As filed with the Securities and Exchange
Commission on June 30, 1999
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------
FORM 20-F
---------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number: 001-14481
---------
TELE LESTE CELULAR PARTICIPACOES S.A.
(Exact Name of Registrant as Specified in Its Charter)
Tele Leste Cellular Holding Company The Federative Republic of Brazil
(Translation of Registrant's (Jurisdiction of Incorporation
Name into English) or Organization)
---------
Av. Antonio Carlos Magalhaes 257, 6 andar/parte
41850-000 Salvador, BA, Brazil
(Address of Principal Executive Offices)
---------
Securities registered or to be registered pursuant to Section
12(b) of the Act:
Name of Each Exchange On
Title of Each Class Which Registered
------------------- ------------------------
Preferred Shares, without par value* New York Stock Exchange
American Depositary Shares, each New York Stock Exchange
representing 50,000 Preferred Shares
- ------------------
* Not for trading, but only in connection with the listing of American
Depositary Shares on the New York Stock Exchange.
Securities registered or to be registered pursuant to
Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the Issuer's classes
of capital or common stock as of the close of the period covered by this Annual
Report:
124,369,030,532 Common Shares, without par value
210,029,997,060 Preferred Shares, without par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
Indicate by check mark which financial statement item the Registrant
has elected to follow.
Item 17 __ Item 18 X
===============================================================================
<PAGE>
===============================================================================
TABLE OF CONTENTS
Page
----
PART I
Item 1. Description of Business.........................................1
Item 2. Description of Property........................................18
Item 3. Legal Proceedings..............................................18
Item 4. Control of Registrant..........................................19
Item 5. Nature of Trading Market.......................................20
Item 6. Exchange Controls and Other Limitations
Affecting Security Holders.....................................22
Item 7. Taxation.......................................................23
Item 8. Selected Financial Data........................................28
Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................33
Item 9A. Quantitative and Qualitative Disclosures
about Market Risk..............................................43
Item 10. Directors and Officers of Registrant...........................44
Item 11. Compensation of Directors and Officers.........................45
Item 12. Options to Purchase Securities from
Registrant or Subsidiaries.....................................45
Item 13. Interest of Management in Certain Transactions.................45
PART II
Item 14. Description of Securities to be Registered.....................45
PART III
Item 15. Defaults upon Senior Securities................................45
Item 16. Changes in Securities, Changes in Security for
Registered Securities and Use of Proceeds......................46
PART IV
Item 17. Financial Statements...........................................46
Item 18. Financial Statements...........................................46
Item 19. Financial Statements and Exhibits..............................46
Index of Defined Terms....................................................47
Technical Glossary........................................................49
<PAGE>
PRESENTATION OF FINANCIAL INFORMATION
In this Annual Report, Tele Leste Celular 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,
Telebahia Celular S.A. ("Telebahia Celular") and Telergipe Celular S.A.
("Telergipe 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 47 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 14-18 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 Bahia and Sergipe (the "Region") under concessions from the Federal
Government (the "Concessions"). Cellular telecommunications services were first
offered in the Region in July 1993, and the Company is the leading provider of
cellular telecommunications services in the Region. At December 31, 1998, the
Company had 269,828 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 and net income for the year ending December
31, 1998 and the Holding Company's shareholding in each Subsidiary at December
31, 1998.
<TABLE>
<CAPTION>
Contribution to results Holding Company ownership
------------------------------------- -----------------------------
% of net % of consolidated % of share % of voting
Subsidiary operating revenues net income capital stock
- --------------------- ------------------ ----------------- ------------- -------------
<S> <C> <C> <C> <C>
Telebahia Celular S.A............. 81.7 71.9 89.1 95.8
Telergipe Celular S.A............. 18.3 23.2 73.6 85.5
</TABLE>
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 Av. Antonio Carlos
Magalhaes, 357, 6 andar/parte, Pituba, 41850-100 Salvador, BA, Brazil, and its
telephone number is 5571-352-2617.
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 fixed-line service provider operating in the
Fixed-Line Region that includes the Region is Tele Norte Leste Participacoes,
S.A. ("TNL"). In this Annual Report, references to the operations of TNL prior
to January 1998 are to the fixed-line operations of the Predecessor Companies.
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 Bahia and Sergipe. 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 voting shares of the Holding Company were purchased by a consortium
comprised of Iberdrola Investimentos Sociedade Unipessoal, Lda. (68%) and
Telefonica Internacional S.A. (32%) (collectively, "Iberdrola/Telefonica"). See
"Control of Registrant."
The Region
The Region covers an area of approximately 590,000 square kilometers,
representing approximately 6.9% of Brazil's area. The Region has 14 metropolitan
areas with populations in excess of 100,000, including Salvador, Brazil's third
largest city.
Set forth below is a map showing the location of the Region within Brazil.
[MAP OF BRAZIL]
<PAGE>
The following table sets forth population, Gross Domestic Product ("GDP")
and per capita income statistics for each state in the Region at the dates and
for the years indicated.
<TABLE>
<CAPTION>
At July 1, 1998 Year ended December 31, 1997
----------------------------- ----------------------------------------------
GDP (2) Per capita
Population % of Brazil's (billions of % of Brazil's income (2)
State (millions)(1) population (1) U.S. dollars) GDP (2) (U.S. dollars)
- --------------- ---------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
(1)
Bahia (Telebahia Celular)............ 12.9 8.0 36.5 4.5 2,900
Sergipe (Telergipe Celular).......... 1.7 1.0 6.6 0.8 4,040
----- ---- ----- ----- ------
Region............................... 14.6 9.0 43.1 5.3 3,030
===== ==== ===== ===== ======
</TABLE>
- ------------------
(1) Estimates of the Instituto Brasileiro de Geografia e Estatistica - IBGE
("IBGE").
(2) Atlas do Mercado Brasileiro, Ano-No. 1, Gazeta Mercantil, 1998.
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 is the leading supplier of cellular telecommunications in the
Region and supplies both analog and digital service. The Company's digital
cellular telecommunications service is based on the CDMA standard and was
launched in Salvador in March 1998 and in Aracaju in April 1999. The Company
also offers ancillary services, including voicemail, call forwarding, call
waiting, caller identification and three-way calling. In December 1998, the
Company started selling cellular telephones in connection with its digital
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 provides a reciprocal roaming service to
subscribers of other cellular service providers while they are in the Region.
The Company also provides fixed-line and cellular service providers with
interconnection pursuant to which the Company completes calls to its subscribers
that originate with other service providers.
The Company operates a call center that enable subscribers to obtain
customer service 24 hours a day, seven days a week. During 1998, the Company's
customer service department answered, on average, 4,847 calls per working day
(averaging 119 seconds per call).
Sales and Marketing
The Company divides its market into two main categories: (i) business
customers and (ii) individual customers. The Company further divides these
categories according to intensity of use and the time of day during which the
customer's usage is heaviest. The Company varies the manner in which it markets
and promotes its services and occasionally develops special plans and services
for particular categories of customers. The Company provides additional support
services, such as dedicated account representatives, to certain customers.
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 "--Sources of Revenue." 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 telephones at significant
discounts or free of charge.
In April 1999, the Company commenced marketing its digital cellular
telecommunications service under the "Movistar" brand. The Movistar brand is
also used by Tele Sudeste Celular Participacoes S.A., which provides cellular
telecommunications service in the States of Rio de Janeiro and Espirito Santo
and is controlled by Iberdrola/Telefonica, the consortium that controls the
Holding Company. See "Control of Registrant."
Anatel requires that cellular telecommunications services are provided to
all individual applicants, regardless of income level, in the order in which
applications are received. Nonetheless, the Company may recommend suitable
services plans, including the Company's prepaid card plan, to applicants for
cellular service. The Company conducts credit checks to assist it in managing
the risk of payment defaults. 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 stores that includes
general retail stores and outlets that only sell the Company's cellular
telecommunication service and related goods. At December 31, 1998, the Company's
services were marketed through 199 stores; 22 of which were operated by the
Company and 177 of which were operated by independent distributors. This network
enables the Company to market its services and provide after-sale service
throughout the Region. The Company also markets its cellular telecommunications
service directly to certain large corporate customers.
The Company's agreements with its distributors provide for the payment of
commissions, which vary depending on the size of the distributor, for activating
new subscribers and performing various other services. The agreements prohibit
distributors from promoting competing cellular telecommunications services and
may be terminated by either party for any reason by giving at least 30 days
written notice. The Company is in the process of implementing a new uniform
commission structure under which distributors will receive a combination of
up-front and trailing commissions in respect of each new subscriber they
activate. The Company provides distributors with marketing materials and product
and customer service training. The Company also supplies distributors with
cellular telephones for resale to new subscribers.
<PAGE>
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........................................ 169,873 206,598 269,828
Subscriber growth during year................................................ 58.2% 21.6% 30.6%
Estimated population of Region at year-end (millions) (1).................... 14.3 14.5 14.6
Estimated covered population at year-end (millions) (2)...................... 6.0 6.4 6.9
Percentage of population covered at year-end (3)............................. 42% 44% 47%
Penetration at year-end (4).................................................. 1.26% 1.42% 1.85%
Average monthly incoming minutes of use per subscriber during year........... 94.0 137.8 128.4
Average monthly outgoing minutes of use per subscriber during year........... 122.6 103.4 96.9
Average monthly revenues per subscriber during year (5)...................... R$90.56 R$87.79 R$87.16
</TABLE>
- ------------------
(1) Company projections based on IBGE estimates.
(2) Number of people within the Region that can access the Company's service.
(3) Percentage of population of the Region that can access the Company's
service.
(4) Number of cellular lines in service divided by the population of the
Region.
(5) In nominal reais, net of value-added taxes.
Sources of Revenue
The Company's revenues consist of (i) usage charges, which include measured
service charges for outgoing calls, roaming charges and, since April 1999,
prepaid card charges, (ii) monthly subscription charges, (iii) activation fees,
which are one-time charges paid to obtain cellular telecommunications service,
(iv) interconnection charges, which are amounts charged by the Company to
cellular, fixed-line and long-distance service providers for use of the
Company's network, (v) other charges, including charges for call forwarding,
call waiting and call blocking, and (vi) since December 1998, proceeds from the
sale of cellular telephones and accessories. The Company's rates are subject to
the approval of Anatel. See "--Regulation of the Brazilian Telecommunications
Industry."
Subscriber Charges
Unlike North America, cellular telecommunications service in Brazil is
offered on a "calling party pays" basis, under which the subscriber generally
pays only for outgoing calls. Subscribers are required to pay certain fees when
they receive calls while outside of their home registration areas. There are 43
registration areas in the Region.
Charges for cellular calls are calculated based on the subscriber's service
plan, the location of each party to the call and the duration of the call. 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 to
persons outside the registration area but within the Region are assessed at a
higher rate ("VC2"). Calls to persons outside the Region are billed at the
highest rate ("VC3"). When a subscriber makes or receives a call while outside
his or her home registration area, a per-call surcharge known as "AD" is
applicable. When a subscriber receives a call while outside his or her home
registration area, the subscriber also pays one rate per minute if the
subscriber is located within the Region ("DSL1"), and a higher rate if the
subscriber is located outside the Region ("DSL2"). Measured service charges are
discounted by at least 30% for calls made on Sundays and national holidays and
for calls made during particular hours during other days ("off-peak calls"). The
Company abolished VC2 rates in June 1999 and all calls within the Region are now
charged at the VC1 rate.
The basic service plan is the Company's principal service plan and is used
by a large majority of its subscribers. The following table sets forth the
average rates for the basic service plan for each year in the three-year period
ended December 31, 1998 in nominal reais and net of value-added taxes.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(nominal reais)
<S> <C> <C> <C>
Activation fee...................................................... 310.00 310.00 85.60
Monthly subscription fee............................................ 26.00 26.00 26.00
Usage charges (per minute)(1):
VC1............................................................. 0.25 0.26 0.26
VC2............................................................. 0.58 0.58 0.58
VC3............................................................. 0.66 0.66 0.66
DSL1............................................................ 0.29 0.29 0.29
DSL2............................................................ 0.33 0.33 0.33
AD (per call)....................................................... 0.55 0.55 0.55
</TABLE>
- ------------------
(1) Weighted average peak rates.
During 1998 the Company commenced offering six additional service plans:
the Free Plus plan, which has low activation monthly subscription fees and is
intended for casual users of telecommunications service; the Night plan, which
is intended for users who use their cellular telephone primarily during off-peak
hours; the Free 80 and Free 200 plans, which are intended for frequent users of
cellular telecommunications services; and the Free Company 30 and Free Company
80 plans, which are intended for corporate customers.
In April 1999, the Company launched its "Facil" prepaid card service, under
which subscribers purchase a calling card that entitles them a certain value of
call minutes. All calls within the Region are charged at the VC1 rate.
Subscribers may continue to receive calls after their card is exhausted (for up
to ten months) but must purchase another card to make further outgoing calls.
Activation and monthly subscription charges do not apply. There is no credit
risk or billing cost associated with prepaid card customers. Management expects
that prepaid card customers will become a significant portion of its customer
base.
The following table sets forth certain terms of the Company's plans of
service as of May 1999, in nominal reais and including value-added and other
taxes that are deducted in arriving at net operating revenue.
<TABLE>
<CAPTION>
Standard Free Free Free
(Basic) Plus Night Free 80 Free 200 Company 30 Company 80 Facil
------- ---- ----- ------- -------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Activation fee...................... 119.98 99.99 99.99 99.99 99.99 99.99 99.99 90.00
Monthly subscription fee............ 33.97 3.90 25.00 53.50 79.99 34.00 53.50 --
Usage charges (per minute):
VC1 (peak)...................... 0.34 1.20 0.65 0.30 0.25 0.24 0.31 1.20
VC1 (off-peak).................. 0.23 0.25 0.12 0.21 0.17 0.17 0.21 0.25
VC2 (1)(2)...................... 0.80 1.29 0.80 0.68 0.68 0.24 0.65 --
VC3 (1)......................... 0.91 1.35 0.91 0.82 0.82 0.75 0.75 1.35
DSL1 (1)........................ 0.40 0.60 0.40 0.35 0.35 0.35 0.35 --
DSL2 (1)........................ 0.45 0.64 0.45 0.40 0.40 0.40 0.40 --
AD (per call)....................... 0.76 0.60 0.76 0.76 0.76 0.70 0.77 --
VC1 minutes included................ -- -- 40 80 200 30 80 --
</TABLE>
- ------------------
(1) Peak rates, reduced rates apply during off-peak hours.
(2) The Company abolished VC2 rates in June 1999 and VC1 rates now apply
throughout the Region.
In June 1999, the company launched a number new digital service plans under
the "Movistar" brand. The following table sets forth the terms of those plans,
in nominal reais and including value-added and other taxes that are deducted in
arriving at net operating revenue.
<TABLE>
<CAPTION>
Movistar Movistar Movistar Movistar Movistar
Basic Personal Professional 80 Professional 200 Travel
----- -------- -------------------------------- ------
<S> <C> <C> <C> <C> <C>
Activation fee......................... 99.99 99.99 99.99 99.99 99.99
Monthly subscription fee (1)........... 24.90 14.00 44.90 65.00 21.00
Usage charges (per minute)(2):
VC1 (peak)......................... 0.34 0.65 0.37 0.30 0.44
VC1 (off-peak)..................... 0.23 0.15 0.25 0.21 0.30
VC2 (3)............................ N/A N/A N/A N/A N/A
VC3 (4)............................ 0.91 0.91 0.82 0.82 0.80
DSL1 (4)........................... 0.34 0.40 0.35 0.35 N/A
DSL2 (4)........................... 0.45 0.51 0.40 0.40 0.40
AD (per call).......................... 0.76 0.76 0.76 0.76 N/A
VC1 minutes included................... -- -- 80 200 --
</TABLE>
- ------------------
(1) Monthly subscription includes certain value-added services including voice
mail, conference calling, caller identification.
(2) All usage charges are for cellular to fixed calls. Lower rates apply to
calls to other Company subscribers and higher rates apply to calls to
subscribers of other cellular service providers.
(3) The Company abolished VC2 rates in June 1999 and VC1 rates now apply
throughout the Region.
(4) Peak rates, reduced rates apply during off-peak hours.
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."
Interconnection
The Company earns revenues from any call to a subscriber located within the
Region that originates with another service provider (cellular or fixed-line).
The Company charges the service provider from whose network the call originates
an interconnection charge for every minute the Company's network is used in
connection with the call. See "--Operating Agreements--Interconnection
Agreements." The Company's average interconnection charge for 1996, 1997 and
1998 was R$0.17, R$0.19 and R$0.19 per minute, net of value-added taxes,
respectively.
Cellular Telephone Sales
The Company started selling cellular telephones in December 1998. The
telephones are often sold at or below cost as part of package that includes
subscription to the Company's digital cellular telecommunications service. The
Company usually sells cellular telephones to subscribers, and to distributors
for resale to subscribers, by means of an installment plan. Management believes
that, while the sale of cellular telephones may become a significant source of
revenue in the future, it is unlikely to become a significant source of income.
Taxes on Telecommunications Goods and Services
The cost of telecommunications goods and services includes a variety of
taxes. The principal tax is a state value-added tax, the Imposto sobre
Circulacao de Mercadorias e Servicos (the "ICMS"), which the Brazilian states
impose at varying rates on certain revenues from the provision of
telecommunications services. The ICMS rate in each state in the Region is 25%
for domestic telecommunications services and 17% for goods including cellular
telephones.
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 and monthly
subscriptions. Under Brazilian law there is a risk that the state governments
will seek to apply the ICMS retroactively to activation and monthly subscription
rendered during the five years preceding June 30, 1998. See "Legal Proceedings."
Two federal social contribution taxes, the Programa de Integracao Social
("PIS") and the Contribuicao para Financiamento da Seguridade Social ("COFINS"),
are imposed on gross revenues at a combined rate of 3.65%. Prior to February
1999, the taxes applied to gross revenues from the sale of goods and services at
a combined rate of 2.65%.
Billing and Collection
In January 1999, the Company replaced the two billing systems it previously
used with a new billing system developed by Informatica Telecomunicaciones y
Servicios, S.A. The new billing system has four main functions: (i) subscriber
registration, (ii) subscriber information management, (iii) accounts receivable
management, and (iv) billing and collection. The new billing system will give
the Company greater flexibility in developing service plans and billing options
and will enable the Company to monitor account balances in near-real time.
Management expects that the new billing system will benefit many areas of its
business, including marketing, customer service and credit management.
Pursuant to Brazilian law, subscribers must receive a bill at least five
days before the due date, and the Company must allow subscribers at least 15
days from the due date before suspending service for nonpayment. If a
subscriber's payment is more than 15 days past due, the subscriber's ability to
make outgoing calls is suspended until full payment for all outstanding charges
is received. If a subscriber's payment is more than 60 days past due, service is
discontinued.
The Company and the other service providers that were formerly part of the
Telebras System reconcile interconnection and roaming charges owed between them
and settle on a net basis. For international and domestic long-distance calls
made by its subscribers, the Company forwards the amount collected for such
calls to Embratel and charges Embratel a fee for the use of its cellular
telecommunications network.
Network
At December 31, 1998, the Company's cellular telecommunications network
consisted of 277 base stations and 13,427 channels, and covered approximately
47% of the Region's population. The Company expanded the network significantly
during 1998, increasing the number of channels by 34%. The Company continues to
increase network capacity and coverage in response to projected consumer demand.
The network is currently connected primarily by a fiber-optic transmission
system leased from TNL, although the Company is considering replacing such
transmission system with its own lines. NEC and Ericsson are the Company's
principal suppliers of cellular telecommunications equipment.
Digitalization represents one of the Company's key strategic initiatives.
At March 31, 1999, approximately 20% of the Company's network and 10% of its
cellular lines in service were digital. The Company's management believes that
digitalization offers certain advantages, including greater network capacity,
reduced operating costs and additional revenue through the sale of value-added
services. Digital cellular telecommunications service also offers subscribers
greater security.
Under the Concessions, the Company is obligated to meet certain quality of
service and annual network expansion obligations. See "--Regulation of the
Brazilian Telecommunications Industry--Obligations of Telecommunications
Companies." Management believes that the Company is in compliance with its
quality of service and network expansion obligations. The Company has already
achieved its network expansion obligations for each year through 2001.
Fraud Detection and Prevention
"Cloning fraud" is common in parts of Brazil and is occasionally
experienced by the Company. 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 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 interconnection fee, regardless of whether the
Company ever collects the receivable associated with the call.
The Company has implemented fraud-detection and fraud-prevention measures
in an effort to reduce fraud-related losses. Fraud-detection measures involve
the collection and review of call records to detect abnormal calling patterns.
When abnormal patterns are found the subscriber is contacted by the fraud
control staff of the Company and, if cloning has occurred, the subscriber's
number is changed. Fraud-prevention measures include restrictions on
international calls from a given number and restrictions on three-way calling by
customers with international direct-dial access.
The Company has installed a nation-wide fraud detection system licensed
from Digital Equipment Corporation. This system aids in fraud detection in
various ways, including identification of simultaneous usage by a single
subscriber, call frequency and unusually high usage patterns. The system has
been operational within the Region since July 1998.
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 that generally
corresponds to a Cellular Region. See "--Regulation of the Brazilian
Telecommunications Industry--Concessions and Licenses."
A license to provide cellular telecommunications services in the Region on
Band B has been granted to Vicunha Telecomunicacoes Ltda., which carries on
business under the name "Maxitel" ("Maxitel"), the shareholders of which are:
(i) STET Mobile Holding N.V., a subsidiary of Telecom Italia S.p.A. (43%), (ii)
the Brazilian textiles group Vicunha S.A. (37%) and (iii) the media group
Organizacoes Globo S.A. and Banco Bradesco S.A., Brazil's largest private sector
bank (20%). Maxitel paid R$250 million for the license and began providing
cellular telecommunications service based on the TDMA digital standard in the
Region in April 1998. Maxitel also acquired a license to provide cellular
telecommunications services in the neighboring state of Minas Gerais for R$520
million. Maxitel's rights and obligations under its license are substantially
identical to the Company's rights and obligations under the Concessions.
Maxitel's subscribers use dual-mode cellular telephones, which operate with AMPS
analog networks, such as the Company's, as well as TDMA networks. Management
estimates that the Company's market share was 67% at May 1999, and Maxitel's
market share was 33%.
Other Competition
While management does not consider fixed-line service providers to be major
competitors, it is possible that increased fixed-line penetration in areas where
cellular telecommunications had previously been the only readily-available
telecommunications service could result in reduced usage of cellular
telecommunication services in those areas. The fixed-line service provider in
the Region is TNL. The Federal Government has granted a second concession to
provide fixed-line telecommunications services in the Region to Canbra
Telefonica S.A., a consortium whose members include Bell Canada International,
WLL International, Inc. and Qualcomm Incorporated. The consortium paid R$60
million for the concession.
Technological advances in the telecommunications field, such as Personal
Communications Services ("PCS"), may introduce additional competition for
cellular service providers. PCS services, which are similar to digital cellular
telecommunications services, require a license from the Federal Government. The
Federal Government has indicated that it does not intend to issue licenses to
provide PCS services until 2000. Satellite services became available in Brazil
in January 1999, when Iridium launched its service. 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.
Cellular telecommunications services compete to a limited extent with
certain other wireless telecommunications services, such as mobile radio, paging
or beeper services, which are generally less expensive than cellular
telecommunications services. However, such services are not widely used in the
Region.
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, market conditions prevailing 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 TNL's subsidiaries operating in the Region. The terms of these
interconnection agreements include provisions specifying the number of
connection points, the method by which signals must be received and transmitted,
and the costs and fees of interconnection. 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. The Company is required to provide reciprocal service to
subscribers of those cellular service providers 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 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 will permit its subscribers to make and receive calls in
Portugal. The terms of these international roaming agreements vary from
agreement to agreement.
Employees
At December 31, 1998, the Company had 256 full-time employees, of whom
approximately 29% were employed in sales, 25% in finance and administrative
support, 22% in customer service, 18% in technical positions and 6% in
marketing. Approximately 41% 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 year 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.
Employees of the Company at the time of the privatization had the right to
maintain their rights and benefits in Fundacao Telebras de Seguridade Social -
Sistel ("Sistel"), a multi-employer defined benefit plan that supplements
government-provided retirement benefits. The Company makes monthly contributions
to Sistel currently equal to 13.5% of the salary of each employee who is a
Sistel member. Each employee member also makes a monthly contribution to Sistel
based on age and salary. Members of Sistel qualify for full pension benefits
after reaching age 57 provided they have been members of Sistel for at least ten
uninterrupted years and have been affiliated with the social security system for
at least 35 years. Sistel operates independently from the Company. As a member
of a multi-employer plan, the Company's contributions are not segregated in
separate accounts or restricted to provide benefits only to employees of the
Company. See Note 24 to the Consolidated Financial Statements. Employees hired
since the privatization are not members of Sistel and the Company does not
contribute to any pension fund on behalf of such employees.
Sistel covers the former employees of the companies 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.
Capital Expenditures
The Company's capital expenditure priorities include increasing the
capacity, coverage and level of digitalization, of the Company's network.
Management expects 1999 capital expenditures to be approximately R$135 million.
The following table sets forth the Company's capital expenditures for each
year in the three-year period ended December 31, 1998.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1996 1997 1998
---- ---- ----
(millions of reais (1))
<S> <C> <C> <C>
Automatic switching equipment..................................... 9.7 4.6 19.8
Other equipment................................................... 128.5 62.7 31.8
Real estate....................................................... 35.8 1.0 5.3
Other assets...................................................... 1.1 0.2 0.8
-------- ------- --------
Total capital expenditures................................... 175.1 68.5 57.7
======== ======= ========
</TABLE>
- ------------------
(1) 1996 and 1997 information is presented in constant reais of December 31,
1997. 1998 information is presented in nominal reais.
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.
Research and Development
In connection with the Breakup, the Subsidiaries were required to enter
into three-year contracts which obligate them to contribute an aggregate of
approximately R$150 thousand per annum to the Centro de Pesquisa e
Desenvolvimento da Telebras (the "Center"), a research and development center
formerly operated by Telebras, during the three years ending May 2001. Prior to
the execution of these contracts the Subsidiaries each paid 1.5% of revenues to
the Center.
The Company's research and development expenses during 1998, including its
contribution to the Center, were R$0.8 million. The Company had no research and
development expenses during 1996 and 1997 because all contributions to the
Center during that period were made by the Predecessor Companies. The Company
does not independently develop new telecommunications hardware and depends upon
the manufacturers of telecommunications products for the development of new
hardware.
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 November 1998 and
various administrative enactments thereunder. Each of the Subsidiaries operates
under a Concession that authorizes it to provide specified services and sets
forth certain obligations (the "List of Obligations").
Anatel is the regulatory agency for telecommunications under the General
Telecommunications Law and the October 1997 Regulamento da Agencia Nacional de
Telecomunicacoes (the "Anatel Decree"). Anatel is administratively independent
and financially autonomous. Anatel 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 initial periods of the Concessions to
provide cellular telecommunications service in the State of Bahia and Sergipe
expire on June 29, 2008 and December 15, 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.
Obligations of Telecommunications Companies
The Company, like other cellular service providers, is subject to
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 tables set forth the Company's quality of service and network
expansion obligations as provided in the Concessions.
<TABLE>
<CAPTION>
Maximum/
Quality of Service Indicator Minimum
- ---------------------------- ----------------
<S> <C>
Average level of system availability (1)............................ greater than 98%
Network drop rate (2)............................................... less than 3%
"All circuits busy" rate (3)........................................ less than 5%
Interconnection drop rate (4)...................................... less than 3%
Average system availability on first call attempt.................. greater than 90%
Number of customer complaints per month (per 100 subscribers) ..... less than 5
</TABLE>
- ----------
(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.
<TABLE>
<CAPTION>
Minimum required coverage
-------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Services offered in cities with populations of:(1)
<S> <C> <C> <C> <C> <C>
Over 200,000 or state capital..................... 100% -- -- -- --
100,000 to 200,000................................ -- 100% -- -- --
75,000 to 100,000................................. -- -- 90% -- --
50,000 to 75,000.................................. -- -- -- 80% --
30,000 to 50,000.................................. -- -- -- -- 70%
Maximum average installation waiting time
(days)(2)........................................ 180 120 30 15 5
</TABLE>
- ----------
(1) For services to be deemed to be offered in any city, service must be
available to at least 30% of the population.
(2) Between request for service and connection in areas with cellular service.
The Company is currently in compliance with its quality of service
obligations and has satisfied its network expansion obligations for each year
through 2001. Although there can be no assurances, the Company's management
expects that the Company will be in compliance with its obligations under the
Concessions at all times.
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.
Anatel does not currently require network operators to unbundle network
elements and services, although Anatel has stated that it plans to review the
issue on a regular basis and may require unbundling in the future. In an
unbundled regime, each network operator is required to provide a detailed list
of network services and elements which may be purchased separately by a party
requesting interconnection.
Rate Regulation
The Concessions provide for a price-cap mechanism to set and adjust rates
on an annual basis. The cap is a maximum weighted average price for a basket of
services. The basket consists of 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 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 an interconnection fee. The
interconnection fee charged by Band A Service Providers is subject to a price
cap stipulated by Anatel. The price cap for the interconnection 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 interconnection
charges, see "--Sources of Revenue--Interconnection."
Replacement of Telebras as Guarantor of Certain Credit Agreements
The Subsidiaries are parties to credit agreements that are guaranteed by
Telebras. The Company is obligated, pursuant to the terms and conditions of the
privatization of the Telebras System, to replace Telebras as guarantor of these
agreements. At May 31, 1999, Telebras had been replaced as guarantor in relation
to all but R$16.3 million of this indebtedness. Management is negotiating with
the creditors in respect of the remaining indebtedness.
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 States of Bahia, Sergipe and Sao
Paulo. Opposition candidates won in six states, including the States of Rio de
Janeiro and Rio Grande do Sul. In January 1999, the new Governor of the State of
Minas Gerais announced that his state would suspend payments on its debt to the
Federal Government for 90 days. The Governor of the State of Rio Grande do Sul
subsequently obtained a court order permitting his state to make its debt
payments into an escrow account, pending resolution of a request of seven states
to renegotiate refinancing agreements they had reached with the Federal
Government in 1997. The Federal Government has responded by seeking to withhold
constitutionally-mandated transfers to the State of Minas Gerais. The Federal
Government has notified certain international financial institutions that it
will no longer guarantee obligations of the States of Minas Gerais and Rio
Grande do Sul to those institutions, leading the World Bank to suspend loans to
certain Brazilian states.
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 disbursement, of approximately US$4.9 billion, from the
IMF, followed by an additional US$4.9 billion in bilateral loans under the
IMF-led support package. Subsequent disbursements will depend on Brazil's
ability to meet the agreed primary surplus targets and on Brazil's progress in
implementing fiscal reforms. There can be no assurance that Brazil will be able
to meet the primary surplus targets under its agreement with the IMF and,
accordingly, that the full amount under the IMF-led support package will be
available to Brazil.
After giving effect to the inflows from the IMF-led support package,
Brazil's international reserves stood at US$38.9 billion on April 8, 1999. The
Commercial Market Rate stood at R$1.7485 to US$1.00. on June 18, 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 issues 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 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 9.0
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 invites Federal Government efforts to control inflation by holding
down the rates that Brazilian public utilities are permitted to charge.
There can be no assurance that Brazilian inflation will remain at modest
rates or, if there is an increase in inflation, that the Company's business,
prospects, financial condition and results of operations will not be adversely
affected.
Item 2. Description of Property
The principal 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 March
31, 1999, the Company had seven large cellular switches in Salvador, Aracaju,
Feira de Santana and Itabuna and 277 base stations, of which 77 were located on
land owned by the Company and the remainder of which were located on land leased
by the Company. Most of these leases do not expire prior to 2003. The Company
leases office space (approximately 1,800 square meters) in Salvador and Aracaju.
The Company also leases seven retail stores.
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 other 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 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. Under Brazilian
law, there is a risk that the state governments could seek to apply this
interpretation retroactively to activation fees charged 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 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.
In December 1998, Telebahia Celular received an assessment from the
taxation authority in the State of Bahia for R$1.4 million in unpaid ICMS tax on
activation fees recognized during the period from February to October 1998, plus
R$1.0 million in penalties. Telebahia Celular has commenced an administrative
challenge to this assessment. There can be no assurance that Telebahia Celular
will ultimately prevail in this action.
The Company's management does not believe that the retroactive application
of the ICMS to activation fees is probable and, therefore, no provision for loss
with respect to such application has been made or is expected to be made in the
Consolidated Financial Statements.
If the ICMS were applied retroactively for the five year period ended
December 31, 1997 it would have a material adverse impact on the financial
condition and results of operations of the Company and would give rise to a
maximum liability estimated at R$22.0 million. However, the Company's management
believes that the Predecessor Companies would be liable for any tax liability
arising from the retroactive application of the ICMS to activation fees
recognized prior to the creation of the subsidiaries on January 5, 1998.
Other Litigation
The Company is a party to certain legal proceedings arising in the normal
course of business. The Company has made provisions in relation to proceedings
where management considers losses to be probable, based on its legal advice. In
the opinion of the Company's management, such actions, if decided adversely to
the Company, would not have a material adverse effect on the Company's business,
financial condition or results of operations.
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 50,000 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 in accordance with Brazilian law. The
Iberdrola/Telefonica consortium owns 51.8% of the Common Shares. Accordingly,
Iberdrola/Telefonica has the ability to control the election of the Holding
Company's Board of Directors and the direction and future operations of the
Company. Iberdrola/Telefonica is managed by Telefonica Internacional, S.A.
pursuant to a shareholder's agreement among Iberdrola S.A. ("Iberdrola") and
Telefonica Internacional, S.A.
The following table sets forth information concerning the ownership of
Common Shares by Iberdrola Investimentos Sociedade Unipessoal, Lda., Telefonica
Internacional S.A. and the Holding Company's officers and directors as a group
at April 1999. The Company is not aware of any other shareholder owning more
than 10.0% of the Common Shares.
<TABLE>
<CAPTION>
Percentage of
Number of common outstanding
Name of owner shares owned common shares
- ------------- ------------ -------------
<S> <C> <C>
Iberdrola Investimentos Sociedade Unipessoal, Lda. ................... 39,931,193,6907 32.11%
Telefonica Internacional S.A.......................................... 24,473,957,428 19.68%
All directors and executive officers as a group (5 persons)........... 4,528 0.00%
</TABLE>
Iberdrola Investimentos Sociedade Unipessoal, Lda. is an indirect
subsidiary of Iberdrola. Iberdrola is an electric power company whose major
activity is the generation, transportation, distribution and marketing of
electricity. Iberdrola is also engaged in sectors such as new energy,
engineering, consultancy, telecommunications, information systems, real estate,
and added value services to customers. In Spain, Iberdrola provides electricity
to more than eight million customers, which represent 40% of the peninsular
domestic market. Iberdrola has 30 subsidiaries in Argentina, Bolivia, Brazil,
Colombia, Chile and Guatemala that supply electricity, gas and
telecommunications to over 14 million customers in those countries. Iberdrola is
a participant in the consortia that acquired control of two other New Holding
Companies: Tele Sudeste Celular Participacoes S.A. and Telesp Participacoes S.A.
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 three
other New Holding Companies: Tele Sudeste Celular Participacoes S.A., Telesp
Celular Participacoes S.A. and Telesp Participacoes S.A.
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 1.9 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.
<TABLE>
<CAPTION>
Nominal reais per
1,000 Preferred Shares
----------------------
High Low
---- ---
<S> <C> <C>
Third quarter 1998 (beginning September 21, 1998)............................... 0.55 0.46
Fourth quarter 1998............................................................. 1.11 0.37
</TABLE>
In the United States, the Preferred Shares trade in the form of ADSs, each
representing 50,000 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 TBE. At December
31, 1998, there were approximately 159 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.
<TABLE>
<CAPTION>
U.S. dollars per ADS
--------------------
High Low
---- ---
<S> <C> <C>
Fourth quarter 1998 (beginning November 16, 1998)............................... 47 7/8 20 1/4
</TABLE>
The common shares and preferred shares of Telebahia Celular trade on the
Sao Paulo Stock Exchange, Rio de Janeiro Stock Exchange and the Bolsa de Valores
da Bahia, Sergipe e Alagoas. The common shares and preferred shares of Telergipe
Celular are traded in the Brazilian over-the-counter market.
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 will be subject to tax at a 25% rate.
No assurance can be given that the Board of Directors of the Holding
Company will not recommend that future distributions of profits should be made
by means of interest on capital instead of by means of dividends.
Amounts paid as interest on capital (net of applicable withholding tax) may
be treated as payments in respect of the dividends the Holding Company is
obligated to distribute to its shareholders in accordance with its Charter and
the Brazilian Corporation Law. Distributions of interest on capital in respect
of the Preferred Shares, including distributions to the Depositary in respect of
Preferred Shares underlying ADSs, may be converted into U.S. dollars and
remitted outside of Brazil, subject to applicable exchange controls.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to
the ownership, transfer or disposition of Preferred Shares or ADSs by a
non-Brazilian holder except for gift and inheritance taxes levied by some states
in Brazil on gifts made or inheritances bestowed by individuals or entities not
resident or domiciled in Brazil or in the relevant State to individuals or
entities that are resident or domiciled within such State in Brazil. There are
no Brazilian stamp, issue, registration, or similar taxes or duties payable by
holders of Preferred Shares or ADSs.
A financial transaction tax (the "IOF tax") may be imposed on the
conversion of Brazilian currency into foreign currency (e.g., for purposes of
paying dividends and interest). The rate of IOF tax rate on such conversions is
currently 0%, but the Minister of Finance has the legal power to increase the
rate to a maximum of 25%. Any such increase will be applicable only
prospectively.
In addition to the IOF tax, a second, temporary tax that applies to the
removal of funds from accounts at banks and other financial institutions (the
"CPMF tax") will be imposed on distributions by the Holding Company in respect
of ADSs at the time such distributions are converted into U.S. dollars and
remitted abroad by the Custodian. The CPMF tax will be in effect until June
2002, unless its term is extended, and such tax will be imposed at a rate of
0.38% from June 1999 until June 2000 and at a rate of 0.30% from June 2000 until
June 2002.
Registered Capital
Amounts invested in Preferred Shares by a non-Brazilian holder who
qualifies under the Annex IV Regulations and obtains registration with the CVM,
or by the Depositary representing an ADS holder, are eligible for registration
with the Central Bank. Such registration (the amount so registered is referred
to as "Registered Capital") allows the remittance outside Brazil of foreign
currency, converted at the Commercial Market Rate, acquired with the proceeds of
distributions on, and amounts realized through dispositions of such Preferred
Shares. The Registered Capital per Preferred Share purchased in the form of an
ADS, or purchased in Brazil and deposited with the Depositary in exchange for an
ADS, will be equal to its purchase price (stated in U.S. dollars). The
Registered Capital per Preferred Share withdrawn upon cancellation of an ADS
will be the U.S. dollar equivalent of (i) the average price of a Preferred Share
on the Brazilian stock exchange on which the most Preferred Shares were traded
on the day of withdrawal or, (ii) if no Preferred Shares were traded on that
day, the average price on the Brazilian stock exchange on which the most
Preferred Shares were traded in the fifteen trading sessions immediately
preceding such withdrawal. The U.S. dollar equivalent will be determined on the
basis of the average Commercial Market Rates quoted by the Central Bank on such
date or dates.
A non-Brazilian holder of Preferred Shares may experience delays in
effecting Central Bank registration, which may delay remittances abroad. Such a
delay may adversely affect the amount in U.S. dollars, received by the
non-Brazilian holder.
U.S. Federal Income Tax Considerations
The statements regarding U.S. tax law set forth below are based on U.S. law
as in force on the date of this Annual Report, and changes to such law
subsequent to the date of this Annual Report may affect the tax consequences
described herein. This summary describes the principal tax consequences of the
ownership and disposition of Preferred Shares or ADSs, but it does not purport
to be a comprehensive description of all of the tax consequences that may be
relevant to a decision to hold or dispose of Preferred Shares or ADSs. This
summary applies only to purchasers of Preferred Shares or ADSs who will hold the
Preferred Shares or ADSs as capital assets and does not apply to special classes
of holders such as dealers in securities or currencies, holders whose functional
currency is not the U.S. dollar, holders of 10% or more of the shares of the
Holding Company (taking into account shares held directly through depositary
arrangements), tax-exempt organizations, financial institutions, holders liable
for the alternative minimum tax, securities traders who elect to account for
their investment in Preferred Shares or ADSs on a mark-to-market basis, and
persons holding Preferred Shares or ADSs in a hedging transaction or as part of
a straddle or conversion transaction.
Each holder should consult such holder's own tax advisor concerning the
overall tax consequences to it, including the consequences under laws other than
U.S. federal income tax laws, of an investment in Preferred Shares or ADSs.
In this discussion, references to "ADSs" also refer to Preferred Shares,
references to a "U.S. holder" are to a holder of an ADS (i) that is a citizen or
resident of the United States of America, (ii) that is a corporation organized
under the laws of the United States of America or any state thereof, or (iii)
that is otherwise subject to U.S. federal income taxation on a net basis with
respect to the ADS.
For purposes of the U.S. Internal Revenue Code of 1986, as amended (the
"Code"), holders of ADRs will be treated as owners of the ADSs represented by
such ADRs.
Taxation of Dividends
A U.S. holder will recognize ordinary dividend income for U.S. federal
income tax purposes in an amount equal to the amount of any cash and the value
of any property distributed by the Holding Company as a dividend to the extent
that such distribution is paid out of the Holding Company's current or
accumulated earnings and profits ("e&p"), as determined for U.S. federal income
tax purposes, when such distribution is received by the Custodian or by the U.S.
holder, in the case of a holder of Preferred Shares. To the extent that such a
distribution exceeds the Holding Company's e&p, it will be treated as a
nontaxable return of capital, to the extent of the U.S. holder's tax basis in
the ADS (or Preferred Shares, as the case may be), and thereafter as capital
gain. The amount of any distribution will include the amount of Brazilian tax
withheld on the amount distributed and the amount of a distribution paid in
reais will be measured by reference to the exchange rate for converting reais
into U.S. dollars in effect on the date the distribution is received by the
Custodian, or by a U.S. holder, in the case of a holder of Preferred Shares. If
the Custodian or U.S. holder, in the case of a holder of Preferred Shares, does
not convert such reais into U.S. dollars on the date it receives them, it is
possible that the U.S. holder will recognize foreign currency loss or gain,
which would be ordinary loss or gain, when the reais are converted into U.S.
dollars. Dividends paid by the Holding Company will not be eligible for the
dividends received deduction allowed to corporations under the Code.
Distributions out of e&p with respect to the ADSs generally will be treated
as dividend income from sources outside of the United States and generally will
be treated separately along with other items of "passive" (or, in the case of
certain U.S. holders, "financial services") income for purposes of determining
the credit for foreign income taxes allowed under the Code. Subject to certain
limitations, Brazilian income tax withheld in connection with any distribution
with respect to the ADSs may be claimed as a credit against the U.S. federal
income tax liability of a U.S. holder if such U.S. holder elects for that year
to credit all foreign income taxes, or such Brazilian withholding tax may be
taken as a deduction. Foreign tax credits will not be allowed for withholding
taxes imposed in respect of certain short-term or hedged positions in securities
or in respect of arrangements in which a U.S. holder's expected economic profit,
after non-U.S. taxes, is insubstantial. U.S. holders should consult their own
tax advisors concerning the implications of these rules in light of their
particular circumstances.
Distributions of additional shares to holders with respect to their ADSs
that are made as part of a pro rata distribution to all shareholders of the
Holding Company generally will not be subject to U.S. federal income tax.
A holder of an ADS that is a foreign corporation or nonresident alien
individual (a "non-U.S. holder") generally will not be subject to U.S. federal
income tax or withholding tax on distributions with respect to ADSs that are
treated as dividend income for U.S. federal income tax purposes, and generally
will not be subject to U.S. federal income tax or withholding tax on
distributions with respect to ADSs that are treated as capital gain for U.S.
federal income tax purposes unless such holder would be subject to U.S. federal
income tax on gain realized on the sale or other disposition of ADSs, as
discussed below.
Taxation of Capital Gains
Upon the sale or other disposition of an ADS, a U.S. holder will recognize
gain or loss for U.S. federal income tax purposes in an amount equal to the
difference between the amount realized in consideration for the disposition of
the ADS (excluding the amount of any distribution paid to the Custodian but not
distributed by the Custodian prior to the disposition) and the U.S. holder's tax
basis in the ADS. Such gain or loss generally will be subject to U.S. federal
income tax and will be treated as capital gain or loss. Long-term capital gains
recognized by an individual holder generally are subject to a maximum rate of 20
percent in respect of property held for more than one year. The deductibility of
capital losses is subject to certain limitations. Gain realized by a U.S. holder
on a sale or disposition of ADSs generally will be treated as U.S. source
income. Consequently, if Brazilian tax is imposed on such gain, the U.S. holder
will not be able to use the corresponding foreign tax credit, unless the holder
has other foreign source income of the appropriate type in respect of which the
credit may be used.
A non-U.S. holder will not be subject to U.S. federal income tax or
withholding tax on gain realized on the sale or other disposition of an ADS
unless (i) such gain is effectively connected with the conduct by the holder of
a trade or business in the United States, or (ii) such holder is an individual
who is present in the United States of America for 183 days or more in the
taxable year of the sale and certain other conditions are met.
U.S. Backup Withholding and Information Reporting
The information reporting requirements of the Code generally will apply to
distributions to a U.S. holder. Distributions to non-U.S. holders generally will
be exempt from information reporting and backup withholding under current law
but a non-U.S. holder may be required to establish its non-U.S. status in order
to claim such exemption.
Item 8. Selected Financial Data
Background
The selected financial information presented below should be read in
conjunction with the Consolidated Financial Statements and the notes thereto.
The Consolidated Financial Statements have been audited by Arthur Andersen S/C
as of and for the year ended December 31, 1998, and by KPMG Peat Marwick as of
December 31, 1997 and for the years ended December 31, 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 monetaria
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 services 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.
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 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 that were spun off from Telebras to the
Holding Company, in addition to its investment in the Subsidiaries, resulted in
an increase of R$57.0 million compared to the Company's historical divisional
equity. See Note 2(a) to the Consolidated Financial Statements. The amount of
distributable retained earnings of the Holding Company includes retained
earnings allocated to the Holding Company in the Breakup of Telebras.
For 1996 and 1997, the Consolidated Financial Statements present the
financial condition and revenues and expenses of the cellular telecommunications
business of the Predecessor Companies, and "minority interests" reflect the
interest 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, minority shareholders
directly and indirectly owned 10.9% and 26.4% of the share capital of Telebahia
Celular and Telergipe Celular, respectively.
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Information
Year ended December 31,
----------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
Income Statement Data: (thousands of reais (1))
Brazilian GAAP
<S> <C> <C> <C> <C>
Net operating revenue............................... 84,176 188,544 220,441 249,290
Cost of services.................................... (30,823) (55,543) (68,716) (101,635)
-------- -------- -------- --------
Gross profit........................................ 53,353 133,001 151,725 147,655
Operating expenses:
Selling expense................................. (3,275) (19,229) (17,471) (40,217)
General and administrative expense.............. (7,745) (16,015) (20,517) (26,756)
Other net operating income...................... 3,441 5,301 1,568 (500)
-------- -------- -------- --------
Operating income before interest.................... 45,774 103,058 115,305 80,182
Allocated interest expense.......................... (9,614) (10,466) (10,333)
Net interest expense (2)............................ (12,927)
-------- -------- -------- --------
Operating income before interest income and
unallocated interest expense (2)................. 36,160 92,592 104,972
Operating income.................................... 67,255
Net nonoperating income............................. -- -- 57 (3,533)
Employees' profit share............................. -- (209) (142) (466)
-------- --------- --------- --------
Income before interest income, unallocated
interest expense, taxes and minority interest (2) 36,160 92,383 104,887
Income before minority interests and taxes.......... 63,256
Income and social contributions taxes............... (15,442)
-------- -------- -------- --------
Income before minority interest (2)................. 36,160 92,383 104,887 47,814
Minority interests.................................. (1,861) (6,468) (13,108) (5,759)
-------- -------- ------- --------
Income before interest income, unallocated
interest expense and taxes (2)................... 34,299 85,915 91,779
======== ======== ========
Net income.......................................... 42,055
========
Net income per 1,000 shares outstanding (reais)..... 0.13
U.S. GAAP
Income before interest income, unallocated
interest expense and taxes (2)................... 85,248 89,459
======== =========
Net Income.......................................... 42,923
========
Net income per 1,000 Common Shares
outstanding--basic (reais)........................ 0.13
Net income per 1,000 Common Shares
outstanding--diluted (reais)...................... 0.13
Net income per 1,000 Preferred Shares
outstanding--basic (reais)........................ 0.13
Net income per 1,000 Preferred Shares
outstanding--diluted (reais)...................... 0.13
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1995 1996 1997 1998
---- ---- ---- ----
Balance Sheet Data: (thousands of reais (1))
Brazilian GAAP
<S> <C> <C> <C> <C>
Property, plant and equipment, net............... 161,815 324,686 373,928 368,431
Total assets..................................... 175,020 352,971 408,947 490,109
Loans and financing.............................. 102,650 139,562 148,848 91,179
Divisional equity................................ 55,428 176,618 194,329
Shareholders equity.............................. 270,966
U.S. GAAP
Property, plant and equipment, net............... 323,110 368,903 365,249
Total assets..................................... 351,915 405,580 489,131
Loans and financing.............................. 136,541 145,839 89,441
Divisional equity................................ 175,733 191,482
Shareholders equity.............................. 275,413
</TABLE>
- ------------------
(1) 1995, 1996 and 1997 information is presented in constant reais of December
31, 1997. 1998 information is presented in nominal reais.
(2) For 1995, 1996 and 1997, prior to the effective creation of the
Subsidiaries, 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.
The Company's net operating revenue in 1994 was R$34.5 million. The Company
did not present 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 31,629 subscribers at year-end, 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 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--Indexation of
Inflation and Devaluation." Prior to January 1999, the Holding Company did 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." At June 18, 1999, the Commercial Market Rate was R$1.7485
to US$1.00.
The following table sets forth the period-end, average, high and low
Commercial Market Rate (through February 21, 1995) and Noon Buying Rate (from
February 22, 1995), expressed in reais per U.S. dollar for the periods
indicated.
<TABLE>
<CAPTION>
Average for
Period Period-end Period (1) High Low
- ------ ---------- ---------- ---- ---
<S> <C> <C> <C> <C>
1994............................................... 0.8460 0.6450 1.0000 0.1186
1995............................................... 0.9722 0.9228 0.9722 0.8450
1996............................................... 1.0393 1.0080 1.0413 0.9733
1997............................................... 1.1165 1.0805 1.1166 1.0394
1998............................................... 1.2085 1.1640 1.2090 1.1160
1999 (through May 31, 1999)........................ 1.7340 1.8553 2.2000 1.2074
</TABLE>
- ------------------
(1) Average of the rates on the last day of each month in the period. Source:
Central Bank through February 21, 1995; Federal Reserve Bank of New York
thereafter.
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 fixed-line
service providers, (b) eight cellular service providers and (c) one domestic and
international long-distance service provider. In the Breakup, certain assets and
liabilities of Telebras, including 89.1% and 73.6% of the total share capital of
Telebahia Celular and Telergipe 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.
For prior years, the Consolidated Financial Statements reflect the
cellular operations of the Predecessor Companies. Costs were
specifically identified where possible and divided accordingly. 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(b) 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 Indexation for inflation. The Consolidated Financial Statements for
1996 and 1997 were prepared using the integral restatement method to
recognize the effects of inflation, and presented in constant reais of
December 31, 1997. For 1998, the Company has not used the integral
restatement method to prepare its financial statements, because the
low rate of Brazilian inflation in 1998 (1.8% as measured by the
IGP-M) would have made any restatement for 1998 inflation
insignificant. Management believes that the lack of indexation of the
Consolidated Financial Statements 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.
The Company has faced competition in the Region since April 1998. As a
result of competition, prices for cellular telecommunications services have
declined and the Company's operating margins have diminished. 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
foreign currency liabilities. At December 31, 1998, the Company had R$85.8
million of indebtedness denominated in U.S. dollars. The Company's revenues are
earned entirely in reais, and the Company has no material dollar-denominated
assets. 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 has hedged a portion of its foreign currency exposure since January
1999, and management expects that the Company will continue to hedge a portion
of its U.S. dollar-denominated debt in the future. The portion to be hedged will
be determined from time to time taking into account factors such as the extent
of the Company's U.S. dollar-denominated indebtedness, the state of the foreign
exchange markets and the cost of such hedging. The Company's foreign
exchange-related losses during the first quarter of 1999 were R$28.4 million.
The Company is exposed to interest rate risk as a consequence of its
floating rate debt. Accordingly, if market interest rates (principally LIBOR)
rise, the Company's financing expenses will increase. At December 31, 1998,
35.1% of the Company's indebtedness bore interest at floating rates.
Results of Operations for 1996, 1997 and 1998
The following table sets forth certain components of the Company's income
for each of the years in the three-year period ended December 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, % Change
-------------------------------------- ------------------------
1996 1997 1998 1996-1997 1997-1998
---- ---- ---- --------- ---------
(millions of reais (1))
<S> <C> <C> <C> <C> <C>
Net operating revenue....................... 188.5 220.4 249.3 16.9 13.1
Cost of services and goods.................. (55.5) (68.7) (101.6) 23.8 47.9
Gross profit................................ 133.0 151.7 147.7 14.1 (2.6)
Operating expenses:
Selling expense........................ (19.2) (17.5) (40.2) (8.9) 129.7
General and administrative expense..... (16.0) (20.5) (26.8) 28.1 30.7
Other net operating income (expense)... 5.3 1.6 (0.5) (69.8) (131.3)
------- ------- -------
Operating income............................ 103.1 115.3 80.2 11.8 (30.4)
Net interest expense (2).................... (10.5) (10.3) (12.9) (1.9) 25.2
Net nonoperating income (expense)........... -- -- (3.5)
Employees' profit share..................... (0.2) (0.1) (0.5) (50.0) 400.0
------- ------- -------
Income before taxes and minority
interests (2)............................ 92.4 104.9 63.3 13.5 (39.7)
Minority interests.......................... (6.5) (13.1) (5.8) 101.5 (55.7)
Income and social contribution taxes (2).... (15.4)
-------- ------- -------
Income before taxes, interest income, and
unallocated interest expense (2)......... 85.9 91.8 6.9
======= =======
Net income.................................. 42.1
=======
</TABLE>
- ------------------
(1) 1996 and 1997 information is presented in constant reais of December 31,
1997. 1998 information is presented in nominal reais.
(2) Prior to the effective creation of the Subsidiaries, 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's revenues consist of (i) usage charges, which include measured
service charges for outgoing calls, roaming charges and, since April 1999,
prepaid card 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) activation
fees, which are one-time charges paid to obtain cellular telecommunications
service, (v) other charges, including charges for call forwarding, call waiting
and call blocking and (v) since December 1998, proceeds from the sale of
cellular telephones and accessories. The composition of operating revenues by
category of service is presented in the Consolidated Financial Statements and
discussed below before deduction of taxes. The Company does not determine net
operating revenues or allocate cost by category of service.
The following table sets forth certain components of the Company's
operating revenues for each of the years in the three-year period ended December
31, 1998.
<TABLE>
<CAPTION>
Year ended December 31, % Change
-------------------------------------- ---------------------
1996 1997 1998 1996-1997 1997-1998
---- ---- ---- --------- ---------
(millions of reais (1))
<S> <C> <C> <C> <C> <C>
Usage charges.......................... 103.3 122.8 143.1 18.9 16.5
Monthly subscription payments.......... 70.8 82.0 91.4 15.8 11.5
Interconnection........................ 33.8 59.7 68.5 76.6 14.7
Activation fees........................ 26.4 13.5 9.9 (48.9) (26.7)
Cellular telephone sales............... -- -- 1.3
Other.................................. 2.9 1.6 3.2 (44.8) 100.0
------ ------- -------
Gross operating revenue................ 237.2 279.6 317.4 17.9 13.5
Value-added and other taxes............ (48.7) (59.2) (68.1) 21.6 15.0
------- ------- -------
Net operating revenues................. 188.5 220.4 249.3 16.9 13.1
======= ======= =======
</TABLE>
- ------------------
(1) 1996 and 1997 information is presented in constant reais of December 31,
1997. 1998 information is presented in nominal reais.
Net operating revenues increased by 13.1% in 1998 and 16.9% in 1997. The
growth in revenues over the three-year period was driven principally by
increases in the Company's subscriber base. The average number of subscribers
increased 20.0% to 229,858 subscribers in 1998 from 191,477 subscribers in 1997,
which in turn represented a 31.2% increase from 145,943 subscribers in 1996.
Usage charges. Revenues from usage charges increased 16.5% in 1998 and
18.9% in 1997. The increase throughout the period principally reflected
increases in outgoing traffic from 214.7 million minutes in 1996 to 237.5
million minutes in 1997 and 275.0 million minutes in 1998. These increases were
partially offset throughout the period by a shift in the subscriber base towards
calling plans with free minutes and/or lower usage charges, and in 1997 by a
reduction in real rates due to inflation.
Monthly subscription charges. Revenues from monthly subscription payments
increased by 11.5% in 1998 and 15.8% in 1997. The increase in 1998 reflected the
growth in the Company's subscriber base and an increase in the percentage of
subscribers choosing plans with higher monthly subscription fees. These effects
were partially offset by a reduction of the monthly subscription rate for the
Company's basic service plan. The increase in 1997 reflected the growth in the
average number of subscribers, offset by a reduction in real rates due to
inflation. Revenues from subscription charges are expected to decline in 1999 as
subscribers migrate to plans with lower subscription fees and prepaid service.
Interconnection. Interconnection revenues increased 14.7% in 1998 and 76.6%
in 1997. The increases over the two-year period were due principally to an
increase in the volume of calls to the Company's subscribers originating outside
the Company's network, principally calls from fixed-line telephones in the
Region. Total incoming traffic increased 15.2% to 367.3 million minutes in 1998
from 316.8 million minutes in 1997, which in turn represented a 92.3% increase
from 164.7 million minutes in 1996. The effect of these increases in incoming
traffic were partially offset in 1997 by a real reduction in interconnection
tariffs due to inflation.
Activation fees. Revenues from activation fees for cellular service
decreased by 26.7% in 1998 and 48.9% in 1997. The decrease in 1998 was due
principally to a reduction of the activation fee from R$318 to R$120 on April
30, 1998 and its suspension in October 1998. These decreases were partially
offset by an increase in the number of new subscribers to 109,446 in 1998 from
43,452 in 1997. The decline in 1997 primarily reflected a reduction in the
number of new subscribers from 85,013 in 1996 to 43,452 in 1997. Management
believes that competition is likely to result in further reductions in
activation fees and that activation fees are likely to be a negligible source of
revenue in the future.
Cellular telephone sales. The Company commenced selling digital cellular
telephones in December 1998 and recognized revenue of R$1.3 million from such
sales in 1998. Management expects that the sale of telephones will constitute a
significant portion of the Company's revenues in 1999 and future years, but does
not expect to realize material gross profit from such sales, which are generally
made at or near cost as an incentive for customers to subscribe for cellular
telephone service.
Other. Revenues from other services increased 100.0% in 1998 and decreased
by 44.8% in 1997. The increase in 1998 reflected increased revenues from TNL
relating to the use by TNL of the Company's network to provide telecommunication
service in remote parts of the Region and increased sales of value-added
services such as call forwarding, call waiting and call blocking. The decrease
in 1997 reflected principally a decrease in fees from the transfer of a cellular
line from one subscriber to another. This practice was common prior to 1997 when
the high cost of cellular activation and a shortage of cellular service created
an active secondary market for cellular lines in the Region.
Value-added and other taxes. The principal taxes on telecommunications
services are the ICMS, PIS and COFINS. See "Description of Business--Sources of
Revenue--Value Added Taxes on Telecommunications Services." Value-added and
other indirect taxes were 20.5% of gross operating revenues in 1996, 21.2% in
1997 and 21.5% in 1998. The variations from year to year reflect fluctuations in
the composition of the Company's gross revenues, not all of which have been
subject to value-added and other indirect taxes over the entire period.
Activation fees, for example, became subject to ICMS for the first time with
effect from July 1, 1998, which increased the effective rate of taxation of
operating revenues in 1998. See "Legal Proceedings--Litigation Related to the
Application of the ICMS."
Cost of services and goods
Cost of services and goods increased 47.9% in 1998 and by 23.8% in 1997.
The gross profit margin (gross profit as a percentage of net revenues) was 59.2%
in 1998, compared to 68.8% in 1997 and 70.6% in 1996. The decline in gross
profit margin in 1998 resulted primarily from a large increase in depreciation
and amortization charges, which was due in turn to significant expansion of the
Company's fixed assets in 1997 and 1998.
The following table sets forth the composition of the Company's costs of
services and goods for each of the years in the three-year period ended December
31, 1998. Some components of the Company's costs of services and goods in 1997
and 1996 are the costs of the Predecessor Companies that were allocated to their
cellular operations and may not reflect the costs that the Company would have
incurred if it had operated as an independent business during those years.
<TABLE>
<CAPTION>
Year ended December 31, % Change
-------------------------------------- ---------------------
1996 1997 1998 1996-1997 1997-1998
---- ---- ---- --------- ---------
(millions of reais (1))
<S> <C> <C> <C> <C> <C>
Depreciation and amortization........ 15.4 20.0 35.4 29.9 77.0
Materials and services............... 7.9 12.0 24.6 51.9 105.0
Fixed-line network expenses.......... 27.2 32.0 21.8 17.6 (31.9)
Cellular telephones.................. -- -- 3.7
Personnel............................ 0.3 0.4 1.4 33.3 250.0
Rental fees and insurance............ -- -- 8.8
Fistel tax........................... 4.7 4.3 5.9 (8.5) 37.2
-------- -------- -------
Cost of services..................... 55.5 68.7 101.6 23.8 47.9
======== ======== =======
</TABLE>
- ------------
(1) 1996 and 1997 information is presented in constant reais of December
31, 1997. 1998 information is presented in nominal reais.
Depreciation and amortization. Depreciation and amortization expenses grew
throughout the 1996 to 1998 period reflecting the expansion of the Company's
network, particularly in late 1997 and 1998. The Company did not change its
depreciation policies during this period. In 1999, the Company re-evaluated its
depreciation policies and accelerated depreciation of certain equipment in light
of changes in technology and industry practice. The new depreciation rates apply
from January 1, 1999.
Materials and services. Materials and services include costs of materials
and services received from third parties, including interconnection charges paid
to TNL and other telecommunications service providers and amounts paid to the
Predecessor Companies for the provision of certain computer-related and other
services. Materials and services costs increased 105.0% in 1998 and 51.9% in
1997. The increases in 1998 and 1997 resulted principally from increases in
interconnection charges. Since interconnection costs were allocated costs in
1996 and 1997, they are not strictly comparable with the interconnection
payments made in 1998. Management expects that the amounts paid to the
Predecessor Companies for computer related services will decline in 1999 as a
result of the replacement of certain computer systems previously provided by the
Predecessor Companies.
Fixed-line network expenses. Fixed-line network expenses represent lease
payments to TNL for use of circuits between the Company's base stations and
switching centers and between the Company's network and the networks of TNL and
Embratel. Such expenses decreased 31.9% in 1998 and increased 17.6% in 1997. The
decrease in 1998 was due to Anatel-mandated discounts in such lease payments,
which initially ranged from 5% to 25% (in March 1998) and were subsequently
increased to a level ranging from 15% to 48% (in May 1998), with the higher
discounts applicable to higher-volume usage of circuits and available capacity.
Management anticipates further decreases in such lease payments in 1999 as a
result of negotiated reductions of rates in December 1998 and further
renegotiations expected in 1999. The 1997 increase was due principally to growth
in the number of the Company's subscribers and associated expansion of the
Company's network.
Cellular telephone costs. The cost of acquiring cellular telephones, which
the Company started selling to its subscribers in December 1998, was R$3.7
million in 1998. There were no such costs in 1997 and 1996.
Personnel, rental fees, insurance, Fistel fees and other costs. Personnel
expenses, Fundo de Fiscalizacao das Telecomunicacoes ("Fistel") fees and rental
and other expenses increased to R$16.1 million in 1998 from R$4.7 million in
1997 and R$5.0 million in 1996. The principal components of the increase in 1998
were R$8.8 million of rental fees paid to TNL for base station sites and other
rentals, such as storage space and customer service locations in small cities,
and an increase in Fistel fees. In 1997, the equivalent rental costs were
included in selling expense (R$15 million) and administrative expense (R$3
million). These costs were allocated costs in 1996 and 1997. The increase in
personnel costs in 1998 was due principally to growth in the Company's business
and the Company hiring personnel to perform services previously provided by the
Predecessor Companies. The Fistel fee is assessed against each service provider
for inspection of existing facilities (based on such provider's number of active
accounts), for installation of new facilities and for each activation of a new
cellular line. Management anticipates increased Fistel taxes in 1999 due to the
increased size of its subscriber base.
Operating expenses
Selling expense. Selling expense increased 129.7% in 1998 and decreased by
8.9% in 1997. The increase in selling expenses in 1998 was due principally to
increased marketing costs and an increase in provisions to the allowance for
doubtful accounts. The decrease in 1997 principally reflected a decline in
provisions to the allowance for doubtful accounts. The increase in marketing
costs in 1998 reflects a substantial increase in the size of the Company's sales
force in response to competition and the separation of the Company's sales
activities from those of TNL, as well as increases in expenditures on
advertising and increases in costs of operating the Company's own stores (due in
part to the opening of new stores). Management expects marketing costs to
increase again in 1999 due to increases in advertising expenses, the granting of
discounts to dealers in connection with the sale of handsets and the opening of
new stores.
The provisions for doubtful accounts charged to selling expense were R$18.6
million in 1998, R$7.2 million in 1997 and R$11.0 million in 1996. See Note 13
to the Consolidated Financial Statements. The increase in 1998 principally
reflected growth in the Company's past due accounts receivable. Past-due
accounts receivable grew substantially faster than the Company's total accounts
receivable, reflecting decreases in the average annual income of the Company's
customers and increased consumer interest rates in Brazil, which have adversely
affected the ability of consumers to meet payment obligations. The Company
recently initiated a number of practices to reduce the level of overdue accounts
receivable. See "Description of Business--Billing and Collection." The decrease
in 1997 in the provision for doubtful accounts reflected a reduction in
management's estimate of the amount of the Company's accounts receivable that
was not probable of collection at year-end 1997.
General and administrative expense. General and administrative expenses
increased 30.7% in 1998 and by 28.1% in 1997. Since general and administrative
expenses were allocated expenses in 1996 and 1997, they are not strictly
comparable with such expenses actually incurred in 1998. The increase in 1998
was due principally to increased personnel costs as the Company hired staff to
perform administrative functions (such as management, information technology,
human resources and accounting) previously performed by personnel of TNL. The
increase in allocated expenses in 1997 compared to 1996 was due principally to
growth in the Company's business.
Other net operating income (expense). The Company had other net operating
expense of R$0.5 million in 1998 and net operating income of R$1.6 million in
1997 and R$5.3 million in 1996. The other net operating expense recorded in 1998
primarily reflects an increase of R$2.5 million in provisions for contingencies,
as well as a charge of R$0.8 million in 1998 for research and development
expenses. The Company had no research and development expenses in 1996 or 1997
but has committed to invest R$0.2 million during each of the three years ending
May 2001. See "Description of Business--Research and Development." The decrease
in other net operating income in 1997 principally reflected a reduction in fines
received from delinquent customers
Interest expense
The Company recognized net interest expense of R$12.9 million in 1998 and
allocated interest expense of R$10.3 million and R$10.5 million in 1997 and
1996, respectively. Net interest expense in 1998 comprised R$14.1 million of
interest on loans outstanding and R$12.0 million of net exchange loss, which
were partially offset by R$13.3 million of interest income. Financial income in
1998 represents earnings on the Company's investments of cash and cash
equivalents. The Company did not recognize financial income in 1997 and 1996.
See Note 8 to the Consolidated Financial Statements.
Management anticipates a significant increase in net interest expense in
1999 for several reasons. The Company does not expect to reach in 1999 the level
of interest income earned in 1998 due to decreases in its balance of cash on
hand. The Company's relatively large balance in 1998 was due to the receipt by
the Company of R$57.0 million in connection with the Breakup of Telebras, which
was used in the fourth quarter of 1998 to repay high-interest indebtedness. See
Note 22 to the Consolidated Financial Statements. In addition, management
expects to record significant losses on foreign exchange variation due to the
approximately 43% devaluation of the real during the first half of 1999.
Finally, although the Company's total indebtedness was down 38.7% at year-end
1998 compared to year-end 1997, management expects to incur additional
indebtedness in 1999 to finance capital expenditures, and interest rates on
average have been higher in 1999 than in prior years. See "--Liquidity and
Capital Resources."
Net nonoperating income (expense)
Net nonoperating income (expense) includes gains and losses from
disposition of fixed assets. The Company had net nonoperating expense of R$3.5
million in 1998. The Company did not record any material nonoperating income in
1997 and 1996.
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. Employees' profit share was
R$0.2 million, R$0.1 million and R$0.5 million in 1996, 1997 and 1998,
respectively.
Minority interests
Minority interest was R$6.5 million, R$13.1 million and R$5.8 million in
1996, 1997 and 1998, respectively, which represented 7.0%, 12.5% and 9.2%,
respectively, of income before minority interests. The 1997 increase in minority
interest as a percentage of income principally reflected the issuance and sale
by the Predecessor Companies of preferred shares to new subscribers to fund
network expansion pursuant to an "auto-financing" system. Under the system
of auto-financing, in order to obtain fixed-line telephone service a prospective
customer was required to purchase preferred shares of the telephone company
from which service was solicited, and such preferred shares were issued at the
first ordinary shareholders assembly following the year in which the customer
had paid for them in full. As a consequence, minority interests tended to
increase. The auto-financing system was discontinued in July 1997.
Liquidity and Capital Resources
The Company's principal capital requirements are for capital expenditures
and payments of dividends to shareholders. The Company made capital expenditures
of R$175.1 million, R$68.5 million and R$57.7 million in 1996, 1997 and 1998,
respectively. These expenditures related primarily to increasing network
capacity and coverage. See "Description of Business--Capital Expenditures."
The Company had R$50.1 million of long-term indebtedness at December 31,
1998, all of which represented dollar-denominated, secured financing from
suppliers for the purchase of equipment and 72.7% of which bore interest at
fixed rates. The Company's indebtedness consists of financing originally
contracted for by Telebras on behalf of the Predecessor Companies and allocated
to the Company in 1998. All of the credit agreements evidencing such
indebtedness have been legally assigned to the Company with the approval of the
lenders thereunder. As of December 31, 1998, R$39.8 million and R$28.9 million
of interest and principal payments on the Company's indebtedness will be due in
1999 and 2000, respectively. The Company has no lines of credit or other credit
commitments available to it.
The Company has approximately R$135 million in planned 1999 capital
expenditures, of which R$51 million are committed expenditures. Management
expects that planned 1999 capital expenditures will be funded initially by an
issuance of commercial paper that subsequently may be refinanced by financings
from one or more financial institutions and may be supplemented by financings
from equipment suppliers. See Note 27 to the Consolidated Financial Statements.
Most of the planned 1999 capital expenditures will be dedicated to expanding and
enhancing the Company's network, including digitalizing the network and
installing signal enhancement devices.
The Holding Company is required to distribute to its shareholders, either
as dividends or as tax-deductible interest on net worth, 25% of its adjusted net
income determined in accordance with Brazilian accounting principles, as
adjusted in accordance with Brazilian corporate law including any realization of
the net income reserve. The Holding Company is also required to pay a
non-cumulative preferred dividend on its Preferred Shares in an amount equal to
6% of the share capital attributable to the Preferred Shares under Brazilian
corporate law. The Subsidiaries are also subject to mandatory distribution
requirements and are accordingly required to pay dividends to the minority
shareholders as well as to the Holding Company.
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'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 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$42.9 million under U.S. GAAP, compared to R$42.1
million under Brazilian GAAP. Shareholders' equity at December 31, 1998 is
R$275.4 million under U.S. GAAP, compared to R$271.0 million under Brazilian
GAAP.
The differences between Brazilian GAAP and U.S. GAAP that have the most
significant effects on net income and shareholders' equity are the treatment of
capitalized interest and, since January 1, 1998, the manner in which revenues
from activation fees are recognized.
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.
Following the Breakup of Telebras, the Company contracted with TNL to
continue providing the Company with a number of computer systems, as it had done
prior to the Breakup. It was contemplated from its inception that this
arrangement would continue only until the Company was able to handle its needs
for computer systems independently of TNL. Thus, the Company has been in the
process of making alternative arrangements for all of its principal computer
systems independently of the year 2000 issue. As a consequence, the Company is
in the process of replacing all of its principal computer systems, including
those provided by TNL, with computer systems that are year 2000 compliant. The
Company's billing, collection and rate calculation system and its payroll system
were replaced with year 2000-compliant systems in January and May 1999,
respectively, and management expects that replacements for the remaining systems
will be operational by September 1999. In order to avoid inefficiencies,
however, management plans to continue utilizing the computer services being
provided by TNL (which are already year-2000 compliant) for accounting and
management of fixed assets through December 1999 and to begin utilizing its own
systems in these areas in January 2000.
In preparation for its change of systems, the Company also prepared, with
the assistance of an international consulting firm, a comprehensive inventory of
its computer systems, which included an assessment of which systems were
year-2000 compliant and which were not, as well as a detailed contingency plan
for the eventuality that any system fails to operate as designed, including
contingency plans for worst-case scenarios. In addition, the Company has
formally contacted its major network infrastructure suppliers seeking their
assurance that equipment supplied by them will not be adversely affected by the
year 2000 issue. The Company has received such assurances from its principal
equipment suppliers, Ericsson, NEC and Lucent.
Because the Company has undertaken the replacement of its computer systems
independently of the year 2000 issue, management does not regard the cost of
such replacement as a cost of its year 2000 program. The only material cost of
the Company's year 2000 program is the R$150 thousand paid by the Company to the
international consultants who assisted with the preparation of the Company's
year 2000 assessment and contingency plans. There can be no assurance that the
Company's future financial performance will not be materially adversely affected
by a failure by the Company, the Predecessor Companies, or a third party upon
whom the Company relies, to timely address the year 2000 issue.
CVM Instruction 293/98, which was issued on October 30, 1998, requires all
Brazilian publicly-held companies to have addressed the year 2000 issue by June
30, 1999. Unless a discretionary extension is granted by the CVM, failure to
have addressed the year 2000 issue by the CVM's deadline could result in the
imposition of fines of R$100 per day. The Company has requested an extension
from the CVM.
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. Prior to January
1999, the Company did 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. Since January 1999, the Company
has hedged against these risks as described below. The Company does not 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$87.6 million of the Company's indebtedness at December 31, 1998
was denominated in U.S. dollars. The potential immediate loss to the Company
that would have resulted as of December 31, 1998 from a hypothetical
instantaneous and unfavorable 10% change in foreign currency exchange rates
would be approximately R$8.8 million. In addition, if such a change were to be
sustained, the Company's cost of financing would increase in proportion to the
change. The Company has hedged a portion of its U.S. dollar-denominated debt
since January 1999.
Interest Rate Risk
At December 31, 1998, the Company had approximately R$89.4 million in loans
and financing outstanding, of which R$58.0 million bore interest at fixed rates
and R$31.4 million bore interest at floating rates of interest (primarily
LIBOR-based). The Company invests its excess cash and cash equivalents (R$14.3
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$0.8 million.
The above sensitivity analyses are based on the assumption of an
unfavorable 100 basis point movement of the interest rates applicable to each
homogeneous category of financial assets and liabilities and sustained over a
period of one year. A homogeneous category is defined according to the currency
in which financial assets and liabilities are denominated and assumes the same
interest rate movement within each homogeneous category (e.g. U.S. dollars). As
a result, the Company's interest rate risk sensitivity model may overstate the
impact of interest rate fluctuations for such financial instruments as
consistently unfavorable movements of all interest rates are unlikely.
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 comprises four members serving for a term of three years. The Board of
Directors holds a regular meeting once a month and holds special meetings when
called by the Chairman or by two members of the Board.
The following are the current members of the Board of Directors and their
respective positions.
Name Position Date Elected
- ---- -------- ------------
Esteban Serra Mont.........................Chairman August 10, 1998
Fernando Maria Fournon Gonzales-Barcia.....Director August 10, 1998
Eduardo Lopez-Aranguren Marcos.............Director August 10, 1998
Alexandre Bertoldi.........................Director August 10, 1998
Set forth below are brief biographical descriptions of the Directors.
Esteban Serra Mont, 50 years old, has served as Chairman of the Board of
Directors since August 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 as 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 Holding 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.
Fernando Maria Fournon Gonzales-Barcia, 40 years old, has served as member
of the Board of Directors since August 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 Head of
Projects and Director of New Projects at Telefonica Internacional S.A. Since
February 1997 he has served as chief executive officer at CRT - Companhia
Riograndense de Telecomunicacoes. In addition to his position as member of the
Board of Directors of the Holding Company, he is also a member of the Boards of
Directors of Companhia Telefonica da Borda do Campo - CTBC, CRT - Companhia
Riograndense de Telecomunicacoes, Telesp Participacoes S.A., Tele Sudeste
Celular Participacoes S.A. and Portugal Telecom. He is also a member of the
Consultative Board of ANATEL - Agencia Nacional de Telecomunicacoes, the Latin
American Committee at the New York Stock Exchange and the Global Information
Infrastructure Commission - GIIC. He holds a degree in telecommunications
engineering from the Polytechnic University of Madrid.
Eduardo Lopez-Aranguren Marcos, 57 years old, has served as a member of the
Board of Directors since August 1998. He joined Iberdrola S.A. in 1965 and has
served as chief executive officer of Iberdrola Energia S.A., the company which
manages the Iberdrola Group's international energy activities and Spanish
investments in water, gas and services. He has also served as President of
Eletropaz in Bolivia and Coelba and Cosern in Brazil. In addition to his
position as a member of the Board of Directors of the Holding Company, he is
also a member of the Boards of Directors of Tele Sudeste Celular Participacoes
S.A. and CEG in Brazil. He holds a degree in mining engineering, with additional
post-graduate studies in energy, from the Technical School of Mining Engineering
of the Polytechnic University of Madrid.
Alexandre Bertoldi, 37 years old, has served as a member of the Board of
Directors since August 1998. He has a law degree from the University of Sao
Paulo, a masters degree in Business Administration from Glasgow Business School
of the University of Glasgow - UK and a post-graduate degree in Global Finance
from the London School of Economics - LSE.
Board of Executive Officers
The Board of Executive Officers consists of one President and one
Vice-President elected by the Board of Directors for a term of three years. An
Executive Officer may be removed from office at any time. The President must be
chosen from among the members of the Board of Directors.
The following are the current Executive Officers and their respective
positions.
Name Position Date appointed
- ---- -------- --------------
Esteban Serra Mont............President August 10, 1998
Felix Pablo Ivorra Cano.......Vice-President October 30, 1998
Set forth below is a brief biographical description of the Executive
Officer not included above.
Felix Pablo Ivorra Cano, 53 years old, has served as Vice-President of the
Company since October 1998. He joined the Investigation and Studies Center of
Telefonica after graduating from engineering school. Since then he has served in
several positions in the Technical Specifications, Network Planning and
Commercial Planning areas, and as General Sub-Manager of Telecommunications.
Since 1993 he has served as General Manager of the team which incorporated and
developed the Telefonica Moviles, a subsidiary of Telefonica, and as Commercial
General Manager and Business Development General Manager of Telefonica Moviles.
He holds a degree in telecommunications engineering from the ETSI of Madrid and
a post-graduate degree in business administration from ICADE.
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$1.2 million. The Holding Company did not set
aside or accrue any amounts to provide pension, retirement or similar benefits
for officers and directors of the Holding Company.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
None.
Item 13. Interest of Management in Certain Transactions
Each of the Subsidiaries has entered into a Consulting Service Agreement
(each a "Consulting Service Agreement") with Telefonica Internacional S.A.
pursuant to which it receives marketing, technical and business development
advice. Under the Consulting Services Agreements, the Subsidiaries are obligated
to make annual payments to Telefonica Internacional S.A. of 1% of net operating
revenues.
PART II
Item 14. Description of Securities to be Registered
None.
PART III
Item 15. Defaults upon Senior Securities
None.
Item 16. Changes in Securities, Changes in Security for Registered Securities
and Use of Proceeds
None.
PART IV
Item 17. Financial Statements
The Holding Company has responded to Item 18 in lieu of responding to this
Item.
Item 18. Financial Statements
Reference is made to pages F-1 through F-41.
Item 19. Financial Statements and Exhibits
(a) The following Consolidated Financial Statements are filed as part of
this Form 20-F:
Report of Independent Public Accountants for the year ended December
31, 1998
Independent Auditors' Report for the years ended December 31, 1997 and
1996
Consolidated Balance Sheet and Statement of Financial Condition
Consolidated Statement of Income and of Revenues and Expenses
Consolidated Statement of Changes in Financial Position
Consolidated Statements of Changes in Shareholders' Equity and Changes
in Divisional Equity
Consolidated Statements of Cash Flows and of Net Interdivisional Cash
Distribution (Receipt)
Notes to the Consolidated Financial Statements
(b) Exhibits
Amendment to the Charter of the Holding Company previously filed
with the Holding Company's Registration Statement on September 18,
1998, together with an English translation.
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. 333-9468).
<PAGE>
INDEX OF DEFINED TERMS
Page
AD 5
ADRs 19
ADSs 19
American Depositary Shares 19
Anatel 1
Anatel Decree 12
Annex IV Regulations 22
Annex V Regulations 22
Band A 9
Band A Service Provider 9
Band B 9
Band B Service Provider 9
Brazil ii
Brazilian Corporation Law 22
Brazilian GAAP ii
Brazilian Securities Law 22
Breakup 2
Breakup of Telebras 2
Cellular Region 2
Center 12
Code 26
COFINS 8
Commercial Market 32
Common Shares 19
Company ii
Concessions 1
Consolidated Financial Statements ii
Consulting Service Agreement 45
CPMF tax 25
Custodian 22
CVM 21
Deposit Agreement 20
Depositary 20
dollars ii
DSL1 5
DSL2 5
e&p 27
Embratel 2
Facil 6
Federal Government 1
Fenattel 11
Fistel 39
Fittel 11
Fixed-Line Region 2
Floating Market 32
Floating Market Rate 32
GDP 3
General Telecommunications Law 1
Holding Company ii
Iberdrola 19
Iberdrola/Telefonica 2
IBGE 3
ICMS 7
IGP-DI 14
IGP-M 17
IMF 15
IOF tax 25
List of Obligations 12
Maxitel 9
Minimum Law 12
Movistar 4
New Holding Companies 1
non-Brazilian holder 23
non-U.S. holder 27
off-peak calls 5
PCS 10
PIS 8
Predecessor Companies 1
Preferred Shares 19
R$ ii
reais ii
real ii
RealPlan 15
Region 1
Registered Capital 26
Rio de Janeiro Stock Exchange 20
Sao Paulo Stock Exchange 20
SENN 21
Sistel 11
Subsidiaries ii
Telebahia Celular ii
Telebras 1
Telebras System 1
Telecommunications Regulations 1
Telefonica 20
Telergipe Celular ii
TJLP 25
TNL 2
U.S. dollars ii
U.S. GAAP 28
U.S. holder 26
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 "interconnection 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 network: A network using analog technology with circuit switching,
capable of connecting one user with all the users, but with limited transmission
capacity.
ATM (Asynchronous Transfer Mode): A broadband switching technology that
permits the use of one network for different kinds of information (e.g., voice,
data and video).
Automatic international roaming: A service which permits a subscriber to
use his or her cellular telephone on a foreign cellular service provider's
network. The subscriber may receive calls made to the subscriber's regular
cellular telephone number (such calls are "automatically" passed to the foreign
service provider's network).
Band A Service Provider: A former Telebras operating subsidiary that has
been granted a concession to provide cellular telecommunications services in a
particular area within a radio spectrum frequency range referred to by Anatel as
"Band A."
Band B Service Provider: A cellular service provider that has been granted
a concession to provide cellular telecommunications services in a particular
area within a radio spectrum frequency range referred to by Anatel as "Band B."
Base station: A radio transmitter/receiver that maintains communications
with the cellular telephones within a given cell. Each base station in turn is
interconnected with other base stations and with the public switched telephone
network.
Broadband services: Services characterized by a transmission speed of 2
Mbit/s or more. According to international standards, these services are divided
into two categories: (i) Interactive services, including
videotelephone/videoconferencing (both point-to-point and multipoint);
videomonitoring; interconnection of local networks; file transfer; CAD;
high-speed fax; e-mail for moving images or mixed documents; broadband
videotext; video on demand; retrieval of sound programs or fixed and moving
images; and (ii) Broadcast services, such as sound programs, television programs
(including high-definition TV and pay TV) and selective document acquisition.
CATV (Cable television): Cable or fiber-based distribution of TV programs.
CDMA (Code Division Multiple Access): A standard of digital cellular
telecommunications technology.
Cell: The geographic area covered by a single base station in a cellular
telecommunications system.
Cell splitting: The process of dividing cells into smaller coverage areas
by reducing the power output and the antenna height of the base station
transmitter. Cell splitting increases capacity in a particular area by allowing
for the further reuse of frequencies by a cellular telecommunications system.
Cellular service: A mobile telecommunications 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 penetration: The substitution of equipment capable of transmitting
digital signals for equipment limited to analog transmission.
Exchange: See Switch.
Frame relay: A data transmission service using fast protocols based on
direct use of transmission lines.
Internet: A collection of interconnected networks spanning the entire
world, including university, corporate, government and research networks from
around the globe. These networks all use the IP (Internet Protocol)
communications protocol.
ISDN (Integrated Services Digital Network): A system in which several
services (e.g., speech and data) may be simultaneously transmitted end-to-end in
digital form.
Leased high-speed data communication: The digital exchange of information
at speeds exceeding 64 kbps transmitted through mediums that are leased to users
for their exclusive use.
Local loop: The system used to connect the subscriber to the nearest
switch. It generally consists of a pair of copper wires, but may also employ
fiber-optic circuits, microwave links or other technologies.
Manual international roaming: A service that permits a subscriber to use
his or her cellular telephone on a foreign cellular service provider's network.
The subscriber may only receive calls made to a temporary number issued to the
subscriber by the foreign service provider for use while roaming.
Microcells: A small cell covered by a low-power base station. Microcells
can cover small areas such as a single building.
Network: An interconnected collection of elements. In a telephone network,
these consist of switches connected to each other and to customer equipment. The
transmission equipment may be based on fiber optic or metallic cable or
point-to-point radio connections.
Interconnection charge: Amount paid per minute charged by network operators
for the use of their network by other network operators. Also known as an
"access charge" or "interconnection charge."
Optical fiber: A transmission medium which permits extremely high
capacities. It consists of a thin strand of glass that provides a pathway along
which waves of light can travel for telecommunications purposes.
Packet-switched data communication services: Data services based on
parceling or breaking the data stream into packets and switching the individual
packets. Information transmitted is segmented into cells of a standardized
length, which are then transmitted independently of one another, allowing
maximization of available capacity and usage of a single transmission path for
multiple communications. The cells are then reassembled upon reaching their
destination.
PBX (Private Branch Exchange): Telephone switchboard for private use, but
linked to the national telephone network.
Penetration: The measurement of the take-up of services. At any date, the
penetration is calculated by dividing the number of subscribers by the
population to which the service is available and multiplying the quotient by
100.
Private leased circuits: Voice, data or image transmission mediums leased
to users for their exclusive use.
PSTN (Public Switched Telephone Network): The public telephone network that
delivers basic telephone service and, in certain circumstances, more advanced
services.
Repeaters: A device that amplifies an input signal for retransmission.
Roaming: A function that enables subscribers to use their cellular
telephone on networks of service providers other than the one with which they
signed their initial contract.
Satellite services: Satellites are used, among other things, for links with
countries that cannot be reached by cable or to provide an alternative to cable
and to form closed user networks.
SDH (Synchronous Digital Hierarchy): A hierarchical set of digital
transport structures, standardized for the transport of suitably adapted
payloads over physical transmission networks.
Sectorization: The process of dividing cells into sectors by using
directional antennae at the base station. Sectorization reduces co-channel
interference which permits smaller cells and increases network capacity.
Switch: These are used to set up and route telephone calls either to the
number called or to the next switch along the path. They may also record
information for billing and control purposes.
TDMA (Time Division Multiple Access): A standard of digital cellular
telecommunications technology.
Universal service: The obligation to supply basic service to all users
throughout the national territory at reasonable prices.
Value Added Services: Value Added Services provide additional functionality
to the basic transmission services offered by a telecommunications network.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the 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 LESTE CELULAR PARTICIPACOES S.A.
By: /s/ Esteban Serra Mont
------------------------------
Name: Esteban Serra Mont
Title: President
By: /s/ Felix Pablo Ivorra Cano
------------------------------
Name: Felix Pablo Ivorra Cano
Title: Vice-President
Dated: June 30, 1999
<PAGE>
TELE LESTE CELULAR PARTICIPACOES S.A.
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1996, 1997 and 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants for the year ended December 31, 1998............................. F-2
Independent Auditors' Reports 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 to F-41
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Tele Leste Celular Participacoes S A.:
(1) We have audited the accompanying consolidated balance sheet of Tele
Leste 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 Leste
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's 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 purpose 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.
January 22, 1999 (except for Notes 22 (c) and 30, which date is May 31, 1999)
Salvador, Brazil
ARTHUR ANDERSEN S/C
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Tele Leste Celular Participacoes S.A.
Brasilia-DF
We have audited the accompanying consolidated statements of financial
condition of Tele Leste 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 ended December 31, 1997. 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
condition of Tele Leste 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 for 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.
July 17, 1998
Brasilia, Brazil
KPMG Peat Marwick
<PAGE>
TELE LESTE 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>
Years ended December 31
-----------------------------------------
Note 1997 1998
-------- -------------- -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... 12 9,825 16,478
Customer accounts receivable, net.................. 13 25,020 41,221
Deferred and recoverable taxes......................... 14 -- 14,031
Other assets........................................... 15 174 34,948
------------ ------------
Total current assets.................................... 35,019 106,678
------------ ------------
Noncurrent assets:
Deferred and recoverable taxes......................... 14 -- 1,069
Other assets........................................... 15 -- 13,931
------------ ------------
Total noncurrent assets................................ -- 15,000
------------ ------------
Permanent assets:
Property, plant and equipment, net..................... 16 373,928 368,431
------------ ------------
Total permanent assets................................. 373,928 368,431
------------ ------------
Total assets............................................. 408,947 490,109
============ ============
Current liabilities:
Payroll and related accruals........................... 17 463 2,316
Accounts payable and accrued expenses.................. 18 18,725 32,458
Taxes other than income taxes.......................... 19 1,164 7,904
Dividends.............................................. 20 -- 24,610
Deferred and accrued income taxes...................... 10 1,218 1,177
Loans and financing.................................... 22 70,564 39,798
Other liabilities...................................... 21 -- 9,453
------------ ------------
Total current liabilities................................ 92,134 117,716
------------ ------------
Noncurrent liabilities:
Deferred income taxes.................................. 10 13,392 11,752
Loans and financing.................................... 22 78,284 51,381
Provisions for contingencies........................... 23 750 3,244
------------ ------------
Total noncurrent liabilities........................... 92,426 66,377
------------ ------------
Minority interest...................................... 30,058 35,013
------------ ------------
Divisional equity...................................... 194,329 --
Shareholders' equity:
Share capital.......................................... 25a -- 87,161
Income reserves........................................ -- 32,395
Retained earnings...................................... -- 151,410
------------ ------------
Total shareholders' equity............................. -- 270,966
------------ ------------
Funds for capitalization:
Other funds............................................ -- 37
------------ ------------
Total funds for capitalization......................... -- 37
------------ ------------
Total liabilities and divisional
equity/shareholders'equity................. 408,947 490,109
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
TELE LESTE CELULAR PARTICIPACOES S.A.
(See Notes 1 and 2)
CONSOLIDATED STATEMENT 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 for earnings per shares)
<TABLE>
<CAPTION>
Years ended December 31
------- ----------------------------------------
Note 1996 1997 1998
------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Net operating revenue.............................. 4 188,544 220,441 249,290
Cost of services................................... 5 (55,543) (68,716) (101,635)
------------ ----------- ---------------
Gross profit....................................... 133,001 151,725 147,655
Operating expenses:
Selling expense.................................... 6 (19,229) (17,471) (40,217)
General and administrative expense................. (16,015) (20,517) (26,756)
Other net operating income(expense)................ 7 5,301 1,568 (500)
------------ ----------- ---------------
Operating income before interest................... 103,058 115,305 80,182
Allocated interest expense......................... 8 (10,466) (10,333) --
Interest expense, net.............................. 8 -- -- (12,927)
------------ ----------- ---------------
Operating income, before interest and unallocated
interest expense................................. 92,592 104,972 --
Operating income................................... -- -- 67,255
Net nonoperating income (expense).................. 9 -- 57 (3,533)
Employees' profit share............................ (209) (142) (466)
------------ ----------- ---------------
Income before interest income, unallocated interest
expense, taxes and minority interests.......... 92,383 104,887
Income before minority interests and taxes......... -- -- 63,256
Income and social contribution taxes............... 10 -- -- (15,442)
------------ ----------- ---------------
Income before minority interests................... 92,383 104,887 47,814
Minority interests................................. (6,468) (13,108) (5,759)
------------ ----------- ---------------
Income before interest income, unallocated interest
expense and taxes.............................. 85,915 91,779
============ ===========
---------------
Net income for the year............................ 42,055
---------------
Shares outstanding at the balance sheet date
(thousands).................................... 334,399,028
===============
Earnings per thousand shares outstanding at the
balance sheet date (Reais)..................... 0.13
===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
TELE LESTE 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$)
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
SOURCE OF FUNDS:
From operations:
Net income............................................................. 42,055
Items not affecting working capital:
Depreciation........................................................... 36,940
Permanent asset disposals.............................................. 29,725
Financial charges on long-term items................................... 4,198
Minority interest...................................................... 5,759
Loss of minority interest.............................................. (804)
Tax incentive - Finor.................................................. (260)
Deferred income tax.................................................... (2,709)
Provisions for contingencies........................................... 2,494
Interest on construction in progress................................... (2,064)
Other.................................................................. (2)
---------
Total from operations............................................... 115,332
From third parties:
Transfer from noncurrent assets to current assets...................... 4,056
Increase in long term liabilities...................................... 3,982
Additional net assets received on the breakup of Telebras.............. 56,963
Increase in funds for capitalization................................... 37
=========
Total sources..................................................... 180,370
=========
APPLICATIONS OF FUNDS:
Dividends proposed..................................................... 25,156
Transfers from long-term to current liabilities........................ 36,098
Increase in non current assets......................................... 15,369
Additions to permanent assets.......................................... 57,670
=========
Total applications................................................ 134,293
=========
INCREASE IN WORKING CAPITAL............................................ 46,077
=========
WORKING CAPITAL VARIATION:
CURRENT ASSETS AT YEAR END............................................. 106,678
CURRENT LIABILITIES AT YEAR END........................................ (117,716)
---------
Working capital at year end........................................... (11,038)
Working capital at the beginning of the year........................... (57,115)
=========
INCREASE IN WORKING CAPITAL............................................ 46,077
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
TELE LESTE CELULAR PARTICIPACOES S.A.
(See Notes 1 and 2)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR
ENDED DECEMBER 31, 1998 AND 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................ 55,428 -- -- -- -- 55,428
Income before interest income, unallocated
interest expense and taxes............... 85,915 -- -- -- -- 85,915
Capitalized interest........................ 231 -- -- -- -- 231
Deferred tax on full indexation............. (8,514) -- -- -- -- (8,514)
Net interdivisional cash receipt............ 47,118 -- -- -- -- 47,118
Minority interests effects other than on
income................................... (3,560) -- -- -- -- (3,560)
----------- ---------- ------------ ----------- ----------- -----------
Balance at December 31, 1996................ 176,618 -- -- -- -- 176,618
Income before interest income, unallocated
interest expense and taxes............... 91,779 -- -- -- -- 91,779
Capitalized interest........................ 859 -- -- -- -- 859
Deferred tax on full indexation............. (6,096) -- -- -- -- (6,096)
Net interdivisional cash distribution....... (65,625) -- -- -- -- (65,625)
Minority interests effects others than on
income................................... (3,206) -- -- -- -- (3,206)
----------- ---------- ------------ ----------- ----------- -----------
Balance at December 31, 1997................ 194,329 -- -- -- -- 194,329
Additional net assets received on the
breakup of Telebras..................... 56,963 -- -- -- -- 56,963
Allocation between accounts approved by
shareholders on the breakup of
Telebras................................ (251,292) 87,161 3,966 67,522 92,643 --
----------- ---------- ------------ ----------- ----------- -----------
Balance at May 22, 1998 after the breakup
of Telebras............................. -- 87,161 3,966 67,522 92,643 251,292
Consolidation adjustments:
Capitalized interest........................ -- -- -- -- 1,430 1,430
Fiscal incentives........................... -- -- -- -- 1,341 1,341
Donations................................... -- -- -- -- 4 4
Net income.................................. -- -- -- -- 42,055 42,055
Transfer to reserves........................ -- -- 2,525 -- (2,525) --
Realization of reserves..................... -- -- -- (41,618) 41,618 --
Dividends................................... -- -- -- -- (25,156) (25,156)
----------- ---------- ------------ ----------- ----------- -----------
Balance at December 31, 1998................ -- 87,161 6,491 25,904 151,410 270,966
=========== ========== ============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
TELE LESTE CELULAR PARTICIPACOES S.A.
(See Notes 1 and 2)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998,
AND OF INTERDIVISIONAL CASH DISTRIBUTION (RECEIPT) FOR THE
YEARS ENDED DECEMBER 31, 1997 AND 1996
(In thousands of Brazilian Reais-R$)
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------
1996 1997 1998
R$ R$ R$
--------- -------- --------
<S> <C> <C> <C>
Cash provided by operations:
Net income ....................................................... -- -- 42,055
Income before interest income, unallocated interest expense
and taxes .................................................... 85,915 91,779 --
Adjustments to reconcile to cash provided by operating activities:
Depreciation .................................................. 17,338 22,531 36,940
Minority interest ............................................. 6,468 13,108 5,759
Loss on permanent asset disposals ............................. -- -- 2,898
Increase in allowance for doubtful accounts ................... 10,956 7,212 18,577
Increase in customer accounts receivable, gross ............... (20,300) (9,597) (34,778)
Increase in taxes receivable .................................. -- -- (15,100)
(Increase) decrease in other current assets ................... (5,736) 5,476 (8,548)
Increase in other noncurrent assets ........................... -- -- (12,426)
Increase (decrease) in payroll and related accruals ........... 883 (770) 1,853
Increase (decrease) in accounts payable and accrued expenses .. 10,780 11,991
Increase (decrease) in taxes other than income taxes .......... 1,984 (4,191) 6,740
Increase in other current liabilities ......................... -- -- 9,453
Increase (decrease) in accrued interest ....................... (1,779) (12) 8,899
Decrease in income taxes ...................................... -- -- (1,681)
Increase in provisions for contingencies ...................... -- 750 2,494
-------- -------- --------
94,169 137,066 75,126
======== ======== ========
Cash flow from investing activities:
Additions to property,plant and equipment ........................ (175,118) (68,542) (57,670)
Capitalized interest ............................................. (4,860) (5,318) (1,836)
Proceeds from asset disposals .................................... -- 2,946 597
Donations ........................................................ -- -- 4
======== ======== ========
(179,978) (70,914) (58,905)
======== ======== ========
Cash flow from financing activities:
Loans repaid ..................................................... (1,877) (6,367) (83,834)
New loans obtained ............................................... 40,568 15,665 17,266
Cash received from spin-off of Telebras .......................... -- -- 56,963
Funds for capitalization ......................................... -- -- 37
-------- -------- --------
38,691 9,298 (9,568)
======== ======== ========
Increase (decrease) in cash and cash equivalents ..................... (47,118) 75,450 6,653
Cash and cash equivalents at beginning of year ....................... -- -- 9,825
Net interdivisional cash (distribution) receipt ...................... 47,118 (65,625) --
-------- -------- --------
Cash and cash equivalents at end of year ............................. -- 9,825 16,478
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
TELE LESTE CELULAR PARTICIPACOES S.A.
(See Note 1 and 2)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of Brazilian Reais-R$)
1. Operations and background
Beginning in 1995, the federal government of Brazil ("the Federal
Government") undertook a comprehensive reform of the 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 Leste
Celular Participacoes S.A. (the "Holding Company") was formed.
Tele Leste Celular Participacoes S.A. was formed on May 22, 1998, through
the spin-off of certain assets and liabilities of Telebras, including 89.1% and
73.6% of the share capital of Telebahia Celular S.A. and Telergipe 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.
Telebahia Celular S.A. and Telergipe Celular S.A. were formed on January 5,
1998 and subsequently received on January 30, 1998 from Telecomunicacoes da
Bahia S.A. ("Telebahia") and Telecomunicacoes de Sergipe S.A. ("Telergipe") the
assets and liabilities comprising their respective cellular telecommunications
services ("the "Subsidiaries"). Tele Leste Celular Participacoes S.A. and its
subsidiaries (the "Companies") are the primary suppliers of cellular
telecommunications services in the states of Bahia and Sergipe under the terms
of concessions granted by the Federal Government on November 4, 1997 (the
"Concessions"). The Concessions will expire on June 29, 2008 with respect to
Telebahia Celular S.A. and December 15, 2008 with respect to Telergipe S.A. and
may be renewed at the discretion of Anatel (as defined below) for a further term
of 15 years. Through their predecessors Telebahia and Telergipe, the Companies
have provided cellular telecommunications services in the states of Bahia and
Sergipe since April 1993 and December 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.
2. Presentation of the financial statements
a. Inclusion of the New Holding Company Tele Leste Celular Participacoes S.A.
in the consolidated financial statments 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 Leste Celular Participacoes S.A. and its subsidiaries (Telebahia Celular
S.A. and Telergipe Celular S.A.). The portion of equity and net income
attributable to shareholders other than Tele Leste Celular Participacoes S.A. at
December 31, 1998 and for the year ended December 31, 1998 is reflected as
"minority interests". At December 31, 1998 such minority shareholders owned
10.9% and 26.4% of the share capital of Telebahia Celular S.A. e Telergipe
Celular S.A., respectively.
Tele Leste 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 Leste 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$56,963 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 Leste 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$251,292 included
retained earnings of R$92,643. The distributable reserves of Tele Leste Celular
Participacoes S.A. are composed of retained earnings allocated in the spin-off
plus the retained earnings of the Company following its formation. This new
legal capital structure is shown in the consolidated statement of changes in
shareholders' equity for the year ended December 31,1998.
Brazilian corporate and tax law allows state controlled companies 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 Leste 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 Telebahia and Telergipe 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 10.7% and 26.4% of the share capital of Telebahia and
Telergipe, respectively.
The formation of the Holding Company and Telebahia Celular S.A. and
Telergipe 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 Telebahia and
Telergipe 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 Telebahia and Telergipe 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 1996 and for
the two year period ended December 31, 1997 had the cellular telecommunication
businesses of Telebahia and Telergipe 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 Telebahia and Telergipe. 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 Leste
and its predecessors as of December 31, 1998 and 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 until 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 trough 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
Telebahia and Telergipe, maintained in accordance with the practices described
in Note 3, were as follows:
i. Inflation restatement index
The consolidated financial statements of 1996 and 1997 were indexed and
expressed in currency of constant purchasing power of December 31, 1997 by using
the monthly average values of the Indice Geral de Precos-Mercado (the General
Prices Index-Market or the "IGP-M") of the Fundacao Getulio Vargas. Inflation
rates for the three year period ended December 31, 1998, as measured by the
IGP-M, were as follows:
Period Index Annual
------ ----- inflation
---------
%
Year ended December 31, 1996........... IGP-M 9.2
Year ended December 31, 1997........... IGP-M 7.7
Year ended December 31, 1998........... IGP-M 1.8
ii. Consolidated statements of revenues and expenses 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$ 8,514 and R$ 6,096 in 1996 and 1997, respectively,
was recorded directly against divisional equity.
The reconciliation between the net income for the year ended December 31,
1998 and shareholders'equity as of December 31, 1998 as per corporate law and as
per the accompanying financial statements, which includes the effects of full
indexation occurred until December 31, 1997, as described above, is presented as
follows:
<TABLE>
<CAPTION>
Net Shareholders'
Income Equity
-------- -------------
<S> <C> <C>
Consolidated figures as per corporate law ............... 47,729 248,558
Effects of full indexation of permanent assets........... (8,063) 38,790
Deferred tax effect of the full indexation .............. 1,502 (12,800)
Effect of minority interest ............................. 887 (3,582)
-------- --------
Consolidated figures as reported ........................ 42,055 270,966
======== ========
</TABLE>
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 Telebahia and
Telergipe. Since Tele Leste 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 Telebahia and Telergipe
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$9,825 were allocated
from Telebahia and Telergipe 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. 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.
g. Vacation pay accrual
Cumulative vacation pay due to employees is accrued as earned.
h. 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.
i. Loans and financing
Loans and financing include accrued interest to the balance sheet date.
j. 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.
k. 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.
l. Research and development
Research and development costs are charged to expense as incurred.
m. 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.
n. 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.
o. Earnings per thousand shares
Earnings per thousand shares were calculated based on the number of shares
outstanding at the balance sheet date.
p. 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 Bahia and Sergipe
q. 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.
r. Minority interests
Minority interests reflected in the consolidated balance sheets 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 Leste
in Telebahia Celular and Telergipe Celular. 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
Telebahia and Telergipe.
4. Operating revenue from cellular telecommunications services
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Monthly subscription charges .................................. 70,777 82,006 91,405
Activation fees ............................................... 26,354 13,470 9,850
Usage charges.................................................. 103,333 122,814 143,098
Network usage charges.......................................... 33,807 59,682 68,575
Goods sold (cellular telephone set) ........................... -- -- 1,321
Other ......................................................... 2,911 1,640 3,189
-------- -------- --------
Total gross operating revenue.................................. 237,182 279,612 317,438
Value added and other indirect taxes........................... (48,638) (59,171) (68,148)
======== ======== ========
Net operating revenue from cellular telecommunications
services.................................................... 188,544 220,441 249,290
======== ======== ========
</TABLE>
There are no customers who contribute more than 5% of gross operating
revenues of Tele Leste Participacoes S.A., excluding Telebahia S.A. that
contributes to approximately 11% of total gross operating revenues.
5. Cost of services
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Depreciation and amortization ................................. 15,353 19,988 35,448
Personnel ..................................................... 310 422 1,366
Materials and services ........................................ 7,900 11,984 24,591
Rental and insurance fees ..................................... -- -- 8,821
Fixed-line network expenses ................................... 27,279 32,000 21,713
Goods sold (cellular telephone set)............................ -- -- 3,750
Fistel tax and other .......................................... 4,701 4,322 5,946
======= ======= =======
55,543 68,716 101,635
======= ======= =======
</TABLE>
6. Selling expenses
Included in selling expenses are provisions for doubtful customer accounts
receivable of R$10,956, R$7,212 and R$18,577 in 1996, 1997 and 1998,
respectively.
7. Other net operating income (expense)
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Fines and expenses recovered .................................. 7,034 2,607 2,473
Research and development ...................................... -- -- (798)
Provision for contingencies ................................... -- (778) (2,494)
Gain (losses) on non-monetary items............................ (1,739) (271) --
Other ......................................................... 6 10 319
====== ====== ======
5,301 1,568 (500)
====== ====== ======
</TABLE>
8. Interest expense, net
1996 1997 1998
------- ------- -------
Financial income:
Interest income ...................... -- -- 13,250
Gain (losses) ....................... -- 954 --
Financial expenses:
Interest expense ..................... (9,867) (11,287) (14,128)
Monetary/exchange variation........... (599) -- (12,049)
------- ------- -------
(10,466) (10,333) (12,927)
======= ======= =======
9. Net non-operating income (expense)
1996 1997 1998
------- ------- -------
Loss on permanent asset disposals.......... -- -- (2,898)
Other...................................... -- 57 (635)
------- ------- -------
-- 57 (3,533)
======= ======= =======
10. Income and social contribution 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%.
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.
The following is an analysis of the income tax expense (benefit):
1998
------
Social contribution charge................................ 6,211
Income tax................................................ 18,989
Deferred taxes............................................ (9,758)
======
Total tax expense......................................... 15,442
======
Supplementary information regarding taxes posted directly to divisional
equity:
1996 1997 1998
------- ------- ------
Deferred taxes................. (8,514) (6,096) --
------ ------ ------
(8,514) (6,096) --
====== ====== ======
The following is a reconciliation of the reported income tax expense/credit
and the amount calculated by applying the combined statutory tax rate of 33% in
1998:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Income before taxes as reported in the accompanying financial statements.... 63,256
-------
Tax charge at the combined statutory rate .................................. 20,874
Permanent additions:
Non-deductible expenses ................................................. 812
Permanent exclusions:
Capitalized interest..................................................... (465)
Interest on shareholders' equity ........................................ (6,056)
Other items:
Tax incentives .......................................................... (89)
Other, net .............................................................. 366
=======
Income tax charge as reported in the accompanying financial statements ..... 15,442
=======
</TABLE>
The composition of deferred tax assets and liabilities, based on temporary
differences is as follows:
1997 1998
------- -------
Deferred tax assets:
Provisions for contingencies...................... -- 1,069
Allowance for doubtful accounts................... -- 6,725
Employees profit share............................ -- 154
-------- ------
Total (see Note 14)............................... -- 7,948
======== ======
Deferred tax liabilities:
Deferred tax on full indexation................... 14,610 12,800
======== ======
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..................... -- 129
Deferred tax liabilities............................ 14,610 12,800
-------- ------
Total............................................... 14,610 12,929
======== ======
Current............................................. 1,218 1,177
Noncurrent.......................................... 13,392 11,752
======== ======
11. Cash flow information
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Income and social contribution taxes paid... -- -- 30,672
Interest paid............................... 10,252 15,720 17,094
</TABLE>
Non cash Transactions:
1998
--------
Tax incentive investment credits received ................... 1,603
Transfer of property plant and equipment to
Telecomunicacoes da Bahia S. A. - Telebahia.............. 26,226
12. Cash and cash equivalents
1997 1998
-------- --------
Banks ............................... -- 2,130
Short-term investments............... 9,825 14,348
-------- --------
9,825 16,478
======== ========
All of the cash and cash equivalents are denominated in Brazilian reais.
13. Trade accounts receivable, net
1997 1998
-------- --------
Accrued amounts.................... 4,555 7,419
Billed amounts..................... 29,209 55,416
Allowance for doubtful accounts.... (8,744) (21,614)
-------- --------
25,020 41,221
======== ========
The changes in the allowance for doubtful accounts were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Beginning balance........................... -- 10,956 8,744
Provision charged to selling expense........ 10,956 7,212 18,577
Write-offs.................................. -- (9,424) (5,707)
------ ------ ------
Ending balance.............................. 10,956 8,744 21,614
====== ====== ======
</TABLE>
14. Deferred and recoverable taxes
1998
--------
Social contribution tax............................. 963
Federal income Tax.................................. 4,638
Deferred tax assets................................. 7,948
Sales and other taxes............................... 1,551
======
15,100
======
Current............................................. 14,031
Noncurrent.......................................... 1,069
======
15. Other assets
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Telecomunicacoes da Bahia S. A. - Telebahia and
Telecomunicacoes de Sergipe S. A. - Telergipe:
Repass of loans ...................................... -- 20,954
Repass of contracts with supplies..................... -- 13,963
Ruralcel ............................................. -- 1,200
Usage charges ........................................ -- 3,772
Other ................................................ -- 995
Prepayments ................................................. 49 483
Inventories ................................................. -- 4,929
Recoverable advances ........................................ 84 625
Fiscal incentives investments ............................... -- 1,603
Other ....................................................... 41 355
------ ------
174 48,879
====== ======
Current .................................................... 174 34,948
Noncurrent ................................................. -- 13,931
====== ======
</TABLE>
Repass of loans is related to contract between Telebahia Celular S.A. and
Telecomunicacoes da Bahia S.A. - Telebahia, aiming to compensate Telebahia
Celular S.A. for amounts to be paid related to financing of fixed asset owned by
the fixed line company. This amount will be received in accordance with the same
contractual conditions for financing amortization by Telebahia Celular S.A.,
including exchange variation and fixed interest of 10.43% per year.
The repass of contracts with suppliers is originated from agreement with
Telecomunicacoes da Bahia S.A. - Telebahia aiming to receive the amounts paid to
NEC which had not been recognized as liability in the split up balance of
Telebahia Celular S.A.
The receivable balance with Ruralcel is originated from services supplied
by Telecomunicacoes de Sergipe S.A. - Telergipe to customers located in the
rural area of Sergipe. Such services use the Telergipe Celular S.A. platform,
and customers are charged by Telecomunicacoes de Sergipe S.A. - Telergipe. The
amounts recorded in this account are related to the repass to be made by
Telecomunicacoes de Sergipe S.A. - Telergipe to Telergipe Celular S.A. from
services rendered in 1998. Such amounts were stated based on preliminary
understanding between management of both Companies.
The amounts related to usage charges receivable from Telecomunicacoes de
Sergipe S.A. - Telergipe are originated from the use of connections between
fixed and cellular network which will be received from the net balance of
accounts payable and receivable.
Inventories are comprised mainly of cellular telephone sets.
16. Property, plant and equipment, net
a. Composition
<TABLE>
<CAPTION>
1997 1998
------------------------------------- -----------------
Accum. Net Book Accum. Net Book
Cost Depr Value Cost Depr. Value
------- ------ -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Construction-in-progress ....... 44,954 -- 44,954 38,863 -- 38,863
Automatic switching equipment .. 51,926 6,199 45,727 58,176 10,189 47,987
Transmission and other equipment 261,930 35,925 287,619 60,911 226,708 226,005
Buildings ...................... 60,757 7,012 53,745 55,303 8,086 47,217
Other assets ................... 4,461 964 3,497 10,332 2,676 7,656
------- ------- ------- ------- ------- -------
Total .......................... 424,028 50,100 450,293 81,862 368,431 373,928
======= ======= ======= ======= ======= =======
</TABLE>
b. Depreciation rates
The annual depreciation rates applied to property, plant and equipment are
as follows:
%
-------------
Automatic switching equipment...................... 7.69
Transmission equipment............................. 10.00
Buildings.......................................... 4.00
Other assets (excluding land)...................... 5.00-33.00
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.................... 326 830 9,646
==== ==== ======
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.................................. 590
2000.................................. 258
2001.................................. 72
====
Total minimum payments................ 920
====
17. Payroll and related accruals
1997 1998
----- -----
Wages and salaries............................... 186 705
Accrued social security charges ................. 277 911
Accrued benefits................................. -- 513
Payroll withholdings............................. -- 187
---- -----
463 2,316
==== =====
18. Accounts payable and accrued expenses
1997 1998
------- ------
Amounts payable to suppliers..................... 17,906 27,657
Withholding income tax on dividends.............. -- 2,753
Other payables and accrued expenses.............. 819 2,048
------- ------
18,725 32,458
======= ======
19. Taxes other than income taxes
1997 1998
------- ------
Value-added taxes................................ 1,139 6,691
Other indirect taxes on operating revenues....... 25 1,213
------- ------
1,164 7,904
======= ======
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 Telebahia and Telergipe when the assets and liabilities
of the cellular telecommunications businesses were transferred to the Companies
because Telebahia and Telergipe have legal responsibility for their payment.
20. Dividends payable
1998
------
Payable by Tele Leste to:
Common shareholders.............................. 8,416
Preferred shareholders........................... 14,212
Payable by subsidiaries to minority shareholders... 1,982
======
24,610
======
Dividends payable by Tele Leste are net of 15% of withholding tax.
21. Other liabilities
1997 1998
------ ------
Employees' profit share.............................. -- 466
Telecomunicacoes da Bahia S. A. - Telebahia and
Telecomunicacoes de Serrgipe S.A.- Telergipe...... -- 7,258
Other................................................ -- 1,729
------ ------
-- 9,453
====== ======
The amount of R$ 7,258 refers to administrative services to be paid to
Telecomunicacoes da Bahia S. A. - Telebahia and Telecomunicacoes de Sergipe
S.A. - Telergipe. The amount to be paid is, respectively, R$ 6,077 and R$ 1,181.
22. Loans and financing
1997 1998
------- ------
Loans and financing ......................... 145,839 89,441
Accrued interest............................. 3,009 1,738
------- ------
148,848 91,179
======= =======
Current...................................... 70,564 39,798
Noncurrent................................... 78,284 51,381
======= =======
a. Loans and financing per creditor
1997 1998
------- -------
NEC do Brasil S.A. ................................. 64,021 18,305
Ericsson Telecomunicacoes S.A. ..................... 5,745 6,196
ABN AMRO BANK....................................... 9,253 9,652
PROUDTEL............................................ 69,829 53,420
Telecomunicacoes da Bahia S.A. ..................... -- 3,606
------- -------
148,848 91,179
======= =======
Balances with NEC do Brasil S.A., Ericcson Telecomunicacoes S.A. and
PROUDTEL are related to financing of network of subsidiaries.
b. Repayment schedule
Noncurrent loans as of December 31, 1998 are scheduled to be repaid as
follows:
2000.............................................. 28,850
2001.............................................. 15,651
2002.............................................. 3,883
2003.............................................. 1,299
After 2004........................................ 1,698
------
Total............................................. 51,381
======
c. Credit agreement guarantees
The Subsidiaries are parties to credit agreements that are guaranteed by
Telebras. The Company is obligated, pursuant to the terms and conditions of the
privatization of the Telebras System, to replace Telebras as guarantor of these
agreements. At May 31, 1999, Telebras had been replaced as guarantor in relation
to all but R$16.3 million of this indebtedness. Management is negotiating with
the creditors in respect of the remaining indebtedness.
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>
Reais..................... 1.0000 -- 3,592
U.S. Dollars.............. 1.2087 145,839 85,849
------- ------
145,839 89,441
======= ======
</TABLE>
Foreign currency denominated debt bears LIBOR plus interest from 0.4% to
2.9% per annum or fixed interest from 7.3% to 10.43% per annum. Local currency
denominated bears TEX (Variation of quotas from extra market fund rate), plus
interest from 1.0% to 1.5% per annum.
The Companies did not hedge their foreign currency liabilities at December
31, 1998.
23. Provisions for contingencies
Provisions for contingent liabilities were as follows:
1997 1998
------ ------
Labor claims................................... 750 866
Disputed taxes................................. -- 1,810
Civil claims................................... -- 568
--- ------
750 3,244
=== ======
Provisions for contingent liabilities correspond to management estimate of
the probable losses on claims filed by employees and former employees, tax
assessments and civil suits.
Potential Litigation
Telebras, Telebahia and Telergipe, the legal predecessors of the Holding
Company and Telebahia Celular S.A. and Telergipe 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
Telebahia and Telergipe prior to the effective date of the spin-off of
Telebahia's and Telergipe's cellular assets and liabilities to Telebahia Celular
S.A. and Telergipe Celular S.A. remains with Telebahia and Telergipe, except for
those liabilities for which specific accounting provisions have been assigned to
Telebahia Celular S.A. and Telergipe Celular S.A. Any claims against Telebahia
and Telergipe which are not met by Telebahia and Telergipe could result in
claims against Telebahia Celular S.A. and Telergipe Celular S.A. to the extent
that Telebahia Celular S.A. and Telergipe Celular S.A. have received assets
which might have been used to settle those claims had they not been spun off
from Telebahia and Telergipe. 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 telecommunications
services but also other services, including cellular activation, which had not
been previously subject to such tax. Pursuant to this new interpretation of tax
law, the ICMS tax may be applied retroactively for such services rendered during
the last five years.
The Company believes that the attempt by the state treasury secretaries to
extend the scope of ICMS tax to services which are supplementary to basic
telecommunications services 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. In addition, the
Company believes that the predecessor companies, Telebahia and Telergipe, the
legal predecessors of the Company, would be liable for any payments made in
connection with any claim arising out of the retroactive application of the ICMS
tax on activation fees for periods prior to January 5, 1998. On December 23,
1998, Telebahia Celular S.A. was notified in relation to the lack of computation
and collection of ICMS on activation fees, retroactively to February 1998. The
amount involved is R$2,375. In Telergipe Celular S.A., the amount involved is
approximately R$300 related to the same period, which has not been notified by
any tax authorities so far. No provision for such taxes has been made in the
accompanying consolidated financial statements as the Company does not believe
it is probable that such taxes will be payable for services rendered during the
last five years and for the current year.
There can be no assurance that the Company will prevail in its position
that the new interpretation by the state treasury secretaries is unlawful. If
the ICMS tax were applied retroactively to activation fees earned during the
past five year period ended December 31, 1997, it would give rise to a maximum
liability estimated at R$22,000.
Labor and Civil Issues
These comprise compensation and damage claims in subsidiaries, involving
obligations in the amount of approximately R$1,250. In addition, Telebahia
Celular S.A. and Telergipe Celular S.A. are party to a number of claims by
employees, in the total amount of approximately R$866. Based on the opinion of
its legal counselors, management decided to record a reserve to cover possible
losses in the amount of R$1,434 as of December 31, 1998.
ISS Notice of Infringement
Telebahia Celular S.A. was notified in relation to ISS (tax on services) on
usage charges. The amount involved is R$1,095 and it is still in the
administrative stage. In accordance with its legal counselors, significant
losses are not expected, therefore, no reserves have been recognized as of
December 31, 1998. In addition, the Company was notified in relation to the lack
of retention and collection of ISS related to services supplied by third
parties. The amount involved and accrued for possible losses is R$1,810.
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").
Aproximately 93% of the Companies' employees are covered by these plans.
The Companies contributed and charged to expense R$463 thousand, R$445 thousand
and R$759 thousand during 1996, 1997 and 1998, respectively, in respect of
pension fund contributions. Information from the plans' administrators is not
available to permit the Companies to determine their share of unfunded vested
benefits, if any. As a member of multi-employer plans, the Companies'
contributions are not segregated in separate accounts or restricted to provide
benefits only to employees of the Companies. The Companies are also contingently
liable for the total obligations of the plans. The Company and the other
sponsors of Sistel (primarily the former Telebras companies) are considering a
break-up of Sistel that would generate a separate plan for each of the sponsors.
The sponsors would expect, however, to jointly maintain a plan offering the
current benefits under all the sponsors in accordance with the method of
allocation used in the break-up of Sistel. The plans for the new funds would be
modified to the needs of the new sponsors. Because the sponsors are only in the
preliminary stages of discussing the proposed break-up of Sistel, the amounts of
the independent reserve liabilities with respect to each sponsors' respective
participation are not yet measurable and, therefore, the final configuration of
each sponsor's plan and the consequences for the Company or its employees cannot
be assessed.
The pension benefit is generally defined as the difference between (i) 90%
of the retiree's average salary during the last 36 months indexed to the date of
retirement and (ii) the value of the retirement pension paid by the Brazilian
social security system. For retired employees the initial pension payment is
subsequently adjusted upwards to recognize cost of living increases and
productivity awards granted to active employees. In addition to the pension
supplements, post retirement health care and life insurance benefits are
provided to eligible pensioners and their dependents.
Contributions to the plans are based on actuarial studies prepared by
independent actuaries under Brazilian regulations. The actuarial studies are
revised periodically to identify whether adjustments to the contributions are
necessary. A summary relating to the overall Sistel plan, in compliance with
accounting principles generally accepted in Brazil, is as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Accumulated pension and other post retirement benefit obligations ............ 3,775,898 3,615,176
Other obligations............................................................. 255,751 312,831
--------- ---------
Total obligations............................................................. 4,031,649 3,928,007
========= =========
Combined plan assets:
Interest bearing deposits..................................................... 1,715,153 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............................................................. 4,614,867 4,697,782
========= =========
Excess of total plan assets over total obligations............................ 583,218 769,775
========= =========
</TABLE>
The financial statements 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$87,161 was represented by the following shares, without par value:
<TABLE>
<CAPTION>
Common Preferred Total
in circulation in circulation outstanding
--------------- --------------- ------------
<S> <C> <C> <C>
As at December 31, 1998 (in thousands)............ 124,369,031 210,029,997 334,399,028
In Brazilian Reais - 12.31.98..................... 32,417 54,744 87,161
</TABLE>
The capital may be increased only by a decision taken at a shareholders'
meeting or by the Board of Directors in connection with the capitalization of
profits or reserves previously allocated to capital increases at a shareholders'
meeting.
The preferred shares are non-voting except under limited circumstances and
are entitled to a preferential, noncumulative 6% dividend based upon their
nominal capital value and to priority over the common shares in the case of
liquidation of Tele Leste 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 Leste 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 Leste Celular Participacoes S.A.'s by-laws, the "Adjusted Net Income" is an
amount equal to Tele Leste Celular Participacoes S.A.'s net profits adjusted to
reflect allocations to or from (i) the legal reserve, (ii) the statutory
reserve, (iii) a contingency reserve income anticipated losses, if any, and (iv)
an unrealized income reserve, if any. The proposed dividend was calculated as
follows:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Reconciliation of net income available for distribution:
Net income available for distribution ............................................. 42,055
Consolidation adjustments ..................................................... 2,775
Adjustments required to arrive at distributable income on a
corporate law basis......................................................... 5,674
-------
Net income available to distribution at the parent Company level in accordance
with corporate law method ..................................................... 50,504
Add:
Realization of unrealized income reserve ...................................... 41,618
Income of Jan.-Feb./98 - Spin-off from Telebras ................................... 914
Deduct:
Appropriation to legal reserve ................................................ (2,525)
-------
Adjusted net income ............................................................... 90,511
=======
Proposed dividend:
Ordinary shares ............................................................... 8,416
Preferred shares .............................................................. 14,212
-------
Total ......................................................................... 22,628
=======
Dividend per thousand shares (Brazilian Reais):
Ordinary shares ............................................................... 0.068
Preferred shares .............................................................. 0.068
</TABLE>
In 1998 Tele Leste Celular Participacoes S.A. declared dividends by means
of interest on shareholders'equity (R$16,850), which is subject to a 15%
withholding tax (R$2,528).In order to accomplish the minimum of 25% of
distributable income, additional dividends of R$8,306 were declared. Thus, total
dividends were R$22,628 as described above.
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
Telebahia and Telergipe 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 Sudeste Celular
Participacoes S.A., Telerj Celular S.A., Telest Celular S.A., Telesp
Participacoes S.A., Telesp S.A., CBTC S.A., Companhia Riograndense de
Telecomunicacoes - CRT and Celular CRT S.A., 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$1,114
was allocated to General and Administrative expenses that were included in the
Operating Expense for the year ended December 31, 1998.
In 1998 companies of the Telebras System, other than those belonging to the
Controlling group, were considered third party even before the privatization.
A summary of the balances and transactions with these related parties, made
under usual market conditions for these types of operations, is as follows:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Current assets:
Customer accounts receivable ............................. 543 154
Current liabilities:
Accounts payable and accrued expenses .................... 819 125
Dividends/Interest on the equity ......................... -- 4,358
<CAPTION>
1996 1997 1998
------ ------ ------
Net operating revenue from cellular communication services.... 33,807 59,682 5,579
Cost of services ............................................. 33,562 48,836 1,135
Operating expenses ........................................... 15,682 18,817 --
</TABLE>
27. Commitments
a. Capital expenditures
At December 31, 1998 the Companies had approximately the following capital
expenditure commitments:
Expected year of expenditure
1999..................................... 51,425
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 (All unaudited)
Service Quality
<TABLE>
<CAPTION>
Actual in 1998
-------------------------------
Indexes ANATEL Telebahia Telergipe
goals(%) Celular(%) Celular(%)
---------------- --------------- --------------
<S> <C> <C> <C>
System availability index.......................... 98 99.95 100.00
Loss (ERBs - CCC).................................. (less than)3 0.03 0.00
Voice channel ERB (HMM)............................ (less than)5 4.45 3.24
Loss on HMM interconnection........................ (less than)3 0.10 1.32
Probability of access in 1st attempt............... (greater than)90 90.00 91.00
Formal complaints from 100 subscribers per month... (less than)5 0.60 0.57
</TABLE>
Services to districts
Telebahia
<TABLE>
<CAPTION>
ANATEL goals
-----------------------------
Anatel Goals Number Accomplished
of Due through December
districts dates 31, 1998
--------------------------------------------------------------- -------------- -------------- ------------------
<S> <C> <C> <C>
30-50 thousand inhabitants (covering a minimum of 70%) 29 Nov/2002 8
50-75 thousand inhabitants (covering a minimum of 80%) 14 Nov/2001 13
75-100 thousand inhabitants (covering a minimum of 90%) 4 Nov/2000 8
100-200 thousand inhabitants (covering a minimum of 100%) 6 Nov/1999 7
+ 200 thousand inhabitants (covering 100%) 2 Nov/1998 3
</TABLE>
Telergipe
<TABLE>
<CAPTION>
ANATEL goals
-----------------------------
Anatel Goals Number Accomplished
of Due through December
districts dates 31, 1998
--------------------------------------------------------------- -------------- -------------- ------------------
<S> <C> <C> <C>
30-50 thousand inhabitants (covering a minimum of 70%) 4 Nov/2002 3
50-75 thousand inhabitants (covering a minimum of 80%) 4 Nov/2001 3
75-100 thousand inhabitants (covering a minimum of 90%) - - -
100-200 thousand inhabitants (covering a minimum of 100%) - - -
+ 200 thousand inhabitants (covering 100%) 1 Nov/1998 1
</TABLE>
All districts are covered by cellular services and all the goals have been
attained, considering the ANATEL goals.
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
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Liabilities:
Loans........................................ 145,839 140,779 89,441 75,475
</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 US 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 Standard ("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>
1997 1998
--------------- --------------
<S> <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 reduced
proportionately)...................................................... 1,949 4,568
Capitalized interest on disposals..................................... -- (628)
------ ------
1,949 3,940
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).................................................. (4,657) (2,064)
Interest capitalized and credited to shareholders equity.............. (859) (1,430)
------ ------
Total capitalized interest....................................... (5,516) (3,494)
Capitalized interest on disposals..................................... -- 1,036
------ ------
(5,516) (2,458)
------ ------
US GAAP Difference...................................................... (3,567) 1,482
====== ======
Amortization of capitalized interest difference
Amortization under Brazilian GAAP..................................... 593 1,214
Capitalized interest on disposals..................................... -- (153)
------ ------
593 1,061
Less amortization under US GAAP....................................... (475) (793)
Capitalized interest on disposals..................................... -- 93
------ ------
(475) (700)
------ ------
US GAAP Difference...................................................... 118 361
====== ======
</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
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.
Note 24 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 as an
appropriation of net income for the year. Under US GAAP employee profit sharing
would be 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 or shareholders'equity
Under Brazilian GAAP various items are posted directly to divisional equity
or shareholders'equity, which under US GAAP would be posted to the consolidated
statements 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 statements 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 statements 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 Leste 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$ 8,514 and R$6,096 in 1996 and 1997
respectively (see Note 2(c)(iii)) that were recorded directly against Divisional
equity. Under U.S. GAAP the deferred tax effect of the 1996 and 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$346 and R$1,139 in 1996 and
1997 respectively, is not included in the reconciliation of income differences
between US and Brazilian GAAP.
In 1996 and 1997, Tele Leste 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 Telebahia and Telergipe.
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, defferred tax and liabilities are classified as current or noncurrent
based on the classification of the asset or liability attribued 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 and 1997, earnings per
share was not presented for Brazilian GAAP in 1996 and 1997.
In these consolidated financial statements, information is disclosed per
lot of one thousand shares, because this is the minimum number of shares that
can be traded on the Brazilian stock exchanges. Each American Depositary Share
("ADS") is equivalent to one thousand shares.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share". This new statement became effective December 15, 1997,
and provides computation, presentation and disclosure requirements for earnings
per share.
Since the preferred and common stockholders have different dividend, voting
and liquidation rights, Basic and Diluted earnings per share have been
calculated using the "two-class" method. The "two-class" method is an earnings
allocation formula that determines earnings per share for preferred and common
stock according to the dividends to be paid as required by the Company's by-laws
and participation rights in undistributed earnings.
Basic earnings per common share is computed by reducing net income by
distributable and undistributable net income available to preferred shareholders
and dividing net income available to common shareholders by the weighted-average
number of common shares outstanding during the period. Net income available to
preferred shareholders is the sum of the preferred stock dividends (a minimum of
6% of preferred capital, as defined in the Company's by-laws) and the preferred
shareholders' portion of undistributed net income. Undistributed net income is
computed by deducting total dividends (the sum of preferred and common stock
dividends) from net income. Undistributed net income is shared equally by the
preferred and common shareholders on a pro rata basis. Total dividends are
calculated as described in Note 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
preferred shareholders were entitled to a non-cumulative dividend of R$0.07 per
thousand preferred shares in 1998. The preferred shareholders would share
equally in the undistributed earnings of the Company in the amount of R$0.06 per
thousand preferred shares in 1998. The amount of dividends paid to the preferred
shareholders exceeded the minimum dividends and was equal to the amount per
share paid to the common shareholders.
For 1997 and 1996, 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 Telebahia and Telergipe.
1. Valuation of Long-Lived Assets
For US GAAP, effective January 1, 1997 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
evaluates the carrying value of long-lived assets to be held and used, when
events and circumstances warrant such a review. The carrying value of long-lived
assets is considered impaired when the anticipated undiscounted cash flow from
such assets is separately identifiable and is less than their carrying value. In
that event, a loss is recognized based on the amount by which the carrying value
exceeds the fair market value of the assets. The adoption of this standard did
not have a material effect on the 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 formed as a result of a spin-off may have
retained earnings in its balance sheet if the parent company shareholders'
resolution adopting the spin-off allocates retained earnings from the parent
company to the new company. Under U.S. 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 U.S. GAAP distributable capital of R$92,643 on May 22, 1998 and
R$151,410 on December 31, 1998.
n. Revenue recognition
Until December 31, 1997, under both Brazilian and U.S. 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 are to be
deferred and amortized over 12 months, 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$69.24 per lot of
13,000 shares (each a "lot" and comprised of 1,000 preferred shares of each of
Telebras and the twelve New Holding Companies). This price represents a 50% of
discount from the market price of 1,000 Telebras preferred shares at the time
the Federal Government authorized the plan. Each employee had the right to
purchase up to 144 lots of 13,000 preferred shares, subject to proration if the
shares were oversubscribed.
The Federal Government had made 7.2 million lots available for sale, or 60%
off the 12.1 million lots that would be taken up if each employee purchased the
maximum 144 lots allowed. The original period to sign up to purchase the shares
ended on October 30, 1998. On August 4, 1998, the date on which the offer
employees commenced and the measurement date for the measurement date for 60% of
the shares, the market price of 1,000 Telebras shares was R$ 127,20. Under US
GAAP, the charge was approximately R$1,038, which represents Telebahia Celular's
and Telergipe 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, employees of
Telebahia Celular and Telergipe Celular had subscribed to 17,901 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.
Reconciliation of the income differences between US and Brazilian GAAP
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Consolidated net income as reported ......................... -- -- 42,055
Income before interest income, unallocated interest expense
and taxes as reported ..................................... 85,915 91,779 --
Add (deduct):
Different criteria for:
Capitalized interest .................................... (1,035) (3,567) 1,482
Amortization of capitalized interest .................... 28 118 361
Items posted directly to Shareholders' equity
Capitalized interest .................................... 231 859 1,430
Fiscal incentive ........................................ -- -- 1,341
Other consolidation adjustemnts ......................... -- -- 4
Stock Compensation ...................................... -- -- (1,038)
Deferred revenues on activation fees ...................... -- -- (3,498)
Deferred tax effect of the above adjustments .............. -- -- 546
Effect of minority interests on the above adjustments ..... 109 270 240
------- ------- -------
US GAAP income before interest income, unallocated interest
expense and taxes ....................................... 85,248 89,459
======= =======
US GAAP net income ........................................ 42,923
======
<CAPTION>
<S> <C>
Net income per thousand shares in accordance with US GAAP
Common shares--Basic............................................ 0,13
===========
Weighted average (thousand) common shares outstanding........... 124,369,031
Common shares--Diluted.......................................... 0,13
===========
Weighted average (thousand) common shares outstanding........... 124,369,031
Preferred shares--Basic......................................... 0,13
===========
Weighted average (thousand) Preferred shares outstanding........ 206,028,812
Preferred shares--Diluted....................................... 0,13
===========
Weighted average (thousand) Preferred shares outstanding...... 206,028,812
</TABLE>
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............ 194,329 270,966
Add (deduct):
Different criteria for:
Capitalized interest ........................................ (4,952) (3,470)
Amortization of capitalized interest ........................ (73) 288
Reversal of proposed dividends ................................. -- 8,306
Deferred revenues on activation fees ........................... -- (3,498)
Deferred tax effects of the above adjustments .................. 1,658 2,204
Effect of minority interest on the above adjustments............ 520 617
======== ========
US GAAP divisional equity/shareholders' equity ..................... 191,482 275,413
======== ========
US GAAP supplementary information:
Total assets ................................................... 405,580 489,131
======== ========
Property, plant and equipment .................................. 419,076 446,823
Accumulated depreciation ....................................... (50,173) (81,574)
======== ========
Net property, plant and equipment .............................. 368,903 365,249
======== ========
</TABLE>
Changes in divisional equity/shareholders'equity in accordance with US GAAP
Divisional
Equity/
Shareholders
equity
------------
Balance at December 31, 1995 ............................ 55,093
Income before interest income, unallocated
interest expense and taxes .......................... 85,248
Net interdivisional cash receipt ........................ 47,118
Deferred tax on indexation of permanent assets .......... (8,514)
Deferred tax on other US GAAP adjustments ............... 346
Minority interests effects other than on income ......... (3,558)
--------
Balance at December 31, 1996 ............................ 175,733
Income before interest income, unallocated
interest expense and taxes .......................... 89,459
Net interdivisional cash distribution ................... (65,625)
Deferred tax on indexation of permanent assets .......... (6,096)
Deferred tax on other US GAAP adjustments ............... 1,139
Minority interests effects other than on income ......... (3,128)
--------
Balance at December 31, 1997 ............................ 191,482
Additional net assets received on the breakup of Telebras 56,963
Net income for the year ................................. 42,923
Stock compensation net of minority interest of R$143 .... 895
Interest on shareholders' equity paid ................... (16,850)
========
Balance at December 31, 1998 ............................ 275,413
========
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
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
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
============ ============
</TABLE>
The actuarial assumptions used were as follows:
<TABLE>
<S> <C> <C>
Discount rate for determining projected benefit obligations........ 6.00% 6.00%
Rate of increase in compensation levels............................ 3.25% 3.25%
Expected long-term rate of return on plan assets................... 6.00% 10.00%
</TABLE>
The above are real rates and exclude inflation.
Amortization of the unrecognized liability at transition: 18.19 years
commencing on January 1, 1991.
Change in benefit obligation
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Benefit obligation at the beginning of year ....... 6,022,228 7,258,074
Service cost ...................................... 323,536 385,239
Interest cost ..................................... 358,102 455,256
Benefits paid
(142,355) (192,155)
Administrative expenses ........................... (22,074) (24,763)
Actuarial (gain) loss ............................. 718,637 400,140
---------- ----------
Benefit obligation at end of year
7,258,074 8,281,791
========== ==========
Change in plan assets
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
========== ==========
</TABLE>
Amortization of the unrecognized liability at transition: 18.84 years
commencing on January 1, 1992.
Health care cost trend rates of increase were projected at annual rates
excluding inflation ranging from 6.48% in 1998 decreasing to 2.00% in 2047. The
effect of a one percent annual increase in the assumed health care cost trend
rates would increase the accumulated post-retirement benefits obligation at
December 31, 1998 by R$238,530. Measurement of the accumulated post-retirement
benefit obligation was based on the same assumptions as were used in the pension
fund liability calculations.
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.
Change in benefit obligation
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Benefit obligation at 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
========== ==========
</TABLE>
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 its businesses, Telebahia Celular S.A. and Telergipe 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 November 1999.
There is no concentration of available sources of labor, services,
concessions or rights, other than those mentioned above, that could, if suddenly
eliminated, severely impact the 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 consolidated 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 consolidated
financial statements.
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 holds 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 Bahia and Sergipe.
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
TELE LESTE CELULAR PARTICIPACOES S.A.
(Aprovado em Assembleia Geral Extraordinaria,
realizada em 30 de novembro de 1998)
CAPITULO I - DAS CARACTERISTICAS DA COMPANHIA
REGIME JURIDICO
Art. 1 - Tele Leste Celular Participacoes S.A. e uma sociedade por acoes, regida
pelo presente Estatuto Social e demais dispositivos legais aplicaveis.
OBJETO SOCIAL
Art. 2 - A Companhia tem por objeto:
I - exercer o controle das sociedades exploradoras do Servico Movel Celular na
Area de Concessao 9;
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 Companhia ou pelas suas controladas;
IV - promover, realizar 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 afetos a area de telefonia movel;
VI - promover, estimular, realizar 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 Companhia tem sede em Salvador, Estado do Bahia, podendo criar e
extinguir, por decisao do Conselho de Administracao, filiais, agencias e
sucursais, escritorios, departamentos e representacoes em qualquer ponto do
territorio nacional e no exterior.
Art. 4 - O prazo de duracao da Companhia e indeterminado.
CAPITULO II - DO CAPITAL
CAPITAL AUTORIZADO
Art. 5 - A Companhia esta autorizada a aumentar seu capital social, mediante
deliberacao do Conselho de Administracao, ate o limite de 700.000.000.000
(setecentos bilhoes) de acoes, ordinarias ou preferenciais.
Paragrafo 1(0) - Nao ha obrigatoriedade, nos aumentos de capital, de se guardar
proporcao entre as especies de acoes, observadas as disposicoes legais e
estatutarias.
Paragrafo 2(0) - O direito de preferencia na emissao de acoes dentro do limite
autorizado, bem como na emissao de debentures, partes beneficiarias conversiveis
em acoes e bonus de subscricao podera ser excluido, por deliberacao do Conselho
de Administracao, nos casos previstos na legislacao.
CAPITAL SUBSCRITO
Art. 6 - O capital social subscrito, totalmente integralizado, e de
R$87.160.567,41 (oitenta e sete milhoes cento e sessenta mil, quinhentos e
sessenta e sete reais e quarenta e um centavos), representado por
334.399.027.592 (trezentos e trinta e quatro bilhoes, trezentos e noventa e nove
milhoes, vinte e sete mil, quinhentos e noventa e duas) acoes nominativas, sendo
124.369.030.532 (cento e vinte e quatro bilhoes, trezentos e sessenta e nove
milhoes, trinta mil, quinhentos e trinta e duas) acoes ordinarias e
210.029.997.060 (duzentos e dez bilhoes, vinte e nove milhoes, novecentos 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. 7 - A cada acao ordinaria corresponde um voto nas deliberacoes das
Assembleias Gerais de Acionistas.
ACOES PREFERENCIAIS
Art. 8 - As acoes preferenciais nao tem direito a voto, exceto nas hipoteses
previstas no art.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 Companhia.
Paragrafo Unico - Sera concedido as acoes preferenciais direito de voto pleno,
caso a Companhia 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. 9 - 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
Presidente do Conselho de Administracao e, em sua ausencia, pelo seu substituto,
conforme o disposto no art. 15 abaixo.
Art. 10 - Devera ser submetida a aprovacao previa da Assembleia Geral de
Acionistas, a celebracao de quaisquer contratos de longo prazo entre a Companhia
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 Companhia, de outra
parte, salvo quando os contratos obedecerem a clausulas uniformes.
Art. 11 - 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
assemblear referida no art. 10, assim como naquelas referentes a alteracao ou
revogacao dos seguintes dispositivos estatutarios:
I - art. 10;
II - paragrafo primeiro do art.12; e
III - art. 31.
Art. 12 - As Assembleias Gerais de Acionistas serao presididas pelo Presidente
do Conselho de Administracao. Em caso de ausencia do Presidente do Conselho de
Administracao, as Assembleias Gerais serao presididas pelo seu substituto,
indicado conforme o art.15 abaixo, ou por qualquer outra pessoa indicada pela
maioria dos presentes. Ao presidente das Assembleias Gerais de Acionistas cabera
a indicacao do Secretario.
Paragrafo 1(0) - 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.
Paragrafo 2(0) - Somente poderao tomar parte e votar na Assembleia Geral de
Acionistas os acionistas cujas acoes estejam registradas em seu nome, no livro
proprio, com antecedencia de 72 (setenta e duas) horas da data designada para a
respectiva Assembleia Geral de Acionistas.
Paragrafo 3(0) - O edital de convocacao podera condicionar a presenca do
acionista, na Assembleia Geral de Acionistas, ao deposito, na sede da Companhia,
do comprovante de sua qualidade de acionista, expedido pela propria Companhia ou
pela instituicao depositaria das acoes da Companhia, com 48 (quarenta e oito)
horas de antecedencia do dia marcado para a realizacao da Assembleia Geral de
Acionistas.
Paragrafo 4(0) - O edital de convocacao tambem podera condicionar a
representacao do acionista por procurador, em Assembleia Geral de Acionistas, ao
deposito do respectivo instrumento de mandato na sede da Companhia, com 48
(quarenta e oito) horas de antecedencia do dia marcado para a realizacao da
Assembleia Geral de Acionistas.
CAPITULO V - DA ADMINISTRACAO DA COMPANHIA
Art. 13 - A Administracao da Companhia compete ao Conselho de Administracao e a
Diretoria, com as atribuicoes conferidas por lei e pelo presente Estatuto
Social, cujos 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. O Conselho de Administracao, orgao de deliberacao
colegiada, exercera a administracao superior da Companhia. A Diretoria e orgao
executivo da administracao da Companhia, atuando, cada um de seus membros
segundo a respectiva competencia, nos termos da lei e do presente estatuto
Social.
Paragrafo 1o - Todos os membros do Conselho de Administracao e da Diretoria
tomarao posse mediante assinatura dos correspondentes termos, permanecendo nos
respectivos cargos ate que seus sucessores tomem posse.
Paragrafo 2o - A Assembleia Geral de Acionistas devera fixar a remuneracao
global dos administradores da Companhia, 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 Companhia, 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 por 4 (quatro) membros
efetivos, todos acionistas da Companhia e residentes no pais.
Paragrafo Unico - O Conselho de Administracao, em sua primeira reuniao apos a
posse, designara o Presidente e o Vice-Presidente do Conselho de Administracao.
SUBSTITUICAO
Art. 15 - Ocorrendo impedimento ou a ausencia de qualquer um dos membros do
Conselho de Administracao, este sera substituido, de imediato, por outro
Conselheiro de Administracao ou Diretor que, por escrito, venha a indicar para
representa-lo na reuniao a qual nao puder estar presente.
Paragrafo Unico - No caso previsto neste artigo, o membro do Conselho de
Administracao que estiver substituindo o membro do Conselho de Administracao
impedido ou ausente votara, por si e pelo membro do Conselho de Administracao
substituido, na reuniao do Conselho de Administracao.
Art. 16 - Havendo vacancia de qualquer dos cargos do Conselho de Administracao,
o substituto sera indicado pelo Conselho de Administracao, e exercera seu
mandato ate a primeira assembleia geral ordinaria que se realizar apos o evento.
COMPETENCIA
Art. 17 - Compete ao Conselho de Administracao:
I - fixar a orientacao geral dos negocios da Companhia, bem como deliberar a
criacao ou extincao de filiais, agencias e sucursais, escritorios, departamentos
e representacoes em qualquer localidade do Pais ou do exterior;;
II- aprovar o orcamento anual e o plano de investimentos e operacoes da
Companhia;
III - convocar a Assembleia Geral de Acionistas;
IV - aprovar as demonstracoes financeiras e o relatorio da administracao da
Companhia 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 Companhia, examinar, a qualquer tempo,
os livros da Companhia, solicitar informacoes sobre os contratos celebrados ou
em via de celebracao ou quaisquer outros atos;
VII - aprovar o regimento interno da Companhia, 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 Companhia com aumento de capital,
dentro do limite do capital autorizado, definindo os termos e 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 Companhia: (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 Companhia a regime de
deposito para comercializacao dos respectivos certificados ("Depositary
Receipts"), e outros titulos semelhantes;
XIII - autorizar a aquisicao de acoes de emissao da Companhia, 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;
XV - aprovar a assuncao de qualquer obrigacao nao prevista no orcamento da
Companhia em valor superior a R$ 20.000.000,00 (vinte milhoes de reais) ou o
equivalente em outra moeda;
XVI - autorizar a celebracao de contratos, nao previstos no orcamento da
Companhia, em valor superior a R$ 20.000.000,00 (vinte milhoes de reais) ou o
equivalente em outra moeda;
XVII - investimentos, desinvestimentos, ou aquisicao, alienacao ou oneracao de
ativos, nao previstos no orcamento, em valor superior a R$ 20.000.000,00 (vinte
milhoes de reais) ou o equivalente em outra moeda;
XVIII - autorizar a participacao, aquisicao, alienacao ou oneracao de acoes e
demais valores mobiliarios, em carater permanente, de emissao de outras
sociedades ou grupos de sociedades;
XIX - aprovar a distribuicao de dividendos intermediarios;
XX - escolher ou destituir os auditores independentes;
XXI - indicar e destituir o titular da auditoria interna; e
XXII.- deliberar acerca de quaisquer outras materias que nao sejam, nos termos
da lei e deste Estatuto Social, de competencia exclusiva das Assembleias Gerais
de Acionistas.
Art. 18 - As atribuicoes especificas do Presidente do Conselho de Administracao
sao: (a) convocar a Assembleia Geral de Acionistas; e (b) convocar e presidir as
reunioes do Conselho de Administracao.
REUNIOES
Art. 19 - O Conselho de Administracao reunir-se-a, (i) ordinariamente, uma vez
por mes e, (ii) extraordinariamente, sempre que necessario, mediante convocacao
do seu Presidente, lavrando-se ata de suas deliberacoes.
Paragrafo 1(0) - As reunioes do Conselho de Administracao deverao ser convocadas
por escrito, com, no minimo, 3 (tres) dias uteis de antecedencia, devendo a
convocacao conter a Ordem do Dia, com a relacao das materias a serem deliberadas
na respectiva reuniao. As convocacoes serao dispensadas quando houver a presenca
da totalidade dos membros do Conselho de Administracao em exercicio.
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.
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, sendo um o Diretor Presidente, um o Vice-Presidente de Financas,
Controle e Recursos, um o Vice-Presidente de Planejamento Corporativo, e o
Diretor Vice-Presidente de Assuntos Regulatorios.
Paragrafo Unico - Um mesmo Diretor podera ser eleito para acumular as
atribuicoes de mais de um cargo da Diretoria.
SUBSTITUICOES
Art. 21 - No caso de vacancia de cargo da Diretoria, a respectiva substituicao
sera deliberada pelo Conselho de Administracao; ocorrendo impedimento de um dos
cargos da Diretoria, o Diretor Presidente designara o substituto do Diretor
impedido, dentre os demais Diretores. O Presidente do Conselho de Administracao
podera cumular o cargo de Diretor Presidente ou indicar aquele que exercera o
cargo em seu lugar.
COMPETENCIA DA DIRETORIA E REPRESENTACAO DA COMPANHIA
Art. 22 - Compete a Diretoria a representacao ativa e passiva da Companhia e a
pratica de todos os atos necessarios ou convenientes a tanto.
Paragrafo 1o - Observadas as disposicoes contidas neste Estatuto Social, sera
necessaria, para vincular a Companhia, (i) a assinatura conjunta de 2 (dois)
Diretores, (ii) a assinatura de 1 (um) Diretor em conjunto com 1 (um)
procurador, ou (iii) a assinatura de 2 (dois) procuradores em conjunto, desde
que investidos de poderes especificos.
Paragrafo 2o - As procuracoes outorgadas em nome da Companhia 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.
Paragrafo 3o - Em casos especiais, a Companhia podera se fazer representar por 1
(um) unico procurador na pratica de quaisquer atos, inclusive aqueles
estabelecidos neste artigo, devendo o respectivo instrumento de procuracao
conter, expressamente, poderes especiais para a pratica do ato em questao, bem
como prazo de validade nao superior a 90 (noventa) dias. O referido procurador
podera ou nao ser membro da administracao da Companhia.
COMPETENCIA DOS DIRETORES
Art. 23 - E a seguinte a competencia especifica de cada um dos cargos da
Diretoria:
I - Diretor Presidente:
(a) acompanhamento e fiscalizacao da implementacao das determinacoes do
Conselho de Administracao;
(b) acompanhamento e fiscalizacao da implementacao da politica estrategica
da Companhia; e
(c) coordenacao e supervisao das atividades dos demais Diretores,
representando a Diretoria perante o Conselho de Administracao.
II - Vice-Presidente de Financas, Controle e Recursos:
(a) preparacao das demonstracoes financeiras da Companhia, e seus balancos
patrimoniais semestrais e balancetes;
(b) coordenacao e fiscalizacao da escrituracao contabil da Companhia;
(c) concepcao das politicas, diretrizes e procedimentos para a elaboracao e
acompanhamento do orcamento da Companhia;
(d) planejamento e gerencia dos recebimentos e os pagamentos da Companhia;
e
(e) conduzir a arrecadacao e a consolidacao do faturamento junto as
instituicoes financeiras e os demais canais de cobranca;
(f) concepcao dos parametros para captacao e aplicacao de recursos pela
Companhia;
(g) planejamento e gerenciamento da politica de compras da Companhia;
(h) responsabilizacao pelas funcoes de Diretor de Relacoes com o Mercado e
representacao da Companhia perante a Comissao de Valores Mobiliarios - CVM e as
Bolsas de Valores e demais orgaos de fiscalizacao do mercado de valores
mobiliarios, incumbido nao so da prestacao de informacoes da Companhia aos
investidores, a Comissao de Valores Mobiliarios - CVM e as Bolsas de Valores e
demais orgaos de fiscalizacao do mercado de valores mobiliarios, como tambem de
manter atualizados os registros da Companhia como Companhia de capital aberto e
pela adocao dos procedimentos elencados na Instrucao CVM n(0) 276/98;
(i) relacionamento com os investidores e demais integrantes do mercado de
valores mobiliarios;
(j) coordenacao e acompanhamento da auditoria interna, de acordo com os
parametros estabelecidos pelo Conselho de Administracao; e
(k) revisao dos procedimentos internos, verificando o cumprimento da
legislacao, das disposicoes estatutarias e das politicas e diretrizes da
Companhia.
III - Vice-Presidente de Planejamento Corporativo:
(a) concepcao do planejamento estrategico da Companhia e de suas
controladas e coligadas;
(b) coordenacao da integracao e da utilizacao das sinergias entre a
Companhia e suas controladas e coligadas, bem como junto as demais sociedades
pertencentes ao mesmo grupo economico; e
(c) concepcao da politica de aliancas com as demais sociedades do ramo de
telecomunicacoes.
IV - Vice-Presidente de Assuntos Regulatorios:
(a) coordenacao do relacionamento com a Administracao Publica, inclusive
com a Agencia Nacional de Telecomunicacoes - ANATEL, o Conselho Administrativo
de Defesa Economica - CADE e demais entidades regulamentadoras e fiscalizadoras;
(b) coordenacao do relacionamento com as entidades civis representativas de
interesses sociais, inclusive com sindicatos, entidades relacionadas aos
consumidores; e
(c) coordenacao do relacionamento com as demais operadoras de telefonia
fixa ou movel, nao pertencentes ao mesmo grupo economico da Companhia.
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. Tal remuneracao sera paga da forma
como o for aos membros da Diretoria. O suplente em exercicio fara jus a
remuneracao do efetivo, no periodo em que ocorrer a substituicao, contado mes a
mes.
Paragrafo 2o - Os membros do Conselho Fiscal serao substituidos em suas
ausencias, impedimentos ou vacancia, pelo respectivo suplente. Vagando mais da
metade dos cargos e nao havendo suplentes a convocar, a Assembleia Geral sera
convocada para eleger os 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 tera duracao de 12 (doze) meses, iniciando-se a
1(0) (primeiro) de janeiro de cada ano e terminando no ultimo dia do mes de
dezembro.
DESTINACAO DOS LUCROS
Art. 26 - O valor correspondente ao dividendo minimo obrigatorio sera destinado
prioritariamente ao pagamento do dividendo prioritario das 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.
Paragrafo Unico - Os dividendos nao reclamados no prazo de 3 (tres) anos
reverterao em favor da Companhia.
Art. 27 - Juntamente com as demonstracoes financeiras, o Conselho de
Administracao apresentara, a Assembleia Geral Ordinaria, proposta sobre (i) a
participacao dos empregados e dos administradores nos lucros e (ii) a destinacao
do lucro liquido do exercicio. Poderao ser levantados, alem do anual, balancos
semestrais ou trimestrais.
Paragrafo Unico - 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, respeitado o disposto no art. 26, sendo este valor aumentando 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 constituicao ou manutencao de reserva suplementar para a
expansao dos negocios sociais ate o limite de 80% (oitenta porcento) do capital
social, ou na distribuicao de dividendos adicionais aos acionistas.
Art. 28 - A Companhia 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 do montante de
reservas de capital de que trata o paragrafo primeiro do artigo 182 da Lei
6.404/76, ou (iii) a conta de lucros acumulados ou de reservas de lucros
existentes no ultimo balanco anual ou semestral.
Paragrafo Unico - Os dividendos intermediarios distribuidos nos termos deste
artigo serao imputados ao dividendo minimo obrigatorio.
Art. 29 - Por deliberacao do Conselho de Administracao e observadas as
disposicoes legais, a Companhia podera pagar, aos seus acionistas, juros sobre o
capital proprio, os quais poderao ser imputados ao dividendo minimo obrigatorio.
CAPITULO VIII - DISPOSICOES GERAIS
Art. 30 - A Companhia entrara em liquidacao nos casos previstos em lei, ou por
deliberacao da Assembleia Geral, que estabelecera a forma da liquidacao, elegera
o liquidante e instalara o Conselho Fiscal, para o periodo da liquidacao,
elegendo seus membros e fixando-lhes as respectivas remuneracoes.
Art. 31 - A aprovacao, pela Companhia, 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 Companhia se
regera pelas disposicoes legais que forem aplicaveis.
<PAGE>
CHARTER OF
TELE LESTE CELULAR PARTICIPACOES S.A.
CHAPTER I
CHARACTERISTICS OF THE COMPANY
Art. 1 - TELE LESTE CELULAR PARTICIPACOES S.A., is a publicly-held
corporation, governed by this Charter and by applicable legal provisions.
Art. 2 - The purposes of the Company are:
I. to exercise control over the companies providing Cellular Mobile
Service in Concession Area 9;
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, conduct 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 affecting the mobile telephone sector;
VI. to promote, foster, conduct 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 City of
Salvador, in the State of Bahia, 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.
Art. 4 - The duration of the Company is indefinite.
CHAPTER II
AUTHORIZED CAPITAL
Art. 5 - The Company is authorized to increase its capital, by decision of
the Board of Directors, up to seven hundred billion (700,000,000,0000) shares of
common or preferred stock.
ss. 1. It is not necessary to maintain, when increasing its capital, the
proportions of the number of common and preferred shares, subject to applicable
law and this Charter.
ss. 2. The Board of Directors may decide to eliminate preemptive rights to
subscribe to shares, as well as during the issuance of debentures, beneficial
rights convertible into shares and subscription rights, subject to applicable
law.
SUBSCRIBED CAPITAL
Art. 6 - The corporate capital, fully subscribed and paid in, is
R$87,160,567.41 (eighty seven million, one hundred sixty thousand, five hundred
sixty seven reais and forty one 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. 7 - Each ordinary share shall correspond to one vote at the Meetings
of Shareholders.
PREFERRED SHARES
Art. 8 - Preferred shares are not entitled to voting rights except as
provided in the sole paragraph of Arts. 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. 9 - 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
Chairman of the Board of Directors, and in his/her absence, by his/her
replacement, in accordance with Art. 15 hereunder.
Art. 10 - 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. 11 - 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. 10, as well
as those relating to the amendment or revocation of the following provisions of
this Charter:
I. Art. 10;
II. ss.1 of Art. 12; and
III. Art. 31.
Art. 12 - The Meeting of Shareholders shall be opened by the Chairman of
the Board of Directors. In case of absence of the Chairman of the Board of
Directors, the shareholders shall by presided by his/her replacement, in
accordance with Art. 15 hereunder, or by another person elected by a majority of
those present. The Chairman of the Board of Directors share elect the Secretary.
ss. 1. 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.
ss. 2 - 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. 3. 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 in
the Company's register or by the depositary institution holding the shares of
the Company, up to 48 (forty-eight) hours prior to the date scheduled for the
Meeting of Shareholders.
ss. 4. 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 48 (forty-eight) 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. The Board of Directors, acting as a collegiate body, shall be
responsible for managing the Company. The Executive Board of Directors is the
executive body for the corporate management, with each Executive Officer acting
in accordance with his/her powers, subject to applicable law and this Charter.
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 4 (four) members, all
of them shareholders of the Company and residents of Brazil.
Sole Paragraph -The Board of Directors shall nominate, on their first
meeting after being elected, shall elect the Chairman and Vice-Chairman of the
Board of Directors.
REPLACEMENT
Art. 15 - In the event of absence or impediment of any member of the Board
of Directors, he/she shall be replaced, immediately, by another member of the
Board or Executive Officer that, in writing, shall be indicated to represent
him/her for said meeting which they shall be absent from.
Sole Paragraph - 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. As established in this Article, the member of the Board of Directors
that is replacing the member of the Board of Directors whose is absent or
impeded shall vote for him-herself and for the replaced member of the Board, in
the meeting of the Board of Directors.
Art. 16 - In the event of vacancies in the Board of Directors, the
replacement shall be given charge by the Board of Directors, to continue as a
replacement up to the next Meeting of Shareholders that takes place after the
replacement.
POWERS
Art. 17 - The Board of Directors shall:
I. set the general business policy of the Company and ensure the
execution thereof, as well as to well as decide to open or close
subsidiaries, agencies, branches, offices, departments and
representative offices anywhere in Brazil or abroad ;
II. approve the budget and annual business and investment 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) and other similar instruments;
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;
XV. approve the undertaking of any obligation not provided for in the
budget of the Company, with a value exceeding R$20,000,000.00 (twenty
million reais) or the equivalent in another currency;
XVI. approve the execution of contracts not provided for in the budget of
the Company, with a value R$20,000,000.00 (twenty million reais) or
the equivalent in another currency; XVII. approve equity investments,
sales or acquisition, disposal or creation of liens on assets not
provided for in the budget of the Company, with a value exceeding
R$20,000,000.00 (twenty million reais) or the equivalent in another
currency;
XVIII. authorize permanent participation, acquisition, alienation or
creation of liens on shares and other securities, in a permanent
manner, of shares of other companies or groups of companies;
XIX. approve the distribution of intermediary dividends;
XX. appoint the independent auditors and remove them from office;
XXI. appoint and remove from office the Internal Auditor; and
XXII. decide on other matters that are not, either in accordance
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, and
(b) 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 month
and (ii) extraordinarily, whenever necessary, 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, 3 (three) days notice, and the notice shall indicate the agenda
and the matter to be decided in the respective meeting. The call for meetings
shall be dispensed with when all members of the Board of Directors are present.
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.
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 be the President, the Vice-President for
Finance, Control and Resources, the Vice-President for Corporate Planning and
the 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.
REPLACEMENT
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. The Chairman of the
Board of Directors may take over the duties of the President or elect one who
shall discharge the President's duties in his/her place.
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.
ss. 1. In accordance with the provisions set forth in this Charter, all
documents binding the Company shall be signed (i) by 2 (two) Executive Officers,
(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. 2. 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.
ss. 3. In special circumstances, the Company can have itself represented by
1 (one) attorney-in-fact to carry out any actions, including those set forth in
this Article, having the certificate granting his/her powers contain expressly,
the special powers for the carrying out the necessary tasks, as well as the term
of effectiveness, which shall not exceed 90 (ninety) days. The aforementioned
attorney-in-fact may, or may not, be a member of the Company's management.
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 supervise and manage the implementation of the decisions of
the Board of Directors;
b) to supervise and manage the implementation of the strategic
policies of the Company; and
c) to coordinate and supervise the activities of the other Executive
Officers, and representing the Board of Directors during the
Meeting of Shareholders.
II. Vice-President for Finance, Control and Resources
a) to prepared the financial statements of the Company, and the
biyearly balance sheets and interim balance sheets;
b) to manage the corporate planning and business development
coordinating activities for the Company and its subsidiaries;
c) to prepare the policies, directive and procedures for preparing
and supervising the Company's budget;
d) to plane and manage the receipts and payments of the Company;
e) to conduct the collection and the consolidation of billing
together with financial institutions and through other billing
systems;
f) to prepare the parameters for the acquisition and application of
the Company's resources;
g) to plan and manage the purchasing policies of the Company;
h) to conduct the responsibilities of Investor Relation Directors
and represent the Company with the Brazilian Securities
Commission (CVM) and the stock exchanges, as well as other
supervisory bodies of the securities markets, with the duties of
not only providing information to investors, to the CVM and to
the stock exchanges and other supervisory bodies of the
securities markets, as well a keeping up to date the register as
a publicly-held company and the adoption of the procedures
enumerated in CVM Instruction n(0) 276/98;
i) to interact with investors and other parties of the securities
markets;
j) to coordinate and supervise the Internal Auditor, in accordance
with the guidelines established by the Board of Directors; and
k) to review the internal procedures, verify and comply with
legislation, in accordance with this Charter and the policies and
directives of the Company.
III. Vice-President for Corporate Planning
a) to prepare the strategic plans of the Company and of its
subsidiaries and affiliates;
b) to consolidate and maximize the synergies existant between the
Company and its subsidiaries and affiliates, as well as other
companies that are part of the same corporate unit; and
c) to prepare the policy of alliances with other companies in the
area of telecommunications.
IV. Vice-President for Regulatory Matters
a) to represent the Company before the Agencia Nacional de
Telecomunicacoes--ANATEL, the Conselho Administrativo de Defesa
Economica--CADE and other regulatory and supervisory agencies;
b) to coordinate the relationship with other civic groups of social
interest, including syndicates, consumer-related entities; and
c) to coordinate the relationship with the other operating companies
of fixed-line and mobile telephony, not part of the Company's
corporate unit.
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. Said
compensation shall be paid in the same manner as made to the Executive Officers.
The alternate who replaces a member shall be compensated for the period for
which the replacement was made on a monthly basis.
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 have a duration of 12 (twelve) months,
beginning on the 1st (first) of January of each year and ending on the last day
of December.
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.
Sole Paragraph - Dividends not claimed within 3 (three) years shall revert
to the Company.
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. In
addition to annual financial statements, quarterly and biyearly ones may also be
prepared.
Sole Paragraph - 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 Art. 26, 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 for the creation or maintenance of a supplement reserve for the
expansion of corporate business up to 80% (eighty percent) of 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, shall select the liquidator, and shall install a Statutory Audit
Committee for the period of the liquidation, elect its members and determine
their compensation.
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.
