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TELEMIG CELULAR PARTICIPACOES SA - 20-F - 20030508 - RESULTS_OF_OPERATIONS
Effects of Inflation in Our Results of Operations
Since the introduction of the real as the Brazilian currency in July
1994, inflation was controlled until January 1999, when it increased due to the
devaluation of the real. During periods of high inflation, wages in
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Brazilian currency tended to fall because salaries typically did not increase as
quickly as inflation. The effect was a progressive decline in purchasing power
of wage earners. The reduction and stabilization of inflation following the
implementation of the real plan resulted in increased spending on services and
goods (including wireless telecommunication services), higher real income
growth, increased consumer confidence and the increased availability of credit.
It also resulted in relatively higher labor costs. However, if Brazil
experiences significant inflation, we may be unable to increase service rates to
our customers in amounts that are sufficient to cover our operating costs, and
our business may be adversely affected as a consequence.
The table below shows the Brazilian general price inflation (according
to the IGP-DI and the IPCA) for the years ended December 31, 1997 through 2002:
INFLATION RATE (%) AS INFLATION RATE (%) AS
MEASURED BY IGP-DI (1) MEASURED BY IPCA (2)
---------------------- ---------------------
December 31, 2002 26.4 12.5
December 31, 2001 10.4 7.7
December 31, 2000 9.8 6.0
December 31, 1999 20.0 8.9
December 31, 1998 1.7 1.7
December 31, 1997 7.5 5.2
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(1) Source: IGP-DI, as published by the Fundacao Getulio Vargas.
(2) Source: IPCA, which is a consumer price index.
COMPOSITION OF OPERATING REVENUES AND EXPENSES
Operating Revenues
We generate operating revenues from:
- usage charges, which include measured service charges of outgoing calls
and roaming and other similar charges, all of which depend upon which
service plan has been selected by the customer;
- monthly subscription payments, which depend upon which service plan has
been selected by the contract customer;
- network usage fees, which are the amounts charged by us to other
cellular and wireline telephone services providers for use of our
network by customers of these service providers;
- activation fees, which are one-time sign up charges paid to obtain
cellular service under our Basic plan;
- sales of handsets and accessories; and
- other services and charges.
Unbilled revenues for the few days in between the billing date and
month-end are estimated and recognized as revenue during the month in which the
service is provided. Revenue from the sales of prepaid cards is recognized as
actually used on a minute-by-minute basis. In Brazil, cellular companies may not
charge customers for incoming calls, unless the customer is roaming.
Operating Expenses
Operating expenses consist of cost of services, selling, general and
administrative expenses, bad debt expense and depreciation and amortization.
Cost of services consists primarily of fixed costs such as leased line charges,
site rental and network maintenance, including overhead, as well as variable
costs such as certain interconnection charges and Fistel inspection fees.
Selling, general and administrative expenses consist primarily of salaries,
wages and related benefits for administrative personnel, advertising and
promotional expenses and other overhead expenses.
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THE EFFECTS OF THE INCREASE OF OUR PREPAID CUSTOMER BASE IN OUR RESULTS OF
OPERATIONS
Since the inception of our prepaid plans in March 1999, the number of
prepaid customers has grown to represent 42%, 55% and 66% of our total customer
base at December 31, 2000, 2001 and 2002, respectively. Our prepaid customers
are able to originate calls until the credit is fully used or otherwise until
the card expires at the end of 180 days (if another card is not activated),
whichever occurs first. Our customers have access to limited cellular service
during the following 60 days (during the first 30 days they can receive calls
and originate emergency calls and calls to our call center, after that, they can
only originate calls to our call center).
Prepaid customers, on average, have substantially lower minutes of use
than contract customers and do not pay monthly fees and, as a result, generating
substantially lower average monthly revenues per customer. Prepaid customers use
their cellular phones predominantly for incoming calls, so prepaid customers
revenues consist primarily of interconnection fees.
We believe that prepaid plans are attractive to a wide range of
cellular customers. In addition to helping customers control costs, a prepaid
program has no monthly invoice and allows customers to prepay for cellular
services in cash. The prepaid market is comprised of customers who generally
earn a variable income and prefer not to make a fixed financial commitment, do
not have the credit profile required to purchase a contract plan or seek
cellular services for emergencies or limited use only.
CONSOLIDATION OF OPERATIONS WITH AFFILIATE
In order to create operating efficiencies and reduce costs, we entered
into a shared services arrangement in February 2001 with our affiliate, Tele
Norte Celular Participacoes S.A. and its operating subsidiary, Amazonia Celular
S.A. Pursuant to this arrangement, the financial, marketing, call center and
human resources departments, as well as portions of the engineering departments,
of each company are now managed by a single team.
REGULATORY AND COMPETITIVE FACTORS
Our business, including the services we provide and the rates we
charge, is subject to comprehensive regulation under the General
Telecommunications Law. As a result, our business, results of operations and
financial conditions could be negatively affected by the actions of the
Brazilian authorities, including, in particular, the following types of actions:
- delays in the granting of, or the failure to grant, approvals for rate
increases;
- the granting of operating licenses in our region; and
- the introduction of new or stricter operational requirements.
We began to face competition in our region in the fourth quarter of
1998 and anticipate that competition will contribute to declining prices for
cellular telecommunications services and increasing pressure on operating
margins. Our growth and results of operations will depend significantly on a
variety of factors, including:
- our ability to attract new customers,
- the rate of growth of our customer base,
- the usage and revenue generated from our customers,
- the level of airtime usage,
- equipment prices,
- the rate of churn, and
- our ability to control costs.
In the first half of 2002, we began to face competition in certain
areas of our region from Telemar - "Oi," that began operations in the D Band SMP
frequency. The extent of increased competition and any adverse effects on our
results and market share will depend on a variety of factors that we cannot now
assess with precision and many of which may be beyond our control.
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TAXES ON TELECOMMUNICATIONS SERVICES
The cost of telecommunications services to customers includes a variety
of taxes. The average rate of all such taxes, as a percentage of our gross
operating revenues, was approximately 19% in 2000, 2001 and 2002. The principal
taxes are a state value-added tax, the Imposto sobre Circulacao de Mercadorias e
Servicos, commonly known as the "ICMS," and a municipal tax on services, the
Imposto sobre Servico, referred to as the "ISS." The ICMS is a tax that the
Brazilian states impose at varying rates on revenues from the sale of goods and
services, including communications services. The ICMS rate for domestic
telecommunications services in the state of Minas Gerais is 25%. The ISS is
imposed on services not subject to the ICMS and its average rate is 5%.
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 some services to which the ICMS had not previously
been applied, including cellular activation and monthly subscription. The
agreement also provides that the ICMS may be applied retroactively to activation
services rendered during the five years preceding June 30, 1998. See "Item
8A--Financial Information--Consolidated Statements and Other Financial
Information--Legal Proceedings" for a fuller description of these developments.
Other taxes on gross operating revenues include two federal social
contribution taxes, the Programa de Integracao Social, referred to as "PIS," and
the Contribuicao para Financiamento da Seguridade Social, known as "COFINS,"
imposed on the gross revenues derived from telecommunications services at a
combined rate of 3.65%. Prior to February 1999, the combined rate of both taxes
was 2.65%.
In addition, the following contributions are imposed on certain
telecommunications services revenues:
- Contribution for the Fund for Universal Access to Telecommunication
Services - "FUST." FUST was established by Law 9,998 of August 17,
2000, to provide resources to cover the cost exclusively attributed to
fulfilling obligations of universal access to telecommunication
services that cannot be recovered with efficient service exploration or
that is not the responsibility of the concessionaire. Contribution to
FUST by all telecommunication services companies started on January 2,
2001, at the rate of 1% of net operating telecommunication services
revenue (excepting interconnection revenues), and it may not be passed
on to customers.
- Contribution for the Fund of Telecommunication Technological
Development - "FUNTTEL." FUNTTEL was established by Law 10,052 of
November 28, 2000, in order to stimulate technological innovation,
enhance human resources capacity, create employment opportunities and
promote access by small- and medium-sized companies to capital
resources, so as to increase the competitiveness of the Brazilian
telecommunications industry. Contribution to FUNTTEL by all
telecommunication services companies started on March 28, 2001, at the
rate of 0.5% net operating telecommunication services revenue
(excepting interconnection revenues), and it may not be passed on to
customers.
We must also pay the Contribution for the Fund of Telecommunication
Fiscalization - "FISTEL." FISTEL is a fund supported by a tax applicable to
telecommunications operators (the "FISTEL Tax"), and was established in 1966 to
provide financial resources to the Brazilian government for the regulation and
inspection of the telecommunications sector. The FISTEL Tax consists of two
types of fees: (i) an installation inspection fee assessed on telecommunications
stations (which could be a base, a repeater or a mobile, according to the
General Telecommunications Law) upon the issuance of their authorization
certificates; and (ii) an annual operations inspection fee that is based on the
number of authorized stations in operation at the end of the previous calendar
year. The amount of the installation inspection fee is a fixed value, depending
upon the kind of equipment installed in the authorized telecommunications
station. The operations inspection fee equals 50% of the total amount of the
installation inspection fee that would have been paid with respect to existing
equipment.
DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES AND POLICIES
General
The preparation of the financial statements included in this annual
report necessarily involves certain assumptions, which are derived from
historical experience and various other factors that we deemed reasonable and
relevant. Although we review these estimates and assumptions in the ordinary
course of business, the portrayal of our financial condition and results of
operation often requires our management to make judgments regarding the effects
on our financial condition and results of operations of matters that are
inherently uncertain. Actual results
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may differ from those estimated under different variables, assumptions or
conditions. Note 3 of our consolidated financial statements includes a summary
of the significant accounting policies and methods used in the preparation of
our consolidated financial statements.
Deferred Taxes
As of December 31, 2002, we had a net deferred tax asset of R$262.1
million, related to paid-in capital, tax loss carryforwards and other temporary
differences relating primarily to accrued expenses and provision for
contingencies, that may be utilized to offset future taxable income. Management
believes it may be able to offset this tax credit against taxable income of
Telemig Celular in order to benefit from this asset.
Long-lived Assets
We consider the effects of obsolescence, competition, changes in
technology and other economic factors when assigning useful lives to our
operating assets. For example, the results for the year-ended 2001 and 2002 were
impacted by the acceleration of the depreciation of our billing system that will
be replaced by the end of the first half of 2003. Changes in the lives of
operating assets with significant impact on the financial statements are
disclosed whenever they occur.
Contingencies
We do not believe that we are a party to any legal proceedings that
will have a material adverse effect on our consolidated financial position. As
discussed in Note 12 of our consolidated financial statements, in December 1998,
we were granted an injunction by the Treasury Court of the state of Minas Gerais
related to the application of ICMS on monthly fees and rentals. We do not
believe such services should be subject to ICMS, as they do not constitute
telecommunications services. We have accrued our best estimate of the probable
cost for the resolution of this claim. This estimate has been developed in
consultation with external legal counsel that is handling this matter. To the
extent additional information arises or our strategy changes, it is possible
that our best estimate of the probable liability in these matters may change. We
recognize the costs of legal defense in the periods incurred. Accordingly, the
future costs of defending claims are not included in the estimated liability and
are not believed to have a material effect on our consolidated financial
position.
RESULTS OF OPERATIONS
The following table shows the components of our net income for 2002,
2001 and 2000.
YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS OF REAIS)
Revenues
Services provided to third parties ............... 930,610 846,340 650,835
Sale of handsets ................................. 77,593 74,793 93,426
---------- ---------- ----------
1,008,203 921,133 744,261
---------- ---------- ----------
Cost of services (1) ................................. 281,382 251,522 201,991
Cost of handsets ..................................... 87,886 81,606 101,919
Selling, general and administrative expenses (1) ..... 240,712 215,526 212,531
Bad debt expense ..................................... 18,190 28,403 21,556
Other net operating income (1) ....................... (1,963) (9,306) (1,132)
Depreciation and amortization ........................ 179,765 153,934 126,747
---------- ---------- ----------
Operating income ..................................... 202,231 199,448 80,649
Interest income ...................................... (161,950) (70,533) (31,408)
Interest expense ..................................... 88,137 59,705 43,514
Foreign exchange loss ................................ 249,195 60,286 24,443
---------- ---------- ----------
Income before minority interest and taxes ............ 26,849 149,990 44,100
Income taxes ......................................... 1,135 49,317 10,064
Minority interest .................................... 3,474 18,784 7,777
---------- ---------- ----------
Income before cumulative effect of accounting change.. 22,240 81,889 26,259
Cumulative effect of accounting change (2) ........... -- (5,325) --
Net income and comprehensive income .................. 22,240 87,214 26,259
---------- ---------- ----------
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(1) Line items were reclassified in 2001 and 2000 in order to make numbers more
comparable to 2002 results.
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(2) See Note 3 (j) to the financial statements.
RESULTS OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED
DECEMBER 31, 2001
Net Revenues
Net revenues increased by 10%, reaching R$1,008.2 million in 2002
compared to R$921,1 million in 2001. The growth in net revenues is almost
entirely attributable to the 10.0% increase in revenues derived from the
provision of wireless services (net service revenues) to R$930.6 million in 2002
from R$846.3 million in 2001 - our service revenues are comprised mainly of
monthly fees, service charges (outgoing traffic) and interconnection revenues
(incoming traffic). The increase in net service revenue was primarily due to the
increase in interconnection revenues, which grew by 13% during the year, mainly
due to an increase of 10% in interconnection fees per minute authorized by
Anatel in February 2002. The increase in net service revenues can be linked, to
a lesser extent, to the 15% increase in our customer base. By year-end 2002, our
customer base had reached 1,922,856, with 66% of clients in the prepaid segment
and 34% in the contract segment.
Our revenues from the sale of handsets increased by 4% in 2002 when
compared to the previous year. This increase can be explained by the 6% growth
in the number of gross additions in 2002 as compared to 2001.
Cost of Services
Our cost of services increased to R$281.4 million in 2002 from R$251.5
million in 2001, representing a 12% increase. This increase is the result of an
18% increase in interconnection costs, as a result of an 8% increase in our
outgoing traffic volume and an increase of 10% in the interconnection fees paid
by us to other operators due to an increase in interconnection cost per minute
with wireless and fixed-line operators. Additionally, there was a 35% increase
in the amount paid as FISTEL tax in 2002 that reached a total of R$23.3 million,
offset by the 10% decrease, to R$20.4 million in 2002 from R$22.5 million in
2001, in leased lines costs that contributed to partially compensate the
increase in the cost of services for the year.
Cost of Handsets
Our cost of handsets increased 8% to R$87.9 million in 2002 from R$81.6
million in 2001 as a result of the increase in the number of handsets sold. The
cost of handsets increased at a rate higher than the sale of handsets as a
result of subsidies we offered our clients.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 12% to R$240.7
million in 2002 from R$215.5 million in 2001. As a percentage of net services
revenue, selling, general and administrative expenses increased to 26% for 2002
from 25% in 2001.
Selling expenses increased by 5% to R$162.4 million in 2002 from
R$154.1 million in 2001. This increase is mainly attributable to higher costs
incurred during the year to retain high use clients and to higher payroll
expenses due to an increase in salaries and the payment of severance expenses.
These increases were partially offset by the decrease in the amount of
commissions, related to client acquisition, paid to independent distributors in
2002 as compared to the previous year. However, as a percentage of net services
revenue, selling expenses decreased slightly to 17% in 2002 from 18% in 2001.
General and administrative expenses increased by 28% to R$78.3 million
in 2002 from R$61.4 million in 2001. The increase is primarily related to an
increase in payroll (16% increase year-over-year); bonuses due substantially to
the implementation of a retention program within our company (79% increase
year-over-year); consulting (37% increase year-over-year); and, software
maintenance and expenses related to our current billing system (90% increase
year-over-year).
Bad Debt Expense
Our bad debt in 2002 decreased 36% to R$18.2 million from R$28.4
million in 2001. As a percentage of net service revenues, our bad debt has been
reduced to 2.0% as opposed to the 3.4% recorded for the previous year. The
continued decrease in our bad debt is directly related to the strengthening of
credit controls and collection policies we began implementing in 1999 and to the
increased participation of prepaid users within our customer
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base. We maintain an allowance for past-due accounts receivable in an amount
equal to our estimate of probable future losses on these accounts, based on
historical losses and the current level of overdue accounts receivable. We also
immediately charge off any accounts receivable arising from fraud.
Other Net Operating Income
Our other net operating income decreased to R$2.0 million in 2002 from
R$9.3 million in 2001, mainly due to a tax amnesty we received in 2001 as a
result of prepayment of ICMS installments in the amount of R$5.9 million.
Depreciation and Amortization
Our depreciation and amortization expense increased 17% to R$179.8
million in 2002 from R$153.9 million in 2001. The increase can be primarily
attributable to: (i) the increase of investments in property and equipment in
order to expand our network capacity and improve the overall quality of our
services; and (ii) the acceleration of depreciation of our billing system that
is expected to replaced by the end of the first half of 2003.
Operating Income
Our operating income remained fairly stable at R$202.2 million in 2002
and R$199.5 million in 2001, as a result of the above.
Interest Income
Our interest income increased to R$162.0 million in 2002 from R$70.5
million in 2001, representing an increase of 130%. The increase is directly
related to the growth in the average balance of our invested cash and to the
positive results of our hedging operations in 2002 due to the strong devaluation
of the real against the U.S. dollar. At the end of 2002, 78% of our foreign
currency denominated debt was hedged as opposed to only 65% in the previous
year.
Interest Expense
Interest expense increased 48% to R$88.1 million in 2002 from R$59.7
million in 2001. The increase was due to an increase in our consolidated
indebtedness in 2002 related to the funding of our capital expenditures.
Foreign Exchange Loss
As a result of the 52% devaluation of the real against the U.S. dollar,
our denominated in or indexed to foreign currencies indebtedness increased and,
consequently, our foreign exchange loss increased substantially to R$249.2
million in 2002 from R$60.3 million in 2001. Our foreign exchange loss was
partially offset by hedging operations, minimizing the currency devaluation
effects in our financial results.
Income Taxes
Income taxes, which include social contribution taxes, decreased
significantly to R$1.1 million in 2002 from R$49.3 million in 2001. The
effective tax rate in 2002 was 4%, down from 33% in 2001. The combined statutory
tax rate is 34%. The decrease in the effective rate in 2002 is directly related
to the social contribution enacted rate adjustment recorded in 2002 (see Note 8
to our consolidated financial statements) and also a much higher relative amount
of interest on capital declared by our subsidiary, Telemig Celular, in 2002 as
compared to the previous year. Under Brazilian law, interest on capital is
considered a tax-deductible dividend.
Net Income
Net income decreased 74% to R$22.2 million in 2002 from R$87.2 million
in 2001 as a result of the above factors.
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RESULTS OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED
DECEMBER 31, 2000
Net Revenues
Net revenues increased to R$921.1 million in 2001 from R$744.3 million
in 2000. This 24% increase was primarily a result of the 35% growth in our
customer base to 1,670,146 customers in 2001 from 1,240,709 customers in 2000.
The customer growth is attributable mainly to the 77% increase in the number of
prepaid customers to 924,076 in 2001 from 521,764 in 2000. As a result, our
customer base mix has changed significantly from 42% prepaid customers in 2000
to 55% in 2001.
Our revenues from the sale of handsets decreased by 20% in 2001. The
number of handsets sold decreased as the market for second hand handsets has
been actively developing. In terms of price, growth in our client base came
primarily from the influx of new prepaid customers, who generally purchase less
expensive handsets.
Our service revenues are comprised mainly of monthly fees, service
charges (outgoing traffic) and interconnection revenues (incoming traffic).
During 2001, the growth of our client base and the associated increase in
traffic usage contributed to the 30% increase in our net service revenues. The
main factor responsible for this growth was the increase in interconnection
revenues, which grew by 51% during the year. These interconnection revenues
represented 40% of our net service revenues in 2001 as compared to 35% in 2000.
There was also an increase of 19.6% in interconnection fees imposed by Anatel in
November 2000, which was fully reflected in 2001.
Cost of Services
Our cost of services increased to R$251.5 million in 2001 from R$202.0
million in 2000, representing a 25% increase. This increase is the result of an
increase of 32% in our interconnection cost related to the 26% increase in our
outgoing traffic, and an increase of 21% in our FISTEL taxes paid to Anatel,
mainly due to an increase in operating inspecting fees associated with the
growth in our customer base.
Cost of Handsets
Our cost of equipment decreased 20% to R$81.6 million in 2001 from
R$101.9 million in 2000, in line with the decrease in our sales of handsets.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 1% to R$215.5
million in 2001 from R$212.5 million in 2000. As a percentage of net services
revenue, selling, general and administrative expenses was 25% in 2001, down from
33% in 2000.
Selling expenses increased by 10% to R$154.1 million in 2001 from
R$139.6 million in 2000. This increase is mainly attributable to a growth in the
number of our employees, and therefore an increase in our payroll, combined with
a general increase in annual salaries and higher marketing and advertising
expenses. However, as a percentage of net services revenue, selling expenses
decreased to 18% in 2001 from 21% in 2000.
General and administrative expenses decreased by 16% to R$61.4 million
in 2001 from R$73.0 million in 2000. The decrease is mainly due to the
recognition of a non-recurring expense in 2000 represented by invoices issued by
TIWI to us for the reimbursement of expenses allegedly incurred by it on our
behalf. We registered approximately R$14 million as general and administrative
expenses in 2000 in connection with these invoices. For more detailed
information relating to the TSA, see "Item 8A - Financial Information - Legal
Proceedings." In addition, we received in 2001 a one-time tax amnesty as a
result of the prepayment of ICMS installments in the amount of R$5.9 million,
which was not reflected in 2000.
Bad Debt Expense
Although our bad debt in 2001 increased 31% to R$28.4 million, our
percentage of bad debt in 2001 was 3.4% of the net service revenue and remained
fairly stable as compared to the 3.3% registered in 2000. The low level of bad
debt was a direct result of the strengthening of credit controls and collection
policies we began implementing in 1999.
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Other Net Operating Income
Our other net operating income increased to R$9.3 million in 2001 from
R$1.1 million in 2000, mainly due to a tax amnesty we received as a result of
prepayment of ICMS installments in the amount of R$5.9 million
Depreciation and Amortization
Our depreciation and amortization expense increased 20% to R$153.9
million in 2001 from R$126.7 million in 2000, primarily as a result of an
increase of investments in property and equipment in order to expand our network
capacity and improve the overall quality of our services.
Operating Income
Our operating income increased 147% to R$199.4 million in 2001 from
R$80.6 million in 2000 as a result of the above factors.
Interest Income
Our interest income increased to R$70.5 million from R$31.4 million,
mainly as a result of the growth in the average balance of our invested cash and
to the positive results of our hedging operations in 2001. At the end of 2001,
65% of our dollar-denominated debt was hedged as opposed to only 33% in 2000.
Interest Expense
Interest expense increased 37% to R$59.7 million in 2001 from R$43.5
million in 2000. The increase was due to an increase in our consolidated
indebtedness in 2001 related to the funding of our capital expenditures.
Foreign Exchange Loss
As a result of the 19% devaluation of the real against the U.S. dollar,
our foreign exchange loss was R$60.3 million in 2001, as compared to R$24.4
million in 2000, a 147% increase.
Income Taxes
Income taxes, which include social contribution taxes, were R$49.3
million in 2001, as compared to R$10.1 million in 2000. The effective rate of
tax on pretax income in 2001 was 33% (up from 23% in 2000), compared to the
combined statutory rate of 34%. The increase in the effective rate in 2001 is
due mainly to a lower relative amount of interest on capital declared by our
subsidiary, Telemig Celular, in 2001 as compared to 2000.
Net Income
Net income increased 231.6% to R$87.2 million in 2001 from R$26.3
million in 2000 as a result of the above factors.
B. LIQUIDITY AND CAPITAL RESOURCES
GENERAL
We have funded our operations and capital expenditures principally from
operating cash flows and loans obtained from financial institutions. At December
31, 2002, we had R$586.0 million in cash and cash equivalents. We have a policy
of maintaining substantial cash and cash equivalents in order to be in a
position to respond immediately to the changing regulatory and competitive
environment in which we operate. Our principal cash requirements include:
- capital expenditures,
- the servicing of our indebtedness, and
- the payment of dividends.
Our primary sources of liquidity have historically been cash flow from
operating activities and borrowings. Net cash generated from operating
activities was R$368.6 million in 2002, R$245.1 million in 2001 and R$170.5
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million in 2000. Net cash used in financing activities was R$112.6 million in
2002. Net cash provided by financing was R$122.1 million in 2001, R$161.1
million in 2000. In 2002, after the payment of dividends and interest on capital
and the repayment of our long-term debt, part of our cash flows and cash
equivalents, in the amount of R$87.3 million, was used for our capital
expenditures.
INDEBTEDNESS
Our total debt was R$850.0 million at December 31, 2002, as compared to
R$680.4 million at December 31, 2001 and R$477.2 million at December 31, 2000.
In 2002, R$590.5 million of our total debt was denominated in U.S. dollars, with
interest computed at six-month LIBOR plus an annual rate ranging from 1.0% to
5.6%, and R$259.5 million was denominated in reais, with interest at an annual
rate of 3.8% over either (i) the average cost of the BNDES currency basket, or
(ii) the long-term interest rate disclosed by the Central Bank (which was 10.0%
at December 31, 2002). See "Item 10C--Additional Information --Material
Contracts" for a description of our principal credit agreements.
At December 31, 2002, 78% of our foreign currency indexed debt was
hedged against exchange rate fluctuation. The hedging agreement exchanges fixed
rates (9.3% to 16.6%) over the U.S. dollar variation for an internal floating
rate (interbank deposit rate). At December 31, 2001, 63% of our foreign currency
indexed debt was hedged against exchange rate fluctuation. In 2000, 33% of our
foreign currency indexed debt was hedged against exchange rate fluctuation. Our
credit facilities are described under "Item 10C--Additional
Information--Material Contracts". We did not obtain any new financing in 2002.
Substantially all of our start-up costs and initial capital investments
were financed by cash flows from the wireline telephone operations of our
predecessor company. At December 31, 2002, R$12.5 million of our total debt was
related to credit obtained by our predecessor company to invest in network
expansion. Accordingly, our indebtedness does not reflect the total amount of
debt we would have been required to incur to build our current network if we had
operated on a stand-alone basis from the inception of our predecessor company's
cellular telecommunications operations.
In 2002, Telemig Celular breached certain financial covenants contained
in a credit agreement entered into with the BNDES and a consortium of three
Brazilian banks, including Banco Itau S.A., Banco Bradesco S.A. and Banco Alfa
de Investimento S.A. Waivers were obtained in connection with the covenant
breaches.
The following table sets forth the amount in millions of reais of our
indebtedness at December 31, 2002:
LESS THAN TWO OVER FOUR
TOTAL ONE YEAR ONE YEAR YEARS THREE YEARS YEARS
Long-term Debt........... 850.0 285.9 229.9 260.3 73.8 0.1
Operating Leases......... 7.2 5.6 3.3 2.1 1.7 4.1
------- --------- -------- --------- ----------- ---------
Total Contractual
Cash Obligations......... 857.2 291.5 233.2 262.4 75.5 0.5
======= ========= ======== ========= =========== =========
|
CAPITAL EXPENDITURES
Prior to the privatization, the capital expenditures of our predecessor
company were planned and allocated on a system-wide basis, subject to approval
by the federal government. These constraints on capital expenditures restricted
the ability of our predecessor to make investments to modernize its network in a
timely manner. Since the privatization of Telebras, these restrictions have not
applied.
We are now able to determine our own capital expenditure budget,
although, as is the case with all telecommunications services providers, we must
comply with build-out obligations under our concession. See "Item 4--Information
on the Company--Regulation of the Brazilian Telecommunications
Industry--Obligations of Telecommunications Companies" for a description of
these obligations.
We spent R$87.3 million in capital expenditures in 2002, R$228.2
million in 2001 and R$228.3 million in 2000. We currently expect that our
capital expenditures for 2003 will be approximately R$90 million, excluding any
expenses associated with network upgrades. Our capital expenditure priorities
include expansion of our network capacity, improvement of overall quality and
increase of the level of digitalization of our network and the upgrade of our
billing system. In order to remain competitive, we will probably invest in the
technological transition of our network (currently operating in TDMA mode) to
another system, such as GSM/GPRS or CDMA/1xRT. We are
30
carrying out tests for alternative technologies and requesting proposals for the
supply of the infrastructure necessary for the eventual network transition. This
transition, depending on the financial return and strategic benefits, may take
place in the second half of 2003. Furthermore, in 2002, we demonstrated an
interest in purchasing additional 1800 MHz frequency. The purchase of this
frequency will also imply the transition of our network to the SMP environment.
We believe that our capital expenditure requirements can be met through
a combination of cash flows from operations, equipment financing from vendors
and credit facilities from export credit agencies and Brazilian and
international financial institutions.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
We do not conduct any independent research and primarily depend upon
the manufacturers of telecommunications products for the development of new
hardware.
D. TREND INFORMATION
We expect an increase in competition. Telemar, the principal wireline
operator in our region with a significant presence in Brazil, commenced wireless
telecommunications operations in our region in the first half of 2002. In
addition, Vesper SMP S.A. has acquired the license to operate the E Band in our
region, however, it has not yet began operations. There are no more licenses to
be auctioned in our region. The increase in competition may negatively affect
our market share and profit margins. See "Item 4-- Information on the Company--
Competition" for a detailed description of the competitive environment in our
region.
We also expect to continue to make capital expenditures to improve the
quality of our network, launch new services, and, possibly, invest in the
technological transition from our TDMA network to either GSM/GPRS or CDMA/lxRTT.
See "Liquidity and Capital Resources--Capital Expenditures".
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
We are managed by our Conselho de Administracao, or board of directors,
and our Diretoria, or executive officers.
BOARD OF DIRECTORS
Our board of directors is currently comprised of eleven members serving
for a term of three years. Our bylaws provide for our board of directors to
convene a regular meeting once every three months and special meetings when
called by the chairman or by two members of the board of directors. During the
shareholders' meeting held on April 29, 2002, the following members of our board
of directors were elected: Arthur Joaquim de Carvalho, Veronica Valente Dantas,
Luciano Batista, Franklin Madruga Luzes, Rodrigo Bhering Andrade, Jose Leitao
Vianna, Maria Amalia Delfim de Melo Coutrim, Carlos Eduardo Teixeira Freire,
Danielle Silbergleid Ninio, Marcos Nascimento Ferreira and Eduardo Alcoforado
Pontual. However, due to an injunction that was issued in connection with a
dispute at the level of our controlling shareholder, the new board of directors
was prevented from taking office, and the predecessor board of directors,
elected on November 13, 2001, remained in office until the next shareholders'
meeting on August 07, 2002, when another injunction allowed the members of the
new board to take office. See "Item 7 - Major Shareholders and Related Party
Transactions."
The following are the current members of our board of directors, and
their respective positions and ages:
NAME POSITION AGE
------------------------------------------------------ ------------- ---
Arthur Joaquim de Carvalho............................ Chairman 46
Veronica Valente Dantas............................... Vice Chairman 46
Rodrigo Bhering Andrade............................... Director 44
Luciano Batista....................................... Director 41
Joao Leitao Viana..................................... Director 63
Franklin Madruga Luzes................................ Director 56
|
31
NAME POSITION AGE
------------------------------------------------------ -------- ---
Maria Amalia Delfim de Melo Coutrim................... Director 45
Petronio Fernandes Goncalves Junior................... Director 57
Danielle Silbergleid Ninio............................ Director 28
Marcos Nascimento Ferreira............................ Director 36
Luiz Augusto Britto de Macedo......................... Director 42
|
Two members of our board of directors, Carlos Eduardo Teixeira Freire
and Eduardo Alcoforado Pontual resigned on May 24, 2002 and January 24, 2003,
respectively.
Set forth below are brief biographical descriptions of our directors.
ARTHUR JOAQUIM DE CARVALHO is the chairman of the board of directors of
Telemig Celular Participacoes S.A. and Tele Norte Celular Participacoes S.A. He
has a nine-year experience in private equity investments and is currently a
partner at CVC/Opportunity Equity Partners. Mr. Carvalho was in charge of the
investment area of CVC/Opportunity Equity Partners from 1980 to 1993, and, since
the foundation of the Opportunity Group in 1993, he has been one of the main
officers of the group. In the past, he also worked in two companies engaged in
agribusiness and exports. Mr. Carvalho holds a business administration degree
from the Universidade Federal da Bahia, or the Federal University of Bahia.
VERONICA VALENTE DANTAS is a partner and managing director of
Opportunity Asset Management Ltda. Ms. Dantas is also a director of Tele Norte
Celular Participacoes S.A. Her past experience includes being the managing
director of Icatu Empreendimentos e Participacoes Ltda., an investment company
established in Brazil. Ms. Dantas holds a degree in business administration from
the Universidade Federal da Bahia, or the Federal University of Bahia.
RODRIGO BHERING DE ANDRADE has been a partner of CVC/Opportunity Equity
Partners since 1997. He was a vice-president in the M&A department for Latin
America at J.P. Morgan from 1990 to 1995 and an investment officer at GP
Investimentos from 1995 to 1997. His past experience includes working as an
associate at two law firms, Pinheiro Neto Advogados and Bingham, Dana & Gould.
Mr. Andrade holds a graduate degree from the Universidade de Brasilia, or the
University of Brasilia and a master degree from the Yale Law School.
LUCIANO BATISTA holds the following degrees: 1999-2000 Post-graduation
Lato Sensu in Controlling and Finances Candido Mendes University, RJ; 1997-1998
Post-graduation Lato Sensu in Competitive Intelligence Communication Faculty of
the Rio de Janeiro Federal University, RJ; 1992-1993 Post-graduation in Systems
Analysis Instituto Brasileiro de Pesquisa em Informatica, RJ (Brazilian
Institute for Computer Research); 1987-1991 Bachelor degree in Industrial Design
Faculdade da Cidade - Rio de Janeiro - RJ. Mr. Batista's professional background
includes: Caixa de Previdencia dos Funcionarios do Banco do Brasil - PREVI:
November 1999 Security Director - Manager of Insurance and Operations with
Participants Administrative Directorate - Controller Management Team Manager
Bank of Brasil S.A. 1997-1999 Finances Unit - Financial Operations Management,
RJ Senior Finance Analyst 1995 - 1997 Superintendencia Estadual do Rio de
Janeiro, RJ (State Superintendency) Advisor 1986 - 1995 / 1997 Rio de Janeiro
Branch - downtown, RJ Control Manager 1982 - 1986 General Accountancy Office.
JOSE LEITAO VIANA is a member of the board of directors of both Telemig
Celular and Tele Norte Celular S.A. and also works as an independent business
consultant. He was the chief financial officer of our predecessor,
Telecomunicacoes de Minas Gerais S.A. - Telemig, from 1972 to 1982 and the vice
chairman of the same company from 1982 to 1985. Mr. Viana worked as the chief
investment officer of Fundacao de Seguridade Social SISTEL and the chief
financial officer of Telebras from 1985 to 1989. His past experience also
includes acting as chief financial officer and member of the boards of directors
of several subsidiaries of Telebras. Mr. Viana holds a degree in economic
sciences from the University of the State of Guanabara (currently the University
of the State of Rio de Janeiro) and a master degree in economic engineering and
industrial administration from the Universidade Federal do Rio de Janeiro, or
the Federal University of Rio de Janeiro.
FRANKLIN MADRUGA LUZES holds a degree in Civil Engineering by the
National School of Engineering (1969) and another in Business Administration by
the Sociedade Universitaria Augusto Motta (1974). He has large experience in the
telecommunications sector and has been administration director at Embratel
(1995-1999), Vice-President and Economic-Financial Director of Embratel
(1987-1990); Board Member of Embratel (1985-1991); Head of the Invoicing and
Charging Department of Embratel (1990-1995); Human Resources Director of Telerj
32
(former Telebras System) (1985-1987); and Administrative Director of Telebahia
(former Telebras system) (1979-1985).
MARIA AMALIA DELFIM DE MELO COUTRIM has been a director at
CVC/Opportunity Equity Partners since 1997. Before that, she was a director of
Opportunity Asset Management and had previously worked as a director and partner
of Banco Icatu from 1986 to 1994. She has a degree in economics from
Universidade Federal Rural do Rio de Janeiro, or the Rural Federal University of
Rio de Janeiro.
PETRONIO FERNANDES GONCALVES JUNIOR is a member of the board of
auditors of Banco do Brasil S.A. From 1996 to 1998, Mr. Goncalves rendered
consulting services to the Interamerican Institute of Cooperation for
Agriculture. From 1964 to 1994, he held several different technical positions at
Banco do Brasil S.A., including chief of the financial department, and in 1979
he acted as a representative of that bank before Caja de Ahorros de Madrid,
Spain, in order to study problems faced by small companies in that country. Mr.
Goncalves holds a degree in economic sciences from the Centro de Ensino
Unificado de Brasilia - CEUB, the Unified Learning Center of Brasilia.
DANIELLE SILBERGLEID NINIO has worked as a corporate legal advisor at
CVC Equity Partners Administracao de Recursos Ltda. CVC/Opportunity Equity
Partners since 1999, and is also an alternate member of the board of directors
of Tele Norte Celular Participacoes S.A. She holds a law degree from the
Catholic University of Rio de Janeiro.
MARCOS NASCIMENTO FERREIRA is also a member of the board of directors
of Tele Norte Celular Participacoes S.A. From 1988 to 1995, Mr. Ferreira worked
in several positions for different companies of the OAS Group, including Vega
Sopave and Ultratec Engenharia. From 1995 to 1998, he was a director of Pantanal
Linhas Aereas, and, in recent years, he has been an active member of the boards
of directors of major telecommunication companies in Brazil, including Telet
S.A. and Americel S.A. (1999-2000) and Pegasus S.A. (2000). Mr. Ferreira holds a
degree in civil engineering from the Federal University of Bahia, or
Universidade Federal da Bahia, as well as a post-graduate degree in business
administration from the University of California, Berkeley.
LUIZ AUGUSTO BRITTO DE MACEDO is a member of the investment committee
and an alternate member of the technical committee of
CVC/Investments/Opportunity FIA Equity Partners; a member of the board of
directors of Invitel S.A., which controls Techold Participacoes S.A.; a member
of the board of directors of Techold Participacoes S.A., which controls Brasil
Telecom Participacoes S.A.; a member of the board of directors of Fiago
Participacoes S.A., which controls Telemar Participacoes S.A. Mr. Macedo worked
from June to November 1988 as an assistant at the financial planning and market
relations department of Companhia Nacional de Tecidos Nova America and has been
an investment manager at Telos - Fundacao Embratel de Seguridade Social, the
pension fund created by Empresa Brasileira de Telecomunicacoes - Embratel since
1999. He holds law and economics degrees and the following master degrees: MBA
in finance and capital markets by the School of Postgraduate Studies in Economy
of the Getulio Vargas Foundation, or Escola de Pos-Graduacao em Economia da
Fundacao Getulio Vargas and MBA in Pension Funds by the Federal University of
Rio de Janeiro, or Universidade Federal do Rio de Janeiro.
EXECUTIVE OFFICERS
The Executive Committee of the Registrant currently consists of three
Executive Officers.
NAME POSITION AGE DATE ELECTED
------------------------------ ------------------------------------- --- ------------
Antonio Jose Ribeiro dos Chief Executive Officer 58 08/30/2002
Santos........................
Joao Cox Neto................. Chief Financial Officer and 39 08/30/2002
responsible for Investor Relations
Aloysio Jose Mendes Galvao.... Chief Human Resources Officer 55 08/16/2001
|
Set forth below are brief biographical descriptions of the executive
officers of the Registrant.
ANTONIO JOSE RIBEIRO DOS SANTOS was appointed as our chief executive
officer in August 2002. He is also the chief executive officer of Tele Norte
Celular Participacoes S.A. and works as a part-time professor at the Electrical
Engineering Department of the University of Brasilia. He was an engineer and
manager at Telecomunicacoes de Brasilia S.A. - Telebrasilia from 1970 to 1983,
and held the position of chief engineering officer of the same company from 1983
to 1995. In 1996 and 1997, Mr. Santos served as a senior advisor and steering
committee member for certain Brazilian pension funds that were members of a
consortium participating in
33
the public bidding for cellular B Band in Brazil. The consortium was awarded
with two licenses, which are currently held by Americel S.A. and Telet S.A. In
1997-1998 Mr. Santos was the chief strategic planning officer of Americel S.A.
and in 1998-1999 he served as the executive vice president of Telet S.A. In
1999-2001, he was the vice president for business development of Telemig and
Tele Norte Celular Participacoes S.A. and in 2001-2002 he served as the chief
executive officer of Telemig Celular and Amazonia Celular S.A. Mr. Santos' past
experience includes working as an advisor for the Brazilian Secretary of
Information Technology. He holds a degree in Electric Engineering by the
University of Brasilia, or Universidade de Brasilia.
JOAO COX NETO has been our chief financial officer since April 1, 1999.
He was reelected in August 2002 and is currently the chief executive officer of
Telemig Celular S.A. and Amazonia Celular S.A. Prior to joining us, Mr. Cox was
chief financial officer at Odebrecht Servicos de Infraestrutura S.A., the
infrastructure and public service arm of the Odebrecht Group. Previously, he
held various financial management positions in the Odebrecht Group, including
finance director for the holding company and CFO for OPP Petroquimica S.A. Mr.
Cox holds a B.Sc. degree in economics from the Federal University of Bahia in
Brazil and has attended post-graduate studies in economics at the University of
Quebec in Montreal and at the Oxford University's CPS program. Since 1991, Mr.
Cox has been a member of the boards of directors of several companies in Brazil
and Argentina, and is currently a member of the board of ABRASCA (the Brazilian
Association of Public Companies) and IBRI (the Brazilian Institute for Investor
Relations).
ALOYSIO JOSE MENDES GALVAO has been our chief human resources officer
since August 2001. From 1998 to 2001, Mr. Galvao acted as a human resources
consultant to major corporations in Brazil including Petrobras, Embraer, Unimed
and Nestle. Mr. Galvao was director of human resources of the Odebrecht Group
for 25 years (from 1973 to 1998). In this period, he was engaged in several
local and international projects (in the United States and Ecuador, among other
countries). He also worked at Banco do Estado da Bahia (Bank of the State of
Bahia) where he was responsible for the human development area from 1970 to
1973. Mr. Galvao holds a degree in business administration from the Escola de
Administracao de Empresas da Bahia (Business Administration School of Bahia).
The Executive Committee of Telemig Celular currently consists of four
Executive Officers.
NAME POSITION AGE DATE ELECTED
------------------------------ ------------------------------------- --- ------------
Joao Cox Neto................. Chief Executive Officer 39 08/30/2002
Joao Alberto Santos........... Chief Financial Officer and responsible 49 01/24/2003
for Investor Relations
Marcos Pacheco................ Chief Technical Officer 46 01/24/2003
Ricardo Augusto de Oliveira Chief Operations Officer 42 01/24/2003
Sacramento....................
|
Set forth below are brief biographical descriptions of the executive
officers of Telemig Celular who are not concomitantly officers of the
Registrant.
JOAO ALBERTO SANTOS is also the chief financial officer of our
affiliate, Amazonia Celular S.A. His previous experience includes fifteen years
at Valvulas Schreider do Brasil S.A., where he worked at several administrative
positions in connection with financial operations. Mr. Santos worked for several
years with cocoa and coffee exports and with the manufacturing of tropical fruit
juices. He holds an accounting degree from the Universidade Estadual de Feira de
Santana, or the State University of Feira de Santana, and a master degree in
finance and accounting from Fundacao Getulio Vargas, or the Getulio Vargas
Foundation.
MARCOS PACHECO has worked for seven years with wireless
telecommunications. In 1993, when wireless telecommunications were implemented
in the state of Minas Gerais, he was responsible for the establishment of the
network operation and maintenance structure and also for the activation and
operation of the call center project. Mr. Pacheco also worked for 12 years at
our predecessor company, Telecomunicacoes de Minas Gerais S.A. - Telemig, where
he was responsible for management of the network, the call center and the
operation support system development. Mr. Pacheco holds an electric engineering
degree from the Universidade Federal de Minas Gerais, or the Federal University
of Minas Gerais, and a master degree in nuclear engineering from the same
university.
RICARDO AUGUSTO DE OLIVEIRA SACRAMENTO was appointed as chief
operations officer of Telemig Celular and Amazonia Celular S.A in January 2003.
From August 2001 to December 2002, Mr. Sacramento acted as vice president
operations for Telemig Celular S.A. and Amazonia Celular S.A. From April 1998 to
July 2001 Mr.
34
Sacramento acted as Sales and Distribution Director for Telemig Celular S.A. and
Amazonia Celular S.A. Prior to joining our companies Mr. Sacramento was
international business manager at Novopharm, a large pharmaceutical company
based in Toronto, Canada for two years where he dealt with international sales &
distribution networks and was also director of business development at
Healthcare Alliance Group, a mergers & acquisitions firm for the health sector,
based in Chicago, for one year where he engaged in a wide number of projects in
Latin America. Mr. Sacramento holds an MBA from the University of Bridgeport,
Connecticut - USA and a bachelor's degree in civil engineering from the Federal
University of Bahia, Brazil.
B. COMPENSATION
For the year ended December 31, 2002, the aggregate amount of
compensation paid by us to all directors and executive officers was
approximately R$2.8 million. This amount includes salaries of approximately
R$1.9 million and bonuses of approximately R$0.9 million. We also paid an amount
of R$1.4 million on behalf of Tele Norte Celular Participacoes S.A. related to
the compensation of the executive officers who share the management of both the
Registrant and our affiliate Tele Norte Celular Participacoes S.A. We are not
required under Brazilian law to disclose on an individual basis the compensation
of our directors and executive officers.
We have a yearly bonus program that provides variable compensation to
our directors and executive officers upon the achievement of previously
stipulated financial and operating performance results. On October 5, 2000, our
board of directors approved two executive stock incentive plans. See "Item
6E--Share Ownership" for a description of these plans. We do not have a
remuneration committee.
C. BOARD PRACTICES
Our board of directors is responsible for, among other things:
- establishing our general business policies,
- electing and removing the members of our board of executive officers,
- supervising our management and examining our corporate records,
- calling shareholders' meetings,
- expressing an opinion on the annual report and management's financial
statements,
- appointing external auditors,
- determining the payment of interest on net worth, and
- authorizing the purchase of our shares, to the extent permitted by law.
Our board of directors may be composed of a minimum of three and a
maximum of 11 directors elected by our shareholders at the annual shareholders'
meeting, which also appoints one chairman and one vice-chairman.
Our board of executive officers is responsible for our day-to-day
management. It is composed of three members, one president and two executive
officers. We have service contracts with executive officers that provide
benefits upon termination of employment.
Our Conselho Fiscal, or board of auditors, has been established
pursuant to our bylaws, which require us to maintain a board of auditors on a
permanent basis. Our board of auditors is a supervisory committee independent
from our board of directors and from our independent accountants, and its
members are elected by our shareholders on a yearly basis. The responsibilities
of the board of auditors are established by Brazilian Corporation Law and
include overseeing the activities of management with respect to compliance with
the law and our bylaws, reviewing the annual report submitted for the approval
of the shareholders, calling shareholders' meetings under certain circumstances
and reporting at those meetings. Our board of auditors is made up of the
following individuals, each of whom serves for a term of one year:
35
NAME POSITION AGE
-------------------------------- -------- ---
Luiz Otavio Nunes West Member 44
Gilberto Braga Member 42
Augusto Cezar Calazans Lopes Member 28
Luiz Fernando Cavalcanti Trocoli Member 47
|
D. EMPLOYEES
At December 31, 2002, we had 1,846 employees, as compared to 2,014
employees at December 31, 2001 and 1,656 employees at December 31, 2000. Of our
employees at December 31, 2002, 52% were employed in customer service, 21% in
sales and marketing, 11% in engineering, 11% in administration and 5% in
information technology. The decrease in the number of employees in 2002 was
primarily due to synergies achieved through the combination of certain
activities with those of our affiliate, Tele Norte Celular Participacoes S.A.,
and to changes in the managerial system implemented since September 2002, in
order to avoid duplication and to improve operating efficiencies.
Approximately 7% of our employees are affiliated with Sinttel-MG
(Sindicato de Trabalhadores de Telecomunicacoes de Minas Gerais), the labor
union for telecommunications companies in the state of Minas Gerais. Telemig
Celular negotiates a new collective labor agreement every year with each local
union. We believe that our relationship with our work force is satisfactory and
we have not experienced any labor strikes since the privatization.
We have implemented a yearly bonus program, designed to stimulate an
increase in our operating productivity, that provides variable compensation to
employees who are members of Sinttel, upon the meeting of previously specified
financial and operating performance goals. The total amount paid in 2002 in
connection with this bonus program was R$7.4 million. Competition has created,
and we believe that it will continue to create, pressure on salaries and our
ability to hire and retain qualified upper- and mid-level management personnel.
We participate in a pension fund, Fundacao Sistel de Seguridade Social,
or Sistel, which supplements government-provided retirement benefits. Currently,
we make monthly contributions to Sistel equal to 13.5% of the salary of each
employee who is a Sistel member. Each member employee also makes a monthly
contribution to Sistel based on his or her age and salary. Members of Sistel
qualify for full pension benefits after reaching the age of 57, provided that
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 us. Our employees, at the time of the privatization,
had the right to maintain their rights and benefits in Sistel. See Note 10 to
our consolidated financial statements. We believe that Sistel may be replaced by
one or more separate plans, but we cannot assure you when or if this will occur
or what consequences this would bring to us or our employees. We are in the
process of changing pension plan rules to create a defined contribution plan for
all employees. Sistel participants will be invited to switch their defined
benefits plan to the new one. We expect this change to be in place in the first
half of 2003, and we anticipate that it will reduce our pension liability.
E. SHARE OWNERSHIP
The members of our board of directors and our executive officers, on an
individual basis and as a group, beneficially own less than 1% of any class of
our stock. See "Item 7A--Major Shareholders and Related Party
Transactions--Major Shareholders" for more information.
On October 5, 2000, our board of directors approved two executive stock
incentive plans:
- The first plan covers certain key executives who may be granted target
awards of our shares of common or preferred stock. The awards are
earned and shares will be issued only to the extent that we achieve
performance goals determined by our board of directors during a
five-year performance period. At December 31, 2002, no shares had been
granted in connection with this incentive plan.
- The second plan covers key executives, who also participate in the
first plan, and other employees. Options granted under this plan relate
to preferred stock and are exercisable at the market price at the date
of the grant. The vesting period is 20% during the second year, 60%
during the third year and 100% during the fourth year. As of December
31, 2002, 194,023 options were outstanding. New allocations were not
made in 2002.
36
For more information regarding our stock incentive plans, see Note 15
to our consolidated financial statements.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
In accordance with our bylaws, there are two classes of capital stock
authorized and outstanding, common shares (acoes ordinarias) and preferred
shares (acoes preferenciais). Each common share entitles its holder to have full
voting rights at meetings of our shareholders. Our preferred shares have voting
rights under limited circumstances. See "Item 10B--Additional
Information--Memorandum and Articles of Association--Preferred Shares and Common
Shares" for more information regarding our capital stock and our two classes of
shares.
The following table presents information concerning the ownership of
common shares by our major shareholders at February 28, 2003. We are not aware
of any other shareholder owning more than 5.0% of the common shares.
NUMBER OF COMMON PERCENTAGE OF OUTSTANDING
NAME OF OWNER SHARES OWNED COMMON SHARES
----------------------------------------------- ---------------- -------------------------
Telpart Participacoes S.A...................... 65,928,326,800 52.1
Latinvest Holdings Delaware LLC ............... 9,186,828,843 7.3
Utilitivest II Delaware LLC ................... 7,898,588,207 6.2
Caixa de Previdencia dos Funcionarios
do Banco do Brasil........................... 6,803,198,008 5.4
|
The Registrants' controlling shareholder is Telpart Participacoes S.A.,
which owns 52.1% of the Registrants' outstanding common shares. As a result of
its controlling interest, Telpart has the ability to control the election of the
majority of our board of directors, and to direct our operations.
Until March 26, 2003, Telpart was a corporation comprised of Newtel
Participacoes S.A. ("Newtel"), which owned approximately 51% of Telpart, and TIW
do Brasil Ltda., later renamed TPSA do Brasil, which owned approximately 49%. On
March 26, 2003, Highlake International Business Company Ltd. ("Highlake"), which
is indirectly controlled by investment and mutual funds managed by Opportunity,
acquired TPSA do Brasil's total share ownership in Telpart.
Newtel Participacoes S.A. is a holding company. Fifty-three percent of
Newtel is owned by Opportunity Mem S.A., which is indirectly held by investment
and mutual funds managed by Opportunity. Forty-seven percent of Newtel is owned
by four Brazilian pension funds: SISTEL - Fundacao Sistel Seguridade Social,
TELOS - Fundacao Embratel de Seguridade Social, PETROS - Fundacao Petrobras de
Seguridade Social and PREVI - Caixa de Previdencia dos Funcionarios do Banco do
Brasil. The relationship among the shareholders of Newtel is governed by a
shareholders agreement to which Telpart has consented.
Telpart also owns a controlling interest in Tele Norte Celular
Participacoes S.A., the A Band service provider in the cellular region that
includes the states of Para, Amazonas, Maranhao, Amapa and Roraima.
Globalvest Management Company L.P., a fund administrator, is the proxy
to a group of private equity investment fund shareholders, including Latinvest
Holdings Delaware LLC and Utilitivest II Delaware LLC, which together hold as of
January 31, 2003, approximately 23% of our outstanding voting stock.
On December 28, 1999, our shareholders approved a legal reorganization
whereby Telpart contributed assets to us, resulting in future tax benefits. We
recorded a deferred tax asset of R$212.0 million, which will be realized over a
period of up to ten years. In accordance with Brazilian Corporation Law, we may
issue shares (pro rata both common and preferred) to Telpart for the amount of
the tax benefits recognized by us. In addition, minority shareholders are
granted preemptive rights. If the minority shareholders do not elect to exercise
these rights, the shares will be issued to and subscribed for by Telpart. See
Note 6 to the consolidated financial statements for a more detailed description
of this transaction.
From 2000 until March 2003, the direct and indirect shareholders of
Telpart, as well as a group of private equity investment fund shareholders
holding an aggregate of approximately 23% of our outstanding voting stock,
37
were involved in a dispute over the right to appoint the members of the
Registrants' board of directors and that of Telemig Celular. The dispute
involved numerous injunctions and legal proceedings. The members of our board of
directors were elected in the shareholders' meeting that took place on April 29,
2002, however they were prevented from taking office as a result of an
injunction. In the shareholders' meeting held on August 7, 2002, as a result of
another injunction, the current members of our board of directors was able to
take office. In addition, another injunction prohibited us from changing the
composition of the board of directors and executive officers of Telemig Celular.
However, on March 26, 2003, the disputes involving TIW and Opportunity have been
settled with the acquisition of TPSA do Brasil total share interests in Telpart
by Highlake, which is indirectly controlled by investment and mutual funds
managed by Opportunity, as described above.
B. RELATED PARTY TRANSACTIONS
We have entered into transactions with some of our shareholders and
other related parties for the provision of certain services. Transactions with
related parties are carried out on an arm's-length basis, conducted on the same
prices, terms and rates that apply to third parties. Our by-laws and the
applicable Anatel regulations require that any long term agreement we enter into
with related parties must be previously approved by the majority of our voting
and non-voting shareholders, with the exclusion of the conflicted party.
The following discussion summarizes certain significant current and
proposed agreements and other material relationships among us and certain of our
affiliates.
ROAMING AGREEMENTS
Telemig Celular is a member of a national roaming committee of cellular
operators that includes a subsidiary of Tele Norte Celular Participacoes S.A.,
Amazonia Celular S.A. The purpose of the committee is to oversee technical and
system aspects to ensure the highest quality of roaming service. We and Amazonia
Celular facilitate roaming to our respective subscribers.
SHARED SERVICE AGREEMENT
In order to maximize efficiency in resource allocation between Tele
Norte Celular Participacoes S.A. and us, in December 1999 we entered into a
shared service agreement pursuant to which certain costs that are incurred for
the benefit of both companies and their subsidiaries are allocated to each
company based on criteria designed to reflect the actual amount of use by each
company. The costs that were allocated under this shared service agreement
related primarily to personnel, marketing and outside consulting fees.
Our shareholders' meeting held on March 19, 2003 approved the execution
of a new shared service agreement among us, Telemig Celular, and our affiliates
Tele Norte Celular Participacoes S.A. and Amazonia Celular S.A. The purpose of
this agreement is to capitalize on synergies, avoid unnecessary duplication of
activities and improve operating efficiencies.
BRASIL CELULAR CONSORTIUM
In December 2002, Telemig Celular, our affiliate Amazonia Celular S.A.
and Brasil Telecom S.A. (a company licensed to operate mobile telecommunication
services in the states of Acre, Goias, Mato Grosso, Mato Grosso do Sul,
Tocantins, Parana, Santa Catarina, Rio Grande do Sul, Rondonia and Distrito
Federal) signed a memorandum of understanding in order to evaluate the benefits
of establishing technical, operational and commercial cooperation among these
companies. It is expected that the final outcome of this evaluation will reveal
significant returns and synergies favoring the establishment of a consortium
between the companies, to be named Consorcio Brasil Celular. This consortium
would not provide for any changes in the legal nature of, or the shareholdings
in, the companies involved. Once the evaluation has been performed, the matter
will be submitted to the board of directors of each respective company, as well
as to the relevant regulatory authorities.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
38
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
The information included in Item 18 of this annual report is referred
to and incorporated by reference into this Item 8A.
LEGAL PROCEEDINGS
Litigation Relating to the Breakup of Telebras
The breakup of Telebras is subject to several lawsuits in which the
plaintiffs have requested, and in certain cases obtained, preliminary
injunctions against the breakup. All of these preliminary injunctions have been
quashed by decisions of the relevant federal court, but several of these
decisions are currently on appeal.
These lawsuits are based on a number of legal theories, the principal
among them being:
- Brazil's Federal Constitution requires that the creation of the 12 new
holding companies be specifically authorized by the Telecommunications
Law;
- the Telebras shareholders' meeting held on May 22, 1998, which approved
the breakup, was not properly convened;
- national sovereignty will be threatened if the country's
telecommunications companies are controlled by foreign entities; and
- the telecommunications law requires that some matters, such as the
entry of new competitors and the administration of development and
technology funds, be regulated prior to the breakup and privatization
either by an executive order of the President or by an act of Congress.
If any of the plaintiffs in the above-described lawsuits ultimately
prevails, the breakup will have to be unwound. This could require, depending
upon the prevailing plaintiff's theory, any combination of the following:
- amending the Telecommunications Law;
- reconvening the May 22, 1998 Telebras shareholders' meeting; and
- the passing of additional laws by Congress or the issuance of executive
orders by the President.
It is theoretically possible under Brazilian law for a court to require
that the breakup be unwound, although we believe that this is very unlikely.
Litigation Arising Out of Events Prior to the Breakup
Telebras, our predecessor company, Telecomunicacoes de Minas Gerais
S.A. and Telemig Celular are defendants in a number of legal proceedings,
including tax and labor-related matters, and are subject to certain other claims
and contingencies.
Liability for any claims arising out of acts committed by our
predecessor company prior to the effective date of the spin-off of the
predecessor company's cellular assets and liabilities to Telemig Celular remains
with the predecessor company except for:
- labor and tax claims, for which the predecessor company and Telemig
Celular are jointly and severally liable by operation of law, and
- liabilities with respect to which our predecessor company made a
specific accounting provision prior to the breakup and assigned them to
Telemig Celular.
Any claims against our predecessor company that are not satisfied by it
could result in claims against Telemig Celular to the extent that Telemig
Celular received assets at the time of the spin-off that might have been used to
settle those claims. Under the shareholders' resolution pursuant to which the
spin-off was effected, Telemig Celular has contribution rights against our
predecessor company with respect to the entire amount of any payments
39
made by Telemig Celular in connection with any labor or tax claims brought
against Telemig Celular that relate to events prior to the effective date of the
spin-off.
Under the terms of the breakup, liability for any claims arising out of
acts committed by Telebras prior to the effective date of the breakup remains
with Telebras except for:
- labor and tax claims, for which Telebras and the new holding companies
are jointly and severally liable by operation of law, and
- any liability with respect to which Telebras made a specific accounting
provision prior to the breakup to the extent that such provision has
been assigned to us or one of the other new holding companies.
We believe that a negative outcome of these claims is remote and will
not have a material adverse effect on our business, results of operations or
financial conditions.
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 state
value-added tax, commonly known as "ICMS," to certain services, including
cellular activation and monthly subscriptions. The agreement also provides that
the ICMS may be applied retroactively to activation services rendered during the
five years preceding June 1998.
We believe that the attempt by the state governments to extend the
scope of the ICMS to services that are supplementary to basic telecommunications
services, such as cellular activation and monthly subscriptions, is unlawful and
we filed a lawsuit with the Treasury Court of the State of Minas Gerais seeking
injunctive relief from retroactive and prospective application of the ICMS to
cellular service activation. The State Court of Appeals of Minas Gerais rendered
a decision partially upholding the new interpretation of the state governments.
The court held that the ICMS applies prospectively, but not retroactively. We
have appealed the decision to the Federal Supreme Court of Appeals and to the
Supreme Court. We cannot assure you as to what the outcome of these appeals will
be.
We may not prevail in our position that the new interpretation of
Brazilian tax law by the state governments is unlawful. Five-year retroactive
application of the ICMS to cellular activation would have a material adverse
impact on our business, results of operations and financial condition. However,
we believe that the retroactive application of the ICMS to cellular activation
is improbable. We also believe that in such event our predecessor company would
be liable to us for any tax liability arising from the retroactive application
of the ICMS to cellular activation recognized prior to 1998. Therefore, we have
not made any provision with respect to such application in our consolidated
financial statements.
We have made provisions totaling approximately R$1.0 million for the
application of the ICMS to cellular activation from June 1998, the effective
date of the agreement, to December 31, 2002. Since the end of 1998, activation
fees revenues have been insignificant (as described below), but the provision is
still registered. The application of the ICMS to cellular activation for the
year ended December 31, 1998 would have had a maximum negative impact estimated
at R$2.9 million on our results of operations for 1998. The application of ICMS
on cellular activation would not materially affect our results of operations for
2000, 2001 and 2002 because we eliminated the activation fee for all but one of
our plans. For the remaining plan, cellular activation has been significantly
reduced. We do not believe that application of the ICMS on cellular activation
applied on a prospective basis will have a material impact on our results of
operations.
In December 1998, we filed an injunction with the Treasury Court of the
state of Minas Gerais and therefore suspended the remittance of the ICMS on
monthly subscriptions and additional services and deposited such amounts in a
trust account administered by the courts. We cannot assure you that we will
prevail in this matter. Accordingly, we have recorded an aggregate provision of
R$206.2 million for 1998 through 2002 in our consolidated financial statements.
Litigation Related to the Bonus Component of Certain Independent
Distributors
We are defendants in a legal proceeding commenced by five of our former
independent distributors. These former independent distributors filed a claim
against us for approximately R$60 million based upon a controversial
interpretation of a bonus component of their dealership agreements. To this
point, we have obtained three favorable final decisions, and three other
favorable decisions were confirmed at the appeal level and are expected to
become
40
final. The outstanding proceedings currently amount to approximately R$32
million. No provision has been made with respect to these lawsuits.
Litigation Relating to the Conveyance of PIS and COFINS to Users
A civil class action has been filed by the Public Prosecutor's Office
against Telemig Celular and other telecommunications companies to (i) prevent
the passing on to customers of the amounts of the social contributions referred
to as PIS, or the Contribution to the Social Integration Program, and COFINS, or
the Contribution for Social Security Financing and (ii) to require the return to
customers of two times the amount of PIS - and COFINS-related charges passed
along to them. These social contributions are based on gross telecommunication
services revenues from final consumers located within the jurisdiction of
Uberlandia in Minas Gerais. The Public Prosecutor's Office considers the
transfer of the tax to customers to be unconstitutional.
On August 17, 2001, a preliminary injunction issued by the relevant
court ordered us to no longer pass the PIS and the COFINS to our customers, but
the same court revoked the injunction on October 7, 2002. We believe that this
civil class action has no legal basis. Accordingly, no provision has been made
with respect to this lawsuit. The maximum liability for this action is
approximately R$140 million.
Litigation Related to Social Security
On July 2, 2002, we were provided with a tax assessment from the Social
Security National Institute - INSS in the amount of R$17.1 million, as a result
of our alleged failure to pay the 11% retention provided for in Law no. 9,711/98
on behalf of some of our service providers. Based on our understanding that a
great portion of the INSS's assessment is legally unfounded, we recorded a
provision in the amount of R$3.5 million for eventual losses caused by this
assessment.
Litigation Related to the Ownership of the Invention Denominated "Caller
ID" and of the Trademark "BINA"
In July 2002, we, together with our subsidiary Telemig Celular, our
affiliate Amazonia Celular, and other Brazilian mobile telecommunication
operators, were summoned to defend in a legal action filed by Lune Projetos
Especiais Telecomunicacao Comercio Ind. Ltda. ("Lune"), pursuant to which Lune
claims to be the owner of patents relating to Equipamento Controlador de
Chamadas Entrantes e do Terminal Telefonico" ("Caller ID") and of the trademark
"BINA" ("B Identifies the Number of A"), and also that the mobile
telecommunication operators are copying the patent and using the trademark
without proper authorization. Therefore, Lune demands that the operators cease
providing "Caller ID" services and using the trademark "BINA" and that it should
be indemnified for the unauthorized use of the "Caller ID" system, upon payment
of fees received by the operators in consideration to the use of the system by
their customers.
The legal discussion involves not only operators, but network component
manufacturers (in our case, Nortel) which supply the "Caller ID" to the
operators. By contract, Nortel undertook to indemnify us against any obligation
arising out of allegations of unauthorized use of patents.
The amount of the indemnification allegedly due by the mobile
telecommunication operators has not been calculated yet and, therefore, we have
not made any provision with respect to this lawsuit. We understand that the
chances of a successful outcome to Lune are very remote.
Litigation Relating to the TSA
During 1999, our controlling shareholders entered into negotiations
regarding a Technical Services Agreement ("TSA") to be entered into by us and
TIWI - Telesystem International Wireless, Inc. ("TIWI"). Because the agreement
would establish a long-term agreement with a related party, our bylaws required
its specific approval by our shareholders, including non-voting shareholders,
with the necessary vote abstention from the interested parties. The shareholders
decided not to deliberate on the execution of the TSA. However, TIWI issued
invoices for the reimbursement of expenses allegedly incurred on our behalf
pursuant to the TSA. Our management decided not to pay the invoices issued by
TIWI and to instead return them to TIWI and recorded a provision in the amount
of R$10.7 million for such potential obligation. TIWI threatened litigation for
the purpose of collecting the invoiced amounts. In March 2003, the potential
lawsuit was settled for an amount of R$9.1 million and we reversed the remaining
portion of provision in the amount of R$1.6 million.
41
Enforcement Proceedings - Service Tax
In September 2002, the city of Belo Horizonte filed against us an
enforcement proceeding, in the amount of R$24.4 million, in order to collect a
service tax allegedly due in connection with amounts charged by us in
consideration of subscription services and other amenities provided to our
customers. The claim was based on the municipality's understanding that it was
the tax authority duly empowered to levy service tax on the rendering of lease,
typewriting, secretarial and data processing services. We believe that an
outcome in our favor is highly likely: subscription services are not equivalent
to a lease, and the amenities that we offer cannot be deemed comparable to
typewriting, secretarial or data processing services. Also, the Brazilian
Supreme Court has clearly asserted the non-applicability of service tax with
respect to leases. For these reasons, we have not recorded any provision in
connection with this claim.
Other Litigation
We are a party to legal proceedings arising in the normal course of
business. We have provided for or deposited in court amounts to cover our
estimated losses due to adverse legal judgments. On December 31, 2002 we had
recorded a provision of R$6.5 million in our consolidated financial statements.
We believe that if these actions were to be decided against us, they would not
have a material adverse effect on our business, results of operations or
financial condition.
Anatel Proceedings
On January 10, 2002, Anatel commenced administrative proceedings
against the Registrant regarding (i) possible irregularities in the election of
four members to the Board of Directors appointed by a non-controlling
shareholder; and (ii) possible non-compliance with investment obligations
relating to the maintenance and enhancement of the services provided by Telemig
Celular. The Registrant filed a timely defense and is awaiting a response from
Anatel. In the event that the Registrant is found to have breached any of its
obligations, the Registrant may be subject to a penalty ranging from a warning
to the loss of its concession. There can be no assurance of the outcome of the
proceeding, but we do not believe that the penalty of loss of concession would
be applied.
On June 25, 2002, the Superintendent of Private Services of Anatel
issued a provisional remedy in connection with the proceeding, preventing the
exercise of voting powers and veto powers of the directors elected by the
non-controlling shareholder.
DIVIDEND POLICY AND DIVIDENDS
General
Brazilian Corporation Law generally requires that the bylaws of each
Brazilian corporation specify a minimum percentage of the distributable profits
comprising dividends and/or notional interest attributable to shareholders'
equity, or distributable amount, of the corporation for each fiscal year that
must be distributed to shareholders as dividends. See "Item 10B - Additional
Information - Memorandum and Articles of Association - Allocation of Net Income
and Distribution of Dividends." Moreover, article 17 of the Brazilian
Corporation Law, as amended by Law no. 10,303/2001, provides that each Brazilian
company may only issue new preferred shares for public distribution if one of
the following terms applies to the preferred shares: (i) priority in the receipt
of dividends corresponding to at least 3% of the book value per share; (ii)
dividends 10% higher than those paid for common shares; or (iii) tag along
rights at 80% of the price paid to the controlling shareholder in case of a
transfer of control. In order to make our bylaws compliant with these
provisions, we amended article 11 to provide that preferred shares will be
entitled to receive, on a priority basis, minimum, non-cumulative dividends
according to the greater of the following criteria: (i) 6% per annum of the
amount resulting from the division of the amount of the outstanding capital
stock by the number of our outstanding shares; or (ii) the right to a share of
the mandatory dividend (see next paragraph) based on (a) a priority to receive a
minimum, non-cumulative dividend corresponding to 3% of the net asset value of
each share; and (b) a right to a share of the profits to be distributed on the
same basis as common shares, after common shares have been paid a dividend equal
to the minimum preferred dividend mentioned in (a) above.
Under our by-laws, we are required to distribute to shareholders as
dividends in respect to each fiscal year ending on December 31 an amount equal
to not less than 25% of net profit in any particular year, adjusted in
accordance with the Brazilian Corporation Law. In addition to the mandatory
dividend, our board of directors may
42
recommend to the shareholders payment of dividends from retained earnings,
profit reserves, and, under certain conditions, capital reserves. Any payment of
interim dividends or payment of interests on shareholders' equity will be netted
against the amount of the mandatory dividend for that fiscal year.
Under the Brazilian Corporation Law, if the board of directors
determines prior to the annual shareholders' meeting that payment of the
mandatory dividend for the preceding fiscal year would be inadvisable in view of
our financial condition, we need not pay the mandatory dividend. This
determination must be reviewed by our board of auditors and reported to the
shareholders and to the CVM, the Brazilian securities commission. If a mandatory
dividend is not so paid, these earnings must be allocated to a special reserve
account. If we do not incur the expected losses which caused us to withhold the
mandatory dividend, we will be obligated to pay this mandatory dividend.
Payment of Dividends
We are required to hold an annual shareholders' meeting, at which an
annual dividend may be declared, by no later than four months after the end of
our fiscal year. Our bylaws permit payment of interim dividends out of net
income for a six-month or shorter period in the current year based on a balance
sheet prepared by our management, or out of preexisting and accumulated profits
as set forth in the preceding fiscal year's balance sheet or in the preceding
six-month period's balance sheet. According to the Brazilian Corporation Law,
dividends must be paid to the holder of record on a dividend declaration date
that must occur prior to the end of the fiscal year in which the dividend was
declared. A shareholder has a three-year period from the date the dividend
payment was made available to claim dividends in respect of its shares, after
which such claim is barred by statutory limitations.
Payments of cash dividends and distributions, if any, will be made in
reais to the custodian on behalf of the depositary, and the custodian will then
convert such proceeds into U.S. dollars and will cause such U.S. dollars to be
delivered to the depositary for distribution to holders of ADSs. Under current
Brazilian law, dividends paid to shareholders who are not Brazilian residents,
including holders of ADSs, will not be subject to Brazilian withholding income
tax, except for dividends declared based on profits generated on or prior to
December 31, 1995.
Dividend Policy and History of Dividend Payments
Due to our significant capital expenditure requirements, our policy is
to pay only the mandatory dividend on our outstanding common and preferred
shares, subject to any determination by our board of directors that such
distribution would be inadvisable in view of our financial condition. It must be
also noted that pursuant to paragraph 6 of article 202 of the Brazilian
Corporation Law, as amended by Law no. 10,303/2001, Brazilian corporations
cannot retain profits without justification. Therefore, except if retained under
any of the reserves provided for in articles 193 to 197 of the Brazilian
Corporation Law, all net profits will have to be distributed to shareholders.
The only significant asset the Registrant has other than cash is its
shares of Telemig Celular. The Registrant relies almost exclusively on dividends
from Telemig Celular to meet cash needs, including the payment of dividends to
its shareholders. The Registrant controls the payment of dividends by Telemig
Celular, subject to limitations under Brazilian Corporation Law.
The following table sets forth the dividends paid to holders of our
common shares and preferred shares since 2000 in reais.
YEAR COMMON SHARES PREFERRED SHARES
---- ------------- ----------------
(PER 1,000 SHARES/IN R$)
2002 0.07 0.07
2001 0.04 0.04
2000 -- --
|
Shareholders who are not residents of Brazil must generally register
with the Central Bank to have dividends and/or notional interest attributable to
shareholders' equity, sales proceeds or other amounts with respect to their
shares eligible to be remitted in foreign currency outside of Brazil. See "Item
10D--Additional Information--Exchange Controls." The preferred shares underlying
the ADSs are held in Brazil by Banco Itau S.A., our custodian, as agent for the
depositary, which will be the registered owner on the records of the registrar
for our preferred shares. The registrar is Banco ABN-AMRO Real S.A.
43
Payments of cash dividends and distributions, if any, will be made in
reais to the custodian on behalf of the depositary, which will then convert
those proceeds into U.S. dollars and will cause those U.S. dollars to be
delivered to the depositary for distribution to holders of ADSs as described
above. In the event that the custodian is unable to convert immediately the
Brazilian currency received as dividends and/or notional interest attributable
to shareholders' equity into U.S. dollars, the amount of U.S. dollars payable to
holders of ADSs may be adversely affected by devaluations of the reais that
occur before those distributions are converted and remitted. See "Item 3A - Key
Information - Selected Financial Data - Exchange Rates." Dividends and notional
interest attributable to shareholders' equity in respect of the preferred shares
paid to shareholders who are not Brazilian residents, including holders of ADSs,
are exempt from Brazilian withholding tax in respect to profits accrued as of
January 1, 1996. See "Item 10E - Additional Information - Taxation - Brazilian
Tax Considerations."
B. SIGNIFICANT CHANGES
We are not aware of any significant changes bearing upon our financial
condition since the date of the consolidated financial statements included in
this annual report.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
The Registrants' preferred shares trade on the New York Stock Exchange
under the symbol "TMB" in the form of American Depositary Shares, or ADSs. Each
ADS represents 20,000 preferred shares, without par value. The ADSs are
evidenced by American Depositary Receipts, or ADR's, issued by The Bank of New
York as depositary, under a deposit agreement among us, the depositary and the
owners and beneficial owners of ADR's from time to time. We became a U.S.
registered company listed on the New York Stock Exchange on November 16, 1998.
The principal trading market for our preferred shares and for our
common shares is the Sao Paulo Stock Exchange (Bolsa de Valores de Sao Paulo -
BOVESPA). Our preferred shares commenced trading on the BOVESPA on September 21,
1998. Our preferred shares trade on the BOVESPA under the symbol "TMCP4" and our
common shares trade under the symbol "TMCP3."
At December 31, 2002, there were:
- an aggregate of 213,818,804,997 preferred shares issued and outstanding
and 126,612,568,962 common shares issued and outstanding, and
- 6,268,228 ADSs representing 125,364,560,000 preferred shares held by
foreign investors (to our knowledge based in each case on their
addresses only as indicated in our records for the shares in our
custody), representing 58.6% of the total preferred shares outstanding.
We have registered one class of ADSs under a registration statement on
Form F-6 pursuant to the Securities Act. At the end of December 2002, there were
approximately 6.3 million ADSs outstanding. All of the ADSs were registered in
the name of The Depository Trust Company. At the end of December 2002, there
were 108 holders of record of the ADSs.
The following table presents the reported high and low closing sale
prices for our preferred shares as reported on the Sao Paulo Stock Exchange in
reais.
44
R$ PER 1,000
PREFERRED SHARES
------------------
CALENDAR PERIOD HIGH LOW
--------------- ---- ---
1998 (beginning September 21, 1998)................................. 2.28 0.71
1999................................................................ 4.22 1.20
2000................................................................ 9.30 3.61
2001................................................................ 7.01 2.61
2002................................................................ 4.65 2.30
2000:
1st quarter......................................................... 9.30 3.61
2nd quarter......................................................... 7.40 3.85
3rd quarter......................................................... 6.57 4.61
4th quarter......................................................... 6.29 3.90
2001:
1st quarter......................................................... 7.01 4.05
2nd quarter......................................................... 5.59 3.82
3rd quarter......................................................... 4.75 2.61
4th quarter......................................................... 4.72 2.91
2002:
1st quarter......................................................... 4.65 3.14
2nd quarter......................................................... 3.27 2.37
3rd quarter......................................................... 3.33 2.53
4th quarter......................................................... 3.13 2.32
Share prices for the most recent six months are as follows:
November 2002....................................................... 3.13 2.86
December 2002....................................................... 3.06 2.82
January 2003........................................................ 3.29 2.55
February 2003....................................................... 2.67 2.35
March 2003.......................................................... 2.99 2.52
April 2003.......................................................... 2.96 2.64
|
The following table presents the reported high and low closing sales
prices for ADSs in U.S. dollars on the New York Stock Exchange for the period
indicated.
U.S. DOLLARS PER ADS
--------------------
CALENDAR PERIOD HIGH LOW
--------------- ---- ---
1998 (beginning November 16, 1998).................................. 37.50 19.75
1999................................................................ 46.75 14.75
2000................................................................ 101.00 42.00
2001................................................................ 71.13 20.62
2002................................................................ 40.30 11.99
2000:
1st quarter......................................................... 101.00 42.00
2nd quarter......................................................... 82.06 18.51
3rd quarter......................................................... 71.44 51.50
4th quarter......................................................... 64.00 43.75
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45
U.S. DOLLARS PER ADS
--------------------
CALENDAR PERIOD HIGH LOW
--------------- ---- ---
2001:
1st quarter......................................................... 71.13 37.00
2nd quarter......................................................... 47.15 34.00
3rd quarter......................................................... 40.05 20.62
4th quarter......................................................... 38.51 21.50
2002:
1st quarter......................................................... 40.30 26.55
2nd quarter......................................................... 28.30 18.51
3rd quarter......................................................... 23.10 13.39
4th quarter......................................................... 17.89 11.99
Share prices for the most recent six months are as follows:
November 2002....................................................... 17.66 16.10
December 2002....................................................... 17.89 15.10
January 2003........................................................ 19.80 14.00
February 2003....................................................... 15.06 12.95
March 2003.......................................................... 17.35 14.33
April 2003.......................................................... 19.01 16.50
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B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
TRADING ON THE BRAZILIAN STOCK EXCHANGES
General
Until May 2000, Brazil had nine stock exchanges with the Sao Paulo
Stock Exchange being the most significant. In May 2000, the nine stock exchanges
were unified under the management of the Sao Paulo Stock Exchange. The
unification process was ratified in June 2000 with the signing of a protocol
agreement between the Sao Paulo Stock Exchange and each of the other eight stock
exchanges. Under this agreement, all equity securities are traded on the Sao
Paulo Stock Exchange and all government securities are traded on the Rio de
Janeiro Stock Exchange. In addition, as of April 2001, corporate debt securities
are traded on the Sao Paulo Stock Exchange.
The Sao Paulo Stock Exchange is a nonprofit entity owned by its member
brokerage firms. Trading on the exchange is limited to member brokerage firms
and a limited number of authorized nonmembers. The Sao Paulo Stock Exchange has
two open trading sessions each day from 11:00 a.m. to 1:30 p.m. and from 2:30
p.m. to 5:45 p.m. Trading is also conducted from 10:00 a.m. to 6:00 p.m. on an
automated system. There are no specialists or market makers for our shares on
the Sao Paulo Stock Exchange.
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 the separate clearinghouses or the
Companhia Brasileira de Liquidacao e Custodia - CBLC, the clearinghouse for the
Sao Paulo Stock Exchange, which maintains 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.
At December 31, 2002, the aggregate market capitalization of the 407
companies listed on the Sao Paulo Stock Exchange was approximately US$124
billion. The Brazilian equity market is relatively small and illiquid compared
to major world markets. In 2002, the five most active issuers represented
approximately 41% of the total trading in the Sao Paulo Stock Exchange. In 2002,
the average monthly trading volume on the Sao Paulo Stock Exchange was
approximately US$3.4 billion.
46
In December 2000, the Sao Paulo Stock Exchange implemented new listing
segments: the Novo Mercado and the Differentiated Levels of Corporate
Governance. The Novo Mercado is a listing segment under the Sao Paulo Stock
Exchange designed for the trading of shares issued by companies that voluntarily
undertake to abide by further corporate governance practices and disclosure
requirements in addition to those already imposed by Brazilian law. A company in
the Novo Mercado must follow a series of corporate rules known as "good
practices of corporate governance." These rules generally increase shareholders'
rights and enhance the quality of information provided to shareholders.
The Sao Paulo Stock Exchange Differentiated Levels of Corporate
Governance imposes obligations meant to improve a company's methods of
disclosure to the market and dispersing its shares among the largest number of
shareholders possible. The corporate governance practices and disclosure
requirements applicable to these segments are not as extensive as in the Novo
Mercado.
Trading on Brazilian stock exchanges by nonresidents of Brazil is
subject to certain limitations under Brazilian foreign investment and tax
legislation. See "Item 10D--Additional Information--Exchange Controls."
Regulation of Brazilian Securities Markets
The Brazilian securities market is governed by Law No. 6,385 of
December 7, 1976, as amended, and Law No. 6,404 of December 15, 1976, as
amended, or the "Brazilian Corporation Law," and by regulations issued by the
CVM, which has authority over stock exchanges and the securities markets
generally, and by the Central Bank, which has licensing authority over brokerage
firms and regulates foreign investment and foreign exchange transactions.
Under the Brazilian Corporation Law, a company is either public
(companhia aberta), such as we are, or closely-held (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 Sao Paulo Stock Exchange or in the Brazilian over-the-counter
market. The shares of a public company may also be traded privately, subject to
some limitations. To be listed, a company must apply for registration with the
CVM and the Sao Paulo Stock Exchange.
Trading in securities on the Sao Paulo Stock Exchange may be suspended
at the request of a company in anticipation of a material announcement. Trading
may also be suspended on the initiative of the Sao Paulo 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 Sao Paulo Stock Exchange.
The Brazilian securities laws and regulations provide for, among other
things, disclosure requirements applicable to issuers of traded securities,
protection of minority shareholders and criminal penalties for insider trading
and price manipulation. On January 3, 2002, the CVM issued Instruction No. 358,
which amended the rules applicable to the disclosure of relevant facts and
became effective on April 28, 2002. In accordance with this regulation,
companies must establish internal policies applicable to the disclosure of
relevant facts and the confidentiality of non-public information. Our board of
directors has approved these policies in July 31, 2002, and we subsequently
filed them with the CVM. However, the Brazilian securities markets are still not
as regulated and supervised as the United States securities markets or markets
in certain other jurisdictions.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
47
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Set forth below is certain information concerning the Registrants'
capital stock and a summary of certain significant provisions of the
Registrant's bylaws and Brazilian Corporation Law. Copies of the Registrant's
bylaws have been filed as exhibits to this annual report.
CORPORATE PURPOSES
The Registrant is a publicly held corporation with our principal place
of business in the city of Brasilia, Brazil, and we are governed mainly by our
bylaws and by the Brazilian Corporation Law. Our corporate purposes are found
under Article 2 of our bylaws, which establishes that our objectives are:
- to control companies that perform activities related to the mobile
telephone sector in the areas of concessions or authorizations;
- to promote, through our controlled or affiliated companies, the
expansion and implementation of mobile telephone services in the areas
of concessions or authorizations;
- to promote, to perform or to assist in domestic and foreign investments
to be made by us or our controlled companies;
- to promote and stimulate studies and research on the development of the
mobile telephone sector;
- to perform, directly or through our controlled or affiliated companies,
technical services related to the mobile telephone sector;
- to perform or promote the import of goods and services for or through
controlled or affiliated companies;
- to promote, to stimulate and to coordinate, directly or through our
controlled or affiliated companies, the formation and training of
professionals in the mobile telephone sector;
- to perform other mobile telephone related activities; and
- to hold equity interests in other companies.
SHAREHOLDERS' MEETING
Our annual shareholders' meeting must occur within four months
following the close of our fiscal year and other shareholders' meetings must be
held whenever so required by corporate interests. The Brazilian Corporation Law
and our bylaws require that all our shareholders' meetings be called by
publication of a notice in newspapers of general circulation in our principal
place of business, currently the city of Brasilia, at least fifteen days prior
to the meeting. In addition, the CVM may also require the first call for a
shareholders' meeting to be made up to 30 days before such shareholders'
meeting. The quorum to hold shareholders' meetings on first call is generally
25% of the shares entitled to vote and on second call the meetings can be held
with the presence of any number of the shares entitled to vote.
Resolutions are generally passed by the majority of the voting
shareholders present at the meeting. Nevertheless, the Brazilian Corporation Law
sets forth that the approval of shareholders representing at least half of the
voting shares outstanding is required:
- to create preferred shares or to increase the shares of existing
classes, without maintaining the proportion with the remaining classes
of preferred shares, except if provided for and authorized in the
bylaws;
- to modify the privileges, advantages and amortization or redemption
conditions of one or more classes of preferred shares or to create a
new class with greater privileges;
48
- to decrease the mandatory dividend;
- to modify the corporate purposes of the company;
- to incorporate a company into another company or to merge it or to spin
it off;
- to liquidate the company;
- to become a member of a group of companies; or
- to issue founder's shares.
Our bylaws establish that general shareholders' meetings addressed to
deliberate subjects requiring special approval must be called at least 30 days
in advance.
PREFERRED SHARES AND COMMON SHARES
The following is a summary of the material terms of the Registrant's
common and preferred shares, including related provisions of our bylaws and the
Brazilian Corporation Law.
General
On March 31, 2003, the Registrant's paid-in capital was
R$263,040,000.00, and share capital consisted of a total of 128,963,300,563
outstanding common shares and 217,788,636,948 preferred shares, without par
value. All our outstanding shares are fully paid. Under our bylaws, the number
of preferred shares may not exceed two-thirds of the total number of outstanding
shares. We may issue preferred shares without maintaining a fixed proportion to
common shares provided we observe the limit prescribed by law. Law No. 10,303,
of October 31, 2001 amended the second paragraph of Article 15 of the Brazilian
Corporation Law to provide that the number of preferred non-voting or restricted
voting shares outstanding, such as the preferred shares, may not exceed one-half
of the total number of outstanding shares. According to Law No. 10,303, this new
limit on the issuance of preferred shares does not apply to existing listed
companies, such as we are. Currently, our common share and preferred share ratio
with respect to our total share capital is 0.3719 and 0.6281, respectively.
Under our bylaws, our board of directors may increase our share capital
up to 700,000,000,000 shares. Our shareholders must approve at a shareholders'
meeting any capital increase that exceeds this limit. Under the Brazilian
Corporation Law, if we issue additional shares in a private transaction, the
existing shareholders have preemptive rights to subscribe for shares on a pro
rata basis according to their current holdings.
Common Shares
Each common share entitles the holder thereof to one vote at our annual
and special shareholders' meetings. Under the Brazilian Corporation Law, our
common shares are entitled to dividends or other distributions made in respect
of the common shares in proportion to their share of the amount available for
the dividend or distribution. See "Dividends and Dividend Policy" for a more
complete description of payment of dividends and other distributions on our
common shares. In addition, upon any liquidation, our common shares are entitled
to return of capital in proportion to their share of our net worth.
Preferred Shares
Holders of preferred shares are generally entitled to priority in the
receipt of dividends and return of capital, with no premium. Our bylaws also
establish the payment of a minimum amount of non-cumulative dividends equivalent
to 6% per year of the value resulting from the division of subscribed capital by
the total number of shares, or the right to receive a share in the mandatory
dividend to be distributed based on the following criteria: (a) priority to
receive a minimum, non-cumulative dividend corresponding to 3% of the net asset
value of each share; and (b) a right to receive a share in the profits to be
distributed on the same basis as common shareholders, after common shares have
been paid a dividend equal to the minimum preferred dividend mentioned in letter
(a) above.
The Brazilian Corporation Law provides that non-voting or
restricted-voting shares (such as the preferred shares) entitled to fixed or
minimum dividends acquire unrestricted voting rights beginning when a company
has failed for three consecutive fiscal years (or for any shorter period, set
forth in a company's constituent documents) to
49
pay any fixed or minimum dividend to which such shares are entitled and to
continue to hold such voting rights until payment thereof is made. Our bylaws do
not provide for any shorter period.
Any change in the preferences or advantages of the preferred shares, or
the creating of a class of shares having priority over the preferred shares,
would require the approval of holders of a majority of the outstanding preferred
shares, voting as a class at a special meeting of holders of preferred shares.
In any circumstance in which holders of preferred shares are entitled to vote,
each preferred share will entitle the holder thereof to one vote.
Moreover, the preferred shareholders are entitled to vote at general
shareholders' meetings in respect of any of the following matters:
- to amend or delete the article in our bylaws that provides that a
shareholders' meeting will be required for approving the execution of
long-term agreements between us or controlled companies, on one side,
and the controlling shareholder, controlled or affiliated companies,
those subject to common control, or that in any other way can be
considered to be related to us, on the other side, except for
standard-form agreements, as well as to approve the execution of any
such agreements;
- to amend or delete the article in our bylaws that provides that
extraordinary general shareholders' meetings called to decide on
special quorum subjects will be valid if the first call is made at
least 30 days in advance of the date on which the general shareholders'
meeting will take place, and a second call is made at least 10 days in
advance therewith; and
- to amend or delete the article in our bylaws that provides that our
approval of a merger, spin-off, consolidation or dissolution of
controlled companies must be guided by the equal treatment to all the
companies involved.
Change in Shareholders' Rights
In principle, a change in shareholders' rights, such as the reduction
of the mandatory minimum dividend requires the vote of shareholders holding at
least one half of our voting shares. Under certain circumstances which may
result in a change in the rights of shareholders, the Brazilian Corporation Law
requires the approval of a majority of the shareholders who would be adversely
affected by the change and who are present at a special meeting called for such
purpose.
ALLOCATION OF NET INCOME AND DISTRIBUTION OF DIVIDENDS
Allocation of Net Income
The allocation of our net income is proposed by our management and is
subject to approval by our shareholders at a general shareholders' meeting. The
discretion of our management and our shareholders to determine the allocation of
our net income, however, is limited by certain rules that determine whether such
net income should be distributed as dividends or allocated to certain profit
reserves or carried forward to future fiscal years, as follows:
Mandatory dividends. Our shareholders are generally entitled to receive
mandatory dividends each year, in an amount equivalent to 25% of our adjusted
net income. Adjusted net income is net income following the addition or
subtraction of :
- amounts allocated to the formation of a statutory reserve account, and
- amounts allocated to the formation of a contingency reserve account and
the return of any amounts in any contingency reserve accounts deposited
in previous years.
The payment of our mandatory dividends may be limited to the profits
actually realized in the fiscal year, if the portion of the profits not realized
is allocated to the unrealized income reserve account (as described below).
If our board of directors recommends prior to a general shareholders'
meeting that payment of mandatory dividends with respect to the preceding fiscal
year would not be advisable in view of our financial condition, our shareholders
would decide at the shareholders' meeting whether or not to make that
distribution. The recommendation of the board of directors must be reviewed by
our board of auditors, and reported to our shareholders and to the CVM.
50
Legal reserve account. We are required to maintain a legal reserve
account to which we must allocate 5% of our net income for each fiscal year
until the amount of the reserve equals 20% of our share capital. The allocation
of a portion of the net income to the legal reserve account is mandatory, even
though it must be submitted to the approval by the shareholders voting at the
general shareholders' meeting and may be transferred to our capital account or
used to offset accumulated losses. However, we are not required to make any
allocations to our legal reserve in respect of any fiscal year in which it, when
added to our other established capital reserves, exceeds 30% of our capital. Net
losses, if any, may be charged against the legal reserve account. The legal
reserve account is not available for the payment of dividends. At December 31,
2002, the balance of our legal reserve was R$18.9 million, which was equal to 8%
of our share capital.
Statutory reserve account. Our bylaws provide that our shareholders may
allocate up to 10% of our net income (adjusted pursuant to the Brazilian
Corporation Law) to a working capital backup reserve account. This reserve,
however may not exceed 10% of our net book value. At December 31, 2002, we had
no working capital back-up reserve.
Statutory reserve for investments. The shareholders' meeting held on
March 19, 2003 approved changes to our bylaws in order to establish a statutory
reserve for investments, to be created with the remaining balance of net income
for the preceding fiscal year, provided that it complies with the capital budget
previously approved by a shareholders' meeting and provided that it is used to
support costs with the expansion of our activities and those of our
subsidiaries, including through capital increases or the development of new
businesses. It may not be approved at the expense of retaining mandatory
dividends, as provided in article 41 of our bylaws. The balance of this reserve,
as well as all profit reserves, except those for contingencies and realizable
profits, may not exceed our share capital; should this limit be reached, a
general shareholders' meeting would have to decide whether the excess should be
applied to pay in or increase the capital or to distribute dividends.
Discretionary reserve accounts. The Brazilian Corporation Law also
provides for two discretionary allocations of net profits that are subject to
approval by the shareholders at the annual meeting. First, a percentage of net
profits may be allocated to a contingency reserve account for anticipated losses
that are deemed probable in future years. Second, if the mandatory distributable
amount exceeds the sum of realized net profits in a given year, such excess may
be allocated to an unrealized income reserve account. Our bylaws, which
authorize the allocation of a percentage of our net income to the discretionary
reserve account, require that the purpose, criteria for allocation and maximum
amount of the reserve be specified.
Retention of our net income based on a capital expenditure budget. A
portion of our net income may be retained for capital expenditure projects, the
amount of which is based on a capital expenditure budget previously presented by
our management and approved by our shareholders. If a project relating to this
approved capital expenditure budget has a term exceeding one year, the budget
relating to the project must be submitted to the general shareholders' meeting
each fiscal year until the relevant investment is completed.
Distribution of Dividends
Under the Brazilian Corporation Law, we may pay dividends only from:
- our net income earned in a given fiscal year, i.e., our after-tax
income reduced by (i) our losses carried forward from prior fiscal
years, and (ii) distributions to holders of founders' shares and to
managers pursuant to profit-sharing arrangements. Our by-laws authorize
a profit sharing plan for management and employees as well as a stock
option plan. The amount to be paid is set by our board of directors.
Under Brazilian Corporation Law, this profit sharing may only be paid
to management with respect to a fiscal year in which the mandatory
dividend has been declared to the shareholders;
- our net income accrued in previous fiscal years or in any six-month
and/or quarterly interim periods of a fiscal year; or
- our profit reserves set aside in previous fiscal years or in the first
six months of a fiscal year. In this case, "profit reserves" means any
discretionary reserve account, contingency reserve account, amounts
allocated to our capital expenditure budget approved by a shareholders'
resolution or unrealized income reserve account.
We are required to pay a non-cumulative preferred dividend on our
preferred shares in an amount equal to 6% per year over the value resulting from
the division of subscribed capital by the total number of shares, or,
51
alternatively, minimum non-cumulative dividends corresponding to 3% of the net
asset value of each share. We must chose the alternative representing the higher
value. As of December 31, 2002, the calculated preferred dividend requirement
amounted to approximately R$14.8 million. For the fiscal year ended on December
31, 2002, management proposed the distribution of dividends in the amount of
R$23.6 million. This proposal was approved at the annual shareholders' meeting.
For purposes of the mandatory distribution requirement, we included in
adjusted net income part of the unrealized income reserve transferred upon the
breakup of Telebras, which amounted to R$132 million and is included in
distributable capital and other reserves in our shareholders' equity. We decided
to include the unrealized reserve in the calculation of the mandatory
distribution requirements over a ten-year period. We cannot assure you that the
mandatory distribution of the unrealized income reserve will not result in
substantial additional dividend requirements.
Distributions of interest on our net worth may constitute an
alternative form of payment to shareholders. These payments may qualify as part
of the mandatory dividend at their net value. Please see "Item 10E - Taxation
-Brazilian Tax Considerations."
Dividends are generally required to be paid within 60 days after the
date the dividends were declared to the holder of record, unless a shareholders'
resolution sets forth another date of payment. This date must, in either case,
be prior to the end of the fiscal year in which the dividend is declared. A
shareholder has a three-year period following the date on which the dividend
payment is made available to claim the dividend in respect of its shares, after
which we have no liability for such payment. We are not required to adjust the
amount of the dividend for inflation for the period from the date of declaration
to the payment date.
Our calculation of "net profits" and allocations to reserves for any
fiscal year are determined on the basis of financial statements prepared in
accordance with Brazilian Corporation Law. The financial statements included
herein have been prepared in accordance with U.S. GAAP and, although our
allocations to reserves and dividends will be reflected in those financial
statements, investors will not be able to calculate these allocations or
required dividend amounts from the financial statements.
INTEREST ON SHAREHOLDERS' EQUITY
Law No. 9,249, of December 26, 1995, as amended, provides for the
distribution of interest on our capital as an alternative form of payment to
shareholders. Such interest is limited to the daily pro rata variation of the
federal government's long-term interest rate as determined by the Central Bank
from time to time. We may treat these payments as a deductible expense for
corporate income tax and social contribution purposes, but the deduction cannot
exceed the greater of:
- 50% of net income (before taking into account such contribution and any
deductions for income taxes and after taking into account any
deductions for social contribution on net profits) for the period in
respect of which the payment is made; or
- 50% of retained earnings.
Any payment of interest on capital to holders of ADSs or preferred
shares, whether or not they are Brazilian residents, is subject to Brazilian
withholding tax at the rate of 15% (or 25% if the beneficiary is resident in a
"tax haven" jurisdiction). The amount paid to shareholders as interest on
capital, net of any withholding tax, may be included as part of any mandatory
distributable amount. Under Brazilian law, we are obligated to distribute to
shareholders an amount sufficient to ensure that the net amount received by
them, after payment by us of applicable Brazilian withholding taxes in respect
of the distribution of interest on capital, is at least equal to the mandatory
distributable amount. When we distribute interest on capital, and that
distribution is not accounted for as part of the mandatory distribution,
Brazilian withholding tax will apply.
SPECIFIC SHAREHOLDERS' RIGHTS
According to the Brazilian Corporation Law, neither a company's bylaws
nor actions taken at a general meeting of shareholders may deprive a shareholder
of certain specific rights, such as:
- the right to participate in the distribution of profits;
52
- the right to participate equally and ratably in any remaining residual
assets in the event of the company's liquidation;
- the right to supervise the management of the corporate business as
specified in the Brazilian Corporation Law;
- the right to preemptive rights in the event of a subscription of
shares, debentures convertible into shares or subscription bonuses
(other than with respect to a public offering of such securities, as
may be provided in the bylaws); and
- the right to withdraw from the company in the cases specified in the
Brazilian Corporation Law.
OTHER PROVISIONS
Neither the Brazilian Corporation Law nor our bylaws expressly
addresses:
- staggered terms for directors;
- cumulative voting, except as described below; or
- measures that could prevent a takeover attempt.
Nevertheless, the General Telecommunications Law requires Anatel's
prior approval for any spin off, merger, incorporation, decrease of capital,
transformation or transfer of control involving corporations holding any
telecommunications concession.
According to the Brazilian Corporation Law, shareholders representing
at least one-tenth of the voting capital may request that a multiple voting
procedure be adopted to entitle each share to as many votes as there are board
members and to give each shareholder the right to vote cumulatively for only one
candidate or to distribute his/her votes among several candidates. Pursuant to
the Brazilian Corporation Law, shareholders' actions must be taken at a
shareholders' meeting duly convened, and not by written consent.
PREEMPTIVE RIGHTS
Each of our shareholders has a general preemptive right to subscribe
for shares or securities convertible into shares in any capital increase, in
proportion to its holding, except in the event of the grant and exercise of any
option to acquire shares of our share capital. A period of at least 30 days
following the publication of notice of the issuance of shares or securities
convertible into shares is allowed for exercise of the right. Under the
Brazilian Corporation Law, we may amend our bylaws to eliminate preemptive
rights or to reduce the exercise period in connection with a public offering of
shares or an exchange offer made to acquire another company. Currently our
bylaws provide for such elimination of the preemptive rights in those
circumstances upon approval of the shareholders or the board of directors.
In the event of a capital increase which would maintain or increase the
proportion of capital represented by preferred shares, holders of ADSs, except
as described above, would have preemptive rights to subscribe only for newly
issued preferred shares. In the event of a capital increase which would reduce
the proportion of capital represented by preferred shares, holders of ADSs,
except as described above, would have preemptive rights to subscribe for
preferred shares in proportion to their shareholdings and for common shares only
to the extent necessary to prevent dilution of their interest in us.
REDEMPTION AND RIGHTS OF WITHDRAWAL
The Brazilian Corporation Law provides that, under limited
circumstances, a shareholder has the right to withdraw his or her equity
interest from the company and to receive payment for the portion of
shareholder's equity attributable to his or her equity interest. This right of
withdrawal may be exercised by our dissenting shareholders in the event that at
least half of all voting shares outstanding authorize us:
53
- to create preferred shares or to increase the existing classes of
preferred shares, without maintaining the proportion with the remaining
classes of preferred shares, except if provided for and authorized in
the bylaws;
- changes in the preferences, advantages and conditions of redemption or
amortization of one or more classes of preferred shares, or the
creation of a new class with greater privileges;
- to reduce the mandatory distribution of dividends;
- to merge into another company or to consolidate with another company,
subject to the conditions set forth in the Brazilian Corporation Law;
- to participate in a centralized group of companies as defined under the
Brazilian Corporation Law and subject to the conditions set forth
therein;
- to change our corporate purpose;
- to split up, subject to the conditions set forth in the Brazilian
Corporation Law;
- to transform into another type of company;
- to transfer all of our shares to another company or to receive shares
of another company in order to make the company whose shares are
transferred a wholly owned subsidiary, a procedure known as
incorporacao de acoes; or
- to acquire control of another company at a price which exceeds the
limits set forth in the Brazilian Corporation Law.
The right of withdrawal lapses 30 days after publication of the minutes
of the shareholders' meeting that approved the corporate actions described
above. We would be entitled to reconsider any action giving rise to withdrawal
rights within 10 days following the expiration of such rights if the withdrawal
of shares of dissenting shareholders would jeopardize our financial stability.
In addition, the rights of withdrawal in the fourth, fifth and ninth
bullet points above may not be exercised by holders of shares if such shares (i)
are liquid, which definition entails being part of the Sao Paulo Stock Exchange
Index or other stock exchange index (as defined by the CVM), and (ii) are widely
held, such that the controlling shareholder or companies it controls have less
than 50% of the shares.
This right of withdrawal may also be exercised in the event that the
entity resulting from a merger, incorporacao de acoes, as described above,
consolidation or spin-off of a listed company fails to become a listed company
within 120 days of the shareholders' meeting at which such decision was taken.
The Brazilian Corporation Law allows companies to redeem their shares
at their economic value, subject to the provisions of their bylaws and certain
other requirements. Our bylaws currently do not provide that our capital stock
will be redeemable at its economic value and, consequently, any redemption
pursuant to the Brazilian Corporation Law would be made based on the book value
per share, determined on the basis of the last balance sheet approved by the
shareholders. However, if a shareholders' meeting giving rise to redemption
rights occurred more than 60 days after the date of the last approved balance
sheet, a shareholder would be entitled to demand that his or her shares be
valued on the basis of a new balance sheet dated within 60 days of such
shareholders' meeting.
FORM AND TRANSFER
According to the Brazilian Corporation Law, all shares issued by
Brazilian companies must be nominative and either registered within the
companies' registry books (the Registro de Acoes Nominativas) or placed under
the custody of a financial institution specifically designated to perform
custodial services by each company. Because preferred shares are in registered
book-entry only form, the transfer of shares is effected by either an entry made
by us in our books by debiting the share account of the transferor and crediting
the share account of the transferee or by a book entry by the custodian in case
the board of directors authorizes the maintenance of our shares under the
custody of a financial institution specifically designated by the shareholders
to perform book-entry services. Under
54
our bylaws, our shares are in the form of book-entry shares and the transfer of
those shares is effected through an order to the financial institution which
controls the registration of those shares.
Transfers of preferred shares by a foreign investor are made in the
same way and executed by that investor's local agent on the investor's behalf
except that, if the original investment was registered with the Central Bank
pursuant to the Annex IV Regulations, the foreign investor also should seek
amendment, if necessary, through its local agent, of the certificate of
registration to reflect the new ownership.
The Sao Paulo Stock Exchange operates a central clearing system. A
holder of our shares may choose, at its discretion, to participate in this
system and all shares elected to be put into the system will be deposited in
custody with the stock exchange (through a Brazilian institution that is duly
authorized to operate by the Central Bank having a clearing account with the
stock exchange). The fact that these shares are subject to custody with the
stock exchange will be reflected in our registry of shareholders. Each
participating shareholder will, in turn, be registered in our register of
beneficial shareholders maintained by the stock exchange and will be treated in
the same way as registered shareholders.
NEW PROVISIONS IN THE BRAZILIAN CORPORATION LAW
On October 31, 2001, Law No. 10,303 amended the Brazilian Corporation
Law with the purpose of increasing the rights of minority shareholders. We were
required to adapt our bylaws to the new provisions by March 1, 2003, which was
effectively done in the shareholders' meeting held on December 19, 2002. The
amended Brazilian Corporation Law and current regulations provide for the
following changes:
- our controlling shareholder must make a tender offer for our shares if
it increases its interest in our share capital to a level that
materially and negatively affects the liquidity of our shares, as
defined by the CVM;
- any acquiror of control must make a tender offer for our common shares
at a price equal to 80% of the per share price paid for the controlling
block of shares;
- we are authorized to redeem minority shareholders' shares if, after a
tender offer, our controlling shareholder increases its participation
in our total share capital to more than 95%;
- dissenting or, in certain cases, non-voting shareholders, are entitled
to obtain redemption upon a decision to conduct a spin-off that results
in (i) a change of our corporate purpose, (ii) a reduction in the
mandatory dividend or (iii) any participation in a group of companies
(as defined by the Brazilian Corporation Law).
- preferred shares are required to have one of the following features in
order to be listed and traded on a stock exchange: (i) priority in the
receipt of dividends corresponding to at least 3% of the book value per
share; or (ii) dividends 10% higher than those paid for common shares;
or (iii) tag along right at 80% of the price paid to the controlling
shareholder in case of a transfer of control. We were required to amend
our bylaws to contemplate one or more of these features which may
affect the holders of our preferred shares currently outstanding, which
was effectively done in the shareholders' meeting held on December 19,
2002. No withdrawal rights will arise from such amendment if it is made
before December 31, 2002;
- shareholders that are not a controlling shareholder but that together
hold (i) preferred shares representing at least 10% of our total share
capital, or (ii) common shares representing at least 15% of our voting
capital are entitled to appoint one member and an alternate to our
board of directors. If no group of common or preferred shareholders
meets the thresholds described above, shareholders holding preferred or
common shares representing at least 10% of our total share capital are
entitled to combine their holdings to appoint one member and an
alternate to our board of directors. Until 2005, the board members that
may be elected pursuant to (i) above or by the combined holdings of
holders of preferred and common shares are to be chosen from a list of
three names drawn up by the controlling shareholder. Any such members
elected by the minority shareholders will have veto powers on the
selection of our independent auditors;
- controlling shareholders, shareholders that appoint members to our
board of directors or board of auditors and members of our board of
directors, executive committee or board of auditors are required to
file immediately with the CVM and the stock exchanges (or the
over-the-counter markets on which our securities are traded) a
statement of any change in their shareholdings;
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- we are required to send copies of the documentation we submit to our
shareholders in connection with shareholders' meetings to the stock
exchanges on which our shares are most actively traded.
C. MATERIAL CONTRACTS
MOBILE CELLULAR SERVICE CONCESSION
Telemig Celular obtained a mobile cellular service concession from the
Brazilian Ministry of Communications on November 4, 1997. The terms of our
concession are described in "Item 4--Information on the Company--Regulation of
the Brazilian Telecommunications Industry."
INTERCONNECTION AGREEMENTS
Incumbent wireline providers are obliged to provide interconnection
services to wireless operators with the incumbent's own installations. Telemig
Celular has entered into interconnection agreements with TIM, our B Band
competitor; Oi, our D Band competitor; Embratel, Telefonica and Intelig (the
three long-distance carriers); and Telemar, Embratel, AT&T and Vesper S.A. (the
four local carriers operating in our region). The terms of these interconnection
agreements include provisions for the number of connection points, the method by
which signals must be received and transmitted and the costs and the network
usage fees. See "Item 4--Information on the Company--Regulation of the Brazilian
Telecommunications Industry--Obligations of Telecommunications Companies" and
"Item 4--Information on the Company--Regulation of the Brazilian
Telecommunications Industry--Interconnection."
ROAMING AGREEMENTS
Telemig Celular has entered into roaming agreements with all other A
and B Band service providers outside our region. The terms of these agreements
are described in "Item 4--Information on the Company--Operating
Agreements--Roaming Agreements."
SERVICE AGREEMENT
On June 30, 2001,Telemig Celular entered into a service agreement with
Amazonia Celular S.A. and LHS do Brasil Ltda under which Sema, a subsidiary of
LHS do Brasil Ltda. licensed a limited right to use certain of its software
together with software produced by third parties to Telemig Celular and Amazonia
Celular S.A. and further agreed to perform specified services in connection with
its proprietary software and the third party software.
CREDIT AGREEMENTS
Export Development Corporation of Canada
On December 31, 1997, Telemig Celular's predecessor, Telecomunicacoes
de Minas Gerais S.A., entered into a US$21.3 million credit agreement with the
Export Development Corporation of Canada relating to the purchase of cellular
telecommunications equipment from Northern Telecom companies. Interest is
payable semi-annually at an annual rate of six month LIBOR plus 1%. Principal is
payable semi-annually with a final maturity on October 15, 2003. At December 31,
2002, there was R$12.5 million outstanding under this credit agreement.
On July 8, 1999, Telemig Celular also entered into a US$91 million
credit agreement with the Export Development Corporation of Canada, which was
restated and amended on April 3, 2001 and April 23, 2001, with an additional
US$50 million credit, relating to the purchase of cellular telecommunications
equipment and services from Northern Telecom companies. ABN Amro Bank NV is
acting as administrative agent. The annual interest rate under this agreement is
six month LIBOR plus 4.875%. Principal (starting on April 30, 2003) and interest
are payable semi-annually. The maturity date is April 28, 2006. At December 31,
2002, there was R$498.2 million outstanding under this credit agreement.
BNDES
On November 9, 2000, Telemig Celular obtained a R$260 million,
five-year facility from the Brazilian National Economic and Social Development
Bank (Banco Nacional de Desenvolvimento Economico e Social (BNDES)) and a
consortium of three Brazilian banks: Banco Itau S.A., Banco Bradesco S.A. and
Banco Alfa de Investimento S.A. The proceeds of this facility, which has an
annual interest rate of 3.8% over either (i) the average cost of BNDES' currency
basket or (ii) the long-term interest rate disclosed by the Central Bank, were
invested in
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the expansion of our coverage area and the introduction of new services.
Principal is payable monthly with a final maturity in January 2006. At December
31, 2002, there was R$259 million outstanding under this facility.
D. EXCHANGE CONTROLS
The system of foreign investment in financial and capital markets in
Brazil was modified by Resolution No. 2,689 of the National Monetary Council on
January 26, 2000, which substitutes the rules of Annex IV to Resolution No.
1,289 of the National Monetary Council.
According to Resolution No. 2,689, the entry of foreign capital through
the free-rate exchange market, as an investment in the Brazilian financial and
capital markets, will be subject to electronic registration with the Central
Bank. Qualified foreign investors 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. However, institutions that provide custody
services must submit monthly information to the Central Bank regarding each
foreign investor as well as submit to the Central Bank or the CVM records of
transactions made by foreign investors.
The term "qualified foreign investors" includes any individual or
financial or non-financial institution, resident or domiciled abroad, which:
- has a legal representative in Brazil;
- fills out a form to be kept on hand by the legal representative;
- obtains registration with the CVM as a foreign investor; and
- registers the foreign investment with the Central Bank.
The issuance of depositary receipts in foreign markets in respect of
shares of Brazilian issuers, such as the Registrant's ADR's, is permitted by
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. Our
ADS program was approved under the Annex V regime 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 the favorable tax
treatment.
An electronic registration has been generated 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 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. A holder of preferred shares may not be able
to convert into foreign currency and remit outside Brazil the proceeds from the
disposition of, or distribution with respect to, the preferred shares, unless
such holder qualifies under Resolution No. 2,689 regulations or obtains its own
certificate of registration. A holder of preferred shares 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"
for a description of this tax treatment. In addition, if the holder resides in a
"tax haven" jurisdiction, this holder will also be subject to less favorable tax
treatment.
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 be registered with the Central
Bank.
The restrictions on the remittance of foreign capital abroad may hinder
or prevent Banco Itau S.A., which is acting as custodian for the preferred
shares represented by ADSs, or holders who have exchanged ADRs for preferred
shares, from converting dividends, distributions or the proceeds from any sale
of such preferred shares, as the case may be, into U.S. dollars and remitting
such U.S. dollars abroad. Holders of ADSs could be adversely affected by delays
in, or refusal to grant any, required government approval for conversions of
Brazilian currency payments and remittances abroad of the proceeds from
dividends or sales of Preferred Shares underlying the ADSs.
57
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 in 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 assurances that the federal
government will not impose similar restrictions on foreign repatriations in the
future.
E. TAXATION
The following summary contains a description of the material Brazilian
and U.S. federal income tax consequences of the acquisition, ownership and
disposition of preferred shares or ADSs. This summary 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. This summary is based upon the
tax laws of Brazil and related regulations and on the tax laws of the United
States and related regulations as in effect on the date of this annual report.
These laws and regulations may change in the future.
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. We cannot assure you, 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 material Brazilian tax consequences
relating to the acquisition, ownership and disposition of preferred shares or
ADSs by a holder not deemed to be domiciled in Brazil for Brazilian tax
purposes. This discussion does not address all the Brazilian tax considerations
that may be applicable to any such 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 us in cash or in kind from profits for 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 15% if the profits were generated in
1994 or 1995, and at 25% if the profits were generated before 1994. Stock
dividends are not subject to Brazilian tax.
The only Brazilian tax treaty now in effect that would, if specified
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%.
Taxation of Capital Gains
Capital gain or loss is defined as the difference between the amount
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.
Capital gains realized outside Brazil by a non-Brazilian holder on the
disposition of ADSs or preferred shares to another non-Brazilian holder are not
subject to Brazilian tax. The deposit of preferred shares in exchange for ADSs
and the withdrawal of preferred shares upon cancellation of ADSs are also not
subject to Brazilian tax.
Capital 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 or may be taxed at one of the following rates, depending
on the circumstances described below:
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- Gains realized through off-exchange transactions in Brazil or with
Brazilian residents are generally subject to tax at a rate of 15%.
- Gains realized through transactions on Brazilian stock exchanges are
generally subject to tax at a rate of 20%.
- Gains on the sale or exchange of duly-registered investments made in
accordance with Resolution No. 2,689 of the Monetary Council are not
subject to Brazilian tax if such sale or exchange occurs on a Brazilian
stock exchange, except for investments originating from countries where
income is not taxed or is taxed at a rate lower than 20%, which are
taxed in accordance with the same tax rules applicable to Brazilian
residents.
- 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.
- If the sales value of the preferred shares contains a component of
interest on capital, the amount of this interest will be taxed at a
rate of 15%. See "--Distributions of Interest on Capital" below.
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%.
We cannot assure you that the current preferential treatment for
holders of ADSs and non-Brazilian holders of preferred shares under the
Resolution No. 2,689 regime 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 underlying ADSs, complying
with the rules set forth by the National Monetary Council will be treated
differently for Brazilian tax purposes depending on whether the transaction
takes place on a Brazilian stock exchange or not.
Gains on sales or assignments made 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 company as an alternative form of making
dividend distributions. The rate of interest is calculated on the company's
equity and it may not be higher than the federal government's long-term interest
rate as determined by the Central Bank from time to time (11% per annum for the
three-month period starting on January, 2003). The deduction of the total amount
distributed as interest on capital may not exceed the greater of
- 50% of net income for the year in respect of which the payment is made
before taking such distribution into account, or
- 50% of retained earnings for years prior to the year in respect of
which the payment is made, plus profit reserves.
Payments of interest on capital are decided by the shareholders on the
basis of the recommendations of a 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 us for
Brazilian corporate income tax purposes. These payments are subject to Brazilian
withholding tax at the rate of 15%, except for payments to persons who are
constitutionally exempt from tax in Brazil. Payments to persons situated in
jurisdictions deemed to be tax havens will be subject to tax at a 25% rate. Tax
havens are defined as countries that either have no income tax or in which the
income tax rate is less than 20%.
We cannot assure you that our board of directors will not recommend
that future distributions of profits should be made by means of interest on
capital instead of by means of dividends.
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Amounts paid as interest on capital, net of applicable withholding tax,
may be treated as payments in respect of the dividends we are obligated to
distribute to our shareholders in accordance with our bylaws 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 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, except for a 0.64% tax on the secondary sale or distribution of the
preferred shares through a public offering registered with the Brazilian
Securities and Exchange Commission, limited to R$82,870 and payable by the
seller.
A financial transaction tax (Imposto sobre Operacoes Financeiras) may
be imposed on the conversion of Brazilian currency into foreign currency, such
as for purposes of paying dividends and interest. The 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.
Another tax, which applies to the removal of funds from accounts at
banks and other financial institutions, will be imposed through to December 2004
on distributions by us in respect of ADSs at the time such distributions are
converted into U.S. dollars and remitted abroad by the custodian. This tax will
be levied at a rate of 0.38% in 2002 and 2003, and at a rate of 0.08% in 2004.
Financial institutions performing transactions to which the tax applies are
responsible for the collection of the tax.
U.S. FEDERAL TAX CONSIDERATIONS
The following is a general discussion of the principal U.S. federal
income tax consequences of the ownership and disposition of our preferred shares
or ADSs that may be relevant to you if you are a U.S. holder (as defined below)
of such shares or ADSs. For purposes of this discussion, a "U.S. holder" is a
beneficial owner of our preferred shares or ADSs that is, for U.S. federal
income tax purposes:
- a citizen or resident alien individual of the United States,
- a corporation or other entity treated as a corporation for U.S. federal
income tax purposes created or organized in or under the laws of the
United States or any political subdivision thereof,
- an estate the income of which is subject to U.S. federal income tax
regardless of its source, or
- a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust, and one or more U.S.
persons have the authority to control all substantial decisions of the
trust.
In general, for U.S. federal income tax purposes, holders of American
Depositary Receipts evidencing ADSs will be treated as the beneficial owners of
the preferred shares represented by those ADSs. Deposits and withdrawals of our
preferred shares by U.S. holders in exchange for ADSs will not result in the
realization of gain or loss for U.S. federal income tax purposes.
This discussion does not address all of the U.S. federal income tax
consequences that may be relevant to you in light of your particular
circumstances, and does not discuss any aspect of state, local or non-U.S. tax
law. Moreover, this discussion deals only with our preferred shares or ADSs that
you will hold as capital assets (generally, property held for investment), and
it does not apply if you are subject to special tax rules, such as banks,
insurance companies, securities dealers, partnerships or other entities
classified as partnerships for U.S. federal income tax purposes, tax-exempt
organizations, persons that hold our preferred shares or ADSs as part of an
integrated investment (including a straddle), persons owning directly,
indirectly or constructively, 10% or more of our voting stock and persons whose
"functional currency" is not the U.S. dollar. If a partnership holds preferred
shares or ADSs, the U.S. federal income tax treatment of a partner generally
will depend upon the status of the partner and upon the activities of the
partnership. Partners of partnerships holding preferred shares or ADSs should
consult their own tax advisers. This discussion is based on provisions of the
U.S. Internal Revenue Code of 1986, as
60
amended (the "Code"), Treasury regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all as now in effect, and
all of which are subject to change, possibly with retroactive effect, and to
different interpretations. We urge you to consult your own tax adviser as to the
tax consequences relevant to the ownership of our preferred shares or ADSs in
light of your particular circumstances, including the effect of any state, local
or non-U.S. laws.
Taxation of Distributions
In general, distributions with respect to our preferred shares or the
ADSs (which likely would include distributions of notional interest charges
attributed to shareholders' equity, as described above under "- Brazilian Tax
Considerations - Distributions of Interest on Capital") will, to the extent made
from our current or accumulated earnings and profits, as determined under U.S.
federal income tax principles, constitute dividends for U.S. federal income tax
purposes. If a distribution exceeds the amount of our current and accumulated
earnings and profits, the excess will be treated as a non-taxable return of
capital to the extent of your tax basis in our preferred shares or ADSs, and
thereafter as capital gain. As used below, the term "dividend" means a
distribution that constitutes a dividend for U.S. federal income tax purposes.
The gross amount of any taxable dividend (including amounts withheld in
respect of Brazilian taxes) paid with respect to our preferred shares or ADSs
generally will be subject to U.S. federal income taxation as ordinary dividend
income and will not be eligible for the dividends received deduction allowed to
corporations. For foreign tax credit purposes, the dividend will be income from
sources outside the United States. The limitation on foreign taxes eligible for
the credit is calculated separately with respect to specific classes of income.
For this purpose, dividends paid by us generally will constitute passive (or
possibly, in the case of certain U.S. holders, financial services) income.
Subject to generally applicable limitations under U.S. federal income tax law,
Brazilian withholding tax imposed on such dividends, if any, will be eligible
for credit against a U.S. holder's U.S. federal income tax liability (or at a
U.S. holder's election, all foreign income taxes paid may instead be deducted in
computing such holder's taxable income). The rules with respect to foreign tax
credits are complex and U.S. holders should consult their own tax advisers
regarding the availability of foreign tax credits in light of their particular
circumstances.
Taxable dividends paid in Brazilian currency will be included in your
gross income in a U.S. dollar amount calculated by reference to the exchange
rate in effect on the date you receive the dividends, or, in the case of
dividends you receive in respect of ADSs, on the date the dividends are received
by the depositary, whether or not converted into U.S. dollars. You will have a
tax basis in any distributed Brazilian currency equal to the amount included in
gross income, and any gain or loss recognized upon a subsequent disposition of
such Brazilian currency generally will be ordinary income or loss. If dividends
paid in Brazilian currency are converted into U.S. dollars on the day you or the
depositary, as the case may be, receive such dividends, you generally should not
be required to recognize foreign currency gain or loss in respect of the
dividend income. We urge you to consult your own tax advisers regarding the
treatment of any foreign currency gain or loss if any Brazilian currency
received by you or the depositary is not converted into U.S. dollars on the date
of receipt.
Taxation of Capital Gains
In general, gain or loss, if any, realized upon a sale or other taxable
disposition of our preferred shares or ADSs will be subject to U.S. federal
income taxation as capital gain or loss in an amount equal to the difference
between the amount realized on the sale or other taxable disposition and your
adjusted tax basis in our preferred shares or ADSs. Such capital gain or loss
will be long-term capital gain or loss if at the time of sale or other taxable
disposition you held our preferred shares or ADSs for more than one year.
Certain non-corporate U.S. holders (including individuals) are eligible for
preferential rates of U.S. federal income taxation in respect of long-term
capital gains. The deduction for capital losses is subject to certain
limitations under the Code. Gain (or loss), if any, recognized by a U.S. holder
on the sale or other taxable disposition of our preferred shares or ADSs
generally will be treated as U.S. source income for U.S. foreign tax credit
purposes. Consequently, if a Brazilian withholding tax is imposed on the sale or
other taxable disposition of our preferred shares or ADSs, a U.S. holder that
does not receive significant foreign source income from other sources may not be
able to derive effective U.S. foreign tax credit benefits in respect of such
Brazilian withholding tax. We urge U.S. holders of our preferred shares or ADSs
to consult their own tax advisers regarding the application of the foreign tax
credit rules to their investment in, and disposition of, such shares or ADSs.
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Passive Foreign Investment Company Rules
Special U.S. federal income tax rules apply to U.S. persons owning
shares of a "passive foreign investment company" (a "PFIC"). A non-U.S.
corporation generally will be classified as a PFIC for U.S. federal income tax
purposes in any taxable year in which, after applying relevant look-through
rules with respect to the income and assets of subsidiaries, either:
- at least 75% of its gross income is "passive income"; or
- on average at least 50% of the gross value of its assets is
attributable to assets that produce passive income or are held for the
production of passive income.
For this purpose, passive income generally includes, among other things,
dividends, interest, rents, royalties, gains from the disposition of passive
assets and gains from commodities transactions.
Based on certain estimates of our current and projected gross income
and gross assets, we do not expect our preferred shares or ADSs to be considered
shares of a PFIC for our current fiscal year or for foreseeable future fiscal
years. However, because the determination of whether our preferred shares or
ADSs constitute shares of a PFIC will be made by us on an annual basis, is based
upon the composition of our income and assets (including, among others, entities
in which we hold at least a 25% interest), and the nature of our activities,
from time to time, and because there are uncertainties in the application of the
relevant rules, we cannot assure you that our preferred shares or ADSs will not
be considered shares of a PFIC for any fiscal year. Moreover, we will not obtain
an opinion of counsel, and no ruling will be sought from the IRS, regarding our
annual PFIC determination. If our preferred shares or ADSs were shares of a PFIC
for any fiscal year, U.S. holders (including certain indirect U.S. holders) may
be subject to adverse U.S. federal income tax consequences upon a sale or other
disposition of such preferred shares or ADSs, or upon the receipt of certain
distributions from us (including imposition of an interest charge), unless such
U.S. holders made certain available elections, generally for the first taxable
year for which shares of a PFIC were considered to be held.
If you are a U.S. holder of "marketable stock" in a PFIC, you may make
a "mark-to-market" election, provided the PFIC stock is regularly traded on a
"qualified exchange." Under applicable Treasury regulations, a "qualified
exchange" includes a national securities exchange that is registered with the
SEC or the national market system established under the Securities Exchange Act
of 1934. Also, under applicable Treasury Regulations, PFIC stock traded on a
qualified exchange is regularly traded on such exchange for any calendar year
during which such stock is traded, other than in de minimis quantities, on at
least 15 days during each calendar quarter. We cannot assure you that our stock
will be treated as regularly traded for this purpose.
If the mark-to-market election is made, you, as the electing U.S.
holder, generally would (i) include in gross income, entirely as ordinary
income, an amount equal to the difference between the fair market value of the
PFIC stock as of the close of such taxable year and its adjusted tax basis, and
(ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of
the PFIC stock over its fair market value at the end of the taxable year, but
only to the extent of the amount previously included in gross income as a result
of the mark-to-market election.
The mark-to-market election is made with respect to marketable stock in
a PFIC on a shareholder-by-shareholder basis and, once made, can only be revoked
with the consent of the IRS. Special rules would apply if the mark-to-market
election is not made for the first taxable year in which a U.S. person owns
stock of a PFIC. You should consult with your tax advisor regarding the
application of the PFIC rules to our preferred shares or ADSs and the
availability and advisability of making an election to avoid the adverse U.S.
federal income tax consequences of the PFIC rules should we be considered a PFIC
for any taxable year.
U.S. Backup Withholding and Information Reporting
If you are a U.S. holder of our preferred shares or ADSs, you may,
under certain circumstances, be subject to "backup withholding" (currently at
the rate of 30%), with respect to certain payments to U.S. holders, such as
dividends we pay or the proceeds of a sale of our preferred shares or ADSs,
unless you (i) are a corporation or come within certain other exempt categories,
and demonstrate this fact when so required, or (ii) provide a correct taxpayer
identification number, certifying that you are not subject to backup
withholding, and otherwise comply with applicable requirements of the backup
withholding rules. Any amount withheld under these rules will be creditable
against your U.S. federal income tax liability, provided the requisite
information is furnished to the IRS.
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F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
The Registrant is subject to the information requirements of the
Securities Exchange Act of 1934, as amended, pursuant to which we file reports
and other information with the Commission. Reports and other information filed
by us with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at 233
Broadway, New York, New York 10279 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661-2511. You may obtain copies of
this material by mail from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may also
inspect these reports and other information at the offices of the New York Stock
Exchange, 11 Wall Street, New York, New York 10005, on which our ADSs are
listed. We also file financial statements and other periodic reports with the
CVM.
Copies of our annual report on Form 20-F and documents referred to in
this annual report and our bylaws will be available for inspection upon request
at our offices at SCN Quadra 3, Bloco A, Sobreloja Norte, 70713-000 Brasilia -
DF, Brazil.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are primarily exposed to market risk from changes in both foreign
currency exchange rates and interest rates. We are exposed to foreign exchange
rate risk because certain of our costs and debt are denominated in currencies,
primarily the U.S. dollar, other than those in which we earn revenues (primarily
the real). Similarly, we are subject to market risk resulting from changes in
interest rates which may affect the cost of our financing. Except for hedging
instruments relating to foreign currency denominated debt, as described below,
we do not use derivative instruments, such as foreign exchange forward
contracts, foreign currency options, interest rate swaps and forward rate
agreements, to manage these market risks, nor do we hold or issue derivative or
other financial instruments for trading purposes.
EXCHANGE RATE RISK
We have exchange rate exposure with respect to the U.S. dollar and
other foreign currencies. At December 31, 2002, R$679.4 million of our
indebtedness was indexed to foreign currencies (R$590.5 million denominated in
U.S. dollars and R$88.9 million denominated in the average cost of BNDES's
currency basket). Of our total foreign currency indexed debt, 78% was hedged.
The potential additional costs to us that would result from a hypothetical 10%
devaluation of the real as compared to the U.S. dollar would be approximately
R$15.1 million. This calculation considers the hedge effect.
INTEREST RATE RISK
At December 31, 2002, we had R$850.0 million in loans and financing
outstanding and bearing interest at floating rates. We invest our excess
liquidity (R$586.0 million at December 31, 2002) mainly in short-term
instruments. At December 31, 2002, we had hedging instruments exchanging fixed
rates over the U.S. dollar variation for an internal floating rate (interbank
deposit rate) with updated notional amounts of R$528.7 million. The potential
loss in earnings to us 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,
2002 would be approximately R$15.8 million.
63
The above sensitivity analysis is based on the assumption of an
unfavorable 100 basis point movement of the interest rates applicable to each
homogeneous category of financial assets and liabilities and sustained over a
period of one year. A homogeneous category is defined according to the currency
in which financial assets and liabilities are denominated and assumes the same
interest rate movement within each homogeneous category (e.g., U.S. dollars). As
a result, our 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 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
We are not in default under any of our obligations nor is any payment
of dividends in arrears.
In 2002, we breached certain financial covenants set forth in credit
agreements entered into with the Export Development Corporation of Canada and
other parties, and with BNDES and a consortium of three Brazilian banks, Banco
Itau S.A., Banco Bradesco S.A. and Banco Alfa de Investimento S.A. Waivers were
properly obtained in connection with these breaches.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. DISCLOSURE CONTROLS AND PROCEDURES
Our chief executive officer and our chief financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in the U.S. Securities Exchange Act of 1934 under Rules 13a-14(c))
within 90 days of the date of this annual report, have concluded that, as of
that date, our disclosure controls and procedures were effective to ensure that
material information relating to us was made known to them by others within our
company particularly during the period in which this annual report and accounts
was being prepared.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls and procedures subsequent
to the date our chief executive officer and our chief financial officer
completed their evaluation, nor were there any significant deficiencies or
material weaknesses in our internal controls requiring corrective actions.
ITEM 16. RESERVED
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
64
ITEM 18. FINANCIAL STATEMENTS
PAGE
----
Telemig Celular Participacoes S.A.
Report of Independent Auditors.................................................................................. F-2
Consolidated Balance Sheets--December 31, 2002 and 2001......................................................... F-3
Consolidated Statements of Income and Comprehensive Income--Years Ended December 31,
2002, 2001 and 2000...................................................................................... F-4
Consolidated Statements of Changes in Shareholder's Equity--Years Ended December 31, 2002,
2001 and 2000............................................................................................ F-5
Consolidated Statements of Cash Flows--Years Ended December 31, 2002, 2001 and 2000............................. F-6
Notes to the Consolidated Financial Statements.................................................................. F-7
|
Financial Statement Schedules
See Note 16 to the Consolidated Financial Statements
See Note 17 to the Consolidated Financial Statements
65
ITEM 19. EXHIBITS
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
1. Bylaws in English of Telemig Celular Participacoes S.A, as amended.
2(a). Amended and Restated Deposit Agreement dated as of December 3, 2002 among Telemig Celular
Participacoes S.A., The Bank of New York, as depositary, and owners and beneficial owners of
American Depositary Receipts. ...............................................................................*****
2(b). Not applicable.
2(c). Not applicable.
3. Not applicable.
4(a). Cellular System Purchase and Sale Agreement dated November 24, 1998 by and among Telemig
Celular Participacoes S.A., Northern Telecom do Brasil Industria e Comercio Ltda., Northern
Telecom do Brasil Comercio e Servicos Ltda., and Northern Telecom Limited........................................*
4(b). Standard Concession Agreement for Mobile Cellular Service.......................................................**
4(c). U.S.$21.3 million Credit Agreement dated December 31, 1997 between Telecomunicacoes de
Minas Gerais S.A. and the Export Development Corporation of Canada.............................................***
4(d). U.S.$141 million Amended and Restated Credit Agreement dated April 3, 2001 among Telemig
Celular, the Export Development Corporation of Canada and others (including amendment dated
April 23, 2001)................................................................................................***
4(e). R$260.3 million Credit Agreement dated November 9, 2000 among Telemig Celular, BNDES and
others.........................................................................................................***
4(f). U.S.$38.0 million Credit Agreement dated December 12, 1996 between Telebras and
Telecomunicacoes de Minas Gerais S.A...........................................................................***
4(g). Service Agreement in English dated as of June 30, 2001 and among LHS do Brasil Ltda.,
Telemig Celular and Amazonia Celular Celular S.A.-- Para.....................................................****
5. Not applicable.
6. Computation of earnings per share (See Note 8 to the consolidated financial statements)
7. Not applicable.
8. List of subsidiaries (See "Item 4-Organizational Structure")
9. Not applicable.
10. None.
12(a)1. CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
12(a)2. CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
|
66
* Previously filed in Annual Report on Form 20-F on June 30, 1999.
** Previously filed in Registration Statement on Form 20-F on September
18, 1998.
*** Previously filed in Registration Statement on Form 20-F on June 29,
2001.
**** Previously filed in Registration Statement on Form 20-F on July 12,
2002.
***** Previously filed in Registration Statement on Form F-6 (333-101446) on
November 25, 2002.
67
GLOSSARY OF TELECOMMUNICATIONS TERMS
AMPS (Advanced Mobile Phone The analogue mobile phone technology used in North and South Americas and
System): in approximately 35 countries. It operates in the 800MHz band using FDMA
technology.
analogue: The representation of information by continuously variable physical quantity
such as voltage.
base station: A radio transmitter/receiver that maintains communications with the cellular
telephones within a given cell. Each base station is interconnected with one
MSO (Mobile Switch Office).
CDMA (Code Division Multiple Access): Also known as spread spectrum, CDMA cellular systems use a single
frequency band for all traffic, differentiating individual transmissions by
assigning them unique codes before the transmission. There are a number of
CDMA variations.
CDMA ONE: The first commercial CDMA cellular system, deployed in North America and
Korea and also known as IS-95.
CDMA /1xRTT: The first generation of CDMA 2000. The standardization process indicated that
there would be CDMA 2x and CDMA 3x, however this is no longer likely.
CDMA 2000: A member of the IMT-2000 family, compatible with CDMA ONE.
cell: The area covered by a cellular base station. A cell site may allocate its antennas
to service several cells from one location.
cellular service: A mobile telecommunications service provided by means of a network of
interconnected 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 base stations and
cellular phones.
digital: A method for representing information as numbers with discrete values;
usually expressed as a sequence of bits.
exchange: See switch.
FDMA (Frequency Division A transmission technique where the assigned frequency band for a network is
Multiple Access): divided into sub-bands that are allocated to a subscriber for the duration of
their calls.
GSM (Global System for Mobile): Global system for mobile communications, the second-generation digital
technology originally developed for Europe. Initially developed for operation
in the 900MHz band and subsequently modified for the 850, 1800 and
1900MHz bands. GSM originally stood for Groupe Speciale Mobile, the CEPT
(Conference of European Post and Telecommunications) committee that began
the GSM standardization process.
GPRS (General Packet Radio System that allows the transmission of data in packages in GSM.
Service):
IMT 2000 : The family of third-generation technologies approved by the ITU (International
Telecommunications Union).
|
68
internet: An informal confederation of autonomous databases and networks. Originally
developed for academic use, the internet is now a global structure of millions
of sites accessible by anyone worldwide.
local loop: The system used to connect a fixed subscriber to the nearest local switch. It
generally consists of a pair of copper wires but may also employ other
technologies.
network: An interconnected collection of elements. In a telephone network, these
consist of switches connected to each other and to customer equipment. The
transmission equipment may be based on fiber optic or metallic cable or point-
to-point radio connections.
network usage charge: Amount paid per minute charged by network operators for the use of their
network by other network operators. Also known as "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.
PCS (Personal Communication The American standard for advanced digital cellular services, usually provided
Services): at 1.9GHz frequency band.
penetration: The percentage of a given total population which owns a mobile phone.
repeater: A device that amplifies an input signal for retransmission.
roaming: A function that enables subscribers to use their cellular telephones 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.
SMP (Servico Movel Pessoal) A specific Brazilian set of rules for advanced digital cellular service, enacted
by Anatel through Resolution no. 316, dated September 27, 2002, to replace
the former SMC (Servico Movel Celular) cellular service rules. SMP is also an
independent technology definition of service to which was originally allocated
the 1.8GHz frequency band, almost equivalent to the North American PCS.
switch: A device that opens or closes circuits or selects the paths or circuits to be used
for transmission of information. Switching is the process of interconnecting
circuits to form a transmission path between users. Switches may also record
information for billing and control purposes.
TDMA (Time Division Multiple A technique for multiplexing multiple users onto a single channel on a single
Access): carrier by splitting the carrier into time slots and allocating these on an as-
needed basis.
UMTS Third-generation wireless telecommunications system designed by ETSI
(European Telecommunications Standard Institute) in accordance with ITU's
(Internatioal Telecommunication Union) standard. It is viewed as the most
likely upgrade of GSM systems.
value added services: Value added services provide additional functionality to the basic transmission
services offered by a telecommunications network.
|
69
CONSOLIDATED FINANCIAL STATEMENTS
TELEMIG CELULAR PARTICIPACOES S.A.
December 31, 2002
CONTENTS
Independent Auditors' Report.................................................... 1
Consolidated Balance Sheets..................................................... 2
Consolidated Statements of Income and Comprehensive Income...................... 3
Consolidated Statements of Changes in Shareholders' Equity...................... 4
Consolidated Statements of Cash Flows........................................... 5
Notes to the Consolidated Financial Statements.................................. 6
|
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
TELEMIG CELULAR PARTICIPACOES S.A.
We have audited the accompanying consolidated balance sheets of Telemig Celular
Participacoes S.A. as of December 31, 2002 and 2001, and the related
consolidated statements of income and comprehensive income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Telemig Celular
Participacoes S.A. at December 31, 2002 and 2001, and the consolidated statement
of income and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 3.j to the consolidated financial statements, in 2001 the
Company changed its method of accounting for derivative financial instruments.
/s/ Ernst & Young
-----------------
Brasilia, Brazil
February 10, 2003,
except for Note 5, as to which the date is
April 29, 2003
|
F-2
TELEMIG CELULAR PARTICIPACOES S.A.
CONSOLIDATED BALANCE SHEETS
Amounts are in thousands of Brazilian Reais - R$
DECEMBER 31,
------------------------
2002 2001
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (includes deposits with a related party of R$85,935
and R$60,705 585,999 417,302
Trade receivables, net of allowance for doubtful accounts of R$17,128 and 121,225 107,931
R$19,216
Deferred income taxes 21,650 21,650
Investments - swap agreements 8,423 1,025
Other current assets (includes R$4,244 and R$1,160 receivable from related
parties) 56,846 40,051
--------- ---------
794,143 587,959
--------- ---------
Property and equipment, net 740,582 833,091
Deferred income taxes 240,419 208,809
Investments - swap agreements 71,088 23,749
Other non current assets 12,229 15,436
--------- ---------
1,858,461 1,669,044
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 67,717 61,300
Accrued liabilities (includes R$10,695 and R$11,650 payable to related 36,457 33,332
parties)
Value added and other taxes payable 26,630 22,101
Interest on capital and dividends payable 10,964 8,293
Current portion of long-term debt 285,932 71,144
Other current liabilities 11,781 9,132
--------- ---------
439,481 205,302
--------- ---------
Long-term debt 564,062 609,254
Provision for contingencies 31,076 21,335
Pension plan obligation 3,543 6,022
Minority interest 81,224 85,911
--------- ---------
679,905 722,522
--------- ---------
SHAREHOLDERS' EQUITY:
Capital stock, 700,000,000 thousand shares authorized in both 2002 and 2001:
Preferred shares, no par value, 213,818,805 thousand shares and 211,385,993
thousand shares issued and outstanding in 2002 and 2001, respectively 144,601 112,540
Common shares, no par value, 126,612,569 thousand shares and 125,171,982
thousand shares issued and outstanding in 2002 and 2001, respectively 85,626 68,153
Other capital and reserves 451,310 466,363
Retained earnings 57,538 94,164
--------- ---------
739,075 741,220
--------- ---------
1,858,461 1,669,044
========= =========
|
See the accompanying notes to the consolidated financial statements
F-3
TELEMIG CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
Amounts are in thousands of Brazilian Reais - R$
YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
----------- ----------- -----------
Revenues:
Services provided 930,610 846,340 650,835
Sale of handsets 77,593 74,793 93,426
----------- ----------- -----------
1,008,203 921,133 744,261
----------- ----------- -----------
Cost of services 281,382 251,522 201,991
Cost of handsets 87,886 81,606 101,919
Selling, general and administrative expenses 257,057 227,506 223,991
Cost sharing agreement - related party (16,345) (11,980) (11,460)
Bad debt expense 18,190 28,403 21,556
Depreciation and amortization 179,765 153,934 126,747
Other net operating income (1,963) (9,306) (1,132)
----------- ----------- -----------
Operating income 202,231 199,448 80,649
Financial income (161,950) (70,533) (31,408)
Financial expense 88,137 59,705 43,514
Foreign exchange loss 249,195 60,286 24,443
----------- ----------- -----------
Income before taxes, minority interest and cumulative
effect of accounting change 26,849 149,990 44,100
Income taxes 1,135 49,317 10,064
Minority interest 3,474 18,784 7,777
----------- ----------- -----------
Income before cumulative effect of accounting change 22,240 81,889 26,259
Cumulative effect of accounting change, net - (5,325) -
----------- ----------- -----------
Net income and comprehensive income 22,240 87,214 26,259
----------- ----------- -----------
Basic and diluted earnings, in Reais per thousand common and preferred
shares:
Before cumulative effect of FAS 133 0.07 0.24 0.08
Cumulative effect of FAS 133 - 0.02 -
Net income 0.07 0.26 0.08
Weighted average number of shares outstanding
Preferred shares 213,025,642 211,011,840 210,109,556
Common shares 126,142,898 124,950,428 124,416,140
|
See the accompanying notes to the consolidated financial statements
F-4
TELEMIG CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Amounts are in thousands of Brazilian Reais - R$
PREFERRED COMMON ADDITIONAL CAPITAL RETAINED
SHARES SHARES PAID-IN CAPITAL RESERVES EARNINGS TOTAL
--------- ------ --------------- -------- -------- -------
BALANCE AT DECEMBER 31, 1999 97,700 57,852 - 464,029 7,196 626,777
------- ------ ------ ------- ------- ------
Additional paid-in capital - - 13,578 - - 13,578
Capital increase 1,233 731 - (1,964) - -
Net income - - - - 26,259 26,259
------- ------ ------ ------- ------- -------
BALANCE AT DECEMBER 31, 2000 98,933 58,583 13,578 462,065 33,455 666,614
------- ------ ------ ------- ------- -------
Capital increase 13,607 9,570 - (9,280) (13,897) -
Net income - - - - 87,214 87,214
Dividends declared - - - - (12,608) (12,608)
------- ------ ------ ------- ------- -------
BALANCE AT DECEMBER 31, 2001 112,540 68,153 13,578 452,785 94,164 741,220
------- ------ ------ ------- ------- -------
CAPITAL INCREASE 32,061 17,473 - (15,053) (34,481) -
LAPSED DIVIDENDS (NOTE 6) - - - - 288 288
NET INCOME - - - - 22,240 22,240
DIVIDENDS DECLARED - - - - (24,673) (24,673)
------- ------ ------ ------- ------- -------
BALANCE AT DECEMBER 31, 2002 144,601 85,626 13,578 437,732 57,538 739,075
======= ====== ====== ======= ======= =======
|
See the accompanying notes to the consolidated financial statements.
F-5
TELEMIG CELULAR PARTICIPACOES S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts are in thousands of Brazilian Reais - R$
YEAR ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
Operating activities:
Net income 22,240 87,214 26,259
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 179,765 153,934 126,747
Cumulative effect of accounting change, net - (5,325) -
Deferred income taxes (31,610) 7,073 2,470
Minority interest 3,474 18,784 7,777
Unrealized foreign exchange loss and monetary variation
on long-term debt 252,369 63,529 24,633
Unrealized gains on swap agreements (54,737) (19,706) -
Provision for contingencies 9,741 8,669 (19,368)
Changes in operating assets and liabilities:
Trade receivables (13,294) (3,034) (37,633)
Accounts payable and accrued liabilities 7,063 (36,199) 15,915
Value added and other taxes payable 4,529 (14,769) 33,479
Other (10,939) (15,110) (9,772)
-------- -------- --------
Net cash provided by operating activities 368,601 245,060 170,507
-------- -------- --------
Investing activities:
Additions to property and equipment (87,256) (228,200) (228,323)
-------- -------- --------
Net cash used in investing activities (87,256) (228,200) (228,323)
-------- -------- --------
Financing activities:
Increases in long-term debt - 187,219 267,888
Repayment of short-term debt - (9,777) (83,534)
Repayment of long-term debt (82,773) (37,790) (19,463)
Dividends paid (29,875) (17,586) (3,764)
-------- -------- --------
Net cash provided by (used in) financing activities (112,648) 122,066 161,127
-------- -------- --------
Increase in cash and cash equivalents for the year 168,697 138,926 103,311
Cash and cash equivalents, beginning of the year 417,302 278,376 175,065
-------- -------- --------
Cash and cash equivalents, end of the year 585,999 417,302 278,376
======== ======== ========
Supplemental cash flow information:
Income taxes paid 42,275 32,395 16,725
Interest paid 67,458 60,999 38,164
======== ======== ========
|
See the accompanying notes to the consolidated financial statements.
F-6
TELEMIG CELULAR PARTICIPACOES S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in thousands of Brazilian Reais - R$
1. BACKGROUND AND DESCRIPTION OF BUSINESS
Telemig Celular Participacoes S.A. and its subsidiary, Telemig Celular S.A.
(together the "Company"), are the primary suppliers of cellular
telecommunications services in the state of Minas Gerais under the terms of
a concession granted by the Federal Government on November 4, 1997 (the
"Concession"). The Concession will expire on April 29, 2008 and may be
renewed at the discretion of Agencia Nacional de Telecomunicacoes
("Anatel"), the regulatory authority for the Brazilian telecommunications
industry, for a further term of 15 years. The Company is controlled by
Telpart Participacoes S.A. ("Telpart").
The Company's business, including the services it may provide and the rates
it charges, is regulated by Anatel and is fully dependent upon the cellular
telecommunications concession granted by the Federal Government.
The Company has made and will be required to make significant capital and
operating expenditures on an ongoing basis in order to deploy its cellular
telecommunications network which will require the Company to seek
additional financing. Some of these investments may be financed through
debt denominated in foreign currencies. The country's currency is subject
to devaluation. A significant devaluation and a return to high levels of
inflation could have an adverse effect on the Brazilian economy, and, as a
result, it could affect the Company's financial position, cash flows or
results of operations.
2. PRESENTATION OF THE FINANCIAL STATEMENTS
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and
rules and regulations adopted by the United States Securities and Exchange
Commission.
The Company has also published consolidated financial statements prepared
in accordance with accounting principles generally accepted in Brazil and
rules and regulations adopted by the Brazilian Securities Commission
("CVM").
The capital reserves and future retained earnings computed using Brazilian
GAAP will be the basis from which future dividends will be payable.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the period reported. Actual results could differ from those
estimates.
F-7
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is as follows:
a) Consolidation
The consolidated financial statements include the accounts of Telemig
Celular Participacoes S.A. and its subsidiary. All significant
intercompany balances and transactions have been eliminated.
b) Cash equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less at the time of purchase.
c) Foreign currency transactions
Transactions in foreign currency are recorded at the prevailing
exchange rate at the time of the related transactions. Foreign
currency denominated assets and liabilities are translated using the
exchange rate at the balance sheet date. Exchange differences are
recognized in the statements of operations as they occur.
d) Property and equipment
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method based on the estimated useful lives of
the underlying assets as follows:
Years
-------
Buildings 20
Network equipment 5 to 8
Other equipment 5 to 10
|
Interest incurred on borrowings is capitalized as part of property and
equipment until the asset is placed in service, to the extent that
borrowings do not exceed construction-in-progress.
The Company reviews property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying amount
may not be recoverable.
F-8
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
d) Property and equipment -- Continued
The wireless telecommunications industry is rapidly evolving and
therefore it is reasonably possible that property and equipment could
become impaired as a result of technological or other industry
changes. For assets the Company intends to hold for use, if the total
of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference
between the fair value and the carrying value of the assets. For
assets the Company intends to dispose of, a loss is recognized for the
amount that the estimated fair value, less costs to sell, is less than
the carrying value of the assets. The Company uses the discounted cash
flow method to estimate fair value of long-lived assets.
e) Revenue recognition
Revenues for services and equipment are recognized when the service is
provided or when the equipment is sold, respectively. Revenues from
cellular telephone services consist of subscription charges, usage
charges, network usage charges and charges for maintenance and other
customer services. Unbilled revenues from the billing date to the
month-end are estimated and recognized as revenue during the month in
which the service was provided. Revenues from equipment sales refer to
sales of handsets.
The Company began selling prepaid cards during 1999. The revenue from
the sales of these cards is recognized according to the minutes used
for each card. Revenue from unused minutes is deferred until used.
Because amount deferred is immaterial it has been included in other
liabilities.
f) Pension and other post-retirement benefits
The Company participates in (i) a multi-employer pension plan that
covers employees who retired prior to 2000 and (ii) a multiple
employer pension plan that covers its active employees and employees
who retired after 2000. The Company also participates in a
multi-employer post-retirement benefit plan for all of its employees.
The Company accounts for such benefit costs in accordance with
Financial Accounting Standards Board (FASB) SFAS 87, "Employers
Accounting for Pension". See Note 10.
F-9
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
g) Advertising costs
Advertising costs are expensed as incurred and included in selling,
general and administrative expenses. They amounted to R$27,749,
R$30,563 and R$24,596 for the years ended December 31, 2002, 2001 and
2000, respectively.
h) Stock-Based Compensation
The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares
at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related Interpretations because the Company
believes the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation", (SFAS 123)
requires the use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company's pro forma information for the years ended December 31,
2002, 2001, and 2000 follows:
2002 2001 2000
------ ------ ------
Net income as reported 22,240 87,214 26,259
Basic and diluted earnings, in Reais per thousand common
and preferred shares 0.07 0.26 0.08
Compensation expense under the fair value method, net of tax 238 66 31
Pro forma net income 22,002 87,148 26,228
Pro forma basic and diluted earnings per thousand common
and preferred shares 0.06 0.26 0.08
|
i) Swaps
The Company entered into swap agreements as part of its program to
manage its dollar denominated debt portfolio and related costs of
borrowing.
F-10
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
j) Derivatives and Hedging Activities
As of January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS 133) which
was issued in June 1998 and its amendments SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133" and SFAS 138, "Accounting
for Derivative Instruments and Certain Hedging Activities" issued in
June 1999 and June 2000, respectively (collectively referred to as
SFAS 133).
As a result of adoption of SFAS 133, the Company recognizes its
foreign currency and interest rate swap agreements on the balance
sheet at fair value and adjustments to fair value are recorded through
income. Prior to adoption of SFAS 133, the Company recognized its
foreign currency and interest rate swap contracts on the balance sheet
at contract value and adjustments to contract value were recorded
through income. The Company accounted for the accounting change as a
cumulative effect of an accounting principle. The adoption of SFAS 133
resulted in a cumulative effect of accounting change of R$5,325, net
of applicable tax expense of R$2,743, which resulted in a gain in the
consolidated statement of income for the year ended December 31, 2001.
k) New accounting pronouncements
In June of 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" on the accounting for obligations associated
with the retirement of long-lived assets. SFAS 143 requires a
liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. SFAS 143 is effective for
fiscal years beginning after June 15, 2002. The Company believes that
adoption of this statement will not have a significant impact on its
financial position or results of operation.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 provides
guidance related to accounting for costs associated with disposal
activities covered by SFAS 144 or with exit or restructuring
activities previously covered by Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 supercedes EITF
94-3 in its entirety. SFAS 146 requires that costs related to exiting
an activity or to a restructuring not be recognized until the
liability is incurred. SFAS 146 will be applied prospectively to exit
or disposal activities that are initiated after December 31, 2002.
F-11
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
k) New accounting pronouncements -- Continued
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure." SFAS 148
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. SFAS 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based
employee compensation be displayed more prominently and in a tabular
format. The transition and annual disclosure requirements of SFAS 148
are effective for the Company's fiscal year ending after December 15,
2002. The Company does not expect SFAS 148 to have a material effect
on its results of operations or financial condition.
l) Reclassifications
Certain amounts were reclassified to conform to the 2002 presentation.
4. PROPERTY AND EQUIPMENT
ACCUMULATED CARRYING
COST DEPRECIATION VALUE
--------- ------------ --------
DECEMBER 31, 2001
Buildings 66,079 17,999 48,080
Network equipment 1,036,052 476,328 559,724
Other equipment 240,452 93,256 147,196
Construction-in-progress 78,091 - 78,091
--------- ------- -------
1,420,674 587,583 833,091
========= ======= =======
DECEMBER 31, 2002
Buildings 38,222 18,500 19,722
Network equipment 1,114,289 604,640 509,649
Other equipment 319,577 142,969 176,608
Construction-in-progress 34,603 - 34,603
--------- ------- -------
1,506,691 766,109 740,582
========= ======= =======
|
The Company incurred interest of R$92,796, R$67,185 and R$50,514 of which
R$4,659, R$7,480 and R$7,000 was capitalized as property and equipment for
the years ended December 31, 2002, 2001 and 2000, respectively.
F-12
5. LONG TERM DEBT
INSTITUTION 2002 2001
----------- --------- --------
U.S. dollar denominated, unsecured, interest and
principal due semi-annually through October 2003,
interest at LIBOR plus 1% (LIBOR was 1.34% at December
31, 2002). EDC 12,514 31,132
U.S. dollar denominated, unsecured, annual interest
at Libor plus 5.4%. The interest payments are due
semi-annually and the principal due in November Dresdner Bank 35,333 23,204
2005.
Brazilian Reais facilities, adjusted by the long-term interest rate (TJLP),
plus 3.8% per year. The interest payments and principal are due monthly,
with final installment due in November 2005. BNDES* 170,600 207,935
Brazilian Reais facilities, adjusted by the long-term monetary unit
(UMBNDES), plus 3.8% per year. The interest payments and principal are due
monthly, with final installment due in January 2006. BNDES* 88,862 60,029
U.S. dollar denominated, unsecured, interest at LIBOR
plus 4.875%. The interest is due on a semi annual
basis. Principal is due on a semi annual basis
beginning April 2003, with final due in April 2006. EDC* / Nortel 498,195 327,176
U.S. dollar denominated, annual interest at LIBOR plus
5.6%. The interest is due on a semi annual basis, with
the entire principal due in January 2003. BCI* / Alcatel 41,340 27,149
Other 3,150 3,773
-------- -------
Total 849,994 680,398
Less current portion (285,932) (71,144)
-------- -------
Long-term portion 564,062 609,254
======== =======
|
* BNDES - National Bank for Economic and Social Development
EDC - Export Development Canada (formerly known as Export and Development
Corporation)
BCI - Banca Commerciale Italiana
F-13
5. LONG TERM DEBT -- Continued
Minimum annual principal repayments of all long-term debt during the next
four years as of December 31, 2002 are as follows:
2004 229,868
2005 260,327
2006 73,787
2007 80
-------
TOTAL 564,062
=======
|
The financing contracts obtained by the subsidiary from the BNDES and the
Export and Development Corporation - EDC have covenants related to the
destination of funds as specified in the contracts and the maintenance of
principally balance sheet ratios. If an event of default occurs, such long
term financing may have their due dates anticipated. Certain covenants
related to the BNDES financing were not met at December 31, 2002. On April
14, 2003, the Company received a waiver from BNDES which included certain
modifications of the covenant terms. At December 31, 2002, all other
covenants were met by the Company.
The contract with BNDES is secured by accounts receivable equivalent to 1.5
times the highest monthly installment.
6. CAPITAL STOCK
The capital stock of the Company is comprised of preferred shares and
common shares, all without par value. The Company has 700,000,000 thousand
shares authorized (including both preferred and common shares). At December
31, 2002, there were 213,818,805 thousand outstanding preferred shares
(211,385,993 thousand at December 31, 2001) and 126,612,569 thousand
outstanding common shares (125,171,982 thousand at December 31, 2001). The
capital may be increased by a decision taken at a shareholders' meeting or
by the Board of Directors in connection with the capitalization of profits
or reserves, provided that the amounts were allocated for capital increases
at a previous shareholders' meeting. During 2002 and 2001, R$34,481 and
R$13,897, of reserves, respectively, were capitalized in accordance with
Brazilian Corporate Law. Such capitalization do not involve issuance of
additional shares.
F-14
6. CAPITAL STOCK -- Continued
The preferred shares are non-voting, except under limited circumstances,
and are entitled to receive, on a priority basis, a minimum, annual
non-cumulative dividends according to the greater of the following: (i) 6%
of the stated value of the Company's preferred shares; or (ii) (a) 3% of
the stated value of the Company's shareholders' equity; and (b) a right to
a share of the profits, as defined, to be distributed on the same basis as
common shares, after common shares have been paid a dividend equal to the
minimum preferred dividend mentioned in (a) above.
Under the Brazilian Corporate law, the number of non-voting shares or
shares with limited voting rights, such as the preferred shares, may not
exceed two-thirds of the total number of outstanding shares.
At December 31, 2002 the Company has reserved 194,023 shares of preferred
stock for issuance in connection with the stock option plans - see Note 15.
Dividends
Pursuant to its by-laws, the Company is required to distribute as dividends
in respect of each fiscal year ending on December 31, to the extent amounts
are available for distribution, an aggregate amount equal to at least 25%
of Adjusted Net Income, as defined below, on such date. The annual dividend
distributed to holders of preferred shares, the "Preferred Dividend", has
priority in the allocation of Adjusted Net Income. Remaining amounts to be
distributed are allocated first to the payment of a dividend to holders of
common shares in an amount per share equal to the Preferred Dividend, and
the remainder is distributed equally, on a per share basis, among holders
of preferred shares and common shares.
For the purposes of the Brazilian Corporate Law, and in accordance with the
Company's by-laws, the "Adjusted Net Income" is an amount equal to the
Company's net profits under Brazilian GAAP adjusted to reflect allocations
to or from (i) the legal reserve, (ii) a contingency reserve for
anticipated losses, if any, and (iii) an unrealized revenue reserve, if
any. Under Brazilian Corporate law, the Company is required to appropriate
5% of its annual earnings calculated using Brazilian GAAP, after absorbing
accumulated losses, to a legal reserve, which is restricted as to
distribution. This reserve may be used to increase capital or to absorb
losses, but may not be distributed as dividends. At December 31, 2002, the
Company's financial statements, prepared using Brazilian GAAP, presented an
unconsolidated total equity of R$ 763,253 (R$714,315 at December 31, 2001)
including a legal reserve of R$18,943 (R$15,550 at December 31, 2001).
F-15
6. CAPITAL STOCK -- Continued
Dividends -- Continued
Brazilian companies are permitted to attribute tax deductible interest
expense on shareholders' equity. This notional interest distribution may be
treated for accounting purposes as a deduction from shareholders' equity in
a manner similar to a dividend. A 15% tax is withheld and paid by the
Company upon credit of the interest. Interest attributed to shareholders'
equity is treated as a dividend for purposes of the mandatory dividend
payable by the Company.
Under the Company's bylaws, if dividends remain unclaimed for a period of
three years, a shareholder's right to receive the dividend lapses. During
2002, dividends totaling R$288 lapsed and were recorded through equity by
the Company.
Dividends and interest on capital paid per thousand shares were:
2002 2001 2000
---- ---- ----
Preferred shares 0.07 0.04 -
Common shares 0.07 0.04 -
|
Capital Reserves
On December 28, 1999, the shareholders approved a legal reorganization
whereby a major shareholder contributed certain assets to the Company
resulting in future tax benefits. This asset will result in amortization
expense and a related tax benefit. For US GAAP purposes, in accordance with
EITF 94-10, tax effects caused by transactions with shareholders were not
included in the Company's income statement but rather in equity. Therefore,
the Company recorded a deferred tax asset of R$212,045 with an offsetting
amount as Capital Reserves. The deferred tax asset will be realized as the
tax benefits are recognized for local tax purposes over a period of up to
10 years.
In accordance with Brazilian Corporate Law, the Company may issue shares
(pro rata both common and preferred) based on the different pricing
criteria permitted by such law to the contributing shareholder for the
amount of the tax benefits recognized by the Company. However, the minority
shareholders will be given the right to purchase their pro-rata share of
this capital stock increase in order to prevent dilution. In case they do
not accept the offer, these shares will be issued to the majority
shareholders. Additionally, the Company has to ensure that shareholders
will receive the minimum dividend required by law if the amortization
expense results in accumulated losses.
F-16
6. CAPITAL STOCK -- Continued
Capital Reserves -- Continued
These potential shares are considered contingent shares and since it is not
possible to determine what pricing criteria the Company will use, these
shares are not included in either basic or diluted earnings per share
calculation, in accordance with SFAS 128.
During 2002, 2001 and 2000, the Company issued 2,433 thousand, 1,138
thousand, and 218 thousand preferred shares, respectively, and 1,441
thousand, 674 thousand, and 129 thousand common shares, respectively, to
the major shareholder that contributed the tax benefit, reflected as a
reduction in capital reserves in the Company's financial statements.
7. EARNINGS PER SHARE
In these consolidated financial statements, information is disclosed per
lot of one thousand shares, because this is the minimum number of shares
that can be traded on the Brazilian stock exchanges.
Since the preferred and common shareholders have different dividend, voting
and liquidation rights, basic earnings per share has been calculated using
the "two-class" method. The "two-class" method is an earnings allocation
formula that determines earnings per share for preferred and common shares
according to the dividends to be paid as required by the Company's by-laws
and participation rights in undistributed earnings.
Basic earnings per common share is computed by reducing net income by
distributable and undistributable net income available to preferred
shareholders and dividing net income available to common shareholders by
the weighted-average number of common shares outstanding during the period.
Net income available to preferred shareholders is the sum of the preferred
dividends distributable net income and the preferred shareholders' portion
of undistributed net income.
Undistributed net income is computed by deducting preferred dividends and
common dividends from net income. Undistributed net income is shared
equally on a per share basis by the preferred and common shareholders.
Options issued under the Company's stock options plan are antidilutive for
each of the years presented. Therefore, diluted earnings per share equals
basic earnings per share.
F-17
7. EARNINGS PER SHARE -- Continued
Under the Company's bylaws, if the Company is able to pay dividends in
excess of the minimum requirement for preferred shareholders and the
remainder of the net income is sufficient to provide equal dividends to
both common and preferred shareholders, then the earnings per share will be
the same for both common and preferred shareholders.
The following table sets forth the computation of basic and diluted
earnings per thousand of common shares:
2002 2001 2000
----------- ----------- -----------
Numerator:
Net income 22,240 87,214 26,259
Net income available to preferred stockholders - numerator
for basic and diluted earnings per thousand shares (13,969) (54,778) (16,493)
----------- ----------- -----------
Net income available to common stockholders - numerator for
basic and diluted earnings per thousand shares 8,271 32,436 9,766
=========== =========== ===========
Denominator:
Basic and diluted weighted-average number common shares
(in thousands) 126,142,898 124,950,428 124,416,140
----------- ----------- -----------
Basic and diluted earnings, in Reais per thousand common shares 0.07 0.26 0.08
=========== =========== ===========
|
2002 2001 2000
----------- ----------- -----------
Basic and diluted weighted-average number preferred shares
(in thousands) 213,025,642 211,011,840 210,109,556
----------- ----------- -----------
Basic and diluted earnings, in Reais per thousand preferred
shares 0.07 0.26 0.08
=========== =========== ===========
|
8. INCOME TAXES
Brazilian income taxes comprise federal income tax and the social
contribution tax. The statutory rates for federal income tax and for the
social contribution tax are 25% and 9% at December 31, 2002, 2001 and 2000
respectively.
Following is the detail of income tax expense for the years ended December
31, 2002, 2001 and 2000, respectively:
2002 2001 2000
-------- ------- ------
Federal income tax 26,541 35,413 7,545
Social contribution tax 6,204 6,831 49
Deferred taxes (31,610) 7,073 2,470
------- ------- ------
Income tax expense as reported in the accompanying financial
statements 1,135 49,317 10,064
======= ======= ======
|
F-18
8. INCOME TAXES -- Continued
Following is a reconciliation of the reported income tax expense and the
amount calculated by applying the combined statutory tax rate of 34% for
the years ended December 31, 2002, 2001 and 2000, respectively:
2002 2001 2000
------ ------ ------
Book income before income taxes and minority interest 9,129 50,997 14,994
calculated at the combined statutory rate
Tax incentive - - (895)
Non-taxable income (net of non-deductible expenses) (29) 730 (1,936)
Social contribution enacted rate adjustment (5,190) - -
Interest on capital paid to minority shareholders (2,775) (2,410) (2,099)
------ ------ ------
Income tax expense as reported in the accompanying
financial statements 1,135 49,317 10,064
====== ====== ======
|
During 2002, the enacted social contribution rate was increased from 8% to
9% beginning on January 1, 2003.
2002 2001
------- -------
Following is an analysis of deferred income tax assets and liabilities:
Deferred tax assets:
Income taxes losses carry forwards 20,960 18,363
Asset related to paid in capital 149,747 166,992
Accelerated depreciation 5,016 -
Accrued expenses and provision for contingencies 82,475 39,946
Allowance for doubtful accounts 5,842 6,533
Capitalized interest 3,359 6,582
------- -------
267,399 238,416
Deferred tax liabilities:
Cumulative indexation differences (5,330) (7,957)
------- -------
Net deferred tax assets 262,069 230,459
======= =======
Current portion 21,650 21,650
Long-term deferred income taxes 240,419 208,809
------- -------
Net deferred tax assets 262,069 230,459
======= =======
|
As further explained in Note 6, the total tax of R$212,045 related to
deferred asset was credited to paid in capital in the shareholders' equity
section.
F-19
9. TRANSACTIONS WITH RELATED PARTIES
The Company has entered into transactions with some of its controlling
shareholders and other related parties for certain services. Transactions
with related parties are carried out based on amounts agreed upon by the
respective related parties.
a) Roaming Agreements
The Company's subsidiary is a member of a national roaming committee
of cellular operators that includes the subsidiary of the affiliate
Tele Norte Celular Participacoes S.A., Amazonia Celular S.A. -
Maranhao. The purpose of the committee is to oversee technical and
system aspects to ensure the highest quality of roaming service. As
required by Brazilian regulation, Telemig Celular and the subsidiary
of Tele Norte Celular Participacoes S.A. facilitate roaming to their
respective subscribers.
b) Telesystem International Wireless
During 1999, the Company's controlling shareholders entered into
negotiations regarding a Technical Services Agreement, or TSA, between
the Company and Telesystem International Wireless - TIW, the parent
company of the 49% owner of Telpart Participacoes S.A., the Company's
controlling shareholder. The Brazilian Corporation Law, the
regulations relating to concessions and the Company's bylaws require
that payment for such services must be approved by the Company's
shareholders. Amounts accrued for such services, to be paid once they
have been duly approved by the shareholders were approved by the
Company's Board of Directors and totaled R$42,686 and R$19,903 in 2000
and 1999, respectively. On December 28, 1999, and again on April 10,
2000, the Company's shareholders voted to adjourn deliberations
concerning execution of the TSA. The Company, after consulting with
legal counsel, decided not to pay the amounts accrued for technical
assistance and services described above. This was because Brazilian
Corporation Law and the Company's bylaws require that payment for such
services must be approved by the Company's shareholders. However, such
approval did not occur. Accordingly, the amounts previously allocated
for payment to TIW - pending approval by the shareholders - for
technical assistance and services at December 31, 2000 of R$13,578 net
of the related tax effect of R$6,994 were credited to paid-in-capital.
At both December 31, 2002 and 2001, the Company has liabilities to TIW
for approximately R$10,695, related to expenses (principally, salaries
and benefits) as claimed by TIW against the Company. Certain of those
expenses are being disputed by the Company. See Note 17.
F-20
9. TRANSACTIONS WITH RELATED PARTIES -- Continued
c) Cost Sharing Agreement
In order to maximize efficiency in resource allocation between Tele
Norte Celular Participacoes S.A. and its subsidiaries, and the Company
and its subsidiary, in December 1999 the Company entered into a cost
sharing agreement pursuant to which certain costs that are incurred
for the benefit of both companies and their subsidiaries are allocated
to each company based on criteria designed to reflect the actual
amount of use by each company. The costs that are allocated under this
cost sharing agreement refer primarily to personnel, marketing and
outside consulting fees. During the years ended December 31, 2002,
2001 and 2000 the Company charged Tele Norte Celular Participacoes
S.A. and its subsidiaries the amounts of R$16,345, R$11,980 and
R$11,460, respectively.
d) Latinvest Asset Management
At December 31, 2002, the Company has cash equivalents of
approximately R$85,935 (R$60,705 in 2001) deposited in Latinvest Red,
an investment fund managed by Latinvest Asset Management (an exclusive
fund for the Company and its subsidiary - managed under the financial
policy of the Company), a shareholder of the Company. This cash
investment earned net interest of 19.99% (17.5% in 2001) and net
interest income related to this cash equivalent amounted to R$13,671
during 2002 (R$6,700 during 2001).
10. PENSION PLAN AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company, together with substantially all of the other companies in
the former Telebras group, participates in a multi-employer defined
benefit pension plan and other post-retirement benefit plans
administered by the Fundacao Sistel de Seguridade Social ("Sistel"), a
minority shareholder.
Effective 2000, the plan was modified and changed into a multiple
employer pension plan with respect to active employees. The plan
assets and liabilities related to active employees were transferred
into a new plan and the benefits remained unchanged. The
post-retirement benefit plans remained unchanged as multi-employer
plans.
Substantially all of the Company's employees are covered by these
plans. The Company contributed R$457, R$215 and R$110 in 2002, 2001
and 2000, respectively, with respect to the multi-employer plans.
F-21
10. PENSION PLAN AND OTHER POST-RETIREMENT BENEFIT PLANS -- Continued
In 1999, Sistel approved changes to the plan statutes resulting in the
break up of plan assets and liabilities related to the active participants
of each sponsor. Sistel did not break up plan assets and liabilities
related to inactive participants and, thus, the Company will continue to
sponsor the Sistel plan for such inactive participants.
At December 31, 2002 and 2001, the Company recorded its estimated portion
of the unfunded pension liability of R$3,543 and R$6,022, respectively.
The pension benefit is generally defined as the difference between (i) 90%
of the retiree's average salary during the last 36 months indexed to the
date of retirement and (ii) the value of the retirement pension paid by the
Brazilian social security system. For retired employees the initial pension
payment is subsequently adjusted upwards to recognize cost of living
increases and productivity awards granted to active employees. In addition
to the pension supplements, post-retirement health care and life insurance
benefits are provided to eligible pensioners and their dependents.
Contributions to the plans are based on actuarial studies prepared by
independent actuaries. The actuarial studies are revised periodically to
identify whether adjustments to the contributions are necessary.
The change in plans assets and benefit obligations, and the annual pension
cost of the multiple employer pension plan, for the active employees plan
and the related actuarial assumptions, for the year ended December 31, 2002
and 2001 are as follows:
Change in plan assets
2002 2001
------ ------
Fair value of plan assets at beginning of year 35,530 29,838
Actual return on plan assets 9,647 3,571
Sponsors' and participants' contributions 2,563 2,809
Benefits paid and expenses (841) (688)
------ ------
Fair value of plan assets at end of year 46,899 35,530
------ ------
|
F-22
10. PENSION PLAN AND OTHER POST-RETIREMENT BENEFIT PLANS -- Continued
Change in benefit obligations
2002 2001
------ -------
Benefit obligation at beginning of year 35,021 29,564
Service cost 2,553 2,290
Interest cost 3,949 3,335
Actuarial losses (gains) 2,693 520
Benefits paid (841) (688)
------ -------
Benefit obligation at end of year 43,375 35,021
------ -------
|
2002 2001
------ -------
Funded status 3,524 509
Unrecognized net gains (7,067) (6,531)
------ -------
Accrued benefit cost (3,543) (6,022)
------ -------
|
Components of net periodic pension cost
2002 2001 2000
------ ------ ------
Service cost 2,553 2,290 1,329
Interest cost 3,949 3,335 1,749
Expected return on assets (5,297) (4,413) (2,227)
Gains and other (2,313) (1,423) -
------ ------ ------
Net periodic pension (benefit) cost (1,108) (211) 851
====== ====== ======
|
The weighted-average actuarial assumptions, as determined by actuaries, were as
follows:
2002 2001
------ ------
Discount rate for determining projected benefit obligations 11.30% 11.30%
Rate of increase in compensation levels 8.15% 8.15%
Expected long-term rate of return on plan assets 14.45% 14.45%
|
F-23
11. COMMITMENTS
At December 31, 2002, the Company had capital expenditure commitments of
R$7,643 related to the continuing expansion and modernization of the
network.
The Company rents certain equipment and premises through a number of
operating lease agreements that expire at different dates. Total rent
expense under these agreements was R$16,872, R$15,629 and R$12,823 for the
years ended December 31, 2002, 2001 and 2000, respectively.
Future minimum lease payments under non-cancelable operating leases with an
initial term of one year or more are as follows at December 31, 2002.
Year ending December 31,
2003 7,155
2004 5,581
2005 3,346
2006 2,126
2007 1,672
2008 and after 4,053
------
TOTAL MINIMUM PAYMENTS 23,933
======
|
The Company's concession requires that certain network coverage
requirements and service quality milestones be met to continue to be valid
and permit the Company to operate.
12. CONTINGENCIES
ICMS tax on monthly fees and additional services
The Company believes that the ICMS (Imposto sobre Circulacao de Mercadorias
e Servicos), a state value-added tax, relates to telecommunications
services and therefore that the application of ICMS on monthly fees or
rentals lacks legal support, as these do not constitute telecommunications
services. In December 1998, the Company was granted an injunction by the
Treasury Court and therefore stopped remitting to the state government the
ICMS on monthly fees and additional services.
On December 31, 2000, based upon its tax consultants opinion, the Company
re-evaluated the amount of its provisions for contingencies related to the
charges of ICMS before the tax rule 69/89, and reversed R$16,784.
F-24
12. CONTINGENCIES -- Continued
ICMS tax on monthly fees and additional services -- Continued
The balance of the provision for monthly fees, activation fees and rentals
above mentioned is R$207,181 (R$150,876 in 2001), which is presented net of
escrow deposits of R$186,164 (R$139,009 in 2001) in the accompanying
financial statements.
Other litigation
The Company is subject to legal proceedings, administrative proceedings and
claims of various types in the ordinary course of its business for which a
provision of R$10,059 and R$9,468, for 2002 and 2001 respectively, has been
recorded in these accompanying consolidated financial statements. In
management's opinion, the ultimate settlements, if any, will not have any
additional significantly adverse effect on the Company's financial
condition or results of operations.
13. FINANCIAL INSTRUMENTS
a) Fair value of financial assets and liabilities
Estimated fair values of the Company's financial assets and
liabilities have been determined using available market information
and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the
estimated fair values. Accordingly, the amounts presented below are
not necessarily indicative of the amounts that could be realized in a
current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair values.
The fair value information as of December 31, 2002 and 2001 presented
below is based on the Company's current borrowing rates for similar
types of borrowing arrangements. Financial assets or liabilities are
not shown when no significant difference in values is believed to
exist.
F-25
13. FINANCIAL INSTRUMENTS -- Continued
a) Fair value of financial assets and liabilities -- Continued
2002 2001
------------------------------- ------------------------------
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
Long-term debt 849,994 833,988 680,398 678,307
|
The carrying value of cash, cash equivalents, trade accounts
receivable, other current assets, accounts payable and accrued
liabilities are a reasonable estimate of their fair value because of
the short maturities of such instruments. Interest rates that are
currently available to the Company for issuance of debt with similar
terms and maturities were used to estimate the fair value of loans and
financing.
b) Concentration of risks
Credit risk with respect to trade accounts receivable is mitigated by
the diversity of the Company's client portfolio. The Company
continually monitors the level of trade accounts receivable and limits
the exposure to bad debts by cutting access to the telephone network
if any invoice is twenty days past due. Exceptions comprise telephone
services that must be maintained for reasons of safety or national
security. The Company does not require collateral for accounts
receivable.
There is no concentration of available sources of labor, services,
concessions or rights, other than those mentioned above, that could,
if suddenly eliminated, severely impact the Company's operations.
14. SWAPS
The Company uses derivative instruments for hedging purposes. At December
31, 2002 and 2001, the Company held foreign currency swap agreements
related to its U.S. dollar denominated debt agreements in an effort protect
against variations in the exchange rate between the U.S. dollar and the
Brazilian real.
F-26
14. SWAPS -- Continued
Through the swap agreements, the Company earns the exchange variation
between the United States dollar and the Brazilian Real plus 9.30% to
16.60% and pays an amount based on a short term inter bank rate. The
annualized short term inter bank rate was 19.11% and 17.29% at December 31,
2002 and 2001, respectively. At December 31, 2002 and 2001, these
agreements have total notional amount of R$282,755 and R$258,934, and
expire on various dates through 2005.
The fair values of the Company's foreign currency rate swap agreements were
estimated based on quoted market prices of comparable contracts and, at
December 31, 2002 and 2001, were approximately the following:
2002 2001
-------- --------
Gross assets 450,436 316,623
Gross liabilities (370,925) (291,849)
-------- --------
Net investments - swap agreements 79,511 24,774
-------- --------
Less current portion (8,423) (1,025)
-------- --------
Long term portion 71,088 23,749
======== ========
|
The fair value is reflected in investments - swap agreements in the
accompanying financial statements, net of the fair value of the Company's
commitment under the swap agreements. The income (expense) derived from the
swap agreements of approximately R$62,030 and R$(41,187) for 2002 and 2001,
respectively, is reflected in financial income in the accompanying
financial statements.
15. STOCK-BASED COMPENSATION
On October 5, 2000, the Company's Board of Directors approved two long-term
incentive plans as follows:
a) The first plan covers certain key executives who may receive shares of
the Company's common or preferred stock. The shares are earned and
shares will be issued only to the extent that the Company achieves
performance goals determined by the Board of Directors during a
five-year performance period. As of December 31, 2002, no shares have
been granted and no compensation expense has been recognized.
F-27
15. STOCK-BASED COMPENSATION -- Continued
b) The second plan covers key executives (who also participate in the
first plan) and other employees. Options granted under this plan
relate to preferred stock and are exercisable at the market price at
the date of grant. The vesting period is 20% during the second year,
60% during the third year and 100% during the fourth year. Information
related to these options is summarized below:
Number of
Options Exercise Price
--------- --------------
Outstanding as of January 1, 2000 - -
Granted 327,607 4.76
Outstanding as of December 31, 2000 327,607 4.76
Forfeited (129,902) 4.76
Outstanding as of December 31, 2001 197,705 4.76
Forfeited (3,682) 4.76
Outstanding as of December 31, 2002 194,023 $4.76
62,415 options exercisable at $4.76 at December 31, 2002
11,805 options exercisable at $4.76 at December 31, 2001
No options exercisable at December 31, 2000
Weighted average fair value of options granted during 2000 $4.47
|
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions for 2002, 2001 and 2000:
2002 2001 2000
----- ----- -----
Risk-free interest rates 6% 6% 6%
Dividend yield 6% 6% 6%
Volatility factors of the expected market price of
the Company's preferred stock 0.66 0.71 0.71
Weighted-average expected life of the option 5 6 7
|
F-28
15. STOCK-BASED COMPENSATION -- Continued
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
16. OTHER INFORMATION
a) The changes in the allowance for doubtful accounts during the three
years ended December 31, 2002 were as follows:
2002 2001 2000
-------- -------- --------
Balance at beginning of period 19,216 15,356 14,770
Charged to cost and expenses 18,190 28,403 21,556
Write-off and recoveries (20,278) (24,543) (20,970)
------- ------- -------
Balance at end of period 17,128 19,216 15,356
======= ======= =======
|
b) In 2001 the Company received a tax amnesty as a result of prepayment
of ICMS installments. The amnesty in the amount of R$5,900 was
recorded as other net operating income.
17. SUBSEQUENT EVENTS (UNAUDITED)
On March 26, 2003, Highlake International Business Company Ltd.
("Highlake"), which is indirectly controlled by investment and mutual funds
managed by Banco Opportunity, acquired TPSA do Brasil's total share
ownership in Telpart. Until March 26, 2003, Telpart was a consortium
comprised of Newtel Participacoes S.A. ("Newtel"), which owned
approximately 51% of Telpart, and TIW do Brasil Ltda., later renamed TPSA
do Brasil, which owned approximately 49%. Telpart is the major shareholder
of the Company, holding 52.1% of its common shares.
F-29
17. SUBSEQUENT EVENTS (UNAUDITED) -- Continued
From 2000 through March 2003, the direct and indirect shareholders of
Telpart, as well as a group of private equity investment fund shareholders
holding an aggregate of approximately 15% of the Company's outstanding
voting stock, were involved in a dispute over the right to appoint the
members of the Company's board of directors and that of its operating
company, Telemig Celular S.A. The dispute involved numerous injunctions and
legal proceedings. However, on March 26, 2003, this dispute has been
settled with the acquisition of TPSA do Brasil's total share interests in
Telpart by Highlake.
Also in March 2003, the dispute involving the reimbursement of expenses
allegedly incurred by TIW and on the Company's behalf was settled for an
amount of R$9,119. At December 31, 2002 the Company had a liability of
R$10,695 related to this dispute. In 2003, the Company reversed a total of
R$1,576 related to the remaining portion of the liability recorded on its
books after the settlement.
F-30
CERTIFICATION UNDER SECTION 302 OF THE U.S. SARBANES-OXLEY ACT OF 2002
I, Antonio Jose Ribeiro dos Santos, certify that:
1. I have reviewed this annual report on Form 20-F of Telemig Celular
Participacoes S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (and persons
performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or any
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Antonio Jose Ribeiro dos Santos
-----------------------------------
Antonio Jose Ribeiro dos Santos
Chief Executive Officer
May 7, 2003
|
CERTIFICATION UNDER SECTION 302 OF THE U.S. SARBANES-OXLEY ACT OF 2002
I, Joao Cox Neto, certify that:
1. I have reviewed this annual report on Form 20-F of Telemig Celular
Participacoes S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
(a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (and persons
performing the equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or any
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Joao Cox Neto
-----------------
Joao Cox Neto
Chief Financial Officer
May 7, 2003
|
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
and Exchange Act of 1934, the Registrant certifies that it meets all
requirements for filing on Form 20-F and has duly caused this annual report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TELEMIG CELULAR PARTICIPACOES S.A.
By: /s/ Antonio Jose Ribeiro dos Santos
-----------------------------------
Name: Antonio Jose Ribeiro dos Santos
Title: Chief Executive Officer
By: /s/ Joao Cox Neto
-----------------
Name: Joao Cox Neto
Title: Chief Financial Officer
Dated: May 7, 2003
|
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
1 Bylaws in English of Telemig Celular Participacoes S.A., as
amended.
2(a) Amended and Restated Deposit Agreement dated as of December 3,
2002 among Telemig Celular Participacoes S.A., The Bank of New
York, as depositary, and owners and beneficial owners of American
Depositary Receipts *****
2(b) Not applicable.
2(c) Not applicable.
3 Not applicable.
4(a) Cellular System Purchase and Sale Agreement dated November 24,
1998 by and among Telemig Celular Participacoes S.A., Northern
Telecom do Brasil Industria e Comercio Ltda., Northern Telecom do
Brasil Comercio e Servicos Ltda., and Northern Telecom Limited *
4(b) Standard Concession Agreement for Mobile Cellular Service **
4(c) U.S.$21.3 million Credit Agreement dated December 31, 1997 between
Telecomunicacoes de Minas Gerais S.A. and the Export Development
Corporation of Canada ***
4(d) U.S.$141 million Amended and Restated Credit Agreement dated April
3, 2001 among Telemig Celular, the Export Development Corporation
of Canada and others (including amendment dated
|
April 23, 2001) ***
4(e) R$260.3 million Credit Agreement dated November 9, 2000 among
Telemig Celular, BNDES and others ***
4(f) U.S.$38.0 million Credit Agreement dated December 12, 1996 between
Telebras and Telecomunicacoes de Minas Gerais S.A ***
4(g) Service Agreement in English dated as of June 30, 2001 and among
LHS do Brasil Ltda., Telemig Celular S.A. and Amazonia Celular
Celular S.A.-- Para ****
5 Not applicable.
6 Computation of earnings per share (See Note 8 to the consolidated
financial statements)
7 Not applicable.
8 List of subsidiaries (See "Item 4 - Organizational Structure")
9 Not applicable.
10 None.
12(a)1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
12(a)2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
* Previously filed in Annual Report on Form 20-F on June 30, 1999.
** Previously filed in Registration Statement on Form 20-F on September 18,
1998.
*** Previously filed in Registration Statement on Form 20-F on June 29, 2001.
**** Previously filed in Registration Statement on Form 20-F on July 12, 2002.
***** Previously filed in Registration Statement on Form F-6 (333-101446) on
November 25, 2002.
EXHIBIT 1
TELEMIG CELULAR PARTICIPACOES S.A./02.558.118/0001-65
COMPANY BYLAWS
BY LAWS OF
TELEMIG CELULAR PARTICIPACOES S.A
CHAPTER I
CHARACTERISTICS OF THE COMPANY
Article 1 - TELEMIG CELULAR PARTICIPACOES S.A. is a publicly held
company ruled by these Bylaws and by the applicable legislation.
Article 2 - The Company has the following corporate object:
I. to control companies engaged in the exploitation of Mobile
Cellular Telephone Services, in the respective areas of
concession or areas authorized for exploitation.
II. to promote, through controlled or affiliated companies, the
expansion and implementation of mobile telephone services in
their respective areas of concession or authorization;
III. to promote, perform or direct the raising of funds, from internal
or foreign investors for application by the Company or by their
subsidiaries;
IV. to promote and encourage study and research activities aiming at
the development of the mobile telephone industry;
V. to perform, directly or through controlled or subsidiary
companies, technical specialized services related to the area of
mobile telephony;
VI. to promote, encourage and coordinate, directly or through
controlled or subsidiary companies, teaching and training of the
personnel required for the mobile telephone industry;
VII. to carry out or promote importation of goods or services for
and/or through controlled or subsidiary companies;
VIII. to perform other activities similar or related to its core
object; and
IX. to own equity interest in other companies.
Article 3 - The Company has its seat and headquarters in the city of
Brasilia, Federal District, and when authorized by the Board of Directors,
provided compliance with Article 30 of these Bylaws, branches and offices may be
opened in any part of the country or abroad.
Article 4 - The company shall operate for an indefinite term.
CONSOLIDATED ON MARCH 19, 2003
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COMPANY BYLAWS
CHAPTER II
CAPITAL STOCK
Article 5 - The subscribed and fully paid up share capital is two
hundred and sixty-three million and forty thousand reais (R$ 263,040,000.00),
represented by three hundred and forty-six billion, seven hundred and fifty-one
million, nine hundred and thirty-seven thousand, five hundred and eleven
(346,751,937,511) shares, of which one hundred and twenty-eight billion, nine
hundred and sixty-three million, three hundred thousand, five hundred and
sixty-three (128,963,300,563) are common shares and two hundred and seventeen
billion, seven hundred and eighty-eight million, six hundred and thirty-six
thousand, nine hundred and forty-eight (217,788,636,948) are preferred shares,
all registered and without par value.
Article 6 - The Company is authorized to increase the capital stock, by
resolution of the Board of Directors, up to the limit of seven hundred billion
(700,000,000,000) ordinary or preferred shares, observing the legal limit of
two-thirds (2/3) for the issuance of preferred shares without voting rights.
Article 7 - The Company may increase its capital stock, by resolution
of the General Meeting or of the Board of Directors, through the capitalization
of accumulated profits or previous reserves set up for this purpose by the
General Meeting.
Paragraph 1 - Capitalization may be made without change in the number
of shares.
Paragraph 2 - Capitalization is not compulsory for any balance of
profits or reserves, which amount to less than one percent (1%) of the capital
stock.
Article 8 - The capital stock is represented by no-par, ordinary and
preferred shares, and the capital may be increased, without regard to the
proportion of each type of shares.
Article 9 - The preemptive rights regarding the issuance of shares,
subscription bonuses or convertible debentures may be excluded, by resolution of
the General Meeting or of the Board of Directors, in the cases foreseen in
Article 172 of the Corporate Law.
Article 10 - Each ordinary share shall have the right to one vote in
resolutions of the General Meeting.
Article 11 - Preferred shares will not be entitled to vote, except in
the event described in the Sole Paragraph hereof, and in the Sole Paragraph of
Section 14, provided, however, that preferred shares will have a preference in
the case of return of capital, without a premium, and will be entitled to
receive, on a preferential basis, minimum, noncumulative dividends according to
the greater of the following criteria:
I - six percent (6%) per annum of the amount resulting from the
division of the subscribed capital stock by the amount of outstanding shares of
the Company; or
CONSOLIDATED ON MARCH 19, 2003
TELEMIG CELULAR PARTICIPACOES S.A./02.558.118/0001-65
COMPANY BYLAWS
II - right to share in the dividend to be distributed under
Section 41 of these By-Laws based on the following criteria:
a) preference to receive a minimum non cumulative dividend
corresponding to three percent (3%) of the net asset value of each share; and
b) right to share in the profits to be distributed on an equal
footing with common shares, after common share have been paid a dividend equal
to the minimum preferential dividend mentioned in letter "a" above.
Sole Paragraph - The preferred shares shall acquire voting rights if
for three (3) consecutive years the Company fails to pay minimum dividends on
them, under the terms of the caput of this article.
Article 12 - The shares of the Company are book shares, and shall be
maintained in a deposit account in a financial institution, in the name of their
holders, without issuance of certificates.
CHAPTER III
GENERAL MEETING
Article 13 - The General Meeting is the higher managerial body of the
Company, with powers to resolve upon all businesses relative to the corporate
object and to take all the necessary actions for the defense and development of
the Company.
Article 14 - In addition to the attributions foreseen in law, the
following is exclusively incumbent upon the General Meeting:
I. to establish the global remuneration of the members of the
Board of Directors and Executive Board and the individual
remuneration of the members of the Audit Board;
II. to approve in advance the execution of any long-term contract
between the Company or its subsidiaries, on one side, and the
controlling shareholder or subsidiaries, affiliates, companies
under common control or controllers of the latter, or which
are by any other form related to the Company, except when the
contracts are ruled by uniform clauses.
Sole Paragraph - Without prejudice of the provisions of Article 115,
Paragraph 1 of Law No. 6404/76, the holders of preferred shares shall be
entitled to vote in the general meeting resolutions referred to in subitem II of
this Article, as well as in those referring to amendment or revocation of the
following provisions of the Bylaws:
1. Subitem II of Article 14 and its Sole Paragraph;
CONSOLIDATED ON MARCH 19, 2003
TELEMIG CELULAR PARTICIPACOES S.A./02.558.118/0001-65
COMPANY BYLAWS
2. Sole Paragraph of Article 15; and
3. Article 49
Article 15 - The General Meeting shall be convened by the Board of
Directors, or in the form stipulated in the Sole Paragraph of Article 123 of Law
No. 6404/76. When the General Meeting is convened by the Board of Directors this
must be substantiated by the Chairman of the Board.
Sole Paragraph - In the cases of Article 136 of Law 6404/76, the first
call for the General Meeting shall be made at least thirty (30) days in advance,
and the second call at least ten (10) days in advance.
Article 16 - The General Meeting is installed by the Chief Executive
Officer of the Company or, in his absence or impediment, by any Officer, or by
an Attorney-in-fact duly vested with specific powers for this purpose. When in
attendance, the Chief Executive Officer shall preside the General Meeting and
appoint the Secretary. In the absence of the Chief Executive Officer, the
General Meeting shall elect the Chairman of the Meeting and the respective
Secretary.
Article 17 - The discussions and resolutions of the General Meeting
shall be recorded in minutes drawn in the proper book and signed by all members
of the presiding board and by shareholders present representing, at least, the
majority required for the resolutions to be approved.
Paragraph 1 - The Minutes of Meeting may be drawn in summary form
including dissident votes and objections.
Paragraph 2 - Unless otherwise resolved by the General Meeting, the
Minutes of Meeting shall be published without the signature of the shareholders.
Article 18 - A General Ordinary Meeting shall be held within the four
months immediately subsequent to the end of the fiscal year to:
I. examine the management accounts and discuss and vote the
income statements;
II. resolve upon destination of the net profit for the fiscal year
and distribution of dividends; and
III. elect the members of the Audit Board and, should this be the
case, the members of the Board of Directors.
Article 19 - General Extraordinary Meetings shall be held, whenever
required by company interest.
CONSOLIDATED ON MARCH 19, 2003
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COMPANY BYLAWS
CHAPTER IV
COMPANY MANAGEMENT
SECTION I
GENERAL NORMS
Article 20 - The management of the Company shall be conducted by the
Board of Directors and by the Executive Board.
Paragraph 1 - The Board of Directors, a joint committee, conducts the
higher management of the Company.
Paragraph 2 - The Executive Board is the representative and executive
body of the Company, and each of its members acts within their respective
competence.
Paragraph 3 - The attributions and powers conferred by law to each of
these governing bodies cannot be conferred to another body in the company.
Article 21 - The Members of the Board of Directors shall take office by
signing the Term of Investiture to be recorded in the Book of Minutes of Meeting
of the Board of Directors or of the Executive Board, as the case may be.
Article 22 - The members of the Board of Directors shall be elected for
a term of three (3) years, reelection being permitted.
Sole Paragraph - The terms of the members of the Board of Directors
shall be extended until their successors have been invested.
SECTION II
BOARD OF DIRECTORS
Article 23 - In addition to the attributions set forth by law, it is
incumbent upon the Board of Directors:
I. to approve the annual budget of the Company, and of
its controlled companies, in addition to the plan of business
goals and strategies applicable to the budget period;
II. to resolve upon the increase of the Company capital
stock up to the authorized limit, and to resolve upon the
issuance of subscription bonuses, and exclusion of the
preemptive rights of shareholders, setting the conditions for
issuance and placement of shares or subscription bonuses;
CONSOLIDATED ON MARCH 19, 2003
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COMPANY BYLAWS
III. to authorize the issuance of commercial papers for
public subscription;
IV. to resolve upon, with powers delegated by the General
Meeting, on the conditions for the issuance of debentures, as
provided in Paragraph 1of article 59 of Law No. 6404/76;
V. to authorize the sale of debentures, including
convertible debentures issued by the Company and held as
treasury papers;
VI. to authorize the acquisition of shares issued by the
Company, for cancellation or to be held as treasury shares to
be disposed of at a later date;
VII. to approve the acquisition or disposal by the Company
of equity interest in other companies;
VIII. to authorize the exchange of shares or other
securities convertible in shares issued by controlled
companies;
IX. to authorize the disposal of, or lien on any assets
that are part of the Company's fixed assets;
X. to authorize the acquisition of fixed assets, the
individual value of which exceeds one percent (1%) of the net
equity of the Company.
XI. to authorize the waiver of any rights to subscribe
shares, convertible debentures or subscription bonuses issued
by controlled companies;
XII. to approve, within the limits of the authorized
capital stock, the grant of call options for the purchase of
shares by their directors, employees and individuals that
render services to the Company or to its controlled companies.
XIII. to authorize the offer of secured or fide-jussio
guarantees by the Company on behalf of third parties or
controlled company.
XIV. to authorize the practice of gratuitous acts on
behalf of the employees or of the communities, considering the
Company' s social responsibility; however, the offer of surety
or guarantee to employees in the case of interstate and/or
intermunicipal transfers and/or relocations, should not
constitute matter requiring previous approval of the Board of
Directors;
XV. to approve the execution of loan or lease agreements,
and the issuance of trade notes, the value of which exceeds
one percent (1%) of the net equity of the Company, as well as
of its controlled companies;
XVI. to authorize the investment in new businesses or the
creation of a subsidiary;
CONSOLIDATED ON MARCH 19, 2003
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COMPANY BYLAWS
XVII. to resolve upon the approval of the program of
"Depositary Receipts" to be issued by the Company;
XVIII. to submit to the approval of the General Meeting the
conclusion of any business or operation included among those
mentioned in subitem II of Article 14 of these bylaws;
XIX. to authorize the a Company, as well as its controlled
or affiliated companies to enter, amend or terminate
shareholder's agreements;
XX. to approve the policy of the Company's complementary
pension fund, as well as the collective agreements;
XXI. to approve the Internal Regiment of the Board of
Directors;
XXII. to approve the proposal of the Executive Board as
regards the Regiment of the Company, with its respective
organizational structure, which includes the attributions and
authority of the Executive Officers of the Company;
XXIII. to elect and remove, at any time, the Executive
Officers of the Company, including the Chief Executive
Officer, stipulating their duties, observing compliance with
the provisions of these bylaws;
XXIV. to divide the global remuneration amount among the
members of the Board of Directors and Executive Board,
stipulating their individual remuneration;
XXV. to establish guidelines for the exercise of voting
rights by representatives of the Company, in the General
Meetings of controlled or affiliated companies;
XXVI. to appoint representatives of the Company to
participate of the management of companies in which it holds
an equity interest; and
XXVII. carry out any other activities delegated by the
General Meeting.
Sole Paragraph - The Board of Directors may delegate to any member of
the Executive Board, the authority to resolve upon items IX and XIV of this
Article, setting limits or not for the performance of such functions.
Article 24 - The Board of Directors is formed by three (3) to eleven
(11) full members, one of which shall be the Chairman of the Board, and another
one the Vice-President; each full member shall have a deputy to substitute for
him in case of impediment, and temporary or definitive absences, until the
investiture of the successor.
Article 25 - The members of the Board of Directors shall be elected by
the General Meeting, and shall choose, from among them, the Chairman and the
Vice President of the Board.
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COMPANY BYLAWS
Sole Paragraph - In case of vacancy of the seat of Full Member, and if
the respective deputy is not invested, the remaining Members of the Board shall
appoint, from among them, the substitute to serve until the next General
Meeting.
Article 26 - The Board of Directors shall hold an ordinary meetings at
each quarter, and extraordinary meetings when convened by the Chairman or by two
(2) Members of the Board; The Minutes of Meeting shall be drawn in the proper
book.
Sole Paragraph - The meetings shall be convened by letter, cable or
fax, and these shall be delivered at least ten (10) days in advance, except in
really urgent cases, at the exclusive criteria of the Chairman of the Board of
Directors; the call notice shall contain the agenda of issues to be discussed.
Article 27 - The resolutions of the Board of Directors shall be
approved by absolute majority of votes, with the presence of the majority of its
members, and it shall be incumbent upon the Chairman of the Board, should this
be the case, to execute any acts required to ratify such resolutions.
SECTION III
EXECUTIVE BOARD
Article 28 - The Executive Board is formed by one (1) Chief Executive
Officer and two (2) Executive Officers, as follows:
a) Chief Financial Officer;
b) Chief Officer - Human Resources.
Article 29 - In case of his absence or temporary impediment, the Chief
Executive Officer shall be substituted by the Chief Financial Officer.
Paragraph 1 - In case of simultaneous absence or impediment of the
Chief Executive Officer and of the Chief Financial Officer, the Chief Executive
Officer shall be substituted by an Executive Officer appointed by the Board of
Directors.
Paragraph 2 - In case of their absence or temporary impediment, the
Chief Financial Officer and the other Officers shall be substituted by another
member of the Board appointed by the Chief Executive Officer.
Paragraph 3 - In case of vacancy in the Board of Directors, the Board
shall elect a substitute to complete the term of the Member replaced.
Article 30 - Provided compliance with the provisions contained in these
Bylaws, the Company shall be bound by: (i) the joint signature of two (2)
Officers, of which one shall necessarily be the Chief Executive Officer; (ii)
the signature of one (1) Officer together with an attorney; or (iii) the joint
signature of two (2) attorneys, vested with specific powers.
Sole Paragraph - the powers-of-attorney granted by the
Company, with the joint signature of two (2) Officers, of which one shall
necessarily be the Chief Executive Officer,
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COMPANY BYLAWS
shall specify the powers conferred thereby, and except for those granting
"ad-judicia" powers shall be valid for a maximum period of one (1) year.
Article 31 - The following shall be specifically incumbent upon each
member of the Executive Board:
I - CHIEF EXECUTIVE OFFICER - The accomplishment of the policy,
guidelines and activities related to the core object of the Company, as
stipulated by the Board of Directors.
II - CHIEF FINANCIAL OFFICER - The accomplishment of the policy,
guidelines and economic-financial and accounting activities of the Company, as
stipulated by the Board of Directors.
III - CHIEF OFFICER - HUMAN RESOURCES - Carry out and direct the
actions relating to the management of the Company, comprising the recruitment,
dimensioning, training and development of the Human Resources of the Company, as
specified by the Board of Directors.
CHAPTER V
AUDIT BOARD
Article 32 - The Audit Board is an inspection organ of the Company
Management, and it shall have permanent operation.
Article 33 - The Audit Board shall be formed by three (3) to five (5)
members and the same number of deputy members.
Paragraph 1 - The term of the members of the Audit Board expires on the
date of the first Ordinary General Meeting held after the respective election,
reelection being permitted; the members shall remain in office until the
investiture of the new members.
Paragraph 2 - On the first meeting held, the Audit Board, shall elect
the Chairman, upon whom it shall be incumbent to fulfill the resolutions
approved by the Board.
Paragraph 3 - The Audit Board may request the assignment by the Company
of qualified personnel to provide secretarial work and technical support.
Art.34 - The Audit Board shall hold ordinary meetings once a
month, and extraordinary meetings whenever required.
Paragraph 1 - The meetings shall be convened by the President of the
Audit Board or by two (2) members of the Audit Board.
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Paragraph 2 -The resolutions of the Audit Board shall be approved by
absolute majority of votes, with the presence of the majority of its members.
Article 35 - The members of the Audit Board are substituted, in their
absence or impediment, by their respective deputies.
Article 36 - In addition to the case of death, resignation, removal and
other reasons stipulated in law, the seat of the members of the Audit Board
shall be vacated if a member of the Audit Board fails to attend, without cause,
two (2) consecutive meetings or three (3) alternate meetings during the same
fiscal period.
Sole Paragraph - Should there be a vacancy in the Audit Board, and if
the deputy member does not substitute for the full member, a General Meeting
shall immediately be held to elect the substitute.
CHAPTER VI
FISCAL YEAR AND INCOME STATEMENTS
Article 37 - The fiscal year of the company shall coincide with the
calendar year.
Article 38 - At the end of the fiscal period, the Management shall
prepare the Balance Sheets and other financial statements required by Law.
Article 39 - The Board of Directors shall submit to the General
Meeting, together with the financial statements, a proposal for destination of
the net profits for the year, observing, however, the provisions of the Law and
of these Bylaws.
Article 40 - In addition to the capital reserves required by law, the
General Meeting may allocate up to ten percent (10%) of the net profits,
adjusted as foreseen in Article 202 of Law 6404/76, to constitute a reserve to
reinforce the working capital; The amount of this Reserve shall not exceed ten
percent (10%) of the net equity recorded for the Company.
Sole Paragraph - The general meeting may also allocate to the
establishment of an Investment Reserve the remaining balance of the net profit
of the year, with due justification by the officers by means of a capital
budget, for the purpose of financing the expansion of the business of the
Company or the creation of new ventures. Its establishment may not adversely
affect the payment of the minimum compulsory dividend established in article 41
and its balance, jointly with the balance of the other profit reserves, except
for the profits realizable, may not exceed the share capital, subject to the
capitalization or distribution of dividends in the amount of any excess.
Article 41 - The shareholders are entitled to a minimum compulsory
dividend of twenty-five (25%) percent of the net profits for each fiscal period,
adjusted as foreseen in Article 202 of Law 6404/76.
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Article 42 - The amount corresponding to the minimum compulsory
dividend shall be allocated first to the payment of the dividend of the
preferred shares, as foreseen in Article 11 of these Bylaws, up to the limit of
the preferred rights; following this, shall be paid the dividend of the ordinary
shares, until each ordinary share has received a dividend equal to that paid to
the preferred shares; the balance of the minimum compulsory dividend, if any,
shall be allocated under equal conditions, to both types of shares.
Sole Paragraph - If the amount of the minimum compulsory dividend is
not sufficient to pay the priority dividend of the preferred shares, the minimum
compulsory dividend shall be increased to the amount required to satisfy such
payment.
Article 43 - After payment of the minimum compulsory dividend, the
General Meeting shall resolve upon the destination of the balance of the net
profit of the fiscal year. The management may present an allocation proposal
including: (i) payment of a supplementary dividend to the shareholders; (ii)
establishment of the Investment Reserve according to article 40, sole paragraph
of these By-laws.
Article 44 - By resolution of the Board of Directors, the Company may
pay, or credit as dividend if more convenient, interest on own capital, under
the terms of Article 9 of Law 9249, of December 26, 1995. The interest paid
shall be offset by the value of the minimum compulsory dividend owed from the
fiscal year, both to the holders of ordinary and preferred shares.
Article 45 - By resolution of the Board of Directors, and provided
compliance with the limitations in force, the Company may:
(I) Prepare semiannual balance sheets or at shorter periods, and, based on
these, declare dividends; and
(II) declare intermediary dividends to be credited to the account of
retained interests or to the profit reserves existing at the closing of
the last annual or semiannual balance sheet.
Article 46 - By resolution of the Board of Directors, the Company may
assign part of the profits to the Management and to its employees.
Article 47 - The dividends not claimed within three 3 (three) years
shall revert to the benefit of the Company.
CHAPTER VII
LIQUIDATION OF THE COMPANY
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Article 48 - The Company shall be dissolved and liquidated in the cases
foreseen in Law, or by resolution of the General Meeting, which will stipulate
the manner of liquidation, and will elect the liquidator and the audit board for
the period of liquidation.
CHAPTER VIII
GENERAL AND TEMPORARY PROVISIONS
Article 49 - The approval by the Company, through its representatives,
of merger, spin-off, incorporation or dissolution of its controlled companies,
shall be preceded by an economic-financial analysis carried out by an
independent and internationally acknowledged company confirming that all
companies concerned are receiving fair and equal treatment and that their
shareholders shall have ample access to the report on such analysis.
CONSOLIDATED ON MARCH 19, 2003
EXHIBIT 12(a)1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002
Telemig Celular Participacoes S.A. (the "Company") is filing with the
U.S. Securities and Exchange Commission on the date hereof, its annual report on
Form 20-F for the fiscal year ended 2002 (the "Report").
I, Antonio Jose Ribeiro dos Santos, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. section 1350, as enacted pursuant to
section 906 of the U.S. Sarbanes-Oxley Act of 2002, that, to the best of my
knowledge:
(i) the Report fully complies with the requirements of section
13(a) or 15(d) of the U.S. Securities Exchange Act of 1934;
and
(ii) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Antonio Jose Ribeiro dos Santos
-----------------------------------
Antonio Jose Ribeiro dos Santos
Chief Executive Officer
May, 7, 2003
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EXHIBIT 12(a)2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ENACTED PURSUANT TO
SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002
Telemig Celular Participacoes S.A. (the "Company") is filing with the
U.S. Securities and Exchange Commission on the date hereof, its annual report on
Form 20-F for the fiscal year ended 2002 (the "Report").
I, Joao Cox Neto, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the
U.S. Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(i) the Report fully complies with the requirements of section
13(a) or 15(d) of the U.S. Securities Exchange Act of 1934;
and
(ii) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Joao Cox Neto
-----------------
Joao Cox Neto
Chief Financial Officer
May, 7, 2003
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