
Deferred tax on full indexation.................. (19,487) - - - - (19,487)
Net interdivisional distribution................. (31,131) - - - - (31,131)
Minority interests effects other than on income.. 10,367 - - - - 10,367
------- ------- ------- ------- -------- -------
Balance at December 31, 1996..................... 334,937 - - - - 334,937
Income before interest income, unallocated
Interest expense and taxes................... 167,462 - - - - 167,462
Capitalized interest............................. 18,806 - - - - 18,806
Deferred tax on full indexation.................. (24,848) - - - - (24,848)
Net interdivisional receipt...................... 3,163 - - - - 3,163
Minority interests effects other than on income.. (38,558) - - - - (38,558)
------- ------- ------- ------- -------- -------
Balance at December 31, 1997..................... 460,962 - - - - 460,962
Additional net assets received on the breakup of
Telebras...................................... 389,058 - - - - 389,058
Allocation between accounts approved by
Shareholders on the breakup of Telebras...... (850,020) 306,458 9,440 160,736 373,386 -
------- -------- ------- ------- -------- -------
Balance at May 22, 1998 after the breakup of
Telebras...................................... - 306,458 9,440 160,736 373,386 850,020
Consolidation adjustments:
Capitalized interest.......................... - - - - 2,637 2,637
Fiscal incentives............................. - - - - 45 45
Net income....................................... - - - - 170,645 170,645
Transfer to reserves............................. - - 9,169 - (9,169) -
Realization of reserves.......................... - - - (88,580) 88,580 -
Dividends........................................ - - - - (69,392) (69,392)
------- ------- ------- ------- -------- --------
Balance at December 31, 1998..................... - 306,458 18,609 72,156 556,732 953,955
======== ======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
TELE SUDESTE CELULAR PARTICIPACOES S.A.
(See notes 1 and 2)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998,
AND OF NET INTERDIVISIONAL CASH DISTRIBUTION (RECEIPT) FOR THE
YEARS ENDED DECEMBER 31, 1997 AND 1996
(In thousands of Brazilian Reais-R$)
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------
1996 1997 1998
-------- ------- -------
Operating activities:
<S> <C> <C> <C>
Net income.............................................. - - 170,645
Income before interest income, unallocated interest expense
And taxes............................................. 111,468 167,462 -
Adjustments to reconcile to cash provided by operating
Activities:
Depreciation........................................... 43,290 69,303 121,652
Minority interests.................................... 20,687 61,994 35,359
Loss on permanent asset disposals..................... - - 648
Allowance for doubtful accounts....................... 3,441 8,251 104,031
(Increase) in trade accounts receivable, gross (16,720) (70,785) (218,124)
(Increase) decrease in taxes receivable............... (4,873) 2,307 (42,609)
(Increase) decrease in other current assets.......... (2,338) 1,746 (33,749)
(Increase) decrease in other noncurrent assets........ (22) 9 (1,377)
Increase in payroll and related accruals............. 258 1,225 2,689
Increase (decrease) in accounts payable and accrued
Expense............................................ 112,984 (95,030) 93,489
Increase (decrease) in taxes other than income taxes.. 3,876 (4,201) 42,672
Increase in other current liabilities................. 58 860 185
Increase in accrued interest.......................... 10,699 27,859 33,168
Increase (decrease) in income taxes................... - - (2,762)
Increase (decrease) in provisions for contingencies... 60 440 1,205
------- -------- -------
282,868 171,440 307,122
======= ======== =======
Investing activities
Additions to property, plant and equipment.............. (467,617) (246,392) (184,121)
Capitalized interest.................................... (617) (25,100) (7,052)
Proceeds from asset disposals........................... - - 22
------- -------- -------
(468,234) (271,492) (191,151)
======= ======== =======
Financing activities:
Loans repaid............................................ (3,616) (454,412) (75,395)
New loans obtained...................................... 220,113 588,764 4,221
Cash received from spin-off of Telebras................. - - 2,000
------- -------- -------
216,497 134,352 (69,174)
======= ======== =======
Increase (decrease) in cash and cash equivalents........... 31,131 34,300 46,797
Cash and cash equivalents at beginning of year............. - - 37,463
Net interdivisional cash (distribution) receipt............ (31,131) 3,163 -
------- -------- -------
Cash and cash equivalents at end of year................... - 37,463 84,260
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
<PAGE>
1. Operations and background
Beginning in 1995, the federal government of Brazil ("the Federal
Government") undertook a comprehensive reform of the Brazilian regulation of the
telecommunications industry. In July 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
consolidated into the twelve separate groups (the "New Holding Companies"). 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, Tele Sudeste
Celular Participacoes S.A.
(the "Holding Company") was formed.
Tele Sudeste Celular Participacoes S.A. was formed on May 22, 1998, through
the spin-off of certain assets and liabilities of Telebras, including 70.7% and
85.2% of the share capital of Telerj Celular S.A. and Telest Celular S.A.,
respectively. Until August 4, 1998, the Companies were controlled by the Federal
Government. On July 29, 1998, the Federal Government sold to twelve buyers (the
"New Controlling Shareholders") its rights to receive shares of the twelve New
Holding Companies upon the distribution of such shares. In connection with this
sale, the Federal Government assigned to the New Controlling Shareholders
substantially all its economic and voting rights with respect to the New Holding
Companies and, as a consequence, effective August 4, 1998 the New Controlling
Shareholders control the New Holding Companies.
Telerj Celular S.A. and Telest Celular S.A. were formed on January 5, 1998
and subsequently received on January 30, 1998 from Telecomunicacoes do Rio de
Janeiro S.A. ("Telerj") and Telecomunicacoes do Espirito Santo S.A. ("Telest")
the assets and liabilities comprising their respective cellular
telecommunications services ("the "Subsidiaries"). Tele Sudeste Celular
Participacoes S.A. and its Subsidiaries (the "Companies") are the primary
suppliers of cellular telecommunications services in the states of Rio de
Janeiro and Espirito Santo under the terms of concessions granted by the Federal
Government on November 4, 1997 (the "Concessions"). The Concessions will expire
on November 30, 2005 for Telerj Celular S.A. and on November 30, 2008 for Telest
Celular S.A., and may be renewed at the discretion of Anatel (as defined below)
for a further term of 15 years. Through their predecessors Telerj and Telest,
the Companies have provided cellular telecommunications services in the states
of Rio de Janeiro and Espirito Santo since December 1990 and November 1993
respectively.
The Companies' businesses, including the service they may provide and the
rates they charge are regulated by 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.
<PAGE>
2. Presentation of the financial statements
a. Inclusion of the New Holding Company Tele Sudeste Celular 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 cellular telecommunication businesses of
Tele Sudeste Celular Participacoes S.A. and its subsidiaries (Telerj Celular
S.A. and Telest Celular S.A.). The portion of equity and net income attributable
to shareholders other than Tele Sudeste Celular Participacoes 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 29.3% and
14.8% of share capital of Telerj Celular S.A. and Telest Celular S.A.,
respectively.
Tele Sudeste Celular 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 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 balance of capital, reserves and
retained earnings, together with the corresponding assets and liabilities for
the formation of Tele Sudeste Celular 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. The assets which were spun-off from Telebras, in
addition to its investment in the operating subsidiaries, resulted in an
increase of R$389,058 in relation to the Company's historical divisional equity.
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 legal structure of the spin-off as allowed under Brazilian
GAAP, upon formation, Tele Sudeste Celular 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 shareholder's equity of R$850,020 included
retained earnings of R$373,386. The distributable reserves of Tele Sudeste
Celular Participacoes S.A. are composed of retained earnings allocated in the
cisao plus 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 that are
participating in the government's privatization program a three month delay
between the accounting base date for a spin-off and the date on which the
shareholders' meeting approves the spin-off, including the related accounting
basis for the net assets spun-off. As a result, the consolidated financial
statements of the Holding Company includes the results of operations and changes
in balance sheet amounts of the subsidiaries from January 1, 1998 and the
effects of the cash and other assets ( principally intercompany receivables)
allocated from Telebras from March 1, 1998.
The presentation of the consolidated financial statements is consistent
with the presentation of the published financial statements of Tele Sudeste and
its predecessors, from which the financial information was extracted, except for
certain reclassifications and changes in terminology within the consolidated
balance sheets and the consolidated statement 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 statements of
the financial condition and revenues and expenses of the combined cellular
telephone businesses of Telerj and Telest have been presented. The portion of
consolidated equity and income before interest income, unallocated interest
expense and taxes of the Companies attributable to shareholders of the Companies
other than Telebras at December 31, 1997 and for each of the two years ended
December 31, 1996 and 1997 is reflected as "minority interests" in the
consolidated financial statements. At December 31, 1997, such minority
shareholders owned 29.3% and 14.8% of the share capital of Telerj and Telest,
respectively.
The formation of the Holding Company and Telerj Celular S.A. and Telest
Celular S.A. has 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 telecommunication businesses of Telerj and Telest
were transferred to the Companies at their indexed historical cost. The revenues
and expenses associated with such assets and liabilities were allocated to the
Companies. Separate records of revenues and costs of services of the cellular
telecommunication businesses of Telerj and Telest were maintained historically.
Accordingly, actual amounts were allocated for the periods included herein. The
consolidated statements of revenues and expenses and net interdivisional cash
distribution (receipt) of 1996 and 1997 have been prepared to include the
historical activity related to the assets and liabilities transferred. The
consolidated financial statements are not necessarily indicative of what would
have been the financial condition and revenues and expenses of the Companies as
of December 31, 1997 and for the two year period ended December 31, 1997 had the
cellular telecommunication businesses of Telerj and Telest been separate legal
entities during such periods.
With respect to costs (other than costs of services) of 1996 and 1997, 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. Those allocation criteria
included: square footage (in relation to land and building related expenses),
number of terminals (in relation to general management, accounting, data
processing, legal department and other general staff functions), number of
employees (in relation to the human resource department), number of requisitions
issued (in relation to office material costs) and miles driven (in relation to
certain transportation costs). Management believes that the amounts included in
the consolidated statements of revenues and expenses fairly reflect the income
before interest income, unallocated interest expense and taxes of the
businesses.
Prior to December 31, 1997 cash and certain non-specific debt could not be
segregated from Telerj and Telest. Accordingly, these amounts have not been
included in the consolidated financial statements. Additionally, interest income
and certain interest expense relating to the cellular telecommunication
businesses could not be identified. Consequently, income tax expense and related
liabilities do not appear in the consolidated financial statements of 1996 and
1997.
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 consolidated financial statements of Tele
Sudeste and its predecessors 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 Company applied the constant
currency method 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 Telerj
and Telest, 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:
Annual
Period Index 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$19,487 and R$24,848 in 1996 and 1997, respectively,
was recorded directly against divisional equity.
d. Divisional equity
As discussed in Note 1, the Companies were formed as a result of the
specific identification and spin-off of assets, liabilities and revenues and
expenses comprising the cellular telecommunication businesses of Telerj and
Telest. Since Tele Sudeste Celular Participacoes S.A. did not exist prior to
January 1, 1998 no individual capital structure was maintained. Consequently,
the net assets contributed have been shown as "divisional equity" in the
consolidated balance sheets. Additionally, consolidated statements of changes in
divisional equity have been provided, which show the changes in the divisional
equity for the years ended December 31, 1996 and 1997.
e. Consolidated statements of net interdivisional cash flows
Because it was not possible to segregate the cash balances for the cellular
telecommunication businesses prior to December 31, 1997 a traditional statement
of cash flows could not be prepared for the periods presented. In lieu of
detailing the beginning and ending cash and cash equivalent balances, and the
net change in cash and cash equivalents between years, the net cash transferred
to/from the fixed line telecommunication businesses of Telerj and Telest has
been presented as "Net interdivisional cash distribution (receipt)" in the
consolidated statements of cash flows for the years ended December 31, 1996 and
1997.
At December 31, 1997 cash and cash equivalents of R$37,463 were allocated
from Telerj and Telest to the Companies to meet future estimated working capital
requirements.
f. Principles of Consolidation
These consolidated financial statements include the financial records of
the Holding Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated.
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 the 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 revenues and expenses/statement of income as they occur.
e. Inventory
Inventories are stated at the lower of average cost or replacement value
and are included within other assets on the Balance sheets. Inventories are
comprised mainly of cellular phones to be sold to operator stores and agents.
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 16(b).
Interest, calculated 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 cellular telephone services consist of subscription charges, usage
charges, activation fees, network usage charges and charges for maintenance and
other customer 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. Revenues from activation fees are
recognized upon the activation of a customer's services.
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.
o. Pension and post-retirement benefits
The Companies participate in a multi-employer plan that provides pension
and other post-retirement benefits for its employees. Current costs are
determined as the amount of required contribution for the period and are
recorded on the accrual basis.
p. Employees' profit share
Accruals are made for granting employees the right to a share of profits.
The amount recorded is the employees' profit share attributable to those
employees of the subsidiaries, which payment is subject to General Shareholders'
Meeting approval.
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 Companies operate solely in one segment for local and regional cellular
telecommunications. All revenues are generated in relation to services provided
in or routed through the states of Rio de Janeiro and Espirito Santo.
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 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 sheet at December
31, 1998 and in the consolidated statements of income for the year ended
December 31, 1998 relate to the interests of shareholders other than Tele
Sudeste in Telerj Celular and Telest Celular while minority interests reflected
in the consolidated statements of financial condition 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 interests of shareholders other than
Telebras in Telerj and Telest.
4. Net operating revenue
1996 1997 1998
------------- ------------- -------------
Monthly subscription charges......... 86,057 154,707 328,141
Activation fees...................... 35,198 102,004 40,277
Usage charges........................ 208,632 339,234 623,744
Network usage charges................ 57,677 113,236 179,567
Goods sold (telephone cellular set) . - - 89,215
Other................................ 17,412 21,869 19,522
------------- ------------- -------------
Total gross operating revenue........ 404,976 731,050 1,280,466
Value added and other indirect taxes. (95,463) (146,639) (357,795)
------------- ------------- -------------
Net operating revenue from cellular
telecommunications services ......... 309,513 584,411 922,671
============= ============= =============
There are no customers who contribute more than 5% of total gross operating
revenues of Tele Sudeste Participacoes S.A., excluding Telerj S.A. that
contributes to approximately 7% of total gross operating revenues.
<PAGE>
5. Cost of services
1996 1997 1998
-------------- ------------- -------------
Depreciation and amortization.......... 43,284 69,066 115,626
Personnel.............................. 758 868 3,046
Materials and services................. 49,605 77,398 97,076
Fixed-line network expenses............ 26,016 71,002 99,007
Fistel tax and other................... - 11,942 15,336
Rental fees and other.................. 136 327 14,512
Goods sold (telephone cellular set).... - - 87,076
-------------- ------------- -------------
119,799 230,603 431,679
============== ============= =============
6. Selling expense
Included in selling expense are provisions for doubtful customer accounts
receivable of R$3,441, R$8,251 and R$104,031 in 1996, 1997 and 1998,
respectively.
7. Other net operating income (expense)
1996 1997 1998
------------- ------------- -------------
Fines and recovered expenses....... 7,275 3,524 4,056
Research and development........... (2,662) (3,135) (2,309)
Donations and sponsorships......... - - (3,128)
Provisions for contingencies....... - - (1,528)
Other.............................. (51) (602) (4,987)
-------------- ------------- -------------
4,562 (213) (7,896)
============== ============= =============
8. Interest expense, net
1996 1997 1998
------------- ------------- -------------
Financial income:
Interest income................ - - 14,079
Monetary/exchange variation.... - - 4,420
Financial expenses:
Interest expense............... (24,376) (64,636) (7,042)
Monetary/exchange variation.... 10,521 29,025 (21,285)
-------------- ------------- -------------
(13,855) (35,611) (9,828)
============== ============= =============
9. Net non-operating income (expense)
1996 1997 1998
-------------- ------------- -------------
Gain (loss) on
permanent asset disposals.......... - - (648)
Other.............................. - - 11
-------------- ------------- -------------
- - (637)
============== ============= =============
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 in
1996 and 1997, 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 cellular operations in the financial statements of 1996 and 1997.
Brazilian income taxes comprise federal income tax and the social
contribution tax. In 1998 the income tax rate was 25%, and social contribution
tax was 8.00%, producing a combined statutory rate of 33.00%.
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.
1997 1998
------------ -------------
Deferred tax assets:
Provisions for contingencies.......... - 570
Tax loss carry forwards............... 2,566 -
Allowance for doubtful accounts....... - 7,556
Accrued ICMS.......................... - 2,132
------------ -------------
Total (see Note 14)................... 2,566 10,258
============ =============
Deferred tax liabilities:
Deferred tax on full indexation....... 44,335 39,198
============ =============
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:
1997 1998
------------ -------------
Social contribution tax payable....... - 2,375
Deferred tax liabilities.............. 44,335 39,198
------------ -------------
Total................................. 44,335 41,573
------------ -------------
Current............................... 3,698 5,961
Noncurrent............................ 40,637 35,612
============ =============
11. Cash flow information
1996 1997 1998
------------ ------------ -------------
Income and social
contribution tax paid................... - - 95,722
Interest paid........................... 6,778 32,584 2,259
Provision for contingencies paid........ - - 323
Non cash Transactions:
1998
-------------
Tax incentive investment credits received............. 52
12. Cash and cash equivalents
1997 1998
------------- -------------
Banks................................ - 16,429
Short-term investments............... 37,463 67,831
------------- -------------
37,463 84,260
============= =============
All of cash and cash equivalents are denominated in Brazilian Reais.
13. Trade accounts receivable, net
1997 1998
------------ -------------
Accrued amounts.................................. 14,957 29,371
Billed amounts................................... 74,603 126,045
Accounts receivable from goods sold.............. - 67,219
Allowance for doubtful accounts.................. (3,907) (22,889)
============ =============
85,653 199,746
============ =============
The changes in the allowance for doubtful accounts were as follows:
1996 1997 1998
------------ ------------ -------------
Beginning balance................. 189 87 3,907
Provision charged to
selling expense................... 3,441 8,251 104,031
Write-offs........................ (3,543) (4,431) (85,049)
------------ ------------ -------------
Ending balance.................... 87 3,907 22,889
------------ ------------ -------------
14. Deferred and recoverable taxes
1997 1998
-------------- --------------
Withholding tax............................... - 1,691
Social contribution tax....................... - 7,611
Federal income tax............................ - 23,015
Deferred tax assets........................... 2,566 10,258
Sales and other taxes......................... - 2,600
============== ==============
2,566 45,175
============== ==============
15. Other assets
1997 1998
------------- --------------
Prepayments.................................. 838 1,130
Inventories.................................. - 12,759
Recoverable advances ....................... 98 2,161
Fiscal incentives investments................ - 416
Telecomunicacoes do Espirito
Santo S.A. - Telest.......................... - 18,336
Other........................................ - 1,182
============== ==============
936 35,984
============== ==============
Current...................................... 923 34,594
Noncurrent................................... 13 1,390
============== ==============
Inventories are comprised mainly of cellular
Until July, 1998, several transactions related to operations of Telest
Celular S.A. were recorded by Telecomunicacoes do Espirito Santo S.A - TELEST
(fixed-line telecommunications company), originated mainly from infra-structure
rental, network usage and amount billed to cellular phone clients.
At a meeting on December 17, 1998 the parties agreed that Telecomunicacoes
do Espirito Santo S.A. - TELEST would pay the amount of R$24,371 in four
installments, updated by financial charges computed based on 99% of the CDI
variation. The first installment, in the amount of R$6,035, was paid on December
21, 1998, reducing the debt to R$18,336.
16. Property, plant and equipment, net
a. Composition
<TABLE>
<CAPTION>
1997 1998
--------------------------------------- ---------------------------------------
Cost Accum. Depr Net Book Cost Accum. Depr. Net Book
Value Value
------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Construction-in-progress........... 149,957 - 149,957 129,452 - 129,452
Automatic switching equipment...... 233,159 40,608 192,551 329,227 64,521 264,706
Transmission and other equipment... 780,507 176,934 603,573 875,815 257,877 617,938
Buildings.......................... 19,911 903 19,008 23,360 3,208 20,152
Other assets....................... 85,010 3,925 81,085 104,071 18,124 85,947
------------- ------------ ------------ ----------- ------------- -------------
1,268,544 222,370 1,046,174 1,461,9255 343,730 1,118,195
============= ============ ============ ============ ============ =============
</TABLE>
Within "Other assets" the book value of land is R$2,019 as of December 31,
1997 and 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 Companies 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....................... 3,005 5,160 14,424
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.......................................... 4,436
2000.......................................... 4,365
2001.......................................... 3,198
2002.......................................... 708
2003 and thereafter........................... 1,157
------------
Total minimum payments........................ 13,864
============
17. Payroll and related accruals
1997 1998
------------- -------------
Wages and salaries.............................. 659 1,164
Accrued social security charges................. 1,289 2,606
Accrued benefits................................ 867 1,276
Payroll withholdings............................ 53 511
------------- -------------
2,868 5,557
============= =============
18. Accounts payable and accrued expenses
1997 1998
------------- -------------
Amounts payable to suppliers.................... 23,460 103,240
Customer deposits............................... 15,509 -
Other payables and accrued expenses............. - 41,170
------------- -------------
38,969 144,410
============= =============
19. Taxes other than income taxes
1997 1998
-------------- ------------
Value-added taxes................................ 3,670 37,939
Other indirect taxes
on operating revenues............................ - 8,403
------------- ------------
3,670 46,342
============= ============
All taxes payable at December 31, 1997, which are related to revenues
(ICMS, PASEP, COFINS), except for the amount related to taxes on unbilled
revenues, remained with Telerj and Telest when the assets and liabilities of the
businesses were transferred to the Companies, because Telerj and Telest have
legal responsibility for their payment.
20. Dividends payable
1998
---------------
Payable by Tele Sudeste to:
Common shareholders......................................... 21,937
Preferred shareholders...................................... 37,046
Payable by subsidiaries to minority shareholders............... 17,024
---------------
76,007
===============
Dividends payable by Tele Sudeste are net of 15% of withholding tax.
21. Other liabilities
1997 1998
------------- -------------
Employees' profit share........................... - 1,123
Other............................................. 938 -
------------- -------------
938 1,123
============= =============
22. Loans and financing
1997 1998
------------- -------------
Loans payable to Telebras.........................383,866 -
Other financing................................... 36,269 32,942
Accrued interest.................................. 39,864 1,862
------------- -------------
459,999 34,804
============= =============
Current...........................................313,828 9,626
Noncurrent........................................146,171 25,178
============= =============
a. Loans payable to Telebras
1997 1998
------------- --------------
Loans payable to Telebras.......................383,866 -
Accrued interest................................ 39,488 -
------------- -------------
423,354 -
============= =============
In the spin-off on May 22, 1998, the intercompany receivables on the books
of Telebras were transferred to the Holding Company. Therefore, the loans
formerly payable to Telebras by the operating subsidiaries have been eliminated
in the consolidated financial statements.
b. Other financing
1997 1998
------------- -------------
Loans .......................................... 36,269 32,942
Accrued interest ............................... 376 1,862
------------- -------------
36,645 34,804
============= =============
Equipment financing comprises loans from suppliers of telecommunication
equipment to be repaid in periodic installments. Debt bears fixed interest rates
of 7.30% per annum and variable interest rates ranging from 1,125% to 6% per
annum over LIBOR. The LIBOR rate at December 31, 1998 was 5.00% per annum.
c. Repayment schedule
Noncurrent loans are scheduled to be repaid as follows:
2000............................................... 4,694
2001............................................... 4,617
2002............................................... 4,551
2003............................................... 3,772
2004............................................... 3,772
2005............................................... 3,772
---------------
25,178
===============
d. Currency analysis
Total debt (excluding interest) is denominated in the following currencies:
<TABLE>
<CAPTION>
Exchange Rate
at December 31, 1998
-------------------------------------
(units of one Brazilian Real) 1997 1998
------------------------------------- --------------- --------------
<S> <C> <C> <C>
Reais........................ 1.0000 379,979 -
U.S. Dollars................. 1.2087 40,156 32,942
--------------- --------------
420,135 32,942
=============== ==============
</TABLE>
The Companies did not hedge their foreign currency liabilities at December 31,
1998, nor do they have monetary assets denominated in foreign currency.
23. Provision for contingencies
Provisions for contingent liabilities were as follows:
1997 1998
-------------- --------------
Labor claims........................ 256 278
Civil claims........................ 275 1,458
-------------- --------------
Total............................... 531 1,736
============== ==============
Current............................. 531 1,729
Noncurrent.......................... - 7
============== ==============
Labor and civil claims
The provisions for labor and civil claims are management's estimates of the
most probable losses in relation to various suits filed by current and former
employees and by suppliers.
Potential litigation
Telebras, Telerj and Telest, the legal predecessors of the Holding Company
and Telerj Celular S.A. and Telest Celular S.A., respectively, are defendants in
a number of legal proceedings and subject to certain other claims and
contingencies. Liability for any claims arising out of acts committed by Telerj
and Telest prior to the effective date of the spin-off of Telerj's and Telest's
cellular assets and liabilities to Telerj Celular S.A. and Telest Celular S.A.
remains with Telerj and Telest, except for those liabilities for which specific
accounting provisions have been assigned to Telerj Celular S.A. and Telest
Celular S.A. Any claims against Telerj and Telest which are not met by Telerj
and Telest could result in claims against Telerj Celular S.A. and Telest Celular
S.A. to the extent that Telerj Celular S.A. and Telest Celular S.A. have
received assets which might have been used to settle those claims had they not
been spun off from Telerj and Telest. Under the terms of the breakup of
Telebras, liability for any claims arising out of acts committed by Telebras
prior to the effective date of the breakup remains with Telebras, except for
labor and tax claims (in which case Telebras and the new Holding Company are
jointly and severally liable) and any liability for which specific accounting
provisions have been assigned to the Holding Company. Creditors of Telebras may
challenge this allocation of liability. Management believes that the chances of
any claims materializing and having a material adverse financial effect on the
Companies and/or the Holding Company are remote and, therefore, no provision was
made.
Taxes--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 telecommunication
services but also other services, including cellular activation, which had not
been previously subject to such tax, effective July 1, 1998. Pursuant to this
new interpretation of tax law, the ICMS tax may be also applied retroactively
for such services rendered the five years preceding June 30, 1998.
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.
Each of the Subsidiaries has filed suit with the Treasury Court of the
state in which it is located seeking injunctive relief from retroactive and
prospective application of the ICMS to cellular activation charges and has
obtained a temporary injunction relieving it from the payment during the
pendency of the suits. Nonetheless, the tax authorities of the states where the
lawsuits are pending may appeal those decisions. There can be no assurance that
the Subsidiaries will ultimately prevail in any appeal relating to the temporary
injunctions or the underlying litigation with respect to application of the ICMS
to cellular activation.
The Company has not made provision for the application of the ICMS on
cellular activation. Five-year retroactive application of the ICMS cellular
activation, if borne by the Company, would have a maximum material adverse
impact on the financial condition and results of operations of the Company
estimated at R$75,000. However, the Company's management does not believe that
the retroactive application is probable. Moreover, the Company's management
believes that the predecessor Companies would be liable to the Subsidiaries for
any tax liability arising form the retroactive application. The Company's
management does not believe that application of the ICMS cellular activation,
applied on a prospective basis, would have a material impact on the Company's
financial condition or results of operations. Application of the ICMS to
cellular activation for the full year ended December 31, 1998, would have a
maximum negative impact estimated at R$18 million on result of operations for
1998.
24. 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 90% of the Company's employees are covered by these plans.
The Companies contributed and charged to expense R$915, R$1,634 and R$1,821
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 members 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
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:
1997 1998
--------------- ---------------
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
=============== ===============
Consolidated 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
=============== ===============
The financial statements of Sistel also contains reserve for the taxes on
investment income which are contingently payable, totaling R$487,269 and
R$636,652 at December 31, 1997 and 1998, respectively.
25. Shareholders' equity
a. Share capital
The Company's authorized capital at December 31, 1998 was 700 billion
shares. Capital subscribed and paid-up at the balance sheet date in the amount
of R$ 306,458 was represented by the following shares, without par value:
Common in Preferred in Total
circulation circulation outstanding
--------------- ----------------- -----------------
As at December 31, 1998
(in thousands).................. 124,369,031 210,029,997 334,399,028
In Brazilian Reais - 12.31.98... 113,977 192,481 306,458
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 Tele Sudeste Celular 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 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, Tele Sudeste Celular 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
Tele Sudeste Celular Participacoes S.A.'s by-laws, the "Adjusted Net Income" is
an amount equal to Tele Sudeste Celular Participacoes S.A.'s net income adjusted
to reflect allocations to or from (i) the 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.................................................................. 170,645
Add:
Consolidation adjustments........................................................... 2,682
Adjustments required to arrive at distributable income on a corporate law basis..... 5,695
===============
Net income on a corporate basis available at Holding Company level.................. 179,022
===============
Add:
Realization of unrealized income reserve............................................ 88,580
Income of Jan.-Feb./98 - Spin-off from Telebras ................................... 4,365
Deduct:
Appropriation to legal reserve...................................................... (9,169)
===============
Adjusted net income...................................................................... 262,798
===============
Proposed dividend:
Ordinary shares..................................................................... 21,937
Preferred shares.................................................................... 37,046
===============
Total............................................................................... 58,983
===============
Dividend per thousand shares (Brazilian Reais):
Ordinary shares..................................................................... 0.176
Preferred shares.................................................................... 0.176
</TABLE>
In 1998 Tele Sudeste Celular Participacoes S.A. declared dividends by means
of interest on shareholders' equity (R$69,392), which is subject to a 15%
withholding tax (R$10,409). On March 17, 1999, the shareholders voted to
increase the dividends in the amount of R$6,715 (R$0.02 per thousand shares),
which will result in a distribution of the minimum 25% of distributable income.
Thus, total dividends were R$65,698 (R$0.196 per thousand shares) to be paid on
December 20,1999.
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.
26. 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 cellular telecommunication and with
Telerj and Telest with respect to use of their communications network. After
privatization, a significant portion of such transactions is no longer
characterized as being with related parties.
In 1998 the related party transactions take 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., Telesp Participacoes S.A.,
Telesp S.A., CBTC 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$3,452
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:
1997 1998
-------------- --------------
Current assets:
Trade accounts receivable............ 4,344 10,754
Current liabilities:
Loans and financing.................. 303,129 -
Dividends/Interest on the equity .... - 12,031
Other................................ - 538
Non current liabilities:
Loans and financing.................. 120,101 -
1996 1997 1998
-------------- -------------- --------------
Net operating revenue from
cellular communication services... 131,780 159,468 68,480
Cost of services..................(97,617) (127,831) (8,562)
Operating expenses................(29,782) (55,724) (3,958)
Interest expense..................(12,222) (33,214) -
27. Commitments
a. Capital expenditures
At December 31, 1998 the Companies had the following capital expenditure
commitments:
Expected year of expenditure
----------------------------
1999........................................................ 214,974
These commitments relate to the continuing expansion and modernization of
the cellular system, information technology, transmission equipment and the
messaging system.
b. Commitments to Anatel Goals (unaudited)
Service Quality
Actual in 1998
------------------ -------------------------------
Indexes ANATEL goals (%) Telerj Telest
Celular (%) Celular (%)
------------------ -------------- ---------------
System availability
index........................greater than 98% 99.7 99.9
Loss (ERBs -
CCC).........................Less than 3% 0.3 1.4
Voice channel ERB
(HMM)........................Less than 5% 16.5 1.5
Loss on HMM
interconnection..............Less than 3% - -
Probability of access in 1st
attempt......................greater than 90% 83.5 98.5
Formal complaints from 100
subscribers..................Less than 5% per month 3 3.2
Services to districts
Rio de Janeiro State
<TABLE>
<CAPTION>
Accomplished
Anatel Goals Number Due dates through
of districts December, 31
1998
- -------------------------------------------------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
30-50 thousand inhabitants (covering a minimum of 70%) 10 Nov/2002 9
50-75 thousand inhabitants (covering a minimum of 80%) 15 Nov/2001 13
75-100 thousand inhabitants (covering a minimum of 90%) 1 Nov/2000 1
100-200 thousand inhabitants (covering 100%) 13 Nov/1999 11
+ 200 thousand inhabitants (covering 100%) 9 Nov/1998 9
</TABLE>
The Districts below do not have, at the moment, cellular coverage which is
foreseen to be in place in June, 1999.
30-50 thousand inhabitants: Itambi (Itaborai)
100-200 thousand inhabitants: Monjolos (Sao Goncalo)
50-75 thousand inhabitants: Cava (Nova Iguacu), Ipiiba (Sao Goncalo),
Sete Pontes (Sao Goncalo)
Espirito Santo State
<TABLE>
<CAPTION>
Accomplished
Anatel Goals Number Due dates through
of districts December, 31
1998
- -------------------------------------------------------- -------------- -------------- ------------------
<S> <C> <C> <C> <C>
30-50 thousand inhabitants (covering a minimum of 70%) 4 Nov/2002 4
50-75 thousand inhabitants (covering a minimum of 80%) 5 Nov/2001 5
75-100 thousand inhabitants (covering a minimum of 90%) 2 Nov/2000 2
100-200 thousand inhabitants (covering 100%) 5 Nov/1999 5
+ 200 thousand inhabitants (covering 100%) 1 Nov/1998 1
</TABLE>
All districts are covered by cellular services and all the goals have been
attained.
28. Insurance
At December 31, 1998, in the opinion of management, all significant and
high risk assets and obligations were insured.
29. Fair values of financial assets and liabilities
Estimated fair values of the Companies' 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
----------- ----------- ----------- -----------
Liabilities:
<S> <C> <C> <C> <C>
Loans and financing:
Other financing................................... 36,269 34,538 32,942 28,642
Loans............................................. 383,866 383,796 - -
Accrued interest................................. 39,864 39,861 1,862 1,619
</TABLE>
Cash, cash equivalents, trade accounts receivable, other current assets,
accounts payable and accrued expenses
The carrying value of cash, cash equivalents, trade accounts receivable,
other current assets, accounts payable and accrued expenses are a reasonable
estimate of their fair value. Cash equivalents are represented principally by
short-term investments, their fair values, and that of other short-term
investments and bank deposits not meeting the definition of cash equivalents,
were estimated using rates currently offered for deposits of similar maturities.
Loans and financing
Interest rates that are currently available to the Companies 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.
30. 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.
31. Summary of the differences between Brazilian and US GAAP
The Companies' 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 amortizing 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 Statement of Financial
Accounting Standards ("SFAS") No. 34 "Capitalization of Interest Costs,"
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 local currency borrowings and the foreign exchange gains
and losses on foreign currency borrowings.
The effects of these different criteria for capitalizing and amortizing
capitalized interest are presented below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
Capitalized interest difference
US GAAP capitalized interest:
Interest which would have been capitalized and credited to
income (Being interest incurred on loans from the Companies'
parent and from third parties, except in years where total
loans exceeded total
construction-in-progress, when capitalized interest is 12,881 35,578 14,097
reduced proportionately).....................................
Capitalized interest on disposals............................. - - (41)
----------- ------------ -----------
12,881 35,578 14,056
Less Brazilian GAAP capitalized interest:
Interest capitalized and credited to income (Up to the
limit of interest incurred on loans obtained for
financing capital investments)............................... (617) (25,100) (7,507)
Interest capitalized and credited to shareholders equity..... (19,067) (18,806) (2,637)
----------- ------------ -----------
Total capitalized interest.......................... (19,684) (43,906) (10,144)
Capitalized interest on disposals............................ - - 51
----------- ------------ -----------
(19,684) (43,906) (10,093)
------------ -----------
US GAAP Difference................................................ (6,803) (8,328) 3,963
=========== ============ ===========
Amortization of capitalized interest difference
Amortization under Brazilian GAAP............................ 3,383 5,656 9,549
Capitalized interest on disposals............................ - - (23)
----------- ------------ -----------
3,383 5,656 9,526
Less amortization under US GAAP.............................. (2,711) (3,901) (7,825)
Capitalized interest on disposals............................ - - 18
----------- ------------ -----------
(2,711) (3,901) (7,807)
------------ ------------ -----------
US GAAP Difference............................................... 672 1,755 1,719
=========== ============ ===========
</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 Companies participate in a multi-employer benefit plan that is operated
and administered by Sistel, and provide for the costs of pension 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 32 shows the funded status of Sistel. The
provisions of SFAS No. 87, "Employers' Accounting for Pensions", 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. 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.
e. 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.
f. 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.
g. 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.
h. 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.
i. Items posted directly to divisional equity / shareholders' equity
Under Brazilian GAAP various items are posted directly to divisional
equity/shareholder's equity, which under US GAAP would be posted to the
consolidated statement of revenues and expenses/income. An example is
capitalized interest. The posting of such items to divisional
equity/shareholders' equity gives rise to adjustments in the consolidated
statement of changes in divisional equity/shareholders' equity. Since the
original postings to the equity accounts would, under US GAAP, be made directly
to the consolidated statement of revenues and expenses/income, the adjustment is
included in the reconciliation of the income differences between US and
Brazilian GAAP.
j. Income taxes
In 1998, Tele Sudeste fully accrued for deferred income taxes on temporary
differences between tax and accounting records. The existing policies for
providing for deferred taxes are materially in accordance with SFAS 109 -
Accounting for Income Taxes, except in connection with the deferred income tax
effects of indexation adjustments of R$19,487 in 1996 and R$ 24,848 in 1997 (see
Note 2(c)(iii) that were recorded directly against Divisional equity. Under U.S.
GAAP the deferred tax effect of the 1997 indexation for financial reporting
purposes, would be charged to income and social contribution taxes in the
consolidated statement of income. Additionally, the deferred tax effect of the
US GAAP adjustments of R$2,024 and R$2,169 in 1996 and 1997, respectively, are
not included in the reconciliation of income differences between US and
Brazilian GAAP.
In 1996 and 1997, Tele Sudeste did not present income taxes since the
consolidated financial statements do not include interest income and unallocated
interest expense as a result of nonspecific cash and debt not being allocated
from Telerj and Telest.
Consequently, this is the only material difference in the implementation of
SFAS 109 other than in relation to the U.S. GAAP adjustments described in this
note to the consolidated financial statements. In addition, for US GAAP
purposes, deferred tax assets and liabilities are classified as current or
noncurrent based on the classification of the asset or liability attributed to
the temporary difference.
k. 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, 1996 or 1997, earnings per
share was not presented for Brazilian GAAP in 1996 or 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 five 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 25(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 there are no dilutive shares
to be issued.
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'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. 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.
For 1996 and 1997, earnings per share has not been presented for US GAAP as
the consolidated statement of revenues and expenses exclude interest income and
unallocated interest expense and income taxes as a result of nonspecific cash
and debt not being allocated from Telerj and Telest.
l. Valuation of Long-Lived Assets
For US GAAP, effective January 1, 1996 the Companies adopted SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." In accordance with this standard, the Companies periodically
evaluate 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 Companies' results or financial condition.
Brazilian GAAP does not require cash flow computations in order to
determine potential asset impairment.
m. Retained earnings
For Brazilian GAAP, a company financed 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$373,386 on May 22, 1998 and
R$556,732 on December 31, 1998.
n. Revenue recognition
Until December 31, 1997, under both Brazilian and US GAAP, revenues from
activation fees were recognized upon activation of a customer's services. Under
US GAAP, effective January 1, 1998, net revenues from activation fees have to be
deferred and amortized over the estimated effective contract life.
o. 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$69.24 per lot of
13,000 shares (each a "lot" and comprised of 1,000 preferred shares of each of
Telebras and the twelve New Holding Companies). This price represents a 50% of
discount from the market price of 1,000 Telebras preferred shares at the time
the Federal Government authorized the plan. Each employee had the right to
purchase up to 144 lots of 13,000 preferred shares, subject to proration if the
shares were oversubscribed.
The Federal Government had made 7.2 million lots available for sale, or 60%
off the 12.1 million lots that would be taken up if each employee purchased the
maximum 144 lots allowed. The original period to sign up to purchase the shares
ended on October 30, 1998. On August 4, 1998, the date on which the offer
employees commenced and the measurement date for 60% of the shares, the market
price of 1,000 Telebras shares was R$ 127.20. Under US GAAP, the charge was
R$2,662, which represents Telerj Celular and Telest Celular's share 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, Telerj Celular and Telest Celular employees had
subscribed to 45,927 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.
<PAGE>
Reconciliation of the income differences between US and Brazilian GAAP
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1997 1998
---------------- ---------------- ---------------
Consolidated net income as reported................................ - - 170,645
Income before interest income, unallocated interest expense and
Taxes as reported................................................. 111,468 167,462 -
Add (deduct):
Different criteria for:
Capitalized interest....................................... (6,803) (8,328) 3,963
Amortization of capitalized interest....................... 672 1,755 1,719
Items posted directly to Shareholders' equity
Capitalized interest....................................... 19,067 18,806 2,637
Fiscal incentive........................................... - - 45
Stock compensation.............................................. - - (2,662)
Deferred revenues on activation fees............................ - - (17,606)
Deferred tax effect of the above adjustments - - 3,935
Effect of minority interests on the above adjustments............... (2,024) (3,305) 2,631
---------------- ---------------- ---------------
US GAAP income before interest income, unallocated interest
Expense and taxes................................................ 122,380 176,390
================ ================
US GAAP net income.................................................. 165,307
===============
Net income per thousand shares in accordance with US GAAP 1998
---------------
Common shares--Basic................................................. 0.50
===============
Weighted average (thousand) common shares outstanding...... 124,369,031
Common shares--Diluted............................................... 0.50
===============
Weighted average (thousand) common shares outstanding...... 124,369,031
Preferred shares--Basic.............................................. 0.50
===============
Weighted average (thousand) Preferred shares outstanding... 206,028,812
Preferred shares--Diluted............................................ 0.50
===============
Weighted average (thousand) Preferred shares outstanding... 206,028,812
</TABLE>
<PAGE>
Reconciliation of the shareholders' equity/divisional equity differences
between US and Brazilian GAAP
<TABLE>
<CAPTION>
1997 1998
-------------- ---------------
<S> <C> <C>
Total divisional equity/shareholders' equity as reported.... 460,962 953,955
Add (deduct):
Different criteria for:
Capitalized interest.............................. (19,834) (15,871)
Amortization of capitalized interest.............. 7,107 8,826
Deferred revenues on activation fees .................. - (17,606)
Deferred tax effects of the above adjustments.......... 4,200 8,135
Effect of minority interest on the above adjustments... 2,203 4,163
-------------- ---------------
US GAAP divisional equity/shareholders' equity.............. 454,638 941,602
============== ===============
US GAAP supplementary information:
Total assets........................................... 1,164,265 1,484,502
============== ===============
Property, plant and equipment.......................... 1,248,710 1,446,054
Accumulated depreciation............................... (215,263) (334,904)
-------------- ---------------
Net property, plant and equipment........................ 1,033,447 1,111,150
============== ===============
</TABLE>
Changes in divisional equity/shareholders' equity in accordance with US GAAP
Divisional
equity /
Shareholders'
equity
-----------------
Balance at December 31, 1995............................. 244,639
Income before interest income,
unallocated interest expense and taxes................... 122,380
Net interdivisional cash receipt......................... (31,131)
Deferred tax on indexation of permanent assets........... (19,487)
Deferred tax on other US GAAP adjustments................ 2,024
Minority interests effects other than on income.......... 13,015
-----------------
Balance at December 31, 1996............................. 331,440
Income before interest income, unallocated interest
expense and taxes........................................ 176,390
Net interdivisional cash receipt......................... 3,163
Deferred tax on indexation of permanent assets........... (24,848)
Deferred tax on other US GAAP adjustments................ 2,169
Minority interests effects other than on income.......... (33,676)
-----------------
Balance at December 31, 1997............................. 454,638
Additional net assets received on the breakup of Telebras 389,058
Net income for the year.................................. 165,307
Stock compensation, net of minority interest of R$671.... 1,991
Interest on shareholders' equity paid.................... (69,392)
-----------------
Balance at December 31, 1998............................. 941,602
=================
32. Additional disclosures required by US GAAP
a. Pension and post-retirement benefits
The Companies, together with substantially all of the other companies in
the former 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
1997 1998
-------------- --------------
Funded status:
Accumulated benefit obligation:
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
============== ==============
The actuarial assumptions used were as follows:
Discount rate for determining
projected benefit obligations......................6.00% 6.00%
Rate of increase in compensation levels...........3.25% 3.25%
Expected long-term rate of return on plan assets..6.00% 10.00%
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
1997 1998
-------------- --------------
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
============== ==============
<PAGE>
Change in plan assets
1997 1998
-------------- -------------
Fair value of plan assets
at beginning of year ...................... 3,112,848 3,897,051
Employer contribution...................... 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
============== =============
Other post-retirement benefits plan
1997 1998
------------- -------------
Funded status:
Accumulated post-retirement benefit obligations:
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
============== ==============
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
1997 1998
------------ ------------
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
============ ============
Change in plan assets
1997 1998
------------ ------------
Fair value of plan assets at beginning of year .. 69,506 96,141
Employer contribution............................ 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
============ ============
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 risks
Credit risk with respect to trade accounts receivable is diversified. The
Companies continually monitor the level of trade accounts receivable and limit
the exposure to bad debts by cutting access to the telephone network if any
invoice is twenty days past-due. Exceptions comprise telephone services that
must be maintained for reasons of safety or national security.
In conducting their businesses, Telerj Celular S.A. and Telest Celular S.A.
are fully dependent upon the cellular telecommunications concession as granted
by the Federal Government.
Approximately 34% of all employees are members of state labor unions
associated with either the Federacao Nacional dos Trabalhadores em
Telecomunicacoes ("Fenattel"), or with the Federacao Interestadual dos
Trabalhadores em Telecomunicacoes ("Fittel"). The Companies negotiate new
collective labor agreements every year with the local union. The collective
agreements currently in force expire in December 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 Companies' 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 statment.
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 Companies operate solely in one segment for local and regional cellular
telecommunications. All revenues are generated in relation to services provided
in or routed through the states of Rio de Janeiro and Espirito Santo.
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 - Tele Sudeste Celular 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 do Servico Movel Celular na
Area de Concessao 3;
II - promover, atraves de sociedades controladas ou coligadas, a expansao e
implantacao de servicos de telefonia movel, 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 movel;
V - executar, atraves de sociedades controladas ou coligadas, servicos tecnicos
especializados, relativos a area de telefonia movel;
VI - promover, estimular e coordenar, atraves de suas sociedades controladas ou
coligadas, a formacao e o treinamento do pessoal necessario ao setor de
telefonia movel;
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 a 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 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
(dois tercos) 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$
306.457.801,85 (trezentos e seis milhoes, quatrocentos e cinquenta e sete mil,
oitocentos e um reais e oitenta e cinco 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 - artigo 9;
II - paragrafo unico do artigo11; e
III - artigo 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
de 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, 05 (cinco) e,
no maximo, 09 (nove) 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$ 150.000.000,00 (cento e cinquenta milhoes de
reais);
XVI - autorizar a celebracao de contratos, nao previstos no orcamento da
Sociedade, em valor superior a R$ 150.000.000,00 (cento 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$ 150.000.000,00 (cento 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 cojunto 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
e 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 administradores e empregados 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 aplicaveis, 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 Tele Sudeste Celular 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
TELE SUDESTE CELULAR PARTICIPACOES S.A.
CHAPTER I
CHARACTERISTICS OF THE COMPANY
Art. 1 - TELE SUDESTE CELULAR 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 Cellular Mobile
Service in Concession Area 3;
II. to promote, through subsidiaries or affiliates, the expansion and
establishment of mobile 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 mobile telephone sector;
V. to provide, through subsidiaries or affiliates, specialized technical
services in the mobile telephone sector;
VI. to promote, foster, and coordinate, through its subsidiaries or
affiliates, the education and training of the personnel required in
the mobile 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 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$306,457,801.85 (three hundred six million, four hundred fifty seven thousand,
eight hundred one reais and eighty five 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, 9 (nine) 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$150,000,000.00 (one
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$150,000,000.00 (one 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$150,000,000.00 (one 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.
